ABSTRACT
When acquiring new aircraft, airlines alter their fleet along two dimensions: expansion and renewal. Airlines expand their fleets to address the growth in the demand for air travel and, if the airline is commercially successful, to capture market share from competitors. This chapter looks at estimating the returns of aircraft fleet investments in the presence of market distortions. It addresses noise, air pollution, and carbon externalities and also addresses the situation when either taxes or market-based mechanisms (MBM) differ from the social cost of carbon and the consequences of attempting to remedy such discrepancy by combining an MBM and a tax. The chapter also looks at fleet replacement and follows with fleet expansion, including the valuation of options on aircraft. It illustrates investment appraisal when the alternative to the project is another transport mode, or when scenario-building focuses on inter-modal competition.
