TO: CHIEF FINANCIAL OFFICER, WESTJET
FROM: CONSULTANT, IFC INTERNATIONAL
RE: FLEET REPLACEMENT
DATE: 10 th June 2019
There are so many costs associated with the operation of an airline, and the total operating expenses can be categorized into the aircraft operating expense, servicing, sales and reservations, and the overhead expense. The aircraft operating costs includes values of the crew, fuel, depreciation, and the direct maintenance costs while servicing includes passenger, planes, and traffic servicing ( Baxter, Srisaeng & Wild, 2018) . Additionally, the overhead costs include the administrative and general expenses and the publicity and advertising costs. Not all these expenses are critical in the evaluation of the cost-benefit analysis. Therefore, it is relevant that the right functions be identified for the accurate computation and for the results to be reliable and valid.
In our case, the comparison of the flights B-767-300 and B-787-9 was necessary to avoid the company running into unnecessary losses by making decisions that could turn to be expensive in the long run. For instance, if the company purchases the new airplane and it turns out that the older plane was more economical in its maintenance and overall profit generation, it would be inefficiency in the reallocation of funds ( Jelača-Strugar & Boljević, 2016) . This would lead to losses from opportunities foregone due to poor decision making. Therefore, it is critical that the company's management make the right decision in the selection of the right project that will safeguard the shareholder's equity.
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From the operations of the Boeing 767-300, it is clear that its costs of maintenance are higher compared to the Boeing 787-9. About the cost of purchase, and the number of seats available for the B-767-300, it is more expensive to operate the airplane, and it is much cheaper to run the B-787-9. Moreover, the depreciation rate of the smaller aircraft is alarming as indicated by the values of the sale price after fifteen years of operation which is $1,000,000,000 meaning the company cannot recover much from the airplane ( Shehadi, 2019) . WestJet has the advantage of benefiting from the possession of Boeing 787-9 as the aircraft has a higher salvage price in 15 years with $132,200,000 as the price of sale.
The metric used in the determination of whether the Boeing 787 is a better replacement for the Boeing 767 is the cost per available seat mile. The metric has been used extensively in the evaluation of the comparison of the proficiency of different airlines. Therefore, in our computation, the CASM was obtained by dividing the costs of operation of WestJet airline by the seats available per mile ( Shehadi, 2019) . In most instances, the prices of fuel are excluded in the calculation of the costs per available seat mile, which makes the function unreliable as these costs are part of the operating expenses.
Therefore, the CASM was used to compare the costs of flying a client in a single sit in a one-mile distance between the B-767-300 and the B-787-9. From the computation, the Boeing 767-300 has a lower CASM of 0.11 compared to Boeing 787-9's 0.13 CASM. Therefore, from this metric, it is evident that as much as the company is seeking to replace the B-767-300, the airplane is more efficient and profitable compared to the Boeing 787-9 ( Jelača-Strugar & Boljević, 2016) . This deduction was arrived at by the fact that a lower CASM typically indicates profitability and efficiency. The figures can be found in the table attached in Appendix A.
In determining the net present value, it is essential that there be a discount rate, and in our case, a rate of 20% was used. Setting the discount rate can be tricky at times as considerations have to be made for the investment risk, capital cost, and inflation ( Lawrence & Thornton, 2017) . The capital cost is the amount of money that is set aside for the acquisition of the new airplane Boeing 787-9 and the funds can be borrowed from investors or lenders or be from a portion of the company's profits. Hence, in our case, the discounted rate was obtained from the targeted return on investment of 20% of the company.
To ensure the reliability of the CASM as a metric, the computation comprised the costs of acquisition, fuel costs, costs of maintenance, and the costs of total annual operations. Furthermore, the calculation revolved around the net present value of both of the airplanes for the first fifteen years of operation where the net present value cost was obtained ( Jelača-Strugar & Boljević, 2016) . From the two planes NPV cost comparison, Boeing 787-9 had a higher cost of 3,769,440,028 compared to B-767-300’s 1,356,571,581. Form the cost-benefit analysis conducted and based on the net present values; both planes have a positive NPV which indicates that they both stand to generate profits, and thus, have the capability of repaying the money invested in them. But since the B-787-9 has a higher NPV cost, then the plane has more chances to generate more profits.
Within the computation, the future fuel prices were estimated through internet software of the crude oil price prediction. Therefore, as a recommendation, the WestJet management should consider purchasing the Boeing 787-9, which from the cost-benefit analysis is the project with the highest net present value ( Clark, 2017) . Boeing 767-300 has a lower CASM, and this could mislead the management into adopting the project by preceding the purchase of the new brand of Boeing Dreamliner. The B-767-300 is disregarded in this case as it involves high maintenance and operation costs.
References
Clark, P. (2017). Buying the big jets: fleet planning for airlines. New York: Routledge.
Baxter, G., Srisaeng, P., & Wild, G. (2018). The Air Cargo Carrying Potential of The Airbus A350-900XWB and Boeing 787-9 Aircraft on Their Ultra-Long-Haul Flights: A Case Study for Flights from San Francisco to Singapore. Transport and Telecommunication Journal, 19(4), 301-314.
Jelača-Strugar, M., & Boljević, A. (2016). Critical success factors and negative effects of development: The Boeing 787 Dreamliner. Strategic Management, 21(1), 30-39.
Lawrence, P. K., & Thornton, D. W. (2017). Deep stall: the turbulent story of Boeing commercial airplanes. New York: Routledge.
Shehadi, M. (2019). Particles Dispersion Analysis in an 11-Row Boeing 767 Cabin Mockup. Science and Technology for the Built Environment, (just-accepted), 1-10
