Development of Business Strategy and Business Plans for Profitable Cargo Operations Dr Emre Serpen
Executive Vice President, Head of Airline Practice
Improvement Profitability Cargo Operations
Benchmarking of Cargo Airline Commercial and Operational Performance to Identify Improvement Opportunities SCOPE
SAMPLE DELIVERABLES
• This will include commercial, financial operational benchmarking of the Cargo Airline. The gaps in performance will be identified for further analysis.
Air Cargo World Annual Survey
PROPOSED INTERVISTAS APPROACH Establish peer group and key competitors Commercial Benchmarking (Belly, Freighter, Total) Volume of cargo carried, RATK ,Yield, Load Factor , Revenues Freighter utilisation
Operational and Productivity Benchmarking ATK, Cost per ATK ATK per Employee Tonnage per employee
InterVISTAS’ Cargo Benchmark Data Repository
Financial Benchmarking Net Revenue/ATK,Costs/ATK, Margin
Air Cargo world annual Survey
Overall survey assessment Staff competency Fares and value added programs E-freight enablement
Customer satisfaction survey
Comparative Analysis of Commercial Performance
Analyze benchmarking results and identify areas that requires improvement. Realizing the vision together 3
Detailed Diagnostic will be Executed in Areas Where Performance is Behind Industry Best Practices • Diagnostic analysis will include meetings, workshops and discussions with commercial, operations and support functions. Processes will be revised, improvement opportunities will be identified.
What volume do you ship with Client yearly?
What volume do you ship with other airlines?
How many customers, apart from allotments, does Client serve on an average flight?
What are the reasons for not choosing Client
Internal Meetings will include:
Executive management Marketing Network design (passenger section for belly) Freighter route planning Capacity management Pricing Revenue Management Sales/stations (domestic/international) Key account management Supply chain management Inbound logistics Outbound logistics Warehouse management Finance Cargo Systems Performance management and Human Resources
Which factors influence your choice most?
□ Destination □ Frequency □ Price □ On time delivery □ Losing/damaging Shipments □ Traceability □ No Main Deck capacity □ Customer relations/Information □ Other □ Destination □ Frequency □ Price □ On time delivery □ Warehouse handling □ Traceability □ Main deck capacity □ Customer relations/Information □ Product range □ Global reach □ Billing accuracy □ Other
Do you think the pricing structures are changed to market circumstances often enough?
□ Yes □ No
How often shipments are flying with a competitor because of price?
□ Rarely □ Sometimes □ Often
Diagnostic is executed using extensive cargo intellectual capital and cargo expertise
External Meetings and Workshops: Freight forwarders Key customers
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Revenue Growth Through Improvement of Air Cargo Commercial Processes Example Cargo Capacity Management
• This will include analysis and evaluation of commercial activities to improve cargo revenues, yield and load factor for belly and freighter operations.
• Capacity management is focused to improve cargo leverage and communications between passenger and cargo teams thru planning and execution phases including Network Planning, Schedule Management, and Operations Control. • Pricing and revenue management evaluates Pricing and Revenue Management activities for belly and freighter operations. LF forecasting, Critical flight management, bid pricing, allotment confirmation.
Example Cargo Revenue Management
• Revenue planning and revenue delivery activities including pricing, revenue management and sales are assessed, and improved. • With sales focus on key account management, development of long term revenues per key account and develop best practice key account management practices.
• Pilot routes will be selected, and recommendations will be implemented/tested. Realizing the vision together 5
Cost Reduction, Productivity and Customer Service Improvement Through Logistics/Supply Chain and Operations Improvement
• Scope is to improve end-to-end supply chain performance, improve reliability, reduce costs and improve customer service ratings.
Inbound and Outbound logistics improvement
• Supply chain improvement include effectiveness of inbound and outbound cargo, use of standard, repeatable processes, integrated systems and compliance with e-cargo.
Example: Cargo operations diagnostic
• Issues include improvements of communications between HQ and stations. • Eliminate waybill related inefficiencies. • Systems and facilities supporting inbound and outbound cargo are effective and integrated. • Job specifications are revised and accountabilities improved. • Develop cargo key performance measures. • Implementation projects are identified and executed.
Example : InterVISTAS Cargo Freighter Cost and Performance Database
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Systems and Human Resources Diagnostic for Alignment with Strategy and Processes • Objective is to review the systems supporting processes and identify improvement opportunities and ensure new processes are supported with integrated and effective systems.
Example: Information flows e-freight assessment
• Audit systems currently used; • Identify key functionality, integration, and technical limitations; • Develop IT Strategy improvement plan;
Example Systems strategy and system functionality
and identify priorities and
• Review implementation effectiveness of current systems – recommend activation of modules, and better use of existing modules; • Review Organization, Job performance management;
specifications
Alignment of job specification and skills with strategy and processes
and
• Recommend improvements to the organization; • Improve job specifications performance management.
and
develop
Example: Cargo performance Management and Key Performance Measures
key
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Development of Business Strategy and Business Plan
Market Analysis and Forecasting to Identify Best Routes and Define the Basis for Subsequent Route Design and Improvement
• This is followed by Market forecasting on current and future potential routes.
Key NE Asia - Australia Export Tradelane Tonnage 90,000
120,000 107,437
80,000
Example Tradelane Analysis Per country and import/export direction
100,000 70,000
89,023
60,000
Tonnes
• Objective is to conduct market and capacity analysis, evaluate relative share gap of Cargo Airline and its key competitors. This will drive scenario’s for route development where the focus will be on routes where favorable demand and supply relationships.
66,788
66,007
50,000
70,541
80,000
71,320
64,204
60,000
40,000 45,264
39,555 30,000
32,178
37,038
40,000
20,000 20,000 10,000
• Cargo Airline Airline route network is evaluated. Over the past two years capacity share growth of Airline’s competitors are identified. This is complemented with market share growth of Airline and its competitors.
• Market forecasting is executed for developing future growth of Airline’s current and potential markets. This is done thru the use multiple methods: - Industry forecast’s, including IATA, Boeing Airbus - Air cargo tradelane analysis: this will include both destination and transhipment cargo (O/D) - Tradelane forecasting is done in each direction (cargo imports and exports separately ) - Conduct workshops with freight forwarders and customers of Cargo Airline specific feedback on obtained key improvement needs, and what Cargo Airline should do for customers to book more cargo with Cargo Airline - Market forecast include weighted average of three methods where InterVISTAS uses its extensive experience and judgment
-
2000
2001
2002 China
2003 Hong Kong
2004 Japan
2005
2006
Group Total
2007
2008
2009
2010
2 per. Mov. Avg. (Group Total)
Example Commodity Analysis Type of cargo
Example Market Forecasting Route level
• In executing market analysis and forecasting work InterVISTAS uses its proprietary data sources obtained from industry research. Realizing the vision together 9
Market Share Forecasting will Provide Base Scenario Considering Market, Cargo Airline and Competitor Growth • Objective if to forecast Airline’s market share on current and future routes considering market forecast, and capacity growth of Airline and its key competitors in these routes. • This will be used to identify determination of best routes where Airline has best chance to capture market share This will be used to design freighter route scenarios.
• First step is to determine the Airline’s expected load factor for each route, regions and system wide, considering future market growth (from the previous market forecasting task).
InterVISTAS provides proprietary tools for route level cargo marketshare forecasting
• Analysis include following elements: - Future market sizes. - Market share growth based on current load factors. - Cargo capacity growth, driven by the growth of the passenger fleet. - Additional cargo capacity driven by freighters that may be committed to this route (capacity and frequency) - Total capacity including competitors operating this route.
• The routes will be prioritized according to best market share forecast and they will be used in developing scenarios for network design. • Market share forecasting proprietary tools.
is
done using InterVISTAS’
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Analysis of Network Scenarios For Improving Route Performance • Scope to design/improve the route structure and freighter type/number/utilization maximizing route profitability. Analysis also drives the freighter performance improvement.
Example: Route Analysis and Market Share Capture Models Market and Capacity Development Origin: Destination:
• If the Freighters types and number are given than the objective is to maximize route profitability with selection of the best route structure supported by cargo codeshares.
CGK pvg
2012 31,337 4,260 0
2013 34,453 4,380 0
2014 36,933 6,588 0
2015 39,610 8,760 0
2016 42,434 8,784 0
Desired belly LF on CGK-pvg GA Capacity Loads given current LF on CGK-pvg Addtional cargo required to reach desired LF on CGK-pvg Addtional cargo required for 2 weekly Full Freighter
2012 37% 4,260 1,338 244 -
2013 43% 4,380 1,376 501 -
2014 49% 6,588 2,070 1,130 -
2015 54% 8,760 2,752 2,003 4,732
2016 60% 8,784 2,760 2,510 4,732
GA Capacity on CGK-pvg Competition Capacity on CGK-pvg GA Freighter (2 weekly)
2012 4,260 0 0
2016 8,784 0 6,760
Market share (business as usual) on CGK-pvg Market share (high) on CGK-pvg Market share when introducing 2 weekly Full Freighter
2012 4.3% 5.0% 5.0%
2013 4.0% 5.4% 5.4%
2014 5.6% 8.7% 8.7%
2015 6.9% 12.0% 24.0%
2016 6.5% 12.4% 23.6%
Market forecast CGK-pvg GA Capacity on CGK-pvg Competition Capacity on CGK-pvg Growing LF in equal steps to desired LF
Current Load Factor: Desired Load Factor:
• Network scenarios will be developed thru analysis of following factors: - Routes with greater market size - Routes with greater market growth rates - Routes with greatest markets hare - Routes including greater current load factor
31% 60%
Including Narrow Body Belly (yes/no): no Useful for ASA with both wide and narrow bodies
Example: Route Design/Improvement Driven by Scenarios
• Criteria will include weighted average, where weights include expertise and experience of InterVISTAS team. • For selected routes deeper analysis will be executed: - Where the current share is less than expected share, analysis is executed to establish LF growth at the target routes in relation to market size • Results will be discussed with Cargo Airline management and analysis will form basis of the route scenarios. • Route scenarios will be subsequently tested for Freighter types that will be analyzed in the next task. Realizing the vision together 11
Development of the Business Plan with Revenue, Cost and Profitability Forecasting Including Strategy and Improvement Impacts
• Scope includes development of a route level business plan for different freighter types tested at different frequencies. The model is used to calculate the network profitability for belly and freighter operations
Business plan method based on marketshare, fare , operating and capital costs for freighter and belly
• InterVISTAS will build the revenue-side of the model using the demand and revenue data gathered in the earlier stages of the project. We will also investigate how alternative agreements such as block-space. • Direct and indirect aircraft-related costs will drive the expenseside of the model. InterVISTAS will use “real world” cost data from other carriers operating these aircraft. Unit costs will be applied to the operation based on key operating statistics such as block hours, landings or other appropriate barometers.
Business plan is based on directional (inbound and outbound route level profitability CGK-PVG (V.V.) by A330 Freighter
2012
Total Operating Revenues Scheduled Full Freighter Revenue Passenger (belly) Revenue Total Revenue CGK-PVG (V.V.)
7,153,070 7,153,070
2013
2014
2015
2016
10,869,673 7,264,308 18,133,981
10,869,673 10,815,246 21,684,919
16,304,509 14,233,240 30,537,750
16,304,509 14,124,143 30,428,652
6,512,381 651,238 781,486 2,050,194 85,425 673,367 156,900
9,768,571 976,857 1,172,229 3,075,291 128,137 1,010,050 235,350
9,768,571 976,857 1,172,229 3,075,291 128,137 1,010,050 235,350
Direct Operating Cost (excluding Ownership)
• We will be able to accurately predict direct and indirect costs, as well as revenue, and will run sensitivity analyses to model various financial and operating variables: - Direct costs will include fuel, maintenance, crew, ground handling, over flight , ownership etc - For belly cost per KG carried will be used. If airline is allocating other direct and indirect costs these will be used. • Profitability forecast will be developed for belly and freighter operations.
Fuel Cockpit Crew Maintenance Depreciation Insurance ATC/LDG charges Sales Commision
-
6,512,381 651,238 781,486 2,050,194 85,425 673,367 156,900
Total Direct Operating Cost Total Indirect Operating Cost Total Full Freighter Operating Cost
-
8,618,472 2,292,518 10,910,990
8,618,472 2,292,518 10,910,990
12,927,708 3,438,778 16,366,485
12,927,708 3,438,778 16,366,485
7,653,167
7,942,968
12,082,153
16,245,108
16,469,692
7,653,167
18,853,958
22,993,143
32,611,593
32,836,178
-500,097 -500,097
-678,660 -41,317 -719,977
-1,266,906 -41,317 -1,308,224
-2,011,867 -61,976 -2,073,843
-2,345,550 -61,976 -2,407,526
-7.0%
-9.3% -0.4% -4.0%
-11.7% -0.4% -6.0%
-14.1% -0.4% -6.8%
-16.6% -0.4% -7.9%
Passenger (belly) Operating Cost Total Operating Cost CGK-PVG (V.V.) Profit (Belly Space, US$) Profit (Full Freighter, US$) Total Profit (US$) Profit Margin (Belly Space, %) Profit Margin (Freighter, %) Total Profit Margin (%)
-7.0%
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Cargo Transformation and Implementation Plans will be Developed • Scope includes development of implementation plan including strategy, process, systems. This will be backed with specific action plan, The implementation of quick hits will start during the project.
Example: Cargo Transformation Plan
• Transformation plan will be developed Projects will include: - Implementation of the strategy - Improvement of revenues - Improvements in costs and productivity - Improvements in customer service and development
Example: Specific Improvement Actions
• Improvement actions will be classified according the business benefit and ease of implementation. These will include: - Capacity Management - Pricing and revenue Management - Supply Chain/operations - Systems - Performance Management Realizing the vision together 13
InterVISTAS Provides Cargo Route Performance Analysis, Design and Business Planning Tools Example: Project Approach Example: Route Analysis
Example: Freighter and Belly Business Plan SAR (Millions)
2006 Baseline
2007 Year 1
2008 Year 2
2009 Year 3
2010 Year 4
2011 Year 5
2012 Year 6
2013 Year 7
Total Operating Revenues (Net) Total Cargo Scheduled Revenue
488
569
622
749
799
844
880
918
8
15
15
15
15
15
15
15
49
49
49
49
49
49
49
49
544
633
685
813
863
907
944
981
30 51 47 7 12 56 2 7 6
38 142 100 4 13 55 2 5 11
47 181 124 6 16 65 3 5 11
57 220 147 7 19 75 3 6 11
59 227 153 7 19 79 3 6 11
60 233 157 7 20 81 3 6 11
61 237 160 7 20 82 3 6 11
62 240 162 7 21 84 3 7 11
Total Aircraft & Other Lease Costs
218
370
458
544
564
580
589
598
Total Indirect Operating Costs
307
269
282
306
306
312
313
312
525
639
740
850
870
892
901
910
Profit (Loss)
19
-6
-55
-37
-8
15
42
71
Profit Margin
4%
-1%
-8%
-5%
-1%
2%
4%
7%
-26 8,173 517 63,649 8.6
-26 9,623 596 70,161 9.0
-34 11,859 734 77,818 8.8
-38 13,757 884 92,531 8.8
-40 14,073 905 98,483 8.8
-42 14,454 919 105,357 8.6
-42 14,454 922 109,794 8.6
-42 14,454 926 114,426 8.6
-6.0 76.9% 1.05 0.42 1.02 66,613 26,705 64,272
-7.1 64.5% 1.06 0.62 1.07 65,776 38,497 66,431
-6.7 55.4% 0.93 0.62 1.01 57,786 38,640 62,444
-7.0 58.5% 0.92 0.62 0.96 59,065 39,566 61,786
-6.8 59.4% 0.95 0.62 0.96 61,304 40,075 61,854
-6.6 62.0% 0.99 0.63 0.97 62,771 40,133 61,699
-6.6 64.6% 1.02 0.64 0.98 65,279 40,736 62,370
-6.6 67.3% 1.06 0.65 0.98 67,896 41,349 62,969
Cargo Charter Revenue Other Revenue
Example: Diagnostic Analysis
Total Revenue Aircraft & Other Lease Costs (Incl. Ownership) Flight Crew Employment Cost Fuel Direct Maintenance Landing Fees Overflight Aircraft, Engines & Components Depreciation Insurance Passenger Operating Costs Charter Operating Costs
Total Operating Costs
Operating Metrics Freighter Fleet at Year-End 12/31 Total Weekly Departures (both directions) Total Block Hours Total Available Ton Kilometers (Millions) Total Cargo Carried (000s) Average Rate per Kilogram Comparative Metrics Average Daily Utilization (Block Hours) Average Block Hours per Flight System Load Factor (Belly/Freighter Combi) Total Operating Revenues per ATK Total Direct Operating Costs per ATK Total Operating Costs per ATK Total Operating Revenues per Block Hour Total Direct Operating Costs per Block Hour Total Operating Costs per Block Hour
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Realizing the vision together
Selected Credentials for Cargo Projects MNG Cargo
Garuda Cargo
Diagnostic Analysis Review Pricing, Revenue Management and Sales processes Development of Revenue Management process Recommendations on organization, job specifications Systems recommendations
Diagnostic and benchmarking Market and capacity analysis Freighter network market share forecast Route evaluation and design Freighter analysis Business plan Implementation Plan
Lead Consultant: Dr. Emre Serpen
Sri Lanka Airlines Cargo Diagnostic Analysis of Belly and Freighter operations Market forecasting Freighter business evaluation Business plan development Implementation plan Lead Consultant: Dr. Emre Serpen
Saudi Arabian Cargo
Lead Consultant: Dr. Emre Serpen
Execution benchmarking Route evaluation for revenue improvement Freighter aircraft appraisal Service levels/ transfer price Market and revenue forecasting for belly and freighter operation Market forecasting and priorities
Malaysian Cargo Developed business case Managed the procurement to secure systems and services Program management of development, testing and implementation of new -- network planning, -- revenue management, -- pricing and data warehouse systems;
Lead Consultant: Dr. Emre Serpen
Saudi Arabian Cargo Privatisation Diagnostic Analysis of Belly and Freighter operations Development of cost model Development of business plan Support of the due diligence with investor queries Sales was completed with successfully with higher than expected subscription
Client
Cathay Pacific Cargo
Successful application for U.S.-China authority in U.S. DOT route proceeding. route case strategy with UPS direct and rebuttal exhibits. proceeding included both U.S. pax and . all-cargo airlines competing for a single award.
Diagnostic of cargo processes Review of the Cargo Systems supporting the processes; Identify improvements in commercial cargo processes; Prioritize requirements for solutions supporting cargo processes; and Develop Implementation plan.
Lead Consultant: Douglas Banez
Lead Consultant: Dr. Emre Serpen 15
Lead Consultant: Dr. Emre Serpen Realizing the vision together
Please contact Dr. Emre Serpen for any queries on this document emre.serpen@intervistas.com +447944163891
Thank You! www.intervistas.com