How to beat LCC, low cost carriers, this is a unique study thatexplore the strength of legacy airlines in terms of connectivity using linear program, it is a question of proper forecasting and good planning

1. How to Beat LCC
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Prepared By:
Eng: Mohammed Salem Awad
International Relations Manager
Yemenia
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2. How to Beat LCC
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Abstract :
Usually the main successful factor that deriving the low cost business is
the cost, and definitely LCC are dominate point to point model, that gain a
competitive edge to Legacy Airlines which don’t have a chance to
succeed, but if we consider a multi stops operation, the Legacy airlines can
be survive, by utilizing and implementing the forecasting procedures an
optimization techniques, that defining right seat allotments for each sector
to secure a profit, and depends on the Company objectives, a several
strategies are examined in environment of no competition, competition
giving a clear picture, where a legacy airlines to be stand.
1. Yemenia – Background :
The history of Yemen Airways goes back to the second 40s. Form 1949
until 1977, Yemen Airways had experienced moderate developments and
different kinds of structural reforms.
In July 1978 Yemen Airways took a big
step forward and new Company, Yemenia
–(Yemen Airways) was formed with 51%
share by Yemen government and 49% by
Saudi Arabia government. The formation
of Yemenia had reflected an ideal
international investment that is lasting unit now. We can say that 1978 is
considered as a landmark in the Aviation history of Yemen. It had
witnessed the beginning of a new era in air travel services and progress.
By the end of 1979, Yemenia had taken delivery of 4 brand new B-727-
200 and 2DHC-7 in 1980. During the period of 1980 to 1995, and with a
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3. fleet of 4 B727, B-737 and 2 DHC-7, Yemenia had undergone many
developments in all aspects of its activities. It had set up a big program for
training its human resources in Operation, Maintenance, and finance. In
the infrastructure side had expanded its maintenance capability and
introduced automatic reservation system and electronic data processing.
Its service had covered around 23 international destinations within 3
continents – Asia, Africa, and Europe and with good reputation in service
and excellent safety records that it was awarded the Certificate of
Membership for the years 1988/1989 form FSF (Flight Safety Foundation)
Inc. Also it had become a member of IATA, AACO and ICAO. Except for
the year 1982, its bottom line of income statement was always positive.
Yemenia
Throughout the 90s many developments had happened in Yemen. One of
Owned
the major in Yemen’s history was the unification of the two parts of the
Modern Fleet
country; North & South into one State called Yemen Republic.
As a consequence of this event, Yemenia had consolidated with DY, the
former South Yemen Airlines, in May 1996 and added to its fleet 2B-737-
100 and 2DHC-7 airplanes. During the year 1998, a further development
has taken place in the management side of Yemenia by assigning a new
Chairman for Yemenia, Capt. Adbulkhalek S.Al-Qadi (B747 Licensed
Captain). With a good vision in airline business and fully aware with the
recent development in the industry, the new leadership had set up Yemenia
goals and objectives so as to adapt to changes to economic, regulatory, and
market condition responding to Global International Business, and facing
the challenge of LCC in the main core business,
Yemenia implemented the state of art of new technologies adapted the
latest research techniques in Aviation, U Curve Technique, Optimum
Operation Curve, and use extensively operation research topic such as
Linear Program. Recently Yemenia owned a modern fleet of A330-200,
A310-300, And B737-800, and fly to more than 25 destinations.
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4. 2. Impact of LCC on Global Aviation
The deriving factors for a successful
aviation business today are costs and
demands and addressing the
competition in the aviation industry,
especially Legacy Vs LLC is a very
hard issue for those belongs to the
classical / traditional business model,
There will be (Legacy Airlines).
a time where The basic concept of LCC, is a good starting that defining the cost
structure, of the company and adapting a new business model that
Legacy
reinforce their aviation business, that keep them profitable.
Airlines Costs
even IATA response to this challenge by implementing a series programs
will meet the
as, Simplifying the Business, e-ticketing, e-fright, the aim of these
LCC level programs is reducing the cost and matching the level of LCC.
Cost. Other airline follows by another approach, which concentrate on a long
haul travelers business, as this can not be reached by LCC, and developed
a sequence of a series business where traveling only is one link in the
business chain.
3. Yemenia Repositioning
Really Yemenia can be act in to two ways
First : Adapting the Right Business Model ( Business Chain Model )
Second : Repositioning the Current Situation.
First : Adapting the Right Business Model
To day, the airline business is always related to other functional series
business as a package - business cycle ,which involved hotels, land
transportation ( taxi ) and finally tourist tour, So the sequence will getting
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5. the price of package that involve, so Yemenia should response to LCC
challenge, and learn from their model, because not only the traveling
business generate a stream of revenues but it is the links of business that
keep generation sustainable, traveling only one link in a series business
chain, so the business pattern is change, even though the fare of low cost is
to low, but it derive the other business to a profitable level by securing the
hotel, taxi, and tours business.
In our days people looking for a
Business complete package, that cover all
Models for their needs, i.e one shop visit,
under one roof.
Airlines are
change
So they prefer to get one deal
rapidly
that cover all theirs request in a
very competitive price, off
course LCC declare the lowest
fare in market which actually
compensate it by other streams of channel revenue in their business model.
Big companies developed their business model, as Emirates, which
including ground handling, and a free zone business, which actually
reinforce their income.
Second : Repositioning the Current Situation.
Yemenia can be repositioning by addressing the following issues :
3.1 Defining the most competitive routes.
3.2 Select Right Asset ( Aircraft ) To Operate.
3.3 Get Clear Picture of Market Fare.
3.4 Implement the Right Forecasting Procedure.
3.5 Survival Strategy.
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6. 3.1 Defining the most
Competitive Routes.
By using BCG Matrix, we
can define and select the right
Airline
strategy, for the competitive
Should sectors
Implement As SAH – DXB, SAH – AUH, and SAH – DOH.
The Right These sectors belong to Gulf and Far East Region (Market Segment) and
Strategy lay in the area of Question Marks? , that mean either to invest to derive
them to Star Region or moving out from the market.
3.2 Select Right Asset ( Aircraft ) To Operate
Yemenia develop a new logarithm that positioning the current fleet, to
define the right aircraft, by
using U Curve approach which
is the base of Optimum
Operating Curve of Gulf & Far
East Region as shown in the
figure
Three
The model is point to point
Factors
and the inputs are:
(Inputs) 1- Demand Passengers
Can Define 2- Market Fare
An Airline 3- Distance ( Stage Length )
Where the cost is step function ( i.e repeated cases as 0.1, 0.2, 0.3, 0.4,
0.5, 0.6, 0.7, 0.8, 0.9 , 0.1 ) then fitting the line for those outcomes point
to the continuous Black line, finally positioning Yemenia fleet by it
shows the right Aircraft is A310-300.
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7. 3.3 Get Clear Picture of Market Fare:
One of the main successful
factors, is to know where we
are standing, is our is fare
fitted to our network.
Yemenia examine this area
also, and develop a new
algorithm that define the right
fares in the network – point to point model ,by this we can mapping the
competitive fares in the competitive routes, and derive the competition
fares until the break even level, of course some times the fare beyond the
break even level of the LCC ( point to point ) if this is the case, we have
to consider the next step.
This shows our margin profit in each route,
Since Yemenia, operate Multi Stops Operation Model, we will see that
some applicable of certain route is extend the right fare with a clear
margin of profit.
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8. 3.4 Implement the Right
Forecasting Procedure.
A plan is nothing but planning is
everything, Forecasting is a
powerful tool for planning,
Yemenia develop, a unique
forecasting program that define
A Plan is and predicate the number of
nothing but passengers for each route, the
Planning is overall accuracy of these
procedures about 80 % which
Everything
consequently create the base of
KPI system. In the company.
These figures are the inputs in
another program to maximize the
profits in Multi Stops Operation
which can be demonstrated by the
next point.
Also forecasting can be indicated
the trends of each sectors
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9. 4.5 Survival Strategy
If we ask what are the strengths of Traditional Airlines over LCC,
definitely the answer will be Long haul Operation and Transit period
The concept of point to point Long haul operation is unhelpful in this
context if not merge with a multi stops operation maybe the legacy
airlines can gain a competitive edge on this point but we don’t look to
one of the strength
What ever the of legacy airline is
Fare of the long haul
operation, it will
Competitors it
be no benefit if the
will be the
airline operated
Margin profit
non stops just only
In Our routes a direct revenue,
while its local and regional market subjected to heavily loses due the
existence of LCC, and losing its market share, if we link the long haul
operation with Multi Stops points, then traditional can manage their
operation by applying a proper forecasting procedure and using a new
algorithms to define the right seat allotment per sector/trip, and
concentrated on long haul passengers market without losing their local
and regional passengers market.
Example : is SAH-DXB-JKT-KUL
The Level of Competition will be
Sector Legacy LCC Flt Hours
SAH-DXB EK G9 3
DXB-KUL EK 6:30
KUL-JKT AK, QZ 1:30
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10. Even it is hard analysis but legacy Airline can survive, by implementing
the right planning and forecasting for procedures those sectors to
maximize the profits in Multi Stops Operation
Case Maximize the Profit ( No Competition )
It depends on demand forecasting of Passengers of each sector
Case Maximize the Profit. it depends on demand forecasting of Passengers
In this case we get a profit of 81,540 USD per flight with a full board
seat utilization for the 3 sectors SAH-DXB, DXB-KUL, and KUL-JKT by
a 3 flight per Week. that is in Normal Operation, but if we look to problem
from another angle, ( Break Even Analysis )
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11. Case Break Analysis and SAH-DXB traffic = zero, KUL-JKT traffic
= zero so that what ever the sales of SAH-DXB and KUL-JKT it will be
the margin profit How !!!!!!
In this case, we put the fare of SAH-DXB, KUL-JKT, zero, this will lead
to ZERO load factor for the respective routes.
Now it is clear we have a profit margin of ( 1.00-0.14 ) = ( 0.86 ) on the
route of SAH-DXB, we can sale by the price of Air Arabia.
While for KUL-JKT, we have very tight margin ( 1.00-0.96 ) = (0.04)
So we have to concentrate on sector of DXB-JKT = ( 0.82 )
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12. If the company plans to get a share on KUL-JKT, so let us make a
constrains on the route of KUL-JKT ( ON BOARD – LF - not greater than
75% )
Still the company will have a profit margin of ( 1.00-0.40 ) = ( 0.60) on
SAH-DXB sector and (1.00-0.92 ) = ( 0.08 ) on DXB-KUL, and as we
planned ( 1.00-0.75 ) = ( 0.25 ) on KUL-JKT
Now it depends on the company policy, if they follow a survival strategy
they will sale as the others competitors but if they are planning to phase
out LCC, they will sale by a lower percentage to those of LCC.
Conclusions:
Legacy airlines can utilize their resources and strengths, to react, their
strengths will in Long haul operation and transit periods, in Multi Stops
Operation Model. The concept to utilize forecasting tools and the
optimization techniques to develop the best plan that keep them survive
these competitive environments.
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