the fundamentals of route development · - air france, emirates ... understanding airlines module 3...
TRANSCRIPT
THE FUNDAMENTALS OF ROUTE
DEVELOPMENT
UNDERSTANDING AIRLINES
MODULE 3
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MODULE 3 AIRLINE ISSUES
• Low margins
• Fuel price uncertainty
• Vulnerability to economic downturn
• Unpredictable one-time events
• High profits of airports
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MODULE 3 AIRLINE ISSUES
• Network carriers (single hub)
- Air France, Emirates
• Network carriers (multiple hubs)
- Air Canada, American Airlines
• Point-to-point regionals
- Flybe
• Regional feeder services
- Lufthansa CityLine, HOP!
• Capacity purchase agreements
- SkyWest
FSCs
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MODULE 3 UNDERSTANDING AIRLINES
• Value LCCs
- Azul, easyJet,
• “Normal” LCCs
- Norwegian Air Shuttle, Southwest
• Ultra Low Cost Carriers (ULCCs)
- Ryanair, Spirit Airlines,
• LCC subsidiaries of FSCs
- Rouge (Air Canada), Germanwings (Lufthansa), Jetstar Airways (Qantas),
Scoot (Singapore Airlines)
• Hybrid LCCs
- Transavia
• Long-haul LCCs
- Air Asia X, Norwegian
LCCs
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MODULE 3 UNDERSTANDING AIRLINES
• Vertically integrated carriers
- TUI Group
- Thomas Cook Group: Condor
• Part-vertically integrated carriers
- Air Transat
• Non-vertically integrated carriers
- Enter Air, Travel Service
• ACMI operators (Aircraft, Crew, Maintenance, Insurance)
- Omni Air, Dynamic
CHARTER
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MODULE 3 UNDERSTANDING AIRLINES
PASSENGER SEGMENTATION
Leisure Passengers Price Conscious
Business
Passengers
High End Product
Business
Passengers
Short Haul
Routes
Long Haul
Routes
LCC’s
Network/FSC Carriers
Regional
CarriersCh
arte
rC
harte
r
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MODULE 3 UNDERSTANDING AIRLINES
MODELS ARE MIXING ACROSS PASSENGER SEGMENTATION
Ch
arte
r
Pure LCC
• Point to point network
model
• Leisure market focus
• No FFP
• Sales channel via
proprietary web sales
only
• Scheduling takes no
account of connecting
opportunities
Hybrid Pure Network
• Point-to point network model
• Business and Leisure market
focus – FFP
• Multiple sales channels
including limited GDS
participation
• No Alliance membership (until
recently!) or IATA driven
interline connecting products
• On-line connecting product
only
• Connecting traffic network
model
• Business and Leisure
market focus – FFP
• Multiple sales channels
including full GDS
participation
• Alliance membership, and
IATA driven interline
connecting products
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MODULE 3 UNDERSTANDING AIRLINES
Ch
arte
r
Source: Boeing CMO 2012-2031
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MODULE 3 UNDERSTANDING AIRLINES
Fundamental questions:
• Will the route generate enough revenue? If so, how quickly?
• Is the route sustainable in the long run?
• Does the route fit with the carrier’s network strategy
ECONOMICS
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MODULE 3 UNDERSTANDING AIRLINES
AIRLINE COSTS
Operating costs + aircraft ownership + overhead costs
VARIABLE
OPERATING
COSTS
AIRCRAFT
OWNERSHIP
OVERHEAD
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MODULE 3 UNDERSTANDING AIRLINES
AIRLINE COSTS
Variable Operating Costs (directly tied to flying)
Fuel Aviation fuel, oil
Direct labour Salaries & benefits of flight crew, airport sales and ramp
staff
Crew cycle expenses Flight and cabin crew layover costs
Maintenance Cycle or block hour driven maintenance costs
Airport & en-route charges Landing fees, handling , navigation fees
Distribution costs GDS charges, commissions
Passenger service Catering, passenger insurance
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MODULE 3 UNDERSTANDING AIRLINES
AIRLINE COSTS
Aircraft ownership Unrelated to flying hours
Lease payments Payments on leased aircraft
Depreciation Depreciation on owned aircraft
Aircraft insurance Costs of insurance on all aircraft in fleet
• Aircraft ownership costs are independent of flying hours (except for “power by the hour” lease
agreements), but are generally allocated to the route level on the basis of block hours flown to
represent the amount of aircraft a route consumes.
• Improving utilization on a given fleet type lowers the ownership cost/block hour.
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MODULE 3 UNDERSTANDING AIRLINES
AIRLINE COSTS
Types of Aircraft Ownership Scenarios Description
Purchase cost depreciation Straight line over 10-15 years
“Wet” leaseAircraft operated under the AOC of the lessor. Includes flight crew,
cabin crew, maintenance, insurance (ACMI)
“Damp” lease Same as wet lease except cabin crews provided by lessee
“Dry” leaseAircraft operated under the AOC of the lessee. Lessor provides
aircraft, lessee provides crew, maintenance & insurance
“Power by the hour” lease
Same as dry lease in that lessee provides crew, maintenance &
insurance but lessee pays lessor only for block hours flown vs. a
monthly lease rate
Operating lease 2-7 years, off balance sheet, ownership remains with lessor
Finance/Capital lease
Typically >75% of aircraft useful working life
Viewed as a purchase on balance sheet
Ownership eventually transferred to airline
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MODULE 3 UNDERSTANDING AIRLINES
AIRLINE COSTS
Corporate Overhead Unrelated to flying hours
Headquarters facilities costs Building, utilities, etc
Headquarters staff Management salaries, benefits, etc
Other corporate overhead Advertising, web administration, etc
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MODULE 3 UNDERSTANDING AIRLINES: EXAMPLES
AIR FRANCE KLM(all figures in Euro millions)
2014 2015
Revenues 24,930 26,062
Operating costs
2015
Operating cost %
Salaries, wages & benefits 7,636 7,852 31.1%
Aircraft fuel 6,629 6,183 24.5%
Landing fees & enroute charges 1,840 1,947 7.7%
All other costs 8,954 9,264 36.7%
Total Operating costs 25,059 25,246 100.0%
Operating profit -129 816
Operating margin -0.5% 3.1%
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MODULE 3 UNDERSTANDING AIRLINES: EXAMPLES
RYANAIR(all figures in Euro millions)
2014 2015
Revenues 5,037 5,654
Operating costs
2015
Operating cost %
Fuel 2,013 1,992 31.1%
Airport & handling charges 617 713 24.5%
Staff costs 464 503 7.7%
All other costs 1,284 1,403 36.7%
Total Operating costs 4,378 4,611 100.0%
Operating profit 659 1,043
Operating margin 13.1% 18.4%
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MODULE 3 UNDERSTANDING AIRLINES
• Airline capacity is measured in Available Seat Kilometres (ASKs):
• A 150-seat A320 flying 2,200 kilometres produces 330,000 ASKs
• Airline traffic is measure in Revenue Passenger Kilometres (RPKs):
• If this flight has 120 revenue (i.e. fare-paying) passengers on board then it generates 264,000 Revenue Passenger Kilometres (RPKs), for a passenger load factor (PLF) of 80%
Capacity, traffic & revenue metrics
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MODULE 3 UNDERSTANDING AIRLINES
Top 10 Routes (by pax volume) Operated from MAN Airport
Source: Sabre Market Intelligence Feb/15 to Jan/16
Dest. Seats Pax PLF
ASK
(000s)
RPK
(000s) PLF
Distance
(km)
DXB 1,009,195 866,697 86% 5,704,981 4,899,438 86% 5,653
AMS 1,016,277 853,978 84% 494,927 415,887 84% 487
DUB 1,105,555 839,669 76% 292,972 222,512 76% 265
TFS 797,961 782,001 98% 2,432,184 2,383,540 98% 3,048
PMI 747,406 732,458 98% 1,181,649 1,158,016 98% 1,581
LHR 1,020,737 720,640 71% 248,039 175,116 71% 243
ALC 639,583 626,792 98% 1,068,104 1,046,742 98% 1,670
AGP 518,608 513,474 99% 966,166 956,601 99% 1,863
ACE 516,183 505,859 98% 1,479,895 1,450,298 98% 2,867
DLM 514,530 504,239 98% 1,554,909 1,523,810 98% 3,022
TOTAL 7,886,034 6,945,806 88% 15,423,826 14,231,960 92%
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MODULE 3 UNDERSTANDING AIRLINES
• Airline yield is measured in “currency” per RPK.
• For example, if the 120 passengers in the previous example paid an average one-way fare of €140.00, then the yield/RPK is €16,800 / 264,000 = €6.36 cents
• Airline yields are highly dependent on distance flown, as yield/RPK decreases as sector length increases. Therefore, there is no single answer to the question “what is a good yield?”. A yield that is good on a 10,000 km sector will be poor on a 500 km sector.
Capacity, traffic & revenue metrics
Source: Sabre Market Intelligence Feb/15 to Jan/16
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MODULE 3 UNDERSTANDING AIRLINES
• Airline unit revenues refer to revenue per unit of capacity. In the above example, this would be €16,800 / 330,000 for a Rev/ASK (RASK) of €5.09 cents.
• Airline unit costs refer to costs per unit of capacity. In the above example, if the cost of operating this flight were €16,000 then the calculation would be €16,000 / 330,000 for a Cost/ASK (CASK) of €4.85 cents.
• When RASK exceeds CASK the airline makes money; when it doesn’t they lose.
Capacity, traffic & revenue metrics
Airline Avg Stage
Length
(km)
RASK
(USD)
CASK
(USD)
Flybe 511 $0.1832 $0.1945
easyJet 1,131 $0.0861 $0.0760
Wizz 1,503 $0.0470 $0.0422
Southwest 1,545 $0.0881 $0.0762
BA 3,334 $0.1128 $0.1060
Emirates 4,777 $0.0818 $0.0774
Source: CAPA
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MODULE 3 UNDERSTANDING AIRLINES
• In addition to route revenues, network carriers also look at “beyond” revenues and system contribution
• Some routes may be operated at a loss because the value of the connecting traffic they deliver is greater.
Capacity, traffic & revenue metrics
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MODULE 3 UNDERSTANDING AIRLINES: EXAMPLES
PASSENGER REVENUE SEGMENTATION
Beyond
PMI
Behind
Bridge
PMI
MAD
MAD
MAD
MADLHR
LHR
LHR
LHR
MAN
MAN
Local
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MODULE 3 UNDERSTANDING AIRLINES
• Combination of processes, analysis, techniques to ensure air routes are full, but equally as
important to maximise the revenue
• Highly automated, real-time monitoring and adjustment of sold inventory
• Inelastic demand – certainty of volumes irrespective of costs (within reason). Occurs typically
at peak periods such as holidays, summer peak.
• Elastic demand – price stimulated
• Yield management skill lies in correctly, continually, drawing the inelastic/elastic line
• Leg based yield management systems focus on maximizing revenue at the route/flight
leg level
• O&D based yield management systems focus on maximizing network revenue
REVENUE MANAGEMENT
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MODULE 3 UNDERSTANDING AIRLINES
PROFITABILITY
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MODULE 3 UNDERSTANDING AIRLINES
MANAGEMENT STRUCTURES
Network Planning
Top Tier –”C” Level
Sales & Distribution
Commercial / Partnership
management
Revenue management
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MODULE 3 UNDERSTANDING AIRLINES
MANAGEMENT STRUCTURES
Head of Network Planning
(Senior) Network Planning Manager –
Region A
Senior Analyst Analyst
(Senior) Network Planning Manager –
Region B
(Senior) Analyst
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MODULE 3 UNDERSTANDING AIRLINES
EASYJET NEW ROUTE DECISION PROCESS
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MODULE 3 UNDERSTANDING AIRLINES
BA: REVENUE FORECASTING IS THE KEY CHALLENGE FOR NEW ROUTES
Market Size
Market Share
Yield
Growth Potential
Other
opportunities
How many passengers currently fly to / from London?
Are there any key transfer markets?
What is the competitive dynamic?
What is the mix of potential passengers?
What are BA’s chances of capturing these passengers?
What fares will we charge?
How will the inventory be set up?
What level of nets, deals etc.?
How fast will the local economy grow?
How much might we stimulate the market with a new service?
Will we get traffic from the surrounding area?
Is there a significant cargo market?
Are there ancillary revenue opportunities?
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MODULE 3 UNDERSTANDING AIRLINES
BA: OPERATIONAL CHALLENGES PLAY A MAJOR ROLE IN FEASIBILITY
CrewingDo we have enough Pilots
and Cabin Crew?
Engineering
Which aircraft need to be
maintained and when?
Airport Infrastructure
Can the airport take the
required aircraft?
Catering
Is there enough galley space
for the length of the flight?
Keeping T5 Working Are we scheduling too many
departures at T5 at the same
time?
Customer ServiceDo we have a ground handling
arrangement in place?
SlotsDo we have the required slots at
both ends of the route?
SchedulingDo we have enough spare
aircraft time on the fleet?
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MODULE 3 SUMMARY
Many variants of airline business models
When determining route and airline targets, need to do your homework:
- Route market size
- Potential connecting flows
- Airline’s fleet: do they have the right aircraft?
- Airline fit: will the route provide incremental revenues to the
airline as opposed to cannibalizing their existing network?
- Alliance fit: does the route complement the carriers’ alliance
network?
- Your route development strategy, objectives, positioning
- Will route be profitable?
Airlines face many issues, but these can be opportunities for airports