How to beat LCC

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How to beat LCC, low cost carriers, this is a unique study thatexplore the strength of legacy airlines in terms of connectivity using linear program, it is a question of proper forecasting and good planning

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How to beat LCC

  1. 1. How to Beat LCC g{|á á à{x jtçPrepared By:Eng: Mohammed Salem AwadInternational Relations ManagerYemenia 1
  2. 2. How to Beat LCCg{|á |á à{x ãtç Abstract : Usually the main successful factor that deriving the low cost business is the cost, and definitely LCC are dominate point to point model, that gain a competitive edge to Legacy Airlines which don’t have a chance to succeed, but if we consider a multi stops operation, the Legacy airlines can be survive, by utilizing and implementing the forecasting procedures an optimization techniques, that defining right seat allotments for each sector to secure a profit, and depends on the Company objectives, a several strategies are examined in environment of no competition, competition giving a clear picture, where a legacy airlines to be stand. 1. Yemenia – Background : The history of Yemen Airways goes back to the second 40s. Form 1949 until 1977, Yemen Airways had experienced moderate developments and different kinds of structural reforms. In July 1978 Yemen Airways took a big step forward and new Company, Yemenia –(Yemen Airways) was formed with 51% share by Yemen government and 49% by Saudi Arabia government. The formation of Yemenia had reflected an ideal international investment that is lasting unit now. We can say that 1978 is considered as a landmark in the Aviation history of Yemen. It had witnessed the beginning of a new era in air travel services and progress. By the end of 1979, Yemenia had taken delivery of 4 brand new B-727- 200 and 2DHC-7 in 1980. During the period of 1980 to 1995, and with a 2
  3. 3. fleet of 4 B727, B-737 and 2 DHC-7, Yemenia had undergone many developments in all aspects of its activities. It had set up a big program for training its human resources in Operation, Maintenance, and finance. In the infrastructure side had expanded its maintenance capability and introduced automatic reservation system and electronic data processing. Its service had covered around 23 international destinations within 3 continents – Asia, Africa, and Europe and with good reputation in service and excellent safety records that it was awarded the Certificate of Membership for the years 1988/1989 form FSF (Flight Safety Foundation) Inc. Also it had become a member of IATA, AACO and ICAO. Except for the year 1982, its bottom line of income statement was always positive.Yemenia Throughout the 90s many developments had happened in Yemen. One ofOwned the major in Yemen’s history was the unification of the two parts of theModern Fleet country; North & South into one State called Yemen Republic. As a consequence of this event, Yemenia had consolidated with DY, the former South Yemen Airlines, in May 1996 and added to its fleet 2B-737- 100 and 2DHC-7 airplanes. During the year 1998, a further development has taken place in the management side of Yemenia by assigning a new Chairman for Yemenia, Capt. Adbulkhalek S.Al-Qadi (B747 Licensed Captain). With a good vision in airline business and fully aware with the recent development in the industry, the new leadership had set up Yemenia goals and objectives so as to adapt to changes to economic, regulatory, and market condition responding to Global International Business, and facing the challenge of LCC in the main core business, Yemenia implemented the state of art of new technologies adapted the latest research techniques in Aviation, U Curve Technique, Optimum Operation Curve, and use extensively operation research topic such as Linear Program. Recently Yemenia owned a modern fleet of A330-200, A310-300, And B737-800, and fly to more than 25 destinations. 3
  4. 4. 2. Impact of LCC on Global Aviation The deriving factors for a successful aviation business today are costs and demands and addressing the competition in the aviation industry, especially Legacy Vs LLC is a very hard issue for those belongs to the classical / traditional business model,There will be (Legacy Airlines).a time where The basic concept of LCC, is a good starting that defining the cost structure, of the company and adapting a new business model thatLegacy reinforce their aviation business, that keep them profitable.Airlines Costs even IATA response to this challenge by implementing a series programswill meet the as, Simplifying the Business, e-ticketing, e-fright, the aim of theseLCC level programs is reducing the cost and matching the level of LCC.Cost. Other airline follows by another approach, which concentrate on a long haul travelers business, as this can not be reached by LCC, and developed a sequence of a series business where traveling only is one link in the business chain. 3. Yemenia Repositioning Really Yemenia can be act in to two ways First : Adapting the Right Business Model ( Business Chain Model ) Second : Repositioning the Current Situation. First : Adapting the Right Business Model To day, the airline business is always related to other functional series business as a package - business cycle ,which involved hotels, land transportation ( taxi ) and finally tourist tour, So the sequence will getting 4
  5. 5. the price of package that involve, so Yemenia should response to LCC challenge, and learn from their model, because not only the traveling business generate a stream of revenues but it is the links of business that keep generation sustainable, traveling only one link in a series business chain, so the business pattern is change, even though the fare of low cost is to low, but it derive the other business to a profitable level by securing the hotel, taxi, and tours business. In our days people looking for aBusiness complete package, that cover allModels for their needs, i.e one shop visit, under one roof.Airlines arechange So they prefer to get one dealrapidly that cover all theirs request in a very competitive price, off course LCC declare the lowest fare in market which actually compensate it by other streams of channel revenue in their business model. Big companies developed their business model, as Emirates, which including ground handling, and a free zone business, which actually reinforce their income. Second : Repositioning the Current Situation. Yemenia can be repositioning by addressing the following issues : 3.1 Defining the most competitive routes. 3.2 Select Right Asset ( Aircraft ) To Operate. 3.3 Get Clear Picture of Market Fare. 3.4 Implement the Right Forecasting Procedure. 3.5 Survival Strategy. 5
  6. 6. 3.1 Defining the most Competitive Routes. By using BCG Matrix, we can define and select the rightAirline strategy, for the competitiveShould sectorsImplement As SAH – DXB, SAH – AUH, and SAH – DOH.The Right These sectors belong to Gulf and Far East Region (Market Segment) andStrategy lay in the area of Question Marks? , that mean either to invest to derive them to Star Region or moving out from the market. 3.2 Select Right Asset ( Aircraft ) To Operate Yemenia develop a new logarithm that positioning the current fleet, to define the right aircraft, by using U Curve approach which is the base of Optimum Operating Curve of Gulf & Far East Region as shown in the figureThree The model is point to pointFactors and the inputs are:(Inputs) 1- Demand PassengersCan Define 2- Market FareAn Airline 3- Distance ( Stage Length ) Where the cost is step function ( i.e repeated cases as 0.1, 0.2, 0.3, 0.4, 0.5, 0.6, 0.7, 0.8, 0.9 , 0.1 ) then fitting the line for those outcomes point to the continuous Black line, finally positioning Yemenia fleet by it shows the right Aircraft is A310-300. 6
  7. 7. 3.3 Get Clear Picture of Market Fare:One of the main successfulfactors, is to know where weare standing, is our is farefitted to our network.Yemenia examine this areaalso, and develop a newalgorithm that define the rightfares in the network – point to point model ,by this we can mapping thecompetitive fares in the competitive routes, and derive the competitionfares until the break even level, of course some times the fare beyond thebreak even level of the LCC ( point to point ) if this is the case, we haveto consider the next step.This shows our margin profit in each route,Since Yemenia, operate Multi Stops Operation Model, we will see thatsome applicable of certain route is extend the right fare with a clearmargin of profit. 7
  8. 8. 3.4 Implement the Right Forecasting Procedure. A plan is nothing but planning is everything, Forecasting is a powerful tool for planning, Yemenia develop, a unique forecasting program that defineA Plan is and predicate the number ofnothing but passengers for each route, thePlanning is overall accuracy of these procedures about 80 % whichEverything consequently create the base of KPI system. In the company. These figures are the inputs in another program to maximize the profits in Multi Stops Operation which can be demonstrated by the next point. Also forecasting can be indicated the trends of each sectors 8
  9. 9. 4.5 Survival Strategy If we ask what are the strengths of Traditional Airlines over LCC, definitely the answer will be Long haul Operation and Transit period The concept of point to point Long haul operation is unhelpful in this context if not merge with a multi stops operation maybe the legacy airlines can gain a competitive edge on this point but we don’t look to one of the strengthWhat ever the of legacy airline isFare of the long haul operation, it willCompetitors it be no benefit if thewill be the airline operatedMargin profit non stops just onlyIn Our routes a direct revenue, while its local and regional market subjected to heavily loses due the existence of LCC, and losing its market share, if we link the long haul operation with Multi Stops points, then traditional can manage their operation by applying a proper forecasting procedure and using a new algorithms to define the right seat allotment per sector/trip, and concentrated on long haul passengers market without losing their local and regional passengers market. Example : is SAH-DXB-JKT-KUL The Level of Competition will be Sector Legacy LCC Flt Hours SAH-DXB EK G9 3 DXB-KUL EK 6:30 KUL-JKT AK, QZ 1:30 9
  10. 10. Even it is hard analysis but legacy Airline can survive, by implementingthe right planning and forecasting for procedures those sectors tomaximize the profits in Multi Stops OperationCase Maximize the Profit ( No Competition )It depends on demand forecasting of Passengers of each sectorCase Maximize the Profit. it depends on demand forecasting of PassengersIn this case we get a profit of 81,540 USD per flight with a full boardseat utilization for the 3 sectors SAH-DXB, DXB-KUL, and KUL-JKT bya 3 flight per Week. that is in Normal Operation, but if we look to problemfrom another angle, ( Break Even Analysis ) 10
  11. 11. Case Break Analysis and SAH-DXB traffic = zero, KUL-JKT traffic= zero so that what ever the sales of SAH-DXB and KUL-JKT it will bethe margin profit How !!!!!!In this case, we put the fare of SAH-DXB, KUL-JKT, zero, this will leadto ZERO load factor for the respective routes.Now it is clear we have a profit margin of ( 1.00-0.14 ) = ( 0.86 ) on theroute of SAH-DXB, we can sale by the price of Air Arabia.While for KUL-JKT, we have very tight margin ( 1.00-0.96 ) = (0.04)So we have to concentrate on sector of DXB-JKT = ( 0.82 ) 11
  12. 12. If the company plans to get a share on KUL-JKT, so let us make aconstrains on the route of KUL-JKT ( ON BOARD – LF - not greater than75% )Still the company will have a profit margin of ( 1.00-0.40 ) = ( 0.60) onSAH-DXB sector and (1.00-0.92 ) = ( 0.08 ) on DXB-KUL, and as weplanned ( 1.00-0.75 ) = ( 0.25 ) on KUL-JKTNow it depends on the company policy, if they follow a survival strategythey will sale as the others competitors but if they are planning to phaseout LCC, they will sale by a lower percentage to those of LCC.Conclusions:Legacy airlines can utilize their resources and strengths, to react, theirstrengths will in Long haul operation and transit periods, in Multi StopsOperation Model. The concept to utilize forecasting tools and theoptimization techniques to develop the best plan that keep them survivethese competitive environments. 12
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