Introduction Airline Economics 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.
Objectives 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
Total aircraft efficiency Aerodynamics Engine Weight
Define the operating cost components that impact airline profitability BOEING 4
Airplane Economics Operating Costs Revenue Profits
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
Contributions to Total Operating Costs Cash Airplane Airplane Total Related Operating Related Operating Costs Costs Costs System Related Operating Costs Cargo Related Operating Flight Costs Crew Passenger Related Operating Costs Other Cabin Crew Ownership Navigation Fees Landing Fees Fuel Airplane Related Cash Airplane Operating Costs Related Operating Costs Maintenance
Exercise 1 Cost drivers and implications Each table will have one cost driver to review Take 5 minutes to list as many items that can drive that cost higher or lower in two groups Manufacturer driven Airline driven Each table will present to the group
Cost Driver and Implications Cost Driver Manufacturer Airline Fuel Flight Crew Cabin Crew Maintenance Cost Landing Fees Navigation Fees Ground Station
Fuel cost drivers Airplane type Airplane size Payload Trip distance Airline rules
Oil and jet fuel price outlook Oil price volatility returns, mid-term price outlooks $60 - $80 per barrel Brent-Oil Jet Fuel - USD/gallon $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Forecast $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Oil price forecasts are nominal annual average prices for 2015-18 Historical data source: EIA, futures: ICE
Using your fleet as a hedge against fuel prices Relative Fuel Consumption 0% 737 Classic 737NG Base Blended Winglets Carbon Brakes Enhanced Engines 737 MAX -10% -20% -7.5% -4.0% -0.4% -2.0% 30% -30% -14.0% -40% -50% Baseline is the 737 Classic, 1,000 NM mission
Flight crew cost drivers Salary/block hour rates Benefits Hotel & per diem Recurrent training
Cabin crew cost drivers Number of attendants Salary/block hour rates Benefits Hotel & per diem Recurrent training
Maintenance costs account for 10-14% of cash airplane related operating costs Cash airplane related operating cost Ground Support Flight Crew Cabin Crew Navigation Fees Landing Fees Maintenance Fuel
Navigation fees are driven by Airplane weight Distance flown Countries flown over
An example of how navigation fees vary Operating Aircraft: 777-300ER JFK-FRA LHR-CDG LHR-SVO Distance 3,351 nm 188 nm 1,359 nm Cost $4,079 $689 $4,348
Drivers of landing fees Airplane weight Noise Emissions
An example of how landing fees vary 737-700W 737-800W 737-900ERW New York (JFK) $981 $1,106 $1,192 Shanghai (PVG) $473 $530 $568
Costs vary by airplane and operation 737-800W 162 Seats 1,000nm 777-300ER 396 Seats 6,000nm Flight Crew Cabin Crew Cabin Ground Flight Crew Support Crew Ground Support Navigation Fees Navigation Fees Fuel Landing Fees Landing Fees Maintenance Fuel Maintenance ~ $11,600 per trip ~ $165,000 per trip
The Sonic Cruiser
Maintenance Cost Drivers From a manufacturer s point of view
Manufacturer Airline Maintenance costs drivers two views Inherent Aircraft Reliability Operations Aircraft Maintainability Product Support Maintenance Practices Accounting Practices Support Practices
Maintenance Cost / Flight Hour Airplane size is a driver of maintenance costs Older Technology Newer Technology Advanced technologies reduce the impact of size on airplane maintenance costs Airplane Size
Technology - getting more from fewer parts 777 777X/787 23 parts 13 parts
Electrical Power Distribution Optimization Traditional Power Architecture 787 No-bleed Systems Architecture Engine Bleed Air Electric Power
Technology Simplified Trailing Edge 767 6-Bar Linkage 777 4-Bar Linkage 787 Single Hinge
787 Flap/Slat Sequencing F L A P S 1 5 15 20 25 30
Systems driven maintenance interval at EIS Longer intervals, less maintenance, less often Major systems check interval (C-check) Typical 777 +39% Setting new industry standards at EIS 787 +100% *EIS entry into service 0 18 36 Months
Technology composite fuselage Composites drive lower weight, fewer parts and fasteners, and less maintenance
First internal structures inspection interval at EIS Longer intervals, less maintenance, less often Heavy maintenance visit (HMV or D-check) Typical 737NG/777/747-8 737 MAX +33% +50% Setting new industry standards at EIS 787 +100% *EIS entry into service 0 6 12 Years
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
What about engines? The longer an engine is on wing, the lower the maintenance costs.
Major factors that influence engine maintenance costs Engine thrust rating Engine derate Operating environment Engine Maintenance Costs Average flight leg
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
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
Takeaways for engine maintenance costs Keep the engine on-wing by using preventive measures Minimize full power takeoffs (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
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
Understanding Introductory and Transition Costs
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
Commonality matters
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
Recurring benefits of commonality Single Aisle Family Twin Aisle Family 100% Engine commonality 100% Flight Deck commonality 737-9 747 Common ground support equipment 98%-100% common airframe spares Common ground handling 737-8 737-7 Operational commonality Flight deck commonality Speed Range 777 787 Parts commonality where it makes sense
Commonality eliminates labor duplication New Deliveries New Subfleet 767-200ER 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
Select the right airplane by analyzing options from the cost perspective
Which aircraft has better economics? 737-800W 162 seats Cost per trip Cost per seat-mile 737 MAX 10 188 seats 1,000 NM sector North American short-medium rules
Relative seat-mile cost, % The fan chart of operating costs 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Exercise 2 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
Exercise 2 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 777-300ER where would you find it? 7. Where would the 787-10 as a simple stretch of the 787-9 be found? What about if you increased its range capability? 8. What cost, if included on this chart, may make the 747-400 more attractive to operate, relative to new airplanes? 9. Where would a 250-seat, Mach 0.98 Sonic Cruiser be found?
REWARD Relative seat-mile cost, % Q1) Which axis represents risk and which represents reward? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, % RISK
Relative seat-mile cost, % Q2) Which area of the chart is most desired and why? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% J 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q3) Identify an airplane that is less attractive cost-wise and why? 20% K 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q4) If the MD11 was new where would it be found? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q5) If a global carbon tax is put in place, which airplanes will benefit most? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q6) If you add more seats on to the 777-300ER where would you find it? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q7) Where would the 787-10 as a simple stretch of the 787-9 be found? What about if you increased its range capability? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q8) What cost, if included on this chart, may make the 747-400 more attractive to operate, relative to new airplanes? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Relative seat-mile cost, % Q9) Where would a 250-seat, Mach 0.98 Sonic Cruiser be found? 20% 10% 747-200 used 767-200ER MD11 used 0% 767-300ER 767-400ER 777-200LR 747-400 used -10% 787-8 777-200ER -20% 787-9 777-300ER 2 Engines 747-8 4 Engines -30% -20% 0% 20% 40% 60% 80% 100% Relative trip cost, %
Conclusion
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.
Thank you!