¶ … Airplane An airline is looking to introduce a new fleet of twin engined wide body aircraft into its fleet. Three different engine options are available and none is compatible with existing engine types in operation. Discuss the likely factors to be evaluated or taken into consideration and/or negotiated to ensure lowest ownership and operating costs over a ten-year period.

First of all, commercial engines are far cheaper, as analysis of Boeing 747 and Douglas DC-10 shows, than are acquisitions of military crafts such as the B-52 bomber and the turboprop C-130 ( The Boeing Company ). This should be encouraging news to the buyer.

Both direct and indirect operating costs should be taken into account when reaching a decision. The type of engine itself is one of the most important components. Here, should be considered costs that are associated with the size, speed and payload- range capability of the engine itself. The engine's hourly productivity rests on assessment of these characteristics and hence the economic value of the aircraft itself (Jenkins, 2002). Sector length and frequency of flights also impacts on economic value and, accordingly, too should be involved in the equation (Doganis, 1991).

Direct operating costs

Aircraft size:

Since the operating costs are independent of the size of the engine, larger aircrafts will generally have lower operating costs per unit of output (such as cost per seat or per tonne of kilometer) than smaller-sized engines. In other words, whilst operating of larger-sized aircraft may be more expensive in absolute terms, taking into consideration cost per unit of output may make the smaller engine more expensive to run than the larger airline (Doganis, 1991)

For instance, it is well-known that part of the reason that military engines are more expensive are because they are smaller than the larger sized ones (Aircraft pricing and economic analysis).

Speed:

Speed is another factor to take into account since it also affects airline costs. Hourly productivity is a factor of speed multiplied by payload therefore the fastest airline will have the greatest economic value in terms of cost per unit kilometer. This is so despite the fact that the faster aircraft will also have greater fuel costs. In the long run, increased distance result in decreased cost per unit of output.

An aircraft equipped with a turbocharger, as for instance, will be more economical in terms of fuel efficiency than its counterpart that flies at a reduced speed. Compare the blown A36, for example, that cruises at 218 mph (190 knots) to a normally aspirated version at 194 mph (169 knots (Plane & pilot; http://www.planeandpilotmag.com/aircraft/modifications/the-need-for-speed.html?tmpl=component&print=1) The turbochargers, however, have their own disadvantages such as increase in maintenance and acquisition costs (as well, perhaps as training the pilot in new skills), but these all have to be taken into consideration.

Payload range capability:

Size of engine should be taken into account. The more room for payload range, the better since hourly productivity will be increased. {Preferably the aircraft length and seating capacity should fall into the "optimum range" area). Everything -- operation, speed, characteristics of aircraft, and its material should be taken into account.

Sector length:

As discussed before and in connection with the discussion on cost per unit output, the longer the sector length the lower is the direct operating cost per unit output, that is - so long as payload is not scarified in order to enhance this equation (Doganis, 1991).

The linearity of sector length has a negative association with fuel burn. As sector length increases, the amount of fuel burnt decreases. The longer, therefore, the sector length of the aircraft, the less fuel burnt and more economic its value. This is because the longer aircraft is able to cover more altitude in a shorter time in both taxiing and in the air than does the smaller aircraft. Consideration of this theme are particularly pressing today since fuel cost rose dramatically following 2007 and has maintained its high level ever since (Aircraft pricing and economic analysis)

An aircraft with longer sector length can also cover more hours of flight in its day than an aircraft with shorter sector length. Aircrafts are faced with exorbitant operating and capital costs also associated with purchase or lease. Only by its operating can the aircraft hope to somehow or other cover some of these costs and, hopefully, make a profit. The more hours, therefore that it operates during the day / night, the more profit it can hope to attain (Doganis, 1991). From their hours of flight, aircrafts also have to consider the ground-turn range of about the same duration at the airport itself during which no revenue is made. Longer sector length equivocates more hours of flight...

Moreover, airport charges for parking are cheaper for longer sector length than they are for short sector length aircrafts. Finally, sector lengths also impact maintenance costs since many maintenance costs are incurred due to factors that can be reduced if sector length were longer. Examples of these are damages incurred by undercarriage cycles and pressurization cycles on the hull.
Power and strength of aircraft itself:

In other words, characteristics that could ensure that the aircraft has the resiliency to undertake frequent flights closely spaced together and for long distances of time. Increased utilization of aircraft and crew causes the cost incurred through higher frequencies to be less than the reverse. Shorter time in between also means less money involved in paying for hotels and other amenities for crew in between flight times.

This is one of the characteristics of the Advanced Blended Winglets designed for Boeing 737. Not only do they provide improved climb gradient, but they provide the aircraft with a more aesthetic appearance, and improved operational flexibility-. This is aside from the fact that they are touted to provide all the other necessary amenities: increased payload range, reduced maintenance cost, and reduced fuel absorption (http://www.b737.org.uk/winglets.htm).

Indirect operating costs.

Product quality:

Considering that the aircraft will need inspection and certification, all safety criteria must be thoroughly investigated and established (Vasigh et al., 2008). The aircraft should be viewed within a competitive mindset to see whether it would be competitively and commercially successful. To that end, variables such as cabin layout, minimum quality levels and the capacity to carry the minimum number of crew should be evaluated.

Seating layout should also be evaluated. From a revenue perspective, the aircraft should have as many high-yielding sears as possible. Here should be considered, too, the number of seats, the pitch of seats, number of toilets, galley layout and capacity, portable water capacity, and in-flight entertainment system. These costs will all be categorized under initial cost, ongoing maintenance costs, and operator empty weight issues

Financial Policies:

In consideration of acquisition of the aircraft, although not an integral part of the aircraft itself but, nonetheless, important to the ultimate decision as to which if any to choose should be financial policies.

Depreciation is one such aspect. Questions include: By acquiring this aircraft will the organization still be able to set aside money on a periodic basis so as to provide for future purchase of replacement aircraft at the end of these 10 years; or will the aircraft be so expensive as to absorb all the revenue. By not taking depreciation into account, or by inadequately considering it, the manager spells the difference between a possible profit and loss (Clark, 2007).

Each new aircraft costs increasingly more than the older version, therefore, to circumvent and deal with this situation, airlines adopt leasing in terms of 'finance leases' where the operator is accorded long-term usage of the plane at the end of which he receives ownership of the craft; and 'operating leases' which do not confer ownership rights at the end of the period. The benefit with this is there is no depreciation costs.

In terms of our situation, the airline may want to consider resorting to leasing as a way of cutting its costs, particularly since we are talking about a new fleet of engines.

Leasing will ensure lowest ownership and operating costs over a ten-year period, and the operator can then decide whetehr or not he wishes to assume ownership of the engine once that 10-year period has passed.

For instance, Boeing itself leases many of its and used airplanes (Startup Boeing http://www.boeing.com/commercial/startup/sourcing.html)

Additional costs

Although primarily operation costs are influenced by variables such as aircraft size, design, weight, and other technical factors, other considerations should include, frequency of intended operations, its production period, and its actual operation. Factors such as fuel, maintenance, size of cabin and crew needed to operate in such n aircraft, landing and enroute charges, aircraft ground handling, and insurance should all be considered (Clark, 2007). These are included under indirect operating costs. The Air Transportation Association of America has likewise developed a statistically-based method for estimating the indirect operating costs (Shevell, R ) which they based on a comparative assessment of 3 aircrafts: based on a study of three aircraft Boeing…