NETWORK DEVELOPMENT AND DETERMINATION OF ALLIANCE AND JOINT VENTURE BENEFITS Status of Alliances in Middle East Compared with other world regions, the Middle East is under represented in global alliances. Passengers carried by Middle Eastern airlines that belong to a global alliance account for only 2.4% of total alliance passengers and 1.8% of daily departures. This suggests there are opportunities for airlines in the Middle East to increase their alliance role and improve service to passengers through better connections. Global Alliances Star Skyteam Oneworld Total Global Passenger Numbers Million 679 537 245 1461 Daily Departures Thousand 21555 14968 9239 45762 Middle East Airlines Participating in a Global Alliance Egyptair Passenger Numbers 9.1 9.1 Daily Departures 237 237 MEA Passenger Numbers 2.05 2.05 Daily Departures 57 57 Saudi Passenger Numbers 21 21 Arabian Daily Departures 430 430 Royal Passenger Numbers 3 3 Jordanian Daily Departures 116 116 Total Middle East Passenger Numbers 35.15 Daily Departures 840 Middle East Alliance Members Passenger Numbers % of Total Global Alliances 2.4% Middle East Alliance Members Daily Departures % of Total Global Alliances 1.8% Rapidly growing Middle Eastern carriers have retained their independence to date and have developed extensive bilateral, commercial, codeshare, frequent flyer program (FFP), cargo and marketing agreements. This is shown in the table below: Commercial Codeshare FFP Cargo Marketing Emirates 9 12 7 4 1 Etihad 1 34 14 0 1 Qatar 5 10 13 0 1
This however, is poised to change as there have been a number of developments recently. The industry has matured to a point where we may see Middle Eastern carriers join the global airline alliances. This year Saudi Arabian Airlines officially joined SkyTeam at a ceremony in Jeddah on May 29, 2012. Middle East Airlines joined SkyTeam on June 28, 2012. Star Alliance, despite having the largest number of carriers among the three global alliances, is relatively quiet on a possible Middle East expansion. This could be caused by a reluctance to build up another alliance hub carrier in the region. oneworld is actively exploring the addition of a Middle Eastern carrier to its partnership network with either Qatar Airways or Etihad Airlines. The CEO of British Airways, Mr. Willie Walsh predicted that a Middle Eastern network carrier would join a global alliance. Qatar s CEO stated in April 2012 that we haven t been invited by anybody and if we were invited, yes, we would consider it in a positive way. Etihad is still considering joining one of the three main global airline alliances which could create a fundamental shift in the Middle East s aviation industry. The Emirates-Qantas partnership is a game changer with impact on existing alliances and relationships. The region is poised for further changes, as Qatar and Etihad are more likely to team with other airlines. Overview Determination of codeshare, alliances, and joint venture benefits and synergies are driven primarily by network design and an optimisation process that is described below. Market Analysis and Market Forecasting Market analysis is critical for understanding the demand and supply of the air transport market. Changes in market sizes, year-over-year market growth, multi-lateral agreements, establishment of new airlines, increasing non-stop services, significant changes in fares, capacity growth, and competitor activities must be examined. The findings are used for identification of market growth opportunities. Analysis provides inputs to the formulation of network scenarios. The example below indicates the airline s hub is poorly designed with the lack of a clear arrival/departure bank structure. This equates to lost opportunities in connecting O/D markets. It also shows the scattering of European departures with poor slot constraint management. Route network development scenarios should aim to resolve such inefficiencies.
Another example is a share gap evaluation which is used for identifying and prioritising markets where year-over-year total market growth exceeds total seat growth. This situation will make it easier for the airline to win market share. The example below includes evaluation of an airline s market share growth compared with total market growth. In this example, attention must be given to routes where the market growth is greater than the airline s market share growth. The evaluation also considers air fares. For example, is the airline increasing or protecting its market share at the expense of reducing its fares compared with average fares in this particular route? The results of the market analysis are then used in formulating network scenarios which will be developed using network design tools. The next step is Market Forecasting. This is the determination of future market sizes for the routes. The GDS booking data capture the number of passengers which is the basis of estimation. GDS excludes airline direct and interline sales, hence market sizes must be calibrated for estimating non-gds passengers. This is done considering the seat share of low cost and charter airlines that are selling outside the GDS.
Market forecasting includes both top-down and bottom-up elements. Top-down elements include GDP-driven passenger growth. There is an established correlation between yearover-year GDP growth and corresponding growth in passenger volumes. For increased accuracy, the GDP of respective countries on a route network and point-of-sale data are considered in the analysis. The bottom-up elements include regression analysis utilizing IATA Paxis and MIDT flown passenger data. The market forecasting results are then used as an input to network optimisation tools. In addition to market sizes, large, fast-growing and high-yield markets that are within circuitry advantage as shown in example below are identified and used for further refinement of network scenarios. Network Design Optimisation is driven by a long-term view, where the starting point is improvement of the current schedule. An optimal network will be the result of design iterations which maximize the variable contribution. This is achieved by testing network scenarios developed in earlier steps through network optimisation analysis. There are multiple network optimisation tools used by different consultancies. To ensure accurate results, the tool must be calibrated against a flown schedule. The market share forecast obtained from the network optimisation tool must be comparable to actual results of a flown schedule.
Long-term network design maximises commercial benefits without considering current constraints such as bilaterals, slots, airport restrictions and capacity or fleet composition as there will be sufficient time to improve and resolve constraints that may be limiting the commercial performance of the current network. Long-term network design also highlights codeshare opportunities to improve the performance of routes, and increase passenger reach from its base. For some airlines, this analysis may highlight any urgent necessities such as increases in airport capacity. Typical activities utilizing long-term network optimisation include: Calibration of the network optimization tool against the flown schedule. Creation of network development scenarios that are further developed through the overbuild approach. The objective is to start with a large number of potential markets and gradually eliminate markets using various criteria including capacity of these markets to support destination traffic and connecting traffic, aircraft range, and route profitability. The overbuild approach is shown in example below where 3,000 candidate markets are reduced to 150 as part of the network optimization process. Network design and fleet type selection and planning are concurrent activates where route profitability is based on the operational and ownership costs of the aircraft used.
Hub optimisation is integral to network design and the objective is to improve the number, timing, and directionality of connecting banks. Network optimisation tools enable effective hub analysis. Station View Network Optimisation In short term network optimisation, the focus is more on tactical improvements within the existing constraints. The starting point is the current network that is flown by the airline and improvements that can be feasibly implemented subject to airport and other operational constraints of the airline. Typical airport constraints that must be considered are shown in the figure below.
Financial performance of the current network can be evaluated and routes can be classified according to the yield and Revenue per Available Seat Kilometre (RASK) achieved on routes. The routes that are low yield and in a low RASK category can be examined and appropriate action can be taken. Discontinuing a route is expensive; hence the root cause of underperformance must be carefully examined. This could be driven by pricing, revenue management, advertising or other reasons. A sample evaluation is provided below. Evaluation Codeshare Opportunities Following the network optimisation analysis, bilateral and codeshare development opportunities can be identified and examined for long-haul flights with codeshares to other alliance hubs including beyond points, and medium/short-haul flights in a feeder role. As some alliances selectively restrict codeshares with rival alliances, the value of current codeshares must be evaluated. The main activity is to identify opportunities for codeshares and bilateral relationships that are beneficial for the airline. As additional codeshare relationships are added to the network, differential passenger and revenue increases can be calculated.
Example: Value of Current Codeshares Evaluation of Alliance and Joint Venture Opportunities If the airline is not currently part of a global alliance, benefits of joining an alliance can be examined. These typically include network and ATI benefits, as follows: Network Benefits: Additional passengers are generated by the synergy due to meaningful and advantageous connections between the candidate airline and alliance networks. This may result in improvements in load factor, system revenue, and route level variable contributions. ATI Benefits: Commercial and operational alliance-wide cooperation, including reciprocal participation in each other s FFP, proration of passenger fares, co-operation on facilities and passenger handling, lounge exchange program, common promotion and advertising, and common procurement programs reducing overall costs all serve to increase profits. It is important for the candidate airline to develop the best strategic fit with the alliance by leveraging the alliance network and resources in support of its own strategy. Alliance members and the candidate airline may not always have the same objective as each alliance member and may pursue their own benefit within the alliance framework and agreements. These could include access to the candidate airline s domestic market and regional catchment area as well as the use of the candidate airline as a feeder to the other alliance member hubs. Each airline should protect its strategic interests. For example, after joining an alliance the airline s long haul network could be reduced, with increasing frequencies to other alliance member s hubs compliant with the proposed feeder role. Other examples include bilateral agreements within the alliance that exclude other airlines. The factors that a carrier should consider in assessing alliance network benefits are shown in the figures below.
Evaluation Alliance Network Benefits Factors Evaluation of ATI Benefits Category Low High Revenue Comes From CRM 1.5 1.5 CRM improvements FFP 5 15 Opportunity cost of not having ATI/Open Skies 0 0 Conclusion Network optimisation and route development methods, optimisation tools and market data offer opportunities for airlines to expand their reach and revenues and improve variable contribution through analysis of codeshare, alliance and joint venture benefits. InterVISTAS offers extensive experience with optimisation tools and has worked with numerous airlines worldwide. Contributors Increase costs per KM to suppliers using Alliance FFP. Could lose many benefits currently offered from Alliance Low er COUNTRY distribution costs 6 9 Reduce commissions/overrides Net Fares in COUNTRY mkts 0 0 Better coordination of net fares Target corporate accounts 0 0 Internet sales increase 0 0 Increase in COUNTRY sales 30 30 Competitive effect in COUNTRY marketplace 0 0 Offer corporations deals for their entire travel needs Joint coordination of sales campaigns & promotions Combination of pricing, RM, sales & marketing Competitive response (pricing, RM, sales & marketing) Low er Country distribution costs 39 39 Reduce distribution costs Negative competitive effect in domestic marketplace 0 0 Franchise Country CTO's 0 0 Competitors erode Client market share Spin-off Country CTO's through franchise concept Dr. Emre Serpen is Executive Vice President and Head of Airline Practice, InterVISTAS Consulting Group. Emre has passion of working with airlines developing and implementing winning strategies and turnaround programs with bankable results. He has worked with over sixty airlines delivering significant financial benefits, led three airline consultancies, won several industry awards, and his projects often became industry case studies.
Tel +447944163891 Emre.Serpen@intervistas.com