SAA finds balance between planning and dealing with unforseen difficulties18 January 2016
Traffic trends can be affected at a moment's notice by anything from an environmental disaster to an unexpected disease outbreak, making it crucial for airlines to be able to think on their feet. But in such a capital-intensive industry, how do operators find the balance between planning in advance and remaining agile? Elly Earls meets South African Airways' Sylvain Bosc to find out.
Airline traffic trends can be affected by anything from a disease outbreak to falling fuel prices or political instability, making it impossible for operators to know whether there's something just around the corner that could make a route completely unviable. Yet while staying agile and ready to react to changing market conditions at any moment is key to route-planning success, it's equally crucial, in such a capital-intensive business, to think ten or even 15 years into the future. So how, in a sector that is also becoming more competitive by the day, can airlines find the balance between planning ahead and thinking on their feet?
Anything and everything that affects people's lives affects aviation traffic trends, whether that's a disease epidemic in West Africa (the Ebola outbreak, for example, halved the number of tourists from certain markets to come into Botswana for game drives, despite the fact that the country was eight hours away by plane from the nearest Ebola case), variations in commodity prices, exchange rates or fuel prices, a thriving or struggling economy, or political instability in a certain region.
"There's not a day that goes by where things happen exactly the way we think they're going to happen," Sylvain Bosc, chief commercial officer for South African Airways (SAA), neatly puts it.
On the other hand, the aviation business is one that's hugely capital-intensive, making it just as critical for airlines to plan their routes and the assets they will need to fly them between ten and 15 years in advance, as it is to be able to react almost instantaneously if a terror alert, diease outbreak or earthquake is registered somewhere in the world. Unsurprisingly, this means the network planning process is far from straightforward.
A three-stage approach
It starts, according to Bosc, with the very long-term view. "Ten to 15 years in advance, we need to know what kind of assets we want to operate (leased or owned) and broadly what the network will cover," he explains. "That will let us know our projected capital expenditure and therefore our financial requirements."
Next, once financing has been secured, backed by high traffic numbers, it's time to drill down further into a more detailed allocation of assets, roughly evaluating how many resources will be flown to how many destinations. "That is your high-level five-year view," Bosc notes.
Step three, two to three years ahead of time, is to put together an implementation plan of the strategy that's been worked out (with exact gauge and frequency projections), which must be reviewed on a constant basis, with each route being monitored to ascertain exactly how it performs.
And finally, the entire strategy cycle, including the ten-to-15-year view, the five-year view and the two-to-three-year view has to be reviewed annually and revalidated by the airline's shareholders.
"The shareholders always need to be aware of the capital requirements and also the potential risks associated with the strategy that's been implemented," Bosc emphasises. "The airline business is an extremely risky one because you have very expensive assets and very fickle traffic trends, so it's crucial to have the full support of your shareholders because you will need it if anything goes wrong."
Indeed, for Bosc, one of the biggest challenges of long-term route planning is balancing the need to achieve growth with the equally important requirement to mitigate against the risks inherent in the aviation business. "Everyone is pushing you from all directions for growth but you need to plan in a way that will be reversible; you need to build in possible exit strategies in the event that growth you're being promised doesn't materialise," he explains. "In other words, you need to grow, but you need to do it in a responsible fashion, with the possibility to shrink the business back to its original form or reallocate assets."
Connectivity and logistics
Key factors airlines must take into account when planning route networks are whether new paths contribute to the overall connectivity of the system, where code sharing fits into the picture and the logistical issues associated with potential new routes. And when it comes to the latter, the most important questions to ask, according to Bosc, relate to the aircraft itself.
"We need to know what size of aircraft we need, what capability we need (will we be flying long distances or will we remain in the region?) and how often the aircraft will be flying (shall we have a big aircraft once a day or two small aircraft twice a day?)," he explains.
The rest tends to take care of itself. "Most airports can accommodate any aircraft and have very competent service providers that you can choose from to handle your local line maintenance, ground handling, catering and so on," he notes. "It's a very sophisticated logistics environment, usually handled by third parties. There's nothing too complex for airlines to manage there."
Ensuring any new route adds value to an airline's global network, as well as making sense commercially on its own, is also crucial to route-planning success. "We are not interested in starting anything that doesn't add to the connectivity of our network," Bosc stresses, adding that working with other airlines is often key to achieving this.
"Often, a route cannot make a profit unless you add enough connections to it and while you can provide some of these through your own hub, very often you also need connections at the other end of the route, and that's where code sharing is critical."
For example, SAA's collaboration with JetBlue in the US is the only thing that enables the airline to make a profit in the US. "JetBlue offers us connectivity into the entire US territory from JFK Airport and if that relationship went wrong, we would either have to find a new partner at JFK or terminate the route altogether," Bosc says. "Code sharing is very tightly intertwined with route planning because often if there's no partnership, it's almost impossible to make sense of a route. Very few markets are big enough to command self-sustained point-to-point capacity."
With so many factors to take into account, forecasting and modelling tools like those provided by Sabre Airline Solutions can be a great help when evaluating future opportunities. Not only can these technologies tell airlines how much traffic a particular route is expected to generate, they can also calculate how much traffic they can expect to recapture from competing airlines and how much a new route is likely to stimulate the market, as well as helping to maximise passenger connections and determine the optimal alliance and code-share options. However, no software tool is a silver bullet; these systems must be used with care and their results combined with human input.
First, it's crucial to ensure the correct information is put into the system, according to Bosc. "The system only spits out the numbers based on the input you entered, so you need to make sure you're not leading it into telling you something incorrect," he stresses.
And second, the system's results must be combined with human insight. "We can't take the information generated as gospel," Bosc adds. "We need to challenge it and understand what lies behind the numbers."
For smaller airlines, this might sometimes mean bringing in external input from consultants who can look at things in a different way to the company's in-house team. "What you're trying to do is outsmart your competitors and see opportunities where others don't see them, so while you need to have skills in house, from time to time you also need some fresh input from international experts to challenge the team," Bosc believes.
Competition heating up
Add to all the challenges inherent in long-term route planning the fact that the worldwide aviation market is more competitive than it's ever been, and smaller-tier airlines have their work cut out for them when it comes to finding profitable routes.
"It's always been the case that there's been competition between carriers, but with mega-carriers adding so many aircraft relentlessly and capacity piling up, it's getting to the point where smaller, second-tier airlines are really struggling to compete as there are very few routes where they can enjoy sustainable yields," Bosc remarks.
So what's the solution? For Bosc, it's twofold - one, make sure costs are under control in order to compete with the fares offered by the mega-carriers, and two, create an excellent value proposition for the customer.
"The customer needs to be willing to pay a bit more to fly direct [through a smaller-tier airline] than to fly through a hub [with a mega-carrier], which is going to be a little bit longer," Bosc elaborates. "So you need to make sure your airport is outstanding, your on-board experience is unique and your crew is caring and professional. The airline business was always very competitive but those mega-carriers, particularly from the Middle East, are putting tremendous pressure on existing carriers to up their game."
Working closely with airports is one way for airlines to really stand out, and according to Bosc it's a relationship that's getting easier to manage. "I've noticed that airports are really going the extra mile now to offer better customer service on the ground, and also to have a better and more robust engagement with airlines, ensuring their mandates are aligned and that together they offer a similar service to the passenger," he notes. "This has been a very positive development over the past few years."
Route planning is an incredibly complex discipline, affected by everything from economic trends to unexpected disasters and growing competition from other airlines. Yet, by working closely with shareholders, airports and other carriers, keeping costs down and balancing technology with human input - as well as finding a balance between planning well in advance and re-evaluating strategies on a regular basis - there's no reason even smaller airlines can't put together a network that's profitable and ready to react to market conditions that could change at any moment.