Cedric Y. Justin

Option-Based Approach to Value Engine Maintenance Cost Guarantees and Engine Maintenance Contracts

The acquisition of new aircraft and engines is a process riddled with uncertainties regarding the economic performance of the assets once in operations. Trend in the recent years has been for original equipment manufacturers to offer warranties and performance guarantees during sales campaigns in order to limit airlines’ exposure to technical risks and assure them that operating costs will remain under control. Similarly, more and more airlines are transitioning from traditional sub-contracted “labor and material” engine maintenance or in-house maintenance to “pay-by-the-hour” maintenance contracts offered either by engine manufacturers or independent maintenance, repair and overhaul facilities. Estimating the value of these warranties, performance guarantees and maintenance contracts is not only an accounting game: there are significant risks faced by manufacturers and repair facilities when such contracts are offered. At the same time, valuing these contracts is a daunting task due to the uncertainty regarding maintenance costs and their sensitivity to operating conditions and operating environments. The primary focus of this paper is on high bypass ratio turbofan maintenance and an option-based approach to computing the fair value of the previously mentioned contracts is proposed. The methodology is inspired by numerical methods used to value financial derivative securities. Comprehensive “by-the-hour” maintenance contracts are shown to be a special case of maintenance guarantee contracts. Finally, the method is applied and some results are presented.

Aircraft Valuation: A Network Approach to the Evaluation of Aircraft for Fleet Planning and Strategic Decision Making

Commercial aircraft and engine developments are major endeavours which strain considerably the resources of manufacturers. Beyond the financial strains, these research and development programs represent huge bets for the companies due to the fixed assumptions made when business plans are conceived and the abundance of uncertainties both at the technical and market levels. Standard methods used for capital budgeting are not well suited to account for uncertainty and tend to undervalue research and development projects. Similarly, traditional methods fail to capture the dynamic nature of the market and the erosion of leadership positions over time. The on-going research tries to fill some of these gaps by proposing a game-theoretic and real-option based method that will both help optimize research and development strategies as well as properly value large development projects. The analysis is applied to large commercial aircraft and engine developments and this paper presents the first step of the proposed methodology which is the valuation of aircraft and engines from a customer perspective. Assessing the value of an aircraft for an airline is both a complex and tedious task due to the uncertain environment and the long forecasting periods. Existing methods do not always capture the problem in its entirety and usually over-simplify it by using generic routes and surrogate models. In this paper, a method is proposed to carry out the valuation of an aircraft and its engines over an entire airline network. The aircraft valuation method developed will be used in later stages of the research to carry out the competitive analysis that is used for the aircraft development project valuation.

Strategic Analysis of Competitive Markets: A Case Study for the Narrowbody Market

Commercial aircraft developments are major endeavours which strain considerably the resources of original equipment manufacturers. Beyond these financial strains, the development programs represent huge bets for the companies due to the fixed assumptions made when business plans are conceived and the abundance of uncertainties both at the technical and market levels. Standard methods used for capital budgeting are not well suited to account for uncertainty and fail to capture the dynamic nature of markets and the erosion of leadership positions over time. The on-going research tries to overcome some of these challenges by proposing a game-theoretic based method that helps substantiate aircraft development strategies. Assessing the value of aircraft development strategies is both a complex and tedious task due to the uncertain environment and long forecasting periods. Existing methods do not always capture the problem in its entirety and usually over-simplify it by using generic customers and generic flight routes. Besides, these methods usually fail to account for lost opportnunities and for the sale diffusion process during the early lives of new aircraft. A method is proposed to carry out the valuation of strategies while accounting for some of the challenges identified. The analysis is applied to large commercial aircraft developments and investigates strategy selection in a competitive environment.

Aircraft and engine economic evaluation for fleet renewal decision-making and maintenance contract valuation:

The fleet acquisition process represents a major gamble for airlines and aircraft leasing companies due to the fixed assumptions made when business plans are laid out and the abundance of uncertainties both at the technical and market levels. Indeed, the evaluation of aircraft and engine acquisitions is riddled with uncertainties regarding the product development (development schedule), the economic performance of the assets once in operations (operating cost), and the demand for air transportation. The trend in recent years has been for original equipment manufacturers to offer contracts and guarantees during sales campaigns that limit the exposure of airlines to technical uncertainty and that shift some of the operating risks from the airlines to the manufacturers. Airlines have embraced these “power-by-the-hour” maintenance contracts because they offer a way to mitigate operating risks and to anticipate cash outflows. Estimating the fair value of these contracts is paramount due to the significant risks faced by companies underwriting them. At the same time, valuing them is a daunting task due to the uncertainty regarding maintenance costs and their sensitivity to both the operations and the operating environment. Traditional evaluation methods are not always well adapted to perform these evaluations as they do not capture the problem in its entirety and they tend to oversimplify by using generic routes and surrogate models. This paper simultaneously proposes a customer-centric methodology to properly evaluate long-term aircraft and engine investments and a real-options inspired methodology to value long-term maintenance contracts and manufacturer guarantees.

Meeting Emissions Reduction Targets: A Probabilistic Lifecycle Assessment of the Production of Alternative Jet Fuels

In 2009, the aviation industry announced its commitment to address aviation’s environmental footprint by defining a four-pillar strategy to reduce greenhouse gas emissions. One of these pillars concerns the development of more efficient technologies for aircraft and engines, and the replacement of fossil carbon-based energy sources by renewable and sustainable solutions. Novel fuel-efficient technologies with promising emission reduction potential are currently being developed around the world. For instance, new lighter materials, new engine architectures, and futuristic aircraft concepts are studied to decrease fuel consumption and thus improve the carbon footprint of the future worldwide fleet. However, the projected 5% average annual growth in air transportation will most likely offset the expected carbon savings from new technologies alone. Another option for the aviation industry is to reduce its carbon footprint by considering the use of bio-jet fuels produced from renewable biomass feedstocks. Cost is however a barrier to large-scale commercial deployment of alternative fuels in aviation. In addition, selecting sustainable biomass options for the production of alternative jet fuels is challenging due to uncertain social, economic, environmental, and climatic factors. In this paper, we first examine the potential of new aircraft and engine technologies to reduce aviation-related carbon emissions. We show that without additional measures, technology infusions are not sufficient to meet the ambitious carbon emissions reduction goal set forth by IATA. Next, we study how changing the fuel source by introducing biofuels has potential to alleviate the environmental footprint of aviation. In this analysis, we account for the uncertainties associated with the selection of biomass feedstock options and their corresponding refining processes to produce suitable “drop-in” bio-jet fuels. A probabilistic analysis encompassing likely scenarios is carried out and a visualization interface is proposed to substantiate and facilitate decision making by aviation industry stakeholders.

A COMPETITIVE MARKET APPROACH TO GAS TURBINE TECHNOLOGY PORTFOLIO SELECTION

Heavy duty gas turbine developments are major endeavors which use significant resource for development. Optimization of the technology portfolio is critical to yield a competitive product-line which is robust enough to compete in a dynamic market where vantage positions bring large profits but quickly erode over time. The current research addresses some of these challenges by proposing a transparent and integrated method aimed at investigating technology portfolio selection for future gas turbine-based power plants. The value-driven methodology analyzes technology investments, and is the foundation for a strategic decision framework that facilitates the formulation of robust and competitive technology portfolio solutions. A three-step process is proposed in this paper. A market response analysis is first carried out to estimate market penetration. A technology impact and readiness level analysis is performed next and augmented with a portfolio optimization. Finally, “what-if” scenarios are investigated to assess the robustness of selected technology portfolio candidates against a set of market conditions.Copyright

Advanced General Aviation Concept Study for a Roadable Aircraft

The past fifty years has seen a myriad of attempts to develop roadable aircraft designs. It is undeniable that the flexibility offered by these personal air vehicles (PAV) would prove useful in urban and suburban environments prone to road traffic congestion, as well as in improving the efficiency of regional business commutes. Surprisingly, only few designs have managed to reach the production phase. The opportunities offered by recent advances in electric and hybrid-electric propulsion systems open the door for more revolutionary designs that may prove more appealing in the market. The authors have carried out a research on roadable aircraft designs and this paper introduces the approaches taken and the capabilities developed to translate the need and requirement of customers into potential design concepts. The proposed methodology enables fast generation of concepts, rapid evaluation of interesting concepts, and finally, down-selection of the most promising design. In order to showcase the process, a notional set of mission requirements is set forth, roadable aircraft concepts are generated and one design is analyzed. Finally, requirement sensitivity and technology trade-off studies are conducted for the proposed roadable design.