Homework 1 Today’s airline industry has changed radically since October 24, 1978? Explain in your word, what happen in that day and effect to Aviation Economy? Not more than 450 words. Keyword: Airline Deregulation Duedate : 7 th April 2011

Economy Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

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.  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.  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 unusual  Economists 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: Tourist/ business? Tourist/ business? Personal / family emergency travel Personal / family emergency travel

What are other demands in airline industry?  Fuel pegging  Cargo  Facilities  Flying Operations-Cabin Personnel  Aircraft Purchase and Lease  Ground Handling-Traffic Servicing  MRO- Aircraft servicing

Other demands in airline industry  Passenger service  Reservations and sales  Advertising and publicity  General and administrative demand, e.g. : Needs for new recruitment

So, how to ‘estimate’ all these demands?

Forecasting  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 period  What do you quantify? Revenue-dollars Revenue-dollars Revenue-passengers: Revenue Passenger Miles (RPM) a.k.a Passenger enplanements Revenue-passengers: Revenue Passenger Miles (RPM) a.k.a Passenger enplanements

 In airline industry, plan of the future cannot be made without forecasting demand  Does forecasting=planning?  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) Forecasting

 In airline industry, forecasting revenues is not a plan-Must have realistic fit with market condition  But plan is an indispensable 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 goals Forecasting

 Another 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 independently  I.e. Projection of flight hours also determine the future demand for Flight personnel Flight personnel Fuel consumption Fuel consumption Facilities etc Facilities etc Forecasting

Why forecasting is important in airline business?  Each type of forecast serves a particular purpose  Like… Short-term forecast Short-term forecast Medium-term forecasts Medium-term forecasts Long-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: Station personnel Station personnel Ground equipment needed Ground equipment needed Gate availability Gate availability Ground handling recruitment Ground handling recruitment Weather/ temperature forecasting Weather/ temperature forecasting Aircraft inspection, minor maintenance Aircraft inspection, minor maintenance Aircrew/ Customer parking facilities Aircrew/ Customer parking facilities  Normally 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: - Route-planning - Aircraft maintenance / spare-parts - Fuel pegging - Accident Awareness - Aircrew/Employee welfare Scheme 15

Long-term forecasts  For a period of 5 to 10 years  It involves: Fleet planning decisions Fleet planning decisions Goals, trademarks, promotions, publicity Goals, trademarks, promotions, publicity Airport Management Airport Management Long-term financial commitments, e.g.. 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” “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 purpose  So, either short-term, medium-term and long term forecast  To carry out 3 important management functions APC APC  Analysis  Planning  Control

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

Analysis  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 on  Instance of short-term’s decision Allocation and scheduling of all limited resources THAT DEMANDING for competing uses Allocation and scheduling of all limited resources THAT DEMANDING for competing uses  Instance of long-term’s decision Rates of expansion of capital equipment and fund Rates of expansion of capital equipment and fund

Planning  Planning airline data:

Control  The need of airliner to know its own control in the market  To 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 determine

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

Forecasting methods  Causal method  Time Series (a.k.a Trend Analysis) method  Judgmental method

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

Causal method  Some forecasting methods use the assumption that it is possible to identify the underlying factors that might influence the variable that is being forecast.  For example, including information about weather conditions might improve the ability of a model to predict umbrella sales.  Correlation: A pattern of relationship between the two or more variables The closer the relationship, the greater the degree of correlation. The closer the relationship, the greater the degree of correlation.

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: Limited availability of data Limited availability of data Deficiencies in measurement technique Deficiencies in measurement technique Outdated observations Outdated observations  So, the result is usually imperfect BUT not useless

Time Series a.k.a Trend Analysis  The oldest, most widely used  Time series methods use historical data as the basis of estimating future outcomes.  Like causal models, it is also founded on statistical correlation but it does not necessarily

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

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

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  Judgmental forecasting methods incorporate intuitive judgements, opinions and subjective probability estimates  Judgmental methods: Survey Survey Scenario Building Scenario Building  Its 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)