Friday, September 30, 2011

The dreamliners and the extra wide bodies

The Boeing 787 or the "Dreamliner", developed by Boeing, is one of the hottest aircrats that is entering passenger service. The main difference between other aircraft and 787 is that most of the body of the aircraft is made of carbon composite material. This material has higher strength to weight ratio which means that the desired durability and strength of the body can be achieved with less weight.

This is a major breakthrough as the persistently high oil prices is hurting the airline industry. The growth in the aviation industry in the developed western market is feeble. However, due to higher growth rate of GDP in the developing world means higher demand for oil. Due to the new-found hunger for energy by the developing world, developed world has to pay higher prices for oil and energy even though their growth rate is close to zero. Hence, there is a greater need to run fuel efficient aircrafts to cut down the cost of running an airline. Fuel is the most expensive expense in an airline's income statement.

Therefore B787 is a highly welcomed aircraft as it provides higher fuel efficiency due to reduced weight. The components are more durable and hence the cost of maintenance is less as well. According to official statements, B787 is 20% more fuel efficient than similar sized aircrafts and it incurs 30% less maintenance cost. Apart from fuel and employee costs, MRO (Maintenance, Repair and Overhaul) is one of the major recurring expenses for the airline. If the Dreamliner can deliver the promise of reducing recurring MRO expense by 30%, it could potentially help the airline to break even with a lesser load factor than normal.

The dreamliner is 20% lighter than a similar sized aircraft, so it is 20% more fuel efficient, releases 20% less CO2, flies 20% more distance than an aircraft with similar sized fuel tank. On top of this, Dreamliner emits 60% less noise. Also, the cabin pressure at cruise altitude is 25% lower. This can help travellers to cope with jet lag better.

To counter B787, Airbus, the rival company for Boeing, is offering a similar aircraft called A350XWB (Extra Wide Body) in its product line. If the official records are to be believed, A350XWB delivers 8% reduction in the total costs than operating a B787. Most of the statistical figures are deceptive as no one clearly understands the underlying assumptions in the cost calculation. However, if A350XWB can deliver the same operating performance as B787, it is a great news for the airline industry.

ANA (All Nippon Airlines) operates the first Dreamliner on November 11, 2011. ANA deploys this aircraft on a domestic route in Japan and later it intends to operate the aircraft for Tokyo-Frankfurt service. This is not a surprise as airlines normally use the most fuel efficient aircraft for its longest route as more fuel can be saved.

What can an aircraft like the Dreamliner do to the airline industry in the near future? The dreamliner is a mid sized long range jet with the best fuel efficiency. This opens up the possibility of opening up routes for which the demand is average. For example, in the far east, for an airline like ANA, it opens up the possibility of starting direct services to less glamorous destinations like Glasgow or Manchester. The seating capacity in a 3 class configuration is around 210. It is almost half when compared to 777 jet.

Airlines make money when the load factor (the ratio of total occupied seats to total number of seats in an aircraft) is higher. This is because airline is a very high fixed cost industry. The incremental cost for carrying one additional passenger in an aircraft is very less. The cost of fuel, pilots, cabin crew, airport parking, take off and landing taxes are the same no matter how many traveler travel in an aircraft. The variable cost of taking an additional passenger is perhaps the cost of food and other services provided by the airline.

B787 provides an opportunity to start routes that seemed unprofitable earlier. With smaller capacity and higher range the problem with load factor can be resolved easily than other aircrafts. The problem with the capacity was probably one of the reasons why full fare airlines are operating in a hub and spoke model. For British Airways, London Heathrow is the hub airport. If a passenger wants to fly from Glasgow to New York in British Airways, then the customer is transported to London Heathrow hub in a smaller aircraft (A320) and then the customer is transported in a bigger 777 or a 747 aircraft to New York. In the hub, the airline uses smaller aircraft to get passengers from smaller locations, gather them and use bigger aircrafts to travel to longer distance cities.

In the above example, British Airways cannot deploy a 747 or a 777 aircraft to fly directly from Glasgow to New york as the demand wont match the available capacity. A smaller aircraft such as A320 cannot be deployed as the range for smaller aircraft is not enough to reach the destination. Hence the hub and spoke model works. The problem with the demand and range is one of the most important reasons for low cost long haul airline NOT to emerge.

Also, for an airline like British Airways, it is difficult to expand operations form the existing hub as the airport runs at a 99% capacity. At some point of time in future, the airline must break away from the main hub and establish secondary hubs in the same city or elsewhere. The merger with Iberia could solve the problem for now, but the airline would need a secondary hub at some time in the future. The airline could also pragmatically choose to fly point to point and slowly break away from the traditional model. The dreamliner or an A350XWB is well placed to solve this problem as well.

Air Asia X is the first airline to start a long haul low cost service. The airline is profitable and they use A330 and A340 aircrafts. According to official figures, B787 and A350XWB are smaller, more fuel efficient, and has higher range. Air Asia X has already ordered A350 for their operations in future. A few more airlines could potentially emerge with similar strategies.

On November 11, when all eyes are on ANA, there could be some airline thinking about starting a big low cost long haul point to point service in the near future. The unthinkable only about a few years ago, has now become thinkable. Exciting times ahead!!

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