Overview of the Airline Planning Process

Dr. Peter Belobaba

Istanbul Technical University Network, Fleet and Schedule
Air Transportation Management  Strategic Planning
M.Sc. Program  Module 2:   10  March 2014
 Lecture Outline

 Basic Airline Profit Model

 Fundamental Strategies to Improve Profitability

 Airline Planning Decisions

 Fleet Planning
 Route Evaluation
 Schedule Development
 Pricing and Revenue Management
 Operations Control

 Airline Organizational Structure

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 Basic Airline Profit Model

Operating Profit = Revenues - Operating Expense

Operating Profit = RPK x Yield - ASK x Unit Cost

 Use of individual terms in this profit equation to

measure airline success can be misleading:
 High Yield is not desirable if ALF is too low; in general, Yield is a
poor indicator of airline profitability
 Low Unit Cost is of little value if Revenues are weak
 Even ALF on its own tells us little about profitability, as high ALF
could be the result of extremely low fares (yields)

 Profit maximizing strategy is to increase revenues,

decrease costs, but the above terms are interrelated.

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 Strategies to Increase Revenues

 Increase Traffic Carried (RPKs):

 Reduce fares (average yields) to stimulate traffic, but revenue
impact depends on demand elasticity
 For revenues to increase, price cut must generate
disproportionate increase in total demand (i.e., “elastic demand”)
 Alternatively, frequency or service quality can be increased to
attract passengers, but both actions also increase operating costs

 Increase Fares (Yields):

 Economic theory tells us any price increase will lead to an
inevitable traffic decrease, but a price increase can still be
revenue positive if demand is “inelastic” (i.e., percent decrease in
passengers is lower than percent increase in price).

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 Strategies to Reduce Costs

 Reduce Unit Costs (Cost per ASK):

 Reduce service quality, but too many cuts can affect consumers’
view of the airline’s product, leading to a reduced RPKs and
market share
 Increase ASKs by flying more flights and larger airplanes, which
can lower unit costs but lead to higher total operating costs and
lower load factors

 Reduce Airline Output (Decrease ASKs):

 Cutting back on number of flights will reduce total operating
costs, but lower frequencies lead to market share losses (lower
RPKs)
 Reduced frequencies and/or use of smaller aircraft can result in
higher unit costs, as fixed costs are spread over fewer ASKs.

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 Airline Planning Decisions

1. FLEET PLANNING: What aircraft to acquire/retire, when and

how many?

2. ROUTE EVALUATION: What network structure to operate

and city-pairs to be served?

3. SCHEDULE DEVELOPMENT: How often, at what times and

with which aircraft on each route?

4. PRICING: What products, fares and restrictions for each O-

D market?

5. REVENUE MANAGEMENT: How many bookings to accept,

by type of fare, to maximize revenue over the network?

6. OPERATIONS CONTROL: Implementing planned schedule of

operations, given airport and air traffic control constraints.

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 STRATEGIC
LONG TERM Fleet Planning

Route Planning

Schedule Development
Time Horizon

o Frequency Planning

Types of Decision
o Timetable Development
o Fleet Assignment
o Aircraft Rotations

Pricing Crew Scheduling

SHORT TERM

Revenue Airport Resource

TACTICAL
Management Management

Sales and Operations Control

Distribution

SOURCE: Prof. C. Barnhart

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 1. FLEET PLANNING

 Fleet composition is long-term strategic decision and

largest capital investment for an airline
 Affects financial position, operating costs, and especially the
ability to serve specific routes.

 Economics of fleet choice

 Lower operating costs vs. higher ownership costs of new aircraft
 Lower trip costs of smaller aircraft vs. lower unit costs (CASK)
and greater revenue generation of larger aircraft

 Fleet evaluations depend on aggregate analysis

 Detailed network profitability models seldom used given
tremendous uncertainty of future demand, costs, competition
 “Top-down” economic and financial impacts evaluated with
spreadsheets, NPV analysis and scenario-building

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 2. ROUTE EVALUATION

 Given a fleet, determination of routes to be flown

 Network structure (hub/spoke, point-to-point or hybrid)

 Evaluation approach at a disaggregate (route) level:

 Demand, market share and revenue forecasts required for
specific route, perhaps for multiple years into the future
 Aircraft performance and operating cost characteristics

 Route planning decision factors

 Availability of aircraft with adequate range and capacity – link to
fleet plan and overall network strategy
 Operational constraints and aircraft/crew rotation issues
 Regulations, bilaterals, and limited airport slots
 Opportunity cost of using aircraft on this route
 Degree of competition and expected competitive response

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 Example: Airline “Profit Manager”

Schedule Demand Traffic

2 allocation 3
Building 1 forecast

Revenue and Cost

Allocation 4

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 3. SCHEDULE DEVELOPMENT

 Involves several interrelated decisions, which to date

have not been fully integrated:

Frequency Planning: Number of departures to be offered on each

route, non-stop versus multi-stop

Timetable Development: Flight departure and arrival times,

including connections at airline hubs

Fleet Assignment: Aircraft type for each flight, based on demand

and operating cost estimates

Aircraft Rotation Planning: Links consecutive flights to ensure

balanced aircraft flows on the network.

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 Integrated Scheduling Planning
Process: Key Decisions
Fleet allocation
Resource
Fleet Planning and resource
allocation
planning

Schedule Schedule
Network Planning
Development revision

60-24 24-12 12-6 6-3 3 months –

months months months months 3days

1 Network Plan 3 5
24-60 months
Schedule Schedule
Fleet Plan 6-12 months 0-3 months
A 24-60 motnhs
2 C D
Network Plan New Fleet Fleet re-
12-60 months allocation allocation
between Bases
B 4

Fleet Plan Schedule

adjustments 3-6 months

E Operational Plan 0-12 months

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 4. PRICING DECISIONS

 “Differential pricing” by airlines is universal:

 Different “fare products” within the coach cabin, with different
restrictions, at different prices
 Virtually every airline in the world offers multiple price points
(even low-fare carriers with “simplified” fare structures)

 “Pricing Decision Support Systems”

 Difficult to estimate price elasticity, willingness to pay, potential
for stimulation and diversion
 No practical tools for airlines to determine “optimal” prices
 Primarily monitoring of competitive price changes

 Dominant practice is still to match low fares to fill

planes and retain market share
 Need to match exacerbated by web sites and search engines

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 5. REVENUE MANAGEMENT

 Seat inventory control to maximize revenues

 Given a scheduled flight, capacity and prices, how many
bookings to accept by fare type
 Objective is to maximize revenue -- fill each seat with highest
possible revenue

 Computerized RM systems based on demand

forecasting and revenue optimization:
 Leg-based RM systems increase revenues by 4-6%
 Network RM systems more sophisticated, add another 1-2%

 Recent industry developments affect RM systems

 Fare simplification and “fare family” bundling require new
approaches to forecasting and optimization
 Alliance code-share traffic complicates both RM and distribution

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 RM Strategy Affects Yield, Load Factor
Average Fare and Revenues

EXAMPLE: 2100 MILE FLIGHT LEG CAPACITY = 200

NUMBER OF SEATS SOLD:

FARE AVERAGE YIELD LOAD FACTOR REVENUE
CLASS REVENUE EMPHASIS EMPHASIS EMPHASIS

Y $420 20 10 17
B $360 23 13 23
H $230 22 14 19
V $180 30 55 37
Q $120 15 68 40

TOTAL PASSENGERS 110 160 136

LOAD FACTOR 55% 80% 68%
TOTAL REVENUE $28,940 $30,160 $31,250
AVERAGE FARE $263 $189 $230
YIELD (CENTS/RPM) 12.53 8.98 10.94

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 6. OPERATIONS CONTROL

 Coordinate the daily operations of the airline on a

dynamic basis.

 Ensure completion of schedule plan within company

goals for on-time performance and safety.

 Process passengers, baggage and cargo subject to

numerous operational constraints:
 Limited number of gates, many with constraints on aircraft size
 Airport flow limitations on taxiways and runways
 Availability of airport and ground crew resources
 Weather (both local and en route) as well as airport field
conditions
 Air traffic control (ATC) congestion and delays

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 Airline Planning and Operations

Airline
Flight Ops ATC
Network Schedule Control
Planning Dispatch
Aircraft
Seat
Maint
Inventory (ASM)
Crew
Revenue
Management Station Payload:
Passengers
Load Factor etc. Baggage
Yields Sched &
Pricing Cargo
RPMs
RASM
Distribution Passenger
CRS Processing
Reservations
Business Loop Operational Loop
Travel
Controls RASM Passengers
Controls CASM
Demand

Source: Prof. John Hansman

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 IT Systems: Planning and Distribution

AIRLINE PLANNING
CRS/GDS AIRLINE “RES” SYSTEMS
FLIGHT RECORDS AND SCHEDULE
DISTRIBUTION FUNCTIONS OPERATIONS DATA OPTIMIZATON
SCHEDULES AND AVAILABILITY
INVENTORY RECORDS
PRICING FUNCTIONS SEAT AVAILABILITY CREW/AIRCRAFT
FARE QUOTES AND RULES PLANNING
FARES AND RULES
SALES FUNCTIONS DATABASE
REVENUE
BOOKING AND TICKETING MANAGEMENT
CUSTOMER
PNR
DATABASE DATABASE
PRICING DECISION
SUPPORT

DEPARTURE FLIGHT
CHECK-IN DISPATCH

AIRLINE STAFF AT AIRPORT

TRAVEL AGENCY

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 Integrated Airline Planning Models

 Current practice is to perform scheduling, pricing

and RM sequentially.

 Integrated models would jointly optimize schedules,

capacity, prices, and seat inventories:
 Better feedback from pricing and RM systems can affect optimal
choice of schedule and aircraft
 Better choice of schedule and capacity can reduce need for
excessive discounting and “fare wars”

 Joint optimization and planning is a big challenge:

 Research is still required to identify models that can capture
dynamics and competitive behaviors
 Organizational coordination within airlines and willingness to
accept large-scale decision tool

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Example: Airline Organizational
Structure

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