Development of Business Strategy and Business Plans for Profitable Cargo Operations Dr Emre Serpen Executive Vice President, Head of Airline Practice

Transcription

1 Development of Business Strategy and Business Plans for Profitable Cargo Operations Dr Emre Serpen Executive Vice President, Head of Airline Practice

2 Improvement Profitability Cargo Operations

3 Benchmarking of Cargo Airline Commercial and Operational Performance to Identify Improvement Opportunities SCOPE SAMPLE DELIVERABLES This will include commercial, financial operational benchmarking of the Cargo Airline. The gaps in performance will be identified for further analysis. PROPOSED INTERVISTAS APPROACH Air Cargo World Annual Survey Establish peer group and key competitors Commercial Benchmarking (Belly, Freighter, Total) Volume of cargo carried, RATK,Yield, Load Factor, Revenues Freighter utilisation Operational and Productivity Benchmarking ATK, Cost per ATK ATK per Employee Tonnage per employee InterVISTAS Cargo Benchmark Data Repository Financial Benchmarking Net Revenue/ATK,Costs/ATK, Margin Air Cargo world annual Survey Overall survey assessment Staff competency Fares and value added programs E-freight enablement Customer satisfaction survey Analyze benchmarking results and identify areas that requires improvement. Comparative Analysis of Commercial Performance 3

4 Detailed Diagnostic will be Executed in Areas Where Performance is Behind Industry Best Practices Diagnostic analysis will include meetings, workshops and discussions with commercial, operations and support functions. Processes will be revised, improvement opportunities will be identified. What volume do you ship with Client yearly? What volume do you ship with other airlines? How many customers, apart from allotments, does Client serve on an average flight? Destination What are the reasons for not choosing Client Frequency Price On time delivery Losing/damaging Internal Meetings will include: Executive management Marketing Network design (passenger section for belly) Freighter route planning Capacity management Pricing Revenue Management Sales/stations (domestic/international) Key account management Supply chain management Inbound logistics Outbound logistics Warehouse management Finance Cargo Systems Performance management and Human Resources External Meetings and Workshops: Freight forwarders Key customers Diagnostic is executed using extensive cargo intellectual capital and cargo expertise Which factors influence your choice most? Do you think the pricing structures are changed to market circumstances often enough? How often shipments are flying with a competitor because of price? Shipments Traceability No Main Deck capacity Customer relations/information Other Destination Frequency Price On time delivery Warehouse handling Traceability Main deck capacity Customer relations/information Product range Global reach Billing accuracy Other Yes No Rarely Sometimes Often 4

5 Revenue Growth Through Improvement of Air Cargo Commercial Processes This will include analysis and evaluation of commercial activities to improve cargo revenues, yield and load factor for belly and freighter operations. Example Cargo Capacity Management Capacity management is focused to improve cargo leverage and communications between passenger and cargo teams thru planning and execution phases including Network Planning, Schedule Management, and Operations Control. Pricing and revenue management evaluates Pricing and Revenue Management activities for belly and freighter operations. LF forecasting, Critical flight management, bid pricing, allotment confirmation. Revenue planning and revenue delivery activities including pricing, revenue management and sales are assessed, and improved. With sales focus on key account management, development of long term revenues per key account and develop best practice key account management practices. Pilot routes will be selected, and recommendations will be implemented/tested. Example Cargo Revenue Management 5

6 Cost Reduction, Productivity and Customer Service Improvement Through Logistics/Supply Chain and Operations Improvement Scope is to improve end-to-end supply chain performance, improve reliability, reduce costs and improve customer service ratings. Inbound and Outbound logistics improvement Supply chain improvement include effectiveness of inbound and outbound cargo, use of standard, repeatable processes, integrated systems and compliance with e-cargo. Issues include improvements of communications between HQ and stations. Eliminate waybill related inefficiencies. Systems and facilities supporting inbound and outbound cargo are effective and integrated. Job specifications are revised and accountabilities improved. Develop cargo key performance measures. Implementation projects are identified and executed. Example: Cargo operations diagnostic Example : InterVISTAS Cargo Freighter Cost and Performance Database 6

7 Systems and Human Resources Diagnostic for Alignment with Strategy and Processes Objective is to review the systems supporting processes and identify improvement opportunities and ensure new processes are supported with integrated and effective systems. Example: Information flows e-freight assessment Audit systems currently used; Identify key functionality, integration, and technical limitations; Develop IT Strategy improvement plan; and identify priorities and Review implementation effectiveness of current systems recommend activation of modules, and better use of existing modules; Review Organization, Job specifications and performance management; Recommend improvements to the organization; Improve job specifications and develop key performance management. Example Systems strategy and system functionality Alignment of job specification and skills with strategy and processes Example: Cargo performance Management and Key Performance Measures 7

8 Development of Business Strategy and Business Plan

9 Tonnes Market Analysis and Forecasting to Identify Best Routes and Define the Basis for Subsequent Route Design and Improvement Objective is to conduct market and capacity analysis, evaluate relative share gap of Cargo Airline and its key competitors. This will drive scenario s for route development where the focus will be on routes where favorable demand and supply relationships. This is followed by Market forecasting on current and future potential routes. Example Tradelane Analysis Per country and import/export direction 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 39,555 32,178 37,038 Key NE Asia - Australia Export Tradelane Tonnage 89,023 70,541 71,320 66,007 66,788 64,204 45, , , ,000 80,000 60,000 40,000 20,000 10,000 Cargo Airline Airline route network is evaluated. Over the past two years capacity share growth of Airline s competitors are identified. This is complemented with market share growth of Airline and its competitors Kong Japan Group Total per. Mov. Avg. (Group Total) China Hong 2 - Market forecasting is executed for developing future growth of Airline s current and potential markets. This is done thru the use multiple methods: - Industry forecast s, including IATA, Boeing Airbus - Air cargo tradelane analysis: this will include both destination and transhipment cargo (O/D) - Tradelane forecasting is done in each direction (cargo imports and exports separately ) - Conduct workshops with freight forwarders and customers of Cargo Airline specific feedback on obtained key improvement needs, and what Cargo Airline should do for customers to book more cargo with Cargo Airline - Market forecast include weighted average of three methods where InterVISTAS uses its extensive experience and judgment Example Commodity Analysis Type of cargo Example Market Forecasting Route level In executing market analysis and forecasting work InterVISTAS uses its proprietary data sources obtained from industry research. 9

10 Market Share Forecasting will Provide Base Scenario Considering Market, Cargo Airline and Competitor Growth Objective if to forecast Airline s market share on current and future routes considering market forecast, and capacity growth of Airline and its key competitors in these routes. This will be used to identify determination of best routes where Airline has best chance to capture market share This will be used to design freighter route scenarios. First step is to determine the Airline s expected load factor for each route, regions and system wide, considering future market growth (from the previous market forecasting task). Analysis include following elements: - Future market sizes. - Market share growth based on current load factors. - Cargo capacity growth, driven by the growth of the passenger fleet. - Additional cargo capacity driven by freighters that may be committed to this route (capacity and frequency) - Total capacity including competitors operating this route. The routes will be prioritized according to best market share forecast and they will be used in developing scenarios for network design. Market share forecasting is done using InterVISTAS proprietary tools. InterVISTAS provides proprietary tools for route level cargo marketshare forecasting 10

11 Analysis of Network Scenarios For Improving Route Performance Scope to design/improve the route structure and freighter type/number/utilization maximizing route profitability. Analysis also drives the freighter performance improvement. If the Freighters types and number are given than the objective is to maximize route profitability with selection of the best route structure supported by cargo codeshares. Example: Route Analysis and Market Share Capture Models Market and Capacity Development Origin: CGK Market forecast CGK-pvg 31,337 34,453 36,933 39,610 42,434 Destination: pvg GA Capacity on CGK-pvg 4,260 4,380 6,588 8,760 8,784 Competition Capacity on CGK-pvg Growing LF in equal steps to desired LF Current Load Factor: 31% Desired belly LF on CGK-pvg 37% 43% 49% 54% 60% Desired Load Factor: 60% GA Capacity 4,260 4,380 6,588 8,760 8,784 Loads given current LF on CGK-pvg 1,338 1,376 2,070 2,752 2,760 Addtional cargo required to reach desired LF on CGK-pvg ,130 2,003 2,510 Addtional cargo required for 2 weekly Full Freighter ,732 4,732 Network scenarios will be developed thru analysis of following factors: - Routes with greater market size - Routes with greater market growth rates - Routes with greatest markets hare - Routes including greater current load factor Criteria will include weighted average, where weights include expertise and experience of InterVISTAS team. For selected routes deeper analysis will be executed: - Where the current share is less than expected share, analysis is executed to establish LF growth at the target routes in relation to market size Results will be discussed with Cargo Airline management and analysis will form basis of the route scenarios. Route scenarios will be subsequently tested for Freighter types that will be analyzed in the next task Including Narrow Body Belly (yes/no): no GA Capacity on CGK-pvg 4,260 8,784 Competition Capacity on CGK-pvg 0 0 GA Freighter (2 weekly) 0 6,760 Useful for ASA with both wide and narrow bodies Market share (business as usual) on CGK-pvg 4.3% 4.0% 5.6% 6.9% 6.5% Market share (high) on CGK-pvg 5.0% 5.4% 8.7% 12.0% 12.4% Market share when introducing 2 weekly Full Freighter 5.0% 5.4% 8.7% 24.0% 23.6% Example: Route Design/Improvement Driven by Scenarios

12 Development of the Business Plan with Revenue, Cost and Profitability Forecasting Including Strategy and Improvement Impacts Scope includes development of a route level business plan for different freighter types tested at different frequencies. The model is used to calculate the network profitability for belly and freighter operations Business plan method based on marketshare, fare, operating and capital costs for freighter and belly InterVISTAS will build the revenue-side of the model using the demand and revenue data gathered in the earlier stages of the project. We will also investigate how alternative agreements such as block-space. Direct and indirect aircraft-related costs will drive the expenseside of the model. InterVISTAS will use real world cost data from other carriers operating these aircraft. Unit costs will be applied to the operation based on key operating statistics such as block hours, landings or other appropriate barometers. We will be able to accurately predict direct and indirect costs, as well as revenue, and will run sensitivity analyses to model various financial and operating variables: - Direct costs will include fuel, maintenance, crew, ground handling, over flight, ownership etc - For belly cost per KG carried will be used. If airline is allocating other direct and indirect costs these will be used. Profitability forecast will be developed for belly and freighter operations. 12 Business plan is based on directional (inbound and outbound route level profitability CGK-PVG (V.V.) by A330 Freighter Total Operating Revenues Scheduled Full Freighter Revenue 10,869,673 10,869,673 16,304,509 16,304,509 - Passenger (belly) Revenue 7,153,070 7,264,308 10,815,246 14,233,240 14,124,143 Total Revenue CGK-PVG (V.V.) 7,153,070 18,133,981 21,684,919 30,537,750 30,428,652 Direct Operating Cost (excluding Ownership) Fuel - 6,512,381 6,512,381 9,768,571 9,768,571 Cockpit Crew - 651, , , ,857 Maintenance - 781, ,486 1,172,229 1,172,229 Depreciation - 2,050,194 2,050,194 3,075,291 3,075,291 Insurance 85,425 85, , ,137 ATC/LDG charges - 673, ,367 1,010,050 1,010,050 Sales Commision - 156, , , ,350 Total Direct Operating Cost - 8,618,472 8,618,472 12,927,708 12,927,708 Total Indirect Operating Cost - 2,292,518 2,292,518 3,438,778 3,438,778 Total Full Freighter Operating Cost - 10,910,990 10,910,990 16,366,485 16,366,485 Passenger (belly) Operating Cost 7,653,167 7,942,968 12,082,153 16,245,108 16,469,692 Total Operating Cost CGK-PVG (V.V.) 7,653,167 18,853,958 22,993,143 32,611,593 32,836,178 Profit (Belly Space, US$) -500, ,660-1,266,906-2,011,867-2,345,550 Profit (Full Freighter, US$) - -41,317-41,317-61,976-61,976 Total Profit (US$) -500, ,977-1,308,224-2,073,843-2,407,526 Profit Margin (Belly Space, %) -7.0% -9.3% -11.7% -14.1% -16.6% Profit Margin (Freighter, %) -0.4% -0.4% -0.4% -0.4% Total Profit Margin (%) -7.0% -4.0% -6.0% -6.8% -7.9%

13 Cargo Transformation and Implementation Plans will be Developed Scope includes development of implementation plan including strategy, process, systems. This will be backed with specific action plan, The implementation of quick hits will start during the project. Example: Cargo Transformation Plan Transformation plan will be developed Projects will include: - Implementation of the strategy - Improvement of revenues - Improvements in costs and productivity - Improvements in customer service and development Example: Specific Improvement Actions Improvement actions will be classified according the business benefit and ease of implementation. These will include: - Capacity Management - Pricing and revenue Management - Supply Chain/operations - Systems - Performance Management 13

14 InterVISTAS Provides Cargo Route Performance Analysis, Design and Business Planning Tools Example: Project Approach Example: Route Analysis Example: Freighter and Belly Business Plan Example: Diagnostic Analysis SAR (Millions) Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Operating Revenues (Net) Total Cargo Scheduled Revenue Cargo Charter Revenue Other Revenue Total Revenue Aircraft & Other Lease Costs (Incl. Ownership) Flight Crew Employment Cost Fuel Direct Maintenance Landing Fees Overflight Aircraft, Engines & Components Depreciation Insurance Passenger Operating Costs Charter Operating Costs Total Aircraft & Other Lease Costs Total Indirect Operating Costs Total Operating Costs Profit (Loss) Profit Margin 4% -1% -8% -5% -1% 2% 4% 7% Operating Metrics Freighter Fleet at Year-End 12/ Total Weekly Departures (both directions) Total Block Hours 8,173 9,623 11,859 13,757 14,073 14,454 14,454 14,454 Total Available Ton Kilometers (Millions) Total Cargo Carried (000s) 63,649 70,161 77,818 92,531 98, , , ,426 Average Rate per Kilogram Comparative Metrics Average Daily Utilization (Block Hours) Average Block Hours per Flight System Load Factor (Belly/Freighter Combi) 76.9% 64.5% 55.4% 58.5% 59.4% 62.0% 64.6% 67.3% Total Operating Revenues per ATK Total Direct Operating Costs per ATK Total Operating Costs per ATK Total Operating Revenues per Block Hour 66,613 65,776 57,786 59,065 61,304 62,771 65,279 67,896 Total Direct Operating Costs per Block Hour 26,705 38,497 38,640 39,566 40,075 40,133 40,736 41,349 Total Operating Costs per Block Hour 64,272 66,431 62,444 61,786 61,854 61,699 62,370 62,969 14

15 Selected Credentials for Cargo Projects MNG Cargo Garuda Cargo Saudi Arabian Cargo Malaysian Cargo Diagnostic Analysis Review Pricing, Revenue Management and Sales processes Development of Revenue Management process Recommendations on organization, job specifications Systems recommendations Lead Consultant: Dr. Emre Serpen Sri Lanka Airlines Cargo Diagnostic Analysis of Belly and Freighter operations Market forecasting Freighter business evaluation Business plan development Implementation plan Lead Consultant: Dr. Emre Serpen Diagnostic and benchmarking Market and capacity analysis Freighter network market share forecast Route evaluation and design Freighter analysis Business plan Implementation Plan Lead Consultant: Dr. Emre Serpen Saudi Arabian Cargo Privatisation Diagnostic Analysis of Belly and Freighter operations Development of cost model Development of business plan Support of the due diligence with investor queries Sales was completed with successfully with higher than expected subscription Lead Consultant: Dr. Emre Serpen Execution benchmarking Route evaluation for revenue improvement Freighter aircraft appraisal Service levels/ transfer price Market and revenue forecasting for belly and freighter operation Market forecasting and priorities Lead Consultant: Dr. Emre Serpen Client Successful application for U.S.-China authority in U.S. DOT route proceeding. route case strategy with UPS direct and rebuttal exhibits. proceeding included both U.S. pax and. all-cargo airlines competing for a single award. Lead Consultant: Douglas Banez Developed business case Managed the procurement to secure systems and services Program management of development, testing and implementation of new -- network planning, -- revenue management, -- pricing and data warehouse systems; Cathay Pacific Cargo Diagnostic of cargo processes Review of the Cargo Systems supporting the processes; Identify improvements in commercial cargo processes; Prioritize requirements for solutions supporting cargo processes; and Develop Implementation plan. Lead Consultant: Dr. Emre Serpen 15

16 Please contact Dr. Emre Serpen for any queries on this document Thank You!