Econ 115 ProjectTitle: Money using strategies of local bus companies

By: Cheung Hon Wai

Chu Chun San

Pang Sai Chung© 2001 All Rights Reserved.

Overview• There are three major franchised bus

companies, their money using strategies are not that similar, we will look at this topic from an economic as well as engineering viewpoint.

• We will look at two different issues:– Money flow on buying new buses with respect

to time. (When???)

– Engineering choice on buying

new buses. (Who???)

• Case study:One bus worth $2.5 million

Each have a life time of 15 year

The maintenance cost for a bus is $50000+$10000*bus age, i.e. the maintenance cost increase with bus age.

Salvage value: $7000

• Assume that the MARR of the company is 5%, and the inflation rate is 3%.

• Click here or here to check the salvage value of a bus.

Money flow on buying new buses with respect to time—or Whenshould you buya new bus??

Money flow on buying new buses with respect to time—or When should you buy a new bus??• Consider there are two bus companies each of the

m have 1500 buses operating:– Company A dump 100 old buses each year and buy 10

0 new buses each year. (Similar to Kowloon Motor Bus’s strategy)

– Company B buy 1500 new buses and use them for 15 years, then replace them

together. (Similar to New World First Bus’s strategy)

• Which one’s strategyis better?

Cash flow analysis---Company A

P.W. = -$5493.13M

Negative value implies investment. (We’ve ignored the income from the buses as new and old buses are earning the same.)

-$451.8M

-$444.3M

-$467.5M

-$459.5M

-$572.4M

-$583.8M

Cash flow analysis---Company B

The above figures are for one bus only.

The real figures are just multiply them by 1500 times.

P.W. = -$5623.49M

-$50k-150k+7k

-$2.5M

-$50k

-10k-$50k

-20k-$50k

-30k

Cash flow results• Company A’s choice is better, less cost, more

stable.• There is a plenty of factors affecting the cash

flow.• Even though the total cash flow is similar, it may

lead to different results, such as risks.• We are not only

consideringthe amount ofcash flow, butit’s stabilityas well.

Engineering choice on buying new buses---orWho should you buy buses from??

From an ordinary person’s aspect……

• There are many producers capable of building double deckers for service. (eg: Dennis, Volvo, Man, Neoplan, Mercedes-Benz, Scania……)

• But why we can’t see

them all appearing in a

large scale?

• Where do the preference

come from?

Engineering choice on buying new buses---orWho should you buy buses from??

From an engineer’s aspect……

• Every bus producers has buses of different quality. (reliability, capacity, performance…)

• Buying buses from more producers will decrease risk.

• But buying buses

from more producers

will also increase

cost.(parts, training)

Risk analysis---balance between risk and money

Suppose we are going to buy 600 buses, we have three plans.

PlanNumber of producers

Buses bought (2.5M/bus)

Parts needed ($0.5M/set)

A 1 600 120*1

B 2 300 80*2

C 3 200 60*3

The number of parts needed is an incremental cost, i.e. a larger number of parts is needed for each single bus in a smaller batch of bus.

Assume all buses and parts are of the same price.

Risk analysis---balance between risk and money

Assume that the probability of breakdown is (1/2500)=0.0004.Click here or here to see the reliability of a real bus.

Plan A B C

Cost for parts (million)

60 80 90

Variance (risk)*10 5.75769 2.878848 1.91923210

Clearly choice A is cheapest, but with highest risk. Choice C is most expensive, but with lowest risk.

What we have to do is to have a compromise between them.

A famous example about risk because of wrong choice (not on bus……)

• Airbus A330– Produced by Airbus Industries, a high-tech state-of-th

e-art wide-bodied aircraft.– Majority aircraft of Hong Kong Dragon Airline– Played a supplementary role in Cathay Pacific Airway

s– Engine has design problems such that one of the beari

ngs may overheat.– All of them had to put out of service immediately in o

rder to have parts replaced.

Newspaper dated back on May and June, 1997 reporting the incident. (unfortunately in Chinese!!)

The A330 incident……Dragonair: Airbus A320 Airbus A330

Number of aircraft 6 4

Capacity 156 286

Total capacity 6*156=936 4*286=1144

Weighted % 936/2080=45% 1144/2080=55%

Cathay Pacific: A330 A340 B747-300 B747-400 B777-200

No. of aircraft 11 6 6 19 4

Capacity 314 249 343 389 336

Total capacity 3454 1494 2058 7391 1344

Weighted % 21.94% 9.49% 13.07% 46.95% 8.54%

Result of the A330 incident• Dragonair is severely affected and they had to send their

passengers to other airlines. (China airlines, Thai International, JAL……) The company lost it’s image due to the incident.

• Cathay Pacific is only

slightly affected as they

can deploy other aircrafts

to serve the routes.

Another illustration ……

The Chinese Kindergarten of Hong Kong (CKHK) has only one set of school uniform:

Hong Kong Kindergarten of Science and Technology (HKKST) has two sets of school uniforms:

What do we learn from these examples…

• Dragonair can in fact buy (or hire) aircraft from a larger variety if producers and reduce the dominance of a single aircraft type. (Disadvantage---risks really happened)

• From the tailors and parents point of view, it’s better to have only one set of uniform, as it cost less to design and buy them. (Advantage---no risks concerned)

• What we have to do is not

investigate on a particular

kind of risk, but to strike a

balance between risk and money.

Summary• Time and plan is a great concern on investment,

as it will change the cash flow.

• We have to consider money and risk

SIMULTANEOUSLY in order to make sensible engineering choices.

• You may find more examples on these issues

yourselves and think about their engineering

choices, you may find many good

examples of wrong decisions!