Mbaa 523 written assignment 2: fleet replacement analysis

MBAA 523

Written Assignment 2: Fleet Replacement Analysis

Page 1 of 4

This assignment has three objectives, to: 1) become familiar with the type and magnitude of mainline 

aircraft operating costs; 2) understand the operating economics of new versus older aircraft; and, 3) 

learn how net present value analysis is used in capital acquisition decision-making. Allegiant has 

engaged the aviation consulting firm SH&E to evaluate whether it should continue its fleet expansion 

with new aircraft instead of the aging McDonnell Douglas MD-80 aircraft that are the backbone of its 

small fleet. You are the senior financial analyst with SH&E assigned to this project and will prepare a 

memorandum with your conclusions to Allegiant’s Chief Financial Officer D. Scott Sheldon. 

Note: The assignment has detailed requirements similar to those that would be given to a financial 

analyst. Be certain to read carefully before beginning work. 

Background

Allegiant Air bills itself “America’s favorite small cities to world-class destinations, Allegiant makes 

leisure travel affordable and convenient.” As of 2013, it is the most profitable U.S. airline based on 

margin on revenue and unique in that it operates only used aircraft. The backbone of the fleet is 57 MD-

80 aircraft, but it also operates 6 Boeing 757-200s and is adding 9 Airbus A319 aircraft. Allegiant 

acquired 18 of its early MD-80s from Scandinavian Airways System paying roughly $4 million dollars 

per plane in an all cash transaction. Allegiant believes it can continue its aggressive fleet expansion 

with additional used MD-80s acquired for the same price as American Airlines and Delta Air Lines 

reduce their large MD-80 fleets. Although these aircraft have a useful service life of 15 more years, 

Allegiant recognizes it must eventually modernize its fleet. As with all older aircraft, the MD-80 burns 

more fuel and requires more maintenance than new generation aircraft of equal mission capability. 

Escalating and volatile fuel prices have added to senior management’s interest in evaluating new 

aircraft. Because it already operates Airbus 319s, the slightly larger Airbus A-320 is its preferred option. 

As you will see, this decision is critically dependent on your projection for future fuel costs and the 

discount rate employed. 

The Analysis

An Excel template is provided as an attachment for conducting your net present value analysis. You will 

need to insert costs and performance figures into the template. You may wish to review the template 

before reading further. 

In order to complete your analysis, you will need to obtain current aircraft operating data and prices 

from authoritative sources. The sources listed below are sufficient and adequate for your project: 

 Aircraft prices: Airbus publishes its aircraft list prices periodically. Search the Airbus Industries 

website or simply do a Google search for “Airbus aircraft list prices.”

 Aircraft performance data and operating costs: The Airline Monitor publishes extensive airline data

needed for your analysis. The Airline Monitor is available through the Hunt Library 

Aerospace/Aviation electronic databases. When you’ve accessed The Airline Monitor, select Online 

Edition, then Block Hour Operating Costs (pdf). This is a large document. Be certain to use 

Allegiant’s reported data for the MD-80 and industry data for the A-320 (use the data for the A-320, 

not the A0320neo). The data you need looks like this:

 

 

 

Allegiant Air Fleet Replacement          
Instructions                                
1. Enter the discount rate (i) in cell C19 (enter as a decimal, e.g., 0.10).  The yearly discount factor equal to 1/(1+i)^year is automatically computed and entered in column B.       
2.  Enter the fuel gallons burned per block hour in cells I19 and O19.                      
3. Enter the Block Hours per year per aircraft in I20 and O20.                        
4. Enter the total maintenance cost per block hour in I21 and 021.                        
5.  Enter the seating capacity (number of seats per aircraft) in I22 and O22.      
6.  Enter the Speed in Miles per Block Hour in I23 and O23.                        
7.  Enter the Purchase Price in I24 and O24      
8. Enter the Sale Price in year 16 in I25 and O25.      
9.  Enter the estimated fuel price for each year in the column C32 through C46.                      
The spreadsheet will automatically compute: 1) The Discount Factor for years 1 through 16, 2) The total fuel cost for years 1 through 15,             
3) total maintenance cost for year one, 4) total operating costs for each year, 5) total net present cost per year, 6) total available seat miles (ASM) for the 15 years,      
7) net present cost per seat mile over the 15 year operating plan.  The maintenance costs for years 2 through 15 must be computed and entered.          
                                   
                                   
Parameters   MD-80 Operating Costs & Statistics   A-320 Operating Costs & Statistics      
Discount Rate =       Gallons/Block Hour =            Gallons/Block Hour =           
          Block Hours/year =             Block Hours/year =        
        Maintenance Cost/Block Hour =           Maintenance Cost/Block Hour =              
          Number of Seats =           Number of Seats =             
          Block hour Speed =          Block Hour Speed =            
          Purchase Price =          Purchase Price =           
          Sale Price in year 16 =          Sale Price in year 16 =           
                                   
        MD-80 capital and direct operating cost   A-320 capital and direct operating cost      
Year Discount  Fuel $/gal   MD-80 Fuel  Maint Total Annual NPV   A-320  Fuel  Maint Total Annual NPV      
  Factor     Purchase  Cost Costs Operating      Purchase Cost Costs Operating        
                                   
0 1.000     0       0   0       0      
1 1.000       0 0 0 0     0 0 0 0      
2 1.000       0   0 0     0   0 0      
3 1.000       0   0 0     0   0 0      
4 1.000       0   0 0     0   0 0      
5 1.000       0   0 0     0   0 0      
6 1.000       0   0 0     0   0 0      
7 1.000       0   0 0     0   0 0      
8 1.000       0   0 0     0   0 0      
9 1.000       0   0 0     0   0 0      
10 1.000       0   0 0     0   0 0      
11 1.000       0   0 0     0   0 0      
12 1.000       0   0 0     0   0 0      
13 1.000       0   0 0     0   0 0      
14 1.000       0   0 0     0   0 0      
15 1.000       0   0 0     0   0 0      
16 1.000     0       0   0       0      
              Net Present Value Cost =   0         Net Present Value Cost =   0      
          MD-80 NP CASM =   #DIV/0!     A-320 NP CASM =   #DIV/0!      
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