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A380 Operating Cost Per Pax Relative To The 773ER  
User currently offlineOldAeroGuy From United States of America, joined Dec 2004, 3574 posts, RR: 67
Posted (2 years 12 months 4 days 8 hours ago) and read 16357 times:

The A.Net conventional wisdom for this relationship is about a 22% advantage for the A380, as reflected in articles like this one:

http://www.emg.rs/en/emplus/130585.html

The A380 advantage, as analyzed by Airbus, is stated to be when both airplanes are configured to the same comfort standard. This would seem to mean that the SQ configurations for these two airplanes, seating 471 and 278 respectively, would be a good example of a common comfort standard.

However, this article also says the A380 has a 12% fuel burn per passenger advantage over the 773ER. Using this fuel burn relationship, the operating cost advantage as stated seems a bit high.

From some work I once did for the 773ER, I believe it's operating costs and their approximate relative weights are as follows:

Fuel 60%
Flight Crew 12%
Cabin Crew 11%
Airframe Maint 5%
Engine Maint 3%
Landing Fee 4%
Control & Comm 3%
Ground Handling 2%
Total 100%

If the 773ER is 22% higher in operating costs per pax, then the summation of these costs for the A380 would need to be 82%. (0.82*1.22 = 1.0).

Using the 12% higher 7773ER fuel burn stated in the article, the fuel burn portion would drop to 53.6% (60/1.12 = 53.6).

With the revised fuel, the remainder of the costs must sum to 28.4% to support 82% lower costs (82% - 53.6% = 28.4%).

Flight Crew: 12% * (278/471) = 7.1% (assumes no Flight Crew premium for operating larger airplane)

Cabin Crew: 11% (unchanged because equal service standard implies equal FA per pax)

Airframe Maint: 5% * (610/471) * (278/370) * 0.9 = 4.4% (Airframe Maint related to OEW, assumes A380 10% improvement)

Engine Maint: 3% * (4*70/471) * (278/(2*115.3)) = 2.1% (Engines at same tech level, power by the hour)

Landing Fee: 4% * (860/471) * (278/554) = 3.7% (Landing fee based on MLW)

Control & Comm 3% * (278/471) = 1.8%

Ground Handling 2% * (278/471) = 1.2% (Assumes no additional fee for A380 Code F wing span)

Total: 31.3% + 53.6% = 84.9%

So the 773ER would be about 18% more expensive per seat to operate than the A380 in the SQ configuration assuming it has a 12% higher fuel burn per seat.

There are plenty of "knobs" to turn that alter the results. For instance, assume that a portion of Flight Crew pay is related to airplane MTOW.

Flight Crew: 6% * (278/471) +( 6% * (278/471) * (1250/775)) = 9.3%

New Total: 33.5% + 53.6% = 87.1%

Under this assumption, the 773ER would be about 15% more expensive to operate per seat.

Of course all this is subject to interpretation, including my cost breakdown for the 773ER.

I'd be happy to see a link on this topic performed by an airline rather than an OEM. I can't seem to find one.

Comments and/or questions?


Airplane design is easy, the difficulty is getting them to fly - Barnes Wallis
81 replies: All unread, showing first 25:
 
User currently offlineZkpilot From New Zealand, joined Mar 2006, 4841 posts, RR: 9
Reply 1, posted (2 years 12 months 4 days 7 hours ago) and read 16316 times:

Sounds pretty reasonable...

of course that all works out if the A380 is full or close to it... if it is only going out with 278 pax (or say 300) then the 773ER is going to kill it economically not to mention the extra hold space available on the 773ER for freight!



56 types. 38 countries. 24 airlines.
User currently offlineArniepie From Belgium, joined Aug 2005, 1265 posts, RR: 1
Reply 2, posted (2 years 12 months 4 days 7 hours ago) and read 16294 times:

Doesn't the fact that the A380 simply has more seats put extra pressure on overall seatprice on the routes
this plane is used for?
I always was under the impression that price was determined by how long before people book their flight and as
the date nears, when there are still a fair amount of seats available, certainly with something as big as the 380, the
prices must go down quite substantially, no?

I clearly remember reading (on A net or PPrune) that especially on slot restricted airports ,like the ones the 380 is
meant for, it can be more beneficial to use planes that are booked out very quickly and long before the actual flight
takes place to guarantee a high yield/big profit.

Planes that are too small (under 50 seats) like we've seen the past 20-30 years used by commuter services seem to
be on their way out, save for markets that have no alternative like islands or very remote places.
Probably the same can be said for planes that are too big, they esentially undermine the overall profitability by adding
too much capacity, again with the exception of markets that have no real alternatives like the bussiest citypairs that
are constantly underserved, but how many airports really qualify for those parameters is the question.

Probably explains the lukewarm salesnumbers for anything bigger than the 77W.



[edit post]
User currently offlinezeke From Hong Kong, joined Dec 2006, 9210 posts, RR: 76
Reply 3, posted (2 years 12 months 4 days 6 hours ago) and read 16277 times:

Quoting OldAeroGuy (Thread starter):

Comments and/or questions?

Airlines do not just pay operating costs, they also have to pay the cost of ownership.

An A380 costs around 375 million, the 77W around 300 million on lists prices. The A380 carries around 70% more passengers, however only costs 25% more to purchase.

Good topic for someone who is retired and no longer has their pulse on what is happening in the real world. Cost of ownership of assets is covered in most if not all airlines annual reports.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently offlineWingedMigrator From United States of America, joined Oct 2005, 2243 posts, RR: 56
Reply 4, posted (2 years 12 months 4 days 5 hours ago) and read 16192 times:

Quoting zeke (Reply 3):
Airlines do not just pay operating costs, they also have to pay the cost of ownership

Depreciation is very much an operating cost. It didn't show up on OldAeroGuy's list.


User currently offlineredflyer From United States of America, joined Feb 2005, 4376 posts, RR: 28
Reply 5, posted (2 years 12 months 2 days 19 hours ago) and read 15710 times:

Quoting zeke (Reply 3):
An A380 costs around 375 million, the 77W around 300 million on lists prices. The A380 carries around 70% more passengers, however only costs 25% more to purchase.

An interesting observation. However, I'm curious: given that the 77W is in far more demand, which would also indicate that its resale value would also be far more higher (as would the fact that a delivery date on the production line is farther out) than an A380's, wouldn't that mean that an A380's discounted price as compared to a 77W mean that on a per-seat basis its sale price would be comparable from the standpoint of depreciation?



My other home is a Piper Cherokee 180C
User currently offlinezeke From Hong Kong, joined Dec 2006, 9210 posts, RR: 76
Reply 6, posted (2 years 12 months 2 days 18 hours ago) and read 15697 times:

Quoting redflyer (Reply 5):

An interesting observation. However, I'm curious: given that the 77W is in far more demand, which would also indicate that its resale value would also be far more higher (as would the fact that a delivery date on the production line is farther out) than an A380's, wouldn't that mean that an A380's discounted price as compared to a 77W mean that on a per-seat basis its sale price would be comparable from the standpoint of depreciation?

I will try and convert that question into English.

Depreciation is not based upon resale value, it is based upon purchase price. Depreciation schedules are country specific depending on local tax laws. Some airlines claim that other airlines have an unfair advantage as they do not receive the same depreciation schedule under their local tax laws.

Today’s demand for a 77W has little effect on what the resale value will be in 10 years, it is the demand in 8-12 years that will dive that figure.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently offlinerwessel From United States of America, joined Jan 2007, 2392 posts, RR: 2
Reply 7, posted (2 years 12 months 2 days 15 hours ago) and read 15629 times:
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Quoting zeke (Reply 6):
Depreciation is not based upon resale value, it is based upon purchase price. Depreciation schedules are country specific depending on local tax laws. Some airlines claim that other airlines have an unfair advantage as they do not receive the same depreciation schedule under their local tax laws.

Today’s demand for a 77W has little effect on what the resale value will be in 10 years, it is the demand in 8-12 years that will dive that figure.

No, no, no.

You are correct in terms of *tax* accounting, which arguably isn't real accounting at all. If your (public*) airline tried to present its books on a tax basis, it would be laughed off Wall Street (and delisted by the NYSE for not following proper accounting standards, and probably smacked around by the SEC).

It terms of the actual bottom line for a corporation, depreciation is the actual decline in value of an asset. It has nothing to do with tax depreciation schedules (which impact how much tax you have to pay, and when). Ideally, a proper estimate of the value of each asset would be made annually, using data from a highly liquid market in that asset. In practice, most markets for industrial assets are anything but liquid, and all sorts of estimates are made, and there are a number of standard schedules for generating those estimates. But you'll need to include a footnote if you stray too far from those (IOW, you had better justify an unusually fast or slow depreciation schedule for an asset). Also a predetermined schedule allows some predictability as asset values are often volatile (again, just to the very ill-liquid markets). But in an ideal world, if you bought a 777 ten years ago for $300m, and you could sell it today for $200m, the accumulated depreciation for that asset *should* be $100m.


*If it’s privately held, they can do their books any way they like, but will still have to do the tax books per your local taxing agencies’ rules


User currently offlinezeke From Hong Kong, joined Dec 2006, 9210 posts, RR: 76
Reply 8, posted (2 years 12 months 2 days 13 hours ago) and read 15602 times:

Quoting rwessel (Reply 7):
No, no, no.

Its is very much dependant on where the aircraft are registered, and what tax rules they fall under. Depreciation is cost allocation, it is not a measure of the assets market value at any period of time. In this article you can see that SQ depreciates their aircraft over 3 years, whilst QF does it over 10.

http://www.routesonline.com/news/24/...or-aircraft-depreciation-overhaul/

More recently QF changed their formula to a straight line depreciation schedule over a longer period

"From 1 January 2010, all passenger aircraft will be depreciated to a residual value of 10 per cent at 20 years, compared to the previous policy of 12.5 or 20 per cent at 20 years, depending on aircraft type."

http://www.qantas.com.au/infodetail/...t/investors/2009HYMediaRelease.pdf

This is almost identical to the CX does it, aircraft are depreciated over 15 to 20 years to residual value of between 10% to 20% of cost. EK does similar, however over 15 years.

The methods of depreciation that are used in industry include straight line, progressive, and regressive, double declining, sum of years, and in the USA MACRS. Some operators depreciate their airframes based upon cycles and hours as well.

The US is somewhat unique in that companies often have two sets of books, one for tax purposes where the use MACRS (which is a form of accelerated depreciation), and another for the public where a straight line depreciation is often used.

Quoting rwessel (Reply 7):
But in an ideal world, if you bought a 777 ten years ago for $300m, and you could sell it today for $200m, the accumulated depreciation for that asset *should* be $100m.

So in your world, inflation does not exist. Depreciation is about allocating costs, nothing to do with the market value of the asset.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently onlineStitch From United States of America, joined Jul 2005, 31244 posts, RR: 85
Reply 9, posted (2 years 12 months 2 days 10 hours ago) and read 15554 times:
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Quoting redflyer (Reply 5):
I'm curious: given that the 77W is in far more demand, which would also indicate that its resale value would also be far more higher (as would the fact that a delivery date on the production line is farther out) than an A380's...

The 777-300ER and A380-800 both enjoy the highest average values of any (Western) commercial airliner in service today. Even during the darkest days of the GFC, when aircraft values were hit hardest, both models held their values very well.


User currently offlineredflyer From United States of America, joined Feb 2005, 4376 posts, RR: 28
Reply 10, posted (2 years 12 months 2 days 8 hours ago) and read 15483 times:

Quoting zeke (Reply 6):
I will try and convert that question into English.

Depreciation is not based upon resale value, it is based upon purchase price.

So what you're saying is that I could depreciate an asset so that it's residual value is less than market value?

And thanks for the English lesson...I'll be sure to water-down my prose in the future so that even a simpleton forum member will understand it.

Quoting Stitch (Reply 9):
The 777-300ER and A380-800 both enjoy the highest average values of any (Western) commercial airliner in service today.

Given that they are the newest, most modern, and most efficient commercial planes flying I'm sure that their values would be the highest compared to other aircraft. But this issue is about how they compare with one another with regards to those values.



My other home is a Piper Cherokee 180C
User currently offlinenomadd22 From United States of America, joined Feb 2008, 1896 posts, RR: 0
Reply 11, posted (2 years 12 months 2 days 8 hours ago) and read 15482 times:

Give the 380 a few years till some of them start to be resold. The tax schedule might not match up to the real world very well. There are some interesting ways to account for maintanence costs that can make comparisons a little iffy too.

Quoting redflyer (Reply 10):
And thanks for the English lesson...I'll be sure to water-down my prose in the future so that even a simpleton forum member will understand it.

Not that I'm likley to go see Brokeback Mountain with Zeke anytime soon, but he was right. Your "prose" was just plain garbled english.

[Edited 2011-11-29 09:39:59]


Andy Goetsch
User currently offlineredflyer From United States of America, joined Feb 2005, 4376 posts, RR: 28
Reply 12, posted (2 years 12 months 2 days 7 hours ago) and read 15445 times:

Quoting nomadd22 (Reply 11):
Not that I'm likley to go see Brokeback Mountain with Zeke anytime soon, but he was right. Your "prose" was just plain garbled english.

Be careful when throwing stones while living in a glass house, especially when using words such as "likley" (I won't remind you that "english" should have an uppercase "E").  



My other home is a Piper Cherokee 180C
User currently offlinezeke From Hong Kong, joined Dec 2006, 9210 posts, RR: 76
Reply 13, posted (2 years 12 months 2 days 4 hours ago) and read 15389 times:

Quoting redflyer (Reply 10):

So what you're saying is that I could depreciate an asset so that it's residual value is less than market value?

Assuming you had a small business and needed an aircraft for 100% business use, you could purchase yourself a new light aircraft like a SR22 and under the current tax rules you could depreciate 100% of that aircraft this year. That is assuming Section 179 expensing which would allow your businesses to expense up to $500,000 in capital improvements for the 2011 tax year.

see http://cirrusaircraft.com/static/img...axprogram/tax_promo_whitepaper.pdf

Diamond have a similar page with their “Depreciation Calculator”
http://www.diamondaircraft.com/buy/tax.php

Under MACRS, business users would normally depreciate their aircraft over a 5 year period. http://www.gkglaw.com/publications/DepreciatingAircraft.pdf

In both cases, the accelerated depreciation schedule exceeds the rate at which the aircraft market value would normally reduce.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently offlinePolymerPlane From United States of America, joined May 2006, 991 posts, RR: 3
Reply 14, posted (2 years 12 months 2 days 3 hours ago) and read 15336 times:

Quoting redflyer (Reply 10):
So what you're saying is that I could depreciate an asset so that it's residual value is less than market value?

Yes. When you sell the asset, you'll have gain or loss from sale of asset, and it will be taxed accordingly.

That's how a lot of housing rental companies can make their money, by depreciating their assets, eventhough their actual values are appreciating (at least before the housing meltdown).



One day there will be 100% polymer plane
User currently offlineredflyer From United States of America, joined Feb 2005, 4376 posts, RR: 28
Reply 15, posted (2 years 12 months 1 day 23 hours ago) and read 15264 times:

Quoting zeke (Reply 13):
Quoting PolymerPlane (Reply 14):

Thanks for the tax advice, guys! I had no idea coming to an aviation forum I could get top-notch info on airplanes AND accounting practices, and all from the same expert sources! Who would've imagined???  Wow!



My other home is a Piper Cherokee 180C
User currently offlineMoltenRock From , joined Dec 1969, posts, RR:
Reply 16, posted (2 years 12 months 1 day 22 hours ago) and read 15226 times:

Quoting redflyer (Reply 5):
An interesting observation. However, I'm curious: given that the 77W is in far more demand, which would also indicate that its resale value would also be far more higher (as would the fact that a delivery date on the production line is farther out) than an A380's, wouldn't that mean that an A380's discounted price as compared to a 77W mean that on a per-seat basis its sale price would be comparable from the standpoint of depreciation?

Huh? What the hell are you going on about? You obviously don't understand depreciation and tax law. For instance, Infiniti (autos) sell far fewer units in the USA than Chevy or Ford, yet Infiniti resale values are some of the highest in the industry, thus their residual values are much higher than the other two are. Depreciation has NOTHING to do with "sales volume", and if anything, is inversely proportionate to the overall volume of units being output, thus invalidating your anti-A380 bias.

Depreciation for tax purposes is a fixed schedule regardless if an asset is actually worth more or less over that fixed timeframe. Why do you find that so hard to understand?


User currently offlinecmf From , joined Dec 1969, posts, RR:
Reply 17, posted (2 years 12 months 1 day 20 hours ago) and read 15198 times:

Quoting zeke (Reply 6):
Depreciation schedules are country specific depending on local tax laws.

Often the rules give companies a lot of flex. LH do new planes at 12 years and Air Berlin at 10 for example.

Quoting zeke (Reply 8):
SQ depreciates their aircraft over 3 years, whilst QF does it over 10.

SQ is 15 years for new airplanes. I think QF is 20 for new.

Quoting redflyer (Reply 10):
So what you're saying is that I could depreciate an asset so that it's residual value is less than market value?

Happens all the time. Depreciation is actually just a way of spreading the cost of purchase over many years instead of taking the full charge at time of purchase and thus making the result of that year look really bad.

A lot of companies have extended depreciation to "fool" shareholder in to thinking the result are better than it would under rules used at earlier times.


User currently offlineOldAeroGuy From United States of America, joined Dec 2004, 3574 posts, RR: 67
Reply 18, posted (2 years 12 months 1 day 19 hours ago) and read 15205 times:

Quoting zeke (Reply 3):
Good topic for someone who is retired and no longer has their pulse on what is happening in the real world.
Quoting zeke (Reply 3):
An A380 costs around 375 million, the 77W around 300 million on lists prices. The A380 carries around 70% more passengers, however only costs 25% more to purchase.


My understanding of the real world is still firm enough to know that airliner list prices have little to do with what airlines actually pay for them or their value on the open market.

Quoting WingedMigrator (Reply 4):
Depreciation is very much an operating cost. It didn't show up on OldAeroGuy's list.

The 12 posts below yours (and Zeke's) show why I didn't include Depreciation in my cash operating cost comparison analysis. There are far too many variables and assumptions when trying to account for Depreciation. Besides, Depreciation has little to do with the cash required for day-to-day airliner operation.

After all, flights aren't delayed because someone couldn't pay the Depreciation bill.

Still looking for a link to an airline created operating cost comparison between the A380 and t.he 777-300ER



Airplane design is easy, the difficulty is getting them to fly - Barnes Wallis
User currently offlinerwessel From United States of America, joined Jan 2007, 2392 posts, RR: 2
Reply 19, posted (2 years 12 months 1 day 19 hours ago) and read 15197 times:
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Quoting zeke (Reply 8):
Its is very much dependant on where the aircraft are registered, and what tax rules they fall under. Depreciation is cost allocation, it is not a measure of the assets market value at any period of time. In this article you can see that SQ depreciates their aircraft over 3 years, whilst QF does it over 10.



There are fundamental difference between “real” accounting and tax accounting. Real accounting is about presenting an accurate picture of the company. Tax accounting is about paying the tax man, according to whatever (often absurd) rules the tax man has set.

Quoting from my “Fundamental Accounting Principles” (Irwin):

“Since plant assets* are purchased for use, you may think of a plant asset as a quantity of usefulness that will contribute to the operations of the business throughout the service life of the asset. However, since the life of any plant asset* (other than land) is limited, this quantity of usefulness expires as the asset is used. This expiration of a plant asset’s quantity of usefulness is generally described as depreciation; and in accounting** the term is used to describe the process of allocating and charging the costs of this usefulness to the accounting periods that will benefit from the asset’s use.”



“The service life of a plant asset is the length of time it will be used in the operation of the business. This may not be the same as the asset’s potential life. For example, although typewriters*** have a potential life of six to eight years, a company may plan to trade in its old typewriters on new ones every three years. In this case, the typewriters have a three year service life. Furthermore, in this company, the cost of the typewriters, less their expected trade-in value, should be charged to depreciation expense over this three year period.”

If you prefer the actual prose from the accounting standards (OK, from the same text book, so a bit dated, but they haven’t changed materially for this):

“…This procedure is known as depreciation accounting, a system of accounting that aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit”

(Apologies for any typos in the above).


*aka fixed assets or capital assets

*and here we’re talking actual GAAP-style accounting, *not* tax “accounting”

***yeah, yeah, yeah - the textbook is old enough that they’re discussing the value of a typewriter - showing my age


The real point of accounting is to understand the entity in question. Owning a 10 year old 777-300ER adds $200m**** to your bottom line in any sane accounting. If you bought that 777 for $300m, and are planning on selling it tomorrow, done correctly, you would have spread $100m of depreciation over the past ten years. If the 777 didn’t depreciate at all (IOW, you could sell it for $300m), you could not claim *any* depreciation. And yes, inflation adds some interesting wrinkles to the process.

Exactly how you allocate the depreciation over the service life is a very interesting question – probably the most common method is straight-line (which has the major advantage of simplicity), but many other schemes exist. For example, if an asset is used irregularly “units of production” is often used to allocation the consumption of the useful life of the asset to the actual use (let’s say an airplane***** is good for 10,000 cycles, if you fly it 1000 cycles this year, and 500 cycles next, you’d depreciate 10% of the cost – less salvage - of the aircraft this year, and 5% next). Various accelerated schedules are used, but care must be taken to not generate an incorrect assessment of the business.

And depreciation is fundamentally scheduled over the expected service life – if an airline is expecting to sell their airplanes after five years, they would allocate the cost, less salvage, to depreciation over those five years. If they were planning on keeping the aircraft 20 years, they’d do it over 20 (presumable with a rather different salvage value). While the expected service life can be fudged somewhat (it is, after all, something of a judgment call, especially for very long lived assets), there are basically no cases where you can, for GAAP-type purposes, depreciate a 20 year asset over three years, or vice versa.

And this has *nothing* to do with tax depreciation (except, of course, indirectly, that tax is an expense). MACRS in particular presents a distorted picture of a companies assets (first it disregards salvage value, then the schedules are extremely rigid – the under 20 year schedules are all declining balance switching to straight line, while the longer ones are all straight line, and are all typically substantially faster than the real life of the asset). Worse, if an asset *does* have salvage value, you record that as income for tax purposes when you actually sell it, which is absurd from a real accounting perspective, since the company just got money for something that was supposed to have no value. IOW, would you a value a company that owns a fully (tax) depreciated airplane that has a market value of $100m more than an otherwise identical company that didn’t? Of course you would (but the tax man basically doesn’t).


****made up valuation of a 10 year old 777-300ER for purposes of discussion

*****just an example, I really don’t know what depreciation scheme most airlines use for airliners, or even if they’re particularly consistent


User currently offlinecmf From , joined Dec 1969, posts, RR:
Reply 20, posted (2 years 12 months 1 day 18 hours ago) and read 15187 times:

Quoting rwessel (Reply 19):
I really don’t know what depreciation scheme most airlines use for airliners, or even if they’re particularly consistent

Most are straight. IIRC LH and QF didn't for a couple of years but changed back.


User currently offlinezeke From Hong Kong, joined Dec 2006, 9210 posts, RR: 76
Reply 21, posted (2 years 12 months 1 day 17 hours ago) and read 15164 times:

Quoting OldAeroGuy (Reply 18):

My understanding of the real world is still firm enough to know that airliner list prices have little to do with what airlines actually pay for them or their value on the open market.

That is correct, as a lot of airline never actually buy aircraft. However there are a number of aircraft finance trade journals available to those in the industry that show a strong correlation between list price minus standard industry discounts. The sort of discounts made available to large 77W operators is similar to what is extended to large A380 operators, neither pays full list price, however the ratios are still a valid comparison for this discussion.

Quoting OldAeroGuy (Reply 18):

The 12 posts below yours (and Zeke's) show why I didn't include Depreciation in my cash operating cost comparison analysis. There are far too many variables and assumptions when trying to account for Depreciation. Besides, Depreciation has little to do with the cash required for day-to-day airliner operation.

The standard ATA method used for comparing direct operating costs between different airframes does include depreciation,

Depreciation (Total Aircraft Including Spares)
Cam = (Ct + 0.10 (Ct – Ne Ce) + 0.40 Ne Ce ) / (Da U Vb)

Where:
Ct = Total airplane cost including engines (dollars)
Ce = Cost of one engine (dollars)
Ne = Number of engines
Da = Depreciation period (years)
U = Annual utilization - block hours/year
Vb = Block speed

I am not sure what you are trying to prove here, everyone understands that a larger aircraft has a higher direct operating cost than a smaller one. And the larger aircraft normally has a lower per seat operating cost due to the economies of scale.

Quoting OldAeroGuy (Reply 18):
After all, flights aren't delayed because someone couldn't pay the Depreciation bill.

They can be, depreciation process of allocating the cost of airframe. If an airline does not allocate costs correctly, they may not be extended credit. An airframe sitting on the ground still costs an airline money, that is why parking airframes is not “free”, or long periods of downtime for maintenance is not “free”.

Quoting rwessel (Reply 19):
Real accounting is about presenting an accurate picture of the company. Tax accounting is about paying the tax man, according to whatever (often absurd) rules the tax man has set.

The two are not disconnected, you need to account for the cost of the asset to the tax man and to the shareholder. This came up recently when QF said its long haul international operations were a loss making venture, despite producing a profit. While the operations were profitable, the allocation of high value assets, and the amount of return they were getting from those assets was below what they could have received by putting an equivalent amount of cash in the bank. One of the major reasons for this is the taxation treatment of its costs, which is less competitive in Australia than countries in the middle and say Singapore.

Quoting rwessel (Reply 19):

“…This procedure is known as depreciation accounting, a system of accounting that aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit”

I agree with that, however that has nothing to do with market value, it is using a book value. The tax man also works on book values, not market values.

Quoting rwessel (Reply 19):
Owning a 10 year old 777-300ER adds $200m**** to your bottom line in any sane accounting. If you bought that 777 for $300m, and are planning on selling it tomorrow, done correctly, you would have spread $100m of depreciation over the past ten years.

Well not really, have a look at this for a detailed explanation http://faculty.cbpp.uaa.alaska.edu/a...t650/Depreciation%20at%20Delta.ppt

Quoting rwessel (Reply 19):
And yes, inflation adds some interesting wrinkles to the process.

Yes, 300 million 10 years ago is worth around 383 million today. The other wrinkle for non US$ based airlines is the exchange rate variation over time.

Quoting rwessel (Reply 19):

Exactly how you allocate the depreciation over the service life is a very interesting question – probably the most common method is straight-line (which has the major advantage of simplicity), but many other schemes exist.

Actually it is normally a modified straight line, often with an overvaluation of the asset in the early years. This takes into account the high costs associated with operating an aircraft over a long period of time. If you have a low service life you may dodge some of the large mid life airframe, engine, and APU expenses. Power by the hour also adds complexity to the equation.

Quoting rwessel (Reply 19):

And this has *nothing* to do with tax depreciation (except, of course, indirectly, that tax is an expense).

Depreciation is also an expense.



We are addicted to our thoughts. We cannot change anything if we cannot change our thinking – Santosh Kalwar
User currently offlineOldAeroGuy From United States of America, joined Dec 2004, 3574 posts, RR: 67
Reply 22, posted (2 years 12 months 1 day 8 hours ago) and read 15074 times:

Quoting zeke (Reply 21):
Quoting rwessel (Reply 19):

Exactly how you allocate the depreciation over the service life is a very interesting question – probably the most common method is straight-line (which has the major advantage of simplicity), but many other schemes exist.

Actually it is normally a modified straight line, often with an overvaluation of the asset in the early years. This takes into account the high costs associated with operating an aircraft over a long period of time.

But the standard ATA method is a straight line.

Quoting zeke (Reply 21):
The standard ATA method used for comparing direct operating costs between different airframes does include depreciation,

Depreciation (Total Aircraft Including Spares)
Cam = (Ct + 0.10 (Ct – Ne Ce) + 0.40 Ne Ce ) / (Da U Vb)

Where:
Ct = Total airplane cost including engines (dollars)
Ce = Cost of one engine (dollars)
Ne = Number of engines
Da = Depreciation period (years)
U = Annual utilization - block hours/year
Vb = Block speed

You're suggesting yet another variation to Depreciation cost accounting.

If Airbus is using Depreciation in their A380 vs 773ER cost comparison, I wonder what method, write down period and airplane & engine values they are using.



Airplane design is easy, the difficulty is getting them to fly - Barnes Wallis
User currently offlineredflyer From United States of America, joined Feb 2005, 4376 posts, RR: 28
Reply 23, posted (2 years 12 months 1 day 7 hours ago) and read 15051 times:

Quoting MoltenRock (Reply 16):
You obviously don't understand depreciation and tax law.

Really?

Quoting MoltenRock (Reply 16):
Depreciation for tax purposes is a fixed schedule regardless if an asset is actually worth more or less over that fixed timeframe.

I know that. However, that schedule does in fact take into consideration the potential (estimated) residual value. And my original comment was in regards to Zeke's in Reply #6 --

Quoting zeke (Reply 6):
Depreciation is not based upon resale value, it is based upon purchase price.

-- that depreciation is based only on purchase price. That was only partially correct because residual (resale) values are a part of determining the schedule. If you have an asset that will hold a value after a period of time you can certainly depreciate it more, but then you will be ignoring any potential liabilities on the gain from the sale.

You obviously don't understand depreciation and tax law. And I would suggest certain members stick to giving advice in their areas of expertise, which I would assume for certain members is aviation. I don't pretend to be a professional commercial pilot and I would think a professional commercial pilot would not pretend to be a tax accountant.



My other home is a Piper Cherokee 180C
User currently offlinehal9213 From Germany, joined May 2009, 302 posts, RR: 0
Reply 24, posted (2 years 12 months 8 hours ago) and read 14856 times:

Quoting rwessel (Reply 7):
But in an ideal world, if you bought a 777 ten years ago for $300m, and you could sell it today for $200m, the accumulated depreciation for that asset *should* be $100m.
Quoting zeke (Reply 8):
EK does similar, however over 15 years.

To be precise, Emirates leases, so does not need to account for that. However, looking at the leasing groups, I can give you the following values:
Emirates 777-300ER A6-ECQ from mid 2009 has been bought for 163M USD and the prognosed sale value is:
Year 5: 109.620.000
Year 10: 89.750.000
Year 12: 81.930.000
Year 14: 72.290.000
Year 16: 66.520.000
Year 18: 62.710.000

Compared to Emirates A380 A6-EDW for mid 2012 will cost 234M USD and the value is prospected to be:
Year 5: 148.380.000
Year 10: 103.910.000
Year 12: 89.010.000
Year 15: 69.650.000

So YES, the prospected residual value of a 777-300ER is MUCH MUCH more than of an A380. In fact, after 15 years, they are basically worth nearly the same.
The figures can be found on the net if you google for DS Fonds, which is the leasing company. The figures are the prospected normal values, there are also "worst case" and "best case" scenario ranges.


25 Flighty : Yes. This is why knee-jerk comparisons between different size classes do not really mean much. On revenue... The A380 fits all your 773ER passengers.
26 OldAeroGuy : Thanks to everyone for the good discussion and the additional information. With the Depreciation data provided by hal9213, I'll try to include Depreci
27 redflyer : Frankly, we don't know what Airbus used to come up with its 22% cost advantage over the 77W. (I'll stand corrected if someone will show us the publis
28 Stitch : I believe it was data provided by SQ, who operate both models with similar cabin configurations - what Airbus refers to as "comfort standards". Suite
29 Pu : I'll send you a royalty everytime I use this phrase I like it so much. Thanks. (Only, I might change it to, "Not that I'm likely to go to Brokeback M
30 Post contains images astuteman : SQ's replacement of 10x 773ER with 7x A380 to ZRH weekly would seem to be the perfect example. When they did that, they described a 20% capacity incr
31 Post contains links astuteman : A holding response... A380 21% More Economical P.seat Than 77W (by NA Jun 27 2009 in Civil Aviation) Still doesn't give you a direct link, of course
32 hal9213 : Cool, thanks for the calculations. However, I must point out, that those depreciation values were from the leasing company. Emirates pays a static mo
33 OldAeroGuy : I'll eagerly await a link that supports an Airline operating cost analysis between the two airplanes. The only ones I can find quote Airbus analyses
34 Post contains links OldAeroGuy : Like this one. http://www.theaustralian.com.au/busi...ccess/story-e6frg95x-1225714771859 Notice it quotes an Airbus analysis, not something that SQ s
35 redflyer : You bring up a valid point, and my initial thought is that, yes, you could. A lull in sales does not necessarily point to a drop in demand. One has t
36 Post contains images Stitch : But it's an analysis of actual SQ in-service data, not a computer model projection based on hypotheticals. So consider it SQ saying it by proxy throu
37 OldAeroGuy : Is it? Or is it an Airbus prediction based on their cost model for SQ's operational choices? I don't think we know without SQ actually saying so. I'd
38 flipdewaf : I'd heard that it was 14 for QF and 7 for SQ, just shows that what you hear isn't always true. I don't think that any A380's will be put on to routes
39 Post contains images cmf : Annual report is the bible
40 redflyer : Not sure what you're trying to imply. If it was intended as a one-up it failed miserably. The fact is, 40% of all A380's sold have been purchased by
41 cmf : You mean like the distortion from Lufthansa holding 55% of all 747-8i orders? Or Delta 55% of all 767-400ER orders. I don't think so.
42 redflyer : You must think I'm a shill for Boeing and that I would have some excuse not to put your examples under the same analysis. Fact is, the examples you c
43 Post contains images astuteman : Disbelieve all you want. The fact remains that these are the nearest to airline-based figures that we have Unless you just want to pluck a shedload o
44 Post contains images flipdewaf : I did some quick analysis on this (don't know much about demand dynamics) but I stated that for every 4 pax gained from outside one was poached from
45 redflyer : Perhaps if 600 or more A380's had been ordered to date (over 10 years after it was launched and in line with Airbus' original projections) and EK hel
46 XaraB : Markets aren't company specific. If EK makes money on their deployment of the A380 (all imaginable costs included), then the market for the A380 is d
47 OldAeroGuy : Quite the contrary. My thread opener post laid out a cash cost breakdown by cost category for the 773ER that I know to be based on fact. Using Airbus
48 cmf : I do not have enough experience in your posts to even consider the shill aspect. I just saw a very poor argument and hoped bringing up a couple of si
49 redflyer : When talking of markets, there are two parts to the analysis. The first part would be to determine if there is a market, and the second part would be
50 sunrisevalley : Have you determined a cross over point below which the A380 would cost more to use than the 773ER? It seems to me that this is relevant to a decision
51 WingedMigrator : I don't think you're going to find the missing % via any rational analysis method. OEM sales and marketing typically picks a mission that exaggerates
52 Post contains images XaraB : This is correct; I deliberately left out the "OEM profitable" part of this since the discussion was centered around whether there was a real market f
53 tommytoyz : No, it is based on both, unless it is written off as worthless, in an uninsured accident for example. Let me unravel: 1. Tax accounting treatments of
54 flipdewaf : Except this isn't marketing talk, it is the actual numbers from SQ operating both aircraft on the SIN-ZRH route. Fred
55 OldAeroGuy : Except that I can't find any reference that attributes the 22% or so to a statement from SQ. All the information I've found so far say it's an Airbus
56 sunrisevalley : Does this mean from an operating cost stand point that it costs the same to operate (10*278=2780) seats on the 77W as (7*471*.97=3198) seats on the A
57 LAXDESI : Going by the numbers quoted in reply #56, the capacity increase is about 16%. With a 3% decrease in operating cost, A380 should have about 19% lower
58 WingedMigrator : ...which is mathematically equivalent to the 77W having 23% higher operating costs per seat relative to the A380. Percentages always look better one
59 OldAeroGuy : No, the relationship would be: (7*471/.97=3399)/(10*278=2780) = 1.223 With this relationship, the 773ER would be 22.3% more expensive to operate per
60 Post contains images sunrisevalley : Also it reinforces the old adage that figures do not lie but that liar's figure
61 LAXDESI : I made a mistake. Going by your correct number, A388 should have about 21.6% lower operating costs per seat relative to B77W in SQ configuration. I s
62 OldAeroGuy : Any details at how you arrived at 21.6%? If you did a built up analysis, what fuel burn per seat increment did you use?
63 Post contains links and images zeke : The last update to the ATA method was published in 1967 where the industry in the US was heavily regulated. With deregulation, the industry has modif
64 OldAeroGuy : Interesting data Zeke, thanks for the effort. Two initial comments: 1) Load factor is a revenue term and has a mininal impact on operating cost per se
65 redflyer : You're right, because "actual" resale value will not be known for some time. It's the estimated resale value that is key. And it certainly does play
66 Post contains images astuteman : If I can just belatedly pick up on a couple of points..... Before last year's stellar performance for the 777, up to the end of 2010, about 440 773ER'
67 Post contains images Stitch : It's also a good way to freeze out your competition. Tim Clark has said that the A380 gives him such a CASM advantage that he doesn't know how airlin
68 Post contains images redflyer : Why in the world are you excluding last year's figures? That smells of "cherry-picking" the facts. Smoke and mirrors. Using this analysis, I could ma
69 Post contains images astuteman : Why in the world you decided to exclude the portion of the post where I re-introduce last year's figures is a mystery to me. That smells of "cherry-p
70 redflyer : We'll have to agree to disagree. This thread is about operating cost per passengers and if we take it further the thread will get locked out. I'll ju
71 ftornik : A lot of experts are concerned about airport congestion and growing GHGs. Clearly part of the picture is to replace many smaller planes with fewer bi
72 Post contains images Stitch : Considering the plurality, if not majority, of movements at many airports are sub-100 seat planes, replacing a 300-seat 744/7WW with a 500-seat A388 i
73 tommytoyz : OldAeroGuy: Comparing the operating costs by the seat metric alone, ignoring cargo earning potential of the two, results in a distorted comparison. Th
74 Starlionblue : This is the case in the US, certainly, and to lesser extent in Europe. But if you come out to East Asia in places like HKG narrowbodies are in the mi
75 Stitch : Yes, but they all have brand new mega airports so they should have the space to handle plenty of movements.
76 Starlionblue : Now yes. But Kai Tak was pretty tiny and still had the same glut of widebodies.
77 nicoeddf : I would think its rather the very decentralized scattering of US population while having large distances at the same time, no?
78 Starlionblue : I think so as well.
79 Post contains images Stitch : The thought of an A380 doing that approach makes me break out in a cold sweat, but considering the FBW controls and the slower approach speeds thanks
80 flipdewaf : SHHHHHH!!!! You make me want to reinstall flight simulator!
81 Post contains images astuteman : I was having a look at this at the weekend OAG. OEM sales talk aside, there can be a considerable amount of variability in the fuel burn comparison,
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