Sunday, July 13, 2014

7 Steps for airline route forecasting

1) Current demand - Collect origin and destination data on relevant markets.  The data is best collected at a passenger per day each way (PDEW) aggregation.  If possible the data should be broken into premium and economy with average fares.

2)  Current supply - Assess all the potential ways that relevant O&D markets can travel today.  The most common way to assess this information is with a Quality of Service (QSI) path build model.  These models will take into account nonstop flights, single stop flights, online connecting flights, code-share connecting flights, and interline connecting flights.  The QSI is a simple way to assign a value to each unique path to travel from O to D.  For example;

  • nonstop flights receive a value of 1.0
  • single stop flights (same aircraft/flight number) receive a value of .30
  • online connecting flights receive a value of .10
  • code-share connecting flights receive a value of .05
  • interline connecting flights receive a value of .02  
Calibration to historical data will give the precise values to use for your airline.


3) Build your flight schedule - Create the flights you want to forecast with a operationally desirable fleet type and block times.

4) New demand - Consider how demand will be changed by your new service.  The topics to consider are;

  • normal growth in the market since the last demand was captured.  This is mainly driven by population changes, income changes, and propensity to travel.
  • service stimulation due to the difficulty to travel in the market previous to this service
  • price elasticity if lower fares will be offered in the market
  • market substitution if this market has similar characteristics as other markets particularly if the market is a tourist destination
5) Market shares - The QSI model for relevant O&Ds is the primary determinant.  Other factors to be considered are;
  • reputation of airline
  • airline product preference (i.e. seats, IFEC, food and beverage)
  • connecting airport quality for connecting passengers
  • aircraft type
  • demand variation for time of year, time of day, and day of week,
  • elapsed time of journey
  • seat factors on competing services (if other services are full they can not carry all of the demand)
  • pricing
  • classes of service offered 
6) Cost allocation - Calculate variable and fixed costs.  Notable costs include fuel, aircraft ownership, crews, ground handling, airport fees, maintenance, and overheads.

7) Allocate revenue and calculate profit - Revenue on point to point travelers are easy to assign.  Connecting travelers revenue needs to be prorated across the flights used.  This is usually done on a distance basis but with more revenue being allocated to shorter flights.  Ancillary revenue also needs to be allocated.  The profitability calculations need to be done on a segment and network basis on both variable and total costs.  It is also important to consider how much of the revenue is incremental to the airline. 

Once you have completed these 7 steps use the correct profitability calculation to make your decision to operate, not operate, or recreate a better schedule in step 3.  The correct profit metric can vary based on the time period being assessed.  For example making a decision to acquire an incremental aircraft is different to the decision to allocate existing aircraft. 


Monday, January 4, 2010

Airline Industry Structure

Structure, conduct and performance are the three building blocks of industrial organization. Structure is best thought of as those things which are mostly outside of the control of the industry participants. They are the things that are the same for everyone. They can and do change over time. Some become more important while others become less important. However, at any given point in time they set the stage to be performed on.

For the airline industry several structural elements are present:
Regulatory environment
Fuel prices
Foreign exchange rates
Interest rates
Demand
Aircraft technology
Etc.

Structure also encompasses the relationships to other industries or averages. It is often said that the airline industry is capital intensive, or labor intensive. It is also said that the industry is highly leveraged or has high fixed costs. These statements are all true to an extent and the relationships do not move quickly over time.

The most important thing about the structure of the airline industry is that while management needs to understand and look for ways to address the inherent strengths and weaknesses it provides to their individual companies, structure also needs to be recognized in order to find those aspects of an airline that can be made truly unique in order to compete as differentiated players.

As the new decade begins the airline industry structure continues to evolve. Issues like security have become more important while new structural issues like the advance of social media are reshaping the stage. Good luck and hard work will determine the airline winners in this decade just like the past ones. To all my airline friends have fun and enjoy the twelfth decade of flight!

Sunday, October 11, 2009

Lists, Marketing, and Web 2.0 Reverberation

A couple of weeks ago someone I follow on Twitter posted a link to Rotten Tomatoes list of 50 movies for 50 states. My wife and I both agreed that this was pretty cool. We rushed to the site to see which picks we agreed and disagreed with, and which movies are in our DVD collection. We correctly predicted a few of the picks then we turned our attention to a difficult state. Point Break for California, I never saw this movie nor did I know what it was about. But to get this honor for California is huge. California is “the” movie making state. Well guess what, today we own Point Break.

A simple list can be a powerful marketing tool. They are a simple way to say that this is more important than that or for a collector to check off what they own. In the web 2.0 world these lists can be anywhere in a second. I am pretty sure that this list was put together with the intention of both entertaining viewers and promoting the sale of DVDs. Well it worked.

Intentional and unintentional consequences happen every time a story or idea is told and retold, even if it is a simple list. So what are the unintentional results of that list? I now want to put together my own ultimate list of lists. Note that I say my own because a simple web search indicates that it already exist. I will probably never get to this on my own but perhaps someone who reads this will.

Spread an idea and change the world!

Friday, September 25, 2009

An Economical Change

The Economist is one of my all time favorite magazines/newspapers. They are also in an industry that is struggling to capture the value they deliver due to changes in distribution. I applaud them today for getting around to making an audio version available automatically in itunes. This is a great example of adaptation and change in the media industry. Many will know that the Economist has gone round and round on whether to make their content online free, limited, etc. While finding the perfect balance takes time and experimentation they generally get it right in the end. I like the print edition but it comes too late in a world that is electronically wired. I liked the audio download but it was cumbersome and time consuming to download. So they figured out a great way to distribute in a timely fashion. I also should add that I like paying them a subscription fee to keep the great reporting alive. However, I think their next step will be to offer a discount for an audio version only. Thanks Economist!

Thursday, August 27, 2009

Here is something to change

Most people do not know it from meeting me but I am partially sighted, this is the politically correct way to say it since I feel more partially blind. I often wonder if my business quailifies as a minority business. I have never followed up on this since I think I do okay without assistance but at the same time being physically disabled does have its downsides to business development, etc. What really gets me though is when I read information like the following found on the wesbite of the US Department of Transportation; http://www.osdbu.dot.gov/DBEProgram/definitions.cfm

If you do not want to follow the link here is the highlight (lowlight?);
African Americans, Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian Americans, and women are presumed to be socially and economically disadvantaged.

My points are;
1) I would be pretty upset if it was presumed that I am socially and economically disadvantaged.
2) I am upset that people with physical disabilities are not included
3) with women included the US government is already presuming over 50% of the population is disadvantaged, I find something defeatist and pessamistic about this wording

Tuesday, August 25, 2009

It is (always) time for a change

Change is everywhere. It is the duty of individuals to embrace it. The government can only moderate the pace and attempt to make it less destructive. But destructive it must be to the status quo. Without it we would have no progress. So stop saying you are dynamic and start being dynamic.

This blog is inspired by the lyrics of the Peter Gabriel song Fourteen Black Paintings

From the pain come the dream
From the dream come the vision
From the vision come the people
From the people come the power
From this power come the change

It does not matter if you are an individual, a company, or a country, let's start working together to make a better and more profitable future.