Managers may dream of introducing the ground-breaking innovation that reshapes the industry. Or of the revolution that launches their airline to new heights of sustained performance. But in today's real world of increasingly competitive marketplace, victories tend to be smaller, more fleeting and harder to win. Welcome to the age of the incremental gain.

While still aiming for the stars when the opportunities arise, savvy airline executives have embraced a more dependable planning philosophy that aggressively cultivates marginal efficiencies, and then leverages those advantages through the multiplying power of their network. This increasingly popular best practices approach relies on advanced decision support systems to coordinate scheduling, forecasting, budgeting and revenue management. By understanding the costs and benefits of this new planning strategy, airlines worldwide can start turning those little gains into long-term competitive victories.

A changing landscape

Certainly the global commercial aviation environment has seen seismic changes over the past two decades: From deregulation and frequent flier programmes through to yield management, alliances and now internet ticketing. Typically it is the larger and more competitively pressured airlines that move more quickly through the learning curve of these realignments. They then struggle to eke out what often turns out to be a short-lived competitive advantage. Smaller companies often miss out entirely.

Other breakthrough technologies may yet emerge, like the introduction of a new supersonic or high capacity aircraft. In the meantime, most airlines will continue battling it out over progressively smaller pieces of the air travel pie. The prospect may seem daunting, but with an astute investment in planning technology, even the smallest airline can turn a tight market to its advantage.

This more analytical approach to planning is driven by several factors, including the creation of more complex hub operating structures and the growing focus on managing yields. Not least it is being driven by the development of advanced decision support technologies. This information technology-driven approach, introduced by larger airlines operating in intensely competitive environments, has revolutionised airline business planning.

You do not have to be a major carrier to make use of the technology on offer. Smaller airlines in Europe, the USA and beyond are now also adopting these automated practices. So are those companies preparing for privatisation or repositioning themselves ready for more liberalised business environments.

Even a network with as few as 20 aircraft and just five or six fare classes can use analytical methods and technologies to their advantage. In an industry characterised by wafer-thin operating margins and a roller-coaster business cycle, any small advantage sustained over time will justify the investment in improving the planning discipline.

Under this new philosophy, airline strategic plans no longer rely on collective best opinions, but are instead based on content-rich analyses of the company's unique operating characteristics and environment. Route and scheduling decisions are made on the basis of network-wide revenue and profitability evaluations. New revenue management rules focus on the end-to-end value of every itinerary and the potential effects of spilled demand on any common flight let in the network.

A solid airline business plan now includes a sophisticated array of detail: the scientific forecasting of market share and passenger volumes; a detailed network-level understanding of route profitability; management of revenues and markets; optimisation of aircraft routings/rotations and aircraft assignments; automation of labour-intensive scheduling activities; and the development of competitive schedules to create and meet market demand.

By implementing these core strategies, executives can now visualise operations on an enterprise-wide scale, or drill down to evaluate the performance of a particular activity at operation. Management can also pose what if? scenarios, analyse the implications of those ideas, and then select and implement the best possible option. These new methods can dramatically reduce costs while improving both performance and customer satisfaction. They have enabled airlines to make better, faster and more informed business decisions.

Choosing a strategy

There are different ways an airline can gain access to these technologies. Some airlines have taken a hybrid approach, purchasing several core systems from specialised software vendors and then customising and integrating the products to meet their specific requirements. It is possible for carriers new to such technologies to leapfrog into directly into highly refined, second-generation planning systems, receiving back-up from systems specialists on design, implementation and training.

Other carriers have passed key business functions such as strategic planning, forecasting, schedule production or revenue management over to outside consultants. Although part of the work may take the form of a series of one-off projects, some airlines are taking a more structured team approach, integrating the consultants into the business. Taking that a stage further, others have skirted around the up-front cost of investing in new technology and expertise by completely outsourcing information technology functions.

Lastly, some airline start-ups are using consultants to draft their business plan. The airline gets a highly professional business plan at a very reasonable cost, and can then devote its attention and resources to executing and extending those sound business strategies.

Perhaps the best guide to how these strategies can work, it is best to take a look at a series of case studies from airlines around the world which have brought in systems and consultants to improve their performance. Also at the problems they hoped to resolve.

A Mexican carrier

Airline managers in Latin America now expect aeropolitical liberalisation to take a firm hold in their key regional markets. Of particular interest is the North America market, where US-based carriers have steadily increased their service penetration. Managers at one Mexican airline knew if they hoped to boost their performance in the new partially open cross-border environment, they had to raise their business planning competencies to match those of their larger US competitors.

The first order of business was to start making more informed planning decisions. This involved changing the way the airline planned and reported its operational and financial data. Management also realised they should adopt state-of-the-art-planning tools and techniques to help evaluate new strategic and operational alternatives.

Historically, traffic, revenue and profitability were expressed at the leg-level, or in the case of flights that had multiple-stops, data was reported at the flight number level. Because onboard load factor and segment flight yields were the primary statistics gathered, these measurements also became the key planning parameters. Management found data at this level did not give them critical insights into origin-destination traffic flows, network demand and profitability. Because of this limitation, the airline often used their best judgements in lieu of hard number data when deciding on aircraft route assignments, weekly aircraft rotations and the most efficient passenger connections.

To meet its objective of matching the planning capabilities of its US partners and competitors, the Mexican carrier purchased a complete package of airline planning products. While the suite of systems was being installed and calibrated, trainers were called in to prepare the organisation to use these new tools.

With the systems in place, the airline now has the ability to make aircraft routings that maximise profit across the network, rather than focusing on the load factor of individual segments. It need no longer make decisions without knowing what impact those changes will have on the overall bottom line.

Gulf Air

Gulf Air took another route by outsourcing its IT function to a third-party provider. The airline took this step to reduce its learning curve costs, and to access the skills, products and resources available from its third-party technology partner. Gulf Air's consultant helped the airline develop a strategic plan and worked to introduce both user-level personnel and upper management to the new decision support methodologies. Airline forecasting, scheduling and corporate staffs received specific training on all aspects of the new arrangement.

Management provided the necessary current data on routes, constraints, costs, traffic and average fares so that the airline's current performance could be modelled to an acceptable degree of accuracy. New analytical techniques were introduced that allowed management to gain fresh insights into the financial performance of its routes and regions.

After meeting with senior managers to discuss their overall vision for the airline, the consultants created a set of what if? studies to evaluate Gulf Airs competitive environment, aeropolitical situation and origin-destination market opportunities. The new systems will enable management to more clearly understand the basic economic drivers of their business, to examine detailed financial and operational data, and to select more successful business strategies.

One of the key benefits for Gulf Air was timing. By choosing the outsource route, the system was in place immediately with the potentially frustrating teething problems associated with building up a system in-house.

Grupo TACA

Grupo TACA, a Central American airline, faced some serious strategic difficulties. The airline saw increasing competition from US majors on some of its more lucrative routes. It needed to consolidate and improve its core administrative systems. TACA also lacked the technical capabilities needed to model the network to ensure optimum profitability. To meet these challenges, the airline realised it needed to buy in experience in generating strategic planning and modelling. The role of the consultancy role team was to create a working business model, complete with what if? scenarios, so laying out recommendations for a five-year structural operating plan.

The consultancy supported TACA's planning department by, running their iterations, offering value-added suggestions, as well as turning the wrenches on the business planning model. Advice given on the profitability of various sub-units, aircraft and regions also allowed TACA to focus on improving its network.

Based on the success of this important initial planning phase, Taca elected to forego the outright purchase of a full-network profitability analysis system. Instead, it subcontracted the services of a group of seasoned planning specialists to provide hands-on assistance.

Scott Dickson, vice-president of planning and revenue management, says that TACA has fulfilled one objective in being able to evaluate market opportunities using a level of sophistication equivalent to major US-based competitors.

A European airline

This is the story of how a sharpened competitive environment forced a European airline to take a hard look at its basic approach to business planning. This airline was a traditional flag carrier during the 1970s and 1980s, using the country's bilateral authorities and serving some international destinations.

The airline enjoyed high yields and productive load factors, but struggled with lower frequencies to remote destinations that required stops on several routes.

Then came the tougher market of the 1990s. Airlines girded themselves for the approaching wave of liberalisation. Price competition led passengers to defect to competing flag hubs. Airlines from competing nations increased service with smaller, newer aircraft and offered passengers more frequent service and more attractive connecting options. As other airlines channelled tourists in and out of the country, the local carrier began to lose its hold on their previously captive market.

Management saw a pressing need to improve its ability to compete, and set about preparing the organisation for a radical change. A first challenge was to develop a more competitive approach to schedules that would meet network demand while delivering optimum returns. The airline considered using its own in-house staff to build the new system, and also talked to outside specialists capable of providing technical assistance.

But after reviewing all of its options, the airline elected to purchase a specialised suite of market-proven decision support software rather than build its own in-house. This software package, together with training and consultative services, enabled the carrier to meet its goals far more quickly. The ready-to-go solution also included ongoing third-party maintenance and support, and upgrades to future best-practice software product releases.

The planning revolution

Advanced planning tools and techniques have created a powerful competitive weapons. The advantages of these new decision support systems may not be readily apparent to the casual observer, since the efficiencies they produce are network-wide and not limited to a specific route or flight. But as airline markets become competitive, the benefits of analytical planning models will be evident.

To prosper, airlines must gain a fuller understanding of their entire network, their origin destination demand, and how best to allocate assets to stimulate and meet market demand. Once the decision is made to improve network planning, airlines must consider whether to develop their systems in-house, to purchase basic systems and customise, or to subcontract selected IT functions to third-party providers.

Whichever option is selected, by investing now in an appropriate decision-support solution, airlines can create small gains that translate into long-term success.

Source: Airline Business

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