Ebook AERO2307 Airline Operations Management

Airline Operations Management
Glenn Baxter
School of Engineering
Airline Operations Management
Author
Dr Glenn Baxter, Aviation and Aerospace Engineering, School of Engineering
This eBook was developed to support the delivery of Airline Operations Management for Aviation and Aerospace
Engineering at RMIT University.
Cover: Flight Real, 2007 Reproduced in accordance with the Wikimedia Creative Commons Attribution License,
<http://upload.wikimedia.org/wikipedia/commons/0/06/A320_EC-HTD.jpg>.
Published by SEH College,

RMIT University, Melbourne,
Victoria, Australia 3000.
 RMIT University.
Project Development Team
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whatsoever without the prior written permission of the publisher.
Published in Australia, 2016

Table of Contents
THE GLOBAL AIRLINE INDUSTRY ............................................................................................. 3

Introduction ................................................................................................................................................................................. 3
A Passenger and Air Cargo Business .......................................................................................................................................... 7
Demand for Airline Services ....................................................................................................................................................... 8
The Nature of the Airline Product ............................................................................................................................................. 13
A Brief history of the Global Airline Industry .......................................................................................................................... 14
The Structure of the Global Air Transport Industry .................................................................................................................. 22
STARTING AN AIRLINE AND AIRLINE ECONOMICS AND FINANCE..................................... 27

Starting an Airline - The Operational Arena ............................................................................................................................. 27
Airline Industry Regulatory Issues ............................................................................................................................................ 35
Airline Business Plans ............................................................................................................................................................... 38
Airline Financing, Risk and Insurance ...................................................................................................................................... 39
Airline Performance Metrics ..................................................................................................................................................... 44
Airline Revenues ....................................................................................................................................................................... 47
Structure of Airline Costs .......................................................................................................................................................... 50
Airline Cost Allocation Methodology ....................................................................................................................................... 59
Economies of Scale, Scope and Density in Airline Operations ................................................................................................. 59
The Influences of Airline Pricing Decisions ............................................................................................................................. 61
Airline Profitability ................................................................................................................................................................... 62
AIRCRAFT ECONOMICS AND PERFORMANCE EVALUATION .............................................. 69

Aircraft Performance ................................................................................................................................................................. 69
Airline Fuel Conservation and Hedging .................................................................................................................................... 77
Airline Breakeven Load Factors ................................................................................................................................................ 82
Aircraft Productivity ................................................................................................................................................................. 85
AIRLINE PRODUCT PLANNING AND DESIGN ......................................................................... 90

Key Airline Product Features .................................................................................................................................................... 92
Schedule-Based Product Features ............................................................................................................................................ 92
Comfort and Convenience-Based Airline Product Features ...................................................................................................... 92
STRATEGIC AIRLINE ALLIANCES ......................................................................................... 102

The Types of Alliances between Airlines .............................................................................................................................. 101
The Major Global Airline Alliance Groupings .................................................................................................................... 10606
Rationale for Forming Global Airline Alliances ................................................................................................................. 10808
Alliance Members Internal Management Issues ..................................................................................................................... 114
AIRLINE CAPACITY MANAGEMENT AND PASSENGER AIRCRAFT FLEET PLANNING ... 118
Airline Capacity Management ................................................................................................................................................. 118
Airline Fleet Planning ............................................................................................................................................................. 121
Aircraft Evaluation .................................................................................................................................................................. 130
1
AIRLINE FLIGHT SCHEDULING AND SLOT MANAGEMENT ................................................ 142
Mission of Airline Flight Scheduling ...................................................................................................................................... 142
The Airline Schedule Development Process ........................................................................................................................... 144
Airline Resource Feasibility Constraints ............................................................................................................................... 1477
Windows of Airline Flight Scheduling Opportunities ............................................................................................................. 151
Airport Slot Coordination ...................................................................................................................................................... 1588
AIRLINE PASSENGER PRICING AND DISTRIBUTION .......................................................... 163

The Objectives of Airline Passenger Pricing ........................................................................................................................... 163
The Structure of Airline Passenger Air Fares .......................................................................................................................... 164
Airline Passenger Pricing and Demand ................................................................................................................................... 169
The Airline Passenger Pricing Process .................................................................................................................................... 171
Airline Passenger Pricing Economics ..................................................................................................................................... 177
Airline Air Fares and Product Distribution ............................................................................................................................. 180
AIRLINE PASSENGER REVENUE MANAGEMENT ................................................................ 189

Objectives of Airline Passenger Revenue Management .......................................................................................................... 189
Approaches to Airline Passenger Revenue Management ........................................................................................................ 195
Elements of Airline Passenger Revenue Management Systems .............................................................................................. 203
AIRLINE PASSENGER FORECASTING .................................................................................. 208

The Purpose of Preparing Forecasts ........................................................................................................................................ 208
Forecasting Types, Models and Accuracy ............................................................................................................................... 208
Forecasting Approaches and Methodologies ......................................................................................................................... 2100
AIRLINE PASSENGER RESEARCH ........................................................................................ 216

The Objectives of Market Research ........................................................................................................................................ 216
The Steps in Marketing Research ............................................................................................................................................ 218
The Significance (if any) of the Gompertz Curve ................................................................................................................. 2211
Airline Passenger Market Segmentation ................................................................................................................................. 222
Airline Passenger Travel Purchase Motivation ....................................................................................................................... 224
Airline Market Research ......................................................................................................................................................... 225
2
The Global Airline Industry
Introduction
The global air transport industry provides services to virtually every country in the world,
and has played an integral part in the creation of the world economy. The global airline
industry is itself a major economic force, in terms of both its own operations as well as its
impacts on other related industries such as aircraft manufacturing and tourism (Air Transport
Action Group 2014; Belobaba 2016).
The air transport industry growth has been underpinned by major technological innovations
such as the introduction of jet aircraft for commercial use in the 1950s (Belobaba 2016). This
was followed by the introduction of wide-body aircraft, for example, the Boeing B747, in the
1970s (Wensveen 2011). At the same time, airlines were heavily regulated throughout the
world. This stringent regulation of the industry created an environment in which
technological innovation and advances and government policy took precedence over airline
profitability and competition. This situation changed following the economic deregulation of
the airline industry, commencing with the US market in 1978. Following deregulation, cost
efficiency, operating profitability and competitive behaviour have become the key issues
confronting airline management. Airline deregulation or, at least, ‘liberalisation’’, has now
spread quite beyond the US to virtually all parts of the industrialised world. The deregulation
and liberalisation of air travel markets has influenced both domestic travel within each
country and, perhaps more importantly, has contributed to the continuing evolution of what
is now the highly competitive global airline industry (Belobaba 2016).
Today, the global aviation industry is composed of around 1,400 commercial airlines, 4,130
airports and 173 air navigation services providers (ANSPs). In 2015, the world’s airlines
carried 3.5 billion (domestic and international) passengers (International Civil Aviation
Organization 2015b).
The growth of world air travel has averaged around 5 per cent per annum over the past three
decades. However, there have been substantial yearly fluctuations in growth rates and traffic
volumes as a result of changing economic conditions and to differences in economic growth
rates in different regions of the world (Belobaba 2016). This is because the level of activity in
an air travel market is closely related to the level of activity in the countries that the market
serves. Higher levels of economic activity will lead to greater demand for air transport
services. This is because of the increased business requirements and generally higher
spending by consumers. Importantly, the annual rate of growth in airline passenger traffic is
closely related to the annual rate of global economic growth (Bureau of Transport and
Communication Economics 1994).
The annual growth rates in passenger air traffic, as measured by revenue passenger
kilometres performed (RPKs), are shown in Figure 1.1, for the period 1980-2014. The principal
driver of air travel demand is economic growth (Doganis 2009; Wensveen 2011). However, as
can be seen in Figure 1.1, there has been substantial variability in airline passenger traffic
growth in different years. World airline passenger traffic declined in 1991 as a result of the
first gulf war, and the subsequent fuel crisis and economic recession that followed. Following
the tragic events of 9/11 in the US, world airline traffic fell again in 2001 (Belobaba 2016). The
adverse impact of the 2008-2009 global financial crisis (GFC) on world airline traffic can also
be seen in Figure 1.1, with a very marked decrease in traffic in 2008 and 2009. Since 2011,
world airline traffic has once again continued its growth trajectory (Figure 1.1).
3
Figure 1.1. The cyclical nature of world airline traffic growth: 1980-2014., Source: Adapted from Air
Transport Association of America (2013); International Civil Aviation Organization (2008, 2009,
2010b, 2011, 2012, 2013, 2014, 2015a), International Monetary Fund (2015).
The growth in world air cargo traffic, as measured by freight tonne kilometres (FTKs)
performed, by world region is presented in Figure 1.2. The growth in air freight traffic in the
Asia-Pacific region has surged over the past 30 years and the region has led the world since
1992. Also, as can be seen in Figure 1.2, the Middle East has shown strong growth in FTKs
since 2009. The Middle East is now viewed as one of the world’s most important markets
(Belobaba 2016).
Figure 1.2. Growth in total world air cargo traffic by world regions: 2007-2014., Source: International
Civil Aviation Organization (2008, 2009, 2010b, 2011, 2012, 2013, 2014, 2015a).
4
The economic significance of the airline industry and, in turn, its ramifications for so many
other major industries makes the volatility of airline profits and their dependence upon
favourable economic conditions a serious and international concern for the industry and their
key stakeholders. This has been especially true since the inception of deregulation of the
industry, as stable profits and/or government assistance was the normal practice rather than
the exception for most international airlines prior to the 1980s. As shown in Figure 1.3, the
total net profits for airlines have been very cyclical and variable in nature over the period
2001-2014. Figure 1.4 shows that the world’s airlines net profits plunged over the period
2000-2006 due to the financial crisis, but improved again in 2006 and 2007. Airline profits then
declined substantially in 2008 and 2009 due to the downturn in demand as a result of the
global financial crisis (GFC) (Belobaba 2016). During the period 2010-2014, the airlines have
once again returned to positive net profits.
Figure 1.3. Global commercial airline net profits: 2001-2014., Source: Source: International Civil
Aviation Organization (2008, 2009, 2010b, 2011, 2012, 2013, 2014, 2015a).
Deregulation and Liberalisation

International air transport operates within the framework of the 1944 Chicago Convention on
International Civil Aviation, and is traditionally regulated through a complex network of
bilateral and multilateral inter-government agreements and International Civil Aviation
Organization (ICAO) and International Air Transport Association (IATA) rules (Oum & Yu
1998; Wensveen 2011). However, liberalisation, deregulation, privatization and the influence
of globalisation have significantly influenced the international air transport industry in recent
years (Fritz 2005).
Since the deregulation of the airline industry in the United States in 1978, the pressure on
other governments to reduce their involvement with the economics of airline competition has
intensified all around the world. The deregulation of the US airline industry has been
considered a success by many other governments, as the overall benefits for air travellers
arising from deregulation have been clearly demonstrated. While the US domestic air travel
market grew at rates higher than that prior to deregulation, average real air fares have
declined significantly following deregulation and today remain at around 50 per cent of the
1978 levels. Successful new entrants and the low cost carriers (LCCs) have had a profound
impact on airline pricing practices as well as on the travelling public’s current expectation of
low-priced air travel (Belobaba 2016).
5
At the same time, deregulation of the US air travel markets has had some negative impacts.
The pressure on airlines to cut costs, combined with increased profit volatility, mergers and
bankruptcies of several large airlines, led to periodic job losses and reduced employee wages.
Moreover, the benefits arising from deregulation have not been equally enjoyed by all air
travellers. Residents of some small US cities saw changes in the pattern of air services
provided to their communities, as small regional jets (Figure 1.4) replaced previously
subsidised air services. Furthermore, despite a substantial decrease in the average real air fare
paid for travel in US domestic markets, the disparity between the highest and lowest air fares
offered by airlines has increased, irritating business traveller who have been forced to pay
higher air fares (United States General Accounting Office 1993).
Figure 1.4. American Eagle Embraer CRJ701ER regional jet., Source: Bri YYZ (20111).
The management strategies and practices of airlines were also fundamentally changed by the
increased competition experienced in the industry. Cost management and productivity
improvements became central goals of the US airlines due to the shift to market competition.
Non-US based airlines have been forced more recently to confront the competitive realities of
the changing market place and the challenges that they produce as well. A by-product of the
quest by airlines to lower costs and increase productivity has been the pursuit of economies
of scale2 by both the US and non-US based airlines. Historically, internal growth and/or
mergers or acquisitions were the principal ways in which airlines hoped to take advantage of
economies of scale. With growing government concerns about the airline industry
consolidation, further mergers became the focus of much greater government scrutiny
(Belobaba 2016). For example, Virgin Australia’s acquisition of Perth-based Skywest Airlines
required the approval of both the Australian Competition and Consumer Commission
(ACCC) and the Foreign Investment Review Board (FIRB) (Battersby 2013).
1
Reproduced as per the Wikimedia Creative Commons Attribution License,
<http://upload.wikimedia.org/wikipedia/commons/8/83/American_Eagle.jpg>.
2 Economies of scale can be defined as aspects of increasing scale that result in falling long-run unit costs (Wilkinson
2005).
6
Furthermore, with regulations or legislation restricting foreign ownership of airlines still
enforced in many countries, complete mergers between airlines of different countries still
continue to confront legal barriers (Belobaba 2016, p. 6). In response to this airlines have
expanded their route networks and have also achieved some economies of scale through
partnerships and membership of one of the three major global alliances. The global airline
alliances are designed to offer a standardised set of products and to project a unified
marketing images to potential consumers (Doganis 2006).
A Passenger and Air Cargo Business

Air transportation is a bi-polar industry. The carriages of persons, goods or property or postal
mail are all facets encompassed within the definition of air transportation (Kane 1996). Air
transportation is in reality compromised of two major segments, each having a symbiotic
relationship with each other. On the one hand, air transportation is the transport of
passengers; or on the other, the carriage of air cargo. Each segment of the industry has its own
unique characteristics, yet despite their unique characteristics the two are difficult to consider
in isolation (Dempsey & Gesell 1997, p. 387). Most airlines carry both passengers and air
cargo, although passenger movements are of much greater relative importance to the majority
of airline firms (Doganis 2009).
In 2014, around 25.2 per cent of the world’s scheduled airline output was concerned with the
carriage of air cargo and mail, though the postal mail share of total output was quite small.
Passenger traffic accounted for the remainder. On international routes, where distances are
greater and air transport becomes more competitive, then air cargo comes into its own,
generating around 32 per cent of the world’s airlines tonne kilometres performed in 2014
(International Civil Aviation Organization 2015a). Furthermore, this share has tended to
increase in recent times. Conversely, the air cargo mode share is very much smaller on
domestic short haul services (Doganis 2009). This is because the surface-based transport
modes – particularly road and rail – are generally more competitive in domestic freight
markets (Dempsey & Gesell 1997; Doganis 2009).
However, these global figures mask the considerable variations between air cargo-carrying
airlines. A few large airlines, such as FedEx and United Parcel Service (UPS) in the USA or
Cargolux Airlines in Luxembourg (Figure 1.5), are exclusively concerned with the carriage of
air cargo. Many airlines are combination carriers, that is, they transport both passengers and
cargo on their international services (many airlines also carry cargo on their domestic
passenger services) in their passenger aircraft lower deck belly-holds. But the level of
involvement of airlines with the transportation of air cargo varies substantially. For some
combination airlines such as Cathay Pacific, Korean Air or Singapore Airlines (SIA), air cargo
represents about half or in some instances well over half of their total international
production in terms of revenue tonne kilometres, that is traffic carried. These airlines
invariably bolster their supply of air cargo capacity by operating fleets of freighter aircraft.
Interestingly, the major US airlines, American, Delta and United, tend to be at the lower end
of the scale with air cargo accounting for around around 25 per cent of their total output. This
is largely due to the loss of both the US international and domestic market to the integrators;
that is the all-cargo door-to-door carriers such as FedEx, UPS and DHL, or to foreign airlines
such as Korean Air and Lufthansa (Doganis 2009, p. 22).
7
Figure 1.5. Cargolux Boeing B747-8 freighter aircraft., Source: Raf-yyc (20123).
Over the airline industry as a whole, the carriage of air cargo traffic is a significant factor,
both in terms of the amount of productive resources absorbed by it and in terms of its
contribution to overall airline revenues and profitability (Doganis 2009). Importantly, air
cargo revenues often make the difference between profit and loss for airline profitability
(Abeyratne 2004). For an individual airline the split of its activities between passengers and
air cargo clearly influences both its marketing policies and strategies, and hence, the structure
of its overall revenues. When comparing airlines’ performance it is important to take into
account the degree to which and the way in which the airline is involved in air cargo
transportation. This impacts many aspects of their operations, and their labour productivity,
together with their cost base and revenue performance (Doganis 2009, pp. 22-23).
Demand for Airline Services

The demand for airline services can be distinguished by two principal market segments:
business travellers – those flying for business related purposes (who demand frequent flights to
a wide range of destinations, require quality service, and are willing to pay a price premium
for these services) and leisure travellers. Leisure travellers generally require the lowest prices
and are less concerned with the quality of services provided or the number of destinations
served by the airline (Doganis 2009). The leisure traveller segment consists of several distinct
segments: visiting friends and relatives (VFR), vacation travellers, and special event travellers
3
<http://upload.wikimedia.org/wikipedia/commons/0/09/LX-VCC_Boeing_747-8F_%287272161952%29.jpg>.
8
(Shaw 2011). In recent years there has been an increasing heterogeneity of passengers as
business travellers are also utilising offers intended for the leisure travel market segment
Business travellers
(Huse & Evangelho 2007; Mason 2001).
A consumer who must travel on a certain date or at a certain time is considered to have
inelastic demand4 as they must travel so they will pay the market fare. A consumer who is
price sensitive and working within a set budget is considered to be elastic, as a price
reduction will prompt an increase in consumption (Dempsey & Gesell 1997). Leisure
travellers aim to optimise the utility – or satisfaction – derived from air travel and from the
associated consumption of vacation experiences, subject to a given income or budget
constraint. Characteristics of leisure travel demand include air travel costs, relative price of
other goods, income and socioeconomic characteristics. Business travel demand is
determined by a range of factors including travel costs, relative price of complementary
production input factors and a firm’s output levels (Brons et al. 2002). As a result, leisure and
business travellers are likely to respond differently to any changes in the socioeconomic
factors affecting air travel demand (Hooper 1993).
In general, the demand for business travel is generally less sensitive to changes in air fares
than the demand for leisure travel (Li 2010). This is because many goods and services
compete against leisure travel for obtaining a share of a consumer’s discretionary budget
(Dwyer et al. 2010). Leisure travel by air is a substitute for the way people can spend their
disposable income. In short-haul air travel markets, surface transport modes compete with
the air mode for passengers. The low cost carriers (LCCs) have captured market share away
from these modes in recent times through the provision of very low fares. However, should
relative prices increase due to reduced competition, or perhaps new environmental taxes, the
air transportation mode could lose traffic back to the surface-based transport modes. Leisure
time is also limited and the amount of free time people have to take a vacation cannot always
be increased thereby placing a possible barrier on the growth of leisure travel (Mason 2007).
As the LCCs in Europe, such as, Ryanair (Figure 1.6), have developed into sizeable operations
there is evidence that suggests that leisure travellers are taking more frequent, shorter-
duration vacations (Graham 2006). However, the increase in multiple holidays is limited by
the amount of annual vacation time that people can take (Mason 2007). Leisure travel also
competes with other ways that people may spend their disposable income. In recent years
home computers, high definition televisions and ipods have also increased in popularity and
vie for leisure travellers’ disposable consumption (Graham 2000). Hence, even though the
number of perfect substitutes for air travel may not be overwhelming, leisure travel,
compared to business travel, has some additional substitutes inside as well as external of the
transport sector and therefore tends to be more sensitive to changes in air fares, implying
higher absolute price elasticity (Brons et al. 2002).
4 A demand elasticity of less than one in absolute value reflects inelastic or price sensitive demand, where the
proportional change in quantity demanded is less than the proportional change in the price. An elasticity of greater
than one in absolute value reflects elastic or price sensitive demand, that is, the proportional change in the quantity
demanded will be greater than the proportional change in the price (Vasigh et al. 2013).
9
Figure 1.6. Ryanair Boeing B737-800 aircraft., Source: Zvereva (20165).
Furthermore, long-term and short-term air transport market cycles play a profound role on
airline economics. The demand for air transport has historically been cyclical in nature, with
greater or lesser demand depending on the time of the day, day of the week, season, and on
broader market fluctuations, year to year (Doganis 2009; O’Connor 2001). For instance, leisure
traffic typically peaks in the summer months (Shaw 2011), thereby enabling airlines to
achieve higher load factors. Business traffic, for example, normally peaks between 0700-0900
hours on weekday mornings, and between 4:00 to 6:00PM on weekday afternoons.
In addition, the airline industry is highly sensitive to fluctuations to economic cycles. Hence, a
strong relationship exists between the overall level of economic activity and air transport
demand in a market. Furthermore, regions and air routes that serve areas with high levels of
economic activity tend to experience higher levels of air travel demand (Bureau of Transport
& Communication Economics 1994; Oum & Yu 1998).
In addition to economic growth (GDP), the following factors significantly influence the
demand for air transportation all around` the world:
 Air fares: are another important driver of air travel demand. Declining air fares,
which indicate cheaper air fares, will tend to result in greater levels of air travel
demand (Hanlon 2007; Holloway 2008; Vasigh et al. 2013).
 Competitive position: the demand for air travel is also dependent on its current and
future ability to compete against alternative modes of transport. In addition,
technological advances in aircraft design and in other alternative transport modes,
together with advances in industrial and marketing processes, can create
transportation demands that may not have previously existed (Young & Wells, 2011).
5Reproduced in accordance with the Wikimedia Creative Commons Attribution License,

<https://upload.wikimedia.org/wikipedia/commons/d/d2/Ryanair%2C_EI-DYM%2C_Boeing_737-
8AS_%2824245829634%29.jpg >.
10
 Demography: the size and structure of an area’s population and its potential growth
rate influence the demand for air travel. The current population together with its
changing age and educational and occupational distributions can provide a guide to
the potential size of the aviation market. Demographic factors influence both the
incoming traffic from other states, regions, or cities, and the potential outbound
traffic generated by the local or regional populations concerned.
 Deregulation - starting with the US domestic air market in the late 1970s, followed in
the 1980s by the European Union (effectively completed in the late 1990s), with other
regions deregulating gradually (Air Transport Action Group 2011, p. 4).
 Disposable personal income per capita: the disposable income per head of capita is a
good indicator of a nation’s average living standards and the financial ability to
travel. High levels of personal disposable income provide a strong foundation for
greater levels of consumer expenditure, particularly on air travel (Young & Wells
2011). Air travel for non-business related purposes tends to be discretionary and
funded by disposable income. Higher incomes tend to be associated with greater
levels of disposable income and, hence, this tends to create higher levels of non-
business travel by the air mode (McKnight 2010).
 Distance between cities: the longer the distances’, or the greater the difficulty of
travelling by surface modes – due to ocean or mountains, for example – the more
likely the traveller will select the air mode for their travel requirements (McKnight
2010, p. 27)
 Crude oil and jet fuel prices: sharp increases in world oil prices have an important
influence on air travel demand. In addition to the adverse influence on the world
economy, increases in oil prices greatly increase the cost of aviation fuel prices and
hence air fares and air cargo rates (International Civil Aviation Organization 2001).
 Geographical factors: the geographic distribution and distances between populations
and centres of commerce have a distinct influence on the type and level of air
transportation services demanded (Gesell 1993). The physical characteristics of the
land and climatic factors are also significant factors. In some instances, alternative
transport modes might not be available or economically feasible (Young & Wells
2011).
 Political factors: the approval of new air services agreements (ASAs) which may
enable greater levels of services together with other government actions, such as the
imposition of taxes and other fees influences air travel demand. Also, certain
countries restrict their citizen’s travel, particularly to other countries, and also that of
incoming foreigners. Instability, violence, and war tend to depress national
economies and raise fear, for bothy residents and visitors alike. Both of these
situations dampen air travel demand (McKnight 2010, p. 27).
 Sociological factors: the trend towards a more urbanised society, the increased
mobility of the population, rising educational levels, and shorter working hours with
the greater leisure time are also major drivers of air travel demand (Wensveen 2011).
The Travel Decision

In general, people do not just travel simply for the intrinsic pleasure of travelling. Travel is
typically undertaken in conjunction with the consumption of other goods and services, such
as attending a conference or having a vacation (Doganis 2009; Shaw 2011). The demand for air
transport services is a derived demand, since it is the demand for business meetings or a
vacation or a traveller(s) attending a conference that determines the demand for transport
services (Bureau of Transport & Communication Economics 1994, p. 19; Holloway 2008).
In considering the demand for air travel from this perspective, a number of decisions that
each consumer makes when purchasing or considering their air travel requirements can be
distinguished. Given that the consumer decides to undertake some travel, either for business
11
or leisure purposes, the consumer must select the best mode of travel, which for international
passengers is predominantly air travel, though there are exceptions, for instance, some travel
in Europe where high speed rail services is a close substitute. If air travel is selected as the
travellers preferred transport mode, then the consumer must select between airlines. As we
have noted previously, for the leisure traveller, own income, price of travel, and quality of
service are key factors considered in their choice of airline. For the business traveller, the
demand for travel will depend upon business requirements, quality of service, particularly
flight frequencies and schedule convenience, and price (Bureau of Transport &
Communication Economics 1994, p. 19; Doganis 2009; Shaw 2011).
In general, international airlines affect the aggregate air transport demand through their air
fare prices and frequencies of services provided. Lower prices on a particular route will often
attract new passengers and divert some passengers from other routes. Increased flight
frequencies may make air transport more attractive for previously diverted or frustrated
demand. In air travel markets where the competition between airlines is already strong the
means of lowering air fares or prices will be through lower production costs. Given the
rigidity of airline costs in the short run, which often restricts the extent to which airlines can
lower their air fares, airlines typically compete against their rivals in order to capture market
share (Bureau of Transport & Communication Economics 1994). Airlines also employ other
tools, such as frequent flyer programs (FFPs) and advertising and promotions, to influence
consumers and increase their market share (Hanlon 2007; Wensveen 2011).
FFPs are considered an important influence on consumer’s choice of airline and,
consequently, these schemes are increasingly being used to create customer loyalty and
increase patronage (Doganis 2009; Proussalologlou & Koppelman 1995). Where the purchaser
of the air travel is the same as the individual or party who accrue the frequent flyer rewards
or benefits, the FFP can be viewed as a form of price discount. The price discount, however,
only becomes available after the customer has met specific conditions or criteria, such as
flying a certain number of miles or number of flights or accrued sufficient status credits
(Bureau of Transport & Communication Economics 1994).
The objective of FFP’s is to increase an airline’s seats sales – either through generating repeat
business among loyal customers, or, if the program is powerful enough, to attract new
customers (O’Toole 2000). However, FFP’s are now much more than just a promotional
program. Today, FFPs have become an important airline choice factor for passengers
(Doganis 2009) with airline FFPs significantly influencing passengers’ choice of airlines
(Proussalologlou & Koppelman 1995). Essentially, these programmes offer airline passengers
upgrades and free tickets if they fly a certain amount of miles on a given airline. In utilising
this strategy, airline passengers are provided with a price incentive (along with other
benefits) to consolidate much or all of their business with a single airline (Long & Schiffman
2000).
Led mostly by the credit card partnerships, the most successful airline FFP’s are now largely
self-funding or indeed profit centres in their own right (Dempsey & Gesell 1997; O’Toole
2000). However, competition between airlines, through their FFPs, to increase passenger
patronage either by offering more frequent flyer rewards or by making it easier for their FFP
members to qualify for the rewards, can reduce the profitability of a FFP, which may impact
on some of the anticipated gains to the airline (Bureau of Transport & Communication
Economics 1994, p. 21).
Product attributes, such as price and service quality, are not the only factors considered
important by a traveller when selecting airline for their travel requirements. The cost of
obtaining information about services provided by different airlines may also influence the
traveller’s choice of airline. Travellers prefer lower information costs and therefore tend to
prefer airlines operating large route networks due to the ease of obtaining information about
the airlines fares and their flight schedules (Bureau of Transport & Communication
Economics 1994).
12
In addition, airlines that have a large route network have an advantage because passengers
generally prefer to travel with a single airline throughout their journey. The convenience of a
‘one-stop-shop’ for purchasing air travel, as well as the perceived benefits in associated
services, such as convenient scheduling of connecting flights, means consumers prefer flying
with airlines with larger route networks rather than having to fly with two or more airlines
(Bureau of Transport & Communication Economics 1994, p. 21).
Advertising is also an important element in the promotional strategies and tools of an airline
(Shaw 2011). When an airline is emphasizing its service aspects in its advertising campaign, it
is endeavouring to increase its share of available traffic by enticing people away from
competitor airlines. However, sometimes a lot of the airline advertising does little to promote
air travel as such but rather concentrates on winning or retaining a share of the available air
travel market. Nevertheless, the airline’s advertising of a new lowered air fare or an air fare
initiative most probably does more to promote air travel than the extensive advertising of
service amenities. And much airline advertising – reflecting the intermediate good nature of
the airline product – promotes air travel by presenting very appetizing pictures and
descriptions of tourist meccas. The latter may result in the problem that the expensive
advertising by one airline may potentially cause people to travel to the attractive point by
competing airlines or by bus, train or private car (O’Connor 2001, p. 109).
A major objective of promotion is to let customers in target markets know that the airline’s
services are available at the right time, place, and price. This calls for the selection of the right
and most effective blend of promotional activities – the combination that best suits the
particular market (Wensveen 2011, p. 283).
The Nature of the Airline Product

As far as passenger services are concerned, there are several contrasting aspects to the airline
product6 (Alamdari 1999). First, the passenger’s air journey is not regarded as an end in itself
but rather it is part of a requirement to travel for business or leisure or some other-related
travel purpose (Doganis 2009). The air journey is an element of other products or services
(Holloway 2008). A number of very important considerations follow.
As noted earlier, the demand for airline passenger services is a derived demand (Vasigh et al.
2013). It is reliant on the demand for these other products and services. Consequently, airlines
have confronted strong pressure to expand vertically into other areas of the travel industry,
such as hotels, car rentals and tours organisation, in order to achieve greater control over the
total travel product. There is also a direct impact on airline marketing strategies in the sense
that these have frequently focused on selling and promoting the total product, whether it be a
business trip or vacation travel, rather than selling a specific airline. In newspaper, magazine
and television advertisements, for example, airlines try to stimulate potential passenger’s
interest in a particular destination or a specific type of trip (Doganis 2002, p. 24).
On the other hand, airlines have to confront the reality that one airline seat is very similar to
another airline’s seat and from the passengers perspective there is in many cases little
perceived difference between one aircraft and another (Doganis 2009, p. 23). Accordingly,
while air journeys may only be one part of a variety of heterogeneous products and services –
with differing market structures – the air service component is relatively homogenous
(Holloway 2008). Even when airlines endeavour to differentiate their products and services,
competitive and economic factors and the fact that they are operating similar aircraft types
often result in them offering very similar products/services (Doganis 2009).
6
Airline Product Planning and Design is presented in Topic 4.
13
Air New Zealand Boeing B777-300ER aircraft Pacific Economy Class Cabin., Source: Capper (20117).
The consequences of the homogenous nature of the airline product are twofold. First, in
competitive markets it often forces airlines into making costly efforts to differentiate their
products and services from those of their rivals. This aim is achieved by being the first airline
to introduce a new aircraft type, by increasing their flight frequencies, or by spending more
on in-flight catering and ground services and on advertising. Furthermore, much of their
advertising is aimed at trying to convince passengers that the service and products that they
provide are appreciably better than those of their competitors, for example, more friendly
flight attendants or the better quality meals. As a result of the difficulty of substantiating
many claims related to quality of service, quality airlines often resort to competing on price,
which is tangible, and fare differences are demonstrable. Second, the homogenous nature of
the airline product facilitates the ease of entirely new airlines or the incursion of airlines on
existing routes relatively easy (Doganis 2009, p. 23).
A Brief history of the Global Airline Industry

The first ever engine powered manned aircraft took to the air around 110 years or so ago. It
was 17 December 1903. The flight lasted for just 12 seconds and flew for about 70 metres. At
the controls was Orville Wright. Whilst the first successful flight at Kitty Hawk, North
Carolina was all over by 10:30 am, it triumphantly marked the beginning of the aviation
industry. For the rest of the day Orville and his brother Wilbur, took turns at powered flight.
They found the controls difficult to operate, however with their gliding experience behind
them, gained over the last four seasons on the Kitty Hawk sand dunes, they learned quickly.
On the last flight of the day, Wilbur Wright stayed aloft for nearly one minute and covered
260 metres (Dixon-Engel & Jackson 2010).
This first day of powered, controlled, manned flight is symbolic of the air transport industry –
great achievements in knowledge and know how in a relatively short time period.
The Wright brothers were always interested in transport – their first business venture was in
bicycles - they became expert lightweight engineers and started manufacturing their own
bicycles (Dixon-Engel & Jackson 2010).
7Reproduced as per the Wikimedia Creative Commons Attribution License,

<http://upload.wikimedia.org/wikipedia/commons/8/86/Air_New_Zealand_Pacific_Economy_777-
300ER_cabin.jpg>.
14
In 2007, the Airbus A380, an aircraft capable of carrying over 500 passengers, entered
commercial service with Singapore Airlines (Proctor et al. 2010). It operates non-stop sectors
lasting over 15 hours and traversing distances in excess of 12,000 km. Aviation certainly come
a long way from its humble beginnings.
The impact of World War II…..
War again spurred technical progress in aviation, most notably the rapid development of the
jet turbine during WWII. The Cold War further extended developments in aviation,
particularly pushing the bounds of aerodynamic design, speed, cabin pressurisation, and
operating ceilings. This military inspired developmental push, fuelled by multiple wars in
Asia and the Middle East where air power was pivotal, resulted in advancements for civil and
commercial air transport.
Again the end of World War II resulted in a glut of very cheap transport aircraft. Over 10,000
DC-3 had been manufactured during the last 3 years of WWII (Young & Young 2010). After
the end of World War II, US air force veterans were given special preference to lease of
purchase government surplus aircraft (Chiavi 2005). Many did, starting new airlines,
however the well established US carriers, which continued to fly and grow during the war
years soon brought an end to most new start-ups.
The Jet age…..
By the early 1950’s attitudes had changed. British Overseas Airways Corporation (BOAC) was
struggling financially and the British aircraft industry continued to lose ground against their
American counterparts. But in 1952 the first scheduled service in a jet powered aircraft
commenced on 2 May. It linked London to Johannesburg and was operated be a de Havilland
Comet I (Figure 1.7) (Groucott et al. 2004).
Figure 1.7. British Overseas Airways Corporation (BOAC) De Havilland Comet aircraft at London
Heathrow Airport., Source: Brein (20108).
8Reproduced as per the Wikimedia Creative Commons GNU Attribution License,

<http://upload.wikimedia.org/wikipedia/commons/1/14/Comet_4.jpg>.
15
A year later on 16 April 1953, British European Airways (BEA) operated a jet powered, British
designed and built, Vickers Viscount (Woodley 2006). The passenger reaction was
enthusiastic. Both aircraft were smooth and quiet and no other country had jet airliners of any
description. The age of jet travel had arrived! While Vickers manufactured over 430
Viscounts, the Comet, which had been ordered by BOAC, Pan American World Airways, Air
India, South African Airways (SAA) and others, suffered from a series of crashes. It was
cutting edge design for its day, but a number of faults, lead to its grounding (Hill 2005).
At the 1950 Farmborough Air Show, Boeing’s Chairman, William Allen, had seen the flying
display of the de Havilland Comet. While sceptics of jet travel at the time were many in
number, Boeing commenced work on aircraft that would eventually become the B707 (Figure
1.8). In March 1955 the USAF ordered 29 KC-135 tankers from Boeing. In October of the same
year, Pan American World Airways, which had cancelled its orders for Comets, ordered 20
B707’s, the civilian version of the KC-135 (Geels 2005). McDonnell Douglas had also been
developing a jet passenger aircraft and on the same day as ordering the twenty B707’s Pan
American ordered 25 McDonnell Douglas DC-8 aircraft (Wall 1980).
Figure 1.8. Egyptair Boeing B707 aircraft at Luqa Airport, Malta., Source: Nolan (19859).
Other carriers also ordered McDonnell Douglas DC-8’s, so Boeing redesigned its B707 aircraft
making it wider and longer and able to cross the Atlantic non-stop. Soon orders flowed from
carriers around the world and the Intercontinental 707, with a capacity of around 100
passengers, overtook the McDonnell Douglas DC-8 as the most popular jet aircraft of its time.
In 1959, Qantas was the first non-US carrier to take delivery of the Boeing B707, commencing
a long and beneficial association with Boeing on the development of new long range aircraft
(Proctor et al. 2010). The Boeing 707 did for the airlines of the world what the DC-3 had done
9
<http://upload.wikimedia.org/wikipedia/commons/2/2a/Egypt_Air_Boeing_707_in_Malta.jpg>.
16
in the 1930’s. Over three decades, more than 800 Boeing B707 jets were manufactured
(Breffort & Jouineau 2008).
After years of industry growth, the early 1960’s again saw airlines losing money. The
International Air Transport Association (IATA) and the International Civil Aviation
Organisation (ICAO) were both established in the 1940’s to develop and raise standards for
commercial aviation. However, at this time, aviation remained highly regulated, with fixed
air fares and conditions of travel (Wensveen 2011). Many airlines were state owned and
controlled, and most were subsidised. The rigours of the market place where comfortably
some distance away. Competition focused on high service standards and more lavish
surroundings. As jet travel had a certain cachet, carriers replaced their fleets with the new jet
aircraft. Up to this point there was really only one class of travel – First Class.
Affordable travel for all…..
The older aircraft that were discarded were often bought by Charter Operators. These carriers
could ‘circumvent’ many of the rules and regulations of the industry. They opened up a new
market segment – the economy traveller – many of who had never travelled by air before. As
the charter business flourished more and more destinations were opened, some being long
haul (Doganis 2002).
Scheduled carriers blamed charters for ‘capturing’ their business, however the economy
traveller was a new market. The scheduled carriers discovered that as they reduced fares
more people travelled and profitability improved. The push was then on for bigger planes,
and provided they could be filled, larger profits would follow.
In Europe, however, they continued with the notion that flying was ‘exclusive’. They
maintained regulated fares and rather than built bigger and bigger airliners, they focused on
building faster aircraft that would cater to the traditional First Class market.
In November 1962 France and Britain signed a treaty to jointly build a supersonic jetliner - the
Concorde (Figure 1.9). They estimated the cost at around 160 million pounds. Six months later
Pan American World Airways placed options for eight Concordes. This action prompted
President Kennedy to announce that US manufacturers would also design and built their own
Supersonic Transport (SST). As the Cold War was in full swing, the Russians also announced
the development of their own SST aircraft. On 2 March 1969, the first Concorde took to the
skies over Toulouse, France (Orlebar 2004.)
17
Figure 1.9. British Airways Concorde aircraft at London Heathrow Airport., Source: Pingstone
(200610).
At the same time the SST developments were progressing, in April 1966, Boeing’s Board gave
the go-ahead to the design and manufacture of the biggest aircraft ever – a 490 seater with
two full decks, one for passengers and one for cargo - the Boeing B747. What was more
impressive was the timetable – its first flight would be in 2 ½ years to mark the 65th
anniversary of the Wright Brothers first flight. The first aircraft rolled out on 30 September
1968, and the first flight on 9 February 1969 unfortunately missed the Wright Brothers 65th
anniversary (Yenne 2005).
Less than a year later on 22 January 1970, the first Boeing B747 service, operated by Pan
American World Airways (Figure 1.10), took off for London. The Boeing 747 aircraft
remained the largest in-service passenger aircraft and one of the most financially successful,
with over 1,200 versions built, until the first commercial flight of the Airbus A380-800 on 24
October 2007, operated by Singapore Airlines from Singapore to Sydney (Morgan &
Thompson 2008).
10
<http://upload.wikimedia.org/wikipedia/commons/5/5a/Concorde_g-boab_heathrow.jpg>.
18
Figure 1.10. Pan Am Boeing B747-100 aircraft at Zurich Airport., Source: Marmet (198511).
Supersonic services commenced on 21 January 1976 with simultaneous operations – British

Airways to Bahrain and Air France to Buenos Aires. The Concorde was initially barred for a
short period of time from US airspace due to noise concerns, however, the US aviation
industry remained hostile as it had been unable to develop its own SST due to funding cuts
(Orlebar 2004).
Only 16 Concordes were produced and production ceased in 1979 (Del Testa et al. 2004).
While a financial disaster (costing well over a billion pounds to develop and introduce), the
project however signified political success – European countries could work together on
complex projects, Europe’s aviation sector was revitalised and Europe remained in the
vanguard of technical progress. It also showed that if Europe was to effectively compete
against the US-based aircraft manufacturers they must work on a collaborative basis. In
September 1967 the German, French and British governments signed a memorandum of
understanding to jointly develop civil aircraft. In 1968 the Airbus A300 (Figure 1.11), was
unveiled, marking the resurgence of large-scale commercial aircraft manufacturing in Europe
(Endres 1999). For airlines this meant more competition and choice, however the success of
Airbus Industries has resulted in further consolidation in the US manufacturing sector. Today
Boeing remains the only major US commercial aircraft manufacturer.
11Reproduced as per the Wikimedia Creative Commons Attribution License,

<http://upload.wikimedia.org/wikipedia/commons/8/8f/Pan_Am_Boeing_747_at_Zurich_Airport_in_May_1985.j
pg>.
19
Figure 1.11. Air France Airbus A300B2-101 aircraft., Source: Piergiuliano Chesi (197612).
In the early 1970’s the price of fuel quadrupled. Up till then fuel was a small cost item for
most airlines. The result was another plunge in the profitability of the industry (Bureau of
Transport & Communication Economics 1994).
The impact of US deregulation and terrorism…..

As previously noted, in 1978 deregulation occurred in the world’s biggest aviation sector at
that time – the US domestic market. After six years the result was a substantial shake-out of
the industry and an increase in productivity of the surviving airlines. Deregulation basically
allowed any licensed US airline operator to fly any US domestic route they desired, and a
plethora of new operators entered the market at first. The airline industry proved no different
to any other industry following de-regulation, with many carriers failing to cope and survive
with the changing dynamics. The structure of US aviation also changed dramatically moving
from point-to-point network operations to the more cost effective ‘hub-and-spoke’ network
system (Doganis 2006; Wensveen 2011).
Step-by-step market liberalisation took place in Europe between 1983 and 1997 and is now
delivering the same level of market shakeout and productivity gains as was achieved in the
US. In contrast though, protective European governments continue to be reluctant to allow
their ‘national’ carriers to become the victims of such a shakeout in Europe and therefore
alliances/mergers dominate the aviation scene in this region. The merger in 2004 of Air
France and KLM Royal Dutch Airlines to form the world’s largest airline heralded the
beginning of rationalisation in Europe. Since that merger, in late 2005 Lufthansa German
Airlines was given European Commission permission to proceed with a buy-out of Swiss
International Air Lines (Doganis 2006).
Meanwhile the European Commission authorised state aid as a one-off measure to help
national carriers restructure during the transition to a liberalised single market (Dempsey
2004). The late 1990’s saw the introduction of a new concept to aviation, the strategic global
alliances. Airlines, restricted by government regulation, ownership and infrastructure issues,
came together in an attempt to enhance their revenues and reduce costs from their
participation in a strategic alliance. All of the world’s major carriers are now members of one
of the three major global alliances – STAR, SkyTeam or oneworld. Whilst difficulties remain
12
<http://upload.wikimedia.org/wikipedia/commons/6/67/Air_France_Airbus_A_300_F-BVGA.jpg>.
20
in delivering the benefits of these tie-ups, their membership continues to grow, as it is
generally seen that membership has significant advantages over ‘going-it-alone’ in an
increasingly hostile global aviation environment (Doganis 2006).
Another significant industry change was the advent of the low cost carriers (LCC)
phenomenon (Figure 1.12) (Doganis 2006; Vasigh et al. 2013). Coupled with the economic
downturn within the airline industry, particularly within the US, following the September 11,
2001 terrorist events prompted a move away from ‘hub-and-spoke’ operations back to point-to-
point (P2P) operations.
Figure 1.12. Jetstar Airways Airbus A321-232 landing at Kansai International Airport, Osaka.,
Source: Oved (201613).
The dramatic circumstances post 11 September 2001 however resulted in a number of major
European airlines collapsing, most noticeably Swissair and Sabena (Kincaid et al. 2012).
Nonetheless there has only been limited success in large-scale industry consolidation through
merger activity. For example, repeated attempts by British Airways (BA) to secure mergers
with Sabena and KLM failed, and BA’s foray into regional carrier ownership with the likes of
TAT and Deutsche BA was also costly and ended in the divestment of these carriers (Hanlon
2007).
So the air transport industry continues to evolve. Impacted greatly by external events beyond
the control of the industry and also bound, to a greater or lesser extent, by government
regulation and policy, some of which remains unchanged since the middle of the last century.
One thing is definite though, the air transport industry will remain a vital and growing
component of today’s global economy.
13
<https://upload.wikimedia.org/wikipedia/commons/e/e4/Jetstar_Japan%2C_A320-
200%2C_JA13JJ_%2824078218983%29.jpg >.
21
The Structure of the Global Air Transport Industry
The Air Transport industry includes those activities that are directly dependent on
transporting people and goods by air. This includes:
 The aviation sector – airports, airlines, general aviation, air navigation service
providers and those activities directly serving passengers or providing air freight
services: and
 The civil aerospace sector, which comprises the manufacture and maintenance of
aircraft systems, air frames, avionics and engines (International Civil Aviation
Organization 2010, p. 2).
Employment in the Global Air Transport Industry
It has been estimated that there around 58.1 million jobs in the global air transport industry.
The global air transport industry has 8.7 million direct jobs; airlines, air navigation service
providers (ANSPs) and airports directly employ around three million people and the civil
aerospace sector (manufacturer of aircraft systems, frames and engines) employs around 1.2
million people. In addition, an additional 4.6 million people are employed in other on-airport
positions (Air Transport Action Group, 2014).
There are a further 9.8 million indirect jobs generated through purchases of goods and
services from companies participating in the air transport industry supply chain. The air
transport industry employees also support an additional 4.6 million induced jobs through
spending (expenditure). The aviation industry also supports the global tourism industry. It
has been estimated that air transport industry-enabled tourism generates around 35 million
jobs around the world (Air Transport Action Group, 2014).
Aviation is also an extremely capital intensive business. As such, productivity per employee
is very high – three and a half times higher than the average for other sectors.
Coordination and Regulation of the Industry

Aviation is a highly regulated industry, which has resulted in one of the safest forms of mass
transportation. As early as 1944 the Chicago Convention on International Civil Aviation
(commonly known as the Chicago Convention) established principles for the safe and orderly
development of international civil aviation. The Convention formed the International Civil
Aviation Organisation (ICAO) which was charged with furthering the safety, security and
efficiency of international civil aviation. ICAO is a specialised agency of the United Nations
and focuses more on the technical aspects of the industry (Wensveen 2011).
The first airline industry representative body was formed in 1947. The International Air
Transport Association (IATA) was formed as the airline industry global trade organisation,
focusing on the more commercial aspects of the airline industry (Wensveen 2011). For over 70
years IATA has developed the industries commercial standards. Today IATA’s mission is to
represent, lead and serve the airline industry via the following:
 Representation: IATA aims to improve understanding of the air transport industry

among decision makers and increase awareness of the benefits that aviation brings to
national and global economies. Advocating for the interests of airlines across the
globe, IATA challenges unreasonable rules and charges, hold regulators and
governments to account, and strives for sensible regulation.
 Leadership: For nearly 70 years, IATA has developed global commercial standards
upon which the air transport industry is built. The organization’s aim is to assist
airlines through the simplification of processes and increasing passenger convenience
while at the same time reducing costs and improving efficiency.
22
 IATA also helps airlines to operate safely, securely, efficiently, and economically
under clearly defined rules. Professional support is provided by the association to all
industry stakeholders with a wide range of products and expert services
(International Air Transport Association 2016b).
IATA’s members comprise some 260 airlines, representing 83 per cent of international
scheduled air traffic (International Air Transport Association 2016a).
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Wensveen, JG 2011, Air transportation: a management perspective, 7th edn, Ashgate Publishing,
Farnham, UK.
Wilkinson, N 2005, Managerial economics: a problem-solving approach, Cambridge University
Press, Cambridge, UK.
Woodley, C 2006, The history of British European Airways: 1946-1972, Pen and Sword Books,
Barnsley, UK.
Yenne, B 2005, The story of the Boeing company, Zenith Press, Minneapolis, MN.
Young, SB & Wells, AT 2011, Airport planning and management, 6th edn, McGraw-Hill, New
York.
25
Young, WH & Young, NK 2010, World War II and the post-war years in America: A historical and
cultural encyclopaedia, ABC – CLIO Press, Santa Barbara, CA.
26
Starting an Airline and Airline Economics and
Finance
Starting an Airline - The Operational Arena
Domestic, International or Both?

One of the first questions that must be asked when establishing a new carrier will be: “in
which sector of the industry will the new carrier operate – domestic, international or a
combination of the two?”
One of the basic principles relating to aviation is that every State has complete and exclusive
sovereignty over the airspace above its territory. This means that for international operations,
permission for foreign airlines must be gained from that State for them to fly through its
airspace and to land at its airports (Doganis 2009; Wensveen 2011).
When it comes to domestic operations, only airlines that are ‘resident’ of that country can
operate air services within its borders. While this precludes foreign international airlines from
operating domestic services within Australia, local rules permit a purely domestic airline to
be set up in Australia, regardless of whether it is Australian or foreign owned (Holloway
2008; Ionides 2007). For example, Virgin Blue (now Virgin Australia), when it first
commenced operating as a new Australian domestic airline in 2001, was fully owned by
Richard Branson’s non-Australian Virgin Group (Thomas 2000, p. 77).
In Australia, domestic operations are considerably simpler to establish than international
operations. Generally, a start-up domestic airline would need to deal with only one
government, one legal jurisdiction, one regulator, one language, and generally have the
ability to freely determine the routes, frequency and type of equipment to be used.
If the new airline is to commence international services, then the start-up issues described in
the paragraphs above generally start to come in multiples – two or more governments,
different legal systems, jurisdictions, regulators, languages, cultures all come into play.
Network versus Point-to-Point (P2P) Operations
Deregulation in the USA in the late 1970s led to dramatic changes in the way airlines
operate. Initially, there was a move away from point-to-point (P2P) operations, to the more
cost-effective ‘hub-and-spoke’ route networks. In more recent times new low cost carriers
(LCCs) have emerged, with a different approach (Doganis 2006).
The old style network operators wished to sell traffic not only between Cities A and B, but
also between A and C via B. They developed route networks with multiple points of
operation that could be sold by combining two or more flights. While significantly
increasing the potential passenger volume on any one flight, this approach added to the
complexity and cost of managing such a route network.
During the 1980’s US carriers devised a system to simplify this network approach to
business. It was termed a “hub-and-spoke’” system. Effectively a few major airports
strategically located around the country were selected as “hubs”. These hubs are linked by
high frequency services using relatively large aircraft. Smaller, nearby airports are
connected (the “spokes”) to the large hub airports using smaller aircraft (Wensveen 2011).
Efficiency benefits resulted from such an approach, the network is simplified and often,
new network points can be added. However, there is a trade-off between non-stop
operations and flight frequency (Topic 6 provides further details). Each airline route
network system has its own advantages and disadvantages and is often dependent on the
27
type of airline structure, Full Service Network (FSNC) or Low Cost Carrier (LCC), and the
marketplace in which they operate. Hub-and-spoke operations may be cost effective, but they
generally add complexities to the business. Network operators are therefore usually full
service network carriers (FSNCs) (Doganis 2006).
Industry changes in the 1990’s saw the rapid development in both size and number of what
we now call low cost carriers (LCCs). The first LCCs operated in domestic markets or short-
haul international markets, such as Europe, but the concept has spread fast and a growing
number of LCC carriers now also operate services in Australia, Asia and India, Africa and the
Middle East (Doganis 2006).
The LCC model is based on simplicity. To keep costs low and increase efficiencies the LCC
must remove all complicating factors from its business environment. As such, point-to-point
(P2P) operations are the obvious choice as they provide the simplest network building block
(Doganis 2006).
Under a basic point-to-point operation, a passenger purchases an LCC’s ticket to fly from City
A to City B. Simple. City B is the final destination. The sales transaction is complete. At the
airport, all passengers booked on the service check-in, their baggage is tagged to City B. At
City A there is no connecting traffic or baggage from other services. On arrival at City B, all
passengers disembark and all baggage is taken off the aircraft and delivered to the baggage
hall. There is no onward passengers or baggage. The aircraft is now ready for its next sector
and the process is repeated all over again.
If the passenger wanted to travel to City C, and the only way was via City B, then on arrival
into City B they would collect their bags, then make their way to check-in for the flight to City
C. The passenger would have purchased a second ticket, unrelated to the ticket for the flight
linking City A and B.
Effectively each flight is a standalone or closed loop operation. For the airline this is a simple
routine. Policy, procedures and processes can be simplified for staff, which should result in
increased efficiency. The sales and marketing process is simple – sell tickets from one city to
another on a non-stop service. However, at times of the day, or week, or year there may be
insufficient demand for that particular city pair. A range of sales strategies would be
employed to fill as many seats as possible while still maintaining a simple process to sell
travel between City A and B.
LCCs tend to purchase smaller domestic aircraft (particularly Boeing B737s and Airbus A320
aircraft), which enables them to operate high frequency schedules between a large number of
city-pairs (Doganis 2006). This often returned non-stop service to routes which FSNCs had
been abandoned as they established their hub-and-spoke networks.
As the public had often suffered delays/disruptions/lost baggage etc. whilst changing
aircraft at hubs, the point-to point approach of the LCCs soon attracted sufficient business to
put enormous financial pressure on full service network carriers (FSNCs).
Full Service Network versus Low Cost Carriers
As we will see below, in the global airline business there are differences in the business
models of the full service network carriers (FSNCs), low cost carriers (LCCs) and value based
airlines (VBAs). Other airline business models include charter, holiday and regional airlines,
which have played a significant role in the development of the global air transport industry
by representing the increasing provision of air transport services to both the larger travelling
public in general as well as to smaller regions without large demand volumes (Koch 2010).
 Full Service Network Carrier
A “legacy” or “full service network carrier” (FSNC) is an airline that focuses on
providing a wide range of both pre-flight and onboard services, including different
service classes, and connecting flights. Since most FSNCs operate a hub-and-spoke
route network model, this group of airlines is generally referred to as hub-and-spoke
28
carriers (Ehmer et al. 2008, p. 5). Air France/KLM, Cathay Pacific Airways, Etihad
Airways, Qatar Airways (Figure 2.1) and Singapore Airlines are examples of full
service network carriers. FSNCs generally focus on the same operational, strategic
and economic features: operating a complex network of air services, combining a
large number of regional services with intercontinental services using a hub-and-
spoke route system. This is normally accompanied by a product/service strategy
predicated on discrete travel class differentiation, by offering a full range of services
to all passengers (Koch 2010).
Figure 2.1. Qatar Airways Boeing B787 aircraft – a 5 star full service network airline., Source:
Manske (201314).
Route network and the aircraft fleet type employed are two of the major elements
defining the FSNC business model. FSNCs target large traffic catchment areas, while,
simultaneously, bundling traffic from smaller catchment areas into their hubs in
order to be able to operate profitable intercontinental air services (Koch 2010).
As noted above, the FSNC business model is generally based upon the operations of a
hub-and-spoke route network (Vespermann & Holztrattner 2010). In the FSNC hub-
and-spoke system, airlines develop their networks by combining features from non-
stop and multi-stop routing patterns. The hub operational system is based on flights
arriving from multiple points (spokes) at a hub airport where passengers, baggage
and air cargo connect to flights departing to multiple points. So after a short
turnaround period, an equally large number of turn-around departures travels out
along spoke routes from the hub. The hub airport thereby acts as a gathering and
consolidation point for flights operating to multiple destinations (Dempsey & Gesell
1997; Reynolds-Feighan 1994). The hub-and-spoke system, by offering a wide variety
of origins- and-destinations (O & Ds), therefore, assists airlines to exploit other
economies of market presence. Combining substantial volumes of domestic traffic
14
Reproduced in accordance with the Wikimedia Creative Commons Attribution License,
<http://upload.wikimedia.org/wikipedia/commons/3/33/A7-BCK_%288917740530%29.jpg>.
29
with international traffic through hubs further enhances this advantage (Button et al.
1998, p. 20).
The hub-and-spoke strategy of FSNCs leads to a focus on primary airports, being
those airports which belong to a highly populated urban area/region or business
centre, and typically serving more than several million passengers per annum. While
these airports guarantee sufficient passenger traffic to fill the number of flights
necessary to efficiently operate the hub, and hence, provide the infrastructure
required to cope with the peaks resulting from hub operations, this strategic focus
often results in disadvantages for airlines when it comes to punctuality. Primary
airports, being a preferred destination for all types of airlines, tend to suffer from
congestion and generate flight delays and operational bottlenecks (Koch 2010).
Therefore, when an airport reduces its available capacity or is congested, it becomes
very costly for airlines, particularly during peak hours of operations (Barrer &
Swedish 2000). Delays incur direct costs due to longer block times and lower aircraft
utilisation rates or the risk of passengers and crew’s missing connecting services.
Indirect costs are also incurred from lower customer satisfaction levels, as a
consequence of having to wait longer than acceptable from the passengers’
perspective. Exceeding these delay costs, hub-and-spoke network systems display
significant planning and operational complexity. Consequently, such a strategy
results in comparably high airline production costs (Koch 2010).
In addition, as much as this multiplier effect facilitates the exponential increase in the
number of available connecting services, it can also cause an exponential implosion
once an airline closes line segments for economic reasons, as closing services to cities
reduces the number of connections to the network spokes, thus reducing the
multiplier effect again (Grin 1998). The requirement for passengers to make transfers
between flights at the hub airport also imposes additional uncertainty, time, and
inconvenience costs on travellers, such as an increased probability of lost baggage
and the requirement to make a second set of connections. Resort destinations that can
only be reached through a hub can become less attractive. For this reason, tourist
industry officials often lobby their local governments to encourage investment in
airport infrastructure so that they are in a position to handle direct flights more
efficiently (Fujii et al. 1992). A further factor is that the operation of a hub airport
requires a considerable investment. Thus, it should have a utilisation factor of its
own, or it should have such a factor, in order to be recognised as a vital component of
the overall airline network economics (Grin 1998).
Long-haul FSNC international traffic can pose a further challenge due to the
additional constraints such as differing time zones. Night curfews at airports and
travellers’ desire to arrive at their destination within certain times, thereby limit
flexibility in the airline’s operations. In addition, the requirement for specific aircraft
to operate long-haul services can also influence an airline’s fleet composition. These
factors can make it difficult for international airlines to provide hub type
arrangements at both ends of a flight (route), although the size of the aircraft operated
would ideally mean that linked feeder services would be desirable. This is one of the
reasons why increased cooperation exists between airlines of different countries, in
effect; they seek to generate additional synergy effects from combining their
respective hub activities and networks (Button et al. 1998, p. 22).
Despite these economic and financially crucial aspects, hub operations are about the
most valuable assets that a FSNC owns. They enable an airline to operate routes
which could never be profitably served by local traffic alone. In total they form the
economic basis for a network density typically exceeding a point-to-point coverage by
a substantial amount (Koch 2010). Hence, the hub-and-spoke system encourages
airline growth. By using hub-and-spoke operational systems, airlines are able to
increase traffic density on certain routes, to take advantage of economies of traffic
30
density, and to lower unit costs. The benefits also arise on the demand side, as
passengers prefer to travel with larger airlines, so an airline with an extensive hub
and spoke system possesses an advantage over a new entrant and smaller airlines
due to the larger network of points served (Bureau of Transport and Communication
Since the FSNC route network is often designed to link regional, continental and
intercontinental routes, the typical FSNC fleet is usually quite heterogeneous.
Ranging from small regional jets to long range wide-body aircraft, FSNCs endeavour
to have the right aircraft in place for each route alone. This results in a broad range of
available seating capacities, but also suggests a multiple aircraft manufacturer
strategy. Thus, flight and cabin crew, technical staff, spare parts, ground handling
equipment and staff and other production factors need to be provided for entirely
different aircraft types, adding to the cost base for the airline (Clark 2007; Koch 2010).
In addition to the FSNC route network itself, product and service features concern the
entire passenger value chain and are not restricted to travel class differentiation
(Koch 2010). The quality of the in-flight service and in-flight entertainment (IFE) has
become increasingly important for the passenger’s choice of airline (Doganis 2009;
Shaw 2011). Network coverage and total journey travel times are becoming
increasingly similar between airlines (FSNCs), hence these customer experience
factors are growing in importance as a differentiator. This is also reflected by the
focus of many on having well-trained and customer service-oriented staff (Koch
2010).
Many FSNCs around the world have now established LCC subsidiaries, to counter
emerging LCC start-ups, or to use as vehicles of change within their own
companies. In our region Qantas has created Jetstar, while carriers like Singapore
Airlines have significant shareholdings in Silk Air and Tiger Airlines, and Thai
Airways International has a significant shareholding in Nok Airlines.
The key attributes of the full service network carrier business model are summarized
in Table 2.1.
31
Table 2.1.
Characteristics of a ‘legacy’ or ‘full service network carrier’.
High Cost High Revenue

 High salaries  Quality products to justify high prices
 Restrictive workplace agreements  Highly focused on frequent business
 Complex networks traveller
 Segmented classes of service  3rd party arrangements with hotel and
For example, Business & Economy Class car hire
 Frequent Flyer Programmes
 Complimentary food and drink
 Airline Alliances with other full service
 Complimentary entertainment systems carriers
 High service levels  Lounge membership programmes
 Interline ability with other airlines
 Paper ticket systems
 Codeshare
Source: Fernie (2011, p.14).
 Low Cost Carriers

A low cost carrier (LCC) is an airline that offers low air fares but eliminates all
unnecessary services (Doganis 2006). The LCC business model is very simple: operate
at the lowest cost possible and sell seats at low rates such that they stimulate demand
and achieve high load factors. By cutting costs to the absolute minimum, LCC’s can
make a profit at much lower prices than their competitors as long as pricing can
stimulate demand (Fernie 2012).
Lower fares create demand in two ways:-
o by winning share of the existing travel market from customers motivated by

price; and
o by stimulating new demand from customers who travel by bus or rail or who
have never travelled before (Fernie 2012).
LCCs therefore focus on cost reduction in order to implement a price leadership
strategy in the markets which they serve. The use of a young and homogenous fleet
of medium-sized aircraft (usually Boeing 737-700/800 or Airbus 319/320 aircraft)
normally results in a reduction in fuel, maintenance, staff costs and – if large orders at
discounted prices are placed – capital costs (Ehmer et al. 2008). High-density seating
leads to lower unit costs, as fixed costs can be attributed to more seats and passengers
(Doganis 2006). Only variable in-flight seating costs (and some fuel costs) increase
when more passengers are carried. Aircraft ground handling turnaround times and
flight delays are reduced by serving smaller, uncongested airports and by focusing on
point-to-point flights (Pitt & Brown 2001), without any connections, thereby enabling
an LCC to maximize the number of daily block hours and aircraft utilization (Ehmer
et al. 2008).
32
LCC’s often use a “free seating” policy, since it encourages passengers to board
quickly and thus helps them to avoid flight delays (Ehmer et al. 2008). The LCCs also
often operate services from secondary airports. Apart from the lack of congestion at
smaller airports, secondary airports usually charge lower fees than the more
established ones and are more willing to co-finance the promotion of new routes.
LCC unit costs are also reduced by directly selling tickets online, by implementing a
high density seating configuration, and by eliminating all kinds of free in-flight
services, such as in-flight catering, onboard entertainment and newspapers (Doganis
2006; Pitt & Brown 2001).
On the sales and demand side, the pricing policy of the LCCs is usually very dynamic
(Doganis 2006), with heavy discounts for tickets booked well in advance. This
practice often leads to the generation of new demand from low-yield passengers who
would not have flown otherwise (Ehmer et al. 2008). Also, LCCs earn ancillary
revenues by selling other products and services both onboard the aircraft and on their
websites (Doganis 2009; Francis et al. 2007).
The original LCC business model was pioneered by US-based Southwest Airlines
(Figure 2.2) in 1971 and it is still widely used around the world. However, in recent
times, certain features of the original model have been dropped or radically altered in
response to the evolving market conditions (Alamdari & Fagan 2005).
Figure 2.2. Southwest Airlines, pioneer of the LCC business model., Source: Abbott (201215).
As we have previously noted, the basic LCC business model is based on low cost leadership.
By having a low cost structure, LCCs are able to provide consumers with lower price services
(Doganis 2006). This has led many price sensitive consumers to switch from legacy FSNCs to
the LCCs. Moreover, the lower prices offered by LCCs have stimulated traffic between city
15
<http://upload.wikimedia.org/wikipedia/commons/f/f7/Boeing_737-
700%2C_Southwest_Airlines%2C_waiting_to_take_off._SFO_%287719536376%29.jpg>.
33
pairs where consumers would not otherwise have flown had there not been an offer of lower
fares by the LCCs (Lall 2005). This has allowed LCCs to gain larger market share.
Table 2.2 shows the characteristics of the LCC business model.
Table 2.2.
Characteristics of a Low Cost Airline (LCC).
Low Cost High Income
 Non-unionised workforce  Targets leisure travel market

 No complimentary services e.g. food &  Low fares drive volume sales
drinks  All additional services at a fee e.g.
Source: Fernie (2010, p. 24).
 Operate from/to secondary airports  Checked baggage charge
 Maximum seats per flight  Refreshments sold at retail prices
 reduced legroom  Audio/visual available at a cost
The
 No travel LCCcommissions
agent model is most suited to the short to medium-haul market.
Whether domestically in the USA  regionally
or Add-on packages
in aggressively
Europe or Asia, nomarketed
LCC
 Sales driven to website  Hotel & car hire
yet operates longer
 Telephone sales at a charge than 4-5 hour sectors).
 Travel insurance
 No seat allocation  Transfers
 No interline ability
 Value Based Airline
 Exclusively e-ticket
The creation of business models that are focused on the complete opposites in the market -
low cost leisure and high cost business travellers – has created an opportunity for something
in the middle.
Although the LCC model works well in large markets, the appeal of the high yield frequent
flyer has not waned. Due to economic pressures, the business traveller has become more
focused on cost and is looking for improved value for money (Mason 2001).
Basically the value based airline (VBA) seeks to operate at a LCC cost base but with quality
product and services that appeal to the business traveller (Taneja 2010). An excellent example
of this model is JetBlue Airways in the USA.
Table 2.3 presents the characteristics of a Value Based Airline business model.
34
Table 2.3.
Characteristics of a Value Based Airline.
Low Cost High Income
 Non-unionised workforce  Targets value driven business travellers

 No complimentary services, for  Innovates traditional business services
example, food & drinks  Lounge
 Operate mix of primary & secondary  Loyalty programme
airports
 Most additional services at a fee, for
 Maximum seats per flight
example.
 reduced legroom
 Checked baggage charge
 Limited travel agent commissions
 Sales driven to website  Refreshments sold at retail
prices
 Telephone sales at a charge
 Limited interline ability  Audio/visual available at a cost
 Codeshare  Added value for high yield fares
 Exclusively e-ticket  Priority check-in
 Extra baggage allowance
 Add-on packages aggressively marketed
 Hotel & car hire
 Travel insurance
 Transfers
Industry Terminology
The airline industry has a number of unique terms and definitions. Appendix B gathers a
number of these terms and defines them for your use, not only with this course, but also for
your other studies in aviation – this document is available in the Learning Resources section
of the course’s “MyRMIT” Blackboard Portal.
Airline Industry Regulatory Issues

Regulatory Issues
The airline industry remains one of the most highly regulated industries in the world (Oum &
Yu 1998). Its outstanding safety record, is in part, a testament to these strict regulations. There
is also a range of other regulations and laws that apply to commercial aspects of the airline
industry.
Specific Regulations for Airline Operations
Regardless if the new airline is to operate domestically or internationally, every airline must
apply for and obtain an Air Operators Certificate (AOC), without which they are not permitted
to commence operations. The AOC is issued by a government statutory authority, which has
responsibly for the operational oversight of aviation in the country where the airline is based.
In Australia, this regulatory authority is the Civil Aviation Safety Authority (CASA). CASA’s
primary function is to regulate aviation safety in Australia and the safety of Australian
aircraft overseas. Its role is also to maintain, enhance and promote civil aviation safety.
The granting of an AOC follows a rigorous process that ensures the new prospective carrier
has in place systems, processes and procedures to ensure compliance with aviation safety
35
standards and regulations as prescribed in the multiple Acts of Parliament which cover
airline operations within Australia. Areas covered include personnel, crew training,
operations, maintenance, manuals, insurance, etc. The process to apply for an AOC will take
many months. Once granted, every AOC is regularly reviewed to ensure standards are
maintained.
Again, regardless if the new airline is to operate domestically or internationally, at each
airport the carrier wishes to operate, it must apply for what are called “slots”. Granting of
slots provides an airline with the entitlement to land and take-off from that airport at a
particular time, on a particular day. They are allocated to the carrier, often by an independent
“slot coordinator”. Generally once a slot is granted it remains the property of that carrier until
relinquished and can be used for any flight it wishes to operate at that particular time
(Graham 2014).
However at many heavily utilised airports, during certain periods of the day, no slots will be
available. As such, the carrier will have to operate at sub-optimal timings (This issue will be
further explored in Topic 7 – Airline Scheduling and Slot Allocation Management).
Specific Regulations for Domestic operation
Another regulatory issue for domestic operations is that of Licences. In Australia, several
state governments issue licences for certain routes. These routes are normally small in
volume – less than 50,000 passengers per annum. The government believes that air ser vice
to that town is required for a variety of reasons – social, medical, administrative, etc., and
that if normal market conditions applied then air services may not be guaranteed or
developed. As such, following a tender process, a licence is issued to a single airline
granting it sole rights to operate that route. This ensures air links are maintained to that
town for the period of the licence – usually three or five years. On some routes a subsidy is
paid to the carrier, as traffic volumes are so low that even normal sole carrier designation
would not result in breakeven operations 16.
Specific Regulations for International Operations
Deciding to commence international operations will result in the need to comply with a
multitude of specific regulations and processes that will impact the airline.
For an Australian carrier these include:
 Gaining foreign AOCs from safety authorities of the foreign countries to be served;
 Issuance of any licences or permits by foreign authorities;
 “Designation” (that is, official recognition of the right to operate as an airline
representing the country of domicile) under relevant bilateral(s) (ASAs);
 Gaining an International Airline Licence from Australia’s Department of
Infrastructure and Regional Development;
 Allocation of capacity from Australia’s International Air Services Commission
(IASC);
 Lodging a security program for approval by the Department of Infrastructure and
Regional Development;
 Applicants are required to supply a copy of an insurance contract or certificate from
an insurer evidencing that appropriate insurance is held by the applicant in relation
to the following: passenger liability; third party liability; cargo and baggage liability;
and injury and loss as a result of active hostilities or civil unrest (War risk insurance);
 Filing the airline’s flight schedules and tariffs;
16
See, for example, the Department of Infrastructure and Regional Development website for details of Australia’s
regional and remote aviation policy at: <http://www.infrastructure.gov.au/aviation/regional/index.aspx>.
36
 Compliance with Aircraft Noise Standards (Use of non-chapter 3 aircraft) (adapted
from Department of Infrastructure and Regional Development 2015); and
 Obtaining slots at all airports to be served, both in Australia and overseas.
In a similar way to gaining an Australian AOC, many countries require new carriers to be
issued with what is termed a Foreign Carrier AOC before services can commence. This can be
a lengthy and exhaustive process, involving a close oversight of an airline’s documentation
relating to its operational and maintenance integrity.
After gaining the Foreign Carrier AOC, licences or permits issued by overseas authorities are
required before the airline can commence marketing its new services. These licences may
require provision of details about the airline, including names of directors, financial
performance and backing, insurance status, etc. Australian carriers need to apply for an
international licence to operate overseas services (Department of Infrastructure and Regional
Development 2016).
As we saw above, one of the basic principles of aviation is that every State has complete and
exclusive sovereignty over the airspace above its territory. This means that for international
operations, permission must be gained from that State to fly through its airspace. There is an
array of possible “permission’s” that may be granted and are enunciated in what are known
as the eight “Freedoms of the Air” (Wensveen 2011). (See Appendix A in the Learning
Resources section of the course’s Blackboard Portal for details of these freedoms).
Air Services Agreements (ASAs)

The ability for an airline to operate between its home country and a foreign country is
governed by an Air Services Agreement (ASA) (Doganis 2006). These treaty agreements are
negotiated between National Governments on behalf of the airlines of each country. The
industry often describes these agreements as “bilaterals” as they are an agreement agreed
between two countries. Some three thousand bilateral aviation agreements are currently in
place throughout the world (Wensveen 2011).
ASAs describe the types of air services, both passenger and air cargo (freight) that will
operate between the two countries by airlines that are registered in those two counties. They
can stipulate any number of things including:
 frequencies or seats to be operated per week;
 cities that can be served in the bilateral partner country;
 rights to operate and carry passengers via intermediate points and to points beyond
the bilateral country; and
 code-sharing arrangements, etc (Doganis 2006).
Once agreed, the respective National government authorities advise their carriers of the
“rights” available under the bilateral ASA. Should a carrier wish to exercise all or some of
those rights, then the carrier must be “designated” (that is, nominated as an Australian carrier)
under the ASA (Doganis 2006). In Australia, this process is handled by the Department of
Infrastructure and Regional Development initially, before being progressed through
diplomatic channels.
In most cases, for a carrier to use these rights it must be substantially owned (usually at least
51 per cent) and effectively controlled by nationals of the designating country (Clark 2007).
The ownership and control requirement has, in some cases, been relaxed in recent times, and
replaced by a formula requiring a designated airline to have its principal place of business
and to be under the effective oversight of the aviation national safety authority of its country
of designation.
Finally, it should be noted that “Open Skies” agreements are an attempt to simplify ASA’s.
They remove the prescriptive aspect of the agreements – for example they allow for unlimited
frequency, capacity, codeshare, access points, etc. However, they are a misnomer, as they still
37
only apply to the carriers of the nations (often only two) that are signatories to the agreement.
For example, an open skies agreement between New Zealand and Canada does not
automatically permit airlines coming from Australia, Korea, Mexico or Indonesia (or
wherever) permission to freely fly and compete on routes between Auckland and Vancouver.
True open skies under a multilateral regime would indeed allow such competition, however
at this point in time, such total deregulation of bilateral ASAs appears to be in the very
distant future.
International Air Services Commission

Australia’s International Air Services Commission (IASC) is an independent statutory
authority that was established under the International Air Services Commission Act 1992. The
functions of the Commission are to: make determinations allocating capacity to Australian
airlines in both contested and uncontested situations; renew determinations on application by
airlines; conduct reviews of determinations; and also to provide advice to the Minister about
any matter referred to the Commission by the Minister concerning international air
operations (International Air Services Commission 2015, p. 5).
Thus, the commission’s role is to allocate capacity available under Australia’s bilateral air
service agreements (ASAs) to Australian airlines so they can operate these international air
services. The commission also assesses applications for capacity from airlines, using public
benefit criteria in a policy statement provided by the Minister for Infrastructure and
Transport. If an application satisfies the criteria, the commission makes a determination
granting capacity to the airline concerned. Also, the commission decides on airlines’
applications to vary determinations, usually to permit for code sharing, and also to renew
determinations (International Air Services Commission 2016a).
Competition Law Issues
Consumer protection and laws preventing restrictions on trade are common place in most
western societies, less so in developing nations. But as economies emerge, more and more
nations are adopting such laws.
Because aviation in most countries is a high profile business, competition authorities actively
review the industry to ensure consumers are protected. In particular, areas such as pricing,
sales and marketing, distribution (particularly via GDS’s), code-sharing and denied boarding
compensation are closely scrutinised by these statutory authorities (Heilbronn 1990).
In Australia, for example, the Australian Competition and Consumer Commission (ACCC)
takes an active interest in these and other matters and in 1997 signed a Memorandum of
Understanding (MOU) with the IASC. The MOU clarifies the roles of the IASC and the ACCC
when assessing competition issues associated with applications to the IASC for Australian air
route capacity, particularly when the commission is examining commercial agreements
between airlines (International Air Services Commission 2016b).
This area of the law is becoming more influential on the way airlines conduct their business.
As there is no common global position on consumer law, this area adds another level of
complexity for airlines that undertake international services, as what may be legal in one
jurisdiction may be illegal in another.
Airline Business Plans

Successful airline companies will have a sound business plan relevant to their market. This
detailed planning document typically includes:
 Analysis of the market and competition
 Core aspects of the profit and loss (P&L) statement;
o Yield
38
o Network
o Productivity and resource requirements
 Description of the business and opportunity
 Details about the operation
 Management team biographies
 Discussion of risks and obstacles
 Pro forma financial statements/projections
 Capitalisation plan
 Implementation strategy.
The business plan is normally the fundamental starting point for working effectively within
an aviation market and it should be the document that, once approved and clearly
communicated by the Board and the Executive team, becomes the main motivating force from
which a range of airline decisions are made. The business plan is therefore relevant to all
factors of the aircraft fleet management and fleet planning processes and these activities
would be difficult to complete successfully without a sound understanding of the airline’s
organisation’s market expectations and capabilities that are documented in an effective
business plan.
Airline Financing, Risk and Insurance

Airline Financing
With any business, the appropriate and adequate financing of the enterprise is essential. Like
the mining and infrastructure sectors, aviation is very capital intensive (Wensveen 2011),
requiring large sums of money in order to provide the initial products and services and then
keep them updated. The world airline industry has extremely significant capital
requirements. Thus, airline finance plays a critical role in airline management. An airline
requires vast amounts of money to run its business, from very expensive aircraft to a
diversity of other items, such as maintenance equipment. Airline managers need to manage
these assets effectively to ensure that they can generate profits for their shareholders.
Furthermore, the product life cycle for aviation is shortening (Wensveen 2011). For example,
continuous improvements in seating technology require airlines to renew their on-board
seating in order to keep up with competition. For an airline with a fleet of 100 aircraft this
may mean well over 20,000 seats to be updated every five or six years. Financially such a
project may cost over $USD 100 million.
However, by far the biggest assets acquired by any carrier will be aircraft. A new Boeing
B787-9 is valued at around $USD 264.6 million (Boeing 2016) and an Airbus A380 aircraft
$USD 432.6 million (Airbus 2016).
Typically, the asset turnover ratio17 for airlines is less than one. That is, more than one dollar
of assets is required for every dollar of revenue generated. This is acceptable provided sales
margins are large, say 15 per cent. However, the airline industry as a whole, has often
struggled to break even on a long-term basis.
This is a problem.
Airlines continually seek funding due to the capital intensity of the business, but returns are
low and the industry is subject to many risks beyond their control – war, terrorism, volcanic
eruptions or pandemics like SARS and Swine flu (H1N1), the global financial crisis etc. If the
airline is government owned, then fund raising may be less of an issue. But for airlines listed
17 The total asset turnover ratio measures how efficiently a firm uses its assets (Gallagher & Andrew 2007, p. 97).
39
on the stock exchange they may have difficulty attracting equity investors, so debt financing
is the only other major alternative source of funds.
Debt financing can include a wide array of funding, including borrowing and leasing (Clark
2007; Morrell 2013). If an airline has a high debt-to-equity ratio (that is, far more borrowing
than money provided by shareholders), then such high levels of debt can only be sustained in
the long-term by the airline generating sufficient cash to service that debt (Wensveen 2011).
It is a difficult juggling act for management. If airlines are unable to service the debt
comfortably, then they must delay investment in new aircraft and new on-board products
and services. This then has a negative impact on customer perceptions of the airline as well as
increasing expenditure on aircraft maintenance and operating costs (for example, less fuel-
efficient fleet versus a newer fleet). On time performance (OTP) may also slip, again having a
negative impact on customers and therefore detrimental impacts of revenue – a vicious circle
begins to develop?
Aircraft Leasing
To assist the industry with debt financing a number of financial services companies have
been formed to address specific industry needs. Both the major aircraft manufacturers –
Boeing and Airbus – have asset-based financing arms. Sixty per cent of all aircraft leases are
controlled by just two companies – International Lease Finance Corporation (ILFC) and GE
Commercial Aviation Services (GECAS). What provides these firms with a competitive edge
is that they enjoy weighted average cost of capital18 of around 7 per cent while airlines at best
have a weighted average cost of capital 9 per cent or higher (Bartsch 2013).
These companies specialise in arranging finance and aircraft lease structures, managing
technical assets, and offering a broad range of financing options and solutions to airlines,
which include:
 Operating and Finance leases
 Leveraged leasing
 Sale/leasebacks
 Long- and short-term financing (Bartsch 2013; Morrell 2013).
According to Morrell (2013, p. 239), a “lease is a contract whereby the owner (the lessor)
grants to another party (the lessee) the exclusive right to use the asset for an agreed period, in
return for the periodic payment of rent”.
An aircraft lease is thus a contract between a lessor and a lessee (the airline) such that the
lessee (the airline):
 Decides the aircraft specifications;
 The lessee makes regular payments to the lessor throughout the prescribed term of
the lease;
 Is granted exclusive use of the aircraft (the asset) during the lease period; and
 The lessee does not own the aircraft at any time during the period of the agreed lease
(Morrell 2013, p. 239).
Aircraft operating leases are generally short-term (less than 10 years in duration), making them
attractive when aircraft are needed for a start-up venture, or for the tentative expansion of an
established carrier. The short duration of an operating lease also protects against aircraft
obsolescence, an important consideration in many countries due to changing laws on noise
18The weighted average cost of capital (WACC) represents the average cost of each dollar of financing no matter its
source, which the firm uses to purchase assets. That is, WACC represents the minimum return the firm needs to earn
on its investments (assets) to maintain its current level of wealth (Besley & Brigham 2008, p. 460).
40
and the environment (Bartsch 2013; Wensveen 2011). However a premium will be paid for the
flexibility this type of lease offers (Oum et al. 2000). Taxation treatment also needs to be
considered. In the UK, some operating lease expenses can be capitalised on the company's
balance sheet, while in the US, operating leases are generally reported as operating expenses,
similar to fuel and salaries (Wensveen 2011).
Aircraft operating leases also normally convey no residual value of the aircraft and, from an
accounting perspective, are considered by airlines as strictly an operating cost (Wensveen
2011). Aircraft operating leases provide benefits for the operators of aircraft, offering a level of
fleet flexibility and residual value risk reduction unobtainable when purchasing an aircraft
outright.
Generally operating leases do not appear on airlines’ balance sheets. Operating leases have a
principal benefit: they provide a method of lowering the airline’s overall capital costs. Equity,
debt, capital leases and operating leases all have varying direct costs, risk premiums,
depreciation and taxation benefits as well as differing degrees of flexibility. Hence, by relying
heavily on a single source of finance would likely result in the airlines capital costs being
greater than those achievable with a mixed portfolio of capital sources (Wensveen 2011).
A related concept to the operating lease is the “leaseback” in which the airline sells its aircraft
for cash to the lessor, and then leases the same aircraft back for a defined amount each month
(Bartsch 2013; Morrell 2013).
The other major category of aircraft lease is the Finance Lease (or capital lease) (Morrell 2013).
This is a long-term arrangement where the airline effectively owns the aircraft. It is a more
complicated transaction, often involving the creation a special purpose company which
purchase aircraft through a combination of debt and equity financing, and then leases the
aircraft back to the airline. The airline often has the option to purchase the aircraft at the
expiration of the lease, or the aircraft automatically becomes theirs at the end of the lease
period. Again different taxation treatments result from finance leasing, both for the lessor and
lessee (Wensveen 2011).
Aircraft leases can also be very short term in nature, sometimes just to fly one or two sectors
only. These leases are normally undertaken to cover minor schedule disruptions, or for
coverage during peaks in aircraft maintenance. Generally there are three basic typesof aircraft
leases:
1. Dry leases - where only the aircraft, with associated engineering support and insurance
are provided;
2. Damp leases – cover the aircraft, the associated engineering support and insurance,
along with technical crew (pilots); and
3. Wet leases - cover the aircraft, the associated engineering support and insurance along
with all the crew, both technical and cabin (Morrell 2013).
Risk and Insurance

Managing risk is an important part of any business (Sadgrove 2005). The risk profile of
airlines changes with their business - new aircraft, new destinations and new security
measures can either create new exposures to risk or modify existing risks. Insurance
premiums are expected to increase as the Boeing 787 aircraft come into commercial service.
The Airbus A380 aircraft introduction was unique, primarily due to its size and the Boeing
787 due to its revolutionary composite construction. The market may be impacted by the
higher limits required by Airbus A380 operators, while some insurers are expressing concerns
about the possible higher cost of hull damage claims for the new composite materials used in
Boeing B787s.
41
Many of the risks facing the industry are external. The severity and possible likelihood of the
risks that may impact the airline industry have been assessed by the International Air
Transport Association (IATA) as follows in Figure 2.3.
Figure 2.3. Possible likelihood and severity of risk in the world airline industry., Source: Pearce (2007,
p. 10).
Aviation Insurance
The global aviation insurance market is quite unique. Aviation insurance is a specialised type
of insurance written in a specialised market, predominantly in the London insurance
market19. The aviation insurance market has always differed quite substantially from most
other insurance markets in that both the premium base and customer base are very small,
with just a small number of insureds. Nonetheless, the potential exposure of each airline is
enormous (Hoeven 2005). Several features of aviation insurance set it apart from other classes
of insurance. Three significant features include:
19Lloyds of London is perhaps the most respected global aviation insurance establishment. Lloyds is a syndicate of
underwriters whose members reinsure each other despite their brokers and agents not being affiliated with any
particular company. Lloyd’s brokers, agents and underwriters are essentially self-regulated. Among the many
requirements of membership is that the syndicated underwriters must undertake their underwriting business
exclusively with a Lloyds’ broker (El-Kasaby et al. 2003, p. 301).
42
1. The limited number of risks available to insure;
2. Its small size; and
3. Its potential exposure to catastrophic events (Flouris & Lock 2008, p. 70).
The market relies on a relatively small pool of aircraft in terms of risk distribution. In
addition, the market must be capable of absorbing potentially staggering losses. In order to
operate under these conditions, insurance firms engage in elaborate reinsurance mechanisms.
For example, in the United States, underwriters reinsure each other in order expand their
capacity to absorb catastrophic losses as well as their ability to assume greater risks.
Insurance companies also endeavour to insure high-risk ventures on the global market so as
further spread their losses (El-Kasaby et al. 2003).
The Nature of Aviation Insurance
Airlines purchase aviation insurance to cover the risks associated with the ownership,
operation and maintenance of their aircraft fleet (Hoeven 2005, p. 73). The principal insurance
coverage includes:
 Hull – damage to the aircraft itself;
 Passenger – liability for death or injury; and
 Third party – liability for death and bodily injury and property damage external to
the aircraft (El-Kasaby et al. 2003; Hoeven 2005, p. 73).
Other forms of aviation insurance cover repossession, residual value and, in some instances,
products liability (El-Kasaby et al. 2003).
Hull insurance is the most common form of aircraft-related insurance (El-Kasaby et al. 2003).
Hull insurance may be related to the replacement cost of the aircraft. Normally, it is a certain
amount of the aircraft price – less engine costs – and is expressed in percentages (Radnoti
2002). Hull insurance comes in several forms. One form is the in-flight or in-motion policy.
When aircraft hull insurance is purchased on an in-flight basis, it covers damage to the
aircraft from the time it commences its take-off run to the time it has landed and stopped or
exited the runway. In-motion insurance is slightly more comprehensive, covering the aircraft
anytime the aircraft is moving under its own power. Importantly, neither of these insurance
policies provides any coverage whilst the aircraft is damaged while parked or tied down.
Consequently, many private and commercial operators purchase all-risk ground and flight
insurance to cover any damages incurred to the aircraft hull (Speciale 2006).
Hull policies cover accidents up to a prescribed limit specified in the policy, with most
policies covering all types of loss, except those that are specifically enumerated as excluded
(El-Kasaby et al. 2003). The factors influencing an airlines hull insurance premium include the
airline safety record, aircraft price, fleet size and age (Clark 2007).
Liability insurance protects the insured (airlines) against claims of passengers and others
arising directly or indirectly from the conduct of the insured. Such damages include injury,
death, and damage to property arising under common law negligence. Typically, insurers
distinguish between liability to passengers and to third parties (persons or property outside
the aircraft). Policies may have different limits for each category (El-Kasaby et al. 2003). An
airline’s passenger liability and accident insurance premiums are a fixed annual charge based
on the total passenger kilometres generated in the prior year. The premium will depend on
the airline’s safety record, the regions the airline operates within or to as well as the type of
insurance cover the airline requires (Doganis 2009, p. 73).
Claims arising from war, hostile detonation of nuclear devices, terrorism, sabotage, political
acts, and the like, are all excluded from aviation insurance policies through an exclusion
clause designated AVN048B – War, Hijacking and Other Perils (Hoeven 2005). Some coverage
43
for such risks20 can normally be written back into a hull or liability policy, at a substantial
cost. In most instances, however, coverage for such risks must be purchased separately from a
specialised insurer to ensure maximum coverage (El-Kasaby et al. 2003). War risk policies
have normally contained a seven-day notice clause which permitted insurers to review and
reassess the risk and, if necessary, amend or cancel the insurance cover in the event of a
radical and adverse change in market conditions (Hoeven 2005, p. 74).
The Terms of Aviation Insurance
Airlines purchase insurance to cover both hull loss and liability exposure on a 12-month
basis. The typical amounts insured used to be around $USD 250 million limit for hull loss and
a $USD 1.5 billion limit for liability (Lane 2005). Following the tragic events of 9/11, the
demand for higher liability limits has increased (Kunreuther & Pauly 2005). The introduction
of the larger Airbus A380 aircraft resulted in the demand for higher hull limits. These limits
apply for each airline’s aircraft, each and every loss. The policies are said to be “all risks”
policies although all policies contain some exclusion clauses. Similarly, the policies can be
regarded as a ground-up coverage although small deductibles may apply in practice.
Significantly, the stated limits apply to each hull or each event, but in total the coverage
applies to the whole fleet and to multiple occurrences within the fleet. In short, the insurer's
exposure is unlimited. The insurer's premium is not; nor is its capital (Lane 2005).
Many other issues, from fleet selection, scheduling, sales and distribution, marketing,
pricing, research and forecasting will also require consideration in the start-up phase. Many
of these subjects are covered in subsequent topics of this course.
Airline Performance Metrics

Performance Metrics
Airlines have the same typical financial performance indicators and measures as any other
business so as to ensure long-term shareholder returns. These include:
 Net profitability by business unit and group (a measure of performance)
 Return on equity (profit to equity)
 Earnings per Share (profit to number of issued shares)
 Returns on investment (ROI) (profit to total assets)
 Cash flow (a measure of viability and long term value)
 Gearing or leverage (liabilities to equity)
 Debt ratio (debt to equity)
 Sales margins (profit to sales)
There is, however, a number of key measures used specifically in the airline industry to
measure performance:
 Available seat kilometres (ASKs) (a measure of capacity)
 Revenue passenger kilometres (RPKs) (a measure of traffic)
 Seat Factor (or Load Factor) (a measure of capacity usage)
 Yield (both per RPK and per ASK)
20
Importantly, nuclear detonation and the associated radioactive contamination cannot be written back since the
potential magnitude, spread, and persistence of damage is such that the insurance industry will not cover it. It is
deemed to be a weapon of mass destruction (WMD), giving rise to a major loss accumulation and is therefore not
insurable (Hoeven 2005, p. 74).
44
 Expenditure per ASK
 Market share
 Productivity – RPKs per employee and ASKs per employee
 Several airlines now use Earnings before interest, tax, depreciation, amortisation and
rent (EBITDAR) as a measure of performance due to the nature of financial
arrangements, particularly leases.
Airline Specific Performance Measures
Available Seat Kilometres (ASKs)
As airlines operate different aircraft types, with different seating configurations on routes of
varying sector lengths, the ASK has become the industry’s stand measure of capacity.
ASKs are calculated by taking the number of seats fitted for sale (irrespective of whether or
not they are occupied) for each aircraft, multiplied by the number of kilometres flown for
each sector (Holloway 2008, p. 193).
Example: Airbus A330-200 aircraft fitted with 25 Business Class and 204 Economy class seats,
operates Sydney to Auckland, the ASKs would be:
ASKs = (25 + 204) x 2,158 km = 494,182 available seat kilometres.
This calculation would be made for every flight operated by the airline for the period under
review to arrive at the total capacity operated by the airline for that period.
Some carriers express distance in miles, therefore in such cases the unit of capacity would
become Available Seat Miles (ASMs).
Revenue Passenger Kilometres (RPKs)
RPKs are a measure of the number of fare paying (revenue) passenger uplifted by an airline.
It is calculated by taking the number of revenue passengers seated on each aircraft, multiplied
by the number of kilometres flown for each sector (Doganis 2009). Continuing our example of
a Airbus A330-200 aircraft flying from Sydney to Auckland, assume there were 18 passengers
in Business Class and 173 passengers in Economy Class, the RPKs would be:
RPKs = (18 + 173) x 2,158 km = 412,178 revenue passenger kilometres (RPKs).
This calculation would be made for every flight operated by the airline for the period under
review to arrive at the total traffic carried by the airline for that period.
Seat Factor (SF%) (or load factor LF%)
The seat factor is an expression of the number of seats sold to fare paying passengers
compared to the total seats made available for sale. It measures the percentage of capacity
productively used (Belobaba 2016; Doganis 2009).
It is calculated by taking the number of RPKs divided by ASKs multiplied by one hundred
and taken to one decimal point. Continuing our example, the seat factor for the Airbus A330-
200 aircraft flying from Sydney to Auckland, would be:
Seat Factor = RPKs/ASKs x 100 = 412,178 / 494,182 x 100 = 83.4%
The seat factor can also be calculated by:
Seat Factor = Passenger/Seats fitted x 100 = (18 + 173) / (25 + 204) x100 = 83.4%
The seat factor can also be calculated by cabin, using either of the above two methods:
Business Class Seat Factor = Passenger/Seats fitted x 100 = 18 / 25 x100 = 72.0%
Economy Class Seat Factor = Passenger/Seats fitted x 100 = 173/204 x100 = 84.8%
45
Yield is probably the most quoted performance indicator (along with seat factor) for an airline
(Holloway 2008). For an established carrier, if both yield and SF% are rising together, then in
general, the carrier is doing well.
Yield measures the quality of revenue received per unit of traffic uplifted. It can be calculated
in two ways:
1. Revenue received from a passenger on the scheduled service divided by RPKs. It is
expressed as cents per RPK or c/RPK (Doganis 2009).
2. Yield can also be expressed as c/ASK, the only change from above is the substitution of
ASK’s for RPK’s. Yield/ASK is a better measure of performance as it also incorporates
a measure of the seat factor of the aircraft. Yield/ASK can be compared directly with
cost/ASK.
For our example, let’s assume on average each Business class passenger paid $780 and each
Economy class passenger paid $290 for the trip.
Business Class Yield per RPK = Business Class Revenue/ Business Class RPK
= (18 x $780) / (18 x 2,158 km)
= ($14,040) / (38,844) = $0.361/RPK , or 36.1 cents/RPK
Economy Class Yield per RPK = Economy Class Revenue/ Economy Class RPK
= (173 x $290) / (173 x 2,158 km)
= ($50,170) / (373,334) = $0.134 /RPK , or 13.4 cents/RPK
You can therefore calculate the yield for the entire flight and also the entire company by
adding together all the figures for all the flights the airline operated in the period. For our
example the yield for the total flight is:
Yield per RPK = Revenue/ RPK
= ($14,040 + $50,170) / (18+173) x 2,158 km)
= ($64,210) / (412,178) = $0.156/RPKs, or 15.6 cents/RPK
Expenditure per ASK

Expenditure per ASK measures the cost of putting capacity (that is, seats) into the air. It is
calculated by taking the total cost of operating the flight divided by ASKs (Holloway 2008). It
is expressed as cents per ASK or c/ASK.
Market Share
Within many industries the ability to influence certain factors effecting the general
commercial environment within which the business operates can be derived from having a
significant market share. The amount of market share required will vary from industry to
industry and from segment to segment within that industry.
Strategies that focus on capturing market share are extremely popular in almost every
industry including the world airline industry. What makes them so popular is the perception
that there is a direct connection between a firm’s profitability and its market share (Day 1997,
p. 61).
Firms with high market share are considered to satisfy customers’ requirements better, and
therefore, enjoy competitive advantage vis-à-vis their smaller counterparts (Schwalbach 1991,
p. 299). Under a market-share based strategy, the growth of the firm is dependent upon the
firm’s ability to capture a market share higher than its competitors in markets which are also
experiencing fast growth.
For airlines, having a significant market share may result in having the ability to charge
higher prices, which generates higher yields. It may also mean that competitors have
46
insufficient traffic left for them to operate economically in that market place. This may result
in one or more competitors exiting the market.
Productivity – RPKs per employee and ASKs per employee
Productivity – RPKs per employee and ASKs per employee measures the efficiency of the
workforce and provides for a comparison between carriers. RPKs per employee is calculated by
taking total RPKs for the airline and dividing by the total number of full time employee
equivalents.
It should be noted though that productivity rates will vary by the type of operation. Short
haul carriers would in general have lower productivity rates than long haul carrier
Airline Revenues
Similar to any other business enterprise, an airline aims to optimise revenue in order to
produce optimum profits. In order to achieve this objective, passenger airlines focus on
attracting as many passengers as possible, and deriving as much fare yield from each of its
passengers, that is, optimizing their yields, as they can (McKnight 2010). Airlines spend a
great deal of effort in trying to build their passenger volumes. The key areas of this focus
include aircraft selection, route and network structure, schedule design, pricing strategy,
competitive analysis, as well as extensive sales, marketing and advertising (McKnight 2010).
Despite these efforts the airline industry profit margins are “narrowly thin’’ (Vasigh et al.
2010). As a result of the narrow profit margins often the difference between profit and loss for
an airline comes down to their effective management of passenger revenues (McKnight 2010).
Airline revenue or yield management21 essentially involves the constant monitoring and
dynamic adjustment of seat inventory and fare availability on every flight on every route
operated by the airline on every day for which reservations are being accepted (normally a
rolling 11-13 months in advance of each flight departure). The objective of revenue
management is to optimise the mix of fares paid by passengers on each flight in a way that
maximises fare revenue in each travel class. Now that airlines have largely unbundled their
air fare structures, this challenging and complex process now includes consideration of how
to optimise ancillary fee revenues as well (McKnight 2010, p. 41).
Revenue Categories
There are various sources of revenue that an airline can access, and the mix of revenues varies
greatly depending on the structure of the airline. Airline revenue can be categorised and
derived from:
Flying activities:
 Passengers
 Freight (or cargo)
 Codeshare agreements
 Mail
 Excess baggage & Express Courier
 Charter operations
 On-board duty-free sales
 On-board meals, beverages, entertainment, comfort (Radnoti 2002).
Servicing activities:
21
Airline Passenger Revenue Management is examined in Topic 9 of this course.
47
 Engineering and Maintenance
 Catering
 Ground Handling
 Warehousing
 Training
 Travel and Tour sales
 Leasing income
 Other revenues
Devising a good mix of revenues from varying sources can assist in reducing the impacts of
external shocks and general economic fluctuations. For example, if air cargo revenue forms a
significant proportion of an airline’s business, then the financial impacts of say a SARS
(Severe Acute Respiratory Syndrome) outbreak may be reduced. Air cargo revenue would
probably be less affected by such an outbreak, while passenger revenue would almost
certainly decline.
In general for most airlines, over 90 per cent of revenue is normally derived from passenger
and air cargo operations.
Essentially, airline revenue has two main components – price and volume. Any changes in
either of these positively or negatively results in revenue changing in the same direction. This
holds true for both passenger and air cargo revenue. For example, if we operated an aircraft
that carried 173 economy class passengers each paying $290 then the total economy class
revenue would be $50,170. If the air fare or number of passengers increase, so too does total
revenues increase and vice versa.
As we have previously noted, the general measure of airline revenue is yield (Wensveen
2011). Generally, it is obtained for the airline’s entire traffic system. Yields may be analysed
by regions or by city-pairs (O & Ds). However, yield generally applies to all revenues earned
by an airline from the scheduled revenue-passenger miles or kilometres flown, including the
carriage of non-revenue paying passengers (Radnoti 2002).
Yield measures the quality of revenue received per unit of traffic uplifted.
 Passenger Yield is defined in cents/RPK (or cents/ASK) and
 Freight Yield is defined in cents/RFTK (or cents/AFTK) (Holloway 2008).
The following factors influence airline passenger yields:
1. The fare structure on any given route - that is, the level of nominal/full fares
and the availability of discounted fares - is the foundation on which yields are
built;
2. The fare structure will itself be driven by variables such as the extent to which
competitors are free to set prices without regulatory approval, and the
distance involved;
3. An airline's traffic mix, the proportion of traffic travelling at each different
price on offer within the given fare structure in a market, has a fundamental
influence on its yield;
4. The activities of competitors, particularly their willingness to price
aggressively in order to win market share, will affect yield whenever open
competition occurs;
5. Either in response to competitors or as a result of a more general need to fill
seats, most airlines offer fares at varying levels of discount off the
normal/full fare for travel in a given cabin; and
6. When a passenger buys a ticket taking them from A to B on one airline and
then onwards to C on another, the fare paid for the entire journey from A to C
will normally be less than the sum of local fares from A to B and from B to C.
48
This is because, as noted above, prices generally taper with distance (that is, the average price
paid per kilometre or mile falls as trip distance rises). The two airlines flying the passenger
from A to B and then B to C respectively have to agree on how they will prorate (that is,
divide between themselves) the through-fare she has paid from A to C. The outcome will
inevitably be that one or both receives less than the equivalent of the local fare on the sector
over which they carried the passenger (adapted from Doganis 2009; Holloway 2008, p. 183).
In general, the longer the sector length, the lower will be the yield. However, the total
revenue will be higher, because more kilometres are flown (Holloway 2008). As yields fall, all
else being equal, then total revenue will also fall. In an attempt to arrest the long-term decline
in their yields, it is necessary for airlines to implement a number of strategies to maintain
(and hopefully increase) revenue and therefore overall profitability. These have included:
 Increasing the seat factors. That is, carry on average more passengers and/or air
cargo per flight;
 Change the source mix of passengers in each cabin (First, Business & Economy). For
example, sell more point-to-point (P2P) and less network traffic;
 Increase the total number of seats on each aircraft whilst maintaining or increasing
the seat factor;
 Change the “mix” of business. If the market is strong enough, increase the number of
First, Business and Premium Economy seating vis-à-vis economy class seating;
 Review the airline’s network by removing underperforming routes and reallocating
flying to under-served routes or open up new routes; and
 Look for new revenue streams – enforce baggage limitations and collect excess
baggage revenue, charge for on-board and ground service items.
A combination of any or all of the above will be necessary.
Finally, as we have noted a factor of growing importance in respect of airline yields is
whether an airline has a yield or revenue management system (YMS) in place ( Shaw 2011).
 Air cargo
Other revenue sources are tapped by airlines around the world. Chief amongst these
is the carriage of air cargo, which comprises freight and mail (McKnight 2010). Thus,
in addition to passenger services, airlines provide cargo services to shippers,
manufacturers and international air freight forwarders. Air cargo can be carried in
freighter aircraft dedicated to that use, or in the lower-deck belly hold compartments
of passenger aircraft (Doganis 2009).
Modern passenger aircraft – in particular long haul Airbus A330-300 and Boeing
B777-300ER aircraft – have substantial air cargo capacity, and are extensively used on
long-haul international routes. Air cargo carried in the lower deck belly-holds of
passenger aircraft augments the revenue earned from passengers in the aircraft’s
main passenger cabin. For those airlines operating dedicated freighter aircraft, the air
cargo revenues must be sufficient to cover all of the operating costs of the flight
(McKnight 2010).
As we noted in Topic 1, for the combination airlines, passenger revenues are still
significantly larger than air cargo revenues, with passenger revenue often accounting
for around 70 per cent or more for most airlines (Zhang et al. 2004). Notwithstanding,
air cargo revenues are now increasingly becoming an important source of revenue for
the world’s airlines (Indranath & Abeyratne 2004).
Air cargo revenue is measured in cents per ton-mile or cents per ton-kilometre. The
revenue earned by airline for the carriage of postal mail is measured in the same way
as air cargo revenues (Radnoti 2002).
 Excess baggage revenue
49
The carriage of passenger’s excess luggage is another source of airline revenue
(Legeza 2001), which is normally more significant for international airlines. Excess
baggage revenue may be expressed as a percentage of airline passenger revenues
(Radnoti 2002).
Methods of Revenue Allocation
For airlines the allocation of revenue is fairly straight forward as most revenue can be directly
linked to a flight. For example, a passenger has a one-way ticket from Melbourne to Hong
Kong on flight number CX104. Hence all the revenue is allocated to flight CX104. The same
would apply for any air cargo revenue from Melbourne to Hong Kong.
Where a passenger’s journey involves two or more different airlines (or is across two or more
flights on the same airline), then an agreed allocation procedure must be established. Such a
process was devised around 60 years ago by IATA. It ensures ease of travel for passengers
and freight forwarders and ease of settlement between airlines. The allocation method, called
the MPA (Multilateral Prorate Agreement), takes into account the varying sector lengths that
are operated on multi-sector itineraries and allocates revenues according to standard
formulas (Holloway 2008).
For other revenues, such as interest or dividends earned, the basis of allocation to routes
could be on the basis of RPKs, ASKs or ASMs.
Structure of Airline Costs

Costs of aircraft operation vary directly with the frequency of an airline’s operations, size of
aircraft operated, type of route and the weight of the traffic load. There may be differences
between state owned and privately owned airlines since the former airline’s cost structure
may not be influenced by commercial considerations only (Cole 2005, p. 183).
Airline costs are the primary influence on the provision of airline services. Profit maximising
airlines will aim to provide services, of a given quality, at the least possible cost. There are,
however, still many airlines around the world that are government owned for which profit
maximisation may not be the primary objective. Without profit maximisation as a key
strategic objective, airlines may not seek to fully minimise costs. Even government owned
airlines, however, will confront budget constraints that require that costs be minimised for
elements of its operations. Cases where privately owned airlines do not minimise their costs
are generally explained as resulting from the separation of ownership and control, where the
objectives of the manager are not the same as the objective of the owner(s) (Bureau of
Transport & Communications Economics 1994, p. 5).
The world airline industry is dynamic, rapidly-changing, and is subject to sudden and
unpredictable variations in the cost of many of its inputs. This is why most airlines break
down their costs in various ways in order for management to be able to use the cost data so as
to measure general trends over time and also to measure the cost efficiency of particular
functional areas. Ultimately these data enables them to produce their annual accounts and
their operating and non-operating profit or loss statements. In addition, airlines require very
detailed cost information by flight or route in order to make operating decisions, for example,
whether to add more flight frequencies on a sector or reduce them, or whether to provide
services on that route at all. Also, cost identification is critical in the development of pricing
policies and decisions, for both passengers and air cargo. Finally, an assessment of costs is
essential for any investment evaluations, whether in new aircraft or in new routes and
services (Doganis 2009, p. 64). A common practice is for airlines to divide their costs into
direct and indirect costs (Doganis 2009; Oum & Yu 1998; Wensveen 2011).
Airline Costs
The major inputs in the provision of international air services include:
50
 Aircraft (hull and engines);
 Fuel;
 Staff (both in-flight and ground-based staff);
 Airport and en-route services (including runway and navigation facilities);
 Airport terminals;
 Computer reservation systems (CRS);
 Passenger coordination facilities;
 Aircraft maintenance and hangar facilities;
 Advertising and promotion; and
 Management and corporate services ((Bureau of Transport & Communications
The nature of individual inputs will influence airline operations. Some of the
abovementioned inputs are specific to a particular flight, some items relate to flying
operations in general – the costs of which are not directly attributable to any specific flight –
and other items relate to the general managerial costs of running an airline (Bureau of
Transport & Communications Economics 1994, p. 6).
In the traditional economic theory of the firm, total costs are divided into two groups –
variable and fixed costs (Nadar & Vijayan 2009). Therefore, to aid in the economic analysis
and also management decision making, variable costs and fixed costs must be distinguished.
Clearly, some costs may be immediately avoidable as a result of a management decision, for
example, staff redundancies and eliminating in-flight meal services (Wensveen 2011, p. 324).
Costs that remain fixed in the short-run, irrespective of the level of output, are termed fixed
costs (FC). Costs that directly vary with the changes in production are termed variable costs
(VC). When fixed and variable costs are combined, the result is the total cost (TC) (Vasigh et
al. 2013). In simple terms the following formula provides the equation for determining total
cost:
TC = FC + VC
where:
TC = Total costs
FC = Fixed costs
VC = Variable costs
The classification of inputs as variable or fixed costs depends on the nature of the airline’s
individual inputs and the time frame that these costs are under consideration (Bureau of
Transport & Communications Economics 1994).
Variable costs: are those costs that increase or decrease with the level of airline output, or
available seat kilometres (ASKs), that an airline produces (Holloway 2008). In general, these
costs are avoidable in the short-term. For instance, if a flight or series of flights is cancelled,
the airline will no longer incur the flight crew costs, fuel charges, aircraft landing charges, and
the costs of in-flight meals (Wensveen 2011). Less obvious are the engineering and
maintenance costs, which should be classified as variable costs (Baldanza 2002).
Whilst aircraft maintenance requirements vary considerably among the different types of
aircraft operated by the world’s airlines (Ashford et al. 1997), there is, however, following a
designated number of flight hours and pressurization cycles – which may vary by aircraft
type and by government regulations – a requirement for every aircraft to undergo a
comprehensive check at a maintenance and engineering base in addition to the flight-by-
flight ground maintenance checks (Dempsey & Gesell 1997). Therefore, as a large part of
direct maintenance is related to the amount of flying or the aircraft cycles, the cancellation of
a flight (service) will immediately reduce both the hours flown by the aircraft as well as the
51
flight cycles and will save some engineering and maintenance expenditures, most notably on
the consumption of some spare parts, and some staff-related costs (Wensveen 2011, p. 324).
According to Vasigh et. al. (2013), “the timeframe is important when categorizing costs based
on their relation to output” (p. 101). This is because in the short run, some airline costs are
fixed, since they have already been incurred. Consequently, they are difficult or even
impossible for the airline to change (Vasigh et al. 2013).
Fixed costs: are those direct operating costs that, in total, do not vary with changes in ASKs
produced. They are costs that are unavoidable in the short run. Having planned its flight
schedules for a specific period, generally for around six months, and adjusted its aircraft fleet,
staff, and maintenance requirements appropriately, an airline cannot easily reduce its
planned flight schedules and services beyond a certain minimum level because of its
obligations to the public. Hence, fixed operating costs may not be avoidable until the airline
can adjust or alter its scheduled service (Wensveen 2011, p. 324).
Although most indirect operating expenses are fixed costs in that they do not rely in the short
run on the amount of flying undertaken by the airline, others are more directly dependent on
the operation of particular flights. This is especially true of some passenger service costs, such
as in-flight catering, and some elements of cabin crew costs. The charges paid for aircraft
ground handling services (passenger, aircraft and air cargo handling) may be avoided if a
flight is not operated. Some advertising and promotional activity costs may be avoidable in
the short term. This leaves within the indirect cost category costs that are not reliant upon the
operation of specific services or routes. Lease payments on aircraft and security services are
very evident examples of costs that are fixed in the short term (Wensveen 2011, p. 324).
The degree to which airline operating costs are fixed depends upon the time scale, and three
periods can be readily identified:
1. The medium term: once the flight schedule has been determined, the costs associated
with operating the flight are relatively fixed, that is, aircraft related costs (capital,
flying, technical and other skilled staff and general overheads);
2. The short term: once the airline has committed to operate the flight, all the medium term
costs are fixed, as well as airport charges, fuel, air traffic control (ATC) fees, and certain
flight-related variable costs (for example, wear and tear on aircraft tyres and landing
gears); and
3. The very short term: once the airline has committed to carry passenger on the flight,
additional costs become fixed, that is, ticketing materials, in-flight meals, travel agent
commissions and fuel required to lift extra payload (Morrell 2013, pp. 13-14).
The additional costs incurred in Point 2 above (The short term) are often described as variable
costs, whilst the additional costs incurred in Point 3 (The very short term) are marginal22 or
incremental costs. Generally, as long as the flight is not fully booked, traffic and revenues can
be increased at very little cost, but once additional flights are required to be operated, costs
start to escalate. Conversely, when there is an unanticipated reduction in traffic demand
(either passenger and air cargo or both), induced by an economic downturn and a major
exogenous event such as the Global financial crisis (GFC), airlines find it difficult to shed
costs: aircraft cannot be easily sold, and staff contracts are difficult or expensive to break
(Morrell 2013, p. 14). In the long run, however, all costs are assumed to be variable. This is
22
Marginal cost denotes the extra or additional cost of producing one extra unit of output (Samuelson & Nordhaus
2010, p. 160). The preponderance of fixed costs in an airline’s cost structure results in rather low marginal costs. For
instance, if an airline has a crewed aircraft sitting idle for a period during the day, the marginal cost of operating one
more additional flight tends to be quite small. Similarly, if an airline has an aircraft with unoccupied seats just prior
to departure time, the marginal cost of carrying additional passengers is relatively low. This is why an airline can
offer extremely low (and thus, highly competitive) fares for any seats anticipated to be empty when the flight departs
(McKnight 2010, pp. 44-45).
52
because over time a firm is fully capable of changing their fixed costs by selling and/or
altering the fixed cost asset base (Vasigh et al. 2013).
Take for an example the operation of a single flight. Short run variable costs include fuel
costs, flight and cabin crew costs, airport and en-route charges, and passenger service costs.
In the short run the actual costs of the aircraft fleet, maintenance facilities and hangars, station
and ground costs, and general and administrative expenses are fixed. Given a slightly longer
time frame the airline can adjust fleet size and composition, and the network of cities served.
In the long run all inputs are variable; thus, airlines will aim to structure their operations so
as to provide a set of services desired by consumers, using the least-cost combination of
inputs (Bureau of Transport & Communications Economics 1994, p. 6).
Fixed costs constitute a high proportion of an airline’s operations. One clear implication is
that the profitability of an airline is dependent upon obtaining the high utilisation of its assets
(aircraft, staff, and facilities). A further implication is that, as noted above, when business
conditions deteriorate rapidly, it is difficult for airlines to respond rapidly by reducing costs
(McKnight 2010, p. 42). Airlines are highly sensitive to fluctuations in traffic (Doganis 2009):
thus, increases in passenger traffic volumes can drive up profits markedly, but a decline in
the number of passengers carried can very quickly result in an airline incurring losses
(McKnight 2010).
The classification of airline costs between variable and fixed costs also provides a framework
which can be utilised to analyse airline operating decisions. The magnitude and distribution
of costs between variable and fixed costs elements can have a substantial influence on the
scale and structure of airline operations. For instance, an airline that is operating services on a
route that is not profitable, due to high fixed costs, would eventually be forced to terminate
services on this route. In the short run, however, if the services cover the day-to-day
operating costs (that is, the service covers short run variable costs) the best practice for the
airline may be to continue to operate services on the route. In the longer term the airline will
be forced to terminate the services, but will be better able to redeploy their resources to other
profitable routes and so terminate the unprofitable services at lower cost (Bureau of Transport
& Communications Economics 1994, pp. 6-7).
The International Civil Aviation Organization (ICAO) apportions costs as either operating or
non-operating costs. Direct operating costs refer to those costs associated with an airline’s
aircraft operations (Doganis 2009; Holloway 2008). Non-operating costs refer to those items
not associated with airline core business operations, and include retirement of equipment,
interest receipts and payments, subsidies not associated with aircraft operations, and
subsidiary company payments or receipts. Non-operating costs do not, in general, influence
the short run operational decisions of an airline (Bureau of Transport & Communications
Economics 1994, p. 7). Thus, these costs will remain unaffected by a change of aircraft type as
they are not directly dependent upon aircraft operations. Indirect operating costs also include
costs that are passenger service related as opposed to aircraft related and general and
administrative costs (Wensveen 2011, p. 322).
Direct Operating Costs
 Flight operations
The largest category of direct operating costs is for flying operations and these costs
consist of the following items.
Flight crew costs: these costs involve not only the direct salaries and travelling costs
but also crew allowances, pensions, and insurance. Flight crew costs can be calculated
directly on a route-by-route basis or, more commonly, can be expressed as an hourly
cost by aircraft type. In the case of the latter, the total flight crew costs for a specific
route or service can be calculated on that route by multiplying the hourly flight crew
costs of the aircraft being operated on that route by the aircraft block speed – that is,
53
the average speed of an aircraft as it moves through the air – time for that route
(Wensveen 2011).
Fuel costs: another major cost element of airlines flight operations is fuel 23 and oil
(Doganis 2006). In the short run, variations in the unit cost of fuel can have a
substantial impact on airline costs, which will be absorbed by the airline through
higher unit costs, though some of the impact of the higher fuel prices will be passed
on to passengers through higher air fares and/or a fuel surcharges. In the long run,
airlines may adjust their aircraft usage and fleet composition as a result of any
increases in fuel costs (Bureau of Transport & Communication Economics 1994, p. 13
Aircraft fuel prices vary substantially from one country to another due to government
taxes and transport costs (Oum & Yu 1998). Ceteris paribus, airlines that operate longer
average stage lengths, such as Qantas, will have higher fuel costs as a proportion of
total operating costs. Conversely, airlines that operate predominantly short-haul
flights will have lower fuel costs as a proportion of total operating costs. Fuel usage,
however, is not uniform across all stages of aircraft operations: for example, a lot of
fuel is consumed during landing and take-off.
Hence, with other things the same, airlines with greater landing and take-off
movements will tend to use more fuel, so fuel costs will represent a greater
proportion of total operating costs, whilst airlines with fewer landings and take-off
movements will tend to have smaller proportional fuel costs. This means that airlines
with higher than average fuel costs as a proportion of their total costs, may operate
longer average stage lengths, greater numbers of take-offs and landings, or both
longer average stage lengths together with more take-off and landings than other
airlines. As fuel costs are a substantial and important component of airlines costs, the
selection of aircraft and engine technology influences total airline costs. Selecting the
right aircraft and engine is crucial to efficient airline operations. Thus, the presence of
sizeable fixed costs and the indivisible nature of some key airline inputs mean that
airlines can reduce unit costs by altering the scale of production and the mix of inputs
(Bureau of Transport and Communication Economics 1994, p. 8).
Airport and en-route charges: airlines are required to pay airport authorities for the use
of airport infrastructure, such as runways and terminal buildings. Airport charges
normally have two elements: (1) an aircraft landing fee, often related to the weight of
the aircraft and (2) in some instances, a passenger facility charge (PFC) levied by the
airport authority on the number of passengers boarded at that airport (Young &
Wells 2011). In addition, if an aircraft remains at an airport beyond a stated period of
time, the airline may have to pay parking or hangar fees (Wensveen 2011). These
charges represent the direct payment made by airlines to airports and air navigation
service providers (ANSPs) and are recorded in their profit and loss (P&L) account
(International Air Transport Association 2009).
Insurance: often the aircraft hull and liability insurance costs amount to a relatively
small part of the airline’s flight operation costs. The hull insurance premium is
normally calculated as a percentage of the value of the flight equipment and may
range from 1 to 2 per cent, or possibly lower, depending upon the airline, the number
of aircraft that are insured, and the geographic areas in which its aircraft operate. The
liability premium is typically based on the estimated f revenue passenger miles or
revenue passenger kilometres (RPKs) to be flown. Additional insurance coverage, for
example, war risk, can be purchased for an additional premium. The airline can
convert the estimated annual premium into an hourly insurance cost by dividing it by
23
Fuel cost is the cost of the fuel burned by the aircraft when operating a flight (Baldanza 2002, p. 67).
54
the predicted aircraft utilisation, that is, by the total number of block hours that each
aircraft is anticipated to fly during the year (Wensveen 2011, p. 321).
Other flight operations costs: there may be some additional costs incurred related to
flight operations that do not fall into these categories. These additional costs may
include the cost of flight crew training and the airline’s route development. If the
airline decides to amortise the costs of training over two or three years, then they are
typically grouped together with depreciation (Wensveen 2011, p. 321). In addition,
some airlines may be required to pay rental or lease charges for the hiring or leasing
of aircraft or crew from another airline (Morrell 2013). These costs are generally
considered part of flight operations costs (Wensveen 2011).
 Aircraft maintenance and overhaul costs:
Direct maintenance costs include the allocated cost of aircraft maintenance checks
attributable to specific operational drivers, such as hours flown or the number of
aircraft landings (Baldanza 2002, p. 67). Total maintenance costs cover a wide range of
costs related to different aspects of aircraft maintenance and overhaul (Figure 2.6).
Flight equipment maintenance costs cover a wide range of costs related to different
elements of aircraft maintenance and overhaul. Flight equipment maintenance costs
are categorised into direct maintenance on the airframe, direct maintenance on the
aircraft engines, and a maintenance burden. The maintenance burden is essentially
the administrative and overhead costs associated with the maintenance function that
cannot be attributed directly to a specific airframe or engine but which can be
allocated on a fairly arbitrary basis. Individual airlines, who have estimated the total
maintenance costs by specific aircraft type, may convert these into an hourly
maintenance cost by dividing them by the total number of block hours flown by all
the aircraft of that fleet type operated by the airline (Wensveen 2011, p. 321).
55
Figure 2.6. Vueling Airlines Airbus A320-214 aircraft undergoing an maintenance check., Source:
Flight Real (200724).
 Depreciation and amortization:

Typically, an airline’s aircraft’s depreciation25 cost is influenced by estimating both
the useful life and the perceived fair market value of the aircraft at the end of its
estimated useful service life (Doganis 2009; Vasigh et al. 2010). Depreciation is a non-
cash accounting item used by a firm to show that an asset provides value to the firm
over an extended period of time (Brearley et al. 2008).
A major reason for airlines to purchase aircraft outright is to take advantage of
possible depreciation tax benefits arising from the ownership of the aircraft. While a
depreciation cost appears on the firm’s income statement, the accumulated
depreciation of the asset is deducted on the balance sheet to help provide an accurate
indication of an asset’s value. The accumulated depreciation of an asset (the total
depreciation of the asset from day one) minus the asset’s original value is called its
book value, and the book value is what appears on the firm’s balance sheet. As the
asset increases in age, the book value of the asset will reduce due to an increase in the
accumulated depreciation (Vasigh et al. 2010, pp. 142-143).
Book Value = Acquisition Cost – Accumulated Depreciation
Airlines normally use straight-line depreciation over a given number of years, with a
residual value of 0 to 15 per cent. Depreciation periods can vary by aircraft type, with
the period for wide-body aircraft ranging from around 14 to 16 years. For smaller
short-haul aircraft, the depreciation periods are normally shorter, often averaging
between 8 to 10 years. If an airline decides to use a shorter depreciation period, then
the annual depreciation costs will increase. The hourly aircraft depreciation cost of
each aircraft in any single year can be determined by the dividing its annual
depreciation cost by the aircraft’s annual utilisation rate, that is, the number of block
hours flown in that year (Wensveen 2011, pp. 321-322).
As previously noted, many airlines amortise the cost of flight crew training, together
with any developmental and pre-operating costs related to the development of new
routes or the introduction of new aircraft. In principle, this means that such costs,
instead of being debited in total to the year in which they are incurred, are spread out
over a number of years. Such amortisation costs are grouped by airlines together with
depreciation costs (Wensveen 2011, p. 322).
Indirect Operating Costs
 Station and ground handling costs:
Station costs26 are one of the larger indirect costs for international airlines. Such costs
include the salaries and associated costs of airline staff located at an airport and
engaged in the handling and servicing of an aircraft, passengers, or air cargo. In
addition, there are the expenses of ground handling equipment, of ground
24 Reproduced in accordance with the Wikimedia Creative Commons Attribution License,

<http://upload.wikimedia.org/wikipedia/commons/0/06/A320_EC-HTD.jpg>.
25 Depreciation is the allocation of the cost of an asset over the period of its use (Vasigh et al. 2010, p. 142).
26 Station costs refer to the costs of airline activities performed at airports, and include the salaries and costs of all
airport staff involved in handling and servicing aircraft; airport accommodation costs, maintenance and insurance of
airport facilities, traffic handling fees charged by third party service providers for handling the air services of an
airline, and airport stores charges. Landing and associated airport fees are airport related air traffic operations, and
include landing and take-off services, and parking and hangar fees. Route facility charges are fees levied for air route
facilities and services, such as air traffic control (ATC) service charges (Bureau of Transport & Communication
56
transportation, of buildings and offices and associated facilities, for example, the
airline’s flight catering centre, and of communication equipment. Costs are also
incurred from the maintenance and insurance of each station’s buildings and
equipment. Rents may also have to be paid for some of the facilities used by the
airline (Doganis 2009; Wensveen 2011, p. 322).
 Passenger service costs:
The greatest single element of costs arising from passenger services is the payroll
(wages/salaries), staff allowances, and other costs related directly to aircraft cabin
staff and other passenger service employees. Such costs include hotel and other costs
associated with overnight stopovers, together with the training costs of cabin staff
where these are not amortized (Wensveen 2011, pp. 322-323). Because the number
and type of cabin staff may vary by aircraft type (Doganis 2009), some airlines
consider cabin staff costs to be an element of flight operations cost and, as such, a
direct operating cost (Wensveen 2011, p. 323).
A second type of passenger service costs are those directly related to the airline’s
passengers. They include the costs of in-flight catering (Figure 2.7), the meals and
other facilities provided on the ground for the comfort of passengers, and the costs
incurred from a delayed or cancelled flight (Doganis 2009, p. 73; Wensveen 2011, p.
323).
Figure 2.7. Air France first class starter (Houston to Paris)., Source: Salard (201327).
 Reservations, sales and promotion costs:
All costs associated with reservations, sales, advertising and publicity and
promotional activities, as well as all office and accommodation costs arising from
these activities, are included in this cost category. Staff costs at retail ticket offices,
whether in the home market or abroad, are also included. In addition, the costs of all

<http://upload.wikimedia.org/wikipedia/commons/9/91/STARTER_IN_FIRST_CLASS_FLIGHT_CDG-
IAH_AIR_FRANCE_777_F-GSQM_%2810232301755%29.jpg>.
57
advertising and any other promotional activities, such as familiarisation flights for
journalists, travel agents or international air freight forwarders, fall into this category
as well. Finally, the sales commissions paid to travel agencies for tickets sales are
typically included in this costs category (Doganis 2009; Wensveen 2011).
 General and administrative costs:
General and administrative costs are normally a relatively small element of an
airline’s total operating costs, because many administrative costs can attributed
directly to a specific function or activity within the airline, such as sales. Accordingly,
general and administrative costs should include only those costs that are truly
general to the airline or that cannot be readily allocated to a particular activity
(Doganis 2009, p. 74; Wensveen 2011, p. 323).
Airline Non-operating Costs and Revenues
Non-operating costs and revenues include those costs and revenues not directly related to the
operation of an airline’s own transportation services. The major non-operating costs and
revenues are:
1. Gains or losses arising from the retirement of property or equipment, both aeronautical
and non-aeronautical. Such gains and losses arise when there is a difference between
the depreciation book value of a particular asset and the value that is realised when it is
retired or sold off;
2. Interest paid on loans, together with any interest received from bank or other deposits.
3. All profits or losses arising from an airline’s affiliated firms, some of which may be
directly involved in air transportation, such as the airline-owned commuter airline; and
4. Direct government subsidies or other government payments (Wensveen 2011, p. 323).
Cost Per Unit (Unit Costs)
It is also useful to look at the airlines unit cost position (cost/ASK). Unit costs can then be
related to the unit selling price (yield/ASK) to see how much profit (or loss) the airline is
making at its current selling price and cost position on a particular route or route group. How
rapidly the costs fall per unit depends upon the size of the fixed costs.
Industries with high fixed costs have very high per unit costs at low levels of output, but
these per unit costs fall rapidly as output increases. Furthermore, route length directly
influences the aircraft unit cost. Aircraft unit costs decrease as the route length increases,
since the fixed costs related to the flight are spread over a larger output and the variable costs
do not increase proportionally with distance, rather they show a declining growth rate
(Hennemann & Malanik 2010, p. 189).
The rapid fall in total unit costs for companies with high fixed costs as output increases
explains the pricing and competitive strategies of many companies. If the airline has large
fixed costs then it is essential to ensure maximum output and this is exactly what airlines aim
to achieve. Airlines try to have their aircraft productively flying for as many hours per day as
possible, keeping ground time to a minimum. This is expressed as aircraft utilisation and
expressed as “flying hours per day”, for example, 13.2 hours/day. LCCs achieve a high daily
fleet utilisation (Doganis 2009), which along with other factors leads to lower average seat
cost, that is, lower unit costs.
Airline annual reports normally provide high level break downs of certain revenue and cost
items only. In day to day airline management these details would be available on a per flight
basis; however they are not generally publicly available. Industry association figures do
provide more detailed analysis, but again they are at a level that would not permit the
detailed route cost breakdowns of an individual airline to be revealed.
However, within the US, some details of cost category components, such as airline fuel costs,
are available, albeit at a high level. In the US, airlines provide this data to the US Department
of Transportation (DOT) on a quarterly basis. Cost details are averaged across all routes, by
58
all airlines, with the resultant being unit costs by expenditure category per ASM (Available
Seat Mile).
Airline Capital Costs
Airlines are extremely capital intensive businesses, and the purchase of an aircraft, in
particular, is a major capital expense (Clark 2007; Wensveen 2011). An airline’s capital
outlays may exceed their internally generated cash flow, thus some method of financing,
using either debt and/or equity instruments, is therefore required to cover the cost of
acquiring aircraft (Bureau of Transport & Communication Economics 1994.
Financing such investments requires diligence. The correct mix of debt and equity funding is
required to ensure ongoing interest payments are sustainable, while shareholder value is
maintained and increased. However, the industry remains intensely competitive and, for the
industry as a whole, profitability and returns on capital still remain extraordinarily weak. In a
typical industry where firms have no market power, competition would force returns on
capital employed (ROCE) down to the cost of capital (WACC) which is really a measure of
opportunity cost for investors. In the airline industry competition is so intense that even in
the good year’s returns on invested capital are what investors would typically consider the
minimum for a competitive industry (International Air Transport Association 2013).
Airline Cost Allocation Methodology

Rightly or wrongly, attempts are made to allocate as many costs as possible to products and
services in all industries. Wrongly, this information is then used for decisions such as pricing,
product line deletion and so on.
Allocated production overheads once represented only a small proportion of a product’s total
costs. Today in many industries, including aviation, they represent a significant part of total
cost.
Airlines which run full route profit management accounting systems allocate 100 per cent of
all revenues and all costs to each flight operated by the company. As with any allocation
methodology the key word is simplicity. Items should always be allocated on the most
appropriate basis.
Methods of Cost Allocation

For costs, however, the process is less clear. Apart from fuel, aircraft landing fees, crew
salaries and a few other items, many costs do not have an obvious and unique link to a
particular flight. Some of these costs are large in value.
In order to allocate these costs to routes (flights) an examination of the nature of the cost is
required and an appropriate allocation basis assigned. Some important measures are ASKs,
RPKs, or block hours.
Once all costs have been allocated to routes, then the cost per unit of production – a seat
(ASK) or a unit of freight (for example, per kilogram) – can be determined.
Economies of Scale, Scope and Density in Airline Operations

In addition to simply attempting to minimise each cost for which they are responsible, airline
executives often try to reduce the company’s unit costs by achieving one or more of the
following three economies: scale, scope, or density (McKnight 2010, p. 45). Economies of scale
exist if average (unit) output declines as airline output increases. Economies of scope exist if it is
cheaper for one airline to produce two or more services than if each of the services were
produced separately by different airlines (Hanlon 2007, p. 77). The major cost advantages
available to airlines are:
59
 Cost per seat declines as the size of the aircraft increases, assuming that an aircraft is
being operated over the distance for which it was designed;
 Cost per kilometre falls as the number of kilometre flown increases 28; and
 Cost per passenger falls as the number of seats filled on an aircraft increases towards
full capacity (Tretheway & Oum 1992, p. 4).
Bearing these relationships in mind, airline executives can choose their aircraft and schedule
services to match demand and minimise total operating costs.
In addition to the cost advantages available from operating different aircraft types, airlines
may also achieve cost advantages through an increase in the scale and scope of their
operations (Bureau of Transport & Communications Economics 1994). An airline that
expands its network (number of points served), with the aim of reducing its unit costs, is
aiming to achieve economies of scale (McKnight 2010).
The size of an airline’s network (economies of network size) and the traffic flows over that
network (economies of traffic density) influence airline costs. As airline route networks
become larger, the number of possible city-pairs rises (O & Ds) exponentially. Hence, the
required fleet of aircraft also increases rapidly. Average costs will decrease to the extent that
fixed costs can be spread over a greater quantity and variety of output. For instance, airlines
can reduce their average in-house engineering and maintenance costs as they increase their
fleet of aircraft. Lower engineering and maintenance costs per aircraft translate into lower
costs per unit of output. Also, economies may be achieved as the number of city pairs served
by the airline increases, by sharing some overhead costs (such as information technology
systems) over the increased range of products. Hence, economies of network size encompass
both of the more traditional concepts of economies of scale and scope (Productivity
Commission 1998, p. 26).
With increasing size, however, airlines will incur higher overhead costs and will have more
complex management processes, both of which will result in higher than proportional
increases in costs (McKnight 2010).
It is important to note that most international airlines, produce a range of different outputs,
generally operating more than one service on any given city pair route and a number of
interconnected routes (Bureau of Transport & Communications Economics 1994, p. 11). For
instance, travel from Melbourne to Los Angeles via Auckland is not the same product as
travel from Melbourne to Los Angeles on a non-stop basis.
An airline that decides to broaden its service offering (for instance, offer an additional class of
service on its aircraft, or commence carrying air cargo) or its geographical coverage (for
example, operate multi-stop flights, or provide new non-stop flights between cities already
served) seeks economies of scope. An airline entering into one of the major global alliances is
also seeking to achieve such economies of scope (McKnight 2010, p. 45).
The scope economies large airlines are able to obtain lie principally on the marketing side,
most of them related to the network size. Airlines operating large and extensively spread
networks can more easily afford large-scale marketing campaigns which are considerably
more efficient than promotions of individual routes, but which are beyond the means of
many small airlines. Quantity discounts in media purchasing mean that advertising costs rise
much less in proportion to the number of city pairs (O & Ds) served by the airline. Also,
advertising an entire network provides large airlines with a strong sense of identity in the
public mind. The marketing advantages of large route networks are reinforced by the use of
28
Technology, however, constrains the extent of the gains available, as after a certain range – depending upon the
aircraft – the distance flown can be extended only by reducing aircraft capacity (Bureau of Transport &
Communications Economics 1994, p. 9).
60
sophisticated computer reservation systems (CRSs) and loyalty marketing schemes. CRSs
generate economies of scope, insofar as they enable the airline’s booking system to be
centralised and they also have some advantageous spin-offs like, for example, facilitating the
airline’s revenue management procedures (Hanlon 2007, p. 77).
Airlines are also able to capture economies of traffic density and economies of network size.
Economies of traffic density relate to the volume of traffic carried on any given route.
Economies of density exist, over a particular route, if unit costs of providing the services on
that route decline as the number of passengers carried on the route increases (Bureau of
Transport & Communications Economics 1994, p. 11). Unit costs decrease when the size of the
aircraft used by the airline increases, the number of seats filled on an aircraft rises and fixed
indirect costs are spread over more passengers and air cargo. These unit costs include route-
specific costs such as ticketing, sales, promotion and airport terminal lease or ownership costs
scope (Productivity Commission 1998, p. 26). Furthermore, economies associated with traffic
density can be significant and may help explain the development of hub-and-spoke route
network systems by airlines in many markets around the world. An airline adding a route
branching out from its existing route network may well realise economies of scope, that is,
savings because, for example, its airport facilities and staff are already in place at the airport
of origin and their costs can now be spread over more units of output (O’Connor 2001, p. 22).
But the most important economies of scope are the economies of route traffic density that
airlines can reap by structuring their route networks in the hub-and-spoke pattern29. Thus, by
combining passengers and groups of passengers airlines can carry the total more cheaply
than if the passengers were carried on an individual basis. This is what airlines might achieve
by routing passengers (and air cargo) through hubs, and which has the effect of increasing
traffic on each sector flown (Hanlon 2007, p. 77).
The Influences of Airline Pricing Decisions

Influence on Demand
Demand does not exist in isolation; it exists at a price. Price is therefore one of the most
important determinants of demand. There is an elasticity associated with price, as there is
with other important independent variables in the demand function. Consequently, any
adjustments or changes of prices influence both the volume of airline traffic generated and
the yield earned by that traffic (Holloway 2008, p. 131).
Airline Pricing Strategy Influence on Supply and Costs
By influencing demand, pricing strategy drives revenues. The volume and nature of demand
an airline decides to supply with output in turn drives costs. For example, the nature of
targeted demand affects the design of an airline's service concept and service delivery system,
and so impacts upon the cost of supply (Doganis 2009): this can be viewed as the 'natural'
tendency towards oversupply which is created by the need to offer high frequencies and seat
accessibility to business travellers (Dempsey & Gesell 1997; Shaw 2011).
Through the demand it creates, airline pricing can affect:
Variable costs: the costs incurred by the airline in serving any incremental demand.
Fixed costs: Identifying the incremental demand to be served by the existing fleet and
infrastructure, or alternatively whether the airline would be required to add more capacity -
and therefore more fixed costs will incurred by the airline.
29
The hub-and-spoke route network achieves economies of traffic density by funnelling passengers from multiple
origin cities onto a single flight to a given destination (McKnight 2010, p. 45).
61
Unit costs: In assessing the impact of pricing on demand for airline services, it is necessary to
consider both the variable and fixed costs. The impact of higher throughput on unit costs will
be influenced by the airlines variable and fixed costs and by the size of any economies of
scale, density, and scope available to a particular airline, and by the precise nature and
geography of the incremental demand (Holloway 1997).
Pricing policies can also have a more direct and immediate influence on airline costs (Doganis
2009). For instance, simple and stable fare structures contribute to lower distribution costs by
reducing sales staff training requirements, shortening reservation sales calls (so increasing the
productivity of reservation staff, and lessening the perceived requirement amongst
passengers to rely on travel agents for current fare information. Conversely, price volatility
could raise distribution costs both by increasing passengers' reliance on travel agents and,
because more enquirers are just shopping around for the best deal. The liberalization of air
transport markets around the world has tended to reduce the predictability of fares from the
customer's perspective, and as a result, this may lead to extreme volatility in both air fares
and the conditions imposed on them (Holloway 2008).
Airline Pricing Strategy Influence on Profits, Market Share, and Cash
Flow
We have seen that price is an important driver of both revenues and costs. However, the
influence is not proportional. This means that a pricing strategy intended to maximize
revenue will not necessarily maximize the difference between revenue and costs - that is,
profit.
One way to influence long-run profitability, where the regulatory framework permits, is for
the airline to discourage market entry by competitors. Aggressive pricing, or a willingness to
match a prospective entrant's aggressive pricing, is a tool that can be used to counter new
market entrant threats. Whether it is in fact the correct strategy will depend upon the price
elasticity of the market concerned, and whether the incumbent can utilise its extensive brand
loyalty, a better frequent flyer programme, or a wide network served at high frequencies, for
example, to counter any threats from the new entrant (Holloway 2003).
Airline Pricing Strategy Influence on Product Positioning
Airline product positioning essentially defines the location of a product relative to competing
products in its target market or segment, as perceived by the airline’s customers. Price is
therefore a critical element assessed by customers when formulating their perceptions of
services and products (Shaw 2011).
This is true for most products, but particularly so for airline services because their
intangibility makes their evaluation more subjective (Babbar & Koufteros 2008). Of course,
the influence of price on product positioning is not a one-way flow; the positioning of a
product also constrains pricing insofar as it can be highly damaging to the image of a
premium product for it to be heavily discounted. Conversely, a more basic product or service
may not sustain a sizeable price increase without the necessity for the redesign and/or the
repositioning of the product in order to satisfy the customer’s requirements (Holloway 2008).
Airline Profitability
As is the case for every firm, airline profits equal total revenues minus total costs. For airlines,
however, another measure of profitability is the margin: the difference between unit revenue
(RASK) and unit cost (CASK). The unit margin is a ready approximation of the average
amount of profit the airline has captured for each unit of capacity (ASK) flown (McKnight
2010, p. 47).
A challenging task for airline executives is assessing the profitability of a given route. For
example, there may be occasions where airline executives may be required to review all
routes operated by the airline with a view to withdrawing services on the worst performing
62
ones. This is a difficult task for two reasons. First, good accounting practice requires that air
fare revenue be apportioned to the flight legs where it was earned. For passengers that paid a
single fare but travelled on multiple flight legs, the airline must decide how to allocate fare
revenue to each of the flight legs that the passenger travelled on. Some airline route networks
are more complex than others, so meeting this challenge varies in complexity for each airline.
The approach to the allocation of passenger fare revenue on multiple segments or routes can
also vary between airlines (McKnight 2010, p. 47).
Secondly, good accounting practice requires that costs also be apportioned to the flight legs
where they were incurred. However, as we have previously noted, some of the costs
associated with a specific route are fixed costs, have a value to several routes, or for other
reasons are not easily allocated. A commonly used solution to this problem is for the airline to
identify the variable costs incurred on the route and to subtract them from the revenue
earned on the route. The result is referred to as Contribution to Fixed Costs and Profit. While this
practice does not identify route profit per se, it is more easily calculated and can serve as a
proxy – especially when the airline’s objective is to rank the profitability of all routes and
identify the least lucrative ones (McKnight 2010, p. 47).
Volatility in Airline Profitability

Airline profits are normally characterised as volatile, meaning that they tend to be highly
volatile from one period to the next (Figure 2.8). One way that demonstrates the volatility of
airline profits is that when the overall economy, that is, gross domestic product (GDP),
displays signs of weakness, airline profits tend to decline to a greater degree, and vice versa
when the economy is strong, airline profits tend to be more positive (McKnight 2010, p. 48).
This is referred to as ‘pro-cyclicality’ (Bureau of Transport & Communication Economics
1994).
Figure 2.10. The cyclical and volatile nature of world airline profits: 2000-2014., Source: International
Air Transport Association (2007, p.4; 2014, p.4).
Airline profits are volatile for two key reasons. First, airlines are often unable to adapt their
operating cost base very rapidly to changes in demand and operating revenues; and, second,
many airlines finance their assets through debt or leases, so that small variations in operating
profits produce large swings in the cash that is available to shareholders (Morrell & Swan
2006, p. 714).
In the United States, for example, the income elasticity of the airline industry has been
estimated at 2.0, meaning that airline profits tends to change at approximately twice the
percentage change in GDP. It is also important to note that changes in the volume of
passenger traffic tend to lag changes in the economy; hence, changes in airline profits may
also lag changes in the economy (McKnight 2010, p. 48).
63
The Effects of Leverage on Airline Profitability
Airlines have two additional ways to manage their profitability apart from simply generating
revenue and reducing their costs. Both of these ways involve leverage, which acts to magnify
the level of profitability or loss, as the case may be. Leverage increases the airline’s upside
profit potential and downside risk. It is, however, not an absolute – its significance lies in its
relative degree (McKnight 2010, p. 48). There are two types of leverage available to airlines:
operating leverage and financial leverage (Holloway 2008; Vasigh et al. 2010).
Operating leverage is determined by the relationship between the firm’s sales revenues and its
earnings before interest and taxes (EBIT). The earnings before interest and taxes are referred
to as operating profits. Financial leverage represents the relationship between the firm’s
earnings before interest and taxes (operating profits) and the earnings available for
shareholders. The operating profits (EBIT) are, hence, used as the pivotal point in defining the
firm’s operating leverage and financial leverage. Operating leverage results from the
existence of fixed costs in the firm’s revenue (income) stream (Jain 2007, pp. 18.3-18.4).
The relative mix of a firm’s variable costs and fixed costs is measured by the operating
leverage. Operating leverage is calculated ass:
Contribution margin
Operating leverage=
Income from operations
Operating leverage is a measure of how much an airline’s operating profit changes in
response to a change in the airline’s revenue. Fundamentally, operating leverage relates to the
relative levels of the airline’s fixed and variable costs 30. Given their normally high level of
fixed costs, operating leverage for most airlines tends to be high relative to firms in many
other industries. High operating leverage requires that the airline accurately forecast future
traffic volumes, because it is on this basis of that forecast that the airline will commit to fixed
obligations (for instance, new aircraft, facilities, staffing) in order to handle the predicted
traffic. If actual traffic exceeds the airline’s traffic forecast, the airline will show high levels of
profit. Conversely, if the traffic generated is less than that predicted, then the airline may
experience heavy losses (McKnight 2010, p. 48).
While operating leverage is related to a firm’s cost structure, financial leverage is related to
how the firm is financed, that is, debt capital versus equity (Jain 2007; McKnight 2010, p. 48).
Financial leverage is a measure of how much an airline’s per-share net profit changes in
response to a change in that airline’s operating profit. An alternative and somewhat easier
way to address financial leverage is for the airline to consider the relative proportions of debt
and equity, that is, the debt/equity ratio31. The higher the proportion of debt, the more the
airline is leveraged financially. Airlines typically raise their financial leverage when they
believe that the investment climate will be favourable and that the value of their company
will grow. Use of financial leverage enables an airline to increase the return on the capital that
has been invested by its shareholders, since the cost of debt capital tends to be fixed, but it
does, however, increase the airline’s level of risk (McKnight 2010, p. 48).
In general, management tends to increase an airline’s overall degree of leverage in response
to perceived positive future prospects and, conversely, to reduce it in the face of negative
30 Since the difference between contribution margin and income from operations is fixed costs, firms with large
amounts of fixed costs will typically have a high operating leverage. Thus, firms in capital intensive industries,
such as airlines, will normally have a high operating leverage. Executives can use operating leverage to measure
the impact of changes in sales on income from the firm’s operations (Warren 2009, p. 418).
31The debt/equity ratio, or gearing, is the long-term debt or borrowings divided by shareholders’ funds (Morrell 2013,
p. 71).
64
prospects. Changing the level of operating leverage involves the firm shifting the mix of fixed
and variable costs, while changing the financial leverage involves shifting the firm’s
debt/equity ratio. There are a number of means and ways available to airline executives to
accomplish both actions; the key is for those executives to take those actions at the
appropriate time (McKnight 2010, p. 48).
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Vespermann, J & Holztrattner, S 2010, ‘The air transport system’, in A Wald, C Fay & R Gleich
(eds), Introduction to aviation management, LIT Verlag, Münster, Germany, pp. 9-24.
Warren, CS 2009, Survey of accounting, 4th edn, South-Western Cengage Learning, Mason,
OH.
Farnham, UK.
York.
Zhang, A, Hui, YV & Leung, L 2004, ‘Air cargo alliances and competition in passenger
markets’, Transportation Research Part E: Logistics and Transportation Review, vol. 40, no. 2, pp.
83-100.
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Aircraft Economics and Performance Evaluation
Aircraft Performance
Aircraft Operational Weights
Aircraft manufacturers specify an extensive range of details and data regarding the safe
operating envelope for the various models of aircraft produced. These details are normally
maintained and evaluated by the Aircraft Performance department in the Engineering and
Maintenance Division of an airline. In addition, these details and operational characteristics
are included in the flight manual for each aircraft type that is approved by the relevant
regulatory authority, for example, in Australia by the Civil Aviation Safety Authority
(CASA).
Weight and balance factors are critical to the safe operation of an aircraft. Weight and balance
refer to the weight of an aircraft and the location of the centre of gravity. Aircraft are
designed to operate within certain weight and balance limits. All-up weight of the aircraft has
a major effect on flight performance of the aircraft, but the imposition of a maximum
allowable weight is necessary to ensure structural integrity of the airframe. Location of the
centre of gravity within a specified range is mandatory to ensure that the aircraft is
controllable (United States Federal Aviation Administration 2011).
Obviously for a commercial airline, whether they are either a passenger or a dedicated all-
cargo airline, the critical weight (from a commercial perspective) is payload – that is, how
many passengers (and their bags) or air cargo can be uplifted on a particular flight. This
weight will be affected by a number of operational issues such as airfield height and
temperature, obstacles, runway length, pavement and apron strengths, volumetrics, and so
forth (Clark 2007; Irrgang 2000).
Importantly, each aircraft type will have load restrictions that create a unique set of important
interactions among the passenger load, air cargo load, and stage length of any flight. Such
limits are defined and imposed during the initial aircraft certification processes. A unique set
of aircraft limits/constraints is developed for each situation, based on the interaction among
the aircraft model, air cargo volumes and density, flight stage length, and the operations of a
particular airline (Jofré & Irrgang 2000, p. 263).
The major aircraft limits/constraints include:
 Operating empty weight (OEW): the OEW is the aircraft’s weight as specified by the
manufacturer, plus a number of additional removable items which are required due
to operational requirements. These include the aircraft engine(s) oil, the unusable
fuel, the flight catering and in-flight entertainment equipment (IFE), flight and
navigational manuals, life vests and emergency equipment (Curtis & Filippone 2009,
p. 30).
 Maximum zero fuel weight (MZFW): the MZFW is the maximum weight permitted
before fuel is loaded, as limited by strength and aircraft airworthiness requirements
(Jofré & Irrgang 2000, p. 263).
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 Maximum takeoff weight (MTOW): the MTOW is the maximum aircraft weight at lift-
off from the runway, that is, when the front landing gear detach from the ground
(Curtis & Filippone 2009, p. 30). The MTOW includes the aircraft’s OEW, payload
(passenger, cargo and baggage weight) and fuel load less taxi fuel (Jofré & Irrgang
2000, p. 263). The maximum gross takeoff weight actually varies with certain
atmospheric conditions (namely air density, which is a function of airfield elevation
and ambient air temperatures). This is due to the fact that at times of low air density
(such as at high elevations and/or high temperatures), an aircraft of a given weight
may simply not have sufficient engine power to get to takeoff speed, while at the
same weight it may be able to at a higher air density, found at lower elevations
and/or lower temperatures (Horonjeff et al. 2010).
 Maximum taxi weight (MTW) is the maximum weight authorised for the ground
manoeuvring of the aircraft and includes both taxi and engine run-up fuel (Jofré &
Irrgang 2000).
 Maximum structural landing weight (MLW) is the structural capability of the aircraft
upon landing. The aircraft’s main landing gear is structurally designed to absorb the
forces encountered by the aircraft during landing; the larger the forces, the heavier
the requirement on the aircraft’s landing gear (Horonjeff et al. 2010, p. 63). The MLW
is the total of the aircraft OEW, passenger weight, baggage weight, cargo payload and
reserve fuel load that an airline is required, by law, to carry on a flight. The MLW of
any flight is either the maximum designed landing weight of the aircraft as limited by
aircraft strength and airworthiness requirements or the landing weight limited by
airport infrastructure and aircraft performance (Jofré & Irrgang 2000). Generally, the
main landing gears of transport category aircraft are structurally designed for a
landing at a weight less than the maximum structural take-off weight (MSTOW). This
is because an aircraft loses weight in flight as it is burning fuel over the flight’s
duration. Thus, as previously noted, on landing, the weight of an aircraft is the sum
of the OEW, the payload, and the reserve fuel, assuming that the aircraft lands at its
destination and is not diverted to an alternate airport. This landing weight cannot
exceed MLW of the aircraft (Horonjeff et al. 2010, p. 63).
Most importantly, these weights cannot be exceeded under any circumstances.
Graphically these weights can be displayed as follows (Figure 3.1):
Figure 3.1. Aircraft weight definition., Source: Radnoti (2002, p. 56).
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Note that the payload weight may only represent a small proportion of the MTOW. For
certain long-haul sectors, the need to carry sufficient fuel will result in a reduction in
maximum payload, which thereby reduces the revenue producing capability for that sector.
Aircraft Loads
In commercial aviation, the term payload (or load) refers to passengers, or cargo (freight) or a
combination of the two carried on the one aircraft (Clark 2007).
Passenger Load
This load is dependent on the number of seats fitted to the aircraft. For a specific flight, an
aircraft’s load is calculated by taking the number of passengers checked-in multiplied by
average weights, which take into account both the individual passenger plus their carry-on
and checked baggage. Generally, commercial airlines use standard weights that have been
derived from industry averages and are split for adults and children (Clark 2007).
However, for some small regional aircraft, or those operating in unusual conditions, for
example, at high altitude airports, then passengers and their luggage are individually
weighed to provide a precise total weight for the flight crew’s aircraft performance
calculations. Commercial aircraft manufacturers develop aircraft to serve specific customer
needs – for instance, short haul, long haul, ultra-long haul services (Belobaba 2006).
Air Cargo Load
This load consists of the cargo32 itself and the empty weight (tare weight) of the aircraft “Unit
Load Devices33” (ULD) themselves in the case of wide-body flights. Airline ULDs consist of
both pallets and containers and are designed to allow fast and efficient handling during the
aircraft turnaround process. These containers/ULDs also offer shippers/freight forwarders
storage flexibility.
Around the world large volumes of air cargo are often delivered to the airport pre-packed on
pallets or in special containers (ULDs) that have been designed for specific aircraft types by
freight forwarders and, in some cases, by the shipper themselves. Most containers/ULDs can
be used on different aircraft types so as to eliminate the need to repack the cargo at transiting
ports. Air freight forwarders are provided with ULDs by the airline when they are packing a
shipper built ULD.
Unlike passengers, air cargo payload has two components, which needs to be considered –
weight and volume. The underfloor (or “belly space”) of a passenger aircraft or the main deck
of a dedicated freighter aircraft has a certain volumetric capacity. In most cases this
volumetric capacity is reached first. That is, an aircraft can run out of actual space before it
reaches the weight limitation of all the ULD’s or total aircraft (Doganis 2009).
Total Aircraft Load
The combined passenger load plus cargo load determines the aircraft’s total load. For most
operators however, the primary payload is passenger with freight taking up the balance to
give the total payload available for uplift on a specific flight (Radnoti 2002). As such, the
freight warehouse often has non-urgent freight assembled in various ULDs, as well as loose
cargo, ready to de dispatched to the aircraft once the final passenger load has been
determined.
32 Air cargo is defined as ‘anything carried in an aircraft except for mail or luggage carried under a passenger ticket
and baggage check but including baggage shipped under an airway bill or shipment record’ (Hui et al. 2004).
33 Airline Unit load devices, or ULDs, are pallets and containers which are used to carry air cargo, mail and passenger
baggage on wide-body passenger and freighter aircraft (Baxter et al. 2014; Lu & Chen 2011).
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Finally, the total load available for a specific sector will vary throughout the year according to
the prevailing wind and weather conditions (Radnoti 2002).
Aircraft Operational Payload versus Range Curve
One of the most important technical and performance characteristic that determines an
airline’s choice of aircraft type is the “Payload/Range Curve”. The specific shape of an aircraft’s
payload/range curve is influenced by its aerodynamic, engine technology, fuel capacity, and
the typical passenger and/or air cargo configuration. The Payload / Range curve is prepared
by the aircraft manufacturers in order to show the trade-off that has to be made by an airline
as to whether to increase payload or whether to increase the flight range of the aircraft.
The importance of the payload/range curve for airlines is that it reflects the aircraft’s
economic potential. Each kilogram of payload, (either a passenger or unit of air cargo) can be
sold to offset the costs of operating that route (Radnoti 2002). For some long haul routes, not
all the available payload can be sold, as additional fuel must be carried in order to accomplish
the flight. Thus, the Payload / Range curve provides a picture of what is achievable for a
particular aircraft under a certain set of conditions (Clark 2007).
Figure 3.2 presents the payload range curve for a Boeing B787-9 aircraft powered with typical
engines.
Figure 3.2. Boeing B787-9 aircraft payload/range curve. , Source: Boeing Commercial Airplanes
(2014, p. 24).
The graph’s top horizontal line indicates the aircraft’s maximum take-off weight (MTOW).
The MTOW consists of three components - operating empty weight, payload and fuel
required for the trip. All along this line, the aircraft can uplift its maximum payload for any
range up until about 5,200 nautical miles (nm). As the aircraft does not need to take-off with
100 per cent full fuel tanks (only the fuel required for the trip plus the legal amount of reserve
fuel), the take-off weight of the aircraft is less than the MTOW until it reaches that MTOW
weight around the 5,200 nm mark. For every point on the line right of this 5,200 nm point, the
aircraft will take-off at MTOW.
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After this point, sometimes called the “knee point”, the outer line’s gradient changes, dropping
to the right. If the range required is greater than 5,200 nm then commercial payload
(passengers and freight) has to be reduced so that more fuel can be uplifted to ensure the
range can be achieved. Normally air cargo would be off loaded first. Finally, at around 9,200
nm, fuel capacity limits aircraft performance. At this point the aircraft’s fuel tanks are 100 per
cent full. At this point it would be carrying no payload (no passengers or air cargo) at all.
On short sectors, for example Sydney-Melbourne, the maximum landing weight (MLW) may
be the limiting factor. Hence, when planning such a trip, the MLW in Melbourne will be
calculated first, then the flight crew will work backwards in order to determine the other
critical weight components.
A whole range of data is required to be able to prepare the payload range curve. This can be
seen on pages 64-65 of Radnoti (2002).
To increase aircraft range, Boeing, for example, has added blended winglets to new models of
some aircraft (Figure 3.3). They can also be retrofitted to older aircraft in order to increase
performance. These winglets reduce fuel burn by 4-5 per cent on missions where the aircraft
is near its maximum design range (Freitag & Schulze 2009).
Figure 3.3. United Airlines Boeing B737-800 aircraft departing from Los Angeles International
Airport for Honolulu, Hawaii., Source: Russavia (201334).
The overall economics of the aircraft also needs to be considered. While a Boeing B777-300ER
aircraft is well and truly capable of operating on the 236 km Sydney – Canberra route and
would provide the largest commercial payload uplift, it may not be the most appropriate
aircraft or the most cost effective aircraft.
The range capabilities of different aircraft are also usually displayed as a pictorial for
prospective airline customers, with the particular airline’s “mission” rules applied. These
mission rules are a unique set of criteria the carrier specifies for flight planning purposes. For
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example, the percentage probability of winds, both head and tailwind, not exceeding certain
limits on a year round basis. The norm is usually 85 per cent however a conservative carrier
may specify 70 per cent which means potentially a lower total commercial payload at certain
times of the year, or at worse, a non-stop sector may not be able to be planned. Figure 3.4
shows the range capability of the Boeing 787-8 and 787-9 aircraft if operating services from
New York.
Figure 3.4. The Boeing 787 aircraft range capability from New York., Source: Boeing Commercial
Airplanes (2011).
ETOPS
ETOPS (Extended-range Twin-engine Operational Performance Standards) is an acronym for the
International Civil Aviation Organization (ICAO) and United States Federal Aviation
Administration (FAA) rules permitting modern twin-engine commercial transport aircraft to
fly routes that, at some points, are further than 60 minutes flying time from an emergency
airport (alternate). ETOPS allows aircraft such the Boeing 737, 757, 767, 777 (Figure 3.5) and
787, and the Airbus A300, A310, A320, and A330 aircraft to fly long distance routes, such as
over water or across deserts, that were previously off-limits to twin engine aircraft (Asselin
1997).
In the 1980s there were large efforts on the part of the aircraft manufacturers, airworthiness
authorities and airlines to put ETOPS regulations in place. At that time, the rules applying to
twin engine operations were such that an aircraft had to be within one hour of an appropriate
airfield (Clark 2007). The changing dynamics of commercial aviation brought the concept
Extended Twin-engine Operations (ETOPS) clearly into focus. ETOPS were first approved in
early 1985 by the United States Federal Aviation Administration (FAA) Advisory Circular
120-42, which permitted twin engine aircraft to fly up to 120 minutes from an air field, and
which was extended to 180 minutes in 1988. In the space of a few years, a vast number of
origin and destination markets (O & Ds) were opened up to twin engine aircraft, particularly
over the North Atlantic, Tasman Sea, and over many land masses as well (Clark 2007).
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Figure 3.5. Cathay Pacific Airways Boeing B777-300ER passenger aircraft landing at Kansai
International Airport, Osaka., Source: Lasta29 (201535).
There were several critical issues associated with ETOPS operations. Firstly, the twin-engine
aircraft had to be deemed by the relevant authorities as being worthy of performing ETOPS
operations. The airworthiness authorities issue an ETOPS type certificate for each eligible
airframe-engine combination. Existing aircraft designs, such as the Airbus A310 and Boeing
B767 models, not only required some modifications but also had to be proven in non-ETOPS
service prior to receiving their ETOPS approvals. Initial ETOPS aircraft had to accumulate up
to 250, 000 engine flying hours, or sometimes even greater, before they were deemed to be
ready for ETOPS operations. Derivative aircraft and engine design were able to take
advantage of commonality in order to substantially reduce this requirement, sometimes
driven down to zero hours, depending upon the degree of technical similarity and experience
(Clark 2007, p. 162).
ETOPS Concept
ETOPS requirements evolved during the era of piston engine aircraft but have since been
reviewed and currently apply to turbine powered aircraft which have significantly better
reliability. This improved reliability is a significant factor to be considered when assessing
the capability of an aircraft and crew to continue operations after an engine shutdown (De
Florio 2006).
The overall safety of ETOPS cannot be better than that provided by the reliability of the
propulsion and airframe systems. Furthermore, some of the factors related to ETOPS are not
necessarily obvious. ETOPS assessment requires a critical analysis of all factors that can
influence flight safety (not only the more obvious ones like engine performance and electrical
power generation). Engine reliability is a critical factor but is not the only single factor which
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must be seriously considered in evaluating ETOPS. Any decision relating to ETOPS must
consider the probability of an occurrence which would reduce the level of reliability of the
aircraft resulting in an increase in risk (De Florio 2006).
Request for ETOPS approval
Each operator requesting approval to conduct ETOPS must have operational in-service
experience appropriate to the operation proposed. Any reduction or increase in in-service
experience guidelines is based on an evaluation of the operator’s ability and competence to
achieve the necessary reliability for the particular airframe-engine combination in ETOPS (De
Florio 2006). For example, a reduction in in-service experience may be considered for an
operator who can show extensive in-service experience with a related engine on another
aircraft which has achieved acceptable reliability. In contrast, an increase in in-service
experience may be considered for those cases where heavy aircraft maintenance has yet to
occur and/or an abnormally low number of take-offs have occurred (De Florio 2006, p. 229).
To support an application the operator will be required to provide a summary indicating the
operator’s capability to maintain and operate the specific airframe/engine combination for
ETOPS. The summary should include experience with the engine type or related engine
types, experience with the aircraft systems or related aircraft systems and experience with the
particular airframe/engine combination on non-extended range routes. Approval would be
based on a review of this information (European Aviation Safety Agency 2010).
The required in-service experience for operational approval is:
 75-Minute Operation
Consideration may be given by the regulatory agencies for the approval of 75-minute
ETOPS for operators with minimal or no in-service experience with the airframe-
engine combination. Such authorisation from the regulator takes into considers such
factors as the proposed area of operations, the operator’s demonstrated ability to
successfully introduce aircraft into operations, and the quality of the proposed
aircraft maintenance and operations programs (De Florio 2006, p. 229).
 90-minute Operation
Each operator requesting approval to conduct ETOPS with a maximum diversion
time of 90 minutes (in still air) should have 12 consecutive months of operational in-
service experience with the specified airframe-engine combination. The operator
must provide evidence the operator’s fleet threshold rate for in-flight shutdown
(IFSD) is less than 0.05 per 1,000 engine hours. In-service experience guidelines may
be reduced or increased by application to the regulating authority.
time of 120 minutes (in still air) should have 12 consecutive months of operational in-
service experience with the specified airframe-engine combination (De Florio 2006, p.
229).
time of 180 minutes (in still air) should have previously gained 12 consecutive
months of operational in-service experience with the specified airframe-engine
combination in conducting 120-minute ETOPS (De Florio 2006, p. 229).
Boeing Commercial Airplanes has received type-design approval from the United
States Federal Aviation Administration (FAA) for up to 330-min. extended operations
(ETOPS) for its Boeing 777 fleet. The new FAA approval enables airlines that operate
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routes in the south Pacific, over the North Pole, and from Australia to South America
and southern Africa to fly the most direct routes (Thomas 2011).
Airline Fuel Conservation and Hedging

Aircraft Fuel Burn
The trend in fuel efficiency of jet aircraft over time has been one of almost continuous
improvement. The fuel burned per seat in today's new modern aircraft is 70 per cent less than
that of early jets. About 40 per cent of this improvement has come from engine efficiency
improvements and 30 per cent from airframe efficiency improvements (International Panel on
Climate Change 2009). Following labour costs, fuel now represents the second largest cost
component in airlines operations (International Air Transport Association 2016b).
In reviewing aircraft fuel burn, the highest rate of fuel consumption per minute occurs during
take-off and climb, with the lowest consumption rate occurring on descent. Therefore, the
highest rate of overall fuel consumption will occur on short trips, as a larger proportion of the
total trip time is spent on climb than for a long haul route. For sectors in excess of approx.
2,000 nautical miles, the fuel burn curve is relatively flat. This translates into a higher unit fuel
cost per ASK (or AFTK for cargo) for short haul sectors versus medium to long haul flights
(Radnoti 2002).
Fuel Conservation
Many airlines have established cross-functional “Fuel Conservation Committees” in order to
identify and develop concepts for fuel efficiency.
Operationally, fuel efficiency can be gained through:
 Punctuality – depart aircraft on time so as not to miss take-off slots;
 Working with the pilot group to develop single-engine taxi procedures;
 Monitoring auxiliary power unit (APU) usage - connect to ground power wherever
possible when aircraft are on blocks and being serviced in preparation for their
next flight;
 Working with Air Traffic Control (ATC) authorities to improve air traffic
management efficiencies; and
 Reducing aircraft weights by:
o Correctly storing items to avoid unnecessarily ordering of catering supplies
and other equipment.
o Removing rubbish, especially newspapers before flight
o Switching off electrical equipment when no longer required
o Reporting door leaks and cabin air-conditioning faults
o Reducing on-board company materials
o Provide feedback on unused items
In recent years, airline from all around the world have implemented a variety of fuel
conservation measures and we will now look at some examples of these. In late 2008, Air
New Zealand announced they would retrofit winglets to five B767s as part of the airline’s fuel
efficiency programme. Winglets reduce fuel burn, improve takeoff performance, lower engine
maintenance costs and lower engine emissions, especially for long cruise flights (Air New
Zealand 2008).
American Airlines (AA) have also fitted winglets on their B737, B757 and B767 fleets (Figure
3.6). American Airlines has also replaced 19,000 catering carts with newer, ergonomically
designed models made with lighter materials, and introduced a Docking Guidance System
(DGS) to provide automated guidance to pilots when parking aircraft at a gate, resulting in
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aircraft being parked in a timely and efficient manner, minimizing taxi fuel and speeding
passenger disembarkation (American Airlines 2009).
Figure 3.6. American Airlines Boeing 767 aircraft fitted with winglets., Source: Harkin (201236).
The following long-standing fuel conservation initiatives have been introduced as a result of
American Airlines “Fuel Smart” program:
 Auxiliary Power Unit (APU) Usage Reduction: The APU burns jet fuel to power
aircraft systems, light the cabin and provide cool or heated air when needed for a
comfortable temperature inside the aircraft. Using available ground power and pre-
conditioned air equipment instead of the APU saves about 5 million gallons of jet fuel
and eliminates more than 100 million pounds of CO2 emissions annually.
 Single-Engine Taxi: Pilots using only one engine during taxi, when safe and
operationally feasible, saves nearly 3 million gallons of jet fuel and eliminates about
60 million pounds of CO2 emissions annually.
 Engine Wash: The engine wash program saves more than 7 million gallons of jet fuel
per year by keeping aircraft engine components cleaner, which allows engines to
operate more efficiently. About 150 million pounds of CO2 is eliminated annually
through this initiative.
 Winglets: Winglets installed on American's Boeing 737, 757 and 767 aircraft fleets
improves airflow over the wing, which helps reduce fuel burn and lower greenhouse
gas emissions. Through this initiative, nearly 40 million gallons of jet fuel is saved
and 825 million pounds of CO2 is eliminated annually.
 High-speed Tow Tractors: Specialized high-speed tow tractors are utilized to
transport aircraft between terminals and maintenance hangars, saving more than 4
million gallons of jet fuel and reducing CO2 emissions by 90 million pounds annually.
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 Aircraft Weight Reductions: By implementing aircraft weight reduction suggestions
from American's employees, more than 10 million gallons of jet fuel is currently
saved and 215 million pounds of CO2 is eliminated each year through operating a
lighter fleet of aircraft. Implemented suggestions include:
o Removing unnecessary items from cabins such as old phone equipment,
galley tables, magazine racks and razor outlets, and the removal of logo
lights, the sum of which saves about 1 million gallons of jet fuel annually.
o Replacing existing Boeing 757 and MD80 cargo liners with lighter-weight
materials, and replacing cargo containers used on Boeing 767 and 777 aircraft
with lighter weight aircraft ULDS and containers saves nearly 3 million
gallons of jet fuel annually.
o Replacing American's 19,000 catering carts with newer models made with
lighter materials saves nearly 2 million gallons of jet fuel annually.
o Reducing potable water amounts, while retaining a safe amount for
passengers and crew, removes enough water weight to save more than 2
million gallons of fuel annually (American Airlines 2012).
Japan Airlines introduced PET wine bottles in August 2009. The plastic bottles look identical
to traditional glass versions but are just one-seventh of the weight, thereby reducing fuel burn
and emissions (Japan Airlines 2009). Airbus launched new "Sharklet" large wingtip devices
for the A320 (Figure 3.7) family in late 2009. These wingtip devices are designed to enhance
efficiency and payload-range performance. This will enable airlines to carry 500 kg more
payload, or travel 200 km more than a standard A320 aircraft. Air New Zealand was the
launch customer for the Sharklets which are specified for its future A320 fleet. The winglets
will save around 3.5 per cent of fuel on long sectors (Airbus 2009).
Figure 3.7. Swiss International Airlines Airbus A320 aircraft fitted with “Sharklets’., Source: Aero
Icarus (201337).
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The International Air Transport Association (IATA) member airlines and the wider air
transport industry industry are collectively committed to ambitious greenhouse emissions
reduction goals. Sustainable alternative aviation jet fuels (presently, mostly biojet fuels), have
been identified as one of the key elements in helping to achieve these objectives. Alternative
aviation jet fuels are the only low-carbon fuels available for air transport in the short to mid-
term. Biofuels derived from sustainable oil crops such as jatropha, camelina and algae or from
wood and waste biomass can reduce the overall carbon footprint by approximately 80 per
cent over their full lifecycle. Test flights using biofuels have been undertaken by many
airlines and these have proven that biofuels work and can be mixed with existing jet fuel. The
airline industry has thus played an instrumental role in advancing technical certification for
biofuels which can now be used on passenger flights. The first commercial flights powered by
biofuels were achieved in 2011 (International Air Transport Association 2016a).
The move toward use of synthetic fuels has progressed significantly following extensive
research and development and multiple trial flights, allowing ten airlines (8 leading US
carriers plus Air Canada and Lufthansa) to sign an agreement with Solena Fuels to acquire a
future supply of jet fuel derived exclusively from waste biomass. Under the plan, the fuel
made from post-recycled urban and agricultural waste, will be produced at a plant in
California, in 2013, and trucked to airports in San Francisco, Oakland and San Jose. The
biomass-to-liquids facility is expected to produce up to 16 million gallons of neat jet fuel per
year by 2015 to support airline operations at the three airports. The project would divert
about 550,000 tonnes of waste that would otherwise be disposed in a landfill, at the same time
producing aircraft jet fuel with lower emissions of greenhouse gases and local pollutants than
petroleum-based fuels (Shifrin 2011).
In the 2016 European spring, KLM Royal Dutch Airlines will commence a new series of
flights from Oslo Airport Gardermoen to Amsterdam that are powered by biofuel. The
biofuel forms part of an ITAKA38 project. The world’s first “biojet” fuel supply via hydrant
system is at Oslo Airport Gardermoen. The “biojet” supply is funded by the European
Commission and is being facilitated by SkyNRG. Effective January 26, 2016, the biofuel was
for the first time available via a hydrant fuel system rather than the usual refuelling truck and
uses the existing infrastructure at Oslo Airport Gardermoen. This is the result of cooperation
between Air BP and Avinor. Avinor is the Norwegian airport operator and is responsible for
the management and operations of Oslo Airport Gardermoen (KLM Royal Dutch Airlines
2016).
Airline Fuel Hedging
On the fuel procurement side, many airlines run “fuel hedging” programs in their Treasury
departments in order to mitigate fluctuations in the price of aviation fuel (Morrell 2013;
Morrell & Swan 2006). Fuel hedging “is the practice of making advance purchases of fuel at a fixed
price for a future delivery to protect against the shock of anticipated rises in price” (Cento 2009, p.
27). Thus, fuel hedging is a technique used by airlines to minimise risk by offsetting their
exposure to fluctuations in prices. For example, airlines can lock in a price by purchasing
crude oil futures at a pre-determined price. By not fuel hedging, airlines assume the risk of
rising fuel prices impacting their operations (Morrell & Swan 2006; Vasigh et al. 2010).
Fuel hedging is a complex exercise. While carriers try and protect themselves from rising fuel
costs, failure to consider impacts of dropping fuel prices can lead to losses (Morrell 2013). For
example, the sudden decline in the oil price in 2008 and 2009 resulted in Cathay Pacific and
38 ITAKA is the acronym for the Initiative Towards Sustainable Kerosene for Aviation. ITAKA, a consortium of leading
aerospace and fuel companies, and funded by the European Commission, was established to produce sustainable
biofuel for use in the aviation industry. The ITAKA project aims to produce sustainable, renewable jet fuel and to test
its use in existing logistics systems as well as during regular flight operations within Europe (KLM Royal Dutch
Airlines 2016).
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Singapore Airlines Ltd. recording millions of dollars in losses because of their fuel hedging
contracts (Park 2016). In 2015, Delta Air Lines Inc., the United States second largest airline by
traffic, incurred fuel hedging losses of $USD 2.3 billion, while United Continental Holdings
Inc., the United States third biggest carrier, lost $USD 960 million on its fuel hedging (Carey
2016). The size of these losses illustrates the financial impact for airline finances when oil
prices decline and airlines are locked into fixed fuel contracts, which are fixed at a higher
price.
In practice, airline fuel price risk can be managed in three ways: forward contracts, futures
contracts, and derivatives such as options, collars and swaps (Morrell & Swan 2006, p. 715).
Forward contracts are ‘over-the-counter’ agreements between two parties whereby one party
purchases a fixed amount of fuel from the other at a fixed price at some future date. Airline
fuel suppliers such as Air BP enter into such agreements, but their tailor-made nature is not
considered a convenient instrument for third parties or speculators. Parties also have full
counter-party risk, that is, risk that the airline or the supplier goes bankrupt before the deal is
closed (Morrell & Swan 2006, pp. 715-716).
Future contracts are better suited to both hedging and trading since they are normally set up
through exchanges that set contract standards and protect against counter-party risk. One
party to the contract agrees to deliver to another a standardised quantity of oil at an agreed
price – the ‘strike’price – on an agreed date in the future. These are conventionally reversed
on their due date, so no physical delivery actually occurs (Morrell & Swan 2006, p. 716). The
main exchange offering future oil futures contracts are the Intercontinental Exchange and
NYMEX, based in New York (Morrell 2013).
Derivatives consist of an option which is a right to buy (or sell) at a specific date at a stated
strike price. Strike prices are available spaced both above and below current futures prices.
The cost of an option is based on the underlying futures, and if exercised (there is no
obligation to do so) will result in a corresponding futures position. A call option, or right to
purchase, offers flexibility over a future, as it gives the holder the possibility to protect against
a price rise, while at the same time providing the opportunity to participate in a decline.
Options and also swaps can be taken without parties, for instance, approved counter-parties
such as banks, in aviation fuel, in addition to crude oil. Jet fuel is very rarely traded on any
exchanges and hence must be ‘over-the-counter’. These involve counter-party risks for both
parties, and thus, financially weak airlines often find it difficult to find others willing to
assume this risk (Morrell 2013; Morrell & Swan 2006, p. 716).
In recent times, airlines have moved towards the use of combinations of a call and a put
option called a ‘collar’. The call protects the holder from price increases above a strike price
above the current future, at a cost of the option premium that must be paid at the outset. The
holder of this call also sells a put option that restricts the advantage that it can take of price
reductions below another strike price, below the current future. The total cost of taking the
two options is the call option premium paid minus the put option received. This is popular
with airlines since it locks in the price that will be paid for fuel between the two known
values. A collar also limits the speculative risk to a small range of price moves (Morrell &
Swan 2006, p. 716).
Swaps are tailor-made futures contracts whereby an airline locks in payments at future dates
that are based on the current fuel or oil price. These swaps could be arranged with a supplier
such as Air BP. With this arrangement, an airline would purchase a swap for a defined period
of time, say for example one year, at a certain strike price for a specified amount of jet fuel per
month. The actual prices for each month are then compared with the swap price, and if the
price is higher the counter-party would pay the airline the price differences times the amount
of fuel. However, if the prices were lower, then the airline would be required to pay the
difference. They lock in a given price, as in the case of forward contracts (Morrell & Swan
2006, p. 716).
81
Aviation fuel itself can only be hedged through over-the-counter arrangements with the
additional counter-party risk. Hedging oil on exchanges such as NYMEX eliminates counter
party risk. These markets also enable an airline to sell before the due date. For longer periods
into the future, only crude oil instruments have good liquidity (jet fuel only has good
liquidity for shorter periods of time). Also, aviation fuel is almost always priced in US
dollars39, as are oil derivative contracts. Airlines are therefore faced with the risk of exchange
rate movements, where they do not have adequate natural hedge cover such as passenger
ticket income in US dollars. However, there are occasions where exchange rates move in such
a way as to mitigate increases in fuel prices. Most of the larger airlines, however, have hedged
their foreign exchange risks for many years (Morrell & Swan 2006, pp. 716-717).
Airlines typically use three approaches in dealing with fuel prices. First, they endeavour to
increase the fuel efficiency of their operations. Second, when fuel prices rise then airlines try
to pass on their higher fuel costs onto their customers through price increases or fuel
surcharges. And, third, they hedge their fuel costs using physical or derivative markets.
Increasing fuel efficiency in the short-term relies on changing operational procedures, for
example, cruise speed of the aircraft, or fuel tankering 40 policies. Most of these are already
normally exhausted, and there are limits to how much can be achieved, given safety
requirements. Replacing existing aircraft with new more fuel-efficient ones can take place
gradually. This has the same influence as a permanent policy of hedging fuel, as it reduces
the profit volatility from fuel price changes (Morrell & Swan 2006, p. 717).
Airline Breakeven Load Factors

Breakeven Load Factors
In Topic 2, we discussed airline seat factors and load factors defining the seat factor as an
expression of the number of seats sold to fare paying passengers as compared to the total
seats made available for sale. Seat and Load factors are a measure of the percentage of
capacity that is productively used by an airline (Radnoti 2002).
Breakeven Load Factor
An important measurement used by airlines is the breakeven load factor (Clark 2007; Vasigh et
al. 2010). The breakeven load factor is that load factor at which revenue earned from carriage
of passengers, air cargo, excess baggage and mail, equals the cost of operating that flight.
When compared with the actual load factor achieved or forecasted, the breakeven load factor
gives a broad indication of airline route profitability. The breakeven load factor can also be
calculated for the entire airline, thereby providing an indication of companywide profitability
(Radnoti 2002; Holloway 2008).
However, caution must be used when calculating at a company wide level as other revenues
and expenditures may come into play that do not relate directly with actual airline operations
– for example contracted maintenance work undertaken by the carrier on behalf of other
airlines.
39
There are some rare occasions when fuel prices are quoted in local currency. In such cases some airlines request
the transport element in fuel prices to be charged separately in local currency. This is because this cost is incurred in
the local currency (Morrell & Swan 2006, p. 729).
40 Modern jet aircraft minimum cost speeds can be slightly higher than minimum fuel burn speeds, because staff,
maintenance and ownership costs accrue with time. However, the differences are quite small (Morrell & Swan 2006,
p. 729). An aircraft must carry the required minimum amount of fuel to safely perform its mission. Some airlines use
the practice of “tankering”, that is, loading more fuel than is required by a mission profile to offset the costs of
purchasing fuel at a higher price at the destination (Filippone 2012, p. 444). However, tankering fuel from low-to-
higher cost airports costs fuel burn, and can be reduced with costs high everywhere. Again, fuel tankering involves a
small fraction of most airline operations (Morrell & Swan 2006, p. 729).
82
The breakeven load factor can also be used as an index to compare between:
 different sized aircraft
 different routes flown
The breakeven load factor should only be used as an indication, as the calculation assumes
that any revenue movement between the current (actual, forecasted or budget) load factor
and the breakeven load factor is at the average yield achieved or assumed.
The main components that influence the level of the breakeven load factor are:
 Yield
 Aircraft configuration
 Unit costs
The breakeven load factor may be calculated in several ways depending on how the data is
expressed. For example:
Breakeven Load Factor = Net Expenditure / Net Revenue x RTKs/ATKs x 100
Breakeven Load Factor = Net Expenditure / Net Revenue x Actual Load Factor
Breakeven Load Factor = Net Expenditure per ATK / Net Revenue per RTK x 100
Breakeven Seat Factor
Like the breakeven load factor, a similar calculation can be made for the breakeven seat factor
which may be calculated in several ways depending on how the data available is expressed.
Also, breakeven seat factor should only be used as an indicative figure, as actual changes in
revenue may differ from the average revenue.
Breakeven Seat Factor = Net Passenger Expenditure / Net Passenger Revenue x
RPKs/ASKs x 100
Breakeven Seat Factor = Net Passenger Expenditure / Net Passenger Revenue x Actual
Seat Factor
Breakeven Seat Factor = Net Passenger Expenditure per ASK / Net Passenger Revenue
per RPK x 100
In order to arrive at Net Revenue (or Net Passenger Revenue), from the gross revenue is
deducted any revenue from contract engineering work, etc. Likewise, to obtain net
expenditure, costs incurred on that contract work must be removed.
An air cargo (freight) breakeven load factor could also be calculated for the belly holds of
passenger aircraft, however this requires an estimate of the certain costs that would be
allocated to freight. For example: How much of the pilot’s salaries should be allocated to the
carriage of air cargo on the flight? As such, freight is regarded as a by-product for most
airlines undertaking predominantly passenger operations (Doganis 2009; McKnight 2010).
The cost of carrying air cargo (freight) is assumed to equal the revenue earned from the
transportation of the cargo consignments on the flight. So the freight revenue is deducted
from the total flight costs in order to arrive at net expenditure.
For dedicated freighter aircraft operations (Figure 3.8), breakeven load factors can also be
calculated, as 100 percent of the aircraft is normally dedicated to freight uplift.
83
Figure 3.8. Etihad Cargo Boeing B747-8 freighter aircraft on final approach at East Midlands
International Airport., Source: Wilson (201441).
Obviously a high breakeven load factor, whether for the total aircraft or for the individual
components – passenger or cargo, is not desirable. For example, if an airline needs to fill 84
per cent of seats just to cover costs (that is, breakeven), then that only leaves a maximum of 16
per cent of fitted seats on which to make a profit. Over the course of a year flying a particular
route (or for the whole company), passenger demand is affected by seasonal factors, weak
days of the week and soft times of the day (O’Connor 2001). Effectively, the higher the
breakeven load factor, the more risky the venture.
Once breakeven has been achieved, each additional passenger (or kg of cargo) contributes to
profit. Effectively the revenue received for each additional passenger above breakeven is
profit, as the incremental cost of carrying that passenger is negligible (Doganis 2009). The
only cost that airlines need consider is additional on board catering, fuel, etc. Normally, all
these incremental costs combined, for a medium haul flight, represent less than ten
percentage points of the revenue earned for that incremental passenger.
Ideally, the airline as a whole, and each route it operates, would want to see a significant
difference between the actual load (or seat) factor and the breakeven factor, with the actual
load (or seat) factor being the larger of the two numbers. The difference between forecasted
seat factor and breakeven seat factor was therefore not great.
Pictorially, the breakeven curve and the payload / range curve can be combined into the one
graph (Figure 3.9).
41
<https://upload.wikimedia.org/wikipedia/commons/4/48/N855GT_%2812504769264%29.jpg >.
84
Figure 3.9. Passenger operations profit potential versus range., Source: Radnoti (2002, p. 128).
This graph holds true provided the average passenger yield remains unchanged.
Aircraft Productivity
The means of production for an airline is its aircraft. They are expensive to buy. The list price
for an Airbus A380-800 aircraft, for example, is around $USD 432.6 million42 (Airbus 2016). So
in order to maximise the efficiency of these production units and cover the cost of owning
and operating the aircraft, aircraft need to be flown as much as possible.
With an increase in aircraft speed and constant payload, aircraft productivity increases with
range to the maximum payload range point. Beyond this point, due to the decreasing
payload, the aircraft productivity decreases. Speed increases, but it cannot balance the loss
due to the aircraft’s decreased payload (Radnoti 2002, pp. 124-125).
A smaller aircraft has two disadvantages versus a larger aircraft as far as productivity is
concerned:
 Small aircraft carry less payload.
 Smaller aircraft often fly at slower speeds (Radnoti 2002, p. 125).
Aircraft productivity consists of tonnage, distance, time or tonnage and speed (speed =
distance/time) (Radnoti 2002).
Tonnage: a smaller aircraft has a lower trip cost. Let’s say a Boeing B737 requires around
$5,000 for a certain trip and Boeing B777 aircraft requires, for the same trip, around $7,000.
The Boeing B777 may carry three to four times more passengers, and for this reason, its unit
costs expressed in cents per passenger-mile or cents per passenger kilometres is significantly
less than the Boeing B737 aircraft.
Time: there is a further factor having an influence on cost, and this is time. More revenue is
generated when an aircraft is flying faster for a given time period. Aircraft do not make
money and therefore contribute to profit whilst they are on the ground. To illustrate this, let
42
Note that the Airbus A380-800 list price depends upon the aircraft design weights, the customer airline’s selection
of the engines, and level of selected customisation (Airbus 2016).
85
us assume that the flight originates from an airport with average levels of congestion. Taxi-
out time at the departure airport and taxi-in time at the destination airport are recorded as
total of 20 or 30 minutes. The effect of a series of shorter trips lowers the daily aircraft
utilisation, and this, in turn, increases the operating costs. Hence, frequent short-haul trips
cause the aircraft to spend more time on the ground with more taxi fuel and taxi time.
Consequently, the yearly utilisation of the aircraft greatly affects its profit potential. For
longer trip lengths, the taxi time-trip time relationship is more favourable, and the daily
aircraft utilisation rate is improved. The same is applicable to taxi fuel and trip fuel. In sum,
on a yearly basis, longer trips have fewer departures, less taxi-in and taxi-out time, and less
taxi-fuel; hence, longer trips contribute to lower unit costs (Radnoti 2002, pp. 125-126).
Speed: aircraft speed is also a measure of output per hour. A faster aircraft will by definition
be able to transport more passengers or tons/tonnes per hour than a slower aircraft even
though the aircraft landing charges, flight crew, and other costs might almost be similar for
each aircraft43 (Vogel 2012, p. 71). Smaller aircraft fly slower and normally have shorter trips,
so their operational Mach number is lower. Larger aircraft fly longer trips at a higher Mach
number. Aircraft speed increases with range. For example, over a period of a year, an aircraft
could cover more miles (kilometres) and generate greater revenue for the airline (Radnoti
2002, p. 126).
Aircraft size effect: a larger aircraft can fly faster, if its average trip length is longer, and it can
carry more payload expressed in tons or tonnes. In addition, there are additional advantages
due to aircraft size and speed:
 More flying time;
 Less aircraft taxi time and taxi fuel;
 More distance covered;
 More tonnage carried;
 Less aircraft maintenance work required (cycle per flight);
 Less passenger processing cost;
 Less station cost;
 Less aircraft servicing cost;
 Less airport landing charges and other fees; and
 Higher and better aircraft utilisation (Radnoti 2002, p. 126).
In conclusion, aircraft productivity is a function of size and speed (Vogel 2012). Airlines need
to optimise these two elements based on their route network structure in order to achieve
higher revenues (Radnoti 2002, p. 126).
Aircraft productivity Measures
Traditional measures of aircraft productivity include:
 Aircraft utilisation – a measure of how many hours per day on average an aircraft is
flying (expressed as block hours44/day). The ability of an airline to attain a certain
level of aircraft utilisation is dependent on the characteristics of its route network, its
flight schedule, and its efficiency in turning aircraft around on the ground in between
flights. The longer the aircraft turnaround times, the less time that is available for
43 In this regard, additional cost considerations such as engine performance (fuel burn rates) at different average
flight speeds, stage length, and frequency of service as well as airspace over-flight fees will come into play (Vogel
2012, p. 71).
44
Block hours refer to the period during which the aircraft is in use, commencing at door close (blocks away from the
aircraft wheels) to door open (blocks placed under the aircraft wheels) a the destination airport. Block hours are the
‘gate-to-gate’ time, including aircraft ground taxi times as well as flight times (Belobaba 2016, p. 153; Doganis 2009, p.
326).
86
increasing block hours given there is only a limited number of feasible operating
hours during the course of each day (Belobaba 2016, p. 153).
 ASKs per aircraft per day (=Fitted seats x km flown x departures).
By increasing aircraft productivity, then the cost of ownership (as well as many other fixed
costs) is spread over a larger number of units (block hours, departures, ASK’s, etc. depending
on what the allocation method chosen is), thus reducing the airline’s overall unit costs. This
has been one of the basic premises of LCCs – fly each aircraft for as many hours / day as
possible and fitting as many seats per aircraft as is comfortable (or not) for the routes flown
(Doganis 2006).
So what can be done by an airline to increase aircraft productivity?
 Squeeze more flight departures per day. This can be done through a number of ways:
o Fly more point-to-point (P2P) services.
o At hub airports, operate continuous connecting banks of flight in order to
reduce turn (that is, ground) times.
o Reorganise maintenance plans.
 Generally, reduce aircraft turnaround times for existing schedule (that is, reduce the
time required at each airport to unload, clean and service, reload the aircraft).
 Work with airports to reduce traffic congestion, both air and ground and improve
terminal efficiencies.
 Operate longer sector lengths.
 Fleet efficiency – reduce the number of sub fleets, aircraft configurations and aircraft
types.
 Fit additional seats into the aircraft. This can be done through a number of ways:
o Reduce the number of cabins on offer, for example, go to an “all economy”
seating configuration
o Reduce seat pitch (reduce space between seat rows)
o Fit new slim line seating while simultaneously retaining or reducing seat
pitch.
o Reduce the size of galleys, number of toilets, etc and replace with seats
(adapted from Belobaba 2016).
By doing any of the above seating changes, then additional ASKs will be flown with the same
schedule. The result of doing any of the above will have a direct impact of reducing unit costs
(cost/ASK) as more ASK’s per period will be flown. Concurrently while ensuring aircraft
productivity is maintained or increased, the airline must also be embarking on strategies to
maximise unit revenues. If more seats are added to a city-pair, but then cannot be sold, all the
airline has achieved is added costs.
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89
Airline Product Planning and Design
Key Airline Product Features

Airline product planning is about deciding what products and service features that the airline
should offer in each of its markets in which it competes. For each airline, product planning is
critical for two key reasons. First, it is the key tool in the process of matching potential
demand for the airlines services with the actual supply of services which the airline offers in
the markets it serves. Each airline controls its own supply of services but can influence the
demand for those services only through its product planning. Product planning therefore
plays a vital role for airlines. Second, product planning has a direct impact on the operating
costs of an airline (Doganis 2009). It is important as a cost factor because it is an area where
airlines have significant discretion (Shaw 2011).
Airline products are divided into four distinct categories: core, expected, augmented and
potential features. Core product consists of those elements of airline services which underpin
the airlines operation, for example, aircraft types operated, flight schedules and the safe and
reliable carriage of passengers. Expected products are those product features that are
additional to the airline’s core product. Almost all traditional legacy or full service network
carriers (FSNCs) provide them, such as the provision of in-flight meals and drinks. Augmented
products are those features that provide added value to passengers. These features usually
exceed the passengers’ expectations. These are the features that are utilised by a number of
airlines, for example, Singapore Airlines, Qatar Airways and Etihad Airways, as product
differentiators. Potential products are those product features which are currently planned for
future use by an airline (Alamadari 1999, pp. 207-208).
In deciding what products and services to offer in the different markets that it serves, an
airline has to be cognisant of a number of objectives. First, it must consider its overall
marketing strategies. The airline must also endeavour to attract and satisfy potential
customers in the different market segments that it has identified. This means utilising its
understanding of the needs and requirements of these discrete market segments. Finally, an
airline will want to optimise its revenues and profits, not always in the short-term but
certainly over the longer-term. Thus, the ultimate objective of product planning is to attract
and retain customers from those market segments that an airline is targeting and to do this on
a profitable basis (Doganis 2009).
Potential airline customers are influenced by five key product features when making travel
decisions and, more importantly, in selecting between airlines (Table 4.1). An airline must
therefore decide how to combine these product features in order to satisfy customer
requirements in the discrete and different markets that it serves. This is an extremely complex
process because customer requirements will vary not only between different market segments
on the same route (for example, business versus leisure passenger market segments) but also
between neighbouring countries and geographical areas/regions. For any specific airline
product in a given market, different combinations of these five product features will need to
be offered by the airline. To a certain degree there may even be a trade-off between these
features. Greater passenger comfort can be offered, for example, by reducing the number of
seats in the aircraft, but this may necessitate the airline selling its products/services at higher
air fares (Doganis 2009).
90
Table 4.1. Key product features influencing passenger travel decisions and choice of airline and also
airline operating costs.
1 Price Fare levels and conditions

2 Schedule-based Points served and flight routings
Flight frequencies
Timings
Connections
Punctuality
3 Comfort-based Type of aircraft
Interior configuration
Individual space
On-board service
Ground/airport terminal service
Airline lounges
In-flight entertainment (IFE)
4 Convenience Distribution/reservations system
Capacity management policy
Seat availability
Ability to change reservations
5 Image Reputation for safety
Branding
Frequent flyer loyalty programs
Promotion and advertising
Market positioning
Source: Adapted from Doganis (2009, p. 228).
It would appear that the air fare level is the most critical feature for many market segments,
particularly in the many price-sensitive leisure or visiting friends and relatives (VFR) markets
(Doganis 2009; Holloway 2008). Fare levels may be less important for business travel markets
which are relatively price inelastic, though even in this important market segment marked
fare differentials between airlines or between different fares on the same airline may have an
impact (Doganis 2009). Air fares are the most dynamic product feature as they can be
changed almost on a daily basis, at least in deregulated markets. Furthermore, in those short-
haul markets and routes where low cost carriers (LCCs) have had a substantial impact, air
travel has become to resemble a commodity (Clark 2007; Holmes 2008), in that price or fare
has become the dominant variable (Vasigh et al. 2013). If markets are price elastic or where
the air fares of different airlines are very similar, then product features other than price
become relatively more important in determining the market penetration of different airlines.
They also tend to become more important in medium and particularly long-haul routes
(Doganis 2009).
91
Scheduled-Based Product Features
From a consumer’s perspective, the most important schedule-based features in any air travel
market are the number of frequencies operated by the airline, their departure and arrival
times, the points/cities served by the airline and in particular whether flights operate on a
direct basis or involve a stop-over or change of aircraft en-route at a hub airport.
Interestingly, the aircraft type operated is often not always regarded as important to some
passengers, though on some short haul routes a jet may be preferred to a turbo-prop aircraft
(Doganis 2009).
Different market segments will have different airline scheduling requirements. Short-haul
business markets normally require at least a morning and an early evening flight in each
direction on weekdays so as to enable business trips to be completed in a single day (Doganis
2002). The ideal situation is for airlines to operate multiple daily services (Holloway 2008).
Weekend services may be less critical for business travellers but are critical for short-stay
weekend leisure markets (Doganis 2009).
Flight frequency requirements will also vary depending on the type of market served by the
airline and the length of the flight. The level of competition present in the market is also a
determining factor in airline flight scheduling. For example, offering a single daily service
when a competitor operates 10 daily services will most probably make no impact on the
market (Doganis 2009) as potential passengers may view the limited flight frequency as
unattractive.
Comfort and Convenience-Based Airline Product Features

Comfort-Based Product Features
The scheduled-based product features are crucial in all air travel markets, whilst in short-haul
travel markets they appear to be more important than comfort-based product features. But
flight schedules cannot always be adjusted quickly by an airline. In many cases they cannot
be adjusted at all, either because an airline has a route network and flight schedules which
satisfy market requirements or because of external constraints such as bilateral air service
agreements (ASAs) or possibly the lack of available of runway landing slots.
Notwithstanding, as air travel markets become more competitive, the requirement for
product innovation by airlines in the global airline industry has certainly intensified. Since
flight schedules, in most instances, can be changed only in the medium term, if at all, airline
product development has often concentrated on improving comfort-based features of their
product and service offering. In fact, these can be changed by the airline more readily and
more quickly. These aspects of the airline product service offering are considered highly
important by passengers when determining their perceptions of the level of comfort provided
by the airline (Doganis 2009).
The first comfort-based airline product feature is the aircraft interior layout and configuration,
which influences the width and pitch of each seat and thereby determines the space available
to each passenger (Nadadur & Parkinson 2009). Individual space in the aircraft appears to be
the key comfort variable for passengers, but so too is the quality of the seating provided by
the airline. Comfort is especially important for long-haul passengers, both for those flying on
business and those travelling on leisure/holiday trips. But, importantly, there is a trade-off
between the aircraft seating density and the airline’s unit costs in that more seats that can be
accommodated in the aircraft the lower the operating costs per seat. Hence, the decision by
airlines as to the seating density on their aircraft has major cost implications for the airline
(Doganis 2009).
A key aspect of comfort relates to the width and pitch of the airline seat. Pitch is the distance
between two seats (Kundo 2010), and is a measure of the leg-room available to passengers
(Doganis 2009). Generally, aircraft seat width varies from 17 inches (tight) to 22 inches (good
comfort) and is designed to satisfy the 16-g government impact regulations. Table 4.2
92
presents the current typical airline seat width and pitch and aisle width (it is important to
note, however, that there are variations in dimensions of the seats provided by airlines).
Flexibility is built into the aircraft design so as to enable airlines convert the seating
arrangement in accordance with market demands (Kundo 2010, p. 123).
Table 4.2: Airline aircraft seat and aisle pitch and width.
Seat Pitch Seat Width Aisle

(cms & inches) (cms & Width
inches) (cms &
inches)
Economy Class 71-81 (28-32) 46-51 (18-20) 43-61 (17-24)
Business Class 84-91.5 (33-36) 53-56 (21-22) 56-63.5 (22-25)
Source: Kundo (2010, p. 123).
Smaller aircraft that carry fewer passengers (that is, up to four abreast – the lower range) can
have a narrower aisle as there is generally less aisle traffic and service provision. For larger
aircraft, however, the minimum aisle width should be at least 22 inches (56 cms) (Kundo 2010,
p. 123). In recent times, many airlines have introduced sleeping accommodation (flat-bed
seats) in larger aircraft that are used for long-haul flights (Figure 4.1) (Clark 2007). This is
normally achieved by rearranging aircraft cabin space (Doganis 2009; Kundo 2010).
Figure 4.1. American Airlines Boeing B777-300ER business class seat, Source: Edward (201345).
Other key aspects of the aircraft interior layout which an airline must decide upon, since they
influence the nature of the product/service offering it is offering, include the number of
separate classes of cabin and service, the number of toilets to be installed in their aircraft, the
45
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?uselang=en-gb>.
93
types of seats installed, interior aircraft design and colour schemes, and the size and the
suitability of overhead lockers (Doganis 2009).
The second important airline comfort and convenience-based product planning area where
decisions need to be made is that of in-flight service and catering standards. This includes the
nature and quality of the food and beverages provided, the number of cabin staff assigned to
each cabin class, the availability and range of newspapers and magazines, in-flight
entertainment (IFE) and communications systems, giveaways for first and business class
passengers as well as for children, and so forth (Doganis 2009, p. 233). A considerable amount
of effort goes into planning aircraft meals and satisfying catering standards (Jones 2004).
Again there are cost implications for airlines. Accordingly, the composition of meals is
planned down to the precise weight in milligrams of a pat of butter or the weight of the sauce
used in a meat dish (Figure 4.2) (Doganis 2009).
Figure 4.2. Air Canada international business class meal, Source: Famikey (201346).
While airlines place much emphasis in their advertising on the quality of food and wines
provided, there is not much evidence available that suggests that gastronomic preferences
determine passenger’s choice of airlines for their journey. Notwithstanding, catering
standards together with the quality and attentiveness of the cabin staff may create a certain
image for a particular airline in the minds of their customers and which may therefore be
important to the airline in marketing and brand terms (Doganis 2009). However, in recent
times in an effort to reduce costs and in response to the growing challenges of the no-frills
low cost carriers, many legacy or full service airlines have reduced or even eliminated all
together free in-flight catering in the economy cabin on short haul sectors. The US full service
airlines, for instance, have done this on most of their domestic services as have many
European-based airlines (Vasigh et al. 2013).
In recent years considerable effort has gone into improving and enhancing the quality of and
range of in-flight entertainment (IFE) in all aircraft cabins, but particularly for Business and
First Class on long-haul services (Alamdari 1999; Shifrin 2004). Aircraft seats are now
expected to provide interactive multi-channel music and films, together with sockets for
computers, in-flight telephones and electronic games (Figure 4.3). Importantly, this costs
46
<http://upload.wikimedia.org/wikipedia/commons/e/eb/Air_Canada_International_Business_Meal.png>.
94
airlines money to install the equipment in the aircraft seat, and also creates substantial
running costs to maintain the system, buy and prepare films and sound programs which need
to be changed monthly (Doganis 2009).
IFE equipment may account for around 2 per cent of the total purchase price of a new aircraft.
Pro-active, innovative airlines, such as Emirates, capture some additional market benefits
from their IFE. But this is a short-term benefit as IFE improvements can be introduced quite
quickly and therefore any competitive advantage is soon lost, but the high costs still remain
(Doganis 2009).
Figure 4.3. Emirates A380 aircraft seat back IFE system., Source: Timsdad (200947).
The third key comfort component of an airline’s product/service offering is the services offered
to passengers on the ground. An airline needs to decide whether to perform its own passenger
check-in or to use another airline or ground handling agent at out-stations. It must also
determine what is considered an acceptable average waiting time for the check-in processing
of its passengers, since this will affect the total number of check-in desks and staff it requires
for each flight. More check-in desks incur more costs for the airline. An airline must also
determine the nature of any special ground facilities for its First and Business class
passengers. These may include special airport business lounges (Figure 4.4), office services,
valet car parking (Doganis 2009; Fernie 2012), or the provision of limousine services to collect
and deliver premium fare passengers from their homes or offices to the airport (Shaw 2011).
Etihad Airways, Emirates and Virgin Atlantic Airways, for example, offer their business class
passengers a chauffeur car service at many of the airports that they serve around the world.
47
<http://upload.wikimedia.org/wikipedia/commons/9/96/Emirates_A380_seat-
back_screen_with_tail_camera.jpg?uselang=en-gb>.
95
Figure 4.4. Cathay Pacific Business Class Lounge – “The Wing” Air at Hong Kong International ,
Airport, Source: Matt@Pek (201048).
To expedite the passenger check-in process, especially when passenger baggage is involved,
airlines have in recent years introduced online check-in and self service kiosks at the airport
together with off-airport check-in at hotels (SAS Scandinavian Airlines) or at railway stations
(Lufthansa) (Doganis 2009; Wu 2010).
The ground-based services environment and quality of service provided can have a very
important influence on the passenger’s perception of an airline, but they are also inevitably
affected by the actions and efficiency of the airport administration or authority. This is the
reason why a growing number of airlines now wish to possibly own and operate their own
passenger terminals (Doganis 2009). Many airlines in the United States, for example, own
their airport passenger terminals but this practice is quite rare elsewhere (Doganis 2009;
Hanlon 2007).
A non-measurable and intangible aspect of comfort which underscores all of the areas
previously mentioned is the efficiency, helpfulness and friendliness of staff, both the cabin
crew during the flight and also the ground staff at check-in, airline lounges and at the
boarding gates. This appears to be dependent upon three key factors. First, the quality of
training received by all staff in contact with the public, but also the degree to which they are
constantly being retrained. The second factor is the success of the airline’s management in
motivating and empowering staff at all levels throughout the company. Staff need to feel that
they ‘own’ any problems that occur and are empowered to deal with them, rather than pass
them onto to someone in a higher level of authority within the company. Finally, the number
of staff employed in each functional area is also highly important. The motivation and quality
of staff in contact with customers is critical. Poor staff attitudes can be highly detrimental to
the best-planned product. Conversely, warm, friendly, welcoming staff can overcome
shortcomings in the product and win customer support (Doganis 2009).
Airline product and service planning is a complex task. Product planners are required to
work in two product dimensions. First, they must ensure that their product and service
48
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96
standards are equivalent to or better than those of their key competitors, and secondly, they
must also endeavour to differentiate the products/services offered in their own aircraft in
such a way that passengers in each class feel that they are obtaining value for money. It is
principally in the comfort-based aspects of the airline product that distinctions between the
products/services offered in the airline’s different cabin classes become most apparent to
passengers. This means that the planners have a complex task. The planners must specify
differing comfort-based features for the different market segments that they serve and are
endeavouring to attract. Not only may product/service features have to varied by cabin class
and type of ticket but the same cabin class may require different product features on different
routes, different flight stage lengths, or in various geographical areas (Doganis 2009, p. 235).
For example, business class on an Australian domestic flight might differ significantly to that
of the long-haul business class product offered to/from Australia.
Because they can be more easily changed and more readily advertised, comfort-based
features are being continuously monitored and revised by airlines. Indeed, airlines have a
requirement to respond to product/service changes by their competitors and an even greater
requirement to be the airline that introduces innovative product/service changes. Airlines
that are innovative can capture a competitive advantage until their product is replicated by
their competitors (Doganis 2009, p. 235).
A relatively recent product innovation has been the introduction of a Premium Economy class
(Figure 4.5) by a number of airlines on their long-haul routes (Clark 2007; Doganis 2009).
Based on the concerns of many airline customers that there is a clearly defined requirement
for a product that falls between an airline’s economy and business class in long-haul markets
(Taneja 2005), Virgin Atlantic was the first airline to introduce a premium economy product
in the mid-1990s for passengers willing to pay the higher end economy fares (Doganis 2006;
Taneja 2005).
Figure 4.5. Air France Boeing B777-300ER Premium Economy Class Cabin., Source: 衛兵隊衛士
(201249).
49
<http://upload.wikimedia.org/wikipedia/commons/d/dc/Air_France_aviation_Premium_economy_class%28B77
7-300ER%29.JPG?uselang=en-gb>.
97
The objective of the premium economy cabin class is to provide passengers paying the full
economy air fare with a dedicated and quieter aircraft cabin with several inches more leg-
room than the normal economy class and better in-flight catering than that offered in
economy class (Doganis 2009). This product has proved to be quite popular with those high-
end leisure travellers and business travellers paying for their airfare themselves. The use of
the premium economy product is also considered favourable during economic downturns
when business people often do not want to pay the higher business class airfares (Taneja
2005). Indeed, during economic recessions, many companies have a down-grading policy in
order to reduce their travel expenditure and save money. Consequently, the use of first and
business class travel is often eliminated by corporations during these times (Shaw 2011).
In sum, when planning new product or service improvements airlines are required to balance
three factors – the cost of the innovation, its marketing benefits in terms of revenue
generation and the speed with which such product/service enhancements can be quite easily
imitated by its competitors (Doganis 2009, p. 236).
Convenience-Based Product Features

Convenience, in the context of an airline product feature, is concerned with both the
availability of passenger seats when desired by the customer together with their ability to
alter or cancel flight bookings. Convenience features also include the ease of customer access
to airline reservations and ticketing services and the quality of such services. Frequent flyer
programs (FFPs) and airline lounges (Figure 4.4 above) may also play an important role both
in enhancing passenger convenience and accessibility whilst also improving an airline’s
image (Doganis 2009).
Each airline has considerable flexibility and scope in deciding its capacity management
policy, though it will also be affected by what its rivals are doing. However, there are two key
challenges. The first is how the airline decides to deploy capacity, that is frequencies and seats
offered on a year-round basis, so as respond to with seasonal variations in demand. The
traditional approach of the traditional full service network airlines (FSNCs) has been to
increase capacity during the peak holiday periods. Airlines hope that the higher air fares and
larger passenger volumes generated during these periods of peak demand will more than
compensate for the fact that some assets, such as aircraft and crews, may be underutilised and
therefore more costly during the off-peak periods. The LCCs have typically adopted a
different strategy. To ensure high utilisation of all assets on a year-round basis, the LCCs do
not generally adjust their capacity or frequencies so much between seasons. Rather they use
the pricing mechanism to stimulate passenger demand during periods of low demand in
order to fill their available capacity (Doganis 2009).
The second challenge for airline management is how they can manage capacity on each route
so as to ensure passenger convenience in terms of seat availability whilst optimising revenue
per flight. Again the approaches of both the full service network (FSNCs) and low cost
carriers (LCCs) differ. Traditionally, the full service network airlines (FSNCs) have used more
complex air fare structures and yield management systems in order to optimise load factors
and revenues in advance. However, if seats were available as the flight departure date grew
closer, full service network carriers (FSNCs) have tended to lower their air fares or sell seats
cheaply via travel agents. In such cases the lowest air fares were often the last minute special
fares or deals (Doganis 2009). In contrast, the LCCs use a simpler fare structure in which the
lowest air fares are available for the earliest bookings (Fernie 2012). As the flight departure
day draws nearer airfares tend to increase. In effect, passengers are required to pay a higher
price for the convenience of booking their flight late on LCCs flights (Gross & Schröder 2007).
A further aspect of airline capacity management is the level to which over-booking of flights
is practiced and, more specifically, the airline’s success in accurately forecasting the pattern
98
and number of ‘no-show’ passengers and cancellations in order to achieve very high passenger
load-factors without the requirement to deny boarding50 to any passenger (Doganis 2002, p.
246). If the airlines over-booking forecasts are consistently wrong then it may end up having
to pay costly denied boarding compensation to passengers that could not be accommodated
on the flight (Vasigh et al. 2013). We return to this issue in Topic 8.
Another important aspect of passenger convenience relates to the ability of passengers to
change or cancel their passenger reservations once made. From the airline’s perspective a
cancelled or changed reservation may mean that that particular passenger seat on the flight
concerned may not be sold until later. This could result in lost revenue. Such a situation must
be balanced against the requirement to attract bookings by not imposing too many air fare
booking conditions. This requires a fine balance by airlines. On full service network carriers
(FSNCs) the cheapest airfares offer the least flexibility and impose the highest penalties if the
passenger makes any changes to their flight reservation. Many airfares may be non-
changeable and non-refundable in the event of the reservation cancellation by the passenger.
Other airlines will permit changes to be made but at a cost to the passenger. Total flexibility
entails passengers paying the highest airfares, which applies to all classes of travel (Doganis
2009).
A critical decision area in any airline’s marketing is how to sell and distribute its
products/services and, in particular, to what degree it should use its own sales outlets in
addition to independent travel agents (Figure 4.6) and also global distribution systems (GDS)
such as Orbitz, Travelocity or Expedia (Doganis 2009; Fernie 2012). Since historically airlines
have paid commissions to travel agents on the sales generated (Wensveen 2011), they have a
vested interest in endeavouring to sell directly through their own sales offices, through their
own call centres, or through their website. Historically, airlines have relied extensively on
travel agents to generate sales and they still do in some markets (Doganis 2009).
Figure 4.7. An example of a traditional high street travel agent, Source: Taylor (201051).
The principal benefit of travel agents is that they were and are still to a large extent quite
numerous and widely scattered, providing airlines with a much wider distribution network
50
Airlines typically overbook their flights to combat spoilage as invariably some passengers fail to show up for a flight
or they miss their flight connections (Vasigh et al. 2013).
51 Reproduced as per the Wikimedia Creative Commons Attribution License,
<http://upload.wikimedia.org/wikipedia/commons/d/d3/Co-
operative_travel_agents_on_Street_Lane%2C_Roundhay.jpg?uselang=en-gb>.
99
at relatively lower cost than they could otherwise achieve themselves (Doganis 2009).
Notwithstanding, the high levels of commissions paid to travel agents, together with the
online selling ability since the 1990s, has significantly changed the role of travel agents with
more ticket sales being made online directly with the airline (Buhalis & Costa 2006). Online
distribution by airlines has also resulted in many cases in a reduction in the number of
airline’s own sales outlets (Doganis 2009).
Easy access to online flight schedules, routings and air fare and other price information
combined with passenger tickets that can be issued electronically, have significantly
enhanced the accessibility and convenience of air travel to both business and leisure
passengers alike. Airlines now compete through the speed, quality and user-attractiveness of
their websites. They are also competing in terms of the speed and quality of ancillary services,
such as hotel bookings, car rentals and tour packages and so forth, which can be assessed and
purchased from the airline's website (Doganis 2009, p. 238).
The internet itself offers several choices in distribution strategies that are available to airlines.
By using their own website, airlines are able to sell their services directly to customers.
Alternatively, airlines can combine this with selling through a variety of additional web-
based service providers (Doganis 2009). One option is for airlines to sell their services via
websites shared with other airlines or alliance partners, for example, Orbitz, which was
started by American, Continental, Delta and United Airlines (Pogue & Biersdorfer 2006).
There are also many other non-airline owned sales outlets. Large traditional travel agencies
such as American Express have their own websites which offer an extensive range of travel
services including hotel bookings or cruises in addition to airline flight bookings. These
website compliment their own sales offices and call centres. In addition there are specialist
online travel agencies, some of which are owned or have links to the global distribution
systems (GDSs), for example, Travelocity. There are also many smaller online travel agencies
located throughout the world (Doganis 2009; Fernie 2012).
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Buhalis, D & Costa, C 2006, Tourism business frontiers: consumers, products and industry, Elsevier
Butterworth-Heinemann, Oxford, UK.
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Abingdon, UK.
Doganis, R 2006, The airline business, 2nd edn, Routledge, Abingdon, UK.
Doganis, R 2009, Flying off course: airline economics and marketing, 4th edn, Routledge, Abingdon, UK.
Fernie, A 2012, AERO2322 Airline Marketing Lecture Notes, Topic 4, Airline Pricing and
Distribution, RMIT University, Melbourne.
Gross, S & Schröder, A 2007, ‘Basic business model of European low-cost airlines – an
analysis of typical characteristics’, in S Gross & A Schröder (eds), Handbook of low cost airlines:
strategies, business processes and market environment, Erich Schmidt Verlag, Berlin, pp. 31-50.
Hanlon, JP 2007, Global airlines: competition in a trans-national industry, 3rd edn, Elsevier
Butterworth-Heinemann, Oxford, UK.
Aldershot, UK.
Holmes, A 2008, Commoditization and the strategic response, Ashgate Publishing, Aldershot, UK.
Jones, P 2004, Flight catering, 2nd edn, Elsevier Butterworth-Heinemann, Oxford, UK.
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Kundo, AK 2010, Aircraft design, Cambridge University Press, New York.
Nadadur, G & Parkinson, MB 2009, ‘Using designing for human variability to optimize
aircraft seat layout’, SAE International Journal of Passenger Cars – Mechanical Systems, vol. 2, no.
1, pp. 1641-1648.
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Pogue, D & Biersdorfer, JD 2006, The internet: the missing manual, O’Reilly Media, Sebastopol,
CA.
Farnham, UK.
Shifrin, C 2004, ‘That entertainment’, Airline Business, vol. 20, no. 1, pp. 46-47.
Taneja, NK 2005, Fasten your seat belt: the passenger is flying the plane, Ashgate Publishing,
Aldershot, UK.
Taneja, NK 2016, The passenger has gone digital and mobile: accessing and connecting through
information and technology, Routledge, Abingdon, UK.
Farnham, UK.
Wensveen, JG 2016, Air transportation: a management perspective, 8th edn, Routledge,
Abingdon, UK.
Wu, CL 2010, Airline operations and delay management: insights from airline economics, networks
and strategic schedule planning, Ashgate Publishing, Aldershot, UK.
101
Strategic Airline Alliances
The Types of Alliances between Airlines

In the broadest sense, alliances involve collaboration between two or more businesses that
retain their autonomy during the course of their relationship (Ring 2000). Important to the
understanding of strategic alliances, specifically in the airline industry, is:
1. the possibility for more than two airlines entering an alliance, and
2. the fact that in tightly integrated alliance groups, the retention of an individual airline's
autonomy is often difficult to maintain (Kleymann & Seristö 2004).
Different Forms of Cooperative Links
What is commonly termed 'airline alliance' consists in fact of several different types of
cooperative links. The following list briefly describes the most common forms of cooperation
links that are used between airlines:
 Asset pools
Airlines often form asset pools, in such cases the alliance partners typically cooperate
in the area of maintenance, where the partners may pool the spare parts (in some
cases even engines) they store at outstations or joint warehouses for use by the
various alliance partners (Kilpi & Vepsäläinen 2004; Kleymann & Seristö 2004).
 Cost sharing ventures
Cost-sharing ventures involves two or more of the airline alliance partners jointly
purchasing equipment. These agreements enable the participating airlines to achieve
substantial discounts from the scale of their purchases (Kleymann & Seristö 2004). For
example, the oneworld alliance have developed common engineering specifications
in order to reduce aircraft maintenance costs by bulk-buying and the sharing of spare
parts (Iatrou & Oretti 2007).
 Code-sharing agreements
Code-share agreements in the airline industry enable partner airlines to coordinate
their operations to serve destinations that they do not physically serve (Brueckner
2001; Vowles 2000). Code-sharing is a cooperation agreement between two or more
airlines, by which at least one of the partner airlines sells seats on a flight of the other
airline partly or wholly under its own name (Beyhoff 1995; Gudmundsson & Rhodes
2001).
Kleymann & Seristö (2004, p. 13) provide the following example of how code-sharing
works in practice:
o Airline A sells a flight under its own airline designator code, even though
that flight is operated by another airline, Airline B (that is, A and B 'share' a
designator code). The advantage for A lies in its access to markets without
having to physically operate its own aircraft there; for B the advantage lies in
being able to better fill the aircraft it operates on that route, namely with its
own and A's passengers, and to be eventually able to move to operating a
larger aircraft type sooner on that route, thereby benefiting from the typically
lower seat-mile costs a larger aircraft has. In code-sharing, revenues are split
between airline’s A and B according to an agreed formula.
102
There is often a discrete distinction between strategic, regional, and point-to-point
(P2P) code-sharing: the first type covering a large part of the partner's route system,
regional code-sharing agreements focussing on cooperation between partners within
a defined geographical area, and the third type being of a purely 'tactical' nature on
single routes (Kleymann & Seristö 2004).
Code-share agreements can be fairly short-term (1-2 schedule periods) and cover a
single air route (Iatrou & Oretti 2007). Alternatively, these agreements can form the
structure of an alliance, being multilateral agreements (where two or more airlines
place their codes on flights of a third carrier). These agreements are also long-term
and involve significant changes in operational arrangements in order to harmonise
flight schedules (Kleymann & Seristö 2004). This can be called an 'equal partner
network' (Child 2015), even if one code-share partner is of overall smaller size, there is
often relative equality in that particular market.
There are a number of advantages for airlines arising from code-sharing agreements.
First, code-sharing enables airlines to expand their breadth of service coverage and
their geographical reach (Griffin & Moorhead 2012). As a result of the expanded
service offering, airlines are therefore able to enhance their market presence (Baur
1998; Oum et al. 1996). This is achieved without incurring the respective costs. Code-
sharing airlines also enjoy more favourable flight offerings in computer reservation
systems (CRS). Airports are also influenced positively through code-sharing
agreements through a better network of integration. This is because code-sharing
results in an increase in hub-and-spoke services and a concentration on major hub
airports (Beyhoff 1995).
 Equity investments
A further form of alliance agreement involves an equity investment between airlines.
Such agreements have often been structured in such a way that the investing airline
obtains a considerable share from the alliance gains (Oum & Park 1997).
In recent years, many privatised airlines have made equity investments in airlines
that are based in other countries and who have complementary route networks.
These investments between airlines may only involve minority stakes (due to home
State legislation which in many cases limit foreign ownership of airlines) (Hanlon
2007). Equity stakes are sometimes considered a strategy to pre-empt competitors
from teaming up with a third airline. In other instances, they are sought because they
are considered to be an ideal way to 'cement' an alliance, thereby providing the
investor with better control over its alliance partner (Kleymann & Seristö 2004).
In 2009, the Air France/KLM Group acquired a large equity stake in the newly
formed Alitalia (Dunn 2009). Other equity links include Lufthansa’s investments in
Swiss International Airlines, Brussels Airlines and BMI (British Midland
International) (Moores 2008). In 2009, Lufthansa purchased Austrian Airlines
(Barnard 2010). Etihad Airways has adopted an equity investment model as a key
corporate strategy. As such, Etihad has made equity investments in airBerlin, Air
Serbia, Air Seychelles, Alitalia, Jet Airways and Virgin Australia (Etihad Airways
2016). Delta Airlines now owns 49 per cent of Virgin Atlantic (Delta Airlines 2013)
and Cathay Pacific Airways own 100 per cent of Dragonair (Sobie 2008). The
operational influence of investors in their partner does, however, vary quite
substantially.
103
 Feeder agreement
Feeder agreements are a special form of code-sharing arrangement between larger
and smaller airlines, in which airlines code-share on several defined routes or
franchise a smaller airline to provide services on their behalf (Chang & Hsu 2005). In
the latter case, a smaller, typically regional, airline flying under its own brand
operates a code-share flight to the larger airline's hub airport (Graham 1997;
Kleymann & Seristö 2004). In such arrangements, regional airlines assist their larger
partner airlines to achieve route network expansion. This enhanced network enables
the larger partners to expand their economies of scope and traffic density (Graham
1997).
A typical example was Eurowings prior to Lufthansa's investment in that airline
(Thompson 2006). Eurowings used to be a fully independent regional airline, feeding
KLM's Amsterdam hub from several points in Germany, and cooperating with Air
France on routes to Paris. The airline also operated some routes solely using their
own flight designator code (Kleymann & Seristö 2004) (see also 'integrated feeders',
below). In the United States, many regional flights operated around the Southeast for
Delta Air Lines Inc., for example, are actually operated by Atlantic Southeast Airlines.
Atlantic Southeast Airlines is a business unit of SkyWest Inc., which itself operates
regional flights for Delta Airlines from its Salt Lake City hub. AMR Corp.'s American
Eagle, which is a separate company from its much-larger American Airlines unit,
operates many of American Airlines regional USA flights (Prada 2009).
This form of cooperation tends to be hierarchical in nature (Kleymann & Seristö 2004).
 Integrated feeder agreements
Possibly the most hierarchical form of cooperation is between major airlines and a
regional airline, where the smaller airline operates fully and exclusively under a
franchise agreement to feed traffic to its partner(s) (Denton & Dennis 2000; Pender
1999). This practice occurs frequently in the USA, where almost all major United
States-based airlines have agreements with smaller, integrated feeder airlines
(Kleymann & Seristö 2004). In Australia, Qantas maintains an extensive regional
feeder network through its Qantaslink partners (Figure 5.1).
Figure 5.1. QantasLink Dash 8-Q400 aircraft taxiing at Brisbane Airport. Source: Wilson. (201452).
52
<https://upload.wikimedia.org/wikipedia/commons/d/d7/VH-TQE_%2815780582179%29.jpg>.
104
 Joint ventures
Pekar and Allio (1994, p. 55) state that a joint venture (JV) is a new business entity
that is owned by two or more companies that shares both resources and skills.
Kleymann and Seristö (2004, p. 14) have noted that in the airline industry a joint
venture (JV) between different airlines is, to a degree, a 'complete' marketing alliance,
in that the JV partners apply joint pricing and revenue sharing on a route or set of
code shared routes.
It is important to note that a joint venture (JV) may raise competition issues, if, for
example, the joint venture (JV) will hold a significant market share (Asefeso 2015). In
such circumstances, the joint venture (JV) may be subject to review by the relevant
government authorities. In the United States, for example, a joint venture (JV)
requires the airline partners to seek antitrust immunity (Button & Oum 1997; Iatrou &
Oretti 2007). Typically, the authorities grant antitrust immunity to the airline alliance
partners for a defined number of years, after which partners are required to re-apply
for the necessary approval. Airline joint ventures agreements can occur between
partners either in markets where there could be route duplication, or in jointly
developing a new third market (Kleymann & Seristö 2004).
These are truly strategic alliances in the sense that they involve the merging of a part
of the alliance partners’ activities, but not all. A route or market joint venture (JV)
might result in one alliance partner giving up its presence in a certain market
(Kleymann & Seristö 2004).
 Marketing alliances
Marketing alliance agreements include joint advertising (sometimes under an alliance
brand name), joint sales, and joint frequent flyer programmes (FFPs) between the
alliance partners. These agreements typically go together with strategic and
sometimes regional code-share agreements. Marketing alliances are multilateral, and
require extensive coordination between the various partners (Kleymann & Seristö
2004). An example of a typical marketing alliance in the global airline industry is the
oneworld alliance. The oneworld alliance members have linked their frequent flyer
programs (FFPs), offer reciprocal use of their airport lounges and a range of global
products including oneworld ‘global explorer’ air fares.
 Pro-rate agreements
Prorate agreements are the simplest form of commercial alliance agreements. A
prorate agreement sets the revenue that one partner alliance pays the other for
carrying the latter’s ticketed passenger on a particular segment of the former’s
network (Holloway 2008).
An alliance group is therefore in many instances more than a simple arrangement of
loose agreements between alliance members to share flight codes and cross-sell tickets
(Li 2000). As cooperation between partners exceeds simple exchange agreements, the
requirements for greater coordination - and therefore, integration of efforts –
increases. In a fully multilateral alliance network – that is, where each alliance member
cooperates fully with all the other alliance partners - a single member's decisions will
affect the overall network offering. These alliances are based on integration of airline
networks (Kleymann & Seristö 2001).
105
The Major Global Airline Alliance Groupings
 oneworld Alliance
American Airlines, British Airways, Canadian Airlines, Cathay Pacific, and Qantas
formed the initial oneworld alliance group in February 1999. Finnair and Iberia joined
the alliance in September 1999 (De Ridder & Rusinowska 2008). Following its
takeover by Air Canada, Canadian Airlines left the alliance on June 1, 2000, while Lan
Chile and Aer Lingus joined on the same date (Iatrou & Alamdari 2005). The
oneworld alliance currently has 15 full members and a further 30 or so affiliate airline
members (Table 11.2). The affiliate members include Austria's NIKI, American Eagle,
Hong Kong’s Dragonair, Denmark's Sun-Air, LAN Argentina, LAN Colombia, LAN
Ecuador, LAN Peru and South Africa's Comair and the transatlantic premium service
carrier OpenSkies (oneworld 2016).
 SkyTeam Alliance
The SkyTeam alliance has a unique history. The origins of the alliance date back to
long before the alliance was established. Northwest Airlines (now merged with Delta
Airlines), and KLM Royal Dutch Airlines (now part of the Air France-KLM Group ),
came together in 1989 to begin establishing what would become the most integrated
airline agreement of its time. These two airlines actually created their own alliance 11
years prior to the SkyTeam Alliance being founded. Interestingly, KLM Royal Dutch
Airlines and Northwest Airlines did not become members of the SkyTeam Alliance
until four years after the alliance was established. On June 22nd 2000, the SkyTeam
Alliance was formed in New York City, bringing together Air France, Korean Air,
Aeroméxico and Delta Air Lines (Wisbrun 2016). The Czech airline CSA joined in
October 2000, while Alitalia joined the alliance in July 2001. Over the past 15 years the
number of member airlines has grown, with the alliance currently having 20 member
airlines (Table 5.2). Air cargo cooperation is also an important part of the alliance53
(Button 2010; Morrell 2011).
 Star Alliance
United Airlines and Lufthansa concluded a code-share agreement in 1993, which
subsequently formed the basis of the ‘Star’ Alliance (Shibata 2001). The Star alliance
was formally launched in 1997 (Fan et al. 2001), by Air Canada, Lufthansa, SAS, Thai
Airways and United Airlines. Varig Brazilian Airlines joined the alliance in October
1997, with Ansett Australia and Air New Zealand joining in March 1999. Ansett
Australia subsequently left the alliance as it formally ceased business in March 2002.
Japan’s All Nippon Airlines (ANA) joined the alliance in October 1999, Austrian
Airlines Group joined in March 2000 and Singapore Airlines in April 2000. British
Midland and Mexican joined the alliance in July 2000 (Iatrou & Oretti 2007). Today,
the Star Alliance has 28 member airlines (Star Alliance 2016) and is the world’s third
largest alliance as measured by passengers carried (Table 11.2).
Table 5.1 and Table 5.2 illustrate basic information for each of the current major
strategic airline alliances.
53
Please see the SkyTeam Cargo website for further details of the alliance members and the services offered:
<http://www.skyteam.com/en/cargo/Home/>.
106
Table 5.1
Basic data of the global airline alliance groupings.
At a glance oneworld (1) SkyTeam (2) Star (3)
Countries Served 154 179 192
Destinations 1,015 1,057 1,330
Daily Flight 14,296 16,270 18,502

Departures
Total Annual 513 665 641

Passengers
(millions)
Note: (1) As at June 2015 (2) As at July 2015 (3) As at July 2015., Source: Tourism Futures International
(2015).
Table 5.2.
World Airline Alliances membership.
Alliance MEMBERS
Oneworld Founding members: American Airlines, British Airways, Cathay

Pacific Airways and Qantas Airways (1 February 1999). Canadian
(15 member airlines) Airlines, also a founding member, withdrew June 2000.
Additional members: Finnair and Iberia (September 1999), LAN
Airlines (May 2000), Japan Airlines and Royal Jordanian (April 2007),
Dragonair (affiliate member, November 2007), S7 Airlines (November
2010), airberlin (March 2012), Malaysia Airlines (February 2013), Qatar
Airways (October 2013), US Airways (March 2014, from Star after
merging with American Airlines), TAM Airlines (March 2014 joined
from the Star Alliance as part of LATAM Airlines Group), SriLankan
Airlines (May 2014).
Former members: Canadian Airlines, after being purchased by Air
Canada, withdrew from the alliance in June 2000. Aer Lingus (joined
May 2000, left April 2007), Mexicana (joined November 2009,
operations suspended August 2010), Malev (joined April 2007,
operations suspended February 2012).
107
SkyTeam Founding members: Air France, Delta, AeroMexico and Korean Air
(June 2000).
(20 member airlines)
Additional members: CSA Czech Airlines (March 2001), Alitalia (July
2001), KLM Royal Dutch Airlines (September 2004), Aeroflot (April
2006), Kenya Airways and Air Europa (associate members September
2007, full members June 2010), China Southern Airlines (November
2007), Vietnam Airlines, TAROM (June 2010), China Eastern Airlines,
including subsidiary Shanghai Airlines (June 2011), China Airlines
(September 2011), Saudi Arabian Airlines (May 2012), Middle East
Airlines (MEA) (June 2012), Aerolineas Argentinas (August 2012),
Xiamen Airlines (November 2012), Garuda Indonesia (March 2014).
Former members: Continental Airlines (joined September 2004, left
October 2009), Copa Airlines (joined September 2007, left October
2009), Northwest (joined September 2004, merged with Delta January
2010).
Star Alliance Founding members: United Airlines, Air Canada, Lufthansa, Thai
Airways International and SAS-Scandinavian Airlines (14 May 1997).
(28 member airlines)
Additional members: Air New Zealand (March 1999), All Nippon
Airways (ANA) (October 1999), Austrian Airlines Group (March
2000), Singapore Airlines (April 2000), Asiana Airlines (March 2003),
LOT Polish Airlines (October 2003), Adria Airways and Croatia
Airlines (December 2004), TAP Air Portugal (March 2005), South
African Airways and Swiss International Airlines (April 2006), Air
China (December 2007), Turkish Airlines (April 2008), EgyptAir (July
2008), Brussels Airlines (December 2009), Aegean Airlines (June 2010),
Ethiopian Airlines (December 2011), Avianca-TACA Airlines and
Copa Airlines (June 2012), Shenzhen Airlines (November 2012), EVA
Air (June 2013), Air India (July 2014), Avianca Brazil (July 2015).
Former members: Ansett Australia (joined March 1999, collapsed and
ceased business in 2001), Mexicana Airlines (joined July 2000, ended
March 2004), Varig Brazilian Airlines (joined October 1997, ended
January 2007), Shanghai Airlines (joined December 2007, ended
October 2010), Continental Airlines (joined October 2009, merged
with United Airlines in January 2012), Spanair (joined April 2003,
ceased operation January 2012), bmi british midland (joined July 2000,
ended April 2012), Blue1 (joined October 2004, ended November
2012), TAM (joined May 2010, moved to oneworld in March 2014 as
part of the LATAM Airlines Group), US Airways (joined May 2004,
moved to oneworld in March 2014 as part of its merger with American
Airlines).
Source: Tourism Futures International (2015).
Rationale for Forming Global Airline Alliances

Evolution of Airline Alliance Systems
Today's strategic global alliance systems have evolved from the traditional stand-alone
operations and bilateral flight arrangements. Globalisation, the requirement to consolidate,
and constraints on foreign ownership and control have all contributed strongly to this
development path (see Figure 5.2) (Fernie 2012).
108
Figure 5.1. Configuration and drivers of airline alliances. , Source: Fernie (2012).
Entering New Markets through Alliance Membership

Historically, bilateral and reciprocal airline service agreements that were common in the past
were aimed mainly at achieving greater integration on a route-by-route basis. Experience
from such tactical agreements led to more strategic thinking and today's alliance agreements
(Fernie 2012). The objectives of airline alliances are aimed at creating a ‘virtual merger’ so as
to bypass national regulations or policies governing the foreign ownership of domestic
airlines and provisions on cabotage (Kleymann & Seristö 2004; Li 2000).
Code-sharing
Code-sharing agreements form an integral part of airline strategic alliances. Code-sharing
agreements between airlines provide both partners with additional potential revenue 54 (Havel
2009; Holloway 2008). Another one of the principal benefits of alliance membership is the
ability to code-share with other alliance partners. This has the effect of upgrading an interline
connection to on-line status, offering significant advantages in selling, especially in terms of
central reservation systems (CRS) flight displays (Alamdari & Morrell 1997). With the advent
of code-sharing, airlines can expand their route networks without spending significant
amounts of capital to acquire new aircraft, and without introducing additional services and
capacity into markets that cannot sustain it (Burton & Hanlon 1994).
Airlines operating in international markets are subject to a complex set of bilateral air services
agreements (ASAs) between States (Doganis 2009; Wensveen 2016). Code-sharing is often
regarded as one means of by-passing foreign ownership restrictions; such alliances may
enable the alliance partners to achieve economies of scope and traffic density that would
otherwise not occur (Baur 1998; Spitz 1998).
As code-share agreements have expanded, interline arrangements between airlines have
begun to reduce in number, which has in turn encouraged additional code sharing
arrangements. Combining code-sharing with frequent flyer agreements gave airlines
operating in different markets a strong base on which to build competitive advantage by:
54
Code-sharing can even provide extra revenue from the services provided on a single route (Havel 2009; Holloway
2008).
109
 connecting markets using schedule coordination, providing passengers with better
network connections and reduced connecting times;
 introducing new destinations;
 single passenger check-in;
 shared airport lounges;
 discounting fares for connecting services operated by alliance partners, providing
savings on conventional interline air fares;
 delivering a more seamless travel experience (for example, by offering lounge access
and coordinated baggage handling); and
 coordinating frequent flyer programs (Humphreys 1994).
The objective of code-sharing is the creation of a ‘seamless connection’, whereby although
passengers are aware they are travelling on two different airlines the quality of service is the
same as would be experienced with a single airline (Brueckner 2003; Humphreys 1994).
Concentration in the Global Airline Industry
Pels (2001, p. 3) argues that the emergences of airline alliances ‘is a continuation of the process
of concentration and consolidation that was first characterised by the emergence of hub-and-
spoke networks’. Indeed, concentration of operations and assets has been a long-term factor
driving the establishment of alliances between the world’s airlines.
Airlines have historically made commercial agreements of limited scope and duration for
many decades (Li 2000). More recently, liberalisation 55 and intensified competition have
driven airlines to form today's strategic multilateral global alliances (Hanlon 2007). A
historical example of successful consolidation in the airline industry was the British Airways
(BA)/Qantas (QF) alliance that followed soon after the BA/USAir partnership and which
proved to very successful. In this case the two operators took the “Kangaroo Route” between
Europe and Australia via the Far East and consolidated their respective operations, removing
excess capacity and streamlining schedules (Doganis 2006). The partnership between British
Airways and Qantas formed the backbone of the oneworld alliance (Fan et al. 2001). Another
example of consolidation, but in a different form of an alliance agreement, is the development
of ‘franchising’ in the US and European markets (Alamdari & Morrell 1998; Pender 1999).
The US market deregulation in 1978 and the dramatic increase in globalisation of the industry
and world economy over the past few decades has fundamentally changed the face of the
airline business, regardless of regulatory constraint. Notwithstanding, there have been
several failed attempts to create equity-based airline relationships, and significant challenges
in making the changes that the new marketplace demanded (Burton & Hanlon 1994).
Benefits of Global Airline Alliances – From the Airline Perspective
Member airlines benefit from their alliance participation in terms of increased traffic and
market-share. This is achieved from joint flight scheduling and hub coordination, extending
their marketable network to include access to markets which otherwise would not have been
possible, and an increase in load-factors through enhanced traffic feed. Alliance members also
achieve advantages through the ease of baggage transfer, single passenger check-in for multi-
sector flights and shared airport lounges; together with more favourable air fare strategies
and the combining of frequent flyer programmes (Alamdari & Morrell 1998).
At congested airports alliances can provide an airline with access to an airport where
generally it would experience landing restrictions and other constraints (Iatrou & Oretti
2007). Alliances can enhance an airline’s capacity to raise capital and increase shareholder
55
Liberalisation in the United States, for example, between 1978 and 1984, resulted in a substantial shake-out in the
industry and productivity of the surviving airlines increased (Chan 2000).
110
value. Airlines which have established alliances with European or United States-based
airlines typically hope that the alliance will result in better access to intercontinental markets
(Bureau of Transport and Communications Economics 1994). This is evident in the Europe-US
links in the following alliances: Lufthansa and United, and Air France/KLM and Delta
Airlines. In addition, alliances can enable the partners to reduce costs through cooperatively
sharing costs (Shaw 2011) – for example, aircraft maintenance, CRS costs, training and the use
of the respective airline’s ground facilities (Bureau of Transport and Communications
Economics 1994).
Benefits of Global Airline Alliances – From the Consumer Perspective
The global airline alliances provide travellers with greater travel options and they help make
their trip more enjoyable. The various flight routings that are available from the global
alliance carriers usually reduce the international journey time for air travellers. In addition,
due to the alliance arrangements, customers are able to enjoy the benefits of ‘seamless’
connections or increased services to more destinations (Lu 2003).
Having a strong global presence also assists the global alliance groupings to obtain global
corporate travel accounts – for those businesses that require extensive travel. This can form a
substantial share of the global alliances revenues. Hence, the attractiveness of their service
offering over competing alliances depends on the alliance’s global market coverage (Vasigh et
al. 2013).
The main benefits common to airline alliances, from a consumer’s perspective, are:
(a) greater network access;
(b) seamless travel;
(c) transferable priority status;
(d) extended lounge access; and
(e) enhanced frequent-flier program (FFP) benefits (adapted from Fernie 2012; Goh & Uncles
2003; Lu 2003; Weber 2005).
Table 5.3 summarizes the strategic airline customer proposition and associated benefits.
111
Table 5.3
Airline Alliance Customer Proposition and Benefits.
ALLIANCE PROPOSITION CUSTOMER BENEFITS
Global Access Schedule Harmonisation

Code-sharing Agreements
Seamless Travel Simplified Pricing

Coordinated Schedules
Through Check-in;
 Baggage
 Seats
Terminal Co-location
One-stop Service
Recognition Mileage Reciprocity;

 Accrual
 Redemption
FFP Status;
 Miles toward Tier Status
 Continuity of Tier Status
Lounge Access;
 Class of travel
 Tier Benefit
Priority Handling;
 Waitlist
 Check-in
 Baggage Allowance
 Baggage Handling
 Priority Boarding
 In-flight Recognition
Value Corporate Price Discounts;

 Trade
 Corporate
Lower Published Fares
Source: Fernie (2012).
112
The Financial Benefits of Global Airline Alliance Membership
Increased Revenue
One of the major benefits of an alliance comes in the form of increased revenue. When larger
global airline alliances are formed, airlines are able to use code-sharing to build a global
service image. Code-sharing with alliance partners in many instances is the best means of
marketing the coordinated service that an alliance offers. Hence, if the marketing is
successful, airline profits can increase (Spitz 1998).
The increased revenue is due to increased passenger flows. In addition, a new service(s) that
would not have been possible without the code share/alliance provides a new revenue source
(Bureau of Transport and Communications Economics 1994).
Cost Synergies and Reductions
Alliances can have a beneficial impact on airlines costs in four ways. First, because the
enhanced market power created by an alliance will generate higher traffic volumes for the
partner airlines. These in turn can provide greater economies of traffic density. Thus, alliances
can assist airlines to develop traffic levels on many routes more rapidly than otherwise would
be the case. This means that airlines have the scope for reducing unit costs through higher
load factors, switching to larger aircraft and achieving higher utilisation of their fixed assets,
such as, airport terminal facilities and sales offices (Doganis 2006).
Second, cost economies may result from potential synergies between the alliance members.
The synergies in operations or marketing allow alliance partners to share some costs or
reduce costs via route rationalisation. Alliance partners can jointly share sales offices, airport
offices, airport lounges and reservation/ticketing staff, all of which will assist them in
reducing their costs. Fleet commonality can also result in lower costs for the alliance members
through the interchange of aircraft and crews, centralised or common maintenance facilities,
and standardised ground handling equipment (Doganis 2006).
Third, alliances can enable one airline, typically the major carrier or carriers, to benefit from
the smaller member’s lower operating costs. A major factor influencing airline unit costs is
the cost of labour, which can vary substantially between neighbouring countries and also
between airlines based in the same country, particularly if some airlines are highly unionised
and other airlines are not (Doganis 2006). For example, Jetstar’s staff costs are considerably
lower than their parent company Qantas).
Fourth, alliances offer considerable scope for their members to achieve significant cost
reductions through joint purchasing (Kleymann & Seristö 2004; Zea & Feldman 1998). The
Star Alliance, for example, estimates that through joint purchasing costs could be reduced by
between 5 and 7 per cent annually (Doganis 2006). In addition, airline costs can also be
reduced through the operation of joint-services, reciprocal sales arrangements, joint ventures
such as catering and ground handling. Nonetheless, these benefits could be offset by the cost
of management time associated with alliance participation, and the dilution of the respective
alliance member’s brand (Alamdari & Morrell 1998).
In addition, alliances can create high transaction costs, for example, contracting, negotiating,
integrating and monitoring costs associated with the new alliance arrangements. The very
nature of intangible assets, such as managerial expertise and industry knowledge, makes
integration of two or more airlines a costly exercise. The ability of an airlines management to
invest the time and effort, and demonstrate the firm’s commitment to the alliance, is
fundamental to the success of the alliance. When an alliance comprises a number of airlines
then there is the increased chance for conflicts of interest to occur. These conflicts may result
in member airlines reducing competition on some routes in order to accommodate one or
more alliance partners, or alternatively the conflict may raise sufficient difficulties which
could potentially threaten the alliance (Bureau of Transport and Communications Economics
1994).
113
Joint Aircraft Purchasing
A further area that provides large potential for cost savings for alliance members is the joint
purchasing of aircraft (Iatrou & Oretti 2007).
Alliance Members Internal Management Issues

Alliance Management and Resources
Participation in an airline alliance requires management and resource commitment that can
prove quite cumbersome to members (Bureau of Transport and Communications Economics
1994; Deprosse & Franke 1998). Inherent in any alliance are a number of protocols that a
member must adhere to. Given the broad nature of these requirements a wide cross-section
of departments and their staff are required to be involved. Several airlines have adopted a
similar management model where a central alliance coordination body manages the
involvement of the ‘delivery’ departments of the business, for example, customer service,
information technology and sales.
Bilateral Versus Multilateral Alliances
The issues reviewed above, while applicable to multilateral membership overall, do not apply
as much when looking at a bilateral alliance. In these cases, for example Lufthansa and
United Airlines, there is usually very clear financial benefits to justify and prioritise the
activity alongside other independent projects. In addition, related staff - usually from
network and revenue departments - traditionally takes the lead on development and
implementation and as a result the projects achieve greater ownership and buy-in.
Very often, projects of this nature originated prior to the airline joining a multilateral alliance
and sometimes continue almost in isolation. Ideally this type of bilateral activity should be
included in the overall alliance picture and its value used to quantify the company’s alliance
strategy as a whole.
Airline Alliance Failure Factors
Alliances may be terminated because the members have attained their objectives and the
alliance no longer serves the purpose for which it was originally intended (Gudmundsson &
Rhodes 2001; Park & Cho 1997).
According to Kleymann & Seristö (2004), alliances in general are terminated for the following
reasons:
 alliances are more like diplomatic and pragmatic pairings than exclusive bilateral
marriages;
 integration for alliances is very different from that of mergers;
 no one governance model fits all alliances as goals, duration, resource
contribution and values may differ dramatically;
 alliance expertise needs to be spread throughout the organisation, not just based
on a small group of experts; and
 alliance performance can be measured, including the intangibles of trust and culture
(Kleymann & Seristö 2004, p.180).
Top Down Management

As is traditional in many large organisations, top down management driven change is often
the only way to achieve progress, particularly in the airline business. In the case of alliance
strategy, the majority of change is being driven from strategic reviews and market led
evolution of the airline industry. These initiatives have to be championed from the front and
this relies on an effective top-down management led change culture and processes
(Kleymann & Seristö 2004).
114
To avoid unnecessary internal conflict and to maximise value, an alliance strategy must fit the
following criteria:
 feature in the corporate strategy as a whole;
 have an agreed value;
 feature in relevant departmental business plans;
 carry agreed and appropriate priority;
 have appropriate resources; and
 be led from the top and championed by senior management (Kleymann & Seristö
2004).
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Airline Capacity Management and Passenger
Aircraft Fleet Planning
Airline Capacity Management

Capacity management in the airline industry involves the matching of a production process
to produce output against the predicted demand for that airline, given certain marketing
assumptions. Capacity management also requires the accumulation of both tangible and
intangible resources, the amount and nature of which will reflect a balance between efficient,
that is, least cost, and effective, that is, maximum customer satisfaction and service delivery
(Holloway 1997, p. 67). Because of the costs of producing output in the airline industry, risks
are high. The overestimation of demand and/or over effective service delivery (that is, the
application of more resources to customer satisfaction than are strictly necessary given the
selected strategic positioning of the product/services concerned in the market) raises an
airline’s unit costs. Conversely, under-estimation of demand and/or over emphasis on
efficiency to the exclusion of effectiveness reduces earnings for shareholders to less than their
full potential and the airline also risks long-term damage to its reputation by generating
negative perceptions amongst consumers (adapted from Holloway 1997, p. 67; McKnight
2010).
The fundamental objectives of capacity management by airlines are quite clear:
1. To minimise revenue loss from spillage56, that is, production of insufficient production
to satisfy potentially profitable demand;
2. To minimise excess output, that is, production of ASKs or ATMs in excess of what can
be profitably sold;
3. To minimise spoilage, that is, production of unsold ASKs or ATMs which could have
been profitably sold but for no-shows and mis-connections, and so forth; and
4. To maximise resource productivity (consistent with the airline’s chosen strategic and
market positioning, and with the type of value that it is offering its customers)
(Holloway 2008, p. 363).
Resources required
Any ability to acquire resources is based on the airline’s ability to access capital (Clark 2007;
Wensveen 2011). If the airline has access to capital then the most fundamental resource is
aircraft. In order to operate aircraft efficiently throughout a route network, some combination
of other factors – staff and facilities – are also required (Wensveen 2011).
Capacity management is a chain of actions taken by an airline that are focussed on identifying
a feasible level of output and ensuring that resources are in place to produce it (Holloway
1997). Demand forecasting57 is followed by a decision on the segments of market demand to
be served by the airline, and then by fleet planning, facilities planning, and human resource
planning. All of this needs to occur within the context of a viable financial plan (Holloway
199; Wensveen 2011).
56
Spillage or spill is the degree of average demand, which exceeds the capacity offered by the airline. The spill costs
are therefore the revenue of lost passengers due to insufficient aircraft capacity to accommodate them (Bazargan
2010, p. 47).
57 Airline passenger forecasting is examined in Topic 10 of the course.
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The challenge of airline capacity management
Demand instability
The nature of the scheduled airline industry is that airlines are required to forecast, decide
how much and which market segments they will attempt to satisfy, then commit capacity to
the task and try to sell it (Doganis 2009). If the marketing has been done successfully, selling
should pose few difficulties for the airline. However, forecasting is complicated by three
particular features of the demand for airline seats:
1. Growth in demand in the airline industry is highly cyclical in nature and is closely
correlated to changes in the underlying fluctuations of economies (Bureau of Transport
and Communication Economics 1994; Doganis 2009). This means that airline
management, attempting to create sufficient capacity to satiate peak demand for
services, will experience considerable difficulty in estimating real future air travel
demand (Dempsey & Gesell 1997). In addition, good financial times often result in
airlines ordering new aircraft, and these aircraft deliveries very often do not coincide
with favourable prevailing economic conditions. This typically results in over-capacity
in markets, and airlines therefore often aggressively price their services to attract
traffic, resulting in serious financial losses. Furthermore, airlines have historically
ordered new aircraft in batches; when air traffic grows airlines often assume that traffic
will continue to do so and consequently new aircraft orders are placed. Due to the high
cost and thus the price of a single aircraft unit, manufacturers do not normally produce
aircraft speculatively. Rather aircraft are manufactured by a production schedule, in
line with the orders received from their customers. As a result, it may be several years
before the airlines receive their new aircraft. Past history has shown that many airlines
take delivery of their new aircraft, which usually increases the capacity that they offer
in the market, at the time that the market is declining due to economic adversity (Chin
& Tay 2001). Thus, the timing between aircraft order and delivery therefore magnifies
the tendency towards periodic overcapacity in the already highly cyclical airline
industry. Consumers can react to changes in the determinants of demand far more
quickly than airlines are able to adjust output (Holloway 1997, p. 69).
2. Any trend line of average demand growth conceals the inevitable peaking suffered by
most forms of transport. In the case of airlines, this peaking can be daily, hourly,
weekly, and/or seasonal depending on the air travel market58 concerned (Holloway
2003, p. 362; O’Connor 2001). For charter or dedicated holiday airlines, this type of
peaking provides the major capacity management challenge. For example, scheduled
airlines utilise a number of demand techniques to try to soften the impact of peaking:
pricing and revenue management, variations in rights to accumulate or use frequent
flyer points or miles, and advertising and promotional campaigns. Airlines serving
networks with the appropriate characteristics may be able to redeploy elements of their
aircraft fleet to counter-seasonal markets, as some US and Canada-based airlines do
when switching aircraft from Atlantic routes into Florida and the Caribbean during the
northern winter. More generally, airline fleet and network structures determine how
easily aircraft can be redeployed in response to anticipated or unexpected demand
volatility (Holloway 1997, p. 70).
3. Because traffic – both in aggregate and in larger individual air travel markets –
involves sizeable volumes, a relatively minor forecasting error or an unanticipated
58
Variability by the day of the week will often reflect whether an airline market is dominated by business or leisure
travel. A market oriented towards business travel will have slack days on weekends, whereas one oriented towards
leisure travel may show quite the opposite pattern. The most severe variability in any travel market, however, is
likely to occur by the hour of the day (O’Connor 2001, p. 106).
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random fluctuation can be highly disruptive to any predicted balance between output
and demand (Holloway 2003, p. 362).
Supply indivisibilities
Airline capacity and output generally tend to increase in substantial increments or ‘lumps’ as
routes, flight frequencies, aircraft, ground infrastructure and so on is added, whilst demand
grows in much smaller units, for example, passenger enplanements. This makes it
fundamentally difficult for airlines when trying to match supply with demand (Holloway
2003).
Product perishability
Because the airline product is perishable at the point of production, it cannot be inventoried
and later sold once it is produced (O’Connor 2001; Shaw 2011). This is therefore a
fundamental challenge for airline capacity management.
Liberalisation and deregulation of air travel markets
The freedom to enter routes and to decide on the level of output almost inevitably results in a
surge in airline output. Sometimes this surge in airline output is attributable to extant
demand which had been constrained by commercial regulation or government policy. On the
other hand, it may also be contributable to the so-called S-Curve effect59 and profitless pursuit
of market share by airlines. Moreover, whenever capacity is added by an airline in a mature,
slow-growing market it is quite probable that what will happen is that revenues and market
share get ‘juggled’ around and yield-damaging air fare wars become endemic. A
countervailing consequence of liberalisation is the freedom that airlines have to exit
unprofitable markets (some state owned carriers are not permitted to exploit this freedom to
withdraw from unprofitable markets) (Holloway 2003, p. 362).
Capacity as a strategic variable as well as an operational parameter
The use of capacity to enter a market with the calculated strategic intent of achieving a market
dominant position can throw supply and demand into a temporary imbalance. An example of
this occurring was when American Airlines commenced its aggressive growth strategies into
Latin America in the early 1990s. At a tactical level, demand imbalances in one region of the
world can have an impact on the balance between supply and demand elsewhere in the
world (Holloway 2003, p. 362).
Air cargo output
The output of air cargo space and capacity is to a large degree influenced by airline passenger
capacity planning (Doganis 2009). The decline in air cargo yields on many routes, due in a
large part by the rapid expansion of lower deck passenger aircraft belly hold capacity from
the growth in passenger traffic60, have on occasion had a profound influence on all-cargo
operations. This type of occurrence is one reason why many larger airlines which have
sufficient resource to operate their own dedicated all-cargo services prefer the flexibility of
wet-leasing freighters on short-term contracts (Doganis 2009; Holloway 1997, p. 72).
As we have noted above, capacity management involves the matching of resource inputs to
the demand for the volume and type of output that an airline’s choice of competitive strategy
and their chosen strategic positioning requires it to produce. Capacity management can be
considered on two levels:
59 The S-Curve effect describes the empirically proven phenomenon of the substantial influence of the flight frequency
share measured in number of flights on an airline’s market share (Auerbach & Delfmann 2005, p. 78).
60 Nearly 60 per cent of world air cargo trafﬁc is carried on freighter aircraft (Boeing Commercial Airplanes 2014)
with the balance carried in the lower-deck belly holds of the combination airlines passenger services.
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1. Micro-level: fleet assignment, the optimisation of passenger and cargo loads on
individual departures, and the management of queues within the service delivery
system are primary areas of interest for airlines at the micro-level. There are two key
tasks:
 Managing demand in line with output: this involves airline management making
dextrous use of the marketing mix (4Ps) – especially, price, promotions and
marketing communications to trim demand peaks and fill troughs in demand. The
breaking down of demand into discrete market segments is an important part of
this challenge for some airlines as demand curves may very well differ between
market segments at different times of the day, week and year. The emphasis here
is on the short-term and price plays a very important role;
 Matching output to demand: this is essentially an operations and human resource
management task. The emphasis in the past has primarily been medium-or-long
term, with efforts in respect of fleet, facilities and staff planning especially
important. The development of computer-based tools and software that are
capable of more accurately forecasting demand by departure and, particularly the
availability of ‘families’ of aircraft of different sizes (such as the Airbus A320 and
the Boeing B737 aircraft series) having similar air-crew type ratings have greatly
improved short-term capacity management opportunities (Holloway 2003, p. 363).
2. Macro-level: medium and long-term fleet and facilities management, within the wider
context of the airline’s strategic route network management, is the focus at this level
(Holloway 2003, p. 364).
Airline Fleet Planning

Fleet planning is the process by which an airline acquires, manages and retires appropriate
aircraft capacity in order to serve existing and potential markets over a period of time with a
goal to maximising corporate profitability. It is an integral part of the company’s strategic
planning process.
Selection of the most appropriate fleet units is one of the most difficult of decisions for airline
management (Clark 2007). In many cases, it will determine the future financial viability of the
airline.
Additional complicating factors, both internal - engineering and maintenance, crewing and
network flexibility, for example, and external – such as future market conditions, competitor
positioning and direction, fuel price movements, future aircraft market conditions, all need
to be considered in the airline fleet decision process.
Airline fleet planning encompasses:
 aircraft evaluation;
 comparability of aircraft;
 route and network analysis;
 matching of current and future supply and demand;
 aircraft acquisition, including financing; and
 harmonisation with existing fleet (Belobaba 2006a).
In today’s deregulated and increasingly liberal aviation markets, great care and skill are
required to assess the entire costs - both operating and financial – versus the revenue and
other benefits derived from fleet decisions. Consideration also needs to be given to internal
costs and benefits. The wrong fleet decision can result in internal inefficiencies, which will
result in long-term sub-optimisation of profits.
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Overall fleet composition is part of the airline’s long-term strategic planning process (Figure
6.1) (Clark 2007). While constantly a question in the minds of senior management, general
fleet planning matters are also considered by many managers when evaluating certain short-
term matters.
Figure 6.1. The airline planning process., Source: Barnhart cited in Belobaba (2006a, p. 10).
Attributes of Fleet Planning

There are three main attributes of airline fleet planning:
 Adaptability
 Flexibility
 Continuity
A combination of all three will lead to more robust fleet planning (Clark 2007).
Adaptability
Adaptability is required in order to optimise the matching of supply with demand
(Clark 2007). This is achieved through:
1. The right aircraft size and customer appeal
 Capacity versus frequency
 Demand imbalances
 Passenger comfort – often a competitive issue
 Sizing for both today and tomorrows market needs
2. The right performance
 Meets the airline’s mission requirements
 Allows for a range of network tasks
3. The right economics
 Provides the best trip and seat cost for the network anticipated
 Provides for the maximum profitability within given network constraints
Flexibility
Flexibility is the ability to adapt rapidly and must take into consideration:
1. Payload flexibility
 Fleet with multi sized aircraft versions
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 Ease of aircraft reconfiguration
2. Operational flexibility
 Changing network requirements – from hub-and-spoke to point-to-point (P2P)
or vice versa.
 Future range requirements
 Best use of resources, particularly crews
 Capacity management
3. Aircraft acquisition flexibility
 The mix of firm aircraft orders and options
 Future aircraft residual values
 Lease versus buy mix (Clark 2007).
Continuity
Continuity provides a platform for smooth development across the entire airline:
 Product homogeneity and consistency
 Introduction of new fleet unit – training and tooling
 Learning curve benefits (Clark 2007, pp. 29-36).
Fleet planning is a highly complex, long-term decision making process (Clark 2007). An
airline’s network is typically heterogeneous and the markets served, both current and
potential, are often volatile with competitor actions and reactions often unpredictable. As
such, the fleet planning process requires compromises.
Why do Airlines undertake Fleet Planning?

There are two fundamental reasons for airlines acquiring aircraft:
Replacement of Existing Fleet Capacity
In replacing existing capacity, the task is to find an aircraft capable of performing a largely
unchanged mission better than the aircraft to be replaced (Holloway 2008; Wensveen 2011).
An airline might find it necessary to replace part of its current fleet because of high operating
cost, unacceptable aircraft noise or emissions, limited remaining aircraft structural life,
inadequate passenger appeal, fleet rationalisation, or an ongoing fleet rollover policy that is
intended to maintain a young fleet age. Normally the task for an airline is to find an aircraft
capable of performing a largely unchanged mission more effectively than the aircraft to be
replaced (Holloway 2008, pp. 457-458).
Growth in Total Capacity
The growth in total capacity often interacts with the need for aircraft replacement, and is
further complicated by the fact that growing demand can in principle, be satisfied by using
larger aircraft and maintaining flight frequencies. This can be achieved by operating the same
size aircraft at higher frequencies (possibly optimising additional utilisation and/or higher
load factors out of the existing fleet before adding further capacity), or by some combination
of the two (Holloway 1997, p. 79).
On a route-by-route basis, it is generally true that additional frequencies have historically
accounted for a significantly higher percentage of additional airline output supplied to satisfy
demand growth than have larger aircraft. In addition, capacity might have to be added to
satisfy a new mission requirement – for example hub-bypass by operating point-to-point
(Holloway 1997, p. 79). Additional capacity may be required by an airline to satisfy new
mission requirements that are beyond the capability of the airline’s existing fleet, such as the
operation of ultra-long haul services (Holloway 2008, p. 458).
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Elements of Airline Fleet Planning
Numerous airlines have gone out of business because of their poor fleet planning procedures.
Australia has had its share of failed carriers, with fleet planning issues playing a role in their
demise – Compass, Ansett Australia, Impulse, Ozjet and, more recently, Air Australia (Figure
6.2) to name a few.
Figure 6.2. Air Australia Airbus A320 aircraft., Source: Topos (201261).
Airline fleet planning characteristics include:

 Aircraft type(s);
 Number of aircraft – both total and sub fleets;
 Timing of purchases and retirements of aircraft;
 Deployment of aircraft; and
 Attainment of the airlines financial goals (Holloway 1997).
A typical airline fleet planning model requires the following inputs:
 The airlines current fleet;
 Cost data;
 Network characteristics;
 Estimated passenger and air cargo demand; and
 Alternative options (Belobaba 2006b).
Fleet Composition
An airline’s “fleet” is the total number of aircraft it operates at a given time, as well as by the
specific aircraft types that compromise the total fleet (Belobaba 2016, p. 160). This fleet can be
broken down into “sub-fleets”, usually comprised of specific aircraft types, for example,
Airbus A320, 330, 380 and Boeing B737, B777, and B787 aircraft. Each aircraft type has
different technical performance characteristics, for instance, short haul thin routes or long
haul major routes, and each aircraft type has different financial attributes, especially
61
<http://upload.wikimedia.org/wikipedia/commons/9/9c/N549CL.jpg?uselang=en-gb>.
124
operating costs, required to serve the specific routes operated by that airline (Belobaba 2006b,
p. 2).
While several aircraft may be able to serve a particular route, certain aircraft will be better
matched to those unique market conditions, be it time of day, day of week, and so forth. A
fleet that comprises aircraft that can serve all market needs effectively and efficiently should
place that airline in a strong financial position.
Fleet selection is a vitally important issue for the business, as over 50 per cent of the gross
assets of an airline are typically its aircraft. The financing to secure these assets needs to be
structured appropriately (Wensveen 2011).
Typically, aircraft may now have service lives of between 25 to 40 years (Fonta 2010),
impacting both balance sheet and profit and loss statements over that period, should the
airline decide to retain the aircraft for the duration of their service life.
The Airline Fleet Planning Process
The components of airline fleet planning are:
 Traffic, yield and revenue forecasts
 Operating cost estimations
 Economic and financial data
 Financing alternatives
 Performance:
o Aircraft
o Aircraft/engine combination
o Airport
o Route analysis
 Environmental factors:
o Noise
o Pollution
 Airline corporate objectives
 Schedule (Belobaba 2006b).
Figure 6.3 presents a graphical description of the airline fleet planning evaluation process.
125
Figure 6.3. Airline fleet planning economic evaluation process., Source: Belobaba (2006b, p.12).
Basically, the airline fleet planning process requires information covering four broad areas:
Corporate Objectives
What are the key objectives for the airline? The broad measurements for the business –
profitability, system-wide load factor, market share targets, cashflow, debt/equity ratio,
earnings per share, along with other targets such as company wide productivity
improvements and cost saving goals. The corporate policy on fleet also needs to be known
(Wensveen 2011). This policy may stipulate a maximum fleet age, maximum length of time
each aircraft will remain in the fleet, fleet replacement policy, maximum capital spend per
annum, etc. For example, Singapore Airlines has always aimed to operate the youngest
aircraft fleet of any major carrier, with an average age of just five years (Birtles 1998, p. 79).
Economic Environment
What does the broader economy look like? What is the outlook for the airline industry? And
what is the outlook for your airline? All three questions must be examined for both the
immediate future as well as the medium and long-term. Not an easy task!
As we will see in Topic 10, forecasts need to be made for the general economy concentrating
on Gross Domestic Product (GDP), employment and unemployment rates, corporate
confidence and profitability, consumer confidence and spending, demographics, and changes
in personal disposable income, being the major determinants of airline passenger demand.
On an industry level, where is the industry as a whole headed? What are the competitor plans
and advised activities - what routes will they add (or remove), will their aircraft type and
frequency be changed on existing routes, are new carriers considering entering the market or
are existing carriers planning a withdrawal, etc.? All this needs to be considered in view of
what the airline is planning and how it is factoring in potential competitor reactions to these
plans (adapted from Wensveen 2011, p. 404).
Corporate Resources
A review of the company’s resources and their use needs to be undertaken. This
includes:
126
 Present fleet, usage and productivity levels, route performance and any planned
changes;
 Engineering and maintenance capabilities – current commitments, workshops and
hangers, licensed and trained personnel, spares inventory, and
 Crews – both technical and cabin. What training facilities are available and what
would be required if new fleet units were introduced? What regulations need to be
onsidered? (Wensveen 2011).
Then for the potential new aircraft fleet units, detailed information on:
 technical performance – payload/range, flight characteristics and performance,
extended operations (ETOPS), runway requirements, airport and other infrastructure
requirements, availability of technical support and spares (if the airline is considering
a small, internally unsupported sub-fleet), and
 Financial performance – fuel burn rates, unit-operating costs, start-up costs and
acquisition financing costs (Clark 2007).
Corporate Marketing Strategy
Given all of the above, what are the company’s strategies to implement the corporate
objectives, given the environmental conditions and other constraints forecasted and resources
that are at hand. These will be both broad as well as at a micro level, focused on particular
routes, aircraft configuration, market share by city pair, pricing and distribution, and so forth
(Wensveen 2011).
The airline planning process is therefore a continual, on-going process that requires input
from a variety of departments, both commercial and operational within the airline (Holloway
2008; Wensveen 2011).
The Airline Fleet Planning Approach
In the airline industry, computer models have been developed to assist in translating all of
the required information into a fleet plan that identifies future aircraft requirements and their
financial impacts for the airline.
There are two broad approaches to fleet planning:
1. “Top-down” or Macro approach (systems approach)
2. “Bottom-up” or Micro approach (detailed) (Belobaba 2006b; Clark 2007).
Macro Fleet Planning Approach
The macro technique is based on “top-down” or aggregate method. Typically, it is performed
at a system-wide level or sub-system level (domestic or international). It could also be used to
evaluate a route group or even at an individual route level (Belobaba 2006b, p. 6).
The macro technique assumes a seat factor (or load factor) from which the ASKs (Available
Seat Kilometres) can be determined that are needed to satisfy the forecasted RPK (Revenue
Passenger Kilometre) demand. The required ASKs determined are then compared to the
current (or existing) ASKs produced by the airline. The difference between the required ASKs
and the existing ASKs is referred to as the “capacity gap” (Belobaba 2016). As such, this
method is sometimes called “Capacity Gap Analysis”.
Assumptions are also made about average sector lengths flown and aircraft productivity
expressed in ASKs per aircraft per day.The result is then used to determine the number of
aircraft required, to cover the “capacity gap” (Belobaba 2006b, p. 6). The number of aircraft
required will depend on the type of aircraft chosen (for example, Airbus A318, A320, A321,
A330), and the seating configurations fitted to each aircraft (for example, single class, two
class or three class).
127
Following the capacity gap analysis, estimates of aircraft operating costs can then be used in
order to compare the economic performance of the different aircraft combinations that will be
used to satisfy the “capacity gap” (Belobaba 2016).
This approach allows for rapid evaluation of capacity requirements and the possibility of
introducing new aircraft types into the fleet, as high level assumptions are made about
changes in - traffic demand, operating costs (particularly fuel) and airline structure (for
example, changes in average stage length) (Belobaba 2006b, p. 8).
It is a commonly used approach by airlines for long-term, 10+ years, system-wide analysis, as
the assumptions are at a high level and over this time period, are highly speculative anyway.
Over such a long planning period, many factors will change, so this approach provides a
general indication of high level aircraft requirements (Belobaba 2006b, p. 8).
Micro Fleet Planning Approach
Micro-level analysis is a “bottom-up” approach. It is a more detailed approach than for a top-
down analysis (Belobaba 2016). It allows for evaluation by route and aircraft requirements to
serve specific markets. It also permits more “what-if” type analysis. As such, this method
requires detailed future scenarios that consider:
 Future route networks and schedules;
 Share of total and individual route market share, and
 Forecasts of all traffic flows – both U/Ds (uplift / discharge) and O/Ds (origin/
destination) – and how they will flow over the airlines network (Belobaba 2006b, p.
7).
This approach provides substantially more detail about changing airline route and market
characteristics and must make detailed assumptions about competitor actions and reactions
(which is a very difficult task). Schedules are constructed for each route and each aircraft, and
economic comparisons are made for different schedule / aircraft combinations. Assumptions
are made regarding fares, passenger mix and likely demand given the pattern of flying on
particular routes.
Such an approach is obviously far more time consuming and will be subject to higher levels
of variation, as the base planning unit, the route, is generally harder to model and forecast
than for the airline as a whole (Belobaba 2006b, p. 8).
However, undertaking this approach will highlight potential constraints, either internal or
external (or both), which the “top-down” approach may fail to identify.
External constraints may include:
 Airports – runway and gate capacity, terminal throughput capacity, etc;
 Air Service Agreements (ASAs) – while the airline may be willing to increase services
and capacity to a foreign country, the Federal or National Government may be
unwilling to hold negotiations with specific foreign governments to alter bilateral
ASAs;
 Environmental – consideration of factors such as noise pollution around specific
airports at specified time periods during the day (for example, early morning, late
night); and
 Aircraft Manufacturers – a backlog in orders or the cessation of production of specific
aircraft models may impact plans (Wensveen 2011).
Internal constraints may include:
 Maintenance facilities – existing hanger and workshop space may be at their
maximum level of usage, or if this function is outsourced, the service provider may
not be able, or willing, to accept further work;
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Purchasers of new aircraft can generally get by for 7 to 10 years without having to
make any major aircraft structural repairs. By way of note, it is interesting to see that
maintenance costs, as a percentage of total costs, have been reducing with time as
improvements are made to aircraft and engine design and construction materials
 Crew Training – simulators for both technical and cabin crews may be fully utilised,
requiring construction of additional facilities; and
 Financing – a major fleet expansion may be impacted by the inability to secure funds
to purchase new equipment or lessors may not have sufficient additional units to
lease to your airline, etc (Wensveen 2011).
Figure 6.4 illustrates the general structure of fleet planning models. These might be
simulation models of the airline system oriented towards identification of the optimal balance
between the projected markets demand on the one hand, and fleet size and composition on
the other. Inputs include route structure, current fleet, and assumed costs and fare structure;
outputs will encompass fleet acquisition, assignment, and financing requirements over the
given planning horizon (Holloway 1997).
Figure 6.4. Generalised structure of fleet planning models., Source: Holloway (1997, p. 81).
Other Factors in Airline Fleet Planning
Many other factors need to be considered when making fleet decisions. Some of these include:
 Type of network: hub-and-spoke or point-to-point (P2P);
 Aircraft technical aspects and evaluation;
 Fleet rationalisation;
129
 Fleet commonality; and
 Environmental restrictions (Belobaba 2006a, p. 13; Holloway 2008).
Aircraft Evaluation
The aircraft evaluation process can be divided into four main categories:
1. Technical and performance characteristics
2. Economics of operation
3. Acquisition costs
4. Marketing, environmental, political concerns (Belobaba 2006a, p. 14).
Technical and Performance Characteristics

The design of an aircraft includes a multitude of factors - actual dimensions, engine type,
avionics, weight profiles (including higher gross weight certification), fuel capacity, buyer-
furnished equipment (BFE) such as seats, galleys, toilets and passenger entertainment
systems, seating configurations, door locations, cargo configuration, being amongst the
important factors.
The possible combination of any of these characteristics is almost endless, and aircraft
manufacturers not only offer a range of aircraft types, but also a range of models for the same
aircraft type (Clark 2007). For example, Boeing offer, B737, B777, B787, B747 and for the B787
they offer B787-8, -9, and -10 aircraft models all designed to operate within specific
performance criteria for varying kinds of missions undertaken.
Commercial aircraft are commonly defined by their range and size. The range being the
maximum distance it can fly with a full (or reasonable) payload of passengers and air cargo,
while its size is represented by its weight and capacity (seats and cargo) (Belobaba 2016; Clark
2007).
Broad categories like short-haul, long-haul and ultra long-haul are used by aircraft
manufacturers. Aircraft with similar characteristics are then more easily compared with the
competitor’s product offerings (Belobaba 2016). Market categories for a range of commercial
aircraft are shown in Figure 6.5.
Figure 6.5. Aircraft market categories, Source: Belobaba (2006b, p.12).
130
The ways of defining the issue of aircraft size are flight frequency versus actual aircraft size,
or route demand per unit of time. Achieving efficiency in aircraft size is a function of how
well an airline can satisfy passenger expectations with a given size aircraft. Based on a simple
efficiency calculation, the more passengers that can be loaded and carried on the aircraft, the
cheaper they can be flown. Similarly, the fewer people who can be loaded and carried on
aircraft, the more expensive it is to fly them. It is the interaction between the mathematical
efficiency of a particular aircraft size and passenger expectations 62 that will produce
operational efficiency for the airline (Irrgang 2000, p. 175).
Prior to the end of the last century, the ability to traverse long distances was limited to just a
few large capacity aircraft. However, aircraft manufacturers are now offering medium sized
aircraft that can operate ultra long-haul thin routes. For example, Airbus has launched it
Airbus A350 aircraft (Figure 6.6) as a competitive response to Boeing’s 787 medium-sized,
long range aircraft (Ehret & Cooke 2010; Marsh 2007).
Figure 6.6. Finnair Airbus A350 aircraft landing at Helsinki-Vantaa Airport, Source: Hintikka
(201563).
As we saw in Topic 3, the payload / range curve is very important in defining the capabilities
of each aircraft type. The payload / range curve is affected by the aerodynamics of the
aircraft, engine technology, fuel capacity and passenger and cargo configurations (Belobaba
2016, p. 164; Clark 2007).
Other critical technical factors include the maximum gross take-off (MGTOW) and maximum
landing weights (MLW); the maximum altitude it can fly during various stages of flight
(critical when traversing mountainous regions); as well as airport configurations – runway
lengths, obstacle clearances, elevation, meteorological conditions and terminal infrastructures
to handle the aircraft (Clark 2007; Radnoti 2002). Importantly, different aircraft have different
runways requirements64 and short runways or low runway bearing strength may limit an
aircraft to flying with inefficient payloads (Irrgang 2000, p. 176).
In selecting an aircraft fleet, some consideration must be given by the airline in the aircraft
evaluation process to efficiencies related to aircraft engines. Engine purchase, spares, and
maintenance are some of the most significant costs associated with an airline’s operation
62 It is important for an airline to note that if efficiency is a function of satisfying passenger expectations, then they
must remain aware that people’s preferences change over time, and that the rationale behind today’s fleet decisions
may therefore be totally invalid after a few years (Irrgang 2000, p. 176).
63 Reproduced as per the Wikimedia Creative Commons Attribution License,
<https://upload.wikimedia.org/wikipedia/commons/3/3d/OH-LWA_%2822023285225%29.jpg>.
64
Some aircraft can land in less than 1,000 feet, while others require a runway of 12,000 feet in length in order to
take-off (Barrer & Swedish 2000, p. 573).
131
(Irrgang 2000, p. 175; Wensveen 2011). When selecting aircraft engines the following should
be considered:
 Newer aircraft engines are more efficient and older engines are cheaper. If an airline
is contemplating acquiring used aircraft, then it is important for them to consider the
trade-off between older and newer engines will affect their airline;
 Engine commonality across multiple aircraft fleet types reduces maintenance
inventory and engineering staff training costs;
 Consideration needs to be given where the aircraft fleet will be operating in terms of
susceptibility to Foreign Object Damage (FOD);
 Consideration needs to be given to the altitudes of the airports being served when
selecting the thrust capabilities of aircraft engines. It may be desirable to equip a fleet
with one model of engine and the remainder of the fleet with a slightly different
model of the same engine, based on the requirements for high-altitude airports that
an airline may serve (Irrgang 2000, p. 176); and
 The aircraft manufacturers normally provide information on an aircraft’s maximum
payload capabilities, minimum runway length, and range information based on
aircraft take-off weights, given temperature, winds, and so forth (Clark 2007).
However, these data are normally calculated assuming the use of the aircraft’s
maximum take-off power. If, on the other hand, the airline has the ability to always
use reduced take-off power based on favourable operating conditions, for instance,
the actual aircraft take-off weights are significantly lower than the maximum take-off
weights permitted under prevailing conditions, then an airline can increase engine
life by 20 per cent or more. This factor msut therefore be factored into the fleet and
engine selection decision (Irrgang 2000, p. 176).
Extended range twin-engine operations (ETOPS) is a critical requirement for airlines that are
acquiring long-range aircraft. In some cases a twin-engine aircraft may be economically much
more attractive to an airline and may appear to be more efficient. However, several cost and
efficiency measures need to be taken into consideration:
 The airline’s route must be considered. ETOPS operations may require the airline to
fly longer routes in some cases;
 If an airline does not already have ETOPS experience, there is a delay associated with
gaining approval for ETOPS flights, and in the meantime the airline’s flights will
have to operate on more restrictive routes;
 An airline should also carefully consider the experience of other airlines flying the
same aircraft. If there is a single engine shutdown during an ETOPS flight in a
random or remote location (by regulation the aircraft must land at the closest
alternate airport), then potentially the aircraft could be out of service from four days
to even a week. This situation may cost the airline millions of dollars in recovery and
disruption costs. Another aircraft must be flown to the location to collect the
passengers; the passengers may need to be accommodated at a hotel, and another
engine and a repair crew will have to be flown in to mount and install another engine
on the disabled aircraft. Conversely, in the case of an in-flight engine shutdown on a
four engine aircraft, passengers can still reach their destination, and usually at most
the aircraft is withdrawn from service for two days but with no further disruption
(the worst case is cancelling the return passenger flight, and the aircraft is flown back
empty to home base on three engines to undergo an engine change or have the
problem with the shutdown engine rectified (Irrgang 2000, pp. 176-177).
Finally, the maintenance needs of the aircraft also need to be considered and these include
factors such as compatibility with other fleet types, spare part availability, training
requirements and technical support (Wensveen 2011). If the aircraft is the only type to operate
at a particular airport, then the ability to pool resources at that airport with other carriers will
force terminal engineering costs up. The cost of maintenance over the aircraft’s life is also
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effected by the number of cycles (take-offs and landings – a factor of average stage length) the
aircraft has, which also influences the resale price (lower cycled aircraft generally attract
higher resale values).
Compatibility with other fleet units is an important consideration. Airbus was the first
aircraft manufacturer to identify the cost benefits of having compatible fleet units. They
designed their A320 family of aircraft that would allow the same pilots to operate any of the
family models – the A318, A319, A320 and A321 aircraft. This concept was carried through to
the A330 / A340 long haul family fleet. This concept allows for less conversion training for
flying crews (both technical and cabin) and engineers. It reduces the need to have flight
simulators for each aircraft type and greatly reduces the size and cost of spares inventory as
over 50 per cent of the parts can be used on any model of the family. Boeing took this concept
on board when they developed the B757 and B767 aircraft (Clark 2007).
Economics of Operations
The main trade-off that an airline normally makes when it is selecting aircraft is flight
frequency and flight schedule versus estimated load factor the percentage of available
capacity that is filled by passengers and cargo and cost, in order maximise profit. Having one
large aircraft that can accommodate all passengers on a single flight minimises the airlines
costs, but operating many flights between the same cities increases the number of passengers
that will travel with the airline. For instance, there may be a total of 300 passengers who
would fly if the flights were offered at either 3PM or 5PM, but only 150 passengers if the
flight operated at 5PM. The airline must analyse whether it would be more profitable to
operate two 100-passenger aircraft flying full or to have one 300 seat aircraft fly half full.
There are other reasons for using a particular aircraft on a given route, such as the
requirement to position it for a later flight segment (Barrer & Swedish 2000, p. 572).
The operating economics of a new fleet type is perhaps the most difficult area to evaluate.
Most comparisons of aircraft economic performance are mainly based on the Direct
Operating Costs (DOCs) and use a number of average costs for financing, training,
maintenance, etc. Determination must also be made on aircraft utilisation, along with average
load factors, yields, etc. Forecasting a range of influencing factors (demand, price, competitor
reactions) needs to be undertaken. As the study will cover a period of 10+ years, small
variations in these forecasts can result in significantly varying outcomes. Further, the impact
on the rest of the network needs to be estimated, as what may be a positive result from
introducing new aircraft into the network may have deleterious effects on other routes the
airline operates (Holloway 1997). The commercial performance also needs to consider the
effects of the time value of money. Net Present Value65 (NPV) calculations are used to account
for this, however the discount rate assumptions are often difficult to accurately determine
(Belobaba 2006b, p. 8). Finally, as the fleet grows, “steps” in other costs may be triggered. For
example, the airlines revenue management area, passenger processing, finance, payroll, etc
areas may all, at varying times, reach maximum output and will need to employ additional
staff.
Aircraft Acquisition Costs
These costs include the cost of the aircraft itself, all spare part inventories needed to support
the sub-fleet, ground handling equipment, initial training of flight, ground and engineering
personnel, property cost for new simulators, hangers and spares warehousing, any
modifications required to existing facilities, as well as the cost of funds themselves (adapted
from Belobaba 2006b, p. 8). Aircraft manufacturers require down payments when orders or
options are placed, along with progress payments whilst the aircraft is under construction
65
Net present value (NPV) is a method of ranking investment proposals using the NPV, which is the present value of
future net cash flows discounted at the cost of capital (Brigham & Houston 2009, p. 338).
133
(Wensveen 2011, p. 449). Before any commitments are made, the airline needs to negotiate the
best deal it can with manufacturers (Clark 2007). Often sizeable discounts are offered to
airlines willing to sign up for large orders. Timing is everything and the ability to negotiate
the most flexible deal for the airline may make the difference between a successful fleet
decision or not. It is worth noting that some carriers have bought the entire production run
for several years. All of this means that costs are incurred for a long period (often years) in
advance of taking delivery and flying the aircraft to earn revenue. During this time, market
conditions will most definitely change (either positively or negatively) from those that were
forecasted at the time of the fleet study. The availability of vendor financing or financial
support, including trade-ins against current aircraft, and/or integration funding to support
the inevitably higher costs of introducing a new type into the fleet, and/or concessions on
prepayments prior to delivery should also be sought and considered (adapted from
Wensveen 2011).
Another option, apart from purchasing aircraft new from the manufacturer, may be acquiring
second hand aircraft (Irrgang 2000; Wensveen 2011). Whilst an active market is present for
such aircraft, ensuring fit with the existing fleet needs careful consideration. As the range of
possible airframe / power plant combinations is large, it may be difficult to get all major
factors aligned when dealing in the second hand market. Further, the cost of bringing the
second hand unit in-line with the rest of the fleet (or the cost of having odd fleet units) also
needs consideration. Compatibility of galleys, toilets, seating, etc. can be more easily
overcome, however the cost of this work must be included in the overall acquisition cost
calculation. Old aircraft are cheaper to purchase or lease than are new aircraft but they are
also more expensive to maintain, and the necessary regulatory maintenance checks require
more time to complete. Thus, both dispatch reliability and the overall utilisation of older
aircraft do not fare well when these factors are used by airlines to compare older aircraft to
newer aircraft (Irrgang 2000, p. 175).
Furthermore, older aircraft models of one aircraft type have less range and are also less fuel
efficient when compared to the newer models of that same aircraft type. When considering
the purchase or lease of older aircraft, an airline also needs to consider whether it has the
maintenance infrastructure to cope with the additional maintenance burden. If, however, the
airline’s maintenance organisation is strong, purchasing or leasing older aircraft with lower
ownership or lease costs may in fact be a good idea. Conversely, a weak maintenance
organisation infrastructure should lead an airline to purchase or lease the newer, more
modern and fuel efficient aircraft (Irrgang 2000, p. 175).
Finally, the financing decision – debt / leasing versus outright purchase needs careful
evaluation (Morrell 2013), taking into account the cost of capital and relevant taxation laws.
Also, serious consideration should be given to building in flexibility for the return of aircraft
that are no longer required before the end of the lease date, or retain units beyond their
termination dates should market conditions at that time be favourable. The option to permit
sub leasing should also be included in any leasing contract. This flexibility will add costs, but
may be prudent under certain market conditions (adapted from Wensveen 2011).
Marketing, Environmental, Political Concerns
Finally, a number of qualitative factors require consideration in the fleet study that will be
hard to value.
Typically, most consumers will have little preference for aircraft type. However, a certain
cache goes with airlines having the latest aircraft, with new cutting edge on-board products.
The Airbus A350 aircraft is in this category (Figure 6.7). Airlines operating new aircraft types
will often gain valuable market share (Belobaba 2006b, p. 10). The ability to advertise that
your airline has “one of the youngest fleets in the world” also has positive marketing
advantages.
134
Figure 6.7. Vietnam Airlines, Airbus A350-900 aircraft, Source: Ukon (201566).
On the environmental side, newer aircraft are also generally less polluting – that is, these
aircraft have lower noise noise levels, and also emit lower levels of carbon dioxide (CO2) and
nitrous oxide emissions. As pollution regulations in developed nations tighten, the need to
have less polluting, more efficient fleets grows (Belobaba 2006b, p. 10). Certain aircraft types
have been banned from many airports and countries. For example, F28-4000 aircraft have
been banned from regular public transport operations within Australia, forcing carriers like
Air Niugini to substitute Fokker F100 aircraft for F28’s on their Port Moresby to Cairns
services.
Political pressures must also be considered during fleet decision making. Some governments
may force their carriers to order aircraft from particular aircraft manufacturers, or impose
additional tax burdens (Belobaba 2006b, p. 10).
Consideration should also be given to the impact of Air Service Agreements (ASA). For
instance, planned expansion on a particular route using new aircraft may not be permitted
under the existing ASA, with no prospect of change evident in the future. Regulations may
constrain the airline’s ideal flight schedule by restricting where the airline can fly, how often,
how much capacity can be offered, whether local traffic can be carried and, if so, how much,
thereby affecting route economics and, in some instances, acceptable aircraft types (Baseler
2002, pp. 92-93).
Other political issues, such as airport curfews or limitation on the maximum number of
movements per hour at an airport, would also need consideration in any fleet planning
decision (Wensveen 2011).
Other Factors to Consider
Amongst the additional considerations likely to enter into a fleet planning exercise are:
66
<https://upload.wikimedia.org/wikipedia/commons/7/78/Vietnam_Airlines%2C_Airbus_A350-900_VN-
A886_NRT_%2821407114348%29.jpg >.
135
 The timing of delivery positions relative to need and/or planned phase-out of current
aircraft. Flexibility in moving production line position will greatly assist the airline,
but will come at a cost;
 The availability of any offset deals;
 Aircraft unit load device67 (ULDs) and cargo container compatibility with existing
fleet units;
 The growth potential of the type (that is, scope for weight increases and development
of derivatives);
 Confidence in the manufacturer to abide by its undertakings, and
 In service performance of new aircraft models and types (Holloway 1997).
The Fleet Plan Decision
The normal process within most airlines is for the Company’s Board of Directors to make the
final decision on ordering new aircraft, whether it is for one additional unit or an entire new
sub-fleet. The preparation work required is extensive and for major fleet decisions the
evaluation process may take several years. Even then, levels of uncertainly still exist.
The decision to buy new, unproven aircraft are often the most difficult, as the fleet unit is
unproven and not all into services issues can be identified pre-launch.
The two year delay in the planned introduction of the Airbus A380 aircraft significantly
impacted the plans of many carriers around the world (King 2007), most notably Emirates
Airline, who had based their near-term expansion plans on having the Airbus A380 in service
by late 2006 (Figure 6.8) (Kingsley-Jones 2008).
Figure 5.8. Emirates Airline Airbus A380 aircraft at Sydney’s Kingsford Smith Airport., Source: Aero
Icarus (201268).
67
Aircraft unit load devices, or ULDs, are pallets and containers which are used to carry air cargo, mail and passenger
baggage on wide-body passenger and freighter aircraft (Baxter et al. 2014).
136
The following two figures (Figures 6.9 and 6.10) by Holloway in his 1997 publication
“Straight and Level: Practical Airline Economics” illustrate two airline fleet planning
conceptualisations which encompass the various stages of the airline fleet planning process.
68
<http://upload.wikimedia.org/wikipedia/commons/5/53/Emirates_Airbus_A380-861%3B_A6-
EDP%40SYD%3B31.07.2012_666ca_%287863597296%29.jpg?uselang=en-gb>.
137
Figure 6.9. Fleet planning – Conceptualisation 1, Source: Holloway (1997, p. 83).
138
Figure 6.10. Fleet planning – Conceptualisation 2, Source: Holloway (1997, p. 84).
139
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Airline Flight Scheduling and Slot Management
Mission of Airline Flight Scheduling

Key Definition
Airline flight scheduling can be defined “as the art of designing network wide flight patterns that
provide optimum connectivity and service, whilst optimising the airlines financial returns
and balancing competing resource units” (Wensveen 2011, p. 360).
Mission of Flight Scheduling
The mission of airline flight scheduling is quite broad. An airline must operate efficiently and
economically in its objective to provide air transport services to the destinations it serves whilst
also returning acceptable profits for its shareholders. Therefore, in flight scheduling practices, airline
management must continually search for the balance between adequate service and economic
strength for the business (Wensveen 2011, p. 360).
The resource areas that impact on the airline’s flight schedule and require balancing
consideration, includes:
1. Aircraft and equipment;
2. Engineering & maintenance;
3. Flight crews - both technical and cabin;
4. Airport facilities - terminal infrastructure - gates, check-in counters, lounges, baggage
make-up areas, etc;
5. Marketing factors - market size, time zones impacts; and
6. Other factors such as meteorological conditions, aircraft block times, curfews, code-share
partners, etc (Holloway 1997; Wensveen 2011).
The Airline Flight Scheduling Department

The flight scheduling department has the task of preparing and over time modifying, a
viable, workable pattern of flying for the airline, while observing all the constraints and
limitations imposed on the operations by both internal and external parties (Deprosse &
Händel 2010).
The flight scheduling department’s task is to design a schedule which, as much as possible,
maximises the airline’s revenue flow, whilst simultaneously minimising network wide costs.
It collects and analyses all the data necessary to present a profitable schedule, and undertakes
many iterations of that schedule in order to balance and satisfy, as much as possible, all
competing commitments from many departments within the airline (Holloway 1997).
In order to analyse the schedule, the flight scheduling department seeks inputs, provide
feedbacks and resolves the competing interests of various departments. Many airlines utilise
a committee system as the vehicle to provided structured progress on this vitally important
activity (Holloway 2008; Wensveen 2011).
Schedule Development Responsibilities
Broadly, the flight scheduling department has responsibility to produce for each International
Air Transport Association (IATA) scheduling season the following three plans.
1. Seasonal Schedule Production
This involves:
 Seasonal flight schedule design, production, communication and publication.
The design is based on the airline’s medium term plan (3 year or 5 year plan)
142
 Schedule scenario work – undertaking multiple iterations of the initial schedules
with the aim of refining and optimising.
 Determining the compromises that need to be made between commercial
requests and resource realities (Deprosse & Händel 2010).
 Codesharing arrangements – consideration of codeshare partners and impacts
both of partners on the airlines own aircraft, plus the airline’s code on other
carriers aircraft.
2. Resource Planning
This involves:
 Slots – includes the application and management of slots; preparing and
attending IATA Slot Conferences; managing the slot “hand-back” process, etc.
 Engineering – reviewing and coordinating maintenance allocations and flows
 Airports – reviewing and coordinating handling capabilities
 Aircrew – reviewing and coordinating the allocation of flight crews (both
technical and cabin) (Radnoti 2002; Wensveen 2011).
3. Relationship Building and Communication
This involves managing the relationship with both internal and external customers and
service providers in order to ensure efficient flight scheduling processes and effective
communication of the final schedule plan with all relevant areas (Wensveen 2011).
Schedule Development – Scheduling Parameters
All of the work of the flight scheduling department is undertaken within the following broad
parameters:
 Number of aircraft available (net of “maintenance aircraft” and any “aircraft
modification” lines that are running)
 Block times – seasonal measure of flying time between airports (Note: flying times
varies by season)
 Airport limitations – minimum times for
o aircraft turnarounds
o aircraft transit stops
o passenger connecting times – known in the airline industry as minimum
connecting times (MCTs)
 Slots
 Time zones
 Curfews
 Competitors
 Market forces (Deprosse & Händel 2010; Radnoti 2002).
IATA Scheduling Seasons

The International Air Transport Association (IATA) divides the year into two broad
scheduling seasons – Northern Summer and Northern Winter (International Air Transport
Association 2013; Shaw 2011). These two seasons are often abbreviated as NS or NW and the
last two digits of the year are added. Thus Northern Summer 2016 is expressed as NS16 and
likewise for Northern Winter 2016 as NW16. The two seasons cover the following periods:
Northern Summer (NS) - effectively the last Sunday of March to the last Saturday of October.
A period of 30 weeks.
Northern Winter (NW) - effectively the last Sunday of October to the last Saturday of March.
A period of 22 weeks.
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Principles of Flight Scheduling
Flight scheduling is complicated by the fact that the flight segments operated by the airline
are interdependent. If one flight is late it will impact those subsequent flights scheduled to
use the resources of the current flight (Dempsey & Gesell 1997).
The performance of the resulting flight schedule may also be degraded due to such stochastic
external events as air traffic control (ATC) congestion, weather, aircraft mechanical problems
(not considered in computation of delays), runway repairs, and air traffic controller decisions
(Haeme et al. 1988). Haeme et al. (1988) notes that the ‘key to solving the airline scheduling
problem is to recognize the random processes involved and make flight scheduling and
policy decisions that minimise the risk of delays.’
The principal resources in this flight scheduling application include the aircraft, flight and
cabin crew, airport gates, and ground service and customer service personnel. The specifics of
the aircraft type operated are addressed in the fleet assignment problem following
development of a flight schedule. The problem of scheduling flight and cabin crew typically
falls under the domain of crew management and is handled separately once a flight schedule
and fleet assignment have been decided (Barnhart & Vaze 2016; Holloway 2008). Therefore,
given this stepwise solution approach those competing factors listed above are not all
considered simultaneously.
The Airline Schedule Development Process

Flight scheduling is complex because in most instances it involves optimising the allocation of
resources to meet demand throughout an airline’s network, rather than on a single route
(Dempsey & Gesell 1997). It is further complicated to the extent that in a liberalised or
deregulated competitive environment the present configuration of an airline’s route network
might itself be flexible insofar as flows of traffic can be channelled either along non-stop
routes or over a variety of alternative stops and/or flight connections (Holloway 1997, p. 123).
There are several possible approaches to the modelling of airline flight schedules. A
sequential approach involves:
1. The airline decides which markets to serve based on traffic demand forecasts.
(passenger and air cargo), corporate objectives, and the availability of route licenses or
other required forms of designation.
2. Assume a market share in each targeted market segment.
3. Decide on the flight frequencies to be offered, with specific regard to any required
trade-off between higher flight frequencies and the operation of smaller aircraft or the
reverse option. This will also involve assumptions regarding product quality and target
load factors.
4. Allocate flight frequencies to specific timings and routings on the basis of market
preferences, network connectivity (including complexing, alliance, and possibly also
interline connections), and airport slot availability (where relevant).
5. Establish block-times for each flight-leg.
6. Establish minimum ground times.
7. Calculate hours per annum expected of each aircraft type and factor in aircraft
maintenance requirements.
8. Develop aircraft rotations to integrate the schedule.
9. Consider availability of human and other resources, together with operational
constraints.
10. Predict competitors’ strategies and likely reactions.
11. Iterate (Holloway 2008, pp. 423-424).
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The flight schedule development process begins more than a year in advance of when the
actual schedule is flown, and continues up until the actual flight departure time (Holloway
2008).
To achieve this, the flight scheduling department is normally divided into two broad areas so
as to facilitate this process:
Schedule Planning
 Flight frequency planning (how often the route is flown)
 Timetable development (at what times the flights will operate)
 Fleet assignment (which aircraft will operate which flights)
 Aircraft rotation (ensuring the total aircraft fleet fits together optimally and allows for
schedule recovery) (Deprosse & Händel 2010).
All this covers the medium to long term planning.
Flight Schedules Variations
 The Flight Scheduling Department reviews minor changes to the flight schedule to
take into account unforseen changes in aircraft availability, aircraft maintenance
issues, crewing issues, and so forth (Deprosse & Händel 2010).
 Opportunities that become available such as changes in demand – both positive and
negative and charter opportunities.
This area covers the short term, normally the season that is currently being flown, or out from
the next three months only. Within the last 24 hours prior to flight departure, the airline’s
operations area takes charge of all flight scheduling matters, as the decision window is very
short and must be made with the knowledge of what resources are actually available now to
resolve any issues that may arise (Deprosse & Händel 2010).
Figure 7.1 illustrates some of the variables that must be considered as part of a flight schedule
development process.
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Figure 7.1. The schedule development process: a schematic representation, Source: Holloway (1997,
p.126).
146
Flight Scheduling Tactics
We have seen that flight scheduling is corporate strategy in action. Especially in liberalised air
travel markets, it is also an invaluable competitive tool for airlines whose capacity
management decisions have left them with sufficient flexibility to use it (Holloway 1997, p.
127).
A new entrant onto a route already served by an airline or airlines offering frequent flight
departures will not be offering potential customers a substantial reduction in the disutility
presently being imposed on them in terms of waiting time (that is, the difference between
preferred and actual departure times). Low-frequency entrants will have to emphasise some
aspect of product design other than flight scheduling, or some other aspect of the marketing
mix — such as price, for example. However, there is a widely accepted view that particularly
on short-haul routes oriented towards the business travel market segment that effective
market entry is only possible at a frequency which is broadly comparable with what is
already offered by any incumbent. An exception might be if the target of entry is network
feed rather than local traffic, in which case, lower frequencies timed to connect into the
airline’s network concerned might be perfectly appropriate (Holloway 1997, p. 127).
The essence of network management at a growing number of large airlines is to extend the
network and expand the schedule — that is, to add output —whilst incurring as few as
possible the incremental costs that would be required to achieve this through organic growth
(Holloway 1997, p. 129). Code-sharing, franchising, and block-space agreements have
become important tactical weapons for use in flight schedule building, as well as vehicles
through which to pursue wider strategic ambitions (Wensveen 2011).
Airline Resource Feasibility Constraints

There are four broad resource areas that constrain an airline’s flight schedule development
and implementation:.
1. Engineering and Maintenance (E & M);
2. Crew rules;
3. Flying and Airports; and
4. Market factors.
Engineering and Maintenance (E & M)
The engineering and maintenance (E&M) department is a vital player in the airline, ensuring
aircraft are well maintained so as to ensure reliability and safety (Dempsey & Gesell 1997). If
aircraft cannot perform the flying that has been planned, then the flight schedule will not be
delivered to the travelling public as published.
E&M produce their own internal “maintenance schedules” in order to ensure that aircraft are
appropriately planned for regular maintenance. This planning is designed to maximise
efficiency so that aircraft spend as minimal time as possible in maintenance and that
engineering facilities and personnel utilisation is optimised (Figure 7.2) (Wensveen 2011).
Aircraft manufacturers recommend a program of maintenance that should be undertaken for
each aircraft type (Holloway 2008; Wensveen 2011). The Regulators in each country review
these programs and ensure that operators in their jurisdictions carry out proper maintenance
in order to uphold the strong safety results and culture within the aviation industry. In
Australia, the Civil Aviation Safety Authority (CASA) has this responsibility.
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Figure 7.2. Jetstar Airways Airbus A330 aircraft undergoing maintenance check at Sydney Kingsford
Smith Airport, Source: Harris (200969).
The structure of maintenance programs for most aircraft has a series of checks to ensure
aircraft reliability and safety (Radnoti 2002). Each type of check is given a letter to summarise
its nature and duration as follows:
A-Check – “Walk around” - around once per week – on average every 60 hours, and only
takes a few hours to perform.
B-Check – around once per month – on average every 300 to 500 flight hours. Can normally be
done overnight.
C-Check – entire aircraft check. They vary by aircraft type:
 for narrow bodies they normally occur once per year and can last for around 3 days
for a “light C check” or 3 to 5 weeks for a “heavy C check”.
 for wide body aircraft they occur every 15 to 18 months and a “heavy C check” may
take 2 weeks
D-Check – entire aircraft and can take several months (Radnoti 2002, pp. 344-345).
All engineers undertaking maintenance work are licensed and certified by the relevant
regulatory authority.
Crew
The operational duty time of flight crews is governed by the regulator, for example, CASA in
Australia, and also by any agreement between the airline and its employees (Wensveen 2011).
For example, in Australia, CASA will stipulate how many hours per day crew can be rostered
69
<http://upload.wikimedia.org/wikipedia/commons/c/cb/Jetstar_Airbus_A330_undergoing_maintenance_at_Syd
ney_Airport.jpg >.
148
on to work, maximum duty times, minimum rest periods, maximum hours per week and per
month, etc.
These are all constraining factors when attempting to construct the most cost efficient flight
schedule.
Flying and Airports
The schedule planner also has to consider factors that affect both the operation of the flight
and ground services.
Weather is one obvious factor; however it is clearly outside the control of the airline
(Dempsey & Gesell 1997). Due regard needs to be given in order to build sufficient recovery
time into a flight schedule in order to recover from weather delays, and flight schedules need
to be constructed with due consideration given to known weather factors such as
temperature, fog, snow, etc. at specific airports (Wu 2010).
Air traffic control (ATC) congestion has also become an increasing problem around the world
with consequential effects on the smooth functioning of the flight schedule (Figure 7.3).
Consideration must be give to this and other factors, and to allow recovery periods to be built
in when designing the flight schedule (Wu 2010).
Figure 7.3. Aircraft waiting for take-off at London Heathrow Airport, Source: Capper (201070).
A more controllable factor is ground operations at airports served by the airline. They
comprise both time and physical components as well as costs. At hub airports, these issues, if
not fully considered, can be costly and lead to inefficiencies (Radnoti 2002).
The schedule planner needs to consider many factors at each and every airport including:
 Runway slots;
 Gate and/or parking positions for each service;

<http://upload.wikimedia.org/wikipedia/commons/0/05/Heathrow_queue%2C_Sept._2010_-_Flickr_-
_PhillipC.jpg>.
149
 Minimum aircraft turnaround times;
 Ground service equipment71 (GSE) required – tugs, stairs, loading devices, containers,
tractors and trailers, toilet and cleaning vehicles, power and air-conditioning units,
and so forth;
 Ground crew (or Ramp) staffing implications
 Terminal facilities – check-in counters, baggage handling systems, customs,
immigration and quarantine facilities, security check points, lounges;.
 Flight connection facilities – transfer of both passengers and their baggage along with
cargo and mail;
 Flight catering facilities;
 Airport construction and maintenance activities; and
 Other factors (adapted from Radnoti 2002; Wensveen 2011).
The schedule planner needs to work closely with local airport authorities as well as the
airlines local staff to ensure that the planned schedule will not adversely impact any of the
above. Often, a series of minor changes can dramatically improve efficiency at that particular
airport.
Market Factors
Finally, the flight schedule is designed to provide the most convenient product offering to
customers. Whilst this will never be achieved 100 percent of the time due to multiple limiting
factors, many of which are conflicting, nonetheless the schedule planner strives to attain an
optimal balance.
Marketing factors that need to be considered include:
 When is the optimal time for the passenger to travel;
 Flight frequency;
 Flight departure and arrival times;
 Connectivity to / from other flights and carriers;
 Non-stop versus flights via an intermediate point;
 Flight schedule stability;
 Competitor activity;
 Seasonality of markets, and
 Bilateral air services agreements (ASAs) and air traffic rights (adapted from
Holloway 2008; Radnoti 2002; Wensveen 2011).
Flight Schedule Recovery

Given all the constraints that airlines confront, unique events will occur that results in the
planned flight schedule not operating. These events include aircraft mechanical problems,
severe weather conditions, crew illness, airport curfews and security. When these events
occur an airline may have to delay or even cancel their regular published flights (Bazargan
2010, p. 155). This is almost an every day occurrence within an airline. When flights are
cancelled or delayed, the Schedules Variations Department and Operations Area must devise
plans that will get the planned flight schedule back on track as soon as possible. Airlines use a
number of tactics, such as flight delays, flight cancellations, aircraft substitutions, ferry flights
(flying an empty aircraft to a point of need) and aircraft diversions in order to return to their
71Ground service equipment (GSE) refers to the pre-specified set of vehicular equipment (such as lower deck loaders,
push back tractors) that are required to service an aircraft whilst it is parked on the airport apron in between flights
(Chu 2002).
150
published scheduled flights as soon as possible (Bazargan 2010, p. 155). Flight schedule
disruption can result in:
 Different aircraft operating the route;
 Crew being out of hours and in the wrong location;
 Passengers missing connecting flights or having their flights cancelled; and
 Other subsequent implications (Wu 2010).
The cost of these disruptions can be significant (Lan et al. 2006). The plans to get the flight
schedules back on track must be devised in only a few hours with the goal of returning the
airline to normal operations as quickly as possible, while simultaneously reducing total
passenger delay times and the number of passengers disrupted. And, all this must also be
undertaken while satisfying resource feasibility issues such as crew and aircraft restrictions,
and controlling the actual costs involved in returning to normalcy (Wu 2010).
Windows of Airline Flight Scheduling Opportunities

As we have seen above, airline flight scheduling is a complex process and to aid our
understanding, we will look at some of the issues that confront the flight schedule planner.
By way of background, today:
 There are over 200 congested airports in the world.
 There is often a shortage of peak period capacity at many airports.
 The ability to operate a route is limited by the “scheduling windows” available.
 There is a need to carefully manage the slots available to an airline.
There are also a number of constraints on the flight schedule planner:
 Curfews for night jet operations;
 Hub and spoke connections;
 Aircraft rotations;
 Crew requirements;
 Airport facility limitations;
 Government agencies; and
 Passenger convenience (Holloway 2008; Wensveen 2011).
Figures 7.4 and 7.5 show there are varying “scheduling window” opportunities depending on
the flight’s sector length as measured by “Elapsed Clock Time” (ECT). The ECT is not the time
it takes to physically fly the route, but the difference between the local time at the departure
airport on departure, and the local time at the arrival airport on arrival. For example, a flight
that has an ECT of one hour has approximately 13 “windows” to depart, but a flight with an
ECT of 10 hours has only 4 “windows”. The flight can effectively only depart between
0800hrs and 1100hrs). Local issues at each airport (arriving and departing) may reduce the
number of possible scheduling windows as several factors will reduce the desirability of
operations. These factors include curfews, lack of connections, commercially undesirable
times, etc.
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Figure 7.4. An example of flight scheduling opportunitIES windows, Source: Williams (2011), Personal Communication.
152
Figure 7.5. Summary of flight scheduling opportunities windows, Source: Williams (2011), Personal Communication.
153
For two or more sector flights (for instance, Sydney-Singapore-London), the scheduling window is further complicated / compromised by factors at the
transit airport. For example (Figure 7.6):
Figure 7.6. Example of an airline’s flight scheduling opportunities, Source: Airport Coordination Australia cited in Williams (2011), Personal Communication.
154
Once all the constraining factors have been considered, the flight scheduler is left with very
limited options:
1. For Northern Summer Schedules (Apr-Oct)

 SYD-LHR - there is only two departure windows of one hour each - 1500hrs and
1600hrs. - which provide for acceptable transit times in SIN and early morning
arrivals into LHR
 LHR-SYD – three windows – 1200hrs. and1300hrs and 2200hrs (with the 2200hrs
departure having a long transit in SIN to accommodate the SYD curfew)
2. For Northern Winter Schedules (Nov- Mar)
 SYD-LHR - there is only one departure window – 1700hrs - which provide for
acceptable transit times in SIN and early morning arrivals into LHR
 LHR-SYD – two windows – 1200hrs and 2200hrs
Each route flown will present its own unique challenges, which the FLIGHT scheduler will
need to overcome.
Aircraft Patterns and Rotations
Today, computer software packages are available to assist the flight scheduler in planning
and altering the schedule (Wensveen 2011). However, the skill in flight scheduling still
resides with the scheduler who uses the software in order to integrate the schedules with
other systems within the airline.
The principles remain the same - whether using software or the old fashion hand drawn
patterns on graph paper. An example is shown below of a daily European service operating
through a hub in Singapore with terminating flights coming from Adelaide, Brisbane, Cairns,
Darwin, Melbourne and Perth (Figure 7.7).
Figure 7.7. An example of an international airline’s aircraft rotation patterns, Source: Airport
Coordination Australia cited in Williams (2011), Personal Communication.
155
The red lines show flights coming through from Europe, departing Europe late evening,
transiting Singapore early evening the next day, then arriving Sydney early the following
morning. The dotted blue lines show aircraft operating from the various points in Australia,
terminating in Singapore then after a few hours on the ground flying back to Australia. These
terminating services provide connections in both directions – northbound to European flights
as well as connecting with southbound flights coming into Singapore from Europe.
The green line shows the alternative scheduling window of a lunchtime departure ex Europe,
with a mid morning transit through Singapore and an evening arrival (same day) into
Sydney. To provide hubbing in Singapore for these services, then terminating flights need to
overnight in Singapore – a very inefficient use of aircraft. The number of aircraft days
required to provide daily terminating flights from six Australian cities would be 42 aircraft
days (blue pattern), but 84 aircraft days would be required for the green pattern alternative.
So what is this saying? The flight scheduler tries to make the European pattern more efficient
by having aircraft arrive into Europe at day break, then depart about 6 hours latter around
lunchtime instead of 2200 at night, thereby saving about 10 hours of aircraft time per day.
However, the compromise is that the Singapore hub is made considerably less efficient – 84
aircraft days instead of 42 aircraft days to maintain the hub. So in order to save around 3
aircraft days with the planned schedule of departing Europe at lunchtime, the airline would
incur another 42 aircraft days (that is, 84 – 42 = 42) to maintain a hub in both directions at
Singapore. That is a net loss of 39 aircraft days (or 6 additional aircraft will be required).
Computer software can do the same pattern as above. An example of a flight schedule
planning software screen view is shown below, followed by a printout of the aircraft pattern
generated by this software. (It is the same schedule as shown above on graph paper) (Figure
7.8).
156
Figure 7.8. An example of a computer generated international airline’s aircraft rotation patterns, Source: Airport Coordination Australia cited in Williams (2011), Personal
Communication.
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Summary of Airline Flight Scheduling
Flight scheduling balances an airline’s revenue management objectives attainable through
product features such as flight frequency and seat accessibility, against its cost minimisation
objectives with regard to utilisation of aircraft, of the space on aircraft (that is, load factor),
and other resources. There is a constant tension between the requirement for airlines to be
efficient at minimising costs and effective at satisfying the needs of customers in target
market segments. Flight scheduling is perhaps the most sensitive interface between the
requirements of consumers and the needs of an airline (Holloway 1997, pp. 129-130).
Most passengers, particularly in the business segment, favour high frequencies, convenient
departure times, high levels of seat accessibility, minimum layovers, and a high level of
despatch reliability (Shaw 2011). Airlines, on the other hand, want to maximise utilisation of
their aircraft and other resources, maximise load factors consistent with the accessibility
requirements of the product(s) being offered, minimise costs, and meet operational
constraints such as those stemming from maintenance programs (Holloway 1997, p. 130).
Every flight schedule that an airline could feasibly operate is a separate product, having its
own specific market and attributes contributing to saleability. Flight schedule saleability can
be influenced by even minor changes in an airline’s flight departure times, and the financial
effects of this are leveraged through load factors. For example, if a flight schedule change
results in an increase of just five or ten extra passengers per day, much of the additional
revenue earned should flow straight through to the bottom line (that is profit) because of the
low variable costs of carrying those passengers. Conversely, the same operating leverage
effect means that diversion of just a few passengers can turn a series of flights from profit;
into loss — perhaps because the revised schedule is less attractive than that of a competitor,
or because it dislocates linkages between connecting flights (Holloway 1997, p. 130).
Airport Slot Coordination

The Types of Slots
The term slot is used for two different areas of air transport operations: the ‘air traffic control’
(ATC) slot (also called airway slot) and the ‘airport slot’ (also called runway slot). Various
schemes have been developed that treat aircraft as items in traffic flows and that exercise
control by assigning slots and slot times to each aircraft in the flow. Aircraft separation can
then be dealt with by reference to the allocated slots. The maximum traffic handling
capacities of traffic flows can be defined in terms of slots, and air traffic control is planned to
ensure that all available slots are actually utilised (Wickens et al. 1997, p. 261).
The ATC slot defines a time window for each departing flight during the actual day of
operation and is often mandatory for all flights operated under instrument flight rules (IFR).
The ATC slot is only valid for the specific flight and for a specific departure time window
(Deprosse & Händel 2010, p. 227). One complication arising from this system is that slots are
not all the same size: because of wake turbulence from heavy aircraft, slot sizes vary, and slot
adjustment can prove problematic during peak traffic times. Tactical adjustments can be
minimised by allowing for the intersection or amalgamation of traffic flows during the initial
slot allocation process (Wickens et al. 1997, p. 261). The ATC authorities are normally
responsibility for the allocation of ATC slots (Deprosse & Händel 2010).
The use of an airport by an airline is expressed in terms of an airport slot. An airport slot is the
scheduled time of arrival (Figure 7.9) or departure available for an aircraft movement on a
specific date at an airport (Button 2001, p. 581).
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Figure 7.9. Emirates Airline Airbus A380 aircraft landing at Zurich Airport, Source: Krapf (201472).
An airport slot is usually awarded for one schedule period. It is principally used for airline
and airport planning purposes in order to minimise airport congestion, and thus, potential
flight delays (Deprosse & Händel 2010).
The World-wide Airport Slot Management Process
Presently, in all parts of the world except the United States, the mechanism for allocating slots
is through self-regulation by using IATA Schedule Coordination Conferences or Committees
(Graham 2014). These voluntary conferences of both IATA and non-IATA airlines are held
twice a year for the summer and winter schedule seasons with the objective of reaching
consensus on how schedules can be coordinated at designated capacity-constrained airports
(International Air Transport Association 2016a).
These airports are designated at two levels:
Level Two: Schedules facilitated airports: Level 2 airports still offer sufficient capacity to the
airlines but are close to reaching their capacity limits. A formal level of cooperation in the
form of voluntary cooperation between the airlines is required for the airport to operate
efficiently, airlines need to declare their planned flight arrival and departure times at the
airport to the airport authority but require no formal approval; and
Level Three: Fully coordinated airports: at Level 3 airports the demand for takeoff and landing
slots exceeds the available airport capacity73. Hence, formal procedures are implemented in
order to allocate available capacity to the airlines and coordinate their flight schedules.
Airlines planning to operate to these airports require approval of their slots by the airport
authority (Deprosse & Händel 2010, p. 228).
72
<http://upload.wikimedia.org/wikipedia/commons/8/81/2014-02-11_11-23-
05_Switzerland_Kanton_Z%C3%BCrich_Oberglatt_ZH_Hell.JPG>.
73 There are currently 170 airports located around the world that have been formally designated as Level 3 (most
congested, requiring slots), and this number is anticipated to grow significantly over the coming five years
(International Air Transport Association 2016b).
159
There are also Level One airports (non-coordinated airports) where supply exceeds demand.
At these airports slot allocations can be decided with straightforward discussions between the
airport authority, airline, and, if necessary, with the ground handling agent (Graham 2014). In
some instances, airlines planning to operate a flight to one of these Level 1 airports only needs
to declare it to the airport authority and does not require any formal approval (Deprosse &
Händel 2010). Each of the fully coordinated or Level 3 airports has an airport slot coordinator
(Odoni 2016).
Many US airports are capacity constrained but these airport do not fall under the auspices of
the IATA Scheduling Committee mechanism (Graham 2014, p. 122). In Europe, the IATA
regulations have been harmonised by the European Union (EU) through Council Resolution
(EEC) No 95/1993, amended by regulations (EC) No 894/2002, 1554/2003, 793/2004 and
545/2009 which is based on the IATA guidelines. The objective of the EU and IATA
guidelines is to ensure that, where airport capacity is scarce, the available landing and take-
off slots are used efficiently and distributed in an equitable, non-discriminatory and
transparent way (Deprosse & Händel 2010, pp. 227-228).
The EU and IATA documentation lays down objective criteria in which an airline can be
classified as “facilitated” or “coordinated”. However, EU Member States can designate any
airport as a ‘coordinated’ airport’. For coordinated airports, each EU member state appoints
an independent coordinator who is responsible for:
 Neutral and transparent slot allocation, according to predefined priorities;
 Procedure for slot monitoring; and
 Imposition of sanctions in case of slot misuse (Deprosse & Händel 2010, p. 228).
The EU legislation aims to encourage new market entrants, which are clearly disadvantaged
by the so-called ‘grandfather rights’ scheme, by providing them with their preference of up to
50 per cent of any new or unused slots. New entrants were initially defined as airlines that
have less than 4 per cent of daily slots at an airport or less than 3 per cent of slots in an airport
system, for example, at London’s airports. They were also airlines which have requested slots
for non-stop intra-EU services where two incumbent airlines already provide services
(Graham 2014, p. 122). Under certain conditions, slots may be reserved for domestic regional
services or routes with public service obligations, this is the so called “ring-fencing” (Forsyth
2008).
Slot allocation is often based on the ‘use-it-or-lose it’ principle: airlines have first refusal for
slots which they have already utilised in a post schedule period (Deprosse & Händel 2010, p.
229). These are the so called ‘grandfather rights’ (Strandenes 2008). This principle of historic
precedence bestows rights upon airlines to be allocated slots in the next timetable period
based on them having held those slots in the previous period (Giesberts 2007). This is
supposed to provide airlines with schedule planning reliability and ensure stable flight
services for their customers. Slots that are not used or additional slots are placed in a slot pool
and distributed to the applicants according to predefined priorities by the slot coordinator.
Slot allocation priorities at coordinated airports are therefore allocated in order of a
descending priority (Deprosse & Händel 2010, p. 229).
The World-wide Slot Allocation Process
Slot coordinators from all the participating airports around the world advise airlines of their
individual accrued historic precedence slots in April and September of each year, for the NW
and NS seasons, respectively. Airlines review their flying and slot requirements for each
season then advise slot coordinators by the filing deadlines, normally mid May or mid
October, of their slot requirements. Late filings and additional requests are given a lower
priority.
Slot coordinators allocate first, flights with historic precedence and retimed historic slots,
followed by new ‘New Entrant’ flights and then, the remaining new demand (if any).
Requests for slots that cannot be allocated in peak periods will be given an alternative offer of
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a slot time nearest to the requested slot time. However, airlines may not be able to accept the
alternative offered because of scheduling windows applicable to that carrier (International
Air Transport Association 2006).
No later than one week prior to the slot scheduling conference, slot coordinators advise
airlines of their allocation. Airlines can accept the offers or delete flights requested, but cannot
enter into any negotiation with the particular airport coordinator until the actual conference
(International Air Transport Association 2006).
Once a carrier has been allocated slots at an airport, they must use them. Carriers cannot
apply for slots and then “bank” them in order to block other carriers from using that airport
(Bauer 2008).
References:
Barnhart, C & Vaze, V 2016, ‘Airline schedule optimization’, in P Belobaba, A Odoni & C
Barnhart (eds), The global airline industry, 2nd edn, John Wiley & Sons, Chichester, UK, pp.
189-222.
Bauer, J 2008, ‘Do airlines use slots efficiently?’, in AI Czerny, P Forsyth, D Gillen & HM
Niemeier (eds), Airport slots: international experiences and options for reform, Ashgate Publishing,
Aldershot, UK, pp. 151-171.
UK.
Button, KJ 2001, ‘Airport slot controls’, in KJ Button & DA Hensher (eds), Handbook of
transport systems and traffic control, Elsevier Science, Kidlington, UK, pp. 579-590.
Chu, SCK 2002, ‘Goal programming model for airport ground support equipment parking’, in
T Trzaskalik, & J Michnik (eds), Multiple objective and goal programming: Recent developments,
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162
Airline Passenger Pricing and Distribution
The Objectives of Airline Passenger Pricing
Pricing is viewed as one of the critical elements in airline management 74 (Doganis 2009). In
the early days of the airline industry, airfare pricing was controlled by governments and
industry bodies, however, today, airline passenger pricing has become one of the key drivers
of business and in many market segments is generally quite volatile.
There are two basic factors that determine the level of price in a market place – supply and
demand. A fundamental characteristic of demand theory is that as price falls, demand for the
product will rise and vice versa. Hence, there is an inverse relationship between price and
quantity demanded. Economists call this relationship the “law of demand” (Landsburg 2010, p.
2). Basically then, price is an obstacle to people travelling more often – lower the air fare and
in general, more people will be willing to travel.
Pricing is one of several product and service features which are planned and combined
together in order to generate passenger demand. But it is the key mechanism whereby the
demand for an airline services is matched with supply. An airline's primary aim must be to
sell the capacity it is prepared and able to offer at prices which will generate sufficient
demand in order to ensure an adequate level of profit (Doganis 2009, p. 252). Apart from
price, other major determinants of demand are the preference of passengers, the total market
size for that particular market segment, the ability to pay (that is, financial status) of the
passengers, the prices rivals are offering, the alternative transport options, and passengers
expectations of future prices (both increases and decreases) (Wensveen 2011, p. 305).
Many airlines will normally have a clear profit objective75 but it will be only one of a number
of corporate objectives. These other objectives may also impinge on its pricing policy.
Expansion into new routes and new markets figures large in many airlines' corporate
objectives. Expansion may be an objective in its own right, or the ultimate objective may be
rapid growth or the attainment of a particular size of operation. Many airlines want to be big!
There may be cost advantages from achieving growth but ultimately the reason for airlines
seeking to expand seems to be more akin to them pursuing a revenue-maximizing or revenue
optimizing objective (Doganis 2009). Pricing has another important role. It should in theory
be a guide to new investment by an airline. Where the number of consumers who are
prepared to pay the full cost, including a reasonable profit, of the goods or services they
consume exceeds the supply, then producers have a clear indication that if they are able to
supply more at the same or a lower price then demand will be sufficient to generate further
profits for the firm. Conversely, if consumers in total do not generate sufficient revenue to
cover the full costs of particular services it would be foolhardy to invest in the expansion of
such services. Thus, if pricing is to be used as a guide by an airline when considering further
investments the prices of different services should reflect their cost of production. If not,
demand could be artificially high or it may be suppressed (Doganis 2009, p. 253).
74
Pricing objectives for a transport firm should reflect the firm’s overall company objectives and reflect, in many
ways, how the firm will compete in its chosen markets. Pricing objectives may also change for a particular product or
service offering as it progresses through its product life-cycle. Firms with multiple markets might also establish
multiple pricing objectives for these markets. For example, passenger airlines have separate pricing objectives for
their premium and leisure travellers (Coyle et al. 2011, p. 130).
75 A further pricing objective is called profit maximisation, which can occur in the short-run or the long-run. Firms
using this type of pricing policy are usually concerned with such measures as return on investment (ROI) (Coyle et
al. 2011, p. 130).
163
Inherent Instability of Airline Passenger Tariffs
Profitability, which appears to be an important objective for most airlines, depends on the
interplay of three variables that is: the airline’s unit costs, the unit revenues or yields and the
load factors achieved by the airline (Doganis 2009, p. 254).
Airline managers must balance costs, air fares and load factors to produce a profitable
combination. This is a very dynamic and interactive process, made more difficult by the
pricing instability inherent in the airline industry. The industry is characterised by short-run
marginal costs which are close to zero. The marginal cost of carrying an extra passenger on a
flight, which is due to depart with empty seats, is typically no more than the cost of an
additional meal, an airport passenger charge, the cost of ground handling and a few
kilograms of extra fuel. The problem is that even when operating with high load factors of 70
per cent or more there may be many empty seats still available (Doganis 2009, p. 255).
The airline product offering is very perishable - seats cannot be stored or sold later – if they
are not sold at the time of departure (that is, at the time of production), the opportunity to
gain revenue on those seats (and the seat kilometres generated) is lost forever (Dempsey &
Gesell 1997; Wensveen 2011). The same considerations apply to unsold air cargo capacity.
An airline committed to operate a published schedule of services for a particular season or a
tour operator committed to operate a series of charter flights will find that their short-run
total costs are fixed and cannot be varied. Consequently, it makes sound business sense for
these companies to try to optimize their revenues. Having sold as much capacity as possible
at normal tariffs, the airline or tour operator may be tempted to sell any remaining empty
seats at virtually any price above the very low marginal cost associated with carrying any
additional passengers (Doganis 2009).
The problem for airlines is how slippage or diversion of passenger traffic who are prepared to
book their flights early and pay the normal tariffs from purchasing lower or cheaper air fares
be prevented. If this situation occurs the total revenue generated by the airline may decline.
In markets where air fare tariff rules are regulated and enforced by governments, then
diversion is prevented or minimised by the conditions, the so-called 'ring-fences', which
circumscribe the availability of the very low tariffs offered in the market (Doganis 2009).
The Structure of Airline Passenger Air Fares

The price a consumer pays for an airline seat has evolved over time until today an airline
ticket is probably the most segmented product a consumer can buy. There are literally
millions of prices in the market today with dozens of different prices per market segment. It is
an interesting situation given the basic product – transportation of a passenger from one city
to another, is the same for everyone on a given aircraft no matter what price was paid; a point
that generates a lot of criticism of the airline industry. Despite the criticism, the pricing of air
transportation has evolved to the point where it is today because it benefits both the airlines
and passengers (Fernie 2012).
In the early days of travel there was only one price – the full economy fare, and the consumer
could buy that fare whenever they wanted to right up until flight departure. Later a first class
fare was added in conjunction with a separate cabin, but there continued to be only two
alternative prices available in the market place – a first class fare or an economy class fare
(Fernie 2012).
Government or industry bodies set the prices for all airlines on all city-pair markets with
bodies like the Civil Aeronautics Board (CAB) responsible in the USA and International Air
Transport Association (IATA) responsible for international travel (Wensveen 2011). In view of
this regulation, airlines tended to compete on reputation, schedule and network.
164
As a result of the introduction of bigger aircraft and more routes being flown, in the 1970’s
alternative cheaper pricing was introduced on certain international routes in the form of
advanced purchase excursion or APEX fares (Dempsey & Gesell 1997). These air fares carried
certain restrictions in that they required the advance purchase of a round-trip ticket and set
minimum and maximum lengths of stay at the destination point but they were sold at
significant discounts to the full fare one-way economy class airfares previously on offer (Todd
& Rice 2005). This type of fare became available in the US domestic market in 1975 with
American Airlines (Figure 8.1) introduction of ‘Super Saver’ fares. Thus, the practice of fare
differentiation was born (Talluri & Van Ryzin 2004).
The US domestic market was deregulated in l978 (Dempsey & Gesell 1997). This generated a
large number of new competitors and saw the introduction of several different economy fare
types on the same route as airlines fought to grow travel demand and capture a larger share
of the market - a practice that is now common throughout most markets in the world (Fernie
2012).
Figure 8.1. American Airlines Boeing B707 aircraft at San Francisco International Airport , Source:
Clipperarctic (201176).
Air fare differentiation generated the need for advanced revenue management and inventory
management tools to enable airlines to maximise the demand for the different price products
(Barnes 2012; Doganis 2009). Revenue Management is now an essential tool for any competitive
airline and this course will look at that subject in detail in Topic 9. However, this current topic
will concentrate on the pricing element of the marketing mix (the four “Ps”) and describe
how airlines create air travel prices and make them available for sale and takes them to the
market.
76
<http://upload.wikimedia.org/wikipedia/commons/6/6f/American_Airlines_707_%287107795511%29.jpg?uselan
g=en-gb>.
165
Market Demand
As noted earlier, there are two basic factors that determine the level of price in a market place
– supply and demand. Demand theory states that as price falls, demand for the product will
rise, all other factors being equal, and vice versa. That is, there is an inverse relationship
between price and quantity demanded, which economists call the “law of demand” (Landsburg
2010).
Importantly, the degree of responsiveness to a price change varies considerably and this facet
is covered by what is known as the “elasticity of demand”. Elasticity is the willingness of the
consumer to pay a certain price for a specific product. A consumer who must travel on a
certain date or at a certain time is considered to have “inelastic” demand, that is, they must
travel so will pay the market fare. A consumer who is price sensitive and working within a
set budget is considered to be “elastic”, as a price reduction will prompt an increase in
consumption (Dempsey & Gesell 1997).
Although today there are still fully flexible full fares available in economy and business class
cabins, there are a plethora of differentiated fares aimed at a wide range of different market
segments that are in fact the majority of air fares sold today (Fernie 2012).
An analysis of market demand for air travel in any market will show that there is varying
levels of demand by direction, by month, by day and by time of day. Hence, there is a need to
stimulate demand at certain periods and price (part of the marketing mix or 4 “Ps” – Price,
Place, Promotion, and Product) can be used for such stimulation (Shaw 2011).
The way airfares are created is actually backwards from a typical segmentation process in
which the product is designed with characteristics that are favourable to different market
segments. For example, consider the motor car industry. The base model car has no
“options” included and is therefore priced at the lowest level. “Options” (for example, air-
conditioning, sunroof, entertainment systems, etc.) are added in order to make the car more
desirable to various customer segments, with the price of the car plus options being higher
than the base model. Airfares, on the other hand, have as their base, a product that has all the
options (for example, flexibility, refunds, changeability, and so forth) which is priced at the
highest level. From this “base”, a range of other products at lower priced levels, are offered,
which have a number of restrictions (that is, fewer options) “added” to them to make them
less desirable and therefore cheaper (Fernie 2012).
These restrictions are put in place to discourage consumers who are willing to pay the full
fare from buying the cheaper fare but at the same time encourage consumers who cannot pay
the highest fares to travel by air instead of by some other transport modes (road, rail, sea).
Airlines usually segment the market into two broad segments - business and leisure
travellers. However, there are many other sub-segments that, by using differing prices,
airlines are trying to attract (Fernie 2012; Shaw 2011).
Customer Segmentation
With the availability of differentiated air fare products at varying price levels, customers need
to make a trade-off between the higher-priced fare products associated with the high level of
service amenities and fewer fare restrictions, and the lower-priced fare products with greater
restrictions and, in some instances, reduced service amenities. The decision is related to the
price sensitivity of the customer for a given trip, and it is not independent of the time
sensitivity of the trip being considered. The time sensitivity of a trip is determined by the
length of time over which a trip will be taken and still provide the customer with a certain
value in being at the desired location. A totally non-discriminatory trip is one that must be
made by a customer at specified time, meaning that the acceptable window for the
passenger’s trip is very narrow. Conversely, a totally discriminatory trip is one in which the
passenger time window for travel is extremely broad (Belobaba 1998).
166
A customer’s location along both the price-sensitivity and time-sensitivity continua can vary
from one planned trip to the next. A customer may be insensitive to price for an extremely
time-sensitive trip, be it for business or personal purposes. The same customer may be
extremely price sensitive for a trip that has no time sensitivity associated with it, again
regardless of the customer’s trip purpose (Belobaba 1998).
Given that any single air trip will lie somewhere along the time-sensitivity continuum, and
given that the potential passenger must fall somewhere along the price-sensitivity continuum
for each trip being considered, these two scales provide the basis for an air travel demand
segmentation model that includes all possible trip/consumer characteristics (Belobaba 1998).
To identify these segments we will divide passenger demand into four main passenger
segments:
Type 1 - Time sensitive and insensitive to price: This segment needs to travel at a particular
time and is willing to purchase the highest priced fare. Travel flexibility and seat availability
are extremely important to this, usually business, segment.
Type 2- Time sensitive but price sensitive: These consumers must make the trip but are
willing to be flexible to secure a discounted fare. They are willing to rearrange trips to get a
discounted fare and are willing to make stops or connections and fly at less convenient times.
Many small to medium enterprises (SME) business travellers fall into this category.
Type 3 - Price sensitive and insensitive to time constraints: These consumers will change
their time and day of travel to find a seat at the lowest price. Some will be induced to travel
for an extremely low fare. They can meet virtually any restriction to qualify for the cheapest
fare. These are usually leisure travellers.
Type 4 – Insensitive to both price and time constraints: This group includes the relatively
few consumers who have little or no time constraints yet are willing to pay for high levels of
service and flexibility. Independently wealthy leisure passengers will usually fall into this
category (Belobaba 1998, p. 356).
Airlines will target these segments by creating products that both appeal to them sufficiently
to encourage them to travel, but also discourage those willing to pay a higher fare from
purchasing lower fares. These restrictions apply to a wide range of different factors (Fernie
2012). The different characteristics can be described below:
High Fares Low Fares
Passenger Type Business Travel Leisure Travel
Cabin First / Business Economy
Restrictions nil multiple
Time of travel Weekday, early morning / late Saturday night, early Sunday
afternoon morning, midday on week
days
School holidays, Lunar New Year, mid winter, wet season

Christmas
Season
Routing Non-stop multi-stop
167
Initially fares are split according to the different aircraft cabins of sale and are identified by a
booking class for passenger reservation and ticketing purposes: -
 First F or P
 Business C or J
 Premium Economy W (for example, British Airways World Traveller Plus)
 Full Fare Economy Y
Discounted fares are then separately identified and although the majority of discounted fares
are found in the main economy cabin, restrictions are being applied to fares in business and
first class, and differentiated fare codes are also being applied in these cases as well
(Holloway 2008). For example:
 Discounted First A, Z
 Discounted Business D, I, U
 Other Discounted Economy M, N, Q, O, S, V
Normal Air Fares: First, Business and Economy Air Fares

Partial or total deregulation of airline tariffs on many routes, together with differences in the
pricing strategies of major airlines, has made it increasingly difficult to identify what are
“normal” air fares. Nonetheless, on most routes there are three basic fare types corresponding
to the separate cabin classes, that is, first, business and economy 77. On many routes there may
be a first-class fare, agreed through IATA, but no first-class services, since many airlines no
longer offer first class on certain routes. While normally there will only be a single first-class
or business fare, or in some cases a couple of such fares, there are frequently several different
fares available for the economy cabin (Doganis 2009, pp. 264-265). It is the full economy fare
that is considered as the basic “normal” fare for the economy cabin and commonly described
as “Full Y” (Barnes 2012; Dempsey & Gesell 1997).
Preferential Air Fares

Preferential fares are those which are available only to passengers who satisfy certain
requirements in terms of age, family kinship or occupation. These fares are typically
expressed as a percentage discount on the normal fares and are generally applicable over
large geographical areas. The most widely accepted and used are the 25 per cent or
sometimes 33 per cent discount on the economy fares for children under twelve years of age
and the 90 per cent discount for infants under two but without the right to a seat. If available,
child discounts on promotional fares may be similar or not so substantial (Doganis 2009, p.
265).
Promotional Air Fares
Promotional fares, sometimes referred to as discount or deep discount fares, are various low
fares, usually with one or more restrictions on their availability, which offer passengers
significant savings on the normal economy class air fares (Wensveen 2011, p. 314). Such fares
are not of general application, as most preferential fares tend to be, but are separately
negotiated and agreed for each point-to-point link. Promotional fares have tended to be most
widely used on routes where there is considerable volumes of leisure traffic, and on routes
where there is overcapacity arising from the operation of fifth-freedom or indirect sixth-
freedom airlines. Not surprisingly, these types of air fare have not been introduced on those
routes where the airlines concerned have wanted to maintain high fares or where they
perceive that demand is likely to be inelastic in response to fare reductions (Doganis 2009).
77
Some airlines, such as Air New Zealand, British Airways, Cathay Pacific Airways, Qantas and Virgin Atlantic
Airways, offer a premium economy product. In these cases, they will have a four separate cabin classes available for
sale.
168
In offering promotional fares, airlines have placed restrictions around the time window for
sale, fare duration limits, departure time limits, purchase time restrictions, flight routing
conditions, inclusive tour requirements, and so forth (Doganis 2009).
We will return to these types of air fares below when examining how airlines structure their
air fare tariffs and determine which air fares will be published and which will be
unpublished.
Airline Passenger Pricing and Demand

Pricing and Demand
According to Holloway (2008, p. 131), “demand does not just exist; it exists at a price”.
Demand is the various amounts of a product or service that consumers are willing and able to
purchase at various prices over a particular time period. Price is one of the most critical
determinants of demand (Holloway 2008). Indeed, a fundamental characteristic of demand is
that as price falls, the corresponding quantity demanded increases; alternatively, as price
rises, the corresponding quantity demanded falls (Wensveen 2011, p. 304).
The higher this price obstacle, the less customers will buy; the lower the price obstacle, the
more customers will buy. Passengers will drive instead of fly; business people will turn to
telephone conference calls and the like as air fares rise (Fernie 2012).
As we have noted earlier, the major non-price determinants of demand in the air travel
market are the:
 preferences of passengers;
 number of passengers in a particular market;
 financial status and income levels of the passengers;
 prices of competitors and related travel expenses, and
 passenger expectations with respect to future prices (Wensveen 2011, pp. 306-307).
If one or more of the determinants of demand change then this results in what economists call
a “shift in demand78” (Wensveen 2011).
Supply Functions and Supply Curves

The other major determinant of airfares is supply. Supply is the quantity of a good or service
that producers are willing and able to sell during a defined period of time and subject to a
particular set of conditions. Price is one important condition, as is the price of any competing
good or service. Other conditions include the level of input costs, the current state of
technology, and the presence of route licensing or similar restraints on free market entry.
According to the theory of the profit-maximizing firm, supply will increase as long as the
marginal benefit to the producer - measured in terms of the marginal revenue earned by
producing one additional unit - exceeds the marginal cost of production (Holloway 1997, p.
4).
78A “shift in demand” refers to changes in the demand curve – either left or right – because some variable other than
price has changed. This can also be called a “change in demand” (Wessells 2006, p. 53). The demand curve shows what
happens to the quantity demanded of a good or service when its price varies, holding constant all the variables that
influence buyers. Hence, when one of these non-price variables changes, the demand curve shifts (Mankiw 2009, p.
71).
169
Supply Functions
According to Holloway (1997, p. 5), “a market supply function is a statement of the relationship
which exists in a market between the quantity supplied - that is, the aggregate of what all
individual producers are supplying to that market - and each of the above conditions, (together
with any other conditions which might be relevant to supply in the market under
considerations)”. In other words, the quantity supplied is a function of (that is, depends upon) all
the supply-determining variables identified as being relevant in that specific market”.
Relationships between supply and each of the determinant variables are generally expressed
quantitatively such that, based on historical data describing the past behaviour of these
relationships, a forecast level for one or more variable in the future can be predicted to have a
particular impact on supply (Holloway 1997, p. 5).
A supply function can be specified either for an individual company or an entire industry. The
supply-determining variables are likely to be very similar, but for a number of reasons their
relative importance will differ between any single firm and the industry in its entirety, and
between two or more firms:
 although airlines tend to use essentially the same production technology and
processes in the air, this is much less true on the ground;
 not only do their production methods vary, but the efficiency with which they use
aircraft and labour also differs widely;
 their unit production costs are inconsistent, both because of these contrasting levels of
productivity and also because input prices are variable in response to the size and
geographical location of the airlines concerned,and
 the choice and management of product distribution channels is far from constant
(Holloway 1997, p. 5).
Supply Curves
A supply function specifies the relationship between the quantity supplied and all of the
determinant variables that have been identified as having an influence on supply. Focusing just
on price, a supply curve can be constructed to represent graphically the relationship between
quantity supplied and this one important element in the supply function at a given point in time,
holding constant all other variables which might also influence supply. In the typical graph
showing quantity on the horizontal axis and price on the vertical axis, supply curves generally
slope upward from left to right indicating that more is supplied at higher prices. The supply
curves of individual firms can be aggregated to create a market supply curve (Holloway 1997, p.
5).
Supply of Output in Airline Markets
As airline markets are progressively liberalised, intensifying competition and greater commercial
freedom can often result in increases in output. Airlines then tend to face downward pressure on
the prices their output can earn. This has made it essential for them to act decisively on non-price
variables in the supply function. Two examples of such actions are the management of costs and
the erection of barriers to market entry in order to exclude competitors no longer excluded by
regulatory restrictions (Holloway 1997, p. 8).
Supply, of course, is only one side of any market. The significant points to note are:
1. price should, in principle, be one of the most important determinants of supply in a
free market;
2. there are also many non-price determinants which affect supply in the absolute sense
and can, in some cases, be varied in order to shift the location of a supply curve in
response to charges in price; and
3. a critical task for airline managers is to identify and, as far as possible, understand the
impact of the determinant variables affecting supply so that they can be manipulated in
concert with variables governing demand (Holloway 1997, p. 8).
170
The Airline Passenger Pricing Process
The Pricing Process
The basic twofold responsibility of airline pricing analysts appears to be relatively simple and
straightforward. They must:
1. monitor, analyze, and respond to hundreds, sometimes thousands, of daily fare
changes implemented by competitor airlines, and
2. routinely develop pricing initiatives to strengthen and/or fortify their company's
position in the marketplace (Wensveen 2011, p. 314).
In moving from conceptual responsibility to real-time practice, however, airline pricing
becomes extremely complex. In broad terms, the airline pricing process can be characterized
as being heavily dependent on information technology (IT) systems and having many
different fare levels subject to change as a competitive response (Wensveen 2011, p. 314).
Publication
Having set the airfares that will be charged for a particular market segment, the airline will
then publish those airfares in the marketplace. The airline will communicate the air fares and
all its restrictions to a distribution company who in turn broadcasts the information to all
participating airline computer reservation systems (CRS) and global distribution systems 79
(GDS) like Sabre, Amadeus and Worldspan. This information is then loaded into their systems
to facilitate itinerary pricing (Fernie 2012).
Nearly all major airlines participate in the fare filing process via the Airline Tariff Publishing
Company (ATPCO). This company is jointly owned and funded by a number of airlines that
are located around the world. ATPCO serves as an electronic clearinghouse for fare
information and changes. Operating every day of the week, ATPCO accepts fare changes
submitted by all participating airlines, subsequently consolidates and processes the changes,
and then transmits and displays these changes to all member airlines. These updates occur
every 4 to 6 hours (Wensveen 2011).
At any point in time, because airlines often collectively serve many thousands of origin-and-
destination (O & D) city-pairs, with each O & D having several different fare levels, the total
fare inventory managed by ATPCO can be counted in the millions of individual fares. Any
single airline's share of ATPCO's database may amount to several hundred thousand fares,
with airlines charged a fee each time they list or update a fare (Wensveen 2011, p. 314).
ATPCO is the world's leader in the collection and distribution of airline fare and fare related
data. The company collects this information from more than 450 airlines and distribute it to
the global distribution systems (GDS) (such as Amadeus, Travelport and Sabre and online travel
agents, such as Expedia and ITA) and airline computer reservation systems (CRS). ATPCO
creates efficiencies in this process by permitting each airline to submit its air fare information
via ATPCO, thereby giving each CRS/GDS the opportunity for a single source of fare-related
data (Airline Tariff Publishing Company 2016).
ATPCO uses an “Automated Rules” product, which permits an airline’s computer reservation
system (CRS) or a global distribution system (GDS) to automatically load pricing rule data
tables without the requirement for significant human intervention, thereby allowing new air
fares to be sold in the marketplace in the quickest possible time (Airline Tariff Publishing
Company 2016).
79
A global distribution system (GDS) is a centralized database that is constantly refreshed, updated and accessible to
the GDS’s subscribers by means of computer terminals (Pizam 2010, p. 284).
171
It is against this backdrop of fast-paced change, fuelled by continuing advances in IT systems
and technology, that airline pricing staff formulates, and regularly reformulates, their basic
air fare pricing strategies (Wensveen 2011, p. 314).
Airline Passenger Tariff Structures
Air fare structure is a term encompassing the many different air fares that may be offered by
an airline at any point in time. Air fares along with the associated fare rules applied form the
basis of the tariff structure. An airline’s tariff structure should be clear and straightforward
and easily understood by travel agents and others in external distribution channels. The tariff
should also be sufficiently layered so as to enable the airline to tap into the various levels of
willingness to pay80 (WTP) that exists in different market segments that it serves (Holloway
2008).
Each airline product consists of a price level (that is, the price the customer is required to pay
for a ticket) and the price conditions which define the restrictions of the usage of the fares
published in the tariff. Airlines have developed standardised restrictions for a price product
with the most important price restrictions being:
 Advanced purchase: defines how many days prior to the departure of the flight the
tariff has to be booked;
 Minimum stay: dictates when the return travel may commence;
 Maximum stay: the latest date when the travel has to be completed by the
passenger(s);
 Penalty: the cost for rebooking or cancellation of the booking;
 Combinability: the right to combine a ticket with another air fare product;
 Application: which operating airline or flight numbers can be used;
 Channel: restriction of sale to certain sales channels or travel agencies;
 Sales restriction: sales period of a price product;
 Travel restriction: defined travel period; and
 Routing/mileage: limits the routing (for example, eastbound or west-bound, via a
certain hub, maximum length of routing) (Dionisius 2010, p. 241).
All fares are defined for a passenger’s entire journey; airlines term this origin-and-destination
(O & D). This means that the airline pricing department creates a tariff structure from an
origin to a destination, regardless of the number of flights that are operated in this particular
O & D. The price product is oriented at the current market situation and customer structure
(Dionisius 2010, p. 241). We will return to price restrictions below.
Coherence between Airline Fares and Tariff Conditions
Traditionally the cheapest air fares come with the most restrictive tariff conditions. The more
a passenger pays for an O & D fare the less restrictive the conditions will be (Dionisius 2010,
p. 242). The types of restrictions applied to the lower or cheaper air fares in most O & D
markets include advance purchase and minimum stay requirements, together with
cancellation and change fees. These restrictions increase the inconvenience or “disutility cost”
of low fares to those customers who have a higher willingness to pay (WTP), thereby causing
80 The economic concept of willingness to pay (WTP) is defined by the theoretical price-demand curve (Belobaba 2016,
p. 80). The price-demand curve can be interpreted as the maximum price that any given number of customers will all
pay for a specified product or service (McEachern 2012). The use of differential pricing principles by airlines is an
attempt to make those customers with higher WTP to purchase the less restricted, higher-priced air fare product
options (Belobaba 2009, p. 78).
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them to select higher fares when they minimise their own disutility of air travel 81 (Belobaba
2009, p. 80).
At the highest fare levels we find the full flexible tariff which can be rebooked or refunded by
the airline at no cost to the passenger. Moreover, this fare can be sold right up to flight
departure, has no minimum stay requirements and is placed in the highest booking class with
the highest availability. In contrast, many cheaper fares have restrictive tariffs and cannot
always be rebooked nor refunded. They are often termed ‘use it or lose it’, since the tariff
comes with no flexibility and is typically sold in the lowest booking class. Between the full
flex and the special tariff fares there could be six to ten economy class price products
(Dionisius 2010, p. 242).
Impact of Seasonality on Airline Fares and Tariffs
The setting of air fare levels also depends upon the seasonality of a market. While the core
price structure remains more or less stable, the price level can vary substantially (Dionisius
2010). A common airline price pattern is three price levels for high, low and shoulder season
which are tied to the demand pattern of the particular market (Holloway 2008). Since air
travel markets behave differently according to the season, this can result in various seasonal
fare patterns on the same route. For example, the high season for travel in the USA normally
commences at the beginning of June, whilst the high season for travel from Europe to the US
starts later, depending upon the vacation schedule of the particular year. Hence, due to the
different seasonal periods, prices in the US could already be at the high season level, while
prices for North Atlantic journeys originating in France, for example, are still in the shoulder
season (Dionisius 2010, p. 241).
Pressures Shaping Airline Passenger Tariff Structures
Two pressures in particular have contributed to the increasingly complex airline passenger
tariff structures and price volatility:
1. Liberalisation and deregulation of markets: airline managers have taken the
opportunity to use pricing proactively as part of both tactical and strategic adjustments
to the marketing mix.
2. Airlines use revenue or yield management systems to micromanage seat availability at
different prices. Airline pricing has evolved from a single price/single class of service
to two classes of service – premium and economy – to a series of full fare and
discounted combinations in the economy (and sometimes business class cabins).
Initially, service factors, such as the width of the aircraft seats and in-flight service,
were the principal differentiators between first class and economy class services.
Airlines have now increasingly realised that they could capture more revenue by filling
seats that would otherwise be empty, they thought that serving passengers sitting side-
by-side differently according to the fare paid would result in customer service
problems and unpleasantness during the flights that they did not wish to confront.
Rather, they have developed other product “fences” to differentiate various discount
fares from full economy fares. These fences include such things as length of stay
requirements, advanced purchase requirements, non-refundability and so forth (Cross
1998, p. 304). Pricing and revenue management have therefore been used together by
airlines to optimise revenue capture on a departure-by-departure basis by ‘ring-fencing’
different market segments with fare conditions and constrained seat availability in an
attempt to prevent price-inelastic customers purchasing fares set below their
willingness to pay (Holloway 2008, p. 143). We will, return to this in Topic 8.
81
The disutility of making an air trip is the sum of the various disutilities associated with the trip – ground travel
time, the disutility of time spent in flight, and the disutility of arriving earlier or later than the passenger’s desired
arrival time. Thus, air travellers usually select a flight which minimises their total disutility (Yance 1970, p. 144).
173
Conversely, two pressures have more recently contributed to a simplification of airline
passenger tariff structures, most noticeably in short-haul passenger markets:
1. The growing reach of the low cost carriers (LCCs), which on the whole prefer simple
tariff structures that are cheap and easy accessible to customers.
2. The penetration of the internet, especially in North America and Europe. This has freed
customers from the stranglehold that airlines and their travel agents had long held on
tariff information, allowing almost instantaneous price comparisons (Doganis 2009;
Holloway 2008, p. 143).
We have noted that the term ‘tariff’ refers to a combination of fares and their associated rules,
and that the expression ‘tariff structure’ refers to the different tariffs available in a market,
each tariff (fare basis) can be identified by a fare basis code. Depending upon the
circumstances in a particular market and the pricing philosophy of the airline concerned,
several dozen air fare bases could be in use across the aircraft cabin on a single departure –
particularly in long-haul markets yet to be influenced by the requirement for simplification
that LCCs have bought to many short-haul markets (Holloway 2008, p. 144). To facilitate
passenger reservations and yield/revenue management, fare bases are normally grouped into
one of a small number of booking classes (Doganis 2009). Variances between air fares within a
specific booking class should as far as possible be minimised by the airline; the fares offered
within a booking class should average out at the target discount of the full fare for the cabin
that has been set by the pricing department. Whether or not a particular fare is available on
request therefore depends not only upon its booking conditions (fare rules), for example, a
requirement for advance purchase can be met, but also whether the relevant booking class is
open for sale (Holloway 2008, p. 144).
In markets – especially international markets, still subject to a level of regulatory or
government control, air fare tariff structures can be relatively rigid; in liberalised or
deregulated air travel markets they are likely to be quite dynamic (Holloway 2008, p. 144). In
a deregulated domestic market like Australia, airlines are able to set their own fare levels
according to “what the market will bear” or in other words at market levels. In other
domestic environments – the government will set the airfares for all airlines (Fernie 2012).
In the international arena the International Air Transport Association (IATA) manages a
process of price setting for international routes that are not deregulated (Doganis 2009). These
fares take into account airline costs and other market forces and sets what is known as the
published fare for all international journeys that all airlines will feature as the standard fare.
As deregulation takes hold in a wider set of markets, IATA Tariff Coordination Conferences
are becoming less important and the rise of low cost carriers are setting the trend for price
competition in the marketplace (Fernie 2012).
IATA also sets standards for complex international itineraries that are difficult to price
automatically. These guidelines use complicated formulae to set competitive fares for multi-
sector itineraries and as travel agents become less willing to specialise in this area, airline
tariff departments are usually looked upon as the specialist in this area. However these fares
are rarely published and are prone to wide variation depending on how the calculation is
done (Fernie 2012).
The fares offered by an airline in a market may be published or unpublished and we will look
at these in turn (Fernie 2012; Holloway 2008).
Published Air Fares
Published air fares are the air fares that are published to the world at large through such
firms as the Airline Tariff Publishing Company (ATPCO). These fares can be broken down
into ‘normal’ and ‘special’ air fares.
 Normal (or full, basic or standard air fares)
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This is the unrestricted, on-demand or walk-up air fare that a passenger is charged
for travel in a particular cabin of the aircraft (as we noted above, these classes include
first, business, economy, and on some airlines, premium economy). The normal fare
can be viewed as the ‘price platform’ for an airline’s service-price offers in a specific
cabin in a given market. It is associated with booking classes such as P (long-haul first
class) and F (primarily short/medium haul first class), J (long haul business class) and
C (primarily short/medium haul business class), and Y (coach class in the United
States and economy class elsewhere) (Holloway 2008, p. 144).
 Special (or discounted air fares)
These are air fares discounted off the price platform in each aircraft cabin and are
available, either seasonally or year-around, subject to restrictions on the booking (for
example, advance purchase) and usage (for example, minimum or maximum stay
requirements at the destination). These air fares are associated with alphanumeric
codes that vary widely from market to market. Airlines also offer:
o Shorter duration ‘promotional’ air fares. It is quite common for short-term
capacity controlled offers (air fare sales) to be made by an airline to in order
to promote a particular service or destination, to stimulate low season
demand, or to offload ‘distressed inventory’ (Holloway 2008, p. 144). For
example, British Airways has often branded periodic sales as ‘World Offers’.
o ‘Preferential’ air fares are available by reference to factors such as age or
employment status, for example, over 60 or in military service (Holloway
2008; Wensveen 2011).
o ‘Round-the-World’ (RTW) air fares: market demand for published airfares for
multi-sector journeys resulted in the development of published fare products
like “Round-The-World” and regional fares like “Circle Asia” or “Circle Pacific”
air fares. Most international airlines will participate in RTW fares, which will
normally quote prices for first, business and economy class travel. Again the
prices start at the lowest point for the simplest itinerary and increase
depending on the number of stopovers or off itinerary sectors that are added
by the passenger(s). With the growth of the three major global alliances,
oneworld, STAR, and SkyTeam, alliance fare products have further
simplified RTW fare offerings, with these products now accounting for the
bulk of RTW fare purchases due to their comprehensiveness, global coverage,
minimum rules and restrictions, and ease of sale (Fernie 2012).
o ‘Air-Pass’: another published price product that has been developed to help
sell long-haul travel is the ‘Airpass’ fare. Airpasses offer the consumer the
ability to buy several flights within a specific region or country at discounted
levels – as long as they are purchased in advance and in conjunction with a
long-haul journey (Collis 2002). There are many examples of these types of
fares, which help simplify the cost and construction of international travel for
the consumer – at value prices (Monaghan 2001). For example, Scandinavian
Airlines (SAS) offers a ‘Visit Scandinavia/Europe airpass’ for passengers
travelling on SAS flights from North America to Scandinavia (Scandinavian
Airlines 2016).
A tiered structure of full and special (discount) airline passenger fares is now a permanent
feature of most long-haul air travel markets, where the margin between the highest and
lowest air fares available on individual 2, 3 or 4-class departures can be quite significant. In
short-haul air travel markets that have been penetrated by the LCCs, both the LCCs and their
competitors normally use a fare structure marked by fewer fare bases, less dispersion
between the highest and lowest fares, that is, a more compressed fare structure, and fewer
conditions (Holloway 2008, p. 144).
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Finally, where an airline has a weaker presence at one end of a route than the other, it may
decide to offer lower air fares for travel originating at the weaker end (directional air fares)
(Holloway 2008; Wensveen 2011).
Un-Published Air Fares
All the fares above are made public, either via an airline’s computer reservation system (CRS)
or by a global distribution system (GDS), or on the airline’s website. Travel Agents can book
these fares for customers and potential travellers can gain access to all the levels, terms and
conditions when researching their next trip (Fernie 2012).
There is another broad group of fares that are not as public (often for competitive reasons)
which are described as “un-published fares”. These fares are individually negotiated private
fares that are made available to specific travel agencies or corporate clients, offering prices and
terms that are unavailable through other channels. Once they have been negotiated, some are
then only available from the airline but some can be purchased through a GDS via code-
restricted access (Holloway 2008, p. 145). These fare types can be grouped as:
Volume Price Discounts
As in any industry, where a customer exists who is willing to buy a company’s products in
bulk, volume discounts are generally available in the airline industry. Apart from the
published discount for groups of consumers travelling on the same itinerary – other
businesses may purchase volumes of seats at a discount from the airline. However, airlines
are often extremely sensitive about the level of discount they offer any volume producer for
fear of having to extend the deepest discount to other channels. Therefore these fares will not
be available to the general public or be quoted in the airline’s CRS or by a GDS, and neither
will they be quoted on the passengers’ ticket (Fernie 2012).
Corporate Discounts
Large airlines with extensive route network coverage are in a strong position to offer
favourable pricing contracts to corporate customers. Airlines with wide networks emanating
from a dominated hub or national market, perhaps augmented by relationships with their
strategic alliance partner, quite clearly have more to offer local companies because any single
competitor is less likely to be strong – if at all – in only a small number of these markets and
therefore is unable to offer the scope of coverage most probably required by a firm generating
trips to a wide range of destinations (Holloway 2008, p. 145).
Thus, corporate fare products and fare levels are directly negotiated between the Revenue
Management or Commercial Department of an airline and define special prices for frequently
used O & Ds of the customer. The corporate customer commits to use a certain amount of
travel in order to obtain the negotiated discount which is not shared publically (Dionisius
2010, p. 244). The high yield characteristics of business travellers enable airlines to offer
attractive discounts, yet still make healthy profit margins. The discount will be based on the
fully flexible published fare and will be dependent on the volume of business and sometimes
the length of the contract, but will average say 20 per cent for medium sized companies
(Fernie 2012).
Corporate travel is very important to airlines. Demand is fairly constant throughout the year
with less seasonal fluctuations than other market segments and corporate customers often
account for the majority of the demand in the premium cabin (first and business class)
Wholesale Discounts
Tour Operator companies are also able to negotiate discounts in return for contracted
volumes of holiday business (Todd & Rice 2005). A tour operator will commit to a certain
number of seats either on a per flight basis or in total volume over a set period. They will the
use this discount to help construct price competitive fully inclusive tours that they market
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either direct to the consumer or more usually through the traditional travel trade (Fernie
2012).
Originally in markets with IATA regulated fares, airlines would use this channel to sell
‘distressed inventory’ with Tour Operators ‘packaging’ the fare with often only a ground
transfer to comply with IATA regulations. These were the predecessors to consolidators
(Fernie 2012).
Market Fares
For markets that are not deregulated or for most international markets, the published fare
often bears no relation to the actual fare that is available in the marketplace. Airlines who
need to increase traffic volume, to increase load factors or market share usually have to sell
tickets at lower than published fares. In government or IATA controlled environments,
airlines are usually restricted to selling published airfares to the general public or travel trade.
However, other markets can be accessed via specialist travel trade and these specialists
provide an outlet for airline inventory at discounted rates (Fernie 2012). The fare that is
actually available through these distribution channels in the general market is then referred to
as the “market fare” (Barnes 2012).
Specialised travel trade actors like the Consolidators, who sell airline seats only in commodity
based trading, will receive significant discounts to the published fare in return for selling
large volumes of airline seats through their distribution channels (Todd & Rice 2005). This
volume-oriented business requires completely different price products that have an emphasis
on inexpensive fares and an early booking window. Later in the booking window the
consolidator is required to be granted a certain level of flexibility to adjust the number of
tickets. Consolidator’s business is very important for airlines and often provides a base load
in the beginning or the middle of a booking period. Airlines generally grant significant
discounts when the business is secured and the tickets cannot be cancelled by the partner
Another way the airlines utilise this channel of distribution is for last minute sale of what is
known as ‘distressed inventory’. In these circumstances the consolidators will sell as and
when the airline has excess capacity it needs to shift at short notice and it will be at extra
special prices not available for the majority of the year (Barnes 2012).
The challenge with this type of distribution diversification however comes about when the
market segmentation between the different channels starts to blur. Many consolidators are
distributing much more widely to the point where many travel agents in the general market
will buy an airline ticket through a consolidator to win a sale, rather than try and sell the
higher price fare they can buy from the airline. In fact some consolidators sell openly to the
general public and create a much higher level of awareness of discounted air tickets in the
market place (Fernie 2012).
In this situation price competition is created where for example, an airline may sell its
cheapest ticket on a certain route at $1,000 whereas a consolidator may have the same airline
seat on the same route on sale for $600.
The challenges of this distribution issue and its impact on yield and cost of sale are discussed
in more detail in the next section, but it leads to a discussion about one of the key issues that
is core to the profitability of the airline business.
Airline Passenger Pricing Economics

In deregulated markets like Australia, Europe and the USA, the need to attract or maintain
market share has led to price wars that are changing the airline industry. The behaviour of the
airline industry as a whole highlights the tendency to both produce excess capacity and to
price its product often well below the fully allocated cost (Wensveen 2011, p. 205). Several
factors cause this apart from management decisions, such as the “lumpiness” of adding extra
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frequencies or starting new routes as a result of the aircraft available to operate them. The
demand for high frequency to serve the business market, can also produce excess capacity at
certain times of the day and week, which is often sold by lowering prices to levels that fail to
cover full costs (Fernie 2012).
In times of economic strength, well managed airlines generally generate acceptable profits,
but in a downward cycle, the aircraft and number of seats offered are still in the marketplace,
and this produces extreme pressures on the airlines to cover their costs and remain profitable.
The result often is heavy air fare discounting (Wensveen 2011).
As we have seen, the airline industry is very capital-intensive, requiring substantial
investments in operating equipment and facilities (Doganis 2009; Wensveen 2011). In
addition, fuel and labour costs constitute a significant percentage (over 50 per cent) of an
airline’s total costs. To cover high fixed costs, airlines often try to produce any possible
revenue, and in markets or environments where there is a revenue short fall, variable pricing
strategies are introduced so as to boost the revenue contribution from these markets. In short
it is better for an airline to discount a seat to levels that are below the full cost of production
so they can earn some revenue from the seat. This revenue makes a contribution to fixed costs
and this strategy also aims to reduce the possibility of the flight departing with empty seats
(Wensveen 2011).
Airlines have the flexibility to reduce prices to deeply discounted levels in order to attract
additional consumers. As a result, the price of an airline ticket often has no relation to the cost
of producing it, but reflects the nature of competition (which quite often can be economically
unsustainable). Accordingly deep discounts, almost always matched by the competition, and
/ or waiving of ticketing rules and other fare reducing behaviour, encourage consumers to
hold unrealistic expectations of what a ticket should cost and condition them to expect lower
prices nearer the date of departure (Fernie 2012).
This strategy may be rational for airlines individually, but as an industry it is irrational, as it
is ultimately unprofitable – requiring the airlines to raise load factors to uneconomical levels
just to break even. Further, this creates fare erosion in the market place that restricts the
carriers’ ability to increase revenue to keep up with rising costs (Wensveen 2011).
Consequently, we see the majority of airlines focused on cost reduction to allow themselves
the flexibility to compete on price. In driving costs down to increase volume or share or
contribution, airlines have created a downward spiral that has forced them to lower costs to
enable them to match the low fares they themselves introduced (Fernie 2012).
In the end, airlines that are unable to lower their costs any further and continue to sell a
disproportionately high number of seats lower than cost will go bankrupt. We have seen
many examples of this dynamic in the last 20 years (Fernie 2012; Morrell 2013).
A fundamental component then of the deeply competitive pricing environment many airlines
conduct their business in, is the ability to revenue manage the different elements of demand
described above and to maximise the ability to capture the high yield business traveller
market and minimise the reliance on the low yield leisure market (Dempsey & Gesell 1997;
Shaw 2011). This is because premium traffic that is, first and business class, is a critical source
of revenue and profitability for airlines (International Air Transport Association 2006, p. 1).
The development of the global airline alliances (oneworld, Skyteam and Star) in the 1990’s
was driven by this need of full service network carriers (FSNCs) to lock in their share of this
lucrative business traveller market (Fernie 2012).
Simplification of Air Fares
Increased competition from low cost carriers (LCC’s) has resulted in a simplification of most
full service network carrier (FSNCs) fare structures. Whereas traditional air fare structures
focused on building barriers to cheap travel for business travellers through the use of air fare
booking restrictions, such as, must stay a Saturday night (Dempsey & Gesell 1997; Doganis
2006), the LCC fare structures, in contrast, were cheap, simple and inventory managed to suit
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demand (Michaels & Fletcher 2009). Indeed, unlike the full service network airlines (FSNC),
LCC’s do not normally segment their customers based on a set of complex rules and
restrictions that artificially inhibit the ability of various customers to access these products.
Rather, the LCC’s usually simply publish different fare levels for a single product, depending
on how close the day-of-departure is to the day-of-booking (Dunleavy & Phillips 2009).
This simplified fare structure is now common practice in the airline industry. The
straightforward structure of fares allows the customer to choose an air fare that suits them
and to mix and match one-way fares of different values, again to suit their needs. However,
restrictions still often apply to cheaper fares. The simplicity and one-way booking ability have
made full-service network carrier (FSNCs) fares much more competitive and in many markets
have countered LCC advances on key routes. Although this goes against the theory of supply
and demand as explored earlier in this topic, the simplified structure is easier to manage
within the airline (therefore cheaper), easier for the customer to understand and buy on-line
(reducing distribution costs) and has enabled the full service network carriers (FSNC) to be
more competitive with the LCCs and value based airlines (VBA) (Fernie 2012).
Impact of the Internet on Airline Passenger Pricing
The inherent instability in airline pricing has been made worse, particularly in short-haul
domestic or international air travel markets, by the internet and its rapidly expanding use
over the past decade or so. The impact of the internet on airline pricing has been twofold.
First, by providing potential passengers, who have online access, easy and immediate
knowledge of the airlines available air fares. In bypassing the traditional travel agents, the
internet has moved market power from the suppliers, the airlines, in favour of the consumer.
Using airline websites and online travel agencies the potential passenger (the consumer) can
very quickly obtain near perfect knowledge of what airlines can offer in terms of air fares,
seat availability and service offerings. There is full transparency and this provides the
potential consumer with considerable power (Doganis 2009, p. 258). They can make their
choice of airline with all the knowledge of the various travel options at their fingertips
(Dunleavy & Phillips 2009). Since on most air routes service standards of different airlines are
quite similar, consumer awareness of all air fare options has reinforced price as a
differentiator between airlines. In fact, it has been argued, that in many short-haul air travel
markets the internet has turned air travel into a commodity where price is the only variable
on which many if not most consumers82 make their choice. All of this has made it absolutely
essential for airlines to get their pricing levels and strategies right (Doganis 2009, p. 258).
The second impact of the internet on airline pricing is that it has made airline pricing much
more dynamic in real time. The development of CRSs and later yield/revenue management
systems working in real time has given airline yield controllers, at least those in the largest
airlines, instant knowledge of air fare changes introduced by their competitors. They can also
assess how well different air fares are selling in the marketplace. The internet has also
provided airlines with the ability to respond immediately with new or matching competitor’s
air fares which can be communicated around the worlds in seconds through their website and
those of the global distribution systems (GDSs). The speed with which new air fares can be
introduced but also matched by competitors in many air travel markets is a new and
additional cause of instability in airline passenger fares (Doganis 2009, p. 258).
In markets with several competitors and where products and services are not that dissimilar,
attempts by any or one or more airlines to gain competitive advantage by lowering air fares
will inevitably be matched by all others. Thus, all airlines end up with similar fares but a
82Price variables affect different segments of the population differently. For instance, for time sensitive travellers
(business people) an airline’s air fare versus a competitor’s fare may not be regarded as important as it is for less
time sensitive leisure travellers (Vasigh et al. 2013).
179
lower level and no single airline is better off in competitive terms. The internet has often
facilitated this downward decline in airline air fare levels (Doganis 2009, p. 258).
Airline Air Fares and Product Distribution

Distribution covers the broad process of how to take the product on offer to the marketplace
and put it “on the shelf” for the consumer to buy. It is the “Place” of the 4P’s of marketing.
There are usually a number of different ways in which a product can be sold and these are
described as channels of distribution. The level of airline passenger product distribution
sophistication varies enormously around the world and depends on the market environment
and the use of available technology. In the major airline markets, the airline product
distribution evolution is now reflecting the markets’ need for cost efficiency and increased
use of technology (Fernie 2012).
An additional factor behind the changes in the distribution model is the relationship with the
consumer. Historically, the majority of airline sales were made through travel agents
(Dempsey & Gesell 1997). However the discovery of the importance of relationships with the
customer, coupled with the lower costs of taking bookings from the customer direct, has
encouraged airlines to pursue direct sales strategies through all possible channels.
The cost of distribution through the various channels varies enormously as does the value of
the business transacted through each channel. In an increasingly competitive market
environment, airline strategies to reduce cost are behind the dramatic change in distribution
trends (Fernie 2012).
Airlines have been approaching this issue in two key ways. The first has been to cut travel
agency commission rates, this has been something that has been progressively achieved so
that travel agents’ standard rates are now about half, or less than half, what they were around
20 years ago. Thus, the role of travel agents has been undergoing a major change. There is
now far more emphasis by travel agents on serving travellers in return for a fee and much
less focus by the agents acting on behalf of airlines in return for commissions earned from
passenger reservations (Hanlon 2007, p. 111).
The second way for airlines to reduce their distribution costs has been for airlines to bypass
traditional travel agents and sell direct to the travelling public. Airlines have been helped in
this regard by the enormous growth in the use of the Internet (Belobaba et al. 2016; Hanlon
2007).
Air travel has become one of the most successful forms of e-commerce. It commenced with
the low-cost airlines (LCCs) encouraging – and in some cases requiring – their passengers to
purchase online (Doganis 2006). A passenger making a booking online is given a confirmation
number, which is required for baggage handling and flight check-in. Flight check-in
ordinarily occurs in the airport terminal, but for many airlines this can now be accomplished
online too, prior to the passenger leaving home. There is on some airlines no seat allocation
process at all, in such cases passengers board the aircraft in order of their arrival at the flight’s
departure gate. This practice substantially reduce queues and speeds up the boarding process
(Hanlon 2007, p. 111)
Online airline passenger bookings are rising rapidly. This growth has been accompanied by
the establishment of large online travel agencies which compete actively with the airlines’
own web sites (Hanlon 2007). Examples of world’s leading online travel agencies are Expedia,
Travelocity, and Orbitz. Whilst the increased use of the Internet and the reductions in travel
agency commissions has had the desired effect of reducing distribution costs, airlines still
have been required to engage with GDSs (Belobaba et al. 2016; Hanlon 2007). This is
particularly so in dealing with business travellers and their more complex travel itineraries.
So, with small travel agents of the traditional kind, online travel agents like Orbitz, airline
web sites, and GDSs there is now a wider variety of distribution channels available (Fernie
2012). A summary flow chart depicting the various players in the industry and how they pay
180
each other is depicted in Figure 8.2. Airlines have been taking steps to encourage more direct
online bookings. Sometimes airlines reward passengers with additional frequent flyer
program (FFP) bonuses for booking online; but more often the incentive is in the form of a
reduced air fare (Hanlon 2007, p. 113).
Figure 8.2. An airline’s reservation systems functions, Source: United States General Accounting
Office (2003, p. 31).
Basically, the airline industry has two broad channels through which it distributes its
product:
1. Direct
 Website
 Call centre
 Retail travel centre
 e-Agency
 Corporate implants
2. Indirect
 Travel Agency
 Corporate Agency
 Wholesaler
 Consolidator
 e-Agency
 Interline
Simply put, airline distribution utilises these channels in a “Push – Pull” model, where airlines
traditionally attempt to “Pull” the consumer to them directly at the same time as “Push”’
certain business through the travel agent towards the consumer (Fernie 2012).
Computer reservations systems (CRS) and global distribution systems (GDS)
As we have previously noted, all airline seating inventory is stored in an automated
computer reservation system (CRS). The first airline computer reservation system (CRS) was
originally developed in the 1950s, when American Airlines partnered with IBM for this
purpose to automate the airline reservation process (Zhou 2004). The first CRS system was
implemented by American Airlines in 1962, following a decade long research effort that was
carried out jointly by American Airlines engineers and IBM technicians (Hill & Jones 2008;
Koontz & Weihrich 2008). The “Semi-Automated Business Research Environment” (SABRE)
enabled reservations offices to manage the distribution process, not only at the airline’s
central reservation office, but also at airports and city ticket offices. SABRE was “the first real-
time business application of computer technology, an automated system with complete
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passenger records available electronically to any travel agent connected to the SABRE
system” (Smith et al. 2001, p. 39).
Prior to the introduction of this CRS system, all passenger reservations were stored on paper
cards. As we have noted earlier, American Airlines was the first carrier to introduce a CRS
called SABRE in 1962 (Smith et al. 2001). At the basic level, the CRS enables the airline’s sales
team to check availability of seats on any flight the airline operates, reserve seats, create
itineraries of multiple sector journeys and usually quote a price for that itinerary. It is the
“shop window” of the airline in as much as it displays all the schedule and price products the
airline has to sell. It is an extremely important and fundamental element of airline
distribution (Fernie 2012).
This inventory is then made available for sale via a range of interfaces (Belobaba et al. 2016;
Dempsey & Gesell 1997). In a direct selling environment the airlines CRS will deliver seat
inventory to a website or airline owned e-agency site as well as via its own passenger
reservation system terminals in Ticket Offices, Call Centres and Airports (Fernie 2012).
In the indirect environment airline CRS’s interface with the travel agency distribution
channels via intermediary systems sometimes described as Global Distribution Systems or
GDSs (Eastman 2002). GDS’s receive all airline schedules and inventory availability and
present them in an unbiased display. GDS’s also present major hotel and car hire company
inventories allowing the agent to provide a comprehensive automated booking service to
their clients. The key benefit to travel agents in using these systems is the ability to see all
airlines information in an unbiased fashion (Fernie 2012).
GDS systems have developed into a significant force in determining passenger’s choice of
airline. A GDS system will display all the possible flights for a given request using
connections and different days of the week to display the optimal number of choices to the
agent. This can sometimes result in 20 screens of information being presented to the travel
agent. It has been found that when presented with so much information, the travel
consultant will book from the first screen 90 per cent of the time and even then 50 per cent of
the time will book the airline displayed on the first line of information (Fernie 2012).
GDS companies have historically generated the majority of their revenue by charging airlines
a fee for every flight segment that is booked in their system (Field & Pilling 2006). Given that
the more segments that are booked the more revenue for the GDS, GDS’s offer their systems
to travel agents at vastly discounted rates and in highly competitive markets they can be
provided for free against certain usage targets (Fernie 2012).
Channels of Distribution
Direct Distribution
 Call Centre
Also described as Reservations or Telephone Sales, the airline call centre remains the
backbone of airlines’ customer contact and support. Initially these departments dealt
primarily with travel agents to make and service bookings (Wensveen 2011).
However, the increased use of automation and focus on distribution costs has
changed the dynamics of these centres. In today’s competitive environment airlines
are keen to focus their Call Centre staff on consumer sales, although a fair amount of
their time is still spent on servicing consumer bookings, for example, passenger
itinerary changes, seat requests and so forth (Fernie 2012).
Although a growing number of consumers will utilize the airline’s website to check
flight schedules, prices and availability a significant number still prefer to make the
actual booking on telephone sales, a habit that increases the cost of distribution for
airlines. This is a feature of the market that will decline as the consumer becomes
more comfortable with the security and reliability of Internet bookings (Fernie 2012).
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 Airline Ticket Offices
Airlines have traditionally used City Ticket Offices (CTO’s) and, in some cases,
Airport Ticket Offices (ATO’s) as their prime selling and servicing customer contact
centres (Wensveen 2011). Over the last 10-20 years, many airlines have developed
these ticket offices into full service travel agents that are able to provide travel
services to the consumer and are in competition to the other main travel agency
chains. This expansion has included the development of business travel management
departments as well as the high street stores (Fernie 2012).
One of the key benefits the airline achieves from this strategy is the ability to avoid
commission payments to other travel agents and, as they use their own central
reservation system (CRS), they avoid global distribution system (GDS) segment fees
as well. However, the overhead costs of a travel agency operation and the structural
need to report a profit means that many airlines have to manage their in-house
agencies as separate business units and the inherent costs increase as a result, making
this channel less cost effective than expected (Fernie 2012).
 Corporate In-Plant staff
In large corporations with substantial travel budgets there is often sufficient travel
demand to justify a travel department located within the company. A travel agent
usually provides this service, but airlines are regularly providing booking and
servicing departments within companies with whom they have a large amount of
business. This provides increased service for the consumer and lower distribution
costs for the airline (as described under ‘ticket offices’ above) (Fernie 2012).
Business travellers predominantly utilise specialist corporate agencies to handle their
business. Airlines have found that the travellers themselves or the corporation itself
will dictate what airline they will use and therefore the travel agent is no longer
“selling” for the airline (if they ever did), rather they are acting as a booking service
for the corporate company. In the “Push/Pull” scenario described earlier, airlines
now depend on a “Pull” strategy with the corporate companies directly via a
“corporate deal” rather than a “Push” strategy via the corporate agency (Fernie 2012).
 Airline Website
The newest and fast growing direct channel of airline distribution, the website was
initially used simply to promote the airline to consumers and provide information
(Alamdari & Mason 2006). However, airlines, like most other businesses, are
increasing the functionality and use of these tools, for example, targeting a wider
audience – investors and media (Fernie 2012).
Most important of these developments is the ability for the consumer to book and pay
for air travel over the Internet. This functionality is enabled by the creation of a link
between the airline’s CRS and the website called a “Booking Engine” (Taneja 2003).
This channel has the potential for the largest increases in sales and to provide the
greatest opportunity to increase direct relationships with the consumer and reduce
distribution costs at the same time (Fernie 2012).
Despite the proliferation of distribution channels, Internet sales via the airlines own
website continues to provide the cheapest sales method open to airlines. LCCs rely
on the majority of sales being made on the internet (Doganis 2006), with many
charging a surcharge for telephone bookings and few LCCs provide travel agency
with sales commissions.
Another interesting benefit of increased internet communication with consumers is
that it provides the opportunity to develop a database of consumer information.
Internet transactions provide airlines with consumer characteristics that, if used
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properly, can provide opportunities to conduct e-mail marketing of special offers and
other information. It can also be linked to their FFP (Frequent Flyer Program) profile
and used to build a better understanding of the consumers travel characteristics
(Fernie 2012).
 E-Agency
The rise of the E-travel agencies like Travelocity and Expedia has motivated airlines to
enter the fast developing arena of Internet agencies on their own. Orbitz, a joint
venture between Northwest, United, Continental, Delta and American Airlines was
the first of such initiatives when it was launched in 2001 (Alamdari & Mason 2006;
Belobaba et al. 2016) and has since led the way for similar ventures in Asia and
Europe. In this environment, member airlines provide inventory to the E-agency to
sell often at much lower rates than other channels and thus have far greater control
over their pricing (Fernie 2012).
Indirect Channels
 Interline
All airline CRS will display most other airlines flight schedules and seat availability.
This enables them to sell seats on sectors they do not operate themselves or on other
airlines or when their own seat inventory is full (Wensveen 2011). These transactions
are called ‘Interline’ and along with hotel and car hire booking facilities allow airline
sales staff to offer a fully automated booking service to their clients, often in
competition with travel agents. Airlines will enter into an interline agreement and
pay each other a low commission level for sales through the interline channel (Fernie
2012).
 Travel Agent
The travel agency community can be split into two main groups: Retail, sometimes
called High Street, and Corporate or Business Travel Agents. Their traditional role is to
act as a selling agent for airlines, hotels, tour operators and other travel producers
and for this service they receive commissions from the travel providers (Eastman
2002).
The International Air Transport Association (IATA) typically sets the base
commission levels for which airline tickets are sold (Doganis 2009; Fernie 2012).
Where an agency can generate significant volumes of sales, an airline will pay
incentive commissions or overrides (Doganis 2006; Shaw 2011).
 Retail Travel Agent

The retail agency will predominantly deal in leisure travel sales leaning more toward
holiday sales than buying seats from the airline direct at published prices (Cruz 2005).
The retail distribution can again be split into 2 main groups – the retail chain and
what is affectionately known in the USA as the ‘Mom and Pop’ agency.
The retail chains are usually large groupings featuring in prime high street or mall
locations and promoting themselves under an umbrella brand. They utilise the size
and the sales volume their size generates to negotiate discounts and incentives from
suppliers. A good example of a major global retail travel agency chain is Thomas
Cook Travel (Fernie 2012).
 Corporate Travel Agent
The corporate travel agency specializes in handling business travel, where a
corporation will contract with a business travel agency to handle all their business
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travel and pass on the charges on a monthly account. Corporate agencies have in the
past generated the highest profits based on the higher average ticket prices and on the
volume of business they transact. The larger corporate accounts will often require
what is referred to an ‘in-plant’ from the travel agency to handle the corporation’s
business travel in-house. Brands vary by market, but some of the major worldwide
corporate agencies include American Express, Rosenbluth Vacations and Carlson
Wagonlit Travel (Fernie 2012).
 Wholesale Travel Operator
A ‘wholesaler’ generally sells packaged holidays or tours, these are also sometimes
called inclusive tours. In this case the wholesaler will combine airfare, hotel and
ground transport costs into one inclusive price (Cruz 2005). Wholesalers will buy
components of these tours in bulk from the different suppliers at a significant
discount to the publicly available prices, and then add a profit margin before selling
the tour at a market price to other travel agents or sometimes direct to the consumer.
In markets with IATA regulated fares, airlines would use this channel to sell
‘distressed inventory’ with Tour Operators ‘packaging’ the fare with only a ground
transfer to comply with IATA regulations. These organisations were the predecessor
to consolidators (Fernie 2012).
 Consolidation Companies
Known as ‘consolidators’, these companies will usually sell airline seat-only products
to the market (Page & Connell 2006). Generally consolidators market destinations at
cheap prices rather than any specific airline and then book whichever airline gives
them the best price to that destination. Traditionally, consolidators are used by most
airlines as a way to dispose of ‘distressed’ inventory, or seats that have not been sold
close to flight departure (Goeldner & Ritchie 2009). Consolidators will sell through
Retail or High Street travel agents as well as direct to the public and will offer
significant discounts on the normal published fares.
In some markets consolidators have been referred to as ‘Bucket Shops’ (Holloway
2008) and initially came with very poor reputations, many of them being unlicensed
and with a number of high profile failures losing a lot of customers’ money.
However this channel has become more accepted now and in many markets
consolidators are a vibrant part of the airline passenger product distribution mix
(Fernie 2012).
 E-Agency
Following the market trend towards the use of the Internet, several travel agencies
have created Internet portals that sell airline seats on–line, and usually at the cheapest
available rates (Barnett & Standing 2001). Originally e-agencies were about
increasing awareness and boosting visits to their websites - too seek information and
potentially to book. However after the Dot Com crash, financial backers demanded
returns on their investment (ROI) and e-agencies have had to evolve rapidly into
profitable organizations to survive. This evolution has seen a change in the way e-
agencies sell. Rather than all e-agencies offering the same service or product, e-
agency distribution has fragmented and different companies are focusing on different
market segments for profitability (Fernie 2012).
For example, in the mid-1990s online travel companies like Travelocity and Expedia –
also known as online intermediaries or online third party sites – entered into
partnership agreements with airlines and hotels to offer travel-related products such
as airline tickets and hotel rooms from multiple suppliers directly to consumers
(Carroll & Siguaw 2003). These firms consolidate services and information from a
diversity of sources, providing consumers of travel services with a central point for
browsing and reserving airline tickets and hotel rooms. These firms also tailor
185
information to individuals based on their user profiles and the user’s use history. As
online intermediaries, these websites function similar to human travel agents,
scouring several sources of information, taking into account customers preferences
and requirements, applying rules and heuristics to try to satisfy constraints, and
engage in a form of dialogue with users to create appropriate travel plans (Maglio &
Barrett 2000). Today, these companies have diversified into more niche products and
focus more on customer segmentation and added value services to build profitable
market share (Fernie 2012).
Companies like Priceline and Last Minute.com will enter into seat auctions where the
customer will specify what price they are willing to pay and the e-agency will seek an
airline willing to sell a seat at that price (Fernie 2012).
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Airline Passenger Revenue Management
Objectives of Airline Passenger Revenue Management

In any market there are a range of customers willing to pay different prices for the product on
offer. The pricing and revenue management challenge is to accept customers at prices that
avoid yield dilution and unaccommodated demand. Today there is a wide array of air fares in
the marketplace, and it is the task of the Revenue Management Department to optimize the
revenue captured by the airline (Fernie 2012).
The airline industry first used the concept of revenue management in the mid 1980’s.
American Airlines was facing severe competition from the low cost carrier (LCC)
PeopleExpress on many of its core routes. Consequently, in 1985, American Airlines devised a
revenue management strategy based on managing and differentiating prices between the two
core market segments of business travelers and leisure travelers (Dempsey & Gesell 1997).
Using a systematic computational optimisation method for deriving a solution (an algorithm),
American Airlines were able to determine the right number of seats to “protect” for
passengers who book close to departure for a flight, and who therefore pay for a flexible, high
yielding (high priced) fare. These passengers, mainly people travelling on business, are the
most lucrative segment for any airline. However, often there are never enough of these
passengers to fill every flight the airline operates. Using this “protection” approach, once the
algorithm had determined the number of seats to be saved for these high yielding passengers,
the airline was then confident to accept passengers who book early in order to take advantage
of discounted fares. The result of this approach was very successful for American Airlines, so
much so that, along with other factors, PeopleExpress Airlines went out of business.
American Airlines noted the success of its yield management strategy in its annual report.
This resulted in widespread interest, not only by other airlines, but many other businesses
who were keen to improve profitability by making the correct pricing decisions (Cross 1995).
Applicability of Revenue Management
Under its strictest definition, revenue management has a fairly narrow field of application.
Robert Phillips in his 2005 book Pricing and Revenue Optimization (p. 6) states that in
particular, the techniques of revenue management are applicable where the following
conditions are met:
1. Capacity is limited and immediately perishable. Most obviously, an empty seat on a
departing aircraft or an empty hotel room cannot be stored to satisfy future demand;
2. Customers book capacity ahead of time. Advanced bookings are common in industries
with constrained and perishable capacity, since customers need a way to ensure ahead
of time that capacity will be available when the need to consume it. This gives airlines
the opportunity to track demand for future flights and adjust prices accordingly to
balance supply and demand, and
3. Prices are changed by opening and closing predefined booking classes. This is a by-
product of the design of airline computer reservation systems (CRSs). These systems
allow airlines to establish a set of prices (or fare classes) for each flight and then open or
close those fare classes as they wish. This is somewhat different from the pricing issues
in most industries, which is not “what fares should we open or close?” but “what
prices should we be offering now for each of our products to each market segment
through each channel?” The difference is subtle, but it leads to major differences in
system design and implementation (Phillips 2005, p. 6).
While the transferability of airline revenue management systems is not directly moveable to
other industries, the philosophy is transferable. Phillips (2005) goes on to say that:
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 Pricing and revenue optimisation can deliver more than short-term profitability
benefits. It can deliver survivability for a company. For example, National Rent-a-Car
after having several attempts to restructure and reduce costs without achieving the
successful outcome sought, decided as a last ditched attempt to work on the revenue
side of their business. They developed a system that forecasted supply and demand
for each car type and rental length at all of its 170 locations and adjusted prices to
balance supply and demand. Results were immediate, they returned to profitability
and avoided liquidation.
 E-commerce both necessitates and enables pricing and revenue optimisation. The
airlines pioneered electronic distribution – via CRSs and global distribution systems
(GDSs) – they were the “internet before the internet “. These systems allowed for
immediate receipt and processing of passenger booking requests; enabled airlines to
change prices and availability; allowed updated information to be instantaneously
transmitted worldwide. In effect, airlines were wrestling with the complexities of e-
commerce well before the arrival of the internet. The necessity to continually monitor
demand and update prices accordingly is being felt by more and more industries as
electronic distribution channels become more pervasive.
 Effective customer segmentation is critical. The key to the success of revenue
management in the airline industry was the ability to segment its customer base. This
segmentation was not on demographics of the customer, but via product
differentiation – creating different products (fares) that appealed to different
segments (Phillips 2005, p. 6).
Revenue (or Yield) Management
Price is a function of both supply and demand (Hirshleifer et al. 2005). Price is also related to
cost and can substantially impact airline load factors – both actual and breakeven. As we have
previously noted, the demand for air transport services is derived, cyclical, directional in
nature, and highly segmented. The productivity of airline resources is therefore enhanced by
the strategy of transporting multidimensional passenger traffic – business, leisure and visiting
friends and relatives (VFR). Since each type of passengers may have a different demand
characteristic, an airline seeking both to sell perishable surplus inventory (thereby increasing
load factors) and optimising revenue will utilise a yield/inventory system (Dempsey & Gesell
1997). Airline revenue management involves airlines dynamically controlling the availability
and prices of many different classes of fares to optimise revenues (Bertisimas & de Boer 2005;
Zhang & Cooper 2005). In essence, this involves the capacity control of discounted air fares,
with the revenue management department monitoring demand carefully, and altering the
size of each ‘fare bucket83’ depending on increases or declines in actual viz-à-viz forecasted
demand on each flight (Dempsey & Gesell 1997).
We have seen that the operating performance of an airline is the result not of any single factor
or strategy alone, but rather as a result of a complex series of interactions between:
 The airline’s output decisions (ASKs produced);
 the costs arising from those decisions (unit costs per ASK produced);
 the characteristics of the demand at which output is targeted;
 the volume of output that is actually sold (RPKs), and
 the yield earned by serving that demand (revenue per RPK) (Holloway 1997).
83Airline fare buckets are an assignment of a defined number of airline seats that are sold at a certain fare (Martinez
2008, p. 239).
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The fact that the fixed costs involved in running an airline, largely capacity-related rather
than traffic-related, represent such a high proportion of total costs, in many ways defines the
essential management task which is:
“Having scheduled a given level of output and accepted the fixed costs associated with it over a specific
period of future time, the challenge is to maximize revenue earned from the output during that period
of time” (Holloway 2008, p. 496).
This places revenue management at centre-stage. Firstly, this is because revenue management
is the discipline which trades-off revenue against traffic (load), whilst exploiting price
elasticity in order to enable the airline to maximize revenues. Secondly, revenue management
directly affects an airline’s passenger traffic, and hence, it influences both total and unit costs
(Holloway 1997).
Indeed, one of the foundations of any effective revenue management system is the knowledge
of demand profiles and customer preferences available from a central reservation system
(CRS) system. Revenue management is central to both commercial and operational strategies;
ideally fusing the two into a unified approach to the airline’s targeted markets. It is also an
important driver of costs (primarily, but not only, direct operating costs [DOCs]) as well as
revenues (Holloway 1997, pp. 421-422).
As well as influencing revenues, and albeit to a lesser extent costs, revenue management
clearly has an impact on load factors, the airline industry's lingua franca of supply-demand
relationships and itself an important driver of costs per unit of output sold (Holloway 1997).
Given the law of demand that states as price declines along an unchanged demand curve for
a particular product (passenger seats or air cargo capacity), demand (passengers and air cargo
traffic) will increase. The reduced unit revenue earned from the sale of that product, however,
will dilute the airline's overall revenue. That might not matter, however, if traffic is still being
carried profitably and the increase in volume more than compensates for declining revenue.
Whether this is the case will depend on the carrier's cost structure. Thus, although careful
management of yields has for some time been considered important to airline profitability, it
is arguably more accurate to talk about managing revenues rather than simply managing
yields (Holloway 1997).
Objectives of Airline Passenger Revenue Management

Revenue management is based on the economic concept of utility, as expressed through the
demand curve (Doganis 2009). There is a maximum price which each consumer is willing to
pay for goods or a service. That price is equivalent to the utility or benefit they get from
consuming it (Mastrianna 2008).
As previously noted, the objective of airline revenue management is to optimize the total
passenger demand generated for a given set of flights where the total passenger revenue is
calculated as the sum, over all fare classes, of the number of seats sold in an air fare class for
the price charged for the fare class (Dunleavy & Phillips 2009, p. 388). This implies that the
maximisation of revenue per unit of output produced (that is, per ASK) is generally the goal,
rather than maximisation of revenue per unit of output sold (that is, per RPK).
In other words, the intention is usually to maximise total revenue rather than to maximize
revenue per seat sold (Holloway 2008, p. 496).
The primary objectives of airline passenger revenue management therefore are:
 Yield maximisation – as previously mentioned, the goal of revenue management is to
maximise the revenue earned from each flight. To achieve this objective it is
necessary for airlines to sell as many seats as possible and at the same time maximise
the yield from each seat sold (Holloway 2008, p. 498).
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 Load factor maximisation – the maximisation of revenue and load-factors may well
amount to the same thing on a low-demand flight; on a high-demand service,
however, the challenge becomes one of ensuring that space is released to the highest-
yield demand that is bidding for it. Maximising load factors is therefore an objective
of revenue management, but not in isolation. Typically, load factors can be
maximised by selling inventory early in a flight’s booking cycle at very low prices,
but this will not maximise the revenue that flight earns – it will simply build market
share at the cost of revenue dilution. What revenue management aims to do is to
ensure that each seat is occupied by a passenger willing to pay as much as or more
than anybody else in order to occupy it (Holloway 2008, p. 498).
 Revenue maximisation – the primary objective of revenue management is revenue
maximisation, that is, to maximise unit revenue from a given flight schedule. This is
achieved by balancing the average price and capacity utilisation. On a low-demand
flight revenue can be achieved by maximising load factor; in contrast on a high-
demand flight it can be achieved only by ensuring as far as possible that space is
released to the highest yield demand coming forward – that is, by ensuring that each
seat is sold to the customer willing to pay the most for it (Holloway 2008, p. 498).
Therefore, in order for airlines to maximise load factor (that is, the number of passengers
boarded) it is necessary to compensate for cancellations and passenger “no-shows84” by
offering more seats for sale than there will be available at departure. Hence, the airlines must
“overbook” the flight (Abdelghany & Abdelghany 2009; Fernie 2012).
Directions in Airline Passenger Revenue Management
The fundamental objectives of revenue management are not new. What has been changing in
recent times is the technology used to attain them. Many airlines have in the past engaged in
both overbooking and active “space control” to manage their yields in the context of
predetermined service levels, and the latter in particular became common after discounted
fares started to spread more widely from the late 1960s onwards. The subsequent
development of central reservation systems (CRSs) began offering an opportunity for airlines
to introduce the real-time inventory management and pricing flexibility required to maximize
revenues on a flight-by-flight basis across a large number of possible fare classes or booking
categories. For a variety of reasons, these efforts evolved into what has become known as
“revenue or yield management” (Holloway 1997, p. 423).
A number of factors have driven the need for dedicated revenue management systems within
airlines:
1. Liberalisation and deregulation of air travel markets have tended to generate a greater
number of alternative fares and to increase both air fare and flight schedule volatility.
In a volatile pricing environment, airlines have to decide quickly which of their
competitors' actions need to be matched and which are of little consequence. An airline
also has a greater opportunity in such environments to take a proactive approach
towards its own pricing tactics;
2. The development of highly integrated hub-and-spoke route networks, has led to
complex fare structures; and
84The percentage of passengers that do not turn up at the airport for their booked flight without early notice to the
airline is defined as the no-show rate. The problem of the no-show passenger is that the airline often does not have the
control over the seat that is left empty, and the airline has no (or often a very limited) opportunity to re-sell this seat
to another customer (Abdelghany & Abdelghany 2009, p. 173).
192
3. Some large carriers have endeavoured to turn the volatility and complexity referred to
above into a competitive advantage by micro-managing revenues at the tactical level.
They are able to do this because their resources allow them to finance the personnel
and information technology (IT) costs necessary to introduce and constantly update a
revenue management system. Less well-resourced airlines often prefer simplified fare
structures which can be competitive in terms of price relativities and yet at the same
time are cheaper to manage (although relatively inexpensive off-the-shelf revenue
management packages are now available to smaller carriers) (Holloway 1997, pp. 423-
424).
In the past, most airlines controlled seating space on the basis of average demand on a route.
More airlines now analyse revenue at the level of an individual flight departures. This is done
through the use of computer-based decision support systems which help guide the release of
space in response to projections based on the historic trends and specific competitive factors
affecting each particular flight (Holloway 1997).
Therefore, as we have previously noted, Revenue Management involves management of fare
structures, allocation of capacity (or inventory) into fare classes (including virtual nesting and
journey control), and management of overbookings (Fernie 2012). These will be discussed
below.
Factors Influencing Airline Passenger Yields

Airline passenger yields are influenced by air fare structure, traffic mix, length of haul,
intensity of competition, network design and exchange rates. We will examine each of these
in turn.
1. Fare Structure
The different levels of air fares available in a market form the foundation on which
airline yields are built.
2. Traffic Mix
An airline's traffic mix, the proportion of traffic travelling at each different price on
offer within the given fare structure in a market, has a fundamental influence on its
yield. Traffic mix is a function of three factors: demand characteristics, the effectiveness
of the conditions imposed within the airline fare tariff to prevent diversion of relatively
time-sensitive and price-inelastic customers to products designed for the more time
insensitive and price-elastic segment(s) being targeted by lower fares and the
effectiveness of the airline’s revenue management system (Holloway 2008, p. 183).
Thus, the yield per passenger-km is influenced by the airline’s passenger mix. This is
due to the overall mix between high-yielding premium (first and business class)
passengers and the typically lower-yielding economy class passengers (Doganis 2009).
It is for this reason that many airlines, as part of their marketing strategy, target the
business-travel market and design their products and in-flight services to try and
attract high-yielding passengers (Shaw 2011). Whilst the improved services may cost
the airline more to provide they can be compensated for by the higher fares that
passengers may be willing to pay. The second aspect of an airline’s traffic mix relates to
the availability and level of air fare discounts and promotional fares. Lower and
specially discounted air fares will especially influence yields within the economy class
cabin. In the case of international markets, low promotional fares are generally more
prevalent and are most commonly offered when there is the greatest competition
between airlines (Doganis 2009).
193
These factors are clearly affected by the manner in which airlines strategically position
their products to tap into targeted demand, and the sophistication with which it
manages the relationship between price product quality, the price-elasticity of different
market segments, and the release of space/seating inventory. Thus, yield is to a large
degree a reflection of the interaction between product design and pricing activities,
because it is these which position an airline in its markets and shapes their traffic mix.
Nonetheless, an airline’s control over such variables is never absolute in competitive
markets (Holloway 2008, p. 183).
3. Length of Haul
Fares per kilometre (or mile) are generally lower for long-haul than for short-haul
routes because unit costs taper as stage length increases (Doganis 2009).
4. Intensity of Competition
The greater the level of monopoly power an airline benefits from, the stronger in
general its yields will be. Conversely, in the event of increased price competition85,
strong downward pressure is placed on yields (Holloway 2008). The activities of
competitors, particularly their willingness to price aggressively in order to win market
share, will affect yield whenever open competition occurs.
5. Airline Network Design
The type of network design – hub-and-spoke or a point-to-point network (P2P) –
affects airline yields insofar as it determines the distance flown by passengers in each
origin-and-destination (O & D) market; the greater the distance covered in serving a
market the lower the yield at any given fare because the revenue must be spread over
more revenue passenger kilometres (RPKs) or revenue passenger miles (RPMs).
Another factor influencing passenger yields is whether passengers are interlined with
another airline; this can influence prorate dilution and therefore yield. Finally, if an
airline with a network covering a good spread of O & D markets and having the
freedom to reallocate capacity easily may well be able to compensate for the softening
of yields in one market by withdrawing and reallocating aircraft or by varying its
planned rate of output growth. This assumes that profit maximization is a stronger
corporate objective than market share (Holloway 2008, pp. 184-186).
6. Geographical Area Served
A critical factor influencing passenger yields is the geographical area in which an
airline is operating. For a variety of reasons, such as past government controls on air
fares or, more recently, the impact of increased competition, air fare levels do vary
significantly between different parts of the world. The geographical spread of an
airline’s network and the relative mix or importance of different geographical regions
in its total revenue will impact on its average revenue or yield. Even when operating
within the same geographical markets, airlines often find that their average yields vary
widely. This is typically due to the variation in average flight sector differences. Some
air fares taper downward with distance. Consequently, the yield the airline obtains,
compared to others operating in the same region, are substantially influenced by the
sector lengths that the airline operates over (Doganis 2009, p. 282).
85Non-price competition tends to result in upward pressure on airline costs – associated with product improvement
or advertising, for example – but may leave yields relatively intact (Holloway 2008, p. 184).
194
7. Foreign Exchange Rates
Exchange rates and currency fluctuations also have an impact on airline yields. If an
airline’s home currency is devalued and sales in the home market represent a
substantial share of its revenues, then its average yield when converted to say US
dollars, for instance, will be adversely affected. For large international airlines
exchange rate fluctuations in any one of their major markets can either increase or
depress their average yields (Doganis 2009).
Approaches to Airline Passenger Revenue Management

 The Revenue Management Process
The heart of the revenue management problem for any airline is whether to accept or
reject a passenger booking request. Literally thousands of booking requests and
updates are received each minute for a moderately sized carrier (Dempsey & Gesell
1997).
Revenue management systems are designed to handle all these requests by utilising
highly developed opportunity cost algorithms, which forecasts future opportunities
to sell a seat and ensure that the seat is not sold for less than the expected value of
those future opportunities. The airline industry faces varying capacity constraints on
a daily or even hourly basis, which is unlike most other industries that can adjust
production levels or store finished or partly finished output.
The revenue management process, as it is still widely practised, can be broken down
into three elements:
1. Allocation of seat inventory
 how to ensure that the highest booking class is not sold out ahead of
lower-yield booking classes
 whether to re-open closed booking classes
 how to control group bookings
 how to deal with misconnections, no-shows, and late cancellations
2. Overbooking of passengers
 misconnections and no-shows
 late cancellations
 spoilage costs
 denied boarding costs
3. Management of seat inventory
 revenue-managing a flight segment: segment control
 revenue-management of a hub-based network: O & D itinerary control
(adapted from Belobaba 1998; Dempsey & Gesell 1997; Holloway 2008).
 Allocation of Seat Inventory
The complexity of revenue management stems from the broad range of demand
characteristics that the different price segments are designed to attract. It is best to
explain this using economic theory. In any market, there is generally a downward
sloping demand curve that indicates what price different consumer segments are
willing to pay for a product. Figure 9.1 shows the ideal demand curve for an airline
where 100 passengers pay 100 different prices. That is, one passenger is willing to
pay $100, one is willing to pay $99, one passenger is willing to pay $98, and so on.
Based on this demand curve, the optimal potential revenue from this market is $5,050.
That is, all 100 customers are accommodated at the highest fare each is willing to pay
(Cross 1995, p. 453).
195
Ideal Market Demand
100
Fare
REVENUE
0 Passengers 100
Figure 9.1. Airline passenger market demand curve, Source: adapted from Cross (1995, p. 452).
Consider as a contrast that the airline sets just one fare level; all passengers will need to pay
this fare. We can see from the above demand curve that if the fare is set at $100 only 1 ticket
will be sold because only one passenger would be willing to pay that fare, but if the fare
drops to $1, then 100 passengers would be willing to pay that fare to fly (Cross 1995). An
important question for the airline is: What should that fare level be to maximise its revenue?
If in this market an airline offered only one fare, it would maximise its revenue by charging
$50 and carrying 50 passengers. For a 100 seat aircraft, this would result in a 50 per cent load
factor and generate $2,500 – or about half of the total market potential. Although there are 49
people willing to pay more than $50 (1 passenger would be willing to pay $100) the airline
collects only $50 from each. The loss of this revenue is known as “dilution”. There are others
customers that are willing to pay $49 or less, but do not buy a ticket resulting in more missed
revenue opportunities otherwise known as “un-accommodated demand” (Cross 1995). This is
displayed in Figure 9.2.
Revenue Lost If Only One Market Fare
100
Dilution
er
a
F
REVENUE
0 Passengers 100
Figure 9.2. Revenue lost if only one air fare offered, Source: adapted from Cross (1995, p. 453).
196
It is not hard to check and see that by selling at any different fare level the revenue would be
less than the $2,500 maximum. For example, selling 49 tickets at $51 would give revenue of
$2,499, 48 tickets at $52 would give revenue of $2,496, and so on in a declining trend. To
significantly reduce dilution and unaccommodated demand airlines must use a more subtle
approach than a single fare structure allows (Cross 1995).
If the airline changed its fare structure to offer four fares rather than one, it could generate
significantly greater revenue without any changes to the product or, in fact, doing anything to
change the passenger demand curve. By offering fares of $80, $60, $40 and $20 and by
controlling the availability of those fares, the airline could sell 80 per cent of its seats and
generate $4,000 a 60 per cent increase in revenue (Cross 1995). This is shown graphically in
Figure 9.3 below:
Effect of Fare Segmentation
100
80
e 60
r
a
F
40
REVENUE
20
0 20 40 60 80 100
Passengers
Figure 9.3. Effect of air fare segmentation, Source: adapted from Cross (1995, p. 454).
An actual example of a demand curve is shown in Figure 8.4 where we see the profile for the
Chicago (IATA CODE: ORD) to Los Angeles (IATA CODE: LAX) market in terms of one-way
fares. As can been seen in Figure 9.4, although even with various price points there is still
unfulfilled demand, the result is significantly improved.
ORD-LAX Demand Curve - one way economy
800
700
Chicago – Los Angeles One Way Coach

600
Fares March 1992
500
400
300
200
100
Captured Revenue Untapped Revenue
Figure 9.4. Chicago (ORD) to Los Angeles (LAX) demand curve : one-way economy fares, Source:
based on Cross (1995, p. 455).
197
This is achieved by creating classes (or “buckets”) of inventory for each fare type and then
allocating an appropriate number of seats to these buckets in the revenue management
system (Barnes 2012). To maximise the revenue on the flight the revenue management
department needs to sell a combination of all marketed fares from the heavily restricted
advance purchase fares to the highest yield business fares (Figure 9.4). To ensure that there
are enough seats available for the high yield business traveller who books close to departure,
revenue management limit access to inventory by the lower yielding fares that are normally
created further out from departure. The danger in holding seats back that could be sold at a
lower price, for potential future sales at a higher price, is that this may result in lower load
factors when estimates of higher yield purchases do not materialise.
In determining whether to discount the price for travel, the revenue management department
must assess the impact of the discount in terms of traffic generation (usually measured in
terms of higher load factors) and on dilution - the amount of revenue lost by giving away a
lower fare to passengers who would have flown at a higher price. Where dilution outweighs
generation, the discount results in a net revenue loss. This then is the classic tension between
yield and traffic (load factor) (Dempsey & Gesell 1997).
Revenue management systems require high capacity computer technology capable of sifting
through large databases and automatically optimising booking limits with sophisticated
models. With up to twenty-six inventory classes, with each class often having nine “points-of-
sale” options, the airline revenue optimisation models are extremely complex. Seat inventory
management systems enable airlines to decide how many seats to offer at which fares based
on historical booking factors like seasonality, holiday periods etc. and contemporary booking
patterns like special events and day-to-day booking trends (Fernie 2012).
The trick is to avoid selling an excessive number of low-yield seats too early, for this may
consume inventory and close out later bookings of higher yield customers, causing “spill” or
the inability to accommodate a potential purchase because capacity has been consumed
(Dempsey & Gesell 1997).
Conversely, holding back an excessive number of seats for potential high yield customers
who may fail to materialise may deprive the airline of earlier sales to price-sensitive lower-
yield customers. This is referred to as “spoilage”, a situation when demand for seats exists, but
due to misallocation of inventory, they depart empty (Dempsey & Gesell 1997).
Inventory allocation strategies will differ by flight according to the demand pattern. For
example a Monday morning flight on a business route will not offer many discounted seats
for sale in advance, as the Revenue Management Analyst will know that the high demand for
those seats will materialise a few days before departure by passengers travelling for business.
Conversely, a lunchtime flight on the same day will offer a much larger number of seats at
lower fares, as it is known that there usually will be lower demand.
Forecasting Demand
In order to be able to identify what will be demanded on future flights, a vast array of data is
required. Revenue management systems utilise large databases containing a history of past
flight performance. It is the Revenue Management Analysts function to review all the data at
hand and then, utilising the revenue management system, make a forecast of demand for
future flights, adjusting the allocation of inventory as demand tracts outside of the forecasted
parameters. Each flight will have a different profile depending on a variety of factors –
business or leisure, time of day, day of week, season, and so forth (Zaki 2005).
When a passenger books a seat and then cancels prior to departure, or no-shows at departure,
the airline risks flying with an empty seat that could have otherwise been sold. As the airline
seat is “perishable” there will never again be an opportunity to sell that seat – its revenue
potential is lost forever. Late cancellations and no-shows occur on a lot of scheduled flights
and to mitigate their losses, airlines overbook flights to reduce the risk of departing the
aircraft with empty seats (Dempsey & Gesell 1997).
198
Within revenue management overbooking is essentially the process of allowing the number
of bookings taken to be greater than the number of seats in the aircraft cabin (Barnes 2012).
This practice causes problems however when more passengers turn up for a flight than there
is available seats on the aircraft. In this case the airline has to deny the passenger boarding
and will try to re-accommodate the passenger on an alternative flight (Parker 2012). This of
course can cause considerable customer complaints and significant compensation payments
and / or other costs.
Nevertheless, overbooking plays a critical role in revenue management. Therefore
overbooking is a delicate balance that aims to produce as few over-sales as possible, while
minimising the number of empty seats at departure (Dempsey & Gesell 1997).
In those cases where the system does not achieve an optimum result, that is equal number of
passengers to seats, and more passengers turn up for a flight than there are seats available,
airlines have a system to minimise the customer disruption over bookings may cause. The
approach most airlines use today is to offer voluntary denied boarding compensation before
imposing involuntary denied boarding on the passengers. This means that if on the day of
departure a flight is overbooked, the airport staff (usually a queue-comber) will approach
passengers at check-in to enquire whether anyone would be interested in being taken off the
flight in return for monetary compensation and the promise of re-accommodation on a later
flight (often with an upgrade) (Fernie 2012).
The customer service issue gets less easy to handle on long-haul services when there may not
be as many alternative flight options on that day (or even that week!). Similarly on long-haul
aircraft with First and Business Class cabins, airport staff may have to downgrade a premium
class passenger if the cabin is full – although these passengers are rarely off-loaded if they
want to travel in a lower class of service (Fernie 2012).
Although overbooking is common amongst full-service network carriers (FSNCs), most
LCC’s do not overbook their flights. Predominantly it is because they do not issue refundable
fares and if a customer does not turn up, they keep the money anyway! (Fernie 2012).
In sum, overbooking can be described as a sensitive “science”. Revenue management will use
historic data to estimate future no-show rates and then estimate the loss of revenue from
unsold seats on departure versus the cost of an overbooking for each flight. As we noted
above, the challenge is to manage the overbooking profile to the point that there are no
unsold seats when the flight departs and no customers left behind. Overbooking profiles
differ according to route, time of operation and fare mix on the flight. For example on a
leisure route where most passengers pay a non-refundable fare, the no-show rate will be quite
low, however on a high demand business route where fully flexible fares allow passengers to
change flights and cancel without penalty, the no-show rate can be very high.
Management of Seat inventory

 Network versus Sector
Traditionally, airline revenue management systems have concentrated on segment
based mechanisms. The allotment of inventory to each booking class determines the
number of bookings that can be accepted for a particular type of fare on that flight
segment. Although this is straightforward, it can limit the scope of what some airlines
want to achieve in terms of network development.
It has been found that by maximising revenue on each flight in no way guarantees
that total network revenues are being maximised. This is especially true for large
connecting hub networks where a large proportion of passenger itineraries involve
multiple flight legs and a connection at a hub. Typically around 40-70 per cent of the
passengers using a flight operating via a hub are travelling on multi-sector flights
(Belobaba 1998). Hence, as a result of their business model, full service network
carriers (FSNCs) have a complex array of fares that need to be carefully managed in
order for the airline to optimise revenue (Dempsey & Gesell 1997). The result of this is
199
an array of O&D passengers that compete for seats on the same aircraft creating a
significant challenge for the revenue management department.
To address this situation, network management systems use a complex system of
“Virtual Nesting” that automatically aligns yield with inventory in revenue order – the
fare with the highest contribution to the company get the seats (Belobaba 1998).
We will use an example of conventional segment based inventory management and
highlight the problems of this approach before looking at how a network driven
revenue management system can address these issues.
Figure 9.5 shows a sample selection of itineraries between Phoenix (IATA CODE:
PHX), Dallas (IATA CODE: DFW), Frankfurt (IATA CODE: FRA) and Miami (IATA
CODE: MIA) and it shows the fare classes available for the different sectors and the
number of seats allocated to each fare class.
FLT 026 FRA

FLT 618
PHX DFW
FLT 174 MIA
FLIGHT LEG INVENTORIES
FLT 618 PHX-DFW FLT 026 DFW-FRA FLT 174 DFW-MIA

CLASS AVAILABLE CLASS AVAILABLE CLASS AVAILABLE
Y 32 Y 142 Y 51
B 18 B 118 B 39
M 0 M 97 M 28
Q 0 Q 66 Q 17
V 0 V 32 V 0
ITINERARY/FARE AVAILABILITY
PHX-DFW FLT 618 Y B
PHX-FRA FLT 618 Y B
FLT 026 Y B M Q V
PHX-MIA FLT 618 Y B
FLT 174 Y B M Q
Figure 9.5: An example of seat availability under conventional air fare class control.
Legend: DFW = Dallas/Fort Worth International Airport; FRA= Frankfurt Airport; MIA = Miami
International Airport, Source: Based on Belobaba (1998, p. 290).
Figure 9.6 then shows the actual one-way fare being charged in each fare class.
(A) FLIGHT LEG INVENTORIES: SHORT HAUL BLOCKS LONG HAUL
PHX-DFW PHX-FRA (via DFW) PHX-MIA (via DFW)

CLASS FARE(OW) CLASS FARE(OW) CLASS FARE(OW)
Y $520 Y $815 Y $750
B $320 B $605 B $480
M $225 M $470 M $350
Q $165 Q $339 Q $225
V $145 V $299 V $195
(B) FLIGHT LEG INVENTORIES: LOCAL VERSUS CONNECTING PASSENGERS
PHX-DFW DFW-MIA PHX-MIA (via DFW)

Y $520 Y $620 Y $750
B $320 B $370 B $480
M $225 M $215 M $350
Q $165 Q $185 Q $225
V $145 V $115 V $195
Figure 9.6: Fare class control does not maximise network revenue, Source: Based on Belobaba (1998, p.
291).
When you compare the two figures you can see that owing to high demand on the PHX-DFW
route, only high yield fares are available, this in effect blocks the sale of any lower yield fares
through to FRA and MIA even though the total ‘Network Value’ of those fares is higher than
200
the highest local PHX-DFW fare. As a result the airline as a whole fails to maximise its
revenue even though its flights may be full. Why is this the case? Because only Y and B class
fares are open for sale on the flight from PHX-DFW. They have fare values of $520 and $320
respectively and by selling only these two classes the airline will therefore maximise the
revenue on that flight as demand is high for this sector, so the load factor will be very high if
not 100 per cent. However this flight (PHX-DFW) also provides the connection to the DFW-
FRA and DFW-MIA services. These flights are lacking demand, so they have the following
classes open for sale – Y, B, M, Q, V for DFW-FRA and Y, B, M, Q for DFW-MIA. If left just
too local traffic, these two services will probably depart with many empty seats. So, from a
network perspective, revenue would be maximised for the airline by allowing bookings in M
and Q class for passengers travelling to FRA and MIA from PHX instead of selling a B class
fare on PHX-DFW (Belobaba 1998, p. 289).Given the very large demand for multiple sector
itineraries that hub networks create, Revenue Management developed a system to identify
network value rather than simple sector value. The system creates what is known as virtual
value classes in a behind the scenes transaction that takes the value of the total itinerary and
maps it to a seat availability hierarchy. Figure 9.7 shows the same flight sector example using
the same fares but then maps the different itinerary values to discreet revenue ranges. The
outcome is the ability to allocate seats to itineraries that produce the highest revenue for the
airline as a whole.
FARE VALUES BY INTEGRITY

Y $520 Y $815 Y $750
B $320 B $605 B $480
M $225 M $470 M $350
Q $165 Q $339 Q $225
V $145 V $299 V $195
Mapping of (i, k) ON PHX-DFW LEG TO VIRTUAL VALUE CLASSES
VIRTUAL REVENUE MAPPING OF
CLASS RANGE O-D MARKETS/CLASSES
1 800+ Y PHX-FRA
2 700-799 Y PHX-MIA
3 600-699 B PHX-FRA
4 500-599 Y PHX-DFW
5 400-499 B PHX-MIA M PHX-FRA
6 330-399 M PHX-MIA Q PHX-FRA
7 270-339 V PHX-FRA B PHX-DFW
8 200-269 Q PHX-MIA M PHX-DFW
9 150-199 V PHX-MIA Q PHX-DFW
10 0-149 V PHX-DFW
Figure 9.7: An example of the virtual nesting of value classes, Source: Based on Belobaba (1998, p.
294).
This functionality requires technology that can manage extremely complex calculations. For
example an average sized hub network could handle over 6,700 possible itinerary/fare
combinations in any one bank of connections and the main hubs can handle six banks of
connections a day. If you recall that air fares will change on each itinerary several times a day,
you can imagine the complexity that a revenue management system would need to be able to
handle to continue to maximise every itinerary (Belobaba 1998).
Because few airlines have thus far developed the ability to handle this complexity, there is
another system that uses existing fare class in a similar “mapping” exercise and the result of
this system when used in our test example is shown in Figure 9.8. However it is clear that
this system is not as able to maximise the yield spread as finitely as the virtual system shown
previously (Belobaba 1998, p. 296).
201
ORIGINAL PUBLISHED FARES/CLASSES

Y $520 Y $815 Y $750
B $320 B $605 B $480
M $225 M $470 M $350
Q $165 Q $339 Q $225
V $145 V $299 V $195
STRATIFIED FARES BY (i, k) VALUE
STRATIF REVENUE MAPPING OF
BUCKET RANGE O-D MARKETS/CLASSES
Y 600+ Y PHX-FRA B PHX-FRA
Y PHX-MIA
B 450-599 B PHX-MIA Y PHX-DFW
M PHX-FRA
M 300-449 M PHX-MIA Q PHX-FRA
B PHX-DFW
Q 200-299 Y PHX-FRA M PHX-DFW
Q PHX-MIA
V 0-199 V PHX-MIA V PHX-DFW
Q PHX-DFW
Figure 9.8: An example of Stratified Bucketing by value class, Source: Based on Belobaba (1998, p.
295).
Point of Sale Control

Different airline passenger markets (or points of sale [POS]), particularly international
markets, create sales at different yields that again compete for seats on the same aircraft. For
example, an airline with a dominant position in its home market will generate much higher
yields than the same airline in a weak position in an overseas market. Another factor will be
the different cycles of demand for various markets related to public holidays and seasons.
The relative strength of different currencies will also need to be taken into account.
Continuing the concept of network value, an international network airline has an equally
high interest in maximising revenue across its entire network yet must deal with the added
complexity of different international points of sale. Each international market will deal with
different competitive conditions and of course generate revenue in different currencies
(Narayanan & Yuen 1998).
Let us now look at an example of a hypothetical airline with carrier code CC operating from
the hub city of Singapore (IATA CODE: SIN), Figure 9.9 shows the network that CC operates
from that hub (SIN). A by-product of a hub complex is that it creates competition between
local traffic and connecting traffic. For instance, Sydney-Frankfurt competes with Sydney-
Singapore and Frankfurt-Singapore. It is a general rule that in international itineraries the
sum of the revenue of two local passengers is greater than that of a connecting passenger,
therefore revenue management will often prefer local traffic to connecting traffic. However
local traffic is not always sufficient to fill the local operations and indeed at certain times of
the year connecting passengers can out number local passengers (Narayanan & Yuen 1998).
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Key to the Codes
KIX Code Airport/City/Country

AMS
CC64 CC44 NRT ADL Adelaide
CC42 AMS Amsterdam
LHR AUS Australia (could be Melbourne or Sydney)
CC66 CGK CGK Jakarta
CC21
FRA SIN FRA Frankfurt
CC68 JPN Japan (could be Osaka or Tokyo)
SYD
CC15 KIX Osaka
MAD
LHR London-Heathrow
CC70 MEL
ADL MAD Madrid
CC11 CC13
MEL Melbourne
NRT Tokyo-Narita
SYD Sydney
Figure 9. 9: Airline O & D revenue management control, Source: Based on Narayan & Yuen (1998,
p. 379).
In this case revenue management are then tasked with managing demand from the various
countries that the airline serves at different yields from different booking curves. For
example, Spain may have a high volume of discounted economy traffic several months before
departure which could fill the flights to Australia. However the booking history shows that
London to Australia demand is later booking and at a higher yield. Therefore revenue
management will not accept the majority of Spain’s bookings given it is likely to be able to fill
demand from the UK at a higher yield closer to flight departure. It is relevant to highlight at
this point that the local sales people in Spain will be under considerable pressure to meet
their sales targets and will not be happy with this type of inventory close-out. As a result
there is always considerable tension between the field and revenue management in the
allocation of inventory for local sales (Narayanan & Yuen 1998). Another example worth
noting is the effect of foreign currencies (Yuen & Irrgang 1998). Although air fares in Jakarta,
for example, may not change over a period of time, if the currency drops against the home
carrier’s currency it becomes less attractive to accept revenue from that country versus
countries with stronger currencies, which have the ability to generate higher yields. Again in
this case, Jakarta will find its access to inventory reduced or potentially cut off (Narayanan &
Yuen 1998).
Elements of Airline Passenger Revenue Management Systems

There are several critical elements in airline revenue management systems – technology,
people, and the necessity to integrate revenue management with other critical airline
functions.
 Technology
Airline pricing relies extensively on computers and CRSs that monitor the impact of
price changes and the reactions of competitors in literally thousands of nonstop and
connecting markets. Revenue/inventory management systems require the installation
of high-capacity computer software and hardware capable of sifting large databases
and automatically optimising flight booking limits with sophisticated forecasting
models (Dempsey & Gesell 1997, p. 300). With just six to eight fare classes for
example, the revenue optimisation models can be extremely complex, requiring linear
programming techniques (Daudel et al. 1994). Seat inventory management systems
enable airlines to decide how many seats to offer at which fares, based on an analysis
of historical and contemporary booking patterns, and impose booking levels on lower
yielding inventory buckets. The expert use of these systems enables airlines to
balance yield and load factors in order to optimise net revenue (Dempsey & Gesell
1997, p. 300).
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Other technology-based applications used in airline revenue management systems
are:
o A database comprising historical records of booking patterns, passenger
cancellations, no-shows, go-shows and achieved load factors, each broken
down by class of travel and fare class for every departure;
o An air fares database showing all published air fares currently applicable for
each flight departure, as well as unpublished net fares negotiated with
individual firms (travel agencies and corporate clients). Because in the
dynamic competitive airline industry environment fares change constantly, it
is critical that the revenue management system has real-time access to the
airline’s current fare database;
o A forecasting module, an overbooking model and an optimisation engine;
o A capability to track advance booking profiles in the same categories for the
next twelve months;
o A CRS to manage availability and record bookings. Current fare details need
to be instantly available to the airline’s CRS 86. In respect of published air fares
filed electronically in industry-standard databases such as ATPCO, this is
generally not an issue; unpublished net deals negotiated by distant or remote
airline sales offices can be more of a problem for international airlines unless
the sales force has access to a fully automated system and air fares are
relayed instantly back to the corporate office fares database (Yuen & Irrgang
1998); and
o Decision support software (Holloway 2008).
An activity which may or may not be organised functionally as a part of a revenue
management system but which has a close relation to it is revenue integrity. This has gained
increasing attention in recent years (Holloway 2008). Airlines have developed systems to
monitor the various revenue leakage points, both internal (charges for additional baggage,
changes in reservations, no-shows) and external (ticketing by various types of travel agents
according to fare rules, bad bookings) so as to achieve revenue integrity (Taneja 2011). Hence,
the objective of revenue integrity efforts is to ensure as far as possible that the revenue
predicted when a passenger reservation is accepted does actually materialise. An important
element of this is flight firming. Flight firming is largely a matter of verifying that passenger
bookings are ticketed and paid for, that the appropriate fare conditions are observed,
duplicate passenger bookings are minimised, and any booked connecting flights are cancelled
as soon as a passenger is confirmed as a no-show at the first point of departure (Holloway
2008).
Finally, a performance benchmarking system should be utilised, covering at least the
following indicators (tracked against same airline historical data and, where known,
competitors’ performances):
 Unsold seats, or the reciprocal of the achieved seat load factor, on each route;
 Seat factor against market share;
 Dilution cost (discount percentage) in each market;
 Revenue per ASK or ASM (that is, RASK or RASM);
86
Particularly for origin-and-destination (O & D) journey control, it is vital that GDSs apply the same inventory
control logic as the airline’s in-house CRS and the travel agencies accessing inventory through GDSs receive true last-
seat availability on their displays. As airlines may not want to divulge how many seats they have available, GDSs
therefore show each booking class as either available or closed, and only when availability reaches a fairly low level,
for example, 7-9 seats, will numbers of remaining seats be identified. Alternatively, a booking class may open at a
low number irrespective of how many seats are readily available, and continually show this number until bookings
fall below it (Holloway 2008, p. 530).
204
 Yield (revenue per ASK or ASM);
 Denied boarding per thousand boarded passengers, against industry average;
 Revenue share of each market or route group against output share;
 Closing rates of the different booking classes;
 Estimated demand spill; and
 Accuracy of demand, no-show, and go-show forecasts (Holloway 2008, pp. 531-532).
People (Staff)
A central component of any revenue management system is an experienced team of revenue
analysts and managers who have a sound understanding of their markets, as well as up-to-
date knowledge of both their airline’s marketing objectives and competitors’ activities.
Critically, these staff require the proactive support of senior management whose members
regard revenue management as a philosophy – a framework within which to integrate
product, network, fleet, marketing, and operational planning – rather than simply treat
revenue management as a tool (Fernie 2012).
In addition to extensive experience, sound judgment, and technical skills, revenue managers
and analysts also need to be able to cooperate collaboratively and efficiently with other
departments. Managing the release of seat inventory across multiple distribution channels is
quite a complicated matter, and revenue staff members sometimes enter the arena long after
decisions critical to flight profitability have been made elsewhere – by an airline’s sales team,
for instance. The internal organisation of a revenue management department may also affect
revenues. A department organised by route-group, market, or region can sometimes generate
suboptimal decisions for the network as a whole. This occurs when such units protect
inventory to optimise their own region’s revenue or profitability rather than overall airline’s
network performance. One common adopted by airlines is to have revenue managers and
analysts working at both market and network levels. The latter unit is responsible for
resolving any conflicts that may arise at the market level (Holloway 2008).
Other Components in the Airline Revenue Management System
Revenue management should be regarded not as an isolated technical task, but rather as part
of an integrated airline marketing effort:
1. Pricing: pricing and revenue management departments need to cooperate closely. For
instance, a possible tactic in response to declining load factors on a flight-leg, might be
to offer promotional fares in one or more markets served by that leg; this type of price
stimulus can only be effective if adequate inventory is allocated to the booking class
concerned;
2. Advertising and promotion: when several flights to the same destination are showing
similarly unfavourable projections, steps might be taken to promote either or both the
flights and the destination. Again, this type of initiative only works effectively if
adequate space is allocated to appropriate booking classes;
3. Frequent flyer program (FFP): space allocated for award redemption can be varied in
response to forecasted demand on a series of flights. Redemption conditions and award
rates can also be varied either seasonally or as part of limited-period promotions in
particular targeted markets; and
4. Sales: group sales, corporate deals, and travel agency incentives can have a substantial
impact on revenue management. Slow reporting of unpublished net fares negotiated
with travel agencies may hinder revenue managers’ inventory allocation efforts.
Finally, the task of revenue management can be complicated when sales teams
rewarded on the basis of volume respond to declining load factors by taking, a more
aggressive stance in negotiating off-tariff net fares, group deals, and corporate rates
(Holloway 2008, p. 533).
205
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Publishing, Farnham, UK.
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management, Oxford University Press, Oxford, UK, pp. 45-92.
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seat inventory control’, in GF Butler & MR Keller (eds), Handbook of airline marketing,
McGraw-Hill, New York, pp. 285-302.
Bertisimas, D & de Boer, S 2005, ‘Simulation-based booking limits for airline revenue
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7th edn, South-Western Cengage Learning, Mason, OH.
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airline economics, McGraw-Hill, New York, pp. 443-458.
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other service industries, Institute of Air Transport, Paris.
Dempsey, P & Gesell, L 1997, Airline management: strategies for the 21st century, Coast Aire
Dionisius, T 2010, ‘Airline revenue management’, in A Wald, C Fay & R Gleich (eds),
Introduction to aviation management, LIT Verlag, Münster, Germany, pp. 233-256.
London.
Dunleavy, H & Phillips, G 2009, ‘The future of airline revenue management’, Journal of
Revenue and Pricing Management, vol. 8, no. 4, pp. 388-395.
Fernie, A 2012, AERO2322 Airline Marketing Course Notes, Topic 6, Airline Revenue Management,
RMIT University, Melbourne.
Hirshleifer, J, Glazer, A & Hirshleifer, D 2005, Price theory and applications: decisions, markets
and information, 7th edn, Cambridge University Press, New York.
Holloway, S 1997, Straight and level: practical airline economics, Ashgate, Aldershot, UK.
Aldershot, UK.
Martinez, HE 2008, Dictionary for air travel and tourism activities, iUniverse, Bloomington, PA.
Mastrianna, FV 2008, Basic economics, 15th edn, South-Western Cengage Learning, Mason,
OH.
Narayanan, PR & Yuen, BB 1998, ‘Point of sale: an alternative form of O & D control’, in GF
Butler & MR Keller (eds), Handbook of airline marketing, McGraw-Hill, New York, pp. 377-385.
Parker, GL 2012, Practical Revenue Management in Passenger Transportation, Airline Revenue
Management Group, Montreal.
Phillips, RI 2005, Pricing and revenue optimization, Stanford University Press, Stanford, CA.
Talluri, KT & van Ryzin, GJ 2005, The Theory and Practice of Revenue Management, Springer
Science + Business Media, New York.
Taneja, NK 2011, The passenger has gone digital and mobile: accessing and connecting through
information and technology, Ashgate Publishing, Farnham, UK.
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applications, 2nd edn, Ashgate Publishing, Aldershot, UK.
Vinod, B 2009, ‘Distribution and revenue management: origins and value proposition’, Journal
of Revenue and Pricing Management, vol. 8, no. 2, pp. 117-133.
Yuen, BB & Irrgang, ME 1998, ‘The new generation of revenue management: a network
perspective’, in GF Butler & MR Keller (eds), Handbook of airline marketing, McGraw Hill, New
York, pp. 319-331.
Zaki, H 2005, ‘Forecasting for airline revenue management’, in CL Jain & J Malehorn (eds),
Practical guide to business forecasting, Graceway Publishing Company, Flushing, NY, pp. 197-
204.
Zhang, D & Cooper, WL 2005, ‘Revenue management for parallel flights with customer-
choice behavior’, Operations Research, vol. 53, no. 3, pp. 415-431.
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Airline Passenger Forecasting
The Purpose of Preparing Forecasts

Airlines forecast demand and traffic growth for a variety of reasons:
 To establish a foundation for flight scheduling and developing their fleet
requirements;
 To determine financial requirements related to aircraft fleet procurement;
 To provide a basis for evaluating station staffing and facilities requirements;
 To develop marketing strategies and promotional programs;
 To establish the public’s future requirements, desires, and ability to travel and
transport goods by air; and
 To plan and be ready for the preceding requirements (Radnoti 2002, p. 279).
Forecasts are made by airlines for a number of specific purposes. They can be broadly divided
into the following time frames:
1. Short Term forecasts – to enable staff rostering, airport gate allocations, tactical
marketing and advertising campaigns, cash flow estimates, and other day-to-day
matters, etc. and would therefore cover a period of a few months and up to a year.
2. Medium Term forecasts – enables route development work, opening new (or closing)
stations, recruitment and training, strategic marketing strategies, heavy maintenance
scheduling, etc., and covers the period from around one up to five years.
3. Long Term forecasts – spans a period up to ten years (or sometimes more) and
provides a basis for fleet planning, terminal construction, debt and equity structuring
and other long term commitments (Wensveen 2011, p. 260).
All forecasts will be used by airlines in carrying out the important management functions of
analysing, planning, communicating, motivating, remunerating and controlling staff
(Wensveen 2011, p. 260).
Forecasting Types, Models and Accuracy

Types of Forecasts
The type of forecast undertaken will depend on a number of factors:
 Accuracy and level of sophistication required;
 The time period covered by the forecast;
 Historical data – its relevance and availability;
 Time frame available to undertake a forecast;
 Skill set of the forecaster;
 Ability of management to understand and interpret the forecast’s results; and
 Cost / benefits of the forecast (adapted from Wensveen 2011).
Three basic types of forecasts are available:
1. Causal models
These models attempt to model the underlying causes (the “independent” variables)
impacting on the forecast variable (the “dependant” variable). The forecast variable
could be, for example, passenger numbers in particular regions or routes or RPKs. By
understanding the cause and effect linkages between various factors these models
208
attempt to enable a forecast of the independent variables to be made (Wensveen 2011,
p. 262).
Methodologies include:
a) Single algebraic equation
b) Simultaneous equations
c) Systems of differential equations (in complex econometric analyses) (Radnoti
2002; Wensveen 2011).
2. Qualitative techniques
These are personal and subjective judgements, frequently from people who have
particular insights or relevance to future behaviour impacting on the forecast variable.
a) Delphi method - a systematic interactive method for obtaining forecasts from a
panel of independent experts
b) Market research - as will be discussed in Topic 10, market research is a set of

techniques for gaining information about future customer demand
c) Individual expert opinion and managerial judgement (Radnoti 2002).

3. Time-series analysis
These analyses endeavour to make forecasts based on past behaviour of the variable of
interest. These techniques do not strongly emphasise how other parameters impact on
the forecast variable.
a) Trend extension (that is, fitting a curve to past behaviour and extrapolating this
trend to the future). These are sometimes called regression models. There are
different techniques for doing this depending on the nature of the change (for
example, steady growth, cyclical variation, seasonal variation, etc.)
b) Smoothing – applying appropriate techniques to mathematically reduce

irregular variations that are relatively extraneous and do not relate to the
primary cause of change in the forecast variable (Wensveen 2011, pp. 265-267).
Forecasting Models
Some models apply quite a sophisticated approach to air traffic forecasting. The following
advantages are associated with these types of models:
 They forecast factors affecting airline traffic demand rather than traffic itself;
 Provide systematic explanations of the relationship between airline traffic and their
causative factors; and
 They produce mathematical models that facilitate control and reproducibility of
results once models are estimated. Once established, they can quickly evaluate
alternative scenarios for the independent variables (for example, sensitivity analysis,
impact on revenues, cost, profit) (Radnoti 2002, pp. 281-282).
Accuracy of the Various Forecasting Models

The forecasting model chosen will be dependent on a number of factors - the objectives of the
analysis, the time frame in which to conduct such analysis, funds available, data availability
and the experience of the forecaster. The quality of the forecast results is generally related to
the forecasting model used. As with all analysis, increasing levels of sophistication is
normally correlated with increased cost to undertake the study. Before a forecast method is
chosen, the reasons for the forecast must be clearly understood and the impact of a less
209
sophisticated (and therefore potentially less accurate) approach assessed in light of the
decisions that will be made as a result of using the forecast findings (Wensveen 2011).
As the airline industry continues to be increasingly complicated and fast moving, forecasting
must not only be cost effective, but also time efficient. Compromises need to be made,
however an understanding of the impacts of such compromises also needs to be understood.
In general, there is a trade off between the cost and time to undertake a forecast and the level
of accuracy attained (Figure 10.1) (Radnoti 2002).
Figure 10.1. Cost versus accuracy of forecasts, Source: Radnoti (2002, p. 295).
As a general rule, short-term forecasts are more accurate than long-term forecasts, as the
relationship between variables changes less over a short time frame. However, short-term
forecasts are susceptible to seasonal and irregular events that need to be accounted for
otherwise they could be misleading (Wensveen 2011, p. 269).
Finally, the smaller the defined area of review, the less accurate will be the forecast. For
example, an airline forecasting its company wide revenue for a year will generally have a
greater degree of accuracy, than if the carrier was forecasting the revenue on a single route
that makes up, say only 3% of its total revenue. Essentially, the reasons for this are:
1. The numbers become smaller and less statistically reliable as the forecast becomes more
finite, and
2. The number of variables increase as the forecast becomes more finite (Wensveen 2011,
p. 269).
Forecasting Approaches and Methodologies

Approach to Forecasting
In order to deliver a forecast that is robust and workable, a systematic approach is required.
For an airline, one of the most important forecasts is that of future traffic demand, both
passengers and air cargo traffic. The accuracy of this forecast will drive a number of short,
medium and long-term decisions of the company. Traffic forecasting has far reaching effects.
As such it must be accurate and constantly reviewed to ensure its relevancy. Most airlines
will do this on a monthly basis, but depending on the level of activity in the marketplace it
may be done weekly. The forecast will normally be for a rolling twelve-month period and
will be quite detailed. Higher level forecasts will then cover the period for several more years
210
into the future. As major events occur, the forecast is reviewed and sensitivity analysis
performed.
Most forecasting commences with a review of historical data (and events) on which a
projection is then made (Radnoti 2002). In making this projection a large number of factors
require consideration, including:
 General economic conditions – gross domestic product, employment, inflation,
interest rates, exchange rates, etc;
 The airline’s strategic plans, policies and goals;
 Special events;
 Competitor activity;
 Political trends;
 Demographic trends;
 Company’s fleet plans, and
 Bilateral air service agreement (ASA) entitlements
In reviewing all inputs, a combination of both top-down (high level) and bottom-up (detailed)
approaches to forecasting are generally taken.
Forecasting Methods
1. Causal Models
Causal models are based on a statistical relationship between the forecasted (or
dependent) variable and one or more explanatory (independent) variables (Wensveen
2011, p. 262).
Causal models are constructed by finding variables that explain, statistically, the
changes in the variables to be forecasted. There need not be a cause-and-effect
relationship between the variables, but simply a correlation - that is, a pattern of
relationship between two or more variables. The closer the relationship the higher will
be the degree of correlation (Wensveen 2011, p. 262).
Data is the key to these models, and examples of some independent variables include
Gross Domestic Product (GDP), real disposable income per capita and consumer
spending (Srisaeng et al. 2015a, 2015b). All of these can help explain the dependent
variable such as RPKs, or enplaned passengers. Importantly, there could be a lagged
effect in their relationship with the dependent variable (Wensveen 2011). For example,
an increase in disposable income will impact air travel in say five months time.
Sophisticated models may use over 20 independent variables to forecast a particular
dependent variable. With these independent variables, mathematical equations are
developed to map the relationships and to forecast outcomes resulting from changes in
the independent variables (Wensveen 2011, p. 263). Obviously for these models to be
effective in forecasting future dependent variable patterns, the input data of independent
variables must be robust and easily accessed.
Causal models are widely and frequently used in many industries, including aviation,
and are the most sophisticated type of forecasting methods in use. However, all
modelling has limitations. Most forecasting models are based on the assumption that
what happened historically will continue to occur into the future in a similar pattern.
This assumption generally holds true, but only in the short term (for example, a few
months or up to a year). After that the correlation may weaken significantly. Another
limitation is that the independent variables may themselves be difficult to establish
and/or forecast going forward (Wensveen 2011, pp. 263-264).
Finally, despite all the sophistication of these models, unforseen events can disturb the
established relationship between the independent and dependent variables. These may
211
include disparate issues like severe and prolonged weather changes or staff-
management conflicts as well as many other unforeseen factors (Wensveen 2011).
2. Time-Series or Trend Analysis Models
Time-Series analysis (sometimes called Trend analysis) is the oldest method of forecasting
air transport demand and is still widely used in the aviation industry (Young & Wells
2011). While statistically it has a certain degree of sophistication, it differs from casual
model forecasting by being less dependent on a causality link (Wensveen 2011).
Time-Series models use only time (the independent variable) to forecast the dependent
variable (Krajewski & Ritzman 2005). They are often used when data is limited and the
requirement to get an answer is pressing - for example, estimated passenger carriage
for the next quarter when the waiting period to run more sophisticated models, is not
an option. Similar to causal models, time-series models are based on a statistical
correlation that does not necessarily reflect a real cause-and-effect relationship between
the dependent variable and the independent variable (Wensveen 2011, p. 265).
Time-series analysis (or trend analysis) is simply a sequence or series of values taken at
regular time intervals – for example, weekly passenger uplifts; or mail revenue per
fortnight, etc. By reviewing regularly reported historical data, patterns can be
identified, the recurrence of which can therefore be used to predict a future event
(Wensveen 2011). For instance, the increase in demand at the start and finish of school
holiday periods this year can be used for similar school holiday periods next year. The
assumption is that history will repeat itself.
An airline’s data storage warehouse can hold vast arrays of data/statistics on the
airline (and the broader industries) previous performance. This data is analysed to
identify trends, and projections are made of likely future performance. The accuracy of
forecasting using a pattern of historical sequences depends on the ability to identify
any changing factors that may keep history from repeating itself. Several forecasts may
be made based on different assumptions – for example, a study on leisure traffic to an
overseas destination may have one assumption that foreign exchange rates remain
unchanged, a second showing favourably moves in the foreign exchange rate, while a
third assumes unfavorable foreign exchange rate movements.
There are four time-related factors (time is the independent variable) that will determine
the values of the forecasted variable (that is, the dependent variable). They are:
 Long-term trends - for example an aging population, or increasing real
disposable income. They occur over many years, if not decades.
 Cyclical variations - such as the business cycle. The time period of each cycle
varies, but usually covers a period of at least several years.
 Seasonal changes, such as traditional holiday periods, or weather related
changes, for example, summer and winter. They are associated with the time of
the year and are quite pronounced and therefore, can generally be forecasted
with a relatively high degree of accuracy.
 Irregular or unique events – for example, riots or wars. They are pronounced,
often short term in nature, but very difficult to forecast. Even when known in
advance, the size of the impact is difficult to determine (Wensveen 2011, pp.
266-267).
Several of these behavioral influences can and will occur simultaneously.
212
Expanding on two of these time related behavioural influences:-
o Trends
A trend is a long-term tendency to change with time. A variable’s trend is a
reflection of its statistical relationship with time, exclusive of cyclical,
seasonal and irregular disturbances. The pattern identified is usually brought
about by factors such as population, real GDP, technology changes and long
term changes in consumer tastes or preferences (Wensveen 2011, p. 265).
The trend can be either positive or negative. The time period can vary
considerably and is dependent on the variable that is being measured. It may
cover many years in order to be longer than a complete business cycle
(Wensveen 2011, p. 265).
o Cyclical
While the business cycle is difficult to explain, and even harder to adequately
predict, it is none the less evident in modern developed economies. However,
by looking at indicators like real GDP, unemployment rates, corporate profits,
capital investments, stock exchange markets and so forth, and plotting them
over time, a pattern becomes evident. Each cycle has a unique time frame –
no two are alike - as the weighting of influencing factors change with each
cycle (Wensveen 2011, p. 265).
3. Smoothing of Variations
Cyclical, seasonal and irregular variations can all be “smoothed” by analysts in order to
increase data clarity.
This “smoothing” adjustment removes the variation from the data, leaving a time series
or trend line free of the particular variation (Wensveen 2011). For example, depending
on the purpose for which the forecast is to be used, the impact of the business cycle can
be removed from the data, which then leaves the forecaster to make predictions
without having to consider the impact of the business cycle. However, it may be
appropriate, or more realistic, that the forecast reflects the uncertainties brought about
by the business cycle.
Smoothing seasonal variations allows the actual situation to be more accurately
portrayed. For example, the Lunar New Year is not a constant date and moves between
the months of January and February each year and is dependent on the phases of the
moon. Failure to take this into account when forecasting will result in inaccurate
forecasts for these particular months. The use of “moving averages” allows for
smoothing of data, with the number of periods used in the moving average being
dependent of the length of the seasonal cycle (Wensveen 2011). Many businesses,
including airlines, use Moving Annual Totals (MATs) which covers twelve months to
assist with smoothing data.
In order to smooth irregular variances, estimates can be made of the impact of the
event after it has passed and adjustments made to the observed historical data using
these estimates. This then realigns the historical time series as though the event did not
occur. The realigned base can then be used to forecast future normal business
scenarios. The need to adjust the base will be flagged by the forecaster and should be
clearly advised to users of the information. Some users may need the historical data left
unadjusted highlighting the impact of the irregular event, while other users will
require the irregular events impact removed for their purposes (Wensveen 2011).
The usual order of removing (or smoothing) unwanted variations is to first remove
irregular events, then cyclical events and finally seasonal variations. The resultant is a
true trend. Graphically this true trend can be drawn and is referred to as the “line of best
fit” (Wensveen 2011).
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Below is a composite time-series trend line used for forecasting after smoothing has
been accomplished (Figure 10.2):
18 Trend line – extending

16 to future
Passenger Numbers 14
12
10
8
6
4
2
0
2003
2006
2008
2010
2012
2001
2002
2004
2007
2009
2011
2013
2014
2015
2016
2017
2018
Passengers Linear (Passengers)
Figure 10.2. Example of actual and forecasted passenger volumes.

Qualitative Techniques
1. Delphi Technique or Consensus Method
This grouping of forecasts is judgemental in nature and are subjective evaluations
based on intuition, educated guesses, past experience and common sense. They are
normally used when data is scarce or non-existent and/or time is not available to
undertake a thorough study (Wensveen 2011). Whilst structurally less rigorous than
causal and time-series analysis, they can nevertheless provide accurate forecasts,
particularly for the short term. They can also be combined with other forecasting
methods to improve overall forecasting accuracy. The reputation of the forecaster plays
a large role in whether the forecasts are accepted or rejected. Often the Chief Executive
Officer (CEO), or some other senior official, will support this type of forecast, with this
support leading to acceptance of the forecast (Wensveen 2011, p. 269).
Often these forecasts move through a number of iterations, with input sought from
diverse areas both within the company –sales, marketing, finance, planning, etc. and
from outside industry experts, which include government and private organisations
specialising in aviation and transport.
2. Market Research
Market research can also be quite useful where data is lacking. The travelling public
can be researched when new products or services are contemplated, or when making
changes to existing offerings (Radnoti 2002). For example, lie flat beds in business class
were extensively researched before being introduced. Detailed input from the target
market was sought, in particular, the revenue premium that they would be willing to
pay for such a product.
The success or otherwise of market research will depend on the subject matter under
review. Potential customers in one particular market may be reluctant to participate as
this may disclose their buying intentions, which they may consider to be confidential.
Alternatively, the airline may not wish to discuss new products or services for fear of
competitors gaining knowledge of such initiatives.
214
References
Hadavandi, E, Ghanbari, A, Shahanaghi, K. & Abbasian-Naghneh, S 2011, ‘Tourist arrival
forecasting by evolutionary fuzzy systems’, Tourism Management, vol. 32, no. 5, pp.1196–1203.
Krajewski, LJ & Ritzman, LP 2005, Operations management: processes and value chain,
Pearson/Prentice Hall, New York.
Radnoti, G, 2002, Profit strategies for air transportation, McGraw-Hill, New York.
Srisaeng, P, Baxter, G & Wild, G (2015a) ‘An adaptive neuro-fuzzy inference system for
modelling Australia’s regional airline passenger demand’, International Journal of Sustainable
Aviation, vol. 1, no. 4, pp. 348–374.
Srisaeng, P, Baxter, G & Wild, G (2015b) ‘Using an artificial neural network approach to
forecast Australia's domestic passenger air travel demand, World Review of Intermodal
Transportation Research, vol. 5, no. 3, pp. 281–313.
Farnham, UK.
York.
215
Airline Passenger Research
The Objectives of Market Research

Key Definition
Marketing research can be broadly defined as the “systematic gathering, recording and
analysing of data about problems relating to the marketing of goods and services”
(Ramaswamy 2013, p. 658). Implicit in this definition is that the data be objectively and
accurately gathered, recorded and analysed.
Market Research Objectives
It was not until the introduction of wide-body aircraft in the 1960’s and 1970s that airlines
began to focus on their customers, as these new aircraft types led to significant increases in
capacity (seating) that needed to be filled. The Boeing B747 (Figure 11.1), for example, was 2.5
times larger than the aircraft it replaced on many routes – hence, a requirement to find out a
lot more about what the airline’s passengers were looking for in air travel was essential
(Wensveen 2011).
Figure 11.1. American Airlines Boeing B747-100 aircraft at Los Angeles International Airport,
Source: Chesi (197487).
Market research is the means by which airlines are able to find information on their
passengers in order for them to respond to changing requirements (Shaw 2011). Indeed, in
highly competitive market environments, such as, the global airline industry, management do
need to know more about their customers so they can respond to their requirements and
desires.
For instance, airline managers may need to ascertain:
 Why did they fly versus other transport options?
 What did they want and why?
 What was their income, age, marital status?
87
<http://upload.wikimedia.org/wikipedia/commons/0/07/American_Airlines_B-747_2.jpg>.
216
 Where did they want to travel?
 What are there interests and dislikes?
 How do they entertain themselves?
 Where do they seek information – internet, print, electronic media (Radnoti 2002).
And, more so, airlines needed this information on their passengers in order to develop
products and services that would, in the future, be demanded by them, thereby maintaining
customer loyalty, or better still, enticing passengers toward their airline and away from
competitors (Radnoti 2002).
To achieve successful marketing and the airline’s goals, the marketing department needs to
know as much as possible about a consumer’s behaviour, attitude and opinion and
requirements (Doganis 2002). As such, marketing research is continuous, not just solving a
specific problem, but seeing the issue in an overall perspective. This can be achieved with a
comprehensive research strategy, which combines one-off research (for example, focus
groups) with continuous monitoring (Drummond & Ensor 2005). However, not all
companies within the same industry will have the same approach and philosophy to
research. It will be determined by the marketing strategy approach the company pursues.
Figure 11.2 sets out a summary of the desired customer (passenger) information and the key
methods available to airlines for collecting that data (adapted from Radnoti 2002).
Figure 11.2. Airline market research information requirements and available research methods.
Adapted from Radnoti (2002).
Broadly, customer research can be divided into two main categories:

1. Quantitative:
Quantitative research gathers information from a large number of people so that it can
be used for statistical evaluation (Zarcadoolas et al. 2006).
For example, 20% of the respondents purchased their ticket via Internet etc.,
This type of information could be done via an “In-flight Survey”.
2. Qualitative:
Qualitative research involves the studies use of and collection of a variety of empirical
materials – case study, personal experience, interview, artifacts, observational,
217
historical, interactionable, and visual texts – that describe routine and problematic
moments in people’s lives (Denzin & Lincoln 2003, p. 7).
As with all consumer interfaces, it pays to have a healthy scepticism about customer
feedback and to calibrate information collected with other sources of information. For
example, business people have a tendency to exaggerate when asked how many times
they travel, and few will admit to having no control over their buying decision. It can
be more effective then to ask for this type of information using trade off or ranking
methodology (Fernie 2012). For instance, if the airline’s product development
department is developing an in-flight service plan against a strict budget, they might
ask the question in the following way:
o Trade-off
“If during your flight you had to choose between a bar service or a hot meal,
which would be your preference”
o Ranking
“What ranking would you give the following features of in-flight service with
1 being the most important service element to you and 5 being the least
important service feature to you”:
 Hot Meal
 Cold Meal
 Bar Service
 Newspaper service
The Steps in Marketing Research

As marketing research should be undertaken in a systematic way, then a sequence of steps,
called the Research Process has been developed to guide the manager and market researchers
(Figure 11.3).
218
Figure 11.3. The market research process, Source: Adapted from Kurtz et al. (2010, p. 233).
All the above steps are highly interrelated. Decisions made at one stage will affect decisions at
all other stages. So feedback loops could be drawn on the above diagram in order to refine the
process and ensure clarity at each step.
1. Formulate Problem
Only when the problem requiring attention has been clearly defined can research be
considered and designed to gather the pertinent information. The research problem
needs to be specified and quantified and the objectives of any research identified
(Kurtz et al. 2010; Wrenn et al. 2007).
2. Determining the Research Design
The sources of information and the research design are strongly related and will
depend on how much is already known about the problem. If relatively little is known
219
about the subject under review, then wide ranging research will need to be undertaken
accessing data from a variety of disparate sources (Kurtz et al. 2010; Wrenn et al. 2007).
3. Design Data Collection Method and Forms
The most cost-effective data will be sourced from the company’s own internal data
warehouse or from government agencies. However, if this does not provide the
information required, then specific data must be sought externally. The research
questions here are many:
 Should the data be collected via questionnaire, observation, focus groups, or
laboratory?
 Should the purpose of the research be made clear to respondents?
 Structure:
o Should an array of alternative answers be provided, or
o Should responses be open ended (Kurtz et al. 2010; Wrenn et al. 2007).
Design Sample and Data Collection

In designing the research instrument, consideration needs to be given to the sample of the
population88 that will be involved with the project (Neelankavil 2007). If the sample is not
carefully and clearly defined the results will be less reliable (Kurtz et al. 2010; Wrenn et al.
2007). For example, if your research is targeting business travellers buying first class tickets,
then interviewing mostly economy class passengers travelling on holidays will not provide
the most comprehensive and pertinent feedback.
Therefore the researcher needs to specify:
 The sampling frame (the criteria from which the sample will be drawn)
 Sampling selection process (will it be scientifically derived, or based on judgement,
convenience, etc.)
 Sample size (for example, how many samples will be taken (Kurtz et al. 2010; Wrenn
et al. 2007).
This will be dependent on both the time frame and financial resources allocated for the
research. The selection and training of data collection staff may also need consideration
(Kurtz et al. 2010; Wrenn et al. 2007).
Once this has been determined, actual data collection can then commence.
1. Analyse and Interpreting Data

The raw data collected, to be of useful, needs to be analysed and summarised in order
to make it useable. Broadly, this is done via the following steps:
a) The raw data needs to be checked for completeness and that it was collected
according to the instructions issued.
b) Next, the data needs to be compiled and entered into a database (usually
computer based).
c) Finally the data requires analysis and cross referencing against other
variables (Kurtz et al. 2010; Wrenn et al. 2007).
88
Sampling in research is a procedure that uses a small number of elements of a given population as a basis for
drawing conclusions about the whole population. Samples that are taken with care and accuracy can provide very
useful information for decision makers (Neelankavil 2007, p. 240).
220
2. Prepare the Research Report
The final phase of the research process involves summarising the results and findings
from the analysis, drawing clear conclusions and making recommendations. The report
has to be clear, succinct and effectively cover of the all major findings and issues, as
management will not have the time (or perhaps even the necessary skills) to review the
data themselves (Kurtz et al. 2010; Wrenn et al. 2007).
This market research can be undertaken by either the airline’s own passenger research
department or via independent expert consultants, contracted to investigate any topic
of interest with regard to travel behaviour, passenger preferences, service evaluation,
product improvements, or any question or problem that might be addressed through
research or analytical techniques.
The Significance (if any) of the Gompertz Curve

In the late 1960s, there was a general agreement that the business travel market segment was
in its mature stage. This assumption neatly followed the forecasters' faith in the ‘classic’
Gompertz Curve, which traces the development of any industry as an S curve with identifiable
stages, as indicated in Figure 11.4 (Radnoti 2002, p. 266).
Figure 11.4.The Gompertz curve, Source: Radnoti (2002, p.266).
Analogous to this is the “product life cycle” concept, where there are four distinct stages in the
sales history of a product - birth, growth, maturity and finally decline. The product life cycle
simultaneously can be both a determinant of as well as a consequence of actions taken by
management (Kurtz et al. 2010).
Many traffic analysts often assumed that air transportation, at least in the developed
countries, had reached the ‘mature’ stage and that traffic growth would slow as a
fundamental symptom of approaching market maturity (Radnoti 2002, p. 266).
However with the introduction of wide-body aircraft, the airline industry entered a new growth
phase – the tourist or leisure segment of the market, which now accounts for approximately 80
per cent of all air travel (Kasarda & Appold 2014; Radnoti 2002). Further, in the late 1990’s yet
another industry expansion phase began in many geographic regions of the world, with the
growth of short haul LCCs, such as Ryanair (Doganis 2006; Shaw 2011).
221
Airline Passenger Market Segmentation
A lot of work has been done by airlines on obtaining a better understanding of the
motivations behind the consumers’ reason for purchasing a particular airline over another
and there are some general basics that apply across most airlines. Market demand segmentation
involves dividing the total demand for a product or service into discrete groups who might
require or prefer different product characteristics (Belobaba 1998, p. 354). Market
segmentation is undertaken for several reasons:
 To match price to the customer group’s price elasticity;
 To target offers in an attempt to optimise the customer response rate, thus increasing
the margin; and
 To arrange optimal staffing for operations and/or sales personnel (Baldanza 2001, p.
362).
As we have previously noted, most traditional airlines have grown along with the air travel
market over the last 50 to 70 years going from postal carriers and flying boat services through
the explosion of jet travel to arrive at their current network. The result being that basically
geography and government ownership have dictated the markets they serve.
Fundamentally, these networks remain the core of an airlines’ operation. However, the
liberalisation of air travel, the increasing sophistication of air travellers and most importantly
the subsequent growth in LCC competition over the last 30 years (Doganis 2006) has forced
airlines in practically every market to look closely at their market place and analyse the
market demand in more detail.
It is not sufficient to know how many people fly, but why they are flying and what motivates
them to travel with a particular airline. The analysis of market demand requires the ability to
segment the market in order to understand its different needs. A market segmentation
exercise will enable an airline to identify sectors of demand that they can profitably serve.
In the airline industry, market segmentation is a common practice principally aimed at
separating business-oriented travel from leisure-oriented travel. Below this level, frequent
flyer programs (FFPs) and affinity marketing programs (students, cruise line passengers,
senior citizens and so forth) are used to further segment the business and leisure groups,
respectively (Baldanza 2001). Segmentation in the airline business has traditionally been
based on three variables: Journey Purpose, Journey Length and Country of Origin (Wensveen
2011).
Journey Purpose
Initially, journey purpose can be clearly divided into Business and Leisure categories.
However, upon further inspection a number of sub-divisions appear and beneath these two
motivators are a myriad of influences. For example a business traveller may be attending a
conference, or travelling as a result of winning a business incentive - both create a different
mindset and set of motivators from the business traveller on a sales trip, attending a meeting
or presenting to his company’s board (Shaw 2011). Similarly a leisure traveller going on a
package holiday has a different mindset and travel needs from someone visiting a sick
relative or travelling to attend university.
In short, the characteristics of Business and Leisure travellers set the tone for the majority of
airline positioning (see Figure 11.5).
222
Figure 11.5. The reasons for air travel.
Journey Length
There are fundamental differences between the needs of a traveller on a short journey versus
a long one (Shaw 2011). Efficient airport experience and on-time operations are of particular
importance on a short journey. The frequency of operations is important on short journeys
with schedules allowing the flexibility to do day trips for example (Doganis 2009).
However, passengers on a long journey will place a lot more importance on in-flight comfort
and service given the length of time they will spend on the aircraft. Although schedules and
on-time performance is still important, generally there has been more flexibility built into the
travellers schedule on a long-haul journey (Doganis 2009; Shaw 2011). In addition, long-haul
travellers often spend longer in the airport, either with longer check-in times or during
connections, and because of this the airport lounge facilities become much more important
(Graham 2014).
Culture/Country of Origin
The globalisation of the airline industry requires airlines to recognise the varying cultural
needs of different countries when they travel. Dietary preference, religious requirements and
simple cultural expectations all have an impact on the products and services an airline will
offer.
For international carriers in particular, often in excess of 50 per cent of their passengers are
not from the airlines homeland and whilst it is important to retain the cultural essence of the
airline, recognition must be given to the different needs and expectations of other cultures.
Therefore, in order to communicate and engage with your customers effectively, you must
first be able to clearly identify them. Market segmentation is a process whereby the total
customer base can be divided into smaller, defined groupings, which often having unique
characteristics. For example, an airline will have a number of sub markets (or market
segments) which could be divided as follows:
1. Purpose of trip – Business, Holiday, Visiting Friends & Relatives (VFR), Education,
other.
2. Profile of Traveller – Age, income category, occupation, nationality.
223
3. Characteristics of Trip – Domestic or International, short or long haul, duration (day,
week, month, weekend) (Wensveen 2011).
Once these sub groupings have been identified, then the marketing mix – Price, Product,
Place and Promotion can be tailored to their needs and wants. The airline can also better
monitor each segment once its characteristics have been identified. Trends can be more easily
followed, and lucrative market segments can be grown at the expense of low margin
segments.
The identification of the frequent traveller segment led to the development of loyalty schemes
that retained these passengers within the airline grouping (Wensveen 2011).
Airline Passenger Travel Purchase Motivation

It is necessary for airlines to understand what drives the target market segment in order to
develop product and service that they will buy. Beyond the reason for travel, comes the
motivators (Figure 11.6) the consumer will respond to when looking to satisfy his travel
needs, from the fundamental emotional needs of safety through schedule and on-time
performance to seat preference and desire for name recognition. Again at the base level they
are identical, but become more divergent as they become more specific. It is here that a
company’s positioning allows products to become more targeted and the associated sub-
brands develops some of their personality.
Figure 11.6. Airline passenger travel purchase motivators, Source: adapted from Beradino (1998, p.
108).
Beyond even this stage however, airlines then need to understand the type of traveller
themselves, that is, Frequent/Infrequent, Own Business/Corporate Employee, for example,
in order to further define its marketing proposition (Fernie 2012).
The business traveller from a large corporation will normally be a lot less sensitive to the
price of the ticket if they need to be at a specific meeting on a set date. However, travellers
from a small business will be a lot more aware of the price given it is usually at the travellers
own expense (Dempsey & Gesell 1997) (also known as SME – Small to Medium Enterprises).
224
Equally families who are tied to school holiday periods for their leisure travel will accept
higher prices – to a point. In addition, consumers travelling to study or for medical reasons
will be a lot less price sensitive.
In short, who is paying for the trip and the urgency or necessity of the travel will play a large
part in the travellers consideration set.
In passenger research, many questions arise: Why do people travel? What are their
motivations? Amongst the answers are - history, curiosity and culture, business and
professional, health, interpersonal (that is, visiting friends and relatives (VFR), pleasure &
romance, spiritual, sports, shopping, and so forth (Radnoti 2002).
Furthermore, and, most importantly, air transport and tourism are closely interrelated.
Tourism often depends on air transportation to bring visitors, while the air transport industry
depends on tourism to generate demand for its services. Tourism is a driving factor for and,
in some instances, a stimulator of change in air transport; most notably the development of
new business models such as charter airlines. Conversely, air transport opens up new
destinations and tourism forms such as long-haul excursions (Bieger & Wittmer 2006, p. 40).
The factors affecting tourism include:
 Destination: - attractiveness (good weather, historical sites, natural beauty,
different cultures, recreational facilities, ground transport, tour arrangement),
availability of varying types of hotel accommodation, social factors, competition from
other destinations;
 Origin: - The travellers themselves are influenced by – their education, their economy
and wealth, lifestyle, motivation, values, interest. Education has a certain effect on
tourism because the increased level of general education (and higher income)
stimulates interest in the outside world. Also, more retirees with higher income
(combined with better general health), along with more holiday time – Europeans
now have annual leave entitlements from 6 to 13 weeks per annum; and
 Transportation: - accessibility, visa requirements, customs and immigration,
distance and time, transport capacity, increased frequency, additional and
improved airports, multilingual guides, costs, etc (Radnoti 2002, pp. 269-270).
Demographics and Income

The income level of a country influences the number of citizens who can afford to travel. To
study tourist passengers further, we may use following classification: - age categories, male /
female, income groupings, level of education, social class, geographic region, city size,
population density, family size, occupation groupings, lifestyle (Radnoti 2002, p. 271).
Passenger Economics
For a given airline route structure, operating the wrong-sized aircraft could have an adverse
impact for an airline. The situation is like building a large hotel without having any idea of
the number of guests expected. In order to obtain a good cross section, it is necessary to
review all the contributing factors and look at the macro and micro economic aspects: - gross
domestic product (GDP), personal consumption expenditure (PCE), unemployment rates,
capital investments, private housing trends, interest rates, foreign exchange, fuel prices,
and so forth (Radnoti 2002, p. 276).
Airline Market Research

Many airlines regularly undertake market research in order to determine customer
satisfaction of their products and services. These surveys can be direct, or conducted by
independent agencies or through a combination of the two (Radnoti 2002). The surveys
enable the airline to measure customer satisfaction and understand customer’s needs across
the entire flight cycle – from planning the trip to returning to their homes.
225
Independent organisations are often contracted when airlines need to benchmark their own
specific result areas with those of competitors, or to analyse general trends in the travel
industry (Radnoti 2002).
So why do airlines measure customer satisfaction?
 satisfied customers are more likely to repeat purchase;
 satisfied customers are more likely to recommend a carrier they have had a pleasant
and successful trip with to friends and colleagues;
 to measure performance over time;
 compare performance with competitors;
 identify strengths and weaknesses of their airline versus competitors; and
 to help identify the relative importance of on the day experience.
Depending on the market segment (international, domestic or regional), different approaches
will be made when surveying customers.
For example, airlines often contract market research agencies to survey passengers with the
objective to measure customer satisfaction across the whole flight cycle.
The research methodology may take several forms:
 On-line Surveys
With the assistance of the airline, on-line surveys are sent out to passengers who have
recently travelled on a flight of the carrier. They are invited to participate in the on-
line survey, which is generally conducted via an independent research agency. This
allows customers the “privacy” to be open with their comments knowing that they
will not be able to be identified by the carrier. This frankness will hopefully result in a
more accurate assessment of the customer’s satisfaction.
The survey will ask passengers about their recent flight experience. They are also
asked several “key satisfaction indicators” questions that sum up their entire flight
experience. These surveys would normally be undertaken on a monthly basis.
While the results are feed back to the carrier, the independent agency will also use a
similar approach with other carriers within the same market. The survey results from
multiple carriers within the same market are aggregated and industry standards and
trends identified, against which individual carriers can benchmark their individual
performance. This is done in order to identify the strengths and weaknesses of their
own offering in the competitive environment.
 Airport Surveys
Again, an independent research agency is normally contracted to undertake in-
person surveys at an airport location in order to gain feedback about customer’s flight
experiences and / or expectations. The customer also has anonymity with this
research method as well, and in a similar way to the on-line surveys, data is
aggregated and measured for the entire segment and results can be reported for
individual aspects of a carrier’s performance relative to competitors in that segment.
Whilst undertaking such surveys, airlines can engage these agencies to seek input on
passenger reaction to potential new products and services or proposed changes to
existing products and services while not disclosing to the passenger which airline is
proposing such innovations or changes.
 On-board Surveys
During the course of the flight, the Cabin Service Manager (CSM) or the In-Flight
Service Manager (IFM) will seek input from a number of passengers, whose seat
226
numbers (across all cabins) have been identified by the airlines market research
department prior to departure. The CSM/IFM will ask the passenger to undertake
the survey, and if the passenger agrees, an in-flight survey form is provided.
The survey asks passengers about their current flight and seeks the customer’s
opinions on their experience throughout the flight from time of booking, through the
passenger check-in process, lounge experience, boarding, in-flight meals and
entertainment, crew attentiveness, and so forth.
Multiple flights across the airline’s network are surveyed on an ongoing basis and
results compiled on a monthly basis. Again, with the assistance of independent
market research agencies, individual carrier results are combined with other carriers
in order to benchmark against competitors and analyse general trends in the travel
industry.
References
Baldanza, B 2001, ‘The evolution of customer segmentation’, in GF Butler & MR Keller (eds),
Handbook of airline strategy: public policy, regulatory issues, challenges, and solutions, McGraw
Hill, New York, pp. 361-372.
Belobaba, P 1998, ‘Airline differential pricing for effective yield management’, in GF Butler &
MR Keller (eds), Handbook of airline marketing, McGraw Hill, New York, pp. 349-361.
Berardino, F 1998, ‘Integrating airline strategy and marketing’, in GF Butler & MR Keller
(eds), Handbook of airline marketing, McGraw Hill, New York, pp. 105-116.
Bieger, T & Wittmer, A 2006, ‘Air transport and tourism – perspectives and challenges for
destinations, airlines and governments’, Journal of Air Transport Management, vol. 12, no. 1, pp.
40-46.
Denzin, NK & Lincoln, YS 2003, ‘Introduction: the discipline and practice of qualitative
research’, in NK Denzin & YS Lincoln (eds), The landscape of qualitative research: theories and
issues, Sage Publications, Thousand Oaks, CA, pp. 1-46.
Doganis, R 2002, Flying off course: the economics of international airlines, 3rd edn, Routledge,
London.
UK.
Drummond, G & Ensor, J 2005, Introduction to marketing concepts, Elsevier Butterworth-
Heinemann, Oxford, UK.
Fernie, A 2012, AERO2322 Airline Marketing Lecture Notes, Topic 8, Airline marketing planning,
RMIT University, Melbourne.
Graham, A 2014, Managing airports: an international perspective, 4th edn, Routledge, Abingdon,
UK.
Kasarda, JD & Appold, SJ 2014, ‘Planning a competitive Aerotropolis’, in J Peoples (ed),
The Economics of International Airline Transport, Advances in Airline Economics Volume 4,
Emerald Group Publishing, Bingley, UK, pp. 281-308.
Kossmann, M 2006, Delivering excellent service quality in aviation: a practical guide for
internal and external service providers, Ashgate Publishing, Aldershot, UK.
Kurtz, DL, MacKenzie, HF & Snow, K 2010, Contemporary marketing, Nelson Education,
Toronto.
McDaniel, CD & Gates, RH 1998, Marketing research essentials, 2nd edn, South-Western College
Publishing, Mason, OH.
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Mouawad, J 2013, The race to build a better business class, The New York Times, August 3,
viewed 2 June 2016, <http://www.nytimes.com/2013/08/04/business/the-race-to-build-a-
better-business-class.html?_r=0>.
Neelankavil, JP 2007, International business research, ME Sharpe, Inc, Armonk, NY.
Pervez, A 2007, Marketing is king: real world marketing to build relationships, Morgan James
Publications, Garden City, NY.
Ramaswamy, VS & Namakumari, S 2013, Marketing management global context: Indian
perspective, 5th edn, McGraw Hill Education, New Delhi.
Wensveen, J 2011, Air transportation: a management perspective, 7th edn, Ashgate Publishing.
Farnham, UK.
Wrenn, B, Stevens, RE & Loudon, DL 2007, Marketing research: text and cases, Haworth Press,
Binghamton, NY.
Zarcadoolas, C, Pleasant, A & Greer, DS 2006, Advancing health literacy: a framework for
understanding and action, Jossey-Bass, San Francisco.
228

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Airline Operations Management

Published by SEH College,

Associate Professor Tom Steiner

Greg Plumb Instructional Design

Geoff Marchiori Desktop Publishing

Published in Australia, 2016

THE GLOBAL AIRLINE INDUSTRY ............................................................................................. 3

STARTING AN AIRLINE AND AIRLINE ECONOMICS AND FINANCE..................................... 27

AIRCRAFT ECONOMICS AND PERFORMANCE EVALUATION .............................................. 69

AIRLINE PRODUCT PLANNING AND DESIGN ......................................................................... 90

STRATEGIC AIRLINE ALLIANCES ......................................................................................... 102

AIRLINE PASSENGER PRICING AND DISTRIBUTION .......................................................... 163

AIRLINE PASSENGER REVENUE MANAGEMENT ................................................................ 189

AIRLINE PASSENGER FORECASTING .................................................................................. 208

AIRLINE PASSENGER RESEARCH ........................................................................................ 216

Deregulation and Liberalisation

A Passenger and Air Cargo Business

Demand for Airline Services

5Reproduced in accordance with the Wikimedia Creative Commons Attribution License,

The Travel Decision

The Nature of the Airline Product

A Brief history of the Global Airline Industry

7Reproduced as per the Wikimedia Creative Commons Attribution License,

8Reproduced as per the Wikimedia Creative Commons GNU Attribution License,

Supersonic services commenced on 21 January 1976 with simultaneous operations – British

11Reproduced as per the Wikimedia Creative Commons Attribution License,

The impact of US deregulation and terrorism…..

Coordination and Regulation of the Industry

 Representation: IATA aims to improve understanding of the air transport industry

Abeyratne, IR 2004, Aviation in crisis, Ashgate Publishing, Aldershot, UK.

Starting an Airline - The Operational Arena

Domestic, International or Both?

High Cost High Revenue

Source: Fernie (2011, p.14).

 Low Cost Carriers

o by winning share of the existing travel market from customers motivated by

Low Cost High Income

 Non-unionised workforce  Targets leisure travel market

Source: Fernie (2011, p.15).

Low Cost High Income

 Non-unionised workforce  Targets value driven business travellers

Source: Fernie (2011, p.17).

Airline Industry Regulatory Issues

Air Services Agreements (ASAs)

International Air Services Commission

Airline Business Plans

Airline Financing, Risk and Insurance

Risk and Insurance

Airline Performance Metrics

Expenditure per ASK

Structure of Airline Costs

 Depreciation and amortization:

24 Reproduced in accordance with the Wikimedia Creative Commons Attribution License,

27Reproduced in accordance with the Wikimedia Creative Commons Attribution License,

Airline Cost Allocation Methodology

Methods of Cost Allocation

Economies of Scale, Scope and Density in Airline Operations

The Influences of Airline Pricing Decisions

Volatility in Airline Profitability

Figure 3.1. Aircraft weight definition., Source: Radnoti (2002, p. 56).

Airline Fuel Conservation and Hedging

Airline Breakeven Load Factors