Route Planning

strategic transportation & tourism solutions

World Low Cost Conference Route Planning Insert Title of your presentation Dr Emre Serpen Executive Vice President

Low Cost Conference 2009 London

Agenda 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

1

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 carriers Develop 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 Revenue Growth Opportunities •

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 ?

Route variable contribution Codeshare ?

Cooperate with Network carriers ?

Improve processes ?

Improve data sources and optimisation technology

3

Diversification of LCC Model and Opportunities for Revenue Improvement

Factors driving change •

Revenue Growth Opportunities

Deregulation (eg Russia, Middle East/ Gulf, Open skies between US and Latin American countries)

•

Improved variable contribution

•

Increase in operating hours – ie. very late and very early departures

•

Fleet utilisation

•

Traffic patterns and holding patterns around some airports – adding costs to certain routes, and making them uneconomical for LCCs

•

Long haul RASK & Yield

4

Factors driving change Growing LCC stage Length

Increasing connecting services

1,400

Airline

Local

Connecting

1,200 1,000

US

Spirit

99.8%

Europe

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%

800 600 400 200 0 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

Source: OAG

Increasing Network Complexity

0.2%

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 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.

Diverging LCC Models

Main Airports

Frequent Flyer Plan

Ryanair

easyJet

×

P

×

×

Southwest Virgin Blue JetBlue

P P

P P

P P

Frontier

P P

WestJet

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

×

×

×

×6

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

Starting to see long haul – low cost activity

7

Low-cost carriers increasingly resemble hub & spoke systems, in addition to expanding their previously limited international offerings

Percent of Total Seats

LCC

Airport

Frontier JetBlue Southwest

Denver New York Kennedy LAS, PHX, MDW, BWI, HOU

49% 35% 30%

WestJet AirTran America West

Calgary/Toronto Atlanta Phoenix

37% 35% 34%

LCC International Destinations Aruba Bahamas Bermuda Canada Costa Rica Dominican Republic Jamaica Mexico

Sources: US DOT O&D Database

Long Haul LCC- Increasing Revenue Potential ?

CONSTRAINTS Stimulation LH has less potential than SH Weekend breaks are less viable

Regulatory International markets are still highly regulated Competition from charter carriers

FUTURE Ryanair Actively considering transatlantic service?Within 3-4 years (maybe) Past

Transatlantic, Asia-Europe & Asia-North America

Curre nt

Intra-Asia Pacific, Australia-North America

Future

Transatlantic, Asia-Europe, Middle East, Elsewhere 9

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 Example 1: Lufthansa 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,

Nonstop Total Weekly seats Operated by Lufthansa Group Aug. 2003–Aug. 2008, Dec. 2008

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

Example 2: Air France / KLM The airline related savings of €525 million over three years by combining purchasing, sales and information technology.

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

Low-costs are looking for simple ways to codeshare Traditional approaches are not welcome Immedaite payment is expected

Reservation systems providers developing new solutions especially for low-costs

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 Design

Production Plan

Focus on improving variable contribution

Operations control

Although LCCs still maintain a utilization advantage, LF offer potential for improvement Load Factors

Yield

Load Factors

Yield

$0.160

90% $0.140

80% 70%

$0.120

60%

$0.100

50%

$0.080

40% $0.060

30% $0.040

20%

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

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Je tB lu

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$-

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0% er ic an

$0.020

on ti n en ta l

10%

Schedule design should take into account revenue drivers

•

•

•

100%

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 Ensure operational feasibility (minimise turn times,

Client - Market Clusters, International HIGH SHARE LOW RELATIVE YIELD

HIGH SHARE HIGH RELATIVE YIELD

80%

Market Share

•

60% 64% 77%

62%

52%

40%

54% 60%

Ensure maximisation of the variable contribution through the right service 20% characteristics

54%

78%

58%

55% 71%

54% 58%

53%

LOW SHARE LOW RELATIVE YIELD

0% 10%

15%

LOW SHARE HIGH RELATIVE YIELD

20%

25%

30%

Avg Fare Relative to FFY

35%

40%

45%

50%

As the network becomes more complex, fleet allocation models may prove beneficial Route Analysis Data: City Pair Market Sizes Sources MIDT a.

Scaled-up, based on research

Government Stats - Some good ie. CAA, USA DOT - Some wanting

All air travel options (OAGRoute Analysis

Market Share INPUT Supply side – all travel options – nonstops, directs, connects, etc.

Demand side – all city pair market sizes New route schedule OUTPUT Share of local market Share of flow potential)

New Route Selection Process The Planet Market Share Model

Other Considerations

All Air Travel Options

Model Input

Network Contribution

New Service Schedule • • • • •

Flight frequency Optimal flight times Aircraft type Seasonality Day of week preference

Model Assessment

- Very significant for network carriers

• 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)

- Prorate issue - How to consider the contribution

Current Route Cannibalization

Model Output

Market Stimulation New service market share

Non-stop flight stimulation Reduced airfare stimulation

x • Market Research • Government statistics • Market stimulation

Research

Quality of service basis

New service carrier market share loss on other routes

Other carrier market share loss

Share before/after new service

Share before/after new service

Passengers recaptured by new service

Passengers lost to new service

=

How to establish Rules-of-thumb

City pair market size

Cannibalization

On-board passengers

X Average fare = Airline revenue Airline costs

÷ Available Seats

= New service load factor

= Profit/loss forecast

16

Risk Sharing Concept Two examples where breakeven + profit margin is at 80% load factor

For New Routes Airlines:

Load Factor

30% Load Factor 80%

68%

Positive financial return for the route Network Contribution (Connectivity) Strategic Considerations Market Share

Airline Risk

60%

40% 30%

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

60% Load Factor Load Factor 80% Airline Risk

Airport Contribution

Airport Contribution

Actual Revenue

Actual Revenue

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 17

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

Domestic U.S. Findings ď ‘ U.S. domestic average stimulation rates by route type for individual airports: 112%

120% 100%

73%

80% 60%

50%

59%

50% 49% 44%

46% 39%

36%

40% 20% 0% -20%

-19% -14% -21% -23% -46%

-40% -60% Seat Capacity Change Ultra-Short Haul

Short Haul

Fare Change Medium Haul

Source: PLANET OAG schedules and U.S. DOT OD1A data.

Passenger Change Long Haul

Ultra-Long Haul

Schedule design should also take into account cost drivers De-peaking (intra-day and seasonal) •

Europe: Change in Weekly Revenue, Cost and Profit 2

Evens out load on the structure

1.6

2

But lowers yield too

Avoiding overnights at outstations •

Crew costs vs. yield

Flying faster or slower •

Fuel burn vs. utilisation

1

Million EGP

•

1 0 -1

Rev Diff -0.4

Var Cost Diff

-1 -2 -2

-2.0

-3

Moving to secondary airports •

Lower costs and higher utilisation vs. yield

Extending the fleet operating date •

Aircraft utilisation vs. low revenue during shoulder-times Source: project work

Var Res Diff

Opportunities to improve route profitability Improve connection times

Shut dow n engines

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

Position Pax bridge or stairs PAX

Deplane Pax at 40 per min.

SERVICE

Cabin cleaning (6 people)

1 7 22

Service Galleys

FWD 6 + AFT 20

Board Pax at 30 per minute

Unload Fw d Cont BAGGAGE

Unload Aft Cont

CARGO

Unload/Load Bulk Cargo

SERVICVE

Load Aft Cont

9

16 14 36 14

Load Fw d Cont

16

Fuel A/C AIRPLANE

Service lavatories

Reduce percentage of fleet out of service

SERVICE

Service potable w ater

Reduce turn times

Elapsed Time

15 12 10

Start engines 40

(minutes)

Crew cost reduction strategy •

•

Crew base policy and crew utilisation CSF’s for crew improvement Reduce crew overnight costs

A Project Finding 15 minute saving in turn-time equated to 1.5% of the saving in revenues

Review network planning processes and identify improvement opportunities cont’d

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

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

Readily available industry best practices and extensive experience with processes, and KPI development will speed the execution of this project NETWORK LEVEL

MARKET LEVEL

Total Revenue & Cost

Frequency by O&D

Total and Variable Profit

Passengers by O&D

Operating Margin

Market Share

System CASK

Share Gap

System RASK

Consistency of Schedule

LEG LEVEL Leg Profit Leg Contribution Leg CASK Leg RASK

Illustrative Example

System Yield Fleet Utilization

Leg Yield Leg Load Factor Percent of Flow Traffic

The impact of increasing product complexity on the design and delivery of the schedule

Route Planning Network Design

Production 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 Monthly tracking of operational costs is insufficient, airline must focus on accomplishments of forward plan Consistent measures ensuring development of balanced plan

Strategy

5yrs

Market Network Fleet Plan

3 - 5 yrs

Operations Plan ( routed)

72 hrs-36 months

OUTPUTS

Short Term Changes IOCC

72hrs

Without a balanced plan that is tracked and manage companies will find diffcult to deliver reliable schedule and minimum cost and optimised productivity

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 Design

Production Plan

Operations Control

The importance of integrated operations control is increasing with more pressure on operating efficiencies

Dynamic commercial environment

Common understanding of scenarios and situations

Pressure on turn times Pressure for aircraft utilisation Need to improve crew utilisation MRO outsourcing

Effective tools and methods to analyse alternative responses Effective interfaces between OC and broader business units

Capacity constraints at airports

Integrated processes and performance measures

Reducing yields the importance of revenue lost due passenger ill-will

Integrated applications

Reduce passenger recovery costs

Additional loads effect capacity planning Support of evolving hub management strategies

Total benefits of improved IOC effectiveness is significant

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 Incident

Total length % Delay minutes Disruption costs % No. of pax Disruption costs of delay recoverable recoverable Cash outlay recoverable affected recoverable (IOC) (mins) from IOC (IOC) from IOC

CX880 / 10 Aug 96

152

100%

152

693

56,550

100%

CX888 / 10 Aug 96

99

100%

99

716

38,688

100%

56550 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

575

100%

575

2,360

100%

2360

1,259

100%

1259

298,900

100%

298900

CX508/ 04 Apr 97 CX2468 / 04 Apr 97 CX007 / 29 Nov 96 Total

6,448

4,213

248 4,750

1,550,364

1,391,242

Storyline How to Leverage OCC for Effective Decisions 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

Facilitated Session Opportunities for Improving the Revenue

Synergies between service providers

Breakout Groups or Plenum Discussion

33

Diversification of LCC Model and Opportunities for Revenue Improvement – Synergies with airports, aircraft, IT and other service providers Factors driving change

Revenue Growth Opportunities

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.

Brainstorm

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

Route Planning 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 35

Route Planning (Continued) 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 36

Route Planning (Continued) 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

37

Route Planning (Continued) IT Service providers 6. Improvement opportunities for data and tools for IT Service providers

38