WWW.avionconsult.biz Aircraft and Engine Finance and Leasing Americas Conference Las Vegas, Oct. 1-4, 2012 Dr. Bijan Vasigh Professor, College of Business Embry-Riddle Aeronautical University Daytona Beach, FL (386) 871-5458 Factors Affecting Aircraft Value Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Agenda: Industry key challenges Commercial aircraft manufacturing A methodology for aircraft valuation Factor affecting residual value Q&A. Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Industry key challenges
Every one-dollar increase in the price of oil adds $1.67 billion in costs for the global airline industry The industry-wide fuel bill in 2011 was about $170 billion The outlook for consistently high oil prices and continued oil price volatility presents some of the biggest challenges for the world airline industry. The demise of Delta Air Lines partner Comair was a result of high fuel costs that made its 50-seat regional jets too expensive to fly.
Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Industry key challenges Volatile Demand Very high elasticity of demand Airlines can not increase ticket prices without an adverse effect on revenue Rigidity in Supply Very high sunk cost Expensive to dispose current fleet Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz U.S. Passenger Airlines: 1Q 2012 Index (2000=100)
0 50 100 150 200 250 300 350 400 Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Commercial aircraft manufacturing Duopoly aircraft industry Early contributions to commercial aircraft industry Ford Tri-Motor Junkers German Transport North America Boeing Aircraft Company, McDonnell Douglas, and Lockheed Europe Airbus Russia and Eastern Europe Regional jet ERJ, CRJ, MRJ, and SRJ
Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Aircraft value Base Value o the appraisers opinion of the underlying economic value of the aircraft Market Value o reflect the state of supply and demand in the market that exists at the time Actual transaction price Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Financial Relationship Capital Cost Operating Cost Total Cost Objective find the age that that Minimizes total cost JetBlue: 6.6 years average fleet age Singapore: 7.1 years average fleet age Allegiant: 22.1 years average fleet age
Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Aircraft value Direct operating costs Aircraft size/range Speed Engine type Technology Geographic distribution Convertibility Commonality In or out of production Number in service/on order Number of operators Market forecasts Number available Number stored Government regulations Reliability Manufacturer status Number of operators
Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Aircraft value The introduction of 737 max by Boeing will drive the values of 737- classic and 737-NG down deeply and quickly. Boeing states the 737 MAX will have a 16% less fuel consumption than the Airbus A320 and it will have 4% less than the A320neo. Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Aircraft Valuation Model 1 2 1 2 ..... (1 ) (1 ) (1 ) n Aircraft n NCF NCF NCF Value k k k Total revenue = block hours RPM= Revenue passenger mile RTM= Revenue ton mile RRPM = revenue per revenue passenger mile (passenger yield) RRTM = revenue per revenue ton mile (cargo yield) AR=Ancillary Revenue Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Direct operating costs
Fuel Efficiency or Average Fuel Burn (Per Block Hour) Average Aircraft Utilization Block Hours Average Stage length Crew cost per Block Hours Depreciation per Block Hours Fuel cost Maintenance Cost per Block Hours
Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Total Costs: Variable direct operating costs. Fuel and oil costs. Flight operations. Aircraft Fuel & Oil. Insurance & Uninsured losses. Lease/Rental of aircraft. Flight Crew Salaries, Expenses and Training. Direct engineering costs. Airport and en route charges. Passenger service costs. Direct Maintenance. Labor. Repairs (by outside agencies). Materials. Fixed direct operating costs: Aircraft standing charges. Annual flight and cabin crew costs. Engineering overheads. Indirect operating costs (IOC) Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Theoretical Value Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz
$361.14 $2,241.39 $24.77 $528.91 $89.24 $214.67 $511.91 $2,005.59 $124.26 $353.67 $258.71 $148.52 Flight Crew Cost Fuel Cost Other Costs Total Maintenance Costs Depreciation Aircraft Rent 737-700 Average Block Hour Cost Comparison in different airlines LCC Legacy 0 200 400 600 800 1000 1200 Average Flight Stage Speed miles per BH Utilization (RH/BH) *1000 Fuel gallons per BH Utilization BH/ Day * 100 Fuel gallons per BH/Seat * 100 Legacy LCC Operational characteristics A319 in different Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Theoretical Aircraft Value with varying Maintenance Costs: A320-200 Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Net Aircraft Value Trend Changes Discount Rate Fuel Cost Maintenance Pax Yield Block Hour +/- 1% +/- 1% +/- 1% +/- 1% +/- 0.1% Narrow Body + -5,403,298.86 -4,593,908.33 -1,771,205.98 17,973,530.99 1,940,246.46 A320-200 - 6,166,950.61 4,019,127.94 1,490,405.89 -15,821,149.01 -1,941,625.81 + -3,843,702.44 -3,223,495.48 -1,253,483.90 14,047,543.89 1,578,608.41 B737-700 - 4,386,930.35 2,820,178.34 1,076,016.99 -12,327,185.36 -1,558,857.94 Wide Body + -12,994,586.12 -13,254,621.43 -2,850,478.44 48,316,100.60 4,643,621.30 A330 - 14,831,102.01 11,596,230.38 2,410,338.72 -42,398,979.69 -4,585,520.25 + -12,753,536.92 -12,140,706.04 -3,496,076.36 44,273,757.28 4,554,906.01 B767-400ER - 14,555,985.49 10,621,685.80 2,954,927.68 -38,851,689.45 -4,497,914.97 Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Residual Value Operation Cost, Capacity, Payload and Range Blended Winglets has demonstrated drag reduction between 5 to 7%, increases range and fuel efficiency and consequently the residual value. Dr. Bijan Vasigh Las Vegas, Nevada October 2, 2012 WWW.avionconsult.biz Thank You and Questions