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

Abstract

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.