Welcome to Airline Industry 101. Class is now in session.
1. Aircraft decisions are always company decisions because of their magnitude – NOT management decisions. Therefore they are always referred to the Board of Directors (or equivalent) for approval. This applies when planes are bought AND when they’re sold. In fact buyers and sellers to airlines will insist on this.
Summary: If it was bought or sold, the Board approved it.
2. The value of an aircraft is dependent on the condition of its maintenance and how much operating ‘life’ is left in its components. As the plane gets older (10 years and older) that value is almost entirely dependent on the maintenance condition of the engines i.e. how much operating life is left in them. In an aircraft that’s over 15 years old, the engines could easily be worth 90% or more of the value of the aircraft.
3. The operating life of an engine is measured in Flight Hours (number of hours in the sky) and Flight Cycles (a cycle being one take off and landing). It varies with how the airline operates the aircraft but as a rough estimate an engine will operate for 3-5 years after which it will need to be taken for overhaul. For an aircraft the size of a 737, the cost of one engine’s overhaul is between $3-6M depending on the work to be done.
4. For an older engine, straight out of an overhaul the value of the engine is roughly the cost of the overhaul.
Summary: As you use an engine, it’s value – and the subsequent value of the aircraft – reduces at roughly the rate of $2M per year ($1M per engine)
5. If you buy 2 aircraft with 2 engines each at approximately $24M in total, then for every year you operate the 2 a/c with 4 engines the value will reduce by about $4M. After 5 years of operations, the value of the aircraft can very realistically reduce from $24M (KES 2B approx) to $2-4M (KES 200M depending on exchange rate)
This ends today’s class. We shall reconvene at a later date. Until then questions are welcome.
Great read…the figures involved in aircraft business is crazy man..
That they are! Planning on doing a small post on the orders of magnitude of the costs involved
Great perspective. Thanks for sharing!
Thanks Duncan. Let me know if you have any questions or topic suggestions.
Interesting read. Keep it up.
Thank you. Let me know if you have any specific question and I’ll do my best to answer it.