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World Low Cost Conference
Route Planning
Dr Emre Serpen Executive Vice President
Low Cost Conference 2009 London
Agenda
1
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
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 carriersDevelop 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
• 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 ?
3
Revenue Growth Opportunities
Route variable contribution
Codeshare ?
Cooperate with Network carriers ?
Improve processes ?
Improve data sources and
optimisation technology
Diversification of LCC Model and Opportunities for
Revenue Improvement
Factors driving change
• Deregulation (eg Russia, Middle East/ Gulf, Open skies between US and Latin American countries)
• Increase in operating hours – ie. very late and very early departures
• Traffic patterns and holding patterns around some airports – adding costs to certain routes, and making them uneconomical for LCCs
4
Revenue Growth Opportunities
• Improved variable contribution
• Fleet utilisation
• Long haul RASK & Yield
Factors driving change
0
200
400
600
800
1,000
1,200
1,400
'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
US
Europe
Source: OAG
Growing LCC stage Length
Airline Local Connecting
Spirit 99.8% 0.2%
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%
Increasing connecting services
Increasing Network Complexity
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.
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
6
Diverging LCC Models
Ryanair easyJet Southwest Virgin Blue JetBlue Frontier WestJet
Main Airports × P P P P P P
Frequent Flyer
Plan × × P P P 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 × × × × 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
7
Starting to see long haul – low cost activity
Low-cost carriers increasingly resemble hub & spoke systems, in
addition to expanding their previously limited international offerings
Percent of
LCC Airport Total Seats
Frontier Denver 49%
JetBlue New York Kennedy 35%
Southwest LAS, PHX, MDW, BWI, HOU 30%
WestJet Calgary/Toronto 37%
AirTran Atlanta 35%
America West Phoenix 34%
LCC International Destinations
Costa Rica
Dominican Republic
Jamaica
Mexico
Aruba
Bahamas
Bermuda
Canada
Sources: US DOT O&D Database
9
Long Haul LCC- Increasing Revenue Potential ?
Transatlantic, Asia-Europe & Asia-North America
Intra-Asia Pacific, Australia-North America
Transatlantic, Asia-Europe, Middle East, Elsewhere
Curre
nt
Future
Past
CONSTRAINTS
Stimulation
LH has less potential than SH
Weekend breaks are less viable
Regulatory
International markets are still highly regulated
Competition from charter carriers
FUTURERyanair
Actively considering transatlantic
service?Within 3-4 years (maybe)
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
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,
• 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
The airline related savings of €525 million over three years by combining purchasing, sales and information technology.
Example 1: Lufthansa
Example 2: Air France / KLM
Nonstop Total Weekly seats Operated by Lufthansa Group
Aug. 2003–Aug. 2008, Dec. 2008
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
Reservation systems providers
developing new solutions
especially for low-costs
Low-costs are looking for simple ways to code-
share
Traditional approaches are not welcome
Immedaite payment is expected
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 DesignProduction
Plan
Operations
control
Focus on improving variable contribution
Although LCCs still maintain a utilization advantage, LF offer
potential for improvement
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
Load Factors
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Con
tinen
tal
Amer
ican
Nor
thwes
t
JetB
lue
Uni
ted
Del
ta
US+H
P (LCC)
Front
ier
ATA
South
wes
t
AirTra
n
Load Factors Yield Yield
$-
$0.020
$0.040
$0.060
$0.080
$0.100
$0.120
$0.140
$0.160
US A
irway
s
North
wes
t
AirT
ran
Sou
thwest
Am
erican
Delta
Cont
inen
tal
Unite
d
Am
erica W
est
Frontie
r
JetB
lue
ATA
Schedule design should take into account revenue
drivers
• 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
Client - Market Clusters, International
0%
20%
40%
60%
80%
100%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Avg Fare Relative to FFY
Market
Sh
are
HIGH SHARE
LOW RELATIVE YIELD
HIGH SHARE
HIGH RELATIVE YIELD
LOW SHARE
LOW RELATIVE YIELD
LOW SHARE
HIGH RELATIVE YIELD
64%
62%
54%
77%
60%
71%
55%
53%
58%
78%
52%
54%
54%
58%
Client - Market Clusters, International
0%
20%
40%
60%
80%
100%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Avg Fare Relative to FFY
Market
Sh
are
HIGH SHARE
LOW RELATIVE YIELD
HIGH SHARE
HIGH RELATIVE YIELD
LOW SHARE
LOW RELATIVE YIELD
LOW SHARE
HIGH RELATIVE YIELD
64%
62%
54%
77%
60%
71%
55%
53%
58%
78%
52%
54%
54%
58%
• Ensure operational feasibility (minimise turn times,
• Ensure maximisation of the variable contribution through the right service characteristics
As the network becomes more complex, fleet allocation
models may prove beneficial
Route AnalysisData:
City Pair Market Sizes
Sources MIDT
a. Scaled-up, based on research
Government Stats
- Some good ie. CAA, USA DOT
- Some wantingAll air travel options (OAGRoute Analysis
Market Share
INPUTSupply side – all travel options – non-
stops, directs, connects, etc.Demand side – all city pair market sizesNew route schedule
OUTPUTShare of local marketShare of flow potential)
New Route Selection Process
Other Considerations
Network Contribution
- Very significant for network carriers
- Prorate issue
- How to consider the contribution
Current Route Cannibalization
Market Stimulation
Non-stop flight stimulation
Reduced airfare stimulation
How to establish
Rules-of-thumb
Research
Quality of service basis
16
Model InputAll Air Travel
Options
Model Assessment
• 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)
Model Output
New Service Schedule• Flight frequency
• Optimal flight times
• Aircraft type
• Seasonality
• Day of week preference
Share before/after
new service
• Market Research
• Government statistics
• Market stimulation
x
=
÷
=
X
=
-
=
New service
market share
City pair
market size
On-board
passengers
Available
Seats
New service
load factor
Average fare
Airline revenue
Airline costs
Profit/loss forecast
Cannibalization
New service carrier
market share loss
on other routes
Passengers lost
to new service
Other carrier
market share loss
Share before/after
new service
Passengers
recaptured
by new service
The Planet Market Share Model
Risk Sharing Concept
Two examples where breakeven + profit margin is at 80% load factor
17
Airline Risk
Airport
Contribution
Actual
Revenue
Airline Risk
Airport
Contribution
Actual
Revenue
80%
40%
30%
80%
68%
60%
Load
Factor
Load
Factor
30% Load Factor 60% Load Factor
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
For New Routes
Airlines: Positive financial return for the route
Network Contribution (Connectivity)
Strategic Considerations
Market Share
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
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
46%
-19%
36%39%
-14%
44%
50%
-21%
50%
-23%
49%
73%
59%
-46%
112%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Seat Capacity Change Fare Change Passenger Change
Ultra-Short Haul Short Haul Medium Haul Long Haul Ultra-Long Haul
U.S. domestic average stimulation rates by route type for individual
airports:
Domestic U.S. Findings
Source: PLANET OAG schedules and
U.S. DOT OD1A data.
Europe: Change in Weekly Revenue, Cost and Profit
-0.4
-2.0
1.6
-3
-2
-2
-1
-1
0
1
1
2
2
Rev Diff Var Cost Diff Var Res Diff
Mil
lio
n E
GP
Schedule design should also take into account cost
drivers
De-peaking (intra-day and seasonal)
• Evens out load on the structure
• But lowers yield too
Avoiding overnights at outstations
• Crew costs vs. yield
Flying faster or slower
• Fuel burn vs. utilisation
Moving to secondary airports
• Lower costs and higher utilisation vs.
yield
Extending the fleet operating date
• Aircraft utilisation vs. low revenue
during shoulder-timesSource: project work
Opportunities to improve route profitability
Improve connection times
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
• Reduce percentage of fleet out of
service
• Reduce turn times
Crew cost reduction strategy
• Crew base policy and crew
utilisation CSF’s for crew
improvement
• Reduce crew overnight costs
Shut dow n engines
Position Pax bridge or stairs 1
PAX Deplane Pax at 40 per min.
SERVICE Cabin cleaning (6 people)
Service Galleys
Board Pax at 30 per minute
Unload Fw d Cont
BAGGAGE Unload Aft Cont
CARGO Unload/Load Bulk Cargo
SERVICVE Load Aft Cont
Load Fw d Cont
Fuel A/C
AIRPLANE Service lavatories
SERVICE Service potable w ater
Start engines
Elapsed Time
(minutes)
40
16
15
12
10
16
14
36
14
7
22
FWD 6 + AFT 20
9
A Project Finding
15 minute saving in turn-time equated to
1.5% of the saving in revenues
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
Review network planning processes and identify improvement
opportunities cont’d
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
Total Revenue & Cost
Total and Variable Profit
Operating Margin
System CASK
System RASK
System Yield
Fleet Utilization
NETWORK
LEVELMARKET
LEVEL
LEG
LEVEL
Frequency by O&D
Passengers by O&D
Market Share
Share Gap
Consistency of Schedule
Leg Profit
Leg Contribution
Leg CASK
Leg RASK
Leg Yield
Leg Load Factor
Percent of Flow Traffic
Illustrative
Example
Readily available industry best practices and
extensive experience with processes, and
KPI development will speed the execution of
this project
The impact of increasing product complexity on the
design and delivery of the schedule
Route Planning
Network DesignProduction
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
Strategy
Short
Term
Changes
IOCC
Operations Plan
( routed)
Market
Network
Fleet Plan
5yrs 3 - 5 yrs 72 hrs-36 months 72hrs
Monthly tracking of operational costs is insufficient, airline must focus
on accomplishments of forward plan
Without a balanced plan that is tracked and manage companies will find diffcult
to deliver reliable schedule and minimum cost and optimised productivity
Consistent measures ensuring development of balanced plan OUTPUTS
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 DesignProduction
Plan
Operations
Control
The importance of integrated operations control is increasing with
more pressure on operating efficiencies
Common understanding of scenarios and situations
Effective tools and methods to analyse alternative responses
Effective interfaces between OC and broader business units
Integrated processes and performance measures
Integrated applications
Additional loads effect capacity planning
Support of evolving hub management strategies
Dynamic commercial environment
Pressure on turn times
Pressure for aircraft utilisation
Need to improve crew utilisation
MRO outsourcing
Capacity constraints at airports
Reducing yields the importance of
revenue lost due passenger ill-will
Reduce passenger recovery costs
Total benefits of improved IOC effectiveness is
significant
Incident
Total length
of delay
(mins)
%
recoverable
from IOC
Delay minutes
recoverable
(IOC)
No. of pax
affected
Disruption costs
Cash outlay
%
recoverable
from IOC
Disruption costs
recoverable (IOC)
CX880 / 10 Aug 96 152 100% 152 693 56,550 100% 56550
CX888 / 10 Aug 96 99 100% 99 716 38,688 100% 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
CX508/ 04 Apr 97
CX2468 / 04 Apr 97 575 100% 575 248 2,360 100% 2360
CX007 / 29 Nov 96 1,259 100% 1259 - 298,900 100% 298900
Total 6,448 4,213 4,750 1,550,364 1,391,242
Incident
Total length
of delay
(mins)
%
recoverable
from IOC
Delay minutes
recoverable
(IOC)
No. of pax
affected
Disruption costs
Cash outlay
%
recoverable
from IOC
Disruption costs
recoverable (IOC)
CX880 / 10 Aug 96 152 100% 152 693 56,550 100% 56550
CX888 / 10 Aug 96 99 100% 99 716 38,688 100% 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
CX508/ 04 Apr 97
CX2468 / 04 Apr 97 575 100% 575 248 2,360 100% 2360
CX007 / 29 Nov 96 1,259 100% 1259 - 298,900 100% 298900
Total 6,448 4,213 4,750 1,550,364 1,391,242
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
Storyline
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
How to Leverage OCC for Effective Decisions
33
Facilitated Session
Opportunities for Improving the Revenue
Synergies between service providers
Breakout Groups or Plenum Discussion
Diversification of LCC Model and Opportunities for
Revenue Improvement – Synergies with airports,
aircraft, IT and other service providers
Factors driving change
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.
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
Revenue Growth Opportunities
Brainstorm
Route Planning
35
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
Route Planning (Continued)
36
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
Route Planning (Continued)
37
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
Route Planning (Continued)
38
IT Service providers
6. Improvement opportunities for data and tools for IT Service providers