Faculty of Engineering and Industrial Sciences

HES6615 Aircraft Selection, Acquisition and Contracts Subject Module

Swinburne University of Technology Hawthorn Subject Name: Aircraft Selection, Acquisition and Contracts Subject Code: HES6615 Author: Terry Farquharson

Copyright 2006: These materials are copyright. Full details of all copyright inclusions may be obtained from Swinburne University of Technology at the address given below. Published by: Swinburne University of Technology, Hawthorn campus, John Street, Hawthorn.

HES615 Aircraft Selection, Acquisition and Contracts

Table of Contents
0. Subject Information
0.1 Introduction 0.2 Overview 0.3 Aims and Objectives 0.4 Assessment

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1. Module 1: A Strategic View of Aircraft Evaluation

1.1 Introduction 1.2 Learning Objectives 1.3 Assessment 1.4 Topic 1: The Strategic View the Broader Picture 1.4.1 Introduction 1.4.2 Learning Objectives 1.4.3 Learning Modes and Resources 1.4.4 A Process Approach to Strategic Planning 1.4.5 Relationship of Strategic Management to the Air Transportation Industry 1.4.6 Strategy in Relation to Aircraft Evaluation and Selection 1.4.7 Strategic Capabilities, Competitive Advantage and the Evaluation of Aircraft. 1.4.8 Towards a Model of Aircraft Evaluation and Selection 1.4.9 Reasons to Undertake an Aircraft Evaluation 1.4.10 Optimal Fleet Structure for Best Corporate Performance 1.4.11 Topic Summary 1.4.12 Topic Bibliography 1.5 Topic 2: Development of Evaluation Processes 1.5.1 Introduction 1.5.2 Learning Objectives 1.5.3 Learning Modes and Resources 1.5.4 Establishing the Framework for Analysis 1.5.5 A Marketing Based Approach 1.5.6 Market Analysis Model 1.5.7 Forecasting 1.5.8 Preliminary Product Definition 1.5.9 Schedule Analysis 1.5.10 Onboard Product 1.5.11 Topic Summary 1.5.12 Topic Bibliography

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HES615 Aircraft Selection, Acquisition and Contracts

1.6 Summary of Module 1 1.7 Review Problem 1.8 Review Problem Answer 1.9 Further Reading

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2. Module 2: Technical Evaluation of Aircraft

2.1 Introduction 2.2 Learning Objectives 2.3 Assessment 2.4 Topic 1: Performance Analysis The Capability and Limitation of an Aircraft 2.4.1 Introduction 2.4.2 Learning Objectives 2.4.3 Learning Modes and Resources 2.4.4 Factors Affecting Aircraft Performance - A Brief Look 2.4.5 Aircraft Weights 2.4.6 Fuel Policy - Fuel required for a Flight 2.4.7 Airport and Routing Constraints 2.4.8 Study Rules 2.4.9 Payload Range Diagram 2.4.10 Range Circle Diagram 2.4.11 Detailed Route Analysis 2.4.12 Topic Summary 2.4.13 Topic Bibliography 2.4.14 Further Reading 2.5 Topic 2: Comparison of Aircraft 2.5.1 Introduction 2.5.2 Learning Objectives 2.5.3 Learning Modes and Resources 2.5.4 Performance Comparisons 2.5.5 Operational Considerations 2.5.6 Technology Considerations 2.5.7 Economic Considerations 2.5.8 Topic Summary 2.5.9 Topic Bibliography 2.6 Topic 3: Comparison of Engines 2.6.1 Introduction 2.6.2 Learning Objectives 2.6.3 Learning Modes and Resources 2.6.4 Engine Thrust Capability 2.6.5 Fuel Consumption Characteristics

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HES615 Aircraft Selection, Acquisition and Contracts

2.6.6 Reliability, serviceability and maintenance cost 2.6.7 Engine Commonality 2.6.8 Topic Summary 2.7 Summary of Module 2 2.8 Review Problem 2.9 Review Problem Answer

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3. Module 3: Analysis of Aircraft-Related Costs

3.1 Introduction 3.2 Learning Objectives 3.3 Assessment 3.4 Topic 1: Cost Determinants 3.4.1 Introduction 3.4.2 Learning Objectives 3.4.3 Learning Modes and Resources 3.4.4 Main Determinants of Airline Costs 3.4.5 Ability of Management to Control Costs 3.4.6 Costs Determined by External Factors 3.4.7 Cost Over Which Airlines Have Limited Control 3.4.8 Costs Over Which the Airline has Full Control 3.4.9 Quality of Management 3.4.10 Topic Summary 3.4.11 Topic Bibliography 3.5 Topic 2: Direct Operating Costs and Other Concepts 3.5.1 Introduction 3.5.2 Learning Objectives 3.5.3 Learning Modes and Resources 3.5.4 Progress to Date 3.5.5 Overview of a Cost Accounting System 3.5.6 Direct Operating Costs 3.5.7 Introductory Investment 3.5.8 Issues of Commonality 3.5.9 Indirect Operating Costs 3.5.10 Fixed/Variable Cost Systems 3.5.11 Topic Summary 3.5.12 Topic Bibliography 3.6 Summary of Module 3 3.7 Review Problem

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HES615 Aircraft Selection, Acquisition and Contracts

3.8 Review Problem Answer 3.9 Further Reading

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4. Module 4: Revenue Potential, Profitability and Financial Viability

4.1 Introduction 4.2 Learning Objectives 4.3 Assessment 4.4 Topic 1: Revenue Potential and Profitability 4.4.1 Introduction 4.4.2 Learning Objectives 4.4.3 Learning Modes and Resources 4.4.4 Genesis of Revenue Estimation 4.4.5 Market Research Revisited 4.4.6 Estimating Airline Market Share 4.4.7 Capacity Matching 4.4.8 Pricing Policy 4.4.9 Yield Management 4.4.10 Revenue Study Outputs 4.4.11 Measures of Profitability 4.4.12 Topic Summary 4.4.13 Topic Bibliography 4.5 Topic 2: Financial Viability 4.5.1 Introduction 4.5.2 Learning Objectives 4.5.3 Learning Modes and Resources 4.5.4 Separation of Issues 4.5.5 Inputs to Financial Evaluation 4.5.6 Application of Financial Modelling Techniques 4.5.7 Methods of Evaluating Cash Flow Alternatives 4.5.8 The Application of Sensitivity Analysis 4.5.9 Topic Summary 4.5.10 Topic Bibliography 4.6 Summary of Module 4 4.7 Review Problem 4.8 Review Problem Answer 4.9 Further Reading

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5. Module 5: Decision Making and Contracting

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HES615 Aircraft Selection, Acquisition and Contracts

5.1 Introduction 5.2 Learning Objectives 5.3 Assessment 5.4 Topic 1: Decision Making 5.4.1 Introduction 5.4.2 Learning Objectives 5.4.3 Learning Modes and Resources 5.4.4 The Strategic Planning Review Process 5.4.5 Strategic Financial Analysis 5.4.6 Ratio Analysis 5.4.7 Decision Making 5.4.8 Topic Summary 5.4.9 Topic Bibliography 5.5 Topic 2: Contracting 5.5.1 Introduction 5.5.2 Learning Objectives 5.5.3 Learning Modes and Resources 5.5.4 Overview 5.5.5 Items From Evaluation and Decision Making 5.5.6 Items from Aircraft Specification and Performance Documents 5.5.7 Negotiations 5.5.8 Contracting 5.5.9 Continuing Project Management 5.5.10 Topic Summary 5.5.11 Topic Bibliography 5.6 Summary of Module 5 5.7 Review Problem 5.8 Review Problem Answer 5.9 Further Reading

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6. Subject Summary
6.1 Review 6.2 Final Assessment 6.3 Conclusion

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HES615 Aircraft Selection, Acquisition and Contracts

0. Subject Information
0.1 Introduction
It is our pleasure to welcome you to this segment of the course. In this book we examine the complex and taxing issues that surround evaluating, selecting, acquiring and contracting for aircraft. While it may appear that we beat the drum of industry complexity rather loudly throughout this course, your studies to date have, hopefully, illustrated that this is a strongly defining characteristic of the air transportation business. Some areas of the industry are legally complex; others are technologically involved, while yet other areas are complex in the business sense. What we hope to demonstrate throughout these notes is that the process of aircraft selection and acquisition spans all these areas and many more. Properly done, this is a truly integrated discipline involving all sectors of the business and a number of external bodies. There is no set single text for this section of the course. As it would be necessary to cover many disciplines, any such document would be a voluminous tome that pretended to be all things to all people who might set out on the path of aircraft evaluation and selection. Throughout the notes material will be drawn from a number of wellrecognized texts. Most of these texts are readily available and students are encouraged to access these documents to develop a broader understanding of the topics concerned. The process of aircraft evaluation and selection is challenging, fascinating, and stimulating. We hope that this segment of the course will generate similar interests for you.

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Overview
This package forms an integral part of the Air Transportation Management programs. The notes provide you with a framework around which you can build a detailed appreciation of how a disciplined, rigorous and comprehensive approach to the task of evaluating, selecting and contracting for aircraft is a vital weapon in the armoury of any serious and successful aircraft operator in the air transportation industry. As the subject is multi-disciplinary (i.e. it is 7

HES615 Aircraft Selection, Acquisition and Contracts

founded on the knowledge base of many specialized areas), you will find reference to a number of topics contained within the Air Transportation Management course and others which are not. A course such as this cannot make you into an instant expert in this field. As previously mentioned, this is a multi-disciplinary activity involving the efforts of many specialists. However, it is an area where some extra effort in research and reading will lead to a far greater understanding of the industry as a whole, your organization, its competitors and the environment in which this contest takes place. For many people in the air transportation industry the aircraft is the focus of all activity. In this world-view all hinges around the aircraft and the aircraft alone. Hopefully, your studies have broadened your horizons to the extent that you understand that the air transportation industry can be seen as a conglomerate of related business activities conducted within a tight regulatory framework. Hence, we should view aircraft as but one element of the air transportation business. Business regulations vary from country to country; however, as we have seen in previous modules, the technical/operational regulatory environment has a foundation that provides a substantial degree of commonality worldwide. In previous course segments we have dealt in detail with the air transportation industry regulatory and operational environments. Harking back to the discussions in the operations management segment of this course, we will see that these technical topics form the operational feasibility background against which we will start our exploration of what is very much the commercial desirability aspect of the industry that of how an operator goes about evaluating, selecting, contracting for and, ultimately, acquiring an asset with which it must live for many years and upon which it largely depends for the successful and profitable delivery of its product to the market place. While we will discuss in some detail the various techniques and disciplines required to successfully conduct the necessary analysis, the subject matter is largely hinged around answering three simple questions. Why is it necessary to conduct such an exercise? How do we do the necessary analytical work? When should such a process take place?

These questions may appear deceptively simple but, as you will see, they provide the intellectual tip of the iceberg for large fields of highly technical, specialist activities.

HES615 Aircraft Selection, Acquisition and Contracts

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Aims and Objectives

The main objectives of this unit are to: Help you develop an appreciation of the business functions and focuses within the air transportation industry. Introduce you to strategic management concepts as these apply to the evaluation, selection and acquisition of aircraft. Develop your awareness of the concepts, advantages and difficulties of working in multi-disciplinary teams. Provide you with an understanding of the techniques that can be applied to evaluating selecting and contracting for aircraft.

After completing this subject you should be able to: Understand the strategic planning process that is used to define an operators business objectives Comprehend the processes of market analysis and research. Understand the concepts of competitive advantage. Describe in detail the techniques and procedures that can be applied to the evaluation and selection of aircraft. Appreciate the information needs of all segments of the organization in relation to the inputs and outputs of any aircraft evaluation. Function as part of a multi-disciplinary aircraft evaluation team. Demonstrate familiarity with aircraft contracting issues.

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Assessment
The subject notes are divided into five modules and each module is subdivided into two topics. A review problem is presented at the end of each module together with a possible answer. These problems are intended to provoke thought and students are strongly encouraged to analyze the issues and develop topics for discussion at the seminars that will be held at the end of each year. An assignment is set for each of the five modules. For assessment purposes students will be required to submit three written assignments from the five set questions. However, you are strongly encouraged to complete all the topics as this will help develop your analytical abilities and general understanding. Two of the assignments are mandatory, each being worth thirty percent of the total available marks.

HES615 Aircraft Selection, Acquisition and Contracts

The third assignment will be one of the students choice from the remaining modules and will count for forty percent of the total mark. The first two assignments should be about three to four typed pages in length (about 2,500 words) and the third; five to six pages (about 3,500 words). However, if you feel it necessary to expand your answer feel free to do so. Take care to address the topics succinctly and to present the assignment neatly. Guidelines directing students to the assignment answers are to be found with each assignment. See the information package that accompanied this subject, for assignment details.

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