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Supportable Capacity
2
Objective
• Understand Network Planning and Capacity
Management
• How the game is played
• How fleet impacts the playing field
• Why it is flawed
3
Route Economic Fundamentals
• Airlines compete in cities, not segments • Hubs serve as the principal means of serving
cities • The number of markets served and the total
number of seats flown in a city are: – Directly related to the local demand to the hub(s)
– Directly related to the number of hub(s)
– Inversely related to the distance from the hub(s)
4
Revenue Share
Service Level Share
Largest Carrier Receives A Revenue Efficiency
Illustrative
5
Revenue Share
Service Level Share
Number Two Carrier In A City Will Generate
Revenue Shares Roughly Equal To Its
Capacity Share
Illustrative
6
Revenue Share
Service Level Share
Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue
Illustrative
7
Major Carrier Business Model
2001 Strategic Plan
Growth
Revenue
Efficiency
City
Presence
Schedule
Strength Products
and
Services
Frequent Flyer
Loyalty
Profits
Supportable
Capacity
8
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Local market size
of hub(s) served
Local Demand At Major Hub Cities
0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000
ORD
ATL
SFO
EWR
DFW
DEN
YYZ
DTW
PHL
IAD
YVR
YUL
PIT
CLT
YYC
MEM
Daily Passengers (Based on 2001 traffic and May 2001 OAG Schedule)
1292
516
1218
1085
596
546
659
671
561
472
321
219
600
564
186
320
Numbers indicate
average daily jet
departures
10
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
11
Colorado Springs To Chicago
COS
ORD
911 miles
Departures: 6
Hours: 14
Seats: 882
12
Colorado Springs To Denver
DEN
COS
67 miles
Departures: 23
Hours: 14
Seats: 3,381
13
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
Number of
Connections
At Hub
14
Marketplace Requires Connections On
Every Flight
• Percent non hub flying down to 11.7% of industry
Domestic departures (from 21.0% in 1990)
• Industry average domestic departure has 60.8% of the
load connecting
• Long haul services require connection feed to fill relatively
large cost efficient long haul aircraft
• Carriers are using connections more and more to
fund/support growth
2001 Hub Factbook - Salomon Smith Barney, OAG
15
All Major Airlines Rely Heavily on
Connections
Local and O&D Traffic for Industry, TME 06/2000
0%
25%
50%
75%
100%
HP AA CO DL NW UA US Industry
(exc.
WN)
Connect
Local
Source: 2001 Hub Factbook, Salomon Smith Barney
16
United’s Washington - Europe
Traffic Composition
63 60
91
5179
45 49
157
47
71
103
90
11686
29
114
5758 36
32
21
Amsterdam Frankfurt London Munich Paris Milan Brussels
Local
PAX
Online
Connect
(UA-UA Only)
Offline
Connect
Source: PRIMS/PRS, TME 03/2001
249
221 220 213 205
156
Total
193
17
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
Number of
Connections
At Hub
Express
Connections
SEA
Connections Determine Who Flies the
Market
BA UA
Local 118 118
Connects 133 37
LHR
Illustrative
19
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
Number of
Connections
At Hub
Code share
feed Express
Connections
FRA
ORD
Alliances Provide New Traffic Sources
Passengers Per Flight
UA LH
Local 50 34
Behind ORD 81 20
Beyond FRA 39 77
Bridge 76 47
Total 246 178 Source: T100/CRS International, 2000
21
FRA
YYZ
Alliances Provide New Traffic Sources
Passengers Per Flight
AC LH
Local 46 72
Behind YYZ 45 20
Beyond FRA 132 236
Bridge 58 53
Total 280 381 Source: MIDT May 2002
22
Air Canada
Toronto - Frankfurt Passenger Mix
Source:MIDT
* Jan-Mar 99-02
-
50
100
150
200
250
300
1999 2000 2001 2002
local Connections
23
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
Number of
Connections
At Hub
Code share
feed
City Presence
Express
Connections
24
Working Together Allows More
Effective Competition At Heathrow
British Airways Star Alliance
Daily Departing Seats
Air New Zealand
ANA
Varig
Thai
Austrian Airlines
Singapore Airlines
Air Canada
SAS
United Airlines
Lufthansa
British Midland International
Source: OAG, April 2001
25
Revenue Share
Service Level Share
Largest Carrier Receives A Revenue Efficiency
Illustrative
26
Revenue Share
Service Level Share
Number Two Carrier In A City Will Generate
Revenue Shares Roughly Equal To Its
Capacity Share
Illustrative
27
Revenue Share
Service Level Share
Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue
Illustrative
How is the game played?
29
American At Little Rock
LIT DFW
BNA
30
Delta At Little Rock
LIT
DFW
ATL
Delta At Little Rock
DFW
LIT
ATL
CVG
American At Little Rock
LIT
DFW
33
United At Lincoln
LNK ORD
DEN
34
Major Carrier Business Model
2001 Strategic Plan
Growth
Revenue
Efficiency
City
Presence
Schedule
Strength Products
and
Services
Frequent Flyer
Loyalty
Profits
Supportable
Capacity
35
INDUSTRY DEMAND BY AIRPORT
UA WN DL AA CO US NW
United Is In A Superior Position
Source: OAG/T100, United Estimates
IAD
DEN
SFO
ORD
LAX PHX
LAS
BWI MDW
SAN SJC
MCI OAK HOU
BNA MSY DAL
SLC
CVG
DFW
ATL
MIA
DFW
ATL
CLE
IAH
EWR PHL
CLT
PIT BWI MEM
MSP
DTW
36
INDUSTRY DEMAND BY AIRPORT
UA WN DL AA CO US NW BA
British Airways Is Not
Source: OAG/T100, IATA Passenger Forecast, United Estimates
IAD
DEN
SFO
ORD
LAX PHX
LAS
BWI MDW
SAN SJC
MCI OAK HOU
BNA MSY DAL
SLC
CVG
DFW
ATL
MIA
DFW
ATL
CLE
IAH
EWR PHL
CLT
PIT
BWI MEM
MSP
DTW
LHR
37
Potential of Global Alliances
$0
$25
$50
$75
$100
StarAlliance oneworld Wings* SkyTeam
Reven
ue (
$B
)
Source: 2000 Revenue forecast
* Anticipated Alliance based on November 2000 announcement by NW
City Revenue Of Industry At Hubs Of Each Airline:
38
Route Economic Fundamentals
• Airlines compete in cities, not segments • Hubs serve as the principal means of serving
cities • The number of markets served and the total
number of seats flown in a city are: – Directly related to the local demand to the hub(s)
– Directly related to the number of hub(s)
– Inversely related to the distance from the hub(s)
The Carrier With The Most
Connections -
WINS!
How Do Networks Compete?
Washington - Amsterdam
United Service
Passengers Per Flight
Locals 68
Behind IAD 175
Beyond AMS 11
Bridge 6
Total 260
Source: T100/CRS, 2000
UA and KL Do Not Compete on AMSIAD
Passengers Per Flight
NW/KL UA
Local 53 82
Behind IAD 2 210
Beyond AMS 164 13
Bridge 5 7
Total 224 312
Source: T100/CRS, 2000
But UA does compete with CO’s EWRAMS
Passengers Per Flight
NW/KL UA
Local 53 68
Behind IAD 2 175
Beyond AMS 164 11
Bridge 5 6
Total 224 260 Source: T100/CRS, 2000
*Behind EWR
CO
75
86*
5
10
176
Fleet Impacts Route Networks
Impact Of New Aircraft
• Aircraft all have unique efficiencies
• Large aircraft tend to offer low unit or seat costs – These aircraft are used by carriers to play a
consolidation game
• Small aircraft tend to offer low trip or plane mile cost – These aircraft are used by carriers to play a
fragmentation game
• The two games don’t get along with each other
Fragmentation
• When efficiency is brought into the market
in the form of a small aircraft
– Frequencies grow
– Markets served grows
– Smaller hubs win
Less revenue
per flight
Flight added
with Low
trip cost aircraft
More flights
Large aircraft
flights become
less profitable
Large aircraft
flights cancelled
Traffic reflows
to remaining
flights
Higher revenue
per Flight
Fragmentation Game
Fragmentation Examples
• B767 supports additional long haul frequency
• B757 replacing DC10s and L1011s on Hawaii –
Mainland
• A320 replacing widebodies on transcon
• RJs replacing B737s and DC9s
Consolidation
• When new efficiency is brought into the market in the form of a large aircraft – Frequencies come down
– Markets served declines
– Large hubs win
Consolidation Game
Less revenue
per passenger
Flight added
With Low
seat cost aircraft
Fares lowered
to help fill large
aircraft
Breakeven
load factor
increases
Low demand
flights cancel
Traffic reflows
to remaining
flights
Higher revenue
per Flight
Consolidation Examples
• B747 Replacing B707 and JFK and LHR rule the
Atlantic
• B777 replacing B767 and large gateways rule once
again
Aircraft Economics Impact
International Services
B747
Aircraft Economics Impact
International Services
B747 B767
Aircraft Economics Impact
International Services
B747 B767 B777
Aircraft Economics Impact International
Services
B747 B767 B777 A380
B787
Summary
• Carriers seek revenue efficiency aka city
presence
• This is achieved through growth, marketing
alliances and fleet planning
• The one with the most hubs in large cities –
wins!
Infrastructure Costs Impact Canada
58
Supportable Capacity (psgrs per departure)
CO - EWR
LCL 68
CNX 22
TTL 90
NW - MSP
LCL 34
CNX 55
TTL 89
AA - DFW
LCL 31
CNX 62
TTL 93
UA - ORD
LCL 46
CNX 51
TTL 97
HP - PHX
LCL 40
CNX 45
TTL 85
AS - SEA
LCL 62
CNX 26
TTL 88
DL - ATL
LCL 36
CNX 83
TTL 119
US - CLT
LCL 16
CNX 64
TTL 80
UA - SFO
LCL 69
CNX 36
TTL 105
59
Why Cost Is A Constant Focus of Air
Carriers
• We know that the more flights
we can schedule will drive
more connections
• More connections drive more
traffic onto the base capacity
at very low incremental cost
• Driving more profits,
supporting more growth
Increased
Profit
Higher
Loads
More Connecting
Traffic
Flights
Added Products
and
Services
Connections
Created
60
Ye Olde Supportable Capacity Model
Supportable
Capacity
Carriers absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the
hub cities
Local market size
Number of
Connections
Regional
Connections
61
Competitive Standing Of Airports
A320 Airport Related Costs
0
500
1000
1500
2000
2500
YYZ JFK DTW SFO YHZ YEG ORD YWG YOW LAX YUL YVR YYC MIA ATL
Co
st
Pe
r O
pe
rati
on
Landing Fees Passenger Charges
62
Significant Cost Difference Will Drive A
Capacity Change
Variable Operating Cost
0
1000
2000
3000
4000
5000
6000
7000
YYZ JFK DTW SFO YHZ YEG ORD YWG YOW LAX YUL YVR YYC MIA ATL
Co
st
Fo
r O
ne
Ho
ur
Tri
p
Varible Operating Cost
37% 48%
63
Industry Annual Seats Per Capita,
Connection %
NYC
3.4
22%
CLT
14.4
64% DAL
11.2
62%
SEA
6.3
26%
PHX
10.4
45%
SFO
6.9
36%
ORD
7.5
51%
ATL
16.4
83%
MSP
8.4
55%
CITY
SEATS/POP.
CNX %
YYZ
3.6
44%
64
Canada’s Higher Cost Structure Stunts
Growth
ORD
7.5
ATL
16.4
CLT
14.4
DFW
11.2
City
Seats/Pop
YUL
2.1
YYC
6.0
YVR
5.0
YYZ
3.6
City
Seats/Pop
65
Costs Do Impact Service Levels
Departure seat per capital (based on 2005 population & Jun OAG, seat
annulized)
11.9
9.8
7.7 7.77.1
6.7 6.7 6.7 6.7
5.6 5.5 5.24.5 4.3 3.8 3.8 3.6 3.4
2.4 2.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
ATL SFO PHX DFW YYC CHI HOU YHZ SEA YVR IAD DTW LAX BOS NY YYZ YEG YWG YOW YUL
Extra Slides
67
Traffic composition for YYZ
international routes
Source: AC data May 2002
Toronto International Traffic Composition
0
50
100
150
200
250
300
CDG FCO FRA GLA LHR MAD MAN MUC ZRH
Local Dom Cnx Trb Cnx Other Cnx
68
Traffic composition for YVR international routes
Source: AC data May 2002
Vancouver International Traffic Composition
0
50
100
150
200
250
300
HKG ICN KIX NGO NRT PEK PVG TPE
Local Dom Cnx Trb Cnx Other Cnx
69
The Breakdown Of YYZ Traffic
Top 10 YYZ Domestic Routes Traffic Composition
-
20
40
60
80
100
120
140
YUL
YYZ
YVR
YYZ
YYC
YYZ
YOW
YYZ
YHZ
YYZ
YWG
YYZ
YEG
YYZ
YQB
YYZ
YQT
YYZ
YYT
YYZ
YQR
YYZ
Local Dom Cnx Trb Conx Int Cnx mutiple Cnx
United Airlines
Chicago - Frankfurt Passenger Mix
Source: PRS
* Jan-Apr 2001
0
100
200
300
400
500
600
700
800
900
1000
'93 '94 '95 '96 '97 '98 '99 '00 '01 *
Dail
y
Passen
gers
('0
00s)
0
1
2
3
4
5
6
7
8
9
10
Dail
y D
ep
art
ure
s
Locals Connections Departures
New Search Engines Add to
Commoditization of The Product
RJs Efficiency - A Fragmentation Game
• 37% lower trip cost versus A319
• Greater range the turboprops
• Net effect is dramatic growth in frequencies and
markets served – The FAA contends that in 1999, regional jets carried almost one in 10 U.S.
passengers.
– In 2002, they accounted for one in six passengers.
73
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
Number of
Connections
At Hub
Code share
feed
City Presence
Express
Connections
74
Revenue Share
Service Level Share
Largest Carrier Receives A Revenue Efficiency
Illustrative
75
Revenue Share
Service Level Share
Number Two Carrier In A City Will Generate
Revenue Shares Roughly Equal To Its
Capacity Share
Illustrative
76
Revenue Share
Service Level Share
Third And Subsequent Carriers Receive Less Than Their Fair Share Of Revenue
Illustrative
Air Canada Faces Tough Competition
EWRDCA
ATL
ORDLAX
DTW
LHR
IAH
PHL
DFW
DFW
ORD
MSP
CLE
BWI
MCOMIA
SFO
MEM
CLT
CVG
DEN BWI
UA WN DL AA US CO NW AC
SJUSC
IAD
PITST
L
BNADA
LHOU
MDW
OA
K
PHX
LASYYZ
YVR
YUL YY
C
78
Supportable Capacity Model
Supportable
Capacity
Carriers’ absolute
operating cost
Blended profit
objectives of
operating
carriers
Distance to the hub
cities
Local market size
of hub(s) served
Number of
Connections
At Hub
Code share
feed
City Presence
Express
Connections
Recommended