Lecture Outline

 Nature of airline operations  Airline costs  Pricing approaches  Conclusions

Air transportation and logistics Week 4 Airline operations Dr. PO‐LIN LAI

Main Airline Types Airlines in Korea

 Passenger  : (Asiana air) Regional air Conventional Scheduled  Air : Cargo air Commuter: ex  : Passengers/ Mainline/ Cargo Regional  Easter Jet: Regional air Mainline  : Regional air Charter  : (Korea air) Regional air Low Cost  Korea Express air: charter  Cargo  : Passengers/ Mainline/ Cargo  T’way Airlines: Regional

Airline Schedule Planning Process Schedule design

Network Structure Airlines are typically classified as schedule airlines or charter airlines. Each schedule airline has a predefined network Schedule Fleet Maintenance Crew Design Assignment Routing Scheduling structure. Selecting a network is considered one of the major strategic decisions of the airline.

1 Point to Point network Hub and Spoke network

 Prior to deregulation movements (end of 1970s‐early 1980s),  With deregulation, a system of hub‐and‐spoke networks many airline services were taking place on a point‐to‐point emerges as airlines rationalize the efficiency of their basis. services.  Two airline companies are servicing a network of major cities.  Each airline assumes dominance over a hub and services are A fair amount of direct connections exists, but mainly at the modified so the two hubs are connected to several spokes. expense of the frequency of services and high costs . Also, Both airlines tend to compete for flights between their many cities are serviced, although differently, by the two hubs and may do so for specific spokes, if demand warrants airlines and it. connections are likely to be inconvenient.

Hub and Spoke Network Structure

Advantages Disadvantages  Economies of density  Longer journey times   More frequent  Greater number of flights Combination service  Impact of disruptions  Increased load  Potential bottleneck if factor on spokes there is insufficient  More connections capacity  Easier to schedule  May be anti‐competitive  Consolidation of at hub airports maintenance

International Hubs –Delta Airlines Time bank for hub and spoke airline

 A time bank consists of a set of flight arrivals followed by a set of departures. Therefore, the time bank allows for several connection possibilities during a short period of time.

2 Scheduling Through Hubs Scheduling Through Hubs The case of KLM at Amsterdam Long Haul

Short Haul

Arrivals Departures

Data source: www.schiphol.nl Data source: www.schiphol.nl

Design and Development‐The Fleet assignment Manufactures Viewpoint

  Boeing Most major air carriers operate different aircraft types, which give them the flexibility to compete in markets with different  leading aircraft in order by ATA members is the B‐737 characteristics, such as demand and length of haul.  Faces stiff competition  The main objective of fleet assignment is to match the  B747‐400 designed to counter MD‐11 characteristics of the aircraft type and the flight to minimize the  B‐777 counters A‐330 total cost to the air carrier.  Airbus  Two features are considered when assigning to a particular  european aircraft manufacturing consortium flights  timing has always been a key to Airbus successes  Seat capacity and demand.  85% common aircraft parts across production lines  Distance between origin and the destination of the flight.  A‐330 /A‐340

Factors Affecting Scheduling Fleet Assignment

 Equipment maintenance  Facility constraints Problem Definition requirements  Gate positions •Given:  Flight operations  Ticket counter space   Airport runway lengths  Baggage handling Flight Schedule: a set of (daily) flight leg  Fuel capacity  Ground equipment Aircraft fleet: consisting of different fleet types;  Air traffic control and routings  Food service Passenger demand pattern;  Crew availability  Marketing factors Revenue and operating cost data;   Airport authorities Traffic flow •Find  Curfews  Sensitivity of schedule saleability A feasible fleet assignment, i.e. a mapping from  Slots  Load factors flight legs to fleet types that maximizes  Enable connections profit = total revenue –total operating costs.

Source: Wells (1988)

3 Flight Assignment Fleet Assignment

 Fleet information Flight Network Boston Logan Fleet type Number of Capacity Per flight operating cost ($000) aircraft owned (Seats) ORD CL 50x LGA‐BOS LGA‐ORD (2 flights ) BOS DC‐91 1201015 CL 33x (3 flights ) B737 2 150 12 17 Chicago O’ Hare A300 2 250 15 20

CL 55x CL 30x (2 flights ) LGA (3 flights )

New York La Guardia

Type No. Capacity Operating cost ($000) Fleet Assignment Fleet Assignment(Seats) LGA‐BOS LGA‐ORD DC‐91 1201015 B737 2 150 12 17 Find: An assignment of fleet types to the flights in this  Flight Schedule, Fares,A300 and Demand 2 250 15 20 network that maximizes net profit. Flight No. From To Dept Time Arr Time Fare $Demand (EST) (EST) Passengers CL301 LGA BOS 1000 1100 150 250 CL302 LGA BOS 1100 1200 150 250 CL303 LGA BOS 1800 1900 150 100 CL331 BOS LGA 0700 0800 150 150 CL332 BOS LGA 1030 1130 150 300 CL333 BOS LGA 1800 1900 150 150 CL501 LGA ORD 1100 1400 400 150 CL502 LGA ORD 1500 1800 400 200 CL551 ORD LGA 0700 1000 400 200 CL552 ORD LGA 0830 1130 400 150

Fleet Assignment Fleet Assignment

4 Fleet Assignment Model (FAM) Fleet Assignment Assign planes of different types to different flight legs so as to minimize the total cost of assignment.  Evaluating assignment profitability (Profitability $000 per day)

Flight No. DC‐9B737A300 CL301 8 10.5 22.5 CL302 8 10.5 22.5 CL303 5 3 0 ATL CL331 8 10.5 7.5 CL332 8 10.5 22.5 CL333 8 10.5 7.5 CL501 33 43 40 CL502 33 43 60 Time: CL551 33 43 60 CL552 33 43 40 024681012141618202224 26

Input to Flight Assignment Model Output of Flight Assignment Model

Inbound Flights at Atlanta: City Flight #: Stops Plane type Inbound Flights at Atlanta: City Flight #: Stops Plane type

6:00 AM 8:05 AM Boston 709 0 ??? 6:00 AM 8:05 AM Boston 709 0 M80 6:30 AM 8:39 AM JFK 538 0 ??? 6:30 AM 8:39 AM JFK 538 0 757 12:25 PM 4:27 PM DC 746 0 ??? 12:25 PM 4:27 PM DC 746 0 M80 2:25 PM 6:13 PM Philly 646 0 ??? 2:25 PM 6:13 PM Philly 646 0 757

Outbound Flights at Atlanta: Outbound Flights at Atlanta:

6:00 AM 8:05 AM Houston 657 0 ??? 9:30 AM 11:45 AM Houston 657 0 757 6:30 AM 8:39 AM Austin 987 0 ??? 9:05 AM 11:00 AM Austin 987 0 M80 12:25 PM 4:27 PM Dallas 564 0 ??? 7:00 PM 9:30 PM Dallas 564 0 757 2:25 PM 6:13 PM Phoenix 367 0 ??? 5:30 PM 7:45 PM Phoenix 367 0 M80

27 28

Through Flights Additional Through Flights

• Combine two flights with the same fleet type 6:00 AM 11:00 AM Boston Austin 709/987 1 M80 passing through a hub into a through flight. 6:30 AM 11:45 AM JFK Houston 538/657 1 757 12:25 PM 7:45 PM DC Phoenix 746/367 1 M80 Atlanta 2:25 PM 9:30 PM Philly Dallas 646/564 1 757 M80 757 Boston Houston 757 JFK M80 Austin • Passengers are willing to pay extra for through M80 DC 757 Dallas flights as the same plane flies both the legs. 757 Philly M80 Phoenix • Through assignment problem identifies the most profitable matching of inbound and outbound flights.

5 Airline Profit Categories of Airline Costs

Operating Non‐Operating cost cost

Direct In‐direct operating cost operating 58 42

Cost structure of airline cost Airline Costs Variable direct operating Fixed direct operating Indirect operating costs costs costs Fuel costs Aircraft standing Station and ground charges expenses Variable flight crew Annual flight crew costs Passenger services costs Variable cabin crew Annual cabin crew costs Ticketing, sales and costs promotions Direct engineering costs Engineering overheads General and administrative Airport and en-route charges Passenger service costs

Source: Doganis (2002)

Trend of operating costs for Maintenance and overhaul costs schedules airlines of operating costs

6 Air Fare Warfare Types of Passenger Fares

 Time‐Specific Fares  Greater than 2000 price changes daily  i.e. night flight offered at 20‐40% off comparable day fares  2 million individual fares between city pairs  Common Fares  Carriers will only match low‐frills fares to meet  Joint Fares competition  Excursion Fares  used during seasonally weak periods of traffic  usually require round‐trip purchase  fare penalties with cancellation  Promotional Fares  Always will have some kind of restriction

The Pricing Process Pricing Tactics

 Airline Tariff Publishing Company (ATPCO)  Fare actions include  Pricing Tactics  Introduction fares  Pricing Analysis  Excursion fare sales  Inventory Management  Connection market sales  Business fare sales  Mileage  Value added  One‐way versus round‐trip fares

Passengers tariffs and costs Seat plan for Boeing 777‐300

 The aim of revenue management is to maximise the total revenue per flight and in doing this generate a sufficient profit or, at worst, minimise the loss.  Where airlines offer a two‐class cabin or, as in long‐haul routes,  If aircraft was operated with full Economy seating only, it a three‐or four‐class cabin, they may wish to assess and monitor would be possible to arrive at a cost per seat. If the total the costs and revenues per passengers in each separate cabin: allocated route costs per Economy seat is then assumed to be  It may help to decide the price for each cabin class more especially 100, it is possible to establish what the cost of providing the the fare differential between them. First and Business class seats should be after allowing for extra  Enable airline planners decide to keep which cabin is more space they require, both because such seats have a longer seat profitable. pitch and because there are fewer seats cross the aircraft.  Three Cabins: First/ Business/ Economy.  8 first 42 business 228 economy

7 Unit Costs for Different Seat Classes Unit Costs for Different Seat Classes Variable First Business Economy Cost/seat if all economy 100 Seat pitch 71 51 32  Ex: Singapore Airlines return fares between Paris and Cost index allowing for seat pitch 221 159 100 Singapore, 2009 Number of seats abreast 4 4 9  767: 427: 100 Cost index allowing for seats abreast 498 358 100 Planning load factor (%) 50% 65% 80% Cost index adjusted for load factor 996 551 125 Passenger specific costs 40 25 10 Cost/passenger 1036 576 135 Cost/passenger (Economy = 100) 767 427 100

On long-haul Boeing 777-300 Source: Doganis (2002)

Yield Management Yield Management

 Yield management has become an essential  Control ticket allocations through marketing tool  Restrictions on travel  Each consumer is willing to pay a different amount for  Number of seats available the same service  Avoid early booking passengers filling all the seats  Aims to maximise the revenue earned from a  Use to increase load factors particular flight  Particularly critical in the final month

Conclusions

 There are many different elements to airline operations  Determining the strategy of the airline can have a big impact on costs  These then need to be reflected within the pricing structure for seats  In maximising revenue, yield management is often deployed

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