Aircraft and engine economic evaluation for fleet renewal decision-making and maintenance contract valuation

Abstract

The fleet acquisition process represents a major gamble for airlines and aircraft leasing companies due to the fixed assumptions made when business plans are laid out and the abundance of uncertainties both at the technical and market levels. Indeed, the evaluation of aircraft and engine acquisitions is riddled with uncertainties regarding the product development (development schedule), the economic performance of the assets once in operations (operating cost), and the demand for air transportation. The trend in recent years has been for original equipment manufacturers to offer contracts and guarantees during sales campaigns that limit the exposure of airlines to technical uncertainty and that shift some of the operating risks from the airlines to the manufacturers. Airlines have embraced these “power-by-the-hour” maintenance contracts because they offer a way to mitigate operating risks and to anticipate cash outflows. Estimating the fair value of these contracts is paramount due to the significant risks faced by companies underwriting them. At the same time, valuing them is a daunting task due to the uncertainty regarding maintenance costs and their sensitivity to both the operations and the operating environment. Traditional evaluation methods are not always well adapted to perform these evaluations as they do not capture the problem in its entirety and they tend to oversimplify by using generic routes and surrogate models. This paper simultaneously proposes a customer-centric methodology to properly evaluate long-term aircraft and engine investments and a real-options inspired methodology to value long-term maintenance contracts and manufacturer guarantees.

A Modular Framework for the Life Cycle Based Evaluation of Aircraft Technologies, Maintenance Strategies, and Operational Decision Making Using Discrete Event Simulation

“…The sensitivity of the engine's SFC on the EGT increase, as this determines the resulting fuel burn savings. This is cited to be within the range of 0.07 [70,71] to 0.1% [30] of SFC increase per • C of EGT.…”

“…(a) Those that focus on the long operational phase of aircraft, where temporal effects such as learning curves and aging are investigated and the complexity of the air transportation system is modeled with more detail (e.g., Justin and Mavris [30]). (b) Those following the "cradle to grave" approach incorporating all life cycle phases.…”

“…Justin and Mavris [30] developed a modular framework named ICARE, which takes the airline's perspective and calculates all aircraft and engine related operating cost and revenues. These include ownership cost; base; heavy component (including the engines); and unscheduled maintenance cost, fly-away cost, and ticket and ancillary revenues.…”

Methodologies and Techniques for Determining the Value of an Aircraft

“…There are 607 units of Airbus 330-200s currently in service (30). The three top U.S. airlines operating the type are Hawaiian (24), American (15), and Delta (11). As of April 2020, the number of aircraft manufactured by Airbus was reported as 12,762 aircraft.…”

“…The outcome is the value of an aircraft over a whole network of routes, taking into consideration future wear-and-tear and the increased maintenance and operating costs. More recently, Justin and Mavris ( 15 ) presented a customer-centric methodology to value the combined aircraft and engine by detailed consideration of cost and revenue elements. They also suggested an approach inspired by real options analysis for valuing maintenance contracts.…”