Investigating optimal replacement of aging air force systems

Abstract

An availability‐oriented approach has been developed to decide when to replace an aging system. For an existing system, it is optimal to operate another year if and only if the incremental cost per available year is less than the lifetime average cost per available year of a new aircraft. We illustrate our approach using United States Air Force KC‐135 tanker data. In demonstrating our approach, we find it will be optimal to replace the KC‐135 by the end of the decade.

Keywords:

• Repair versus replace
• United States Air Force
• KC‐135
• Aging aircraft
• Reliability and Maintainability Information System (REMIS)
• Aircraft availability
• JEL codes: H4; H56; H57

Acknowledgements

The authors appreciate the comments and assistance of the anonymous referees as well as those of Laura Baldwin, Lionel Galway, Jean Gebman, Victoria Greenfield, Jeanne Heller, Greg Hildebrandt, Jim Hosek, Michael Kennedy, Rob Leonard, Dan Norton, Lieutenant Colonel Jeff Peterson, Ray Pyles, Tim Ramey, Bob Roll, Jane Siegel, Fred Timson, and Alan Vick. Dick Enz of Getronics Government Solutions helped with the Reliability and Maintainability Information System. Professor Michael Alles of Rutgers University, Brent Boning and Peter Francis of the Center for Naval Analyses, and David Frye and Terry Mitchell of Lockheed Martin Aeronautics also provided helpful assistance.

This research was briefed at the Western Economic Association conference in Denver on July 14, 2003; Gary Bliss of the Office of the Secretary of Defense constructively discussed the research. We also benefited from comments received at the United States Air Force Academy on July 28, 2003.

This research was sponsored by, but does not necessarily represent the views of, the United States Air Force. Of course, remaining errors are the authors' responsibility.

Notes

† Corresponding author.

Greenfield and Persselin denote the interest rate r, but we use d because of our use of R to denote replacement aircraft.

While it is less common than discounting costs, it is also appropriate to discount available flight years in this manner. The Office of Management and Budget's Circular A‐94 prescribes that ‘all future benefits and costs, including nonmonetized benefits and costs, should be discounted.’

‘Possessed aircraft’ is USAF terminology for aircraft that are in control of fleet operators (i.e. not in the depot system). For on‐ or off‐equipment maintenance to occur, an aircraft would have to be outside of the depot system.

Pyles (2003) examines a variety of cost function structures. He could not find evidence that a compound model fits the data better than a linear form for much of his aging aircraft data. In this paper's analysis, we use this functional form in large part due to its pedagogical simplicity. A more complete analysis would experiment with alternative functional forms, as was Pyles (2003) approach.

Our assumed 767 acquisition cost of $151.3 million exceeds the acquisition cost typically cited. See, for instance, United States General Accounting Office (2003). However, we feel this estimate is appropriate as the proposed 767 lease with Boeing includes some costs (e.g. for initial spares and system‐specific support equipment) in the annual payment which we consider to be part of the aircraft's acquisition costs. Naturally, running the model with a lower 767 acquisition cost encourages yet sooner replacement of the KC‐135.