I am following relatively closely the news related to the grounding of Boeing 787 world fleet due to the recent issues that 2 of the operating aircraft had in service. I was wondering how much could Boeing be penalised by this situation.
Then, a couple of days ago I started seeing estimates (up to 5bn$?!), so enjoying playing with numbers as I do, I wanted to make up my figures before reading the explanation I am looking for somewhere else. Let me share the number play with you.
I have read news pointing at a solution based on new batteries, which certification could extend until 2014! Well, hopefully it doesn’t take that long, but since we don’t know for how long the fleet is going to be grounded and we also don’t know what the final fix is going to be, what I am interested at this moment is in trying to guess the cost per day of the grounding of the fleet.
Let me explain the assumptions I am going to take and where do they come from:
- aircraft grounded: 50 (Boeing deliveries).
- average seating: 210-250 seats for -8 (a/c delivered) and 250-290 for -9 (seating numbers from Boeing; deliveries from Wikipedia).
- revenue per passenger: here, instead of doing an extensive research, I based the calculation on a previous research made by Air Insight for a report about Air India potential claim for 787 delays (the article is from one year ago).
- $234 per flight hour for first class (using a 75% load factor),
- $136 per flight hour for business class (80%),
- $67 per flight hour for economy class (85%).
- seating per class: using the information from United as reported by SeatGuru for the
- 787-8: 36 + 72 + 111 (1) (for a total of 219 pax).
- flight hours per day: Air India was flying between 11 and 11.78 FH/day according to Air Insight. Ethiopian was said to be flying about 14 FH/day. I’ll take an average of 12 flight hours per day.
With all these assumptions, the daily cost of B787 grounded fleet is: ~12.3 millon dollars / day.
Partial results of the calculation are:
- average revenue per flight hour, ~20,500$;
- average daily revenue of a 787, ~245k$.
Taking into account that the fleet has been grounded for already 2 weeks, the cost so far is in excess of 170m$, not much compared to Boeing earnings (to be released today). But if the solution and certification process takes really until 2014, this cost would be in the order of 4.5bn$ (close to the 5bn$ figure pointed by Jefferies & Co. analyst).
Final remarks. Remember that this number play just tries to guess what is the revenue loss from not flying 787s. It doesn’t take into account the cost of fixing the problem, or whether the same routes are flown by other aircraft models and to what extent Boeing might or might not be penalised (in relation to revenue loss? profit loss?). This number play also does not take into account potential financial impact on further deliveries being postponed.
***
(1) Taking estimate of revenues and load factors from Air India and seating numbers from United already introduces some error.
Note: After completing this post, I saw the following similar estimate in Reuters published 2 weeks ago: 1.1m$ per day for a fleet of 17 a/c, the case of ANA.
The Blog by Javier 
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The numbers do get more complicated. The airline no longer has to pay for fuel or landing fees on the flights that got cancelled which is a savings. But if they can’t get the passengers onto other flights from the same airline and instead either lose those journeys or have to pay another airline to carry then they’ll be paying fuel costs to someone.
Plane Talking has a report from ANA which you can use to double check your numbers. Of note is the different impact on revenue versus profits. http://blogs.crikey.com.au/planetalking/2013/02/01/dreamliner-boeing-leaks-a-fix-while-ana-seeks-damages/
Quote: “In US reports ANA’s Chief Financial Officer Kiyoshi Tonomoto said the airline’s revenue will be eroded by about three percent for this fiscal year ending March 31 if the 787 services can’t be resumed by then, but that will translate to minimal impact on profit. Such losses will be gradually reduced over coming months, he said.
“It is not small,” Tonomoto said of the 787 impact. “But it is not that great.”
However if revenue for the carrier does fall at what is approximately one percent per month during which its 787 fleet is unavailable, a prolonged grounding would obviously become a substantial drain on the carrier.”
Thanks for sharing these insights Roger. I had read somewhere else (I believe it was from Air Insight) that the calculation was made comparing fuel efficiency lost from having to carry passengers in other aircraft types rather than 787 (more efficient). That it’s why I included the remarks in the post. I guess that for Boeing, the liabilities will be only a fraction of all these.
I was making the case for when they don’t replace the flight. For example if the flight is flown 4 times a day at 70% occupancy and one of the flights is cancelled then the majority of the passengers can be accommodated on the 3 existing flights and would actually result in better profit for the airline! Similar maths applies if the passenger can be sent to the same destination via a different route on the carrier’s network such as via a different hub. Of course if most legs are on the 787 then that doesn’t work.
ANA have some pretty good information to work out what the impact is http://www.ana.co.jp/topics/notice130116/index_list_e.html (click on a date)
It looks like they are cancelling about 30% of the flights and using alternate aircraft for the rest.