EAS431 Aviation Finance Study Guide (5CU) Course Development Team Head of Programme : Mr KOH Pak Keng Course Developer : Mr TAN Wai Sing, David Production : Educational Technology & Production Team © 2017 Singapore University of Social Sciences. All rights reserved. No part of this material may be reproduced in any form or by any means without permission in writing from the Educational Technology & Production, Singapore University of Social Sciences. Educational Technology & Production Singapore University of Social Sciences 461 Clementi Road Singapore 599491 Release V1.2 CONTENTS SECTION 1: COURSE GUIDE 1.1 Introduction ..................................................................................................... 1 1.2 Course Description and Aims ....................................................................... 2 1.3 Learning Outcomes ........................................................................................ 2 1.4 Overall Assessment ........................................................................................ 3 1.5 Learning Materials .......................................................................................... 4 SECTION 2 : STUDY UNITS STUDY UNIT 1 Overview ······································································································ SU1-2 Learning Outcomes ···················································································· SU1-3 Chapter 1: Overview of the Aviation Industry ······································ SU1-4 1.1 Introduction 1.2 Key factors and challenges affecting travel demand 1.3 Evolution and performance of global airline industry 1.4 Challenges, boom and bust of aviation industries 1.5 The competitive landscape in the transportation industry 1.6 Summary ····························································································· SU1-13 STUDY UNIT 2 Overview ······································································································ SU2-2 Learning Outcomes ···················································································· SU2-2 Chapter 2: Evolution of the Aviation Industry ······································· SU2-3 2.1 Evolution of the Aircraft Manufacturers Industry 2.2 History of the aircraft manufacturers Aircraft engine manufacturers with engine launch history Point-to-Point versus Hub-and-Spoke networks The making of B787 The making of A380 2.2 The Economic and Business Model of Airlines Full Service Carrier (FSC) Low Cost Carrier (LCC) Charter Carrier (CC) 2.3 Airline’s Performance and Profitability ‘White doves’ in the airlines industry Fate of parked or stored aircraft 2.4 New Market Entrants Case study of successful low-cost carriers (LCCs) Definition of Cost per RPM and Cost per ASM Threats to LCC’s business model LCC yield management Review of Europe LCC consolidation 2.5 Summary ····························································································· SU2-29 STUDY UNIT 3 Overview ······································································································ SU3-2 Learning Outcomes ···················································································· SU3-2 Chapter 3: Overview of the Costs Structure of Airline Businesses ····· SU3-3 3.1 Aircraft Economics Direct Operating Costs versus Indirect Operating Costs Fuel Costs Maintenance Costs Other Costs 3.2 Key Aircraft Operating Economics Break-even load factor Operating leverage Cost escapability Profit profiling Dynamic fleet management Economics of fleet commonality Spare provisioning Cabin crew training 3.3 Asset Utilisation and Fleet Size Scheduled versus Charter versus Low-cost operation Effect of fleet size on economics The impact of alliance on economics Impact of external factors Spare provisioning 3.4 Summary ····························································································· SU3-16 STUDY UNIT 4 Overview ······································································································ SU4-2 Learning Outcomes ···················································································· SU4-2 Chapter 4: Overview of Investment Appraisal ···································· SU4-3 4.1 Aircraft Finance and Investment Return on Capital (ROC) Return on Invested Capital (ROIC) Weighted Average Cost of Capital (WACC) Lease versus Buy decisions Net Present Value (NPV) NPV calculations for investment appraisal 4.2 Sources of Aircraft Financing Impact of operating lease 4.3 Aircraft Leasing Aircraft financing spectrum The world of lessor versus lessee Finance Lease Japanese Leverage Lease (JLL) US Leverage Lease European Leverage Lease Extendible Operating Lease Wet Lease Sales and Lease Back Enhanced Equipment Trust Certificate (EETC) Comparison between aircraft manufacturers and airlines 4.4 Aircraft Residual Value Factors influencing aircraft residual value Key model inputs for residual value forecast Investment Trends and Consideration Case review: Timing of SIA A345 All business class reconfiguration Garuda new brand image in 2010 4.5 Reference ····························································································· SU4-18 STUDY UNIT 5 Overview ······································································································ SU5-2 Learning Outcomes ···················································································· SU5-2 Chapter 5: Overview of the MRO Businesses and External Factors affecting the aviation industry ·································································· SU5-3 5.1 Global MRO Market Outlook in 2010 Global MRO market share Global MRO spending 5.2 International Regulatory Bodies Federal Aviation Administration (FAA) European Aviation Safety Agency (EASA) Japan Civil Aviaition Bureau (JCAB) Other local regulatory bodies Association of Asia Pacific Airlines (AAPA) Trends and effects of market deregulation History of market deregulations 5.3 Effects of Currency Exchange Rates Case review: Lufthansa dilemma case in 1985 5.4 Summary ····························································································· SU5-17 STUDY UNIT 6 Overview ······································································································ SU6-2 Learning Outcomes ···················································································· SU6-2 Chapter 6: Overview of External Shock Factors ····································· SU6-3 6.1 Price of Jet Fuel Correlation between jet fuel and cruel oil prices 6.2 Nature Catastrophe Case review of Iceland volcanic disruption 6.3 Bankruptcy Law US Bankruptcy Code 6.4 Boeing & Airbus 20 Years Forecast Reports 6.5 Emerging Trends & Development Technology advancement of new aircraft model: B747-8 example 6.6 Summary ····························································································· SU6-16 Reference ···································································································· SU6-19 EAS431 Aviation Finance COURSE GUIDE EAS431 COURSE GUIDE SECTION 1: COURSE GUIDE 1.1 Introduction Welcome to your study of EAS431 – Aviation Finance, a 5 credit unit (CU) course. This Study Guide is divided into two sections – the Course Guide and Study Units. The Course Guide provides a structure for the entire course. As the phrase implies, the Course Guide aims to guide you through the learning experience. In other words, it may be seen as a roadmap through which you are introduced to the different topics within the broader subject. This Guide has been prepared to help you understand the aim[s] and learning outcomes of the course. In addition, it explains how the various materials and resources are organised and how they may be used, how your learning will be assessed, and how to get help if you need it. Course Schedule To help monitor your study progress, you should pay special attention to your Course Schedule. It contains study unit related activities including Assignment, self-evaluations, and examinations. Please refer to the Course Timetable in the Student Portal for the updated Course Schedule. NOTE: You should always make it a point to check the Student Portal for any announcements and latest updates. You need to ensure you fully understand the contents of each Study Unit listed in the Course Schedule. You are expected to complete the suggested activities either independently and/or in groups. It is imperative that you read through your Assignment questions and submission instructions before embarking on your Assignment. It is also important you comprehend the Overall Assessment Weighting of your course. This is listed in Section 1.4 of this Guide. Manage your time well so you can meet given deadlines and do regular revisions after completing each unit of study. They will help you retain the knowledge garnered and prepare you for any required formal assessment. If your course requires an end-of-semester examination, do look through the Specimen or Past Year Exam Paper which is available on Learning Management System. Although flexible learning – learning at your own pace, space and time – is a hallmark at SUSS, you are encouraged to engage your instructor and fellow students in online discussion forums. A sharing of ideas through meaningful debates will help broaden your learning and crystallise your thinking. 1 EAS431 COURSE GUIDE 1.2 Course Description and Aims This course aims to provide a good understanding