Game Theory Analysis of the Impact of Single Aisle Aircraft Competition on Fleet Emissions

Abstract

To meet aviation’s CO2 emission reduction targets while maintaining mobility in the face of increasing effective fuel costs, technology innovation will be required. The single aisle commercial aircraft market segment is the largest by quantity and value, but has the longest running product lines. New aircraft programs offer the largest potential gains in fuel efficiency, but are risky and require large capital investments. Re-engining existing airframes reduces risk and capital requirements, but offers lower potential fuel burn improvements. Incremental improvements to existing aircraft lines may entail the lowest risk. It is hypothesized that competition has important effects on manufacturers’ decisions to innovate and that these effects must be considered when designing policies to reduce CO2 emissions from aviation. An aircraft program valuation model is developed to estimate expected payoffs to manufacturers under different competitive scenarios. A game theory analysis demonstrates how the incentives for manufacturers to innovate may be altered by subsidies, technology forcing regulations, increased effective fuel costs, the threat of new entrants, and long-term competitive strategies. It is shown that increased competition may result in incumbent manufacturers producing re-engined aircraft while increased effective fuel costs may result in new aircraft programs. Incumbents’ optimal strategies may be to delay the entry into service of new single aisle aircraft until 2020-24, unless technology forcing regulations are implemented.