Description
A business strategy is the means by which it sets out to achieve its desired ends (objectives). It can simply be described as a long-term business planning.
Airline Business Strategy
Driver for Aircraft Financing
Dr Emre Serpen
Executive Vice President and Head of Airline Practice
29 November 2012
Realizing the vision together
InterVISTAS is the Leading Aviation Consulting
Specialist – Exclusively Focused on Aviation
2
• Parent company Royal Haskoning/DHV
has strong aviation engineering and
consulting component and over 9000 staff
worldwide;
• Established in 1997;
• Over 400 clients worldwide;
• Project experience in 60 countries;
• 80 professionals in 10 offices;
• Extensive airline expertise;
• Airline process model;
• Extensive airline and airport experiences
worldwide.
Realizing the vision together
3
InterVISTAS’ Client Experiences
Team Members’ Client Experiences: 60
+
Airlines
Sectors
Selected current/recent
clients
•Qantas
•Malaysian Airlines
•Garuda
•Turkish Airlines
•MAZ Holding
•DAS Holding
•Oman Airways
•Sri Lanka Airlines
•RAK Airlines
•Royal J ordanian
•Porter Airlines
•Etihad
•British Airways
•Amadeus
•Belleair
Regions
•Europe
•Middle East
•South Asia
•Eastern Europe
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Our Airline Practice Service Lines are Focused on Airline
Strategy and Airline Performance Improvement
Strategy – Develop strategy, feasibility studies and
business planning
– Market Forecasting (Airline, Airport, MRO, Cargo)
– Start up Airline and MRO Feasibility and Business Plan
– Mergers and Acquisitions Planning
Network and Fleet Planning – Develop and
optimise network and route plans for airlines
– Route Planning and Schedule Development, Alliances
– Hub Design and Optimization, Slot Remarketing
– Fleet Planning, Aircraft Leasing and Remarketing
Financial Services – Evaluate airline investment
opportunities
– Due Diligence (Airline, Airport, MRO, Cargo, GH)
– Privatization and Spin-off and Financing of Airline, MRO, Pilot
School, GH, Cargo
IT Strategy
Strategy and Finance Performance Improvement
Commercial Improvement – Airline revenue
improvement
– Pricing and Revenue Management
– Marketing, Sales and Distribution
– Technology Solutions supporting revenue growth
Operations Improvement – Airline
productivity improvement and cost reduction
– Diagnostic and Cost Reduction
– MRO
– Crew Resource Management
– Integrated Operations Control
Restructuring & Change Management –
Airline transformation and turnaround
– Restructuring (Airline, MRO, Cargo, Aerospace)
– Start up Implementation
– Performance Management
– Organization Improvement and Change Management.
IT Implementation
Realizing the vision together
Stakeholders Require Comprehensive Business Plan Prior
to Sanctioning Fleet Decisions
5
Reasons for airlines’ strategy review projects often are prompted by fleet
financing:
• Delayed fleet renewal decisions causes airlines to fly operationally
expensive aircraft with high and maintenance costs.
• Governments not willing to provide funds for flag carriers with
operating losses and require detailed business plan.
• Current conditions makes fleet financing difficult for many airlines.
They cannot raise finance from local banks and they need to access
capital markets.
• Start up carriers below profitability targets are not funded by
owners/holding companies.
• Incorrect fleet decisions, increased competitor activity and unrealistic
growth rates can cause stakeholders to review risk exposure and
require detailed business plans
Profitability forecast and development of a bankable business plan is critical
for clients to raise finance for aircraft renewal.
Realizing the vision together
Strategy, Performance Improvement, Fleet Plan and often
Interdependent Introducing Risk to Business Plan
6
Profit forecast, business risks influence
fleet financing for fleet renewal decisions
• Execution effectiveness and financial
results
• Market and competitive changes, strategic
options (mainline, regional, cargo, MRO,
etc.)
• Changes in route structure and alignment
of fleet with changes in strategy and
network
• Alignment and improvement of commercial
and operational activities
• Forecast of marketshare and route
profitability based on variable contribution
• Business plan: revenue, cost, profitability
forecast
• Assessment of risks; market, competition,
turnaround delivery, fuel costs, etc.
• Aircraft sourcing, availability, vintage, buy
versus lease
• Financial analysis sources and application
of funds
Breadth of depth of analysis, accurate
assumptions, implementable strategies and
improvement actions are key for the quality
of the business plan
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Benchmarking Provides Insights to Execution Effectiveness
and Effectiveness and Results of the Current Strategy
• Compare commercial performance with
peers and competitors
• Passenger numbers, capacity (ASK),
compare airline’s growth with its peers and
competitors
• Revenues
RASK, load factor, yield
Cargo revenue and ancillary revenues
• Costs, CASK
Fuel, maintenance, ground, crew, etc.
• Productivity benchmarking
Number of employees per passenger
Employees per aircraft, employees per ASK
Cockpit cabin crew productivity
• Follow up gaps with further detailed
diagnostic to identify improvement areas
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Sri Lankan
Jet Airways
Air India
Royal Jordanian
Gulf Air
Malaysian
Thai
Qatar
Etihad
Emirates
62%
64%
66%
68%
70%
72%
74%
76%
78%
? 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
Stage Length (km)
Load Factor
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Poor Revenue Performance
often driven by markets, capacity, product quality, fleet utilisation, commercial
strategy and management expertise
• Review functions contributing to
revenues
• Network revenue performance
Marketshare by revenue quality
Low share, High yield: improve LF, better
RM
High Share Low Yield’: improve RM
Low share low Yield: restructure
Poor optimisation 2% - 10%
Reasons for poor route performance
Route restructuring costs
• Pricing and RM improvement
Lack of management expertise, tools
Proactive, strategic, performance focused
Opportunity 2% - 5%
• Ancillary Revenues
Full service 5%
Low cost/Regional 20%
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Client Market Clusters, International
0%
20%
40%
60%
80%
100%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Avg Fare Relative to FFY
M
a
r
k
e
t
S
h
a
r
e
HIGH SHARE
LOW RELATIVE YIELD
HIGH SHARE
HIGH RELATIVE YIELD
LOW SHARE
LOW RELATIVE YIELD
LOW SHARE
HIGH RELATIVE YIELD
64%
62%
54%
77%
60%
71%
55%
53%
58%
78%
52%
54%
54%
58%
Client Market Clusters, International
0%
20%
40%
60%
80%
100%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Avg Fare Relative to FFY
M
a
r
k
e
t
S
h
a
r
e
HIGH SHARE
LOW RELATIVE YIELD
HIGH SHARE
HIGH RELATIVE YIELD
LOW SHARE
LOW RELATIVE YIELD
LOW SHARE
HIGH RELATIVE YIELD
64%
62%
54%
77%
60%
71%
55%
53%
58%
78%
52%
54%
54%
58%
0% 5% 10% 15% 20% 25%
Allegiant
Vueling
Flybe
AirAsia
Jazeera Airways
Air Arabia
Air Berlin
PIA Pakistan Int.
Austrian
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Airlines with High Costs Route Structure
typically driven by wrong fleet mix, low fleet utilisation, low staff productivity,
high MRO, crew, ground handling, distribution costs and overheads
• CASK benchmarking can highlight
opportunities to reduce cost and
improve productivity
• Maintenance costs (9% costs)
Benchmark maintenance costs
Hangar/engine component
TAT/costs
Materials/supply chain outsourced
contracts
• Pilot/Cabin crew costs (3-10% roster)
Improve productive hours
Basings/reserves
• Ground handling costs (5% of cost
base)
Turn times/resource optimisation
Contract improvements
• Distribution (8% of costs)
Direct distribution/lower cost channels
GDS contracts
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Item Example Client Industry Practice
Fixed Rate – Routine Labor C8 - $800,000 C8 - $635,000
T&M Man Hour Rate $60 / manhour - Hangar
$80 / manhour – Engineer
$50-50 /manhour –
Technician
$70-80 /manhour - Engineer
Material Premium New parts – CLP plus 13%,
cap of $3K plus $150 admin
fee
Consumables extra
New parts – CLP plus 10%,
cap of $2K, No admin fee
Consumables included up
to $100 per task
Subcontracted Services Invoice plus 15% plus
admin fee of $150
Invoice plus 8%, no admin
fee
Turn-around-Time (TAT) 60Days 42 Days
TAT Penalty None $4000-$5000 per day
Warranties 12 months or 4,300 flights
hours, whichever 1
st
.
12 months or 3,000 flights
hours, whichever 1
st
.
Overall Value Mediocre
Realizing the vision together
Review of Market Growth, Market Share, Competitors, Fares
provides insights into routes with opportunities and weaknesses
• Airlines position in markets
Year on year marketshare growth
Marketshare growth relative to market
growth
Shrinking share in growing markets
Marketshare of high yield markets
Year on year fare changes
Gain or protect marketshare at the
expense of reducing fares/yield
• Capacity growth, competitor
activities markets with share gap
• Competitors gaining share at own
hub
• What are the competitive
opportunities and threats from other
airline
• Market forecasting, focus on growth
markets, yield and circuitry
• Development of network and route
scenarios
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Realizing the vision together
Network Design, Route Development and Fleet Alignment is
Key to Improve Airline Profitability
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• Test different scenarios and business
models and evaluate respective
differences in variable contribution towards
selection of the best model
• Align routes and frequencies markets with
growth, and yield advantages
• The route structure that maximises
marketshare, and variable contribution
improving competitiveness is selected
• Identify key changes to Long Haul,
Medium Haul, Regional and Domestic
routes
• Improve 6
th
freedom traffic and revenues
• Identify key changes for better use of code
shares, alliances and joint ventures
• Changes in the fleet plan is driven by the
optimal route structure – iterative process
Realizing the vision together
Schedule Improvement, Next Season
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• Focus on current network and improvements
that can be feasibly implemented subject to
airport and other operational constraints of
the airline.
• Financial performance of the current
network can be evaluated and routes can be
classified according to the yield and
Revenue per Available Seat Kilometre
(RASK) achieved on routes.
• Focus will be on improving overall RASK,
increase in business class routes and
reduce volatility of passenger throughputs.
• Quick-hit improvements to the schedule are
identified. This can include changes to
departure times or introduction of new flights
given no new fleet in 2013).
• Operational constraints, such as overnight
maintenance downtime requirements,
crewing restrictions, slot and bilateral
restrictions, etc.
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Network Design uses Candidate Aircraft Type and use of Accurate
Aircraft Data is Essential
aircraft purchase, lease and operational costs
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• Use of accurate operational and ownership
costs
Aircraft selection list prices
Optimised scenario actual price
Actual MRO, Fuel, Crew costs
Use if actual block hours
• Aircraft replacement – fuel, maintenance
costs
• Many airlines delay fleet replacement
decisions with impact on financial
performance
• Lack of financial resources may force
airlines to use vintage aircraft, or aircraft
with high operational costs
• Leverage geographic advantage for NB use
reduce commercial risk
• Right NB/WB ratio to for hub operations
• Fleet commonality for reduced costs
• Buy versus lease calculations
Actual lease and purchase prices and bank rates
Block Hours by Aircraft Type
FY2012 FY2013 FY2014 FY2015 FY2016
320 22,677 35,391 35,740 36,286 38,878
332 29,261 38,809 53,221 62,553 68,125
343 29,629 24,734 14,389 7,143 2,590
81,567 98,934 103,350 105,983 109,593
Average Utilization
FY2012 FY2013 FY2014 FY2015 FY2016
320 10.8 11.4 10.9 11.0 11.8
332 14.3 13.7 14.3 13.7 14.3
343 13.5 12.9 12.1 13.6 14.2
12.9 12.6 12.6 12.7 13.3
ATK by Aircraft Type
FY2012 FY2013 FY2014 FY2015 FY2016
320 236,455,883 395,899,079 399,489,366 405,245,130 434,944,089
332 807,967,280 1,091,350,985 1,552,586,802 1,866,583,715 2,051,262,199
343 1,022,549,024 881,844,737 527,312,858 265,463,424 96,647,409
2,066,972,187 2,369,094,801 2,479,389,026 2,537,292,269 2,582,853,697
A 320
Operating Cost Category Measurement FY2012 FY2013 FY2014 FY2015 FY2016
FUEL & OIL Per Block Hour 1,999 2,039 2,080 2,122 2,164
LANDING Per Departures 439 448 457 466 475
HANDLING Per Departures 900 918 936 955 974
OVERFLYING Per Departures 303 309 316 322 328
AIRCRAFT MAINT Per Block Hour 753 791 830 872 915
INFLIGHT CATERING Per Pax 8.0 8.1 8.3 8.5 8.6
AIRCRAFT RELATED % of Block Hours, Cost per Month 3,022,321 4,064,446 4,288,890 4,458,607 4,489,891
CREW LAYOVER Per Flight 1,043 1,063 1,085 1,106 1,129
AREA/OTHER % of ATK 6,879 7,885 8,252 8,444 8,596
CORPORATE OVERHEADS % of ATK 2,414 2,767 2,896 2,964 3,017
A 330
FY2012 FY2013 FY2014 FY2015 FY2016
FUEL & OIL Per Block Hour 4,371 4,459 4,548 4,639 4,732
LANDING Per Departures 1,229 1,253 1,278 1,304 1,330
HANDLING Per Departures 2,778 2,833 2,890 2,948 3,006
OVERFLYING Per Departures 1,609 1,642 1,674 1,708 1,742
AIRCRAFT MAINT Per Block Hour 1,401 1,298 1,193 1,205 1,265
INFLIGHT CATERING Per Pax 10.7 10.9 11.1 11.3 11.6
AIRCRAFT RELATED % of Block Hours, Cost per Month 4,665,661 6,577,686 9,032,459 11,269,780 12,216,526
CREW LAYOVER Per Flight 3,168 3,232 3,296 3,362 3,429
AREA/OTHER % of ATK 6,879 7,885 8,252 8,444 8,596
CORPORATE OVERHEADS % of ATK 2,414 2,767 2,896 2,964 3,017
A 340
FY2012 FY2013 FY2014 FY2015 FY2016
FUEL & OIL Per Block Hour 5,313 5,419 5,528 5,638 5,751
LANDING Per Departures 1,657 1,690 1,724 1,758 1,793
HANDLING Per Departures 3,523 3,593 3,665 3,738 3,813
OVERFLYING Per Departures 2,624 2,676 2,730 2,784 2,840
AIRCRAFT MAINT Per Block Hour 1,401 1,298 1,193 1,205 1,265
INFLIGHT CATERING Per Pax 13.6 13.8 14.1 14.4 14.7
AIRCRAFT RELATED % of Block Hours, Cost per Month 5,013,844 4,455,852 2,863,950 1,352,374 939,733
CREW LAYOVER Per Flight 3,593 3,664 3,738 3,812 3,889
AREA/OTHER % of ATK 6,879 7,885 8,252 8,444 8,596
CORPORATE OVERHEADS % of ATK 2,414 2,767 2,896 2,964 3,017
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Alignment of Commercial Processes with Business Model
Changes for Improved Revenue
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• Alignment of commercial processes with the new
business model and route strategy
• Key changes in the product strategy
• Critical changes in pricing strategy, fare matrix,
pricing review for RASK increase
Pro-active pricing processes
Reactive pricing processes
• Improvements in revenue management
Diagnostic assessment
LF forecasting
Critical flight management
• Revenue planning and revenue delivery
• Pricing and revenue management performance
measures
• Improvements in ancillary revenues
• Distribution benchmarking, segments, unit revenue,
unit cost per channel, as is costs
• Changes in distribution mix
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Alignment and Improvement of Airline Operational Activities
• Opportunities to align operations with the
business model changes and reduce costs
• Target CASK to align with target revenues
• Review and improve direct and indirect costs
• Determine initiatives for productivity
improvement and unit cost reduction to meet
target CASK
• Organisational improvement
• Productivity improvements
Fleet (utilisation)
Maintenance
Crew
Ground handling costs
Overheads and other areas
15
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Operations Cost Reduction and Productivity Improvement:
Crew and Operations Control
• Review crew assignment process and costs
• Review flight operations identify
improvement opportunities
• If needed, identify opportunities in
improvements in crew productivity
• Identify changes in the crew manpower plan
• Operations control centre diagnostic
• Identify inefficiencies leading to suboptimal
decision making
• Identify improvements in processes and
improvements in co-location of IOC functions
• Provide recommendations that relate to
organisation, systems and performance
management that relate to:
Flight operations
Crew optimisation
Integrated operations control
16
Realizing the vision together
Operations Cost Reduction and Productivity Improvement:
MRO
• Alignment of the operational activities support
business model changes – MRO costs and
productivity improvement
• Benchmark MRO costs and productivity,
operation, turnaround times, material costs and
productivity
• Diagnostic of key MRO areas:
Hangar
Line maintenance
Supply chain
Engineering and planning
Other processes
• Benchmarking of engine, OM, component
contracts
• Restructure processes for productivity
improvements at shops
• Opportunities for the growth of third party
revenues
• Business plan
17
Realizing the vision together
Air Cargo Market and Competitor Analysis and Market Size
Forecasting
SAMPLE DELIVERABLES
18
• Compare market share and capacity share
with competitors
• Are there opportunities to improve route
performance
• Market forecasting to focus on best return
markets
Air cargo trade lane analysis
Conduct workshops with freight forwarders and
customers
Feedback for improving market share with
customers
• In executing market analysis and forecasting
work, InterVISTAS uses its proprietary data
sources from industry research and regular
contact with related associations
• Cargo markets are particularly challenging due
current economic conditions – with many
freighters grounded
39,555
32,178
37,038
45,264
66,007
64,204
66,788
70,541
71,320
89,023
107,437
?
20,000
40,000
60,000
80,000
100,000
120,000
?
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
T
o
n
n
e
s
Key NE Asia ? Australia Export Tradelane Tonnage
China Hong Kong Japan Group Total 2 per. Mov. Avg. (Group Total)
Example
Tradelane
Analysis
Per country and
import/export direction
Example
Commodity
Analysis
Type of cargo
Example
Market
Forecasting
Route level
Realizing the vision together
Forecast Market Share and Expected Gain for Profitable
Operation of Freighters
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• Determine expected load factor for each
route, regions and system wide, considering
future market growth (from the previous
market forecasting task).
• Analysis include following elements:
Future market sizes
Market share growth based on current load
factors
Cargo capacity growth, driven by the growth of
the passenger fleet
Additional cargo capacity driven by freighters
that may be committed to this route (capacity
and frequency)
Total capacity including competitors operating
this route
• The routes will be prioritized according to
best market share forecast and they will be
used in developing scenarios for network
design.
• Market share forecasting is done using the
InterVISTAS proprietary tools.
InterVISTAS provides proprietary tools
for route level cargo marketshare
forecasting
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Analysis of Air Freight Route and Freighter Scenarios for
Improving Profitable Operation of Freighters and Belly
20
• Scope to design/improve the route structure and
freighter type/number / utilization maximizing route
profitability. Analysis also drives the freighter
performance improvement.
• Criteria will include weighted average, where
weights include expertise and experience of
InterVISTAS team.
• For selected routes deeper analysis will be
executed:
Where the current share is less than expected share,
analysis is executed to establish LF growth at the target
routes in relation to market size
• Route scenarios will be subsequently tested for
freighter types that will be analyzed in the next task
• Significant growth in WB aircraft increasing
availability of belly capacity
• Increasing fuel price causing intermodal shift
towards maritime
• Warehouse development costs are significant
Market and CapacityDevelopment
2012 2013 2014 2015 2016
Origin: CGK Market forecast CGK-pvg 31,337 34,453 36,933 39,610 42,434
Destination: pvg GA Capacity on CGK-pvg 4,260 4,380 6,588 8,760 8,784
Competition Capacity on CGK-pvg 0 0 0 0 0
2012 2013 2014 2015 2016
Current Load Factor: 31% Desired belly LF on CGK-pvg 37% 43% 49% 54% 60%
Desired Load Factor: 60% GA Capacity 4,260 4,380 6,588 8,760 8,784
Loads given current LF on CGK-pvg 1,338 1,376 2,070 2,752 2,760
Addtional cargo required to reach desired LF on CGK-pvg 244 501 1,130 2,003 2,510
Addtional cargo required for 2 weekly Full Freighter - - - 4,732 4,732
2012 2016
Including NarrowBody Belly (yes/no): no GA Capacity on CGK-pvg 4,260 8,784
Competition Capacity on CGK-pvg 0 0
GA Freighter (2 weekly) 0 6,760
2012 2013 2014 2015 2016
Market share (business as usual) on CGK-pvg 4.3% 4.0% 5.6% 6.9% 6.5%
Market share (high) on CGK-pvg 5.0% 5.4% 8.7% 12.0% 12.4%
Market share when introducing 2 weekly Full Freighter 5.0% 5.4% 8.7% 24.0% 23.6%
Growing LF in equal
steps to desired LF
Useful for ASA with both
wide and narrowbodies
Example:
Route Analysis and Market Share Capture Models
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Results of New Strategy and Improvement/Turnaround Actions
Reflected in the Business Plan
• Revenue forecast
Scheduled seat revenues: route
revenue forecast, market share,
fares, service/schedule quality
Charter revenues
Non seat airline revenues: ancillaries
SBU revenues: third party growth
• Cost Forecast
Direct operating costs
Aircraft ownership costs
Overheads
• Assumptions including
improvements of business benefits
Impact of product improvement on
yields/fares
Impact of productivity and cost
reduction initiatives
21
FY2012 FY2013 FY2014 FY2015 FY2016
Revenue
Passenger Revenue 635,228,571 $ 803,092,806 $ 891,513,937 $ 947,015,305 $ 1,004,265,779 $
Cargo + Ancillary Revenue 109,454,682 131,603,839 147,044,555 156,421,628 163,819,439
Total Revenue 744,683,253 $ 934,696,645 $ 1,038,558,492 $ 1,103,436,933 $ 1,168,085,219 $
Direct Operating Costs
FUEL & OIL 330,660,278 379,040,756 395,681,914 407,196,630 421,122,606
LANDING 20,541,879 21,143,634 21,707,200 22,155,400 23,130,335
HANDLING 44,443,143 45,832,857 47,413,681 48,557,299 50,748,709
OVERFLYING 26,582,867 25,392,457 25,301,630 25,389,360 26,119,396
AIRCRAFT MAINT 99,580,550 110,687,945 110,589,137 115,577,018 124,891,454
INFLIGHT CATERING 36,560,349 40,428,471 42,356,792 43,680,279 45,778,350
Total Direct Operating Costs 558,369,067 622,526,120 643,050,354 662,555,986 691,790,851
Operating Profit/Loss 186,314,186 312,170,524 395,508,138 440,880,946 476,294,368
Operating Margin 25.0% 33.4% 38.1% 40.0% 40.8%
General and Administrative Costs
AIRCRAFT RELATED 152,421,912 179,636,473 192,669,727 203,735,604 205,653,328
CREW LAYOVER 19,807,081 21,624,405 22,483,249 23,222,814 24,301,372
AREA/OTHER 82,549,397 94,291,242 98,893,290 101,267,727 103,100,737
CORPORATE OVERHEADS 28,970,884 33,091,709 34,706,807 35,540,121 36,183,420
Total General and Administrative Costs 283,749,273 328,643,829 348,753,074 363,766,266 369,238,857
Total Costs 842,118,340 951,169,950 991,803,428 1,026,322,252 1,061,029,708
Net Profit/Loss (Airline Operations) (97,435,087) (16,473,305) 46,755,064 77,114,680 107,055,511
Net Margin (from Airline Operations) ?13.1% ?1.8% 4.5% 7.0% 9.2%
Realizing the vision together
Development of the Business Plan with Revenue, Cost and
Profitability Forecasting Including Strategy and Improvement Impacts
22
• Route level business plan for different
freighter types tested at different
frequencies for route profitability for belly
and freighter operations
• Opportunities in reduction of direct and
indirect aircraft-related cost:
Direct costs will include fuel, maintenance,
crew, ground handling, over flight , ownership,
etc.
For belly cost per KG carried will be used. If
airline is allocating other direct and indirect
costs these will be used.
• Profitability forecast will be developed for
belly and freighter operations
• Sensitivity analysis
CGK?PVG (V.V.) by A330 Freighter 2012 2013 2014 2015 2016
Total Operating Revenues
Scheduled Full Freighter Revenue ? 10,869,673 10,869,673 16,304,509 16,304,509
Passenger (belly) Revenue 7,153,070 7,264,308 10,815,246 14,233,240 14,124,143
Total Revenue CGK?PVG (V.V.) 7,153,070 18,133,981 21,684,919 30,537,750 30,428,652
Direct Operating Cost (excluding Ownership)
Fuel ? 6,512,381 6,512,381 9,768,571 9,768,571
Cockpit Crew ? 651,238 651,238 976,857 976,857
Maintenance ? 781,486 781,486 1,172,229 1,172,229
Depreciation ? 2,050,194 2,050,194 3,075,291 3,075,291
Insurance 85,425 85,425 128,137 128,137
ATC/LDGcharges ? 673,367 673,367 1,010,050 1,010,050
Sales Commision ? 156,900 156,900 235,350 235,350
Total Direct Operating Cost ? 8,618,472 8,618,472 12,927,708 12,927,708
Total Indirect Operating Cost ? 2,292,518 2,292,518 3,438,778 3,438,778
Total Full Freighter Operating Cost ? 10,910,990 10,910,990 16,366,485 16,366,485
Passenger (belly) Operating Cost 7,653,167 7,942,968 12,082,153 16,245,108 16,469,692
Total Operating Cost CGK?PVG (V.V.) 7,653,167 18,853,958 22,993,143 32,611,593 32,836,178
Profit (Belly Space, US$) ?500,097 ?678,660 ?1,266,906 ?2,011,867 ?2,345,550
Profit (Full Freighter, US$) ? ?41,317 ?41,317 ?61,976 ?61,976
Total Profit (US$) ?500,097 ?719,977 ?1,308,224 ?2,073,843 ?2,407,526
Profit Margin (Belly Space, %) ?7.0% ?9.3% ?11.7% ?14.1% ?16.6%
Profit Margin (Freighter, %) ?0.4% ?0.4% ?0.4% ?0.4%
Total Profit Margin (%) ?7.0% ?4.0% ?6.0% ?6.8% ?7.9%
Business plan method based on marketshare, fare ,
operating and capital costs for freighter and belly
Business plan is based on directional (inbound and
outbound route level profitability
Realizing the vision together
Minor Variation in Modelling Assumptions can make Significant
Difference on Profitability/Financial Forecast
23
• Due diligence questions
Market growth rates
Competitor capacity growth rates
Average fares
Fare improvement as a function
product improvement
Ancillary revenues
SBU third party market
share/revenue growth
assumptions
Fuel costs: current and future
Maintenance costs:
accuracy/variations
Aircraft ownership costs: list,
actual
Depreciation rates
• Sensitivity analysis: major
revenue and cost assumptions
Baseline Shock Scenario
Key Statistics 2011 2015 2011 2015
Passengers 262,968 2,891,151 253,274 2,768,001
Revenue 53,052,618 $ 652,142,240 $ 43,982,830 $ 537,292,097 $
Operating Expenses 69,714,983 $ 509,015,566 $ 72,540,299 $ 528,936,974 $
Profit (Loss) (16,662,366) $ 143,126,674 $ (28,557,470) $ 8,355,123 $
Operating Margin ?34.5% 24.6% ?71.4% 1.7%
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Key Statistics 2011 2015 2011 2015 2011 2015 2011 2015
Passengers 262,968 2,891,151 262,968 2,891,151 253,274 2,768,001 262,968 2,891,151
Revenue 45,978,935 $ 565,189,941 $ 53,052,618 $ 652,142,240 $ 50,749,419 $ 619,952,419 $ 53,052,618 $ 652,142,240 $
Operating Expenses 69,264,058 $ 504,714,962 $ 72,137,108 $ 527,628,489 $ 69,537,333 $ 507,031,861 $ 70,701,516 $ 516,218,616 $
Profit (Loss) (23,285,123) $ 60,474,979 $ (19,084,491) $ 124,513,751 $ (18,787,914) $ 112,920,559 $ (17,648,898) $ 135,923,624 $
Operating Margin ?55.7% 12.0% ?39.6% 21.4% ?40.7% 20.4% ?36.6% 23.3%
Scenario 1 – Fares are discounted XX percent from MIDT market
fares versus XX percent in the Baseline scenario
Scenario 2 – Fuel price of $XX/kg consumed increases by XX
percent
Scenario 3 – Market introduction stimulation rates are lowered
by XX percent
Scenario 4 – Overhead costs increase from X percent to XX
percent of all other costs
Shock Scenario – All of the above factors occur at once,
showing a worst case scenario
Realizing the vision together
Financial Analysis for Determination of Sources and
Application of Funds for Aircraft Financing
24
SOURCES AND APPLICATION OF FUNDS [BLEND]
FUNDING REQUIREMENTS
1. Capital Expenditure
Client Airline
Equity funding requirement for Refleeting (Generic AC Blend Scenario ? bought AC only)
including current year cabinmod ($XX m)
Client SBU's
Information Technology
SBU Engineering
XXX
SBU Cargo
Airport Services XX
Airport Services ? XX
Total Equity funding requirement by SBUs
Total CAPEX
2. Capitalised Cost of Engines Overhauls ? current fleet only
3a. Maintenance Reserves (Net of Recoveries) ? current fleet ? reflected in AC OPS COST
3b. Maintenance Reserves (Net of Recoveries) ? new fleet ? reflected in AC OPS COST
4. Increase in Inventories (from original BP)
5. Increase in Trade Receivables
6. Increase in Trade Payables (from original BP)
7. Repayment of Interest Bearing Liabilities ? Foreign Loans
8. Repayment of Interest Bearing Liabilities ? Local Loans (FY2012/13 ff from original BP)
Total Funding Requirement
SOURCES OF FUNDS
1. ClLIENT GROUP EQUITY INFUSION REQUIREMENT [BLEND]
2. Proceeds of IPO of subsidiary (potential of $ XXm indicated)
3. Proceeds from Disposal of Property, Plant and Equipment
(from original BP)
4. Proceeds from Interest Bearing Loans and Borrowings (from
original BP)
5. Client Profit adjusted for non?cash items
Total Funding Available
NET INCREASE IN CASH
Cash Balance Brought Forward
CASH BALANCE CARRIED FORWARD
# of Months of Operating cost for min cash level
Min. cash liquidity required
Min. cash level ok?
XX GROUP CUMULATIVE EQUITY INFUSION REQUIREMENT ?
BLEND Scenario
Dividend potential to Equity Investor (capped at XX % of Client
Group profit p.A.)
Realizing the vision together
Use of Accurate Assumptions in Aircraft Purchase and
Lease Calculations
25
Purchase & Lease of new aircraft
EQUITY
Required PDP equity narrowbody aircraft
Required Delivery Equity narrowbody aircraft
Interest payments on PDP Debt
Owned Narrowbody Total
Rent, only for 3 new replacement & growth narrowbody aircraft
Deposits (3 months rental)
Maintenance Reserves on new NB fleet only
Leased Narrowbody Total
Owned and interim leased Narrowbody total
Required PDP equity widebody aircraft
Required Delivery Equity widebody aircraft
Interest payments on PDP Debt
Owned Widebody Total
Rent, only for 3 new long term lease replacement widebody aircraft
Deposits (3 months rental)
Maintenance Reserves on new WB fleet only
Leased Widebody Total
Owned and interim leased Widebody total
New Aircraft Total Equity demand (incl. PDP interest)
DEBT
PDP Debt converted into senior loan at Delivery - narrowbody
PDP Debt converted into senior loan at Delivery - widebody
Senior Loan amount at end of fiscal year - narrowbody
Leverage (PDP +Sr Loan) at end of fiscal year - narrowbody
Senior Loan amount at end of fiscal year - widebody
Leverage (PDP +Sr Loan) at end of fiscal year - widebody
Total Seni or Loan at end of fi scal year - fl eet
Fl eet l everage at end of fi scal year
Seni or l oan annui ty payments
Interest payments of Senior loan after Delivery - Narrowbody
Interest payments of Senior loan after Delivery - Widebody
New Ai rcraft Total Fundi ng demand (i ncl . debt i nterest payments)
Principal payments of Senior loan after Delivery - Narrowbody
Principal payments of Senior loan after Delivery - Widebody
Realizing the vision together
Turnaround Implementation including Fleet Renewal
26
• Overall migration plan is used for delivery
of business model changes including
specific projects
Product changes
Route, hub schedule related
Distribution
Relationships between client, airlines and operating
companies (MRO, ground handling, catering)
Organization
Other
• Airlines ability to service debt will be
driven by the effectiveness of new
strategy and on time implementation of
turnaround actions
• Fleet decisions can be delayed by airline
management not committing to
turnaround plan or stake holders lack of
confidence in execution
Thank You!
www.intervistas.com
Please contact Dr. Emre Serpen for any
queries on this proposal.
E-mail: [email protected]
Telephone: +447944163891
doc_910397986.pdf
A business strategy is the means by which it sets out to achieve its desired ends (objectives). It can simply be described as a long-term business planning.
Airline Business Strategy
Driver for Aircraft Financing
Dr Emre Serpen
Executive Vice President and Head of Airline Practice
29 November 2012
Realizing the vision together
InterVISTAS is the Leading Aviation Consulting
Specialist – Exclusively Focused on Aviation
2
• Parent company Royal Haskoning/DHV
has strong aviation engineering and
consulting component and over 9000 staff
worldwide;
• Established in 1997;
• Over 400 clients worldwide;
• Project experience in 60 countries;
• 80 professionals in 10 offices;
• Extensive airline expertise;
• Airline process model;
• Extensive airline and airport experiences
worldwide.
Realizing the vision together
3
InterVISTAS’ Client Experiences
Team Members’ Client Experiences: 60
+
Airlines
Sectors
Selected current/recent
clients
•Qantas
•Malaysian Airlines
•Garuda
•Turkish Airlines
•MAZ Holding
•DAS Holding
•Oman Airways
•Sri Lanka Airlines
•RAK Airlines
•Royal J ordanian
•Porter Airlines
•Etihad
•British Airways
•Amadeus
•Belleair
Regions
•Europe
•Middle East
•South Asia
•Eastern Europe
Realizing the vision together
Our Airline Practice Service Lines are Focused on Airline
Strategy and Airline Performance Improvement
Strategy – Develop strategy, feasibility studies and
business planning
– Market Forecasting (Airline, Airport, MRO, Cargo)
– Start up Airline and MRO Feasibility and Business Plan
– Mergers and Acquisitions Planning
Network and Fleet Planning – Develop and
optimise network and route plans for airlines
– Route Planning and Schedule Development, Alliances
– Hub Design and Optimization, Slot Remarketing
– Fleet Planning, Aircraft Leasing and Remarketing
Financial Services – Evaluate airline investment
opportunities
– Due Diligence (Airline, Airport, MRO, Cargo, GH)
– Privatization and Spin-off and Financing of Airline, MRO, Pilot
School, GH, Cargo
IT Strategy
Strategy and Finance Performance Improvement
Commercial Improvement – Airline revenue
improvement
– Pricing and Revenue Management
– Marketing, Sales and Distribution
– Technology Solutions supporting revenue growth
Operations Improvement – Airline
productivity improvement and cost reduction
– Diagnostic and Cost Reduction
– MRO
– Crew Resource Management
– Integrated Operations Control
Restructuring & Change Management –
Airline transformation and turnaround
– Restructuring (Airline, MRO, Cargo, Aerospace)
– Start up Implementation
– Performance Management
– Organization Improvement and Change Management.
IT Implementation
Realizing the vision together
Stakeholders Require Comprehensive Business Plan Prior
to Sanctioning Fleet Decisions
5
Reasons for airlines’ strategy review projects often are prompted by fleet
financing:
• Delayed fleet renewal decisions causes airlines to fly operationally
expensive aircraft with high and maintenance costs.
• Governments not willing to provide funds for flag carriers with
operating losses and require detailed business plan.
• Current conditions makes fleet financing difficult for many airlines.
They cannot raise finance from local banks and they need to access
capital markets.
• Start up carriers below profitability targets are not funded by
owners/holding companies.
• Incorrect fleet decisions, increased competitor activity and unrealistic
growth rates can cause stakeholders to review risk exposure and
require detailed business plans
Profitability forecast and development of a bankable business plan is critical
for clients to raise finance for aircraft renewal.
Realizing the vision together
Strategy, Performance Improvement, Fleet Plan and often
Interdependent Introducing Risk to Business Plan
6
Profit forecast, business risks influence
fleet financing for fleet renewal decisions
• Execution effectiveness and financial
results
• Market and competitive changes, strategic
options (mainline, regional, cargo, MRO,
etc.)
• Changes in route structure and alignment
of fleet with changes in strategy and
network
• Alignment and improvement of commercial
and operational activities
• Forecast of marketshare and route
profitability based on variable contribution
• Business plan: revenue, cost, profitability
forecast
• Assessment of risks; market, competition,
turnaround delivery, fuel costs, etc.
• Aircraft sourcing, availability, vintage, buy
versus lease
• Financial analysis sources and application
of funds
Breadth of depth of analysis, accurate
assumptions, implementable strategies and
improvement actions are key for the quality
of the business plan
Realizing the vision together
Benchmarking Provides Insights to Execution Effectiveness
and Effectiveness and Results of the Current Strategy
• Compare commercial performance with
peers and competitors
• Passenger numbers, capacity (ASK),
compare airline’s growth with its peers and
competitors
• Revenues
RASK, load factor, yield
Cargo revenue and ancillary revenues
• Costs, CASK
Fuel, maintenance, ground, crew, etc.
• Productivity benchmarking
Number of employees per passenger
Employees per aircraft, employees per ASK
Cockpit cabin crew productivity
• Follow up gaps with further detailed
diagnostic to identify improvement areas
7
Sri Lankan
Jet Airways
Air India
Royal Jordanian
Gulf Air
Malaysian
Thai
Qatar
Etihad
Emirates
62%
64%
66%
68%
70%
72%
74%
76%
78%
? 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
Stage Length (km)
Load Factor
Realizing the vision together
Poor Revenue Performance
often driven by markets, capacity, product quality, fleet utilisation, commercial
strategy and management expertise
• Review functions contributing to
revenues
• Network revenue performance
Marketshare by revenue quality
Low share, High yield: improve LF, better
RM
High Share Low Yield’: improve RM
Low share low Yield: restructure
Poor optimisation 2% - 10%
Reasons for poor route performance
Route restructuring costs
• Pricing and RM improvement
Lack of management expertise, tools
Proactive, strategic, performance focused
Opportunity 2% - 5%
• Ancillary Revenues
Full service 5%
Low cost/Regional 20%
8
Client Market Clusters, International
0%
20%
40%
60%
80%
100%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Avg Fare Relative to FFY
M
a
r
k
e
t
S
h
a
r
e
HIGH SHARE
LOW RELATIVE YIELD
HIGH SHARE
HIGH RELATIVE YIELD
LOW SHARE
LOW RELATIVE YIELD
LOW SHARE
HIGH RELATIVE YIELD
64%
62%
54%
77%
60%
71%
55%
53%
58%
78%
52%
54%
54%
58%
Client Market Clusters, International
0%
20%
40%
60%
80%
100%
10% 15% 20% 25% 30% 35% 40% 45% 50%
Avg Fare Relative to FFY
M
a
r
k
e
t
S
h
a
r
e
HIGH SHARE
LOW RELATIVE YIELD
HIGH SHARE
HIGH RELATIVE YIELD
LOW SHARE
LOW RELATIVE YIELD
LOW SHARE
HIGH RELATIVE YIELD
64%
62%
54%
77%
60%
71%
55%
53%
58%
78%
52%
54%
54%
58%
0% 5% 10% 15% 20% 25%
Allegiant
Vueling
Flybe
AirAsia
Jazeera Airways
Air Arabia
Air Berlin
PIA Pakistan Int.
Austrian
Realizing the vision together
Airlines with High Costs Route Structure
typically driven by wrong fleet mix, low fleet utilisation, low staff productivity,
high MRO, crew, ground handling, distribution costs and overheads
• CASK benchmarking can highlight
opportunities to reduce cost and
improve productivity
• Maintenance costs (9% costs)
Benchmark maintenance costs
Hangar/engine component
TAT/costs
Materials/supply chain outsourced
contracts
• Pilot/Cabin crew costs (3-10% roster)
Improve productive hours
Basings/reserves
• Ground handling costs (5% of cost
base)
Turn times/resource optimisation
Contract improvements
• Distribution (8% of costs)
Direct distribution/lower cost channels
GDS contracts
9
Item Example Client Industry Practice
Fixed Rate – Routine Labor C8 - $800,000 C8 - $635,000
T&M Man Hour Rate $60 / manhour - Hangar
$80 / manhour – Engineer
$50-50 /manhour –
Technician
$70-80 /manhour - Engineer
Material Premium New parts – CLP plus 13%,
cap of $3K plus $150 admin
fee
Consumables extra
New parts – CLP plus 10%,
cap of $2K, No admin fee
Consumables included up
to $100 per task
Subcontracted Services Invoice plus 15% plus
admin fee of $150
Invoice plus 8%, no admin
fee
Turn-around-Time (TAT) 60Days 42 Days
TAT Penalty None $4000-$5000 per day
Warranties 12 months or 4,300 flights
hours, whichever 1
st
.
12 months or 3,000 flights
hours, whichever 1
st
.
Overall Value Mediocre
Realizing the vision together
Review of Market Growth, Market Share, Competitors, Fares
provides insights into routes with opportunities and weaknesses
• Airlines position in markets
Year on year marketshare growth
Marketshare growth relative to market
growth
Shrinking share in growing markets
Marketshare of high yield markets
Year on year fare changes
Gain or protect marketshare at the
expense of reducing fares/yield
• Capacity growth, competitor
activities markets with share gap
• Competitors gaining share at own
hub
• What are the competitive
opportunities and threats from other
airline
• Market forecasting, focus on growth
markets, yield and circuitry
• Development of network and route
scenarios
10
Realizing the vision together
Network Design, Route Development and Fleet Alignment is
Key to Improve Airline Profitability
11
• Test different scenarios and business
models and evaluate respective
differences in variable contribution towards
selection of the best model
• Align routes and frequencies markets with
growth, and yield advantages
• The route structure that maximises
marketshare, and variable contribution
improving competitiveness is selected
• Identify key changes to Long Haul,
Medium Haul, Regional and Domestic
routes
• Improve 6
th
freedom traffic and revenues
• Identify key changes for better use of code
shares, alliances and joint ventures
• Changes in the fleet plan is driven by the
optimal route structure – iterative process
Realizing the vision together
Schedule Improvement, Next Season
12
• Focus on current network and improvements
that can be feasibly implemented subject to
airport and other operational constraints of
the airline.
• Financial performance of the current
network can be evaluated and routes can be
classified according to the yield and
Revenue per Available Seat Kilometre
(RASK) achieved on routes.
• Focus will be on improving overall RASK,
increase in business class routes and
reduce volatility of passenger throughputs.
• Quick-hit improvements to the schedule are
identified. This can include changes to
departure times or introduction of new flights
given no new fleet in 2013).
• Operational constraints, such as overnight
maintenance downtime requirements,
crewing restrictions, slot and bilateral
restrictions, etc.
Realizing the vision together
Network Design uses Candidate Aircraft Type and use of Accurate
Aircraft Data is Essential
aircraft purchase, lease and operational costs
13
• Use of accurate operational and ownership
costs
Aircraft selection list prices
Optimised scenario actual price
Actual MRO, Fuel, Crew costs
Use if actual block hours
• Aircraft replacement – fuel, maintenance
costs
• Many airlines delay fleet replacement
decisions with impact on financial
performance
• Lack of financial resources may force
airlines to use vintage aircraft, or aircraft
with high operational costs
• Leverage geographic advantage for NB use
reduce commercial risk
• Right NB/WB ratio to for hub operations
• Fleet commonality for reduced costs
• Buy versus lease calculations
Actual lease and purchase prices and bank rates
Block Hours by Aircraft Type
FY2012 FY2013 FY2014 FY2015 FY2016
320 22,677 35,391 35,740 36,286 38,878
332 29,261 38,809 53,221 62,553 68,125
343 29,629 24,734 14,389 7,143 2,590
81,567 98,934 103,350 105,983 109,593
Average Utilization
FY2012 FY2013 FY2014 FY2015 FY2016
320 10.8 11.4 10.9 11.0 11.8
332 14.3 13.7 14.3 13.7 14.3
343 13.5 12.9 12.1 13.6 14.2
12.9 12.6 12.6 12.7 13.3
ATK by Aircraft Type
FY2012 FY2013 FY2014 FY2015 FY2016
320 236,455,883 395,899,079 399,489,366 405,245,130 434,944,089
332 807,967,280 1,091,350,985 1,552,586,802 1,866,583,715 2,051,262,199
343 1,022,549,024 881,844,737 527,312,858 265,463,424 96,647,409
2,066,972,187 2,369,094,801 2,479,389,026 2,537,292,269 2,582,853,697
A 320
Operating Cost Category Measurement FY2012 FY2013 FY2014 FY2015 FY2016
FUEL & OIL Per Block Hour 1,999 2,039 2,080 2,122 2,164
LANDING Per Departures 439 448 457 466 475
HANDLING Per Departures 900 918 936 955 974
OVERFLYING Per Departures 303 309 316 322 328
AIRCRAFT MAINT Per Block Hour 753 791 830 872 915
INFLIGHT CATERING Per Pax 8.0 8.1 8.3 8.5 8.6
AIRCRAFT RELATED % of Block Hours, Cost per Month 3,022,321 4,064,446 4,288,890 4,458,607 4,489,891
CREW LAYOVER Per Flight 1,043 1,063 1,085 1,106 1,129
AREA/OTHER % of ATK 6,879 7,885 8,252 8,444 8,596
CORPORATE OVERHEADS % of ATK 2,414 2,767 2,896 2,964 3,017
A 330
FY2012 FY2013 FY2014 FY2015 FY2016
FUEL & OIL Per Block Hour 4,371 4,459 4,548 4,639 4,732
LANDING Per Departures 1,229 1,253 1,278 1,304 1,330
HANDLING Per Departures 2,778 2,833 2,890 2,948 3,006
OVERFLYING Per Departures 1,609 1,642 1,674 1,708 1,742
AIRCRAFT MAINT Per Block Hour 1,401 1,298 1,193 1,205 1,265
INFLIGHT CATERING Per Pax 10.7 10.9 11.1 11.3 11.6
AIRCRAFT RELATED % of Block Hours, Cost per Month 4,665,661 6,577,686 9,032,459 11,269,780 12,216,526
CREW LAYOVER Per Flight 3,168 3,232 3,296 3,362 3,429
AREA/OTHER % of ATK 6,879 7,885 8,252 8,444 8,596
CORPORATE OVERHEADS % of ATK 2,414 2,767 2,896 2,964 3,017
A 340
FY2012 FY2013 FY2014 FY2015 FY2016
FUEL & OIL Per Block Hour 5,313 5,419 5,528 5,638 5,751
LANDING Per Departures 1,657 1,690 1,724 1,758 1,793
HANDLING Per Departures 3,523 3,593 3,665 3,738 3,813
OVERFLYING Per Departures 2,624 2,676 2,730 2,784 2,840
AIRCRAFT MAINT Per Block Hour 1,401 1,298 1,193 1,205 1,265
INFLIGHT CATERING Per Pax 13.6 13.8 14.1 14.4 14.7
AIRCRAFT RELATED % of Block Hours, Cost per Month 5,013,844 4,455,852 2,863,950 1,352,374 939,733
CREW LAYOVER Per Flight 3,593 3,664 3,738 3,812 3,889
AREA/OTHER % of ATK 6,879 7,885 8,252 8,444 8,596
CORPORATE OVERHEADS % of ATK 2,414 2,767 2,896 2,964 3,017
Realizing the vision together
Alignment of Commercial Processes with Business Model
Changes for Improved Revenue
14
• Alignment of commercial processes with the new
business model and route strategy
• Key changes in the product strategy
• Critical changes in pricing strategy, fare matrix,
pricing review for RASK increase
Pro-active pricing processes
Reactive pricing processes
• Improvements in revenue management
Diagnostic assessment
LF forecasting
Critical flight management
• Revenue planning and revenue delivery
• Pricing and revenue management performance
measures
• Improvements in ancillary revenues
• Distribution benchmarking, segments, unit revenue,
unit cost per channel, as is costs
• Changes in distribution mix
Realizing the vision together
Alignment and Improvement of Airline Operational Activities
• Opportunities to align operations with the
business model changes and reduce costs
• Target CASK to align with target revenues
• Review and improve direct and indirect costs
• Determine initiatives for productivity
improvement and unit cost reduction to meet
target CASK
• Organisational improvement
• Productivity improvements
Fleet (utilisation)
Maintenance
Crew
Ground handling costs
Overheads and other areas
15
Realizing the vision together
Operations Cost Reduction and Productivity Improvement:
Crew and Operations Control
• Review crew assignment process and costs
• Review flight operations identify
improvement opportunities
• If needed, identify opportunities in
improvements in crew productivity
• Identify changes in the crew manpower plan
• Operations control centre diagnostic
• Identify inefficiencies leading to suboptimal
decision making
• Identify improvements in processes and
improvements in co-location of IOC functions
• Provide recommendations that relate to
organisation, systems and performance
management that relate to:
Flight operations
Crew optimisation
Integrated operations control
16
Realizing the vision together
Operations Cost Reduction and Productivity Improvement:
MRO
• Alignment of the operational activities support
business model changes – MRO costs and
productivity improvement
• Benchmark MRO costs and productivity,
operation, turnaround times, material costs and
productivity
• Diagnostic of key MRO areas:
Hangar
Line maintenance
Supply chain
Engineering and planning
Other processes
• Benchmarking of engine, OM, component
contracts
• Restructure processes for productivity
improvements at shops
• Opportunities for the growth of third party
revenues
• Business plan
17
Realizing the vision together
Air Cargo Market and Competitor Analysis and Market Size
Forecasting
SAMPLE DELIVERABLES
18
• Compare market share and capacity share
with competitors
• Are there opportunities to improve route
performance
• Market forecasting to focus on best return
markets
Air cargo trade lane analysis
Conduct workshops with freight forwarders and
customers
Feedback for improving market share with
customers
• In executing market analysis and forecasting
work, InterVISTAS uses its proprietary data
sources from industry research and regular
contact with related associations
• Cargo markets are particularly challenging due
current economic conditions – with many
freighters grounded
39,555
32,178
37,038
45,264
66,007
64,204
66,788
70,541
71,320
89,023
107,437
?
20,000
40,000
60,000
80,000
100,000
120,000
?
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
T
o
n
n
e
s
Key NE Asia ? Australia Export Tradelane Tonnage
China Hong Kong Japan Group Total 2 per. Mov. Avg. (Group Total)
Example
Tradelane
Analysis
Per country and
import/export direction
Example
Commodity
Analysis
Type of cargo
Example
Market
Forecasting
Route level
Realizing the vision together
Forecast Market Share and Expected Gain for Profitable
Operation of Freighters
19
• Determine expected load factor for each
route, regions and system wide, considering
future market growth (from the previous
market forecasting task).
• Analysis include following elements:
Future market sizes
Market share growth based on current load
factors
Cargo capacity growth, driven by the growth of
the passenger fleet
Additional cargo capacity driven by freighters
that may be committed to this route (capacity
and frequency)
Total capacity including competitors operating
this route
• The routes will be prioritized according to
best market share forecast and they will be
used in developing scenarios for network
design.
• Market share forecasting is done using the
InterVISTAS proprietary tools.
InterVISTAS provides proprietary tools
for route level cargo marketshare
forecasting
Realizing the vision together
Analysis of Air Freight Route and Freighter Scenarios for
Improving Profitable Operation of Freighters and Belly
20
• Scope to design/improve the route structure and
freighter type/number / utilization maximizing route
profitability. Analysis also drives the freighter
performance improvement.
• Criteria will include weighted average, where
weights include expertise and experience of
InterVISTAS team.
• For selected routes deeper analysis will be
executed:
Where the current share is less than expected share,
analysis is executed to establish LF growth at the target
routes in relation to market size
• Route scenarios will be subsequently tested for
freighter types that will be analyzed in the next task
• Significant growth in WB aircraft increasing
availability of belly capacity
• Increasing fuel price causing intermodal shift
towards maritime
• Warehouse development costs are significant
Market and CapacityDevelopment
2012 2013 2014 2015 2016
Origin: CGK Market forecast CGK-pvg 31,337 34,453 36,933 39,610 42,434
Destination: pvg GA Capacity on CGK-pvg 4,260 4,380 6,588 8,760 8,784
Competition Capacity on CGK-pvg 0 0 0 0 0
2012 2013 2014 2015 2016
Current Load Factor: 31% Desired belly LF on CGK-pvg 37% 43% 49% 54% 60%
Desired Load Factor: 60% GA Capacity 4,260 4,380 6,588 8,760 8,784
Loads given current LF on CGK-pvg 1,338 1,376 2,070 2,752 2,760
Addtional cargo required to reach desired LF on CGK-pvg 244 501 1,130 2,003 2,510
Addtional cargo required for 2 weekly Full Freighter - - - 4,732 4,732
2012 2016
Including NarrowBody Belly (yes/no): no GA Capacity on CGK-pvg 4,260 8,784
Competition Capacity on CGK-pvg 0 0
GA Freighter (2 weekly) 0 6,760
2012 2013 2014 2015 2016
Market share (business as usual) on CGK-pvg 4.3% 4.0% 5.6% 6.9% 6.5%
Market share (high) on CGK-pvg 5.0% 5.4% 8.7% 12.0% 12.4%
Market share when introducing 2 weekly Full Freighter 5.0% 5.4% 8.7% 24.0% 23.6%
Growing LF in equal
steps to desired LF
Useful for ASA with both
wide and narrowbodies
Example:
Route Analysis and Market Share Capture Models
Realizing the vision together
Results of New Strategy and Improvement/Turnaround Actions
Reflected in the Business Plan
• Revenue forecast
Scheduled seat revenues: route
revenue forecast, market share,
fares, service/schedule quality
Charter revenues
Non seat airline revenues: ancillaries
SBU revenues: third party growth
• Cost Forecast
Direct operating costs
Aircraft ownership costs
Overheads
• Assumptions including
improvements of business benefits
Impact of product improvement on
yields/fares
Impact of productivity and cost
reduction initiatives
21
FY2012 FY2013 FY2014 FY2015 FY2016
Revenue
Passenger Revenue 635,228,571 $ 803,092,806 $ 891,513,937 $ 947,015,305 $ 1,004,265,779 $
Cargo + Ancillary Revenue 109,454,682 131,603,839 147,044,555 156,421,628 163,819,439
Total Revenue 744,683,253 $ 934,696,645 $ 1,038,558,492 $ 1,103,436,933 $ 1,168,085,219 $
Direct Operating Costs
FUEL & OIL 330,660,278 379,040,756 395,681,914 407,196,630 421,122,606
LANDING 20,541,879 21,143,634 21,707,200 22,155,400 23,130,335
HANDLING 44,443,143 45,832,857 47,413,681 48,557,299 50,748,709
OVERFLYING 26,582,867 25,392,457 25,301,630 25,389,360 26,119,396
AIRCRAFT MAINT 99,580,550 110,687,945 110,589,137 115,577,018 124,891,454
INFLIGHT CATERING 36,560,349 40,428,471 42,356,792 43,680,279 45,778,350
Total Direct Operating Costs 558,369,067 622,526,120 643,050,354 662,555,986 691,790,851
Operating Profit/Loss 186,314,186 312,170,524 395,508,138 440,880,946 476,294,368
Operating Margin 25.0% 33.4% 38.1% 40.0% 40.8%
General and Administrative Costs
AIRCRAFT RELATED 152,421,912 179,636,473 192,669,727 203,735,604 205,653,328
CREW LAYOVER 19,807,081 21,624,405 22,483,249 23,222,814 24,301,372
AREA/OTHER 82,549,397 94,291,242 98,893,290 101,267,727 103,100,737
CORPORATE OVERHEADS 28,970,884 33,091,709 34,706,807 35,540,121 36,183,420
Total General and Administrative Costs 283,749,273 328,643,829 348,753,074 363,766,266 369,238,857
Total Costs 842,118,340 951,169,950 991,803,428 1,026,322,252 1,061,029,708
Net Profit/Loss (Airline Operations) (97,435,087) (16,473,305) 46,755,064 77,114,680 107,055,511
Net Margin (from Airline Operations) ?13.1% ?1.8% 4.5% 7.0% 9.2%
Realizing the vision together
Development of the Business Plan with Revenue, Cost and
Profitability Forecasting Including Strategy and Improvement Impacts
22
• Route level business plan for different
freighter types tested at different
frequencies for route profitability for belly
and freighter operations
• Opportunities in reduction of direct and
indirect aircraft-related cost:
Direct costs will include fuel, maintenance,
crew, ground handling, over flight , ownership,
etc.
For belly cost per KG carried will be used. If
airline is allocating other direct and indirect
costs these will be used.
• Profitability forecast will be developed for
belly and freighter operations
• Sensitivity analysis
CGK?PVG (V.V.) by A330 Freighter 2012 2013 2014 2015 2016
Total Operating Revenues
Scheduled Full Freighter Revenue ? 10,869,673 10,869,673 16,304,509 16,304,509
Passenger (belly) Revenue 7,153,070 7,264,308 10,815,246 14,233,240 14,124,143
Total Revenue CGK?PVG (V.V.) 7,153,070 18,133,981 21,684,919 30,537,750 30,428,652
Direct Operating Cost (excluding Ownership)
Fuel ? 6,512,381 6,512,381 9,768,571 9,768,571
Cockpit Crew ? 651,238 651,238 976,857 976,857
Maintenance ? 781,486 781,486 1,172,229 1,172,229
Depreciation ? 2,050,194 2,050,194 3,075,291 3,075,291
Insurance 85,425 85,425 128,137 128,137
ATC/LDGcharges ? 673,367 673,367 1,010,050 1,010,050
Sales Commision ? 156,900 156,900 235,350 235,350
Total Direct Operating Cost ? 8,618,472 8,618,472 12,927,708 12,927,708
Total Indirect Operating Cost ? 2,292,518 2,292,518 3,438,778 3,438,778
Total Full Freighter Operating Cost ? 10,910,990 10,910,990 16,366,485 16,366,485
Passenger (belly) Operating Cost 7,653,167 7,942,968 12,082,153 16,245,108 16,469,692
Total Operating Cost CGK?PVG (V.V.) 7,653,167 18,853,958 22,993,143 32,611,593 32,836,178
Profit (Belly Space, US$) ?500,097 ?678,660 ?1,266,906 ?2,011,867 ?2,345,550
Profit (Full Freighter, US$) ? ?41,317 ?41,317 ?61,976 ?61,976
Total Profit (US$) ?500,097 ?719,977 ?1,308,224 ?2,073,843 ?2,407,526
Profit Margin (Belly Space, %) ?7.0% ?9.3% ?11.7% ?14.1% ?16.6%
Profit Margin (Freighter, %) ?0.4% ?0.4% ?0.4% ?0.4%
Total Profit Margin (%) ?7.0% ?4.0% ?6.0% ?6.8% ?7.9%
Business plan method based on marketshare, fare ,
operating and capital costs for freighter and belly
Business plan is based on directional (inbound and
outbound route level profitability
Realizing the vision together
Minor Variation in Modelling Assumptions can make Significant
Difference on Profitability/Financial Forecast
23
• Due diligence questions
Market growth rates
Competitor capacity growth rates
Average fares
Fare improvement as a function
product improvement
Ancillary revenues
SBU third party market
share/revenue growth
assumptions
Fuel costs: current and future
Maintenance costs:
accuracy/variations
Aircraft ownership costs: list,
actual
Depreciation rates
• Sensitivity analysis: major
revenue and cost assumptions
Baseline Shock Scenario
Key Statistics 2011 2015 2011 2015
Passengers 262,968 2,891,151 253,274 2,768,001
Revenue 53,052,618 $ 652,142,240 $ 43,982,830 $ 537,292,097 $
Operating Expenses 69,714,983 $ 509,015,566 $ 72,540,299 $ 528,936,974 $
Profit (Loss) (16,662,366) $ 143,126,674 $ (28,557,470) $ 8,355,123 $
Operating Margin ?34.5% 24.6% ?71.4% 1.7%
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Key Statistics 2011 2015 2011 2015 2011 2015 2011 2015
Passengers 262,968 2,891,151 262,968 2,891,151 253,274 2,768,001 262,968 2,891,151
Revenue 45,978,935 $ 565,189,941 $ 53,052,618 $ 652,142,240 $ 50,749,419 $ 619,952,419 $ 53,052,618 $ 652,142,240 $
Operating Expenses 69,264,058 $ 504,714,962 $ 72,137,108 $ 527,628,489 $ 69,537,333 $ 507,031,861 $ 70,701,516 $ 516,218,616 $
Profit (Loss) (23,285,123) $ 60,474,979 $ (19,084,491) $ 124,513,751 $ (18,787,914) $ 112,920,559 $ (17,648,898) $ 135,923,624 $
Operating Margin ?55.7% 12.0% ?39.6% 21.4% ?40.7% 20.4% ?36.6% 23.3%
Scenario 1 – Fares are discounted XX percent from MIDT market
fares versus XX percent in the Baseline scenario
Scenario 2 – Fuel price of $XX/kg consumed increases by XX
percent
Scenario 3 – Market introduction stimulation rates are lowered
by XX percent
Scenario 4 – Overhead costs increase from X percent to XX
percent of all other costs
Shock Scenario – All of the above factors occur at once,
showing a worst case scenario
Realizing the vision together
Financial Analysis for Determination of Sources and
Application of Funds for Aircraft Financing
24
SOURCES AND APPLICATION OF FUNDS [BLEND]
FUNDING REQUIREMENTS
1. Capital Expenditure
Client Airline
Equity funding requirement for Refleeting (Generic AC Blend Scenario ? bought AC only)
including current year cabinmod ($XX m)
Client SBU's
Information Technology
SBU Engineering
XXX
SBU Cargo
Airport Services XX
Airport Services ? XX
Total Equity funding requirement by SBUs
Total CAPEX
2. Capitalised Cost of Engines Overhauls ? current fleet only
3a. Maintenance Reserves (Net of Recoveries) ? current fleet ? reflected in AC OPS COST
3b. Maintenance Reserves (Net of Recoveries) ? new fleet ? reflected in AC OPS COST
4. Increase in Inventories (from original BP)
5. Increase in Trade Receivables
6. Increase in Trade Payables (from original BP)
7. Repayment of Interest Bearing Liabilities ? Foreign Loans
8. Repayment of Interest Bearing Liabilities ? Local Loans (FY2012/13 ff from original BP)
Total Funding Requirement
SOURCES OF FUNDS
1. ClLIENT GROUP EQUITY INFUSION REQUIREMENT [BLEND]
2. Proceeds of IPO of subsidiary (potential of $ XXm indicated)
3. Proceeds from Disposal of Property, Plant and Equipment
(from original BP)
4. Proceeds from Interest Bearing Loans and Borrowings (from
original BP)
5. Client Profit adjusted for non?cash items
Total Funding Available
NET INCREASE IN CASH
Cash Balance Brought Forward
CASH BALANCE CARRIED FORWARD
# of Months of Operating cost for min cash level
Min. cash liquidity required
Min. cash level ok?
XX GROUP CUMULATIVE EQUITY INFUSION REQUIREMENT ?
BLEND Scenario
Dividend potential to Equity Investor (capped at XX % of Client
Group profit p.A.)
Realizing the vision together
Use of Accurate Assumptions in Aircraft Purchase and
Lease Calculations
25
Purchase & Lease of new aircraft
EQUITY
Required PDP equity narrowbody aircraft
Required Delivery Equity narrowbody aircraft
Interest payments on PDP Debt
Owned Narrowbody Total
Rent, only for 3 new replacement & growth narrowbody aircraft
Deposits (3 months rental)
Maintenance Reserves on new NB fleet only
Leased Narrowbody Total
Owned and interim leased Narrowbody total
Required PDP equity widebody aircraft
Required Delivery Equity widebody aircraft
Interest payments on PDP Debt
Owned Widebody Total
Rent, only for 3 new long term lease replacement widebody aircraft
Deposits (3 months rental)
Maintenance Reserves on new WB fleet only
Leased Widebody Total
Owned and interim leased Widebody total
New Aircraft Total Equity demand (incl. PDP interest)
DEBT
PDP Debt converted into senior loan at Delivery - narrowbody
PDP Debt converted into senior loan at Delivery - widebody
Senior Loan amount at end of fiscal year - narrowbody
Leverage (PDP +Sr Loan) at end of fiscal year - narrowbody
Senior Loan amount at end of fiscal year - widebody
Leverage (PDP +Sr Loan) at end of fiscal year - widebody
Total Seni or Loan at end of fi scal year - fl eet
Fl eet l everage at end of fi scal year
Seni or l oan annui ty payments
Interest payments of Senior loan after Delivery - Narrowbody
Interest payments of Senior loan after Delivery - Widebody
New Ai rcraft Total Fundi ng demand (i ncl . debt i nterest payments)
Principal payments of Senior loan after Delivery - Narrowbody
Principal payments of Senior loan after Delivery - Widebody
Realizing the vision together
Turnaround Implementation including Fleet Renewal
26
• Overall migration plan is used for delivery
of business model changes including
specific projects
Product changes
Route, hub schedule related
Distribution
Relationships between client, airlines and operating
companies (MRO, ground handling, catering)
Organization
Other
• Airlines ability to service debt will be
driven by the effectiveness of new
strategy and on time implementation of
turnaround actions
• Fleet decisions can be delayed by airline
management not committing to
turnaround plan or stake holders lack of
confidence in execution
Thank You!
www.intervistas.com
Please contact Dr. Emre Serpen for any
queries on this proposal.
E-mail: [email protected]
Telephone: +447944163891
doc_910397986.pdf