Month: November 2016

Class is now in session 🙂

Today’s Lesson: Aircraft Acquisition

I’ve often heard questions about aircraft acquisition. How do airlines decide when to get new aircraft? How do they decide how many to get? Who chooses what size of aircraft the airline should get? Or when those aircraft will come in to the fleet and what aircraft will need to leave in order to accept them? Answering these questions for an airline is what is done by the airline’s Fleet Planners (or Fleet Development). So in this lesson, I will outline the basics of how the decisions in Aircraft Acquisition are made.

There is a cardinal, but unwritten, rule in Fleet Planning that airlines ignore at their peril: “The Network drives the Fleet, never the other way around”. Simply put, you decide WHERE you want to fly BEFORE you get the aircraft to fly there.

Because of this rule, the basics of acquisition of aircraft are inextricably linked to the basics of network planning.

Network Planning basics

Network Planning is broad and deserves it’s own detailed post. It’s not my area of expertise though, so I’ll outline what little I’ve learned over the years and hopefully we can revisit it in the future in greater detail.

Network Planning is an ongoing activity that continually adjusts the airline’s network in line with the company’s strategy and what is happening in the market. Typically airlines will have a rolling 5-10 year network plan.

An airline’s network is the core skeleton of its operations. It provides part of an airline’s competitive value proposition and drives a large part of the operational structure. At its simplest, the network is the combination of all the routes to which the airline flies and how they connect with each other.

Network planners determine the collection of routes the airline needs to fly to in order to achieve its strategy. They look at projected passenger demand on different routes and the way passenger traffic flows to determine where  the airline should fly to – and how often the airline should fly there – in order to provide the most efficient connections and the most profitability.

The network drives the fleet requirement in the following ways:

1. Combining the Network Planning outputs with a practicable schedule gives an output of the NUMBER of aircraft that are required.
2. Projected Demand per flight in addition to factors like distance between the two destinations and government determined restrictions on number of flights  determine the SIZE & CAPABILITY of the aircraft required.
3. Projected growth of passenger numbers over the period determines TIMING of the aircraft requirement.

Aircraft Type Selection

With guidance on number, size and performance of aircraft and when they need to be delivered, the Fleet Development team then starts the process of selecting the type of aircraft to be used. This isn’t a process that’s undertaken very often as a lot of investment goes into introducing a new aircraft type into an airline’s fleet. Therefore a lot of analysis goes into the decision as mistakes can be costly.

The selection is usually carried out as a competitive campaign between the Airframe Manufacturers that make planes within that size. For long and medium haul aircraft (widebodies and narrowbodies respectively)  that is between Airbus and Boeing. For regional aircraft there is more selection with manufacturers like ATR, Bombardier and Embraer in addition to new entrants like COMAC, MRJ and Sukhoi.

The airline sends out a request for proposals (RFP) which lays out their requirements to the manufacturers. The manufacturer’s take some time to prepare their submission – usually a few weeks. The proposals will normally include a commercial component (the aircraft pricing and concessions like discounts etc.) and a product component (highlighting the design and performance characteristics of the aircraft). A cross-functional team from the airline then spends the next few months seeking clarification and analysing the product component of the proposals, even as they negotiate the commercial component.

Once the analysis and negotiations are completed, the Fleet Development team – representing the cross functional team – submits a recommendation to the airline’s Board of Directors (or equivalent approval committee) for corporate approval.

Buy or Lease

Concurrent to the analysis and negotiations on the type of aircraft, the airline will need to make a decision about whether they want to buy, lease or use a combination of both options to finance the acquisition of the aircraft. Sometimes the choice is not available to the airline e.g. if there are no available purchase slots at the time the airline needs the aircraft, then the only option would be to seek aircraft to lease with appropriate delivery slots.

If the decision is to lease, further to the aircraft type selection, the airline needs to carry out a similar campaign with leasing companies that have aircraft of the required type available at the time the airline needs them.

 

Once the decision on what to buy (and when) has been made and all the relevant contracts and agreements (including leasing agreements) have been signed then the airline starts the process of preparing to receive the aircraft and operate them.

This concludes today’s lesson.

 

Class is now in session 🙂

Today’s Lesson: The Basics of Aircraft Maintenance

The aviation industry is heavily regulated. Most notably this is the case in the Commercial Aviation space – which is the category that most airlines fit into. One of the reasons it takes so long to develop a new type of aircraft is the rigorous certification process the design must go through before it’s approved to fly. Among MANY other things, the manufacturer must prove the aircraft can fly with only half of its engines functional. They must prove the interior of the aircraft will meet the flammability requirements (how the materials will be resistant to burning and if they do catch fire, how they burn). They must even launch chickens (or other suitably sized birds) into a running aircraft engine to certify how it will respond in the event it ingests a bird in flight – which is something that happens far more often than you might think! (Side note: The birds aren’t still alive when they do this – that would just be mean)

The same rigour that applies during the design and build of the aircraft carries over into the operation of the aircraft in commercial service. Aircraft are ‘worked’ hard and stringent maintenance requirements are in place to ensure the safety of the passenger. In an average airline, the average narrow body plane (your 737s and A320s) will fly an average of 11-12 hours every day. For context, that would be longer than a drive from Nairobi to Malindi or the same as a return journey from LA to San Francisco every single day. If you drove your car as much as a commercial aircraft is flown, it’s unlikely that it would last more than 3 years. Meanwhile, the design working life of an aircraft is approximately 20-25 years (give or take a few). So aircraft are meticulously tested in their design and build then they are rigorously maintained in their operations.

As part of the design process, the aircraft and engine manufacturers will develop a maintenance programme for each aircraft type. This is usually in the form of a Maintenance Planning Data (MPD) document which is approved by the aviation regulator in the State of Design of the aircraft (so the FAA in the US for Boeing, EASA in Europe for Airbus etc.). This MPD usually will not be aligned with the airline’s specific operational characteristics so, working with its own regulator, an airline will develop a customised scheduled maintenance programme that is based on the manufacturer’s MPD.

Maintenance Letter Checks

Most customised maintenance programmes will group scheduled maintenance with similar maintenance intervals into ‘blocks’. These blocks become maintenance event checks which are broadly split into two: 1) Line Maintenance and 2) Base Maintenance.

Line Maintenance is largely done at the airport (on ‘the flight line’) and includes daily walk around checks, pre & post flight inspections – done before and after every flight – and weekly checks.

Base Maintenance is carried out in the maintenance facilities hangar. It encompasses the heavier checks and tasks that will require more access to the aircraft’s inner mechanics. Base Maintenance checks are driven by the intervals of the tasks which comprise them and these are, in turn, driven by the utilisation of the aircraft. In the MPD, each task will have an interval based on either Flight Cycles (one take off and landing), Flight Hours (hours in the air) or Calendar (either days, weeks or months). Some tasks might have all three, in which case the most limiting is used. These intervals will be reviewed and revised by the State of Design regulator – mainly being increased as the aircraft type accumulates more hours and there is data to support claims of better reliability.

As a standard for consistency across the industry, the base checks are designated by letter, mainly A-Checks, C-Checks and D-checks. (B-Checks are no longer really used – their tasks were moved into A-Checks and C-Checks as the intervals were approved for increase)

A-Checks

These are the equivalent of taking your car for its regular service. The intervals will vary from 400-800 hours depending on the aircraft type. Based on the individual aircraft’s utilisation, this will occur every 4-8 weeks. During an A-Check they will carry out inspections of the interior and exterior of the aircraft, lubricate the moving parts, check oil and fluid levels – topping up as required and  replace filters and any components that fail functional tests.

A-Checks follow a cycle with increased tasks in each subsequent check until the cycle is reset. (usually after a C-check) i.e. a 2A check will include more tasks than a 1A and so on

C-Checks

C-Checks are carried out every 24-36 months – again, depending on the aircraft type and aircraft utilisation. Due to the calendar interval/limitation, even an aircraft that has not been flying will require a C-Check once the calendar time has elapsed before it can be operated commercially. The tasks at a C-Check include functional and operational systems checks, structural inspections, cleaning and servicing of parts and replacements of time expired or faulty components.

Like A-Checks, they follow a cycle of increased tasks that is ‘reset’ following a D-Check

D-Checks

These are also known as Heavy Maintenance Visits  (HMVs). These occur every 8-12 years. The aircraft is taken out of service for several weeks. It is often stripped of paint for structural inspections, large outer panels are removed to carry out detailed inspections of the airframe, wing and support structure. In addition, components undergo functional checks, repair, overhaul and/or replacement.

 

Larger components like Engines and Landing Gears have their own maintenance schedules and overhaul programmes. A deeper look will follow in future.

 

Before an airline can carry out any of the above maintenance on an aircraft type, they have to be approved by their regulator to do each of the checks. This includes an assessment of maintenance staff, tooling and facilities and procedures. Once approval is granted, it is audited and reviewed at regular intervals (usually annually) to ensure compliance. Approval can be withdrawn if the required standards are not met.

So, in summary, there are trained professionals inspecting and maintaining the planes you fly on, at approved facilities, more frequently than you take your car to the car wash 🙂

This concludes today’s lesson.

Class is back in session 🙂

Today’s topic: Aircraft Leasing.

Leasing Aircraft has been a mainstay of the Airline industry for more than twenty years. Despite this, not many people – even in airlines themselves – know much about leasing. So, following a straw poll among some friends about what they’d like me to explain, I’ll outline the basics of Aircraft Leasing. One point on the scope: I’ll only be dealing with the leasing of commercial aircraft for airlines – I will not talk about corporate jet leasing or helicopter leasing (because frankly I know very little about them :-))

 

Aircraft leasing is broadly divided into two categories

1. Finance Leases
2. Operating Leases

Finance Leases

The key aspect of Finance Leases is that at the end of the lease term, the aircraft belongs to the airline. Finance leases are identical in concept to the mortgage on a house. The airline pays an agreed amount every period and once the term is over, ownership of the aircraft is transferred to the airline.

Finance Leases are sometimes done by leasing companies but for the most part they are used by lending institutions such as banks through Special Purpose Vehicles (SPVs).

A typical finance lease is 10-12 years long though they can sometimes be as long as 15-18 years.

When an airline takes out a finance lease, they take on the risk of what the future value of the aircraft will be (Residual Value risk). If the values hold or climb in the market, then the airline can sell the aircraft and make some profit on disposal. If the values drop, then it’s the airline that takes the hit and makes the loss. In reality, the only control the airline can exert on their residual values is to manage their depreciation of the aircraft on their books and in choosing when they will sell the aircraft. Beyond that, the market is what the market is.

Operating Leases

Operating Leases are what most people are referring to when they speak of Aircraft Leasing. Operating Lessors own roughly 40% of the aircraft being flown today. While there are several leasing companies in the world, the top 10 lessors by size and fleet value own easily 90% of the leased aircraft in service. Of these ten, the largest two are GECAS (GE Capital Aviation Services) and AerCap. Between them they own and manage (on behalf of other owners)  over 3000 aircraft – roughly 60% of the leasing market. This portfolio is in the region of $90-100 Bn in value.

There are two main types of Operating leases: Wet Leases and Dry leases. (Occasionally there is a sub category known as a Damp lease but it is usually just a modified Wet Lease)

In an Operating Lease, the Airline takes the Operating Risk (due to delays, cancellations and the inability to operate) while the lessor takes the Residual Value risk.

Wet Leases

These are also known by their more technical term – ACMI leases. They are short term leases (anywhere from a week to a few months) where the lessee pays a rate to the lessor covering the Aircraft, Crew, Maintenance and Insurance. Other costs such as fuel and handling fees are the responsibility of the lessee airline. In a wet lease, the airline lessee does not take control or registration of the aircraft, it remains under the control of the lessor.

Typically the lease rate is charged per hour of operation with a guaranteed minimum number of hours per week or per month. Wet leases tend to be quite expensive. Depending on the season, a wet lease of a wide body aircraft could be as high as $9,000-10,000 per hour of operation. Because of this, airlines only tend to go for wet leases in unusual or unexpected circumstances. Some of these (but not all) may include:

– Unexpected maintenance on an aircraft in the fleet that takes it out of service at a time when bookings are full

– A delay in delivery of an aircraft that has been planned for operations

– Trying out a new aircraft type before committing to a longer term lease or purchase

– Beginning operations before you (as the airline) have your own regulatory approvals to operate – such as an Air Operator’s Certificate (AOC)

Dry Leases

Dry Leases are by far the most common form of operating leases. Leases are medium to long term (typically 4 to 15 years). The aircraft is placed with the airline who register it under their name with their regulatory authority and take full operational control of it (Ownership still remains with the Lessor though).

The lease agreement with include commercial terms (such as rent and security  deposits) and technical terms (such as requirements for maintenance, insurance and conditions at return). Subject to the airline lessee meeting these terms, the lessor will grant Quiet Enjoyment whereby the let the lessee operate the aircraft without any interference.

Most of the payments made – especially Rent – are made on a monthly basis. While there are variances depending on the agreement between Lessor and Lessee, the rent is typically a fixed amount that will be paid every month for the duration of the lease.

A typical clause found in a lease is a “Hell or High Water” clause. Basically it places an obligation on the lessee to pay the amounts due to the lessor ‘come hell or high water’. So whether or not the lessee operates the plane – whether or not they are profitable – they have to meet their obligations under the lease or face mutually agreed penalties.

Operating Lessors acquire their aircraft in one of three main ways:

1. Speculative Orders – The Lessor places an order for aircraft with the manufacturer before they have found an airline to lease it from them. They then send their teams out to market the aircraft to airlines who can then sign up to lease them from the day they are delivered. The lease rental is determined partly by the market and partly by the price the Lessor has negotiated with the manufacturer (not to mention what return they are seeking)
2. Sale and Leaseback (SLB) – In this instance, the Lessor buys the aircraft from the airline (which either owns it or has a commitment to buy it) and then leases it back to them. The lease rent is directly linked to the purchase price agreed though some times competition can affect it.
3. Lease novation – This is a transaction between two lessors without the airline’s significant involvement. One lessor will sell the aircraft to the other with the lease attached.

This ends this lesson on the basics of Aircraft Leasing. Please feel free to ask any questions and I will do my best to expound or clarify.