THE FUNDAMENTALS OF ROUTE DEVELOPMENT · - Air France, Emirates ... UNDERSTANDING AIRLINES MODULE 3 PASSENGER SEGMENTATION Leisure Passengers Price Conscious Business Passengers High

THE FUNDAMENTALS OF ROUTE

DEVELOPMENT

UNDERSTANDING AIRLINES

MODULE 3

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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 AIRLINE ISSUES

• Network carriers (single hub)

- Air France, Emirates

• Network carriers (multiple hubs)

- Air Canada, American Airlines

• Point-to-point regionals

- Flybe

• Regional feeder services

- Lufthansa CityLine, HOP!

• Capacity purchase agreements

- SkyWest

FSCs

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MODULE 3 UNDERSTANDING AIRLINES

• Value LCCs

- Azul, easyJet,

• “Normal” LCCs

- Norwegian Air Shuttle, Southwest

• 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

- Transavia

• Long-haul LCCs

- Air Asia X, Norwegian

LCCs

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• Vertically integrated carriers

- TUI Group

- Thomas Cook Group: Condor

• Part-vertically integrated carriers

- Air Transat

• Non-vertically integrated carriers

- Enter Air, Travel Service

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

- Omni Air, Dynamic

CHARTER

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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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MODELS ARE MIXING ACROSS PASSENGER SEGMENTATION

Ch

arte

r

Pure LCC

• Point to point network

model

• Leisure market focus

• No FFP

• Sales channel via

proprietary web sales

only

• Scheduling takes no

account of connecting

opportunities

Hybrid Pure Network

• Point-to point network model

• Business and Leisure market

focus – FFP

• Multiple sales channels

including limited GDS

participation

• No Alliance membership (until

recently!) or IATA driven

interline connecting products

• On-line connecting product

only

• Connecting traffic network

model

• Business and Leisure

market focus – FFP

• Multiple sales channels

including full GDS

participation

• Alliance membership, and

IATA driven interline

connecting products

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Ch

arte

r

Source: Boeing CMO 2012-2031

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Fundamental questions:

• Will the route generate enough revenue? If so, how quickly?

• Is the route sustainable in the long run?

• Does the route fit with the carrier’s network strategy

ECONOMICS

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AIRLINE COSTS

Operating costs + aircraft ownership + overhead costs

VARIABLE

OPERATING

COSTS

AIRCRAFT

OWNERSHIP

OVERHEAD

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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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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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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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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

AIR FRANCE KLM(all figures in Euro millions)

2014 2015

Revenues 24,930 26,062

Operating costs

2015

Operating cost %

Salaries, wages & benefits 7,636 7,852 31.1%

Aircraft fuel 6,629 6,183 24.5%

Landing fees & enroute charges 1,840 1,947 7.7%

All other costs 8,954 9,264 36.7%

Total Operating costs 25,059 25,246 100.0%

Operating profit -129 816

Operating margin -0.5% 3.1%

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RYANAIR(all figures in Euro millions)

2014 2015

Revenues 5,037 5,654

Operating costs

2015

Operating cost %

Fuel 2,013 1,992 31.1%

Airport & handling charges 617 713 24.5%

Staff costs 464 503 7.7%

All other costs 1,284 1,403 36.7%

Total Operating costs 4,378 4,611 100.0%

Operating profit 659 1,043

Operating margin 13.1% 18.4%

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

• A 150-seat A320 flying 2,200 kilometres produces 330,000 ASKs

• Airline traffic is measure in Revenue Passenger Kilometres (RPKs):

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

Capacity, traffic & revenue metrics

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

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

• Airline yields are highly dependent on distance flown, as yield/RPK 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 km sector will be poor on a 500 km sector.


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

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• Airline unit revenues refer to revenue per unit of capacity. In the above example, this would be €16,800 / 330,000 for a Rev/ASK (RASK) 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/ASK (CASK) of €4.85 cents.

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


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

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• In addition to route revenues, network carriers also look at “beyond” revenues and system contribution

• Some routes may be operated at a loss because the value of the connecting traffic they deliver is greater.


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PASSENGER REVENUE SEGMENTATION

Beyond

PMI

Behind

Bridge

PMI

MAD

MAD

MAD

MADLHR

LHR

LHR

LHR

MAN

MAN

Local

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• 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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PROFITABILITY

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MANAGEMENT STRUCTURES

Network Planning

Top Tier –”C” Level

Sales & Distribution

Commercial / Partnership

management

Revenue management

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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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EASYJET NEW ROUTE DECISION PROCESS

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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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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?

Airlines face many issues, but these can be opportunities for airports

THE FUNDAMENTALS OF ROUTE DEVELOPMENT · - Air France, Emirates ... UNDERSTANDING AIRLINES MODULE 3 PASSENGER SEGMENTATION Leisure Passengers Price Conscious Business Passengers High

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