using the right information and tools for network decision making: aviation outlook mena...
TRANSCRIPT
14 April, 2010
USING THE RIGHT INFORMATION AND TOOLS FOR NETWORK DECISION MAKING
USING THE RIGHT INFORMATION AND TOOLS FOR NETWORK DECISION MAKING Presented by:
Mark DiamondPrincipal, SH&E
Presented by:
Mark DiamondPrincipal, SH&E
1
AgendaAgenda
Context: Key Trends in the Region
Implications for Carrier Network, Fleet & Alliance Strategy
Correctly Measuring Network and Route Profitability
Automated Network Planning Models
2
Liberalization and Increased Competition are Coming to the Middle East and North Africa– Liberalized Bilaterals
– Multiple Carrier Designations– Monopoly Flag Carriers are
No Longer the Only Model
– New Startups, Growth of LCC’s
– Subsidiaries and JV’s Expanding to New Sub-Regions
– Hub Development and Increasing 6th Freedom Focus
– Launch of Regional Feeder Operations
– Aircraft Down-Gauging & Frequency Growth
– Entry of Global Alliances
– Huge Capacity Influx
Key Trends in the Region: Liberalization and CompetitionKey Trends in the Region: Liberalization and Competition
3
The Region is Going Down a Well-Trodden Path, With Numerous Precedents But With its Own Unique TwistsThe Region is Going Down a Well-Trodden Path, With Numerous Precedents But With its Own Unique Twists
Deg
ree
of L
iber
aliz
atio
n
Low
Hig
h
1970’s 1980’s 1990’s 2000’s 2010’s
USA EU
Australia
South Africa
India
Middle East /North Africa
Airline Deregulation / Liberalization History
4
The Degree of Liberalization and Competition Varies Widely Across the Region, and is Evolving at Different RatesThe Degree of Liberalization and Competition Varies Widely Across the Region, and is Evolving at Different Rates
At Present, Market Access Ranges from Relatively Open to Highly Restrictive
Gradual Privatization, But State-Owned Carriers Remain Predominant
Price Ceilings and Subsidies Continue
The Region is Divided into “Have” and “Have Not” Carriers
LCC Penetration Varies Considerably by Market
But Capacity Influx is Unprecedented – Particularly in the Gulf– More Than 1,000 Aircraft on Order – Equal to 100% of the Current Operating Fleet
Passenger Aircraft on Firm Order by MENA Carriers & Lessorsas of April 2010
Source: ACAS
GCC & Iraq
Levant & Egypt Maghreb Total
Orders as % of Current
FleetWidebodies 490 12 24 526 137%Narrowbodies 419 24 53 496 99%RJ's 25 -- -- 1,022 33%Turboprops 10 -- 18 18 24%Total 944 36 95 1,075 100%
5
Increasing Competitive Threats – as Well as Opportunities –Will be the New Reality for All MENA CarriersIncreasing Competitive Threats – as Well as Opportunities –Will be the New Reality for All MENA Carriers
Threats– Potential to Depress Onboard
Loads and Dilute Yields– Continuous and Increasing
Pressure to Reduce Unit Costs– Need to Maximize Aircraft
Utilization– All Magnified by the Global
Economic Crisis
Opportunities– Potential Traffic Stimulation– New Markets and Route Access– New Partnerships– New Business Models– And… Middle East Carriers are
Leading the Globe in Rebounding– IATA’s February 2010 Numbers
Show Y/Y Traffic Growth of 26%
Whether National Flag, State-Owned, Private, 6th Freedom, Point-to-Point, LCC, “Have” or “Have Not” Carriers:
But Also…
6
Implication: Using the Correct Information, Tools and Techniques for Network Planning is More Important Now Than EverImplication: Using the Correct Information, Tools and Techniques for Network Planning is More Important Now Than Ever
Management of the Network is Among the Most Important Things an Airline Can do to Improve its Profitability and ROI
– Route Selection, Capacity and Frequency Plan, Schedule, Code-Sharing and Alliances, Fleet Choice, Aircraft Assignment, Rotation Plan
But Highly Complex to Manage, and Mistakes Can be Extremely Costly
Carriers Must Understand:
– The Implications of Market Changes
– Where They’re Making and Losing Money
– How Networks Can be Optimized to Generate the MostRevenue With the Most Cost-Effective Use of Resources
7
The Key is Finding the Best Way to Balance Out the Tradeoffs That are Inherent in Any Network and Fleet PlanThe Key is Finding the Best Way to Balance Out the Tradeoffs That are Inherent in Any Network and Fleet Plan
Yield On-Board Load vs.
Local O&D Flow Traffic vs.
Locally Focused Schedule Connectivity-Focused Schedulevs.
Schedule to Meet Market Needs Schedule to Maximize Utilizationvs.
Higher Frequency with SmallerAircraft -- But Higher Unit Costs
Lower Frequency With Larger Aircraft – But Lower Unit Costsvs.
High Frequency / High Capacity to Generate “S-Curve” Market Benefits
Risk of Excess Capacity, Diluting Loads and Yieldsvs.
Planning Your Network toMeet Customer Needs
Managing Constraints – Fleet, Airport Capacity, Regulatoryvs.
8
And This Applies Not Only to Legacy Carriers, But Also to LCC’sAnd This Applies Not Only to Legacy Carriers, But Also to LCC’s
As LCC “Point-to-Point” Operations Grow, the Potential for Network Connectivity Increases
Even a Small Amount of Transfer Traffic Can Make the Difference Between Profitable and Unprofitable Loads
U.S. LCC’s: Transfer Revenue (Multi-Coupon) as Percent of Total RevenueCY 2009
43%
31%
21%
8% 7%3%
0%
10%
20%
30%
40%
50%
Frontier AirTran Southwest JetBlue Spirit Virgin America
Source: US DOT Origin-Destination Survey
MEASURING NETWORKAND ROUTE PROFITABILITY MEASURING NETWORKAND ROUTE PROFITABILITY
10
Review Results
Operate
Refine Into Routed Schedule
Select Optimum Network Plan
Model and Test Network Scenarios
Translate Strategic Options Into Fleet & Network Scenarios
Develop Strategic Options for Network Optimization
Evaluate Competitor Actions and Plans
Evaluate Industry Trends and Projected Demand
Evaluate Current Network Performance
Understanding Current Route Profitability is Step #1 in Strategically and Tactically Optimizing Your NetworkUnderstanding Current Route Profitability is Step #1 in Strategically and Tactically Optimizing Your Network
Profitability, Load Factor, Yield, RASK, CASK, Utilization, etc.
Traffic Growth, Regulatory Actions, Price Elasticity by Segment, etc.
Aircraft Orders, Capacity & Schedule Trends, etc.
Incremental Change vs. New Business Models
Destinations, Routes, Frequencies, Aircraft Payload/Range, Fleet Size
Forecast Share, Traffic, Revenue, Profitability
Iterative Testing
Incorporate Aircraft Rotations, Other Operating Constraints
Tactical Adjustments
Measure Results andIncorporate Lessons
11
Measuring Network & Route Profitability: All About Understanding Where You’re Making Money and Where You’re Losing MoneyMeasuring Network & Route Profitability: All About Understanding Where You’re Making Money and Where You’re Losing Money
Many Airlines Measure it, But Do They Measure it Correctly?
In a Network, Changing a Single Route Can Affect the Performanceof All Routes – So It’s Important to Get the Measurements Right
If Route Profitability is Not Known, It Will be Next to Impossible to Make Correct Decisions on How and Where to Allocate Capacity
“You Can’t Manage What You Can’t Measure”
12
Key Factors in Correctly Measuring Network and Route Profitability:Key Factors in Correctly Measuring Network and Route Profitability:
Correct Allocation of Revenues and Costs to Routes
– Correct Revenue Proration and Cost Allocation Drivers
Understanding What Costs are Variable and What Costs are Fixed – and When
– Costs Become Increasing Variable Over Time
Taking Into Consideration “Network Effects”
– The Network Revenue and Associated Costs That a Route Generates by Feeding Traffic Onto Other Routes
13
Different Measures of Route Profitability are Appropriate for Different Planning HorizonsDifferent Measures of Route Profitability are Appropriate for Different Planning Horizons
Long Term: On a Fully Allocated Basis, Including Network Contribution, is Each Route Profitable?
Long Term: In Aggregate, is the Total Network Profitable?
Medium Term: Including Network Contribution, Does the Flight Cover Aircraft Ownership/Rental Costs?
Medium Term: Does the Flight Cover Aircraft Ownership/ Rental Costs?
Short Term: With Network Contribution, Does the Flight Contribute to Fixed Costs?
Short Term: Do the Flight & Network Contribute to Fixed Costs?
When to Use It
Adjust Schedule, Capacity and Fleet, Where Possible
Variable + Ownership Contribution -Aircraft Ownership/Rental Expenses
Variable + Ownership + Network Contribution
Adjust Flights, Schedule, Frequency
Variable Contribution + “Beyond/Behind Revenue – “Beyond/ Behind Passenger Variable Costs
Variable + Network Contribution
Fully Allocated Contribution + “Beyond/Behind” Revenue – “Beyond/ Behind” Passenger Variable Costs
Variable + Ownership Contribution -Fixed Operation Costs & Overhead
Variable Contribution - Aircraft Ownership/Rental Expenses
Flight Revenue - Variable Flight Operating Costs
Definition
Adjust Network, Fleet and Resource Strategy
Total System Contribution
Adjust Network, Fleet and Resource Strategy
Fully Allocated Contribution
Adjust Schedule, Capacity and Fleet, Where Possible
Variable + Ownership Contribution
Adjust Flights, Schedule, Frequency
Variable Contribution
ImplicationMeasure
Profitability Measures
AUTOMATED NETWORKPLANNING MODELS AUTOMATED NETWORKPLANNING MODELS
15
Modeling of Network Scenarios Has Become an Increasingly Necessary Part of Network Planning, and is a Widespread Practicein Liberalized, Highly Competitive Markets
Modeling of Network Scenarios Has Become an Increasingly Necessary Part of Network Planning, and is a Widespread Practicein Liberalized, Highly Competitive Markets
Review Results
Operate
Refine Into Routed Schedule
Select Optimum Network Plan
Model and Test Network Scenarios
Translate Strategic Options Into Fleet & Network Scenarios
Develop Strategic Options for Network Optimization
Evaluate Competitor Actions and Plans
Evaluate Industry Trends and Projected Demand
Evaluate Current Network Performance Profitability, Load Factor, Yield, RASK, CASK, Utilization, etc.
Traffic Growth, Regulatory Actions, Price Elasticity by Segment, etc.
Aircraft Orders, Capacity & Schedule Trends, etc.
Incremental Change vs. New Business Models
Destinations, Routes, Frequencies, Aircraft Payload/Range, Fleet Size
Forecast Share, Traffic, Revenue, Profitability
Iterative Testing
Incorporate Aircraft Rotations, Other Operating Constraints
Tactical Adjustments
Measure Results andIncorporate Lessons
16
A Network Model is an Automated Desktop Tool That Enables Rapid Testing of “What If” Network Scenarios and Hypotheses Before They’re Implemented – With No Risk
A Network Model is an Automated Desktop Tool That Enables Rapid Testing of “What If” Network Scenarios and Hypotheses Before They’re Implemented – With No Risk
Proposed New Routes and Network & Capacity Plans
New Schedules & Schedule Modifications
Optimal Service Timing & Hubbing Analyses
Aircraft Size vs. Frequency Trade-Offs
Code Shares & Alliances
Fleet Planning – Optimal Aircraft Types and Fleet Size
Predict the Impact of Competitor Actions on Your Network
Rationale: Model the Impact of Scenarios to Understand Likely Results, Before Risking Costly Assets and Resources
17
How They Work:How They Work:
Generally Based on Refined “QSI” (“Quality of Service Index”) Methodology
– Developed by the U.S. Civil Aeronautics Board
Forecast Market Share in Each O&DCity-Pair Across an Entire Network, and Allocate Traffic to Individual Flights
Take Into Consideration Both Total Market Demand as Well as Competition in Projecting a Carrier’s Network Performance
Models are Designed to Replicate Consumer Behavior in Choosing Air Service Options
18
The Fundamental Principle: Projected Results are Related to theService Attributes the Carrier Offers Relative to its CompetitorsThe Fundamental Principle: Projected Results are Related to theService Attributes the Carrier Offers Relative to its Competitors
Departure/Arrival Times
Total Elapsed Trip Time from Origin to Destination
Capacity Offered (Seats)
Service Frequencies
Number of Stops Enroute
Number of Connections Enroute
On-Line vs. Code-Share vs. Interline
In Each O&D City-Pair Market Across the Carrier’s Network
The Model Calculates a “QSI” Value for Each Service Offered in Every O&D Market Based on the Combination of These Attributes
The Carrier’s Projected Share of That Market is a Function of its “QSI” Value Relative to its Competitors
19
Based on the Projected Share in Each O&D City-Pair Market, the Models Allocate Traffic to Individual Flights, Including Local and Connecting Passengers
Based on the Projected Share in Each O&D City-Pair Market, the Models Allocate Traffic to Individual Flights, Including Local and Connecting Passengers
Revenue Projections for Each O&D City-Pair are Based on Applying Estimated Yields/Fares by Market to the Traffic Loads
P&L’s by Route and for the Overall Network are Then Developed by Applying Unit Operating Costs
20
The More Sophisticated Models Offer a Number of Important Features and AdvantagesThe More Sophisticated Models Offer a Number of Important Features and Advantages
Calibration: Permit Calibration to Actual Results, to Ensure Accuracy of Predictions
Service Generation: Generate Services and Realistic Connections, Respecting Airport MCT Constraints
Stimulation: Include Impact of Fare and Service Stimulation of Market Demand
Preference Factors: Consider Consumer Preferences for Lower Fare Offerings (LCC’s), or a Carrier’s Market Presence
“Spill” Effects: Model Traffic Turnaway When Capacity is Constrained Relative to Demand
Seasonality: Model Differences in Consumer Preference by Time of Day, Day of Week, Month of Year
Multiple Connections: Capture the Impact of Double-Connecting Itineraries
Code-Sharing: Generate Code-Shares Across Partner Carrier Networks
Cabin Class: Forecast Onboard Traffic and Revenue by Cabin Class
21
Effective Network Optimization Typically Requires Multiple Rounds of Iterative Testing and RetestingEffective Network Optimization Typically Requires Multiple Rounds of Iterative Testing and Retesting
Base Schedule
Analyzing a Proposed Network and Schedule Scenario:
CalibrateModel
Create NewNetwork & ScheduleScenario
Run ProposedNetwork &
Schedule in Model
AnalyzeResults
AdjustNetwork & ScheduleScenario
Final OptimizedNetwork & Schedule
Market Sizes
Time of Day Preference
Airline Preference
Aircraft Preference
Non-stop or Connecting Service
InputConstraintsOperational
Commercial
Maintenance
Share
Projected Traffic & Spill
Projected Load Factor
Revenue
Profitability
22
Example: In a Recent Assignment, SH&E Used its NETWORKS Model to Test a Hub De-Peaking Proposal for a Latin American CarrierExample: In a Recent Assignment, SH&E Used its NETWORKS Model to Test a Hub De-Peaking Proposal for a Latin American Carrier
HOURHOUR
09000900--09590959
10001000--10591059
11001100--11591159
12001200--12591259
13001300--13591359
14001400--14591459
15001500--15591559
16001600--16591659
17001700--17591759
18001800--18591859
19001900--19591959
22 arrivals from 21 destinations 22 arrivals from 21 destinations
24 departures to 21 destinations 24 departures to 21 destinations
22 arrivals from 21 destinations22 arrivals from 21 destinations
23 departures to 22 destinations23 departures to 22 destinations
1 arrival from XXX1 arrival from XXX1 departure to YYY1 departure to YYY
11stst PeakPeak(3 Hours)(3 Hours)
22ndnd PeakPeak(3 Hours)(3 Hours)
ThroughThrough(5 Hours)(5 Hours)
DEPARTURESDEPARTURESARRIVALSARRIVALS HOURHOUR
09000900--09590959
10001000--10591059
11001100--11591159
12001200--12591259
13001300--13591359
14001400--14591459
15001500--15591559
16001600--16591659
17001700--17591759
18001800--18591859
19001900--19591959
22 arrivals from 21 destinations 22 arrivals from 21 destinations
24 departures to 21 destinations 24 departures to 21 destinations
22 arrivals from 21 destinations22 arrivals from 21 destinations
23 departures to 22 destinations23 departures to 22 destinations
1 arrival from XXX1 arrival from XXX1 departure to YYY1 departure to YYY
11stst PeakPeak(3 Hours)(3 Hours)
22ndnd PeakPeak(3 Hours)(3 Hours)
ThroughThrough(5 Hours)(5 Hours)
DEPARTURESDEPARTURESARRIVALSARRIVALS HOUR
0900-0929
0930-1029
1030-1129
1130-1200
1200-1259
1300-1359
1400-1459
1500-1559
1700-1759
1800-1859
1900-1959
2000-2059
16 arrivals from 16 destinations
10 departures to 10 destinations
1 arrival from XXX
1 departure to YYY
1st Peak(1.5
Hours)
Through(5 Hours)
DEPARTURESARRIVALS
13 arrivals from 13 destinations 2nd Peak(1.5 Hours) 20 departures to 20 destinations
19 arrivals from 19 destinations
9 departures to 9 destinations
11 arrivals from 11 destinations
20 departures to 20 destinations
3rd Peak(2 Hours)
4th Peak(2 Hours)
1600-1659
HOUR
0900-0929
0930-1029
1030-1129
1130-1200
1200-1259
1300-1359
1400-1459
1500-1559
1700-1759
1800-1859
1900-1959
2000-2059
16 arrivals from 16 destinations
10 departures to 10 destinations
1 arrival from XXX
1 departure to YYY
1st Peak(1.5
Hours)
Through(5 Hours)
DEPARTURESARRIVALS
13 arrivals from 13 destinations 2nd Peak(1.5 Hours) 20 departures to 20 destinations
19 arrivals from 19 destinations
9 departures to 9 destinations
11 arrivals from 11 destinations
20 departures to 20 destinations
3rd Peak(2 Hours)
4th Peak(2 Hours)
1600-1659
Before: Heavily Peaked 2-Bank Structure Proposal: De-Peaked 4-Bank Structure
23
Projected Results: an 18% Increase in Passenger Traffic, a 20% Increase in Passenger Revenue, and a 17% Increase in Operating ProfitProjected Results: an 18% Increase in Passenger Traffic, a 20% Increase in Passenger Revenue, and a 17% Increase in Operating Profit
Item Base Proposal ChangeScheduled Aircraft 27 32 +5Weekly Departures 740 870 18%Enplaned Passengers 65,873 77,546 18%Passenger Revenue $11,867 $14,230 20%Total Revenue $12,876 $15,440 20%Operating Result $1,723 $2,015 17%Operating Margin 13% 13% -2%RPM's (000's) 78,041 96,434 24%ASM's (000's) 100,978 121,806 21%Load Factor 77% 79% 2%Passenger RASM $0.118 $0.117 -1%Aircraft Utilization, Hrs. 10.3 11.2 9%Peak Gate Usage 22 20 --
Summary Results of Hub Analysis
24
Potential Pitfalls of Network ModelingPotential Pitfalls of Network Modeling
Potential Shortcomings in O&D Traffic Data Availability and Completeness
– BSP and MIDT Traffic and Booking Data Exclude Direct Bookings
– Some Markets Have Very Little Coverage
– Double Ticketing Distortions
– “Garbage In, Garbage Out”
– Expect Extensive Data Scrubbing, “Reality Check” Comparisons Against DifferentData Sources and Estimation
Models Can be Extremely Sensitive and Tricky to Use– Calibration Requires Multiple Rounds of Testing and Market-by-Market
Examination, to Ensure That There Are Not Hidden Biases or Distortions
– It is Not Uncommon to Get Counterintuitive Results at First
“Analysis Paralysis”– Need to Strike a Balance Between “Not Enough” Analysis and “Too Much”
CONCLUSION CONCLUSION
26
The Bottom Line:The Bottom Line:
Correct Measurement of Route/Network Profitability and Use of Network Planning Models are Key Success Factors for Air Carriers
These are Among the Most Important Initiatives a Carrier Can Take to Ensure its Future Health in Increasingly Competitive Markets
27
Thank You!
Mark [email protected]
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