Embed Size (px)
Citation preview
A MAgAzine for Airline executives 2012 issue no. 1
Making Flying Good Again
New technology streamlines bidding processes for aviation employees
Azul achieves phenomenal success in three years
Biofuels may help airlines meet CO2 targets and control fuel costs
558 70
A Conversation With … David Cush, President and
Chief Executive Officer, Virgin America,
Pg. 12
t a k i n g y o u r a i r l i n e t o n e w h e i g h t s
t a k i n g y o u r a i r l i n e t o n e w h e i g h t s
2012 issue no.1 editor in chiefStephani Hawkins
Art Direction/DesignCharles Urich
Associate editors Anita Allen Bradley Bennett
contributors Tyler Anglim, Angela Berry, John Chen, Dominique Lecomte, Suzanne Levesque, Thai-Ling Maltez, Julie Medulan, Michelle Priller, Beatriz Silva, Barry Vandevier, Robert Wiseman, George Wrigley
PublisherSabre Airline Solutions® www.sabreairlinesolutions.com
Awards
Awards for Publication Excellence: 2011, 2009, 2008, 2007, 2006, 2005, 2004 ECO Awards For Excellence In Environmental Communications: 2009 Hermes Creative Awards: 2011, 2010, 2009, 2008 International Association of Business Communicators Bronze Quill: 2011, 2009, 2008, 2007, 2006, 2005, 2004
International Association of Business Communicators Gold Quill: 2006, 2005 International Association of Business Communicators Silver Quill: 2008, 2006, 2005, 2004
MarCom Platinum Award: 2010
The Communicator Award: 2011, 2010, 2008
makingcontact
Asia Pacific Theo Panagiotoulias General Manager Phone: +65 6215 9518 Email: [email protected]
Europe Alessandro Ciancimino General Manager Phone: +39 348 3708240 Email: [email protected]
Latin America John Elieson General Manager Phone: +1 682 605 1797 Email: [email protected]
Middle East And Africa Maher Koubaa General Manager Phone: +973 38350001 Email: [email protected]
North America Mike Douglass General Manager Phone: +1 682 605 5349 Email: [email protected]
Sabre Airline Solutions, the Sabre Airline Solutions logo and products noted in italics in this publication are trademarks and/or service marks of an affiliate of Sabre Holdings Corp. All other trademarks, service marks and trade names are the property of their respective owners. ©2012 Sabre Inc. All rights reserved. Printed in the USA.
Address corrections And reader inquiriesIf you have questions about this publication, suggested topics for future articles or would like to change your address, please send an email to [email protected].
If you have questions about this publication or want to suggest a topic for a possible future article, change your address or add someone to the mailing list, please send an email to the Ascend staff at [email protected].
For more information about products and services featured in this issue of Ascend, please visit our website at www.sabreairlinesolutions.com or contact one of the following Sabre Airline Solutions regional representatives:
reedom. You may have seen the word “freedom” in our ads and brochures as well as on our website. You may have even heard us talk about it in meetings or at conferences. That’s because it’s our
mission to provide airlines with the freedom to better market their product, sell to their customers, serve their customers and operate their airline the way they want.
Clearly, there are many aspects of the airline industry where freedom simply doesn’t apply.
Each day airlines like yours face the complexities of coordinating across all departments to make strategic deci-sions, market and sell through multiple touchpoints, respond to irregular opera-tions and simply ensure that your airline operates as efficiently as possible. This level of coordination is challenging at best.
On top of managing these complexi-ties, there are rules and regulations established by governmental regulatory agencies and industry associations such as the European Aviation Safety Agency, the Civil Aviation Authority, the U.S. Federal Aviation Administration and IATA. While these regulations promote safety and manage air traffic control in all aspects of civil aviation, they come with many restrictions.
With all the limitations put upon air-lines as well as the task of effectively managing a complex business, how can we talk about freedom?
First, we don’t dwell on industry rules and regula-tions. We know they exist, and many are a necessity. We know most, if not all, are here to stay. So we help airlines work within them. We offer ways for airlines to operate at top efficiency, giving them the freedom to grow, despite existing boundaries.
Second, we base our mission on and build our tech-nology around choice. As the industry’s largest Software as a Service provider, we offer the broadest portfolio of solu-tions so airlines can increase revenue, decrease costs and deliver a unique customer experience. This gives airlines of all business models and size the freedom to uniquely grow and evolve. Our solu-
tions provide freedom because: There are no constraining applications or
platforms, They work with an airline’s existing appli-
cations or that of third-party providers, They are built on flexible open-architec-
ture technology, They include flexible business processes, They adapt as an airline’s business chang-
es, They share data seamlessly across the
enterprise. In addition to rules, regulations and
complexities, there are other challeng-es airlines face on a daily basis. For example, fuel has always been an uncon-trollable expense. Sure, it may seem like we’ve talked this subject into the ground. Nonetheless, the challenge of managing fuel expense is very real for airlines, and it’s not going away.
For decades, many airlines have practiced fuel hedging. However, the stakes are high, giving reason to look for alternate options. In recent years, sev-eral airlines, aircraft manufacturers and other industry-related companies have performed or plan to perform tests using a mix of traditional jet fuel and biofuels. While this will help airlines meet aggres-sive carbon emissions targets, biofuels are still more expensive than traditional fossil fuel, so they aren’t a viable option today.
At present, there are three ways to address rising fuel costs:
Burn less fuel. There are a number of ways airlines can reduce fuel burn, such as effec-tive fleet planning (where and how you deploy your aircraft) and improved flight planning practices.
Generate more revenue. One example is strategically merchandising ancillary prod-ucts and services that appeal to a variety of customer segments.
Drive cost efficiencies in other areas. For instance, increase aircraft utilization, improve resource planning and better man-age off-schedule (irregular) operations. Again, we must find ways to work
around the aspects of the industry that are beyond our control.
Many of these challenges are a result of change — both good and bad. Fuel prices cause change for airlines. The economy forces change. Weather and catastrophic events present change. Innovation sparks change. It’s natural evolution.
With these constant fluctuations, it’s never business as usual. What worked well yesterday may not work today or in the future. So it’s critical that airlines have the freedom to modify their opera-tions as needed. And it’s essential that the technology they use today is innova-tive, dynamic and easily adaptable to support future modifications.
With this in mind, we build mod-ern, flexible solutions that evolve as your business evolves, giving you the freedom to conduct business the way you want, when you want. Now that’s freedom!
I hope you enjoy this issue of Ascend, and I look forward to working with you to bring freedom to your daily operations.
Hugh
perspective
with Hugh JonesPresident, Sabre Airline Solutions
F
8 Tudo Azul
Brazil’s low-cost airline, Azul, achieves record success
Making Flying 12 Good Again
David Cush discusses Virgin America’s value system and strategy for success A Famous Chinese 18
Brand China Eastern Airlines faces a challenging aviation environment head on
22 The Future By Airbus
Airbus’ innovative marketing supports sustainable growth
42
E-Commerce ROI Offers 26 Real Digital Digit$
E-commerce is an integral part of a robust sales and distribution strategy
Common Ground: 30 In The Air
Airlines can synchronize OCC and HCC activities through common IT support
34 Journey Management
Quickly recovering from flight disruptions results in customer satisfaction and retention
When Legacy 38 Becomes History
Legacy mainframe systems must remain functional until replacement systems are in place
Airline Pricing: 42 Part Art, Part Science
Competitive fare evaluation and dilution management is critical in airline pricing
45 O&D Stepping Stone
An intermediate O&D model reaps benefits without huge challenges
ASCEND I TABLE OF CONTENTS
PROFILE INDUSTRY
12
ascend
18
50
The Emissions Dilemma The EU ETS is imposed despite worldwide opposition Biofuels: The Next Goldrush Biofuels present an alternative to traditional fuel Hedging Your Bets Best practices to manage and better control fuel-hedging risks
83 Strength In Numbers
Airline alliances and partnerships … beyond reservations
70
It’s About Time Automating the airport shift and vacation-bidding process
72
Plan Ahead New gate planning optimizer perfects gate assignment process 75
Shopping With Confidence Online shopping technology continues to evolve
78 The Network Manager
Enabling airlines to maximize network revenue
80 Accelerating Innovation
New e-commerce capabilities on the horizon
55
64
COMPANYSPECIAL SECTION SOLUTIONS
ASCEND I TABLE OF CONTENTS
ascend
8
83
ascend
In The News
If you’re interested in finding out what airlines around the world and Sabre Airline Solutions® have been up
to the last several months, you’ve come to the right place.
To the right are several article synopses that include QR Codes®. If you want to read more about how other
airlines are using technology, view Ascend online or watch some of our recent videos about relevant
industry topics, scan the accompanying QR Code. We’ll also append a QR Code to other areas throughout
the magazine whereby additional information can be found.
When you come across a QR Code, use your smartphone QR code reader to take a picture of the code,
and you’ll be redirected to a website containing related information using your cell phone’s browser.
If your cell phone doesn’t come equipped with a QR Code reader, you can download a free version from
multiple resources, such as AT&T Scanner, i-nigma or QR Reader.
Ascend online enables you to view the entire issue from your computer at your convenience.
View our many videos covering industry topics such as how airlines can improve the efficiency of their
operations, better integrate data across their organization in real time and benefit from consulting services.
ascend
High-Level ViewJetBlue Airways realized a measurable increase in customer satisfaction after implementing automated re-accommodation technology from Sabre Airline Solutions®.
TAM Linhas Aereas implemented Sabre® AirVision™ Commercial Intelligence to gather critical pricing and revenue information so it can quickly respond to competitive marketplace activity.
Airbus S.A.S. implemented airport data intelligence technology from Sabre Airline Solutions, which it will use as its primary source of passenger traffic, airline schedule and fares information.
Gulf Air renewed its reservations system agreement with Sabre Airline Solutions. The new multi-year contract offers seamless integration of passenger service solutions.
Virgin Australia selected SabreSonic® Customer Sales & Service, an end-to-end business solution for guest reservations and ticketed operations.
Ethiopian Airlines implemented several new capabilities from Sabre Airline Solutions to enable its entrance in the Star Alliance.
Airline executives oppose government regulations on airport security, emissions and taxes.
Virgin Australia signed a multi-year full content distribution agreement with Sabre Travel Network® to extend its reach through the Sabre® Global Distribution System.
30%
25%
20%
15%
10%
5%
0%
2009-2010 2010-2011
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2009 2010 2011
550
500
450
460
350
300
Network-wide Traffic Average Ticket Value
Mill
ions
ASCEND I BY THE NUMBERS
ascend
Based on data from Sabre® AirVision™ Marketing & Planning, including all global distribution systems and an estimate of low-cost carrier traffic, year-over-year annual traffic continues to increase from a little more than 2 billion passengers in 2009 to 2.4 billion in 2011. This accounts for a 16 percent increase in annual traffic from 2009 to 2011. The average global roundtrip fare shows a similar trend from 2009 to 2011. It increases from US$416.48 in 2009 to US$439.91 in 2010 to US$520.18 in 2011. This is a 25 percent increase in annual average global roundtrip fare value from 2009 to 2011.
In 2010, all regions experienced an increase in annual average international fares. Americas experienced the highest increase of 14 percent followed by an 8 percent increase in Europe and Asia as compared to 2009. In 2011, the increasing trend in average international fares contin-ued with America and Oceania reporting an increase of 25 percent followed by Europe and Africa at 20 percent. Asia and the Middle East followed closely at 19 percent as compared to 2010.
Average Global Year-Over-Year Traffic And Fares
Average Airfare Trend On International Flights Departing Region
By Gautam Pradhan, Vikram Rao, Sheetal Sharma, Jeremy Soares and Kartik Yellepeddi
Ex-Africa Ex-America Ex-Europe Ex-Middle East Ex-OceaniaEx-Asia
25%
20%
15%
10%
5%
0%
-5%
-10%
2009-2010 2010-2011
14%
12%
10%
8%
6%
4%
2%
-0%
-2%
-4%
2009-2010 2010-2011
25%
20%
15%
10%
5%
0%
2009-2010 2010-2011
Domestic AfricaDomestic America
Domestic Europe
Domestic OceaniaDomestic Asia Domestic Middle East
Ex-Africa
Ex-America Ex-Europe Ex-OceaniaEx-Asia
ASCEND I BY THE NUMBERS
ascend
Domestic Fare Trends By Region
Year-Over-Year Regional International Traffic
Year-Over-Year Regional Domestic Traffic
All regions except Europe experienced an annual average fare increase in the domestic market in 2010 as compared to 2009. Oceana led with a 17 percent increase in domestic fares, followed by America, the Middle East, Africa and Asia. Domestic average fares in Europe decreased by 5 percent in 2010 as compared to the same period in 2009. In 2011, all regions experienced an increase in domestic average fares as compared to the same period in 2010. America led the pack with a 21 percent increase, followed by Asia with a 17 percent increase, followed closely by the Middle East and Europe with a 16 and 14 percent increase, respectively. Africa and Oceania experienced 11 percent and 10 percent increase, respectively, in annual domestic average fares.
As compared to 2009, the international traffic across all regions increased in 2010. Asia saw the highest increase in international traffic at 12 percent fol-lowed by Oceania at 11 percent. America experienced only a 5 percent increase in international traffic, which was the lowest percentage increase as compared to other regions. In 2011, annual traffic departing the Middle East to international destina-tions increased by 10 percent from 2010. However, Africa, the only region to experience a decrease in international traffic, was down 5 percent from 2010.
In comparison to 2009, all regions expe-rienced an increase in domestic traffic in 2010. Oceania led with a 19 percent increase in domestic traffic, followed by Asia with a 16 percent increase. Africa, the Middle East, America and Europe experi-enced an increase of 7 percent, 6 percent, 5 percent and 1 percent, respectively. Domes-tic traffic was up in 2011 compared to 2010. However, in 2011, Europe experienced an increase of 11 percent in domestic traffic, which was the highest across all regions. Asia closely followed with an increase of 10 percent. Domestic traffic in the Middle East and America grew by 8 percent and 6 percent, respectively. Africa and Oceania experienced an increase of 1 percent.
Domestic AfricaDomestic America
Domestic Europe
Domestic Oceania
Domestic Asia Domestic Middle East
Ex- Middle East
ascend8
By Paul Barry | Ascend Contributor
In little more than three short years after it began operations, Brazil-based Azul has grown at a phenomenal pace. Its success stems from strong leadership, a powerful long-term strategy, a collaborative team and an eye toward exceptional customer service.
Brazil’s Low-Cost Airline, Azul, Achieves Record Success
ASCEND I PROFILE
ascend
ASCEND I PROFILE
9
roadly translated, the Portuguese phrase “Tudo Azul,” as used in the Brazilian Portuguese vernacular, means: “Everything is going great.” It
appears to be an accurate phrase to describe Azul, the newest Brazilian low-cost carrier.
Founded by former missionary and well-known Brazilian advocate and native, David Neeleman, Azul began operations with 700 crewmembers in December 2008. (Azul considers all staff to be crewmembers independent of their specific func-tions within the airline. This promotes a sense of team with a strong focus on exemplary customer service.)
The carrier has since grown to represent 10 percent of the Brazilian domestic market — which boarded record-breaking 79 million passengers boarded in 2011, up 15 percent from 2010 — a commendable feat in just three years of operation.
Azul’s continuing success can be credited to the visionary ideas Neeleman had just a few years before Azul began operations. Neeleman had an idea to improve air travel in the complex, bureaucratic market of Brazil. He implemented an innovative strategy focused on stimulating market demand and striving for exceptional customer service.
Neeleman is known throughout the global airline industry as the highly successful founder of both Morris Air and JetBlue. As a teenager, he traveled
extensively within the vast South American coun-try as a missionary for his church. He developed a deep fondness and admiration for Brazil and its people during this time and felt compelled to give back.
Neeleman began to recognize opportunities for improvement in air travel. More specifically, in his opinion, the travel prices were high and the quality of service was poor.
Brazil is a large country — geographically as well as in overall population — that for decades has had a deep disparity between and among its varied social classes.
For those considered “C” and “D” Brazilian social classes, the most common form of transportation is bus travel. Because of Brazil’s extraordinarily expansive geography, most travel is long distance and takes several days.
However, during the past decade, Brazil has experienced solid and stable economic growth. The middle class has grown and somewhat solidified, with more and more people moving upward within the social classes. This has gener-ated higher levels of disposable income, enabling Brazilians to now consider airplanes as a mode of transportation.
For decades, air travel was primarily reserved and available only to the “A” and “B” classes. The recent expansion of Brazil’s middle class has significantly changed this reality.
All of these factors indicated that Brazil had more than enough room for another airline. However, to succeed, it would have to include multiple innovative business instincts and be able to provide differentiated service for various categories of passengers.
Considering Neeleman’s track record of found-ing successful airlines, investors were not difficult to find. Azul comprises a group of U.S.-based and Brazilian-based investors, including himself.
With solid financial backing, the next step was to enroll a talented group of executives with whom Neeleman was familiar and trusted. He needed talented executives to assist in the initiation of operations and day-to-day running of the airline. One of the earliest decisions was to appoint a Brazilian executive to be Azul’s president.
An exhaustive search paid off with the appoint-ment of Pedro Janot, who did not come from the airline industry, a résumé factor that was questioned by some. Nonetheless, Azul’s board of directors knew exactly what they were looking for and believed Janot was the man.
Prior to joining Azul, Janot had accumu-lated vast experience helping establish startup companies. He had worked extensively in the customer-service-focused retail industry. During his professional career, Janot had become some-what of an evangelist or guru of customer service.
By Paul Barry | Ascend Contributor
B
Azul Founder David Neeleman Recognized around the world as the extremely successful founder of Morris Air and JetBlue, David Neeleman had a vision to improve air travel in Brazil. Three years ago, he launched low-cost Azul, which provides service to many Brazilians who previously relied on ground transportation.
Pho
tos:
Azu
l
ASCEND I PROFILE
ascend10
Some describe him as “laser-focused” on the pursuit of perfection in customer service.
Janot is credited with having instilled a culture at Azul of seriously listening to what the cus-tomer eagerly wants to tell the airline about areas for improvement and finding truly impactful and appropriate solutions. As such, Janot has become a living human symbol for what Azul stands for as an airline.
After firmly establishing a seasoned and insight-ful leadership team, Azul’s next steps involved creating vision and mission statements to set down the foundational principles of a growing and successful airline.
Azul’s vision, in short, is to make air travel more humane, easy and economical. The mission state-ment emphasizes these basic concepts: “Focusing on customers, we will build together the best airline, generating crewmember growth, return to investors and benefits to the communities served.”
Azul also created a set of values that are representative of the company culture: safety, consideration, integrity, passion, innovation and example.
Next among the airline’s essentials would be strategy: Exactly where was Azul going to fly to and from?
The business plan initially looked at Brazil’s two largest regional airports, Congonhas in the heart of São Paulo and Santos Dumont in Rio de Janeiro, as the default choices to set up operations.
Unfortunately, however, these two airports have become incredibly slot-constrained and almost impossible to gain access to in setting up a hub. Plus, the state government prohibited adding flights to Santos Dumont, the regional airport in Rio de Janeiro, in favor of building out the city’s international airport, Galeao.
In continuing its search for likely airports, Azul settled on Aeroporto Internacional de Campinas, more broadly referred to as Viracopos. The airport is located 14 kilometers from the center of Campinas and just a relatively short 99 kilometers from the center of São Paulo.
Viracopos already had an advanced and expand-ing level of infrastructure because it was an international airport serving São Paulo. It had this distinction before Cumbica, São Paulo’s current international airport, began serving the community.
In 2008, Viracopos served relatively small mea-sures of passenger traffic. However, it had a large cargo presence among cargo companies and airlines that landed in Campinas versus the also-busy Guarulhos International Airport in São Paulo.
The catchment area of Viracopos is one of the most dynamic in the country. It produces a level of wealth and demand that compares to an elite airport in a country such as Chile. IATA statistics have confirmed that Viracopos has achieved the largest growth year over year.
To attract customers from São Paulo — state capital and home to 20 million residents — Azul instituted a free bus service, Onibus Azul. The ser-vice runs from various points in São Paulo as well
as international and regional airports. It contributes to thousands of passengers a year who willingly commute to Viracopos.
Azul’s strategic plan implements market simulation as the primary path to growth. The carrier focuses more on creating a value proposition for air transportation than reacting to competitors within Brazil.
In short, Azul prides itself on marching to its own beat.
That attitude is also prominently illustrated in its selection of airplanes. In a market dominated by Airbus and Boeing narrow-body aircraft, Azul decided to go another route.
The fundamental Azul business plan, in fact, required a completely different type of aircraft. The question was: Why not choose an aircraft manufactured in Brazil to fly within Brazil?
This was not a difficult question to answer. Azul quickly realized that the corporate and business culture at Embraer is also one that coincides with what the airline aims to establish.
Just a few months prior, JetBlue became the launch customer for the Embraer 190 air-craft. It had gone through most of the growing pains of being the initial operator of that aircraft and could attest to the reliability of the aircraft. However, culture alone would not be enough to make and confirm such a huge and influential business decision. There were other factors.
“The choice of the Embraer 190 and 195 was consistent with the adopted strategy — using the concept of hub bypass as well as having a lower per-trip cost,” said Azul Chief Operating Officer Cmte. Miguel Dau.
That, at least, was a viable explanation of the decision from an operational perspective.
From a marketing and customer-satisfaction viewpoint, Paulo Nascimento, Azul vice presi-dent of commercial, marketing and IT, said,
“Azul decided to fly Embraer E-Jets with fewer seats than the major competitors — offering point-to-point flights with many frequencies between cities.
“The Embraer 190 and 195 are among the most modern, secure and comfortable equipment in this class, and they provide a perfect option to serve the Brazilian market.”
Key elements — investment, leadership team, strategy and aircraft type — were now in place. What would follow would prove both logical and prescient: a name that would truly evoke anything and everything positive about Brazil. In its search for the ideal name, the carrier launched a Web campaign, allowing anyone among the Brazilian public to make suggestions.
Out of this campaign, called “Voce Escolhe” or “You choose,” came approximately 158,000 suggestions from about 110,000 participants.
Two favorites became the finalists: “Azul” and “Samba.” However, the airline quickly eliminated Samba due to several local nuances of its mean-ing. Even more important, however, the positive benefits and meanings of the term “Azul” in Brazil are manifold.
“It was a huge marketing and PR coup that set us apart from the outset,” said Nascimento. “Also, by using the Brazilian map in the logo and the name ‘Azul’ as our corporate identity — as well as Brazilian-built aircraft — we were able to reach the soul of the traveling public.
“Overnight, Brazilians had a new airline to call their own.”
Yet even at this point, with everything head-ing in the right direction, there were significant challenges that would impact Azul prior to its first takeoff. Some of these challenges also affect carriers that have been in operation for many years. Therefore, the challenges were amplified by the new airline’s desire to do things differently.
Prominent among Azul’s initial challenges were those involving the:
15 Million Passengers Azul has carried 15 million passengers during its first three years in service. The carrier represents 10 percent of the Brazillian domestic market.
ascend
ASCEND I PROFILE
Expediting of the grant for the Brazilian Civil Aviation Authority’s operational certificate,
Hiring of qualified management, Introduction of a new aircraft type in Brazil, Will to fight the proverbial lack of infrastructure
that is a growing issue for all carriers in Brazil.Other challenges were primarily internal to Azul.With a large American contingent among the
management team at Azul, cultural diversity is more visible than at many other carriers. In the beginning, the two cultures seemingly could not have been further apart.
Azul executives identified this challenge from the onset. The leadership team worked diligently to address the issue head on so as not to derail the harmony and common goal of operating a growing and successful airline.
Although cultural differences still exist at Azul, the level of understanding and comprehension of each other’s culture continues to grow with successful operations.
Azul has fostered a practice of open commu-nications within the company through a program called “Chega Mais.” American-born and -bred executives are encouraged to be on the front lines on many occasions to help bridge the gap and openly interact and communicate with Azul’s diverse collection of crewmembers.
“With Brazil being such a young democracy, culturally speaking, Brazilians aren’t generally a society that questions much or pushes back, unlike people in the United States,” said Jason Ward, Azul’s vice president of people and customers. “Whereas we Americans, on the other hand, are from a society built on questioning the status quo, finding new ways to improve and making things right.
“That’s a fairly new concept for Brazilians, due partly to their significant historical period of oppres-sion under military dictatorship. And together, moving forward, we’re working to optimally find the right balance in fostering mutual understanding and respect.”
All of these ingredients have been intermixed to create an airline that has gained many accolades since it initiated operations in 2008.
Azul transported its first million passengers in record time, reaching this pinnacle after only eight months of operation. The only other airline that has ever transported more than a million passengers in less than 12 months is JetBlue, which did it in 10 months.
In February, Azul transported its 15-millionth passenger, representing 73 percent of all flights at Viracopos.
Understanding the keen need to serve smaller Brazilian markets, Azul expanded its aircraft fleet to include ATR-200s and ATR-600s. This further contributes to Azul’s growth and business plan.
The carrier has continued to innovate and expand its business model. In 2010, it launched Azul Cargo, which has now carried more than 12,000 tons of freight (more than 1.5 million pack-ages). Estimates are that 5 percent of Azul Cargo sales originate in the greater realm of e-commerce, including direct customer demand (storefronts) and specialized logistics operators that partner with Azul.
Additionally, Azul created a tour operator called Azul Viagens.
Specifically regarding the airline’s innovative approach, Azul is the only national carrier that has its own flight simulators. In addition, it offers eight free bus lines connecting cities to airports, free snacks onboard, free live television of up to eight channels and the elimination of trolleys in the aisles.
Operationally speaking, Azul continues to lead in on-time performance in Brazil, according to the National Agency of Civil Aviation.
As a whole, the industry has taken due notice of Azul. The airline has earned several awards for excellence in the airline industry including: “Best Airline in Brazil” by the Airplane Review, “Highlight of the Year 2009” by XII Aero
Magazine,
“One of the 30 World’s Hottest Brands” by Advertising Age,
“Best carrier among low-cost airlines in Latin America” by Skytrax World Airline Awards.In the area of technology, Azul adheres to the
philosophy of maintaining the best technologies available in the market to build a solid base and sustain the airline’s continuing high level of growth.
Key to large portions of this philosophy have been Azul’s decision and commitment to imple-ment Sabre® AirCentre™ Movement Control, Sabre® AirCentre™ Crew Control, Sabre® AirCentre™ Load Manager and Sabre® AirVision™ Schedule Manager.
“Our tremendous growth and desire to com-municate more effectively led us to the conclusion that our current systems would be incapable of meeting the challenge of the future,” said Dau. “With this in mind, we decided to partner with Sabre Airline Solutions®.
“Although the systems have only been online for a short period of time, we have benefited from the advanced technology and features within the systems. We believe that once we totally integrate and configure the systems, additional benefits will be realized.”
While it is obvious that technology has been destined to play a critical role in supporting this fast-growing airline, just as important are the crew-members who demonstrate every day that Azul’s values make all the difference to the carrier’s success.
Looking at the remainder of 2012 and beyond, Azul’s objectives include: Continuing to grow at a rate greater than that of
the market, Increasing frequencies to existing destinations, Adding 15 new destinations.
Azul will receive two aircraft per month to support its aggressive growth plans. It expects to transport an estimated 10 million passengers this year.
“In customer service, we don’t live in a black-and-white world,” said Ward. “We live in a gray world of many different shades. And in a gray world, customers don’t want to hear what you can’t do for them. They want to hear what you can do for them to help solve their problems.”
Azul has pledged to live by this fundamental philosophy.
Judging by its results after just three years of operation, the carrier has been able to blend all these elements into a solid foundational corner-stone of success. a
Paul Barry is a senior account director in Latin America for Sabre Airline Solutions. He can
be contacted at [email protected].
11
Embraer Aircraft Azul turned to Brazil-manufactured Embraer 190 and 195 aircraft for numerous reasons. Mainly, the aircraft supported Azul’s strategy of hub bypass and lower-per-trip costs.
Making Flying Good Again By Stephani Hawkins | Ascend Editor A Conversation With …
David Cush, President and Chief Executive Officer,
Virgin America
Making Flying Good Again
Pho
tos:
Vir
gin
Am
eric
a
For a relative newcomer, California-based Virgin America has many “firsts.” It was the world’s first airline to implement an on-demand food and drink ordering system on every seatback. It was the first to offer fleet-wide in-flight WiFi. It was the first U.S.-domestic airline to offer passengers an in-flight carbon offset option. It was the first airline to list its carbon footprint according to internationally accepted standards via The Climate Registry. It placed the first commercial order for the new Airbus A320neo, which will offer 15 percent fuel efficiency gains.
For an airline that is just a few months shy of reaching its five-year anniversary, its accom-plishments are remarkable. And it doesn’t stop there. The airline has also pulled down numer-ous industry awards, including: Best Domestic Airline, Travel + Leisure’s
World’s Best Awards (2008, 2009, 2010 and 2011);
Best Domestic Airline, Condé Nast Traveler’s Readers’ Choice Awards (2008, 2009, 2010 and 2011);
Best Business/First Class, Condé Nast Traveler Business Travel Poll (2008, 2009, 2010 and 2011);
Best Domestic Airline for Food, Travel + Leisure’s World’s Best Awards, (2009);
No. 1 in Class in Zagat’s Global Airlines Survey (2008, 2009 and 2010);
Most Eco-Friendly Airline, SmarterTravel Editor’s Choice (2010). Virgin America’s mission is to make flying
good again by reinventing domestic air travel. And based on the carrier’s numerous awards, it’s going about it the right way. Its focus is purely on its guests and teammates. As long as they are happy, everything else falls into place.
Virgin America’s appeal begins with brand new planes, attractive airfares, topnotch service
and a host of innovative amenities. The carrier’s fleet of Airbus A320s is highly customized with mood-lit cabins; custom-designed, roomy leather seats; and the most modern in-flight entertainment system.
The Red™ In-flight Entertainment System gives guests access to more than 30 on-demand movies and 24 channels of live television, a kids’ entertainment sec-tion, libraries to video games and music, onboard seat-to-seat chat messaging, on-demand food and beverage ordering, a digital shopping platform, and WiFi at every seat. Combining a stylish design and com-fort with innovative technology provides an upscale flight at affordable rates and gives guests control over their overall in-flight experience.
For Virgin America, it’s not just about bells and whistles and special perks. It’s
about giving the traveling public their money’s worth while ensuring they have an exceptional travel experience. The carrier has a strict value system and extremely high standards that makes it a great airline. But being a great airline isn’t enough. Virgin America also strives to be a good neighbor and takes corporate responsibility seriously.
From an environmental standpoint, it incorporates environmentally sustainable practices into its business model. Its fleet is up to 25 percent more fuel and carbon efficient. It uses organic hand soap in air-craft lavatories, and includes locally grown and organic food on its menus. And that just scratches the surface.
The carrier operates out of San Francisco International Airport’s Terminal 2, the first LEED® Gold-certified airport terminal in the United States. The facility uses mod-ern ventilation systems that require 20 percent less energy as well as skylights and clerestories that reduce electricity usage. Numerous other “green” initiatives, such as hydration stations, recyclable din-ing utensils, preferred parking for hybrid cars and 100 percent EnergyStar-certified computers and office equipment, further contribute to the airline’s sustainability status.
From a community perspective, Virgin America supports numerous worthy causes and community organizations, such as Stand Up To Cancer, the California State Parks Foundation and KIPP (the Knowledge Is Power Program).
The airline takes it a step farther. Not only does it watch over the environment and fellow beings, it also assists animals. Last year, because of an overpopula-tion of Chihuahuas in California, Virgin America offered to fly several Chihuahua pups from San Francisco to New York. The City of San Francisco’s Animal Care and Control Agency released the pups to the New York American Society for the Prevention of Cruelty to Animals so they could be adopted into loving homes on the East Coast. As part of the initiative, Virgin America teammates volunteered to escort the pups to ensure proper handling and care before, during and after the flight.
The airline has a compelling story to tell from its exceptional treatment of guests and teammates and its idea of what it takes to make flying good to its impact on and responsibility to the com-munities it serves. In a recent interview with Ascend, Virgin America President and Chief Executive Officer David Cush discusses the airline’s value system, strategy for success and overall philoso-phy behind this flourishing new airline.
Question: Virgin America’s mis-sion is to make flying good again. What are some aspects of the current aviation industry that have taken the greatness out of flying? What are the primary things your airline does to support its mission?
Answer: I think for the most part, the major carriers have really taken the joy out of flying for the past few decades. Part of it is the economics of the industry, but also management turning inward and away from the guest experience. Many of us remember when flying was actually exciting and fun. The idea behind Virgin America was to get back to that. We wanted to create an outstanding experi-ence by focusing on what travelers actually want. We got to start with a blank sheet of paper and rethink the way things had been done. We knew people didn’t like the loss of control on flights and the lack of connec-tion to the ground. So we invested in an entertainment platform that allows guests to control their own flight. They can decide which TV shows or movies to watch and which videogames to play. They have the ability to order food on demand whenever they like, not just when the cart comes through the aisle. We also built in things like a seat-to-seat chat system so guests can chat with other guests onboard. We invested to be the first airline to offer fleet-wide WiFi and power outlets at every seat
so they can stay connected to their lives on the ground. We are also very focused on the overall guest experience. It is not just the new aircraft, entertainment, design and other features — it is our people delivering that product in a guest-centric way. From the people side, we invest a great deal in this area. We have an annual program called Refresh, where we bring everyone in the company in for a two-day program that helps teammates refocus on the guest — and what we do differently at Virgin America.
Q: Virgin America follows a strict ethical value system. What are your airline’s core values? Why is it important to incorporate these standards into your business model?
A: As a Virgin-branded company and as the only airline headquartered in California, our guests, teammates and investors are passionate not just about creating a great airline but building a great company. That means operating in an environmentally sustainable way as possible for an airline, giving back to our community and support-ing our teammates. Our core values are: Being Virgin — Embracing the brand to
do things differently in our category; Elevating People — Our teammates,
neighbors, guests and community; Creating ‘Wow’ — Surprising and delight-
ing travelers.
ASCEND I PROFILE
ascend14
Spacious Leather Seats Virgin America’s highly customized Airbus A320 aircraft is lined with roomy leather seats along with numerous other amenities to ensure an enjoyable, comfortable ride for the airline’s guests.
ascend
ASCEND I PROFILE
15
Q: When establishing Virgin America, what were some of the lessons you learned from other carriers that helped mold your business model and identify your core values?
A: Having spent 22 years at American Airlines, I saw that the new entrant carriers (JetBlue, Virgin, even Spirit) were the ones shaking up the status quo in the airline category and offering products that the modern traveler actually wants. So, I think having really smart, analytical people in the business is key, but also having people who are creative and able to think differently is critical. Being able to adapt the business to the guest and market needs is something that is just crucial, especially in an industry like aviation where you need to move quickly. I would also say that having a highly motivated, engaged workforce across the board is core to our mission and, ultimately, our guest promise. That’s why we spend a lot of time investing in teammate training, recruiting and other programs despite the fact that many travelers are with us for the amenities onboard. The product gets them in the door, but our people keep them. And
having a team that is actually passionate about going above and beyond for the guest and about doing things differently in our business — you just cannot beat that.
Q: Your rewards program, Elevate, is unique in that members can redeem points for flights anytime, without black-out periods. What other aspects set your airline apart from other airlines?
A: The idea behind Virgin America was really to reinvent something (domestic fly-ing) that, for the most part, had become a dismal experience here in the United States. People didn’t like the loss of control, the lack of connection — to the ground or other guests, and the lack of options similar to what they get in other areas of their lives, like entertainment on demand. This is an airline built from the ground up, designed around the customer — what they like and what they don’t like. So everything from our in-flight entertainment to the design of our onboard cups (pleasing to the eye and more stable) reflect that. Our in-flight entertainment platform is individualized, touch-screen and offers live satellite TV, 35 movies, a 3000-track MP3 library where
you can build your own playlist, videogames, interactive
Google maps, a shop platform and a host of other options that people now have in their living rooms. There are several innovative touches — all designed around making the experience better. Before we launched, we knew that travelers did not like that ‘DMV’ fluorescent glare on aircraft. Our in-cabin moodlighting was designed to transition across 12 shades based on outside flying light (settings vary from Seattle Morning to Dusk) to soothe, relax and even gradually awaken travelers on a red eye. Although we have pretty generous leg-room onboard, we also found that a major flying complaint was the seat comfort itself, which is why our seats are custom-designed, deeper and more ergonomically correct — with a higher knee elevation. We also knew that travelers did not like the food trolley carts blocking the aisles and the fact that they had one time to order food onboard — again the loss of control over their experience. We designed a first-of-its-kind food menu to allow guests to order cocktails or meals right from their seatback entertainment screen any time during a flight. Our flight crews pick up the order from an LED screen at the back of the aircraft and deliver it on a tray, which has also been well received
with teammates because they can serve faster and keep
the aisles clear. We continue to
a d a p t .
Pho
tos:
Shu
tter
stoc
k
ASCEND I PROFILE
ascend16
For example, guests have wanted an ‘open tab’ function on our Red system so they can swipe a credit card once and order movies, dinner, drinks and other products throughout a flight. We launched that in 2010.
Q: You wrote in a letter to your guests that your pledge is to “keep doing what’s working, stop doing what isn’t and continue to come up with new stuff to make guests say, ‘this is how to fly.’” In what ways do you obtain feedback from guests? What are some of the things your airline guests like? And what have you stopped doing or changed based on guest feedback?
A: This is extremely important to who we are as a company. We get a tre-mendous amount of feedback from our frequent flyers via surveys, emails, events and social media. The latter, in particular, has developed into a great channel for guest feedback — it is real time and oftentimes comes to us live from 35,000 feet (via in-flight WiFi) and, in aggregate, can be a great arbiter for what is working and what isn’t. We’ve asked our social audiences to help determine our in-flight
cocktail bar (we currently have drinks onboard submitted by Facebook fans) and other preferences on the menu, including a push for healthier items, locally brewed beers and only cage-free eggs. Comments from these audiences also helped us make other onboard changes like allowing travel-ers to listen to a custom soundtrack from our MP3 library rather than listen to the static videogame soundtrack when playing a game.
Q: Virgin America touts its friendly ser-vice. What motivates teammates to put forth that extra effort to ensure guest satisfaction? What type of special training do you offer your customer-facing employ-ees to ensure they meet your airline’s standards?
A: We have recruiting, training and engagement programs that we think are well suited to a start-up, fueling growth in a competitive environment. Every teammate in the company (from pilots to in-flight to airport staff and headquarters folks like me) goes through Refresh, our annual ‘brand bath,’ to improve our guest experi-ence across the airline. This is unique in
the domestic airline industry as far as I know. Refresh includes some unique prac-tices, including conflict resolution training, hospitality training, emotional intelligence training, with breakouts for different work areas. We have a ‘red carpet’ orientation program that introduces new recruits to the larger Virgin brand guest philosophy. Exercises emphasize teamwork and com-munication — critical in a service business — with unique exercises like a scavenger hunt in downtown San Francisco with one of the challenges being to track down the San Francisco Mayor wherever he is in the city. Our teammates demonstrate real tenacity trying to pry his schedule informa-tion from his office or staking out City Hall!
Q: Virgin America engages in a number of corporate responsibility initiatives. Why is it important for your airline to be socially and environmentally responsible?
A: I think a lot of it is our roots as a California company and our connection to the Virgin brand, which is really committed to the idea that busi-ness can be a force for good. Our teammates and guests care about how we do business — as do our investors and founders. We work with
SFO’s Terminal 2 Sir Richard Branson relaxes at the new sustainable Terminal 2 at San Francisco International Airport. The terminal offers features intended to improve the typical airport experience, such as a stress-free “recompose” lounge post-security, free wireless and plugs throughout, living room-like gate spaces and “moodlighting” that reflects Virgin America’s own signature cabin lighting.
Real Steel Hugh Jackman, star of DreamWorks Pictures Real Steel, and Virgin America in-flight teammates unveil a larger-than-life image of Atom, a World Robot Boxing contender, on the side of a new Virgin America Airbus A320 aircraft named Real Steal.
the Entertainment Industry Foundation’s Stand Up to Cancer nonprofit, California State Parks Foundation and the KIPP, Knowledge is Power Program. We also support multiple programs and partners under the Virgin Unite umbrella such as Galactic Unite, an initiative that aims to inspire students to seek answers to global chal-lenges through science, engineering, math and business entrepreneurship education. Virgin pilots and engineers have served as mentors in the program, which is aimed at youth from kindergarten through grade 12.
Q: Your airline has a number of airline part-ners. Why are partnerships with other airlines critical to the success of Virgin America? What are your thoughts about joining a global alliance?
A: One of the reasons we undertook the Sabre Airline Solutions® transition was our ability to expand our partnerships, including dual earn-and-burn capability for our Virgin airline partners. They are important to expand our sales and network reach and are one of the more frequently requested initiatives from our guests. No comment on global alliances just yet!
Q: Last October, your airline implemented technology from Sabre Airline Solutions in the
areas of reservations, marketing and planning, and operations. In what ways will the new technology improve your airline?
A: We made the switch to Sabre Airline Solutions quite simply because of our growth. We needed to move to an industry-standard system that would accommodate our expan-sion as a young airline, allow us to expand our codeshare/interline ability, and give guests and teammates better tools. We had some issues with systems instability in the past because we had outgrown our old system. This investment will allow us to build a better foundation for growth.
Q: Why did you select Sabre Airline Solutions as your technology partner of choice?
A: Sabre Airline Solutions has always been the industry leader in technology, and the latest iteration of its systems increases that lead. These are the tools we need to run a reliable operation and maximize our revenue-generating potential.
Q: How was the implementation process? A: I’ve heard the scope of a reservations
system switch likened to a simultaneous heart and brain transplant for an airline, so given that, I think the transition went well overall, with a few
bumps along the way. Every cutover is different for an airline, and although we did not have flight cancellations and our airports continued to run relatively smoothly, we did see quite a few bumps with the Web transition, which our guests suffered. We hope that now that we are on the other side of the transition itself, guests will immediately see the additional capabilities the new system allows. Sabre Airline Solutions’ support throughout was excellent.
Q: What benefits have you experienced thus far from the new technology?
A: The two quick wins we have seen are a much faster bag-drop process for those who check-in online or through the kiosk and significant revenue improvement through the GDS channels.
Q: What role does technology play in the overall success of your airline?
A: Technology is an important part of our service delivery, so it is absolutely critical to our growth and success.
Q: Where do you see Virgin America in five years?
A: I see us in 30 cities and continuing to push the industry envelope in terms of innovating our product for guests. a
ascend 17
ASCEND I PROFILE
A Famous Chinese Brand
China Eastern Airlines is in it for the long haul. Its strategic
management style combined with its new membership in the
SkyTeam alliance and acquisition of Shanghai Airlines only
scratches the surface for this successful Chinese carrier.
China Eastern Airlines Faces A Challenging Aviation Environment Head On
By Lauren Lovelady | Ascend Staff
ASCEND I PROFILE
y most accounts, the first decade of the 21st century presented unprecedented chal-lenges for the global airline industry worldwide. In fact,
many industry analysts have labeled the first 10 years of this century as the “lost decade,” citing: Massive layoffs, Staggering financial losses, Record numbers of bankruptcies and con-
solidations, Skyrocketing fuel prices, Declining consumer confidence, Widespread service disruptions attributed to
pandemics, volcanic ash and wild weather patterns.Along with the challenges, the decade also
brought myriad opportunities for the industry. The tragic events of Sept. 11, 2001, in the United States, it appears, were the first of many catalysts that drove airlines worldwide to evaluate and fundamentally restructure the way they do business. Rising costs and declin-ing passenger traffic forced debt-laden carriers to pare down or dismantle vast networks and fleets. It accelerated the growth of alli-ances and joint ventures to more economically reach destinations airlines had once served on their own. Low-cost and second-tier carriers emerged as strong competitors, offering niche services to targeted audiences.
While most of the industry struggled to survive, a few regions and even more specifically, carriers, thrived. In particular, China’s civil aviation industry experienced
double-digit passenger traffic growth from 2004 through 2010, according to the Civil Aviation Administration of China (CAAC). While that growth has slowed during the last two years, it is still the highest in the world. Total profits for China’s airline industry in 2011 alone are an estimated US$7.2 billion, accounting for more than half the profits of the entire worldwide airline industry.
Leading the way are China’s “big three” carriers — Air China, China Southern Airlines and China Eastern Airlines, followed by a strengthening number of second-tier carriers. While expansion has been a major focus of China’s aviation industry during the first decade, flexibility — the ability to adapt quickly to the volatile marketplace — continues to be a priority.
China Eastern was the first Chinese civil aviation company to be listed simultaneously on the Hong Kong, New York and Shanghai stock exchanges. It has carefully and success-fully navigated the industry’s last few turbulent years by optimizing and integrating resources, including technology. The carrier developed and implemented specific yet flexible strate-gies, and it effectively responded to changes in the marketplace.
Headquartered in Shanghai, the country’s business center, China Eastern serves nearly 70 million passengers annually and is among the world’s top-10 carriers based on passenger traffic statistics. Its fleet of 380 wide- and narrow-body aircraft and more than 35,000 employees serve 197 destinations throughout China, Asia, Europe, North America and Oceania.
ascend 19
15%
70%
15%A Successful Chinese Airline China Eastern serves nearly 70 million passengers annually with its fleet of 380 wide- and narrow-body aircraft and more than 35,000 employees. The carrier serves 197 destinations in all corners of the world.
BP
hoto
s: S
hutt
erst
ock
Overseen by the CAAC, China Eastern plays a vital role in the country’s economy.
“China Eastern’s international routes promote political and business contacts between China and other countries and encourage both inbound and outbound tourism, as well as provide convenient service for leisure travelers,” said Mr. Liu Hao, general manager of the airline’s network and revenue management depart-ment and marketing and sales committee. “Domestically, we meet the economic development requirements of all parts of the country, not just the demand for travel from passengers in the big cities. And we drive local employment and economies.”
For its part, China Eastern continually evolves to meet the challenges and capital-ize on opportunities.
“We’ve faced many challenges during the last 10 years,” said Mr. Hao, “par-ticularly in the areas of long-haul route operation, brand management, and enter-prise management and control.
“To assist with our long-haul operations, we’ve focused on the construction of a rich hub route network and increased the products and fares we offer, as well as expanded the coverage of product and fare releases. We’re also building our sales chan-nels, including increasing the proportion of direct marketing, advertising and sales.” Careful attention to brand management has also become essential.
“The establishment, interpretation and connotation of the China Eastern brand is important,” said Mr. Hao. “We constantly evaluate the promotion of our brand image and its associated value.”
In the area of enterprise management, China Eastern focuses on strengthening the business organization at its Shanghai headquarters and exercising better control over its subsidiaries and ticket offices.
Early in the 21st century, the carrier also began investing in new technology to standardize, streamline and integrate operations and support its growth strategy. In 2005, China Eastern opened a new state-of-the-art airline operations center with the assistance of Sabre Airline Solutions®.
Since then, the airline has continued to upgrade its facilities and technology, most recently implementing Sabre® AirVision™
Network to automate its fleet planning and scheduling processes and subsequently generate additional savings based on great-er efficiency. The implementation of these solutions was necessary to ensure China Eastern’s growth plans were adequately supported by efficient operations planning, in particular its acquisition of Shanghai Airlines in 2010.
“Prior to the implementation of Sabre AirVision Network, we evaluated schedules
manually or via Excel, but we lacked the quantitative analysis and proof,” said Mr. Hao. “After introducing the solution, pur-chasing MIDT data and training employees to use the solution to conduct analysis, we now make more informative, reasonable decisions. The implementation of the solu-tion with training has helped us achieve very good results.”
Before the merger, China Eastern and Shanghai were rivals, often competing for the same travelers on the same routes. As a result, both carriers suffered huge losses in these
markets. Rather than continue the financial and resource drain on both companies, China Eastern developed a plan favorable to both airlines’ shareholders. As a result, Shanghai Airlines now operates as a wholly owned subsidiary of China Eastern, while retaining its own brand.
“In the past, the two companies had to pur-chase their own sets of equipment and employ their own teams,” said Mr. Liu Jiangbo, deputy general manager of China Eastern. “Now we can save 100 million yuan (US$15.9 million) on plane maintenance. Net profit will increase by at least
A China Aviation First China Eastern was the first Chinese civil aviation company to be listed concurrently on the Hong Kong, New York and Shanghai stock exchanges.
ASCEND I PROFILE
ascend20
1.5 billion yuan (US$238 million). We’ve done what once would have been inconceivable.”
While domestic travel — traditionally shielded from foreign competition — has long been the mainstay of China’s airline industry, developing aviation infrastructures and regulatory reforms are enabling the country’s carriers to more effectively compete internationally.
China Eastern expanded its global presence last year, becoming the 14th member of the SkyTeam airline alliance, along with Shanghai Airlines. The addition of China Eastern and Shanghai solidifies SkyTeam’s position as the most prominent alliance for the greater China region and brings 32 new destinations into the global network. In turn, the carriers’ customers have greater access to travel options worldwide, as well as additional oppor-tunities to earn and redeem frequent flyer miles throughout the alliance network.
Until last year, China Eastern had been the only one of the country’s top three airlines not associ-ated with a global alliance. Industry analysts believe alliance membership will help the airline fend off competitors and create additional efficiencies and cost savings by sharing resources with other members.
Competition, however, is no longer limited to airspace. High-speed rail was introduced in China in 2007, and by 2020, it is expected to cover more than 16,000 miles within the country’s bor-ders, thanks to a multi-billion-dollar investment in the project by the Chinese government. Both highly acclaimed and criticized, it is an attractive alternative to air travel and a challenge to airlines with extensive domestic networks, such as China Eastern.
To minimize market-share loss, the carrier has increased flight frequencies, streamlined passenger check-in, created dedicated check-in counters and security channels, and implemented accelerated baggage claim on its busiest air travel routes, includ-ing Beijing-Shanghai. Additional services such as online check-in and advanced booking capabilities are now offered to help retain business traffic.
Ironically, railway officials signed an agreement last year with China Eastern to integrate services in the future. Under the agreement, travelers will be able to book tickets for both airlines and HSR trains at a designated China Eastern site and transfer from railways to airplanes without using other types of transportation.
Although China’s aviation industry has entered a period of slower growth largely due to global eco-nomic pressures and high fuel prices, the demand for air travel, especially within the country, continues to be strong, despite the impact of high-speed rail. Citing such conditions, last fall China Eastern canceled an order for 24 Boeing 787 Dreamliners in favor of the smaller Boeing 737 planes. The carrier will take delivery of 45 737s between 2014 and 2016. It also returned five Airbus A340-300s in exchange for 15 smaller wide-body Airbus A330 aircraft.
“We are not optimistic about the international market in the next two years, for the weakening glob-al economy hurts air travel,” said Mr. Luo Zhuping, secretary of the board of China Eastern. “We are making rapid moves to serve domestic demand, which is still robust at the moment.”
Despite the ongoing volatility of the global economy and aviation industry, China Eastern has remained strong. Its strategic planning efforts and
customer-service focus continue to be rewarded and recognized.
Last year, the carrier was named one of the most innovative Chinese companies by Fortune China magazine in its 15th anniversary issue. The magazine, in cooperation with research institutes, comprehensively evaluated the financial status of 500 Chinese companies on the mainland and Hong Kong based on factors such as industry differences, industry cycles and investment strategies to develop the final list of 25 companies. In addition, China Eastern’s trademark logo was officially recognized as a “famous Chinese brand.”
Dedicated to building a top-quality service brand, China Eastern aims to be a “superb airline company that is cherished by staff, preferred by customers, satisfactory to shareholders and trusted by society.” As such, the airline served as the official carrier of the 2010 World Expo in Shanghai, transporting travelers worldwide during the six-month event. Its exemplary Expo cabin service was awarded the Expo City Star prize by the Bureau of Shanghai World Expo Coordination.
Last year, the airline also participated in world-wide humanitarian efforts, including the operation of charter flights to evacuate people from earthquake-devastated Japan and war-torn Libya.
To ensure its long-term survival and continued success, China Eastern is focused for the foresee-able future on strategies related to five key areas of its business: Hub networks, Cost control, Brand management, Lean management, Information construction.
“In the next five years, our goal is to rank among the world’s top-10 airlines based on gross income and revenue passenger miles,” said Mr. Hao. “To maintain a competitive edge, we must continuously reform and innovate.
“We have to learn from our international experi-ence and introduce mature practices into China, such as 35-day domestic pre-sale products, group travel management and small to medium-size enter-prise travel management. This will help narrow the gap between ourselves and more advanced interna-tional airlines.” a
Lauren Lovelady can be contacted at [email protected].
Enterprise Management Strategy Based in Shanghai, China Eastern focuses on strengthening the business organization at its headquarters as part of its enterprise management strategy.
ASCEND I PROFILE
ascend 21
Sabre AirVision Network
The FutureBy AirbusAirbus’ Innovative Marketing Supports Sustainable Growth
By Christophe Ritter I Ascend Contributor
Pho
tos:
Air
bus
fter celebrating four decades of innovation, Toulouse, France-based Airbus looks ahead to the next 40 years. In its recent “The Future by Airbus” report,
the aircraft manufacturer seeks to determine what air transport will look like in the year 2050. Through this initiative, it works with various stakeholders and experts to anticipate the global needs of a better-connected and more sustainable world.
Airbus believes that the aviation indus-try as a whole must focus on technological advances that will satisfy passenger and mar-ket demand, the growing population and its demographic profile, and respect all aspects of the environment.
Airbus has come a long way since it launched four decades ago. It has gone from a vision to consolidate and develop an indepen-dent European aviation industry, which led to its creation in 1970, to being today’s market leader with more than 11,500 aircraft orders. At the heart of this growth has been creating the world’s most modern aircraft by building innovation into all of its products.
Airbus incorporates advanced technology to: Improve customer profitability,
Address environmental concerns impacting the airline industry,
Provide the best possible flying experience for passengers.Technology, combined with economies of
scale, is the main driver in making airliners more economical.
From the onset, innovation has been key to competing with established manufacturers Boeing, Lockheed and McDonnell Douglas. While three- and four-engine aircraft were standard for large aircraft at the time, Airbus’ founders decided to design and develop a competitive two-engine wide-body aircraft. The Airbus A300 would be lighter and more economical than its competitors. After a slow start, the aircraft became a hit, reaching a market share of 26 percent by the mid-1970s.
With the development of its product line, Airbus pioneered innovations such as: Cockpit commonality, Fly-by-wire controls that reduce training
time and costs, New weight-saving materials such as car-
bon fiber, Time- and cost-saving centralized mainte-
nance. An ambitious focus on innovation required
ground-breaking marketing techniques to
overcome the traditionally conservative opinions of crewmembers, maintenance and operations teams, and finance departments. More importantly, the financial benefits for airlines had to be clear to demonstrate the advantage of Airbus products against well-established competitors.
As part of the process, Airbus developed a team of fleet- and network-planning experts who model, evaluate and determine, for each potential customer, the revenue and cost benefit of flying Airbus aircraft. Using special support tools to assist with decision making, and working collaboratively with its airline part-ners, Airbus’ marketing team creates specific scenarios to design the optimal fleet size and sub-fleet requirements in the medium and long term to maximize airline profitability.
This innovative partnership approach allows airlines and Airbus to quantify the revenue and cost benefits of each incremental aircraft or sub-fleet.
For years, Airbus has been in the position of the challenger to penetrate new airline customers. However, marketing challenges for Airbus are changing: Airbus experiences more fleet renewals
rather than gaining new customers because of the success of its sales campaigns. This
Airbus Facilities More than 11,000 people are employed at Airbus facilities in the Toulouse, France, area, where final assembly lines are located for the A320 family as well as A330/A340 and A380 aircraft.
AASCEND I PROFILE
ascend 23
adds more complexity to the fleet and net-work analysis performed by its experts.
Airbus has a wider range of aircraft, more versions of the same aircraft and, with the Airbus A320 and A320neo families, two gen-erations cohabiting together. This creates additional complexity in the preparation and development of marketing campaigns.
Airlines expect more in-depth simulations and detailed analysis during aircraft selec-tion and negotiations. It is expected that aircraft will deliver on technical perfor-mance because airlines have less control of the overall cost of operation. This is mainly due to increasing fuel prices and lower yields. Hence, it has become para-mount to precisely evaluate the expected incremental revenue and associated costs at both the specific market and network levels. In addition, the development of code-
shares, joint ventures, alliances and other partnerships has complicated the work of the marketing team. To support the need to perform specific fleet and network analy-sis, Airbus recently selected Sabre Airline Solutions® to provide airport data intelligence (ADI) and global demand data tools.
Leading Airbus’ fleet and network profit-ability group, Vice President Philippe Gossard shares with Ascend his perspectives on the strategic role of his department, the partnership Airbus wants to foster with its
customers and its support of the company’s “The Future by Airbus” concept.
Question: Airbus’ revenue and fleet depart-ments play a key strategic role within its marketing division. What are your specific roles and activities within Airbus?
Answer: We are here to support our Airbus sales and marketing teams. Fleet planning is more and more complex, and we need to have a team of specialists able to communicate with their airline counterparts. Several of our team members used to do fleet planning for an airline before joining Airbus.
Q: Your department is currently enhancing its support for decision making. Which changes in your relationship with your customers drive this investment?
A: Our customers have an excellent and in-depth knowledge of their own numbers. Some of them have even developed teams to look at those of their competitors. Therefore, we need to equip ourselves with data and tools to have constructive discussions with our custom-ers. Worldwide, successful companies dictate significant efforts to acquire, digest and analyze data. Apple, BMW, 3M and Cisco are examples of companies with this winning strategy.
Q: Against an external consulting firm, how would you define the role of your fleet and revenue team? How do you cooperate with such firms?
A: First, through the different studies we do for our customers, we build on what we learn
to improve and leverage our own expertise. Second, we stick to strict confidentiality rules. What is shared with some of our customers remains between them and us, without time limit. Third, our role is not only limited to fleet planning studies. Some of our knowledge is recycled for other parts of our own company, such as strategy or pricing. This would be dif-ficult to do with external consultants.
Q: The development of alliances, joint ven-tures and codeshare agreements should lead to a rationalization of the fleet through better utilization and optimization of capacity among airline partners. What is the impact for Airbus?
A: Airlines have already made huge prog-ress in yield management. Load factors are significantly higher than 10 or 20 years ago. International yields remain at relatively good levels. Therefore, we have to continue to improve our products and demonstrate that the combination of our products, through fleet planning scenarios, creates value for our customers. Today, 75 percent of world traffic is carried by the three major alliances, so we need to be very convincing with these three alliances’ partners.
Q: There is currently a movement toward concentration within the airline industry, spe-cifically in North America and Europe. Does this present an opportunity or threat for Airbus?
A: Some new airlines pop up, some airlines disappear and some airlines merge, that’s life. However, merged airlines are bigger and often
Competitive Airbus A380 Among several key drivers that make the Airbus A380 competitive, it has excellent operating numbers due to the amount of pas-sengers it can carry.
ASCEND I PROFILE
ascend24
capitalize on their respective skills. It also forces us to be more efficient in the way we convince our customers that combined opera-tions of our products create value for them … and for their shareholders.
Q: How does the current financial crisis affect your customers?
A: A lot of people forget that the financial crisis of the last two years has been worse than that of Sept. 11 for the airline industry, in terms of earnings impact. Our customers want, more than ever, fuel-efficient aircraft with competitive operating costs. They also want reliable products, especially for low-cost airlines with high daily utilization rates. Airlines’ revenue generators are aircraft, and the airline industry is based on growth, so their appetite for modern aircraft is still very strong, as shown by the 2011 order intake.
Q: With the launch of the Airbus A380 program, does Airbus have a hub-and-spoke strategy that will prevail for network carriers?
A: It is incorrect to describe Airbus as hav-ing a hub-and-spoke strategy. Airbus makes both point-to-point aircraft, such as the A330, A340 and A350 families, as well as hub-to-hub aircraft, such as the double-deck A380. Both strategies (fragmentation and hub-and-spoke) are valid, and airlines can chose from the mod-ern Airbus aircraft family that suits them best.
Three drivers make the A380 very competi-tive. First, with more passengers, the aircraft has excellent operating numbers. Second, the hub-and-spoke structure is, for some destina-tions, the only way to distribute passengers where the volume is not high enough. Third, the limited resource for airlines is slots. There are not many new airports and runways so, to continue growth, there are many alternatives than operating bigger aircraft.
Q: A hot topic is the current row over the European Emissions Trading System that came into force in January. What is Airbus’ perspective on this issue?
A: What is important is that a particular sector is not weakened compared to other transportation sectors. We live today in a global economy, so if there are important modifications impacting global companies, such as airlines or our own company, it is important that all views are discussed for a constructive dialogue. We all want to protect our planet, but this needs to be discussed all together. Remember that global aviation only generates 2 percent of carbon dioxide emissions, whereas the heating and cooling of buildings and cars each account for around 40 percent. Therefore, while we as manufacturers are doing our part to reduce emissions, the worthwhile savings are to be found elsewhere.
Q: Airbus recently presented its vision of aviation in 2050 called The Future by Airbus. What are some highlights of this study?
A: This is a long-term vision. If you go back 40 years, a lot of technologies incorporated in
our current product line did not even exist. In 40 years, passengers will enjoy technologies and solutions that are still in our labs today. By communicating about these possibilities, we wanted to keep the dream of aviation alive so we could benefit from new technologies and services in the next 40 years.
Q: What role does technology play in Airbus’ future? How will it translate for your airline customers and their passengers?
A: Innovation, and the technology that is part of it, is in Airbus’ DNA. It is still a big part of our company culture. Airbus has been very innovative by incorporating new technolo-gies during the development of its products, provided, of course, that they make economic sense. For our customers, this means reliable, fuel-efficient aircraft with good operating num-bers. For passengers, this means affordable
tickets, better comfort and good services on board, which all help put the fun back into flying as well as make it more accessible. Look at some of the services offered by various carriers. Most were not even possible in hotel rooms 30 years ago. Technology made them possible.
Q: Airbus plays an active role in the Single European Sky ATM Research (SESAR) initia-tive. What is the scope of this project? Why did Airbus want to be involved in the project?
A: Aircraft fly longer paths to their destina-tions than they did 30 years ago, often on
indirect paths, because advances in aircraft and communications have yet to be matched in the equipment used by air traffic controllers on the ground. Air traffic management will enable shorter and more direct routings, saving fuel and journey times. Airbus is working with several key partners to make this happen … both in Europe and the rest of the world.
Q: What are the medium-term challenges for Airbus?
A: There are many medium-term challenges. Building enough of our modern aircraft family to satisfy the world’s needs is one of them. Introducing the game-changing Airbus A350 into service, and then ramping up deliveries to airlines is another. We have also had tremen-dous success with the re-engined A320neo family, which is the world’s fastest-selling airliner product line, and we are working to engineer and deliver that, beginning in 2015.
Q: How do you perceive the threat of new entrants, in particular, Chinese aircraft manufacturers?
A: We recognize that we will be challenged by aircraft made in Brazil, Canada, China, Japan and Russia. However, it has taken us a couple of decades and tens of billions of dollars of investment to create the world’s most modern aircraft family, which ranges from the 100-seat A318 to the 500-plus-seat A380. There will be no shortcut for our competitors. Our aim is to continue to innovate; keep our aircraft at the forefront of economics, capability and value; and deliver world-leading products to our customers.
Q: Where do you see Airbus in five years?A: We will have begun delivering the world’s
most efficient single-aisle aircraft, the A320neo family, which is around 15 percent more eco-nomical per seat than the aircraft we are building today, and around 6 percent more efficient than its older competitor. Our A350 will also bring people together on new long-haul routes, with more comfort and wider seats than are available today. In addition, our A380 will fly with even more prestigious carri-ers, bringing its stunningly quiet cabin to even more flyers. a
Christophe Ritter is a senior partner for Sabre Airline Solutions. He can be
contacted at [email protected].
Our aim is to continue to innovate; keep our aircraft at the forefront of economics, capability and value; and deliver world-leading products to our customers.
HigHlight
— Philippe Gossard, vice president, fleet and network profitability group,Airbus.
ASCEND I PROFILE
ascend 25
By Rodolfo Elizondo and Sanjay Nanda I Ascend Contributors
Key Aspects Of A Powerful E-commerce Strategy
E-COMMERCE ROI OFFERS REAL DIGITAL DIGIT$
E-commerce, specifically for airline websites, is an integral part of a robust sales and distribution strategy. So why do so many airlines struggle with offering it?
epending on geography, level of maturity or business model, many airlines are still debating and changing their point of view in terms of where e-commerce
fits within their organization. They are determining if all functions should reside in an e-commerce area or in some other functional area within the airline.
Airlines that achieved a high level of suc-cess in e-commerce have done so because of their commitment to it as a viable sales channel. This commitment and the willingness to rework corporate structure to support this new sales channel often has a direct impact on the type of results airlines see from an e-commerce strat-egy. Carriers that embrace it and support it with dedicated resources are able to realize real revenue benefits and a return on investment.
Online competition is fierce. It does not wait for functionality enhancements, reliable shopping experiences or complex digital marketing campaigns. Even though e-commerce is not new, many airlines are still struggling to find the right balance between functionality and reliability in their websites while also trying to make market-ing decisions that impact both revenue and user perception.
Competition for an airline’s website chan-nel has two fronts: online travel agents (OTAs) and other airlines’ websites. Consumers do not discriminate as long as their needs are met by: The right price, The right schedule, Reliability, Functionality.
Tactical Components Of E-commerce
Traditionally, digital marketers tend to differentiate between two types of adver-tising activities — strategic and tactical. These activities are by no means mutually exclusive. On the contrary, they have expo-nential benefits if executed accurately and effectively together.
Strategic e-commerce usually entails larger-scale efforts without a specific action or offering. Some examples include: High-level website launches, Website functionality releases, Multichannel efforts, Informational emails, Brand-building social media strategies, Non-targeted display advertising, Affiliate marketing.
Strategic activities usually have an impact on brand awareness and brand recognition, for both the airline and its website. These activities are more general in nature and provide long-term benefits.
By contrast, tactical e-commerce activities deal with specific actions to bring about a desired business outcome. They are typically more measureable than strategic activities because they drive traffic and revenue through an airline’s website. Examples include: Search engine marketing, Targeted-display advertising, Call-to-action emailing, Search engine optimization practices, Fare specials, Macro promotions, Sweepstakes.
Depending on the airline’s goals, these tactical activities can be targeted to a small or broad audience and can also be either short or long in duration.
Sources Of Website TrafficWebsite traffic is generated by four sources:
1. Search engines —Internet-based search engines can be global in nature such as Google, Yahoo! and Bing; or local, depend-ing on the geography.
2. Direct traffic — A website address is entered directly into a Web browser and the user is immediately taken to the desired site.
3. Referred traffic — A visitor clicks on a link on another website to access the desired site.
4. Email marketing — The visitor clicks a link in an email to access a specific site. Each source has particular and well-defined
strategies that can help optimize website traffic. These strategies are most efficient when addressed simultaneously through a systematic and well-thought-out approach. Each one has its pros and cons and levels of assertiveness.
There are two critical drivers of website traffic that airlines can influence — paid search (PPC) or search engine marketing (SEM) and search engine optimization (SEO). Both are tactical in nature but can contribute to the airline’s brand.
By definition, paid search and search engine optimization are drivers of search engine web-site traffic, while paid display advertising is a driver of referred traffic.
Paid Search Paid search is a form of advertising that
ensures a specific website appears in search engine results when certain keywords are entered. Most search engines offer a platform through which advertisers can bid for the right to appear under certain desired search results and pay a determined fee if their ad is clicked. This is known as pay-per-click advertising. Search engines balance capitalizing profits and providing users with highly relevant search results.
Managing Paid SearchManaging paid search is no easy feat. It
takes a bit of science and ingenuity to hone the best results using: Keywords, Ads, Cost-per-click (CPC), Tracking and optimization.
KeywordsThe base of paid search is predicting
which keywords an individual might search for when seeking the products, services or information that a website offers. For
Long-term E-commerce Benefits Strategic e-commerce initiatives, such as brand-building social media strategies, non-targeted display advertising and high-level website launches, generally have an impact on brand awareness and recognition and provide long-term benefits.
D
ASCEND I INDUSTRY
ascend 27
Pho
tos:
Shu
tter
stoc
k
example, an airline would predict that some-one searching for “flight to city X” would find value in “www.airlineexample.com.”
Keywords can be bid on with three levels of precision: Broad — Broad search queries include
words that are similar in meaning or topic to the keyword.
Phrase — Phrase search queries include the keyword.
Exact — Exact search queries must be exact to the keyword.The more precise the predicted search
query, the lower the cost of the click for the advertiser. Search engines are interested in making money, but they also want to provide the site visitor (or searcher) with the most accurate results.
Given that the search engine rewards precision, sophisticated pay-per-click man-agement includes prediction of thousands of keywords to pinpoint even the lower-frequency search queries that capture a larger share at a much lower cost.
These keywords are not static, and the true skill of paid search is to refine and redefine keywords based on the clicks and conversion they generate. To add an additional dimension of complexity, search patterns vary by culture, geography and language. Global carriers must consider these variables.
AdsAds are a second component in paid
search. Paid search ads appear atop and along the side of general organic search results in a search engine. They appear similar to search results and link to a Web page.
Ads should entice the searcher to click but should also be informative to avoid unwanted clicks. For example, if the des-tination page of an ad is an email sign-up page, the words “sign up” should be specified in the ad to maintain a high con-version rate from click to sign up. There has to be relevance in the call to action.
Ads can target an individual based on certain variables such as geography, time of day, language, demographics, device used and repeat viewer of ads.
Cost-Per-ClickPaid search media is purchased on a
cost-per-click basis. The advertiser bids a maximum willingness to pay for a click on its ad if an individual searches for one of its keywords and its ad is displayed. The search engine uses an algorithm to deter-mine which ad it should display for which search query based on two main factors: 1. Willingness to pay — The advertiser’s maximum amount committed if the ad is clicked;
2. Quality score — The evaluation of the relevance of the website to which the ad points with regards to the keyword.An example of a high-quality score could
be an ad mentioning “flights to Mexico” con-nected to the keyword “flights to Mexico” and linking to www.aeromexico.com. A low-quality score would result if an ad mentioned “free flight to Abu Dhabi” con-nected to the word “flights to Abu Dhabi” but linked to a credit card application.
The higher the quality score of an advertiser’s website, the lower the CPC an advertiser can successfully bid for a click. In addition, search engines, regardless of the amount of the CPC bid, will not mislead searchers.
Tracking And Optimization
Optimizing a paid search campaign is possible given that every single keyword and ad group can be tracked and custom-ized all the way to a sales conversion action. This is also possible given that a campaign-bidding platform offers complete control of all these components. These tools can help maximize return on investment by effec-tively optimizing a paid search campaign. To do this, choose a statistic as a goal for optimization and align a bidding strategy and tactics to target that statistic.
Airlines primarily want to maximize their revenue and keep a close eye on cost of sale. For example, keywords in the family of “flights to Abu Dhabi” cost US$1CPC and generate US$20 in revenue with an ROI of 20 times. On the flipside, keywords
in the family of “vacations in the emirates” cost US$0.50 CPC and generate US$5 in revenue with an ROI of 10 times. Therefore, more budget should be allocated to the “flights to Abu Dhabi” keywords.
Search Engine OptimizationSearch engine optimization includes
search results that appear in the core of a search page, below the paid search ads and results. Results in this section of a search engine are not paid. They earn the spot based on a series of factors.
Search engine optimization is a collec-tion of strategies, tactics and best practices that maximize the likelihood of a website appearing in search results from a search engine. The way a search engine finds information on websites is by performing a “crawl” and indexing every page on the Internet. Search engines attempt to emu-late human behavior, trying to understand what each Web page is about and to whom it would be relevant.
Companies have a goal to increase fre-quency of their website’s appearance in search results to include website traffic by choosing important keywords and under-standing the methods search engines use to determine a website’s relevance.
Each page of organic search results displays 10 positions ordered by rank. Although search engines find millions of results for each search query in millions of pages, only a few of these pages are ever considered. More importantly, 90 percent of all searchers click on results found in the
SEO Matters Search engine optimization is the foundation of Web sales growth for an airline and should be at the forefront of any e-commerce strategy. Its value is based on the actual revenue gener-ated from both organic non-brand and brand search traffic.
ASCEND I INDUSTRY
ascend28
ascend 29
ASCEND I INDUSTRY
first page. And, most important, 64 percent select the first three organic search results.
Websites will always compete with one another for traffic, branding, marketing and sales opportunities driven by search engines. In short, the likelihood of being clicked depends on the relative position of each result and the text in the title and description of the result. Therefore, the importance of rank and relevance becomes more than evident with these industry metrics. It is clear that all efforts must be made to capture that premium organic search results page real estate.
Airline Web StrategyWith a deeper understanding of paid
search and SEO, how do they fit into an airline’s overall Web strategy?
To receive the maximum amount of website traffic from a paid search cam-paign, airlines must constantly devote attention to optimizing the selection of keywords used, as well as assess the bidding strategies being used for those keywords. Layered on top of that, they must also be aware of other marketing activities such as route launches and promotions to ensure paid search activi-ties are aligned with larger marketing objectives.
Like paid search, SEO is also very tacti-cal in nature. It is critical to ensure that the tactics implemented in an SEO plan are also aligned with the larger marketing objectives of the airline.
To maximize website traffic, airlines must look to do both paid search and SEO because
each can provide different types of results. Paid search can generate immediate traffic to an airline’s website, and if done correctly, it delivers impressive ROI numbers and a very low cost of sales and acquisition ratios. An SEO strategy to capture organic Web traffic is a much longer-term initiative, but it can also generate a good return.
Therefore, a Web strategy should have a clear roadmap and implementa-tion strategies for both paid search and SEO, regardless of how things are currently being done or if they are currently actively managed.
In terms of the strategic value of both paid search and SEO, why does all this matter? It matters because airlines compete in the same space, and all these tools have the potential to provide huge competitive advantages.
Airline marketing budgets are often lim-ited and tagged for multiple activities and initiatives. Most of the time, e-commerce is not one of the top recipients of marketing funds because airlines have to keep up with legacy expenditures in many other areas. Also, Web sales are still a small percentage of total company sales for most carriers.
Paid Search And SEO ValuePaid search is a revenue-generating strat-
egy for any airline, provided that a visitor to the site can effectively search for flights, select flights, enter the required passen-ger information and make a successful payment.
A good way to measure paid search results across airlines and channels is to use ROI and cost of sale. They help show how the performance of the paid search activity evolves and help compare perfor-mance in different markets.
Airlines can expect an ROI of 500 percent to 2,500 percent. These figures depend on the competitive environment of the airline as well as the experience and time the airline has been playing in this space. However, it is possible that some airlines will experience a decrease in ROI as more money is put into the practice, but this threshold is a long way from most airlines’ current paid search expenditures.
Cost of sale makes sense only when compared internally against other channels rather than across airlines and regions. Even though cost of sale figures may sometimes seem high for the Web sales channel, paid search has a double purpose. It generates revenue but also contributes to brand build-ing and brand exposure. If the airline is able to generate more revenue with less investment, it means the campaigns are being optimized correctly.
SEO’s value is easier to define and it is as or more important than paid search.
SEO’s value comes from the actual revenue generated from both organic non-brand and brand search traffic. What is generated is based on how well SEO tactics have been implemented.
Are paid search and SEO for all airlines? They definitely should be. Both of these strategies are integral parts of any grow-ing e-commerce operation. It’s important to analyze and consider the availability of resources and the maturity of the organiza-tion to embrace a new item of expenditure on paid search.
At minimum, SEO should be at the forefront of any e-commerce strategy since it is the foundation of Web sales growth for the airline. Investing in paid search gives airlines an advantage over competitors that might not have the internal capabilities or resources.
Effective paid search and SEO strategies require great coordination and oversight. Some organizations become overly reliant in their agencies to carry both of these tasks, which is not always a bulletproof strategy. Agencies with many accounts and clients may mass-produce their campaigns without really looking at maximum optimization. They often take advantage of the airline’s lack of resources, time or understanding on the subject to deliver mediocre results that, to the naked eye, seem good enough.
Some organizations decide to create the knowledge and expertise in-house, which carries the burden of a steep learning curve.
Either way, airlines must be vigilant and detail oriented when dealing with paid search and SEO. The digital marketing space is extremely dynamic and airlines need to be nimble enough to cope with rapid changes in both competitive and digi-tal environments. a
Rodolfo Elizondo is business consulting engagement director and Sanjay Nanda is senior vice president of delivery and consulting for Sabre
Airline Solutions®. They can be contacted at rodolfo.elizondo@sabre.
com and [email protected].
To maximize web-
site traffic, airlines
must look to do
both paid search and
SEO because each
can provide different
types of results.
HigHlight
ASCEND I INDUSTRY
Common Ground: In The Air
By Sergey Shebalov I Ascend Contributor
Bringing Together OCC And HCC through Common IT Support
By harmonizing OCC (activities in the air) and HCC (ground operations) activities, airlines can enhance their IT scope and reach.
ASCEND I INDUSTRY
efore a pilot can say “we’re ready for takeoff”, all systems must truly be “go.” Behind that “go” are complex systems that must work together or planes remain on the ground.
An airline’s operations represent a complex and multifaceted process — requiring both collabora-tion among numerous groups within the carrier’s purview and communication with customers and service providers.
Different procedures performed on the day of operations — both in the air and on the ground — are interlinked by complicated relationships. Quite often, their effect on one another can be very difficult to predict.
In addition, weather, special events, security needs, labor actions, catastrophes and other irregu-lar events require continuous refinements to plans. It becomes critical to reevaluate different scenarios and select the best strategy within an extremely short timeframe.
On the day of operations, operational plans are developed in two different environments: The airline operations control center (OCC), also
referred to as the systems operations control center (SOCC) or the integrated operations con-trol center (IOCC),
The hub control center (HCC), also commonly known as the airport control center (ACC) or hub control (HC).The OCC is responsible for overall network
operations and processes as well as people involved in activities in the air. The HCC focuses on ground operations at a station.
A carrier that has significant operations from several airports might consider having several HCCs. This may include consolidating operations of co-terminus airports under one HCC.
There are several organizational and admin-istrative setups for OCCs and HCCs. In all of them, consistency and availability of information for decision-making processes is crucial for organizing efficient operations.
OCC ResponsibilityThe operations control center is responsible
for overall network performance and operations management.
There are six primary components of operations management controlled by an OCC:1. Schedule management tracks flight operations
and reacts to disruptions by adjusting arrival and departure times, diverting or canceling flights.
2. Flight management extends schedule manage-ment to individual flight planning. It ensures that each flight has an optimal trajectory; complies with airport, airspace and aircraft restrictions; and manages disaster recovery needs.
3. Aircraft management starts with logical lines of flying created by a planning department. It assigns those lines to specific tails, while adher-ing to operational and maintenance restrictions.
4. Maintenance management keeps track of and updates flying hours, cycles and calendar-day counters for each tail. It also schedules main-
tenance activities to ensure that all tails are fully eligible to fly their assignments.
5. Crew management controls tactical planning, tracking and recovery procedures for cockpit and cabin crew. It also includes access capabil-ities that enable two-way interaction between the OCC and crewmembers.
6. Passenger and payload management moni-tors expected passengers and cargo loads by receiving continuous updates from rev-enue management or inventory systems. On the day of operations, it interacts with the departure control system, controls critical con-nections and special-service requests, and interacts with the reaccommodation system to create new itineraries for disrupted passen-gers.All these activities are automated within
Sabre® AirCentre™ Enterprise Operations, a suite of solutions that supports: Movement control, Crew management and services, Flight operations, Weight and balance, Flight tracking, Maintenance control, Irregular operations management.
These products provide an integrated environ-ment for decision making and collaboration.
HCC FunctionalityOperating on a more detailed level than the
OCC, the HCC uses the overall operations frame-work defined by the OCC. HCC implements this framework by managing ground resources required for aircraft turnaround activities, pas-senger and payload connections, terminal operations, and other processes.
The HCC must also provide feedback to the OCC on decisions that might result in various effects at the network level.
Similar to the OCC, the operational data and decision-making process for HCC operations can benefit significantly from integration. In addition, the IT tools and infrastructure used by the HCC enables two-way communication with multiple parties who support those operations.
Sabre Airline Solutions® offers an integrated hub control decision-support system that includes four management capabilities — schedule manage-ment, passenger and payload, aircraft turnaround management and resource management. They are based on a unique optimization engine and employ a “same-feel” user interface.
Schedule ManagementSchedule management is responsible for track-
ing flight operations during the day and reacting to disruptions by adjusting arrival and departure times and gate assignments. The module interacts with aircraft tracking and movement management solu-tions as well as irregular operations management used by an airline’s OCC.
Passenger And PayloadPassenger and payload management handles
passengers, luggage and cargo connections using information from the departure control system and aircraft tracking and movement management solu-tions. In advance, multiple transfer and recovery options are identified, and information is collected for their accurate evaluation. For example, possible transfer options for passengers might include: Regular terminal transfer, including an analysis
of hard-stand parking that consists of a bus trip from an aircraft to a terminal, transfer within the terminal (or between terminals, as required) and possible transfer from the terminal to an aircraft.
Fast terminal transfer is similar to regular trans-fer — except that transfer within a terminal is assisted by allocating designated personnel and equipment. It might also involve going through
B
OCC and HCC Responsibilities OCC is responsible for operations on a network level while HCC is focused on operations in and around the airport. Depending on the origin of a disruption, either OCC or HCC acts as a leader in recovery procedures.
ascend 31
Process Separation Between OCC And HCC
ASCEND I INDUSTRY
ascend32
fast-track processes governing security- and immigration-check corridors.
Ramp transfer, whenever possible, eliminates trips to the terminal by picking up passengers directly from an aircraft and transferring them using a special transfer vehicle.
Reaccommodation to the airline’s next available itinerary, which requires evaluating its schedule and availability so the best reaccommodation can be made. The evaluation involves estimation of delay-compensation costs and hotel accom-modations as well as meal vouchers in case of an overnight stay.
Reaccommodation to a flight operated by a dif-ferent airline presents another viable option. In addition to the costs associated with delay com-pensation, this option also includes the costs of booking passengers on a different carrier.
Departing flight delay and restoring the connec-tion might be feasible. The cost associated with this option is estimated based on either an aver-age delay-cost-per-minute or a more detailed analysis that can be prepared in advance with regard to delay consequences for a particular flight. The feasibility of the delay relating to the airline’s own network as well as airport and air-space restrictions must also be checked.Evaluation of each option depends on the
multiple passenger-compensation rules and contracts a carrier might have with other car-riers, local hotels and other service providers.
User controls allow airlines to set param-eters that specify a value for each resource and define restrictions for the selection pro-cess. In this case, recovery procedures will automatically pick the best option and transfer it for execution, or a controller will have multiple choices from which to manually select the best option.
Aircraft Turnaround ManagementAircraft turnaround management focuses
on tasks and processes associated with turning an aircraft around and continuing its operations. It identifies tasks that must be completed between chocks-on and chocks-off, defines relationships among them, and con-structs a task network. Time intervals note the time in which each task must be completed. It recognizes “critical tasks” as those that cannot be delayed without causing further disruption.
Turnaround networks are prepared in advance for each airport, aircraft type, season and time of day, among other variables. They might also have other features specific to the conditions under which a turnaround must be performed.
The aircraft turnaround management solu-tion uses an event-tracking mechanism that reevaluates task status each time external fac-tors result in arrival- or departure-time change or delay of a task that affects other tasks. Leaders of the ground teams are equipped with mobile devices to enable a two-way con-nection with the HCC. Ground team members
record when each task is complete. They then either proceed with another planned task or receive a new assignment.
Ground-service coordinators at the HCC monitor the process of a turnaround and determine if they need to intervene. The intervention may include assigning additional staff, rescheduling and restrict-ing task sequences, and/or working with other HCC groups.
Resource ManagementThe resource management capability is an
extension of staff and gate planning systems. It works in a hub-control environment so multiple tasks can be automatically generated for airport resources. These include passenger buses, bag tags, baggage carousels, terminal personnel and fast-transfer equipment.
Data and process integration significantly improves decision making and minimizes the effects of operational disruptions. For further efficiency, a system can be programmed to inter-act with airport security and third-party service providers including catering and fueling.
OCC/HCC IntegrationNeither OCC nor HCC — in isolation — can
successfully recover from a complex disruption. That is why integrating data and decision-making processes is considered to be a priority for any future airline operations decision-support systems.
The OCC does not have access to detailed status information for ground processes and availability of airport resources. Even if the infor-mation was available, the high speed at which decisions must be made at an airport level does not allow waiting for an optimal solution for the entire network.
On the other hand, if the HCC makes decisions without accounting for a network effect, it might cause even more problems at down-line stations.
From an HCC perspective, for example, a flight delayed at a hub should be rushed to departure to minimize the delay. But even a short delay might cause passengers to miss their connections. The cost to reaccommodate these passengers might be much higher than if they were viewed from a “network” perspective and moved to a different route with the same destination.
Complexity of airline operations does not allow the OCC and HCC decision-making processes to be combined in one automated system. Yet, critical interdependencies of the operations will not permit these processes to be completely separated.
To help solve this problem, Sabre Airline Solutions offers two decision-support systems that focus on the separate areas of airline operations. They continuously interact with one another and account for each other’s objectives, restrictions and priorities.
An essential prerequisite for establishing a truly integrated business process between the OCC and the HCC is data integration.
Both entities must have instantaneous access to all relevant information. This data may come from multiple internal systems, such as: Departure control, Revenue management, Ground resource management, Load planning, Aircraft movement management.
In addition, data from external sources, such as the airport management system, catering and fueling providers, is required. This information must be consolidated, verified for consistency and transformed into a format to make it usable by all automated systems that support airline operations.
Instant Information Exchange The core of Sabre AirCentre Enterprise Operations includes traditional airport RMS, passenger and payload connection management, aircraft turn-around control and schedule management that allows instantaneous information exchange with OCC. These modules use the same format GUI and an integrated optimization engine that guarantees consistency of decision making. HCC DSS access all required information through a BUS-based integration platform and provides gateways for which to collaborate with other airport agents.
Schematic Structure Of An HCC Decision-Support System
ascend 33
ASCEND I INDUSTRY
To fulfill this requirement, Sabre Airline Solutions developed interfaces that use an enterprise-service, bus-based integration platform for multiple sources and providers.
Such integration enables airlines to process a large volume of transactions and easily manage errors. This is especially critical in situations in which data quality may often vary from one source to another.
Once all necessary data has been verified and made available, an integrated framework for decision-making processes in the OCC and the HCC can be established.
To provide a structural approach for recovery operations, Sabre Airline Solutions has introduced a
two-level procedure: “local” recovery and “global” recovery. Prior to the day of operations, the OCC must develop a set of regularity buffers that are defined on two levels: “hard” and “soft.”
A hard buffer cannot be violated without OCC involvement. A soft buffer can be violated by the HCC but a penalty will apply. Penalties are estimated by the OCC in advance and must reflect the cost of a delay spread throughout the airline’s network.
The OCC, for example, may predict that a 15-min-ute delay for a departing flight would not cause any ripple effects and, therefore, set it as a soft buffer. Any delay between 15 minutes and 30 minutes can be recovered by increasing the flight speed. Therefore,
30 minutes might be set as a hard buffer, and the cost associated with additional fuel burn should be assessed as a penalty.
Under the integrated-recovery concept, both the OCC and the HCC monitor operations. If a deviation from plan occurs, either the OCC or the HCC is specifically designated to analyze and react to the deviation.
If a disruption originates at an airport — for example, one of the turnaround tasks is delayed — the HCC first examines the situation and decides whether the incident can be resolved within the buf-fers provided by the OCC. If a resolution is possible, the necessary adjustments to plans and work orders are performed, and the OCC is informed about those adjustments. This is a local recovery.
If the HCC is not able to recover within regularity buffers provided by the OCC, it transfers control to the OCC — along with all identified feasible recovery options. The OCC then considers an airport’s capa-bilities, generates a solution that minimizes recovery costs for the entire network and communicates the plan back to the HCCs of all affected hub stations. This collective effort is a global recovery.
If an irregular operation originates outside of an airport, the OCC initiates a global-recovery procedure and acts as the leader. The OCC might also then request the HCC to analyze the possibilities of recovering within the HCC’s scope. If such recovery is possible, the procedure is downgraded to local-recovery status, and the HCC assumes control.
Integration of numerous procedures evolves quickly to a complexity level that requires automated solutions and expe-rience. Sabre Airline Solutions can help airlines enhance their end-to-end opera-tions with integrated systems and strategic processes that bring together OCC and HCC activities. As a result, airlines will save money and customers will have a better travel experience.
This concept will be validated and tested within one of the SESAR projects led by Sabre Airline Solutions. This project defines requirements related to commercial airline operations in the air and on the ground. This engagement allows Sabre Airline Solutions to align the design of operations solutions with latest industry standards and ensure that product functionality is consistent with best practices use by leading European air-lines and airports. These solutions are compliant with key SESAR concepts that will become mandatory for airlines and air-ports operating within European space once this program is implemented. a
Sergey Shebalov is a principal research analyst for Sabre Airline Solutions. He can be
contacted at [email protected].
Aircraft Turnaround A turnaround network consists of all tasks and processes associated with a turn of an aircraft that have to be completed between chocks-on and chocks-off. It also defines relationships between them, time interval when they must be carried out and recognizes “critical tasks” as those that cannot be delayed without disruption propagation. Turn-around networks are prepared in advance for each airport, aircraft type, season and time of day among other variables.
Local Recovery A local Recovery procedure is initiated in the event a disruption originates at an airport. If HCC is able to recover within regularity buffers predetermined by OCC, it generates necessary adjust-ments to plans, issues work orders and informs OCC. If not, control is transferred to OCC and a global recovery procedure is initiated. OCC takes into account airport capabilities, generates a solution that minimizes recovery cost for the entire network and communicates the plan to HCCs of all affected hub stations.
HCC Planning — Aircraft Turn
HCC/OCC Recovery
ASCEND I INDUSTRY
ascend34
JOURNEYMANAGEMENT
Irregular flight operations are unavoidable. The manner in which an airline responds to flight disruptions can be the difference of losing money and customers or recovering quickly and getting back on schedule. The latter is essential to the end-to-end customer experience and long-term retention.
By Michael Clarke I Ascend Contributor
Delivering On The Promise Of Exceptional Customer Service
Pho
tos:
Shu
tter
stoc
k
ASCEND I INDUSTRY
ascend 35
he global airline industry is driven in part by the economic and geo-political conditions across world markets. From many perspec-tives, it is a highly cyclical industry
varying from record periods of profitability to periods of very poor financial conditions. This is associated with wide variations in capital expenditure (such as aircraft acquisitions) and challenging labor relationships between man-agement and union members.
During the last two decades, market lib-eralization has been the key focus of many governing bodies around the world with an emphasis on relaxing market access restric-tions and control over what airlines can do on a daily basis. As passenger traffic has soured as a by-product of liberalization, the neces-sary infrastructure to support such growth in passenger levels has often been lacking. This has resulted in the deterioration of passenger services and the anticipated level of comfort in some markets.
Flight Disruptions
Within the U.S. domestic market, on aver-age 77 percent of scheduled flights arrive on time. The remaining 23 percent are subject to a wide variety of disruptions that lead to pro-longed travel times for impacted passengers. In most cases, these disruptions are beyond the control of the airline and are a result of severe weather conditions and/or congestion in the national airspace.
Nonetheless, the manner in which airlines deal with these external factors often lead to secondary, and some may argue unneces-sary, delays because of poor decision making around the original or primary disruptions. Some airlines operate with a “wait-and-see” attitude, which promotes a delayed decision-making procedure that often leads to bad decisions.
A flight delay occurs when it arrives 15 or more minutes than the schedule. Delayed minutes are calculated for delayed flights only. When multiple causes are assigned to one delayed flight, each cause is prorated based on delayed minutes for which it is responsible — the displayed numbers are rounded and may not add up to the total.
On the flip side, some airlines have become conservative in their decision-making proce-dures in light of recent government regulations on prolonged tarmac delays. Since April 2010, airlines are subject to fines of US$27,500 per passenger for flights experiencing ground delays in excess of three hours from the gate.
In an effort to avoid these fines, airlines have opted to cancel flights at a higher rate than risk severe fines. In addition, when flights remain on the tarmac for a prolonged time (less than three hours), they are often returned to the gate before the three-hour limit to avoid the penalty. This has led to
additional disruptions and delays, as crew duty-limit rules, which don’t apply until the aircraft is at the gate, have led to more crewmembers timing out (becoming illegal to operate the flight) before the flight can be rereleased for departure.
Disrupted passengers are often subjected to prolonged wait times for alternate flights because airlines are operating at relatively higher load factors due to reduced flight sched-ules. When a major schedule disruption occurs at an airline, it is common for passengers to wait for several days to get to their destina-tion. In the worst case, their trip is canceled altogether.
Passengers who opt to stick it out are subject to long customer-service lines and/or calls. Few airlines have the capability to offer effective passenger-rebooking alternatives in a timely fashion, and passengers are still required to interact with gate agents or contact the reservations center.
Essential CoordinationIn the event of a major disruption, the
situation is often exacerbated by inadequate communications within the airline and among the airline and its competitors, airport authori-ties and regulatory bodies as well as the impacted passengers.
In some cases, aircraft divert to airports without the necessary facilities to handle the increased level of operations in a short time period. This may range from not having enough refueling trucks available to not having ample immigration and customs officers on duty to handle diverted international flights. Ultimately, this leads to even more prolonged flight delays and devastating passenger jour-ney experiences.
Effective Decision MakingAlthough disruption management has pro-
gressed, airlines have been slow to embrace optimization-based decision-support systems to assist with real-time planning. Such resis-tance stems from a variety of factors such as: The complexity of the underlying problem, The required approach to solve the disrup-
tion management problem, Associated passenger rebooking.
Airlines have traditionally been divided into functional groups based on prescribed resources —aircraft, crewmembers and pas-senger services. In the past, decision-support systems handled only one resource, often ignoring auxiliary factors during the decision-making process.
Unfortunately, this has created an environ-ment of mistrust within airline operations control centers toward decision-support systems. The most effective way to handle disruption management is to employ an inte-grated approach that transcends the existing airline organizational structure.
T
ASCEND I INDUSTRY
ascend36
An airline can be viewed as a collection of working networks — aircraft, crewmembers, passengers and freight cargo — all connected by scheduled flights. Events that occur in one network affect another network. As such, it is important to address each planning prob-lem in light of its impact on other planning problems.
Passenger reaccommodation during schedule irregularities is an important issue for an individual airline as well as a global airline alliance. An alliance’s system network consists of multiple hub airports that allow individual airlines to offer passengers alterna-tive itineraries on their partner carriers. “Journey management” includes con-cepts from passenger reaccommodation processes and procedures. The underlying premise is to assign alternative itineraries to disrupted passengers based on a prescribed priority list determined by the airline.
In practice, there may be a need to offer alternative passenger choices that deviate from what is most globally beneficial to the airline. A decision-support system used by agents at each airport or reservations center would streamline the lengthy reaccommoda-tion process.
The system would actively monitor the status of each scheduled flight to ensure passengers were not reassigned to alter-native flights that were already cancelled. The underlying concept of the solution is to foster centralized planning and decision making while leveraging the benefits of local (decentralized) executions.
In effect, the airline operations control cen-ter would drive the decisions made at the airport to solve the problem of passenger reaccommodation using a global approach.
Impact Of Alliances/PartnershipsSince their inception, global airline alli-
ances have focused primarily on the marketing aspect of each partner carrier within the group-ing. In recent years, the focus has shifted to cost reduction and building synergies in their operations. These have included co-existence at key airport terminals, increased access to data through a common data repository and a gradual migration to common IT systems.
Yet, airline alliance benefits have been attained with only modest levels of operational coordination among alliance partners. Additional benefits come from greater coordination of airline planning, marketing and operations. At some point, alliances may become more influential than their individual airline members. In this environment, there are business pro-cesses that should be centralized. However, significant changes in the near future are not anticipated because major alliances will remain confederations of inde-pendent entities, where no one is in charge of or responsible for the alliance interests.
The benefit of alliances in terms of market-share premium is based on the customer perception that the service on an alliance is of higher quality and reliability than interline travel. Delivering on this promise requires that alliance partners coordinate their business processes and operations prior to departure to provide high reliability in service throughout the entire passenger journey.
Prior to departure, PNR information must be coordinated and passenger journeys will require improved communications and greater sharing of data among carriers. From the pas-senger view, this means seamless handling among alliance partners and transparent reac-commodation during off-schedule operations. This will require a high level of data sharing or common data in terms of flight following, PNR and availability. It also requires an airline to communicate its recovery process with its partners.
The dependability of an alliance network and its underlying ability to recover from disruptions in a minimal amount of time to facilitate the flow of passenger and/or cargo should be a primary focus. As they have grown, alliances have faced new challenges in the recovery of irregular operations. The main
challenge comes from each partner having its own operations control center, with different strategies and methods of functioning. For this reason, it is imperative that perfect commu-nication exists among the various operations control centers to find solutions beneficial to the entire system.
As the airlines expand their joint operations, the need will develop to pursue collaborated operational decisions, especially in the event of a schedule disruption. Day-of-operations decisions should encompass all aspects of the business affected by the irregular event, including: Passenger reaccommodation, Aircraft routing, Crew tracking and recovery, Ground resource management.
In the long term, benefits in the develop-ment of a centralized global operations control center may exist, which would be responsible for monitoring and coordinating all operational decisions within the alliance. Alternatively, each airline operations control center should be able to handle decisions both related to its own fleet and that of its partners. There may also be substantial benefits from collabora-tion during the strategic phase of operations,
Flight Delay Ripple Effect Over the last decade, there has been a substantial increase in percentage of knock-in delays due to late-arriving aircraft in the U.S. domestic market. This has resulted in more disrupted flights, leading to an increase in missed passenger connections at major hub airports. In many cases, flight delays at heavily constrained airports in the U.S. northeast/east corridor have a ripple effect across the entire U.S. domestic network.
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Air Carrier Delay
Aircraft Arriving Late
National Aviation System Delay
Security Delay
Extreme Weather
Delay Cause By Year
2003 2005 2007 2009
Perc
ent O
f Tot
al D
elay
Min
utes
SOURCE: Bureau of Transportation Statistics
(Jun-Dec)
ascend 37
ASCEND I INDUSTRY
including such issues as joint maintenance planning.
Decision-Support BenefitsIt is essential for airlines to effectively man-
age their operations and quickly recover from off-schedule operations and disruptions. It is important that any proposed business solution incorporate the core components of the car-rier’s operations including aircraft routing, crew assignments and customers’ itineraries. In addi-tion, it is necessary to account for maintenance planning, air traffic control, weather and other auxiliary information that will drive and influence its operations.
The successful implementation and deploy-ment of an optimization-based decision-support system to assist with disruption management and passenger rebooking necessitates a func-tioning business environment that can support its use. It must possess the necessary process-es and procedures to facilitate decision-making as well as the timely distribution of recovery solutions.
The introduction of any new technology into an existing environment will potentially necessitate changes in business processes and procedures. Nonetheless, the benefits of the proposed business solution will outweigh any foreseen process changes.
A primary benefit of an optimization-based disruption-management system is the ability to better preplan for potential disruptions (small/daily to large/severe). It must work in con-junction with all key departments within the operations control center to make comprehen-sive decisions that are in the best interest of the airline’s operations. Another important benefit of an optimization-based decision-support tool within an operations control center is the ability to generate multiple recovery solutions based on varying input parameter sets, and make trad-eoffs among conflicting business requirements.
In today’s environment, an airline barely has enough time to develop and implement a feasible solution much less having the time to optimize a specific business objective. The reduction in solution time gained from the intro-duction of the decision-support tool opens up a new avenue in decision-making. It gives the airline the option to explore additional scenarios and incorporate additional input information that is currently prohibited due to the complexity and/or effort necessary to use this data. The air-line will also benefit from reductions in analysis time as well as the overall decision horizon for resolving outstanding disruptions.
Enabling SolutionsSabre Airline Solutions® has developed
industry-leading technology to help airlines bet-ter manage off-schedule operations and deliver effective disruption management.
Sabre® Reaccommodation Manager helps airlines rebook their impacted customers so
travelers can make it to their final destinations with as little disruption as possible. It meets customer needs and contractual obligations while minimizing the overall cost impact to operations.
Reaccommodation Manager receives schedule-change and disrupted-flight infor-mation and evaluates each passenger’s itinerary according to airline-defined criteria. It prioritizes the passenger list based on calculated values such as frequent flyer status, fares paid and class of travel to create alternative itineraries. Passengers are rebooked and notified via an automated alerting process. In this manner, more valued customers are accommodated, customer loyalty increased and costs reduced.
Reaccommodation Manager enables air-lines to take care of their most important customers; thereby, preserving customer loyalty and resulting in current and future revenue protections. By automating the reac-commodation process, an airline can provide a complete solution that explicitly considers costs, from the point of flight cancellation and rebooking through passenger notifica-tion and response.
In terms of recovery, Sabre® AirCentre™ Recovery Manager, an automated optimiza-tion-based flight operations decision-support system, quickly and proactively resolves schedule disruption problems while minimizing operational disruption. The decision-support software works in the operations timeframe, typically from day of departure to a week into the future. Recovery Manager consists of two capabili-ties — operations recovery (Ops) and crew recovery (Crew).
Recovery Manager (Ops) fully integrates with two movement control systems — Sabre® AirCentre™ Movement Manager or Sabre® AirCentre™ Movement Control. It extracts specific data, including the airline schedule as well as maintenance, passenger and crew details, in required formats and uses the same to generate a complete solu-tion. The results from Recovery Manager (Ops) are saved as a what-if scenario that can be reviewed from the movement control system Gantt chart. In addition, the system generates a set of reports with comprehen-sive information on the solution.
Recovery Manager (Ops) takes the cur-rent (disrupted) flight schedule, operational constraints (airport curfews, airport gate limits, air traffic control flow management programs, equipment restrictions and weather restrictions) and data on all avail-able aircraft and crew members, to generate a proposed recovery plan. The plan com-prises a revised flight schedule, revised fleet and crew assignments. The revised flight schedule could consist of proposed delays, cancellations, overflies, diversions
and any necessary positioning ferry flights to get back on plan. Recovery Manager (Ops) ensures that the solution generated is as close as possible to the original flight schedule while accounting for scheduled crew assignments and passenger itineraries.
Recovery Manager (Crew) fully integrates with two crew management systems — Sabre® AirCentre™ Crew Manager and Sabre® AirCentre™ Crew Control. It is a comprehensive decision-support system that addresses crewmember reassignments based on a revised flight schedule generated by a schedule recovery decision-support tool or manually. It will solve disruptions at the crewmember level and provide solution alternatives with respect to crew availability, crew preference and cost considerations.
Recovery Manager (Crew) determines a minimum cost reassignment of disrupted crews to a revised flight schedule, taking into consideration monthly hours the crews have flown, current partially flown pairings and future assignments. The solution incor-porates both business and regulatory crew rules and requirements into the rescheduling process. It generates revised crew assign-ments that are flyable by repairing disrupted duties through crew reassignment and the use of move-up crew, standby/reserve crew and deadheading.
The system allows airline controllers to specify a wide variety of limitations, includ-ing which crews to consider based on: The base airport and crew grouping, The number of reserve and standby crews
to utilize in the solution by crew base, The number of deadheads to allow within
a crew group, The level of which the user wants to incor-
porate additional (non-disrupted, move-up) crewmembers in the solution process.These decision-support systems sustain
airline operations during the most critical times and under the most unique circum-stances so customers have an extraordinary end-to-end journey. In addition, they help reduce the negative impact of flight disrup-tions to crewmembers and the overall airline operation. a
Michael Clarke is director of optimization solutions, Sabre® AirCentre™
Enterprise Operations for Sabre Airline Solutions. He can be contacted
ASCEND I INDUSTRY
ascend38
When LegacyBecomes History
Legacy mainframe systems that are being replaced with advanced client/server IT capabilities should be functionally maintained throughout the conversion. Until fully replaced, legacy mainframe functions, are vital to day-to-day operations.
By Ulrich Vitt I Ascend Contributor
Legacy Mainframe Replacement Projects
ascend 39
ASCEND I INDUSTRY
dding to or replacing legacy systems is a bit like the “pick-up sticks” game. In the game, a bundle of sticks is placed in a pile. The goal of the game is
to pull out and get as many sticks as you can, without disturbing the pile. The more tangled the pile, the more challenging the game. For legacy systems, the goal is to add to or replace the system without disrupting service. The larger the system, the bigger the risks.
Many airlines have built business pro-cesses and information flows in operations control around — and on top of — the supporting legacy mainframe IT infrastruc-ture. As functional requirements have changed, more solutions have been added into the IT infrastructure. In most cases, these solutions are not enhancements to the mainframe. Rather, they are “attach-ments” to the mainframe.
Drawing on a hypothetical example from architecture, this resembles adding balconies to the structural core of an old building. There are certain consequences that relate directly to the manner in which the legacy environment and its “balconies” have been developed over time.
Both the IT infrastructure and the busi-ness procedures in operations control have tended to become highly dependent on the supporting mainframe. This means the mainframe and its functional capabilities and technical possibilities (in terms of data management) determine the way business processes must be followed, or can and cannot be changed.
For example, the policy that determines the callout sequence for standby crew-members during the day of operations can be quite difficult to change — especially if changes are required to the data manage-ment in the mainframe. In this instance, the current search logic uses crewmember seniority-driven rules. New search logic should include crewmember preferences, as well.
The new logic requires either an enhance-ment to the existing search logic in the mainframe, or the complete removal of callout search functionality from the mainframe. The latter would require adding a new balcony via a new system implementation.
The new callout system would need to be integrated with the mainframe to get details from the mainframe (such as which crewmembers are on reserve) to perform a
valid search. Either case — enhancing the mainframe or adding a solution balcony — represents a rather expensive endeavor. This includes the one-time implementation plus continual maintenance and operations-related efforts.
Some carriers have resisted changes to business processes because changing the mainframe — or adding new solutions balco-nies — is deemed too expensive.
As a result, IT environments and business processes that support legacy mainframe systems have become more complex because of solution balconies and are more expensive to maintain.
It’s also more difficult to adjust to develop-ing functional and/or nonfunctional business requirements due to piecemeal changes and additions that have been made over time.
Sustaining the mainframe-centered IT environment is no longer a viable option. It should be replaced by a new, decentralized IT environment that consists of individual client/server-based solutions.
Each solution would support one of the functional areas within airline operations control. These include but are not limited to: Flight dispatch, Load management, Crew control/tracking, Flight operations control, Maintenance planning and control.
Business-Process Change Management
Due to the dependency among business processes and the technical limitations set by the mainframe and its balconies, airlines must change their business processes to replace a legacy system. Yet, doing so would present significant opportunities because the different business areas within flight opera-tions will be able to search for solutions that are tailored to their specific needs.
For example, functional requirements in flight dispatch will no longer be restrained by crew-tracking requirements since, in the new IT environment, both areas will be supported by their own client/server-based solutions.
If not managed appropriately, however, the new business processes that define functional requirements for the new solu-tions will add to costs. Those added costs come from searching for and implementing new individual IT solutions, and then inte-grating them to support end-to-end business processes.
To help avoid these costs, airlines must manage requirements in a coordinated and strategic way across all business areas. This requirement management has to be an integral part of the program that will manage the replacement of the mainframe IT environment.
A
Mainframe Risks Similar to adding balconies to an old building structure, there are certain risks and consequences to the way in which legacy mainframe systems and newer “add-on” solutions have been developed over time.
Pho
tos:
Shu
tter
stoc
k
ASCEND I INDUSTRY
ascend40
Business-process changes, implementa-tion, and operations and maintenance costs will be managed more efficiently if carriers observe a strict hierarchy in defining their business processes and functional require-ments. These must detail what will be covered by the new IT solutions that, as a whole, will replace the legacy system.
Consider top-down hierarchy, with “top” representing the end-to-end business pro-cesses across all functional areas in airline operations control and “down” representing the business processes of an individual functional area. Top-down hierarchy can best be described as the process of developing schedule changes with what-if scenarios before implementing the changes in a real, published schedule.
The higher-hierarchy business processes and functional requirements should always have precedence over the particular interests of each functional area. This will effectively reduce the effort of removing conflicts from schedule changes in the individual functional areas — and their solutions — that would result if a schedule change was presented as a new, published schedule from one of the functional areas.
Validation of scenarios from different functional areas requires seamless exchange of the scenarios among the individual IT solutions. In addition, inte-grated schedule-scenario management requires alignment among the business processes that guide the development of schedule-change sce-narios with the areas within operations control.
For example, the sequence in which the differ-ent areas will validate a new scenario has to be defined, with the primary objective of optimization of the end-to-end business process — not the optimization of the process in each functional area.
A couple of questions apply when develop-ing a consistent end-to-end business process for schedule-change management: Should maintenance control validate the viability
of a scenario developed by operations control before crew management has determined that a staffing solution is possible?
Should operational network scheduling validate a schedule change initiated by maintenance plan-ning before operations control has developed a tail-assignment solution or crew tracking has developed a crew solution?There is a risk if all three functional areas (net-
work operations, maintenance control and crew control) define business processes for schedule-scenario management in isolation. The solutions implemented to meet their individual requirements will not be able to communicate with one another.
The much bigger risk, however, is that the end-to-end business process for schedule-scenario management may evolve to be inefficient, too expensive and non-operational.
This example points to the approach for business-process change management that provides benefits to actual legacy-replacement
projects. That approach uses a hierarchical basis for development of business-process changes as specified:1. End-to-end business processes in flight
operations are defined, regardless of the wishes and requirements raised by the indi-vidual functional business areas.
2. The detailed business processes for indi-vidual functional areas that are defined as “dependent” processes (“daughter” pro-cesses) will be developed once the higher-level, end-to-end business processes are defined.
3. Following this activity, all functional areas must approve a complete listing of all end-to-end business processes.
4. Only at this time are the individual business processes developed and described. It is crit-ical that all new processes be in complete, conflict-free alignment with the previously defined end-to-end business processes.
5. Once the development of all end-to-end and detailed business processes has been completed, functional and nonfunctional requirements for the new IT solutions can be defined.Once the selection process of the pre-
ferred solutions for each individual functional area begins, only solutions that meet the requirements based on end-to-end business
processes should be considered for addition going forward.
Phased ImplementationMoving from a legacy mainframe system to
a new suite of client/server-based applications should be completed in phases.
Replacing a legacy system in one step through a simultaneous move into production of the new application suite would come with significant risks that flight operations should not accept.
In addition to the inherent risks, it would require a longer up-front timeframe to develop the new client/server application suite to meet all the stated business requirements, both end-to-end and from each business area.
Each individual solution of the suite must be developed (or enhanced based on the available version of the solution at the start of the project) to the specific requirements of its individual business area. Additionally, the individual applications must be integrated to support end-to-end business processes in flight operations.
Application development/enhancement and integration work must be completed before moving into production. In essence, it would retime the start of the replacement project until development work is complete.
Legacy Mainframe Attachments In many cases, business processes and information flows have been built around and on top of the supporting legacy mainframe IT infrastructure. More solutions have been added, and in most cases, the new solutions are not enhancements but rather attachments to the mainframe. This creates a level of risk.
ASCEND I INDUSTRY
ascend 41
The carrier will only benefit from the new functionality and/or new and enhanced business processes when the end-to-end development of the new suite of applications is complete.
Phased replacement provides improved risk management for flight operations. It allows portions of the new solutions to be moved into production before completing end-to-end suite development. This enables the implementation of new functionality and improved business processes. It also provides significant value to the business earlier in comparison to a one-step replacement of the legacy infrastructure.
At the same time, phased replacement of the legacy system would raise specific chal-lenges, both for the management of the actual migration phases as well as for the technical implementation of the replacement solution. A phased-migration approach automatically entails that for a length of time, both the legacy and parts of the new application suite must cooperate to provide consistent end-to-end support in flight operations management.
The need to integrate the legacy system with the new application suite requires challenging technological solutions due to differences in technology between the legacy and the archi-tecture of the client/server applications.
The following specific actions would help support a successful integration with the legacy environment: Synchronization of data across all systems
— To prevent data inconsistencies during the phased migration, information must be coordinated across all solutions. To meet this requirement, the legacy system must be technologically integrated with the new application suite. The integration must also include an intelligent, reliable data-manage-ment solution. In addition, security and information-safety requirements must be identified and addressed to integrate with the legacy infrastructure.
Support to down-line systems — In addition to the solutions supporting flight operations, other systems require information about the carrier’s operation (to produce reports, for example). With a phased migration, infor-mation relevant for down-line consumers must be maintained in different applications, including the legacy system. Consolidation of information from these different systems might require implementation of additional layers. For example, an airline may need a data-storage system to prevent down-line systems from being impacted by the replacement of the legacy environment.
Affect on workstations and networks — The replacing suite of applications and the legacy solution will have different require-ments concerning end-user workstations and network infrastructure. Since both environments must coexist for a length of time, these different requirements may
add costs to simultaneously operate dual workstation and network environments.As the abbreviated listing illustrates, replac-
ing a legacy mainframe through a phased approach raises challenging technological issues. To avoid unnecessary costs, the project team must simultaneously provide preventive management on these issues and follow a replacement strategy that protects the integrity and quality of flight operations.
To have the best chance of success, the migration strategy should be developed at the start of the project since the strategy will help identify additional development and implemen-tation requirements.
In addition, new business processes need to be defined and implemented to allow simul-taneous use of the legacy system and the new applications. This supports end-to-end business processes during intermediate stages of the phased replacement of the legacy infrastructure.
One of the key decisions in managing replacement projects is balancing additional costs with the risk mitigation that is possible through additional investment in the replace-ment project. Additional costs will result, for example, if intermediate solutions — either for business processes or in “throwaway” IT development — are necessary to support the phased replacement of the legacy environment.
Investment in intermediate solutions, besides being required to execute a phased migration, can provide significant benefits for mitigation of risks associated with the replace-ment of the legacy system. A typical example of intermediate investment in business processes would be a decision to implement a manual workaround to perform a migration step to allow decommissioning a portion of the legacy system.
The manual workaround might be required if, for instance, the new application does not provide functional support to the relevant pro-cess (a situation that might occur because the specific process functionality is targeted for a later phase of the migration).
If the benefits from decommissioning parts of the legacy infrastructure at this time out-weigh the additional costs of implementing a manual workaround, it would still be advisable to proceed with the migration step instead of waiting until the required functionality is available in the new application. It is up to the project team and the affected business areas to decide how to proceed if a tradeoff between additional costs and implementation of throw-away solutions (including manual workaround procedures) is required.
Should the focus always be on replace-ment of the legacy system with the described new application suite within the projected timeframe?
No. The focus should not be on perform-ing all individual steps in the replacement project as originally scheduled. Extensive
experience with legacy-replacement proj-ects has shown that, in general, without adequate preparation and planning, thor-ough assessment of relevant business processes and structured management of business-process changes, legacy-replace-ment projects will run longer, cost more and have a higher risk of failure.
The primary driver of project failures and/or significant project delays and rising costs would seem to be the inability to manage requirements — in essence, it is the failure to keep business processes under control.
This is an indicator that insufficient time has been spent on thoroughly captur-ing, documenting and base lining business processes — and the derived functional and nonfunctional requirements — before the start of the actual replacement project.
Insufficient documentation and base lining of processes and requirements will result in “scope creep” as well as new potential functionality being identified later (at a time when the actual project is already under way). These are primary reasons for project delays and significant additional costs.
Continuous management of business processes — and preventive planning and assessment of business-process changes — are among the key tools and practices that have been broadly demonstrated as primary success factors in supporting timely, on-budget completion of legacy-replacement projects. a
Ulrich Vitt is a business-project leader in business consulting for
Sabre Airline Solutions®. He can be contacted at [email protected].
Competitive Fare Evaluation And Dilution Management
To respond to competitive pricing changes, airlines should tailor their pricing based on market segments, market strength and product comparison to reduce the risk of dilution and achieve competitive pricing.
By Thomas Bertram I Ascend Contributor
rom outside of the industry, airline pricing looks random and complicated. For those in airline pricing departments, it is a dynamic and highly competi-
tive environment. Fares can be changed and distributed multiple times throughout the day. With so many pricing changes over multiple markets, quick and effective decision-making is imperative. So how does one determine how to react to a competitor’s pricing?
There are three key pricing concepts to keep in mind when talking about competitive fare evaluation: Dilution — Simply defined, dilution is the dif-
ference between how much customers are willing to pay and what they actually pay. Dilution risk is present with all types of fares, but is especially problematic for higher value business-type fares, and in markets that have restriction-free pricing. Effectively minimizing dilution is central to pricing success.
Customer segmentation — Different custom-ers have different travel needs. People travel-ing for business want more flexibility and less pricing restrictions. They are also willing to pay higher fares to meet their travel needs. Conversely, people traveling for vacations and visiting friends and relatives are willing to accept more travel restrictions (advance pur-chase, minimum stays) in return for lower fares. When evaluating a competitive fare, it is critical to know the type of market segment that is being targeted. There are many seg-ments in the airline industry; the larger ones are business, independent travelers, tours, ethnic, labor and student.
Elasticity — Elasticity measures the sensitiv-ity between changes in price and quantity of demand. When a change in a fare results in a high change in quantity demand, it is elas-tic. It is inelastic when a change in price has little effect on quantity of demand. Because airline fares change frequently, it is difficult to calculate the exact elasticity of a fare change. That said, there are some general attributes to determine elastic or inelastic fares:
Business-type fares tend to be inelastic; lowering the fare does not result in an increase of demand to offset the discount.
Small and remote markets also tend to be inelastic because the traffic base is too small to stimulate significant demand.
Large cities, vacation destinations, visiting friends/relatives and student markets tend to be elastic. Lowering fares may spur more travel in general, and make some consumers shift between modes of trans-portation, such as from train to airplane.
Competitive pricing activity comes from a variety of sources. The primary source of pub-lished fare information is fare distributors such as ATPCO and SITA. ATPCO transmits inter-national fares on scheduled intervals through most of the day, seven days a week. Fare
management tools, such as Sabre® AirVision® Fares Manager, provide information on analyz-ing fare changes.
Other sources of finding competitive fare changes include an airline’s field sales staff, Web scraping of airline and online travel agency sites, and advertisements in the media. Time is of the essence when responding to a competitive fare, so the quicker a pricing change is identified, the more the impact will be limited.
When reviewing a competitor’s fare, there is more to consider than just the price. Analyze the associated rules, restrictions and distribu-tion as well. For example, say a competitor lowered a fare by 40 percent. If looking at the fare value only, this could have a significant impact on revenue. However, if this fare is only good on Tuesday travel between 10 a.m. and 2 p.m. with a 21-day advance purchase, the impact is much less. By ignoring information about the rules and restrictions, matching the competitor’s fare would result in serious dilution.
Reviewing these fare rules and restrictions, an airline can identify which market segments the competitor’s fare targets. Fares with mul-tiple rules/restrictions generally aim at leisure travelers. Before responding to a competitor’s price, know and understand all information about the fare.
Know Your MarketsThe first step to evaluating competitive fares
is to understand your market. Not all markets are created equally. One way to determine and quantify a market is by relative yield and market share. Relative yield is a measure of a market’s actual yield compared to the yield of the mar-ket’s highest fare. To determine overall market strength, look at market share as the absolute market share. Quantifying markets in this man-ner provides a methodology to define the type of competitive pricing response to use.
It is important to view the competitive fare evaluation through the type of market. Each type of market has a general market profile that shows the characteristics of the market. Market types include: High market share/high yield — Maintain
market strength, improve yield and defend the market.
High market share/low yield — Leverage market presence to improve yield.
Low market share/high yield — Segment fare products to avoid dilution from higher fares.
Low market share/low yield — Opportunistic pricing develops more demand. High market share/high yield markets gener-
ally comprise a high component of business demand. Because most business customers are relatively inelastic, lowering prices does not usually generate any new revenue. In fact, it most likely will result in dilution. Therefore, an airline should tailor the competitive pricing response to protect high fares. It should match the competitor’s price, but with additional restrictions such as advance purchase or mini-mum stays.
Conversely, in markets where the airline has low market share and low yield, the competi-tive position relative to the competitor airline allows an airline to be more aggressive on fares. At the very least, fares should be equal to the competitor. If the competitor has very strong market presence, there may also be an opportunity to undercut fares to drive additional market share.
Markets that have low market share and high yield might have a high percentage of business demand. Even though market share is low, protecting the higher business fares from discounting helps reduce the risk of dilution. Because market share is low, there could be an opportunity for selective pricing reductions in the lower fare ranges to attract incremental demand.
FASCEND I INDUSTRY
ascend 43
Effective Competitive Pricing To determine competitive pricing actions, an airline must know its markets, product and competitors.
Know Your Markets Know Your ProductKnow Your Competitors
Evaluating Competitive Pricing Actions
Finally, high share and low yield markets present an opportunity to leverage market strength to take small premiums against a competitor, especially if the fare is in the lower part of the fare hierarchy.
Know Your ProductOnce the market type is identified, another
factor in the competitive analysis is how the airline product compares with the competi-tor. Many factors go into the airline purchase decision, and understanding these factors can affect how to price. Key factors include: Schedule — This is one of the most
important factors to consider, especially in markets with a high component of busi-ness traffic. An airline should analyze how its schedule lines up with competitors. Airlines that have higher frequency than their competitors and well-timed depar-tures might be able to take small premi-ums on the higher business fares.
Load factor — If markets are running a high load factor, there is little incentive to lower or undercut fares. If load factors are extremely high, implement small pricing increases. If pricing cannot be increased, work with the revenue management staff to reduce inventory in the lower reserva-tions booking designator (RBDs) on high load-factor flights.
Loyalty/alliances — Loyalty programs pro-vide incentives for frequent travelers to fly with a specific airline or global alliance. Some customers are willing to pay a pricing premium to accrue miles on their chosen airline/alliance. If an airline has a strong program, it has an opportunity to
take pricing premiums versus a competi-tor. Airlines without a strong program may need to undercut the competitor’s fare to entice customers to change their travel hab-its.
Airport/in-flight service — While schedule and price are the two key drivers in select-ing a flight, an airline’s service can impact pricing. Airlines with poor service will not be able to extract a pricing premium versus a competitor that offers great service. Some airlines have legendary reputation for cus-tomer service, and their prices reflect that reputation.Unfortunately, there is no magic formula
on how to weigh the above items, but it is easy to look at each of these factors and determine if an airline is better or worse than its competitor. If an airline is superior to its competitor in all items, it may be able to take pricing premiums in the market. On the other end, if the airline lags behind its competitor in all four factors, at best it can match competitor fares.
Know Your CompetitorsThe final component to consider is under-
standing a competitor’s pricing behavior. A good, experienced pricing analyst learns how a competitor airline will react to a pric-ing change. For example, if a fare is reduced and the competitor has a strategy to have the lowest price available, any decrease in fares will be matched. No advantage will be gained and it will cause dilution. If an airline has demonstrated it will not match a small undercutting of a fare, then taking small fare
reductions might move some small market share and revenue gains.
Before a fare change is launched against a competitor, an airline must assess how the competitor will react to the pricing action. It becomes like a chess match where players not only think about their next move but their opponent’s next move, and then respond to that move. Anticipating the potential result in advance will reduce pricing churn.
When taking a competitive pricing action, it is important to measure the impact of the pricing change. One of the simplest and most immediate measures is reviewing advance bookings. Analyze both the total and bookings by RBD to see if there is an increase in demand, or if demand is just shifting between RBDs. If the competitive pricing response was to increase market share, then analyze market share data to see if the share did shift.
Finally, analyzing revenue accounting data can determine yield changes. If the data is available at the fare-basis code level, measure the impact of a specific fare. Based on the result of these analyses, adjust com-petitive pricing changes accordingly.
Airline pricing is one part art and one part science. Blindly matching a competitor’s fare does not take into account the type of market, the market segment, or the airline’s advantages and disadvantages. Tailoring pricing based on market segments, market strength and product comparison positions competitive pricing appropriately and helps reduce the risk of dilution. a
Thomas Bertram is engagement director of consulting for Sabre Airline
Solutions®. He can be contacted at [email protected].
ASCEND I INDUSTRY
ascend44
Market Types Airlines must view the competitive fare evaluation through the type of market. Each one has a general market profile that exhibits the distinctiveness of the market.
High Share/ High Yield
Low Share/ Low Yield
High Share/ High Yield
Low Share/ High Yield
Market Types
Sabre AirVision Fares Manager
Airline Pricing Video
ASCEND I INDUSTRY
ascend 45
O&D Stepping Stone
By Lindsay Millward Ascend Contributor
An Intermediate O&D Model Reaps Benefits Without Huge Challenges
The revenue benefits of moving to a full origin-and-destination setup in revenue management are well proven. So are
the difficulties of moving to more complex systems, restructuring the organization and consuming the associated costs.
A move to intermediate O&D enables airlines to retrieve some of the benefits without all of the associated complexities. Pho
to:
Shu
tter
stoc
k
or years, airlines have been searching for the perfect revenue management meth-odology that most accurately fills the finite space on the
aircraft based on passengers’ willingness to pay and their overall contribution to the bottom line. Airlines with significant connecting traffic know the challenges of trying to reserve space for passengers whose end-to-end journeys contribute the most. Research shows that O&D (or a full origin-and-destination forecasting and optimization system) is the answer.
Yet, the complexity of moving to a full O&D operation can be enough to deter even the most bullish airline execu-tives. The list of challenges and changes required can seem overwhelming, and the time to market can be extensive. It can take 12 to 18 months to collect the necessary data, implement the system and get analysts up to speed before the entire operation works like a well-oiled machine.
Why So Difficult?Technically, the requirements are com-
plex and hefty. They require a PNR data warehouse that is updated daily as well as fares data by origin, destination and inventory class (or even point-of-sale inventory class). Generating and storing this volume of data can require significant investment by the airline and requires ongoing maintenance. Yet, it is simple when compared to the substantial human impact.
In a point-to-point (non-O&D) environ-ment, analysts have complete control over their markets. They can analyze and adjust demand forecasts easily because there are typically 20 to 30 inventory classes to work with on any flight depar-ture. They can view the exact availability on their market at any time as well as open or close classes in seconds.
In an O&D environment, there can be hundreds of ODIFs (O&D inventory fare classes) or even ODIF-PoS (with point of sale), with minute-demand values to analyze. To further complicate the analy-sis, other analysts’ actions affect their market’s availability. Therefore, they have to coordinate with multiple analysts to achieve their market objectives, making for complex processes and visibility into performance extremely difficult.
The analysts’ ability and willingness to work in this new world directly impacts the revenue increase that can be gained from moving to O&D. Investment in train-ing and consulting is required to ensure analysts ramp up quickly. An organiza-tional restructure is often required as the team moves from an inventory analyst role to a market-demand analyst role. This move can result in experienced ana-lysts falling by the wayside as their role becomes more intellectually demanding.
Even when a restructure occurs, responsibility for managing demand on less-popular markets can be unclear, leav-ing certain markets without management. Reporting is more complex and involves larger volumes of data.
In short, the process of revenue man-agement becomes less tangible and more theoretical — less crystal clear and more of a hazy shade of grey. The risks associ-ated with moving can be significant and the entire process can become a major distraction from the day-to-day running of the business.
Why Move To O&D?It’s been proven airlines can achieve
a 1 percent to 2 percent revenue ben-efit, direct to the bottom line for airlines whose network warrants it. Estimates vary, but generally, a network with 20 percent to 25 percent connecting traffic is enough to benefit significantly from moving to an O&D operation.
This kind of revenue increase is tempt-ing, but it requires significant investment to achieve. Airlines can generate some of the return with much less business upheaval and a much lower capital outlay through intermediate O&D.
The Passenger Origin Destination Simulator (PODS) MIT Research Consortium, which is funded by eight international airlines to explore forecast-ing, optimization and competitive impacts of revenue management, conducted an analysis. The Consortium determined that the benefits vary depending on the type of O&D control implemented. The three types are: Heuristic bid price — Forecasting is
done at the fare-class level, but bid prices are produced and can be used by the inventory system to control O&D availability based on the bid-price curve.
Displacement adjusted virtual nesting (DAVN) — Forecasting and optimiza-tion are done at the O&D level, but the controls are at the leg/bucket level. Sometimes referred to as “virtual nest-ing,” this requires an offline map-ping of origin/destination/fare values to buckets.
Network probabilistic bid-price control (PROBP) — Forecasting, optimization and inventory control are all done at the O&D level.
Options Abound Typically, an airline views the potential
move to an O&D operation as an “all-or-nothing” migration. Yet, it is clear from the PODS analysis that significant revenue benefits can still be achieved from implementing an intermediate O&D solution. For example, using the heu-ristic bid-price method where demand forecasts are produced at the segment fare-class level, but inventory controls are at the O&D level.
FASCEND I INDUSTRY
ascend46
Different O&D Models Using different O&D tactics, revenue benefits vary depending on an airline’s average load factor (passengers flown divided by the number of seats expressed as a percentage.) If an airline operates at 83 percent load factor and uses the heuristic bid price O&D method, it can expect a 0.6 percent revenue gain. Displacement adjusted virtual nesting and network probabilistic bid-price control methods produce much higher revenue gains.
2.5%
2%
1.5%
1%
.5%
0%
Network Load Factor
Revenue Gains Based On Different O&D Models
70% 78% 83% 87%
HBP
DAVN
PROBP
ASCEND I INDUSTRY
ascend 47
Based on a network load factor of 83 percent, the revenue benefits are more than 0.5 percent and the difficulties and costs associated with moving to O&D are greatly reduced. There is no requirement for a restructure of the organization because analysts still have route respon-sibility and work with demand forecasts at the segment-class level.
These are much easier to interpret and control, being more significant than the minute values of O&D demand forecasts. The interactions that the analyst has within the system remain as before — the key piece to change is inventory control.
In Intermediate O&D, the optimization process utilizes the demand forecast and O&D fares data to determine a heuristic bid price for each flight leg. It then produces both a bid-price curve and class-level authorizations to send to the inventory system. This enables avail-ability decisions to be based on the sum of the bid prices of the composite legs of any passenger journey. As a result, the true fare value of the passenger is the determining factor of the availability
offered, rather than the inventory-class availability.
There is also no need for a huge PNR database that is supported by expensive hardware and IT staff because the nightly inventory, schedule and post-departure data are sufficient.
Stepping StonesOf course, implementing this kind of solu-
tion doesn’t mean that full O&D forecasting and optimization isn’t on the horizon. With intermediate O&D, an airline can break up the mammoth move to O&D into two distinct steps.
With this method, analysts have time to become familiar with the implications of O&D inventory and availability before having to tackle the changes to demand forecasting and the consumer choice models therein.
Alternatively, intermediate O&D can pro-vide an ideal final solution to medium-sized carriers that have healthy O&D traffic but do not have the appetite or scale to move to full O&D.
Airlines can also start achieving some of the revenue benefits of moving to
O&D much more quickly, and it signifi-cantly reduces the risks associated with such a major change. As such, the bullish airline executive doesn’t have to be so bullish after all. a
Lindsay Millward is a solutions manager in the revenue management
division for Sabre Airline Solutions®. She can be contacted
90+ The percentage by which high-
efficiency particulate air (HEPA) filters
are effective at capturing airborne
microbes in the filtered air. According
to IATA, modern aircraft contain
HEPA filters that have a similar
performance to those used to keep
air clean in hospitals, operating
rooms and industrial clean rooms.
2020 The year by which the Single European
Sky, including the technical component
of SESAR, must cut user costs by 50
percent, reduce the environmental
impact per flight by 10 percent and
improve safety levels as traffic increases
by 70 percent, according to IATA.
80
The percentage by which biofuels
derived from biomass, such as algae,
jatropha and camelina, have been
shown to reduce the carbon footprint
of aviation fuel over their full lifecycle,
according to enviro.aero. If commercial
aviation were to get 6 percent of its
fuel supply from biofuels by 2020,
this would reduce its overall carbon
footprint by 5 percent.
240 million The number of passengers flown by
Chinese carriers in 2010, according
to IATA, making it the second-largest
domestic market. The number is
expected to reach 425 million in 2015.
+count it up
2050 The year by which some 16 billion
passengers and 400 million tons of
freight will need to be flown yearly,
according to IATA.
2010 The year in which about a third of all
passengers traveled on routes to, from
or within Asia/Pacific. North America
and Europe accounted for 31 percent
each. According to IATA, by 2015, Asia/
Pacific is expected to increase its share
to 37 percent.
The Emissions Dilemma
Despite opposition from numerous nations around the world, the European Union is determined to enforce carbon emissions fees for airlines flying to, from and within Europe.
50
BioFuels: The Next Generation
Biofuels are still in the early stages of development. The push to create and produce biofuels technologies may help airlines meet aggressive CO2 targets and keep a lid on fuel costs.
55
64
Hedging Your Bets
Airlines hedge fuel and foreign exchange to mitigate fuel-price volatility and exchange-rate fluctuations. Some airlines have made money and others have suffered significant losses due to hedging, raising the question if hedging is like betting part of the ranch. Trading in carbon is the next frontier for airline hedging.
SPECIAL SECTION
FUEL REPORT: Hedging, Biofuels
And Carbon Emissions
The Emissions Dilemma
By Holly Forté | Ascend Contributor
The EU ETS Is Imposed Despite Worldwide Opposition
Despite opposition from numerous nations around the world, the European Union is determined to enforce carbon emissions fees for airlines flying to, from and within Europe.
ASCEND I SPECIAL SECTION
ascend50
s of Jan. 1, all airlines flying in Europe’s airspace are included in the European Union Emissions Trading System (EU ETS). EU ETS operates through a system of allo-cation and trading of emissions
allowances.Airline obligations under the EU ETS
include: Emissions reporting — Airlines must submit
annual emissions reports to their competent authority by March 31 of the following year.
Emissions audit — Emissions reports must be verified by an independent third party prior to the airline submitting its annual emissions report.
Surrender carbon allowances — Airlines must surrender carbon allowances to cover emissions by April 30 of the following year. They must buy additional allowances or can sell surplus allowances depending on actual emissions and their free allocation of allow-ances. The EU ETS is only one component in the
complexity of aviation emissions. Yet, it has evoked powerful reactions due to the poten-tial impact on cost escalation for airlines. With the pressure on all industries to improve environmental practices and become greener, emissions reduction is a prevalent issue in the aviation industry.
Fuel-reduction efforts dominate the avia-tion industry since fuel costs are the largest expense in airline operations. Reducing emissions is clearly a natural extension of fuel reduction. With two big motivators to reduce emissions and fuel costs, strategic forecasting and planning seem like obvious objectives.
However, despite the apparent simplicity of the concept, the emerging laws and initia-tives affecting airline emissions are riddled with complexity and controversy. In fact, companies are arguing with governments, airlines are refusing to fly to certain countries, associations are standing against governmen-tal agencies and governments are fighting the EU ETS regulations.
For example, like legislation proposed in the United States last summer, Russia and China are both preparing legislation that for-bids their airlines to participate in the EU ETS. In addition, Russia is looking at Siberian overflights for European airlines in an effort to step up the pressure. Russia is also consider-ing blocking its civil aviation radio frequencies from use by E.U. carriers flying to and from the Far East, effectively closing Siberia’s airspace to them.
State Of Affairs The landscape for emissions is complex.
Some of the many influences that will help reduce emissions include infrastructure initia-tives, such as SESAR and NextGen, that push
A
ascend 51
ASCEND I SPECIAL SECTION
for improvements in air traffic management. In addition, biofuels and aircraft design will provide longer-term reductions in CO2 emis-sions. There is also added pressure due to escalating and unpredictable fuel prices for airlines to be more efficient.
There are many different initiatives to reduce emissions, but the primary one for the aviation industry is the EU ETS, which is attempting to reduce the growth of carbon
emissions worldwide. The transportation sec-tor, which includes trains, cars, buses, trucks and other forms of transportation, accounts for around 13 percent of worldwide C0
2 emissions. Aviation currently accounts for 2 percent globally and about 3 percent of the European Union’s total greenhouse gas emissions.
Assuming historical trends in technological improvements continue, aviation emissions
output is still expected to escalate dramati-cally by 2050.
“CO2 emissions from the aviation sector
have been growing rapidly,” Jos Delbeke, European Commission, director general for climate action said in a speech given in February. “By 2020, global international avia-tion emissions are projected to be around 70 percent higher than 2005 levels, even with 2 percent per year fuel efficiency improvement. According to forecasts, they could further grow by up to 700 percent by 2050.”
The EU ETS aims to cap this growth in emissions by placing limitations on the amount of carbon emissions allowed for airlines flying in, out or within Europe. As such, it will require airlines to pay for carbon emissions above the benchmark period of 2004-2006.
Some of the controversy around the EU ETS comes from the perception that it is designed to generate revenue for the European Union in addition to its stated purpose of emissions reduction. This is partially due to the fact that the EU ETS does not designate how revenues from the auctioning of carbon allowances are to be used. The vast majority of E.U. member states have said they will not earmark rev-enues to affect climate change efforts.
Under EU ETS guidelines, a certain number of free carbon allowances are allocated to each sector and for each airline. Beyond that, the rest will have to be purchased in the open market or from other airlines. The fluctuation in prices of carbon allowances opens up a new world of uncertainty regarding operational costs for airlines because EU ETS requires controlling carbon emissions for flights to and from European airports. As a result, the financial impact on flights could be significant, even if only a small portion of the total distance flown is in European airspace.
Initially, airlines will be required to purchase credits for 15 percent of their total baseline usage, but this allocation will not increase as airlines grow. Although this may sound low, this is 15 percent of their baseline only. Airlines will be responsible for paying for 100 percent of carbon requirements above the original baseline. As a result, according to the president of the European Regions Airline Association, the average airline will have to purchase 27 percent of carbon on the open market.
Carbon prices declined at the end of 2011 and hit an all-time low of 6.43 Euros (US$8.41) last December, but prices earlier in 2011 were much higher. Prices are likely to increase in 2012. To show how volatile carbon can be, in late 2011 IATA’s Chief Executive Officer and Director General Tony Tyler estimated that EU ETS could cost airlines US$1.2 billion this year. An updated figure of around US$670 million was made by Thomson Reuters Point Carbon in February when carbon prices were lower.
Aviation Emissions Impact Looking at worldwide emissions, 13 percent are estimated to be from the transportation sector, with only 2 percent of overall emissions generated from aviation. However, at cur-rent rates, the 2 percent is on track to increase to 3 percent of the overall total by 2050. The European Union Emissions Trading System aims not only to stop growth, but to decrease emissions from all sec-tors by putting a price on emissions output. The cost impact on the aviation industry is expected to be greater than US$1 billion per year.
Cost Of Emissions Credits On a per-flight basis, the cost of emissions credits to fly from New York to Frankfurt and then from Frankfurt to New Dehli (using June 2011 prices) would have been 5,712 Euros (US$7,543). Although open market prices for emissions credits have fluctuated sig-nificantly and ended 2011 at record lows, estimates for increases could put the emissions credit cost for the same route in 2020 at 13,440 Euros (US$17,749).
ASCEND I SPECIAL SECTION
ascend52
Rail, ships andOthers 1%
Aviation2%
Road 10%
Transportation13%
Energy supply26% Buildings 8%
Waste 3%
Agricultur; 14%Forestry 17%
Industry 19%
Aviation Emissions growing 3% by 2050
NY > Frankfurt > New Dehli
Estimated CO2(tons)
Cost per credit(1 credit/ton CO2)
Cost per flight
Estimated Costs Per Flight Example
Current prices (6-13-11) 336 16 Euros 5,712 Euros
40 Euros 13,440 Euros336Estimated prices (2020)
Worldwide Man-made CO2 Emissions
To address volatility in carbon prices, air-lines are already hedging carbon. Lufthansa and Air France-KLM are examples of airlines that have already begun purchasing carbon through futures and options. Other airlines are likely to wait until the date when they are required to surrender their emissions.
To apply for “free” carbon allowances , air-lines had to report their 2010 emissions to the European Union in March 2011. The European Union used these reports to determine how many free allowances airlines receive per year from 2012 through 2020. Since airlines now know what their free allowances are, they can decide to purchase their projected shortfall through futures and options for the current year now if they believe carbon prices are low, or wait until they are required to pay by April 30 of the following year when they must surrender their required allowances.
The requirement to surrender carbon allowances points to a need for emissions forecasting and developing strategies to reduce carbon emissions and cost. With accurate forecasting and an understanding of market expectations regarding carbon, companies can better plan and time their carbon purchases. Airlines have some options to comply with their allowance requirements: Re-fleet using more efficient aircraft, Reduce E.U. capacity or bypass the European
Union (called “carbon leakage”), Purchase carbon allowances to meet their
CO2 requirement.
Industry ResearchSabre Airline Solutions® conducted research
to obtain industry input on what airlines are looking for and current thinking on ways to reduce emissions. The objectives were to:1. Evaluate the political and economic factors
at play,2. Understand what airlines need to success-
fully and profitably navigate the emissions regulations being imposed by the European Union,
3. Determine what, if any, best practices are being followed,
4. Determine which management tools are available and how airlines use them to man-age emissions reporting and strategy.The study involved formal surveys and
questionnaires, direct discussions with airlines, feedback at industry conferences, discussions with third-party verifiers and input from other subject-matter experts within the industry. In total, nearly 100 airlines and other industry experts completed the survey and provided insight about what they were look-ing for to help control emissions and reduce costs.
Key findings include: Informal emissions reporting methods —
There are many standalone solutions avail-able in the market to assist with emissions
reporting. However, the majority of airlines surveyed used internal methods. Although flight planning fuel management systems were often used as the basis for gathering information, in many cases, the report-ing method consisted of a time-consum-ing manual data entry process to compile results.
Disparate parties responsible for emissions reporting — Emissions reporting is currently managed in as many as seven different departments across different companies. This indicates that airlines have not deter-mined whether emissions management falls
best under financial, corporate or operations departments.
Lack of strategy for purchasing carbon cred-its — Only 13 percent of airlines surveyed had any type of strategy in place for pur-chasing carbon credits. Of the strategies in place, many were still relatively undefined. Strategies currently in place at airlines sur-veyed include:
Making regular purchases over the course of the year,
Meeting regulation requirements, Using an internal ad hoc committee, Using a brokerage house.
Open-Market Emissions Purchasing Airlines will be given free allowances to cover approximately 85 percent of their emissions. The amount above the baseline, including new growth, must be purchased in the open market.
Emissions Reporting Tools Among airlines surveyed, approximately 85 percent are currently per-forming emissions reporting and/or forecasting in house, with less than 15 percent outsourcing or using third-party products despite the availability of more than 60 emissions reporting solu-tions in the market.
ascend 53
ASCEND I SPECIAL SECTION
In house
}}
Purchase
Free Allowances
Benchmark
20122013
20142015
20162017
20182019
2020
Emissions Reporting Solutions
Emissions Allowances And Purchases
The informal nature of the strategies in place as well as the low percentage of carriers that have yet to put a strategy in place shows the uncertainty the industry is feeling regarding the EU ETS. Much of this uncertainty is fueled by the formal opposition from governments, airlines and the aviation industry overall.
Wei Zhenzhong, the secretary general of the China Air Transport Association urged Chinese airlines not to participate in the EU ETS. He stated the scheme will cost Chinese airlines 800 million yuan (US$126.2 million) this year and more than triple that by 2020. In addition, members of a coalition including nearly all segments of aviation are urging U.S. senators to pass a bill that would prohibit operators of all U.S. aircraft from participating in the EU ETS.
As a result of numerous formal protests, airlines have not felt a sense of urgency to imple-ment formal reporting solutions or forecasting tools for managing the costs and purchasing of carbon credits on the open market.
Conversations with airlines and survey results indicate that airlines might welcome a formal reporting solution and/or a forecasting solution when the expectations and require-ments for compliance with the EU ETS become clear. However, there is uncertainty as to where and how they would want to manage these aspects of emissions. Overall, best practices for managing emissions compliance both in terms of reporting and forecasting are undetermined at this point.
Current OutlookDespite the formal opposition from more
than 20 nations, in December 2011, the European Union’s highest court affirmed the union’s right to impose the carbon emission fees. Opposition to EU ETS is founded on the view that the plan infringes on a “cardinal prin-ciple of state sovereignty” by basing its charges on the distance flown by each flight, which means calculations would include airspace that is outside the European Union.
Many airlines believe that this is in direct violation of the Chicago Convention that gives each country exclusive sovereignty over its skies. Also fueling opposition is the view that the scheme disproportionately punishes the countries farthest away from Europe. IATA warned that going forward with the inclusion of aviation in the EU ETS could result in a trade war.
The topic of aviation emissions was also debated last December in Durban, South Africa, at the United Nations Framework Convention on Climate Change. After several days of nego-tiations regarding emissions and other key climate issues for aviation, the 17th Conference of the Parties, it was agreed upon to continue “consideration of issues related to addressing emissions from international aviation.”
“There is agreement amongst nearly all countries that ICAO is the most appropriate
place to deal with aviation emissions,” said Air Transport Action Group Executive Director Paul Steele.
Despite the controversy, the European Union has continued to move forward with the Emissions Trading System. In early December, Germany (responsible for overseeing the EU ETS for 409 airlines) began notifying airlines around the world about how many free carbon dioxide emission certificates they would receive annually.
Despite the fact that the EU ETS went into effect at the start of the year as planned, nations around the world are still actively protesting this action. As recently as February 9, Bloomberg reported that 27 nations, includ-ing India, China and the United States, were meeting to discuss retaliatory steps against the regulations.
Although the political influences are still at odds with each other, the industry will have to manage emissions in some way, whether for regulatory compliance, green initiatives or in conjunction with fuel management. Since EU ETS is already in force, airlines need solutions now to actively manage emissions reporting, emissions forecasting and carbon credit pur-chasing strategies, as well as best practices to govern this process.
The SolutionConsultants from Sabre Airline Solutions®
can assess capabilities and tools to develop and support best practices in emissions reduction. The company also offers tools and services to forecast carbon emissions for a future sched-ule, identifying ways to reduce emissions and carbon costs and helping airlines develop financial strategies for hedging carbon.
Solutions such as Sabre® AirCentre™ Emissions Manager allow airlines to automate manual tracking and reporting processes. The solution helps airlines collect, validate and store carbon emissions data so they can
comply with the requirements of the EU ETS and other government regulations.
Emissions Manager automates the data collection, verification and reporting process through defined integrations with airlines opera-tions, airport and reservations systems. While supporting EU ETS requirements, the solution will also be enhanced to manage other require-ments likely to arise from pending legislation in countries around the world.
In Addition, Sabre® AirVision™ Network ana-lyzes different options to develop effective solutions to reduce future emissions and lower carbon costs through network modification, re-fleeting and financial modeling.
By reviewing their current practices and understanding new and changing industry requirements, airlines can determine where emissions-related tactical and strategic respon-sibilities best fit within their organization. At the same time, they can deploy methods to help reduce carbon emissions and related costs across their system as well as meet require-ments for EU ETS. a
Holly Forté is an associate of product marketing in Sabre® AirCentre™ Flight
for Sabre Airline Solutions. She can be contacted at [email protected].
Rerouting To Avoid Emissions Charges Airlines can change routes to reduce carbon allowance requirements. For example, a route from New York to Dubai to New Delhi incurs no CO2 charges. However, a route from New York to Paris to New Delhi incurs CO2 charges on both segments.
ASCEND I SPECIAL SECTION
ascend54
Sabre AirCentre Emissions Manager
ascend 55
BIOFUELS: The Next Gold Rush
Biofuels are still in the early stages of development. The push to create and
produce biofuels technologies may help airlines meet aggressive CO2 targets
and eventually keep a lid on fuel costs.
An Alternative To Costly Traditional Fuel
By Peter Berdy | Ascend Contributor
ASCEND I SPECIAL SECTION
Pho
tos:
Shu
tter
stoc
k
ASCEND I SPECIAL SECTION
ascend56
he rapid progress of biofuels is part of a global shift toward alternative energies to reduce dependence on fossil fuels, for both economic and ecological reasons.
The airline industry sees biofuels as a prin-cipal way to achieve zero carbon growth. This means keeping carbon emissions at the current level while the airline industry continues to grow.
Commercial use of biofuels in aviation is imminent. There are strong interests behind it to scale up quickly. Global use of biofuels requires local development of feedstocks as well as local conversion to biofuels to reduce transportation costs. However, this may not be economically practical due to other considerations.
Food Or Fuel For Thought Like agriculture crops, biofuel feedstocks suf-
fer from: Uncertain crop yields, Changing weather patterns, Requirements for fertilizers and water.
A recent example is the drop in Brazil’s sugar cane production in 2011. The 17 percent decline was largely due to weather.
The aviation industry and policy makers speak about novel sources for biofuels. They claim these new crops will not compete with food or forests. The list of new-generation (Gen2) raw material, or feedstock, includes algae, camelina, jatropha and the salt-resistant herb salicornia. Despite large-scale plantation developments, so far there are no commercial supplies of oil from these crops. Palm oil is rarely mentioned; however, jet fuel from palm oil appears to be a real choice for commercial aviation biofuels in the next few years.
According to a recent report by Biofuelwatch entitled “Aviation Biofuels in 2011,” reaching the airline industry’s goal of zero carbon growth will require 225 refineries the same size of Neste Oil’s 800,000-metric-ton biofuel refinery, Europe’s largest. Feedstock for a single refinery at full production requires about 800 square miles of oil palm plantations and even more land for other feedstocks, based on average palm oil yields. This means that a minimum of about 174,000 square miles of land, slightly larger than the state of California, would be needed to meet IATA’s goal to be carbon neutral by 2020.
If camelina was used instead of palm, even with an optimistic yield assumption, 533,000 square miles of land worldwide would need to be planted to meet the industry’s stated goals. Compared to the total biofuel feedstocks currently in production in the world, oil palm plantations cover 46,000 square miles of land, and the total land area used to grow biofuels is between 77,000 to 96,000 square miles.
Millions of hectares of jatropha have been planted across tropical and subtropical countries. Large-scale plantings began around 2006, yet, commercial output is still very low. Despite claims about jatropha “thriving” with little water
on poor soils, the opposite appears to be the case. Jatropha requires fertile soils and more water than virtually any other biofuel feedstock.
“The results of this survey, taken from interviews with hundreds of jatropha farmers throughout Kenya, show extremely low yields and generally uneconomical costs of production,” according to a report by the World Agroforestry Centre. “Jatropha currently does not appear to be economically viable for smallholder farming when grown either within a monoculture or intercrop plantation model.”
Biofuel production is still in the early research and development stages. Converting solid bio-mass into liquid fuel isn’t new. However, more energy is required than is gained, and basic problems must be overcome before this technol-ogy is economically viable.
Green Light For Biojet FuelsBiofuel manufacturers are creating “drop-in”
replacements for petroleum-based fuel. This
means they require no modification to either the engines or the aircraft. Requirements include high purity and low freezing point.
Before putting a single drop of biofuel in air-plane tanks, biofuels must meet the same safety standards as regular aviation fuels. The U.S. tech-nical standards body ASTM International, formerly known as the U.S. American Society for Testing and Materials, sets these requirements. In June 2009, the Aviation Fuel Subcommittee of ASTM passed a new fuel specification for the use and testing of synthetic fuels, including biofuels, in air transport. This approval took place following successful demonstration flights of commercial aircraft powered by different biofuel blends.
In July 2011, ASTM revised the standard (D7566) to approve blended fuel processed from algae, inedible plants and organic waste with tra-ditional jet fuel. Under the new revised standard, up to 50 percent bio-derived elements can be added to conventional jet fuel. This revision paved the way to use biofuel in commercial flights.
Biofuel Feedstock Jatropha seeds and the plants they produce require fertile soils and more water than nearly any other biofuel feedstock. Tests performed by several airlines use a mix of biofuels from a vari-ety of sources including jatropha.
T
ascend 57
ASCEND I SPECIAL SECTION
“The real winners of this type of regula-tory breakthrough will be technology companies involved in the production of aviation biofuels,” said Harry Boyle, an analyst at Bloomberg New Energy Finance.
Biofuel Lifecycle DilemmaBiofuel lifecycle analysis indicates that the
climate impact of some biofuels may be worse than the fossil fuels they replace. There has not been a universally accepted agreement on how to estimate the total lifecycle emissions of biofuels, causing a dilemma.
According to the U.S. Environmental Protection Agency, the term “lifecycle green-house gas emissions” means the aggregate quantity of greenhouse gas emissions related to the complete fuel lifecycle. This includes all stages of fuel and feedstock production and distri-bution, where the mass values for all greenhouse gases are adjusted to account for their relative global-warming potential. The stages comprise feedstock generation or extraction through the distribution, delivery and use of the finished fuel to the ultimate consumer.
In the European Union, biofuels must meet certain sustainability criteria according to the European Commission Climate Action. The purpose is to reduce undesired impacts from biofuels production. Therefore, greenhouse gas emissions must be substantially lower than comparable fossil fuels, and raw materials used in the biofuels cannot come from land with high biodiversity or high carbon stock.
The European Commission also recommends that greenhouse gas emissions be calculated on a lifecycle basis. This includes the emissions from extracting, processing and distributing fuels. The increased demand of agricultural products for use in biofuel production may lead to more land elsewhere being converted for agriculture. This indirect land-use change leads to increased emissions overall. Therefore, emissions must be reported when land is directly converted to agricultural use to produce biofuels in order to determine the relative greenhouse gas impact compared to fossil fuels.
The European Union also believes that the carbon absorbed by biofuel plants will offset their CO
2 emissions when burned. Under the E.U. Emissions Trading System draft regulations, the biofuel component will be counted as zero emissions.
“The CO2 emitted from burning biofuels is assumed to be carbon neutral, as the carbon was taken out of the atmosphere when the biomass grew,” according to an E.U. official. “It therefore does not add carbon to the atmosphere, as this carbon is part of the existing carbon cycle.”
Starting this year, each gallon of regular jet fuel will incur carbon costs of about 27 cents starting in 2012. The cost is based on the price of carbon and the average cost of jet fuel in 2011. However, this premium would not apply to biofuels.
There’s much controversy around the fact that biofuels will be counted as zero emissions. A panel of 19 European Environment Agency scientists decided that this neglected the fact that other carbon-absorbing plants would have grown in the biofuels place if the land was fertile. Any carbon absorption from the biofuels would then be “double counted.”
“In recent years, there has been a grow-ing interest for large-scale land acquisition for securing future supply of food, as well as for investment opportunities including biofuel pro-duction,” according to the United Nation’s Food and Agriculture Organization. “This development raised concerns about land tenure security, particularly since the poorest segment of the population depends on this resource for their livelihood and food security. Therefore, issues related to land-tenure security need to be carefully assessed, in particular for bioenergy production.”
Campaigners from Friends of the Earth say camelina competes with food crops. It is specifically concerned about jatropha driving land-grabbing in Africa and India, especially given the amounts of fuel required by the aviation industry.
“The World Bank and OECD have recom-mended removing support for biofuels, yet the aviation industry continues obliviously,” said Robbie Blake from Friends of the Earth Europe. “It would be irresponsible to grow enormous amounts of crops and grab land to fuel flights, rather than to feed the hungry.”
Another report by the Organization for Economic Cooperation and Development states that, “Statistical results reveal that agricultural price volatility is found to be higher now than in the ’90s for most products. In this context, experience in recent years may suggest that authorities and stakeholders now face additional challenges with volatile prices and agricultural trade and should coordinate their policy respons-es. The high correlation with crude oil price for
some agricultural products during the 2000s may confirm that biofuel products have played a role in the recent price surges.”
Airline Biofuel Use Is airline biofuel use good public relations or a
true environmental concern? If airline capacity grows, so will the growth of
CO2 emissions. Per IATA, the aviation sector is expected to grow 4.5 percent annually through 2050. At this rate, fuel consumption should also grow about 3 percent a year.
To combat this increase: Some European governments (such as
Germany, the United Kingdom and Austria) have created “green” taxes on aviation in the form of surcharges.
IATA members have pledged to improve fuel efficiency, make the industry carbon-neutral by 2020, and reduce CO2 emissions by 50 percent by 2050.
The European Union has started including avia-tion in the E.U. Emissions Trading System this year.But these regulations, taxes and extra costs
are not the only reasons airlines will move to biofuels. They’re doing it for true environmental concerns, good public relations and marketing advantages.
Who’s Using ItNumerous airlines have performed or plan to
perform limited tests using a mix of biofuels with regular jet fuel. Biofuels for these tests come from a variety of sources including used cooking oils, camelina, jatropha and algae. Biofuels that meet industry standards are essentially identical to conventional jet fuel, meaning there are no performance or operability differences.
Airlines involved in biofuel testing include: Virgin Atlantic was the first airline to use first-
generation biofuel (made from babassu and
Algae-based Biojet Fuel As of July 2011, blended fuel processed from algae (along with inedible plants and organic waste) can be mixed with traditional jet fuel. Up to 50 percent bio-derived elements can be added to traditional jet fuel. This has paved the way to use biofuel in commercial flights.
coconut oil mixed with kerosene). The carrier plans to use fuel made from waste gases from steel mills.
Finnair operated the longest commercial bio-fuel flight anywhere in the world to date.
Air France claimed the world’s greenest flight combining biofuel and air-traffic-management technology.
Air China and Boeing conducted a flight dem-onstration with biofuels.
In April, Qantas operated a commercial flight powered by sustainable fuel, the first flight of its kind in Australia.
Thai Airways was the first airline in Asia to fly a commercial passenger flight using biofuels.
Lufthansa’s experiment with biofuels included a six-month trial on daily Frankfurt-Hamburg scheduled service that began in mid-2011 and ended in December. Lufthansa operated 1,186 flights with an Airbus A321 using traditional jet fuel in one engine and blended biofuel using a combination of jatropha, camelina and animal fats in the other engine. After the trial, Lufthansa examined the engines and saw no differences. Joachim Buse, Lufthahnsa vice president in charge of the biofuel project said the trial produced “a positive result from which we want to continue to work.” He indi-cated that Lufthansa would not make regular use of the biofuel until global production increased to a level that could support routine operations.
United Airlines signed a letter of intent with Solazyme to provide 20 million gallons a year of biofuel starting in 2014.
British Airways signed a letter of intent with the Solena Group, which will convert munici-pal waste to biofuels. The London-based plant will convert half a million metric tons of waste per year to supply all of British Airways’ opera-tions from the London City Airport. Boeing has been working to bring biofuels
into the marketplace for six years. “We’ve got research projects literally around
the world to figure out where the sources are and what is sustainable and what can be eco-nomically scaled up to meet what we envision as market demand,” said Terrance Scott, a member of Boeing Commercial Airplanes’ environment and aviation policy team.
Biofuel test flights are also intended to show producers there is demand for biofuel, although at present, it doesn’t make economic sense for airlines to buy a product that costs several times the price of conventional fuel.
Production ChallengesMajor challenges that delay efforts to scale
production of biofuels include unknown technical problems and the high cost of investment.
On the technical side, it is hard to apply pro-cesses created in a controlled laboratory setting to the real world. The biggest challenge may be the investment required to produce enough fuel to impact the industry.
ascend58
Biofuel Leaders Airlines from around the world, including Air France, Finnair, Lufthansa, Thai Airways, United Airlines and Virgin Atlantic, lead the crusade of finding alternative jet fuels. These carriers have been involved in varying degrees with testing of biofuels.
ASCEND I SPECIAL SECTION
ascend 59
ASCEND I SPECIAL SECTION
Synthetic fuel components are significantly more expensive than conventional aviation jet fuel. The hope is that the price will decline as more feedstock becomes available, and that quality control will be critical to fuel quality and safety during production and use.
It is also capital intensive. Venture capital can get companies to the proof-of-concept stage. However, funding is rarely enough to pay for major scale up, so more capital is required.
Partnerships Are Key A logical way to scale up involves part-
nerships with large companies. These “big sister” partnerships can include direct equity stakes, and provide support for research and development as well as financing for scale up and distribution. Logical partners for biofuel development include oil producers, refiners and chemical companies.
Close relationships with feedstock suppliers are also important since low-cost feedstock is a basic requirement for biofuel production. This is beneficial for feedstock suppliers since it is dif-ficult to make money with conventional ethanol, and Gen2 companies offer a platform to sell premium-priced products using the exact same feedstock. Some examples include building bio-fuel plants next to sugarcane mills (Amyris and Solazyme in Brazil), and revamping corn-based ethanol plants (Gevo in the United States).
Feedstock partnerships can also involve non-food feedstocks. Waste Management, the world’s largest solid waste services provider, is working with Enerkem on waste-to-ethanol projects. LanzaTech has partnered with mul-tiple steel companies, including Chinese giant Baosteel Group, to produce ethanol and other biofuels from steel mill off-gases.
Some larger airlines are also forming partner-ships with biofuel producers. Qantas Airways and Solazyme are targeting commercial produc-tion of an algae-based biojet fuel. Solayyme signed a letter of intent with United Airlines to supply up to 20 million gallons per year of biojet fuel starting in 2014. In addition, Gevo has a non-binding letter of intent to supply biojet to United’s hub in Chicago starting in 2013. Virgin Atlantic has partnered with LanzaTech. Brazil’s Azul has partnered with both Embraer and Amyris.
European airlines are moving ahead with biofuel plans to cut use of regular jet fuel. The European Commission, Airbus, sev-eral European airlines and biofuel producers launched an initiative to speed up commercial-ization of aviation biofuels in Europe.
The initiative, “European Advanced Biofuels Flight path,” is a roadmap with milestones to create 2 million metric tons of biofuel a year by 2020 (about 3 percent of their current fuel use). It is a shared and voluntary commitment by its members to support and promote biofuels in aviation. It also targets getting the financial means to build biofuel production plants.
Trends in the biofuels industry can help determine how much time it will take to produce significant quantities of Gen2 biofuels.
In the United States, less than 100 million gallons of biofuels are expected to be produced in 2012. Production jump to 800 million gallons of capacity online is expected by 2013, and then it should triple by the end of 2015. By comparison, current corn ethanol production is around 15 bil-lion gallons a year, and it will continue to exceed Gen2 until at least 2020.
These numbers include all biofuels from etha-nol and biodiesel for ground transportation as well as drop-in fuel for airplanes. To put this into perspective, approximately 64 billion gallons of jet fuel were used in 2010.
Assuming biofuels become commercially available, the aviation industry is assessing how to handle biofuels within the existing jet-fuel sup-ply chain. One idea mentioned by Billy Glover, Boeing’s managing director of environmental strategy, is through a “book-and-claim” method where an airline could book the purchase of bio-fuel that would then go into the general jet-fuel distribution system. Later, the airline could claim use of that biofuel because it had reduced the overall carbon footprint of fuel in the distribution system.
An important aspect to consider is that the biofuel supply chain is not integrated. This would require selection of feedstock, refining con-tracts, distribution to airports, quality assurance,
insurance, marketing and project funding with airports and airlines. One company — SkyNRG — has been doing this on a case-by-case basis.
Some airlines testing flights with biofuels want to demonstrate there is a market for biofuels.
“But there isn’t yet current access to an adequate and affordable biofuel supply,” said Bobbie Egan of Alaska Air Group. “So without an adequate supply, the costs are going to be extremely high.”
To scale up quickly and integrate the supply chain, government initiatives are fundamental to reduce the high cost of biofuels.
Government InvolvementIn the Biofuels Flight Path Technical Paper
authorized by the European Commission, three hurdles prevent biofuels from being on the market. They include lack of: Government incentives, Financial means to build biofuel plants, Long-term agreements between biofuel pro-
ducers and the aviation industry. To overcome these hurdles, governments
must support biofuels development by offering and funding policies that encourage such tech-nological investments.
IATA’s director general, Tony Tyler outlined six steps for governments to promote the success-ful commercialization of sustainable biofuels: 1. Foster research into new feedstock sources
and refining processes, 2. Reduce the risk of public and private invest-
ments in aviation biofuels, 3. Provide incentives for airlines to use biofuels
from an early stage, 4. Encourage stakeholders to commit to robust
international sustainability criteria, 5. Make the most of local green growth opportu-
nities, 6. Encourage coalitions encompassing all parts
of the supply chain.Several such practices are already in place. “The United States is extending Department
of Defense contracting authority, which is cur-rently limited to five years for fuel purchases to 10 years and beyond,” said Terrance Scott, a member of Boeing’s environment and aviation policy team.
This can encourage start-up processing facilities, assuring a long-term viability for this market. Another example is the U.S. Department of Agriculture’s encouragement to develop biofuel feed stocks, including guaran-teed loans and viability on crops.
The United States Department of Agriculture (USDA) and U.S. Federal Aviation Administration (FAA) teamed up with the Farm to Fly program to help evaluate feedstock development needs. Under this program, the USDA and FAA teamed up to develop aviation biofuels in the United States.
In Europe, key regulations impact biofuels, including a 10 percent minimum target for
ASCEND I SPECIAL SECTION
ascend60
Prospective Biofuels Customers The U.S. military, along with commercial airlines, are the two largest prospective customers for biofuels. By 2016, the U.S. Air Force will acquire 50 percent of its jet fuel for domestic operations from alternative blends. By 2020, the U.S. Navy expects to reduce its total fossil fuel use by half.
renewable energy consumed in the trans-portation sector. Biofuels must meet certain criteria to count against the 10 percent goal and to meet specific sustainability require-ments. These include minimum greenhouse gas emissions reductions as well as economic and social criteria such as the impact on food prices.
The diversity in member state approaches, combined with the approval by the European Commission of voluntary certification schemes, complicates the process of supplying biofuels to the E.U. market.
Military To The RescueThe two largest potential customers for
biofuels are the U.S. military and commercial
airlines. The potential for airlines to use biofu-els dwarfs what is needed for defense.
The U.S. Air Force plans to acquire 50 percent of its jet fuel for domestic operations from alternative blends by 2016, and the U.S. Navy plans to cut its total fossil fuel use in half by 2020. To meet these targets, the Navy and Air Force have begun implementation of test programs for alternative fuels with several start-up biofuel companies.
The U.S. Department of Defense, U.S. Department of Agriculture and U.S. Department of Energy jointly announced plans to spend US$510 million over a three-year period to support scale-up production of drop-in aviation and marine fuels.
“The focus is on working with [the biofuels] industry to figure out how best in 2012 to push the construction of biorefineries,” said U.S. Agriculture
Secretary Tom Vilsack. “The Defense Department is in a position to purchase the fuel, and the USDA is trying to ensure the cost is competitive.”
According to Vilsack, there is ample feedstock available in the United States to meet demand from aviation and other forms of transportation without competing with food for land and water.
“It’s about the better utilization of resources,” he said. “There are millions of acres of dead trees that have to be cleared out and replanted to preserve water. That creates millions of tons of biomass. Perennial grasses help retain water. We are also talking about better utilization of agricultural and landfill waste.”
The main objective of this program is to construct or retrofit multiple advanced drop-in biofuel plants and refineries and avoid impacting the supply of agricultural commodities.
The U.S. government indicated it may purchase several hundred million gallons of drop-in advanced biofuels by 2016, based on an expected demand of 336 million gallons from the Navy and 587 million gallons from the Air Force. The Navy already placed the world’s largest order of 425,000 gallons of renewable fuels for delivery in 2012, of which 100,000 gallons are jet fuel.
In addition to the military, the FAA is also involved in biofuels. Late last year, the FAA awarded US$7.7 million in contracts to develop or produce alternative jet fuel.
The FAA added that, “Alternative aviation fuels offer enormous potential environmental and economic benefits. This work, in combina-tion with investments being made by other U.S. agencies and industries, will advance our pursuit of clean alternative jet fuels for a more sustainable NextGen aviation system in the United States and around the world.”
Biofuels are seen as an alternative to help airlines achieve industry goals to reduce CO
2 emissions. However, biofuels are still in the early stages of development. Over time, bio-fuels are expected to be a game changer. For this to happen, it will require government support, continued technical breakthroughs and financing.
Scaling up production and integrating the supply chain is crucial to reducing prices and speeding up the use of biofuels in the airline industry. Airlines will receive benefits under the E.U. Emissions Trading System since biofuels are classified as carbon neutral.
Environmental challenges for biofuels need to be resolved. To quote Kermit the Frog from Sesame Street and The Muppets, “it’s not easy being green.” a
Peter Berdy is a consultant for Sabre Airline Solutions®. He can be contacted
ascend 61
ASCEND I SPECIAL SECTION
Plane Makers Keen On Biofuels Aircraft manufacturers have joined the biofuels movement. Airbus, along with the European Commission, several European airlines and biofuel producers introduced a program to speed up commercialization of aviation biofuels in Europe. Boeing, which has worked to bring biofuels into the market for six years, partnered with Air China to conduct a flight demonstration using biofuels.
Pho
tos:
Shu
tter
stoc
k
New biofuel companies appear to be sprouting up on a daily basis, with new technology discoveries and the formation of new partnerships. Here’s a look at some of them:
Amyris produces biofuels primarily with sugar-cane. It works with sugar and ethanol mills in Brazil to reduce capital costs. Partners include French oil company Total; two large sugar and ethanol produc-ers in Brazil, Cosan and Grupo São Martinho; and Procter & Gamble. Amyris plans to sell a renewable jet fuel in 2013, working with engine manufacturer GE, Embraer and Azul in Brazil.
Dynamic Fuels produces synthetic fuels from animal fats, greases and vegetable oils. The com-pany is a joint venture of agribusiness giant Tyson Foods — one of the world’s largest processors of chicken, beef and pork — and Syntroleum Corporation. Dynamic Fuels is producing 425,000 gallons of renewable fuels for the U.S. Navy this year — 100,000 gallons of which will be jet fuel.
Their renewable fuels production plant will make the fuel from used cooking oil as well as algal oil supplied by Solazyme. Dynamic Fuels is conduct-ing renewable jet fuel work with KLM Royal Dutch Airlines, Finnair, Thomson Airways and Alaska Airlines.
Gevo uses a fermentation platform to produce isobutanol. It is used as a building block for produc-ing jet fuel, among other applications. Gevo’s strategy is to retrofit U.S. corn ethanol facilities, and to form joint ventures with ethanol plant owners to avoid acquisition expenses. Gevo has some airline arrangements and has grants from the U.S. Government. Gevo began commercial-scale production of isobutanol in 2011, and it will expand to 400 million gallons of capacity by 2014.
Solazyme makes algal-based jet fuel using a fermentation process. By feeding plant sugars to its proprietary microalgae, Solazyme produces oils that can be processed into a wide range of
products including biofuels. The company partners with Qantas, Chevron, Dow Chemical and Unilever among others. Solazyme signed a letter of intent with United Airlines to provide up to 20 million gallons a year of bio-jet fuel in 2014.
Lanzatech converts waste gases into fuel and chemical products. It converts gas from steel manufacturing, oil refining and chemical produc-tion, as well as from forestry and agricultural residues, municipal waste, and coal into fuel and chemical products. Its partner, Swedish Biofuels, will convert the alcohols to jet fuel. Virgin Atlantic is working with LanzaTech to develop jet fuel made from these waste gases. LanzaTech received US$3 million in funding from the U.S. FAA to produce alternative jet fuels.
Neste Oil produces aviation fuel from a range of vegetable oil and waste products, such as palm oil and animal fat waste from the food industry. The Finnish company is the largest producer of aviation biofuels. It has supplied fuel for Lufthansa and Finnair biofuels tests, among others.
Sapphire processes algae to biofuel. It partici-pated in a test flight using algae-based jet fuel in a Boeing 737-800 twin-engine aircraft in 2009.
Virent converts plant sugars to jet fuel. Virent received US$1.5 million in funding from the U.S. FAA to produce alternative jet fuels from corn production waste.
SkyNRG is a one-stop shop for biofuels tests. SkyNRG integrates the supply chain for airlines testing biofuels. By the end of 2011, SkyNRG conducted tests with 10 airlines including Finnair, KLM, Air France, Alaska Airlines and Thai Airways. SkyNRG launched after a KLM biofuel test flight in November 2009. Founding partners are Air France-KLM Group, North Sea Group and Spring Associates.
Rentech converts biomass and waste materi-als to synthetic fuels. Its technology is paired with Fischer-Tropsch process to make complex hydrocarbons. These hydrocarbons are upgraded to jet fuel by refining technology licensed from UOP. Rentech is working toward a definitive supply agreement with 13 airlines for certified jet fuel from Rentech’s proposed synthetic fuels and power facility. The agreement may result in these carriers buying the entire synthetic jet fuel production (about 250 million gallons per year).
UOP has a green jet fuel process based on hydro-processing technology that is commonly used in refineries to make transportation fuels. In this process, hydrogen is added to remove oxygen from the biological feedstock. The result is a bio-derived jet fuel. UOP worked with Boeing and several airlines to produce biofuel for test flights. UOP also received US$1.1 million in funding from the U.S. FAA to produce renewable jet fuel from the alcohol found in natural feedstocks. UOP works with Gevo to convert sugars to a type of alcohol (isobutanol) and then to jet fuel. Fuels produced by Solazyme and Sapphire are upgraded to bio-jet fuel using UOP processes. UOP has worked with PetroChina to refine Chinese grown jatropha to bio-jet fuel. a
ASCEND I SPECIAL SECTION
ascend62
Corn Ethanol Gevo will retrofit U.S. corn ethanol plants and form joint ventures with their owners as part of its fermentation platform to produce isobutanol, which is used as a building block for producing jet fuel. The company began commercial-scale production of isobutanol last year. It plans to expand to 400 million gallons of capacity by 2014.
Pure Sugar Because of its abundance, low cost, price stability and sustainable production, Brazilian sugar-cane is a primary source for biofuels producer Amyris. Working with GE, Embraer and Azul, the company will sell a renewable jet fuel next year.
BIOFUELS PRODUCERS
Brazil’s Experience With Ethanol:
ascend 63
ASCEND I SPECIAL SECTION
Ethanol Powerhouse Brazil is the leading exporter and second-largest producer of ethanol because of its significant investments in renewable fuels after the energy crisis in the 1970s.
Potential Lessons
For Biofuels Development
The development of Brazil’s ethanol industry could provide lessons for government involvement and stimulation of biofuels development.
Brazil invested heavily in renewable fuels after the energy crisis in the 1970s. It’s now the leading exporter and second-largest producer of ethanol thanks to incen-tive-based government policies that helped foster its initial growth. The Brazilian government set up a phased imple-mentation of mandatory blending requirements to include a percentage of ethanol in gasoline. It offered discounted prices for ethanol fuels at the pump to create a guaranteed domestic market. In addition, ethanol producers were eligible for incen-tives including lines of credit, price guarantees and tax breaks.
Research and development by public institutions were critical to innovation, especially for agronomic and biotechnological improve-ments. The cost of production in the early stages of development exceeded the price of gasoline. Over time, this cost was reduced with technological advances and gains from economies of scale. a
Pho
to:
Sou
thw
est
Air
lines
ASCEND I SPECIAL SECTION
ascend64
Pho
to:
Shu
tter
stoc
k
Hedging Your BetsBest Practices To Manage And Better Control Fuel-Hedging Risks
Airlines hedge fuel and foreign exchange to mitigate fuel-price volatility and exchange-rate fluctuations. Some airlines have made money and others have suffered significant losses due to hedging, raising the question if hedging is like betting part of the ranch. Trading in carbon is the next frontier for airline hedging.
By Peter Berdy I Ascend Contributor
Pho
tos:
Shu
tter
stoc
k
igh-stakes economic drama took place in 2011: the downgrade of the U.S. credit rating, questions of unity in the Euro zone, currency volatil-ity around the world and continued
instability in fuel prices. Similar economic events are likely to take place this year, and they will continue to have major effects on airlines.
Airlines are heavily exposed to fuel price swings. Many of them are also exposed to foreign exchange (forex) movements. While fuel hedging tends to make the most headlines, forex fluctuations can generate some tremendous headaches for airlines — especially those with a significant portion of revenues or costs that are exposed to foreign currencies.
To mitigate the risks associated with large swings in fuel and currencies, many airlines, as well as aircraft manufacturers, engage in hedging in one or both of these areas. Therefore, it is important to examine how fuel and currency hedges work as well as how some airlines have coped with the uncertainty that accompanies fuel volatility and currency exchange.
Time Bombs And Russian RouletteWhile airlines have engaged in hedging for
years, there are strong critics of the practice. These critics have their claims backed in that selected companies took massive losses or have even gone out of business due to hedging.
Critics’ Point Of View Warren Buffett, a business magnate, inves-
tor and philanthropist has attacked all deriva-tives saying, “We view them as time bombs, both for the parties that deal in them and the economic system. In our view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Virgin America Chief Executive Officer David Cush said about fuel hedging, “This is out of control. This is a kind of silent killer. It has a huge impact on airlines.”
“Trying to predict the price of a barrel of oil is a little bit like playing Russian roulette today,” said travel analyst Peter Yesawich.
“The problem with the airlines is that they treated hedging as a profit/loss mechanism rather than as insurance, which should then be regarded as cost and as cover in case of the unexpected happening,” said Clarence Chu, a trader with Hudson Capital.
“If this industry all stopped hedging, there would be a much more rational pricing environment. It would be a landscape that would be far more conducive to fuel sur-charges and would save airlines hundreds of millions of dollars in expense,” according to Stifel Nicolas & Co analyst Hunter Keay.
“It’s like you can’t win,” said Betsy J. Snyder, an industry analyst with Standard & Poor’s Ratings Services. “People bother
you when you don’t hedge, and when you do and prices go down, you get hit.”
Hedging Gone WrongThere are several extreme cases where hedg-
ing resulted in bankruptcy, and one case where hedging could have saved an airline’s demise.
China Aviation Oil was the Singapore-based trading subsidiary of China National Aviation Fuel Group Corporation. CAO had a near monopoly to provide jet fuel for Chinese airports. CAO traded oil-related derivatives on behalf of the parent company and clients. CAO lost US$550 million due to derivatives trading in 2005, which lead to the collapse of the company. Its trading strategies were not reviewed or approved by the board of directors before trading began. There was no risk committee in place to review these transactions on an ongoing basis.
Fuel hedging was behind the demise of the Spanish charter airline, Futura, in 2008.
Japan Airlines’ US$441 million in fuel hedg-ing losses contributed to its bankruptcy in 2010.
Varig was Brazil’s leading airline in the 1990s. It used Japanese financing to acquire airplanes, but did not protect itself from cur-rency fluctuations. When Brazil’s economy crashed in 1994, with a sharply declining currency and high inflation, Varig could not pay its aircraft leases, ultimately leading to bankruptcy. Critics indicated that Varig did not do an adequate job to prepare for the future and should have used forward hedg-ing to ensure the company would not go under due to a drop in currency.
Fuel Hedging On FireFuel represents about a third of an airline’s
costs. A fuel hedge is a form of insurance policy, protecting an airline’s cost structure from poten-tially catastrophic increases or spikes in jet fuel prices due to external factors outside its control. Fuel hedging removes the future uncertainty of volatile jet fuel prices. Knowing fuel prices are locked in, it allows airlines to build and follow their business plans.
However, there are risks and costs involved in fuel hedging. Purchasing the derivatives costs millions of dollars and involves transaction fees. Aggressive fuel hedging can leave an airline open to the negative impact of a sharp decline in fuel and oil prices.
On a day-to-day basis, airlines have to deal with fuel price volatility. How volatile can fuel prices be? During 2008, crude oil peaked at a high of more than US$147 per barrel and hit a low price of under US$35 per barrel, a swing of US$112. This dramatic change took place within a period of only five months. During 2011, crude ranged from US$113 in April to US$75 in October, a change of US$35 a barrel. (The price per barrel of crude was in the US$30 range as recently as 2004).
In addition, the price to refine crude to jet fuel, called the crack spread, can fluctuate and add to airlines’ costs. The gap between the maximum and minimum crack spread was US$27 per barrel in 2008. The gap closed to US$3 per barrel in 2010 and was US$6 per barrel in 2011.
Brent Versus WTI ShowdownSince there is no financial instrument specifi-
cally for jet fuel, the closest commodities used for hedging are crude oil and heating oil. West Texas Intermediate crude, or WTI, provides the most
ascend 65
ASCEND I SPECIAL SECTION
H
Value Of Carbon Carbon is on track to be the world’s biggest commodity market. The value of carbon has grown from US$11 billion traded in 2005 surging to over US$140 billion by 2010. Nearly 85 percent of current trades are EU ETS allowances.
Other
EU ETS Allowances
Bill
ion
s O
f D
olla
rs
2005 2006 2007 2008 2009 2010$0
$20
$40
$60
$80
$100
$120
$140
$160
Carbon Market Evolution 2005-2010in $ Billions (Source: World Bank)
liquidity over the longest period. WTI has been used by many airlines for hedging. However, Brent crude, the European benchmark, came into favor in 2011.
Historically, Brent traded at a slight premium to WTI, around US$1 to US$2. However, the relation-ship changed dramatically in 2011, and Brent’s premium over WTI’s began to rise. The price of WTI fell while jet fuel prices, which more closely tracked to Brent, remained high. Concerns about rising oil inventories and strained pipeline capacity in North America put downward pressure on WTI, while the war in Libya and emerging market growth helped increase Brent’s prices.
At its peak in 2011, the spread between Brent and WTI widened to a record US$36, causing trouble for airlines using WTI futures contracts.
As a result, Delta Air Lines shifted almost all of its jet fuel hedges to Brent from WTI in 2011.
“We’ve needed to restructure our hedge posi-tion,” said Delta Air Lines President Ed Bastian. “WTI, which is the instrument that many of us hedge in this market, has dislocated from Brent in terms of pricing.”
The widening of the spread in 2011 “was an exceptional situation that had a lot to do with the anomalies of the North American production situ-ation and the landlocked crude in North America,” said Bill Warlick, a senior director at Fitch Ratings. “That’s likely to be addressed now, and so we would expect some continued reduction in the spread.”
Fitch said the narrowing spread was a positive, though not an enormous one, for airlines.
“A lot of airline management teams have been tweaking their approach to hedging for a while now in response to this spread,” he said. “It’s good for U.S. airlines to the extent that they are more exposed to WTI-based hedging strategies.”
The premium of Brent to WTI has since nar-rowed and was around US$9 a barrel at the end of 2011.
“To the extent we see WTI and Brent come together, I think that’s helpful and the hedges that we have in place will really give us much better protection than they were when WTI was trad-ing at a discount,” said Southwest Airlines Chief Financial Officer Laura Wright.
Due in part to the WTI differential plus oil price changes, carriers such as Southwest Airlines, United Continental Holdings, Alaska Airlines and Delta Air Lines had markdowns or special expenses tied to hedges in the third quarter 2011, including:
United Continental reported a US$56 million charge related to “fuel-hedge ineffectiveness” in the third quarter. It was an apparent reference to the fact that its exposure to WTI was insufficient protection against jet fuel prices that more closely tracked Brent crude.
Southwest had a net loss of US$140 million for the third quarter 2011, reporting a non-cash markdown of more than US$200 million tied to its hedge portfolio.
Alaska Air Group said hedge markdowns ate into its third-quarter profit by US$52 million.
Delta Air Lines had a US$216 million mark-down of its fuel hedges and a foreign-exchange loss.
Surcharges: The Other Way To Manage Fuel Risks
Airlines typically have not been able to increase prices to cover rising costs for fear
of losing market share to competitors, or scar-ing away passengers from flying altogether because of added surcharges and fees. A solution intended to address fuel hikes was the fuel surcharge, quoted separately from the base fare.
“Surcharges are the most-effective tool for passing through higher fuel prices,” according
ASCEND I SPECIAL SECTION
ascend66
Hedge-Related Expenses The WTI differential plus oil price changes, in part, caused hedge-related markdowns or special expenses for several carriers during the third quarter last year. Among them were Southwest Airlines, United Continental Holdings, Alaska Airlines and Delta Air Lines.
to United Continental Chief Revenue Officer Jim Compton.
Although airlines have applied fuel surcharges to the price of tickets for many years, fuel surcharges, similar to fare increases, stick only when matched by competitors and when applied consistently. Fuel surcharges have not been effec-tive at completely passing through fuel increases to consumers. Instead, fuel surcharges have become another tool for price competition and as a marketing tool to create lower base prices — prior to the small print that adds taxes, charges and fees, including fuel surcharges.
Freight carriers present a case that fuel sur-charges can work at the expense of hedging. UPS and FedEx do not hedge fuel. Instead, they successfully pass through fuel increases by using fuel surcharges.
For example, FedEx has developed an indexed fuel surcharge to protect itself from fuel risks. The surcharge is subject to monthly adjustment based on the average spot price for jet fuel. FedEx publishes information on the fuel surcharge on its website.
In its 10K annual report, FedEx stated, “To date, we have been mostly successful in mitigat-ing the expense impact of higher fuel costs through our indexed fuel surcharges, as the amount of the surcharges is closely linked to the market prices for fuel.”
Airplane Manufacturers Hedge
Airlines place orders for new planes that may be delivered years into the future. Purchases are typically denominated in U.S. dollars. The large purchase value exposes both the airline and the manufacturer to currency fluctuations. As a result, both the airline and the manufacturer may engage in hedging.
Airbus and Boeing deal with hedging in dif-ferent ways, with Airbus having the bigger forex challenge.
In the case of Boeing, there is little need to hedge against forex risk since the majority of its revenues are dollar denominated. Most of Boeing’s internal costs and large supply base is
in the United States, so its cost base is also in dollars. The majority of Boeing’s contracts with external suppliers are dollar denominated, which requires its foreign suppliers to deal with how to hedge.
Airbus is a different story. EADS, the par-ent company of Airbus, reports its financial results in Euros. The majority of revenues and costs come from Airbus. A significant portion of Airbus revenues are dollar denominated while a substantial portion of its costs are in Euros. This makes Airbus highly vulnerable to currency shifts between the Euro and U.S. dollar.
Airbus hedges are tied to purchases of individ-ual airplanes that can vary on delivery schedules, cost and percent Euro content. Airbus policy is to hedge each aircraft at 100 percent based on the forecasted inflow of cash.
EADS manages its currency exposure to shield earnings from foreign currency volatility by using a hedge portfolio to help secure rates so future dollar-denominated revenue streams are converted to Euros. In 2010, EADS cash-flow hedges amounted to US$70.2 billion, hedged against the euro.
Historically, EADS recorded losses since the Euro had been strengthening against the dollar. With problems in the Euro zone, the Euro has fallen against the dollar. As a result, EADS is expected to record forex gains.
Airline Hedging ExamplesGOL, Southwest Airlines and Lufthansa
Group are prime examples of how hedging can be used to deal with forex and fuel risk under different environments.
GOLThe Brazilian airline, GOL, operates in an
environment exposed to currency risk, interest-rate risk and fuel-price risk. As a result, GOL engages in forex trading, hedges fuel using WTI and has interest-rate hedges tied to future aircraft deliveries.
Both historically and recently, Brazil’s cur-rency, the real, has experienced frequent and
substantial fluctuations relative to the U.S. dollar. Almost all of GOL’s revenues are denominated in reals, while 72 percent of its liabilities are tied to the dollar.
GOL reported a loss in the third quarter 2011 stating, “The loss was mainly due to the appreciation of the dollar, which increased from R$1.56 (US$.90) at the end of the second quarter to R$1.85 (US$1.07) at the end of the third quarter (an 18.8 percent upturn).”
GOL reported a R$75 million (US$43.2 million) loss in other income due to hedging of WTI, forex and interest rates during the third quarter.
Southwest AirlinesSouthwest Airlines has gained a reputation for
proactive risk management, especially through effective use of fuel hedging and mastery of energy-trading skills. Some analysts suggest that Southwest speculates on energy prices without a formal rationale for doing so.
Southwest Airlines has been one of the most consistent and aggressive hedgers in the airline business. A key to the company’s financial success has been its long-running fuel-hedging program. From 1998 through 2008, Southwest saved US$3.8 billion in fuel costs due to hedging. However, this trend reversed in 2009.
Due to fuel hedges Southwest had in place in 2009 and including the effect of accounting requirements to report derivatives and hedging, the airline experienced net losses of US$467 million in fuel and oil expense relating to fuel-derivative instruments. This amount included cash payments of US$245 million for fuel derivatives, a major reversal from 2008 when Southwest received US$1.3 billion in cash from fuel derivatives. During 2010, Southwest rec-ognized US$324 million in losses in its income statement because of fuel hedging. Southwest reported hedging losses of US$117 in the third quarter of 2011.
Lufthansa GroupThe case of the Lufthansa Group points to
the complexities involved in managing a complex multinational business. Lufthansa Group hedges forex, fuel and now carbon credits. International ticket sales and the purchase of fuel, aircraft and spare parts present foreign currency risks for the Lufthansa Group. It has more than 400 subsidiaries and associated companies, including 100 percent ownership in Lufthansa German Airlines, Lufthansa Cityline Austrian, Swiss, germanwings, Eurowings, Air Dolomiti, as well as partial ownership in other airlines such as jetBlue.
Revenue sources come from 69 different currencies, of which 22 are hedged. Other than the Euro, important revenue sources are denominated in U.S. dollars, yen and sterling. Currencies highly correlated with the U.S. dollar are also set off against operating U.S. dollar exposure. Lufthansa develops a fuel-hedging policy based on fixed rules and uses standard
ascend 67
ASCEND I SPECIAL SECTION
instruments for hedging. Since fuel is priced in dollars, fluctuations in the euro-dollar-exchange rate add an additional positive or negative effect. With the advent of European Union Emissions Trading System (EU ETS), Lufthansa also is engaged in trading carbon credits to hedge emis-sions exposure.
Carbon Hedging
“Carbon will be the world’s biggest com-modity market, and it could become the world’s biggest market overall,” according to Lewis Redshaw, head of environmental markets at Barclay Capital.
The EU ETS is the world’s largest carbon market. The primary unit for trading carbon is the EU Allowance (EUA). Carbon trading has been growing fast, from US$11 billion traded in 2005 when the EUA was launched, vaulting to almost US$142 billion in 2010. About 85 percent of all carbon traded is tied to EU ETS.
Despite significantly lower carbon prices in 2011 versus 2010, the value of the global carbon market continued to grow in 2011, increasing 4 percent over the prior year, according to analy-sis by Thomson Reuters Point Carbon. In 2011, the volume of EUA transactions was more than 8 billion allowances and credits.
With the EU ETS mandate taking affect earlier this year, a new form of hedging is taking shape for aviation, trading in carbon emissions and carbon futures, especially due to the volatility of carbon prices. EUAs have fluctu-ated trading over 30 Euros (US$40) per EUA in 2006 to around 7 Euros (US$9) at the end of 2011, making carbon emissions candidates for hedging. Instruments for emissions hedging include tradable emissions permits, and futures and options on emissions permits.
Under EU ETS, airlines must submit their emissions by April 30 of the following year. This provides airlines with a long time horizon to estimate their emissions and develop strategies to cover their allowances, including developing emissions hedges.
Given low carbon prices in early 2012, a few airlines have already begun to trade in carbon credits (see related article on page 50).
“We are continuously buying allowances,” said Peter Schneckenleitner, a spokesman for Lufthansa.
Lufthansa said it would need to buy 35 per-cent of the permits covering 2012 operations on the open carbon market.
Air France-KLM Group plans to buy emission permits throughout the year in 2012. The group estimates EU ETS compliance for 2012 will cost between 50 million Euros (US$66 million) to 100 million Euros (US$132 million). It will have to buy around 7 million carbon units this year, according to Cedric Leurquin, a spokesman for Air France.
The aviation sector’s net demand for carbon permits could reach up to 700 million by 2020, making aviation the second-largest buyer of
carbon after the electricity sector according to Thomson Reuters Point Carbon.
Hedge-Accounting HeadachesGAAP (generally accepted accounting
principles) reporting for derivative instru-ments requires significant compliance work to document changes in hedge value over time and to prove that hedge relationships are effective. Although it may be hard to follow the changes in the accounting trail, these adjustments can be significant.
Accounting for derivative financial instru-ments falls under International Accounting Standards and is covered by IAS39 (Financial Instrument: Recognition and Measurement). IAS39 requires that all derivatives are marked to market with changes made to the profit and loss account. For many compa-nies, this can result in significant profit and loss volatility from the use of derivatives.
Hedge Accounting In A NutshellAccounting guidance for hedge transac-
tions specifies that the derivative must be marked to market on the balance sheet. The offsetting journal entry is not booked to earnings but rather to other comprehensive income (OCI).
Entries to the OCI account are booked directly to retained earnings, bypassing the income statement. Then, when the
forecasted transaction hits the income statement, the amounts booked to OCI are transferred to the income statement. This offsets the earnings fluctuations from the price of jet fuel. The net result is that the derivatives are carried at market value on the balance sheet, but there is no volatility introduced to the income statement.
While airlines follow these international standards, they also report what they believe are more meaningful results to shareholders.
For example, Southwest states, “The Company believes it is more meaning-ful to provide its financial results on an ‘economic’ basis reflecting its actual net cash outlays for fuel consumed during the current period, inclusive of settled fuel derivative contracts, as current market pric-es are not always indicative of actual future settlements. As a result, the company also provides its financial results excluding these unrealized, noncash special items, to provide a better measure of the impact of the company’s fuel hedges on its current period operating performance and liquidity. The actual cash impact of hedges related to fuel to be consumed in future periods will be reported in the applicable future economic results.
“These economic results provide a better measure of the impact of the
ASCEND I SPECIAL SECTION
ascend68
Crude Fluctuations Wild fluctuations in the price of crude oil took place during 2008, peaking over US$147 and dropping under US$35 per barrel. Crude has steadily continued to rise since 2009. WTI and Brent crude traded in parallel until 2011 when a surplus of oil in the United States caused WTI to drop versus Brent. The cost to refine crude to products like jet fuel, called the crack spread, adds additional fluctuation based on supply and demand for different petroleum products and refinery capacity.
2008 2009 2010 2011$30
$50
$70
$90
$100
$130
$150
$170
Jet Fuel, WTI And Brent(Source: U.S. Energy Information Administration)
Jet Fuel (U.S. Gulf Coast)
Brent
WTI
Pri
ce P
er B
arre
l
company’s fuel hedges on its operating per-formance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guid-ance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within fuel and oil expense. This enables the company’s management, as well as investors, to con-sistently assess the company’s operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense.”
Hedge accounting is not easy to follow. Due to hedge accounting and reporting complexity, clear communication by man-agement of hedging results is critical to the company’s shareholders and analysts who are interested in understanding actual hedging performance.
Best-Practices Risk Management Losses from hedging can be blamed on
many variables, including: Governance failures by management, Poor risk management,
Insufficient disclosure from suppliers of instruments (banks that were supposed to have advised options buyers of the underlying risks),
Lack of understanding by shareholders. Due to the importance of hedging pro-
grams, many airlines create a system of governance and management oversight. They put in place internal controls so pro-cedures are followed and accountability is present at appropriate levels.
A survey of controls used for best-practice risk management includes: Create and maintain a comprehensive risk
management policy, Provide authorization by appropriate lev-
els of management, Provide segregation of duties and respon-
sibilities, Maintain knowledge on execution and
accounting for derivatives, Put key performance indicators in place to
measure hedging performance, Develop effective shareholder communi-
cation of hedging philosophy and results.Hedging provides a way for airlines to
manage otherwise uncontrollable costs,
especially fuel. Since there are no hedges for jet fuel, airlines must use futures con-tracts on commodities highly correlated with jet fuel such as crude oil.
The case for hedging includes being able to better manage future cash flows and earnings. By locking in cash flows, airlines are better able to reduce their most volatile expense category and earnings volatility. The case against hedging is that it can also produce poor financial results and, in some cases, large losses.
Best-practice controls help develop clear accountability and transparency with an emphasis of using hedges to manage and better control risks. a
Peter Berdy is a consultant for Sabre Airline Solutions®. He can be
contacted at [email protected].
89 The number of European airports that
require slot coordination because
they don’t have enough capacity to
meet demand, according to IATA.
80 The percentage by which biofuels have
the potential to reduce emissions over
their lifecycle, according to IATA.
2014
The year by which European governments
agreed to reduce average flight
delays to 30 seconds and improve
cost efficiency 3.5 percent per year.
According to IATA, only five out of 27
European states are on track to meet
their targets.
70 The percentage by which today’s jet
aircraft are more fuel efficient per seat
kilometer than the first jets in the 1960s,
according to the Air Transport Action
Group.
1,715 The number of airlines that operate a fleet
of 23,000 aircraft serving 3,750 airports
through a route network of several million
kilometers by 160 air navigation service
providers, according to the Air Transport
Action Group.
+count it up
12 The percentage of CO2 emissions for
which aviation is responsible,
compared to 74 percent from road
transport, according to the Air
Transport Action Group.
ASCEND I SPECIAL SECTION
ascend 69
Pho
tos:
Shu
tter
stoc
k
It’s About Time By Jennifer Jennings and Derek Sutton I Ascend Contributors
Automating The Airport Shift- And Vacation-bidding Process
A new shift- and vacation-bidding module in the Sabre® AirCentre™ Airport suite will provide airlines and ground handlers with sophisticated, real-time bidding automation to streamline bidding processes for employees at all levels.
or decades, airport workers ranging from cabin cleaners and check-in agents to towing crews have endured countless shift or vacation bids at least once a year.
The bid normally brings both a sense of anticipation and dread. It’s always exciting to have the opportunity to change schedules or work areas, but it also means that employees might have to come in on their day off to submit their bids.
For bid administrators, a new bid period means months of preparation and manual work to review stacks of paper piled high on their desks. In an era of 24/7 Internet access and advanced technology, employees must question why they need to make that trip to a dark, windowless room on the ramp to sign a piece of paper confirming their new work schedule or vacation days.
Time Is Of The EssenceDemand for a vacation- and shift-bidding
solution is extremely high. Most airlines, airports and ground handlers are actively evaluating options for increased bidding automation. The ongoing need to optimize a highly utilized workforce, with many varia-tions in shifts and work patterns, requires careful control of staffing plans to ensure operational goals are met.
For these reasons — and many more — Sabre Airline Solutions® developed a new automated shift- and vacation-bidding solu-tion as part of the Sabre AirCentre Airport suite. The solution will make the manual bidding process a thing of the past and provide airlines, airports and ground handlers increased value through: Reduced costs and inefficiencies in the bid-
ding process, Reduced exposure to union or regulatory
fines due to errors or rule violations, Improved employee satisfaction and
morale.The launch of the new module, due later
this year, will transform the shift and vacation-bidding process. Through the new Web-based application, employees can browse published rosters and submit their shift or vacation bids during the designated bid window via an Internet connection in the office, at home or even on their mobile device.
Airlines, airports or ground handler system administrators can tailor the shift- and vaca-tion-bidding application to fit their operational conditions, union contracts and governmental regulations.
The shift- and vacation-bidding module can be used as a standalone solution; how-ever, for existing Sabre AirCentre Airport customers, the module will be integrated with the Sabre® AirCentre™ Staff Admin appli-cation. Published rosters can be extracted from Staff Admin to active bids in the
shift- and vacation-bidding module, while employee information and criteria key to the bidding process are continually updated. After the shift- and vacation-bidding process has concluded, rosters are pushed back to Staff Admin, complete with employee names attached to rosters and vacation days added as anomalies. At this point, there’s a com-plete, assigned roster, ready for use in the live operation.
With the introduction of an automated shift- and vacation-bidding process at an airline, airport or ground handing organization, several core benefits impacting many aspects of the business are possible to achieve, including: Employee satisfaction, Administrative time savings, Improved quality and visibility, The right information at the right time.
Employee SatisfactionFor airport agents, it can be a real hassle
to go through a manual, in-person shift- or vacation-bidding process. They must pick up their bid packets and find their specific window for bidding. Then, they may have to drive to the airport to place their bid, even if their window for bidding is on their day off.
The new shift- and vacation-bidding mod-ule removes this hassle. Employees will have the freedom to manage their bid electronically with access to the system from any location — without stacks of paper or extra trips to a specific physical location at a set time to process a bid.
Administrative Time Savings
For a large hub operation, development of rosters and the subsequent bidding process can demand an incredible amount of time and labor for station administrative personnel. This can be extremely challenging, labor intensive and costly. With the new Sabre AirCentre Airport shift- and vacation-bidding module, administrators will have a reduced workload, in both bid preparation and bid management.
Many bid rules can be configured in a one-time setup, reducing repetitive pre-work and vulnerability to data entry errors. With the new bidding automation, bid administrators no longer have to maintain a bid room and manually award lines as employees select their preferences. Instead of a constant, manual effort to conduct a bid, with the new shift- and vacation-bidding module, admin-istrators can merely oversee the process and let the system handle the tedious and repetitive tasks.
Improved Quality And VisibilityBid administrators can easily and effi-
ciently construct shifts and publish them for preview, open and close the bidding process,
and award shifts. Because the vacation- and shift-bidding functionality is fully integrated, creating rosters from bids takes minutes instead of hours or even days.
The quality of a schedule is one of an employee’s most important benefits. This solution can ensure the shift- and vaca-tion assignments are as fair as possible, providing bid administrators with peace of mind. Inconsistent shift and vacation-bidding policies can cause confusion and frustra-tion among employees, breed unfairness and impact morale.
The new Sabre AirCentre Airport shift- and vacation-bidding module allows employees to express their preferences. If permitted by their company’s bid practices, employees will have the ability to see their selections in terms of the number of positions avail-able, what other employees are selecting, and the status and selection of more-senior employees.
Bid administrators will no longer need to worry about any potentially unfair schedul-ing practices. While employees will have a choice, the solution will assign shifts that are in line with its bid rules. This provides consistency, transparency and fairness into shift and vacation assignments.
Right Information, Right TimeUnion regulations and contracts require
discrete labor management rules to be enforced, particularly in shift- and vacation-bidding scenarios. Of equal importance is the ongoing requirement to be ready to document every employee transaction and assignment to union authorities. This requires deeper access to transaction histories through audit logs. In case of disputes, bid administrators will be able to access all bids entered by employees, along with the awarded bids. Consider this a form of insurance.
The manual bidding processes of the last several decades at airlines, airports and ground handler companies are in use well beyond their expected lifecycle. The new shift- and vacation-bidding solution will ease the bidding process for airport agents and transform the significant administrative time invested in shift and vacation bids. a
Jennifer Jennings and Derek Sutton are solution managers for Sabre
Airline Solutions. They can be contacted at jennifer.jennings@sabre.
com and [email protected].
ASCEND I SOLUTIONS
ascend 71
F
Sabre AirCentre Airport
Plan Ahead
A new gate planning optimization engine perfects the process of assigning flights to gates and saves airlines significant time and money. In addition, leading technology is on the horizon to integrate numerous hub-centered activities.
By Hemchand Kochukuttan and Sergey Shebalov, Ascend Contributors
New Gate Planning Optimizer Perfects Gate Assignment Process
ASCEND I SOLUTIONS
irports around the world operate a full schedule with limited gate resources to maximize revenue. They have unique gate resource and traffic con-straints that need to be considered
during the planning process. Airlines also must take into account the cost of operating a gate and unique passenger service challenges during gate planning. This presents unique challenges to both airline and airport resource planners. Airports and airlines need a flexible solution to help them achieve optimum gate planning as well as maximize revenues.
Sabre® AirCentre™ Gate Planner provides auto-mation and optimization to gate planners, enabling them to make fast, optimal planning decisions regarding the number and efficiency of flights that can operate from the airport. The system offers a new optimization tool that can: Gate the flight schedule into gates based on
airport constraints, Provide multiple what-if scenarios, Deliver information to assist in marketing the air-
port for increased traffic and precise segments of the day. Flight schedulers use Gate Planner to validate
and verify that proposed schedules work at a given airport for the available gates and airport layout. Additionally, by validating the schedule during the planning stage, changes and improvements can be made prior to publishing production schedules.
Airport resource planning is typically con-strained by various factors that are categorized into hard and soft constraints. The new Gate Planner optimizer, or optimization engine, helps airlines and airports optimize gate planning using hard and soft constraints based on multiple objectives for the best possible outcome.
Hard ConstraintsHard constraints cannot be violated in an airport.
They are: GateMix constraint — This includes aircraft
types that are valid for a specific gate based on the physical layout of the airport. The typical gate can accept wide-body, narrow-body or com-muter aircraft.
Adjacency constraint — This ensures the wings of the aircraft parked in adjacent gates do not come in contact with each other.
Hard gate buffer — This is where a hard buf-fer must be maintained between a scheduled departure and the next arrival at a gate. The opti-mizer cannot violate the hard gate buffer during the gate-planning process.
Soft ConstraintsSoft constraints can be violated while gating
flights at the airport. However, the number of violations should be kept to a minimum. Soft constraints include: Market gate constraint — This constraint is used
to assign flights departing or arriving from a par-ticular station to a set of specific gates based on set business needs.
Soft gate buffer — This applies to the buffer between a scheduled departure and scheduled arrival at a particular gate. The buffer between a scheduled departure and arrival would be maximized within the soft gate buffer.Analysts using the gate planning solution can
choose the type of constraint — hard or soft — and specify a penalty for their violations using a special dialog window. Relative sizes of those penalties guide the process toward the desired solution in case a conflict occurs and the system needs to determine which constraint to violate.
New Optimization EngineThe new optimization engine within Gate
Planner uses a mixed integer program formula-tion, which: Substantially improves performance, Gives planners more control over the search
direction, Simplifies future product development, Promotes airport resource-management inte-
gration.The main objective of the gate assignment
remains the same: assign as many flights to gates as possible. However, instead of a heuristic approach, Gate Planner uses an exact algorithm that guarantees the best possible solution. The new optimization engine also introduces a con-cept of soft constraints that allow an analyst to specify desired characteristics of the solution and a concept of secondary objectives that are useful in specific situations.
In practice, flights are assigned to gates in a way that numerous requirements and restrictions are satisfied.
With soft constraints, analysts can assign gates to flights in a single run. This significantly saves time during the planning process and avoids mul-tiple cycles to determine final gate assignments.
In addition to minimizing violations of business requirements formulated as soft constraints, the new optimization engine also allows planners to specify additional objectives that might help steer the solution process toward a gate assignment with desired characteristics. These include: Schedule consistency, Uniform gate utilization, Aircraft assignment bonus, Gate assignment cost.
Schedule Consistency A repeatable schedule is critical for several
reasons: Day-to-day consistency of a weekly sched-
ule improves customer experience and, there-fore, might increase airline market share. Frequent business travelers greatly benefit from a “memory schedule.” Flights arriving and departing at the same gate contributes to this convenience. In addition, crewmembers and ground staff have stable, predictable working conditions. It is also much more convenient for schedule planners to manage schedules for dif-ferent days of the week that are similar to each other.
Solution consistency is important when sched-ule changes happen. Minor schedule changes are quite frequent in the planning process and might be caused by demand fluctuation, crew restrictions, maintenance requirements, etc. Once a gate assignment for a future date is completed and transferred to other plan-ning departments, it is not practical to run a new optimization and completely change it to accommodate the schedule update.
On the day of operations, schedule changes caused by disruptions might affect gate assign-ments. In this case, the assignment should be adjusted with as many flights staying at the
Optimizer Objectives The Gate Plan Optimizer run dialog allows planners to select appropriate parameters and optimizer objectives. Using the dialog, planners can select weights for specific objectives to be used in the optimizer run.
A
ascend 73
original gates as possible so other airport pro-cesses are not disrupted. To introduce schedule consistency into the
optimization process, planners can specify a base schedule with flights that have already been gated. For example, an analyst who is working on a Tuesday schedule might use Monday’s schedule as a base. Or, a previous schedule for the same day could be used if Monday’s schedule had been changed and flights need to be re-gated.
When determining an optimal gate assign-ment, the system adds an incentive, or bonus, for every flight that is assigned to the same gate in the new schedule as it appears in the base schedule.
The assignments made to other gates would have an associated penalty or negative impact, which would be considered during the overall optimization of the solution.
Uniform Gate UtilizationA basic gate planning algorithm, which maxi-
mizes the number of assigned flights, produces a highly unbalanced schedule. Some gates have several flights assigned to them while other gates are mostly open. This produces a schedule that is very sensitive to even minor disruptions. It also makes it difficult to create a reasonable plan for ground crews.
Using the new optimization engine, analysts can choose an additional objective of balancing the workload among all available gates. This type of gate utilization is defined as the number of flights assigned to a particular gate or the total time that gate is occupied. The number of
assigned flights would still be maximized, but now the system would try to spread them among all available gates.
Aircraft Assignment BonusThe Gate Planner optimization engine improves
the assignment of constrained aircraft types, such as wide-body aircraft, early in the gating process. It gives a higher priority to flights that have higher aircraft assignment bonuses. This enables plan-ners to give high priority to the handling of highly constrained aircraft types at an airport.
Gate Assignment CostAirlines sometimes lease gates from airports
or other airlines at a premium cost. They prefer to minimize the usage of those expensive gates during the planning process. Gate Planner allows planners to assign costs for every gate. The opti-mization engine gates the flights to low-cost gates to avoid using more-expensive leased gates, when possible.
New Optimization Engine BenefitsThe new optimization engine offers many
benefits to airlines, including: The right mix of hard/soft constraints and objec-
tives would produce a fully gated solution in a single optimizer run. This significantly reduces the planning duration by 90 percent.
The introduction of soft constraints would allow analysts to produce a gated solution that would abide by business constraints as defined by the planner. This would improve internal business processes such as:
Gate buffers, Market gates, Simultaneous operations, Market buffers.
Gating costs would be minimized because the optimizer honors gate assignment costs as defined by the planner.
Schedule gating consistency would greatly enhance customer satisfaction by operating flights from a specific gate across multiple schedules.
Aircraft assignment bonuses allow highly con-strained aircraft types to be gated first during the optimizer run. This reduces the chances of flights with highly constrained aircraft types to remain unassigned at the end of the planning process.
Simultaneous operation constraint allows plan-ners to handle traffic in a congested alleyway associated with aircraft lead-in and push-back.
Future GrowthThe new optimization engine is flexible and
well suited for introducing new gating require-ments and objectives that might be proposed in the future or required for a particular airline. Similar to the secondary objectives, it is possible to minimize total passenger walking distance within an airport to: Improve the connection quality for passengers, Slightly retime arriving and departing flights to
achieve a better assignment, Produce a back-up assignment plan that would
increase schedule robustness. In addition, Sabre Airline Solutions® is cur-
rently working on a hub managment concept that would integrate gate and staff planning, aircraft turn-around process control, passenger and cargo connections management, and other hub-centered activities.
The new gate-assignment approach is the first step toward developing a unified optimization for all hub operations that would improve consistency of the decision-making process and boost effi-ciency of planning and operational procedures. a
Hemchand Kochukuttan is a Sabre®
AirCentre™ Airport solutions manager and Sergey Shebalov is a principal research
analyst for Sabre Airline Solutions. They can be contacted at hemchand.kochukuttan@
sabre.com and [email protected].
ascend74
ASCEND I SOLUTIONS
Hard And Soft Constraints Gate Planner Constraints dialog allows gate planners to specify various hard and soft constraints along with the penalty used by the optimizer in gating flights.
Sabre AirCentre Gate Planner
ASCEND I SOLUTIONS
ascend 75
Advanced online shopping capabilities enable airlines to market and sell products via multiple channels that give customers the online shopping experience they expect.
By Joelle Cuvelier and Cecilia Labora, Ascend Contributors
Online Shopping Technology Continues To Evolve
Shopping With ConfidenceShopping With Confidence
ascend76
ASCEND I SOLUTIONS
he sound of cash registers ring-ing up sales has been replaced with a few clicks of the mouse through online shopping. As the Internet continues to change the
way consumers shop online for products and services, it has also changed their expecta-tions for finding the best deal at the lowest cost.
For businesses, such as airlines, that market and sell their goods online, new tech-nology and competitors’ actions drive them to keep pace with the rest of the industry.
Once viewed by consumers with somewhat of a suspicious eye, the online marketplace is now booming. During the last two months of 2011, U.S. consumers spent US$35.3 billion online during the holiday season. This marks a 15 percent increase over the year before, according to market research organization ComScore. In fact, there were nine days during the period in which online sales reached more than US$1 billion.
The travel industry, no doubt, benefited greatly from the online shopping surge as consumers purchased air and train fares; rented cars; and/or booked hotels, con-dominiums and resorts to visit family and friends or simply enjoy a vacation.
Airfare Shopping EvolutionIn the early 1980s, individual travelers had
to call multiple airlines to find the cheapest fares. Now, consumers have the ability to quickly view and compare hundreds of options online with a few simple clicks.
In recent years, metasearch engines, which explore multiple airlines’ websites and online travel agencies, give consumers an efficient and effective way to shop online and purchase the best fares to meet their needs.
The Ypartnership/Harrison Group 2011 Portrait of American Travelers survey revealed the Internet has moved to the forefront as a resource for travel pricing and comparison shopping. Travel service suppli-ers’ websites, including those of airlines and hotels, were used by 51 percent of travelers to obtain fare price information. However, only 35 percent used the sites to compare prices.
To purchase the best deal, the majority of travelers used two options, according to the survey: 41 percent booked through online travel
agencies, 38 percent booked through airline and
hotel websites.As options and search criteria multiply
for online travel shoppers, airlines’ ability to maximize yield per online booking and boost customer loyalty to their websites is being diluted. Airlines are gradually losing
control and competitors are just a click away. Without efficient shopping tools that not only generate a wide variety of fare choices but also support non-traditional and innovative search options, airlines are at the mercy of consumers’ willingness to visit their web-sites, with no particular incentive to do so.
Airfare Shopping AdvancesTo help airlines address these rapid chang-
es and challenges in the online shopping
environment, Sabre Airline Solutions® con-tinually researches and analyzes emerging shopping trends. Its strategic investments focus on solutions that airlines’ can use to offer a transparent and user-friendly shop-ping experience that their customers will remember and value. These sophisticated tools enable carriers to: Improve the attractiveness of their web-
sites, Make them faster and easier to navigate,
Activity-based Shopping Affinity/activity shopping capabilities enable travelers to shop for partic-ular destinations that cater to specific interests or activities, such as a family holiday that includes snow skiing.
Airline Website Booking Online air bookings through airline websites will reach about 72 percent this year. Advanced shopping capabilities present airlines with numerous opportunities to maxi-mize their online shopping potential.
T
ASCEND I SOLUTIONS
ascend 77
Enrich their content.The latest innovations in affordable low-
fare search and efficient online shopping technology place airlines back in the driver’s seat. Using new SabreSonic® Web advanced shopping capabilities, airlines will have greater control over how their products are displayed to and purchased by consumers.
These new capabilities expand airlines’ ability to sort and display hundreds of diverse, lower-priced itineraries for available flights using a highly configurable, high-performance open-systems platform. They also empower consumers and drive cus-tomer loyalty by providing additional fare and destination choices as well as differentiating service levels and competitor offerings.
Designed to support any size car-rier worldwide, the new advanced shopping capabilities include: Award Shopping — Included in the basic
product offering, it provides travelers with the cost of airfare in miles. This enables
them to more readily redeem award miles without contacting a call center;
Affinity/Activity Shopping — Returns travel possibilities for a specific destina-tion geared toward an interest or activity, such as family holiday, singles vacation, honeymoon, adventure, hiking, skiing, etc.;
Destination Shopping — Enables travel-ers to efficiently compare prices during a month or range of months to multiple destinations based on a certain type of activity such as water or snow skiing, scuba diving, etc.;
Expanded 90-Day Calendar Shopping — Searches for the lowest airfare across multiple calendar dates, providing con-sumers insight into which travel days/dates offer the lowest fares;
Shop By Specific Fare — Recognizes travelers on successive shopping queries and offers targeted information and pric-ing based on their booking patterns or
travel profiles during the critical decision-making process, making a purchase more likely;
Branded Fares Shopping — Helps airlines maximize yield by moving away from a focus on low-fare search models and tap-ping into travelers’ willingness to pay for the services they value most. Products and services may be bundled into the brand or offered à la carte. This gives airlines the opportunity to “up sell” con-sumers to higher yielding fare families and generate additional revenue.Destination and Expanded 90-Day Calendar
Shopping incorporates results from multiple O&D combinations paired with a calendar view. By offering travelers a comprehensive data set as well as an increased number of options from which to choose, airlines can build consumer confidence. Shoppers who trust a carrier to provide them with the best matched itinerary/fare combinations will be less likely to search elsewhere for
alternatives. Consumers expect the most relevant data
to be available at their fingertips. Both Destination and Affinity Shopping priori-tize results and deliver the most desirable options. They give the lowest fares to mul-tiple destinations over a specified range of dates in a format that enables consumers to efficiently shop, compare and book using a single source.
Branding Fares Shopping enables car-riers to clearly define their own levels of service offerings as well as differentiate themselves from competitors. As a result, carriers have increased brand awareness in the marketplace. Consumers are more likely to purchase travel from airlines that clearly explain the value of the services they will receive based on the types of fares purchased.
All advanced shopping capabilities accom-modate complex shopping itineraries while providing the richest content at the highest
level of accuracy possible for individual and multiple airlines and their codeshare partner-ships. They direct channels of distribution, including carriers’ websites, via OTA XML schemas. Once received, airlines can custom-ize the schemas to display all, part or none of the data provided.
Future enhancements to the current advanced shopping capabilities, particularly in the areas of branded fares and calendar shop-ping, will support interline partnerships with full rules validation and complete accuracy in tax and fee calculations.
An airline’s website is one of its most visi-ble and valuable assets, serving as a central hub for efficiently and effectively delivering content from multiple sources to its custom-ers. With online air bookings through carrier websites expected to be around 72 percent this year, according to research firm PhoCusWright, airlines would be wise to invest in the latest technology to support and maximize their online shopping potential. a
Joelle Cuvelier is merchandising director of SabreSonic® Check-in and Cecilia
Labora is solutions marketing manager of SabreSonic Advanced Shopping
for Sabre Airline Solutions. They can be contacted at joelle.cuvelier@sabre.
com and [email protected].
The travel industry, no doubt, benefited greatly from the online
shopping surge as consumers purchased air and train fares; rented
cars; and/or booked hotels, condominiums and resorts to visit family
and friends or simply enjoy a vacation.
HigHlight
SabreSonic Web
ascend78
The Network Manager
By Rajesh Vijayagopal I Ascend Contributor
Enabling Airlines To Maximize Network Revenue
Identifying optimal departure and arrival times for flights is an essential planning function that helps maximize total network connectivity and boost revenue.
irlines constantly refine their sched-ules to expand their network, add services to new destinations and improve passenger connectivity
between their own flights and with code-share and alliance partners.
Sophisticated forecasting models such as Sabre® AirVision™ Profit Manager allow schedule planners to evaluate the commer-cial benefit of serving a new destination and changing frequencies to existing destinations. Because of a limited set of available aircraft, every airport pair cannot be served with direct flights. Creating preferred connection pos-sibilities for passengers at specific airports is key to serving a wide network.
Airport constraints, such as slot/gate availability and aircraft inventory, limit the possibility of positioning flights at different times of the day to maximum connectivity. Schedule planners are tasked with a common challenge to find the best departure times for flights so all constraints are satisfied and network revenue is maximized.
Currently, schedule planners use forecast-ing and fleet optimization tools to identify ways to improve passenger connectivity. Planners make a set of flight-time changes to evalu-ate the revenue benefit and then optimize the schedule to ensure it is operationally feasible. This process is often manual and impossible to get the best schedule since all combinations of flight departure times are not evaluated simultaneously.
Sabre® AirVision™ Network Manager helps schedule planners identify the best departure times. The inputs to the system include: The initial schedule with direct flights, A definition of an airline’s bank structure, Other airlines’ schedules, A set of operational and marketing con-
straints that need to be honored. Network Manager uses the same forecast-
ing engine as Profit Manager to forecast passenger demand for all possible flight times. It then optimizes the schedule to honor all marketing and operational constraints. Network Manager uses global optimization techniques to select the best flight times to maximize overall network revenue. It uses a systematic approach to search for opportuni-ties to improve the schedule and considers the effect of codeshare connections and con-nections involving alliance partners’ flights to optimize maximum revenue for the airline.
Network Manager recognizes a flight time as beneficial when: The local passenger demand increases
because of better placement of service during the day,
Elapsed time of the connections improves relative to competitor services, which helps attract more passengers. The optimization is based on passenger
yields (fares) in the impacted O&Ds and
the operational constraints that need to be satisfied.
Network Manager does not change the equipment type assigned to flights. Rather, it maximizes demand and revenue potential for the schedule. Once times are optimized, the output schedule is optimized further in Sabre® AirVision™ Fleet Manager for better capacity allocation to realize maximum profitability.
Network Manager produces a new sched-ule with modified flight times and a list of reports.
It has three main interfaces that: Help planners define the schedule and
period for optimization, Set up operational and marketing con-
straints that need to be satisfied, View the reports that help describe the
effectiveness of the optimized schedule.
Analysis EditorAnalysis Editor, a component of Network
Manager, helps select the schedule and period for optimization. The schedule planner also provides the schedule that contains all competitors’ flights. The tool uses the same connection-building and passenger-choice-model parameters used in the Profit Manager forecasting tool to ensure consistency between the forecasting and optimization models.
Constraint Set EditorThis interface has a list of all supported
operational and marketing constraints. Planners can select the appropriate constraint that needs to be satisfied for the business problem. They can also create multiple rule sets to optimize different sets of business objectives.
Report ViewerThe Report Viewer interface contains all
information regarding input data provided for optimization as well as a list of reports that help planners understand the benefits of the new schedule timings. This interface also has a set of logs in case issues arise during optimization runs.
Future EnhancementsSome of the other challenges for schedule
planner are: Identifying the best partner flights to code-
share on, Identifying the optimal frequency of ser-
vices to a destination to improve aircraft utilization,
Maximizing revenue.Upcomming enhancements to Network
Manager include automation for codeshare flights selection and market/frequency optimi-zation, which are all manual, tedious planning functions. a
Rajesh Vijayagopal is a Sabre® AirVision™ Network solution manager for Sabre
Airline Solutions®. He can be contacted at [email protected].
Revenue Gains A revenue improvement of 0.84 percent was achieved by an airline network with about 2,000 flights to 120 destinations using a retiming window of +/-10 minutes for all flights touching the hub.
ascend 79
ASCEND I SOLUTIONS
A
Network Manager
Accelerating InnovationAirlines can create their own unique, customized e-commerce solutions using a robust application programming interface (API) solution.
New E-commerce Capabilities On The Horizon
By David Turton I Ascend Contributor
ASCEND I SOLUTIONS
ascend 81
reating engaging, cost-effective e-com-merce solutions for the airline industry is a highly complex process.
Some of the challenges facing airlines and their e-commerce solution providers include: Existing system integration, Ensuring consistency in user experience, Maximizing performance and scalability, Enhancing usability and conversion without loss
of pricing accuracy, Security and fraud management.
The list actually goes on and on. Creating these solutions is only going to become more complex. Here’s why: As traffic continues to shift to online transactions,
airlines want and must do more to differentiate themselves from their competitors. To achieve this level of differentiation, carriers require high-ly customizable solutions that offer scalability, speed-to-market and ease of integration.
Innovative mobile devices and platforms continue to proliferate. These offer new opportunities (or “touchpoints”) through which travelers can inter-act with carriers during their trip. Each new touch point provides the individual carrier various oppor-tunities to stimulate revenue growth and improve customer satisfaction.
Maximizing the potential of “smart” devices requires extensive (and often costly) expertise. It is possible to build “one-size-fits-most” mobile applications that can run on multiple devices and in multiple formats. However, many carriers are realizing that they’re going to need solutions tailored to specific devices to truly offer a unique customer experience. Airlines need extensive knowledge to effectively
sell and serve through any given touch point. They also require specialized expertise to handle back-office and system integration as well as deliver the experience on unique devices and platforms.
In other words, the increased complexity and customization that travelers and carriers demand make scalability (and, therefore, cost-effectiveness and decreased time-to-market) even more difficult to achieve.
A single solution provider cannot be all things to all airlines. Fortunately, one solution provider doesn’t have to do everything.
Solution providers can help carriers build their own unique e-commerce solutions by exposing core sales and service capabilities via a robust, efficient application programming interface — and hiding the complexity of third-party and existing-system integration.
In essence, this allows a carrier to focus on differentiating where it is most critical: at the customer-experience (or “presentation”) layer.
“APIs promote innovation. Through an API, peo-ple who are passionate about a problem can solve it on their own,” according to Forbes magazine.
Sabre Airline Solutions® will soon offer such flexibility and options. It will progressively expose capabilities from SabreSonic® Customer Sales & Service (SabreSonic CSS) in a new easy-to-use
Accelerating Innovation By David Turton I Ascend Contributor
C
format. These services will be made available to all customers (or their partners) that wish to build their own e-commerce solutions, or even to customize SabreSonic CSS applications.
Travel-based Web services have been around for years. Sabre Airline Solutions is among numerous providers that already offer comprehensive industry-standard Web services to the travel industry. In fact, Sabre Airline Solutions processes more than 40 million Web-services transactions a day.
So how are the soon-to-be-developed services going to differ from current offerings?
The API is simpler and more relevant to e-com-merce solution development. Effectively, this will allow developers to focus on doing what they do
best: building inspiring solutions that appeal to users. It will also enable airlines to work with a wider variety of partners because there will be less airline subject-matter expertise required.
Many low-level services will be orchestrated (bundled) into a fewer high-level services. This will allow solution developers to build rich functionality using just a handful of services. For example, a single service could be used to create a passenger name record (PNR), accept payment and issue tickets. Traditionally, this outcome may have required about 15 or so lower-level services.
The API definition (or schema) minimizes the use of complex airline industry concepts that were developed 50 years ago. Application developers
that use traditional service offerings must have extensive knowledge of legacy and related back-end systems. Their task is complicated by the fact that these host-based services are characterized by an agent-oriented business flow rather than an online business flow. This results in a longer, more-expensive application development lifecycle.
Sabre Airline Solutions’ customer-experience applications (starting with SabreSonic® Web and SabreSonic®Check-in) will be built on top of these orchestrated services. This will enable airlines to use SabreSonic CSS applications for some touch points and their own applications for other touch points. This will ensure that travelers have a consistently enhanced end-to-end experience.
Alternatively, airlines could even deploy custom Web components inside SabreSonic Web (and later SabreSonic Check-in) applications. These compo-nents would utilize the same orchestrated services as the rest of the application, allowing airlines to customize where it is needed the most.
All orchestrated services will be exposed in mul-tiple formats including, at a minimum, both Simple Object Access Protocol (SOAP) and JavaScript Object Notation (JSON), so developers can use the format that best suits their framework and expertise.
The API schema will be as independent as pos-sible for the downstream systems that the services depend on. Its independent nature will help ease the integration of new or alternative services and content providers. For example, carriers will be able to use their own profile systems, loyalty systems, third-party hotel and car rental services, etc.
Airlines will also be able to commission new or custom services for compelling, unique business scenarios. For example, a carrier may require mer-chandising data sourced from an in-house system to be combined with traditional shopping data.
What does all of this mean for airlines? In a nutshell, these new, orchestrated Web services are designed to deliver: Increased control over the customer experience, Improved time to market for new capabilities, Improved ease of integration into downstream
services (e.g. shopping, payments) and content (e.g. hotel, car).The underlying technology will complement an
airline’s customer-engagement strategy. The choice and control they provide are critical elements in bringing its e-commerce vision to reality. a
David Turton is an e-commerce solutions manager for Sabre Airline Solutions. He can
be contacted at [email protected].
New Orchestrated Services SabreSonic Customer Sales & Service capabilities will be progressively exposed via new orchestrated services. All Sabre Airline Solutions, airline and third-party touchpoints will utilize these services to provide a consistent traveler experience, regardless of the touchpoint in which they interact.
Reduced Complexity Service orchestration simplifies a large number of low-level services into fewer high-level services, reducing the complexity involved in developing e-commerce applications.
Sabre Airline Solutions
Touchpoints
SiteConfiguration
Trip booking and servicing
Trip information
Customermanagement
Airline AndThird-Party
Touchpoints
Self-serviceWeb, mobile, kiosk
Full serviceairport and res agent
Agent Interface
Orchstrated Services
Sabre Airline Solutions Web Services
SabreSonic Customer Sales & Service
Orchestrated Services
Sabre Airline Solutions Web Services
Reservations and other Systems
Shop Book and Pay
SabreSonic CSS
ascend82
ASCEND I SOLUTIONS
Third PartyPaymentsReservations Shopping and Pricing
Strength In Numbers
While airline alliances promote a
seamless customer experience and
provide opportunities for route expan-
sion and additional revenue genera-
tion, they can become quite complex.
Carriers can manage the complexity
with the right balance of technology and
expertise that transcends airline
reservations fuctionality.
Airline Alliances And Partnerships … Beyond Reservations
By Asha Patel I Ascend Contributor
irline partnership models have come a long way since the for-mation of the first global alliance in the late 1990s. Today, roughly
80 percent of all carriers belong to an alli-ance or partnership. This includes: Alliance membership, Bi-lateral relationships, Codeshares, Interline agreements, Joint ventures.
National regulations are slowly being liberalized in favor of more open-skies poli-cies toward regional markets. The mergers of LAN and TAM in South America and British Airways and Iberia in Europe are evidence of this trend. Globalization fac-tors drive consolidation of the industry in some regions, while other regions enjoy rapid expansion. Increased travel demand driven by rapidly growing economies, changing demographics and wealth effect is primarily responsible for this expansion.
The changing landscape means new and ever-changing collaborative arrange-ments. The three major global alliances — oneworld, SkyTeam and Star Alliance — expect to increase airline membership significantly during the next five years. Currently, more than half of the world’s passenger travel is via a global alliance. Airline partnership models have seen a 19 percent compound annual growth rate dur-ing the past three years alone. Carriers that fall outside major alliances have been busy, too, forming strategic partnerships at vari-ous levels to leverage new opportunities in existing and emerging markets.
Historically, national regulations had prevented cross-border mergers that would have typically occurred due to mar-ket forces. Collaborative models were a natural adaptation to these legal barriers. However, other factors come into play as to why airlines are increasingly partnering up. The different partnership models have proven successful for both customers and airlines.
For customers, the most obvious ben-efits include: Access to a worldwide network, Combined frequent flyer programs, Seamless services throughout the net-
work, Priority check-in and baggage handling, Access to partner lounges.
For airlines, it has provided a counter balance against competitive pressures through: Network amplification, Increased market share, Reduced costs, Increase in overall operational efficiency.
Airline partner programs are the fastest-growing option in leveraging an
airline’s reach. Partnership programs, and specifically alliance programs, are much more than codeshare and reservations sys-tems functionalities. Alliances now look to increase the access of shared applications with the objective of:
Creating seamless customer service for all customers, not just elite members,
Further synchronizing their network (schedules and hubs),
Generating additional revenue, Improving cost efficiencies,
Improving asset management (shared slots, check-in faci l i t ies, lounges, etc.).Ferocious competition places a high
emphasis on quality of service. All major global alliances have plans to increase the sophistication of their offerings with more integrated products and services.
Airlines join alliances or form partner-ships to leverage new opportunities in the marketplace or to counter threats from competition. To determine whether a strategic partnership of some form
ascend84
More Than Reservations Alliances go beyond codeshare agreements and reservations functionality. Today, alliances aim to increase the access of shared applications that span an airline’s entire operation. The objective is to create seamless customer service, further synchronize the network, generate additional revenue, improve cost efficiencies and improve asset management.
Customer And Operations Data It’s essential that alliances and their member airlines leverage data across the entire enterprise. Sabre Airline Solutions combines its reservations system with a broad portfolio of solutions to power alliance participation.
Alliance Success Is More Than Just Reservations
Alliance Portfolio Enhances Member Airline Capabilities
A
ASCEND I COMPANY
makes sense, airline executives should ask themselves several questions: Which partnership or alliance model best
fits their business model? How profitable will the venture be? Can they quantify the benefits? Which alliance best complements their
network? What is required to join, and how is the
process managed? How is data exchanged among various
carriers? How do they ensure consistency of the
customer experience among all alliance partners?
Is their fare structure aligned with that of potential partners?
How will an alliance impact loyalty pro-grams?
What is the exit strategy should their needs change in the future?Once key decisions regarding an alliance
or partnership have been made, speed to market is an important consideration for the team in charge of implementing the agreement. While each airline has its own system for schedules, reservations, ticketing, check-in and so forth, these core functions are usually unique to the airline because of the legacy heritage.
In most cases, alliance partners that strive to achieve common functionality will not have the same architecture and data-sharing capabilities as their partners. As a result, new airline relationships can be costly to implement due to the complex-ity of integration required to ensure data accuracy.
Of course, the scope of information shar-ing depends on the nature and size of the partnership. However, given the variety of models to be supported, any solution must be flexible enough to respond to changing strategies and operations.
For a new alliance entrant, the level of complexity can appear daunting given the ever-increasing integration requirements to support the enhanced customer experi-ence. Airlines must connect and validate bi-directional data exchange not only with the alliance hub but also among all individual alliance members. This results in a lengthy and iterative process to resolve the many exceptions that arise during testing.
Once the partnership or alliance member-ship is operational, the relationship needs to be continually monitored to ensure it remains optimal. By determining the right schedule, pricing model and services, airlines can create the customer experience that best represents their brand. Some airlines have benefitted considerably by investing in complex projects, such as schedule synchro-nization. These have a higher complexity but also offer the highest delivered value.
Airlines should look for opportunities for even deeper engagement, such as: Schedule synchronization and optimiza-
tion, End-to-end revenue management, Seamless customer service, Automated processing of mileage
redemption, Fare proration, Loading of bid prices, Slot management, Hub management, Codeshare optimization, Real-time earn and burn.
To manage these multifaceted require-ments and provide world-class services, airlines need tools to understand the infor-mation and carry out decisions that benefit all partners and their customers. This is especially true for operational decisions at hubs and key airports. Alliance members need capabilities to manage hub operations that allow a view of aircraft turnaround processes for an airline and its partners as well as manage passenger/baggage con-nectivity and transfer requirements. This delivers a seamless customer experience.
Another critical area within an alliance is the ability to manage disruptions so partner airlines and their customers experi-ence minimum, if any, impact from the disruption. Sabre Airline Solutions® offers sophisticated rules-based technology that quickly identifies problem areas and tracks numerous tasks, activities and processes with aircraft, passengers, baggage, cargo, etc. For example, Sabre® AirCentre™ Hub Manager enables carriers to minimize loss of revenue and customer dissatisfaction when the inevitable disruptions occur.
Sabre Airline Solutions is intimately famil-iar with alliance partnership issues. Its leading solutions and expertise represent its depth of experience as well as pace-setting software engineering, industry best practices and decision-support intelligence. The unique advantage manifests itself through adaptable and scalable solutions, a global support model, consulting services and a large airline community.
Airlines are now looking beyond basic PNR and frequent flyer synchronization to achieve greater financial benefits. Sabre Airline Solutions extends airline capabili-ties by overcoming the complex integration challenges to deliver higher value. This will
ascend 85
ASCEND I COMPANY
Shared Application Access A good portion of alliance members share frequent flyer, PNR and check-in data through shared applications. However, only a small portion have access to more complex areas such as revenue management, maintenance, and scheduling and planning data. Sabre Airline Solutions offers a broad range of capabilities for more extensive data sharing.
Airlines must con-nect and validate bi-directional data exchange not only with the alliance hub but also among all individual alliance members.
HigHlight
Shared Application Access Among Alliance Members(percent of alliance members)
make new carrier implementations easier to integrate. Airline partners will have access to newly emerging models where crew, equip-ment and other assets (such as slots, hubs, lounges and check-in counters) are shared across the alliance network.
Airlines will require new technology to better address their mutual needs as their partnerships evolve from the traditional codeshare (or revenue-sharing partnership) to a shared services approach. Understanding these evolving requirements and implement-ing the right technology is critical. Sabre® AirVision™ Marketing & Planning and Sabre® AirCentre™ Enterprise Operations offer capa-bilities specific to unified alliance partnerships.
Sabre AirVision offers capabilities that help manage: Alliance evaluation, Codeshare evaluation and synchronization, Fleet planning and optimization, Close-in to departure re-fleeting, Carbon use modeling.
Network planning and scheduling is directly impacted by partner relationships. Sabre® AirVision™ Network helps airlines plan their network, schedule aircraft and maximize
operational efficiency while satisfying many operational constraints.
In addition, as airline partnerships and alli-ances continue to expand, the size of shared schedules will grow exponentially. In this instance, airlines need a network scheduling tool that is flexible and scalable enough to support ever-increasing schedules. Sabre® AirVision™ Schedule Manager, through its 64-bit architecture, is the only solution cur-rently on the market that makes it possible to accommodate schedules of thousands of flights based on different flight times per day, different bookings per day, etc.
There are also issues more specific to the type of relationship. For example, optimiz-ing and synchronizing codeshares can be challenging without the right tools. Sabre® AirVision™ Codeshare Manager reduces the amount of time required to set up codeshare flights and publish them through automation. It also eliminates misconnections by aligning marketing flights with operating flights.
On the financial side, Sabre® AirVision™
Profit Manager helps airlines evaluate the overall financial impact of an alliance or partnership. The leading route profitability
solution leverages market data and conducts what-if analysis to identify new opportunities that will improve overall network profitability.
Airlines should not have to make strategic decisions about partnerships alone. Sabre Airline Solutions’ team of experts can help navigate critical issues and determine the viability of joining an alliance or identifying potential partnerships.
Selecting the right solutions partner is essential to achieving short- and long-term alliance benefits. Sabre Airline Solutions is the only provider that combines a major passen-ger service system with the broad portfolio of applications needed to completely support airlines and alliances. a
Asha Patel is marketing and solutions manager for alliances and airline
partnerships for Sabre Airline Solutions. She can be contacted
ascend86
ASCEND I COMPANY
414,498 The number of Star Alliance
employees when combining work-
forces of all member carriers. The
alliance currently has 26 member
airlines that operate 4,386 aircraft.
653.62 million The number of passengers carried by
Star Alliance members each year. The
alliance operates in 1,290 airports and
has more than 990 lounges.
149
The number of countries served
by oneworld member airlines,
which offer a combined 8,627 daily
departures.
15 The number of SkyTeam members that
operate more than 14,500 daily flights to
916 destinations in 173 countries.
265 liters The amount of paint needed to cover
SkyTeam member Delta Air Lines’
Boeing 767-400 aircraft. Of that, 37.85
liters of dark blue paint is used for the
ribbon and SkyTeam logo.
+count it up
324 million The number of passengers carried
by oneworld airlines each year. Of
those, American Airlines carries nearly
a third, serving 105.2 passengers
annually.
Join us on Facebook at sabreairlinesolutions.com/fb Follow us on Twitter at twitter.com/SabreAS
