THE FUNDAMENTALS OF ROUTE DEVELOPMENT UNDERSTANDING AIRLINES MODULE 3

Transcription

1 THE FUNDAMENTALS OF ROUTE DEVELOPMENT UNDERSTANDING AIRLINES

2 AIRLINE ISSUES Low margins Fuel price uncertainty Vulnerability to economic downturn Unpredictable one-time events High profits of airports

3 AIRLINE ISSUES FSCs 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

4 LCCs 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

5 CHARTER 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

6 PASSENGER SEGMENTATION Leisure Passengers Price Conscious Business Passengers High End Product Business Passengers Short Haul Routes Long Haul Routes Charter LCC s Regional Carriers Network/FSC Carriers

7 MODELS ARE MIXING ACROSS PASSENGER SEGMENTATION Pure LCC Hybrid Pure Network Point to point network model Leisure market focus No FFP Sales channel via proprietary web sales only Scheduling takes no account of connecting opportunities Charter 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

8 Charter Source: Boeing CMO

9 ECONOMICS 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

10 AIRLINE COSTS VARIABLE OPERATING COSTS AIRCRAFT OWNERSHIP OVERHEAD Operating costs + aircraft ownership + overhead costs

11 AIRLINE COSTS Variable Operating Costs (directly tied to flying) Fuel Direct labour Crew cycle expenses Maintenance Airport & en-route charges Distribution costs Passenger service Aviation fuel, oil Salaries & benefits of flight crew, airport sales and ramp staff Flight and cabin crew layover costs Cycle or block hour driven maintenance costs Landing fees, handling, navigation fees GDS charges, commissions Catering, passenger insurance

12 AIRLINE COSTS Aircraft ownership Lease payments Depreciation Aircraft insurance Unrelated to flying hours Payments on leased aircraft Depreciation on owned aircraft 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.

13 AIRLINE COSTS Types of Aircraft Ownership Scenarios Purchase cost depreciation Wet lease Damp lease Dry lease Power by the hour lease Operating lease Finance/Capital lease Description Straight line over years Aircraft operated under the AOC of the lessor. Includes flight crew, cabin crew, maintenance, insurance (ACMI) Same as wet lease except cabin crews provided by lessee Aircraft operated under the AOC of the lessee. Lessor provides aircraft, lessee provides crew, maintenance & insurance 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 2-7 years, off balance sheet, ownership remains with lessor Typically >75% of aircraft useful working life Viewed as a purchase on balance sheet Ownership eventually transferred to airline

14 AIRLINE COSTS Corporate Overhead Headquarters facilities costs Headquarters staff Other corporate overhead Unrelated to flying hours Building, utilities, etc Management salaries, benefits, etc Advertising, web administration, etc

15 : EXAMPLES AIR FRANCE KLM (all figures in Euro millions) Revenues 24,930 26,062 Operating costs 2015 Operating cost % Salaries, wages & benefits 7,636 7, % Aircraft fuel 6,629 6, % Landing fees & enroute charges 1,840 1, % All other costs 8,954 9, % Total Operating costs 25,059 25, % Operating profit Operating margin -0.5% 3.1%

16 : EXAMPLES RYANAIR (all figures in Euro millions) Revenues 5,037 5,654 Operating costs 2015 Operating cost % Fuel 2,013 1, % Airport & handling charges % Staff costs % All other costs 1,284 1, % Total Operating costs 4,378 4, % Operating profit 659 1,043 Operating margin 13.1% 18.4%

17 Capacity, traffic & revenue metrics 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%

18 Top 10 Routes (by pax volume) Operated from MAN Airport Dest. Seats Pax PLF ASK (000s) RPK (000s) PLF Distance (km) DXB 1,009, ,697 86% 5,704,981 4,899,438 86% 5,653 AMS 1,016, ,978 84% 494, ,887 84% 487 DUB 1,105, ,669 76% 292, ,512 76% 265 TFS 797, ,001 98% 2,432,184 2,383,540 98% 3,048 PMI 747, ,458 98% 1,181,649 1,158,016 98% 1,581 LHR 1,020, ,640 71% 248, ,116 71% 243 ALC 639, ,792 98% 1,068,104 1,046,742 98% 1,670 AGP 518, ,474 99% 966, ,601 99% 1,863 ACE 516, ,859 98% 1,479,895 1,450,298 98% 2,867 DLM 514, ,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% Source: Sabre Market Intelligence Feb/15 to Jan/16

19 Capacity, traffic & revenue metrics 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 , 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

20 Capacity, traffic & revenue metrics 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 $ $ easyjet 1,131 $ $ Wizz 1,503 $ $ Southwest 1,545 $ $ BA 3,334 $ $ Emirates 4,777 $ $ Source: CAPA

21 Capacity, traffic & revenue metrics 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.

22 : EXAMPLES PASSENGER REVENUE SEGMENTATION LHR Local MAD Beyond LHR MAD PMI Behind MAN LHR MAD Bridge MAN LHR MAD PMI

23 REVENUE MANAGEMENT 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

24 PROFITABILITY

25 MANAGEMENT STRUCTURES Top Tier C Level Revenue management Network Planning Sales & Distribution Commercial / Partnership management

26 MANAGEMENT STRUCTURES Head of Network Planning (Senior) Network Planning Manager Region A (Senior) Network Planning Manager Region B Senior Analyst Analyst (Senior) Analyst

27 EASYJET NEW ROUTE DECISION PROCESS

28 BA: REVENUE FORECASTING IS THE KEY CHALLENGE FOR NEW ROUTES Market Size How many passengers currently fly to / from London? Are there any key transfer markets? Market Share Yield Growth Potential 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? Other opportunities Is there a significant cargo market? Are there ancillary revenue opportunities?

29 BA: OPERATIONAL CHALLENGES PLAY A MAJOR ROLE IN FEASIBILITY Crewing Do 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? Slots Do we have the required slots at both ends of the route? Customer Service Do we have a ground handling arrangement in place? Scheduling Do we have enough spare aircraft time on the fleet?

30 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