The Demand for Airline Service Forecasting methods use in determining the demands in airline industry

Airline Demand Market In the airline industry, there exist standard measures of passenger traffic and airline output.In the airline industry, there exist standard measures of passenger traffic and airline output. Airline carriers have to produce one of the most perishable goods (passenger transport).Airline carriers have to produce one of the most perishable goods (passenger transport). This fact has forced carriers to implement and refine practices and strategies in order to react promptly to the ups and downs of the demand.This fact has forced carriers to implement and refine practices and strategies in order to react promptly to the ups and downs of the demand. Measures of “airline traffic” quantify the amount of airline output that is actually consumed or sold.Measures of “airline traffic” quantify the amount of airline output that is actually consumed or sold.

What is the demands for airline service? Unlike other industry, here is some demand characteristics of airline service- Not unique rather unusualUnlike other industry, here is some demand characteristics of airline service- Not unique rather unusual Economists call it “intermediate good”- People use air transportation to achieve some other purpose not for the sake of flying: Passenger DemandEconomists call it “intermediate good”- People use air transportation to achieve some other purpose not for the sake of flying: Passenger Demand So, in passenger demand its important to examine its all aspects:So, in passenger demand its important to examine its all aspects: –Tourist/ business? –Personal / family emergency travel

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 industry Passenger servicePassenger service Reservations and salesReservations and sales Advertising and publicityAdvertising and publicity General and administrative demand, e.g. : Needs for new recruitmentGeneral and administrative demand, e.g. : Needs for new recruitment

So, how to ‘estimate’ all these demands?

Forecasting Why is it important?Why is it important? “Business action taken today must be based on yesterday’s plan and tomorrow's expectations” -“Business action taken today must be based on yesterday’s plan and tomorrow's expectations” - J. G. Wensveen 2007 Forecasting: The attempt to quantify demand in a future time periodForecasting: The attempt to quantify demand in a future time period What do you quantify?What do you quantify? –Revenue-dollars –Revenue-passengers: Revenue Passenger Miles (RPM) a.k.a Passenger enplanements

In airline industry, plan of the future cannot be made without forecasting demandIn airline industry, plan of the future cannot be made without forecasting demand Does forecasting=planning?Does forecasting=planning? Forecasting is predicting, projecting, or estimating future financial situation (outside managerial control)Forecasting is predicting, projecting, or estimating future financial situation (outside managerial control) Planning concerned with setting objectives and goals and with developing alternatives to reach them (within managerial control)Planning concerned with setting objectives and goals and with developing alternatives to reach them (within managerial control) Forecasting

In airline industry, forecasting revenues is not a plan-Must have realistic fit with market conditionIn airline industry, forecasting revenues is not a plan-Must have realistic fit with market condition But plan is an indispensible part of forecasting as it must be goals, strategies and development of alternativesBut plan is an indispensible part of forecasting as it must be goals, strategies and development of alternatives It is a management tool for deciding now what the company must do to realize its profit and future goalsIt is a management tool for deciding now what the company must do to realize its profit and future goals Forecasting

Another significant of forecasting for aviation industry is forecasts of one type of demand may also be based on other forecastsAnother significant of forecasting for aviation industry is forecasts of one type of demand may also be based on other forecasts That is, it does not only done for a given type of demand independentlyThat is, it does not only done for a given type of demand independently I.e. Projection of flight hours also determine the future demand forI.e. Projection of flight hours also determine the future demand for –Flight personnel –Fuel consumption –Facilities etc Forecasting

Why forecasting is important in airline business? Each type of forecast serves a particular purposeEach type of forecast serves a particular purpose Like…Like… –Short-term forecast –Medium-term forecasts –Long-term forecasts The types of forecasting

Short-term Forecast A total of passenger enplanements between a particular pair of cities to provide a basis for determining:A total of passenger enplanements between a particular pair of cities to provide a basis for determining: –Station personnel –Ground equipment needed –Gate availability –Ground handling recruitment –Weather/ temperature forecasting –Aircraft inspection, minor maintenance –Aircrew/ Customer parking facilities Normally done for 1month to 1 year period and cover day-to-day expensesNormally done for 1month to 1 year period and cover day-to-day expenses

Medium-term forecasts Generally for a period of 1-5 years and it involves things such as:Generally for a period of 1-5 years and it involves things such as: - Route-planning - Aircraft maintenance / spare-parts - Fuel pegging - Accident Awareness - Aircrew/Employee welfare Scheme 13

Long-term forecasts For a period of 5 to 10 yearsFor a period of 5 to 10 years It involves:It involves: –Fleet planning decisions –Goals, trademarks, promotions, publicity –Airport Management –Long-term financial commitments, e.g.. –“Aircraft-manufacturer might make a long- term forecast of demand for an aircraft specifically designed to serve the passengers of airliners’ market so that they could make a plan to meet the projected demand”

The purpose of forecasting Each type of forecasts serves a particular purposeEach type of forecasts serves a particular purpose So, either short-term, medium-term and long term forecastSo, either short-term, medium-term and long term forecast To carry out 3 important management functionsTo carry out 3 important management functions –APC AnalysisAnalysis PlanningPlanning ControlControl

Analysis Every airliners must make choices among the many markets or submarkets open to itEvery airliners must make choices among the many markets or submarkets open to it Plus… deciding onPlus… deciding on –Level of service to offer –The type of aircraft to fly on particular route –So, in the end…they have to decide the type of aircraft they have to purchase/ lease –Along…with its costs

Analysis Analysis airline data:Analysis airline data: Age RangeNumber of pilot DonationNumber of collections RM 125 RM 250 RM 575 RM 1050 RM 1537 RM 2013 RM 5010 RM 1008

Planning Every airline firms must make short-term AND long-term decision onEvery airline firms must make short-term AND long-term decision on Instance of short-term’s decisionInstance of short-term’s decision –Allocation and scheduling of all limited resources THAT DEMANDING for competing uses Instance of long-term’s decisionInstance of long-term’s decision –Rates of expansion of capital equipment and fund

Planning Planning airline data:Planning airline data:

Control The need of airliner to know its own control in the marketThe need of airliner to know its own control in the market To determine how does the airliner’s actual performance: REVENUETo determine how does the airliner’s actual performance: REVENUE For example, a CEO/ President of an airliner is dissatisfied with the delay in flight scheduling, thus, need to determineFor example, a CEO/ President of an airliner is dissatisfied with the delay in flight scheduling, thus, need to determine

Control Control airline data:Control airline data: MonthFlight Delayed Jan5 Feb15 Mar10 Apr20 May18 Jun25 Jul30 Aug35 YearBaggage Lost

Forecasting methods Causal methodCausal method Time Series (a.k.a Trend Analysis) methodTime Series (a.k.a Trend Analysis) method Judgmental methodJudgmental method

So, which of which? Depends on:Depends on: –Availability of data –Management sophistication –Intended forecast use –Availability of electronic data processing

Causal method Based on statistical relationship between the forecasted (a.k.a. dependent) variable and or more explanatory (a.k.a. independent) variablesBased on statistical relationship between the forecasted (a.k.a. dependent) variable and or more explanatory (a.k.a. independent) variables Can either be causal-and-effect relationship (not necessarily) or simply a relationship/ association/ correlationCan either be causal-and-effect relationship (not necessarily) or simply a relationship/ association/ correlation Correlation: A pattern of relationship between the two or more variablesCorrelation: A pattern of relationship between the two or more variables –The closer the relationship, the greater the degree of correlation.

How does causal method works? By finding the variables that explain (IV) statistically the changes in the variable to be forecast (DV)By finding the variables that explain (IV) statistically the changes in the variable to be forecast (DV) The IV must have these characteristics:The IV must have these characteristics: –Statistically related to the DV –Data on these IVs must be available –The relationship between these IV and DV must be 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 assumptions that existing patterns and historical relationships will continue in the future.A: Most forecasting methods are based on the assumptions that existing patterns and historical 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 available in order to forecast the DV (s):In addition, DATA of IVs must be made available in order to forecast the DV (s): –Gross National Product (GNP) –Disposable Personal Income (DPI) –Consumer spending on services Causal method

Therefore, DV (s) can be forecasts that might include..Therefore, DV (s) can be forecasts that might include.. –RPM: Revenue Passenger Per Mile –Passenger Revenue For example, in aviation sector, aircraft purchases correlates with profits in the economyFor example, in aviation sector, aircraft purchases correlates with profits in the economy Aircraft purchases is only one of the IV but via sophisticated causal method it could determine up to IVsAircraft purchases is only one of the IV but via sophisticated causal method it could determine up to IVs Causal method

The formula is…The formula is… Linearity: Linear correlationLinearity: Linear correlation That is how IV and DV correlated in one linear line:That is how IV and DV correlated in one linear line: –Y= mX + c OR –Y=a+bX Causal method

Let’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 number of touristLet’s say we would like to determine the number of tourist So Y= a+bXSo Y= a+bX –Number of tourist= a+b –X= number of aircraft –Y= number of tourist

Let’s Demonstrate Causal Method PayrollFlight landed RM RM RM RM 4355 RM 5856 RM 5662 RM 6284 RM 4378 RM 5773 RM 7567 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 obstacles Although it is the most sophisticated method, but there are several difficulty that may hinder its usefulness in forecasting, such as:Although it is the most sophisticated method, but there are several difficulty that may hinder its usefulness in forecasting, such as: –Limited availability of data –Deficiencies in measurement technique –Outdated observations So, the result is usually imperfect BUT not uselessSo, the result is usually imperfect BUT not useless

Time Series a.k.a Trend Analysis The oldest, most widely usedThe oldest, most widely used Mainly for estimating demand in aviation industryMainly for estimating demand in aviation industry It shows how DV as a function of single IV- TIMEIt shows how DV as a function of single IV- TIME –How time determine demands in airline Like causal models, it is also founded on statistical correlationLike causal models, it is also founded on statistical correlation –But it does not necessarily reflect X cause Y

How does it works? Aviation is not static:Aviation is not static: –New aircraft sales –RPM –Prices –Cargo Tonnage –Flying hours –On-time Performance –Numbers of Departures ALL of these fluctuates over timeALL of these fluctuates over time

So, with Time Series (TS) it detects regular movements/ sequence that are like likely to recur and..So, with Time Series (TS) it detects regular movements/ sequence that are like likely to recur and.. Can further be used for future eventsCan further be used for future events Where do the movements/ sequence were obtained?Where do the movements/ sequence were obtained? –Data kept by the airliners such as Departures, Passenger enplanements, Flying hours etcDepartures, Passenger enplanements, Flying hours etc Time Series a.k.a Trend Analysis

Let’s demonstrate TS There are 4 time-related factors that leads to different types pattern in DV:There are 4 time-related factors that leads to different types pattern in DV: –Long-term trends: Market growth as a result of increases in population –Cyclical variations: Caused by business cycle –Seasonal phenomena: Like whether or holidays –Irregular Unique events: Wars, disasters or even terrorism

The following table shows the respective international flight landed in KLIA from 2000 YearTourist Draw the time series and forecast the number of tourist in the year Let’s demonstrate TS

Judgmental methods Definition: Educated guess based on intuition and subjective evaluationsDefinition: Educated guess based on intuition 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 Opinion –Sales Force Opinion –Poll Forecasts Its usefulness depends on contextual needsIts usefulness depends on contextual needs

Question 1 In 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 2 Accurate 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 3 The 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)