13 - Airplane Value Analysis

TRAINING & FLIGHT SERVICES
Airplane Value Analysis
BOEING is a trademark of Boeing Management Company.

Copyright © 2011 Boeing. All rights reserved.
TRAINING & FLIGHT SERVICES
Financial Analysis
Aircraft Evaluation
Techniques
BOEING is a trademark of Boeing Management Company.

Aircraft Evaluation
Strategic planning
Equipment analysis
Operational analysis
Market analysis
Considerations Economic analysis
Financing alternatives
Other:
Financial analysis
Image/Brand
Passenger preference
Flexibility
Reliability

Agenda
 Financial Evaluation of Projects
 Time Value of Money
 Cost of Capital
 Value Analysis Example
 Sensitivity Analysis

Agenda
 Cost of Capital

Financial Evaluation of Projects
 Basic question
 When it is time to invest in the business, how do we know what is a
good investment and what isn’t?
 Basic answer
 When the return on the investment is higher than the cost of the
money invested.
 How do we measure this?

Financial Evaluation of Projects
 Select a Capital Budgeting Technique
 Cumulative cash flow
 Payback period
 Internal rate of return (IRR)
 Net present value (NPV)
 Estimate relevant cash flows
 Compare the results to an acceptance criterion

Cumulative Cash Flow and Payback Period
Cum CF Cash out
$120
($100)
Cash in
$76
$80
5 x pmts =
$40 $100
$20
$20
$20
$20
$20
$76
$0
Year 0 Year 1 Year 2 Year 3 Year 4 Year 55
Year Year 66
Year NPV Net cash
NPV
($40) Payback $76
Looks like a great

($80) deal!
($100)
($120)

Agenda
 Cost of Capital

Time Value of Money
Cash out
PV @0%
PV @ 0%(CF) PV @ 10%
$120
($100)
$120
Cash in
$76
$76
$80
$80 5 x pmts =
$43
$100
$40
$40
$20
$20
$20
$20
$20
$18
$19
$17
$15
$14
$12
$76
$0
$0
Net
Cashcash
out
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 NPV
$76
($100)
($40)
($40)
Looks likein
PV of Cash a great
deal!
($80)
($80) 5 x pmts =
($100)
($100)
$76
($120)
($120)
$43
Net Present Value (NPV)
PV @
@ 0%
0%(CF) PV @ 10%
 Net Present Value (NPV) is the $120
PV
sum of all years’ discounted
$76
$76
$80
cash flows
$43
$40
$20
$20
$20
$20
$20
$19
$18
$17
$15
$14
$12
 The NPV method is a valuable $0
indicator because it recognizes Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 NPV
the time value of money ($40)
($100)
($80)
 Projects whose returns show
positive NPVs are attractive ($120)
NPV = -Investment + PV of future cash flows

= ($100) + $18 + $17 + $15 + $14 + $12 + $43
 The project with the highest = $19
Ct
NPV will be chosen PV 
(1  r ) t
Where:
 The project chosen can change PV: present value
based on the discount rate that Ct: future value
is used r: annual discount rate
t: number of periods
Internal Rate of Return (IRR)
PV @ 0%
PV @ 0% (CF) PV @ 15%
 It is that rate where the total $120
present value of cash inflow is
$76
$76
equal to the present value of cash $80
outflow
$33
$40
$20
$20
$20
$20
$20
$17
$15
$13
$11
$10
 IRR is a measure of the rate of
$0
$0
profitability Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 NPV
($40)
 The calculated IRR is examined to
($100)
determine if it exceeds a minimally ($80)
acceptable return, often called the

hurdle rate ($120)
IRR of this stream of cash flow is 15%

 The advantage of IRR is that, unlike
NPV, its percentage results allow
projects of vastly different sizes to
be easily compared
 The use of IRR always leads to the

selection of the same project,
unlike NPV
Net Present Value – Example
PV @ 0% (CF) PV @ 10% PV @ 15% PV @ 20% Cum CF
$100.00
$80.00
$60.00
$40.00
NPV =0;
$20.00 IRR = 15%
$0.00
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 NPV
($20.00)
Payback
($40.00)
($60.00)
($80.00)
($100.00)
($120.00)
The net present value declines as the cost of capital increases

Agenda
 Cost of Capital

Cost of Capital
What discount rate should I use?
Typical Typical Overall

airline costs airline mix cost
Borrowed money (debt) 5% – 6%

Interest expense is tax deductible, so interest paid means taxes are reduced.
Debt cost after tax* 3.25% - 3.9% 55% 2.0%
Invested money (equity) 13% – 18% 45% 7.0%
“Weighted average cost of capital (WACC)” 9.0%
Other adjustments 1.0%
Discount rate 10.0%
*Tax rate of 35%

Agenda
 Cost of Capital
 Value Analysis - Example

Value Analysis - Example
The basic question: How can we compare two alternative aircraft?
The basic answer: By weighing the value each aircraft provides.
We measure the earning power of a capital asset such as a

commercial airplane by estimating its future cash flows and
discounting them back at the airline’s cost of capital.
787-8 767-300ER
Versus

What are the value elements to consider?
 Revenue  Costs
 Passenger  Fuel expense
 Cargo  Maintenance
 Landing/Navigation/Handling
fees
 Crew costs
 Passenger and Cargo related
 Lease expense

Assumptions
Number of years 12
Discount rate 10%
Average trip length (km) 7,700
Annual trips 607
Annual Cost and Revenue Escalation 2%
Average Baseline Fare $656
Fuel price (US $ per usg) $3.00
787-8 (new) 767-300ER (new)

OEW (kg) 117,843 92,034
MTOW (kg) 227,930 186,880
Engines GEnx-1B67 CF6-80C2B7F
Thrust (lbs) 67,000 62,100
Seats 242 (16/44/182) 211 (12/42/157)
Gross Cargo Volume (m3) 124.4 108.7
Fuel Burn (kg) 40,182 43,540
Block Time (hrs) 9.03 9.51
Monthly lease rate $1,000,000 $650,000
Passenger Revenue
NPV of: Number of flights x trip length x passengers x yield
Drivers
Using Spill
 Seat Count Model
31 More
 Cabin Area
Seats 13.4 More Passengers
 Interior Configuration
 Passenger Preference $482 Incremental
Fare
$6,459 Higher Revenue per Trip
607 Trips
Per Year
$3.9M More Revenue per Year

12 Years
2% Commission
$29.3M NPV
Advantage 2% Inflation
10% Discount Rate
Additional 787-8 seats generate $29.3 Million More Revenue than 767-300ER
Cargo Revenue
NPV of: Number of flights x trip length x tonnes x yield
Drivers 10 lb/cf Density
 Lower Hold Volume 60% LF
424cf More
 Structural & Volume Limit
Cargo Volume 1.2 tonnes More Cargo
 Passenger Bags Net of Pax Bags
Yield:
22.3 cents per RTK
($1.72/Kg)
$2,048 More Revenue per Trip
607 Trips
Per Year
$1.2M More Revenue per Year

12 Years
2% Commission
$9.3M NPV
Advantage
2% Inflation
10% Discount Rate
Increased 787-8 cargo capacity provides $9.3M additional cargo revenue opportunity
Fuel Expense
NPV of: Number of block-hours x fuel burn per block-hour x fuel price per gallon
Drivers
 Aerodynamic Efficiency Composite 3.4 Less tonnes
 Engine Technology Structure Fuel per Trip
 Weight Advanced Technology
$3.00/usg
 Thrust
Fuel Price
$3,315 Lower Cost per Trip
607 Trips
Per Year
$2.0m Lower Cost per Year
$15.0M NPV 12 Years

advantage
2% Inflation
78K tonnes less CO2 over 12 years 10% Discount Rate
787-8 lower fuel burn and increased speed generates $15.0M in value
787 Maintenance Overview
The 787 is designed for Low Maintenance:
Less Scheduled Maintenance
Longer Check Intervals Composite Structure Fewer Maintenance

 Twice as long as the 767  Resists fatigue Tasks
 Resists corrosion  Less inspections with
 30% Fewer tasks composite structures
Less Unscheduled Maintenance
More Reliable Systems More Durable Structure Health Monitoring

 Designed for low life  Less accidental damage  System monitoring
cycle costs  Easy to inspect  Engine monitoring
 No Pneumatic system  Quick repair techniques

Maintenance Expense
NPV of: Cost per flight hour x number of flight-hours
Drivers Newer Design
 Materials  Utilization Fewer LRU’s
 Systems Longer Engine On-wing Time
 Environment
Fewer MPD man-hours
 Weight  Age Better Accessibility
 Thrust/Derate Reduced Replacement Time
Lower Thrust Requirement
$190 Lower Cost per FH (mature)
8.8 FH/Trip
607 Trips/Year
$1.4M Lower Cost per Year

12 Years
Newness/Aging
$10.9M NPV
10% Discount Rate
The 787-8 was designed for lower maintenance costs

Maintenance Days Out of Service &
Schedule Reliability
Drivers
787 767-300ER
 Check Length A 1000 hrs 750 hrs 4.3 Fewer Days
 Check Interval C 36 mths 18 mths Out of Service
D 12 years 6 years Per Year
2 Trips/Day
8.6 Additional Trips per Year
$31,100 Operating
Profit per Trip
$270K Higher Profit per Year
12 Years
$2.0M NPV
10% Discount Rate
787-8 advanced technology has fewer days out of service & better reliability
Flight and Cabin Crew Expense
NPV of: (flight crew + cabin crew cost per flight) x number of flights
Driver 1 Additional
 Number of Seats Cabin Attendant
 Block time 29 Less Minutes $395 Lower Cost
per Flight per Trip
607 Trips
Per Year
$239K Lower Cost per Year
12 Years
$ 1.8M NPV
10% Discount Rate
787-8 increased speed reduces block hours and subsequent crew costs
Landing / Navigation / Handling Fees
NPV of: (Landing fees + navigation fees + handling fees per flight) x number of flights
Drivers
 MTOW
 Number of Passengers 31 More Seats
Higher MTOW $1,300 Higher Cost per Trip
 Mission Stage Length
607 Trips
Per Year
$789K Higher Cost per Year
12 Years
($ 6.0M) NPV
Disadvantage 2% Inflation
10% Discount Rate
787-8 higher MTOW results in higher landing/navigation/handling fees
Passenger Related Costs
NPV of: Cost per flight x number of flights
Drivers
 More seats & passengers
13.4 more
 Type of airport & on-board services $1,567 Higher cost per trip
passengers
 Airline business model
 Flight distance/length
607 Trips Per Year
($ 7.2M) NPV 12 Years

Disadvantage
2% Inflation
10% Discount Rate
Revenue advantages of carrying more passengers is reduced by cost of carrying them

Cargo Handling Costs
NPV of: Cost per flight x number of flights
Drivers
 Cargo Capacity 1.2 tonnes
$139 Higher cost per trip
 Short / long haul More Cargo
 Airport cost
 Type of handling equipment
607 Trips Per Year
12 Years
($ 0.6M) NPV
Disadvantage
2% Inflation
10% Discount Rate
Revenue advantages of carrying more cargo is reduced by cost of carrying it

Insurance
NPV of: Insurance rate x aircraft value
Drivers
 Net price of airplane
 Appraised value $43M Higher Value Today
0.70 percent of
Net Price
10% Discount Rate

($ 2.1M) NPV
Disadvantage
Lower insured value of 767-300ER results in lower insurance premiums

Lease Expense
NPV of: Initial deposit and monthly lease payments
Drivers
 Operator base
 Ability to reconfigure $450K Higher monthly lease rate
 Residual value and asset risk
$4.2M Higher Cost per Year
10% Discount Rate

($ 29.3M) NPV
Disadvantage
The advantages of the new 787-8 are reflected in a higher lease rate

787-8 is Worth US $23.7 Million More Than
the 767-300ER
12 year NPV per aircraft value comparison: 787-8 vs. 767-300ER
Incremental NPV impact per airplane ($ millions)
$80
$80
$80
$80
$2.8
$2.8 $1.8 ($6.0)
$1.8 ($6.0)
($6.0)
$70
$70
$70
$70 $10.9
$10.9 ($7.2)
($7.2)
$60
$60
$60 $15.0
$15.0 ($0.6)
($0.6) ($2.1)
($2.1) ($29.3)
($29.3)
$60
$50
$50
$50
$50
$9.3
$9.3
$40
$40
$40
$40
$29.3
$30
$30
$30
$30 Key assumptions $23.7
$23.7
Distance (km) 7,700
Annual Flights 607
$20
$20
$20
$20 Fuel / US gal. $ 3.00
787-8 LF 75.3% 787-8 advantage: higher revenue or lower costs
$10
$10
$10
$10 767-300ER LF 80.0% 787-8 disadvantage: higher costs or lower revenue
Baseline Fare $ 656 787-8 Value
Discount Rate 10%
$-
$-
$-
$-
ue ue l y g s
e n en Fue anc e ab ilit Crew d l in Cost
s
Cos t an ce e nse Va
lue
v v 0 e n l i n r g r Exp
r Re o Re $ 3.0 i nt Re /H
a
n ge d lin I nsu e
e rg a d o n e n a s
s sen
g
t Ca M
S che ig ati P ass o Ha Le
a Ne & av r g
tP ays /N Ca
Ne D i n g
a nce L and
en
a i nt
M
Value Analysis - Example
Conclusion
Based on this analysis, investing in the 787-8 generates $23.7

million more value than the 767-300ER
787-8 Net Present Value $74.2M

of all CF’s
767-300ER Net Present Value $50.5M

of all CF’s
Net 787-8 advantage $23.7M

Additional elements that could be quantified
and monetized
 Delivery availability
 Introductory costs
 Disruption during airplane type rollover
 Gold Care
 Ancillary revenue
 CO2 and Noise charges
 Range
 Passenger preference

Agenda
 Cost of Capital

Sensitivity Analysis
It is important to look at the NPV calculations and determine
the critical variables and assumptions that will determine the
project’s success or failure…..
 Passenger and cargo yields
 Load factors and demand
 Discount rate
 Fuel price
 Unit costs
 Monte Carlo simulation

787-8 vs 767-300ER Fuel Price Sensitivity

787-8 is Worth US $23.7 Million More Than
the 767-300ER
12 year NPV per aircraft value comparison: 787-8 vs. 767-300ER
Incremental NPV impact per airplane ($ millions)
$80
$1.8 ($6.0)
$70 $10.9 $2.8 ($7.2)
$60 $15.0 ($0.6) ($2.1) ($29.3)
$50
$9.3
$40
$29.3
$30 Key assumptions $23.7
Distance (km) 7,700
Annual Flights 607
$20 Fuel / US gal. $ 3.00 787-8 advantage: higher revenue or lower costs
787-8 LF 75.3% 787-8 disadvantage: higher costs or lower revenue
$10 767-300ER LF
Baseline Fare $
80.0%
656
787-8 Value
Discount Rate 10%

$-
ue ue l y ing sts
e n en Fue ance ab ilit Cr ew d l Co st s
Co an ce e nse Va
lue
v ev 0 e n l i an r g u r xp
Re oR $3
.0 i nt Re /H ge lin I ns eE
g er rg a ed o n en n d a s
n a M
Sch gati ss Ha Le
asse e tC & v i Pa g o
tP N a r
Ne Days n g /N Ca
i
anc e L and
en
a i nt
M
What is the likelihood that the 787-8 fuel advantage is worth US $15 Million
Copyright © 2011 Boeing. All rights reserved. More Than the 767-300ER?
Financial Analysis
Summary
 Time value of money is an important concept for any

investment evaluation
 Financial analysis allows us to systematically compare

aircraft alternatives and identify opportunities
 Assumptions will drive the fidelity of the investment analysis
 Sensitivity analysis helps us understand the impact of

changes to key variables
 Financial analysis is a key element in the aircraft acquisition

process

13 - Airplane Value Analysis

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TRAINING & FLIGHT SERVICES

Airplane Value Analysis

BOEING is a trademark of Boeing Management Company.

BOEING is a trademark of Boeing Management Company.

Copyright © 2011 Boeing. All rights reserved.

 Time Value of Money

 Value Analysis Example

Copyright © 2011 Boeing. All rights reserved.

 Time Value of Money

 Value Analysis Example

Copyright © 2011 Boeing. All rights reserved.

 How do we measure this?

Copyright © 2011 Boeing. All rights reserved.

 Estimate relevant cash flows

 Compare the results to an acceptance criterion

Copyright © 2011 Boeing. All rights reserved.

($40) Payback $76

Looks like a great

Copyright © 2011 Boeing. All rights reserved.

 Time Value of Money

 Value Analysis Example

Copyright © 2011 Boeing. All rights reserved.

sum of all years’ discounted

the time value of money ($40)

NPV = -Investment + PV of future cash flows

present value of cash inflow is

 The calculated IRR is examined to

acceptable return, often called the

IRR of this stream of cash flow is 15%

 The use of IRR always leads to the

The net present value declines as the cost of capital increases

 Time Value of Money

 Value Analysis Example

Copyright © 2011 Boeing. All rights reserved.

What discount rate should I use?

Typical Typical Overall

Borrowed money (debt) 5% – 6%

Debt cost after tax* 3.25% - 3.9% 55% 2.0%

Invested money (equity) 13% – 18% 45% 7.0%

“Weighted average cost of capital (WACC)” 9.0%

Other adjustments 1.0%

Discount rate 10.0%

*Tax rate of 35%

Copyright © 2011 Boeing. All rights reserved.

 Time Value of Money

 Value Analysis - Example

Copyright © 2011 Boeing. All rights reserved.

The basic question: How can we compare two alternative aircraft?

The basic answer: By weighing the value each aircraft provides.

We measure the earning power of a capital asset such as a

Copyright © 2011 Boeing. All rights reserved.

Copyright © 2011 Boeing. All rights reserved.

787-8 (new) 767-300ER (new)

$6,459 Higher Revenue per Trip

$3.9M More Revenue per Year

$2,048 More Revenue per Trip

$1.2M More Revenue per Year

$3,315 Lower Cost per Trip

$2.0m Lower Cost per Year

$15.0M NPV 12 Years

Longer Check Intervals Composite Structure Fewer Maintenance

Less Unscheduled Maintenance

More Reliable Systems More Durable Structure Health Monitoring