Browsing by Author "Morrell, Peter"

Now showing 1 - 16 of 16
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    Aircraft investment planning and uncertainty
    (Cranfield University, 2010-05) Gibson, William E.; Morrell, Peter
    This research sets out to determine whether there is a best way to perform aircraft investment analysis. The question of best practice is found to be linked to corporate ownership: world airline shareholding patterns are identified and linked to investment analysis practices, and to airline financial performance over the last aviation cycle. A key weakness identified by surveying airline practice concerns the treatment of uncertainty in the financial analysis. This research critically examines the state of practice regarding treatment of uncertainties embedded investment valuation assumptions, in airline fleet planning around the world, and proposes structured application of advanced analytical techniques to valuation in today’s world of volatile and diverse aviation markets. The assumptions underlying valuation are embedded in modern financial theory, which has been developed and tested over the last century. The validity and usefulness of financial valuation models is examined from both theoretical and practical perspectives, and the state of practice regarding these models in the airline industry is established, both quantitatively through survey research, and qualitatively through aviation executive interviews in the field. This combined approach has allowed the establishment of ‘paradigms’ characterizing the concrete application of financial theory to the question of aircraft investment. Regional patterns of airline shareholding are identified in a detailed analysis of ownership structure and business models. The resulting governance typology is analyzed in aggregate, and associated with production, and profitability by region. The tendency of each airline ownership type to use modern financial valuation techniques has to some extent been established by applying survey results to the different regions. The fleet planning process and the positioning of investment valuation within it is discussed, and key uncertainties underlying fleet planning assumptions are identified and mapped in a risk map framework. A method for strategic analysis of fleet financing alternatives is derived from classical theory, and applied to the specifics of the aircraft market. The uncertainties surrounding several key modelling assumptions are found to be substantial in the minds of today’s fleet planners, and the assessments of uncertainty vary substantially between airline fleet planners and third-party advisors. The identified practices in applying classical financial theory are found to be strikingly inadequate in treatment of these uncertainties.A model is developed for valuing the acquisition of aircraft under uncertainty, using extensions of the classical financial framework entailing more advanced quantitative techniques. The model’s application to a specific analytical situation analysis show that investment valuations under deterministic models are contradicted when applying uncertainty to key uncertainties present in today’s markets, and a process that yields insights beyond classical finance is proposed.
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    Airline Jet Fuel Hedging: Theory and practice
    (Taylor & Francis, 2006-11) Morrell, Peter; Swan, William
    Most international airlines hedge fuel costs, but the theoretical justification behind this action is weak. The paper explores the nature and extent of airline fuel hedging and asks why airlines hedge. The availability of hedging instruments is first discussed, with the most liquid markets in crude and exchange traded contracts. Aviation fuel contracts are possible, but with counter-party risk. Most major passenger airlines with sufficient cash and credit now hedge at least part of their future needs. Hedging does protect profits against a sudden upturn in crude prices caused by political and consumer uncertainty leading to slower economic growth. However, if higher oil prices are induced by strong economic growth and oil supply constraints, hedging increases volatility with hedging gains reinforcing improved profits from higher traffic and improved yields. If hedging does not reduce volatility, it may still have an accounting role in moving profits from one time period to another, insure against bankruptcy, and signal the competence of management to investors and other stakeholders.
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    Airlines within airlines: an analysis of US network airline responses to low cost carriers.
    (Elsevier, 2005-09) Morrell, Peter
    The establishment of Low Cost Carrier offshoots by network carriers has three possible objectives: to spin off profitable businesses; to see off low cost competition in key markets; and to establish a test-bed for adapting low cost business processes to their mainline operations. It is argued that US network carrier offshoots have failed on all three counts. The significant cost differences between network and Low Cost Carriers are identified, and it is shown that network carriers have made little inroads into closing this gap, whether or not they set up Low Cost Carrier offshoots. Some reasons for the failure of the offshoots are proposed by examining operating differences: mixed fleets, keeping interlining and two class cabins and the lack of progress on reducing labour costs. Labour Union restrictions and the lack of separation from the main airline were crucial.
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    Can long-haul low-cost airlines be successful?
    (Elsevier Science B.V. Amsterdam, 2008-01-01T00:00:00Z) Morrell, Peter
    A key question is whether the very successful, largely short-haul LCC business model can work over long-haul sectors? This paper compares the cost and other advantages of LCCs and evaluates how far they might be applied to long-haul sectors. It is estimated that cost advantages might be much lower than the 50–60% on short-hauls. Other factors such as the adoption by network airlines of some LCC features and their likely competitive response, the limited potential for market stimulation, the need for dense markets and feed traffic all combine to cast doubt on the widespread establishment of the business model for long-haul flights.
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    Capital productivity and investment : their role in profitable airline operations
    (Cranfield University, 2003-04) Morrell, Peter; Alamdari, Fariba
    The aim of the research was to develop and apply improved measures of capital productivity using published airline data, and to evaluate the role of capital investment and productivity in overall airline performance. As well as contributing to total factor productivity, capital productivity is a partial measure, and the investment upon which it is based should improve the productivity of other inputs to the production process, in particular labour and fuel. Productivity ratios require outputs and inputs to be combined and indexed. Index numbers have been developed using weights that are consistent with the underlying economic theory, and also meet various tests (such as reversal and products). Airline passenger, cargo and incidentals were combined using a number of such index number approaches. Capital inputs were estimated using annual lease equivalents which when discounted to the present over the expected future economic lives of the assets resulted gave either balance sheet values adjusted to a common year’s prices, or the total of the market values of individual assets (aircraft).
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    Determination and Applications of Environmental Costs at Different Sized Airports – Aircraft Noise and Engine Emissions.
    (Springer, 2006-01) Lu, Cherie; Morrell, Peter
    With the increasing trend of charging for externalities and the aim of encouraging the sustainable development of the air transport industry, there is a need to evaluate the social costs of these undesirable side effects, mainly aircraft noise and engine emissions, for different airports. The aircraft noise and engine emissions social costs are calculated in monetary terms for five different sized airports, ranging from hub airports to small regional airports. The number of residences within different levels of airport noise contours and the aircraft noise classifications are the main determinants for accessing aircraft noise social costs. The environmental impacts of aircraft engine emissions include both aircraft landing and take-off and 30-minute cruise. The social costs of aircraft emissions vary by engine type and aircraft category, depending on the damage caused by different engine pollutants on the human health, vegetation, materials, aquatic ecosystem and climate. The results indicate that the relationship appears to be curvilinear between environmental costs and the traffic volume of an airport. The results and methodology of environmental cost calculation could be applied to the proposed European wide harmonised noise charges as well as the social cost benefit analysis of airports.
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    The environmental cost implication of hub-hub versus hub by-pass flight networks.
    (Elsevier, 2007-05-03) Morrell, Peter; Lu, Cherie
    Increasing congestion at major hubs and the advantage to passengers of non-stop flights and faster journey times has intensified the debate on patterns of air service. At the same time the economics of highly focused networks has been challenged by the availability of very economic smaller capacity long-haul aircraft. The purpose of this research is to value the environmental costs of these two patterns of service: hub-to-hub and hub by-pass. Five long-haul markets were evaluated both on a hub to hub and hub by-pass basis. These involved both transatlantic and Europe/Asia flights. It was found that the noise and emissions social cost impact of the hub by-pass networks was significantly lower than the hub to hub in all cases. Differences in environmental costs per passenger depend on the concentration of population around the airports and the degree to which the hub routing involves extra mileage.
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    The environmental cost implication of hub-hub versus hub bypass flight networks
    (Elsevier Ltd, 2007-05) Morrell, Peter; Lu, Cherie
    The increasing congestion at major hubs and the advantage to passengers of non-stop flights and faster journey times has intensified the debate on patterns of air service. At the same time the economics of highly focused networks has been challenged by the availability of very economic smaller capacity long-haul aircraft. The purpose of this research is to value the environmental costs of these two patterns of service: hub-to-hub and hub bypass. Five long-haul markets were evaluated both on a hub to hub and hub by-pass basis. These involved both transatlantic and Europe/Asia flights. It was found that the noise and emissions social cost impact of the hub by-pass networks was significantly lower than the hub to hub in all cases. The difference in environmental costs per passenger ranged between 25% and 73%, depending on the concentration of population around the airports and the degree to which the hub routing involved extra mileage. The difference increasedto a range of 56% to 113%, if a stimulation factor of 25% was applied to the non-stop market. The environmental cost saving for the non-stop flight amounted to just under 20% of the total aircraft operating costs of one of the cases considered.
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    An evaluation of airline beta values and their application in calculating the cost of equity capital.
    (Elsevier, 2003-07) Turner, Sheelah; Morrell, Peter
    This paper focuses on the calculation of the cost of equity capital in a sample of airlines, in comparison to industry-calculated values. The approach usually taken is to apply the Capital Asset Pricing Model to airline stock prices and market indices. The research shows that the calculated b values are sensitive to the precise methodology and calculations used. Further, the low regression model fits indicate the Capital Asset Pricing Model may not be the most suitable model for b value calculations. The emerging b values are lower than expected, and possible causes of this are discussed.
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    An evaluation of possible EU air transport emissions trading scheme allocation methods
    (Elsevier Ltd, 2007-11) Morrell, Peter
    The European Commission has been requested by member states to study the incorporation of air transport into their existing emissions trading scheme (ETS). Only CO2 is to be included, at least initially. This paper focuses on the method of allocation of emissions permits in the EU context. It has been assumed here that the EU ETS will be applied only to intra-EU flights and that airlines will be the entities selected for implementation. Three UK airlines were selected to evaluate three main types of allocation: grandfathering, auctioning and benchmarking. The airlines were representative of the three major airline business models: network, low-cost carrier and charter/leisure. Based on 2003/2004 aircraft/engine type and operating data, the per passenger impact of each allocation option was analysed for each airline. A new benchmarking approach is proposed that takes into account both the landing and take-off (LTO) cycle and per kilometre emissions: this avoids penalising shorter sector operators and focuses on the damage caused by aircraft and their engines and not on passengers.
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    How the consumer confidence index could increase air travel demand forecast accuracy?
    (Cranfield University, 2012-09) Teyssier, Narjesse; Alamdari, Fariba; Morrell, Peter; Lei, Zheng
    Because of the complex nature of the air transportation industry with continuous changes in the environment, the past records of air traffic forecasters, either using trend extrapolation or causal models or even more sophisticated methods have not produced accurate results. In recent years, the trend has been to develop air travel demand forecasts based on econometric equations, which specify a relationship between passenger traffic and a number of traditional key economic variables. However these forecasts do not take into account air traffic downturns or strong increases. Periods of economic or political uncertainty are associated with consumer confidence volatility, suggesting that swings in confidence could influence air travel demand. The failure of forecasters to predict the repeated peaks and troughs since 2001 has renewed interest in supplementing econometric forecasts with qualitative indicators such as consumer confidence indices. These variables are available for some countries and the aim of this research is to find whether forecasts based on these indices are more accurate in predicting short-term traffic up and downs. Through the analysis of three case studies, this thesis examines how the introduction of a confidence index in the air travel demand model, including only macroeconomic variables, could have some ability to improve the forecast accuracy of the model. For each case study, the demand for the market has been divided according to the existing supply side segments, namely legacy carriers, low cost carriers and non-scheduled airlines. The results show that this confidence index has some ability to improve the forecast accuracy of both, the global top-down and the bottom-up models built for some supply side segments, notably the legacy ones during periods of uncertainty such as 1991, 2001, 2008 and 2009. The results are also suggesting that the forecasting power of this index is increasing when applied to more mature markets such as the demand linked to the US legacy carriers or to the European charter airlines.This study is appraising the performance of consumer confidence indexes by examining their impact on different air travel demand forecasts.
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    The impact of airline alliances on partners' traffic
    (Cranfield University, 2004-01) Iatrou, Kostas; Alamdari, Fariba; Morrell, Peter
    Airline alliances have been dominating the air transport industry since the 1990s and by now the four strategic alliances, in which almost all of the major airlines participate, control the 56% of the world RPK. The thesis examines the airline alliance phenomenon in its entirety and more specifically, it examines the reasons and circumstances that have led to the formulation of these alliances and the impact these alliances have had on the participating airlines. A key parameter airlines use to assess their own performance and that of alliances is traffic. Thus, the present research examines alliances impact on the traffic of the allied partners by different types of routes (hub-hub, hub-non hub and non hub-non hub), different types of cooperation (FFP, code share, strategic alliance without and with antitrust immunity) and by the length of the route. In addition, the thesis analyses which alliance groupings, which type of airline and which geographical area have produced the best results from the alliances. To achieve these objectives, the thesis is divided into a theoretical and an empirical part. The theoretical approach starts with an industry alliance overview and then moves to the presentation of airline alliances, by discussing the reasons that have led to their establishment, the evolution of the regulatory framework around which airline alliances have developed, the definition of airline alliances, the different forms they have taken, their advantages and disadvantages; and finally, the past and current alliance groups. The empirical part focuses on the alliance traffic and analyses it around two different axes. The first consists of a survey in which the airlines participating in alliances were asked to assess their alliance participation and to quantify the impact of alliances on several parameters of their operation and performance and more specifically, on their passenger traffic. The second analyzes this impact on the basis of an econometric model that seeks to determine and measure any positive impact on traffic volume generated by alliances. The findings indicate that airlines are satisfied from their alliance experience as they have helped them achieve the main purpose for which they have resorted to alliances, that is to secure increased network coverage with little capital investment. Both the survey and the econometric model indicate that airline alliances have led to an increase in passenger traffic amounting to 10%. According to the survey, this traffic increase is mainly registered on hubhub routes while the econometric model indicates that this increase is evenly distributed on hub-hub and hub-non hub routes. The benefits result mostly from the marketing cooperation and appear within one or two years from the establishment of the alliance. Alliances may bring about cost reduction, but this depends on the level of integration among the partners. Almost all participants agree that alliances are the final stage of airline cooperation and that there will be no or very few mergers.
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    Integrators’ Air Network A review of the Domestic Express European Market
    (Cranfield University, 2007-09) Lafaye , Alexandre; Morrell, Peter
    The express industry witnessed dramatic growth during the 1990’s with an economic environment changing toward globalisation. Integrators’ international expansion has been supported by extensive transportation networks applying the model developed by FedEx: the hub and spoke model. This report investigates integrators’ air network configurations within a specific geographical area: the intra-European market. The research has been focused on the big four integrators, DHL, FedEx, TNT and UPS and provides an analysis on their strategy. Before presenting integrators, a review of the different network models presents the major role played by the Hub and Spoke network in the express freight industry. This model is one of the strategic foundations of the integrators’ success. Afterwards, the paper deals with three objectives. It first identifies the hub and spoke network configurations selected by integrators in Europe. Then, work uncovers the drivers behind network configuration. Finally, the key factors influencing the European Hub location are discussed through the case of the DHL move to Leipzig. This paper provides a location analysis and compares Brussels to Leipzig in term of distance to the core market. This paper brings several conclusions. First of all, there is a strategic area to locate a central hub in Europe, between Amsterdam Liege & Paris. Moreover several factors influence central hub selection as followed: market proximity, Airport capacity 1 , environmental restrictions 2 , operational cost and capacity of driving traffic are the key factors. Secondly, two hub and spoke configurations are used by integrators in Europe, the single hub and spoke network with pickup stopovers and feeders and the multi-hub and spoke configuration. Finally, network configuration relies particularly on the size of business and the transport strategy elected. 1 This term includes slots restrictions, runway capacity, and possibility of building logistic facilities. 2 Includes night curfews and environmental concerns of the local community
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    Socio-economic impact of air transport in small island states : an evaluation of liberalisation gains for the Caribbean Community (Caricom)
    (Cranfield University, 2008-10) Warnock-Smith, David; Morrell, Peter
    As the primary output of the air transport sector, the flow of air passengers plays an important role in the economic and social welfare of nations, while the sector’s regulatory framework represents the main vehicle through which government can exert a given level of influence over the provision of such services. This research modifies and applies existing macroeconomic impact theory to the Caribbean Community (Caricom), before developing an improved method by which to evaluate the supply and demand effects of further air policy liberalisation in the region. It was found, using an original multi-method approach, that the Caricom air transport sector contributed on average 16.9% towards GDP and 14.2% of the labour force. A large variation around these regional averages were noted, however, and are said to be primarily determined by exogenous factors such as relative size of GDP, relative sector diversity and relative level of trade dependency, with the largest impacts being recorded in smaller, tourism dependent islands. A significantly different picture emerges if catalytic impacts are removed showing the strength of the multiplier, with contribution to GDP reducing to 2.8% and the percentage of the labour force declining to around 1.9%. Multipliers for Trinidad & Tobago (-0.40), the Bahamas (2.38) and Guyana (2.95) were below the global average, however, reiterating the heterogeneity of the sample and by extension the whole Caribbean community. Using fixed-effects panel regression, the removal of bilateral or multilateral entry and tariff barriers were found to increase the average country-pair’s arriving and departing passenger levels by 250,000, 22,000 and 8,000 on NA-, UK- and Intra-Caricom markets respectively, given a one unit increase in air policy liberalisation. The actual impact of liberalisation on any given market was moderated by unobserved fixedeffect dummy variables which provided each country-pair with a unique intercept value to take account of underlying network and market maturity differences. Hence, all currently restricted country-pairs in the sample would stand to gain around 183,000 passengers per annum if a gradual bilateral approach to liberalisation was adopted. A counterfactual analysis suggested that a one unit policy change in the year 2000 on all 13 currently restricted markets would have increased passengers levels to around 16.4 million. In the multilateral scenario both restricted and partially liberal markets experience simultaneous reform resulting in a predicted traffic increase of 621,000 passengers per annum. Using ‘within sample’ multipliers, the extra bilateral output is estimated to increase baseline expenditure by US$51 million or US$16 million per annum when catalytic spending is included and excluded respectively. With multilateral reform, an additional US$164 million or US$53 million would accrue to the regional economy. When compounded, the total time-series effect of multilateral liberalisation totals 3.7 million passengers on top of the baseline, boosting regional output by 2.6% or 0.7% and increasing employment by 1.4% or 0.2%. Given previous evidence, extra-regional reform will not take place multilaterally in the foreseeable future. In the short to medium term, a combination of a revised Caricom MASA and gradual moves towards bilateral liberalisation would produce optimum macroeconomic results. The historical and counterfactual findings of this research challenge current restrictive practises in the region. Further assistance with respect to foreign carrier entry and regional carrier integration could stimulate the desired fare, capacity, frequency and connectivity improvements and generate significant increases in overall welfare.
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    Theory and Practice in Aircraft Financial Evaluation.
    (Elsevier, 2004-11) Gibson, William E.; Morrell, Peter
    This paper explores the state of practice regarding aircraft financial evaluation. Traditional measures of aircraft economic viability, including Direct Operating Cost (DOC) comparison, ignore both the non-cash elements of costs, and the time value of money. Practitioners adopting more advanced techniques often go straight to the Net Present Value calculation using an “industry standard” discount rate, ignoring critical problems such as estimating the cost of capital, quantifying the highly uncertain economic environment airlines face, and valuing the flexibility offered by manufacturer options and operating leasing. We propose taking advantage of the potential flexibility of the NPV approach by close attention to the choice of discount rates to flesh out investment/financing interactions, use of Monte Carlo analysis to quantify risk up front, and Real Options Analysis (ROA) to better understand the value of flexibility to aircraft operators.
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    UK Aviation: Carbon Reduction Futures. Final Report to the Department for Transport.
    (2009-07-01T00:00:00Z) Morris, Joe; Rowbotham, Alex; Morrell, Peter; Foster, Andy; Poll, Ian; Owen, Bethan; Raper, David; Mann, Mike; Ralph, Malcolm
    The objective of this study, commissioned by the Department for Transport, is to determine the scope for, and cost of actions that can be taken by, the UK domestic aviation sector to reduce its emissions of CO2. This involves estimating the cost of achieving CO2 abatement to help ensure that the most cost effective measures can be identified. For the purposes of this project UK domestic aviation refers to internal passenger flights within the UK only. The timeframe considered is the period 2007 to 2050. Given the timeframes involved and the evidence available, the costs and benefits of abatement options in this report are to be considered illustrative and represent broad orders of magnitude only. They are nonetheless indicative of the potential for abatement and relative costs.