ABSTRACT
This chapter looks at estimating the returns of aircraft fleet investments in the presence of market distortions. One key distortion is external costs via environmental pollution. The chapter deals with this issue as generically as possible, without entering into discussion on alternative ways of internalising externalities, whether through taxes, emissions trading, or regulation. It starts by looking at fleet replacement and follows with fleet expansion, including the valuation of options on aircraft. The chapter contrasts correct and incorrect ways of estimating the socio-economic benefits of aviation to society. It illustrates investment appraisal when the alternative to the project is another transport mode, or when scenario-building focuses on inter-modal competition. The calculation of the option value has consisted purely of a financial value. Options can also be calculated for economic values. New aircraft tend to offer significant operating efficiency improvements and passengers may appreciate newer aircraft.
