Airline Economics Airline Planning Workshop

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1 Airline Economics 2016 Airline Planning Workshop The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing. Boeing is a trademark of The Boeing Company.

2 Objectives Airline Economics Define the operating cost components that impact airline profitability Introduce maintenance costs and its drivers Understand introductory and transition costs Select the right airplane by analyzing options from an airplane cost perspective

3 Total aircraft efficiency Aerodynamics Engine Weight

4 Define the operating cost components that impact airline profitability The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing. Boeing is a trademark of The Boeing Company.

5 Airplane Economics Operating Costs Revenue Profits

6 Operating cost categories Total Operating Costs (TOC) Airplane Related Operating Costs (AROC) Systems Related Operating Costs (SROC) Payload Related Operating Costs (PROC) Cash Airplane Related Operating Costs (CAROC) Ownership Costs General and administrative Airplane Passenger Cargo Passenger Related Costs Cargo Related Costs Fuel Flight Crew Cabin Crew Maintenance Landing Navigation Airplane Station Ground Power Financing Depreciation Introductory Investment Operating Lease Hull Insurance Food In flight services Handling Commissions Advertising Reservation and sales Baggage handling Handling Commissions Advertising Reservation and sales

7 Contributions to Total Operating Costs System Related Operating Costs Cargo Related Operating Flight Costs Crew Cash Airplane Total Related Operating Related Operating Costs Costs Costs Cabin Crew Passenger Related Operating Costs Other Ownership Navigation Fees Landing Fees Fuel Airplane Related Cash Airplane Operating Costs Related Operating Costs Maintenance

8 Fuel costs are driven by: Airplane type Airplane size Payload Trip distance Airline rules

9 Oil and jet fuel price outlook Oil price volatility returns, mid-term price outlooks $60 - $80 per barrel Forecast Oil price forecasts are nominal annual average prices for Historical data source: EIA, futures: ICE

10 Over 28% fuel reduction with design improvements 0% 737 Classic 737NG Blended Winglets Carbon Brakes Base Relative Fuel Consumption Enhanced Engines 737 MAX -10% -7.5% -4.0% -0.4% -2.0% 28% -20% -30% -14.0% -40% -50% Baseline is the 737 Classic, 1,000 NM mission

11 Flight crew costs: Salary/block hour rates Benefits Hotel & per diem Recurrent training

12 Cabin crew costs: Number of attendants Salary/block hour rates Benefits Hotel & per diem Recurrent training

13 Maintenance costs account for 14% - 20% of cash airplane related operating costs Airplane size and airline operations are the major drivers of costs

14 Each bar represents a different way to view total maintenance costs Total maintenance cost Labor Line A C D/4C/SI APU Equipment and furnishings Structure Landing gear Systems Routine Nonroutine Flight cycle Material Component maintenance Engines Flighthour Labor/material Maintenance Events ATA Chapters Routine/ Non-routine Flight-Cycle Flight-hour

15 Navigation fees are driven by: Airplane weight # LHR Distance flown Countries flown over # SIN

16 An example of how navigation fees vary Operating Aircraft: ER JFK-FRA LHR-CDG LHR-SVO Distance 3,351 nm 188 nm 1,359 nm Cost $4,079 $689 $4,348

17 Landing fees are defined by each local authority Landing fees are driven by: Airplane weight Noise Emissions

18 An example of how landing fees vary W W ERW New York (JFK) $981 $1,106 $1,192 Shanghai (PVG) $473 $530 $568

19 Costs vary by airplane and operation ~ $11,600 per trip ~ $165,000 per trip

20 The Sonic Cruiser

21 Maintenance Cost Drivers: From a Manufacturer s View The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing. Boeing is a trademark of The Boeing Company.

22 Maintenance costs drivers two views Manufacturer Inherent Aircraft Reliability Aircraft Maintainability Product Support Airline Operations Maintenance Practices Accounting Practices Support Practices

23 The 3 major areas of maintenance costs influence a manufacturers view Product Support Continuous Improvement Engineering Training & Spares Documentation Access MPD MMEL Commonality Maintainability Characteristics Inherent Reliability Design System Redundancy Quality Type MPD Maintenance Planning Data MMEL Master Minimum Equipment List

24 Airplane size is a driver of maintenance costs Maintenance Cost / Flight Hour Older Technology Newer Technology Advanced technologies reduce the impact of size on airplane maintenance costs Airplane Size

25 Technology - getting more from fewer parts X/ parts 13 parts

26 Electrical Power Distribution Optimization Traditional Power Architecture 787 No-bleed Systems Architecture Engine Bleed Air Electric Power

27 Technology Simplified Trailing Edge Bar Linkage Bar Linkage 787 Single Hinge

28 787 Flap/Slat Sequencing F L A P S

29 Systems driven maintenance interval at EIS Longer intervals, less maintenance, less often +39% Setting new industry standards at EIS +100% *EIS entry into service

30 Technology composite fuselage Composites drive lower weight, fewer parts and fasteners, and less maintenance

31 First internal structures inspection interval at EIS Longer intervals, less maintenance, less often +33% +50% Setting new industry standards at EIS +100% *EIS entry into service

32 Airplane age impacts costs Airframe maintenance cost/flight hour Newness Maturity Aging Higher Utilization Actual Lower Utilization Amortized Two dimensional aging curve Defined by age (years) and annual utilization (flight hours) Years in service

33 What about engines? The longer an engine is on wing, the lower the maintenance costs.

34 Major factors that influence engine maintenance costs Engine thrust rating Engine derate Operating environment Engine Maintenance Costs Average flight leg

35 Engine maintenance overview Plan Period (Typically Years) 1 st Interval 1 st Shop Visit $ spent 2 nd Interval 2 nd Shop Visit $ spent 3 rd Interval 3 rd Shop Visit $ spent $/Engine SV $/Engine Flight Hour Time On-Wing Cost Breakdown

36 Environmental effects on engine maintenance Environmental effects can impact both time-on-wing and shop visit costs Sand Dust Pollution Compressor Blades Compressor Vanes Combustion Chamber Turbine Blades Turbine Vanes Sand Dust Pollution North America Seasonal South America Europe Seasonal Seasonal Source Van Donkelaar, A., et al., Global estimates of ambient fine particulate matter concentrations from satellite-based aerosol optical depth: Development and application, Environmental Health Perspective, 2010, Volume 118, Issue 6 North Africa/ Middle East China India Source 737NG/CMF567B WTT Meeting, May 22-24, 2012

37 Takeaways for engine maintenance costs Keep the engine on-wing by using preventive measures Minimize full power takeoffs where they are not needed (i.e. maximize the use of derates where possible) Purchase only the thrust rating required. Sub-fleet of higher thrust required for certain markets is a way to minimize costs Water wash engines as needed to reduce environmental impacts

38 How can airlines reduce maintenance costs? Understand the costs Improve operations Find opportunities o o o Capture Monitor Compare o o o Escalate intervals Outsource Delete unnecessary tasks o o o Training Optimize facility Renegotiate contracts

39 Understanding Introductory and Transition Costs The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing. Boeing is a trademark of The Boeing Company.

40 Introductory and transition costs Capital expenditures to support a new or incremental fleet introduction SPARES TRAINING FACILITIES DOCUMENTS Airframe Flight Crew Tooling MPD Engine Cabin Crew Upgrades Weights Mechanics Rentals MMEL Technical Software

41 Commonality can reduce provisioning costs Initial provisioning, $ Airplane with no commonality Airplane with partial commonality Savings Airplane with total commonality Existing airplane fleet Fleet size

42 Recurring benefits of commonality Single Aisle Family Twin Aisle Family 100% Engine commonality 100% Flight Deck commonality Common ground support equipment %-100% common airframe spares Common ground handling Operational commonality Flight deck commonality Speed Range 787 Parts commonality where it makes sense

43 Commonality eliminates labor duplication New Deliveries New Subfleet ER 737 MAX 737NG Fleet 737NG Fleet Fleet Supported by Fleets Supported by 737 Chief Pilot and staff 737 Technical Pilots 737 Pilot Trainers (TRE/TRI/LTC) 737 Line Crews & Reserves 737 Chief Pilot and staff 737 Technical Pilots 737 Pilot Trainers 737 Line Crews & Reserves 767 Chief Pilot and staff 767 Technical Pilots 767 Pilot Trainers 767 Line Crews & Reserves Duplicate set of pilots

44 Select the right airplane by: Analyzing options from the cost perspective The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing. Boeing is a trademark of The Boeing Company.

45 Which aircraft has better economics? W 162 seats Cost per trip Cost per seat-mile ERW 178 seats 1,000 NM sector North American short-medium rules

46 The fan chart of airplane operating costs 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

47 Exercise The fan chart challenge Each table will be assigned one question to answer Take 2 minutes to discuss the answer One person from the table will answer the question by pointing it out on the chart

48 Exercise The fan chart challenge Questions: 1. Which axis represents risk and which represents reward? 2. Which area of the chart is most desired and why? 3. Identify an airplane that is less attractive cost-wise and why? 4. If the MD11 was new where would it be found? 5. If a global carbon tax is put in place, which airplanes will benefit most? 6. If you add more seats on to the ER where would you find it? 7. Where would the as a simple stretch of the be found? What about if you increased its range capability? 8. What cost, if included on this chart, may make the more attractive to operate, relative to new airplanes? 9. Where would a 250-seat, Mach 0.98 Sonic Cruiser be found?

49 Q1) Which axis represents risk and which represents reward? 20% Relative seat-mile cost, % REWARD 10% ER MD11 used 0% ER ER LR used -10% ER ER -20% 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, % RISK used

50 Q2) Which area of the chart is most desired and why? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% -20% ER ER J LR ER ER 2 Engines used Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

51 Q3) Identify an airplane that is less attractive cost-wise and why? 20% K 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

52 Q4) If the MD11 was new where would it be found? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

53 Q5) If a global carbon tax is put in place, which airplanes will benefit most? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

54 Q6) If you add more seats on to the ER where would you find it? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

55 Q7) Where would the as a simple stretch of the be found? What about if you increased its range capability? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

56 Q8) What cost, if included on this chart, may make the more attractive to operate, relative to new airplanes? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

57 Q9) Where would a 250-seat, Mach 0.98 Sonic Cruiser be found? 20% 10% used ER MD11 used Relative seat-mile cost, % 0% -10% ER ER LR ER ER used % 2 Engines 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %

58 Conclusion The statements contained herein are based on good faith assumptions and provided for general information purposes only. These statements do not constitute an offer, promise, warranty or guarantee of performance. Actual results may vary depending on certain events or conditions. This document should not be used or relied upon for any purpose other than that intended by Boeing. Boeing is a trademark of The Boeing Company.

59 Key takeaways Profitability always includes cost control The right airplane fleet will minimize costs Fuel, maintenance, and fees are key costs Environmental costs are increasing, but addressable Fleet commonality provides benefits Fan Chart will tell you where you are and where you can be Environmental impact offset by new airplanes, fuel alternatives, and operating practices.

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