The City Airways Group (CA Group hereinafter), a company founded in 1946, operates Utopia’s flag carrier, City Airways (CA hereinafter). It is partially owned by the government, which has a 49% stake in it, whilst the rest of its holdings are publicly owned and traded. It operates within the European continent, regionally within the Nordic region through Region Air, Airline AA and Airline BB. It also owns Remote Air, a specialist division. Aside from these, CA Group also owns CA Cargo and holds shares in other smaller airline companies, hotels, flight training and aircraft maintenance. CA has established itself, through the years, as a reliable, socially responsible and quality airline catering primarily to the business class.
Recent challenges to the company like the effects of the worldwide economic recession, labour unrest, high costs, stiff competition from bigger airlines and the proliferation of low-cost carriers flying the same routes have taken a toll on its profitability and viability. In 2007, with a new CEO manning its helm, CA Group adopted Strategy 2011 (S2011 hereinafter), a new company approach geared to ensure company viability and elevate profitability whilst minimising operation costs, through the following: divestment of non-core assets; savings in costs; improvement of management-labour relations to halt the strike culture that previously characterised it, and a review of its fleet planning. The economic recession that began in 2007, however, hampered the smooth implementation and realisation of S2011.
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A. Divestment of Non-Core Assets
CA Group plans to strip itself of non-core assets its 37.5% shares in Air Greenland and 100% shares in Med Holiday Air, operating in Spain. This is a move designed to consolidate and strengthen its operation in its main turfs which are the Nordic and Baltic regions as well as allow it to expand or replace ageing fleet either through the purchase or lease of new or re-engine airplanes. The company has, however, remaining non-core assets unsold because union opposition threatened to interfere with their dispositions, causing delay in the full implementation of S2011.
B. Cost Savings
Most of the cost savings of the company in 2009 comprise the revenues earned from the sale of its non-core assets albeit a significant number of non-core assets remain unsold due to union opposition.
C. Improvement in Labour-Management Relations
The future acquisition of new fleets is deemed to rely on the resolution of the union problems within CA Group. The strike culture in CA Group prior to 2007 was critical, with 70 strikes out of 100 considered illegal in the last ten years. It underpinned most of the company’s problems and its resolution is seen as the key to the success of S2011. The new CEO was able to come to obtain the commitment of union groups in helping sustain stability of labour relations within the company in exchange for the withdrawal of the cutbacks being threatened by management.
D. Review of Current Fleet
CA Group presently operates 235 aircrafts which it either owns or leases, excluding those used by Air Greenland and Med Holiday Air. The majority, or 177, of the aircrafts are leased and the rest company-owned. The fleet consists of 20 models from various aircraft manufacturers like Boeing, Airbus, Bombardier, Fokker and Avro. More than a hundred of these aircrafts, like MD 81/82, Q100/300, Fokker 50, Boeing 737-300/400/500 Classics and MD 87, primarily used in medium or short-haul operations are nearing retirement age. They are costly to maintain, less fuel efficient and less comfortable to passengers as newer aircrafts would be. In addition, unscheduled maintenance, which often happen with ageing aircrafts, cause delays or flight cancellations and add to customer perception of airline inefficiency.
Majority of these ageing aircrafts are leased by the company. Only around 58 aircrafts, including the relatively newer models such as the 9 Airbuses, 14 Boeing 737NGs, 7 Q400 and the near retiring-age planes such as the 8 Boeing Classics, 4 MD 81/82, 4 Fokker and 12 Q100/300, are company owned. This gives the company the option of negotiating for better contract terms or not renewing contracts altogether and find other airplane suppliers and lessor to negotiate with for better aircrafts.
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What Fleet Planning Issues Does the Group Face – Bearing in Mind that the Fleet has Short-Haul/Regional Elements, Medium-Haul Elements and a Long-Haul Element?
A. Long-Haul Flights
Long-haul flights, which refer to flights that take more than 12 hours of travel time [1] or with a travel distance of 1,500 miles or more, [2] are being handled by CA’s main airline, the City Airways. For these flights, CA uses 11 wide-bodied aircrafts from Airbus such as A340-300 and A330-300, five of which are company-owned and the remaining 6 leased. These aircrafts having an average seating capacity of 251, more or less, are relatively young with ages not more than 7 years. It is believed that the present 11 fleet used for long-haul flights are not enough for CA to compete with other airlines in this category. A previous plan to add another wide-bodied aircraft to the present fleet was temporarily scrapped because of the losses incurred by CA in its operations in 2008 caused by traffic feeds losses due to disruptions in operations. The following year, 2009, was even worse.
B. Medium-Haul Flights
Medium-haul flights, or those with a travel distance of 1,000 miles and more but less than 1,500 miles,[3] are likewise being operated by City Airways and these are flights that primarily use the Boeing 737s and MD80 models, although the latter are substituted by the Airbus A320s together with the newly delivered 737NGs, in destinations that have stringent noise restrictions. The Airbuses, 4 of them, have an average age of 4 years, the 56 Boeing 737NGs, on the other hand, have an average age of 5 years, whilst the MD80s are nearing retirement period at 19.4 average age. The ageing MD80s, however, are more cost-efficient than the newer models and has an operating cost advantage of 5%. In addition to the MD80s, the Boeing 737 Classics are also reaching maturing age and need to be replaced in the very near future.
C. Short-Haul Flights
Short-haul operations, or those flights traveling distances of 300 miles or more but less than 1,000 miles, [4] are handled by two airlines of the CA Group, namely: Remote Air, and; Region Air. Remote Air flights are serviced by 24 Q100/300 aircrafts, with an average age of 18.1 years. These planes are known for their reliability and cost-efficiency than passenger comfort and convenience. These planes need to be replaced very soon, but production for their make had already been stopped and therefore, the company is faced with the problem of scouting for other models to replace them.
On the other hand, Region Air operates using turboprop planes of the newer Q400 and the older Fokker50. The latter had also been phased out of the market and their production ceased; their replacement with another model also a dilemma to the company since they are now averaging 18 years old. In relation to this, turboprops are observed to be less favoured by many passengers but the company cannot altogether drop the flights using them for fear other airlines will grab the market. The turboprop resistant perception was also exacerbated by an accident in another country involving a Q400 turboprop. The 9 Avro models with an average age of 9 years, all of which are leased and servicing Airline AA compete with Embraers planes of Finnair. The Avros are neither known for their reliability or are fuel efficient. On the other hand, the routes being serviced by Airline BB are serviced by airline companies using jet planes.
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What Options are Open to the Group in Terms of Addressing the Fleet Planning Issues that have been Identified?
Since majority of the planes, viz. 177, used for the operations of long-haul, medium-haul and short haul flights of the CA Group airlines are leased, it will be easier for the company to revise or enter new agreements of lease for other model types with the same or other airplane manufacturing companies. Moreover, majority of the ageing airplanes, or 99 out of 127, are merely leased only by the company, giving it the advantage of acquiring or leasing more suitable planes without having to worry about what to do with a fleet of unusable planes. This will give the company the chance to scour for more planes that are more cost and fuel efficient, and are newer to preclude unscheduled maintenance that disrupts, and worse, cause cancellations of flights. At the same time, newer planes use better technology that promotes a clean and green environment, features that are in keeping with company goals and reputation. All these will reinforce the overall reputability of the company.
For issues relative to short-haul flights, like ageing planes and passenger resistance to turboprops, the company has the following options: the 50-seater ATR-42; the Dash 8 Q-400; airplane models from the Brazilian manufacturer Embraer; various plane models from the Russian manufacturer Sukhoi; the new CRJ series from Bombardier, maker of the Q400; and the 70 to 96-seater Mitsubishi Regional Jet from Japanese manufacturer Mitsubishi Aircraft Corporation.
The medium-haul operation of the CA Group is likewise faced with ageing airplanes due for replacement in the very near future. The 42 MD-80 airplanes and the 17 Boeing 737 Classics need to be replaced very soon, and production for the latter has already ceased. There are three options available to the company: phase out the MD-80s and replaced them with A320 and Boeing 737NG models, either brand new or used or from leasing companies; delay phase out for 6 months of MD 80s to see if Airbus and Boeing will offer re-engined models of A320 and Boeing 737NG, which could be more fuel efficient than the present versions, and; to wait for the next generation short to medium-haul airplanes that will save at least 30% costs in fuel than the present A320 and 737NG models, an event that will most likely come in 2018 or 2020.
The CA Group, which had earlier announced its intention to compete with other airlines in the long-haul flights, could push through with its desire to acquire or lease more wide-bodied aircrafts to augment its present 11 fleet of long-haul aircrafts.
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Looking to the Future, Which of these Fleet Options Would you Recommend as Being Likely to be Most Attractive?
For short-haul operations, the company may altogether renegotiate to lease a different brand of fleets in lieu of the Avro fleet, since all of the Avro planes it uses are on a lease basis. The 50-seater CRJ200 series[5] is ideal for the routes serviced by the Avro fleets. Since the Fokker 50 fleet being used for short-haul by Region Air and Airline BB are due for replacement because of their age, the CA Group can also opt to lease the same Bombardier model rather than the ATR 42.
The company can also consider leasing the CRJ700 or CRJ705 [6] in lieu of turboprop driven Q400 planes, which have 70 and 75 seating-capacity, respectively to solve the turboprop-resistant perception encountered in many regional passengers or again, go for the 50-seater CRJ200.
For medium-haul operations, there is no reason why the company can’t hold off making important decisions for six months to find out whether Airbus or Boeing would come out with re-engined models of the Boeing 737 NGs or Airbus A320. The company may reconsider leaning towards the Airbus models to save maintenance and pilot training, considering that its long-haul airplanes are also Airbus models.
If the company is serious in competing in the long-haul operation with other airlines, it must augment the present Airbus models (i.e. A340-300 and A330-300). With the savings that the potential new fleet planning will generate, perhaps the company will be financially able to.
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Explain Why you Think these are Likely to Be the Most Attractive Options.
The preceding options are the most practical and viable choices for the company taking into consideration the optimum value of the aircrafts to the company and its business goals and strategies. In the short-haul category, for example, the new Bombardier models are chosen over the ATR to replace Avros planes to preclude the need to change suppliers to give the company better chances in negotiating for better terms. Aside from that, opting for an ATR plane means adding a different family to its present fleet, which could mean additional costs in training pilots and maintenance personnel.
Moreover, the CRJ series, unlike the Q400 also from Bombardier, have 50-seaters which are ideal for many of regional routes being operated by Remote Air, on top of their fuel efficiency and general reliability. The familiarity by maintenance with the Bombardier brand will also result to savings for the company because there will be no need to hire additional maintenance personnel or spend for extensive training for another airplane brand. The same justification underpins the matter of choosing the 70-seater CRJ700 or 75-seater CRJ705 in lieu of the Q400 turboprops. Since all CJR series planes employ Advanced Collins ProLine 4 all glass integrated cockpit avionics, a pilot granted “Same Rating Type” to handle one CRJ model will be qualified to handle all other CRJ models. [7]
Another factor favouring the CJR series is the fact that it is not turboprop driven but by turbofans, to appease many passengers who have aversions towards turboprop driven planes. The CRJ series are good substitutes for the MD80s because these series are known to have one of the lowest noise levels, viz. Stage IV certified, and the have emission levels much lower than that prescribed by the International Civil Aviation Organization (ICAO).[8] These factors are in keeping with the company’s commitment towards environmentalism.
For medium-haul operations, putting off the replacement of MD 80s into the 2018s and thereafter may be too dangerous because that would mean using some or many of MD80s beyond their life expectancy. In addition, a comparison of the Airbus and Boeing new models show that the Airbus is more fuel efficient than the 737NGs. Considerations for medium-haul recommendations are also underpinned by optimum economic value, competitive passenger appeal, excellent customer perception, potential pricing advantages from suppliers and lessor, the particular needs of markets and routes, crewing, commonality, environment standards and certification rules. [9]
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What are the Five Main Uncertainties that are Likely to Affect the Final Fleet Planning Decision? (In other Words, What are the Main Factors that Should be Taken Into Account in any Risk Analysis or Sensitivity Analysis?)
The uncertainties that often accompany fleet planning decisions are: availability of aircrafts that will be used to replace ageing aircrafts or unsuitable ones; overall costs of aircraft acquisition or lease, including factors like fuel efficiency, commonality with existing planes in the company’s stable of fleets to potentially reduce pilot training costs, maintenance costs, and the like; financing and financing options available to the company in purchasing or leasing new models, including warranties, possibility of negotiating with suppliers for lesser prices considering the number of planes being ordered; upgrade options available to the company in the future like re-engined models with features that offer potential savings in costs or more environmentally friendly features or more advanced technology, and; market conditions that affect the company and its operations like demand and supply of passenger load factors, geographical and weather conditions in the routes being serviced.
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Explain Why these Five Main Factors Have Been Chosen for the Sensitivity Analysis and How Different Assumptions Might Alter the Recommended Fleet Options.
The aforesaid factors were chosen for sensitivity analysis because they are the factors that have the most impact on the viability of the objectives and purposes of the CA Group fleet planning. Fleet planning is most sensitive, first and foremost, with the aircrafts in the market available for purchase of for lease because it is from among them that the company can choose from with viability in accordance with its needs and objectives. On the other hand, structural costs are likewise basic to any fleet planning because of budgetary considerations. Costs do not cover only the actual price of the purchase or lease but also extends to the potential costs or savings that the company will commit or gain once the airplanes are in operation. Financing is likewise important in the viability of the company’s acquisition or lease of aircrafts as well as purchase or lease terms that may be advantageous or disadvantageous to the company. Upgrade options are also pivotal to fleet planning because market conditions may change and company operations airplanes must be able to adapt to them, whilst taking into consideration present market conditions at the same time.
References:
- Clark, P. (2007). Buying the Big Jets: Fleet Planning for Airlines, 2nd Edition. England: Ashgate Publishing Limited.
- CRJ200, Bombardier. http://www.crj.bombardier.com/CRJ/en/description.jsp?langId=en&crjId=200.
- Dobbs, D. (2009). Aviation Industry Performance: A Review of the Aviation Industry in 2008. DIANE Publishing.
- Plunkett, J.W. (2007). Plunkett’s Airline, Hotel & Travel Industry Almanac 2008: Airline, Hotel & Travel Industry Market Research, Statistics, Trends & Leading Companies.
- Plunkett Research, Ltd.
- [1] J.W. Plunkett (2007) Plunkett’s Airline, Hotel & Travel Industry Almanac 2008: Airline, Hotel & Travel Industry Market Research, Statistics, Trends & Leading Companies (Texas: Plunkett Research, Ltd.) p. 14.
- [2] D. Dobbs (2009) Aviation Industry Performance: A Review of Aviation Industry in 2008 (DIANE Publishing) p. 29.
- [3] Ibid.
- [4] Ibid.
- [5] CRJ200, Bombardier. http://www.crj.bombardier.com/CRJ/en/description.jsp?langId=en&crjId=200.
- [6] CRJ700, Bombardier. http://www.crj.bombardier.com/CRJ/en/home_crj.jsp?langId=en&crjId=700.
- [7] Ibid, http://www.crj.bombardier.com/CRJ/en/technology.jsp?langId=en&crjId=705.
- [8] Ibid.
- [9] P Clark (2007) Buying the Big Jets: Fleet Planning for Airlines, 2nd Edition (England: Ashgate Publishing Limited) pp. 39-42.
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