Five years ago, network management was still quite an abstract concept for most European airlines. Though many had heard of hub-and-spoke systems and the 'network optimisation' principles that were developed in the US following deregulation, few had begun to incorporate these concepts into their everyday practices. Now, with Europe fully deregulated, this has changed. Increased competition has prompted most carriers to look for ways to protect their revenues, and has forced network management onto the agenda.
The principle underlying network management is that airline profits are maximised by optimising the total network, rather than individual routes. As a result, some carriers are abandoning traditional organisational structures in favour of more functional ones. Some are devoting substantial resources to acquiring or developing the databases, tools and skills required for effective network management. And changes in network configuration - be it a major reorganisation around a hub or minor, seasonal fine-tunings of flight schedules or fleet assignments - are increasingly common. Indeed, the degree of attention being paid to network management suggests that it is no longer regarded as a sophisticated source of competitive advantage, but as a real necessity.
Nevertheless, it would be wrong to assume that all European airlines are now seasoned network managers. Though the most sophisticated have been able to expand their operations through network management, others have yet to enjoy the pay-off from their investments. Still others have yet to embark on change. The question, therefore, is whether today's laggards can recoup the lost ground, or whether airlines currently ahead in network management have won themselves an unassailable lead.
The recent deregulation of European skies has created new market dynamics that have forced airlines to change their network management processes fundamentally (Chart 1). In short, network management has become a key success factor.
The most sophisticated airlines soon realised that their network of interrelated routes was vital from the marketing perspective. By combining direct point-to-point with connection traffic, they could dramatically increase the number of origin/destination pairs served, increase the density and profitability of intercontinental flights, and diversify the client base. They moved from a focus on serving their home markets to a strategy of capturing passengers originating elsewhere too. These airlines have actively developed their connection traffic, gaining market share in O&D flows traditionally served by other carriers.
Less sophisticated players now feel they have no choice but to develop their own network management capabilities if they want to survive. The impact of traffic lost to top performers via connecting traffic is all too evident to them. Furthermore, betting their growth on a pure point-to-point traffic strategy similar to Southwest's in the US is not likely to succeed in Europe, where a large part of intra-European traffic is already direct (except for secondary destinations).
In fact, network management improvement is a key feature of many of the turnaround programmes that the worst performing European airlines have put in place over the past few years. The impact on airline profits is estimated at several percentage points of total revenues.
These trends can be observed in the growing importance of connecting traffic at major European airports. The percentage of transfer passengers at major European airports increased substantially between 1990 and 1995: from 27 to 32 per cent at London/Heathrow; from 27 to 39 per cent in Amsterdam; from 20 to 25 per cent at Paris/CDG; from 27 to 30 per cent in Zürich; from 12 to 20 per cent in Brussels; and from 32 to 35 per cent in Copenhagen. The increase for individual carriers has been even higher, given that most transfer flows at these airports are on the national carrier.
Deregulation, improvements in IT systems, and the availability of new information sources have greatly amplified European airlines' degrees of freedom in network management, but at the same time they have increased the need for new skills to act on the five levers at their disposal:
1 Destinations and schedules. European airlines now have total freedom to decide where and when to fly within the European Union. Nevertheless, these decisions can be very complex and require leading-edge network management skills and extensive O&D traffic databases: for example, a large European carrier estimated that moving the schedule of a flight by 30 minutes affected 1,000 other flights.
2 Flight connectivity. This lever determines the level and quality of interrelations among flights at an airline's hub. Network management can play with the number of connections for a given flight, by concentrating flights around an optimal number of time windows or 'waves'. The type of connection between flights - online or interline - has an important influence on the position on CRS screens and on passenger perception.
Some recent success stories in network management in Europe have been largely due to improvements in flight connectivity. For instance, in 1995 Air France decided to concentrate all its Paris operations at CDG in four to five waves. It also integrated Air Inter with the AF code designator, dramatically increasing the number of O&D markets that Air France could serve effectively, and greatly improving connectivity.
Another success story is that of Swissair, which obtained remarkable results by moving its Geneva intercontinental operations to Zürich and adding a fourth wave to this hub in November 1996. According to Zürich Airport, in the first two months of 1997 Swiss carriers' traffic (essentially Swissair and its subsidiary Crossair) was up 19 per cent, with a 20 per cent increase in transfer passengers. No less important was the fact that foreign carriers' traffic decreased approximately 1 per cent, although their movements increased by 6 per cent. The transfer traffic increase offset transfer passengers lost in Geneva by a factor of three.
3 Matching resources to demand. This aspect is critical to the profitability of the network, given the importance of fleets and crews to total costs and the constraints they impose on capacity. These types of decisions have to be taken continuously by network managers who are trading off allocations to one flight or the other, not only at the beginning of each season but also on a continuous basis in order to adapt to the evolution of demand in the different O&D markets.
Some of the most successful network management stories can be put down to fleet assignments. One European carrier pooled the fleet resources that were assigned separately to short-haul and medium-haul sub-networks in order to improve fleet utilisation. Another reduced its flight assignment planning period to one or two months (compared with the traditional seasonal planning period of five to seven months). As a result, it was able to match capacity to demand much more closely. Most carriers, however, have not yet developed the IT tools that are needed for continuous, short-term fleet assignment optimisation, where the potential to be captured is very significant.
4 Airport transfer facilities. Airlines with substantial connecting traffic are paying increasing attention to this aspect, in an effort to reduce minimum connection times and maximise connection 'friendliness'. Of course, the efforts an airline can make in these areas are very much constrained by the physical configuration of the airport. But airlines can work on optimising the location of their gates, improving baggage handling, and easing passengers' movements. They can also make the time spent waiting between flights a more pleasant experience. British Airways' arrival lounges at Heathrow and Gatwick, which include hot showers, shirt pressing and fast passport lanes, are a good example.
5 Alliances. One of the key objectives of alliances is to improve connectivity among partners through schedule alignment and the use of shared codes. Alliances can create complex, multihub systems that dramatically increase the number of O&D markets served and complement each partner's network. Lufthansa, for example, has been seeking a larger catchment area for its intercontinental flights through its alliance with SAS, which in turn is now in a better condition to offer its passengers a wide range of intercontinental destinations through Lufthansa's system. Another increasingly common practice consists of a large airline franchising part of its short and medium haul network to smaller, more cost-efficient carriers.
A key factor for success in the management of these network levers is the use of sophisticated IT systems. Developed originally in the US, modern computerised models and tools help the network manager deal with increasingly complex decisions and shorter time frames (Chart 2).
Though most airlines have the same levers at their disposal to manage their networks, some have used those levers far more extensively than others. The result is a wide discrepancy in the level of network management sophistication among European airlines. It can take an airline several years to make the transformation from an organisation founded on traditional, route-based processes to one focused on network management. Consequently, those carriers that took the initiative first now find themselves in an advantaged position. Moreover, if the leaders continue climbing the learning curve of network management, the laggards could find it difficult to close the gap.
In Europe airlines are currently at three different levels of network management sophistication.The first level comprises those carriers that have not yet incorporated the concept of network management into the organisation, except maybe for a few individuals who are aware of its importance. Their main focus is to serve direct traffic flows to and from their home market. Decisions about destinations and schedules are typically done on a route-by-route basis. Information about traffic and market shares by O&D is not available, and internal accounting looks at route profitability, not at the contribution of each route to the network. Little attention is paid to connectivity, and the organisational structure is often based on regional business units, each responsible for its own route management.
The main issue for these airlines is how to make the organisation understand and believe in the concept of network management and how not to get left further behind in the learning curve. Their low level of network management capabilities, combined with the steadily improving achievements of competitors, is likely to spell poor financial performance. This then undermines their investment capacity and their ability to attract and retain the highly skilled professionals needed to establish the network.
Unfortunately, much has to be tackled if progress is to be made. The problem, of course, is that these companies have limited resources to tackle everything simultaneously. However, a balance needs to be struck, as an approach that does not integrate improved processes, new tools and changes in the organisation is likely to lead to a dead-end (Chart 3).
The second group of airlines understands both the importance of serving clients outside their home markets through connecting traffic, and the basic equation underlying network management - network profit equals revenues by O&D minus costs by route.
These airlines have usually reorganised themselves around a more functional type of structure with centralised network management. Many of them are investing in obtaining O&D traffic information from CRS MIDT data, although they don't always have the IT tools to process and analyse them in a systematic way. For example, fully exploiting a network profitability simulation model can take between two and three years, including system installation, database structuring, calibrations and skill building.
For airlines at this level, the issue is how to speed up the reengineering process while beginning to collect the benefits of network management. Typically, IT systems integration is problematic at this stage due to the migration difficulties from legacy systems. While substantial investments have been made at this point, the sophisticated tools needed to take advantage of them are still not there. Transition solutions are possible at this point: evaluating major network effects with a simplified model based on the O&D traffic data available can provide satisfactory results.
Airlines at the third level use state-of-the-art information, tools, skills and processes that allow them quickly to simulate options and take critical network management decisions. They take full advantage of the key IT tools needed for agile decision making - which, for example, allows them to plan schedules in one to two month sub-seasons. Their hub operations are often so successful that passenger numbers have grown quickly, allowing them to expand their networks and increase the number of waves at their hubs. Most have also gone on to develop multihub systems, either by themselves or through alliances.
For these airlines the challenge is how to integrate fully their current capabilities - in areas like network design, scheduling, pricing, sales and yield management - and make the best use of them to solve the growth issues that they typically face. At the same time, they need to reflect on how to get to the next level of network management sophistication - with flexible schedules and new optimisation tools - so as to maintain their leadership.
Whether or not network management capabilities continue to differentiate European airlines depends both on the laggards' ability to make up lost ground, and on the front-runners' ability to keep climbing. If the front-runners hit a ceiling, the gap could be filled quickly. But if they can emulate the skills of some of their US counterparts - and perhaps develop new skills of their own - their competitive advantage may prove to be permanent.
Source: Airline Business
