strategic transportation & tourism solutions
World Low Cost Conference Route Planning Insert Title of your presentation Dr Emre Serpen Executive Vice President
Low Cost Conference 2009 London
Agenda 1. Introduction and Expectations
9:00 - 9:30
2. Route Planning
9:30 - 10:30
3. Coffe Break
10:30 - 10:50
4. Revenue Management (Integrated Approach)
10:50 - 12:15
5. Measuring Performance (Presentation)
12:15 - 13:00
6. Lunch
13:00 - 14:00
7. Measuring Performance (Facilitation)
1400 - 14:30
8. Coffee Break
14:30 - 14:45
9. Optimising Costs
14:45 - 15:30
10. Expectations Review & Next Steps
15:30 - 16:00
1
Objective This workshop will focus on strategies and methods to improve revenue. Integration of commercial activities enables airlines and airports to improve the revenue base. By working together and understanding each others priorities airlines, airports and service providers can maximise the revenues and margins of the chain. Benefits for airlines: Learn key strategies, tactics, use of tools, organisation, processes and measures that result in revenue maximization Learn and develop new methods used in route planning Benefits for airports Learn how to support the growth of lead or leading carriers Develop new strategies in how to attract new airlines Benefits for solution providers and vendors Learn how best to share data and technologies with airlines Develop expertise and knowledge about your customers – Learn how to lead educate your customers to better use your tools Learn how to improve revenues for your customers
Diversification of LCC Model and Opportunities for Revenue Improvement Factors driving change Revenue Growth Opportunities •
Extending route lengths
•
Connecting services
•
Increasing network complexity
•
Cooperation between Network and Low Cost Carriers ?
•
Network carriers establishing successful low cost carriers ?
•
Mariginal improvement in costs ?
•
Pressure to increase revenues ?
•
Reducing margins in route risks ?
•
Consolidation ?
•
Airport costs ?
Route variable contribution Codeshare ? Cooperate with Network carriers ? Improve processes ?
Improve data sources and optimisation technology
3
Diversification of LCC Model and Opportunities for Revenue Improvement
Factors driving change •
Revenue Growth Opportunities
Deregulation (eg Russia, Middle East/ Gulf, Open skies between US and Latin American countries)
•
Improved variable contribution
•
Increase in operating hours – ie. very late and very early departures
•
Fleet utilisation
•
Traffic patterns and holding patterns around some airports – adding costs to certain routes, and making them uneconomical for LCCs
•
Long haul RASK & Yield
4
Factors driving change Growing LCC stage Length
Increasing connecting services
1,400
Airline
Local
Connecting
1,200 1,000
US
Spirit
99.8%
Europe
Jet Blue
95.5%
4.5%
Southwest Airlines
85.1%
14.9%
ATA
83.9%
16.1%
Airtran
70.6%
29.4%
Frontier
67.9%
32.1%
Continental
62.7%
37.3%
America West Airlines
61.0%
39.0%
American
59.9%
40.1%
United
54.4%
45.6%
US Airways
54.3%
45.7%
Delta
50.2%
49.8%
Northwest
47.2%
52.8%
800 600 400 200 0 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Source: OAG
Increasing Network Complexity
0.2%
The US sees steady increases in connecting traffic among LCCs Some US LCCs are positioning themselves for connecting trans-atlantic traffic as a result of the EU-US market liberalisation JetBlue – Aer Lingus Virgin America – Virgin Atlantic Notes: Includes Domestic and International Traffic. Local = 1 Coupon Passengers. Connecting = Online Passengers Traveling on Multiple Coupons. Source: U.S. DOT O&D Survey, Database Products Inc.
Diverging LCC Models
Main Airports
Frequent Flyer Plan
Ryanair
easyJet
×
P
×
×
Southwest Virgin Blue JetBlue
P P
P P
P P
Frontier
P P
WestJet
P P
Free Beverage and Snacks
×
×
P
P
P
P
P
Connecting Flights
×
×
P
P
P
P
P
Assigned Seating
×
×
×
P
P
P
P
Free Inflight Entertainment
×
×
×
×6
P
P
P
jetBlue started to serve international routes - eg Carribean and Mexico Southwest is considering adding international destinations in the future jetBlue has opted to enter smaller markets with the Embraer E190s jetBlue already operates from congested airport facilities (JFK, BOS, etc.) Southwest has increased belly cargo capacity
Starting to see long haul – low cost activity
7
Low-cost carriers increasingly resemble hub & spoke systems, in addition to expanding their previously limited international offerings
Percent of Total Seats
LCC
Airport
Frontier JetBlue Southwest
Denver New York Kennedy LAS, PHX, MDW, BWI, HOU
49% 35% 30%
WestJet AirTran America West
Calgary/Toronto Atlanta Phoenix
37% 35% 34%
LCC International Destinations Aruba Bahamas Bermuda Canada Costa Rica Dominican Republic Jamaica Mexico
Sources: US DOT O&D Database
Long Haul LCC- Increasing Revenue Potential ? CONSTRAINTS Stimulation LH has less potential than SH Weekend breaks are less viable
Regulatory International markets are still highly regulated Competition from charter carriers
FUTURE Ryanair Actively considering transatlantic service?Within 3-4 years (maybe) Past
Transatlantic, Asia-Europe & Asia-North America
Curre nt
Intra-Asia Pacific, Australia-North America
Future
Transatlantic, Asia-Europe, Middle East, Elsewhere 9
WestJet/Southwest Investing in interline or other capabilities
JetBlue Interlining with transatlantic carriers at JFK
Consolidation among low cost carriers, here is some learnings from Network Carriers Example 1: Lufthansa The synergies from integration with Swiss, exceeded 200 million Euros •
expanded route network with more destinations and better connections
•
interlinked frequent flyer programmes and mutual lounge access
Total synergies from integration of Austrian are estimated at around EUR 80 million Euros (both revenue and cost) •
•
improved access to international passenger flows and joint international marketing,
Nonstop Total Weekly seats Operated by Lufthansa Group Aug. 2003–Aug. 2008, Dec. 2008
cost advantages and economies of scale
The scope of integration Swiss /Austrian were similar •
Autonomous carrier own business management, own crew and fleet
•
Zurich integral part of Lufthansa’s multi hub strategy
Example 2: Air France / KLM The airline related savings of €525 million over three years by combining purchasing, sales and information technology. Depending on further progress of discussions between FAA – EU in future we could see similar deals between US/EU
For example if Virgin Group and easyJet’s agrees to cooperate to Operate London Gatwick – this drives clear benefits for both
Low-costs are starting to connect their networks Virgin Blue Southwest Jet4you
Jetstar Gol Vueling Simple structures are used yet
Mostly one-way Mostly block-space
Low-costs are looking for simple ways to codeshare Traditional approaches are not welcome Immedaite payment is expected
Reservation systems providers developing new solutions especially for low-costs
No prorating
Open questions Baggage transfers for extra charge? How to share liabilities? Will there be schedule coordination in the future?
The impact of increasing product complexity on the design and delivery of the schedule
Route Planning Network Design
Production Plan
Focus on improving variable contribution
Operations control
Although LCCs still maintain a utilization advantage, LF offer potential for improvement Load Factors
Yield
Load Factors
Yield
$0.160
90% $0.140
80% 70%
$0.120
60%
$0.100
50%
$0.080
40% $0.060
30% $0.040
20%
LCCs lower unit costs require lower break-even Load Factors.
Southwest has made improving Load Factors a major component of their future strategy. Through capacity restraint (less profitable long-haul route reductions and aircraft deferrals) and increased market share. Increasing yields requires higher fares. Passengers must perceive value to pay more for a service that has become more commoditized
A AT
ue Je tB l
r Fr on tie
W
es t
te d er ica
Un i
Am
en ta l
ta De l
Co nt in
So ut hw es t Am er ica n
rT ra n Ai
No rth we st
Ai rw ay s US
ra n Ai rT
es t So ut hw
AT A
) P S+ H U
Fr on tie r
C (L C
el ta D
ni te d U
Je tB lu
or th w N
Am
C
e
$-
es t
0% er ic an
$0.020
on ti n en ta l
10%
Schedule design should take into account revenue drivers
•
•
•
100%
Consistent priorities ? Service timing which does not meet the needs of the local market Inconsistent schedules which do not meet the needs of the market Ensure operational feasibility (minimise turn times,
Client - Market Clusters, International HIGH SHARE LOW RELATIVE YIELD
HIGH SHARE HIGH RELATIVE YIELD
80%
Market Share
•
60% 64% 77%
62%
52%
40%
54% 60%
Ensure maximisation of the variable contribution through the right service 20% characteristics
54%
78%
58%
55% 71%
54% 58%
53%
LOW SHARE LOW RELATIVE YIELD
0% 10%
15%
LOW SHARE HIGH RELATIVE YIELD
20%
25%
30%
Avg Fare Relative to FFY
35%
40%
45%
50%
As the network becomes more complex, fleet allocation models may prove beneficial Route Analysis Data: City Pair Market Sizes Sources MIDT a.
Scaled-up, based on research
Government Stats - Some good ie. CAA, USA DOT - Some wanting
All air travel options (OAGRoute Analysis
Market Share INPUT Supply side – all travel options – nonstops, directs, connects, etc. Demand side – all city pair market sizes New route schedule OUTPUT Share of local market Share of flow potential)
New Route Selection Process The Planet Market Share Model
Other Considerations
All Air Travel Options
Model Input
Network Contribution
New Service Schedule • • • • •
Flight frequency Optimal flight times Aircraft type Seasonality Day of week preference
Model Assessment
- Very significant for network carriers
• Relative score of new flight against all other travel options • Multiplicative equation based on coefficients for: Flight Frequency X Number of Stops X Aircraft Type X Travel Time X Day of Week Also known as Quality of Service Index (QSI)
- Prorate issue - How to consider the contribution
Current Route Cannibalization
Model Output
Market Stimulation New service market share
Non-stop flight stimulation Reduced airfare stimulation
x • Market Research • Government statistics • Market stimulation
Research
Quality of service basis
New service carrier market share loss on other routes
Other carrier market share loss
Share before/after new service
Share before/after new service
Passengers recaptured by new service
Passengers lost to new service
=
How to establish Rules-of-thumb
City pair market size
Cannibalization
On-board passengers
X Average fare = Airline revenue Airline costs
÷ Available Seats
= New service load factor
= Profit/loss forecast
16
Risk Sharing Concept Two examples where breakeven + profit margin is at 80% load factor
For New Routes Airlines:
Load Factor
30% Load Factor 80%
68%
Positive financial return for the route Network Contribution (Connectivity) Strategic Considerations Market Share
Airline Risk
60%
40% 30%
For New Routes Airports: Airport fees from more flights Retail sales from additional passenger flow Better Air Travel Product for the Community at Large Tourism, Business, Economic Development
60% Load Factor Load Factor 80% Airline Risk
Airport Contribution
Airport Contribution
Actual Revenue
Actual Revenue
Routes linking regional airports 5m> For new routes only & increase net pax nos Profitable routes (3 years) Support plans must go public Penalties for not honoring the commitment 17
Market Stimulation For new routes, stimulation can be as important as market share.
Stimulation is a result of: •
Product improvement - new non-stops vs connections, etc. & Price reduction.
Contributors: •
“Gets them out of their couch” Allegiant Airlines.
Airline rules of thumb: •
A USA airline – A new daily flight will stimulate the market by 45%.
•
A European charter carrier – A one/week service will increase the market by 65%
Models ln(%Traffic) = Constant + (a x ln(%Fare)) + (b x ln(%Capacity))
+ (d x ln(distance))
Traffic is the percent change in O/D passengers on the specified route. The constant term captures to some extent the influence of other variables not explicitly accounted for in the model. %Fare is the percent change in the industry average air fare. %Capacity is the percent change in total non-stop capacity offered by all airlines on the route. 18
Domestic U.S. Findings ď ‘ U.S. domestic average stimulation rates by route type for individual airports: 112%
120% 100%
73%
80% 60%
50%
59%
50% 49% 44%
46% 39%
36%
40% 20% 0% -20%
-19% -14% -21% -23% -46%
-40% -60% Seat Capacity Change Ultra-Short Haul
Short Haul
Fare Change Medium Haul
Source: PLANET OAG schedules and U.S. DOT OD1A data.
Passenger Change Long Haul
Ultra-Long Haul
Schedule design should also take into account cost drivers De-peaking (intra-day and seasonal) •
Europe: Change in Weekly Revenue, Cost and Profit 2
Evens out load on the structure
1.6
2
But lowers yield too
Avoiding overnights at outstations •
Crew costs vs. yield
Flying faster or slower •
Fuel burn vs. utilisation
1
Million EGP
•
1 0 -1
Rev Diff -0.4
Var Cost Diff
-1 -2 -2
-2.0
-3
Moving to secondary airports •
Lower costs and higher utilisation vs. yield
Extending the fleet operating date •
Aircraft utilisation vs. low revenue during shoulder-times Source: project work
Var Res Diff
Opportunities to improve route profitability Improve connection times
Shut dow n engines
Right operational characteristics •
•
Reduce Turn time, ensure station delivery capability to match target turn time Right size block time
Maximise asset utilisation •
•
•
Design to maximise daily utilisation (without impact on OTP, station delays and reliability
Position Pax bridge or stairs PAX
Deplane Pax at 40 per min.
SERVICE
Cabin cleaning (6 people)
1 7 22
Service Galleys
FWD 6 + AFT 20
Board Pax at 30 per minute
Unload Fw d Cont BAGGAGE
Unload Aft Cont
CARGO
Unload/Load Bulk Cargo
SERVICVE
Load Aft Cont
9
16 14 36 14
Load Fw d Cont
16
Fuel A/C AIRPLANE
Service lavatories
Reduce percentage of fleet out of service
SERVICE
Service potable w ater
Reduce turn times
Elapsed Time
15 12 10
Start engines 40
(minutes)
Crew cost reduction strategy •
•
Crew base policy and crew utilisation CSF’s for crew improvement Reduce crew overnight costs
A Project Finding 15 minute saving in turn-time equated to 1.5% of the saving in revenues
Review network planning processes and identify improvement opportunities cont’d
Review current practices •
Focus on benchmark results
•
Compare current market forecasting, network design, scheduling processes
•
Use of information and use of tools
•
Skills and capabilities
•
Compare with industry best practices
•
Gap Analysis
Provide recommendations for improvement
Key Performance Indicators for network management, and schedule optimisation activities will be developed Performance measures used to track network optimisation will be revised Reccommendations will be provided New Performance Indicators will be developed to track Performance at network, market and leg levels
Readily available industry best practices and extensive experience with processes, and KPI development will speed the execution of this project NETWORK LEVEL
MARKET LEVEL
Total Revenue & Cost
Frequency by O&D
Total and Variable Profit
Passengers by O&D
Operating Margin
Market Share
System CASK
Share Gap
System RASK
Consistency of Schedule
LEG LEVEL Leg Profit Leg Contribution Leg CASK Leg RASK
Illustrative Example
System Yield Fleet Utilization
Leg Yield Leg Load Factor Percent of Flow Traffic
The impact of increasing product complexity on the design and delivery of the schedule
Route Planning Network Design
Production Plan
Operations control
Planning and delivery of the schedule include many opportunities to reduce cost and improve productivity
Actual example Schedule Jan 1 - Jan 10 • 661 schedule changes occurred in the last 10 days on 597 flights: > 1 action per flight (as an average)
Source : Project work
The revenue growth and cost reduction plan must be linked and managed on rolling forward basis Monthly tracking of operational costs is insufficient, airline must focus on accomplishments of forward plan Consistent measures ensuring development of balanced plan
Strategy
5yrs
Market Network Fleet Plan
3 - 5 yrs
Operations Plan ( routed)
72 hrs-36 months
OUTPUTS
Short Term Changes IOCC
72hrs
Without a balanced plan that is tracked and manage companies will find diffcult to deliver reliable schedule and minimum cost and optimised productivity
Pilot salary per block hour is often used as crew measure, but this is insufficient Pilot and cabin crew productivity Speed up pilot training times Crew base policy and crew utilisation
Reduce crew overnight costs Improve pilot training Eliminate crew changes at non-maintenance delays
Reduce number of pilots with fleet size Reduce number of flight attendants per aircraft Preferential bid system, reduce sick leave Reduce crew overnights
Case study opportunities to reduce costs
Minimise fuel use •
Fuel calculation
•
Single engine taxi
•
Flight plan
•
KPI’s for fuel use
•
Tankering procedures (get from Paul good fuel procedures)
Reduce airport and station costs •
Shorter station operating hours
•
Align capabilities with target turn times
•
Flight policies (limit no of bags in cabin
•
De-peak operations
Design for schedule reliability – Reduction in block hour variability – refine block times monthly, refine pilot procedures and adherences
Reduce % of fleet out of service Shorter turn times
The impact of increasing product complexity on the design and delivery of the schedule
Route Planning Network Design
Production Plan
Operations Control
The importance of integrated operations control is increasing with more pressure on operating efficiencies
Dynamic commercial environment
Common understanding of scenarios and situations
Pressure on turn times Pressure for aircraft utilisation Need to improve crew utilisation MRO outsourcing
Effective tools and methods to analyse alternative responses Effective interfaces between OC and broader business units
Capacity constraints at airports
Integrated processes and performance measures
Reducing yields the importance of revenue lost due passenger ill-will
Integrated applications
Reduce passenger recovery costs
Additional loads effect capacity planning Support of evolving hub management strategies
Total benefits of improved IOC effectiveness is significant
Passengers
• revenue • ill will • hotel costs
Crew
• productivity • lifestyle(morale) • legality • overtime
Aircraft
• fuel • landing fees • maint . schedules • catering
Airports
• staff overtimes • staff morale • gates • equipment
Cargo
• revenue • agents ill will
IOC Incident
Total length % Delay minutes Disruption costs % No. of pax Disruption costs of delay recoverable recoverable Cash outlay recoverable affected recoverable (IOC) (mins) from IOC (IOC) from IOC
CX880 / 10 Aug 96
152
100%
152
693
56,550
100%
CX888 / 10 Aug 96
99
100%
99
716
38,688
100%
56550 38688
CX251 / 06 Dec 96
925
0%
0
480
264,000
100%
264000
CX289 / 15 Dec 96
171
0%
0
248
144,742
0%
0
CX400 / 23 Jan 97
461
30%
138
1,044
120,744
100%
120744
CX767 / 27 Jan 97
851
30%
255
395
6,600
0%
0
CX103 / 01 Feb 97
1,640
100%
1640
469
610,000
100%
610000
CX719 / 04 Apr 97
315
30%
95
457
7,780
0%
0
575
100%
575
2,360
100%
2360
1,259
100%
1259
298,900
100%
298900
CX508/ 04 Apr 97 CX2468 / 04 Apr 97 CX007 / 29 Nov 96 Total
6,448
4,213
248 4,750
1,550,364
1,391,242
Storyline How to Leverage OCC for Effective Decisions Balance of reserves built the plan versus cost of recovery Ensure commercial and airports function are represented in OCC Airline planning and dispatch – close relationship Outsourcing weight and balance may lead to increased fuel consumption Continuous flight planning and flight following focus and learnings are built into plans Integrated OCC systems schedule, movement control, flight planning must be integrated
OCC provide regular feedback to consistently reoccurring issues – missing slot times, delays etc Effective team work decisions to harness contributions of each department properly Introduce findings from Virgin Atlantic report Decision support capability Effective ramp coordination Use benefits case of Virgin Atlantic Maintenance
Facilitated Session Opportunities for Improving the Revenue
Synergies between service providers
Breakout Groups or Plenum Discussion
33
Diversification of LCC Model and Opportunities for Revenue Improvement – Synergies with airports, aircraft, IT and other service providers Factors driving change
Revenue Growth Opportunities
Fleet selection – Boeing and Airbus dominate (they have different outlooks on demand growth: point-to-point vs hub and spoke) – if they cannot manufacture enough aircraft to meet demand, there will be a restriction on growth.
Brainstorm
What about regional aircraft? Are airlines choosing Embraer/Bombardier etc because they are the best suited to their routes or because they cannot get the popular 737s and 320s? Environmental Issues – Are stage lengths going to increase? Shortest flights dropped because of customer attitudes? 34
Route Planning Airline 1. How to assess which routes to serve, that drives max top line and variable contribution – method, latest trends
2. How to assess routes where there is no previous /little activity. What to do when there is lack market and other data available 3. What are the methods on assessing level of stimulation – Capture, Share from incumbant carriers, share versus no of competitors - useful info sources 4.Review the growth of routes in different geographies, (low cost) identify winners and what they may be doing right – eg Northern US ?, Gol , Vueling, Anadolujet, Air Arabia, need to choose one from APAC Virgin Blue ? – Anadolujet may participate with a preso 5.What are the requirements of a low cost airline from the airport operator - Fees, MCT, Turn Time, Facilities – will be good to include lots of practical ideas here 35
Route Planning (Continued) Airline 6. Do we see cooperation and synergies between Low Cost carriers 7. Do we see cooperation and synergies between Network and Low cost Carriers eg Lufthansa – Jetblue, Air Berlin – Pegasus 8 . How can airline and airport share risks of starting new route 9 . Are network carriers learning how to set-up successful low cost carriers, Is Vueling, Flydubai , Anadolu jet constitute successful examples following early failures 10. What are the best practice network planning process, optimisation tools. What are the limitations of current tools and how the airlines would like to see the improvement of routes
Other ideas 36
Route Planning (Continued) Airports 1. How to attract low cost carriers, what are the key incentives, recent developments
2. Risk sharing with airlines, synergies on working with airlines Other Ideas 3. Air Service Development, how to improve the message for a low cost carrier
Ground Handling 3. Ideas to reduce costs for airlines – common uniform, airline provide incentive to high performing GH agents, variable check in desk (not committed), and others 4. Ideas to reduce ground handling costs for airlines
37
Route Planning (Continued) IT Service providers 6. Improvement opportunities for data and tools for IT Service providers
38