strategic

transportation

& tourism

solutions

Insert Title of your presentation

World Low Cost Conference

Route Planning

Dr Emre Serpen Executive Vice President

Low Cost Conference 2009 London

Agenda

1

1. Introduction and Expectations 9:00 - 9:30

2. Route Planning 9:30 - 10:30

3. Coffe Break 10:30 - 10:50

4. Revenue Management (Integrated Approach) 10:50 - 12:15

5. Measuring Performance (Presentation) 12:15 - 13:00

6. Lunch 13:00 - 14:00

7. Measuring Performance (Facilitation) 1400 - 14:30

8. Coffee Break 14:30 - 14:45

9. Optimising Costs 14:45 - 15:30

10. Expectations Review & Next Steps 15:30 - 16:00

Objective

This workshop will focus on strategies and methods to improve revenue. Integration

of commercial activities enables airlines and airports to improve the revenue base. By working together and understanding each others priorities airlines, airports and service providers can maximise the revenues and margins of the chain.

Benefits for airlines:

Learn key strategies, tactics, use of tools, organisation, processes and measures that result in revenue maximization

Learn and develop new methods used in route planning

Benefits for airports

Learn how to support the growth of lead or leading carriersDevelop new strategies in how to attract new airlines

Benefits for solution providers and vendors

Learn how best to share data and technologies with airlines

Develop expertise and knowledge about your customers –

Learn how to lead educate your customers to better use your tools

Learn how to improve revenues for your customers

Diversification of LCC Model and Opportunities for

Revenue Improvement

Factors driving change

• Extending route lengths

• Connecting services

• Increasing network complexity

• Cooperation between Network and Low Cost Carriers ?

• Network carriers establishing successful low cost carriers ?

• Mariginal improvement in costs ?

• Pressure to increase revenues ?

• Reducing margins in route risks ?

• Consolidation ?

• Airport costs ?

3

Revenue Growth Opportunities

Route variable contribution

Codeshare ?

Cooperate with Network carriers ?

Improve processes ?

Improve data sources and

optimisation technology

Diversification of LCC Model and Opportunities for

Revenue Improvement

Factors driving change

• Deregulation (eg Russia, Middle East/ Gulf, Open skies between US and Latin American countries)

• Increase in operating hours – ie. very late and very early departures

• Traffic patterns and holding patterns around some airports – adding costs to certain routes, and making them uneconomical for LCCs

4

Revenue Growth Opportunities

• Improved variable contribution

• Fleet utilisation

• Long haul RASK & Yield

Factors driving change

0

200

400

600

800

1,000

1,200

1,400

'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

US

Europe

Source: OAG

Growing LCC stage Length

Airline Local Connecting

Spirit 99.8% 0.2%

Jet Blue 95.5% 4.5%

Southwest Airlines 85.1% 14.9%

ATA 83.9% 16.1%

Airtran 70.6% 29.4%

Frontier 67.9% 32.1%

Continental 62.7% 37.3%

America West Airlines 61.0% 39.0%

American 59.9% 40.1%

United 54.4% 45.6%

US Airways 54.3% 45.7%

Delta 50.2% 49.8%

Northwest 47.2% 52.8%

Increasing connecting services

Increasing Network Complexity

Notes: Includes Domestic and International Traffic. Local = 1 Coupon

Passengers. Connecting = Online Passengers Traveling on

Multiple Coupons.

Source: U.S. DOT O&D Survey, Database Products Inc.

The US sees steady increases in

connecting traffic among LCCs

Some US LCCs are positioning

themselves for connecting trans-atlantic

traffic as a result of the EU-US market

liberalisation

JetBlue – Aer Lingus

Virgin America – Virgin Atlantic

6

Diverging LCC Models

Ryanair easyJet Southwest Virgin Blue JetBlue Frontier WestJet

Main Airports × P P P P P P

Frequent Flyer

Plan × × P P P P P

Free Beverage

and Snacks × × P P P P P

Connecting

Flights × × P P P P P

Assigned

Seating × × × P P P P

Free Inflight

Entertainment × × × × P P P

jetBlue started to serve

international routes - eg

Carribean and Mexico

Southwest is considering

adding international

destinations in the future

jetBlue has opted to enter

smaller markets with the

Embraer E190s

jetBlue already operates from

congested airport facilities

(JFK, BOS, etc.)

Southwest has increased belly

cargo capacity

7

Starting to see long haul – low cost activity

Low-cost carriers increasingly resemble hub & spoke systems, in

addition to expanding their previously limited international offerings

Percent of

LCC Airport Total Seats

Frontier Denver 49%

JetBlue New York Kennedy 35%

Southwest LAS, PHX, MDW, BWI, HOU 30%

WestJet Calgary/Toronto 37%

AirTran Atlanta 35%

America West Phoenix 34%

LCC International Destinations

Costa Rica

Dominican Republic

Jamaica

Mexico

Aruba

Bahamas

Bermuda

Canada

Sources: US DOT O&D Database

9

Long Haul LCC- Increasing Revenue Potential ?

Transatlantic, Asia-Europe & Asia-North America

Intra-Asia Pacific, Australia-North America

Transatlantic, Asia-Europe, Middle East, Elsewhere

Curre

nt

Future

Past

CONSTRAINTS

Stimulation

LH has less potential than SH

Weekend breaks are less viable

Regulatory

International markets are still highly regulated

Competition from charter carriers

FUTURERyanair

Actively considering transatlantic

service?Within 3-4 years (maybe)

WestJet/Southwest

Investing in interline or other capabilities

JetBlue

Interlining with transatlantic carriers at JFK

Consolidation among low cost carriers, here is some

learnings from Network Carriers

The synergies from integration with Swiss, exceeded 200 million Euros

• expanded route network with more destinations and better connections

• interlinked frequent flyer programmes and mutual lounge access

Total synergies from integration of Austrian are estimated at around EUR 80 million Euros (both revenue and cost)

• improved access to international passenger flows and joint international marketing,

• cost advantages and economies of scale

The scope of integration Swiss /Austrian were similar

• Autonomous carrier own business management, own crew and fleet

• Zurich integral part of Lufthansa’s multi hub strategy

The airline related savings of €525 million over three years by combining purchasing, sales and information technology.

Example 1: Lufthansa

Example 2: Air France / KLM

Nonstop Total Weekly seats Operated by Lufthansa Group

Aug. 2003–Aug. 2008, Dec. 2008

Depending on further progress of discussions between FAA

– EU in future we could see similar deals between US/EU

For example if Virgin Group and easyJet’s agrees to cooperate to

Operate London Gatwick – this drives clear benefits for both

Low-costs are starting to

connect their networks

Virgin Blue

Southwest

Jet4you

Jetstar

Gol

Vueling

Simple structures are used yet

Mostly one-way

Mostly block-space

Reservation systems providers

developing new solutions

especially for low-costs

Low-costs are looking for simple ways to code-

share

Traditional approaches are not welcome

Immedaite payment is expected

No prorating

Open questions

Baggage transfers for extra charge?

How to share liabilities?

Will there be schedule coordination in the future?

The impact of increasing product complexity on the

design and delivery of the schedule

Route Planning

Network DesignProduction

Plan

Operations

control

Focus on improving variable contribution

Although LCCs still maintain a utilization advantage, LF offer

potential for improvement

LCCs lower unit costs require lower break-even Load Factors.

Southwest has made improving Load Factors a major component of their future strategy. Through capacity restraint (less profitable long-haul route reductions and aircraft deferrals) and increased market share.

Increasing yields requires higher fares. Passengers must perceive value to pay more for a service that has become more commoditized

Load Factors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Con

tinen

tal

Amer

ican

Nor

thwes

t

JetB

lue

Uni

ted

Del

ta

US+H

P (LCC)

Front

ier

ATA

South

wes

t

AirTra

n

Load Factors Yield Yield

$-

$0.020

$0.040

$0.060

$0.080

$0.100

$0.120

$0.140

$0.160

US A

irway

s

North

wes

t

AirT

ran

Sou

thwest

Am

erican

Delta

Cont

inen

tal

Unite

d

Am

erica W

est

Frontie

r

JetB

lue

ATA

Schedule design should take into account revenue

drivers

• Consistent priorities ? Service timing which does not meet the needs of the local market

• Inconsistent schedules which do not meet the needs of the market

Client - Market Clusters, International

0%

20%

40%

60%

80%

100%

10% 15% 20% 25% 30% 35% 40% 45% 50%

Avg Fare Relative to FFY

Market

Sh

are

HIGH SHARE

LOW RELATIVE YIELD

HIGH SHARE

HIGH RELATIVE YIELD

LOW SHARE

LOW RELATIVE YIELD

LOW SHARE

HIGH RELATIVE YIELD

64%

62%

54%

77%

60%

71%

55%

53%

58%

78%

52%

54%

54%

58%

Client - Market Clusters, International

0%

20%

40%

60%

80%

100%

10% 15% 20% 25% 30% 35% 40% 45% 50%

Avg Fare Relative to FFY

Market

Sh

are

HIGH SHARE

LOW RELATIVE YIELD

HIGH SHARE

HIGH RELATIVE YIELD

LOW SHARE

LOW RELATIVE YIELD

LOW SHARE

HIGH RELATIVE YIELD

64%

62%

54%

77%

60%

71%

55%

53%

58%

78%

52%

54%

54%

58%

• Ensure operational feasibility (minimise turn times,

• Ensure maximisation of the variable contribution through the right service characteristics

As the network becomes more complex, fleet allocation

models may prove beneficial

Route AnalysisData:

City Pair Market Sizes

Sources MIDT

a. Scaled-up, based on research

Government Stats

- Some good ie. CAA, USA DOT

- Some wantingAll air travel options (OAGRoute Analysis

Market Share

INPUTSupply side – all travel options – non-

stops, directs, connects, etc.Demand side – all city pair market sizesNew route schedule

OUTPUTShare of local marketShare of flow potential)

New Route Selection Process

Other Considerations

Network Contribution

- Very significant for network carriers

- Prorate issue

- How to consider the contribution

Current Route Cannibalization

Market Stimulation

Non-stop flight stimulation

Reduced airfare stimulation

How to establish

Rules-of-thumb

Research

Quality of service basis

16

Model InputAll Air Travel

Options

Model Assessment

• Relative score of new flight against all other travel options

• Multiplicative equation based on coefficients for:

Flight Frequency X Number of Stops X Aircraft Type

X Travel Time X Day of Week

Also known as Quality of Service Index (QSI)

Model Output

New Service Schedule• Flight frequency

• Optimal flight times

• Aircraft type

• Seasonality

• Day of week preference

Share before/after

new service

• Market Research

• Government statistics

• Market stimulation

x

=

÷

=

X

=

-

=

New service

market share

City pair

market size

On-board

passengers

Available

Seats

New service

load factor

Average fare

Airline revenue

Airline costs

Profit/loss forecast

Cannibalization

New service carrier

market share loss

on other routes

Passengers lost

to new service

Other carrier

market share loss

Share before/after

new service

Passengers

recaptured

by new service

The Planet Market Share Model

Risk Sharing Concept

Two examples where breakeven + profit margin is at 80% load factor

17

Airline Risk

Airport

Contribution

Actual

Revenue

Airline Risk

Airport

Contribution

Actual

Revenue

80%

40%

30%

80%

68%

60%

Load

Factor

Load

Factor

30% Load Factor 60% Load Factor

Routes linking regional airports 5m>

For new routes only & increase net pax nos

Profitable routes (3 years)

Support plans must go public

Penalties for not honoring the commitment

For New Routes

Airlines: Positive financial return for the route

Network Contribution (Connectivity)

Strategic Considerations

Market Share

For New Routes

Airports:

Airport fees from more flights

Retail sales from additional passenger flow

Better Air Travel Product for the Community at

Large

Tourism, Business, Economic Development

Market Stimulation

For new routes, stimulation can be as important as market share.

Stimulation is a result of:

• Product improvement - new non-stops vs connections, etc. & Price reduction.

Contributors:

• “Gets them out of their couch” Allegiant Airlines.

Airline rules of thumb:

• A USA airline – A new daily flight will stimulate the market by 45%.

• A European charter carrier – A one/week service will increase the market by 65%

Models

ln(%Traffic) = Constant + (a x ln(%Fare)) + (b x ln(%Capacity)) + (d x ln(distance))

Traffic is the percent change in O/D passengers on the specified route.

The constant term captures to some extent the influence of other variables not explicitly accounted for in the model.

%Fare is the percent change in the industry average air fare.

%Capacity is the percent change in total non-stop capacity offered by all airlines on the route.18

46%

-19%

36%39%

-14%

44%

50%

-21%

50%

-23%

49%

73%

59%

-46%

112%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Seat Capacity Change Fare Change Passenger Change

Ultra-Short Haul Short Haul Medium Haul Long Haul Ultra-Long Haul

U.S. domestic average stimulation rates by route type for individual

airports:

Domestic U.S. Findings

Source: PLANET OAG schedules and

U.S. DOT OD1A data.

Europe: Change in Weekly Revenue, Cost and Profit

-0.4

-2.0

1.6

-3

-2

-2

-1

-1

0

1

1

2

2

Rev Diff Var Cost Diff Var Res Diff

Mil

lio

n E

GP

Schedule design should also take into account cost

drivers

De-peaking (intra-day and seasonal)

• Evens out load on the structure

• But lowers yield too

Avoiding overnights at outstations

• Crew costs vs. yield

Flying faster or slower

• Fuel burn vs. utilisation

Moving to secondary airports

• Lower costs and higher utilisation vs.

yield

Extending the fleet operating date

• Aircraft utilisation vs. low revenue

during shoulder-timesSource: project work

Opportunities to improve route profitability

Improve connection times

Right operational characteristics

• Reduce Turn time, ensure station

delivery capability to match

target turn time

• Right size block time

Maximise asset utilisation

• Design to maximise daily utilisation

(without impact on OTP,

station delays and reliability

• Reduce percentage of fleet out of

service

• Reduce turn times

Crew cost reduction strategy

• Crew base policy and crew

utilisation CSF’s for crew

improvement

• Reduce crew overnight costs

Shut dow n engines

Position Pax bridge or stairs 1

PAX Deplane Pax at 40 per min.

SERVICE Cabin cleaning (6 people)

Service Galleys

Board Pax at 30 per minute

Unload Fw d Cont

BAGGAGE Unload Aft Cont

CARGO Unload/Load Bulk Cargo

SERVICVE Load Aft Cont

Load Fw d Cont

Fuel A/C

AIRPLANE Service lavatories

SERVICE Service potable w ater

Start engines

Elapsed Time

(minutes)

40

16

15

12

10

16

14

36

14

7

22

FWD 6 + AFT 20

9

A Project Finding

15 minute saving in turn-time equated to

1.5% of the saving in revenues

Review current practices

• Focus on benchmark results

• Compare current market forecasting, network design, scheduling processes

• Use of information and use of tools

• Skills and capabilities

• Compare with industry best practices

• Gap Analysis

Provide recommendations for improvement

Review network planning processes and identify improvement

opportunities cont’d

Key Performance Indicators for network management, and

schedule optimisation activities will be developed

Performance measures used to track network optimisation will be revised

Reccommendations will be provided

New Performance Indicators will be developed to track Performance at network, market and leg levels

Total Revenue & Cost

Total and Variable Profit

Operating Margin

System CASK

System RASK

System Yield

Fleet Utilization

NETWORK

LEVELMARKET

LEVEL

LEG

LEVEL

Frequency by O&D

Passengers by O&D

Market Share

Share Gap

Consistency of Schedule

Leg Profit

Leg Contribution

Leg CASK

Leg RASK

Leg Yield

Leg Load Factor

Percent of Flow Traffic

Illustrative

Example

Readily available industry best practices and

extensive experience with processes, and

KPI development will speed the execution of

this project

The impact of increasing product complexity on the

design and delivery of the schedule

Route Planning

Network DesignProduction

Plan

Operations

control

Planning and delivery of the schedule include many

opportunities to reduce cost and improve productivity

Actual example Schedule Jan 1 - Jan 10

• 661 schedule changes occurred in the last 10 days on 597

flights: > 1 action per flight (as an average)

Source : Project work

The revenue growth and cost reduction plan must be

linked and managed on rolling forward basis

Strategy

Short

Term

Changes

IOCC

Operations Plan

( routed)

Market

Network

Fleet Plan

5yrs 3 - 5 yrs 72 hrs-36 months 72hrs

Monthly tracking of operational costs is insufficient, airline must focus

on accomplishments of forward plan

Without a balanced plan that is tracked and manage companies will find diffcult

to deliver reliable schedule and minimum cost and optimised productivity

Consistent measures ensuring development of balanced plan OUTPUTS

Pilot salary per block hour is often used as crew

measure, but this is insufficient

Pilot and cabin crew

productivity

Speed up pilot training

times

Crew base policy and crew

utilisation

Reduce crew overnight

costs

Improve pilot training

Eliminate crew changes at

non-maintenance delays

Reduce number of pilots

with fleet size

Reduce number of flight

attendants per aircraft

Preferential bid system,

reduce sick leave

Reduce crew overnights

Case study opportunities to reduce costs

Minimise fuel use

• Fuel calculation

• Single engine taxi

• Flight plan

• KPI’s for fuel use

• Tankering procedures (get from

Paul good fuel procedures)

Reduce airport and station costs

• Shorter station operating hours

• Align capabilities with target

turn times

• Flight policies (limit no of bags

in cabin

• De-peak operations

Design for schedule reliability

– Reduction in block hour

variability – refine block times

monthly,

refine pilot procedures and

adherences

Reduce % of fleet out of service

Shorter turn times

The impact of increasing product complexity on the

design and delivery of the schedule

Route Planning

Network DesignProduction

Plan

Operations

Control

The importance of integrated operations control is increasing with

more pressure on operating efficiencies

Common understanding of scenarios and situations

Effective tools and methods to analyse alternative responses

Effective interfaces between OC and broader business units

Integrated processes and performance measures

Integrated applications

Additional loads effect capacity planning

Support of evolving hub management strategies

Dynamic commercial environment

Pressure on turn times

Pressure for aircraft utilisation

Need to improve crew utilisation

MRO outsourcing

Capacity constraints at airports

Reducing yields the importance of

revenue lost due passenger ill-will

Reduce passenger recovery costs

Total benefits of improved IOC effectiveness is

significant

Incident

Total length

of delay

(mins)

%

recoverable

from IOC

Delay minutes

recoverable

(IOC)

No. of pax

affected

Disruption costs

Cash outlay

%

recoverable

from IOC

Disruption costs

recoverable (IOC)

CX880 / 10 Aug 96 152 100% 152 693 56,550 100% 56550

CX888 / 10 Aug 96 99 100% 99 716 38,688 100% 38688

CX251 / 06 Dec 96 925 0% 0 480 264,000 100% 264000

CX289 / 15 Dec 96 171 0% 0 248 144,742 0% 0

CX400 / 23 Jan 97 461 30% 138 1,044 120,744 100% 120744

CX767 / 27 Jan 97 851 30% 255 395 6,600 0% 0

CX103 / 01 Feb 97 1,640 100% 1640 469 610,000 100% 610000

CX719 / 04 Apr 97 315 30% 95 457 7,780 0% 0

CX508/ 04 Apr 97

CX2468 / 04 Apr 97 575 100% 575 248 2,360 100% 2360

CX007 / 29 Nov 96 1,259 100% 1259 - 298,900 100% 298900

Total 6,448 4,213 4,750 1,550,364 1,391,242

Incident

Total length

of delay

(mins)

%

recoverable

from IOC

Delay minutes

recoverable

(IOC)

No. of pax

affected

Disruption costs

Cash outlay

%

recoverable

from IOC

Disruption costs

recoverable (IOC)

CX880 / 10 Aug 96 152 100% 152 693 56,550 100% 56550

CX888 / 10 Aug 96 99 100% 99 716 38,688 100% 38688

CX251 / 06 Dec 96 925 0% 0 480 264,000 100% 264000

CX289 / 15 Dec 96 171 0% 0 248 144,742 0% 0

CX400 / 23 Jan 97 461 30% 138 1,044 120,744 100% 120744

CX767 / 27 Jan 97 851 30% 255 395 6,600 0% 0

CX103 / 01 Feb 97 1,640 100% 1640 469 610,000 100% 610000

CX719 / 04 Apr 97 315 30% 95 457 7,780 0% 0

CX508/ 04 Apr 97

CX2468 / 04 Apr 97 575 100% 575 248 2,360 100% 2360

CX007 / 29 Nov 96 1,259 100% 1259 - 298,900 100% 298900

Total 6,448 4,213 4,750 1,550,364 1,391,242

Passengers• revenue• ill will

• hotel costs

Crew• productivity• lifestyle(morale)• legality• overtime

Aircraft• fuel• landing fees• maint . schedules• catering

Airports• staff overtimes• staff morale• gates• equipment

Cargo• revenue• agents ill will

IOC

Storyline

Balance of reserves built the plan versus cost of recovery

Ensure commercial and airports function are represented in OCC

Airline planning and dispatch – close relationship

Outsourcing weight and balance may lead to increased fuel consumption

Continuous flight planning and flight following focus and learnings are built into plans

Integrated OCC systems schedule, movement control, flight planning must be integrated

OCC provide regular feedback to consistently reoccurring issues – missing slot times, delays etc

Effective team work decisions to harness contributions of each department properly

Introduce findings from Virgin Atlantic report

Decision support capability

Effective ramp coordination

Use benefits case of Virgin Atlantic Maintenance

How to Leverage OCC for Effective Decisions

33

Facilitated Session

Opportunities for Improving the Revenue

Synergies between service providers

Breakout Groups or Plenum Discussion

Diversification of LCC Model and Opportunities for

Revenue Improvement – Synergies with airports,

aircraft, IT and other service providers

Factors driving change

Fleet selection – Boeing and Airbus

dominate (they have different outlooks on demand growth: point-to-point vs hub and spoke) – if they cannot manufacture enough aircraft to meet demand, there will be a restriction on growth.

What about regional aircraft? Are airlines choosing Embraer/Bombardier etc because they are the best suited to their routes or because they cannot get the popular 737s and 320s?

Environmental Issues –

Are stage lengths going to increase? Shortest flights dropped because of customer attitudes?

34

Revenue Growth Opportunities

Brainstorm

Route Planning

35

Airline

1. How to assess which routes to serve, that drives max top line and variable

contribution – method, latest trends

2. How to assess routes where there is no previous /little activity. What to do

when there is lack market and other data available

3. What are the methods on assessing level of stimulation – Capture, Share

from incumbant carriers, share versus no of competitors - useful info sources

4.Review the growth of routes in different geographies, (low cost) identify

winners and what they may be doing right – eg Northern US ?, Gol ,

Vueling, Anadolujet, Air Arabia, need to choose one from APAC Virgin Blue

? – Anadolujet may participate with a preso

5.What are the requirements of a low cost airline from the airport operator

- Fees, MCT, Turn Time, Facilities – will be good to include lots of practical

ideas here

Route Planning (Continued)

36

Airline

6. Do we see cooperation and synergies between Low Cost carriers

7. Do we see cooperation and synergies between Network and Low cost

Carriers eg Lufthansa – Jetblue, Air Berlin – Pegasus

8 . How can airline and airport share risks of starting new route

9 . Are network carriers learning how to set-up successful low cost carriers, Is

Vueling, Flydubai , Anadolu jet constitute successful examples following

early failures

10. What are the best practice network planning process, optimisation tools.

What are the limitations of current tools and how the airlines would like to

see the improvement of routes

Other ideas

Route Planning (Continued)

37

Airports

1. How to attract low cost carriers, what are the key incentives, recent

developments

2. Risk sharing with airlines, synergies on working with airlines

Other Ideas -

3. Air Service Development, how to improve the message for a low cost carrier

Ground Handling

3. Ideas to reduce costs for airlines – common uniform, airline provide incentive

to high performing GH agents, variable check in desk (not committed), and

others

4. Ideas to reduce ground handling costs for airlines

Route Planning (Continued)

38

IT Service providers

6. Improvement opportunities for data and tools for IT Service providers