4/14/2011

COC and DOC

Scott Hamilton wondered about changing messages from Boeing regarding operating cost comparison between the 737-800NG and the A320/A320neo.
Indeed the numbers Boeing told to the public were a little bit confusing. But when you look carefully what they really talked about, the picture gets clearer:
Let's begin with the situation we have today: Boeing says the 737-800NG is 8% better than the A320. This is probably a fairly accurate statement when you talk about COC per seat. COC or "cash operating costs" are the costs the airline pays for flying the aircraft from point A to B: fuel costs, maintenance costs for aircraft and engine, crew costs, landing fees, navigation charges. But as the 737-800NG has, in a typical layout, 162 seats compared to 150 seats in the A320, and the difference is - coincidentally or not - exactly 8%, the COC per trip should be right on-par between the two aircraft. That can be explained by the fact that the A320 is a little bit heavier than the B737-800NG, but the engines of the A320 have a better SFC, so that fuel burn should end up in the same range. Maintenance costs for the CFM56-7B and -5B should be not very much different also, maintenance costs between the two aircraft should also not be a decisive factor.
So for now let's assume:

 B737-800NG     A320
seats    162      150
COC per trip    100%     100%
COC per seat    100%     108%


Now the "neo" comes into play. But before the "neo", Airbus will gain 3 seats in the A320 through a new galley design, as we saw at the media briefing day last week.
The "neo" engine are advertised to save 15% fuel, at least when combined with the sharklets, which will be introduced before.
Also, these engines are advertised to have 20% lower maintenance costs.
Now: how much is that worth? First, we have to establish a certain mission we want to look at, as for a long flight fuel costs represent a larger pie of the (cost) cake than for a short flight. For our study let's assume a 500nm mission.

Even now, the question how much 15% lower fuel burn and 20% lower engine maintenance costs are worth in COC largely depends on the cost of fuel:
  • At $1.50 per gallon you can assume that the fuel costs are one third of the COC. Engine maintenance costs would be in the 10% range.
  • At $3.00 per gallon fuel costs are about 50% of COC and engine maintenance costs are more in the 6-7% range.
Right now we are at $3.20 per gallon, so let's assume the $3.00 per gallon numbers. Then the new engines save 7.5% per the lower fuelburn (50%*15%) and 2% per the lower maintenance costs (10%*20%).

Now we have:
 B737-800NG  A320neo
seats      162     153
COC per trip     100%    90,5%
COC per seat     100%    95,8%


Boeing stated that the 737-800NG would have a 2-3% cost deficit compared to the A320neo. But that was before Airbus came out with the three extra seats. If you compare COC per seat on a 150 seat basis for the A320neo, the value is 97.7% - the Boeing statement can therefore be seen as accurate.

Scott Hamilton now thought that Boeing's message shifted when they said that the B737-800NG would still be better by 2% than the A320neo - but read carefully: now they are talking not about COC, but DOC, which include capital costs.
I have doubts that it makes sense here to compare DOC, as that implies that Boeing knows the pricing policy of Airbus or can foresee future leasing rates. In reality, it is very hard to estimate DOC's, as leasing rates vary, interest rates vary and so do depreciation rules in different countries.

If Boeing says that the DOC's for the 737-800NG are 2% better than for the A320neo and COC's are (say for simplicity) 2% worse, that implies that in their calculation COC's are 60% of DOC's and so capital costs are 40% of DOC's. That seems to be a little bit on the high side I think, at least in times of $3.00 per gallon, where COC's are higher than at $1.50 per gallon and historically low interest rates, which would lower capital costs. So the 2% cost advantage for the 737-800NG compared to the A320NEO might be, say "overoptimistic".

So, Boeing does not necessarily change messages - but:
  • they change the topic of what they are talking about
  • they are making assumptions which are at least not very transparent
In the end, the market will decide and show us the "truth".

2 comments:

  1. Scott Hamilton is known in the Industry to refer to Line AirFreight the "Crazy Uncle" of airliners ... but in Europe/Asia a better nickname for Line Airfreight would be to call it their "First Concubine", this to say that for fair comparisons of the RGC (revenue generating capability) of eg. A321 taken as an all-YC 32" pitched aircraft, the correct formular is A321 = 198 + 4 x AKH/Phi where AKH is the VOLUME of the AKH (LD3-45 Container, ie 127 cuft) and where Phi is the revenue conversion factor between Line AirFreight vs YCff (net revenue from one Y-class full-fare paying passenger); at current market conditions, Phi is somewhere between 8 cuft and 16 cuft, so one AKH is equivalent in RGC to between 8 and 15 pax, take 10 as a ball-park value, so the capacity of A321 really is 198 "seats" + 4 x 10 = 40 "virtual underbelly seats-equivalent", total 238 "generalised seats", vs some corresponding number for 737NG-900 ... however, what is the real LINE AIRFREIGHT equivalence of the 737NG-900, which we all know is BULK-LOADED, with all the related airport ground rotation planning head-aches ?

    That's why A320 Series (with or without NEO)- although a more costly investment vs the direct 737NG Series equivalent - is selling faster.

    Don't let Scott mislead you into reducing A320 Series to solely its maindeck cabin : a SMR Feeder module is really Two-Aircraft-in-One, when counting with the Cargo Holds.

    TwinAisleFeeders
    http://www.wix.com/twinaislefeeders/quickrotation

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  2. The cargo argument is one that is usually missing, good point. However, the market has to be there to fill the belly, so it most probably will not apply for all routes, which again needs to be factored into the equation.
    Regarding the operating costs of -800 vs. A320 it is worth noting that the extra seats above 150 require an extra flight attendant, eating into the profit potential, something that I rarely see in the comparison of numbers.

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