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Profit maximization


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Profit Maximization is addressing Multi-stop operating model of Airlines, it shows how to max. profit in terms of CASK and RASK analysis, delivering the best seniario to select the aircraft then the best result to operate the right segment

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Profit maximization

  1. 1. Profit Maximization Of Multi–Stops Operating ModelFIRST: SECOND:Right Aircraft Most Profitableto Assign Route to Operate.
  2. 2. Profit Maximization of Multi–Stops Operating Model Laila Adam1 and M. Salem2 Felix Airways - Sana’a Yemen The competitive environment of aviation industry is driving most airlines to re- evaluate their strategies to survive, and many strategies are setup, either to reduce the cost or to improve the profits as e-ticketing, simplify the Business, e-freight, to meet the challenge of Low Cost Carriers in their markets. This paper is addressing a new approach for maximizing profits in Multi-Stops Operating Model in long haul operation of legacy airlines, based on demand passengers of multi destinations, corresponding market fares and cost of available ton kilometers of the assigned aircraft, a linear program is developed and many constrains are set up. The profit is maximizing by solving the right number of frequencies, load factor per operating sector and cabin load factor for each respective destination. Based on these results many scenarios are implemented to define the right aircraft to operate and the most profitable routes in the network. The program can be extended further, to study the effects of a new destination on the existing routes / network. While market opportunity is another important factor for developing a decision matrix with a profit and defining the complete picture of the airline network. NomenclatureA320 = Aircraft Family of Airbus – A320ASK = Available Seat KilometersASM = Available Seat MilesATK = Available Tonne KilometersB737 = Aircraft Family of B737.BCG = Boston Consulting GroupCAN = Guangzhou – ChinaCASK = Cost per Available Seat KilometerDOC = Direct Operating CostDXB = Dubai – EmiratesJED = Jeddah – Al –SaudiaJKT = Jakarta – IndonesiaLCC = Low Cost CarriersLP = Linear ProgramLOS = Lagos – NigeriaNm = Nautical MileRASK = Revenue per Available Seat KilometerRPK = Revenue Passenger KilometerRTK = Revenue Tone KilometerSAH = Sanaa – Yemen1 Pricing &Yield Manager, Commercial Department, Sana’a-Yemen/laila.adam@felixairways.com2 Senior Consultant, CEO - Office, Sana’a-Yemen/ 1Anna Valicek - paper
  3. 3. TOC = Total Operating CostPij = Number of Passengers from city i to city jFij = Fare the sector - city i to city j ( one way )L ij = Load Factor of i-j sectorD ij = Distance in km of i-j sectorS = Typical Seat Configuration of the assigned Aircraft.C = Operating Cost per Available Tonne Kilometerf = Number of Frequencies I. IntroductionM OST of decisions making relay on the issue of how to make the most of the companys resources of raw material, capital, manpower, time and facilities. Linear Programming (LP) is a technique that aims atoptimizing performance in terms of combinations of facilities and resources. Linear Programming can beviewed as an analytical process and a holistic decision support tool that offers many advantages to managers.Problems that involve allocation of resources, such as blending of raw material, production planning, rawmaterial allocation and manpower management planning can solved used the LP technique (Calvert, et al, 1989;Grass, 1990; Shenoy, 1989).In addition to its ability to calculate an optimal solution, LP also offers managers the capability of buildingscenarios through its extensive "what if"? Analysis facility. While most practical LP problems would require avery long time to be solved on hand, computers can be utilized to arrive at a solution in a very short time(minutes or even seconds). In this respect, LP type problems can be solved in a number of ways. Severaldedicated software packages are available, but are often expensive, difficult to use and take a long time to learn.As a result, the power of LP is utilized only by larger organizations. Spreadsheet technology offers a cheaper,simpler and more flexible alternative to solving LP problems.Spreadsheet package make it very simple to construct What if? models; where a range of possible decisions canbe input and the resulting effects immediately calculated. These models can be very powerful and simple tobuild but they rely upon the decision-maker to arrive at the correct answer. The model itself is not prescriptivein providing the best answer, but does enable the decision-maker to determine which strategies are feasible. Athird method uses graphs, but this method can only be used for solving simple problems with only two variablesand limited number of constrains. This method is used extensively in teaching the concepts, but offers little tothe practicing decision-maker involved with real problem situations. The utilization of spreadsheet technology to support managerial decision-making has been greatly advancedthrough the ever –increasing processing power of the personal computer (PC). Spreadsheet software such asExcel from Microsoft offers advanced capabilities for solving linear and non-linear problems. It is argued herethat the availability of advanced spreadsheet functions such as Excels Solver provides managers with anexcellent decision support tool that exploits the power of linear programming. Such a tool should constitute anintegral part of any managers decision-making tools. Enhancing decision-making capabilities of managers mustincorporate improving both the efficiency and, to a greater extent, the effectiveness of decision-making.Presenting decision-makings with easy to understand information and quick solutions improves decision-makingefficiency, while the availability of What if? scenario analysis allows for enhanced decision-makingeffectiveness (Caine and Robson)A. Statement of problemIn multi stops operating airline business model, most of the airline operates tentatively on the combined andcomplex routes, some of them applying the strategy of lowering the fares while this may tend to huge loses inspite of filling the aircraft, the question how to avoid such a situation and plan properly to implement the rightpolicy, how to addressing high yield routes, what are the right ratio of sector load factor that maximize theprofit. 2Anna Valicek - paper
  4. 4. B. LiteratureLinear Program in Aviation:The airline industry uses linear programming to optimize profits and minimize expenses in their business.Initially, airlines charged the same price for any seat on the aircraft. In order to make money, they decided tocharge different fares for different seats and promoted different prices depending on how early you bought yourticket. This required some linear programming. Airlines needed to consider how many people would be willingto pay a higher price for a ticket if they were able to book their flight at the last minute and have substantialflexibility in their schedule and flight times. The airline also needed to know how many people would onlypurchase a low price ticket, without an in-flight meal. Through linear programming, airlines were able to findthe optimal breakdown of how many tickets to sell at which price, including various prices in between.Airlines also need to consider plane routes, pilot schedules, direct and in-direct flights, and layovers. There arecertain standards that require pilots to sleep for so many hours and to have so many days rest before flying.Airlines want to maximize the amount of time that their pilots are in the air, as well. Pilots have certainspecializations, as not all pilots are able to fly the same planes, so this also becomes a factor. The mostcontrollable factor an airline has is its pilot’s salary, so it is important that airlines use their optimization teamsto keep this expense as low as possible. Because all of these constraints must be considered when makingeconomic decisions about the airline, linear programming becomes a crucial job.Decision Matrix:Decision matrix is an important tool to reflect multi decisions possibilities, is created by two main factors.A well known matrixes are Cost per trip vs. Cost per seat, really it depends about what analysis want and how tobuild it decisionIn our case many decisions can be developed by two scenarios.The first one is targeting aircraft, while the second is targeting route. The matrix is addressing four outcomespossibilities for the related objective as shown in Fig. (1) Based on, how we design the matrix, the first quarteris for the favor of the setting objective, and the third one is for the favor of competitors, while the second andthe fourth quarter are compromise decision. And one should balance between benefits of all options.The matrix can be represented a direct comparable values with same scale or a relative value to the targetingobjectives, both ways are applicable in practice,It is an important tool management in most of the fields as Marketing, Operation, Education, Social and GeneralScienceDecision Matrix Targeting AircraftsIn this case, many aircrafts are examined havingsimilar capabilities in range (Distance) and capacities(Seats) to operate for certain route, two factors areevaluated and measured, and the first one is the profitsand the second one is marketing opportunity Profits: the main factor to consider, in the study that driving the results. Market Opportunity: this reflects the Market size, that not utilize and included in study, since program try to fit the size market to maximize the profit, so the program addressing the right traffic size in terms of the right seat allocation for each sector which reflect in terms of passenger load factor, Fig. ( 1 ). Decision MatrixDecision Matrix Targeting Routes Whence we define the right aircraft to operate, wehave to reset the inputs to address many routes, to define the most profitable routes, to assign the first prioritiesfor operation, of course market opportunity will be consider also in this matrix. 3Anna Valicek - paper
  5. 5. Theoretical - Mathematical Model:The problem can be setup by: Maximize Profit = Revenue - Cost -- 1 Subjected to :II. Case Study:The decision to continue the existingoperation of CGK to JED, or to study theother options as operating to CAN, LOS,Data Collection:The existing dataof the routesSAH-DXB, SAH-JEDSAH-JKT, DXB-JKTJED-JKTFrom the Rapid System LOSNumber of passengers, average yield, DXB CAN SAHdistance between routes,While for the new routes asLOS-SAH, LOS-DXB, LOS-CANCAN-DXB, CAN-SAH,CAN-LOS, DXB-LOS, DXB-CANWe are addressing number of operatorsbetween these sectors, average load factor,number of frequencies and type of aircraftused; from that value we consider 5-10 Map. 1. Route CAN-DXB-SAH-LOSmarket percentages.Also estimation for new routes can be evaluated by considering airport movement, for specified sector, andselect 5-10 market share.Both ways should support the final result.The following routes are evaluated 4Anna Valicek - paper
  6. 6. CAN-DXB-SAH-LOS, CAN-DXB-SAH-JED, CAN-DXB-SAH-KRT, CAN-DXB-SAH-ADD, CAN-DXB-SAH-CAI, JED-SAH-DXB-CGKWhile we define the aircraft to operate, as the following Aircraft Capacity Cost per ATK Type (Seat) (USD) A330-200 277 0.35 A310-300 200 0.36 B737-800 154 0.41Program:By using the solver package in Microsoft Excel, equation (1) is used with its constrains as in table (1) Table. 1. Input of Route: CAN-DXB-SAH-LOSResults: 1- Aircraft Evaluation : Sector: JED-SAH-DXB-CGK By using the previous program, for sector JED-SAH-DXB-CGK, and relates Aircrafts inputs. As shown in table (2) , Table. 2. Results by Aircrafts for JED-SAH-DXB-CGK route 5Anna Valicek - paper
  7. 7. Analysis of the Results:Based on the evaluation ofthe operating sector and theactual demand of Route JED-SAH-DXB-CGK, the resultis shown in the above table interms of the profits (USD)and market opportunity, so bydeveloping the decisionmatrix, considering A320-200, as the origin aircraft ofthe analysis,In the 1st quarter:Only A310-300 means thatA330-200 in a better positionin terms of profits gains andhas a greater market Figure 2. Decision Matrix – Selecting Right Aircraftopportunity than A310-300. thIn the 4 quarter:Only B737-800 means that A330-200 is in a better position in terms of profit gains and but the marketopportunity is still not utilize completely as this aircraft has a small capacity compare to A330-200.2- Sector Evaluation Based on A330-200 operation: Table. 3. Results by Routes for A330-200 operationAnalysis of the Result:The previous analysis provesthat the right asset / aircraft tooperate is A330-200 for theexisting sector - JED-SAH-DXB-CGK, the next step arewhat the right routes tooperate by this type ofAircrafts. So many routesaddressed in this part of thestudy which shows obviouslyrepresented by the decisionmatrix:In the 3rd Quarter:All routes in this quartermean that Route JED-CGKhas a market opportunity overthe others while the mostimportant issue is the profit Figure 3. Decision Matrix – Defining the Right Market 6Anna Valicek - paper
  8. 8. gains from the addressed routes, which can be ranked as the following.CAN-JED, CAN-ADD , CAN-CAI, CAN-KRT, CAN-LOS, and finally JED-CGKImplementation in Practice:The study can be used in many situations as1– Aircraft Evaluation: The purpose is to select the right aircraft in the fleet that developed maximum profit based on the historical data. So that we are assigning the right aircraft for the right routes.2- Route - Profit Maximization: Based on forecasting passengers of the sectors, airlines can developed the planning scheme that maximize the profits by implementing and allocating the seats by the right ratio of load factors developed by program.3- Extended Operation to new destination: By this program it can be easily study and evaluate the effects of introducing a new destination to the existing combined routes, to see is it worth to operate or not?. III. ConclusionThe study explores the use of decision matrix, in multi stops operating model. By using linear program, manyout comes can be addressed as profits and market opportunity, the problem is solved in two steps,First –Aircraft Evaluation, i.e. to define right aircraft for operation.Second- we evaluate the routes to reflect the higher route that delivers maximum profit.The study shows that A330-200 is the right aircraft to operate, while route CAN-JED is the highest route thatdelivers maximum profit.The Decision Matrix of Profit-Market Opportunity has greater benefits over the classical Decision Matrix ofCost per trip-Cost per Seat. As it is addressed the profit, which includes revenue and cost, and additional factor,i.e. Market Opportunity, while the classical Decision Matrix only addressing cost, which gives only comparisonfor costs of seats and trips. 7Anna Valicek - paper
  9. 9. Appendix1- Definitions:Sector Load Factor:This load factor measure the load carried from point A to point B that issued by flight coupon, passengers arepoint to point traveler, so they are partially filled the aircraft. The program only considers the optimum loadfactor in the calculation that maximum the profit.On Board Load Factor:The most important factor in the analysis, it measured and counted the entire passengers on board of the aircraftbetween point to point (sectors) including those who traveling long haul destinations.Market Opportunity:It is the difference between the numbers of passengers, of what is available in the market and number ofpassengers that used in the program. It a percentage that measure the possibility of further utilizing the market.That mean, the program selects only the right of passengers that maximize the profit of the route, while theremaining passengers consider as a Market Opportunity that not utilize. If we force the program to utilize thetotal market, definitely the profit will drive down, due to increase of frequencies to meet the total market andthere is a possibility of lose occurrence. 8Anna Valicek - paper
  10. 10. 2- Passengers and Fares Estimation for the new destinations: SECTORS PRICE FREQUENCIES PASSENGERS FARES CAN - LAGOS (LOG) USD days/week USD LH 1160 5 KQ 1514 3 EK 1702 5 234 580 CAN - ADDIS ABABA (ADD) USD days/week USD LH 1160 3 KQ 1230 1 EK 1262 5 162 580 CAN - KHARTOUM (KRT) USD days/week USD LH 1160 2 KQ 1230 3 EK 1717 5 180 580 CAN - CAIRO (CAI) USD days/week USD LH 1160 5 KE 1200 3 SQ 1420 2 EK 1508 2 KQ 1514 5 QR 1661 7 450 580 CARRIERS CAN - DARALSALAM (DAR) USD days/week USD KQ 1230 3 EK 1262 4 QR 1717 5 216 615 CAN - NAIROBI (NBO) USD days/week USD KQ 1230 6 EK 1262 7 QR 1717 5 324 615 CAN - DUBAI (DXB) USD days/week USD CA 659 4 TG 711 7 KQ 762 5 SQ 972 4 CZ 987 7 KE 1170 7 EK 1350 7 QR 1511 5 828 330 CAN - BAHRIAN (BAH) USD days/week USD LH 1160 2 QR 1540 5 EK 1561 2 162 580 CAN - JEDDAH (DXB) USD days/week USD LH 1160 4 SQ 1421 3 CA 1702 5 EK 1572 6 QR 1579 5 414 580 Table. 4. Estimation 9 Number of PassengersAnna Valicek - paper
  11. 11. AcknowledgmentsPreparation of this paper would not have been possible without the help of many people and we would like totake this opportunity to express our sincere gratitude to them.Many thanks to the top management level of Yemen – Yemen Airways and Felix Airways. Those whom spritour aviation knowledge. Especially Eng. Mohammed Abdulla Alarrasha – CEO of Felix Airways. ReferencesAirbus (2008), Global Market Forecasts 2007-2026.Boeing (2008), Current Market Outlook 2008-2028, Seattle, Washington, 2008.Elwood S. Buffa (1988), " Modern Production/Operations Management " pp.559-569.Robert J. T., Robert C. K. (1975), “Decision Making Through Operations Research " pp.157-159Wikipedia ( 2008 ), Competition between Airbus and Boeing, 2009.Yemenia Yemen Airways (2008), “Monthly Traffic Reports" Sana,a, 2008. 10Anna Valicek - paper