Journal of Air Transport Management 25 (2012) 26e29

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Journal of Air Transport Management

journal homepage: www.elsevier.com/locate/jairtraman

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Aircraft replacement strategy: Model and analysis

Massoud Bazargan a, *, Joseph Hartman b
a b

College of Business, Embry-Riddle Aeronautical University, 600 S. Clyde Morris Blvd., Daytona Beach, FL 32114, USA Industrial and Systems Engineering, University of Florida, Gainesville, FL 32611, USA

a b s t r a c t
Keywords: Aircraft acquisition Aircraft replacement Aircraft purchasing Aircraft leasing

This study presents a model to help airlines plan their strategic eet acquisitions and disposals. It minimizes the discounted costs of owning or leasing and operating a eet by identifying which aircraft to buy, sell and lease over the planning horizon. The paper explains how the related cost data were compiled and analyzed. The model is applied to two US airlines with different business models and shows that aircraft leasing is generally the preferred alternative with benets from having newer aircraft and less eet diversity. 2012 Elsevier Ltd. All rights reserved.

1. Introduction Most aviation regulatory agencies and aircraft manufacturers foresee that demand for air transport will rise in the next 20 years. Airlines seek to strategically position themselves to meet this rise in demand. Aircraft replacement strategies are important decisions that impact all processes related to planning and operations within airlines, and involve when and how many aircraft of different types to purchase, lease and dispose of within an airlines planning horizon. These decisions must support an airlines short and longterm decisions affecting their nancial, operational and competitive performance. Most prior work in this eld addresses the problem in the context of eet planning (e.g. Gao et al., 2009) and focus on short-term tactical decisions and utilizing the available eet rather than consider long-term changes to the size or composition of the eet. The limited aircraft replacement models include Hsu et al. (2011) who present modeling approach to aircraft replacement strategy with an application to an airline in Taiwan. One possible reason for such a limited work on aircraft replacement strategy is the reluctance of airlines to share their condential nancial data. 2. Mathematical model We adopt a binary-integer linear programming model to identify the number of aircraft to buy, lease or sell in an effort to minimize total discounted costs. The model makes use of:
* Corresponding author. Tel.: 1 386 226 6705. E-mail address: bazargam@erau.edu (M. Bazargan). 0969-6997/$ e see front matter 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.jairtraman.2012.05.001

Index: k i j

l LH SH

Index for eet type (k l,.., K); Index for age of the aircraft (i 0,..,N), N is the maximum aircraft age allowed; Index for period (j 0,..,T), T is the number of periods (years) in the planning horizon. Time 0 represents current year; Index for lease period (l 1,..., Lk), e Lk is the maximum lease period for eet type k; Set of aircraft in the long-haul eet (typically wide-body eet); Set of aircraft in the short haul eet (typically narrowbody eet).

Decision variables: Bk i j j Lk i;l Sk i j ZBk(j) XOk i j XLk i j Number of aircraft to buy of eet type k, age i, ordered in period j; Number of leased aircraft of eet type k, age i, ordered in j for a lease period of l; Number of owned aircraft of eet type k, age i, sold in period j; A binary variable taking a value of 1 if the airline has aircraft of eet type k in j and zero otherwise; Number of owned aircraft in operation of eet type k, age i, in j; Number of leased aircraft in operation of eet type k, age i, in j.

Parameters: Unit purchase price for aircraft of eet type k, age i, PBk i j ordered in j. (For ordering new aircraft i 0);

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Unit annual lease price for aircraft of eet type k, age i, ordered in j, for a lease period of I; d(j) Discount factor for period j; Fixed cost for introducing/keeping aircraft of eet type k FBk(J) in j; Unit annual operating and maintenance cost for owned COk i j aircraft of eet type k, age i, in j; j Unit annual operating and maintenance cost for leased CLk i aircraft of eet type k, age i, in period j; Unit salvage value for owned aircraft of eet type k, age i, in j; Rk i j Average seat capacity for aircraft eet type k; capk dLH(j) Demand for seats on long-haul (wide-body) ights in j; dSH(j) Demand for seats on short haul (narrow-body) ights in j; min_AC_reqk (j) Minimum number of aircraft of eet type k needed in j; max_AC_reqk (j) Maximum number of aircraft of eet type k needed in j; Average waiting time for delivery of a new aircraft of eet lagk type k; Budget(J) Available budget for aircraft purchase and lease in period j; Current number of owned aircraft in operation of eet XOk i 0 type k, age i; Current number of leased aircraft in operation of eet XLk i 0 type k, age i. The model is then represented as:

PLk i;l j

N  X i0

 k k XOk i j XLi j  M $ZB j

cj; k

(8)

k Sk i j  XOi1 j 1

ck and i; j  1

(9)

K X N  X k1 i0

Lk K X N X  X k PBk i j$Bi j

k PLk i;l j$Li;l j

k0 i0 l1

(10)

 budjetj
N  P i0

cj

min AC reqk j   max AC reqk j

 k XOk i j XLi j

(11)

cj and k ci; j; k (12) (13)

k k k k Bk i j; Li;l j; Si j; XOi j; XLi jZ

ZBk jf0; 1g

Minimize

K X N X T X k1 i0 j0

k dj PBk i j$Bi j

K X N X T X k0 i0 j0 K X N X T X k1 i0 j0

dj

Lk  X l1

k PLk i;l j$Li;l j

k dj XOk i j$COi j

(1)

K X N X T  X   k k dj Sk XLk i j$CLi j i j$Ri j k1 i0 j0 K X T X k1 j0

dj FBk j$ZBk j

Subject to:

X
kLH

capk

N  X i0

 k XOk i j XLi j  dLHj  k XOk i j XLi j  dSHj

cj

(2)

X
kSH

capk

N  X i0

cj

(3)

  k k k Sk XOk 0 j B0 j lag 0 j ck and j  1 and j  lag

k k k XOk i j XOi1 j 1 Bi j Si j Lk X l1

(4) (5)

The objective function (1) minimizes the total discounted cost over the planning horizon. The rst three terms in the objective function represent the total purchasing, leasing and operating and maintenance costs over the planning horizon, respectively. The fourth term is the discounted revenue generated from the sales of owned aircraft and nally the last term in this function represents the discounted cost of keeping eet in the airlines network. This term includes costs such as hangers, crew training, spare parts, etc. The set of constraints 2 and 3 insure that the demand for wide- and narrow-body aircraft are met each year within the planning horizon. Constraints 4 through 7 maintain the balance on the number of aircraft for new (age 0) and old (age > 0) for both owned and leased aircraft for each year respectively. Constraint 8 ensures a cost associated with a eet type is incurred if an aircraft of that eet type is in the airlines network for each year. M is a sufciently large positive number. Constraint 9 limits the number of salvaged aircraft from each eet to the available number of owned aircraft in that eet for each year. Constraint 10 imposes a budget restriction for purchasing and leasing aircraft in each year. For operational, marketing and strategic purposes, the airlines may impose a minimum and/or maximum number of aircraft of a specic eet type within their network. Constraint 11 imposes these limits for each year. Constraints 12 and 13 impose integer and binary status on the models decision variables. This model does not attempt to dispose of nor enforce the lease expiry of all aircraft at the end of planning horizon T. The airline continues to operate at year T 1, where there are the same number of aircraft, both owned and leased, as the number of planning horizon T. 3. Model parameters

ck and i; j  1

XLk 0 j

  k Lk 0;l j lag
Lk P i1

ck and j  1 and j  lagk

Lk K N P P P u0 v1 l1

(6)

k XLk i j XLi1 j 1

Lk j i;l

Lk v u;l

(7)

ck; i and j  1; u j v i; and l v j

The airlines typically do not have or do not wish to disclose the relevant parameters. We thus initiated an alternative search. Aircraft values including purchase and salvage prices (PBk i j and k Ri j) for each eet were compiled from Collateral Verication (2010) and Airnance Journal (2010) databases. These databases provide both the aircraft book and market values with respect to their ages. We adopted a series of regression analyses to identify the relationships between aircraft market values and their ages for each eet. We found that the following equation provides a valid

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M. Bazargan, J. Hartman / Journal of Air Transport Management 25 (2012) 26e29

estimate with an R2  0.968 for aircraft market values with respect to their ages for all eet.

aircraftage new aircraftage 0$eexponent$age

The aircraft annual lease prices (PLk i;l j) vary depending on the leasing company and the airlines network. Again, Collateral Verication (2010) was used to determine the lease payments. A logarithmic equation was found to provide a good estimate for annual aircraft lease prices with respect to their market values with an R2  0.968

Aircraft annual lease price coefficient$lnmarket value constant

Fig. 1. Aircraft replacement strategy for AirTran Airways.

The operating and maintenance cost estimates (CLk l j) were obtained from the Airline Monitor (2010). The operating cost of a eet tends to be stable and does not depend on the age of the aircraft (Dixon, 2006). The RAND Corporation (2010) has conducted research on maintenance costs for both commercial and military aircraft as they age (e.g. Keating and Dixon, 2003) that shows that new aircraft have 17.6% annual rate of increase in maintenance cost. For mature aircraft, ages 6e12 years, an increase of 3.5% and for aging aircraft (after 12 years) this increase rate is 0.7% per year. We adopt Conklin and Decker (2010) to determine the cost associated with introducing a new eet, US Bureau of Transportation Statistics for current eet sizes and International Air Transport Association for nominal discount factor. Clark (2007) indicates that major technological change in aircraft manufacturing occurs every decade. Accordingly, we set the planning as 2011 to 2020. 4. Analysis We examine AirTran Airways, a low cost carrier and Continental Airlines, a major airline operating within the US. The rationale for selecting these two airlines was to investigate if the aircraft replacement strategies vary with eet diversity, network size and/ or business models. In 2010, AirTran Airways operated only two types of narrow-body eet, with 138 aircraft and more than 600 daily ights while Continental Airlines operated more than ten types of narrow and wide-body eet, with 352 aircraft and more than 2200 daily short and long-haul ights. The models for the two airlines were solved using Cplex Solver.1 Figs. 1 and 2 present the solutions for the aircraft replacement strategies for the two airlines between 2011 and 2020. The discounted costs over the ten years are $3.45 billion and $53.50 billion for AirTran and Continental airlines respectively. These gures provide the eet type, number of aircraft to buy, lease, and sell. It should be noted that these solutions also include current airlines orders for owned and leased aircraft to be delivered between 2011 and 2020 as reported by the US Bureau of Transportation Statistics. To avoid clutter, the gures do not present the ages of the aircraft to buy, sell or lease. The solutions for both airlines favor:      Brand new aircraft for both buying and leasing; Short-term leases; Selling older aircraft with ages of 12 years and older; Discouraging eet diversity; Leasing aircraft over buying them.

Fig. 2. Aircraft replacement strategy for Continental Airlines.

Fig. 3. Solutions for percentages of leased aircraft for AirTran and Continental airlines from 2010 to 2020.

example Hsu, et al., 2011 and Oum, et al., 2000) also show a growing interest for leasing over buying among airlines. Based on the solutions, Fig. 3 presents the percentage of leased aircraft out of total aircraft in their networks for the two airlines from 2010 to 2020. 5. Sensitivity analysis In this section we further explore the sensitivity of the solutions presented in Section 4. In particular, we examine how the strategies of lease/buy are affected as we change their prices and identify major cost drivers and their roles. To determine how sensitive the solutions are to lease/buy prices, we let the prices uctuate between 50% and 50% of their current values. The strategy started to favor buy over lease when the lease prices went up by 30% and purchase prices are reduced by 40% which are unlikely events. We made uctuations to other parameters such as annual demand and planning horizon. The strategy still continued to favor lease over buy. The solutions in Section 4 presented the total discounted costs for the two airlines over ten years. These costs include purchase, lease, operation, maintenance and depreciation costs minus

These recommendations are similar for both airlines, which have different network sizes and eet diversity. Other studies (see for

http://www-01.ibm.com/software/integration/optimization/cplex-optimizer/.

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costs. This gure presents the aircraft market value and cumulative operating and maintenance cost for a sample eet over ten years. As the gure suggests, the airlines spend more money on operation and maintenance in the rst years of operating this new aircraft than what the aircraft is worth at the end of three years. Further analyses with other eet also conrmed that no aircraft was worth more than what it was spent on within their rst four years of operations.

6. Conclusion
Fig. 4. Percentages of cost components for the two airlines over 10 years.

This study introduced a model to highlight major factors in aircraft replacement strategy for the airlines. The model minimizes the total discounted cost by identifying the number of aircraft to lease, buy and sell over a planning horizon. The study explores how cost data were compiled and analyzed from aviation databases. The model was applied to two US airlines with different network sizes and business models. The suggested strategy favors new aircraft to be leased over short-term periods. This strategy discourages eet diversity. Various sensitivity analyses tend to imply that leasing aircraft is preferred to buying them. The analyses also suggest that airlines will benet from operating more efcient eet, even if they cost more to acquire.

References
Fig. 5. Aircraft market value and cumulative operations and maintenance cost over 10 years. Clark, P., 2007. Buying the Big Jets e Fleet Planning for Airlines, second ed. Ashgate, Farnham. Conklin, Decker, 2010. http://www.conklindd.com/. Dixon, M., 2006. The Maintenance Costs of Aging Aircraft e Insights From Commercial Aviation. RAND Corporation, Santa Monica, Calif. UG1243.D568. Gao, C., Johnson, E., Smith, B., 2009. Integrated airline eet and crew robust planning. Transportation Science 43, 2e16. Hsu, C., Li, H., Liu, S., Chao, C., 2011. Aircraft replacement scheduling: a dynamic programming approach. Transportation Research E 47, 41. Keating, E., Dixon, M., 2003. Investigating Optimal Replacement of Aging Air Force Systems. RAND Corporation, Santa Monica, Calif. MR-1763-AF. Oum, T.H., Zhang, A., Zhang, Y., 2000. Optimal demand for operating lease of aircraft. Transportation Research B, 17e29. Rand, 2010. Rand Corporation. Available from: http://www.rand.org/topics/ maintenance-repair-and-overhaul.html.

revenue generated from sales of aircraft. Fig. 4 presents the percentages of each of these cost components over 10 year period for each airline. As this gure suggests the major cost drivers are operation and maintenance costs. These two components make up more than 90% of incurred cost over the decade planning horizon. In fact, as the gure shows, the lease/purchase costs are insignicant compared to operation and maintenance cost gures. Fig. 5 provides a comparison between lease/buy and operations and maintenance