Financial Analysis

Financial Analysis
Aircraft Evaluation
Techniques
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Copyright © 2010 Boeing. All rights reserved.
Aircraft Evaluation
Equipment analysis Operational analysis
Financial analysis
Market
Considerations Strategic planning
Financing alternatives Other:

Image
Passenger preference
Economic analysis
Flexibility
Reliability

Agenda
 Financial Evaluation of Projects
 Time Value of Money
 Cost Of Capital
 Value Analysis Example
 Sensitivity Analysis

Financial Evaluation of Projects
 Basic question
 When it is time to invest in the business, how do we know what is a
good investment and what isn’t?
 Basic answer
 When the return on the investment is higher than the cost of the
money invested.
 How do we measure this?

Financial Evaluation of Projects
 Estimate relevant cash flows
 Calculate a figure of merit for the investment

 Payback period
 Accounting rate of return
 Profitability index
 Net present value
 Internal rate of return
 Modified internal rate of return
 Compare the figure of merit to an acceptance criterion

Time Value of Money
An Example Project
100
Cash out -100

50
23 23 23 23 23 23
Cash in
6 x 23 = 138
0
Cash
in and Net cash 38
out
-50
-100 Looks like a

-100
good deal!
-150
1 2 3 4 5 6 7

Time Value of Money
To properly evaluate a financial project, the amounts and the timing of

cash flows need to be considered.
Basic relationship: A dollar tomorrow is worth less than a dollar today
Year 1 2 3 4 5 6
Sum
Cash flow 23 23 23 23 23 23 138
Present value
at 10% 21 19 17 16 14 13 100
You could invest 17 dollars today at 10% to receive 23 dollars three years from
now. Seventeen dollars is the present value of 23 dollars three years from now.

Time Value of Money
The Value of the Project Depends on the Cost of the
Capital Invested
40
30
Net 20
present
value 10
-10
-20
-30
0 2 4 6 8 10 12 14 16 18 20
Cost of money, %

Cost of Capital
How would an airline calculate its cost of capital?
Typical Typical Overall

airline costs airline mix cost
Borrowed money (debt) 5% – 6%
Interest expense is tax deductible, so interest paid means taxes are reduced.
Debt cost after tax* 3.25% - 3.9% 55% 1.9%
Invested money (equity) 13% – 18% 45% 7.0%
“Weighted average cost of capital” 8.9%
Other adjustments 0.0%
Hurdle rate 8.9%

*Tax rate of 35%

Value Analysis - Example
The basic question: How can we compare two alternative aircraft?
The basic answer: By weighing the value each aircraft provides.
We measure the earning power of a capital asset such as a

commercial airplane by estimating its future cash flows and
discounting them back at the airline’s cost of capital.
787-8 767-300ER
Versus

Analysis Groundrules
 10-year study
 10% discount rate
 Pretax analysis
 7,480-km average trip length
 625 trips per year
 Number of seats
 787-8 224 seats
 767-300ER 218 seats
 Age of aircraft
 787-8 new
 767-300ER new
 Aircraft will be leased
 787-8 $1,000,000 per month
 767-300ER $650,000 per month

Passenger Revenue
6 more despill 1.9 more

seats passengers
$.082 yield,
$1,168 more net

revenue per trip
10 years,
10% discount,
$730K more net
2% esc 625 trips
$4.8m revenue per
NPV year
Value Analysis—Example
Passenger Revenue
Additional seats provide additional opportunity for revenue

generation
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of $366.7M $371.5M $4.8M

passenger revenue*
NPV of: Number of flights x trip length x passengers x yield
*$0.08 yield per rpk, using spill model with passenger demand of 159

The 787-8 Generates $4.8 Million More Revenue Than the 767-300ER
767-300ER advantages 787-8 advantages
Passenger revenue 4.8
Total $0 $4.8M

Cargo Revenue
Increased cargo capacity on the 787-8 provides additional

opportunity to generate cargo revenue
Advantage
767-300ER 787-8 767-300ER 787-8
10 year NPV of
Cargo Revenue* $13.9M $16.3M $2.4M
NPV of: Number of flights x trip length x kg x yield
*yield $2 per kg

Scorecard 767-300ER advantages 787-8 advantages
Cargo Revenue 2.4
Total $0 $7.2M

Fuel Expense
The lower fuel burn and increased speed of the 787-8 generates
value
Advantage
767-300ER 787-8 767-300ER 787-8
10 year NPV of
fuel expense* $107.9M $91.2M $16.7M
NPV of: Number of block-hours x fuel burn per block-hour x fuel price per gallon
*Fuel price of $2.00 per gallon, 787 block time of 8.721 hr, 767-300 block time of 9.159 hr, 15-min ground time

Cargo Revenue 2.4
Fuel expense 16.7
Total $0 $23.9M

The 787 is designed for Low Maintenance:
Less Scheduled Maintenance
Longer Check Composite Structure Fewer Maintenance

Intervals  Resists fatigue Tasks
 Twice as long as the  Resists corrosion  Less inspections with
767  30% Fewer tasks composite structures
Less Unscheduled Maintenance
More Reliable More Durable Structure Health Monitoring

Systems  Less accidental damage  System monitoring
 Designed for low life  Easy to inspect  Engine monitoring
cycle costs  Quick repair techniques
 No Pneumatic
system

Maintenance
The 787-8 was designed for low maintenance costs
Advantage
767-300ER 787-8 767-300ER 787-8
10 year NPV of
maintenance* $26.2M $18.0M $8.2M
NPV of: Cost per flight-hour x number of flight-hours
*Includes airframe and engine labor and material for in-house and contract maintenance plus overhead

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Total $0 $32.1M

Landing and Navigation
The 787-8 higher MTOW results in higher landing and navigation fees
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
landing and navigation $26.3M $28.6M $2.3M
NPV of: (Landing fees + navigation fees per flight) x number of flights

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Landing/Nav Fees -2.3
Total $2.3 $32.1M

Crew Costs
Increased speed reduces block hours and subsequent crew costs
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
crew costs* $78.9M $74.5M $4.4M
NPV of: (Flight crew + cabin crew cost per flight) x number of flights

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Total $2.3 $36.5M

Insurance
The lower insured value of the 767-300ER results in lower insurance

premiums
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
insurance* $3.5M $5.4M $1.9M
NPV of: Insurance rate x aircraft value
*Insurance rate: .07%

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Insurance -1.9
Total $4.2 $36.5M

Ground Handling and Power
The slightly smaller 767-300ER generates a minimal cost savings
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
ground handling $11.4M $11.5M $0.1M
and power
NPV of: Cost per flight x number of flights

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Insurance -1.9
Ground Handling -0.1
Total $4.2 $36.5M

Passenger Related Costs
The revenue advantage of carrying more passengers is reduced by

the cost of carrying them
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
passenger related $49.3M $50.0M $.7M
costs

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Insurance -1.9
Passenger Cost -0.7
Total $5.0 $36.5M

Cargo Handling Costs
The revenue advantage of carrying more cargo is reduced by

the cost of carrying it
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
Cargo handling costs $7.8M $9.2M $1.4M

Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Insurance -1.9
Passenger Cost -0.7
Cargo Handling -1.4
Total $6.4 $36.5M

Schedule Reliability and Maintenance Days
The advanced technology of the 787-8 generates additional revenue

potential as there are less days out of service
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
$1.9M $1.0M $.9m
Reliability*
* Average per aircraft days out of fleet


Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Insurance -1.9
Passenger Cost -0.7
Cargo Handling -1.4
Schedule Reliability 0.9
Total $6.4 $37.4M

Lease Expense
The advantages of the new 787-8 are reflected in a higher monthly

lease rate
Advantage
767-300ER 787-8 767-300ER 787-8
10-year NPV of
lease expense* $48.7M $74.9M $26.2M
NPV of: Initial deposit and monthly lease payments
* 787-8 lease rate of $1,000,000 per month, 767-300ER lease rate of $650,000 per month, 3-month deposit


Cargo Revenue 2.4
Fuel expense 16.7
Maintenance 8.2
Crew Costs 4.4
Insurance -1.9
Passenger Cost -0.7
Cargo Handling -1.4
Schedule Reliability 0.9
Lease Expense -26.2
Total $32.6 $37.4M

Conclusion
Based on this analysis, the New 787-8 generates $4.8 million

more value than the 767-300ER
787-8 advantages $37.4M
767-300ER advantages $32.6M
Net 787-8 advantage $4.8M

Sensitivity Analysis
It is important to look at the NPV calculations and determine

the critical variables and assumptions that will determine the
project’s success or failure…..
 Passenger and cargo yields
 Load factors and demand
 Discount rate
 Fuel price
 Unit costs
 Monte Carlo simulation

Financial Analysis
Summary
 Time value of money is an important concept for any
investment evaluation
 Financial analysis allows us to systematically compare

aircraft alternatives and identify opportunities
 Sensitivity analysis helps us understand the impact of

changes to key variables
 Financial analysis is one element in the aircraft acquisition

process

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BOEING is a trademark of Boeing Management Company.

Equipment analysis Operational analysis

Considerations Strategic planning

Financing alternatives Other:

Copyright © 2010 Boeing. All rights reserved.

 Financial Evaluation of Projects

 Time Value of Money

 Value Analysis Example

Copyright © 2010 Boeing. All rights reserved.

 How do we measure this?

Copyright © 2010 Boeing. All rights reserved.

 Estimate relevant cash flows

 Calculate a figure of merit for the investment

 Compare the figure of merit to an acceptance criterion

Copyright © 2010 Boeing. All rights reserved.

Cash out -100

-100 Looks like a

Copyright © 2010 Boeing. All rights reserved.

To properly evaluate a financial project, the amounts and the timing of

Basic relationship: A dollar tomorrow is worth less than a dollar today

Copyright © 2010 Boeing. All rights reserved.

Copyright © 2010 Boeing. All rights reserved.

How would an airline calculate its cost of capital?

Typical Typical Overall

Borrowed money (debt) 5% – 6%

Debt cost after tax* 3.25% - 3.9% 55% 1.9%

Invested money (equity) 13% – 18% 45% 7.0%

“Weighted average cost of capital” 8.9%

Other adjustments 0.0%

Hurdle rate 8.9%

Copyright © 2010 Boeing. All rights reserved.

The basic question: How can we compare two alternative aircraft?

The basic answer: By weighing the value each aircraft provides.

We measure the earning power of a capital asset such as a

Copyright © 2010 Boeing. All rights reserved.

Copyright © 2010 Boeing. All rights reserved.

6 more despill 1.9 more

$1,168 more net

Additional seats provide additional opportunity for revenue

767-300ER 787-8 767-300ER 787-8

10-year NPV of $366.7M $371.5M $4.8M

NPV of: Number of flights x trip length x passengers x yield

Copyright © 2010 Boeing. All rights reserved.

Passenger revenue 4.8

Copyright © 2010 Boeing. All rights reserved.

Increased cargo capacity on the 787-8 provides additional

767-300ER 787-8 767-300ER 787-8

NPV of: Number of flights x trip length x kg x yield

Copyright © 2010 Boeing. All rights reserved.

Passenger revenue 4.8

Cargo Revenue 2.4

Copyright © 2010 Boeing. All rights reserved.

767-300ER 787-8 767-300ER 787-8

Copyright © 2010 Boeing. All rights reserved.

Passenger revenue 4.8

Cargo Revenue 2.4

Fuel expense 16.7