Fleet replacement analysis for replacing the md-80 fleets

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Reference no: EM131029635

Fleets Replacement Analysis from SH&E Consult.

The following reports and assumptions has been considered following Fleet Replacement Analysis for replacing the MD-80 fleets with new fleets of Airbus A-320.

1. InselAir plans to expand its aircraft fleets with 18 MD-80 at the rate of $4 M. The total purchase price for MD-80 valued at $72 M and to scrap the aircraft at end of 15 years at the rate of $ 100,000 each.

2. I researched the Airline monitor to check out for different parameters such as Gallons/Block Hour, Bloch Hours/year, cost of maintenance and block hour, Number of seats and Block hour speed for spreadsheet analysis.

MD-80 Operating Cost and Statistics.

Gallons/Block Hour                                1,012

Block Hour/year                                    95,270

Cost of Maintenance/Block Hour             $543.02

Number of seats                                    166

Block hour speed                                   383

Purchase price                                      $4,000,000

Scrap value price in the 16th year           $100,000

A-320 Operating Costs and Statistics

Gallons/Block Hour                                   743

Block Hour/year                                       127,598

Cost of Maintenance/Block Hour                 $342.98                                    

Number of seats                                       178                                             

Block hour/speed                                     400

Purchase price                                         $64,666,000

Scrap value price in the 16th year             $32,300,000

3. The price listed for the Airbus A-320 is $97 M as indicated in 2015 new Airbus list prices. Then considering InselAir track record we ensure to buy the A-320 for the 2/3 of the listed price. Therefore the purchasing price of A-320 will be $64.6. In the 16th year A-320 are expected to be sold for half the purchase price at the rate of $32.3 M.

4. The report of the research for the annual crude oil, Jet Fuel price and AEO2014 Early Release Overview that estimated the current and future fuel cost reveal, that from annual crude and jet fuel price in 2015 is 2.26 per gallon. Short term energy outlook from the US energy Information Administration indicate that Brent crude price was $98.89/bbl. in 2014 (1bbl = 42 US gallon).  So the average Fuel price $98.89/42 = $2.35 in 2014. Projected Fuel price decreases in 2017 to $92.bbl ($2.20) and increases linearly to $ 141/bbl.in 2040. So I have used averaging method to calculate the average decrease rate from 2015 - 2017 as (2.26 - 2.20/2 = 0.06. So Fuel prices for 2016 should be 2.26 - 0.36 = 1.9 and so on till 2017.

5. Research on the discount rate indicates that most airline using 10% discount rate. Based on the good credit report I think is a good idea to settle with the rate. In the course of my research I noted that Southwest Airlines uses 15%discount rate and I have used that for the sensitivity analysis report.

6. Since Allegiants fly long routes, so our segment lengths are relatively long which give us lesser fuel burns. So for the new Airbus A-320 I have considered the lowest Gallons per hour of any airline.

7. Because of long segments, InselAir can as well fly at higher speeds. So, I have considered highest speed in miles per block for any airline using A-320.

8. Allegiants business has long segments and A-320 has greater capability that MD-80 annual utilization for the A-320 will be 20% higher than MD-80. This assumption is used to calculate block hours/ year for A-320.

9. Allegiant proposed fleet of A-320 will be brand new, it is assumed that the first year maintenance expenses will be equal to lowest for any airline operating the Airbus 320. This is again noted from page 17 as 304.55. As A-320 continue to stay in service, the maintenance cost increases by 2% per year. This is factored in excel model by incorporating the required formula. While the maintenance cost for MD-80s increases by 5% per year and also factored in the excel model as well.

10.  It is assumed that InselAir would want to use the maximum seating capacity which is equal to the highest of any airline operating A-320 and this is 166 seats.

11. Using discount rate of 10% and other data as explained above the fleet replacement analysis was carried out. Cost per available seat mile (CASM) for MD-80 is found to be 0.01606

Recommendations:

1. From the detailed Replacement analysis I noted that CASM for A-320 continues to be much lower than that of MD-80. Meaning that I recommend replacing MD-80 with A-320.

2. See detailed spreadsheet attached.

References

Annual crude oil and Jet fuel prices (http:.www.airlines.org/pages/annual-crude-oiland Jet-Fuel-prices.aspx)

Airbus list price (http://www.airbus.com/presscenter/corporate-information/key-documents/?doc

A review of trends in the airline and commercial jet aircraft industries (http://www.airlinemonitor.com).

Attachment:- Fleet Replacement.rar

Reference no: EM131029635

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