Geoff Dixon, CEO, Qantas Airways

A MAGAZINE FOR AIRLINE EXECUTIVES 2004 Issue No. 2

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

AN ALLIED FRON T A conversation with … Geoff Dixon, CEO, Qantas Airways

INSID E

Air France and KLM form 4 Europe’s Largest Airline

18 The Evolution of Alliances

A Conversation with oneworld, SkyTeam 26 and Star Alliance

tainly present a challenge for an industry so the smooth flow of passengers between significant impact on airline profitability. affected by the volatility of the global econo- alliance partners. Because airline planning is often a matter of my. But, by developing new practices in the Competitive positioning for an airline seeking profitability, shifts in demand should Aligning the Alliance untapped areas of planning and scheduling, generally involves assigning resources to mar- affect the relative attractiveness of markets revenue management, passenger service, and kets to maximize expected profit. Each carrier and change individual airline plans. Timetable operations, airlines can further take advantage in the alliance has the same objective and con- coordination helps maximize the benefits of of alliance membership. straints. Without accurately accounting for the demand share shift created by the alliance. By more tightly aligning their operations in areas such as planning and alliance traffic, an individual airline could allo- Relatively small changes in the timetables of scheduling, revenue management, and passenger service and operations, Planning and Scheduling cate an aircraft with insufficient capacity, all alliance carriers will increase the quality of individual members of an airline alliance can further cut costs as well as To be most effective in schedule planning, air- thereby generating passenger spill in a given alliance service. On a more subtle level, this line alliance partners should have a common O&D market that could be competitively coordination can also maximize the portion of realize additional incremental revenue. view of: served by the alliance. Alliance membership traffic retained in the alliance when demand Alliance objectives, creates a new variable — how significantly exceeds capacity. This requires an O&D view Market size, should a given airline’s market position be of passenger spill and recapture. By Michael Clarke and Abdoul Sylla | Ascend Contributors Passenger preferences, modified to take advantage of alliance demand Schedule coordination within the Revenues, and revenue opportunities? alliance results in potential demand increase. n recent years, global alliances have Yet, there is still plenty of work left to be The foundation for some of the coming Operating costs. Alliances also should coordinate fleet assign- I evolved from simple marketing partner- done before airlines reap the full benefits of changes is already in place. With schedule Since individual airlines are not likely to ments to ensure that capacity is in place to ships to more integrated entities striving to alliance membership. Although necessary coordination, codesharing and joint pricing, relinquish control of planning and scheduling Without accurately accounting accommodate this demand. achieve operational synergies as well as mutu- technologies already exist, airlines have been alliance members have begun the process of to a centralized alliance group in the near The fleet assignment process for each “for alliance traffic, an individual al cost reduction. hesitant to take this final step toward full inte- integrating their operations. But there remain future, each airline must be capable of com- partner, or for the alliance, must be sensitive Already, alliances have helped their gration of planning and scheduling operations, several untapped areas for future growth, municating key information to fellow alliance airline could allocate an aircraft to the flow of passengers within each airline member airlines generate additional revenue, in part because of the potential for unexpect- including greater coordination of airline plan- members during the planning process. By opti- with insufficient capacity, there- and alliance network. This requires that control costs and deliver incremental value for ed changes in the alliance composition and ning, marketing and operations. By establish- mizing the alliance’s scheduling processes, demand and revenue forecasts used in fleet by generating passenger spill in a their customers. Individual airlines are begin- prevailing competitiveness between partner ing new business practices that maximize the partner airlines can effectively coordinate their assignment consider the flow of traffic across ning to realize the economies of scale offered carriers for high-end passengers. Secondly, interests of each airline, the interests of the timetables and take advantage of alliance mar- given O&D market that could multiple partners. It also requires that the by membership in one of the main global some aspects of schedule coordination are alliance are also advanced. In such situations, ket presence and the resulting market share be competitively served by the capacity optimization process is also sensitive alliances — facility sharing at key airports, restricted by regulatory constraints as well as an airline’s individual agenda has to be aligned shift it creates. to this O&D flow. alliance. common information technology systems, and established contractual work rules. with that of the global alliance. By doing so, Doing so involves the alliance compet- ” common data repositories and joint purchas- As the global alliances continue to each member airline is better off due to its itive position (rather than airline competitive Revenue Management ing programs. Alliances also provide key cus- develop, each member airline faces the chal- cooperation with other partners, and the position) in origin-destination markets in By maximizing the flow of revenue through tomer service benefits such as an increased lenge of making the necessary cultural evolu- alliance is enhanced due to the participation of terms of service frequency, quality and The potential impact can be a 1 percent the network, alliances boost the income of network, seamless travel through tools such tion and business process transition that will every member. timetable coordination to ensure that the to 2 percent increase in market share for a individual members. The revenue manage- as interline electronic ticketing, and shared fre- ensure the success of alliances’ combined The new business practices should alliance provides quality online service. It given O&D market. A demand increase of 1 ment process is complex for an airline alone, quent flyer benefits and lounges. operations. encourage long-term relationships, which cer- also involves capacity allocation to ensure percent across multiple markets can have a much less for an alliance. But, in essence,

THE HIGH LEVEL THE HIGH LEVEL vıew News Briefs from Around the Globe vıew News Briefs from Around the Globe

Who negotiated fare contracts. Why Who analysis and flexibility. In addition, Randy Laser, vice president Sabre Travel Network With the automated solution, “We are committed to providing Aloha Airlines the airline has implemented the for Aloha Airlines. “We gain airlines file published fares and rules quality fare information, enhancing ® ™ What What Sabre PC AirFlite flight scheduling performance-enhancing capa- via Airline Tariff Publishing Company efficiency and guaranteeing fares that Will utilize the Sabre ® AirMax ® system to improve the carrier’s air- bilities without having to resort Released enhanced capabilities for the using the Category 25 fare by rule are auto-priced and auto-ticketed in Revenue Management Suite and the craft utilization. to costly infrastructure upgrades. Sabre ® Air Pricing suite that fully process to attach corporate discount the Sabre GDS,” said John Stow, Sabre ® AirPrice ™ fares management By choosing the eMergo delivery automate fare by rule capability. The formulas and client-specific fare rules president of Sabre Travel Network. system through Sabre ® eMergo ® Web Why model, we avoid major upfront global solution for Category 25 pro- to the fares they file. The Sabre® global “This development allows more access, an applications service “These products will enable Aloha costs and better position vides airlines the ability to automati- distribution system then accepts the accurate and quicker filings, decreasing provider delivery method, to leverage to grow, streamline our operations ourselves to focus resources cally accept and process discounted ATPCO Fare by Rule feeds, automati- the agent workload and the presence an integrated solution for pricing and compete effectively,” said on our core operations.” a fares and further simplifies complicated cally calculating the appropriate fare. of human error.” a company company

THE HIGH LEVEL THE HIGH LEVEL vıew News Briefs from Around the Globe vıew News Briefs from Around the Globe

revenue management for alliances must Current revenue management facili- cost — this seat could have been sold at a alliance. Since bid prices change with time, account for the flow of passengers among tates communication and cooperation among higher fare later. Bid prices are used to control some history of the changes for all partners Integrated Operations partners through an O&D approach. Because it partners. Leading carriers are moving to an availability — a booking request valued higher must be maintained in order to adequately Decision-support systems is unlikely that alliance members will relinquish O&D control structure using bid prices, which than bid price is accepted, a request valued share revenues. This could prove a costly control of their revenue management process- represent the free-market value of a seat on lower than bid price is rejected. For carriers exercise unless bid prices are directly incorpo- Crew planning Airline Airline Crew planning es, business rules must be established to any future flight. A fare exceeding the bid price using bid prices, the benefits have been due to rated into passenger name records or global and tracking and tracking allow each partner to maximize its interests provides a net benefit to the carrier whereas a an improved control of bookings by O&D. distribution systems directly perform the rev- operations operations control center control center while also helping alliance partners. fare below bid price represents an opportunity Availability for a market class is tied to the enue sharing functions. Maintenance Maintenance Airline A Airline B value of the request rather than the availability Other issues, such as booking cancella- and inventory and inventory in a bucket of many potential requests. tions and third-party proration agreements, Integrated Scheduling have to be addressed as well. In dynamic pro- Alliance centralized Passenger Seat operations database name records availibility ration, if an alliance member has a special pro- Carrier 1 Leading carriers are moving to ration agreement with an outside airline, rev- Flight Load enue sharing becomes a complex issue. The following planning “an O&D control structure using revenue split between alliance members is not bid prices, which represent the fixed, making it impossible to guarantee a minimal revenue to a third-party airline. For re-book- Demand Schedule Slot free-market value of a seat on Integrated operations control entails the global alliance maintaining a centralized operations Distribution ings, the entire itinerary must be reevaluated database that contains up-to-date information on flight schedules (times, seat availability), estimation construction management any future flight. ” even if only one leg is cancelled. Undoubtedly, active PNRs and operational data necessary for load planning, flight planning and flight this will have some implication on the revenue following. Individual airlines are responsible for their own operational decisions under accounting systems of partner airlines. normal conditions, while decisions about off-schedule operations are driven by alliance Bid prices can provide an even greater objectives. By sharing a common methodology and decision-making framework, effective Carrier 2 benefit for alliances. They represent an individ- Passenger Service and Operations decisions are made such that the operational integrity of the global alliance is preserved. ual carrier’s view of inventory value. Multiple The market-share premium benefit of alliances carriers using bid prices are able to value their is based on the customer perception that the Integrated scheduling requires that alliance members put all their resources in a pool and own inventory as well as their partners’ inven- alliance’s service is of higher quality and relia- journeys will require improved communica- availability. It also requires that an airline com- develop an alliance schedule, which would be flown by individual members. Demand esti- tory in terms of a common currency, which bility than interline travel. Delivering on this tions and greater sharing of data among carri- municate its recovery process with its partners. mation is done out of an alliance data warehouse, and the demand model calibration is provides significant operational benefits. In promise requires alliance partners to coordi- ers. From the passenger’s view, this means The dependability of an alliance network performed by a single team for the entire alliance. Similarly, the schedule construction, particular, alliance partners don’t need to main- nate their business processes prior to depar- seamless handling among alliance partners and its underlying ability to recover from dis- slot management and schedule distribution are performed by the alliance or teams from tain additional business processes and/or sys- ture, as well as their operations, to provide and transparent re-accommodation during off- ruptions in a minimal amount of time to facili- individual carriers. At this stage of integration, one would envision a downline integration tems to make effective revenue management high service reliability throughout the passen- schedule operations, which requires a high tate the flow of passengers and/or cargo of the alliance’s other business units. decisions. Imbalances in supply and demand ger journey. Prior to departure, customer infor- level of data sharing or common data in terms should be a primary focus. As they grow, between partners on flights with split invento- mation must be coordinated and passenger of flight following, customer information and alliances will face new challenges in the ry can be resolved by trading seats at a fair value — the current bid price. The availability Integrated Revenue Management of booking requests involving multiple alliance Airline 1 Airline 2 partners can be determined based on the THE HIGH LEVEL value to the alliance, which will facilitate the Inventory management sale of long-haul, high-value traffic. News Briefs from Around the Globe Because this approach will maximize vıew Distribution Overbooking Distribution alliance revenue, specific operating rules must be put into place so that no carrier incurs a rev- Who BA Citiexpress, and other carriers in Airline Solutions/Sabre Travel enue penalty on any booking transaction. This Optimization Forecast Optimization the European market. RM Rocade also Network. “In the last four years, this should include a method of dynamic revenue Sabre Airline Solutions proration to ensure that every alliance booking has a significant presence in Asia and has included launching the most suc- transaction is either revenue neutral or rev- What other regions with customers such as cessful Web-based applications Revenue Pricing Scheduling Alliance accounting data data database enue positive for every participating alliance Acquired Stockholm, Sweden-based Air China and Kuwait Airways. access in the industry through Sabre ® carrier. In this way, the alliance appears to ® make effective revenue management deci- RM Rocade, which develops and sells eMergo Web access, our application sions even without a centralized alliance rev- software solutions to airlines for com- Why service provicer offering, and adding Integrated revenue management involves an alliance team performing all revenue man- enue management group. mercial planning, crew management “Sabre Airline Solutions has made PC-based scheduling and operations agement functions. A forecast server using data from all carriers provides demand data Dynamic proration introduces new chal- to a revenue mix module, which in turn supplies bid prices and gradients for all alliance lenges, such as risk of gaming and determin- and operations control. Currently, it possible for small, medium-size software through the acquisition of flights. The revenue mix module receives input from all carriers, allowing them to set poli- ing bid-prices for carriers that do not use bid- more than 60 airlines use the RM and low-cost carriers to operate David R. Bornemann Associates in cies such as for overbooking, denied boarding or oversales compensation. The inventory price controls in their revenue management. Rocade Integrated Suite, including in new ways through the use of 2001. The RM Rocade integrated suite management module is also centralized and assumes that the alliance members are in For example, it will be necessary to obtain the process of achieving a better integration of their operations. pseudo bid prices from seat availability and FlyDBA, Air Atlanta, MyTravel, Cyprus accessible technology,” said Tom of products is another extension of applicable fares for all carriers within the Airways, Austrian Airlines, Icelandair, Klein, group president for Sabre this strategy and portfolio.” a

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recovery of irregular operations. The main Alliances are evolving, and in order to challenge comes from each partner having its The dependability of an alliance sustain growth and profitability, it will become own system operations control center with dif- imperative that members share demand and “network and its underlying abili- ferent strategies and methods of functioning. operational information, explore opportunities Riding the RAIL It is imperative that highly coordinated com- ty to recover from disruptions in for sharing resources (e.g., slots at congested munication exists among the various airline a minimal amount of time to airports), and rationalize revenue management operations control centers, or AOCC, to find processes. Standardized planning procedures facilitate the flow of passengers solutions beneficial to the entire alliance system. will bring consistency, even when airlines have Sabre Holdings Labs is working on breakthrough technology to help As airlines expand their joint operations, and/or cargo should be a prima- dissimilar levels of ability, experience and suc- airlines significantly reduce the cost of communicating among alliance pursuing collaborated operational decisions, ry focus. As they grow, alliances cess in the marketplace. The research group especially in the event of a schedule disrup- that supports Sabre Airline Solutions is actively members by using the redundant array of Internet links. will face new challenges in the tion, becomes more important. Day-of-opera- researching the impact of alliances on revenue tions decisions should encompass all aspects recovery of irregular management business processes. In addition, of the business, which will be affected by operations. the schedule recovery decision-support frame- By Gary Potter | Ascend Contributor irregular events such as passenger re-accom- ” work developed by the research group has been modation, aircraft routing, crew tracking and designed specifically to incorporate alliance con- trong alliances require active communica- saved as much as 50 percent a year on its net- wide area network strategies and found that recovery, and ground resource management. siderations in passenger re-accommodation and S tion — not just between people but also work costs by switching from frame to they intended to continue with costly frame In the long term, alliances may develop a cen- airlines to further coordinate their operations schedule changes. The research group is also between systems via high-speed, cost-effec- Internet service provider links. And, roundtrip relay and dedicated links as their primary WAN tralized global AOCC, which would be respon- and decision-making procedures. During the working with planning and scheduling systems tive networks. Until recently, such networks time (entry and response) was reduced by service. Why? Reliability. Of those surveyed, sible for monitoring and coordinating all opera- initial phases of decision-support deployment, to develop new market share models that will were something of a contradiction in terms — almost a third. 47 percent had no plans to change. Of those, tional decisions within the alliance. airlines will continue to make decisions inde- leverage online shopping capabilities and help it was difficult for a network to achieve high 33 percent did not consider the Internet as a Alternatively, each AOCC should be able to pendently, but they will use the same data determine true O&D market demands. a speed at a reasonable cost. But, new enabling suitable replacement for a WAN — 17 percent handle decisions related both to its own fleet across the entire alliance. Unilateral decision technologies becoming available today are … a migration strategy that considered the technology too new and risky, and that of its partners. There may also be sig- making would be transmitted within the Michael Clarke and Abdoul Sylla helping resolve the performance dilemma. and another 17 percent said moving to the “moves an airline off of a nificant benefits of collaborating during the alliance using the established channels of are principal research scientists in One exciting development involves the Internet wasn’t necessary. strategic phase of operations, including such communications. The ultimate alliance AOCC the Sabre Holdings technology office. redundant array of Internet links, or RAIL, wide area network in favor Two years ago, very few businesses issues as joint maintenance planning. would be responsible for making real-time They can be contacted at which connects an end point via multiple net- of the RAIL would result in were making the leap to route control — tech- The introduction of advanced decision- decisions for all airlines that are part of the [email protected] and works. New technology tools are being devel- nology that searches the Internet and makes a 40 percent to 50 percent support systems within the AOCC will drive global alliance. [email protected]. oped and deployed to manage routing of mes- routing decisions based on either performance sages over the RAIL, enabling airlines to com- annual savings … or price based upon message priority. Most municate more cheaply or rapidly. ” resisted the change, citing the uncertainties of Research indicates that a migration new technologies. THE HIGH LEVEL strategy that moves an airline off of a wide When asked about multi-homing (con- area network in favor of the RAIL would result The development of RAIL technology necting one location via multiple providers for News Briefs from Around the Globe in a 40 percent to 50 percent annual savings during the past two years has caused many greater reliability), approximately half of the vıew on network costs while maintaining reliability. information technology officials to rethink their IT directors questioned said they used or Qualcomm, the inventor of the code division position on networks. planned to use it, but most still had no plans to multiple access wireless telephone standard, As recently as late 2002, Forrester replace their existing WAN with the Internet. Who Why Marc Cavaliere, vice president of and an early adopter of RAIL technology, Research spoke with IT directors about their As one participant in the study said, “Who are sales and distribution for Spirit Frontier, Spirit Airlines, Aeroméxico, “Frontier is focused on providing the Airlines, said, “Spirit Airlines has Japan Airlines and Qantas right mix of price and flexibility to quickly emerged as an affordable THE HIGH LEVEL What both leisure and business travelers,” option and maintains a high level News Briefs from Around the Globe Made special business travel discounts said Sean Menke, senior vice president of quality and flexibility, which is vıew available through Travelocity Business, of marketing for Frontier Airlines. attractive to budget-conscious busi- the first Internet full-service corporate “Travelocity has always been an ness travelers. Travelocity Business Who automation of the airline’s flight Round, manager network systems and communication for Qantas. travel agency to offer all of its customers excellent partner, and now working continues to focus on offering the Qantas Airways scheduling and route evaluation “As the first airline to go live with business travel discounts on the airline. with Travelocity Business, we are able most complete range of options to processes. What the new system version, we were The discounts are designed specifically to enhance our reach into the business business travelers, including discount- Why expecting some initial problems, for business travelers, including dis- travel market, offering even more ed fares that offer them the flexibility Has gone live with release “I have been very pleased with the but we have been impressed with 10 of Sabre ® AirFlite ™ Schedule counts on refundable and non-refund- flexibility to complement the wide to deal with changes in travel, and smooth introduction that Sabre the system and support we have ® ™ able tickets, without the restrictions of range of value-added programs we Spirit Airlines is an excellent addition Manager and Sabre AirFlite Airline Solutions has achieved with received from the staff at Sabre leisure discounts, such as Web fares. currently offer the business traveler.” to this program.” a Profit Manager, providing Schedule Manager,” said David Airline Solutions.” a