MEMORANDUM TO Mary Litton FROM Operations Team RE Evaluation of 4 Policies to Cover Aircraft Losses Background Per your request, we have completed an analysis of the 4 proposed policies to cover the risk of catastrophic loss and incidental damage to our aircraft fleet focusing on the following two factors: •Ensure 1st year total costs (loss and cost of insurance) do not exceed $37M •Minimize total 5 year costs (loss cost of insurance) In addition, we have also considered any other factors for the proposed policies that would serve to minimize our overall exposure and therefore, minimize the risk of negative cash flows.
We did not consider self insurance as this would violate our obligation to the Export-Import Bank. Key Assumptions •342 flight days per year •6 flights per day for Boeing 757’s; 2. 25 for Airbus A340/model 200; and 2 for Airbus A340/model 300 •Risk of crash per flight: 1/5,000,000 based on industry averages •Total replacement value for 86 planes: $5. 958M •Incidental loss varies from $1M and $5M annually Method These assumptions were modeled for a total of 5 years using a total of 10,000 trials.
Recommendation Purchase the policy from CTC. •RCNC1 was ruled out because it had a 2. 63% chance of 1st year costs exceeding $37M. The other 3 policies had minimal risk of exceeding $37M: oCTC = 0. 03% oHIC = 0. 0% oRCNC1 = 0. 03% •RCNC2 was ruled out because it had expected 5 year total costs of $113. 7M (mean) which was substantially higher than CTC or HIC; 5 year total expected costs for each of the remaining two carriers were not significantly different. oCTC = $65. 24M oHIC = $67. 59M Each of the remaining policies, CTC and HIC, has advantages and disadvantages.
CTC has the lowest maximum expected costs at $110. 83 M, but does have an added risk in that annual losses are limited to a maximum of $80M. The HIC policy has a higher maximum expected cost, but guarantees payment of all losses, no matter how large. •Given the company’s concern with limiting the risk of negative cash flow, the HIC policy appears to be the best choice. However, the risk of loss greater than $80M in any given year is only 0. 02%.
Because our fleet is newer and it’s reasonable to assume might have fewer crashes, we conducted a sensitivity analysis with risk of crash 25% lower than the industry average. Under this scenario, risk of loss dropped to 0. 01%. •Because this risk of a loss is so small and the overall 1 and 5 year expected costs for CTC were lower, we recommend the CTC plan be selected. •The following chart summarizes key parameters for each of the plans, including a summary of 5 year expected costs at a very high level of certainty; the CTC policy is clearly lower at just $87. M. CTC HICRCNC1RCNC2 Year 1 Mean$13. 5M$13. 4M$27. 30M$10. 03M Range$13. 1-58. 5M$10. 8-33. 8M$26. 9-38. 3M$6. 9-65. 5M Risk >$37M0. 03%0. 0%0. 03%2. 63% Total 5 years Mean. 6M$65. 2M$113. 7M$49. 9M Range$65. 7-169. 1M$54. 3-110. 83M$109. 2-157. 9M$35. 7-161. 3M 99. 5% cost probability$87. 5M$105. 4M$143. 6M$145. 6M Attached •Analysis of 1 year costs •Analysis of 5 year costs Next Steps Please let us know if you have any questions or would like us to model any additional scenarios.
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