| Summary: | This research sets out to determine whether there is a best way to perform
aircraft investment analysis. The question of best practice is found to be
linked to corporate ownership: world airline shareholding patterns are
identified and linked to investment analysis practices, and to airline financial
performance over the last aviation cycle.
A key weakness identified by surveying airline practice concerns the treatment
of uncertainty in the financial analysis. This research critically examines the
state of practice regarding treatment of uncertainties embedded investment
valuation assumptions, in airline fleet planning around the world, and
proposes structured application of advanced analytical techniques to valuation
in today’s world of volatile and diverse aviation markets.
The assumptions underlying valuation are embedded in modern financial
theory, which has been developed and tested over the last century. The
validity and usefulness of financial valuation models is examined from both
theoretical and practical perspectives, and the state of practice regarding
these models in the airline industry is established, both quantitatively through
survey research, and qualitatively through aviation executive interviews in the
field. This combined approach has allowed the establishment of ‘paradigms’
characterizing the concrete application of financial theory to the question of
aircraft investment.
Regional patterns of airline shareholding are identified in a detailed analysis of
ownership structure and business models. The resulting governance typology
is analyzed in aggregate, and associated with production, and profitability by
region. The tendency of each airline ownership type to use modern financial
valuation techniques has to some extent been established by applying survey
results to the different regions.
The fleet planning process and the positioning of investment valuation within it
is discussed, and key uncertainties underlying fleet planning assumptions are
identified and mapped in a risk map framework. A method for strategic
analysis of fleet financing alternatives is derived from classical theory, and
applied to the specifics of the aircraft market.
The uncertainties surrounding several key modelling assumptions are found to
be substantial in the minds of today’s fleet planners, and the assessments of
uncertainty vary substantially between airline fleet planners and third-party
advisors. The identified practices in applying classical financial theory are
found to be strikingly inadequate in treatment of these uncertainties.A model is developed for valuing the acquisition of aircraft under uncertainty,
using extensions of the classical financial framework entailing more advanced
quantitative techniques. The model’s application to a specific analytical
situation analysis show that investment valuations under deterministic models
are contradicted when applying uncertainty to key uncertainties present in
today’s markets, and a process that yields insights beyond classical finance is
proposed.
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