Introduction to Modelling

Applications in Airline Industry

Lecture 1
1st September 2019
 Assignment / Quiz

• Separate top 10 airline Groups by revenue, 2018, into the regions—North

America, Europe, Middle East, Asia-Pacific, Latin America and Africa
• Separate top 10 airline Groups by Operating Profits, 2018, into the regions—
North America, Europe, Middle East, Asia-Pacific, Latin America and Africa
 Assignment / Quiz

• Separate top 10 airline Groups by traffic (RPKs), 2018, into the regions—North
America, Europe, Middle East, Asia-Pacific, Latin America and Africa
• Separate top 10 airline Groups by Passenger numbers, 2018, into the regions—
North America, Europe, Middle East, Asia-Pacific, Latin America and Africa
• While airlines continue to enjoy historically high levels of collective profits, last year showed
that the tougher conditions were being felt by the industry.
• Figures collected by Cirium covering the 100 biggest airline groups by revenue in US dollar
terms show collective revenues rose around 8% to over $780 billion in 2018. These airlines
delivered a collective operating profit of just under $49 billion – around 14% lower than the
same carriers did in 2017. Net profits fell more than one-fifth to $27.7 billion
• A large portion of industry profits remain attributed to a relatively small group of leading
carriers. Seventeen airline groups recorded operating profits in excess of $1 billion and
collectively totaling $38.9 billion.
• That leaves 83 airlines or groups out of the 100 biggest by revenue between them delivering a
combined operating profit of about $10 billion. Of the 77 biggest groups for which operating
profits are so far available for 2018, just under one-quarter posted a loss.
• The number of airline groups posting high profit levels continues the trend evident during the
strong profits cycle airlines have enjoyed since recovering from the financial crisis a decade ago
• Restructuring, consolidation, a largely benign environment and – in the latter years,
at least – lower fuel costs have helped airlines enjoy an unprecedented run of
profits. This has gone beyond previous economic cycles.
• Fuel costs, however, turned during 2018. Even though a sharp fall in the final quarter
helped airlines enjoy stronger profits than they would have expected as the summer
ended, there were clear signs in 2018 of profits coming under pressure.
• That was evident even among the groups that still delivered the bulk of the industry
profit last year. In 2017 there were 20 airline groups that delivered an operating
profit in excess of $1 billion. But Alaska Airlines, Air Canada and JetBlue all fell short
in 2018.
• And those 17 airline groups that did pass the $1 billion mark delivered combined
operating profits of over $41 billion – around $2.5 billion more than they did in
2018.
• The sharpest fall in profits came among North American carriers, largely reflecting
the impact of higher oil prices. The relative lack of fuel hedging among carriers in the
region means they more immediately feel the impact of major changes in the oil
price.
• North American carriers remain the most profitable. Five of the eight most
profitable airline groups are from North America and delivered $16.5 billion
operating profit between them.
• But there is more balance between the leading operators, with five coming from
North America and Europe, six from Asia-Pacific and one from the Middle East.
• Profits among leading Asia-Pacific airline groups largely remained stable in 2018 –
driven by the three big Chinese carrier groups, the Japanese big two of ANA and
Japan Airlines, as well as Qantas.
 Assignment /Quize

• List the regions profit-wise—above $ 1 billion— in the order of highest to the

lowest, year-wise from 2009-2018
• The big three carrier groups account for much of the European profits – with a
particularly strong year for IAG. While all three groups have developing interests in
the low-cost segment, the bulk of the profits are still delivered through network
operations – notably British Airways, KLM and Lufthansa.
• The recovery of its home market has aided further growth at Turkish Airlines, and
while Ryanair profits took a hit last year, the carrier still recorded profits in excess of
$1 billion for a fifth consecutive year.
• Although its operating profits fell by one-quarter amid more challenging conditions,
Emirates still produced a group profit almost $1.1 billion in 2018 - though at an
airline level, this fell to just over $700 million.
• A further sign of the tougher conditions taking hold of the industry in 2018 is the
greater portion of groups posting losses. There were 17 carriers in the red – out of
the 77 for which operating figures are available – while only seven posted such
losses in 2017.
 LOW-COST FEELS PINCH
• Revenues rose by around 10% among leading low-cost operators in 2018, but
profitability also suffered in this sector
• Data covering 36 low-cost carriers that feature within the 100 biggest operators by
revenue – either in their own right or as subsidiaries of larger groups – shows the
segment's carriers accounting for around $112 billion in 2018. That compares with
almost $102 billion the previous year.
• That increase is roughly in line with the 10% climb in passenger numbers among leading
low-cost carriers in 2018. The data, covering 37 operators, accounts for 1.13 billion
passengers – around 30% of passengers carried by operators within the 100 biggest
airlines by RPKs.
• Collective operator profits, which are available for 33 of these carriers, totalled $8.2
billion last year. That compares with $11.8 billion in 2017. Net profits almost halved from
just under $10 billion to a little over $5 billion in 2018
USA
Ireland
UK
Brazil
Australia
USA
Hungry
China
USA
Malaysia
 LOW-COST FEELS PINCH
• Southwest Airlines remains the biggest low-cost operator by all three financial
measures, and while its profit levels slipped, it still delivered $3.2 billion in
operating profits.
• Ryanair is the second-largest budget operator, but its operating profits slipped by
40% to a little under $1.2 billion in 2018. Despite increasing passenger numbers
by 9% to over 142 million for the year ending March 2019 – including traffic from
its Lauda subsidiary – yield pressure and higher costs ate into its profits. It is one
of only two low-cost carriers to generate profits in excess of $1 billion, though.
 LOW-COST FEELS PINCH
• JetBlue had in 2017 posted net profits of $1 billion, but its profits were hard hit in
2018 by rising fuel costs – and it continues to implement a company-wide cost-
cutting programme that it unveiled almost three years ago.
• EasyJet, the third largest low-cost operator, lifted its profits after a strong year.
That included a 10% jump in passenger numbers during its financial year running
to October, which in part reflects its launch of operations at the start of 2018 at
Berlin Tegel after acquiring former Air Berlin assets.
 LOW-COST FEELS PINCH
• It was generally a tougher year for Europe's low-cost operators, however – one in
which Icelandic carrier Wow Air ultimately collapsed. Norwegian continued to
struggle to translate its rapid expansion into profit. Similarly, Eurowings’
(Subsidiary of Lufthansa) moves to expand in the gap left by Air Berlin and Niki,
amid rival competitive pressure in these markets from the likes of EasyJet and
Ryanair's Lauda unit, have had an impact on the profitability of all three
operators.
 LOW-COST FEELS PINCH
• Both Norwegian and, more recently, Eurowings have begun measures aimed at
improving profitability, revamping their respective networks.
• India is another market where low-cost carrier profitability has been hit. Again,
this reflected a combination of intense competition and higher fuel costs, but was
allied to currency pressure in India. Even the country's largest and most
successful operator, Indigo, slipped to a pre-tax loss – its first such of the kind
since 2011.
• This tough environment has not stopped Indigo – and other Indian budget
players – from expansion, which is further accelerated by their efforts to exploit
the grounding of Jet Airways. Indigo alone increased its traffic by one-quarter in
the 2018 calendar year
 IATA sees profits squeezed further in 2019 as cost and
trade concerns mount
• There is a view that for some airlines the grounding of the Boeing 737 Max has
provided a timely way to reduce capacity just when they have needed to.
• Certainly overcapacity has exacerbated the tougher environment in some markets,
evident in quarterly results in Europe and parts of Asia.
• But there are wider pressures which are contributing to a squeeze on airline profits,
and which prompted IATA to cut is industry outlook for 2019 by a fifth to $28 billion
during its AGM in Seoul at the start of June.
• That represents a $7.5 billion reduction on its previous outlook of six months ago –
the largest revision in absolute terms to an IATA outlook since it moved from
quarterly to half-yearly forecasts in 2013.
 IATA sees profits squeezed further in 2019 as cost and
trade concerns mount
• Rather than anticipating a small uptick in industry profits for 2019, IATA now foresees
sector profits slipping from $30 billion in 2018 (a figure restated from $32.3 billion)
• A net profit of $28 billion still compares favourably to airlines' historic returns. But it
means 2019 is set to be the least profitable year for airlines since 2014.
• "Under current circumstances, the great achievement of the industry creating value
for investors with normal levels of profitability is at risk," notes de Juniac. "Airlines
will still create value for investors in 2019 with above cost-of-capital returns, but only
just."
Key to the change in fortunes is higher than anticipated oil prices and the impact of weak international trade on
demand, particularly for air cargo.
IATA had expected a slight easing in fuel cost pressure – after a big rise in 2018 – as helping to lift profits. But it
now assumes the average barrel price of Crude oil to be $70 rather than $65, almost at the same level as in 2018.
 Trading Places
• On the revenue side, weak international trade is hitting demand and this has crept into passenger
picture. IATA projects passenger traffic rising 5% this year. While this is still steady growth, it would be
the slowest pace for a decade.
• More critically impacted, however, is air cargo. IATA expects volumes to be flat this year – ending a
run of six consecutive years of growth.
• This is behind the cut of more than $4 billion from IATA's profit expectations for Asia-Pacific carriers –
the region most reliant on the air cargo business..
• "Airlines have seen their financial positions squeezed by higher costs for the past 18 months, and I
think that is going to carry on for the rest of the year," says IATA chief economist Brian Pearce.
• While Pearce says IATA does not see a recession this year, he acknowledges that the new challenge
airlines have been facing over the past year is an inability to recover the higher costs.
• "Unit revenues had been keeping pace, more or less, with unit costs. But that ability has diminished
quite rapidly [since mid-2018] and that is what is leading to this squeeze on airline profitability,
 Assignment

• Separate the given 70 Airline groups region wise—Asia-Pacific, North America,

Latin America, Europe, Middle East, & Africa—along with their group members
• Identify Low-cost airlines within the 70 groups and their parent airlines / country
• List the airlines which posted net losses in 2018, along with the countries / airline
group they belong to.
 Assignment / Quiz

• Segregate airline groups region-wise

• Identify and list low cost carriers along with parent group and / country.
• List the airlines having less than 80% load factor region wise.
Pakistani Airline Industry
 Domestic Airlines
(PIA)
• Pakistan International Airlines can trace its origins to the days when Pakistan had
not yet come into existence following the end of the British Raj and the Partition
of India. Orient Airways was registered in Kolkata (then known as Calcutta) on 23
October 1946. In February 1947, the airline bought three Douglas DC-3 aircraft
and obtained a licence to fly in May of the same year. It was the first and only
Muslim owned airline in the British Raj and flew from 1947 to 1955
• However, due to sustained losses being suffered by the airline, the Government
of Pakistan proposed that Orient Airways merge with a new national airline. On
11 March 1955, Orient Airways merged with the government's proposed airline,
becoming Pakistan International Airlines Corporation
 Domestic Airlines
(PIA)
• Pakistan International Airlines can trace its origins to the days when Pakistan had
not yet come into existence following the end of the British Raj and the Partition
of India. Orient Airways was registered in Kolkata (then known as Calcutta) on 23
October 1946. In February 1947, the airline bought three Douglas DC-3 aircraft
and obtained a licence to fly in May of the same year. It was the first and only
Muslim owned airline in the British Raj and flew from 1947 to 1955
• However, due to sustained losses being suffered by the airline, the Government
of Pakistan proposed that Orient Airways merge with a new national airline. On
11 March 1955, Orient Airways merged with the government's proposed airline,
becoming Pakistan International Airlines Corporation
 Domestic Airlines
(PIA)
• PIA enjoyed absolute monopoly on domestic routes until 1992, allowing PIA to pass on
cost of inefficiency to the consumers. Ticket prices were so high that only elite section of
the society could afford air travel. Other travelers were either government servants or
corporate business executives.
• The government deregulated domestic airline industry in 1992, allowing private airlines
to compete PIA on price and quality. Several airline licenses were issued in the following
eight years—Shaheen Air, Aero Asia, Bhoja Air, Raji Aviation, Hajveri Airlines and Safe Air.
Only Shaheen Air, Aero Asia and Bhoja Air could survive for more than 10 years. Aero
Asia shut down its operations in 2006, Bhoja Air kept operating intermittently before
closing in 2012, and Shaheen Air stopped flying in 2018. Indus Air another domestic
airline operated for about an year or so before ceasing operations in 2014. At present
there are only two private airlines—Airblue and Serene Air.
 Domestic Airlines
(PIA)
• Domestic market fares fell under competitive pressure and PIA started to suffer
losses. However, PIA cross subsidized domestic losses from international market
profits, because private airlines’ international operations remained severely
restricted until 2005, despite liberal bilateral arrangements with Gulf countries.
• Restrictive Bilateral Air Services Agreements with foreign countries until 1998,
helped PIA restrict foreign airlines’ operations mostly to Karachi only. Liberalized
bilateral arrangements with other countries allowed their airlines access to
northern gateways, eliminating PIA’s monopoly to northern part of Pakistan. In
2005 domestic airlines were allowed to freely operate on international routes
within bilateral framework. Private airlines primarily remained focused on UAE
(Dubai). Open skies with Saudi Arabia became effective in 2012. This was a big
blow to PIA’s monopolistic operations to a very attractive market.
PIA’s losses for the year 2016 are Rs.45.43 billion ,2017 Rs. 45 billion, and about Rs.60
billion in 2018—though officially undeclared yet. PIA’s accumulated losses are about Rs 400
billion. The company is technically bankrupt with a negative equity of about Rs 340 billion
 Domestic Traffic ‘Market Share’

• PIA’s domestic market share is the highest among all three airlines—about 61% in
2017-18. It competes private airlines on trunk routes but has monopoly on socio-
economic routes
• With the exist of Shaheen Airways last year (2018), the remaining three airlines,
including PIA, are minting money—an operating profit of upto 150%. The pie-
chart below reflects market shar of four domestic airlines before SAI’s closure.
This means that PIA’s market share must have shot upto about 67%
Domestic Airlines' Market Share 2017-18
8.0%

12.9%

60.7% 18.5%

Airblue Shaheen Air Serene Air PIA

 International Traffic ‘Market Share’

• At present, the most attractive market for two private airlines is Saudia route.
Both PIA and Airblue compete Saudi Arabian Airline, Flynas and Saudi-gulf airlines
directly and almost nine other airlines indirectly—Emirates, Qatar Airways, Etihad
Airways, Gulf Air, Oman Air, Air Arabia, Flydubai, and Salam Air. Serene Air is
happy in local market and does not seem to venture into international market.
 12 Years Domestic Traffic Volume Growth

• The above chart shows that only 3.3% of our Population of 222 million travelled
by air on domestic routes in 2017-18.
• This is in sharp contrast to our neighboring country whose domestic traffic grew
from 51 million in 2006 to 243 million in 2018 @ 13.91% 9 (CAGR). This means
that 28% of their population of 1,100 million travelled by, air in 2017-18.
 Annual Domestic Passenger Growth Rate
15.0%

CAGR 1.6%
10.0%
9.2% 9.5%
8.1%
6.4%
5.0% 5.5%
3.0% 3.2%
1.9%
0.0%

-5.0%
-5.4%
-7.8%
-10.0%

-12.1%
-15.0%
2007-08 2008-09 2009-10 2010-11 2012-11 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Series1 9.2% -5.4% 8.1% 5.5% -7.8% 3.0% 6.4% -12.1% 9.5% 3.2% 1.9%
 12 Years Combined Annual Growth Rate (CAGR)

• CAGR of passengers, for a period of last 12 years, is just 1.6% on domestic sector.
• Like every cloud has a silver lining, the improvement in homeland security has
given a big boost to domestic tourism. The domestic tourist traffic has jump
started in 2018 showing an exponential growth of tourists to norther areas of
Pakistan. The number of tourists to these destinations increased from just a few
thousands in 2017 to about 2.5 million in 2018—albeit by road because missing
air link.
• Major Pakistani airlines are not much interested to venture into this niche market
 International Passenger Traffic

• Unlike domestic passenger traffic, Compound Annual Growth Rate (CAGR) on

international sector has an impressive figure of 7% for a period of last 12 years.
International Passenger Traffic almost doubled—about 6.7 million to 15.2 million
during this period.
• International passenger traffic in our neighboring country grew from 22 million to
65 million during the same period at @ 9.36% (CAGR).
 Annual Int'l Passenger Traffic Growth Rate
20.0%

18.0%
17.4%
CAGR 7%
16.0%

14.0%

12.0% 12.1%
11.3% 11.3%
10.0%

8.0% 7.7% 7.6%

6.0%
5.4%
4.0% 4.2% 4.0%
2.9%
2.0% 1.9%
0.0% 0.0%
2006-07 2007-08 2008-09 2009-10 2010-11 2012-11 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Series1 12.1% 5.4% 4.2% 1.9% 11.3% 4.0% 11.3% 7.7% 17.4% 7.6% 2.9%
 Annual System Passenger Traffic Grwoth Rate
16.0%
14.7%
14.0%
CAGR 4.8%
12.0%
10.7%
10.0%
9.3%
8.0%

6.0% 5.9% 6.1%

4.0%
3.5% 3.6%
2.5% 2.6%
2.0%

0.0% 0.0% 0.4%

-0.2%

-2.0%
2006-07 2007-08 2008-09 2009-10 2010-11 2012-11 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Series1 10.7% 0.4% 5.9% 3.5% 2.5% 3.6% 9.3% -0.2% 14.7% 6.1% 2.6%
 Pakistan’s Total Traffic Growth Trend

• In our neighboring country the system traffic (Dom + Int’l) grew from 73 million to
309 million during the same period at a CAGR of 12.72%. This translates into 28%
of their population of 1,100 million population.
• Assuming that both domestic and international tourist industry will grow at a
faster pace now, it is expected that overall traffic growths rate will double in the
next three to five years
 The overall passenger traffic
2016 2036 CAGR growth of 4.8% CAGR—
domestic and International
China 579 1500 4.9% passengers put together—does
US 699 1100 2.3% not look bad, when compared
India 141 478 6.3% with other markets

Indonesia 120 355 5.6% IATA estimates CAGR of 3.5%

Turkey 77 196 4.8% between 2016 and 2036. Other
markets
Asia-Pacific 4.8%
Other emerging markets are
expected to experience much
higher growth rates than global
average in 20 years
71
PAF-KIET – Department of Aviation Management
 72
PAF-KIET – Department of Aviation Management
Thank You

73
Book Chapter 1
 Different types of airline brands find its way
in the highly competitive airline market
serving customers with diverse travel
preferences. It is almost impossible to come
across two identical airlines

There are several characteristics based on

Brands of Airlines which airlines are defined and classified

These characteristics play a significant role in

the undertaking of the airline’s network
planning and scheduling
 Generally, airlines could be classified and
branded based on:
• schedule availability (chartered and scheduled
airlines),
• size and domain of service (e.g. regional, national, and
major),
• business model (legacy, low cost, and ultralow cost),
Brands of Airlines • ownership (publicly, privately, and mixed owned),
• network structure (hub and spoke and point to point),
• locality and network coverage (domestic and
international),
• and transport service type (cargo only and passenger
and cargo airlines)

A combination of these characteristics

defines the brand of the airline
 • Charter airlines provide on demand and as
needed service for a group of customers (or
cargo) that share travel itinerary including
origin, destination, and date of travel
• Thus, these airlines do not provide a published
Schedule Availability flight schedule with pricing and seat availability
(Charter Airlines) • Any party that is interested in a customized
travel service contacts the charter airline (or its
agents) and agrees on initiating the flight
• The agreement usually involves deciding on
date of travel, origin, destination, pricing, and
number of seats required
Thomas Cook Named World's Best Charter Airline

homas Cook has

racked up an
impressive 62
awards in five
years. (photo via
Flickr/Rob
Hodgkins)
 • Charter airlines focus on serving customers with
customized needs such as urgent or time
sensitive travel, privacy, and need of flexibility
• Charter airlines are also used in peak travel
Schedule Availability periods or during special events, when demand
(Charter Airlines) temporarily increases above available capacity
• Example of these events include pilgrimage
seasons (e.g. pilgrimage in Saudi Arabia), major
sports champions and games, tour operations
for tourism, etc
Group Air Charter
Boarding a large group charter regional airliner
 • Some charter airlines may also follow a set
schedule, with a certain number of flights per
week to desirable tourist destinations
Schedule Availability • Even in this case, individual passengers do not
book their tickets for the flight; they are sold in
(Charter Airlines) bulk to a tour company or a travel agency
• The departure time of these flights are usually
flexible based on the preferences of the service
requesters
 • The scheduled airlines plan and publish flight
schedules on regular basis ahead of the
scheduled dates of operation
• The published schedule involves detailed
information on served markets, departure and
arrival times of each flight, available seat capacity,
pricing and associated ticket restrictions, and fees
Schedule Airlines • The flight schedule is usually published a few
months before its implementation
• During this period, which is also known as the
booking horizon, prospective travelers can shop
among the available itineraries offered by all
airlines and select (book) the one that meets their
travel preferences
 • The published schedule might be subject to
several minor modifications and amendments
made by the airline during the booking horizon
• The seat availability is updated when a new
booking is materialized on any itinerary. Pricing
and ticket restriction information are subject to
Schedule Airlines more frequent updates, as airlines respond to
changes in demand and competition with other
airlines
• The published schedule is made available to
customers and travel agents. Thus, customers can
buy their tickets directly from the airline or
through travel agents
 • The term major airlines is used in the United States to
define large airlines that generate an annual operating
revenue of one billion dollars or more
• These airlines typically have a large network that
Size and Domain covers most of the major destinations in the domestic
of Service market with reasonable service frequency
(Major Airlines) • Major airlines usually connect its hubs and major
destinations to other international major destinations.
Most major airlines operate a mixed fleet of small ,
½….. medium , and large sized airplanes
• The term major airlines is used in the United States to
define large airlines that generate an annual operating
revenue of one billion dollars or more
 • These airlines typically have a large network that
covers most of the major destinations in the
Size and Domain domestic market with reasonable service
frequency
of Service
(Major Airlines) • Major airlines usually connect its hubs and major
destinations to other international major
2/2…. destinations
• Most major airlines operate a mixed fleet of small
, medium , and large sized airplanes
The Size
and Domain
of Service