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Selection of the Suitable Airline Based on Efficiency and Cost

Dsicuss about the Empirical Analysis Of The Airline Industry.

The aviation Industry has sustained turbulence in the last decade. From escalating jet fuel to global insecurity due to terrorism, airline companies have been forced to tighten their belts as they cruise through the unpredictable global airline market. Nevertheless, new entrants into the market continue to flock. In this report, a general guideline on practical fleet planning is provided. A case for a startup company is considered where various planning factors are discussed. This is preceded by a selection of suitable airline based on efficiency and cost. Notably, there are two airlines up for selection as the company aims to grow and expand her networks internationally. The two airlines under consideration include: Airbus 320 and CRJ 1000.

Notably, high density airlines would be the best choice given the higher number of passenger servicing per flight hence lower unit operating costs. However, small aircrafts are best for average traffic airports hence reduced delays. The point-to-point network model would then come in handy as domestic travels prefer the point to point flight without unnecessary connections. As a result of this, there is a possibility of the daily block hours being maximized. As a startup company, this would then be the best network model to adopt. By simplifying the operations, the ATCs operations are also streamlined and a lean team is established to grow with the company. Normally, unless effective operations management is implemented, large airline companies often experience inefficiencies due to a mismatched ground and airborne operations. This is often complicated by the complex operations model they adopt (AERO.com, 2018).

Additionally, the performance of world economy over the last decade has shaped the airline industry in a tremendous way. After the 2008 Global economic crisis, companies struggled realigning their businesses with the new reality. Faced with the dwindling market share due to stiff competition from start ups and the escalating fuel price, a number of companies undertook stringent measures such as downsizing so as to maintain sustainability in performance. According to Stalnaker, Uzman and Taylor (2016) the airline industry in US collectively made a 1.3% operating loss in the year 2000. However, due to structural and business reforms, the industry made a comeback of 15.2% in 2013 and has since continued to grow. Similarly, in the Middle East region, airline companies such as Qatar Airlines have surprisingly performed amid the global airline challenges to

Implementation of a Point-to-Point Network Model

Airline efficiency mostly comprises the flight efficiency and on-ground service efficiency. These two are interdependent and collectively they contribute to either worst or best performance in terms of quality of service or consequently the business performance. For example, delays arise as a result of inefficient booking and flight management system. The company will have to implement the most effective online booking system that matches with the flight management system. Since this is a startup company, it is expected that the passenger processing volume will modest but certainly it will increase over the given period hence the operations and the systems will have to be improved in a continuous fashion to meet the growing expectation and needs from passengers.

Based on the two factors discussed above, the airline selection is undertaken and the following is the criterion applied to arrive at the choice:

Aircraft

CRJ 1000

A320

Seat capacity

90

170

Time to operate

1 BH

1BH

Annual rent (USD)

1000000.00

2500000.00

Fuel cost (USD/BH)

1500

2500

Total crew cost(USD/BH)

400

604

Maintenance (USD/BH)

558

400

Landing charge

700

1400


Based on the running cost, the A 320 is more expensive to operate than CRJ 1000 as shown in table 2 at least in the short term. However, suppose I compare the ratios of revenue to cost for both airlines:

Expected Revenue for CRJ 1000: 90 x 0.076x200000= $ 1 368 000

 Expected Revenue for A320: 170 x0.076x 200000= $ 2 584 000

The ratios: A320:  2 584 000/2504904 = 1.03157

CRJ: 1 368 000/1003158 = 1.3636

This implies that it is cheaper to operate the CRJ airline than the A 320. However the marginal unit difference in profitability is a mere (1.3636-1.03157) = 0.33302. In fact, this can also be achieved by the A 320 airline given the cost reduction and optimization techniques that will be undertaken. Besides, based on the projected traffic volumes that are escalating, selection of A 320 will not only meet the midterm needs of the customer but will extend in the long term period and that needs to be accommodated. That is, with CRJ 100 there is a great possibility of attaining breakeven point earlier but afterwards, the profits will stagnate. On the other hand, the break even is likely to take longer however due to low maintenance cost of the A 320 jet, the profit margins are certainly going to grow tremendously. This is actually in line with the company’s goal of vigorous expansion to include international travels.

TOTAL ANNUAL COST

CRJ 1000

A320

Rent

1000000

2500000

Fuel

1500

2500

Crew cost

400

604

Maintenance

558

400

Landing

700

1400

TOTAL

1003158

2504904

Figure 1: Passenger Traffic in Asia (courtesy of AAPA (2011)

In planning for fleet size and capacity over the next decade, the following tenets of airline performance growth will be considered:

  • Total Market Traffic

Growth Plan for Fleet Size and Capacity over the Next Decade

The global airline traffic is expected to grow courtesy of increased air travels as jet oil price has remained averagely stable. The market volatility normally spirals out of control due to the global economic performance. However, interestingly,  in the US the domestic air travel industry has grown more than the international networks. This was explained as being so due to the increased threat of global terrorism and the favorable domestic markets that encouraged investments in the private sector more than at international scale. Notably, after the 2011 attack, the US aviation industry tremendously changed and consequently affected the world economy (Doganis, 2009). This was further complicated by the Iraqi war which contributed immensely to skyrocketing fuel prices. However, in the long run, based on the global economics projection, total market traffic is expected to further grow by at least 1.5% per annum

  • Forecasted traffic growth

This is directly related to total market traffic. In this case, it expected that traffic will grow at the an average rate of 3.7% to double by 2035. In fact demand for airline travels will see more pressure being piled on the existing infrastructure. This then will force further growth in the airline infrastructure. Currently, the sustainable growth in terms of implementation of more efficient airlines will cause it to be a major factor in the growth plan. This will then mean that companies will no longer worry about losses due to inefficient fuels as technology develops further to boost the jet engine performance. It is estimated that a total of 7 billion air travelers will be available by the year 2035. Due to improved engine performance, the amount of carbon foot prints generated by the airline industry will also drastically reduce hence contributing to the green economy. 

  • Potential competition

Being a startup company, it is expected the 1st year revenues will not be high as competition is still stiff. But with a robust marketing plan that the company will adopt, this is expected to rise steadily to 25% by the end of the 10th year. The company, as mentioned earlier, will build more networks, alliances and partnerships. In fact, benchmarking is to be undertaken from the giant company: Qatar airlines. At the onset, the company will strive to fit in the domestic market portfolio. However, once performance is stabilized towards the end of the 7th year, the company will certainly go international with a total network coverage of 38.

  • Cargo traffic

Conclusion

This is also expected to grow consequently the nature of cargo transport will also shift such as volume of more perishable goods are likely to be airlifted . Due to faster and more efficient airlines expected in the industry, growth of cargo traffic is expected to grow tremendously. Therefore, to meet this demand, the company accommodated this element in its long term fleet plan where a steady increase in cargo flight is to be undertaken. However, as pointed out by Doganis (2011), this sector is expected to grow based in such indicators as origin, commodity, service level and the international market performance.

There are normally two basic models currently being used in the airline industry, namely: Hub and spoke and Point-to-point airline. The point to point airline provides a simple routing network that is often suitable for midsized companies flying over short distances, typically city to city or nearby countries. The hub and spoke was designed to cater for large commercial air travels, such that the spokes represent the many destinations within the flight network from a single departure point. Grouping this in the international airspace would give a very complex network web. However, it should be noted that most companies utilize more than one model but they are often distinct in implementation. The P2P model supports the domestic air travels.

As a startup company, the best model would be the point to point as it is simple to operate and is more efficient for small airline company. In fact, in this case, the company will have to begin its operations between the two cities that are 700km a part. Besides, this is in line with the chosen aircraft A320 designed for average flight sessions.

However, as the airline expands its territories, it would be prudent to embed the hub and spoke model in the long term plan. For instance, according to the proposed network projections, by the 10th year, the company hopes to expand to about 61 more destinations. This will be a present a significant challenge in the expansion plan should the growth expectations not accommodated in the plan.

Additionally, the flight frequency will increase proportionately to the growth in network such that the passengers can have a perfect match between their preferred destinations and the preferred fleet model. At the beginning, the company will purchase and maintain a sizeable fleet of 4 and this is expected to grow to 30 by the 10th year. Meanwhile, the fleet will be constituted of a common model A320. Furthermore, to boost network growth, the company will enter into strategic and business alliances and partnerships. It should be noted that the fleet plan will be revised annually to align with the dynamic global aviation realities. For example, it is expected that the jet fuel cost will continue to behave in a cyclic manner in the next decade as it did in the last decade.

Lastly, in this the selected network model, if successfully implemented will see the company deliver first class services at moderate rates while boosting its profitability within the 1st half of its 10 yr plan (that is by the end of 5th year).

Table 1: Master Fleet Plan

CRITICAL ELEMENTS

1st year

2nd

3rd

4th

5th

6th

7th

8th

9th

10th

AGP(%)

Network expansion

10

13

16

20

25

31

38

47

58

71

23

Fleet size

4

5

8

13

15

19

22

25

28

30

13

Economy

3

3

4

7

7

8

8

9

9

10

Business class

0

1

2

3

3

4

5

6

7

8

Cargo

1

1

1

2

3

4

4

4

5

5

Charted airline

0

0

1

1

2

2

3

4

4

4

Special executive

0

0

0

0

0

1

2

2

3

3

Passenger turnover

23

Passenger Revenue ($ per RPK)

0.076

_

_

_

_

_

_

_

_

0.107

Crew size

15

Standard annual use

1500

1700

2000

2200

2700

2700

3000

3000

3000

3000

1.5

Jet Models

A320

A320

A320

A320

A320

A320

A320

A320

A320

A320

Market share

2.5

3.7

4.9

16.1

17.5

21.4

22.3

23.6

24.67

25

13

Note: AGP-Annual Growth Projection

Conclusion

From the discussion, it can be noted that selection of the best airline is never one time trade off; it involves a series of decision making to appropriately choose between the options. However, this is normally made simple given the specific requirements of the company for which the airline will operate.

References

AERO.com. (2018). AERO - Effective Flight Plans Can Help Airlines Economize. [online] Available at: https://www.bing.com/cr?IG=5E0257A6D78744EFA0570C17DDB4D693&CID=2E2EB4E473966C44224EBF5B72396DD0&rd=1&h=Otwo2feMTR34Xmq8ZrC_ZDw04QKrkCU_Z72oTmBnnIs&v=1&r=http%3a%2f%2fwww.boeing.com%2fcommercial%2faeromagazine%2farticles%2fqtr_03_09%2farticle_08_1.html&p=DevEx,5205.1 [Accessed 27 Mar. 2018].

Berry, S. and Jia, P. (2010). Tracing the Woes: An Empirical Analysis of the Airline Industry. American Economic Journal: Microeconomics, 2(3), pp.1-43.

Bowen, J. (2009). Network Change, Deregulation, and Access in the Global Airline Industry*. Economic Geography, 78(4), pp.425-439.

Cook, G. and Goodwin, J. (2008). Airline Networks: A Comparison of Hub-and-Spoke and Point-to-Point Systems. Journal of Aviation/Aerospace Education & Research.

Doganis, R. (2009). The airline business. London [u.a.]: Routledge.

Henckels, E. (no year). Airline Industry Overview. Online Pdf.

Herdman, A. (2011).Future Growth of the Airline Industry: How will global competition drive change. Geneva.

Iata.org. (2018). IATA - IATA Forecasts Passenger Demand to Double Over 20 Years. [online] Available at: https://www.iata.org/pressroom/pr/Pages/2016-10-18-02.aspx [Accessed 28 Mar. 2018].

Skift. (2018). Analysis: Consolidation of U.S. Airline Industry Radically Reducing Competition. [online] Available at: https://skift.com/2015/07/14/analysis-consolidation-of-u-s-airline-industry-radically-reducing-competition/ [Accessed 28 Mar. 2018].

Vidovi?, A., Štimac, I. and Vince, D. (2013). DEVELOPMENT OF BUSINESS MODELS OF LOW-COST AIRLINES. International Journal for Traffic and Transport Engineering, 3(1), pp.69-81.

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