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1 Foundations of fleet planning
Fleet planning and the airline business
Airlines are complex organisations engaged in the daily miracle of safely moving millions of people and goods by air from one place to another. They compete vigorously with one another, struggle with the vagaries of weather, security imperatives, often wild variations in operating costs, and high expectations of their customers. They walk a never-ending tightrope separating financial success and ruin. They wrestle with the day-to-day challenge of matching their supply, in the form of seats on aircraft or cargo space, with levels of demand for their services that are both unpredictable and fickle. On top of that, along with health and nuclear power, aviation is one of the most tightly regulated industries in the modern age.
There is no such thing as a typical airline. From the sumptuous luxury offered by top-tier carriers in the Gulf to the sometimes chaotic world of the low-cost carriers, airlines offer a service â and a price â for everyone. Central to every airlineâs existence is its fleet, which is not only the most highly visible of an airlineâs assets, but is a vehicle through which brand is communicated. The choice of aircraft is crucial to financial success. Indeed, a significant portion of the capital required to enable an airline to function is consumed by the aircraft they deploy. Yet, aircraft are astonishingly expensive. A brand new Airbus A380 will set you back a cool $432.6 million according to the average list price (which, by the way, no one actually pays) and level of options selected.1 For this, a buyer would take delivery of a flying machine with a typical weight of around 277 tonnes (when an allowance for options is included) before the addition of fuel and payload. An A380 consists of around 4 million individual components with 2.5 million part-numbers produced by around 1,500 companies from 30 countries around the world.2
The value of the backlog of orders in the Airbus and Boeing order books at the end of 2015 amounted to an eye-watering $1.5 trillion at list prices.3,4 For Airbus, this represented around 10 years of backlog. The company is totally undaunted by the magnitude of the task ahead. Their Chief Operating Officer simply says to his staff, âLetâs stop bitching and moaning and get on with the jobâ.5 Vast expenditure on aircraft is needed to serve an airline industry that may generate an average profit per passenger of just $9.59 according to the International Air Transport Associationâs (IATA) forecast for 2016.6 What a crazy business!
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The planning of a fleet of aircraft for an airline is really no different from any other planning activity. It is fraught with complexity, dilemmas and uncertainty. Building a successful fleet plan requires a blend of engineering and commercial know-how, the ability to predict the future, a good deal of intuition, plus a lot of luck. Good fleet planners, one can almost say, are born, not made.
This book specifically addresses aircraft with a passenger-carrying capacity of 100 seats or more. Such aircraft are not only acquired by commercial airlines. Leasing companies, heads of state, governments, large corporate organisations, financiers, rock groups, humanitarian organisations and âhigh net worthâ individuals are also customers for large aircraft. We shall be concentrating mostly on airline-related aircraft evaluation and decision-making.
Defining fleet planning
A good starting point is to define what we mean by âfleet planningâ from an airline perspective.
However, a leasing company may well adopt the following attitude.
Already, we have two very different objectives of customers seeking the same product. We could go on and expand these definitions even further. For example, there are many different types of airline. Scheduled, leisure, full service, low-cost, regional or cargo airlines are all driven by a multitude of objectives according to their particular markets and business models and can consequently be expected to adopt different approaches to planning. On the other hand, leasing companies consider the aircraft as a financial tool, or a vehicle to generate regular rental income. Crucially, a lessor expects to realise a profit on the eventual sale of the asset.
However, letâs concentrate for a moment on our airline-based definition of fleet planning and consider the key words. Firstly, we can consider fleet planning a process. We can certainly envisage that a structured review of the airlineâs market positioning and aspirations must take place. It is essential that any type of structured review take place on a continuous, rather than ad hoc, basis. Importantly, the process should be driven by the major principles of project management.
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Next, we determine that an airline acquires and manages its fleet. Acquisition may take the form of outright purchase or rental or a mixture of both. The degree to which an airline opts for one or the other could be driven by factors such as financial expediency, spreading risk among different suppliers, the availability of aircraft, or even national pride. It is true to say that fleet planning today has become more than just a matter of acquiring aircraft. The management of that capacity, such as changing aircraft assignments either within the airline or with alliance partners, or realising an unexpected cash value by selling an asset, is just as much a part of the process.
Our definition goes on to describe aircraft capacity. Capacity, in the sense of fleet planning, is a generic term for the size of an aircraft and may relate to the number of seats as well as volume available for cargo. However, the number of frequencies employed in a market plays a major role in a fleet plan. As we shall see, the understanding of how markets respond to the relationship between aircraft size and frequencies offered is crucial to airline success.
Fleet planning should not be concerned with todayâs markets alone. Anticipated markets must be taken into account, too. Planning aircraft size for a market is rather like buying shoes for children. A good fleet plan allows the market to grow into the aircraft just as little feet must grow into shoes. You do not want the shoes to become too small too quickly in a situation of rapid growth. Airlines operating small numbers of aircraft may not be able to fine-tune their capacity to their markets as easily as large airlines, where it may be easier to allocate different aircraft sizes to markets that grow at different rates.
A variety of defined periods of time suggests that a fleet plan should be valid for several periods. The essence of this part of the definition is that one particular solution may only be appropriate for a single time horizon. It may be the case that taking a longer-term view would result in a wholly different initial solution. This is because we might invoke the effects of technical obsolescence or else the imposition of anticipated environmental restrictions. So, a fleet plan should take account of different time periods in order to judge whether the solutions would change. Only then, can an optimum choice be made.
Lastly, our definition refers to maximising corporate wealth. Although this does sound rather obvious, it is nevertheless the case that many airlines in todayâs competitive world have pursued market share at the expense of their bottom lines. The temptation to dominate through market share alone is a dangerous phenomenon, and the history of air transport bears testimony to this. It is as well to emphasise that, for the majority of the worldâs airlines, overall profitability should be the main driver of the fleet decision.
One of the most frustrating things about fleet planning is that no matter how logical, how financially sound, how compelling the case for implementing a particular fleet, the real decision may be driven by purely extraneous political factors. The content of this book is not built around a planning system controlled by unwise or unwelcome intervention by outside agencies, but rather one controlled by cool and old-fashioned logic.
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The complexities of aircraft development
Designing a new aircraft type, then developing, producing, marketing, selling and supporting a fleet of those aircraft in service is an amazingly complicated, expensive, time-consuming and risk-laden process. Manufacturers must embrace innovation, then develop and deliver new technologies at a level of safety and reliability that will satisfy not only their customers but the regulators as well. These customers crave aircraft that are economically viable and give them a competitive edge. Their buying behaviour is often fickle, and who can blame them when their own activities take place in a world of constant flux? To succeed, a manufacturer must be prepared to play the long game.
Aircraft development in todayâs world involves the establishment of a global supply chain network of hundreds of companies, large and small. Even the most experienced manufacturers may misjudge the market or experience unexpected technology glitches. In fact, the delivery of a new aircraft type with no delays or technical issues is the exception rather than the norm. Where delays occur it is often after the detailed design stage has been completed and when a prototype is under construction. This is where integration issues, either physical or software-related, may bubble to the surface.
Developing the 787âs composite wing was a leap in technology for Boeing and problems with the structure led to years of delay in development and even surfaced during the production of the aircraft.7,8 Airbus similarly struggled with wiring issues that delayed the A380 and added billions of dollars to the project costs.9
New and inexperienced manufacturers are even more vulnerable. Bombardierâs foray into a larger size category with advanced technology has not been trouble free, although the CSeries is an excellent product. A succession of delays served to push up costs and trigger a $1 billion injection by the provincial government of Quebec.10 COMAC of China worked diligently for many years to establish a credible commercia...