Author: AMudachi

Anyone who’s taken a commercial flight since COVID restrictions were reduced might have been surprised by how full all the flights seemed. They might be further surprised to hear airlines raising concerns about their profitability. “How can you be making losses?” They might ask. “Every time I fly you the planes are full. So if you’re saying you’re losing money it’s because you’re doing something wrong!” The truth is, however, that it’s not that simple. There are multiple factors that drive profitability and we’ll examine some of them here.

Airlines measure profitability in several ways:

1. At an operating level (which can be route profitability or network profitability)

2. At a net level – the so called “bottom line” that also factors in overheads, financing costs and taxation

For this post, we’ll focus on Route Profitability (network profitability can be examined at a later date). Whether or not a route is profitable is dependent on Demand (how many people want to fly on the route), Fares (how much people will pay to fly on the route) and Cost (how much it costs the airline to operate on that route).

Demand

Demand is generally measured in PDEWs – Passengers per Day Each Way. This is simply how many passengers want to fly in each direction between two places, every day. It could be as few as none 😊 or as many as over 20,000 (on one particular route in South Korea). If, for example, there are 200 PDEWs, an airline might have a choice to make – “Do we fly a 100 seater plane twice a day? Or a 200 seater plane once a day?” If, however, there are only 50 PDEWs on a route – and the airline has a 100 seater aircraft – then perhaps the airline might choose to fly once every two days.

Fares

How much an airline should charge is a more complicated question. If an airline offers a fare of $50 from JFK in New York to London Heathrow, they might sell out in a few minutes and fill the aircraft. However, just because the aircraft is full doesn’t mean it’s flying profitably. In contrast, if they charge $50,000 per seat, they would easily be profitable – but unlikely to get many passengers, and therefore, also unlikely to be profitable. The balance is found somewhere in between.

Different types of passengers will be willing to pay different amounts. While a businesswoman trying to close an urgent, million-dollar deal might be willing to pay $5000 one way, a student going home on holiday might be limited to maybe $250. So the airline needs to do comprehensive market research to understand the make up of their passengers on the route and what they’re willing to pay. (Also, the addition of competitor airlines charging lower fares changes the dynamic)

Cost

The cost to operate is driven in part by the metrics of a given aircraft (ownership cost, fuel burn, maintenance etc.) and some operational items beyond the metal (such as ground handling, passenger handling or navigation costs). Typically, the selection of the aircraft for a particular route is also nuanced, as the metrics may contrast in different aircraft. For example, a 737-800 (which would now be an older aircraft) may cost less on the ownership metric. However, a 737-8 – a new model of the same type – will cost more to own but save you money on fuel burn.

– x –

To become profitable, and remain so, an airline must balance and optimise for each of the above factors. This is where Aircraft Right Sizing comes in. Aircraft are designed with different capabilities in mind. Narrowbodies (like B737s, A320s or E190s) are typically for relatively short, regional flights (~500-3000km) carrying 90-200 passengers. Widebodies (like B787s, A330s, A350s or B777s) may carry anywhere from 200-400 passengers and travel even 11,000km.

The widebodies are optimised for long flights – which makes them sub-optimal for short flights where the operating costs become too high. So in a situation where the demand on a 500km route might be 300 PDEWs, it would likely be more cost effective to fly 2 x daily flights with 150 seater 737s or 3 x daily flights with 100 seater E190s than 1 daily flight with a 300 seater 777.

Competition can also affect right sizing. In the Demand segment above, let’s say the airline (XYZ Wings) opted to fly a 200 seater aircraft 1 x daily on the 200 PDEW route. They would be doing fine until a competitor started operating the route. If the competitor ‘takes away’ 50% market share, then all of a sudden XYZ Wings will have to either i) Reduce their number of weekly flights, ii) Reduce their fares to attract the passengers back (a negative sum game as the competitor could do the same) or iii)They could right size by changing the aircraft they operate on the route – perhaps by switching to a 100 seater aircraft.

Changes in these factors happen frequently – and airlines have to manage and adjust for them. This happens across multiple routes (sometimes with overlapping impacts) requiring input from several disciplines in the airline to maintain profitability.

So in summary and conclusion, just because an aircraft is full, doesn’t (necessarily) mean it’s profitable. Profitability at a route level is a complex dynamic requiring consistent monitoring, adjustment and, sometimes, the best way to maintain it is to make the structural change to right size the aircraft you operate.

Freedoms of the Air are rights that states can choose to grant to each other as part of Air Services Agreements (usually referred to as Bilateral Air Services Agreements or BASAs). When granted through a BASA, the freedoms of the air are reciprocal between the two countries. However, there may sometimes be limitations put on the number of daily (or weekly) frequencies allowed or the size of aircraft that can be used

International treaties officially recognize 5 freedoms with an additional 4 that are generally accepted and referred to. The 9 freedoms are outlined below:

• 1^st Freedom – This freedom is commonly referred to as Overflight freedom. If granted, it allows aircraft registered / operated in one party to the BASA to fly over the international airspace of the other party. During actual operations, clearances will be sought from Air Traffic Control for individual flights.

• 2^nd Freedom – This freedom allows the aircraft from one party to the BASA to land in the other country. While on the ground, the aircraft can refuel or undergo maintenance. However, boarding or disembarking of passengers or cargo is not allowed under this freedom.

• 3^rd Freedom – If Country A has granted the 3^rd freedom to Country B, then the aircraft from Country A are allowed to fly passengers and cargo from Country A to Country B.

• 4^th Freedom – If Country A has granted the 4^th freedom to Country B, then the aircraft from Country A are allowed to fly passengers and cargo from Country B back to Country A.

• 5^th Freedom – If Country A has granted 5^th freedom rights to Country B, then the aircraft from Country A are allowed to fly to Country B, board passengers in Country B and fly them to a third country, Country C. Many countries with a protectionist approach to their local carriers will not grant 5^th freedom rights to carriers from other countries – even where the 1^st to 4^th freedoms are granted. This is especially the case when the foreign carriers are bigger, or better established, than the local carriers.

• 6^th Freedom – With 6^th Freedom rights between Countries A & B, an airline from Country A is allowed to:
  1. Carry passengers from Country C,
  2. Make a non-technical stop in Country B (without disembarking the Country C passengers),
  3. Then fly the Country C passengers on to Country B where they will disembark.

• 7^th Freedom – This freedom allows an aircraft from Country A to carry passengers from Country C to Country B, without making a stopover in Country A. 

• 8^th Freedom – The 8^th freedom is also known as cabotage. This freedom allows an aircraft from Country A to:
  1. Start a flight in Country A.
  2. Fly to one airport in Country B (Airport A)
  3. Board and disembark passengers in Airport A
  4. Fly to another airport in Country B (Airport B)
  5. Then board and disembark passengers in Airport B (some of whom may be from Airport A)

• 9^th Freedom – When granted, this freedom allows an aircraft registered in one country to operate domestic flights in the country with whom the BASA is agreed. (For example, an aircraft registered in Italy operating a scheduled passenger flight from Frankfurt to Hamburg).

Within the European Union (EU) there is an ‘open skies’ agreement that allows aircraft registered in EU member states to operate flights within all the 9 freedoms. There are no restrictions on the airports that can be used, nor the number of frequencies, if the airline can come to commercial agreements with the management of individual airports and if there are available landing/departure slots. 

Similarly, the African Union (AU) is working to implement the Single African Air Transport Market (SAATM) among its member states. SAATM would create a single, unified air transport market in Africa to advance the liberalization of civil aviation on the continent.

Traditionally, when people spoke about flight lengths in the aviation industry, they classified them as short haul, medium haul and long haul. Short haul flights are generally those below two and a half hours. Medium haul ranges from two and a half to about five or six hours with long haul being anything longer than that. However, as technology progressed – and aircraft became more efficient – much longer flights became possible. This led to the creation of a new class of flights – the Ultra-long haul.

Ultra-long haul flights are typically those longer than 12 hours (though in some quarters it’s flights longer than 10 hours). Some flights stretch into 15 or 16 hours e.g. Hong Kong to New York (16.5 hours), Nairobi to New York (15 hrs) and Los Angeles to Melbourne (16 Hours). For such a long duration, the operational plan has to be modified from a regular long haul flight – partly in order to meet regulations but also from a practical standpoint.

What airlines do differently on the Ultra-long haul

Because their primary role is to ensure their passengers complete their journey safely, Flight Deck crew (pilots) and Cabin crew have what is known as a Flight Time Limitation (FTL). It is simply the number of consecutive flying (working) hours they are allowed to perform before they are required to take rest. The FTL varies from country to country as the respective regulator defines it. Typically, though, it will be 12 hours for the pilots and 15 hours for Cabin crew. This will include the time on ground in briefings and pre-flight checks.

In order to safely (and legally) perform an Ultra-long haul flight, the airlines equip the aircraft with crew rest areas. These are bunk beds (and in some cases seats) secluded from the rest of the aircraft (especially the noise of the passenger cabin) where the crew can have quite time to rest and relax. They’re located at the front and back of the aircraft.

With the rest areas in place, the crew will work in shifts during the flight. The pilots normally operate as a double crew who will all be in the flight deck for take off. Maybe half an hour into the flight, however, two pilots will take their leave and start their rest period. They can watch a movie, read a book, take a nap or all of the above. They usually have just slightly less than half of the flight to do this before they ‘change shift’ with the two pilots they left on the flight deck. Once the second set has flown their segment, they all reconvene on the flight deck for the landing. (Note: some airlines choose to stagger the shift change to ensure there’s an overlap of those pilots who are flying the aircraft).

The Cabin crew follow a similar pattern to the Flight deck crew with the main difference being that they only fly with one, full set of crew. All Cabin crew are on shift during the main meal service times and then they support the passengers with half the complement while the other half rests.

Tips on what you, the passenger, can do differently on an Ultra Long Haul

Over my career I’ve been fortunate (or unfortunate depending on your perspective ;-)) to have been on several Ultra-long haul flights. I’ve picked up a few tips that have made the flights more bearable because, whether you’re in economy class or a premium class, 15 hours is a LONG time!

1. A Change of Clothing

This I picked up from a former colleague while I was working in Asia. Once the ‘fasten seat belts’ sign would go off, she would be off to the lavatory. She’d change into pyjamas or something similar. For my part I go for a light t-shirt and a pair of shorts. The point is to be in something comfortable for the bulk of the flight because, no matter how good that pair of jeans is, it will start to chafe after 13 / 14 hours in your seat. Just remember that lighter clothing may mean you get colder so you should compensate

2. Noise Reduction

If you travel a lot then a good pair of noise cancelling headsets is a worthwhile investment. In most widebody aircraft there is an almost subtle ambient sound that comes from i) the engines and ii) the air rushing by the aircraft (it is moving at close to 1000km/hr!). The longer you’re on the aircraft the more this will begin to irritate you. Noise Cancelling headsets go a long way to mitigate this.

If the cost of such headsets is beyond your budget, ear plugs are a reasonable substitute, especially when you’re trying to get some sleep. If you don’t have any (or don’t know where to get some), ask the cabin crew – they usually have a few pairs on board.

3. Carry Full Size pillows

I saw a family with young children doing this and realized this would make a big difference for those travelling with children – especially toddlers. The full size pillows are bulky and unwieldy as you make your way through security. That said, you spend far less time on the ground than you will in the air. And in the air, they might just be the difference that means your munchkin (and subsequently you!) can get some sleep.

4. Different Entertainment Options

As I’ve said above, 15-16 hours is a long time! I’ve found that the provided in-flight entertainment is usually not enough. A bit of variety goes a long way. This is where my iPad makes all the difference. When I’m tired of watching the movie selection, books and games to pass some more time come to my rescue.

5. Pack a snack

Most airlines will provide you with 2 full meals and a snack on such flights (they don’t often have the space to carry much more). Unfortunately, as we know, meals on planes aren’t exactly filling most of the time. Add that to the time in between the meals and you can find yourself uncomfortably hungry with more than a couple of hours before the next meal is due. Because of this I always have something like a chocolate bar or protein bar in my hand luggage to take the edge off if required. This becomes even more important if travelling with children.

6. Stay hydrated and keep stretching

The aircraft cabin tends to be a drier environment than usual. As such you can lose a fair amount of water over such a long flight. It’s important to consciously keep drinking fluids (non-alcoholic! ;-)). I try for about 200ml every hour.

In the same vein, to avoid Deep Vein Thrombosis and any similar complications it’s important to stretch and flex your muscles frequently during the flight. I find, however, that if I’m good enough at keeping myself hydrated then the stretching takes care of itself as I have to get up frequently to attend to nature’s calls. 🙂

So there are some thoughts on the Ultra-long haul flight. I hope they help ease yours when you have to take it. I just heard Boeing is working on aircraft capable of making the London – Sydney flight a direct one. I wonder what we’ll call it when it hits 19 hours…

Class is back in session 🙂 (Apologies for the long hiatus. Sadly it might not be the last but I’ll still keep coming back :-))

One of the main product differentiators airlines have is what they offer in their cabin. Over the past decades, as the airline space has become more competitive, carriers have been consistently improving what they offer – constantly pushing the bar higher in order to stay in the game. As the pictures in this Daily Mail article on British Airways’ First Class over the years shows, where a reasonably spacious cabin with upright seats that reclined slightly was considered the best, nowadays, anything less than a seat that reclines to full flat – with a large personal video screen – is considered a travesty. This is especially the case on long haul flights where passengers are commonly in the aircraft for more than 8 hours – sometimes even as much as 17 hours!

Passengers love comfort. They aren’t necessarily willing to pay more for it though. Especially not when your competitor offers the same (or better) for the same ticket price. Therefore, a constant challenge airlines face is how to keep improving their product while keeping their product cost relatively low. These costs, as I’ll illustrate below, are quite significant in their own right.

For the purpose of this illustration, let’s assume the following:

• A long haul aircraft with 200 seats in economy and 30 premium seats (This is roughly the size of a B787 or an A330)
• Economy seats recline about 4-6 inches
• Premium seats recline to full flat
• Personal in-seat video screen for each passenger but varying in size between Economy and Premium

IFE

IFE is an acronym for In-Flight Entertainment. In the past this was a screen (or screens) broadcasting the same movie to the entire cabin. This progressed to individual screens playing different movies off tapes – each movie had its own channel and would play on a loop for the entire flight. Modern systems have an individual screen for each passenger and play the content on demand (They call these AVOD systems or Audio/Video On Demand). Since an AVOD system is digital, the content is not limited to movies but also includes TV shows, music and games.

Each economy screen could cost region of $5000-$7000 depending on the size – and no, I didn’t add an extra zero by mistake. The high cost is driven by the certification requirements for safety and ruggedisation for heavy use (The average screen will be used for at least 10 hours each day, every day and is expected to last at least 6 years). Each Premium screen could cost twice as much.

On top of the screens you have to pay for:

1. Head end servers to store your digital content,
2. Wires and cabling – and there’s a lot of this in an almost 200ft long a/c!
3. Control units for each seat
4. Non-Recurring Design engineering work
5. Design engineering work for the graphics the users will see
6. Certification Testing

All told, this will come to $4-7M – give or take a few million dollars.

Seats

Economy seats are sold in doubles, triples or quadruples. A basic triple may cost $10,000 and that price will rise depending on the features selected e.g. seat fabric,  moveable headrests, leg rests etc. So on the conservative side, we’re looking at $700-800K for the economy seats.

Premium seats – especially modern premium seats – are a lot pricier. With all the bells and whistles that come with full flat seat, the price range for a single seat is $40-60K. This would bring the Premium seat total to $1.2-1.8M.

On top of the price of the seat you again have to pay for:

1. Wires and cabling for the seat controlled features like overhead lights, attendant call etc
2. Non-Recurring Design engineering work
3. Certification testing

Total for seats is therefore about $2.5-3M

Galleys and The Cabin Items

The galleys – where the meals on the aircraft are prepared – are the other big cost item in the cabin. That, in addition to things like carpets, mood lighting systems and wi-fi connectivity could cost $3-5M depending on the elaborateness of the fabric design, lighting system, features of the wi-fi etc.

Like for the seats and IFE, there is also design engineering work and certification testing that most be completed

Therefore, this illustration comes to between $9.5 and $15M (In reality the cost would be higher once you add in the manufacturer’s selectable features for the cabin.)  This is 5-7.5% of the list price of a similar aircraft (see this post on SPVs for approximate list pricing of a 787) – though it’s a much higher percentage of the actual price following negotiated discounts.

The other aspect to factor in is the timeline. Since most of the items are custom modified to match the airline’s branding and product requirements, this design, certify and build process takes 2-3 years to complete. In addition, it is likely this product will need to be refreshed every 5-7 years or so in order to keep up with technology trends and market expectations.

In summary, that means $10-15M per aircraft – every 5-7 years – in order to stay competitive with the market. Regardless, of the number of aircraft in your fleet, those numbers very quickly stack up. Especially when you consider that passengers won’t pay you extra for a refreshed product and financiers are hesitant to finance such a customised item that is not easily transferred in the event it needs to be repossessed.

So the next time you feel that the cabin in the aircraft you’re flying in and is a bit dated, spare some consideration for how much it might cost to upgrade it, how long it will take and the reality that it’s unlikely you will be willing to pay more on your ticket to get it done 🙂

This ends this lesson.

Happy New Year! I hope 2017 finds you well.

First, my apologies for my recent lack of blog plots. 2016 (and for that matter 2015) had been a very busy and taxing year. I needed a break to recharge, so I left all things aviation behind for the Christmas Holiday. Now the holiday season is over and people are back at work (or soon will be) so I thought I’d touch on something that I’m sure has been a pain point for a number of travellers  – flight delays and cancellations.

Delays and cancellations are the bane of everyone in the airline industry value chain. From the passengers to the airport staff and even the airlines themselves, everyone hates a delay or, worse still, a cancellation. Delays, cancellations and their mitigation are such a key part of airline operations that they are possibly the one criteria measured by all operators in the world. On time performance (OTP) – measured as the percentage of your flights that depart on time or within 15 minutes of schedule – is tracked and targeted for improvement on an ongoing basis. OTP in the region of 98% is a normal target (98% meaning that for every 100 departures only 2 will be late).

Despite all the best intentions, the planning and contingencies put in place, the sad reality is that delays still happen to all airlines the world over. In some cases it’s due to forces beyond the airline’s control (like weather) in others it’s down to the aircrafts themselves. Even though they are meticulously designed, rigorously built and consistently maintained, at the end of the day aircrafts are machines and they will breakdown. These breakdowns often result in delays to the flights planned for those aircrafts but it doesn’t stop there. Since most airlines have a network that schedules flights to maximise the use of the aircraft, a delayed flight in the morning can very easily result in a delayed flight that evening.

The most straightforward way to prevent the delays due to mechanical issues is to keep extra aircraft to use as spares. Therein lies the ‘Spare Aircraft Dilemma‘ the airlines face. How many spare aircraft should you keep? How many narrowbodies and how many widebodies? Where on your route network do you position the aircraft? (Because planes don’t only become unavailable at your home base). Do you have the resources to maintain the spare aircraft in  readiness to operate in addition to your operational fleet?

Beyond a certain number – which varies depending on the airline’s fleet size – additional spares become impractical. However, the fundamental challenge with spare aircraft is cost. Depending on the age of the aircraft, a narrowbody could cost you between $250K and $450K per month in ownership costs. A widebody could cost even up to $2M (for new, larger aircrafts like A380s or 747s). All of which occur before maintenance costs (which can be of the same order of magnitude as the ownership costs), storage and parking fees etc..

At it’s simplest, the Spare Aircraft Dilemma is a choice between i) Keeping enough spare aircraft to mitigate operational disruptions  – which is financially costly and can even be damaging OR ii) Managing disruptions through the efficiency of your support teams – which can only reduce the delays and cancellations but not eliminate them. On one hand they risk their business’ health, on the other hand they risk their passenger’s time (and ultimately their goodwill).

Every airline has to make that choice for themselves. Most of the time they find a middle ground based on their financial position, their experience and their resources. Sometimes, unfortunately, they make the wrong choices. Other times, their circumstances mean the choice is made for them and they have to do the best they can with what they have. Given the reality of reduced revenue per passenger (from competition pricing etc.) and the continual pressure on cost reduction, it is likely that this will be a problem passengers and airlines will have to contend with for quite a while to come.

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.

Class is back in session following that brief recess 🙂

In the previous post, I spoke of the different factors that affect the pricing of tickets. This will follow on from that and look at Fare classes and Overbooking.

Fare Classes

There’s a common misconception that there’s a single economy fare and a single business class fare. The reality is that most airlines have multiple fare classes within each sitting area. On any given flight, you might find there are 5 or more different economy fares – each with its own price and restrictions. As an illustration, lets say that you have economy classes Y, B, M & Q. These might be some of the restrictions you find:

Now, the above is information that can be easily established by going onto any airline’s website to book a ticket. The question I often hear asked is Why? Why do airlines do this? The truth is that there isn’t a single or simple answer. However, let me try and outline some of the possible reasons:

1. Customer Requirements – Different customers require different things from their tickets. Some might want the cheapest possible while others might want maximum flexibility to change their travel plans. Rather than trying for a single “one size fits all” fare – which will inevitably leave several customers dissatisfied – different classes are created to offer different options.
2. Advance Planning – From a planning perspective, the ideal situation would be to know well in advance of a flight how many passengers you’ll be flying. It allows the airline to make a early adjustments if required like i) combining flights if they are too empty to be operated economically (and advising the passengers of the same in good time) and ii) change the scheduled aircraft to another of suitable size if required. With this in mind, the airline will offer the incentive of a cheaper ticket earlier so as to encourage more people to book as early as possible. In this way it’s exactly the same as the reduced ticket price for a Music  Concert for those willing to purchase in advance rather than at the door. SIDE NOTE: The flip side of this is if there is no premium to be paid for late bookings, then people will book as late as they possibly can. This creates a late booking market where an airline has no visibility on how full a flight will be until the very last minute – often leaving it with the unenviable position of choosing between flying an empty flight at a loss or cancelling it at the last minute and frustrating the passengers.
3. Profitability mix – In order for an airline to remain in operations it needs to be profitable. Different fare classes and how much is availed per class to the buying customers enables the airline to manage the mix in the way that will result in the highest profitability.

Comparing Fares

When Comparing Fares of two different airlines, it’s important to ensure you’re comparing apples to apples. Is the routing the same or is one flight direct while the other has stops? Are both flying to the same airport? Is the flight on the same day of the week or similar time of day? Are the fare classes the same – or similar enough that they have the same restrictions / flexibility?

In practise airlines will close the cheaper fare classes the closer to the date of departure and the closer they are to filling the plane. Therefore, if you happen to look at the ticket pricing of two different flights that are at different levels of filling up, chances are you will be looking at different available Fare classes.

Overbooking

This is often a source of frustration for passengers because it sometimes results in being bumped off a flight. In truth though, airlines overbook to help preserve their revenues.

Roughly 10% of tickets booked and paid for end up being ‘No-shows’. For a multitude of reasons, at the last minute, passengers do not  show up for their flights. This is a significant chunk of revenue to lose – most tickets will be refunded or changed to a later date at a fee that is far less than a new ticket. So, in order to protect against that loss, airlines overbook their flights to compensate.

Response to Question Asked:

I was asked the following question on Facebook.: “Please explain why a ticket to US (Nairobi to Washington; Business) will cost Airline A: $6,600, Airline B: $3,400 and Airline C: $2,800.”

There could be several reasons. One possible reason is that Airline B & C might be flying to the destination on their own planes from NBO to IAD. If Airline A is not doing the same i.e. they are selling seats on another airline that they are codesharing with, then they might not have as much control of the ticket price.

Airline B and Airline C can set their own price – even if it is below the actual seat cost – or it may be the lowest fare class in business class with other classes costing more. In a code share, though, Airline A could have been told by their code share partner “We’ll give you 5 seats in business class at $4000 a piece – ” or “We will only allow you to book business class on Fare Class J” or something similar. Airline A will then have to add the cost of their leg of the trip (plus a bit of a mark up) resulting in a much higher fare.

This concludes the lesson on Fares 🙂 Please let me know your comments and queries below.