a magazine for airline executives 2009 issue no. 1 2008 issue … · 2016-09-25 · percent of...
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A MAgAzINe for AIrlINe executIves 2009 Issue No. 1
A Clear Vision
Special Section
Airlines have three basic options to raise capitalDelta Air Lines/Northwest Airlines merger impacts regional carriers
Japan Airlines takes steps to improve its environmental performance
8 21 44
A Conversation With … Sean Durfy, Chief Executive Officer, WestJet Airlines, Page 16.
Survival Guide
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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
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
2009 Issue No. 1
editor in chiefStephani Hawkins
Managing editor B. Scott Hunt
Art Direction/DesignCharles Urich
contributors Khaled Al-Eisawi, Edward Bowman, Stan Boyer, Steve Clampett, Dennis Crosby, Jeanette Frick, Greg Gilchrist, Carla Jensen, Christine Kretschmar, Gordon Locke, Craig MacFarlane, Tim Maher, Kazuya Ohta, Dave Roberts, Tim Sutton, Jeremy Sykes, Fionna Wee.
PublisherGeorge Lynch 3150 Sabre Drive Southlake, Texas 76092 www.sabreairlinesolutions.com
Awards
2008 Awards for Publication Excellence, International Association of Business Communicators Bronze Quill and Silver Quill, Hermes Creative Award, The Communicator Award
2007 Awards for Publication Excellence, International Association of Business Communicators Bronze Quill 2006 Awards for Publication Excellence, International Association of Business Communicators Bronze Quill, Silver Quill and Gold Quill
2005 Awards for Publication Excellence, International Association of Business Communicators Bronze Quill, Silver Quill and Gold Quill 2004 Awards for Publication Excellence, International Association of Business Communicators Bronze Quill and Silver Quill
reader InquiriesIf you have questions about this publication or suggested topics for future articles, please send an e-mail to [email protected].
makingcontact
Asia/Pacific David Chambers Vice President 3 Church Street, #15-02 Samsung Hub Singapore 049483 SG Phone: +65 6511 3210 E-mail: [email protected]
europe Alessandro Ciancimino Vice President Via Appia Nuova 990 00178 Rome, Italy Phone: +39 348 3708240 E-mail: [email protected].
India/south Asia Vish Viswanathan Vice President 187, Royapettah High Road, Flat A-7 Mylapore Chennai, India Phone: +1 682 605 4544 Cell: United States +1 817 312 2830 Cell: International +91 98404 96765 E-mail: [email protected]
latin America Kamal Qatato Vice President 3150 Sabre Drive Southlake, Texas 76092 Phone: +1 682 605 5399
Middle east and Africa Maher Koubaa Regional Head 77 Rue de la Boetie Paris, France 75008 Phone: +33 1 44 20 7657 E-mail: [email protected]
North America Kristen Fritschel Vice President 3150 Sabre Drive Southlake, Texas 76092 Phone: +1 682 605 5335 E-mail: [email protected]
Worldwide Shane Batt Executive Solutions Partner Phone: +44 7717 495 129 E-mail: [email protected]
Sabre Airline Solutions, the Sabre Airline Solutions logo and products noted in italics in this publication are trademarks and/or service marks of an affiliate of Sabre Holdings Corp. All other trademarks, service marks and trade names are the property of their respective owners. ©2009 Sabre Inc. All rights reserved. Printed in the USA.
Address correctionsPlease send address corrections via e-mail to [email protected].
To suggest a topic for a possible future article, change your address or add someone to the mailing list, please send an e-mail message to the Ascend staff at [email protected].
For more information about products and services featured in this issue of Ascend, please visit our Web site at www.sabreairlinesolutions.com or contact one of the following Sabre Airline Solutions regional representatives:
find the aviation industry’s “try-and-try-again” philosophy to be quite remark-able. With it, there are no failures, just
experiences that lead to greater success-es. No matter how far back in history you go, you’ll find the same level of optimism. If you look back to 1799 at Sir George Cayley, sometimes known as the “father of aerodynamics,” or today at any number of airline leaders, they approach aviation with buoyancy. No task is beyond reach, and there’s always room to expand and improve. Doesn’t matter how old this way of thinking is, I always find it refreshing and worthy of discussion.
It was 210 years ago that Cayley began his crusade to get man off the ground and into the air. For 50 years, Cayley designed an array of gliders that would help set the foundation for the airline industry. Adding to Cayley’s work, German engineer Otto Lilienthal designed the first glider that could fly a person long distances. And physicist and astronomer Samuel Langley recognized a power engine was necessary to help man fly.
Based on the studies and experiments of Cayley, Langley and Lilienthal, 110 years ago the Wright Brothers designed their first aircraft. And in 1908, a friend of the Wright Brothers became the first passenger of their fixed-wing aircraft.
As I look back on the work of Cayley, Langley, Lilienthal and the Wright Brothers, it’s apparent they set out to accomplish great things, and they did. It took a lot of persever-ance, trial and error, and setbacks, but they didn’t give up. And their enthusiasm clearly carries over into the industry we know today.
What started out as a mission to put a human being in the air has progressed into an ever-evolving business that brings together millions of people from all cor-
ners of the world and creates millions of employment opportunities in thousands of communities. And it’s only made possible by the very people who continue pushing the boundaries to secure the future of air transportation.
Air New Zealand, (see pg. 12) for example, proactively set forth to reduce fuel burn and CO2 emissions on its long-haul flights. During its ASPIRE flight last September from Auckland to California, the carrier saved nearly 1,200 gallons of fuel and reduced CO2 emissions by more than 11,200 kilograms using advanced flight planning techniques, datalink communications and air traffic control advancements.
Japan Airlines (see pg. 8) made history in January as the first airline to conduct a demonstration flight using 50 percent biofuel blend and 50 percent Jet-A fuel in one of the four engines on a Boeing 747-300 aircraft. The test flight not only reduced CO2 emissions, it also brought the airline industry that much closer to reducing its dependence on today’s petro-leum-based fuels.
These are just two examples of how airlines have worked diligently to move the industry forward. And we consistently see this level of enthusiasm from airlines around the world.
On our cover, WestJet Airlines Chief Executive Officer Sean Durfy discusses his plans of continuing to grow the airline, the recently announced codeshare agree-ments with two of the world’s leading airlines and how staying true to its initial vision has kept the airline’s foundation strong and thriving. He doesn’t hesitate or re-think his strategy. He’s identified the best course of action, and he’ll move
forward with grace for the good of his airline, the communities it serves and the entire industry.
Likewise, aircraft manufacturers con-tinue building innovative aircraft that, during the course of the next 20 years, will fill our skies with planes that are far more efficient than those in service today. Technology providers will continue to develop software that enables carriers to operate with preci-sion and at optimal levels.
And even the new U.S. administra-tion is giving it a run with US$800 million earmarked for air traffic control upgrades. Albeit it’s US$25 billion short, it’s certainly a step in the right direction. All of this is possible because of the try-and-try-again approach. We’re getting better with each try, and we never stop trying.
I assume that like me, many of you have been mentioning to family members, friends and colleagues that you are tired of hearing and reading nothing but pessimistic and bad news. This perspective is one guy’s attempt to find the bright side.
Looking at the airline industry as a whole, I’m impressed with the many carriers that recognized the trends in demand last year and made necessary capacity adjust-ments to help keep the industry healthy. What we see time and time again, just like in the early days of aviation, is airlines’ innate ability to move the industry forward with confidence.
Bravo airline industry … take a bow!
perspective
with Tom KleinGroup President, Sabre Airline Solutions/Sabre Travel Network
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Japan’s green Machine
Japan Airlines takes myriad sustainable actions to improve its environmental performance.
12 forward leap
Air New Zealand’s ASPIRE flight from Auckland to California saved approximately 1,174 U.S. gallons of fuel using a Boeing 777-200ER aircraft.
16 A clear vision
WestJet Airlines explains how it stays true to its vision.
21 connecting the Dots
Delta Air Lines and Northwest Airlines merger has significant impact on some regional carriers.
24 Aeroflot’s revolution
Aeroflot Russian Airlines reinvents itself through an extensive turnaround initiative.
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26 fleet shuffle
As a result of aircraft delivery delays, carriers around the world are forced to improvise until their new planes arrive. 30
cutting up Airlines’ revenue management and pricing teams can offset the ill effects of capacity reductions and maximize their potential benefits.
33 the KIss Principle
Low-cost carriers are implementing traditional airline characteristics while network carriers remove some conventional attributes. 36
Immense Intelligence Airlines can determine a successful course, effectively respond to change and measure their success using business intelligence.
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40 Network checkup Airlines can follow basic guidelines to ensure the right markets are served at the right times. captital uplifting Airlines that need to raise capital in a tight credit environment have three basic options.
47 saving the Pie Choosing the right cooperative agreements helps airlines effectively compete.
50 climate change Airlines need to prepare for new European legislation requiring them to report CO2 emissions.
Hedging Your (Jet fuel) Bets Many airlines have come out on top after leveraging fuel-hedging opportunities, but those that hedged too far ahead are paying a price.
looking Back for tomorrow Despite the most significant challenges, some carriers have a natural ability to succeed during tough times.
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the explorer Sabre Airline Solutions recently acquired Flight Explorer for its real-time tracking, reporting and display of enroute aircraft capabilities.
sharpening the 67 e-commerce edge
The recent acquisition of EB2 gives Sabre Airline Solutions customers a broad range of Web options.
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Brainpower Business intelligence solutions enable airlines to broaden their analysis capabilities to include key performance data into their business strategies.
service360°: 72 It’s All Around You
Service360°SM
Consistent Practices comprise five service practice areas to ensure airlines receive optimum solutions that drive the performance of their businesses.
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North America continues to generate the largest share of worldwide production, accounting for 32 percent of global available seat kilome-ters last year. Asia/Pacific and Europe were comparable in size, and the three regions together account for 85 percent of global capacity.
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2008 World trafficSource: Sabre Airline Solutions® Global Demand Dataset
2008 capacity Distribution By region (AsKs)
Latin America
Middle East
Europe24%
6%6% 3%
Asia/Pacific29%
North America32%
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For the full year 2008, total world-wide industry capacity and traffic increased. All regions except North America increased (the decrease in North America was driven by the U.S. domestic market). The Middle East posted large percentage increases; however, this growth occurred on a comparatively small base of produc-tion.
{traffic And capacity changes full year 2008 versus full Year 2007
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Industry North Asia/ Europe Middle Latin AfricaAmerica Pacific East America
2.2% -1.5% 2.8% 2.0% 11.2% 6.1% 5.3%
2.2% -3.3% 5.1% 1.6% 14.1% 4.2% 4.7%
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By Chris Spidle and Paul Pederson | Ascend Contributors
The trend of decreases accelerated in some areas such as North America; however, the percentage decrease in worldwide production for January was similar to the fourth quarter. Gains in the Middle East began to decrease.{
traffic And capacity changes January 2009 versus January 2008
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Industry North Asia/ Europe Middle Latin AfricaAmerica Pacific East America
-1.8% -6.0% 2.3% -4.4% 5.8% -1.1% 3.3%
-2.4% -8.9% 1.8% -4.5% 13.2% 1.5% 2.6%
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The trend in traffic and capacity shift-ed from increases to decreases dur-ing the fourth quarter, with North America posting the largest abso-lute decreases. Decreases in North America contributed significantly to the global decline; however, Europe also showed weakness. The Middle East continued to post large per-centage increases on a comparatively small base of production.
{traffic And capacity changes fourth Quarter 2008 versus fourth Quarter 2007
Industry North Asia/ Europe Middle Latin AfricaAmerica Pacific East America
-2.7% -7.5% -0.3% -4.0% 11.5% 0.6% 3.0%
-2.3% -8.7% 2.0% -4.5% 14.0% 2.3% 2.9%
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Chris Spidle is delivery director of research, analysis
and modeling and Paul Pederson is an airline
research principal for Sabre Airline Solutions®.
They can be contacted at [email protected]
and [email protected].
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Japan’s green Machine
By Phil Johnson | Ascend Staff
Among the world’s carriers that are serious about improving their environmental performance, Japan Airlines takes a multitude of sustainable actions.
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During an era when environmental and greater sustainability issues have evolved into top priorities — both in the public mind
and in the corporate boardroom — certain com-panies in various industries have taken it upon themselves to become environmental leaders.
These companies are boldly asserting themselves in all things sustainable, to the extent that some of these environmentally conscientious companies have established the credibility to help set the standards for the environmental discus-sion, at least within their individual industry.
In the global airline industry today, perhaps no carrier more thoroughly exemplifies what it means to be an advocate of “green” practices and technologies than Japan Airlines. In fact, the carrier’s management team has made clear its stance that even though the airline industry has a critical, positive part in bringing people from around the world together for business, pleasure and cultural exchange, JAL also understands the potentially detrimental impact that air transport business operations can have on the global environment.
And regardless of the necessity of every business to forge ahead during this period of worldwide economic slowdown, JAL nonethe-less also maintains 100 percent commitment to its obligations in relation to sustainability and the environment.
The International Air Transport Association has estimated that the global airline industry is responsible for generating up to 3 percent of the current total man-made segment of climate change and that by 2050, there’s a possibility that the airline industry’s share of man-made climate-change responsibility could grow to as much as 5 percent.
Just in terms of carbon dioxide — strongly suspected of being one of the key culprits that may be causing measurable levels of global warming — aviation is estimated to be respon-sible for up to 2 percent of current worldwide CO2 emissions.
By industry (based on 2005 figures), trans-portation accounts for 20 percent of all CO2 emissions in Japan, and looking solely at the airline industry, flights on Japan’s domestic routes account for 4 percent of all emissions in the transportation segment and 0.9 percent of all emissions generated by Japanese industries.
“We have to think differently about CO2 emissions than companies involved in business-es with low CO2 emissions,” said JAL President and Chief Executive Officer Haruka Nishimatsu. “Irrespective of the level of attention being paid to the environment by the public, at the JAL Group, environmental initiatives must be a core management issue, not a peripheral one.”
So ensuring a healthy and bountiful glob-al environment for future generations is fully acknowledged by JAL’s executives as one of the carrier’s greatest social responsibilities. And for more than 15 years, JAL has been implementing a variety of measures designed to reduce and
offset the impact its business activities have on the environment.
Compared with 1990 levels, the JAL Group has a goal to cut fuel consumption (and, therefore, CO2 emissions) by 20 percent in terms of transported capacity by fiscal year 2010. To date (since 1990), JAL has achieved a 16 percent reduction in fuel consumption in terms of trans-ported capacity.
JAL’s total CO2 emissions in fiscal 2007 (the year ended March 31, 2008) totaled 15 mil-lion tons, down 0.77 million tons (or 4.9 percent) from the previous fiscal year. For perspective, this reduction by 0.77 million tons is approximately equivalent to the CO2 annually absorbed by 55 million Japanese cedars.
Management realizes that one of the most significant ways JAL can slim down its envi-ronmental footprint is by reducing — or more efficiently using — the fuel that powers its aircraft (the amount of CO2 emitted is approximately pro-portionate to the amount of fuel consumed).
For example, on a long-haul international flight from Tokyo to London using a four-engine Boeing 747-400 with 303 passengers onboard, the aircraft’s engines would emit approximately 356 tons of CO2, whereas using a twin-engine Boeing 777-200ER on the same route, with 12 percent fewer passenger seats, the aircraft’s engines would emit almost 33 percent less CO2.
JAL has therefore already replaced the Boeing 747-400 with the more fuel-efficient Boeing 777 aircraft on nearly all of its routes from Asia to Europe. And the carrier is now also gradu-ally replacing the 747 aircraft it uses on its routes between Japan and the United States.
Essential, then, to JAL achieving signifi-cant CO2-emission cuts is fleet renewal through the introduction of more-fuel-efficient aircraft equipped with state-of-the-art engines — com-bined with the retirement of older aircraft. Almost 30 percent of the aircraft in JAL’s fleet have been delivered within the past five years as JAL has retired 90 older-model aircraft.
JAL’s substantial investment in new, more-efficient aircraft continues, as the carrier still has outstanding orders for more than 80 new aircraft, including the advanced Boeing 787 equipped with GEnx engines, which are General Electric engines of next-generation-turbofan design, anticipated under normal circumstances to use 20 percent less fuel than today’s comparable aircraft engines.
Nonetheless, JAL is going even further in terms of its fuel-consumption reduction mea-sures. The carrier’s planners have estimated that trimming just 1 kilogram (or about 2.2 pounds) from the weight of each aircraft will cumulatively reduce CO2 emissions across the JAL fleet by 76 tons a year.
In pursuit of such incremental weight reduction, JAL has been looking at its flight opera-tions from every conceivable angle to find various innovative ways to reduce aircraft weight, even if just by a single gram.
So among other things, JAL has been reducing both the weight and numbers of items onboard its aircraft, including equipment such as galleys, meal carts and trays, and meals and magazines.
Several years ago, JAL introduced light-weight porcelain tableware, which is approxi-
JAl became the first airline to conduct a demonstration flight using a sustainable biofuel, which consisted of a blend of 50 percent biofuel and 50 percent traditional Jet-A fuel in one of the four Pratt & Whitney Jt9D engines of a Boeing 747-300 aircraft.
Photo courtesy of JAL
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mately 20 percent lighter, for meal service in first and business class. Also, JAL has made in-flight cutlery in economy class — including premium economy — 2 grams lighter per item.
Furthermore, JAL has found it can make an individual aircraft 23 kilograms lighter by reduc-ing, for example, the number of newspapers and magazines carried onboard international flights. Through a combination of various methods, JAL, on one of its typical 777 aircraft, has managed an overall weight reduction of 500 kilograms.
JAL has also reduced the average weight of cargo containers carried onboard its aircraft by 26 kilograms per unit on international routes, and by 14 kilograms per unit on domestic Japanese routes.
Previously, JAL cargo containers have all been made of aluminum alloy, but JAL, in fiscal year 2007, started using Twintex — a new mate-rial made of polypropylene and glass fibers — in the side panels of the containers. And JAL plans to steadily update its multipurpose containers on international routes with this material (at this point, more than 10 percent of JAL’s contain-ers have been replaced with the new lighter version).
The average number of these containers in the belly of one of JAL’s 777-300ER aircraft is 44 (which translates to a total weight reduction, with the new material, of 1,144 kilograms), and in the belly of one of JAL’s 747-400 aircraft is 30 (which translates to a total weight reduction, with the new material, of 780 kilograms).
In terms of cargo aircraft, JAL is now operating more of its freighters in bare metal, saving the weight of paint. In 1992, JAL began operating 747 cargo aircraft with unpainted exteriors, helping to reduce weight by approxi-mately 150 to 200 kilograms per aircraft. And during fiscal year 2007, JAL took delivery of three 767-300F aircraft (all of these aircraft arrived and remain unpainted, which in effect reduces their weight by approximately 110 kilograms per aircraft).
By using hot water to regularly clean the jet engines of its large and midsize aircraft, JAL has managed to improve engine performance by approximately 1 percent.
Having cleaned half of its aircraft engines in this manner, JAL estimates its fleet CO2 emissions have been reduced by about 53,000 tons, which is equivalent to the emissions generated by 980 round trips between Tokyo and Sapporo (a city world-renowned as the host of the 1972 Winter Olympics, located on the northern Japanese island of Hokkaido).
In early 1990, JAL flight crewmembers set up a fuel-efficiency committee to explore ways of flying in a more eco-friendly fashion. This committee has since been reorganized as the operations division team, with several mem-bers meeting every two months to discuss how to avoid excessive fuel usage and then com-municating the results of these discussions to fellow flight crews.
The team’s findings have led, for example, to a decrease in the use of auxiliary power units at the airport, more accurate measurement of fuel loaded onboard, more optimal timing and angle of flap operation, reduced use of reverse-thrust on landing, and turning off one of the four engines on 747 aircraft while taxiing.
APUs onboard the aircraft provide elec-tricity for onboard air conditioning and lighting while the aircraft is on the ground with the main engines disengaged. Since an operating APU consumes between 600 and 700 liters of fuel per hour, JAL pilots try not to start up these power units until shortly before takeoff, and they rely on ground power units at the airport for electricity and air conditioning. APUs generate approximately 1,200 kilograms of CO2 per hour, compared to 44 kilograms of CO2 for GPUs.
To work toward greater fuel efficiency, the amount of fuel onboard an aircraft must be accurately measured. At one time, fuel was loaded onboard JAL aircraft in units of 1,000 pounds (around 450 kilograms), but JAL decided to modify the fuel load to 100-pound (45-kilogram) units.
More precise measures of the amount of fuel required for safe arrival at each destination has allowed JAL to achieve weight savings of approximately 400 kilograms per flight.
In addition, JAL is committed to recycling every possible item, from aluminum cans and
paper to old uniforms. The carrier has even adopt-ed a green procurement policy. For example, it now only uses in-flight chopsticks that are made from certifiable Japanese wood obtained through domestic forest-thinning procedures.
The bulk of paper onboard JAL’s aircraft is generally accounted for among the magazines offered to passengers, including Skyward, JAL’s in-flight magazine, and JEN Guide, JAL’s in-flight-entertainment guide. Each month, JAL crews remove the old copies from all aircraft and replace them with new copies.
Years ago, such waste was generally either burned or transported to landfills. In 2004, however, JAL at Narita, Kansai, Haneda and Fukuoka airports created special project teams to address this issue. And as a result, the airline introduced new storage carts that make it easier to collect magazines within the limited space of the aircraft cabin. Today, these airports recycle about 600 tons of magazines each year — almost equivalent to the maximum takeoff weight of two 777-200ER aircraft.
JAL executives have expressed interest in exploring ways to reduce reliance on conven-tional fuels, which would again contribute to an overall reduction of CO2 emissions.
In partnership with Boeing, Pratt & Whitney, and Honeywell’s universal oil products (a refining technology developer), JAL was the first carrier to conduct a demonstration flight using a sustainable biofuel refined primarily from
JAl capt. Keiji Kobayashi (left), featured with JAl ceo Haruka Nishimatsu, piloted the industry’s first demonstration flight using a sustainable biofuel blend in one of the engines of a Boeing 747-300 aircraft.
Photo courtesy of JAL
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camelina, an energy crop. This also represented the first biofuel demo by an Asian carrier as well as the first biofuel demo using Pratt & Whitney aircraft engines.
The demo flight effectively brings the airline industry closer to finding a commercially viable second-generation biofuel that could help reduce the impact of carbon dioxide emissions generated by aviation, while also reducing the industry’s reliance on traditional petroleum-based fuels. The test conducted on Jan. 30 involved a blend of 50 percent biofuel and 50 percent traditional Jet-A (kerosene) fuel in one of the four Pratt & Whitney JT9D engines of a JAL-owned Boeing 747-300 aircraft.
The biofuel component was a mixture of three second-generation biofuel feedstocks: camelina (84 percent), jatropha (less than 16 percent) and algae (less than 1 percent). JAL, Boeing, Pratt & Whitney, and Honeywell’s UOP have committed to the use of second-generation biofuel feedstocks that represent more efficient and sustainable energy than their first-generation predecessors.
Second-generation biofuel feedstocks, such as camelina, jatropha and algae, do not compete with natural food or water resources and do not contribute to detrimental environmental activity such as deforestation.
The fuel for the JAL demo flight was successfully converted from plant-based oil to biofuel by Honeywell’s UOP, using proprietary hydro-processing technology to complete the fuel conversion. To create the 50 percent blend, the biofuel was then blended with typical jet fuel.
Subsequent laboratory testing by Boeing, UOP and several independent laboratories verified that the blended biofuel meets industry criteria for jet-fuel performance. Ground-based jet-engine performance testing by Pratt & Whitney of similar fuels further established that the biofuel blend either meets or exceeds the performance criteria in place for commercial aviation jet fuel today.
At Tokyo’s Haneda Airport, JAL Group companies have also been working together with the Japan Civil Aviation Bureau and a group of other companies in testing biodiesel fuel that has been refined from waste tempura oil collected from restaurants.
As part of the trials, JAL has tested the novel fuel in one of its tug vehicles, which is most commonly used to transport heavy loads around the airport and for baggage transportation. In using a 50/50 mixture of light oil and biodiesel fuel, no modification of the tug was necessary.
Being a member of a global airline industry has also enabled JAL to play some unique roles in fostering environmental improvement. Because forests theoretically mitigate the effects of such challenges as global warming by absorbing CO2 emitted through the burning of fossil fuels, JAL has supported the Boreal Forest Fire Control Initiative and other similar projects.
With the overall aim of preventing or at least effectively containing wildfires through early
detection, information gathering and analysis, JAL’s pilots flying over vast open regions including Indonesia, Siberia and Alaska have been reporting any fire outbreaks they happen to spot, with more than 700 blazes reported in the past six years.
Since 1993, JAL has also been partici-pating in a global-warming observation project, monitoring greenhouse gases in the upper atmo-sphere using specially fitted air-sample-collection and -measuring equipment. The program now involves five JAL aircraft on international routes, measuring the CO2 concentration in the upper atmosphere.
The data collected using JAL aircraft are helping scientists study and better understand the causes and effects of measurable increments in global warming and overall climate change.
And beyond JAL’s own regular air transpor-tation activities, the carrier has been supporting the Japanese government’s energy-saving “Team Minus 6 Percent” initiative by reducing levels of office heating during the winter and office cooling during the summer, cutting CO2 emissions at JAL’s offices in Japan by more than 10 percent during the last five years.
Also in support of the campaign, JAL has shown a Team Minus 6 Percent public-informa-tion video on its domestic flights, making a sincere appeal to members of the general public to con-sider ways they use energy in their everyday lives and encouraging them to economically use and conserve energy in every way possible.
As company policy, JAL is also applying innovative flying and routing techniques including tailored arrival and user-preferred route to allow its aircraft to arrive at their destinations while using the least amount of fuel and producing the fewest CO2 emissions in the process.
Additionally, JAL has instituted a voluntary customer carbon-offset program, enabling its passengers to purchase credits that are spent specifically on environmental procedures that effectively offset passengers’ individual mea-sures of carbon generation during that particular trip.
Furthermore, JAL’s commitment to finding and eventually introducing biofuel alternatives to conventional fossil fuels in its aircraft and ground vehicles represents a trailblazing effort for commercial aviation, essentially helping make commercial aviation the first global-transport sec-tor to place verifiable sustainability practices in its fuel-supply chain.
All of these and more measures are key elements of JAL’s equation to do its part in helping substantially improve the global environment.
“As a symbol of our commitment to the environment, we operate an airplane with a green tail — and all employees are sharing in the effort to accelerate and carry out specific environmental activities,” Nishimatsu said.
In the actions of its top executives and oth-ers throughout the organization, the JAL Group has exhibited a level of determination that may even be unique in worldwide corporate business circles to seriously combat the possible long-term detrimen-tal effects of potentially harmful emissions and to leave a much more healthful environment as a genuine legacy to future generations. a
Phil Johnson can be contacted at [email protected].
As part of its environmental sustainability strategy, JAl continues investing in new, more-efficient aircraft, such as the Boeing 787, which under normal conditions is estimated to burn 20 percent less fuel than current comparable aircraft.
Photo courtesy of Boeing
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By Michael Mankowski and Michael Reyes | Ascend Contributors
In response to the many new challenges it’s faced during the past
few years, Mexicana Airlines has made highly strategic changes to its
commercial side of the business as well as experienced great success
from its low-cost subsidiary.
Forward LEAP
Air New Zealand embraces innovation in both routing and flying techniques to generate significant fuel savings and reduced carbon dioxide emissions on a route from New Zealand to the United States.
By Shawn Mechelke | Ascend Contributor
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Two basic necessities in the global air transport industry — saving fuel and reducing potentially environmentally
harmful CO2 emissions — are linked directly to greater efficiency.
And greater efficiency is precisely the goal that Air New Zealand has effectively tar-geted in its innovative application of advanced routing and flying procedures on its trans-Pacific route between New Zealand’s global economic hub in Auckland and the California coast at Air New Zealand’s North American destination in San Francisco.
Considering the entire process, Air New Zealand has helped enable the aviation indus-try to make a leap forward in defining both a more environmentally friendly and economic means of operating aircraft over long trans-oceanic distances.
On Sept. 12, Air New Zealand com-pleted what is now recognized as an economi-cally and environmentally significant flight of a Boeing 777-200ER aircraft from Auckland to San Francisco.
Before and during this historically note-worthy flight called ASPIRE 1, Air New Zealand applied broad capabilities in the areas of advanced flight planning techniques, datalink communications and air traffic control advance-ments to reap highly impressive results in trip fuel savings totaling approximately 1,174 U.S. gallons as well as approximately 11,218 kilo-grams in reduced CO2 emissions.
Combined concerns revolving around global climate change, ongoing measurable
ozone depletion and the overuse of natural resources (as represented by petroleum prod-ucts) have intensified the sense of urgency felt by Air New Zealand executives to position themselves on the leading edge in identify-ing new operational methods for the carrier’s scheduled flights — especially flights across the vast distances of the Pacific Ocean.
In coordination with innovative oceanic air traffic procedures, Air New Zealand has implemented advanced flight planning tech-niques to set a new standard in trans-Pacific travel.
Air New Zealand determined that approx-imately 42 percent of the total fuel savings on the Auckland-San Francisco flight is attributable to calculations and decisions derived from data supplied by Air New Zealand’s flight planning system, Sabre® Dispatch Manager.
The remainder of the credit for Air New Zealand’s significant achievement goes primarily to the most advanced air-navigation services provided by several government agencies, including Airways New Zealand, Airservices Australia and the U.S. Federal Aviation Administration.
In incrementally analyzing Air New Zealand’s remarkable accomplishment, it’s important to examine the flight’s sequential process — from preflight stage through take-off and climb, cruise, descent, and finally the flight’s landing at San Francisco International Airport.
Air New Zealand uses Dispatch Manager to create optimized flight plans, which are then
sent via datalink communications to an Air New Zealand aircraft cockpit’s flight management computer. This includes the flight plan itself, plus enroute wind and temperature data.
The carrier is able to analyze historical fuel-burn data for each of its individual aircraft (compared to what was flight planned) and adjust its fuel-burn calculations accordingly for each aircraft, including calculation of a perfor-mance-deterioration allowance.
To analyze this factor in proper context, the airline takes into account that as aircraft age, their fuel-burn performance is altered. Air New Zealand monitors the fuel-burn per-formance of each of its aircraft on a daily basis and makes weekly adjustments in its aircraft fuel-burn data. It also considers these measures a collective maintenance practice, which are followed to produce highly accurate flight plans based at least partly on the specific expected fuel-burn performance of each indi-vidual aircraft.
As another key factor that results in highly accurate flight plans, Dispatch Manager receives an updated set of worldwide wind and temperature forecasts every six hours. Air New Zealand flight dispatch officers are then able to use these latest wind and temperature forecasts in the preflight planning stage to cre-ate the initial flight plan for any given flight’s departure.
Further augmenting the flight-plan accu-racy (as based on the most recent six-hourly wind and temperature data), Air New Zealand maintains various items of direct-operating-
During its economically and environmentally significant flight last september, called AsPIre 1, Air New zealand saved approximately 1,174 u.s. gallons of fuel and reduced co2 emissions by some 11,218 kilograms.
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cost information in the flight planning system, including fuel costs.
To determine the optimum route and altitude for a particular flight, the Air New Zealand flight planning engine uses the latest wind and temperature information, plus highly reliable direct-operating-cost data. The carrier then calculates the cost of flight time cross-referenced against the cost of fuel and eventu-ally arrives at a cost index that will result in the minimum total cost for the flight.
The cost-index data correspond to the performance data in the aircraft’s flight man-agement computer and provide guidance to the flight crew as to the performance profiles to use in the climb, cruise and descent flight phases.
As a result, variable cost-index calcula-tions can be computed preflight as well as while the aircraft is en route — every six hours, when wind and temperature updates are received. The flight-plan route, winds, temperatures and cost-index setting are sent to the aircraft’s flight management computer via datalink communications.
In addition to its Dispatch Manager flight-planning capability, Air New Zealand uses aircraft situation display technology via the Sabre® Flight Explorer® System to graphically view and track a flight’s progress in real time while the aircraft is en route from takeoff to landing.
The aircraft situation display, in addition to the flight-planning system, can also be used to guide Air New Zealand flight dispatchers in determining optimum routes by using the system’s weather-overlay capabilities plus sat-ellite imagery to compare and take into consid-eration graphical forecast weather conditions along the route, including potential turbulence and icing as well as areas of thunderstorm activity in relation to the planned route.
In addition to the optimization provided by the flight planning system, an Air New Zealand flight dispatcher can assess the overall route and determine if it needs to be adjusted at certain points due to locally adverse weather conditions.
All of the factors are in place, then, to allow flight planners to take into consideration not only a vast array of weather variations that can affect a flight, but to allow the planners to construct a route with both fuel savings and minimal CO2 emissions in mind. And in the preflight stage, Air New Zealand uses Dispatch Manager to determine the most economical flight route — looking to identify a route requir-ing the least amount of fuel and generating the lowest CO2 emissions.
As a key element in this process, Air New Zealand defines for the flight a user-preferred route, or UPR. UPRs have been operational in the South Pacific oceanic air-space for a number of years, enabling carriers to plan optimized routes based on better flight
efficiency in taking advantage of the benefits of prevailing wind patterns rather than simply being required to fly fixed city/pair routes.
Fixed routes — whether in the form of permanently defined tracks or flex-tracks (flex-tracks, effectively, are fixed tracks defined daily) — are not essential in the Auckland oceanic flight information region (managed by the government agency Airways New Zealand using its oceanic control system, or OCS) and the Oakland flight information region (managed by the FAA using its Ocean21 system).
In the pre-departure phase for Air New Zealand’s flight from Auckland to San Francisco — using the calculated cost index and the latest enroute upper-air wind and temperature fore-cast — the carrier used Dispatch Manager to calculate the track between Auckland and San Francisco that would most effectively minimize fuel usage and emissions.
This route is the UPR, implementation of which requires air traffic control systems that are able to support aircraft operating out-side of predefined airways. With Air New Zealand’s OCS and the FAA’s Ocean21 — as well as their real-time conflict-probe capabilities, which instantly probe for conflicting factors with regard to any revision of flight profile — there is no requirement for traffic to maintain fixed routes in order for air traffic controllers to be able to identify conflicts.
Once calculated, the user-preferred route is digitally uplinked to the aircraft, inclusive of the wind and temperature data for loading into the aircraft flight management computer. The fuel saved on this flight through the implemen-tation of UPR amounted to approximately 420 U.S. gallons and UPR was also accountable for approximately 4,015 kilograms of reduced CO2
emissions (emission reductions and fuel sav-ings across the entire flight).
Other factors in the initial stages of the flight also figured into the greater fuel equation. In an aircraft’s climb after takeoff, for example, there are numerous disparate factors that must be balanced to arrive at an optimum operating procedure.
When considering climb power, the use of a derate climb power, or a power setting that is up to 20 percent below the aircraft’s maximum climb power, serves to significantly improve engine life potential and thereby lower maintenance costs, but the use of derate climb power also effectively increases the overall amount of fuel consumed during this flight phase.
Even under the effects of fairly recent high-er fuel prices, however, the savings to a carrier in terms of engine maintenance costs would still exceed by more than double the cost of fuel that could be saved in this flight phase. Thereby, der-ate climb power has remained Air New Zealand’s preferred option.
Climb speeds on Air New Zealand aircraft, incidentally, are set automatically through the mechanism of a cost-index factor that is entered into the aircraft’s flight management computer.
And some of the things that figured in later during the Auckland-San Francisco flight took on even greater significance. Once at cruising alti-tude, for instance, the flight gained an advantage through the six-hourly update of the upper air wind and temperature forecasts received through the flight planning system. A process called dynamic airborne reroute procedure, or DARP, is applied in effectively re-planning the flight en route.
On the Air New Zealand flight from Auckland to San Francisco, the DARP process was completed twice, thereby saving approxi-mately 70 U.S. gallons of fuel.
Air New Zealand’s use of DARP com-mences with an aircraft-datalink request for a DARP to the Air New Zealand flight dispatch office in Auckland. Immediately, the latest wind and temperature forecast becomes available, and the Air New Zealand flight dispatcher uses Dispatch Manager to recalculate the optimum track from a predetermined point just ahead of the current aircraft airborne position.
Once calculated, the revised route is uplinked to the aircraft for flight crew consider-ation. The crew then downlinks a request for the revised route to New Zealand’s oceanic control center and, once approved, accepts the revised route into the active side of the flight manage-ment computer.
Another advanced air traffic procedure that now benefits Air New Zealand operations in the Pacific oceanic region is 30/30 separation.
Beginning in 2005, the Airways New Zealand and Airservices Australia agencies reduced the required separation between aircraft in their oceanic airspace to 30 nautical miles longitude and 30 nautical miles latitude — the first such reduced separation in international airspace
In coordination with innovative oceanic air traffic procedures, Air New Zealand has implemented advanced flight planning techniques to set a new standard in trans-Pacific travel.
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to be implemented globally. Within a year, the FAA followed suit with regard to its Pacific airspace.
Air New Zealand has invested in aircraft systems that enable the carrier to obtain approval for both RNP10 (which results in 50-nautical-mile lateral and longitudinal separation) and RNP4 (which allows the use of a 30-nautical-mile stan-dard in oceanic regions).
This separation standard is now routinely applied on flights between Auckland and San Francisco, and 30/30 separation effectively pro-
vides the Airways New Zealand agency sig-nificantly increased airspace capacity as well as increased route flexibility, thereby enabling an overall reduction in fuel burn and CO2 emissions from each and every aircraft operating in the region.
Air traffic control’s ability to allow closer separation between aircraft therefore also reduces the number of times during which aircraft are held below the optimum altitude, and on this Air New Zealand flight resulted in savings of approximately
135 U.S. gallons of fuel and 1,290 kilograms in reduced CO2 emissions.
The crew of the Air New Zealand flight was also able to make use of new descent and arrival procedures into San Francisco International Airport that saved approximately 200 U.S. gal-lons of fuel and 1,912 kilograms in reduced CO2 emissions.
Through what is known as a tailored arrival, the descent and approach into San Francisco was optimized for efficiency.
Tailored arrival into San Francisco is a sophisticated application of a type of emissions-optimized arrival known as a continuous descent arrival. CDA allows an aircraft to fly a continuous-descent path to land at an airport, instead of the traditional step-downs or intermediate-level flight operations.
Using CDA, the pilot initiates descent from a high altitude in a near-idle (or low-power) engine condition until reaching a stabilization point prior to touchdown on the runway. CDA results not only in fuel savings and decreased emissions, but also significantly reduces noise beyond the airport.
The tailored arrival then takes the principles of the CDA a step further by identifying the most beneficial flight path available by integrating all known aircraft performance, air traffic, airspace, meteorological, obstacle-clearance and environ-mental constraints expected to be encountered during the arrival phase.
So in a broad analysis, the combination of Air New Zealand’s desire to pursue a “green” approach in the air — combined with state-of-the-art technologies as well as innovative air traf-fic control systems from government agencies, Airways New Zealand, Airservices Australia and the FAA — made this particular Air New Zealand flight something of a high-profile case study, wor-thy of both detailed analysis and emulation.
And the entire aviation industry appears to have taken notice. In a remarkable globally significant accomplishment, Air New Zealand has effectively demonstrated how to operate aircraft over long oceanic distances while creating a considerably smaller environmental footprint and saving substantial amounts of fuel.
Today, there are more than 150 flights per week connecting New Zealand and Australia to the United States and Canada. Based on these flights alone, the potential total annual savings are in excess of 10 million U.S. gallons of fuel and reduced CO2 emissions of more than 100,000 tons … simply by following the principles that have been established and proven effective by Air New Zealand during a memorable flight from Auckland to San Francisco. a
Shawn Mechelke is an operations product management director for Sabre Airline Solutions®. He can be contacted
According to Air New zealand, approximately 61 percent of the total fuel savings on its AsPIre 1 flight last september were attributed to the carrier’s state-of-the-art flight planning system, Dispatch Manager, part of Sabre® AirCentre™ Enterprise Operations.
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AClearVision
A Conversation With … Sean Durfy, WestJet Chief Executive Officer
WestJet Airlines
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WestJet Airlines, Ltd., has come a long way since the days of three aircraft flying to five destinations in western
Canada. Its growing fleet of Boeing Next-Generation aircraft now serve cities across Canada and the United States, including three Hawaiian destinations. It is quickly becoming the airline of choice for vacation travel with its Caribbean and Mexican destinations.
Despite a global economy that is cur-rently dictating a significant downturn in the airline industry, WestJet remains optimistic about its expansion plans.
Yes, it’s been impacted. In February, the carrier posted a 45 percent slide in fourth-quarter earnings to C$40.8 million (US$31.5 million) as harsh winter weather and waning demand for air travel continued to bog down its earnings. But Sean Durfy, WestJet chief executive officer, is bullish on his airline’s expansion plans, which forecasts 5 percent growth this year and includes adding eight more leased planes to its 77-plane fleet.
“We’re still growing this airline,” Durfy said in a February interview with Canada’s Financial Post. “We’re still adding new routes, and we’ll continue to grow the WestJet Vacations product. We’re taking nine aircraft this year, and we have no flexibility on that.”
During that interview, Durfy said there are several initiatives in the works that will help fill WestJet’s planes, most of which rely on the successful implementation of its new reservations system, built by Sabre Airlines Solutions®, by the end of the year.
While that process will likely push the launch of WestJet’s new loyalty program into the third quarter, it will enable the airline to increasingly move to an “à la carte” model, where passengers pay for the services they desire, such as advance seat selection and flexible fares.
It will also enable the airline to imple-ment its recently announced codeshare agreements with Southwest Airlines and Air France-KLM by the end of the year and during the first quarter of 2010, respectively.
Talks continue with Cathay Pacific Airways and several other carriers over the potential for further codeshare agreements.
“I think we will sign up at least one more this year for 2010,” Durfy said.
What is the key to the carrier’s suc-cess? People, first. At WestJet, a team responsible for corporate culture organizes
Photos courtesy of WestJet
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250 annual events including talks with pilots and flight crews to discuss culture and news, parties, and town hall meetings.
Durfy communicates regularly with employees to keep them updated. In addition,
all employees undergo an orientation program in which they learn about the importance of corporate culture. The company also con-ducts an internal biannual survey called WHY (We Hear You) that measures culture and
employee engagement and encourages feed-back so leaders can make improvements.
Durfy ties his success to technology as well. In an ad by Microsoft, an announcer asks, “So Durf, how do you keep the vision alive?” His reply?
“When we had 200 people, everyone said, ‘Ah, you’ll never keep your culture.’ Then we went to 1,000 people; they said, ‘Ah, bet you won’t keep it when you go to 2,000.’ Then we went to 2,000, and they said, ‘Ah, when you get to 5,000, it’s going to be a different game.’ Of course, we’re at 7,500 people, and our culture has never been as strong.
“With 7,500 folks across Canada and the United States, you can’t look at everybody’s eyes anymore. We now look at technology as a strategic driver of the company. If you don’t have that, you’re screwed, brother.”
Durfy has been with WestJet since 2004, when he joined the airline as executive vice president of sales and marketing. He was appointed president in September 2005 and assumed the role of CEO in September 2007.
In a recent interview with Lynne Clark from Ascend magazine, Durfy shared more thoughts about keeping the vision alive.
Question: on your Web site, you call WestJet a different kind of airline. What sets WestJet apart from other low-cost carriers?
Answer: First and foremost, it’s our people and their commitment to deliver a world-class guest experience that sets us apart from other airlines and, indeed, other companies. Our people are our greatest asset. In addition, we have a strong business model and low cost structure, which allow us to offer our guests great fares and travel packages.
Q: WestJet has been named one of canada’s “most admired corporate cul-tures” four times. Describe your corporate culture and how it has contributed to the company’s phenomenal success.
A: Our culture is value based and driven by our entire workforce in a grassroots way by every WestJetter and demonstrated equally by our leadership teams. Centered around caring, our culture includes elements of accountability, safety, fun, friendliness and ownership. Pride in ownership and being part of this great success story encourages our people to make great decisions and contrib-ute even further to our performance.
Q: What would a first-time WestJet passenger notice most about his or her flight experience?
A: The first thing they’ll notice is the fun and friendly attitude of our WestJetters.
WestJet Airlines employees, through their friendly, professional interaction with customers, display firsthand the airline’s emphasis on its award-winning corporate culture and how important its employees are to the company’s overall success.
safety is just one of five key elements that define WestJet Airlines’ culture, along with accountability, fun, friendliness and ownership.
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We get more compliments about our people than anything else. From the time our guests book their tickets to check-in, the boarding lounge and, of course, the flight itself, it’s all about delivering a world-class guest experi-ence. People also like our new and efficient Boeing Next-Generation 737s, our on-time performance and, in general, how easy and worry-free it is to fly with us.
Q: Describe a memorable, fun or off-the-wall event WestJet hosted for employ-ees and/or shareholders.
A: It would be hard to describe just one. In fact, we have over 200 parties and events for WestJetters and their families every year. Probably one of the most satisfy-ing events is our twice-annual profit share par-ties, when WestJetters have an opportunity to come together to celebrate and share in our success, and leaders enjoy the opportu-nity to personally reward team members for their part in our success.
Q: Your founders based their business model on southwest Airlines. Describe the similarities and differences of the two carriers.
A: There are many similarities as well as some differences. For example, we are similar in that we use only one type of aircraft, we are dedicated to providing high value at a low cost, we’re fun and friendly, and we focus on creating an amazing guest experience. However, our workforce is much smaller and it is non union.
Q: You have a new codeshare agree-ment with southwest Airlines. How chal-
lenging will it be to integrate your opera-tions? Will it be difficult to differentiate your brands?
A: From day one, we have always enjoyed a tremendous relationship with our friends at Southwest. For example, our respective operations teams have exchanged best practices and business process informa-tion, which has been a significant benefit not only from a technical perspective, but also in terms of getting to know each other and experiencing the cultural “fit” firsthand. From a brand perspective, we share many
of the same values with Southwest and look forward to the day when our guests will be able to enjoy the full benefits of this new arrangement.
Q: What do you consider when evaluating new partners?
A: Our first priority is a cultural fit. How does the potential partner view the importance of creating a world-class guest experience? What are their orga-nizational values, and how do they treat their people? Of course, we also evalu-ate critical elements such as technology, business processes, etc. At the end of the day, any partnership must be mutually beneficial and be capable of moving both companies forward in their respective business strategies.
Q: How do you balance the need to grow with the need to nurture the corporate culture that has made you so successful?
A: This is an excellent question. As an organization grows, its culture changes subtly with each new hire. At WestJet, we believe we can maintain our strong corpo-rate culture while growing our business, and that our culture will grow and evolve along with our business. There is a strong relationship between the two, and we’re resolved to never lose that focus.
Q: obviously, WestJet has been successful because it continues to pro-vide safe, friendly and affordable air travel. What role has technology played in that commitment?
like traditional low-cost carriers, WestJet Airlines operates a single aircraft type, with a fleet of 77 Boeing Next-generation 737 planes and plans to grow its fleet by 5 percent this year.
More than 80 percent of WestJet employees are owners of the airline, which contributes to their strong desire and motivation to help build and grow the business. In addition, WestJet leaders view all employees as partners, and it’s this team concept that supports the thriving carrier.
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A: Technology innovations and part-nerships have played a significant role in our success as much of our core business is dependant on technological applica-tions. For example, we developed an RNP (required navigational performance) application, which affords us significant fuel savings and increased safety when flying approaches. We have brought Sabre Airline Solutions onboard to replace our reservations system, which will serve as a critical foundation for our growth in the future. As an aside, we were asked a similar question by Microsoft recently, and the answer is contained within their new series of animated television commer-cials featuring prominent businesses and CEOs. We were flattered that we were the only Canadian company they chose to feature!
Q: Why has WestJet been so suc-cessful in an environment that sees air-lines going out of business every year?
A: We have an incredibly hard-working, dedicated and committed work-force of some 7,400 WestJetters, over 80 percent of whom are owners of the company and highly motivated to drive
strong business results. We have a sound business model, low costs, a strong value proposition and, best of all, guests that are fiercely loyal to us. Some nine out of 10 people who fly with us, fly with us over and over again.
Q: What specifically do you intend to do to become one of the five most successful international airlines by 2016?
A: Overall, we will continue to grow and expand in a balanced, measured and sustainable way. We will continue to focus on creating and delivering an amaz-ing guest experience and celebrating our incredible culture. Specifically, we will look for additional codesharing opportuni-ties with other airlines as well as other strategic alliances to move our company forward.
Q: What do employees and customers say about the WestJet experience?
A: A WestJet customer service agent captured her gratitude for flight privileges and being part of this great team by saying, “Thanks for making the
country so small and my heart so big.” Another WestJetter once said, “After years of searching, I’ve finally found my home.”Our guests sum up their experi-ence with comments such as: “I am well aware how important well-trained, caring people are to the success of any com-pany. Without them, any company will fail. Thankfully, WestJet is in good hands.” Another guest said, “I am singing your praises to everyone I know. Thank you to all your great employees.”
Q: If there is one thing you want customers, employees and sharehold-ers to know about WestJet, what would that be?
A: We want our customers to know that we value their business and genuinely enjoy their company. We want our employ-ees to know they are valued partners and contributors in our success and the keep-ers of our culture. We want shareholders to know that we have a strong business model, a proven track record, we routinely outperform our peers, and we are confi-dent that we will continue to achieve our goals and create value for our sharehold-ers. a
With its fleet of Boeing Next-generation 737-600, 737-700 and 737-800 aircraft, WestJet Airlines operates the most modern fleet in North America of any large commercial airline. the aircraft are equipped with more legroom, leather seats and live seatback television.
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By Michael Clarke | Ascend Contributor
Connecting The DotsThe Delta Air Lines and Northwest Airlines merger has had a significant impact on regional carriers — specifically those that no longer partner with the new, combined network carrier.
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The recently completed merger of Delta Air Lines and Northwest Airlines has created the world’s largest global car-
rier. As part of the terms and conditions of the acquisition, the combined airline has agreed to maintain its existing hub airports for the fore-seeable future, including major flight operations in Amsterdam, Netherlands; Atlanta, Georgia; Cincinnati, Ohio; Detroit, Michigan; Memphis, Tennessee; Minneapolis-St. Paul, Minnesota; New York City, New York; Salt Lake City, Utah; and Tokyo, Japan.
In addition, the two carriers will continue to operate independently during the transition process, until they can be merged onto a single U.S. Department of Transportation operating certificate. This process is anticipated to take 12 to 18 months to fully complete. In the interim, it’s business as usual for the two carriers that, together, maintain partnerships with 10 regional carriers.
While three of these carriers are direct subsidiaries of the new, combined carrier, Delta Air Lines’ relationship with the remaining regional carriers is governed by capacity purchase agree-ments that involve a fixed fee for departure or cost-plus contract.
As part of these agreements, regional carriers are usually restricted to operate a limited number of aircraft below an agreed-upon seat capacity and on specific routes through specific pilot scope clauses, and they are in effect under the strategic control of the network carrier. Under these capacity purchase agreements, the network carrier assumes all the market risk and is responsible for commercial planning, revenue management, marketing, sales and distribution of the airline product. It usually covers high-risk items such as aircraft ownership and insurance as well as fuel costs. The regional carrier is responsible for operating the flights and ensur-ing the availability of capacity for the network airline.
Leading up to the merger, Delta Air Lines had proactively reviewed its existing agree-ments with each regional carrier and opted to terminate operations entirely with Big Sky Airlines and ExpressJet Airlines as well as sig-nificantly reduce its dependence on Freedom Airlines (subsidiary of Mesa Air Group). While Delta Air Lines’ original intent was to remove non-beneficial partnerships, it was also able to reduce the number of partner carriers and retire less-desirable aircraft from its fleet — primarily small regional jets (50 seats or less).
Throughout the course of last year’s damaging economic downturn and simultane-ous escalation of fuel prices, U.S. domestic major network carriers started to re-evaluate the benefits of regional operations in their network systems. While Delta Air Lines’ and Northwest Airlines’ review may have been accelerated by their pending merger, the remaining network carriers also took a hard look at their partnerships.
In the majority of the cases, the major network carrier was able to obtain more-favor-able capacity purchase agreements as well as place a greater level of financial risk on the regional carrier. In the end, the stronger regional carrier groups such as Republic Airlines and SkyWest Airlines were able to re-enforce their position as marquee regional partners with their existing network partners as well as pick up some additional flying lost by smaller and often less-financially stable regional airlines. It was essentially a matter of the strong getting stron-ger and the weak getting weaker or, in some cases, ceasing operations altogether.
The jury is still out on what will happen to the remaining independent regional carriers, but many believe that they will either be acquired by their stronger counterparts and/or join forces together to counteract the negotiating power of their network partners.
As the level of regional carrier operations increases for a given network carrier, the thorny issue of which ones will fly next-generation larger regional aircraft (70 seats or more) sur-faces. Most network carriers are still restricted by scope clauses in their pilot contracts, and they have found creative ways to deal with the situation by introducing first-class cabins on
the merger between Delta Air lines and Northwest Airlines, which has created the world’s largest airline, has significant benefits for regional partners such as compass Airlines operated by Northwest Airlines and comair serving Delta connection.
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many of the larger aircraft that offer service that in some essence parallels first-class service on the mainline narrow-body aircraft. While some will argue that the larger and more spacious seats are there primarily for marketing purposes, only time will tell what happens to these cabins when carriers are free to allocate aircraft to either the main operations or regional partners.
Other carriers have simply opted to have the larger aircraft flown in house by their union-ized crewmembers and benefit from the other cost savings of having a more homogeneous fleet ranging in seat capacity from 70 to, in some cases, 110 seats. These savings include but are not limited to the purchasing of in-flight products and services, procurement of ground support equipment, engine maintenance and spares, and, in some cases, joint flight attendant training.
The lingering issue of who will fly the larger regional jets — such as the Embraer E190, Embraer E195, Bombardier CRJ-1000 and proposed Bombardier C-Series — will continue until major network carriers first and foremost address the scope clause issue as part of their pilot contract negotiations and decide which direction they will go with their narrow-body fleet replacement plans.
In general, the airline community has two purchasing options: Embrace the family of regional jets and assign
their flying as dictated by pilot contracts, Preserve the status quo and order next-gen-
eration narrow-body aircraft that will be pro-duced by Airbus and Boeing.
The only caveat is that these aircraft manufacturers are in no hurry to launch these programs as they continue to sell the venerable Boeing Next-Generation 737s and the Airbus A320 family of aircraft. For some airlines, how-ever, the deadline and/or need to order new narrow-body aircraft is fast approaching, and they have been forced, in some cases unwill-ingly, to order additional aircraft from the current generation of narrow bodies. In addition, since most pilot contracts are not yet up for renewal at the top major network carriers, it’s business as usual for now.
However, the new Delta Air Lines’ inher-ited fleet of aging yet dependable Northwest Airlines’ Douglas DC-9s will soon reach their end, and only time will tell how Delta Air Lines will replace them.
Prior to the merger, Northwest Airlines had established a new subsidiary — Compass Airlines — to fly a fleet of Embraer E-175 and Bombardier CRJ-900s from its three main hub airports. Initially, these operations were used to supplement its mainline operations, but it was apparent to those in the industry that Compass Airlines was a feeding ground for gaining the necessary experience with the mid-range to larger regional carriers to decide which direction to go with the DC-9 replacement. It has often been reported in the press as one of the leading contenders for launching the Bombardier CRJ
Series aircraft as the replacement aircraft for the sizeable DC-9 fleet.
Currently, Northwest Airlines operates approximately 65 DC-9 aircraft, down from a high of more than 100 aircraft before the eco-nomic downturn and sky-rocketing fuel prices. The introduction of newer and much more fuel-efficient aircraft in its domestic operations could fundamentally change its current route structure.
The future role of regional airline opera-tions in the U.S. domestic system goes without saying. For Delta Air Lines, its decision to maintain seven major hub airports will only re-enforce its need for a strong, efficient regional aircraft fleet and network structure. For any network carrier to be successful, it must provide high-frequency connections between airport hubs so it can flow passengers to the appropriate gateway for their international destinations.
Delta Air Lines has designated Atlanta and Cincinnati as major international gateways to Europe and Latin America; New York as a gate-way to Europe and beyond; and Los Angeles, Minneapolis-St Paul and Tokyo as primary gate-ways to Asia/Pacific. The remaining hub airports will continue to play an active role in the flow of domestic passengers and potentially provide alternate gateways to various regions in the world. The need for high-frequency service will call for smaller capacity aircraft that can support hub-to-hub flying, especially between the closely located hubs of Detroit and Cincinnati on the one hand and Memphis and Atlanta on the other hand. It’s impractical for Delta Air Lines to offer
multiple trans-Atlantic service from all of its hub airports beyond the major European gateways of its alliance partners. For example, if a traveler chooses to fly from Düsseldorf, Germany, or Nice, France, he would have to fly through New York or Atlanta.
Regional carriers aligned with Delta Air Lines are well positioned to reap the benefits of being associated with the world’s largest carrier. However, it remains to be seen how Delta Air Lines’ executes on its overall strategic plan, which will include how to effectively balance competing hub airports, manage the flow of pas-sengers and aircraft throughout its network sys-tem, collaborate and manage its multiple regional airline operations, and ultimately make effective fleet renewal decisions to drive and sustain the efficiencies of its massive global network.
Within the context of a global airline alli-ance, the number of destinations served by the main players will dictate the attractiveness of the alliance network to the business community and the general traveling public. The ability to serve a diverse range of destinations in terms of market distance and customer demand will mean that regional carriers will have an important role to play in connecting the dots across the U.S. domestic network. a
Michael Clarke is director of optimization solutions in airline operations for Sabre Airline Solutions®. He can be contacted
Major Network Airline
Delta Air Lines
Northwest Airlines
Regional Partner (Number Of Assigned Aircraft/On Order)
Atlantic Southeast Airlines (SkyWest) – 161
Chautauqua (Republic) – 37
Comair – 141
Freedom Airlines (Mesa) – 42
Pinnacle – 16
Shuttle America (Republic) – 15
SkyWest Airlines – 91
Compass Airlines – 36
Mesaba Airlines – 53
Pinnacle Airlines – 133
Prior to its merger with Northwest Airlines, Delta Air lines ceased operations with regional partners Big sky Airlines and expressJet Airlines. the combined airline will continue its partnerships with 10 of its existing regional operators.
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A thorough examination of Aeroflot Russian Airlines through an extensive turnaround exercise has helped the carrier reinvent itself and once again become a top player in the world’s air space.
By Barbara Childs and Luc Lachoix | Ascend Contributors
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When it comes to Aeroflot, the old adage, “You can’t teach an old dog new tricks,” is far from the truth.
This 85-year-old airline has lots of tricks up its sleeve. Just ask the people who make up Russian-based Aeroflot, one of the old-est airlines in the world. Founded in 1923, Aeroflot began flying re-equipped warplanes domestically and internationally to destina-tions in Germany.
Since the 1991 dissolution of the USSR, Aeroflot has been transformed from a state-owned bureaucracy into a semi-privatized airline that ranks among the most profitable in the world. The car-rier operates scheduled passenger flights from Sheremetyevo International Airport in Moscow to 52 countries serving 96 destina-tions in Russia, Africa, Asia, Europe, the Middle East and North America.
Aeroflot has seen a significant financial improvement during the past several years, both in earnings and number of passengers carried. Last year, Aeroflot increased the scope of its work by 13.5 percent over the previous year, carrying nearly 9.3 million passengers (5.7 million international and 3.6 million domestic), which is higher than the industry-average indicators. Despite the 50 percent increase in fuel expenses, the company’s income has grown by more than 26 percent.
The remarkable revenue gains can be attributed to a number of things. Beginning in early 2000, Aeroflot began redefining itself as one of the world’s safest and most reliable airlines, hiring consultants for a rebranding project that included new livery and uniforms for flight attendants as well as a promotional campaign launched in 2003.
In addition, the carrier began upgrad-ing its fleet of western-built aircraft, which today includes 52 Airbus A319, A320 and A321 jet planes for short-haul flights in Europe as well as 11 Boeing 767 and two Airbus A330 planes for long-haul routes.
Aeroflot’s transformation can also be attributed to forward thinking by Dmitry Gorbatov, the carrier’s director of revenue management. The Russian market was becoming more highly competitive from entry of both low-cost carriers and network carriers, and Aeroflot needed to redesign its business plan. Dmitry recognized an oppor-tunity to considerably improve Aeroflot’s revenue management practices, organiza-tion and revenue gain performance.
To help leverage this opportunity, Dmitry worked with Sabre Airlines Solutions® to develop and implement a commercial turnaround project, in which a team of consultants worked closely with Aeroflot’s revenue management department and iden-tified four key areas — processes, organi-zation, people, and reports and measures
— the airline would focus on improving financial performance.
A look at the carrier’s revenue man-agement in 2004 showed it had a long way to go to adopt industry best practices, pro-cesses and tools. But perhaps the biggest challenge was convincing the then 81-year-old organization’s executive team that a culture and leadership shift was essential if it was to become a premier airline in the 21st century.
giant leaps Begin With Baby steps
Aeroflot’s commercial turnaround project team first tackled the more objective challenges of change: processes as well as reports and measures. It began by initiating a broad review of revenue management and other commercial practices. Pricing, distribution, revenue integrity, commercial planning and sales processes were all thor-oughly evaluated. In addition, the team looked closely at how Aeroflot’s systems, were helping achieve industry performance standards and commercial objectives.
Based on the team’s findings, it was determined that: The company must develop market-based teams comprising employees who would embrace ownership and accountability,
New processes must adhere to industry best practices while leveraging the use of existing revenue management solutions,
A benchmark system should be imple-mented to measure performance and translate issues into actionable practices,
Department boundaries should be exam-ined and clarified,
A “culture of performance” should be adopted to develop ownership and accountability of the commercial results by all team members.
“Close analysis of all these issues caused apprehension among department staff members who saw just how much change would need to happen if Aeroflot was to become a competitive new airline,” said Dmitry. “The natural tendency is to prefer status quo. People were naturally defensive about learning new technologies and processes as well as assuming new responsibilities.”
The commercial turnaround proj-ect team upgraded to newer versions of Sabre® AirMax® Revenue Manager, Sabre®
AirMax®Group Manager and the Sabre® AirPrice™ System, and then it began tack-ling people and organizational challenges by training the airline’s staff and show-ing them data-based results. Employees attended pricing and revenue manage-ment workshops where they learned the theory behind the technology and then received hands-on training.
“For example, analysts were trained to use Revenue Manager and Group Manager for new business processes with an empha-sis on systems adjustments and how to address performance issues,” Dmitry said. “Over a period of time, they received addi-tional training and hands-on assistance as well as mentoring support.”
Even after completing training phas-es, many systems users remained skeptical and old practices were still widespread. To create confidence among these employ-ees, Sabre Airline Solutions’ consultants conducted tests on selected flights and markets using new practices and applica-tions. When the team measured high-yield spill during high seasons and low-yield spill during off-peak periods, results showed clearly that the new revenue management method increased revenue. The result? Organizational buy-in.
the New AeroflotAfter undergoing significant growing
pains, Aeroflot today is reaping the rewards of improved work processes, a more bal-anced work load, and better teams and reporting relationships. In addition, the car-rier reports significantly healthier revenues, which it attributes to the revenue manage-ment intervention. Last year, Aeroflot expe-rienced a net revenue gain of 10 percent, or US$145 million, using Revenue Manager and its revenue management practices. It now looks forward to capitalizing on this success by expanding revenue manage-ment capabilities and refining technology as it relates to point-of-sale control and origin-and-destination revenue management.
Aeroflot’s revenue management team experienced a revolution of its practices in just a few short years. It was successful first because the carrier had executive commit-ment and its ongoing support. Second, the carrier was persistent and team members were extremely dedicated. Third, there was and continues to be ongoing collaboration between Aeroflot’s revenue management team and Sabre Airline Solutions.
“The rewards are concrete, and the new revenue management environment positions Aeroflot to face the challenges of today’s environment and to reach superior commercial performance,” Dmitry said. a
Barbara Childs is an account director serving Russian airlines and Luc Lachoix
is an airline consulting principal for Sabre Airline Solutions. They can be
contacted at [email protected] and [email protected].
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By Michael Clarke | Ascend Contributor
Fleet ShuffleAircraft manufacturers have been pleasantly bombarded during the last few years with record orders, but the two main aircraft makers, Airbus and Boeing, continue to struggle with seriously delayed delivery schedules, leaving carriers around the world to improvise until their new aircraft arrive. Additionally, sales for regional plane makers Bombardier and Embraer continue to climb. Especially popular are the larger airframes, with record orders for the stretched CRJ series and E-jets, but similar to the larger aircraft, it’s uncertain when these orders will be fulfilled.
Photo courtesy of Bombardier
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During the last five years, major aircraft manufacturers have enjoyed record orders from airlines across the globe. Granted, the
distribution of these orders has been focused on the rapidly growing Indian domestic market and aggressively expanding Middle Eastern carriers. U.S. domestic network carriers, still recovering from the fallout of geopolitical situations and declining economic conditions, have been slow in ordering new aircraft to replace aging fleets of narrow-body aircraft and first-generation twin wide-body aircraft.
As of January, Boeing racked up a healthy backlog of more than 3,700 aircraft with an amazing 913 Boeing 787s ordered, while Airbus enjoys a backlog of 3,715 aircraft, including 478 of its recently launched Airbus A350 extra-wide-body aircraft. The prevailing demand for efficient wide-body aircraft and the evolving route-map structure created demand for new fleet types with enhanced mission capability and operating range. When first introduced to the airline community, there was a level of excitement unparalleled in the industry for the Boeing 787 and competing Airbus A350 aircraft. Carriers saw the opportunity to fundamentally change the flow of international passenger traffic through bypassing congested gateways such as London Heathrow Airport and New York’s John F. Kennedy International Airport and offering more direct scheduled services to/from secondary markets.
External factors such as the rapid increase in the price of jet fuel (especially during 2008), the passing of the U.S.-European open-skies agreements, the approval of anti-trust partner-ships across the North Atlantic and the continued growth in global airline alliances only added to the frenzy of demand for new aircraft to serve newly conceived city-pair markets. There seemed to be no end in sight for the record orders of aircraft at the two leading aircraft manufacturers.
The introduction of the new wide bodies promised the utilization of the latest technologi-cal advances, especially around engine perfor-mance and airframe construction techniques. Boeing believed that the opportunity was ripe to develop and mass produce the world’s first commercial passenger aircraft using advanced composite materials, which offered significant weight savings that would in turn lead to more efficient operating in terms of fuel consumption and environmental impact. Experiences with the increasing use of composite materials across the airframe, along with the decades-long use of such materials in military and business jet con-struction, provided the foundation for launching the next-generation of wide-body aircraft.
With these new technologies and con-struction techniques came the risk of uncertainty. Adding to this risk, a decision was made to out-source a larger portion of the airframe construc-tion to key manufacturing partners across the globe, introducing an added level of complexity in the logistics and distribution arena.
Ultimately, numerous factors centered around the construction of the aircraft frame, which resulted in a significant delay in the Boeing 787 program. The 787 now has an anticipated delivery date three years later than originally planned. Adding to Boeing’s woes was an unex-pected and prolonged strike by its machinist union, which more or less shut down production late last year. Airbus has also had its own share of setbacks, with the introduction of the ultra-large A380 aircraft severely impacting the availability of engineering and design resources to work on the A350 program to compete against Boeing.
In both the B787 and A380 programs, aggressive product development and delivery timelines were negatively impacted by unex-pected manufacturing challenges that resulted in multiple rounds of part redesigns and/or reworks. In many cases, partially constructed aircraft sat idle along the assembly lines until engineers could figure out an efficient and effective way to resolve the problems. Ultimately, the B787 and competing A350, along with the A380, will be great aircraft in their own right, but these delays have had tremendous impact on fleet planning departments around the world. Carriers have been forced to delay the launch of new routes, the retirement of aging and less-efficient aircraft types, and, in some cases, newly established car-riers have been forced to entirely postpone their launch date.
By far, northern Asia airlines have been impacted the most by the B787 delays. Launch customers ANA and JAL in Japan anticipated taking deliveries of their first batch of aircraft during the first half of 2008. Some Chinese car-riers expected to receive the new aircraft in time for the summer Olympics in Beijing. While the disappointment from the missed opportunity to showcase the new advanced aircraft as part of
the Olympic celebrations subsides, the carriers remain eager to receive their aircraft. As a stop-gap to these aircraft delays, ANA and JAL have been forced to place supplemental orders for the venerable B767-300 aircraft as well as postpone the retirement of existing B767s in its operating fleet. In addition, Airbus has benefitted from an increased demand for its A330 series until the competing A350s come online.
This situation has created a strong demand for these equipment types, which has resulted in higher leasing costs and residual values, delayed cargo conversion programs, and revised flight schedules. At the same time, many Asian carriers have elected to replace their aging B747-400s with twin-engine aircraft, especially the similar-capacity B777-300s. On most routes from Japan to North America, the B777-300 is becoming the aircraft of choice, replacing not only B747s but also MD-11s, which are being converted to freighter operations.
On the regional front, Embraer and Bombardier have seen the continued interest in their product lines, especially in larger airframes, with record orders for the E-jets and stretched CRJ Series. In addition, there has been a healthy resurgence in the demand for advanced turboprop aircraft with some major network carriers reintro-ducing turboprop operations in their scheduled service. As a fallout to the run up in fuel prices, there has been a noticed reduction in smaller jet aircraft operations, with many network carriers opting to park their 50-seat regional jets. In return, they are upgrading to larger regional jets (ranging from 70 to 100 seats), downgrading to turboprop operations or exiting the given market altogether.
A recent study by USA Today found that some major airports experienced more than a 30 percent reduction in operations year over year. Nonetheless, regional aircraft manufacturers also
Qatar, along with other prominent Middle east carriers, has slowed its growth plans as it awaits the arrival of wide-body aircraft such as the Airbus A350.
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Photo courtesy of Airbus
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enjoy a record level of aircraft backlog, but as with the mainline carriers, only time will tell what percentage of these orders finally materialize.
Within the U.S. domestic market, there has been a significant reduction in flight schedules, not only in the amount of regional flying but also scheduled flights flown by older narrow-body air-craft such as the B737-300s and MD-80s. During the second quarter last year, major network airlines facing a marked reduction in passenger demand and escalating fuel prices made drastic reductions in the number of scheduled flights in the timetable. In conjunction with the flight reduc-tions, carriers decided to accelerate the retire-ment of aging narrow-body fleet without making any new substantial aircraft orders. In effect, the equivalent of one major network carrier’s fleet (in terms of the number of aircraft) was voluntarily removed from the U.S. domestic system during the fourth quarter of 2008.
Some of the larger narrow-body aircraft, especially B757-200s, were not parked but rede-ployed for international operations, particularly across the North Atlantic. Delta Air Lines opted to add winglets to the majority of its B757s, and it introduced many new year-round and seasonal routes from JFK International Airport to secondary markets in Europe and Western Africa. In addition, the carrier has increased substantially the number of routes served from its home base in Atlanta, Georgia, to Central and South America using its next-generation narrow-body aircraft.
In the midst of all these changes, the recently completed merger of Delta Air Lines and Northwest Airlines has allowed the residual Delta Air Lines to completely rethink its fleet planning and allocation of equipment types. Although the integration of the separate airline operations and culture will take time to complete, this has not stopped Delta Air Lines from making some imme-
diate fleet changes. Aircraft such as the B747-400s and A330-300s operated by Northwest Airlines crewmembers are now being deployed on Delta Air Lines’ scheduled flights, and B767-300s and B767-400s being operated by Delta Air Lines crews are flying scheduled Northwest Airlines flights. Before the merger with Northwest Airlines, Delta Air Lines was in the process of a fleet reconciliation with the retirement of aging fleets and the increased use of regional aircraft in its network.
Now, Delta Air Lines is both blessed and cursed with a very diverse fleet that allows it to allocate the ideal aircraft type for a given route — so much so that the carrier is now reconsidering its inherited B787 launch order, originally placed by Northwest Airlines to enhance its international operations (mainly from Detroit, Michigan, to cities in northern Asia and beyond). Nonetheless, one challenge Delta Air Lines faces today is the large number of hub airports it now has in its sys-tem network. Deciding which market should be served from which hub and using which aircraft type will definitely remain challenging for a period of time.
Even the venerable North American low-cost carriers — AirTran Airways, jetBlue, Southwest Airlines and WestJet — were not immune to the economic downturn. While most low-cost carriers did not significantly reduce their operating fleets, some did opt to sell older air-craft and replace them with new tails accepted from the manufacturers. In other cases, intended growth plans were impacted by the prolonged machinist strike at Boeing, which produces the B737 workhorse favorite of many value-based carriers. For example, WestJet has reduced its forecasted growth rate this year from 8 percent to 5 percent, a direct result of the aircraft delivery delays. In spite of this setback, it still intends to
ultimately grow its operating fleet from the cur-rent 77 aircraft to 120 aircraft.
Southwest Airlines has reduced its growth plans for the year and has been actively reviewing its current system network to determine which routes and flights to trim and how to reallocate the impacted aircraft capacity to support attractive growth opportunities in recently established mar-kets such as Denver, Colorado, and Minneapolis-St. Paul, Minnesota.
JetBlue has slowed the delivery on new aircraft and has opted to sell some older A320s as it continues to accept Embraer E-190s to support its continuing growth strategy. AirTran Airways has deferred the delivery of 36 B737s and has recently sold five B737 aircraft (three used and two new) to end 2008 with an operating fleet of 136 aircraft. In addition, it plans to further reduce its fleet by 3 percent to 7 percent this year.
In the international arena, the rapid growth for India-based carriers, both domestically and internationally, has fundamentally changed the face of commercial passenger service in the sub-continent. In tandem with the record-breaking growth has come the anticipated consolidation of major players as India experiences market deregu-lation in an accelerated mode. The two leading government-owned carriers have been merged into Air India, and the two leading private carriers (Jet Airways and Kingfisher Airlines) have elected to acquire Air Sahara and Air Deccan, respectively, to create low-cost subsidiaries to effectively com-pete in the ever-changing landscape.
In spite of all this consolidation, there is excess capacity in the domestic market as a result of the rapid downturn in global economic condi-tions and its impact on passengers’ willingness to travel.
Similar to U.S. carriers, India’s carriers have opted to redeploy their next-generation narrow- and wide-body aircraft on regional and internation-al routes. Today, a large portion of the outstanding narrow-body backlog orders are from Indian carri-ers, so only time will tell what happens to these aircraft. The only silver lining is that many U.S. domestic carriers that are in need of new aircraft have not placed the necessary orders due to the lack of collateral and resources to secure them. In addition, it’s become somewhat of a wait-and-see situation as many U.S. major network carriers are strongly encouraging aircraft manufacturers to develop the subsequent generation of advanced narrow-body aircraft beyond the Boeing 737NG and A320.
In the Middle East, fast-growing carriers Emirates, Etihad and Qatar have been forced to slow their growth plans because, collectively, they hold a large percentage of the outstanding orders for current and next-generation wide-body aircraft.
Emirates has opted to continue its expan-sion plans for the Americas, but instead of daily service, it provides service to Los Angeles and San Francisco, California, three times a week. As it receives new aircraft on order, its ultimate goal
carriers in northern Asia, such as ANA, have been significantly impacted by the Boeing 787 delays, which have had an immense effect on the carriers’ fleet planning departments.
Photo courtesy of Boeing
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is to offer daily service in all markets and, in some cases, increase it to twice daily or even more, depending on market demand. Emirates offers service to most continents with extended-range operations with the B777-200LRs to São Paulo, Brazil, and Houston, Texas. As one of the launch customers for the A380, Emirates was finally able to deploy the aircraft type on high-frequency, high-volume routes to London Heathrow Airport and John F. Kennedy International Airport. As one of the world’s most profitable airlines, Emirates plays a major role in the Europe to Australia market and has aggressive plans to increase frequency and service in this market as well as continue to serve as a major feeder of traffic into the Indian sub-continent. On the heels of Emirates are Etihad and Qatar Airlines, which share a similar large order of wide-body aircraft and the desire to rival the larger neighbor in fleet size and network structure.
The prolonged delay of the A380 program also had a substantial impact on Singapore Airlines, the global launch customer of the equipment type. In many cases, the carrier was forced to either temporarily increase frequency and/or maintain B747-400 operations on routes slated for the A380. Ultimately, Singapore Airlines plans to reduce the number of B747 in its fleet and supplement its operations with B777, A330 and A380 aircraft. Similarly to Emirates, Singapore has introduced the A380 on high-frequency, high-volume routes from its base airport to London Heathrow Airport, Tokyo Narita International Airport and Australia’s Sydney Airport.
Qantas Airways has also introduced the A380 on its high-volume routes to Los Angeles from both Sydney and Melbourne, Australia, with the goal of offering daily service between the two city pairs. Interestingly, Singapore Airlines has opted to reintroduce A330s into its operating fleet, replac-ing some B777s on regional routes that were used almost a decade ago to replace the older A330s.
Nonetheless, the airline is committed to the use of the B777 for international operations and has used them to replace older B747-400s.
Although the immediate future for the global airline industry remains uncertain, one thing remains valid — there will be a residual demand for new aircraft rolling off the production lines, and carriers that have taken the necessary steps during the eco-nomic downturn will be well positioned to reap the benefits of the newly acquired resources. There will be rationalization in the Indian and Middle East mar-kets, and U.S. major network carriers will have to face the reality of obtaining new aircraft to improve their operational efficiency and reduce fuel costs.
Regardless of the future trends in fuel prices, airlines can actively control their fuel expenses either through fuel hedging and/or operating modern, more-efficient aircraft. In addition, these new aircraft will give carriers the flexibility to pursue new markets
that result from recent market liberation and open-skies agreements.
As the world economy recovers from its cur-rent recession, passenger and cargo traffic levels will recover, and airlines will see the need to increase their flight schedules to serve the increasing traffic demand. The continued growth of global airline alli-ances will influence future fleet planning decisions as alliances reconcile their marketing strategies and realign key markets. a
Michael Clarke is director of optimization solutions in airline operations for Sabre Airline Solutions®. He can be contacted
the economic downturn has also impacted low-cost carriers, such as jetBlue, which has opted to sell its older Airbus A320 aircraft while continuing to accept embraer e-190s to support its growth plans.
3.2 The percentage of estimated annual
growth rate for aircraft in service
between the years 2007 and 2027,
according to Boeing.
2027 The year in which 82 percent of the
industry’s fleet will be aircraft that do
not exist today, according to Boeing.
98
The percentage of accurate baggage
handling of the 2.25 billion bags
airlines handle each year. According
to IATA, the 2 percent of mishandled
bags leave 48 million passengers dis-
appointed each year.
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Photo courtesy of Embraer
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shutterstock_19254766 1 4/23/09 11:53 PM
CUTTING UP
Last year’s global capacity cuts, with more on the horizon, can have extensive ramifications for an airline, specifically in the area of revenue optimization. However, revenue management and pricing teams can offset the ill effects of capacity reductions and maximize their potential benefits by implementing strategies designed to effectively manage the new demand levels.
By Lindsay Millward | Ascend Contributor
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Last year, the airline industry saw the most dramatic cuts in capacity since 9/11, with promises of more to come. As oil prices
continued to soar up to an eventual peak of US$147 a barrel, airline executives saw no option but to take drastic action — reducing capacity. The belief was the action would result in lower costs and that removing seats would sustain or even boost ticket prices, lead-ing to an increase in yields.
“The events allowed for needed capac-ity reductions that wouldn’t have happened other-wise,” said Robert Crandall, former chairman and chief executive officer of AMR Corp.’s American Airlines, during the 2008 Airline Strategy Summit in London. “It is this ruthless reduction in seats that will preserve ticket prices and margins and thus ensure that a few carriers survive.”
Although the action was taken as a result of oil prices, which have since declined significantly, it appears the right decision was made for an unex-pected reason — the abrupt softening of demand. Whether the decision was good luck or good judg-ment, the capacity decreases could not have come at a better time.
Early signs of a slowing economy started to snowball with banks and financial institutions reaching crisis point and governments providing huge bailout packages. The inevitable cuts in corpo-rate travel budgets and leisure travel followed, and demand softened noticeably. Numerous predictions have been made on the revenue impacts to the industry. The International Air Transport Association
has forecasted a fall of US$36 billion in revenues compared to the last downturn, which saw a drop of US$1 billion. Others have forecasted decreases to lesser or more severe degrees, but all have agreed that the airline industry is facing one of its most challenging years.
Capacity declines have not been seen glob-ally, however. Comparing the fourth quarter of 2008 versus the fourth quarter of 2007, there is a clear dis-tinction regionally. In typical fashion, North America has made the most drastic cuts, while European and Asian carriers have implemented a more tempered decrease. The Middle East, Australasia and South America, meanwhile, continue to see a marked increase in available seat kilometers, up by 8.9 percent, 4.3 percent and 6.0 percent, respectively. And while North America capacity is down overall, Southwest Airlines bucks the trend with a slight increase in available seat miles.
Commercially, capacity cuts have far-reaching repercussions across an airline, and few areas are more affected than revenue optimization. When this type of change occurs, revenue management and pricing departments need to respond appropri-ately to maximize the benefits that should be gained. There are tactical steps revenue management and pricing teams can take and strategies that can be implemented to effectively manage these new demand levels.
Pricing strategyTypically, the pricing strategy for a market
is based on various factors that need to be reas-
sessed given a capacity cut. These factors include price sensitivity, market segmentation, seasonality, market performance, market share, capacity share, schedule and competition. As capacity decreases in a market, the pricing structure needs to be reviewed accordingly. In fundamental economic theory of supply and demand, the reduction of supply would result in an increase in the price that can be charged for goods. However, in the current economic climate, given the diminishing demand and the reduction in companies’ corporate travel budgets, pricing analysts need to be even smarter in formulating strategies based on the characteris-tics of their markets.
In some markets, no action will be required. Where a comprehensive pricing structure exists and competition is minimal, the revenue man-agement system should optimize those flights, thereby controlling the fare availability given the decreased capacity. However, in more competitive markets that have seen more drastic capacity cuts by multiple carriers, certain questions need to be answered: Do the high-yield fares go high enough? Are there sufficient price increments of a rea-
sonable size to encourage up-sell opportunities among the fare classes?
What action has the competitor taken so far? What is the current strategy for this market? This
is based on market type: Expand — Low market share but high yield,
whereby product segmentation could mini-mize dilution.
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A softening of the global economy has caused load factors to decrease, and airlines have been dramatically cutting capacity in response to minimize the number of empty seats.
Photo by shutterstock.com
Maintain — High yield and market share, offering the potential to improve yield and defend share.
Opportunistic — Low market share and low yield, but opportunities exist to develop traf-fic and yield.
Yield — High market share but low yield, presenting the potential to improve the traf-fic mix.
Does this strategy still hold true given the reduced capacity, or does it need redefining?
How can pricing reach the latest strategic objec-tive?
Demand forecastingTypical revenue management systems fore-
cast demand on an unconstrained basis, allowing the system to respond automatically to adjustments to capacity; however, where capacity is reduced across multiple airlines on a market or entire flights/routes are cancelled, passenger demand can be significantly affected. The prime concern for an inventory analyst in this situation is how the schedule offered to the passenger has changed. Is there less frequency? Has the capacity reduced to a level where flights are now expected to sell out? How can this demand be recaptured across other departures? And how can the inventory analyst determine what kind of demand adjustments need to be made in the revenue management system? An analyst needs to consider a number of possible scenarios and factors:
Reduction in the aircraft size but maintenance of the same schedule — Here, the analyst needs to consider whether there is now more opportunity for up sell on this market. If capacity is significantly cut across the operating carriers, assuming there is not still surplus capacity and demand remains stable, the yields could be expected to increase.
Cancelling a flight but continuing to operate the route — In this scenario, the analyst needs to review the competitions’ schedule offering to estimate how much demand will move to the competitors’ flights and how much will move to other departures on that day. Factors to be considered include the historical passenger mix on the cancelled flight. If the passengers were primarily price-sensitive leisure passengers, they can be retained by ensuring availability of com-petitive fares on the remaining schedule.
Cancelling a route — The key consideration here is the impact on other markets. Cancelling a route may result in:
Redirection of connecting traffic through an alternative hub,
A significant reduction in connecting traffic formerly travelling on that leg, which may no longer be served,
An increase in traffic to a nearby airport. Various data sources can assist the inven-
tory analyst in determining how capacity changes may impact the market demand. MIDT data can provide guidance to market size and share, along-
side capacity and traffic-trend statistics. The airline’s historical data may provide insight from periods where different frequencies or capacities were operated. Competitor fare data can give valuable guidance to competitor strategies following the capacity changes and, with the right tools, the analyst could choose to automatically remain in line with the competitions’ fares until the new demand levels have become apparent and the situation has stabilized.
overbooking strategyWhen overbooking far in advance to com-
pensate for cancellations and no shows, discount-ed fare classes are usually made available. When significantly decreasing capacity, there is a risk of insufficient seats remaining for higher yielding passengers booking later. Typically, overbooking on lower-capacity aircraft or lower-frequency routes, even as a percentage value, will decrease because there is less room for error. Following a capacity reduction, overbooking strategies and levels must be reviewed. The revenue management system will automatically adjust the overbooking levels, but the analyst needs to be aware of flights with potential for high-yield spill, look for up-sell opportu-nities and adjust the strategies (including maximum permissible levels) accordingly.
group ManagementIn times of capacity reductions, it becomes
ever more critical to maximize the profitability of group traffic. When capacity is at a surplus, group demand is often a way of filling empty seats, but in times of reduced availability, group traffic competes for space against individual passengers often con-tributing higher revenue. Recommending alternate routings at a competitive price to a destination city that is in close proximity to the requested destination city can retain group demand in the airline network and prevent loss of market share. Decision support to recommend a group fare can ensure each group accept/reject decision is based on an accurate demand forecast for individual passengers.
While capacity cuts are inevitable and quite necessary for many carriers around the world, those implementing strategic revenue manage-ment and pricing practices are in a stronger position to make up revenue from the lost seats and come away with a much healthier bottom line. a
Lindsay Millward is a revenue management product marketing lead for Sabre Airline
Solutions®. She can be contacted at [email protected].
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In times of reduced demand, there are several factors an airline must consider such as reducing aircraft size, cancelling a flight or cancelling a route.
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Photo by shutterstock.com
Low-cost carriers from all corners of the world are incorporating characteristics from the traditional airline model, such as codeshare agreements and frequent flyer programs, to more effectively compete. And at the same time, established network carriers are stripping away some of their conventional attributes and implementing low-cost carrier strategies for the same reason.
The KISS Principle
By Lynne Clark | Ascend Staff
K ISS — or “Keep it simple, stupid”— is the empirical principle that most sys-tems will work best if they are kept
simple rather than made complex. It’s also the principle behind a business strategy that has made low-cost carriers pose a serious threat to traditional full-service airlines.
But in today’s economic environment of over capacity, fluctuating fuel prices and growing worldwide economic recession, even the most dedicated KISS advocates are acquiescing to a 21st-century spin on KISS — “Keep It Simple And Smart.” Smart meaning that many of today’s LCCs are straying from their no-frills roots by adopting some strategies typical of network carriers such as offering frequent flyer programs and entering into codeshare and interline agreements as well as joining other types of alliances. These alliances are possible, in part, to nimble new technologies that accommodate changing business models.
love And KIssAfter nearly 40 years of uninter-
rupted profit making, Southwest Airlines, the world’s most successful proponent of KISS, introduced complexity into its busi-ness model when it announced last year two new codeshare agreements. In June, the Dallas Love Field-based carrier announced an agreement with Canadian low-cost car-rier WestJet to codeshare on cross-border flights beginning late this year. In November, it announced plans to enter a codeshare agreement with Mexican airline Volaris. Under both new agreements, Southwest’s Web site will become a distribution channel for existing WestJet and Volaris flights. In addition, the carriers most likely will coop-erate on frequent flyer programs, ground handling and cargo.
Analysts say the moves make sense. While Southwest Airlines has long domi-nated the low-cost field, economic pressure is forcing changes previously not considered including wide-ranging cuts to its workforce and expansion beyond its tried-and-true for-mula of point-to-point service and simple fare structures.
“We are continuing to look for ways to expand our network through interna-tional codeshare partnerships, and we are excited to team up with Volaris to offer our customers access to attractive Mexican des-tinations,” Bob Jordan, Southwest Airlines executive vice president of strategy and planning, said in a November press release. “Volaris has a stellar reputation for being a highly efficient airline with a dedication to customer service, which makes it a natural fit for Southwest Airlines.
“We recently announced our deci-sion to enter the international market with Canadian carrier WestJet, and we will con-tinue to work diligently to broaden our inter-national codeshare service even further,” Jordan said.
Commenting on the WestJet agree-ment, one industry blogger said, “This little agreement with an almost-unknown (out-side of Canada) airline and Southwest could be the beginning of a worldwide network of budget flights, which the flying public has overwhelmingly decided is the future of commercial aviation.”
Hybrids emerging to Keep It simple And smart
The drastic change in attitude toward codeshares at Southwest Airlines has cap-tured the attention of low-cost carriers worldwide, many of which have modeled themselves after Southwest Airlines, result-
ing in a new breed of hybrid carriers. These hybrids, according to a 2007 study by Sabre Airline Solutions®, are more numerous than traditional LCCs (see related article on page 23 of Ascend 2008 Issue No. 1 via www.sabreairlinesolutions.com). Of the 123 bud-get carriers the study examined, 59 per-cent offered products and services that strayed beyond the sphere of a pure low-cost model.
Adopted practices include interna-tional routes, using the global distribution system, codeshare agreements, connect-ing services, multiple fares available at any time, advanced ticketing procedures, multiple aircraft types, multiple classes of service, interline agreements and long-haul destinations.
Only 41 percent of the airlines studied remained pure LCCs, selling point-to-point routes on one-class travel, using simple fares, with no codeshare, on the same aircraft type.
The hybrid carriers are profitable and popular. In 2007, these airlines flew 64 percent of passengers looking for budget air travel.
The research identified easyJet, Germanwings, Norwegian Air Shuttle, bmibaby, KD Avia, Centralwings, Blue Panorama Airlines and Flybaboo as hybrid airlines now along with Southwest Airlines, jetBlue Airways, WestJet, AirTran Airways, Virgin Blue and GOL Linhas Aéreas Inteligentes.
The LCC segment is one of the most competitive in the airline industry, and this has spurred many pure LCCs to explore new ways of evolving their businesses to remain competitive and sustainable. For many, this has meant adopting some full-service car-rier business practices to help grow their
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passenger bases and expand their reach in the marketplace, although they have often added their own twist on how these busi-ness practices are implemented.
Blue Meets greenJetBlue Airways and Aer Lingus put a
twist on traditional codeshare agreements when they announced in 2007 “the world’s first tie up between two international low-cost carriers.” The innovative partnership is a Web-based alliance that enables Irish and U.S. customers to book a single reservation between Ireland and more than 40 continen-tal U.S. destinations, connecting through jetBlue Airways’ home base at New York’s John F. Kennedy International Airport.
When the tie up was announced, Aer Lingus and jetBlue Airways stressed their agreement did not go quite as far as traditional alliances because there was no codesharing deal to allow them to sell seats on one another’s planes as if they were their own. The partnership is also not an interline arrangement because there is no pro-rate agreement. Instead, the two carriers are simply combining their cheapest one-way Internet fares with each carrier receiving its portion of the ticket. The carriers trans-fer bags, something many low-cost carriers refuse to do, but they claim transfer costs are minimal because they operate at adja-cent terminals at JFK.
virgin Blue: 10 Alliances And counting
At its inception in 2000, Virgin Blue did not have interline or marketing alliances with any other airline. But after the collapse of its domestic competitor Ansett, the low-cost carrier began the first of many alliances by signing a codeshare agreement with United Airlines. The agreement allowed United Airlines’ customers to fly from the United States to any of Virgin Blue’s Australian des-tinations that United Airlines did not already serve.
In 2006, in an effort to be more com-petitive with rival Qantas Airways, Virgin Blue expanded cross-carrier relationships, forming frequent flyer agreements with Emirates, Hawaiian Airlines and Malaysia Airlines.
The same year, Virgin Blue announced a plan to operate up to seven flights a week to the United States using California’s Los Angeles International Airport or San Francisco International Airport, saying that the route was needed to make the airline as profitable as possible. After three years of negotiations between U.S. and Australian regulators, an open-skies agreement emerged giving Virgin Blue’s long-haul spin-off, V Australia, permis-sion for 10 flights a week between Sydney Airport and LAX, which the carrier began operating earlier this year.
Photos courtesy of Airbusin
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since 2002, virgin Blue has taken advantage of interline and codeshare agreements to expand its reach and more effectively compete. It first partnered with united Airlines, and most recently, it has entered into an interline arrangement with vietnam Airlines, bringing its codeshare and interline agreements to 10.
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In November 2007, Virgin Blue announced an interline deal with interna-tional carrier Garuda Indonesia, offering easy transfer from a domestic Virgin Blue flight to an international Garuda service departing from Australia’s Perth, Melbourne, Sydney or Darwin.
Most recently, Virgin Blue announced an interline agreement with Vietnam Airlines, which allows passengers to fly from Melbourne and Sydney to Ho Chi Minh City, Vietnam, then transfer easily to any of the 41 international and 18 domestic desti-nations served by Vietnam Airlines.
“This agreement with Vietnam Airlines brings the number of Virgin Blue codeshare and interline agreements to 10,” said Virgin Blue Chief Executive Officer Brett Godfrey. “It’s a significant new association as it means Virgin Blue guests will now have the option of convenient travel to one of Asia’s most interesting and popular destinations. We are pleased to be partnering with a reputable carrier such as Vietnam Airlines, to offer more choice for leisure and business travelers.”
AirAsia xAirAsia, Asia’s largest low-fare, no-
frills airline, pioneered low-cost traveling in the region. It was also the region’s first air-line to implement fully ticketless travel and unassigned seats. In January 2007, AirAsia further demonstrated its pioneer thinking when it affiliated with AirAsia X (previously known as FlyAsianXpress), a long-haul, low-cost carrier to cover destinations more than four hours in flight duration from Kuala Lumpur, Malaysia.
A series of strategic investor relation-ships has put AirAsia X on solid financial ground, allowing it to expand beyond its original Australian Gold Coast Airport des-tinations. The carrier has secured rights to land in China, Korea and west Asia, with future expansion plans that include India, the Middle East and Europe. Its European expansion was confirmed in December when executives announced the launch of direct service flights from Kuala Lumpur to London, which began in March and operates five times a week.
Network carriers respondWhile low-cost carriers are borrowing
some moves from network carrier play-books, network carriers are incorporating some low-cost carrier strategies themselves in hopes of remaining competitive.
“As we are in a recession that is becoming worse, there is going to be an impact on air travel,” said Bruce Zirinsky, a bankruptcy attorney who spoke to report-ers about the state of the industry last December. “There is already shrinking
demand and if that continues, it is fair to say we will see more consolidation.”
Lucrative business from international business travelers is forcing strong interna-tional alliances.
American Airlines lost its status as the world’s largest airline last year with the merger of Delta Air Lines and Northwest Airlines. An alliance by rivals United Airlines and Continental Airlines is putting additional pressure on American Airlines.
Airline economists predict other size-able U.S. airlines could possibly make head-lines with mergers this year including US Airways, Southwest Airlines, Northwest Airlines and jetBlue Airways.
Across the pond, merger mania and low-cost subsidiaries are taking off. British Airways is in talks with Iberia and has recently launched its own budget carrier. Last June, OpenSkies made its inaugural flight using a single Boeing 757 transferred from British Airways’ fleet. The flight dem-onstrated that British Airways was doing more than taking advantage of the recent E.U.-U.S. open-skies agreement. It was test-ing a new business model by applying the low-cost structure of a budget carrier to a more upscale product.
“Low cost doesn’t mean low fares,” British Airways Chief Executive Officer Willie Walsh told reporters. “There is a lower cost base, but it’s still a premium product.”
OpenSkies is unique in that it com-bines the perks of a traditional carrier — including oneworld membership, more legroom and electrical outlets — with slimmed-down staffing levels, fewer expensive benefits and a chance to sim-plify complex operating systems that are entrenched in flagship carriers. The idea is to attract budget-minded corporate travel-ers who don’t want to give up all of the amenities of the front cabin.
Iberia is another example of a net-work carrier adopting its own budget airline. In 2006, the Spanish flag carrier bought an 80 percent stake in Clickair where it directed all of its short-distance passengers, except those from its Madrid, Spain, hub. The airline has been success-ful, say experts, because of Clickair’s efforts to keep Iberia — and its network mentality — at arm’s length.
In January, the European Commission gave conditional clearance for closer ties between Iberia, Clickair and Barcelona, Spain-based Vueling. Vueling, named in 2006 among Europe’s best low-cost car-riers, started restructuring in 2007 to enhance profitability. Last July, Vueling and Clickair announced plans for a full merger to create a carrier better equipped to tackle stiff competition and high fuel costs.
Agreements And It requirementsFor an airline, regardless of its busi-
ness model or strategic partnerships, it is just as important to have robust computer systems as it is to have a modern fleet. Creating flight schedules, providing fare information, making reservations, offering electronic ticketing, effectively managing passenger check-in, changing a booking or giving credit for frequent flyer miles are impossible without sophisticated informa-tion technology.
Today, many airlines have their own IT systems that are unique to them, even though tasks are similar. However, when they act in concert, in an alliance, for example, the use of different hardware and software by individual member airlines poses major problems, mak-ing it time consuming, expensive and complex for them to achieve their common goals.
Regardless of the form an airline agree-ment takes — codeshare, alliance, interline or joint venture — decision makers should look for synergies in network, business and systems compatibility to avoid an historically dismal track record of past airline partnerships. Network and business compatibility evalua-tions are relatively simple when compared to the complexities of systems integration.
Philip Wang, principal management con-sultant for Sabre Airline Solutions, suggests that before airlines enter into an agreement, they should evaluate IT compatibility by analyz-ing four key operating systems: 1. Reservations and ticketing systems — Do
the systems enable free sell and interline e-ticketing?
2. Revenue accounting systems — Can they handle the type of interline billing settlement that both partners want to use?
3. Check-in systems — Does the check-in sys-tem handle interline through check-in?
4. Web sites — Do both airlines’ Web sites display, reserve and ticket codeshare flights and multi-leg interline itineraries on top travel portals and each partner Web site?
“Without this kind of system compatibil-ity, the partnership can become very costly in terms of investment and lost opportunity,” Wang said. a
Lynne Clark can be contacted at [email protected].
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Michael Embry | Ascend Contributor
Immense IntelligenceBusiness intelligence capabilities enable companies to determine a successful course, effectively respond to change and measure their success based on a mix of current and historic data.
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Enterprise business intelligence shows what’s going on in your business and helps plan business strategy, react
to changes and monitor success. During the course of business, you can only know what direction and how fast you’re going in relation to where you are and where you’ve been. That is a fundamental concept behind the use of business intelligence systems, which can be extremely beneficial to airlines that utilize them from providers specifically designed for the air transport industry (see related article on page 70). Even though BI incorporates a lot of technology, the busi-ness view of BI is most critical because if you don’t know what’s going on in your busi-ness, you may be going out of business.
As with any type of industry, busi-ness intelligence systems can be effectively applied to the travel and airline businesses. BI systems can help in many areas includ-ing cost control, revenue enhancement, customer engagement/satisfaction and marketing effectiveness. While transaction systems (online transaction processing) are needed to perform business functions and capture data from those transactions, BI is required to understand the context of the transactions and the effectiveness of busi-ness decisions as well as to provide insight into planning for the future.
So what exactly is business intel-ligence? According to Forrester Research, Inc., BI is a set of methodologies, pro-cesses, architectures and technologies that transform raw data into meaningful and useful information. And Gartner, Inc., breaks it down even further by separating BI into information delivery and analysis. Information delivery includes reporting, dashboards, ad hoc query and Microsoft Office automation. Analysis covers online analytical processing, advanced visualiza-tion, predictive analytics, data mining and scorecarding.
This list is indicative of the different aspects of BI. There are two primary cat-egories: reporting and analysis. Traditional BI tools have been used for reporting, which usually identifies what has happened in the past. For example, it is important to know how many passengers there were yester-day, last week and last month as well as how much revenue was generated. This can be expanded to compare the number of pas-sengers last month versus the same month the previous year. This type of reporting then generates further questions such as: Why would the number of passengers change last month versus the same month last year?
What were the frequent flyer demograph-ics of the passengers?
What were the advanced-purchase char-acteristics?
Do those demographics and characteris-tics differ based on the origin-and-desti-nation cities?
As these questions continue to arise, more in-depth analysis of the data is required, which leads to more data to analyze as well as different ways to analyze and view the information generated.
How Does It Work?Capturing data is the first key to an
effective business intelligence solution. The transaction systems used to run the busi-ness (shopping, point of sale, passenger check-in, etc.) provide data sources for BI systems. Data is usually collected in a data warehouse system using extract/transform/load, or ETL, processes. The transforma-tions are used to apply business rules to make the data more understandable from a business rather than technical perspec-tive. It is important that these data ware-house systems are on separate database infrastructures from the online transaction processing systems because of the differ-ent tuning, processing and data retention requirements. Using an enterprise data warehouse method (where all required data is collected in one system) provides the data management features required to provide “one version of the truth” for reporting and analysis. A representative list of DW vendors includes Oracle, IBM-DB2, Microsoft-SQL Server and Teradata. A new and interesting entrant into this DW space is data warehouse appliances, which includes Netezza, Greenplum Network, Microsoft-DATAllegro, Oracle and Teradata.
Business Intelligence toolsThe most commonly used data
reporting tool is Microsoft Excel, but since Excel is an independent desktop tool, it presents many deployment challenges, most of which can be overcome by using business intelligence tools specifically developed for data reporting and analysis. The BI tools (for example, SAP-Business Objects, IBM-Cognos, MicroStrategy, etc.), in conjunction with the DW system, can be architected to provide develop-ment, test and production environments where processes can be implemented to ensure information quality (completeness, consistency, accuracy and timeliness).
As can be surmised from Gartner’s classification of information delivery and analysis, more than one BI solution may be required to accommodate every busi-ness need. Even though one enterprise tool may be a goal, in many cases, this goal cannot be achieved because of pre-vious purchase decisions, business unit independence, cost restrictions or tool capabilities.
As a BI application expands to include many aspects of reporting, analysis, dash-boards, data visualization, etc., one ven-dor’s BI tools may not provide the “best in class” for all aspects of the requirements. However, trying to integrate and manage different tools from multiple vendors may be more than some companies are willing to attempt.
Two other options that exist for BI application development include newer open-source tools (such as Jaspersoft and Pentaho) and programmatic development (using Java, Visual Studio or other program-ming languages). Both of these alternatives to using traditional BI tool suites may require developers with different skill levels and different support requirements for man-aging the BI products.
the future of BIWhile many businesses are at the
early stages of adoption of traditional BI capabilities, others have begun to deploy more advanced methods as the BI indus-try and business requirements continue to develop. To understand your business, it is important to be able to report on what happened in the past and analyze why these things happened. BI reporting and analysis tools can provide these capabilities. However, being able to make reliable predic-tions of what will happen under certain busi-ness conditions and being able to influence the outcome of business/customer interac-tion is also an important capability that can be provided by certain BI processes such as data mining and predictive analytics.
New areas of investigation include operational BI and business performance management. Operational BI uses tradi-tional BI methods, concepts and tools to report and analyze near real-time data. This, of course, requires access to real-time data feeds that can require different data source and ETL methods. Business performance management is considered a next-gener-ation BI solution that integrates a broader scope of a company’s data, including sales transactions, human resource information, financial data and any other relevant busi-ness data.
The overriding point to consider for investment in business intelligence devel-opment is that BI processes are an integral part of business management, process improvement and business success. a
Michael Embry is business intelligence
architecture and development manager for Sabre Holdings®.
He can be contacted at [email protected].
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Network checkup
capital uplifting
saving the Pie
climate change
Hedging Your (Jet fuel) Bets
looking Back for tomorrow
Airlines must often evaluate their route network — determining when to add a new route, when to discontinue a route or when to change the frequency on a route. Following some basic guidelines is key to making sure the right markets are served at the right times.
An industry downturn has left many airlines struggling to raise capital in a credit-tight environ-ment, but three basic options exist for those that need capital.
Choosing the right coopera-tive agreements helps airlines compete without “getting their collective lunches eaten.”
Beginning in 2012, all airlines operating to Europe will be required to report CO2 emissions and will have emissions limits. Airlines need to prepare now to ensure they comply with the new legislation.
Many carriers exercised fuel hedging opportunities and came out on top during the last few years when oil prices shot through the roof. But those who hedged too far into the future are paying a pretty se-vere price today.
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Even in times of economic dif-ficulty, certain carriers seem to have a knack for making the best of their situations. And they set the bar high for everyone.
Survival Guide
SPECIAL SECTION
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NetworkCheckup
Airlines must often evaluate their route network — determining when to add a new route, when to discontinue a route or when to change the frequency on a route. Following some basic guidelines is key to making sure the right markets are served at the right times.
By Mark Hess and Kathy Turney | Ascend Contributors
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Airlines live and die by the strength of their network. Therefore, they need to relentlessly ensure that their routes
maintain an acceptable return for their invest-ment. With this in mind, airlines should always seek ways to strengthen their networks through the addition and deletion of routes as well as strong codeshare relationships.
Deciding which changes are beneficial can be very difficult, if not impossible, to determine completely. There are many factors that go into this type of decision and, unfor-tunately, many of the drivers are constantly changing. With such a huge economic impact on the airline, the decision to change service must be examined in detail with a process that is dynamic enough to stay ahead of the changes in the marketplace. Knowing this, the ever-important task remains in deciding how or when to change the network. Fortunately, there are some universal guidelines to follow when making network modifications.
Adding flightsThe goal to increase profits is usu-
ally dependent on the strength of the airline’s network. The question then arises, how does an airline identify flights to add and then judge if the flight is beneficial? There are several factors to consider before adding a flight. Before proceeding too far, the airline must verify that it has proper authority to add the flight. Restrictions exist between most countries limiting new service into a country and, depending on the location, domestic restrictions may exist as well. In addition, an airport may have its own constraints such as slots or heavy congestion that may influence a new route opportunity. However, the question remains, assuming the authority exists and the airport can support the new service, how are opportunities identified and then measured for profitability?
One of the more common ways to iden-tify opportunities is through the use of market-ing information data tapes, or MIDT, which will identify how traffic has historically flowed between origins and destinations. Additionally, it allows the comparison of month-over-month and year-over-year data to establish trends. When using MIDT data, an airline should keep in mind that the data is based on bookings not actual flown passengers. Many airlines have processes in place to adjust the booking data to an estimation of traffic data by incor-porating other data sources into the process. When using MIDT data, it is also helpful to pair the nonstop capacity with the origin and destination. This gives a feel for the traffic in the market as well as for the capacity in the nonstop market. Markets with far more traffic than nonstop capacity are likely to be good opportunities.
If a carrier does not have access to MIDT, there are other ways to help identify opportuni-
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ties. First, using the airline’s own historical data to identify trends in the market can give valuable insight. If single-plane service to a point via another point exists and the beyond point has been growing, then perhaps the beyond point now warrants its own nonstop service. Additionally, airlines often have intelligence from their sales organizations of opportunities. While this insight is extremely helpful, they should beware that the sales manager may be a little too optimistic about opportunities in their own region and certainly other groups within the airline should give input on the opportunity. Another external data source that can often be free or inexpensive to obtain is population and census data for given cities. While a growing population can indicate opportunities, it is often more relevant to look at non-agricultural busi-ness growth — the type of business that funds lucrative business passengers.
Often, opportunities exist between link-ing the airline’s network with codeshare part-ners’ networks. This usually increases traffic for both airlines. Additionally, having partners as well as the airline’s internal sales force trying to sell seats usually ensures a higher success rate.
Also, airlines should consider infrastruc-ture that may allow unique opportunities that competitors find difficult to match. Obviously, one of the recent changes in the industry is the performance of aircraft. With newer-generation aircraft, markets that previously suffered with-out nonstop service due to stage length are now within range of new airplanes.
After identifying an opportunity, the potential new service needs to be evaluated for profitability. Hence, the opportunity needs to be forecast. If the airline owns a forecasting tool, such as the Sabre® AirFlite™ Profit Manager, then this is an easy task to perform. However,
even if a sophisticated forecasting model is not owned, there are still ways to judge the potential of a market. One way is to calculate the seat share in the new market and use that as an indicator of potential load factor. With this method, an airline should consider the type of service offered against the competitor along with fare implications to understand if this seat share needs to be adjusted to represent the market share realistically. With a low seat share, it will be difficult to capture significant traffic, especially with the S-curve (providing limited service in a market) working against the airline. Additionally, new markets typically have a “ramp-up” period. If a forecast predicts a 73 percent load factor, it may take the flight three to six months, or longer, to reach this level as the flight is being established.
As new markets are evaluated, airlines should consider the corporate strategy. All too often, a company will enter a market that fore-casts profitably but goes against the corporate strategy. Years later, these companies tend to drop out of the market after coping with the unanticipated repercussions of these types of markets.
removing flightsBefore discussing canceling flights,
a quick definition of key finance terms is appropriate: Variable operating costs, or VOC, refer to strict costs driven solely by flying the plane (for example, fuel, catering, etc.).
Direct operating costs, or DOC, are VOC plus aircraft lease payments or depreciation.
Fully allocated costs, or FAC, are DOC plus all other costs not accounted for in DOC (overhead, administrative costs, etc.).
When considering deleting flights from the network, there needs to be a clear under-
standing on what will be done with the aircraft if it no longer operates a particular flight. Are there new or better opportunities where the aircraft can be deployed? Is there an option to return or sell aircraft? Is parking the airplane the best or only alternative if a flight is can-celled? Having this overall understanding will help assist the analyst in weighing out the many factors that will determine if a flight or route needs to be eliminated.
In general, all routes should be covering their VOC for the long term or the airline may be better off simply grounding the aircraft. There will be instances, such as fare sales and seasonality, where the flight might lose money on a VOC basis; however, this should only be a short-term condition unless there is a reason to allow the flight to operate with a negative VOC. In some cases, the flight might lose on a VOC basis but make significant contribution to the network, resulting in an overall positive net-work effect. An airline might choose to operate a flight that is below the VOC threshold for defensive measures (discourage competition from encroaching); however, caution should be used to measure the actual benefit of delaying (probably not preventing) competition from
entering the defending airleriine’s€ territory when there is a consistent negative VOC.
If an airline has the ability to dispose of an aircraft (either return it to the lessor or sell the unit), then each route should pass the DOC threshold in addition to the VOC threshold to maintain its place in the network. Again, this should be measured on a long-term rather than short-term basis, taking into account strategic positioning and future growth as well as total network contribution. It is important to monitor any cancellations of flights that other airlines may invoke as well, especially
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When examining a flight for cancellation, it is important to understand how revenue is allocated to the routes and how much will be retained with the cancellation.
FCO-MAD Segment
MAD-LIS Segment
Total
Itinerary Fare Segment Contribution System Contribution
Segment And System Revenue Contribution For Set Passengers
Local Passenger
Connecting Passenger
FCO-MAD
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€1,200
€1,200
€500
€750 €1,200
€1,200€450
€1,700 €2,900
€500
Connecting Passenger
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codeshare partners. Other airline cancellations could decrease or increase traffic to an airline’s network, therefore, it’s critical that the airline understands from where its connecting traffic is coming.
Another consideration in analyzing routes is to understand the segment revenue as well as the revenue contribution the route makes to the rest of the network. When discussing pas-senger revenue, two categories are generally used: segment revenue or system revenue. For example, a passenger who travels from Rome, Italy, to Lisbon, Portugal, via Madrid, Spain, contributes revenue to both the Rome-Madrid segment as well as the Madrid-Lisbon segment while a local passenger from Rome-Madrid will only contribute directly to the Rome-Madrid segment.
Using this example, assume a pas-senger is traveling Rome-Madrid on a €500 fare and another passenger is traveling Rome-Madrid-Lisbon on a €1,200 fare, with €750 of the fare being allocated to the Rome-Madrid portion and the remaining €450 allocated to the Madrid-Lisbon portion. The segment revenue for Rome-Madrid would be €1,250 (€500 from the local passenger plus €750 from the Rome-Madrid-Lisbon passenger). The system revenue for the Rome-Madrid market requires adding the beyond revenue (€450 in this example) to the segment revenue giving €1,700 system revenue contribution from the Rome-Madrid segment. If a flight is being can-celed, its segment revenue will certainly disap-pear (€1,250 in this case). More than likely, the system revenue (€1,700) will also be lost unless the airline has sufficient capacity and schedules to recapture the Rome-Lisbon pas-sengers via other services. For the connect-ing Rome-Madrid-Lisbon passenger who pays €1,200, the system revenue will be €1,200 for both the Rome-Madrid segment as well as the Madrid-Lisbon segment. While accountants do not like the use of system revenue, arguing that it is double counting, it is important for the analyst to understand the segment revenue as well as the total system revenue a segment or flight will contribute. This can help justify the cancellation or protection of a flight or route in the network.
When a route is being considered for cancellation, it is extremely helpful to measure the network effect with and without the flight or route in place. Profit Manager enables an airline to simulate the performance before and after the cancellation. It is important to understand that in addition to the local market that may be lost, there may be other markets that will be lost as well. Using a forecasting model, it is easy to determine how many over-all markets as well as passengers are lost and how many can be recaptured on the network via other gateways or codeshare partners. If a flight is cancelled that provides significant feed to the airline’s network and cannot be
recaptured by the airline, the overall impact of the cancellation may not be beneficial to the airline even if it is losing on a VOC basis. In any case, the airline has to have a full picture of the connecting passengers who may be lost by cancelling a flight. In addition, for carriers with codeshare partners, it is important to understand the impact of the cancellation on the codeshare relationship as well.
With a forecasting model in place, the analyst can measure the amount of traffic that might be recaptured on the network or through the partner’s network prior to the cancellation.
While it would be ideal if most of the flights covered their fully allocated costs, this is rarely the case. In general, airlines will have flights at all different profitability levels. However, the network must contain enough routes that are profitable on a fully allocated basis to cover all the airline’s expenses.
If a route is identified as a candidate for cancellation, airlines should not rush to remove the service before fully understanding, and hopefully fixing, the situation. If a flight is losing money on a VOC basis, carriers should strive to improve it through alternative avenues such as revenue management strategies, sales initiatives and codeshare agreements. If a flight covers its VOC, the airline should not be satisfied. Rather, it should desperately search for ways to cover the flights DOC.
Adjusting frequencyIn most cases, the goal would be to
offer daily service in a given market. There are certain times, however, that this does not hold true. If the airline’s traffic base is constrained, for example, based on an island where growth is limited or in an area with a limited popula-tion that travels, the market may not be large enough to support daily service. Another
example is niche markets. Perhaps an airline offers weekend service to a tourist destination that does not require or warrant daily service. However, if the airline targets business traffic, the goal should be to have daily service or, if less than daily, at least at similar levels as its competition.
An important principle, the S-curve, comes into play when an airline offers sparse service in a market. One might expect that as the airline adds frequency, its traffic share increases proportionally. In this case, if an airline has 10 percent of the flights in a market, it may expect 10 percent of the traffic, but this is not the case. The S-curve, named for its S-like shape, demonstrates that if a carrier has fewer frequencies in a market than its competitors, it gets less than its fair share of the traffic. Conversely, if a carrier has an advantage over its competition in frequencies in a market, it will get a disproportionate amount of traffic. Hence, frequency becomes an issue in most markets and why an airline should strive for daily service. If an airline is going to operate with less-than-daily service, it is important to analyze the competitions’ nonstop service and remain at competitive frequency levels. It is also essential to note that while the S-curve is a crucial tool, there are exceptions. Studies have indicated that the S-curve effect can be altered with the presence of a low-cost carrier in the market.
There is an old saying that “you can’t fix what you don’t know is broken.” This is particularly true for airlines when analyzing their network. They need to constantly monitor routes against historical performance as well as expected performance. It is all too easy for a competitor to “slip” into a market and steal share before an airline realizes it. This is espe-cially true in connecting markets. Markets, as well as individual routes, should be examined on a weekly basis by many areas such as net-work, scheduling, revenue management and sales. All groups have important insight on the overall performance of routes as well as new opportunities. It is only when all these groups work in unison that those optimal results can be achieved.
While the surface has just been scratched on evaluating network changes, airlines should use this foundation of general knowledge when evaluating optimal network performance. a
Mark Hess is delivery manager and Kathy Turney is a senior consultant
for Sabre Airline Solutions®. They can be contacted at [email protected] and [email protected].
... airlines should always seek ways to strengthen their networks through the addition and deletion of routes as well as strong codeshare relationships.
HiGHlight
An industry downturn has left many airlines struggling to raise capital in a credit-tight environment, but three basic options exist for those that need capital.
Capital Uplifting
By Shane Batt | Ascend Contributor
October 2007 was the last month when the global economy was growing. Because the airline industry is the first to notice a down-
turn, it has just completed one of the most difficult calendar years in history of commercial aviation.
Last year, the aviation industry suffered dur-ing the first two-thirds of the year from skyrocketing fuel prices, only to succumb to a sharp reduction in demand as soon as fuel prices began to ease. Now, airline executives increasingly worry about capital availability and its effect on the survival — not just the growth — of their companies.
During these times of uncertainty, there are things airlines can do to raise capital to secure their future, but first it’s necessary to examine the financial crisis and its effect on commercial aviation as well as the ways in which airlines are raising capital under the new financial reality. To begin this examination, it is first necessary to look back at the relatively happy days of 2007.
In retrospect, and despite severe structural difficulties, 2007 was a better year for commercial aviation than most years. Fuel prices were high, but crude oil prices had not yet passed US$100 a barrel, as they did last year, and the average jet fuel price for 2007 was less than US$75 a barrel. Share prices were high, and there was substantial investment interest in the aviation sector from a wide variety of sources.
2007 will be remembered (among other ways) as the year in which private equity made many inroads into the aviation sector. Because airlines were attractive to investors, banks also courted airlines by providing a high availability of credit facilities. At one point during 2007, a govern-ment-owned airline that had never published profits attracted bids for privatization that were more than 60 times the airline’s earnings before interest, taxa-tion, depreciation and amortization, or EBITDA.
By comparison today, airlines are attracting on average four to five times EBITDA for privatiza-tion, but only if they have a history of profitability. During 2007, capital was substantially available from a variety of sources, and airlines employed these sources to go on an aircraft shopping spree.
the collapse of several major financial institutions last year, including Northern rock, had a large impact on airlines’, whose asset values rapidly dropped, and they began to look less attractive for new credit or extensions of existing credit.
Photo courtesy shutterstock.com
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Boeing achieved record sales of 1,413 aircraft during 2007, and Airbus was just behind in record new sales with 1,364 aircraft. This was more than 800 aircraft higher than the combined (Boeing plus Airbus) orders for new aircraft in 2006, the previous record year, and about 1,600 more aircraft orders than the average sales year this decade.
Massive orders for aircraft were agreed upon by China, India, the Middle East and South American airlines. Additionally, future delivery slots for aircraft were valuable, so credit was read-ily available from financial institutions to fund the manufacturer-required pre-delivery payments, or PDPs. While the manufacturers provided substan-tial discounts on new aircraft in consideration of the vast individual orders, PDP percentages were paid off the list price of aircraft. For example, if an aircraft’s list price was US$100 million, it might be sold for as low as US$60 million as part of a bulk purchase. Nevertheless, the PDPs of around 40 percent needed to be paid on the list price so air-lines would need to find US$40 million to cover the PDPs of that single unit instead of US$24 million.
Despite the huge capital commitments that were being agreed upon, airlines purchased aircraft with confidence because capital was widely avail-able. By the end of 2007, however, early signs of trouble in the capital markets arose. Late that year, there were concerns about the stability of over-extended banks. In August 2007, BNP Paribas, the largest bank in France, discontinued three investment funds it had set up based on selling mortgage debt from U.S. mortgage lenders. The BNP Paribas funds had invested in collateralized debt obligations, or CDOs, which are complex financial instruments designed to take advantage of high-asset growth rates that produce increasing equity for asset owners.
Simply put, mortgage companies in the United States and United Kingdom were increas-ingly offering credit-debt swaps that allowed mort-gage holders to trade equity in their homes for credit facilities they could use to pay off credit cards or finance other lifestyle improvements. These credit-debt swaps, along with new mortgages and other debt facilities, were then put into structured CDOs that, in theory, had a very low default rate. In fact, the default rates of the CDOs were so low that the default rates could only be predicted. There was no actual data on the default rate for CDOs. Financial institutions throughout the world invested in these high-yielding CDOs believing that their default rate was very low.
Then, in mid-September 2007, there was a bank run on Northern Rock, the fifth-largest mortgage lender in the United Kingdom. Collapse of Northern Rock was only narrowly averted by the end of 2007 through injections of funds by the Bank of England. Equity markets around the world began a downturn as concerns over bank liquidity began to surface. The downturn was just begin-ning, however.
Then 2008 dawned with increasingly bad financial news. Stock markets around the world began to see downturns and struggling banks
began to fail. Defaults of CDOs provided real data on the default rate, and banks soon found that their exposure with these facilities was very significant. Banks have governance rules that do not allow them to risk high levels of exposure on bad debts. Unfortunately, investments in CDOs greatly increased the exposure of banks and, when it became clear that the default rate was much higher than expected on CDOs, banks had to immediately curtail providing new loans until they could reduce their exposure.
Last year, several major banks failed includ-ing Northern Rock, Bear Stearns, Washington Mutual, IndyMac, First Integrity Bank, ANB Financial, Hume Bank, Douglas National Bank, First Heritage Bank and First National Bank
of Nevada. Many more large banks, such as Citibank, Morgan Stanley, Barclays Bank, Bradford and Bingley, HBOS, Royal Bank of Scotland and Corus Financial, required huge bailouts to keep from collapsing. The U.S. Government promised US$700 billion in bank bailouts and even began to distribute these funds.
Airlines were caught in the middle of this increasingly deep banking crisis. First, asset values dropped rapidly, and this meant that their balance sheets suffered, and airlines began to look less attractive for new credit or even the extension of existing credit lines. Banks that had tightened their credit policies in light of the CDO impact found that their liquidity was greatly affected. The poor liquidity in the financial system meant that many existing revolving credit facilities could not be serviced. All of this occurred at a time when airlines needed cash the most.
At the same time, crude oil prices hit a record US$147 a barrel last July, meaning that JetKero was selling for more than US$220 a bar-rel. Airlines needed to protect themselves with
fuel and currency hedging, but capital availability became increasingly restrictive just as those PDPs began to come due. As a result, more than 30 airlines failed worldwide last year.
Typically, airlines do not fail due to losses of profit; they fail because of an absence of cash to pay their obligations. By the end of 2008, it became clear that the world was in a global financial crisis, and demand for air travel plummeted as both individual consumers and companies cut back on travel to save on expenses. As airlines stumbled into 2009, the full impact of the financial crisis was beginning to be factored in the real economy as companies worldwide began massive layoffs.
So during the first quarter of the year, airlines find themselves in a precarious situation. First, there are virtually no credit facilities available to airlines under the current financial conditions. Airlines with very strong cash equity are still able to acquire credit, but these carriers are limited to a few fairly elite examples. Reduced demand for air travel that was increasingly apparent during the first quarter of 2009 is further putting pressure on cash management by airlines. Quite simply, most airlines lack cash. Furthermore, all of the purchases made in 2007 require PDP payments during 2009, and many airlines don’t have the capital to pay these obligations.
The manufacturers, which had all increased production quotas, are beginning to see order cancellations because the airlines cannot pay their PDPs. Order cancellations and deferrals are expected to increase through the year. Therefore, the manufacturers will be required to slow produc-tion and reduce the number of planned deliveries for this year and into next year. This reduction in production quotas will be reflected in layoffs by the largest manufacturers, which will further exacer-bate the financial crisis.
To survive and also address their obligations, airlines desperately need to raise capital. How does an airline raise capital, however, under these cur-rent financial circumstances? They have three basic options for raising capital under the new financial reality that is expected to continue for some time, including: Equity injections — Take on additional owners or
obtain more funds from existing owners, Debt facilities — Take on additional debt in ways
that solve the airline’s capital requirements with-out increasing its survival risks,
Asset liquidation — Existing assets of airlines can be liquidated to increase cash availability.
Each of these methods of raising capital produces its own opportunities and challenges.
equity InjectionsEquity injections are increasingly becoming
the preferred choice of airlines to raise capital under the current financial crisis. Earlier this year, Qantas Airways and SAS Scandinavian Airlines announced their intentions to perform a “rights issue” to increase their common shares. Many companies retain the right from their owners to issue additional shares — up to an agreed upon percentage of the
Airlines that own their aircraft, facilities and other assets are more attractive to financial institutions because they have real assets that might be attached by the lenders in the event of default.
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outstanding existing shares — to address their immediate capital requirements. Essentially, the owners have pre-granted the right to the airlines to dilute the owners’ percentage of ownership to solicit additional investors that will bring in much-needed capital. While this looks like a good way of raising capital, it is also fraught with risk.
For example, Qantas Airways had to suspend trading of its shares in advance of announcing its rights issue due to rapidly declining share values (shares fell more than 10 percent over two consecutive trading days). Investors became aware of rumors that the carrier would be making its rights issue to financial investors at US$2 a share — a substantial reduction over the then-selling price. Qantas Airways made the rights issue to the financial institutions at the lower price to quickly raise necessary capital, but its existing shareholders felt that their own share value would drop under these conditions and, therefore, decided to sell before the rights issue could be announced. This produced the requirement to suspend share trading, which further undermines investor confidence.
A different way of obtaining capital through equity is to court private equity where a public company can actively look for private equity and then take the company “private” by de-listing it from its associated stock exchange. While there is much less private equity available in the marketplace compared to 2007, there is still availability — especially from Sovereign Funds set up by the richest oil-producing states that made massive profits during 2007 and 2008.
The problem with private equity, how-ever, is that it often violates foreign owner-ship maximums. Aeroflot Russian Airlines recently announced that it is interested in investing in CSA, the Czech national airline. European Union regulations, however, only allow a maximum of 49 percent ownership by non-European owners. So, a private equity investor who would like to invest in an airline has to consider ownership restrictions and control issues before making investments that can, especially under the current finan-cial conditions, be considered risky. While increasing cash equity is a popular way of addressing an airline’s capital requirements, these types of transactions should be care-fully considered.
Debt facilitiesThe second method of raising capital
is through debt facilities, which can include taking on additional loans or through the issu-ance of corporate bonds. Most airlines have a very difficult time today convincing banks to increase their credit facilities. This is not true, however, in some cases. Many banks are still interested in lending to airlines that show sub-stantial credit worthiness. One of the ways of
demonstrating credit worthiness is to have a low debt/equity ratio because the airline is asset rich. Airlines that own their aircraft, facilities and other assets are more attractive to financial institutions because they have real assets that might be attached by the lenders in the event of default.
Similarly, some airlines can obtain sov-ereign guarantees from their government owners that will back the loans. Sovereign guarantees are often even better than assets to attract loans from financial institutions. Corporate bonds are a fall-back approach to raising capital through debt facilities. When an airline issues corporate bonds, it is essentially going to investors instead of banks to obtain a loan. The airline must provide an extremely attractive interest rate to the purchasers of the corporate bonds, or the investors would not be attracted. This means that the cost of corporate bonds for airlines is probably greater than other types of loans.
There is also the matter of collateral associated with corporate bonds. To attract substantial funds through corporate bonds today, airlines have to provide substantial security. This means that the bonds have to be backed by assets that can be easily liquidated in the event of default or the bonds need to be “convertible” into equity. That is, airlines can sell “convertible bonds” that, under certain circumstances (such as default), can be converted into an equity ownership in the business. Despite the high cost of corpo-rate bonds to airlines, it is expected that this form of raising capital will be popular this year because of the credit crunch affecting banks that traditionally provide loans to the aviation sector.
Asset liquidation
The final method of raising capital under the current economic climate is through asset liquidation, where an airline essentially con-verts an asset into cash to fund its ongoing capital requirements. Airlines that own their aircraft can sell them to a leasing com-pany and then lease back the same aircraft after receiving the cash value from the sale. Similarly, airlines can sell buildings, slots, non-core businesses and other assets to raise capital. Many carriers selected leasing instead of purchasing of aircraft throughout the last decade, meaning airlines don’t have aircraft to sell and lease back.
Increasingly, therefore, airlines are sell-ing other assets such as their headquarter buildings, hangars and similar “hard” assets to fund their cash requirements. Similarly, airlines are liquidating non-core businesses. For example, airlines are selling their main-tenance facilities, catering facilities, airport ground handling companies and even distribu-tion companies to generate cash resources. Ultimately, the sale of assets can reduce
the value of the airline’s balance sheet and may make the airline even less attractive to lenders in the future. Furthermore, assets today have a lower value than in many years. Because there is a lack of liquidity, assets are selling for rates that are much below their notional value. So, an airline that liquidates assets today may, in fact, be selling these assets for very little compared to their intrin-sic value. This means that asset liquidation is pretty much the last resort for most airlines for raising capital. Nonetheless, as airlines “go to the wall,” they will increasingly sell assets throughout 2009 to fund their immedi-ate capital needs.
The industry outlook for capital-hungry airlines doesn’t appear to look very promising. The current economic crisis, which airlines can’t control, is affecting capital availability, and airlines are struggling to meet their obli-gations. There is some good news inherent in this situation, however.
First, the carriers that restructure to become leaner organizations will solve many of their long-term structural issues and ensure that their unit costs are low enough to com-pete effectively. The survivors are going to be much stronger and more resilient than what is currently observed throughout the industry. The survivors will arise from this financial quagmire stronger, more profitable and better able to weather future economic downturns. More importantly, however, these survivors won’t have to wait very long.
Airlines are the first businesses to feel the impact of an economic downturn. They are also, however, the first businesses to improve and lead the way out of a recession. This is because airlines are an economic enabler. Companies that have tightened all discretionary costs then have to turn to their revenue performance. To increase their reve-nues, most businesses have to travel to meet existing and new clients. Therefore, travel picks up ahead of most other industries.
In the past, airlines have typically dem-onstrated recovery two calendar quarters before most other business sectors. Renewed growth in the aviation sector will allow more capital availability to airlines, which will then further stimulate the recovery of the real economy. While this will be another challeng-ing year, airlines worldwide will likely experi-ence relief from this financial crisis by the end the year. a
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Choosing the right cooperative agreements helps airlines compete without “getting their collective lunches eaten.”
By Lynne Clark, Ascend Staff and Thomas Bertram and Philip Wang, Ascend Contributors
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In their book, “Co-Opetition,” authors Adam Brandenburger and Barry Nalebuff say co-opetition “explains how to com-
pete without destroying the pie and how to cooperate without getting your lunch eaten.”
It’s fair to say that since the dawn of the 21st century, economic conditions have nibbled away at the pie known as the airline industry. From 2001 to 2005, network carriers lost more than US$33 billion, while four of them entered and exited bankruptcy. More recently, in 2006 and 2007, the airline industry returned to modest profitability only to confront rapidly increasing fuel costs and renewed losses last year.
The recent economic downturn and the long-term downward trend in fares create a challenging environment for revenue genera-tion that has even affected previously immune low-cost carriers. In January, Southwest Airlines reported a net loss of US$56 million, compared with a profit of US$111 million a year earlier.
Macroeconomic troubles — such as the recent tightening credit market and housing slump — have generally served as early indi-cators of reduced airline passenger demand. These are the challenges that have spurred a wave of airline partnership agreements with one objective in mind — to achieve sustain-able profitability without partner entities get-ting their collective lunches eaten.
Sustained profitability depends on a carrier’s ability to increase revenues and reduce costs. And one of the most effective ways to increase revenue and reduce cost is cooperation with other carriers. Cooperation among airlines comes in many forms, and the benefits include: Network expansion with minimal or small resource investment,
Increased airline presence in regions not located in their home market,
Incremental revenue support for specific markets that cannot be profitably served by the airline alone,
Higher volume interline sales through shared Internet and open-systems oppor-tunities,
Preferential screen display through global distribution systems and Internet chan-nels,
Reduced network costs by higher utiliza-tion of resources,
Increased passenger loyalty.
complexity Drives Partnership typeAirline partnerships are defined by their
degree of complexity, cohesiveness, potential benefits and strategic impacts. An interline ticketing agreement can be a multilateral or special proration agreement, depending on whether the International Air Transport
Association standard proration or special pro-ration is used.
Even though frequent flyer program cooperation is often agreed to along with codeshare or alliance agreements, carriers sometimes enter into this kind of partnership without a codeshare or alliance program in place. Codeshare agreements come in many different types including block seats, free sale or tactical-level joint ventures. The alliance can be regional or global. A joint venture is the highest level of inter-airline partnership in terms of cohesiveness but not necessarily in scale and complexity compared to entering a large global alliance.
Carriers must have well-defined pri-orities before deciding the type of agreement that matches the outcome they most desire. Agreements are either tactical or strategic and accomplish different goals including: Maximizing profit, Maximizing revenue, Maximizing growth, Minimizing cost,
Minimizing implementation efforts and investment.
Generally, tactical types of partnerships generate quicker results but have smaller impacts with less effort. Strategic partner-ships have larger and more long-term impacts. But the implementation of strategic partner-ships takes longer to implement, requires more capital and effort, and poses bigger challenges and risks.
For example, if an airline’s top priority is to maximize profits quickly, joining a global alliance may not be the best choice. Instead, the airline should consider implementing a partial network codeshare with separate air-lines that target underperforming sectors.
In deciding potential partners, airlines will use industry data, such as market infor-mation data tapes, and decision-support tools, such as the Sabre® AirFlite™ Profit Manager, to estimate the effect of linking up with dif-ferent carriers. It is impossible to forecast the profitability of a comprehensive codeshare using a spreadsheet or simple forecasting tool.
Airline partnerships are defined by their degree of complexity, cohesiveness, potential benefits and strategic impacts. Interline ticketing agreements represent the simplest level of cooperation, and joint ventures are the most cohesive and complicated. Mergers, combining two entities into one, are beyond the scope of cooperation.
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compatibility considerationsOnce the potential partnership type
is identified, airlines should examine how well they will work in conjunction with one another. Three key areas for evaluation include:1. Network compatibility, 2. Business compatibility,3. System compatibility.
To examine these issues, decision makers should evaluate potential partners by asking several questions in each of the key areas:
Network compatibility Coverage — Will the partnership enlarge market reach to meet the demand?
Connectivity — How well will flights con-nect at hubs of all partners?
Capacity share — Will the joint capacity dominate the local trunk market?
Business compatibility Service levels and branding — If the part-ner is a low-cost carrier, does its services match those of a premium carrier or vice versa?
Corporate culture — How entrenched is the culture, and how easily will it accom-modate a partners culture?
Products — What cabin classes, in-flight services and frequent flyer programs does the potential partner offer?
Financial stability — Is the airline willing to take on a troubled partner? What will it cost?
system compatibility Reservations and ticketing systems — Does the partner system enable free sell and interline e-ticketing?
Revenue accounting system — Can the potential partner handle the type of inter-line billing system the operating carrier handles?
Check-in systems — Can the potential partner handle interline through check-in?
Web sites — Does the partner system have the ability to display, reserve and ticket codeshare flights and multi-leg interline itineraries in top travel portals and partner Web sites?
When integrating information tech-nology systems with other carriers, the key is to use the right systems that work well and directly impact the customer. The primary integration point is with the pas-senger services systems. A reservation made by a marketing airline must be pres-ent in the inventory from the operating car-rier’s system. Items such as frequent flyer traveler numbers, seat assignments and special service requests need to be pres-ent and synchronized in both the operating
and marketing carriers’ systems. The best method for doing this is using one of the four industry standard codeshare options that have been developed for electronic communication between airline reserva-tions systems. The other best practice from a customer perspective is frequent traveler miles. Best practice is to consistently send data feeds to and from loyalty systems.
Newer and more open systems also help attract partners because the imple-mentation will be easier, faster and less expensive. These types of systems also often mean more sales opportunities and better customer service.
revenue sharingOnce a potential partner is analyzed,
it should be determined how revenue will be shared. Rather than using the standard IATA prorate methodology, most airlines in a codeshare arrangement will create a
special prorate agreement with their part-ner carrier. This enables more flexibility in determining how the revenue will be split among partners. An analysis of an SPA should take into account the potential new traffic from the codeshare and the potential displacement of passengers and/or revenue on the existing flights.
The key to success in setting up an SPA is that there is fairness and balance. An airline needs to balance the potential revenue displacement of carrying a code-share passenger in a busy market with the additional opportunity of adding an additional codeshare passenger in a more lightly traveled market. In short, SPAs need to be beneficial to both partners.
Once the SPA has been finalized, the next step is to determine how the booking
classes will be aligned between the carri-ers. Each operating carrier is responsible for managing its own inventory, so when the marketing carrier requests a seat on the operating carrier, the operating carrier needs to know how to tell the marketing carrier if the seat is available or not.
The process is handled using trans-lation tables set up in the reservations system. Each operating carrier reviews the prorate agreement to determine where it will point the marketing carrier’s booking classes to its own. Ideally, the revenue received by the operating carrier in a book-ing class from the codeshare passenger should be the same as the revenue the operating carrier would expect from its own customers.
effect on the traveling PublicGenerally, airline agreements have
a positive impact on the traveling public. Passengers have more choices of flights and itineraries to reach the same des-tination. If the partnership does its job, travelers will find a seamless integration between carriers from booking to check-in to post-flight services.
While partnerships get the kinks out, however, travelers may be confused by dif-ferent flight numbers for the same flights displayed on airport screens and heard in announcements. In addition, frequent flyer numbers may not be automatically credited by partners, and passengers may have to manually fax the document to partner airlines.
However, airline executives are bet-ting that customers will endure the short-term hardships when they realize the result will be far more travel choices within an alliance than they would have with an indi-vidual airline.
It’s the travel choices that will ulti-mately drive more brand loyalty to both the airline and the alliance. a
It’s fair to say that since the dawn of the 21st century, economic conditions have nibbled away at the pie known as the airline industry.
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Lynne Clark can be contacted at [email protected].
Thomas Bertram and Philip Wang are consultants for Sabre Airline
Solutions®. They can be contacted at [email protected]
and [email protected].
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CLIMATECHANGEBeginning in 2012, all airlines operating to Europe will be required to report CO2 emissions and will have emissions limits. Airlines need to prepare now to ensure they comply with the new legislation.
By Peter Berdy | Ascend Contributor
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The alarm of global warming and climate change has taken a top spot on the European Union’s agenda for several years.
The challenge has been heightened further by the need to upgrade the European Union’s power grids and energy infrastructure to replace aging electricity and gas networks in the face of soaring increases in energy demand. While some of the money from new E.U. directives will be spent on renewable energy sources, most will be spent on electricity produced by fossil fuels. This raises concerns that Europe is locking itself into decades of dependence on non-renewable fuels rather than laying the foundation for a low-carbon future.
Against the background of the economic slump, the European Parliament passed a new climate and energy package last December including a revised emissions trading system, or E.U. ETS. In addition to setting tougher targets to lower greenhouse gases, for the first time, the European Union also included aviation in E.U. ETS.
e.u. emissions changesThe recent legislation passed by the
European Union created legally binding targets for the year 2020: Cut greenhouse gas emissions by 20 per-
cent, Establish a 20 percent share for renewable
energy, Improve energy efficiency by 20 percent.
It also: Confirms a 10 percent target for renewable
energy sources in transportation, Fixes criteria for biofuel sustainability to sup-
port biofuels that have no negative environ-mental impact,
Reconfirms the European Union’s commit-ment to move to a 30 percent reduction in emissions if other developed countries make similar commitments.
The idea behind tightening the emissions cap over time is that it should lead to a scarcity of emission allowances. (An allowance entitles a company to emit one ton of carbon dioxide or an amount of any other greenhouse gas with an equivalent global warming potential during a specified period.) This should drive up the price of polluting, which should then incentivize com-panies to invest in clean technologies that pay off within several years rather than continuing to purchase emissions allowances.
emissions trading systemE.U. ETS is the world’s largest green-
house gas emissions trading system. It has been in place since January 2005, and now it covers more than 11,000 energy-intensive installations representing about 2 billion tons of CO2 emis-sions, nearly half of the European Union’s total greenhouse gas emissions.
E.U. ETS is a “cap-and-trade” system. Using E.U. ETS, policy makers set a limit or cap
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on their total level of CO2 emissions based on agreed-upon targets covering a span of several years (called trading periods). The targets are aimed at reducing global warming.
E.U. ETS emission allowances for indi-vidual participants in the system (such as com-panies with polluting installations) are granted for several consecutive year periods. This is done to neutralize changes in CO2 emission levels that may occur due to extreme weather events such as harsh winters or very hot summers. The first trading period ended in 2007. The current trading period, called the second trading period, also corresponds to the Kyoto Protocol’s first commitment period, where the European Union is required to make an 8 percent commitment to reduce emissions compared to a 1990 baseline. During the second ETS trading period, the emis-sions cap is set at about the same levels for each year.
During the second trading period, once the cap has been set, E.U. member states establish individual national allocation plans that determine their total level of ETS emissions. These plans must be approved by the E.U. Commission, and they show how allowances will be issued to participants of the system. The total number of issued allowances must be con-sistent with member states’ individual emission reduction targets under the European Union’s agreement for the Kyoto Protocol.
The national allocation approach has been criticized and will be sunset during the third trad-ing period. The national allocation approach has generated significant differences in allocation rules and creates incentives for member states to favor home industries. To address these prob-lems and replace national allocation plans, there will be a single European Union-wide cap starting in 2013, and allowances will be allocated on the basis of coordinated rules. The move toward union-wide free allocation rules gives new E.U. member states the ability to auction more allow-ances for industrial installations and introduce a means to redistribute them.
linking ets With other schemes Around the World
The E.U. ETS also allows the use of offset credits from outside the European Union to help reduce global emissions. E.U. ETS recognizes credits generated by the Kyoto Protocol’s proj-ect-based mechanisms — Joint Implementation and the Clean Development Mechanism — as being equivalent to emission allowances. Joint Implementation allows companies in coun-tries with a Kyoto target, namely developed countries, to undertake projects in other devel-oped countries, which reduce their emissions of greenhouse gases. The Clean Development Mechanism allows companies in developed countries to implement project activities that reduce emissions and contribute to sustainable development in countries without a Kyoto target (developing countries). Key elements of the CDM
project include voluntary participation; achieving sustainable development; real, measurable and long-term reductions; and that the benefits must be “additional.”
Linking E.U. ETS with these Kyoto mecha-nisms creates additional incentives for E.U. busi-nesses to invest in emission reduction programs in developing countries, using environmentally friendly technologies to achieve sustainable development.
The CDM projects are potentially eligi-ble to receive credits called certified emission reductions, or CERs. JI projects create credits known as emission reduction units, or ERUs. The European Union recognizes these credits as being equivalent to emission allowances (1 EUA = 1 CER = 1 ERU) and allows them to be traded under the scheme.
The ETS is open to linking with compat-ible greenhouse gas emission trading schemes with other countries that have ratified the Kyoto Protocol. It is foreseen that each side would agree to recognize allowances issued by the other, thereby expanding the market for emis-sions trading.
Through the link to the Kyoto mechanisms, E.U. ETS facilitates investments in emission-sav-ing projects in developing countries. Supporters of E.U. ETS also hope it can be eventually linked up with other carbon markets, in particular in the United States.
The E.U. ETS revisions in December still allow the use of offset credits from out-side the European Union, but this amount remains below half of the reduction effort to
ensure a sufficient level of emission reduc-tions take place inside the European Union. compling With e.u. ets
ETS participants with polluting installa-tions must have a permit from their national authority for emissions of greenhouse gases controlled by the Kyoto Protocol. They must also be able to demonstrate they can monitor and report emissions to obtain their permit. A permit is different from emissions allowances. A permit sets out the emissions monitoring and reporting requirements for an installation, whereas allow-ances are the tradable unit.
Participants that are required to participate in ETS receive emission allowances from their gov-ernments. These allowances total to the member state’s national level. Participants are given the right to emit CO2 volumes at facilities in these countries up to a level specified each year. At the end of each year, participants must surrender allowances equivalent to their emissions. A certain number of allowances are given free of charge, allowing levels of CO2 emissions to occur without any cost.
To meet their emissions requirements, par-ticipants may buy and sell allowances with others, and liquid markets have developed to facilitate this trading activity. Participants can engage in trading credits by purchasing and selling allowances. One allowance gives the holder the right to emit one metric ton of CO2 or the equivalent amount of another greenhouse gas. The cap on the total num-ber of allowances creates value in the market.
At the end of each year, participants are required to ensure they have enough allowances
emissions futures contracts are traded on several exchanges and can be bought and sold by anyone. the contracts can be purchased to pay for shortages when a participant in e.u. ets pollutes above its allowance. A futures contract gives the holder the right to buy or sell an e.u. allowance at a certain date in the future and at a preset price. ecx euA futures contracts allow participants to lock in prices for delivery of carbon emission allowances for future dates.
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to account for their actual emissions. They have the flexibility to buy additional allowances on the open market, and they may sell any excess allowances generated from reducing their emissions below their allocation. Participants that have not produced enough allowances to cover their emissions have to pay a fine of €100 (US$133) per ton for each excess ton emitted. This process becomes an incentive to reduce emissions such as investing in more efficient technology or using less carbon-intensive energy.
Participants are required to monitor and report emissions according to a plan approved by the regulator of each member state. After each calendar year, participants must surrender allow-ances equivalent to their verified CO2 emissions in that year. These allowances are then cancelled so they cannot be used again. Participants with surplus allowances can sell or save them for next year (within one trading period).
Participants must report their CO2 emissions after each calendar year following E.U. monitoring and reporting guidelines. These reports have to be checked by an independent verifier using criteria in the ETS legislation. Participants with emission reports that are not verified as satisfactory are not allowed to sell allowances until a revised report is approved by a verifier.
the carbon MarketThe buying and selling of allowances takes
place on an open market, providing a flexible means for participants to comply with their emis-sions requirements.
Participant companies can cost-effectively manage their emissions where emission allow-ances can be traded in the marketplace.
Companies can access the market to buy allowances to meet their compliance requirements or to sell surplus allowances in several ways: Trade allowances with other companies in the
system, Buy or sell allowances from intermediaries
(banks and specialist traders), Use a broker to find other buyers and sellers of
allowances, Join one of the exchanges that list carbon-
allowance products.E.U. ETS does not specify how or where
trading in allowances should take place. Companies and other participants in the market trade directly with each other or buy and sell via a broker, exchange or any other type of market intermedi-ary that has sprung up to take advantage of this significant new market.
A whole range of new businesses has emerged in Europe as a result of the E.U. carbon market: carbon traders, carbon finance and carbon management specialists, and carbon auditors and verifiers. New financial products such as carbon funds have entered the market as well.
The size of emissions trading is impressive. In the first half of 2008 versus the first half of 2007, the global emissions market grew more than 40 percent, worth around €38 billion (US$50 billion).
E.U. ETS comprised 70 percent of that global market.
The carbon market itself was worth about €89 billion (US$118 billion) last year, up 84 per-cent versus 2007. The carbon market for 2009 is projected to be €113 billion (US$150 billion), up 27 percent from last year, according to a report by London-based firm New Carbon Finance.
Growth in the carbon marketplace during 2008 came from higher carbon prices and greater transaction volume — about 4 billion emissions permits changing hands, 42 percent more than in 2007. Trade in European Union allowances, or EUAs, accounted for €71 billion (US$94 billion), or about 80 percent of the overall total.
The EUA futures contract on the European Climate Exchange peaked at about €30 (US$40) in July, before recessionary pressure brought prices down to around €15 (US$20) by year’s end. Prices have continued to drop, and they reached a low of €8 (US$10) in early February. These low prices make it more economical to build new coal-fired power stations than to invest in renewable energy and smart infrastructure.
Including Aviation In e.u. etsThe new legislation passed on E.U. ETS last
December affects aviation directly in the last year of the second trading period (2012) and the entire third period, which lasts eight years, from 2013 to 2020. During the third trading period, the cap will change each year to meet the target of reducing CO2 by 20 percent over a baseline. The starting point of this line is the average of allowances to be issued by member states for the second trading period, plus adjustments to reflect the broadened scope of the system starting in 2013.
The legislation passed in December adds aviation in its greenhouse gas emissions allowance within the European Commission. The reason for including aviation in E.U. ETS is because total E.U. greenhouse gas emissions fell by 3 percent from 1990 to 2002, while emissions from international aviation in the European Union increased by almost 70 percent. Aviation has grown at high rates rela-tive to other sectors, putting CO2 emissions from airlines on the charts.
Even though there has been significant improvement in aircraft technology and operational efficiency, this has not been enough to neutralize the effect of increased traffic, and the growth in emissions is projected to continue. Within Europe, commercial aviation is expected to double by 2020.
To address these problems, the European Union will pursue three complementary streams related to aviation: research and development for “greener” technology, modernized air traffic man-agement systems, and market-based measures, namely ETS.
research And Development for greener technology
Joint technology initiatives, such as Clean Sky, are research initiatives that bring together E.U.-
funded projects and major industrial stakeholders in aeronautics and aerospace to move important technologies closer to market.
Modernizing Air traffic Management systems
The Single European Sky legislation reforms the way air traffic management is organized in Europe. This requires a modernization of the air traffic management systems in Europe. The Single European Sky ATM Research, or SESAR, initiative is the technological component of Single European Sky. One of its objectives is to reduce emissions by 10 percent per flight.
The Atlantic Interoperability Initiative to Reduce Emissions, or AIRE, is a cooperative pro-gram between the European Union and the U.S. Federal Aviation Administration to coordinate two major programs on air traffic control infrastructure modernization, SESAR in Europe and NextGen in the United States.
AIRE will make it possible to speed up the application of new technologies and opera-tional procedures, which will have a direct impact in the short and medium term on greenhouse gas emissions. The measures include “smooth” or “reduced engine” approaches, which will enable noise and exhaust gas emissions to be reduced during landing. Experiments have shown sub-stantial savings in fuel and CO2 and nitrogen oxide emissions. The European Union and the FAA have close involvement of partners from the industry such as Airbus and Boeing; airlines such as Air France-KLM, SAS, Delta Air Lines and FedEx; and aviation navigation service providers in Ireland, Sweden and Portugal.
other ActionsOther actions are being taken on renew-
able energy, such as biofuels as a renewable energy source for use in aviation. Renewables can contribute to security of supply, sustainability and competitiveness. A binding target of a 20 percent share of renewable energies in overall E.U. energy consumption by 2020 was agreed upon by the European Council in 2007, with a 10 percent bind-ing minimum target to be achieved by all member states for the share of biofuels in E.U. transporta-tion fuel consumption by 2020.
e.u. ets starting Point for AirlinesFrom 2012 on, all flights to and from
E.U. airports will be covered by E.U. ETS. This includes E.U.-based airlines as well as airlines that are not part of the European Union.
As with other participants in E.U. ETS, airlines will need to surrender emissions allow-ances for each ton of CO2 they produce. Airlines will also be able to apply for free alloca-tions of allowances at the start of the reporting period by submitting verified activity data for a baseline year. Like other industries, airlines will be able to sell allowances they don’t need on the market. They will have to buy allowances if their emissions are higher or use emission
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credits from clean energy projects in developing countries.
In 2012, the number of emissions allow-ances allocated to aviation will be capped at 97 percent of the baseline period. Emissions allowed by the European Union will be 3 percent below the average annual European aviation emissions for the baseline period of 2004 to 2006. From 2013 and beyond, this cap will be reduced to 95 percent below the baseline. This is based on the overall E.U. target of reducing emissions by 20 percent below 1990 greenhouse gas emissions.
Initially, 85 percent of these pollution per-mits would be handed out to airlines for free based on benchmarking during a baseline period, with the remaining 15 percent allocated by auc-tioning, where airlines will have to pay market rates for allowances. Unlimited auctioning would be introduced as of 2013.
Airlines would also be able to buy allowanc-es from other sectors, such as power generation, which are already covered by the E.U. ETS, to factor in current high growth levels in the aviation sector, should this occur as forecast.
Each aircraft operator flying in or out of the European Union will be assigned to a single member state that will be responsible for ensur-ing compliance with the requirements of the legislation. Member states will be responsible for the aircraft operators to which they issued an operating license and for the aircraft operators whose emissions in 2006 were mostly attribut-able to that member state.
The list of airlines and operators was released in February and was developed along with EUROCONTROL, the international organiza-tion responsible for European air traffic manage-
ment. The commission will update the list by February each year to include aircraft operators that have subsequently performed an aviation activity as defined in the legislation.
National oversight means that countries with busiest airports, such as Britain, France and Germany, are likely to prosper the most. Britain would oversee almost 800 carriers and opera-tors of corporate flights. This includes American Airlines, United Airlines and Emirates, as well as Wal-Mart. France would oversee more than 500 carriers and operators including FedEx and the Coca–Cola Company. Germany would oversee almost 400 carriers and operators including Delta Air Lines and UPS.
Airline Monitoring, reporting And verification
Monitoring, reporting and verification are crucial to the functioning of the E.U. ETS and key to its environmental effectiveness.
There are two important elements to monitoring, reporting and verification for aviation’s inclusion in the E.U. ETS: MRV of ton-kilometer data — When airlines
apply for their free allowances, they will have to submit verified ton-kilometer data for their avia-tion activities for a reference year. To apply for free allowances before 2012, operators need to monitor their ton-kilometers in the bench-mark year 2010. The amount of allowances for 2012 will be established at 97 percent of this baseline using applications of airlines in 2010. Operators need to submit their monitoring plan by July 2009 to cover 2010. The monitoring plan needs to be approved by the administering member state’s regulating authority. This is the
only time to submit ton-kilometer data, and the only reason to do so is to apply for free allow-ances.
MRV of annual emissions — Throughout each compliance year, airlines will have to monitor their emissions and then submit a verified emissions report at the end of the year. Based on these verified emissions reports, airlines must surrender allowances to cover their emis-sions.
timelineNow that the legislation has been adopted,
the European Union recently published a prelimi-nary list of airlines and their administering mem-ber states. Guidelines on monitoring, reporting and verification should be published by mid year.
By the second half of the year, airlines must submit monitoring plans to their admin-istering member state’s authority. To get free allocations during the first year, each airline must submit its plan to monitor its ton-kilometer data by mid-2009. Approved monitoring will then be implemented in 2010. By March 2011, airlines need to apply to their member state authority to obtain free allocation. They will do this by submit-ting their verified ton-kilometer data for 2010. By September 2011, the European Commission will calculate the allocation benchmark using the 2010 verified data. This data will establish how to allocate allowances among various operators that they will use during 2012. By the end of 2011, the European Commission should publish allocation of free allowances. Then the trading period for airlines will start in 2012.
The International Air Transport Association said the system will cost the industry at least €3.5 billion (US$4.4 billion) each year to comply. In addition, there is no certainty the money col-lected by governments would be used to combat climate change.
“There is no requirement to invest the money in the environment,” an IATA spokes-person told the International Herald Tribune in February. “Governments have carte blanche to put the money towards the general collection.”
Whether applying E.U. ETS on aviation will make airlines actually reduce CO2 is to be deter-mined. Technology improvements and reductions in capacity are already underway, without E.U. ETS. Overflying the European Union is an option as well. Otherwise, airlines will simply have to pay the price of emissions and will likely pass the cost to consumers. a
Peter Berdy is a consultant for Sabre Airline Solutions®. He has written about
transportation emissions and developed the company’s enterprise-wide emissions
models for air, car, hotel and rail. He can be contacted at [email protected].
Aviation emissions are comparable to other e.u. ets sectors with the exception of combus-tion installations such as utilities, which produce much higher levels of co2 emissions.
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As with all controversial legislation, the revisions to E.U. emissions trading system have brought forward vocal opponents and proponents.
Environmental organizations have been lobbying for a focus on renewable energies and energy efficiency in the transition to a low-carbon economy. Industries are calling for the development of a firm legislative framework to safeguard future investment in cleaner ener-gies, as well as phase out subsidies for ineffi-cient plants, appliances, vehicles and buildings, and for fossil fuel use and nuclear power installations.
Proponents of renewable energies and other clean technologies argue the moment is ripe for a paradigm shift, where the entire ener-gy system, including key infrastructures, needs to be re-examined. The European Renewable Energy Council believes the renewables sec-tor could deliver more than 20 percent of the European Union’s energy needs by 2020 if member states continued to invest in new technologies.
Opinions on the topic of aviation emis-sions trading run the gamut, and several offi-cials, from government agencies to standalone organizations, have no reservations about standing by their convictions and beliefs.
“the long-term stable framework is key for future development.”
— EREC Secretary General Christine Lins
“A very substantial investment (pub-lic and private) will be required to progress toward the 20 percent greenhouse gas emission reduction target.”
— European Commission Energy and Transport
“A massive clean technology push will create ‘thousands of new businesses and millions of jobs in europe.’”
— E.U. Executive President José Manuel Barroso
“recent fallout in global financial markets has raised doubts whether a recession is the right moment to spend huge sums on clean technology investments that may only pay off in several years’ time, rather than spending on short-term stimulus and job preservation programs. too stringent a co2 reduction regime would not make sense in light of competitiveness and employment concerns.”
— German Chancellor Angela Merkel
“there is a fundamental tension between using international trading in the ets to lower the cost of meeting the e.u.’s targets and expecting the ets to send suf-ficient price signals to drive the low-carbon power investment needed to reach the e.u.’s objectives.”
“the e.u.’s renewable energy direc-tive creates a positive investment climate for a more long-term development of its industries.”
— The European Solar Thermal Industry Association
“the directive would allow the wind power industry to expand to meet an increasing share of european electricity needs.”
— The European Wind Energy Association
“Auctioning emissions allocations will both generate revenues for governments and are also needed to address climate change. for example, last November, the u.K. gov-ernment held its first auction in the e.u. ets. More than 4 million allowances were auctioned at a price of ₤16.15 (us$24) raising ₤54 million (us$80 million) and were
four times oversubscribed. Auctioning is viewed as more efficient than giving away allowances for free. Auctioning ensures businesses take into account the cost of carbon and creates incentives to change behavior and reduce energy consumption.
“the new e.u. legislation indicates that this revenue source should be used to tackle climate change and suggests that member states should now use at least half of their auctioning revenues on measures to combat climate change. unfortunately, this is not obligatory.”
— U.K. Department of Environment, Food and Rural Affairs
Red Flags And Flowers
— Nick Mabey, founding director of British think tank E3G and former U.K. Prime Minister’s strategy unit advisor
The European Union has issued CO2
emissions guidelines for all types of reserva-tions systems. Although there is no specific requirement to provide information about CO2 emissions to passengers, the European Union encourages this practice.
“CRS should be encouraged to provide in the future easily understandable information about CO2 emissions and fuel consumption of the flight,” the European Parliament stated last September as part of the code of conduct for computerized reservations systems in relation to CO2 emissions. “This could be shown via average fuel consumption data per person in litre/100km and average CO2 emissions per person in g/km and could be compared with data of the best alternative train/bus connec-tion for journeys of less than five hours.”
E.U.’s CO2 Emissions Guidelines for Res Systems
By Peter Berdy | Ascend Contributor
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By Shane Batt | Ascend Contributor
Hedging Your (Jet Fuel) BetsMany carriers exercised fuel hedging opportunities and came out on top during the last few years when oil prices shot through the roof. But those who hedged too far into the future are paying a pretty severe price today..
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From January 2005 until last September, jet fuel was the single biggest expense of any airline. It was a larger expense
than maintenance, passenger service and even the costs of labor. Before 2005, fuel prices were 10 percent to 15 percent of an airline’s operating costs. Since January 2005, fuel prices have fluctuated between 25 per-cent and 40 percent of an airline’s operating costs. Then, in September, the price of jet fuel began to fall rapidly in line with the cost of crude oil on the world market.
In mid-July, crude oil reached a peak of US$147 a barrel for Brent Crude, but just eight weeks later, oil was selling for less than US$60 a barrel. In September, the price of crude oil dropped even further and earlier this year fell below US$35 a barrel.
Given the significant dip in jet fuel, airline chief financial officers should be extremely pleased that their highest single expense has dropped by about 70 percent, right? Well, it’s not a simple “yes” because many airlines had engaged in fuel hedging and had “bet” on the wrong expectation that crude oil prices would continue to be high. When crude oil prices dropped, many airlines that were highly hedged lost a great deal of money.
While fuel price was a major driver of last year’s poor aviation financial performance, fuel hedges are a major driver of poor aviation financial performance this year.
The impact of fuel hedging is even more bizarre than it sounds. If an airline had strong financial performance and good credit in 2008, then it engaged in good risk management and hedged fuel with a strong hedging policy that protected against the rise of fuel prices. This is what “good” airline CFOs did to protect their financial performance.
Airlines with poor financial performance and insufficient credit lines could not afford to hedge fuel, so they carried a great burden of risk. The CFOs of these “poor” airlines wor-ried about the viability of their businesses as fuel prices skyrocketed because they had little protection against the unbridled rise of their largest expense. This was also reflected in the profit and loss of the airlines and in their share prices if they were publicly traded.
Strong hedging airlines, such as Southwest Airlines, made millions of dollars of profit from their hedging positions last year. Similarly, airlines with strong hedging policies saw their share prices retain value in a highly volatile market because their risk management portfolio was strong. All prudent CFOs who
had available capital or credit facilities invested in fuel hedges during 2008 for their 2009 and even 2010 fuel requirements, carefully protecting for the expectation that crude oil would continue to rise … even above US$200 a barrel.
Much to the happiness of consum-ers, the CFOs that hedged against fuel price increases were wrong. So, the “good” airlines with strong financial performance and good credit lines have lost large amounts of money on their hedges, while the struggling airlines that were unable to afford fuel hedges have “won” because fuel prices have dropped by about 70 percent. The “good” airlines are tak-ing large reductions in their profits, while the “poor” airlines are improving their profitability. This is one of the great reversals in financial performance in the history of aviation. Since fuel hedging will have such a large impact on airline financial performance this year and next, it is important to understand more about it.
Some CFOs would now call fuel hedging “gambling” because of their current plight, but this is not really an accurate definition of the process. Fuel hedging is a form of risk man-agement designed to protect against the fear of volatile fuel prices. When oil is perceived to be increasing, then fuel hedging becomes an
During the last couple of years, when fuel prices climbed to astronomical levels, fuel accounted for 25 percent to 40 percent of an airline’s operating expense, up from 10 percent to 15 percent prior to January 2005. those that weren’t in a financial position to leverage fuel-hedging opportunities suffered tremendously, while others didn’t survive.
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important way to protect an airline’s financial performance.
Airlines can hedge many different com-modities. For example, most airlines hedge “JetKero,” which is kerosene used as jet fuel. Similarly, however, airlines can hedge crude oil or hedge the “crack spread” — the difference in price per barrel of crude oil and the price per barrel of a commodity such as JetKero. When oil is pumped from the ground at the well, transported, refined, stored and then distributed, these costs add to the price of the crude oil and affect the price of end products such as JetKero.
This difference in price is reflected in the crack spread. In addition, the demand for end products, such as petrol, fuel oil and heating oil, all vary throughout the year, adding further volatility to the crack spread.
Just in terms of the commodities, air-lines have a choice of hedging JetKero, crude oil or the crack spread. Commodity hedging is only part of the hedging story, however. Since most of the costs of an airline are in U.S. dol-lars (jet fuel, aircraft purchases and leasing, and most maintenance costs), airlines outside of the United States or even U.S. carriers with large expenses outside of the United States also need to consider hedging currency risk.
Similarly, during volatile economic times, airlines need to hedge interest rate risk to pro-tect against variable rate credit facilities and future loan requirements. Finally, carriers flying into the European Union increasingly need to consider hedging carbon credits to address their future expansion needs under the soon-implemented carbon offset program. Clearly, airline hedging policies are complex because they can involve jet fuel, crude oil, the crack spread, currency risk, interest rate risk and carbon credits.
To make matters a little more interest-ing, there are also different forms of hedging, which are essentially different strategies for controlling financial risk. Rather than exam-ining all of the forms of financial hedging, many of which are quite complex, it’s ideal to concentrate on the different forms of hedging related to JetKero — the most important form of hedging for most airlines. There are three principal forms of JetKero-hedging financial instruments: Self hedging — When an airline purchases JetKero at a particular price in the amount that the airline will consume,
Fixed-price risk hedging — When an airline hedges against a specific future price of JetKero,
Floating-price risk hedging — When an air-line hedges against a volatile floating price of JetKero.
Self hedging is the simplest form of jet-fuel hedging for an airline. With this type of hedging, an airline pays a fuel supplier a fixed price for the future delivery of a percentage of the airline’s jet fuel needs. The airline is said to “swap” the volatile fuel price for a fixed price that is known. Thus, self hedging is also known as a “simple JetKero swap.”
Frequently, airlines will make public statements such as, “65 percent of our fuel needs for 2009 are hedged at US$85 a barrel.” Simply stated, this means that the airline has agreed to buy 65 percent of its expected 2009 consumption of fuel at the price of US$85 a barrel for JetKero. The requirement for most airlines to be experts at hedging really originated with the rise of fuel prices in late 2004. Therefore, most small- and medium-sized airlines with hedging policies use this basic approach, which is also the one that has the biggest downside risk from a drop in fuel prices.
During the U.S. summer of 2008, simple JetKero swaps reached US$180 a barrel. A carrier that locked in a significant portion of its 2009 consumption in July 2008 at US$180
In eight short weeks, beginning last July, crude oil plummeted from a high of us$147 a barrel for Brent crude to less than us$60 a barrel. And while the dip brought much-needed relief to many airline cfos around the world, those who participated in long-term hedging, counting on the oil prices to continue to climb, have taken a significant loss.
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a barrel would be paying US$128 a barrel of jet fuel premium over the current (early this year) jet fuel spot price of US$52 a barrel. (Remember that the price of jet fuel is always higher than the price of crude oil by the amount of the crack spread.) Luckily, most airlines were very wary about buying US$180 a barrel simple JetKero swaps last July. Nonetheless, several airlines now suffer from having locked in simple JetKero swaps at US$105 a barrel to US$135 a barrel.
Most airlines are still imposing fuel surcharges today, despite the low cost of jet fuel on the open market, precisely because they have simple JetKero swaps that are significantly higher than the current market price of jet fuel. Meanwhile, “poor” airlines that could not hedge last year are able to lower and even eliminate fuel surcharges at the expense of their competitors.
Larger airlines have a longer track history of fuel hedging, so they frequently use the more sophisticated fixed-price risk hedging strategy, where the airline is not fixing its price for fuel, it is protecting itself against a rising (or falling) fuel price. The airline buys a financial instrument called a “fuel future” that allows it to buy fuel in the future at a “strike price.” Fuel futures are essentially insurance policies and are, in fact, handled by financial institutions instead of fuel suppliers.
For example, an airline could buy a fixed-price risk hedge for a strike price of US$100 a barrel and might pay about US$10 a barrel for this hedge. If the price of jet fuel subsequently went up to US$120 a barrel, then the airline would exercise the hedge to buy fuel at the strike price for US$100 a barrel. The airline would thus pay the strike price plus the cost of the hedge (US$10 a barrel) for an effective maximum price of US$110 a barrel, even though jet fuel was selling on the open market for US$120 a barrel.
Using the same hedge (strike price = US$100 a barrel for a hedge cost of US$10 a barrel), if the market price for jet fuel drops to US$80 a barrel, the airline would not exercise the hedge against the strike price and would pay an effective US$90 a barrel (US$80 a barrel at market price plus US$10 a barrel paid for the hedge). Using this hedging strategy, an airline could limit its exposure to rising jet fuel prices while not being overly hurt in the event that fuel prices dropped. Also, the airline could limit its exposure even more by watching fuel and fuel future prices and selling its futures accordingly.
For example, if fuel prices are increas-ing, then the value of the future increases as well. So, if the airline bought futures for more than its required consumption, it could buy fuel at the strike price to meet its needs
and sell the remaining fuel futures at a prof-it. However, if the airline bought futures at a level greatly exceeding its consumption and the price of fuel dropped below the strike price, then the carrier’s average price paid per barrel would increase to cover the mar-ket price plus the non-exercised hedges.
This may sound like a more compli-cated approach to risk management — and it is — but large carriers with strong financial managers could afford to mitigate their risks in this more sophisticated fashion. Fuel futures are an asset, so fixed-price risk hedging not only affects the profitability of the airline (profit and loss), it also affects the balance sheet of the airline.
The last type of fuel hedging, floating-price risk hedging, is the most sophisticated form of commodity hedging, but will gain substantial utilization this year because of uncertainty about world fuel prices. While fuel prices are low today because of the cur-rent economic crisis, most airline CFOs are uncertain about the impact of world events on jet fuel prices.
The Organization of the Petroleum Exporting Countries, or OPEC, is impos-ing production quotas to drive up crude oil prices, there continues to be wars in regions that produce crude oil and terrorism is still a worldwide concern. All of these issues could cause a rapid increase in crude oil prices with an associated impact on jet fuel prices. A floating-price fuel hedging is a risk management strategy that protects against rising and falling jet fuel prices concurrently. When an airline purchases a floating-price risk hedge, it buys an insurance policy that will protect it against a wildly fluctuating price that either goes very high or very low. An example of this type of swap can be seen in a recent quote for Singapore delivery of JetKero between February and December for US$57 to US$90 per barrel. This floating-price risk hedge would cost an airline about US$16 a barrel.
For reference, the fixed-price risk hedge for 2009 delivery was concurrently US$69 a barrel at a hedge price of US$9 a barrel. The US$57 to US$90 per barrel floating-price risk hedge states that the strike price for fuel is US$57 a barrel with unlimited protection at market prices above US$90 a barrel.
An airline buying this hedge could watch fuel prices carefully and use this hedge to manage its downside and upside risk. For example, if the price of fuel throughout the remainder of the year stays below US$57 a barrel, the airline would pay the market price plus US$16 a barrel. This would be a higher price than would be paid for the unexercised fixed-price risk hedge of market price plus US$9 a barrel. In fact, the floating-price risk hedge would cost more than the fixed-price
risk hedge as long as the market price stays below US$64 a barrel.
Between a market price of US$64 and US$73 a barrel, the floating-price risk hedge becomes more attractive than the fixed-price risk hedge. If the market price of fuel rises even higher than US$73 a barrel (US$57 a barrel strike price plus the cost of US$16 a barrel price of the hedge), the value of both the floating-price risk hedge and the fixed-price risk hedge become very attractive because the airline can sell the valuable fuel future. Because the fixed-price risk hedge costs less than the floating-price risk hedge, however, it is more valuable as the market price increases than the floating-price risk hedge as long as the market price is between US$78 a barrel and US$90 a bar-rel (the US$69 a barrel strike price plus the US$9 a barrel price of the hedge).
Should the market price, however, be more than US$90 a barrel, the floating-price risk hedge becomes much more valu-able because it has “unbounded protection” above US$90 a barrel. This floating-price risk hedge is a more complicated approach to risk management, but it is attractive under the current market conditions of possible high fuel price volatility.
If last year is remembered by airlines as the “year of outrageous fuel prices,” this year may well be remembered by some airlines as the “year we lost our shirts with fuel hedges.”
It is ironic that airlines with the best risk management portfolios last year are suf-fering from those decisions this year. Early last year, very few economists could have predicted the impact of the credit crunch, worsening liquidity and failing banks that would be the hallmark of the remainder of the year. Despite the bad results of hedging for some airlines during 2009, hedging of fuel, currency, interest rates and carbon credits will gain more momentum in airlines in the future. Airlines will either become more sophisticated at handling these financial instruments or will continue to be adversely affected by financial market volatility.
The future of the airline industry may well be related to the level of sophistication that airlines can gain at financial market engineering from managing these hedges. Hedging isn’t gambling, it is, in fact, a gam-ble for airlines not to hedge. a
Shane Batt is executive solutions partner for Sabre Airline Solutions®. He can be
contacted at [email protected].
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Even in times of economic difficulty, certain carriers seem to have a knack for
making the best of their situations. And they set the bar high for everyone.
Looking Back For Tomorrow
By Phil Johnson | Ascend Staff
The airline industry will always pose chal-lenges to carriers striving to achieve profitability year after year. And some of
those challenges come in the form of adverse economic circumstances that no one can accu-rately predict, but everyone has to address and overcome.
There was, for instance, the severe eco-nomic slowdown resulting from the terrorist attacks of 9/11, and there have been tsunami, typhoons and hurricanes as well as major worldwide or regional health scares such as severe acute respiratory syndrome, or SARS. And now, the world’s airlines face a global eco-nomic bloodletting — the full extent of which is yet to be determined.
Nonetheless, a very select few carriers seem to have the ability to survive critical chal-lenges … and even thrive in times of economic turmoil and uncertainty.
Among those carriers, for example, is Southwest Airlines, which long ago established a standard of low-cost excellence that many envy but few have been able to successfully emulate.
But other carriers around the world are blazing their own trails to success in spite of sometimes-adverse circumstances, and it’s useful to carefully analyze how they’ve done it. If nothing else, there may well be something to learn from those carriers — something that could prove of future value to another carrier during difficult times.
Besides Southwest Airlines, some other carriers that have exhibited remarkable resil-iency in spite of difficult circumstances are Etihad Airways, which maintains its headquar-ters in Abu Dhabi, United Arab Emirates; LAN Airlines, headquartered in Santiago, Chile; TAM Airlines, headquartered in São Paulo, Brazil; and WestJet Airlines Ltd., headquartered in the western Canadian business hub of Calgary, Alberta, Canada.
WestJet, in fact, is often mentioned along with Southwest Airlines as a carrier that
has found similar success using a low-cost strategy. Extending the two carriers’ simi-larities, they’ve announced plans to establish codesharing between them (and at the same time, Southwest Airlines is moving toward codesharing with Mexican low-cost carrier Volaris).
Incremental moves such as these code-shares (see related article on page 47), of course, serve to strategically extend these carriers’ brand reach throughout much of North America. And in terms of potential for growth under uncertain economic circumstances, the “incremental,” meticulously measured growth strategies are often the approaches that prove to be the wisest and most sustainable over the long term.
The shareholders of public companies, after all, expect and demand at the very least an incremental return on their investments. And codesharing among like-minded, cost-con-scious but highly service-oriented carriers such as Southwest Airlines, WestJet and Volaris allows these carriers to achieve incremental, measured growth without requiring any of the carriers to make a huge investment in infrastructure.
Looking at the bigger picture, then, what are some of the common factors that have enabled carriers such as Etihad in the Middle East, LAN and TAM in South America, and WestJet and Southwest Airlines in North America to not only survive but fundamentally prosper, regardless of the extraordinarily dif-ficult obstacles that all carriers come up against in challenging and volatile economic times?
While it’s impossible to broad brush each carrier with single strokes that link their individual strategic moves to one another, there are some larger generalities that seem to be fairly common among them (as well as among select highly successful companies in every industry).
The first characteristic of success is dynamic leadership. No company shines eco-
nomically without a healthy dose of leadership that is inclined to think innovatively and, after careful and thoughtful analysis, act decisively.
Another characteristic to be found scat-tered broadly among these successful carriers is a willingness to “break the mold” — even a historically successful mold — to achieve posi-tive results by differentiating themselves from their competition. Just because “nobody else” has ever done something doesn’t mean it’s a bad idea. But it must still be carefully evaluated for financial viability — and to make sure it lines up with the carrier’s business model and service promise to its customers. And only at that point, the carrier may proceed, with cau-tion, but also without hesitation.
In somewhat the same vein, another characteristic of success is these carriers’ application of a “no-fear” principle — they appear to have no fear when it comes to doing what they believe is right even if it’s different from what the rest of the industry is doing. In other words, there’s no fear to venture into business territory that these carriers feel — based on their thoroughly researched and thought-out business assumptions — may prove to be very fruitful.
A fourth success characteristic among these tenaciously forward-thinking carriers is a basic institutional awareness that nobody in the industry holds a “silver bullet.” This principle basically means there’s no sub-stitute for hard work and an optimistic approach — service with a smile and working with a “fun” perspective, but the fun must be accompanied by an ultimate willingness to work extremely hard to overcome every obstacle and outpace every competitor.
Fifth among these carriers’ successful characteristics is the ability of each carrier to take its situation, whatever the specifics, and make the best of it. It may be easy to complain that budgets are short and means are lacking, but whatever situation prevails, these successful carriers have managed to
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turn it into an overall positive and come out on top.
One more characteristic of all of these successful carriers is a fundamental realization that they live, breathe and compete each and every day in a service industry — and that industry first, foremost and always is all about the customer.
“It’s a customer-centric model that they have been able to build,” said Kannan Ramaswamy, Ph.D., a professor of management at Thunderbird School of Global Management in Glendale, Arizona, who specializes in aviation strategy research.
“Among the things using this customer-centric model means is that when I am incur-ring cost, I don’t automatically assume that it can be passed along to the customer,” said Ramaswamy. “And that, in turn, means that even though I’m differentiating my product, I’ll have to keep my costs in check in order to be able to afford the ability to give the customer a good experience. In the most basic terms, I need to be able to give my customer more for less.
“So this is all about the customer experi-ence — and Southwest [Airlines] is a very good example,” he said.
Some of the techniques Southwest Airlines has been able to successfully apply over the years — such as flying a single aircraft type — are aimed directly at keeping its costs of doing business reasonably low to be able to pass lower fares on to its fiercely loyal customers.
Again, however, situations arise that affect every airline, yet every carrier doesn’t necessarily handle those situations advanta-geously. In that case, what’s the difference that opens up avenues to success?
“As an industry, there are always chal-lenges,” said James Hogan, chief executive officer of Etihad Airways, in a March 2007 inter-view with the Australian Broadcasting Corp. “There are so many factors out of our control, whether it’s SARS, tsunami, war, fuel.”
All these things have presented signifi-cant challenges that have affected every carrier that operates where these factors have been present. And, as Hogan said, “We’re in a busi-ness where there are so many variables that can take you off track.”
Still, Hogan, who was formerly CEO of Bahrain-based Gulf Air, fully realizes that Etihad has the ability to seize certain advan-
tages if it chooses. And in a presentation to the Wings Club in New York City, New York, last September, Hogan explained the basics of the Etihad approach.
“The ‘magic three’ factors of location, investment and vision have combined to cre-ate an opportunity never seen before in the industry,” he said. “In less than 10 years, Abu Dhabi, Doha and Dubai have gone from serious players in regional aviation to major players on the global stage.
“Abu Dhabi’s location offers an ideal position from which to set off to the rest of the world, placed perfectly between East and West. Indeed, if you were going to launch a new global airline, there are few better places you could choose.”
In addition to geographic positioning, equipment type presents another critical factor in Etihad’s ability to succeed year after year.
“Another important catalyst is the invest-ment we have made in new equipment — and particularly in the latest aircraft technology,” Hogan said. “The new breed of long-haul and ultra-long-haul aircraft make nonstop travel from our region to all four corners of the world a comfortable and convenient reality.
“Because we are ‘new’ carriers [Etihad only started flying in 2003], we are able to invest in modern, efficient and environmen-tally friendly aircraft, with none of the ‘legacy’ issues affecting the more-established industry players today.
“And finally, we have vision: the vision of Abu Dhabi’s leadership not just in creating a travel hub, but in developing a focal point for the wider aviation industry — all part of the ongoing effort to diversify our economy in the future.”
In the same speech, Hogan addressed several other questions about issues Etihad has faced during its mounting successful climb to prominence.
“Let me explode a few urban myths,” Hogan said. “We do not receive government subsidies or guarantees, and neither do we benefit from free or discounted airport and fuel costs. We hedge fuel. We borrow money from financial markets. There are no ‘free kicks.’
“Our shareholders — the investors of this region — demand accountability, a return on investment and a well-run business. And we have a real and genuine commercial mandate — a mandate that will see us break even over the coming years despite heavy investment in new aircraft and on new routes.”
Those routes include some of the most exciting possibilities in the world of air trans-portation today, such as one-stop trips from Australia through Abu Dhabi to London, or the same single stop from Australia to New York. The globally central location of the Middle East — and the massive investment in aviation infrastructure that is occurring there — provide Etihad a solid foundation to achieve multiple
Despite many serious challenges facing the airline industry during the last decade, Abu Dhabi-based etihad Airways stands out as being one of the world’s most prominent airlines that continues to weather the storm.
Photo courtesy of Airbus
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business goals, but those goals can only be reached through a bold determination to follow through.
Likewise, TAM Airlines in Brazil and LAN Airlines in Chile have constructed successful corporate experiences based on solid manage-ment and innovative leadership, sound financial underpinnings, a customer-centric model and a service promise that sees these carriers striving to deliver genuine, memorable value to each and every customer on every trip.
TAM, for example, has been the recipi-ent of a steady pattern of lavish industry praise for superior delivery on its customer-service promise, which fits right in with the carrier’s own internally developed mandates that the company refers to as “pillars of action”: management excellence, technical-and-operational excellence and, quite logi-cally, service excellence.
Having won a decades-long battle against national carrier Varig for Brazilian superiority (debt-riddled Varig was bought by low-cost Brazilian carrier GOL Linhas Aéreas Inteligentes a couple years ago), TAM now stands as South America’s largest airline and has announced its intention to join the glob-al Star Alliance (essentially replacing Varig, which was dropped from the Star Alliance in 2006).
And similarly to TAM, LAN has con-centrated on setting a consistent standard of excellence, steadily building its brand among the South American countries in which it has sunk deep roots, and the airline effec-tively has extended its reach globally not only through its membership in oneworld, but also through codeshares with specific one-world partners including American Airlines and British Airways.
LAN also maintains codeshares with other prominent carriers such as Alaska Airlines, AeroMéxico and Mexicana. And, not insignificantly, LAN has an ongoing code-sharing relationship with TAM — once again illustrating that an incremental codeshare strategy, partnering with like-minded, highly reputable companies, can be hugely benefi-cial beyond its relatively minimal cost.
Both LAN and TAM have also estab-lished sound, realistic plans for a future in which a return to reasonable, incremental, measured growth is not simply hoped for … it’s inevitable.
But, first things first — and in an indus-try that had already significantly downsized its capacity to deal with fuel prices that appeared to be going nowhere but up, air carriers in general are now positioned much more favorably to be able to ride out the current economic maelstrom that threatens to devour other industries.
That doesn’t excuse any carriers from the necessity to think creatively and act inno-vatively — always looking toward the best
south American carriers lAN and tAM have plowed through the industry’s many obstacles with powerful leadership, a strong financial foundation, a true customer focus and a sound service promise.
Photos courtesy of Airbus
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ways to bring strategic logic to bear on every business decision, large and small.
“In strategy, we talk about ‘blue-ocean’ thinking, which is basically thinking outside the box,” Ramaswamy said. “This is a business model that says you have to be creative in what you offer and how you offer it.
“And there are several questions we suggest companies should be asking,” said Ramaswamy, who has conducted extensive studies of several carriers including Singapore Airlines. “One of those questions is, ‘Where did we fail?’ This revolves around the fact that we tend to take things for granted — meaning we tend to believe that the drivers that drive perfor-mance in an industry are static.
“We say, ‘Industry has always done A, B and C — so in order to succeed today, I should also be doing A, B and C.’ This is basically the ‘herd’ mentality. But the important question we should be asking ourselves is: Are we really testing the assumptions? Are we evaluating the perceived wisdom of the industry? Or are we just following for the sake of following?
“Another question is: What can we do without? What can we do without that my industry takes for granted? And at the same time, you ask yourself: What are some additional factors we can add to the mix that others have not thought about?
“Here’s where Southwest [Airlines] and some of these other companies gained some key advantages in things like flight frequencies, offering people a low-cost fare with more flights and more choices in flying from Point A to Point B. That’s what customers want: on-time arrival, and the service experience you can provide. And in that regard, always treat your customers with the utmost respect.
“Each of these elements is very critical.”During its three-and-a-half-plus decades of
stellar performance, Southwest Airlines has, in fact, managed to create a business model that is universally admired not just within aviation circles but in the greater business community. What is now broadly recognized as “the Southwest Airlines model” is not just airline-focused, it’s people-focused.
To be sure, the Southwest Airlines model is based on common sense — and that common sense, as well as ever-present good humor, has been easy to detect through Southwest Airlines’ leadership from original boss and co-founder Herb Kelleher through current Southwest Airlines CEO Gary Kelly.
In between, Jim Parker occupied the Southwest Airlines CEO’s chair, and Parker has since written a book entitled, Do the Right Thing: How Dedicated Employees Create Loyal Customers and Large Profits.
In a January 2008 interview with the Fort Worth Star-Telegram, Parker said, “It’s so common these days for companies to say that people are their most important asset. But they don’t really believe it, because they don’t really
give their employees the chance to feel like they’re part of something meaningful.
“That’s something we always tried to do at Southwest [Airlines],” Parker said. “And the reality is that people who enjoy their work are going to do a better job than people who don’t.”
Parker went on to heap effusive praise on Southwest Airlines’ “front-line” leadership.
“Most companies don’t really realize that the most critical area of leadership is the front line,” Parker said. “That’s where a com-pany most interacts with its own employees and the public.
“We always put a lot of focus on our front-line leaders and their understanding of their mission and role,” he said. “You have to focus on the value of the individual — at every level — and make it part of your culture.”
Perhaps, then, it would be most logical to conclude that the real key to success of the air carriers that usually seem to find it — car-riers such as Southwest Airlines, WestJet, TAM, LAN and Etihad — is a culture of service, combined with a capability to see the value of every individual within the bigger picture.
And those individuals include both cus-tomers and employees, because every indi-vidual’s experience is truly critical in a people-driven business such as the movement of travelers around the world — in a true sense of giving and receiving fair and genuine value.
“The bottom line should be a conse-quence of good business decisions you make — it should not be the driver of decisions,” Ramaswamy said. “For Southwest [Airlines], it goes all the way back to Herb Kelleher, when he was running the company.
“And I’m paraphrasing, but he said something like, ‘If I take care of my employ-ees really well, the assumption is that the employees will take care of my customers well. Because I cannot be taking care of every customer myself, I’m relying on my employees to do that.’
“I think it makes a lot of sense. And it also illustrates the amount of effort that is required to make that work.”
Obviously, several of the world’s pre-mier carriers are making it work. Among other things, it simply proves that working hard truly can be fun, and for these successful carriers, the fun is most evident at the bottom line.
Southwest Airlines has long been known for the self-effacing humor upon which it bases much of its advertising. The carrier is afraid neither of making fun of itself nor of its entire industry. And that says a lot about its greater corporate psyche.
It says, more pointedly, that Southwest Airlines is a carrier that’s psychologically com-fortable in its own corporate skin. And occa-sionally, the carrier may fail. Its fuel-hedging strategy, in fact, led to recent losses when fuel prices nosedived.
But in the longer run, Southwest Airlines, WestJet, TAM, LAN, Etihad and a handful of other carriers around the world know that they are on an exciting, innova-tive journey toward a future that holds the broad possibility of becoming even more successful. And that’s the type of corporate confidence that can be observed as a les-son to many other companies — in multiple industries — as the future unfolds.
“A customer-centric business model means attention to detail — making the customer feel comfortable and going out of their way to help customers,” Ramaswamy said. “And if you compare that with carriers that have not necessarily done well, most of them treat people like cattle.
“You will never see that happen-ing with Southwest [Airlines]. Southwest [Airlines] and these other successful car-riers are going through the same issues of security and loads and the delays — all of that — but still, they have a smile on their face. And they’re able to make fun of themselves.”
It’s all reflected in the service prom-ise, a promise that says the customer is entitled to reap the benefits of an apprecia-tion and respect that only customer-centric businesses are willing to apply on the job every day.
“That’s why I think carriers have to go back to the basics,” Ramaswamy said. “They have to understand what kind of busi-ness model they’ve put in place and what the components of the business model are. They need to respect the customer’s intelli-gence and treat the customer with respect.
“And you have to decide: What’s your vision in terms of how you’re going to be able to differentiate yourself in the marketplace? In many instances, people are selecting their airlines simply because they don’t have a choice.”
Yet when competition abounds, cer-tain carriers consistently prevail. And those are the carriers with vision, with determina-tion, with insightful and innovative leader-ship, and with employees who understand that the customer is their true boss.
These are the carriers that will be pacesetters long into the bright future of air transportation worldwide. a
Phil Johnson can be contacted at [email protected].
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The Explorer
By Chris Zanardi | Ascend Contributor
Sabre Holdings® recently acquired Flight Explorer ®, the leading provider of commercial aircraft situation display, or ASD, solutions providing real-time tracking, reporting and display of enroute aircraft.
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L ast September, Flight Explorer and its industry-leading solutions became part of Sabre Airline Solutions®, the
world’s leading provider of integrated solutions and services for airlines, air-ports and other air transportation-related businesses.
With only a personal computer and access to the Internet, customers can use the Flight Explorer solution to manage and track all of their aircraft, anywhere in the world. Flight Explorer also goes beyond just flight tracking, incorporating multiple data feeds, dynamic weather overlays, situational alerts, and predictive weather and air traffic tools to make it an essen-tial, reliable flight operations management tool.
Flight Explorer was first introduced in 1997, and it immediately gained rec-ognition as the premiere real-time flight tracking and management system in the industry. It’s the world’s leading aircraft situation display in terms of performance, value, reliability, sales and reputation.
Flight Explorer provides its ASD ser-vices to more than 800 corporate custom-ers with an installed base of more than 2,300 systems. Its corporate customers include:
85 percent of the U.S. Federal Aviation Administration’s collaborative decision making, or CDM, participants;
85 percent of North American major airlines including Northwest Airlines, American Eagle Airlines, Air Canada, jetBlue, US Airways and Continental Airlines;
17 of the top 20 regional airlines; 80 percent of the Air Transport Association membership;
The top five cargo carriers including FedEx, UPS, Airborne Express, TNT Express and DHL Express;
International carriers such as British Airways, Copa Airlines and Aer Lingus;
The 12 largest executive jet opera-tors including NetJets, Flight Options, Gulfstream and Bombardier;
Major airports including Hartsfield-Jackson Atlanta International Airport, Chicago O’Hare International Airport, New York Port Authority, Los Angeles International Airport and Miami International Airport;
More than 200 corporate flight depart-ments, air charter operators and fixed -base operators.
Flight Explorer’s success is based on a solid, technical approach that pro-vides a high level of security and reliabil-ity to meet the stringent requirements of a 24/7 airline operation, the FAA, the U.S. Department of Defense and airports, combined with a robust architec-
“The addition of Flight Explorer, with its out-standing flight tracking and airspace monitoring capabilities, to our com-prehensive portfolio of solutions positions us to be the unique provider of a fully integrated, world-class flight planning and aircraft tracking solution,”
— Steve Clampett, president of Airline Products and Solutions, Sabre Airline Solutions
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ture that Flight Explorer enables airlines to add layers to the display for a true picture of what may be impacting their operation. Filtering and zooming enables analysts to limit the display to a specific flight or set of flights that may require particular focus due to current conditions. enables quick development of new services and solutions to meet the needs of clients throughout the world
“The addition of Flight Explorer, with its outstanding flight tracking and airspace monitoring capabilities, to our comprehensive portfolio of solutions posi-tions us to be the unique provider of a fully integrated, world-class flight planning and aircraft tracking solution,” said Steve Clampett, president of Airline Products and Solutions for Sabre Airline Solutions. “We have enjoyed a strong working rela-tionship with Flight Explorer for many years and are now proud to make them a part of Sabre Airline Solutions.”
The Flight Explorer solution, which will also be available to global aviation customers as a stand-alone solution, will be fully integrated with Sabre Airline Solutions’ dispatch management solu-tion, Dispatch Manager. The integrated solution will provide airlines the technol-ogy they need to access critical, real-time operational information and world-class flight plan optimization, helping pre-empt delays, among other benefits.
The combined solution will leverage the powerful graphic components and proactive alerting capabilities of Flight Explorer with the robust flight planning capabilities of Dispatch Manager to help airlines choose the most efficient, cost-effective flight plan.
Later this year, Flight Explorer and Sabre Airline Solutions will launch Airspace Flow Manager, a tool that will give airlines or general aviation an opportunity to reap the benefits offered by the integration of collaborative decision making tools into the Flight Explorer ASD. Prior to flight departure, Airspace Flow Manager will proactively alert the airline if its flights are going to be affected by any traffic man-agement initiative, analyze the impact of the initiative and help the airline explore its options. Airspace Flow Manager is expected to significantly improve on-time performance, aircraft utilization and fuel efficiencies across carriers and general aviation. a
Chris Zanardi is a senior solutions partner for Sabre Airline
Solutions. He can be contacted at [email protected].
Flight Explorer enables airlines to track aircraft anywhere in the world. Both Atc radar data and AcArs information is used to graphically display aircraft in real time so an airline always knows the locations of its aircraft.
Flight Explorer enables airlines to add layers to the display for a true picture of what may be impacting their operation. filtering and zooming enables analysts to limit the display to a specific flight or set of flights that may require particular focus due to current conditions.
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Sharpening The E-Commerce Edge
Sabre Holdings® recently acquired EB2 to enhance airlines’
e-commerce capabilities by providing a vast range of Web options.
By Phil Johnson | Ascend Staff
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y The revenue-generating potential of an airline’s e-commerce channel may very well become even more significant con-
sidering the level of uncertainty in worldwide economics.
Sabre Holdings’ acquisition of e-commerce specialist EB2 brings new vigor to SabreSonic® Web, a component of SabreSonic® Customer Sales & Service. The expanded set of advanced Web-based tools gives airlines a leading edge.
The London-based e-commerce unit specializes in developing, customizing and hosting Internet booking engines for online travel booking, simplifying direct sales to the corporate, agency and individual traveler segments alike.
Historically, EB2 has staked a solid reputation as a top supplier of e-commerce solutions, infrastructure and services to a broad range of global carriers.
The EB2 acquisition represents an important part of Sabre Holdings’ pledge to provide forward-looking technologies that enable carriers to maximize e-commerce-channel revenues with flexible, cost-effec-tive, reliable solutions.
The capabilities and expertise of EB2 are being integrated into SabreSonic Web (with products to be developed up to two years earlier than previously scheduled).
Current customers of Sabre Airline Solutions® as well as the newly acquired clients from EB2 — including AeroMéxico, Transaero, RegionalLink, S7 Airlines, Brussels Airlines, Air Malta, Belavia, Brindabella Airlines, Olympic Airlines and Gulf Air — will benefit from the new capabilities of the enhanced SabreSonic Web.
Planning and integration activities are underway to accelerate e-commerce capabil-
ities through a service-oriented, rules-based architecture, enabling both Sabre Airline Solutions and its customers to quickly adapt to new business processes. This is in addi-tion to providing merchandising capabilities based on up-sell, cross-sell and ancillary-product Web offerings. Online direct Web services are also being introduced to lever-age and control airline content for third-party and airline use as well as plug-in adaptors enabling activity by payment service provid-ers and third-party content.
The new version of SabreSonic Web, planned for rollout by year end, will leverage several key differentiators such as flexible calendar-search displays with targeted shop-ping experiences adapted to suit individual markets. Providing a range of calendar-based shopping experiences optimizes an airline’s look-to-book conversion rates.
New screen designs planned for SabreSonic Web include dual-display shop-ping as well as matrix shopping and a mer-chandising framework that provides carriers the ability to configure sets of products and other associated features for each of their fare families. Airlines can configure products and features related to specific fare families by market using an online administration interface or customize by the individual car-rier’s philosophy, mission, service promise, direction and innovative ideas.
Also included are customer up-sell opportunities, enabling the sale of higher-value products through fully configurable business rules that determine the most opportune moment to offer up-sell oppor-tunities to online customers. In addition, cross-sell emphasis offers appropriate ancil-lary products to the right customers at the right times.
All of these customer-specific capa-bilities are dependent upon accurate, up-to-date, customer profiles available to call up at any customer interface. It’s a necessity for carriers to be able to take full advantage of the SabreSonic CSS capabilities.
Sabre Airline Solutions advancement through the EB2 acquisition represents a truly significant achievement — with the company now possessing the industry’s most powerful Internet booking-engine capabilities.
Existing SabreSonic Web customers will be migrated to the new version of SabreSonic Web during the next 18 to 24 months.
In joining SabreSonic CSS, EB2 has brought — in addition to its quality portfolio of airline customers — an extremely high level of processing capability at more than 2.6 million transactions annually.
EB2’s employees in the United Kingdom and Australia are being assimilated into existing Sabre Airline Solutions offices, and the EB2 development center in the Philippines will be maintained as a new Sabre Airline Solutions office location.
Overall, with the addition of EB2, a highly robust offering of SabreSonic CSS has grown even more robust — leading to a more exciting future for many airlines around the world. a
Phil Johnson can be contacted at [email protected].
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The number of aircraft deliveries last
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new record for the Toulouse, France-
based aircraft manufacturer.
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Future proof your airline with SabreSonic CSS
SabreSonic ® CSS is the industry’s most powerful revenue-generating customer sales and service solution. By enabling airlines to uniquely value every passenger, SabreSonic CSS creates a new intersection for customer value and revenue growth. From reservations, inventory and departure control to online direct, loyalty, revenue management and more, SabreSonic CSS easily adapts to your ever-changing business needs with a future-proof technology platform.
See how a complete view of your customers opens new windows to revenue. Start your airline’s future today with SabreSonic CSS.
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Brainpower
By Michael Askew | Ascend Contributor
Business intelligence solutions from Sabre Airline Solutions® enable airlines to broaden their analysis capabilities to include key performance data into their business strategies.
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Many airlines currently rely on SabreSonic® Customer Sales & Service to manage trans-actional passenger reservations data that
enables them to book and manage travel for their cus-tomers. However, significant benefits can be realized by moving beyond solving transactional problems to creating a customer sales and service solution.
To gain the most from a CSS solution, insights into how an airline’s business is performing are essen-tial. Leveraging Sabre Airline Solutions’ rich travel industry knowledge and layering powerful business intelligence systems on top of CSS data, SabreSonic CSS offers flexible analysis capabilities so airlines can incorporate valuable performance insights into their business strategy.
The Business Intelligence option of SabreSonic® Res provides such insights. And one of the first of sev-eral planned new Business Intelligence capabilities is now available — Essential Analytics, a reports module offering flexible analytics. One of the most important actions airlines can take to maximize revenue oppor-tunities is to first understand which booking sources, distribution channels and markets are driving bookings. With this information, carriers can enhance distribu-tion channels and relationships, identify less-effective sources, and adjust their marketing and distribution strategies. Essential Analytics provides these insights and more, enabling airlines to analyze booking trends and identify effective sales and marketing initiatives.
SabreSonic CSS leverages Sabre Airline Solutions’ industry knowledge and strengths in res-ervations data management to deploy new business intelligence capabilities to its SabreSonic CSS cus-tomers. Essential Analytics, an interactive Web-based analytical and intelligence reporting solution, leverages leading business intelligence (see related article on page 36) and analytical data management technolo-gies, enabling SabreSonic CSS customers to measure the performance of their various distribution channels, including airline reservations agents, airline Web sites and global distribution systems.
The CSS concept represents the best oppor-tunity for airlines to develop customer-focused solu-
tions and revenue generation in every distribution channel, helping them realize their revenue goals. Essential Analytics and its planned enhancements are integral components to helping airlines achieve the value of the CSS approach. The Business Intelligence environment and Essential Analytics give airlines of all sizes around the globe the ability to: Analytically view top sources and markets —
Airlines can evaluate the top sources of their bookings (GDS, airline direct and interline bookings) and the top travel markets based on user-selected dates. With backward- and forward-looking book-ing, market and last-minute cancellation reports, they have insight into areas that may require change.
Measure and target incremental market opportuni-ties — The flexibility of the analytic tool provides a variety of ways to drill into business bookings performance — more easily than was possible before — enabling airlines to measure and target incremental market opportunities within their net-work and distribution channels.
Graphically present analysis results — Airlines can quickly select the desired report parameters to create a variety of reports. The various report views include tabular, drilldown and graphic for-mats as well as year-over-year comparative views to highlight how bookings are performing this year compared to last year.
Access a cost-effective reports solution online — Because Essential Analytics is a hosted solution, airlines can realize significant cost savings in the areas of hardware and third-party software, system implementation, support personnel, data storage, and ongoing monitoring and maintenance. With Sabre Airline Solutions managing the application environment, airlines can focus on their core busi-ness rather than internal information technology operations.
Essential Analytics helps focus on histori-cal and forward-looking reservations booking details (travel booked up to 331 days into the future and as far back as two years) through a wide range of airline-
specific filters such as booking class, travel cities and booking source (including direct booking channels such as reservations centers and Web sites).
Airlines generate hundreds of thousands, in some cases millions, of data points used in the report-ing and analysis process. Flexible report parameters help isolate and focus on only the level of report out-put detail that is relevant to a specific business ques-tion. For example, for a particular timeframe, it is easy to narrow the bookings performance report output to highlight details such as the number of bookings that are being driven through an airline’s Web site(s), reservations center or a particular GDS.
Summary booking reports provide access to simplified booking reports for creating a quick snapshot of bookings performance with some additional built-in drilldown capabilities and graphic summary representations such as pie charts and bar charts. These reports also include top markets and top booking source reports for identifying an airline’s top 20 markets or booking sources for the selected time period.
Additional detailed booking reports provide the ability to analyze even more detailed report outputs and support the export of report output to comma-separated value, or CSV, format for import into Excel or a local database for further manipula-tion by power users. The option supports analysis by booking date or travel date and identifies the key sources of last-minute cancellations that impact an airline’s available inventory. In addition, it provides year-over-year, quarter-over-quarter and month-over-month outputs to support comparative analysis.
Essential Analytics is available to airlines using SabreSonic Res, and it leverages Microsoft Internet Explorer Web browser version 6.x or high-er. It also provides preliminary, unaudited booking and market data for directional and trending analyt-ics based on a snapshot of the current state of a carrier’s bookings in SabreSonic Res. The reports provide the airline with a preliminary unaudited view into its booking and channel performance as well as trends during that critical timeframe when the airline is typically waiting days or weeks before fully adjusted audited revenue accounting-based statistics become available.
Essential Analytics complements other technology from Sabre Airline Solutions, such as the Quasar™ System for revenue accounting, or the airline’s own in-house or third-party passenger revenue accounting system.
Additional business intelligence product enhancements such as revenue analytics and an executive dashboard are also planned this year as part of an overall strategy to help airlines drive profit-ability insights and provide an at-a-glance view of critical business metrics. a
Michael Askew is a SabreSonic CSS product marketing manager for Sabre Airline Solutions. He can be contacted
carriers can examine the main sources of their bookings and the top travel markets based on user-selected dates. With a variety of historical and forward-looking booking, market and last-minute cancellation reports, they have insight into areas that may need to be adjusted.
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Service360° SM consistent practices, from Sabre Airline Solutions®, comprises five service practice areas intended to ensure carriers around the world receive top-quality software that steers the performance of their businesses.
it’s all around you
By Parag Sanghvi | Ascend Contributor
SM
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tion
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I n 1965, Gordon Moore, co-founder of Intel, the integrated semiconductor chip manufacturer, introduced his law that
the number of transistors per square inch on integrated circuits doubles every year. Over time, the definition evolved slightly, and today, data density doubles roughly every 18 months. This trend is expected to continue for at least another two decades.
An important consequence of Moore’s Law is that the amount of com-puting power available to help drive busi-ness productivity has grown exponentially during the last several decades. Software that optimizes use of such computing power has become ubiquitous and has enabled significant advances in all aspects of modern commercial activity, including commercial aviation.
A curious outcome of all this prog-ress has been that often times busi-ness software capabilities far exceed the capacity of their owners to use them to maximum effect. As a result, companies make significant capital investments in purchasing software from which they are only realizing fractional value. A US$1 million investment may be only delivering US$750,000 worth of value.
Sabre Airline Solutions is well aware of the importance of airlines getting full value from the software solutions they use. In the past, this awareness was manifested through activity such as investments in best-in-class graphical user interfaces, superior training models and periodic regular customer “health checks” that identified areas of sub-optimization. Today, the company has taken this phi-losophy to the next level.
In January, Sabre Airline Solutions introduced Service360° practices, its unique framework of five service practice areas designed to ensure airlines receive superior solutions that drive the perfor-mance of their businesses. Service360° practices represent how Sabre Airline Solutions drives tangible business value, ensures full adoption and provides a con-sistent experience across the industry’s leading portfolio of airline software solu-tions. Its focus is on measuring its suc-cess not only by traditional means such as market share but also by how much value customers receive from the solutions they purchase from Sabre Airline Solutions.
Service360° practices consist of five delivery and customer care practice areas:
Solution consulting — A consultative approach to identifying opportuni-ties, recommendations and business processes that ensures solution per-formance and realization of business value;
Solution delivery — A proven process that ensures a consistent delivery expe-rience focused on business value and solution adoption, resulting in improved business performance for the airline;
Knowledge transfer — Extensive train-ing and education resources to provide airlines and other air transport-related companies with deep solutions exper-tise that maximizes the results across their businesses;
Customer community — Comprehensive solution access, collab-oration and networking via leading user conferences and the Sabre® Community Portal;
Customer care — Proven customer care disciplines infused with deep sub-ject matter and technical expertise, to support ongoing business value real-ization after implementation; available 24 hours a day, 365 days a year, both online and offline.
Service360° practices apply across the full breadth of Sabre Airline Solutions’ portfolio and provide a unifying effect that makes steady delivery of service not only possible but likely. The key is to approach customer care and delivery with the intent of driving consistency, efficiency, predict-ability and effectiveness.
These ideals are sustained by spe-cific programmatic models. Three in par-ticular worth exploring further include: implementation and support lifecycle, Sabre® Airline University, and customer value measurement.
The implementation and support lifecycle is a structured approach to implementation and support of each solu-tion across the Sabre Airline Solutions portfolio. It improves business processes and value, it helps build collaboration and team-oriented attitudes between Sabre Airline Solutions employees and its customers’ employees, and it pro-motes honoring of budget and schedule commitments. The implementation and support lifecycle resides under the solu-tion delivery practice area of Service360° practices and consists of five formalized stages: project initiation, interactive pilot, solution adoption, project transition and customer care.
By following this prescribed method-ology, Sabre Airline Solutions employees are able to improve value realization for customers from initiation of a project through maturity. Clear, articulated steps are outlined that enable the company’s professionals to deliver consistent, repeat-able service that improves productivity, shortens implementation timelines, drives fewer customizations and focuses on cus-tomer business objectives.
A second important innovation under Service360° practices is the Sabre Airline University. Accessed via the single interface of the Sabre Community Portal, all training information for customers becomes available online, regardless of learning format. Sabre Airline University lives under the knowledge transfer prac-tice area of Service360° practices and con-sists of a centralized source for training and reference resources for the specific solutions a carrier uses. In addition to pro-viding access to resources that promote solution adoption and usage, Sabre Airline University includes certification capabili-ties that help ensure employees have
using the implementation and support lifecycle, Sabre Airline Solutions professionals can help customers realize a project’s value from initiation through completion and help ensure they deliver consistent, repeatable service that enhances productivity, reduces implementation timelines, requires fewer customizations and supports customer goals.
ProjectInitiation
InteractivePilot
SolutionAdoption
ProjectTransition
CustomerCare
Implementation And Support Model
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solu
tio
ns mastered material they need to effectively
do their jobs. The pervasive nature of the Internet
means airline employees can gain real-time access to training resources any-where in the world at any time. Questions can be resolved more quickly, employees become more empowered to problem solve, and costs can be reduced for items such as travel and incidentals. Sabre Airline University leverages the realization that in today’s fast-paced business world, perhaps the most important resource of all is time, and getting meaningful informa-tion into the hands of airline employees in a relevant timeframe can mean the dif-ference between success and failure. The Sabre Airline University has a rich trove of solution information as well as interac-tive learning activities that help airline employees become proficient at managing software capabilities in a timely manner.
A third advancement is customer value measurement. One of the key focus areas of Service360° practices is ensuring Sabre Airline Solutions’ systems drive tangible business value for customers. It is impossible to gauge how much value a solution has created without having a formalized, methodical approach to value measurement. Under Service360° prac-tices, a common diagnostic process for all tools in the suite is available to the deliv-ery manager to evaluate value creation from the starting baseline for that particu-lar customer. The delivery manager works closely with the customer’s employees to complete diagnostic information that forms a foundation for ongoing value measurement.
The most important aspect of this is that it has a weighting measure to take into account the importance of a particular criterion to the customer. For example, rather than indicating that a value creation should be examined exclusively from one angle or another, the airline provides input on what is most important to it, and the final measure of value reflects the air-line’s preferences. The ability to include a comparison of before/after or product versus product is provided, and results are validated and made credible. Customer inputs are straightforward and easy to understand.
Value measurement can help an airline confirm and communicate through the ranks the real impact of software purchases on the operation. Opportunities for improvement can be highlighted and successes can be heralded. Most impor-tantly, the return on investment becomes easier to articulate, and progress toward strategic goals can be monitored.
Among the types of results the value measurement program has docu-mented are:
The use of Sabre® AirFlite™ Profit Manager at one airline generated US$3.9 million in one year,
Confirmation of an 11 percent incre-mental revenue gain (equating to more than US$271 million) during a 12-month period from the Sabre® AirMax® Revenue Manager at another airline,
Reduced reaction time to competitor fare actions by 72 percent year over year with introduction of the Sabre® AirPrice™ System for fares management for a third carrier.
The biggest benefit of value mea-surement is perhaps the control and vis-ibility it provides to an airline management team. With this control, better decisions can be made that ultimately lead to improved profitability.
The choice of the name Service360° practices for the coordinated program of five service practice areas was deliber-ate. Sabre Airline Solutions recognized that business activity only has value and meaning if customers realize benefit from its solutions, and Service360° practices helps convey that the customer is always at the center.
In today’s challenging economic environment, it is not enough for an airline to install the best software solutions to realize positive business results. Unless there is a coherent, integrated approach to implementation and customer support by the technology partner, even the best solutions can fail to deliver on their prom-ise. The industry is littered with examples of lofty ambitions that never materialized due to implementation and usage defi-ciencies. Sabre Airline Solutions recogniz-es that economic value can be created for customers simply by ensuring that the solutions are implemented and being used as designed. a
100 The percentage of e-ticketing
achieved by IATA member airlines,
an annual cost savings of more than
US$3 billion, according to IATA.
29 The percentage of increase in traf-
fic that would result from a simula-
tion of full liberalization of the United
States-United Kingdom market under a
Comprehensive First Step Air Service
Agreement between the United States
and the European Union, according to
InterVISTAS-ga2.
2011
The year by which air service liber-
alization in Egypt could increase the
gross domestic product by 12 percent,
adding 260,000 full-time jobs, accord-
ing to InterVISTAS-ga2. Additionally,
the total GDP for all sectors would
increase by 1.8 percent.
+count it up
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