Strategic Planning for Airlines by Leah Dupuis

Strategic Planning for Airlines Dr Emre Serpen, Intervistas Consulting Group EVP

Intervistas team members have extensive airline strategy and network design assignments worldwide

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Examples of Strategy and Network Design Projects Dr. Emre Serpen

Executive Vice President, Head of Airline Practice • 20+ years, 70+ airlines in 50+ countries

Turkish Airlines

South African Airways

Temasek (SQ)

 Market evaluation, capacity assessment, SWOT analysis  2016 and 2012 network design, hub design, and schedule  Business plan associated with the strategy

 Marker assessment  Strategy for maximizing share in Africa  Selection of hub locations in west and central Africa  Network design and fleet plan  Business plan

 SWOT analysis of Singapore Airlines  Market forecasting  Identify growth opportunities  Develop strategy for medium and long haul network and fleet

Lead Consultant: Dr. Emre Serpen

Malaysian Airlines

EgyptAir

LOT Polish Airlines

 Evaluated the feasibility of a premium service in conjunction with another airline  Market Forecasting  Route Design  Commercial Workshops  Joint Venture/Codeshare Benefits

 Company-wide strategy and turnaround  Development of network, Cairo hub, and schedules  Improvements in sales, marketing, organization, IT  Fleet & Business Plan

 Multiple network optimisation projects  Alliance strategy analysis and decision for LOT to joined Star Alliance  Develop Asian strategy and network for LOT  Evaluate joint venture with Indian partner

Lead Consultant: Dr. Emre Serpen

Lead Consultant: Dr. Emre Serpen Realizing the vision together

Examples of Strategy and Network Design Case Studies Continental Lufthansa Airlines Airlines  Optimisation of Frankfurt and Munich hubs  Advised Lufthansa on the ramifications of deregulation of the European market  Examined in detail the history and competitive implications of U.S. deregulation Lead Consultant: Jim Miller

Delta Air Lines  Hub optimisation of Atlanta ATL and Memphis MEM hubs  Improved network contribution of Delta’s domestic flying  Fleet optimisation between mainline and regional aircraft Lead Consultant: Zach Mensen

SriLankan Airlines

Istanbul Airport

 Diagnostic assessment  Market evaluation and forecasting  Network design, Colombo hub design  Fleet plan  Commercial improvements  Business plan

 Medium to Long Term Passenger Forecast to 2040 for Istanbul’s new Third Airport  Fleet Plan forecasts for fast-growing Turkish Airlines (TK)  Future IST hub route design for TK and other airlines

Lead Consultant: Dr. Emre Serpen

Czech Airlines ČSA  Network design and route optimisation for ČSA  Short term improvements for the summer schedule by connecting and improving and flights

Lead Consultant: Dr. Emre Serpen

Air Canada  Hub optimisation of Toronto YYZ regional USA network  Fleet optimisation using Fleet Assigner modelling software, to maximize medium and short term profitability  New route forecasts Lead Consultant: Marcus Lam Realizing the vision together

Intervistas uses Industry Trusted Sources And Professional Network Optimisation Tools . The modelling tool uses discrete choice methodology, an advanced form of the QSI passenger market share forecasting method.

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Strategic Planning for Airlines - Overview

2 Strategic Intent

Global Continent/Region Country Specific Segment

3 Strategic Assessment

Demand Supply SWOT Market Forecasting

Network Design and Fleet Planning

Business Model Alignment

Long Term Short Term Hub Design Fleet Planning

Commercial Operational Subsidiaries Organisational

Business and Implementa tion Planning

Business Plan Implementation Plan

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Analytical Framework for Multi Country Strategy Step 1: Obtain Macro Economic, Air Traffic, Competition, Governance and Operational Cost data for each country. Step 2: Assign Score; Best in Category country is assigned a 10.0 score; scores of other countries are assigned a score relative to the Best in Category country. Step 3: Add up all scores per the weighting of each category to calculate a final score for each country.

Macro Economic GDP per Capita GDP Growth Forecast Average Population Air Traffic Intra Africa Oubound Pax (2012) # of City Pairs (<140% Circuity) Competition Seat Share of Dominate Airline Population/Outbound Seat Quality of Competition (SkyTrax Rating) Presence of Competition Governence Stability Ease of Business Corruption Infrastructure Operational Cost Fuel Maintenance Landing costs Departure costs Navigation Catering and Handing

Weight South Africa C1 25% 5.0 35% 6.7 35% 4.9 30% 2.9 25% 6.0 50% 10.0 50% 2.0 17% 1.7 33% 3.2 33% 0.6 17% 2.0 17% 0.7 17% 7.1 25% 7.1 25% 4.9 25% 6.6 25% 10.0 17% 5.2 25% 8.4 15% 7.3 15% 3.3 15% 1.7 15% 5.8 15% 2.8

Egypt C2 4.8 2.8 7.0 4.8 5.9 1.8 10.0 3.2 2.1 5.0 4.0 1.0 5.1 5.4 1.7 4.9 8.2 5.2 8.4 7.3 3.3 1.7 5.8 2.8

Nigeria C3 6.5 1.5 8.5 10.0 3.3 3.6 3.0 5.1 4.4 5.4 10.0 0.9 4.1 4.2 1.5 4.2 6.6 5.5 6.0 10.0 2.2 2.0 6.7 6.0

Ghana C4 4.4 1.7 9.6 1.5 1.7 0.7 2.7 7.1 10.0 5.4 10.0 2.0 5.5 5.6 3.0 6.9 6.7 6.2 9.0 6.4 5.6 1.7 10.0 3.0

Botswana C5 4.9 8.4 5.4 0.1 1.0 0.1 2.0 4.5 2.7 0.9 10.0 10.0 7.1 9.1 3.2 10.0 6.2 7.0 9.0 8.2 6.7 1.7 5.0 10.0

Ethiopia C6 Cote d'Ivoire C7 Mauritius C8 Seychelles C9 4.6 4.1 4.9 5.1 0.5 1.0 8.8 10.0 8.2 9.5 5.2 4.7 5.3 1.4 0.1 0.0 2.9 1.4 1.0 1.8 0.5 0.4 0.2 0.1 5.3 2.4 1.8 3.4 6.0 9.0 3.3 4.3 2.0 7.1 3.0 2.8 9.2 10.0 0.3 0.1 4.0 10.0 10.0 10.0 10.0 10.0 3.3 10.0 4.9 4.5 9.4 6.4 4.8 5.5 10.0 6.7 1.5 1.1 10.0 2.6 5.1 4.5 8.8 8.0 8.4 7.0 8.7 8.2 5.2 5.2 5.2 5.2 8.4 8.4 8.4 8.4 7.3 7.3 7.3 7.3 3.3 3.3 3.3 3.3 1.7 1.7 1.7 1.7 5.8 5.8 5.8 5.8 2.8 2.8 2.8 2.8

Algeria C10 3.8 4.6 4.7 2.0 4.3 0.5 8.0 4.6 2.1 5.2 10.0 3.3 4.1 4.7 1.3 5.2 5.4 5.2 8.4 7.3 3.3 1.7 5.8 2.8

Source Intervistas Analysis

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Multi country strategy – additional criteria

Strategic Intent 1. Participate in markets 2. Ensure choice of profitable airlines 3. Strategic view of the Continent and development of an airline system for future dominance of Continent Egg 1) Gov. 2) Air Asia, 3) LAN 4. Readiness to challenge established incumbent airlines thru superior product and execution 5. Leverage previous investments existing assets 6. Pre-selection of Countries

Source Intervistas/Burlington Analysis

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Continental or Multi Country Strategy -Qualification Example: O/D Pax and Growth Rate

Example: Flying Population South Africa Egypt Angola Nigeria Morocco Sudan Tunisia Algeria Kenya Zimbabwe Libya Ethiopia Cameroon Ghana Congo, Republic DRC Zambia Cote d'Ivoire Tanzania Uganda Namibia Burkina Faso Senegal Botswana South Sudan Gabon Mali Mauritius Lesotho Mozambique Benin

250

500

750

1,000

1,250 4,000K

Example :Consumer Markets

Source Intervistas Analysis

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Single country strategy, selection of hub structure

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Strategic Planning in Airlines - Overview

2 Strategic Intent

Global Continent/Region Country Specific Segment

3 Strategic Assessment

Demand & Supply SWOT Market Forecasting

Network Design and Fleet Planning

Business Model Alignment

Long Term Short Term Hub Design Fleet Planning

Commercial Operational Subsidiaries Organisational

11 11

Business and Implementa tion Planning

Business Plan Implementation Plan

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Market Analysis EXAMPLES MARKET ANALYSIS

• Year-on-year growth of Airline ’s key markets • Identification of markets with fast and high yield growth opportunities • Analysis of Airline ’s capacity growth competitors in key markets • Evaluation of share gap and identification of opportunities where market growth exceeds marketshare growth

Source Intervistas Analysis

• Evaluation of region to region growth (Airline market share growth, total market growth, considering circuity and yield) • Identification of Airline market share: market share growth in growing markets market share loss in growing markets market share growth in shrinking markets market share loss in shrinking markets

• Relationships between market, market share and pricing changes • 100 o/d thru the hub, relative changes of share of different airlines – given the hub advantage of the home airline

Source Intervistas Analysis

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Example Analysis of Market Sizes and Fares in Russia

Source Intervistas Analysis

Note: Average fares excludes taxes, surcharges and fees. Source: Diio FMG, 2012

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SWOT, Connectivity Analysis

Example Analysis

SWOT

• Year-on-year growth of Hub operation including connectivity • Maximum connections and minimum connect time analysis between Airline and its competitors at Hub, and identify improvement opportunities • Analysis of connecting markets identified in Market Analysis and identify connection improvement opportunities • Hub capacity analysis (growth in seats, ASK’s, destinations, frequencies), and level of competition on routes (Airline versus other carriers) • Evaluation of Hub connectivity pattern by region and by time-ofday, and identify improvement opportunities. • Analyse Airline hub connectivity using network optimisation tools and identify preliminary connecting opportunities • Evaluation of Hub Hub Constraints (capacity, airspace, gates, slots, etc.). Source Intervistas Analysis

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Passenger, Capacity, Revenue Trends and Share

Source Intervistas Analysis

Source: Diio FMG

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Benchmark competing hubs

Nonstop Competition from Comparative Hubs

Total Seat Capacity (Millions)

Total Capacity at Major Hubs over time

1.1%

12 11 10 9 8 7 6 5 4 3 2

5.2%

10.3%

10.0%

10.5%

34.1%

36.4% 46.2%

36.0%

46.1% 20.9%

22.0% 58.4%

TK - IST

Quarter CDG

FRA

No Competition

MUC

43.4%

44.0%

AF - CDG

LH- FRA

EK - DXB

1 Competitor

32.0%

2-4 Competitors

3+ Competitors

DXB

EK - DXB 160

Total Seats Capacity

140

120

100

25 80 20 60

15 10

Total Seat Capacity AF*/LH* (Millions)

Total Seat Capacity EK/SQ/TK (Millions)

45 40

SQ - SIN

Region Africa Domestic Europe Far East Latin America Middle East North America Oceania South Asia TOTAL

SQ - SIN

Destinatio Frequencie Countries ns s 16 18 159 0 0 0 13 24 288 9 12 168

Countries 2 0 11 11

Destinatio Frequencie ns s 3 14 0 0 14 100 18 344

1 10

1 13

7 200

0 3

0 5

0 32

2 2 5 58

5 6 17 96

38 98 275 1,233

1 2 4 34

5 7 9 61

45 113 69 717

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source TroyAvi Analysis EK

AF*

LH*

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Market Forecasting

Example Analysis Market forecasting

Top down = GDP/capita X Elasticity Bottom Up = MIDT/PAXIS/DIIO Analyse forecast results to identify specific market forecast insights: 1.

Sort by market size

Sort market growth rate

Sort by yield

Sort by circuitry

Sort by Size x growth rate x yield x circuitry

Destinations Airline is not flying

Source Airbus

Under represented markets identified in the market forecast will be used in scenario formulation Realizing the vision together

Strategic Planning in Airlines - Overview

2 Strategic Intent

Global Continent/Region Country Specific Segment

3 Strategic Assessment

Demand Supply SWOT Market Forecasting

Network Design and Fleet Planning

Business Model Alignment

Long Term Short Term Hub Design Fleet Planning

Commercial Operational Subsidiaries Organisational

18 18

Business and Implementa tion Planning

Business Plan Implementation Plan

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Long Term Network Design Overview of Network Design

Example Analysis Calibration Scenario Development Unconstrained long term view Maximise commercial opportunity

Market Forecast, Average Fares, Costs, Schedules Overbuilt Analysis

Test different scenarios Network Optimisation Network that maximises Route Level Variable contribution

DME

SVO

Evaluate frequency changes New service opportunities. Schedule options Connecting traffic opportunities at Hub.

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Hub connectivity and optimisation Connectivity evolution Example Analysis • Execute Airline hub optimisation, adjusting number, timing, and directionality of flights • Add frequency and capacity according to demand and profitability without slot constraints. This unconstrained scenario will define maximum benefit opportunity. • Determine changes in connectivity, passenger numbers and yield for long haul pillar flights, medium haul flights, regional flights, short haul domestic flights. • Improve Airline ’s market share in fast growing, high yield markets with good Hub circuitry. • Improve meaningful connections offered at Hub. • Improve competitiveness compared with other regional airlines and gateways. • Improvements in overall connect time and passenger share on key markets. • Improvements of revenue and variable contribution through improved hub design. Once the runs of each qualified scenario are finished, a quantitative comparative evaluation is be undertaken where the relative strengths and weaknesses of scenarios will be discussed Intervistas Analysis

Source: OAG, July 10-16, 2000

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Hub design and optimisation (continued)

Example Analysis Overbuild – maximise margins

Lang haul flights optimisation

Medium to short haul flights optimisation

Within bank flight optimisation

Stagelength (Hrs) 14

Maximising connection of high yield markets

Optimise hub connectivity

DEL

2 Time at Base (IST)

LHR

BUD

LHR

BUD

0600 0630 0700 0730 0800 0830 0900 0930 1000 1030 1100 1130 1200 1230 1300 1330 1400 1430 1500 1530 1600 1630 1700 1730 1800 1830 1900 1930 2000 2030 2100

Source Intervistas Analysis

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Evaluation of optimised schedule effectiveness Improvements in Hub Performance

Source TroyAvi Analysis

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Comparison of improvements across interim Long Term Network Optimisation schedules From passenger revenues, route profitability is also calculated . This includes route revenues and costs – the basis of network and hub optimisation

Source TroyAvi Analysis

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Short term Network Optimisation

Example Analysis

Example: Constraints with Impact on Profitable Network Growth

Objective is an optimised short term hub design, including improvements in connecting markets and incremental financial performance compared with the current schedule. A list of potential new destinations and frequencies identified for immediate implementation Evaluate current near-term operational constraints at Hub (airspace, aircraft movements during peak hours, bilaterals, slots, curfews, gate space restrictions) which may prevent increase of frequency/capacity of flights or the introduction of new flights.

Example: Evaluation of Flights According to Route Profitability and Revenue Performance

Analyse Airline ’s capability in consistently delivering aircraft turn times (critical for optimal hub performance). Focus on time of day changes to maximise number of meaningful connections between markets as these could be implemented without much operational impact

Sort flights according to contribution and take action for improvements in system wide variable contribution

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Example Evaluation Of Airport Constraints Is Important In Constraints limiting network growth Development Of Practical And Implementable Network Design

Example: Connect Times Example: ATM’s

Airport AMS AUH BKK CAI DOH DTW DXB FRA HKG IAH ICN IST KUL MSP MUC NRT PHL SAW SEA SIN

Standard Hub Carrier #1 Hub Carrier #2 HC1 HC2 D-D D-I I-D I-I D-D D-I I-D I-I D-D D-I I-D I-I KL 25 50 50 50 50 50 50 50 EY 60 60 60 60 60 60 40 60 TG 30 120 120 75 30 90 90 45 MS 30 90 90 90 60 60 60 60 QR 20 60 60 60 20 60 60 30 DL 45 60 90 60 30 40 75 75 EK 20 60 60 75 20 60 60 45 LH 45 45 45 45 45 45 45 45 CX n/a n/a n/a 60 n/a n/a n/a 50 CO 45 60 60 75 30 30 50 50 KE OZ 40 100 100 70 40 70 100 45 40 70 90 45 TK 30 90 75 60 45 75 75 60 60 60 60 60 DL 40 40 60 60 30 40 75 75 LH 45 45 45 45 30 30 30 30 JL NH 30 100 100 60 20 100 90 60 20 100 100 60 US 40 90 90 90 30 50 90 90 TK 20 60 60 60 30 45 45 45 AS 70 70 90 90 40 40 80 80 SQ n/a n/a n/a 60 n/a n/a n/a 50

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Fleet Planning Example: Fleet Operating Costs Analysis

Example Analysis . • Develop optimal fleet plan supporting the long term network plan

• Provide recommendations for redeployment of fleet plan • Review current Airline fleet including age, maintenance requirements/costs, onboard product, range, fuel burn and fleet commonality. • Review current fleet orders and compare it against the optimised long term network requirements maximizing route profitability and fleet utilization.

Example: Fleet Optimisation Analysis

• Apply fleet plan to proposed passenger forecast and schedule to assess the optimal types/mix of aircraft that will most efficiently operate the route network.

• Assess how the fleet plan will evolve over the forecast period taking retirements and new deliveries into consideration. • Ensure that fleet utilization is optimised • Develop optimal narrow body and wide body fleet ratios in the near term, considering optimal requirements for the Hub • Buy versus lease calculations Intervistas Analysis

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Example Aircraft Financing Evaluations

Source DVB bank, AISI

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Example Aircraft Buy Versus Lease Calculations

Source Intervistas Analysis

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Strategic Planning in Airlines - Overview

2 Strategic Intent

Global Continent/Region Country Specific Segment

3 Strategic Assessment

Demand Supply SWOT Market Forecasting

Network Design and Fleet Planning

Business Model Alignment

Long Term Short Term Hub Design Fleet Planning

Commercial Operational Subsidiaries Organisational

29 29

Business and Implementa tion Planning

Business Plan Implementation Plan

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Business Model Alignment - Commercial Processes Example Analysis Alignment of commercial processes with the new business model and route strategy. These will include changes in pricing, distribution and product strategy supporting the business model changes and route strategy Distribution benchmarking, segments, unit revenue, unit cost per channel Changes in Distribution mix with focus on direct channels without losing high yield GDS channels Development of the distribution strategy Meetings with Airline key customers, (travel Agency, Corporate) and establish improvement priorities Alignment of commercial organisation Alignment of performance measures. And key performance measures for the leadership of Airline Airlines These will drive further improvement projects

Source Intervistas Analysis

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2.2 Business Model Alignment- Operations and Support Processes

Example Analysis • Alignment of the operational activities support business model changes – Review cost structure, assess changes to the operational costs, productivity improvements • Determine improvements in performance targets to support the business model changes • Determine target CASK to support business model • Review current cost structure, direct and indirect

• Direct costs include - Fuel, MRO, Ground Handling, Catering,

• Determine initiatives for productivity improvement and unit cost reduction to meet target CASK • Alignment of the operational activities support business model changes- Crew and integrated operations control improvements • Alignment of MRO activities • Alignment of organisation and performance measures

• Projects and initiatives for reduction of operational costs and improvements in productivity This will include major cost items such as Fleet (Utilisation), maintenance, crew, ground handling costs, overheads and other areas

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Strategic Planning in Airlines - Overview

2 Strategic Intent

Global Continent/Region Country Specific Segment

3 Strategic Assessment

Demand Supply SWOT Market Forecasting

Network Design and Fleet Planning

Business Model Alignment

Long Term Short Term Hub Design Fleet Planning

Commercial Operational Subsidiaries Organisational

32 32

Business and Implementa tion Planning

Business Plan Implementation Plan

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Business Plan Development Example Development of Business Plan

Example Activities

New Forecast Operating Results

Expense Forecast

Business plan is driven by the new network, fleet, and alignment of commercial and operational functions including revenue and cost forecast ..

Based on the revenue and cost forecast conducted above, create a five-year operating profitability and profit margin forecast of the airline is developed. This will include estimate of capital expenditure and working capital for the start up period Sensitivity analysis is executed for the most important drivers in the model, such as fleet size, load factor, yields, price of fuel, etc Identify key revenue and cost drivers and develop risk scenarios that test the assumptions upon which they are based to understand the extent to which the business is sensitive to these assumptions. To deliver the business model changes, an overall migration plan will be developed. This will be complemented with specific improvement initiatives and projects.

Current Debt & Capital Structure

Modify for Fleet Changes & Restructuring

Capital Spending

Debt Service Requirements

Projected Financial Results

Cash Flow from Operations

Technique Options Evaluation Through Modeling

Cash Requirements

Cash Plan Debt

Debt Restructuring Opportunities

Potential Sources of Capital Equity

Source ICF

Example Development of Business Plan 2007

2008

2009

2010

2011

2012

2013

91,659 11,190 102,849

96,538 20,224 116,762

94,629 16,599 111,227

90,486 18,274 108,759

68,610 28,324

85,694 30,018

71,147 30,102

65,191 30,187

65,015 30,187

3,041 5,511 8,552 105,485

2,953 3,961 6,914 122,626

3,349 3,961 7,309 108,559

3,481 3,961 7,442 102,820

3,481 3,961 7,442 102,643

-2,636

-5,865

2,668

5,940

6,116

EBITDA Margin

-3%

-5%

Change versus Baseline EBITDA EBITDA Margin

0 0%

762 1%

4,002 4%

3,975 4%

Revenues Passenger Revenues Other Revenues Total Revenues Operating Expenditure Total Variable Costs Total Fixed Direct Operating Costs Indirect Operating Costs Other Staff Salary Costs Other Indirect Costs Total Indirect Operating Costs Total Operating Expenditure EBITDA

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Exhibit 31Business Plan Development

Cash Flow Working Capital (Start) Operating Revenue Operating Expenses Initial CapEx Outlay Additional CapEx Aircraft Security Deposits Working Capital Changes Working Capital (End)

Jan-11 40,000,000 2,744,094 4,315,595 3,791,000

Feb-11 31,637,500 2,396,536 4,128,026 2,220,000

Mar-11 27,686,010 2,725,847 4,314,317 559,333

Apr-11 25,538,207 2,819,215 4,268,174 645,000

May-11 23,444,248 3,779,495 5,672,700 559,333

Jun-11 19,991,710 4,136,597 5,629,043 2,586,667

Jul-11 15,912,597 4,719,013 5,746,804 837,667

Aug-11 14,047,140 6,091,082 7,175,952 -

Sep-11 11,962,270 5,433,022 7,032,587 192,667

3,000,000 (8,362,500) (3,951,490) (2,147,803) 31,637,500 27,686,010 25,538,207

(2,093,959) 23,444,248

1,000,000 (3,452,538) 19,991,710

(4,079,112) 15,912,597

(1,865,457) 14,047,140

1,000,000 (2,084,871) 11,962,270

(1,792,232) 10,170,038

Cash Flow Working Capital (Start) Operating Revenue Operating Expenses Initial CapEx Outlay Additional CapEx Aircraft Security Deposits Working Capital Changes Working Capital (End)

Oct-11 10,170,038 5,773,966 7,151,210 55,000

Nov-11 8,737,794 5,982,714 7,075,968 192,667

Dec-11 7,451,873 6,451,036 7,204,609 366,667

2011 2012 2013 2014 40,000,000 6,331,634 (5,087,537) 14,687,757 53,052,618 127,466,820 243,703,168 430,005,855 69,714,983 132,885,992 217,927,873 345,692,428 12,006,000 1,000,000 1,000,000 1,000,000 5,000,000 5,000,000 5,000,000 10,000,000 (33,668,366) (11,419,172) 19,775,294 73,313,427 6,331,634 (5,087,537) 14,687,757 88,001,184

2015 88,001,184 652,142,240 509,015,566 1,000,000 10,000,000 132,126,674 220,127,858

(1,432,244) 8,737,794

(1,285,921) 7,451,873

(1,120,239) 6,331,634

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Thank You Please contact Emre Serpen for queries eserpen@intervistas.com

+447944163891