Route Planning and Evaluation

Given a fleet plan, the process of route planning and evaluation involves the

selection by the airline of which routes should be flown. The route selection

decision is both strategic and tactical. It is an essential component of an integrated

network strategy or “vision” for the airline, which must decide whether to focus on

short-haul or long-haul services, domestic or international operations.

Route Planning and Evaluation

At the same time, the characteristics of the selected routes will affect the types of

“products” the airline offers to travelers. For example, an international route

network will likely lead to a decision that business- and first-class products should

be offered in order to be competitive.

Route Planning and Evaluation

The distance or “stage length” of the selected routes will also affect the airline’s cost structure, as longer routes will likely

be flown with bigger aircraft that have lower unit costs per seat and per ASK.

Route Planning and Evaluation

Route planning can also be a much shorter-term tactical process, as unexpected route

opportunities often present themselves to the airline with changes to the market environment.

For example, the bankruptcy of another airline, a withdrawal from a route by a competitor, or a

newly negotiated bilateral agreement with another country can lead to new route

opportunities that must be acted upon within months or even weeks.

Route Evaluation Issues

Economic considerations dominate route evaluation, especially for airlines operating in competitive environments with a profit

maximization objective. These evaluations of the potential for a route to be profitable can be performed at a very high level (like

“top-down” fleet planning) or at a more detailed level of assessment.

Route Evaluation Issues

Perhaps the most important inputs to any route evaluation are forecasts of potential passenger and cargo demand (as well as

expected revenues) for the proposed route.

Route Evaluation Issues

For a given route, O-D market demand is likely to be the primary source of demand

and revenues, but far from the only source. In airline hub networks, traffic flow support to the new route from connecting flights and other (non-local) O-D markets

can make the difference between expected route profitability and loss.

Once a forecast of the total O-D market demand (per period) for the route in

question has been generated, an equally important step is the estimation of the

market share that the airline can expect of this total demand.

The airline’s own market share of totalforecast demand will depend on its frequency

share in the market, the path qualityof its planned services (non-stop versus connecting flights), as well as its planned

departure times. To the extent that the competitive marketplace will allow differences to

be maintained, relative prices and service quality can also have a significant impact on

expected market share of total demand.

Route Planning and Evaluation

The fundamental economic criterion for evaluation of a planned route is its

potential for incremental profitability in the short run, given the opportunity cost of

taking aircraft from another route.

However, in route planning (as in fleet planning) a number of practical considerations can be just as important as the outcome of the economic evaluation. The technical

capability to serve a new route depends on availability of aircraft with adequate range and proper capacity. The

performance and operating cost characteristics of available aircraft in the airline’s fleet will in turn have a substantial impact on the economic profitability of the

proposed route. If the route involves a new destination, there will be additional costs of establishing the required

airport facilities and sales offices, along with staff relocation.

Regulations, bilateral agreements and limited airport slots can also impose constraints

on new route operations, to the point of non-profitability. For example, while a new route

to Hong Kong might appear to be a viable option for the airline, the availability of landing

slots only at undesirable arrival and departure times will have a negative impact on the

airline’s market share and route profitability.

In some cases, strategic considerations might be used by an airline to proceed with the

initiation of service on a route despite a negative outcome from the economic evaluation

of expected route profitability. Given the political and other uncertainties of international

bilateral agreements and route opportunities, the airline might focus on the longer-term

competitive and market presence benefits of entering a new route even if it is expected

to be unprofitable in the short run.

Route Planning Models

Demand, operating cost and revenue forecasts are required for the specific route under consideration,

perhaps formultiple years into the future. An estimate of the airline’s

own market share of totaldemand is also critical, based on models of passenger

choice of different airline andschedule options. Both the forecasts of future demand and

market share will depend to alarge extent on the presence and expected response of

competitors to the planned routeentry.

“Route profitability models” have been developed both by some airlines and by software

vendors for purchase by airlines. These are computer models designed to perform such

route evaluations based on detailed inputs that include demand forecasts, operating cost

estimates, and planned frequency and schedule of operations for the airline using the

model. The objective such models is to allow airlines to select routes to maximize total

airline profits, given a set of candidate routes and estimated demands, subject to fleet and

capacity constraints.

These models have proven to be useful in comparing alternatives, but airlines must

recognize that the profit estimates generated by the models are entirely dependent on the

accuracy of future demand and revenue estimates, the allocation of operating costs to

each route, and assumptions concerning expected market shares. A major shortcoming of

even the most sophisticated airline profitability models is a very limited ability to integrate

competitive effects.

Route Planning and Evaluation