The Air Transport Industry: Fleet Planning - Research Proposal Example

The Air Transport Industry: Fleet Planning 1. Introduction Fleet planning is a tremendously vital process in the operation of an airline. In this process, an airline procures and manages the right fleet-size and aircraft capacity so as to meet the anticipated market in different routes. Fleet planning involves evaluating existing aircraft types and any new types, carrying out a comparison of all costs, and making sure the fleet is compatible with the business model and route network. It is implicit that fleet planning engages all the departments of an airline since the aircraft a significant asset for the airline. Fleet planning is essential for the airline, regardless of whether the airline operates a large fleet or a small fleet (Wensveen, 150). This is because the modern business environment has unusually many uncertainties and risks on a macroeconomic scale, as well as for the individual businesses. The airlines have two options, the first being outsourcing the fleet planning operations. The second option is developing an in-house fleet planning development with a staffing mix of computer experts and industry professionals with a broad knowledge of the airline industry dynamics. Fleet planning process has eight facets. These include market analysis, traffic rights analysis, revenue analysis, schedule analysis, aircraft analysis, financial analysis, crew analysis, and technical analysis. The fleet planning process should shape the fleet to meet customer requirements and be consistent with the airline’s business strategy. I will evaluate the eight facets either explicitly or implicitly in the sections that follow. This report is on the fleet planning for a hypothetical airline, British American Airways (BAA). I have made significant assumptions on the business model of the airline, its alliances, route network, the ancillary operations, and operation base. The fleet data, market share, airline capacity, aircraft utilisation factor, and airline traffic information refer to the base year, 2012. 2. Market Analysis The projections for the global airline business are positive. It will have revenue compound annual growth rate of 4.5 per cent and a volume compound annual growth of 4.5 per cent for the 2011-2016 periods. The overall performance of the airline industry will accelerate, with the total value of the industry will increase by 94 per cent between the year 2011 and 2016. This is positive for the airline industry since investors will channel significant investment to this growing industry. It is noteworthy that this will sustain the overcapacity of the airlines. British American Airways has its headquarters at the Heathrow Airport, a leading airport in the world. It operates flights between London and USA, with a point-to-point network model. Europe and America account for 32.2 percent and 41.8 of the global airline by value. This implies that BAA has a network across two continents that account to almost three quarters of the global airline business by value. This is a positive factor which implies that infrastructure, human resource, and ancillary operations are the best. Unlike the global industry, in which 68 per cent of flights are domestic flights, the European Airline industry has 68 per cent of flights as international flights. The United Kingdom airline industry is the second largest in Europe, with 13.2 per cent of the total value in Europe. The volumes of passengers in the European aviation market will grow at a compound annual growth rate of 4.2 per cent. However, the market in the United Kingdom will grow at a slightly lower rate. The United Kingdom is a powerhouse in the global arena. London is a leading financial centre that attracts a lot of business executives from across the Atlantic. The city of London is a key cultural centre which has many museums and historical buildings and sites. The city also stages a variety of games including marathons, tennis, football, cycling, and horse racing. All these mean there is a constant influx of international tourists. Although the demand outlook for the aviation industry is strong, there are certain shocks and trends that can cloud it. The credit crunch experienced in the United States had significantly affected demand. Further, most of the European economies have a sovereign debt crisis. This is affecting demand because there are low disposable incomes translating to a decrease in international travel. The rate of growth of the volume in the airline industry follows the rate of growth of the Gross Domestic product. The United Kingdom is quite stable economically. This translates to stability for this London Based Airline. The long term trend that is quite worrying is the emergence of Low Cost Carriers. These airlines model on the concept of securing the lowest unit cost in the relevant market. These carriers bring about price competition in an era of increasing liberalisation. This brings about a challenge of offering the customer either a ‘low price’ offer or a ‘full service’ experience. The demand level for in between level of service is highly uncertain (Chunhua et al 10). This means that the airline must rethink its business strategy in order to maintain profitability. British American Airways has a 20 per cent market share. However, despite overall growth in value and volumes in the airline industry and BAA, the market share of BAA will remain steady over the next five years. This is mainly because of intense competition from rival airlines, which have gained strategic advantage through mergers and alliances (Shaw 120). British Airways merged with Iberia and, therefore, increased the number of routes and connection choices. BAA has a business strategy to counter this so as to maintain market share. 3. Business Strategy British American Airways has a total contribution approach to doing business. The airline seeks to minimise cost while maximising profits. This requires a good business strategy, a well trained human resource to implement the strategy, and proper tools to carry out the functions. The discussion that follows reflects the five year business strategy of BAA. British American Airways aims to maintain its small network as it is, because it is profitable. The routes are where the premium customers of the airline want to go. Although all the aircrafts in the BAA fleet have a three class configuration, the premium class passengers effectively subsidise the economy class. Therefore, the airline will maintain the routes of choice of these premium class passengers while targeting to grow their numbers within these routes. This simple approach is favourable to point to point network model that British American Airways uses. It is true that there is no true point to point network model since the headquarters at Heathrow is a hub in a sense. Most flights originate or terminate at this airport, but there are seldom any connecting flights. The point to point network model deals with the origin and the destination of a flight. This simplification is the strength of British American Airline. It enables the airline to maintain market share with a relatively smaller fleet than other players in the same routes. The customer is king (KLM 7). The airline seeks to win customers and maintain them through superior value of the services it offers. This means that, although the airline will engage in tactical sales promotions, it will focus on brand building in order to attract the premium segment of the market. This means that it should target its advertising, its customer service experience, and its personnel training in line with this goal. Furthermore, the company has a loyalty programme in collaboration with hotels, both in London and key cities, across the United States. British American Airways seeks to maintain profitability through a relentless focus on cost. This is through improved efficiency in all areas of operation. The past ten years have seen an increase in the price of crude oil and, consequently, the price of jet fuel. Fuel is a substantial cost in the operations of the airline, accounting for over 30 per cent of the total operating cost. The airline is especially vulnerable to fluctuating fuel prices since it operates long haul flights. One way to reduce fuel cost is to reduce consumption by using efficient technology. Another area where efficiency cuts costs is in the maintenance and ground operations. These ancillary operations can considerably increase the operating costs if not handled efficiently. British American Airways has its own department that does ground handling and maintenance. The airline, however, seeks to collaborate with another airline in order to achieve savings, and tap into other sources of knowledge and experience in these matters. Simplicity is a key philosophy in all operations of British American Airways. First, the airline’s fleet consists of similar long range wide body aircrafts. Secondly, the route network is simply from London to significant cities in the United States. Thirdly, the airline focuses on its core business: flying the customer. Every other service must contribute towards the execution of the core business (“Transportation Science”, 505). This ensures that ground-handling, training, engineering, and maintenance enhance the efficiency and quality of the core business. It is clear that the airline has a cautious approach to growth. However, the airline has to accommodate any growth in its loyal customers and still be able to meet peak demand. This translates to maintaining a certain load factor or utilisation factor to allow for this. However, the load factor will still be consistent with the airline’s goal of minimising cost. 4. Fleet British American Airways has a fleet of long range three class aircrafts. These include three Airbus 340-300 with capacities of 290 seats, eight Airbus 340-600 with capacities of 380 seats, and six Boeing 747-400 with capacities of 410 seats. The B747-400 type first began operation in 1989, while A340-300 type first began operation in the year 1993. The A340-600 is the latest of the aircraft types, commencing operation in the year 2002. The Airbus 340-300 models are the oldest in the BAA fleet with an average age of 15 years. The Boeing 747-400 models in the fleet have an average age of 11 years while the Airbus 340-600s in the fleet have an average age of just 7 years. These aircrafts have similar characteristics in that they are wide body long haul planes with four engines each. The airline currently owns all the aircrafts using varying financing mechanisms. The Boeing 747-400 and the Airbus 340-600 are relatively new. Although 747s appear to be close to the average retirement age of commercial jets in the European aviation industry, it is in superb working condition with more useful commercial life. Furthermore, they are technologically sophisticated and would meet the stringent demands of aviation authorities in Europe and America. Production of this aircraft ceased in the year 2008. The Airbus 340-600 are the most recent acquisition of the airline. This model held the record for the longest commercial airliner until the Boeing 747-8 emerged in 2010 (Clark 58). This model of 340 has a lower cost per unit than the Boeing 747-400. 5. Demand Modelling In 2011, British American Airways had Available Seat kilometres (ASK) capacity of 25000 million. The Revenue Passenger Kilometres (RPK) was 20000 million. I assumed that all aircraft had the same utilisation factor (load factor). This represents a load factor of 0.8 as illustrated below: Load factor = RPK / ASK 0.8 = 20 000 / 25 000 The market analysis projects that the airline will maintain its 20 percent market share in the market segment it operates. There will be no change in the route network. However, the overall market volume will increase at a compound annual rate of 4.2 percentage points. Over the 2011 to 2016 period, this represents 22.84 a percent increase in passenger volume. This translates to an RPK of 24 600 million. The Available Seat Kilometres of 25 000 million barely covers the RPK in 2016, implying 100 per cent utilisation factor. From the foregoing analysis, it is quite clear that the airline needs to increase its fleet to meet future demand while maintaining an acceptable load factor of, say 0.8, which is higher than the world average (Barnhart et al 371). This translate to having an ASK of 31 000 million by the year 2016. This is approximately a 25 per cent increase in the fleet capacity. 6. Other Considerations The airline addresses many issues when purchasing new aircraft. Among the issues top on the airline’s agenda are fuel efficiency, financing, human resource training, and ownership plans (Clark 200). The technical specifications of the aircraft will not change much to the ones used by the airline. The airline already has a staff that handles and maintains its aircraft models. If there is no change in model, personnel training will be at a minimum. This will save on associated costs and eliminate problems associated with new models. 7. Fleet Plan British American Airways intends to retire the three Airbus 340-300 because of their advanced age. They have an age higher than the European average of 13.2 years. The airline will replace the A340-300 with the A340-600 model. This is mainly because the UK-USA route has a high density of passengers, making this larger and newer model quite suitable. The model was a replacement for the B747-400, which is no longer in production. The airline also intends to acquire more A340-600 aircraft to increase the capacity of the fleet in order to meet demand and load factor requirements. The available seats were 6370. A 25 per cent increase requires 7963 seats. Assume similar utilisation for all planes, this means an addition of 4 Airbus A340-600 to increase capacity, and three aircrafts of the same model to replace the A340-300 while increasing capacity. The airline will stagger the acquisitions over the five year period in three instalments. The airline will acquire three aircrafts in 2012 to replace the A340-300, which BAA will retire. This will provide an additional 270 seats, which covers the increases in volume to maintain the 0.8 load factor. BAA will acquire two more aircrafts in 2013 and the last batch of two aircraft in the year 2015. However, the challenge is that the airline will source second hand airplane if it plans to buy. The airline considers leasing of this aircraft from a lessor in order to allow room for a brand new acquisition in the medium term. 8. Conclusions This report has reaffirmed the notion that fleet planning engages all the departments of the airline. The business model of the airline is a key driving factor to ensure profitability. British American Airways goes for simplicity and a focus on the core business. Further, the airline makes sure it delivers a branded customer service to attract and retain customers. This is the strategy to maintain market share and ensure the airline utilises the aircrafts it acquires to a satisfactory degree. Demand forecasting is a key aspect of the fleet planning process. I have adequately dealt with this and shown the required fleet size. BAA will be able to deliver its services to customers efficiently even at peak times. Moreover, the experienced experts will handle the technical aspect of the new additional planes. The report has adequately handled the acquisition of the aircraft which is the principal asset in the operation of the airline. Works cited Wensveen, John G. Air Transportation: A Managers Perspective, USA: Ashton. 2012. Print Clark, Paul. Buying the Big Jets. U.K , Ashton. 2007. print Barnhart, Cynthia, Peter Belobaba, and Amedeo R. Odoni. "Applications Of Operations Research In The Air Transport Industry." Transportation Science 37.4 (2003): 368- 391. Business Source Complete. Web. 12 Dec. 2012. Chunhua, Gao, Ellis Johnson, and Barry Smith. "Integrated Airline Fleet And Crew Robust Planning." Transportation Science 43.1 (2009): 2-16. Business Source Complete. Web. 12 Dec. 2012. "Robust Airline Fleet Assignment: Imposing Station Purity Using Station Decomposition." Transportation Science 40.4 (2006): 497-516. Business Source Complete. Web. 12 Dec. 2012. Shaw, S. Airline Marketing and Management, U.K., Ashgate: 2011. "DATAMONITOR: Air France-KLM." Air France KLM SWOT Analysis (2011): 1-11. Web. 12 Dec. 2012. Read More