AIRLINE OPERATIONS ▪ Boeing concludes that 60% to 80% of air

MANAGEMENT travel growth can be attributed to economic

growth
MIDTERMS WEEK 2
▪ The remaining 20% to 40% of air travel
growth that is not directly associated with
FORECASTING AIR TRAVEL DEMAND
GDP growth but from other factors, primarily
the fare level and service provided.
▪ Forecasts of demand are the basis for
▪ As airline service typically increases and
planning and essential to manufacturers,
fares fall as markets are liberalized.
airlines, airports, and most other aviation-
▪ Macro-level forecasting is essential for
related firms.
manufacturers' new aircraft decisions.
▪ Long-term forecasts of air transport demand
▪ Airbus Industries' flagship A-380 is an
are most important for aircraft manufacturers
interesting example.
because of the lead time and expense
▪ The A-380 is a new class of very large aircraft
involved in developing and marketing new
(VLA).
aircraft.
▪ Capable of seating up to 850 passengers in an
▪ New aircraft will likely be in service for 30
all-coach configuration, although 550 or
or more years
fewer seats with three cabins is more
▪ Airports and airlines also depend on long-
common
range forecasts accommodate passenger and
freight demand.
 How do manufacturers develop forecasts for
market demand for the next 20 or more years?
FOUR WAYS OF FORECASTING AIR
o Statistics
TRAVEL DEMAND
o Demographics
1. Macro-forecasting
o Per Capita Income
2. Route-Level Micro-forecasting
o History route
3. Passenger Segmentation
▪ The annual Airbus and Boeing forecasts
4. Variation in Demand
include outlines of their methodologies.
▪ Airbus titles its forecast the Global Market
MACRO-FORECASTING
Forecast, whereas Boeing tags its forecast
the Current Market Outlook
▪ Forecast of an economy as a whole
▪ The forecasts are based on a range of
▪ The development of long-range forecasts of
methodologies. The development and sales
air travel demand usually begins with
history of early similar products are helpful.
estimates of GDP
▪ Boeing and Airbus know every airline with
▪ GDP (Gross Domestic Product) is the
market value of all final goods and services the potential to purchase a new aircraft type.
▪ Many of these airlines can be surveyed. There
produced in a country during a given period
are relatively few airlines with a need for an
of time, usually one year.
airplane the size of the A-380
▪ As per capita income increases, people tend
to spend proportionally more on air travel.
▪ Air travel is also more volatile than GDP and
highly cyclical
▪ Manufacturers, airlines, and others in the
aviation industry use these forecasts of GDP
as one independent variable in deriving
estimates of future air travel demand.
▪ Other important factors driving air travel
demand are population and per capita income
growth. Population and income growth are
reflected in GDP.
 ROUTE-LEVEL
MICRO-FORECASTING
▪ Whether evaluating potential new routes or
estimating growth in the existing network
airlines incorporate the factors that drive
global and regional demand but also many
additional factors that influence the demand
on individual routes such as:
o Historical traffic,
o Types of passengers,
o Competition
o Prevailing fares
▪ With an estimate of total demand at the route
level, the airline must then estimate the share
of that demand, or market share, it can obtain
versus that of competing airlines
▪ Market shares - How many will book with
the airline
▪ Historical data on the number of passengers
and fares in a given market are usually the
starting point for demand estimation and
route planning.
▪ For its own existing markets, the airline will
have internal data. External data on passenger
traffic and fares are available from several
sources.
▪ The Marketing Information Data Transfer
(MIDT) is a database that captures booking
information from the major global
distribution systems (GDS).
▪ Actual sales data, in contrast to booking data,
are available for transactions settled through
the Airlines Reporting Corporation and the
Billing and Settlement Plan (BSP).
▪ Sales through airline websites and
reservations centers are not captured by any
of these databases, the data represent only a
portion of the total market
▪ Data from each of these sources are
processed and sold by several vendors, many
of whom do provide estimates of total traffic
and sales.
▪ An airline considering a new route without
existing service will have little or no
historical traffic data on which to base its
forecasts might rely on market research and
expert opinion, but demand can be at least
crudely estimated using the populations of
the two cities and the distance between them.
▪ Forecast Demand is a starting point for
airline planning, but it is subject to
considerable uncertainty and error. A
common error has been the failure to
differentiate between underlying demand and
past traffic growth that was stimulated by
declining yield (low fares).
▪ Falling prices will increase traffic, especially
leisure travel. Airlines have frequently
overestimated traffic growth and ordered new
aircraft to meet the expected demand. When
traffic failed to materialize, ticket prices fell,
which stimulated new traffic.
PASSENGER SEGMENTATION
▪ Demand for air travel is derived from the
purpose of travel
▪ Passengers do not fly for the enjoyment of
flight but because they need to be in another
location for some reason, be it for business or
pleasure.
▪ Some markets attract mostly business
passengers, whereas others are dominated by
leisure travelers
▪ Depending on the reason for travel,
passengers have different wants and needs.
The airline must tailor its product and pricing
to meet the desires of its passengers.
Two types of airline passengers:
o Business
o Leisure
BUSINESS PASSENGER
▪ Business passengers, may be classified as
lower and higher end.
▪ High-end business travelers are less price
sensitive and often book flights near the
departure date,
▪ Lower-end business passengers display
more price sensitivity.
▪ Passengers traveling for business tend to
value the following:
o Flight frequency
o Non-stop flights
o Choice of cabin classes(first, business,
economy),
o In-flight service(amenities, food)
o Flexibility of flight
o Refundable fare
LEISURE PASSENGERS
▪ Leisure passengers are universally divided
into those who are visiting friends and
relatives (VFR) and those on vacation or
holiday (Leisure).
▪ VFR PASSENGERS usually have some
flexibility in travel plans, book far in
advance, and often select the airline offering
the lowest price. Flight frequency and
amenities are less important
▪ LEISURE PASSENGERS display most of
the same wants as VFR, but are usually
traveling on vacation or holiday, so the
destination appeal is an important
consideration, and their travel days may be
restricted by the days they are off work
▪ Some passengers may also be traveling for
business one week and for leisure the next, so
the passenger wants and needs are tied to the
purpose of the trip, not the individual.
▪ Passenger wants and needs also vary with the
length of the travel.
▪ Many passengers will sacrifice cabin
amenities, such as seat and legroom, for a
lower price on a short segment of less than
three hours, but will demand a higher-quality
service on longer flights.
VARIATION IN DEMAND
▪ The airline planner tries to match the demand
in each market with capacity, flight
frequency, and aircraft size.
▪ If an airline does not provide enough capacity
to meet periods of peak demand, it risks
losing passengers to other airlines, a loss
known in industry jargon as SPILL.
▪ Unlike manufactured goods, airline capacity
cannot be stored until demand is higher.
▪ Too much capacity for the existing demand
results in empty seats known as SPOIL.
▪ The demand in each market varies
substantially by hour of the day, day of the
week, and season, and with the business or
economic cycle.
▪ Business travelers favor morning departures
and late afternoon or earlier evening return
flights.
▪ In a predominately business market, a flight
departing at 7 a.m. may face heavy demand.
▪ However, when the aircraft operating this
flight reaches its destination, little demand
may exist for the next departure at, say, 10 am
▪ Business travelers also travel more frequently
on Mondays and Fridays.
▪ Both VFR and leisure passengers are less
sensitive to the timing of flights, but often
wish to leave on a Saturday and return on
Sunday.
▪ As a result of these desires, demand mid-
week on Tuesdays and Wednesdays is
typically low.
▪ Demand also varies by season of the year
▪ Directional demand introduces another
complication. - This
is easiest to visualize with special events such
as big sporting attractions. Prior to the event,
demand will be high into the host city and
strong leaving the city after the event. The
result is that with sufficient capacity for the
high demand, flights in the opposite direction
will be wanting.
▪ The need for business travel also varies with
the business economic environment;
- when business is good, managers and sales
staff travel extensively.
- When the economy softens or even contracts,
business travel is curtailed
▪ Demand is further complicated by:
- Natural disasters
- political upheavals like war
- economic crises
- all of which are unpredictable.
▪ The impact of natural disasters from
typhoons, tsunamis, and volcanoes is usually
regional rather than worldwide.
▪ Traffic falls because of a lack of demand, as
well as the reduction in supply as airlines
reduce flights.