A Magazine for Executives 2008 Issue No. 1 2008 I ssue N o.2008 1

t a k i n g y o u r a i r l i n e t o new heights

A Conversation with Tim Hoeksema, chairman, president and chief the executive officer, pilot Midwest . pg. 36

Special Section www.sabreairlinesolutions.com i nsiDe Airline Mergers Airlines are scrutinized for affects and Consolidation 26 on the environment

Etihad doubles its revenue from 44 2006 to 2007 Focus On The Customer Carriers can become true customer- 62 centric businesses 60

perspective

time. Last year, airlines around the world were hit with service delays and schedule disruptions that left thousands of passen- gers outraged. In the United States alone, last year’s on-time performance was only 73.4 percent for the 20 airlines reporting with the U.S. DOT, down from 75.4 percent the previous year. It’s not all bad news though. While there’s plenty of room for carriers around the world to improve their customer sat- isfaction ratings, many airlines have taken monumental steps to ensure their customers come back time and time again. Milwaukee, Wisconsin-based , for example, provides spacious, with Tom Klein all-leather seating and offers fresh-baked chocolate chip cookies to its passengers Group President, Sabre Airline Solutions/Sabre Network during flight, making them feel at home. The carrier is also well known for the excep- tional, personalized service its staff offers remember a time when companies undoubt- with the tools and technology necessary to customers, earning it a reputation of “The edly put their customers first. Familiar mottos provide top-quality service across the board. best care in the air.” Isuch as “The customer comes first” or But even technology-challenged airlines find There are several airlines like Midwest “The customer’s always right” signified a ways to satisfy their customers. And, today, that are taking special care to ensure their customer’s importance and value. that must be a primary goal — making most, customers are not only satisfied, but that That was the overarching attitude if not all, customers happy. they always remain true to their carrier a couple of decades ago. But with the For some, it seems nearly impos- of choice. It’s a fairly simple philosophy fast-paced world in which we live coupled sible to please that many people, but it’s — take good care of your customers, and with a grave need to expand the business, not. According to London-based Skytrax, they’ll take good care of you. cut costs, grow revenues and keep a con- the world’s leading quality advisors in the In our special section, we examine stant eye on the bottom line, often times airline and industries, six airlines several aspects of customer centricity. We the customer doesn’t always come first. currently hold Skytrax’s five-star ranking, discuss how airlines can focus more on their In fact, many customers seldom get the part of its “Star Ranking” program that was customers and how they can measure their true respect, treatment or satisfaction they introduced in 2000 and grades quality levels effectiveness. We look at how one airline is deserve and expect. Instead, many busi- of more than 400 airlines. leveraging social media to open numerous nesses mistakenly assume that customers Asiana Airlines, Cathay Pacific Airways, lines of communication with customers. are as loyal today as they ever were … Kingfisher Airlines, Malaysia Airlines, Qatar We discuss how airlines are investing in that they’ll always be there … no matter Airways and are the advanced analytics to retain profitable cus- what. But nowhere is that less true than in only six carriers in the world that have tomers. And we talk about how airlines can the airline industry, where customers have received top recognition for exceptional work together to ensure the best solutions countless choices and demand superior quality. Skytrax rates a variety of areas, in the industry are being developed. service. A bad experience, no matter how such as long-haul business- and first-class Every decision we make has a direct seemingly minute, has the potential to push service, staff grooming and presentation, impact on our customers … and our bottom the customer straight into the hands of the assistance for families and children, check- line. And those who have a close eye on competition. in services, Internet/WiFi options, service their customers have the greatest chance Speaking as a consumer, custom- efficiency, staff enthusiasm and attitude, of achieving long-term success. ers not only want exactly what they pay dining options and food quality, washroom/ We hope you enjoy this issue, and we for, they want exceptional service as well. cleanliness, seat comfort, prior- look forward to visiting with you again in the That’s not to say they expect business ity processes, personalization of coming months. personnel to drop everything, bow down service, in-flight entertainment, and consis- and treat them like royalty. It’s as simple as tency among staff. Wishing you smooth skies … recognizing each customer as a respected Even though these six airlines have individual. Not just a paying customer, but earned exemplary status, they must main- Tom as a human being who, by nature, deserves tain these service levels year after year to that level of respect. retain customers and continue to grow and It doesn’t seem like a tall order, but succeed. it can be. Half the battle is hiring service This is just one example of what it personnel who understand the concept takes for airlines to be aligned with their that customers must be treated exception- customers. Aside from service excellence ally well or they simply won’t come back. at every touch point, one of the biggest The other half of the battle is that airlines aspects of achieving customer satisfaction or their personnel aren’t always equipped is getting travelers to their destinations on contents

56 profile industry special section

8 36 62 Checkmate The Pilot Customers Come First Open-skies agreement between Midwest Airlines has earned Airlines around the world can the United States and European the reputation of “the best care become truly customer centric Union generates a new level of in the air” for its exceptional using the right combination of global competition. customer service. staff, technology, processes and data. 14 Little Models 44 World’s Fastest-Growing Take Big Steps Airline 65 Some low-cost carriers have tried Etihad Airways is considered Delta Meets “Change” to acquire their nation’s flag carrier the fastest-growing airline after ’ “Change” — a rare twist to traditional airline doubling its revenue from 2006 campaign enables customers to consolidation. to 2007 and achieving record communicate directly with the passenger growth last year. airline using a variety of social 18 media to improve the end-to-end In Control 50 Staying Power travel experience. A fully integrated system Airlines has served a operations control center is at the loyal customer base for more than 68 core of an airline’s operation. 75 years and intends to do so for at What Customers Want least another 75 years. Advanced analytics to better 23 understand customer behaviors Blending Models and preferences will substantially Many low-cost carriers have impact airlines’ revenue implemented the best attributes management and inventory control of their network counterparts to processes. expand market reach and grow their customer base. 73 Great Minds Think Alike 26 A “customer community” “Green”er Skies approach enables airlines to pool Airlines continue to be resources and help create the chastised for their impact on the precise solutions they need to environment, despite myriad succeed. efforts to improve.

28 The Barbarians Are Still At The Gates Private equity firms continue to target carriers that have untapped or strong potential to grow revenues. 50

34 Balancing Act 59 Come Rain Or Shine 53 offers The low-fare business model several new features, such as is being challenged differently, improvements and in-flight based on economic issues, such amenities, to enhance customer as rising fuel costs, facing every service. region of the world. 56 ’s Passionate Start Virgin America places great emphasis on its use of technology and passenger- comfort amenities to ensure its customers enjoy the best possible travel experience.

ascend contents regional products company 94

76 82 88 97 The Highest Peak Prime Partners The Test Of Time Bursting At The Seams Sabre Airline Solutions, with Partnering with the best solutions Chinese carriers, like most airlines The U.S. Federal launch partner , provider presents a long-term in the industry, face on-time Administration is implementing introduces the industry’s leading relationship that should be built performance challenges due to modern technology and processes movement control software. on common goals and a numerous flight delays. to support the country’s command for service excellence. exceptional airline industry growth 80 91 rate, help reduce flight delays and Raising Revenues 85 Faster, Smaller, Cheaper enhance safety. Fully integrated, state-of-the-art Best Of Both Worlds The strong entrance of very revenue management solutions An airline’s computing systems light jets could be of significant 99 yield significant results for less- must provide high performance, concern to carriers serving Middle East On The Rise restricted fare structures found reliability and the flexibility to business travelers. More than 600 aircraft orders, in non-traditional, hybrid airline change with today’s business double-digit annual traffic growth models. needs. 94 ’s Major and new on the horizon Modifications has the Middle East exceeding all Mexico’s airline industry has airline industry expectations. realized major changes involving 76 privatization of its traditional carriers.

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Trans-Atlantic Overview Prior To E.U.-U.S. “Open-Skies” Agreement

Top 15 U.S.-Europe Airlines* Scheduled Weekly U.S.-Europe Departures By Airline

450 The top 15 airlines account for more than 85 percent of all 400 DL U.S.-Europe departures. 364 350 CO 309 BA Within this list, the United AA 300 281 States has fewer and larger 266 LH trans-Atlantic airlines than 250 Europe. 232 UA 200 AF 182 US The smaller U.S. players are 167 } departures 154 NW still comparatively large by 150 VS 133 European standards. 129 KL 100 AZ Scheduled weekly U.S.-Europe 74 EI LX 59 58 54 SK 50 46 12% 11% 10% 9% 8% 6% 6% 5% 5% 4% 3% 2% 2% 2% 2% 0 Airline

Top 15 U.S. Gateways to Europe* Scheduled Weekly Departures To Europe By U.S. Gateway

700 JFK Despite years of growth in depar- 616 tures from interior gateways, John F. 600 Kennedy remains EWR the pre-eminent departure airport. 500 447 ORD 400 292 Together, New York-area airports JFK and Newark Liberty International BOS PHL 300 Airport account for 36 percent of ATL IAD 171 168 industry departures, nearly four times 210 209 LAX 200 the share of No. 2 Chicago O’Hare 150 DTW MIA IAH { International Airport. 98 SFO DFW 100 91 80 MCO MSP 77 49 38 35 Scheduled weekly departures to Europe 12% 11% 10% 9% 8% 6% 6% 5% 5% 4% 3% 2% 2% 2% 2% With few exceptions, the “stair steps” 0 are fairly consistent throughout the U.S. departure airport ranking.

Top 15 U.S. Heathrow Airlines* All Others 813 BA 1,992 Compared to a U.S. fortress hub, Scheduled Weekly Departures - All Destinations where the leading carrier might

hold a departure share of 50 percent LX 42 to 60 percent or higher, London Most No. 2-ranked bmi flights are TP 44 Heathrow Airport is more frag- short hauls, and these face intense AZ 66 mented — No. 1 British Airways low-cost carrier competition at AF 81 holds a 43 percent share. nearby London airports. These UA 70 slots might be more profitably used KL 95

However, compared to the share on longer-haul operations. IB 91 held by the No. 1 carrier in the larg- est U.S. origin-destination airports No. 3 German Airlines AC 105 } AA 112 such as Los Angeles International has only a 4 percent share. SK 131 Airport or JFK — often 20 percent EI 151 VS 161 to 30 percent — British Airways’ LH 203 BD 523 share is relatively large. ascend by the numbers

U.S.-Europe: Ranking Of Global Alliances*

SkyTeam leads by a wide margin. Non-aligned 436 Star does not currently have a lead- Airways accounts for 15% ing share at either of the top two 129 departures and 4.4 percent of trans-Atlantic gateways, JFK and the non-aligned carriers. LHR. SkyTeam If Virgin Atlantic Airways joined 1,133 Although ’s share of an alliance, then the remaining 38% departures is comparatively small, non-aligned departure total would most of these are focused in the decrease to 307, or 10.5 percent of lucrative and hard-to-access LHR the trans-Atlantic total. market. }oneworld 608 21%

Star 760 26%

Top European Gateways to the United States* Scheduled Weekly Departures To United States By European Gateway

700 In contrast to the United States, there are three distinct clusters of airports: 600 LHR 534 o Large: LHR is the second-busiest gateway on either side of the 500 Atlantic, behind JFK. 400 LHR plus London Gatwick FRA CDG Airport account for 25 percent 310 307 300 AMS of European departures to the 238 LGW United States. 200 191 o Medium: Frankfurt Airport, Paris FCO MUC MAD ZRH Charles de Gaulle and Amsterdam 112 MAN DUB BRU MXP SNN { 94 93 CPH 100 89 81 74 63 63 Airport Schiphol. 61 46 18% 11% 10% 8% 7% 4% 8% 3% 3% 3% 3% 2% 2% 2% 2% o Small: There are many compara- 0 Scheduled weekly departures to United States bly sized European airports in the European departure airport “small” cluster.

Global Alliances at Heathrow*

Scheduled Weekly Departures - All Destinations oneworld 2,301 50% oneworld is by far No. 1 at this SkyTeam has a small share of premium airport, with a 50 percent only 6 percent. share of departures: o Quality versus quantity — This Within the non-aligned category, contrasts with its No. 3 position Virgin Atlantic Airways has 161 in the overall U.S.-Europe market. flights, or 4.4 percent of the LHR SkyTeam total. 298 Star No. 2 is about half the 6% 1,271 size of oneworld and about half of { 27% its LHR flights are on bmi. Non-aligned 810 17% * Midyear 2007 Schedules

ascend Spurred by the open-skies agreement between the United States and the European Union, a new era of global competition is emerging. And just as every chess move reflects a strategic calculation, airlines are scanning a giant trans-Atlantic chessboard, trying to devise the right strategic moves.

By Chris Spidle | Ascend Contributor

C H E C K

M A T E

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igning of the open-skies treaty on April 30, What are the inclinations of the players? 4. Finding equilibrium — The airline industry will 2007, between the European Union and What strategies will be most effective? converge to a new balance point. The ultimate Sthe United States was an historic event How will the game board look in five years? extent of change will be determined by govern- from many perspectives. Previous experience in similar situations ment policy for mergers and rules for foreign The agreement grants any E.U. or U.S. suggests the industry could develop in four ownership of U.S. airlines. Unexpected geo- airline — for the first time — full traffic rights to phases: political or economic events could significantly fly between any point in the European Union and 1. Incremental change — Airlines will finally make influence the pace of change. any point in the United States. Among the numer- long-sought incremental changes based on Before speculating further on what actual ous changes this agreement brings, perhaps sound economic underpinnings, such as add- changes might occur during these prospective the biggest effects are being felt in the United ing service to large and previously restricted phases, it is important to understand the regula- Kingdom/United States arena — the largest and markets such as Heathrow. tory changes that have been introduced by the previously most restricted trans-Atlantic market. 2. Exuberant experimentation — There will be a open-skies treaty. Previously, only four carriers were allowed to period of innovation and experimentation as Game rules for the trans-Atlantic chess serve the United States from London Heathrow airlines add previously prohibited new routes match now include expanded traffic rights and Airport. With the agreement, additional carriers and/or flights. Precedents will be set as limits other new freedoms. There is now a single E.U. can operate flights from Heathrow to the United are tested. Expect a few trials — and probably market for air transportation as the European States. some errors, as well. Union replaces individual countries in bilateral Those who compare airline-network strat- 3. Survival of the fittest — Powerful basic eco- agreements with the United States. egy issues to a high-stakes game of chess with nomic factors will cull some of both the new The “community carrier” concept replaces multiple players can readily recognize the new and already-existing services. Networks and airline nationality. Now E.U. airlines may fly from rules as a game-changing event. The changes business models with sustainable economic any E.U. country to the United States — not just raise several pertinent questions: fundamentals will prevail. their home country. For example, British Airways What new business moves are now possible? can now fly from Belgium to the United States as

“Supportable Capacity” Paradigm

Supportable Capacity • Determined by •Local market size • Hub size MSP NW Height = • Distance to spoke ORD UA Local market size • Results in “neighborhoods” for hubs DSM Spoke • AUS = primarily DFW, IAH } ORD 8 flights • DSM = primarily ORD, MSP MSP 7 DFW 6 DSM IAH 2 Width = Hub size

DFW Line Width = AA Frequency

AUS Spoke IAH DFW 15 flights CO IAH 11 AUS ORD 3 MSP 2

Airline planners sometimes use the “supportable capacity” paradigm to describe the amount of capacity that a market can profitably sustain on a long-term basis. The construct illustrates that hubs have structural advantages for serving nearby points and that this creates natural neighborhoods for each hub. This effect is independent of political boundaries and is observable in borderless markets, such as the U.S. domestic market.

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has been a related flurry of activity regarding Heathrow slots. European Common Aviation Area Some details are unconfirmed, but media reports suggest that the going rate for Heathrow A multilateral aviation agreement among the 27 members slot pairs has rapidly increased to more than of the European Union and nine other European countries £30 million (US$60 million) for peak-hour tim- ings suitable for trans-Atlantic operations. U.S. Creates a common area for aviation by extending application carriers without close European partnerships of E.U. legislation to nearby areas have tended to pay the highest prices. Other Extends the E.U. internal air transport market U.S. carriers have pursued their European alli- Nine non-E.U. countries in the ECAA as of April 30, 2007: ance partners to try to obtain Heathrow slots. – Albania And SkyTeam partners even coordinated a – Bosnia and Herzegovina large reallocation of Air France and KLM slots. – Croatia Coupled with additional slot purchases, this reallocation enabled SkyTeam, the alliance with – Iceland by far the lowest share of Heathrow slots, to – The former Yugoslav Republic of Macedonia add the most new U.S. flights at Heathrow — – Montenegro 11 new daily roundtrips. – Norway The fact that most U.S. carriers currently – Serbia entering Heathrow have retained some opera- – The UN Interim Administration Mission in Kosovo tions at suggests a consider- able amount of unmet demand for Heathrow slots and that there is continuing pressure to The European Common Aviation Area is a flexible framework that’s membership can shift more U.S. flights to Heathrow over the change over time. It includes all 27 E.U. countries plus additional adjacent countries. long term. Within the context of the E.U.-U.S. open-skies treaty, non-E.U. members of the ECAA Another pivotal step in incremental are defined to be the nine countries that were ECAA members when the treaty was change is increasing alliance network linkages signed last year. by adding hub-to-hub services. Even compara- tively smaller U.S. hubs such as Salt Lake City, Utah, are participating. And while some of the well as from the United Kingdom to the United Union reserved the right to begin rescinding free- new nonstop city pairs represent smaller local States. doms granted in Stage 1 if there is no progress in markets, all of the hub-to-hub routes nonethe- Many other rules on codesharing, pric- Stage 2 negotiations by the end of next year. And less serve as important pipelines for connecting ing, franchising and other areas have also been British Airways has already publicly stated that if traffic by fully linking the partners’ hub catch- relaxed. no real progress has been made by then, it will ment areas. On a global scale, the United States has ask the U.K. government to start the process of In addition to the growth at Heathrow already been fairly successful in achieving its rescinding Stage 1 freedoms in 2010. and in hub-to-hub flying, rapid growth is occur- stated policy goal of open-skies agreements That possibility, of course, could be ren- ring in boutique, all-business-class trans-Atlantic worldwide. And Europe, in general, has not been dered moot if business reality and success have flights. This growth actually started before the an exception. become so ingrained on both sides of the Atlantic regulatory environment changed, but it could For example, open-skies bilateral agree- by 2010 that neither side would really want to interact with and be influenced by the changes ments were already in effect between the United turn back the clock. that result from the open-skies agreement. States and 16 of the current E.U. countries. So An important, inconvenient detail is Two approaches have emerged for all- the new E.U.-U.S. open-skies agreement repre- that while the open-skies treaty offers greatly business-class trans-Atlantic flights: sents a bigger change between the United States increased traffic rights, it does not change the Legacy-affiliated — Wet-lease flights oper- and the 11 other E.U. countries that had either a requirement for airlines to obtain slots for flights. ated on behalf of European network carriers, more restrictive bilateral or no previous bilateral And it happens that some of the airports that Discount-boutique — Independent carriers agreement with the United States. represent the richest targets for airlines to take operating discount business-class flights in While the new agreement represents a advantage of the expanded traffic freedoms are the U.S.-London market. substantial change, it falls short of a few of the also the most slot restricted. The legacy-affiliated model focuses on E.U. negotiators’ key objectives for cabotage and However, carriers have been solving this full-fare business travelers, featuring narrow- foreign ownership restrictions for U.S. airlines. problem by essentially purchasing slots. Although body aircraft operated by Swiss/German airline Although the U.S. Department of E.U. law technically prohibits the buying and sell- PrivatAir and marketed by European network Transportation originally proposed terms that ing of slots, airlines operating there do trade slots carriers, linking major U.S. cities with top busi- permitted foreign control of U.S. airlines, these in a “gray market.” And airlines have tapped into ness centers in the European carriers’ home ownership provisions subsequently met strong this market heavily as they prepare to take full countries. Normal business-class fares are political resistance in the U.S. Congress. So U.S. advantage of the open-skies agreement’s new charged. This approach focuses every revenue negotiators offered different changes instead, freedoms. and cost advantage in markets with unusually and the modified agreement has gone forward high numbers of premium passengers. provisionally as “Stage 1” while negotiators con- First Moves: Incremental Change On the other hand, the discount-boutique tinue to work on what would eventually become Airlines have already announced schedule approach depends on access to a high-volume a final agreement in “Stage 2.” changes to take advantage of the additional local market with a large segment of customers To ease E.U. concerns that the United freedoms in the aviation agreement. Most of willing to pay more for comfort. Current opera- States now feels reduced incentive to negotiate these schedule changes involve U.S. carriers tors offer independently branded premium-class the remaining Stage 2 issues, the European adding new service to Heathrow Airport, so there seats in the U.S.-London market at a substantial

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E.U.-U.S. Open-Skies Agreement — Highlights

Element Change What It Means

Single E.U. market E.U. replaces individual countries in bilateral negotiations with U.S. Supercedes “Bermuda II” U.S.-U.K. bilateral

Additional airlines allowed into LHR-United States

“Community Carrier” Any E.U. airline can now fly from any E.U. country to the United Air France can now fly London-Los concept replaces airline States with full traffic rights Angeles nonstop nationality

Traffic Rights: open No restrictions on EU-US routes, frequency or capacity British Airways still may not carry Chicago- skies now applies to all Unrestricted fifth-freedom rights Houston local traffic 27 E.U. countries Cabotage still prohibited Slot constraints still apply

Additional commercial Codeshare Unlimited between E.U., U.S., and third- and British Airways may changes country airlines codeshare on trans-Atlantic flights

Pricing All restrictions on E.U.-U.S. routes removed Virgin America may start operations Franchising/branding Now explicitly permitted Lufthansa German Airlines could operate Seventh-freedom E.U. airlines gain full traffic rights to areas Belgrade-Chicago nonstop rights outside the European Union - European Common Aviation Area Virgin Nigeria may operate Lagos-Newark - Africa: 18 countries nonstop

Wet leasing E.U. airlines may wet lease to U.S. airlines for PrivetAir (Germany) could wet lease to U.S.-international operations American Airlines for New York-Stansted Cargo Unrestricted seventh-freedom rights for E.U. airlines

Competition Applications for antitrust immunity expedited by the United States

Ownership E.U. nationals owning U.S. airlines: Mergers between E.U. and U.S. airlines - 25 percent cap on voting equity remains in place are not possible at this time - 49.9 percent cap on total equity - 50 percent or more total equity possible subject to special U.S. approval British ownership of Virgin Nigeria does - E.U. nationals still may not control U.S. airlines not jeopardize its Lagos-Newark traffic Reciprocal rules for U.S. nationals owning E.U. airlines rights E.U. ownership of airlines in ECAA or certain African countries would not jeopardize their U.S. traffic rights An ECAA-owned E.U. airline would be treated as if it were E.U.-owned

Regulatory Cooperation Increased in many areas Joint committee established to interpret agreement

Other Provisions to increase reach of E.U. companies into U.S. market and vice-versa

The E.U.-U.S. open-skies agreement enables any E.U. or U.S. airline to link any city in the European Union with any city in the United States and offers additional freedoms covering many commercial areas besides traffic rights. It represents a major change for the large U.K.-U.S. market, which was previously regulated by the restrictive Bermuda II bilateral. discount from normal business-class fares, and Next Moves: Exuberant Southwest Airlines has historically been they fly larger or 767 aircraft. Experimentation extremely successful competing on the basis of Early experience suggests that all-busi- According to the classic pattern for market low costs. But there are fewer instances of new ness-class flights may be a specialized, fragile incursions, an innovative new entrant provides entrants competing for premium passengers. niche. Given the finite number of markets that a stimulus to the incumbent. The incumbent In the case of boutique airlines making meet either narrow set of criteria for the busi- responds. And the marketplace chooses a new incursions into the E.U.-U.S. market, incumbents’ ness models — perhaps only London, Paris, equilibrium. Whether the new entrant is rebuffed plans for responses are well under way. Virgin German business centers, and Zürich — there or the incumbent cedes market share is often Atlantic Airways, a proven marketer, is prototyp- will be limits on how large these operations can determined by whether the new entrant seeks to ing an Airbus A319 for all-business-class trans- become. compete on a cost or revenue basis. Atlantic service. British Airways has announced

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If a carrier exuberantly over expands, some Countries Included In The E.U.-U.S. new flights will be unprofitable, and the venerable Open Skies Treaty Scottish financial theorist Adam Smith’s “invisible hand” of economics will take over: over time, as losses mount, the carrier will be forced to with- draw those flights. A few industry experts cite the concept of “supportable capacity” to describe what is

Iceland sustainable in the marketplace. This paradigm holds that the amount of capacity a carrier can profitably deploy from a hub to a spoke depends on three factors: Finland 1. The size of the local market in the hub, 2. The scale or size of the airline’s hub operation, Norway 3. The distance from the hub to the spoke. Sweden Estonia The three factors combine to determine Existing open-skies agreements Latvia the amount of sustainable capacity: Local traffic 16 countries Denmark Lithuania provides an essential foundation of higher-yield- N. Ireland Open-skies for first time ing traffic. However, connection customers are 11 countries Ireland needed to provide additional volume. And close United Additional ECAA countries Kingdom hub proximity lowers many costs. 9 countries Poland Netherlands Based on these factors, airlines can expect Germany Belgium to be economically penalized for certain longer Luxembourg Czech Republic Slovakia flights and benefit from higher-frequency short- haul flights. Austria Hungary France Romania Market fundamentals related to the sup- Slovenia Croatia Italy portable capacity concept suggest that hubs, Bosnia & Herzegovina Serbia & especially large hubs, tend to dominate their Kosovo Bulgaria nearby neighborhoods. Just as a very large tree Montenegro Portugal Macedonia casts a long shadow and takes up moisture, Spain Albania Greece nutrients and sunlight to deprive nearby seed- lings of the chance to establish themselves, the “hub-neighborhood” effect makes it harder for a Cyprus competitor to start services from a distant hub Malta to points that naturally fall within another hub’s “shadow” or catchment area — regardless of whether or not a route crosses country borders. The new E.U.-U.S. open-skies aviation services bilateral applies to 27 E.U. Due to the neighborhood effect, which is countries and represents the biggest change for the 11 countries that did frequently demonstrated in borderless markets not already have open-skies bilaterals with the United States — 16 countries such as the United States, natural or “home” already had open-skies agreements with the United States. Many terms of the territories emerge for each hub. In the case of agreement also apply to nine nearby non-E.U. countries, which are part of the Europe, the neighborhood effect might be slight- European Common Aviation Area. ly less pronounced since hubs are somewhat smaller than in the United States, and there is a plans for new all-premium flights from London ity than European airlines. And U.S. carriers stronger preference for nonstop flights. City Airport to the United States. And American also have fewer capacity limitations, such as But two other phenomena could enhance Airlines, a top player in the New York-London slots, at their home gateways. the effect of home territories: market, reinstated service to Stansted Airport, Past experience is that enthusiasm 1. The S-curve effect of market presence, which is the U.K. base of . for new freedoms and perceived competi- 2. Cultural preferences. Outside of the boutique arena, plans are tive pressures often drive frenzied carriers While the S-curve effect manifests itself now underway for British Airways’ new carrier to overindulge with their initial expansions. as “city” presence in the United States and “OpenSkies” to operate three-class Boeing 757s Then, over time, there is a retreat as suc- gives airlines an advantage in selling to custom- from New York to Brussels, Belgium, and/or Paris, cessful approaches are expanded and loss- ers originating in a hub or other city where the France. At a minimum, OpenSkies could be a use- making services are pruned. Winners and carrier has a large capacity share, in Europe there ful prototype for British Airways to fine-tune the losers are separated by the economic reali- is a “country” effect. A European airline’s home platform for serving nearby, non-home markets. ties of the marketplace. market usually includes the entire home country. Besides responding to the new all-busi- Cultural dynamics may reinforce this effect. ness-class services and the startup of OpenSkies, The Match Continues: Survival of The market fundamentals of supportable other airlines are likely to keep adding capacity the Fittest capacity and the neighborhood effect are not only on trans-Atlantic routes. The market continues Some industry-watchers speculate that very powerful but also they are independent of to experience double-digit revenue growth, and carriers will be tempted to invade one anoth- political boundaries. So even in a newly border- U.S. carriers continue to seek opportunities to er’s territories — for example, for Lufthansa less market, they still apply. Home territories will export their unprofitable domestic capacity. In to operate Heathrow-United States. But there still exist, making it more difficult for a smaller fact, it is possible that U.S. carriers have more are some natural limits that will influence the airline to invade a larger rival’s backyard or for a economic incentive to add trans-Atlantic capac- sustainability of such forays. hub to tap into a distant neighborhood.

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Airlines will continue to need some point mega-mergers between 2001 and year-end 2007: vice-versa, providing any new route “network of real strength on at least one end of a route American-TWA and US Airways-America West. strength” on both ends. for that route to be viable, whether that strength And recently, Delta Air Lines and Taking into consideration the large local derives from a network or a home territory. have announced merger plans, but further major market sizes, the highly developed networks that After the first moves and early expansions, U.S.-airline merger proposals are moving haltingly. low-cost carriers have built on each side of the the dynamics of supportable capacity, neighbor- Few if any of the possible U.S. airline combi- Atlantic, a newly deregulated marketplace and hood effect and home territories will determine nations involve overlapping trans-Atlantic routes, so the absence of any existing low-cost service, which changes survive. Changes that play to their effect on E.U.-U.S. flights could simply be to there could be high growth potential for low-cost a carrier’s inherent strengths will have distinct stabilize supporting U.S. networks. carriers in the trans-Atlantic market. Perhaps the survival advantages throughout the evolutionary Unlike the United States, where consolida- dense U.K.-U.S. market will be the launch point period, while changes that amount to attempts to tion has meant direct merger with loss of one for such service. challenge intrinsic properties of airline economics carrier’s identity, the emerging model in Europe In the end, the differences between Stage will inevitably be eliminated. has the largest carriers such as Lufthansa and 1 and Stage 2 of the open-skies agreement may Air France using holding companies to manage prove slight. Although only Stage 2 permits full End Game: Finding Equilibrium acquired airlines such as Swiss or KLM as wholly control of U.S. airlines by E.U. nationals — and Overall, the trans-Atlantic market may at owned subsidiaries. These examples created a use- thus possible mergers between E.U. and U.S. first be churned to an extent — but it will eventu- ful template for possible subsequent cross-border carriers — Stage 1 does provide expedited review ally find a new equilibrium. mergers by preserving distinct cultural identities of requests for antitrust immunity, which is help- The two-phase nature of the open-skies after a merger while still consolidating fundamental ful for effective joint ventures. And Northwest agreement leads to the possibility that there will economics. and KLM have already demonstrated that joint be two separate balance points — the first repre- Just as several U.S. carriers might leap ventures can function as “virtual” mergers. senting the full extent of change possible under into merger action after a “triggering” event, the While it is impossible to know the future, the Stage 1 treaty, and the second for Stage 2. European industry is in some respects spring- we can project an airline industry with even larger The speed with which the industry converges loaded for consolidation. Given the high value of global carriers such as British Airways, Lufthansa to either of these points could be increased by Heathrow slots and the creativity of deals to date, and Air France-KLM each owning smaller regional economic shocks. Or the steady state for Stage 1 many possibilities could make economic sense if airlines plus perhaps a few large carriers adjacent could be bypassed completely should Stage 2 be owners are inclined to deal. to their neighborhoods. Additional antitrust-im- quickly agreed upon and implemented. And existing cross-ownership stakes might munized joint ventures are also likely. The future So the burning question clearly becomes: influence consolidation. For instance, if Lufthansa might also include fewer trans-Atlantic flights What will “equilibrium” look like? had proceeded to bid for , it might have been from smaller former flag carriers. Since regulatory influences have effec- interested in the 10 percent stake owned by British Many smaller markets will still have tively been reduced through the open-skies Airways. British Airways, in turn, might have been service, but some players might change, as agreement, economic factors can be expected to interested in Lufthansa’s 29.9 percent stake in bmi. in OpenSkies replacing Sabena in New York- govern more strongly. The neighborhood effect SAS could have entered the picture, too, due to Brussels. Competition among global carriers will will give larger hubs substantial advantages over either its stake in bmi or in . remain fierce, as evidenced by the rush to add smaller hubs. And over time, the gap between Lufthansa is strategically positioned as a service to Heathrow. And low-cost carriers could large and small airlines will grow. potential kingmaker through its significant owner- provide relentless price competition. In Europe, history has shown that although ship stakes in leading carriers at the top two trans- There is some risk that negotiations over economically troubled airlines may shrink, they do Atlantic gateways — bmi at Heathrow Airport and Stage 2 will deadlock and that this would call not usually vanish completely. Additionally, while jetBlue at New York’s John F. Kennedy International Stage 1 into question. But by then, it might be some smaller hubs may currently be overbuilt, Airport. hard to turn back. they aren’t likely to disappear altogether. In both Because of the relatively higher cost struc- There are extremely high stakes on each of Europe’s first major airline collapses, the end tures of European versus U.S. airlines, it’s hard to side of the Atlantic. U.S. carriers will want to pre- game was intercontinental growth opportunities imagine traditional mergers such as Air France-Delta serve access to Heathrow. And E.U. airlines will for nearby rivals and regional opportunities for a Air Lines combining to form a single company. It’s want influence over key sources of feed traffic in smaller successor to the failed carrier. easier to imagine U.S. carriers as subsidiaries of the United States. These factors — plus a gener- The largest airlines can be expected to European airlines’ holding companies. European ally higher level of business integration between defend their neighborhoods, as slots permit. carriers already own stakes in their key partners E.U. and U.S. airlines — should create strong Situations such as Air France’s entry to London- around the world. economic incentives on both sides to somehow Los Angeles and a possible British Airways/ A hypothetical British Airways-American resolve issues on a more permanent basis. OpenSkies venture into Paris-New York might Airlines combination would be formidable, with The multilateral game of chess will contin- represent a “checkmate.” hubs in New York and at Heathrow — the most ue. And although its participants may be grouped British Airways is even now matching U.S. important gateways on each side of the Atlantic. into fewer and larger teams, their business strate- carriers’ moves of Gatwick flights to Heathrow With strong city presence in both New York and gies will still be highly sophisticated, and competi- to avoid what could otherwise quickly become a London, this combination would be well-positioned tion will remain strong. a competitive disadvantage. to compete vigorously with the U.K.-U.S. boutique Whether and how much consolidation airlines. occurs on either side of the Atlantic could be One of the most dramatic possibilities in strongly influenced by government regulation, the trans-Atlantic arena is the prospective entrance antitrust policies, the intensity of economic stress of a low-cost carrier. Several are well-positioned on airlines, and the presence or absence of eco- to do so: from London’s Stansted Airport; nomic or geopolitical shocks. easyJet from London’s Gatwick Airport; or jet- Chris Spidle is delivery director of Highly regarded industry analysts have Blue from John F. Kennedy International Airport. research, analysis and modeling for Sabre long predicted further consolidation in the U.S. U.S. low-cost carriers could potentially serve as Airline Solutions®. He can be contacted airline industry. However there were only two feed partners to a European low-cost carrier or at [email protected].

ascend 13 industry

Little Models Take Big Steps

Unique to the traditional merger or airline consolidation seen in recent years are several low-fare carriers that have either acquired their nation’s flag carri- ers or made attempts to do so. Ever-changing processes that are persuading various business models may be at the root of these unusual acquisitions.

By Alessandro Ciancimino | Ascend Contributor

t might, at first blush, seem pretty audacious riers and their larger, mostly “incumbent” growth in these carriers’ publicly traded share for low-cost or value-focused airlines to be in brethren among the flag carriers. values. But if at any time the growth momen- Ithe business of acquiring some of the larger, In recent years, low-cost, value-fo- tum is interrupted by even a small decrease more traditional incumbent flag carriers. cused and/or hybrid carriers have grown in load factor, the financial community can But such acquisitive actions now at a tremendous pace. And some of those be counted on to almost automatically and appear to constitute a developing global carriers have exhibited outstanding financial immediately issue a profit warning. trend. Or, at least, if the trend has not performance, considering the fact that their At that juncture, the low-cost carrier is been fully established, some low-cost, value- industry has historically achieved, even dur- obligated to do something different, and its focused or hybrid carriers are attempting to ing very good times, only a few percentage business plan may have to morph to accom- turn it into a trend. points in net profits. modate pure physical growth. For example, Brazil’s low-cost GOL The low-cost-carrier success around Best estimates are that about 75 per- Airlines — known for original, innovative cent of low-cost-carrier customers originally thinking and a savvy business approach — came to those carriers as the direct, tangible has acquired longtime Brazilian flag carrier Highlight results of new-traffic stimulation — such as Varig. passengers who did not previously consider And Air Berlin, a respected member a leisure option. of the low-cost, value-focused fraternity of Basically, there are Logic, though, says that such stimulation airlines, has acquired the larger operations cannot continue indefinitely and that low-cost, of both LTU and DBA — surprising many two ways a low-cost, value-focused carriers, to keep growing and fill business analysts and shaking up the current the aircraft they have as well as those they’ve European lineup of airlines. value-focused carrier ordered, must deviate from the original, pure On the other side of the ledger, low-cost-carrier business model. For instance, low-cost carrier Ryanair was recently can sustain continuous Ryanair stands to double the size of its fleet blocked by the European Commission from by 2012. acquiring Irish flag carrier Aer Lingus (the growth: through organic Basically, there are two ways a low-cost, European Commission cited competitive value-focused carrier can sustain continuous considerations). growth: through organic or inorganic means. And low-cost carrier Air One — like or inorganic means. several other would-be suitors — has been Organic Growth unsuccessful in its ambitious attempt to Organic growth can be achieved by acquire Italian flag carrier Alitalia. the world can be largely chalked up to the growing the geographic footprint covered by What’s going on here? Does the flur- exploitation of latent demand for inexpensive the airline or by growing its customer base. ry of merger-and-acquisition activity signal travel as an alternative option to, say, theater Either option deviates from the pure low-cost something more than what appears on the tickets or an automobile day trip. At some business model. surface? Or are airlines of all stripes simply point, such sources of demand for low-cost In fact, to grow its geographic footprint, adjusting to competitive and marketing reali- air travel are likely to be saturated. In fact, one a low-cost carrier must increase the average ties across the board? could argue that some of these sources may stage length of its network, which means flying The answers to these intriguing ques- already have exceeded the saturation point. longer routes that the low-cost carrier would tions may be found in closer examination In any event, the success of low-cost, probably not otherwise intentionally choose. of current evolutionary processes that are value-focused carriers has been based on Longer flight times mean significantly heavily influencing the respective business continuous growth. Theoretically, continuous lower aircraft utilization and market saturation models of low-cost/value-focused/hybrid car- growth should ensure similarly continuous — straying from the normally high number

14 ascend industry Photo courtesy of Boeing of courtesy Photo of daily frequencies low-cost carriers are set up to serve. Ryanair is an example of a low-cost carrier that is pursuing this avenue to sustain growth. It has recently initiated flights between Dublin, Ireland, and Malta, a four-hour time block that would not align with its original business model. Other low-cost carriers are expanding their customer bases by winning passengers over from incumbent airlines — those large or small carriers that are already flying a specific route in a particular market. This, by definition, is a deviation from the original low-cost business model and from the actions of other low-cost carriers. And it represents a brand-new challenge for the typical low-cost carrier. Until very recently, direct competition between low-cost carriers represented less than 10 percent of total worldwide airline capacity. But now that further growth opportu- nities in potential low-cost-carrier “virgin” markets are drying up, some of the low- cost, value-focused airlines are beginning to saturate each others’ markets. In the United States, for example, the yield of Southwest Airlines is more than 10 percent lower on routes on which the carrier faces competition from another low-cost carrier than on routes shutterstock.com by Photo where it does not. On the other hand, winning passengers away from traditional airlines is neither easy nor inexpensive — especially when network airlines fight back by attacking their cost bases and trying to emulate features of the low-cost model. In moving to meet this challenge, many low-cost, value-focused carriers have found themselves obligated to offer “frills” on their flights. This strategy is based on the concept of succeeding at the expense of the larger incumbents, which, believe it or not, was not a foundational element of low-cost-carrier strategy and success. And it means increasing the cost base of operations — an immediate result of offering frills to attract passengers who are not merely price sensitive, but schedule sensitive. Low-cost carriers that are following this strategy include jetBlue, Southwest Airlines, Air Berlin and SkyEurope. They offer more ser- vices, more convenient schedules and more GOL, Brazil’s low-cost, no-frills airline, took a bold step last year when it acquired Varig, distribution channels, including global distribu- the country’s flag carrier. The two carriers continue to serve their independent markets and tion systems. operate under separate brands. These low-cost, value-focused carriers are squeezing the gap between themselves and incumbents in terms of four key factors: schedule, service, yield and cost. elers by flying to main airports instead of sec- And the larger incumbents are fighting Of course, there are different approaches ondary airports like those served by Ryanair. back by incorporating some of the low-cost- for different value-focused carriers. Southwest The need to offer more to justify an carrier business design in their model such Airlines, for example, is counting on its global increase in low-cost-carrier fares and yield as pushing online sales, cutting travel-agent distribution system for effective distribution as is also the result of the need to cope with commissions, improving the productivity of opposed to jetBlue, which is instead offering increasing costs such as various aircraft and resources, focusing their networks around some interregional connecting flights. There’s jet-fuel expenses that impact every airline, their natural key assets and simplifying their also easyJet, which is targeting business trav- regardless of its business model. fare structures.

ascend 15 industry Photo courtesy of Airbus of courtesy Photo Inorganic Growth The other way to grow, which is labeled, logically, “inorganic growth,” is through merg- ers and acquisitions. Actually, all the ingredients seem to be in place for low-cost-carrier consolidation — and merger-and-acquisition activity is already occurring. According to a recent International Organization study performed through a series of interviews with airline chief executive officers, the vast majority believe the industry will move toward further consolidation. The primary driver of industry consoli-

Photo courtesy of Airbus of courtesy Photo dation relates to increasing the share value of consolidating companies in concert, it is certainly assumed, with economies of scale in combining airline fleets and other assets. But one important factor that always goes hand-in-hand with mergers and acqui- sitions in the airline industry is stringent regulatory oversight. Antitrust issues and cross-border-ownership restrictions are often roadblocks to merger-and-acquisition suc- cess, as in the case of the would-be Ryanair/ Aer Lingus merger that was vetoed by the European Commission. Other examples are to be found in global alliances, which figure to play substantial roles in enabling consolidation through direct

Photo by shutterstock.com by Photo equity investment among alliance partners. To a great extent, the global alliances exist to allow a partial “commercial consolidation” of the industry that is blocked by current foreign- ownership restrictions. Most of the airline CEOs who took part in the ICAO interviews say stronger alliance relations are being formed basically in lieu of a formal merger-and-acquisition process — when the latter is not achievable due to either regulatory or business issues.

Outlook For The Future The convergence of formerly distinct

Photo courtesy of Airbus of courtesy Photo business models and the increase in low-fare competition present different challenges for the larger incumbent airlines and the low- cost/value-focused/hybrid carriers. Low-cost carriers will have to engage more and more in actions and imperatives that are intimately familiar to the larger flag carriers: finding new sources and diversifica- tion of revenue, streamlining and making the network and operations more effective, redesigning and creating innovative business processes around pricing and revenue man- agement and, of course, keeping tight control on costs. Given the stereotypical frugality of low- cost carriers, their way forward may espe- While some low-cost carriers have been successful at acquiring larger counterparts, the cially concentrate on the redesign of some European Commission stopped Dublin, Ireland-based Ryanair from purchasing Irish flag commercial and operational processes, such carrier Aer Lingus. And Italy’s Air One was unsuccessful in its attempt to acquire the as new techniques in revenue management, country’s flag carrier, Alitalia. to be better able to face the competition at the same time and in the same markets of

16 ascend industry Photo courtesy of Boeing of courtesy Photo both large incumbents and other low-cost carriers. Or the low-cost carrier may look at items such as demand-driven, short-term fleet-assignment processes to better match its capacity to ever-changing demand factors. Meanwhile, the larger incumbents must exploit differentiating factors such as network size, schedule quality, better cus- tomer service, more favorable airport loca- tions, alliances and frequent flyer programs. A larger incumbent airline can also gain advantages by segmenting its offerings more effectively and simplifying its fare structure — making fare elements more transparent and adding a la carte features: enabling customers to individually select Photo courtesy of Airbus of courtesy Photo and pay for the specific onboard and in-flight items they really value. Another priority of the larger incum- bent airlines should be refocusing their net- works around market needs and their key natural strengths. Larger airlines would be well-advised to shift toward “follow-the-mar- ket” instead of “force-the-market-to-follow- you” philosophies. Certain larger carriers, for example, tend to build unnecessarily complex connecting schedules in trying to serve non-natural connecting markets. Larger incumbent business-transfor- mation priorities might also be shifted to make operations more efficient through fleet rationalization, process automation, out- sourcing of non-core business and increasing labor-force productivity. As the future unfolds, it’s likely that — in adjusting to various market factors — the larger flag carriers and low-cost/value-fo- cused/hybrid carriers will primarily continue to coexist. Obviously, price pressure will Photo by shutterstock.com by Photo always represent a huge challenge for every airline, large and small (and could enter into merger-and-acquisition thought processes in a very big way). And only those airlines that are able to quickly and nimbly adapt to new and continu- ally changing conditions will be rewarded with consistently profitable operations — whether they’re actively engaging in merg- ers and acquisitions or simply trying to forge a conventional path to business-sustaining growth. a

Alessandro Ciancimino is a Germany’s budget carrier, Air Berlin, has expanded it’s operations with the acquisition of senior partner for Consulting and Duesseldorf-based LTU in 2006 and Munich-based DBA last year. The airline is one of several Solutions Delivery at Sabre Airline European low-cost carriers that have taken an interest in larger operations. Solutions®. He can be contacted at [email protected].

ascend 17 System operation control centers are critical to an airline’s day of operations, but the most effective, efficient SOC is an integrated one — from the people who work in a centrally located SOC environment to the systems that support them.

By Dave Roberts | Ascend Contributor

18 ascend industry Photo by shutterstock.com by Photo

he room is crowded with people use are in control of their environment and internal and external groups. These groups sitting in front of various types of their responsibilities. are always occupied with external events, Tcomputer or console screens. They Is it NASA’s Mission Control Center? working hard to ensure a safe, efficient are clustered in groups throughout the Is it the flight control room that has guided and cost-effective airline. Success of an room — some on raised platforms over- and controlled hundreds of space shots? No. SOC is dependent on both the effective- seeing the work of others. It is a win- Anyone in the airline industry could easily ness and administration of the underlying dowless room, and around the walls are identify this scene. It’s an airline’s system business processes. It is the coordination very large plasma screens that display operations control center — its nerve center. of flight operations, crew tracking, main- many graphical pictures of colored lines Within the confines of the SOC, airline tenance and engineering, dispatching, air- around the world, weather depictions of personnel are monitoring and controlling the port and ground staff, and reservations sky conditions and forecast, and many very essence of the operation of the airline and passenger service personnel working charts filled with numbers and symbols. at any given time … day or night. The SOC together to ensure the efficient and timely There is a low-level buzz throughout is a full-time, 24-hour-a-day, 365-day-a-year transportation of passengers, bags and the room with many people talking at operation that oversees the airline — its cargo. It requires a fully integrated opera- once — to each other or on the phone. schedule, flights, aircraft, staff, passengers tion of flight, aircraft and crew systems to Some are yelling instructions, many and cargo. An airline runs on its heart and produce this timely experience. are asking questions, but all appear to soul, but it is controlled by its brain and nerve A positive flight experience produc- be concentrating on the work at hand. center, the SOC. es huge returns on investment because of The technology of communication and The SOC is more than a location passenger satisfaction. Integrated airline computing can be sensed throughout where many operations business units operations enable high-level decisions that the room. At first glance, it appears come together during the day of opera- produce optimum results and a superior chaotic. But with a closer look around tions to make air travel possible. The experience for customers, which, in turn, the room, observing and listening, it primary business processes within an air- drive customer loyalty. The evolution of becomes apparent that all is in order and line SOC encompass communication and the SOC has been ongoing for many that these people and the machines they coordination with many of the airline’s years, but today, the responsibilities of the

ascend 19 industry Photo by shutterstock.com by Photo

The most efficient system operations control center combines well-trained airline professionals with end-to-end integrated systems in a single, centralized location to ensure communications occur in real time and day of operations run as smoothly as possible.

SOC include combinations of several functions, and passengers and cargo — is a challenge. making was very difficult given the separation of including: Months, even years, go into the planning of those responsible for the airline’s operation. Monitoring, coordinating and controlling the a flight schedule. The SOC is the entity that Airline management realized that change operation of the airline and its resources on controls the execution of the plan to meet the was necessary, which is when centralized offic- the day of operations; legal requirements of various governments, the es to manage the day of operations were formed Planning and executing the daily operational laws of aerodynamics and the goals of the airline. throughout the industry. These new offices, plan and flight operations for all scheduled and After safety, cost control, which is an essential called many different names, such as systems non-scheduled aircraft movements toward on- factor of success when executing the daily plan, control, operations control and airline control time operations according to government and is achieved through reduced fuel consumption, center, had a common objective — to bring corporate policies and requirements; improved personnel productivity and enhanced together in one location the people responsible Managing operational control of the airline flight movement from departure to flight path for the daily operation of the airline. when irregular operations occur caused by to arrival. Airlines also realized that the most efficient adverse weather, aircraft or other mechanical Airlines rely on the people and informa- SOC was created by centralizing, consolidating problems; airport or prob- tion technology located in the SOC to help and integrating operational control functions, lems; or labor issues; achieve their corporate objectives. SOC staff and they quickly understood that these new Minimizing passenger disruption during irregular members are the primary decision makers for offices were successful in better coordinating operations by operating the schedule as close the day of operations. This decision-making and controlling the business, especially during to plan as possible and providing alternatives role requires communication and coordination irregular operations. Key in the establishment of for passengers when flight delays or cancella- with not only the numerous groups within the these centers was the new, localized integration tions occur; SOC but also the many external groups that among operational functions that control the Serving as the focal point for coordination during are engaged in the physical operation of the airline. Of course, in the early days, integration emergencies. airline. meant standing up and hollering across the room The operation of an airline on a daily basis The centralized group of airline staff that from one position to another, as verbal commu- is complex, and a key to success is the efficient oversees the operational control of the airline nication was the first form of integration used in and effective completion of the flights as close has not always existed. In the early years of these new SOC offices. to the published schedule as possible. Bringing , this control was decen- The tools used to control the airline opera- it all together — airworthy aircraft, qualified and tralized and located at many different points tions were once manual. The airline industry, legal flight crews, sufficient ground resources, around an airline’s airport system. Decision which was one of the first to adopt computer

20 ascend industry

automation, was concentrating on automating the SOC to balance these competing interests mum fuel to reduce the amount of fuel onboard passenger reservations, and SOCs and airports and produce a system-wide solution rather than and reduce in-flight fuel burn and that there is were among the last areas to be fully automated a local one. justification when carrying additional fuel above during the second half of the 20th century. the minimum. When additional fuel is carried With the introduction of automation into Real-Time Management Of Pilots And above the minimum or legal amount required the SOC and its core functions, airline operations Flight Attendants for a flight, more fuel is burned due to the extra became even more efficient by reducing costs Along with scheduling and monitoring the weight. As a rule of thumb, every extra pound of through productivity enhancements. Since air- movement of aircraft, scheduling and managing weight (fuel in this case) burns approximately 3 craft generate revenue only when they are in the flight crews is essential to an airline’s operational percent extra fuel per hour. air, automation helped increase aircraft utilization control success. Included in the end-to-end crew In some cases, the opposite process is through improved flight operations. By minimiz- management needs of an airline are phases that most cost effective — add more fuel than is ing ground time, the aircraft could be scheduled address day-of-operations crew scheduling and needed to fly to the next destination, known for more flight time each day. The increased crew tracking and recovery that are designed to as fuel ferrying or tankering. Airlines analyze flying was brought about by more efficient opera- ensure efficient deployment of crews at mini- fuel costs at each airport to which they fly, and tional control tools now automated within the mum cost while maintaining flight reliability and then they calculate the costs of flying (tanker- SOC. Further improvements were still needed schedule integrity. ing) additional fuel from one airport to another through systems integration so each segment Crew scheduling actually begins prior to versus the costs of buying fuel at the destination of automated solutions was sharing and utilizing the day of operation and, like flight scheduling, is airport. The additional costs of carrying additional the same data. a very complex requirement. Within each aircraft fuel can be lower than the price of purchasing While the roles and responsibilities and crew complement are different crew member additional fuel at the destination airport. even the functional departments within the types as determined by the airline, and crew many SOCs have changed, the core functions scheduling ensures that there are legal and quali- Following The Progress Of Each Flight generally remain the same. These core func- fied crew members assigned to each flight. Flight following is the real-time tracking of tions, which range from managing essential After crew assignments are made for flights from departure to arrival. SOC staff moni- resources to perform flight activities to the deci- each flight, the SOC crew controllers must track tor the position of each flight at all times after sion-making required during irregular operations, these crews throughout the operational day to departure. Flight following is necessary to enable include flight planning and following, assignment continually be sure that flights have the correct, the SOC to respond to any occurrence during the of aircraft, scheduling of maintenance, control of legal complements of crew members available. flight that may require communication with the flight and aircraft movement, and scheduling and Crew controllers will also fill open positions and, flight crew. Estimated arrival times can be more tracking of flight crews. And all of these func- if necessary, reassign crews when irregular accurately determined as a result of proper flight tions can be optimally achieved using end-to-end operations occur. following, and destination airports and passen- integrated solutions. In the SOC, the tasks of movement con- gers can be updated when changes occur. trol and crew management are closely related. Controlling Flight And Aircraft Integration of data for these two areas provides Adhering To The Aerodynamics Movement many benefits when compared to systems that Of Flight The foundation for an airline’s day of oper- are managed separately. Decisions made by Load planning, a critical safety element ation is the flight schedule, a complex system both of these functional groups have a direct in flight operations, is the detailed process of designed to coordinate the published schedule impact on an airline’s operational performance gathering data on items to be loaded on the with the required aircraft, crews and operational and daily expenses. aircraft and calculating the load plan based on resources at various airports. Maintaining the the aircraft’s basic operating empty weight or integrity of the flight schedule is one of the Creating A Trip Plan For Each Flight dry operating weight, meaning without fuel. SOC’s primary goals. The schedule is a complex A flight plan is developed for each flight Included in the items to be loaded are booked linkage of aircraft, crews and passenger demand. and is designed to ensure the operation of these passengers, estimated bags, and mail and cargo An airline’s movement control is the system flights adhere to all legal and safety require- for a particular flight leg, resulting in an estimated that oversees the reporting and monitoring of ments. Included in the flight plan are the flight zero fuel weight when added to the operating the actual flight times as compared to the flight route, speeds, altitudes, flight times and airport empty weight. The load plan calculates the dis- schedule. Irregular operations cause changes to details to include designated alternate airports. tribution of cargo and passengers on the aircraft the flight times, and the movement control sys- Dispatchers within the SOC check for airworthi- and ensures they are loaded within the proper tem is designed to ensure that disruptions are ness of the aircraft, weight limitations for each center of gravity and aircraft weight limitations. identified and corrective action is administered to segment of the flight (from taxi to takeoff to Since it is necessary for SOC load plan- quickly return the flight schedule to normal. enroute flight to landing), route and altitude limi- ners to coordinate closely with other SOC staff On any given day, events occur that tations and restrictions, required fuel for opera- and airport personnel, integration of systems prevent the schedule from operating as planned. tion to destination, and contingency to alternates enhances the productivity and effectiveness of These disruptions upset the timing of critical based on current and forecasted weather. In load planners. flight events. The more restrictive the schedule addition, flight planning considers the costs to If the SOC is able to execute the day’s is, the more difficult it is for the SOC to manage the airline. Economical routes, altitudes and flight flight schedule, if sufficient resources are avail- the day-to-day operation. When a disruption to speeds are selected considering weather and air able to operate the schedules, and if there are the flight schedule occurs, various departments traffic control constraints. Factors related to flight no disruptions, operation control can be a routine have a vested interest in which solutions are schedules and connecting flights for passengers task. However, the disruptions that inevitably selected. Crew scheduling requires a solution are considered in determining the flight plan. happen can cause local resource shortages that that reduces crew costs. Maintenance con- Fuel consumption is a key factor when determin- require corrective action to avoid unacceptable trol needs a solution that ensures scheduled ing the flight plan and the decisions to tanker or delays or flight cancellations. maintenance is accomplished. Airport personnel ferry additional fuel. While the SOC cannot prevent disrup- must have a solution that accommodates their It is essential that the flight planning tions caused by external factors, the effective passengers as quickly as possible. It is the job of system calculates the optimum level of mini- execution of business processes and systems

ascend 21 industry Photo by shutterstock.com by Photo to the airline are more than just managing the SOC and the operations. In addition, there are realizable economic benefits associated with automation and integration — fuel savings, improved on-time performance, more effective recovery from irregular operations, improved payload through optimized load and flight plan- ning, and improved productivity for SOC control- lers and dispatchers. Disruptions or irregular operations can occur in many forms and at any time. Integrated solutions in the SOC are essential during these times to help the SOC fulfill one of its primary roles — to quickly and efficiently return the airline to its routine schedule. Many airlines today rely on manual sys- tems or automated, independent systems to manage irregular operations. The recovery time and the resulting costs are much greater for these airlines than for those that have inte- grated their systems and share the data and solutions among the entire SOC staff and external departments required to handle the Having access to real-time information enables SOC personnel to effectively respond to disruptions. Relying on integrated systems, unexpected schedule disruptions, making it possible for airlines to quickly recover with the such as the complete, end-to-end suite of SOC ® least impact on customers. systems offered by Sabre Airline Solutions , provides SOC controllers and dispatchers real- time, easy access to information from various functional areas of the airline. It enables them determines how well an airline handles and SOC and between the SOC and external opera- to enter and maintain data more rapidly and recovers from external events. SOC personnel tional groups. Data exchange is more efficient, efficiently. Reaction time to irregular operation must react to the disruptions — whatever the response times are quicker and employee pro- situations is increased due to instant notification magnitude — to keep the airline running as ductivity is improved. The human factor, often of events such as flight delays and cancella- smoothly as possible. The challenge faced by a problem during critical periods, is improved tions. The additional time enables the SOC SOC personnel is that disruptions are caused as errors are lowered and redundant tasks are team to make crucial decisions to return to by many factors to include resource limitations reduced. Data accuracy is more dependable and normal operations. involving aircraft, crew members and ground provides for a safer environment and better cus- The room is now quiet. It is midnight, and personnel, mechanicals, weather, and air traffic tomer service. The ability to analyze problems the last large flight complex of the day has control restrictions. Minimizing the impact on rapidly and more efficiently allows for better departed from the west coast. Several controllers passenger service and maintaining the integrity decision making and more of a proactive rather and dispatchers are still on duty wrapping up the of the published flight schedule requires close than reactive posture. day. The low buzz is now calm as the shift ends. cooperation and communication among the Along with automation and information But the activities have not ended. A new group of departments within the SOC. Often, the deci- technology, further improved capabilities of the people are settling in to begin the planning of the sions that must be made in the SOC to return SOC are realized through the integration of the next day’s operation. Schedules are reviewed, the airline to normal operation may be affected automated systems and solutions. Integration aircraft assignments are matched to the schedule by factors that are diametrically opposed to of SOC data during normal operations enables and the aircraft location, maintenance logs are one another. The decision to cancel a flight an airline to fly more efficiently and reduce checked, weather forecast reviewed for potential may cause an aircraft to be out of position for costs associated with flight time, resources, problems, dispatch desk assignments are made, a scheduled overnight maintenance check. The fuel consumption, delays and cancellations. The and preliminary load plans have been developed decision to operate the flight on a delayed basis enhanced operational control environment dis- based on preliminary passenger loads. In just a to await connecting passengers may cause tributes information to appropriate personnel, few short hours, the early morning originators will crew members to miss their connecting flights, providing common situation awareness with be scheduled for departure and a new operational thus delaying those flights as well. which to make informed flight-related decisions. day will be underway. The room will be buzzing To make optimum decisions, the SOC The automated systems in the SOC are fully again, and the airline operation will be under con- must be able to provide the same data and situ- integrated so changes in one are immediately trol thanks to the system operations control cen- ations to all functional groups within the center. reflected across the board. Data is entered once ter, its people and its integrated solutions. a Integration is essential to achieving the opti- and shared throughout the SOC as well as mum solution. Enhancing the level of systems forwarded to other affected areas such as integration enables SOC controllers to focus on maintenance and engineering, crew scheduling, the most critical tasks and problems at hand. and aircraft routing. The ability of the SOC to manage and Integration reduces the risk of miscom- Dave Roberts is senior principal control an airline’s daily operations has been munication as SOC controllers and other air- of strategic planning, airline and significantly improved with the advancements line/airport employees have access to the same flight operations for Sabre Airline in information technology. Automation provides data that is in real time and updated with more Solutions. He can be contacted for improved exchange of information within the current and factual information. The benefits at [email protected].

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Blending Models

While the low-cost carrier model has proven quite successful during the past several years, even the purest of LCCs are forced to implement characteristics of network carriers to gain a broader passenger base and expand market reach.

By Christine Kretschmar | Ascend Contributor

rom an initial skeptical status to a Low-cost carriers entered Asia/ During the past decade, low-cost car- now-well-regarded position in the air- Pacific in 2000 — led by operators such riers have proven the most profitable and Fline industry, the success and popu- as Malaysia’s AirAsia and Australia’s Virgin dynamic segment of the airline industry. larity of low-cost carriers in recent years Blue. Low-cost airlines around the globe — includ- has generally been well documented. In 2006, new low-cost carriers were ing Southwest Airlines, Ryanair and AirAsia Allowing the masses to conveniently introduced in Saudi Arabia and Mexico. — have shown consistent profitability dur- travel the globe at affordable prices, low- cost carriers have maintained continuous growth. But after more than a decade of Low-Cost Carrier Growth multiple LCC success stories, deviations from the original low-cost-carrier business model have become apparent. In fact, few 50 of today’s low-cost carriers are “pure.” Most are now considered “hybrid” carri- 44 45 43 ers — operating an entirely new business model that is essentially a blend of pure 40 LCC elements with those of the more tra- ditional network carrier. Many in the air travel industry hear- 35 ken back to the early days of Southwest Airlines as the birth of the LCC business 30 model — but Pacific Southwest Airlines in 1949 was actually the first U.S. air carrier 25 to use the low-cost airline title. Since 1971 — when Southwest Airlines initiated service — the carrier has 20 operated under the low-cost model with 16 enormous success. In fact, the carrier has 15 14 sustained profitability almost continuously 12 ever since its inception. Number of Low-cost carriers 10 9 Meanwhile, in Europe, where 7 8 entrance of low-cost carriers into the larger airline equation is much more recent, 5 4 expansion of the LCC business model 0 1 0 generally coincided with the final deregula- 0 Africa Asia/Pacific Europe Latin America/ Middle East North America tion of the air passenger market during the Caribbean 1990s. Number in 2000 Number in 2006/07 Genuine low-cost operations in Europe actually began with the founding of Low-cost carrier growth rate around the world has increased significantly during Irish-based Ryanair in 1985, which openly the last several years, specifically in Asia/Pacific and Europe. Many of these used Southwest Airlines as its role model carriers, however, are adopting a hybrid model to better compete with each other and was then followed 10 years later by and network carriers. easyJet.

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Multiple fares. and 7 percent demonstrated characteristics Based on a recent study where Sabre that place them within the more traditional Moving To Hybrid Airline Solutions® considered 540 of the “network” business model. largest global carriers, 123 are commonly The study revealed that a total of 59 70% referred to either by the airline industry or by percent of the 123 low-cost carriers have themselves as “low-cost carriers.” On the broken the commonly assumed LCC oper- 60% basis of how many points an airline scored ating parameters — pure LCC parameters with regard to the 10 key attributes, each such as point-to-point networks, single 50% of the 123 carriers was characterized as aircraft types and simple fares with no belonging to any of three sub-categories: interline or codeshare agreements. That 40% Pure low-cost — This represents an airline means 59 percent of the 123 airlines have that basically remains true to its original introduced complexity into their once-pure 30%

Percentage LCC model, which scores zero to two LCC model. points according to the stated comparative In comparing the study results with 20% attributes (that is, if an attribute applies to actual passenger numbers, larger airlines a low-cost carrier, that airline gets a score (among the 123 in the original low-cost- 10% of 1 on that attribute; if the attribute does carrier group) have generally been the ones 0% not apply, the airline’s score on that attri- to adopt more complexity, with 65 percent Pure LCC Hybrid Almost bute is zero). of all LCC passengers traveling on a, now, network carrier Hybrid — Carriers that scored between hybrid carrier. three and seven points are characterized Numerically, in fact, hybrid carriers had Percent of airlines studied as belonging to a new “hybrid” segment twice the average passenger volume com- Passengers traveled of low-cost carriers. pared to the pure low-cost carriers. Larger Almost-network — An airline that scored airlines are more likely to adopt a hybrid Of the 123 low-cost carriers that from eight to 10 points is characterized as model, at least, in part, to feed their quest were recently studied, 50 percent an “almost-network” carrier. for more robust growth. have acquired more complexity In addition, low-cost carriers in mature Further results of the study show that and moved to a hybrid model markets compete with each other more the hybrid attributes that are most likely to be and now carry more than 60 fervently on route and price. To extend their adopted by low-cost carriers are international percent of all LCC passengers. opportunity to grow, they have to find new service, codesharing, connecting service, ways to diversify. Normally, low-cost carriers global distribution systems placement and ing times when more-established competi- can grow in any of three ways: multiple fare offers. (There is little domestic tors have struggled to remain solvent. 1. Increasing their network by entering new airline service in Europe, so in evaluating In raw numbers, Asia/Pacific and markets, European low-cost carriers, the study partly Europe currently have the highest popula- 2. Expanding their customer base (attracting discounted the “international” attribute.) tions of low-cost carriers. business travelers), Regarding the top-10 defined attri- In terms of passengers boarded since 3. Pursuing mergers and acquisitions. butes, taken as a whole, not only have they benchmark year 2000, Latin America has Following one of these growth pos- been widely adopted among LCCs, but it is increased dramatically compared to other sibilities generally means an airline is moving clear that the largest LCCs are most likely to major global regions, with an eye-popping 4,045 percent increase. Asia/Pacific, during Highlight the same period, has realized a 1,901 per- cent increase, and in Europe there’s been a 333 percent increase. As low-cost carriers have grown to the Hybrid carriers had twice the average passenger point at which they now carry about 25 per- cent of the world’s airline passengers, many volume compared to the pure low-cost carriers. LCCs have found it necessary to modify their business models to take full advantage of Larger airlines are more likely to adopt a hybrid market opportunities. Different hybrid business models have model, at least, in part, to feed their quest for adopted a variety of attributes from tradi- tional network carriers. The top 10 include: more robust growth. Multiple aircraft types, Classes of service, International service, Long-haul or intercontinental service, Interline agreements, away from the pure low-cost-carrier model adopt them, supporting the hypothesis that Codeshare agreements, to a more complex business plan and operat- a move toward hybrid status is a function of Global distribution system participation, ing environment. maturity and growth. Connecting service, Based on the analysis of 123 low-cost In the more mature markets of North Ticketing procedures (either the issuance of carriers worldwide, 41 percent of those America and Europe, airlines based on the accountable paper tickets or International low-cost carriers remained true to their pure LCC business model are substantially larger Air Transport Association standard elec- LCC business model. Meanwhile, 52 percent in terms of passengers carried than low- tronic tickets), moved toward a “hybrid” business model, cost carriers in other regions.

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These larger low-cost carriers in North In examining the adoption of new needs have been largely met by specialist America and Europe also have an average business models per region, it becomes suppliers of very simple solutions acquired hybrid score that is significantly higher than evident that carriers in mature markets are during the airlines’ infancies. LCCs in other regions — lending further sup- more likely to adopt a hybrid business model Research indicates that this picture is port to the idea that increased complexity and/or an “almost-network-carrier” model. undergoing a metamorphosis in the evolu- results from increased maturity and growth. North America exhibits the lowest tion of low-cost carriers into hybrids that Of the 123 low-cost carriers identified percentage (25 percent) of pure LCC mod- incorporate features that would once have in the study, North America’s airlines carry els, while the other 75 percent of the been strictly the preserve of full-service an average of almost 10 million passengers North American low-cost-carrier market has airlines. And as low-cost carriers continue each and have an average hybrid score of moved toward the hybrid business model to modify, it is likely that their requirements 3.9. — but no low-cost carriers in North America for IT solutions will also become more Europe has significantly more low- have further diverted to almost-network sophisticated. cost carriers, serving fewer than half as carriers. Vendors wishing to properly serve many passengers per airline as their North The market research also showed that this new breed of low-cost carrier will be American equivalents. The average hybrid the average ticket value for a hybrid carrier required to provide more sophisticated man- score in Europe is higher, but this higher is 88 percent higher than that for a pure agement practices and IT solutions, which score can be chalked up to the near non- low-cost carrier (respectively, US$179 ver- may not be available from the current estab- existence of purely domestic airlines in sus US$95 per passenger segment), indicat- lished suppliers to the LCC sector. Europe. Accounting for and adjusting this ing that hybrid carriers may be able to gain Based on the recent study, it is not factor yields an average hybrid score in higher yields than pure low-cost carriers. only apparent that the trend among low-cost Europe of about 3.5. This extensive research project was carriers toward hybridization is well estab- Latin America and Asia/Pacific are at intended to investigate and quantify the lished, but that the hybrid sub-category is earlier stages of development of low-cost movement of pure low-cost carriers to more likely to continue to grow as the low-cost- models — as reflected in both the average complex business models. carrier market sector matures, competes passenger numbers and the average hybrid It appears that the move toward and consolidates. a score for these regions. hybridization follows from the aspiration Africa and the Middle East, where of any particular low-cost carrier for further low-cost carriers are still in their infan- growth. With significant growth comes the cy, have the smallest airlines among the need for a more sophisticated technology world’s low-cost carriers. The low-cost provider. Christine Kretschmar is regional carriers in Africa and the Middle East also The business model of the pure low- marketing manager in Europe for Sabre remain closest to the original pure LCC cost carrier is less complex than that of Airline Solutions. She can be contacted business model. conventional airlines, and low-cost carriers’ at [email protected].

Adoption Of Hybrid Characteristics

80%

70%

60%

50%

40%

30%

20% Percentage of all low-cost airlines 10%

0% Multiple aircraft types Multiple classes of serviceInternational services Long haul Interline Codeshare Connecting service GDS distribution Tickets Multiple fares available at any time

Airlines Passenger numbers

Low-cost carriers, when transforming to a hybrid model, have adopted several characteristics of traditional network carriers, most commonly, international service, codesharing, connecting service, GDS placement and multiple fares.

ascend 25 industry Illustration by shutterstock.com by Illustration

“Green”er Skies Despite airlines’ countless efforts to help “clean up” the skies, they are continually cited for leaving the most damaging affects on the environment. By Benjamin Mussler | Ascend Contributor

he trend to “go green” continues to carbon emissions while enabling airlines to regulation and has struggled to find a bal- build momentum as companies, includ- support increased customer traffic growth ance between what the industry deems Ting airlines, expand their green, eco- expected during the next several decades. realistic and what some governments have friendly offerings in the name of efficiency proposed or implemented. In the United and the environment. But as concerns for Aviation Industry And Green Policy States, the proposed Lieberman-Warner carbon emissions mount, the aviation indus- The aviation industry accounts for about Bill would gradually cap greenhouse gas try has increasingly come under scrutiny 2 percent of carbon emissions — a small emissions to 1990 levels and, if passed, despite gains in fuel efficiency and mea- figure compared to the total footprint of would affect U.S. transportation and other

surable reductions of CO2 emissions. As transportation (13.5 percent) or the total industries. More pressing, the decision by next-generation aircraft and technology take output from electricity and heat (24.6 per- the European Union to include aviation in flight, a more efficient sky has the potential cent). Nevertheless, the industry continues its Emissions Trading Scheme, or ETS, to add to the “green” equation — reducing to be targeted as a candidate for emissions beginning in 2011 will also introduce

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stricter caps on average emissions for not Technology — Advances in alternative Some carriers have taken this mat- only domestic but international flights to fuels, , engine and traffic manage- ter into to their own hands. Delta Air Lines and from E.U. airports as well. ment. IATA is working with manufacturers has demonstrated a successful utilization Critics, such as the Association of and fuel suppliers to develop short-, medi- of global positioning system satellites to European Airlines, argue that the measures um- and long-term measures. Short-term allow aircraft to take off at its Atlanta, proposed by the European Union represent advances include improvements to existing Georgia, hub an average of three min- “a massive blow to the viability and com- fleets such as winglets that have been utes faster than radar previously allowed. petitiveness of the European airline indus- shown to save significant amounts of fuel The U.S. Federal Aviation Administration try.” AEA Secretary General Ulrich Schulte- and hence CO2 emissions as well. approves of this process and understands Strathaus added that the action represents Operations — The implementation of more the need to move away from radar-based “political compromises more than it does efficient aircraft into carrier fleets. This air traffic control — encouraging airlines the reality of the environmental challenge.” will be measured in part by a stricter fuel- to innovate. This decision is being opposed by other efficiency goal that IATA passed last year Other regions of the world are industry groups as well. The International that requires a reduction in fuel consump- also investing heavily in improved air Air Transport Association also rebuked the tion by at least 25 percent per revenue ton traffic control systems. The Civil Aviation decision. kilometer by 2020, as measured at 2005 Administration of China purchased a sec- “Climate change is a serious problem levels. Once achieved, IATA estimates that ondary radar system that will allow the and hypocrisy is not the answer,” said this will save 345 million tons of CO2 during Beijing Capital International Airport to IATA Director General and Chief Executive that period. safely cut the distance between landings Officer Giovanni Bisignani. “We could be Infrastructure — Open- and single-sky through the use of Automated Dependent saving 12 million tons of CO2 annually with agreements and improved air space man- Surveillance-Broadcast, or ADS-B. The an effective ‘single European sky.’ Instead agement. IATA recognizes that such system cuts the lag time between radar of making that a reality, Europe is single- improvements present a major opportu- beacon positional updates from 14 to 36 mindedly pursuing a political agenda of nity for fuel and CO2 reductions in the near seconds down to just one second. The emissions trading that does nothing to term. To achieve this pillar, IATA suggests result is far fewer coverage gaps that improve environmental performance. I don’t that “governments must adopt policies and equate to faster, safer landings. see the European Parliament planting many remove obstacles to allow airspace and As focus on emissions, fuel con- trees, but somehow they have gotten lost airport inefficiencies to be cut in half over sumption and improvements to air traffic in the woods.” the next five years.” control continue to gain attention, more As recently as 2006, Ascend reported how certain groups in the industry were opposed to the charges that airlines had negatively impacted the environment and possibly contributed to global warming. Today, the opinion of much of the industry “Climate change is a serious problem and is shifting to one of increased responsibility and methodical approaches to sustainability. Economic measures are part of the discus- hypocrisy is not the answer.” sion that many industry groups are currently holding over aviation’s role in the future of greenhouse gas management. But manda- — Giovanni Bisignani, IATA Director General and Chief Executive Officer tory measures such as those being debated today in the European Union are seen by organizations such as the Air Transport Infrastructure emerges as one of than ever before, the aviation industry has Association as “not necessary” arguing the key factors in the aviation industry’s an opportunity to work together with sup- that they “will divert funds away from success in achieving fuel- and emission- pliers, governments and customers to find aviation’s ability to continue to invest in the reduction goals and meeting increased pas- solutions to the issues that will ensure a technological and operational improvements senger volume. Much of the potential fuel sustainable future. Time will be the ulti- through which we have achieved such savings that improves the efficiency of mate judge about the impact today’s pro- great gains in fuel efficiency and emissions aircraft comes in the form of more efficient posed measures and mandates will have reduction.” engines and design. But a great deal of on the industry. But as can be gleaned by Similarly, IATA’s four-pillar strategy to this efficiency relies on the carrier’s abil- the efforts of individual carriers and by address climate change suggests that eco- ity to fly the most efficient route as well industry organizations — aviation will con- nomic measures should be voluntary. Its as minimize delays and time spent on tinue to be on the forefront of develop- strategy, which was accepted by all mem- the and in the air waiting to land. ment and implementation of technology ber states of the International Civil Aviation According to the Intergovernmental Panel that ensures efficient travel for generations Organization last September, advocates that on Climate Change, addressing airspace to come. a economic measures should be used to “boost and airport inefficiencies, governments and the research, development and deployment infrastructure providers can eliminate up of new technologies rather than as a tool to to 12 percent of CO2 emissions from avia- suppress demand.” Moreover, IATA suggests tion. IATA approximations suggest that the that in addition to the economic pillar, the savings could be even greater; estimating Ben Mussler is product manager of industry has an opportunity to work together the industry could save 35 million tons of the Sabre® Community Portal for ® to find improvements in the areas of technol- CO2 emissions per year if obstacles were Sabre Holdings . He can be contacted ogy, operations and infrastructure, including: removed. at [email protected].

ascend 27 industryprofile THE BARBARIANS ARE STILL AT THE GATES

Some carriers may continue to be targets of private equity firms as pressure for privatization and consolidation of airlines unfolds this year.

By Peter Berdy | Ascend Contributor

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rivate equity has a colorful history, first out prominent U.S. and European carriers that ing investment last year — around the time gaining prominence during the junk-bond were in financial trouble during the year. Apax Partners was rumored to be raising cash Pand leveraged buy-out heydays in the “We believe UAL is a potential private for a stake in Iberia. 1980s. Most notable was the case of RJR equity play, given the US$4 billion we esti- TPG’s investment in Ryanair represents Nabisco. In 1988, RJR Nabisco was purchased mate it can earn in free cash flow over the another start-up example. Ryanair President by private equity firm Kohlberg Kravis Roberts next four years,” Daniel McKenzie of Credit Michael O’Leary said, “He [Bonderman] got & Co. (now called KKR), in what is the second- Suisse told BusinessWeek. McKenzie said 20 percent for pretty much nothing. Sold us in largest buy-out in history (the 2007 buy-out such groups “could take UAL private today, ’97 and made a fortune.” The US$42 million of the Texas-based utilities giant, TXU, by collect dividends and go public when the that Bonderman and his partners invested KKR, TPG Capital and Goldman Sachs is the industry consolidates, thereby capturing the in Ryanair’s initial public offering of stock largest). valuation arbitrage.” increased sevenfold. At that time, the use of a leveraged Private equity firms also rediscovered Private equity firms invest in buy-out buy-out to acquire RJR Nabisco along with proven ways to unleash hidden shareholder situations where they acquire a significant por- the aggressive pursuit by the private equity value by attempting to spin off undervalued tion or a majority control in a mature company. principals was seen as an ominous threat to businesses within the airline’s portfolio, such Buy-outs usually involve a change of owner- the free capitalist structure. The men behind as frequent flyer programs and regional feeder ship. Some examples in 2007 included TPG’s these plays were termed “corporate raiders” divisions. unsuccessful attempts at Qantas and Iberia; and “barbarians at the gate.” (The story was and both TPG’s and Matlin-Patterson’s unsuc- written in the book called, Barbarians at the Opportunistic Focus Of Private cessful bids for Alitalia. Look for private equity Gate, by Bryan Burrough and John Helyar). The Equity firms to play a role in the coming years as RJR transaction also benefited the investment Typical private equity opportunities, speculation and action swirls around mergers bankers and lawyers who advised KKR. These including those in aviation, fall into one of and consolidation in the airline business. advisors walked away with more than US$1 several categories: billion in fees. Leveraged buyouts and go-private Unlocking Value During the 1980s, high-profile airline pur- transactions, Blackstone Group got a quick return on suits included TWA (featuring Frank Lorenzo Spin-offs and carve-outs from larger invested capital after it bought Travelport — a and Carl Icahn) and Continental (with Frank companies, reservations conglomerate that owns a major- Lorenzo once again, and David Bonderman of Restructuring and recapitalization, ity stake in Orbitz Worldwide Inc. and Galileo Texas Pacific Group). Structured minority investments and and has agreed to buy Worldspan. Blackstone strategic stakes, bought Travelport from Cendant in 2006, using The Business Model Financing acquisitions, US$1.1 billion in debt to fund the purchase. Once a targeted company was acquired Venture capital for new enterprises. Seven months after the deal with Cendant by the private equity firm, the firm would As “venture capitalists,” private equity closed, Blackstone received a dividend equal to restructure it, implement a series of cost- firms may invest to create a new company or its debt. The company went on to file an initial cutting measures and usually sell off underper- expand a smaller company that has undevel- public offering for Travelport last December. forming assets. The new “leaner and more- oped or a strong potential to grow revenues. The IPO could raise US$2 billion. efficient” company could then be resold, often For example, Apax Partners provided financial A go-private example is Sabre Holdings®, at significant return on investment. backing for the creation of Vueling Airlines, a the publicly traded firm known for providing Now, 20 years later, the image of private Spanish low-cost carrier that was created in software solutions and consulting services to equity has changed dramatically. The private 2004. Apax Partners initially had a 40 percent the travel industry that was purchased last equity “barbarians” are now shrewd global interest in Vueling Airlines and sold its remain- year by TPG and Silverlake. investment managers and specialists whose financial backers are looking for high ROI Frequent Flyer Program Value from acquisitions, spin-offs, re-financings and restructuring businesses. They also help Market Estimated capitalization bail out ailing companies by pro- Airline Value of FFP of parent viding management services, guid- Air Canada C$4.3 billion C$2.9 billion ance and US$7.5 billion US$3.4 billion advice as well Northwest Airlines US$6.4 billion US$2.9 billion as look- ing for American Airlines US$5.7 billion US$3.3 billion ways to increase British Airways £1.0 billion £3.4 billion share- Air France/KLM €2.4 billion €6.6 billion holder value. Lufthansa German Airlines €2.8 billion €8.0 billion P r i v a t e equity has become a fully Source: Bear, Sterns and Morgan Stanley, January 2008 fledged industry. Private equity firms Private equity firms have identified frequent flyer programs as hidden assets that can made headlines in the airline industry potentially be far more valuable to the firm if they were separated from the airline business. last year. They were identified as firms to bail

ascend 29 industry Photo by shutterstock.com by Photo Private Equity Money During the last two decades, the global private equity market has experienced explo- sive growth. New sources of liquidity created from rocketing oil prices and the developing Asian economies, among others, has been put into the hands of private equity firms. Private equity has become an invest- ment option for many of the world’s largest investors, including pension funds, insurance companies, banks and university endowments. These institutions are committing an increas- ing proportion of their capital to private equity, which often out performs more-established investment choices available. Photo by shutterstock.com by Photo Private Equity Investments Private equity firms generally receive a return on their investments through an IPO, a sale or merger of the company they control, or a recapitalization. Their offering of unlisted securities may be sold directly to investors through a private offering or to a private equity fund that collects contributions from smaller investors to create a capital pool. Most private equity funds require signifi- cant initial investment, usually US$1 million or more, plus further investment for the first few years of the fund. Investments in limited partnerships, the Boeing of courtesy Photo dominant form of private equity investments, are typically illiquid — it is very difficult to gain access to money that is tied up in these long-term investments. Distributions are made only when investments are converted to cash. Limited partners typically have no right to demand that sales be made. Private equity firms can provide high returns, with the best private managers sig- nificantly outperforming the public markets. Private equity fund investments are for those who can afford to have their capital locked in for long periods of time and who are able to risk losing significant amounts of money. This is balanced by the potential benefits of annual

returns that range up to 30 percent for suc- shutterstock.com by Photo cessful funds. Given the risks associated with private equity investments, investors can lose all their investments if the fund invests in fail- ing companies. The risk of loss of capital is typically higher in venture capital funds, which invest in companies during the earliest phases of their development, and lower in mezzanine capital funds, which provide interim invest- ments to companies that have already proven their viability but have yet to raise money from public markets.

Major Private Equity Players The majority of investment in private TPG, one of the most prominent private equity firms in the world, has invested in several air- equity funds comes from institutional investors lines, including , Southwest Airlines, Tiger Airways and Ryanair, giving it including public pension funds and banks and the most experience in the airline industry. financial institutions, which, together, provided 40 percent of all commitments made glob-

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ally according to data from London-based Prudent capital investment, research and of €305 million (US$452 million) on its stake Private Equity Intelligence Ltd. Other promi- development, new product marketing, tal- in in 2006. nent groups investing in private equity include ent development, improved operations, and corporate pension plans, insurance companies, appropriate strategic acquisitions. Europe endowments, family offices and foundations. The degree of involvement is also likely In 2007, European Union transport min- Last year, Private Equity International to be related to the size of the investment isters approved an open-skies agreement that magazine published a ranking of the larg- made by the private equity firm. went into effect in March. The agreement est private equity firms in the world. The allows European carriers to operate flights to Carlyle Group was ranked the largest private Private Equity Moves To Aviation the United States that originate in cities out- equity firm, followed by KKR, Goldman Sachs Industry side their home countries. The agreement also Principal Investment Area, The Blackstone With the airline industry posting profits makes it easier for European carriers to acquire Group, TPG, Permira, Apax Partners, Bain in 2006 and 2007 amid strong demand and airlines in other E.U. countries. Capital, Providence Equity Partners and CVC leaner costs as well as a stable outlook, It was long thought that changes brought Capital Partners. The sector also includes airlines were potential targets for private about by open skies would trigger consolidation multi-billion-dollar portfolios managed by equity firms. among airlines in Europe. Some of the larger or Cerberus Capital Management, Summit “They’ve significantly picked up their financially weak airlines have been considered Partners, Golden Gate Capital, Hellman & interest from, say, five years ago,” said John to be prime candidates for privatization and Friedman, and Equity Capital Markets Group, Luth, chief executive of transport-focused takeover, including Iberia and Alitalia, as well among others. Several of these firms and investment bank Seabury Group. “They’re as state airlines Olympic and TAP. smaller private equity players, such as Yucaipa really open for business both here in the Iberia has undergone a major restructur- and Ranch Capital, have invested in the avia- United States and elsewhere.” ing in recent years. Its extensive Latin American tion sector. route system, “would make a good network North America fit” for any of Europe’s three bigger carriers, Investment Targets Last year, American Airlines’ parent according to Andrew David Lobbenberg, a Private equity firms share common AMR Corp. came under pressure by its third- London analyst with ABN AMRO. themes to their strategies, objectives and largest shareholder, the Icelandic investment A consortium lead by British Airways approaches to investment: firm FL Group. The investor wrote to AMR’s and TPG (BA owned 10 percent of the Spanish Identify out-of-favor, under-appreciated board urging it to spin off American Airlines’ carrier) made an initial bid for Iberia, and then industries and businesses, and undervalued frequent flyer program and make other dis- withdrew, citing that “a bid under friendly companies, posals. Hannes Smarason, FL Group chief terms was no longer possible,” according to Pursue opportunities to change the structure executive, said the carrier was burdened by the Nov. 28 issue of ATW Daily News. and profit potential of specific industry sec- a cluttered corporate structure that needed In Italy, private equity firms TPG and tors through consolidation, slimming down. Matlin Patterson expressed interest to bid Avoid short-term investments and trades; “There is no question that they have during the first round to purchase the Italian private equity firms are in it for the long not been performing as well as they could government’s shares in Alitalia. However, the haul. have,” Smarason told The Guardian last government’s rules of procedure were consid- While these may be stated objectives, September. “If you have too complicated ered onerous enough that they, as well as all private equity firms also are interested in mak- a structure and no one is responsible, then the other bidders, withdrew their offers. ing a quick return on investment. Many private you have a problem and you need to clean equity firms play an active role in managing it up.” Asia/Pacific their investments, and there are certainly some FL Group said AMR’s structure mud- In November 2006, Australia’s national common threads among the key players: died the profitability of the company’s con- flag carrier, Qantas, announced that it was Take a long-term view; be prepared to work stituent parts, a situation compounded by the target of a takeover bid by a private equity with management through the inevitable ups the fact that it does not publish details on consortium lead by TPG and the Australian and downs of business life to achieve objec- individual units. Fort Worth, Texas-based bank, Macquarie. The deal was structured to tives, American Airlines warned that third-quarter give TPG about 15 percent voting interest and Ensure there is active board participation, revenue growth would lag behind some 25 percent of its earnings. The bid failed in Provide expert resources and a network of rivals and rising fuel costs would affect earn- April 2007 when the consortium could not gain advisors consisting of skilled former senior ings for the rest of the year. the percent of shares needed to complete the corporate executives, FL Group had a history of investing takeover. Work with management of the company and in airlines, and at one point last year, it had outside advisors on a plan to enhance the an investment portfolio of approximately 25 Texas Pacific Group company’s operations. percent of its assets in the industry. The TPG has the most experience in the Obtaining financing is an important FL Group has made a series of success- airline industry among private equity firms. offering to a company about to be acquired or ful investments including the acquisition of Its past and present investments in aviation in need of financial assistance. Private equity Sterling Airlines, Scandinavia’s largest low- include Continental Airlines, America West, firms offer: cost airline, with its head office in Denmark, Southwest Airlines, Ryanair, Tiger Airways, Financing expertise to lower the cost of cap- building a 23 percent stake in Finnair, the Midwest Air Group, Sabre Holdings, Hotwire ital, reduce risk and uncover hidden assets, Finnish flag carrier. FL Group was the former and Gate Gourmet. Last year, TPG made bids Use of efficiencies of scale from invest- sole owner of Icelandair, the Icelandic flag to acquire Iberia, Alitalia and Qantas. One of ments across companies in an industry, carrier and former owner of a 16.9 percent TPG’s founders, David Bonderman, is currently such as combining purchasing power of stake in easyJet. chairman of Ryanair. goods and services at lower prices to On its easyJet stake, FL Group made a TPG’s buy-out of Continental Airlines in achieve savings, profit of €140 million (US$207 million) when 1993 and then America West Airlines in 1994 it was sold in April 2006. It also made a profit became models for private equity investment.

ascend 31 industry

Private Equity Investments

Private Equity Firm Aviation Acquisition or Investment Notes

ARINC provides communications Carlyle Group Acquired ARINC; July 2007 services to airlines Sale of MRO company, ACTS (Aero Technical Support ACTS is part of ACE Holdings, Kohlberg Kravis Roberts (KKR) and Services Holdings) owner of Air Canada

Goldman Sachs Considered PE investment in business-class airline

The Blackstone Group Purchased Cendant’s Travelport company for US$4.3 billion

Apax Partners PE funds to start Spain’s LCC, Vueling in 2004 Considered bid for Iberia

FL Group AMR, IcelandAir, Finnair, Sterling Airlines, easyJet

Attempted hostile takeover of Air Canada/Canadian merger; Onex teamed with Airline Partners Australia in takeover bid for Qantas

Cerberus Capital Management ACE Holdings, privatization of Debis AirFinance

Indigo Partners LLC Tiger Airways,

Wexford Capital LLC

Yucaipa 2005 Aloha Airlines

Ranch Capital LLC Hawaiian Holdings

Global Aero Logistics (ATA Airlines, North American Airlines MatlinPatterson Global Advisers LLC and World Airways); Owned and sold VarigLog logistics Bid for Alitalia business of Varig Continental, AmericaWest, Southwest, Ryanair, Gate Bids in 2007 for Qantas, Iberia, TPG Gourmet, Sabre Holdings, Hotwire, Midwest Air Group, Alitalia Tiger Airways

Silverlake Partners Sabre Holdings partnered with TPG

Several of the world’s top private equity firms have invested in travel-related companies, and many of them have current bids on the table to acquire additional businesses.

TPG’s strategy was to invest in an airline built up the carrier’s Houston, Texas; Newark, employee morale and even the photos on emerging from bankruptcy during a cyclical New Jersey; and Cleveland, Ohio, hubs and executives’ walls. downturn, oversee the carrier’s turnaround upgraded the fleet. Bonderman and his partners believe this and then cash out after the economy and TPG’s founders spent years on its is prime time for long-term-value investors. company had recovered. turnaround. Eventually, it was rewarded with “There’s a lot of trouble in the world, but At the time TPG, which was named, extraordinary returns on investment. Thanks it is also a potential time of value,” said TPG “Best Global Firm of the Year” in 2006 by to a clever purchasing arrangement, TPG’s co-founder James Coulter. “As investors, we Euromoney Magazine, stepped in, Continental partnership controlled Continental Airlines, like this environment better than the bubble. It Airlines was ailing in a weak U.S. economy. The although it owned only 14 percent of its stock. may stay rough for a while, but we’re focused airline had been plagued with labor and cus- Continental’s share price, once as low as five years out.” tomer service challenges. TPG’s plan included US$2, soared to US$65 by 1998. Some of TPG’s recent targets have bringing in a new management team that “It was a huge gamble with an even been challenging. On the success side, TPG focused on improving customer yield, aircraft larger payoff in an industry where net profits and Northwest Airlines acquired Midwest utilization and financial performance. It took are close to zero,” said Continental Airlines Airlines earlier this year (see cover story rapid action to close unprofitable routes, shut board member George Parker. on page 36), in the airline’s effort to stave down the airline’s low-cost division (CALite) After eight years, TPG’s total return off an unfriendly takeover bid by AirTran and reduce maintenance costs. The private on its US$66 million investment was nearly Airways. However, there were unsuccessful equity firm addressed one of the primary cus- US$700 million. bids that were publicized last year, such as tomer complaints, moving Continental Airlines TPG’s partners get high grades from TPG’s deal in conjunction with Australia’s from consistently near the bottom of the airline insiders for its knowledge of the indus- Macquarie Bank for Qantas Airways, which on-time departures table to consistently in try and eye for executive talent. Before any was rejected by the Australian carrier’s own- the top three by creating financial incentives major investment, the company’s executives ers in March 2007, as well as the attempted for front-line staff. At the same time, TPG walk the halls of the business, checking out bids on Iberia and Alitalia.

32 ascend industry

FFP Spin-Offs Private equity firms and investors have Size Of Investment found that airlines may have hidden assets that could be worth as much as or more than the carriers themselves. The crown jewels Co-investment Lead Investor High — airlines’ frequent flyer programs. Team with leading strategic Involvement through board seats. The underlying concept to this hidden partners. Long-term involvement Develop strategy and structure. wealth is that a stand-alone frequent-flyer and relationship building. Commitment and expertise. business, with its high margins, good growth prospects and steady cash flows, would trade at a much greater multiple to earnings when separated from the airline business. The theory is relatively simple: Unlike Size of stake Trading Active Ownership airlines, loyalty programs tend to be stable, Opportunistic investment, Constructive dialog with manage- cash-producing businesses with low fixed leveraging company’s expertise. ment. Communication with share- costs and substantial growth opportunities. holders. PR where appropriate. Separating them from their riskier airline Low gives investors direct access to the busi- Degree of involvement ness, resulting in a higher valuation. Low High The airline would benefit by getting cash from the FFP sale, and it could still Source: FL Group collect profits by keeping a share in the program while the FFP grows. Once out of the airline’s control, mileage programs could The degree of involvement a private equity firm has when acquiring a company move outside the air travel industry and add depends on the size of its investment. retail partners and attract more members. The success story and model for deter- mining FFP value is Air Canada’s Aeroplan. done in the right way,” said Smarason, the spinning off FFPs may make the core Prior to 2002, Aeroplan was integrated FL Group’s chief executive. In the letter airline parent less attractive (valuable) to with Air Canada. Aeroplan became a wholly to AMR’s board, Smarason said, “… our investors. owned, limited partnership of Air Canada conservative analysis indicates the unbun- in 2002. It was spun off in an initial public dling of AAdvantage could lead to value Mining Gold offering in 2005 and had an initial valuation creation of US$4 billion.” Private equity firms represent a global, of C$2 billion (US$ 1.9 billion). It has since This was based on FL Group’s esti- sophisticated industry. They follow tradi- doubled in value to about C$4.3 billion (US$ mate of US$6 billion business valuation tional “buy low, sell high” investment advice 4.2 billion) compared with the market cap of offset against a cost of US$2 billion to de- and have a history of out performing other C$ 2.9 billion (US$ 2.8 billion) for ACE, Air couple from American Airlines. FL Group investment categories for the private inves- Canada’s holding company. also encouraged AMR to sell its feeder tors who fund these firms. “Creating a separate structure made business, American Eagle. The aviation industry has provided Aeroplan a better business with more freedom Citi analyst Andrew Light said it opportunities for this group to mine gold. to add partners and grow,” said Karl Moore, a would be “much easier” to divest American Just like mining, there can often be long, professor at McGill University in Montreal who Eagle than AAdvantage because the car- hard work to achieve good payouts, as well worked with the mileage plan’s executives rier is run as a separate entity. Similarly, as the occasional nugget that was there for on business school projects. “It unleashed an airlines such as Continental Airlines, Delta the taking. Challenges include finding under- enormous amount of capital that they [ACE] Air Lines and Northwest Airlines have valued companies or hidden businesses that wouldn’t have otherwise had.” spun off or sold regional carriers. could be spun off for large gains, such as Qantas Airways has met with Aeroplan to “As with Air Canada’s Aeroplan, frequent flyer programs, and then getting discuss how to release value from its rewards stripping out the frequent flyer program the green light to go forward to restructure, plans. The carrier may find a buyer in Aeroplan, would leave a barely profitable, volatile refinance and spin off value to shareholders and the frequent flyer program’s chief executive and poorly valued core airline,” Light and investors. officer, Rupert Duchesne, said in an interview said. Private equity may well continue to in last August that Aeroplan was in talks to buy “Spinning out the mileage programs play an active role as airline consolidation stakes in other loyalty programs. would be very beneficial to sharehold- rumors began to swirl earlier this year. a American Airlines’ FFP, AAdvantage, ers,” said Craig Hall, a Dallas investor which could be worth as much as US$5.7 bil- who owns the fifth-biggest stake in AMR lion, according to a Morgan Stanley estimate, and wants American Airlines to divest was under pressure to be sold last year. That AAdvantage. Hall calls the frequent flyer amount is about the same as the market value plans a “hidden asset” not reflected in of parent company, AMR. airline valuations. FL Group, which at one point owned 9.1 Several major airlines have since percent of AMR, urged American Airlines to sell examined setting up their FFPs as sep- its frequent-flyer program in an open letter to arate companies. However, there are Peter Berdy is a partner for Consulting the AMR board last September. some concerns. The cost of spin-off is and Solutions Delivery at Sabre Airline “This has the potential to become a steep. In the AAdvantage case, the cost Solutions®. He can be contacted sustainable source of value creation if it’s was estimated at US$2 billion. In addition, at [email protected].

ascend 33 industry

Come Rain Or Shine

Rising fuel prices and global economic worries are challenging the low-cost carrier business model differently, depending on the region.

By Lynne Clark | Ascend Staff

lobal forecasts for low-cost carriers this largest carriers, Southwest Airlines and jetBlue in global distribution systems; and offer paying year are as varied as the climates in Airways, both cut 2008 capacity growth plans. perks such as lounges, leather seats, extra Gwhich they operate. Overall, the sector Last December, Southwest trimmed growth leg room, speedy boarding and frequent-flyer grew 20.1 percent last year versus 2006, with plans to approximately 5 percent — about half miles. 4.6 million scheduled flights, according to the of its previously announced plan. In January, That’s the strategy behind Southwest’s OAG, a global flight information company. The jetBlue followed suit by downsizing its capac- introduction late last year of a new fare group reported that low-cost operations dur- ity growth plans from 13 percent to between category designed for business travelers. ing 2007 represented 16 percent of all flights 6 percent and 9 percent. The New York-based The carrier has tripled its corporate sales worldwide and 19 percent of all seats globally, carrier has also sold two Airbus A320 aircraft force and started listing fares and inventory up from 14 percent and 17 percent, respec- during the first half of the year, and it will sell on GDSs. tively, the previous year. But rising fuel prices an additional four of the same aircraft by the JetBlue is offering refundable fares and fallout from the global credit crunch will end of the year. for an extra US$50 to US$100 after testing cloud profit predictions in many regions based Dwindling domestic opportunities for the concept with corporate accounts and on each market’s unique economic climate. U.S. LCCs are forcing them to rethink tradi- has hinted at “an enhanced front-cabin tional business models. Most are realizing they product” now in development. Orlando, United States — Mostly Cloudy can’t survive without the business customer. Florida-based AirTran Airways, which has “Mostly cloudy” is the forecast for U.S. The new model strays from the segment’s come the farthest among U.S. LCCs in LCCs, which are feeling pressured by a slowing no-frill roots and introduces opportunities for negotiating volume discounts, introduced economy and over-capacity concerns. The two LCCs to craft corporate travel deals; participate optional advance seat assignments, allow- ing passengers to pay more for sitting in a

Photo courtesy of Airbus of courtesy Photo roomier row, for example. “You’ll see a lot more product dif- ferentiation as low-cost carriers scramble to compete with each other and with network carriers,” said Garth Overmyer, principal of global airline distribution for Sabre Airline Solutions®. “So instead of no frills, they’ll feature menus of frills customers can pay for, essentially becoming hybrid carriers.” Contributing to the hybrid image is an increased focus on international markets made possible by liberalization of international flying rights through the recent open-skies agreements. “There has been a lot of talk and speculation these days, especially about Southwest, that it will either purchase or partner with some other low-cost car- rier to go international,” Overmyer said. “Southwest has publically stated that it would be willing to purchase another airline, even if it doesn’t fly all Boeing 737s. That’s U.S.-based low-cost carrier jetBlue Airways has cut capacity growth plans, sold two of its a pretty bold statement. Airbus A320 aircraft and will sell four more by the end of the year as a result of a slowing “In addition, jetBlue and Aer Lingus economy and over-capacity issues. have announced a new partnership, and Lufthansa has a 19 percent stake in jetBlue.

34 ascend industry Photo courtesy of Boeing of courtesy Photo “Ancillary revenue, including The group expects an “unprecedented period charges and commission earnings from areas of international route development in the such as hotel bookings, car hire and travel region.” insurance, drives revenue performance for The forecast is based on announced European LCCs,” he said. “It’s second nature aircraft orders by existing LCCs, reported to them to charge for things U.S. passengers in CAPA’s Outlook 2007. Given reasonably are used to getting for free. sound fundamentals over the rest of this “Additionally, the United States has decade, the number of new entrant LCCs will more capacity than Europe, which has driven grow significantly, the report said. demand and sustained profits in the past. But Outlook 2007 also stated that Asian air- the honeymoon is about over. Within the next lines have planned deliveries during the next two years, Europe’s carriers will begin to deal five years that represent almost 59 percent of with the same capacity issues that are hinder- the current fleet — well ahead of the global ing U.S. carriers.” average of 31 percent despite the fact that, in Ryanair, Europe’s leading low-cost air- most cases, Asian airlines possess younger line, warned in February profits could fall as fleets than the global average. much as 50 percent in its next financial year “The expected surge in deliveries is due to a “perfect storm” of rising oil prices, potentially a concern, with overall profitability AirTran Airways continues to add “frills” to tougher economic conditions and falling fare falling despite a generally benign business its low-cost model, such as optional advance levels. environment in 2006,” said Peter Harbison, assigned seating that gives passengers the In stark contrast, easyJet, the United executive chairman of the Centre for Asia ability to select a row with more space for Kingdom’s leading LCC, has maintained its Pacific Aviation. “But the Asian markets are an extra fee, to help differentiate itself from forecast for a 20 percent increase in underly- by no means mature at this stage and, while its LCC and network competitors. ing pre-tax profits in its financial year that the level of deliveries may suggest youthful ends in September. Total revenues per seat exuberance, disproportionate growth is quite rose ahead of expectation by .05 percent in possible.” Spirit has aggressive expansion plans that the airline’s first quarter that runs October There are structural reasons why this include 40 percent growth, 20 more fre- to December. Revenues were boosted by a region should have a higher proportion of quencies and 10 new routes, mostly to the strong euro and the introduction of baggage new aircraft orders than elsewhere, notably Caribbean and Latin America. It’s a whole charges, in addition to expanding markets in the rapid liberalization of markets that have new frontier.” continental Europe, particularly Italy, Spain been tightly held for decades, along with and Switzerland. the correspondingly higher opportunities for Europe — Cloudy With Potential short-haul, intra-Asian services, which flow Storms Asia/Pacific — Sunny directly from local deregulation and increased European low-cost carriers fared much The forecast is sunny for Asia/Pacific bilateral trade. Aircraft deliveries during the better in the last quarter of 2007 than did LCCs. By 2012, LCCs as a group plan to next five years will also be focused on the their U.S. counterparts. Overmyer attributes expand capacity by 250 percent and triple fastest-growing markets — in particular, China the difference to ancillary revenues and their combined fleet to 200 aircraft by 2012, and India — where there is great potential for capacity differences. the Centre for Asia Pacific Aviation noted. demand growth to absorb new capacity addi- tions, according to the report.

Photo courtesy of Airbus of courtesy Photo These factors, combined with strong underlying rates of economic growth and ris- ing personal incomes, should ensure a bright future for LCCs in Asia/Pacific. “It will be interesting to see how things develop in the Asian and Indian markets,” said Overmyer. “Because markets are emerg- ing, these carriers have the advantage of new technology and the ability to sell ancillary services right off the bat and not have to change their whole infrastructure to achieve new hybrid strategies. “The region is not without its challeng- es, however. Asian customers are slow to adopt Internet technologies to buy tickets, so most are sold through travel agencies. Internet adoption and infrastructure are big challenges for these emerging markets, but the potential is huge.” a

Leading the low-cost carrier position in the United Kingdom, easyJet expects underlying

pre-tax profits to rise 20 percent in its financial year ending in September. Expanding markets, the implementation of baggage charges and a strong euro have contributed to the carrier’s continued success. Lynne Clark can be contacted at [email protected].

ascend 35 the pilot

36 ascend the pilot A Conversation With... Tim Hoeksema chairman, president and chief executive officer, midwest airlines

or the many loyal passengers of No one believes more in the power Milwaukee, Wisconsin-based Midwest of employees than the airline’s chairman, FAirlines, the carrier’s signature fresh- president and chief executive officer, Tim baked chocolate chip cookies on board most Hoeksema, who has led the airline for two- flights are just one of the special amenities and-a-half decades. His philosophy is simple they’ve come to enjoy and appreciate. Beyond — hire wonderful employees who focus on the aroma and taste of homemade cookies as delivering the best care in the air. well as the spacious, comfortable all-leather In 1969, Hoeksema, who aspired to seating with extra legroom and exceptional become a pilot since the tender age of 6, personal attention, it’s the tireless contribu- joined Kimberly-Clark as a in the tions of more than 2,000 talented, dedicated company’s air transportation operations, and employees that has earned this 24-year-old in 1974, he was appointed chief pilot. Three airline the reputation of “The best care in the years later, he became the director of air trans- air.” portation for Kimberly-Clark Corp. and presi- What started in 1948 as a corporate dent of K-C Aviation. He was named president shuttle for Kimberly-Clark’s executives travel- of Midwest Express Airlines in 1983, and he ing from its headquarters to company mills, was appointed president of Kimberly-Clark’s Midwest Express Airlines in 1983 brought transportation sector in 1988. the customized corporate jets to the traveling Hoeksema began his aviation career in public. The carrier, which operates a fleet of 1968 as a flight instructor for the University McDonnell Douglas MD-80 and of Illinois at Urbana-Champaign. He graduated aircraft, changed its name to Midwest Airlines summa cum laude from Western Michigan five years ago. University in 1972 with a bachelor’s of science On Jan. 31, the carrier became privately in aviation engineering technology. In 1977, on owned when it was acquired by TPG Capital. a Kimberly-Clark scholarship to the University As part of the acquisition, Northwest Airlines of Chicago Executive Program, he obtained a will be a passive investor with a 47 percent master’s degree in business administration. stake. Midwest Airlines’ executives view the In a recent interview with Ascend maga- acquisition as a positive change — one that will zine, Hoeksema shared his views on running a help it continue down a successful path. successful airline. What’s the recipe for the airline’s suc- cess? Its executive team and employees alike Question: How important is it to work together to bring only the best traveling keep up the reputation of “The best care in experience to its guests. They are aligned in their the air”? How does it keep your customers thinking, and everyone who represents Midwest coming back? And how does it fend off the Airlines has a keen understanding that the most competition? important ingredient to a successful operation is Answer: I think it’s very important happy, satisfied customers. And from an execu- that we maintain a strong focus on delivering tive perspective, the airline’s leaders know that “The best care in the air.” We’re 24 years the only way to take good care of their guests is old. We’ve grown significantly in that period. to take equal care of their employees. We’ve been recognized many times as the

Photos courtesy of Midwest Airlines ascend 37 profile

What do you want from a customer service representative? What do you want from a reservations agent? We wrote those things down, translated them and shared them with our employees. Every month we measure how we’re doing against what our customers say they want. We share that throughout our offices. There are boards all around. If you walk down the res- ervations center, there’s a big board that tells how reservations did last month in every one of the categories that customers said were important and how we’re doing as a company in a composite score. That’s all 50 stations across the country. Pilots and flight attendants all get rated by several thousand customers a month. We share that information. We talk about it. If it drops, we talk about how we’re going to get back on track. We have constant communication. Hiring people who have that intrinsic value of caring about others and the type of values that we have as a company has been very important.

Q: Do you think learning the specific services your customers have requested plays in their minds when making a deci- sion which airline to fly so that it becomes less of a discussion of just price and more of a desire to fly Midwest Airlines? A: Absolutely. It’s very important. I Midwest Airlines’ spacious, all-leather two-by-two seats provide passengers added comfort, was in Kansas City earlier in 2007, and I spoke one of the carrier’s most attractive amenities that keep many loyal customers coming back. to several hundred people during a luncheon. They asked me to talk about the softer side of business rather than the hard dollars. I talked about quality, value, our core values as a com- best U.S. airline. The thing that’s important to A: Probably the best way to do that pany, how we translate that and all those types us is not the external recognition; it’s really the in the long run is to hire quality people, of things. Afterward, a lady came up and said, customer loyalty that we have built up over the hire people who care, hire people who are “I just want you to know that those things you years. Our people are focused on doing that. oriented toward caring about others and call the ‘softer side’ translate into hard, cold I’ve shared many times that the best article delivering the best type of service, and com- cash. I can prove it. I fly once a week to New I’ve ever read was entitled Differentiate or Die. municating with those people regularly on York. I fly you all the time, period.” She went If you look at running a company, it seems to how important it is, on how we’re doing and on the say, “Could I shop around and find me that you have to be a little different, have to how our customers respond. When we get lower fares? Probably, maybe, possibly, but have something special whether you’re making recognized by Travel and Leisure or Zagat’s, I don’t because you take such good care of potato chips, building widgets or flying people we share that internally. We say thanks to me. I just fly you.” I think it does translate into on airplanes. You want to have a product that our people. We share how important it is. loyalty. It does translate into people saying, people want to choose. People want to come We don’t dwell on it because you can pat “You’re my airline. My kids are always going to to you for some reason because it’s special, yourself on the back to the point that you go to school in places that you serve.” I think different, unique or better. We’ve tried to do take your eye off the ball and lose focus on the ultimate goal of everybody is to try and all those things. It’s extremely important to our quality. That’s very important; so we com- develop that type of loyalty so people will con- continued success that we continue to differen- municate constantly to our employees. tinue to come back and frequent your product tiate our product and continue to have a product or, in our case, frequent our service. that people want to choose, and they do. That Q: How do you know your methods has really been the secret to our growth and are effective and employees are deliver- Q: The two-by-two seating and success. It’s about wonderful employees all ing exactly what your customers want chocolate chip cookies are probably the focused on delivering “The best care in the and expect? most visible aspects. Are there any other air.” For us, it’s extremely important. It’s who A: We do monthly measurements. particular things that you feel are the differ- we are. We hire people who line up with our We measure several thousand passengers entiators that factor in with that customer core values and who are really centered around a month in terms of how we’re doing at loyalty? delivering “The best care in the air.” delivering the service they want. A number A: It’s the entire experience. When of years ago we asked them several key you go on vacation somewhere or you fly an Q: How do you motivate your questions: airline, you really rate the experience. If you employees and get them to deliver day What do you want? call for reservations, you have a sense of after day after day? What do you want from flight times? how you were treated. Certainly cookies are

38 ascend profile

something we talk about. Cookies are good, our MD-80s. We’re changing both so our custom- that are full now. I think more people will be particularly ours. To us, it’s a symbol. It’s a ers (after August) will have the choice on any of able to fly on us. I think that will make them symbol of warmth. One of our goals in our our airplanes of Signature or Saver. We started happy. If you’re paying a normal business fare, core values that I referenced was service to with taking the Saver airplanes (the MD-80s) and a refundable-type business fare, there will be no the customer. We say, in part, that we want adding 12 Signature seats to those airplanes to additional charge for the Signature service on the to treat customers as if they were a guest in give a choice. It is going extremely well. It has 717. There will be more leg room, so I think they our own home. On our planes, chocolate chip been very well received. The US$65 fee that will be happy. That’s why I think it is a win-win. cookies really relate to how we care about you, we charge for that has been very well accepted. We’ll continue to look for more opportunities to how we feel about you and how we treat you. People like the choice. We’ll offer that choice on give people choices. It’s much more than something that’s good the 717 as well when we change the configura- to eat. It’s really symbolic of what we think tion and actually add 11 seats to it. We’ll have 40 Q: How do you project that the full is very important. The cookie is probably the Signature seats in two-by-two and 59 Saver seats implementation of your one-cabin business best known. We’ve had a lot of fun with it, on our 717s. People will have a choice. We’ll be model with both Signature and Saver seating and it is good. It’s really a symbol of the entire able to carry more passengers. We’ll have more will influence your profitability and customer experience that we try and provide. Of course, leg room in the Signature sections. I think it’s experience? two-by-two seating has been very successful. really going to be a win-win. A: I think it’s going to be significant. It’ll It’s another one of the things people look for enhance our revenue because we’ll have 11 … extra space. Q: Do you think it will change any- more seats on every 717. We have 25 717s. I will tell you over the years, early on, body’s perception of the airline? Will they see That’s about a 12.5 percent increase in avail- we had shrimp scampi, beef Wellington, com- that as an added service? able seat miles just on that fleet. It will enhance plimentary wine and champagne. It’s easy to A: As you look at various products, cer- our revenue with virtually no cost. The plane is say, “That’s why we got high ratings.” All that tainly the airline industry is trying to move to flying anyway. It’ll be able to carry 11 more pas- had to go away after Sept. 11. We now have a situation where there are more alternatives, sengers. There’ll be some incremental revenue a buy-on-board program that’s from external more choices. As you survey customers, choice on a Signature seat before discount tickets that restaurants. The interesting thing is that our is important. Variation is important. Having addi- people buy. It will enhance our revenue in scores, in terms of how our customers feel tional seats on the 717s will make some people that area as well. I think it will be significant about it, have proven that it’s more reflective happy because there’ll be more options at some in terms of enhancing our revenue and profit- of the service our people provide as opposed of the lower-fare levels. We have some routes ability with virtually no cost. It’ll be significant in to the things we used to offer. Maybe the most significant measure was the Best U.S. Airline Award we received from Travel and Leisure the first year after we discontinued complimentary wine, champagne, beef Wellington and shrimp scampi. Then it was truly our people. It really is about the experience of how people treat you, how they care about you and how they inter- act with you. Those are the things I think are important; so maintaining that type of culture is extremely important at Midwest Airlines.

Q: The cookies have been so well received that you began selling them locally after several customer requests for the recipe. Do you have any intention of selling them nationwide? A: We’ll just take it a step at a time. We began selling them at [Milwaukee] Brewers [baseball] and [Milwaukee] Bucks [basketball] games in 2006. That’s gone over very well, so now we’re selling them in a small chain of grocery stores in the Milwaukee area and another in Kansas City. We’ll see how it goes. I think it’s been fun for our loyal passengers to be able to buy some and bake them at home, especially when they’re so easy to bake. No thoughts right now on expanding that beyond here.

Q: You recently introduced the Signature and Saver seating choices. How has the response been to that new seating configuration? Midwest Airlines’ fresh-baked chocolate chip cookies aren’t just a big hit in flight. The carrier A: We’ve had Signature [two-by-two] sells its signature cookies to select grocery stores in Milwaukee and Kansas City. seating on our 717s historically. Since 2003, we’ve had Saver [two-by-three] seating only in

ascend 39 profile

offering more customers their choice. In some back and retool some of our service offerings years, we’ve done everything everybody cases it’s the difference in the choice to fly us, to the consumers. We’ve focused on cost. We else has. We’ve taxied out and in on one which they want to do, or flying someone else have reduced our non-fuel costs, our cost per engine. You reduce the amount of water that they don’t want to. In some cases, flying available seat mile, by more than 32 percent in you carry. You don’t fill up the water; you two-by-two versus two-by-three, I think it will the last five years. We’ve done a lot to control take just what you need for that flight. You be very positive all the way around. We’ve very non-fuel-related costs, but at the same time, reduce certain services; we haven’t taken excited about it. We would have it in place right we’ve focused on doing it in a way that would pillows and blankets off because we think now if it weren’t for the technology. That’s not harm the onboard experience. I think by that’s important to our customers. You try why it’s so important for us to work with Sabre and large, we’ve done a very good job of that. and reduce weight onboard the airplane as [Airline Solutions®] in partnership to make this In terms of fuel, it’s the single highest cost much as you can in terms of pushcarts and happen. We’re excited about it, and things element in the industry right now. We’re a such. You fly careful flight patterns and seem to be moving along very well in terms of tiny little carrier, and one penny a gallon to us become as fuel efficient as possible. that phase of our technology. We’re unique in is US$1.3 million a year. It’s a very significant As we move into the year, the indus- doing this in one cabin. We’re not making this cost. In January 2007, we hedged 90 percent try is looking at reducing some capacity. two cabins. We’re making it one cabin. There of our fuel for 2007 at about US$58 a barrel. Late last year, there were a fair amount are corporations that say their people can’t fly Now it’s up to more than US$100 a barrel. of announcements in terms of capacity or . We’re looking at That’s an increase of about a dollar a gallon. reduction for this year. We’re going to see this as a one-cabin product with a choice of It’s a huge cost, and we’ve done several things reduced domestic capacity this year versus Saver or Signature.A That’sPP why theOA work Sabre CHto offset it. TO MANlast given what’sAG going on.IN At US$2.80G per [Airline Solutions] is doing here is so important In the bigger picture over the longer gallon of jet fuel, there are markets that to this airline. haul, even when things were really tough were just marginally profitable before that after Sept. 11, we totally transitioned have become unprofitable. We’re also Q: How have you managed your our fleet from DC-9s to 717s. The 717 is looking at reducing some service that we operations differently to maintain profit- about 23 percent to 24 percent more fuel had planned. We’ll still have some growth, ability and offset fuel costs? efficient than the DC-9 it replaced. The but it won’t be quite the size of growth we A: Very good question. Very pertinent best hedge we could do was that. That’s had planned on. with what’s going on right now in this very dif- really an on-run hedge for increasing fuel We’re in the middle of going through ficult industry. If we back up, prior to Sept. 11, costs. We’re looking now at replacing our those assessments right now. It is a tough we had 14 consecutive years of profitability. MD-80s with a more fuel-efficient airplane. industry. We have about 25 percent of the Midwest and Southwest Airlines are the only That’s really the best long-term hedge that first half of 2008 hedged at an average of jet carriers in the United States that can say you can do, and it’s very, very important. US$73.44 a barrel. We’ve been hedging that. Sept. 11 really changed everything, and On a short-term basis, you try and do right along but hedges in the long run just it’s been very difficult. We have had to go everything you can. During the last couple smooth out the peaks and valleys. You’re going to pay over the long haul what you’re going to pay. That’s why more fuel efficient airplanes and things like that are very important. There have been some fare increases in the last several months. It’s not enough to totally cover the cost of fuel, otherwise you’re going to affect ridership too much. There’s that balance between how much the industry can push fares up and not affect ridership. The economy isn’t going to be robust this year. It’ll be OK but not robust. We’re looking at a 1 percent to 2 percent GDP growth movement in 2008, down from 2007. Hopefully, it will stay there and not get any worse. Most of the companies in this area feel that this is going to be a good year. They’re going to be hiring. They’re going to be flying more instead of less. I think we’re in the right sector of business with our focus on busi- ness travel. As oil prices and fares go up, the first group affected will be leisure, dis- cretionary travelers. They’re paying more money for putting gas in their cars and heating their homes. I think the leisure traveler gets affected first when fuel More than 2,000 dedicated Midwest Airlines employees focus on delivering exceptional prod- prices go up. The businesses I talked to, ucts and services to customers, which has earned the airline the reputation of providing “The at least 80 percent of them, where I’ve best care in the air.” personally done my own survey in the Milwaukee area, say they’re going to have

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more business travel this year. I think some areas. We’re happy about TPG. They Q: Are environmental concerns that’s certainly encouraging. are quality people. They really know this something that are on your radar screen, or Q: When faced with circumstances business. Our experience with them to date are they more of a European issue? like US$100 a barrel oil, is it always a has been terrific. They’re honorable people A: I will tell you that it is here. It’s not cost part of the equation or do you look with everything on the table. They’re straight going to be here, it is here. Maybe Europe is at additional revenue streams like selling shooters. a little ahead of us, but it’s very important that cookies? Q: What kind of feedback have you anyone running any company in this country A: We’re always looking at revenue gotten from your employees about the today be very cognizant of environmental opportunities. Until we’re ready to do them, acquisition? concerns. We’ve been doing things for a long we typically wouldn’t announce them. Selling A: Very positive. We had a press con- time to the extent that we could. One of them cookies isn’t big dollars, but it’s going to be ference on a Thursday night at 11:15 p.m., I mentioned was the transition from DC-9 meaningful dollars in this year, surprisingly and the media with all the TV cameras were to 717. We have reduced fuel burn and enough. We’ve looked for opportunities like hanging around here after the board meeting. have quieter airplanes now than we used to. that to do things differently. We announced it. Everybody in the community That’s an important step. You have taxiing on was very happy. Our employees were very one engine. We’re doing those types of things. Q: It’s not just a pure cost focus; you happy. It was a very positive day when we We recycle. We probably do as much or more look at both sides of the equation? announced that. recycling than anybody. We’ve reclaimed A: Absolutely. You have to look at both sides of the equation and balance both from a fare point of view. You say, “I’d like to Highlight push fares up a lot, but I can’t because it will negatively impact my revenue.” But you have to push the fares up some. Fortunately for us, I think we’re positioned in the best part of the If we had the next-generation technology in terms market going forward with a focus on business travel. You see other carriers that have been real of air traffic control, we’d be able to handle more leisure focused moving a little bit more toward business focus now because I think that’s traffic than we do now way more efficiently and where travel will be least affected this year. save lots of fuel. Q: What is your feeling about what the recent acquisition by TPG will bring to the airline and how it will impact Midwest Airlines? A: TPG has an outstanding reputa- tion. They’ve been the biggest private equity Q: Are there any other advantages deicing fluid here in the Milwaukee airport in player in the airline space. They’re very smart to being privately held? partnership with the county. We’ve replaced airline people. First, I would say that TPG’s A: We were privately held for the some of our gas-powered carts with electric interest in us to start with and their eventual first 11 years of our life and then public for ones. We’re looking ahead at carbon emission offer to acquire us says good things about the next 12. Now we’ll go through a period credits. We’re very much involved in that as is our business plan. It says good things about of being private again. We try not to be so the industry. our people. It says good things about our short-term focused as a public company. strategy. They were very pleased when they There’s this tendency to go from quarter to Q: Do you feel that the aviation indus- came and looked at us. They plan on us con- quarter, trying to make every quarter better. try is unfairly singled out when it comes tinuing to do the things we’ve been doing. There were times when we got on quarterly to environmental concerns such as carbon We’ll continue as Midwest Airlines, continue conference calls after our quarterly results/ emissions? to grow and continue to provide “The best earnings and told the investors that this is not A: Certainly I think when you look at care in the air.” a good short-term investment. We think it’s a the percentage of contribution that the industry From a customer point of view, I don’t good long-term investment, so we’re doing it. makes, we probably get more press than we see things changing. From a pure business When we announced that we were ordering should. That’s probably true about a lot of point of view, we won’t be doing some of the 25 Boeing 717s in the middle of very difficult things in this industry. It’s easy to talk about things that take a lot of time, energy, effort economic times for us and the industry, we aviation. Everybody’s somewhat involved in it and money that don’t contribute to running said it’s probably not a good short-term deci- because everybody flies. In the same light, it’s the business. We will continue to do all the sion, but it’s a very good market decision. It important that we do our part as an industry. I things that a public company would do, but turns out that it’s a very, very good long-term can tell you that it’s not only us; all airlines are we won’t do an audit of the audit of Sarbanes- decision. We try not to be influenced by the pretty cognizant of this. We’re really doing Oxley. We’ll only do an audit of that, and so short term. From a private equity point of everything we can. When you look at the we’ll save money. view, you have a little longer-term horizon. amount of power that you need to get out Also, with Northwest as a passive You don’t live quarter to quarter. We’ll be of a jet engine and keep the weight really minority investor, there are some synergy able to share financial data more openly with light, there are probably fewer options for opportunities that we’ll have with Northwest our employees on a month-to-month basis. I converting to other power sources than in terms of purchasing of hull and liability think there will be some advantages … strong for an automobile. You can put a heavy insurance and fuel and things like that. There potential capital behind us for things that battery in an automobile and it’s not going to will be some good opportunities for some are good. We’re very pleased with the TPG bother you. You can’t put a heavy battery cost savings through working with them in partnership. in an airplane that’s going to fly you across

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Midwest Airlines’ one-cabin business model will include 11 additional seats on its Boeing 717 aircraft, a 12.5 percent increase in available seat miles. The ability to carry extra passengers on every flight can enhance revenues substantially.

the Atlantic Ocean. You can’t really use nuclear of environment-conscious things. I think we’ll of being environmentally conscious and saving up there. be right out there, right along with everybody fuel. It’s the air traffic control system. We need There are a lot of limitations from a doing everything we can within the constraints the next-generation system. There’s a lot of talk weight restriction perspective and things like that I talked about. about it in Congress right now. There are bills that. If the auto industry did a lot of switching that are in various stages of advancement that and moved away from fossil fuel, I would think Q: How important do you view tech- have to happen to help this air traffic control there would be some availability for the airline nology in the operations of your airline? system come of age, if you will. That would be industry, a lot more availability. There’s coal A: Technology in the airline industry is huge. If we had the next-generation technology liquefaction that is being looked at and tested key to everything. As an airline, we are totally in terms of air traffic control, we’d be able to now by the military. They’re flying jet engines dependent on technology in every aspect and handle more traffic than we do now way more with coal that has been liquefied into product to every phase. You look at the airplanes and efficiently and save lots of fuel. If there’s any- use for jet fuel. There’s a lot of things like that the technology and advancements that have thing needed in terms of technology, it’s really updating the air traffic control system in this country. That would be huge.

Q: What’s it going to take to make that happen? “... we want to treat customers as if they A: It’s going to happen. It’s a matter of how quickly. It’s a matter of getting the new were a guest in our own home.” FAA authorization bill approved in Congress right now that has that provision in there. The industry is working on that. It’s on the go. We’re hoping it will get approved this year. The old — Tim Hoeksema, chairman, president and CEO, Midwest Airlines 10-year authorization expired in September. It’s been extended. That has to happen soon, and hopefully it will happen early this year. going on. There are a lot of coal reserves in this happened in airplane over the years. country. There are clean processes for translat- It allows us to fly more fuel-efficient routes and Q: Where do you see Midwest ing that into gasoline. I think there are options. to fly more fuel efficiently. I think one of the Airlines in five years? Those options are being worked on very vigor- most important technology applications hasn’t A: Continuing to grow. Continuing ously, and the airline industry is involved. We’re happened and needs to happen. That is air to have a differentiated product. Continuing all working along those lines and being as traffic control. We have an ATC system that is to deliver ”The best care in the air.” We’ll environmentally conscious as we can. operating on 1950s technology. That is literally continue to grow a little bit more in Kansas true. That has to change. If that changes, you’ll City and look for other focus cities similar Q: Are you optimistic that the airline see a much more efficient, better-run air traffic to Milwaukee and Kansas City that will industry will be a leader in environmental control system. What does that do? It reduces allow us to provide our service to those issues? delays. It allows more airplanes to fly in the types of cities. Hopefully we’ll be flying a A: Absolutely. You’re already starting to airspace. It saves fuel like you couldn’t imagine. lot more passengers and serving a lot see the airline industry talk about this in terms There’s an effort that needs to happen in terms more chocolate chip cookies. a

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Meet the Pilot

Q: What is your home town? I ran that business. I started with Midwest they’re running chunks of our business. To see A: Born and raised in Berwyn, Illinois, Airlines, which was owned by Kimberly-Clark them blossom and see them grow and develop a Chicago suburb. I’m a converted [Green for the first 11 years of our life. I was running … there’s no better feeling. The industry has Bay] Packers fan. I used to hate the Packers about five business units for Kimberly-Clark at had its ups and downs over the last 23-and-a- years ago, but I’ve lived in Wisconsin 38 the time and starting an airline was one of them. half years, but to see people who have really years. That’s over half my life. You can’t live in I moved to Milwaukee about 19-and-a-half years grown and moved up in terms of where their Wisconsin 38 years without being converted ago because I was running Midwest Airlines capabilities are, there’s no better feeling. to a Packers fan. directly and had other people running these other businesses. When we split 12 years ago, Q: Who do you admire most? Q: What is your educational I went with the airline instead of staying with A: That’s kind of relating to the influ- background? Kimberly-Clark. I’ve always wanted to fly. ence question. There are lots of people in the A: I have a bachelor’s degree from business world that you look and say, “Boy, Western Michigan University and a master’s Q: Who is your biggest influence? they’ve done a great job.” I think I admire in business administration from the University A: I don’t know if there’s any particular people that have a passion for something and of Chicago. person. I think we’re all a product of people the wherewithal to carry it out. If you looked at that we’ve been exposed to. We become a Herb, I think Herb’s done that well. He’s had a Q: What are your main hobbies? little bit of a lot of those people. I have a very passion for people and a passion for service and A: I have a Harley. That’s more of a strong faith. I would say my faith and beliefs being a little different. I think he’s done a terrific passion. I had my first Harley 43 years ago. It have been a big influence on my life at how you job out there. was a little Harley 175. I wish I still had it today. approach things and how you approach people. It would really be worth something today. They I look at our core values as a company in terms Q: What is the best advice you’ve don’t make little bikes like that anymore. I had of service to the customer and mutual respect ever received? it for about a year, year and a half and sold it. I and responsiveness, honesty, and integrity. I A: Probably not best to get into the didn’t get a big bike until probably 10 or 12 years think those are all values that one can say have airline business … no, not really! ago, something like that. It’s a lot of fun. I really basis in one’s belief system and have a basis of enjoy getting out. Harleys are quality. They’re faith. The Bible talks about good servants and Q: If you weren’t running an airline, hometown. They started here [in Milwaukee] putting in a fair day’s work for a fair day’s pay. It what would you be doing? over 100 years ago. I have a 100th Anniversary talks about respect for people and caring about A: If I weren’t running an airline, I’d Ultra Classic, which is from 2003. In 2003, other people, honesty, and integrity. It says a probably be a pilot for an airline. a Harley had a big celebration and a big shindig in lot about that. We’re all influenced by many town. It was a lot of fun. I like to golf and fish. people, by families and by our belief system. That’s about it. As I look over the years, I talked with [former Southwest Airlines CEO] Herb Kelleher Q: How many years have you been in several years before I actually started this air- the airline industry? line. To see a guy there who has a passion for A: Twenty-four years. what he’s doing, who cares about people, who has really differentiated themselves in a little Q: What attracted you to the airline different way than we have … in many ways industry? I would say that even though we maybe serve A: That’s a good question. There’s a little different spectrums of the marketplace, something about this that gets in your blood. they more leisure and us more business, our The people who leave it come back. I wanted to cultures are more alike than any other two air- fly ever since I can remember. We lived in the lines. I think we’re all influenced by many, many Chicago area; planes going overhead. I started people over time. Some in a positive way, and flying when I was 16. I got my private license on some in a negative way. That’s how we learn my 17th birthday, commercial when I was 18. and get molded. I went away and got an AP mechanic’s license and advanced flight ratings and instructed at Q: What is your favorite thing about the University of Illinois. I started as a pilot for running an airline? Kimberly-Clark Corp. on Oct. 1, 1969, over 38 A: That’s an easy, easy question. I look years ago. I was a first officer, then captain and back over the last 23 years. There is no ques- then chief pilot, corporate flight operation. I then tion that the thing that I feel best about and am Tim Hoeksema, Midwest Airlines ran something called K-C Aviation with custom happiest about is seeing some of our people chairman, president and CEO interior modifications, heavy maintenance on who have come in at entry level positions and corporate jets literally from all over the world. have grown personally and professionally. Now

ascend 43 WORLD’S FASTEST—GROWING

After declaring bankruptcy in late 2005, Delta Airlines has undergone a complete facelift that it succeeding in new markets and the road to profitability.

By Lynne Clark | Ascend Contributor

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tihad Airways, because of its short tenure, may not be one of the most E seasoned or mature carriers in the industry, but nonetheless, it is certainly the world’s fastest-growing airline. Founded in July 2003 by Abu Dhabi royal decree as the federal airline of the United Arab Emirates, Etihad Airways has grown faster than any other airline in avia- FASTEST—GROWING tion history. In a few short years, Etihad has evolved from a startup carrier into a major player. Last year, Etihad Airways doubled its revenue from 2006 and enjoyed double- digit growth in yield. The carrier achieved a record passenger growth of 67 percent, carrying 4.6 million passengers compared to 2.8 million the previous year. Its average factor rose by 15 percent, mainly in first class where growth was 43 percent over 2006; and its available seat kilometers By Raida Abumaizar | Ascend Contributor increased by 14 percent. In addition, Etihad Airways has dramatically expanded its network. In November 2003, services were launched with a ceremonial flight to Al Ain in the UAE. In the months that followed, almost one new route was added per month. June 2006 marked a milestone for the carrier … 30 destinations in 30 months. In 2007 alone, nine new routes were added in Australia, the Indian subconti- nent, Singapore and Europe. Beijing is next where Etihad Airways is set to serve the 2008 Olympic Games in August. The airline also boosted its number of weekly flights from 556 to 718. By 2010, the carrier plans to serve 70 international destinations. Aircraft growth has also been impres- sive. The airline’s fleet is among the young- est and most environmentally fit in the industry, with an average age of two-and- a-half years. The backbone of the fleet is the -200. Last year, the carrier added 13 new aircraft to its fleet of 24 and is expected to reach 53 aircraft by 2011. To support the expansion, staff is growing at a phenomenal rate with an aver- age of 200 newcomers a month. Etihad Airways’ has a diverse group of employees from all corners of the globe, representing more than 110 nations. Along with the growth in assets and reach, there has been a steady improve- ment in service quality. The airline was recently voted “airline with best first- class service in the world” by readers of Business Traveler, the U.S. version, which is not surprising given the airline’s invest- ment to distinguish its premium product, offering award-winning flat beds (World Travel Awards 2006 and 2007) in both first and business class, in-seat massage facilities, and in-seat dining for up to four people. This year, the airline will unveil a

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What is behind this success story, and what drives the carrier’s exceptional growth? To some extent, the answer seems simple. Some aspects of the success story can easily be attributed to the changes the airline has made during the last couple of years: The quality improvements of the onboard product, which has directly contributed to the increase in yield and seat factors in premium classes, The extended reach and improved connectiv- ity due to an expanded network breadth and depth, The expansion of the Etihad Guest loyalty pro- gram. In addition, Etihad Airways Chief Executive Officer James Hogan and his executive team have implemented several restructuring initia- tives that have played a large role in the evolution and progression of the airline. Hogan was appointed CEO of Etihad Airways in October 2006, bringing more than 25 years of travel industry expertise to the airline. Previously, Hogan assumed the role as Gulf Air’s Key to Etihad Airways’ record-breaking first quarter in terms of passengers carried has been president and CEO where he was responsible the performance of its premium cabins. The carrier’s business-class cabin attained an average for the three-year Project Falcon program, reposi- seat factor of 65 percent. tioning the business on a commercial platform. Hogan has held a number of other senior operational and commercial positions within the airline industry including vice president of mar- new product in its premium cabins as well Football Club, Harlequins Rugby Football keting and sales for Hertz; worldwide sales direc- as launch its flagship premium lounge in Club and Abu Dhabi Golf Championship tor for the Granada Group; and chief operating Abu Dhabi airport with personalized dining where Etihad Airways’ branding is promi- officer for bmi. and state-of-the-art electronic facilities. nently displayed. The airline recently Recently, Hogan visited with Ascend to Sports sponsorship plays a big part of announced a three-year deal to sponsor the discuss how he will effectively manage Etihad the airline’s marketing and public relations inaugural FORMULA 1™ Abu Dhabi Grand Airways’ exceptional growth. strategy. It has partnerships with Chelsea Prix, which will begin next year. Question: How do you feel about capacity growth given the latest announce- ments by and Emirates on the Etihad Growth Has Been Impressive acquisition of more wide-body aircraft includ- ing the Airbus A380? How sustainable is it 35 to have so many hub-and-spoke carriers in Etihad (year 0 = 2003) a region, competing for the same east-west 30 and north-south traffic, out of hubs that are Qatar relatively small in terms of local traffic, and 25 located 45 minutes from each other? 20 Answer: Etihad Airways welcomes Emirates competition and believes there is plenty of room 15 for all the Gulf carriers to compete successfully within the region. In the same way that Malaysia 10 Number of aircraft Airlines and Singapore Airlines have managed to co-exist side by side in the Far East, so can 5 Virgin Atlantic Etihad Airways and the likes of Emirates and 0 Qatar Airways in the Gulf. 0 1 2 3 4 5 6 7 8 9 Tourism in the Middle East is still relatively embryonic and will grow enormously during the year next 20 years. The massive investment in infra- structure we’re seeing across the UAE and the rest of the region will help further boost tourism and business. Many of the people who will be Etihad Airways is the fastest-growing wide-body airline in aviation history. Last year, serving that growth will be traveling from all the Abu Dhabi-based carrier added 13 new aircraft to its fleet, bringing the total to 37, points of the globe into the region. with plans of reaching 53 by 2011. What Etihad Airways is doing so well is attracting traffic from the traditional European

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and Asian hubs. The more traffic carriers from the Gulf region can switch over to the Gulf hubs the better for all of us. With modern-day aircraft technology, ultra-long-range aircraft are able to fly non-stop to all four corners of the world, so the mix of technology and geography means our business model is more than sustainable, it’s very robust indeed.

Q: What are your plans for manag- ing the growth path you’ve set for Etihad Airways? Do you think you’ll get the traffic rights and slots to support the expanded network? A: Negotiating traffic rights and slots is a complex business and one that involves a number of different stakeholders. We have a strong and committed government affairs team that works closely with relevant parties to ensure our voice is heard. There are never any concrete guarantees in this business, but our track record to date — launching 45 destinations in just four Under the leadership of James Hogan, Etihad Airways continues to make enhancements, years — is testament to our efforts. such as onboard quality improvements, extended reach and connectivity, and expansion of its frequent flyer program, to heighten its customers’ travel experience. Q: You’ve had phenomenal success at the start of last year: doubling the rev- enue from 2006, double-digit growth in yield and load factor improvements. What are your plans to maintain the upward growth pattern? Growth of Destinations A: Etihad Airways’ growth in 2008 and beyond will be based upon ensuring we have the 50 right fleet, the right network strategy and, most important of all, the right customer service. 45 45 Much of Etihad Airways’ growth to date 42 has been based upon adding breadth to our flying program, launching an incredible 45 destinations 40 37 in four years. Moving forward, we will continue to seek opportunities for further expansion — 35 34 such as China and India — but growth will also be achieved by adding more depth to the sched- 30 ule. By introducing additional frequencies on key routes, like we did with our last winter schedule, 24 we can substantially improve the connections 25 we are able to offer our customers.

20 Q: Etihad Airways is no longer a start- 17 16 up airline, but an established airline compet- Number of destinations 15 ing with the major Middle East airlines. How 11 do you plan to differentiate your product to address the competitive pressures? 10 A: One of the key advantages Etihad Airways has is that we’re not a “legacy” carrier. 5 3 As a relatively new airline and brand, we can make decisions quickly without the burden that 0 the older, more traditional airlines have. Moving Winter Summer Winter Summer Winter Summer Winter Summer Winter away from a formulaic, one-size-fits-all approach, 2003 2003 2004 2004 2005 2005 2006 2006 2007 Etihad Airways is shifting the focus from “a large airline processing many indistinct Winter Summer individuals” to a focused one that is based around the individual. In March, Etihad Airways expanded its network yet again with four flights a week from its Abu Dhabi home base to Beijing, China, which represents the carrier’s first 2008 will see us progressively introduce destination into the Chinese market. a new style of service, focused on the individual, including innovative dining options, redesigned

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menus and new crockery. One of the highlights of 2008 will be the introduction of a new food and beverage manager position onboard our aircraft, something that will help set Etihad Airways apart from other carriers. Each of the new managers will possess an in-depth knowledge of our new menu and involvement in its design. This will enhance the customer experience onboard and move the experi- ence closer to one akin to a fine dining restaurant.

Q: How do you see the development of your information technology strategy: partner- ship with providers, outsourcing, integration, etc.? A: Information technology is fundamental to everything we do. It plays a major part in supporting and driving the growth of Etihad Airways, both in terms of revenue growth and cost control as well as how we serve our customers and provide capability for our own people. Information technology is the biggest enabler in our business and makes life easier for our custom- ers by giving them greater control over how and when they interact with the airline and develop- In 2007, Etihad Airways added 13 Airbus A330-200 aircraft to its fleet of 24. Within the next three years, the airline expects to expand even more, bringing its total to 53 planes. ments such as online check-in and the ability to pre-print a are helping to meet the ever-increasing demand for self service.

Growth Of Fleet Q: What are your plans for managing rising fuel costs? A: Rising fuel costs are a challenge for all 55 53 airlines and remain a significant proportion of Etihad 52 3 Airways’ total costs. However, we’re comfortable 50 49 3 with a hedging policy that is giving us greater certain- 12 3 ty and allowing us to manage seasonal fluctuations. 12 Fuel costs represent about one-third of Etihad 45 12 Airways’ total costs. The airline is hedged at 60 per- cent to 65 percent in 2008 and 20 percent in 2009. 40 40 Without a hedging program in place, Etihad 37 3 38 Airways’ costs would be far higher, so being prudent 35 3 8 37 and forward thinking is extremely beneficial to the 4 34 company. 30 Apart from hedging, Etihad Airways has a 30 fuel surcharge that rises or falls, dependent on the 29 cost of buying aviation fuel, which is something that 25 most airlines around the world have in place. Number of aircraft

20 21 Q: What are your views on the wave of privatization that is sweeping the airline 15 world? How do you think this will impact Etihad Airways? A: Business is business. Each country, each 10 10 government and each business has to make deci- sions it feels are appropriate at that time in its busi- 5 6 ness cycle, but I don’t see a wave of privatization sweeping the airline world, whatever the region. a 0 2004 2005 2006 2007 2008 2009 2010 2011

Narrow body Wide body Freighter Raida Abumizar is a Middle East-based Etihad Airways began with the largest-ever start-up fleet order of 29 aircraft with a total value of US$8 billion. It is now building a balanced fleet of wide- and account director for Sabre Airlines ® narrow-body aircraft, enabling it to serve short- and long-haul destinations. Solutions . She can be contacted at [email protected].

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Adding Cargo to the Mix

tihad Crystal Cargo, which began compared to global increases of 4.5 percent service in September 2004, serves and Middle East increases of 9.7 percent. E50 destinations, of which seven are Its cargo terminal has been enhanced to cargo-only routes. The cargo division enable the cargo division to handle more than operates two Airbus A300-600RF 270,000 tons of freight a year. and a McDonnell Douglas MD-11F Etihad Crystal Cargo was voted 2007 freighter, which joined the fleet in of the Year by readers of Air September, increasing freighter Cargo News and last year achieved: capacity by 30 percent. 38 percent revenue growth com- Etihad Crystal Cargo pared to the previous year, continues to out-perform 34 percent tonnage growth, its competitors in the 43 percent increase in shipments, Middle East and jumping from 152,000 in 2006 to 218,000 last global markets. year. Last year, it To support its impressive growth in the a c h i e v e d cargo business, Etihad Airways recently select- growth of ed Sabre® CargoMax™ Revenue Manager. 38 per- “Revenue Manager will assist the airline cent to achieve improved revenues, specifically through effective cargo space and yield man- agement,” said Des Vertannes, executive vice president cargo for Etihad Crystal Cargo. “It will help us manage our capacity more scien- tifically, enabling us to minimize wastage of our most precious asset, the cargo space on our flights. “Additionally, it will enable us to improve our processes and better align our organizational structure to serving our customers.” a

ascend 49 products Photo by shutterstock.com by Photo

Staying Power has served its loyal passenger constituency for more than 75 years, and the airline that’s distinguished itself as an industry leader is bound to be around at least 75 more innovative and productive years.

By Phil Johnson | Ascend Staff

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Alaska Airline’s Staying Power n 1932, when Linious “Mac” McGee first started catching an Alaska Airlines flight back home to a taking passengers on his McGee Airways fur- destination in the Lower 48 states. Irun flights between Anchorage and Bristol Bay, With the expansion of Alaska Airlines’ Alaska, little did he realize he had started what service to the U.S. West Coast, the airline’s head- would grow to become one of the most popular quarters was eventually shifted from Anchorage and innovative U.S.-based airlines. to , where the corporate offices remain Today, despite a few hiccups in recent today. times due largely to some necessarily drastic cost Seattle-Tacoma International Airport and cutting, Alaska Airlines represents a study in busi- Ted Stevens International Airport in Anchorage ness leadership and survival throughout what have are the primary hubs for Alaska Airlines as it now stretched to be more than 75 years. continues to expand its service not only on After McGee’s early exploits — as well the West Coast (and to Hawaii), but to major as legendary bush-piloting escapades by Merle destinations including Boston, Massachusetts; “Mudhole” Smith, Bob Ellis, Shell Simmons and Washington, D.C.; Miami, Florida; New York, New other pioneers of the skies throughout the Alaska York; Chicago, Illinois; Dallas/Fort Worth, Texas; Territory in the 1930s and ’40s — it was several and Denver, Colorado. operational mergers and a couple of name changes During its history, Alaska Airlines has faced later before the Alaska Airlines name was adopted several “down” periods but has persevered and in 1944 (just ahead of a competitor that had filed for survived. Important economic developments the “Alaska Airlines” trade name, as well). have occurred throughout Alaska Airlines’ lifespan Among its other historic achievements, to bring the airline back from the dips in its eco- Alaska Airlines participated in the Berlin Airlift of nomic business cycle. 1948 and 1949 that helped preserve freedom in A good example of these key economic a part of the world in which the stifling reality of developments is the shot in the arm Alaska the Cold War was all too stark. During the Cold Airlines received when Alaska’s Prudhoe-Bay-to- War, Alaska Airlines was one of few U.S. carriers Valdez oil pipeline was built in the late ’60s and that occasionally operated scheduled flights to the early ’70s — providing access to an enormous Soviet Union. energy source for the U.S. economy, thousands But the airline’s bread and butter in its early of jobs for Alaskans and plenty of major transpor- decades was always its essential service in Alaska tation needs during the project — transportation — as Alaska Airlines became the primary mode needs that Alaska Airlines was able to help satisfy of transportation for people in the intra- and trans- on an extremely large scale. Alaska passenger market, with so much of the Furthermore, since Alaska Airlines is the vast Alaska landmass only reachable through air. primary carrier to so many regions of the state In fact, since the late 1960s when it — and the only carrier to some Alaska destina- acquired the airlines then serving southeastern tions — the airline has become a vital linchpin in Alaska where there’s no interconnecting road net- carrying items such as medical and emergency work leading to the towns and villages scattered supplies to those areas. among the mountainous and island terrain, Alaska Throughout Alaska Airlines’ existence, its Airlines has offered one of the only two practical business model has been shaped by circumstances. modes of travel in and out of that region. Similar to many low-cost business models, the Juneau, which is Alaska’s state capital, has carrier’s fleet consists mainly of Boeing 737 for the last 40 years depended heavily on Alaska variants. Airlines as a physical lifeline to the civilized world Benefits of the single-aircraft fleet include — and so have Ketchikan, Sitka, Petersburg and lower maintenance costs required to service one Wrangell as well as the other towns of southeast- type of aircraft as well as standardization of air- ern Alaska’s narrow geographic strip that hugs the craft-auxiliary equipment throughout the airline’s sea to the west and south and is closely bounded system. by Canada to the east and north. Also, the Alaska Airlines approach has tra- The original access to southeastern ditionally embraced a fun-loving, easygoing style Alaska’s towns and villages was, of course, by — at one time, for example, dressing its flight water transport. And freighters as well as the attendants in Russian Cossack garb in a nod to its Alaska cruise lines continue that tradition today. native state’s rich Russian heritage. In fact, a key staple of Alaska Airlines’ business Over time, as with almost all carriers, plan is to participate strongly in Alaska tourism Alaska Airlines has cut back on services such as by partnering with various cruise lines — flying in-flight meals. But it still maintains a reserved- passengers to Alaska from the continental United seating structure on its flights. States so they can enjoy a scenic cruise south Another part of the airline’s long-term busi- along the Alaskan and Canadian coastlines to ness plan has evolved from its service to Mexico, Vancouver, British Columbia, or U.S. ports such as which was initiated in the late 1980s primarily in Portland, Oregon, or Seattle, Washington. a strategic move to better utilize its aircraft year Or the touring adventurers can select round. a routing the other direction, with passengers Traditionally, many of Alaska Airlines’ flights cruising north through Alaska’s Inland Passage, from the Lower 48 to Anchorage as well as to its sometimes all the way north to Anchorage, then numerous other destinations in Alaska would be

ascend 51 profile Photos courtesy of Alaska Airlines Alaska of courtesy Photos its numerous trout and salmon streams and its lakes and ponds, or to hunt all over the state. Alaska Airlines’ cargo arm does major business carrying fishermen’s frozen catches and hunt- ers’ trophies to other U.S. destinations. The airline even designates several of its aircraft strictly for cargo — specifically to ensure it is able to adequately serve its large and ever- growing sporting-outdoorsman constituency. Yet another of Alaska Airlines’ key strate- gies going forward has been to avoid joining any of the major airline alliances, but rather to partner aggressively with individual carri- ers including American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and KLM/Air France in codeshare agreements that now essentially expand Alaska Airlines’ reach and scope around the globe. And such strategies have kept Alaska Airlines on an upward growth path for most of its 75-plus years in business. In the challenging realm of innovation, Alaska Airlines has during its long history been credited with several industry firsts, such as being the first airline (along with its sister airline , the other carrier operating under the auspices of Alaska Airlines’ holding company, the ) to book flights and sell tickets via the Internet, starting in the mid-’90s. Now, the Alaska Air Group — starting with Alaska Airlines — is working to further develop its concept of the “airport of the future,” which is designed to speed the pas- senger check-in process. Basically, the idea is to eliminate the front-desk ticket counter in favor of various strategically positioned check-in kiosks and bag-check stations. Through its “airport-of-the-future” imple- mentation, Alaska Airlines has demonstrated dramatically reduced check-in times at Ted Stevens International Airport in Anchorage. And Horizon Air has established a similar (though prospectively much larger) version of the con- cept at Seattle-Tacoma International Airport. The entire Alaska Air Group has been inspired by Alaska Airlines’ traditional pioneer- ing spirit, which continues to breed innovative Pillbox hats, Russian Cossacks and hot pants represent six decades of Alaska Airlines’ most strategic thinking even after more than 75 years unusual attire. In honor of the airline’s 75th year in business, a variety of past of building a loyal, fiercely demanding customer uniforms were showcased during last year’s flight attendant fashion show at Seattle-Tacoma constituency. International Airport. Flight attendants wore these and other retro uniforms on select flights And although Alaska Airlines is rightly for a few months after the anniversary celebration. proud of its rich heritage, it also takes pride in being very much in tune with today’s air travel- ers. The people of Alaska Airlines do not appear filled to the brim in the summer months, but pas- resort destinations have evolved to a more-or- to be letting up in their efforts to succeed senger bookings would fall off drastically during less four-season level of popularity — a situation through long-held innovative and competitive the state’s notoriously cold, dark winters. that could then threaten to leave the Alaska instincts — even in today’s ever-changing airline To better utilize its aircraft fleet throughout Airlines fleet shorthanded during the summer industry. a the year, the carrier’s strategists suggested serv- months when travel to and from Alaska picks ing some of Mexico’s resort regions that are pop- up again. ular wintertime destinations for U.S. travelers. One of the unique aspects of the air- The good news is that the strategy worked. travel market between Alaska and the Lower The bad news is that the strategy may have 48 is the significant proportion of outdoor Phil Johnson can be contacted at worked too well, in the sense that many Mexican sports enthusiasts who travel to Alaska to fish [email protected].

52 ascend Balancing Act Southwest Airlines abandons its one-size-fits-all approach by offering a number of new features including check-in and boarding processes, gate improvements, frequent flyer enhancements and in-flight amenities designed to heighten its customers’ experience.

unambulism is the technical term for By Lynne Clark | Ascend Staff tightrope walking, done usually at Fgreat heights. It’s also an accurate picture of what Southwest Airlines is attempting to do as it walks the thin line between differentiating its product while remaining true to its core maver- ick philosophy. The first test of this delicate balancing act came last June when Southwest Airlines announced a laundry list of technological enhancements that would allow for product customization and more incentives for business and leisure travelers. In November, the air- line provided an advance peek at its new products and Web site features, includ- ing new displays, the new “Business Select” fare product and special offers for the most frequent travelers in the Rapid Rewards frequent flyer program. “In recent months, we’ve announced plans to change how we board our aircraft and the look and feel of our gate areas system wide — all to increase customer productivity and comfort,” said Gary Kelly, Southwest Airlines’ chief execu- tive officer, in a press release issued Photo by shutterstock.com by Photo

ascend 53 profile Photo courtesy of Southwest Airlines Southwest of courtesy Photo free cocktail. Business Select travelers pay US$10 to US$30 more than those who purchase fully refundable coach fares. The Business Select fare marks the end of “cattle-call” boarding while pre- serving the airline’s hallmark open-seating arrangements. Instead of jostling in line with other passengers for up to an hour to be among the first to board, travelers get assigned a boarding number when check- ing in and are called to board in a more orderly fashion. Those paying the highest fares and frequent flyers are guaranteed early boarding numbers, and other pas- sengers may get a good boarding number by checking in online up to 24 hours in advance. Business Select fares are part of an upgrade to the airline’s booking site, which took nearly three years to develop. Instead of a large display with numerous fare cat- egories, the airline has streamlined the pro- cess by bundling its fares into three major fare columns: Business Select, Business The new look and feel of Southwest Airlines’ airport gates include family areas with vibrant, colorful child-sized tables and chairs as well as kid-friendly television programming. and Wanna Get Away. The new display may only show three fare columns, but it is powered by an upgraded revenue manage- ment system that enables Southwest to November. “Today, we are announcing value most — whether it’s money, time tailor its fares to market demand by nearly additional product changes that transi- or both.” doubling the number of fare types to 15 tion Southwest from a one-size-fits-all Business Select is a new fare that from eight. airline to the airline that fits your life. guarantees ticket holders will be among “We went from selling a bucket of We are offering our customers exciting the first to board the aircraft. In addi- fares that were hard to understand to sell- improvements to their overall Southwest tion, Business Select holders receive extra ing products geared to the unique needs of experience and saving them what they Rapid Rewards credit for the flight and a our passengers,” said Darren Dayley, vice president of technology, customer experi-

Photo courtesy of Southwest Airlines Southwest of courtesy Photo ence portfolio for Southwest. “Before, our customers didn’t understand why they should pay US$119 for a fare when it appeared the US$109 fare was the same. There were differences, but they weren’t easily apparent. The challenge for us was how to collapse eight columns of fares into the three columns we have today. We had to design it from scratch. The technol- ogy took about four months for test and production, but the business analysis took nearly two years.” Along with fare and boarding changes, Southwest Airlines also unveiled enhance- ments to its Rapid Rewards frequent flyer program. Now, Rapid Rewards members are rewarded for their frequent flight activ- ity by jumping to the airline’s “A-List.” Rapid Rewards members who have flown 32 one-way flights or 16 roundtrips in 12 months will join the A-List where they will be automatically checked in for their flight in advance of departure and will most likely receive an “A” boarding pass, which is the Southwest Airlines’ gate makeovers in its 64 airports, which is expected to be completed first boarding group. during the first half of the year, offers power stations for charging electric devices as well Additionally, Southwest Airlines’ over-sized padded seats, tables with power outlets, power stations with seating and flat- Rapid Rewards program introduced its new screen televisions airing current news. Freedom Award. Rapid Rewards members now have the opportunity to exchange

54 ascend profile Photo by shutterstock.com by Photo

Southwest Airlines will be the first carrier in the United States to test satellite-delivered broadband Internet access, giving customers in-flight access to external communications such as e-mail, music, shopping and high-speed connectivity. The carrier will begin testing on four aircraft within the next couple of months.

two Standard Awards for one Freedom full gate makeover during the first half of Jan Marshall, vice president of technol- Award. The Freedom Award is free of the year. ogy applications for Southwest. “Over seat restrictions except for a few blackout And in the near future, Southwest the next year, we are focusing on on-time dates around major holidays, which means Airlines technological advances are enabling a performance improvements, more effi- as long as there is a seat for purchase on number of changes passengers can expect. cient operations and enhanced mechanic a flight, members can use this new award In January, the company announced schools. From a market standpoint, they’re to reserve it. that it will be the first U.S. carrier to test equally exciting and will eventually impact In conjunction with new fare types, satellite-delivered broadband Internet access the customer experience.” Southwest has embarked on “gate make- on multiple aircraft. The innovation will enable These changes mark the start of overs” in each of is 64 airports. The customers with a WiFi-enabled device to have a new era for Southwest Airlines, and enhanced gate areas are designed to cater full access to the Internet including e-mail, there’s more to come. to different types of customers and will music, shopping and virtual private networks “What you saw us implement in include: via a high-speed connection. The airline is November is not the end,” said Dayley. A family area containing small-sized partnering with Southern California-based “It’s the beginning. We have plans quarter tables and chairs, Row 44 and hopes to begin testing Internet by quarter, and they’re all focused on Kid-friendly programming displayed on a capabilities on four aircraft this summer. enhancing the flying experience for our flat screen television, Customers will also soon enjoy a customers. Stay tuned.” a Low-to-the-ground power stations for Southwest e-ticketing system, an electronic charging electric devices, boarding process, enhanced kiosks and a tool A business/leisure section with padded that will let customer service agents interact seats, tables with power outlets, power more directly with customers. stations with stools and flat-screen tele- Technology is changing operations in visions with news programming. exciting ways as well. San Antonio International and Dallas “Customer experience changes are Love Field were the first airports to adopt very visible, but there are some significant Lynne Clark can be contacted at the new look, and the airline anticipates a changes going on behind the scenes,” said [email protected].

ascend 55 Virgin America’s PASSIONATE START Brown/iStockphoto.com Robert by Photo

By Russ Perkins | Ascend Contributor

Virgin America has entered the U.S. domestic-airline picture with plenty of enthusiasm as well as innovative technology — making for an impressive start to what could turn out to be a long, successful and highly influential business run.

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ir Richard Branson, chairman of the Indeed, “innovation” might well be America has already built an expanding flight British-based Virgin Group, has spent Virgin America’s middle name — with its schedule — flying from to Sa lifetime approaching business in his innovative use of technology and passenger- transcontinental destinations New York and own inimitable fashion — founding and operat- comfort features that give the airline a unique Washington, D.C., and also within the greater ing hugely successful companies in music and feel in the domestic-U.S. air-travel market. Pacific Coast region to Los Angeles and San entertainment as well as global transportation. As a matter of fact, it required quite a bit Diego, California; Las Vegas, Nevada; and And the primary unifying factor among Branson’s innumerable business ventures is that they usually work: Their essential features connect with customers, resulting in steady Highlight growth and sometimes-smashing success. One of the Virgin Group’s well-known Indeed, “innovation” might well be Virgin companies is Virgin Atlantic Airways, which has been operating since the mid-1980s America’s middle name — with its innovative featuring passenger-pleasing amenities com- bined with a low-cost business model that has made Virgin Atlantic one of the top use of technology and passenger-comfort choices for veteran flyers on the airline’s European and trans-Atlantic routes. features that give the airline a unique feel in The Virgin Group also operates or maintains considerable investments in sev- the domestic-U.S. air-travel market. eral other airlines, including Virgin Blue in Australia and Virgin Nigeria on the African continent. Now the Virgin brand has been affixed of innovation just to get Virgin America off the Seattle, Washington. And many other highly to a new U.S. domestic airline: Virgin ground, due to strict legal specifications that desirable U.S. destinations are in the works. America Inc. limit U.S. domestic carriers to foreign owner- But routes are not what make Virgin And judging by the Virgin America busi- ship no greater than 25 percent. America unique. Neither — on the surface, ness plan as well as the airline’s performance The Virgin Group is now a minority share anyway — are Virgin America’s Airbus A319 since its August 2007 first flight, there’s investor with U.S. investors holding a majority and A320 aircraft; however, the wealth of tech- every reason to believe Virgin America has stake and a U.S. controlled board of directors. nology inside those aircraft is another story. what it takes to extend the pattern of success Virgin America now licenses the Virgin brand What really makes Virgin America unique that business analysts customarily associate for marketing and public relations. — besides the obvious spirit, enthusiasm and with many of the other innovatively oriented From its headquarters city and prima- general excitement of its employees, who Virgin-branded enterprises. ry base in San Francisco, California, Virgin seem to grasp that they’re part of something Photo courtesy of Virgin America Virgin of courtesy Photo

All Virgin America first-class seats and two out of every three seat groupings in the carrier’s main cabin are equipped with adaptor-free 110-volt outlets.

ascend 57 profile Photo courtesy of Virgin America Virgin of courtesy Photo Basically, Virgin America started from scratch, carefully and assiduously studying the industry and trying to answer two key ques- tions: What do people like about flying? And what don’t they like? This fundamental beginning was all in keeping with Virgin America’s mission state- ment — not commonly a business’s ultimate rallying point, but in this case the very reason for Virgin America’s existence: “We want to create an airline people will love.” From that basis, Virgin America set out to assure that in the 21st-century world of airlines, it is truly a different animal, purchasing the brand-new, state-of-the-art Airbus aircraft, then leveraging technology in the planes them- selves to assure a totally unique passenger experience. The technology that Virgin America is lever- Virgin America’s first-class cabin sports posh, spacious leather seats that include a massage aging includes staged, variable mood lighting with function and international-grade 55-inch seat pitch. soft tones in color and brightness that change dur- ing the flight with conditions outside the aircraft as well as with the time of day. very different — is the Virgin America passen- to do things just a little differently — just a Overall, the result is a calm, sophisticated ger experience. little better. environment designed for relaxation and enter- The company’s marketing philosophy To that end, Virgin America first tainment. And the ultimate benefit is embodied revolves around the concept that even focused its efforts on hiring precisely the in more-relaxed passengers who, theoretically though U.S. traveling customers have a right type of person to work for the brand; a at least, should arrive at their destination more number of choices from which to select person capable of looking at things from the rested and less stressed out by the flight, no mat- when flying transcontinental or shorter passenger’s perspective and making sure ter how long. routes, a new airline such as Virgin America the airline provides an experience that will Virgin America’s Web site states that “we might realize immense potential if it is able bring passengers back for more. started with the things everybody likes” — then Photo courtesy of Virgin America Virgin of courtesy Photo

In its main cabin, Virgin America’s all-leather seats include 9-inch-wide screens as well as the handset for entertainment-system game controls and full keyboard.

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notes such things as, “Everybody likes plugs at technology can possibly deliver on a commercial dwarfing comparable individual-seat equipment in their seats,” referring to the aircraft’s adaptor-free aircraft. the main cabins of other U.S. domestic airlines. 110-volt outlets, which are located at all seats And Virgin America’s amenities don’t end Once again: The primary idea guiding the in first class and at two out of every three seat there. The airline is also attempting to take cushy Virgin America approach is to center the entire groupings in the main cabin. passenger comfort to new levels. flying experience on the customer and to lavish But Virgin America’s passenger-pleasing In addition to the positive effects of its passengers with in-flight technology and options technology also includes a colossal, multifaceted unique in-plane mood lighting, Virgin America they may never have previously imagined. entertainment system that plays on a 9-inch-wide wants its passengers to arrive at their destina- So far, the Virgin America philosophy screen for each individual seat in both first class tion refreshed rather than flustered and harried; seems to be working. Some might even say it’s and the main cabin. therefore, its aircraft seats have been designed like the days of yore, when flying was so much Passengers can test their skills playing for extra comfort. fun that passengers — to a certain extent, at least popular, full-feature video games or select In first class, Virgin America passengers — almost hated for a flight to end. from 25 or more high-demand, late-release get to cozy up in plush, oversized off-white Or perhaps it was never quite that much Hollywood movies. leather seats, with built-in massage function and fun. But Virgin America is trying mightily to make it And Virgin America’s passengers can international-grade 55-inch seat pitch. Each first- more fun now. And one of the best gauges of its also listen to an extremely broad range (in the class seat has an electronic seat-recline control, ultimate success will likely be how fast various thousands) of MP3 music tracks, watch live footrest and lumbar support. And each seat also competitors among U.S. domestic airlines begin to television, listen to live radio, shop, order food features a handset with entertainment-system copy many of Virgin America’s technological and and drink when they want it during the flight, game controls and full keyboard. passenger-comfort ideas as their very own. a even communicate with one another. Seats in the main cabin are luxurious black And in the near future, Virgin America leather with soft lumbar support and a generous also intends to offer in-flight broadband recline. Internet access. Each main-cabin seat also includes the In short, Virgin America plans to stop handset for entertainment-system game controls at nothing to assure that its passengers are and full keyboard as well as the aforementioned Russ Perkins is a sales director for able to enjoy the latest entertainment and 9-inch-wide screen that is standard equipment Sabre Holdings®. He can be contacted ongoing-business opportunities that developing in both first class and the main cabin, essentially at [email protected].

+count it up

18 83 500 The percentage in wasted aviation The percentage of sales that The amount in U.S. dollars of the esti- fuel, as a result of inefficient infra- are paid for with a credit card, according mated average airline fare, according structure and operations, according to Edgar, Dunn & Company. to Edgar, Dunn & Company. to the International Air Transport Association. This represents more

than 100 million tons of CO2 per year.

12.50 315 million 1.5 billion The amount in U.S. dollars IATA’s The estimated annual cost in U.S. The estimated average fare in U.S. fuel efficiency efforts saved airlines in dollars that airlines are charged for dollars that is paid to merchant bank, the Middle East and North Africa last accepting payments by credit card, according to Edgar, Dunn & Company. year, according to the International Air according to Edgar, Dunn & Company. Transport Association.

ascend 59 Customers Come First

62 Combining the best people with the most powerful information technology, processes and customer data, airlines can transform themselves into true customer-centric businesses. Delta Meets Change Social media opens several lines of communication 65 between Delta Air Lines and its customers. It’s a significant part of the airline’s “Change” campaign, designed to hear the voice of customers and find ways to enhance their travel experience.

What Customers Want

68 With an enhanced focus toward customer loyalty, airlines are investing in advanced analytics to gain insights into customer behaviors and preferences, which will significantly impact carriers’ revenue management and inventory control processes as well as boost the bottom line.

Great Minds Think Alike

73 Airlines can take a “customer community” approach — using emerging technology — to collaborate and help develop the exact solutions and services they need to thrive.

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Focus On The Customer

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Customers Come First Combining the best people with the most powerful information technology, processes and customer data, airlines can transform themselves into true customer-centric businesses. Photo by shutterstock.com by Photo

By Stan Boyer | Ascend Contributor

orget “ticketless” as the next big As part of a renewed customer focus, Employee coordination, thing. Customer centricity has now many carriers are reducing expenditures on Technology usage. F become the revisited battle cry for air- customers, and while this is very visible to lines. They want to increase their focus on travelers, it has little effect on total costs. It Customer Expectations customers while reducing costs to remain is estimated that variable costs associated Basic customer expectations are that profitable. For many airlines, this means a directly to the customer vary between 7 the airline will maintain operational integrity reduction in service levels on the ground percent and 10 percent, depending on the — on-time performance, few cancelled flights and in the air for its customers, which airline’s business model. and efficient recovery from service failures. is tough to balance when the goal is to Regardless of an airline’s costs, ser- But customers also expect a certain level of improve customer service throughout the vices and technology strategies and issues, customer service. travel experience. In addition, airlines often customer centricity is shaping up to be First and foremost, customers expect to complain that their technology keeps them the mother of all battles. It’s a force to be be treated with courtesy and respect (although from improving customer service. However, reckoned with, and in doing so, there are they don’t often perceive it as a two-way street). there are several technology-challenged air- three key areas airlines must understand and Why? Airlines often forget that air travel is still a lines that continually top various industry master to be truly customer centric: big event for most travelers and, often times, a lists in this area. Customer expectations, fearful one. Unlike moving from point A to point

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category — economy, business and first Sample Ratings of Customer Touch Points class. 6 5 This customer most likely in the least of the economic compartments. The 4 expenditure for air travel, while deemed too low by the airline is often perceived as signifi- 3 cant by the customer. Why? Perhaps because it’s a one-time event that usually costs more Rating scale 2 than US$100 and the air travel cost is only one element of overall trip expenses. Ask the same 1 set of customers how much they spent on their last restaurant meal and no doubt, it will have 0 been substantially less. Without taking a class Web Gate in airline finance, the customer has expecta- Inflight Security Check-in Curbside tions that service levels should exceed that of a Bag claim Marketing Sales calls Arrival limo Train transfer Train Guest service restaurant. Unfortunately, for many airlines, this Contact center Inbound lounge Public relations Transfer counter Transfer communications failure Agency relations Outbound lounge

recovery is not the case. Customers must follow a maze of signs and passageways only to queue at vari- Customer-centric airlines should strive to provide consistency across all customer ous stops along the way. For those unfamiliar touch points, measuring effectiveness using a scale of 1 to 5, with 5 providing the best with the experience (and even for those who customer service. Using this scale enables airlines to quickly determine strengths and are familiar), it is simply exhausting. weaknesses so improvements can be made that will increase customer satisfaction. Business Class B in an automobile, in which the traveler either Anxiety increases further when cus- Business-class customers are likely to has perceived control of his or her destiny or at tomers must consider airport and in-flight travel much more frequently than those in least influence on it, passengers have little or no amenities. Will they have permission to visit economy. Many left a meeting prior to the control when flying on an airplane. And although a lounge if they have an extended layover? flight and must get to a meeting almost imme- flying remains one of the safest means of Will there be enough space for carry-on diately after landing. This includes travelers on travel, special consideration has to be made for items? Will there be food on board? Will short-haul domestic flights as well as those on fearful flyers whose anxiety begins well before there be a fee for it? Will the seat be next long-haul international flights. For this reason, that of the average traveler. to the lavatories? Will there be an orderly the customer desires a most-efficient, hassle- Fear of flying is just one aspect of anxi- boarding of the plane, or will it be a free for free booking and airport process. The onboard ety. Each time travelers elect to fly, anxiety — in all? Will the flight leave and land on time? experience must first and foremost provide a a variety of ways and for a variety of reasons Customers finally reach their seats, comfortable seat that reclines as much as pos- — begins to rise long before they reach the either assigned or open seating. Now sible into a position for sleeping. airport. thoughts turn to the flight experience itself. Generally, the first sign of stress comes Takeoffs can be tense. The flight may First Class when customers must decide how to book be turbulent (and safety videos, though This is a diverse group of customers. They travel. Should they use the airline’s Web site, required, are not necessarily fear relievers). range from frequent flyers who get upgraded to a , call the airline directly? These And while landing is welcome, the pilot may the wealthy who prefer a little luxury in the sky. issues may seem mundane to most airlines, have to circle for a landing slot. Numerous A comfortable seat remains the top priority, but consider that most leisure travelers take in-flight activities can cause additional stress with tasteful meal service a close second. one trip per year and most business travelers for travelers. Unfortunately, for all customers, airlines take three to four trips per year. If one were to Because of the anxiety that natu- are most likely to experience service degradation play golf with this infrequency, no doubt simi- rally comes with air travel, a thorough during the airport experience, with less-than- lar emotions would surface. Decisions about understanding of and continuous atten- desirable boarding processes. What good is which items to take along as well as determine tion to customers’ needs and concerns having a seat assignment when the boarding who will take care of daily responsibilities, are required by genuinely customer-centric process makes travelers fearful that they will such as the pets, the house or apartment, the airlines. These carriers must understand never reach the seat alive? mail, and the bills, create equal anxiety. how to best interact with customers at Culture plays a large role in determining Next is the stress that’s more closely each touch point. Most airlines are very how customers behave at the gate. However, related to the airport experience. Will there compartmentalized and can optimize a Walt Disney Theme Park has demonstrated be parking? How will I get my luggage to the single set of touch points, but few continu- how well a nicely designed queue system counter? How much extra will I have to pay? ally seek to optimize the entire customer works. One may argue that there is not room Will my clothing or jewelry set off security experience. While it is nearly impossible to at the gate for extensive queue control. alarms? Is deodorant a liquid or a gel? All of have all touch points receive the highest Understandably, this is the case at most air- these concerns work together to place cus- rating, it should be a goal of the airline to ports; however, a few airlines have figured out tomers in an edgy, yet usually controllable, at least lessen the discrepancies between that seat assignments are not as important as emotional state. Any small deviation from cus- touch points. the boarding process itself. These carriers have tomers’ perceived expectations of the airport Another way of learning and under- carefully considered the boarding process to experience, including interaction with airline standing customers’ needs and desires to make it orderly and efficient for all. personnel, can cause very sudden and unwel- further improve the customer experience Within each major economic category come outbursts. is to divide them according to economic and across the categories, there exist sub-

ascend 63 special report

groups of customers (families, corporate travel- ers, holiday travelers, travelers visiting friends and relatives, travelers on religious pilgrimages) Total Operating Costs who have different needs and expectations. These may be further subdivided into frequent Indirect and infrequent as well as international and costs domestic travelers. 8% Total 25% 16% operating Fixed Employee Coordination costs costs Employee coordination is key in providing 100% 36% 42% 46% top-notch customer service. Today, customers Direct Flight often have as much or more information avail- costs 27% 35% 42% costs able to them than airline staff. The difficulty 75% 84% 92% 85% 82% 80% airlines face is two fold. Customers have more Variable access to information than ever before, and costs 41% 37% 38% they expect airline staff to be equally informed. 64% 58% 54% As airlines reduce staff, they also apply more Passenger costs technology that the remaining staff must learn Figures in white 48% 49% 50% to operate. represent percentage 15% 18% 20% During the booking process, custom- of the total operating costs. ers can select specific seating through 7% 9% 10% graphical seat maps, and they can also com- pare on-time statistics for particular flights. Flag carrier U.S. average Low-cost carrier Members of a loyalty program can see their points or miles online any time and have Passenger costs represent between 15 percent and 20 percent of an airline’s an expectation that airline employees will variable costs and 7 percent to 10 percent of an airline’s total operating costs, have similar capabilities. Their preferences depending on the airline’s business model. Unfortunately, many airlines choose for seats and other special requests are to cut costs in this area first, decreasing customer service levels and having a expected to be preserved by the airline for limited effect on overall costs. future reference, and the airline employee is expected to have similar information or at least be able to efficiently coordinate Technology Usage the capabilities, some are slow to adapt to with someone who does. Basically, the Even when airlines have adequate a new world of customer focus. more information about a particular traveler technology, existing business processes Technologies from other industries, such as publish and subscribe, can be integrated into the airline environment, Highlight enabling data to be automatically pushed to airline staff, who, as a result, will be Unfortunately, many airlines don’t leverage their more efficient and coordinate better with one another to provide superior customer service. Consider an example whereby technology to track and move customer data effi- maintenance teams could “push” mainte- nance log items to pilots well in advance ciently between work groups, making it difficult of customers actually boarding the plane. This would enable pilots to make decisions for their employees to have critical customer data. about whether an aircraft should remain in service or be taken out of service before customers board the plane. Becoming a customer-centric airline requires cultural change. Airlines must be airline staff has at its fingertips, the less may prevent them from making the most of focused on meeting and exceeding cus- stressful and more seamless the experi- customer data. For example, some reserva- tomer expectations. They must excel at ence is for the customer. tions systems, such as SabreSonic® Res, employee coordination. And they must For airline employees to excel, how- offer customer profiles that enable any learn to use their technology more strategi- ever, they need to have all types of cus- airline staff to access customers’ future cally. a tomer information readily available. It needs and historical travel records by looking up to be constantly updated and in real time so their name or address. To use the function- all employees have the same information ality, the airline must have processes that regardless where the customer is during ensure each customer is assigned a profile his or her journey. number. This can be a manual or an auto- Unfortunately, many airlines don’t mated process; however, if the capabilities leverage their technology to track and move aren’t used, employees cannot provide Stan Boyer is delivery director for customer data efficiently between work superior customer service. Many airlines Consulting and Solutions Delivery at groups, making it difficult for their employ- are unaware of the capabilities of their Sabre Airline Solutions®. He can be ees to have critical customer data. existing systems, and even if they know contacted at [email protected].

64 ascend special report Photo by shutterstock.com by Photo DELTA MEETS “CHANGE” By Lynne Clark | Ascend Staff

Social media opens several lines of communication between Delta Air Lines and its customers. It’s a significant part of the airline’s “Change” campaign, designed to hear the voice of customers and find ways to enhance their travel experience.

raditional network carrier Delta Air tors for international (76.3 percent), Latin cased a reinvigorated customer experi- Lines is looking decidedly “new America (82.3 percent), domestic (74.9 ence. The campaign, entitled “Change,” T school” these days. Barely one year percent) and system (75.4 percent) were honors Delta’s strong heritage with a out of Chapter 11 restructuring, the 80-year- higher than any previous January on record renewed sense of vitality and focuses on old airline tells customers it’s not the same for the carrier. the airline’s effort to rethink every moment old airline. Underscoring the message is its While much of the company’s new of the travel experience from trip planning delivery through 21st-century social media success is due to international market to arrival. technology including podcasts, animated expansion, many analysts credit Delta’s A key component of the campaign videos and blogs. marketing initiatives. Last May, it launched is the use of social media. Modem Media Customers seem to be getting the a multi-million-dollar re branding campaign created a new Web site for Delta, dubbed message. In February, Delta reported to mark a new era; introduced an updated, delta.com/change, which launched last record load factors for January. Load fac- boldly modern corporate brand; and show- May. The site enables travelers to partici-

ascend 65 special report Photo courtesy of Delta Air Lines Air Delta of courtesy Photo pate in a dialogue about their travels, share ideas and travel tips, and provide feedback. Today, the site is home to the company’s “Under the Wing” blog, where custom- ers can hear directly from Delta leaders about some of their most passionate and inspiring ideas, as well as some upcoming changes. “What Delta is doing is position- ing the airline in the right way from a marketing standpoint,” Henry Harteveldt, principal analyst at Forrester Research Inc., said during a social media conference last year. “They’re doing all these things to show John Q. Public that this is not your father’s or your grandfather’s Delta, that they are serious about changing. Marketing a product plays a role in how an airline is investing in itself.” Kristen Manion, Delta’s general manager of relationship marketing, said the “Change” campaign opened the door to social marketing opportunities. Delta Air Lines’ refreshed brand — a three-dimensional, red “widget” icon flying across a “Delta wanted to show customers blue background and the result of months of employee and customer research — will appear that we had taken our time in Chapter 11 on more than 900 Delta and Delta Connection aircraft, in more than 300 airports, on Delta’s to change and that we were truly a new award-winning delta.com Web site, and in all advertising and printed material. airline,” she said. “Part of what we wanted to do was to open up conversations with customers. Social media provided that opportunity.” Social-networking Web sites rep- percent by 2011. That’s because consum- Jacob Morris, product manager of resent an important media channel for ers respond less to traditional media and delta.com, said, “We were looking for reaching a diverse demographic, including advertising and are moving toward con- opportunities to connect with customers in teens and young adults, women, moms, sumer-to-consumer communication such an open, human and meaningful way. Our affluent consumers, and older individuals. as blogging, mobile messaging, comparison challenge was how do you take that ‘Change’ According to a report last May by Market shopping via sites, word-of-mouth market- brand message and communicate it online. Wire, experts expect U.S. ad spending on ing and peer-to-peer networks. Researcher That translation for us was social technol- social networks to grow approximately 200 Chris Ward states that 80 percent of con-

ogy, which allowed a two-way dialog.” Lines Air Delta of courtesy Photo

What Is Social Media? Wikipedia defines social media. “Social media describes the online tech- nologies and practices that people use to share opinions, insights, experiences and perspectives with each other. A few prominent examples of social media applications are Wikipedia (reference), MySpace (social networking), YouTube (video sharing), Second Life (virtual real- ity), Digg (news sharing), Flickr (photo sharing) and Miniclip (game sharing). These sites typically use technologies such as blogs, message boards, pod- casts, wikis and vlogs to allow users to interact.” Andy McDill, Delta spokeman, said that social media takes consumers behind the scenes. “It makes for a nice middle ground for getting your message out and also creating buzz,” he said. “It’s not mass communi- As part of its US$10 million re-branding effort announced April 2007, Delta Air Lines repainted its planes to reflect its new modern corporate brand. The airline rolled out the first Boeing 757-200 cations like an ad or press release. But painted in the new livery at an employee celebration in Atlanta, Georgia, shortly after the it’s not one-on-one either. It’s a middle- announcement. of-the-road way to communicate.”

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sumers trust advice from friends online, to tell why their team was a perfect travel their travel woes. The videos are also representing three times as much trust pair. Five teams were chosen to travel posted on YouTube and iTunes. than via traditional media. Further, one together to an international destination in three Internet users visits Web sites where Delta captured their travel adven- Not An Easy Sell containing user-generated content to help ture on video. Videos from each of the five At first, it wasn’t easy to get Delta make purchase decisions. It’s not surpris- teams were then posted onto the SiteSeer executives to launch social media sites. ing, then, that companies such as Delta Travelcast Web site and viewers voted on However, the idea had many proponents are successfully leveraging their marketing the best team. Those who received the who saw it as a natural fit with the corpo- communications via social networking Web fewest votes were eliminated. The grand ration’s “Change” campaign. sites to achieve one or more objectives, prize winners — a retired couple from Salt “At first there was a lot of hand- including: Lake City, Utah — won 1 million frequent holding and acclimatization,” said Morris. Improve customer understanding, flyer miles. “But we got it out there and everybody Promote issues of social concern, “Planeguage” — the language of realizes it’s not that bad. For corporations Promote products and services, traveling by plane — is another very popu- this size, it’s very hard to want to let go of Facilitate internal knowledge sharing, lar social media venture by Delta. The control of the conversation. We’ve done Increase brand awareness. humorous series of animated short videos that. We started to dip our toes into it and Photo by shutterstock.com by Photo Adventures In Cyberspace Delta is focusing its social network- ing in three primary areas: 1. “Under the Wing” blog, 2. Video logs (vlogs) including “SiteSeer Travel Cast,” 3. “Planeguage.” The narrow focus keeps the resource impact manageable. Content is provided by internal employees. Morris moderates the blog with help from an outside firm that fills in when he is unavailable. Manion man- ages content for the video logs. In terms of the number of comments, “Under the Wing” averages five to 20 comments daily. Employees always respond the same day. “We get content, good and bad,” said Morris. “We’re open to whatever people want to discuss. One minute we’ll be talking about in-flight entertainment and then someone comes into the conversa- tion and turns it into a discussion about the kinds of drinks we offer on board. It’s never boring.” One of the company’s most popu- lar sites is “SiteSeer Travelcast,” a mini As part of its strategy to turn its attention more closely to its customers, Delta Air Lines has travel show featuring Delta employees made numerous changes, including leveraging social media such as blogs, message boards and podcasts. This interactive approach enables the carrier’s customers to share views and at different locations around the world. express what’s most important to them during their travels. One recent post showcased shopping in Mumbai, India, with Cindy and Smita. The pair took viewers to a shoe market where they bought beaded shoes; a vegetable market where a local shop owner mixed an highlight universal truths in travel. For everybody sees it’s a good thing and our after-meal breath freshener, “an acquired example, one called “Domino” was the customers love it. So many people spend taste,” according to Cindy; and a flower result of a passenger complaint about so much time debating on whether or not market where they bought jasmine. fellow passengers who aggressively, with- to do it. I say, just do it. The value you get “SiteSeer Travelcast makes travel out warning, recline seats into their laps. for your brand can’t be matched with other real for customers because they see our Domino reflects the mayhem that could media.” employees — not actors — who give ensue if an entire row fully reclined its “Customers are talking about you insider tips on places to eat, where to stay, seats simultaneously without warning. anyway,” Manion said. “You might as well local customs and other things travelers “These are tongue-in-cheek anima- insert yourself into the conversation.” a want to know about,” Manion said. “Any of tions that highlight those irritating, yet our employees can provide content.” often times humorous, moments we’ve all Customers were the content experts experienced while traveling,” said Morris. for a widely popular “SiteSeer Challenge” “These tell our customers, ‘yeah, we’re that ran late last year. Contestants were with you … we understand.’” chosen from among 500 video applications Planeguage is posted on Delta’s blog Lynne Clark can be contacted at submitted by customers who were asked where customers are encouraged to share [email protected].

ascend 67 special report

What Customers Want With an enhanced focus toward customer loyalty, airlines are investing in advanced analytics to gain insights into customer behaviors and preferences, which will significantly impact carriers’ revenue management and inventory control processes as well as boost the bottom line.

By Ben Vinod | Ascend Contributor

o get closer to customers and understand marketing to acquire new customers in the most and-destination revenue management in the mid what they truly desire, airlines are investing cost-effective manner. However, today, it requires 1990s. T in data mining, business intelligence and a combination of marketing, revenue management advanced data analytics to understand consum- and real-time inventory control to facilitate one-to- Consumer Preference Forecasting er traits, behaviors and preferences to improve one targeted responses to manage the customer The arrival of the Internet in the mid 1990s customer retention, acquire new customers and life cycle across all customer touch points. Key was followed shortly with Web travel supermar- maximize the revenue-generation potential with business drivers are converging to enable customer- kets and consumer-direct Web sites. With the every customer interaction. The renewed focus on centric revenue management along six key dimen- growth in online bookings from airline Web sites customer loyalty and experience for airlines to dif- sions. While these initiatives along these six dimen- and supermarkets, there is a new source of rich ferentiate themselves also has a significant impact sions can be sometimes viewed as independent data to model consumer preferences and estimate on pricing and revenue management. initiatives, they need to come together in a cohesive demand for an airline’s product. Forecasting using framework for an effective pricing and revenue this approach is based on the fundamental recogni- Key Enablers management program. tion that demand is the outcome of a consumer Customer-centric revenue management is Business process changes necessitated with choice decision. Demand forecasting based on an enabler of customer relationship management to a desire to get closer to customers has resulted consumer preferences follows the actual demand increase an airline’s profitability based on customer in the most significant changes in pricing and rev- process in terms of how a specific air product is insight. Traditionally, it has been the role of airline enue management since the introduction of origin- purchased for travel. Consumers typically select Key Drivers To Enable The Six Dimensions Of Customer-Centric Revenue Management

Accurate real-time Predictive analytics Understanding availability Customer preferences the customer Alternate segmentation Intelligent Consumer Willingness to pay pro active preferences- fare based demand management forecasting

1:1 marketing Key initiatives Interactive Customer-centric Customer-centric marketing pricing and availability revenue management Branded products Attribute (ancillary Consumer knowledge services) preferences discovery-based Product Fare decision making unbundling simplification Customer retention Accurate real-time True availability availability across Incremental bookings all channels Alternate segmentation/ Minimize UCs branded and price jumps products Point-of-sale control

Key business drivers — understanding the customer, interactive marketing and accurate real-time availability across all channels — are joining to facilitate customer-centric revenue management along six key dimensions.

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an itinerary based on a combination of schedule Single-Dimensional attributes and price. This new source of data used for forecast- Restriction-Free Tariff Structure ing demand based on consumer preference is Booking Advance Minimum Cancellation called shopping data. The forecast model is based class Fare purchase stay penalty (%) Description on a customer’s utility function — a function of market share, market size, competitive schedule Y US$279 – – 100% • Fare classes are not changes, type of service (nonstop, direct or connec- independent B US$249 – – 100% tion), carrier preference in a market, type of aircraft • Lower fare differential (turbo, jet), requested time, departure/arrival times, M US$209 – – 100% • Multiple fares are filed but elapsed times, displacement time between ser- with the same identical vices, route frequency, fares and applicable restric- H US$179 – – 100% restrictions tions. Introducing price into the equation has the US$159 – – 100% advantage of being able to react quickly to major V • Promotes 100 percent sell down to the open-fare fare specials. This approach to forecasting is a vast Z US$139 – – 100% improvement over traditional time-series models class due to the absence that do not consider the effects of competitor sched- Q US$109 – – 100% of restrictions ule, quality of service attributes and prices prevailing in the market. When considering a simplified pricing structure where the fare amount is the only determinant of the market segment, all fare rules are identical. An effective method to forecast dependent demand, or demand that is a function of the price and other consumer choice variables, is to adopt a twist by dropping restrictions. The earliest fare As low-cost carriers have grown from start- top-down consumer choice model that follows the simplification model, which is still practiced by a ups to established airlines with an increasing and actual demand process of itinerary selection by a few LCCs today, relies on a pure restriction-free sometimes dominant market share, the evolution customer. In addition, a consumer choice-modeling pricing structure. In this scenario, an airline would of fare simplification has gravitated toward a hybrid framework is the only practical method to forecast file multiple fares with the same identical minimal model based on the realization that fare restrictions restriction-free demand where only the price point fare restrictions across all fare classes. Hence, the provide flexibility and the ability to target specific determines the product and consumer demand is probability of selling a fare higher in the hierarchy customer segments. The hybrid model has unique dependent on the price points. Besides forecasting is contingent on the immediate lower fare being class groups or restriction sets where each class demand, this approach can also be used to estimate closed for sale. In other words, the fare structure group has the same fare restrictions but with differ- the demand for new markets, impact of flight promotes a 100 percent sell down to the lowest ent fare values. With launch carrier bmi, Sabre Airline schedule changes, up-sell rates, recapture rates and available fare since there is no distinction in the Solutions introduced the first leg/segment revenue price elasticities. Calibration of a logit choice model product with the exception of the fare value. With management solution with decision support for requires a combination of industry data, airline data this approach, when a flight is first detailed in the restriction-free pricing in 2002. and actual passenger booking sessions that reflect reservations system, there is a single one-way fare The dilemma faced by full-service network the options available and the choices made by in the market. In this scenario, revenue manage- airlines is how to effectively compete against low- passengers. ment should forecast dependent demand based cost carriers in key markets that are predominantly Last August, Sabre Airline Solutions® on current fare class that is open. In addition, active short haul where profitability is the exception rather deployed the world’s first consumer-preference- monitoring and closure of selling fare at the right than the rule. Even established and well-run carriers based demand-forecast model for GOL, Brazil’s time is required to promote sell-up to the higher such as British Airways have been unable to oper- fastest-growing low-cost carrier with a primary hub fare and maximize flight revenues. ate profitably on the intra-European routes, even in São Paulo, as part of the Sabre® AirMax® Revenue Management Suite for O&D control. Hybrid Restriction-Free Tariff Structure Fare Simplification The first attempt at value pricing was made Booking Advance Minimum Cancellation in April 1992 by American Airlines, a bold initiative to class Fare purchase stay penalty (%) Description move to a radical simplification of a fare structure that Y US$279 – – 25% • Products (fare classes) had grown in complexity since deregulation. Instead with identical restrictions of selling seats at several prices, American Airlines B US$249 – – 25% are not independent offered only four types of fares — first class, regular coach and two discount coach fares that had a sev- M US$209 – – 25% • Multiple fares are filed en-day and 21-day advance purchase restriction. The with identical restrictions H US$189 7AP 3 50% carrier’s value pricing initiative also planned to abolish • Promotes less than 100 corporate discounts. Acknowledged by industry V US$169 7AP 3 50% percent sell down since analysts as well ahead of its time, the value pricing multiple classes with initiative by American Airlines, however, collapsed Z US$149 7AP 3 50% different restrictions may when major competitors that had initially matched be open American’s tariff structure quickly retracted, which Q US$129 21AP 7 100% prompted American’s then Chief Executive Officer R US$109 21AP 7 100% Robert Crandall to famously remark “you are only as smart as your dumbest competitor.” W US$99 21AP 7 100% With the objective of providing transparency in fares to customers, low-cost carriers reintroduced In the case of a simplified fare structure with three class groups, within each class group the simplified fares in the late 1990s with an added restrictions are the same and the fare amount is the only component that is different.

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before the arrival of the LCCs. While retaining where CTA is the cost toward acquisition of the Display of availability should indicate if the branded their traditional fare structure with restrictions customer and VTD is the value to date from incep- product, such as premium economy, is available for connecting traffic, network carriers have to tion up to the current time period and the last and at what price, compete against low-cost carriers on short-haul term, which is the most important measure, is the Demand forecasting that models the actual routes. To compete and protect market share, remaining customer lifetime value. is the revenue demand process requires a top-down approach Rt they have to operate in a hybrid environment. in period , is the direct variable cost in period and to first forecasting demand for the branded prod- t Ct t From an inventory control perspective, to oper- i is the cost of capital. ucts followed with a forecast for booking classes ate in a hybrid environment, a cabin on a flight By sorting the CLVs or remaining CLVs mapped to the branded product. can be viewed as consisting of a virtual partition in descending order, the individual measures can The Sabre® global distribution system product to accommodate the optimal mix of custom- be grouped to create target segments for various called Sabre® Branded Fares has been successfully ers on the traditional fare structure in the first marketing programs. An example of the use of CLV deployed with Qantas Airways and Porter Airlines, partition and the optimal mix of passengers for an airline is to execute a promotion for frequent which enables a new way of displaying fares that who purchase unrestricted fares at various flyer customers who have not flown on an airline for is integrated with the agency desktop workflow for price points in the second partition. Hence, a specified period of time. In this scenario, the data is Sabre Connected SM travel agency points of sale. the two types of inventory controls for the two first segmented to only include frequent flyers who passenger types should co-exist on the same have not flown for a specific time period, such as 12 Product Unbundling flight. The consumer choice modeling approach months. Next, these customers can be clustered by It is a well-known fact that for typical consum- can be used to forecast traditional fare classes CLV and specific CLV tiers can be selected for the er purchases, such as toothpaste, deodorant and (independent demand) and restriction-free promotional campaign to achieve the desired mar- automobiles, one-third of all customers purchase fare classes (dependent demand). However, keting objective of generating incremental bookings based on price, one-third based on quality and one- the network optimization model poses some by providing incentives for these target customers third based on brand recognition. However, airlines unique challenges since there are two types to fly. have always been an anomaly. Leisure passengers of passengers — restriction-free and regular Branded fares provide another example of are notoriously price sensitive and business pas- tariffs. The world’s first restriction-free pricing alternate segmentation beyond the booking class. sengers base their decision on price and schedule. solution for network carriers that control inven- To overcome the perception of an airline seat as a Brand loyalty is minimal unless the prices of the tory by O&D was launched with the AirMax commodity, a key initiative in the airline community competing itineraries are very close. To differenti- suite deployment at GOL that uses a new fare- is to focus on the brand, describe the uniqueness of ate their brand and create brand loyalty, airlines are adjustment approach to transform dependent the products offered for sale and communicate the experimenting with offering a no-frills base fare and demand into independent demand and solving product offering to the customer. adding back services for which customers are truly the modified problem with the proven stochas- The standard segmentation of customers willing to pay. tic network optimization model from Sabre for revenue management is based on the booking With the growing emphasis on ancillary prod- Airline Solutions. class. Up to 26 booking classes can be used, which ucts and services as a potential revenue stream that can be distributed through GDSs. This paradigm can augment the bottom line, airlines require the Alternate Segmentation does not change with branded fares since booking capability to sell, distribute and settle ancillary ser- Getting closer to the customer requires classes are still mapped to the branded-fare families. vices across all channels of distribution. This implies an understanding of the underlying data and an However, it spawns several new requirements for that a capability is required to set the prices for ancil- investment in a data management infrastruc- reservations processing, revenue management and lary services, distribute products with differentiated ture. With an investment in the storage and distribution, including: content and conduct financial settlement across all analysis of passenger name record and ticket Ability to maintain booking counts by branded prod- channels. This has significant impact on the capabili- data, there is a growing interest in segmenta- ucts in real time to display availability by branded ties of current airline reservations, global distribution tion of customers beyond the traditional book- product, and revenue accounting systems. ing class to promote brand recognition and cus- Support for the display of availability by branded In a recent study, ATPCO estimated the tomer retention. While booking classes are still product through both the consumer direct Web site opportunity value of a global industry solution to required for inventory control and distribution of and the GDS (The marketing objective of airlines exceed US$9 billion in revenue. Ryanair recently availability through GDSs, alternate segmenta- is to have a travel agent on a self-service online reported that its ancillary revenue rose 31 percent in tion offers a framework for implementing key booking engine describe the branded products to the quarter ending June 30, 2006, outpacing its 20 marketing initiatives. customers when a selection is being made.), percent increase in traffic. At easyJet, ancillary rev- Creation of a data management infra- structure supports a deeper understanding of the customer base and prevents customers from leaving through the revolving door. Branded Fare Families The creation of alternate segments Airline Branded fares beyond the traditional booking class is typically accomplished based on a desired marketing Air Canada Tango, Tango Plus, Latitude, Executive objective. For example, displaying availability to an end consumer based on value score may be Porter Airlines Firm, Flexible, Freedom a desired marketing objective. In this scenario, the customer lifetime value, or CLV, is a mea- bmi Tiny, Economy, Premium Economy, Business sure of the present value of the likely future rev- Promo (Promotion), Econo (Tourist), Flexi (Flexible), Plena (Full Rate), Avianca enue stream generated by a customer. Hence, Ejecutive (Business)

There are several examples of branded fare families adopted by some airlines. Each branded product is a fare family with unique traits that are essentially soft qualifiers bundled into the CustomerLifetimeValue = -CTA+VTD+ product definition such as access to pre-reserved seats, frequent flyer miles, lounge access and baggage count allowed at no charge.

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enue accounted for 8 percent of the global revenue for the first half of 2006. Tactical Fare Management Process An independent survey conducted by Leflein Associates in January 2006 showed that many Global travelers would pay for extra perks such as more Fare distribution distributors frequent flyer miles, more overhead bin space and systems the ability to sit in a child-free section of the aircraft. Other ancillary items promoted by airlines include in- flight Internet access, pre-reserved seats, access to the frequent flyer lounge and ground transportation. The two primary trends that have been identified in the unbundling of airline products at the time of booking include: Airlines review and respond to ATPCO/SITA transmit fare 1. Distribution of a variety of in-flight products and fare changes for changes several times a the next scheduled services (pre-paid seats, , day to airlines and GDSs meals, entertainment, etc.) and services con- transmission sumed either before the flight or after the flight (access to frequent flyer lounge, pre-paid limo pick-up, etc.), Price Apply fare Finalize 2. Selling optional flexibility with the use of their monitoring matching rules fare response fares. Today, the pricing of ancillary services, fre- quently referred to as attribute pricing, typically has the same value across the airline network. During the traditional fare management process, the fare distributors disseminate However, the future evolution of attribute pricing will all fare changes, and the airlines respond to competitor fare actions. vary by market for some ancillary services, such as pre-reserved seats, based on prevailing competitive market conditions. Pricing for ancillary services can be determined by using predictive analytics based available at any Sabre Connected travel agent after Strategic pricing has a longer term view and is the on consumer preferences gathered from the book- the initial rollout. process of promoting an entirely new tariff structure ing process and survey data. for a market. Promoting ancillary services also has an Intelligent Proactive Pricing Traditional airline pricing has relied on reactive impact on revenue management. If certain custom- Tactical and strategic price leadership in a fare matching to respond to competitor actions. er segments are more likely than others to consume market is increasingly viewed as a competitive Sometimes, the reaction ripples through other mar- ancillary services, this should be factored into the weapon. Tactical pricing is the traditional fare man- kets or differs from the original change, inducing a decision-making process when discount allocation agement process of responding to a fare action sequence of changes. The objective of reactive fare controls are established on an airline’s reservations taken on a specific fare in a market by a competitor. inventory system. Hence, the average passenger revenue for a booking class can be augmented with the ancillary revenue forecast before nested seat Customer-Centric Tactical Fare Management Process allocations are determined to ensure that seats pro- tected for booking classes with an ancillary revenue upside receive additional seats. As ancillary revenues Global Fare proliferate, this requires a forecast of the expected distribution distributors ancillary revenues by customer segment based on systems historic consumption that can then be added to the average fare value of the booking class to get a true representation of contribution when the network is optimized. Current revenue accounting systems do not aggregate ancillary services consumed to a flight segment. Hence, the challenge is to enhance the existing revenue accounting systems to track the Airline Branded fares usage of ancillary revenues by flight segment and ATPCO/SITA transmit fare changes several times a Air Canada Tango, Tango Plus, Latitude, Executive booking class. day to airlines and GDSs Sabre Airline Solutions is partnering with Porter Airlines Firm, Flexible, Freedom Midwest Airlines to launch merchandising through the Sabre® Distribution Merchandising Suite with bmi Tiny, Economy, Premium Economy, Business ® enhancements to SabreSonic Res for reservations, Price Quality of Apply rules to Finalize monitoring service reflect quality fare response Promo (Promotion), Econo (Tourist), Flexi (Flexible), Plena (Full Rate), inventory and departure control processing and the visibility of service Avianca TM Ejecutive (Business) Quasar passenger revenue accounting system. This unique new solution will enable airlines to There are several examples of branded fare families adopted by some airlines. Each branded differentiate and sell premium airline seats in a Rather than the recommended fare management process where fare matching is product is a fare family with unique traits that are essentially soft qualifiers bundled into the coach-class cabin, and it will be available initially at product definition such as access to pre-reserved seats, frequent flyer miles, lounge access taken for granted, here, the quality of service is considered to determine the ideal the Midwest Airlines Web site and airport kiosks fare response to a competitor’s fare actions. and baggage count allowed at no charge. during check-in. Premium seat selection will also be

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changes is often to match a competitor’s fare to of the availability data. When an item is not found For airlines that manage seat inventory by ori- preserve market share. in cache, the response to an end consumer can be gin and destination, the value proposition of deploying Traditional tactical fare matching can be based on pre-stored AVS or a direct query to the host an availability proxy for Sabre Connected points of sale replaced by determining the right response based on CRS of the airline to refresh the cache. is the reduction in UCs, which results in incremental the quality of service offered by the competitor that Cached inventory unfortunately is often bookings and improvement in customer goodwill initiated the fare action. Therefore, the tactical fare inaccurate since online channels typically store this since the first choice selected by the customer is response to a specific fare action by a competitor can information by segment class; therefore, operational rarely rejected. From a Sabre GDS perspective, with be an intelligent response as a function of the quality business rules are not reflected in the cache. For the deployment of an availability proxy, all availability of service. If the quality of service offered by a com- airlines that manage their inventory by origin and and shopping transactions from Sabre Connected petitor that initiated the action is inferior, a fare match destination, the segment-class cache does not reflect points of sale will be processed directly by the avail- response may not be the desired alternative. true O&D-class availability. To address this problem, ability proxy for true last-seat availability. Sabre Travel Sabre Airline Solutions was the first to deploy cached Network® partnered with Continental Airlines last year Accurate Availability availability by O&D, class and country point of sale. to launch the availability proxy. Similar deployments The exponential growth in online bookings This was an industry first and constituted a step are planned for other major network carriers. during the past decade has provided customers with improvement in accuracy of availability displays over While focus on the customer has begun in instant access and visibility into competing sched- cached availability by segment class. earnest, the key components of customer-centric ules and fares through Web supermarkets such as There are two types of availability errors — revenue management are still in their early stages Travelocity and Expedia. This unparalleled transpar- type 1 and type 2 errors — that occur when the cache of evolution. As the evolving trend suggests, ency of schedules and fares over the Internet has does not reflect true availability. revenue management, customer relationship man- propagated a bargain-hunting mentality among leisure A type 1 error occurs when the cached avail- agement and how solutions are distributed are con- online travelers, resulting in a disproportionate growth ability for a booking class is open while the class is truly verging with strong interdependencies that require in availability processing due to increased shopping closed in the host CRS. A type 1 error can also result a holistic view to understand business impacts and activity. As a result, the need for greater revenue and in the customer experiencing a price jump, which how the various customer touch points need to be inventory control has not been greater. Due to the implies that the minimum available fare displayed is managed. The continuing evolution of pricing and growth in online shopping coupled with the use of lower when only a higher fare is truly available. revenue management is a winning proposition for robotics for comparison shopping across Web sites, A type 2 error occurs when the cached avail- both the airline and the customer. it is estimated that the look-to-book ratio from online ability for a booking class is closed while the class is A key driver for the migration are the more channels can vary from 100:1 to well over 1,000:1 in truly open in the host CRS. sophisticated demands from airlines based on certain markets. With these high shopping volumes, These errors result is higher UCs, or unable to advances in pricing, revenue management and online Web supermarkets resort to cached availability confirm at sell messages, which in turn result in lost customer-retention initiatives in customer relation- for two reasons: demand and loss of customer goodwill. The deploy- ship management to effectively manage customer 1. Reduction in transaction costs associated with ment of an availability proxy is a step improvement to touch points to build lifetime relationships with the querying an airline’s host CRS for true last-seat determine true last-seat availability by replicating an valued customer base. a availability, airline’s availability and business logic resident in the 2. Faster response times from availability data that is host CRS without submitting the availability requests readily available in cache. directly to the host CRS. The solution also serves The cache is periodically refreshed based on as an availability offload or by-pass for the host CRS Ben Vinod is chief scientist for Sabre Holdings®. algorithms that are a function of the age and usage without losing accuracy in availability responses. He can be contacted at [email protected].

Figure 8. Availability Proxy Deployment for an O & D Carrier Availability Proxy Deployment For An O&D Carrier

AvailabilityAvailability request Request m SSM/ASM,SSM AVS/AVN/ ASM , AVS/AVN e RoutingRouting AvailabilityAvailability response t Host CRS s Response Sabre Connected Hosty CRS solutionsSolutions Sabre Connected S Point of Sale s point of sale n ClassClass o ti availabilityAvailability AvailabilityAvailability request a Request rv e AvailabilityAvailability SabreSabre® AirAir Traffic Traffic Shopping s AvailabilityAvailability response proxy Proxy Shoppingand Pricing and Complex Travelocity e Pricing Complex Response R User e ® in O&D Inventory Controls Travelocity rl Periodic (Weekly ) Load user i O&D inventory controls Periodic (weekly) load A with dailywith net Daily changes Net Changes Airline reservations system www.airline.com www.airline.com Market (Fare ) Value MarketUpdates (fare) value from Airline updates from airline

For an airline that operates with O&D inventory controls, the host CRS sends standard and ad hoc schedule change messages (SSM/ASM) and availability status (AVS/AVN) to the availability proxy environment. The host CRS also sends current O&D controls, such as bid prices, every time there is a change in bookings by flight leg and date. The market values required for the O&D availability evaluation are typically updated weekly by the airline, and net changes are processed daily by market on an exception basis.

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Great Minds Think Alike Airlines can take a “customer community” approach — using emerg- ing technology — to collaborate and help develop the exact solutions and services they need to thrive.

By Phil Johnson | Ascend Staff

t used to be that any given supplier com- for customer service — or the customers vices. They no longer enjoy the luxury of pany’s marketers were pretty certain of themselves — to worry about. waiting to find out what suppliers come I where the “traditional” marketing cycle Today, there’s a new customer reali- up with year to year, then see if and how begins and ends. ty emerging in the marketplace that affects the solutions and services address their Marketing had always been involved how companies market and sell their solu- current needs. in helping the company position itself in the tions and services in a technologically In the 21st century, companies tend greater marketplace — including such key connected business world that seems to to realize, or at least they have a pretty items as the messaging in advertisements be morphing into something just a little good idea, what solutions and services to try to interest and persuade potential different all the time. they need, and they want to define where customers to buy. But as to making sure Business customers now want and they go in the marketplace. That’s good, the solutions and services actually fulfill demand direct input into the development because the technology is now available specific customer needs, that was usually of suppliers’ lineups of solutions and ser- to enable buying companies to take a

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major hand in helping design and develop shutterstock.com by Photo those solutions and services, working right alongside the suppliers’ “idea” people and designers. A case in point involves airlines, which need software and equipment solu- tions to help them effectively and effi- ciently address complex challenges. And airlines today are no longer comfortable allowing someone else to dictate to them what their business needs and priorities should be year-in and year-out. The airline industry moves too fast for that. Most industries, in fact, move too fast for that — and the individual company either has to be nimble or lose its com- petitive edge. Airlines now desire and demand access to the software solutions they’re going to use in day-to-day operations. Furthermore, many airlines want direct input into the development of that soft- ware. And they’re getting both access and input through a new concept called “customer community.” Customer community is a spin-off of sorts from another current trend called “community marketing,” in which the emphasis is not so much on figuring out ways to sell more widgets to more new customers, but rather how to interact to better meet the real everyday needs of A customer community approach enables carriers around the world to work together to help current as well as future customers. develop next-generation solutions necessary to optimally run an airline. There’s a vintage marketing principle that revolves around knowing the cus- tomer and understanding precisely what that customer needs and wants. And the customer-community concept takes the that were never even dreamed of just a is people, not wallets. The people who principle even further. few short years ago. end up not being as effective as they Customers today want to do much The customer-community movement otherwise might be are the ones who try more than just tell a supplier what they has gained particular momentum in the to control and direct, as opposed to listen want, and they’re willing to apply much business-to-consumer space. For instance, and enable.” greater effort than simply participating in Procter & Gamble, one of the most suc- So it’s clear that the customer-com- a focus group to try to define their desired cessful consumer-products companies the munity philosophy is very much attuned to solutions and services. Those customers world has ever known, delves deeply into learning. It’s based solidly on listening to would prefer to have the opportunity to business/consumer interaction. what customers want and to what others actually run parts of the businesses they “Our vision is simple,” said A.G. who have a vested interest may be able work with — to sit right beside develop- Lafley, president, chairman and chief to contribute. ers and instruct them in inserting features executive officer of Procter & Gamble. NBC Universal’s Beth Comstock may they want and need. “We want P&G to be known as the have summed it up best when she said, Benefits of the customer-communi- company that collaborates — inside and “In the digital age, community is all about ty model include shorter time to market out — better than any other company in gathering people with shared interests in creating solutions and services that the world. and giving them a platform to interact with customers have called for, with much “I want us to be the absolute best each other, to engage in relevant content better product quality as well as lower at spotting, developing and leveraging and to create something new.” overall cost that results from on-the-spot relationships with best-in-class partners in This is the essence of customer customer input as the product is being every part of our business.” community, and its value can be felt in developed. Or as eBay’s savvy former President numerous industries. It is, in fact, being These capabilities fit right in with and CEO Meg Whitman said, “When we put to very good use in the business- the Web 2.0 communications and inter- hire people, they often don’t understand to-consumer arena at many companies. action technologies of today: MySpace, what eBay is. Often your instincts — com- Fewer, however, have so far succeeded in Facebook and LinkedIn — even “virtual” ing from more traditional companies — are putting customer community to the test in worlds such as Linden Lab’s Second Life wrong. business-to-business dealings. — all provide connectivity and capacity to “We have to enable the community, Among airlines, that situation is interact in substantive business processes we can’t direct them. Our community changing. For example, Sabre Airline

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Solutions® now maintains an online portal Essentially, then, Sabre Airline ultimate beneficiaries of solutions and ser- devoted specifically to customer com- Solutions customers are collaborating vices that are greatly improved thanks to a munity among its global array of airline by participating in solution concept and massive technology-enabled leveraging of clients. development, then essentially apportion- collaboration within the industry. And that bodes well for opportu- ing its new-product budget to aggressively And with today’s common trend nities within that customer community pursue the solutions customers say they toward shortening or compressing product- to benefit from the technological and most fervently need and want. development cycles, it’s more important software best practices that are being Such a “customer-selection” pro- than ever to apply all the brainpower avail- devised and developed for and by various cess — again, enabled through technology able to quickly develop as many new and members of the community at any given — is a quantum leap beyond traditional useful solutions and as much advanced moment around the world. business practices that have previously functionality as possible. Industry collabora- It is the goal and intent of Sabre relied on internal teams of marketers and tion, among airlines as well as between the Airline Solutions to provide tools, resourc- production people trying to figure out airlines and their primary service providers, es and support in fostering customer which solutions and services they think can play a major part in that equation. interaction — to help make sure each and might be most important to develop. So the customer-community move- every customer has the greatest possible None of this, of course, means that ment — empowered through technologies opportunity to provide input in the concep- there aren’t still other challenges to be that continue to emerge more rapidly than tion and development of its solutions and addressed and overcome in the process ever — figures to be of ongoing and lasting services. of showing airlines the multitude of col- value throughout the airline industry for Solution development is an area in laborative possibilities through customer decades to come. a which huge industry impact may be real- community to provide airline constituen- ized. On the Sabre® Community Portal, a cies with the latest and finest solutions Sabre Airline Solutions product group now and services available in the industry encourages customers to suggest product today. ideas, then to register their votes on a list But as the years pass, addressing of those customer-proposed solutions, and overcoming those challenges will be which will then be used to apportion fund- well worth the effort — particularly to Phil Johnson can be contacted at ing on the various solution selections. the airlines’ consumers, who will be the [email protected].

+count it up

1.6 million 170 years 56 minutes The number of passenger flights that The equivalent of flight delays for The average delay of a late flight were delayed by at least 15 minutes the first 11 months last year, up during the first 11 months last year, during the first 11 months of 2007, steadily from 98 years lost on 1 million which has grown from 49 minutes in according to the Washington Post. flights during 2003, according to the 2003, according to the Washington Washington Post. Post.

19,000 1 million 50+ The number of transactions that are The number of travel transactions pro- The percentage larger the Sabre® global ® processed through the Sabre® global cessed each minute through the Sabre distribution system is than Visa. It’s the distribution system every second. global distribution system during peak largest transaction engine in the world. times.

ascend 75 Photo by shutterstock.com by Photo The Highest Peak

The most innovative and creative resources of Sabre Airline Solutions ® are brought together in Project Denali — designing and developing the industry’s foremost movement-control software.

By Phil Johnson | Ascend Staff

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fficient, cost-effective management of British Airways, in choosing to partner scheduling and daily operations is, with Sabre Airline Solutions in the interim Eobviously, critical to the wellbeing of launch of Movement Manager, was looking any airline. ahead to furthering its traditional leadership And during the past decade or so, vari- role among world airlines, as well as its ous vendors have developed progressively potential to take greater advantage of the better and more advanced software to help new capacity and capabilities to accompany airlines get a firmer handle on their functions the opening of Terminal 5 at London’s glob- in these vital areas. ally significant Heathrow Airport. Still, the need to become even more The carrier will implement a temporary skilled and proficient in operations and sched- version of Movement Manager while the uling is an essential requirement that involves advanced version is being finalized. As part serious competitive factors for airlines of of its movement management operations, every size and shape the world over. British Airways will use the system to help A couple of years ago, Sabre Airline precisely and accurately control and track Solutions — understanding the cost and com- each of the airline’s assets that moves, petitive implications to its airline customers including aircraft and every piece of equip- — embarked on an ambitious project to com- ment as well as logistical aspects such as pletely redesign and upgrade its movement scheduling and other operational factors that management software with highly advanced are required in both day-to-day and long-term functionality, usability, scalability and integra- airline business. tion features to establish Sabre® Movement The Sabre Airline Solutions/British Manager as the ongoing industry standard. Airways connection makes a lot of business Because of the mountain-climbing, sense: a partnering of two industry leaders in quest-pursuing nature of the immense soft- extending and expanding the utility of the fin- ware development that would be required, est movement-control software tools in the Sabre Airline Solutions named the project world of aviation and global logistics. after the highest peak in North America: Sabre Airline Solutions has designed Denali. the next-generation Movement Manager to And while the work is not yet totally provide functionality, usability, scalability and complete, extensive progress has been made integration features second to none — fully — to the point that launch partner British suited to serve any airline in improving Airways is now making day-to-day practi- operational and scheduling efficiency and to cal use of the advanced-version Movement help significantly lower an airline’s overall Manager, even upgrading the airline’s opera- cost structure. tional approach in ways designed to serve the The newest version of Movement airline well into future decades. Manager features improved and expanded Photo courtesy of Airbus of courtesy Photo

As the launch partner for the next-generation Movement Manager, British Airways is making practical use of the solution in its day-to-day operations.

ascend 77 products Photo courtesy of Airbus of courtesy Photo

British Airways will employ a transient form of Movement Manager while the advanced solution is being completed. The carrier will use the system to help accurately manage and monitor each of the airline’s moving assets, including aircraft and every piece of equipment.

capabilities in critical areas such as tail assign- Manager technology envelope — and by much quicker, with much more favorable ment and aircraft attributes as well as a seam- so doing to deliver a product with a tangi- bottom-line performance. The quick transi- less capability to work in tandem with each bly lower total cost of ownership through tion period from an older system to the new of the other products in the extensive Sabre the advanced capabilities of the latest Movement Manager means much lower Airline Solutions portfolio. technology. costs of initial installation. Improvements to Movement Manager Developers working to significantly Furthermore, a stated objective from encompass a next-generation solution slated upgrade the system’s capabilities and per- day 1 of Project Denali has been to provide a to meet business requirements that are fully formance have focused on greatly improved Movement Manager framework for managing expected to change and grow throughout the product usability — essentially making inevitable changes in the airline industry with- product’s lifecycle. Movement Manager much easier to train on out requiring an entire rebuild of the software Also, an important consideration in and use day to day, thereby leading direct- infrastructure. Rather, through open-systems Project Denali involves upgrading the capabili- ly to increased productivity among airline technology, the newest-generation Movement ties of Movement Manager to provide airlines employees, both new and experienced. Manager enables the easy addition of new fea- the ability to configure applications to their During the Movement Manager devel- tures and functionality as they develop — an own needs. Movement Manager conforms to opment process, usability has been posi- immediate reaping of the lower-cost rewards. business best practices, with the flexibility to tioned front and center, with the aim to By working with both customers and fully support airlines as they transition toward reduce what’s often been months-long train- usability specialists, the Project Denali team more productive best practices in the future. ing periods for analysts to learn to use new has consistently improved and enhanced usabil- The newest version of Movement movement-control software in the airline ity features of Movement Manager during the Manager is designed to provide a robust industry (or for newly hired people to train development process — making the system framework to enhance any airline’s existing on the software) down to a matter of three to easier, for example, to become comfortable functionality — plus the capability to easily four weeks — even, as a realistic objective, with and to train on — and the project team and routinely add new features and functions down to one to two weeks. will continue to do so as the next-generation during the life of the product. Such a low required training timeframe product is further upgraded. One Project Denali mandate has cen- can save enormous investment by airlines, Project Denali has not consisted of tered on strongly pushing the Movement putting their people into productive mode a simple enhancement or slight improve-

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ment of the former version of Movement components to be leveraged across other various layers of software and helps make Manager. It has involved a complete over- Sabre Airline Solutions applications, and the entire system more cost effective haul and redesign of the former system, train on the latest technology. through scalability and more efficient use to the extent that the next-generation In the context of 21st-century air- of hardware. Movement Manager essentially represents line operations, this newest Movement And because the latest Movement a new product, with technological capa- Manager has built-in implementation capa- Manager has been built from the ground bilities that had not even been dreamed of bilities, enabling it to be installed parallel up, it encompasses numerous integration when the original product was introduced to existing systems — be they some com- advantages including what is fundamental- a number of years ago — features such bination of an older version of Movement ly a platform-independent database struc- as full-solution compatibility as well as Manager, a system from a different vendor ture, which allows the use of essentially improved and expanded tail-assignment and/or a system designed by the airline any database, from IBM to Microsoft to and aircraft-attribute capabilities. itself. Oracle. Movement Manager is also designed Running systems parallel to one Inspired by the legendary success of to be fully and easily integrated with other another serves to avoid lag time during Toyota manufacturing procedures, which solutions in the Sabre Airline Solutions installation, minimizing operational impact. have incorporated “Test Driven Design” portfolio to constitute a seamless sys- Installation of the newest Movement processes in the automotive world — basi- tem of applications throughout an airline’s Manager is specifically designed to occur cally enabling the testing of design prac- operations, scheduling and other activities. with minimal interruption of current airline tices before the final product is built — the The ease of integration enables an airline operations. Project Denali team has made ample use to incorporate new technology as more All of these factors, such as quicker of Test Driven Design concepts in assur- products are upgraded and introduced to training and adaptation characteristics, ing that Movement Manager functionality help bring greater efficiency and productiv- help make the transition period from meets rigid test criteria. ity to the airline’s day-to-day as well as any older system to the new Movement The result is that well-researched long-term business. Manager remarkably short, for a very quick business-function requirements have The idea behind the next-generation switchover including full integration with defined the design of Movement Manager, Movement Manager is to incorporate the existing systems. And quick implementa- meaning it is designed with its real-world best and latest technological tools and tion capability translates to lower cost of requirements foremost in mind. components — installed in an open archi- installation. There are three primary Movement tecture for a system that’s easy to upgrade By way of its total system redesign, Manager components that enable airlines as further developments occur — to help Movement Manager now features what is to realize significantly lower total cost of enhance usability, make applications con- known in the software industry as “n-tier” ownership. figurable, develop a repository of reusable architecture, which effectively separates In addition to the first component — the enhanced usability that reduces training time Photo by shutterstock.com by Photo for employees — the system’s functionality is closely attuned to what an airline actu- ally needs in its day-to-day as well as long- term operations and scheduling. Movement Manager is designed to function the way the airline functions and is further customizable to the individual airline’s specific functional requirements. The third lower-cost characteristic of Movement Manager revolves around the fact that an airline is able to realize savings based on less hardware and software requirements for Movement Manager as a whole. So the airline can better manage its system costs. Any airline that invests in the new-gen- eration Movement Manager is fully expected to see immediate value — while Sabre Airline Solutions will continue to enhance the prod- uct to make it work even better and smarter over time. And Sabre Airline Solutions will apply the advanced technological ideas, compo- nents and functions that have been developed for Movement Manager to upgrade and enhance other parts of the broader Sabre Airline Solutions portfolio, further benefiting airlines. a In selecting Sabre Airline Solutions for its movement management operations, British

Airways sought to further benefit from the solution’s new capacity and capabilities to accom- pany the opening of Terminal 5 at London’s Heathrow Airport. Phil Johnson can be contacted at [email protected].

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Raising Revenues

Tightly integrated, next-generation revenue management technology produces optimal results for less-restricted pricing structures found in non-traditional, hybrid airline models.

By Michelle Fischer and Steve Packwood | Ascend Contributors

he challenges airlines face from rising management segments the marketplace by Choice-based forecasting and revamped costs are well documented: high fuel placing various restrictions on fares, such as optimization to handle the combination of Tprices, expensive labor contracts and Saturday night stay over and advanced pur- both restricted and unrestricted fares on a rising maintenance fees. While airlines and the chase requirements, then derives individual network; media debate and discuss these issues, airline segment-class (or origin-and-destination) fore- Conditional business rules executed in real revenue management departments around the casts and ultimately determines the optimal time to enforce availability strategies and world are grappling with their own challenge: inventory controls. While this approach works respond to the competition; how to increase airline revenues to cover well for traditional pricing structures, it does Flexibility to independently manage inven- rising costs in an increasingly competitive not generate optimal results for less-restrict- tory by fare products via mixed nesting environment. ed pricing schemes that can result in an airline structures; There are two commonly acknowledged having one effective price in the market at any Faster response to changing flight condi- revenue challenges facing airlines: one time. tions, including significant bookings, cancel- Major corporations are shifting to a more During the past five years, airlines and lations or schedule changes. cost-conscious culture. The distinction industry experts have come to agree that the By combining the latest version of between business and leisure travelers is theory, and practice, of revenue management Sabre® AirMax® Revenue Manager with Sabre® blurring with more of today’s business trav- needed to be adjusted to satisfy the require- AirMax® Low-Fares Manager and SabreSonic® elers booking in advance, flying in economy ments of carriers operating in a hybrid pricing Inventory, today’s airlines have a tangible and searching for low fares to help their environment with a mixture of traditional solution to tackle their revenue challenges and company’s bottom line. restricted and less or unrestricted fares. contribute to their company’s growth. Today’s consumer has more information Sabre Airline Solutions® and its air- and choices in air travel than ever before. line partners spent several years researching Planning For Revenue Maximization With a few clicks on the Internet, travelers revenue management solutions to address Regarding revenue management plan- have access to countless permutations and the market needs stemming from the new ning, the next-generation Revenue Manager combinations on how to get from point A to challenges resulting in the development of features an advanced customer-choice-based point B. Azirlines are being forced to com- the latest-generation revenue management O&D forecasting framework designed to closely replicate customer booking behavior. Highlight It incorporates passenger name record data and deploys a top-down, two-step approach of estimating demand directly at the market level Airlines using both Revenue Manager and and then employing customer-choice models to distribute demand from the market level SabreSonic Inventory have the unique advantage to the itinerary level. The passenger-choice modeling utilizes different choice attributes, of Sabre Airline Solutions’ real-time revenue including fare, elapsed time, time-of-day and origin-point presence, and it takes into account the interrelation between services as well as management solution, which offers the ability to forecasts changes in demand due to changes in fare. Revenue Manager represents the first provide updated optimal inventory controls in real revenue management system to use forecast- ing methodology that incorporates customer time based on conditions in the marketplace. behavior through PNR data. Such a framework provides for the convergence of forecasting in revenue management and network plan- ning, leveraging the integration between Sabre pete primarily zon schedule and price. planning and execution solutions that cater Airline Solutions’ scheduling and revenue man- These challenges have called the fun- to the specific challenges of hybrid airlines. agement solution suites. damentals of revenue management into ques- These solutions incorporate state-of-the-art Revenue Manager also incorporates tion. The traditional methodology for revenue functionality, including: a hybrid solution framework to handle the

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varying behavior of product- and price-sen- ity, country point of sale and International Air airlines are reacting faster than ever before to sitive passengers. The optimization process Transport Association travel agencies. changes on their flights. appropriately handles the sell-down behavior The innumerable combinations of actions The Sabre Airline Solutions revenue man- associated with price-sensitive passengers. and conditions enable analysts to implement agement planning and execution solution also In addition, Revenue Manager incorporates precise inventory strategies beyond the traditional includes the competitive revenue management a business rules interface for analysts to adjustments of class authorizations. For example, feature within the Sabre® AirMax® Revenue proactively influence the system based on airlines can target local points of sale to limit avail- Management Suite, an add-on component that airline business strategies and policies. Such ability, allowing higher-valued international traffic provides current competitive revenue manage- influences are then used within the solution to fill the plane and improve yields. Combined ment intelligence, including shopping data analy- to constrain system-generated results, signifi- with the intuitive graphical user interface, airlines sis. Insight into competitive information enables cantly improving the adaptability of the solution can quickly adjust their business rules to adapt to carriers to answer some of revenue manage- to the business needs. changing market conditions. ment’s most difficult questions including: While the new, leading-edge Revenue How is a carrier’s availability relative to competi- Manager provides unique benefits for low- Faster Response Through Real-Time tors? cost carriers, it provides airlines of any size Revenue Management Which flights are under or over priced relative to similar advantages in revenue management. Airlines using both Revenue Manager and the competition? Revenue Manager provides seamless integra- SabreSonic Inventory have the unique advan- Can inventory controls be adjusted to account tion between Low-Fares Manager modules tage of Sabre Airline Solutions’ real-time revenue for other airline availability around high-volume and Revenue Manager, creating the industry’s management solution, which offers the ability to travel dates? best framework for revenue management provide updated optimal inventory controls in real Combined with the real-time integration decision support in today’s hybrid fare environ- time based on conditions in the marketplace. between Revenue Manager and SabreSonic ment. This solution can be delivered through When integrating this technology, analysts Inventory, the competitive revenue management Sabre® eMergo® Web Access, which provides define a threshold for booking and cancellation component gives airlines an advantage over their software as a service. activity within SabreSonic Inventory. When there competition and agility in the marketplace. a is a schedule change or a threshold is reached, Executing On Optimal Inventory SabreSonic Inventory sends an alert notification Controls to Revenue Manager, which reacts to these alert To fully recognize the value of the advanced messages and automatically re-optimizes, both decision-support functionality available in Low- for individual flight departures and based on the Michelle Fischer is solutions director Fares Manager, airlines can leverage SabreSonic amount of alerts, the complete network for a for SabreSonic Inventory and Steve Inventory to flawlessly execute their optimal particular departure date. The result is optimal Packwood is solutions director of inventory controls. SabreSonic Inventory is an inventory controls immediately updated in the revenue management solutions for open-systems inventory platform that provides marketplace without the wait for the nightly Sabre Airline Solutions. They can be airlines several key differentiators beyond legacy download and optimization. By tightly integrating contacted at [email protected] reservations systems. Revenue Manager and SabreSonic Inventory, and [email protected]. First, SabreSonic Inventory enables airlines to create multiple, mixed nesting structures on their network to improve fare product segmenta- tion. For example, a leg-segment airline with a mix of unrestricted and restricted fare products can choose to create two sets of parallel nested fare classes: one for unrestricted, highly competi- tive fare classes and one for restricted, traditional fare classes. By separating the classes, revenue management analysts can force up-sell on their restricted fare class hierarchy while maintain- ing availability and competitive presence in the unrestricted fare classes. The nesting functional- ity within SabreSonic Inventory was primarily designed to be flexible — airlines can create and implement up to 99 different structures on their network. This inherent flexibility enables carriers to be agile and easily move from one control strategy to the next. SabreSonic Inventory also enables airlines to create conditional business rules to execute rev- enue management policies in real time. Through the graphical user interface, analysts provide two inputs to their business rules: Action: Analysts select from a comprehensive As business travelers book more of their travel in advance, fly economy class and search list of actions including inhibit availability, sales for the lowest possible fares to save money for their companies, the distinction between and passenger waitlists. business and leisure travelers becomes more blurred, creating a revenue challenge for Condition: Analysts select from an extensive many airlines. set of conditions including flight, departure date, market, day of week, class availabil-

ascend 81 regional

Prime Partners Partnering with the right solutions provider presents a long-term business relationship that should be built on common goals and a command for service excellence.

By Suzanne Cottraux and Jeanette Frick | Ascend Contributors

82 ascend company Photo by shutterstock.com by Photo s economic pressures continue forc- how deep its expertise is in one particular area. ing airlines to reduce or repackage the Working with a total solutions provider translates Aservices they offer their customers, while into greater efficiency, ease of implementation working to maintain customer loyalty, the con- and continuity for an airline’s business. cept of “service” has never been as relevant Sabre Airline Solutions®, for example, or multi-faceted as it is today. And most airline brings to its air transport partners industry lead- executives probably feel pulled in myriad direc- ership in airline solutions and services, reserva- tions trying to meet the changing demands tions and departure control, airline distribution, of customers, employees, shareholders, the and consulting services. Through a strategic mix community and the government, while striv- of solutions, services and consulting expertise, ing to manage costs and stay in the proverbial Sabre Airline Solutions helps its aviation partners black. How do airlines identify the solutions and cut costs, increase revenue, streamline opera- services necessary to meet these challenges? tions, improve workflow, raise productivity and More importantly, how do they implement very enhance the bottom line. This commitment to specific solutions while continuing to operate service excellence is unmatched in the industry. their day-to-day business smoothly? The answer can be found in strategic part- 3. Does the solutions provider offer a nership with a solutions provider that can evalu- full continuum of support? ate the business holistically and then combine Selecting a solutions provider, negotiat- the right technology, services and expertise to ing the contract and moving forward with the deliver the most value-added solutions. Whether implementation of a solution, service or both an airline is currently working with a solutions represents just one dimension of an airline’s provider or considering enhancing its current relationship with its solutions provider … yet for capabilities with outside support, it should con- many service companies positioning themselves sider five key points to ensure it selects the top as strategic partners, this is the full extent of business partner: their repertoire. To realize the most meaningful, measurable and lasting impact on business per- 1. Does the solutions provider formance, an airline needs a solutions provider understand the airline’s complex that offers a full array of service practice areas so issues? at any given point in the engagement, its issues The airline industry continues to change, will be addressed by expert professionals. driven by external factors ranging from security At Sabre Airline Solutions, for example, concerns, government and industry mandates, the delivery and customer care portfolio is dif- and environmental sustainability challenges to ferentiated by eight key service practice areas internal factors including shifts in customer buy- including: airline business consulting, solution ing patterns, and management of costs and dis- approach, solution delivery, knowledge transfer, tribution strategies. And while many airlines have quality assurance, customer community, global restructured their operations and have adapted service centers and customer care. Within each to the post-9/11 world, the emergence of new service practice are proprietary processes and hubs, not to mention the debut of new entrants disciplines designed to drive customer-focused and business models, has further complicated results. For instance, airline business consulting the environment in which airlines operate. comprises a comprehensive array of disciplines The ideal solutions provider will offer that include organizational audit, build-operate- more than a single-dimension understanding transfer model, benchmark and competitive of these and other issues; it will offer a com- tracking, best practices and strategic planning, prehensive understanding of how these issues a service bureau, and turnaround consulting. inter-relate and possibly converge to affect The customer community practice includes an short- and long-term business performance. online community portal, customer conferences The provider’s ability to address the converging and councils, solution planning, and a Sabre issues impacting an airline’s business should be Airline Solutions executive advisory board. The evident through a review of case studies as well idea is that each practice area is substantiated as the depth, breadth and longevity of its service by processes, systems and people dedicated offerings. to achieving the best possible results, and that the practice areas are integrated to provide a 2. Does the solutions provider offer full range of support no matter when or why it a portfolio that is equally broad and is needed. deep? Breadth of portfolio plays a critical role in 4. Is the solutions provider as a provider’s ability to meet an airline’s diverse results driven as its airline partner? needs. Because the airline business is integrated It’s important to evaluate a provider’s from its marketing systems through sales, cus- offering to ensure it truly is a solution that tomer service and operations, a provider that contains the right technology and supporting offers tightly integrated solutions can help meet services that will integrate well into an airline’s an airline’s challenges more efficiently and effec- business environment, as well as deliver value tively than any single-service provider, no matter and a timely return on investment. The pro-

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vider should have a clear understanding of an 5. Does the solutions provider have airline’s business goals and processes and be a company culture based on the qualified to provide business consulting and same principles it’s trying to sell? process-change support. A provider can design solutions to Sabre Airline Solutions’ highly experi- address an airline’s problems. It can also enced consultants work with its airline part- acquire expertise to provide a competitive ners to ensure that new solutions or service edge to its airline partners. Innovative tech- integration conforms to their current business nology is an enabler. Smart algorithms are processes, paving the way for a successful differentiators. But as solutions providers, implementation, full adoption of a solution and each employee within a provider’s organiza- optimal realization of the solution’s business tion must think and act as a business partner value. to their airline customers. The provider should When talking with a solutions pro- proactively evaluate problems and opportuni- vider, the discussion should center on the ties from an airline’s business perspective. It airline’s business needs and how best should look beyond its broad range of solu- to measure its success. For instance, in tions and collaboratively partner in an airline’s catering, product overages or shortages unique success. can cause budget and customer satisfaction The service journey with a provider is issues. And in revenue management, small a long one, beginning with the sales process changes in the management of load factor through delivery and into maintenance and can have significant impacts on profitability. enhancement, when needed. A provider’s A true partner and solutions provider will be attention needs to be clearly focused on how focused on these business issues and assist it’s anticipating an airline’s needs rather than in measuring the success of the implemented merely responding to them. solution. Selecting a solutions provider is a deci- Post-implementation support and fol- sion that should be made deliberately, with an low up is also critical. A provider should eye toward a long-term partnership based on always follow up on its promise to deliver mutual success as measured by an airline’s value. It should have the business expertise improved performance. a necessary to ensure that an airline’s con- tinued usage fully leverages industry best practices, that its users are proficient and that the expected ROI is achieved. In addition to providing a full-service support function, a top Suzanne Cottraux is a corporate provider brings relevant industry and business communications principal at Sabre information to the table through additional Holdings® and Jeanette Frick is vice business consulting services, advanced train- president of delivery and service ing and networking opportunities across the excellence at Sabre Airline Solutions. airline community so all airline partners have They can be contacted at ready access to new information with which [email protected] to continue to evolve their businesses. and [email protected].

+count it up 2017 315 million 1.5 million

The year by which the airline industry The percentage representing IATA’s The weight in tons of CO2 saved

aims to use 10 percent alternative goal to improve fuel efficiency (and CO2 last year by Middle East and North fuel sources for aircraft fuel needs, emissions) between 2000 and 2010, Africa airlines as a result of IATA’s according to the International Air which was already ahead of schedule fuel efficiency initiative, according Transport Association. two years ago. to the International Air Transport Association.

84 ascend company Photo by shutterstock.com by Photo

Best Of

Both Worlds By Bill Glover | Ascend Contributor

An airline’s computing systems must provide high performance, reliability and the flexibility to change with today’s business needs. The most efficient way for carriers to accomplish all three is through a hybrid solution that shares the strengths of both specialized processing and general computing.

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riving to work in an electric golf cart would be a risky choice in rush-hour TPF And Commodity Systems Dtraffic, but fuel costs for a huge, luxury sport utility vehicle might make the paycheck TPF Commodity at the other end seem less worth the drive. Automobile consumers have embraced hybrid vehicles that take advantage of the power and Architecture Monolithic Distributed reliability of the conventional internal combus- tion engine but also use a battery and electric Inter-process Communication Shared memory Network motor to get the most out of the stop-and-go traffic of a typical commute. More than just a snazzy place to keep those organic foods Scaling Vertical Horizontal bumper stickers, hybrids are cheaper to oper- ate without sacrificing the performance and Acquisition Cost High Low safety of a traditional automobile. Executives in the travel industry face MTBF Longer Shorter similar tradeoffs around computing resources where commodity hardware offers cheap computing, but powerful systems specially TPF and commodity systems differ significantly in key areas such as their architecture, scal- designed for transaction processing still domi- ing and costs. These differences must be considered when implementing systems designed nate. Can a hybrid approach meet the needs to hold large amounts of data while operating in real time. of the travel industry for computing that is economical, scalable and reliable while still handling some of the highest transaction volumes in the world? Avoiding software problems is much Acquisition cost — Commodity hardware is more complex. It requires careful change cheaper to buy than hardened, specialized What Does It Take? control and testing. Documentation has to be hardware. Getting people where they want to go crisp and clear to avoid misunderstandings, MTBF — Commodity hardware is designed takes coordination, and coordination takes and procedures must be constantly rehearsed and produced to be inexpensive and flex- communication. All of that communication to avoid surprises to keep a system up 24 ible, not for extended use under heavy load. creates a huge number of transactions hours a day, seven days a week, decade after Imagine running a desktop machine at 90 flowing through travel IT systems — 15,000 decade. These things are easier to do with percent for months on end. It would quickly to 20,000 transactions per second for large a specialized transaction processing system, fail due to heat stress. Commodity servers distribution systems. These systems need but, these days, more and more systems are more robust but built using the same to be able to distribute those transactions, are built on a commodity, general-purpose basic technology. which may be long or short lived, over computing infrastructure. processors in such a way that no processor What Would It Take To Use is too busy to take the load and no proces- What’s The Difference? Commodity Hardware? sor is sitting idle with nothing to do. This There are significant primary differ- Based on these differences between is more complicated than just asking the ences between a specialized transaction pro- the two types of systems, what would it take processors if they have room for another cessing facility, or TPF, system and general to build a system from commodity hardware transaction. Each one of those transactions purpose, commodity systems: that can do the job of a TPF system? A matters to someone, but they have very Architecture — A monolithic architec- distributed system typically is separated into different priorities. A transaction related to ture puts all of the transaction processing tiers. The resource tier (databases) would run boarding passengers needs to get through together in one box, while a distributed on a separate machine from the business no matter how busy the system may be, architecture puts different processes in logic while the presentation tier (Web pages) while a shopping transaction might be able different boxes. For instance, one box may would operate on still another machine. This to a wait a short while to let more critical be a Web server and another a database makes end-to-end transaction monitoring transactions through during especially busy server. more difficult. The monitoring records from periods. Making those sorts of decisions Inter-process communication — In a mono- each machine will have to be compared and takes a smart load-balancing system that lithic architecture, the processes share the transaction identified in some way as it can tell with configurable priorities the dif- the same machine and are able to com- hops from machine to machine. The individual ference between two transaction types and municate directly with each other using systems must also share the responsibility for give preference to one over the other. the machine’s own memory. Distributed security. Controls on one tier will not neces- With so many people depending on applications typically communicate over a sarily protect another tier. There may be tight them, travel IT systems need to be reliable. network. Imagine a Web server connected login restrictions at the presentation tier, They can’t be down due to a software or to an application server and the application for instance, but that won’t by itself protect hardware problem. Reliable hardware is server to a database server over a local area the database tier from being accessed by relatively easy, just buy components with a network or the Internet. the wrong person. Throttling and smart load mean time between failures, or MTBF, long Scaling — Scaling refers to the way the balancing are also more difficult with com- enough that they can be replaced according system adds capacity to grow over time. modity systems. Typically, these systems use to a scheduled maintenance plan. The sort A system that scales vertically adds more a hardware load balancer that understands of hardware with a long enough MTBF for memory and more processors in the same how to distribute load according to relatively breathing room comes at a premium, but machine while a system that scales hori- simple algorithms, but to conduct smart load can pay for itself in total cost of ownership. zontally adds more machines. balancing, the system must use software

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load balancing and throttling that understands IT industry. This helps make the skill pool of The Duck Test transaction priority. No single off-the-shelf knowledgeable people much larger than for Those familiar with mainframes and the system currently offers all of these capabili- specialized computing systems such as TPF. discussions around offloading applications ties, so offloading TPF requires custom devel- Commodity hardware also tends to be more from those systems may be surprised that opment and extensive testing. The business flexible and improves more rapidly. But how this article hasn’t used the term “open sys- logic must also be designed in such a way can the benefits of commodity computing be tems.” The term is somewhat dated and that it works well with smart load balancing realized while limiting some of the liabilities? arguably obsolete. In the 21st century, TPF and can report when a particular machine is can run on a commodity laptop system, and too busy to handle more transactions. This Son Of Big Iron To The Rescue mainframes can run Linux and Java. A laptop puts some constraints on how the business To take on some of the jobs previously cannot, however, handle the transaction loads logic can be distributed in the system. handled by TPF systems, general-purpose of more than a modest-sized airline … yet. To handle the high transaction volumes, commodity systems have had to step up to And it certainly does not have the MTBF a commodity system must scale horizontally. the next level of maturity. Previous articles required for reliability. So is a system that This has implications for the overall complex- in Ascend have discussed service oriented runs TPF at the center for transactions on top ity and reliability of the system. Examine architecture, which provides some pieces of of Linux and commodity hardware and that is the low end of the range that was previ- the puzzle by externalizing security and end- accessed exclusively through XML services ously discussed for a conservative estimate, to-end monitoring and providing critical buffer- an open system? Is an organically managed 15,000 transactions per second, and make ing and self correcting throttling through pull- grid computer farm running on commodity a generous guess that each machine can based messaging. Cutting-edge technologies, hardware but presenting the behavior of a handle around 100 transactions per second, such as organic server management and grid single machine a mainframe? To quote the sustained. Then assume 150 machines are computing, offer to help solve the problem poet James Whitcomb Riley, “If it walks like needed for the transaction processing busi- of managing huge numbers of short-lived a duck and quacks like a duck, I would call it a ness logic. Adding machines for databases machines in such a way that they appear to duck.” What matters is that the system does and Web servers, load balancers, logging be one big system. These technologies are what it needs to do with high performance, monitors and a few other miscellaneous still relatively new and maturing, and they reliability and the flexibility to change with the systems, one can reasonably assume 200 have primarily been used for compute-inten- business needs of the industry. The most machines. If the MTBF for a given machine sive applications such as protein folding and cost-effective way to do that today is to share is around two years, which is not unusual in rendering graphics. Systems with extremely the strengths of both specialized processing commodity hardware, a machine could expect high reliability needs, huge transaction vol- and general computing, a hybrid — minus the to be replaced every three days on average as umes and massive input/output requirements organic foods bumper sticker. a part of scheduled maintenance. will challenge these technologies and drive additional innovation. Then Why Bother? Sabre Airline Solutions® has approached If building a system with commod- technology of all sorts from a strategic posi- ity hardware is so difficult, why bother? tion that, while aggressive, values depend- There are several advantages to commodity ability and cost-effective solutions for its cus- hardware. The first and most obvious is the tomers. A hybrid solution currently provides lower acquisition cost. Another advantage is the best balance of flexibility and stability, but that because general purpose computers can careful attention to the end-to-end solution Bill Glover is chief architect for Sabre be used in many different kinds of applica- positions the technology company to adopt Airline Solutions. He can be contacted tions, they are more widely adopted in the new approaches efficiently. at [email protected].

+count it up 2.1 billion 12 million 16.5 The amount of savings in U.S. dollars The amount of savings in U.S. dollars by The percentage of airline fuel effi- that was achieved across the globe shortening routes in Bahrain, Iran and ciency improvements since 2001, last year based on IATA’s campaign Algeria, improving departure, approach according to the International Air to shorten routes, improve opera- and landing procedures in Doha and Transport Association. tional procedures and share best Yenbou, according to the International practices in fuel management. Air Transport Association.

ascend 87 regional

On-time performance has been a growing issue for the global aviation industry during the past few years, and Chinese carriers are no exception to the late arrivals due to numerous flight delays.

By Rakesh Narayanan | Ascend Contributor The Test Of Time Photo by shutterstock.com by Photo

88 ascend regional

surprise to many first-time visitors of its reputation on the efficiency of the similar characteristics. Delay standards to China is that this vast country transportation systems installed in time (+15 minutes, +25 minutes) are different A only has a single time zone — for the Olympic Games. Reliability and from one airport to another. Individual Beijing Standard Time. Under “normal” on-time performance are key service items airlines do not necessarily conform to geographic time-zone assignment, there and leave a lasting impression on passen- coding the delay in a standard manner, and would probably be at least four different gers. The Chinese Civil Aviation Authority, record keeping varies between airlines and time zones in China, but the Chinese airports and airlines are all cognizant of government bodies. The CAAC has vowed government prefers to maintain time-zone the requirement for efficiency and are to correct this situation and improve the commonality to ensure that businesses working to improve the end-to-end traveler overall performance of airlines and air- and government agencies have a common experience. ports within China. standard of time. This demonstrates a con- During the past several years, China Collateral delays pose the most sig- cern about timeliness that is a hallmark of has experienced exceptional growth in nificant cause for delays among most the country’s business culture. the aviation markets, which has come carriers — a staggering 42 percent in Of course, the single time zone is with some growing pains. CAAC allowed China. Collateral delays occur when a late not the only surprising characteristic about the industry to grow rapidly without sub- in-coming flight affects a follow-on flight China. The most startling characteristic of mod- stantial constraints, but now regulations (or flights), which is often the case. There ern China is its growth. Beijing, in particular, are following this growth. The average is little a governing body can do to reduce is building on a massive scale to prepare on-time performance for arrivals in China collateral delays except to minimize the for the 2008 Summer Olympic Games. As is 71.48 percent. Although this is in line cause of the original delays and ensure the celebrations are fast approaching, the with many regions in the world, Chinese schedules have extra resiliency to allow entire country is gearing up to show the on-time performance needs an overhaul. for recovery. world the modern and efficient face of The delays impact 32.3 million passengers The next-highest culprit is weather, China. Spectators coming from around the a year and cause schedule disruptions which is at the crux of 20 percent of China’s world will experience China for the first equal to 267,000 hours annually. The finan- flight delays. In January, an alarming issue time when they board a Chinese airline and cial impact to the airlines could be as high came to light with the inability of the arrive at Chinese airports in cities such as as ¥6.17 billion (approximately US$868 country’s airports and airlines to respond Beijing, Shanghai and Guangzhou. million). to unusually severe weather. Hundreds of Therefore, it is absolutely critical OTP in China is loosely defined and thousands of passengers were stranded at to ensure proper service at airports and reported due to a lack of standardized various airports around China before the for airlines to set the image of China as central reporting. Each carrier reports Chinese New Year, a peak travel season. modern, efficient and fast growing. The differently within China based on type of Aircraft could not be de-iced due to lack Chinese government is staking a great deal flight, origin or destination airport, and of facilities and had to be grounded. In total, travel was in chaos at this busy time because the weather affected train, ground and air transportation services. While weather cannot be controlled, the Arrival On-Time Performance impact of weather delays can be effec- tively managed with better planning and resources. The primary controllable delay in a China is related to maintenance at 13 percent of total delays. This volume of a 85% delays suggests two probable points of a improvement: 80% 78.75% a 1. China needs to reduce the amount of time to resolve equipment failures that 75% 72.98% a 71.48% 72.07% 72.34% result in delays (AOG, or aircraft on ground). a 70% 2. The airline’s schedules need to be more a 65.47% 65% resilient to allow recovery following AOG incidents. Another controllable but important rea- Arrivals within 15 minutes 60% son for delays is due to schedule volatility, 55% which are termed “company plan.” Airlines in 50.90% China alter flight schedules within the last 24 50% to 48 hours prior to operation due to commer- China North America Europe Africa Middle East / India Asia/Pacific cial or slot issues. For every carrier in China, North Africa 70 percent of the schedule is published, confirmed and approved by CAAC for the season, but the remaining 30 percent of the China’s on-time performance for arrivals within 15 minutes falls in the middle when schedule the airline needs to constantly re- China’scompared on-time to other performance regions of forthe arrivalsworld. Butwithin at 71.48 15 minutes percent falls OTP, in there the middleis much when room for submit to the CAAC for approval. This leads to comparedimprovement. to other regions of the world. But at 71.48 percent OTP, there is much inefficient planning for airlines and last-minute room for improvement. disruptions that contribute to reduced on-time performance.

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passenger, security, regular and irregular operations procedures. Training of and enforcing these procedures is paramount China Top Delay Reasons to efficient operation. A number of new technologies are 45% available to help address OTP issues, 42% such as global positioning systems, elec- a 40% tronic flight bag and decision-support a technologies, such as the Sabre® AirOps® 35% Operations Suite and the Sabre® Rocade® a Airline Operations Suite (along with busi- 30% a ness consulting to bring about the specific improvements). These technologies assist a 25% in the enhancement of the operation and 20% a 20% on-time performance of the aviation indus- try as well as greatly improve efficiency. a 15% During a day-long seminar last 13% November in Beijing — which was hosted 9% ® Arrivals within 15 minutes 10% by Sabre Airlines Solutions , for the CAAC, 7% 5% airlines and airports — more than 100 5% 3% airline executives had the opportunity to 1% discuss OTP issues, their resolution and 0% Collateral Weather M&E Company Passenger ATC Navigation Other how these resolutions might be applied to Plan China. CAAC Vice Minister Yang Guoqing summed up the meeting by committing Chinese aviation to improving the complete passenger experience. China’s on-time performance for arrivals within 15 minutes falls in the middle when China is undergoing exciting aviation Severalcompared factors to other are toregions blame of for the flight world. delays But atin China,71.48 percent but collateral OTP, there delays, is much those room for expansion in concert with its overall explo- causedimprovement. by the domino affect of one late aircraft impacting down-line flights, account for the majority of flight interruptions. sive growth, and the CAAC strives to ensure that this growth protects the inter- ests of travelers, airlines and airports. a

Improving OTP in China will require busiest airports. Next, procedures at air- a concerted effort between the CAAC, lines and airports need to improve to bring the airlines and the airports. First, the consistency in the operation. Such airport CAAC needs to take a proactive approach procedures should consider the constraints in overhauling regulations to keep pace at individual airports and include ramp, with the growth and present conditions in security, passenger movement, airside and Rakesh Narayanan is a China. For example, the schedule volatil- landside procedures. Airline procedures solutions partner for Sabre Airline ity issue can be significantly improved by should be closely related to the airport Solutions. He can be contacted at providing standardized slot control for the procedures and should include in-flight, [email protected].

+count it up

2 23 50

The percentage of global CO2 emis- The percentage of CO2 emissions all The amount of years in which the sions aviation is responsible for, and modes of transport combined account industry is challenged to build a zero- it will represent 3 percent by 2050, for, according to the International Air carbon emission aircraft, according according to the International Air Transport Association. Of that, 74 percent to the International Air Transport Transport Association. is road and 12 percent is air transport. Association.

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Faster, Smaller, Cheaper

Very light jets, or air taxis as they are commonly referred to, are making a seemingly strong debut that could be of concern to airlines serving business travelers. Photo courtesy of Cessna of courtesy Photo

By Eric Meyer | Ascend Contributor

aking off for the first time this year will be Feature advanced automation, auto- The first such operator, DayJet, recently small, speedy, cheap jets that big airlines mated engines and systems management, began operations in Florida, offering access to T worry will cause traffic jams around major and integrated autopilot and flight guidance more than 50 airports within the state. These are metropolitan areas. systems. not scheduled flights. Anyone can call DayJet Called “microjets” or “very light jets,” In addition, very light jets can operate and book an airplane to go from point A to B they’ve been likened to minivans with wings. from much shorter runways than commercial within the state at an average cost of US$3 a With two engines and seating capacity for five , meaning that they can utilize the hun- mile versus US$10 to US$25 a mile for traditional or six people, priced between US$1 million and dreds of satellite airports throughout the United business jets such as a Cessna Citation or a US$3 million, they compare favorably with the States, Europe and other regions of the world. Gulfstream G-IV. US$6 million to US$40 million that one would Two VLJ were certified by the U.S. Federal Given all their advantages, some view the have to spend to acquire a current business jet. Aviation Administration last year: the Eclipse advent of VLJ as a game-changing technology What’s more, they cost about half as much to 500 from Eclipse Aviation and the Cessna that will have the same impact on business jet operate per hour as traditional small business Mustang from Cessna Aircraft, with more com- flying as the low-cost model has had on the jets, vastly broadening their market potential. ing up for certification during the next two years commercial aviation sector. In fact, the VLJ Studies have shown that a 50 percent reduction (Embraer Phenom 100, Adam Aircraft A-700 phenomenon has been described alternatively in cost — compared to today’s business jet pric- and HondaJet). as “business jets — light” or “the low-cost busi- ing — could multiply demand by a factor of 10. Their affordable economics as well as ness jet.” These VLJ have autonomy of up to three their ability to land and take off from uncon- Should traditional network and flag carri- hours of flying time, they cruise at altitudes and gested airports have made them a possible ers be worried? After all, those VLJ are targeting speeds similar to those of mid-range airliners, substitute for commercial aviation, and various the same business professionals who currently and they have unique characteristics, including: operators have come forward saying they will pay full fare, the most profitable segment in the Seat six or fewer passengers, operate those airplanes as on-demand air taxis, industry. Weigh less than 10,000 pounds, much like an automobile taxi service, at prices The new business model is too recent to Have two jet engines, not much higher than an unrestricted business- bring any definitive answers. With the exception Cruise at speeds averaging 430 miles per hour class ticket on a traditional airline. These opera- of DayJet, most air-taxi companies have not yet (commercial aviation: 500 miles per hour), tors plan to serve underutilized small airports begun operations. That is expected to change Have a range between 1,100 nautical miles as a way of bypassing congested hubs for later this year when the first VLJ start rolling and 1,300 nautical miles, business travelers. off the production lines in sufficient quantities.

ascend 91 regional Photo courtesy of Cessna of courtesy Photo However, unique regional characteristics already exist that will shape how the VLJ phenomenon plays out.

VLJ In The United States Taking into consideration the nature of business travel in the United States, there is a strong case to be made for the economics of an on-demand air taxi model: The majority of business trips (84 percent) are regionally based, 90 percent of Americans live within 30 min- utes of one of the nation’s 5,000 underutilized small airports, 99.88 percent of all air passengers travel through the 500 commercial service airports and 70 percent travel through the 31 largest hub airports. It is air-taxi operators’ intention to cap- ture a percentage of regional business traffic, thereby bypassing congested hub airports. Given the time gained and the favorable eco- nomics, early indications are that this value proposition resonates well with mid- to senior- Unlike many light jets, the Cessna Mustang has no overhead panel. On this VLJ, all the level executives. switches and gauges are on the instrument panel and center console, which also carries the The threat posed by the VLJ business thrust levers, pitch trim wheel and co-located indicator, flap lever, an alphanumeric keypad model will then be more of an issue for for the flight management system, and the switches for aileron and rudder trim. Jets are tra- commuter airlines than for network carriers. ditionally fitted with “thrust levers,” but Mustang’s are called throttles. Commuter operators stand to lose to air-taxi operators some of their short-haul, high-yield- ing business passengers. VLJ In Latin America States, Latin America is an enticing market. With In addition to DayJet, other air-taxi com- There are more business jets and turbo a poor road network and few railways, Latin panies are ramping up operations. POGO (led props in Brazil than in any other country outside America has relied on private aircraft for business by former American Airlines Chief Executive the United States and Canada. As a region, Latin travel. As the Latin American economies gain Officer Robert Crandall) will commence opera- America and the Caribbean operate more turbo momentum and the boom in agriculture gener- tions this year, targeting business travelers props than Europe or Asia. ates business in areas far removed from the big with operations centered in the northeastern With VLJ manufacturers forecasting more industrial centers, demand for new air service United States. than 60 percent of their sales outside the United keeps growing, and VLJ will definitely have a role

Photo courtesy of Eclipse Aviation Eclipse of courtesy Photo to play there.

VLJ In Europe The impact of VLJ on European commer- cial airliners is harder to predict because the new aircraft are heavily dependant on the level of air travel infrastructure, the availability of substitutes such as rail and car, and pan-European air traffic regulations. In Western Europe, where 50 percent of all business-class flights are less than 500 kilometers, flying commercial airlines is no longer a good value because of: Interminable security checks at airport hubs, Mounting delays, Lack of flexibility with scheduled flights. Alternatives such as high-speed trains — especially in France and Germany — exist but are not practical for many travelers because they almost always require connecting through a major rail hub such as Paris, Frankfurt or Berlin. VLJ should be an attractive alternative to those business travelers, most likely at the expense of Eclipse 500 VLJs are assembled in a 50,000 square-foot production facility in Albuquerque, New Mexico, and feature Eclipse Aviation’s breakthrough friction stir welding process, an traditional carriers. advanced manufacturing process that the company was the first to use in the assembly of Eastern Europe markets, particularly in thin-gauge aluminum aircraft. Russia, Poland and Turkey, are developing rap- idly, yet they lack the air infrastructure to accom-

92 ascend regional Photo courtesy of Cessna of courtesy Photo modate their rapid growth. There is still a dearth of air service to and within those countries. Yet, with more than 1,700 airfields in Russia and 530 in the Ukraine, the potential for VLJ is there. According to Eurocontrol, most of the 100,000 city pairs in Europe are not linked by direct flights. Only 10 percent of city pairs within the European Union are connected on a regular basis, and only 3 percent are connected on a daily basis. As a consequence to those opportunities, many air-taxi companies are preparing to begin operations in Europe (Blink in the United Kingdom, Jetbird in Switzerland, byJets in France, GlobeAir in Austria, JetReady and TaxiJet in Spain, AirCab in central Europe). There are, however, some inhibitors to the success of VLJ growth in Europe. Over- regulation, an active and powerful anti-aviation lobby, carbon trading, and crowded air corridors in the west are all issues that could prevent VLJ from taking off in Europe. Flag carriers have begun paying attention to that segment of the market. Some airlines are studying the feasibility of buying and operating very light jets as a way to route their high-contribution passengers expedi- tiously to their hubs for their onward international journey.

VLJ In Asia The Mustang was the first of its class to receive full-type certification and certification to fly In general, distances within Asia are too into known-icing conditions. It’s also the first VLJ to be delivered to a customer and makes great to operate very light jets — with their 1,200 Cessna the first company to obtain an FAA Production Certificate (in 2006) for a very light jet. nautical-mile range — as a credible alternative to commercial aviation, so yield premiums should be safe for most of the flag carriers in the region, with the possible exception in fast-growing United States — with one-fourth the population makes the Middle East one of the most ideal regions where the basic commercial aviation and roughly the same size as China — has more markets for this new generation of small airport infrastructure has not kept pace with the than 14,000. business jets. growth in air traffic. In countries such as China New terminals for executive jets are and India, access to regional airports as a way VLJ In The Middle East under construction or have just been com- to bypass congested hub airports is a credible Regional aviation experts believe VLJ will pleted in Abu Dhabi, Qatar, Bahrain and alternative for VLJ as is access to out-of-the-way prove highly popular when they enter the Middle Dubai. The private jet industry in the region is worth about US$400 million annually, accord- Highlight ing to the Middle East Business Aviation Association, and has been growing at an annual rate of 10 percent to 15 percent. “Business aviation in the Middle East Given all their advantages, some view the will be worth about US$800 million by 2012 — double its current level — as people advent of VLJ as a game-changing tech- increasingly turn to “aviation-on-demand” for privacy, safety and corporate efficiency,” nology that will have the same impact on said MEBBA Chairman Al Naqbi. In other words, most of the carriers in business jet flying as the low-cost model the region — except for those that primarily fly long-haul international routes — should has had on the commercial aviation sector. pay close attention to this development if they want to protect their yield. a

places not yet served by regular commercial avia- East market, Gulf News recently reported. tion. But even this development is limited by the The relatively small distances between Eric Meyer specializes in market number of regional airports available in those two the Gulf’s business hubs, the increase in development for Sabre Airline countries. China has 480 regional airports and business traffic in the region and the high Solutions ®. He can be contacted India only has 330. For comparison purposes, the level of disposable income in the region at [email protected].

ascend 93 regional Mexico’s Major Modifications During the past few years, Mexico’s air transportation industry has undergone significant changes involving privatization of its major carriers — a situation that has ushered in a boldly renewed competitive environment along with a number of new low-cost carriers.

By Hector Gonzalez and Horacio Mena | Ascend Contributors

Photo by shutterstock.com

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viation in Mexico traces its nativ- including , Aerocalifornia and hospitality industries and one of the coun- ity to the early years of the 20th Transportes in what has rapidly try’s primary hotel owners and operators. A century, not long after Orville and evolved into a crowded and highly com- Since its privatization, Mexicana Wilbur Wright first proved the viability petitive Mexican air travel environment. has focused its business plan on being of manned, powered flight in 1903. This But it’s not just the newer airlines more efficient, including a full-fledged was a restive period during which Mexico and those that are more specialized that corporate cost restructuring. It has also was about to become involved in a long, are developing innovative business plans recently expanded its route network to drawn-out civil war — the “Revolución in Mexico. It’s the large network carri- more U.S. and Canada destinations. Mexicana” — which broke out in 1910 and ers and those that are intensifying their At the bottom line, most of Mexico’s continued well into the 1920s. efforts to grow. airlines have been striving to grow, taking That internal struggle in Mexico — as Mexico’s flag-car- advantage of this unique interlude in marked the first armed conflict in which rier airline — is No. 1 among the nation’s the Mexican commercial airline industry, the airplane was used not just logistically, carriers in terms of passengers as well as which has grown steadily in terms of pas- but as an actual weapon. the size of its aircraft fleet. Now under sengers since the early ’90s. The Mexican government army under private ownership, AeroMéxico is closely In 1992, for example, more than 14 Gen. Victoriano Huerta was one of the examining its operations and implement- million passengers were boarded in the world’s first to designate an airborne unit ing various cost-cutting initiatives, while Mexican air travel market; by 2006, that — flying just a couple of early bi-winged concurrently awaiting delivery of its orders figure had risen to more than 22 million aircraft — to patrol Mexican territory. And of a number of new Boeing 737, 777 and passengers; and last year 27.5 million at several junctures during this revolution- 787 aircraft. passengers were boarded. ary interim, aircraft were used by both the A huge part of the carrier’s operat- With regard to their immediate government and the rebels. ing strategy involves reliance on its sub- future, Mexico’s air travel customers Another notable event occurred sidiary airline AeroMéxico Connect (for- should continue to benefit from a great- when Mexican president Francisco Madero merly AeroLitoral) to drive business and er range of carrier options and very became the first sitting chief executive promote passenger connections within attractive fares — although consolidation of any country to fly in an airplane. That AeroMéxico’s greater route system. between or among several carriers could historic flight left the ground on Nov. 30, Similarly, AeroMéxico’s chief rival be just around the corner and is probably 1911, from a makeshift airstrip in Mexico Mexicana is leaning heavily on its associ- inevitable. City, and lasted only about 10 minutes. ated airline Click (formerly ) to Business analysts have predicted Earliest known commercial aviation complement its primary route structure. a number of airline consolidations in in Mexico dates to 1921, when the com- Mexicana emerged from its government Mexico, particularly between some of the pany now known as Mexicana de Aviación ownership to be acquired by the Posadas new players (since most of them operate was founded. Group, a mainstay of Mexico’s travel and on similar low-cost business models). In the late 1920s and early ’30s, first solo nonstop trans-Atlantic pilot Charles

Lindbergh flew to Mexico several times, shutterstock.com by Photo almost always to raucous welcomes. Among the aircraft Lindbergh piloted to Mexico was a workhorse Ford Tri-Motor — when he flew from Brownsville, Texas, to for Pan American Airways. Certainly, Mexico has a long and storied aviation history, which has mainly revolved around its two government- owned carriers, Mexicana and AeroMéxico. Through the years, both carriers have alternated between being privately owned and government owned and, once again, in 2005, the country’s air transport indus- try changed quite dramatically when the Mexican government looked to again priva- tize its two airlines; first selling Mexicana to private interests in late 2005, then finally letting go of AeroMéxico last year. And with the privatization of the country’s two network carriers, the Mexican commercial aviation picture became a much more competitive and dynamic environment, marked primarily by the entrance of a number of new players — most operating on a low-cost business Mexico’s is one of several new carriers that has contributed to a highly competitive model. environment for the country’s traditional carriers. The Toluca, Mexico-based carrier operates These new carriers — , 14 Airbus A319-100 aircraft to 17 destinations. , Volaris, ALMA de Mexico and VivaAerobus — all joined older airlines

ascend 95 regional Photo courtesy of Boeing of courtesy Photo Unquestionably, Mexico’s airline industry is expected to continue to grow, as carriers order new aircraft and map out new routes. Therefore, advanced tech- nological platforms will continue to play extremely important roles, essentially paving the way for airlines in Mexico to achieve their goals, from planning to execution. Worldwide, there’s a mushroom- ing customer preference to select and purchase transportation options through direct channels. And the trend is impos- sible to miss in Mexico, where the number of people who have access to the Internet is steadily and substantially increasing. In addition, attractive fares offered by Mexico’s low-cost carriers have obliged the network carriers to reduce fares — yet at the same time, the network carriers have encountered considerable difficulty in trying to reduce their operating costs, creating the common conundrum in which fares are artificially kept at low levels and losses accumulate. But lower fares have helped stimu- In late 2006, Mexico’s largest airline, AeroMéxico, ordered two additional 787-8 Dreamliners, late phenomenal air transportation growth bringing to five the number of 787s the carrier expects to acquire. In June 2006, the airline in Mexico. Double-digit growth is forecast announced plans to lease three 787-8s from International Lease Finance Corp. with deliveries for the next several years. Fares, though, scheduled to begin in early 2010, making it the first Latin American airline to incorporate the must eventually move more in line with mostly composite airplane into its fleet. operational costs. Regardless of what happens in the future, however, the new players in the Mexican air travel market have struck Photo courtesy of Boeing of courtesy Photo positive chords in creativity and breaking paradigms, innovatively acquiring resourc- es and partnering with companies from other industries in sponsor relationships. At the same time, these new play- ers have been able to take advantage of the various abilities of their partners and investors to help lower costs. Volaris, for example, provides entertainment on its flights through its close connection to Grupo Televisa, and it offers snacks in cooperation with its sponsor Krispy Kreme Doughnuts. On the whole, Mexico’s airline industry is spawning innovative approach- es and realizing rapid growth. And gener- ally, the country’s travelers are experienc- ing what is for now, at least, a notably affordable and enjoyable ride. a

Hector Gonzalez is senior principal and account director in Mexico Mexicana, Mexico’s second-largest airline, was acquired in 2005 by the Posadas Group, one and Horacio Mena is airlines of the country’s most prominent hotel owners and operators. In a move to remain competi- account manager for Sabre Airline tive and satisfy customer demand, the carrier expanded its network to include additional Solutions®. They can be contacted destinations in Canada and the United States. at [email protected] and [email protected].

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Bursting At The Seams

With an airspace system that for decades has been overcrowded and inefficient, the U.S. Federal Aviation Administration is finally implementing new technology and processes to support the country’s phenomenal airline industry growth rate as well as reduce flight delays and make the skies safer.

By Michael Clarke | Ascend Contributor

he U.S. domestic airline industry has expe- In March, the U.S. Department of experiences, it has been observed that airspace rienced phenomenal growth during the Transportation announced the allowance of 30 changes are essential for realizing the benefits Tlast 30 years since deregulation. In spite of additional daily flights at Newark Liberty Airport, of new runway projects, and they can enhance major geopolitical events that have caused tempo- but to achieve this and avoid the significant the flow of air traffic even without new airport rary reductions in passenger traffic, the number of delays experienced last year, airlines must spread infrastructure. For example, a recent airspace passengers traveling within the domestic market more services into off-peak times. The new cap design above the Philadelphia International Airport and the number of aircraft movements have went into effect in early May and applies to both has shown marginal improvements in northeast increased three fold. At the same time, there has domestic and international flights, enabling an operations as Philadelphia traffic often impacted been very little growth in the underlying airport average of 83 services per hour during peak peri- traffic bound for the tri-state area. and air traffic control system necessary to support ods. The same cap began in March on rotations During an airspace flow program, air traffic this immense growth. As a result, there has been at JFK Airport, and it already exists at LaGuardia controllers are allowed to delay only those flights a consistent increase in the number of delayed Airport. America’s domestic airline delays were that are expected to encounter extremely bad and cancelled flights as measured by the U.S. the second worst on record in 2007 according to weather. As a result, the new program is expect- Department of Transportation. the DOT, and these three airports had the worst ed to minimize the crippling effects of the sudden During the first half of 2007, nearly 28 per- on-time arrival rates. thunderstorms that frequently affect the nation’s cent of flights were delayed, cancelled or diverted. Several programs have recently been insti- airspace system during the summer when travel Of the late arrivals, passengers experienced an tuted by the FAA, including the redesign of the is at its highest. On a single severe weather day, average delay of 57 minutes. An alarming and airspace in the northeast and the introduction thousands of flights can be delayed, diverted or disturbing trend observed in delayed flights is a of the airspace flow program. Based on past canceled, affecting hundreds of thousands of pas- significant increase in duration of taxi-in and taxi- out times, in some cases exceeding five hours. With limited gate availability at major hub airports, Flight Delays, Cancellations And Diversions airlines are often forced to board flights and repo- sition aircraft to holding areas until they receive departure clearance. On arrival, inbound flights 30% 27.4% often end up waiting until gates open, where, in 27.8% 25% 22.6% 24.6% some cases, the outbound flights at the occupied 21.9% 22.6% gates are waiting for delayed crew members on 20% inbound flights. 18.0% 17.9% Even during blue-sky days (something that 15% rarely happens), existing U.S. airports and air traffic control systems are barely able to cope 10% with the number of scheduled flights, especially in major metropolitan areas such as New York 5% City. In fact, the three most chronically disrupted Percent of scheduled flights U.S. airports — John F. Kennedy International 0% 2000 2001 2002 2003 2004 2005 2006 2007* Airport, LaGuardia Airport and Newark Liberty Years International Airport — all serve the New York *January through July tri-state area. This bottleneck impacts the entire Source: BTS data national airspace, and the U.S. Federal Aviation

Administration has placed great emphasis on The percentage of on-time arrivals at the nation’s busiest airports has steadily declined each dealing with problems in the New York City area year since 2002, when only 82 percent of flights arrived on time at the 35 busiest airports. In and the surrounding northeast region to minimize 2006, the on-time arrival rate at those airports fell to 75 percent. disruptions.

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inform the crew if the requirement is not met during Average Length Of Arrival Delays an operation. This onboard monitoring and alerting capability enhances the pilot’s situation awareness and can enable reduced obstacle clearance or closer route spacing without intervention by air traffic control. 60% 54.0 56.7 52.5 52.2 Once the required performance level is established, 49.2 48.9 51.4 46.8 45% the aircraft’s own capability determines whether it can safely achieve the desired performance and 30% qualify for the operations.

Minutes The backbone of the NextGen system is 15% Automatic Dependent Surveillance Broadcast, or ADS-B. It uses global positioning satellite signals to 0% provide air traffic controllers and pilots with much 2000 2001 2002 2003 2004 2005 2006 2007* more accurate information that will help keep aircraft *January through July Years safely separated in the sky and on runways, allowing Source: BTS data flights to go from point to point. As a result, airlines will be able to file shorten flight plans, which lead to reduced travel times for passengers. Aircraft tran- For flights that arrived late, passengers experienced an average flight delay of nearly 57 sponders receive GPS signals and use them to deter- minutes, up nearly three minutes from 2006. These rising flight delays are leading to mine the aircraft’s precise position in the sky, which is more on-board tarmac delays. combined with other data and broadcast out to other aircraft and air traffic control facilities. When properly sengers and resulting in millions of dollars in oper- optimum profiles, gain fuel savings and increase equipped with ADS-B, both pilots and controllers will, ating losses for carriers. Typically, there are more airspace capacity. for the first time, see the same real-time displays of than 40 severe weather days annually in the U.S. The FAA is developing the next-generation air air traffic, substantially improving safety. domestic system. Under the AFP, controllers issue transportation system, called NextGen, to modernize However, the benefits of these new concepts expected departure times to aircraft that are expected the national airspace system through 2025. As part will be limited due to the slow acceptance by com- to pass through airspace affected by bad weather of the NextGen initiative, the FAA will address the mercial airlines. As part of these solutions, airlines and safely meter them through the constrained area. impact of air traffic growth by increasing national are required to equip their aircraft with the necessary Airlines are given the option of either accepting delays airspace system capacity and efficiency while simul- onboard tools that are considered by some carriers for flights scheduled to fly through storms or flying taneously improving safety, environment impacts and expensive and not cost effective. longer routes to safely maneuver around the weather accessibility to the ATC system. On the ground, the FAA is currently approving system. It improves the FAA’s ability to respond to Currently, the U.S. air transportation system construction for new runways, installing new tech- severe weather and reduces the amount of unneces- handles 750 million passengers each year. It is nology and instituting new procedures to facilitate sary delays and disruptions. While this initiative does anticipated that the NextGen system will accom- capacity and efficiency enhancements. Since 2001, it not create additional capacity, it limits the negative modate two to three times the current traffic levels has approved 10 miles of new runways at 10 of the effects of severe weather patterns. It is estimated by shifting away from outdated ground-based, voice- United States’ busiest airports including Hartsfield- that in the first year of operations (summer of 2006), driven technology. To achieve these goals, the FAA Jackson Atlanta International Airport. At other major AFP programs saved U.S. airlines US$20 million in is leveraging emerging aircraft navigation capabilities, hub airports such as Dallas/Fort Worth International reduced operating costs. including performance-based navigation that uses Airport, the FAA has introduced perimeter taxiways In another initiative, the FAA has implemented satellite-based technology. and high-speed exits that reduce the number of the adaptive compression program in which arrival Performance-based navigation incorporates active runway interceptions necessary to get from slots that become available as a result of flight cancel- navigation performance requirements that can be the runway threshold to terminal gates. Together, lations, delays and diversions are automatically filled applied to an air traffic route, instrument procedure or these accommodate more than 1.6 million additional with available flights. The underlying goal of this defined airspace. This includes both area navigation operations per year and decrease average delay per program is to ensure that airports impacted by bad and required navigation performance specifications. operation at these airports by approximately five weather receive the maximum number of flights that Performance-based navigation provides a foundation minutes. can safely arrive, thereby reducing the overall number for the design and implementation of automated No one can question the dynamic role of the of delay minutes experienced by the traveling public. flight paths as well as airspace design and obstacle U.S. airline industry in the country’s economy, and it is While a lot of attention is often placed on extremely clearance. therefore essential that the FAA maintains a focused bad weather days, the FAA is advocating the use of Area navigation enables aircraft to fly on any strategy in improving system capacity and efficiency. new and emerging technologies such as data com- desired flight path within the coverage of ground- or Without any substantial changes to the national air- munication and satellite-based navigation to increase space-based navigation aids within the limits of the space system, the level of congestion will only wors- the capacity of the national airspace system. capability of the self-contained systems, or a combina- en, resulting in increased flight delays, cancellations Data communication provides an additional tion of both capabilities. As such, RNAV aircraft have and diversions. The increased levels of flight disrup- means for two-way exchange between controllers better access and flexibility for point-to-point opera- tions will lead to more disrupted passengers, increased and flight crews for air traffic control clearances, tions. RNAV arrival and departure procedures should airline operating costs and a continued negative instructions, advisories, flight crew requests and drastically reduce noise, emissions and fuel usage. impact on the environment. a reports. The recent introduction of Reduced Vertical RNAV procedures at Hartsfield-Jackson Atlanta Separation Minimum, or RVSM, in the U.S. domestic International Airport have already saved airlines US$34 system has helped increase the capacity of the million in fuel costs. Required navigation performance national airspace system. RVSM was designed to is RNAV with the addition of an onboard performance Michael Clarke is director of airline reduce the vertical separation above flight level 290 monitoring and alerting capability. A defining charac- operations optimization solutions for Sabre from the previous 2,000-foot minimum to 1,000-foot teristic of RNP is the ability of the aircraft navigation Airline Solutions®. He can be contacted minimum. This has enabled aircraft to safely fly more system to monitor the navigation performance and at [email protected].

98 ascend With well over 600 new aircraft orders at the Dubai Air Show, Photo by shutterstock.com by Photo double-digit annual traffic growth and a number of new airports planned, the Middle East is exceeding all airline industry expectations — although various factors could influence sustainability of medium-and long-term growth. By Christophe Ritter | Ascend Contributor

MIDDLE EAST ON THE RISE

ascend 99 regional Photo by shutterstock.com by Photo 2007, and is the world’s fastest-growing airport. Leveraging the Middle East’s proxim- ity to fast-developing regions and emerging markets, such as southern Asia (primarily India and Pakistan) and northern and west- ern Africa, international passenger traffic to and from the Middle East is growing rapidly in all world regions. While one of the European and North American challenges is a relative lack of capacity to address strong domestic and international demand, the Middle East has invested in and will continue to heavily invest in airport infrastructure. Recently, a half dozen new airports have been announced. These include Oman as well as the Qatar New Doha International Airport project that will triple the airport’s capacity to 50 million passen- gers annually by 2015. Abu Dhabi Airport will rapidly expand with the addition of a second runway and a third terminal. And Jeddah will benefit from four new terminals and capacity for up to 80 million passengers a year. The Dubai World Central International Airport — currently under construction — During the Dubai Air Show last November, 662 aircraft orders worth more than US$100 has been designed to handle more than billion were placed. Combined, Emirates Airlines and Qatar Airways exceeded 220 aircraft 120 million passengers a year, representing orders, representing approximately 33 percent of the show’s total orders. 40 percent more than Atlanta Hartsfield- Jackson International Airport, currently the world’s largest airport. Leveraging these gigantic infra- here’s no arguing the fact that revenue nomic policies and strong government structure-enhancement projects, airlines passenger traffic is growing at a phe- investments in infrastructure as well as have been investing heavily in additional T nomenal rate in the Middle East. diversification of the traditional petro- capacity. Last year, the Arabian peninsula (from leum-based economy into financial hubs Last year, more than 720 aircraft Syria to Oman) exhibited a year-over-year and leisure destinations. Development were ordered (either firm orders or options) increase of more than 18.8 percent in total air of free-trade zones, which have created by 15 Middle East airlines or leasing com- revenue passenger traffic, compared to a 7.5 an international investor-friendly environ- panies, establishing a new record year for percent market growth rate worldwide. ment, and regional government spending both Airbus and Boeing in the region. And even though Middle East air traf- have enhanced the competitiveness of During the November 2007 Dubai fic market share represents only 8 percent non-energy sectors. Air Show, 662 aircraft orders were placed of total passenger traffic globally, it also Surges in petroleum revenues have — for a value exceeding US$100 billion. represents the fastest-growing market for enabled the various Middle East coun- Emirates Airlines added 120 Airbus A350 scheduled airlines. tries to invest heavily in infrastructure, aircraft orders and 11 Airbus A380 orders While this market growth has, to a large industrial projects and tourism, provid- to its already-secured 47 orders — fol- extent, been fueled by a significant increase ing stimulus for the private sector to lowed by Qatar Airways with more than 90 in capacity with the rapid development of expand. orders of Boeing 777 and 787 models. low-cost airlines and continuously added total In addition, the geographical loca- With such major capacity investment, available seats by the region’s large network tion of the Middle East — at a maximum the Middle East leads the world in capacity carriers, the latest figures provided by the range within 8,000 nautical miles of all expansion, with 14.8 percent year-over-year International Air Transport Association also continents — has boosted international available seat kilometer growth — more show a significant load-factor increase. traffic flow, positioning the Middle East than twice the overall industry growth rate With such growth, the Middle East region as a major global hub for both busi- according to the latest IATA figures. — along with India and China — remains at ness and leisure travelers. Just in the past five years, the capac- the forefront of the fastest-growing markets During the past decade, for exam- ity flown from the Middle East to Africa worldwide. That’s a remarkable achievement ple, Dubai International Airport advanced and Asia has doubled and has increased 36 because the growth has occurred on the inter- from the 26th-largest to the 10th-largest percent to Europe and 23 percent to North national passenger market. There’s simply no international hub in the world, with more America. Stimulated by the rapid develop- strong intra-domestic Middle East market that than 34 million passengers handled (a ment of low-cost carriers such as Air Arabia would support the high level of growth. year-over-year growth rate of 19.3 per- and Jazeera Airways, the capacity within The dynamism of the Middle East cent) and 260,000 aircraft movements (a the Middle East has increased by 56 per- is supported by market-oriented eco- year-over-year growth of 9.8 percent) in cent during the same period.

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While the lost-cost phenomenon Supported by a mix of narrow-body that investors have confidence in the is relatively new in the region (in com- and wide-body aircraft deliveries in the region’s air transportation fundamentals parison to North America, Europe and coming year, as well as by the devel- for the short and medium terms. even Asia), major expansion plans from opment of secondary airports, the high But for the truly serious investor, already-established low-cost carriers — percentage of medium- to long-haul opera- there are still key questions: Is the high as well as the arrival of several new tions will continue to increase in the growth rate in the Middle East sustainable entrants in Saudi Arabia, the United Arab Middle East. in the medium to long term? What might Emirates and Yemen — are expected to In addition, the Gulf Cooperation be the result if market growth unexpect- significantly stimulate the intra-Middle Council countries (Bahrain, Kuwait, Oman, edly levels off? East market. Qatar, Saudi Arabia, the United Arab It’s fairly obvious that geopolitical risk Fortuitous circumstances relating Emirates and associate member Yemen) is the most prominent threat to the region’s to a dynamic economy, major infrastruc- will continue to pursue the GCC’s liberal- economy. To one extent or another, most ture investment and fast-growing aircraft ization program, leading eventually to full countries in the Middle East endure politi- capacity (leading to extensive worldwide open skies in the Middle East as well as cal tensions at various levels. network coverage) is making the mid-term enhancement of the efficiency of its air Investors, however, have already Middle East outlook fairly promising. The transportation industry. priced geopolitical risk into the equation, International Civil Aviation Organization Therefore, the intra-Middle East resulting in broader market volatility in forecasts that Middle East passenger market (along with Pakistan and India) comparison to other regions. The risk has traffic will grow at an average annual rate should continue its rapid growth with the been mitigated somewhat by the region’s of 6.4 percent until 2015, which is well development of the already-established financial flow patterns and integration into above the 4.5 percent world average of low-cost carriers and several potential international trade. all other regions, including Asia. new regional entrants using single-aisle In fact, the region’s airline industry The presence of multiple major net- aircraft. recovery since 2003 has been significant, work carriers (Emirates, Qatar Airways, Based on these massive invest- despite the high concentration of political Etihad, Gulf Air and Saudi Airlines) and ments in infrastructure and capacity, the issues. The impact of those issues on inter- the strong ambitions of several region- Middle East appears to be raising its limits national traffic has so far proven marginal al carriers (Oman Air, Kuwait Airways, every year, with a growth rate surpassing and has been more than overcome by the Yemenia and Middle East Airlines) will analysts’ forecasts. economic strength of the region. enable the region to remain the leader The recent success of Royal And barring an unlikely plummet in with the fastest-growing increase in pas- Jordanian’s initial public offering — result- oil prices, Middle East governments will sengers per aircraft movement, according ing in market capitalization for Royal continue to increase the diversification of to Airports Council International. Jordanian of US$366 million — illustrates their economies and massively invest to

While Middle East air traffic market share accounts for only 8 percent of the world’s total passenger traffic, it also represents the fastest-growing market for scheduled airlines. The growth has been largely driven by a substantial rise in capacity from the advent of low-cost carriers and additional total available seats by the region’s network carriers.

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enhance the overall attractiveness of the America/India market, for example, showed ers to feed their hubs, while the region region to business and other interests. that enhanced elapsed flight time (due to is currently one of the main providers for But even more than external geopoliti- improved connections and additional capaci- international traffic. cal factors, the biggest risk the Middle East ty) stimulated traffic by up to 14 percent until Kingfisher Airlines, for example, air transportation industry faces in coming 2005. Since then, this figure has decreased will likely operate most of its 10 Airbus years is the potential for overcapacity. to less than 5 percent on average for mar- A380 aircraft (which are to be delivered Massive wide-body and single-aisle kets already operated by an airline. from 2011 onward) on key European aircraft orders — booked during the last Most traffic generated by airlines’ routes, leading to a redistribution of air- three years — will come to fruition start- increasing capacity was due to the natural line market share at the expense of cur- ing in 2010 and continuing through 2015, market growth of demand as well as pas- rent leaders Air France/KLM, Lufthansa, leading to a double-digit capacity increase senger recapture versus competition. Emirates, British Airways and Qatar in the Middle East. Despite demand still Network carriers will most likely con- Airways. running at a fairly high level, it seems tinue to be dominant at major airports, but Since Middle East airlines have somewhat unlikely that the current traffic- “thin” markets out of regional airports will be been performing better on dense routes, growth rate can continue at such a frenetic more challenging because the potential route it is more likely that carriers adding pace in the medium and long terms. capacity that will be added may far exceed capacity will first focus on these mar- Rather than following normal market the overall market potential. kets, increasing overall competition cyclicality, largely offset by the stimula- Additionally, development of low-cost with a potential negative impact on the tion of demand on newly operated routes, and regional carriers operating at main and routes’ yields. At the same time, the average growth rate is tailing off. IATA and the Highlight Airports Council International see the strong current demand in international air travel in the Middle East region rap- Just in the past five years, the capacity idly slowing from a double-digit growth rate down to less than 5 percent by year- flown from the Middle East to end 2010, which would be just before a large number of wide-body aircraft are Africa and Asia has doubled and has scheduled to be delivered. So airlines will need a more aggres- sive approach to fill their seats — limit- increased 36 percent to Europe and ing, at best, any increase in average passenger fares. This represents the 23 percent to North America. biggest challenge Middle East airlines are likely to face in the near future, since price elasticity requires significant fare changes to positively influence demand in a market in which airline preference is a fairly volatile factor to customers. the tailing off of the current Middle East secondary airports will continue to siphon off Large capacity increases, strong air transportation growth rate will prob- a significant portion of the local traffic that demand (but growing at a much slower ably happen due to lower-than-expected was previously served by network carriers. pace with operating costs remaining demand-elasticity ratios against capacity So the peak of added capac- high due to fuel prices and complex growth and yield variation. ity in the Middle East region from 2011 network-carrier operations) will most Capacity increases in the Middle onward on major routes — in conjunction likely negatively affect Middle East air- East — leveraging regional hub-and-spoke with lower market-stimulation factors — line profitability in the medium term. networks —have allowed airlines based in promise the airlines challenging times in Push from investors to improve the Middle East to grow traffic well out- filling seats. industry returns — as most Middle East side their local catchment areas. Naturally, airlines in the Middle airlines either are or will be privatized by But network carriers such as East will still benefit from hot markets in the end of this decade — will probably Emirates, Qatar Airways, Etihad and Gulf India and Southern Asia, where slower- drive consolidation in the Middle East Air have performed best on dense routes than-expected liberalization has some- airline industry in the medium term to at major airports rather than regional what limited new airlines’ ambitions to cut overlapping operations and reduce destinations, with the exception of India, grow internationally. capacity, making it easier to improve where strong economic development has But this situation may not last yield and opening a new era in the dramatically increased demand for both very long. Several Indian carriers, for Middle East. a domestic and international air travel. example, are planning to open new Addition of frequencies and capac- nonstop routes to Europe (particularly to ity (particularly with the introduction of the United Kingdom) with a more aggres- the huge new Airbus A380 aircraft) will sive commercial approach than current continue to stimulate traffic, but at a much competitors. slower pace and will most likely tend to Direct services that provide both Christophe Ritter is a senior dilute existing demand. competitive elapsed flight time and partner for Sabre Airline A recent study performed by aggressive fares will limit the potential Solutions. He can be contacted at Sabre Airline Solutions® on the North growth of neighboring Middle East carri- [email protected].

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