Managing Revenue in a Shrinking Airline IATA Commercial Strategy Symposium Las Vegas, December 2-4, 2008

Current Situation The fuel price crisis and the world economic situation has pushed carriers of all types to reduce capacity and shelf growth plans Some airlines are trimming frequencies on a “day-of-week” basis where demand is less Less capacity usually results in higher fares, but soft demand and competitive pricing are impacting RASK and profitability

The fuel price crisis and the world economic situation has pushed carriers of all types to reduce capacity and shelf growth plans

Some airlines are trimming frequencies on a “day-of-week” basis where demand is less

Less capacity usually results in higher fares, but soft demand and competitive pricing are impacting RASK and profitability

Capacity Reduction The global airline industry will fly nearly 60m fewer seats (7%) in the final three months of this year (OAG) Ryanair, Europe’s largest budget carrier, is grounding 20 planes and easyJet is halving expansion plans One of the fastest growing markets, Asia, will see a 13% reduction in the number of seats The biggest cuts are US domestic flights, the world’s largest airline market The Guardian, August 2008

The global airline industry will fly nearly 60m fewer seats (7%) in the final three months of this year (OAG)

Ryanair, Europe’s largest budget carrier, is grounding 20 planes and easyJet is halving expansion plans

One of the fastest growing markets, Asia, will see a 13% reduction in the number of seats

The biggest cuts are US domestic flights, the world’s largest airline market

The Guardian, August 2008

US Domestic Capacity Reduction Source: Airline Business, August 2008 Airline ASK 2008 (m) Change (%) ASK 2007 (m) American 3,322.5 -8.6 3,634.7 Southwest 3,207.8 0.6 3,190.0 Delta 2,694.4 -13.6 3,118.4 United 2,567.0 -10.1 2,853.8 US Airways 2,066.8 -5.4 2,184.8 Continental 1,792.2 -8.3 1,954.1 Northwest 1,456.3 -8.5 1,592.0 JetBlue 849.0 -7.7 920.2 Alaska 740.1 -2.9 762.4

Relatively Fixed Supply One of the key reasons why the airline industry has faced financial difficulties and has profit margins well below many other industries is that its demand fluctuates constantly but its supply is relatively fixed Introduction to Air Transport Economics – from theory to applications – Vasigh, Fleming and Tacker, 2008

One of the key reasons why the airline industry has faced financial difficulties and has profit margins well below many other industries is that its demand fluctuates constantly but its supply is relatively fixed

Introduction to Air Transport Economics – from theory to applications – Vasigh, Fleming and Tacker, 2008

Airline Scheduled Capacity Create schedules six months in advance Accept bookings up to a year in advance Must adhere to their schedules or face re-accommodation fees Fixed costs, such as investment in infrastructure at hub airports, aircraft leases, and labour contracts have to be paid regardless of the schedule, making it impractical to reduce capacity at short notice

Create schedules six months in advance

Accept bookings up to a year in advance

Must adhere to their schedules or face re-accommodation fees

Fixed costs, such as investment in infrastructure at hub airports, aircraft leases, and labour contracts have to be paid regardless of the schedule, making it impractical to reduce capacity at short notice

Demand is Under Assault Even among relatively optimistic carriers, however, there are signs of yield weakness relative to what was expected given deep capacity cuts. Airline Weekly, November 24, 2008

Even among relatively optimistic carriers, however, there are signs of yield weakness relative to what was expected given deep capacity cuts.

Airline Weekly, November 24, 2008

Managing Revenue in a Shrinking Airline How do we manage the demand implications of a smaller schedule? How do we deal with the schedule change and passenger re-accommodation issues? How do we analyze the lost network impacts?

How do we manage the demand implications of a smaller schedule?

How do we deal with the schedule change and passenger re-accommodation issues?

How do we analyze the lost network impacts?

Flight Schedule Scenario 06:50 07:25 07:55

Revenue Optimisation

Morning Revenue Distribution

Total Revenue Distribution

Flight Cancellation Criteria Passenger and cargo revenues will not cover variable costs Current booked passengers can be accommodated on other flights with no additional cost The airline will not lose passengers to the competition Flight cancellation will not result in revenue spill on other flights

Passenger and cargo revenues will not cover variable costs

Current booked passengers can be accommodated on other flights with no additional cost

The airline will not lose passengers to the competition

Flight cancellation will not result in revenue spill on other flights

Flight Profitability Model Total passenger forecast demand Average fare, including beyond traffic Unit costs (frequency and block hour) Recapture analysis (including local and non-local market share) Passenger protection costs

Total passenger forecast demand

Average fare, including beyond traffic

Unit costs (frequency and block hour)

Recapture analysis (including local and non-local market share)

Passenger protection costs

Flight Cancellation Exceptions A market share battle Protection on alternate flights results in missed connections or additional expenses Crews left stranded or unable to operate next flights Aircraft due maintenance Minimum service requirements to smaller stations

A market share battle

Protection on alternate flights results in missed connections or additional expenses

Crews left stranded or unable to operate next flights

Aircraft due maintenance

Minimum service requirements to smaller stations

Passenger Re-accommodation

Revenue Spill

Network Flow Vancouver Calgary Edmonton Winnipeg Thunder Bay Fredericton Charlottetown St. John’s Calgary Edmonton Regina Winnipeg Windsor Moncton Charlottetown St. John’s Deer Lake Ottawa Winnipeg Thunder Bay Timmons AM679 (70 Pax) AM681 (52 Pax) AM683 (71 Pax) 9 inbound, 51 local, 10 outbound 30 inbound, 13 local, 9 outbound 18 inbound, 47 local, 6 outbound Sydney Charlottetown Deer Lake

Network Capacity Control (O&D Control)

Schedule Banks

Looking Forward What can be done to reduce the risks in the future when capacity is trimmed? Adjust demand forecasts Just-in-time overbooking Group evaluation based on utilization and displacement cost

What can be done to reduce the risks in the future when capacity is trimmed?

Adjust demand forecasts

Just-in-time overbooking

Group evaluation based on utilization and displacement cost

Managing Revenue in a Shrinking Airline [email_address]