Airline Business – Airline Network Strategies
Home Airport:
O+D potential
o Population size
o Economic activity
o Wealth
o Accessibility
o Surface alternatives
o Surrounding airports
Hub potential
o Airway routing
o Directionality
o Capacity
o Time zone
o Connecting airlines
Strategy
o Every airport has two potential forces relevant for the airline
o Airline networks are designed for optimal utilization of either one of two or
both forces
Product definition:
o Via home product
o Exploiting the hub quality of the home airport and the airline as transfer
point
o To home product
o Exploiting the attractiveness of the home airport as a destination
o From home product
o Exploiting the catchment area of the home airport
,Cost management
Cost control:
Cost allocation
o Identify real cost
Cost effectiveness
o Do we need / can we sell what we get for the cost
o Optimal utilization of production capacity
o Airline planning
Minimizing fixed cost per unit (ASK)
Cost comparison
o Are we cost competitive
Utilizing resources
o Fixed cost are fixed with time
o Over time, fixed cost become variable
Over time we can change flee
Over time we can change the workforce
Cost allocation:
Total cost
o Total fixed cost + total variable cost +
total indirect cost per year
Unit cost
o Total fixed cost + total variable cost +
total indirect cost per year / total
production ASK’s
CASK
Cost per flight
o Total fixed cost per flight hour * flight time +
o Total variable cost for this flight
o Total indirect cost (per Year/total ASM) * ASM produced by this flight
Cost per product
o Total cost flight to home / nr of seats in the aircraft +
o Total cost flight home to destination / nr of seats in the aircraft
Cost of connectivity
o If this connectivity is by coincidence
No cost
o If aircraft need to wait for this connection
There will be costs
o Maximum utilization - Actual utilization of production capacity = cost of
connectivity
Cost per fleet
o Total operating cost / flight hours produced = fixed fleet cost per hour
, Unit cost per fleet
o Total operating cost / ASK’s produced = fleet cost per ASK
Cost versus Revenues:
Cost effectiveness
o Optimal utilization of fixed production capacity
When production goes up, cost per unit goes down
Main questions:
o Can we sell the units produced
o Can we sell at prices higher than the costs
o Which products contribute to profitability
Total airline:
Are we profitable
o Is an individual route profitable
o If not, can we make it profitable
Do we need the flight for network synergy
Revenues > cost
If not, or insufficient, we have to find out why
o Cost too high
o Revenues too low
Products:
Are we selling this connection at the right price
Do we sell the connections via home
o If so, do we sell the connection
Revenue > cost
o If not, we can optimize schedules per destination
Frequencies:
Do we deploy the optimal fleet
If not, we need to evaluate other aircraft types
Cost calculations:
Cost calculation is not only for calculation cost as such
Different approaches to cost calculation create a management toolbox for optimizing
the airline
Airline management:
Successful airline management
o Understanding cost by using cost allocation methods
o Understanding revenue streams by analyzing markets
Resulting in
o Producing the right products in the right quantities
o For markets prepared to pay more than the production cost
Home Airport:
O+D potential
o Population size
o Economic activity
o Wealth
o Accessibility
o Surface alternatives
o Surrounding airports
Hub potential
o Airway routing
o Directionality
o Capacity
o Time zone
o Connecting airlines
Strategy
o Every airport has two potential forces relevant for the airline
o Airline networks are designed for optimal utilization of either one of two or
both forces
Product definition:
o Via home product
o Exploiting the hub quality of the home airport and the airline as transfer
point
o To home product
o Exploiting the attractiveness of the home airport as a destination
o From home product
o Exploiting the catchment area of the home airport
,Cost management
Cost control:
Cost allocation
o Identify real cost
Cost effectiveness
o Do we need / can we sell what we get for the cost
o Optimal utilization of production capacity
o Airline planning
Minimizing fixed cost per unit (ASK)
Cost comparison
o Are we cost competitive
Utilizing resources
o Fixed cost are fixed with time
o Over time, fixed cost become variable
Over time we can change flee
Over time we can change the workforce
Cost allocation:
Total cost
o Total fixed cost + total variable cost +
total indirect cost per year
Unit cost
o Total fixed cost + total variable cost +
total indirect cost per year / total
production ASK’s
CASK
Cost per flight
o Total fixed cost per flight hour * flight time +
o Total variable cost for this flight
o Total indirect cost (per Year/total ASM) * ASM produced by this flight
Cost per product
o Total cost flight to home / nr of seats in the aircraft +
o Total cost flight home to destination / nr of seats in the aircraft
Cost of connectivity
o If this connectivity is by coincidence
No cost
o If aircraft need to wait for this connection
There will be costs
o Maximum utilization - Actual utilization of production capacity = cost of
connectivity
Cost per fleet
o Total operating cost / flight hours produced = fixed fleet cost per hour
, Unit cost per fleet
o Total operating cost / ASK’s produced = fleet cost per ASK
Cost versus Revenues:
Cost effectiveness
o Optimal utilization of fixed production capacity
When production goes up, cost per unit goes down
Main questions:
o Can we sell the units produced
o Can we sell at prices higher than the costs
o Which products contribute to profitability
Total airline:
Are we profitable
o Is an individual route profitable
o If not, can we make it profitable
Do we need the flight for network synergy
Revenues > cost
If not, or insufficient, we have to find out why
o Cost too high
o Revenues too low
Products:
Are we selling this connection at the right price
Do we sell the connections via home
o If so, do we sell the connection
Revenue > cost
o If not, we can optimize schedules per destination
Frequencies:
Do we deploy the optimal fleet
If not, we need to evaluate other aircraft types
Cost calculations:
Cost calculation is not only for calculation cost as such
Different approaches to cost calculation create a management toolbox for optimizing
the airline
Airline management:
Successful airline management
o Understanding cost by using cost allocation methods
o Understanding revenue streams by analyzing markets
Resulting in
o Producing the right products in the right quantities
o For markets prepared to pay more than the production cost
