Route Planning and Evaluation
Given a fleet plan, the process of route
planning and evaluation involves the
selection by the airline of which routes
should be flown. The route selection
decision is both strategic and tactical. It is
an essential component of an integrated
network strategy or “vision” for the airline,
which must decide whether to focus on
short-haul or long-haul services, domestic
or international operations.
Route Planning and Evaluation
At the same time, the characteristics of the
selected routes will affect the types of
“products” the airline offers to travelers.
For example, an international route
network will likely lead to a decision that
business- and first-class products should
be offered in order to be competitive.
Route Planning and Evaluation
The distance or “stage length” of the
selected routes will also affect the airline’s
cost structure, as longer routes will likely
be flown with bigger aircraft that have
lower unit costs per seat and per ASK.
Route Planning and Evaluation
Route planning can also be a much shorter-term
tactical process, as unexpected route
opportunities often present themselves to the
airline with changes to the market environment.
For example, the bankruptcy of another airline, a
withdrawal from a route by a competitor, or a
newly negotiated bilateral agreement with
another country can lead to new route
opportunities that must be acted upon within
months or even weeks.
Route Evaluation Issues
Economic considerations dominate route
evaluation, especially for airlines operating
in competitive environments with a profit
maximization objective. These evaluations
of the potential for a route to be profitable
can be performed at a very high level (like
“top-down” fleet planning) or at a more
detailed level of assessment.
Route Evaluation Issues
Perhaps the most important inputs to any
route evaluation are forecasts of potential
passenger and cargo demand (as well as
expected revenues) for the proposed
route.
Route Evaluation Issues
For a given route, O-D market demand is
likely to be the primary source of demand
and revenues, but far from the only
source. In airline hub networks, traffic flow
support to the new route from connecting
flights and other (non-local) O-D markets
can make the difference between
expected route profitability and loss.
Once a forecast of the total O-D market
demand (per period) for the route in
question has been generated, an equally
important step is the estimation of the
market share that the airline can expect of
this total demand.
The airline’s own market share of total
forecast demand will depend on its frequency
share in the market, the path quality
of its planned services (non-stop versus
connecting flights), as well as its planned
departure times. To the extent that the competitive
marketplace will allow differences to
be maintained, relative prices and service quality
can also have a significant impact on
expected market share of total demand.
Route Planning and Evaluation
The fundamental economic criterion for
evaluation of a planned route is its
potential for incremental profitability in the
short run, given the opportunity cost of
taking aircraft from another route.
However, in route planning (as in fleet planning) a number
of practical considerations can be just as important as
the outcome of the economic evaluation. The technical
capability to serve a new route depends on availability of
aircraft with adequate range and proper capacity. The
performance and operating cost characteristics of
available aircraft in the airline’s fleet will in turn have a
substantial impact on the economic profitability of the
proposed route. If the route involves a new destination,
there will be additional costs of establishing the required
airport facilities and sales offices, along with staff
relocation.
Regulations, bilateral agreements and limited
airport slots can also impose constraints
on new route operations, to the point of nonprofitability. For example, while a new route
to Hong Kong might appear to be a viable option
for the airline, the availability of landing
slots only at undesirable arrival and departure
times will have a negative impact on the
airline’s market share and route profitability.
In some cases, strategic considerations might be
used by an airline to proceed with the
initiation of service on a route despite a negative
outcome from the economic evaluation
of expected route profitability. Given the political
and other uncertainties of international
bilateral agreements and route opportunities, the
airline might focus on the longer-term
competitive and market presence benefits of
entering a new route even if it is expected
to be unprofitable in the short run.
Route Planning Models
Demand, operating cost and revenue forecasts are
required for the specific route under consideration,
perhaps for
multiple years into the future. An estimate of the airline’s
own market share of total
demand is also critical, based on models of passenger
choice of different airline and
schedule options. Both the forecasts of future demand and
market share will depend to a
large extent on the presence and expected response of
competitors to the planned route
entry.
“Route profitability models” have been developed both by
some airlines and by software
vendors for purchase by airlines. These are computer
models designed to perform such
route evaluations based on detailed inputs that include
demand forecasts, operating cost
estimates, and planned frequency and schedule of
operations for the airline using the
model. The objective such models is to allow airlines to
select routes to maximize total
airline profits, given a set of candidate routes and
estimated demands, subject to fleet and
capacity constraints.
These models have proven to be useful in
comparing alternatives, but airlines must
recognize that the profit estimates generated by
the models are entirely dependent on the
accuracy of future demand and revenue estimates,
the allocation of operating costs to
each route, and assumptions concerning expected
market shares. A major shortcoming of
even the most sophisticated airline profitability
models is a very limited ability to integrate
competitive effects.
Route Planning and Evaluation