Development of Business Strategy and Business Plans for Profitable Cargo Operations Dr Emre Serpen Executive Vice President, Head of Airline Practice
Development of Business Strategy and Business Plans for Profitable Cargo Operations
Dr Emre Serpen
Executive Vice President, Head of Airline Practice
Improvement Profitability Cargo Operations
Realizing the vision together
Benchmarking of Cargo Airline Commercial and Operational
Performance to Identify Improvement Opportunities
SCOPE SAMPLE DELIVERABLES
PROPOSED INTERVISTAS APPROACH
Establish peer group and key competitors
Commercial Benchmarking (Belly, Freighter, Total)
Volume of cargo carried,
RATK ,Yield, Load Factor , Revenues
Freighter utilisation
Operational and Productivity Benchmarking
ATK, Cost per ATK
ATK per Employee
Tonnage per employee
Financial Benchmarking
Net Revenue/ATK,Costs/ATK, Margin
Air Cargo world annual Survey
Overall survey assessment
Staff competency
Fares and value added programs
E-freight enablement
Customer satisfaction survey
Analyze benchmarking results and identify areas that
requires improvement.
• This will include commercial, financial operational
benchmarking of the Cargo Airline. The gaps in
performance will be identified for further analysis.
3
Air Cargo
World
Annual
Survey
InterVISTAS’
Cargo
Benchmark
Data
Repository
Comparative
Analysis of
Commercial
Performance
Realizing the vision together
Detailed Diagnostic will be Executed in Areas Where
Performance is Behind Industry Best Practices
Internal Meetings will include:
Executive management
Marketing
Network design (passenger section for belly)
Freighter route planning
Capacity management
Pricing
Revenue Management
Sales/stations (domestic/international)
Key account management
Supply chain management
Inbound logistics
Outbound logistics
Warehouse management
Finance
Cargo Systems
Performance management and Human Resources
External Meetings and Workshops:
Freight forwarders
Key customers
• Diagnostic analysis will include meetings, workshops
and discussions with commercial, operations and
support functions. Processes will be revised,
improvement opportunities will be identified.
4
What volume do you ship with Client yearly?
What volume do you ship with other airlines?
How many customers, apart from allotments, does Client serve on an average flight?
What are the reasons for not choosing Client
□ Destination □ Frequency □ Price □ On time delivery □ Losing/damaging Shipments □ Traceability □ No Main Deck capacity □ Customer relations/Information □ Other
Which factors influence your choice most?
□ Destination □ Frequency □ Price □ On time delivery □ Warehouse handling □ Traceability □ Main deck capacity □ Customer relations/Information □ Product range □ Global reach □ Billing accuracy □ Other
Do you think the pricing structures are changed to market circumstances often enough?
□ Yes □ No
How often shipments are flying with a competitor because of price?
□ Rarely □ Sometimes □ Often
Diagnostic is
executed
using
extensive
cargo
intellectual
capital and
cargo
expertise
Realizing the vision together
Revenue Growth Through Improvement of
Air Cargo Commercial Processes
• This will include analysis and evaluation of commercial
activities to improve cargo revenues, yield and load
factor for belly and freighter operations.
5
• Capacity management is focused to improve cargo
leverage and communications between passenger and
cargo teams thru planning and execution phases
including Network Planning, Schedule Management,
and Operations Control.
• Pricing and revenue management evaluates Pricing and
Revenue Management activities for belly and freighter
operations. LF forecasting, Critical flight management,
bid pricing, allotment confirmation.
• Revenue planning and revenue delivery activities
including pricing, revenue management and sales are
assessed, and improved.
• With sales focus on key account management,
development of long term revenues per key account
and develop best practice key account management
practices.
• Pilot routes will be selected, and recommendations will
be implemented/tested.
Example Cargo Capacity Management
Example Cargo Revenue Management
Realizing the vision together
Cost Reduction, Productivity and Customer Service Improvement
Through Logistics/Supply Chain and Operations Improvement
• Scope is to improve end-to-end supply chain
performance, improve reliability, reduce costs and
improve customer service ratings.
6
• Supply chain improvement include effectiveness of
inbound and outbound cargo, use of standard,
repeatable processes, integrated systems and
compliance with e-cargo.
• Issues include improvements of communications
between HQ and stations.
• Eliminate waybill related inefficiencies.
• Systems and facilities supporting inbound and
outbound cargo are effective and integrated.
• Job specifications are revised and accountabilities
improved.
• Develop cargo key performance measures.
• Implementation projects are identified and executed.
Inbound and
Outbound
logistics
improvement
Example:
Cargo
operations
diagnostic
Example :
InterVISTAS
Cargo
Freighter
Cost and
Performance
Database
Realizing the vision together
Systems and Human Resources Diagnostic for
Alignment with Strategy and Processes
• Objective is to review the systems supporting
processes and identify improvement opportunities
and ensure new processes are supported with
integrated and effective systems.
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• Audit systems currently used;
• Identify key functionality, integration, and technical
limitations;
• Develop IT Strategy and identify priorities and
improvement plan;
• Review implementation effectiveness of current
systems – recommend activation of modules, and
better use of existing modules;
• Review Organization, Job specifications and
performance management;
• Recommend improvements to the organization;
• Improve job specifications and develop key
performance management.
Example:
Cargo performance
Management and
Key Performance
Measures
Alignment of job
specification and
skills with
strategy and
processes
Example:
Information flows
e-freight
assessment
Example
Systems strategy
and system
functionality
Development of Business Strategy and Business Plan
Realizing the vision together
Market Analysis and Forecasting to Identify Best Routes and
Define the Basis for Subsequent Route Design and Improvement
• Objective is to conduct market and capacity analysis, evaluate
relative share gap of Cargo Airline and its key competitors. This
will drive scenario’s for route development where the focus will be
on routes where favorable demand and supply relationships.
• This is followed by Market forecasting on current and future
potential routes.
9
• Cargo Airline Airline route network is evaluated. Over the past two
years capacity share growth of Airline’s competitors are identified.
This is complemented with market share growth of Airline and its
competitors.
• Market forecasting is executed for developing future growth of
Airline’s current and potential markets. This is done thru the use
multiple methods:
- Industry forecast’s, including IATA, Boeing Airbus
- Air cargo tradelane analysis: this will include both destination and
transhipment cargo (O/D)
- Tradelane forecasting is done in each direction (cargo imports and
exports separately )
- Conduct workshops with freight forwarders and customers of Cargo
Airline specific feedback on obtained key improvement needs, and what
Cargo Airline should do for customers to book more cargo with Cargo
Airline
- Market forecast include weighted average of three methods where
InterVISTAS uses its extensive experience and judgment
• In executing market analysis and forecasting work InterVISTAS uses
its proprietary data sources obtained from industry research.
39,555
32,178 37,038
45,264
66,007
64,204
66,788 70,541
71,320
89,023
107,437
-
20,000
40,000
60,000
80,000
100,000
120,000
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Ton
ne
s
Key NE Asia - Australia Export Tradelane Tonnage
China Hong Kong Japan Group Total 2 per. Mov. Avg. (Group Total)
Example
Tradelane
Analysis Per country and
import/export direction
Example
Commodity
Analysis
Type of cargo
Example
Market
Forecasting Route level
Realizing the vision together
Market Share Forecasting will Provide Base Scenario
Considering Market, Cargo Airline and Competitor Growth
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InterVISTAS
provides
proprietary
tools for route
level cargo
marketshare
forecasting
• Objective if to forecast Airline’s market share on current and
future routes considering market forecast, and capacity
growth of Airline and its key competitors in these routes.
• This will be used to identify determination of best routes
where Airline has best chance to capture market share This
will be used to design freighter route scenarios.
• First step is to determine the Airline’s expected load factor for
each route, regions and system wide, considering future
market growth (from the previous market forecasting task).
• Analysis include following elements:
- Future market sizes.
- Market share growth based on current load factors.
- Cargo capacity growth, driven by the growth of the passenger
fleet.
- Additional cargo capacity driven by freighters that may be
committed to this route (capacity and frequency)
- Total capacity including competitors operating this route.
• The routes will be prioritized according to best market share
forecast and they will be used in developing scenarios for
network design.
• Market share forecasting is done using InterVISTAS’
proprietary tools.
Realizing the vision together
Analysis of Network Scenarios For Improving Route Performance
• Scope to design/improve the route structure and freighter
type/number/utilization maximizing route profitability.
Analysis also drives the freighter performance
improvement.
• If the Freighters types and number are given than the
objective is to maximize route profitability with selection of
the best route structure supported by cargo codeshares.
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• Network scenarios will be developed thru analysis of
following factors:
- Routes with greater market size
- Routes with greater market growth rates
- Routes with greatest markets hare
- Routes including greater current load factor
• Criteria will include weighted average, where weights
include expertise and experience of InterVISTAS team.
• For selected routes deeper analysis will be executed:
- Where the current share is less than expected share,
analysis is executed to establish LF growth at the
target routes in relation to market size
• Results will be discussed with Cargo Airline
management and analysis will form basis of the route
scenarios.
• Route scenarios will be subsequently tested for Freighter
types that will be analyzed in the next task.
Market and Capacity Development
2012 2013 2014 2015 2016
Origin: CGK Market forecast CGK-pvg 31,337 34,453 36,933 39,610 42,434
Destination: pvg GA Capacity on CGK-pvg 4,260 4,380 6,588 8,760 8,784
Competition Capacity on CGK-pvg 0 0 0 0 0
2012 2013 2014 2015 2016
Current Load Factor: 31% Desired belly LF on CGK-pvg 37% 43% 49% 54% 60%
Desired Load Factor: 60% GA Capacity 4,260 4,380 6,588 8,760 8,784
Loads given current LF on CGK-pvg 1,338 1,376 2,070 2,752 2,760
Addtional cargo required to reach desired LF on CGK-pvg 244 501 1,130 2,003 2,510
Addtional cargo required for 2 weekly Full Freighter - - - 4,732 4,732
2012 2016
Including Narrow Body Belly (yes/no): no GA Capacity on CGK-pvg 4,260 8,784
Competition Capacity on CGK-pvg 0 0
GA Freighter (2 weekly) 0 6,760
2012 2013 2014 2015 2016
Market share (business as usual) on CGK-pvg 4.3% 4.0% 5.6% 6.9% 6.5%
Market share (high) on CGK-pvg 5.0% 5.4% 8.7% 12.0% 12.4%
Market share when introducing 2 weekly Full Freighter 5.0% 5.4% 8.7% 24.0% 23.6%
Growing LF in equal steps to desired LF
Useful for ASA with both wide and narrow bodies
Example:
Route Analysis and Market Share Capture Models
Example:
Route Design/Improvement Driven by Scenarios
Realizing the vision together
Development of the Business Plan with Revenue, Cost and
Profitability Forecasting Including Strategy and Improvement Impacts
• Scope includes development of a route level business plan
for different freighter types tested at different frequencies.
The model is used to calculate the network profitability for
belly and freighter operations
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• InterVISTAS will build the revenue-side of the model using the
demand and revenue data gathered in the earlier stages of the
project. We will also investigate how alternative agreements
such as block-space.
• Direct and indirect aircraft-related costs will drive the expense-
side of the model. InterVISTAS will use “real world” cost data
from other carriers operating these aircraft. Unit costs will be
applied to the operation based on key operating statistics such
as block hours, landings or other appropriate barometers.
• We will be able to accurately predict direct and indirect costs,
as well as revenue, and will run sensitivity analyses to model
various financial and operating variables:
- Direct costs will include fuel, maintenance, crew, ground
handling, over flight , ownership etc
- For belly cost per KG carried will be used. If airline is
allocating other direct and indirect costs these will be used.
• Profitability forecast will be developed for belly and freighter
operations.
CGK-PVG (V.V.) by A330 Freighter 2012 2013 2014 2015 2016
Total Operating Revenues
Scheduled Full Freighter Revenue - 10,869,673 10,869,673 16,304,509 16,304,509
Passenger (belly) Revenue 7,153,070 7,264,308 10,815,246 14,233,240 14,124,143
Total Revenue CGK-PVG (V.V.) 7,153,070 18,133,981 21,684,919 30,537,750 30,428,652
Direct Operating Cost (excluding Ownership)
Fuel - 6,512,381 6,512,381 9,768,571 9,768,571
Cockpit Crew - 651,238 651,238 976,857 976,857
Maintenance - 781,486 781,486 1,172,229 1,172,229
Depreciation - 2,050,194 2,050,194 3,075,291 3,075,291
Insurance 85,425 85,425 128,137 128,137
ATC/LDG charges - 673,367 673,367 1,010,050 1,010,050
Sales Commision - 156,900 156,900 235,350 235,350
Total Direct Operating Cost - 8,618,472 8,618,472 12,927,708 12,927,708
Total Indirect Operating Cost - 2,292,518 2,292,518 3,438,778 3,438,778
Total Full Freighter Operating Cost - 10,910,990 10,910,990 16,366,485 16,366,485
Passenger (belly) Operating Cost 7,653,167 7,942,968 12,082,153 16,245,108 16,469,692
Total Operating Cost CGK-PVG (V.V.) 7,653,167 18,853,958 22,993,143 32,611,593 32,836,178
Profit (Belly Space, US$) -500,097 -678,660 -1,266,906 -2,011,867 -2,345,550
Profit (Full Freighter, US$) - -41,317 -41,317 -61,976 -61,976
Total Profit (US$) -500,097 -719,977 -1,308,224 -2,073,843 -2,407,526
Profit Margin (Belly Space, %) -7.0% -9.3% -11.7% -14.1% -16.6%
Profit Margin (Freighter, %) -0.4% -0.4% -0.4% -0.4%
Total Profit Margin (%) -7.0% -4.0% -6.0% -6.8% -7.9%
Business plan method based on marketshare, fare ,
operating and capital costs for freighter and belly
Business plan is based on directional (inbound and
outbound route level profitability
Realizing the vision together
Cargo Transformation and Implementation Plans
will be Developed
• Scope includes development of implementation
plan including strategy, process, systems. This
will be backed with specific action plan, The
implementation of quick hits will start during the
project.
13
• Transformation plan will be developed Projects
will include:
- Implementation of the strategy
- Improvement of revenues
- Improvements in costs and productivity
- Improvements in customer service and
development
• Improvement actions will be classified according
the business benefit and ease of implementation.
These will include:
- Capacity Management
- Pricing and revenue Management
- Supply Chain/operations
- Systems
- Performance Management
Example:
Cargo Transformation Plan
Example:
Specific Improvement Actions
Realizing the vision together
InterVISTAS Provides Cargo Route Performance
Analysis, Design and Business Planning Tools
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2006 2007 2008 2009 2010 2011 2012 2013
SAR (Millions) Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Total Operating Revenues (Net)
Total Cargo Scheduled Revenue 488 569 622 749 799 844 880 918
Cargo Charter Revenue 8 15 15 15 15 15 15 15
Other Revenue 49 49 49 49 49 49 49 49
Total Revenue 544 633 685 813 863 907 944 981
Aircraft & Other Lease Costs (Incl. Ownership)
Flight Crew Employment Cost 30 38 47 57 59 60 61 62
Fuel 51 142 181 220 227 233 237 240
Direct Maintenance 47 100 124 147 153 157 160 162
Landing Fees 7 4 6 7 7 7 7 7
Overflight 12 13 16 19 19 20 20 21
Aircraft, Engines & Components Depreciation 56 55 65 75 79 81 82 84
Insurance 2 2 3 3 3 3 3 3
Passenger Operating Costs 7 5 5 6 6 6 6 7
Charter Operating Costs 6 11 11 11 11 11 11 11
Total Aircraft & Other Lease Costs 218 370 458 544 564 580 589 598
Total Indirect Operating Costs 307 269 282 306 306 312 313 312
Total Operating Costs 525 639 740 850 870 892 901 910
Profit (Loss) 19 -6 -55 -37 -8 15 42 71
Profit Margin 4% -1% -8% -5% -1% 2% 4% 7%
Operating Metrics
Freighter Fleet at Year-End 12/31 -- -- -- -- -- -- -- --
Total Weekly Departures (both directions) 26 26 34 38 40 42 42 42
Total Block Hours 8,173 9,623 11,859 13,757 14,073 14,454 14,454 14,454
Total Available Ton Kilometers (Millions) 517 596 734 884 905 919 922 926
Total Cargo Carried (000s) 63,649 70,161 77,818 92,531 98,483 105,357 109,794 114,426
Average Rate per Kilogram 8.6 9.0 8.8 8.8 8.8 8.6 8.6 8.6
Comparative Metrics
Average Daily Utilization (Block Hours) -- -- -- -- -- -- -- --
Average Block Hours per Flight 6.0 7.1 6.7 7.0 6.8 6.6 6.6 6.6
System Load Factor (Belly/Freighter Combi) 76.9% 64.5% 55.4% 58.5% 59.4% 62.0% 64.6% 67.3%
Total Operating Revenues per ATK 1.05 1.06 0.93 0.92 0.95 0.99 1.02 1.06
Total Direct Operating Costs per ATK 0.42 0.62 0.62 0.62 0.62 0.63 0.64 0.65
Total Operating Costs per ATK 1.02 1.07 1.01 0.96 0.96 0.97 0.98 0.98
Total Operating Revenues per Block Hour 66,613 65,776 57,786 59,065 61,304 62,771 65,279 67,896
Total Direct Operating Costs per Block Hour 26,705 38,497 38,640 39,566 40,075 40,133 40,736 41,349
Total Operating Costs per Block Hour 64,272 66,431 62,444 61,786 61,854 61,699 62,370 62,969
Example: Project Approach
Example: Diagnostic Analysis
Example: Freighter and Belly Business Plan
Example: Route Analysis
Realizing the vision together
Selected Credentials for Cargo Projects
15
Diagnostic Analysis
Review Pricing, Revenue
Management and Sales
processes
Development of Revenue
Management process
Recommendations on
organization, job specifications
Systems recommendations
Diagnostic and
benchmarking
Market and capacity
analysis
Freighter network market
share forecast
Route evaluation and design
Freighter analysis
Business plan
Implementation Plan
Developed business case
Managed the
procurement to secure
systems and services
Program management of
development, testing and
implementation of new
-- network planning,
-- revenue management,
-- pricing and data
warehouse systems;
MNG Cargo Garuda Cargo Saudi Arabian Cargo Malaysian Cargo
Sri Lanka Airlines Cargo Client Successful application for
U.S.-China authority in U.S.
DOT route proceeding.
route case strategy with UPS
direct and rebuttal exhibits.
proceeding included both
U.S. pax and . all-cargo airlines
competing for a single award.
Lead Consultant:
Dr. Emre Serpen Lead Consultant:
Dr. Emre Serpen
Lead Consultant:
Dr. Emre Serpen
Lead Consultant:
Dr. Emre Serpen Lead Consultant:
Dr. Emre Serpen Lead Consultant:
Douglas Banez
Cathay Pacific Cargo
Execution benchmarking
Route evaluation for revenue
improvement
Freighter aircraft appraisal
Service levels/ transfer price
Market and revenue
forecasting for belly and
freighter operation
Market forecasting and
priorities
Diagnostic Analysis of Belly
and Freighter operations
Market forecasting
Freighter business
evaluation
Business plan development
Implementation plan
Diagnostic of cargo
processes
Review of the Cargo Systems
supporting the processes;
Identify improvements in
commercial cargo processes;
Prioritize requirements for
solutions supporting cargo
processes; and
Develop Implementation plan.
Saudi Arabian Cargo Privatisation
Diagnostic Analysis of Belly
and Freighter operations
Development of cost model
Development of business
plan
Support of the due diligence
with investor queries
Sales was completed with
successfully with higher than
expected subscription
Lead Consultant:
Dr. Emre Serpen
Thank You! www.intervistas.com
Please contact Dr. Emre Serpen for
any queries on this document
+447944163891