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KTPAFlyer
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Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 2:00 am

Title says it all. Is there any one reason in particular? Delta, United, Southwest, Alaska went for it, why is AA the holdout? All contributions appreciated, thank you.
Last edited by KTPAFlyer on Mon Jan 02, 2017 2:04 am, edited 1 time in total.
 
grbauc
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 2:02 am

The best answer I can remember reading when asked before was They thought AA figured the majority of there missions would not benefit from them that's why. There is a lot of good knowledgeable posters and im sure they will be chiming in soon.
 
Okcflyer
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 2:09 am

While it's been pretty well established they pay for themselves over the long haul, they're still very expensive up front. AA is leveraging itself more so than the other airlines for its rapid fleet replacement (A321,738,A319, 787). I suspect their desire to wait is related to not wanting to (or being able to) to afford the additional capex for the upgrades. And as mentioned, AA tends to not push the 738 as far as UA and AS do so the range-payload gains matter less.
 
MSPNWA
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 2:10 am

I'll jump in with the obvious. They've made a short-sighted mistake that's costing them more and more every day they wait. There's just no good reason not to install them, particularly when they have so many young frames.
 
commavia
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 2:41 am

When viewed in the context of managing an entire fleet, as opposed to a single aircraft type, AA's decision not to go with split scimitars on the 737s makes perfect sense.

For airlines as for any business, there is always the matter of opportunity cost - a dollar spent "here" is a dollar not spent "there." Each profitability improvement - lower costs and/or higher revenue - has to be weighed against a simple question: compared to what? And when you look at where AA's fleet is (and was) relative to some of its competitors, and the amount of capital it has been spending on its fleet, AA's rationale is self-evident. As compared to 30-year-old MD80s and 757s, it is intuitively obvious that one incremental, marginal additional dollar of capex investment is better spent on buying a new airplane to completely replace an MD80 as compared with simply marginally improving the efficiency of a new and already-relatively-efficient 737. And that's before even accounting for the other ancillary benefits that come with entirely new aircraft such as the maintenance holiday and other cost-saving and revenue-enhancing opportunities.

AA has consistently concluded that the biggest "bang for the buck" in terms of reducing per-seat fuel consumption was to (1) replace aging MD80s, 757s and 767s and (2) densify the cabins of remaining aircraft. AA has weighed such fleet investment decisions against the current state. But the "current state" is a moving target, and in a few years, when the fleet renewal is largely finished, AA may have a different opinion about the economic efficacy of split scimitars. And, needless to say, if fuel prices spike again, that, too, could obviously change the calculus and make the marginal fuel efficiency improvement more financially attractive.

But for now, the bottom line is this: at the time the fleet transaction was announced in July 2011, AA said that the new 737s and A320 family aircraft being purchased were 35% more fuel efficient than MD80s, and 12% better than 757s, on a per-seat basis. The comparable improvement from split scimitars is nowhere near that. And so, given that AA has lots of MD80s and 757s still left to replace, it's clear why AA is spending money on new 737s and A321s at the moment instead of split scimitars.
 
MaxTrimm
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 2:56 am

What is AA's longest 738 route?
 
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csturdiv
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 3:01 am

Could you just imagine all of the whiny posts of people here when the first picture of an AA 738 in the new livery and split scimitar winglets appeared? Not sure which one they would whine about more.
An American expat from the ORD area living and working in SYD
 
Q
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 3:01 am

MaxTrimm wrote:
What is AA's longest 738 route?


Miami to Seattle AA has B738 daily.

Q
 
33lspotter
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 3:01 am

MaxTrimm wrote:
What is AA's longest 738 route?


I would guess BOS-LAX is up there.
 
33lspotter
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 3:02 am

Q wrote:
Miami to Seattle AA has B738 daily.

Q


Well, this would have to be the longest that I know of. Does AA operate any 738s to South America (and if so where)?
 
Q
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 3:09 am

33lspotter wrote:
Q wrote:
Miami to Seattle AA has B738 daily.

Q


Well, this would have to be the longest that I know of. Does AA operate any 738s to South America (and if so where)?


No, I have checked with Flightmapper.Net there are no 738 to South American flights. Mostly 767,777,787 and 319 from mainly Miami flights.

Q
 
commavia
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 3:12 am

33lspotter wrote:
Does AA operate any 738s to South America (and if so where)?


Not that it's anywhere near pushing the range of a 737, but yes, AA schedules 737s from MIA to Venezuela (CCS/MAR) and Ecuador (GYE) and depending on season and market conditions on and off to Colombia (often MDE/CLO).
 
Raventech
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 4:36 am

MSPNWA wrote:
I'll jump in with the obvious. They've made a short-sighted mistake that's costing them more and more every day they wait. There's just no good reason not to install them, particularly when they have so many young frames.


No it is not that simple. That's the line of thinking that makes people justify buying a brand new prius to save money on gas when you only drive 5 miles a day. Just because they save fuel does not mean they save enough fuel to justify the expense. If it takes several years to break even then its no wonder they would opt not to as they won't save enough fast enough to be worth it. It might be that they took that money and spent it on other items that either saved them more money or increased revenues more than the fuel saving would be.

Acutally, since im curious, why don't we run the numbers. I will source all my data from http://www.aviationpartnersboeing.com/ , http://www.iata.org/publications/econom ... lysis.aspx , and http://www.boeing.com/assets/pdf/commer ... ps/737.pdf

We will assume 160 Pax at 220 lbs (195 for Pax and 25 for luggage) at full load unless payload restricted, then max payload. OEW: 91300 MTOW: 174900 (Assumed for both).
ZFW unless Payload restricted is 126,500 lbs.
Fuel Cost will be calculated based on empty tanks at $1.535 per gallon
ASL = Average Stage Length

**** Step 1: No Winglets ****
@ 500nm ASL: Fuel Needed - 13000 lbs, Fuel Cost - $2,978.36
@ 1000nm ASL: Fuel Needed - 19000 lbs, Fuel Cost - $4,352.99
@ 2000nm ASL: Fuel Needed - 33000 lbs, Fuel Cost - $7,560.45

*** Step 2: With Winglets ****
@ 500nm ASL: Efficiency Gains: 2.5%, Fuel Needed 12675 lbs, Fuel Cost - $2,903.90, Money Saved - $ 74.46
@ 1000nm ASL: Efficiency Gains: 3.45%, Fuel Needed - 18344.5 lbs, Fuel Cost - $4,202.81, Money Saved - $ 150.18
@ 2000nm ASL: Efficiency Gains: 3.9%, Fuel Needed - 31713 lbs, Fuel Cost - $7,265.59, Money Saved - $294.86

*** Step 3: Scimitar Upgrade ***
@ 500nm ASL: Efficiency Gains: 1%, Fuel Needed 12548.25 lbs, Fuel Cost - $2,874.86 , Money Saved - $29.04
@ 1000nm ASL: Efficiency Gains: 1.6%, Fuel Needed - 18050.99 lbs, Fuel Cost - $4,135.56 , Money Saved - $67.24
@ 2000nm ASL: Efficiency Gains: 2%, Fuel Needed - 31078.74 lbs, Fuel Cost - $7,120.28, Money Saved - $145.31

*** Step 4: Math ***
Assuming approx 20 hours days and about 50 minute block times and 340 days worth of flying per year
500nm = 7 Segments per day
1000nm = 5 Segments per day
2000nm = 3 Segments per day

At 500nm ASL: (ex SFO- PDX)
Blended Winglets upgrade will save $521.21 a day and break even in 5.98 Years
Scimitar Upgrade will save $203.27 a day and break even in 8.32 Years

At 1000nm ASL: (ex PHX-SEA)
Blended Winglets upgrade will save $750.89 a day and break even in 4.15 Years
Scimitar Upgrade will save an additional $336.22 a day and break even in 5 Years

At 2000nm ASL: (ex PHX-BOS)
Blended Winglets upgrade will save $884.57 a day and break even in 3.52 Years
Scimitar Upgrade will save an additional $435.94 a day and break even in 3.88 Years

So after being reminded by this:
Image

Basically the shorter the segments the less they save and the longer it takes to break even. At that point the question is can you take the money and spend it somewhere else and make more money in the same amount of time, and if yes then scimitars don't get installed. It's all about priorities, and AA decided that they can make more money if they spend the money elsewhere.
 
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LAX772LR
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 6:19 am

MSPNWA wrote:
I'll jump in with the obvious.

More like jump in with absolutist conclusions based on information that you don't have.


commavia wrote:
For airlines as for any business, there is always the matter of opportunity cost - a dollar spent "here" is a dollar not spent "there." Each profitability improvement - lower costs and/or higher revenue - has to be weighed against a simple question: compared to what?

....bingo.


Raventech wrote:
No it is not that simple. That's the line of thinking that makes people justify buying a brand new prius to save money on gas when you only drive 5 miles a day.

^ This!

Toyota laughs all the way to the bank, at people paying a significant markup for the likes of a Prius, thinking they're going to "save money" due to fuel efficiency; without realizing that the cheaper Corolla (whose fuel economy isn't all that much lower) would save them more money in the longrun due to its lower acquisition cost/insurance/maintenance, and that it's generally moved at higher relative rebates and dealer discounts.

But hey, the best deal is the one the customer thinks it's getting, versus what they are.
I myself, suspect a more prosaic motive... ~Thranduil
 
MSPNWA
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 9:00 am

commavia wrote:
When viewed in the context of managing an entire fleet, as opposed to a single aircraft type, AA's decision not to go with split scimitars on the 737s makes perfect sense.

For airlines as for any business, there is always the matter of opportunity cost - a dollar spent "here" is a dollar not spent "there." Each profitability improvement - lower costs and/or higher revenue - has to be weighed against a simple question: compared to what? And when you look at where AA's fleet is (and was) relative to some of its competitors, and the amount of capital it has been spending on its fleet, AA's rationale is self-evident. As compared to 30-year-old MD80s and 757s, it is intuitively obvious that one incremental, marginal additional dollar of capex investment is better spent on buying a new airplane to completely replace an MD80 as compared with simply marginally improving the efficiency of a new and already-relatively-efficient 737. And that's before even accounting for the other ancillary benefits that come with entirely new aircraft such as the maintenance holiday and other cost-saving and revenue-enhancing opportunities.

AA has consistently concluded that the biggest "bang for the buck" in terms of reducing per-seat fuel consumption was to (1) replace aging MD80s, 757s and 767s and (2) densify the cabins of remaining aircraft. AA has weighed such fleet investment decisions against the current state. But the "current state" is a moving target, and in a few years, when the fleet renewal is largely finished, AA may have a different opinion about the economic efficacy of split scimitars. And, needless to say, if fuel prices spike again, that, too, could obviously change the calculus and make the marginal fuel efficiency improvement more financially attractive.

But for now, the bottom line is this: at the time the fleet transaction was announced in July 2011, AA said that the new 737s and A320 family aircraft being purchased were 35% more fuel efficient than MD80s, and 12% better than 757s, on a per-seat basis. The comparable improvement from split scimitars is nowhere near that. And so, given that AA has lots of MD80s and 757s still left to replace, it's clear why AA is spending money on new 737s and A321s at the moment instead of split scimitars.


There's a huge difference between buying a new airplane and adding a new winglet to an existing airplane. It's an apples and oranges comparison. The only time it should come down to one or the other is if you're nearly broke and can't afford both. AA is obviously not broke.

The economist in me is why I believe AA has been making a mistake. It's not hard to make the same calculations as the airline, and Raventech has done a lot of it already. The data is out there. If AA can afford billions in investments such as share buybacks, they can afford the investment of a couple hundred sets of Split Scimitars. Foregoing an easy cost reduction with a guaranteed positive ROI is incredibly foolish and is the type of thinking that runs airlines into the ground. By artificially reducing CAPEX for short-term stock prices, they reduce longer-term returns (and stock prices). A general rule of thumb is that you always sign off for cost reductions for existing capacity if you can afford the expense, and it's a positive return. That's the case here, and it's why all U.S. airlines, besides AA, are going for it. Again, there's simply no valid reason out there for AA NOT to do it.



Raventech wrote:
No it is not that simple. That's the line of thinking that makes people justify buying a brand new prius to save money on gas when you only drive 5 miles a day. Just because they save fuel does not mean they save enough fuel to justify the expense. If it takes several years to break even then its no wonder they would opt not to as they won't save enough fast enough to be worth it. It might be that they took that money and spent it on other items that either saved them more money or increased revenues more than the fuel saving would be.

Acutally, since im curious, why don't we run the numbers. I will source all my data from http://www.aviationpartnersboeing.com/ , http://www.iata.org/publications/econom ... lysis.aspx , and http://www.boeing.com/assets/pdf/commer ... ps/737.pdf

We will assume 160 Pax at 220 lbs (195 for Pax and 25 for luggage) at full load unless payload restricted, then max payload. OEW: 91300 MTOW: 174900 (Assumed for both).
ZFW unless Payload restricted is 126,500 lbs.
Fuel Cost will be calculated based on empty tanks at $1.535 per gallon
ASL = Average Stage Length

**** Step 1: No Winglets ****
@ 500nm ASL: Fuel Needed - 13000 lbs, Fuel Cost - $2,978.36
@ 1000nm ASL: Fuel Needed - 19000 lbs, Fuel Cost - $4,352.99
@ 2000nm ASL: Fuel Needed - 33000 lbs, Fuel Cost - $7,560.45

*** Step 2: With Winglets ****
@ 500nm ASL: Efficiency Gains: 2.5%, Fuel Needed 12675 lbs, Fuel Cost - $2,903.90, Money Saved - $ 74.46
@ 1000nm ASL: Efficiency Gains: 3.45%, Fuel Needed - 18344.5 lbs, Fuel Cost - $4,202.81, Money Saved - $ 150.18
@ 2000nm ASL: Efficiency Gains: 3.9%, Fuel Needed - 31713 lbs, Fuel Cost - $7,265.59, Money Saved - $294.86

*** Step 3: Scimitar Upgrade ***
@ 500nm ASL: Efficiency Gains: 1%, Fuel Needed 12548.25 lbs, Fuel Cost - $2,874.86 , Money Saved - $29.04
@ 1000nm ASL: Efficiency Gains: 1.6%, Fuel Needed - 18050.99 lbs, Fuel Cost - $4,135.56 , Money Saved - $67.24
@ 2000nm ASL: Efficiency Gains: 2%, Fuel Needed - 31078.74 lbs, Fuel Cost - $7,120.28, Money Saved - $145.31

*** Step 4: Math ***
Assuming approx 20 hours days and about 50 minute block times and 340 days worth of flying per year
500nm = 7 Segments per day
1000nm = 5 Segments per day
2000nm = 3 Segments per day

At 500nm ASL: (ex SFO- PDX)
Blended Winglets upgrade will save $521.21 a day and break even in 5.98 Years
Scimitar Upgrade will save $203.27 a day and break even in 8.32 Years

At 1000nm ASL: (ex PHX-SEA)
Blended Winglets upgrade will save $750.89 a day and break even in 4.15 Years
Scimitar Upgrade will save an additional $336.22 a day and break even in 5 Years

At 2000nm ASL: (ex PHX-BOS)
Blended Winglets upgrade will save $884.57 a day and break even in 3.52 Years
Scimitar Upgrade will save an additional $435.94 a day and break even in 3.88 Years

Basically the shorter the segments the less they save and the longer it takes to break even. At that point the question is can you take the money and spend it somewhere else and make more money in the same amount of time, and if yes then scimitars don't get installed. It's all about priorities, and AA decided that they can make more money if they spend the money elsewhere.


This isn't the same as a Prius comparison. We're not replacing our car. We're making our car more efficient.

That's about the same calculations I was meddling with. Thanks for proving my point that AA is out of their minds by not doing it, even at current bargain-basement fuel prices. As of a 2013, AA's average stage length for the 738 was 1,116 miles. I suspect that has dropped somewhat as the 737s replace more MD-80s than 757s or US Airbus routes, but the MDs stage length was still nearly 800 miles. I don't see the current stage 737 length being under that 1,000 benchmark.

LAX772LR wrote:
More like jump in with absolutist conclusions based on information that you don't have.


Unfortunately for you my conclusion is based on absolutist information that has already been posted. Your logical fallacies aren't going to win a debate.
 
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LAX772LR
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 9:19 am

MSPNWA wrote:
If AA can afford billions in investments such as share buybacks, they can afford the investment of a couple hundred sets of Split Scimitars.

You managed to miss the key element of what Commavia was trying to tell you:
It's not that they can't afford it, it's that they don't feel they can justify it relative to the opportunity cost at this time, if ever.



And if you don't want to hear it from either of us; then look to the poster whom you just alluded to, as he ALSO told you the exact same thing. Here it is again, in case you didn't see it:
Raventech wrote:
Basically the shorter the segments the less they save and the longer it takes to break even. At that point the question is can you take the money and spend it somewhere else and make more money in the same amount of time, and if yes then scimitars don't get installed.




MSPNWA wrote:
Unfortunately for you my conclusion is based on absolutist information that has already been posted.

Okay, I'll bite:
Posted by who, and where?

Cite it..... I'll zip right to it, bringing it here, and we'll discuss.
I myself, suspect a more prosaic motive... ~Thranduil
 
commavia
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Mon Jan 02, 2017 11:11 am

MSPNWA wrote:
There's a huge difference between buying a new airplane and adding a new winglet to an existing airplane. It's an apples and oranges comparison.


Indeed. No question about it. The acquisition of a new aircraft unquestionably requires a lot more capital, but as already said, it also of course delivers a far larger fuel efficiency improvement relative to an old aircraft. And again, that's without also accounting for the other ancillary financial benefits of new aircraft including the significant maintenance "holiday" which is near-term, and thus not only profit-accretive but also NPV-accretive. At today's cost of money, it isn't at all hard to see how AA made the business case close on focusing its next incremental dollar of capex on new aircraft over new winglets.

MSPNWA wrote:
The only time it should come down to one or the other is if you're nearly broke and can't afford both. AA is obviously not broke.


Well "nearly broke" is relative, and in any event, every economically rational decision made at a profit-seeking corporation is absolutely made on the basis, among other things, of opportunity cost - regardless of the broader financial state of the company. Indeed, excluding the consideration of opportunity cost would render a decision economically irrational.

MSPNWA wrote:
If AA can afford billions in investments such as share buybacks, they can afford the investment of a couple hundred sets of Split Scimitars.


Talk about a logical fallacy. That's not how corporate decision making works - it's not "if we have money for A than we also have money for B." If A is the more NPV-attractive investment, then it should be maximized and prioritized over B until its economic benefits have been optimally realized.

MSPNWA wrote:
Foregoing an easy cost reduction with a guaranteed positive ROI is incredibly foolish and is the type of thinking that runs airlines into the ground.


Actually, the "if we have money for A than we also have money for B" fallacy above is the type of thinking that runs companies into the ground. On the contrary, concentrating investment dollars on the place where they will have the largest and most immediate impact on profit is highly economically rational.

MSPNWA wrote:
By artificially reducing CAPEX for short-term stock prices, they reduce longer-term returns (and stock prices).


Who said anything about "reducing capex," "artificially" or otherwise? On the contrary, nobody is suggesting that AA reduce its investments, and indeed AA is investing more than any other U.S. airline in dramatically improving the cost efficiency of its fleet. The argument isn't about more capex or less. It's about how that capex is spent.

MSPNWA wrote:
A general rule of thumb is that you always sign off for cost reductions for existing capacity if you can afford the expense, and it's a positive return.


No. The "general rule of thumb" is that you "sign off" on the decisions that maximize NPV. And as multiple people have now explained, in AA's case, it is entirely reasonable to conclude that the NPV-maximizing decision is to concentrate on rapidly replacing 30-year-old MD80s and 757s with brand new (and winglet-equipped!) 737s and A321s.

MSPNWA wrote:
That's the case here, and it's why all U.S. airlines, besides AA, are going for it.


Every U.S. airline is different. They all have different opportunity costs, different costs of debt, equity and capital overall, different existing fleets, different route networks, etc. All of these countless variables and inputs will lead to different - not necessarily right or wrong, just different - conclusions for different airlines. It is entirely logical and understandable that two airlines could view the exact same investment differently, with one concluding that it is the best deployment of capital and the other concluding that it's not. This happens all the time.

Among these myriad of variables, the utility of the airplanes in question are obviously a big factor - Alaska, for example, uses its 737s on lots of long sectors to Hawaii where a fuel burn would obviously be relatively more valuable, for example. But, again, the question of "compared to what?" also undoubtedly comes into play. So extending the comparison, if I'm Alaska and I already have a fleet comprised near-entirely of relatively new and relatively fuel efficient 737NGs, the incremental profit improvement (fuel, maintenance, etc.) of replacing those with slightly newer 737NGs is almost certainly not worth the newer aircraft's capital costs. So scratch that from the list. Then moving down the list to the theoretical "next" potential fleet investment, split scimitars are worth their capital cost and represent the next best chance at profit improvement. That is exactly how decisions are made.

And, again, in the future AA's decision may change. Once the near term opportunity to dramatically reduce fleet fuel efficiency through the replace of MD80s and 757s is fully exhausted, AA will be - ostensibly - about where Alaska is, which is to say that at that point split scimitars may well represent the "next" most attractive opportunity to improve the profitability of the fleet. Similarly, if fuel prices jump back to $100/barrel, the calculus for split scimitars would also certainly change. All of these things are dynamic - they move and change on a constant basis, which is why I'm quite sure that AA and every other airline evaluates them on a constant basis.

MSPNWA wrote:
Again, there's simply no valid reason out there for AA NOT to do it.


There are multiple valid reasons restated multiple times in this thread.
 
Okcflyer
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Tue Jan 03, 2017 1:48 pm

Additionally, the industrial / manufacturing capacity by APB must be considered as well. It's possible they don't have manufacturing slots in the near term future that made sense to AA in-addition to all the other factors mentioned.

Another not considered is market volatility, both the air travel market and oil price (large input of airline cost).

Payback of this particular upgrade is very dependent on fuel outlook. Each company handles this differently and reaches slightly different conclusions. It'll take several years from contract signed to fully installed. With lower fuel prices, as shown, its questionable ROI. If volatility is a concern, fuel operating costs become high and suddenly ROI increases quite substantially.
 
777PHX
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Tue Jan 03, 2017 4:18 pm

MSPNWA wrote:
I'll jump in with the obvious. They've made a short-sighted mistake that's costing them more and more every day they wait. There's just no good reason not to install them, particularly when they have so many young frames.


I'd wager the guys making these decisions at AA are far more informed and have far better data to use to make these decisions than you do.
 
ripcordd
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Tue Jan 03, 2017 6:28 pm

Cause they are waiting for the next new winglet to hit the market
 
JoeCanuck
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Tue Jan 03, 2017 6:41 pm

I imagine they will put them on a few of their 738's and make a 'longer haul', transcon subfleet but for now, I'm willing to bet that they figure their money can be best spent elsewhere.
What the...?
 
brilondon
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Tue Jan 03, 2017 6:49 pm

MSPNWA wrote:
I'll jump in with the obvious. They've made a short-sighted mistake that's costing them more and more every day they wait. There's just no good reason not to install them, particularly when they have so many young frames.


I don't think that AA would see a return large enough to justify the expense of the installation of the scimitar wing tips.
Rush forever Closer To My Heart
 
hiflyeras
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Tue Jan 03, 2017 7:36 pm

Raventech wrote:
MSPNWA wrote:
I'll jump in with the obvious. They've made a short-sighted mistake that's costing them more and more every day they wait. There's just no good reason not to install them, particularly when they have so many young frames.


No it is not that simple.


Thanks Raventech! And thank your SO for us for letting you stay up late working on that! ;)
 
MSPNWA
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 3:59 am

LAX772LR wrote:
You managed to miss the key element of what Commavia was trying to tell you:
It's not that they can't afford it, it's that they don't feel they can justify it relative to the opportunity cost at this time, if ever.


No, you must have missed the responses. Commavia's arguments have been nullified by the deeper economic theory and facts brought into this thread. Commavia's arguments don't contain any factual evidence in support of the theory. It's only an discussion of a basic economic theory that may or may not be a deciding factor in AA's decision. So are you going to contribute and bring your own facts and conclusions into the equation, or are you going to ride coattails?

LAX772LR wrote:
And if you don't want to hear it from either of us; then look to the poster whom you just alluded to, as he ALSO told you the exact same thing. Here it is again, in case you didn't see it:
Raventech wrote:
Basically the shorter the segments the less they save and the longer it takes to break even. At that point the question is can you take the money and spend it somewhere else and make more money in the same amount of time, and if yes then scimitars don't get installed.



Except Raventech's figures (which I defend) shows us why airlines are doing it! They're paid off in a matter of a few years. Raventech's theory to implement those figures sends mixed signals for some reason. The data clearly shows why every North American airline besides AA is doing it, and it doesn't show why AA would NOT do it.

LAX772LR wrote:
Okay, I'll bite:
Posted by who, and where?

Cite it..... I'll zip right to it, bringing it here, and we'll discuss.


Raventech (and now mine as well) Clearly you saw them. If you don't agree, take those numbers and show me why UA, WN, DL, AS, and others are wrong. Contribute in support of your stance.


commavia wrote:
Indeed. No question about it. The acquisition of a new aircraft unquestionably requires a lot more capital, but as already said, it also of course delivers a far larger fuel efficiency improvement relative to an old aircraft. And again, that's without also accounting for the other ancillary financial benefits of new aircraft including the significant maintenance "holiday" which is near-term, and thus not only profit-accretive but also NPV-accretive. At today's cost of money, it isn't at all hard to see how AA made the business case close on focusing its next incremental dollar of capex on new aircraft over new winglets.


Okay, you agree on that. So let's do a different calculation that also speaks against AA's decision.

Let's say AA spent that money on new aircraft, like you point out as a potential strategy. Now buying an aircraft is far more complex to calculate the return of than winglets, which only deal with the cost side, but let's keep it simple. From what we know about the cost of Split Scimitars and new 737s, and of AA's fleet of 304 737s (284 in service at last check with 20 to come soon), let's say the tradeoff was 5 airplanes (It may be a plane less or more than that, but let's go an even 5 so we're close). That is, assuming a hard limit on the budget (which in reality AA doesn't have), American could either purchase winglets for it's entire 737 fleet, or it could buy 5 more new 737s to replace less efficient aircraft such as the MD-80. Now let's imagine that AA took their money and purchased winglets instead. We'll imagine that 5 less efficient aircraft that would have been retired will continue to fly a little longer to cover the gap. Now we know from the data that AA can expect about a 1.6% average fuel burn reduction at the average stage length they operate the 738 on. Now since AA has decided to make each 738 burn 1.6% more fuel than necessary, take the 304 and multiply by 0.016. It comes to 4.864, almost 5, or basically the same figure as the "extra" 737s purchased. That means that by foregoing Split Scimitar winglets, each day without them AA burns the fuel of about 5 more 737s. What does this mean? If AA thought that buying 5 more airplanes instead of winglets would be better for lowering cost, they're barking up the wrong tree. The only way it's even cost effective, let alone worth it on an opportunity cost basis, is if those MDs, Boeings, or Airbuses have higher costs (and we're not counting their lower ownership costs in relation to NPV) even after you subtract a 738s entire fuel burn from their fuel burn. That's not happening. So if AA decided to buy more 737s instead of buying winglets, AA is paying more, and each day they wait, the more they will pay for their mistake. They are literally burning extra money out the back of the CFMs.

commavia wrote:
Well "nearly broke" is relative, and in any event, every economically rational decision made at a profit-seeking corporation is absolutely made on the basis, among other things, of opportunity cost - regardless of the broader financial state of the company. Indeed, excluding the consideration of opportunity cost would render a decision economically irrational.


The opportunity cost clearly is in favor of the winglets over short-term stock inflation such as inflated ROICs and stock repurchases. It's even in favor of winglets over new airplanes. But like I've said all along, your theory is reliant on a flawed either/or situation. That's not the case with a massive and profitable corporation like AA. They do not have that shortage of capital available to them. Indeed, U.S. airlines are intentionally restricting their capital spending to inflate stock price-friendly metrics. It's a good thing to restrict capital spending when the capital is relatively expensive. It's also good to restrict if it's a negative return or the risk isn't worth the reward. But it's not a good idea to restrict it when capital is relatively cheap, and the return is known, solidly positive, a virtual guarantee, and diminishes over time (while the capital expense required does not diminish).

commavia wrote:
Talk about a logical fallacy. That's not how corporate decision making works - it's not "if we have money for A than we also have money for B." If A is the more NPV-attractive investment, then it should be maximized and prioritized over B until its economic benefits have been optimally realized.


It's not a fallacy. It's an easy question, even with based on the flawed either/or argument. Would AA (and their investors) have been better off in the long-run spending a very small portion of their buyback money on winglets instead? The answer is a resounding "yes".

commavia wrote:
Actually, the "if we have money for A than we also have money for B" fallacy above is the type of thinking that runs companies into the ground. On the contrary, concentrating investment dollars on the place where they will have the largest and most immediate impact on profit is highly economically rational.


If this is an either/or situation due to capital constraints, and A is an airplane needed for growth, and B is a cost efficiency product, only then do you have a point. AA is not in that situation, and that is not the purchase scenario up for debate.

And second, it is very wrong to say "most immediate impact on profit is highly economically rational". Proper management looks at both the short-run and long-run. What can be highly profitable in the immediate future could be highly unprofitable over the long-run.

commavia wrote:
Who said anything about "reducing capex," "artificially" or otherwise? On the contrary, nobody is suggesting that AA reduce its investments, and indeed AA is investing more than any other U.S. airline in dramatically improving the cost efficiency of its fleet. The argument isn't about more capex or less. It's about how that capex is spent.


How much they're spending is irrelevant. Spending only a $100 when you are able and should spend $105 for the best return in the long-run is a internal, artificial reduction in CAPEX for temporary gain.

commavia wrote:
No. The "general rule of thumb" is that you "sign off" on the decisions that maximize NPV. And as multiple people have now explained, in AA's case, it is entirely reasonable to conclude that the NPV-maximizing decision is to concentrate on rapidly replacing 30-year-old MD80s and 757s with brand new (and winglet-equipped!) 737s and A321s.


Now that your "reasonable conclusion" has been debunked, where's your evidence against my theory?

commavia wrote:
Every U.S. airline is different.


I figured that would be said. That's a catch-all without any evidence needed to back it up. A decision on Split Scimitars has little to do with differences between airlines. How each airline uses a 737 doesn't vary tremendously. It either saves money in the long-run and generates a positive return, or it doesn't. It's an easy calculation too since it only deals with the cost side. It's pretty clear in this thread why all North American airlines but one are springing for them. Let's turn the question around. How is AA so different that it doesn't generate a positive long-run return?


commavia wrote:
There are multiple valid reasons restated multiple times in this thread.

Sorry. Valid in theory, but not also supported by facts, unlike the reasons to install them.


777PHX wrote:
I'd wager the guys making these decisions at AA are far more informed and have far better data to use to make these decisions than you do.


Oh yeah, the "the airline guys never make a wrong decision" cop-out. We know that's far from the truth. Why even have a discussion if airlines are infallible?

And I'd wager the managers at United, Delta, Alaska, and Southwest, among others, are more informed than us as well, and they've made a different decision supported by the facts.
Last edited by MSPNWA on Wed Jan 04, 2017 4:04 am, edited 1 time in total.
 
deltal1011man
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 4:02 am

KTPAFlyer wrote:
Title says it all. Is there any one reason in particular? Delta, United, Southwest, Alaska went for it, why is AA the holdout? All contributions appreciated, thank you.

because fuel has dropped so much and as others have pointed out AA is putting capex into other areas.


Just a note on DL, yes the 739s are getting them but the 738s and 73Gs are not. DL did a study to add them and last I heard (right now) fuel costs are not high enough to justify them. This could easily change as fuel goes up though. I expect AA will probably do the mod if fuel reaches a certain target.
 
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LAX772LR
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 5:31 am

MSPNWA wrote:
Commavia's arguments have been nullified by the deeper economic theory and facts brought into this thread.

Which specifically? Let's discuss them line-by-line.


MSPNWA wrote:
Except Raventech's figures (which I defend) shows us why airlines are doing it!

^This right here, further demonstrates how removed from comprehension you actually are on this issue:
Opportunity Cost is entirely subjective to the individual airline.

Saying "....why airlines are doing X!" and using that to conclude "thus this airline is suffering from not doing X" without specific knowledge of that airline's operational needs (relative to the aforementioned competition), is the height of fallacy.



MSPNWA wrote:
take those numbers and show me why UA, WN, DL, AS, and others are wrong.

No problem, just hand me UA, WN, DL, AS (and of course, then AA's) calculations specific to that fleet, that you've been using to reach your conclusions, so we can cross-compare.

....wait, what's that you say? You don't have access to said numbers?

Oh, I see. Hmm. :scratchchin:
I myself, suspect a more prosaic motive... ~Thranduil
 
777PHX
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 6:13 am

MSPNWA wrote:

Oh yeah, the "the airline guys never make a wrong decision" cop-out. We know that's far from the truth. Why even have a discussion if airlines are infallible?


You're right. I should *totally* believe the adolescent that's clearly talking out of his butt over a bunch of professionals that do this for living and have a fiduciary duty to do what's right by the company.

What I was thinking.....

Welcome to airliners.net, where your neighborhood 12 year old knows how to run your airline better than you do!
 
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kitplane01
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 6:30 am

commavia wrote:
For airlines as for any business, there is always the matter of opportunity cost - a dollar spent "here" is a dollar not spent "there." Each profitability improvement - lower costs and/or higher revenue - has to be weighed against a simple question: compared to what? And when you look at where AA's fleet is (and was) relative to some of its competitors, and the amount of capital it has been spending on its fleet, AA's rationale is self-evident. As compared to 30-year-old MD80s and 757s, it is intuitively obvious that one incremental, marginal additional dollar of capex investment is better spent on buying a new airplane to completely replace an MD80 as compared with simply marginally improving the efficiency of a new and already-relatively-efficient 737. And that's before even accounting for the other ancillary benefits that come with entirely new aircraft such as the maintenance holiday and other cost-saving and revenue-enhancing opportunities.



That only makes sense if you capital expenditure is limited. But in American's case it is not. They could finance this many ways, and the return would greatly exceed the near zero interest expense.

This is true if (1) American has not borrowed the last dollar they are able to borrow and (2) the pay back is at a rate greater than the interest rate at which American has to borrow, maybe 1-2%.

Also, if you ever want to sell the planes you'll get more if they are equipped. If you want to borrow against them you can borrow more if they are equipped.
 
IPFreely
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 6:57 am

MSPNWA wrote:
The economist in me is why I believe AA has been making a mistake. It's not hard to make the same calculations as the airline, and Raventech has done a lot of it already. The data is out there. If AA can afford billions in investments such as share buybacks, they can afford the investment of a couple hundred sets of Split Scimitars. Foregoing an easy cost reduction with a guaranteed positive ROI is incredibly foolish and is the type of thinking that runs airlines into the ground.


The only logical question is why is an economist posting this on a message board instead of taking it to the top management of AA? No management wants to be foolish and their board will definitely reward you generously for preventing them from running their airline into the ground. Your economic information is of high value. The economist in you surely realizes this -- you need to stop giving information away for free on the internet and market it where it provides the most value.
 
commavia
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 12:10 pm

MSPNWA wrote:
The only way it's even cost effective, let alone worth it on an opportunity cost basis, is if those MDs, Boeings, or Airbuses have higher costs (and we're not counting their lower ownership costs in relation to NPV) even after you subtract a 738s entire fuel burn from their fuel burn. That's not happening. So if AA decided to buy more 737s instead of buying winglets, AA is paying more, and each day they wait, the more they will pay for their mistake. They are literally burning extra money out the back of the CFMs.


All I can say is that I believe there are a myriad of flaws in this logic. There are substantial additional profitability enhancements that would factor into the decision. The utilization of the aircraft. The economies of scale of commonality that come with getting rid of a smaller, non-standard fleet of aircraft and all of its attendant peculiar costs (support equipment, training, etc.). The maintenance holiday and other ancillary benefits that come with a new airplane. The opportunity cost of one incremental additional dollar being spent elsewhere, or simply returned to shareholders. The price of fuel. And of course timing - not only in that, of course, there is a lead time for the installation of new winglets on nearly 400 jets just as there is for new deliveries, but also the timing expectation of the cost of money. If AA really believes that the cost of money is at historic lows and likely to rise in the future, but also knows with certainty that older aircraft will have to be replaced, it may be logical to leverage the lower borrowing costs and replace today.

MSPNWA wrote:
The opportunity cost clearly is in favor of the winglets over short-term stock inflation such as inflated ROICs and stock repurchases. It's even in favor of winglets over new airplanes.


Again with the fallacies. The choice isn't between the "clear" winglet payback and "short-term stock inflation." The choice is between new winglets and other investments AA could be making. As said repeatedly, and for the final time, with the cost of money and fuel prices where they are, the resulting fuel burn improvements that winglets could deliver, and the alternative investments AA could make - and is making! - with that money, it isn't hard to see how AA's management arrived at the decision now to mod the 737 wings. As everyone acknowledges and agrees, this decision certainly may change in the future as all of these and other various conditions evolve - that's not hard to see either if fuel prices rise, or once the MD80s are gone, etc. But for now, AA's management is "clearly" (at least to me) not making the decision so as to manipulate "short-term stock inflation."

MSPNWA wrote:
But like I've said all along, your theory is reliant on a flawed either/or situation. That's not the case with a massive and profitable corporation like AA. They do not have that shortage of capital available to them.

MSPNWA wrote:
It's not a fallacy.

MSPNWA wrote:
If this is an either/or situation due to capital constraints, and A is an airplane needed for growth, and B is a cost efficiency product, only then do you have a point. AA is not in that situation, and that is not the purchase scenario up for debate.


It is a logical fallacy. Nobody said this was an "either/or situation due to capital constraints." It's an "either/or situation" due to economic reality - as is literally every single other capital decision at every single other corporation on the face of the earth. Every decision is an either/or decision. If it isn't, the management team should be fired. A decision that doesn't take into account opportunity cost is, inherently, a flawed decision. I work in corporate finance, and thus I do this for a living - every day - so forgive me if I couldn't care less that someone else believes it's a "flawed theory." It's very much real, and very much not flawed, to me.

MSPNWA wrote:
Indeed, U.S. airlines are intentionally restricting their capital spending to inflate stock price-friendly metrics. It's a good thing to restrict capital spending when the capital is relatively expensive. It's also good to restrict if it's a negative return or the risk isn't worth the reward. But it's not a good idea to restrict it when capital is relatively cheap, and the return is known, solidly positive, a virtual guarantee, and diminishes over time (while the capital expense required does not diminish).


AA isn't "intentionally restricting [its] capital spending," though! AA has spent billions in the last five years on transforming its fleet in a larger, more radical and more immediate way that perhaps any other U.S. carrier in recent memory. Taking delivery of more than 500 new airplanes and replacing over two thirds of the fleet is "restricting ... capital spending to inflate stock price-friendly metrics?" Huh? Sorry, but no. On the contrary, prudently managing investments and targeting them to the places where they have the most immediate and largest impact on profit and NPV isn't "restricting" capital expenditures, it's just being smart stewards of shareholders' capital (i.e., it's management doing its job).

MSPNWA wrote:
And second, it is very wrong to say "most immediate impact on profit is highly economically rational". Proper management looks at both the short-run and long-run. What can be highly profitable in the immediate future could be highly unprofitable over the long-run.


Another fallacy. Management accounting for which investment delivers the "most immediate impact on profit" and "[looking] at both the short-run and long-run" are not mutually exclusive. Management can, and must, do both. And in this case I'm sure they did. But what I was saying previously, and will reiterate again, is that it is highly economically rational to make decisions on the basis of one investment delivering a dramatically larger profit enhancement, and faster - that is highly favorable for NPV. And again, it isn't hard to imagine how AA determined that replacing 30-year-old MD80s would deliver a dramatically larger profit enhancement, faster.

MSPNWA wrote:
Now that your "reasonable conclusion" has been debunked, where's your evidence against my theory?


With all due respect, these are all opinions. We all come to this with our own experiences - academic and professional. I won't continue wasting time with this back and forth - as there is obviously no point. So I'll just conclude by saying this: for as "clear" and obvious and certain as the "right" answer seems to be to one person here on A.net, it is notable that AA's actual management - informed by far better information than any of us, and bound by law with a fiduciary responsibility to shareholders - have arrived at a "wrong" answer. Now that's not to say that AA's executives are automatically right or that a poster on A.net is automatically wrong. Certainly not. But in that light, perhaps some humility is in order, or at least acknowledgement that some other posters' logic may have some merit and may, indeed, be precisely the logic actually being used by management itself to arrive at a decision.
 
Okcflyer
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Re: Why did AA opt of split-scimitars on its 737 fleet?

Wed Jan 04, 2017 12:56 pm

Give it a rest and get back on topic.

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