environmental aspects of fleet turnover, retirement and...

Environmental aspects of fleetturnover, retirement and life cycleFinal Report

Professor Peter Morrell and Dr Lynnette Dray

The authors are very grateful for comments, proof-reading and data providedby members of Cambridge University's Institute for Aviation and theEnvironment, in particular Andreas Schafer, Tom Reynolds and Tony Evans,and also Ian Stockman and Andy Foster from Cranfield University. Specialthanks are due to Maria Vera-Morales from Cambridge for providing andprogramming an interface for BADA data.

Cranfield UniversityDepartment of Air Transport, School of EngineeringUniversity of CambridgeInstitute for Aviation and the Environment17 March 2009

About Omega

Omega is a one-stop-shop providing impartial world-class academic expertiseon the environmental issues facing aviation to the wider aviation sector,Government, NGO’s and society as a whole. Its aim is independentknowledge transfer work and innovative solutions for a greener aviationfuture. Omega’s areas of expertise include climate change, local air quality,noise, aircraft systems, aircraft operations, alternative fuels, demand andmitigation policies.

Omega draws together world-class research from nine major UK universities.It is led by Manchester Metropolitan University with Cambridge and Cranfield.Other partners are Leeds, Loughborough, Oxford, Reading, Sheffield andSouthampton.

Launched in 2007, Omega is funded by the Higher Education Funding Councilfor England (HEFCE).

www.omega.mmu.ac.uk

Contents

Executive Summary1 Introduction............................................................................................... 4

1.1 Objective ............................................................................................ 4

1.2 Methodology ....................................................................................... 4

2 An analysis of the aircraft life cycle.............................................................. 6

2.1 Introduction ........................................................................................ 6

2.1.1 Summary...................................................................................... 6

2.1.2 Data sources and system boundaries ............................................. 6

2.1.3 Global context............................................................................... 8

2.1.4 Primary factors affecting fleet composition and emissions.............. 10

2.1.5 Uncertainty................................................................................. 11

2.2 Aircraft entering the fleet ................................................................... 12

2.2.1 Factors affecting the number of aircraft required .......................... 12

2.2.2 Factors affecting the timing of orders ........................................... 13

2.2.3 Purchasing behaviour by aircraft characteristics ............................ 16

2.2.4 Purchases by Technology Age...................................................... 16

2.2.5 Fuel burn.................................................................................... 17

2.2.6 Emissions effects of aircraft entering the fleet............................... 22

2.3 Changes to aircraft within the fleet ..................................................... 23

2.3.1 Freighter conversion.................................................................... 25

2.3.2 Global location ............................................................................ 27

2.3.3 Emissions implications of modifications......................................... 28

2.4 Retirement of older aircraft ................................................................ 30

2.4.1 Early retirements ........................................................................ 32

2.4.2 Noise regulations ........................................................................ 32

2.4.3 Local air quality regulations ......................................................... 34

2.4.4 Safety ........................................................................................ 34

2.4.5 Fuel costs, availability and other reasons...................................... 36

2.4.6 Emissions implications of retirements ........................................... 37

2.5 Integrated Modelling.......................................................................... 38

3 The fleet planning and investment appraisal decision process ..................... 42

3.1 Aircraft acquisition for market growth ................................................. 42

3.2 Aircraft economic life ......................................................................... 43

3.3 New programmes from manufacturers ................................................ 47

3.4 Existing aircraft performance deterioration .......................................... 48

4 Modelling aircraft investment options......................................................... 50

4.1 Modelling approach............................................................................ 50

4.2 Key model assumptions...................................................................... 51

4.2.1 The discount rate........................................................................ 53

4.2.2 Treatment of capital costs ........................................................... 54

4.3 Model results for short/medium-haul aircraft replacement .................... 55

4.4 Model results for long-haul aircraft replacement .................................. 56

4.5 The NPV cost of obtaining emissions reductions................................... 57

4.6 Compulsory early retirement .............................................................. 58

5 Conclusions.............................................................................................. 60

5.1 Summary and main findings ............................................................... 60

5.2 Related areas for future research........................................................ 62

Appendices

Appendix 1 - Omega Environmental Aspects of Aircraft Fleet Turnover, Retirementand Life Cycle Workshop

Appendix 2 - December 3, 2009, Workshop participants

Appendix 3 - Case Study of individual airline behaviour

Appendix 4 - Detailed model specification

Appendix 5 - UK airline seats and flights on London/New York, 1998 to 2008

Appendix 6 - Operating cost projections for replacement short/medium-haul aircraft(first 10 years)

Appendix 7 - Operating cost projections for existing short/medium-haul aircraft (first10 years)

Appendix 8 - Operating cost projections for replacement long-haul aircraft (first 9years)

Appendix 9 - Operating cost projections for existing long-haul aircraft (first 9 years)

Appendix 10 - Summary of short/medium-haul (A320) replacement model

Appendix 11 - Summary of long-haul (B767-300) replacement model

List of Tables

Table 1 - Age at which 50% of aircraft have retired, by aircraft type ........... 31

Table 2 - Aircraft life estimates ................................................................. 44

Table 3 - Aircraft service lives estimated for National Statistics ................... 46

Table 4 - Estimated useful lives for aircraft depreciation ............................. 47

Table 5 - Oil and fuel price base case assumptions..................................... 51

Table 6 - Oil and fuel price high case assumptions ..................................... 51

Table 7 - Assumptions for operation of existing 150 seat aircraft (15 year old)............................................................................................................... 52

Table 8 - Assumptions for operation of replacement (new) 150 seat aircraft 53

List of Figures

Figure 1 - Historical numbers of (a) active aircraft and (b) equivalent seats onactive aircraft by aircraft category, 1955 and 2008.......................................... 7

Figure 2 - Historical traffic flown by the global aircraft fleet and the resultingCO2 emissions............................................................................................... 9

Figure 3 - Number of study aircraft in service, retired or destroyed, 1960 to2007 .......................................................................................................... 10

Figure 4 - Narrowbody, widebody and regional jet aircraft operated byEuropean low-cost and legacy carriers: fleet size by aircraft age (a), seatnumber distribution (b) and utilisation distribution (c) ................................... 13

Figure 5 - New and cancelled orders, aircraft entering the fleet andretirements by year and aircraft type ........................................................... 15

Figure 6 - Technology age distribution for narrowbody planes entering thefleet between 1980 and 2005 ...................................................................... 17

Figure 7 – Range in sample mission fuel burn per RPKM of aircraft available toorder by year, compared to the mean sample mission fuel burn of new ordersand of aircraft already in the fleet ................................................................ 18

Figure 8 – Sample mission fuel burn per RPK of new aircraft available to orderfor planes in narrower size categories only ................................................... 19

Figure 9 - Oil price projections by forecast year compared to actual prices,1982-2007.................................................................................................. 21

Figure 10 - Emissions savings arising from hypothetical scenarios in which therate of decrease in fuel burn for new technology per year was greater thanactual values by (black line) 0.1% and (red line) 0.2%.................................. 22

Figure 11 - Fleet size and number of modifications by year and type, for theglobal narrowbody aircraft fleet ................................................................... 24

Figure 12 - Fleet size and number of modifications by year and type, for theglobal widebody aircraft fleet....................................................................... 24

Figure 13 - Fleet size and number of modifications by year and type, for theglobal turboprop aircraft fleet ...................................................................... 25

Figure 14 - The proportion of active freighter aircraft at a given age, byaircraft type and manufacture year .............................................................. 26

Figure 15 - Histograms of current fleet size with age for aircraft operated indifferent world regions ................................................................................ 28

Figure 16 - Change in carbon dioxide emissions from aviation over time fromthe historical base case as a result of the two hypothetical scenarios ............. 29

Figure 17 - Retirement curves for the aircraft types considered in this study,by manufacture year ................................................................................... 31

Figure 18 - Number of aircraft in different noise categories operating in theUS, EU and elsewhere over time .................................................................. 33

Figure 19 - Proportion of active aircraft damaged past economic repair byyear, for different manufacture years ........................................................... 35

Figure 20 - Retirement curves for narrowbody aircraft incorporating a modelfor increasing safety over time..................................................................... 36

Figure 21 - Changes in global carbon dioxide emissions resulting fromhypothetical aircraft retirement scenarios ..................................................... 38

Figure 22: Screenshot of integrated java applet model: historical vs. modeldata for mean aircraft age ........................................................................... 39

Figure 23 - Screenshot of integrated java applet model, comparing emissionsfor scenarios with fuel burn reductions per year for new models of aircraft of1% and 1.5%............................................................................................. 40

Figure 24 - Screenshot of integrated java applet model: scenario in whichairlines are only allowed to purchase post-1995 technology after the year2010 .......................................................................................................... 41

Figure 25 - Cumulative block hours per day versus aircraft age: SouthwestAirlines B737-300........................................................................................ 48

Figure 26 - Decline in second generation narrowbody jet aircraft values......... 54

Figure 27 - Impact of fuel price forecast and fuel efficiency on replacementdecision for short/medium-haul aircraft ........................................................ 56

Figure 28 - Impact of fuel price forecast and fuel efficiency on replacementdecision for long-haul aircraft ...................................................................... 57

Figure 29 - NPV cost of emissions reduction by aircraft operations ................. 58

Cranfield University & University of Cambridge, Final Report 3-09

Environmental aspects of fleet turnover,retirement and life cycle

Final Report, March 2009

Executive Summary

This project assessed the factors affecting the rate of retirement of aircraftfrom airline fleets, the extension of such useful or economic lives bymodifications such as freighter conversion and the speed and process ofincorporating new technology into airline fleets. As these factors may have astrong effect on the success or otherwise of policies aimed at influencingaircraft emissions, their individual effect on emissions has also been assessed.

We approached this assessment on two fronts: first, a statistical analysis ofpast data of aircraft acquisition, modification and retirement to identifygeneral trends, resulting in a basic model for aggregate fleet emissions; andsecond, building a simplified airline fleet planning model on the basis of whichthe economic viability of several options can be illustrated, including the earlyretirement of aircraft and the introduction of new technology into fleets, aswell as alternative assumptions on future fuel prices and efficiency,maintenance costs and new replacement aircraft programmes.

Our historical assessment of fleet turnover concentrates on three mainaspects affecting global emissions: new aircraft purchases, changes to aircraftin the fleet, and retirements. The recent rapid growth in global aviationdemand has led to changes in fleet composition which are led mainly byaircraft entering the global fleet, rather than those leaving it. Airlinespurchasing new aircraft for a given purpose can choose from a range ofaircraft models with different fuel burn characteristics (as well as many otherdiffering properties, eg purchase and maintenance costs). Our analysissuggests that this decision has historically been relatively unaffected by fuelprice when the selection of aircraft types available remains constant, i.e.airlines are reluctant to incur costs from switching aircraft models ormanufacturers for what may be a small decrease in relative fuel burn.However, the mean fuel burn of new aircraft orders is strongly affected by theintroduction of new aircraft models with significantly lower fuel burn andemissions. This suggests that influencing the rate of technology developmentmight be a useful policy lever for reducing emissions via fleet turnover,whereas increasing fuel-related costs, eg via carbon trading, may have asmaller than expected effect.


In contrast, modifications to aircraft over the course of their lives havehistorically had little effect on global emissions. For example, the present-dayresult of all historical re-engining of aircraft has been to reduce global aviationCO2 emissions by 0.1 percent.

Our analysis of aircraft leaving the global fleet suggests that aircraftretirements typically peak at an age of around 30 years. This value isrelatively unaffected by noise and local air quality regulations or by increasesin safety over time. However, there is some evidence it might be influencedby high fuel prices and the availability of new aircraft programmes. Forexample, 1960s build narrow-bodied aircraft experienced faster retirementover the ages 15-25 years. Evidence for some decline in annual utilisation ofaircraft with age was also found. Where possible, simple models have beenspecified for the relationships described above. These have been combined inthe form of a java applet, intended for public use, allowing the effects andtimescales of some fleet-related policies to be demonstrated.

These findings support the assumptions used in the fleet planning models,which produce NPV cost implications of various fuel burn reduction scenariosthat will be driven by high fuel prices, ETS and other policy options.

The fleet planning model provides a general framework for evaluating the NetPresent Value (NPV) advantages or costs of replacing aircraft of various ageswith new technology offering a significant improvement in fuel efficiency (ofbetween 15-35% compared to the best existing models of the same seatcapacity). The evaluation extends 15 years into the future with realisticresidual values adopted at the end of this period based on the past behaviourof aircraft values. Models were built for a short/medium-haul replacement ofaround 150 seats and a long-haul type of 220 seats.

The models were run using various assumptions for fuel prices (base and highcases), environmental taxes (US$30 per tonne CO2), and existing aircraft age(5 to 15 years). Ageing aircraft were penalised from lower annual utilisationand higher maintenance costs. The utilisation deterioration was addressedthrough the need to wet lease in equivalent hours in order to operate thesame schedule. For each model run the fuel and CO2 saving was aggregatedover the evaluation period and the NPV cost (or in some cases benefit) pertonne of CO2 was calculated.

The discount rate used in the NPV calculations was based on the airlineweighted average cost of capital (WACC), using realistic shares of debt andequity. This requires estimates of the risk-free rate, pre-tax cost of debt, theequity risk premium and the airline equity beta (using the Capital AssetPricing Model approach). The real WACC for a major EU airline was taken tobe 7-8%, with a base case assumption of 7%. Cash flows and the discountrate were both inflation adjusted.


We found that the substitution of new short/medium-haul aircraft for existingones is not a cost-effective option for reducing fuel burn and thus CO2

emissions at oil prices that are assumed to rise from current levels to US$85per barrel in 2010 and $140 in 2025. Thus, policy measures (eg significanttax incentives) would be needed to induce the replacement. Long-haulaircraft substitution was more responsive to improved fuel efficiency and oilprices than short/medium-haul aircraft under similar sets of assumptions.


1 Introduction

1.1 Objective

To understand the total life cycle contribution, including the various aspects ofentry and removal from the fleet, of an aircraft on emissions effects.

Questions to be addressed:

How are new technologies drawn into fleet, how long do they last in thefleet?

What are the factors that influence the rate of retirement eg fuelefficiency, noise changes, cost of servicing etc.?

How do manufacturers respond to airline demands on technologicaldevelopment and innovation?

What are the influences on: aircraft retirement and fleet turnover,movement of aircraft into 2nd tier airlines, and ultimate retirement interms of scrapping?

What influences the developments in aircraft size? What influences longevity – just return on investment or other factors? What factors influence purchasing trends? (first purchase, sales of

second hand aircraft) How do environment factors feature in these actions and their

promulgation? What is the environmental loss, gain or flexibility in these changes?

1.2 Methodology

A full understanding of the factors that determine airline fleet acquisition andretirement is required based on past airline behaviour, including the effects ofenvironmental pressures on these factors. In the past environmental issueshave mainly been focused around noise, although there is now growingconcern about aviation emissions. There is the potential for futureenvironmental policies to target many aspects of the fleet acquisition,modification and retirement process. Other past and future factors affectingthis process include airline business models, the impact of leasing versuspurchasing aircraft, purchase and maintenance costs, economic cycles, fuelprices, technology availability and the rate of passenger and air freight marketgrowth in different world regions.

For example, different airline business models will have quite differentpatterns of operation and varied approaches to the fleet planning process.Network carriers tend to require a mix of feeder and long-haul aircraft, withalliance partnerships and common ownership perhaps having had someimpact in the past (eg Swissair and Sabena). Low-cost airline businessmodels often put a single aircraft type high on their list of priorities. Regional


airlines evaluate jets versus turboprops, while cargo specialists have theoption to convert older passenger aircraft to freighter use. Finally, integratorssuch as FedEx need intensive night feeder flights with low overall dailyutilisation suggesting used, low capital cost, aircraft. The role of militaryconversions (eg DC10 and L1011 to tankers) is another potentialconsideration.

Similarly, around one third of the world fleet is acquired by operating leasingcompanies and leased to airlines on contracts of between one or two to six orseven years. This gives financially strong airlines greater flexibility to acquirenew technology faster, but leasing companies can only achieve their requiredreturn on assets by re-leasing an aircraft to two, three or four differentoperators. Operating lessor aircraft selection is thus based on their suitabilityto a wide range of airlines and not just a particular airline network. Leasingcompanies also tend to buy aircraft in standard configuration with fewexpensive add-ons. However, leasing is an alternative way of financing anaircraft acquisition and thus considered to be beyond the scope of this study,which deals with aircraft operators.

In order to address these questions, two packages of work have beenundertaken:

An analysis of the aircraft life cycle

An analysis of the fleet planning and investment appraisal decisionprocess

The first package focuses on the aircraft delivery/modification/retirementcycle in relation to air traffic and economic growth, trends in fuel and aircraftprices, technology availability and other factors based on past data. Thesecond examines the airline planning process and the considerations that aretaken into account; these are then incorporated into a model that allows theevaluation of various aircraft replacement options.

Frequent contacts with industry occurred throughout the research to ensurethat the assumptions were realistic. Furthermore, a workshop took place on3rd December 2008 to present the findings to date, obtain feedback on themodelling and generate discussion. The workshop programme can be foundin Appendix 1 and the participants and their employers in Appendix 2.


2 An analysis of the aircraft life cycle

2.1 Introduction

2.1.1 Summary

Each individual aircraft purchasing decision is made for complex economicreasons, sometimes ones which are difficult to understand or predict for anoutside observer. However, in terms of the effect of fleet turnover on globalemissions, a number of clear trends are discernable from aggregate dataabout global aircraft purchases, adaptation and retirement. One example isthat of retirement or survival curves for aircraft retirements (eg Feir 2001, seealso 2.1). Although the optimal time to retire an aircraft is dependent on thecharacteristics and history of that aircraft and the economic and regulatoryenvironment in which it operates, aggregate retirements with aircraft agedisplay a remarkably consistent S-curve relationship. Similarly, aircraftpurchases as a whole behave in a predictable way with respect to economiccycles and the availability of new aircraft models. This study focuses onidentifying these trends from historical data. Our aim is to discount factorswhich have historically not had a large effect on global fleet composition andemissions, and create simple models, where possible, for factors which have.These relationships are then combined in a simple Java applet which allowsthe effect of policies aimed at affecting emissions via fleet turnover to beestimated.

The layout of this section is as follows: factors relating to the whole study,such as system boundaries, uncertainties and the interaction between fleetgrowth and mitigation strategies are detailed in the rest of this introduction.Section 2.2 looks in detail at historical trends in new aircraft entering thefleet. Section 2.3 is a study of the effect of modifications of already-operatingaircraft, including freighter conversion and re-engining. Section 2.4 coversretirements from the fleet, and section 2.5 brings these strands together intoan integrated model. Finally, there are two appendices relating to this part ofthe study: Appendix 3 is a case study illustrating the differences in fleetturnover behaviour between some individual airlines with different businessmodels, and Appendix 4 contains technical details of the models specifiedhere.

2.1.2 Data sources and system boundaries

Global fleet data is sourced from the BACK Aviation Fleet database (BACKAviation, 2008), a comprehensive historical database of the global aviationfleet which allows queries down to the individual aircraft level. For this study,the most important variables are aircraft type, as specified by the OAG code1,

1 The OAG code specifies the model of an individual aircraft down to the basic variant level, i.e. the


and dates of entry to and exit from the fleet. The database also includesinformation on aircraft orders and options (including those that werecancelled before manufacture), utilization, sales of second-hand aircraft, andmajor modifications made to aircraft during their lifetimes, such as re-engining or freighter conversion. However, it does not include detailedinformation on more minor emission-reducing procedures, such as wingletfitting, paint removal or engine washing (eg Morris et al. 2009).

Figure 1 - Historical numbers of (a) active aircraft and (b) equivalent seats onactive aircraft by aircraft category, 1955 and 2008

For the purposes of this study, it is useful to consider aircraft in broad classesas well as by individual type. Database categories for which information isavailable include widebody aircraft, narrowbody aircraft, regional jets,turboprops, executive jets, piston aircraft and very light jets (VLJs). However,these categories are of varying importance in terms of current and future fleetsize and emissions. Whilst VLJs may be an important component of the futurefleet (eg Smith et al. 2007), data on current VLJ numbers and order books isinsufficient to draw any firm conclusions. The late-2008 bankruptcies andoperations suspensions of VLJ manufacturers and operators (eg Eclipse,DayJet) suggest that growth in VLJ usage may be limited, at least in the shortterm. For the other aircraft categories, historical numbers of active aircraftand equivalent seats are shown in Figure 1.2

It is apparent from Figure 1 that piston aircraft do not play an important rolein the global fleet after 1975. Therefore we restrict our analysis of fleetturnover to the main remaining aircraft types: narrowbody, widebody,executive jet, turboprop and regional jet. We also exclude military aircraft,

Boeing 747-200 is distinguished from the 747-400, but passenger variants of the 747-400 typically allhave the same code.2 To account for freighter aircraft, which make up about 10% of the global fleet, in this comparison,they are assigned equivalent seat numbers equal to those of the passenger version of the same aircraft.For example, a freighter based on the Boeing 747-400 would count for the same number of seats as apassenger 747-400.

(a) (b)


which are not covered in the database. These currently produce around 10%of aviation CO2 emissions, but that figure has historically decreased over timedue to the strong growth in commercial aviation (eg IPCC 1999).

Since this study is concerned with the environmental effects of fleet turnover,it is important to include these effects within the analysis. Aviation has anumber of impacts on the environment, with a range of different temporaland geographical scales (eg ICAO 2007). The most important in terms ofglobal cost is likely to be that of climate change caused by carbon dioxide(CO2) and other greenhouse gases emitted at altitude (eg Stern 2006).However, particulate and NOx emissions and noise also represent significantand high-profile problems with their own associated costs, particularly forcommunities around airports (eg Wadud 2008). In addition, different aircrafttypes have different impacts, as do the types of missions those aircraft areused on. To simplify the scope of this study, we perform detailed emissionsanalysis for CO2 only, and concentrate on jet aircraft, i.e. excludingturboprops from emissions analysis. However, the effects on fleet turnover ofpolicies aimed at reducing noise and improving local air quality are discussedin section 2.4.2 and section 2.4.3.

As the BACK database does not supply emissions information, we use theEurocontrol BADA database (Eurocontrol, 2008) to assess the fuel use andhence CO2 emitted by the global fleet. Since aircraft fuel use and emissionsdepend strongly both on technology and on the typical mission that aircraft isused for, a sample mission including load factor and reserve fuel amount isdefined for each aircraft class (see Section A4.1). We then use BADA togenerate emissions, including those resulting from takeoff and landing, foreach aircraft model by OAG code. It should be noted that these emissionsestimations do not take into account the increased fuel use resulting fromairborne delay or sub-optimal routing, and are therefore likely tounderestimate the total aviation CO2 released on real-life routes.

2.1.3 Global context

In Figure 2 the historical evolution of global aircraft revenue passenger-kilometres (RPKM) and emissions is shown. Historical improvements inairframes and engines have led to fuel burnt per RPKM for new-technologyaircraft declining by 1-1.5% per year on average (Lee et al. 2000, IPCC1997). This has resulted in growth in aviation fuel use and emissions which islower than the corresponding growth in aviation RPKM. However, since totalaviation RPKM has typically grown much faster than fuel use per RPKM hasdecreased, total aviation emissions have shown a steady increase over time.Changes in the overall fleet mix may also have an effect. For example, onepossible reason for the decrease in emissions for growing RPKM in the early1970s could be the result of a switch to larger aircraft as early widebodymodels (eg the Boeing 747-200) became available. It should be noted that


the emissions in Figure 2 come from all aircraft sources, including militaryaircraft (which are not considered in this study)

Figure 2 - Historical traffic flown by the global aircraft fleet and the resulting CO2

emissions

Source: IEA, 2007

However, it is important to put aviation emissions in context. It has beenestimated (eg IPCC 1999) that aviation contributes 2-3% of global CO2

emissions. The exact value of this figure depends on which emissions sourcesare taken into account (eg are land use changes included?) and which yearthe emissions are evaluated in. For example, the IPCC report cited aboveevaluated emissions for 1992 and found aviation’s contribution to be 2% oftotal emissions. Since then, aviation emissions have grown significantly but sohave those from many other sources, and a 3% value may now be moreappropriate. One of the main reasons that aviation emissions have beensingled out for particular scrutiny in the press is because, although aviation iscurrently a small fraction of total emissions, there exist relatively fewstraightforward ways of reducing those emissions in comparison with thosefrom ground sources. Another problem, as discussed in sections 3.2 and 2.4,is that aircraft have a long in-service lifetime and so technology-basedalterations take a long time to percolate into the fleet. These difficulties haveled some commentators to suggest that aviation could in theory account forup to 80% of European emissions by 2050, based on extreme scenarios withunregulated aviation growth and strong reductions in emissions from othersources (Anderson, Bows & Upham 2006).

In reality, there are a number of proposed strategies for reducing aviationemissions, whether by operational, technological or economic means (eg theEU emissions trading scheme), many of which are covered by other Omegaprojects and reports. The effects of fleet turnover on emissions form onesmall part of this overall picture.


2.1.4 Primary factors affecting fleet composition and emissions

There are three main elements which govern fleet composition and its effecton emissions:

The introduction of new aircraft into the fleet, either due to expansion orto replace other aircraft which have been retired.

Modifications to the in-service fleet which affect emissions, utilisation orexpected retirement date.

Retirements from the fleet, either because an aircraft has reached theend of its economic life or due to accidental damage.

These elements are discussed individually in sections 2.2, 2.3 and 2.4.However, it is useful to discuss beforehand their relative importance.

Figure 3 shows the number of study aircraft which have ever beenmanufactured, by date, divided into aircraft which are still in service, thosewhich have been retired for economic reasons and those which have beenretired due to damage. Not only are the majority of aircraft which have everbeen manufactured still in operation, but the rate at which new arrivals arebeing added to the fleet is greater than the rate at which older aircraft areleaving the fleet. This is a combined result of the recent rapid growth rates ofthe aviation industry and the long lifetimes of aircraft (see section 3.2). Insuch a situation, assuming roughly constant rates of improvement intechnology, new aircraft additions to the fleet have the strongest effect onaverage emissions, and retirements have a smaller effect (the relativeemissions change from aircraft modification has typically been rather low, asdiscussed in section 2.3).

Figure 3 - Number of study aircraft in service, retired or destroyed, 1960 to 2007


As future growth rates in global RPKM are forecast to remain relatively high ataround 5% per year for the next 20 years, with fuel use increasing by around3% per year (eg Airbus 2007, Boeing 2007), this situation seems likely tocontinue. This suggests that, if policies are to be applied to reduce aircraftemissions, they should be directed towards encouraging airlines to buy lower-emission aircraft and supporting the development of lower-emissiontechnology. Although rapid growth and technological improvement make itrelatively easy to reduce the average environmental impact of a singleaircraft, however, the environmental impact of the fleet is still likely to growas there will be many more aircraft in service.

If, however, aviation growth is much lower than expected, then fewer aircraftwill be bought and the effect of retirements will become more important. Thissituation is similar to that which currently applies to the automobile fleet inthe US and Europe, in which most purchases are for the purpose of replacingan older automobile which is then retired or sold on (eg Greenspan & Cohen1999; Lin, Chen & Niemeier 2008). However, whilst average retirement agesfor automobiles are 10-20 years (eg OECD 2001), the average retirement agefor an aircraft is close to 30 years and the capital cost associated withreplacing it is much higher. In this case a successful policy for reducingemissions might aim to encourage airlines to preferentially retire less fuel-efficient aircraft, similarly to “Cash for Clunkers” schemes for olderautomobiles (Blinder 2008). However, these are typically the oldest aircraftwhich are more likely to be retired anyway. If airlines are reluctant to makenew purchases it becomes significantly more difficult to lower the averageemissions per plane and the average age of an aircraft in service is likely toincrease significantly. However, since growth is slow in this scenario, the totalemissions of the global fleet will also increase only slowly.

2.1.5 Uncertainty

In this section of the report we have attempted to specify models for variousbehaviours observed in historical fleet turnover. Any predictive model mustmake the assumption that future behaviour can be inferred from pastbehaviour. In the case of aviation, there are a number of reasons why thefuture may differ substantially from the past. For example, growingenvironmental concerns may curb airport expansion, leading to capacityconstraints which are far more stringent than those experienced by pastoperators. This may reduce the demand for new aircraft, or increase theaverage number of seats per aircraft. Another aspect with great uncertainty isthe oil price. If oil prices increase significantly over historical values, airlinesmay become more interested in even small decreases in fuel use perpassenger-km. Therefore projections from this study should be interpretedcautiously.


2.2 Aircraft entering the fleet

As discussed in section 2.1.4, the rapidly-expanding global market for aviationleads to changes in fleet characteristics which are primarily driven by newaircraft entering the global fleet rather than the retirement of old aircraft.This applies particularly to fuel burn and hence emissions. In this section, weconsider factors which affect when aircraft enter the fleet and what thecharacteristics of those aircraft are. In particular, we are interested inidentifying trends which can be relatively simply modeled and projected intothe future. Purchasing decisions which do not affect the composition of theglobal fleet, such buying second-hand or leasing, are discussed in section 2.3;‘aircraft purchases’ in this section should be taken to mean purchases of newaircraft only.

2.2.1 Factors affecting the number of aircraft required

The number of new aircraft required in a given year depends primarily onpassenger and freight demand growth. Past and future levels of demandgrowth are outside the scope of this study; where information is required, weuse external data for past growth. For the future fleet we use externalprojections (eg ICAO 2007, Airbus 2007, Boeing 2007) or (in the case ofintegrated modeling) assume a constant, user-specified rate of growth.However, the number of aircraft required can also be affected by how airlinesuse the aircraft they have or are intending to buy. These factors are oftenrelated to business model. For example, low-cost carriers tend to operatepoint-to-point rather than hub-and-spoke networks. A point-to-point networktypically requires a larger number of smaller, short-haul aircraft for the samedestinations served than a hub-and-spoke one (eg Reynolds-Feighan 2001),affecting the number and distribution of aircraft orders. The low-cost airlinesalso typically have a higher rate of aircraft utilization than legacy carriers,which lowers the number of aircraft required but may result in greatermaintenance costs. Figure 9 shows a comparison between the distributionsof fleet age, aircraft size by seats and utilization for narrowbody, widebodyand regional jet aircraft operated by European low-cost and legacy airlines.3

The recent rapid growth and consequent purchasing of new aircraft by low-cost carriers has left them with a significantly younger fleet than that of thelegacy airlines, as shown in panel (a). In addition, the mix of aircraft favouredby low-cost carriers is more homogeneous, with low-cost airline fleets beingdominated by single airline types (eg the Boeing 737; panel (b)), and theutilization of these aircraft is higher (panel (c)). One reason an airline may

3 The distinction between low-cost and other business models is not always clear-cut, with many airlinesfollowing hybrid strategies. For this comparison we use a relatively conservative list of low-cost carriers,hence the small proportion of aircraft deemed to be operated in a low-cost manner, and include all othercarriers (including most charter and freight operators) in the ‘legacy’ group.


adopt a homogeneous fleet is in order to lower crew and maintenance costs,a significant consideration for low-cost carriers.

Figure 4 - Narrowbody, widebody and regional jet aircraft operated by Europeanlow-cost and legacy carriers: fleet size by aircraft age (a), seat numberdistribution (b) and utilisation distribution (c)

In terms of the global fleet, an increase in the proportion of carriers with alow-cost business model has some effect on which types of aircraft areordered and how they are used, which may follow through to a change inemissions. Such an effect is difficult to quantify globally as there arecompeting factors involved (for example, the effect of having a fleet of 150-seater aircraft as opposed to one composed of both smaller and largeraircraft, where smaller aircraft typically have higher emissions per RPKM andlarger aircraft lower emissions per RPKM) and it requires knowledge of whichcarriers currently operate in a low-cost manner. We have therefore notexplicitly modeled changes in utilization and type of aircraft ordered due tochanges in business model, although past changes are implicitly included bythe use of data on orders by type. However, in Appendix 3, a more detailedcomparison of the fleets of some specific airlines with different businessmodels is made.

2.2.2 Factors affecting the timing of orders

Figure 5 shows aircraft orders, cancelled orders, new aircraft entering thefleet and retirements by type and year from 1960 to 2005. The ‘orders’ line inFigure 5 also includes options, and retirements include those due to damageor destruction as well as economic factors. In addition, the bottom panelshows global airline operating profit (ICAO, 2008) and oil price in year 2005dollars. Although the global trend in increasing air travel RPKM is relativelysmooth (eg Figure 2) airline ordering and purchasing behaviour is stronglycyclical, with a peak in orders every 8-10 years.

(a)

(b) (c)


This arises from the effect of economic cycles and from the time lags inherentin the order-delivery system (Jiang & Hansman 2006). Airlines need moneyto buy new aircraft, so orders tend to be higher when airline operating profitis above zero and demand growth is anticipated (eg the large peaks in ordersin 1989-1990, Figure 5). Mean order-delivery times are around 1-3 years,depending on aircraft type. Combined with economic cycles in airline finance,this typically means that by the time deliveries from a given order havepeaked, airlines are no longer making a profit (eg 1992, Figure 5). Many ofthe still-outstanding orders are then cancelled (eg 1993, Figure 5).

Although we include historical data on the timing or aircraft orders anddeliveries in our model, it is notoriously difficult to predict future economiccycles. Typically environmental models which include scenarios of futureeconomics (eg IPCC 1999, CCSP 2007) use smooth curves for trends inquantities such as oil price and GDP rather than attempting to superimposecyclical behaviour. We follow this methodology in our base model.

However, there may be some situations in which cyclical behaviour affectssystem growth or the results of policy measures in a way which is notreproducible with models assuming only smooth underlying trends. Forexample, the location of a peak in ordering with respect to an emissions ornoise stringency may determine if the effects of that stringency on the fleetare relatively rapid or delayed. There may also be certain actions which aretriggered by passing a particular fuel price threshold, such as increases ordecreases in charges, or purchasing and retirement decisions. If these occuronly at high or low points in oil price cycles, they will be missed in a modelwhich assumes a smooth underlying trend.

In response to these concerns we have also run a sensitivity analysis withcyclical behaviour applied to ordering behaviour (note that although the leveland timescale of variability are taken from past cycles, detailed economicmodeling is not carried out) superimposed, to assess the level of uncertaintyprovided by these effects, and the option of superimposing cyclical futureordering behaviour is included in the integrated model. The results of thisanalysis suggest that, for the policies considered here, the net effect of cyclesin airline ordering behaviour on policy-related CO2 reductions is relativelysmall, with the main difference between the two scenarios being the shape ofthe resulting curves rather than the magnitude of the overall emissionsreduction.


Figure 5 - New and cancelled orders, aircraft entering the fleet and retirements byyear and aircraft type


2.2.3 Purchasing behaviour by aircraft characteristics

Once the choice has been made to buy a new aircraft with the intent ofserving a given market, airlines have the choice of a range of aircraft modelssuitable for that market with different technology and fuel burncharacteristics. This choice may be affected by a number of factors, asdetailed further in sections 3 and 4 of this report, including basic cost andmanufacturer discounting, on-board facilities, regulatory compliance and localoperating restrictions (eg on noise or NOx emissions). The decision is alsolikely to be influenced by the predictions used by the purchaser for oil priceand economic conditions over the expected life of the aircraft (see section4.2). Such decisions can be modelled in detail using choice models (eg MVA2007) or the NPV models such as that described in section 3 of this report.However, these models require knowledge about the detailed characteristicsof the aircraft available. This makes modelling all aircraft coming into theglobal fleet using them a daunting task. In this part of the study we thereforelook instead at aggregate properties of aircraft orders and purchases.

2.2.4 Purchases by Technology Age

One major factor affecting both purchases and emissions is the age of thetechnology used in an aircraft. We define the technology age of a givenaircraft (as identified by OAG code) as the time elapsed since the firstmanufacture of any aircraft of that type. For example, an airline seeking topurchase a 100-seater aircraft in 1990 could choose between the Boeing 737-300 (which first entered the fleet in 1985 and thus had a technology age of5), the MD-82 (with a technology age of 8) or the Boeing 737-500 (which firstentered the fleet in 1990, ie technology age 0), amongst others. Airlinesmight choose to purchase an aircraft with a higher technology age for anumber of reasons: they could wish to avoid ‘early-adopter’ risk, reducecapital costs or seek to minimize maintenance costs by restricting aircrafttypes in their fleet to those they already have, for example.

Although fuel burn per RPK correlates strongly with the year an aircraft modelis introduced, a lower technology age does not necessarily mean a lower fuelburn for a given mission. Other factors, such as incorporating the extraweight needed for more sophisticated entertainment systems or reducing seatnumbers to increase passenger legroom, may lead to higher fuel burn perRPK even with better engine and airframe technology.

In Figure 6 we show the technology age distribution for narrowbody aircraft.Aggregate airline purchases follow an approximately exponential distributionwith technology age, with airlines preferring on average to purchase newertechnology. Although only narrowbody purchases are shown, other aircrafttypes display similar trends. However, this distribution is strongly affected byavailability. The number of successful models of aircraft is relatively small. In


addition, although the overall trend in the airline industry is for improvingtechnology over time, this tends to be expressed as large improvements intechnology happening every 5-10 years rather than smaller incrementalchanges every year. This leads to a distribution of technology age which isvery strongly peaked at the technology ages of successful aircraft models.Projecting future purchases by technology age therefore has relatively lowpredictive power, since it requires a guess simultaneously at when futuretechnology programs for different size and range categories will producepurchasable aircraft, and what the fuel burn of those aircraft will be.

Figure 6 - Technology age distribution for narrowbody planes entering the fleetbetween 1980 and 2005

2.2.5 Fuel burn

A better predictor of the environmental impact of future purchasing behaviouris to directly compare the fuel burn of aircraft models (using the EurocontrolBADA database (Eurocontrol, 2004) and a sample mission for each aircrafttype, as detailed in Appendix 4) available to order in a given year. Multiplemetrics can be used for assessing fuel burn, including SFC (the mass of fuelrequired to provide a specific net thrust for a given period of time), energyintensity (amount of energy required per RPKM or ASKM) and fuel efficiency(typically RPKM or ASKM per kg fuel). These numbers may also either bequoted for just the cruise portion of the flight or as average values for the


whole flight, including takeoff, climb and descent. In this study we use thefuel burn per RPKM for the whole mission, which is most easily translatableinto global emissions for a given predicted growth in RPKM. However, itshould be noted that this value for a given aircraft type is still sensitive to theload factor and mission length assumed, as detailed above. In addition, ouranalysis in this section ignores the extra fuel burnt due to delays, non-optimalrouting and fuel burn deterioration of aircraft over time. Therefore whencompared to “real-life” usage, the numbers shown here will beunderestimates.

In Figure 7 the range of fuel burn per RPKM values for aircraft available toorder in a given year is shown (red dashed lines). Note that the Airbus A380is excluded as BADA does not yet contain a model for its fuel burn, and theIlyushin 86 is excluded as it is an outlying point with only a limited number of(geographically and politically constrained) orders. Step changes in the lowerline indicate the first year a new aircraft model with lower fuel burn per RPKMwas open to orders or options. This may be several years before that aircraftenters the fleet, depending on the initial order-delivery time. Similarly stepchanges in the upper line indicate the end of orders or options being placedon the aircraft with the highest fuel burn per RPK at that time, rather than theend of its production run.

Figure 7 – Range in sample mission fuel burn per RPKM of aircraft available toorder by year, compared to the mean sample mission fuel burn of new orders andof aircraft already in the fleet


The mean fuel burn per RPKM of aircraft orders and options in a given year isalso shown in Figure 7 (dashed black line). This excludes orders which wereeventually cancelled – only aircraft which were manufactured and entered thefleet are shown. It is apparent that the mean lies approximately half-waybetween the best-available and worst-available aircraft models in terms offuel burn per RPKM available for order in that year, depending on aircrafttype. This reflects the underlying distribution of orders, which followapproximately a triangular distribution over the range of aircraft available interms of fuel burn per RPKM.

The comparison shown in each panel of Figure 7 still reflects a wide range ofaircraft types, numbers of seats and mission lengths. For example, thenarrowbody class contains both planes with 100 seats and those with 200seats. As larger planes typically have lower values of fuel burn per RPK, itcould be argued that using broad aircraft type categories introduces adistorting trend to this analysis. Therefore, as shown in Figure 8, we repeatthe analysis using smaller size categories. In this case the data are morevariable, as we are dealing with small numbers of aircraft types in eachcategory. However, the basic picture is the same as with the broader aircrafttype categories.

Figure 8 – Sample mission fuel burn per RPK of new aircraft available to order forplanes in narrower size categories only


In particular, it might be expected that a high current oil price would causeairlines to preferentially choose aircraft models with as low a fuel burn aspossible. In this case a high oil price would correlate strongly with a meanfuel burn per RPKM for new orders which is much closer to the lowest-available value at that time. However, such a correlation was not found inmost of the size categories examined, and dependence on oil price was lowand only marginally significant in the cases where a correlation was found. Infact, the most successful model was one in which the mean fuel burn of neworders (FBmean) is a simple function only of the highest (FBupper) and lowest(FBlower) fuel burn available to order:

,)( lowerupperuppermean FBFBFBFB

where the constant differs for each aircraft type (see list of constants inAppendix 4) but is typically in the range 0.4-0.7. We use this equation,combined with historical data for the highest- and lowest-available fuel burnby year and type, to model past orders by fuel burn. Mean order-deliverytimes by type are then applied to get the fuel burn of new aircraft enteringthe fleet.

There are several reasons which may explain this behaviour. First, and asdiscussed in section 3 of this report, even when oil prices are historically high,the difference in fuel-related costs between two models of aircraft availablefor purchase may represent only a small portion of the costs associated withthose aircraft. Other factors, including manufacturer discounts, maintenancecosts and on-board facilities may play a larger role. In particular, airlines mayhave the choice of waiting for a significantly improved version of an aircrafttype they already fly, or switching now to an alternative aircraft type whichmay be only marginally better than their current aircraft in terms of fuel burn.In this case it seems the former option is nearly always preferable. Forexample, of 350 carriers receiving new 150-seater aircraft between 1960 andthe present day, only 69 ordered more than one family of aircraft (eg the 737or A320 family) over time. Airlines may also have historical or political ties toa particular manufacturer. It is also important to note that aircraftmanufacture lines have limited capacity. Even if the world’s airlines were to alldecide on the most fuel-efficient aircraft for a given mission, the manufacturerof that aircraft might not be able to provide all of those aircraft in a timescalewhich is acceptable to airlines.

Finally, it is worth noting that airlines will base their purchasing behaviourwith fuel usage on the projected fuel costs over the lifetime of an aircraft.This requires projections of oil prices which, as noted above, may divergesignificantly from the actual future oil price trajectory. Figure 9 shows USDepartment of Energy (DOE) Annual Energy Outlook forecast oil prices from1982. As can be seen, an airline basing its decisions on the 1982 forecast willput a greater value on fuel savings than it would if it had perfect foresight.


Conversely, an airline basing its decisions on the 1998 forecast will put amuch smaller value on fuel savings than it would if it had perfect foresight.One possible consequence of this effect is that aircraft purchases in the late1980s, which in Figures 7 and 8 display generally a slightly lower fuel burnthan modelled, may have been made under the incorrect assumption(supported by the predictions of the time) that fuel prices were shortly to risesharply from the relatively low levels they were at during that period.

Figure 9 - Oil price projections by forecast year compared to actual prices, 1982-2007

Source: US Department of Energy Outlook, 2008

Within the modelling framework described above aircraft availability has amuch stronger effect than fuel price, ie significant improvements in the best-available technology improve the fuel burn and emissions characteristics ofnew orders much more than a high oil price without a change in the best-available technology. This suggests that a suitable policy lever to apply in arapidly-growing aviation market might be one that affects technologyavailability. This might take the form of manufacturer support or researchfunding for technology development. Historically there have been a number ofresearch programmes aimed at reducing aviation fuel use and/or emissionsinitiated during periods when the oil price was high which were thenabandoned following a decrease in oil prices, only for similar research to berestarted when the oil price was high again. Examples include algae biofuelresearch (eg Heminghaus & Boval 2006) and open rotors (eg the GE36propfan, Norris 2007, although this also had significant noise problems).


In terms of modelling, to predict future behaviour we need to have some ideaof availability of new aircraft types. Typically, both best-available and worst-available fuel burn per RPKM decrease at an average rate of 1-1.5% per year(eg Lee et al. 2001). However this curve is strongly stepped, and there aresome exceptions to this trend in regions where aircraft availability is limited,particularly in the case of Russian aircraft during the Cold War era. In ourbase model we assume that these trends continue, but the exact rate of fuelburn decrease per year is set by the user. In the absence of informationabout when major technology programs will produce purchasable aircraft, weassume a smooth curve for fuel burn changes with a small decrease in thebest-available and worst-available values every year. However, we also allowthe user to apply a stepped curve with the same average rate of technologydevelopment but with improvements applied only every 8 years. As with theoption of including cyclical behaviour in aircraft ordering, the resulting effectson model outcome are relatively small.

2.2.6 Emissions effects of aircraft entering the fleet

In order to get an idea of the magnitude of emissions savings that might bepossible by affecting technology development, we look at some hypotheticalscenarios for what might have happened had technology developed slightlydifferently. As noted above, fuel burn per RPKM for new models of aircrafthas historically decreased by around 1-1.5% per year on average. As shownin Figure 10, we consider what the difference in emissions would have been ifthat rate of technology development had been slightly higher, by 0.1% and0.2% respectively from actual historical values since a base year of 1960.

Figure 10 - Emissions savings arising from hypothetical scenarios in which therate of decrease in fuel burn for new technology per year was greater than actualvalues by (black line) 0.1% and (red line) 0.2%


These scenarios are meant to give an idea of the rough level of systemresponse to changes, rather than to provide exact figures; in particular, theyare not economically costed and apply only to those aircraft whose emissionswe model in this study (narrowbody, widebody and regional jets). TotalRPKM, freight tonne-kilometres (FTKM), fleet size and utilization in both casesare assumed to remain constant. By 2008, these savings represent about1.5% (in the first case) and 3% (in the second) of total global aviation CO2

emissions. As can be seen by comparison with similar exercises formodifications in section 2.3.3 and retirements in section 2.4.6, this is aconsiderable saving, although it requires a long time to take effect.

2.3 Changes to aircraft within the fleet

The primary use, environmental performance and fuel usage of an activeaircraft may be altered by making changes to the engines or airframe, such asadding winglets, converting it to a freighter, hushkitting or re-engining it.Some of these adjustments have beneficial effects in terms of fleetenvironmental performance (eg re-engining), whilst others are likely to havedetrimental effects (eg freighter conversion, which typically extends the life ofolder, less fuel-efficient aircraft). Similarly, usage changes may affect theemissions of aircraft within the fleet (Greene 1992). As discussed in section3.4 of the report, fuel burn performance also tends to deteriorate andutilization typically decreases over the working life of an aircraft. In thissection, we consider the effects both of modifying aircraft and of some otherfactors which may affect aircraft usage throughout their lifetimes.

In Figure 11 we show the fleet size and number of major modifications andusage changes over time, for narrowbody aircraft. 4 The corresponding figurefor widebody aircraft is shown in Figure 12. In general, these indicate thataircraft modifications behave broadly as expected. For example, hushkittingpeaks just before the application of noise regulations (such as therequirement for US operations to comply with Stage 3 in 1999), re-enginingpeaks when the oil price is high, and storage peaks after events whichtemporarily reduce demand (such as 9/11 and the Gulf War). However,relatively small numbers of aircraft are re-engined. This is likely to be a resultof the relatively high cost of re-engining for the benefits obtained incomparison to that of buying a new aircraft, as well as the limited applicabilityof the procedure (the new engines must fit on the old airframe). Whilst thenumber of freight conversions is also relatively small, freighters represent alarge proportion of older, less fuel-efficient aircraft. For example, by age 30about 50% of surviving widebody aircraft are freighters.

4 Note that the way in which the database is accessed means that some events in the life of an aircraftmay be missed if they happen directly before other major events. However a comparison with morecomprehensive data for re-engining and freighter conversion suggests that this effect is relatively small.


Figure 11 - Fleet size and number of modifications by year and type, for the globalnarrowbody aircraft fleet

Figure 12 - Fleet size and number of modifications by year and type, for the globalwidebody aircraft fleet


Data for turboprop aircraft are given in Figure 13.5 Unlike the narrowbodyand widebody fleets, the global turboprop fleet has remained largely constantover the past 10-15 years as regional jets have been introduced to servetraditional turboprop routes. However, as turboprops typically have lower fuelburn for similar missions than regional jets, it has been suggested that therecent spike in oil prices might prompt a switch back to turboprops on theseroutes. Although there was not a significant increase in turboprop orders inthe most recent data available (end of 2007), the number of turboprops beingretired or put into storage in Figure 13 has decreased almost to zero by thispoint. This may suggest that airlines are keeping older turboprops active to agreater extent than they historically have.

Figure 13 - Fleet size and number of modifications by year and type, for the globalturboprop aircraft fleet

2.3.1 Freighter conversion

The global freighter fleet has two main components: aircraft which aremanufactured as freighters and those which have been converted frompassenger service. These two groups are not interchangeable as convertedfreighters have some properties which may make them undesirable for large

5 We omit figures for regional jets and executive jets as regional jets have been around for too short atime to have built up a significant modification history, and executive jets typically have a lowmodification rate.


items of freight (eg position of doors and carrying capacity). Thereforeconverted freighters are more typically used by parcel carriers. Freighterconversion can affect emissions if the conversion affects the utilization of thataircraft or keeps it active and in service for longer than it would otherwisehave been. In practice the decision to convert is an economic one and theage of an aircraft at conversion tends to correspond to a cost window insecond-hand value for a given aircraft model. Typically this occurs relativelylate in the lifetime of an aircraft model, after it is no longer in production(Rehrmann 2008). However for any given model other factors, such as thecarrying capacity, range and suitability for overnight operations (for examplein terms of noise levels), affect how successful it is likely to be as a freighter.

Figure 14 - The proportion of active freighter aircraft at a given age, by aircrafttype and manufacture year

Figure 14 shows the proportion of active aircraft manufactured in a given yearwhich are freighters, by aircraft type and age. The black lines shown aremodel fits to the pooled data from all manufacture years. As freighterconversion typically occurs at a characteristic age for a given aircraft model,as discussed above, the behaviour for aircraft manufactured in different yearsby type is remarkably consistent. For the narrowbody and widebody types,the proportion of freighters amongst young aircraft is initially low, at 0 – 20


percent. This proportion rapidly increases at around age 25, until at age 30-35 over half of the still-operating aircraft are freighters. Only turboprops showsignificant evolution in behaviour over time, with much greater use of 1960s-manufacture turboprops as freighters (red lines) than more modern ones. Therelatively consistent curves with high freighter proportions at large ages fornarrowbody and widebody aircraft are a function of two complementaryfactors. Firstly, freighter conversion is a one-way process – a freighter isunlikely to be converted into a passenger plane. Secondly, freighters tend tobe kept active at greater ages than passenger planes.

As a simple method of providing an approximate measure of the freighterfleet, we fit relationships to the curves for widebody and narrowbody freighterconversion shown in Figure 14 using the same methodology as for retirementcurves. This is described in section 2.4 and relationships are shown in Figure19 as black lines for those aircraft classes where the estimated parametersare significant at the 95% level.

2.3.2 Global location

Another factor which may potentially affect the effect of aircraft emissions isglobal location. Different world regions have different regulations and patternsof aircraft usage, potentially allowing aircraft to stay active longer or be usedin more polluting ways if they can be moved to a less regulated region. Inaddition, although the long life of CO2 in the atmosphere means that CO2

emissions have the same effect no matter where they are released, the sameis not true of other aviation emissions at altitude (eg IPCC 1999). Thepotential therefore exists for global location shifts in the aircraft fleet to havereal effects in terms of climate change, even if the same total amounts ofpollutants are released.

One assumption that is frequently made about aircraft location is that newaircraft are bought in rich countries and then sold second-hand to poorcountries, leading to the oldest aircraft mainly operating in Africa, SouthAmerica and parts of Asia. However, this is reflected only to a small extent indata (Figure 15).

In fact aircraft age in different world regions tends mainly to reflect recentpatterns of growth. For example, recent expansion in the Indian and Chinesemarkets leads to an age distribution for Asian aircraft which is more stronglypeaked at the very young end (0-3 years) than either the European or NorthAmerican distributions. Although aircraft operating in Africa and SouthAmerica are typically older, there are still non-negligible numbers of newaircraft being operated in these regions. It is also notable that the African,South American and Middle Eastern fleets are currently much smaller than theEuropean and North American fleets, as indicated by the different y-axisscales on the upper and lower panels in Figure 15.


Figure 15 - Histograms of current fleet size with age for aircraft operated indifferent world regions

The large sizes of the North American and European fleets means that thereare greater numbers of old (> 30 years) aircraft being operated in Europe andNorth America than elsewhere. Whilst these old aircraft could in theory besold to less-regulated regions, the typically small aviation markets in theseregions means that demand is low. In general, there is no strongly consistenttrend for aircraft flows around the world with age. For this study, we assumethat the effects of global location can be safely ignored.

2.3.3 Emissions implications of modifications

It is useful to get an idea of the order of magnitude of the change thathistorical modifications have made to fleet emissions (see also sections 2.2.6and 2.4.6). To do this, we apply some hypothetical scenarios to our historicaldata. These scenarios are meant to give an idea of the rough level ofimportance of different factors, rather than to provide exact figures; inparticular, they are not economically costed and apply only to those aircraftwhose emissions we model in this study (narrowbody, widebody and regionaljets). In the first scenario, we consider what the total historical emissionssaving over time from all re-enginings has been (or, conversely, the extraemissions which would have been released had those re-enginings not

Age Age Age

Age Age Age


happened). As BADA does not include detailed emissions by engine type, weassume an 18% reduction in fuel burn on re-engining is plausible (see section3.2). In the second scenario, we consider what historical emissions wouldhave been had no freighter conversions ever occurred, ie had every freighterrequired instead been bought new, with typical fuel burn for a new aircraft atthe time of its purchase. In this case, aircraft which would have beenconverted to freighters are assumed to be directly retired instead. Total RPKMand FTKM in both cases is assumed to remain constant.

In Figure 16 we show the results of these scenarios. For comparison, totalglobal aviation emissions in 2005 are around 450 million tonnes.Comparatively, the scenarios have only a small effect; in particular, for the2005 fleet, the effect of all historical re-enginings represents only 0.1% oftotal CO2 emissions. As the majority of re-enginings occurred relatively earlyin the time period we look at, their effect relative to total emissions hasdecreased over time. In contrast, the new-freighters scenario has a greatereffect in more recent years, due to the growth of freight demand outstrippingthat of passenger demand. However, it produces a saving of 0.9% in 2005 –not negligible, but still relatively small for a dramatic scenario. In ourintegrated models, we include the effect of freighter conversion but ignore re-engining.

Figure 16 - Change in carbon dioxide emissions from aviation over time from thehistorical base case as a result of the two hypothetical scenarios


2.4 Retirement of older aircraft

Aircraft retirements have historically been a strong function of aircraft age. Inthis section, we consider an aircraft retired only if it has left the global fleet, ieexcluding aircraft which leave an airline’s service to be sold, converted orstored with the option of returning to the fleet. Retirement is therefore a one-way condition from which an aircraft cannot return. Typically, retirementbehaviour of aircraft (as well as for other goods, eg automobiles) is expressedin terms of retirement or survival curves (Feir 2001, Greenspan & Cohen1999). For a group of aircraft manufactured in a given year, the retirementcurve given the proportion of those aircraft which will still be active in theglobal fleet at a given age. Typically such curves have a distinctive S-curveshape which may be represented by a number of alternative functional forms(Steffens 2001).

Retirement curves for the aircraft considered in this study by type are shownin Figure 17. We plot separate curves by aircraft manufacture year, toidentify any changes over time in retirement behaviour. These indicate that,in general, the age at which 50% of aircraft have retired remains remarkablyconstant over time, at approximately 30 years (Table 1) in agreement withthe IPCC estimates given in Section 3.2. There are two notable exceptions tothis rule. Executive jets display a longer lifetime of approximately 40 years,although it is uncertain how much usage the older executive jets are subjectto. More notably, the narrowbody class of aircraft display retirement curvesthat differ strongly with manufacture year. Narrowbody aircraft manufacturedin the period 1960-1964 typically retire early (lifetime around 20 years), whilstthose manufactured between 1965 and 1971 have a slightly later retirementdate (lifetime around 35 years).

In order to model retirements, we assume a logistic (S-curve) functional form:

01

1ttb

retiredactive

active

eNN

N

,

where Nactive and Nretired refer to the number of active (including temporarilystored) and retired aircraft at a given age t, the estimated constant t0 givesthe average retirement age6 and b is another estimated constant giving thecurve shape. Values for these constants for each aircraft class are given inAppendix 4. Estimated retirement curves are shown in Figure 17 (black lines).We also compare the FESG ‘all other aircraft’ retirement curve (dashed blacklines), a 6th-degree polynomial. Note however that the FESG curves arespecified for different aircraft type groupings to the ones shown here and so adirect comparison is not possible.

6 The average retirement age here refers to the point at the slope of the curve is steepest, ie the age atwhich the largest number of retirements occur. This is technically speaking the mode, although if thecurve is symmetric (as in the models shown here) it may also be the median and/or mean retirementage as well.


Figure 17 - Retirement curves for the aircraft types considered in this study, bymanufacture year

Table 1 - Age at which 50% of aircraft have retired, by aircraft type

All Widebody Narrowbody TurbopropRegional

JetExecutive

JetAge at 50%retirement,years

32.6 29.3 29.8 33.4 29.5 43.7

There are a number of factors which may complicate this relatively simplepicture of consistent retirement behaviour, as discussed in the next section.For example, sometimes aircraft are stored and then retired directly fromstorage without re-entering the fleet. In this case in emissions terms theirtrue retirement date was that in which they were stored. However, we findthat including this effect on reduces the average retirement age by only 0.7years.


2.4.1 Early retirements

One notable deviation from the relatively uniform retirement behaviourdisplayed in Figure 17 is the early retirements of 1960s-manufacturednarrowbody aircraft. A number of reasons were investigated for thisdiscrepancy, most of which have general applicability to other aircraft typesand manufacture years as well. Broadly, there are a number of reasons whyan airline might choose or be forced to retire an aircraft early:

The aircraft may be in breach of new noise or local air qualityregulations for the regions in which it operates.

It may have become more difficult to sell on second-hand aircraft ratherthan retiring them, eg under conditions of market contraction.

High fuel prices may have made it costly to operate in comparison withthe operator’s other aircraft or new models available for purchase.

The aircraft may have been accidentally damaged past economic repair. Expectations and assumptions about the economic life of an aircraft may

have changed over time.

We explore some of these reasons below.

2.4.2 Noise regulations

The peak retirement dates of the 1960-64 aircraft cohort fall in the early1980s. This is the period shortly before Stage 2 certification was required tooperate in the US, so some of the retirements may be older planes which didnot meet noise regulations. In order to test this, we plot the number ofaircraft in different noise categories and world regions over time (Figure 18).This comparison suggests that the total number of Stage 1 planes was smalland most had already been retired by this point.

To understand why this is the case, it is useful to consider the way that noiseregulations are typically introduced (eg ICAO 1993). In the case of the Stage1/Stage 2 transition, the regulation process began in 1969 with theestablishment of Stage 2 noise standards for new aircraft type designs. Asshown in Figure 18, the majority of aircraft operating in the US at the timeStage 2 was defined in fact already met the standard, although the situationwas less clear-cut in Europe.

By 1973, all newly produced aircraft were required to meet Stage 2standards. Although the process of ending Stage 1 operations in the USbegan in 1982, the US requirement to completely cease all Stage 1 operationsdid not come into place until 1988, nearly 20 years after the establishment ofthe standard. The long time periods involved in regulation, in combinationwith rapid fleet growth and a high fraction of complying aircraft even beforethe regulations were introduced, lead to a minimal number of enforcedretirements. Instead, introduction of lower-noise technology into the fleet is


driven by the much earlier requirement that new aircraft type designs meet agiven standard, and noise phase-outs are agreed beforehand between airlinesand manufacturers precisely so as to cause minimum disturbance in the formof enforced retirements or sales.

Figure 18 - Number of aircraft in different noise categories operating in the US, EUand elsewhere over time

Another factor minimizing the effect of noise regulations is that differentworld regions tend to apply different levels of stringency on differenttimescales. Regionally-applied regulations allow non-complying aircraft to besold to non-regulated regions rather than retired, providing that sufficientdemand exists in non-regulated regions for second-hand aircraft (see egsection 2.3.2).


2.4.3 Local air quality regulations

Another factor which may affect the choice of individual airlines to retire orsell aircraft is the issue of local air quality regulation. Different local emissionsare regulated in different regions, but the regulated pollutant is usually eitherNOx, NO2 or particulates (DfT 2006). Typically, older technology engines havehigher emissions of these pollutants, and emissions increase over an aircraft’slifetime due to engine deterioration (although this can be mitigated somewhatby engine washing, eg Henderson 2005). The application of penalties forexceeding local emissions limits therefore typically targets airlines with olderfleets. This applies particularly to airlines which make extensive and/or hubuse of individual airports which have introduced local emissions-basedcharges. As detailed in ICAO (2007), both Zurich and Stockholm airports haveinvestigated the effects of NOx-based emissions charges which were appliedin the late 1990s. Their analysis of the available data suggested thatemissions charges had only a limited effect in encouraging airlines to switchto lower-NOx technology. As the emissions charges applied were relativelysmall in comparison to direct operating costs (0.3 – 1.5% depending onaircraft type), airlines instead chose to simply absorb the increased cost.

Obviously there is some level of charge which would make airlines changetheir behaviour. However, it seems that present-day accepted levels ofcharging are significantly lower than this level, and it may be that there is nolevel of charge which would induce significant airline behaviour change whilstremaining politically acceptable and economically reasonable. It is also likelythat the initial airline response to such a charge applied at the individualairport level would be to operate non-complying aircraft at less regulatedairports or sell them, rather than retiring them from the global fleet.

2.4.4 Safety

In our analysis above we have defined as retired any aircraft which has leftthe global fleet. This includes those which have crashed or have beendamaged past economic repair, so another potential reason behind the earlyretirements of 1960s-manufactured aircraft is that some of these retirementsare due to damage or accidents from a time in which aircraft safety was lessadvanced. The numbers involved may be significant; for example, around20% of aircraft manufactured in 1960 were eventually retired for damage-related rather than economic reasons. To investigate this, we separated outdamaged and destroyed aircraft, and specified an adjusted model for them.The proportion of active planes which are retired each year due to damage ordestruction is shown in Figure 19. Although there is a consistent downwardtrend in accidents when all aircraft are considered together (black points; theblack line shown fits these points), if aircraft manufactured in differentdecades are considered (coloured points) a slightly different picture emerges.There is a strong trend relating manufacture year and accident risk. For


example, 1960s-manufactured aircraft remain at roughly the same relativelyhigh risk of damage as in 1980 even with the safety procedures available inthe year 2000. Conversely, 1990s-manufactured aircraft remain at roughly thesame, lower risk level from 1990 to the present day. As the relativeproportions of earlier-manufacture aircraft in the fleet go down over time, thenet result is a lowering in total accident rate.

Figure 19 - Proportion of active aircraft damaged past economic repair by year, fordifferent manufacture years

We therefore assume that the number of damage-related retirements in agiven year is proportional to the number of active aircraft and also a functionof the manufacture years of those aircraft. Assuming the total number retiredthrough damage is small compared to the total number retired, the number ofdamage retirements by age t is then, to first order, a function of the integralof the retirement curve. We model this safety effect with the modifiedretirement equation:

,

where Ndes is the number of aircraft damage retirements by year t, y is themanufacture year and q1 and q2 are estimated parameters governing howsafety levels have historically improved over time. Sample adjusted retirementcurves resulting from this model are shown in Figure 20. As can be seen,although damage-related retirements and crashes do have some effect on theslope of the retirement curve for aircraft in the first 10 years of life, they donot have a strong effect on the average retirement date. The source of theearly retirements of 1960s aircraft must therefore have some other cause. In

0

0)1950(21

1

1log

bt

ttbyq

retiredactive

des

e

ee

b

q

NN

N


addition, unless there is a sudden deterioration in future aircraft safety (whichseems unlikely), the increasing safety levels over time suggests thatretirements due to accidental damage will be unimportant in determining themakeup of the future fleet.

Figure 20 - Retirement curves for narrowbody aircraft incorporating a model forincreasing safety over time

2.4.5 Fuel costs, availability and other reasons

Having examined several reasons for early retirement which are likely notsignificant, there remain a number of other reasons which are harder todiscount. It is likely that the early retirements we observe are the result of acombination of these reasons. One reason which cannot be discounted is thatearly expectations of useful, safe or economic aircraft life were simply shorter.Although this is not straightforward to investigate with the data we haveavailable, it is notable that the assumed aircraft lifetimes used for capitalstock accounting have typically been revised upwards over time (eg OECD2001). However, the most important factor is likely to have been thecombination of high oil prices, difficult conditions in the US aviation market(which even today represents around 40% of the global flights, eg OAG2005), and a new generation of aircraft becoming available to order. As notedabove, the early retirements of 1960s-manufactured aircraft peak around1980. At this time, oil prices were high, due to the second oil crisis in 1979(Figure 5). In the US, the airline industry was still adjusting to its 1978deregulation, and in 1981-1982 the US economy was in recession. As shownin Figure 2, these factors led to a growth rate in aviation RPKM in 1978-1983that was relatively low compared to the periods directly before andafterwards.


Low growth rates in turn reduce the demand for second-hand aircraft, makingolder aircraft more difficult to sell on. In addition, new models of aircraft werestarting to become available to order which had significantly lower fuel burnthan current models. For example, orders for the Boeing 737-300 and AirbusA320 began to be placed in the early-mid 1980s. These may have promptedearly retirement either by making it more attractive to buy new aircraft thansecond-hand ones, or by directly prompting replacement of older aircraft atan earlier age (see section 4.6). In modelling future early retirements, wetake results from the NPV model described in section 4 below and fit a verysimple parameterized model to them relating economic retirement date to theassumed oil price and mean rate of technology development (which gives thefuel burn characteristics of potential replacement aircraft in a given futureyear). Typically, the effect on retirement date is small for reasonable rates oftechnology development.

It is notable that the early retirements discussed above have directapplicability to the current market. Our data extends only until the beginningof 2008, but individual airline reports indicate that significant numbers ofaircraft have been retired since then. Although the economic situation issimilar in terms of initially high oil prices followed by a recession, one majordifference between the present day and the early 1980s is the issue of newtechnology availability. For example, there is currently no B737/A320replacement-type aircraft orderable which offers a significant improvement onpresent-day aircraft for short-medium haul trips. Aircraft currently indevelopment (such as the Airbus NSR or Boeing 737RS programmes) areunlikely to become available before 2015 at the earliest (Norris 2006). Theupcoming few years will therefore provide a very interesting (if painful) test ofthe forces behind early aircraft retirement.

2.4.6 Emissions implications of retirements

How important in terms of global emissions is the effect of early and/or lateretirement? As for aircraft purchases and modification in sections 2.2.6 and2.3.3 above, we apply hypothetical scenarios to past data to get an idea ofthe magnitude of the effects we are looking at. As noted previously, these areapproximate analyses only, not economically costed, and are restricted to theaircraft types for which we model detailed emissions. In all cases, we keepthe total RPKM and FTKM flown constant and equal to the base case to allowa direct comparison between scenarios.

We consider two scenarios. In the first, the peak retirement age is reduced byone year, with any shortfall in aircraft numbers being made up by new-technology aircraft. In the second, more fanciful scenario, no aircraft is everretired, representing an extreme ‘late-retirement’ situation. Although the fleetis larger than in the base case, utilisation is assumed to be lower so that thetotal RPKM remains the same. In Figure 21 we show the results of these twoscenarios. In terms of total global aviation emissions, reducing the retirement


age of aircraft by a year reduces aviation CO2 in 2005 by 0.35%.7 The no-retirement scenario increases emissions in 2005 by 2.3%. In combination withthe results in section 2.2.6, these results suggest that only relatively smallemissions savings are likely to be made by changing retirement behaviour.

Figure 21 - Changes in global carbon dioxide emissions resulting fromhypothetical aircraft retirement scenarios

2.5 Integrated Modelling

Combining the analysis above with data on historical additions to the aircraftfleet and projections of future fleet additions (either arbitrarily assumed orfrom available forecasts, eg Airbus (2007), Boeing (2007)) allows a simplemodel of aggregate fleet characteristics to be constructed. This in turn allowsthe general effects of policies which affect the fleet to be demonstrated, mostnotably the timescales involved. The model is currently implemented as ajava applet, and produces plots of various quantities (including size of fleet,average age, mean sample mission fuel burn) by aircraft type andfreighter/non-freighter status, for adjustable input assumptions. We restrictthe policies which may be implemented to a potential restriction on buyingolder technology, a potential requirement to retire older planes, and apotential change in the rate of technology development in this version. It isintended to make this model publically available. Screenshots from apreliminary version are given below.

7 Note that this may not be linear with retirement age, ie reducing the retirement age by 10 years willnot necessarily reduce emissions by 3.5%.


Figure 22: Screenshot of integrated java applet model: historical vs. model datafor mean aircraft age

In Figure 22 we show a sample comparison between historical data andmodel data. Shown in the top panel is the mean age of aircraft in the 190-299seat category including both freighters and passenger planes, over time. Theblack line represents actual historical data and the red line is the result of themodels developed in the previous sections. After 2007, the models togetherwith user-chosen scenarios for new aircraft demand and oil price are used toprovide projected data. In this case, the new aircraft demand projectioncorresponds to moderate growth (on average, around a 3.4 percent increasein global RPKM per year) superimposed with a cyclical trend to account forvariations in airline ordering (see Section 2.2.2), with no policies applied. Thenew aircraft demand projection for the aircraft size class shown is displayed inthe middle left panel, and the oil price scenario chosen in the middle rightpanel.


Figure 23 - Screenshot of integrated java applet model, comparing emissions forscenarios with fuel burn reductions per year for new models of aircraft of 1% and1.5%

In Figure 23 and 24 we show a pair of contrasting policies. Figure 23 showsthe effect in terms of CO2 emissions of increasing the future rate of fuel burntechnology development from the assumed base case of 1% per year (in kgfuel per RPKM) to 1.5%, for a given demand projection and oil price. Figure23 shows instead the effect of restricting airlines such that they can onlypurchase post-1995 technology after 2010. Whilst the second policy producesa much more rapid effect on the fleet emissions initially, its overall effect issmaller. In addition, after 2030, as the fleet is made up almost entirely ofpost-1995 technology both in the base and policy cases, the policy effects onemissions begin to decrease. Applying a one-off step-change in fuel burn perRPKM (such as would result from an individual technology program focusingon one particular idea) would have a similar effect. In contrast, applying anincreased rate of technology for a long period of time (the result of morevaried or less focused technology programmes) as in Figure 24 has a


cumulative rather than a time-limited effect, but comes into effect over alonger timescale.

Figure 24 - Screenshot of integrated java applet model: scenario in which airlinesare only allowed to purchase post-1995 technology after the year 2010


3 The fleet planning and investment appraisaldecision process

The factors that affect fleet replacement fit three main categories: regulatory,demand and supply side. Noise and emissions are two key regulatory factorsthat could directly affect operations through the compulsory retirement ofcertain noisy types and through the standards incorporated into newprogrammes. Airworthiness Directives may lead to certain types becominguneconomic to operate.

On the supply side, new programmes from aircraft and engine manufacturerscan result in step changes in technological advance or smaller changes thatcan be retrofitted to existing aircraft. The key economic variables areinvestment, fuel and maintenance costs.

On the demand side, airlines will require new aircraft for both replacementand expansion, depending on the following:

New routes Additional frequencies Larger aircraft size Replacement: end of economic life Attractive new and trade-in aircraft price Attractive economics/performance

This will in turn depend on strategic and competitive factors and the resultingmarket forecasts. These forecasts will underlie the supply of airline servicesand the schedule operated by the airline’s fleet.

It is impossible to predict how these factors will influence future aircrafteconomic lives. Hulten and Wykoff (1981) found no evidence of the earlyscrapping of industrial equipment as a result of higher energy prices, butairlines react to this by utilising fuel-inefficient aircraft less. The timing ofeconomic cycles will also be important, a major downturn leading to a sharplyreduced demand for aircraft. In this situation, airlines either retire old aircraftearly, or defer the introduction of, or ground, newer types. The starting pointto arrive at aircraft lives is to examine past behaviour.

3.1 Aircraft acquisition for market growth

Over the past ten years, the network airlines’ average seats operated perflight has scarcely increased, either on short or long-haul sectors. This meansthat market growth was largely absorbed by similar sized aircraft operatingmore frequently, and aircraft were replaced at the end of their economic lifeby ones of similar size. Frequency competition remained a priority for shorter


sectors, and even on many long-haul sectors, where some airlines evendownsized from larger B747s to smaller B767/B777 or equivalent Airbusaircraft.

In other words, to provide more capacity on a given route, an airline canconsider increasing service frequency and/or increasing the size of aircraftemployed on the route. The choice is clearly influenced by the airline’s fleetof aircraft and network demands on those aircraft. A further, strategic,consideration is in the stimulation of demand expected from increasingfrequency.

The way three major, competing carriers on a heavily contested transatlanticroute handled capacity growth illustrates this. American Airlines, BritishAirways and Virgin Atlantic all operated between London’s Heathrow airportand New York’s JFK between 1997 and 2008 (see graphs in Appendix 5).During this period both the two UK airlines increased their seat capacities onthe route significantly, but the number of seats offered by Americanmaintained relatively constant over the period, as did the average frequencyof service offered. Virgin’s seat-offer on the route was up almost sixtypercent over the period, while BA increased its capacity by just under forty-five percent.

Virgin, the smaller of the players, achieved its growth by effectively doublingthe frequency of its services from twice daily to four times each day, butreducing the average capacity of aircraft employed on the route from close to450 seats to 350 seats.

On the other hand, British Airways, already the dominant airline in terms offrequency and overall capacity, chose to employ larger aircraft (averaging anextra one hundred seats per flight by 2008) on the route while increasingfrequency over the period by only twelve percent.

Quite clearly, British Airways’ decision was influenced by opportunity costconsiderations in allocating available slots across its wide network. Operatingseven frequencies a day on the route in 1997, it was content to increase theproportion of B747 aircraft on the route as a means to increase capacity.Virgin Atlantic was freer, in network terms, to boost market share byallocating more of its slots to the transatlantic service while employingsomewhat smaller, Airbus A340 aircraft.

3.2 Aircraft economic life

The length of time aircraft in the fleet are operated depends on theireconomic life:


‘The period of time over which it is expected to be physically andeconomically feasible to operate both aircraft and engines in theintended role.’ US Court decision, 2006

The economic life will depend on the availability of new aircraft from themanufacturer offering sufficiently good economics, and existing aircraftbecoming too expensive to operate. Some aircraft programmes’ life becomecurtailed through the production of aircraft which are significantly moreeconomic to operate (eg the Lockheed Tristar). Existing aircraft may becomerelatively uneconomic through fuel price increases and fuel efficiencydeterioration, labour and maintenance cost escalation, utilisation deterioration(reliability, maintenance), become environmentally less acceptable (noise,emissions), or a combination of these.

British Airways’ first B747, the B747-136 model, was retired after 102,570flight hours and 22,161 landings (cycles). This was acquired in May 1970,and left the fleet in 1998, after 28 years. Thus, this aircraft was beyond itsexpected service life, although below its fatigue test life, according to theBoeing estimates in Table 2, but it probably averaged considerably fewercycles per year than the 2,000 used by Boeing for long-haul types. BritishAirways recorded an average of only 374 cycles per B747-200 aircraft (a typeused on similar sectors to the B747-100) in 2001 (CAA, 2002). Applying thisfigure to the Boeing flight cycle service life cycles would result in a service lifeof over 50 years!

Table 2 - Aircraft life estimates

AircraftService Life

(flight cycles)Equivalent

years*Fatigue Test(flight cycles)

Equivalentyears*

B707 20,000 10.0 50,000 25.0B727 60,000 15.0 170,000 42.5B737 75,000 18.8 150,000 37.5B747 20,000 10.0 40,000 20.0B757 50,000 12.5 100,000 25.0B767 50,000 16.7 100,000 33.0B777 44,000 22.0 60,000 30.0

* assuming 2,000 cycles per year for a long-haul type and 4,000 cycles for a short/medium-haul typeSource: Boeing Airliner April-June 1996

Boeing has also increased the structural life of two fuselage sections of thederivative B747-400 to 40,000 cycles (Table 2) and 60,000 cyclesrespectively. This follows fatigue tests on those parts of the airframe, whichhad been considerably improved in design from the original B747-100.Boeing are confident that current production aircraft ‘have significantlyimproved structural performance. They are more durable, damage tolerant,and corrosion resistant than the previous-generation airplanes’.8

8 Boeing Airliner, April-June 1996.


Lives can be extended by re-engining, possibly to meet new noise regulations,and investments will in any case be required over the life of the aircraft inmandatory modifications or optional retrofits. The life of the BA B747-100might also have been extended by conversion to freighter use, although sucha conversion would not have been economic with that particular type, whichwas too noisy for night movements at many airports.

What is the expected economic life of jet aircraft? The Boeing assumptions forits 20 year global aircraft forecasts in terms of aircraft service life (includingpossible life as a converted freighter) are:

Aircraft designed before 1980: Single aisle: 25 yearsTwin aisle: 28 years

Aircraft designed after 1980: Single aisle: 28 yearsTwin aisle: 31 years

They assumed a service life of 35 years or more for freighter aircraft.9 Thebasis for assuming longer lives for widebodied jets is their longer hauloperation and less stress and wear and tear because of a lower number oflandings.

Airbus uses various default ages for aircraft replacement from passengerservice, depending on world region. Their world average was 24 years, withNorth America being 25 years, Western Europe 22 years and Asia/Pacific 20years.10

Some analysts assume an economic life of four D check periods. The D checkis the major maintenance event that takes an aircraft out of service foraround one month. As an aircraft ages, these are likely to throw up agrowing number of unscheduled maintenance needs, in addition to mandatorychanges from regulators. For a B737-300 the D check occurs at intervals of22,000 hours of operation or six years, whichever comes first. This wouldgive an economic life of 24 years or one based on hours. British Airways arestill operating B737-300s of more than 25 years, with D checks at currentaverage utilisation at year 22 and 33. Southwest’s oldest B737-300s averageover 3,000 hours per year and would thus require D checks at between 6 and7 yearly intervals.

Monarch Airlines retired four B757-200s in 2008, all 25 years old, with around85,000 hours (over 3,000 hrs pa) and just over 31,000 cycles. The two withthe lowest number of cycles are to be converted to express parcels freighters,but the other two higher cycle aircraft will probably be broken for spares.Interestingly, their maintenance intervals (A checks) were originally 313hours/120 cycles, but the intervals were increased such that 600 hours/250cycles now applied to the 25 year old aircraft.

9 Boeing, Current Market Outlook, 1998.10 Airbus Industrie, Global Market Forecast, 1998-2017.


The UK Inland Revenue looked at all jet aircraft that were built between 1970and 1972 and still in service after 25 years.11 They found that, of those builtin 1970, 70% were still in service 25 years later, and that for all B737s thepercentage was 75% versus 72% for the B747. For the 1971 builds, the totalpercentage was the same, with B737s at 76% and B747s at 73%. For 1972models, the total still in service had risen to 74%, the B737s had climbed to91% and the B747s to 78%. These findings suggest that first the Boeingassumptions may be too low, and second there may not be empiricalevidence for expecting a longer life for the widebodies. Unsuccessful aircraftprogrames such as the HS Trident or the Mercure are exceptions to this, withthe Inland Revenue finding no Tridents in service beyond 15-16 years.

The Intergovernmental Panel on Climate Change (IPCC) report on aviationsuggested a typical time-history for a medium range commercial aircraft fromtechnology development and testing through to final retirement. This gave arange of 25 to 35 years for the aircraft in-service lifetime.12 This agrees withthe findings from our historical analysis of aircraft (section 2.4).

Somewhat more conservative assumptions were used for a joint EuropeanCommission and European Civil Aviation Conference (ECAC) working group onglobal aircraft emissions: older Chapter 2 aircraft were retired after 15-25years and newer Chapter 3 types between 20 and 30 years.13

Asset service lives are needed for estimates of capital assets and consumptionin national statistics. The Perpetual Inventory Method is based on theremoval of assets from gross asset stocks at the end of their lives, and muchwork has been done in certain countries on the lives of various types of asset.Table 3 summarises the estimates for aircraft that have been produced forthese statistics (OECD, 2001):

Table 3 - Aircraft service lives estimated for National Statistics

Life in years

Netherlands 25USA Post 1960 20USA Pre-1960 16Singapore 15Czech Republic 13

Source: OECD, 2001, p.47

In addition the German Statistisches Bundesamt reported that the GermanMinistry of Finance was in regular contact with firms concerning changes inasset lives, and this source noted that a number of changes had been made,

11 The author is grateful to Keith Wright of the Inland Revenue for providing this data, which was undertakenfollowing the introduction of legislation in the UK in November 1996 that gave capital allowances of only 6% forassets with lives of over 25 years, as opposed to the 25% allowed for shorter life assets.12 Aviation and the Global Atmosphere, IPCC, Cambridge University Press, 1999, p.224.13 ANCAT/EC2, Global Aircraft Emissions Investories for 1991/92 and 2015. ECAC/ANCAT and EC Working Group,1998.


and ‘with the exception of commercial aircraft, all are reductions’ (OECD,2001a, p.46).

Table 4 - Estimated useful lives for aircraft depreciation

Life in years

B747 10 to 25B767 15 to 22B757 10 to 20B737 5 to 20A300 10 to 22A310/320 10 to 22MD 80/81 12 to 20

Source: IATA/KPMG, 1992

A survey of Chief Financial Officers from 25 major international airlinesrevealed a wide range of aircraft useful lives summarised for selected aircrafttypes in the above table (IATA/KPMG, 1992). Those adopting shorter livessometimes depreciated aircraft to quite high residual values (up to 40% ofthe original cost for many of the types shown in Table 4).

3.3 New programmes from manufacturers

Economic life is also determined by the replacement aircraft’s economics. Ifaircraft available and still in production incorporate somewhat datedtechnology, an airline might wait for new programmes to be developed. Onthe other hand, the manufacturer is less likely to develop new programmes ifexisting ones are still selling well. That seems to be the case at the momentwith both the A320 and B737 families, particularly the former. Due tocompetition between the two major manufacturers each might wait until theother makes a move, or assume first mover advantages.

Programmes might also be delayed due to lack of suitable engine, or drivenby engine manufacturer advances. They would also certainly be driven byairline requirements (lower fuel costs, improved environmental features …), inother words the need to deliver greater fuel efficiency, lower maintenancecosts and improved noise and emissions at an affordable price. These are atleast 20% higher fuel efficiency, and aircraft price per seat at least matchingcurrent types.

In the absence of new programmes, technology on an aircraft may beupdated by retrofit:

Winglets for selected aircraft types (2-4% improved fuel efficiency; lowcapital cost)

Engine modification kits (CFM Tech package for -5B and -7B engineswith around 2-3% improvement in fuel burn)

Re-engining existing aircraft (Limited track record: B727-100/RR Tay orP&W and DC8/CFM56 with 18% better fuel burn)


A manufacturer may want to sell more from existing production line, but theremay be significant problems with upgrading existing lines (eg the problem offitting a larger engine under the B737 wing).

3.4 Existing aircraft performance deterioration

Existing aircraft may be subject to performance deterioration once they reach15-20 years. This may result in greater unscheduled maintenance but alsothe need to lease in aircraft to replace grounded aircraft. This would lead toa fall in annual hours per aircraft as an aircraft aged. Figure 25 seems toconfirm this with the critical period after 18-20 years. A similar pattern wasevident for Lufthansa and Air France, although British Airways’ B737-200sachieved a fairly consistent 2,000 plus hours per year up until their retirementin the late 1990s, with variations in utilisation more dependent on economiccycles than age.

Figure 25 - Cumulative block hours per day versus aircraft age: Southwest AirlinesB737-300

Source: ATI

Fuel efficiency may also deteriorate, with Boeing (1992) suggesting that fuelburn would be up to 6% higher for older aircraft. Similarly a new A320estimated to have 3% better fuel efficiency than older A320s.

The age effect on maintenance costs was researched in a Rand study: itfound that cost increases in years 1-6 were distorted by warranties, but foryears 6-12 costs increased by 3.5% pa, and years after 12 by only 0.7% a

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0

Aircraft age (years)

Avera

ge

blo

ck

ho

urs

per

day


year (Dixon 2006). This counter-intuitive result incorporates both airframe(where the deterioration occurs) and engines (showing little deteriorationassuming regular overhaul). Boeing’s research suggests a sharp rise in themaintenance costs maturity factor in the first 6-7 years (similar to the RandStudy), but then a flattening out of the curve to year 14 when the maturityfactor starts a linear increase to 1.25 at 25 years and 1.50 at 30 years (forpost 1980 aircraft). Thus from year 14 to 30, age related maintenance costswould increase at an average rate of 2.6% a year.


4 Modelling aircraft investment options

4.1 Modelling approach

This part of the research focuses the airline decision as to whether to replacean existing aircraft with a new one incorporating improved technology,environmental performance and fuel efficiency. Replacement with a usednewer generation aircraft would also be an option that could be assessedusing the models. Many airlines support such a decision with a similarmodelling process, and aircraft manufacturers also use such models to maketheir case for selling to potential airline customers.

The models will be based on a short/medium haul aircraft (narrowbodied)replacement and a small long-haul type. The two size categories consideredare the 150 seat (short/medium-haul) and 220 seat (long-haul), both innetwork carrier configuration.

The model compares investment and operating costs of the new aircraft withthose of the existing short-haul aircraft (for detailed estimates see Appendices6 and 7). The existing aircraft selected is a 150 seat A320 operated in theUS, the data obtained from the DOT Form 41 database (it could equally havebeen a B737-800). Various assumptions on fuel efficiency and price,maintenance costs and other factors are made for the replacement aircraftwhich is assumed also to have 150 seats in the same configuration as theexisting one. The long-haul aircraft selected was the B767-300 using thesame database (see Appendices 8 and 9).

The model allows a comparison on fuel burn and thus CO2 emissionsreductions and NPV lifetime costs. The age of the existing aircraft atreplacement and its market value at that point in time can be varied, alongwith the many other assumptions that go into the model. Otherenvironmental impacts such as noise and NOx were not considered.

Three factors will be important in determining whether emissions can bereduced in the short/medium term by early retirement and replacement ofowned aircraft: first the availability and efficiency of replacement aircraft, andsecond the age of existing aircraft. The second assumes that the retiredaircraft will be replaced, and the airline is not merely downsizing. The thirddepends on the aircraft having completed a sufficient number of hours andcycles to be able to spread the fixed costs of acquiring the aircraft type, andthe relationship between the replacement aircraft price and the residual valueof the retired aircraft.

Aircraft on operating lease can in theory be retired upon expiry of the leaseterm without penalty, although the lessor will normally try to offer anattractive lease rate to extend the lease period. Furthermore, high fuel prices


and emissions charges and taxes will tend to push up lease rates for fuelefficient aircraft and depress less efficient types such as the B737-300/400s.

The latest current technology aircraft available from Boeing are the B737NGseries, incorporating technology from the second half of the 1990s. The othermain manufacturer of these types, Airbus, offers A319s, A320s and A321snone of which currently have more economical replacements available,although the technology of the first of these dates from the late 1980s.14 Bythe time a replacement can be delivered, say in 2018, they would both be 3-8years away from the normal retirement age of 20-25 years. Earlier retirementwould depend on the timing and economics of the replacement aircraft for theA320/B737NG families. Using a simple fleet planning model, the net presentvalue cost advantages of replacement were estimated over various evaluationperiods and ages of existing aircraft in the fleet.

4.2 Key model assumptions

A critical assumption in the model is the future oil and jet kerosene pricescenario. Table 5 shows the baseline forecasts, maintaining the relationshipbetween aviation fuel and crude oil that existing in 2008. This ‘crack spread’has varied over past years, and has been somewhat higher than average inrecent years.

Table 5 - Oil and fuel price base case assumptions

Base year(2008)

2010 2015 2020 2025

Oil price: US$ perbarrel

107 85 100 120 140

Aviation fuel: US$ perUS gallon

3.41 2.71 3.19 3.82 4.46

Percent pa change 3.3 3.7 3.1

This base case was somewhat higher than the high scenario from the BERRforecasts (May 2008) with the 2008 price taken from IATA’s latest estimatefor the average aviation fuel price for the full year 2008.15

Table 6 - Oil and fuel price high case assumptions

Base year(2008)

2010 2015 2020 2025

Oil price: US$ perbarrel

107 100 120 140 160

Aviation fuel: US$ perUS gallon

3.41 2.71 3.19 3.82 4.46

Percent pa change 3.3 3.7 3.1

14 Newer aircraft of the same type would not give much advantage in terms of fuel efficiency.15 IATA is currently anticipating world airline fuel prices to be based on US$60 per barrel, which isconsistent with these base case projections.


The high case fuel price forecasts are shown in Table 6. These assume afaster recovery from the current economic recession. A further assumptionwas made of a US$30 per tonne CO2 tax or ETS premium. This addedroughly US$9 per barrel to both base and high fuel forecasts.

Other model assumptions included aircraft utilisation deterioration for existingaircraft from year 16 on, made up by wet leasing capacity (with no revenueloss). This ensures that the same market can be served by the two optionsand follows the discussion above (section 2.3). A fuel efficiency deteriorationfactor was also included after 15 years of operation of a new aircraft. Also asdiscussed above was the incorporation of a maintenance cost escalationfactor that is shown in the Tables 7 and 8.

Noise charges have not been included, partly because they are very airportspecific, and partly because they are only significant for older long-haul types.

Table 7 - Assumptions for operation of existing 150 seat aircraft (15 year old)

Base year Year 1-5 Year 6-10 Year 11-15 Year 16-20

Aircraft related:

Capital value Market value

Value depreciation pa As per Figure 26

Annual hours pa/change 3,000 0.0% -1.5% -2.0% -2.0%

Fuel costs:

US gallons/hour 767

Fuel burn deterioration pa 0.5% 0.5% 0.5% 0.5%

Fuel price (US$/gallon) see Tables 5 and 6 above

Maintenance costs:

Cost per block hour 821

Maintenance costescalation pa

2.5% 2.5% 2.5% 2.5%

It can be seen in Table 7 that the base case fuel efficiency improvement wastaken to be 25%, in line with ACARE and other predictions. Sensitivity testswere also applied using 15%, 20%, 30% and 35% better fuel efficiency. Linemaintenance for the new aircraft was assumed to be 15% below than the oneto be retired and all other maintenance costs 20% lower.

Maintenance costs are assumed to increase at increasing rates until year 15,after which point 2.5% a year is taken to be the upper limit. Thus theexisting 15 year old aircraft has already reached this level, and no furtherdeterioration is expected (Table 7).


Table 8 - Assumptions for operation of replacement (new) 150 seat aircraft

Baseyear

Year 1-5 Year 6-10 Year 11-15 Year 16-20

Aircraft related:

Capital value Market value (US$77m excluding spares etc)

Value depreciation pa As per Figure 26

Annual hours pa/change 3,000 0.0% 0.0% 0.0% -0.0%

Fuel costs:

US gallons/hour -25%

Fuel burn deterioration pa 0.0% 0.0% 0.0% 0.5%

Fuel price (US$/gallon) see Tables 5 and 6 above

Maintenance costs:

Cost per block hour 663

Maintenance costescalation pa

0.5% 0.5% 1.0% 2.5%

A small fuel burn deterioration was assumed from year 15, in spite of heavymaintenance and engine overhauls. This is justified by the ageing airframe,with engine overhaul returning fuel burn to almost new levels.

4.2.1 The discount rate

The discount used in the NPV calculations was based on the airline weightedaverage cost of capital (WACC), using realistic shares of debt and equity.This requires estimates of the risk-free rate, pre-tax cost of debt, the equityrisk premium and the airline equity beta. The latter can vary considerablydepending on the period of analysis (Morrell and Turner 2001). The CAA hasconducted a considerable amount of analysis into establishing the pre-tax realWACC for the London airports, recent estimates being 6.2% for Heathrow and6.5% for Gatwick (CAA 2007). Airline betas are likely to above those used forthese airports, such that the real WACC for a major EU airline might be 7-8%.

Discussions with an investment bank with a strong airline equity analysis teamtended to confirm the above assumption. They were currently using a WACCfor British Airways of 7.3% in nominal terms but thought this should beincreased. Subtracting inflation would then give a similar figure.

Lufthansa calculated their group and passenger airline WACC in the 2007Annual Report (Lufthansa Group 2008). This was apparently in nominalterms, and was 8.6% in 2003, rising to 7.9% in 2007.

Cash flows and the discount rate were both inflation adjusted.


4.2.2 Treatment of capital costs

The fleet model is an economic evaluation of various capital investmentchoices, and does not include financing alternatives. Therefore thisspecifically excludes operating or finance lease offers. The NPV analysis isapplied to cash flows, and thus capital costs are included in full upon aircraftdelivery.16 The existing (15 year old) aircraft has a book value depending onthe airline’s policy of depreciation, but this is not relevant to a cash flowanalysis. What is important is the aircraft’s opportunity cost which can betaken to its market value. This has been estimated from Figure 26, which isalso used to determine new and existing aircraft values 15 years later.

Figure 26 - Decline in second generation narrowbody jet aircraft values

Source: Robert Agnew, Morten, Beyer & Agnew, Presentation to MSDW EETC Conference 14March 2001

The existing 150 seat aircraft value for a 15 year old aircraft has been takento be 30% of the current new value of US$66m, including normal discountsand related spare parts. This value, less the present value of its residualvalue after 15 years, is taken to be the cost of capital tied up in the existingaircraft, which could also be viewed as the trade-in value on a replacement.

16 If the new aircraft were to be owned, or acquired on finance lease, pre-delivery payments would berequired. These have not been taken into account.


The market value of the new and old aircraft was estimated for each year toobtain the residual values at the end of the 15 year period that was taken forthe preliminary analysis. At this point the old aircraft would be 30 years old.This was done by assuming a 5% loss of value each year according to thehistorical trends in Figure 26. Also the MTOW of the new aircraft was takento be 15% below the existing type with the same seating capacity, givingadvantages in landing and ATC charges.

This analysis becomes complicated for scenarios that involve either areduction or extension in an aircraft’s economic life. If legislation forced theretirement of all aircraft at 20 years, the value of a 15 year old aircraft wouldbe much reduced. On the other hand some increase in its economic life fromthe 30 years used above should, other things being equal, increase its currentvalue.

4.3 Model results for short/medium-haul aircraftreplacement

The base case assumptions (fuel price forecasts discussed above and 25%improved fuel efficiency) produced a NPV benefit of US$28m beforeconsideration of capital costs. In PV terms these would be $66.4m for thenew aircraft less its residual value in year 15 of $7.2m or $59.2m. For the oldaircraft it would be $19.9m less the residual value of $1.4m, or $18.5m. Thusif the old could be sold for this amount, the net capital requirement would be$40.7m. This is assuming a discount on the new price of 25%.

Combining the operating and capital costs gives a project NPV of -US$12.8m,which suggests that the replacement should be rejected.17 This may seemsomewhat surprising, but fits in with decisions by airlines such as SAS not toreplace existing aircraft of 15-25 years vintage given the current aircraftmanufacturer offerings in terms of fuel efficiency. A negative NPV is evengenerated with high fuel price assumptions and a 35% improvement in fuelefficiency (see Appendix 10 for sensitivity tests). The result is of coursehighly sensitive to capital costs, especially new aircraft prices andmanufacturers’ discounts and the current trade-in values of existing aircraft.It is far less sensitive to assumptions on the future price of oil.

Figure 27 shows how sensitive the replacement decision is for a 15 year oldaircraft and a replacement aircraft of varying fuel efficiency improvements. Italso shows the importance of airline assumptions on future fuel prices.Adding an environmental ‘tax’ even at $100/t CO2 makes little impact on theproject’s NPV at current and likely future fuel prices. This assertion is based

17 A positive NPV adds shareholder value, assuming the investment costs can be raised in full at theweighted average cost of capital (WACC). Some airlines use the internal rate of return (IRR) to evaluatesuch investments, in which case the IRR should exceed the WACC.


on the results of various runs of the model found in Appendix 10: with thebase case fuel price forecasts and a 25% efficiency improvement, the NPV isnot significantly better, the negative value reduced from $12.8m to $11.6mfor a $30/t CO2 ‘tax, and from -$10.2m to -$8.9m for the high fuel pricescenario and a $100/t CO2 ‘tax’.

Figure 27 - Impact of fuel price forecast and fuel efficiency on replacementdecision for short/medium-haul aircraft

-25

-20

-15

-10

-5

0

-15 -20 -25 -30 -35

Replacement aircraft fuel efficiency improvement (%)

NP

V(U

S$m

)

Base oil price

High oil price

4.4 Model results for long-haul aircraft replacement

The base case assumptions (fuel price forecasts discussed above and 25%improved fuel efficiency) produced a NPV benefit of US$28m beforeconsideration of capital costs. In PV terms these would be $129.4m for thenew aircraft less its residual value in year 15 of $14.1m or $115.3m. For theold aircraft it would be $38.8m less the residual value of $2.3m, or $36.5m.Thus if the old could be sold for this amount, the net capital requirementwould be $78.8m. This is assuming a discount on the new price of 25%.

Combining the operating and capital costs gives a project NPV of -US$7.6m.A positive NPV is generated with base case fuel price assumptions and a 30%improvement in fuel efficiency, or with the high fuel forecasts and 25% betterfuel efficiency (see Appendix 11 for sensitivity tests). The result is of coursehighly sensitive to capital costs, especially new aircraft prices andmanufacturers’ discounts and the current trade-in values of existing aircraft.It is also sensitive to assumptions on the future price of oil.


Figure 28 shows how sensitive the replacement decision is for a 15 year oldaircraft and a replacement aircraft of varying fuel efficiency improvements.The replacement investment decision looks positive at fuel efficiencyimprovements of 25% and better, and significantly better than the results forthe short/medium-haul aircraft for each set of assumptions. Addingenvironmental ‘tax’ even at $100/t CO2 makes some impact on the project’sNPV at current and likely future fuel prices.

Figure 28 - Impact of fuel price forecast and fuel efficiency on replacementdecision for long-haul aircraft

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

-15 -20 -25 -30 -35

Replacement aircraft fuel efficiency improvement (%)

NP

V(U

S$m

)

Base oil price

High oil price

4.5 The NPV cost of obtaining emissions reductions

Another way of presenting the new aircraft replacement is in terms of theNPV cost of such reductions in fuel burn and thus emissions. This can becalculated as the NPV$ cost per tonne of CO2 saved over the evaluationperiod, which for the above cases was 15 years.

Figure 29 shows these costs at varying fuel efficiency improvements for bothshort/medium- and long-haul aircraft. These costs can be compared with theEU ETS market emissions allowance prices which have so far ranged fromvery low values to between €30 to €40 per tonne CO2 (US$40-53 at currentexchange rates). With aviation’s entry into the EU ETS, higher carbon priceshave been forecast, perhaps as high as $100 per tonne. At these levels,airlines would still have little incentive to replace short/medium-haul aircraft,even with substantial improvements in fuel efficiency. However, for long-haulaircraft replacement would now look interesting even with improvements inefficiency of 15-20%.


Figure 29 - NPV cost of emissions reduction by aircraft operations

-100

-50

0

50

100

150

200

250

300

350

-15 -20 -25 -30 -35

Fuel efficiency difference (%)

NP

VC

ost

(US

$)

per

ton

ne

CO

2saved

Short/medium-haul

Long-haul

4.6 Compulsory early retirement

One of the major low-cost airlines, easyJet, recently proposed that Europeangovernments remove almost 700 of the oldest, dirtiest aircraft from Europe’sskies by banning any aircraft built before 1990 from operating within theEuropean Union after January 1, 2012.18 The requirement would then rollforward each year, so no aircraft would operate in Europe older than 22 yearsof age. This would mean that about 20 per cent of Europe’s aircraft would beforced from the skies within five years, including freighter aircraft, which isoften where older aircraft end up.

The airline cited a precedent for such collective action. Today’s aircraft aretypically 75 per cent quieter than jets in the 1960s due to the prohibition ofthe noisiest aircraft types over the past 30 years. The removal of these lessfuel efficient aircraft is estimated by easyJet to give a reduction in emissionsof around 8%.

The aircraft belonging to the major EU airlines that would be candidates forearly retirement were listed by easyJet to be as follows:

Air France: 29 aircraft pre-1990 (ten Boeing 747s, 19 Airbus A320s)Alitalia: 29 (all MD82s)British Airways: 20 (three Boeing 737-300s, seven 747-400s, one 757,

three 767s, six Airbus A320s)

18 www.easyJet.com


DHL Air: 22 (all Boeing 757-200s)Jet2.com: 28 (21 Boeing 737-300s, seven 757-200s)KLM: 21 (ten Boeing 737-300s, five 737-400s,

six Boeing 747-400s)Lufthansa: 39 (15 Boeing 737-300s, six 747-400s, nine Airbus 300s,

nine 320s)SAS: 19 (all MD82s)

Source: AirCraft Analytical System

Early retirement can be modelled for the two types of aircraft operationsshown above. However, the market values of existing aircraft will clearly takea hit, and little guidance is available on its extent from previous behaviour. Itshould be assumed that early retirement should be agreed internationally soas not to favour particular countries and also to remove the possibility ofmoving the retired aircraft to other world regions. This was possible whenstrict noise rules were introduced in North America and Europe, and thus atthat time second hand values did not suffer very significantly.

Using the base case assumptions above on fuel price forecasts and a 25%improvement in fuel efficiency, an early retirement at 25 years (rather than30 years) has been modelled. This assumes all 25 year old aircraft arescrapped. Modelling a 15 year old aircraft over its remaining 10 years ofuseful life compared to replacing it at year 15 gives a NPV of -$15.2m and acost per tonne CO2 of $250. This result is highly dependent on the marketvalue of the existing aircraft which has been reduced from 30% of its originalcost to only 15% and a fall in residual value from 5% to zero. This reducesthe trade-in value of the existing aircraft and thus the desirability ofreplacement before the end of its life dictated by regulatory requirements.


5 Conclusions

5.1 Summary and main findings

The longer term reduction in CO2 emissions from aircraft depends on thespeed of application of new technology to the airline fleet and thus the rate ofimprovement in fuel efficiency over time. This study looks at the extent towhich factors such as high fuel prices, ETS allowance costs and other factorsmight influence this. It takes into account past behaviour in terms of fleetturnover as well as airline needs to obtain an economic return on the aircraftin their fleet.

First, a statistical analysis of past data of aircraft acquisition, modification andretirement was undertaken to identify general trends, resulting in a basicmodel for aggregate fleet emissions; and second, building a simplified airlinefleet planning model on the basis of which the economic viability of severaloptions can be illustrated, including the early retirement of aircraft and theintroduction of new technology into fleets, as well as alternative assumptionson future fuel prices and efficiency, maintenance costs and new replacementaircraft programmes.

The assessment of fleet turnover concentrated on three main aspectsaffecting global emissions: new aircraft purchases, changes to aircraft in thefleet, and retirements. The recent rapid growth in global aviation demand hasled to changes in fleet composition which are led mainly by aircraft enteringthe global fleet, rather than those leaving it. Airlines purchasing new aircraftfor a given purpose can choose from a range of aircraft models with differentfuel burn characteristics (as well as many other differing properties, egpurchase and maintenance costs). This decision has historically beenrelatively unaffected by fuel price when the selection of aircraft typesavailable remains constant, ie airlines are reluctant to incur costs fromswitching aircraft models or manufacturers for what may be a small decreasein relative fuel burn.

However, the mean fuel burn of new aircraft orders is strongly affected by theintroduction of new aircraft models with significantly lower fuel burn andemissions. This suggests that influencing the rate of technology developmentmight be a useful policy lever for reducing emissions via fleet turnover,whereas increasing fuel-related costs, eg via carbon trading, may have asmaller than expected effect.

In contrast, modifications to aircraft over the course of their lives havehistorically had little effect on global emissions. For example, the present-dayresult of all historical re-engining of aircraft has been to reduce global aviationCO2 emissions by 0.1 percent.


The analysis of aircraft leaving the global fleet suggests that aircraftretirements typically peak at an age of around 30 years. This value isrelatively unaffected by noise and local air quality regulations or by increasesin safety over time. However, there is some evidence it might be influencedby high fuel prices and the availability of new aircraft programmes. Forexample, 1960s-build narrow-bodied aircraft experienced faster retirementover the ages 15-25 years. Evidence for some decline in annual utilisation ofaircraft with age was also found.

Where possible, simple models have been specified for the relationshipsdescribed above. These have been combined in the form of a java applet,intended for public use, allowing the effects and timescales of some fleet-related policies to be demonstrated.

The above findings support the assumptions used in the fleet planning modelspresented in the second half of this study, which produce NPV costimplications of various fuel burn reduction scenarios that will be driven byhigh fuel prices, ETS and other policy options.

The fleet planning model provides a general framework for evaluating the NetPresent Value (NPV) advantages or costs of replacing aircraft of various ageswith new technology offering a significant improvement in fuel efficiency (ofbetween 15-35% compared to the best existing models of the same seatcapacity). The evaluation extends 15 years into the future with realisticresidual values adopted at the end of this period based on the past behaviourof aircraft values. Models were built for a short/medium-haul replacement ofaround 150 seats and a long-haul type of 220 seats.

The models were run using various assumptions for fuel prices (base and highcases), environmental taxes (US$30 per tonne CO2), and existing aircraft age(5 to 15 years). Ageing aircraft were penalised from lower annual utilisationand higher maintenance costs. The utilisation deterioration was addressedthrough the need to wet lease in equivalent hours in order to operate thesame schedule. For each model run the fuel and CO2 saving was aggregatedover the evaluation period and the NPV cost (or in some cases benefit) pertonne of CO2 was calculated.

The discount rate used in the NPV calculations was based on the airlineweighted average cost of capital (WACC), using realistic shares of debt andequity. This requires estimates of the risk-free rate, pre-tax cost of debt, theequity risk premium and the airline equity beta (using the Capital AssetPricing Model approach). The real WACC for a major EU airline was taken tobe 7-8%, with a base case assumption of 7%. Cash flows and the discountrate were both inflation adjusted.

We found that the substitution of new short/medium-haul aircraft for existingones is not a cost-effective option for reducing fuel burn and thus CO2

emissions at oil prices that are assumed to rise from current levels to US$85


per barrel in 2010 and $140 in 2025. Thus, policy measures (eg significanttax incentives) would be needed to induce the replacement. Long-haulaircraft substitution was more responsive to improved fuel efficiency and oilprices than short/medium-haul aircraft under similar sets of assumptions.

The NPV model sensitivity analysis provided a graph of the cost of reducingCO2 emissions by one tonne over the evaluation period versus thereplacement aircraft fuel efficiency improvement. Thus a 25% fuel efficiencyimprovement would cost US$135 per tonne of CO2 emissions saved for theshort/medium haul aircraft and US$26 for the long-haul type. This comparesto the highest EU ETS market price of carbon of around €30 or just under$40.

5.2 Related areas for future research

The focus of the above research has been on the airline fleet replacementdecision. Aircraft and engine manufacturers have provided new aircraft typesover the period studied and also some retrofit options for certain aircraft.However, there does not seem to be any pattern emerging as to the timebetween new programmes or aircraft upgrades. Furthermore, there is someindication of the importance of sticking to ‘families’ of aircraft from onemanufacturer.

It is thus recommended that the scope of the above study be expanded toexamine the role played by aircraft and engine manufacturers in the fleetrenewal and retirement process. Just an airline makes an economic decisionwith regard to aircraft acquisition, the manufacture needs a sufficient numberof expected sales to give it an adequate return on capital invested. Both theaircraft family concept and the ability to stretch an aircraft programmethrough successful upgrades needs researching in the light of environmentalconsiderations.

A further interesting avenue for future research would be the interactionbetween locally-applied policies and the global location of aircraft types. Inparticular, this could be combined with an extension in scope to a moredetailed consideration of aviation’s non-CO2 impacts and how these areaffected by aircraft acquisition, modification and retirement. For example,does the imposition of a policy phasing out specific aircraft types in Europeprompt their sale to Asia or Africa, or their early retirement? How is thisaffected by economic cycles and fuel prices? Given that aviation’s non-CO2

impacts may differ depending on the geographical location of the emissions,what overall environmental impact might we expect from applying such apolicy in one region of the world only?

Finally, this report has considered the effect of freighter aircraft only in a veryapproximate way. Although freighters make up only 10% of the fleet, theyare typically older aircraft with higher emissions than more modern


technology. In addition, belly freight can contribute a significant proportion ofthe weight of passenger planes. A more detailed examination of freighteraircraft might therefore shed some light on how to control emissions in whatis a rapidly-growing sector of aviation. For example, what factors govern thepurchase of new-build vs. converted freighters and how could the use of new-build freighters be encouraged? Would environmental advantages arise fromgreater use of belly freight? How does the asymmetry in air freight demand(e.g. US-China vs. China-US) affect fleet use and emissions? How have noiseregulations affected the composition and emissions of the freighter fleet, andhow might this behaviour change in a future in which policy levers focus oncruise emissions rather than local area environmental effects?


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Appendix 1 - Omega Environmental Aspects of AircraftFleet Turnover, Retirement and Life Cycle Workshop

BERR Conference Centre, 1 Victoria Street, London, SW1H OET

Wednesday 3 December 2008, 9.00am to 5.00pm

Objectives:

Explore airline factors influencing airline fleet replacement and the roleplayed by fuel efficiency and engine emissions

Discuss preliminary research findings from Cranfield/Cambridge team

0930 – 0945 Introduction and background

0945 – 1030 Environmental inputs to airline fleet planning,Olof Nittinger, Corporate Fleet Strategy and AircraftEvaluation, Lufthansa

1030 – 1130 Cranfield: factors influencing aircraft replacement,Professor Peter Morrell, Department of Air Transport,Cranfield University

Coffee/tea

1200 – 1300 Modelling the evolution of the global aircraft fleetDr Lynnette Dray, Institute for Aviation and theEnvironment, University of Cambridge

1300 – 1400 Lunch

1400 – 1500 The rate of absorption of new technology in airline fleetsJohn Blanchfield, Head of Technical Marketing, Airbus

Tea/coffee

1530 – 1700 Panel discussion


Appendix 2 - December 3, 2009, Workshop participants

The following attended the workshop, in addition to the research team fromCranfield and Cambridge:

Name Organisation/company Position

Speakers:

Olof Nittinger LufthansaCorporate Fleet Strategy andAircraft Evaluation

John Blanchfield Airbus Indsutrie Head of Technical Marketing

Steven Guo DVB Bank Aviation Industry Research

Gary Critchlow Ascend Aviation Analyst

Other participants:

Sara BandsteinSwedish Defence ResearchAgency Analyst

Richard Deighton Omega Project Manager

Gary Crichlow ASCEND

Max Suhhasamtikul Analyst

Richard Mills The Boeing Company Director for Strategic Analysis, UK

Ian Wilson - -

Martin Broadley British Airways Fleet Planning, Europe

Steven Guo DVB Bank Analyst

Aidan Harrison TUI Travel plc. Senior Leasing Manager

Ian Hall Consultant

Martyn Graham SBAC

Fazrul Roslan Aviation Economics Aviation Analyst

Magda Gregorova Eurocontrol STATFOR Forcaster & Analyst

Keith Maxted Virgin Atlantic Airways Ltd.Head Of Aircraft Acquisitions andReturns

Michael Mann Independent Consultant Economic consultant

Hal Calamvokis easyJet Airline Co Ltd Strategic Planning Manager

Aidan Harrison TUITravel plc Senior Leasing Manager

Peter Newton BERR

Julie Lane British Airways Corporate Responsibility Manager

Anna MahoneyStrategic Aviation SpecialInterest Group


Appendix 3 - Case Study of individual airline behaviour

In the analysis of historical fleet turnover in Section 2 we have concentratedon the aggregate behaviour demonstrated by the global fleet. However, thedata from this analysis also allows us to highlight the range of differences infleet usage and turnover between airlines. This appendix examines the fleetsof specific airlines, concentrating mainly on three airlines with differentbusiness models: Singapore Airlines, NorthWest and UPS. Rather thanproviding quantitative input for modeling, the purpose of this appendix is togive a qualitative idea of the variability in airline behaviour underlying themodels presented in the main report.

Whilst Singapore Airlines is an international and intercontinental carrier whichprefers to operate newer aircraft, NorthWest is a large US carrier with bothdomestic and international services and a primarily older fleet. UPS’s fleet isshaped by its role as an express cargo carrier, and mainly consists of ex-passenger aircraft which have been converted to freighters.

Figure A3.1: Aircraft owned and operated over time by NorthWest, SingaporeAirlines and DHL. Note that the large increase in NorthWest’s fleet in 1986 is dueto its merger with Republic Airlines.

Figure A3.1 shows the total number of aircraft owned and operated by eachairline since 1960. Note that the large increase in NorthWest’s fleet in 1986 isdue to its merger with Republic Airlines. Airlines have the choice of owning orleasing aircraft, depending on their business model and financial situation. Ascan be seen in Figure A3.1, NorthWest has tended, particularly since itsmerger with Republic in 1986, to operate more aircraft than it owns, i.e. asignificant component of its fleet is leased aircraft. After 2001-2002,NorthWest reduced its operating fleet primarily by getting rid of leasedaircraft. In contrast, Singapore Airlines owns more aircraft than it operates.This is due to a specific policy of purchasing new aircraft, operating them asSingapore Airlines aircraft for around 10 years, and then leasing them toother airlines. A more detailed examination of the Singapore Airlines fleet isshown in Figure A3.2. Each horizontal line represents an individual aircraftwhich was owned at some point during its life by Singapore Airlines, withmore recent purchases shown higher up the vertical axis. The line colouring


for a given year indicates the status of that aircraft in that year. Broadly,green colours indicate that the aircraft is associated with Singapore Airlines inthat year, whereas purple colours indicate that the aircraft was associatedwith some other carrier. In Figure A3.2 the green-coloured line segmentsappear primarily close to the starts of those lines, indicating that SingaporeAirlines has bought new aircraft and then sold them on or leased them afterabout 10 years of use. Also of note is the large number of aircraft which werestored (yellow segments) after the temporary market contraction in 2001-2002. These aircraft were primarily sold on after storage rather than beingreturned to service.

A similar analysis is shown in Figure A3.3 for NorthWest Airlines. Note againthat the large increase in NorthWest’s fleet in 1986 is due to its merger withRepublic Airlines. Unlike Singapore Airlines, NorthWest has tended to keepolder aircraft in operation (for example, many of the aircraft acquired in its1986 merger have only recently left the fleet, despite having manufacturedates in the 70s and early 80s). Most of the aircraft entering the NorthWestfleet between 1986 and 1996 were on lease rather than purchases, and it alsoappears to have operated some aircraft on a sale-and-leaseback basis. Thesebehaviours may be a function of the financial situation of NorthWest at thetime; a costly buyout by investment groups in 1989 incurred large debts forthe airline, and it was threatened with bankruptcy in 1993.

In contrast to the passenger airlines shown, cargo airlines do not have toimpress passengers and may seek to acquire aircraft for as low a cost aspossible. In Figure A3.4 a similar analysis is shown for all aircraft ever ownedor operated by DHL. As an express parcels carrier, DHL primarily operateswith converted passenger aircraft. The age of these aircraft at conversion istypically already 10-20 years or more, and they may change hands severaltimes after conversion. Thus when the aircraft enter DHL’s service they areusually at least 20 years old. DHL both leases many of its aircraft (includingone block of leased new aircraft shown at the top of the figure, acquired earlyin DHL’s history) and makes available some of the aircraft it owns for leasingby other airlines.


Figure A3.2: Aircraft ever owned by Singapore Airlines. Each horizontal linerepresents a single aircraft, from the time it was ordered to the time it wasretired. Ownership, order and lease status in a given year are indicated by linecolour.


Figure A3.3: As Figure A3.2, but for NorthWest Airlines.

Figure A3.4: As Figure A3.2, but for DHL.

As is shown in Figure A3.5, the different behaviour of the three airlines resultsin very different fleet age profiles. Singapore Airlines operates a consistently


young fleet, with average age of around 5 years. In contrast, NorthWest’smean fleet age has risen over the lifetime of the airline, as it chooses to keepand continue operating aircraft it already owns. The average age of DHL’sfleet is initially small due to its lease of a group of new aircraft early in the lifeof the airline, as shown at the top of Figure A3.4. However, after this time ithas tended to lease or purchase significantly older converted passengerplanes, leading to a mean fleet age of between 25 and 30 years. Assuming a(conservative) 1% per year decrease in CO2 emissions per RPK for newaircraft, this age difference suggests a representative aircraft in SingaporeAirlines’ fleet would have emissions around 25% lower than a similar sizeaircraft in DHL’s fleet. However, the real situation is less straightforward thanthis as DHL typically operates smaller, shorter-range aircraft than SingaporeAirlines.

Figure A3.5: Average age of operated aircraft with time, for NorthWest, SingaporeAirlines and DHL.

Finally, in Figure A3.6 and Figure A3.7 we show similar data for two othercarrier types: a pure low-cost carrier (Ryanair) and an African national airline(Kenya Airways). Ryanair’s behaviour is typical of many low-cost airlines:initially starting out with a small fleet of elderly second-hand and leasedaircraft, it expanded its fleet by ordering large numbers of new aircraft,resulting in a mean fleet age which has dramatically decreased over time.Whilst Kenya Airways also started up with a fleet of older second-handaircraft, its present-day fleet is a mixture of leased and new aircraft.


Figure A3.6: As Figure 22, but for Ryanair.

Figure A3.7: As Figure 22, but for Kenya Airways.


Appendix 4 - Detailed Model Specification

The main report on historical fleet behaviour (Section 2) includes a number ofresults from simple models for different aspects of fleet turnover specifiedfrom the available data. This appendix gives details of those models, includingthe functional form and any constants by aircraft type. Fleet turnover models(eg retirement curves) are given for the aircraft classes discussed in the mainreport (widebody, narrowbody, regional jet, turboprop and executive jet).However, for the java applet, in which emissions are modeled, weconcentrate on narrowbody, widebody and regional jet aircraft, for which wehave straightforward emissions data. In this case the narrowbody category inparticular contains a very wide range of aircraft with different uses. Thereforefor modelling we use categorization by numbers of seats rather than broadclass. Results are given below where calculated for both sets ofclassifications; it should be noted throughout that the results by number ofseats do not include turboprops.

A4.1 Sample Missions

The emissions for a given flight depend both on the aircraft type and themission characteristics. In particular, take-off and climb consume greateramounts of fuel than cruise and descent; therefore, shorter flights whichspend a greater proportion of their length in climb typically consume morefuel per RPKM than longer-haul ones. In addition, aircraft used for short-haultypically have fewer seats and often operate with lower load factors, againincreasing the fuel use per RPKM flown. The result of this is that values fortypical mission length, cruise flight level, load factor, reserve fuel requirementetc. are needed as input to the BADA database to determine the level ofemissions for a typical flight for a given aircraft type.

Table A4.1 - Sample missions used for determining emissions for different aircrafttypes.

Aircraft class Sample Mission Length(nm)

Sample Mission CruiseFlight Level

Regional/Executive Jet 400 FL250

Narrowbody 1250 FL320Widebody 3500 FL350

<100 Seats 400 FL250

100-190 Seats 1250 FL320

190-300 Seats 2250 FL350

>300 Seats 3500 FL350

Table A4.1 shows sample missions for the main aircraft classes whoseemissions were considered in this study. These missions were derived fromexamination of OAG schedule data (OAG, 2005), with regional jet data fromMozdzanowska (2004). For all sample missions a 70% weight load factor wasassumed. Reserve fuel (i.e. fuel carried beyond that needed to complete themission) was assumed to be 15% of total mission fuel. For some purposes a


finer control of mission length was necessary, in which case additionalcategories between the ones specified were included.

In calculating total emissions from demand predictions, it is also necessary toknow the utilization of aircraft, as well as their load factors. We assume thatutilization by aircraft type remains similar to past values. These values areobtained from the Aviation Link database, with missing values being filled inby similar aircraft types. Note that the database is not complete for all aircraftin terms of hours and cycles. We have not corrected for any bias this mightintroduce. For broad size categories, mean values for utilization and otheruseful quantities are:

Model Hours/day Cycles/day Hours/cycleMeanseats

Mean Order-DeliveryTime (years)

<100 Seats 4.28 3.55 1.21 59.7 1.09

100-190Seats

5.90 3.79 1.56 140.8 1.80

190-300Seats

8.44 2.81 3.00 235.8 2.49

>300 Seats 8.87 1.95 4.54 364.0 2.44

Historical load factors are taken from ICAO (2008). It is assumed that futureload factors remain at present-day levels.

A4.2 New Purchases by Fuel Burn

As detailed in Section 2.2.5, we model the mean fuel burn of new aircraftorders as a function of the lowest- (FBlower) and highest- (FBupper) availablefuel burn per RPKM for aircraft available to order:

)( lowerupperuppermean FBFBFBFB ,

Where is a constant which varies by aircraft type, but is typically around0.5. The historical upper and lower bounds for fuel burn with time are takenfrom BADA sample missions as detailed in section A11.1, with the start andend of orders for each aircraft type taken from the Aviation Link database. Aswe do not know the timing of future aircraft production runs or the fuel burnof those aircraft, we assume both FBlower and FBupper decrease at a user-specified rate per year (by default 1%) for years after the present day. Valuesof are given below. We include also values for the very narrow seatcategories shown in (100, 150, 200 and 300 seats). Standard errors are givenin brackets after values; all are significant at 95% apart from for the RegionalJet model, which is omitted below.


Narrowbody Widebody <100 Seats 100-190 Seats 190-300 Seats

0.52 (0.04) 0.53 (0.02) 0.81 (0.02) 0.54 (0.02) 0.59 (0.02)

>300 Seats 100 Seats 150 Seats 200 Seats 300 Seats

0.42 (0.03) 0.66 (0.03) 0.55 (0.04) 0.62 (0.03) 0.59 (0.03)

It is assumed that the distribution in fuel burn per RPKM for a given year is atriangular distribution with the mean value given by the equation above (notethat this means the peak of the distribution, which is not necessarily themean, is at (FBlower + FBmean + FBupper)/3). These aircraft are then introducedto the fleet after the application of the appropriate order-delivery time.

A4.3 Retirement Curves

Retirement curves take a logistic functional form, as specified in Section 2.4:19

taaretiredactive

active

eNN

N211

1

,

where Nactive and Nretired are the numbers of active and retired aircraft at aget, and a1 and a2 are constants given in the table below. In the case of the<100 seats and 100-190 seats categories, we model separate curves for themanufacture years 1960-64 and 1965-71 to account for early and slightly lateretirements respectively. Standard errors are indicated in brackets afterparameter values; all are significant at the 95% level. Note that the curves foraircraft classes which have also been investigated using the NPV model(section 4 of the main part of this study) are also adjusted slightly using aparametric model of the NPV model’s outputs to account for the effect onearly retirements of oil price and new technology availability. However, theeffect of this is usually small.

Model a1 a2 Adjusted R2

Narrowbody 5.10 (0.28) -0.184 (0.011) 0.88Widebody 6.64 (0.55) -0.230 (0.022) 0.95Regional Jet 3.98 (0.27) -0.135 (0.012) 0.73Turboprop 3.78 (0.21) -0.114 (0.008) 0.94Executive Jet 5.02 (0.36) -0.124 (0.013) 0.80<100 Seats (1960-64) 4.12 (0.58) -0.214 (0.028) 0.97<100 Seats (1965-71) 4.19 (0.48) -0.161 (0.019) 0.95<100 Seats (>1972) 5.03 (0.41) -0.165 (0.018) 0.92100-190 Seats (1960-64) 4.20 (0.55) -0.192 (0.024) 0.95100-190 Seats (1965-71) 4.36 (0.52) -0.136 (0.018) 0.94100-190 Seats (>1972) 6.03 (0.52) -0.211 (0.022) 0.97190-300 Seats 5.42 (0.47) -0.140 (0.018) 0.81>300 Seats 6.73 (0.55) -0.242 (0.022) 0.94

19 Parameters are specified slightly differently in Section 4.4 for ease of explanation, although the onesshown here are those estimated. For comparison with the factors mentioned in Section 4.4: a2=b, a1 = -bt0. Therefore the average lifetime of each aircraft type is given by t0 = -a1/a2.


A4.3.1 Safety-adjusted curves

As detailed in Section 4.1.3, for the narrowbody subtype we also estimateequations taking into account the effect of increased safety over time. Thenumber of destroyed aircraft Ndes with time is given by:

,

where q1 and q2 are extra constants, y is the manufacture year, and all otherquantities are as expressed in the retirement curves given in the previoussection. For narrowbody aircraft these parameters were as given in the tablebelow, for aircraft cohorts manufactured after 1964:

Model a1 a2 q1 q2Adjusted

R2

Narrowbody 5.70 (0.11) -0.188 (0.004) 0.319 (0.046) -0.235 (0.012) 0.95

Note that in use the corresponding number of retirements needs to beadjusted down slightly (by the ratio of planes never destroyed to the total) totake account of the fact that a destroyed aircraft cannot subsequently beretired. However, we do not use this equation in the integrated modelling asseparate curves are specified for different manufacture year groups instead.These implicitly include the effect of increased safety as well as that ofhistorical early retirements, so including a model of this form as well wouldresult in double-counting.

A4.4 Freighter Conversion

To account for the conversion of passenger aircraft to freighters over time,we use a similar model to that for retirements, in which the proportion ofactive aircraft which are freighters takes a logistic form:

,1

121 tff

active

freighters

eN

N

where Nfreighters is the total number of freighters which are active at age t, andf1 and f2 are estimated constants. Although this formulation does not addressat all the underlying economic forces affecting freight demand and freighterconversion, it is a reasonably accurate predictor of past behaviour given itssimplicity. Using it as a predictor of future behaviour implicitly assumes thatfactors such as the balance between parcel and bulk freight operators, and

1

21)1950(2

2

1

1

1log

a

taayq

retiredactive

des

e

ee

a

q

NN

N


the relative growth in freight and passenger demand, will remain in the sameapproximate range as past values. The constants f1 and f2 are given in thetable below for different size classes. We omit regional jets as they have notbeen around in large numbers for long enough to obtain a reasonable modelfor conversion, which often happens late in an aircraft’s lifetime. Similarly, weomit the <100 seat class as this has significant overlap with the regional jetclass.

Model f1 f2 Adjusted R2

Narrowbody -3.02 (0.18) 0.068 (0.007) 0.51Widebody -3.17 (0.11) 0.110 (0.011) 0.70Turboprop -1.53 (0.12) 0.048 (0.005) 0.39Executive Jet -5.80 (0.13) 0.129 (0.017) 0.65100-190 Seats -3.01 (0.23) 0.037 (0.010) 0.65190-300 Seats -4.80 (0.38) 0.165 (0.018) 0.71>300 Seats -2.27 (0.14) 0.079 (0.010) 0.55


Appendix 5 - UK airline seats and flights on London/NewYork, 1998 to 2008

Virgin Atlantic Airways seats and flights on London/New York route,1998 to 2008

50

100

150

200

250

300

350

400

450

50

100

150

200

250

300

350

400

450

VS seats per flight

VS flights per month

British Airways seats and flights on London/New York route, 1998 to2008

150

170

190

210

230

250

270

290

310

330

350

98

01

98

06

98

11

99

04

99

09

00

02

00

07

00

12

01

05

01

10

02

03

02

08

03

01

03

06

03

11

04

04

04

09

05

02

05

07

05

12

06

05

06

10

07

03

07

08

08

01

150

170

190

210

230

250

270

290

310

330

350

BA seats per flight

BA flights per month


Appendix 6Operating cost projections for replacement short/medium-haul aircraft (first 10 years)

Fuel efficiency improvement: 25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Equipment 150seater 150seater 150seater 150seater 150seater 150seater 150seater 150seater 150seater 150seaterAverage sectors per day per aircraft 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9Aircraft utilisation: hours per annum 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000Average block hours per day per aircraft 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2Average sector distance per aircraft (km) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000Annual capacity per aircraft (seat-kms x 1,000) 270,795 270,795 270,795 270,795 270,795 270,795 270,795 270,795 270,795 270,795Yield per passenger (US$) 0 0 0 0 0 0 0 0 0 0

CO2 emissions per annum (tonnes) 16,574 16,574 16,574 16,574 16,574 16,574 16,574 16,574 16,574 16,574

Average flight time (minutes) 100 100 100 100 100 100 100 100 100 100Fuel used per block hour 575 575 575 575 575 575 575 575 575 575Fuel US$ per gallon 3.41 2.71 2.71 2.80 2.89 2.99 3.08 3.19 3.29 3.40

Operating costs per annum (US$)Aircraft leaseHull insurance 796,950 757,103 717,255 677,408 637,560 597,713 557,865 518,018 478,170 438,323Fuel & oil 5,884,528 4,674,625 4,674,625 4,829,065 4,988,606 5,153,419 5,323,677 5,499,559 5,681,253 5,868,949ATC charges 1,614,385 1,614,385 1,614,385 1,614,385 1,614,385 1,614,385 1,614,385 1,614,385 1,614,385 1,614,385Landing and terminal navigation charges 2,233,903 2,233,903 2,233,903 2,233,903 2,233,903 2,233,903 2,233,903 2,233,903 2,233,903 2,233,903Airport passenger charge 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126Emissions charges (NOx) 25,816 25,816 25,816 25,816 25,816 25,816 25,816 25,816 25,816 25,816Airframe maintenance 1,303,650 1,310,168.25 1,316,719.09 1,323,302.69 1,329,919.20 1,336,568.80 1,343,251.64 1,349,967.90 1,356,717.74 1,363,501.33Engine Maintenance 684,000 687,420.00 690,857.10 694,311.39 697,782.94 701,271.86 704,778.22 708,302.11 711,843.62 715,402.84Ground Handling 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907

Total annual operating costs 21,073,265 19,833,452 19,803,593 19,928,223 20,058,005 20,193,108 20,333,708 20,479,983 20,632,120 20,790,312


Appendix 7Operating cost projections for existing short/medium-haul aircraft (first 10 years)


2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Equipment A320-200 A320-200 A320-200 A320-200 A320-200 A320-200 A320-200 A320-200 A320-200 A320-200Average sectors per day per aircraft 4.9 4.9 4.9 4.9 4.9 4.9 4.8 4.7 4.7 4.6Aircraft utilisation: hours per annum 3,000 3,000 3,000 3,000 3,000 2,955 2,911 2,867 2,824 2,782Average block hours per day per aircraft 8.2 8.2 8.2 8.2 8.2 8.1 8.0 7.9 7.7 7.6Average sector distance per aircraft (km) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000Annual capacity per aircraft (seat-kms x 1,000) 270,795 270,795 270,795 270,795 270,795 266,733 262,732 258,791 254,909 251,085Yield per passenger (US$) 0 0 0 0 0 0 0 0 0 0

CO2 emissions per annum (tonnes) 22,098 22,209 22,320 22,431 22,543 22,656 22,769 22,883 22,998 23,113

Average flight time (minutes) 100 100 100 100 100 100 100 100 100 100Fuel used per block hour 767 771 775 779 782 786 790 794 798 802Fuel US$ per gallon 3.41 2.71 2.71 2.80 2.89 2.99 3.08 3.19 3.29 3.40

Operating costs per annum (US$)

Aircraft wet lease 0 0 0 0 0 315,000 625,275 930,896 1,231,932 1,528,453Hull insurance 239,085 231,000 184,800 138,600 92,400 46,200 46,200 46,200 46,200 46,200Fuel & oil 7,846,038 6,263,998 6,295,318 6,535,818 6,785,506 6,939,061 7,096,092 7,256,676 7,420,894 7,588,829ATC charges 1,751,046 1,751,046 1,751,046 1,751,046 1,751,046 1,724,780 1,698,909 1,673,425 1,648,324 1,623,599Landing and terminal navigation charges 2,301,574 2,301,574 2,301,574 2,301,574 2,301,574 2,301,574 2,301,574 2,301,574 2,301,574 2,301,574Airport passenger charge 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126 3,791,126Emissions charges (NOx) 30,582 30,582 30,582 30,582 30,582 30,123 29,671 29,226 28,788 28,356Airframe maintenance 1,608,000 1,648,200 1,689,405 1,731,640 1,774,931 1,819,304 1,864,787 1,911,407 1,959,192 2,008,172Engine Maintenance 855,000 876,375 898,284 920,741 943,760 967,354 991,538 1,016,326 1,041,734 1,067,778Ground Handling 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907 4,738,907

Total annual operating costs 23,161,358 21,632,808 21,681,043 21,940,035 22,209,832 22,673,431 23,184,079 23,695,764 24,208,672 24,722,994


Appendix 8Operating cost projections for replacement long-haul aircraft (first 9 years)


2008 2009 2010 2011 2012 2013 2014 2015 2016

Equipment 220 seater 220 seater 220 seater 220 seater 220 seater 220 seater 220 seater 220 seater 220 seater

Average sectors per day per aircraft 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1Aircraft utilisation: hours per annum 4,380 4,380 4,380 4,380 4,380 4,380 4,380 4,380 4,380

Average block hours per day per aircraft 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0Average sector distance per aircraft (km) 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500

Annual capacity per aircraft (seat-kms x 1,000) 579,862 579,862 579,862 579,862 579,862 579,862 579,862 579,862 579,862

CO2 emissions per annum (tonnes) 50,477 50,477 50,477 50,477 50,477 50,477 50,477 50,477 50,477

Average flight time (minutes) 349 349 349 349 349 349 349 349 349

Fuel used per block hour 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200Fuel US$ per gallon 3.41 2.71 2.71 2.80 2.89 2.99 3.08 3.19 3.29


Aircraft leaseHull insurance 1,552,500 1,474,875 1,397,250 1,319,625 1,242,000 1,164,375 1,086,750 1,009,125 931,500

Fuel & oil 17,922,110 14,237,190 14,237,190 14,707,555 15,193,461 15,695,419 16,213,962 16,749,635 17,303,006

ATC charges 3,739,401 3,739,401 3,739,401 3,739,401 3,739,401 3,739,401 3,739,401 3,739,401 3,739,401Landing and terminal navigation charges 1,174,521 1,174,521 1,174,521 1,174,521 1,174,521 1,174,521 1,174,521 1,174,521 1,174,521

Airport passenger charge 2,319,447 2,319,447 2,319,447 2,319,447 2,319,447 2,319,447 2,319,447 2,319,447 2,319,447Emissions charges (NOx) 10,769 10,769 10,769 10,769 10,769 10,769 10,769 10,769 10,769

Airframe maintenance 2,808,456 2,822,498.28 2,836,610.77 2,850,793.83 2,865,047.79 2,879,373.03 2,893,769.90 2,908,238.75 2,922,779.94Engine Maintenance 714,816 718,390.08 721,982.03 725,591.94 729,219.90 732,866.00 736,530.33 740,212.98 743,914.05

Ground Handling 2,899,309 2,899,309 2,899,309 2,899,309 2,899,309 2,899,309 2,899,309 2,899,309 2,899,309

Total annual operating costs 33,141,329 29,396,400 29,336,480 29,747,013 30,173,175 30,615,480 31,074,459 31,550,659 32,044,647


Appendix 9Operating cost projections for existing long-haul aircraft (first 9 years)


2008 2009 2010 2011 2012 2013 2014 2015 2016

Equipment B767-300 B767-300 B767-300 B767-300 B767-300 B767-300 B767-300 B767-300 B767-300

Average sectors per day per aircraft 2.1 2.1 2.1 2.1 2.1 2.0 2.0 2.0 2.0Aircraft utilisation: hours per annum 4,380 4,380 4,380 4,380 4,380 4,336 4,293 4,250 4,207

Average block hours per day per aircraft 12.0 12.0 12.0 12.0 12.0 11.9 11.8 11.6 11.5Average sector distance per aircraft (km) 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500

Annual capacity per aircraft (seat-kms x 1,000) 579,862 579,862 579,862 579,862 579,862 574,063 568,322 562,639 557,013Yield per passenger (US$) 0 0 0 0 0 0 0 0 0

CO2 emissions per annum (tonnes) 67,302 67,639 67,977 68,317 68,659 69,002 69,347 69,694 70,042

Average flight time (minutes) 349 349 349 349 349 349 349 349 349Fuel used per block hour 1,600 1,608 1,616 1,624 1,632 1,640 1,649 1,657 1,665

Fuel US$ per gallon 3.41 2.71 2.71 2.80 2.89 2.99 3.08 3.19 3.29


Aircraft wet lease 0 0 0 0 0 306,600 610,134 910,633 1,208,126

Hull insurance 465,750 231,000 184,800 138,600 92,400 46,200 46,200 46,200 46,200

Fuel & oil 23,896,146 19,077,835 19,173,224 19,905,698 20,666,156 21,241,108 21,832,056 22,439,445 23,063,732ATC charges 4,055,950 4,055,950 4,055,950 4,055,950 4,055,950 4,015,391 3,975,237 3,935,484 3,896,130

Landing and terminal navigation charges 1,245,573 1,245,573 1,245,573 1,245,573 1,245,573 1,245,573 1,245,573 1,245,573 1,245,573Airport passenger charge 2,650,796 2,650,796 2,650,796 2,650,796 2,650,796 2,650,796 2,650,796 2,650,796 2,650,796

Emissions charges (NOx) 12,757 12,757 12,757 12,757 12,757 12,629 12,503 12,378 12,254Airframe maintenance 3,438,300 3,524,258 3,612,364 3,702,673 3,795,240 3,890,121 3,987,374 4,087,058 4,189,235

Engine Maintenance 893,520 915,858 938,754 962,223 986,279 1,010,936 1,036,209 1,062,114 1,088,667Ground Handling 3,313,496 3,313,496 3,313,496 3,313,496 3,313,496 3,313,496 3,313,496 3,313,496 3,313,496

Total annual operating costs 39,972,288 35,027,522 35,187,714 35,987,767 36,818,646 37,732,850 38,709,578 39,703,178 40,714,209

Cranfield University & University of Cambridge, Draft Final Report 1-09

Appendix 10 - Summary of short/medium-haul (A320)replacement model

Base year (08) 2010 2015 2020 2025BASE CASE OIL PRICEOil price (US$/barrel crude) 107 85 100 120 140HIGH OIL PRICEOil price (US$/barrel crude) 107 100 120 140 160

BASE CASE OILNew aircraft discount (%) 25Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -19.5 -16.2 -12.8 -9.5 -6.2

CO2 emissions (t) saved over yrs remaining 61,576 78,152 94,724 111,299 127,871

NPV$ cost per tonne CO2 emissions saved -317 -207 -135 -85 -48

HIGH OIL PRICENew aircraft discount (%) 25Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -18.0 -14.1 -10.2 -6.2 -2.3



BASE CASE OIL + US$30/t CO2 tax

New aircraft discount (%) 25Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -18.8 -15.2 -11.6 -8.0 -4.4



HIGH OIL PRICE + US$100/t CO2 tax

New aircraft discount (%) 25Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -17.3 -13.1 -8.9 -4.7 -0.5



Cranfield University & University of Cambridge, Draft Final Report 1-09

Appendix 11 - Summary of long-haul (B767-300) replacementmodel

Base year (08) 2010 2015 2020 2025BASE CASE OIL PRICE

Oil price (US$/barrel crude) 107 85 100 120 140HIGH OIL PRICE

Oil price (US$/barrel crude) 107 100 120 140 160

BASE CASE OIL

New aircraft discount (%) 25Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -28.0 -17.8 -7.6 2.6 12.7


NPV$ cost per tonne CO2 emissions saved -149 -75 -26 8 33

HIGH OIL PRICENew aircraft discount (%) 25Aircraft life (years) 30

Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -22.8 -10.8 1.2 13.2 25.2


NPV$ cost per tonne CO2 emissions saved -122 -45 4 39 65

BASE CASE OIL + US$30/t CO2 tax

New aircraft discount (%) 25

Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -25.5 -14.6 -3.6 7.4 18.4


NPV$ cost per tonne CO2 emissions saved -136 -61 -12 22 47

HIGH OIL PRICE + US$100/t CO2 tax

New aircraft discount (%) 25

Aircraft life (years) 30Number of years of evaluation 15 15 15 15 15Existing aircraft age (years) 15 15 15 15 15Fuel efficiency difference (%) -15 -20 -25 -30 -35NPV @ 7% (US$m) -20.3 -7.5 5.3 18.1 30.9


NPV$ cost per tonne CO2 emissions saved -108 -32 18 53 79

environmental aspects of fleet turnover, retirement and...

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