The Demand for The Demand for Airline ServiceAirline Service

Forecasting methods use in determining Forecasting methods use in determining the demands in airline industrythe demands in airline industry

Airline Demand MarketAirline Demand Market• In the airline industry, there exist standard In the airline industry, there exist standard

measures of passenger traffic and airline output.measures of passenger traffic and airline output.• Airline carriers have to produce one of the most Airline carriers have to produce one of the most

perishable goods (passenger transport). perishable goods (passenger transport). • This fact has forced carriers to implement and This fact has forced carriers to implement and

refine practices and strategies in order to react refine practices and strategies in order to react promptly to the ups and downs of the demand. promptly to the ups and downs of the demand.

• Measures of “airline traffic” quantify the amount Measures of “airline traffic” quantify the amount of airline output that is actually consumed or of airline output that is actually consumed or sold. sold.

What is the demands for airline service?What is the demands for airline service?

• Unlike other industry, here is some demand Unlike other industry, here is some demand characteristics of airline service- Not unique rather characteristics of airline service- Not unique rather unusualunusual

• Economists call it “intermediate good”- People use Economists call it “intermediate good”- People use air transportation to achieve some other purpose air transportation to achieve some other purpose not for the sake of flying: not for the sake of flying: Passenger DemandPassenger Demand

• So, in passenger demand its important to examine So, in passenger demand its important to examine its all aspects: its all aspects: – Tourist/ business?Tourist/ business?– Personal / family emergency travelPersonal / family emergency travel

What are other demands in airline industry?What are other demands in airline industry?

• Fuel peggingFuel pegging

• CargoCargo

• FacilitiesFacilities

• Flying Operations-Cabin PersonnelFlying Operations-Cabin Personnel

• Aircraft Purchase and LeaseAircraft Purchase and Lease

• Ground Handling-Traffic ServicingGround Handling-Traffic Servicing

• MRO- Aircraft servicingMRO- Aircraft servicing

Other demands in airline industryOther demands in airline industry

• Passenger servicePassenger service

• Reservations and salesReservations and sales

• Advertising and publicityAdvertising and publicity

• General and administrative demand, e.g. : General and administrative demand, e.g. : Needs for new recruitmentNeeds for new recruitment

So, how to So, how to ‘estimate’ all these ‘estimate’ all these

demands?demands?

ForecastingForecasting

• Why is it important?Why is it important?• ““Business action taken today must be based on Business action taken today must be based on

yesterday’s plan and tomorrow's expectations” - yesterday’s plan and tomorrow's expectations” - J. G. Wensveen 2007

• Forecasting: The attempt to Forecasting: The attempt to quantifyquantify demand in demand in a future time perioda future time period

• What do you quantify?What do you quantify?– Revenue-dollarsRevenue-dollars– Revenue-passengers: Revenue Passenger Miles Revenue-passengers: Revenue Passenger Miles

(RPM) a.k.a Passenger enplanements(RPM) a.k.a Passenger enplanements

• In airline industry, plan of the future cannot In airline industry, plan of the future cannot be made without forecasting demandbe made without forecasting demand

• Does forecasting=planning?Does forecasting=planning?• Forecasting is predicting, projecting, or Forecasting is predicting, projecting, or

estimating future financial situation (outside estimating future financial situation (outside managerial control)managerial control)

• Planning concerned with setting objectives Planning concerned with setting objectives and goals and with developing alternatives and goals and with developing alternatives to reach them (within managerial control)to reach them (within managerial control)

ForecastingForecasting

• In airline industry, forecasting revenues is In airline industry, forecasting revenues is not a plan-Must have not a plan-Must have realistic fit with realistic fit with market conditionmarket condition

• But plan is an indispensible part of But plan is an indispensible part of forecasting as it must be goals, strategies forecasting as it must be goals, strategies and development of alternativesand development of alternatives

• It is a management tool for deciding now It is a management tool for deciding now what the company must do to realize its what the company must do to realize its profit and future goalsprofit and future goals

ForecastingForecasting

• Another significant of forecasting for aviation Another significant of forecasting for aviation

industry is forecasts of one type of demand may industry is forecasts of one type of demand may also be based on other forecastsalso be based on other forecasts

• That is, it does not only done for a given type of That is, it does not only done for a given type of demand independentlydemand independently

• I.e. Projection of flight hours also determine the I.e. Projection of flight hours also determine the future demand forfuture demand for– Flight personnelFlight personnel– Fuel consumptionFuel consumption– Facilities etcFacilities etc

ForecastingForecasting

Why forecasting is important in airline business?Why forecasting is important in airline business?

• Each type of forecast Each type of forecast serves a particular serves a particular purposepurpose

• Like…Like…– Short-term forecastShort-term forecast– Medium-term forecastsMedium-term forecasts– Long-term forecastsLong-term forecasts

The types of forecastingThe types of forecasting

Short-term ForecastShort-term Forecast

• A total of passenger enplanements between a particular pair A total of passenger enplanements between a particular pair of cities to provide a basis for determining:of cities to provide a basis for determining:– Station personnelStation personnel– Ground equipment neededGround equipment needed– Gate availabilityGate availability– Ground handling recruitmentGround handling recruitment– Weather/ temperature forecastingWeather/ temperature forecasting– Aircraft inspection, minor maintenance Aircraft inspection, minor maintenance – Aircrew/ Customer parking facilitiesAircrew/ Customer parking facilities

• Normally done for 1month to 1 year period and cover day-to-Normally done for 1month to 1 year period and cover day-to-day expensesday expenses

Medium-term forecastsMedium-term forecasts

• Generally for a period of 1-5 years and it Generally for a period of 1-5 years and it involves things such as:involves things such as:

- Route-planning- Route-planning

- Aircraft maintenance / spare-parts- Aircraft maintenance / spare-parts

- Fuel pegging - Fuel pegging

- Accident Awareness- Accident Awareness

- Aircrew/Employee welfare Scheme - Aircrew/Employee welfare Scheme

13

Long-term forecastsLong-term forecasts

• For a period of 5 to 10 yearsFor a period of 5 to 10 years

• It involves:It involves:– Fleet planning decisionsFleet planning decisions– Goals, trademarks, promotions, publicity Goals, trademarks, promotions, publicity – Airport ManagementAirport Management– Long-term financial commitments, e.g..Long-term financial commitments, e.g..– ““Aircraft-manufacturer might make a long-term forecast Aircraft-manufacturer might make a long-term forecast

of demand for an aircraft specifically designed to serve of demand for an aircraft specifically designed to serve the passengers of airliners’ market so that they could the passengers of airliners’ market so that they could make a plan to meet the projected demand”make a plan to meet the projected demand”

The purpose of forecastingThe purpose of forecasting

• Each type of forecasts serves a particular Each type of forecasts serves a particular purposepurpose

• So, either short-term, medium-term and long So, either short-term, medium-term and long term forecastterm forecast

• To carry out 3 important management To carry out 3 important management functionsfunctions– APCAPC

• AnalysisAnalysis• PlanningPlanning• ControlControl

AnalysisAnalysis

• Every airliners Every airliners must make choices must make choices among among the many markets or submarkets open to itthe many markets or submarkets open to it

• Plus… deciding onPlus… deciding on– Level of service to offerLevel of service to offer– The type of aircraft to fly on particular routeThe type of aircraft to fly on particular route– So, in the end…they have to decide the type So, in the end…they have to decide the type

of aircraft they have to purchase/ leaseof aircraft they have to purchase/ lease– Along…with its costsAlong…with its costs

AnalysisAnalysis

• Analysis airline data:Analysis airline data:

Age Range Number of pilot20-24 825-29 2530-34 3035-39 4240-44 1845-49 10

Donation Number of collectionsRM 1 25RM 2 50RM 5 75

RM 10 50RM 15 37RM 20 13RM 50 10

RM 100 8

PlanningPlanning

• Every airline firms Every airline firms must make short-term must make short-term AND long-term decision onAND long-term decision on

• Instance of short-term’s decisionInstance of short-term’s decision– Allocation and scheduling of all limited Allocation and scheduling of all limited

resources THAT DEMANDING for competing resources THAT DEMANDING for competing usesuses

• Instance of long-term’s decisionInstance of long-term’s decision– Rates of expansion of capital equipment and Rates of expansion of capital equipment and

fundfund

PlanningPlanning

• Planning airline data:Planning airline data:

ControlControl

• The need of airliner to know its own The need of airliner to know its own control in the marketcontrol in the market

• To determine how does the airliner’s To determine how does the airliner’s actual performance: actual performance: REVENUEREVENUE

• For example, a CEO/ President of an For example, a CEO/ President of an airliner is dissatisfied with the delay in airliner is dissatisfied with the delay in flight scheduling, thus, need to determine flight scheduling, thus, need to determine

ControlControl

• Control airline data:Control airline data:Month Flight Delayed

Jan 5Feb 15Mar 10Apr 20May 18Jun 25Jul 30

Aug 35

Year Baggage Lost2000 2002001 1502002 2102003 802004 682005 512006 402007 35

Forecasting methodsForecasting methods

• Causal methodCausal method

• Time Series (a.k.a Trend Analysis) methodTime Series (a.k.a Trend Analysis) method

• Judgmental method Judgmental method

So, which of which?So, which of which?

• Depends on:Depends on:– Availability of dataAvailability of data– Management sophisticationManagement sophistication– Intended forecast useIntended forecast use– Availability of electronic data processingAvailability of electronic data processing

Causal methodCausal method

• Based on statistical relationship between the Based on statistical relationship between the forecasted (a.k.a. dependent) variable and or forecasted (a.k.a. dependent) variable and or more explanatory (a.k.a. independent) variablesmore explanatory (a.k.a. independent) variables

• Can either be Can either be causal-and-effect relationship causal-and-effect relationship (not necessarily) (not necessarily) or simply a relationship/ or simply a relationship/ association/ correlationassociation/ correlation

• Correlation: A pattern of relationship between Correlation: A pattern of relationship between the two or more variablesthe two or more variables– The closer the relationship, the greater the degree The closer the relationship, the greater the degree

of correlation.of correlation.

How does causal method works?How does causal method works?

• By finding the variables that explain (IV) By finding the variables that explain (IV) statistically the changes in the variable to be statistically the changes in the variable to be forecast (DV)forecast (DV)

• The IV must have these characteristics:The IV must have these characteristics:– Statistically related to the DVStatistically related to the DV– Data on these IVs must be availableData on these IVs must be available– The relationship between these IV and DV must be The relationship between these IV and DV must be

lagged (IV must follow DV by several months)lagged (IV must follow DV by several months)

• Why the IV must follow DV in several months?Why the IV must follow DV in several months?

• A: Most forecasting methods are based on the A: Most forecasting methods are based on the assumptions that existing patterns and historical assumptions that existing patterns and historical relationships will continue in the future.relationships will continue in the future.

• BUT, subjected to 2 years of accuracy!BUT, subjected to 2 years of accuracy!

• In addition, DATA of IVs must be made In addition, DATA of IVs must be made available in order to forecast the DV (s):available in order to forecast the DV (s):– Gross National Product (GNP)Gross National Product (GNP)– Disposable Personal Income (DPI)Disposable Personal Income (DPI)– Consumer spending on servicesConsumer spending on services

Causal methodCausal method

• Therefore, DV (s) can be forecasts that might Therefore, DV (s) can be forecasts that might include..include..– RPM: Revenue Passenger Per MileRPM: Revenue Passenger Per Mile– Passenger RevenuePassenger Revenue

• For example, in aviation sector, aircraft For example, in aviation sector, aircraft purchases correlates with profits in the purchases correlates with profits in the economyeconomy

• Aircraft purchases is only one of the IV but via Aircraft purchases is only one of the IV but via sophisticated causal method it could determine sophisticated causal method it could determine up to 20-30 IVs up to 20-30 IVs

Causal methodCausal method

• The formula is…The formula is…

• Linearity: Linear correlationLinearity: Linear correlation

• That is how IV and DV correlated in one That is how IV and DV correlated in one linear line: linear line: – Y= mX + c OR Y= mX + c OR – Y=a+bXY=a+bX

Causal methodCausal method

Let’s Demonstrate Causal MethodLet’s Demonstrate Causal Method

• Develop a hypothetical situation or formulaDevelop a hypothetical situation or formula

• Find data availability (i.e. 15 years of data)Find data availability (i.e. 15 years of data)

• Let’s say we would like to determine the Let’s say we would like to determine the number of tourist number of tourist

• So Y= a+bXSo Y= a+bX– Number of tourist= a+bNumber of tourist= a+b– X= number of aircraftX= number of aircraft– Y= number of touristY= number of tourist

Let’s Demonstrate Causal MethodLet’s Demonstrate Causal Method

Payroll Flight landed

RM 171 103

RM 108 75

RM 119 92

RM 43 55

RM 58 56

RM 56 62

RM 62 84

RM 43 78

RM 57 73

RM 75 67

The following table shows the allowances payroll for 10 pilots for the year 2009, along with the number of flight landed conducted by the 10 particular pilots:

However…The obstaclesHowever…The obstacles

• Although it is the most sophisticated Although it is the most sophisticated method, but there are several difficulty that method, but there are several difficulty that may hinder its usefulness in forecasting, may hinder its usefulness in forecasting, such as:such as:– Limited availability of dataLimited availability of data– Deficiencies in measurement techniqueDeficiencies in measurement technique– Outdated observationsOutdated observations

• So, the result is usually imperfect BUT not So, the result is usually imperfect BUT not uselessuseless

Time Series a.k.a Trend AnalysisTime Series a.k.a Trend Analysis

• The oldest, most widely usedThe oldest, most widely used• Mainly for estimating demand in aviation Mainly for estimating demand in aviation

industryindustry• It shows how DV as a function of single IV-It shows how DV as a function of single IV-

TIMETIME– How time determine demands in airlineHow time determine demands in airline

• Like causal models, it is also founded on Like causal models, it is also founded on statistical correlationstatistical correlation– But it does not necessarily reflect X cause YBut it does not necessarily reflect X cause Y

How does it works?How does it works?

• Aviation is not static: Aviation is not static: – New aircraft salesNew aircraft sales– RPMRPM– PricesPrices– Cargo TonnageCargo Tonnage– Flying hoursFlying hours– On-time PerformanceOn-time Performance– Numbers of DeparturesNumbers of Departures

• ALL of these fluctuates over timeALL of these fluctuates over time

• So, with Time Series (TS) it So, with Time Series (TS) it detects detects regular movements/ sequence that are like regular movements/ sequence that are like likely to recur likely to recur and..and..

• Can further be used for future eventsCan further be used for future events

• Where do the movements/ sequence were Where do the movements/ sequence were obtained?obtained?– Data kept by the airliners such asData kept by the airliners such as

• Departures, Passenger enplanements, Flying Departures, Passenger enplanements, Flying hours etchours etc

Time Series a.k.a Trend AnalysisTime Series a.k.a Trend Analysis

Let’s demonstrate TSLet’s demonstrate TS

• There are 4 time-related factors that leads There are 4 time-related factors that leads to different types pattern in DV:to different types pattern in DV:– Long-term tLong-term trendsrends: Market growth as a result : Market growth as a result

of increases in populationof increases in population– Cyclical variationsCyclical variations: Caused by business cycle: Caused by business cycle– Seasonal phenomenaSeasonal phenomena: Like whether or : Like whether or

holidaysholidays– Irregular Unique events: Irregular Unique events: Wars, disasters or Wars, disasters or

even terrorismeven terrorism

The following table shows the respective international flight landed in KLIA from 2000

Year Tourist

2000 50

2001 83

2002 36

2003 65

2004 77

2005 102

2006 89

2007 42

2008 59

2009 98

Draw the time series and forecast the number of tourist in the year 2020.

Let’s demonstrate TSLet’s demonstrate TS

Judgmental methodsJudgmental methods

• Definition: Educated guess based on Definition: Educated guess based on intuition and subjective evaluationsintuition and subjective evaluations

• Least rigorous powerful for decision makingLeast rigorous powerful for decision making• 3 sources of Judgmental methods:3 sources of Judgmental methods:

– Expert OpinionExpert Opinion– Sales Force OpinionSales Force Opinion– Poll ForecastsPoll Forecasts

• Its usefulness depends on contextual needsIts usefulness depends on contextual needs

Question 1In the airline industry, there exist standard measures of

passenger traffic and airline output, which are also combined to generate several common measures of airline performance.

a)Describe what do you understand about the demand characteristics of airline service. (3 marks)

b) Discuss in your own words the definition and purpose of forecasting. (8 marks)

c) Define the judgmental forecasting method. From your opinion, what is the best source to ensure usefulness information such as advertisement for this method. (4 marks)

Question 2Accurate forecasts are crucial to a revenue management

system especially for airline revenue that could lead to adequate inventory controls and optimal revenue performance.

a)Brief in your own words the three type of forecasting and provide examples to support your answer. (6 marks)

b) Briefly explain in your own words the causal method for forecasting and provide a simple example aviation industry to support your answer. (4 marks)

c) Let say you are required to forecast the number of aircraft needed for the LIMA expedition in Langkawi urgently, discuss which type of forecasting method would you opt to use. (4 marks)

Question 3The forecast of the air transport demand has a great

influence on the development of airport master plans, which include runways, taxiways, boarding/landing area, waiting rooms, etc.

a)Briefly explain in your own words the forecasting methods in aviation industry . From your opinion, which is the best method and state your reasons. (8 marks)

b) State the 2 demands in airline industry and discuss what type of forecasting suit to quantify those demands (4 marks)

c) Analysis is one the purpose of forecasting, from you opinion, what kind of aviation data would a management analyses to increase the passenger revenue. (3 marks)