Anybody Wanna Buy a Used Airbus?

First of a series that examines what happened to Thomas Cook:

If you want to be a millionaire, start with a billion dollars and launch a new airline. Attributed to Richard Branson

Thomas Cook’s package tour business is, essentially, dead in the water.

Depending on how you count them. The Cook fleet, which includes Condor Air and the eponymous Thomas Cook <<Insert Country>> Airlines, includes as many as 115 aircraft.

It’s reasonable to assume that some of Cook’s creditors have priority liens on the aircraft – that they will eventually perfect those liens – and have some inventory to dispatch. The question then becomes: Do you really want to be in this business?

“First, Capture your Hare:”

If you pick up a bargain on an Airbus A320, A321, or A330 (or even a 757 or 767) – what could you expect to pay? Should you buy used, or ante up for the full price? (We’ll leave aside the sticky choice between buy or lease.)

Airbus stopped publishing its “catalog” this year[1] but recent indications are that a “fresh and shiny off the showroom floor” A320 runs $70-$101 Million. Add about $18 million to that to step up to an A321 ($90-$118 Million) and (roughly) double the A321 price for an A330 ($238-$265 Million). Clearly, this is more than most of us want to pay.

So, let’s set our sights on a used A321 (Mostly because we couldn’t find a single listing for a used A330). The A321 seems to hold its value – regardless of vintage, asking prices cluster around $50 Million. Only when the aircraft gets “rode-hard-and-put-away-wet” (Lots of flight hours!) does the used price begin to drop. Then, it does so precipitously! (A fifteen year old A321 was listed at $9 Million.)

“Take your Hare when it is cas'd, and make a pudding...”

As any self-respecting boat, horse, or Lamborghini owner can tell you[2] vehicle cost is only the beginning. In addition to the (roughly) $470,000 to $610,000 per month ($1,880-$2,425 per block hour[3]) of financial costs[4] you’ll incur every month you own your A321, you pay for its operation as well. Hourly Operating costs include crew, fuel, insurance, taxes, and maintenance. Airbus estimates these costs at $3,620/block hour. Several air carriers report their block-hour costs are in line with Airbus’ estimate.

Finally, your A321 costs you money every time you take off or land, and even when it is standing still. Take-off and landing fess differ from airport to airport. “Space Rental,” “Parking Fees,” and “Hangar Rentals” make sure you incur costs even when your baby is sitting still. Non-Signatory[5] parking fees for an A321 at Oakland Airport, for example, run to $633 per day.

With Choicest Viands (have your) Table Crown'd; Health with Frugal Ellegance is found.

So, let’s imagine a five-day trip that begins and ends in New York (your A321 home base) and stops in Oakland. The flight itself takes about five hours. With luck, your taxi and wait time will be about 45 minutes at each end (Total of 1.5 hours). (Total block time is thus 6.5 hours.) There are four take-offs and landings, and you’ll be parked in Oakland for five days.

Total cost of your flight to and from Oakland: $75,200 to $82,250. (Before considering snacks, airline meals, and the ongoing cost of operating your New York facility.)

If you are flying alone – that’s expensive airfare. Flying with an entourage? That’s about the cost of commercial first-class airfare for 40 people (or commercial coach for about 160).

If you are thinking of running your own airline – that’s your break-even, and it's between 78% and 88% of an A321’s capacity. (Cook ran at about 85% occupancy - and was bleeding money – not necessarily because of operating costs.)

But here is the Catch-22 in this scenario: Not one airline that we could find flies direct non-stop between JFK and OAK. “Fast travel times” between those locations run to 10.5 to 12.5 hours, usually with one or two stopovers. Best case scenario: you are missing 8-12 hours of ground time in Oakland when you fly commercial. Who wants to miss all that fun!

[1] The Airbus catalog allowed direct comparison between “factory pricing” of Airbus’ and Boeing’s models. Unfortunately, the catalog didn’t reflect actual transactions – which often involve volume discounts and maintenance-replacement contracts. It was thus, from Airbus’s perspective, a lot of work for a document that didn’t represent the realities of the market.

[2] Boat = A wood-lined hole in the water, into which you throw money. Horses eat while you sleep, and stuff spontaneously falls off a Lamborghini. None of them is cheap to own or operate. Aircraft have many of the same features – but bigger.

[3] Block Hours include startup, idling, taxiing, holding, climbing, flight, descent, landing, and taxi-disembark time. Thus, a five-hour flight usually takes 6-8 block hours. Most manufacturers quote their operating costs in terms of block hours.

[4] Financial costs include the cost of the aircraft and the cost of financing it. The “monthly cost” thus depends on the initial cost of the aircraft, the loan or lease payment terms, the interest or discount rate, the holding period, and the expected proceeds from disposition. All of these vary widely. For our example, we assumed 70%-100% financing, 120 months-240 month financing, 6%-8% interest rates, holding periods equal to the financing period, and about 50% resale-salvage value. There is nothing sacred, or even “typical” about those choices.

[5] Translates loosely to “visiting aircraft owners.” Signatories occupy terminals and do regular business at the airport. Non-signatory fees often depend on the plane’s length and wingspan.

#ThomasCook #AircraftOperations #BusinessFinance #MarketEconomics #BreakevenAnalysis

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