strategic transportation & tourism solutions
Session ME302 Airline Routes: How You Can Influence Their Development Paul Ouimet
49th ICCA Congress & Exhibition October 25, 2010 Presentation Outline
1. What airlines are looking for…
2. Implementing an Air Service Development program…
3. What you can do to attract new services…
2 Global Air Passenger Traffic
Millions Financial Credit IATA Crisis, Global forecasts Recession 7.1% 9/11, & H1N1 Outbreak Economic increase Downturn in 2010 Asian & SARS Economic outbreak Gulf War Flu and Recession
Source: International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA). Global Air Passengers by Sector
Total Passengers
Millions
34%
24% 66%
76%
Source: International Civil Aviation Organization (ICAO). Airline Financial Performance
Global Air Carriers Operating Profit/Loss US$ (millions)
Source: International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA). Global Air Traffic and Capacity
% Change
Source: International Air Transport Association (IATA). Consolidation: Mergers & Failures
Gol Lufthansa EasyJet KLM Varig Swiss Air France go Martinair Austrian KLM dba SkyBus Brussels Air Canada Oasis Hong Kong Delta Canadian US Airways Northwest America West Silverjet ATA
Ryanair Southwest AirTran XL Airways MaxJet buzz Zoom FlyLAL United Continental Aviacsa Sterling EOS MyAir
SkyEurope Aloha Centralwings Nationwide 7 Growth of Low Cost Carriers
8 Growth of Low Cost Carriers
LCC Capacity Share by Region (YTD Aug-2009)
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What airlines are looking for… The Airline Reality
. Airline planners require detailed, accurate information to make new route decisions . But airlines do not have the resources to fully evaluate every market – Legacy carriers have scaled back staff – LCCs face innumerable expansion opportunities . A sound, well articulated business case, can convince airlines to introduce new air services . Airports/destinations can influence the airline planning process
11 Airline Economics
. New routes are a huge investment & risk to an airline
Annual Operating Cost: ~ US$50 million
Note – Assumes 75% load factor. 12 Source – InterVISTAS Consulting Inc. Route Priorities
. Air service development is a long term, strategic effort . Airlines will add service in order of expected profitability PRIORITY ROUTE . Different airlines pursue 1 2 different strategies 3 4 . Destinations can move up 5 the priority board with: 6 7 – Solid research & analysis (always) 8 9 – Incentives (sometimes) 10
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13 Influencing Airline Decisions
. Airline questions for new routes: – What is the current, actual market for a potential route? – How much can I stimulate the market? – How will the competition react? – How much market share will I achieve? – What will be the connectivity contribution? – Will the new route be a financial success? . Airports/DMOs can answer these questions and reduce uncertainty and risk
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Implementing an Air Service Development Program… The Air Service Development Process
• Required to quantify the true size of the existing Market Assessment air travel market on an O&D basis
• Deficiency analysis and ASD Strategy detailed route analysis
• Packaging & presenting the Business Case information to airlines
• An appropriate incentive, Evaluate and Negotiate in certain circumstances, Airline Incentives helps airlines commit to new air services 16 Market Assessment
. Determine Catchment Area – What is reasonable? . Quantify Market Size & Traffic Leakage – Government, GDS, primary research – Identify & fill the deficiencies . Data must be: – Relevant – Current – Conservative – Defendable
17 ASD Strategy
Benchmark Air Services
Identify Deficiencies
Identify New Route Opportunities
Identify Potential Air Service Providers
Assess Viability of Potential Air Services
Prioritize Route Opportunities and Target Carriers 18 New Route Business Cases
. Business cases should include all information airline planners require: – Catchment area profile: demographics, economy, tourism, etc. – Airport profile: facilities, traffic – Market profile: market sizes, top city pairs, traffic leakage, etc. – Suggested service: frequency, schedule, aircraft, routing – Route analysis: market share, load factor, stimulation potential, self-diversion, etc. – Strategic considerations
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What you can do to attract new services… Tourism Stakeholder Involvement
Provide Unique Data Guest origins, occupancy rates, ADRs, group potential, etc.
Adapt product to match target airline business models, where appropriate All inclusive, fly-drive, package tours, etc.
Support route development efforts Budget support, airline fam trips, etc.
Contribute to incentive funding Route Development Quantify incremental benefit and invest Success
21 Incentives
. Destinations have become increasingly aggressive in pursuing new services – Portland-Tokyo: $3.5 million – Pittsburgh-Paris: $5.0 million – Baltimore-London: $5.5 million . Airlines often demand risk sharing programs . Incentives can be a good investment, if used properly
22 Types of Incentives
. Common types of incentives: – Airport fee concessions – Start-up cost reimbursement – Operating cost reimbursement – Direct subsidy – Revenue guarantees – Marketing support – Ticket trusts/travel banks . Designed to impact either the supply of or demand for air services
23 Best Practices - Incentives
. Air service checklist - will the route be:
– Strategically important? – Marginally (un)profitable? – Self-sustaining in the short term? . Service must meet all three criteria . Qualifying services: – New routes only? – Increases on existing routes? Does this work? – Service retention incentives?
24 The Challenge…and Solution
. How can airports afford aggressive airline incentives/fee discounts and still fund route development marketing in a difficult economy?
The Solution: Investments in Marketing New Air Services Develop and maximize & Fee Discounts non-aeronautical revenue streams: • Retail & duty free • Food & beverage • Parking • Loyalty & premium programs Incremental Airport Additional Flights Revenues • Land development & Passengers
25 Cooperative Marketing Program
. Marketing funding can be an effective incentive for destinations – However, it may not differentiate a market, as route marketing incentives are used by over 80% of communities in the U.S. . Marketing incentives can be: – Unilateral (DMO or airport pays 100%), or – Cooperative (airline matches some portion) . Funding amounts are often tied to the capacity of inbound seats to be available on the new route – E.g., Puerto Rico offered $5-$10 per inbound seat . By calculating the economic impact of new visitors (spend at the destination), a destination can calculate the return on investment in co-op marketing 26 Thank You
Paul Ouimet
Executive Vice President InterVISTAS Consulting Inc.
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