0
Evolution of                      Low Cost Airlines                      Mark Diamond, P i i l ICF SH&E                   ...
Agenda                1. ICF SH&E summary                2. What defines a Low Cost Carrier (LCC)?                3. Evolu...
SECTION 1                      ICF SH&E summaryicfi.com/aviation |                      2
ICF SH&E is a consulting firm exclusively dedicated to thegglobal air transport industry                p           y     ...
Our client base spans the aviation industry and itsparticipants                       Passenger airlines                 ...
Selected airlines we’ve worked with Spain   p      Ireland       France         UK             Luxembourg                 ...
Management consulting services                       Strategic and business planning                       Alliances    ...
Financial and technical services                            Asset management                            Appraisals      ...
Airport services                       Demand forecasting                  Cargo marketing                       Air se...
Aviation safety & security services                           Aviation safety and security audits of commercial          ...
SECTION 2                      What defines a                      Low Cost Carrier (LCC)?icfi.com/aviation |             ...
First of all – why is this important?     Whether you’re in industry or government, it’s critically important to      und...
What defines a Low Cost Carrier (LCC)?      Simplicity, consistency, repeatability      Maximize asset utilization – to ...
How does the LCC model differ from the traditional“legacy” airline model?    Legacies have evolved, but were traditionally...
Comparative domestic unit operating costs –U.S. LCC’s vs. Majors                        Domestic U.S. Cost per Available S...
Cost & productivity metrics, U.S. LCC’s vs. Majors –domestic market: aircraft utilization, unit labor cost   Hours        ...
Revenue & traffic generation metrics, U.S. LCC’s vs. Majors– domestic market: yield vs. load factor                    y  ...
LCC’s offer the potential for tremendous fare-driven market stimulation    When Southwest launched service at T.F. Green ...
History of Low Cost Carriers‘71 ‘72 ‘73 ‘74 ‘75 ‘76 ‘77 ‘78 ‘79 ‘80 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘9...
LCC’s are operating today in every region of the globe                                                                   E...
Some key prerequisites for a successful Low CostCarrier operation:               Deregulated market                      ...
SECTION 3                      Evolution of LCC’sicfi.com/aviation |                        21
Over the years the original LCC model pioneered bySouthwest has evolved to include numerous variations    Point-to-point ...
Many LCC’s now carry a considerable amount of flow traffic                   U.S. LCC’s: Transfer Revenue (Multi-Coupon) a...
The lines between LCC’s and legacies have been blurring   Legacies have adopted many cost efficiency practices, many of wh...
Recent developments JetBlue code-share with Lufthansa (2008) Southwest code-share with Volaris (2010) JetBlue & Westjet...
Legacy “airline-within-an-airline” LCC’s have largelydisappeared in North America & Europe    pp                          ...
Legacy airlines have reduced their costs in recent years,but there is still an important cost gap relative to LCC’s The w...
Public policy implications of LCC’s   Stress on airport and airway infrastructure, potential for congestion      • From f...
SECTION 4                      Added bonus: the airline                      network planning process                     ...
Network management is one of the core planningactivities of any airline                y   Route selection, capacity & fr...
Network planning is all about managing trade-offs                                 Yield    vs.   On-Board Load       Local...
The “S-Curve” concept: adding frequency & “presence” ina market will increase demand, yield and revenue                   ...
Hubbing concept: each new spoke exponentially increasesthe number of O&D city-pair markets an airline can access          ...
The network planning process:                                                            Profitability, Load Factor,      ...
Modeling of network scenarios has become awidespread practice                                                             ...
A network model permits rapid testing of “what if” networkscenarios and hypotheses          Proposed new routes and      ...
The fundamental principle: projected results are related tothe airlines’ service attributes relative to the competition   ...
Effective network optimization typically requires multiplerounds of iterative testing and retesting                       ...
SECTION 5                      Q&Aicfi.com/aviation |               39
icfi.com/aviation |   40
Upcoming SlideShare
Loading in...5
×

Evolution of Low Cost Airlines

2,233

Published on

Presentation to John F. Kennedy School of Government, Harvard University, as part of Transportation Issues Speaker Series, 21 September 2011.

0 Comments
5 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
2,233
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
215
Comments
0
Likes
5
Embeds 0
No embeds

No notes for slide

Transcript of "Evolution of Low Cost Airlines"

  1. 1. Evolution of Low Cost Airlines Mark Diamond, P i i l ICF SH&E M k Di d Principal, MPP 1986 Prepared for: 21 September 2011icfi.com/aviation | 0
  2. 2. Agenda 1. ICF SH&E summary 2. What defines a Low Cost Carrier (LCC)? 3. Evolution of LCC’s 4. Added bonus: the airline network planning process 5. Q&Aicfi.com/aviation | 1
  3. 3. SECTION 1 ICF SH&E summaryicfi.com/aviation | 2
  4. 4. ICF SH&E is a consulting firm exclusively dedicated to thegglobal air transport industry p y  Specialty consulting firm with over 70 staff  Founded in 1963  Performed over 8,000 individual engagements worldwide  Full-service offices in Boston, New York and London, with specialists worldwide  Staff recruited from airlines airports academia finance airlines, airports, academia, finance, government agencies, manufacturers and IT  Joined publicly-held ICF International in December 2007icfi.com/aviation | 3
  5. 5. Our client base spans the aviation industry and itsparticipants  Passenger airlines  Air cargo express & integrated logistics operators cargo,  Major & regional airports  National, regional & local governments  International development agencies  Maintenance, repair, & overhaul (MRO) providers  Airframe, engine & avionics suppliers  Leasing companies, IT, equipment & service providers  Investors & financial institutions  Booking, distribution & travel services  Corporate & business aviationicfi.com/aviation | 4
  6. 6. Selected airlines we’ve worked with Spain p Ireland France UK Luxembourg g Netherlands Germany Scandinavia Finland y Poland Hungary Romania g y Russia Bulgaria g Czech. Iberia Aer Lingus Air France BA Luxair KLM Lufthansa SAS Finnair Central Wings Malev Tarom Aeroflot Balkan CSA Air Littoral Br. Midland Condor & LOT S7Canada EasyJet Neckermann UTair ChinaAir Canada Switz. Italy Greece Turkey Cyprus Virgin Atlantic China EasternWestJet flybaboo Alitalia Olympic Pegasus Aegean China Northern THY Cyprus China Southern United States Helios Formosa American Maxjet Alaska/Horizon Mesa Air South So th Korea Aloha Midwest Asiana Am. West Netjets Korean Air Atlantic Coast Northwest Japan Atlas Air Pan Am ANA Bus. Express Polar Japan Airlines Continental SkyLink Commutair Southwest Hong Kong Delta Spirit Air Hong Kong DHL TWA Cathay Pacific Emery United Dragon Falcon Air UPS Taiwan FedEx US Airways Formosa Great Plains Western Pac. Harmony Virgin America Thailand Hawaiian Thai AirwaysMexico Venezuela ChileAeromar Aeropostal LanChile PhilippinesAeromexico VIASA Philippine PeruALMA Ecuador Aeroperu IndonesiaMexicana Ecuatoriana GarudaTAESA Argentina TAME Aerolineas MicronesiaCayman Islands Antilles Argentinas Air MicronesiaCayman Airways ALM Austral MalaysiaCentral America Colombia AirAsiaCopa Airlines Bahrain Saudi Lebanon Kuwait U.A.E. Oman Sri Lanka Avianca MASGrupo TACA Bex Air Arabia MEA Jazeera Royal Jet Oman Air Lanka Brazil Gulf Air NAS Kuwait Etihad New ZealandJamaica BRA Saudia Air New ZealandAir Jamaica GOL NetjetsWest Indies Australia TransbrasilALM Morocco Egypt Ethiopia Ivory Coast Uganda S Africa S. Madagascar Mauritius Qantas TAMBWIA Royal Air Egyptair Ethiopian Air Afrique Uganda SAA Air Air Mauritius Australian VARIG Maroc Airlines SA Express Madagascar VASP Mango icfi.com/aviation | 5
  7. 7. Management consulting services  Strategic and business planning  Alliances  Privatization advisory  Process improvement  P bli policy / economic research Public li i h  Litigation support  Business and industry analysis y y  Financial services support (investment analysis, due diligence & advisory)  Bankruptcy merger & financial restructuring Bankruptcy,  Financial management auditsicfi.com/aviation | 6
  8. 8. Financial and technical services  Asset management  Appraisals  Aircraft and engine repair oversight  Financial modeling  Interiors management  Reliability analysis  Inspection services  Litigation support g pp  Future value forecasts  Maintenance reserve requirements  D dili Due diligence  Aircraft procurements  Aircraft & other asset remarketingicfi.com/aviation | 7
  9. 9. Airport services  Demand forecasting  Cargo marketing  Air service marketing and  Cargo facility & business route development planning  Strategic & master planning  Safety & security evaluations  Airport system planning – commercial and GA  Air traffic control infrastructure planning  Capacity & delay analysis  Airport concession &  Environment / noise analyses lease structure  Economic impact studies  Bilateral & regulatory advisory  Airport privatization  Operational restructuring  Airport finance, rates & chargesicfi.com/aviation | 8
  10. 10. Aviation safety & security services  Aviation safety and security audits of commercial i li i t d i ti th iti airlines, airports, and aviation authorities  Program design  Professional training  Safety-related technical analysis  Security, quality and loss control  Legal and regulatory support  Aviation claims servicesicfi.com/aviation | 9
  11. 11. SECTION 2 What defines a Low Cost Carrier (LCC)?icfi.com/aviation | 10
  12. 12. First of all – why is this important?  Whether you’re in industry or government, it’s critically important to understand how the industry works  LCC’s are a fundamental driver of airline industry evolution worldwide • There are 9 LCC’s in the U.S. and 100+ worldwide, accounting for about 21% of U.S. airline industry revenue and about 25% of scheduled seats globally  Plus – it’s interestingicfi.com/aviation | 11
  13. 13. What defines a Low Cost Carrier (LCC)?  Simplicity, consistency, repeatability  Maximize asset utilization – to spread fixed costs • M i Maximum aircraft operating h i ft ti hours per d day, quick t i k turns  Minimize number of aircraft types • Enable economies of scale in crews, training, maintenance, p g procurement, spares p inventory  Outsource non-core functions • E g reservations & distribution handling maintenance etc E.g., distribution, handling, maintenance, etc.  Drive costs out of the system & eliminate overhead wherever possible • Direct online booking vs. agency & Global Distribution System (“GDS”) commissions, commissions automated check in etc check-in, etc.  Simplified pricing structure  Low unit costs -> enable low fares -> stimulate market > >icfi.com/aviation | 12
  14. 14. How does the LCC model differ from the traditional“legacy” airline model? Legacies have evolved, but were traditionally characterized by:  Complexity  Focus on revenue generation via hubbing • Susceptible to peaking of activity, poor resource utilization  More services performed in-house • Reservations, passenger handling, aircraft handling, maintenance, etc.  High overhead  Distribution via intermediaries • Travel agencies & GDS’s  Multiple aircraft types tailored to mission  Complex pricing structures  C ll ti b Collective bargaining agreements i i ticfi.com/aviation | 13
  15. 15. Comparative domestic unit operating costs –U.S. LCC’s vs. Majors Domestic U.S. Cost per Available Seat Kilometer (CASK) – USD, CY 2010 $0.16 Legacy g y $0.14 LCC $0.12 United Continental ASK - USD D $0.10 US Airways Delta Frontier American $0.08 Alaska USA 3000 Southwest Hawaiian JetBlue CA $0.06 $0 06 AirTran Virgin America Vi i A i Allegiant Spirit Sun Country $0.04 $ $0.02 $0.00 0 500 1,000 1,500 2,000 2,500 3,000 3,500 Average Sector Length, KmSource: US DOT Form 41, domestic entityicfi.com/aviation | 14
  16. 16. Cost & productivity metrics, U.S. LCC’s vs. Majors –domestic market: aircraft utilization, unit labor cost Hours Average Daily Narrowbody Aircraft Utilization, CY 2010 16 13.9 LCC Legacy 14 13.0 11.6 11.2 11.2 10.6 12 10.4 10.3 10.2 9.9 99 9.8 98 9.3 93 9.1 91 8.8 8.6 10 8 6.0 6 4 2 0 Cents Labor Costs Per ASK, CY 2010 ASK 7¢ 6.0¢ 5.9¢ 5.8¢ LCC Legacy 5.7¢ 5.7¢ 5.5¢ 6¢ 5.1¢ 5¢ 4.5¢ 4.3¢ 3.8¢ 3.7¢ 4¢ 3.3¢ 3.0¢ 3.0¢ 2.8¢ 2.6¢ ¢ 3¢ 2¢ 1¢ 0¢Source: US DOT Form 41, domestic entityicfi.com/aviation | 15
  17. 17. Revenue & traffic generation metrics, U.S. LCC’s vs. Majors– domestic market: yield vs. load factor y Domestic Avg. Yield (Rev. per Passenger-Km, USD) vs. Load Factor, CY 2010 $0.16 $0 16 Legacy $0.14 Delta United LCC US Airways $0.12 Continental Alaska American Yield - USD $0.10 Southwest Frontier Hawaiian AirTran $0.08 JetBlue d Virgin America Vi i A i Spirit S i it Allegiant $0.06 $0.04 $0.02 $0.00 75% 80% 85% 90% 95% Load FactorSource: US DOT Form 41, domestic entityicfi.com/aviation | 16
  18. 18. LCC’s offer the potential for tremendous fare-driven market stimulation  When Southwest launched service at T.F. Green Airport (PVD) in Providence, R.I., in 1996, passenger traffic grew 85% in one year Total E l T t l Enplaned Passengers & Avg. Yield (Constant 2010 $) at PVD CY 1991 – CY 2007 dP A Yi ld (C t t t PVD,Enplanements Yield ($ / RPK) 3,000,000 16¢ 14¢ 14 2,500,000 12¢ 2,000,000 10¢ 1,500,000 8¢ 6¢ 1,000,000 Enplaned Passengers 4¢ Southwest starts 500,000 Yield (¢/RPK) service Nov. 1996 2¢ 0 0¢ Source: US DOT O&D Survey icfi.com/aviation | 17
  19. 19. History of Low Cost Carriers‘71 ‘72 ‘73 ‘74 ‘75 ‘76 ‘77 ‘78 ‘79 ‘80 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 Southwest (1971 – Present) Midway (1979-1991) People Express (1981 – 87) Ryanair (1985 – Present) Kiwi International (1992 1999) (1992-1999) Valujet / AirTran (1992 – Present) 1978 CAL Lite U.S. Airline (‘93 – ‘95) Deregulation Act Shuttle by United (‘94 – ‘01) Easyjet (1995 – Present) yj ( ) WestJet (1996 – Present) 1983 Metrojet (US Airways) (‘98-’01) U.S. Industry Allegiant (1998 – Present) Fully Deregulated JetBlue (1999 – Present) Gol (2001 – Present) Song (Delta) 1997 (2003 – 2006) Completion of Wizz Air (2003 – Present) EU Liberalization Jetstar (Qantas) (2003 – Present) Air Arabia (2003 – Present) Ted (United) (2004 – 2009) Spicejet (2005 – Present) Virgin America (2007 – Present) Air Asia X (2007 – Present) icfi.com/aviation | 18
  20. 20. LCC’s are operating today in every region of the globe Europe A i Asia  Ryanair  Air One Smart Carrier  Bmibaby  Blu-express  Spring Airlines  Jeju Air  easyJet  Meridiana  Air India Express  Jin Air North America  eastJet Switzerland  Windjet  Goair  T’way Airlines  Belle Air  airBaltic  IndiGo  Air Asia  AirTran Airways  InterSkyy  ArkeFly y  JetLite  AirAsia X  Allegiant Air  Niki  Norwegian Air Shuttle  Jet Konnect  Firefly  CanJet  Jetairfly  Jet Air  Kingfisher Red  Air Blue  Frontier Airlines  Wizz Air  Blue Air  Spicejet  Shaheen Air  JetBlue Airways  Wizz Air Bulgaria  Avianova  Batavia Air  Airphil Express  Southwest Airlines  Wizz Air Ukraine  Sky Express  Citilink  Cebu Pacific  Spirit Airlines  Smart Wingsg  g Vueling Airlines  Indonesia AirAsia  Spirit of Manila Airlines  Sun Country Airlines  Climber Sterling  Anadolujet  Lion Air  Zest Airways  USA3000 Airlines  Transavia  Corendon Airlines  Air Next  Mihin Lanka  Virgin America  Transavia.com France  Onur Air  Hokkaido Intl. Airlines  Jetstar Asia Airways  WestJet  XL Airways France  Pegasus Airlines  JAL Express  Tiger Airways  Germanwings  SunExpress  Skymark Airlines  Valuair  TUIfly y  Flybe y  Skynet Asia Airways  Nok AirLatin America / C Carib.  Iceland Express  Jet2  StarFlyer  Orient Thai Airlines REDjet  Air Busan  Thai AirAsia Azul Brazilian Airlines Middle East/ N. Africa  Eastar Jet  Jetstar Pacific Gol Airlines Sub Saharan Africa  Jazeera WebJet Linhas Aereas  Fly540  Nas Air EasyFly  Aero Contractors  Air Arabia Viva Colombia Australia/Pacific  Kulula.com  Air Arabia Egypt Aires  Jetstar  1Time  Air Arabia Maroc Interjet  Tiger Airways Australia  Mango  Jet4You VivaAerobus  Velvet Sky  Flydubai Volaris  RAK Airways LC Busre  Felix Airways Peruvian Airlines  Karthago Airlines Star Peru icfi.com/aviation | 19
  21. 21. Some key prerequisites for a successful Low CostCarrier operation:  Deregulated market • Little or no controls on fares, capacity, schedule , p y,  Ability to turn aircraft quickly • Premium on passenger & aircraft handling  Ability to drive costs out of the system • Work rules • Outsourcing • Strategic procurement  Financing  Understanding the market and the competition • Legacies will not sit still and let their market disappearicfi.com/aviation | 20
  22. 22. SECTION 3 Evolution of LCC’sicfi.com/aviation | 21
  23. 23. Over the years the original LCC model pioneered bySouthwest has evolved to include numerous variations  Point-to-point flying  Connectivity & hubbing  Short-haul  Long-haul g  Single aircraft type  Multiple aircraft types  Domestic only  International  Operate in  Operate in unserved or underserved contested markets markets vs.  “No frills”  Quality product, in-flight entertainment  Single class  Economy + business  Secondary airports  Primary airports  Go-it-alone distribution  Code-sharing & alliances  Direct booking  Use of intermediaries for booking  Standard, simple product  Unbundling of services + ancillary revenue sourcesicfi.com/aviation | 22
  24. 24. Many LCC’s now carry a considerable amount of flow traffic U.S. LCC’s: Transfer Revenue (Multi-Coupon) as Percent of Total Revenue CY 2009 50% 43% 40% 31% 30% 21% 20% 10% 8% 7% 3% 0% Frontier AirTran Southwest JetBlue Spirit Virgin AmericaSource: US DOT Origin-Destination Surveyicfi.com/aviation | 23
  25. 25. The lines between LCC’s and legacies have been blurring Legacies have adopted many cost efficiency practices, many of which L i h d t d t ffi i ti f hi h were pioneered by LCC’s:  Outsourcing non-core functions  Direct on-line booking and automated check-in  Unbundling of services and ancillary revenue offerings  Focus on aircraft utilization “continuous hubbing” utilization, continuous hubbing At the same time, LCC’s have moved closer to some legacy practices:  Greater focus on connectivity, hub-and-spoke  Code-sharing & alliances  Multiple aircraft types  L Long-haul h l  Quality on-board amenities, multi-cabin product  Primary airports  Distribution via GDS’sicfi.com/aviation | 24
  26. 26. Recent developments JetBlue code-share with Lufthansa (2008) Southwest code-share with Volaris (2010) JetBlue & Westjet code-shares with American Airlines (2011) Southwest launches service at New York LaGuardia & Boston Logan (2009) Air Asia X – establishment of long-haul low cost service (2010) Growth of international LCC joint venture carriers • Air Asia • Air Arabia – Japan – Morocco – Philippines – Egypt – I d Indonesia i – Jordan – Thailand – Vietnamicfi.com/aviation | 25
  27. 27. Legacy “airline-within-an-airline” LCC’s have largelydisappeared in North America & Europe pp p In an effort to hold back the growth of independent LCC’s, a number of legacy carriers launched their own LCC’s: • CAL Lite (Continental): 1993-1995 • Bmibaby (British Midland): 2002-present • United Shuttle (United): 1994-2001 • Song (Delta): 2003-2006 • Delta Express (Delta): 1996-2003 • Ted (United): 2004 2009 2004-2009 • Metrojet (US Airways): 1998-2001 • Jetstar (Qantas): 2004 - present • Go (British Airways): 1998-2003 • Mango (South African Airways): 2006-present • JAL Express (Japan Airlines): 1998-present • FlyDubai (Emirates): 2009-present • Tango (Air Canada): 2001-2003 Many have now disappeared • Difficult-to-resolve issues: Cannibalizing the parent airline’s business, and achieving enough independence from the parent carrier to achieve true low costs • Th need f LCC subsidiaries h d The d for b idi i has decreased as l d legacy parent carriers h t i have reduced costs and become more efficienticfi.com/aviation | 26
  28. 28. Legacy airlines have reduced their costs in recent years,but there is still an important cost gap relative to LCC’s The wide wave of Chapter 11 filings in 2002 – 2007 helped the Majors considerably in restructuring their costs F l costs remain a difficult-to-control cost driver for both legacies & LCC’ Fuel t i diffi lt t t l td i f b th l i LCC’s LCC and Legacy Carrier Average CASK (Constant 2010 $) CY 2005 - CY 2010 2010 US$ 12¢ 10¢ 8¢ 6¢ 4¢ LCC Legacy 2¢ 0¢ ¢ 2005 2006 2007 2008 2009 2010Source: US DOT Form 41icfi.com/aviation | 27
  29. 29. Public policy implications of LCC’s  Stress on airport and airway infrastructure, potential for congestion • From fare driven market stimulation fare-driven • LCC’s now account for 29% of scheduled operations and 33% of scheduled seats at Boston Logan  O Opportunity to develop air service – and local economies – at t it t d l i i dl l i t underserved airports and markets  Outside the U.S.: • Whether / how to protect a nation’s flag carrier from encroaching LCC competition? • Whether / how to ease the market into liberalization?icfi.com/aviation | 28
  30. 30. SECTION 4 Added bonus: the airline network planning process t k l iicfi.com/aviation | 29
  31. 31. Network management is one of the core planningactivities of any airline y  Route selection, capacity & frequency planning, scheduling, code- sharing & alliances fleet selection aircraft assignment, rotation plan alliances, selection, assignment  Can have a huge impact on profitability and ROI  But highly complex to manage  Carriers must understand: • The implications of market & competitive developments • Where they’re making and losing money • How networks can be optimized to generate the most revenue with the most cost-effective use of resourcesicfi.com/aviation | 30
  32. 32. Network planning is all about managing trade-offs Yield vs. On-Board Load Local O&D (Origin-Destination) vs. Flow Traffic Locally Focused Schedule vs. Connectivity-Focused Schedule Schedule to Meet Market Needs vs. Schedule to Maximize Utilization Higher Frequency with Smaller Lower Frequency With Larger Aircraft -- But Higher Unit Costs vs. Aircraft – But Lower Unit Costs High Frequency / High Capacity to Risk of Excess Capacity, Capacity Generate “S-Curve” Market Benefits vs. Diluting Loads and Yields Planning Your Network to Managing Constraints – Fleet, Meet Customer Needs vs. Airport Capacity, Regulatory Capacityicfi.com/aviation | 31
  33. 33. The “S-Curve” concept: adding frequency & “presence” ina market will increase demand, yield and revenue ,yRisk: too much capacity can dilute onboard loads and / or yields S Curve S-Curve Illustration: Revenue Share vs. Capacity Share 100% 90% 80% Revenue Share (%) 70% 60% S 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Frequency or Capacity Share (%)icfi.com/aviation | 32
  34. 34. Hubbing concept: each new spoke exponentially increasesthe number of O&D city-pair markets an airline can access ypRisk: too much focus on connectivity may result in undesirableschedules for important (and higher yield) local passengers Illustrative Hub-and-Spoke Network: Number of Spokes vs. Number of O&D City-Pairs 350 300 ty-Pairs 250 200 O&D Cit 150 100 50 0 0 5 10 15 20 25 Spokes S kicfi.com/aviation | 33
  35. 35. The network planning process: Profitability, Load Factor, P fit bilit L d F t Evaluate Current Network Performance Yield, RASK, CASK, Utilization, etc. Traffic Growth, Regulatory Actions, Evaluate Industry Trends and Projected Demand Price Elasticity by Segment, etc. Aircraft Orders, Capacity & Evaluate Competitor Actions and Plans Schedule Trends, etc. Incremental Change vs. Develop Strategic Options for Network Optimization New Business Models Translate Strategic Options Into Destinations, Routes, Frequencies, Fleet & Network Scenarios Aircraft Payload/Range, Fleet Size Forecast Share, Traffic, Model and Test Network Scenarios Revenue, P fit bilit R Profitability Select Optimum Network Plan Iterative Testing Incorporate Aircraft Rotations, Refine Into Routed Schedule Other Operating Constraints Operate Tactical Adjustments Measure Results and Review R R i Results lt Incorporate Lessonsicfi.com/aviation | 34
  36. 36. Modeling of network scenarios has become awidespread practice Profitability, Load Factor, Evaluate Current Network Performance Yield, RASK, CASK, Utilization, etc. Traffic Growth, Regulatory Actions, Evaluate Industry Trends and Projected Demand Price Elasticity by Segment, etc. Aircraft Orders, Capacity & Evaluate Competitor Actions and Plans Schedule Trends, etc. Incremental Change vs. Develop Strategic Options for Network Optimization New Business Models Translate Strategic Options Into Destinations, Routes, Frequencies, Fleet & Network Scenarios Aircraft Payload/Range, Fleet Size Forecast Share, Traffic, Share Traffic Model and Test Network Scenarios Revenue, Profitability Select Optimum Network Plan Iterative Testing Incorporate Aircraft Rotations, I t Ai ft R t ti Refine Into Routed Schedule Other Operating Constraints Operate Tactical Adjustments Measure Results and Review Results Incorporate Lessonsicfi.com/aviation | 35
  37. 37. A network model permits rapid testing of “what if” networkscenarios and hypotheses  Proposed new routes and network & capacity plans  New schedules & schedule modifications  Optimal service timing & hubbing analyses  Aircraft size vs. frequency trade-offs  Code-shares & alliances  Fleet planning – optimal aircraft types & fleet size  Predict the impact of competitor actions Rationale: Model the impact of scenarios to understand likely results, before risking costly assets and resourcesicfi.com/aviation | 36
  38. 38. The fundamental principle: projected results are related tothe airlines’ service attributes relative to the competition In each O&D city-pair market across the carrier’s network  Departure/arrival times p  Total elapsed trip time from origin to destination  Capacity offered (seats)  Service frequency  Number of stops enroute  N b of connections enroute Number f ti t  On-line vs. code-share vs. interline The model calculates a “QSI” (“Quality of Service Index”) value for each service offered in every O&D market, based on a combination of these attributes The carrier’s projected share of that market is a function of its carrier s “QSI” value relative to its competitorsicfi.com/aviation | 37
  39. 39. Effective network optimization typically requires multiplerounds of iterative testing and retesting g g Analyzing a proposed network and schedule scenario: Base Calibrate C lib t Input I t Create New C t N Schedule Model Constraints Network &  Market Sizes  Operational Schedule Scenario  Time of Day Preference  Commercial  Airline Preference  Maintenance  Aircraft Preference  Non-stop or Connecting Service Final Adjust Analyze Run Optimized Network & Results Proposed Network & Schedule Network &  Share Schedule Scenario Schedule in  Projected Traffic & Spill Model  Projected Load Factor  Revenue  Profitabilityicfi.com/aviation | 38
  40. 40. SECTION 5 Q&Aicfi.com/aviation | 39
  41. 41. icfi.com/aviation | 40
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×