Ontario Gateway 2

Topics: Cash flow, Arithmetic mean, Decision theory Pages: 3 (607 words) Published: November 6, 2011

TO Mary Litton

FROM Operations Team

RE Evaluation of 4 Policies to Cover Aircraft Losses


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

These assumptions were modeled for a total of 5 years using a total of 10,000 trials.


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...
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