The flexibility and benefits of operating a diverse fleet: an analysis using real options

Purpose - The purpose of this paper is to develop a simple model illustrating the benefits of operating a diverse fleet of aircraft.Design methodology approach - The paper is theoretical. It describes how real options are beneficial to the firm in both capital budgeting and risk management. It illus...

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Bibliographic Details
Published in:Management research news 2012-05, Vol.35 (6), p.462-472
Main Author: Treanor, Stephen D.
Format: Article
Language:English
Subjects:
Air travel
Aircraft
Airline industry
Airlines
Brand loyalty
Capital budgeting
Costs
Flexibility
Investments
Purchasing
Real options analysis
Stock prices
Studies
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Summary:Purpose - The purpose of this paper is to develop a simple model illustrating the benefits of operating a diverse fleet of aircraft.Design methodology approach - The paper is theoretical. It describes how real options are beneficial to the firm in both capital budgeting and risk management. It illustrates the use of real options in the airline industry, and how real options are used as a risk management tool. Then the model is developed which illustrates how a diverse fleet can provide an airline protection against fuel price risk.Findings - The results of the model show that a diverse fleet is value enhancing to an airline during periods when fuel prices are high or uncertain. Furthermore, this paper shows that a diverse fleet provides an airline with an operational hedge to jet fuel prices. Though the paper focuses on the airline industry, the results are applicable to those industries vulnerable to volatile input costs, and prohibitive abandonment and re-entry costs.Originality value - The paper uses real option analysis to show the benefits for an airline deriving from operating a diverse fleet of aircraft.
ISSN:2040-8269
2040-8277
DOI:10.1108/01409171211238244