capacity management in airline industry- a case study

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@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management' course in the University of Warwick, United Kingdom

Capacity Management in Airline Industry: A Case Study

The purpose of this case study is to analyse the capacity management in three

companies, and to identify a set of critical success factors in this area. The

companies are: Royal Jordanian Airline, American Airliners and Easy Jet. The first

two companies were selected as examples for 'full-service carrier', while the last one

was selected as an example for 'low-cost carrier'. The complete companies' profiles

are shown in Appendix A, B and C respectively.

Critical Success Factors for Capacity Management in Airline Industry

With reference to the three case studies, fours critical factors are needed for a

successful capacity management in airliners, which are:

1. Yield management: yield management plays a key role in capacity

management for industries that have a perishable inventory, utilize a

reservation-based demand system, operating with a high fixed cost and a

market that is divided into segment. The above conditions are available in

airline industry; therefore, yield management is a critical aspect in that

industry.

2. Managing stochastic demand: The demand in airline industry is affected by

many external conditions that lead to a stochastic demand. Analysing these

external factors-such as politics, economy and diseases - is crucial so

companies can put the right response and right capacity in place.

3. Long term capacity planning: the capacity in airline industry is measured by

'seats' which reflects the size of the aircraft at a wider context. Given that

airliners cannot change the number of seats in each aircraft easily, optimizing

the load factor per each flight is very important. Additionally, the lead time that

is needed to produce an aircraft by the OEM (Original Equipment

Manufacturer) could be several months, therefore, long term capacity

planning and determining the needed capacity in terms of addition/ deletion of

aircrafts is critical.

4. Alliance agreement and airline subsidiaries: airliners can improve their

load factor by getting into alliance agreements and subsidiaries partnerships

where shared capacities can be managed using Code-Sharing. These

approaches reduce the fixed cost needed for capacity expansion and the risk

that is associated with demand fluctuation. As a result, alliances and such

partnerships are important for a successful capacity management.

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Appendix A: Royal Jordanian Airline

Background Information

Royal Jordanian is the national airline company in the Kingdom of Jordan. It was

established in December 1963 and was operated with two aircraft only to provide

flights between three cities. Today, the company provides regular flights to 45 cities

all over the world (Royal Jordanian 2014, p.16).

Competition, fuel prices, political situation in the Middle East to name but a few of the

reasons that are affecting the company negatively. Within capacity management

context, these challenges resulted in a very small load factor for some flights and

eventually led to cancel them (Royal Jordanian 2014, p.23).

Long Term Capacity Planning

As a part of the long term capacity planning in Royal Jordanian airline, the company

is planning to introduce five Boeing 787 aircrafts in 2016 alongside with plans to

upgrade the medium and long haul fleet. Additionally, four Airbus 340 aircrafts and

one airbus 330 had been removed from the fleet.

The company studies the long term demand forecast continuously and update its

capacity of flights. For example, destinations such as Alexandria, Colombo, Milano,

Delhi, Mumbai, Lagos and Accra were deleted. Flights such as Tripoli, Benghazi,

Misrata and Mosul, Damascus and Aleppo have been suspended. The company also

has a commercial alliance agreement with different airliners in order to manage their

shared capacities with other companies such as “American Airlines, USAirways,

Iberia, Siberian Airlines, Air Berlin, Malysian Airlines and Sri Lanka airlines”. As a

result, more than 100 destinations are available for Royal Jordanian airline (Royal

Jordanian 2014, pp.31–33).

The company will continue to participate in Oneworld Alliance and Code Sharing

which provides extra 1000 destinations for the company (Royal Jordanian 2014,

p.37).

Medium and Short Term Capacity Planning

As an example for the medium and short term capacity planning in Royal Jordanian

Airline, the company is working continuously to increase the number of destinations

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and/ or the number of weekly departures according to medium and short term

demand forecasts (Royal Jordanian 2014, p.16).

Capacity Measures

Some of the capacity measures in Royal Jordanian Airline are shown below. Figure

A.1 shows how the company measures its capacity by Available Seat Kilometre

(ASK). The company works continuously to improve seat load factor in order to

generate the maximum Passenger Revenue Kilometre (PRK).

Royal Jordanian Airline Company- Capacity Measures

Figure A.1 Capacity- Related Measures in Royal Jordanian Airline

(Source: Royal Jordanian 2014, p.23)

Table A.1 shows the capacity expansion plan that the company is planning to

implement in 2016 in response to the long term demand forecast. As shown below,

some aircrafts will be added and some will be eliminated from the fleet.

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Table A.1 Number of Aircrafts in Royal Jordanian Airlines Company

Type 2015 2016

Boeing 787 5 6

Airbus A330 2 2

Airbus A320 7 7

Airbus 321 2 2

Airbus 319 5 4

Embraer EMJ195 2 2

Embraer EMJ195 3 3

Airbus 310 (cargo) 2 1

Total 28 27

(Source: Royal Jordanian 2014, p.36; Royal Jordanian 2015, p.41)

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Appendix B: American Airlines Group


American Airlines Group was founded in 1929 and became the world's largest airline

company in 2013 after the acquisition of US Airways. The company provides an

average of 6,700 daily flights to more than 50 countries with a total of 350

destinations (American Airlines Group 2015, p.5).


The long term capacity planning in the group is essential to ensure continuous

capacity to meet future demand. The company has a mainline fleet which consists of

946 aircrafts. Additional 75 aircrafts were delivered in 2015 and 112 aircrafts were

disposed. The company also has different capacity purchase agreements with

subsidiaries and third party companies (American Airlines Group 2015, p.45)

The detailed seating capacity in the groups is shown on figure B.1.

Figure B.1 Fleet Inventory in American Airlines Group for the Year 2015

(Source: American Airlines Group 2015, p.45)


Capacity management and revenue management in American Airlines Group are

widely affected by the stochastic seasonality demand in airline industry. Some of the

factors that cause seasonality demand pattern are (American Airlines Group 2015,

p.20):

"Seasonality where greater demand for air and leisure travel during the

summer months",

"General economic conditions",

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"Fears of terrorism or war",

"Fare initiatives",

"Fluctuations in fuel prices",

"Labour actions",

"Weather and natural disasters" and

"Outbreaks of disease".

Yield Management

American airline group uses yield management approach to manage its capacity

under three basic functions (Smith et al. 1992):

1- Overbooking which is “the practise of intentionally selling more reservations

for a flight than the actual seats on the aircraft”.

2- Discount allocation which is “the process of determining the number of

discount fares to offer on a flight”.

3- Traffic management which is “the process of controlling reservations by

passenger origin and destination to provide the mix of markets (multiple flight

connecting markets versus single flight market) that maximize revenue”.

The three major changes in the yield management in American airline happened due

to (Smith et al. 1992):

1. The implementation of SABRE (semi-automated business research

environment) In 1996.

1- The adaption of super-saver discount fares in 1977.

2- The deregulation act in 1979.

The logic behind yield management in American Airlines Group is shown in figure

B.2.

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Figure B.2 Yield Management in American Airlines Group

(Source: adapted from a discussion in Smith et al. 1992)

Capacity Measures

The detailed operational capacity measures in American Airlines Group is shown

in figure B.3.

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Figure B.3 Operational Capacity Measures in American Airlines Group

(Source: American Airlines Group 2015, p.67)

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Appendix C: EasyJet Airline


EasyJet company, which celebrated its 20th anniversary in November 2015,

succeeded in becoming the second largest short-haul airline in Europe, with a total

revenue of £686 million by end of 2015 (EasyJet Company 2015, p.8).

The core business model of this British Company is a low-cost point- to-point short-

haul airline (EasyJet Company 2015, p.6). With more 10,000 employees, the

company serves 70 million passengers per year in 31 different countries, through 735

routs and using 241 aircrafts (EasyJet Company 2015, p.3).


The long term capacity planning in EasyJet Company is well- understood by looking

at their continuous effort to increase the number of routs and destinations it offers. As

an example for that, the company added 95 new routes to new destinations in 2015

such as Stuttgart, Pula and Preveza, and it has future plans to add another 90 routs

in 2016 (EasyJet Company 2015, p.4). This long term plan includes an agreement

with Airbus Company to deliver additional 36 A320 aircrafts to meet the expected

demand increase between the year 2018 and 2021. The new fleet consists of two

models with 186 seats each; 30 aircrafts from the type A320s and 6 from the type

A320s (EasyJet Company 2015, p.8,9).


The successful medium and short term capacity planning in EasyJet was translated

into an increase in revenues per seat in 2015 by 1.5% in response to a 6% increase

in passenger volume. In addition, Load Factor increased by 0.9 percentage points

and reached 91.5% (EasyJet Company 2015, p.9).

Capacity Measures

Some of the capacity measures, operational and financial, that the company tracks

are shown in figures C.1 and C.2 respectively.

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Figure C.1 Operational Measures for Capacity Related KPIs

(EasyJet Company 2015, p.23)

Figure C.2 Financial Measures for Capacity Related KPIs

(EasyJet Company 2015, p.23)

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References

American Airlines Group, 2015. American Airlines Group Annual Report. Available

at: http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-reportsannual.

EasyJet Company, 2015. EasyJet Annual Report.

Royal Jordanian, 2014. Royal Jordanian Airlines Annual Report. Available at:

http://www.rj.com/en/reports?cat=1&_=205.

Royal Jordanian, 2015. Royal Jordanian Airlines Annual Report, Available at:

http://www.rj.com/en/reports?cat=1&_=205.

Smith, B.C., Leimkuhler, J.F. & Darrow, R.M., 1992. Yield management at American

Airlines. Interfaces, 22(1), pp.8–31.

capacity management in airline industry- a case study

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