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The Civil Aircraft Market: An Examination of the Replacement Order Cycle and the Used Aircraft Market
Published online by Cambridge University Press: 04 July 2016
Extract
The aviation industry over the past twenty years has experienced rapid growth and also considerable fluctuations about this growing trend. It is fluctuations about this trend, even though they may be of relatively short duration, which make or break airlines. In Table I(a) for instance, are shown the fluctuations about the trend of fares, load factor, international airline operating projects, aircraft investment and output. The institutional structure within which air travel operates is shown by the small variation in fares, while aircraft investment and profits show wide fluctuation. Reference to the last three columns shows the synchronised cycle in aircraft producer profits. We shall enquire into some possible courses of these fluctuations, and then examine the consequences of these fluctuations on used aircraft prices and financial performance of the airlines.
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- Copyright © Royal Aeronautical Society 1971
References
Notes
Page 493 note (1) See the footnotes to Table I(a) for details of the calculation of these figures.
Page 493 note (2) The paper contains research which is being undertaken into the fluctuations in the civil aircraft market. A number of models explaining the post-war order-delivery cycle are being explored, the replacement-order model presented in the first section is one part of the research which has been completed.
Page 494 note (1) For a development of these models see R. Frisch: Theory of Production, Chapters 16-18.
Page 497 note (1) Second owner here refers to owners other than first owners. Hence the airline scrapping could in fact be the third, fourth or fifth owner, etc.
Page 497 note (2) For details of the data used see Appendix I.
Page 497 note (3) If scrapping necessitates replacement, then during a slump scrapping is likely to be delayed. Of course scrapping is encouraged if it can be undertaken without replacement. We suggest that the latter condition generally prevails.
Page 497 note (4) The orders for large and medium sized aircraft are the orders considered. This is to compare with the data we have on scrapping, which is for large and medium sized aircraft.
Page 497 note (5) The total fleet of large and medium sized aircraft in 1962 was 2353. Therefore in the heaviest year of scrapping, the percentage scrapped was only 3·9% of the total stock.
Page 498 note (1) The literature with respect to used commodities has so far been scarce. The following studies have dealt with the demand for used goods in a general manner: A. H. Fox. A Theory of Second Hand Markets, Economico (new series) Vol. 24, February 1957 and H. L. Miller A note on Fox's Theory of Second Hand Markets, Economico, August 1960. K. J. W. Alexander. Markets in Second Hand Goods, Lloyds Bank Review, July 1970. Mr. Farre. The Demand for Motor Cars in the US, Journal of the Royal Stats Society, Series A 1959 dealt specifically with the used prices of motor vehicles, but this was bedded in the larger study of car demand.
In the case of AIR there has been one major theoretical study, that of S. P. Sabotka and C. Schnabel: Linear Programming as a Device for Predicting Market Value: Prices of Used Commercial Aircraft 1959-65, The Journal of Business, 1961.
Page 499 note (1) The number of one-year-old aircraft in 1968 will depend upon the number supplied in 1967 minus those that crashed.
Page 499 note (2) Of course if the commodities are similar it is possible to aggregate them together and to exclude differences in ages. However, an examination of the price data suggest quite marked differences in price according to age. Furthermore, such an aggregation would involve even more difficulties over aggregating indices.
Page 499 note (3) See Appendix I for details.
Page 499 note (4) In making these estimated sales we performed the following exercise. We calculated the departure probability on those aircraft for which we had detailed data, related these estimates to the production data on types for which we had no detailed sales information and obtained the expected sales. These aggregate sales for the differing ages of aircraft were obtained for each year, and the data on prices related to them. Unfortunately time series estimates could not be calculated, and instead cross section estimates for 1962/63/64 were obtained. These price flexibility coefficients, after transformation (only price was included as an independent variable), yielded elasticities.
Page 499 note (5) See the next section for details
Page 500 note (1) An income measure was not included because of data limitations. We would have required a measure of the income of second rank airlines. Although this is available for the US, the division of front and second rank airlines is not available in sufficient detail for the rest of the world.
Page 500 note (2) Journal of Business, 1961
Page 501 note (1) Technology here refers to the introduction of the latest aircraft and not just to the durability of an aircraft as in the curlier section
Page 501 note (2) See M. H. Peston: Public Utility Pricing: The Case of North Sea Gas. Essays in Honour of Lord Robbins (ed. B. Corry).
Page 501 note (3) The situation with respect to depreciation in the US domestic market created considerable controversy in the 1950s. This is illustrated by the comments made on the 1957 CAB hearings in the Suspended Passenger Fare Increase Case, reported in Aviation Week, September 2, 1957. The airlines were pushing for a 6% emergency fare increase. The policy on depreciation recommended by the Bureau of Air Operations was one of a seven-year life and a 10% or 15% residual value. CAB witness, H. H. Schneider testified: “The depreciation allowance which the carriers have been charging for postwar piston engines have borne little, if any, direct relationship to the actual depreciation expense… . At the present time, there is no indication that the market for modern piston engine aircraft will change significantly.”
Page 502 note (1) For a study of the effects of the new capacity on the American industry see: CAB Impact of New Large Jets on Air Transport System 1970-73, November 1969.