In today’s economic climate, it is essential that you can accurately forecast and measure the results of your next capital investment, including any improvement in your airline’s operations or infrastructure. The value of a project can only be determined by a thorough analysis of the costs, benefits and cash flow requirements for the project.
The first element to consider for a project is not how much it will cost but what the measured benefits are that result from the project. Measured benefits can be in the form of hard and soft opportunity costs. Hard opportunity costs are generally more easily measured and can be calculated using hard numbers from an airlines operations, e.g. the project’s effect on Out, Off, On & In (OOOI) times. Soft opportunity costs tend to be more subjective and assumptions and estimates must be used to arrive at a measured benefit, e.g. trying to measure the benefits that are generated by reducing 50% of an employees duties. As a result of these assumptions and estimates, higher risk factors need to be applied to soft opportunity costs.
The second element for consideration is the project cost. These need to be broken down into non-recurring (Capital Investment) and recurring costs associated with operations or maintenance. Non-recurring costs have an additional element of depreciation on hardware and other tangible assets. To better manage risks on recurring costs software-as-a-service, leasing and other concepts can be used to manage obsolescence, upgrades and obtain certain functionality in a competitive market place.
The third element for consideration is the cash flow analysis for the project. This will provide the basis of assessing both the expected and measured performance of the project. Key metrics for this analysis include: Net Present Value (NPV), Internal Rate of Return (IRR) and time period to cash flow positive.
For operators who do not have the resources for this level of analysis, there are resources and models that can be accessed via the Internet to provide these and other more detailed services.
