THE FUNDAMENTALS OF

ROUTE DEVELOPMENT

UNDERSTANDING AIRLINES

MODULE 3

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MODULE 3 MODULE 3 OBJECTIVES

• Why are the different airline types?

• What are the different airline costs?

• What is the planning process and how does it differ for different airlines?

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MODULE 3 AIRLINE ISSUES

• Low margins

• Fuel price uncertainty

• Vulnerability to economic downturn

• Unpredictable one-time events

• High profits of airports

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MODULE 3 AIRLINES ISSUES

• Network carriers (single hub)

- Etihad, Emirates

• Network carriers (multiple hubs)

- United, American Airlines

• Point-to-point regionals

- Flybe

• Regional feeder services

- Silk air

• Capacity purchase agreements

- Sky Regional

FSCs

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MODULE 3 UNDERSTANDING AIRLINES

• Value LCCs

- Azul, easyJet, Westjet

• “Normal” LCCs

- Norwegian Air Shuttle, Southwest, Air Asia

• Ultra Low Cost Carriers (ULCCs)

- Ryanair, Spirit Airlines,

• LCC subsidiaries of FSCs

- Rouge (Air Canada), Germanwings (Lufthansa), Jetstar Airways (Qantas),

Scoot (Singapore Airlines)

• Hybrid LCCs

- Tiger

• Long-haul LCCs

- Air Asia X, Norwegian

LCCs

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MODULE 3 UNDERSTANDING AIRLINES

• Vertically integrated carriers

- TUI Group

- Thomas Cook Group: Condor

• Part-vertically integrated carriers

- Air Transat

• Non-vertically integrated carriers

- Enter Air

• ACMI operators (Aircraft, Crew, Maintenance, Insurance)

- Omni Air, Dynamic

CHARTER

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MODULE 3 UNDERSTANDING AIRLINES

PASSENGER SEGMENTATION

Leisure Passengers Price Conscious

Business

Passengers

High End Product

Business

Passengers

Short Haul

Routes

Long Haul

Routes

LCC’s

Network/FSC Carriers

Regional

CarriersCh

arte

rC

harte

r

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MODULE 3 UNDERSTANDING AIRLINES

Ch

arte

r

Source: Boeing CMO 2012-2031

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MODULE 3 LCC MARKET SHARE

North Asia LCC Seat only 9.5%

South East Asia 50%

1020 aircraft order from the three

largest LCCs in Asia

Development of Pan Asia LCC brands

% of Low Cost Seats by Region (2013)

Source: Innovata

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MODULE 3 UNDERSTANDING AIRLINES

AIRLINE COSTS

Operating costs + aircraft ownership + overhead costs

VARIABLE

OPERATING

COSTS

AIRCRAFT

OWNERSHIP

OVERHEAD

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MODULE 3 UNDERSTANDING AIRLINES

AIRLINE COSTS

Variable Operating Costs (directly tied to flying)

Fuel Aviation fuel, oil

Direct labour Salaries & benefits of flight crew, airport sales and ramp

staff

Crew cycle expenses Flight and cabin crew layover costs

Maintenance Cycle or block hour driven maintenance costs

Airport & en-route charges Landing fees, handling , navigation fees

Distribution costs GDS charges, commissions

Passenger service Catering, passenger insurance

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MODULE 3 UNDERSTANDING AIRLINES

AIRLINE COSTS

Aircraft ownership Unrelated to flying hours

Lease payments Payments on leased aircraft

Depreciation Depreciation on owned aircraft

Aircraft insurance Costs of insurance on all aircraft in fleet

• Aircraft ownership costs are independent of flying hours (except for “power by the hour” lease

agreements), but are generally allocated to the route level on the basis of block hours flown to

represent the amount of aircraft a route consumes.

• Improving utilization on a given fleet type lowers the ownership cost/block hour.

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MODULE 3 UNDERSTANDING AIRLINES

AIRLINE COSTS

Types of Aircraft Ownership Scenarios Description

Purchase cost depreciation Straight line over 10-15 years

“Wet” leaseAircraft operated under the AOC of the lessor. Includes flight crew,

cabin crew, maintenance, insurance (ACMI)

“Damp” lease Same as wet lease except cabin crews provided by lessee

“Dry” leaseAircraft operated under the AOC of the lessee. Lessor provides

aircraft, lessee provides crew, maintenance & insurance

“Power by the hour” lease

Same as dry lease in that lessee provides crew, maintenance &

insurance but lessee pays lessor only for block hours flown vs. a

monthly lease rate

Operating lease 2-7 years, off balance sheet, ownership remains with lessor

Finance/Capital lease

Typically >75% of aircraft useful working life

Viewed as a purchase on balance sheet

Ownership eventually transferred to airline

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MODULE 3 UNDERSTANDING AIRLINES

AIRLINE COSTS

Corporate Overhead Unrelated to flying hours

Headquarters facilities costs Building, utilities, etc

Headquarters staff Management salaries, benefits, etc

Other corporate overhead Advertising, web administration, etc

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MODULE 3 UNDERSTANDING AIRLINES: EXAMPLES

UNITED AIRLINES

Landing fees are not show separately, are likely included in ground operations figure.

(all figures in $USD millions)

Operating costs 2014 2015

2015

Operating cost %

Salaries and related costs 2,251 2,424 30.5%

Aircraft fuel 2,530 1,618 20.3%

Landing fees & other rent 568 556 7.0%

All other costs 3,339 3,357 42.2%

Total Operating costs 8,688 7,955 100.0%

FUEL DROPPED FROM 29% OF ALL COSTS TO JUST 20% IN 2015

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MODULE 3 UNDERSTANDING AIRLINES

• Airline capacity is measured in Available Seat Kilometres (ASMs):

• A 150-seat A320 flying 2,200 miles produces 330,000 ASMs

• Airline traffic is measure in Revenue Passenger Miles (RPMs):

• If this flight has 120 revenue (i.e. fare-paying) passengers on board then it generates 264,000 Revenue Passenger Miles (RPMs), for a passenger load factor (PLF) of 80%

Capacity, traffic & revenue metrics

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MODULE 3 UNDERSTANDING AIRLINES

Top 10 Routes (by pax volume) Operated from MAN Airport

Source: Sabre Market Intelligence Feb/15 to Jan/16

Dest. Seats Pax PLF

ASK

(000s)

RPK

(000s) PLF

Distance

(km)

DXB 1,009,195 866,697 86% 5,704,981 4,899,438 86% 5,653

AMS 1,016,277 853,978 84% 494,927 415,887 84% 487

DUB 1,105,555 839,669 76% 292,972 222,512 76% 265

TFS 797,961 782,001 98% 2,432,184 2,383,540 98% 3,048

PMI 747,406 732,458 98% 1,181,649 1,158,016 98% 1,581

LHR 1,020,737 720,640 71% 248,039 175,116 71% 243

ALC 639,583 626,792 98% 1,068,104 1,046,742 98% 1,670

AGP 518,608 513,474 99% 966,166 956,601 99% 1,863

ACE 516,183 505,859 98% 1,479,895 1,450,298 98% 2,867

DLM 514,530 504,239 98% 1,554,909 1,523,810 98% 3,022

TOTAL 7,886,034 6,945,806 88% 15,423,826 14,231,960 92%

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MODULE 3 UNDERSTANDING AIRLINES

• Airline yield is measured in “currency” per RPM.

• For example, if the 120 passengers in the previous example paid an average one-way fare of $140.00, then the yield/RPM is $16,800 / 264,000 = $6.36 cents

• Airline yields are highly dependent on distance flown, as yield/RPM decreases as sector length increases. Therefore, there is no single answer to the question “what is a good yield?”. A yield that is good on a 10,000 mi sector will be poor on a 500 mi sector.

Capacity, traffic & revenue metrics

Source: Sabre Market Intelligence Feb/15 to Jan/16

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MODULE 3 UNDERSTANDING AIRLINES

• Airline unit revenues refer to revenue per unit of capacity. In the above example, this would be $16,800 / 330,000 for a Rev/ASM (RASM) of $5.09 cents.

• Airline unit costs refer to costs per unit of capacity. In the above example, if the cost of operating this flight were $16,000 then the calculation would be $16,000 / 330,000 for a Cost/ASM (CASM) of $4.85 cents.

• When RASM exceeds CASM the airline makes money; when it doesn’t they lose.

Capacity, traffic & revenue metrics

Airline Avg Stage

Length

(km)

RASK

(USD)

CASK

(USD)

Flybe 511 $0.1832 $0.1945

easyJet 1,131 $0.0861 $0.0760

Wizz 1,503 $0.0470 $0.0422

Southwest 1,545 $0.0881 $0.0762

BA 3,334 $0.1128 $0.1060

Emirates 4,777 $0.0818 $0.0774

Source: CAPA

AMEND

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MODULE 3 UNDERSTANDING AIRLINES

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MODULE 3 UNDERSTANDING AIRLINES

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MODULE 3 UNDERSTANDING AIRLINES: EXAMPLES

PASSENGER REVENUE SEGMENTATION

Beyond

ATL

Behind

Bridge

ATL

MIA

MIA

MIA

MIABOG

BOG

BOG

BOG

BAQ

BAQ

Local

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MODULE 3 UNDERSTANDING AIRLINES

• Combination of processes, analysis, techniques to ensure air routes are full, but equally as

important to maximise the revenue

• Highly automated, real-time monitoring and adjustment of sold inventory

• Inelastic demand – certainty of volumes irrespective of costs (within reason). Occurs typically

at peak periods such as holidays, summer peak.

• Elastic demand – price stimulated

• Yield management skill lies in correctly, continually, drawing the inelastic/elastic line

• Leg based yield management systems focus on maximizing revenue at the route/flight

leg level

• O&D based yield management systems focus on maximizing network revenue

REVENUE MANAGEMENT

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MODULE 3 UNDERSTANDING AIRLINES

PROFITABILITY

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MODULE 3 UNDERSTANDING AIRLINES

MANAGEMENT STRUCTURES

Network Planning

Top Tier –”C” Level

Sales & Distribution

Commercial / Partnership

management

Revenue management

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MODULE 3 UNDERSTANDING AIRLINES

MANAGEMENT STRUCTURES

Head of Network Planning

(Senior) Network Planning Manager –

Region A

Senior Analyst Analyst

(Senior) Network Planning Manager –

Region B

(Senior) Analyst

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MODULE 3 UNDERSTANDING AIRLINES

TUI PLANNING TIMELINE FOR S17 SCHEDULE

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MODULE 3 UNDERSTANDING AIRLINES

BA: REVENUE FORECASTING IS THE KEY CHALLENGE FOR NEW ROUTES

Market Size

Market Share

Yield

Growth Potential

Other

opportunities

How many passengers currently fly to / from London?

Are there any key transfer markets?

What is the competitive dynamic?

What is the mix of potential passengers?

What are BA’s chances of capturing these passengers?

What fares will we charge?

How will the inventory be set up?

What level of nets, deals etc.?

How fast will the local economy grow?

How much might we stimulate the market with a new service?

Will we get traffic from the surrounding area?

Is there a significant cargo market?

Are there ancillary revenue opportunities?

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MODULE 3 UNDERSTANDING AIRLINES

BA: OPERATIONAL CHALLENGES PLAY A MAJOR ROLE IN FEASIBILITY

CrewingDo we have enough Pilots

and Cabin Crew?

Engineering

Which aircraft need to be

maintained and when?

Airport Infrastructure

Can the airport take the

required aircraft?

Catering

Is there enough galley space

for the length of the flight?

Keeping T5 Working Are we scheduling too many

departures at T5 at the same

time?

Customer ServiceDo we have a ground handling

arrangement in place?

SlotsDo we have the required slots at

both ends of the route?

SchedulingDo we have enough spare

aircraft time on the fleet?

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MODULE 3 SUMMARY

Many variants of airline business models

When determining route and airline targets, need to do your homework:

- Route market size

- Potential connecting flows

- Airline’s fleet: do they have the right aircraft?

- Airline fit: will the route provide incremental revenues to the

airline as opposed to cannibalizing their existing network?

- Alliance fit: does the route complement the carriers’ alliance

network?

- Your route development strategy, objectives, positioning

- Will route be profitable?