Why is your fleet failing?
Poor profitability? Diminishing market share? Decreasing operational performance? If your airline is showing any of these symptoms, it might have the case of bad fleet planning. Seen across the globe, this disease is a recurring cause of bankruptcy. Gladly, the illness is not fatal and the mistakes leading to it can be avoided from the start. And if the team responsible for curing the disease is good enough, full recovery is possible even after many years of struggle.
Never too late to restructure
The first sign that an airline should consider changing its fleet is extremely high capacity, Jonas Juodagalvis, Vice President for Transactions at AviaAM Leasing, told AeroTime.
“If certain routes are operated at full (or near full) capacity, this signals the need to restructure the fleet,” Juodagalvis told AeroTime. “The first step airlines should make is to evaluate, whether the route is historical (operated for decades and likely to be operated at least a decade more) or seasonal. Depending on that, the airline decides whether to purchase an aircraft, enter a long-term operational lease or a short-term ACMI lease agreement for a couple of months.”
“It is a must to reflect upon your competitors’ experiences, especially the bad ones,” Juodagalvis told AeroTime. “If a competitor goes bankrupt, it does not mean that the routes were unsuitable. Perhaps an inadequate fleet was used. Take, for example, Finnair’s restructuring. They were flying half-empty Embraer E170s on Finnair flights, which was not very efficient. Right now, they choose smaller ATR72 aircraft on lease, which means they can carry almost fully loaded planes and offer more routes at the same time.”
According to Roy Fan, fleet planning analyst at Allegiant Air, one can describe a problematic fleet as either being inappropriately gauged (having too much/too little capacity per aircraft) or poorly aligned with its network growth. In the latter case, the carrier either has too many aircraft or not enough to satisfy its growth appetite.
“With an oversized aircraft gauge, concerns from some existing operators on profitably filling the A380 year-round immediately come to mind,” Fan told AeroTime in an email. “Conversely, an undersized fleet often suffers structural unit cost disadvantages and could be vulnerable to external constraints. The growing pilot shortage is an example that could accelerate upgauging.”
In terms of poor alignment, a number of start-up failures have often been blamed on overstretched capital commitments from adding excess capacity, while having a limited pipeline of aircraft to fuel growth could risk losing market relevance or becoming a takeover target, Fan believes.
Smart decisions save companies
No need to look far for restructuring cases, as airlines of different sizes are constantly reshuffling their fleets. This year, for example, we have seen Flybe announcing a reduction of 10-15 aircraft. The decision came after several years of losses or minimal profits.
“A major challenge we faced was having 50 Embraer 175s the business didn’t want or need – it very nearly killed the business and it’s taken us three years to ameliorate,” Vincent Hodder, Chief Strategy Officer at Flybe said at the Routes Europe 2017 conference, as quoted by Routes Online.
After the airline had reached peak capacity at 85 aircraft, it decided to reduce its Bombardier Q400 fleet by about six aircraft, and it aims by 2019/2020 to go even lower – to 70-75 aircraft.
Another European airline, Latvia’s airBaltic has been following a similar path, with past mistakes of overgrowing still haunting the carrier. Now the airline is in the process of replacing its Boeing 737s as well as older turboprops with a 100% C Series fleet.
Across the Atlantic, a notable recent case of fleet optimization is Azul. It sold ten of its ATR 72-600 aircraft to Nordic Aviation Capital, reducing its debt by $100 million. At the same time, the agreement also included the delivery of three new ATR 72-600 aircraft under operating leases.
“We will continue to deploy ATRs to explore new markets and to fly shorter regional routes, however, as we expand our network over the next few years, it is only natural that we replace smaller aircraft with larger next generation aircraft. In line with our fleet strategy of having the right type of aircraft for the markets we serve, we have identified several markets that are ready to be upgraded to larger aircraft,” John Rodgerson, Azul’s CEO, said in an official statement.
No perfect solution
The International Civil Aviation Organization lists three main approaches to fleet planning: macro evaluation, schedule evaluation and aircraft assignment. The macro approach is considered a reasonably quick method of estimating future fleet requirements, according to ICAO. With a heavy emphasis on historical seat trends and past data, the approach might not be the most comprehensive. While it takes the forecasted aggregate passenger numbers as a theoretical load factor, it dismisses the route structure of the airline.
The schedule evaluation method examines the quality of a previously determined schedule and the aircraft assignment method, considers and initially defines the total traffic demand, airplane performance, operating economics, financial limits and system constraints.
No method is perfect and there is no “one-size-fits-all” solution, aviation analyst Ziad Haddad told AeroTime.
“Planning and structuring should be a system-level approach,” Haddad said in an email to AeroTime. “Each method has its own specific contribution to make, and only the airline requirements and unique circumstances dictate when each technique will be more appropriate.”
A correct fleet structuring approach starts with a correct business plan, according to Daniel McDonald, Managing Director at Aviation Fleet Group.
“An airline needs to first decide its strengths and weaknesses and then what are its targets for profitability, customer/product offerings, competitive position, needed cost structure and revenue,” Mcdonald told AeroTime in an email. “This is an iterative process that will drive decisions on the route network and also matching the right fleet to this business plan/route network. The right fleet structure is really the right fleet plan. A fleet plan should be the number of aircraft by month/year/type over the next 3 to 5 years. This should be formally updated every quarter.”
Finally, it might seem like a no-brainer that longer routes require longer range aircraft and busy routes are best operated by larger aircraft. However, this is just part of the equation. Aircraft availability and the kind of service a carrier wants to offer need to be accounted for as well.
“The carrier requires to weigh the difference regarding when an aircraft is available and when it is needed, Syed M. Bilal Zaidi, aviation analyst at Flight Ascend Consultancy, told AeroTime in an email. “At the same time, fleet planning relies on what the airline wishes to provide its passengers.”
For example, full-premium cabins are not available on narrow-body aircraft, and an airline like Emirates would not be able to provide Airbus A380 suite service even on a smaller wide-body jet.
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