Why Are Regional Jets Less Used in Emerging Economies? A Real Options Valuation Approach

29 Pages Posted: 12 Dec 2016

See all articles by Qiwei Hu

Qiwei Hu

Commercial Aircraft Corporation of China, Ltd. (Comac) - Department of Finance

Anming Zhang

University of British Columbia (UBC) - Sauder School of Business

Date Written: October 2016

Abstract

In this paper we offer an explanation for why regional jets are less used in emerging economies by using a real options valuation (ROV) approach. Our ROV analysis is based on the observation that airlines are operating under different development and regulatory environments between emerging economies and developed economies. We quantify the values of the options using a case study of aircraft acquisition by airlines in the US, Brazil and China. It is found that although a theoretical value gap (a negative ROV) exists between narrow-body aircraft and regional jets (e.g., between A320 and E190) for the US carrier that operates in the condition of a low initial passenger volume per trip and a low passenger growth rate, the gap will be weaken and even become a positive ROV for the Brazilian and Chinese carriers facing a high growth rate. Furthermore, regulatory restrictions faced by Chinese carriers have a positive influence on the ROV that is biased towards narrowbody aircraft over regional jets, although this influence is less than the positive ROV impact from the high growth rate. The managerial and policy implications are also discussed.

Keywords: Aircraft Acquisition, Category, Real Options, Growth, Regulation, Monte Carlo Simulation

JEL Classification: R4

Suggested Citation

Hu, Qiwei and Zhang, Anming, Why Are Regional Jets Less Used in Emerging Economies? A Real Options Valuation Approach (October 2016). Available at SSRN: https://ssrn.com/abstract=2883567 or http://dx.doi.org/10.2139/ssrn.2883567

Qiwei Hu (Contact Author)

Commercial Aircraft Corporation of China, Ltd. (Comac) - Department of Finance ( email )

No. 1919
Shibo Avenue
Shanghai
China

Anming Zhang

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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