1. Airline Economics and Planning
Gilbert George
Manager - Planning
Jet Airways

2. Presentation Outline
Civil aviation & its contribution to growth of economy
Current aviation environment
Paradigms of success
Demand for Air Transportation
Airline Economics
Measures of airline efficiency / productivity and
their validity

3. Civil aviation & its contribution to
growth of economy

4. Economic Influence on Air Travel
Air transport is primarily determined by economic development
Development in personal income - spur leisure traffic
Increase in trade & commercial activity - spur business travel and air freight
Devaluation of currency has a positive influence on growth of foreign leisure travellers

5. Contribution of Civil Aviation
Unlike 1950s, the governments of today cannot fuel high growth
Private concerns are not only more efficient but can also meet the changing requirements of the consumers, unlike public enterprise
Role of aviation is that of a catalyst & as such contributes indirectly to the general economy...
Reduce cost of trade
Open new markets
Improve the speed of moving goods & services
Increase economic efficiency - faster mechanism for distributing goods & services

6. Improved employment, business & economic activity in and around the airports
Direct impact - accessed thru airlines, airports & business located at the airports
Indirect impact - Off-airport activities of PAX & shippers, hotels & tourist - calculated by accessing multiplier effect across the economies
Success of a country’s economic policies depends of air infrastructure available in the country

7. Demand for air travel is primarily determined by income levels and the cost of air travel. World energy demand, supply and prices are critically important both to economic progress and to the cost of travel. Hence the airline industry is highly vulnerable to economic cycles and fluctuations in fuel prices

8. Current aviation environment

9. Deregulated & Liberalised environment
Alliances
Privatisation
Growth fed by resurgent economies
Higher Disposable Income - increased leisure traffic
Market segment based products
Customised products and services
Technology used to enhance revenue, customisation, cost reduction & resource optimisation
Market based pricing

10. Shift from operational requirements to market segment requirements
Changing technology
Increased competition from other modes of transport
Large increase in leisure traffic
Removal of subsidies
Improved communication technology
Operating cost economics
Entry of more “niche” regional airlines
Foreign airline ownership
Traffic expected to double in 10 years time

11. Regional distribution of schedule traffic -1998
Source : ICAO
Europe %
Africa %
Middle east %
Asia & Pacific %
North America %
South America %
Total % (PAX 1,462 mio.)
India %

12. Paradigms of success

13. What does success depends on ?
Clear and well defined mission statement
Clear vision of the future
The economic environment
Competitive scenario
Well defined strategies - Business & Operational planning
Management efficiency

14. Extent of innovations
Alliances
Standards of services
Harnessing Technology for optimising resources
Bench marking
REVENUE & COST SYNERGIES

15. What determines profit optimisation ?
Mission and the consequent strategies...
Market Demand
Type of markets served
Cost structures
Opportunities for outsourcing
Regulatory environment
Infrastructure availability
Matching demand with the right capacity

16. Demand for Air Transportation

17. When do people not prefer to fly ?
Price & time competition from other modes of transportation could be higher
Fast and convenient overnight trains
If time saved by air travel is not much

18. Market Demand Considerations for time & money saved
Business links & interactions between city-pairs
Distance between city-pairs
Convenience of air travel vs. other modes
Price
Extent of available disposable incomes - leisure markets
Contribution & increase in leisure traffic has resulted in increased pressure on yields - price & income sensitivity
Greater availability of internet & the resultant knowledge of the far away tourist attractive places

19. Measures for calculating demand
Extent of affluence
Origin & Destination traffic statistics
Distance between city-pairs
Convenience of flying & frequency
Macro environment impacts - the trickle down factors
Evaluation of external factors that influence travel demand - range of forecasts associated with different assumptions
Prospective developments for other surface modes
Use data source and methods that minimises the range of uncertainty

20. Determinants of Demand
Who
Nationality
Adult of child
Male of female
How
Scheduled or Charter
Airline Market Share
Interline traffic
Where
Gateways
True Origin-destination
Frequency of visits
When
Annual Traffic
Seasonality
Time of day demand
Why
Business
Pleasure
Government & Others
How much
Fares
PAX by Fare class
Realised yields

21. Methods for Calculating Demand
Trend Projections : used when historical traffic growth has been steady & no major environmental changes are expected during the study period
Econometric relationships : used when traffic is influenced by many environmental factors
Market and Industry surveys : used for new or immature markets
However, end results may be combination of the above and use of sound judgements to consolidate different conclusions

22. Trend Projections
Depends on the stability factors in the past - factors that have influenced traffic in past will continue into the future
Type of trend curves :
Linear - implies constant annual increment in the traffic levels and declining rate of growth

23. Exponential : constant annual percentage increase in traffic

24. Econometric Forecasting
Trend forecasts does not take into account the various economic, social & operations conditions that affect travel.
Forecasting involves establishing a quantitative relationship between air traffic and other economic variables that influences level of demand - establishing causal factors
Process consists of...
Selection of casual factor parameters
Collection of data
Type of functional relationships
Statistical estimation of the relationships
Forecast of casual factor parameters

25. Market & Industry Surveys
Aims at analysing the characteristics of the market based on the demographic structure and socio-economic environment
Quality and size of population sample is paramount
Analysis based on opinions - usage of Delphi method
Used mostly in underdeveloped and immature markets
Used in mature markets for market / consumer segmentations

26. Market Segmentation Market segments are categorised as ....
Business : Schedule friendly departure timings are important
Leisure : Low fare structures are important
The product requirements for each of the above are different and hence product delivery has to be unique to each of the segments

27. Business Traffic Characteristics Frequent flyers
More consideration for flight frequencies
Reservations done closer to departure dates
Not sensitive to fares
Attracted to products that caters for ease of check-ins

28. Leisure Traffic Characteristics Seek for low fares
Attracted to integrated package deals
Preference for mid-day departures
Usually travel in groups

29. Price & Income Elasticities of Demand
Elasticity can be defined as a change in traffic resulting from a change in an identified causal variable .
Price and Income elasticities of demand are defined based on changes to GDP and / or prices
As per a recent NCEAR study..
The estimate for income elasticity is 1.1
The estimate for price elasticity is -0.6
Elasticity of income plays a higher role in air traffic demand as compared to price

30. Why do potential markets fail to deliver?
Monopoly and market power
Externalities - excessive number of players in the markets
Public good
Severe information asymmetries

31. What is required to capture markets ?
Value based products at the right price
Identifiable & sustainable competitive advantage
Brand and image value
Innovation, development & management of brand
Strategic Alliances
Technical
Operational
Marketing
Distribution

32. Leadership in the market place
Products catering to individual customer & market groups
Ontime and reliable schedule keeping
Situation management for the evolving world economics, competition and consequent changes in the market.
Constant innovations and identifiable “edge”

33. Airline Economics

34. What governs airlines’ economics ?
Capital and resource intensive industry
Seasonality - year round, week round, day round and hour round
Management efficiency - complex type of environment both internal and external
Yield management
Function of load factor vs. break even load factor
Management of trip cost and per mile cost economics
High load factors does not mean profits - need to strongly relate per unit cost with per unit revenues

35. What determines airlines’ cost ?
Price - a function of stage length & relative cost of operations
Subsidies on social obligation routes, if borne by the airline, leads to high cost of operation & requirement for cross subsidies
Fuel and landing cost economics
Distribution cost
Overheads
Products offered

36. Cost of technology innovations - net gains over long gestation periods
Pressure on yields should also result in lowering unit costs - sustain profitability

37. Why should cost structures be defined?
Details - as a management and accounting tool
Measure cost vs. operational efficiency
Measure operating & non-operating profit & loss
Determine productivity ratios
Determining cost of products and services offered - price

38. Cost can be categorized as ...
Direct Operating Cost
Indirect Operating Cost
Direct Operating Cost can be categorised further..
Variable Cost
Fixed Cost

39. Direct Operating Cost - Variable Cost
Cost that is directly related to operating between 2 city-pairs ..
Fuel
Maintenance Cost (excludes spares)
Landing & navigation charges
Crew Allowances
Catering & other cabin amenities
Reservations
Travelling expense for crew
Commissions
Cost that are not incurred if the flights are not operated or passenger demand fluctuates

40. Direct Operating Cost - Fixed Cost
Cost that is directly related to airline operations
Aircraft acquisition cost - Lease / Financing
Aircraft insurance
Maintenance overheads
Operating staff salaries
Reservations systems
Rental of airport premises
Cost that are incurred irrespective of flights are operated or not

41. Indirect Operating Cost
Cost that is indirectly related to airline operations
Office space
Advertising cost
Communication network
Other overheads
Cost that are incurred to support airline operations - administration cost

42. Operating cost movement over stage lengths
As distance between city-pairs becomes shorter the per unit distance operating cost is higher

43. Economics of aircraft operating cost
20 seater aircraft operations
Operating cost on a per unit(seat) basis is high - cost do not come down in proportion to the seats
Overhead cost could be lower as these type of operations normally offer “no-frills” service
Per unit yield required for economic viability is higher

44. Economics of aircraft operating cost (contd...)
100 seater plus aircraft operations
Operating cost on a per unit(seat) basis is low
Overhead cost could be higher as these type of operations require large infra-structural support systems and offer market specific products
Per unit yield required for economic viability is lower

45. Economics of aircraft operating cost (contd...)

46. Airline control over cost
Factors which cannot be influenced by the airline..
Fuel rates
Landing & Navigation cost
Salaries
Factors which can be influenced by the airline...
Type & age of aircraft - Fuel and maint cost economics
Distribution cost
Product cost
Overhead cost

47. Measures for lowering cost
Cost reduction via technology gains
Modern & young fleet of aircraft - lower operating cost economics
Outsourcing
Reengineering & downsizing

48. Structure of Airline fares
Yields are governed by market forces and as such cost curve need to adjust itself to be in line with yield curve
Per unit cost
Per unit rev. in India

49. Yield Management
Principle - Sale of all seats at different price levels at different periods but at the same time ensuring that net dilutions do not affect cost levels
Factors to be considered..
Demand at various time intervals - assessing demand pattern based on historical data
Yield management should also consider trend factors, and competitive actions
Fare levels for different demand periods to be planned in order to achieve the targeted per trip revenues

50. efficiency / productivity
Measures of airline
efficiency / productivity
and
their validity

51. Key Performance Indicators
Aircraft utilisation
On Time Performance & Technical Despatch reliability
Load factors vs. Break Even Load Factors
Per unit yields (Rev. per RPK & Rev. per ASK)
Per unit cost (Cost per ASK)
Advertising Cost as a % to gross revenue

52. ASK per employee
RPK per employee
Return on Investments
Debt to equity ratio
Earnings per share

53. Airline operations is complex and multi-dimensional in nature
Airline Economics & Planning are governed by strategies used and the management efficiency in implementing these strategies.
Thank you