Third-level
airlines are approached as a
financial
system composed of
models of travel demand
and cost. The
models are
formulated by
multiple regression, subjective probability
distributions,
and
weighted random-walk techniques because these techniques result
in
probability
distributions
which may
be input into
a risk analysis
program.
The
risk analysis program
is
used to
investigate
the cash
required to start,
by the method of
"Optimum Coverage",
an example
third-level airline
in Oregon. The
risk analysis program
is
also used
to analyze the airline as an
investment
and to determine the proper
method of
finance.
The airline required
from $4.2
million to
$6.1
million
dollars to
begin
operations and
had
expected
internal
rates of return
from 25% to
62% depending
on the method of
finance.
The
analysis shows that the airline performs
best
as a tax shelter and
that in
every
instance,
with an average weighted cost of capital
exceeding
2.0%, the airline should exchange tax benefits (either
as a
tax shelter or
by leasing
aircraft)
for
more
favorable financial terms.
New travel demand forecasting
methods
investigated included
a method
for
combining the flight frequency, the time of
desired departures,
and the difference between
mode travel times
into
a single
independent
variable; and a method
for
combining population,
income,
and the
distribution
of personal
income into
a single
independent
variable.
Hence, a single
independent
variable may account quantitatively
for
the effects of several variables when only a small
data base is
available.
The short-haul nature of the third-level airline routes were
found to
make traffic more sensitive to quality-of-service variables than
price, and the costs of third-level airlines were
best determined by
the revenue-passenger-miles
they produced.
The
reserve aircraft problem and the service
levels
of engines and
avionics are
determined
using the concept of affordable risk.
Rate
Per Hour Contracts are
beneficial for the small operator
for
avionics,
but they are
beneficial for
engines only
if there
is
also an exchange
agreement