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Real option analysis of aircraft acquisition: A case study

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  • Hu, Qiwei
  • Zhang, Anming

Abstract

This paper demonstrates that aircraft acquisition by airlines may contain a portfolio of real options (flexible strategies) embedded in the investment's life cycle, and that if airlines rely solely on the static NPV method, they are likely to underestimate the true investment value. Two real options are investigated: i) the “shutdown-restart†option (a carrier may shutdown a plane if revenues are less than costs, but restarts it if revenues are more than costs), and ii) the option to defer aircraft delivery. We quantify the values of these options in a case study of a major U.S. airline. The economic insight could help explain observed capital expenditures of airlines, and serve as a rule of thumb in evaluating capital budgeting decisions. A compound option (consisting of both the shutdown-restart and defer options) is also analyzed.

Suggested Citation

  • Hu, Qiwei & Zhang, Anming, 2015. "Real option analysis of aircraft acquisition: A case study," Journal of Air Transport Management, Elsevier, vol. 46(C), pages 19-29.
    • Handle: RePEc:eee:jaitra:v:46:y:2015:i:c:p:19-29
    DOI: 10.1016/j.jairtraman.2015.03.010
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    4. Chen, Wei-Ting & Wu, Cheng-Lung, 2023. "Aircraft acquisition optimization under demand and cost fluctuations: Before and after leasing standard changes," Journal of Air Transport Management, Elsevier, vol. 112(C).
    5. Gao, Fei & Wang, Weixiang & Bi, Chencan & Bi, Wenhao & Zhang, An, 2023. "Prioritization of used aircraft acquisition criteria: A fuzzy best–worst method (BWM)-based approach," Journal of Air Transport Management, Elsevier, vol. 107(C).
    6. Sun, Xiaoqian & Wandelt, Sebastian & Zhang, Anming, 2021. "Technological and educational challenges towards pandemic-resilient aviation," Transport Policy, Elsevier, vol. 114(C), pages 104-115.
    7. Jiangang Shi & Kaifeng Duan & Shiping Wen & Rui Zhang, 2019. "Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective," Sustainability, MDPI, vol. 11(7), pages 1-18, March.
    8. Chen, Wei-Ting & Huang, Kuancheng & Ardiansyah, Muhammad Nashir, 2018. "A mathematical programming model for aircraft leasing decisions," Journal of Air Transport Management, Elsevier, vol. 69(C), pages 15-25.
    9. Raisa Pérez-Vas & Javier Hervés-Estévez & María Dolores Garza Gil & Raquel Fernández-González, 2024. "Valuation of an innovative investment project using real options approach: A case study of a viticulture company in Spain," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 70(2), pages 91-100.
    10. Xiao, Yi-bin & Fu, Xiaowen & Ng, Adolf K.Y. & Zhang, Anming, 2015. "Port investments on coastal and marine disasters prevention: Economic modeling and implications," Transportation Research Part B: Methodological, Elsevier, vol. 78(C), pages 202-221.
    11. Hu, Rong & Xiao, Yi-bin & Jiang, Changmin, 2018. "Jet fuel hedging, operational fuel efficiency improvement and carbon tax," Transportation Research Part B: Methodological, Elsevier, vol. 116(C), pages 103-123.

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