Strategic Planning for Airlines. Dr Emre Serpen, Intervistas Consulting Group EVP

Transcription

1 Strategic Planning for Airlines Dr Emre Serpen, Intervistas Consulting Group EVP

2 Intervistas team members have extensive airline strategy and network design assignments worldwide

3 Examples of Strategy and Network Design Projects Dr. Emre Serpen Turkish Airlines Market evaluation, capacity assessment, SWOT analysis 2016 and 2012 network design, hub design, and schedule Business plan associated with the strategy South African Airways Marker assessment Strategy for maximizing share in Africa Selection of hub locations in west and central Africa Network design and fleet plan Business plan Temasek (SQ) SWOT analysis of Singapore Airlines Market forecasting Identify growth opportunities Develop strategy for medium and long haul network and fleet Lead Consultant: Dr. Emre Serpen Lead Consultant: Dr. Emre Serpen Lead Consultant: Dr. Emre Serpen Executive Vice President, Head of Airline Practice 20 + years, 70 + airlines in 50 + countries Malaysian Airlines Evaluated the feasibility of a premium service in conjunction with another airline Market Forecasting Route Design Commercial Workshops Joint Venture/Codeshare Benefits EgyptAir Company-wide strategy and turnaround Development of network, Cairo hub, and schedules Improvements in sales, marketing, organization, IT Fleet & Business Plan LOT Polish Airlines Multiple network optimisation projects Alliance strategy analysis and decision for LOT to joined Star Alliance Develop Asian strategy and network for LOT Evaluate joint venture with Indian partner Lead Consultant: Dr. Emre Serpen Lead Consultant: Dr. Emre Serpen Lead Consultant: Dr. Emre Serpen

4 Examples of Strategy and Network Design Case Studies Continental Lufthansa Airlines Optimisation of Frankfurt and Munich hubs Advised Lufthansa on the ramifications of deregulation of the European market Examined in detail the history and competitive implications of U.S. deregulation Lead Consultant: Jim Miller SriLankan Airlines Diagnostic assessment Market evaluation and forecasting Network design, Colombo hub design Fleet plan Commercial improvements Business plan Lead Consultant: Dr. Emre Serpen Delta Air Lines Hub optimisation of Atlanta ATL and Memphis MEM hubs Improved network contribution of Delta s domestic flying Fleet optimisation between mainline and regional aircraft Lead Consultant: Zach Mensen Istanbul Airport Medium to Long Term Passenger Forecast to 2040 for Istanbul s new Third Airport Fleet Plan forecasts for fast-growing Turkish Airlines (TK) Future IST hub route design for TK and other airlines Lead Consultant: Dr. Emre Serpen Czech Airlines ČSA Network design and route optimisation for ČSA Short term improvements for the summer schedule by connecting and improving and flights Lead Consultant: Dr. Emre Serpen Air Canada Hub optimisation of Toronto YYZ regional USA network Fleet optimisation using Fleet Assigner modelling software, to maximize medium and short term profitability New route forecasts Lead Consultant: Marcus Lam

5 Intervistas uses Industry Trusted Sources And Professional Network Optimisation Tools. The modelling tool uses discrete choice methodology, an advanced form of the QSI passenger market share forecasting method.

6 Strategic Planning for Airlines - Overview Strategic Intent Strategic Assessment Network Design and Fleet Planning Business Model Alignment Business and Implementa tion Planning Global Continent/Region Country Specific Segment Demand Supply SWOT Market Forecasting Long Term Short Term Hub Design Fleet Planning Commercial Operational Subsidiaries Organisational Business Plan Implementation Plan 6

7 Analytical Framework for Multi Country Strategy Step 1: Obtain Macro Economic, Air Traffic, Competition, Governance and Operational Cost data for each country. Step 2: Assign Score; Best in Category country is assigned a 10.0 score; scores of other countries are assigned a score relative to the Best in Category country. Step 3: Add up all scores per the weighting of each category to calculate a final score for each country. Weight South Africa C1 Egypt C2 Nigeria C3 Ghana C4 Botswana C5 Ethiopia C6 Cote d'ivoire C7 Mauritius C8 Seychelles C9 Algeria C10 Macro Economic 25% GDP per Capita 35% GDP Growth Forecast Average 35% Population 30% Air Traffic 25% Intra Africa Oubound Pax (2012) 50% # of City Pairs (<140% Circuity) 50% Competition 17% Seat Share of Dominate Airline 33% Population/Outbound Seat 33% Quality of Competition (SkyTrax Rating) 17% Presence of Competition 17% Governence 17% Stability 25% Ease of Business 25% Corruption 25% Infrastructure 25% Operational Cost 17% Fuel 25% Maintenance 15% Landing costs 15% Departure costs 15% Navigation 15% Catering and Handing 15% Source Intervistas Analysis 7

8 Multi country strategy additional criteria Strategic Intent 1. Participate in markets 2. Ensure choice of profitable airlines 3. Strategic view of the Continent and development of an airline system for future dominance of Continent Egg 1) Gov. 2) Air Asia, 3) LAN 4. Readiness to challenge established incumbent airlines thru superior product and execution 5. Leverage previous investments existing assets 6. Pre-selection of Countries Source Intervistas/Burlington Analysis 8

9 Continental or Multi Country Strategy -Qualification Example: O/D Pax and Growth Rate Example: Flying Population South Africa Egypt Angola Nigeria Morocco Sudan Tunisia Algeria Kenya Zimbabwe Libya Ethiopia Cameroon Ghana Congo, Republic DRC Zambia Cote d'ivoire Tanzania Uganda Namibia Burkina Faso Senegal Botswana South Sudan Gabon Mali Mauritius Lesotho Mozambique Benin ,000 1,250 4,000K Example :Consumer Markets Source Intervistas Analysis 9

10 Single country strategy, selection of hub structure 10

11 Strategic Planning in Airlines - Overview Strategic Intent Strategic Assessment Network Design and Fleet Planning Business Model Alignment Business and Implementa tion Planning Global Continent/Region Country Specific Segment Demand & Supply SWOT Market Forecasting Long Term Short Term Hub Design Fleet Planning Commercial Operational Subsidiaries Organisational Business Plan Implementation Plan 11

12 Market Analysis EXAMPLES MARKET ANALYSIS Year-on-year growth of Airline s key markets Identification of markets with fast and high yield growth opportunities Analysis of Airline s capacity growth competitors in key markets Evaluation of share gap and identification of opportunities where market growth exceeds marketshare growth Source Intervistas Analysis Evaluation of region to region growth (Airline market share growth, total market growth, considering circuity and yield) Identification of Airline market share: market share growth in growing markets market share loss in growing markets market share growth in shrinking markets market share loss in shrinking markets Relationships between market, market share and pricing changes 100 o/d thru the hub, relative changes of share of different airlines given the hub advantage of the home airline Source Intervistas Analysis

13 Example Analysis of Market Sizes and Fares in Russia Source Intervistas Analysis Note: Average fares excludes taxes, surcharges and fees. Source: Diio FMG, 2012

14 SWOT, Connectivity Analysis Example Analysis SWOT Year-on-year growth of Hub operation including connectivity Maximum connections and minimum connect time analysis between Airline and its competitors at Hub, and identify improvement opportunities Analysis of connecting markets identified in Market Analysis and identify connection improvement opportunities Hub capacity analysis (growth in seats, ASK s, destinations, frequencies), and level of competition on routes (Airline versus other carriers) Evaluation of Hub connectivity pattern by region and by time-ofday, and identify improvement opportunities. Analyse Airline hub connectivity using network optimisation tools and identify preliminary connecting opportunities Evaluation of Hub Hub Constraints (capacity, airspace, gates, slots, etc.). Source Intervistas Analysis

15 Passenger, Capacity, Revenue Trends and Share Source Intervistas Analysis Source: Diio FMG 15

16 Total Seat Capacity EK/SQ/TK (Millions) Total Seat Capacity (Millions) Benchmark competing hubs Total Capacity at Major Hubs over time 5.2% 36.4% 58.4% Nonstop Competition from Comparative Hubs 1.1% 10.3% 10.5% 10.0% 34.1% 36.0% 46.2% 46.1% 20.9% 22.0% 43.4% 43.4% 44.0% 32.0% Quarter TK - IST AF - CDG LH- FRA EK - DXB SQ - SIN No Competition 1 Competitor 2-4 Competitors 3+ Competitors CDG FRA MUC DXB Total Seats Capacity EK SQ AF* LH* Total Seat Capacity AF*/LH* (Millions) Source TroyAvi Analysis EK - DXB SQ - SIN Destinatio Frequencie Destinatio Frequencie Region Countries ns s Countries ns s Africa Domestic Europe Far East Latin America Middle East North America Oceania South Asia TOTAL ,

17 Market Forecasting Example Analysis Market forecasting Top down = GDP/capita X Elasticity Bottom Up = MIDT/PAXIS/DIIO Analyse forecast results to identify specific market forecast insights: 1. Sort by market size Source Airbus 2. Sort market growth rate 3. Sort by yield 4. Sort by circuitry 5. Sort by Size x growth rate x yield x circuitry 6. Destinations Airline is not flying Under represented markets identified in the market forecast will be used in scenario formulation

18 Strategic Planning in Airlines - Overview Strategic Intent Strategic Assessment Network Design and Fleet Planning Business Model Alignment Business and Implementa tion Planning Global Continent/Region Country Specific Segment Demand Supply SWOT Market Forecasting Long Term Short Term Hub Design Fleet Planning Commercial Operational Subsidiaries Organisational Business Plan Implementation Plan 18

19 Long Term Network Design Example Analysis Overview of Network Design Calibration Scenario Development Unconstrained long term view Maximise commercial opportunity Market Forecast, Average Fares, Costs, Schedules Overbuilt Analysis Test different scenarios Network Optimisation Network that maximises Route Level Variable contribution Evaluate frequency changes New service opportunities. Schedule options Connecting traffic opportunities at Hub. DME SVO 19

20 Hub connectivity Connectivity and optimisation evolution Example Analysis Execute Airline hub optimisation, adjusting number, timing, and directionality of flights Add frequency and capacity according to demand and profitability without slot constraints. This unconstrained scenario will define maximum benefit opportunity. Determine changes in connectivity, passenger numbers and yield for long haul pillar flights, medium haul flights, regional flights, short haul domestic flights. Improve Airline s market share in fast growing, high yield markets with good Hub circuitry. Improve meaningful connections offered at Hub. Improve competitiveness compared with other regional airlines and gateways. Improvements in overall connect time and passenger share on key markets. Improvements of revenue and variable contribution through improved hub design. Once the runs of each qualified scenario are finished, a quantitative comparative evaluation is be undertaken where the relative strengths and weaknesses of scenarios will be discussed Intervistas Analysis Source: OAG, July 10-16, 2000

21 Hub design and optimisation (continued) Example Analysis Overbuild maximise margins Lang haul flights optimisation Medium to short haul flights optimisation Within bank flight optimisation Maximising connection of high yield markets Stagelength (Hrs) Optimise hub connectivity 8 6 DEL 4 LHR LHR 2 BUD BUD BUD Time at Base (IST) Source Intervistas Analysis

22 Evaluation of optimised schedule effectiveness Improvements in Hub Performance Source TroyAvi Analysis

23 Long Term Network Comparison Optimisation of improvements across interim schedules From passenger revenues, route profitability is also calculated. This includes route revenues and costs the basis of network and hub optimisation Source TroyAvi Analysis

24 Short term Network Optimisation Example Analysis Example: Constraints with Impact on Profitable Network Growth Objective is an optimised short term hub design, including improvements in connecting markets and incremental financial performance compared with the current schedule. A list of potential new destinations and frequencies identified for immediate implementation Evaluate current near-term operational constraints at Hub (airspace, aircraft movements during peak hours, bilaterals, slots, curfews, gate space restrictions) which may prevent increase of frequency/capacity of flights or the introduction of new flights. Analyse Airline s capability in consistently delivering aircraft turn times (critical for optimal hub performance). Focus on time of day changes to maximise number of meaningful connections between markets as these could be implemented without much operational impact Sort flights according to contribution and take action for improvements in system wide variable contribution Example: Evaluation of Flights According to Route Profitability and Revenue Performance

25 Example Evaluation Of Airport Constraints Is Important In Constraints limiting network growth Development Of Practical And Implementable Network Design Example: Connect Times Example: ATM s Standard Hub Carrier #1 Hub Carrier #2 Airport HC1 HC2 D-D D-I I-D I-I D-D D-I I-D I-I D-D D-I I-D I-I AMS KL AUH EY BKK TG CAI MS DOH QR DTW DL DXB EK FRA LH HKG CX n/a n/a n/a 60 n/a n/a n/a 50 IAH CO ICN KE OZ IST TK KUL MSP DL MUC LH NRT JL NH PHL US SAW TK SEA AS SIN SQ n/a n/a n/a 60 n/a n/a n/a 50 25

26 Fleet Planning Example Analysis. Develop optimal fleet plan supporting the long term network plan Provide recommendations for redeployment of fleet plan Review current Airline fleet including age, maintenance requirements/costs, onboard product, range, fuel burn and fleet commonality. Review current fleet orders and compare it against the optimised long term network requirements maximizing route profitability and fleet utilization. Apply fleet plan to proposed passenger forecast and schedule to assess the optimal types/mix of aircraft that will most efficiently operate the route network. Assess how the fleet plan will evolve over the forecast period taking retirements and new deliveries into consideration. Ensure that fleet utilization is optimised Develop optimal narrow body and wide body fleet ratios in the near term, considering optimal requirements for the Hub Buy versus lease calculations Example: Fleet Operating Costs Analysis Example: Fleet Optimisation Analysis Intervistas Analysis

27 Example Aircraft Financing Evaluations Source DVB bank, AISI

28 Example Aircraft Buy Versus Lease Calculations Source Intervistas Analysis

30 Business Model Alignment - Commercial Processes Example Analysis Alignment of commercial processes with the new business model and route strategy. These will include changes in pricing, distribution and product strategy supporting the business model changes and route strategy Distribution benchmarking, segments, unit revenue, unit cost per channel Changes in Distribution mix with focus on direct channels without losing high yield GDS channels Development of the distribution strategy Meetings with Airline key customers, (travel Agency, Corporate) and establish improvement priorities Alignment of commercial organisation Alignment of performance measures. And key performance measures for the leadership of Airline Airlines These will drive further improvement projects Source Intervistas Analysis 30

31 2.2 Business Model Alignment- Operations and Support Processes Example Analysis Alignment of the operational activities support business model changes Review cost structure, assess changes to the operational costs, productivity improvements Determine improvements in performance targets to support the business model changes Determine target CASK to support business model Review current cost structure, direct and indirect Direct costs include - Fuel, MRO, Ground Handling, Catering, Determine initiatives for productivity improvement and unit cost reduction to meet target CASK Alignment of the operational activities support business model changes- Crew and integrated operations control improvements Alignment of MRO activities Alignment of organisation and performance measures Projects and initiatives for reduction of operational costs and improvements in productivity This will include major cost items such as Fleet (Utilisation), maintenance, crew, ground handling costs, overheads and other areas 31

33 Business Plan Development Example Activities Example Development of Business Plan New Forecast Operating Results Current Debt & Capital Structure Business plan is driven by the new network, fleet, and alignment of commercial and operational functions including revenue and cost forecast.. Based on the revenue and cost forecast conducted above, create a five-year operating profitability and profit margin forecast of the airline is developed. This will include estimate of capital expenditure and working capital for the start up period Sensitivity analysis is executed for the most important drivers in the model, such as fleet size, load factor, yields, price of fuel, etc Identify key revenue and cost drivers and develop risk scenarios that test the assumptions upon which they are based to understand the extent to which the business is sensitive to these assumptions. To deliver the business model changes, an overall migration plan will be developed. This will be complemented with specific improvement initiatives and projects. Technique Options Evaluation Through Modeling Source ICF Expense Forecast Projected Financial Results Cash Flow from Operations Cash Plan Debt Restructuring Opportunities Modify for Fleet Changes & Restructuring Example Development of Business Plan Capital Spending Cash Requirements Potential Sources of Capital Debt Service Requirements Revenues Passenger Revenues 91,659 96,538 94,629 90,486 90,486 90,486 90,486 Other Revenues 11,190 20,224 16,599 18,274 18,274 18,274 18,274 Total Revenues 102, , , , , , ,759 Operating Expenditure Total Variable Costs 68,610 85,694 71,147 65,191 65,015 65,015 65,015 Total Fixed Direct Operating Costs 28,324 30,018 30,102 30,187 30,187 30,187 30,187 Indirect Operating Costs Other Staff Salary Costs 3,041 2,953 3,349 3,481 3,481 3,481 3,481 Other Indirect Costs 5,511 3,961 3,961 3,961 3,961 3,961 3,961 Total Indirect Operating Costs 8,552 6,914 7,309 7,442 7,442 7,442 7,442 Total Operating Expenditure 105, , , , , , ,643 Debt Equity EBITDA -2,636-5,865 2,668 5,940 6,116 6,116 6,116 EBITDA Margin -3% -5% 2% 5% 6% 6% 6% Change versus Baseline EBITDA ,002 3,975 3,975 3,975 EBITDA Margin 0% 0% 1% 4% 4% 4% 4%

34 Exhibit 31Business Plan Development Cash Flow Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Working Capital (Start) 40,000,000 31,637,500 27,686,010 25,538,207 23,444,248 19,991,710 15,912,597 14,047,140 11,962,270 Operating Revenue 2,744,094 2,396,536 2,725,847 2,819,215 3,779,495 4,136,597 4,719,013 6,091,082 5,433,022 Operating Expenses 4,315,595 4,128,026 4,314,317 4,268,174 5,672,700 5,629,043 5,746,804 7,175,952 7,032,587 Initial CapEx Outlay 3,791,000 2,220, , , ,333 2,586, , ,667 Additional CapEx Aircraft Security Deposits 3,000, ,000, ,000,000 - Working Capital Changes (8,362,500) (3,951,490) (2,147,803) (2,093,959) (3,452,538) (4,079,112) (1,865,457) (2,084,871) (1,792,232) Working Capital (End) 31,637,500 27,686,010 25,538,207 23,444,248 19,991,710 15,912,597 14,047,140 11,962,270 10,170,038 Cash Flow Oct-11 Nov-11 Dec Working Capital (Start) 10,170,038 8,737,794 7,451,873 40,000,000 6,331,634 (5,087,537) 14,687,757 88,001,184 Operating Revenue 5,773,966 5,982,714 6,451,036 53,052, ,466, ,703, ,005, ,142,240 Operating Expenses 7,151,210 7,075,968 7,204,609 69,714, ,885, ,927, ,692, ,015,566 Initial CapEx Outlay 55, , ,667 12,006, Additional CapEx - 1,000,000 1,000,000 1,000,000 1,000,000 Aircraft Security Deposits ,000,000 5,000,000 5,000,000 10,000,000 10,000,000 Working Capital Changes (1,432,244) (1,285,921) (1,120,239) (33,668,366) (11,419,172) 19,775,294 73,313, ,126,674 Working Capital (End) 8,737,794 7,451,873 6,331,634 6,331,634 (5,087,537) 14,687,757 88,001, ,127,858

35 Thank You Please contact Emre Serpen for queries