Caso Aeropuerto Pronostico

1.
231 Planning and Design of Airport System Term Project

Flexible Design of Airport System Using Real Options Analysis Case Study of New Runway Extension Project of Tokyo International Airport
Dai Ohama Technology and Policy Program Engineering Systems Division Massachusetts Institute of Technology December 14, 2007
Table of Contents
1. Introduction .................................................................................................................1 2. Outline of the Case Project.........................................................................................1 2.1 Tokyo International Airport....................................................................................1 2.2 Runway Extension Project......................................................................................2 2.3 Current Design is Optimal? ....................................................................................3 2.4 Project Capacity of Airport.....................................................................................5 2.5 Flexible Design.......................................................................................................5 3. Real Options Analysis .................................................................................................6 3.1 Financial Options Theory .......................................................................................6 3.1.1 Black-Sholes Option Pricing Model ................................................................7 3.1.2 Binomial Lattice Model ...................................................................................8 3.1.3 Monte Calro Simulation...................................................................................9 3.2 Real Options Analysis ............................................................................................9 3.2.1 Real Options.....................................................................................................9 3.2.2 Types of Real Options ...................................................................................10 3.3 Application of Real Options Analysis to Case Study...........................................10 3.3.1 Which Method should be used for the Case Study? ......................................10 3.3.2 Real Options Analysis Using Monte Calro Simulation .................................11 4. Analysis of Case .........................................................................................................11 4.1 Analysis Condition ...............................................................................................11 4.1.1 Capital Investment .........................................................................................12 4.1.2 Revenues and Costs .......................................................................................13 4.1.3 Capacity of Airport ........................................................................................14 4.1.4 Discount Rate.................................................................................................14 4.2 Uncertainty in System...........................................................................................14 4.3 Demand Forecasting .............................................................................................15 4.4 Summary of Analysis Condition ..........................................................................17 4.5 Result of Analysis.................................................................................................18 5. Conclusion ..................................................................................................................21 6. References ..................................................................................................................22
1.231 Planning and Design of Airport System

1. Introduction
12/14/2007 Dai Ohama
The Airport systems not only in the U.S. but also all over the world are now very complex. However, all of them are not always designed optimally. Some facilities are
built excessively compared to their estimation during planning phases, others are required improvement since they are too large for the actual situations. [1] For example, the size of
the New Denver Airport is too big, and as a matter of fact there is an unnecessary passenger building. The Newark airport is unsuited for the actual transfer and international traffic, and major changes should be required. The reason for them is that the master plan of these
airport systems did not anticipate future risks and uncertainties of possible changes in market conditions, and did not consider the countermeasure of those real risks. Eventually, it leads to losses or extra costs, and even losses of opportunities happen. often inflexible and inherently cannot respond to the risks. Thus, the master plan is
In order to respond to this
situation, it is essential to plan strategically by considering future risks and uncertainties and by applying flexibility into design. This project is to consider one of the possible effective ways to incorporate flexibility into design by using real options analysis. The goal of this project is to demonstrate how
the flexible design is conducted and how it works. The case of Tokyo International Airport New Runway Extension Project is applied as a case study.
2. Outline of the Case Project
2.1 Tokyo International Airport Tokyo International Airport or Haneda Airport (HND) is located in the bay area, near the center of Tokyo. Haneda Airport is the busiest and an important hub airport in Japan
for domestic air traffic.[2] Haneda Airport is consistently ranked among the world's busiest passenger airports in terms of the number of passengers, and its ranking was fourth in 2006. Currently it has three runways (Runway A: 3,500m, Runway B: 2,500m, Runway C: 3,000m), serving nearly 60 million passengers every year. The total capacity of Haneda Airport is 296,000 aircraft (a/c) per year.
Term Project: Flexible Design of Airport System
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Japan
Tokyo Chiba Yokohama Kyoto Osaka Tokyo Tokyo Bay
Haneda Airport
Figure 2-1 Location Figure 2-2 Tokyo Intl Airport

Source: Ministry of Land, Infrastructure and Transport in Japan, Kanto Regional Development Bureau [2]
2.2 Runway Extension Project However, its capacity has already reached a limit of airport capacity against the increasing demand, and it is necessary to respond to the demand as soon as possible. In
order to solve this problem, Tokyo International Airport Extension Project was launched in 2002 to build 4th runway, which is called Runway D, to increase the total capacity of the airport. [2] This extension enables the airport to have the capacity from of 296,000 a/c per
year to 407,000 a/c per year.
Runway B Runway C
Runway A
Extension Project Runway D (Under Construction)
Figure 2-3 Plan of New Runway Island in Haneda Airport

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The new runway will be constructed on the artificial island approximately 3,000 meters long and 500 meters wide, on the south side of the airport. As the new runway island is
planned in the estuarine waters of the Tama River, the course of the river shall not be affected by reclaimed island. Therefore, pile elevated platform is applied for the part in the
river mouth, and reclamation is applied for the part outside the alignments of the river mouth. Two taxiway bridges for aircraft connecting the existing airport to the new runway island, 600 meters long and 60 meters wide, are planned as well. Pile elevated platform of the new
runway island is 1,100 meters long and 500 meters wide in total. It is a jacket structure composed of approx. 200 steel jacket units 60 meters long and 45 meters wide. The water
depth at the construction site is 15 to 19 meters, and the river has 30 to 40 meters thick sedimentary layers of soft clayey soil. for the pile elevated platform. Thus, long steel pipe piles are used as bearing piles
Figure 2-4 Structure of Runway D

By the end of the fiscal year of 2006, the design has been completed, the construction started in March 2007, and it is supposed to be in service in December 2010.
2.3 Current Design is Optimal? As discussed above, the new runway is expected not only to improve the airport capacity but also to bring about a major impact on the overall economy. Term Project: Flexible Design of Airport System However, is this Page 3 of 22
1.231 Planning and Design of Airport System new project really optimal? uncertainty?
Can the design of this project respond to the future
The current design of Runway D consists of the Runway (R/W) and the Parallel Taxiway (PT/W). At the Runway D, airplanes depart from south to north and land from
north to south, and the projected capacity is based on this operation. A parallel taxiway is usually necessary for a runway since airplanes have to move to a runway in order to take off and to go to terminal after landing. But at this Runway D, a parallel taxiway will be used only when those airplanes which are running for takeoff stop and return to the terminal. This possibility is very low. Because there is turning pad at the end of the runway, it is
possible that those airplanes which are running for takeoff return to the terminal by using this area. Therefore, the operation frequency of the PT/W is extremely low. In addition, the area at the south edge of the runway (S/E), is also not used since airplanes do not depart and land this way. Therefore, PT/W & S/E are not necessary for the currently planned operation, and it can be said that this runway island is not designed optimally. This project
was based on taxpayers money (570 billion) and it is excessively invested, so it is indispensable to evaluate if the PT/W and S/E is worthwhile investing or not.
Runway (R/W) Departure Arrival
North
South
Parallel Taxiway (PT/W)
South Edge (S/E)
In the currently designed operation, these areas are not necessary.
Existing Airport
Figure 2-5 Operation Concepts of Runway D
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These areas such as PT/W and S/E would be used if airplanes depart from north to south and land from south to north. Thus, if they need this operation in the future, they should be constructed, otherwise they should not be constructed.
2.4 Projected Capacity of Airport So when are such departure and landing necessary? In the current plan, when north
wind blows, runway B and D are used for departure and runway A and C are used for landing. When the south wind blows, runway A and C are used for departure and runway B and D are used for landing. In this planning, during south wind, only 12 a/c land at the runway D per hour, while during north wind 28 a/c depart from the runway D per hour. This is because runway usages are decided so that the entire capacity of the airport could be maximized. However, at the runway D, if airplanes depart from N to S and land from S to
N, it is possible for the entire capacity of the airport to be increased.
North Wind
Departure: B-12 ac/hr D-28 Landing : A-28 ac/hr C-12 Total : 40 ac/hr
South Wind
Departure: A-22 ac/hr C-18 Landing : B-28 ac/hr D-12 Total : 40 ac/hr
Figure 2-6 Currently Designed Capacity

2.5 Flexible Design As a matter of fact, estimating this capacity is very complicated because all of four Term Project: Flexible Design of Airport System Page 5 of 22
runways capacities are related complexly to one another. So, in this project, estimating this capacity is outside of the scope of the goal. I assume that the opposite departure (from north to south) and landing (from south to north) could increase the total capacity of the airport. In other words, PT/W and S/E could increase the capacity. If the demand is more
than the capacity, PT/W and S/E should be constructed. If the demand is less than the capacity, its not necessary to construct them. constructed when they become necessary. Therefore, PT/W and R/E should be
In other words, they dont have to be If such
constructed until the demand of passengers exceeds the projected capacity.
flexibility is incorporated into design, managers are able to respond to future risks and uncertainties such as demand of passengers. Therefore, flexible design can minimize the
initial investment, reduce risks, respond to uncertainties, and maximize the value of the project. By doing so, this runway extension project would be optimized.
3. Real Options Analysis In order to evaluate those projects, one of the best possible ways is real options analysis, which is an evaluation method for those projects which involve decision opportunities. Real options analysis is the application of financial options theory to the actual projects such as infrastructure developments, real asset investments, research and development, and so on. In these projects, those who make decision generally have options such as the option to defer, the option to defer, and the option to abandon. In this case study, the option to expand should be applied.
3.1 Financial Options Theory Financial options theory is a basis for the real options analysis. In finance, an option
contract is an agreement where the owner has the right, but not the obligation, to buy or sell an underlying asset, such as a stock, at a pre-determined price on or before the expiration date. [3] There are two types of options in terms of the right. buy a stock at the strike price, the pre-determined price. sell a stock at the strike price. [3] A call option refers to the right to A put option refers to the right to
Options are also divided into two categories in terms of Page 6 of 22
1.231 Planning and Design of Airport System expiration date.
An American option is exercised when the owners are allowed to exercise A European option is exercised only on the
them on or before the expiration date. expiration date. [3]
Option is not the obligation but the right to buy or sell the underlying asset. owner would exercise the option only when it is favorable to do so. [3]
So the
For example, those
who hold option would exercise a call option only if the price of the underlying asset (S), is higher than the strike price (K), and would earn a profit of S-K; otherwise, they would buy the asset not from the option, but from the market. A European put option is the right to
sell the underlying asset at a certain price. So it can be exercised only when the market price of the asset (S) is less than the strike price (K), where those who hold the option can make the profit of K-S. Figure 3-1 shows the general payoff of a European call option and
put option. Although American options can be exercised at any time on or before the expiration date, they have the same payoffs as European options.
Payoff ($)
Underlying Assets S-K
Payoff ($)
Underlying Assets
K-S
Option
S=K
Asset Price ($)
S=K
Asset Price ($)
Payoff of European call = Max (S-K, 0)
Payoff of European put = Max (K-S, 0)
Figure 3-1 Payoff Diagram for a European Call Option (Left) and Put Option (Right)
Source: R de Neufville Lecture notes of the MIT course of ESD.71 (Fall 2006)[4]
3.1.1 Black-Scholes Option Pricing Model The Black-Scholes option pricing model is the most well-known method. It applies to
those European call and put options that do not provide dividends. It can produce the theoretical value of the option by applying five factors such as the price of the underlying asset (S), the strike price (K), the time until expiration (T), the risk-free rate of interest (rf), and the volatility (i.e., standard deviation) of returns on the stock. [3] The following formula shows this model for a European call option. [3] Term Project: Flexible Design of Airport System Page 7 of 22
C = S N (d 1 ) K e
rf T
N (d 2 )
Where C: Theoretical value of a European call option with no dividends

d1 = ln (S / K ) + r f + 2 / 2 T
d 2 = d1 T
N(x): Cumulative probability function for a standardized normal distribution
The following formula shows the theoretical value of European put options.
P = K e
rf T
N ( d 2 ) S N ( d 1 )
Where P: Theoretical value of a European put option with no dividends
3.1.2 Binomial Lattice Model Binomial Lattice Model, which is also widely used, is a more simplified discrete-time approach to valuation of options compared to the Black-Scholes Option Pricing Model. [4] It assumes that the price of the underlying asset will change to one of the only two possible values during the next period of time. Figure 3-2 shows a three-stage binomial example.
Figure 3-2 Binomial Tree Representations of Changes in Underlying Asset

Source: R de Neufville Lecture notes of the MIT course of ESD.71[4]
In the Binomial Lattice Model, the price of an underlying asset at a certain time can change to one of the only two possibilities, which are an upward movement with multiplier u with the probability of p, and a downward movement with multiplier d with the probability of 1-q. [4]
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u = e d = e
T T
= 1/ u
p = 0.5 + 0.5(v / d ) T
3.1.3 Monte Calro Simulation Monte Calro Simulation is an analytical method that generates the stochastic distribution of possible outcome that correspond to probability-distributed sampled inputs. [5] Because of the development of computer technology, large computer simulation such Spread sheet software such as
as Monte Calro Simulation can be constructed easily.
Microsoft Excel is the tool for conducting Monte Calro Simulation.
3.2 Real Options Analysis In the previous section, financial options theory including Black-Scholes option pricing model, Binomial Lattice Model, and Monte Calro Simulation were introduced. In this section, real options analysis, which was the application of financial options theory to the actual projects, is introduced.
3.2.1 Real Options Real option is the option to undertake some business decision under high uncertainty. In real options analysis, they are associated with flexibilities in designing systems or the evolution of projects. [4] Option - like flexibilities are included in systems and projects, represent opportunities to increase the value of the project through design or through management actions. [4] It is not obligation, and only when future asset price is preferable This allows
for you, you can exercise it, otherwise you dont have to do it.
decision-makers to avoid downside losses as well as to obtain upside opportunities. These flexibilities are called real options. [4] Managers have applied real options analysis to Although real options are
business strategies including large-scale engineering systems.
very similar to financial options, they are different from financial options in terms of what should be assessed and the time span. [4] Term Project: Flexible Design of Airport System In financial options, the actual price such as Page 9 of 22
stock price is evaluated, while in real options, the value of the project itself is evaluated. Financial options are usually very short span such as two years, while the time span of real options is very long-term.
3.2.2 Types of Real Options There are several types of real options, such as deferral options, abandonment options, expansion options, growth options, and compound options. [6] Applying appropriate type For example, in
of options enables managers to actively manage risks and uncertainties. this case study, expansion options is appropriate to be applied.
In the current design, which
is inflexible design, the whole facilities such as a runway, a parallel taxiway, and a south edge would be constructed at the initial construction. On the other hand, in flexible design
that should be proposed in this study, only a runway would be constructed at the initial construction and then sometime after 10 years of operation, if the demand of passengers exceeds the capacity, a parallel taxiway and a south edge should be constructed; otherwise they would not be constructed. Thus, if uncertain demand is unfavorable, it is not
necessary to exercise the option. It is possible to reduce upfront capital investment and therefore reduce losses. The Flexibility to expand them takes advantage of demand that is higher than expected in the deterministic projections.
Payoff Expansion
No Expansion
Value of Project
Figure 3-3 Payoff of Expansion Option
3.3 Application of Real Options Analysis to Case Study
3.3.1 Which Method should be used for the Case Study Term Project: Flexible Design of Airport System Page 10 of 22
As introduced in section 3.1, there are three types of evaluation method in financial options, and these are also applied to real options analysis. Black-Scholes option pricing
model and Binomial Lattice Model are widely used in financial options, but because they are very complex and needs financial skills, they are not so widely used in real options in engineering practice as in financial field. [7] Even if those methods are used appropriately,
it is very difficult to explain to those managers who are not familiar with financial skills. [7] On the other hand, Monte Calro Simulation can be used more easily by using spread sheet than those two methods. Compared to conventional methods using financial mathematics,
real options analysis using Monte Calro Simulation has advantages such as user friendly procedure, being based on data availability in practice, and being easy to explain graphically. [7] Thus real options analysis based on Monte Calro Simulation can be the appropriate as a
tool for the valuation method for this case study.
3.3.2 Real Options Analysis Using Monte Calro Simulation In this case study, real options analysis using Monte Calro Simulation method is used and its procedure is: 1) to estimate cash flows pro forma including capital investment, future costs and revenues of the project, and calculate the economic value of currently designed case, 2) to explore the effects of uncertainty by simulating possible scenarios, each of which leads to a various NPVs, and the collection of each scenario generate both an expected net present value (ENPV) and the distribution of possible outcomes for a project by demonstrating cumulative distribution functions, and 3) to explore ways to avoid the downside risk and take advantage of upside potential by exercising options. [7]
4. Analysis of Case - Tokyo Intl Airport New Runway Extension Project
4.1 Analysis Condition In order to conduct real options analysis, it is necessary to set up analysis conditions such as cash flow pro forma including capital investment, revenue scheme, operating and maintenance costs. In this case study, three types of design should be considered. Term Project: Flexible Design of Airport System Case A refers to the Page 11 of 22
current design that government actually planned and that would construct the whole runway island, including a parallel taxiway and a south edge. flexibility. Case B refers to the design that constructs the whole runway island in the same way as Case A. But this design recognizes future uncertainty which is demand of passengers, This design does not include
while Case A considers deterministic projection of the demand of passengers. Case C refers to the design that constructs only runway area without parallel taxiway and south edge of the runway at the initial construction, and expands the parallel taxiway and south edge after 10 years operation if the demand exceeds the capacity of the airport for two consecutive years. Table 4-1 shows the summary of case of analysis.
Case Case A Case B Case C
Table 4-1 Cases of Analysis Initial Future Flexibility Investment Uncertainty R/W, N/A N/A PT/W & SE R/W, N/A Recognizing PT/W & SE Future Expansion R/W Recognizing PT/W & SE
Source: Applied R de Neufville,et al [7]
4.1.1 Capital Investment Capital investment here means the initial construction fee and the expansion fee of the parallel taxiway and the south edge. In the New Runway Extension Project, the
construction fee is 570 billion, [2] so the initial investment in Case A and Case B is 570 billion. In Case C, I assume that the initial investment can be set by prorating the area where it needs. In the area of the taxiway (827,625m2), the structure of the runway island is landfill (64,700/m2), [2] so the construction fee is 53.55 billion. In the area of the south edge (45,120m2), the structure of the runway island is piled pier (786,500/m2), [2] so the construction fee is 35.48 billion. Therefore, considering the bank revetment area
(assumed 5% extra) and the joint area for the both areas so that the expansion could be possible, the initial construction fee of Case C is 505 billion. ([570-(53.55+35.48)]*1.05)
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The expansion cost of Case C is only the area of taxiway and the south edge, which is the same as the difference between the initial cost of Case A, B and that of Case C. Considering the extra fee of the joint area (assumed 10% extra), the expansion fee is 97.9 billion. ((53.55+35.48)*1.05) The initial investment is assumed to be paid equally every year through the construction for 4 years, while the expansion investment is supposed to be paid equally every year for 2 years.
Runway (R/W)
Parallel Taxiway (Landfill) 827,625m2
South Edge (Piled Pier) 45,120m2
Figure 4-1 Expansion Area of Runway D 4.1.2 Revenues and Costs There are several types of revenues and costs in the airport system such as from aeronautical charges, non-aeronautical charges, and off-airport or non-operate charges. [8] In the current operation of Tokyo Intl Airport, these charges applies, but in terms of a runway, aeronautical charges, which is the charges for services or facilities directly related to the processing of aircraft and their passengers, is the main charge. [8] The aeronautical charges have several categories such as landing charge, terminal-area air navigation charge, passenger service charge in terminals, security charge, charges for airport noise, and so on. [8] In terms of a runway, landing charge is the main source of the revenue. Thus, I
assume that the revenue is only from the landing charge. The current landing charge in Tokyo Intl Airport as of 2006 is 490,000 for B747-400D, 350,000 for B777-200, and 230,000 for B777-724, and so on. [9] I set the average landing fee of this airport as
332,000 / aircraft by assuming the probabilities for each type of aircraft of 23% for B747-400D, 35% for B777-200D, and 41% for B767-300. I also assume that this landing charge is fixed for the next 20 years. For the simplicity, I also set the revenue for each year
is landing charge multiplied by the minimum of the number of passenger or the capacity.
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12/14/2007 Dai Ohama From the
Costs for the operation and maintenance are categorized into the ones above.
past disclosed information by the government, operating and maintenance cost in all airports in Japan in 2005 was 147.4 billion. [10] air traffic. I assume that these costs depend on the scale of
The whole air traffic in Japan in 2005 was 1,431,000 and 300,000 in Tokyo Intl
Airport, which is about 20% of the whole traffic, so the operating and maintenance costs for Tokyo Intl Airport in each year is assumed 29.48 billion, which is also assumed equally for the current three runways. So the operating cost and maintenance costs for the one runway In addition, in the current
is one-third of 29.48, which is equal to 9.84 billion.
construction plan indicates that the specific maintenance cost for the runway D is 100 billion for the next 30 years. Thus the maintenance cost of 3.33 billion should also be included in the operating and maintenance cost for the new runway. operating and maintenance costs for the runway D are set as 13.17 billion. Therefore, the
4.1.3 Capacity of Airport According to the Ministry of Land, Infrastructure and Transport in Japan, the improved maximum capacity of the airport by the runway extension in Tokyo Intl Airport is 40 aircrafts per hour, and it estimated this capacity can accommodate 87 million passengers per year. [2] So the capacity in terms of the number of passenger in this airport is 87 million.
4.1.4 Discount Rate Discount rate is the opportunity cost of capital, and it can be calculated by the capital asset pricing model (CAPM). CAPM requires the risk-free rate of interest, the sensitivity
of specific project or company to stock price, and the expected rate of return of the market. However, the government used the discount rate of 4% when it assessed not only this project but also any airport related project. [11] Thus, the discount rate of 4% is also used in this case study.
4.2 Uncertainty in System There are usually a lot of uncertainties in large-scale engineering systems which include technical change, economic change, regulatory change, industrial change, political change, and so on. [4] This case also includes a lot of uncertainties such as demand of the number Page 14 of 22
of passengers, capital investment in the future, the operating and maintenance costs, and unexpected events in the future. For the sake of the simplicity, I set only demand of the When forecasting the number of passenger in airports,
number of passengers as uncertainty.
the time span should be considered at most 20 years span and the volatility, which is the range of the chance the demand is higher or lower, should be considered by plus or minus 50%. [12] 4.3 Demand Forecasting According to the government estimation, it forecasted the demand of the number of passengers as 73.2 million in 2012, 80.3 million in 2017, and 85.5 million in 2022. [2]
Past and Predicted Number of Passengers at Tokyo Int'l Airport
90.00 80.00 Number of Passengers 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00
19 85 19 91 19 95 20 01 19 89 19 83 19 99 20 12 19 87 19 97 19 93 20 03 20 22
Year
Figure 4-2 Demand Forecasting

Source: Ministry of Land, Infrastructure and Transport in Japan [2]
This estimation was based on the estimate of the total population in Japan, the estimate of GDP and other several factors. [13] However, forecast is always wrong. The table
below is comparison of 10 years forecasts of international passenger to Japan with actual results. [12] These results clearly show that forecast has been always wrong. In addition
the forecast of the total population in Japan and GDP are also very difficult to assess. Thus, the demand forecast above could be wrong.
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1.231 Planning and Design of Airport System Table 4-2 Comparison of 10-year forecasts of international passengers to Japan with actual results Forecast Passengers (millions) Percent error For Done in Actual Forecast Over actual 1980 1970 12.1 20.0 65 1985 1975 17.6 27.0 53 1990 1980 31.0 39.5 27 1995 1985 43.6 37.9 (13)
Source: R. de Neufville, A. Odoni, Airport Systems: Planning, Design, and Management[12]
However, when assessing the real options analysis, it is necessary to rely on some forecasts, although they are nothing but estimation. Thus, in this case study, the demand
curve that is based on the estimation of the total population and the estimation of GDP in Japan should be considered. The important thing is to recognize that this forecast is just an
assumption and to evaluate this by using various demand scenarios with volatility. In this case study, the demand forecast is estimated based on the estimation of population [14] and the estimation of GDP [15] in Japan by conducting regression analysis. [16] The table and the graph below show the estimation of the number of passenger for the
next 20 years in Tokyo Intl Airport.

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Population (Thousands) 121.05 121.66 122.24 122.75 123.21 123.61 124.10 124.57 124.94 125.27 125.57 125.86 126.16 126.47 126.67 126.93 127.32 127.49 127.69 127.79 127.77 127.76 127.69 127.57 127.40 127.18 126.91 126.60 126.25 125.86 125.43 124.96 124.46 123.92 123.34 122.73 122.10 121.43 120.74 120.01 119.27 118.50 117.71 116.90 116.07 115.22 GDP (in trillion) 350.3 360.8 374.5 400.0 421.2 443.1 458.2 462.7 463.7 468.8 477.7 489.9 496.8 488.0 487.0 501.3 503.2 503.9 512.8 524.6 538.9 544.8 550.8 556.9 563.0 569.2 578.9 588.7 598.7 608.9 619.3 629.8 640.5 651.4 662.4 673.7 683.1 692.7 702.4 712.2 722.2 732.3 742.6 753.0 763.5 774.2 Passengers (million) 24.27 25.88 28.19 30.28 34.96 38.09 40.06 39.98 39.12 41.44 43.02 45.08 47.43 49.91 52.27 54.77 57.01 59.49 59.41 59.05 59.47
Demand Forecasting 120 Demand (PAX in million) 100 80 60 40 20 0 1982 1987 1992 1997 2002 2007 2012 2017 2022 2027 Time (Year) Projected Demand (Government) Projected Demand (This Project)
61.08 62.23 63.37 64.49 65.59 67.35 69.11 70.87 72.63 74.39 76.14 77.89 79.64 81.38 83.12 84.46 85.80 87.11 88.42 89.70 90.98 92.24 93.48 94.71 95.92
PAX = 2 * A * { - 0.1818 + 0.0077 * B } (A: Estimated Population, B: Estimated GDP)
Figure 4-3 Demand Forecast of Number of Passengers in Tokyo Intl Airport Term Project: Flexible Design of Airport System Page 16 of 22
The demand curve shown in Figure 4-3 is still deterministic projection, and this is usually used for the static analysis. However, it is essential to recognize and consider the uncertainty in this demand forecasting. Thus, uncertainty is recognized in the model by simulating possible scenarios. It indicates how fluctuations can be incorporated around deterministic projections based on the relevant probability distribution. [17] In this case study, 2,000 Monte Calro Simulations are generated where all of those simulations create each demand scenarios over the 20 years span. Figure 4-4 shows some of the examples of simulations of the uncertain demand. All of these scenarios can be considered and
incorporated into the calculation of the expected value of the plans statistically.
Demand Forecasting 120 Demand (PAX in million) 100 80 60 40 20 0 1982 1987 1992 1997 2002 2007 2012 2017 2022 2027 Time (Year)
Demand Forecasting 120
120 Demand (PAX in million) 100 80 60 40 20 0
Demand Forecasting
Projected Demand (Government) Projected Demand (This Project) Demand scenario
Projected Demand (Government) Projected Demand (This Project) Demand scenario
1982 1987 1992 1997 2002 2007 2012 2017 2022 2027 Time (Year)
Demand Forecasting 120 Demand (PAX in million) 100 80 60 40 20 0 1982 1987 1992 1997 2002 2007 2012 2017 2022 2027 Time (Year) Projected Demand (Government) Projected Demand (This Project) Demand scenario
Demand (PAX in million)
100 80 60 40 20 0 1982 1987 1992 1997 2002 2007 2012 2017 2022 2027 Time (Year) Projected Demand (Government) Projected Demand (This Project) Demand scenario
Figure 4-4 Examples of Simulation of the Uncertain Demand
4.4 Summary of Analysis Condition The Table 4-3 shows the summary of analysis condition.
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1.231 Planning and Design of Airport System Table 4-3 Summary of Analysis Condition Initial Future Perspective Simulation Investment Expansion R/W, N/A Deterministic No PT/W & SE R/W, Recognizing N/A Yes PT/W & SE Uncertainty Incorporating R/W PT/W & SE Yes Flexibility
Source: Applied R de Neufville, S. Scholtes, T. Wang [7]
Option No No Yes
Design A Design B Design C
4.5 Result of Analysis Table 4-4, 4-5, 4-6 shows the cash flow pro forma for three cases. Table 4-4 shows the
cash flow pro forma and calculating the NPV of the project assuming the demand of the number of passengers grows as projected. (Case A) (ENPV) of the project is 678.8 billion. In this case, the expected NPV
However, this value is not realistic since the actual
demand of the number of passengers can change from this deterministic value. Table 4-5 shows the cash flow pro forma and calculating the NPV of the project recognizing uncertainty. (Case B) In this case, Monte Calro Simulation is conducted and it The ENPV of this case is 638.3 billion. But
produces 2,000 possible demand scenarios.
this ENPV is just one of the 2,000 scenarios. This simulation can generate 2,000 ENPV in each scenario, and can also generate distribution for each scenario. The actual ENPV is
distributed as shown in Figure 4-5. The average of ENPV is 569.3 billion, which is less than that of the Case A. Although this design assumes that there are equal chances that
demand changes to higher and to lower, this design limits the higher value of the project since the capacity is fixed, while there are still lower chances to generate losses. [7] Table 4-6 shows the cash flow pro forma and calculating the NPV of the project recognizing uncertainty and holding the option to expand. (Case C) This case also
recognizes uncertainty and Monte Calro Simulation is conducted, which produces the ENPV of 686.7 billion. But this ENPV is also just one of the 2,000 scenarios. In this design,
the actual ENPV is distributed as shown in Figure 4-5, and the average of ENPV is 621.6 billion, which is higher than that of Case B. Because the option to expand is exercised
when the demand is higher than the current capacity, the ENPV is improved higher. The
Page 18 of 22
estimated value of the option exercised in order to incorporate the flexibility into design can be calculated by the difference between the ENPV of Case C and that of Case B, which is 52.3 billion. Table 4-7 shows the summary of this analysis. Case C, which holds Table 4-6 shows the
flexibility in design has advantages over Case B in every aspect.
summary of the analysis. [7] The initial investment in Case C is less than that of Case B, which means that the flexibility can reduce the initial investment. The ENPV, the
maximum and minimum NPV in Case C is higher than that of Case B, so the flexibility can enhance the overall value of the project.
Cumulative distribution function

100.0% 90.0% 80.0%
Case B
Average ENPV(B) 569.3 B
Case C Case A
(678.7 B) Option Value 52.3 B Average ENPV(C) 621.6 B
Probability
70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000
Target value \ million

Figure 4-5 Cumulative Distribution Function (Value at Risk)
Table 4-7 Summary of the Analysis Case B Case C (No Flexibility) (with Flexibility) Initial Investment ( in billion) 570.0 505.0 ENPV ( in billion) 569.3 621.6 Minimum NPV ( in billion) 339.3 338.1 Maximum NPV ( in billion) 773.4 899.1
Page 19 of 22
Table 4-4 Analysis Result (Case A)

2007 62,233,839 87,000,000 Construction Phase 2008 2009 63,366,512 64,486,139 87,000,000 87,000,000 2010 65,592,131 87,000,000 2011 67,353,149 87,000,000 2012 69,114,281 87,000,000 2013 70,874,568 87,000,000 2014 72,633,340 87,000,000 2015 74,389,968 87,000,000 2016 76,143,790 87,000,000 2017 77,894,119 87,000,000 2021 84,463,179 87,000,000 2022 85,795,633 87,000,000 2023 87,113,387 87,000,000 Operation Phase 2018 2019 2020 79,640,235 81,381,152 83,116,111 87,000,000 87,000,000 87,000,000 2024 88,416,454 87,000,000 2025 89,704,914 87,000,000 2026 90,978,530 87,000,000 2027 92,237,068 87,000,000
NPV Static Model (Design A)
Year
Demand (Deterministic Projection) Capacity (Constant)
Revenue (Yen in M) Operating & Maintenance Cost (Yen in M) Initial Capital Investment (Yen in M) 142,500 -142,500 -142,500 678,770 -142,500 -137,019 -142,500 -131,749 -142,500 -126,682 94,526 80,801 97,342 80,008 100,156 79,155 102,969 78,248 105,778 77,291 108,582 76,288 111,381 75,245 114,173 74,164 116,956 73,051 119,730 71,907 121,884 70,385 124,015 68,861 142,500 142,500 142,500 107,696 13,170 0 110,512 13,170 0 113,326 13,170 0 116,139 13,170 0 118,948 13,170 0 121,752 13,170 0 124,551 13,170 0 127,343 13,170 0 130,126 13,170 0 132,900 13,170 0 135,054 13,170 0 137,185 13,170 0
139,111 13,170 0 125,941 67,241
139,111 13,170 0 125,941 64,655
139,111 13,170 0 125,941 62,168
139,111 13,170 0 125,941 59,777
139,111 13,170 0 125,941 57,478
Cash Flow (Yen in M) Present Value Cash Flow (Yen in M) Net Present Value (Yen in M)
Table 4-5 Analysis Result (Case B)

2007 62,233,839 62,233,839 87,000,000 Construction Phase 2008 2009 63,366,512 64,486,139 57,868,139 65,908,629 87,000,000 87,000,000 2010 65,592,131 38,319,447 87,000,000 2011 67,353,149 62,649,153 87,000,000 2012 2013 2014 69,114,281 70,874,568 72,633,340 96,258,574 105,906,007 107,792,690 87,000,000 87,000,000 87,000,000 2015 74,389,968 40,892,745 87,000,000 2016 2017 76,143,790 77,894,119 70,852,191 107,971,158 87,000,000 87,000,000 Operation Phase 2018 2019 2020 2021 79,640,235 81,381,152 83,116,111 84,463,179 67,571,602 102,961,943 115,202,209 103,423,185 87,000,000 87,000,000 87,000,000 87,000,000 2022 2023 85,795,633 87,113,387 54,083,607 108,556,015 87,000,000 87,000,000 2024 88,416,454 89,944,244 87,000,000 2025 2026 89,704,914 90,978,530 51,261,467 122,025,498 87,000,000 87,000,000 2027 92,237,068 82,989,813 87,000,000
NPV Model with Flexibility (Design B)
Year
Demand (Deterministic Projection) Random Demand Capacity (Constant)

142,500 -142,500 -142,500 638,294 -142,500 -137,019 -142,500 -131,749 -142,500 -126,682 87,004 74,372 125,941 103,514 125,941 99,533 125,941 95,705 52,216 38,154 100,121 70,343 125,941 85,081 94,875 61,629 142,500 142,500 142,500 100,174 13,170 0 139,111 13,170 0 139,111 13,170 0 139,111 13,170 0 65,386 13,170 0 113,291 13,170 0 139,111 13,170 0 108,045 13,170 0 139,111 13,170 0 125,941 78,662 139,111 13,170 0 125,941 75,637 139,111 13,170 0 125,941 72,728 86,478 13,170 0 73,308 40,705 139,111 13,170 0 125,941 67,241 139,111 13,170 0 125,941 64,655 81,966 13,170 0 68,796 33,959 139,111 13,170 0 125,941 59,777 132,698 13,170 0 119,528 54,551
Revenue (YenM) Operating & Maintenance Cost (Yen in M) Initial Capital Investment (Yen in M)
Cash Flow (Yen in M) Present Value Cash Flow (Yen in M) Net Present Value (Yen in M)
NPV Model with Expansion Option (Design C)

Construction Phase 2008 2009 63,366,512 64,486,139 39,894,335 54,103,487 87,000,000 87,000,000 2010 65,592,131 51,525,702 87,000,000 2011 67,353,149 76,708,558 87,000,000 0 0 0 0 0 0 0 2012 69,114,281 90,411,186 87,000,000 2013 70,874,568 78,516,141 87,000,000 0 0 0 Operation Phase (No Expansion) 2014 2015 2016 2017 72,633,340 74,389,968 76,143,790 77,894,119 85,421,842 58,639,900 53,141,813 101,463,792 87,000,000 87,000,000 87,000,000 87,000,000
Table 4-6 Analysis Result (Case C)

2018 2019 79,640,235 81,381,152 81,211,366 116,851,429 87,000,000 87,000,000 0 Operation Phase with Expansion Optiton 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 83,116,111 84,463,179 85,795,633 87,113,387 88,416,454 89,704,914 90,978,530 92,237,068 93,480,029 94,706,438 95,915,430 99,558,999 80,045,196 46,217,658 76,364,557 94,004,581 71,889,072 85,106,617 118,002,960 108,274,523 116,423,514 134,211,221 87,000,000 121,800,000 121,800,000 121,800,000 121,800,000 121,800,000 121,800,000 121,800,000 121,800,000 121,800,000 121,800,000 Expand 0 34,800,000 0 0 0 0 0 0 0 0 0 0
Year
2007 62,233,839 62,233,839 87,000,000 0
Demand (Deterministic Projection) Random Demand Capacity (Flexible) Expansion Build Extra Capacity
Revenue (YenM) Operating & Maintenance Cost (Yen in M) Initial Capital Investment (Yen in M) Expansion Expenditure (Yen in M) 126,255 0 -126,255 -121,399 0 -126,255 -116,729 0 -126,255 -112,240 0 110,075 94,092 0 126,531 103,999 0 112,965 89,278 0 124,007 94,235 0 81,184 59,320 0 126,255 0 126,255 0 122,655 12,580 0 0 72,392 50,862 0 139,111 12,580 0 0 125,545 12,580 0 0 136,587 12,580 0 0 93,764 12,580 0 0 84,972 12,580 0 0
126,255 0
139,111 12,580 0 0 126,531 85,480 0
129,855 12,580 0 48,967 68,308 44,372 31,808
139,111 12,580 0 48,967 77,564 48,446 30,584
139,111 12,580 0 0 126,531 75,991 0
127,990 13,170 0 0 114,820 66,306 0
73,901 13,170 0 0 60,731 33,722 0
122,105 13,170 0 0 108,935 58,161 0
150,311 13,170 0 0 137,141 70,404 0
114,949 13,170 0 0 101,779 50,241 0
136,083 13,170 0 0 122,913 58,340 0
188,683 13,170 0 0 175,513 80,102 0
173,128 13,170 0 0 159,958 70,195 0
186,158 13,170 0 0 172,988 72,993 0
194,755 13,170 0 0 181,585 73,674 0
Cash Flow (Yen in M) Present Value Cash Flow (Yen in M) Present Value Expansion Cost (Yen in M) Net Present Value (Yen in M)
-126,255 -126,255 0 686,728
Page 20 of 22
5. Conclusion There are a lot of facilities that are not designed optimally in airport systems. The
master plan of those designs does not anticipate and consider future risks and uncertainties. Thus, inflexible design cannot manage risks and uncertainties, and it leads to losses. In order to solve this problem, it is essential to incorporate flexibility into design. As
demonstrated in the case study in this paper, the real option analysis is the useful way to recognize uncertainty and incorporate flexibility into design. The case study demonstrated
that flexibility can enhance the expected value of the project, and reduce the possible losses by using the option to expand. Also it can demonstrate that flexibility can keep the initial cost lower than that of the current design. Therefore, at the initial construction phase, only
runway should be constructed and if the demand of the number of passenger exceeds the capacity after 10 years operation, a parallel taxiway and a south edge should be constructed. Furthermore, real options analysis using Monte Calro Simulation is very useful in that it just focuses on the ENPV of options and it does not require any financial skills unlike typical financial options approaches such as Black-Sholes option pricing model and binomial lattice model. Thus, those who are in charge of design can relatively easily use this method.
Flexible design thus enables projects to be optimized and reduce excessiveness and losses in airport systems.
Page 21 of 22
1.231 Planning and Design of Airport System 6. Reference
[1] R. de Neufville, Lecture note of the MIT course of 1.231: Planning and Design of Airport System (Fall 2007). [2] Ministry of Land, Infrastructure and Transport in Japan, Outline of Tokyo Intl Airport New Runway Extension Project, 2007. http://www.mlit.go.jp/koku/04_outline/01_kuko/02_haneda/index.html [3] R. A. Brealey, S.C. Myers, and F. Allen, Principles of Corporate Finance, 8th ed., (New York: McGraw-Hill Publishing Company, 2005). [4] R. de Neufville, Lecture notes of the MIT course of ESD.71: Engineering Systems Analysis for Design (Fall 2006). [5] K. Hodota, R&D and Deployment Valuation of Intelligent Transportation Systems: A Case Example of the Intersection Collision Avoidance Systems, M.S. Thesis in Master of Science in Transportation, MIT, Cambridge, MA, 2006. [6] T. Copeland, T. Koller, J. Murrin, Valuation: Measuring and Managing the Value of Companies, Fourth Edition (McKinsey & Company Inc., 2002). [7] R. de Neufville, S. Scholtes, T. Wang, Valuing Real Options by Spread Sheet : Parking Garage Case Example, January 2005. [8] A. Odoni, Lecture notes of the MIT course of 1.231: Planning and Design of Airport System (Fall 2007). [9] Ministry of Land, Infrastructure and Transport in Japan, Civil Aviation Breau. http://www.mlit.go.jp/singikai/koutusin/koku/seibi/14/images/shiryou1_22.pdf [10] Ministry of Land, Infrastructure and Transport in Japan, Survey of the Air Traffic Condition in Japan, 2003, http://www.mlit.go.jp/kisha/kisha03/12/120523_3/05.pdf [11] Katsuya Hihara, Research for New Operation System of Transportation Policy Considering Uncertainty, 2004, Policy Research Institute for Land Infrastructure and Transport, https://www.mlit.go.jp/pri/houkoku/gaiyou/pdf/kkk9.pdf [12] R. de Neufville, A. Odoni, Airport Systems: Planning, Design, and Management, 2nd ed., (New York: McGraw-Hill Publishing Company, 2003) [13] Ministry of Land, Infrastructure and Transport in Japan, Forecast of air traffic, http://www.mlit.go.jp/singikai/koutusin/koku/07_9/01.pdf [14] National Institute of Population and Social Security Research, Forecast of Population http://www.ipss.go.jp/syoushika/tohkei/suikei07/suikei.html#chapt1-1 [15] Ministry of Land, Infrastructure and Transport in Japan, Transition and Forecast of GDP, http://www.mlit.go.jp/road/kanren/suikei/7-1.pdf [16] R. de Neufville, Forecasting Assignment of the MIT course of 1.231: Planning and Design of Airport System (Fall 2007) [17] Michel-Alexandre Cardin, Facing Reality: Designing and Management of Flexibility Engineering Systems, M.S. Thesis in Master of Science in Technology and Policy, Massachusetts Institute of Technology, Cambridge, MA, 2007. Term Project: Flexible Design of Airport System Page 22 of 22

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1.

231 Planning and Design of Airport System Term Project

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

In order to respond to this

2. Outline of the Case Project

Term Project: Flexible Design of Airport System

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

Figure 2-1 Location Figure 2-2 Tokyo Intl Airport

year to 407,000 a/c per year.

Extension Project Runway D (Under Construction)

Figure 2-3 Plan of New Runway Island in Haneda Airport

Term Project: Flexible Design of Airport System

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

Figure 2-4 Structure of Runway D

12/14/2007 Dai Ohama

Can the design of this project respond to the future

Parallel Taxiway (PT/W)

South Edge (S/E)

In the currently designed operation, these areas are not necessary.

Figure 2-5 Operation Concepts of Runway D

Term Project: Flexible Design of Airport System

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

N, it is possible for the entire capacity of the airport to be increased.

Figure 2-6 Currently Designed Capacity

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

In other words, they dont have to be If such

constructed until the demand of passengers exceeds the projected capacity.

Options are also divided into two categories in terms of Page 6 of 22

Term Project: Flexible Design of Airport System

1.231 Planning and Design of Airport System expiration date.

12/14/2007 Dai Ohama

them on or before the expiration date. expiration date. [3]

For example, those

Underlying Assets S-K

Asset Price ($)

Asset Price ($)

Payoff of European call = Max (S-K, 0)

Payoff of European put = Max (K-S, 0)

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

Where C: Theoretical value of a European call option with no dividends

N(x): Cumulative probability function for a standardized normal distribution

Where P: Theoretical value of a European put option with no dividends

Figure 3-2 Binomial Tree Representations of Changes in Underlying Asset

Term Project: Flexible Design of Airport System

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

as Monte Calro Simulation can be constructed easily.

Microsoft Excel is the tool for conducting Monte Calro Simulation.

business strategies including large-scale engineering systems.

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

In the current design, which

Figure 3-3 Payoff of Expansion Option

3.3 Application of Real Options Analysis to Case Study

1.231 Planning and Design of Airport System

12/14/2007 Dai Ohama

tool for the valuation method for this case study.