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Economic Analysis of Potential Transition from Manned to Unmanned Air Freight

Transportation

Benjamin C Townsend

ERAU Worldwide

ECON 225: Engineering Economics

Dr. Jono Anzalone

Oct 3, 2021
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Introduction

This economic analysis, performed at the request of SATATAS Air Freight Services,

serves to explore the potential modernization of a mid-sized, U.S. based, domestic air freight

company specializing in on-demand transportation of medium-to-heavy loads. The company

faces the decision of continuing operations as a manned-freight based operation or pivoting

toward an unmanned aerial vehicle (UAV)-based operation. The factors considered in this

analysis will be the up-front cost of fleet modernization, the current state of the U.S. domestic air

freight market, the projected future state of the same, as well as the maintenance and operations

costs of an unmanned fleet compared to a manned fleet of comparable size. All estimated

modernization costs will be compared to the alternative costs of retaining a manned-fleet while

undertaking regular fleet modernization, operation, and maintenance.

After careful analysis of the alternative future options, it has been determined that the

most attractive option for SATATAS Air Freight Services will be a gradual replacement of the

manned-fleet with an unmanned-fleet of air freight vehicles. The primary driving factor driving

this decision are the decreased labors costs due to decreased pilot / UAV operator requirements.

Additionally, increased cash flows are expected as a result of decreased delivery times following

a following a restructuring of sorties generation scheduling allowed by increased operational

flexibility. At final fleet size of 33 unmanned aircraft, these two cost savings factors coupled

with the expected increase in domestic air freight demand should return an estimated present

value of $193,283,054 per year after 4 years.

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Literature Review

Throughout the course of this economic analysis, several expert sources and peer

reviewed were utilized, providing insight into the operations of an aviation operation, the state of

the air freight industry and market, and unmanned aerial vehicle specific operational

requirements. The principal source of aviation operations, maintenance, and life-cycle was

Fundamentals of Aviation Operations authored by Gert Meijer. The primary sources regarding

the state of the air freight industry were the United States Bureau of Transportation Statistics,

accompanied by an entry in Sourcing Journal by Arthur Friedman along with an entry in the

Journal of Revenue and Pricing Management by Inna Gavrilova and Marina Gyazova. Specific

operating costs of the Boeing 737-300 along with aircrew cost estimates were sourced from

Oliver Wyman’s www.planestats.com. The insight and data acquired from these sources was

compiled and evaluated using standard engineering economic analysis techniques as

demonstrated in Leland Blank and Anthony Tarquin’s Engineering Economy.

State of the U.S. Domestic Market Air Freight Industry and Expected Future Trends

Based on figures from the U.S. Bureau of Transportation Statistics, the U.S. domestic air

freight industry has seen an average growth of 3.2% per year between the year 2008 and 2019.

The industry experienced a significant increase of 14.29% in 2020. As of May 2021, the rapid

growth trend has continued with a rate of growth of 14.57% based on the same timeframe from

the previous year. This continued rapid growth has the U.S. domestic air freight industry set to

exceed 20 billion ton-miles of cargo for the first time in history. The recent trend of 14% growth

is not expected to continue, several experts expect the trend to decrease and settle at

approximately 8% - 9% over the next 10 years (Friedman, 2021). For the purposes of this
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analysis the rate of 8.7% will be used for expected future market growth (Gavrilova & Gyazova,

2020).

Capital Inflows

Comparing potential earnings of a manned versus unmanned air freight operation, the

primary metrics to be evaluated is the number of sorties and, subsequently, the cargo moving

capacity. SATATAS AFS currently operates a fleet of 33 Boeing 737-300 aircraft. Each

individual aircraft averages 7.27 hours of flight per day, per year. This is due to each aircraft

cycling through regular Maintenance, Repair, and Overhaul inspections and downtime. On

average, from the fleet of 33, 3 aircraft are down for MRO activities. This leaves 30 aircraft

producing an average of 2 sorties each per day for a total of 21915 sorties per year.

30aircraft×2sorties×365.25days = 𝟐𝟏𝟗𝟏𝟓 sorties

Air cargo has a variable cost per kg of approximately $2.50 to $5.00 per kilogram of

cargo. Due to the on-demand nature of transportation service provided by SATATAS, the

company’s current rate is $4.50 per kg. Each sortie has historically averaged a cargo of 45% the

max capacity of the Boeing 737-300. This yields an average cash inflow of $38,780.78 per

sortie.

19151kg max capacity × 45% capacity utilized × $4.50/kg = $𝟑𝟖, 𝟕𝟖𝟎. 𝟕𝟖 per sortie

A key element of unmanned aerial vehicles is the ability to enable one operator to control

between 10 and 30 UAVs at one time. This reduction in manpower costs will be covered in

further detail in the next section of this analysis. However, for now this reduction in crew
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requirements also allows crews to swap out mid-sortie. The aircraft and routes are no longer

limited by crew rest or work schedules. With this added flexibility, SATATAS AFS expects to

transition to a 3 shift, 3 sortie per day schedule. The increase of 50% in sorties generation rate

will naturally be accompanied by an increase in income. However, due to the reduced lag time

between the PM and AM sorties, the company expects to see a slight decrease in aircraft capacity

utilization. The previous value of 45% is expected to drop to 25% before increase at the

established growth rate of 8.7% and levelling out at the maximum cargo capacity of the potential

replacement of 7000kg or roughly 35% of the 737-300 maximum capacity. At an 8.7% growth

rate, this recovery is expected to take place over a four-year span.

At the current utilization and sortie rates, the PW of the annual revenue of SATATAS

AFS has been $849,880,684.13. Following a transition to the CITRUS UAS platform and three

shift operations, the sortie rate is expected to increase to approximately 32873 sorties per year.

With the drop in average cargo (in kg) from 8618kg to 4788kg, the revenue is expected to drop

to $708,270,885.00 in year zero. This decrease in revenue is expected to be temporary and will

recover to $1,035,483,750.00 by year 4. The PW of the revenue is expected to plateau at this

amount, as the carrying capacity of the CITRUS UAS has been reached at 7000kg per sortie.
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Capital Outflows

As expected, the largest expense in an air freight company is the cost of equipment.

SATATAS is investigating the potential of replacing their aging fleet of 33 737-300 cargo

aircraft with a fleet of slightly smaller unmanned vehicles with a carrying capacity roughly 35%

of the current fleet. At an estimated cost per unit of 75 million USD per unit, the aircraft will be

significantly less expensive than a newly purchased Boeing 737 replacement, currently prices at

roughly 124 million USD. While SATATAS already owns an operates a fleet of aircraft, this

replacement cost must be taken into consideration as the company has historically seen a life

cycle of 20,000 cycles (take offs and landings), or 30 years and 1 month at an average of 664

cycles per aircraft per year. After this lifecycle, the aircraft have historically been sold for scrap.
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With the cost of fuel and MRO per flight hour expected to remain constant, the next

largest expenditure is the personnel cost of aircrew. The Federal Aviation Administration has

found that Group II air cargo carriers (revenues between 100 million and 1 billion), allocated an

35% of spending on direct costs of aircraft operation expenses. The largest portion of this 35% is

the 49.95% spent on flight personnel. Based on data published by The Oliver Wyman Group via

www.planestats.com, the rate of aircrew compensation increased from 7.75% per year between

the years 2014 and 2019. This increased rate had previously outpaced the growth of the air cargo

market and will continue to cut into profits if left unchecked.

As previously noted, the crowning achievement of UAV operation is the ability of one

operator to safely control multiple aircraft simultaneously. A sustainable operator load is

expected to be between 10-30 aircraft per operator during ferry operations. An additional

operator will be tasked with solely performing take-off and landing operations. SATATAS has

made it known that in order to ensure safe and smooth operation, they will aim for the lower end

of this spectrum. Even this conservative goal allows for a reduction in aircrew from 2 per aircraft

(pilot and copilot) to 1 per 10 aircraft plus 1 per shift for TO/L operations. This is a 80%

reduction in manpower required.

At a current average annual salary of $175,000 per year for pilots and $145,000 for

copilots, this gives an average operator salary of $160,000 per year. By reducing this cost, by

95%, the overall cost of operations by a present value of over 7.6 million dollars annually.
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Conclusion

Having completed this economic analysis, we recommend a phased replacement of the

Boeing 737-300 fleet with the CITRUS UAS. This replacement should take place at an increased

paced when compared to the expected turnover of B737-300 units in use. The historical lifecycle

of 20,000 cycles or 20.12 years should be curtailed to an approximate 5,000 cycles. This

increased turnover will bring in extra capital from the sale of airworthy aircraft compared to the

scrap price and will aid in offsetting the replacement cost of the fleet. In the interim, the

company should plan to begin reducing aircrew staffing positions in advance of the reduced

demands of the new agile scheduling multi-tasking UAV operator scheme.

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Resources

Alexander, D. W., & Merkert, R. (2020). Applications of gravity models to evaluate and forecast US

international air freight markets post-GFC. Transport Policy, 104.

https://doi.org/10.1016/j.tranpol.2020.04.004

Bureau of Transportation Statistics. (2021, May). U.S. Ton-Miles of Freight | Bureau of Transportation

Statistics. Www.bts.gov. https://www.bts.gov/content/us-ton-miles-freight

Chernousov, V. I., Krutov, A. A., Pigusov, E. A., & Zamaraev, V. S. (2021). Conceptual design of an

unmanned aerial vehicle for fast container transport. IOP Conference Series.Materials Science

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899X/1024/1/012059

Friedman, A. (2021). First-half air cargo growth strongest since 2017. Sourcing Journal (Online),

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com.ezproxy.libproxy.db.erau.edu/trade-journals/first-half-air-cargo-growth-strongest-since-

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Gavrilova, I. S., & Gyazova, M. M. (2020). Analysis of the market for the air transportation of bulky

and heavy cargo: trends and prospects. Journal of Revenue and Pricing Management, 20.

https://doi.org/10.1057/s41272-020-00252-4

Meijer, G. (2020). Fundamentals of aviation operations. ProQuest Ebook Central

https://ebookcentral.proquest.com

Robins, J., & Brett, D. (2020). Cargo becoming rare 'bright spot'. Airline Business, 36(6), 8.

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Zhao, C., Xiu, C., & Yu, G. (2021). FedEx and UPS network structure and accessibility analysis based

on complex network theory. Complexity,

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