Issue 60: September 1990

The main task thus for any new entrant, aimost irrespective of the equipment they choose to operate, is to be able to survive those early years with a cashflow that exceeds the monthly debits. And that is tough. What can make it a lot less tough though is to vastly reduce the cost of the single most expensive item in any airline — the airliners themselves.

At present all of the new entrants are looking at acquiring brand new shiny jets. Compass has its $80m A300-600Rs (the largest airliner of its type in the world), Capitol and Southern Cross have opted for new $30m MD-83s, while little known TransContinental have stated they want a fleet of new 737-300s which usually sell for a little more than an MD-80. So the question must be asked as to why these upstart airlines all want ultra expensive, brand new equipment, when it is that very equipment which may well drain their financial reserves to such an extent in those early years to possibly force their ultimate bankruptcy. Their reasons primarily revolve around the perceived public image of new equipment (though most passengers wouldn’t know, or care, what they were flying on so long as it leaves on time and gets them there safely) coupled with a lower initial maintenance requirement on the new jets. Both valid considerations though do not, in our opinion, pay a dividend sufficient to warrant the higher risk that the airline is taking in the first place by extending itself with debts it may well not be able to pay.

Let’s look at an alternative and you can be the judge. Let’s look at the world’s second most popular jet, the Boeing 727, which has only recently been surpassed by its smaller brother. The 727-200 is now at bargain basement prices owing to the virtual collapse of the second-hand market this past year due to large fleet sales of the type from Eastern, a defunct Braniff and more recently Trans World. A rapid increase in the aircraft available, coupled with a continuing soft US domestic market, has resulted in a fall in value of something in the order of a third this past year for aircraft like the 727, 737-200 and DC-9. Thus you can now get a fully D checked 727-200 for around $9m.

Assuming all the airlines, for the sake of this comparison, are configured for an all economy operation then you would also require only seven 727s to provide the uplift of eight MD-83s as the 727 has 163 seats against typically 145 for the MD-83. The

monthly lease costs (courtesy Avmark) are thus $900,000 for each A300-600R, $330,000 for the MD-83, similar for the 737-300 and around $160,000 for the 727-200. A saving of that magnitude means a lot lower load factor is required to achieve breakeven, something that could be a lifesaver once the cut and thrust of deregulation becomes reality amidst the spectre of a soft economy.

The advantages of the basic 727 is that at around $60,000 a seat it is cheap to acquire, is known in Australia and easily backed up in a technical sense in addition to being a proven performer that is popular with consumers. The established airlines could not realistically decry the planes as ‘aged’ equipment as the very jets they would be lambasting served as the very flagships of their fleets for nearly two decades. Indeed, with over 1,200 stillin service, the 727 is still the world’s second most populous airliner.

So much for the standard 727, but the story gets better.

For a total investment of around $19m per airframe you can upgrade your basic aircraft via an FAA certificated Valsan conversion. This relatively simple upgrade has the two external early model P&W JT8s replaced with higher bypass JT8D-217Cs from the MD-80 twinjet. The centre engine is retained and modded to reduce exhaust noise and is usually run at reduced thrust on takeoff. What the Valsan conversion gives you is a full ICAO Stage 3 (super quiet) airliner with the added benefits of a 12% increase in range (enough for Sydney/Perth), a 70% reduction in noise and a 35% reduction in field length. The overall maintenance requirement is also reduced owing to the more modern external engines coupled with the derated centreline engine. At presstime Valsan had taken 69 firm orders for the conversion, which is already operating with Denmark’s Sterling Airways, plus an additional 135 options from an eventual market they conservatively estimate at over 400 aircraft.

The per seat cost of a Valsan 727 is thus a mere $116,000 as against $220,000 for the new MD-83 and $270,000 for the A300. Furthermore, your initial investment is extremely well protected as this Stage 3 trijet will no doubt only appreciate in the years to come just as re-engined (Tay) and hushkitted 727-100s have in recent times.

What we are saying is that you could, in equipment terms, acquire a seven unit Valsan 727 airline for around $133m as against $240m using eight MD-80s or 737-300s or $400m for five AA300-600R. Whether you buy outright or lease, the fundamental equation remains the same. The less outgoings you have, particularly in those early years, the better chance your airline will have of surviving the cold winters of cut and thrust competition, high interest rates and perhaps a flat economy. And while, for obvious reasons, we have centred our argument on the 727, the same logic applies wherever viable used equipment exists as it currently does, for instance, with early model A300B4s. Perhaps the budding Frank Lorenzos out there can’t see it now but maybe in three or four years time, these words may well seem a lot more thought provoking.