Size And Age Matters

Formulating A Robust Long-term Aircraft Replacement Strategy

Before purchasing or leasing aircraft, airlines should determine the precise number of aircraft as well as mix of sizes to match the network based on the numerous inputs that go into the fleet planning process, including network, finance and operations.

Whether an airline is starting up, growing or focusing on profit opportunities, capacity planning is one of the most important areas in the business-planning process. Although there are many contributing departments leading up to the induction of an aircraft, such as operations, finance and legal, network and fleet planning are responsible for matching the appropriate capacity to demand, which can make the difference between an operating loss or profit.

An aircraft too large will not fill and, ultimately, not realize its full profit potential. On the other hand, an aircraft too small will spill revenue and not realize its full revenue potential. Therefore, the optimal profit potential lies somewhere between the combination of revenue possibilities and the various costs associated with deploying the capacity. Thus, it is necessary to make a minimum set of assumptions on the future network, aircraft availability and capacity requirements before any decision should be made on aircraft type, size, configuration and count.

Aircraft: Old Versus New

Assuming demand and capacity is equal for a 9 and 12 hour average daily utilization scenario, there is a cost advantage for each depending on the utilization targets. A lower utilized older aircraft may be more cost effective than a newer higher utilized aircraft. On the other hand, a newer aircraft may be more cost effective for a higher utilized fleet (figures are monthly).

The most critical step in the fleet-planning process is developing a long-term network plan based on demand and competitive outlook. There are cases where fleet plans precede a network plan, therefore the schedule is dictated by the capacity plan. However, to effectively plan for profitability, the network should drive the fleet decisions.

Considering the lead-time to acquire newer aircraft, the longer-term outlook of the network plan enables the fleet plan to better contribute to the profitability of the airline. Hence, it is common for successful airlines to have a five- to 10-year network outlook. Ideally, they should contain all scheduled segments and aircraft flows, creating a fleeted and routable schedule plan so aircraft count and utilization can be measured.

Then, based on expected market demand and market share, the capacity plan can better match the demand to capacity ratio instead of the capacity determining where the airline should fly. Once a network plan is defined, an initial, generic and steady-state capacity plan can be applied to address future demand.

Something to consider during the planning process is the types of equipment that best represent the network. For example, one fleet size might be suitable for a high-frequency point-to-point network versus varied fleet sizes that may be more appropriate for a hub-and-spoke structure.

Having a single fleet type has cost advantages because of the commonalities of having same inventories and crew; however, such a constraint may limit growth opportunities. Therefore, having a good understanding of the average mix of aircraft seat count and aircraft count to fulfill the network requirements is a critical first step in the fleet-planning process.

Once the range of average gauge type required to fulfill the schedule is determined, the next step is to identify aircraft availability. This is much less of a concern for long-term planning. However, it is still critical for short- and medium-term planning. The further the outlook, the greater the opportunity to take advantage of fleet commonality and plan for new aircraft technologies. Thus, it is important to evaluate the current fleet performance and determine if the same meets only part of or all of the future network requirements. Other considerations include whether a new fleet type should be introduced or replace the current fleet.

Having a solid vision of which capacity fits the schedule, one of the most complex and important decisions related to the fleet plan is to narrow down the fleet types to match the network. To identify the optimal fleet type, size and configuration for a startup, replacement or growth aircraft, regardless of the scenario, there are additional necessary steps to guide the process to achieve market share and revenue opportunity and allocate equipment and the most optimal capacity to achieve profitability.

Airline Operating Costs

Three main components — aircraft ownership, fuel and maintenance — account for more than half of an airline’s operating expenses. While they are not entirely controllable, it is essential to factor them into the fleet-planning decision.

The ideal method for measuring and determining the best fit of capacity to demand is by using some form of revenue and cost forecast. While it is possible to do this manually, there are many software solutions that dramatically improve the results. An effective software solution considers many of the factors necessary, including operational constraints, in determining the optimal capacity deployment.

The primary drivers that go into any schedule and fleet plan include financial performance, demand, competition and the network structure. However, these are largely based on current or historic performance. For fleet planning, a long-term outlook is necessary and, unfortunately, the future performance is a large unknown. Nevertheless, it can be modeled by estimating demand trends, various network and fleet scenarios, and competitive assumptions.

There are a variety of methodologies and models to estimate the revenue and costs associated with the numerous network and fleet scenarios. As long as the appropriate steps are taken to estimate, regardless of the mechanism, the process is still valid.

Assuming an ideal network is already developed, revenue should be forecasted at a flight level. A proper model will determine the market share for the itineraries created by the schedule and the capacity built into it. The market share will then be broken into passenger demand that is allocated at itinerary levels, thereby, allocating revenue at origin-and-destination levels.

The power of using such a profitability model, such as Sabre® AirVision™ Profit Manager, allows airline planners to adjust the schedule to identify if there are any changes that can further increase the revenue potential of the schedule.

Cost is the remaining component of the forecast. Considering that approximately 85 percent of an airline’s total expenses come from costs directly from the operation itself, it is important to manage and optimize this category. Aircraft ownership, fuel and maintenance account for more than half of an airline’s expenses and, although not fully controllable, they are important inputs that need to be factored into the fleet-planning decision.

Ownership, whether leased or purchased, will largely be determined by the age of the aircraft. Quite simply, as an aircraft gets older, the ownership cost reduces. On the other hand, newer aircraft often deliver higher fuel efficiency and lower maintenance costs.

For example, fuel efficiency decreases as engines age and maintenance costs increase as the aircraft ages. So although an older aircraft with a less-expensive ownership cost may be attractive to one airline, the lower cost of fuel and maintenance may offset the higher cost of ownership of a newer aircraft to another airline.

Another example would be maintenance-related costs. During the first several years of operation, aircraft have a lighter maintenance requirement, giving airlines the benefit of lower maintenance costs. As the aircraft ages, a series of more labor-intensive and time-consuming requirements are necessary to maintain the aircraft, leading to higher costs and time out of service.

The ability to forecast these costs compared to the revenue the schedule generates allows for a variety of fleet scenarios so planners will understand which aircraft have greater profit potential.

Direct Operating Costs

Excluding ownership, fuel makes up the largest percentage of an airline’s direct operating costs. As an aircraft ages, its fuel efficiency declines. Additionally, its maintenance expenses rise. Therefore, while the ownership costs for an older aircraft might be less than that of new aircraft, the lower cost of fuel and maintenance for a newer aircraft may offset the higher cost of ownership.

For example, a same size and manufacturer narrow body having a 15-year age difference will have different costs. Since the cost of most variable expenses such as crew, ground handling, navigation and passenger-related costs should be similar, it is necessary to focus on the main cost drivers between aircraft types: ownership, fuel and maintenance (see Figure 1).

The result would be a preference for an older and lower-utilized aircraft or a newer and higher-utilized aircraft. Even if evaluating the benefit of one scenario over the other, for a fleet of 10 aircraft, the value for this demonstration purpose would be at least US$1.7 million per year.

Optimization

The previous example demonstrates the evaluation between same-size aircraft, an exercise appropriate for considering replacement aircraft or new equipment type. However, for many airlines looking to “right size” their operation, it may be necessary to introduce a different aircraft size or type into its fleet. Therefore, to evaluate the different sizes of aircraft and the count across aircraft types, an optimization exercise will help identify the ideal mix between aircraft types.

Assigning aircraft to scheduled flight segments is another important step toward improving airline profitability. Since many factors go into fleet deployment, a manual process for larger networks is normally inefficient and leads to higher costs or missed revenue opportunities. Thus, much like a forecast tool, an optimization tool, such as Sabre® AirVision™ Fleet Manager, can be used in a long-term planning environment to evaluate different fleet types by matching capacity to demand at the lowest possible cost to maximize profits.

By using an optimization tool, it is easier and more analytical to identify revenue opportunity flights where demand is expected to exceed capacity or reduce costs by deploying higher-cost aircraft on shorter routes where demand may be lighter.

Incorporating robust solutions increases the number of possible aircraft size swaps and can provide a significant increase in system contribution, especially for networks with more-complex network structures that include a hub, multiple focus cities and interwoven fleet deployment.

An optimization tool measures the value of different fleeting scenarios at a network level as well as combines economic and operational information to create solutions that are both profitable and feasible.

Additional Factors

Of course, these are not the only decision points to either scenario. Onboard product strategy such as seat configuration, in-flight entertainment and other options may be worth the cost from a marketing perspective. Other factors that are not included in these assumptions but completely relevant include new aircraft acquisition, new inventories, crew and ground training costs, and financing options. Thus, forecasting the expected revenue and cost components of the network and fleet are crucial, but they are not the only decision drivers.

Fleet planning is a highly important exercise that needs to be continuously evaluated during the planning lifecycle. Largely driven by the network, which is a result of demand and market share assumptions, the fleet is the delivery mechanism to capture traffic and can have a significant impact on profitability. Therefore, prior to any fleet purchase/lease commitment, an airline should have an idea of the ideal aircraft count and mix of sizes to fit the network based on the many inputs that go into the fleet planning process, including network, finance and operations.

The true art of fleet planning is how to merge all the factors together and determine the optimal fleet. Only then can an airline understand when aircraft will be inducted into the fleet, how to finance the aircraft, train personnel and prepare for new inventories to support the new or replacement aircraft.

Trends In Network Planning

In addition to assisting airlines with their long-term aircraft replacement strategies, Business Consulting Engagement Director Ed Bowman consults airlines in myriad areas across their business. Here, he discusses some of the key trends he is seeing in the industry, including passenger connectivity and how to increase revenue by chosing the right partners and constructing optimal seasonal schedules.

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