2008 i n o. 1...a conversation with tim hoeksema, chairman, president and chief executive officer,...
TRANSCRIPT
A Conversation with Tim Hoeksema, chairman, president and chief executive officer, Midwest Airlines. pg. 36
t a k i n g y o u r a i r l i n e t o n e w h e i g h t s
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A MAgAzine for Airline executives 2008 issue no. 1
Airlines are scrutinized for affects on the environment
etihad doubles its revenue from 2006 to 2007
carriers can become true customer-centric businesses
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Focus On The Customer
I remember a time when companies undoubt-edly put their customers first. Familiar mottos such as “The customer comes first” or
“The customer’s always right” signified a customer’s importance and value.
That was the overarching attitude a couple of decades ago. But with the fast-paced world in which we live coupled with a grave need to expand the business, cut costs, grow revenues and keep a con-stant eye on the bottom line, often times the customer doesn’t always come first. In fact, many customers seldom get the true respect, treatment or satisfaction they deserve and expect. Instead, many busi-nesses mistakenly assume that customers are as loyal today as they ever were … that they’ll always be there … no matter what. But nowhere is that less true than in the airline industry, where customers have countless choices and demand superior service. A bad experience, no matter how seemingly minute, has the potential to push the customer straight into the hands of the competition.
Speaking as a consumer, custom-ers not only want exactly what they pay for, they want exceptional service as well. That’s not to say they expect business personnel to drop everything, bow down and treat them like royalty. It’s as simple as recognizing each customer as a respected individual. Not just a paying customer, but as a human being who, by nature, deserves that level of respect.
It doesn’t seem like a tall order, but it can be. Half the battle is hiring service personnel who understand the concept that customers must be treated exception-ally well or they simply won’t come back. The other half of the battle is that airlines or their personnel aren’t always equipped
with the tools and technology necessary to provide top-quality service across the board. But even technology-challenged airlines find ways to satisfy their customers. And, today, that must be a primary goal — making most, if not all, customers happy.
For some, it seems nearly impos-sible to please that many people, but it’s not. According to London-based Skytrax, the world’s leading quality advisors in the airline and airport industries, six airlines currently hold Skytrax’s five-star ranking, part of its “Star Ranking” program that was introduced in 2000 and grades quality levels of more than 400 airlines.
Asiana Airlines, Cathay Pacific Airways, Kingfisher Airlines, Malaysia Airlines, Qatar Airways and Singapore Airlines are the only six carriers in the world that have received top recognition for exceptional quality. Skytrax rates a variety of areas, such as long-haul business- and first-class service, staff grooming and presentation, assistance for families and children, check-in services, Internet/WiFi options, service efficiency, staff enthusiasm and attitude, dining options and food quality, washroom/aircraft cleanliness, seat comfort, prior-ity boarding processes, personalization of service, in-flight entertainment, and consis-tency among staff.
Even though these six airlines have earned exemplary status, they must main-tain these service levels year after year to retain customers and continue to grow and succeed.
This is just one example of what it takes for airlines to be aligned with their customers. Aside from service excellence at every touch point, one of the biggest aspects of achieving customer satisfaction is getting travelers to their destinations on
time. Last year, airlines around the world were hit with service delays and schedule disruptions that left thousands of passen-gers outraged. In the United States alone, last year’s on-time performance was only 73.4 percent for the 20 airlines reporting with the U.S. DOT, down from 75.4 percent the previous year.
It’s not all bad news though. While there’s plenty of room for carriers around the world to improve their customer sat-isfaction ratings, many airlines have taken monumental steps to ensure their customers come back time and time again.
Milwaukee, Wisconsin-based Midwest Airlines, for example, provides spacious, all-leather seating and offers fresh-baked chocolate chip cookies to its passengers during flight, making them feel at home. The carrier is also well known for the excep-tional, personalized service its staff offers customers, earning it a reputation of “The best care in the air.”
There are several airlines like Midwest that are taking special care to ensure their customers are not only satisfied, but that they always remain true to their carrier of choice. It’s a fairly simple philosophy — take good care of your customers, and they’ll take good care of you.
In our special section, we examine several aspects of customer centricity. We discuss how airlines can focus more on their customers and how they can measure their effectiveness. We look at how one airline is leveraging social media to open numerous lines of communication with customers. We discuss how airlines are investing in advanced analytics to retain profitable cus-tomers. And we talk about how airlines can work together to ensure the best solutions in the industry are being developed.
Every decision we make has a direct impact on our customers … and our bottom line. And those who have a close eye on their customers have the greatest chance of achieving long-term success.
We hope you enjoy this issue, and we look forward to visiting with you again in the coming months.
Wishing you smooth skies …
Tom
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with Tom KleinGroup President, Sabre Airline Solutions/Sabre Travel Network
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The Pilot Midwest Airlines has earned the reputation of “the best care in the air” for its exceptional customer service.
World’s Fastest-Growing Airline
Etihad Airways is considered the fastest-growing airline after doubling its revenue from 2006 to 2007 and achieving record passenger growth last year.
Staying PowerAlaska Airlines has served a
loyal customer base for more than 75 years and intends to do so for at least another 75 years.
Balancing ActSouthwest Airlines offers
several new features, such as gate improvements and in-flight amenities, to enhance customer service.
Virgin America’s 56 Passionate Start
Virgin America places great emphasis on its use of technology and passenger-comfort amenities to ensure its customers enjoy the best possible travel experience.
8 Checkmate
Open-skies agreement between the United States and European Union generates a new level of global competition.
Little Models 14 Take Big Steps
Some low-cost carriers have tried to acquire their nation’s flag carrier — a rare twist to traditional airline consolidation.
18 In Control
A fully integrated system operations control center is at the core of an airline’s operation.
23 Blending Models
Many low-cost carriers have implemented the best attributes of their network counterparts to expand market reach and grow their customer base.
26 “Green”er Skies
Airlines continue to be chastised for their impact on the environment, despite myriad efforts to improve.
The Barbarians Are Still At The Gates
Private equity firms continue to target carriers that have untapped or strong potential to grow revenues.
Come Rain Or ShineThe low-fare business model is being challenged differently, based on economic issues, such as rising fuel costs, facing every region of the world.
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62 Customers Come First
Airlines around the world can become truly customer centric using the right combination of staff, technology, processes and data.
65 Delta Meets “Change”
Delta Air Lines’ “Change” campaign enables customers to communicate directly with the airline using a variety of social media to improve the end-to-end travel experience.
68 What Customers Want
Advanced analytics to better understand customer behaviors and preferences will substantially impact airlines’ revenue management and inventory control processes.
73 Great Minds Think Alike
A “customer community” approach enables airlines to pool resources and help create the precise solutions they need to succeed.
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76 The Highest Peak
Sabre Airline Solutions, with launch partner British Airways, introduces the industry’s leading movement control software.
80 Raising Revenues
Fully integrated, state-of-the-art revenue management solutions yield significant results for less-restricted fare structures found in non-traditional, hybrid airline models.
97 Bursting At The Seams
The U.S. Federal Aviation Administration is implementing modern technology and processes to support the country’s exceptional airline industry growth rate, help reduce flight delays and enhance safety.
99 Middle East On The Rise
More than 600 aircraft orders, double-digit annual traffic growth and new airports on the horizon has the Middle East exceeding all airline industry expectations.
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Prime Partners Partnering with the best solutions provider presents a long-term relationship that should be built on common goals and a command for service excellence.
85 Best Of Both Worlds
An airline’s computing systems must provide high performance, reliability and the flexibility to change with today’s business needs.
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88 The Test Of Time
Chinese carriers, like most airlines in the industry, face on-time performance challenges due to numerous flight delays.
91 Faster, Smaller, Cheaper
The strong entrance of very light jets could be of significant concern to carriers serving business travelers.
Mexico’s Major Modifications Mexico’s airline industry has realized major changes involving privatization of its traditional carriers.
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The top 15 airlines account for more than 85 percent of all U.S.-Europe departures.
Within this list, the United States has fewer and larger trans-Atlantic airlines than Europe.
The smaller U.S. players are still comparatively large by European standards.
}
Compared to a U.S. fortress hub, where the leading carrier might hold a departure share of 50 percent to 60 percent or higher, London Heathrow Airport is more frag-mented — No. 1 British Airways holds a 43 percent share.
However, compared to the share held by the No. 1 carrier in the larg-est U.S. origin-destination airports such as Los Angeles International Airport or JFK — often 20 percent to 30 percent — British Airways’ share is relatively large.
}
Despite years of growth in depar-tures from interior gateways, John F. Kennedy International Airport remains the pre-eminent departure airport.
Together, New York-area airports JFK and Newark Liberty International Airport account for 36 percent of industry departures, nearly four times the share of No. 2 Chicago O’Hare International Airport.
With few exceptions, the “stair steps” are fairly consistent throughout the ranking.
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Top 15 U.S.-Europe Airlines* Scheduled Weekly U.S.-Europe Departures By Airline
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S.-E
urop
ede
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CO309 BA
281 AA266
LH232
UA182 AF
167 US154 NW
133 VS129
KL74
AZ59
EI58
LX54 SK
46
12% 11% 10% 9% 8% 6% 6% 5% 5% 4% 3% 2% 2% 2% 2%
0
100
200
300
400
500
600
700 JFK616
U.S. departure airport
Top 15 U.S. Gateways to Europe* Scheduled Weekly Departures To Europe By U.S. Gateway
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urop
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EWR447
ORD292
ATL210
IAD209
BOS171
PHL168
LAX150 DTW
98MIA
91IAH80
SFO77
DFW49
MCO38
MSP3512% 11% 10% 9% 8% 6% 6% 5% 5% 4% 3% 2% 2% 2% 2%
Most No. 2-ranked bmi flights are short hauls, and these face intense low-cost carrier competition at nearby London airports. These slots might be more profitably used on longer-haul operations.
No. 3 Lufthansa German Airlines has only a 4 percent share.
All Others813 BA
1,992
LX 42TP 44
AZ 66
AF 81
UA 70
KL 95
IB 91
AC 105
AA 112
SK 131EI 151
VS 161 LH 203 BD 523
Top 15 U.S. Heathrow Airlines*Scheduled Weekly Departures - All Destinations
Trans-Atlantic Overview Prior To E.U.-U.S. “Open-Skies” Agreement
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SkyTeam leads by a wide margin.
Star does not currently have a lead-ing share at either of the top two trans-Atlantic gateways, JFK and LHR.
Although oneworld’s share of departures is comparatively small, most of these are focused in the lucrative and hard-to-access LHR market.
} Virgin Atlantic Airways accounts for 129 departures and 4.4 percent of the non-aligned carriers.
If Virgin Atlantic Airways joined an alliance, then the remaining non-aligned departure total would decrease to 307, or 10.5 percent of the trans-Atlantic total.
U.S.-Europe: Ranking Of Global Alliances*
In contrast to the United States, there are three distinct clusters of airports:o Large: LHR is the second-busiest
gateway on either side of the Atlantic, behind JFK.
LHR plus London Gatwick Airport account for 25 percent of European departures to the United States.
o Medium: Frankfurt Airport, Paris Charles de Gaulle and Amsterdam Airport Schiphol.
o Small: There are many compara-bly sized European airports in the “small” cluster.
oneworld is by far No. 1 at this premium airport, with a 50 percent share of departures:
o Quality versus quantity — This contrasts with its No. 3 position in the overall U.S.-Europe market.
No. 2 Star Alliance is about half the size of oneworld and about half of its LHR flights are on bmi.
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LHR534
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Top European Gateways to the United States* Scheduled Weekly Departures To United States By European Gateway
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FRA310
CDG307
AMS238 LGW
191FCO112
MUC94
MAD93
ZRH89
MAN81
DUB74
BRU63
MXP63
SNN61
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18% 11% 10% 8% 7% 4% 8% 3% 3% 3% 3% 2% 2% 2% 2%
SkyTeam1,13338%
Star76026%
oneworld60821%
Non-aligned43615%
oneworld2,30150%
Star1,27127%
Non-aligned81017%
SkyTeam2986%
Global Alliances at Heathrow*Scheduled Weekly Departures - All Destinations
{ SkyTeam has a small share of only 6 percent.
Within the non-aligned category, Virgin Atlantic Airways has 161 flights, or 4.4 percent of the LHR total.
* Midyear 2007 Schedules
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By Chris Spidle | Ascend Contributor
C H E C KM A T E
Spurred by the open-skies agreement between the United States and the European Union, a new era of global competition is emerging. And just as every chess move reflects a strategic calculation, airlines are scanning a giant trans-Atlantic chessboard, trying to devise the right strategic moves.
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Signing of the open-skies treaty on April 30, 2007, between the European Union and the United States was an historic event
from many perspectives.The agreement grants any E.U. or U.S.
airline — for the first time — full traffic rights to fly between any point in the European Union and any point in the United States. Among the numer-ous changes this agreement brings, perhaps the biggest effects are being felt in the United Kingdom/United States arena — the largest and previously most restricted trans-Atlantic market. Previously, only four carriers were allowed to serve the United States from London Heathrow Airport. With the agreement, additional carriers can operate flights from Heathrow to the United States.
Those who compare airline-network strat-egy issues to a high-stakes game of chess with multiple players can readily recognize the new rules as a game-changing event. The changes raise several pertinent questions: What new business moves are now possible?
What are the inclinations of the players? What strategies will be most effective? How will the game board look in five years?
Previous experience in similar situations suggests the industry could develop in four phases:1. Incremental change — Airlines will finally make
long-sought incremental changes based on sound economic underpinnings, such as add-ing service to large and previously restricted markets such as Heathrow.
2. Exuberant experimentation — There will be a period of innovation and experimentation as airlines add previously prohibited new routes and/or flights. Precedents will be set as limits are tested. Expect a few trials — and probably some errors, as well.
3. Survival of the fittest — Powerful basic eco-nomic factors will cull some of both the new and already-existing services. Networks and business models with sustainable economic fundamentals will prevail.
4. Finding equilibrium — The airline industry will converge to a new balance point. The ultimate extent of change will be determined by govern-ment policy for mergers and rules for foreign ownership of U.S. airlines. Unexpected geo-political or economic events could significantly influence the pace of change.
Before speculating further on what actual changes might occur during these prospective phases, it is important to understand the regula-tory changes that have been introduced by the open-skies treaty.
Game rules for the trans-Atlantic chess match now include expanded traffic rights and other new freedoms. There is now a single E.U. market for air transportation as the European Union replaces individual countries in bilateral agreements with the United States.
The “community carrier” concept replaces airline nationality. Now E.U. airlines may fly from any E.U. country to the United States — not just their home country. For example, British Airways can now fly from Belgium to the United States as
Airline planners sometimes use the “supportable capacity” paradigm to describe the amount of capacity that a market can profitably sustain on a long-term basis. The construct illustrates that hubs have structural advantages for serving nearby points and that this creates natural neighborhoods for each hub. This effect is independent of political boundaries and is observable in borderless markets, such as the U.S. domestic market.
MSPNW ORD
UA
DFWAA
DSM SpokeORD 8 flightsMSP 7DFW 6IAH 2
AUS SpokeDFW 15 flightsIAH 11ORD 3MSP 2
Line Width = Frequency
Height =Local market size}
IAHCOAUS
DSM
Width =Hub size
“Supportable Capacity” Paradigm
Supportable Capacity• Determined by •Local market size • Hub size • Distance to spoke• Results in “neighborhoods” for hubs • AUS = primarily DFW, IAH • DSM = primarily ORD, MSP
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well as from the United Kingdom to the United States.
Many other rules on codesharing, pric-ing, franchising and other areas have also been relaxed.
On a global scale, the United States has already been fairly successful in achieving its stated policy goal of open-skies agreements worldwide. And Europe, in general, has not been an exception.
For example, open-skies bilateral agree-ments were already in effect between the United States and 16 of the current E.U. countries. So the new E.U.-U.S. open-skies agreement repre-sents a bigger change between the United States and the 11 other E.U. countries that had either a more restrictive bilateral or no previous bilateral agreement with the United States.
While the new agreement represents a substantial change, it falls short of a few of the E.U. negotiators’ key objectives for cabotage and foreign ownership restrictions for U.S. airlines.
Although the U.S. Department of Transportation originally proposed terms that permitted foreign control of U.S. airlines, these ownership provisions subsequently met strong political resistance in the U.S. Congress. So U.S. negotiators offered different changes instead, and the modified agreement has gone forward provisionally as “Stage 1” while negotiators con-tinue to work on what would eventually become a final agreement in “Stage 2.”
To ease E.U. concerns that the United States now feels reduced incentive to negotiate the remaining Stage 2 issues, the European
Union reserved the right to begin rescinding free-doms granted in Stage 1 if there is no progress in Stage 2 negotiations by the end of next year. And British Airways has already publicly stated that if no real progress has been made by then, it will ask the U.K. government to start the process of rescinding Stage 1 freedoms in 2010.
That possibility, of course, could be ren-dered moot if business reality and success have become so ingrained on both sides of the Atlantic by 2010 that neither side would really want to turn back the clock.
An important, inconvenient detail is that while the open-skies treaty offers greatly increased traffic rights, it does not change the requirement for airlines to obtain slots for flights. And it happens that some of the airports that represent the richest targets for airlines to take advantage of the expanded traffic freedoms are also the most slot restricted.
However, carriers have been solving this problem by essentially purchasing slots. Although E.U. law technically prohibits the buying and sell-ing of slots, airlines operating there do trade slots in a “gray market.” And airlines have tapped into this market heavily as they prepare to take full advantage of the open-skies agreement’s new freedoms.
First Moves: Incremental ChangeAirlines have already announced schedule
changes to take advantage of the additional freedoms in the aviation agreement. Most of these schedule changes involve U.S. carriers adding new service to Heathrow Airport, so there
has been a related flurry of activity regarding Heathrow slots.
Some details are unconfirmed, but media reports suggest that the going rate for Heathrow slot pairs has rapidly increased to more than £30 million (US$60 million) for peak-hour tim-ings suitable for trans-Atlantic operations. U.S. carriers without close European partnerships have tended to pay the highest prices. Other U.S. carriers have pursued their European alli-ance partners to try to obtain Heathrow slots. And SkyTeam partners even coordinated a large reallocation of Air France and KLM slots. Coupled with additional slot purchases, this reallocation enabled SkyTeam, the alliance with by far the lowest share of Heathrow slots, to add the most new U.S. flights at Heathrow — 11 new daily roundtrips.
The fact that most U.S. carriers currently entering Heathrow have retained some opera-tions at Gatwick Airport suggests a consider-able amount of unmet demand for Heathrow slots and that there is continuing pressure to shift more U.S. flights to Heathrow over the long term.
Another pivotal step in incremental change is increasing alliance network linkages by adding hub-to-hub services. Even compara-tively smaller U.S. hubs such as Salt Lake City, Utah, are participating. And while some of the new nonstop city pairs represent smaller local markets, all of the hub-to-hub routes nonethe-less serve as important pipelines for connecting traffic by fully linking the partners’ hub catch-ment areas.
In addition to the growth at Heathrow and in hub-to-hub flying, rapid growth is occur-ring in boutique, all-business-class trans-Atlantic flights. This growth actually started before the regulatory environment changed, but it could interact with and be influenced by the changes that result from the open-skies agreement.
Two approaches have emerged for all-business-class trans-Atlantic flights: Legacy-affiliated — Wet-lease flights oper-ated on behalf of European network carriers,
Discount-boutique — Independent carriers operating discount business-class flights in the U.S.-London market.
The legacy-affiliated model focuses on full-fare business travelers, featuring narrow-body aircraft operated by Swiss/German airline PrivatAir and marketed by European network carriers, linking major U.S. cities with top busi-ness centers in the European carriers’ home countries. Normal business-class fares are charged. This approach focuses every revenue and cost advantage in markets with unusually high numbers of premium passengers.
On the other hand, the discount-boutique approach depends on access to a high-volume local market with a large segment of customers willing to pay more for comfort. Current opera-tors offer independently branded premium-class seats in the U.S.-London market at a substantial
The European Common Aviation Area is a flexible framework that’s membership can change over time. It includes all 27 E.U. countries plus additional adjacent countries. Within the context of the E.U.-U.S. open-skies treaty, non-E.U. members of the ECAA are defined to be the nine countries that were ECAA members when the treaty was signed last year.
A multilateral aviation agreement among the 27 members of the European Union and nine other European countries
Creates a common area for aviation by extending application of E.U. legislation to nearby areas
Extends the E.U. internal air transport market Nine non-E.U. countries in the ECAA as of April 30, 2007:
– Albania – Bosnia and Herzegovina – Croatia – Iceland – The former Yugoslav Republic of Macedonia – Montenegro – Norway – Serbia – The UN Interim Administration Mission in Kosovo
European Common Aviation Area
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discount from normal business-class fares, and they fly larger Boeing 757 or 767 aircraft.
Early experience suggests that all-busi-ness-class flights may be a specialized, fragile niche. Given the finite number of markets that meet either narrow set of criteria for the busi-ness models — perhaps only London, Paris, German business centers, and Zürich — there will be limits on how large these operations can become.
Next Moves: Exuberant Experimentation
According to the classic pattern for market incursions, an innovative new entrant provides a stimulus to the incumbent. The incumbent responds. And the marketplace chooses a new equilibrium. Whether the new entrant is rebuffed or the incumbent cedes market share is often determined by whether the new entrant seeks to compete on a cost or revenue basis.
Southwest Airlines has historically been extremely successful competing on the basis of low costs. But there are fewer instances of new entrants competing for premium passengers.
In the case of boutique airlines making incursions into the E.U.-U.S. market, incumbents’ plans for responses are well under way. Virgin Atlantic Airways, a proven marketer, is prototyp-ing an Airbus A319 for all-business-class trans-Atlantic service. British Airways has announced
E.U.-U.S. Open-Skies Agreement — Highlights
Element Change What It Means
Single E.U. market E.U. replaces individual countries in bilateral negotiations with U.S. Supercedes “Bermuda II” U.S.-U.K. bilateral
Additional airlines allowed into LHR-United States
“Community Carrier” concept replaces airline nationality
Any E.U. airline can now fly from any E.U. country to the United States with full traffic rights
Air France can now fly London-Los Angeles nonstop
Traffic Rights: open skies now applies to all 27 E.U. countries
No restrictions on EU-US routes, frequency or capacityUnrestricted fifth-freedom rightsCabotage still prohibitedSlot constraints still apply
British Airways still may not carry Chicago-Houston local traffic
Additional commercial changes
Codeshare Unlimited between E.U., U.S., and third-country airlines
American Airlines and British Airways may codeshare on trans-Atlantic flights
Virgin America may start operations
Lufthansa German Airlines could operate Belgrade-Chicago nonstop
Virgin Nigeria may operate Lagos-Newark nonstop
PrivetAir (Germany) could wet lease to American Airlines for New York-Stansted
Pricing All restrictions on E.U.-U.S. routes removed
Franchising/branding Now explicitly permitted
Seventh-freedom rights
E.U. airlines gain full traffic rights to areas outside the European Union - European Common Aviation Area - Africa: 18 countries
Wet leasing E.U. airlines may wet lease to U.S. airlines for U.S.-international operations
Cargo Unrestricted seventh-freedom rights for E.U. airlines
Competition Applications for antitrust immunity expedited by the United States
Ownership E.U. nationals owning U.S. airlines:- 25 percent cap on voting equity remains in place- 49.9 percent cap on total equity- 50 percent or more total equity possible subject to special U.S. approval- E.U. nationals still may not control U.S. airlinesReciprocal rules for U.S. nationals owning E.U. airlinesE.U. ownership of airlines in ECAA or certain African countries would not jeopardize their U.S. traffic rightsAn ECAA-owned E.U. airline would be treated as if it were E.U.-owned
Mergers between E.U. and U.S. airlines are not possible at this time
British ownership of Virgin Nigeria does not jeopardize its Lagos-Newark traffic rights
Regulatory Cooperation Increased in many areasJoint committee established to interpret agreement
Other Provisions to increase reach of E.U. companies into U.S. market and vice-versa
The E.U.-U.S. open-skies agreement enables any E.U. or U.S. airline to link any city in the European Union with any city in the United States and offers additional freedoms covering many commercial areas besides traffic rights. It represents a major change for the large U.K.-U.S. market, which was previously regulated by the restrictive Bermuda II bilateral.
plans for new all-premium flights from London City Airport to the United States. And American Airlines, a top player in the New York-London market, reinstated service to Stansted Airport, which is the U.K. base of Silverjet.
Outside of the boutique arena, plans are now underway for British Airways’ new carrier “OpenSkies” to operate three-class Boeing 757s from New York to Brussels, Belgium, and/or Paris, France. At a minimum, OpenSkies could be a use-ful prototype for British Airways to fine-tune the platform for serving nearby, non-home markets.
Besides responding to the new all-busi-ness-class services and the startup of OpenSkies, other airlines are likely to keep adding capacity on trans-Atlantic routes. The market continues to experience double-digit revenue growth, and U.S. carriers continue to seek opportunities to export their unprofitable domestic capacity. In fact, it is possible that U.S. carriers have more economic incentive to add trans-Atlantic capac-
ity than European airlines. And U.S. carriers also have fewer capacity limitations, such as slots, at their home gateways.
Past experience is that enthusiasm for new freedoms and perceived competi-tive pressures often drive frenzied carriers to overindulge with their initial expansions. Then, over time, there is a retreat as suc-cessful approaches are expanded and loss-making services are pruned. Winners and losers are separated by the economic reali-ties of the marketplace.
The Match Continues: Survival of the Fittest
Some industry-watchers speculate that carriers will be tempted to invade one anoth-er’s territories — for example, for Lufthansa to operate Heathrow-United States. But there are some natural limits that will influence the sustainability of such forays.
If a carrier exuberantly over expands, some new flights will be unprofitable, and the venerable Scottish financial theorist Adam Smith’s “invisible hand” of economics will take over: over time, as losses mount, the carrier will be forced to with-draw those flights.
A few industry experts cite the concept of “supportable capacity” to describe what is sustainable in the marketplace. This paradigm holds that the amount of capacity a carrier can profitably deploy from a hub to a spoke depends on three factors:1. The size of the local market in the hub,2. The scale or size of the airline’s hub operation,3. The distance from the hub to the spoke.
The three factors combine to determine the amount of sustainable capacity: Local traffic provides an essential foundation of higher-yield-ing traffic. However, connection customers are needed to provide additional volume. And close hub proximity lowers many costs.
Based on these factors, airlines can expect to be economically penalized for certain longer flights and benefit from higher-frequency short-haul flights.
Market fundamentals related to the sup-portable capacity concept suggest that hubs, especially large hubs, tend to dominate their nearby neighborhoods. Just as a very large tree casts a long shadow and takes up moisture, nutrients and sunlight to deprive nearby seed-lings of the chance to establish themselves, the “hub-neighborhood” effect makes it harder for a competitor to start services from a distant hub to points that naturally fall within another hub’s “shadow” or catchment area — regardless of whether or not a route crosses country borders.
Due to the neighborhood effect, which is frequently demonstrated in borderless markets such as the United States, natural or “home” territories emerge for each hub. In the case of Europe, the neighborhood effect might be slight-ly less pronounced since hubs are somewhat smaller than in the United States, and there is a stronger preference for nonstop flights.
But two other phenomena could enhance the effect of home territories:1. The S-curve effect of market presence,2. Cultural preferences.
While the S-curve effect manifests itself as “city” presence in the United States and gives airlines an advantage in selling to custom-ers originating in a hub or other city where the carrier has a large capacity share, in Europe there is a “country” effect. A European airline’s home market usually includes the entire home country. Cultural dynamics may reinforce this effect.
The market fundamentals of supportable capacity and the neighborhood effect are not only very powerful but also they are independent of political boundaries. So even in a newly border-less market, they still apply. Home territories will still exist, making it more difficult for a smaller airline to invade a larger rival’s backyard or for a hub to tap into a distant neighborhood.
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The new E.U.-U.S. open-skies aviation services bilateral applies to 27 E.U. countries and represents the biggest change for the 11 countries that did not already have open-skies bilaterals with the United States — 16 countries already had open-skies agreements with the United States. Many terms of the agreement also apply to nine nearby non-E.U. countries, which are part of the European Common Aviation Area.
Countries Included In The E.U.-U.S. Open Skies Treaty
Serbia &Kosovo
Existing open-skies agreements16 countries
Open-skies for first time11 countries
Additional ECAA countries9 countries
Spain
France
UnitedKingdom
Poland
Germany
Italy
Iceland
Portugal
Ireland
HungaryAustria
Slovenia
Slovakia
Netherlands
Belgium
Malta
Luxembourg
N. Ireland
Norway
Finland
Sweden
Lithuania
Latvia
Estonia
Denmark
Romania
Greece
Cyprus
Bulgaria
Macedonia
CroatiaBosnia &
Herzegovina
Albania
Montenegro
Czech Republic
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Airlines will continue to need some point of real strength on at least one end of a route for that route to be viable, whether that strength derives from a network or a home territory.
After the first moves and early expansions, the dynamics of supportable capacity, neighbor-hood effect and home territories will determine which changes survive. Changes that play to a carrier’s inherent strengths will have distinct survival advantages throughout the evolutionary period, while changes that amount to attempts to challenge intrinsic properties of airline economics will inevitably be eliminated.
End Game: Finding EquilibriumOverall, the trans-Atlantic market may at
first be churned to an extent — but it will eventu-ally find a new equilibrium.
The two-phase nature of the open-skies agreement leads to the possibility that there will be two separate balance points — the first repre-senting the full extent of change possible under the Stage 1 treaty, and the second for Stage 2. The speed with which the industry converges to either of these points could be increased by economic shocks. Or the steady state for Stage 1 could be bypassed completely should Stage 2 be quickly agreed upon and implemented.
So the burning question clearly becomes: What will “equilibrium” look like?
Since regulatory influences have effec-tively been reduced through the open-skies agreement, economic factors can be expected to govern more strongly. The neighborhood effect will give larger hubs substantial advantages over smaller hubs. And over time, the gap between large and small airlines will grow.
In Europe, history has shown that although economically troubled airlines may shrink, they do not usually vanish completely. Additionally, while some smaller hubs may currently be overbuilt, they aren’t likely to disappear altogether. In both of Europe’s first major airline collapses, the end game was intercontinental growth opportunities for nearby rivals and regional opportunities for a smaller successor to the failed carrier.
The largest airlines can be expected to defend their neighborhoods, as slots permit. Situations such as Air France’s entry to London-Los Angeles and a possible British Airways/OpenSkies venture into Paris-New York might represent a “checkmate.”
British Airways is even now matching U.S. carriers’ moves of Gatwick flights to Heathrow to avoid what could otherwise quickly become a competitive disadvantage.
Whether and how much consolidation occurs on either side of the Atlantic could be strongly influenced by government regulation, antitrust policies, the intensity of economic stress on airlines, and the presence or absence of eco-nomic or geopolitical shocks.
Highly regarded industry analysts have long predicted further consolidation in the U.S. airline industry. However there were only two
mega-mergers between 2001 and year-end 2007: American-TWA and US Airways-America West. And recently, Delta Air Lines and Northwest Airlines have announced merger plans, but further major U.S.-airline merger proposals are moving haltingly.
Few if any of the possible U.S. airline combi-nations involve overlapping trans-Atlantic routes, so their effect on E.U.-U.S. flights could simply be to stabilize supporting U.S. networks.
Unlike the United States, where consolida-tion has meant direct merger with loss of one carrier’s identity, the emerging model in Europe has the largest carriers such as Lufthansa and Air France using holding companies to manage acquired airlines such as Swiss or KLM as wholly owned subsidiaries. These examples created a use-ful template for possible subsequent cross-border mergers by preserving distinct cultural identities after a merger while still consolidating fundamental economics.
Just as several U.S. carriers might leap into merger action after a “triggering” event, the European industry is in some respects spring-loaded for consolidation. Given the high value of Heathrow slots and the creativity of deals to date, many possibilities could make economic sense if owners are inclined to deal.
And existing cross-ownership stakes might influence consolidation. For instance, if Lufthansa had proceeded to bid for Iberia, it might have been interested in the 10 percent stake owned by British Airways. British Airways, in turn, might have been interested in Lufthansa’s 29.9 percent stake in bmi. SAS could have entered the picture, too, due to either its stake in bmi or in Spanair.
Lufthansa is strategically positioned as a potential kingmaker through its significant owner-ship stakes in leading carriers at the top two trans-Atlantic gateways — bmi at Heathrow Airport and jetBlue at New York’s John F. Kennedy International Airport.
Because of the relatively higher cost struc-tures of European versus U.S. airlines, it’s hard to imagine traditional mergers such as Air France-Delta Air Lines combining to form a single company. It’s easier to imagine U.S. carriers as subsidiaries of European airlines’ holding companies. European carriers already own stakes in their key partners around the world.
A hypothetical British Airways-American Airlines combination would be formidable, with hubs in New York and at Heathrow — the most important gateways on each side of the Atlantic. With strong city presence in both New York and London, this combination would be well-positioned to compete vigorously with the U.K.-U.S. boutique airlines.
One of the most dramatic possibilities in the trans-Atlantic arena is the prospective entrance of a low-cost carrier. Several are well-positioned to do so: Ryanair from London’s Stansted Airport; easyJet from London’s Gatwick Airport; or jet-Blue from John F. Kennedy International Airport. U.S. low-cost carriers could potentially serve as feed partners to a European low-cost carrier or
vice-versa, providing any new route “network strength” on both ends.
Taking into consideration the large local market sizes, the highly developed networks that low-cost carriers have built on each side of the Atlantic, a newly deregulated marketplace and the absence of any existing low-cost service, there could be high growth potential for low-cost carriers in the trans-Atlantic market. Perhaps the dense U.K.-U.S. market will be the launch point for such service.
In the end, the differences between Stage 1 and Stage 2 of the open-skies agreement may prove slight. Although only Stage 2 permits full control of U.S. airlines by E.U. nationals — and thus possible mergers between E.U. and U.S. carriers — Stage 1 does provide expedited review of requests for antitrust immunity, which is help-ful for effective joint ventures. And Northwest and KLM have already demonstrated that joint ventures can function as “virtual” mergers.
While it is impossible to know the future, we can project an airline industry with even larger global carriers such as British Airways, Lufthansa and Air France-KLM each owning smaller regional airlines plus perhaps a few large carriers adjacent to their neighborhoods. Additional antitrust-im-munized joint ventures are also likely. The future might also include fewer trans-Atlantic flights from smaller former flag carriers.
Many smaller markets will still have service, but some players might change, as in OpenSkies replacing Sabena in New York-Brussels. Competition among global carriers will remain fierce, as evidenced by the rush to add service to Heathrow. And low-cost carriers could provide relentless price competition.
There is some risk that negotiations over Stage 2 will deadlock and that this would call Stage 1 into question. But by then, it might be hard to turn back.
There are extremely high stakes on each side of the Atlantic. U.S. carriers will want to pre-serve access to Heathrow. And E.U. airlines will want influence over key sources of feed traffic in the United States. These factors — plus a gener-ally higher level of business integration between E.U. and U.S. airlines — should create strong economic incentives on both sides to somehow resolve issues on a more permanent basis.
The multilateral game of chess will contin-ue. And although its participants may be grouped into fewer and larger teams, their business strate-gies will still be highly sophisticated, and competi-tion will remain strong. a
Chris Spidle is delivery director of research, analysis and modeling for Sabre
Airline Solutions®. He can be contacted at [email protected].
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It might, at first blush, seem pretty audacious for low-cost or value-focused airlines to be in the business of acquiring some of the larger,
more traditional incumbent flag carriers.But such acquisitive actions now
appear to constitute a developing global trend. Or, at least, if the trend has not been fully established, some low-cost, value-focused or hybrid carriers are attempting to turn it into a trend.
For example, Brazil’s low-cost GOL Airlines — known for original, innovative thinking and a savvy business approach — has acquired longtime Brazilian flag carrier Varig.
And Air Berlin, a respected member of the low-cost, value-focused fraternity of airlines, has acquired the larger operations of both LTU and DBA — surprising many business analysts and shaking up the current European lineup of airlines.
On the other side of the ledger, low-cost carrier Ryanair was recently blocked by the European Commission from acquiring Irish flag carrier Aer Lingus (the European Commission cited competitive considerations).
And low-cost carrier Air One — like several other would-be suitors — has been unsuccessful in its ambitious attempt to acquire Italian flag carrier Alitalia.
What’s going on here? Does the flur-ry of merger-and-acquisition activity signal something more than what appears on the surface? Or are airlines of all stripes simply adjusting to competitive and marketing reali-ties across the board?
The answers to these intriguing ques-tions may be found in closer examination of current evolutionary processes that are heavily influencing the respective business models of low-cost/value-focused/hybrid car-
riers and their larger, mostly “incumbent” brethren among the flag carriers.
In recent years, low-cost, value-fo-cused and/or hybrid carriers have grown at a tremendous pace. And some of those carriers have exhibited outstanding financial performance, considering the fact that their industry has historically achieved, even dur-ing very good times, only a few percentage points in net profits.
The low-cost-carrier success around
the world can be largely chalked up to the exploitation of latent demand for inexpensive travel as an alternative option to, say, theater tickets or an automobile day trip. At some point, such sources of demand for low-cost air travel are likely to be saturated. In fact, one could argue that some of these sources may already have exceeded the saturation point.
In any event, the success of low-cost, value-focused carriers has been based on continuous growth. Theoretically, continuous growth should ensure similarly continuous
growth in these carriers’ publicly traded share values. But if at any time the growth momen-tum is interrupted by even a small decrease in load factor, the financial community can be counted on to almost automatically and immediately issue a profit warning.
At that juncture, the low-cost carrier is obligated to do something different, and its business plan may have to morph to accom-modate pure physical growth.
Best estimates are that about 75 per-cent of low-cost-carrier customers originally came to those carriers as the direct, tangible results of new-traffic stimulation — such as passengers who did not previously consider air travel a leisure option.
Logic, though, says that such stimulation cannot continue indefinitely and that low-cost, value-focused carriers, to keep growing and fill the aircraft they have as well as those they’ve ordered, must deviate from the original, pure low-cost-carrier business model. For instance, Ryanair stands to double the size of its fleet by 2012.
Basically, there are two ways a low-cost, value-focused carrier can sustain continuous growth: through organic or inorganic means.
Organic GrowthOrganic growth can be achieved by
growing the geographic footprint covered by the airline or by growing its customer base. Either option deviates from the pure low-cost business model.
In fact, to grow its geographic footprint, a low-cost carrier must increase the average stage length of its network, which means flying longer routes that the low-cost carrier would probably not otherwise intentionally choose.
Longer flight times mean significantly lower aircraft utilization and market saturation — straying from the normally high number
Little Models Take Big Steps
By Alessandro Ciancimino | Ascend Contributor
Basically, there are two ways a low-cost, value-focused carrier can sustain continuous growth: through organic or inorganic means.
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Unique to the traditional merger or airline consolidation seen in recent years are several low-fare carriers that have either acquired their nation’s flag carri-ers or made attempts to do so. Ever-changing processes that are persuading various business models may be at the root of these unusual acquisitions.
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of daily frequencies low-cost carriers are set up to serve. Ryanair is an example of a low-cost carrier that is pursuing this avenue to sustain growth. It has recently initiated flights between Dublin, Ireland, and Malta, a four-hour time block that would not align with its original business model.
Other low-cost carriers are expanding their customer bases by winning passengers over from incumbent airlines — those large or small carriers that are already flying a specific route in a particular market.
This, by definition, is a deviation from the original low-cost business model and from the actions of other low-cost carriers. And it represents a brand-new challenge for the typical low-cost carrier. Until very recently, direct competition between low-cost carriers represented less than 10 percent of total worldwide airline capacity.
But now that further growth opportu-nities in potential low-cost-carrier “virgin” markets are drying up, some of the low-cost, value-focused airlines are beginning to saturate each others’ markets. In the United States, for example, the yield of Southwest Airlines is more than 10 percent lower on routes on which the carrier faces competition from another low-cost carrier than on routes where it does not.
On the other hand, winning passengers away from traditional airlines is neither easy nor inexpensive — especially when network airlines fight back by attacking their cost bases and trying to emulate features of the low-cost model.
In moving to meet this challenge, many low-cost, value-focused carriers have found themselves obligated to offer “frills” on their flights. This strategy is based on the concept of succeeding at the expense of the larger incumbents, which, believe it or not, was not a foundational element of low-cost-carrier strategy and success.
And it means increasing the cost base of operations — an immediate result of offering frills to attract passengers who are not merely price sensitive, but schedule sensitive.
Low-cost carriers that are following this strategy include jetBlue, Southwest Airlines, Air Berlin and SkyEurope. They offer more ser-vices, more convenient schedules and more distribution channels, including global distribu-tion systems.
These low-cost, value-focused carriers are squeezing the gap between themselves and incumbents in terms of four key factors: schedule, service, yield and cost.
Of course, there are different approaches for different value-focused carriers. Southwest Airlines, for example, is counting on its global distribution system for effective distribution as opposed to jetBlue, which is instead offering some interregional connecting flights. There’s also easyJet, which is targeting business trav-
elers by flying to main airports instead of sec-ondary airports like those served by Ryanair.
The need to offer more to justify an increase in low-cost-carrier fares and yield is also the result of the need to cope with increasing costs such as various aircraft and jet-fuel expenses that impact every airline, regardless of its business model.
And the larger incumbents are fighting back by incorporating some of the low-cost-carrier business design in their model such as pushing online sales, cutting travel-agent commissions, improving the productivity of resources, focusing their networks around their natural key assets and simplifying their fare structures.
GOL, Brazil’s low-cost, no-frills airline, took a bold step last year when it acquired Varig, the country’s flag carrier. The two carriers continue to serve their independent markets and operate under separate brands.
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Photo by shutterstock.comPhoto courtesy of Boeing
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Inorganic GrowthThe other way to grow, which is labeled,
logically, “inorganic growth,” is through merg-ers and acquisitions.
Actually, all the ingredients seem to be in place for low-cost-carrier consolidation — and merger-and-acquisition activity is already occurring. According to a recent International Civil Aviation Organization study performed through a series of interviews with airline chief executive officers, the vast majority believe the industry will move toward further consolidation.
The primary driver of industry consoli-dation relates to increasing the share value of consolidating companies in concert, it is certainly assumed, with economies of scale in combining airline fleets and other assets.
But one important factor that always goes hand-in-hand with mergers and acqui-sitions in the airline industry is stringent regulatory oversight. Antitrust issues and cross-border-ownership restrictions are often roadblocks to merger-and-acquisition suc-cess, as in the case of the would-be Ryanair/Aer Lingus merger that was vetoed by the European Commission.
Other examples are to be found in global alliances, which figure to play substantial roles in enabling consolidation through direct equity investment among alliance partners. To a great extent, the global alliances exist to allow a partial “commercial consolidation” of the industry that is blocked by current foreign-ownership restrictions.
Most of the airline CEOs who took part in the ICAO interviews say stronger alliance relations are being formed basically in lieu of a formal merger-and-acquisition process — when the latter is not achievable due to either regulatory or business issues.
Outlook For The FutureThe convergence of formerly distinct
business models and the increase in low-fare competition present different challenges for the larger incumbent airlines and the low-cost/value-focused/hybrid carriers.
Low-cost carriers will have to engage more and more in actions and imperatives that are intimately familiar to the larger flag carriers: finding new sources and diversifica-tion of revenue, streamlining and making the network and operations more effective, redesigning and creating innovative business processes around pricing and revenue man-agement and, of course, keeping tight control on costs.
Given the stereotypical frugality of low-cost carriers, their way forward may espe-cially concentrate on the redesign of some commercial and operational processes, such as new techniques in revenue management, to be better able to face the competition at the same time and in the same markets of
Photo courtesy of Airbus
While some low-cost carriers have been successful at acquiring larger counterparts, the European Commission stopped Dublin, Ireland-based Ryanair from purchasing Irish flag carrier Aer Lingus. And Italy’s Air One was unsuccessful in its attempt to acquire the country’s flag carrier, Alitalia.
Photo courtesy of AirbusPhoto courtesy of Airbus
Photo by shutterstock.com
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both large incumbents and other low-cost carriers.
Or the low-cost carrier may look at items such as demand-driven, short-term fleet-assignment processes to better match its capacity to ever-changing demand factors.
Meanwhile, the larger incumbents must exploit differentiating factors such as network size, schedule quality, better cus-tomer service, more favorable airport loca-tions, alliances and frequent flyer programs.
A larger incumbent airline can also gain advantages by segmenting its offerings more effectively and simplifying its fare structure — making fare elements more transparent and adding a la carte features: enabling customers to individually select and pay for the specific onboard and in-flight items they really value.
Another priority of the larger incum-bent airlines should be refocusing their net-works around market needs and their key natural strengths. Larger airlines would be well-advised to shift toward “follow-the-mar-ket” instead of “force-the-market-to-follow-you” philosophies. Certain larger carriers, for example, tend to build unnecessarily complex connecting schedules in trying to serve non-natural connecting markets.
Larger incumbent business-transfor-mation priorities might also be shifted to make operations more efficient through fleet rationalization, process automation, out-sourcing of non-core business and increasing labor-force productivity.
As the future unfolds, it’s likely that — in adjusting to various market factors — the larger flag carriers and low-cost/value-fo-cused/hybrid carriers will primarily continue to coexist. Obviously, price pressure will always represent a huge challenge for every airline, large and small (and could enter into merger-and-acquisition thought processes in a very big way).
And only those airlines that are able to quickly and nimbly adapt to new and continu-ally changing conditions will be rewarded with consistently profitable operations — whether they’re actively engaging in merg-ers and acquisitions or simply trying to forge a conventional path to business-sustaining growth. a
Alessandro Ciancimino is a senior partner for Consulting and
Solutions Delivery at Sabre Airline Solutions®. He can be contacted at
Photo by shutterstock.comPhoto courtesy of Boeing
Photo courtesy of Airbus
Germany’s budget carrier, Air Berlin, has expanded it’s operations with the acquisition of Duesseldorf-based LTU in 2006 and Munich-based DBA last year. The airline is one of several European low-cost carriers that have taken an interest in larger operations.
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System operation control centers are critical to an airline’s day of operations, but the most effective, efficient SOC is an integrated one — from the people who work in a centrally located SOC environment to the systems that support them.
By Dave Roberts | Ascend Contributor
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The room is crowded with people sitting in front of various types of computer or console screens. They
are clustered in groups throughout the room — some on raised platforms over-seeing the work of others. It is a win-dowless room, and around the walls are very large plasma screens that display many graphical pictures of colored lines around the world, weather depictions of sky conditions and forecast, and many charts filled with numbers and symbols. There is a low-level buzz throughout the room with many people talking at once — to each other or on the phone. Some are yell ing instructions, many are asking questions, but all appear to be concentrating on the work at hand. The technology of communication and computing can be sensed throughout the room. At first glance, it appears chaotic. But with a closer look around the room, observing and listening, it becomes apparent that all is in order and that these people and the machines they
use are in control of their environment and their responsibilities.
Is it NASA’s Mission Control Center? Is it the flight control room that has guided and controlled hundreds of space shots? No. Anyone in the airline industry could easily identify this scene. It’s an airline’s system operations control center — its nerve center.
Within the confines of the SOC, airline personnel are monitoring and controlling the very essence of the operation of the airline at any given time … day or night. The SOC is a full-time, 24-hour-a-day, 365-day-a-year operation that oversees the airline — its schedule, flights, aircraft, staff, passengers and cargo. An airline runs on its heart and soul, but it is controlled by its brain and nerve center, the SOC.
The SOC is more than a location where many operations business units come together during the day of opera-tions to make air travel possible. The primary business processes within an air-line SOC encompass communication and coordination with many of the airline’s
internal and external groups. These groups are always occupied with external events, working hard to ensure a safe, efficient and cost-effective airline. Success of an SOC is dependent on both the effective-ness and administration of the underlying business processes. It is the coordination of flight operations, crew tracking, main-tenance and engineering, dispatching, air-port and ground staff, and reservations and passenger service personnel working together to ensure the efficient and timely transportation of passengers, bags and cargo. It requires a fully integrated opera-tion of flight, aircraft and crew systems to produce this timely experience.
A positive flight experience produc-es huge returns on investment because of passenger satisfaction. Integrated airline operations enable high-level decisions that produce optimum results and a superior experience for customers, which, in turn, drive customer loyalty. The evolution of the SOC has been ongoing for many years, but today, the responsibilities of the
Photo by shutterstock.com
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SOC include combinations of several functions, including: Monitoring, coordinating and controlling the
operation of the airline and its resources on the day of operations;
Planning and executing the daily operational plan and flight operations for all scheduled and non-scheduled aircraft movements toward on-time operations according to government and corporate policies and requirements;
Managing operational control of the airline when irregular operations occur caused by adverse weather, aircraft or other mechanical problems; airport or air traffic control prob-lems; or labor issues;
Minimizing passenger disruption during irregular operations by operating the schedule as close to plan as possible and providing alternatives for passengers when flight delays or cancella-tions occur;
Serving as the focal point for coordination during emergencies.
The operation of an airline on a daily basis is complex, and a key to success is the efficient and effective completion of the flights as close to the published schedule as possible. Bringing it all together — airworthy aircraft, qualified and legal flight crews, sufficient ground resources,
and passengers and cargo — is a challenge. Months, even years, go into the planning of a flight schedule. The SOC is the entity that controls the execution of the plan to meet the legal requirements of various governments, the laws of aerodynamics and the goals of the airline. After safety, cost control, which is an essential factor of success when executing the daily plan, is achieved through reduced fuel consumption, improved personnel productivity and enhanced flight movement from departure to flight path to arrival.
Airlines rely on the people and informa-tion technology located in the SOC to help achieve their corporate objectives. SOC staff members are the primary decision makers for the day of operations. This decision-making role requires communication and coordination with not only the numerous groups within the SOC but also the many external groups that are engaged in the physical operation of the airline.
The centralized group of airline staff that oversees the operational control of the airline has not always existed. In the early years of commercial aviation, this control was decen-tralized and located at many different points around an airline’s airport system. Decision
making was very difficult given the separation of those responsible for the airline’s operation.
Airline management realized that change was necessary, which is when centralized offic-es to manage the day of operations were formed throughout the industry. These new offices, called many different names, such as systems control, operations control and airline control center, had a common objective — to bring together in one location the people responsible for the daily operation of the airline.
Airlines also realized that the most efficient SOC was created by centralizing, consolidating and integrating operational control functions, and they quickly understood that these new offices were successful in better coordinating and controlling the business, especially during irregular operations. Key in the establishment of these centers was the new, localized integration among operational functions that control the airline. Of course, in the early days, integration meant standing up and hollering across the room from one position to another, as verbal commu-nication was the first form of integration used in these new SOC offices.
The tools used to control the airline opera-tions were once manual. The airline industry, which was one of the first to adopt computer
The most efficient system operations control center combines well-trained airline professionals with end-to-end integrated systems in a single, centralized location to ensure communications occur in real time and day of operations run as smoothly as possible.
Photo by shutterstock.com
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automation, was concentrating on automating passenger reservations, and SOCs and airports were among the last areas to be fully automated during the second half of the 20th century.
With the introduction of automation into the SOC and its core functions, airline operations became even more efficient by reducing costs through productivity enhancements. Since air-craft generate revenue only when they are in the air, automation helped increase aircraft utilization through improved flight operations. By minimiz-ing ground time, the aircraft could be scheduled for more flight time each day. The increased flying was brought about by more efficient opera-tional control tools now automated within the SOC. Further improvements were still needed through systems integration so each segment of automated solutions was sharing and utilizing the same data.
While the roles and responsibilities and even the functional departments within the many SOCs have changed, the core functions generally remain the same. These core func-tions, which range from managing essential resources to perform flight activities to the deci-sion-making required during irregular operations, include flight planning and following, assignment of aircraft, scheduling of maintenance, control of flight and aircraft movement, and scheduling and tracking of flight crews. And all of these func-tions can be optimally achieved using end-to-end integrated solutions.
Controlling Flight And Aircraft Movement
The foundation for an airline’s day of oper-ation is the flight schedule, a complex system designed to coordinate the published schedule with the required aircraft, crews and operational resources at various airports. Maintaining the integrity of the flight schedule is one of the SOC’s primary goals. The schedule is a complex linkage of aircraft, crews and passenger demand. An airline’s movement control is the system that oversees the reporting and monitoring of the actual flight times as compared to the flight schedule. Irregular operations cause changes to the flight times, and the movement control sys-tem is designed to ensure that disruptions are identified and corrective action is administered to quickly return the flight schedule to normal.
On any given day, events occur that prevent the schedule from operating as planned. These disruptions upset the timing of critical flight events. The more restrictive the schedule is, the more difficult it is for the SOC to manage the day-to-day operation. When a disruption to the flight schedule occurs, various departments have a vested interest in which solutions are selected. Crew scheduling requires a solution that reduces crew costs. Maintenance con-trol needs a solution that ensures scheduled maintenance is accomplished. Airport personnel must have a solution that accommodates their passengers as quickly as possible. It is the job of
the SOC to balance these competing interests and produce a system-wide solution rather than a local one.
Real-Time Management Of Pilots And Flight Attendants
Along with scheduling and monitoring the movement of aircraft, scheduling and managing flight crews is essential to an airline’s operational control success. Included in the end-to-end crew management needs of an airline are phases that address day-of-operations crew scheduling and crew tracking and recovery that are designed to ensure efficient deployment of crews at mini-mum cost while maintaining flight reliability and schedule integrity.
Crew scheduling actually begins prior to the day of operation and, like flight scheduling, is a very complex requirement. Within each aircraft crew complement are different crew member types as determined by the airline, and crew scheduling ensures that there are legal and quali-fied crew members assigned to each flight.
After crew assignments are made for each flight, the SOC crew controllers must track these crews throughout the operational day to continually be sure that flights have the correct, legal complements of crew members available. Crew controllers will also fill open positions and, if necessary, reassign crews when irregular operations occur.
In the SOC, the tasks of movement con-trol and crew management are closely related. Integration of data for these two areas provides many benefits when compared to systems that are managed separately. Decisions made by both of these functional groups have a direct impact on an airline’s operational performance and daily expenses.
Creating A Trip Plan For Each FlightA flight plan is developed for each flight
and is designed to ensure the operation of these flights adhere to all legal and safety require-ments. Included in the flight plan are the flight route, speeds, altitudes, flight times and airport details to include designated alternate airports. Dispatchers within the SOC check for airworthi-ness of the aircraft, weight limitations for each segment of the flight (from taxi to takeoff to enroute flight to landing), route and altitude limi-tations and restrictions, required fuel for opera-tion to destination, and contingency to alternates based on current and forecasted weather. In addition, flight planning considers the costs to the airline. Economical routes, altitudes and flight speeds are selected considering weather and air traffic control constraints. Factors related to flight schedules and connecting flights for passengers are considered in determining the flight plan. Fuel consumption is a key factor when determin-ing the flight plan and the decisions to tanker or ferry additional fuel.
It is essential that the flight planning system calculates the optimum level of mini-
mum fuel to reduce the amount of fuel onboard and reduce in-flight fuel burn and that there is justification when carrying additional fuel above the minimum. When additional fuel is carried above the minimum or legal amount required for a flight, more fuel is burned due to the extra weight. As a rule of thumb, every extra pound of weight (fuel in this case) burns approximately 3 percent extra fuel per hour.
In some cases, the opposite process is most cost effective — add more fuel than is needed to fly to the next destination, known as fuel ferrying or tankering. Airlines analyze fuel costs at each airport to which they fly, and then they calculate the costs of flying (tanker-ing) additional fuel from one airport to another versus the costs of buying fuel at the destination airport. The additional costs of carrying additional fuel can be lower than the price of purchasing additional fuel at the destination airport.
Following The Progress Of Each FlightFlight following is the real-time tracking of
flights from departure to arrival. SOC staff moni-tor the position of each flight at all times after departure. Flight following is necessary to enable the SOC to respond to any occurrence during the flight that may require communication with the flight crew. Estimated arrival times can be more accurately determined as a result of proper flight following, and destination airports and passen-gers can be updated when changes occur.
Adhering To The Aerodynamics Of Flight
Load planning, a critical safety element in flight operations, is the detailed process of gathering data on items to be loaded on the aircraft and calculating the load plan based on the aircraft’s basic operating empty weight or dry operating weight, meaning without fuel. Included in the items to be loaded are booked passengers, estimated bags, and mail and cargo for a particular flight leg, resulting in an estimated zero fuel weight when added to the operating empty weight. The load plan calculates the dis-tribution of cargo and passengers on the aircraft and ensures they are loaded within the proper center of gravity and aircraft weight limitations.
Since it is necessary for SOC load plan-ners to coordinate closely with other SOC staff and airport personnel, integration of systems enhances the productivity and effectiveness of load planners.
If the SOC is able to execute the day’s flight schedule, if sufficient resources are avail-able to operate the schedules, and if there are no disruptions, operation control can be a routine task. However, the disruptions that inevitably happen can cause local resource shortages that require corrective action to avoid unacceptable delays or flight cancellations.
While the SOC cannot prevent disrup-tions caused by external factors, the effective execution of business processes and systems
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determines how well an airline handles and recovers from external events. SOC personnel must react to the disruptions — whatever the magnitude — to keep the airline running as smoothly as possible. The challenge faced by SOC personnel is that disruptions are caused by many factors to include resource limitations involving aircraft, crew members and ground personnel, mechanicals, weather, and air traffic control restrictions. Minimizing the impact on passenger service and maintaining the integrity of the published flight schedule requires close cooperation and communication among the departments within the SOC. Often, the deci-sions that must be made in the SOC to return the airline to normal operation may be affected by factors that are diametrically opposed to one another. The decision to cancel a flight may cause an aircraft to be out of position for a scheduled overnight maintenance check. The decision to operate the flight on a delayed basis to await connecting passengers may cause crew members to miss their connecting flights, thus delaying those flights as well.
To make optimum decisions, the SOC must be able to provide the same data and situ-ations to all functional groups within the center. Integration is essential to achieving the opti-mum solution. Enhancing the level of systems integration enables SOC controllers to focus on the most critical tasks and problems at hand.
The ability of the SOC to manage and control an airline’s daily operations has been significantly improved with the advancements in information technology. Automation provides for improved exchange of information within the
SOC and between the SOC and external opera-tional groups. Data exchange is more efficient, response times are quicker and employee pro-ductivity is improved. The human factor, often a problem during critical periods, is improved as errors are lowered and redundant tasks are reduced. Data accuracy is more dependable and provides for a safer environment and better cus-tomer service. The ability to analyze problems rapidly and more efficiently allows for better decision making and more of a proactive rather than reactive posture.
Along with automation and information technology, further improved capabilities of the SOC are realized through the integration of the automated systems and solutions. Integration of SOC data during normal operations enables an airline to fly more efficiently and reduce costs associated with flight time, resources, fuel consumption, delays and cancellations. The enhanced operational control environment dis-tributes information to appropriate personnel, providing common situation awareness with which to make informed flight-related decisions. The automated systems in the SOC are fully integrated so changes in one are immediately reflected across the board. Data is entered once and shared throughout the SOC as well as forwarded to other affected areas such as maintenance and engineering, crew scheduling, and aircraft routing.
Integration reduces the risk of miscom-munication as SOC controllers and other air-line/airport employees have access to the same data that is in real time and updated with more current and factual information. The benefits
to the airline are more than just managing the SOC and the operations. In addition, there are realizable economic benefits associated with automation and integration — fuel savings, improved on-time performance, more effective recovery from irregular operations, improved payload through optimized load and flight plan-ning, and improved productivity for SOC control-lers and dispatchers.
Disruptions or irregular operations can occur in many forms and at any time. Integrated solutions in the SOC are essential during these times to help the SOC fulfill one of its primary roles — to quickly and efficiently return the airline to its routine schedule.
Many airlines today rely on manual sys-tems or automated, independent systems to manage irregular operations. The recovery time and the resulting costs are much greater for these airlines than for those that have inte-grated their systems and share the data and solutions among the entire SOC staff and external departments required to handle the disruptions. Relying on integrated systems, such as the complete, end-to-end suite of SOC systems offered by Sabre Airline Solutions®, provides SOC controllers and dispatchers real-time, easy access to information from various functional areas of the airline. It enables them to enter and maintain data more rapidly and efficiently. Reaction time to irregular operation situations is increased due to instant notification of events such as flight delays and cancella-tions. The additional time enables the SOC team to make crucial decisions to return to normal operations.
The room is now quiet. It is midnight, and the last large flight complex of the day has departed from the west coast. Several controllers and dispatchers are still on duty wrapping up the day. The low buzz is now calm as the shift ends. But the activities have not ended. A new group of people are settling in to begin the planning of the next day’s operation. Schedules are reviewed, aircraft assignments are matched to the schedule and the aircraft location, maintenance logs are checked, weather forecast reviewed for potential problems, dispatch desk assignments are made, and preliminary load plans have been developed based on preliminary passenger loads. In just a few short hours, the early morning originators will be scheduled for departure and a new operational day will be underway. The room will be buzzing again, and the airline operation will be under con-trol thanks to the system operations control cen-ter, its people and its integrated solutions. a
Dave Roberts is senior principal of strategic planning, airline and
flight operations for Sabre Airline Solutions. He can be contacted
Having access to real-time information enables SOC personnel to effectively respond to unexpected schedule disruptions, making it possible for airlines to quickly recover with the least impact on customers.
Photo by shutterstock.com
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Blending Models
From an initial skeptical status to a now-well-regarded position in the air-line industry, the success and popu-
larity of low-cost carriers in recent years has generally been well documented.
Allowing the masses to conveniently travel the globe at affordable prices, low-cost carriers have maintained continuous growth.
But after more than a decade of multiple LCC success stories, deviations from the original low-cost-carrier business model have become apparent. In fact, few of today’s low-cost carriers are “pure.” Most are now considered “hybrid” carri-ers — operating an entirely new business model that is essentially a blend of pure LCC elements with those of the more tra-ditional network carrier.
Many in the air travel industry hear-ken back to the early days of Southwest Airlines as the birth of the LCC business model — but Pacific Southwest Airlines in 1949 was actually the first U.S. air carrier to use the low-cost airline title.
Since 1971 — when Southwest Airlines initiated service — the carrier has operated under the low-cost model with enormous success. In fact, the carrier has sustained profitability almost continuously ever since its inception.
Meanwhile, in Europe, where entrance of low-cost carriers into the larger airline equation is much more recent, expansion of the LCC business model generally coincided with the final deregula-tion of the air passenger market during the 1990s.
Genuine low-cost operations in Europe actually began with the founding of Irish-based Ryanair in 1985, which openly used Southwest Airlines as its role model and was then followed 10 years later by easyJet.
Low-cost carriers entered Asia/Pacific in 2000 — led by operators such as Malaysia’s AirAsia and Australia’s Virgin Blue.
In 2006, new low-cost carriers were introduced in Saudi Arabia and Mexico.
During the past decade, low-cost car-riers have proven the most profitable and dynamic segment of the airline industry. Low-cost airlines around the globe — includ-ing Southwest Airlines, Ryanair and AirAsia — have shown consistent profitability dur-
By Christine Kretschmar | Ascend Contributor
Low-cost carrier growth rate around the world has increased significantly during the last several years, specifically in Asia/Pacific and Europe. Many of these carriers, however, are adopting a hybrid model to better compete with each other and network carriers.
Low-Cost Carrier Growth
Num
ber o
f Low
-cos
t car
riers
Africa Asia/Pacific Europe Latin America/ Middle East North America
Number in 2000 Number in 2006/07
0
7
12
44 43
14
1
9
4
8
16
50
45
40
35
30
25
20
15
10
5
0Caribbean
While the low-cost carrier model has proven quite successful during the past several years, even the purest of LCCs are forced to implement characteristics of network carriers to gain a broader passenger base and expand market reach.
0
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ing times when more-established competi-tors have struggled to remain solvent.
In raw numbers, Asia/Pacific and Europe currently have the highest popula-tions of low-cost carriers.
In terms of passengers boarded since benchmark year 2000, Latin America has increased dramatically compared to other major global regions, with an eye-popping 4,045 percent increase. Asia/Pacific, during the same period, has realized a 1,901 per-cent increase, and in Europe there’s been a 333 percent increase.
As low-cost carriers have grown to the point at which they now carry about 25 per-cent of the world’s airline passengers, many LCCs have found it necessary to modify their business models to take full advantage of market opportunities.
Different hybrid business models have adopted a variety of attributes from tradi-tional network carriers. The top 10 include: Multiple aircraft types, Classes of service, International service, Long-haul or intercontinental service, Interline agreements, Codeshare agreements, Global distribution system participation, Connecting service, Ticketing procedures (either the issuance of accountable paper tickets or International Air Transport Association standard elec-tronic tickets),
Multiple fares.Based on a recent study where Sabre
Airline Solutions® considered 540 of the largest global carriers, 123 are commonly referred to either by the airline industry or by themselves as “low-cost carriers.” On the basis of how many points an airline scored with regard to the 10 key attributes, each of the 123 carriers was characterized as belonging to any of three sub-categories: Pure low-cost — This represents an airline that basically remains true to its original LCC model, which scores zero to two points according to the stated comparative attributes (that is, if an attribute applies to a low-cost carrier, that airline gets a score of 1 on that attribute; if the attribute does not apply, the airline’s score on that attri-bute is zero).
Hybrid — Carriers that scored between three and seven points are characterized as belonging to a new “hybrid” segment of low-cost carriers.
Almost-network — An airline that scored from eight to 10 points is characterized as an “almost-network” carrier.
In addition, low-cost carriers in mature markets compete with each other more fervently on route and price. To extend their opportunity to grow, they have to find new ways to diversify. Normally, low-cost carriers can grow in any of three ways: 1. Increasing their network by entering new
markets,2. Expanding their customer base (attracting
business travelers),3. Pursuing mergers and acquisitions.
Following one of these growth pos-sibilities generally means an airline is moving
away from the pure low-cost-carrier model to a more complex business plan and operat-ing environment.
Based on the analysis of 123 low-cost carriers worldwide, 41 percent of those low-cost carriers remained true to their pure LCC business model. Meanwhile, 52 percent moved toward a “hybrid” business model,
and 7 percent demonstrated characteristics that place them within the more traditional “network” business model.
The study revealed that a total of 59 percent of the 123 low-cost carriers have broken the commonly assumed LCC oper-ating parameters — pure LCC parameters such as point-to-point networks, single aircraft types and simple fares with no interline or codeshare agreements. That means 59 percent of the 123 airlines have introduced complexity into their once-pure LCC model.
In comparing the study results with actual passenger numbers, larger airlines (among the 123 in the original low-cost-carrier group) have generally been the ones to adopt more complexity, with 65 percent of all LCC passengers traveling on a, now, hybrid carrier.
Numerically, in fact, hybrid carriers had twice the average passenger volume com-pared to the pure low-cost carriers. Larger airlines are more likely to adopt a hybrid model, at least, in part, to feed their quest for more robust growth.
Further results of the study show that the hybrid attributes that are most likely to be adopted by low-cost carriers are international service, codesharing, connecting service, global distribution systems placement and multiple fare offers. (There is little domestic airline service in Europe, so in evaluating European low-cost carriers, the study partly discounted the “international” attribute.)
Regarding the top-10 defined attri-butes, taken as a whole, not only have they been widely adopted among LCCs, but it is clear that the largest LCCs are most likely to
adopt them, supporting the hypothesis that a move toward hybrid status is a function of maturity and growth.
In the more mature markets of North America and Europe, airlines based on the LCC business model are substantially larger in terms of passengers carried than low-cost carriers in other regions.
Hybrid carriers had twice the average passenger volume compared to the pure low-cost carriers. Larger airlines are more likely to adopt a hybrid model, at least, in part, to feed their quest for more robust growth.
HigHlight
Of the 123 low-cost carriers that were recently studied, 50 percent have acquired more complexity and moved to a hybrid model and now carry more than 60 percent of all LCC passengers.
Percent of airlines studied
Passengers traveled
Moving To Hybrid
Perc
enta
ge
Pure LCC Hybrid Almost network carrier
70%
60%
50%
40%
30%
20%
10%
0%
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These larger low-cost carriers in North America and Europe also have an average hybrid score that is significantly higher than LCCs in other regions — lending further sup-port to the idea that increased complexity results from increased maturity and growth.
Of the 123 low-cost carriers identified in the study, North America’s airlines carry an average of almost 10 million passengers each and have an average hybrid score of 3.9.
Europe has significantly more low-cost carriers, serving fewer than half as many passengers per airline as their North American equivalents. The average hybrid score in Europe is higher, but this higher score can be chalked up to the near non-existence of purely domestic airlines in Europe. Accounting for and adjusting this factor yields an average hybrid score in Europe of about 3.5.
Latin America and Asia/Pacific are at earlier stages of development of low-cost models — as reflected in both the average passenger numbers and the average hybrid score for these regions.
Africa and the Middle East, where low-cost carriers are still in their infan-cy, have the smallest airlines among the world’s low-cost carriers. The low-cost carriers in Africa and the Middle East also remain closest to the original pure LCC business model.
In examining the adoption of new business models per region, it becomes evident that carriers in mature markets are more likely to adopt a hybrid business model and/or an “almost-network-carrier” model.
North America exhibits the lowest percentage (25 percent) of pure LCC mod-els, while the other 75 percent of the North American low-cost-carrier market has moved toward the hybrid business model — but no low-cost carriers in North America have further diverted to almost-network carriers.
The market research also showed that the average ticket value for a hybrid carrier is 88 percent higher than that for a pure low-cost carrier (respectively, US$179 ver-sus US$95 per passenger segment), indicat-ing that hybrid carriers may be able to gain higher yields than pure low-cost carriers.
This extensive research project was intended to investigate and quantify the movement of pure low-cost carriers to more complex business models.
It appears that the move toward hybridization follows from the aspiration of any particular low-cost carrier for further growth. With significant growth comes the need for a more sophisticated technology provider.
The business model of the pure low-cost carrier is less complex than that of conventional airlines, and low-cost carriers’
needs have been largely met by specialist suppliers of very simple solutions acquired during the airlines’ infancies.
Research indicates that this picture is undergoing a metamorphosis in the evolu-tion of low-cost carriers into hybrids that incorporate features that would once have been strictly the preserve of full-service airlines. And as low-cost carriers continue to modify, it is likely that their requirements for IT solutions will also become more sophisticated.
Vendors wishing to properly serve this new breed of low-cost carrier will be required to provide more sophisticated man-agement practices and IT solutions, which may not be available from the current estab-lished suppliers to the LCC sector.
Based on the recent study, it is not only apparent that the trend among low-cost carriers toward hybridization is well estab-lished, but that the hybrid sub-category is likely to continue to grow as the low-cost-carrier market sector matures, competes and consolidates. a
Christine Kretschmar is regional marketing manager in Europe for Sabre Airline Solutions. She can be contacted
Low-cost carriers, when transforming to a hybrid model, have adopted several characteristics of traditional network carriers, most commonly, international service, codesharing, connecting service, GDS placement and multiple fares.
80%
70%
60%
50%
40%
30%
20%
10%
0%
Perc
enta
ge o
f all
low
-cos
t airl
ines
Multiple fares available
at any time
Tickets
GDS distribution
Connecting service
Codeshare
Interline
Long haul
International services
Multiple classes of service
Multiple aircraft types
Airlines Passenger numbers
Adoption Of Hybrid Characteristics
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“Green”er Skies
The trend to “go green” continues to build momentum as companies, includ-ing airlines, expand their green, eco-
friendly offerings in the name of efficiency and the environment. But as concerns for carbon emissions mount, the aviation indus-try has increasingly come under scrutiny despite gains in fuel efficiency and mea-surable reductions of CO2 emissions. As next-generation aircraft and technology take flight, a more efficient sky has the potential to add to the “green” equation — reducing
carbon emissions while enabling airlines to support increased customer traffic growth expected during the next several decades. Aviation Industry And Green Policy The aviation industry accounts for about 2 percent of carbon emissions — a small figure compared to the total footprint of transportation (13.5 percent) or the total output from electricity and heat (24.6 per-cent). Nevertheless, the industry continues to be targeted as a candidate for emissions
regulation and has struggled to find a bal-ance between what the industry deems realistic and what some governments have proposed or implemented. In the United States, the proposed Lieberman-Warner Bill would gradually cap greenhouse gas emissions to 1990 levels and, if passed, would affect U.S. transportation and other industries. More pressing, the decision by the European Union to include aviation in its Emissions Trading Scheme, or ETS, beginning in 2011 will also introduce
Despite airlines’ countless efforts to help “clean up” the skies, they are continually cited for leaving the most damaging affects on the environment.
By Benjamin Mussler | Ascend Contributor
Illustration by shutterstock.com
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stricter caps on average emissions for not only domestic but international flights to and from E.U. airports as well.
Critics, such as the Association of European Airlines, argue that the measures proposed by the European Union represent “a massive blow to the viability and com-petitiveness of the European airline indus-try.” AEA Secretary General Ulrich Schulte-Strathaus added that the action represents “political compromises more than it does the reality of the environmental challenge.”
This decision is being opposed by other industry groups as well. The International Air Transport Association also rebuked the decision.
“Climate change is a serious problem and hypocrisy is not the answer,” said IATA Director General and Chief Executive Officer Giovanni Bisignani. “We could be saving 12 million tons of CO2 annually with an effective ‘single European sky.’ Instead of making that a reality, Europe is single-mindedly pursuing a political agenda of emissions trading that does nothing to improve environmental performance. I don’t see the European Parliament planting many trees, but somehow they have gotten lost in the woods.”
As recently as 2006, Ascend reported how certain groups in the industry were opposed to the charges that airlines had negatively impacted the environment and possibly contributed to global warming. Today, the opinion of much of the industry is shifting to one of increased responsibility and methodical approaches to sustainability. Economic measures are part of the discus-sion that many industry groups are currently holding over aviation’s role in the future of greenhouse gas management. But manda-tory measures such as those being debated today in the European Union are seen by organizations such as the Air Transport Association as “not necessary” arguing that they “will divert funds away from aviation’s ability to continue to invest in the technological and operational improvements through which we have achieved such great gains in fuel efficiency and emissions reduction.”
Similarly, IATA’s four-pillar strategy to address climate change suggests that eco-nomic measures should be voluntary. Its strategy, which was accepted by all mem-ber states of the International Civil Aviation Organization last September, advocates that economic measures should be used to “boost the research, development and deployment of new technologies rather than as a tool to suppress demand.” Moreover, IATA suggests that in addition to the economic pillar, the industry has an opportunity to work together to find improvements in the areas of technol-ogy, operations and infrastructure, including:
Technology — Advances in alternative fuels, airframe, engine and traffic manage-ment. IATA is working with manufacturers and fuel suppliers to develop short-, medi-um- and long-term measures. Short-term advances include improvements to existing fleets such as winglets that have been shown to save significant amounts of fuel and hence CO2 emissions as well.
Operations — The implementation of more efficient aircraft into carrier fleets. This will be measured in part by a stricter fuel-efficiency goal that IATA passed last year that requires a reduction in fuel consump-tion by at least 25 percent per revenue ton kilometer by 2020, as measured at 2005 levels. Once achieved, IATA estimates that this will save 345 million tons of CO2 during that period.
Infrastructure — Open- and single-sky agreements and improved air space man-agement. IATA recognizes that such improvements present a major opportu-nity for fuel and CO2 reductions in the near term. To achieve this pillar, IATA suggests that “governments must adopt policies and remove obstacles to allow airspace and airport inefficiencies to be cut in half over the next five years.”
Infrastructure emerges as one of the key factors in the aviation industry’s success in achieving fuel- and emission-reduction goals and meeting increased pas-senger volume. Much of the potential fuel savings that improves the efficiency of aircraft comes in the form of more efficient engines and design. But a great deal of this efficiency relies on the carrier’s abil-ity to fly the most efficient route as well as minimize delays and time spent on the runway and in the air waiting to land. According to the Intergovernmental Panel on Climate Change, addressing airspace and airport inefficiencies, governments and infrastructure providers can eliminate up to 12 percent of CO2 emissions from avia-tion. IATA approximations suggest that the savings could be even greater; estimating the industry could save 35 million tons of CO2 emissions per year if obstacles were removed.
Some carriers have taken this mat-ter into to their own hands. Delta Air Lines has demonstrated a successful utilization of global positioning system satellites to allow aircraft to take off at its Atlanta, Georgia, hub an average of three min-utes faster than radar previously allowed. The U.S. Federal Aviation Administration approves of this process and understands the need to move away from radar-based air traffic control — encouraging airlines to innovate.
Other regions of the world are also investing heavily in improved air traffic control systems. The Civil Aviation Administration of China purchased a sec-ondary radar system that will allow the Beijing Capital International Airport to safely cut the distance between landings through the use of Automated Dependent Surveillance-Broadcast, or ADS-B. The system cuts the lag time between radar beacon positional updates from 14 to 36 seconds down to just one second. The result is far fewer coverage gaps that equate to faster, safer landings.
As focus on emissions, fuel con-sumption and improvements to air traffic control continue to gain attention, more
than ever before, the aviation industry has an opportunity to work together with sup-pliers, governments and customers to find solutions to the issues that will ensure a sustainable future. Time will be the ulti-mate judge about the impact today’s pro-posed measures and mandates will have on the industry. But as can be gleaned by the efforts of individual carriers and by industry organizations — aviation will con-tinue to be on the forefront of develop-ment and implementation of technology that ensures efficient travel for generations to come. a
Ben Mussler is product manager of the Sabre® Community Portal for
Sabre Holdings®. He can be contacted at [email protected].
“Climate change is a serious problem and hypocrisy is not the answer.”
— Giovanni Bisignani, IATA Director General and Chief Executive Officer
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THE BARBARIANS ARE STILL
AT THE
GATESSome carriers may continue to be targets of private equity firms as pressure for privatization and consolidation of airlines unfolds this year.
By Peter Berdy | Ascend Contributor
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Private equity has a colorful history, first gaining prominence during the junk-bond and leveraged buy-out heydays in the
1980s. Most notable was the case of RJR Nabisco. In 1988, RJR Nabisco was purchased by private equity firm Kohlberg Kravis Roberts & Co. (now called KKR), in what is the second-largest buy-out in history (the 2007 buy-out of the Texas-based utilities giant, TXU, by KKR, TPG Capital and Goldman Sachs is the largest).
At that time, the use of a leveraged buy-out to acquire RJR Nabisco along with the aggressive pursuit by the private equity principals was seen as an ominous threat to the free capitalist structure. The men behind these plays were termed “corporate raiders” and “barbarians at the gate.” (The story was written in the book called, Barbarians at the Gate, by Bryan Burrough and John Helyar). The RJR transaction also benefited the investment bankers and lawyers who advised KKR. These advisors walked away with more than US$1 billion in fees.
During the 1980s, high-profile airline pur-suits included TWA (featuring Frank Lorenzo and Carl Icahn) and Continental (with Frank Lorenzo once again, and David Bonderman of Texas Pacific Group).
The Business ModelOnce a targeted company was acquired
by the private equity firm, the firm would restructure it, implement a series of cost-cutting measures and usually sell off underper-forming assets. The new “leaner and more-efficient” company could then be resold, often at significant return on investment.
Now, 20 years later, the image of private equity has changed dramatically. The private equity “barbarians” are now shrewd global investment managers and specialists whose financial backers are looking for high ROI from acquisitions, spin-offs, re-financings and
restructuring businesses. They also help bail out ailing companies by pro-
viding management services, guid-
ance and a d v i c e as well as look-ing for ways to increase s h a r e -h o l d e r v a l u e .
P r i v a t e equity has
become a fully fledged industry. Private equity firms
made headlines in the airline industry last year. They were identified as firms to bail
out prominent U.S. and European carriers that were in financial trouble during the year.
“We believe UAL is a potential private equity play, given the US$4 billion we esti-mate it can earn in free cash flow over the next four years,” Daniel McKenzie of Credit Suisse told BusinessWeek. McKenzie said such groups “could take UAL private today, collect dividends and go public when the industry consolidates, thereby capturing the valuation arbitrage.”
Private equity firms also rediscovered proven ways to unleash hidden shareholder value by attempting to spin off undervalued businesses within the airline’s portfolio, such as frequent flyer programs and regional feeder divisions.
Opportunistic Focus Of Private Equity
Typical private equity opportunities, including those in aviation, fall into one of several categories: Leveraged buyouts and go-private transactions,
Spin-offs and carve-outs from larger companies,
Restructuring and recapitalization, Structured minority investments and strategic stakes,
Financing acquisitions, Venture capital for new enterprises.
As “venture capitalists,” private equity firms may invest to create a new company or expand a smaller company that has undevel-oped or a strong potential to grow revenues. For example, Apax Partners provided financial backing for the creation of Vueling Airlines, a Spanish low-cost carrier that was created in 2004. Apax Partners initially had a 40 percent interest in Vueling Airlines and sold its remain-
ing investment last year — around the time Apax Partners was rumored to be raising cash for a stake in Iberia.
TPG’s investment in Ryanair represents another start-up example. Ryanair President Michael O’Leary said, “He [Bonderman] got 20 percent for pretty much nothing. Sold us in ’97 and made a fortune.” The US$42 million that Bonderman and his partners invested in Ryanair’s initial public offering of stock increased sevenfold.
Private equity firms invest in buy-out situations where they acquire a significant por-tion or a majority control in a mature company. Buy-outs usually involve a change of owner-ship. Some examples in 2007 included TPG’s unsuccessful attempts at Qantas and Iberia; and both TPG’s and Matlin-Patterson’s unsuc-cessful bids for Alitalia. Look for private equity firms to play a role in the coming years as speculation and action swirls around mergers and consolidation in the airline business.
Unlocking ValueBlackstone Group got a quick return on
invested capital after it bought Travelport — a reservations conglomerate that owns a major-ity stake in Orbitz Worldwide Inc. and Galileo and has agreed to buy Worldspan. Blackstone bought Travelport from Cendant in 2006, using US$1.1 billion in debt to fund the purchase. Seven months after the deal with Cendant closed, Blackstone received a dividend equal to its debt. The company went on to file an initial public offering for Travelport last December. The IPO could raise US$2 billion.
A go-private example is Sabre Holdings®, the publicly traded firm known for providing software solutions and consulting services to the travel industry that was purchased last year by TPG and Silverlake.
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Frequent Flyer Program Value
AirlineEstimated Value of FFP
Marketcapitalization of parent
Air Canada C$4.3 billion C$2.9 billion
United Airlines US$7.5 billion US$3.4 billion
Northwest Airlines US$6.4 billion US$2.9 billion
American Airlines US$5.7 billion US$3.3 billion
British Airways £1.0 billion £3.4 billion
Air France/KLM €2.4 billion €6.6 billion
Lufthansa German Airlines €2.8 billion €8.0 billion
Source: Bear, Sterns and Morgan Stanley, January 2008
Private equity firms have identified frequent flyer programs as hidden assets that can potentially be far more valuable to the firm if they were separated from the airline business.
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Private Equity MoneyDuring the last two decades, the global
private equity market has experienced explo-sive growth. New sources of liquidity created from rocketing oil prices and the developing Asian economies, among others, has been put into the hands of private equity firms.
Private equity has become an invest-ment option for many of the world’s largest investors, including pension funds, insurance companies, banks and university endowments. These institutions are committing an increas-ing proportion of their capital to private equity, which often out performs more-established investment choices available.
Private Equity InvestmentsPrivate equity firms generally receive a
return on their investments through an IPO, a sale or merger of the company they control, or a recapitalization. Their offering of unlisted securities may be sold directly to investors through a private offering or to a private equity fund that collects contributions from smaller investors to create a capital pool.
Most private equity funds require signifi-cant initial investment, usually US$1 million or more, plus further investment for the first few years of the fund.
Investments in limited partnerships, the dominant form of private equity investments, are typically illiquid — it is very difficult to gain access to money that is tied up in these long-term investments. Distributions are made only when investments are converted to cash. Limited partners typically have no right to demand that sales be made.
Private equity firms can provide high returns, with the best private managers sig-nificantly outperforming the public markets. Private equity fund investments are for those who can afford to have their capital locked in for long periods of time and who are able to risk losing significant amounts of money. This is balanced by the potential benefits of annual returns that range up to 30 percent for suc-cessful funds.
Given the risks associated with private equity investments, investors can lose all their investments if the fund invests in fail-ing companies. The risk of loss of capital is typically higher in venture capital funds, which invest in companies during the earliest phases of their development, and lower in mezzanine capital funds, which provide interim invest-ments to companies that have already proven their viability but have yet to raise money from public markets.
Major Private Equity Players The majority of investment in private
equity funds comes from institutional investors including public pension funds and banks and financial institutions, which, together, provided 40 percent of all commitments made glob-
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Photo by shutterstock.com
industry
TPG, one of the most prominent private equity firms in the world, has invested in several air-lines, including Continental Airlines, Southwest Airlines, Tiger Airways and Ryanair, giving it the most experience in the airline industry.
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Photo by shutterstock.comPhoto courtesy of Boeing
Photo by shutterstock.com
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ally according to data from London-based Private Equity Intelligence Ltd. Other promi-nent groups investing in private equity include corporate pension plans, insurance companies, endowments, family offices and foundations.
Last year, Private Equity International magazine published a ranking of the larg-est private equity firms in the world. The Carlyle Group was ranked the largest private equity firm, followed by KKR, Goldman Sachs Principal Investment Area, The Blackstone Group, TPG, Permira, Apax Partners, Bain Capital, Providence Equity Partners and CVC Capital Partners. The sector also includes multi-billion-dollar portfolios managed by Cerberus Capital Management, Summit Partners, Golden Gate Capital, Hellman & Friedman, and Equity Capital Markets Group, among others. Several of these firms and smaller private equity players, such as Yucaipa and Ranch Capital, have invested in the avia-tion sector.
Investment TargetsPrivate equity firms share common
themes to their strategies, objectives and approaches to investment: Identify out-of-favor, under-appreciated industries and businesses, and undervalued companies,
Pursue opportunities to change the structure and profit potential of specific industry sec-tors through consolidation,
Avoid short-term investments and trades; private equity firms are in it for the long haul.
While these may be stated objectives, private equity firms also are interested in mak-ing a quick return on investment. Many private equity firms play an active role in managing their investments, and there are certainly some common threads among the key players: Take a long-term view; be prepared to work with management through the inevitable ups and downs of business life to achieve objec-tives,
Ensure there is active board participation, Provide expert resources and a network of advisors consisting of skilled former senior corporate executives,
Work with management of the company and outside advisors on a plan to enhance the company’s operations.
Obtaining financing is an important offering to a company about to be acquired or in need of financial assistance. Private equity firms offer: Financing expertise to lower the cost of cap-ital, reduce risk and uncover hidden assets,
Use of efficiencies of scale from invest-ments across companies in an industry, such as combining purchasing power of goods and services at lower prices to achieve savings,
Prudent capital investment, research and development, new product marketing, tal-ent development, improved operations, and appropriate strategic acquisitions.
The degree of involvement is also likely to be related to the size of the investment made by the private equity firm.
Private Equity Moves To Aviation Industry
With the airline industry posting profits in 2006 and 2007 amid strong demand and leaner costs as well as a stable outlook, airlines were potential targets for private equity firms.
“They’ve significantly picked up their interest from, say, five years ago,” said John Luth, chief executive of transport-focused investment bank Seabury Group. “They’re really open for business both here in the United States and elsewhere.”
North AmericaLast year, American Airlines’ parent
AMR Corp. came under pressure by its third-largest shareholder, the Icelandic investment firm FL Group. The investor wrote to AMR’s board urging it to spin off American Airlines’ frequent flyer program and make other dis-posals. Hannes Smarason, FL Group chief executive, said the carrier was burdened by a cluttered corporate structure that needed slimming down.
“There is no question that they have not been performing as well as they could have,” Smarason told The Guardian last September. “If you have too complicated a structure and no one is responsible, then you have a problem and you need to clean it up.”
FL Group said AMR’s structure mud-died the profitability of the company’s con-stituent parts, a situation compounded by the fact that it does not publish details on individual units. Fort Worth, Texas-based American Airlines warned that third-quarter revenue growth would lag behind some rivals and rising fuel costs would affect earn-ings for the rest of the year.
FL Group had a history of investing in airlines, and at one point last year, it had an investment portfolio of approximately 25 percent of its assets in the industry. The FL Group has made a series of success-ful investments including the acquisition of Sterling Airlines, Scandinavia’s largest low-cost airline, with its head office in Denmark, building a 23 percent stake in Finnair, the Finnish flag carrier. FL Group was the former sole owner of Icelandair, the Icelandic flag carrier and former owner of a 16.9 percent stake in easyJet.
On its easyJet stake, FL Group made a profit of €140 million (US$207 million) when it was sold in April 2006. It also made a profit
of €305 million (US$452 million) on its stake in Icelandair in 2006.
EuropeIn 2007, European Union transport min-
isters approved an open-skies agreement that went into effect in March. The agreement allows European carriers to operate flights to the United States that originate in cities out-side their home countries. The agreement also makes it easier for European carriers to acquire airlines in other E.U. countries.
It was long thought that changes brought about by open skies would trigger consolidation among airlines in Europe. Some of the larger or financially weak airlines have been considered to be prime candidates for privatization and takeover, including Iberia and Alitalia, as well as state airlines Olympic and TAP.
Iberia has undergone a major restructur-ing in recent years. Its extensive Latin American route system, “would make a good network fit” for any of Europe’s three bigger carriers, according to Andrew David Lobbenberg, a London analyst with ABN AMRO.
A consortium lead by British Airways and TPG (BA owned 10 percent of the Spanish carrier) made an initial bid for Iberia, and then withdrew, citing that “a bid under friendly terms was no longer possible,” according to the Nov. 28 issue of ATW Daily News.
In Italy, private equity firms TPG and Matlin Patterson expressed interest to bid during the first round to purchase the Italian government’s shares in Alitalia. However, the government’s rules of procedure were consid-ered onerous enough that they, as well as all the other bidders, withdrew their offers.
Asia/PacificIn November 2006, Australia’s national
flag carrier, Qantas, announced that it was the target of a takeover bid by a private equity consortium lead by TPG and the Australian bank, Macquarie. The deal was structured to give TPG about 15 percent voting interest and 25 percent of its earnings. The bid failed in April 2007 when the consortium could not gain the percent of shares needed to complete the takeover.
Texas Pacific GroupTPG has the most experience in the
airline industry among private equity firms. Its past and present investments in aviation include Continental Airlines, America West, Southwest Airlines, Ryanair, Tiger Airways, Midwest Air Group, Sabre Holdings, Hotwire and Gate Gourmet. Last year, TPG made bids to acquire Iberia, Alitalia and Qantas. One of TPG’s founders, David Bonderman, is currently chairman of Ryanair.
TPG’s buy-out of Continental Airlines in 1993 and then America West Airlines in 1994 became models for private equity investment.
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TPG’s strategy was to invest in an airline emerging from bankruptcy during a cyclical downturn, oversee the carrier’s turnaround and then cash out after the economy and company had recovered.
At the time TPG, which was named, “Best Global Firm of the Year” in 2006 by Euromoney Magazine, stepped in, Continental Airlines was ailing in a weak U.S. economy. The airline had been plagued with labor and cus-tomer service challenges. TPG’s plan included bringing in a new management team that focused on improving customer yield, aircraft utilization and financial performance. It took rapid action to close unprofitable routes, shut down the airline’s low-cost division (CALite) and reduce maintenance costs. The private equity firm addressed one of the primary cus-tomer complaints, moving Continental Airlines from consistently near the bottom of the on-time departures table to consistently in the top three by creating financial incentives for front-line staff. At the same time, TPG
built up the carrier’s Houston, Texas; Newark, New Jersey; and Cleveland, Ohio, hubs and upgraded the fleet.
TPG’s founders spent years on its turnaround. Eventually, it was rewarded with extraordinary returns on investment. Thanks to a clever purchasing arrangement, TPG’s partnership controlled Continental Airlines, although it owned only 14 percent of its stock. Continental’s share price, once as low as US$2, soared to US$65 by 1998.
“It was a huge gamble with an even larger payoff in an industry where net profits are close to zero,” said Continental Airlines board member George Parker.
After eight years, TPG’s total return on its US$66 million investment was nearly US$700 million.
TPG’s partners get high grades from airline insiders for its knowledge of the indus-try and eye for executive talent. Before any major investment, the company’s executives walk the halls of the business, checking out
employee morale and even the photos on executives’ walls.
Bonderman and his partners believe this is prime time for long-term-value investors.
“There’s a lot of trouble in the world, but it is also a potential time of value,” said TPG co-founder James Coulter. “As investors, we like this environment better than the bubble. It may stay rough for a while, but we’re focused five years out.”
Some of TPG’s recent targets have been challenging. On the success side, TPG and Northwest Airlines acquired Midwest Airlines earlier this year (see cover story on page 36), in the airline’s effort to stave off an unfriendly takeover bid by AirTran Airways. However, there were unsuccessful bids that were publicized last year, such as TPG’s deal in conjunction with Australia’s Macquarie Bank for Qantas Airways, which was rejected by the Australian carrier’s own-ers in March 2007, as well as the attempted bids on Iberia and Alitalia.
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Private Equity Firm Aviation Acquisition or Investment Notes
Carlyle Group Acquired ARINC; July 2007ARINC provides communications services to airlines
Kohlberg Kravis Roberts (KKR) Sale of MRO company, ACTS (Aero Technical Support and Services Holdings)
ACTS is part of ACE Holdings, owner of Air Canada
Goldman Sachs Considered PE investment in business-class airline
The Blackstone Group Purchased Cendant’s Travelport company for US$4.3 billion
Apax Partners PE funds to start Spain’s LCC, Vueling in 2004 Considered bid for Iberia
FL Group AMR, IcelandAir, Finnair, Sterling Airlines, easyJet
OnexAttempted hostile takeover of Air Canada/Canadian merger; teamed with Airline Partners Australia in takeover bid for Qantas
Cerberus Capital Management ACE Holdings, privatization of Debis AirFinance
Indigo Partners LLC Tiger Airways, Spirit Airlines
Wexford Capital LLC Republic Airways
Yucaipa 2005 Aloha Airlines
Ranch Capital LLC Hawaiian Holdings
MatlinPatterson Global Advisers LLCGlobal Aero Logistics (ATA Airlines, North American Airlines and World Airways); Owned and sold VarigLog logistics business of Varig
Bid for Alitalia
TPGContinental, AmericaWest, Southwest, Ryanair, Gate Gourmet, Sabre Holdings, Hotwire, Midwest Air Group, Tiger Airways
Bids in 2007 for Qantas, Iberia, Alitalia
Silverlake Partners Sabre Holdings partnered with TPG
Several of the world’s top private equity firms have invested in travel-related companies, and many of them have current bids on the table to acquire additional businesses.
Private Equity Investments
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FFP Spin-OffsPrivate equity firms and investors have
found that airlines may have hidden assets that could be worth as much as or more than the carriers themselves. The crown jewels — airlines’ frequent flyer programs.
The underlying concept to this hidden wealth is that a stand-alone frequent-flyer business, with its high margins, good growth prospects and steady cash flows, would trade at a much greater multiple to earnings when separated from the airline business.
The theory is relatively simple: Unlike airlines, loyalty programs tend to be stable, cash-producing businesses with low fixed costs and substantial growth opportunities. Separating them from their riskier airline gives investors direct access to the busi-ness, resulting in a higher valuation.
The airline would benefit by getting cash from the FFP sale, and it could still collect profits by keeping a share in the program while the FFP grows. Once out of the airline’s control, mileage programs could move outside the air travel industry and add retail partners and attract more members.
The success story and model for deter-mining FFP value is Air Canada’s Aeroplan. Prior to 2002, Aeroplan was integrated with Air Canada. Aeroplan became a wholly owned, limited partnership of Air Canada in 2002. It was spun off in an initial public offering in 2005 and had an initial valuation of C$2 billion (US$ 1.9 billion). It has since doubled in value to about C$4.3 billion (US$ 4.2 billion) compared with the market cap of C$ 2.9 billion (US$ 2.8 billion) for ACE, Air Canada’s holding company.
“Creating a separate structure made Aeroplan a better business with more freedom to add partners and grow,” said Karl Moore, a professor at McGill University in Montreal who worked with the mileage plan’s executives on business school projects. “It unleashed an enormous amount of capital that they [ACE] wouldn’t have otherwise had.”
Qantas Airways has met with Aeroplan to discuss how to release value from its rewards plans. The carrier may find a buyer in Aeroplan, and the frequent flyer program’s chief executive officer, Rupert Duchesne, said in an interview in last August that Aeroplan was in talks to buy stakes in other loyalty programs.
American Airlines’ FFP, AAdvantage, which could be worth as much as US$5.7 bil-lion, according to a Morgan Stanley estimate, was under pressure to be sold last year. That amount is about the same as the market value of parent company, AMR.
FL Group, which at one point owned 9.1 percent of AMR, urged American Airlines to sell its frequent-flyer program in an open letter to the AMR board last September.
“This has the potential to become a sustainable source of value creation if it’s
done in the right way,” said Smarason, the FL Group’s chief executive. In the letter to AMR’s board, Smarason said, “… our conservative analysis indicates the unbun-dling of AAdvantage could lead to value creation of US$4 billion.”
This was based on FL Group’s esti-mate of US$6 billion business valuation offset against a cost of US$2 billion to de-couple from American Airlines. FL Group also encouraged AMR to sell its feeder business, American Eagle.
Citi analyst Andrew Light said it would be “much easier” to divest American Eagle than AAdvantage because the car-rier is run as a separate entity. Similarly, airlines such as Continental Airlines, Delta Air Lines and Northwest Airlines have spun off or sold regional carriers.
“As with Air Canada’s Aeroplan, stripping out the frequent flyer program would leave a barely profitable, volatile and poorly valued core airline,” Light said.
“Spinning out the mileage programs would be very beneficial to sharehold-ers,” said Craig Hall, a Dallas investor who owns the fifth-biggest stake in AMR and wants American Airlines to divest AAdvantage. Hall calls the frequent flyer plans a “hidden asset” not reflected in airline valuations.
Several major airlines have since examined setting up their FFPs as sep-arate companies. However, there are some concerns. The cost of spin-off is steep. In the AAdvantage case, the cost was estimated at US$2 billion. In addition,
spinning off FFPs may make the core airline parent less attractive (valuable) to investors.
Mining GoldPrivate equity firms represent a global,
sophisticated industry. They follow tradi-tional “buy low, sell high” investment advice and have a history of out performing other investment categories for the private inves-tors who fund these firms.
The aviation industry has provided opportunities for this group to mine gold. Just like mining, there can often be long, hard work to achieve good payouts, as well as the occasional nugget that was there for the taking. Challenges include finding under-valued companies or hidden businesses that could be spun off for large gains, such as frequent flyer programs, and then getting the green light to go forward to restructure, refinance and spin off value to shareholders and investors.
Private equity may well continue to play an active role as airline consolidation rumors began to swirl earlier this year. a
Peter Berdy is a partner for Consulting and Solutions Delivery at Sabre Airline
Solutions®. He can be contacted at [email protected].
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The degree of involvement a private equity firm has when acquiring a company depends on the size of its investment.
Co-investment Team with leading strategic partners. Long-term involvement and relationship building.
Size
of s
take
Low
Hi
gh
Trading Opportunistic investment, leveraging company’s expertise.
Degree of involvementLow High
Lead Investor Involvement through board seats. Develop strategy and structure. Commitment and expertise.
Active OwnershipConstructive dialog with manage-ment. Communication with share-holders. PR where appropriate.
Source: FL Group
Size Of Investment
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Global forecasts for low-cost carriers this year are as varied as the climates in which they operate. Overall, the sector
grew 20.1 percent last year versus 2006, with 4.6 million scheduled flights, according to the OAG, a global flight information company. The group reported that low-cost operations dur-ing 2007 represented 16 percent of all flights worldwide and 19 percent of all seats globally, up from 14 percent and 17 percent, respec-tively, the previous year. But rising fuel prices and fallout from the global credit crunch will cloud profit predictions in many regions based on each market’s unique economic climate.
United States — Mostly Cloudy“Mostly cloudy” is the forecast for U.S.
LCCs, which are feeling pressured by a slowing economy and over-capacity concerns. The two
largest carriers, Southwest Airlines and jetBlue Airways, both cut 2008 capacity growth plans. Last December, Southwest trimmed growth plans to approximately 5 percent — about half of its previously announced plan. In January, jetBlue followed suit by downsizing its capac-ity growth plans from 13 percent to between 6 percent and 9 percent. The New York-based carrier has also sold two Airbus A320 aircraft during the first half of the year, and it will sell an additional four of the same aircraft by the end of the year.
Dwindling domestic opportunities for U.S. LCCs are forcing them to rethink tradi-tional business models. Most are realizing they can’t survive without the business customer. The new model strays from the segment’s no-frill roots and introduces opportunities for LCCs to craft corporate travel deals; participate
in global distribution systems; and offer paying perks such as lounges, leather seats, extra leg room, speedy boarding and frequent-flyer miles.
That’s the strategy behind Southwest’s introduction late last year of a new fare category designed for business travelers. The carrier has tripled its corporate sales force and started listing fares and inventory on GDSs.
JetBlue is offering refundable fares for an extra US$50 to US$100 after testing the concept with corporate accounts and has hinted at “an enhanced front-cabin product” now in development. Orlando, Florida-based AirTran Airways, which has come the farthest among U.S. LCCs in negotiating volume discounts, introduced optional advance seat assignments, allow-ing passengers to pay more for sitting in a roomier row, for example.
“You’ll see a lot more product dif-ferentiation as low-cost carriers scramble to compete with each other and with network carriers,” said Garth Overmyer, principal of global airline distribution for Sabre Airline Solutions®. “So instead of no frills, they’ll feature menus of frills customers can pay for, essentially becoming hybrid carriers.”
Contributing to the hybrid image is an increased focus on international markets made possible by liberalization of international flying rights through the recent open-skies agreements.
“There has been a lot of talk and speculation these days, especially about Southwest, that it will either purchase or partner with some other low-cost car-rier to go international,” Overmyer said. “Southwest has publically stated that it would be willing to purchase another airline, even if it doesn’t fly all Boeing 737s. That’s a pretty bold statement.
“In addition, jetBlue and Aer Lingus have announced a new partnership, and Lufthansa has a 19 percent stake in jetBlue.
Come Rain Or Shine
By Lynne Clark | Ascend Staff
U.S.-based low-cost carrier jetBlue Airways has cut capacity growth plans, sold two of its Airbus A320 aircraft and will sell four more by the end of the year as a result of a slowing economy and over-capacity issues.
industry
Photo courtesy of Airbus
Rising fuel prices and global economic worries are challenging the low-cost carrier business model differently, depending on the region.
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Spirit has aggressive expansion plans that include 40 percent growth, 20 more fre-quencies and 10 new routes, mostly to the Caribbean and Latin America. It’s a whole new frontier.”
Europe — Cloudy With Potential Storms
European low-cost carriers fared much better in the last quarter of 2007 than did their U.S. counterparts. Overmyer attributes the difference to ancillary revenues and capacity differences.
“Ancillary revenue, including baggage charges and commission earnings from areas such as hotel bookings, car hire and travel insurance, drives revenue performance for European LCCs,” he said. “It’s second nature to them to charge for things U.S. passengers are used to getting for free.
“Additionally, the United States has more capacity than Europe, which has driven demand and sustained profits in the past. But the honeymoon is about over. Within the next two years, Europe’s carriers will begin to deal with the same capacity issues that are hinder-ing U.S. carriers.”
Ryanair, Europe’s leading low-cost air-line, warned in February profits could fall as much as 50 percent in its next financial year due to a “perfect storm” of rising oil prices, tougher economic conditions and falling fare levels.
In stark contrast, easyJet, the United Kingdom’s leading LCC, has maintained its forecast for a 20 percent increase in underly-ing pre-tax profits in its financial year that ends in September. Total revenues per seat rose ahead of expectation by .05 percent in the airline’s first quarter that runs October to December. Revenues were boosted by a strong euro and the introduction of baggage charges, in addition to expanding markets in continental Europe, particularly Italy, Spain and Switzerland.
Asia/Pacific — Sunny The forecast is sunny for Asia/Pacific
LCCs. By 2012, LCCs as a group plan to expand capacity by 250 percent and triple their combined fleet to 200 aircraft by 2012, the Centre for Asia Pacific Aviation noted.
The group expects an “unprecedented period of international route development in the region.”
The forecast is based on announced aircraft orders by existing LCCs, reported in CAPA’s Outlook 2007. Given reasonably sound fundamentals over the rest of this decade, the number of new entrant LCCs will grow significantly, the report said.
Outlook 2007 also stated that Asian air-lines have planned deliveries during the next five years that represent almost 59 percent of the current fleet — well ahead of the global average of 31 percent despite the fact that, in most cases, Asian airlines possess younger fleets than the global average.
“The expected surge in deliveries is potentially a concern, with overall profitability falling despite a generally benign business environment in 2006,” said Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation. “But the Asian markets are by no means mature at this stage and, while the level of deliveries may suggest youthful exuberance, disproportionate growth is quite possible.”
There are structural reasons why this region should have a higher proportion of new aircraft orders than elsewhere, notably the rapid liberalization of markets that have been tightly held for decades, along with the correspondingly higher opportunities for short-haul, intra-Asian services, which flow directly from local deregulation and increased bilateral trade. Aircraft deliveries during the next five years will also be focused on the fastest-growing markets — in particular, China and India — where there is great potential for demand growth to absorb new capacity addi-tions, according to the report.
These factors, combined with strong underlying rates of economic growth and ris-ing personal incomes, should ensure a bright future for LCCs in Asia/Pacific.
“It will be interesting to see how things develop in the Asian and Indian markets,” said Overmyer. “Because markets are emerg-ing, these carriers have the advantage of new technology and the ability to sell ancillary services right off the bat and not have to change their whole infrastructure to achieve new hybrid strategies.
“The region is not without its challeng-es, however. Asian customers are slow to adopt Internet technologies to buy tickets, so most are sold through travel agencies. Internet adoption and infrastructure are big challenges for these emerging markets, but the potential is huge.” a
Lynne Clark can be contacted at [email protected].
Leading the low-cost carrier position in the United Kingdom, easyJet expects underlying pre-tax profits to rise 20 percent in its financial year ending in September. Expanding markets, the implementation of baggage charges and a strong euro have contributed to the carrier’s continued success.
Photo courtesy of Airbus
Photo courtesy of Boeing
AirTran Airways continues to add “frills” to its low-cost model, such as optional advance assigned seating that gives passengers the ability to select a row with more space for an extra fee, to help differentiate itself from its LCC and network competitors.
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the pilot
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For the many loyal passengers of Milwaukee, Wisconsin-based Midwest Airlines, the carrier’s signature fresh-
baked chocolate chip cookies on board most flights are just one of the special amenities they’ve come to enjoy and appreciate. Beyond the aroma and taste of homemade cookies as well as the spacious, comfortable all-leather seating with extra legroom and exceptional personal attention, it’s the tireless contribu-tions of more than 2,000 talented, dedicated employees that has earned this 24-year-old airline the reputation of “The best care in the air.”
What started in 1948 as a corporate shuttle for Kimberly-Clark’s executives travel-ing from its headquarters to company mills, Midwest Express Airlines in 1983 brought the customized corporate jets to the traveling public. The carrier, which operates a fleet of McDonnell Douglas MD-80 and Boeing 717 aircraft, changed its name to Midwest Airlines five years ago.
On Jan. 31, the carrier became privately owned when it was acquired by TPG Capital. As part of the acquisition, Northwest Airlines will be a passive investor with a 47 percent stake. Midwest Airlines’ executives view the acquisition as a positive change — one that will help it continue down a successful path.
What’s the recipe for the airline’s suc-cess? Its executive team and employees alike work together to bring only the best traveling experience to its guests. They are aligned in their thinking, and everyone who represents Midwest Airlines has a keen understanding that the most important ingredient to a successful operation is happy, satisfied customers. And from an execu-tive perspective, the airline’s leaders know that the only way to take good care of their guests is to take equal care of their employees.
No one believes more in the power of employees than the airline’s chairman, president and chief executive officer, Tim Hoeksema, who has led the airline for two-and-a-half decades. His philosophy is simple — hire wonderful employees who focus on delivering the best care in the air.
In 1969, Hoeksema, who aspired to become a pilot since the tender age of 6, joined Kimberly-Clark as a first officer in the company’s air transportation operations, and in 1974, he was appointed chief pilot. Three years later, he became the director of air trans-portation for Kimberly-Clark Corp. and presi-dent of K-C Aviation. He was named president of Midwest Express Airlines in 1983, and he was appointed president of Kimberly-Clark’s transportation sector in 1988.
Hoeksema began his aviation career in 1968 as a flight instructor for the University of Illinois at Urbana-Champaign. He graduated summa cum laude from Western Michigan University in 1972 with a bachelor’s of science in aviation engineering technology. In 1977, on a Kimberly-Clark scholarship to the University of Chicago Executive Program, he obtained a master’s degree in business administration.
In a recent interview with Ascend maga-zine, Hoeksema shared his views on running a successful airline.
Question: How important is it to keep up the reputation of “The best care in the air”? How does it keep your customers coming back? And how does it fend off the competition?
Answer: I think it’s very important that we maintain a strong focus on delivering “The best care in the air.” We’re 24 years old. We’ve grown significantly in that period. We’ve been recognized many times as the
A Conversation With...
Tim Hoeksemachairman, president and chief
executive officer, midwest airlines
Photos courtesy of Midwest Airlines
the pilot
best U.S. airline. The thing that’s important to us is not the external recognition; it’s really the customer loyalty that we have built up over the years. Our people are focused on doing that. I’ve shared many times that the best article I’ve ever read was entitled Differentiate or Die. If you look at running a company, it seems to me that you have to be a little different, have to have something special whether you’re making potato chips, building widgets or flying people on airplanes. You want to have a product that people want to choose. People want to come to you for some reason because it’s special, different, unique or better. We’ve tried to do all those things. It’s extremely important to our continued success that we continue to differen-tiate our product and continue to have a product that people want to choose, and they do. That has really been the secret to our growth and success. It’s about wonderful employees all focused on delivering “The best care in the air.” For us, it’s extremely important. It’s who we are. We hire people who line up with our core values and who are really centered around delivering “The best care in the air.”
Q: How do you motivate your employees and get them to deliver day after day after day?
A: Probably the best way to do that in the long run is to hire quality people, hire people who care, hire people who are oriented toward caring about others and delivering the best type of service, and com-municating with those people regularly on how important it is, on how we’re doing and how our customers respond. When we get recognized by Travel and Leisure or Zagat’s, we share that internally. We say thanks to our people. We share how important it is. We don’t dwell on it because you can pat yourself on the back to the point that you take your eye off the ball and lose focus on quality. That’s very important; so we com-municate constantly to our employees.
Q: How do you know your methods are effective and employees are deliver-ing exactly what your customers want and expect?
A: We do monthly measurements. We measure several thousand passengers a month in terms of how we’re doing at delivering the service they want. A number of years ago we asked them several key questions: What do you want? What do you want from flight times?
What do you want from a customer service representative?
What do you want from a reservations agent?We wrote those things down, translated
them and shared them with our employees. Every month we measure how we’re doing against what our customers say they want. We share that throughout our offices. There are boards all around. If you walk down the res-ervations center, there’s a big board that tells how reservations did last month in every one of the categories that customers said were important and how we’re doing as a company in a composite score. That’s all 50 stations across the country. Pilots and flight attendants all get rated by several thousand customers a month. We share that information. We talk about it. If it drops, we talk about how we’re going to get back on track. We have constant communication. Hiring people who have that intrinsic value of caring about others and the type of values that we have as a company has been very important.
Q: Do you think learning the specific services your customers have requested plays in their minds when making a deci-sion which airline to fly so that it becomes less of a discussion of just price and more of a desire to fly Midwest Airlines?
A: Absolutely. It’s very important. I was in Kansas City earlier in 2007, and I spoke to several hundred people during a luncheon. They asked me to talk about the softer side of business rather than the hard dollars. I talked about quality, value, our core values as a com-pany, how we translate that and all those types of things. Afterward, a lady came up and said, “I just want you to know that those things you call the ‘softer side’ translate into hard, cold cash. I can prove it. I fly once a week to New York. I fly you all the time, period.” She went on the say, “Could I shop around and find lower fares? Probably, maybe, possibly, but I don’t because you take such good care of me. I just fly you.” I think it does translate into loyalty. It does translate into people saying, “You’re my airline. My kids are always going to go to school in places that you serve.” I think the ultimate goal of everybody is to try and develop that type of loyalty so people will con-tinue to come back and frequent your product or, in our case, frequent our service.
Q: The two-by-two seating and chocolate chip cookies are probably the most visible aspects. Are there any other particular things that you feel are the differ-entiators that factor in with that customer loyalty?
A: It’s the entire experience. When you go on vacation somewhere or you fly an airline, you really rate the experience. If you call for reservations, you have a sense of how you were treated. Certainly cookies are
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Midwest Airlines’ spacious, all-leather two-by-two seats provide passengers added comfort, one of the carrier’s most attractive amenities that keep many loyal customers coming back.
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something we talk about. Cookies are good, particularly ours. To us, it’s a symbol. It’s a symbol of warmth. One of our goals in our core values that I referenced was service to the customer. We say, in part, that we want to treat customers as if they were a guest in our own home. On our planes, chocolate chip cookies really relate to how we care about you, how we feel about you and how we treat you. It’s much more than something that’s good to eat. It’s really symbolic of what we think is very important. The cookie is probably the best known. We’ve had a lot of fun with it, and it is good. It’s really a symbol of the entire experience that we try and provide. Of course, two-by-two seating has been very successful. It’s another one of the things people look for … extra space.
I will tell you over the years, early on, we had shrimp scampi, beef Wellington, com-plimentary wine and champagne. It’s easy to say, “That’s why we got high ratings.” All that had to go away after Sept. 11. We now have a buy-on-board program that’s from external restaurants. The interesting thing is that our scores, in terms of how our customers feel about it, have proven that it’s more reflective of the service our people provide as opposed to the things we used to offer. Maybe the most significant measure was the Best U.S. Airline Award we received from Travel and Leisure the first year after we discontinued complimentary wine, champagne, beef Wellington and shrimp scampi. Then it was truly our people. It really is about the experience of how people treat you, how they care about you and how they inter-act with you. Those are the things I think are important; so maintaining that type of culture is extremely important at Midwest Airlines.
Q: The cookies have been so well received that you began selling them locally after several customer requests for the recipe. Do you have any intention of selling them nationwide?
A: We’ll just take it a step at a time. We began selling them at [Milwaukee] Brewers [baseball] and [Milwaukee] Bucks [basketball] games in 2006. That’s gone over very well, so now we’re selling them in a small chain of grocery stores in the Milwaukee area and another in Kansas City. We’ll see how it goes. I think it’s been fun for our loyal passengers to be able to buy some and bake them at home, especially when they’re so easy to bake. No thoughts right now on expanding that beyond here.
Q: You recently introduced the Signature and Saver seating choices. How has the response been to that new seating configuration?
A: We’ve had Signature [two-by-two] seating on our 717s historically. Since 2003, we’ve had Saver [two-by-three] seating only in
our MD-80s. We’re changing both so our custom-ers (after August) will have the choice on any of our airplanes of Signature or Saver. We started with taking the Saver airplanes (the MD-80s) and adding 12 Signature seats to those airplanes to give a choice. It is going extremely well. It has been very well received. The US$65 fee that we charge for that has been very well accepted. People like the choice. We’ll offer that choice on the 717 as well when we change the configura-tion and actually add 11 seats to it. We’ll have 40 Signature seats in two-by-two and 59 Saver seats on our 717s. People will have a choice. We’ll be able to carry more passengers. We’ll have more leg room in the Signature sections. I think it’s really going to be a win-win.
Q: Do you think it will change any-body’s perception of the airline? Will they see that as an added service?
A: As you look at various products, cer-tainly the airline industry is trying to move to a situation where there are more alternatives, more choices. As you survey customers, choice is important. Variation is important. Having addi-tional seats on the 717s will make some people happy because there’ll be more options at some of the lower-fare levels. We have some routes
that are full now. I think more people will be able to fly on us. I think that will make them happy. If you’re paying a normal business fare, a refundable-type business fare, there will be no additional charge for the Signature service on the 717. There will be more leg room, so I think they will be happy. That’s why I think it is a win-win. We’ll continue to look for more opportunities to give people choices.
Q: How do you project that the full implementation of your one-cabin business model with both Signature and Saver seating will influence your profitability and customer experience?
A: I think it’s going to be significant. It’ll enhance our revenue because we’ll have 11 more seats on every 717. We have 25 717s. That’s about a 12.5 percent increase in avail-able seat miles just on that fleet. It will enhance our revenue with virtually no cost. The plane is flying anyway. It’ll be able to carry 11 more pas-sengers. There’ll be some incremental revenue on a Signature seat before discount tickets that people buy. It will enhance our revenue in that area as well. I think it will be significant in terms of enhancing our revenue and profit-ability with virtually no cost. It’ll be significant in
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Midwest Airlines’ fresh-baked chocolate chip cookies aren’t just a big hit in flight. The carrier sells its signature cookies to select grocery stores in Milwaukee and Kansas City.
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offering more customers their choice. In some cases it’s the difference in the choice to fly us, which they want to do, or flying someone else that they don’t want to. In some cases, flying two-by-two versus two-by-three, I think it will be very positive all the way around. We’ve very excited about it. We would have it in place right now if it weren’t for the technology. That’s why it’s so important for us to work with Sabre [Airline Solutions®] in partnership to make this happen. We’re excited about it, and things seem to be moving along very well in terms of that phase of our technology. We’re unique in doing this in one cabin. We’re not making this two cabins. We’re making it one cabin. There are corporations that say their people can’t fly business class or first class. We’re looking at this as a one-cabin product with a choice of Saver or Signature. That’s why the work Sabre [Airline Solutions] is doing here is so important to this airline.
Q: How have you managed your operations differently to maintain profit-ability and offset fuel costs?
A: Very good question. Very pertinent with what’s going on right now in this very dif-ficult industry. If we back up, prior to Sept. 11, we had 14 consecutive years of profitability. Midwest and Southwest Airlines are the only jet carriers in the United States that can say that. Sept. 11 really changed everything, and it’s been very difficult. We have had to go
back and retool some of our service offerings to the consumers. We’ve focused on cost. We have reduced our non-fuel costs, our cost per available seat mile, by more than 32 percent in the last five years. We’ve done a lot to control non-fuel-related costs, but at the same time, we’ve focused on doing it in a way that would not harm the onboard experience. I think by and large, we’ve done a very good job of that. In terms of fuel, it’s the single highest cost element in the industry right now. We’re a tiny little carrier, and one penny a gallon to us is US$1.3 million a year. It’s a very significant cost. In January 2007, we hedged 90 percent of our fuel for 2007 at about US$58 a barrel. Now it’s up to more than US$100 a barrel. That’s an increase of about a dollar a gallon. It’s a huge cost, and we’ve done several things to offset it.
In the bigger picture over the longer haul, even when things were really tough after Sept. 11, we totally transitioned our fleet from DC-9s to 717s. The 717 is about 23 percent to 24 percent more fuel efficient than the DC-9 it replaced. The best hedge we could do was that. That’s really an on-run hedge for increasing fuel costs. We’re looking now at replacing our MD-80s with a more fuel-efficient airplane. That’s really the best long-term hedge that you can do, and it’s very, very important. On a short-term basis, you try and do everything you can. During the last couple
years, we’ve done everything everybody else has. We’ve taxied out and in on one engine. You reduce the amount of water you carry. You don’t fill up the water; you take just what you need for that flight. You reduce certain services; we haven’t taken pillows and blankets off because we think that’s important to our customers. You try and reduce weight onboard the airplane as much as you can in terms of pushcarts and such. You fly careful flight patterns and become as fuel efficient as possible.
As we move into the year, the indus-try is looking at reducing some capacity. Late last year, there were a fair amount of announcements in terms of capacity reduction for this year. We’re going to see reduced domestic capacity this year versus last given what’s going on. At US$2.80 per gallon of jet fuel, there are markets that were just marginally profitable before that have become unprofitable. We’re also looking at reducing some service that we had planned. We’ll still have some growth, but it won’t be quite the size of growth we had planned on.
We’re in the middle of going through those assessments right now. It is a tough industry. We have about 25 percent of the first half of 2008 hedged at an average of US$73.44 a barrel. We’ve been hedging right along but hedges in the long run just smooth out the peaks and valleys. You’re going to pay over the long haul what you’re going to pay. That’s why more fuel efficient airplanes and things like that are very important.
There have been some fare increases in the last several months. It’s not enough to totally cover the cost of fuel, otherwise you’re going to affect ridership too much. There’s that balance between how much the industry can push fares up and not affect ridership. The economy isn’t going to be robust this year. It’ll be OK but not robust. We’re looking at a 1 percent to 2 percent GDP growth movement in 2008, down from 2007. Hopefully, it will stay there and not get any worse. Most of the companies in this area feel that this is going to be a good year. They’re going to be hiring. They’re going to be flying more instead of less. I think we’re in the right sector of business with our focus on busi-ness travel.
As oil prices and fares go up, the first group affected will be leisure, dis-cretionary travelers. They’re paying more money for putting gas in their cars and heating their homes. I think the leisure traveler gets affected first when fuel prices go up. The businesses I talked to, at least 80 percent of them, where I’ve personally done my own survey in the Milwaukee area, say they’re going to have
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More than 2,000 dedicated Midwest Airlines employees focus on delivering exceptional prod-ucts and services to customers, which has earned the airline the reputation of providing “The best care in the air.”
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more business travel this year. I think that’s certainly encouraging.
Q: When faced with circumstances like US$100 a barrel oil, is it always a cost part of the equation or do you look at additional revenue streams like selling cookies?
A: We’re always looking at revenue opportunities. Until we’re ready to do them, we typically wouldn’t announce them. Selling cookies isn’t big dollars, but it’s going to be meaningful dollars in this year, surprisingly enough. We’ve looked for opportunities like that to do things differently.
Q: It’s not just a pure cost focus; you look at both sides of the equation?
A: Absolutely. You have to look at both sides of the equation and balance both from a fare point of view. You say, “I’d like to push fares up a lot, but I can’t because it will negatively impact my revenue.” But you have to push the fares up some. Fortunately for us, I think we’re positioned in the best part of the market going forward with a focus on business travel. You see other carriers that have been real leisure focused moving a little bit more toward business focus now because I think that’s where travel will be least affected this year.
Q: What is your feeling about what the recent acquisition by TPG will bring to the airline and how it will impact Midwest Airlines?
A: TPG has an outstanding reputa-tion. They’ve been the biggest private equity player in the airline space. They’re very smart airline people. First, I would say that TPG’s interest in us to start with and their eventual offer to acquire us says good things about our business plan. It says good things about our people. It says good things about our strategy. They were very pleased when they came and looked at us. They plan on us con-tinuing to do the things we’ve been doing. We’ll continue as Midwest Airlines, continue to grow and continue to provide “The best care in the air.”
From a customer point of view, I don’t see things changing. From a pure business point of view, we won’t be doing some of the things that take a lot of time, energy, effort and money that don’t contribute to running the business. We will continue to do all the things that a public company would do, but we won’t do an audit of the audit of Sarbanes-Oxley. We’ll only do an audit of that, and so we’ll save money.
Also, with Northwest as a passive minority investor, there are some synergy opportunities that we’ll have with Northwest in terms of purchasing of hull and liability insurance and fuel and things like that. There will be some good opportunities for some cost savings through working with them in
some areas. We’re happy about TPG. They are quality people. They really know this business. Our experience with them to date has been terrific. They’re honorable people with everything on the table. They’re straight shooters.
Q: What kind of feedback have you gotten from your employees about the acquisition?
A: Very positive. We had a press con-ference on a Thursday night at 11:15 p.m., and the media with all the TV cameras were hanging around here after the board meeting. We announced it. Everybody in the community was very happy. Our employees were very happy. It was a very positive day when we announced that.
Q: Are there any other advantages to being privately held?
A: We were privately held for the first 11 years of our life and then public for the next 12. Now we’ll go through a period of being private again. We try not to be so short-term focused as a public company. There’s this tendency to go from quarter to quarter, trying to make every quarter better. There were times when we got on quarterly conference calls after our quarterly results/earnings and told the investors that this is not a good short-term investment. We think it’s a good long-term investment, so we’re doing it. When we announced that we were ordering 25 Boeing 717s in the middle of very difficult economic times for us and the industry, we said it’s probably not a good short-term deci-sion, but it’s a very good market decision. It turns out that it’s a very, very good long-term decision. We try not to be influenced by the short term. From a private equity point of view, you have a little longer-term horizon. You don’t live quarter to quarter. We’ll be able to share financial data more openly with our employees on a month-to-month basis. I think there will be some advantages … strong potential capital behind us for things that are good. We’re very pleased with the TPG partnership.
Q: Are environmental concerns something that are on your radar screen, or are they more of a European issue?
A: I will tell you that it is here. It’s not going to be here, it is here. Maybe Europe is a little ahead of us, but it’s very important that anyone running any company in this country today be very cognizant of environmental concerns. We’ve been doing things for a long time to the extent that we could. One of them I mentioned was the transition from DC-9 to 717. We have reduced fuel burn and have quieter airplanes now than we used to. That’s an important step. You have taxiing on one engine. We’re doing those types of things. We recycle. We probably do as much or more recycling than anybody. We’ve reclaimed
deicing fluid here in the Milwaukee airport in partnership with the county. We’ve replaced some of our gas-powered carts with electric ones. We’re looking ahead at carbon emission credits. We’re very much involved in that as is the industry.
Q: Do you feel that the aviation indus-try is unfairly singled out when it comes to environmental concerns such as carbon emissions?
A: Certainly I think when you look at the percentage of contribution that the industry makes, we probably get more press than we should. That’s probably true about a lot of things in this industry. It’s easy to talk about aviation. Everybody’s somewhat involved in it because everybody flies. In the same light, it’s important that we do our part as an industry. I can tell you that it’s not only us; all airlines are pretty cognizant of this. We’re really doing everything we can. When you look at the amount of power that you need to get out of a jet engine and keep the weight really light, there are probably fewer options for converting to other power sources than for an automobile. You can put a heavy battery in an automobile and it’s not going to bother you. You can’t put a heavy battery in an airplane that’s going to fly you across
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If we had the next-generation technology in terms of air traffic control, we’d be able to handle more traffic than we do now way more efficiently and save lots of fuel.
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the Atlantic Ocean. You can’t really use nuclear up there.
There are a lot of limitations from a weight restriction perspective and things like that. If the auto industry did a lot of switching and moved away from fossil fuel, I would think there would be some availability for the airline industry, a lot more availability. There’s coal liquefaction that is being looked at and tested now by the military. They’re flying jet engines with coal that has been liquefied into product to use for jet fuel. There’s a lot of things like that
going on. There are a lot of coal reserves in this country. There are clean processes for translat-ing that into gasoline. I think there are options. Those options are being worked on very vigor-ously, and the airline industry is involved. We’re all working along those lines and being as environmentally conscious as we can.
Q: Are you optimistic that the airline industry will be a leader in environmental issues?
A: Absolutely. You’re already starting to see the airline industry talk about this in terms
of environment-conscious things. I think we’ll be right out there, right along with everybody doing everything we can within the constraints that I talked about.
Q: How important do you view tech-nology in the operations of your airline?
A: Technology in the airline industry is key to everything. As an airline, we are totally dependent on technology in every aspect and every phase. You look at the airplanes and the technology and advancements that have
happened in airplane cockpits over the years. It allows us to fly more fuel-efficient routes and to fly more fuel efficiently. I think one of the most important technology applications hasn’t happened and needs to happen. That is air traffic control. We have an ATC system that is operating on 1950s technology. That is literally true. That has to change. If that changes, you’ll see a much more efficient, better-run air traffic control system. What does that do? It reduces delays. It allows more airplanes to fly in the airspace. It saves fuel like you couldn’t imagine. There’s an effort that needs to happen in terms
of being environmentally conscious and saving fuel. It’s the air traffic control system. We need the next-generation system. There’s a lot of talk about it in Congress right now. There are bills that are in various stages of advancement that have to happen to help this air traffic control system come of age, if you will. That would be huge. If we had the next-generation technology in terms of air traffic control, we’d be able to handle more traffic than we do now way more efficiently and save lots of fuel. If there’s any-thing needed in terms of technology, it’s really updating the air traffic control system in this country. That would be huge.
Q: What’s it going to take to make that happen?
A: It’s going to happen. It’s a matter of how quickly. It’s a matter of getting the new FAA authorization bill approved in Congress right now that has that provision in there. The industry is working on that. It’s on the go. We’re hoping it will get approved this year. The old 10-year authorization expired in September. It’s been extended. That has to happen soon, and hopefully it will happen early this year.
Q: Where do you see Midwest Airlines in five years?
A: Continuing to grow. Continuing to have a differentiated product. Continuing to deliver ”The best care in the air.” We’ll continue to grow a little bit more in Kansas City and look for other focus cities similar to Milwaukee and Kansas City that will allow us to provide our service to those types of cities. Hopefully we’ll be flying a lot more passengers and serving a lot more chocolate chip cookies. a
Midwest Airlines’ one-cabin business model will include 11 additional seats on its Boeing 717 aircraft, a 12.5 percent increase in available seat miles. The ability to carry extra passengers on every flight can enhance revenues substantially.
“... we want to treat customers as if they were a guest in our own home.”
— Tim Hoeksema, chairman, president and CEO, Midwest Airlines
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Q: What is your home town?A: Born and raised in Berwyn, Illinois,
a Chicago suburb. I’m a converted [Green Bay] Packers fan. I used to hate the Packers years ago, but I’ve lived in Wisconsin 38 years. That’s over half my life. You can’t live in Wisconsin 38 years without being converted to a Packers fan.
Q: What is your educational background?
A: I have a bachelor’s degree from Western Michigan University and a master’s in business administration from the University of Chicago.
Q: What are your main hobbies? A: I have a Harley. That’s more of a
passion. I had my first Harley 43 years ago. It was a little Harley 175. I wish I still had it today. It would really be worth something today. They don’t make little bikes like that anymore. I had it for about a year, year and a half and sold it. I didn’t get a big bike until probably 10 or 12 years ago, something like that. It’s a lot of fun. I really enjoy getting out. Harleys are quality. They’re hometown. They started here [in Milwaukee] over 100 years ago. I have a 100th Anniversary Ultra Classic, which is from 2003. In 2003, Harley had a big celebration and a big shindig in town. It was a lot of fun. I like to golf and fish. That’s about it.
Q: How many years have you been in the airline industry?
A: Twenty-four years.
Q: What attracted you to the airline industry?
A: That’s a good question. There’s something about this that gets in your blood. The people who leave it come back. I wanted to fly ever since I can remember. We lived in the Chicago area; planes going overhead. I started flying when I was 16. I got my private license on my 17th birthday, commercial when I was 18. I went away and got an AP mechanic’s license and advanced flight ratings and instructed at the University of Illinois. I started as a pilot for Kimberly-Clark Corp. on Oct. 1, 1969, over 38 years ago. I was a first officer, then captain and then chief pilot, corporate flight operation. I then ran something called K-C Aviation with custom interior modifications, heavy maintenance on corporate jets literally from all over the world.
I ran that business. I started with Midwest Airlines, which was owned by Kimberly-Clark for the first 11 years of our life. I was running about five business units for Kimberly-Clark at the time and starting an airline was one of them. I moved to Milwaukee about 19-and-a-half years ago because I was running Midwest Airlines directly and had other people running these other businesses. When we split 12 years ago, I went with the airline instead of staying with Kimberly-Clark. I’ve always wanted to fly.
Q: Who is your biggest influence?A: I don’t know if there’s any particular
person. I think we’re all a product of people that we’ve been exposed to. We become a little bit of a lot of those people. I have a very strong faith. I would say my faith and beliefs have been a big influence on my life at how you approach things and how you approach people. I look at our core values as a company in terms of service to the customer and mutual respect and responsiveness, honesty, and integrity. I think those are all values that one can say have basis in one’s belief system and have a basis of faith. The Bible talks about good servants and putting in a fair day’s work for a fair day’s pay. It talks about respect for people and caring about other people, honesty, and integrity. It says a lot about that. We’re all influenced by many people, by families and by our belief system.
As I look over the years, I talked with [former Southwest Airlines CEO] Herb Kelleher several years before I actually started this air-line. To see a guy there who has a passion for what he’s doing, who cares about people, who has really differentiated themselves in a little different way than we have … in many ways I would say that even though we maybe serve a little different spectrums of the marketplace, they more leisure and us more business, our cultures are more alike than any other two air-lines. I think we’re all influenced by many, many people over time. Some in a positive way, and some in a negative way. That’s how we learn and get molded.
Q: What is your favorite thing about running an airline?
A: That’s an easy, easy question. I look back over the last 23 years. There is no ques-tion that the thing that I feel best about and am happiest about is seeing some of our people who have come in at entry level positions and have grown personally and professionally. Now
they’re running chunks of our business. To see them blossom and see them grow and develop … there’s no better feeling. The industry has had its ups and downs over the last 23-and-a-half years, but to see people who have really grown and moved up in terms of where their capabilities are, there’s no better feeling.
Q: Who do you admire most?A: That’s kind of relating to the influ-
ence question. There are lots of people in the business world that you look and say, “Boy, they’ve done a great job.” I think I admire people that have a passion for something and the wherewithal to carry it out. If you looked at Herb, I think Herb’s done that well. He’s had a passion for people and a passion for service and being a little different. I think he’s done a terrific job out there.
Q: What is the best advice you’ve ever received?
A: Probably not best to get into the airline business … no, not really!
Q: If you weren’t running an airline, what would you be doing?
A: If I weren’t running an airline, I’d probably be a pilot for an airline. a
Meet the Pilot
Tim Hoeksema, Midwest Airlines chairman, president and CEO
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After declaring bankruptcy in late 2005, Delta Airlines has undergone a complete facelift that it succeeding in new markets and the road to profitability.
By Lynne Clark | Ascend Contributor
WORLD’S FASTEST—GROWING
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E tihad Airways, because of its short tenure, may not be one of the most seasoned or mature carriers in the
industry, but nonetheless, it is certainly the world’s fastest-growing airline.
Founded in July 2003 by Abu Dhabi royal decree as the federal airline of the United Arab Emirates, Etihad Airways has grown faster than any other airline in avia-tion history. In a few short years, Etihad has evolved from a startup carrier into a major player.
Last year, Etihad Airways doubled its revenue from 2006 and enjoyed double-digit growth in yield. The carrier achieved a record passenger growth of 67 percent, carrying 4.6 million passengers compared to 2.8 million the previous year. Its average seat factor rose by 15 percent, mainly in first class where growth was 43 percent over 2006; and its available seat kilometers increased by 14 percent.
In addition, Etihad Airways has dramatically expanded its network. In November 2003, services were launched with a ceremonial flight to Al Ain in the UAE. In the months that followed, almost one new route was added per month. June 2006 marked a milestone for the carrier … 30 destinations in 30 months.
In 2007 alone, nine new routes were added in Australia, the Indian subconti-nent, Singapore and Europe. Beijing is next where Etihad Airways is set to serve the 2008 Olympic Games in August. The airline also boosted its number of weekly flights from 556 to 718. By 2010, the carrier plans to serve 70 international destinations.
Aircraft growth has also been impres-sive. The airline’s fleet is among the young-est and most environmentally fit in the industry, with an average age of two-and-a-half years. The backbone of the fleet is the Airbus A330-200. Last year, the carrier added 13 new aircraft to its fleet of 24 and is expected to reach 53 aircraft by 2011.
To support the expansion, staff is growing at a phenomenal rate with an aver-age of 200 newcomers a month. Etihad Airways’ has a diverse group of employees from all corners of the globe, representing more than 110 nations.
Along with the growth in assets and reach, there has been a steady improve-ment in service quality. The airline was recently voted “airline with best first-class service in the world” by readers of Business Traveler, the U.S. version, which is not surprising given the airline’s invest-ment to distinguish its premium product, offering award-winning flat beds (World Travel Awards 2006 and 2007) in both first and business class, in-seat massage facilities, and in-seat dining for up to four people. This year, the airline will unveil a
AIRLINEFASTEST—GROWING
By Raida Abumaizar | Ascend Contributor
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new product in its premium cabins as well as launch its flagship premium lounge in Abu Dhabi airport with personalized dining and state-of-the-art electronic facilities.
Sports sponsorship plays a big part of the airline’s marketing and public relations strategy. It has partnerships with Chelsea
Football Club, Harlequins Rugby Football Club and Abu Dhabi Golf Championship where Etihad Airways’ branding is promi-nently displayed. The airline recently announced a three-year deal to sponsor the inaugural FORMULA 1™ Abu Dhabi Grand Prix, which will begin next year.
What is behind this success story, and what drives the carrier’s exceptional growth?
To some extent, the answer seems simple. Some aspects of the success story can easily be attributed to the changes the airline has made during the last couple of years: The quality improvements of the onboard product, which has directly contributed to the increase in yield and seat factors in premium classes,
The extended reach and improved connectiv-ity due to an expanded network breadth and depth,
The expansion of the Etihad Guest loyalty pro-gram.
In addition, Etihad Airways Chief Executive Officer James Hogan and his executive team have implemented several restructuring initia-tives that have played a large role in the evolution and progression of the airline.
Hogan was appointed CEO of Etihad Airways in October 2006, bringing more than 25 years of travel industry expertise to the airline. Previously, Hogan assumed the role as Gulf Air’s president and CEO where he was responsible for the three-year Project Falcon program, reposi-tioning the business on a commercial platform.
Hogan has held a number of other senior operational and commercial positions within the airline industry including vice president of mar-keting and sales for Hertz; worldwide sales direc-tor for the Granada Group; and chief operating officer for bmi.
Recently, Hogan visited with Ascend to discuss how he will effectively manage Etihad Airways’ exceptional growth.
Question: How do you feel about capacity growth given the latest announce-ments by Qatar Airways and Emirates on the acquisition of more wide-body aircraft includ-ing the Airbus A380? How sustainable is it to have so many hub-and-spoke carriers in a region, competing for the same east-west and north-south traffic, out of hubs that are relatively small in terms of local traffic, and located 45 minutes from each other?
Answer: Etihad Airways welcomes competition and believes there is plenty of room for all the Gulf carriers to compete successfully within the region. In the same way that Malaysia Airlines and Singapore Airlines have managed to co-exist side by side in the Far East, so can Etihad Airways and the likes of Emirates and Qatar Airways in the Gulf.
Tourism in the Middle East is still relatively embryonic and will grow enormously during the next 20 years. The massive investment in infra-structure we’re seeing across the UAE and the rest of the region will help further boost tourism and business. Many of the people who will be serving that growth will be traveling from all points of the globe into the region.
What Etihad Airways is doing so well is attracting traffic from the traditional European
Key to Etihad Airways’ record-breaking first quarter in terms of passengers carried has been the performance of its premium cabins. The carrier’s business-class cabin attained an average seat factor of 65 percent.
Etihad Growth Has Been Impressive
Etihad Airways is the fastest-growing wide-body airline in aviation history. Last year, the Abu Dhabi-based carrier added 13 new aircraft to its fleet, bringing the total to 37, with plans of reaching 53 by 2011.
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and Asian hubs. The more traffic carriers from the Gulf region can switch over to the Gulf hubs the better for all of us.
With modern-day aircraft technology, ultra-long-range aircraft are able to fly non-stop to all four corners of the world, so the mix of technology and geography means our business model is more than sustainable, it’s very robust indeed.
Q: What are your plans for manag-ing the growth path you’ve set for Etihad Airways? Do you think you’ll get the traffic rights and slots to support the expanded network?
A: Negotiating traffic rights and slots is a complex business and one that involves a number of different stakeholders. We have a strong and committed government affairs team that works closely with relevant parties to ensure our voice is heard. There are never any concrete guarantees in this business, but our track record to date — launching 45 destinations in just four years — is testament to our efforts.
Q: You’ve had phenomenal success at the start of last year: doubling the rev-enue from 2006, double-digit growth in yield and load factor improvements. What are your plans to maintain the upward growth pattern?
A: Etihad Airways’ growth in 2008 and beyond will be based upon ensuring we have the right fleet, the right network strategy and, most important of all, the right customer service.
Much of Etihad Airways’ growth to date has been based upon adding breadth to our flying program, launching an incredible 45 destinations in four years. Moving forward, we will continue to seek opportunities for further expansion — such as China and India — but growth will also be achieved by adding more depth to the sched-ule. By introducing additional frequencies on key routes, like we did with our last winter schedule, we can substantially improve the connections we are able to offer our customers.
Q: Etihad Airways is no longer a start-up airline, but an established airline compet-ing with the major Middle East airlines. How do you plan to differentiate your product to address the competitive pressures?
A: One of the key advantages Etihad Airways has is that we’re not a “legacy” carrier. As a relatively new airline and brand, we can make decisions quickly without the burden that the older, more traditional airlines have. Moving away from a formulaic, one-size-fits-all approach, Etihad Airways is shifting the focus from “a large airline processing many indistinct individuals” to a focused one that is based around the individual.
2008 will see us progressively introduce a new style of service, focused on the individual, including innovative dining options, redesigned
Under the leadership of James Hogan, Etihad Airways continues to make enhancements, such as onboard quality improvements, extended reach and connectivity, and expansion of its frequent flyer program, to heighten its customers’ travel experience.
In March, Etihad Airways expanded its network yet again with four flights a week from its Abu Dhabi home base to Beijing, China, which represents the carrier’s first destination into the Chinese market.
Growth of Destinations
Num
ber o
f des
tinat
ions
Winter Summer Winter Summer Winter Summer Winter Summer Winter 2003 2003 2004 2004 2005 2005 2006 2006 2007
Winter Summer
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45
40
35
30
25
20
15
10
5
0
45
3
11
1617
34
24
37
42
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menus and new crockery. One of the highlights of 2008 will be the introduction of a new food and beverage manager position onboard our aircraft, something that will help set Etihad Airways apart from other carriers. Each of the new managers will possess an in-depth knowledge of our new menu and involvement in its design. This will enhance the customer experience onboard and move the experi-ence closer to one akin to a fine dining restaurant.
Q: How do you see the development of your information technology strategy: partner-ship with providers, outsourcing, integration, etc.?
A: Information technology is fundamental to everything we do. It plays a major part in supporting and driving the growth of Etihad Airways, both in terms of revenue growth and cost control as well as how we serve our customers and provide capability for our own people.
Information technology is the biggest enabler in our business and makes life easier for our custom-ers by giving them greater control over how and when they interact with the airline and develop-ments such as online check-in and the ability to pre-print a boarding pass are helping to meet the ever-increasing demand for self service.
Q: What are your plans for managing rising fuel costs?
A: Rising fuel costs are a challenge for all airlines and remain a significant proportion of Etihad Airways’ total costs. However, we’re comfortable with a hedging policy that is giving us greater certain-ty and allowing us to manage seasonal fluctuations.
Fuel costs represent about one-third of Etihad Airways’ total costs. The airline is hedged at 60 per-cent to 65 percent in 2008 and 20 percent in 2009.
Without a hedging program in place, Etihad Airways’ costs would be far higher, so being prudent and forward thinking is extremely beneficial to the company.
Apart from hedging, Etihad Airways has a fuel surcharge that rises or falls, dependent on the cost of buying aviation fuel, which is something that most airlines around the world have in place.
Q: What are your views on the wave of privatization that is sweeping the airline world? How do you think this will impact Etihad Airways?
A: Business is business. Each country, each government and each business has to make deci-sions it feels are appropriate at that time in its busi-ness cycle, but I don’t see a wave of privatization sweeping the airline world, whatever the region. a
Raida Abumizar is a Middle East-based account director for Sabre Airlines
Solutions®. She can be contacted at [email protected].
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In 2007, Etihad Airways added 13 Airbus A330-200 aircraft to its fleet of 24. Within the next three years, the airline expects to expand even more, bringing its total to 53 planes.
Etihad Airways began with the largest-ever start-up fleet order of 29 aircraft with a total value of US$8 billion. It is now building a balanced fleet of wide- and narrow-body aircraft, enabling it to serve short- and long-haul destinations.
Growth Of Fleet
Num
ber o
f airc
raft
2004 2005 2006 2007 2008 2009 2010 2011
Narrow body Wide body Freighter
55
50
45
40
35
30
25
20
15
10
5
0
6
21
10
4
3029
3
33
3
3
1212
12
8
34
3837
3740
4952
53
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Adding Cargoto the Mix
Etihad Crystal Cargo, which began service in September 2004, serves 50 destinations, of which seven are
cargo-only routes. The cargo division operates two Airbus A300-600RF
and a McDonnell Douglas MD-11F freighter, which joined the fleet in
September, increasing freighter capacity by 30 percent.
Etihad Crystal Cargo continues to out-perform
its competitors in the Middle East and
global markets. Last year, it
a c h i e v e d growth of
38 per-c e n t
compared to global increases of 4.5 percent and Middle East increases of 9.7 percent.
Its cargo terminal has been enhanced to enable the cargo division to handle more than 270,000 tons of freight a year.
Etihad Crystal Cargo was voted 2007 Cargo Airline of the Year by readers of Air Cargo News and last year achieved:
38 percent revenue growth com-pared to the previous year,
34 percent tonnage growth, 43 percent increase in shipments,
jumping from 152,000 in 2006 to 218,000 last year.
To support its impressive growth in the cargo business, Etihad Airways recently select-ed Sabre® CargoMax™ Revenue Manager.
“Revenue Manager will assist the airline to achieve improved revenues, specifically through effective cargo space and yield man-agement,” said Des Vertannes, executive vice president cargo for Etihad Crystal Cargo. “It will help us manage our capacity more scien-
tifically, enabling us to minimize wastage of our most precious asset, the cargo space
on our flights. “Additionally, it will enable us to
improve our processes and better align our organizational structure
to serving our customers.” a
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By Phil Johnson | Ascend Staff
Staying PowerAlaska Airlines has served its loyal passenger constituency for more than 75 years, and the airline that’s distinguished itself as an industry leader is bound to be around at least 75 more innovative and productive years.
Photo by shutterstock.com
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Alaska Airline’s Staying Power In 1932, when Linious “Mac” McGee first started taking passengers on his McGee Airways fur-run flights between Anchorage and Bristol Bay,
Alaska, little did he realize he had started what would grow to become one of the most popular and innovative U.S.-based airlines.
Today, despite a few hiccups in recent times due largely to some necessarily drastic cost cutting, Alaska Airlines represents a study in busi-ness leadership and survival throughout what have now stretched to be more than 75 years.
After McGee’s early exploits — as well as legendary bush-piloting escapades by Merle “Mudhole” Smith, Bob Ellis, Shell Simmons and other pioneers of the skies throughout the Alaska Territory in the 1930s and ’40s — it was several operational mergers and a couple of name changes later before the Alaska Airlines name was adopted in 1944 (just ahead of a competitor that had filed for the “Alaska Airlines” trade name, as well).
Among its other historic achievements, Alaska Airlines participated in the Berlin Airlift of 1948 and 1949 that helped preserve freedom in a part of the world in which the stifling reality of the Cold War was all too stark. During the Cold War, Alaska Airlines was one of few U.S. carriers that occasionally operated scheduled flights to the Soviet Union.
But the airline’s bread and butter in its early decades was always its essential service in Alaska — as Alaska Airlines became the primary mode of transportation for people in the intra- and trans-Alaska passenger market, with so much of the vast Alaska landmass only reachable through air.
In fact, since the late 1960s when it acquired the airlines then serving southeastern Alaska where there’s no interconnecting road net-work leading to the towns and villages scattered among the mountainous and island terrain, Alaska Airlines has offered one of the only two practical modes of travel in and out of that region.
Juneau, which is Alaska’s state capital, has for the last 40 years depended heavily on Alaska Airlines as a physical lifeline to the civilized world — and so have Ketchikan, Sitka, Petersburg and Wrangell as well as the other towns of southeast-ern Alaska’s narrow geographic strip that hugs the sea to the west and south and is closely bounded by Canada to the east and north.
The original access to southeastern Alaska’s towns and villages was, of course, by water transport. And freighters as well as the Alaska cruise lines continue that tradition today. In fact, a key staple of Alaska Airlines’ business plan is to participate strongly in Alaska tourism by partnering with various cruise lines — flying passengers to Alaska from the continental United States so they can enjoy a scenic cruise south along the Alaskan and Canadian coastlines to Vancouver, British Columbia, or U.S. ports such as Portland, Oregon, or Seattle, Washington.
Or the touring adventurers can select a routing the other direction, with passengers cruising north through Alaska’s Inland Passage, sometimes all the way north to Anchorage, then
catching an Alaska Airlines flight back home to a destination in the Lower 48 states.
With the expansion of Alaska Airlines’ service to the U.S. West Coast, the airline’s head-quarters was eventually shifted from Anchorage to Seattle, where the corporate offices remain today.
Seattle-Tacoma International Airport and Ted Stevens International Airport in Anchorage are the primary hubs for Alaska Airlines as it continues to expand its service not only on the West Coast (and to Hawaii), but to major destinations including Boston, Massachusetts; Washington, D.C.; Miami, Florida; New York, New York; Chicago, Illinois; Dallas/Fort Worth, Texas; and Denver, Colorado.
During its history, Alaska Airlines has faced several “down” periods but has persevered and survived. Important economic developments have occurred throughout Alaska Airlines’ lifespan to bring the airline back from the dips in its eco-nomic business cycle.
A good example of these key economic developments is the shot in the arm Alaska Airlines received when Alaska’s Prudhoe-Bay-to-Valdez oil pipeline was built in the late ’60s and early ’70s — providing access to an enormous energy source for the U.S. economy, thousands of jobs for Alaskans and plenty of major transpor-tation needs during the project — transportation needs that Alaska Airlines was able to help satisfy on an extremely large scale.
Furthermore, since Alaska Airlines is the primary carrier to so many regions of the state — and the only carrier to some Alaska destina-tions — the airline has become a vital linchpin in carrying items such as medical and emergency supplies to those areas.
Throughout Alaska Airlines’ existence, its business model has been shaped by circumstances. Similar to many low-cost business models, the carrier’s fleet consists mainly of Boeing 737 variants.
Benefits of the single-aircraft fleet include lower maintenance costs required to service one type of aircraft as well as standardization of air-craft-auxiliary equipment throughout the airline’s system.
Also, the Alaska Airlines approach has tra-ditionally embraced a fun-loving, easygoing style — at one time, for example, dressing its flight attendants in Russian Cossack garb in a nod to its native state’s rich Russian heritage.
Over time, as with almost all carriers, Alaska Airlines has cut back on services such as in-flight meals. But it still maintains a reserved-seating structure on its flights.
Another part of the airline’s long-term busi-ness plan has evolved from its service to Mexico, which was initiated in the late 1980s primarily in a strategic move to better utilize its aircraft year round.
Traditionally, many of Alaska Airlines’ flights from the Lower 48 to Anchorage as well as to its numerous other destinations in Alaska would be
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filled to the brim in the summer months, but pas-senger bookings would fall off drastically during the state’s notoriously cold, dark winters.
To better utilize its aircraft fleet throughout the year, the carrier’s strategists suggested serv-ing some of Mexico’s resort regions that are pop-ular wintertime destinations for U.S. travelers.
The good news is that the strategy worked. The bad news is that the strategy may have worked too well, in the sense that many Mexican
resort destinations have evolved to a more-or-less four-season level of popularity — a situation that could then threaten to leave the Alaska Airlines fleet shorthanded during the summer months when travel to and from Alaska picks up again.
One of the unique aspects of the air-travel market between Alaska and the Lower 48 is the significant proportion of outdoor sports enthusiasts who travel to Alaska to fish
its numerous trout and salmon streams and its lakes and ponds, or to hunt all over the state. Alaska Airlines’ cargo arm does major business carrying fishermen’s frozen catches and hunt-ers’ trophies to other U.S. destinations.
The airline even designates several of its aircraft strictly for cargo — specifically to ensure it is able to adequately serve its large and ever-growing sporting-outdoorsman constituency.
Yet another of Alaska Airlines’ key strate-gies going forward has been to avoid joining any of the major airline alliances, but rather to partner aggressively with individual carri-ers including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and KLM/Air France in codeshare agreements that now essentially expand Alaska Airlines’ reach and scope around the globe.
And such strategies have kept Alaska Airlines on an upward growth path for most of its 75-plus years in business.
In the challenging realm of innovation, Alaska Airlines has during its long history been credited with several industry firsts, such as being the first airline (along with its sister airline Horizon Air, the other carrier operating under the auspices of Alaska Airlines’ holding company, the Alaska Air Group) to book flights and sell tickets via the Internet, starting in the mid-’90s.
Now, the Alaska Air Group — starting with Alaska Airlines — is working to further develop its concept of the “airport of the future,” which is designed to speed the pas-senger check-in process. Basically, the idea is to eliminate the front-desk ticket counter in favor of various strategically positioned check-in kiosks and bag-check stations.
Through its “airport-of-the-future” imple-mentation, Alaska Airlines has demonstrated dramatically reduced check-in times at Ted Stevens International Airport in Anchorage. And Horizon Air has established a similar (though prospectively much larger) version of the con-cept at Seattle-Tacoma International Airport.
The entire Alaska Air Group has been inspired by Alaska Airlines’ traditional pioneer-ing spirit, which continues to breed innovative strategic thinking even after more than 75 years of building a loyal, fiercely demanding customer constituency.
And although Alaska Airlines is rightly proud of its rich heritage, it also takes pride in being very much in tune with today’s air travel-ers. The people of Alaska Airlines do not appear to be letting up in their efforts to succeed through long-held innovative and competitive instincts — even in today’s ever-changing airline industry. a
Phil Johnson can be contacted at [email protected].
Photos courtesy of Alaska Airlines
Pillbox hats, Russian Cossacks and hot pants represent six decades of Alaska Airlines’ most unusual flight attendant attire. In honor of the airline’s 75th year in business, a variety of past uniforms were showcased during last year’s flight attendant fashion show at Seattle-Tacoma International Airport. Flight attendants wore these and other retro uniforms on select flights for a few months after the anniversary celebration.
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By Lynne Clark | Ascend Staff
Balancing ActSouthwest Airlines abandons its one-size-fits-all approach by offering a number of new features including check-in and boarding processes, gate improvements, frequent flyer enhancements and in-flight amenities designed to heighten its customers’ experience.
Photo by shutterstock.com
Funambulism is the technical term for tightrope walking, done usually at great heights. It’s also an accurate
picture of what Southwest Airlines is attempting to do as it walks the thin line between differentiating its product while remaining true to its core maver-ick philosophy.
The first test of this delicate balancing act came last June when Southwest Airlines announced a laundry list of technological enhancements that would allow for product customization and more incentives for business and leisure travelers. In November, the air-line provided an advance peek at its new products and Web site features, includ-ing new displays, the new “Business Select” fare product and special offers for the most frequent travelers in the Rapid Rewards frequent flyer program.
“In recent months, we’ve announced plans to change how we board our aircraft and the look and feel of our gate areas system wide — all to increase customer productivity and comfort,” said Gary Kelly, Southwest Airlines’ chief execu-tive officer, in a press release issued
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November. “Today, we are announcing additional product changes that transi-tion Southwest from a one-size-fits-all airline to the airline that fits your life. We are offering our customers exciting improvements to their overall Southwest experience and saving them what they
value most — whether it’s money, time or both.”
Business Select is a new fare that guarantees ticket holders will be among the first to board the aircraft. In addi-tion, Business Select holders receive extra Rapid Rewards credit for the flight and a
free cocktail. Business Select travelers pay US$10 to US$30 more than those who purchase fully refundable coach fares.
The Business Select fare marks the end of “cattle-call” boarding while pre-serving the airline’s hallmark open-seating arrangements. Instead of jostling in line with other passengers for up to an hour to be among the first to board, travelers get assigned a boarding number when check-ing in and are called to board in a more orderly fashion. Those paying the highest fares and frequent flyers are guaranteed early boarding numbers, and other pas-sengers may get a good boarding number by checking in online up to 24 hours in advance.
Business Select fares are part of an upgrade to the airline’s booking site, which took nearly three years to develop. Instead of a large display with numerous fare cat-egories, the airline has streamlined the pro-cess by bundling its fares into three major fare columns: Business Select, Business and Wanna Get Away. The new display may only show three fare columns, but it is powered by an upgraded revenue manage-ment system that enables Southwest to tailor its fares to market demand by nearly doubling the number of fare types to 15 from eight.
“We went from selling a bucket of fares that were hard to understand to sell-ing products geared to the unique needs of our passengers,” said Darren Dayley, vice president of technology, customer experi-ence portfolio for Southwest. “Before, our customers didn’t understand why they should pay US$119 for a fare when it appeared the US$109 fare was the same. There were differences, but they weren’t easily apparent. The challenge for us was how to collapse eight columns of fares into the three columns we have today. We had to design it from scratch. The technol-ogy took about four months for test and production, but the business analysis took nearly two years.”
Along with fare and boarding changes, Southwest Airlines also unveiled enhance-ments to its Rapid Rewards frequent flyer program. Now, Rapid Rewards members are rewarded for their frequent flight activ-ity by jumping to the airline’s “A-List.” Rapid Rewards members who have flown 32 one-way flights or 16 roundtrips in 12 months will join the A-List where they will be automatically checked in for their flight in advance of departure and will most likely receive an “A” boarding pass, which is the first boarding group.
Additionally, Southwest Airlines’ Rapid Rewards program introduced its new Freedom Award. Rapid Rewards members now have the opportunity to exchange
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The new look and feel of Southwest Airlines’ airport gates include family areas with vibrant, colorful child-sized tables and chairs as well as kid-friendly television programming.
Southwest Airlines’ gate makeovers in its 64 airports, which is expected to be completed during the first half of the year, offers power stations for charging electric devices as well over-sized padded seats, tables with power outlets, power stations with seating and flat-screen televisions airing current news.
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Photo courtesy of Southwest Airlines
Photo courtesy of Southwest Airlines
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two Standard Awards for one Freedom Award. The Freedom Award is free of seat restrictions except for a few blackout dates around major holidays, which means as long as there is a seat for purchase on a flight, members can use this new award to reserve it.
In conjunction with new fare types, Southwest has embarked on “gate make-overs” in each of is 64 airports. The enhanced gate areas are designed to cater to different types of customers and will include:
A family area containing small-sized tables and chairs,
Kid-friendly programming displayed on a flat screen television,
Low-to-the-ground power stations for charging electric devices,
A business/leisure section with padded seats, tables with power outlets, power stations with stools and flat-screen tele-visions with news programming.
San Antonio International and Dallas Love Field were the first airports to adopt the new look, and the airline anticipates a
full gate makeover during the first half of the year.
And in the near future, Southwest Airlines technological advances are enabling a number of changes passengers can expect.
In January, the company announced that it will be the first U.S. carrier to test satellite-delivered broadband Internet access on multiple aircraft. The innovation will enable customers with a WiFi-enabled device to have full access to the Internet including e-mail, music, shopping and virtual private networks via a high-speed connection. The airline is partnering with Southern California-based Row 44 and hopes to begin testing Internet capabilities on four aircraft this summer.
Customers will also soon enjoy a Southwest e-ticketing system, an electronic boarding process, enhanced kiosks and a tool that will let customer service agents interact more directly with customers.
Technology is changing operations in exciting ways as well.
“Customer experience changes are very visible, but there are some significant changes going on behind the scenes,” said
Jan Marshall, vice president of technol-ogy applications for Southwest. “Over the next year, we are focusing on on-time performance improvements, more effi-cient operations and enhanced mechanic schools. From a market standpoint, they’re equally exciting and will eventually impact the customer experience.”
These changes mark the start of a new era for Southwest Airlines, and there’s more to come.
“What you saw us implement in November is not the end,” said Dayley. “It’s the beginning. We have plans quarter by quarter, and they’re all focused on enhancing the flying experience for our customers. Stay tuned.” a
Lynne Clark can be contacted at [email protected].
Southwest Airlines will be the first carrier in the United States to test satellite-delivered broadband Internet access, giving customers in-flight access to external communications such as e-mail, music, shopping and high-speed connectivity. The carrier will begin testing on four aircraft within the next couple of months.
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Photo by shutterstock.com
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Photo by Robert Brown/iStockphoto.com
Virgin America’s
By Russ Perkins | Ascend Contributor
P A S S I O N A T E S T A R T
Virgin America has entered the U.S. domestic-airline picture with plenty of enthusiasm as well as innovative technology — making for an impressive start to what could turn out to be a long, successful and highly influential business run.
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Sir Richard Branson, chairman of the British-based Virgin Group, has spent a lifetime approaching business in his
own inimitable fashion — founding and operat-ing hugely successful companies in music and entertainment as well as global transportation.
And the primary unifying factor among Branson’s innumerable business ventures is that they usually work: Their essential features connect with customers, resulting in steady growth and sometimes-smashing success.
One of the Virgin Group’s well-known companies is Virgin Atlantic Airways, which has been operating since the mid-1980s featuring passenger-pleasing amenities com-bined with a low-cost business model that has made Virgin Atlantic one of the top choices for veteran flyers on the airline’s European and trans-Atlantic routes.
The Virgin Group also operates or maintains considerable investments in sev-eral other airlines, including Virgin Blue in Australia and Virgin Nigeria on the African continent.
Now the Virgin brand has been affixed to a new U.S. domestic airline: Virgin America Inc.
And judging by the Virgin America busi-ness plan as well as the airline’s performance since its August 2007 first flight, there’s every reason to believe Virgin America has what it takes to extend the pattern of success that business analysts customarily associate with many of the other innovatively oriented Virgin-branded enterprises.
Indeed, “innovation” might well be Virgin America’s middle name — with its innovative use of technology and passenger-comfort features that give the airline a unique feel in the domestic-U.S. air-travel market.
As a matter of fact, it required quite a bit
of innovation just to get Virgin America off the ground, due to strict legal specifications that limit U.S. domestic carriers to foreign owner-ship no greater than 25 percent.
The Virgin Group is now a minority share investor with U.S. investors holding a majority stake and a U.S. controlled board of directors. Virgin America now licenses the Virgin brand for marketing and public relations.
From its headquarters city and prima-ry base in San Francisco, California, Virgin
America has already built an expanding flight schedule — flying from San Francisco to transcontinental destinations New York and Washington, D.C., and also within the greater Pacific Coast region to Los Angeles and San Diego, California; Las Vegas, Nevada; and
Seattle, Washington. And many other highly desirable U.S. destinations are in the works.
But routes are not what make Virgin America unique. Neither — on the surface, anyway — are Virgin America’s Airbus A319 and A320 aircraft; however, the wealth of tech-nology inside those aircraft is another story.
What really makes Virgin America unique — besides the obvious spirit, enthusiasm and general excitement of its employees, who seem to grasp that they’re part of something
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All Virgin America first-class seats and two out of every three seat groupings in the carrier’s main cabin are equipped with adaptor-free 110-volt outlets.
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Indeed, “innovation” might well be Virgin America’s middle name — with its innovative use of technology and passenger-comfort features that give the airline a unique feel in the domestic-U.S. air-travel market.
HigHlight
Photo courtesy of Virgin America
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very different — is the Virgin America passen-ger experience.
The company’s marketing philosophy revolves around the concept that even though U.S. traveling customers have a number of choices from which to select when flying transcontinental or shorter routes, a new airline such as Virgin America might realize immense potential if it is able
to do things just a little differently — just a little better.
To that end, Virgin America first focused its efforts on hiring precisely the right type of person to work for the brand; a person capable of looking at things from the passenger’s perspective and making sure the airline provides an experience that will bring passengers back for more.
Basically, Virgin America started from scratch, carefully and assiduously studying the industry and trying to answer two key ques-tions: What do people like about flying? And what don’t they like?
This fundamental beginning was all in keeping with Virgin America’s mission state-ment — not commonly a business’s ultimate rallying point, but in this case the very reason for Virgin America’s existence: “We want to create an airline people will love.”
From that basis, Virgin America set out to assure that in the 21st-century world of airlines, it is truly a different animal, purchasing the brand-new, state-of-the-art Airbus aircraft, then leveraging technology in the planes them-selves to assure a totally unique passenger experience.
The technology that Virgin America is lever-aging includes staged, variable mood lighting with soft tones in color and brightness that change dur-ing the flight with conditions outside the aircraft as well as with the time of day.
Overall, the result is a calm, sophisticated environment designed for relaxation and enter-tainment. And the ultimate benefit is embodied in more-relaxed passengers who, theoretically at least, should arrive at their destination more rested and less stressed out by the flight, no mat-ter how long.
Virgin America’s Web site states that “we started with the things everybody likes” — then
Virgin America’s first-class cabin sports posh, spacious leather seats that include a massage function and international-grade 55-inch seat pitch.
Photo courtesy of Virgin America
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In its main cabin, Virgin America’s all-leather seats include 9-inch-wide screens as well as the handset for entertainment-system game controls and full keyboard.
Photo courtesy of Virgin America
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notes such things as, “Everybody likes plugs at their seats,” referring to the aircraft’s adaptor-free 110-volt outlets, which are located at all seats in first class and at two out of every three seat groupings in the main cabin.
But Virgin America’s passenger-pleasing technology also includes a colossal, multifaceted entertainment system that plays on a 9-inch-wide screen for each individual seat in both first class and the main cabin.
Passengers can test their skills playing popular, full-feature video games or select from 25 or more high-demand, late-release Hollywood movies.
And Virgin America’s passengers can also listen to an extremely broad range (in the thousands) of MP3 music tracks, watch live television, listen to live radio, shop, order food and drink when they want it during the flight, even communicate with one another.
And in the near future, Virgin America also intends to offer in-flight broadband Internet access.
In short, Virgin America plans to stop at nothing to assure that its passengers are able to enjoy the latest entertainment and ongoing-business opportunities that developing
technology can possibly deliver on a commercial aircraft.
And Virgin America’s amenities don’t end there. The airline is also attempting to take cushy passenger comfort to new levels.
In addition to the positive effects of its unique in-plane mood lighting, Virgin America wants its passengers to arrive at their destina-tion refreshed rather than flustered and harried; therefore, its aircraft seats have been designed for extra comfort.
In first class, Virgin America passengers get to cozy up in plush, oversized off-white leather seats, with built-in massage function and international-grade 55-inch seat pitch. Each first-class seat has an electronic seat-recline control, footrest and lumbar support. And each seat also features a handset with entertainment-system game controls and full keyboard.
Seats in the main cabin are luxurious black leather with soft lumbar support and a generous recline.
Each main-cabin seat also includes the handset for entertainment-system game controls and full keyboard as well as the aforementioned 9-inch-wide screen that is standard equipment in both first class and the main cabin, essentially
dwarfing comparable individual-seat equipment in the main cabins of other U.S. domestic airlines.
Once again: The primary idea guiding the Virgin America approach is to center the entire flying experience on the customer and to lavish passengers with in-flight technology and options they may never have previously imagined.
So far, the Virgin America philosophy seems to be working. Some might even say it’s like the days of yore, when flying was so much fun that passengers — to a certain extent, at least — almost hated for a flight to end.
Or perhaps it was never quite that much fun. But Virgin America is trying mightily to make it more fun now. And one of the best gauges of its ultimate success will likely be how fast various competitors among U.S. domestic airlines begin to copy many of Virgin America’s technological and passenger-comfort ideas as their very own. a
Russ Perkins is a sales director for Sabre Holdings®. He can be contacted
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18The percentage in wasted aviation
fuel, as a result of inefficient infra-
structure and operations, according
to the International Air Transport
Association. This represents more
than 100 million tons of CO2 per year.
83 The percentage of airline ticket sales that
are paid for with a credit card, according
to Edgar, Dunn & Company.
500
The amount in U.S. dollars of the esti-
mated average airline fare, according
to Edgar, Dunn & Company.
315 millionThe amount in U.S. dollars IATA’s
fuel efficiency efforts saved airlines in
the Middle East and North Africa last
year, according to the International Air
Transport Association.
1.5 billionThe estimated annual cost in U.S.
dollars that airlines are charged for
accepting payments by credit card,
according to Edgar, Dunn & Company.
+count it up
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12.50The estimated average fare in U.S.
dollars that is paid to merchant bank,
according to Edgar, Dunn & Company.
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Customers Come FirstCombining the best people with the most powerful information technology, processes and customer data, airlines can transform themselves into true customer-centric businesses.
Delta Meets ChangeSocial media opens several lines of communication between Delta Air Lines and its customers. It’s a significant part of the airline’s “Change” campaign, designed to hear the voice of customers and find ways to enhance their travel experience.
What Customers WantWith an enhanced focus toward customer loyalty, airlines are investing in advanced analytics to gain insights into customer behaviors and preferences, which will significantly impact carriers’ revenue management and inventory control processes as well as boost the bottom line.
Great Minds Think AlikeAirlines can take a “customer community” approach — using emerging technology — to collaborate and help develop the exact solutions and services they need to thrive.
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SPECIAL SECTION
Focus On The Customer
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Forget “ticketless” as the next big thing. Customer centricity has now become the revisited battle cry for air-
lines. They want to increase their focus on customers while reducing costs to remain profitable. For many airlines, this means a reduction in service levels on the ground and in the air for its customers, which is tough to balance when the goal is to improve customer service throughout the travel experience. In addition, airlines often complain that their technology keeps them from improving customer service. However, there are several technology-challenged air-lines that continually top various industry lists in this area.
As part of a renewed customer focus, many carriers are reducing expenditures on customers, and while this is very visible to travelers, it has little effect on total costs. It is estimated that variable costs associated directly to the customer vary between 7 percent and 10 percent, depending on the airline’s business model.
Regardless of an airline’s costs, ser-vices and technology strategies and issues, customer centricity is shaping up to be the mother of all battles. It’s a force to be reckoned with, and in doing so, there are three key areas airlines must understand and master to be truly customer centric: Customer expectations,
Employee coordination, Technology usage.
Customer ExpectationsBasic customer expectations are that
the airline will maintain operational integrity — on-time performance, few cancelled flights and efficient recovery from service failures. But customers also expect a certain level of customer service.
First and foremost, customers expect to be treated with courtesy and respect (although they don’t often perceive it as a two-way street). Why? Airlines often forget that air travel is still a big event for most travelers and, often times, a fearful one. Unlike moving from point A to point
Customers Come First
By Stan Boyer | Ascend Contributor
special reportPhoto by shutterstock.com
Combining the best people with the most powerful information technology,
processes and customer data, airlines can transform themselves into true
customer-centric businesses.
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B in an automobile, in which the traveler either has perceived control of his or her destiny or at least influence on it, passengers have little or no control when flying on an airplane. And although flying remains one of the safest means of travel, special consideration has to be made for fearful flyers whose anxiety begins well before that of the average traveler.
Fear of flying is just one aspect of anxi-ety. Each time travelers elect to fly, anxiety — in a variety of ways and for a variety of reasons — begins to rise long before they reach the airport.
Generally, the first sign of stress comes when customers must decide how to book travel. Should they use the airline’s Web site, a travel agency, call the airline directly? These issues may seem mundane to most airlines, but consider that most leisure travelers take one trip per year and most business travelers take three to four trips per year. If one were to play golf with this infrequency, no doubt simi-lar emotions would surface. Decisions about which items to take along as well as determine who will take care of daily responsibilities, such as the pets, the house or apartment, the mail, and the bills, create equal anxiety.
Next is the stress that’s more closely related to the airport experience. Will there be parking? How will I get my luggage to the counter? How much extra will I have to pay? Will my clothing or jewelry set off security alarms? Is deodorant a liquid or a gel? All of these concerns work together to place cus-tomers in an edgy, yet usually controllable, emotional state. Any small deviation from cus-tomers’ perceived expectations of the airport experience, including interaction with airline personnel, can cause very sudden and unwel-come outbursts.
Anxiety increases further when cus-tomers must consider airport and in-flight amenities. Will they have permission to visit a lounge if they have an extended layover? Will there be enough space for carry-on items? Will there be food on board? Will there be a fee for it? Will the seat be next to the lavatories? Will there be an orderly boarding of the plane, or will it be a free for all? Will the flight leave and land on time?
Customers finally reach their seats, either assigned or open seating. Now thoughts turn to the flight experience itself. Takeoffs can be tense. The flight may be turbulent (and safety videos, though required, are not necessarily fear relievers). And while landing is welcome, the pilot may have to circle for a landing slot. Numerous in-flight activities can cause additional stress for travelers.
Because of the anxiety that natu-rally comes with air travel, a thorough understanding of and continuous atten-tion to customers’ needs and concerns are required by genuinely customer-centric airlines. These carriers must understand how to best interact with customers at each touch point. Most airlines are very compartmentalized and can optimize a single set of touch points, but few continu-ally seek to optimize the entire customer experience. While it is nearly impossible to have all touch points receive the highest rating, it should be a goal of the airline to at least lessen the discrepancies between touch points.
Another way of learning and under-standing customers’ needs and desires to further improve the customer experience is to divide them according to economic
category — economy, business and first class.
Economy ClassThis customer most likely travels in the
least of the economic compartments. The expenditure for air travel, while deemed too low by the airline is often perceived as signifi-cant by the customer. Why? Perhaps because it’s a one-time event that usually costs more than US$100 and the air travel cost is only one element of overall trip expenses. Ask the same set of customers how much they spent on their last restaurant meal and no doubt, it will have been substantially less. Without taking a class in airline finance, the customer has expecta-tions that service levels should exceed that of a restaurant. Unfortunately, for many airlines, this is not the case. Customers must follow a maze of signs and passageways only to queue at vari-ous stops along the way. For those unfamiliar with the experience (and even for those who are familiar), it is simply exhausting.
Business ClassBusiness-class customers are likely to
travel much more frequently than those in economy. Many left a meeting prior to the flight and must get to a meeting almost imme-diately after landing. This includes travelers on short-haul domestic flights as well as those on long-haul international flights. For this reason, the customer desires a most-efficient, hassle-free booking and airport process. The onboard experience must first and foremost provide a comfortable seat that reclines as much as pos-sible into a position for sleeping.
First ClassThis is a diverse group of customers. They
range from frequent flyers who get upgraded to the wealthy who prefer a little luxury in the sky. A comfortable seat remains the top priority, with tasteful meal service a close second.
Unfortunately, for all customers, airlines are most likely to experience service degradation during the airport experience, with less-than-desirable boarding processes. What good is having a seat assignment when the boarding process makes travelers fearful that they will never reach the seat alive?
Culture plays a large role in determining how customers behave at the gate. However, Walt Disney Theme Park has demonstrated how well a nicely designed queue system works. One may argue that there is not room at the gate for extensive queue control. Understandably, this is the case at most air-ports; however, a few airlines have figured out that seat assignments are not as important as the boarding process itself. These carriers have carefully considered the boarding process to make it orderly and efficient for all.
Within each major economic category and across the categories, there exist sub-
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Customer-centric airlines should strive to provide consistency across all customer touch points, measuring effectiveness using a scale of 1 to 5, with 5 providing the best customer service. Using this scale enables airlines to quickly determine strengths and weaknesses so improvements can be made that will increase customer satisfaction.
Sample Ratings of Customer Touch Points
Ratin
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ale
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5
4
3
2
1
0
Mar
ketin
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unic
atio
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Publ
ic re
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lls
Web
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act c
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cy re
latio
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n tra
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side
Secu
rity
Gate
Outb
ound
loun
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Inbo
und
loun
ge
Chec
k-in
Infli
ght
Tran
sfer
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Bag
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Arriv
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vice
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groups of customers (families, corporate travel-ers, holiday travelers, travelers visiting friends and relatives, travelers on religious pilgrimages) who have different needs and expectations. These may be further subdivided into frequent and infrequent as well as international and domestic travelers.
Employee CoordinationEmployee coordination is key in providing
top-notch customer service. Today, customers often have as much or more information avail-able to them than airline staff. The difficulty airlines face is two fold. Customers have more access to information than ever before, and they expect airline staff to be equally informed. As airlines reduce staff, they also apply more technology that the remaining staff must learn to operate.
During the booking process, custom-ers can select specific seating through graphical seat maps, and they can also com-pare on-time statistics for particular flights. Members of a loyalty program can see their points or miles online any time and have an expectation that airline employees will have similar capabilities. Their preferences for seats and other special requests are expected to be preserved by the airline for future reference, and the airline employee is expected to have similar information or at least be able to efficiently coordinate with someone who does. Basically, the more information about a particular traveler
airline staff has at its fingertips, the less stressful and more seamless the experi-ence is for the customer.
For airline employees to excel, how-ever, they need to have all types of cus-tomer information readily available. It needs to be constantly updated and in real time so all employees have the same information regardless where the customer is during his or her journey.
Unfortunately, many airlines don’t leverage their technology to track and move customer data efficiently between work groups, making it difficult for their employ-ees to have critical customer data.
Technology UsageEven when airlines have adequate
technology, existing business processes
may prevent them from making the most of customer data. For example, some reserva-tions systems, such as SabreSonic® Res, offer customer profiles that enable any airline staff to access customers’ future and historical travel records by looking up their name or address. To use the function-ality, the airline must have processes that ensure each customer is assigned a profile number. This can be a manual or an auto-mated process; however, if the capabilities aren’t used, employees cannot provide superior customer service. Many airlines are unaware of the capabilities of their existing systems, and even if they know
the capabilities, some are slow to adapt to a new world of customer focus.
Technologies from other industries, such as publish and subscribe, can be integrated into the airline environment, enabling data to be automatically pushed to airline staff, who, as a result, will be more efficient and coordinate better with one another to provide superior customer service. Consider an example whereby maintenance teams could “push” mainte-nance log items to pilots well in advance of customers actually boarding the plane. This would enable pilots to make decisions about whether an aircraft should remain in service or be taken out of service before customers board the plane.
Becoming a customer-centric airline requires cultural change. Airlines must be focused on meeting and exceeding cus-tomer expectations. They must excel at employee coordination. And they must learn to use their technology more strategi-cally. a
Stan Boyer is delivery director for Consulting and Solutions Delivery at
Sabre Airline Solutions®. He can be contacted at [email protected].
Unfortunately, many airlines don’t leverage their technology to track and move customer data effi-ciently between work groups, making it difficult for their employees to have critical customer data.
HigHlight
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Passenger costs represent between 15 percent and 20 percent of an airline’s variable costs and 7 percent to 10 percent of an airline’s total operating costs, depending on the airline’s business model. Unfortunately, many airlines choose to cut costs in this area first, decreasing customer service levels and having a limited effect on overall costs.
Total Operating Costs
Indirectcosts
25% 16% 8%
Directcosts
75% 84% 92%
Totaloperating
costs
100%
Fixedcosts
36% 42% 46%
Variablecosts
64% 58% 54%
Flightcosts
85% 82% 80%
Passengercosts
15% 18% 20%
Flag carrier U.S. average Low-cost carrier
27% 35% 42%
48% 49% 50%
41% 37% 38%
7% 9% 10%
Figures in white represent percentage
of the total operating costs.
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Photo by shutterstock.com
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By Lynne Clark | Ascend Staff
DELTA MEETS “CHANGE”
Social media opens several lines of communication between Delta Air Lines and its customers. It’s a significant part of the airline’s “Change” campaign, designed to hear the voice of customers and find ways to enhance their travel experience.
T raditional network carrier Delta Air Lines is looking decidedly “new school” these days. Barely one year
out of Chapter 11 restructuring, the 80-year-old airline tells customers it’s not the same old airline. Underscoring the message is its delivery through 21st-century social media technology including podcasts, animated videos and blogs.
Customers seem to be getting the message. In February, Delta reported record load factors for January. Load fac-
tors for international (76.3 percent), Latin America (82.3 percent), domestic (74.9 percent) and system (75.4 percent) were higher than any previous January on record for the carrier.
While much of the company’s new success is due to international market expansion, many analysts credit Delta’s marketing initiatives. Last May, it launched a multi-million-dollar re branding campaign to mark a new era; introduced an updated, boldly modern corporate brand; and show-
cased a reinvigorated customer experi-ence. The campaign, entitled “Change,” honors Delta’s strong heritage with a renewed sense of vitality and focuses on the airline’s effort to rethink every moment of the travel experience from trip planning to arrival.
A key component of the campaign is the use of social media. Modem Media created a new Web site for Delta, dubbed delta.com/change, which launched last May. The site enables travelers to partici-
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pate in a dialogue about their travels, share ideas and travel tips, and provide feedback. Today, the site is home to the company’s “Under the Wing” blog, where custom-ers can hear directly from Delta leaders about some of their most passionate and inspiring ideas, as well as some upcoming changes.
“What Delta is doing is position-ing the airline in the right way from a marketing standpoint,” Henry Harteveldt, principal analyst at Forrester Research Inc., said during a social media conference last year. “They’re doing all these things to show John Q. Public that this is not your father’s or your grandfather’s Delta, that they are serious about changing. Marketing a product plays a role in how an airline is investing in itself.”
Kristen Manion, Delta’s general manager of relationship marketing, said the “Change” campaign opened the door to social marketing opportunities.
“Delta wanted to show customers that we had taken our time in Chapter 11 to change and that we were truly a new airline,” she said. “Part of what we wanted to do was to open up conversations with customers. Social media provided that opportunity.”
Jacob Morris, product manager of delta.com, said, “We were looking for opportunities to connect with customers in an open, human and meaningful way. Our challenge was how do you take that ‘Change’ brand message and communicate it online. That translation for us was social technol-ogy, which allowed a two-way dialog.”
What Is Social Media?Wikipedia defines social media.
“Social media describes the online tech-nologies and practices that people use to share opinions, insights, experiences and perspectives with each other. A few prominent examples of social media applications are Wikipedia (reference), MySpace (social networking), YouTube (video sharing), Second Life (virtual real-ity), Digg (news sharing), Flickr (photo sharing) and Miniclip (game sharing). These sites typically use technologies such as blogs, message boards, pod-casts, wikis and vlogs to allow users to interact.”
Andy McDill, Delta spokeman, said that social media takes consumers behind the scenes.
“It makes for a nice middle ground for getting your message out and also creating buzz,” he said. “It’s not mass communi-cations like an ad or press release. But it’s not one-on-one either. It’s a middle-of-the-road way to communicate.”
Social-networking Web sites rep-resent an important media channel for reaching a diverse demographic, including teens and young adults, women, moms, affluent consumers, and older individuals. According to a report last May by Market Wire, experts expect U.S. ad spending on social networks to grow approximately 200
percent by 2011. That’s because consum-ers respond less to traditional media and advertising and are moving toward con-sumer-to-consumer communication such as blogging, mobile messaging, comparison shopping via sites, word-of-mouth market-ing and peer-to-peer networks. Researcher Chris Ward states that 80 percent of con-
Delta Air Lines’ refreshed brand — a three-dimensional, red “widget” icon flying across a blue background and the result of months of employee and customer research — will appear on more than 900 Delta and Delta Connection aircraft, in more than 300 airports, on Delta’s award-winning delta.com Web site, and in all advertising and printed material.
As part of its US$10 million re-branding effort announced April 2007, Delta Air Lines repainted its planes to reflect its new modern corporate brand. The airline rolled out the first Boeing 757-200 painted in the new livery at an employee celebration in Atlanta, Georgia, shortly after the announcement.
Photo courtesy of Delta Air LinesPhoto courtesy of Delta Air Lines
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sumers trust advice from friends online, representing three times as much trust than via traditional media. Further, one in three Internet users visits Web sites containing user-generated content to help make purchase decisions. It’s not surpris-ing, then, that companies such as Delta are successfully leveraging their marketing communications via social networking Web sites to achieve one or more objectives, including:
Improve customer understanding, Promote issues of social concern, Promote products and services, Facilitate internal knowledge sharing, Increase brand awareness.
Adventures In CyberspaceDelta is focusing its social network-
ing in three primary areas: 1. “Under the Wing” blog,2. Video logs (vlogs) including “SiteSeer Travel
Cast,”3. “Planeguage.”
The narrow focus keeps the resource impact manageable. Content is provided by internal employees. Morris moderates the blog with help from an outside firm that fills in when he is unavailable. Manion man-ages content for the video logs. In terms of the number of comments, “Under the Wing” averages five to 20 comments daily. Employees always respond the same day.
“We get content, good and bad,” said Morris. “We’re open to whatever people want to discuss. One minute we’ll be talking about in-flight entertainment and then someone comes into the conversa-tion and turns it into a discussion about the kinds of drinks we offer on board. It’s never boring.”
One of the company’s most popu-lar sites is “SiteSeer Travelcast,” a mini travel show featuring Delta employees at different locations around the world. One recent post showcased shopping in Mumbai, India, with Cindy and Smita. The pair took viewers to a shoe market where they bought beaded shoes; a vegetable market where a local shop owner mixed an after-meal breath freshener, “an acquired taste,” according to Cindy; and a flower market where they bought jasmine.
“SiteSeer Travelcast makes travel real for customers because they see our employees — not actors — who give insider tips on places to eat, where to stay, local customs and other things travelers want to know about,” Manion said. “Any of our employees can provide content.”
Customers were the content experts for a widely popular “SiteSeer Challenge” that ran late last year. Contestants were chosen from among 500 video applications submitted by customers who were asked
to tell why their team was a perfect travel pair. Five teams were chosen to travel together to an international destination where Delta captured their travel adven-ture on video. Videos from each of the five teams were then posted onto the SiteSeer Travelcast Web site and viewers voted on the best team. Those who received the fewest votes were eliminated. The grand prize winners — a retired couple from Salt Lake City, Utah — won 1 million frequent flyer miles.
“Planeguage” — the language of traveling by plane — is another very popu-lar social media venture by Delta. The humorous series of animated short videos
highlight universal truths in travel. For example, one called “Domino” was the result of a passenger complaint about fellow passengers who aggressively, with-out warning, recline seats into their laps. Domino reflects the mayhem that could ensue if an entire row fully reclined its seats simultaneously without warning.
“These are tongue-in-cheek anima-tions that highlight those irritating, yet often times humorous, moments we’ve all experienced while traveling,” said Morris. “These tell our customers, ‘yeah, we’re with you … we understand.’”
Planeguage is posted on Delta’s blog where customers are encouraged to share
their travel woes. The videos are also posted on YouTube and iTunes.
Not An Easy SellAt first, it wasn’t easy to get Delta
executives to launch social media sites. However, the idea had many proponents who saw it as a natural fit with the corpo-ration’s “Change” campaign.
“At first there was a lot of hand-holding and acclimatization,” said Morris. “But we got it out there and everybody realizes it’s not that bad. For corporations this size, it’s very hard to want to let go of control of the conversation. We’ve done that. We started to dip our toes into it and
everybody sees it’s a good thing and our customers love it. So many people spend so much time debating on whether or not to do it. I say, just do it. The value you get for your brand can’t be matched with other media.”
“Customers are talking about you anyway,” Manion said. “You might as well insert yourself into the conversation.” a
Lynne Clark can be contacted at [email protected].
As part of its strategy to turn its attention more closely to its customers, Delta Air Lines has made numerous changes, including leveraging social media such as blogs, message boards and podcasts. This interactive approach enables the carrier’s customers to share views and express what’s most important to them during their travels.
Photo by shutterstock.com
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T o get closer to customers and understand what they truly desire, airlines are investing in data mining, business intelligence and
advanced data analytics to understand consum-er traits, behaviors and preferences to improve customer retention, acquire new customers and maximize the revenue-generation potential with every customer interaction. The renewed focus on customer loyalty and experience for airlines to dif-ferentiate themselves also has a significant impact on pricing and revenue management.
Key EnablersCustomer-centric revenue management is
an enabler of customer relationship management to increase an airline’s profitability based on customer insight. Traditionally, it has been the role of airline
marketing to acquire new customers in the most cost-effective manner. However, today, it requires a combination of marketing, revenue management and real-time inventory control to facilitate one-to-one targeted responses to manage the customer life cycle across all customer touch points. Key business drivers are converging to enable customer-centric revenue management along six key dimen-sions. While these initiatives along these six dimen-sions can be sometimes viewed as independent initiatives, they need to come together in a cohesive framework for an effective pricing and revenue management program.
Business process changes necessitated with a desire to get closer to customers has resulted in the most significant changes in pricing and rev-enue management since the introduction of origin-
and-destination revenue management in the mid 1990s.
Consumer Preference ForecastingThe arrival of the Internet in the mid 1990s
was followed shortly with Web travel supermar-kets and consumer-direct Web sites. With the growth in online bookings from airline Web sites and supermarkets, there is a new source of rich data to model consumer preferences and estimate demand for an airline’s product. Forecasting using this approach is based on the fundamental recogni-tion that demand is the outcome of a consumer choice decision. Demand forecasting based on consumer preferences follows the actual demand process in terms of how a specific air product is purchased for travel. Consumers typically select
What Customers Want
By Ben Vinod | Ascend Contributor
Key business drivers — understanding the customer, interactive marketing and accurate real-time availability across all channels — are joining to facilitate customer-centric revenue management along six key dimensions.
1:1 marketingCustomer-centricavailabilityBranded productsAttribute (ancillary services) preferences
Interactivemarketing
Consumer knowledgediscovery-baseddecision making
Key initiatives
Understandingthe customer
Predictive analyticsCustomer preferencesAlternate segmentationWillingness to pay
Customer retentionTrue availabilityIncremental bookingsMinimize UCs and price jumpsPoint-of-sale control
Accurate real-timeavailability across
all channels
Customer-centricpricing and
revenue management
Key Drivers To Enable The Six Dimensions Of Customer-Centric Revenue Management
Intelligentpro active
faremanagement
Consumerpreferences-
based demandforecasting
Faresimplification
Productunbundling
Accuratereal-time
availability
Alternatesegmentation/
brandedproducts
With an enhanced focus toward customer loyalty, airlines are investing
in advanced analytics to gain insights into customer behaviors and
preferences, which will significantly impact carriers’ revenue management
and inventory control processes as well as boost the bottom line.
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an itinerary based on a combination of schedule attributes and price.
This new source of data used for forecast-ing demand based on consumer preference is called shopping data. The forecast model is based on a customer’s utility function — a function of market share, market size, competitive schedule changes, type of service (nonstop, direct or connec-tion), carrier preference in a market, type of aircraft (turbo, jet), requested time, departure/arrival times, elapsed times, displacement time between ser-vices, route frequency, fares and applicable restric-tions. Introducing price into the equation has the advantage of being able to react quickly to major fare specials. This approach to forecasting is a vast improvement over traditional time-series models that do not consider the effects of competitor sched-ule, quality of service attributes and prices prevailing in the market.
An effective method to forecast dependent demand, or demand that is a function of the price and other consumer choice variables, is to adopt a top-down consumer choice model that follows the actual demand process of itinerary selection by a customer. In addition, a consumer choice-modeling framework is the only practical method to forecast restriction-free demand where only the price point determines the product and consumer demand is dependent on the price points. Besides forecasting demand, this approach can also be used to estimate the demand for new markets, impact of flight schedule changes, up-sell rates, recapture rates and price elasticities. Calibration of a logit choice model requires a combination of industry data, airline data and actual passenger booking sessions that reflect the options available and the choices made by passengers.
Last August, Sabre Airline Solutions® deployed the world’s first consumer-preference-based demand-forecast model for GOL, Brazil’s fastest-growing low-cost carrier with a primary hub in São Paulo, as part of the Sabre® AirMax® Revenue Management Suite for O&D control.
Fare Simplification The first attempt at value pricing was made
in April 1992 by American Airlines, a bold initiative to move to a radical simplification of a fare structure that had grown in complexity since deregulation. Instead of selling seats at several prices, American Airlines offered only four types of fares — first class, regular coach and two discount coach fares that had a sev-en-day and 21-day advance purchase restriction. The carrier’s value pricing initiative also planned to abolish corporate discounts. Acknowledged by industry analysts as well ahead of its time, the value pricing initiative by American Airlines, however, collapsed when major competitors that had initially matched American’s tariff structure quickly retracted, which prompted American’s then Chief Executive Officer Robert Crandall to famously remark “you are only as smart as your dumbest competitor.”
With the objective of providing transparency in fares to customers, low-cost carriers reintroduced simplified fares in the late 1990s with an added
twist by dropping restrictions. The earliest fare simplification model, which is still practiced by a few LCCs today, relies on a pure restriction-free pricing structure. In this scenario, an airline would file multiple fares with the same identical minimal fare restrictions across all fare classes. Hence, the probability of selling a fare higher in the hierarchy is contingent on the immediate lower fare being closed for sale. In other words, the fare structure promotes a 100 percent sell down to the lowest available fare since there is no distinction in the product with the exception of the fare value. With this approach, when a flight is first detailed in the reservations system, there is a single one-way fare in the market. In this scenario, revenue manage-ment should forecast dependent demand based on current fare class that is open. In addition, active monitoring and closure of selling fare at the right time is required to promote sell-up to the higher fare and maximize flight revenues.
As low-cost carriers have grown from start-ups to established airlines with an increasing and sometimes dominant market share, the evolution of fare simplification has gravitated toward a hybrid model based on the realization that fare restrictions provide flexibility and the ability to target specific customer segments. The hybrid model has unique class groups or restriction sets where each class group has the same fare restrictions but with differ-ent fare values. With launch carrier bmi, Sabre Airline Solutions introduced the first leg/segment revenue management solution with decision support for restriction-free pricing in 2002.
The dilemma faced by full-service network airlines is how to effectively compete against low-cost carriers in key markets that are predominantly short haul where profitability is the exception rather than the rule. Even established and well-run carriers such as British Airways have been unable to oper-ate profitably on the intra-European routes, even
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Booking class Fare
Advance purchase
Minimum stay
Cancellationpenalty (%) Description
Y US$279 – – 100% • Fareclassesarenot independent
• Lowerfaredifferential
• Multiplefaresarefiledbutwith the same identical restrictions
• Promotes100percentsell down to the open-fare class due to the absence of restrictions
B US$249 – – 100%
M US$209 – – 100%
H US$179 – – 100%
V US$159 – – 100%
Z US$139 – – 100%
Q US$109 – – 100%
When considering a simplified pricing structure where the fare amount is the only determinant of the market segment, all fare rules are identical.
Single-DimensionalRestriction-Free Tariff Structure
Booking class Fare
Advance purchase
Minimum stay
Cancellationpenalty (%) Description
Y US$279 – – 25% • Products(fareclasses)with identical restrictions are not independent
• Multiplefaresarefiledwith identical restrictions
• Promoteslessthan100percent sell down since multiple classes with different restrictions may be open
B US$249 – – 25%
M US$209 – – 25%
H US$189 7AP 3 50%
V US$169 7AP 3 50%
Z US$149 7AP 3 50%
Q US$129 21AP 7 100%
R US$109 21AP 7 100%
W US$99 21AP 7 100%
In the case of a simplified fare structure with three class groups, within each class group the restrictions are the same and the fare amount is the only component that is different.
Hybrid Restriction-Free Tariff Structure
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before the arrival of the LCCs. While retaining their traditional fare structure with restrictions for connecting traffic, network carriers have to compete against low-cost carriers on short-haul routes. To compete and protect market share, they have to operate in a hybrid environment. From an inventory control perspective, to oper-ate in a hybrid environment, a cabin on a flight can be viewed as consisting of a virtual partition to accommodate the optimal mix of custom-ers on the traditional fare structure in the first partition and the optimal mix of passengers who purchase unrestricted fares at various price points in the second partition. Hence, the two types of inventory controls for the two passenger types should co-exist on the same flight. The consumer choice modeling approach can be used to forecast traditional fare classes (independent demand) and restriction-free fare classes (dependent demand). However, the network optimization model poses some unique challenges since there are two types of passengers — restriction-free and regular tariffs. The world’s first restriction-free pricing solution for network carriers that control inven-tory by O&D was launched with the AirMax suite deployment at GOL that uses a new fare-adjustment approach to transform dependent demand into independent demand and solving the modified problem with the proven stochas-tic network optimization model from Sabre Airline Solutions.
Alternate Segmentation Getting closer to the customer requires
an understanding of the underlying data and an investment in a data management infrastruc-ture. With an investment in the storage and analysis of passenger name record and ticket data, there is a growing interest in segmenta-tion of customers beyond the traditional book-ing class to promote brand recognition and cus-tomer retention. While booking classes are still required for inventory control and distribution of availability through GDSs, alternate segmenta-tion offers a framework for implementing key marketing initiatives.
Creation of a data management infra-structure supports a deeper understanding of the customer base and prevents customers from leaving through the revolving door.
The creation of alternate segments beyond the traditional booking class is typically accomplished based on a desired marketing objective. For example, displaying availability to an end consumer based on value score may be a desired marketing objective. In this scenario, the customer lifetime value, or CLV, is a mea-sure of the present value of the likely future rev-enue stream generated by a customer. Hence,
where CTA is the cost toward acquisition of the customer and VTD is the value to date from incep-tion up to the current time period and the last term, which is the most important measure, is the remaining customer lifetime value. Rt is the revenue in period t, Ct is the direct variable cost in period t and i is the cost of capital.
By sorting the CLVs or remaining CLVs in descending order, the individual measures can be grouped to create target segments for various marketing programs. An example of the use of CLV for an airline is to execute a promotion for frequent flyer customers who have not flown on an airline for a specified period of time. In this scenario, the data is first segmented to only include frequent flyers who have not flown for a specific time period, such as 12 months. Next, these customers can be clustered by CLV and specific CLV tiers can be selected for the promotional campaign to achieve the desired mar-keting objective of generating incremental bookings by providing incentives for these target customers to fly.
Branded fares provide another example of alternate segmentation beyond the booking class. To overcome the perception of an airline seat as a commodity, a key initiative in the airline community is to focus on the brand, describe the uniqueness of the products offered for sale and communicate the product offering to the customer.
The standard segmentation of customers for revenue management is based on the booking class. Up to 26 booking classes can be used, which can be distributed through GDSs. This paradigm does not change with branded fares since booking classes are still mapped to the branded-fare families. However, it spawns several new requirements for reservations processing, revenue management and distribution, including: Ability to maintain booking counts by branded prod-
ucts in real time to display availability by branded product,
Support for the display of availability by branded product through both the consumer direct Web site and the GDS (The marketing objective of airlines is to have a travel agent on a self-service online booking engine describe the branded products to customers when a selection is being made.),
Display of availability should indicate if the branded product, such as premium economy, is available and at what price,
Demand forecasting that models the actual demand process requires a top-down approach to first forecasting demand for the branded prod-ucts followed with a forecast for booking classes mapped to the branded product.
The Sabre® global distribution system product called Sabre® Branded Fares has been successfully deployed with Qantas Airways and Porter Airlines, which enables a new way of displaying fares that is integrated with the agency desktop workflow for Sabre Connected SM travel agency points of sale.
Product UnbundlingIt is a well-known fact that for typical consum-
er purchases, such as toothpaste, deodorant and automobiles, one-third of all customers purchase based on price, one-third based on quality and one-third based on brand recognition. However, airlines have always been an anomaly. Leisure passengers are notoriously price sensitive and business pas-sengers base their decision on price and schedule. Brand loyalty is minimal unless the prices of the competing itineraries are very close. To differenti-ate their brand and create brand loyalty, airlines are experimenting with offering a no-frills base fare and adding back services for which customers are truly willing to pay.
With the growing emphasis on ancillary prod-ucts and services as a potential revenue stream that can augment the bottom line, airlines require the capability to sell, distribute and settle ancillary ser-vices across all channels of distribution. This implies that a capability is required to set the prices for ancil-lary services, distribute products with differentiated content and conduct financial settlement across all channels. This has significant impact on the capabili-ties of current airline reservations, global distribution and revenue accounting systems.
In a recent study, ATPCO estimated the opportunity value of a global industry solution to exceed US$9 billion in revenue. Ryanair recently reported that its ancillary revenue rose 31 percent in the quarter ending June 30, 2006, outpacing its 20 percent increase in traffic. At easyJet, ancillary rev-
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Airline Branded fares
Air Canada Tango, Tango Plus, Latitude, Executive
Porter Airlines Firm, Flexible, Freedom
bmi Tiny, Economy, Premium Economy, Business
AviancaPromo (Promotion), Econo (Tourist), Flexi (Flexible), Plena (Full Rate), Ejecutive (Business)
There are several examples of branded fare families adopted by some airlines. Each branded product is a fare family with unique traits that are essentially soft qualifiers bundled into the product definition such as access to pre-reserved seats, frequent flyer miles, lounge access and baggage count allowed at no charge.
Branded Fare Families
CustomerLifetimeValue = -CTA+VTD+
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enue accounted for 8 percent of the global revenue for the first half of 2006.
An independent survey conducted by Leflein Associates in January 2006 showed that many travelers would pay for extra perks such as more frequent flyer miles, more overhead bin space and the ability to sit in a child-free section of the aircraft. Other ancillary items promoted by airlines include in-flight Internet access, pre-reserved seats, access to the frequent flyer lounge and ground transportation. The two primary trends that have been identified in the unbundling of airline products at the time of booking include:1. Distribution of a variety of in-flight products and
services (pre-paid seats, checked baggage, meals, entertainment, etc.) and services con-sumed either before the flight or after the flight (access to frequent flyer lounge, pre-paid limo pick-up, etc.),
2. Selling optional flexibility with the use of their fares.
Today, the pricing of ancillary services, fre-quently referred to as attribute pricing, typically has the same value across the airline network. However, the future evolution of attribute pricing will vary by market for some ancillary services, such as pre-reserved seats, based on prevailing competitive market conditions. Pricing for ancillary services can be determined by using predictive analytics based on consumer preferences gathered from the book-ing process and survey data.
Promoting ancillary services also has an impact on revenue management. If certain custom-er segments are more likely than others to consume ancillary services, this should be factored into the decision-making process when discount allocation controls are established on an airline’s reservations inventory system. Hence, the average passenger revenue for a booking class can be augmented with the ancillary revenue forecast before nested seat allocations are determined to ensure that seats pro-tected for booking classes with an ancillary revenue upside receive additional seats. As ancillary revenues proliferate, this requires a forecast of the expected ancillary revenues by customer segment based on historic consumption that can then be added to the average fare value of the booking class to get a true representation of contribution when the network is optimized. Current revenue accounting systems do not aggregate ancillary services consumed to a flight segment. Hence, the challenge is to enhance the existing revenue accounting systems to track the usage of ancillary revenues by flight segment and booking class.
Sabre Airline Solutions is partnering with Midwest Airlines to launch merchandising through the Sabre® Distribution Merchandising Suite with enhancements to SabreSonic® Res for reservations, inventory and departure control processing and the QuasarTM passenger revenue accounting system. This unique new solution will enable airlines to differentiate and sell premium airline seats in a coach-class cabin, and it will be available initially at the Midwest Airlines Web site and airport kiosks during check-in. Premium seat selection will also be
available at any Sabre Connected travel agent after the initial rollout.
Intelligent Proactive PricingTactical and strategic price leadership in a
market is increasingly viewed as a competitive weapon. Tactical pricing is the traditional fare man-agement process of responding to a fare action taken on a specific fare in a market by a competitor.
Strategic pricing has a longer term view and is the process of promoting an entirely new tariff structure for a market.
Traditional airline pricing has relied on reactive fare matching to respond to competitor actions. Sometimes, the reaction ripples through other mar-kets or differs from the original change, inducing a sequence of changes. The objective of reactive fare
Airline Branded fares
Air Canada Tango, Tango Plus, Latitude, Executive
Porter Airlines Firm, Flexible, Freedom
bmi Tiny, Economy, Premium Economy, Business
AviancaPromo (Promotion), Econo (Tourist), Flexi (Flexible), Plena (Full Rate), Ejecutive (Business)
There are several examples of branded fare families adopted by some airlines. Each branded product is a fare family with unique traits that are essentially soft qualifiers bundled into the product definition such as access to pre-reserved seats, frequent flyer miles, lounge access and baggage count allowed at no charge.
During the traditional fare management process, the fare distributors disseminate all fare changes, and the airlines respond to competitor fare actions.
Globaldistribution
systems
Pricemonitoring
ATPCO/SITA transmit fare changes several times a day to airlines and GDSs
Tactical Fare Management Process
Finalizefare response
Airlines review and respond to fare changes for the next scheduled transmission
Apply farematching rules
Faredistributors
Rather than the recommended fare management process where fare matching is taken for granted, here, the quality of service is considered to determine the ideal fare response to a competitor’s fare actions.
Customer-Centric Tactical Fare Management Process
Globaldistribution
systems
Pricemonitoring
ATPCO/SITA transmit fare changes several times a day to airlines and GDSs
Quality ofservice
visibility
Faredistributors
Finalizefare response
Apply rules toreflect quality
of service
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changes is often to match a competitor’s fare to preserve market share.
Traditional tactical fare matching can be replaced by determining the right response based on the quality of service offered by the competitor that initiated the fare action. Therefore, the tactical fare response to a specific fare action by a competitor can be an intelligent response as a function of the quality of service. If the quality of service offered by a com-petitor that initiated the action is inferior, a fare match response may not be the desired alternative.
Accurate AvailabilityThe exponential growth in online bookings
during the past decade has provided customers with instant access and visibility into competing sched-ules and fares through Web supermarkets such as Travelocity and Expedia. This unparalleled transpar-ency of schedules and fares over the Internet has propagated a bargain-hunting mentality among leisure online travelers, resulting in a disproportionate growth in availability processing due to increased shopping activity. As a result, the need for greater revenue and inventory control has not been greater. Due to the growth in online shopping coupled with the use of robotics for comparison shopping across Web sites, it is estimated that the look-to-book ratio from online channels can vary from 100:1 to well over 1,000:1 in certain markets. With these high shopping volumes, online Web supermarkets resort to cached availability for two reasons: 1. Reduction in transaction costs associated with
querying an airline’s host CRS for true last-seat availability,
2. Faster response times from availability data that is readily available in cache.
The cache is periodically refreshed based on algorithms that are a function of the age and usage
of the availability data. When an item is not found in cache, the response to an end consumer can be based on pre-stored AVS or a direct query to the host CRS of the airline to refresh the cache.
Cached inventory unfortunately is often inaccurate since online channels typically store this information by segment class; therefore, operational business rules are not reflected in the cache. For airlines that manage their inventory by origin and destination, the segment-class cache does not reflect true O&D-class availability. To address this problem, Sabre Airline Solutions was the first to deploy cached availability by O&D, class and country point of sale. This was an industry first and constituted a step improvement in accuracy of availability displays over cached availability by segment class.
There are two types of availability errors — type 1 and type 2 errors — that occur when the cache does not reflect true availability.
A type 1 error occurs when the cached avail-ability for a booking class is open while the class is truly closed in the host CRS. A type 1 error can also result in the customer experiencing a price jump, which implies that the minimum available fare displayed is lower when only a higher fare is truly available.
A type 2 error occurs when the cached avail-ability for a booking class is closed while the class is truly open in the host CRS.
These errors result is higher UCs, or unable to confirm at sell messages, which in turn result in lost demand and loss of customer goodwill. The deploy-ment of an availability proxy is a step improvement to determine true last-seat availability by replicating an airline’s availability and business logic resident in the host CRS without submitting the availability requests directly to the host CRS. The solution also serves as an availability offload or by-pass for the host CRS without losing accuracy in availability responses.
For airlines that manage seat inventory by ori-gin and destination, the value proposition of deploying an availability proxy for Sabre Connected points of sale is the reduction in UCs, which results in incremental bookings and improvement in customer goodwill since the first choice selected by the customer is rarely rejected. From a Sabre GDS perspective, with the deployment of an availability proxy, all availability and shopping transactions from Sabre Connected points of sale will be processed directly by the avail-ability proxy for true last-seat availability. Sabre Travel Network® partnered with Continental Airlines last year to launch the availability proxy. Similar deployments are planned for other major network carriers.
While focus on the customer has begun in earnest, the key components of customer-centric revenue management are still in their early stages of evolution. As the evolving trend suggests, revenue management, customer relationship man-agement and how solutions are distributed are con-verging with strong interdependencies that require a holistic view to understand business impacts and how the various customer touch points need to be managed. The continuing evolution of pricing and revenue management is a winning proposition for both the airline and the customer.
A key driver for the migration are the more sophisticated demands from airlines based on advances in pricing, revenue management and customer-retention initiatives in customer relation-ship management to effectively manage customer touch points to build lifetime relationships with the valued customer base. a
Ben Vinod is chief scientist for Sabre Holdings®. He can be contacted at [email protected].
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Sabre Connected Point of Sale
Figure 8. Availability Proxy Deployment for an O & D Carrier
Host CRS
Airline Reservations System
Availability Proxy
Routing Solutions
Class Availability
SSM / ASM , AVS/AVN
O&D Inventory Controls
Sabre Air Traffic Shopping and Pricing Complex Travelocity
UserTravelocity
User
Availability Request
Availability Response
Availability Request
Availability Response
Market (Fare ) Value Updates from Airline
Periodic (Weekly ) Load with Daily Net Changes
www.airline.com
For an airline that operates with O&D inventory controls, the host CRS sends standard and ad hoc schedule change messages (SSM/ASM) and availability status (AVS/AVN) to the availability proxy environment. The host CRS also sends current O&D controls, such as bid prices, every time there is a change in bookings by flight leg and date. The market values required for the O&D availability evaluation are typically updated weekly by the airline, and net changes are processed daily by market on an exception basis.
Periodic (weekly) loadwith daily net changes
Market (fare) valueupdates from airline
Travelocity®
user
Sabre® Air TrafficShopping and
Pricing Complex
SSM/ASM, AVS/AVN
O&D inventory controls
www.airline.com
Availabilityproxy
Routingsolutions
Classavailability
Availability request
Availability response
Availability request
Availability response
Sabre Connectedpoint of sale
Availability Proxy Deployment For An O&D Carrier
Airl
ine
rese
rvat
ions
sys
tem
Host CRS
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I t used to be that any given supplier com-pany’s marketers were pretty certain of where the “traditional” marketing cycle
begins and ends.Marketing had always been involved
in helping the company position itself in the greater marketplace — including such key items as the messaging in advertisements to try to interest and persuade potential customers to buy. But as to making sure the solutions and services actually fulfill specific customer needs, that was usually
for customer service — or the customers themselves — to worry about.
Today, there’s a new customer reali-ty emerging in the marketplace that affects how companies market and sell their solu-tions and services in a technologically connected business world that seems to be morphing into something just a little different all the time.
Business customers now want and demand direct input into the development of suppliers’ lineups of solutions and ser-
vices. They no longer enjoy the luxury of waiting to find out what suppliers come up with year to year, then see if and how the solutions and services address their current needs.
In the 21st century, companies tend to realize, or at least they have a pretty good idea, what solutions and services they need, and they want to define where they go in the marketplace. That’s good, because the technology is now available to enable buying companies to take a
Great Minds Think AlikeAirlines can take a “customer community” approach — using emerg-ing technology — to collaborate and help develop the exact solutions and services they need to thrive.
By Phil Johnson | Ascend Staff
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major hand in helping design and develop those solutions and services, working right alongside the suppliers’ “idea” people and designers.
A case in point involves airlines, which need software and equipment solu-tions to help them effectively and effi-ciently address complex challenges. And airlines today are no longer comfortable allowing someone else to dictate to them what their business needs and priorities should be year-in and year-out.
The airline industry moves too fast for that. Most industries, in fact, move too fast for that — and the individual company either has to be nimble or lose its com-petitive edge.
Airlines now desire and demand access to the software solutions they’re going to use in day-to-day operations. Furthermore, many airlines want direct input into the development of that soft-ware. And they’re getting both access and input through a new concept called “customer community.”
Customer community is a spin-off of sorts from another current trend called “community marketing,” in which the emphasis is not so much on figuring out ways to sell more widgets to more new customers, but rather how to interact to better meet the real everyday needs of current as well as future customers.
There’s a vintage marketing principle that revolves around knowing the cus-tomer and understanding precisely what that customer needs and wants. And the customer-community concept takes the principle even further.
Customers today want to do much more than just tell a supplier what they want, and they’re willing to apply much greater effort than simply participating in a focus group to try to define their desired solutions and services. Those customers would prefer to have the opportunity to actually run parts of the businesses they work with — to sit right beside develop-ers and instruct them in inserting features they want and need.
Benefits of the customer-communi-ty model include shorter time to market in creating solutions and services that customers have called for, with much better product quality as well as lower overall cost that results from on-the-spot customer input as the product is being developed.
These capabilities fit right in with the Web 2.0 communications and inter-action technologies of today: MySpace, Facebook and LinkedIn — even “virtual” worlds such as Linden Lab’s Second Life — all provide connectivity and capacity to interact in substantive business processes
that were never even dreamed of just a few short years ago.
The customer-community movement has gained particular momentum in the business-to-consumer space. For instance, Procter & Gamble, one of the most suc-cessful consumer-products companies the world has ever known, delves deeply into business/consumer interaction.
“Our vision is simple,” said A.G. Lafley, president, chairman and chief executive officer of Procter & Gamble. “We want P&G to be known as the company that collaborates — inside and out — better than any other company in the world.
“I want us to be the absolute best at spotting, developing and leveraging relationships with best-in-class partners in every part of our business.”
Or as eBay’s savvy former President and CEO Meg Whitman said, “When we hire people, they often don’t understand what eBay is. Often your instincts — com-ing from more traditional companies — are wrong.
“We have to enable the community, we can’t direct them. Our community
is people, not wallets. The people who end up not being as effective as they otherwise might be are the ones who try to control and direct, as opposed to listen and enable.”
So it’s clear that the customer-com-munity philosophy is very much attuned to learning. It’s based solidly on listening to what customers want and to what others who have a vested interest may be able to contribute.
NBC Universal’s Beth Comstock may have summed it up best when she said, “In the digital age, community is all about gathering people with shared interests and giving them a platform to interact with each other, to engage in relevant content and to create something new.”
This is the essence of customer community, and its value can be felt in numerous industries. It is, in fact, being put to very good use in the business-to-consumer arena at many companies. Fewer, however, have so far succeeded in putting customer community to the test in business-to-business dealings.
Among airlines, that situation is changing. For example, Sabre Airline
A customer community approach enables carriers around the world to work together to help develop next-generation solutions necessary to optimally run an airline.
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Photo by shutterstock.com
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Solutions® now maintains an online portal devoted specifically to customer com-munity among its global array of airline clients.
And that bodes well for opportu-nities within that customer community to benefit from the technological and software best practices that are being devised and developed for and by various members of the community at any given moment around the world.
It is the goal and intent of Sabre Airline Solutions to provide tools, resourc-es and support in fostering customer interaction — to help make sure each and every customer has the greatest possible opportunity to provide input in the concep-tion and development of its solutions and services.
Solution development is an area in which huge industry impact may be real-ized. On the Sabre® Community Portal, a Sabre Airline Solutions product group now encourages customers to suggest product ideas, then to register their votes on a list of those customer-proposed solutions, which will then be used to apportion fund-ing on the various solution selections.
Essentially, then, Sabre Airline Solutions customers are collaborating by participating in solution concept and development, then essentially apportion-ing its new-product budget to aggressively pursue the solutions customers say they most fervently need and want.
Such a “customer-selection” pro-cess — again, enabled through technology — is a quantum leap beyond traditional business practices that have previously relied on internal teams of marketers and production people trying to figure out which solutions and services they think might be most important to develop.
None of this, of course, means that there aren’t still other challenges to be addressed and overcome in the process of showing airlines the multitude of col-laborative possibilities through customer community to provide airline constituen-cies with the latest and finest solutions and services available in the industry today.
But as the years pass, addressing and overcoming those challenges will be well worth the effort — particularly to the airlines’ consumers, who will be the
ultimate beneficiaries of solutions and ser-vices that are greatly improved thanks to a massive technology-enabled leveraging of collaboration within the industry.
And with today’s common trend toward shortening or compressing product-development cycles, it’s more important than ever to apply all the brainpower avail-able to quickly develop as many new and useful solutions and as much advanced functionality as possible. Industry collabora-tion, among airlines as well as between the airlines and their primary service providers, can play a major part in that equation.
So the customer-community move-ment — empowered through technologies that continue to emerge more rapidly than ever — figures to be of ongoing and lasting value throughout the airline industry for decades to come. a
Phil Johnson can be contacted at [email protected].
1.6 millionThe number of passenger flights that
were delayed by at least 15 minutes
during the first 11 months of 2007,
according to the Washington Post.
170 years The equivalent of flight delays for
the first 11 months last year, up
steadily from 98 years lost on 1 million
flights during 2003, according to the
Washington Post.
56 minutes
The average delay of a late flight
during the first 11 months last year,
which has grown from 49 minutes in
2003, according to the Washington
Post.
19,000The number of transactions that are
processed through the Sabre® global
distribution system every second.
1 millionThe number of travel transactions pro-
cessed each minute through the Sabre®
global distribution system during peak
times.
50+The percentage larger the Sabre® global
distribution system is than Visa. It’s the
largest transaction engine in the world.
+count it up
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By Phil Johnson | Ascend Staff
Highest
The most innovative and creative resources of Sabre Airline Solutions® are brought together in Project Denali — designing and developing the industry’s foremost movement-control software.
The
Peak
Photo by shutterstock.com
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Efficient, cost-effective management of scheduling and daily operations is, obviously, critical to the wellbeing of
any airline.And during the past decade or so, vari-
ous vendors have developed progressively better and more advanced software to help airlines get a firmer handle on their functions in these vital areas.
Still, the need to become even more skilled and proficient in operations and sched-uling is an essential requirement that involves serious competitive factors for airlines of every size and shape the world over.
A couple of years ago, Sabre Airline Solutions — understanding the cost and com-petitive implications to its airline customers — embarked on an ambitious project to com-pletely redesign and upgrade its movement management software with highly advanced functionality, usability, scalability and integra-tion features to establish Sabre® Movement Manager as the ongoing industry standard.
Because of the mountain-climbing, quest-pursuing nature of the immense soft-ware development that would be required, Sabre Airline Solutions named the project after the highest peak in North America: Denali.
And while the work is not yet totally complete, extensive progress has been made — to the point that launch partner British Airways is now making day-to-day practi-cal use of the advanced-version Movement Manager, even upgrading the airline’s opera-tional approach in ways designed to serve the airline well into future decades.
British Airways, in choosing to partner with Sabre Airline Solutions in the interim launch of Movement Manager, was looking ahead to furthering its traditional leadership role among world airlines, as well as its potential to take greater advantage of the new capacity and capabilities to accompany the opening of Terminal 5 at London’s glob-ally significant Heathrow Airport.
The carrier will implement a temporary version of Movement Manager while the advanced version is being finalized. As part of its movement management operations, British Airways will use the system to help precisely and accurately control and track each of the airline’s assets that moves, including aircraft and every piece of equip-ment as well as logistical aspects such as scheduling and other operational factors that are required in both day-to-day and long-term airline business.
The Sabre Airline Solutions/British Airways connection makes a lot of business sense: a partnering of two industry leaders in extending and expanding the utility of the fin-est movement-control software tools in the world of aviation and global logistics.
Sabre Airline Solutions has designed the next-generation Movement Manager to provide functionality, usability, scalability and integration features second to none — fully suited to serve any airline in improving operational and scheduling efficiency and to help significantly lower an airline’s overall cost structure.
The newest version of Movement Manager features improved and expanded
As the launch partner for the next-generation Movement Manager, British Airways is making practical use of the solution in its day-to-day operations.
Photo courtesy of Airbus
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capabilities in critical areas such as tail assign-ment and aircraft attributes as well as a seam-less capability to work in tandem with each of the other products in the extensive Sabre Airline Solutions portfolio.
Improvements to Movement Manager encompass a next-generation solution slated to meet business requirements that are fully expected to change and grow throughout the product’s lifecycle.
Also, an important consideration in Project Denali involves upgrading the capabili-ties of Movement Manager to provide airlines the ability to configure applications to their own needs. Movement Manager conforms to business best practices, with the flexibility to fully support airlines as they transition toward more productive best practices in the future.
The newest version of Movement Manager is designed to provide a robust framework to enhance any airline’s existing functionality — plus the capability to easily and routinely add new features and functions during the life of the product.
One Project Denali mandate has cen-tered on strongly pushing the Movement
Manager technology envelope — and by so doing to deliver a product with a tangi-bly lower total cost of ownership through the advanced capabilities of the latest technology.
Developers working to significantly upgrade the system’s capabilities and per-formance have focused on greatly improved product usability — essentially making Movement Manager much easier to train on and use day to day, thereby leading direct-ly to increased productivity among airline employees, both new and experienced.
During the Movement Manager devel-opment process, usability has been posi-tioned front and center, with the aim to reduce what’s often been months-long train-ing periods for analysts to learn to use new movement-control software in the airline industry (or for newly hired people to train on the software) down to a matter of three to four weeks — even, as a realistic objective, down to one to two weeks.
Such a low required training timeframe can save enormous investment by airlines, putting their people into productive mode
much quicker, with much more favorable bottom-line performance. The quick transi-tion period from an older system to the new Movement Manager means much lower costs of initial installation.
Furthermore, a stated objective from day 1 of Project Denali has been to provide a Movement Manager framework for managing inevitable changes in the airline industry with-out requiring an entire rebuild of the software infrastructure. Rather, through open-systems technology, the newest-generation Movement Manager enables the easy addition of new fea-tures and functionality as they develop — an immediate reaping of the lower-cost rewards.
By working with both customers and usability specialists, the Project Denali team has consistently improved and enhanced usabil-ity features of Movement Manager during the development process — making the system easier, for example, to become comfortable with and to train on — and the project team will continue to do so as the next-generation product is further upgraded.
Project Denali has not consisted of a simple enhancement or slight improve-
British Airways will employ a transient form of Movement Manager while the advanced solution is being completed. The carrier will use the system to help accurately manage and monitor each of the airline’s moving assets, including aircraft and every piece of equipment.
Photo courtesy of Airbus
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ment of the former version of Movement Manager. It has involved a complete over-haul and redesign of the former system, to the extent that the next-generation Movement Manager essentially represents a new product, with technological capa-bilities that had not even been dreamed of when the original product was introduced a number of years ago — features such as full-solution compatibility as well as improved and expanded tail-assignment and aircraft-attribute capabilities.
Movement Manager is also designed to be fully and easily integrated with other solutions in the Sabre Airline Solutions portfolio to constitute a seamless sys-tem of applications throughout an airline’s operations, scheduling and other activities. The ease of integration enables an airline to incorporate new technology as more products are upgraded and introduced to help bring greater efficiency and productiv-ity to the airline’s day-to-day as well as long-term business.
The idea behind the next-generation Movement Manager is to incorporate the best and latest technological tools and components — installed in an open archi-tecture for a system that’s easy to upgrade as further developments occur — to help enhance usability, make applications con-figurable, develop a repository of reusable
components to be leveraged across other Sabre Airline Solutions applications, and train on the latest technology.
In the context of 21st-century air-line operations, this newest Movement Manager has built-in implementation capa-bilities, enabling it to be installed parallel to existing systems — be they some com-bination of an older version of Movement Manager, a system from a different vendor and/or a system designed by the airline itself.
Running systems parallel to one another serves to avoid lag time during installation, minimizing operational impact. Installation of the newest Movement Manager is specifically designed to occur with minimal interruption of current airline operations.
All of these factors, such as quicker training and adaptation characteristics, help make the transition period from any older system to the new Movement Manager remarkably short, for a very quick switchover including full integration with existing systems. And quick implementa-tion capability translates to lower cost of installation.
By way of its total system redesign, Movement Manager now features what is known in the software industry as “n-tier” architecture, which effectively separates
various layers of software and helps make the entire system more cost effective through scalability and more efficient use of hardware.
And because the latest Movement Manager has been built from the ground up, it encompasses numerous integration advantages including what is fundamental-ly a platform-independent database struc-ture, which allows the use of essentially any database, from IBM to Microsoft to Oracle.
Inspired by the legendary success of Toyota manufacturing procedures, which have incorporated “Test Driven Design” processes in the automotive world — basi-cally enabling the testing of design prac-tices before the final product is built — the Project Denali team has made ample use of Test Driven Design concepts in assur-ing that Movement Manager functionality meets rigid test criteria.
The result is that well-researched business-function requirements have defined the design of Movement Manager, meaning it is designed with its real-world requirements foremost in mind.
There are three primary Movement Manager components that enable airlines to realize significantly lower total cost of ownership.
In addition to the first component — the enhanced usability that reduces training time for employees — the system’s functionality is closely attuned to what an airline actu-ally needs in its day-to-day as well as long-term operations and scheduling. Movement Manager is designed to function the way the airline functions and is further customizable to the individual airline’s specific functional requirements.
The third lower-cost characteristic of Movement Manager revolves around the fact that an airline is able to realize savings based on less hardware and software requirements for Movement Manager as a whole. So the airline can better manage its system costs.
Any airline that invests in the new-gen-eration Movement Manager is fully expected to see immediate value — while Sabre Airline Solutions will continue to enhance the prod-uct to make it work even better and smarter over time.
And Sabre Airline Solutions will apply the advanced technological ideas, compo-nents and functions that have been developed for Movement Manager to upgrade and enhance other parts of the broader Sabre Airline Solutions portfolio, further benefiting airlines. a
Phil Johnson can be contacted at [email protected].
In selecting Sabre Airline Solutions for its movement management operations, British Airways sought to further benefit from the solution’s new capacity and capabilities to accom-pany the opening of Terminal 5 at London’s Heathrow Airport.
Photo by shutterstock.com
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The challenges airlines face from rising costs are well documented: high fuel prices, expensive labor contracts and
rising maintenance fees. While airlines and the media debate and discuss these issues, airline revenue management departments around the world are grappling with their own challenge: how to increase airline revenues to cover rising costs in an increasingly competitive environment.
There are two commonly acknowledged revenue challenges facing airlines:
Major corporations are shifting to a more cost-conscious culture. The distinction between business and leisure travelers is blurring with more of today’s business trav-elers booking in advance, flying in economy and searching for low fares to help their company’s bottom line.
Today’s consumer has more information and choices in air travel than ever before. With a few clicks on the Internet, travelers have access to countless permutations and combinations on how to get from point A to point B. Azirlines are being forced to com-
pete primarily zon schedule and price.These challenges have called the fun-
damentals of revenue management into ques-tion. The traditional methodology for revenue
management segments the marketplace by placing various restrictions on fares, such as Saturday night stay over and advanced pur-chase requirements, then derives individual segment-class (or origin-and-destination) fore-casts and ultimately determines the optimal inventory controls. While this approach works well for traditional pricing structures, it does not generate optimal results for less-restrict-ed pricing schemes that can result in an airline having one effective price in the market at any one time.
During the past five years, airlines and industry experts have come to agree that the theory, and practice, of revenue management needed to be adjusted to satisfy the require-ments of carriers operating in a hybrid pricing environment with a mixture of traditional restricted and less or unrestricted fares.
Sabre Airline Solutions® and its air-line partners spent several years researching revenue management solutions to address the market needs stemming from the new challenges resulting in the development of the latest-generation revenue management
planning and execution solutions that cater to the specific challenges of hybrid airlines. These solutions incorporate state-of-the-art functionality, including:
Choice-based forecasting and revamped optimization to handle the combination of both restricted and unrestricted fares on a network;
Conditional business rules executed in real time to enforce availability strategies and respond to the competition;
Flexibility to independently manage inven-tory by fare products via mixed nesting structures;
Faster response to changing flight condi-tions, including significant bookings, cancel-lations or schedule changes.
By combining the latest version of Sabre® AirMax® Revenue Manager with Sabre® AirMax® Low-Fares Manager and SabreSonic® Inventory, today’s airlines have a tangible solution to tackle their revenue challenges and contribute to their company’s growth.
Planning For Revenue MaximizationRegarding revenue management plan-
ning, the next-generation Revenue Manager features an advanced customer-choice-based O&D forecasting framework designed to closely replicate customer booking behavior. It incorporates passenger name record data and deploys a top-down, two-step approach of estimating demand directly at the market level and then employing customer-choice models to distribute demand from the market level to the itinerary level. The passenger-choice modeling utilizes different choice attributes, including fare, elapsed time, time-of-day and origin-point presence, and it takes into account the interrelation between services as well as forecasts changes in demand due to changes in fare. Revenue Manager represents the first revenue management system to use forecast-ing methodology that incorporates customer behavior through PNR data. Such a framework provides for the convergence of forecasting in revenue management and network plan-ning, leveraging the integration between Sabre Airline Solutions’ scheduling and revenue man-agement solution suites.
Revenue Manager also incorporates a hybrid solution framework to handle the
Raising RevenuesTightly integrated, next-generation revenue management technology produces optimal results for less-restricted pricing structures found in non-traditional, hybrid airline models.
By Michelle Fischer and Steve Packwood | Ascend Contributors
Airlines using both Revenue Manager and SabreSonic Inventory have the unique advantage of Sabre Airline Solutions’ real-time revenue management solution, which offers the ability to provide updated optimal inventory controls in real time based on conditions in the marketplace.
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varying behavior of product- and price-sen-sitive passengers. The optimization process appropriately handles the sell-down behavior associated with price-sensitive passengers. In addition, Revenue Manager incorporates a business rules interface for analysts to proactively influence the system based on airline business strategies and policies. Such influences are then used within the solution to constrain system-generated results, signifi-cantly improving the adaptability of the solution to the business needs.
While the new, leading-edge Revenue Manager provides unique benefits for low-cost carriers, it provides airlines of any size similar advantages in revenue management. Revenue Manager provides seamless integra-tion between Low-Fares Manager modules and Revenue Manager, creating the industry’s best framework for revenue management decision support in today’s hybrid fare environ-ment. This solution can be delivered through Sabre® eMergo® Web Access, which provides software as a service.
Executing On Optimal Inventory Controls
To fully recognize the value of the advanced decision-support functionality available in Low-Fares Manager, airlines can leverage SabreSonic Inventory to flawlessly execute their optimal inventory controls. SabreSonic Inventory is an open-systems inventory platform that provides airlines several key differentiators beyond legacy reservations systems.
First, SabreSonic Inventory enables airlines to create multiple, mixed nesting structures on their network to improve fare product segmenta-tion. For example, a leg-segment airline with a mix of unrestricted and restricted fare products can choose to create two sets of parallel nested fare classes: one for unrestricted, highly competi-tive fare classes and one for restricted, traditional fare classes. By separating the classes, revenue management analysts can force up-sell on their restricted fare class hierarchy while maintain-ing availability and competitive presence in the unrestricted fare classes. The nesting functional-ity within SabreSonic Inventory was primarily designed to be flexible — airlines can create and implement up to 99 different structures on their network. This inherent flexibility enables carriers to be agile and easily move from one control strategy to the next.
SabreSonic Inventory also enables airlines to create conditional business rules to execute rev-enue management policies in real time. Through the graphical user interface, analysts provide two inputs to their business rules:
Action: Analysts select from a comprehensive list of actions including inhibit availability, sales and passenger waitlists.
Condition: Analysts select from an extensive set of conditions including flight, departure date, market, day of week, class availabil-
ity, country point of sale and International Air Transport Association travel agencies.
The innumerable combinations of actions and conditions enable analysts to implement precise inventory strategies beyond the traditional adjustments of class authorizations. For example, airlines can target local points of sale to limit avail-ability, allowing higher-valued international traffic to fill the plane and improve yields. Combined with the intuitive graphical user interface, airlines can quickly adjust their business rules to adapt to changing market conditions.
Faster Response Through Real-Time Revenue Management
Airlines using both Revenue Manager and SabreSonic Inventory have the unique advan-tage of Sabre Airline Solutions’ real-time revenue management solution, which offers the ability to provide updated optimal inventory controls in real time based on conditions in the marketplace.
When integrating this technology, analysts define a threshold for booking and cancellation activity within SabreSonic Inventory. When there is a schedule change or a threshold is reached, SabreSonic Inventory sends an alert notification to Revenue Manager, which reacts to these alert messages and automatically re-optimizes, both for individual flight departures and based on the amount of alerts, the complete network for a particular departure date. The result is optimal inventory controls immediately updated in the marketplace without the wait for the nightly download and optimization. By tightly integrating Revenue Manager and SabreSonic Inventory,
airlines are reacting faster than ever before to changes on their flights.
The Sabre Airline Solutions revenue man-agement planning and execution solution also includes the competitive revenue management feature within the Sabre® AirMax® Revenue Management Suite, an add-on component that provides current competitive revenue manage-ment intelligence, including shopping data analy-sis. Insight into competitive information enables carriers to answer some of revenue manage-ment’s most difficult questions including:
How is a carrier’s availability relative to competi-tors?
Which flights are under or over priced relative to the competition?
Can inventory controls be adjusted to account for other airline availability around high-volume travel dates?
Combined with the real-time integration between Revenue Manager and SabreSonic Inventory, the competitive revenue management component gives airlines an advantage over their competition and agility in the marketplace. a
Michelle Fischer is solutions director for SabreSonic Inventory and Steve
Packwood is solutions director of revenue management solutions for
Sabre Airline Solutions. They can be contacted at [email protected]
and [email protected].
As business travelers book more of their travel in advance, fly economy class and search for the lowest possible fares to save money for their companies, the distinction between business and leisure travelers becomes more blurred, creating a revenue challenge for many airlines.
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By Suzanne Cottraux and Jeanette Frick | Ascend Contributors
Prime PartnersPartnering with the right solutions provider presents a long-term business relationship that should be built on common goals and a command for service excellence.
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Photo by shutterstock.com
As economic pressures continue forc-ing airlines to reduce or repackage the services they offer their customers, while
working to maintain customer loyalty, the con-cept of “service” has never been as relevant or multi-faceted as it is today. And most airline executives probably feel pulled in myriad direc-tions trying to meet the changing demands of customers, employees, shareholders, the community and the government, while striv-ing to manage costs and stay in the proverbial black. How do airlines identify the solutions and services necessary to meet these challenges? More importantly, how do they implement very specific solutions while continuing to operate their day-to-day business smoothly?
The answer can be found in strategic part-nership with a solutions provider that can evalu-ate the business holistically and then combine the right technology, services and expertise to deliver the most value-added solutions. Whether an airline is currently working with a solutions provider or considering enhancing its current capabilities with outside support, it should con-sider five key points to ensure it selects the top business partner:
1. Does the solutions provider understand the airline’s complex issues?
The airline industry continues to change, driven by external factors ranging from security concerns, government and industry mandates, and environmental sustainability challenges to internal factors including shifts in customer buy-ing patterns, and management of costs and dis-tribution strategies. And while many airlines have restructured their operations and have adapted to the post-9/11 world, the emergence of new hubs, not to mention the debut of new entrants and business models, has further complicated the environment in which airlines operate.
The ideal solutions provider will offer more than a single-dimension understanding of these and other issues; it will offer a com-prehensive understanding of how these issues inter-relate and possibly converge to affect short- and long-term business performance. The provider’s ability to address the converging issues impacting an airline’s business should be evident through a review of case studies as well as the depth, breadth and longevity of its service offerings.
2. Does the solutions provider offer a portfolio that is equally broad and deep?
Breadth of portfolio plays a critical role in a provider’s ability to meet an airline’s diverse needs. Because the airline business is integrated from its marketing systems through sales, cus-tomer service and operations, a provider that offers tightly integrated solutions can help meet an airline’s challenges more efficiently and effec-tively than any single-service provider, no matter
how deep its expertise is in one particular area. Working with a total solutions provider translates into greater efficiency, ease of implementation and continuity for an airline’s business.
Sabre Airline Solutions®, for example, brings to its air transport partners industry lead-ership in airline solutions and services, reserva-tions and departure control, airline distribution, and consulting services. Through a strategic mix of solutions, services and consulting expertise, Sabre Airline Solutions helps its aviation partners cut costs, increase revenue, streamline opera-tions, improve workflow, raise productivity and enhance the bottom line. This commitment to service excellence is unmatched in the industry.
3. Does the solutions provider offer a full continuum of support?
Selecting a solutions provider, negotiat-ing the contract and moving forward with the implementation of a solution, service or both represents just one dimension of an airline’s relationship with its solutions provider … yet for many service companies positioning themselves as strategic partners, this is the full extent of their repertoire. To realize the most meaningful, measurable and lasting impact on business per-formance, an airline needs a solutions provider that offers a full array of service practice areas so at any given point in the engagement, its issues will be addressed by expert professionals.
At Sabre Airline Solutions, for example, the delivery and customer care portfolio is dif-ferentiated by eight key service practice areas including: airline business consulting, solution approach, solution delivery, knowledge transfer, quality assurance, customer community, global service centers and customer care. Within each service practice are proprietary processes and disciplines designed to drive customer-focused results. For instance, airline business consulting comprises a comprehensive array of disciplines that include organizational audit, build-operate-transfer model, benchmark and competitive tracking, best practices and strategic planning, a service bureau, and turnaround consulting. The customer community practice includes an online community portal, customer conferences and councils, solution planning, and a Sabre Airline Solutions executive advisory board. The idea is that each practice area is substantiated by processes, systems and people dedicated to achieving the best possible results, and that the practice areas are integrated to provide a full range of support no matter when or why it is needed.
4. Is the solutions provider as results driven as its airline partner?
It’s important to evaluate a provider’s offering to ensure it truly is a solution that contains the right technology and supporting services that will integrate well into an airline’s business environment, as well as deliver value and a timely return on investment. The pro-
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vider should have a clear understanding of an airline’s business goals and processes and be qualified to provide business consulting and process-change support.
Sabre Airline Solutions’ highly experi-enced consultants work with its airline part-ners to ensure that new solutions or service integration conforms to their current business processes, paving the way for a successful implementation, full adoption of a solution and optimal realization of the solution’s business value.
When talking with a solutions pro-vider, the discussion should center on the airline’s business needs and how best to measure its success. For instance, in catering, product overages or shortages can cause budget and customer satisfaction issues. And in revenue management, small changes in the management of load factor can have significant impacts on profitability. A true partner and solutions provider will be focused on these business issues and assist in measuring the success of the implemented solution.
Post-implementation support and fol-low up is also critical. A provider should always follow up on its promise to deliver value. It should have the business expertise necessary to ensure that an airline’s con-tinued usage fully leverages industry best practices, that its users are proficient and that the expected ROI is achieved. In addition to providing a full-service support function, a top provider brings relevant industry and business information to the table through additional business consulting services, advanced train-ing and networking opportunities across the airline community so all airline partners have ready access to new information with which to continue to evolve their businesses.
5. Does the solutions provider have a company culture based on the same principles it’s trying to sell?
A provider can design solutions to address an airline’s problems. It can also acquire expertise to provide a competitive edge to its airline partners. Innovative tech-nology is an enabler. Smart algorithms are differentiators. But as solutions providers, each employee within a provider’s organiza-tion must think and act as a business partner to their airline customers. The provider should proactively evaluate problems and opportuni-ties from an airline’s business perspective. It should look beyond its broad range of solu-tions and collaboratively partner in an airline’s unique success.
The service journey with a provider is a long one, beginning with the sales process through delivery and into maintenance and enhancement, when needed. A provider’s attention needs to be clearly focused on how it’s anticipating an airline’s needs rather than merely responding to them.
Selecting a solutions provider is a deci-sion that should be made deliberately, with an eye toward a long-term partnership based on mutual success as measured by an airline’s improved performance. a
Suzanne Cottraux is a corporate communications principal at Sabre
Holdings® and Jeanette Frick is vice president of delivery and service
excellence at Sabre Airline Solutions. They can be contacted at
[email protected] and [email protected].
2017The year by which the airline industry
aims to use 10 percent alternative
fuel sources for aircraft fuel needs,
according to the International Air
Transport Association.
315 millionThe percentage representing IATA’s
goal to improve fuel efficiency (and CO2
emissions) between 2000 and 2010,
which was already ahead of schedule
two years ago.
1.5 millionThe weight in tons of CO2 saved
last year by Middle East and North
Africa airlines as a result of IATA’s
fuel efficiency initiative, according
to the International Air Transport
Association.
+count it up
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Both Worlds By Bill Glover | Ascend Contributor
An airline’s computing systems must provide high performance, reliability and the flexibility to change with today’s business needs. The most efficient way for carriers to accomplish all three is through a hybrid solution that shares the strengths of both specialized processing and general computing.
Best Of
Photo by shutterstock.com
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Driving to work in an electric golf cart would be a risky choice in rush-hour traffic, but fuel costs for a huge, luxury
sport utility vehicle might make the paycheck at the other end seem less worth the drive. Automobile consumers have embraced hybrid vehicles that take advantage of the power and reliability of the conventional internal combus-tion engine but also use a battery and electric motor to get the most out of the stop-and-go traffic of a typical commute. More than just a snazzy place to keep those organic foods bumper stickers, hybrids are cheaper to oper-ate without sacrificing the performance and safety of a traditional automobile.
Executives in the travel industry face similar tradeoffs around computing resources where commodity hardware offers cheap computing, but powerful systems specially designed for transaction processing still domi-nate. Can a hybrid approach meet the needs of the travel industry for computing that is economical, scalable and reliable while still handling some of the highest transaction volumes in the world?
What Does It Take?Getting people where they want to go
takes coordination, and coordination takes communication. All of that communication creates a huge number of transactions flowing through travel IT systems — 15,000 to 20,000 transactions per second for large distribution systems. These systems need to be able to distribute those transactions, which may be long or short lived, over processors in such a way that no processor is too busy to take the load and no proces-sor is sitting idle with nothing to do. This is more complicated than just asking the processors if they have room for another transaction. Each one of those transactions matters to someone, but they have very different priorities. A transaction related to boarding passengers needs to get through no matter how busy the system may be, while a shopping transaction might be able to a wait a short while to let more critical transactions through during especially busy periods. Making those sorts of decisions takes a smart load-balancing system that can tell with configurable priorities the dif-ference between two transaction types and give preference to one over the other.
With so many people depending on them, travel IT systems need to be reliable. They can’t be down due to a software or hardware problem. Reliable hardware is relatively easy, just buy components with a mean time between failures, or MTBF, long enough that they can be replaced according to a scheduled maintenance plan. The sort of hardware with a long enough MTBF for breathing room comes at a premium, but can pay for itself in total cost of ownership.
Avoiding software problems is much more complex. It requires careful change control and testing. Documentation has to be crisp and clear to avoid misunderstandings, and procedures must be constantly rehearsed to avoid surprises to keep a system up 24 hours a day, seven days a week, decade after decade. These things are easier to do with a specialized transaction processing system, but, these days, more and more systems are built on a commodity, general-purpose computing infrastructure.
What’s The Difference?There are significant primary differ-
ences between a specialized transaction pro-cessing facility, or TPF, system and general purpose, commodity systems: Architecture — A monolithic architec-ture puts all of the transaction processing together in one box, while a distributed architecture puts different processes in different boxes. For instance, one box may be a Web server and another a database server.
Inter-process communication — In a mono-lithic architecture, the processes share the same machine and are able to com-municate directly with each other using the machine’s own memory. Distributed applications typically communicate over a network. Imagine a Web server connected to an application server and the application server to a database server over a local area network or the Internet.
Scaling — Scaling refers to the way the system adds capacity to grow over time. A system that scales vertically adds more memory and more processors in the same machine while a system that scales hori-zontally adds more machines.
Acquisition cost — Commodity hardware is cheaper to buy than hardened, specialized hardware.
MTBF — Commodity hardware is designed and produced to be inexpensive and flex-ible, not for extended use under heavy load. Imagine running a desktop machine at 90 percent for months on end. It would quickly fail due to heat stress. Commodity servers are more robust but built using the same basic technology.
What Would It Take To Use Commodity Hardware?
Based on these differences between the two types of systems, what would it take to build a system from commodity hardware that can do the job of a TPF system? A distributed system typically is separated into tiers. The resource tier (databases) would run on a separate machine from the business logic while the presentation tier (Web pages) would operate on still another machine. This makes end-to-end transaction monitoring more difficult. The monitoring records from each machine will have to be compared and the transaction identified in some way as it hops from machine to machine. The individual systems must also share the responsibility for security. Controls on one tier will not neces-sarily protect another tier. There may be tight login restrictions at the presentation tier, for instance, but that won’t by itself protect the database tier from being accessed by the wrong person. Throttling and smart load balancing are also more difficult with com-modity systems. Typically, these systems use a hardware load balancer that understands how to distribute load according to relatively simple algorithms, but to conduct smart load balancing, the system must use software
TPF Commodity
Architecture Monolithic Distributed
Inter-process Communication Shared memory Network
Scaling Vertical Horizontal
Acquisition Cost High Low
MTBF Longer Shorter
TPF and commodity systems differ significantly in key areas such as their architecture, scal-ing and costs. These differences must be considered when implementing systems designed to hold large amounts of data while operating in real time.
TPF And Commodity Systems
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load balancing and throttling that understands transaction priority. No single off-the-shelf system currently offers all of these capabili-ties, so offloading TPF requires custom devel-opment and extensive testing. The business logic must also be designed in such a way that it works well with smart load balancing and can report when a particular machine is too busy to handle more transactions. This puts some constraints on how the business logic can be distributed in the system.
To handle the high transaction volumes, a commodity system must scale horizontally. This has implications for the overall complex-ity and reliability of the system. Examine the low end of the range that was previ-ously discussed for a conservative estimate, 15,000 transactions per second, and make a generous guess that each machine can handle around 100 transactions per second, sustained. Then assume 150 machines are needed for the transaction processing busi-ness logic. Adding machines for databases and Web servers, load balancers, logging monitors and a few other miscellaneous systems, one can reasonably assume 200 machines. If the MTBF for a given machine is around two years, which is not unusual in commodity hardware, a machine could expect to be replaced every three days on average as part of scheduled maintenance.
Then Why Bother?If building a system with commod-
ity hardware is so difficult, why bother? There are several advantages to commodity hardware. The first and most obvious is the lower acquisition cost. Another advantage is that because general purpose computers can be used in many different kinds of applica-tions, they are more widely adopted in the
IT industry. This helps make the skill pool of knowledgeable people much larger than for specialized computing systems such as TPF. Commodity hardware also tends to be more flexible and improves more rapidly. But how can the benefits of commodity computing be realized while limiting some of the liabilities?
Son Of Big Iron To The Rescue To take on some of the jobs previously
handled by TPF systems, general-purpose commodity systems have had to step up to the next level of maturity. Previous articles in Ascend have discussed service oriented architecture, which provides some pieces of the puzzle by externalizing security and end-to-end monitoring and providing critical buffer-ing and self correcting throttling through pull-based messaging. Cutting-edge technologies, such as organic server management and grid computing, offer to help solve the problem of managing huge numbers of short-lived machines in such a way that they appear to be one big system. These technologies are still relatively new and maturing, and they have primarily been used for compute-inten-sive applications such as protein folding and rendering graphics. Systems with extremely high reliability needs, huge transaction vol-umes and massive input/output requirements will challenge these technologies and drive additional innovation.
Sabre Airline Solutions® has approached technology of all sorts from a strategic posi-tion that, while aggressive, values depend-ability and cost-effective solutions for its cus-tomers. A hybrid solution currently provides the best balance of flexibility and stability, but careful attention to the end-to-end solution positions the technology company to adopt new approaches efficiently.
The Duck TestThose familiar with mainframes and the
discussions around offloading applications from those systems may be surprised that this article hasn’t used the term “open sys-tems.” The term is somewhat dated and arguably obsolete. In the 21st century, TPF can run on a commodity laptop system, and mainframes can run Linux and Java. A laptop cannot, however, handle the transaction loads of more than a modest-sized airline … yet. And it certainly does not have the MTBF required for reliability. So is a system that runs TPF at the center for transactions on top of Linux and commodity hardware and that is accessed exclusively through XML services an open system? Is an organically managed grid computer farm running on commodity hardware but presenting the behavior of a single machine a mainframe? To quote the poet James Whitcomb Riley, “If it walks like a duck and quacks like a duck, I would call it a duck.” What matters is that the system does what it needs to do with high performance, reliability and the flexibility to change with the business needs of the industry. The most cost-effective way to do that today is to share the strengths of both specialized processing and general computing, a hybrid — minus the organic foods bumper sticker. a
Bill Glover is chief architect for Sabre Airline Solutions. He can be contacted
2.1 billionThe amount of savings in U.S. dollars
that was achieved across the globe
last year based on IATA’s campaign
to shorten routes, improve opera-
tional procedures and share best
practices in fuel management.
12 millionThe amount of savings in U.S. dollars by
shortening routes in Bahrain, Iran and
Algeria, improving departure, approach
and landing procedures in Doha and
Yenbou, according to the International
Air Transport Association.
16.5The percentage of airline fuel effi-
ciency improvements since 2001,
according to the International Air
Transport Association.
+count it up
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By Rakesh Narayanan | Ascend Contributor
The Test OfTime
On-time performance has been a growing issue for the global aviation industry during the past few years, and Chinese carriers are no exception to the late arrivals due to numerous flight delays.
Photo by shutterstock.com
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A surprise to many first-time visitors to China is that this vast country only has a single time zone —
Beijing Standard Time. Under “normal” geographic time-zone assignment, there would probably be at least four different time zones in China, but the Chinese government prefers to maintain time-zone commonality to ensure that businesses and government agencies have a common standard of time. This demonstrates a con-cern about timeliness that is a hallmark of the country’s business culture.
Of course, the single time zone is not the only surprising characteristic about China. The most startling characteristic of mod-ern China is its growth. Beijing, in particular, is building on a massive scale to prepare for the 2008 Summer Olympic Games. As the celebrations are fast approaching, the entire country is gearing up to show the world the modern and efficient face of China. Spectators coming from around the world will experience China for the first time when they board a Chinese airline and arrive at Chinese airports in cities such as Beijing, Shanghai and Guangzhou.
Therefore, it is absolutely critical to ensure proper service at airports and for airlines to set the image of China as modern, efficient and fast growing. The Chinese government is staking a great deal
of its reputation on the efficiency of the transportation systems installed in time for the Olympic Games. Reliability and on-time performance are key service items and leave a lasting impression on passen-gers. The Chinese Civil Aviation Authority, airports and airlines are all cognizant of the requirement for efficiency and are working to improve the end-to-end traveler experience.
During the past several years, China has experienced exceptional growth in the aviation markets, which has come with some growing pains. CAAC allowed the industry to grow rapidly without sub-stantial constraints, but now regulations are following this growth. The average on-time performance for arrivals in China is 71.48 percent. Although this is in line with many regions in the world, Chinese on-time performance needs an overhaul. The delays impact 32.3 million passengers a year and cause schedule disruptions equal to 267,000 hours annually. The finan-cial impact to the airlines could be as high as ¥6.17 billion (approximately US$868 million).
OTP in China is loosely defined and reported due to a lack of standardized central reporting. Each carrier reports differently within China based on type of flight, origin or destination airport, and
similar characteristics. Delay standards (+15 minutes, +25 minutes) are different from one airport to another. Individual airlines do not necessarily conform to coding the delay in a standard manner, and record keeping varies between airlines and government bodies. The CAAC has vowed to correct this situation and improve the overall performance of airlines and air-ports within China.
Collateral delays pose the most sig-nificant cause for delays among most carriers — a staggering 42 percent in China. Collateral delays occur when a late in-coming flight affects a follow-on flight (or flights), which is often the case. There is little a governing body can do to reduce collateral delays except to minimize the cause of the original delays and ensure schedules have extra resiliency to allow for recovery.
The next-highest culprit is weather, which is at the crux of 20 percent of China’s flight delays. In January, an alarming issue came to light with the inability of the country’s airports and airlines to respond to unusually severe weather. Hundreds of thousands of passengers were stranded at various airports around China before the Chinese New Year, a peak travel season. Aircraft could not be de-iced due to lack of facilities and had to be grounded. In total, travel was in chaos at this busy time because the weather affected train, ground and air transportation services. While weather cannot be controlled, the impact of weather delays can be effec-tively managed with better planning and resources.
The primary controllable delay in China is related to maintenance at 13 percent of total delays. This volume of delays suggests two probable points of improvement: 1. China needs to reduce the amount of
time to resolve equipment failures that result in delays (AOG, or aircraft on ground).
2. The airline’s schedules need to be more resilient to allow recovery following AOG incidents.
Another controllable but important rea-son for delays is due to schedule volatility, which are termed “company plan.” Airlines in China alter flight schedules within the last 24 to 48 hours prior to operation due to commer-cial or slot issues. For every carrier in China, 70 percent of the schedule is published, confirmed and approved by CAAC for the season, but the remaining 30 percent of the schedule the airline needs to constantly re-submit to the CAAC for approval. This leads to inefficient planning for airlines and last-minute disruptions that contribute to reduced on-time performance.
China’s on-time performance for arrivals within 15 minutes falls in the middle when compared to other regions of the world. But at 71.48 percent OTP, there is much room for improvement.
a
a
a
a
a
a
a
China’s on-time performance for arrivals within 15 minutes falls in the middle when compared to other regions of the world. But at 71.48 percent OTP, there is much room for improvement.
Arrival On-Time Performance
China North America Europe Africa Middle East / India Asia/Pacific
71.48%
50%
55%
60%
65%
70%
75%
80%
85%
72.98% 72.07%
65.47%
72.34%
50.90%
78.75%
Arriv
als
with
in 1
5 m
inut
es
North Africa
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Improving OTP in China will require a concerted effort between the CAAC, the airlines and the airports. First, the CAAC needs to take a proactive approach in overhauling regulations to keep pace with the growth and present conditions in China. For example, the schedule volatil-ity issue can be significantly improved by providing standardized slot control for the
busiest airports. Next, procedures at air-lines and airports need to improve to bring consistency in the operation. Such airport procedures should consider the constraints at individual airports and include ramp, security, passenger movement, airside and landside procedures. Airline procedures should be closely related to the airport procedures and should include in-flight,
passenger, security, regular and irregular operations procedures. Training of and enforcing these procedures is paramount to efficient operation.
A number of new technologies are available to help address OTP issues, such as global positioning systems, elec-tronic flight bag and decision-support technologies, such as the Sabre® AirOps® Operations Suite and the Sabre® Rocade® Airline Operations Suite (along with busi-ness consulting to bring about the specific improvements). These technologies assist in the enhancement of the operation and on-time performance of the aviation indus-try as well as greatly improve efficiency.
During a day-long seminar last November in Beijing — which was hosted by Sabre Airlines Solutions®, for the CAAC, airlines and airports — more than 100 airline executives had the opportunity to discuss OTP issues, their resolution and how these resolutions might be applied to China. CAAC Vice Minister Yang Guoqing summed up the meeting by committing Chinese aviation to improving the complete passenger experience.
China is undergoing exciting aviation expansion in concert with its overall explo-sive growth, and the CAAC strives to ensure that this growth protects the inter-ests of travelers, airlines and airports. a
Rakesh Narayanan is a solutions partner for Sabre Airline
Solutions. He can be contacted at [email protected].
2The percentage of global CO2 emis-
sions aviation is responsible for, and
it will represent 3 percent by 2050,
according to the International Air
Transport Association.
23The percentage of CO2 emissions all
modes of transport combined account
for, according to the International Air
Transport Association. Of that, 74 percent
is road and 12 percent is air transport.
50The amount of years in which the
industry is challenged to build a zero-
carbon emission aircraft, according
to the International Air Transport
Association.
+count it up
China’s on-time performance for arrivals within 15 minutes falls in the middle when compared to other regions of the world. But at 71.48 percent OTP, there is much room for improvement.
a
a
a
a
a
a
a
Several factors are to blame for flight delays in China, but collateral delays, those caused by the domino affect of one late aircraft impacting down-line flights, account for the majority of flight interruptions.
China Top Delay Reasons
Collateral Weather M&E Company Passenger ATC Navigation Other
42%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
20%
13%9%
7%5%
1%
Arriv
als
with
in 1
5 m
inut
es
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Plan
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T aking off for the first time this year will be small, speedy, cheap jets that big airlines worry will cause traffic jams around major
metropolitan areas.Called “microjets” or “very light jets,”
they’ve been likened to minivans with wings. With two engines and seating capacity for five or six people, priced between US$1 million and US$3 million, they compare favorably with the US$6 million to US$40 million that one would have to spend to acquire a current business jet. What’s more, they cost about half as much to operate per hour as traditional small business jets, vastly broadening their market potential. Studies have shown that a 50 percent reduction in cost — compared to today’s business jet pric-ing — could multiply demand by a factor of 10.
These VLJ have autonomy of up to three hours of flying time, they cruise at altitudes and speeds similar to those of mid-range airliners, and they have unique characteristics, including: Seat six or fewer passengers, Weigh less than 10,000 pounds, Have two jet engines, Cruise at speeds averaging 430 miles per hour
(commercial aviation: 500 miles per hour), Have a range between 1,100 nautical miles
and 1,300 nautical miles,
Feature advanced cockpit automation, auto-mated engines and systems management, and integrated autopilot and flight guidance systems.
In addition, very light jets can operate from much shorter runways than commercial airliners, meaning that they can utilize the hun-dreds of satellite airports throughout the United States, Europe and other regions of the world. Two VLJ were certified by the U.S. Federal Aviation Administration last year: the Eclipse 500 from Eclipse Aviation and the Cessna Mustang from Cessna Aircraft, with more com-ing up for certification during the next two years (Embraer Phenom 100, Adam Aircraft A-700 and HondaJet).
Their affordable economics as well as their ability to land and take off from uncon-gested airports have made them a possible substitute for commercial aviation, and various operators have come forward saying they will operate those airplanes as on-demand air taxis, much like an automobile taxi service, at prices not much higher than an unrestricted business-class ticket on a traditional airline. These opera-tors plan to serve underutilized small airports as a way of bypassing congested hubs for business travelers.
The first such operator, DayJet, recently began operations in Florida, offering access to more than 50 airports within the state. These are not scheduled flights. Anyone can call DayJet and book an airplane to go from point A to B within the state at an average cost of US$3 a mile versus US$10 to US$25 a mile for traditional business jets such as a Cessna Citation or a Gulfstream G-IV.
Given all their advantages, some view the advent of VLJ as a game-changing technology that will have the same impact on business jet flying as the low-cost model has had on the commercial aviation sector. In fact, the VLJ phenomenon has been described alternatively as “business jets — light” or “the low-cost busi-ness jet.”
Should traditional network and flag carri-ers be worried? After all, those VLJ are targeting the same business professionals who currently pay full fare, the most profitable segment in the industry.
The new business model is too recent to bring any definitive answers. With the exception of DayJet, most air-taxi companies have not yet begun operations. That is expected to change later this year when the first VLJ start rolling off the production lines in sufficient quantities.
Faster, Smaller, Cheaper
By Eric Meyer | Ascend Contributor
Photo courtesy of Cessna
Very light jets, or air taxis as they are commonly referred to, are making a seemingly strong debut that could be of concern to airlines serving business travelers.
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However, unique regional characteristics already exist that will shape how the VLJ phenomenon plays out.
VLJ In The United StatesTaking into consideration the nature of
business travel in the United States, there is a strong case to be made for the economics of an on-demand air taxi model: The majority of business trips (84 percent) are
regionally based, 90 percent of Americans live within 30 min-
utes of one of the nation’s 5,000 underutilized small airports,
99.88 percent of all air passengers travel through the 500 commercial service airports and 70 percent travel through the 31 largest hub airports.
It is air-taxi operators’ intention to cap-ture a percentage of regional business traffic, thereby bypassing congested hub airports. Given the time gained and the favorable eco-nomics, early indications are that this value proposition resonates well with mid- to senior-level executives.
The threat posed by the VLJ business model will then be more of an issue for commuter airlines than for network carriers. Commuter operators stand to lose to air-taxi operators some of their short-haul, high-yield-ing business passengers.
In addition to DayJet, other air-taxi com-panies are ramping up operations. POGO (led by former American Airlines Chief Executive Officer Robert Crandall) will commence opera-tions this year, targeting business travelers with operations centered in the northeastern United States.
VLJ In Latin AmericaThere are more business jets and turbo
props in Brazil than in any other country outside the United States and Canada. As a region, Latin America and the Caribbean operate more turbo props than Europe or Asia.
With VLJ manufacturers forecasting more than 60 percent of their sales outside the United
States, Latin America is an enticing market. With a poor road network and few railways, Latin America has relied on private aircraft for business travel. As the Latin American economies gain momentum and the boom in agriculture gener-ates business in areas far removed from the big industrial centers, demand for new air service keeps growing, and VLJ will definitely have a role to play there.
VLJ In Europe The impact of VLJ on European commer-
cial airliners is harder to predict because the new aircraft are heavily dependant on the level of air travel infrastructure, the availability of substitutes such as rail and car, and pan-European air traffic regulations.
In Western Europe, where 50 percent of all business-class flights are less than 500 kilometers, flying commercial airlines is no longer a good value because of: Interminable security checks at airport hubs, Mounting delays, Lack of flexibility with scheduled flights.
Alternatives such as high-speed trains — especially in France and Germany — exist but are not practical for many travelers because they almost always require connecting through a major rail hub such as Paris, Frankfurt or Berlin. VLJ should be an attractive alternative to those business travelers, most likely at the expense of traditional carriers.
Eastern Europe markets, particularly in Russia, Poland and Turkey, are developing rap-idly, yet they lack the air infrastructure to accom-
Eclipse 500 VLJs are assembled in a 50,000 square-foot production facility in Albuquerque, New Mexico, and feature Eclipse Aviation’s breakthrough friction stir welding process, an advanced manufacturing process that the company was the first to use in the assembly of thin-gauge aluminum aircraft.
Photo courtesy of Eclipse Aviation
Photo courtesy of Cessna
Unlike many light jets, the Cessna Mustang has no overhead panel. On this VLJ, all the switches and gauges are on the instrument panel and center console, which also carries the thrust levers, pitch trim wheel and co-located indicator, flap lever, an alphanumeric keypad for the flight management system, and the switches for aileron and rudder trim. Jets are tra-ditionally fitted with “thrust levers,” but Mustang’s are called throttles.
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modate their rapid growth. There is still a dearth of air service to and within those countries. Yet, with more than 1,700 airfields in Russia and 530 in the Ukraine, the potential for VLJ is there. According to Eurocontrol, most of the 100,000 city pairs in Europe are not linked by direct flights. Only 10 percent of city pairs within the European Union are connected on a regular basis, and only 3 percent are connected on a daily basis.
As a consequence to those opportunities, many air-taxi companies are preparing to begin operations in Europe (Blink in the United Kingdom, Jetbird in Switzerland, byJets in France, GlobeAir in Austria, JetReady and TaxiJet in Spain, AirCab in central Europe).
There are, however, some inhibitors to the success of VLJ growth in Europe. Over-regulation, an active and powerful anti-aviation lobby, carbon trading, and crowded air corridors in the west are all issues that could prevent VLJ from taking off in Europe. Flag carriers have begun paying attention to that segment of the market. Some airlines are studying the feasibility of buying and operating very light jets as a way to route their high-contribution passengers expedi-tiously to their hubs for their onward international journey.
VLJ In AsiaIn general, distances within Asia are too
great to operate very light jets — with their 1,200 nautical-mile range — as a credible alternative to commercial aviation, so yield premiums should be safe for most of the flag carriers in the region, with the possible exception in fast-growing regions where the basic commercial aviation airport infrastructure has not kept pace with the growth in air traffic. In countries such as China and India, access to regional airports as a way to bypass congested hub airports is a credible alternative for VLJ as is access to out-of-the-way
places not yet served by regular commercial avia-tion. But even this development is limited by the number of regional airports available in those two countries. China has 480 regional airports and India only has 330. For comparison purposes, the
United States — with one-fourth the population and roughly the same size as China — has more than 14,000.
VLJ In The Middle EastRegional aviation experts believe VLJ will
prove highly popular when they enter the Middle
East market, Gulf News recently reported. The relatively small distances between
the Gulf’s business hubs, the increase in business traffic in the region and the high level of disposable income in the region
makes the Middle East one of the most ideal markets for this new generation of small business jets.
New terminals for executive jets are under construction or have just been com-pleted in Abu Dhabi, Qatar, Bahrain and Dubai. The private jet industry in the region is worth about US$400 million annually, accord-ing to the Middle East Business Aviation Association, and has been growing at an annual rate of 10 percent to 15 percent.
“Business aviation in the Middle East will be worth about US$800 million by 2012 — double its current level — as people increasingly turn to “aviation-on-demand” for privacy, safety and corporate efficiency,” said MEBBA Chairman Al Naqbi.
In other words, most of the carriers in the region — except for those that primarily fly long-haul international routes — should pay close attention to this development if they want to protect their yield. a
Eric Meyer specializes in market development for Sabre Airline
Solutions®
. He can be contacted at [email protected].
The Mustang was the first of its class to receive full-type certification and certification to fly into known-icing conditions. It’s also the first VLJ to be delivered to a customer and makes Cessna the first company to obtain an FAA Production Certificate (in 2006) for a very light jet.
Given all their advantages, some view the advent of VLJ as a game-changing tech-nology that will have the same impact on business jet flying as the low-cost model has had on the commercial aviation sector.
HigHlight
Photo courtesy of Cessna
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By Hector Gonzalez and Horacio Mena | Ascend Contributors
Mexico’s Major ModificationsDuring the past few years, Mexico’s air transportation industry has undergone significant changes involving privatization of its major carriers — a situation that has ushered in a boldly renewed competitive environment along with a number of new low-cost carriers.
Photo by shutterstock.com
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A viation in Mexico traces its nativ-ity to the early years of the 20th century, not long after Orville and
Wilbur Wright first proved the viability of manned, powered flight in 1903. This was a restive period during which Mexico was about to become involved in a long, drawn-out civil war — the “Revolución Mexicana” — which broke out in 1910 and continued well into the 1920s.
That internal struggle in Mexico marked the first armed conflict in which the airplane was used not just logistically, but as an actual weapon.
The Mexican government army under Gen. Victoriano Huerta was one of the world’s first to designate an airborne unit — flying just a couple of early bi-winged aircraft — to patrol Mexican territory. And at several junctures during this revolution-ary interim, aircraft were used by both the government and the rebels.
Another notable event occurred when Mexican president Francisco Madero became the first sitting chief executive of any country to fly in an airplane. That historic flight left the ground on Nov. 30, 1911, from a makeshift airstrip in Mexico City, and lasted only about 10 minutes.
Earliest known commercial aviation in Mexico dates to 1921, when the com-pany now known as Mexicana de Aviación was founded.
In the late 1920s and early ’30s, first solo nonstop trans-Atlantic pilot Charles Lindbergh flew to Mexico several times, almost always to raucous welcomes. Among the aircraft Lindbergh piloted to Mexico was a workhorse Ford Tri-Motor — when he flew from Brownsville, Texas, to Mexico City for Pan American Airways.
Certainly, Mexico has a long and storied aviation history, which has mainly revolved around its two government-owned carriers, Mexicana and AeroMéxico. Through the years, both carriers have alternated between being privately owned and government owned and, once again, in 2005, the country’s air transport indus-try changed quite dramatically when the Mexican government looked to again priva-tize its two airlines; first selling Mexicana to private interests in late 2005, then finally letting go of AeroMéxico last year.
And with the privatization of the country’s two network carriers, the Mexican commercial aviation picture became a much more competitive and dynamic environment, marked primarily by the entrance of a number of new players — most operating on a low-cost business model.
These new carriers — Avolar, Interjet, Volaris, ALMA de Mexico and VivaAerobus — all joined older airlines
including Aviacsa, Aerocalifornia and Transportes Aeromar in what has rapidly evolved into a crowded and highly com-petitive Mexican air travel environment.
But it’s not just the newer airlines and those that are more specialized that are developing innovative business plans in Mexico. It’s the large network carri-ers and those that are intensifying their efforts to grow.
AeroMéxico — as Mexico’s flag-car-rier airline — is No. 1 among the nation’s carriers in terms of passengers as well as the size of its aircraft fleet. Now under private ownership, AeroMéxico is closely examining its operations and implement-ing various cost-cutting initiatives, while concurrently awaiting delivery of its orders of a number of new Boeing 737, 777 and 787 aircraft.
A huge part of the carrier’s operat-ing strategy involves reliance on its sub-sidiary airline AeroMéxico Connect (for-merly AeroLitoral) to drive business and promote passenger connections within AeroMéxico’s greater route system.
Similarly, AeroMéxico’s chief rival Mexicana is leaning heavily on its associ-ated airline Click (formerly AeroCaribe) to complement its primary route structure. Mexicana emerged from its government ownership to be acquired by the Posadas Group, a mainstay of Mexico’s travel and
hospitality industries and one of the coun-try’s primary hotel owners and operators.
Since its privatization, Mexicana has focused its business plan on being more efficient, including a full-fledged corporate cost restructuring. It has also recently expanded its route network to more U.S. and Canada destinations.
At the bottom line, most of Mexico’s airlines have been striving to grow, taking advantage of this unique interlude in the Mexican commercial airline industry, which has grown steadily in terms of pas-sengers since the early ’90s.
In 1992, for example, more than 14 million passengers were boarded in the Mexican air travel market; by 2006, that figure had risen to more than 22 million passengers; and last year 27.5 million passengers were boarded.
With regard to their immediate future, Mexico’s air travel customers should continue to benefit from a great-er range of carrier options and very attractive fares — although consolidation between or among several carriers could be just around the corner and is probably inevitable.
Business analysts have predicted a number of airline consolidations in Mexico, particularly between some of the new players (since most of them operate on similar low-cost business models).
Mexico’s Volaris is one of several new carriers that has contributed to a highly competitive environment for the country’s traditional carriers. The Toluca, Mexico-based carrier operates 14 Airbus A319-100 aircraft to 17 destinations.
Photo by shutterstock.com
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Unquestionably, Mexico’s airline industry is expected to continue to grow, as carriers order new aircraft and map out new routes. Therefore, advanced tech-nological platforms will continue to play extremely important roles, essentially paving the way for airlines in Mexico to achieve their goals, from planning to execution.
Worldwide, there’s a mushroom-ing customer preference to select and purchase transportation options through direct channels. And the trend is impos-sible to miss in Mexico, where the number of people who have access to the Internet is steadily and substantially increasing.
In addition, attractive fares offered by Mexico’s low-cost carriers have obliged the network carriers to reduce fares — yet at the same time, the network carriers have encountered considerable difficulty in trying to reduce their operating costs, creating the common conundrum in which fares are artificially kept at low levels and losses accumulate.
But lower fares have helped stimu-late phenomenal air transportation growth in Mexico. Double-digit growth is forecast for the next several years. Fares, though, must eventually move more in line with operational costs.
Regardless of what happens in the future, however, the new players in the Mexican air travel market have struck positive chords in creativity and breaking paradigms, innovatively acquiring resourc-es and partnering with companies from other industries in sponsor relationships.
At the same time, these new play-ers have been able to take advantage of the various abilities of their partners and investors to help lower costs. Volaris, for example, provides entertainment on its flights through its close connection to Grupo Televisa, and it offers snacks in cooperation with its sponsor Krispy Kreme Doughnuts.
On the whole, Mexico’s airline industry is spawning innovative approach-es and realizing rapid growth. And gener-ally, the country’s travelers are experienc-ing what is for now, at least, a notably affordable and enjoyable ride. a
Hector Gonzalez is senior principal and account director in Mexico
and Horacio Mena is airlines account manager for Sabre Airline Solutions®. They can be contacted
at [email protected] and [email protected].
In late 2006, Mexico’s largest airline, AeroMéxico, ordered two additional 787-8 Dreamliners, bringing to five the number of 787s the carrier expects to acquire. In June 2006, the airline announced plans to lease three 787-8s from International Lease Finance Corp. with deliveries scheduled to begin in early 2010, making it the first Latin American airline to incorporate the mostly composite airplane into its fleet.
Mexicana, Mexico’s second-largest airline, was acquired in 2005 by the Posadas Group, one of the country’s most prominent hotel owners and operators. In a move to remain competi-tive and satisfy customer demand, the carrier expanded its network to include additional destinations in Canada and the United States.
Photo courtesy of BoeingPhoto courtesy of Boeing
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The U.S. domestic airline industry has expe-rienced phenomenal growth during the last 30 years since deregulation. In spite of
major geopolitical events that have caused tempo-rary reductions in passenger traffic, the number of passengers traveling within the domestic market and the number of aircraft movements have increased three fold. At the same time, there has been very little growth in the underlying airport and air traffic control system necessary to support this immense growth. As a result, there has been a consistent increase in the number of delayed and cancelled flights as measured by the U.S. Department of Transportation.
During the first half of 2007, nearly 28 per-cent of flights were delayed, cancelled or diverted. Of the late arrivals, passengers experienced an average delay of 57 minutes. An alarming and disturbing trend observed in delayed flights is a significant increase in duration of taxi-in and taxi-out times, in some cases exceeding five hours. With limited gate availability at major hub airports, airlines are often forced to board flights and repo-sition aircraft to holding areas until they receive departure clearance. On arrival, inbound flights often end up waiting until gates open, where, in some cases, the outbound flights at the occupied gates are waiting for delayed crew members on inbound flights.
Even during blue-sky days (something that rarely happens), existing U.S. airports and air traffic control systems are barely able to cope with the number of scheduled flights, especially in major metropolitan areas such as New York City. In fact, the three most chronically disrupted U.S. airports — John F. Kennedy International Airport, LaGuardia Airport and Newark Liberty International Airport — all serve the New York tri-state area. This bottleneck impacts the entire national airspace, and the U.S. Federal Aviation Administration has placed great emphasis on dealing with problems in the New York City area and the surrounding northeast region to minimize disruptions.
In March, the U.S. Department of Transportation announced the allowance of 30 additional daily flights at Newark Liberty Airport, but to achieve this and avoid the significant delays experienced last year, airlines must spread more services into off-peak times. The new cap went into effect in early May and applies to both domestic and international flights, enabling an average of 83 services per hour during peak peri-ods. The same cap began in March on rotations at JFK Airport, and it already exists at LaGuardia Airport. America’s domestic airline delays were the second worst on record in 2007 according to the DOT, and these three airports had the worst on-time arrival rates.
Several programs have recently been insti-tuted by the FAA, including the redesign of the airspace in the northeast and the introduction of the airspace flow program. Based on past
experiences, it has been observed that airspace changes are essential for realizing the benefits of new runway projects, and they can enhance the flow of air traffic even without new airport infrastructure. For example, a recent airspace design above the Philadelphia International Airport has shown marginal improvements in northeast operations as Philadelphia traffic often impacted traffic bound for the tri-state area.
During an airspace flow program, air traffic controllers are allowed to delay only those flights that are expected to encounter extremely bad weather. As a result, the new program is expect-ed to minimize the crippling effects of the sudden thunderstorms that frequently affect the nation’s airspace system during the summer when travel is at its highest. On a single severe weather day, thousands of flights can be delayed, diverted or canceled, affecting hundreds of thousands of pas-
Bursting At The SeamsWith an airspace system that for decades has been overcrowded and inefficient, the U.S. Federal Aviation Administration is finally implementing new technology and processes to support the country’s phenomenal airline industry growth rate as well as reduce flight delays and make the skies safer.
With an airspace system that for decades has been overcrowded and inefficient, the U.S. Federal Aviation Administration is finally implementing new technology and processes to support the country’s phenomenal airline industry growth rate as well as reduce flight delays and make the skies safer.
By Michael Clarke | Ascend Contributor
The percentage of on-time arrivals at the nation’s busiest airports has steadily declined each year since 2002, when only 82 percent of flights arrived on time at the 35 busiest airports. In 2006, the on-time arrival rate at those airports fell to 75 percent.
27.8%
0%
5%
10%
15%
20%
25%
30% 27.4%
22.6%
17.9% 18.0%
21.9% 22.6%24.6%
2000 2001 2002 2003 2004 2005 2006 2007* Years
Flight Delays, Cancellations And Diversions
Perc
ent o
f sch
edul
ed fl
ight
s
*January through July
Source: BTS data
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sengers and resulting in millions of dollars in oper-ating losses for carriers. Typically, there are more than 40 severe weather days annually in the U.S. domestic system. Under the AFP, controllers issue expected departure times to aircraft that are expected to pass through airspace affected by bad weather and safely meter them through the constrained area. Airlines are given the option of either accepting delays for flights scheduled to fly through storms or flying longer routes to safely maneuver around the weather system. It improves the FAA’s ability to respond to severe weather and reduces the amount of unneces-sary delays and disruptions. While this initiative does not create additional capacity, it limits the negative effects of severe weather patterns. It is estimated that in the first year of operations (summer of 2006), AFP programs saved U.S. airlines US$20 million in reduced operating costs.
In another initiative, the FAA has implemented the adaptive compression program in which arrival slots that become available as a result of flight cancel-lations, delays and diversions are automatically filled with available flights. The underlying goal of this program is to ensure that airports impacted by bad weather receive the maximum number of flights that can safely arrive, thereby reducing the overall number of delay minutes experienced by the traveling public. While a lot of attention is often placed on extremely bad weather days, the FAA is advocating the use of new and emerging technologies such as data com-munication and satellite-based navigation to increase the capacity of the national airspace system.
Data communication provides an additional means for two-way exchange between controllers and flight crews for air traffic control clearances, instructions, advisories, flight crew requests and reports. The recent introduction of Reduced Vertical Separation Minimum, or RVSM, in the U.S. domestic system has helped increase the capacity of the national airspace system. RVSM was designed to reduce the vertical separation above flight level 290 from the previous 2,000-foot minimum to 1,000-foot minimum. This has enabled aircraft to safely fly more
optimum profiles, gain fuel savings and increase airspace capacity.
The FAA is developing the next-generation air transportation system, called NextGen, to modernize the national airspace system through 2025. As part of the NextGen initiative, the FAA will address the impact of air traffic growth by increasing national airspace system capacity and efficiency while simul-taneously improving safety, environment impacts and accessibility to the ATC system.
Currently, the U.S. air transportation system handles 750 million passengers each year. It is anticipated that the NextGen system will accom-modate two to three times the current traffic levels by shifting away from outdated ground-based, voice-driven technology. To achieve these goals, the FAA is leveraging emerging aircraft navigation capabilities, including performance-based navigation that uses satellite-based technology.
Performance-based navigation incorporates navigation performance requirements that can be applied to an air traffic route, instrument procedure or defined airspace. This includes both area navigation and required navigation performance specifications. Performance-based navigation provides a foundation for the design and implementation of automated flight paths as well as airspace design and obstacle clearance.
Area navigation enables aircraft to fly on any desired flight path within the coverage of ground- or space-based navigation aids within the limits of the capability of the self-contained systems, or a combina-tion of both capabilities. As such, RNAV aircraft have better access and flexibility for point-to-point opera-tions. RNAV arrival and departure procedures should drastically reduce noise, emissions and fuel usage. RNAV procedures at Hartsfield-Jackson Atlanta International Airport have already saved airlines US$34 million in fuel costs. Required navigation performance is RNAV with the addition of an onboard performance monitoring and alerting capability. A defining charac-teristic of RNP is the ability of the aircraft navigation system to monitor the navigation performance and
inform the crew if the requirement is not met during an operation. This onboard monitoring and alerting capability enhances the pilot’s situation awareness and can enable reduced obstacle clearance or closer route spacing without intervention by air traffic control. Once the required performance level is established, the aircraft’s own capability determines whether it can safely achieve the desired performance and qualify for the operations.
The backbone of the NextGen system is Automatic Dependent Surveillance Broadcast, or ADS-B. It uses global positioning satellite signals to provide air traffic controllers and pilots with much more accurate information that will help keep aircraft safely separated in the sky and on runways, allowing flights to go from point to point. As a result, airlines will be able to file shorten flight plans, which lead to reduced travel times for passengers. Aircraft tran-sponders receive GPS signals and use them to deter-mine the aircraft’s precise position in the sky, which is combined with other data and broadcast out to other aircraft and air traffic control facilities. When properly equipped with ADS-B, both pilots and controllers will, for the first time, see the same real-time displays of air traffic, substantially improving safety.
However, the benefits of these new concepts will be limited due to the slow acceptance by com-mercial airlines. As part of these solutions, airlines are required to equip their aircraft with the necessary onboard tools that are considered by some carriers expensive and not cost effective.
On the ground, the FAA is currently approving construction for new runways, installing new tech-nology and instituting new procedures to facilitate capacity and efficiency enhancements. Since 2001, it has approved 10 miles of new runways at 10 of the United States’ busiest airports including Hartsfield-Jackson Atlanta International Airport. At other major hub airports such as Dallas/Fort Worth International Airport, the FAA has introduced perimeter taxiways and high-speed exits that reduce the number of active runway interceptions necessary to get from the runway threshold to terminal gates. Together, these accommodate more than 1.6 million additional operations per year and decrease average delay per operation at these airports by approximately five minutes.
No one can question the dynamic role of the U.S. airline industry in the country’s economy, and it is therefore essential that the FAA maintains a focused strategy in improving system capacity and efficiency. Without any substantial changes to the national air-space system, the level of congestion will only wors-en, resulting in increased flight delays, cancellations and diversions. The increased levels of flight disrup-tions will lead to more disrupted passengers, increased airline operating costs and a continued negative impact on the environment. a
Michael Clarke is director of airline operations optimization solutions for Sabre
Airline Solutions®. He can be contacted at [email protected].
For flights that arrived late, passengers experienced an average flight delay of nearly 57 minutes, up nearly three minutes from 2006. These rising flight delays are leading to more on-board tarmac delays.
56.7
0%
15%
30%
45%
60%52.5
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2000 2001 2002 2003 2004 2005 2006 2007* *January through July
Source: BTS data
Average Length Of Arrival Delays
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Years
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By Christophe Ritter | Ascend Contributor
MIDDLE EASTON THE RISE
With well over 600 new aircraft orders at the Dubai Air Show, double-digit annual traffic growth and a number of new airports planned, the Middle East is exceeding all airline industry expectations — although various factors could influence sustainability of medium-and long-term growth.
Photo by shutterstock.com
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T here’s no arguing the fact that revenue passenger traffic is growing at a phe-nomenal rate in the Middle East.Last year, the Arabian peninsula (from
Syria to Oman) exhibited a year-over-year increase of more than 18.8 percent in total air revenue passenger traffic, compared to a 7.5 percent market growth rate worldwide.
And even though Middle East air traf-fic market share represents only 8 percent of total passenger traffic globally, it also represents the fastest-growing market for scheduled airlines.
While this market growth has, to a large extent, been fueled by a significant increase in capacity with the rapid development of low-cost airlines and continuously added total available seats by the region’s large network carriers, the latest figures provided by the International Air Transport Association also show a significant load-factor increase.
With such growth, the Middle East — along with India and China — remains at the forefront of the fastest-growing markets worldwide. That’s a remarkable achievement because the growth has occurred on the inter-national passenger market. There’s simply no strong intra-domestic Middle East market that would support the high level of growth.
The dynamism of the Middle East is supported by market-oriented eco-
nomic policies and strong government investments in infrastructure as well as diversification of the traditional petro-leum-based economy into financial hubs and leisure destinations. Development of free-trade zones, which have created an international investor-friendly environ-ment, and regional government spending have enhanced the competitiveness of non-energy sectors.
Surges in petroleum revenues have enabled the various Middle East coun-tries to invest heavily in infrastructure, industrial projects and tourism, provid-ing stimulus for the private sector to expand.
In addition, the geographical loca-tion of the Middle East — at a maximum range within 8,000 nautical miles of all continents — has boosted international traffic flow, positioning the Middle East region as a major global hub for both busi-ness and leisure travelers.
During the past decade, for exam-ple, Dubai International Airport advanced from the 26th-largest to the 10th-largest international hub in the world, with more than 34 million passengers handled (a year-over-year growth rate of 19.3 per-cent) and 260,000 aircraft movements (a year-over-year growth of 9.8 percent) in
2007, and is the world’s fastest-growing airport.
Leveraging the Middle East’s proxim-ity to fast-developing regions and emerging markets, such as southern Asia (primarily India and Pakistan) and northern and west-ern Africa, international passenger traffic to and from the Middle East is growing rapidly in all world regions.
While one of the European and North American challenges is a relative lack of capacity to address strong domestic and international demand, the Middle East has invested in and will continue to heavily invest in airport infrastructure.
Recently, a half dozen new airports have been announced. These include Oman as well as the Qatar New Doha International Airport project that will triple the airport’s capacity to 50 million passen-gers annually by 2015. Abu Dhabi Airport will rapidly expand with the addition of a second runway and a third terminal. And Jeddah will benefit from four new terminals and capacity for up to 80 million passengers a year.
The Dubai World Central International Airport — currently under construction — has been designed to handle more than 120 million passengers a year, representing 40 percent more than Atlanta Hartsfield-Jackson International Airport, currently the world’s largest airport.
Leveraging these gigantic infra-structure-enhancement projects, airlines have been investing heavily in additional capacity.
Last year, more than 720 aircraft were ordered (either firm orders or options) by 15 Middle East airlines or leasing com-panies, establishing a new record year for both Airbus and Boeing in the region.
During the November 2007 Dubai Air Show, 662 aircraft orders were placed — for a value exceeding US$100 billion. Emirates Airlines added 120 Airbus A350 aircraft orders and 11 Airbus A380 orders to its already-secured 47 orders — fol-lowed by Qatar Airways with more than 90 orders of Boeing 777 and 787 models.
With such major capacity investment, the Middle East leads the world in capacity expansion, with 14.8 percent year-over-year available seat kilometer growth — more than twice the overall industry growth rate according to the latest IATA figures.
Just in the past five years, the capac-ity flown from the Middle East to Africa and Asia has doubled and has increased 36 percent to Europe and 23 percent to North America. Stimulated by the rapid develop-ment of low-cost carriers such as Air Arabia and Jazeera Airways, the capacity within the Middle East has increased by 56 per-cent during the same period.
During the Dubai Air Show last November, 662 aircraft orders worth more than US$100 billion were placed. Combined, Emirates Airlines and Qatar Airways exceeded 220 aircraft orders, representing approximately 33 percent of the show’s total orders.
Photo by shutterstock.com
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While the lost-cost phenomenon is relatively new in the region (in com-parison to North America, Europe and even Asia), major expansion plans from already-established low-cost carriers — as well as the arrival of several new entrants in Saudi Arabia, the United Arab Emirates and Yemen — are expected to significantly stimulate the intra-Middle East market.
Fortuitous circumstances relating to a dynamic economy, major infrastruc-ture investment and fast-growing aircraft capacity (leading to extensive worldwide network coverage) is making the mid-term Middle East outlook fairly promising. The International Civil Aviation Organization forecasts that Middle East passenger traffic will grow at an average annual rate of 6.4 percent until 2015, which is well above the 4.5 percent world average of all other regions, including Asia.
The presence of multiple major net-work carriers (Emirates, Qatar Airways, Etihad, Gulf Air and Saudi Airlines) and the strong ambitions of several region-al carriers (Oman Air, Kuwait Airways, Yemenia and Middle East Airlines) will enable the region to remain the leader with the fastest-growing increase in pas-sengers per aircraft movement, according to Airports Council International.
Supported by a mix of narrow-body and wide-body aircraft deliveries in the coming year, as well as by the devel-opment of secondary airports, the high percentage of medium- to long-haul opera-tions will continue to increase in the Middle East.
In addition, the Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and associate member Yemen) will continue to pursue the GCC’s liberal-ization program, leading eventually to full open skies in the Middle East as well as enhancement of the efficiency of its air transportation industry.
Therefore, the intra-Middle East market (along with Pakistan and India) should continue its rapid growth with the development of the already-established low-cost carriers and several potential new regional entrants using single-aisle aircraft.
Based on these massive invest-ments in infrastructure and capacity, the Middle East appears to be raising its limits every year, with a growth rate surpassing analysts’ forecasts.
The recent success of Royal Jordanian’s initial public offering — result-ing in market capitalization for Royal Jordanian of US$366 million — illustrates
that investors have confidence in the region’s air transportation fundamentals for the short and medium terms.
But for the truly serious investor, there are still key questions: Is the high growth rate in the Middle East sustainable in the medium to long term? What might be the result if market growth unexpect-edly levels off?
It’s fairly obvious that geopolitical risk is the most prominent threat to the region’s economy. To one extent or another, most countries in the Middle East endure politi-cal tensions at various levels.
Investors, however, have already priced geopolitical risk into the equation, resulting in broader market volatility in comparison to other regions. The risk has been mitigated somewhat by the region’s financial flow patterns and integration into international trade.
In fact, the region’s airline industry recovery since 2003 has been significant, despite the high concentration of political issues. The impact of those issues on inter-national traffic has so far proven marginal and has been more than overcome by the economic strength of the region.
And barring an unlikely plummet in oil prices, Middle East governments will continue to increase the diversification of their economies and massively invest to
While Middle East air traffic market share accounts for only 8 percent of the world’s total passenger traffic, it also represents the fastest-growing market for scheduled airlines. The growth has been largely driven by a substantial rise in capacity from the advent of low-cost carriers and additional total available seats by the region’s network carriers.
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enhance the overall attractiveness of the region to business and other interests.
But even more than external geopoliti-cal factors, the biggest risk the Middle East air transportation industry faces in coming years is the potential for overcapacity.
Massive wide-body and single-aisle aircraft orders — booked during the last three years — will come to fruition start-ing in 2010 and continuing through 2015, leading to a double-digit capacity increase in the Middle East. Despite demand still running at a fairly high level, it seems somewhat unlikely that the current traffic-growth rate can continue at such a frenetic pace in the medium and long terms.
Rather than following normal market cyclicality, largely offset by the stimula-tion of demand on newly operated routes,
the tailing off of the current Middle East air transportation growth rate will prob-ably happen due to lower-than-expected demand-elasticity ratios against capacity growth and yield variation.
Capacity increases in the Middle East — leveraging regional hub-and-spoke networks —have allowed airlines based in the Middle East to grow traffic well out-side their local catchment areas.
But network carriers such as Emirates, Qatar Airways, Etihad and Gulf Air have performed best on dense routes at major airports rather than regional destinations, with the exception of India, where strong economic development has dramatically increased demand for both domestic and international air travel.
Addition of frequencies and capac-ity (particularly with the introduction of the huge new Airbus A380 aircraft) will continue to stimulate traffic, but at a much slower pace and will most likely tend to dilute existing demand.
A recent study performed by Sabre Airline Solutions® on the North
America/India market, for example, showed that enhanced elapsed flight time (due to improved connections and additional capaci-ty) stimulated traffic by up to 14 percent until 2005. Since then, this figure has decreased to less than 5 percent on average for mar-kets already operated by an airline.
Most traffic generated by airlines’ increasing capacity was due to the natural market growth of demand as well as pas-senger recapture versus competition.
Network carriers will most likely con-tinue to be dominant at major airports, but “thin” markets out of regional airports will be more challenging because the potential route capacity that will be added may far exceed the overall market potential.
Additionally, development of low-cost and regional carriers operating at main and
secondary airports will continue to siphon off a significant portion of the local traffic that was previously served by network carriers.
So the peak of added capac-ity in the Middle East region from 2011 onward on major routes — in conjunction with lower market-stimulation factors — promise the airlines challenging times in fill ing seats.
Naturally, airl ines in the Middle East will still benefit from hot markets in India and Southern Asia, where slower-than-expected liberalization has some-what limited new airlines’ ambitions to grow internationally.
But this situation may not last very long. Several Indian carriers, for example, are planning to open new nonstop routes to Europe (particularly to the United Kingdom) with a more aggres-sive commercial approach than current competitors.
Direct services that provide both competit ive elapsed fl ight t ime and aggressive fares will limit the potential growth of neighboring Middle East carri-
ers to feed their hubs, while the region is currently one of the main providers for international traffic.
Kingfisher Airl ines, for example, will likely operate most of its 10 Airbus A380 aircraft (which are to be delivered from 2011 onward) on key European routes, leading to a redistribution of air-line market share at the expense of cur-rent leaders Air France/KLM, Lufthansa, Emirates, Brit ish Airways and Qatar Airways.
Since Middle East airl ines have been performing better on dense routes, it is more likely that carriers adding capacity will first focus on these mar-kets, increasing overal l competit ion with a potential negative impact on the routes’ yields.
At the same time, the average growth rate is tailing off. IATA and the Airports Council International see the strong current demand in international air travel in the Middle East region rap-idly slowing from a double-digit growth rate down to less than 5 percent by year-end 2010, which would be just before a large number of wide-body aircraft are scheduled to be delivered.
So airlines will need a more aggres-sive approach to fill their seats — limit-ing, at best, any increase in average passenger fares. This represents the biggest challenge Middle East airlines are likely to face in the near future, since price elasticity requires significant fare changes to positively influence demand in a market in which airline preference is a fairly volatile factor to customers.
Large capacity increases, strong demand (but growing at a much slower pace with operating costs remaining high due to fuel prices and complex network-carrier operations) wil l most likely negatively affect Middle East air-line profitability in the medium term.
Push from investors to improve industry returns — as most Middle East airlines either are or will be privatized by the end of this decade — will probably drive consolidation in the Middle East airline industry in the medium term to cut overlapping operations and reduce capacity, making it easier to improve yield and opening a new era in the Middle East. a
Christophe Ritter is a senior partner for Sabre Airline
Solutions. He can be contacted at [email protected].
Just in the past five years, the capacity flown from the Middle East to Africa and Asia has doubled and has increased 36 percent to Europe and 23 percent to North America.
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t a k i n g y o u r a i r l i n e t o n e w h e i g h t s
2008 issue no. 1
editors in chiefStephani Hawkins B. Scott Hunt 3150 Sabre Drive Southlake, Texas 76092 www.sabreairlinesolutions.com
Art Direction/DesignCharles Urich
contributors Raida Abumaizar, Khaled Al-Eisawi, Jack Burkholder, Rick Dietert, Steve Hackler, Hanjo Krause, Gordon Locke, Sandra Meekins, Garth Overmyer, Jody Pickering, Murray Smyth, Fionna Wee, Chris Wilding, John Winstead.
PublisherGeorge Lynch
Awards
2008 Hermes Creative Awards - Platinum
2007 International Association of Business Communicators Bronze Quill.
2005 and 2006 International Association of Business Communicators Bronze Quill, Silver Quill and Gold Quill.
2004 International Association of Business Communicators Bronze Quill and Silver Quill.
2004, 2005 and 2006 Awards for Publication Excellence.
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