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A MAGAZINE FOR AIRLINE EXECUTIVES

2004 Issue No. 1

w w w. s a b r e a i r l i n e s o l u t i o n s . c o m Ta k i n g

y o u r

a i r l i n e

t o

n e w

h e i g h t s

ON THE ROUTE TO RECOVERY

A conversation with ‌ 2004 Issue No. 1

James Hogan, President and CEO, Gulf Air INSIDE

19

Industry Showing Signs of Recovery

38

Low-Cost Carrier Model Continues to Evolve

79

Recent Breakthroughs in Revenue Management


T a k i n g

y o u r

a i r l i n e

t o

n e w

h e i g h t s

2004 Issue No. 1 Publisher

James Filsinger Sabre Airline Solutions 1 E. Kirkwood Blvd. Southlake, Texas 76092 www.sabreairlinesolutions.com Editors

Stephani Hawkins B. Scott Hunt

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Raida Abumaizar, Pam Ashley, Hans Belle, Kathy Benson, Erin Bouck, Jack Burkholder, Michael Clarke, Kathryn Crispin, Cameron Curtis, Karen Davis, Karen Dielman, Walter Di Luca, Melodie Estes, Tim Finholt, Becky French, Greg Gilchrist, Masud Hashem, Roland Hollis, Carla Jensen, Craig Lindsey, Apurva Mathur, Michael McCurdy, Jamie Patel, Michelle Porter, Gary Potter, Kamal Qatato, Giovanna Rosselli, Michelle Schneider, Ron Smalley. Reader Inquiries

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contents

Taking its Share

12

Advanced market data and analysis tools help Mexicana better analyze key markets.

6

A New Lease on Life

38

The low-cost carrier model continues to evolve with new features and customer amenities.

More airlines turn to leasing as an option for acquiring new aircraft.

Iberia Airlines: Focused Strategy for an Optimistic Future

16

CRM: Going Beyond a Frequent Flyer Program

40

A successful CRM program involves multiple customer touch points.

Strategic planning helps the Spanish flag carrier maintain its leading position.

6

19

The Long Night’s Journey into Day

Scoring Points with Passengers

Alaska Airline’s enhanced loyalty program helps boost customer satisfaction and return the airline to profitability.

35

Getting Fit for Recovery

By maximizing resources, transportation companies can take advantage of the improving environment.

48

Faster than the speed of Industry

The new SabreSonic™ passenger solution offers highly flexible reservations, inventory and departure control functionality.

51

company A Higher Plane

Middle East airlines find distinct ways to meet the unique needs of the region.

56

Coming of Age

Low-cost carrier ATA Airlines stays true to its roots while also branching out to develop a full-service, hub-and-spoke network.

Self Serve: Airlines Increasingly Employ Customer-Enabling Tools

Popular customer check-in tools also help airlines reduce costs and generate revenues.

24

62

Faring Well: Air New Zealand Revamps its Fare Structure

Air New Zealand CEO Ralph Norris discusses how the airline’s revamped fare structure has fueled a turnaround.

66

Everything to Gain

While profitable, Estonian Air continues to adapt to the new airline landscape.

with Tom Klein

I

Leveling the Playing Field

By revamping their business models, network carriers can effectively compete with low-cost airlines.

10

45

perspective

Sizing it Up

Airbus and Boeing offer different views for the future of aircraft.

28

On the Route to Recovery

Gulf Air CEO James Hogan discusses how the airline’s recovery plan has helped it prepare for future growth.

After a prolonged period, the airline industry is showing signs of recovery.

24

The Revolution’s Here

76

regional

industry

profile 4

62

products

12

70

Putting IT all together

A strong user community helps create products more tailored to the industry.

76

Channel Surfing

Accessing multiple channels of distribution through a global distribution system enables airlines to increase their reach.

79

Talking Technology With … Barry Smith

Recent breakthroughs continue pushing the evolution of revenue management.

Group President, Sabre Airline Solutions

’ve been waiting far too long to confidently write about an industry recovery. But having just returned from visits to many of you around the globe, I feel we must embrace optimism while continuing to work hard to improve the industry and face our challenges head on. Optimism will be welcomed by all of our dedicated people working in the industry — those thousands of airline employees who look to their leaders for signs that our great industry will be OK; different yes, but OK! We’ve worked closely with many airlines as they have taken incredible steps to navigate the last three years, and now as the global economy improves and passenger traffic begins to climb, airlines will be poised to enter a period of improved performance. With early traffic results suggesting a strong 2004, we should see strength in almost all regions of the world. Airlines have done a tremendous amount of restructuring, putting themselves in position to enjoy the benefits of the improving conditions. We have challenges, which I will get to shortly, but on balance, there is reason for optimism. Carriers such as Gulf Air continue to transform themselves by streamlining their operations, developing focused strategic plans and squeezing out inefficiencies. Under the leadership of James Hogan, a reinvigorated Gulf Air stands ready to take on all challengers and maintain its position as a world-class airline. We’ve seen the same type of steps at airlines such as Spain’s Iberia, which by executing a series of strategic three-year plans has changed its operation so it has been able to maintain its

profitability even during the most challenging of times. And carriers in the low-cost segment, which continue to help reshape the industry with creative new ideas and methods of operation, constantly push their business models to include additional customer-friendly touches such as new in-flight entertainment options. Big challenges remain despite our improved forecasts. There is a punishing trend in fuel prices with few good hedging options. Airports haven’t reduced costs in line with the industry need, and governments continue to be inconsistent regarding consolidation opportunities that appear to be positive for our industry. The consumer is likely to remain frugal — traveling, but with the expectation of reasonable fares whether for leisure or business trips. For too many airlines, the return of passengers has not resulted in a return to profitability. We still have our work cut out for us! To my colleagues around the industry, I can only say “thank you” for allowing Sabre Airline Solutions to play a role in your recovery and improvement plans. Our expertise in technology, operations research and airline business is a powerful force, and we have it solely and passionately focused on solving the problems you face every day. Again, thank you for allowing us to serve you.


profile Photo courtesy Mexicana

profile

Taking its Share Mexicana better analyzes its key markets by utilizing leading market data and analysis systems. By Kathy Loveless and Badal Vyas | Ascend Contributors

L

ocked in a battle for market share with its largest domestic competitor, Mexicana realized it would need to make more informed decisions about its key markets to give it an advantage. Mexicana and its chief competitor, AeroMexico, contend not only domestically, but on key international routes including Mexico-United States, Mexico-Canada and Mexico-Latin America. With 82 years of continuous operation and one of the most modern fleets in the world, Mexicana needed to focus on maximizing market share opportunities to protect its position as one of Mexico’s leading international carriers. Currently both airlines are owned by government-controlled holding company CINTRA, Mexico’s main transportation system. However, each is being prepared for privatization, making it even more important to build upon current strengths in the most profitable markets. Identifying areas of potential revenue increases, improving scheduling and network planning, maximizing agency sales, and reducing commissions became essential for Mexicana. In 2000, to achieve those goals, Mexicana placed a newfound emphasis on point-of-sale decision-support technology and began using a system to analyze markets. However, the system was not robust enough to meet the airline’s needs. It did not integrate with newer operating systems, such as Windows 2000 or Windows NT, which presented major challenges for the airline’s analysts. In addition, the tools were limited in terms of agency data and the different types of queries available. Due to these limitations, Mexicana began researching other market data and analysis tools. After extensive exploration of available solutions, Mexicana selected the market data and analysis tools from Sabre Airline Solutions.

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Last May, the airline implemented the Sabre ® TransVision ® traffic flow analyzer and the Sabre ® WiseVision ™ sales expansion system in addition to renewing its contract for the Sabre ® ProVision SM MIDT processing service. The implementation of the systems enabled Mexicana to measure market position and track agency performance, which it was previously unable to do. “The WiseVision system has allowed us to negotiate new commission agreements with agencies, track their performance and greatly increase sales representative efficiency,” said Luis Zamudio, sales and statistics manager for Mexicana. The WiseVision system also helps Mexicana sales representatives decrease the time required to analyze and interpret large quantities of market data. By presenting analysis results in multiple ways to support the sales process, the system facilitates productivity and financial savings. “Our sales people are amazed by the capabilities and amount of information provided by these tools and have noticed a significant difference in the way we operate now versus the products we previously used,” said Zamudio. “The system so far has met every requirement we desired.” With approximately 100 sales representatives, the carrier has significantly improved performance with the WiseVision system by enabling sales representatives to efficiently run queries and reports and create agency groups to determine the number of bookings for each agency. Mexicana has further leveraged its market information data tapes purchase with the use of the TransVision analyzer in its network management department. The system assists with scheduling and task planning based on traveler booking trends. By reducing analysis time, it also enables analysts to spend less

Through the use of a new suite of MIDT tools, Mexicana has improved its ability to measure market position and track agency performance, which has helped the airline maintain its share in key origin and destination markets.

time retrieving and compiling data and more time making business decisions. Analysis of areas such as route performance, passenger flow and codeshare evaluation facilitates maximized flight schedules. The system also helps Mexicana view potential market opportunities in a variety of ways by extracting valuable transit information from MIDT booking transactions. With this insight, the airline analyzes: Transit-point passenger flows, Trunk route feeding, Onward traffic flows, Time-of-day and day-of-week passenger distribution, Route and airline preferences, Codeshare performance, Cabin and yield distribution. Additionally, monitoring capabilities within the TransVision analyzer enable Mexicana to track and evaluate its codeshare agreements. The system provides not only information on its agreements, but also competitive codeshare agreements as well, giving the carrier a strategic advantage during future negotiations. Mexicana also utilizes the analyzer to determine network utilization. This data-mining tool provides the carrier with detailed analysis of origin and destination data. Details such as passenger travel patterns, segment, feeder and onward traffic flows, and yield and cabin class distribution can be found quickly. Utilizing the in-depth travel analysis, Mexicana’s planning and scheduling analysts

are able to modify and adapt flight schedules to fit traffic flow patterns. Due to the tool’s ability to identify the most popular routes and transit points, Mexicana can target the best possible departure and/or arrival times and maximize passenger loads. “When we first implemented the TransVision analyzer, our users were taken aback by all of the features and functionality,” said Zamudio. “Sabre Airline Solutions has done a good job of addressing our needs, and since the last release, our users can export anything they see on their screens to Excel.” The market analysis tools have already helped the airline toward its market share goals. “2003 was a bad year for most of the airlines in Mexico, so it is difficult to evaluate the results versus previous years,” said Felipe Batres, director, statistics and information at Mexicana. “However, using the WiseVision system and the TransVision analyzer have enabled us to maintain the same market share that we had in 2002. Our current market share domestically in Mexico is 29 percent and in the international Mexico-USA market it is 21 percent. We would like to realize a 1 percent increase in each of these markets this year,

T H E

which we feel is much more feasible by harnessing the capabilities offered by the market data and analysis systems. This would translate to about a US$40 million increase in revenues for us.” With uncertainty regarding privatization for Aeromexico and Mexicana, it is important to Mexicana that it remains well entrenched and prepared to compete for market share. “Last year we maintained the same market share while other competitors lost 3 percent to 4 percent in the domestic market and 2 percent in the Mexico-USA market,” said Zamudio. Mexicana has just begun to scratch the surface regarding the capabilities offered by the WiseVision system and the TransVision analyzer. “We are at the beginning of the learning curve with the tools, and as we look forward, we would like to have more powerful users capable of maximizing the functionality offered by these systems,” said Felipe Batres. Implemented through the Sabre ® eMergo ® Web-enabled and dedicated network solutions, an application service provider delivery method, the market data and analysis systems enable Mexicana to realize significant savings

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H I G H

through reduced maintenance, support, hardware and distribution costs. The eMergo solutions give carriers of all sizes access to leading technology, enabling greater integration among software products by delivering quicker implementations, lower total cost of ownership, predictable monthly pricing and fewer complications than running an onsite system. Providing analysts with systems that offer more efficient ways of detecting market trends and changes has helped Mexicana make wiser decisions. “By using the TransVision analyzer and WiseVision system, we now have reliable numbers, giving our sales representatives greater negotiation power,” said Zamudio. “With these systems, we have increased overall confidence in the business decisions we make.” a

Kathy Loveless is product manager market data and analysis, and Badal Vyas is senior product management specialist at Sabre Airline Solutions. They can be contacted at kathy.loveless@sabre.com and badal.vyas@sabre.com.

L E V E L News Briefs from Around the Globe

Who

market,” said Glen Baker, ATA vice

from our operations to allow us

ATA Airlines

president of information systems.

to reinvest those resources into

What

“Sabre Airline Solutions has played

enhanced services for our passen-

a major role in helping us offer

gers,” said Stan Hula, ATA vice

reliable, high-quality air transportation

president, planning. “By teaming

services to our more than 10 million

with Sabre Airline Solutions consul-

passengers annually. SabreSonic

tants — a team with vast airline

Renewed its agreement for the SabreSonic ™ passenger solution and engaged Sabre Airline Solutions Consulting to streamline planning and scheduling processes and improve profits through pricing and revenue management enhancements.

Res empowers our service profession-

industry knowledge and experience —

als to provide a streamlined travel

we look forward to maximizing our

experience to our valued customers.”

operational efficiency and capturing

The consulting engagement

the highest returns on our technology

Why

enabled ATA to identify several areas

investments. Having technology is

“Since we achieved ‘major carrier’

that will differentiate it in the market-

only one part of the solution — what

status in 2000, we have continually

place and maximize its profitability.

is even more important is making

focused our efforts to streamline

“By optimizing our systems

sure we have the right strategy in

our operations and sustain the growth

and our processes, we intend to

place to make the best use of the

we’ve enjoyed even in a constrained

wring every dollar of profitability

technology.” a


profile

Iberia Airlines

key to Iberia’s ongoing success has “The been its management’s focused strategy and discipline to implement it, and its desire to ensure it maintains a competitive edge and exceeds its customers’ expectations.

FOCUSED STRATEGY FOR AN OPTIMISTIC FUTURE

W

Photo courtesy of Iberia Airlines

By Gary Thompson Ascend Contributor

Iberia Airlines, the Spanish national carrier, has seen its profits take off during the past three years, achieving operating profits from 2001 through 2003. Last year, the airline, which is currently in its third three-year strategic “Director Plan,” earned €4.6 billion (US$5.7 billion) in operating revenues, a sign of the carrier’s strength despite the industry’s economic condition.

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ithout a doubt, 2003 was a year of great change in the airline industry. But for Iberia Líneas Aéreas de España, the national airline of Spain, the year’s changes marked a continuation of its recovery and transformation into a commercially successful global airline. The airline’s ability to weather the storm has been proven through its financial results of the past few years. For 2003, Iberia earned a €161 million (US$199 million) operating profit, and in 2002, Iberia posted an operating profit of €249 million (US$314 million) and a net profit of €157 million (US$198 million). Even in 2001, when the industry suffered its worst financial year in history, Iberia turned a €5 million (US$6 million) operating profit and a €50 million (US$63 million) net profit. For Iberia, however, recovery was not an overnight process. Rather, the foundation for the profitability the airline has enjoyed recently was poured a decade ago. The key to Iberia’s ongoing success has been its management’s focused strategy and discipline to implement it, and its desire to ensure it maintains a competitive edge and exceeds its customers’ expectations.

“Iberia decided to adopt a strict policy of cost control long before 2001, the fruits of which were demonstrated during the worst crisis the industry has suffered to date,” said Angel Mullor, consejero delegado for Iberia. “At the same time, operational and financial flexibility was a key focus for Iberia. The crisis that has affected the industry over the past two years has underlined the fact that airlines today need to be extremely focused on controlling their costs and planning, while at the same time, they need to be more flexible.” Ten years ago, with the liberalization of the Spanish market, Iberia’s leadership realized it would have to adapt to a new airline industry. In 1994, the airline launched a threeyear “Viability Plan,” which featured initiatives to cut costs and reduce holdings in other airlines. Following the Viability Plan, the airline launched its first “Director Plan” in 1997 in conjunction with the full phase-in of the liberalization of the air transport industry in the European Union.

Photo courtesy of Iberia Airlines

By staying the course of its strategic plans, Iberia Airlines is poised to continue its recovery and preserve its position as one of Europe’s leading carriers.


profile Photo courtesy of Iberia Airlines

The first Director Plan was highlighted by finalizing agreements with British Airways and American Airlines, which led to the founding of the oneworld alliance. It also embarked on a fleet renewal program — moving to the A320 for short- and medium-range flights and the A340 for long-haul flights — and rationalized its route network. As a result of the first Director Plan, revenues exceeded the plan by 6.2 percent, and income before taxes was 62 percent above plan.

profile

Iberia continues to maintain a “…leadership position on Europe/Latin America routes in terms of number of destinations, number of non-stop flights and daily frequencies.

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Part of Iberia Airlines’ strategy for future growth includes taking advantage of planned expansions at Barcelona El Prat Airport and Madrid Barajas Airport, both of which will increase passenger capacity between 30 percent to 40 percent during the next three years, much greater than any other major European airport.

T H E

Sabre Airline Solutions

In 2000, a second Director Plan began, featuring the airline’s initial public offering, the sale of Binter Mediterraneo and Binter Canarias, and the launch of iberia.com and electronic ticketing. The second Director Plan brought about the strong growth of the airline’s European market and the development of enhanced customer service plans. Last year, the airline entered a third Director Plan, which aims to reduce costs by 8 percent to 10 percent; increase the margin of earnings before interest, taxes, depreciation, amortization and rent above 19 percent; and achieve a return on equity of at least 15 percent. These targets are within reach given Iberia's 2002 EBITDAR margin of 17.1 percent (compared with 13.8 percent in 2001) and ROE of 12 percent. Through the third Director Plan, the airline seeks to achieve these objectives through further cost-cutting initiatives, preserving Iberia's leading position on Europe/Latin America routes, and making its domestic and European point-to-point routes profitable. Specific targets include a capacity increase of at least 22 percent over the plan’s three-year period, a rise in fleet utilization of 9 percent and a 15 percent reduction in costs. As it continues its recovery, the airline is now back to focusing on growth. Orders for A320/A321 aircraft that were put on hold began arriving this year, and it will replace its fleet of Boeing 747s with eight A340-600s, which will be assigned on routes to North and South America. Another key element of Iberia’s focused strategy for continued growth is to take full

advantage of the planned airport expansions at Barcelona El Prat — which will open an additional runway this year and a new terminal in 2005 — and Madrid Barajas — which will add two new runways and a terminal this year. This will result in passenger capacity growth of between 30 percent and 40 percent at Barcelona and Madrid during the next three years — much greater than any other major European airport. “Iberia is already the natural ‘bridge’ between Europe and Latin America, and the new expansion reinforces our position,” said Enrique Donaire, director general of the airline. “The aggressive growth of the airports in Madrid and Barcelona will allow us to dramatically increase our offerings to Latin America, while at the same time, offer better facilities for our European connections.” Altogether, Iberia will spend more than €1.5 billion (US$1.9 billion) on aircraft and terminal

improvements. Management claims that if aircraft productivity targets are not achieved, capacity will be increased even further than planned through additional wet leasing.

decided to adopt a strict “ Iberia policy of cost control long before 2001, the fruits of which were demonstrated during the worst crisis the industry has suffered to date. At the same time, operational and financial flexibility was a key focus for Iberia.

The third Director Plan remains on course, and Iberia continues to maintain a leadership position on Europe/Latin America

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H I G H

Gary Thompson is the Europe-based account director for Iberia Airlines. He can be contacted at gary.thompson@sabre.com.

L E V E L

Who Aeropostal

What

News Briefs from Around the Globe

The systems will help Aeropostal

functions that normally took up a lot

integrate its crew and operations areas.

of the schedulers’ time in answering

“Implementation of the AirCrews suite has benefited Aeropostal by per-

Implemented the Sabre ® AirCrews ® Crew Management suite and the Sabre ® AirOps ™ Control suite through the application service provider delivery method, the Sabre ® eMergo ® Web-enabled and dedicated network solutions. As a result of the implementation, Aeropostal has automated two key functional areas.

Through its series of three-year strategic plans, Iberia Airlines has not taken a quixotic approach to future success. Rather than chasing at windmills like the famous Spanish literary character Don Quixote, the airline identified specific achievable goals and set out to realize them.

routes in terms of number of destinations, number of non-stop flights and daily frequencies. To maintain its position and compete in such a tough commercial environment, Iberia officials recognize that they will need to continue their focus and determination to develop competitive service and prices in domestic and European point-to-point routes, maintain a competitive cost base on par with low-cost carriers, and maximize the value of the different airline-related businesses. The foundation has been laid, the strategy is in motion and the future is optimistic. a

telephone calls.” The airline also benefited from

mitting a much greater level of con-

the lower total cost of ownership

trol regarding the utilization of our

by accessing the suites through

manpower,” said Capt. Enrique Zerpa,

an ASP.

responsible for the coordination and

“We do not have the resources

implementation of the AirCrews suite.

to dedicate to the installation of an

“By integrating functions between the

onsite system operations control

AirCrews and AirOps suites and the

center, but with the eMergo solutions,

schedule generated by the Sabre

we get the technology without the

®

AirFlite Schedule Manager, we are

expensive upfront hardware costs

Why

able to operate more efficiently.

or the ongoing cost to maintain

“With the increased efficiencies in the

The Sabre AirCrews Crew

the system,” Piccoli said. “In

operations and crewing processes,

Connection has provided the crews

addition, Sabre Airline Solutions

travelers should encounter less flight

with an efficient and low-cost means

made accessing the system easy

delays and cancellations, which then

of communicating with the rostering

by linking Unix servers to personal

improves customer satisfaction,” said

department to handle such items

computers for a graphical user

Licio Piccoli, chief information officer

as flight, days off, swaps, requests

interface such as the use of a

for Aeropostal.

for specific duties and many other

three-button mouse.” a

®

®


profile

profile Given Alaska Airlines’ long-standing focus on customer service, the Points suite represented a perfect fit. “During the dot-com peak, we were approached by five companies who had put together wonderful business cases,” said Ardizzone. “They all looked good, but what attracted us to Points was that the CEO, Rob MacLean, really understood loyalty marketing and the value of our mile currency. Some of the online services were more complicated, but the Points concept was easy to understand.” Sabre Airline Solutions has partnered with Points International to provide innovative loyalty

Scoring Points with Passengers Through its recently enhanced frequent flyer program, Alaska Airlines increases loyalty and satisfaction among its most valued passengers, helping the airline return to profitability.

By Gisselle Miranda | Ascend Contributor

10 10 ascend

management team clearly has a deep understanding of loyalty marketing and technology.” Alaska Airlines, which in 1995 became the first airline to sell tickets online and in 1999 became the first airline to implement online check in, began by using The Points Exchange , which enables Mileage Plan members to exchange points and miles among loyalty programs online. Through The Points Exchange, Mileage Plan members can consolidate other loyalty points into Alaska Airlines’ program and also redeem the airline’s miles for rewards of other programs. Based on the success of The Points Exchange, Alaska Airlines, the ninth largest carrier in the United States, decided to deploy other Points solutions that facilitated the sale of miles online via alaskaair.com. In 2002, Alaska launched Instant Miles, which is powered by an pointspurchase ™, application that enables the airline’s 4 million Mileage Plan members to purchase frequent flyer miles for themselves or as a gift. And last year, the airline added Partner Miles online using pointscorporate ™, a private label service that enables partner organizations to buy and distribute Mileage Plan miles. The airline also plans to add pointsclub ™, which automates

the sale and renewal of airline lounge and private club memberships online. Because Points integrates seamlessly with Alaska Airlines’ loyalty system as a backend solution, the carrier boosts loyalty and maintains brand image among its Mileage Plan members and partners with little overhead expenditures. Airline officials said the Points suite of solutions has been extremely popular with customers. “Our customers have long enjoyed the ease and convenience of managing their frequent flyer account online,” said Ardizzone. “Now, the Points suite has opened up several new options that give them the ability to purchase miles needed to redeem an award or transfer miles and points to their Mileage Plan account through the The Points Exchange.” By using Points products, Alaska Airlines has enabled its customers to have more flexibility with their frequent flyer accounts. By going to the airline’s Web site, customers can purchase miles for themselves or as a gift for others. The Points products also enable corporate partners to buy and distribute Mileage Plan miles as an additional incentive.

40

Cost in U.S. dollars per minute

1993

Year British Airways’

a flight is delayed according to the Air

Barbara Harmer became the first

Transport Association. The cost does

female supersonic commercial pilot

not include indirect delay cost such as

in the world when she flew the

lost revenues for transferring passen-

Concorde on March 25 of that year.

gers who missed their connections.

16,000

21 Length in feet of

Age of the youngest female pilot

to be hired for a major U.S.-based

the longest commercial runway in

airline. Duana Robinson was hired by

North America and longest instrument

Texas International Airlines in February

landing system, or ILS, runway in the

1978 to fly the DC-9.

world. Denver International Airport opened the runway last year.

1935

Year of the first flight

of the Douglas DC-3 airliner, the first As part of its customer commitment, Alaska Airlines deploys technology to provide amenities for customers, such as check-in kiosks. The airline attributes its customer service for contributing to its improved financial performance.

165 million

over 2002 when it had a net loss of US$118.6 million. In announcing the 2003 results, Alaska Airlines’ Chairman and Chief Executive Officer Bill Ayer said the performance helps “confirm the preference customers have for our service.”

Cost in

aircraft to make money carrying

U.S. dollars that it took to construct

passengers rather than mail. It seated

the 16,000-foot-long runway at Denver

21 passengers.

International Airport.

1998 Since implementing the Points application within its loyalty program, Alaska Airlines has increased incremental growth in revenue and cost savings. In 2003, the airline recorded its first annual profit since 1999, earning US$8.8 million, a dramatic improvement

Gisselle Miranda is manager of partner relationships for Points International. For more information about the Points suite, contact kathy.benson@sabre.com

+count it up All images courtesy of Alaska Airlines

A

ttracting new customers and taking care of current passengers is helping Alaska Airlines continue its recovery from the industry downturn and strengthening its position as one of the major carriers in the United States. The airline, which outlines its dedication to its passengers in a 12-point customer commitment statement, has long used technology to provide amenities that enhance the travel experience with the airline and increase the likelihood for return business. One of Alaska Airlines’ top customer service initiatives is its frequent flyer program, Mileage Plan, which rewards customers for their loyalty to the airline. The program, launched in 1983, allows passengers to redeem awards with 15 airlines, Amtrak, restaurants, car rental agencies, hotels, and other companies offering financial and telecom services. In 2001, the airline, continuing its tradition of deploying advanced technology, enhanced the Mileage Plan program by partnering with Points International, a provider of online loyalty management solutions. “The Instant Miles program really exploded when we moved it online because it’s such a well-designed experience,” said Ann Ardizzone, managing director of marketing programs for Alaska Airlines. “Ease of use is important to us, and our internal team was able to deploy the Points solutions quickly. We also knew that the product would be intuitive for our members and partners. The Points

management solutions for frequent flyer programs. Points International offers a variety of loyalty technology solutions, which can supplement an airline’s loyalty program. Points’ customer services and consumer programs offer value-added member propositions and strong financial and marketing benefits for an airline’s frequent flyer program. The Points International loyalty expansion tools are available through Sabre Airline Solutions. a

1 million+ Year of the first mother/son

Number

of passengers who flew across the

airline pilots. Capt. Joy Klopfer and

Atlantic Ocean in 1958, the first

First Officer Glenn Klopfer flew their

year air passengers surpassed

first flight together a year later on a

the number of Atlantic steamship

United Airlines Boeing 767.

passengers.

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industry

industry

Some airlines turn to leasing options when upgrading their fleet, while others purchase aircraft outright hoping to increase the value of their airline. By Stephani Hawkins | Ascend Editor

A

down large sums of money to purchase aircraft. “If I was starting an airline, instead of investing my equity in buying an asset that is going to reduce in value, I would rather keep a hold of my capital and lease the aircraft,” said Nejib Ben-Khedher, senior vice president of Sabre Airline Solutions Consulting. “Then you have the capital in the bank to use for other investments that are going to retain their value, like real estate.”

Image courtesy Pakistan International Airlines

s airlines around the world take hold of the industry’s upturn and continue refining their operations to become more closely aligned with the changed landscape, conserving cash remains a critical part of their revival. Keeping their dollars close to the vest, 46 percent of the world’s top 500 airlines lease all or portions of their fleet (a 10 percent increase from five years ago) rather than laying

Pakistan International Airlines is one of the carriers leading the way in obtaining aircraft through special purpose vehicle lease financing options, which enable the airline to take ownership of aircraft at the end of the lease term. Last year, the airline obtained more than 10 aircraft under special purpose vehicle-based lease financing agreements.

12 ascend

There is much debate surrounding the pros and cons of each option, and some industry experts believe that in the long term, some form of leasing will prevail and traditional purchasing will become a thing of the past. “The way the industry is going, most airlines are simply not going to own their equipment,” Ben-Khedher said. “They are either going to lease it purely from a third-party provider and pay only for utilization, or they are going to set up ‘special purpose vehicles’ — a ‘lease-to-own’ option — which protect the asset in the event the carrier goes bankrupt. I think the period of owning the equipment outright, for many airlines, is over.” On the other hand, there’s the argument that owning aircraft sustains the capital value of an airline. At least that was true a few years back when specific aircraft types were in high demand and appreciated with time. Airlines knew they could buy an aircraft and two years later it would be worth more than they paid for it. In the “old” days, growth in the industry was so high that airplane manufacturers couldn’t keep up with demand. But today, as the leading creators of aircraft compete with each other, numerous different aircraft types have come into existence, saturating the market with an overabundance of “tin” and driving the value of aircraft downward. “When you have an asset that is intrinsically going to reduce its value year after year … do you buy it and know that every year the value of your asset decreases?” Ben-Khedher said. “Or do you lease it? Leasing is about paying for utilization of the aircraft instead of paying the full price of the aircraft.”

the greatest advantage of “…leasing, possibly above the

financial benefits, is flexibility.

“When you lease it, you may pay a little higher monthly charge, but you get flexibility,” he said. “For example, if there is a downturn or traffic curtails, you only have it for two more years. Maybe you don’t need that extra airplane. You can get rid of it — turn it back in and walk away.” If leasing really is the better option for the current environment, maybe the more appropriate question is: What type of lease is most fitting for an individual airline? Today, there are a number of possibilities that can be exercised depending on an airline’s financial situation, credit status and specific needs. But

T H E

three represent popular choices among many carriers worldwide, and two of those enable carriers to retain the asset in the end.

Operating Lease: No Money Down A clear advantage of the operating lease is that at the end of the leasing term, the airline returns the aircraft to the lessor without further obligation. Through this conventional method, the airline determines the dates in which it would like to lease the aircraft, and both companies agree on certain aspects of the contract such as which company will assume responsibility for maintenance. “Maybe the lessor has some maintenance responsibilities, and you have some maintenance responsibilities,” said Ben-Khedher. “You pay a fixed amount per month to lease the aircraft. At the end of the period of time, it goes back to them and you have no rights to it.” Through this approach, the leasing company estimates what the value of the aircraft will be at the end of the lease and applies a profit margin to determine the monthly payment, which is likely to be higher than it would be if purchasing the aircraft through traditional financing. However, if the airline is not in a position to make a sizable down payment or does not qualify for certain types of credit, it may be more logical to pay the higher monthly rate to obtain the aircraft. Selecting the operating lease, the airline is essentially paying for the “utilization of the equipment … and a portion of the ‘heavy check’ that aircraft is going to have to undergo later on,” said Ben-Khedher. Another appealing aspect for many carriers is the ability to frequently upgrade their fleet.

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Sabre Airline Solutions

A New Lease on Life

trend. And what fuels it is a host of factors that appeal to airlines striving to refresh their fleet without the capital expenditures that accompany ownership. One advantage of leasing an aircraft, similar to leasing an automobile, is that “when you’re done, you can turn in the keys,” said Eric Jones, manager, communications for the aircraft leasing business of General Electric. “You want a bigger or more modern airplane, you can turn it back in. The great thing about that is it isn’t your problem. It is our problem. We own it. We have the residual value risk in our hands as opposed to you. You can move on and do what you do best, which is running an airline.” According to Jones, the greatest advantage of leasing, possibly above the financial benefits, is flexibility.

As airlines of all sizes around the world look to upgrade or grow their fleets, more of them are leasing as a more cost-effective means of acquiring aircraft rather than purchasing them outright.

“If you want to be known as the world’s youngest equipment airline, you lease the equipment,” Ben-Khedher said. “After five or seven years, you just ‘flip’ that piece of equipment for a newer piece.”

Finance Lease: Capital Outlay While the “finance” or “capital” lease requires a down payment, the airline not only shows a portion of the airplane as an asset on its books during the leasing period, it may save on taxes

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Who

Why

China Eastern Airlines

“In our drive to be a major player in

of marketing and sales for China

the Asian region, this solution will go

Eastern. “Overall, we expect to

a long way to boosting our efficiency,

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What Selected the Sabre AirFlite ®

Weighing the Options

Schedule Manager to manage its

tighten our accuracy and provide

by between 1 percent and 3 percent.

Leasing didn’t just catch on as a way to offset the aftermath of a wounded industry. During the past several years, and perhaps the last couple of decades, it has become a growing

flight schedules and improve its

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Aircraft Owned and Leased by the Largest Airlines 12,000

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The Best of Both Worlds What has become an ideal option for many airlines is the ability to acquire aircraft with the same safety guarantees that traditional leasing offers, yet own the aircraft at the end of the agreement. A growing trend among government-owned carriers, and a viable choice for privately owned carriers as well, is special purpose vehicle-based lease financing where, in some instances, a new company is created specifically to lease aircraft to a particular airline that will eventually own the asset. “Government-owned carriers want to see the assets on the books,” Ben-Khedher said. “That way the company has a value. Governments were always leery of using leases because their citizens would say that it’s just a ‘paper’ airline. They do not own anything. So what was developed several

Percentage of Aircraft Owned Versus Leased Percentage of Units

years ago is something known as a special purpose vehicle.” What makes this option so popular for government-owned airlines is that in some instances, the special purpose vehicle company is developed and owned by the government; therefore, if the airline fails, the government still has possession of the asset. If it is not owned by the government, the SPV-based company has reduced risk because it holds the title to the asset until it’s paid in full, enabling it to sell or lease the aircraft to another company if the original lessee defaults.

Number of Units

if it is investing income that would otherwise be recorded as profit. And in the end, it still has the option of returning the aircraft to the leasing company. However, if the contractual residual value of the aircraft is less than what the aircraft is actually worth at the end of the term, the airline has an opportunity to purchase the aircraft for the contractual residual. It can then sell the aircraft for a profit, or it can continue to operate the aircraft. Either way, the value of the airline has been increased. Under this agreement, a key advantage for the airline is that in addition to taking partial ownership of the aircraft, the risks associated with aircraft devaluation are of no consequence. “The great thing about the finance lease from the airline’s point of view, they own a portion of it, so it improves the value of the company,” Ben-Khedher said. “They do not have to own the unit outright. They do not have to take the risks of its value going down very heavily.”

industry

1999

2000

Leased

2001

Owned

2002

2003

Total

The past four years have reflected a growing trend of airlines leasing a larger percentage of their fleets. While the total number of aircraft flown has remained largely stable, a greater percentage of the world’s aircraft are now leased, enabling many airlines to cost-effectively upgrade their fleets with more modern, fuel-efficient aircraft. By 2003, almost half of the aircraft flown by the largest airlines were leased rather than owned.

Typically, the SPV-based company is established in another country, and its government receives “hard” cash for the SPV arrangement. In turn, the airline does not have to pay corporate taxes for the SPV, and it receives import/export credits from the country in which the SPV exists. Alternatively, airlines that qualify can set up SPV-based lease financing through interna-

tional export banks and similar lending institutions. In 1991, Pakistan International Airlines entered into its first SPV-based lease, acquiring six A310 aircraft under the guarantee of European export credit agencies. “SPV is a conduit to raise money for financing aircraft,” said Ahmed Saeed, chairman and chief executive officer of PIA. “Airlines normally do not have large surplus

funds to deploy in outright purchase of aircraft because huge investment is required. The SPV raises the funds from the market to purchase the aircraft and leases it to us. We pay monthly rental installments to the SPV. The title to the aircraft remains with the SPV until the total loan installments are paid. At which time we take ownership of the aircraft, and they become assets.” Two years ago, the airline took the same approach using the Export-Import Bank of the United States, the U.S. government’s official export credit agency, which guarantees term financing on soft terms to creditworthy international buyers in private and public sectors by covering 100 percent of the associated commercial and political risks. “We’ve had ongoing discussions with the leadership of both Pakistan International Airlines and the Ministry of Finance about how best to structure a possible sale of U.S.-manufactured aircraft to PIA,” said James Lambright, executive vice president of Ex-Im Bank during a 2002 speech to the International Chamber of Commerce in Karachi, Pakistan. “When this transaction is concluded, it will upgrade the quality of PIA’s fleet; and as busi-

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Who

Why

TransMeridian Airlines

and provide personalized service to

Customer Insight

customers.

description

features

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What

of Customer Insight, an airline will have a simplified method of looking at and relating data about its customers.

Airlines. “We are confident that

benefits

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global distribution system will make

will take advantage of this

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our airline even more attractive to the

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News Briefs from Around the Globe

A variety of choices for acquiring aircraft leave many of the world’s airlines in a favorable position to upgrade their fleet using methods that will positively impact their bottom line. For government-owned airlines that place a strong emphasis on showing assets on the balance sheet, the SPV option likely outweighs the others. Privately owned airlines that are seeking to obtain new aircraft and are not faced with disqualifiers, such as credit issues, may lean toward SPV-based lease financing as well for the many benefits it offers. Every airline has its own unique set of circumstances. As with the aviation industry, aircraft leasing companies and financial institutions have entered a new era with new surroundings. Taking into account the number of viable purchasing and leasing options available today, most airlines, regardless of their distinctive conditions or geographic location, are well positioned to attain a younger fleet and grow their operation during the industry’s upswing. a

News on New and Improved Products and Services from Sabre Airline Solutions

tional database that collects and stores

L E V E L

The Bottom Line

hightech

Profile System, is a comprehensive rela-

T H E

nesspeople, you understand the benefits of improved flying conditions and improved prospects for the airline’s finances.” Through international financing institutions, last year PIA purchased more than 10 aircraft under SPV-based agreements. “U.S. Ex-Im Bank is a relatively cheaper source of financing,” said Saeed. “This financing structure requires creation of an off-shore company (SPV), which leases aircraft to PIA.” Through Ex-Im Bank-supported funding, the airline introduced three Boeing 777200ERs into its fleet earlier this year using SPV-based lease financing. Five more aircraft in the Boeing 777 family will be purchased through this financing structure — two in 2006 and three in 2008. “We look forward to providing support for PIA’s purchase of other U.S.-manufactured aircraft and engines in the future,” said Ex-Im Bank President and Chairman Philip Merrill. The only disadvantage of leasing through a special purpose vehicle rather than purchasing aircraft outright through traditional financing is that “the title to the aircraft remains with the SPV,” Saeed said. “The title reverts to the lessee when the financing is fully repaid.”

Flexible access — Agents are provided real-time access to display, create or modify customer information via SabreSonic ™ Res or Web services. The Web service interface enables access from a wide variety of applications or devices. Comprehensive data — Expanded customer data can be stored including: • Personal information — Name, address, phone, e-mail address, document information, • Preferences and policies — Special service requests and other service information, preferred services, • Airline relationship information —

Frequent traveler information, club information, value score, customer comments, • Marketing information — Annual trip count, average trip length, • Corporate information — Company name, job title, number of employees. Single view — Agents are provided a single view of the traveler throughout the travel experience. When accessed through Web services, connectivity to customer touch-point applications and devices is minimized. Increased productivity — Customer Insight improves the accuracy and efficiency of passenger name record creation through the use of structured data creation, enabling agents to focus on customer interaction. a


industry

industry pose a risk of losing sight of the overall strategic orientation.

CRM: Going Beyond a Frequent Flyer Program As more airlines look to begin CRM initiatives, there are still some misconceptions about what it involves, what it takes and the benefits it provides. By Nadja Killisly | Ascend Contributor

C

ustomer relationship management, areas of the organization. It will determine and developing innovative solutions to acquire sometimes called CRM, customer which applications or services could better or keep the airline’s customers. management, customer centricity or support particular customer segments. And Today, many people remain confused customer-centric management, has been a CRM should highlight how each area can about what CRM is or is not and what its over“buzz word” in the airline industry for a numcontribute to the bottom line. As a conseall strategic objectives should be. ber of years and will become more prominent quence, CRM for an airline may have different What is CRM? as airlines look to it as a way to help recover boundaries and can involve different technoloCRM is a strategic business approach that from the challenges of the past few years. But gies depending on its business objectives. enables airlines to effectively manage relationthere’s still a lot of confusion about what CRM CRM involves building and using cusreally is. In fact, the value of CRM tomer data in a smart way. and its future is still being debatAirlines need to develop and use Growth of Frequent Flyer Programs ed. Even today, many airlines are knowledge about their customers trying to answer fundamental so they can transform what has Number of Number of frequent flyer frequent flyer questions related to the topic — been a transaction into a relationNumber of programs programs What is CRM, and how tangible ship with travelers, particularly a airlines 1998 2004 is it? Is having a frequent flyer relationship with those who are Full-service ~250 83 130 program the same as CRM? Can most valuable. The data should providers the investment in CRM be justified not only be used in relation to a Low-cost 31 3 13 in a cost-cutting environment? particular flight event at the varicarriers (including subsidaries) CRM has been described ous interaction points with the as many things ranging from data customer, but also in a proactive warehousing, campaign managemanner. This includes possibiliThe number of frequent flyer programs has increased dramatically ment, even contact management ties for targeting specific cusduring the last six years as airlines have relied on them to retain and calendar scheduling. While tomer segments individually or customer loyalty. these can be aspects of a CRM using the data as an input for program, none in itself constiroute planning if it shows that oriships with their customers. CRM, like many tutes CRM. CRM is best understood as a gin and destination traffic between two cities potential business strategies, underscores the method of interacting with customers rather has reached a level where a direct service need for an airline to identify its competitive than a product. So why do many people view rather than a transfer connection would be advantage. CRM as a set of information technology soluprofitable. Before starting CRM, an airline needs to tions to solve their business issues? CRM’s orientation toward changing decide what it wants to achieve. Does it want Perhaps it is because it is easier to look the customer experience and improving to reduce the time it takes to resolve custoward data management and technology to revenue differentiates it from previous entertomer issues? Does it want to increase the deal with the challenges of the market rather prise resource planning, sales force automanumber of customers? Does it need to return than to address the fundamental strategic tion or supply chain management systems to profitability? This is where the strategy issues. In fact, CRM represents a giant step in that are designed primarily to help reduce plays a role. A CRM strategy determines what marketing and customer service, and it forces costs and improve efficiency. While CRM the final objectives are and how customer new skill sets, focus and resources on validatincludes cost reduction potential, these beninformation is going to be used by the various ing new customer strategies, analyzing trends, efits should not be isolated since this would

16 ascend

program data, but collect information from every point of contact. Up to now, airlines have segmented passengers based on frequent flyer data, and many have found that this limits the ability to have a clear view of customers. Frequent flyer members, in reality, may not be the most valuable customers. For example, one U.S.-based carrier discovered that if it measured its customer base by revenue, the top customers would not be determined by mileage. In fact, the top 1,000 customers determined by revenue generated 60 percent more income than the top 1,000 customers measured by mileage. Lufthansa German Airlines had a similar experience and demonstrated that only 4 percent of its “Miles & More” customers accounted for 50 percent of its revenue. In other words, given that not every passenger who flies on Lufthansa is a member of its frequent flyer program, 96 percent of its top mileage customers generated less than half of the airline’s revenue. Such findings have led airlines to widen the boundaries of their frequent flyer programs, aligning them more with true CRM practices.

Does a Frequent Flyer Program Constitute CRM? During the last 10 years, airlines have focused on loyalty marketing to serve and retain customers as evidenced by the boom of frequent flyer programs. This trend has been pushed by intense competition and limited growth in the total base of potential customers. These programs hardly influenced the overall demand for travel but did affect the choice of carrier and resulted in carriers improving their market share. Recently, loyalty has given way to a more encompassing approach to maximize customer lifetime value. Despite this shift, some airlines have not approached CRM as a holistic strategy but instead view it as synonymous with the frequent flyer program. A common denominator between traditional loyalty programs and CRM is customer data, but successful CRM installations generate far richer data than loyalty programs can provide on their own. One reason is that CRM systems are not limited solely to loyalty

Good For The Bottom Line Impact of customer relationship management Increase in revenues by source (percent) 0.3 – 1.2

0.05

Potential improvement in operating profit, US$ million per year

0.85 – 2.35

Large airline2 Medium airline2 Small airline2

100 – 250 25 – 60 15 – 50

Change in cost (percent) 0.5 – 1.1 0.2 – 0.5 0

0.1 – 0.8

0.1 – 0.3 0.2 – 0.4

0 Reduced Growth in New churn wallet customers share1

Total

Reduction Increase in CRM Net in cost3 marginal implementa- increase flight costs4 tion costs

Proportion of consumer’s disposable income allotted to single company. Based on revenue-passenger-kilometers (RPKs), that is number of passengers multiplied by number of kilometers they fly, large airline=76 million to 200 million RPKs; medium=21 million to 75 million; small=5 million to 20 million. 3 Through elimination of waste associated with targeting unprofitable customers. 4 Due to increased business. 1 2

According to the McKinsey Quarterly, an effective CRM program can have a significant impact on an airline’s revenues by reducing churn, gaining more of a consumer’s spend and attracting new customers. Depending on the airline’s size, the impact on operating profit can range from US$15 million to US$250 million annually. A CRM program can also increase revenues by up to 2.35 percent, which more than balances the increased costs of .1 percent to .8 percent caused by implementation and increases in marginal flight costs.

In the past, airlines in general believed: Loyal customers were more profitable, Miles flown should be the primary measure of loyalty, Rewards should be redeemed in proportion to the miles accumulated on a customer’s account and did not represent the revenue that a customer brought in. Given this mindset, airlines discounted the willingness of a customer to pay more for a better product or service. Today, an airline’s CRM strategy should be based on new principles: Customers who purchase higher fares are more profitable, Both distance traveled and fare purchased should be factored into a customer-value measure, Customers who are willing to pay more for additional benefits should gain status more quickly. CRM statistics, compiled by Sabre Airline Solutions, also show that on average only 20 percent of a carrier’s passengers belong to its frequent flyer program. Not having customer information on the other 80 percent eliminates the opportunity for the airline to establish contact with these other passengers for direct marketing purposes and to attract additional valuable customers. Another difference with frequent flyer programs is that CRM involves managing all relationships with travelers along their journey, utilizing the customer data not only to reward travelers but also influence their behavior through personalized interactions via various communication channels. Numerous customer behavior studies confirm that the choice of airline travelers is not only driven by frequent flyer programs but also by price, schedule, product attributes, customer service and individualization. In a survey conducted by Jupiter in 2002, 79 percent of travelers said they were less likely to make a purchase on the same airline after a dissatisfying customer experience. The survey also found that proactive customer-service efforts would satisfy the 62 percent of passengers who want to be informed about delays. In addition, the expectations of travelers are growing, and they already expect rewards such as frequent flyer points or redemptions, thus reducing their ability to differentiate an airline. And business realities such as fuller planes and better revenue management make awards more difficult to redeem, thus reducing the effectiveness of a frequent flyer program.

ascend

17


industry Although CRM and frequent flyer programs are interrelated, CRM with its personalized and holistic approach can do much more for an airline than a loyalty program by itself.

In a Time of Cost Cutting, does Investment in CRM Make Sense? The current challenging economic environment and the continued growth of low-cost carriers has put competitive pressure on the traditional network airlines, which have responded by focusing almost exclusively on cost-cutting measures in order it remain competitive. And in a challenging economy, many strategic initiatives such as CRM get pushed to the side, and some airlines question whether the time is right for a CRM initiative. Even in the current climate, a CRM strategy is critical to recovery and future growth because it helps set an airline apart from its competition. An airline’s price structure, schedule and product can be duplicated by competitors, but customer data and customer insight will allow an airline to understand its

customers’ issues and to differentiate itself by implementing better services that offer a new level of personalized service, especially compared with low-cost carriers. That’s not to say that low-cost carriers don’t have a need for a CRM strategy. Southwest Airlines, for example, a low-cost carrier with few extra amenities, justifiably views itself as customer-service focused. Southwest Airlines has repeatedly finished at the top of airline customer satisfaction ratings. Its strategy is based on a customer-service approach, maximizing the “people aspect” and making sure issues with travelers are solved quickly. Southwest is also working to collect more customer data and share it among touch points, creating a single view of the customer in order to offer better service. “Customer service causes loyalty that can’t be explained by low prices alone,” said Donna Conover, vice president of customer service at Southwest Airlines. Airlines have struggled with how to effectively measure the returns from their

Keeping Passengers Happy Reasons for customers’ downward migration1 (percent)

60–70 30–40

Structural factors

Nonstructural factors

such as change in:

Related to

• Job

• Service

• Delays, lost luggage

• Identify and proactively apologize to high-value customers

• Frequent-flyer program

• Failure to redeem frequent-flyer points

• Provide high-priority frequent-flyer redemption certificates

• Product

• Dissatisfaction with seat design

• Initiate changes in future product design

• Competitors’ offers

• Sales promotion in • Predict which customers specific market may defect; offer appropriate discount

• Location • Personal circumstance

Possible issues

CRM2 actions

• Flight

1 2

• Availability of high- • Ensure sufficient timing, demand routes frequency of scheduled flights preferred by high-value customers Choosing fewer or less expensive products or discontinuing use of products. Customer relationship management Source: 2001 McKinsey survey of nine European, five North American and three Asia-pacific airlines

Several issues, according to the McKinsey Quarterly, lead customers to downgrade their use of an airline’s products. Such downgrading — choosing fewer or less expensive products or discontinuing using the carrier altogether — can be addressed through an effective customer relationship management program.

18 ascend

industry CRM initiatives and to justify their expense. Given the scope of most CRM investments, an airline should take a holistic approach and consolidate results in various areas to determine the effectiveness of the CRM program. Rather than focusing narrowly on specific areas such as revenue optimization or pricing where there doesn’t appear to be a direct benefit from CRM, but instead looking at the overall performance of the airline, the effectiveness of the program can be gauged. Customer focus holds the key to increased profitability but also presents challenges. The promise is clear — better treatment of customers will lead to higher profitability. A McKinsey investigation of 17 airlines in 2003 indicated CRM can improve revenues by between 0.9 percent and 2.4 percent. After deducting the costs, this still leaves large airlines with an annual improvement of US$100 million to US$250 million or, for smaller airlines, a US$15 million to US$50 million annual improvement. However, achieving those results requires more than just additional data and analysis. It requires that the information be used to change the way of selling, marketing and serving customers as well as the way the airline interacts with the customer. The primary reason some CRM efforts don’t deliver the expected benefits is that the customer-facing employee is overlooked during the CRM implementation. Having more customer data by itself achieves nothing. To be successful, an airline must have an effective strategy and implement the strategy throughout the enterprise.

A Comprehensive Strategy CRM is more than IT or a frequent flyer program. It is a strategy that enables airlines to remain competitive today and in the future. Many carriers have already experienced the benefits of their CRM initiatives and have received a return, understanding that CRM should be considered an investment with short- and long-term results that follow the overall corporate strategic plan. The CRM trend will continue to evolve. The later airlines start CRM initiatives, the bigger the gap will be with their competition. Addressing CRM issues today positions carriers to capitalize on the ongoing recovery and will help airlines manage customers effectively in the future. a Nadja Killisly manages airline CRM strategy and customer relations at Sabre Holdings. She can be reached at nadja.killisly@sabre-holdings.com.

The Long Night’s Journey into Day With traffic, profits and demand on the rise, the world’s airline industry appears to be on its way to brighter days. By B. Scott Hunt and Stephani Hawkins | Ascend Editors

I

f it is truly darkest before the dawn, then the airline industry certainly stands on the cusp of a spectacular sunrise. After a prolonged period of darkness in the industry, many industry experts say that they see the first rays of the recovery dawn on the horizon, with increases in metrics such as passenger traffic, load factors and revenue per kilometer. “Positive growth is expected in 2004, with a bounce back of 7 percent to 8 percent in international RPKs,” said Giovanni Bisignani, director general and chief executive officer of the International Air Transport Association. “Our agenda for 2004 is designed to turn this positive trend into sustained growth and to help the industry repair damaged balance sheets.” T h e I n t e r n a t i o n a l C i v i l Av i a t i o n Organization also predicts that traffic, after two flat years, will grow this year. The ICAO projects traffic will reach 3.1 billion passenger kilometers performed in 2004, surpassing 2000 levels of 3.017 billion PKPs. The ICAO projects traffic will further increase to 3.3 billion passenger kilometers performed in 2005. Even in North America, where impacts of the industry downturn have been felt most

T H E

acutely, there are rays of hope. According to of course. It’s not like everything is perfect. the Air Transport Association of America, an But there’s improvement.” industry trade group, the U.S. industry’s lossThe improving global economy and es decreased from US$11.3 billion in 2002 to pent-up demand for travel have helped airlines US$5 billion last year. around the world regain their footing. The low“We’re heading in the right direction,” cost segment, which was not impacted to the said James C. May, chief executive of the ATA degree of some of the network carriers, continearlier this year. ues to grow and stimIn January, the ulate traffic with low Market growth rates are back on ATA reported that revfares and by tapping track, load factors are recovering, enue from passengers underserved markets. carried was up 5.4 perAlthough the recovand there’s general improvement. cent year-over-year, ery appears to be We still need to be cautious, of exceeding analysts’ worldwide, it is procourse. It’s not like everything is expectations. Most of gressing at different the gains came from rates in the three perfect. But there’s improvement. international travel, regions most dramatithe ATA said. cally affected by the “We see improvements across the events of the past three years. board comparatively speaking against the preAsia/Pacific vious two years,” said Emre Serpen, a senior As the region least impacted by the industry’s partner with Sabre Airline Solutions downturn, Asia/Pacific has also been the Consulting. “I would say the recovery hapquickest to begin recovering. pened faster than expected. In terms of profBecause the low-cost carrier segment is itability, European and Asian carriers are doing less developed in Asia/Pacific, the industry is well. Market growth rates are back on track, more regulated, the region’s economy is doing load factors are recovering, and there’s generrelatively well and the carriers receive more al improvement. We still need to be cautious,

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L E V E L News Briefs from Around the Globe

Who

Web. Through the agreement,

Why

American Airlines, Northwest Airlines,

Travelocity provides links to

By driving people who book their

Alaska Airlines and Midwest Airlines

online check-in from its Web

travel on Travelocity to check in via

What

site as well as in an e-mail

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Partnered with Travelocity to drive

message sent to travelers shortly

staffing needs at the airport as well as

more passengers to check in via the

before the day of departure.

provide a popular customer service. a


industry

industry

Global Passenger Forecast Summary Total International North Atlantic Trans-Pacific Europe-Asia/Pacific Europe-Middle East Europe-Africa North America-Latin America Caribbean Within Asia/Pacific Within Europe Within Latin America/ Caribbean Total Domestic Total

2003 -1.1% -0.5% -6.3% -3.5% -3.1% -0.6%

2004 6.9% 4.7% 9.4% 8.9% 7.0% 4.8%

2005 7.2% 6.0% 8.9% 7.9% 6.5% 7.0%

2006 5.6% 4.2% 5.9% 6.6% 5.8% 5.0%

2007 5.1% 3.9% 5.3% 5.8% 5.0% 4.7%

AAGR 4.7% 3.6% 4.5% 5.0% 4.2% 4.1%

2.7% -10.9% 3.2%

5.7% 14.0% 4.6%

7.5% 10.6% 5.7%

5.5% 7.8% 4.7%

4.9% 7.2% 4.4%

5.3% 5.4% 4.5%

0.8% 0.4% -0.1%

5.3% 3.9% 4.9%

6.7% 4.9% 5.7%

5.5% 4.4% 4.8%

5.2% 3.7% 4.2%

4.7% 3.4% 3.9%

Beginning this year and continuing through 2007, passenger traffic is expected to increase, according to IATA forecasts. The average annual growth rate through 2007, including the declines in passenger traffic in 2003, shows positive growth worldwide of 3.9 percent, led by the intra-Asia/Pacific region.

revenue from international travel, they have been recovering more rapidly. “In terms of profitability, the Asia/Pacific carriers are in a good position,” said Serpen. “As far as passenger growth, China is very strong, Southeast Asia is very strong. I think Asia is very optimistic. The mindset is on growth.” Analysts in the region are also optimistic about the continuing recovery.

don’t know if the dark times have “ Ipassed, but somebody turned up the dimmer switch a little bit. We’re looking better than we used to, that’s for sure.

“If you look at traffic statistics that have been released by different companies, whether they are Qantas, Cathay or Singapore Airlines, you are seeing volume coming back,” said Anthony Srom, Melbourne, Australiabased transport analyst for Goldman Sachs JBWere. “Load factors are beginning to improve. Generally, you are seeing those signs pointing that recovery is underway. If you look at the investment community, analysts that actually cover the Asia/Pacific airline stocks are saying they’ve upgraded their forecasts for profits, so there’s a bit of an anticipation that the recovery should continue.”

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The Centre for Asia Pacific Aviation is also optimistic about the region’s recovery. The Centre said 2003 was a “surprisingly good” year with traffic levels close to the previous year levels despite the impact of severe acute respiratory syndrome. If the current momentum is maintained, the Centre said, “double-digit traffic growth (is) assured.” For 2004, a “year of massive opportunity,” economic conditions are favorable across the region with consumer confidence high and strong gross domestic product growth anticipated throughout the region, the Centre said. With effective capacity management growth, the region’s recovery should stay on track. Srom projected that it will take 12 to 24 months for the region to make a full recovery, provided that there are no additional setbacks. He said the carriers are “becoming leaner and meaner” taking steps to succeed in a new industry environment such as restructuring labor deals, revamping fare structures and thoroughly examining their product. He also said the region is “seeing a nice little rebound in business traffic at this point,” which bodes well for the yields of major carriers.

Europe “It is slow and painful, but the recovery is underway,” said Ian Tunnacliffe, U.K.-based vice president, industry services at META Group Inc. “Not everyone is recovering at the same rate as everyone else.”

Tunnacliffe said after the collapse, the region’s airlines lowered their pricing to entice passengers back onto their aircraft. “They made some very attractive fares,” he said. “They got the cabin factors back fairly quickly. The real struggle has been to get the yields back.” Tunnacliffe pointed to British Airways reporting in January a 1.1 percent year-overyear increase in traffic in its first and business classes as evidence that yields are improving. January 2003 was the last month before the Iraq war threat started to affect airline results, Tunnacliffe said, so to be ahead of that pace represents a significant achievement. Late last year, BA’s premium traffic was growing by 2.5 percent to 3.5 percent per month. “Their load factors were up in the premium classes,” Tunnacliffe said. “BA historically has tended not to discount its premium classes very much. When the load factors are going up in the premium cabin, it’s interpreted as a very good sign. “Obviously that sort of growth rate is unsustainable in the long term, but it illustrates that the market is coming back quite quickly,” he said. A general economic recovery, led by the United States, has fueled traffic on North Atlantic routes, where many of the major European carriers generate a significant amount of their profits, said Tunnacliffe, who projects the regional industry, with a “fair wind and no major incidents” will return to some level of normalcy in two years. “To have that market recover is very important to them,” he said. And, Serpen said, because the major European carriers rely more on long-haul intercontinental traffic, which is less susceptible to low-cost competition, they have been able to rebound more quickly than their North American counterparts, which depend more heavily on revenues from their domestic market. Some positives have even come out of the last few years, analysts said. Carriers are opening their minds to new ways of doing business, embracing ideas many have resisted for a long time such as outsourcing some of their processes to specialty providers who can do them more efficiently and cost effectively. “I think probably every airline CIO in the western world now is moving very strongly to get rid of proprietary technologies and move to standard technologies,” Tunnacliffe said. “It is good news because it will ultimately lead to lowering of cost and improvement of efficiency.”

Airlines are also beginning to change their focus, Tunnacliffe said. “It has appeared that market share has been more important to many airlines than profitability,” he said. “Where I think we’re seeing that change is in the new generation of airlines. Those airlines have been resolute on profit; they don’t do stuff unless it’s profitable. That’s the mindset that ought to be spreading.”

Comparison of IATA Total Passenger Forecasts Annual Passenger Growth Rate (percent) 8%

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6%

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4%

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2%

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0%

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-2%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-4%

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-6%

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2000

North America The region most impacted has finally begun to show some positive signs of a comeback. “I don’t know if the dark times have passed, but somebody turned up the dimmer switch a little bit,” said Steve Hendrickson, senior partner with Sabre Airline Solutions Consulting. “We’re looking better than we used to, that’s for sure.” The sun began to shine again in the North American airline industry during the latter part of 2003, he said. “A lot of things caused people to take their travel dollars and put them on the shelf for a while,” Hendrickson said. “It would appear in the third quarter, people said, ‘hey, you know, SARS is gone, the war is over, the economy is back, interest rates are low, job losses are tapering — let’s go out there and do what we used to do as a family, as a business, as an economy.’” One of the brightest spots for North American carriers has been on international routes. “In North America to some of the international regions, not only do the second half of ’03 numbers beat out the ’02 numbers, but

T H E

Who

2000 – 2004

2002

2003

2004

2005

2001 – 2005 (Original) 2001 – 2005 2002 – 2006 2003 – 2007

2006

2007

(Revised) Source: IATA

Forecast Total Scheduled Passengers Forecast Growth Rates and Passenger Numbers 2002

1,071

545 ‘02 to ‘03: -0.1% +

2003

1,075

538 ‘03 to ‘04: 4.9% +

2004

1,117

575 ‘04 to ‘05: 5.7% +

2005

1,171

617 ‘05 to ‘06: 4.8% +

2006

1,223

2007

651

1,268 0

500

1,000

AAGR ‘06 to ‘07: 4.2% = 3.9%

685 1,500

Passengers (millions) Domestic International

2,000

Source: IATA

According to global passenger projections from IATA, recovery is expected this year with a large bounce back in 2004 and 2005, followed by a return to more traditional levels of growth through 2007. IATA also projects the average annual growth rate for scheduled international passenger traffic to be 4.3 percent from 2008 to 2017 and an AAGR of 3.4 percent in domestic passenger traffic during the same time period.

vıew

H I G H

2001

L E V E L News Briefs from Around the Globe

lead directly to increased revenue.

our reservations efficiency and the

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industry

industry

Regional Outlook 2003—2007: Broad Factors Affecting Passenger Growth Trends Trans-Pacific

North Atlantic

Impact of SARS in 2003 Continued slow economic recovery in Japan Increasing expansion of North America-Southeast Asia non-stop services

Within Europe

Europe-Asia/Pacific

Slow recovery from Sept. 11 event

Continued low-cost carrier expansion

Poor outlook for the Japanese economy

Expansion of services between North America and Eastern/Central Europe

Competition from highspeed train links

Impact of SARS in 2003

Extended European Union will stimulate traffic between Western and Eastern/Central Europe

Strong Chinese and Vietnamese growth

Expected opening of Vietnam-U.S. route

Strong and quick recovery

they also, in some cases, eclipse the 2000 Industry experts say there are several announced plans for their own low-cost carrier n u m b e r s , s o i t ’s p r e t t y e n c o u r a g i n g , ” factors that could send the industry back into within a carrier. Others such as Air New Hendrickson said. the dark. Zealand have revamped their pricing structure In the U.S. to Latin America sector, rev“In the last few years, you could call it to offer reduced fares. enues are up about 11 percent. In the U.S. to the ‘constant shock syndrome’ where there According to Srom, to compete with Europe market, the revenue per available seat always seems to be an ‘X’ factor you have to low-cost carriers going forward, traditional airmile numbers have passed 2000 levels. Even be cognizant of,” Srom said. “You have potenlines should ensure that they are “reexamining in domestic travel, which is still lagging well tially SARS, terrorist activity, continued emertheir networks and the profitability of each behind 2000 levels, individual part of passenger levels are those networks (as World Economic Growth Verses Scheduled climbing. well as) examine the International Passenger Growth (percent change) “Year over year products. Are they difwe’ve turned the corferentiated enough in 14% ner,” Hendrickson their market niche?” 12% said. “Coming from Beyond restruc10% an environment like turing to address the 8% the one we’ve just challenge from low6% experienced, that’s a cost carriers, one of 4% positive thing.” the main themes that 2% Much of this could continue to fuel 0% growth, he said, is a strong recovery still -2% fueled by the burgeonremains on the horizon. -4% ing U.S. economy, which “The world has -6% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 in the third quarter of too many airlines,” 2003 grew by 8.2 perTunnacliffe said. “Any Passenger Growth World Gross Domestic Product Growth cent — “It has been other industry faced Source: IATA more than five years with these sort of since we have seen economic conditions, According to IATA statistics, the health of the airline industry continues to mirror that of economic growth of the natural reaction the world economy. From 1990 to 2003, the growth of scheduled international passenger that magnitude.” would be consolidatraffic has reflected the growth of the world economy as measured by gross domestic As the economy tion. Airlines would product. Based on improving economic conditions, IATA predicts an “upbeat” forecast for improves, some of the merge. Some airlines passenger traffic during the next few years. pent-up demand for would go bankrupt. travel is being released. Some would be gence of low-cost carriers, potential fuel price “Companies are saying, ‘OK, it looks like acquired. This is very difficult to happen under increases that could derail the recovery.” the markets have stabilized, we know what our the current regulatory environment that the Of the potential barriers to recovery for future looks like, let’s go out and face those airlines operate in, especially internationally. major network carriers, the growth of low-cost customers and chase those deals,’” he said. But I think we have to see that change, and airlines presents the biggest challenge. With The region’s airlines have also taken we have to see the ability of major airlines to low fares and point-to-point route structures some other steps to regain health such as consolidate.” combined with competitive levels of service focusing on long-haul trunk routes, aggressiveStill overall, the future looks bright espeand unique amenities, the entire concept of ly pricing their product, attacking inefficiencies cially compared with the recent past. low-cost flying has changed in the minds of and rationalizing their fleets. “I’m optimistic,” said Tunnacliffe. “I many travelers, sending them aboard those Still, it will take six to eight quarters of think we’re going to see some quite substanairlines that bring the most value. consistent revenue and earnings growth to tial changes in the way the industry operates “There’s no doubt that the network carreturn to some semblance of health, over the next decade. I think we will see some riers as we know them are going to have to Hendrickson said. rationalization as far as the regulatory environremake themselves if the marketplace contin“The industry really needs to show ment. We will see consolidations in the indusues to move the way it has with the low-cost some earning power and some revenue try. When that happens, the industry should carriers bringing products that are of comparagrowth momentum before Wall Street is ever be stronger. Individual airlines will be more ble quality into the market with much lower going to recapitalize it,” he said. profitable. They will be able to invest more in costs,” Hendrickson said. “They can’t just sit technologies that they’re going to need in the The Future is Still Cloudy there doing what they’ve always done.” coming years.” a ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Europe-Middle East Serious short-term political and military concerns

North American-Latin America/Caribbean

Continuing expansion of Dubai as regional hub and tourist destination

Capacity redeployment by U.S. carriers leading to strong growth in this route area

Emergence of Doha hub with Qatar Airways

Economic problems in several Latin American countries

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Within Asia/Pacific

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Impact of SARS in 2003

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Strong and quick recovery

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Continuing expansion of China’s international traffic

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Anticipated opening of mainland China-Chinese Taipei direct services

Europe-Africa

Within Latin America/Caribbean

Network expansion and fleet renewal by largest African carriers

Serious economic problems in key markets

Some loss of routes due to Sabena and Swissair bankruptcies

Creation of off-shoot operations by financially stronger carriers in neighboring countries

Political instability in some key markets Source: IATA

According to IATA, airlines in various regions are expected to recover at different rates due to unique circumstances that affect the local industry. While some areas such as Asia/Pacific are bouncing back more quickly, other regions including Europe and North America will experience slower recoveries due, in part, to their struggling economies.

T H E

vıew

H I G H

L E V E L News Briefs from Around the Globe

Who

staff forecasting and planning system,

director for JASG. “We visited several

Jardines Aviation Services Group

to efficiently manage its resources at

Sabre Airline Solutions resource

What

Hong Kong International Airport.

management customers thoughout

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Why

Europe and could see similarities

generation, integrated resource man-

“JASG required an efficient and cen-

agement suite, including the Sabre ®

tralized staff and equipment planning

StaffAdmin ™ employee tracking and

system for both passenger and ramp

assignment system, the Sabre

®

handling that would enable a move

StaffManager automated staff alloca-

away from the current non-centralized

tion system and the Sabre ® StaffPlan ™

setup,” said David Clymo, finance

with our operations. After an intensive evaluation, Sabre Airline Solutions was proven to offer the best-of-breed customized solution for the requirements of JASG, which was instrumental in the contract win.” a

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Even with the positive signs, “it seems like we’re always right around the corner from something unforeseen that could potentially be another major setback, or at least the fear of such a force,” Hendrickson said.

Even in Asia/Pacific where low-cost carriers are just beginning to make their mark, the traditional carriers are having to respond. Carriers such as Qantas Airways, Singapore Airlines and Thai International Airways have

B. Scott Hunt and Stephani Hawkins can be contacted at scott.hunt@sabre.com and stephani.hawkins@sabre.com.

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industry

Flying a larger aircraft is just one way of fighting congestion. Airlines could also further fragment their route network by bypassing their own hubs to offer passengers a more convenient nonstop service between secondary cities. Direct services between smaller cities will mean that passengers no longer have to connect over hubs, which will help reduce the demand on the large “trunk” routes. Typically,

D

uring the recent IEA, Future of Air Transport Conference in London, both Boeing and Airbus delivered their vision of the future of aircraft. The individual presentations each painted a fairly compelling — yet opposing — picture. The stakes for both companies are quite high. Given the long lead time it takes to go from idea to concept to design to delivery, Airbus

flown by the largest aircraft available today, the 747, with a capacity of approximately 430 seats in a typical configuration. With a capacity of approximately 550 seats for its typical configuration, the A380 represents a significant increase in size over the largest aircraft available today and will help satisfy the demand for this special set of routes. Will the A380 then really help reduce congestion? Probably not considering that most large congested airports have less than 15 percent of their departures served by aircraft with more than 300 seats. But then, it’s not about reducing congestion; it’s about serving large-growing markets in a congested environment with a larger aircraft — for many airlines, the A380 represents the most logical choice. The only question is how large will this demand for the A380 be given that its mission is very specific?

appears to be the A380 versus the 7E7 — or size versus efficiency.

and Boeing are now effectively determining their success and failure for the next 10 years or longer. On the surface, the battle between the two aircraft manufacturers appears to be the A380 versus the 7E7 — or size versus efficiency. Airbus, however paints the battle as the A380 plus the A330 plus the A321 versus the 7E7 and the rest of the Boeing product line, adding the dimension of operating economics. As airlines continue to recover and evaluate their future fleet needs, they will face a choice between the two competing visions of the future. It’s all a bit confusing, but four underlying issues will determine the success and failure of each strategy.

Image courtesy of Airbus

secondary cities have less congested airports, and the air corridors connecting these cities can accommodate additional services. Direct service between an origin and destination is also a convenience that passengers crave. Or is it? Official Airline Guide data

need to obtain the “ Airlines appropriate mix of aircraft to

Image courtesy of Boeing

By Vinay Dube | Ascend Contributor

the surface, the battle between “ On the two aircraft manufacturers

one of the four largest air travel markets has not had a dramatic increase in the number of city pairs served by nonstop service (the intraU.S. market). The other three top markets have all grown dramatically — intra-Europe by 65 percent, Europe to the United States by 60 percent and trans-Pacific by 250 percent. While it’s tempting to throw away the intra-U.S. data point as an outlier, the intra-U.S. market has invariably been a lead

The philosophies of the two large aircraft manufacturers are reflected in their newest products. Airbus has launched the A380 (left and below center), which will be the world’s largest commercial aircraft when it enters service in 2006. The double-decker, four-aisle aircraft seats 555 passengers in a three-cabin class configuration. The A380's modern technology and economies of scale provide 15 percent lower seat-mile costs than today's most efficient aircraft, according to Airbus. Boeing, meanwhile, has focused its efforts on a new, fuel-efficient aircraft, the 7E7 (below left and right), which will be built primarily using composite materials — including the fuselage and wings. The base model of the new Boeing will carry 200 to 250 passengers on routes between 7,800 and 8,300 nautical miles (14,500 to 15,400 kilometers) and is projected to be 20 percent more fuel efficient than comparably sized aircraft. Boeing expects the aircraft to enter service in 2008.

Image courtesy of Boeing

As the two largest commercial aircraft manufacturers present competing views of the future for aircraft production, airlines are faced with choosing the proper strategy for their future fleet.

Service Patterns

Airports and airspace are getting increasingly congested or even saturated. Increased congestion at airports and across available airspace will prevent a continued growth in frequency in a number of large markets that have a high growth in air traffic demand. The only way to satisfy this demand will be to fly larger aircraft across each frequency. But a large proportion of these routes are already

Image courtesy of Airbus

Sizing it Up

Congestion

indicator of what’s to come in the global aviation industry. Although it’s difficult, if not impossible, to predict what the future will hold, there is no doubt that if the number of city pairs connected via nonstop services grows dramatically over the next few years, the need for an ultra-large aircraft will decrease significantly.

Operating Economics

maximize network profitability.

has shown that the number of city pairs connected via nonstop services has marginally declined since 2000. For most other industries, the last three years of data would be extremely relevant in predicting long-term trends, but in the airline industry, the last three years likely are not a fair representation of market trends. Looking at OAG data for the last 17 years shows that since 1985 only

Continued pressure on prices, and therefore on operational costs, needs to be addressed by every airline. Reducing the unit operating cost per passenger is one way of accomplishing this goal. Flying a larger aircraft with reduced unit operational costs will allow airlines to respond to the continuous downward pressure on prices. Airbus believes the A380 will burn at least 15 percent less fuel per passenger than any other aircraft in the world on a typical long-haul route. While this may be the case, larger planes are generally more

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25


industry years, we’ve seen airlines rationalize their fleets in a number of ways. In particular, airlines have gained a substantial advantage in operating costs by purchasing crew-compatible aircraft from a single manufacturer. This is the reason Airbus has designed the A380 to be flown by a common pool of A320, A330 and A340 pilots. Airlines need to obtain the appropriate mix of aircraft to maximize network profitabili-

Image courtesy of Boeing

expensive to fly than smaller planes even though their unit cost per passenger may be lower. For example, even though the A380 consumes less fuel per seat as compared to the 747-400, Boeing estimates it still costs approximately 29 percent more in fuel per trip. While the 29 percent statistic is debatable, it is almost certain that the A380 will consume more fuel than the 747- 400 per trip and is only a viable option to reduce operating costs on

The interior of the new 7E7, developed in partnership with Teague, a Seattle, Washingtonbased design firm, incorporates many new elements such as sweeping arches, dynamic lighting, larger lavatories, more spacious luggage bins and electronic window shades.

Various market factors such as congestion, service patterns, operating economics and product range will determine whether the Boeing 7E7 (above) or the A380 (below right) or both will become the most viable option for the future of international transport.

Product Range While a low operating cost is an important issue for any individual aircraft type, it is not the only issue to consider. During the last few

26 ascend

T H E 600

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500

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400

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300

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200

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A340

High

vıew

H I G H

L E V E L

the electronic ticketing database with-

“First, we'll be able to reduce the

Philippine Airlines

out the cost of building its own sys-

costs incurred by processing

tem. The system also gives the airline

paper tickets, and secondly, we’ll be

the option of interline electronic tick-

able to improve efficiency and cus-

eting and provides it with connectivity

tomer service levels. With this imple-

to all global distribution providers.

mentation, we are well placed to facil-

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itate electronic document exchange

Signed a five-year contract for elec-

Low

tronic ticketing services across its domestic and international network. ty. Simplistically, this means that if a route is operating at a high load factor, an airline might consider upgauging aircraft, and if a route is operating at a low load factor, it might consider downgauging. As such, an airline typically has a range of aircraft with varying numbers of seats.

News Briefs from Around the Globe

Who What

A380

With 555 seats, the A380 represents a significant leap in capacity from Airbus’ next largest size aircraft, the A340. For airlines wishing to operate a complete Airbus fleet, there is a risk of having too much or too little capacity on a route.

Vinay Dube is vice president of the Europe, Middle East and Africa region for Sabre Airline Solutions. He can be contacted at vinay.dube@sabre.com.

Image courtesy of Airbus

Capacity of Airbus Fleet Number of Seats

routes that are being flown with large aircraft at very high load factors. While lower operating economics are not central to the A380 argument (although they can’t be ignored), they are the key to Boeing’s 7E7 program. Boeing states that the 7E7 will consume 20 percent less fuel than a comparable A330. Airbus doesn’t think so. Airbus believes that its new class of A330s can fly as efficiently as any comparable aircraft. Given the popularity of the 200-to-250-seat segment, this argument is central to the viability of the 7E7 program, and Boeing’s future depends on its ability to deliver on its promises and/or Airbus’ response in the next few years.

Image courtesy of Boeing

Airbus has chosen to step away from tradition and create something that truly is a mission-specific aircraft that does not easily fit into a step-wise increment of capacity. The A380 represents a jump of 170 seats from the next largest size of plane Airbus offers, which means that if a route currently operating an A340 is running full, it’s not obvious that it could be flown by an A380. Most airlines operating an A340 as their largest aircraft today would rather buy a 450seat aircraft than a 550-seat aircraft to add a degree of versatility to their fleet mix. But if Airbus does not offer such an aircraft and the airline is an “all-Airbus” airline, then it might elect to go a step higher with the 550-seat A380, potentially risking having too large an aircraft to serve the route. So what’s the verdict? Is it Airbus or Boeing? Or could it be both? The choice is not necessarily mutually exclusive. As conditions continue to evolve, traffic increases and routes fracture, the aviation industry might require a large aircraft to combat congestion as well as a fuel-efficient, mid-market aircraft to combat the perennial downward pressure of yields. During the next 10 years, the market place will determine the answer. a

The Sabre Airline Solutions Electronic

with other airlines whom we have

Ticketing Hosting tool gives Philippine

“The benefits of moving to electronic

Airlines a way to distribute tickets

ticketing are twofold,” said Kevin

electronically and manage the

Hartigan-Go, vice president informa-

activities related to maintaining

tion systems for Philippine Airlines.

interline relationships with, fulfilling the requirements of some U.S. carriers to support electronic ticketing by 2005.” a


industry

Leveling the Playing Field Revamping their business models enable network carriers to remain competitive and return to profitability despite the growing low-cost segment. By Emre Serpen | Ascend Contributor

I

t was a tiny upstart that changed the low-cost threat because they lack the size, As these carriers continue to increase world. Challenging the industry leaders by market reach and production efficiencies their reach — in the United States, nearly 80 offering low prices and good customer of major network carriers and the cost percent of markets are subject to low-cost service, the startup gradually grabbed market and utilization advantages of low-cost competition — the traditional network carriers share until it became one of the most powerful carriers. Some of these carriers have reinare being forced to respond. companies in the world. vented themselves as And what Wallow-fare airlines with Mart did to retailing spectacular success. in the ‘80s is being Two years ago, echoed in the airline Aer Lingus, the Irish flag industry today. carrier, was on the Companies such verge of bankruptcy as as Southwest Airlines, it battled with low-cost Ryanair, easyJet, jetBlue, R y a n a i r. U n d e r t h e Virgin Blue and numerleadership of Chief ous others have carved Executive Officer Willie an increasingly larger Walsh, the airline has niche for themselves transformed itself into a by — like Wal-Mart — successful and profoffering low prices and itable low-fare carrier. good customer service. Although its yields have Transparency of pricing and restrictions due to the availability of fare information over These companies dropped by 23 percent, the Internet has fueled a growing trend of reducing complex pricing rules and simplihave enjoyed the beneits per-kilometer costs fying fare structures. Such transparencies have also led passengers to expect consisfits of a lower cost dropped even more sigtent and simple pricing rules. For example, Southwest Airlines, which pioneered the structure, in many cases nificantly by 35 percent low-cost carrier model, makes price, rule and availability 100 percent transparent to b e c a u s e t h e y d i d n ’t resulting in a 6.6 percent its passengers, who book flights on its Web site, leading other airlines to increase inherit costly labor conboost in profits to €64 transparency as well. tracts developed under million (US$82 million) a regulated environment in 2002. The airline where profits were virtually guaranteed or aggressively cut overall costs by 30 percent, Fortunately for network carriers, there the complex procedures and overhead from reducing labor costs by 33 percent and disare ways they can compete with the growing being a government-owned flag carrier. In tribution costs by 51 percent. The lower low-cost carrier segment and continue recovmany cases, the low-cost carriers have also cost structure enabled Aer Lingus to remove ering in improved economic times. Depending chosen to serve secondary cities and price restrictions on trans-A t l a n t i c on a carrier’s circumstances, there are three airports where it costs less to operate. f l i g h t s a n d reduce business fares by up to primary ways it can respond: With their much lower costs and presence 60 percent. The successful transformation Transform to a low-cost carrier, in lower served markets, they are growenabled Aer Lingus to start 28 new routes in Leverage network advantage, ing rapidly. two years. Start a low-cost carrier within a carrier. Because they offer such low fares, they In March 2002, America West Airlines Becoming a have made air travel feasible for a larger numintroduced a new pricing structure throughout Low-Cost Carrier ber of people, thereby helping stimulate trafits network that significantly reduced one-way Smaller carriers with high costs and without fic. Many of these carriers also have focused and unrestricted walk-up fares and eliminated the revenue advantage of major network on underserved markets, providing direct serthe traditional Saturday night stay requirecarriers are particularly susceptible to the vice to new destinations. ment. The new structure cut America West’s

28 ascend

industry unrestricted fares by 40 percent to 70 percent below those of other major carriers, according to the airline. America West, now the second-largest low-fare carrier in the United States, has improved its financial performance as a result of the transformation. In the nine full months following implementation of the new fare structure, the airline reported one of the largest domestic revenue per available seat mile increases among major airlines. “America West, like other low-fare carriers, continues to experience impressive yearover-year gains in market share,” said Scott Kirby, executive vice president, sales and marketing at America West announcing the 2002 results. “Our 26 percent increase in traffic is well in excess of the industry average and is driven by tremendous consumer response to our business-friendly fare structure.” In 2003, America West was one of the first airlines to return to profitability in the second and third quarters, and it reported a net income of US$57.4 million for the year. Operating costs for the year per available seat mile declined 2.5 percent despite an 8.5 percent increase in the average fuel price. And, for 2003, the company reported total cash and investments of US$629.5 million, the highest cash balance in the company’s history.

Exploit Network Advantage Most traditional network and flag carriers have an advantage over their low-cost counterparts because of their extensive network that serves a number of domestic and international destinations. By lowering costs in their domestic product, they can feed more passengers into their more profitable, longhaul operations.

T H E

U.S. Major Air Carriers Have Successfully Reduced Product Distribution Costs 18.2%

19.1% 18.0%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

0%

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17.0%

16.6%

Sabre Airline Solutions

16.0%

15.3%

11.9%

10.1%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Source: U.S. Department of Transportation Form 41

Liverpool/Manchester-Nice Schedule Passenger Traffic 180,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

160,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

140,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

120,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

100,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

80,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

60,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

0

easyJet British Airways other

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1996

1997

1998

1999

2000

2001

2002

Top: Direct distribution offers a way for airlines to dramatically reduce distribution costs. In the United States, major carriers have increasingly used their own Web sites as a way to significantly reduce distribution costs. In 2001, distribution costs shrank to just over 10 percent, down from more then 19 percent in 1993. Bottom: As easyJet showed on its Liverpool/Manchester to Nice routes, serving an underserved market with low costs proves beneficial. The carrier experienced eightfold growth on the route compared to incumbent carriers. Such a business model has led to the growth and profitability of low-cost carriers around the world.

L E V E L News Briefs from Around the Globe

Why Who

15.8%

14.2%

vıew

H I G H

18.2%

18%

the Control Center that manages these

To increase usability and help improve

systems, strengthening their codeshare

agent productivity. The enhancements

capabilities. The new GUI uses open-

What

include a major revamp of the graphi-

systems and Internet technology to

Released new enhancements

cal user interface to SabreSonic Res

simplify the reservations and check-in

for its reservations and

and SabreSonic Check-In. The com-

process, improve airline agent productivity

departure control systems.

pany also introduced an upgrade to

and enhance customer focus. a


industry

Transforming the Business Model Key areas to transform

Current Model

New Model

industry

Plan

Results (‘01 — ‘03)

· Reduce costs

· ASKs (6%)

€190 million

· 17% reduction Destinations

Highly dispersed

Focused

in ASK

· 2000 staff Frequency (scheduled)

reduction 33%

· Remove price

Fleet

Highly mixed types

Consolidate fleet to the extent possible

Hub vs point to point

No hub structure/ very poor flows

Leverage selected flows, and point to point

Charter vs Scheduled ops

Undefined mix

Differentiate scheduled and charter on frequency

Low yield

Medium and low yield

restrictions, load factor in trans-Atlantic flights >80%

· RPKs (7%) · Load factor (11 points)

· Average yield (-23%)

· Cost per RPK (35%)

· Profit (6.6%) €64 million

· 60% reduction business fare

· 28 new routes in two years

Market segments

· Direct distribution

reduced its distribution costs by US$217 million, or one-third of its total cost-reduction program. British Airways is pursuing an aggressive cost-reduction program seeking to simplify its operation and reduce its fares significantly, particularly on short-haul European routes. And Aer Lingus revamped its fleet moving to a single-type, the Airbus A320, and revised its route structure, adding 30 new routes. Airlines that are working toward transformation should focus on taking the full advantage of both cost and reach opportunities offered by direct distribution. In the United Kingdom, FlyBE, the nation’s third largest lowcost carrier, increased its direct distribution from 5 percent to 80 percent within one year by changing its distribution strategy to focus on direct distribution, including much greater use of its Web site.

The low-cost subsidiary should not be a standalone response. Throughout their operations, airlines must also aggressively reduce operating costs, pursue production efficiencies and seek to lower unit costs, which would enable them to reduce their fares. Although many industry analysts are skeptical about the prospects of low-cost subsidiaries, they may work provided they can achieve true cost advantages and not infringe on the parent airline’s network. Whether transforming to a low-fare airline, exploiting the advantage of an extensive network or forming a low-fare subsidiary, airlines are pursuing aggressive transformation programs and reinventing their business model.

Business Transformation As low-cost carriers continue to grow rapidly worldwide, they will increasingly put

pressure on network carriers’ fares and market share. The root cause of the traditional carriers’ disadvantage is not revenue but costs. The average revenue per available seat kilometer for major network carriers is 8.48 U.S. cents compared with 6.09 U.S. cents for low-cost carriers. But the cost per available seat kilometer for major network carriers is 8.4 U.S. cents versus only 4.5 U.S. cents for the low-cost segment. Despite higher revenue, the higher costs of network carriers results in razor-thin profit margins. Though established network and flag carriers have an advantage of longer stage lengths and larger aircraft, the production efficiency of low-cost carriers makes it difficult for them to compete in short-haul routes. And today, low-cost carriers in the United States are beginning to serve long-haul

Carrier Within a Carrier

To maintain that domestic feeder network, they need to lower their costs to be competitive on the short-haul routes. There are ways airlines can reduce costs other than by focusing on labor. The traditional carriers are subject to rigid labor contracts and larger overheads, but their response has been consistent: reduce costs and complexity as much as feasible and

T H E

reduce fares on short-haul routes. However, network carriers can also improve their competitiveness within the constraints of existing labor contracts by rationalizing their network, reducing the number of fleet types, improving the production planning processes and reducing distribution costs. Distribution offers tremendous savings for carriers. Since the mid ’90s, U.S.-based

vıew

H I G H

carriers significantly reduced their distribution costs by 10 percent and more in some instances. By investing in direct channels of distribution such as its Web site and revising its commissions, Delta Air Lines reduced its distribution costs by US$295 million, or nearly 45 percent of its US$652 million cost-reduction program. Similarly, Continental Airlines

Low cost

Majors

Characteristics · Point to point · Low fare · High asset utilization · Basic service · All private

Characteristics · Network (size/density) · Alliance member · Local and flow traffic · Full service · Some privatized

Sabre Airline Solutions has

Peer group

Peer group

FR, Ryanair U2, EasyJet TZ, ATA B6, JetBlue AK, AirAsia DJ, Virgin Blue WN, Southwest

AA, American UA, United LH, Lufthansa BA, British Airways JL, Japan Airlines SQ, Singapore CX, Cathay Pacific MU, China Eastern DL, Delta AF, Air France

L E V E L News Briefs from Around the Globe

Who

Why

WestJet

“Our primary goal in choosing a

“From the very beginning,

What

technology partner is to join forces

been concerned not only

Selected the Sabre Airlines Solutions

with an industry provider that is

with our current needs,

suite of resource management prod-

knowledgeable, flexible and adaptable

but how these resource

ucts to help the airline more effective-

and will align its solutions with

management technologies

ly manage its staffing levels at all its

our business goals,” said Dale

will fit with our future

airport locations.

Tinevez, WestJet director, airports.

expansion.” a

Percent of business travelers in premium cabins, four quarter moving average 50

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1995

1996

1997

1998

Long-haul

1999

Flight attendants productivity increase of 7% 1,200

1,194

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1,154 1,128 1,100

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1,000

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1,075

1998

1999

2000

2001

2000

2001

2002

Short-haul

Pilot productivity increase of 10% ASKs/Pilot

Right: Facing bankruptcy, Aer Lingus implemented a plan to transform into a low-cost carrier to compete with Ryanair. By reducing costs by 35 percent, the airline earned a €64 million (US$82 million) profit.

When bmi surveyed a competitive landscape with rising challengers such as Ryanair and easyJet, it realized it needed to take a radical step to compete. Its response was to form bmibaby, its low-fare subsidiary that took over the airline’s entire operations at its Nottingham East Midlands Airport home base. The lowcost subsidiary has helped its parent airline fend off the low-fare competition. Last year, bmibaby helped the parent group carry a record 9.4 million passengers. Other carriers — Delta with Song, United with Ted, Air Canada with Zip, Singapore with Tiger Airways and Qantas with Jetstar — have developed low-fare subsidiaries to maintain market share in the new price-driven environment.

ASKs/Flight Attendant

Above: Traditional airlines can become more competitive with their growing low-cost counterparts by transforming their business models. Although there is no single magic formula, there are some things traditional airlines can do in the areas of destinations served, schedule frequency, fleet consolidation and market segmentation to reinvent themselves to compete with the new breed of carriers and ensure longterm sustainability.

2,250

2,203

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2,138 2,030 1,941 1,950 -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------2,100

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1,800

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1,650

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1998

1999

2000

2001

Above: As low-cost airlines offer flexible business fares, they cut into a traditional market of mainline carriers — the business traveler. A typical European network carrier experienced a drop of more than 20 percent of business travelers in its premium cabins on short-haul flights from 1995 to 2002. Below: By using integrated production planning and management, AeroMexico has delivered significant benefits, including a 10 percent productivity improvement for pilots and 7 percent for flight attendants. Left: A peer-group analysis conducted by Sabre Airline Solutions Consulting identified certain traits of major carriers versus low-cost carriers.

ascend

31


industry

industry

2002 Average Operating Revenue Per Available Seat Kilometer (US$) 14.87 14.62 13.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.58 8.89

8.48

8.62 7.50

7.00

6.73

6.09

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.32

6.25

5.96

5.93

5.65 4.98

4.00

4.93

4.79

4.73

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

LH

JL

AF

BA

FR

U2

CX

DL

Low cost

AA

UA

DJ

MU

WN

SQ

B6

TZ

Majors

2002 Operating Cost Per Available Seat Kilometer (U.S. cents) 14.54 13.62 12.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.45 9.00

7.45 6.00

3.00

8.4 4.5

8.55

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.14

6.94

6.83 6.17

5.76

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.32

5.29

5.21

4.60

4.55

4.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

JL

LH

AF

BA

AA

UA

DL

U2

Low cost

FR

CX

TZ

MU

DJ

WN

SQ

B6

Majors

2002 Profit Per Available Seat Kilometer (U.S. cents) 24.48 23.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-1.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-4.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-7.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-10.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-13.00

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12.42

9.66

7.92

7.21

7.35

6.66

3.79

3.76

3.62

3.42

1.31

0.75

0.36 -5.92

-6.21

-11.84 -12.02

FR

LH

CX

B6

DJ

U2

SQ

WN

Low cost

MU

BA

AF

JL

TZ

DL

UA

AA

Majors

For major carriers, unprofitability is not because they are unable to generate revenue — in fact, the major air carriers earn an average of 2.39 U.S. cents more per available seat kilometer than low-cost carriers — but rather because they have higher costs. Major carriers average operating costs of 3.9 U.S. cents more than low-cost carriers. Because of the cost discrepancy, low-cost carriers average 6.99 U.S. cents more profit.

32 ascend

routes. Southwest, jetBlue, AirTran and America West now fly coast to coast, entering the customary turf of mainline carriers while maintaining significant cost advantages — jetBlue’s cost per available seat mile on its transcontinental flights is half that of traditional carriers. The biggest issue for major carriers is labor costs, exacerbated by complicated work rules designed to maximize the revenues for the workforce, including pilots, cabin crew, ground handling, technical and other aspects of an airline’s operation. The situation for major U.S.-based carriers is particularly difficult. If Southwest Airlines’ labor costs were similar to the five largest domestic airlines, its costs would have been US$1 billion greater in 2002, and it would have reported operating losses of almost US$600 million. Conversely, if the five major domestic airlines had Southwest’s labor costs, operating expenses would have been reduced by US$9.8 billion in 2002. Many airlines around the world are striving to transform their business quickly and efficiently. Unlike the many transformation programs of the ’90s, the conditions forcing business transformation are much more severe, and the realization has set in among board rooms and leadership teams that carriers must reinvent themselves to ensure longterm survival. The extreme circumstances are forcing airline management to challenge the status quo and accept changes that may have first seemed counter intuitive. To truly transform itself, an airline must focus on its competitive disadvantages and maximize its natural assets. If a carrier enjoys strong point-to-point tourist traffic and its home airport is strategically positioned for north/south and east/west connecting flows, it can take advantage of both these strengths. It could offer direct services for its prime tourist destinations through a low-fare or charter subsidiary as well as establish a hub operation for the main carrier for key business markets, avoiding the risk of the subsidiaries cannibalizing the main network operation. Levels of service also present an opportunity for transformation. Many carriers question whether they should provide full or nofrills service. For price-sensitive, short-haul routes where the carrier competes with lowcost airlines, certain amenities such as firstclass seating may not be as important to customers. On long-haul routes where the carrier is likely to compete with other established network carriers, such amenities become more

important; therefore, the carrier can provide low-fare service on short-haul routes to reduce its costs while continuing to provide higher levels of service on longer routes. The establishment of comprehensive, consistent and measurable transformation objectives defines the strategic intent of the leadership team for the carrier. Executives should seek to change those areas that are ineffective while maintaining those that are time tested and have evolved efficiently through the years. To avoid false starts, the airline should discuss its objectives with its stakeholders to ensure appropriate freedom of action, which will enable the leadership team to deliver the new business model. The next step in transformation involves strategic market analysis of routes and customer segments. Much of the growth from low-cost carriers comes through stimulating new demand and tapping underserved markets, so assessment of target markets must be much more holistic and strategic. Through a more open, innovative analysis of traditional marketing information data tapes data, a carrier can examine competitor activities and evaluate broader sources of data and information in order to create a more robust route network. Once the market analysis is complete, the airline’s network should be restructured. The carrier should focus its efforts on markets where it has a competitive advantage, which for most network carriers includes both domestic and regional markets. Long-haul routes must be analyzed carefully, and where possible, the carrier should take full advantage of codeshare agreements to help reduce operating costs. Revamping the current schedule will help quickly deliver business results.

T H E

Transformation objectives

Develop strategy markets, schedule fleet, fares

2

Commercial processes

3

Eight-Step Process to Transformation

8 Measure benefits, communications and mobilization

7

Strategy and process implementation

Measure organization changes

6

4

Operational processes

5

The Low-Cost Advantage Cost Per Available Seat Mile (U.S. cents) 17¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10¢

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

US Airways

Delta

American United Continential

Northwest

Alaska AirTran Southwest

Frontier

American West

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Spirit

ATA 400

600

800

1,000

jetBlue

1,200

1,400

Average Stage Length (miles) Top: Through a structured eight-step process, airlines can transform themselves to compete in an altered industry landscape. Bottom: With costs as much as twice as high as those of low-cost competition, major carriers will have to address the discrepancy by transforming their business models to be more in line with the marketplace.

Traditionally, fleet analysis follows network design; however, to reduce operating costs through fleet simplification, carriers should conduct network and fleet analysis at the same time. While this may result

vıew

H I G H

Solution envelope: strategic intent

1

in some trade offs by not having the optimum-sized aircraft for every market, reduction of the number of different fleet types will reduce staff training and maintenance costs.

L E V E L News Briefs from Around the Globe

Who

Why

Alitalia Linee Aeree Italiane SPA

“We needed to get this capability in

this done. In addition, their

What

place quickly,” said Gianni Matassa,

end-to-end offering of technology

director of pricing, revenue manage-

for airline operations ensures

fares management system to help

ment systems and operations for

that we can have a truly

maximize its revenues through

Alitalia. “Our previous experience

integrated solution — boosting

the tactical and strategic analysis

with Sabre Airline Solutions proved

operational productivity and our

and management of fares.

that they had the experience and

bottom line.” a

Selected the Sabre AirPrice ®

the right technology to get


industry

industry

inate restrictions. Given that even business travelers are shying away from paying high, last-minute walk-up fares, the focus of revenue management should shift from “revenue protection,” where seats are held for last-minute travelers,

resource management and maintenance planning, work closely together to optimize and reduce production costs. Developing such a “can-do,” team-oriented structure drives higher levels of performance than traditional

Emre Serpen is a partner with Sabre Airline Solutions Consulting. He can be contacted at emre.serpen@sabre.com.

hightech News on New and Improved Products and Services from Sabre Airline Solutions product

benefits

Version 3.0 of the Sabre ® LiteVision ® personalized MIDT system

The LiteVision system enables airlines to

description

and maximize market potential.

The LiteVision system helps smaller airlines obtain market information data tapes data necessary for making informed decisions. Utilizing the system, airlines can extract valuable decision-support information from all major global distribution systems’ booking transactions.

minimize data expense, view competitor information, increase revenue and share,

features Enhanced reporting — Airline analysts now have access to six base reports including yearover-year and yield class by competitor. More flexibility — Airlines now have the choice of selecting 50

markets or going with the traditional top market analysis. Increased market analysis — The new version doubles the number of markets available for analysis to 50 at no additional charge. Comprehensive data — Analysts can use the system to study markets based on system-wide or regional bookings. Increased booking share — The LiteVision system can increase booking share on specific markets by 7 percent or more. a

Self Serve: Airlines Increasingly Employ Customer-Enabling Tools As customers come to expect, and demand, self-service check-in tools, airlines can also use them to reduce costs and explore new revenue opportunities. By Mark Canton | Ascend Contributor

T

oday’s travelers demand service tailored to meet their individual needs. They are comfortable with new technology and expect airlines to embrace new and exciting tools to improve customer service and enhance their travel experience. At the same time, airlines are continually striving to reduce the cost of processing passengers and providing increased levels of customer service. As traffic recovers, airlines will want to maximize their resources and provide high levels of service to the additional passengers without substantially increasing staff levels. Airlines are embracing a strong trend toward self-service to accomplish these seemingly contradictory objectives. Self-service technologies have been readily adopted in other consumer arenas — such as banks with automatic teller machines and Internet banking, and grocery stores providing selfservice check out. Airlines are no different, leveraging this Above: Web check-in tools can provide automation to perform an easy-to-use process for quick check in. key functions such as Above right: Self-serve kiosks are travel planning, flight popular because they reduce time reservations and, now, travelers spend waiting in lines. flight check in.

Moving to Automation The trend to deploy self-service technology has rapidly accelerated since the late 1990s. Most major U.S.- and European-based airlines have installed self-service check-in kiosks at

their airports, with some already planning deployment of a second generation of hardware and software. The trend is just now starting to spread to Asia where the major carriers are beginning to deploy kiosks and other self-service technology. However, for those airlines where selfservice is available and aggressively marketed, acceptance has increased among both busi-

Photo by Mark Canton

As part of the transformation, the carrito “asset sweat,” where airlines sell seats for methods. With this approach, AeroMexico has er must also evaluate its processes. If they are as much as possible until the plane is full. delivered significant benefits, including approxitoo analytical and purely driven by traditional Integrated production planning and mately 10 percent productivity improvements quality of service index techniques, changes management offer significant opportunities for in crew, maintenance and fleet utilization. must be made throughout the organization to cost reduction. Cross-functional commercial Transforming the business model by ensure marketing innovation becomes an inteand operational teams, including staff from becoming a low-fare carrier, leveraging netgral part of the evaluation and overall decisionshort-term scheduling, operations planning, work advantage or introducing a low-cost making process. Some airlines subsidiary creates significant have appointed chief marketing benefits that can help traditional The Efficiency Advantage officers to gain a more innovative network carriers grab and mainand holistic approach to market, tain market share that may othPassenger Percent network and fleet analysis to erwise be captured by low-cost per Employee Ryanair rapidly transform these parts of counterparts. As more and more Low Ryanair 9,492 the business. major network carriers revamp Med easyJet/GO 5,500 + 73% In pricing and revenue their business model to adapt to Air Berlin 4,200 + 126% management, competitor fares a changed environment and Deutsche BA 3,600 + 163% are essential in defining pricing meet the demands of today’s Germanwings 1,000 + 850% strategies in key markets and travelers, the gap between carriHigh Lufthansa 1,150 + 725% determining where fares must er types will decrease, service Alitalia 1,096 + 766% Iberia 996 + 853% be reduced to retain market levels will become a key differBritish Airways 620 + 1,430% share. Because passengers have entiator between airlines, and come to expect low fares that network carriers will have as Because low-cost carriers such as Ryanair operate more efficiently, are consistent and simplistic, the many opportunities for growth as shown by the number of passengers boarded per employee, general trend is to reduce the and profitability as those currently they have a significant advantage on short-haul routes. number of fare classes and elimenjoying them. a

ness and leisure travelers. Internet check in has experienced the most dramatic usage growth, increasing by more than 400 percent from 2002 to 2003 among both business and leisure travelers. Use of self-service kiosks also continues to rise, increasing 20 percent from 2002 to 2003. Those most likely to use kiosks or the Internet for check in are the experienced, frequent travelers. These passengers appreciate the convenience of self service and are more likely to repay the airline for that convenience with repeat business.

ascend

35


industry

25%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

0%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Kiosk

2003

Kiosk/Web Usage Growth Business Travelers Percentage of Use

Percentage of Use

Kiosk/Web Usage Growth Leisure Travelers

industry

Internet

25%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

0%

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Kiosk

2002

2003

Source: Forrester’s Consumer Technographics North American Survey

Internet

2002

Source: Forrester’s Consumer Technographics North American Survey

More travelers, business and leisure, are using kiosks and the Internet to check in for flights. Among leisure travelers, kiosk use has increased almost 10 percent from 2002 to 2003, and use of the Internet for check in climbed more than 15 percent. Among business travelers, kiosk use increased about 5 percent and Internet check in rose more than 20 percent during the same time period.

The Importance of Self-Service Technology The deployment of self-service technology has become an important strategy for most airlines. Kiosks and Internet check in are only part of the overall strategy. Self service can actually lead to a complete overhaul of the day-of-departure process as airlines seek to improve efficiencies, reduce costs and retain customers. In general, the business benefits of self service can be separated into three categories: Customer service improvements such as reducing check-in lines, improving handling of irregular operations and automating service recovery processes. Cost savings including reducing staff required to handle irregular operations and reducing the requirement for airport space.

hightech News on New and Improved Products and Services from Sabre Airline Solutions product

loaded and available space within each

Sabre ® AirServ ® Galley Manager

galley and position. The Galley Manager

description

service planners by providing easy-to-use

The Galley Manager for airline galley

loading the galleys and reporting to field

provisioning planning is the latest enhance-

locations via the Web.

ment to the Sabre ® AirServ ® aircraft provisioning suite. The Galley Manager offers a graphical user interface enabling airline inflight service planning departments to allocate aircraft provisioning based on volume and weight constraints of aircraft galleys. The first phase of this application was released in January, and additional operational functionality will continue to be added in phases throughout the year.

benefits The Galley Manager enables airlines to plan the loading of the aircraft galleys with automatic monitoring of the weight being

creates significant efficiencies for airline tools for creation of the aircraft overview,

features Usability — Offers intuitive user interfaces that model many of the current manual business processes in place today. Combined with features such as “drag-and-drop” placement, automatic weight capacity monitoring, space availability and rich graphical capability, these tools make the task of loading the various services easy to manage. Illustration — Provides tools that enable the drawing or importation of aircraft overviews. Users can assemble galleys from a pre-defined set of stencils and customize the galley appearance of each fleet and sub-fleet type. Users of

the Galley Manager can associate the physical tail numbers of each aircraft to the appropriate overview. Performance — Provides users with the ability to manage large volumes of data quickly. The quick desktop performance enables products to be moved efficiently around an aircraft and within a galley. Web-based reporting — Provides authorized personnel with access to reports via the Web with no proprietary client software required, always giving users access to the latest version of the product. Graphical navigation — Utilizes graphical navigation such as form-based screens for all entries, drop-down lists and buttons, and on-screen help to efficiently set up loading plans with increased accuracy. These user interfaces enable planners to be quickly trained, freeing them to utilize system functionality that previously had been manually cumbersome to create and maintain. a

Revenue opportunities such as selling upgrades during check in, collecting applicable fees and selling additional amenities. One of the key benefits realized through the implementation of self service is the equitable and uniform application of airline policies, ensuring that all users adhere to airline and security procedures during check in. Adding to that benefit is the reduction in overall time spent by passengers at airports waiting to check in, allowing for a more secure process and more satisfied customers.

The New Generation of Self Service Hardware, software and communications infrastructure are key technological components that must be carefully considered when developing a self-service strategy. The first generation of self-service kiosks provided hardware features similar to those found in the second generation of devices: a colorful touch-screen interface, credit card readers, printers for boarding passes and bag tags. The second generation of kiosk devices — such as those available through the Sabre ® Aerodynamic Traveler ™ passenger processing solutions — are providing additional capability, including passport readers, biometric interfaces and access to different systems such as those for customer relationship management and frequent flyer data. Much of the increased functionality in this new generation of kiosks can be attributed to the use of a “thin-client architecture” software distribution methodology. Instead of loading all of the check-in and host interface application software on each device, the software runs in a central environment and is accessed via a Web browser application installed on each device. This methodology simplifies the software update process, improves overall control of the kiosk units and enables the reuse of check-in applications in a variety of environments such as kiosk, Web or mobile devices. In fact, recently introduced commonuse self-service, or CUSS, standards require the deployment of thin-client applications for use on common-use kiosks. These

Benefits of Self-Service Technology Customer service improvements

Cost savings

Revenue opportunities

Reduced queuing time at check in

Reduction in the number of staff needed to handle a given number of customers

Possibility to sell upgrades at check in

Improved consistency in applying airline policies and following procedures

Reduction in staff required to handle irregular operations

Enforcement of booking conditions and collection of required applicable fees

Improved handling of irregular operations

Faster passenger throughput in airport terminals

Capability to sell add-ons, such as standby fees, meal/beverage coupons

Automated service recovery processes according to airline policy

Reduced requirement for airport space

Release of terminal space for more profitable use, i.e. retail or catering

Source: Giga Research

In addition to being popular among travelers and a way to differentiate an airline from its competition, the use of self-serve technologies, such as kiosks and Internet-based check in, offer opportunities to improve customer service, achieve cost-savings and provide potential revenue opportunities.

International Air Transport Association standards enable the sharing of kiosk devices by airlines at a given airport, much as workstations, printers and gate readers are shared today at SITA and ARINC shared-system airports. This will help eliminate the capital cost outlay for kiosk units and communications for airlines, improve space utilization, and provide an additional source of revenue for airport authorities. Today, there are only a handful of CUSS airports — Las Vegas McCarran International Airport, Aéroport Nice Côte D’Azur and Vancouver International Airport. However, this number is expected to increase dramatically as airports strive to regain lost space and look for ways to increase revenue opportunities.

being pursued diligently as airlines seek to improve service and cut costs. In addition, the introduction of newer technology such as mobile phones, personal digital assistants and improved wireless communications at airports will open the door for even more self-service opportunities. These new devices are now able to leverage the same thin-client architecture to perform airline functions, and it’s just a matter of time before airlines begin to deploy these new customer service tools. Security concerns may have an adverse impact on the adoption of new technologies for check in. But industry sources expect these issues to be addressed in time and the expansion of self service to continue within the travel industry. a

Future Expectations Industry analysts project that in three to five years, 80 percent of all airlines’ check-in transactions worldwide will be self service. That is a monumental goal to achieve, but one that is

Mark Canton is senior manager of airport products. He can be contacted at mark.canton@sabre.com

+count it up 1,312

Length in feet of the world’s shortest international airport runway — located at the Juancho Yrausquin Airport in

Saba, Dutch West Indies, which is surrounded by 130-foot cliffs.


industry

industry

As the low-cost carrier segment continues to grow, it also continues to fragment as new entrants move away from the traditional model, adding new features and customer amenities. By B. Scott Hunt | Ascend Editor

F

irst-class cabins. Assigned seating. Trans-continental flights. Growing hubs. In-flight entertainment. Gourmet incabin catering services. International destinations. Mixed fleets. If this sounds like a list of characteristics that distinguishes the full-service traditional network carrier from its low-cost competition, think again. More and more low-cost carriers — once also called “no frills” airlines — are now adding such features and have, in some cases, led the way in offering additional customer amenities. Many industry observers believe the low-cost carrier segment is transforming the aviation industry and will determine how — and how quickly — it recovers from the most challenging period in its history. The low-cost segment, however, is currently undergoing significant changes itself, and the proliferation of carriers and variations on the proven lowcost model will undoubtedly affect how the industry will look in the future.

are among the most prominent. And their growth and, in many cases, ability to maintain profitability during difficult circumstances has caused the industry to reexamine the way it operates. According to industry observers, low-cost carriers have captured about 25 percent of the U.S. market, 15 percent of the intra-European market, and 30 percent of the Canadian and Australian markets. But, in the last few years, new entrants in the low-cost arena have also begun to deviate from the Southwest approach. Many

is nothing sacred about “ There what Southwest does. I really doubt that in coming up with their business plan that God gave it to them on Mount Sinai and wrote it in stone. It could be deviated from.

The Origins In the past few years, carriers in the low-cost segment have begun to deviate from the “pure” LCC model first developed by Southwest Airlines. Southwest has grown to become the sixth largest U.S. carrier — the second largest in terms of domestic traffic — and has maintained profitability for 31 consecutive years by staying true to its formula: mostly short-haul, point-to-point service from secondary airports with a single fleet type; no assigned seating; no in-cabin meals; and onboard entertainment that consists of joketelling flight attendants and an in-flight magazine. The model’s success spawned a legion of like-minded carriers around the globe: Ryanair and easyJet in Europe, Virgin Blue in Australia, Gol in Brazil and WestJet in Canada

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low-cost carriers had already broken ranks to some degree by offering assigned seating or flying to major airports. But the low-cost segment’s “shot heard round the world” likely came in 2000, when start-up carrier jetBlue launched with free live television in every seat. From there, the fragmenting of the LCC model has accelerated rapidly. Frontier Airlines added live TV to its A319 aircraft. AirTran, already featuring a business-class cabin, recently announced it will provide free XM Satellite Radio for its passengers. And jetBlue has further pushed the envelope by adding XM Satellite as well as additional TV channels featuring 20th Century Fox movies, television shows, sports and news programming. The airline is expected to charge about

US$3 per movie, enough for the service to break even. New York-based jetBlue also sent ripples through the industry last June when it ordered 100 Embraer 190 regional jets with options for an additional 100, breaking from the nearly sacrosanct single-fleet-type principle. This year, AirTran also will begin taking deliveries of Boeing 737-700s, complementing its all-Boeing 717 fleet. Now, even Southwest has said publicly that it is looking at possibly adding new fleet types and in-flight entertainment systems. What in the name of Herb Kelleher is going on here? “What you are seeing is an evolution,” said Henry Harteveldt, vice president of travel research, with Forrester Research. “It’s kind of like the evolution we saw in the auto industry where a budget car manufacturer like Honda has increasingly upgauged the quality of its products. Airlines are recognizing that you have to do something in today’s marketplace. The customer will find a better mousetrap elsewhere and will go away.”

Making a Difference Darryl Jenkins, a professor at Embry-Riddle Aeronautical University in Dayton, Florida, said the changes in the low-cost sector are not surprising and are positive for the industry. “There is nothing sacred about what Southwest does,” he said. “I really doubt that in coming up with their business plan that God gave it to them on Mount Sinai and wrote it in stone. It could be deviated from. “Product differentiation is good,” he said. “What made Southwest successful is they had a good idea, which they never deviated from. It is good, but not perfect. Southwest is having its own evolution right now. We see

Added Amenities, Added Cost? Despite adding new features, LCCs still manage to keep costs well under control in order to continue capitalizing on their core advantage — low fares. “I think it is important to note what these airlines are offering and what they are not offering,” Harteveldt said. “It is really putting the emphasis on what the customer wants. And it is also the type of product that does not require a lot of labor. They are amenities that are incredibly extendable. Once you put it in, there is no variable cost. So they scale at almost zero. Once you put live TV in the plane, it’s there. It’s not like the flight attendant has to go and change the channel or has to change tapes in a video entertainment center. Photo courtesy of Southwest Airlines

The Revolution’s Here

them for the first time attacking someone’s hub in Philadelphia. I think jetBlue’s plan is good, but I doubt it is the last one. I see other people doing things that are just as exciting.” The need to differentiate their product is driving airlines to alter the LCC model, Harteveldt said. “It’s just like in retailing,” he said. “You have to figure out what can make you different. If you can’t compete on price, do you try to go for location? Do you try to go for product? “The (major) airlines, by failing to really stand for anything in terms of their product or serving a particular customer, have only undermined their ability to compete effectively against the low-cost carriers,” Harteveldt said. “If United, American, US Airways, Continental, Northwest or Alaska had really focused on serving a type of customer rather than trying to cover the earth with their service, then perhaps they would have found that people will be more loyal and would pay a premium.” The new carriers, Jenkins said, have a different mindset when it comes to making their product stand out. “Major carriers differentiated themselves by their networks,” he said. “United’s network dominated in the Orient. American’s network dominated in Latin America. The new guys define their product differently. They define their product as the service you get while you are on the plane. That is a new idea in the airline industry. Before, service was always considered your network.” With that new mindset, then, the new breed of carriers are looking for ways to differentiate themselves by providing the kind of onboard “service” that resonates with their customers. “I think an airline has to really understand who its core customer is,” said Harteveldt. “Instead of ‘We serve people in Chicago who want to go to these places.’ It has to be more demographic and psychographic — ‘We want to serve people who have income levels of ‘X’ dollars. They take ‘X’ flights per year.’ There are some people out there for whom price is extremely important and always will be. There is no getting around that. You have to ask yourself, as a businessperson, do I want to make those people the focus of my business, or do I want to focus on the people who are going to pay me what I need to be paid, but I am going to give them an experience in return that justifies that ticket price?”

As the low-cost segment continues to develop, more low-cost airlines are beginning to deviate from the “pure” low-cost model first pioneered by Southwest Airlines.

“What the low-cost airlines are doing is putting in amenities that people appreciate and help create loyalty, but do not require human delivery,” he said. Although the added amenities are not driving huge costs, low-cost carriers still face the prospect of rising overhead. In many cases, the low-cost carriers have enjoyed a “maintenance holiday” by flying brand-new aircraft, an advantage that will decline as the fleets age. They also have the benefit of labor pay rates that are significantly lower than the traditional carriers. As the start-up carriers mature, that will also put pressure on labor costs. Southwest flight attendants, for example, recently picketed the airline during contract negotiations as they sought additional benefits.

“Over time, their costs will rise; there’s no doubt about that,” Jenkins said. But because they focus on costs rather than revenue, analysts said, they will continue to maintain an advantage. “The advantage the low-cost guys have is that they concentrate only on having low costs,” Jenkins said. “Their low costs translate into low fares, which will bring in the revenue. The major carriers for years have concentrated on revenue, and that (chasing additional revenue) made them high cost.”

The Future The evolution of the low-cost carrier segment is far from over. Already this year, ATA has announced it is adding a business class and company officials have said publicly that it “makes sense” for a low-cost carrier to offer international service, currently one of the last domains of the traditional airlines. Spirit Airlines has already won governmental approval to fly from the United States to 11 countries throughout North America and the Caribbean. And a new low-cost startup, RivieraJet, announced it plans to operate on trans-Atlantic routes. And those are only the plans that have been announced. “Since 9/11, I have had over 150 different groups approach me with ideas for new airlines,” Jenkins said. “About 100 of these people, I talked them out of doing it. The 50 remaining, 30 will not be discouraged, but I don’t think their plans will survive. The other 20, I consider good. Of that, half will get funded. So, there will be a lot of new airlines in the next three or four years.” With the addition of new carriers, and with the cost-cutting traditional carriers in a better position to fight back, competition will intensify in the next few years, Jenkins predicted. But if the major carriers do not respond effectively, they could be facing an uphill battle, Harteveldt said. “The fact that they are unwilling to invest in these customer-appreciated and customer-valued products only makes it that much easier for the low-cost carriers to cherry pick more and more people away from the network airlines,” he said. “Pretty soon, network airlines will be left only with either the most mileage-addicted customers or bottom-feeders who are just buying strictly on price.” a

B. Scott Hunt can be contacted at scott.hunt@sabre.com.

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On the Route to

industry

RECOVERY A CONVERSATION WITH … JAMES HOGAN, PRESIDENT AND CEO, GULF AIR

Photo courtesy of Gulf Air

W

hen the board of Gulf Air met at the end of 2002, after facing more than a year of crisis,

conflict and economic chaos, it stood at a crossroads. But rather than throwing up their hands in the face of daunting challenges, board members took the bold step to launch an ambitious threeyear strategic recovery plan. The plan, named Project Falcon after the carrier’s emblem, represents a plan that will “restore Gulf Air to its position as one of the world’s leading airlines,” according to the official announcement of the project.

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industry

industry

Under the leadership of James Hogan, chief executive officer of Gulf Air, the airline has embarked on an ambitious three-year recovery plan — Project Falcon — designed to maintain the airline’s position as a world-class carrier in the Middle East region. The plan includes brand development, fleet reconstruction, network restructuring, alliance membership and enhanced customer service.

At the time the Project Falcon plan was approved, Gulf Air President and Chief Executive James Hogan said it was “one of the most comprehensive and important documents the airline has ever compiled.” The pillars of the recovery plan include brand development, fleet reconstruction, network restructuring, alliance membership and enhanced customer service. The plan also contains a strong focus on profitability and improving cost structures. As part of the plan, the airline’s owners — the nations of Abu Dhabi, Bahrain and Oman — injected BD90 million (US$238 million) into the airline, reaffirming their commitment to Gulf Air as their national carrier.

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In the first year of the plan, Gulf Air, founded in 1950, established its new corporate identity; launched Gulf Traveller, an all-economy, full-service subsidiary; and introduced a five-star chef service in its first-class cabin as well as the Gulf Air Sky Nanny, a professional childcare service on long-haul flights. It also introduced self-service check-in kiosks and service to several new destinations, which required it to expand its fleet by leasing six aircraft. And in this, the second year of the plan, Gulf Air, which serves more than 45 cities in 34 countries and is considered the only true pan-Gulf carrier, expects to break even financially.

Hogan recently discussed Project Falcon, the changes it has brought and the prospects for the future. Question: You’re half way through your three-year recovery plan. Are you on track with where you expected to be at this point? Answer: In terms of the three-year plan, we undertook to reduce the losses to BD20 million (US$53 million) by the end of 2003, breaking even in 2004 and returning to profitability in 2005. The first year of the program has been one of unprecedented change and innovation at Gulf Air, resulting in a strengthened financial position and much higher market visibility. We have met our financial target for the first year, achieving a 50 percent decrease in our losses from BD40.6 million (US$108 million) in 2002, and our balance sheet is much more robust. However, more importantly, we have done everything we said we would, astounding even the greatest skeptics, who believed we would not be able to achieve even half of what we set out to achieve. In a challenging year, affected by regional tensions, the war in Iraq and the damaging severe acute respiratory syndrome, a year in which most airlines have been downsizing and cutting capacity, we have achieved positive growth with record passenger figures. Q: Had you not implemented this plan, where would Gulf Air be today? A: In May 2002, when the board approved a further capital injection and initiated the process to formulate and implement a restructuring strategy, the airline was all but written off. The bold scope and nature of the measures we have implemented during 2003 have contributed to our continued existence and improved position. The cumulative effects of the growing and increasingly competitive market in which we operate regionally and the general state of the global airline industry would undoubtedly have spelt a death knell for Gulf Air as it was at the beginning of 2002. Q: Why was it necessary to have a recovery plan that takes three years? A: Although we have managed to achieve a great deal in one year, there is obviously still work to be done in our aim to be a world-class airline and achieve profitability. Experience has shown that real change is not an overnight process. If it is to be more than cosmetic (on the surface), it has to occur at every level within the organization, and this is a slower, sometimes painful process.

Photo courtesy of Gulf Air

Photo courtesy of Gulf Air

As part of the airline’s efforts to develop its brand in conjunction with Project Falcon, Gulf Air recently unveiled a new livery for its four types of passenger aircraft: A340-300, A320-200, A330-200 and the 767-300E. The airline serves more than 60 destinations around the world.

We have implemented stricter fiscal discipline and procedures to regulate corporate governance alongside more efficient business processes, and product and service innovations geared at serving our customers better. The three-year plan is evidence of a commitment that goes beyond a quick fix that would not be sustainable in the future. That is why we have invested significant amounts in the numerous and diverse initiatives, including the new livery, the rebranding process, the worldwide contact center, the new lounge, a state-of-the-art information technology infrastructure, improved training programs, and product and service enhancements. These will ensure

T H E

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H I G H

Who

the long-term, enduring success of the change. Q: What are the goals of Project Falcon? How will you measure the success of the program? A: The stated aim of Project Falcon is to turn Gulf Air into a world-class airline that operates on a commercially successful basis. The success of the strategy to date can be measured in our stronger financial position and increased market visibility. We have surprised the industry and the market by the speed and scope of change in the first year. We have met all our objectives and delivered on all the elements of the plan we undertook to implement in 2003.

However, I believe the numbers speak for themselves. The losses are down by 50 percent, in line with our first year’s target. The success of this customer-centric strategy is evident in increased customer confidence and higher passenger numbers. In 2003, we achieved record passenger numbers and, in August, record figures for the 53 years of operation. Q: What have been the greatest challenges and the biggest successes of the plan? A: On its own, the process of turning an airline is a significant challenge, but it should be seen against the global context of the present airline and aviation industry, which since Sept. 11, 2001, has faced problems of its own, including a nervous and depressed travel market, heightened security, regional tensions and conflict, and also SARS. The ever-changing and dynamic market demands corporate flexibility and the ability to respond intuitively as changes occur. This can only be achieved from a position of fiscal strength and product confidence. The challenge of Project Falcon is to achieve this flexibility and freedom. Another challenge we face is marketing the region in which we operate. While the region has cultural richness, natural beauty and, most importantly, unique Arabian hospitality, these assets are largely unknown in the rest of the world and are more often than not obscured in the mass of negative publicity on the regional tensions. It is part of our challenge to dispel these incorrectly held perceptions and market this region, specifically our owner states. The greatest success of the plan to date has been the return of our customers, who are central to our business.

L E V E L News Briefs from Around the Globe optimization costs," said Alain Bergeron,

FliteTrac system. These products

flight control director at Bangkok

Bangkok Airways

will be integrated with the Sabre

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AirOps Load Manager, which

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Bangkok Airways implemented

this latest Sabre Airline Solutions

at the beginning of 2003.

product suite, we are once again able

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industry The renewed customer confidence and record passenger numbers in a difficult travel and tourism market demonstrate that our efforts to address customer requirements are being recognized and experienced. Q: How much does Project Falcon rely on enabling technology to aid your recovery? A: Technology plays a vital role in facilitating our customer-centric vision. We have a strong, visionary IT team, which is supported by global technology partners and some of the finest software and hardware available in the market. The past year has seen our suite of electronic products and services enhanced by the introduction of the region’s first electronic check-in kiosks at the airports in Bahrain, Abu Dhabi, Dubai and Oman. Other innovative services we have recently added include worldwide traveler notification via short message service and the downloadable electronic timetable. Technological innovation reached its highpoint in September when the region’s first worldwide customer contact center was opened in Oman. Endorsing our commitment to employing and empowering owner-state nationals, the staff hired to implement the first stage of the contact center are all Omani citizens. When it is fully operational, the center will employ about 300 people. Q: How has Project Falcon positioned you to take advantage of the emerging industry recovery? A: We are better equipped in every way to move forward into the next phase of our strategy and the prevailing market. We are energetic and bold, and coupled with our strengthened financial position and committed staff,

T H E

we are positioned to take advantage of the improving marketplace. Q: How does your recovery plan help differentiate you from your competition? A: Project Falcon made provisions for a rebranding program designed to create a unique niche for us. Implemented in April 2003, the redefined brand is based on Arabian hospitality and values, and in moving forward, it is our aim to differentiate ourselves from our competitors by building on our strong cultural, geographic and historic links with the region. The plan will also ensure that we strengthen and consolidate our position as a strong regional player. Q: You announced that you planned to lease several aircraft as part of Project Falcon. Will leasing as opposed to buying aircraft play a bigger role in your recovery? A: Not necessarily. Fleet and network expansion are linked to the requirements of our customers, and in meeting these needs, we will do whatever is commercially beneficial and viable for the airline. Until we conclude our aircraft evaluation, aircraft leasing will meet our incremental capacity requirements. Q: How do innovative steps such as launching Sky Nanny and Gulf Traveller fit into the recovery plan? A: They are indicative of two things. In the first instance, they represent the spirit of innovation in the airline, but more importantly they demonstrate our commitment to our customers. The various product and service innovations are designed to surprise and delight our diverse customers and to create a memorable travel experience while meeting the dif-

vıew

H I G H

products ferentiated needs of the multi-segmented market in which we operate. Q: Does Project Falcon position you for the long term, or do you envision a need to reevaluate and develop a new plan at the project’s conclusion? A: Change is a continuous process, and it would be naïve at the end of three years to believe that we “have arrived.” While the three-year plan was designed to attain very specific goals, we will continuously evaluate our strategy and evolve in response to the current requirements of the market and its various segments and customers to remain relevant. In short, Project Falcon is updated on a regular basis to ensure that we always have a three-year plan. Q: How does Project Falcon prepare you for unforeseen industry challenges? A: By creating flexibility and freedom, through good corporate governance, strict fiscal disciplines and streamlined business processes, we can respond more effectively to the dynamics of the market and to any unforeseen industry or global challenges. Q: How has Project Falcon positioned you to succeed in the future? A: The progress of change and the visible results have inspired people and given them confidence in our ability to win. This confidence and belief will be vital ingredients in our future success. Q: How will the airline of five years from now differ from the airline today? A: Gulf Air will be a commercially successful, world-class airline providing service that is based on the values of Arabian hospitality. a

L E V E L News Briefs from Around the Globe

Who

airline to react quickly to situations

scenarios,” said Knok Abhiradee,

Thai Airways International

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president of Thai Airways. “With

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planning through day-of-operations

is able to support decision-making

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benefit the crew through better pairing and supporting work preferences.” a

Getting Fit for Recovery Leading optimization tools help several transportation companies get in shape for the industry’s upswing. By Jim Haley and Brad Laser | Ascend Contributors

I

n the past few years, a combination of growing the number of employees. With defiworld events that no one could ever prenite signs of recovery occurring in the latter dict undoubtedly caught the transportahalf of 2003, the focus for this year is to get fit. tion industry off guard, resulting in the eliminaShaping Up tion of thousands of jobs worldwide. How does a company begin to get fit as it During such difficult times, transportarelates to planning headcount at an airport tion companies that utilized nimble staff operation? The answer is pure and simple: go management tools had a competitive advanback to the basics and look for refinement. tage by helping them adjust staffing levels and The heart of resource management planning is optimizing remaining personnel. Such tools the source data — input rules, guidelines and are not only beneficial under these extreme standards — used conditions but can to drive work requirealso prove advantaHow does a company begin to ments. The ultimate geous when coping get fit as it relates to planning goal is developing with the cyclical ups and maintaining engiand downs of the headcount at an airport operation? neered labor standards industry as well as The answer is pure and simple: that are as close to shifting circumstances. go back to the basics … real life as possible. Changes to comThe Sabre ® pany rules, government ™ StaffPlan staff forepolicy mandates and casting and planning system and optimization competitive pressure happen frequently, and modules from the Sabre ® AirCrews ™ Crew many times abruptly. Typically, there is little or Management suite can provide the informano time to evaluate the current situation tion necessary to develop the optimal because it’s always a constantly moving tarresource management plan. The magnitude of get. Although speed and accuracy is always improvement will vary depending on where a important to long-range planning, it has company is on a planning continuum. become even more crucial to have this capaNear one end of the continuum are bility. Immediate identification of staffing inefcompanies taking a minimalist approach to ficiencies is required to stay a step ahead. planning. They have not developed standards Many transportation companies have had to based on time and motion studies, and experifight during the last few years to keep their ence is the main guideline for future planning. heads above water. Long-range planning was Therefore, they are only able to utilize the pushed aside to focus on remaining solvent basic features of the StaffPlan system. The for the next month. first step to getting fit is to begin observing the For companies that weathered the operation. Once there is an understanding of storm and are “right sized” for the new the operation and determination of the best economy of 2004, the focus has begun to methods, then the company should conduct shift. There are numerous indicators that, at studies to observe and time required tasks. worst, the economy has stabilized, and there’s This is not just a one-time event. Whenever even talk about a true recovery. Transportation observations are taken, it is a snapshot companies are wisely recognizing how to of what happened at a certain time, day and grow their businesses without significantly

location with certain employees. When significant changes to the method, flight schedule or other factors arise, it is time to conduct a new study. Maximizing the financial benefits of the StaffPlan system requires a committed budget for future studies. The U.S. Transportation Security Administration falls in this section of the continuum. Essentially created from scratch in the aftermath of the events of Sept. 11, 2001, the TSA quickly hired employees with little strategic planning of resources. The initial goal was simply to have all U.S. airports secure. As costs continued to rise, the funding of this department became a key congressional concern. In late 2002, the TSA selected resource management systems from Sabre Airline Solutions and installed them at the 159 TSA hub airports to optimize a workforce of more than 50,000. The StaffPlan system has assisted in determining the correct allocation and requirements at the airport level, resulting in impressive savings. The impact has reportedly been a 12 percent reduction in labor costs, saving the government and U.S. taxpayers more than US$200 million annually. Today, the TSA is actively engaged in conducting time studies throughout major U.S. airports to further reduce costs. Companies on the other end of the spectrum typically have a staff of industrial engineers who understand the need for updated standards via work sampling techniques and have conducted such studies in the past. They are likely applying their work standards to the various models available in the StaffPlan system. However, with all the changes during the past three years, those standards may need to be updated. Major changes affecting the aviation industry have resulted in the need for new studies: Flight schedule retiming/restructuring — This can range from a changing mix of

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products domestic versus international flights to timing of peak activity at a hub operation or changing aircraft types. There may also be new opportunities for handling other carriers during certain times of the day when significant downtime exists. Companies taking advantage of this situation are cashing in on a classic method of increasing revenue with no additional costs. Company policies — If for no other reason than government-mandated changes in security policies, airlines have been forced to change to their own rules. For example, passengers cannot expect to arrive 10 minutes prior to departure at most large airports and still make the flight. In fact, those having checked luggage may be hard pressed to make an international flight if they arrive less than two hours before departure. Another area to consider is expanding the variety of shifting standards to create more flexibility. This can include a larger selection of shift lengths, days-on/days-off patterns and the full-time/part-time mix. Passenger type — The passenger mix is an important factor when developing standards. Business people who frequently travel, have no checked luggage and use the Internet to check in for a flight have little contact with airport agents; however, infrequent leisure travelers headed for a fun destination may not be savvy to the latest travel trends and may actually look forward to having airline personnel pay special attention to their needs. Other characteristics include domestic versus international passengers (specifically those requiring additional security measures) and the size of a group traveling together. Technology improvements — New technology can be seen in many areas of the airport, and those that are most prevalent are the new check-in options, such as self-service kiosks and Internet check in. With the ever-increasing adoption rate of electronic

tickets in the industry, these alternatives are also becoming increasingly attractive to travelers. New ground support equipment, for example, has features that can improve methods, eliminate work or decrease the number of required units. Most companies probably fall somewhere in the middle of the planning spectrum. Regardless of the level of detail used for planning the operation, there is always room for improvement. The ultimate result of getting fit is greater confidence in a company’s plan. Collecting data, analyzing the results and calculating standards will not guarantee headcount savings, but it will improve the cost accuracy of all StaffPlan system headcount analyses and provide valuable airport operation knowledge. There may also be side benefits such as prompting ideas on new ways to reduce overtime, increase cross utilization of the workforce and eliminate waste. Companies that focus on planning and maximizing the potential of their employees will be ready for recovery.

A Fit Staff In addition to optimizing airport labor resources, similar solutions are required by airlines to maximize the productivity of in-flight crew resources as the industry enters this period of financial recovery and growth. In recent years, airlines have looked for ways to cut labor costs to stay lean during the down surge in the global economy. As the environment begins to change and opportunities for growth become more of a reality, these airlines are beginning to search for ways to increase the number of flights flown while keeping incremental crew additions to a minimum. Many airlines utilize the AirCrews suite to assist with reaching these growth goals. The end-to-end integration of the suite, from planning to day of operations, and consistency and seamless flow of data throughout the

products process provide users with the necessary details to make the most cost-effective and efficient decisions in a timely manner. Before the TSA began the task of launching operations to provide passenger and baggage screening at all major U.S. airports, a similar ramp up had already occurred within the Federal Air Marshal Service. As a result of the events of Sept. 11, 2001, the U.S. president and Congress authorized a dramatic expansion of the FAMS mission and workforce

Planning continuum High level experiencebased

Detailed with engineered labor standards

The magnitude of improvement of an airline’s airport operations depends on where the company falls on the planning continuum. The ultimate goal is achieving engineered labor standards that are as close to real life as possible.

that culminated in the hiring, training and deploying of thousands of new air marshals by July 1, 2002. The AirCrews suite, specifically the Pairing Optimizer and Schedule Optimizer, were instrumental in assisting the FAMS in this critical endeavor. When the FAMS was first directed to expand its mission and operations, it was using a manual system to schedule air marshals for flight duty. This system was quickly overwhelmed as the number of air marshals and flights grew, leading to the concern that air marshals were being scheduled inconsistently for flight duty. In June 2002, the FAMS replaced its manual system with three modules from the AirCrews suite — the Pairing

Optimizer, Schedule Optimizer and Operations Manager — in conjunction with the Sabre ® Qik ® business processing solutions, which, according to FAMS officials, improved the agency’s ability to schedule and deploy its air marshal workforce. Another user of the AirCrews suite, Korean Air, regained the growth and prosperity it had enjoyed prior to the outbreak of severe acute respiratory syndrome and the strict regulatory environment that developed due to the impending threat of terrorism. The utilization of the AirCrews optimization tools enables Korean Air to plan for growth with minimal additions in cockpit crew. Primarily, it has found many ways to minimize the resources required for its flights, especially long-haul flights. For some flights operated by Korean Air, flying times can vary by a few hours on each leg of the trip due to wind currents and other conditions. Before it began utilizing the AirCrews suite, Korean Air would regularly schedule the maximum amount of cockpit crew possible for both legs of its longer flights, such as Seoul to Anchorage, Alaska, because developing a manual pairing solution with just the optimal number of crew for each segment proved too complicated. Due to the optimization discovered with the use of these new tools, crew schedulers were able to cut down on the number of pilots it had to use for these types of flights, while maintaining the industry-accepted legal and safety requirements. The airline is now able to spread a smaller number of pilots among the same number of flights flown previously. This lowered headcount for its current flight capacity enables Korean Air to plan for the addition

T H E

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a very big decision, but it’s the right

tures, such as e-ticketing, that the

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integrated system will bring. In addi-

of Eastern Airways. “We now have

tion to its leading passenger systems,

passenger solution for its

the opportunity to shift focus from the

Sabre Airline Solutions has a proven

Selected the SabreSonic

Number of daily load

News Briefs from Around the Globe

ciencies and introduction of new fea-

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What Number of types of rose named for the

Jim Haley is on the product marketing team for crew management solutions, and Brad Laser is a product manager for resource management products at Sabre Airline Solutions. They can be contacted at james.haley@sabre.com and brad.laser@sabre.com.

benefiting from the operational effi-

+count it up 1

crew days could be integral in helping Aeropostal by increasing its flight capacity and taking advantage of the dynamic industry environment that currently exists in South America. “Implementation of the AirCrews suite has benefited us by permitting a much greater level of control regarding the utilization of our manpower,” said Capt. Enrique Zerpa, who coordinated the implementation of the AirCrews suite for Aeropostal. In-flight resource optimization and the ability to ensure the high level of performance in the area of core business principles are both important results achieved through the use of the AirCrews system. With the use of the optimization technology from Sabre Airline Solutions, Aeropostal, FAMS, Korean Air and the TSA have all positioned themselves for continued growth and success in 2004 and beyond. As the industry enters the financial recovery phase, it is important for transportation companies to ensure that adequate planning for optimal growth occurs before implementation begins. With labor remaining one of the most expensive costs to airlines today, the optimization of crew and staff resources, whether on the ground or in the air, remains a top priority. a

Why

Eastern Airways

Number of

of more flights with a lowered requirement for additional cockpit crew. As an airline begins its road to financial growth, it cannot afford to place less importance on the attributes that were fundamental to its original success. It must take advantage of tools that will enable it to solidify its intrinsic values, such as safety, customer service and on-time performance. As a part of an ongoing fleet overhaul that Korean Air has been implementing for the past few years, new aircraft are replacing older ones. With the addition of this newer fleet comes the complexity of ensuring that all of its pilots are trained on the newest features and functionality. With the use of the AirCrews suite, Korean Air is able to easily plan for and ensure completion of these important training sessions. Now, due to the increased schedule stability enjoyed through the use of the AirCrews optimization tools, Korean Air has a variety of options to choose from, and its crew schedulers are less likely to change these critical training sessions in order to ensure that flights are properly staffed. In the past, Korean Air was sometimes forced to change some of these training duties to cover unstable schedules. The ability to not only grow on the road to financial recovery, but to do so without sacrificing any of the essential standards that an airline was built upon, is integral in this phase of the industry cycle. Another airline on the move, Aeropostal, implemented the AirCrews suite in September and within one month had already increased the efficiency of its crew operations by decreasing the number of crew days required by almost 6 percent. The realized savings in

passengers in the next 24 hours that

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plans for weight and balance that are

will board 42,300 flights on Boeing

to have a rose named after it. The rose, deep

generated in the Sabre ® AirOps ™ Load

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products

Faster of New, flexible passenger solution offering from Sabre Airline Solutions gives airlines the ability to adapt and grow in the future.

than the speed

Industry

By Holly Burkholder | Ascend Contributor

A

s the airline industry continues to transform, airlines will need high-performing reservations and departure control functionality with the flexibility to adjust to changing circumstances and new technologies. The new SabreSonic ™ passenger solution has been designed to give airlines of all sizes and business models not only crucial capabilities but also the ability to anticipate change and adapt quickly. For more than 40 years, Sabre Airline Solutions has provided the industry with leading reservations technology, and the SabreSonic solution represents the new generation of this functionality. Built on an open-systems platform, the solution opens the door for airlines to seamlessly integrate new functionality and technology as they become available. “The SabreSonic solution represents a high-performing passenger solution that provides carrier-specific flexibility,” said Gianni Marostica, president of Airline Passenger Solutions at Sabre Airline Solutions. “In today’s market and projecting into the future,

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carriers will increasingly require flexibility from their systems. As their business models evolve, airlines need to keep the longer view in mind with systems that can offer maximum scope and scale to accommodate future growth and model changes. Our open-systems approach provides this flexibility to airlines across the travel experience from shopping to fulfillment.” Keeping flexibility in the forefront, airlines can utilize the entire suite of open-systems functionality or select stand-alone components to enhance in-house or third-party reservations systems. Airlines that rely on Sabre Airline Solutions for their reservations and departure control functionality can implement the SabreSonic solution as a single, fully integrated passenger suite, realizing the financial and strategic benefits of working with a single partner. In addition, a single solution gives airlines an accurate, real-time view of passenger information across all customer touch points, enhancing customer service levels and boosting productivity. With the

SabreSonic solution, airlines can choose from any combination, or all, of seven primary components: SabreSonic ™ Res — Advanced reservations management capabilities enable airlines to efficiently grow revenue and manage every channel of distribution. The offering includes the industry’s leading online booking engine, and shopping, ticketing and codeshare capabilities all managed from a single, easy-to-use graphical user interface. SabreSonic ™ Check-In — Leading departure control capabilities facilitate efficient passenger processing both on and off airport grounds, streamlining operations and enhancing the customer travel experience. Capabilities include check-in, re-accommodation and automated fee collection capabilities all managed from a single, easy-to-use GUI. SabreSonic ™ Inventory — Advanced inventory management capabilities such as serial, virtual and continuous nesting enable origin and destination-based inventory management, replacing outdated leg and segment

processing. Considered a breakthrough in yield management, this system — either a fully integrated hosted component or a Unix-based, stand-alone component — provides real-time transaction processing 24 hours a day, seven days a week. SabreSonic ™ Command — A first in the industry, this Web-based tool enables airlines to quickly react to changes in the marketplace by managing and configuring the entire system from one location. SabreSonic ™ Shop — This component features advanced shopping and pricing capabilities for all distribution channels. Airlines have the flexibility to offer customers both fare-led and itinerary-led shopping options, as well as the ability to price complex itineraries involving multiple carriers and segments. SabreSonic ™ Ticket — State-of-the-art electronic ticketing functionality eliminates the need to build costly systems for electronic ticket distribution and database maintenance. Using this component, airlines can connect to a universal electronic ticketing

hub for cost-effective, efficient connectivity to e-ticketing partner airlines. SabreSonic ™ Web — A complete, fully hosted online booking system enables airlines to efficiently display and sell products over the Internet as well as those of selected partner airlines, car and hotel providers. Alternatively, airlines using an in-house system or third-party reservations provider can supplement their tools with four of the seven highly sought-after, innovative components available through the SabreSonic solution: SabreSonic Inventory, SabreSonic Shop, SabreSonic Ticket, SabreSonic Web. As stand-alone components built on open-systems technology, these tools seamlessly integrate directly with any reservations system. A few years ago, as an industry first, the process of migrating key operational systems to an open-systems platform began in an effort to provide affordable, futuristic solutions

capable of managing every facet of an airline’s reservations and departure control environment. As part of this migration, Sabre Airline Solutions took a phased re-platforming approach, making new technology seamlessly available to airlines. With more functionality on an open-systems platform than any other reservations system, the SabreSonic solution, currently used by more than 100 airlines around the world, offers a single suite of unmatched passenger management solutions. The sophisticated shopping and pricing functionality was most recently migrated to the open-systems platform. Several options within the SabreSonic solution components have already been migrated to an open-systems platform: Agent Sales Report — A robust agent ticketing activity reporting and reconciliation tool, Customer Data Delivery — A tool that transforms data into a structured format enabling analytics and reporting, Customer Data Warehouse — A relational database used to store trip information used

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products

regional

The SabreSonic Solution …

Smart.Proven.Bankable. Proven Performance

The SabreSonic solution fits airlines of all sizes, in all stages of growth, in all regions of the world, utilizing any business model.

The SabreSonic solution is backed by the highest operational excellence rating in the industry.

It can be implemented as a single, fully integrated solution or as stand-alone components that deliver only the desired functionality.

Airlines drive product development, ensuring the solution is continually enhanced to anticipate evolving needs.

Airlines can easily configure the entire system from a single, easy-to-use Web-based tool to quickly react to changes in the marketplace.

Unmatched support services available 24 hours a day, seven days a week keep airlines running at full speed.

The open-systems architecture enables airlines to easily adopt and integrate new technologies with their existing in-house or third-party systems.

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By Nejib Ben-Khedher and Shane Batt | Ascend Contributors

E

For more information, visit www.sabresonic.com or www.sabreairlinesolutions.com.

new technology is further leveraged to help airlines reduce their costs. Our experience has shown that airlines utilizing our passenger management solutions can achieve up to 40 percent cost savings.” As the migration to an open-systems platform continues, additional components will be added to the modular offering. Airlines currently using the SabreSonic solution drive new enhancements, which are released quarterly. In an ongoing effort to anticipate trends and changes in technology, Sabre Airline Solutions invests millions of dollars annually in the product portfolio, ensuring that airlines always have access to systems based on a cutting-edge infrastructure.

Facing unique circumstances, Middle East carriers are bucking global trends by adding service to satisfy customer demand and boost market share.

Powerful capabilities deliver bankable results, with airlines increasing total revenue by up to 10 percent and reducing total costs by up to 40 percent.

More large-scale system migrations have been successfully performed by Sabre Airline Solutions than any other company in the history of aviation.

The robust, open-systems customer relationship management platform ensures consistency across all customer touch points by enabling the integration of reservations and check-in information with an airline’s CRM systems.

for post-travel analytics, Customer Insight — A comprehensive relational database that collects and stores information on travelers for real-time operational use. While modernization and flexibility represent key elements of state-of-the-art reservations and departure control functionality, affordability makes possible the implementation of such technology for most, if not all, airlines. “By leveraging the open-systems approach, we are able to provide a new generation solution at a price that airlines can afford, aiding carriers as they reign in all costs,” Marostica said. “We provide leading technology at the right price, and once in place, the

Bankable Results

“I'm pleased to see that Sabre Airline Solutions is continuing to invest in its suite of products and services,” said Andy Dawson, head of worldwide reservations for Gulf Air. “Gulf Air has to compete for business, and using leading-edge technology is essential to do that. We have a commitment from Sabre Airline Solutions that it will deliver industryleading capabilities to support our efforts, and the launch of the SabreSonic solution is clear evidence of executing on that commitment.” a Holly Burkholder is marketing communications manager for Airline Passenger Solutions. She can be contacted at holly.burkholder@sabre.com.

ver since 1325 when Ibn Battuta, the renowned 14th century Arab adventurer, embarked on his famous 75,000-mile journey from Tangiers to India, the Middle East has had a rich history of international travel. That history continues today for a region at the crossroads between the east and the west. The area and its aviation industry are growing and continue to develop despite volatility caused by changing geopolitical conditions. Although Middle Eastern airlines have been on a roller-coaster ride for the past three years, since January 2000 they have consistently out-performed the world average for traffic and capacity growth. Cumulatively, traffic growth in the region has averaged more than 12.5 percent since January 2000, surpassed only by the growth of traffic in Latin America (13.8 percent). During the same period, capacity growth has been substantial. Middle Eastern carriers increased capacity by 11.3 percent since January 2000, primarily through fleet renewal and expansion. This capacity growth has been among the world’s highest. Despite these encouraging numbers, there is a danger that carriers are increasing capacity too quickly and may have to allow it to become better aligned with demand. In the first half of 2003, capacity to and from the Middle East was down by 6.5 percent while traffic was down 5.4 percent. Beginning in June, however, there was a rapid resurgence of demand, and the region’s carriers reacted by significantly increasing the number of seats available. During August alone, passenger traffic grew more than 10.1 percent and capacity grew 6.1 percent year over year. This growth has been concentrated primarily on intra-regional traffic. Traffic from

Western Europe and North America has been substantially down since 2001, and flow traffic across the hubs of the region has also declined. During this period, however, economic and political circumstances have helped intraregional traffic increase by more than 15 percent. The region’s economies have grown rapidly based on increased oil revenues from higher

Period of Spill Maximum booking level Capacity Bookings at departure

Bookings held

Smart Flexibility

A Higher Plane

180

C B A

8 3 0

Days before departure

Due to the booking patterns of most flights in which cancellations occur after the maximum booking level is reached, a market can be “constrained” by capacity even with load factors below 100 percent.

crude oil prices, encouraging the region’s residents to travel. (Paradoxically, this increase in oil prices has also raised the costs of air travel and lowered the profit expectations of Middle Eastern airlines.) From a political and social standpoint, citizens of the Middle East find it more convenient to visit other countries within the region compared to traveling to the West. A number of initiatives across the region have simplified visa procedures to attract local tourism. This intra-regional traffic growth is new for the area and is sparking increased investment in the regional airline industry.

The downside to this high level of growth is that Middle Eastern airlines compete for market share using capacity — the most expensive method. When they increase capacity, market size increases through market stimulation, which is not sufficient to benefit all the carriers in the region. Instead, stronger airlines gain market share, and weaker carriers struggle. Since many of the weaker carriers are government owned, it is unlikely that they will disappear. Instead, they will become more desperate for cash and will cut fares to maintain market share, leading to revenue dilution and harder times for everyone. The Middle East aviation marketplace is driven by four primary characteristics that are rapidly changing the airline environment: The introduction of new low-cost airlines, The impact of restrictive bilateral conditions, Highly volatile demand and extreme seasonality, The reemergence of high service levels.

The Allure of Low Cost The low-cost model has become attractive for launching new airlines and for transforming national carriers in the Middle East. Governments wishing to increase tourism and stimulate economic growth are quick to invest in airlines claiming to be low cost. Investors allured by the promise of double-digit return on equity find investing in low-cost airlines attractive when the rest of the equity market shows only marginal returns. This phenomenon is especially true in the Arabian Gulf. The United Arab Emirates alone recently granted licenses to four start-up low-cost carriers. Arabian Gulf investment in low-cost airlines is a new trend that has resulted from the increased economic prosperity of the region. Traditional Arab investment in the region has concentrated on service industries with much

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regional

Commercial Characteristics Whereas most low-cost carriers minimize distribution costs by relying on direct channels of distribution such as their own Web sites, Middle Eastern airlines rely on sales through the more expensive travel agency and tour operator channels. This is unlikely to change in the near future due to a relatively low penetration of the Internet, and any forced change on behalf of an airline would likely lead to reduced market share and the strengthening of competitors that rely on traditional distribution models. Also in the traditional low-cost model, carriers operate high-frequency, shuttle-type operations between network points to capture maximum market demand. But in the Middle East, all but a handful of high-density routes are too small to accommodate such operations. Like other low-cost carriers, airlines in the Middle East can simplify pricing rules, but this will require a greater knowledge and utilization of available revenue management technologies. Another tenet of the low-cost model, exclusive point-to-point operations, would make Middle Eastern airlines vulnerable to competition and susceptible to the region’s periodic political instability.

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Because low-cost carriers are primarily domestic — or at least operate in a common aviation environment under open skies — airlines in the Middle East would likely need to restrict their operations to specific geographical areas to eliminate international landing and navigation fees required for true international flights. Fleet commonality, a characteristic of low-cost carriers because it maximizes utilization of equipment, personnel and maintenance resources, is possible, but it does not enable airlines to serve smaller markets or those requiring greater range. To minimize costs, low-fare carriers generally offer limited service options. Because most passengers in the region expect higher levels of service than are provided on “nofrills” carriers, eliminating service options is liable to lower passenger satisfaction. And, due to limited demand and to the large amount of baggage on many flights, high frequency and short turn times would be difficult for Middle Eastern airlines to achieve.

Corporate Characteristics A high equity base will ensure low-cost carriers’ debt to equity ratio remains low. But many Middle Eastern airlines suffer from a low equity base, and there is little possibility, short of privatization, that these airlines can increase their equity bases to levels required to operate a low-cost airline. New entrants are remarkably well capitalized — at least during the planning stage — but actually producing the required equity for a startup may be more problematic than it appears. While low-cost carriers maximize technology to reduce manpower needs, the effect in the Middle East would be limited because of the already low labor costs. Another way low-cost carriers control labor costs is through performance-based compensation for their employees, but this would have a limited effect in the Middle East without the implementation of the other low-cost carrier attributes. Therefore, while attractive for existing and new entrants in the Middle East to consider the low-cost model, the realities of the region tend to discount it as a viable alternative. But, airlines in the region do not need to be low cost in order to be successful. Due to existing bilateral conditions, airlines in the region have become accustomed to high yields and market exclusivity. As demand for air travel increases in the region, government authorities are becoming more liberal in granting licenses and routes. Governments want to

increase tourism and diversify their economies by introducing new air travel capacity. This new-found largesse with air operator certificates and routes will allow new entrants into markets that are high yield. Therefore, new carriers will be able to pick and choose from the characteristics of low-cost airlines.

The Impact of Restrictive Bilateral Agreements Despite substantial growth of the region’s aviation sector, many markets remain underserved due to restrictive bilateral agreements and prohibitive taxation. In an effort to increase capacity, governments are investing in airport and airspace infrastructure. At the same time, however, they are increasing taxes and landing and navigation fees, and they are maintaining restrictive bilateral agreements designed to protect local markets for national carriers. Market stimulation refers to increased traffic resulting from introducing capacity in an origin and destination market. The introduction of non-stop capacity tends to increase demand for air travel because the demand is constrained by available capacity. Governments wishing to protect local carriers with low load factors maintain restrictive bilateral conditions designed to keep capacity low, allowing yields to be high enough to support the operation of national carriers. National carriers argue that relaxing bilateral agreements will allow too much capacity to enter the marketplace, driving down yields. As yields decrease, the amount of government support necessary to maintain the national carriers increases. Due to stimulation, however, restrictive bilateral conditions are more often liable to restrict the growth of the aviation sector instead of protect the local carrier. A good example is the rapid growth of Dubai as an O&D. Despite the growth of capacity in and out of Dubai, many O&Ds are substantially underserved. The growth of Dubai as a hub and as an O&D is a clear example to governments throughout the region. Spending more on infrastructure will not necessarily produce the “next Dubai.” Governments that consider the relaxation of restrictive bilateral conditions can find an easy way to increase growth in the aviation sector without requiring significant outlays of capital to improve infrastructure. The recently signed open skies agreement between Singapore and the United Arab Emirates (home of Dubai and Abu Dhabi, two

Demand Volatility and Seasonality BEY — DXB Seasonality of Demand

Passengers

Operational Characteristics

40,000

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35,000

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30,000

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25,000

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37,186

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24,339

21,510 22,352

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5,000

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0

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Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03

CAI — JED Seasonality of Demand

Passengers

higher financial returns such as the banking and insurance sectors. Since the region’s increased economic prosperity is oil-revenue based and subject to cyclical results, the equity currently available in the region for investment in airlines is somewhat tenuous. If this investment does not result in expected growth and income, then the prospects for future investment in the aviation sector within the Middle East will probably decline. In order to ensure success, the low-cost carriers in the region will have to generate high profits on a low cost base. Low-cost carriers in the area will have to match the overhead of similar carriers in Europe and North America, where the stage length adjusted unit costs are between 2.1 and 3.5 U.S. cents per available seat kilometer. Maintaining costs at this level requires an airline to have a large number of seats over which to split the fixed and indirect costs. This means new low-cost airlines in the region must fly larger aircraft over shorter distances and turn the aircraft more times each day, increasing the glut of capacity and further diluting revenue. Also, many characteristics of low-cost airlines are out of reach for new Middle East carriers because of their market and geographical position.

regional

120,000

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

100,000

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----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

0

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03

As the Beirut to Dubai and Cairo to Jeddah markets demonstrate, demand in the Middle East region is highly seasonal and is influenced by several occasions such as religious holidays, Ramadan, the Hajj and similar events. Even secular events such as the Dubai shopping festival are driving substantial changes in demand.

regional hubs) is a model for improved bilateral conditions. Still, this relaxation is not enough. The recent position of the European Union with regard to bilateral negotiations should be a caution to the region. Under European Union regulations, bilateral agreements with third-party countries will be centralized in Brussels on behalf of all member states. Therefore, a small country such as Bahrain may negotiate and obtain rights to a

T H E

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Who

few European destinations while every airline in Europe would obtain reciprocal rights in Bahrain. Undoubtedly, the Middle East region would be better served by an open skies agreement among its regional member states and a similar policy of collective bargaining between the Middle East region as a whole and larger blocs such as the European Union and the North America free trade zone.

Passenger demand in the region is highly volatile due to highly variable seasonality. While demand is high on an average basis compared to capacity, it is clumped into periods, making the application of capacity more difficult and creating a classic dilemma: For a carrier to win sufficient market share, it must have a consistent capacity presence and schedule regularity. Because demand is so variable, however, consistent capacity will sometimes be too little or too much. In order to address this, airlines must commit a smaller amount of capacity when demand is low and a larger amount of capacity when demand is high. This variable capacity violates the first requirement for winning sufficient market share. Part of the reason for demand volatility in the region is easy to understand given the range of political events in the past four to five years. Each security alert, military action or bit of political tension affects demand. A second reason for demand volatility is seasonal, but not just related to the 12-month Gregorian calendar. The lunar Muslim calendar shifts about 11 days each year. Specific events that greatly impact demand — religious holidays, Ramadan, the Hajj — result in profound changes in market demand. Increasingly, secular events such as the Dubai shopping festival drive substantial changes in demand. The 13-month seasonality of the Beirut to Dubai market clearly illustrates this volatility. The demand in August 2003 was more than three times greater than the demand in November 2002. Also, the March through May 2003 figures reflect the Iraq war’s affect on market demand. During the lowest month

L E V E L News Briefs from Around the Globe

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regional (November 2002), demand per day in the O&D market was 363 passengers, about two round trips of a single-aisle aircraft. In August 2003, the demand per day was 1,200 passengers, about five round trips of a singleaisle aircraft. Beirut to Dubai is not the only market in the Middle East that demonstrates this volatility. The extremely volatile seasonality between Jeddah, Saudi Arabia and Cairo, Egypt, also makes it difficult to plan capacity. During August 2003, the demand was more than five times greater than the low month of April 2003, a month with no Islamic holidays that coincided with security concerns in Saudi Arabia during the height of the Iraq war. This demand volatility is not likely to significantly change. Carriers that best accommodate the variability of demand will earn the highest profits. Accommodating this demand can involve increasing capacity or reducing discount seat availability. With such highly seasonal demand, it is somewhat inevitable that yields will be highly seasonal as well. During periods of low demand, prices will fall and during periods of high demand, prices will rise. Because the volatility of demand in the Middle East is so high, it becomes important for carriers to pro-

tect their yields during times of low demand to avoid a huge increase in the effective price of travel during the high season. Since Middle East carriers need to maintain the highest annual yields as possible, they must have higher yields during the low season to allow lower yields during the high season. The challenge becomes keeping yields higher during the low season.

The Reemergence of Service As carriers in the Middle East struggle to maintain yields during the low season, they are increasingly trying to attract premium passengers. Premium passengers, including business travelers, tend to have lower seasonality than non-premium passengers. Therefore, several carriers in the region are experimenting with increasing service levels to attract and maintain higher-yield passengers. While this is not specific to the Middle East, it is contrary to the trend that has developed in North America and Western Europe, where the prevailing notion is that passengers will not pay extra for increased service. Therefore, cost-cutting exercises have reduced passenger service levels to increase profitability. The traditional carriers in North America are emulating their low-cost carrier

regional competitors to lower the cost of travel through a no-frills approach. In the Middle East, the exact opposite is occurring. Traditional carriers are increasing service levels, and low-cost carriers are starting with higher service levels than their Western counterparts. Carriers such as Gulf Air have added chefs on board their premium service flights. The airline has added self-service kiosks, short messaging service and similar technologies to enhance the travel experience. And Gulf Air has improved lounges and check-in facilities throughout its stations and has re-branded itself to draw attention to its new, high-quality service standards. Doha-based Qatar Airways has upgraded its fleet and facilities, Beirut-based Middle East Airlines has dramatically improved its product, and Dubai-based Emirates airline continues to provide a very high-quality product. Nearly every carrier in the region is updating its service to increase the value of its product. Carriers risk a significant amount when they increase service levels. This risk is particularly great when they have renewed their fleets to increase service. Unit costs are rising among the carriers that are increasing their service, and it is yet to be determined whether these increased service levels will allow yields

hightech

a structured method of inputting manual document details into an agent’s sales report ensures all agent ticketing activity is recognized.

The Agent Sales Report is a comprehensive reporting and reconciliation tool that tracks all agents’ ticketing activity, improving the integrity of revenue recognition for that airline.

benefits The Agent Sales Report provides an airline easy access to any ticketing transaction type stored in the database. Interactivity between reports and the introduction of

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1,107 1,000

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800

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569

507 400

features Enhanced analysis of ticketing activity — Designed using a relational database, Agent Sales Report enables ticketing activity reports to be created dynamically. Once individual agent and station manager reports have been closed, a data feed is generated to an airline’s revenue accounting system. Comprehensive data — The Agent Sales Report offers expanded ticketing

activity including the ability to easily integrate manual document details into an agent’s sales report and provides seven unique reports — sales summary, detailed report, accounting report, credit card report, tax report, station summary report and station manager report. Increased productivity — The Agent Sales Report enables an agent to void and reactivate voided items directly from the agent’s sales report. Additionally, a supervisor can access view details on a particular item by selecting an item from the summary report. a

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496

383

366

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60 0 BAH

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34

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RUH

Daily Demand

Capacity and Demand to/from Dubai, January 2003 — December 2003 2,500

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2,246 2,000

2,190

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1,871 1,885

1,645

1,592

1,500

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944

763

650

621

730

459

439

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379

BAH

BEY

CAI

Daily Capacity

product

description

1,200

AMM

News on New and Improved Products and Services from Sabre Airline Solutions Agent Sales Report

Capacity and Demand to/from Beirut, January 2003 — December 2003

JED

KWI

MCT

RUH

Daily Demand

The rapid rate of growth of Dubai as an origin and destination illustrates bilateral conditions are more often liable to restrict the growth of the aviation sector instead of protect the local carrier. Despite the rapid growth of capacity in and out of Dubai, many O&Ds from Dubai are substantially underserved.

to remain sufficiently high. If carriers are unable to attract high-value premium travelers, they can suffer substantial financial difficulties. In addition, the susceptibility of the region to demand volatility increases the level of risk associated with increasing service. To reduce the impact of higher service costs, Middle Eastern airlines are flying their new aircraft more often, splitting fixed operating costs and indirect costs over a greater amount of flying, lowering unit costs, which should increase profits. Yet profits may not rise as unit costs fall if yields fall as well. While carriers try to increase yields by introducing higher service, it requires them to fly their aircraft more, placing more capacity in the marketplace — even during times of low demand —

causing a capacity glut that reduces yields. Therefore, the very benefits that these carriers hope to achieve from increased service may indirectly force their profitability to remain low. There is no easy answer to this dilemma. On one hand, carriers that do not increase service levels will lose market share among premium passengers. These carriers, however, will maintain a lower cost base, which could help them weather hard financial times. On the other hand, carriers that increase their service level will drive up unit costs that may not be covered by increased retention of premium demand. The result is that the carriers in the Middle East are fighting for market share of the premium passengers even as the size of

the market place increases. The region is growing, but the largest carriers in the region are forced to compete every day for the highvalue premium passengers. Not all carriers can prosper in the Middle Eastern marketplace where share shift is the primary way of maintaining profitability, but this does not mean that carriers will fail and remove capacity.

Hope for the Future The Middle East marketplace is a fascinating example of the brutal effects of aggressive competition. The carriers are fighting strength with strength in a marketplace that has unique challenges. Some of the carriers in the region will prosper while others will inevitably decline. The Middle Eastern aviation marketplace is at a critical crossroads. A few years of geopolitical stability along with continued regional growth should allow for Darwinian evolution — survival of the fittest. If, however, events continue to reduce market demand, the investments in service improvement that have been made by the region’s carriers may mean that all carriers have difficulty. The aviation marketplace in the Middle East must remain strong because there are few alternatives for travel throughout the region, a vast area that encompasses large tracts of desert and offers limited transportation infrastructure. Solving the dilemma of Middle East aviation will not be simple, but there is hope in regional cooperation. Today, largely due to choice as well as cultural issues, no Middle Eastern airline participates in a global alliance. Airlines throughout the Middle East would do well, however, to cooperate among themselves through virtual alliances or vertical integration, both of which are trends for similar regional entities in other locations. The common cultural ties of Middle Eastern carriers should be a bonus to cooperation, not a hindrance. The Arab Air Carriers Organization plays a strong role in bringing Middle Eastern carriers together. More and more, the success of the aviation marketplace in the region will be based on the ability of the AACO to operate as a catalyst for bringing the disparate regional interests together in a manner that promotes the health of the region’s air travel industry. a

Nejib Ben-Khedher is senior vice president, and Shane Batt is a partner of Sabre Airline Solutions Consulting. They can be contacted at nejib.ben-khedher@sabre.com and shane.batt@sabre.com.

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Photo courtesy of ATA Airlines

regional

COMING of AGE While staying true to its low-cost carrier tradition, ATA Airlines has built a high-quality, full-service hub-and-spoke network.

By Steve Hendrickson | Ascend Contributor

S

keptics say it can’t be done. While tradiadded to the credibility of its emerging brand, tional thinking famously asserts that that it is hard to single out any one as being people can’t have their cake and eat it the preeminent breakthrough. Rather, what too, airline strategists are nearly as unanimous becomes apparent is that the confluence of in saying that you can’t have a full-service, these improvements is what has set ATA on a hub-and-spoke-oriented network airline and new, clearer course for successful growth. low operating costs. But try telling that to the One initiative was to improve operational 7,200 employees of Indianapolis, Indianadependability. So, when ATA rejuvenated its based ATA Airlines. Their defiance of the confleet and committed to a new terminal and gates ventional wisdom is at Chicago Midway Photo courtesy of ATA Airlines propelling the carrier Airport, management toward a brighter, laid the infrastructure stronger future amid groundwork to make the ever-changing U.S. that happen. Passenair travel market. gers demanded conveAs the 10th nience and comfort, so largest U.S. airline, the carrier responded ATA is the smallest with electronic tickof the so-called ets, assigned seating, majors, defined by online c h e c k - i n , i n the U.S. Department f l i g h t entertainment, of Transportation as along with an increashaving US$1 billion or ingly popular frequent more in annual pasflyer program. senger revenue. But The convenience despite being the tiniof its Web site has George Mikelsons, who founded ATA est within that catebeen another initiative Airlines in 1972 as a charter service, gory, the magnitude welcomed by passencontinues to lead the airline, which of the carrier’s growth gers, but one that has has grown to become the 10th largest and evolution has helped the airline keep scheduled U.S. airline. been nothing short of distribution costs down gargantuan. as well. Using its Web-based booking engine in tandem with The Airline that Could SabreSonic ™ Res, the online bookings acceptThere have been so many incremental ed through the company’s Web site now comenhancement initiatives accomplished by ATA prise nearly 40 percent of all ATA reservations. in recent years, efforts that have further ATA has steadily improved service-pattern quality to give business travelers the frequency they desire. Beyond that, the flight network was broadened through the 1999 acquisition of a regional carrier, Chicago Express Inc., which now serves 14 destinations as a feed

56 56 ascend

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regional as we reached a higher “ But, frequency level in several key cities, we began to see economies of scale working to our advantage … certainly on the cost side, but also on the revenue side.

carrier branded as ATA Connection. ATA was quick to upgrade the regional airline’s original fleet of 19-seat J-31 aircraft to Saab 340 aircraft seating 32 passengers, improving passenger acceptance. Still, other aspects of network growth have taken the form of additional service to Hawaii from the West Coast and new transcontinental nonstop flights between San Francisco, California, and New York City. But, above all, and amazingly at times, the airline continues to maintain its low-cost philosophy through all of these service additions and enhancements. With such a powerful combination coming together — full service at low costs — the airline has found a secret for success.

Low-Cost Emphasis Pays Off If nothing else, ATA’s roots as a charter carrier imbued it with an efficien“It took us a From its hub at Chicago Midway Airport, ATA Airlines flies nonstop to 33 destinations cy-driven culture that has while to grow our throughout North America and the Caribbean with its fleet of aircraft (above right) that carried over into its service to where includes the Boeing 737-800, 757-200 and 757-300. In 2003, the airline reported its first fullscheduled business. And our expenses could year profit since 1999, earning US$15.8 million. clinging to its low-cost be leveraged effecadvantage has been job tively,” said Stan No. 1. Today, the company’s unit costs are The newer aircraft have helped dramatiHula, ATA’s vice president of market planning. lower than any other U.S. major airline, with its cally improve operational dependability, on“But, as we reached a higher frequency level cost per available seat mile consistently near or time performance and passenger comfort. in several key cities, we began to see below 7 U.S. cents. Even Southwest Airlines, Also, the current mix of aircraft features a economies of scale working to our advantage famous for its rock-bottom cost levels, has not higher degree of fleet commonality, providing … certainly on the cost side, but also on the been able to keep CASM as low as ATA. operational advantages that simplify training, revenue side.” Part of the secret, to be sure, is ATA’s support services and spare parts. But flying The airline reached critical mass in sevrelatively long average stage length, which is young, efficient, large planes on long missions eral markets where its former service patterns the longest in the U.S. domestic industry. is not the only strategy keeping ATA’s low-cost were thin or even nonexistent. And the marAnother factor is that its fleet has, on average, carrier title safe. kets ranking highest in ATA’s route structure more seats per departure than any other Favorable, yet fair, agreements with its are now business-oriented markets rather domestic U.S. major airline. In addition, the airlabor groups have provided the airline with than vacation hotspots. line invested heavily in a fleet renewal proflexible work rules and competitive pay scales Indeed, the service buildup has cast a gram during the last few years, replacing its crucial for success in today’s changed ecovery different look on ATA’s schedule, making Boeing 727-200 fleet with 737-800 and 757nomic environment. And as ATA has expanded it more attractive to passengers in general, but 300 aircraft, a move that gives it the youngest its flight schedule, it has been able to achieve to business travelers in particular. The relatively average aircraft age among majors in the U.S. real economies of scale with its hard-working low frequency flight patterns offered several marketplace. employees. years ago have been beefed up substantially.

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Photo and graphic courtesy of ATA Airlines

T H E

The destination list has grown to include nearly all the major domestic business markets as well as keeping a large set of leisure points including eight spots throughout the Caribbean and Latin America plus three airports in the Hawaiian Islands. The expanded flight offerings’ impact on ATA’s market-share trends have been encouraging, especially within the critical sphere of Midway Airport and the Greater Chicago market. In fact, ATA now boards nearly 50 percent of Midway’s total passenger enplanements and about 11 percent of the overall combined total for both Chicago area airports. Among all the things that have taken shape during ATA’s coming of age, the adolescent growth spurt of its Midway hub may stand as one of the most important milestones yet. But milestones have been in abundant supply at ATA in recent times, and they all seem to be fitting together nicely as part of a disciplined growth and maturation process. “Given all the developments at ATA over the past several years, it really made sense to communicate, more clearly than ever, our extraordinary value proposition to passengers,” said John Happ, senior vice president of marketing for ATA. “We’re reminding people that they can have a great flying experience without paying the premium fares that many of the traditional major airlines might demand.”

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H I G H

Thus, ATA’s new, clarified brand promise has been telling passengers to expect “An Honestly Different Airline.” The subtext of that new brand message has focused on the most appealing features of the company’s high quality, low-cost business model, including: Low, everyday leisure fares; No advance purchase or minimum stay requirements; Business (walk-up) fares that never exceed US$299 for a one-way domestic trip; Advanced seat assignments; Change fees well below industry norms; No fees for same-day standby; Unused tickets that retain their original value; New planes that maximize reliability, on-time performance and comfort; Self-service and curbside check in at many airport locations; A modern, comfortable and convenient hub facility at Midway Airport. ATA is making the right moves to continue its upward path; however, to fully appreciate the airline’s strategic direction and really comprehend how far it has come in recent years, it is helpful to understand its origins. The story, as it turns out, began very modestly.

L E V E L News Briefs from Around the Globe

Who

planning and management tools

axsResource capabilities, we can bet-

Sabre Airline Solutions

offered to airlines and ground

ter help airlines and ground handlers

What

handlers worldwide.

reduce airport handling costs through

Why

more efficient planning, administra-

Acquired EDS’ axsResource Airport

tion and deployment of personnel,”

Resource Management Solutions

The axsResource tools bring new

product line. The addition of these

capabilities to the resource manage-

new capabilities, furthered by the

ment suite including acceleration

company’s travel and transportation

to a Web-based delivery platform,

market alliance with EDS, broadens

increased focus on airport staffing

Sabre Airlines Solutions’ already com-

capabilities and enhanced internation-

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al features to meet global market

ment system suite of airport resource

demands. “By adding the

said Tom Klein, group president, Sabre Airline Solutions. “We are also fulfilling our mission to help airlines succeed by offering technology, products and services to address the issues that are key to their challenges in the current market.” a


regional

at the gates have enhanced the

in and the Sabre ® Aerodynamic

Ondrey, director of information

efficiency of our airport staff

Traveler Gate Reader. The airline will

technology for Sun Country.

activities, and we’ve received

access the tools through the Sabre

“The collaborative efforts of Sabre

extremely positive passenger

eMergo ® Web-enabled and dedicated

Airline Solutions and the Sun

feedback, making this implemen-

network solutions, an application

Country staff have already paid

tation a true win-win for

service provider delivery method.

off, with more than a third of

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®

5%

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Share of Chicago (MDW+ORD)

Enplanements

Top: ATA Airlines has achieved critical mass in several markets where former service patterns were thin or even nonexistent. And the markets ranking highest in ATA’s route structure, such as New York City and Los Angeles, are now business-oriented markets rather than vacation hotspots, such as Orlando, Florida, and Maui, Hawaii. Bottom: The expanded flight offerings’ impact on ATA’s market share trends have been encouraging, especially within the critical sphere of Midway Airport and the Greater Chicago market. The growth at its Midway hub, where it now controls almost half of all enplanements, has been one of the airline’s most important milestones.

2Q03

International Airport),” said Mark

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Aerodynamic Traveler Web Check-

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10%

2Q02

availability. The improvements

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15%

4Q01

Terminal (at the Minneapolis-St. Paul

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2Q01

Successfully implemented the Sabre ®

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25%

4Q00

in just the first two weeks of

30%

Share of MDW

4Q99

the longer lines at the Humphrey

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35%

2Q99

in for their flights at suncountry.com

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40%

4Q98

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45%

4Q97

Sun Country Airlines

our passengers having checked

50%

2Q98

Why

ATA’s Share of Midway Airport and Chicago Overall Enplanements

2Q97

Who

NYC (LGA) Newark, NJ Minneapolis/St. Paul, MN Los Angeles, CA San Francisco, CA Denver, CO Dallas/Fort Worth, TX Orlando, FL Charlotte, NC Washington, D.C. (Reagan)

4Q96

News Briefs from Around the Globe

— — — — — — — — — —

4Q95

L E V E L

March 2004 Chicago Midway Chicago Midway Chicago Midway Chicago Midway Chicago Midway Chicago Midway Chicago Midway Chicago Midway Chicago Midway Chicago Midway

Scheduled departures per day 7.1 5.4 5.3 4.7 4.7 4.6 4.6 4.0 3.6 3.6

2Q96

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H I G H

Rank 1 2 3 4 5 6 7 8 9 10

Scheduled departures per week 50 38 37 33 33 32 32 28 25 25

2Q95

The kind of dramatic growth exhibited by ATA would normally cause enough headaches by itself to challenge any management team, but with nearly 2 percent of U.S. market scheduled available seat miles last year, the airline

With all that ATA has accomplished in its maturation process during the past several years, exciting things still lie ahead. The airline is not ready to rest on its laurels. One challenge to ATA’s continued growth trajectory was tackled recently when the company refinanced approximately US$235 million in senior notes related to aircraft debt that were to come due this year and in 2005. Various note exchange programs and lease restructurings were developed to alleviate what could otherwise have created the risk of a troubling cash crunch. The restructuring paves the way for more growth from a financially healthier posture. Never content with its progress in the ongoing battle for market position in the Midway and Greater Chicago marketplace, ATA has recently redesigned its hub schedule

March 1998 Chicago Midway — Orlando, FL Chicago Midway — St. Petersburg, FL Honolulu — Maui, HI Chicago Midway — Phoenix, AZ Chicago Midway — Ft. Lauderdale, FL Indianapolis, IN — Ft. Myers, FL Chicago Midway — NYC (JFK) Chicago Midway — Los Angeles, CA Chicago Midway — Ft. Myers, FL Indianapolis, IN — St. Petersburg, FL

Scheduled departures per day 3.4 3.4 2.3 2.1 2.0 2.0 2.0 2.0 2.0 1.9

4Q94

Big Airline, Big Challenges

Major Challenges Still to Come

Rank 1 2 3 4 5 6 7 8 9 10

Scheduled departures per week 24 24 16 15 14 14 14 14 14 13

2Q94

There were many forays into various markets during the early years of ATA scheduled service as the company showed its willingness to explore potentially profitable opportunities in this area. After a period of experimentation and learning the key differences between charter and scheduled market dynamics, the carrier initiated scheduled service from Midway Airport in 1992. This airport selection would eventually form the foundation for ATA’s scheduled flight network and become a strategic linchpin in its growth plans. By 1999, the Midway Airport hub operations had helped drive ATA’s annual revenues past the US$1 billion mark, making it the newest major airline in the United States.

Then and Now: The Top 10 ATA Mainline Nonstop Markets by Weekly Departures

4Q93

T H E

Finding a Base for Scheduled Operations

has also quickly become a competitor that other airlines can no longer afford to ignore. Plus, with its evolving hub at Midway Airport at the core of its network, ATA has been inexorably involved in a brutal, four-way battle for market position in Chicago with rivals United Airlines, American Airlines and Southwest Airlines. The smallest and least known of that group, ATA has been firmly focused on using its competitive strengths and overcoming its weaknesses, while never underestimating its foes. But, it would seem that competitive pressures have only forced the airline to mature more rapidly and for the better.

2Q93

In 1972, Capt. George Mikelsons founded an air travel club called Ambassadair in Indianapolis and acquired a single Boeing 720 aircraft to conduct charter flights to vacation destinations for his growing membership base. Six years later, as the airline industry was deregulated, Ambassadair doubled its fleet by adding a second B-720. Mikelsons, still at the helm today as the chairman, president, chief executive officer and majority shareholder of ATA’s holding company, recalled the early days fondly. “We had a lot of fun, and I was just too darn stubborn back then to think about the long odds against success,” he said. “And we were working so hard to make things go, we never had time to think about the possibility of failure.” That early “can-do” attitude has remained a hallmark of ATA’s culture to this day. By 1981, ATA, now established as a common-air carrier, was able to offer public charters and soon acquired a fleet of eight Boeing 707s. Subsequently, a holding company structure (now ATA Holdings Corp.) was implemented for Ambassadair, ATA and any future subsidiaries. The company continued to grow aggressively and, by 1985, had become the largest charter carrier in North America, boasting a fleet that included L-1011s capable of covering high volume, distant vacation markets from major U.S. cities or carrying troops on far-flung military air charter missions overseas.

Just 18 years ago, in 1986, ATA first tested the waters in the intensely competitive arena of scheduled service, initiating regular flights between Indianapolis and Fort Myers, Florida. While ATA would continue its industryleading role within the charter category, expansion in the scheduled segment would ultimately become its new focal point and primary engine for growth going forward.

4Q92

Humble Beginnings: A man, a plane and a dream

regional structure to maximize the revenue and operational performance of its eventual 15 Midway Airport gates. The new architecture will unfold later this year. The growing set of origin and destination markets served via ATA’s connecting complexes at the Midway Airport hub has lead it to pursue more sophisticated revenue management approaches designed to increase the financial performance of the overall network. Databases, software tools, process improvements and staff additions are all part of the push to ensure prices are set where they will boost sales to their maximum. By the end of the year, the airline will wrap up an aircraft reconfiguration program and roll out a recently announced new business-class cabin, a product developed with the assistance of Sabre Airline Solutions Consulting, designed to further enhance ATA’s value proposition to the business traveler. Low-priced fare add-ons are intended to make this a great bargain for those road warriors needing to be as productive as possible while in transit. ATA also recently began studying the transAtlantic corridor with an eye toward launching scheduled flights to Europe by 2005 or 2006. Between its scheduled and charter service, the airline already flies nearly 20 percent of its overall capacity to international destinations. Longer term, the company will consider a fleet replacement strategy for the L-1011. While the scheduled service side of the company has been growing at a breakneck pace, ATA is still the No. 1 military air charter and commercial charter carrier in the industry and is committed to maintaining that position. It is, after all, part of the original heritage of the company and a positive contributor to overall financial performance. Perhaps the biggest question surrounding ATA’s future deals with what domestic growth opportunities it plans to focus on beyond its potential at Midway Airport, which will reach its maximum gate capacity in a couple of years. But one thing seems certain, it will likely amount to aggressive growth taking place somewhere, and it will certainly include the low-cost carrier value orientation combined with super-serving customers a high-quality product that has made ATA successful in the past. a

Steve Hendrickson is a senior partner with Sabre Airline Solutions Consulting. He can be contacted at steven.hendrickson@sabre.com.

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regional

FaringWell AIR NEW ZEALAND REVAMPS ITS FARE STRUCTURE

A Conversation with Ralph Norris, managing director and chief executive officer, Air New Zealand All photos courtesy of Air New Zealand

A

ir New Zealand has had a remarkable reversal of fortune in the past three years.

Airline officials attributed much of its financial success to “changes in the airline’s business model that underpin that performance.” After the demise of its Australian-based Among the changes introduced as part subsidiary, Ansett, in 2001, the airline was on of a new strategic business plan, Air New the brink of closing its Zealand completely doors until it received a rerevised its domestic and capitalization package from trans-Tasman pricing structhe New Zealand governtures to simplify and lower ment, which is now the fares, repositioned its majority shareholder. long-haul international serBut any thoughts vice and purchased new that the airline’s biggest A320 aircraft. The airline challenges were behind it also introduced a number were quickly dispelled. Like of customer-service initiathe rest of the industry, it tives, such as enhanced was suddenly confronted online booking, improved with the impact of terrorfrequency, faster check in ism, war and disease — and boarding, and is now with a resulting significant looking to improve border drop in revenue. processing on international Industry observers flights, provide better Ralph Norris has led Air New wondered if Managing recognition of loyalty and Zealand through the developDirector and Chief Executive add new in-flight offerings. ment of a new strategic plan Officer Ralph Norris had The airline is also making that included completely revising taken on mission impossichanges to its crew uniits domestic and trans-Tasman ble when he was appointforms and will introduce a pricing structures. ed in February 2002. new uniform with “a more Under Norris’ stewcontemporary stylish look ardship, Air New Zealand has quickly accom[to] be reflective of our Kiwi culture” in the plished what many of its competitors have been next 18 months. unable to achieve — a return to healthy profits. In December 2002, the airline announced In the 2003 fiscal year, it earned NZ$220 another key component of its long-term stratmillion (US$150 million) in net profit before egy: a proposed alliance with Qantas Airways taxes and unusual items and also had an of Australia. The alliance would see Qantas operating cash flow of NZ$523 million eventually own up to 22.5 percent of the New (US$363 million). Zealand flag carrier.

62 ascend

Competition regulators on both sides of the Tasman have rejected the alliance. However, the airlines have appealed these decisions and will argue their case later this year. Air New Zealand officials have argued that the alliance is necessary to “ensure the future of Air New Zealand as part of a viable and globally competitive airline industry.” Norris recently discussed the changes the airline has made and how those changes As part of its in-flight customer ameniare positioning the airline to ties, Air New Zealand’s cabins support adapt to the new world of compersonal entertainment options such mercial aviation. as portable DVD players. Question: Why did Air New Zealand recently revamp its domestic fare structure? Answer: Simply because we needed to ensure that Air New Zealand remained competitive against other airlines. Not only was Qantas already aggressive in the market, we were facing the entry of several low-cost carriers, such as Pacific Blue, Australia’s Virgin Blue international brand. Q: Other than lowering fares, what changes — such as with aircraft types, catering or cabin classes — have you made in your domestic service? Air New Zealand has upgraded its fleet A: One major change is the by purchasing new A320 aircraft, which commitment to the upgrading are configured to include 138 seats in of our fleet. We will retire six their economy-class cabins (left). 737-300s, which will be replaced with A320s. Five of these A320s are already in service, with another 10 on order. We also have options with Airbus to add a further 20 A320s. Other changes include the introduction of Express Class on domestic routes, which has radically transformed our business.

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Response to Air New Zealand’s revised fare structure has helped the airline reach new heights. As a result of implementing its Express Class, passenger figures increased 40 percent during the past 14 months. The airline also launched a similar program, Tasman Express, on flights between New Zealand and Australia, which led to a passenger increase of 15 percent following its introduction.

Express Class is a one-class service with excellent customer service and light refreshments, usually on flights of 40 to 60 minutes. Q: How has Express Class impacted business and leisure travel?

T H E

A: Express Class has transformed Air New Zealand. We’ve found that we have new people flying as the cost is less prohibitive, which includes people flying for business purposes. We conducted extensive customer focus

vıew

H I G H

regional groups before any changes were implemented to ensure that changes were to be done the right way. One of the key things that came from those focus groups was that there was no requirement for business class on the short domestic routes. Express Class allowed us to focus on customer requirements, which offer passengers value and face-to-face service. Q: How has lowering fares with Express Class impacted your finances? A: Express Class has been a significant platform for our growth in passenger numbers while also improving our productivity. For example, our passenger figures have increased 40 percent (compounded) since the introduction of Express Class, while during the same time Internet sales for domestic tickets has gone from 3 percent to 45 percent. Further, at the airport we have introduced selfcheck-in kiosks, which are used by up to 50 percent of passengers. This is a huge reduction in distribution and staff costs. Q: What has been the reaction by New Zealanders to the new, low-fare Express Class domestic service? A: The response has been very positive, which is reflected in our compounded passenger numbers — up 40 percent from 14 months ago. What we found in focus groups was that customers were prepared to trade off certain things for lower fares. For example, as many of our domestic routes are just 40 to 60 minutes,

we discovered that the provision of meals was not a requirement by our passengers, if that meant fares would be lower. Q: How has business and leisure traffic between Australia and New Zealand been impacted by Tasman Express, the revised trans-Tasman pricing structure? A: We fly 1.5 million passengers per year on the trans-Tasman route. This is a reasonable figure for us, and it’s one we have seen increase by 15 percent. Again, this is significant. This is a very competitive route for Air New Zealand as there are 13 other carriers flying the Tasman. We knew business-class customers liked options, so we kept full meals and newspaper service. While in economy, we offer light meals and beverage service. Q: What goals did you have with Tasman Express? Has the new fare structure achieved them? A: The main goal was to have a model that enabled our operation to run at a low cost but was also price competitive. Most airlines usually cut fares without cutting costs, which of course means yields will suffer. We made

changes such as Express Class and Tasman Express. We knew that these changes were sustainable and based around profitability and robust performance.

is a business that is tough, “This and the value that needs to be provided to customers has risen.

Q: What do you believe would have been the fate of Air New Zealand without the fare restructuring of Express Class and Tasman Express? A: Air New Zealand could not have continued. We created significant changes to improve productivity, and we needed a platform to remain competitive to new entrants, in particular low-cost carriers. Q: Given the success of the new fare structure on domestic and trans-Tasman routes, why do you still want to form an alliance with Qantas?

Photo courtesy Air New Zealand

Photo courtesy of Air New Zealand

regional

L E V E L News Briefs from Around the Globe

A: We require a joint venture to improve the platform that supports the business. Both airlines will be appealing the decision in their respective countries, Qantas in May and Air New Zealand in July. Q: Why do you think regulators initially resisted the alliance? A: Regulators do not understand the speed of change in international aviation. This is a business that is tough, and the value that needs to be provided to customers has risen. The new technology, more efficient aircraft, it all costs, but it all benefits the customer. If we look around the world, many airlines are seeking mergers: KLM and Air France, Iberia and British Airways, Lufthansa and European airlines. If first-class aviation infrastructure is required, it needs to be done through greater scale, such as through mergers and alliances. The last thing the industry needs is to become unattractive to investors because airlines will not be able to raise capital to reinvent and meet the needs of the customer. It’s especially important in this part of the world, as we need that infrastructure to survive. Q: How have you changed your strategy for long-haul international flights? A: We are very focused on long-haul flights, but we do not aim to be all things to all people. Our long-haul fleet is relatively young; it is the configuration — from a passenger’s view — that is out of date. We currently have a traditional configuration and have made a decision to upgrade to state-of-the-art configuration — including our 747-400s — with lie-flat beds in business class, in-seat entertainment in both business-class and economy-class cabins, and the replacement of our 767-300 fleet. Q: What other changes have you made to your overall strategy in order to compete effectively in the new airline environment? A: We have very much focused on our people, who were on their knees staring bankruptcy in the face. Our focus was to improve their morale in the belief that the company can be successful because of the people standing behind it. a

Who

Why

Qantas Airways, Aeroflot

The more powerful calibration tool

ever,” said Amr Junaid, systems pro-

Russian Airlines, AeroMexico

provides features such as an

ject leader of commercial planning

and Gulf Air

enhanced market-size estimation

and network development for Gulf Air.

What

method that improves leg-level fore-

“With the new calibration tool offered

Upgraded to a new calibration

cast accuracy, a utility that enables

by the Sabre ® AirFlite ™ suite of plan-

tool for the Sabre ® AirFlite ™ Profit

users to determine which itineraries

ning and scheduling solutions, we

Manager designed to enhance

in a market will be built, and a utility

can reduce the time it takes to gather

forecasting of airline passenger

that enables users to choose a flight

market calibration information and

demand, traffic, revenue and

leg and quickly see which inbound

concentrate more on analyzing that

costs. The tool, a graphical user

and outbound connections are valid.

data and making decisions that allow

140

us to introduce more profitable routes

February. The 16-hour flight and its 18-and-a-half-hour return represent the longest scheduled commercial flight in the world

and schedules.” a

at 7,937 nautical miles.

interface-based add on, streamlines the calibration of market information.

“In today's extremely competitive global market, making right deci-

sions quickly is more important than Air New Zealand offers more than 470 domestic flights per day, serving 25 New Zealand communities. The airline, which operates a total of 89 aircraft, also serves more than 20 international routes, including London, Tokyo, Honolulu and Los Angeles. The airline is upgrading its long-haul aircraft to include lie-flat beds and in-seat entertainment.

+count it up Number of passengers who flew on the inaugural Singapore Airlines flight from Los Angeles to Singapore in


regional

Everything to

Gain

Estonian Air remained profitable during some of the industry’s lowest points, but the carrier still realizes the need to make major adjustments in order to adapt to a changed marketplace.

By Tim Ricketts | Ascend Contributor

A

Photo courtesy of Estonian Air

mid a rapidly transforming industry, the past year also marked a period of great change for Estonian Air.

In recent months, the national carrier of the Republic of Estonia added four destinations, leased an additional aircraft, introduced a revamped low-fare structure and launched an ambitious information technology investment program, which have helped the 13-yearold carrier maintain profitability despite the struggles of the industry. “Changes in products offered were aimed at responding to changed customer needs and values,” said Leela Lilleorg, vice president commercial for Estonian Air. “Finding cost-efficient ways of conducting our daily business does give the solid platform to enable that.” In 2003, the airline began service to Paris, Oslo, Berlin and Amsterdam, growing its network to 12 destinations in Europe.

This year, the carrier plans to add a fifth aircraft to its single fleet of Boeing 737-500s. The airline, owned in part by Scandinavian Airlines (49 percent), the Estonian government (34 percent) and Cresco Ltd., an

new and considerably lower “ Our prices have changed flying to an affordable, down-to-earth mode of traveling for our customers in Estonia and abroad alike.

Estonian investment bank (17 percent), derives 85 percent of its income from scheduled passenger operations, 6 percent from charter operations, 3 percent from cargo and 6 percent from other services. Even while undergoing dramatic changes, Estonian Air grew its passengers carried and load factors and managed to carve out

a profit for the third consecutive year. Estonian Air, which earned a net profit of €5.2 million (US$6.6 million) in 2003, more than doubling its €2.5 million (US$3.2 million) net result of the previous year, carried 410,652 passengers for the year, a 30 percent increase over the previous year, and maintained an average load factor of 59 percent, five points higher than in 2002. Erki Urva, president of Estonian Air, attributed much of the growth to the airline’s new low-fare structure, which was introduced on all its routes in 2003 and features one-way fares as low as €45 (US$56) to Hamburg, Stockholm, Moscow, Oslo and other similar destinations and approximately €65 (US$81) to Frankfurt, Paris and Amsterdam. “Our new and considerably lower prices have changed flying to an affordable, down-toearth mode of traveling for our customers in Estonia and abroad alike,” Urva said. “Estonian Air has proven that an airline can offer prices comparable with bus, train and ferry fares and still maintain profitable operation

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Photo by Jennifer Knoeber

regional Air has proven that an “ Estonian airline can offer prices comparable with bus, train and ferry fares and still maintain profitable operation and development. Aviation in the entire world has changed forever, and Estonian Air has been successfully following these changes.

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Estonian Air, founded in 1991 when the country regained its independence after the fall of the Soviet Union, has positioned itself to take advantage of its home county’s entry into the European Union this month. EU membership, which promises to increase passenger traffic to and from the country, will make it easier for people throughout Europe to travel to the historic cities of Estonia and experience their old-world charm.

its fare structure “Byandrevamping investing in IT, Estonian Air, headquartered in the nation’s historic capital city of Tallinn, has also prepared itself to take advantage of dynamic changes in its home country.

Headquartered in Tallinn, the capital of Estonia, Estonian Air serves 12 destinations in Europe with its fleet of four Boeing 737-500s (right) and will add a fifth 737-500 this year.

Photo and illustration courtesy of Air Estonia

and development. Aviation in the entire world has changed forever, and Estonian Air has been successfully following these changes.” To h e l p a d m i n i s t e r i t s n e w f a r e structure, the airline installed the Sabre ® AirMax ™ Revenue Manager, which features a restriction-free pricing model that enables airlines to forecast demand in a restriction-free pricing e n v i r o n m e n t a n d determine the best fare levels to use for each flight. The installation of the Revenue Manager is part of the airline’s strategic IT investment program, launched in the first quarter of 2003 in order to help it adapt to the new marketplace, which has seen the expansion of low-cost carriers and the retrenchment of traditional airlines. Estonian Air realized that enhancing its IT could give it a competitive advantage by increasing efficiency, thereby reducing costs and further improving profitability. The airline, looking to improve its reservations and related IT systems as well as reduce costs, has also implemented the SabreSonic ™ passenger solution for reservations and departure control functionality, the Sabre ® Aerodynamic Traveler ™ Self-Service Kiosk and the Sabre ® Aerodynamic Traveler ™ Gate Reader to efficiently process passengers at the airport.

By revamping its fare structure and investing in IT, Estonian Air, headquartered in the nation’s historic capital city of Tallinn, has also prepared itself to take advantage of dynamic changes in its home country. This month, Estonia, located on the Baltic Sea and the Gulf of Finland, bordering Russia and Latvia, fully enters the European Union, a move expected to further boost a robust economy built since the country gained independence following the collapse of the Soviet Union. The country has also begun preparations to adopt the Euro as its national currency in 2007. As EU membership will make it easier for more people to discover the scenic beauty of Estonia, a country featuring islands, forests and lakes, the airline expects its fortunes to continue to improve. The airline already anticipates continued passenger growth this year, adding new routes and increasing frequencies to existing destinations. a Tim Ricketts is the Sabre Airline Solutions account director for Estonian Air. He can be contacted at tim.ricketts@sabre.com.

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company

company

PUT TING

The User Community

IT

Working Together to Shape Product Direction he contract has been signed, the software solution installed and working, and the information technology provider and the airline are celebrating. Now what? This could be a major crossroads for the relationship with the parties either going their separate ways or working even more closely together. Ideally, the moment the contract is signed is the beginning — not the end — of the relationship. After the product is installed, an airline can become a member of a larger community of product users, which provides an opportunity for the relationship to further grow and prosper. With this goal in mind, an IT provider and its user community should work as a team after implementation to improve and expand the horizon of the software solutions. Through an active user community, the old adage of two heads being better than one is taken to the next level as the members work together to enhance the software for the common good of the whole. The user community brings together experts from the IT provider and actual users of the solution to continually exchange ideas about the product and how it can best fit the needs of airlines. A successful user community should meet regularly to ensure a constant flow of communication. Design meetings, focus groups and users’ conferences held throughout the year bring the community together to address specific product and industry issues. The community also provides an avenue for informal discussion among members throughout the year. Having constantly improving products and savvy users maximizes the benefits of the tools, which is a key to reaping the financial benefits that will help airlines return to, or further increase, profitability.

T

By Dave Roberts, Sanjay Sathe and Elayne Vick Ascend Contributors

A LL TOGE THER

Being a member of a user community offers several benefits for airlines: By working closely with the IT provider, users can ensure that the product solves realworld issues. It provides a forum for representatives from airlines of different sizes, from different regions, using different operating models, to provide feedback, making for more robust systems. Members have an opportunity to interact with their peers to learn how they use systems to tackle various challenges. Working closely with the IT provider enables users to help shape future product direction to meet changing industry needs. The constant flow of information helps improve the usability of the product as well as ensure it contains the necessary functionality to solve industry challenges. Communication improves between the provider and the airline’s analysts. Beginning with its first product — the computerized reservations system — Sabre Airline Solutions has teamed with its technology users to develop strong user communities that work closely together. The model has been copied across the product portfolio, customized to fit the unique needs of each community. And, where appropriate, user communities work together across product lines to help push integration. Two user communities — passenger solutions and flight operations — provide ideal examples of the ways airlines can benefit from participating in a user community with their IT provider. a

The relationship between an airline

a product that meets their needs

and its IT provider shouldn’t end

now and in the future, they can

once the contract is signed. By

draw upon the expertise of fellow

participating in a user community,

professionals to better leverage

airlines not only ensure they have

the products they use.

Airline Passenger Solutions

Flight Ops Community

The Original User Community Continues to Set the Pace

Meeting the Complex Needs of a Vital Operational Area

F

O

or Aldo Borg, head seat control and distribution for Air Malta, being part of a larger community of airlines provides reassurance in a turbulent industry. “We’ve been implored to think globally and act locally,” he said. “This brings to mind our forming part of the Sabre Airline Solutions community. The fact that we form part of some 100 airlines gives me, at least, the strong feeling of being part of a big, large group of airlines. We interact quite frequently also among airlines of the same region for the benefit of the community.

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“We have long been feeling the first tremors of deregulation and keen competition especially from the low-cost carriers,” he said. “Our joining the user community is facilitating us in reviewing our business model and adapting to a radically different world.” Formed more then 25 years ago, the user community for Airline Passenger Solutions includes representatives from more than 100 airlines from 23 countries around the world who help define product strategy for the reservations, inventory and departure control systems. During the past three

decades, the administration of the products has evolved into a well-defined community governance structure and process to ensure the collective priorities of airlines are reflected in product plans. “Having been with Sabre Airline Solutions for 10 years and participated in previous customer-focused events, the new governance process is an improvement,” said Monica Ornellas, director of information technology at Hawaiian Airlines. “Events are

continued on page 72

nce aviation officials decided to decrease airway congestion by reducing the vertical separation between aircraft, airlines realized they would need an enhancement to comply with the new reduced vertical separation minimum, or RVSM. Well before going into effect, however, the updated RVSM guidelines were incorporated into Sabre Airline Solutions’ flight operations suite of products. Members of the flight operations community were able to successfully comply with the revised RVSM on time and with a reliable tracking program —

all because airlines worked closely with the flight operations product team to prepare for the new government mandate. In fact, during a 2001 focus group, airlines identified the new RVSM as their top product enhancement request, and it was introduced within months, giving airlines plenty of time to update their procedures before the new rules were in place. Such cooperation between airlines and the flight operations product team ensures that products stay ahead of the curve, anticipating industry changes and incorporating

them before they take effect. Through various organized events throughout the year such as design committees, focus groups and users’ conferences, airlines are able to help shape future product generations. Since the inception of the product suite, both the flight operations team at Sabre Airline Solutions and system users have realized the value of working together. For more than seven years, the flight operations user community has benefited from a

continued on page 73

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Sabre Airline Solutions

Sabre Airline Solutions employees demonstrate the Sabre eMergo Web-enabled and dedicated network solutions during a regional planning session in Bangkok, Thailand, last year. Delegates from eight Asia/Pacific carriers attended. Similar events were held for the Americas and Europe/Middle East/Africa. ®

®

Attendees at a recent Airline Passenger Solutions users’ event enjoyed an evening of socializing at the Lone Star Park horse track in Grand Prairie, Texas.

Online conferences conducted four times a year to keep members of the community updated about quarterly enhancements. Product working groups — Community meetings designed to discuss existing and proposed functionality in detail, share and identify requirements for new and enhanced functionality, review designs for upcoming enhancements or new development, and conduct product demonstrations. Advisory board — A leadership meeting to discuss and review strategic product direction and set regional priorities. During the annual gathering, the 12 airline members, representing all regions, discuss product and service strategies. “As a part of the Airline Passenger Solutions community, Jet Airways is able to interact with other airlines and understand how various products have been deployed in global markets with different practices,” said Gaurang Shetty, vice president of marketing for Jet Airways. “It also provides a forum for airlines to discuss industry problems that are similar in nature across markets and seek solutions from Airline Passenger Solutions in a cost-effective manner.” Keith Smith, vice president of IT services for Air Jamaica, also said the user community provides an excellent forum for his airline to help shape future product direction. “As a hosted customer, it is important for Air Jamaica to have some influence over the direction, technology choices and application enhancements,” he said. “We do this in a few ways, all of which we have found beneficial to us such as regular involvement in the

continued on page 74

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continued from page 71 symbiotic relationship. Sabre Airline Solutions relies on product users to validate the functionality of the product and its adaptability to the changing environment. The product users in turn rely on Sabre Airline Solutions to provide the technical expertise to develop leading solutions to make their jobs easier. “User group meetings have enabled our airline to preview new functionality before it’s finalized in the product,” said Tom Powell, manager of operations control at Gulf Air. “We are able to make recommendations at that point that will make the product more efficient and usable. In addition, as a group, we must agree on the direction of the products by establishing priorities for development. The group participation has proved very beneficial to us in terms of operational efficiency and cost reduction.” The interaction across the user community leads to direct improvements in the product. Input from a focus group led to the implementation of a safety feature in the Sabre ® AirOps ™ Movement Manager that helped curtail inadvertent disruptions in operations. The introduction of the concept of authorization created user access levels such as “no access,” “read only” and “read/write,” which ensured that only designated users could change specific data.

Evolution of the Flight Operations User Community The original flight operations user community was formed when it became clear that much could be gained by working together to determine the direction the product should take, and users and the flight operations product team soon realized that

T H E

During the annual flight operations users’ conference in Dallas, Texas, last year, eight attendees won a drawing in which they received an aerial tour of Dallas aboard a vintage WWII-era DC-3. More than 80 representatives from more than 35 airlines around the world attended the seventh annual event.

everyone would benefit by pooling ideas and experiences. As the product suite grew, additional product-specific user groups, or focus groups as they are known today, were formed at the request of airlines. These various groups began to meet concurrently at a single, preselected location, an event that has grown to become the annual flight operations and crew management users’ conference. During the flight operations and crew management users’ conference, the

vıew

H I G H

Who

Photo by Elayne Vick

Putting IT All Together | Airline Passenger Solutions

scheduled in advance allowing us to plan ahead and increase our number of participants. Events are structured and focused to address both global and regional challenges. And, whenever possible, processes have been made available to us online, making participation convenient.” The guiding principles of the Airline Passenger Solutions community governance place a strong emphasis on airline involvement and input by: Involving them in defining and setting product priorities, Incorporating their deep industry knowledge and expertise, Ensuring regional needs are met through leadership of local airlines, Leveraging a shared-systems environment. By helping shape the future product direction, the members of the user community play a vital role in making sure products continually evolve to meet their changing needs. Last year, Cyprus Airways had an idea for a way to improve the reservations system. The airline noted that when a travel agent rebooks an itinerary on a canceled passenger

name record, the reservations system created a new PNR in the host partition rather than inserting the new itinerary in the original PNR. Because of that, the airline did not have all the information contained in the original PNR. Cyprus Airways recommended an enhancement that would eliminate this situation and avoid the auto-cancellation of these records as not ticketed. After a vote by the Airline Passenger Solutions community, the enhancement was included in the 2004 product plan. Throughout the year, airlines come together at various events to help provide recommendations about product direction and discuss ways to better utilize the products. Four primary forums facilitate collaboration among members of the user community: Customer conferences — A forum for airlines and the Airline Passenger Solutions team to discuss product plans and industry needs, gather input from airlines about their product and service needs, conduct roundtable discussions about industry trends, hold interactive product demonstrations, and interact with representatives from other airlines. Reservations review net conferences —

Putting IT All Together | Flight Ops Community

continued from page 70

company Sabre Airline Solutions

company

community reviews pertinent and relevant trends in the industry that are of interest to the entire group. This time together enables airlines to exchange information and ideas among the many attendees that represent other airlines, different geographic locales and different products. The number of attendees at focus groups and users’ conferences has grown from seven or eight in the beginning to more than

continued on page 75

L E V E L News Briefs from Around the Globe

Why

functions. The engagement will

EgyptAir

Consultants from Sabre Airline

focus on improving the effectiveness

What

Solutions will work with the

of the carrier’s network planning

Signed a consulting agreement

airline to improve financial and

and scheduling; pricing and

business performance through

revenue management; and

to help enhance its business performance and develop management

hands-on tactical changes and

sales, marketing and distribution

expertise in key areas.

improvement in core commercial

processes. a


Sabre Airline Solutions

continued from page 73 100 at the users’ conferences. At present, Sabre Airline Solutions has focus groups representing flight planning and dispatch, movement control, and crew management. Because the focus groups, chaired by elected airline representatives, are designed to be administered by the airline user community, a formal charter has been developed to outline the flight operations group procedures. The focus group charter describes its specific objectives and goals: “The users’ group exists to enhance the performance of the (flight operations products) and provide a means for communicating product functionality within the industry. Through this formal organization, the product development process will receive vital input from all members. The objective of the group is to steer the product development to meet the needs of the industry.”

During the users’ conference, participants enjoyed an evening social event at a local flight museum.

T H E

Who

Representatives from various airlines team up to try to solve the mystery presented at the Mystery Dinner Theater in the Dallas, Texas, area. The trip to the dinner theater was a nice change of pace from the productive users’ community meetings held earlier that day.

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Sanjay Sathe is Airline Passenger Solutions’ director marketing strategy and product governance at Sabre Airline Solutions. He can be contacted at sanjay.sathe@sabre.com.

Through joint meetings, community members share their needs and agree on a priority system to direct the annual development of the product, helping determine how best to direct investment dollars. During the past several years, the focus groups have taken on different shapes and appearances to accommodate different industry and user needs. Today, in addition to the users’ conference, many of the focus groups meet at least twice a year and are attended by the majority of airline users that participate in the maintenance program. “The focus group concept provides an opportunity, as part of the wider flight planning user community, to be able to influence the strategic direction and development of the (Sabre ® AirOps ™) Dispatch Manager,” said David Forbes-Dawson, flight dispatch manager for Air New Zealand, who has been a member of the flight planning focus group since its inception. “Also, it's a great opportunity to network with other Dispatch Manager users sharing ideas, problems and solutions.” Complementing the focus groups, design committees are newly formed groups that meet quarterly to review Sabre Airline Solutions’ integration of its flight operations products into a common database and look and feel for system operations control centers. These quarterly meetings are held in person or via an Internet-based conference. During these meetings, users make recommendations about the direction of the next generation of flight operations solutions and provide feedback about the integration effort. One of the most critical functional areas of an airline, flight operations plays a key role in making sure flights remain as close to schedule as possible, in compliance with legal and contractual obligations, and safe for departure.

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H I G H

Photo by Elayne Vick

opment groups. The product plan is compiled throughout the year and submitted to all airlines in the user community in June for their input. Airlines then vote on their top productenhancement priorities. Voting on the product plan is concluded by July, and regional meetings are held thereafter. The projects with the most votes are considered global needs and become top priorities in the product plan. All other projects receiving votes are divided by regions, and the regional meetings — for Asia/Pacific; Europe, Middle East and Africa; North America; and Latin America and the Caribbean — establish local priorities that will be funded regionally. Each region has 10 percent of the overall budget to spend on local projects. A final list of global and regional projects is presented to the governing advisory board for its approval. The final global and regional product plan is completed and distributed to customers in early December. Product plan progress is reviewed throughout the year at several community forums. In addition to the product plan, there are opportunities to pursue private or joint development. Because many carriers want to pursue products and services to differentiate themselves, they can initiate private development or joint development on an exclusive or non-exclusive basis. The community continues to grow and evolve, and recent improvements include online submission of new ideas, weighted voting for carriers based on carrier size and regional planning sessions. Based on airline feedback, there will be two rounds of regional planning sessions this year in place of an annual global users’ conference. Although the objectives and agenda are similar to that of the users’ conference, the planning sessions enable airlines to work more closely with other carriers in their region to prioritize region-specific product needs. The user community enables the customers’ voice to be heard, ensuring that products are customer-driven and meet the needs of a dynamic market. a

Photo by Roland Hollis

quarterly net conferences, attendance and participation in the regional planning workshops, and participation in the global advisory board. This level of participation helps to improve our perception of the organization and its ability to both meet our long-term needs and resolve our immediate concerns when they occur.” Outside of these meetings, members of the user community have several communications opportunities. The customer support Web site provides 24-hour-a-day, sevenday-a-week access to: Product information, Product plans, Overviews of upcoming enhancements, Enhancement rollout schedule, Documentation, Information about upcoming and past events and supporting materials, Training information and curricula, Help desk, Electronic submission and review of service requests, Resolutions guide, Frequently asked questions. Members of the user community also receive The Airline Passenger Solutions Insider, a bimonthly electronic newsletter

that includes tips on how to more efficiently use passenger solutions, answers to frequently asked questions, updates on product development, the latest information on upcoming events and training classes, and discussion of industry issues. The key to a successful product development community is a collaborative process that results in clear, relevant product direction. By gaining access to innovation and thought-leadership from airlines around the world, and by spreading the cost of enhancement across the community, each airline secures innovative, industry-leading capabilities at reduced costs. Customer participation is key in the annual product planning process, which has been in place for more than six years. Product plans are created annually for all of the core applications within Airline Passenger Solutions to guide investments for the coming year. The product plan is evaluated each year through an iterative process of discussions and reviewed with customers at both the global and regional levels. Airline Passenger Solutions gathers information for the product plan from multiple sources including direct input from the user community, data on product issues received by the help desk, and feedback from Sabre Airline Solutions account directors and devel-

Putting IT All Together | Flight Ops Community

continued from page 72

company Putting IT All Together | Airline Passenger Solutions

company

Seven members of the flight operations steering committee led an interactive discussion during the users’ conference.

The goal of the user community — to meet the needs of airlines — has been achieved through the exchange of industry information and the sharing of ideas to expand each product. Because aircraft and associated technology change rapidly, government flight regulations change rapidly also. To remain legal, airlines must adhere to these regulations or face grounding by government inspectors. The flight operations user community shares this information and works with Sabre Airline Solutions to ensure software modifications are timely and accurate. a

Dave Roberts is director of flight operations, and Elayne Vick is a marketing advisor for Sabre Airline Solutions. They can be contacted at dave.roberts@sabre.com and elayne.vick@sabre.com.

L E V E L News Briefs from Around the Globe

airline’s operations personnel readily

operations manager for duo Airways.

duo Airways

monitor the status of flights in

“All too often software packages fail

What

line with business and regulator

to deliver against expectations. The

requirements.

FliteTrac system is an exception

to facilitate the airline’s business and

Why

to this industry norm — not only

regulatory requirements for monitor-

“We are extremely impressed with

ing flight status, which will help the

this product,” said Richard King,

Installed the Sabre ® FliteTrac system

does it deliver what we wanted, it does more.” a


company Photo courtesy of Delta Air Lines

company

Channel Surfing A global distribution system can play a key role in an airline’s cost-effective recovery by providing access to multiple channels of distribution throughout the world. By Jason Toothman | Ascend Contributor

A

s airlines look to take advantage of the Today, successful airlines rely on a full worldwide, with travelers in more than 115 recovering economy and the increases suite of distribution products, from basic countries purchasing their travel through the in demand for travel, it’s crucial that reservations to the latest and most technologsystem during the past year. The system, they maximize sales opportunities, especially ically advanced connectivity systems, as well relied on by more than 430 airlines to distribfor high-yield passengers. as revenue maximization and cost manageute pricing and product, is used by more travAirlines can capitalize on the economic ment tools. el service professionals and consumers for upturn by increasing their reach real-time schedules and other travand driving their sales and el-related information than any marketing efforts. By doing other GDS. so, they expose consumers to The market share leader in their product and enable them to North America (45 percent), Latin interact in real time, effectively America (53 percent) and positioning their product at the Asia/Pacific (52 percent), the point of sale. Sabre system provides many distriOne of the most effective bution options including: ways of accomplishing these Direct Connect Availability — goals is by offering the product Maximizes sales and yields through a global distribution systhrough interactive reservatem that provides access to travtions between the GDS and el agencies worldwide. Studies airlines, enabling seamless, have shown that the travel real-time access to inventory, agency channel continues to proBasic Booking Request — duce travelers who generate the Enables carriers with limited most revenue for airlines. By distribution needs to achieve Thousands of travel agents worldwide rely on the Sabre global expanding reach and marketabiliextended market reach with a distribution system to book travelers on airlines. Being included ty, an airline can maintain a comlow-frills tool that automates in such systems can help airlines increase their market reach. petitive advantage. Beyond probooking and scheduling, viding a suite of revenue-generatClaim It — Enables subscribers Carriers of all sizes, competing in all ing and cost-saving products and services, to drive down client handling costs by promarkets and geographic locations, have recogpartnering with a leading GDS helps deliver cessing an airline-created booking without nized the tremendous sales opportunities sales where an airline cannot afford to provide having to call the airline directly, gained by utilizing multiple distribution outlets. its own staff as well as provide access and visElectronic Ticketing — Generates substanA GDS that reaches many different channels ibility to key travel service providers. tial savings and customer convenience by such as full-service corporate, online travel “Distributing through the Sabre ® global providing computerized storage of passendistribution system has allowed HMY Airways agencies, leisure specialists, general travel gers’ entitlements to travel, enabling the to extend our distribution reach by gaining arrangers, wholesalers and consolidators, supairline to dispense with the costly manageaccess to nearly 60,000 connected travel plier portals, cruise and tour companies, and ment of paper ticket documents. agents,” said Jeffery Chu, vice president of consortium operators increases an airline’s The Sabre system provides many strategy and planning for HMY Airways, one of sales and marketing opportunities allowing it products to reduce costs and increase efficien40 airlines around the world that signed new to take advantage of multiple revenue streams. cies within other critical areas of an airline participating agreements for the Sabre sysParticipating in the Sabre system such as alliance management. The Sabre ® Alliance Manager is designed to help airlines tem in the past year. provides access to 60,000 travel agencies

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Delta Air Lines, which is participating in the Direct Connect Availability — Three-Year Option, a program that lowers booking fees in exchange for access to all fares, finds value in a global distribution system’s operating efficiencies as a high-yield channel. A GDS, by providing access to travel agents around the world, can also provide tools to help manage costs, boost customer loyalty and achieve sales goals.

T H E

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H I G H

L E V E L News Briefs from Around the Globe

Who

Awards+Plus members with greater cus-

Pakistan International Airlines

tomer service than we could previously,”

method, PIA eliminates the need

What

said Alamzeb Afridi, general manager,

for costly onsite implementation.

marketing support systems for PIA. Enhanced its Awards+Plus frequent flyer program with the Sabre ® Traverse ™ loyalty management system. PIA utilizes the Traverse system as a Sabre ® eMergo ® Web-enabled and dedicated network solution, an applications service provider model.

Through the ASP delivery

“The Traverse system's ASP

“The partner profile and management

interface relieves us of the burden of

aspects of the system enable us to add

maintaining a costly infrastructure to

new partners and functionality to the

support our loyalty program,” Afridi

Awards+Plus program, increasing the

continued. “Now we can maintain our

benefits and value of the program for

entire program online. This type of

our members. In addition, the Traverse

automation is critical for PIA in our

system provides greater efficiency for

key international cities. Accessing

Why

our agents in terms of time required for

these capabilities via the Web helps

“With the addition of the Traverse

processing member information and

us better perform in today's highly

system, we will be able to provide

the ability to perform other duties.”

competitive airline industry.” a


company

company

Photo courtesy HMY Airways

Talking Technology With

BARRY SMITH, CHIEF SCIENTIST, SABRE HOLDINGS

The Continuing Evolution of Revenue Management Despite the latest advancements, the practice of revenue management is far from mature. Recent breakthroughs show that using customer choice models will further improve the field of revenue management.

D HMY Airways, a Vancouver, Canada-based international airline founded in 2002, recently decided to distribute its inventory through the Sabre global distribution system to extend its distribution reach to nearly 60,000 travel agents worldwide. HMY, which stands for “harmony,” operates scheduled flights from Vancouver to Toronto, Los Angeles and Las Vegas as well as charter flights to vacation destinations in Cancun, Puerto Vallarta and Mazatlan in Mexico with its fleet of Boeing 757 aircraft.

leverage marketing agreements within the distribution channel. The Sabre system, which provides the most comprehensive content with availability to more than 1 million city pairs, has recently been enhanced to include additional functionality: Interactive Air — Enables the fastest booking process between airlines, Inventory Manager — Efficiently processes high-value shopping and reduces data processing costs, Group Management Tool — Automates the manual process for booking groups and blocks of inventory. As airlines continue their recovery,

controlling costs will remain a primary focus. To help control distribution costs and provide stable, long-term pricing, many airlines took

program … allows us to fur“ The ther reduce distribution costs and reflects our confidence in the value of the Sabre system and its operating efficiencies

fixed for three years in exchange for providing access to all fares including Web and promotional fares. “The program … allows us to further reduce distribution costs and reflects our confidence in the value of the Sabre system and its operating efficiencies as a high-yield channel,” said Lee Macenczak, vice president sales and distribution for Delta Air Lines. a

advantage of the Sabre ® Direct Connect Availability SM — Three-Year Option in 2003, which offers a reduced booking fee rate that is

Jason Toothman is a senior marketing analyst in airline distribution at Sabre Travel Network. He can be contacted at jason.toothman@sabre-holdings.com

+count it up 40 billion

Number of U.S.

19,971

Number of flight plans

50,000+

Number of cockpit

dollars paid annually by airlines to

generated per day in the Sabre ® AirOps ™

and cabin crewmembers around the

airport and air navigation service

Dispatch Manager and the Sabre ® Flight

world who are managed by the Sabre ®

providers, according to IATA.

Operating System.

AirCrews ® crew management system.

uring the past 30 years, we’ve seen and seats sold. This indicates what customers revenue management evolve with purchased, but not what they actually wanted. changing airline business opportuniEstimating spilled demand, recapture and upties from overbooking to discount allocations sell are examples of inferring what customers to origin and destination control and beyond. wanted. But these tend to be used to modify I’ve heard from some airlines a belief that our booking-based view of the market and O&D is the ultimate approach to revenue mandon’t provide much insight into the underlying agement and that there are no significant bendemand in a market. Ideally, we’d like to know efits beyond current state-of-the-art systems. I customer preferences for price, product qualibelieve we are about to enter a new era of revty, screen placement and promotion. These enue management that takes advantage of preferences are the foundation for customer new customer data choice models that and modeling. While tell us the relative I believe we are about to enter current revenue mandemand for any product a new era of revenue management agement systems (itinerary/fare combiprovide significant nation) in a market. that takes advantage of new benefits, future revCustomer choice customer data and modeling. enue management models simplify the systems and the busiforecasting process ness processes they by linking together support can become significantly simpler and the demand for the products in a market. more productive by shifting our focus more Today, we track bookings and forecast toward the customer. demand for individual itineraries and classes separately. Every forecast must be adjusted to A Customer Focus reflect demand changes at the market level The development of revenue management caused by schedule, price or availability. This is has provided incremental benefits to airlines not only complex but can easily introduce by controlling seat inventory at finer levels of inconsistencies in forecasts and controls. By detail. Because revenue management sysforecasting at the market level and mapping to tems are focused on inventory, the increase in the individual product, we ensure consistency. control granularity has caused revenue manThese forecasts automatically incorporate the agement systems to become more complex impacts of schedule, price and availability. So and more challenging to monitor and control. the effect of closing or opening a fare class on Let me explain how a customer view can help. one flight can be reflected in the demand and Airline revenue management is based inventory controls for other related flights. on the analysis and forecasts of reservations Forecasting accuracy also improves because

forecasts at the market level are more accurate than those made at the individual itinerary fare level and customer preferences are relatively stable. Garrett van Ryzin, a professor of private enterprise at Columbia University in New York City, New York, and Kalyan Talluri, a professor of economics and business at the Universitat Pompeu Fabra in Barcelona, Spain, have developed an approach to incorporating customer preferences directly into revenue management forecasting and optimization models and have shown significant theoretical benefits. I believe that these models will be in production use in the next several years. Why haven’t we done this before? Collecting data to observe customer shopping behavior has been very difficult in the past. In particular, we need to know what people asked for, what options they saw and what they did. Access to this data has been difficult due to the volume of transactions and the impact of the required data collectors on the performance of reservations systems. This type of data is more accessible from online sources including online travel agencies, airline Web sites and next-generation shopping platforms such as Sabre Airline Solutions’ SabreSonic ™ Shop. In addition to the detailed shopping data, we can also observe overall shopping performance. The labs group supporting Sabre Airline Solutions is developing reports to answer questions such as, “How often do I show up on low-fare search engines?” or “How often do I have the best service or lowest fare in the market?”

ascend

79


Talking Technology With | BARRY SMITH, CHIEF SCIENTIST, SABRE HOLDINGS

Simplifying Systems Incorporating customer data can simplify systems as well as the models used to forecast. The overall design and flow of revenue management systems have not changed significantly in the past 20 years. We collect data from the reservations system in the off-peak times and then race to complete database updates, forecasting, optimization and reporting processes before the revenue management staff arrives the next morning. This tends to drive hardware requirements for this off-line processing and limits the collection and modeling to specified reading days. Tracking customer shopping involves a lot of data. Fortunately, forecasting and optimization models don’t need all the details, only the customer preferences. Customer preferences are relatively stable and don’t need to be recalibrated every day. So, customer shopping calibration does not need to run the daily processing loop. This, combined with the elimination of the bottom-up detailed forecasting, allows us to consider several areas of simplification: We can reduce data storage. Revenue management systems store data associated with inventory controls and bookings. In an inventory-based view, we need to summarize booking activity by flight and reading date. As forecasts are made at finer levels of detail, booking and cancellation events become less frequent and the storage requirements increase. Storing the summarized data now requires significantly more space than storing the details (actual reservations). While we may need the summarized data for reporting and monitoring, it is not necessary for customer-based forecasting and optimization models. We can target revenue management processing to where it is most valuable. Since we only need booking information, we can reduce the cost and improve performance by feeding data to the revenue management system as events occur (booking, cancellation, price change, availability change) through a publish/subscribe framework. Forecasts and optimization models can be triggered by events or rules associated with

accumulated change in bookings or availability. In this way the processing and updates are directed to flights and situations that provide an opportunity for revenue improvement rather than an arbitrary calendar. We know that more frequent forecasting and reoptimization significantly improves revenue management performance. In this framework, real-time monitoring and optimization become practical.

Other Benefits Having a customer view will not only improve revenue management performance, it has significant benefits in related marketing functions of pricing, scheduling and distribution. Revenue management and inventory control were developed to micromanage a relatively static pricing structure to match demand to supply. Customer choice models can help markets that are inefficiently or inconsistently priced. Talluri has done some groundbreaking work to demonstrate how to use customer preferences to design the right mix of products in your markets. While Talluri’s work helps capture the opportunities with a static pricing structure, unfortunately there is no single right answer to airline pricing. The best price for any request depends on who is asking, what they are asking for and what the other options available are. Airline pricing is riddled with inconsistencies such as non-stops priced lower than competitor connections and connecting service priced higher than your own non-stops. These inconsistencies cannot be avoided with a static fare structure. The solution is dynamic pricing. Given a shopping request, we estimate the likelihood of selling any product shown to an agent or customer and adjust dynamically priceable fares to increase expected profitability. If this approach is implemented in conjunction with the revenue management system to avoid displacement, then any adjustment can provide incremental profitability. Dynamic pricing does not yet exist, but we are working hard to make this a reality. Customer choice information can also improve the performance of reservations

office and Web site sales by selling toward profit. For example, suppose we have a request that can be satisfied by one of two flights. While both flights are wide open and all fares are available, one has a higher likelihood of eventually selling out; it now has a higher bid price. The net profit associated with any sale is the fare minus the bid price. If an earlybooking customer is indifferent, then we can increase profit by displaying the flights in a way that encourages booking the flight with the lower bid price. The objective of revenue management is typically to adjust price to match demand to supply of seats. Revenue management forecasts can also be used to help match supply to demand in two ways. First, revenue management forecasts and optimization are integrated with the schedule planning process in the origin and destination version of the Sabre ® AirFlite ™ Fleet Manager. This ensures that capacity is assigned where it is most profitable. Second, revenue management forecasts and optimization can help by making changes in aircraft assignments late in the booking process. Because demand forecasts get more accurate closer to departure, this approach, typically known as demand-driven dispatch, has been shown by Boeing at the Massachusetts Institute of Technology to increase airline profitability by up to 5 percent. There is academic research underway to build schedules that include many swap opportunities.

The Future of Revenue Management Revenue management has provided increasing benefits through various stages of development during the past 30 years. Today’s systems and business processes are the most effective ever. But, rather than thinking we are nearing the end of the revenue management evolution, I believe that we have reached the mid-point of its development. The next steps will take us in the direction of business and technical sophistication rather than complexity. With revenue management processes based on the customer preferences, future revenue management organizations and systems can be much simpler and more effective. a

Sabre Airline Solutions and the Sabre Airline Solutions logo are trademarks and/or service marks of an affiliate of Sabre Holdings Corporation. ©2004 Sabre Inc. All rights reserved.

company

smart

solutions.

making contact To suggest a topic for a possible future article, change your address or add someone’s name to the mailing list, please send an e-mail message to the Ascend staff at wearelistening@sabre.com.

For more information about products and services featured in this issue of Ascend, please visit our Web site at www.sabreairlinesolutions.com or contact one of the following Sabre Airline Solutions regional representatives:

Asia/Pacific Chris Vasiliou Senior Vice President Level 9, Phillips Building 15 Blue Street North Sydney NSW 2060 Australia Phone: 61 2 8923 5230 E-mail: chris.vasiliou@sabre.com

Europe, Middle East and Africa Vinay Dube Vice President 23-59 Staines Road Somerville House Hounslow, Middlesex TW3 3HE, United Kingdom

What makes a solution “smart”? Patented algorithms? Intuitive interfaces? Open-systems architecture? Absolutely. But what’s really smart are solutions that help you overcome your challenges and deliver results.

Phone: 44 20 8814 4540 E-mail: vinay.dube@sabre.com

North America Greg Gilchrist Senior Vice President

By working closely with carriers worldwide, we’ve developed a portfolio of flexible, integrated solutions that can optimize operations for all airlines — any size, any business model, anywhere in the world.

1 E. Kirkwood Blvd. Southlake, Texas 76092 United States Phone: 817 264 7947 E-mail: greg.gilchrist@sabre.com

Latin America

Learn how we can work together to create smart solutions for your airline. Call us at 682 605 1000. Or visit www.sabreairlinesolutions.com.

Marcela Lizárraga Vice President 1 E. Kirkwood Blvd. Southlake, Texas 76092 United States

+count it up

30,000+

Number of

45,000+

Phone: 817 264 6967

Number of

crewmembers who have their

crewmembers worldwide whose

schedules generated through the

pairings are generated using the

Sabre ® AirCrews ® Schedule Optimizer.

Sabre ® AirCrews ® Pairing Optimizer.

E-mail: marcela.lizarraga@sabre.com

smart. proven. bankable.

/ascend_2004_issue1  

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