development of business strategy and business plans for profitable cargo operations

Development of Business Strategy and Business Plans for Profitable Cargo Operations

Dr Emre Serpen

Executive Vice President, Head of Airline Practice

http://www.euroavia.com/nordic/default.htm

Improvement Profitability Cargo Operations

Realizing the vision together

Benchmarking of Cargo Airline Commercial and Operational

Performance to Identify Improvement Opportunities

SCOPE SAMPLE DELIVERABLES

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

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

Analyze benchmarking results and identify areas that

requires improvement.

• This will include commercial, financial operational

benchmarking of the Cargo Airline. The gaps in

performance will be identified for further analysis.

3

Air Cargo

World

Annual

Survey

InterVISTAS’

Cargo

Benchmark

Data

Repository

Comparative

Analysis of

Commercial

Performance


Detailed Diagnostic will be Executed in Areas Where

Performance is Behind Industry Best Practices

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

External Meetings and Workshops:

Freight forwarders

Key customers

• Diagnostic analysis will include meetings, workshops

and discussions with commercial, operations and

support functions. Processes will be revised,

improvement opportunities will be identified.

4

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

□ Destination □ Frequency □ Price □ On time delivery □ Losing/damaging Shipments □ Traceability □ No Main Deck capacity □ Customer relations/Information □ Other

Which factors influence your choice most?

□ 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


Revenue Growth Through Improvement of

Air Cargo Commercial Processes

• This will include analysis and evaluation of commercial

activities to improve cargo revenues, yield and load

factor for belly and freighter operations.

5

• 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.

• 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.

Example Cargo Capacity Management

Example Cargo Revenue Management


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.

6

• Supply chain improvement include effectiveness of

inbound and outbound cargo, use of standard,

repeatable processes, integrated systems and

compliance with e-cargo.

• 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.

Inbound and

Outbound

logistics

improvement

Example:

Cargo

operations

diagnostic

Example :

InterVISTAS

Cargo

Freighter

Cost and

Performance

Database


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.

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• Audit systems currently used;

• Identify key functionality, integration, and technical

limitations;

• Develop IT Strategy and identify priorities and

improvement plan;

• Review implementation effectiveness of current

systems – recommend activation of modules, and

better use of existing modules;

• Review Organization, Job specifications and

performance management;

• Recommend improvements to the organization;

• Improve job specifications and develop key

performance management.

Example:

Cargo performance

Management and

Key Performance

Measures

Alignment of job

specification and

skills with

strategy and

processes

Example:

Information flows

e-freight

assessment

Example

Systems strategy

and system

functionality

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

• 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.

• This is followed by Market forecasting on current and future

potential routes.

9

• 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

• In executing market analysis and forecasting work InterVISTAS uses

its proprietary data sources obtained from industry research.

39,555

32,178 37,038

45,264

66,007

64,204

66,788 70,541

71,320

89,023

107,437

-

20,000

40,000

60,000

80,000

100,000

120,000

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ton

ne

s

Key NE Asia - Australia Export Tradelane Tonnage

China Hong Kong Japan Group Total 2 per. Mov. Avg. (Group Total)

Example

Tradelane

Analysis Per country and

import/export direction

Example

Commodity

Analysis

Type of cargo

Example

Market

Forecasting Route level


Market Share Forecasting will Provide Base Scenario

Considering Market, Cargo Airline and Competitor Growth

10

InterVISTAS

provides

proprietary

tools for route

level cargo

marketshare

forecasting

• 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).

• 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 is done using InterVISTAS’

proprietary tools.


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.

• 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.

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• 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

• 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.

Market and Capacity Development

2012 2013 2014 2015 2016

Origin: CGK Market forecast CGK-pvg 31,337 34,453 36,933 39,610 42,434

Destination: pvg GA Capacity on CGK-pvg 4,260 4,380 6,588 8,760 8,784

Competition Capacity on CGK-pvg 0 0 0 0 0

2012 2013 2014 2015 2016

Current Load Factor: 31% Desired belly LF on CGK-pvg 37% 43% 49% 54% 60%

Desired Load Factor: 60% GA Capacity 4,260 4,380 6,588 8,760 8,784

Loads given current LF on CGK-pvg 1,338 1,376 2,070 2,752 2,760

Addtional cargo required to reach desired LF on CGK-pvg 244 501 1,130 2,003 2,510

Addtional cargo required for 2 weekly Full Freighter - - - 4,732 4,732

2012 2016

Including Narrow Body Belly (yes/no): no GA Capacity on CGK-pvg 4,260 8,784

Competition Capacity on CGK-pvg 0 0

GA Freighter (2 weekly) 0 6,760

2012 2013 2014 2015 2016

Market share (business as usual) on CGK-pvg 4.3% 4.0% 5.6% 6.9% 6.5%

Market share (high) on CGK-pvg 5.0% 5.4% 8.7% 12.0% 12.4%

Market share when introducing 2 weekly Full Freighter 5.0% 5.4% 8.7% 24.0% 23.6%

Growing LF in equal steps to desired LF

Useful for ASA with both wide and narrow bodies

Example:

Route Analysis and Market Share Capture Models

Example:

Route Design/Improvement Driven by Scenarios


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

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• 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 expense-

side 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.

• 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.

CGK-PVG (V.V.) by A330 Freighter 2012 2013 2014 2015 2016

Total Operating Revenues

Scheduled Full Freighter Revenue - 10,869,673 10,869,673 16,304,509 16,304,509

Passenger (belly) Revenue 7,153,070 7,264,308 10,815,246 14,233,240 14,124,143

Total Revenue CGK-PVG (V.V.) 7,153,070 18,133,981 21,684,919 30,537,750 30,428,652

Direct Operating Cost (excluding Ownership)

Fuel - 6,512,381 6,512,381 9,768,571 9,768,571

Cockpit Crew - 651,238 651,238 976,857 976,857

Maintenance - 781,486 781,486 1,172,229 1,172,229

Depreciation - 2,050,194 2,050,194 3,075,291 3,075,291

Insurance 85,425 85,425 128,137 128,137

ATC/LDG charges - 673,367 673,367 1,010,050 1,010,050

Sales Commision - 156,900 156,900 235,350 235,350

Total Direct Operating Cost - 8,618,472 8,618,472 12,927,708 12,927,708

Total Indirect Operating Cost - 2,292,518 2,292,518 3,438,778 3,438,778

Total Full Freighter Operating Cost - 10,910,990 10,910,990 16,366,485 16,366,485

Passenger (belly) Operating Cost 7,653,167 7,942,968 12,082,153 16,245,108 16,469,692

Total Operating Cost CGK-PVG (V.V.) 7,653,167 18,853,958 22,993,143 32,611,593 32,836,178

Profit (Belly Space, US$) -500,097 -678,660 -1,266,906 -2,011,867 -2,345,550

Profit (Full Freighter, US$) - -41,317 -41,317 -61,976 -61,976

Total Profit (US$) -500,097 -719,977 -1,308,224 -2,073,843 -2,407,526

Profit Margin (Belly Space, %) -7.0% -9.3% -11.7% -14.1% -16.6%

Profit Margin (Freighter, %) -0.4% -0.4% -0.4% -0.4%

Total Profit Margin (%) -7.0% -4.0% -6.0% -6.8% -7.9%

Business plan method based on marketshare, fare ,

operating and capital costs for freighter and belly

Business plan is based on directional (inbound and

outbound route level profitability


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.

13

• 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

• 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

Example:

Cargo Transformation Plan

Example:

Specific Improvement Actions


InterVISTAS Provides Cargo Route Performance

Analysis, Design and Business Planning Tools

14

2006 2007 2008 2009 2010 2011 2012 2013

SAR (Millions) Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Total Operating Revenues (Net)

Total Cargo Scheduled Revenue 488 569 622 749 799 844 880 918

Cargo Charter Revenue 8 15 15 15 15 15 15 15

Other Revenue 49 49 49 49 49 49 49 49

Total Revenue 544 633 685 813 863 907 944 981

Aircraft & Other Lease Costs (Incl. Ownership)

Flight Crew Employment Cost 30 38 47 57 59 60 61 62

Fuel 51 142 181 220 227 233 237 240

Direct Maintenance 47 100 124 147 153 157 160 162

Landing Fees 7 4 6 7 7 7 7 7

Overflight 12 13 16 19 19 20 20 21

Aircraft, Engines & Components Depreciation 56 55 65 75 79 81 82 84

Insurance 2 2 3 3 3 3 3 3

Passenger Operating Costs 7 5 5 6 6 6 6 7

Charter Operating Costs 6 11 11 11 11 11 11 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

Total Operating Costs 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%

Operating Metrics

Freighter Fleet at Year-End 12/31 -- -- -- -- -- -- -- --

Total Weekly Departures (both directions) 26 26 34 38 40 42 42 42

Total Block Hours 8,173 9,623 11,859 13,757 14,073 14,454 14,454 14,454

Total Available Ton Kilometers (Millions) 517 596 734 884 905 919 922 926

Total Cargo Carried (000s) 63,649 70,161 77,818 92,531 98,483 105,357 109,794 114,426

Average Rate per Kilogram 8.6 9.0 8.8 8.8 8.8 8.6 8.6 8.6

Comparative Metrics

Average Daily Utilization (Block Hours) -- -- -- -- -- -- -- --

Average Block Hours per Flight 6.0 7.1 6.7 7.0 6.8 6.6 6.6 6.6

System Load Factor (Belly/Freighter Combi) 76.9% 64.5% 55.4% 58.5% 59.4% 62.0% 64.6% 67.3%

Total Operating Revenues per ATK 1.05 1.06 0.93 0.92 0.95 0.99 1.02 1.06

Total Direct Operating Costs per ATK 0.42 0.62 0.62 0.62 0.62 0.63 0.64 0.65

Total Operating Costs per ATK 1.02 1.07 1.01 0.96 0.96 0.97 0.98 0.98

Total Operating Revenues per Block Hour 66,613 65,776 57,786 59,065 61,304 62,771 65,279 67,896

Total Direct Operating Costs per Block Hour 26,705 38,497 38,640 39,566 40,075 40,133 40,736 41,349

Total Operating Costs per Block Hour 64,272 66,431 62,444 61,786 61,854 61,699 62,370 62,969

Example: Project Approach

Example: Diagnostic Analysis

Example: Freighter and Belly Business Plan

Example: Route Analysis


Selected Credentials for Cargo Projects

15

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

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;

MNG Cargo Garuda Cargo Saudi Arabian Cargo Malaysian Cargo

Sri Lanka Airlines Cargo Client 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.

Lead Consultant:

Dr. Emre Serpen Lead Consultant:

Dr. Emre Serpen

Lead Consultant:

Dr. Emre Serpen

Lead Consultant:



Douglas Banez

Cathay Pacific Cargo

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

Diagnostic Analysis of Belly

and Freighter operations

Market forecasting

Freighter business

evaluation

Business plan development

Implementation plan

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.

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

Lead Consultant:

Dr. Emre Serpen

Thank You! www.intervistas.com

Please contact Dr. Emre Serpen for

any queries on this document

[email protected]

+447944163891

development of business strategy and business plans for profitable cargo operations

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