Selected tools for increasing the efficiency of airlines

Introduction

Air carriers use a number of tools and methods to increase the profitability of this sector of the economy, in which – as some researchers point out – „the profit has moved away from the product” (Slywotzky et al. 2000, p. 95). Therefore, the review of available solutions in this area deserves attention, of which the key ones are presented below.

Cooperation in the aviation sector

Airlines use the synergy effect to increase the revenue generation area. Cooperation between carriers can take various forms. One of the most popular of these is code-share, i.e. sharing the connection made on the basis of reciprocity with the reservation systems of the second carrier. The cooperating airline assigns its own flight number to the connection and includes it in its network of connections. Thanks to this, it can offer, in its own reservation system, a destination that is not offered by the airline itself , but which is serviced by the partner line. Through developing its services, the airline increases its attractiveness for passengers. On the other hand, it generates an area of ​​additional revenues that it shares with the carrier actually performing the flight (Alderighi et al. 2015).

Affiliate leasing means a short or long-term rental of an airplane by one line to another. There are two types of such lending: „wet” (with crew) and „dry” (plane itself). This enables providing aircraft in periods of increased demand, without the need to purchase new machines that would be unused in the remaining period. It also allows the partner side to increase the efficiency of resources (technical and human) in the period of lower demand for its services.

Airline alliances are another method of airline cooperation. Airlines cooperating within alliances usually share loyalty programs and enable carriers to sell tickets of other members of the Alliance. The largest alliances are the Star Alliance (28 members) formed in 1997, Oneworld (14 members) created in 1999 and the SkyTeam (20 members) established in 2000. These alliances serve a total of about 60% of global air traffic. As indicated by the research, these alliances are sensitive to the departure of their members, which impacts the efficiency of the network of connections served by the alliance (Klophaus, Lordan, 2018).

Low cost carriers do not usually use the aforementioned solutions. This is due to the strategies adopted by them, focusing on strong competition with other players on the market. In spite of this, there are various forms of cooperation, such as selling tickets of other carriers (Ryanair offers Transatlantic Air Europe tickets in its reservation system1), coordination of connections enabling changeovers (Norwegian Air Shuttle, after taking control of swedish regional carrier FlyNordic, established cooperation with Finnair on connections at Helsinki airport2, and EasyJet collaborates with Singapore Airlines on Mediolan-Malpensa and Berlin-Tegel airports3), etc..

More often, however, the low-cost carriers conduct aggressive marketing and, for example, offer „emergency” connections for passengers of other lines, which for any reason have been suspended (e.g. due to bankruptcy of the carrier).

By their very nature, airlines cooperate closely with airports. However, this cooperation is not only operational in nature, especially in the case of regional airports, where airlines also operate on the basis of orders from regional authorities. These authorities usually manage regional airports, and even if they are not their owners or co-owners, they are interested in increasing the accessibility and prestige of the region, which among other things can be obtained by making it possible to reach its key urban centers by air. Formally there are restrictions (Olipra 2015) in subsidizing regional flights by local governments, but they are circumnavigated by ordering promotional services of a given region or city in the aviation sector. For example, the Marshal’s Office of the Lubuskie Voivodeship in Zielona Góra in 2016 allocated almost PLN 10 million for the promotion of the Lubuskie Voivodeship by an air carrier operating a connection from Zielona Góra/Babimost airport to Warsaw and back4. In fact, this amount covers 5 flights a week on the aforementioned route. It also illustrates the financing structure of a key European airline operating in the low-cost model, i.e. Ryanair, in which as much as 22% of revenues comes from public funds5. This confirms the far-reaching cooperation between airlines and local governments, even in the context of legal restrictions in this area.

The use of ICT tools

Aviation is a highly innovative sector. This applies to both the hardware sphere, where plane and other aircraft manufacturers constantly compete in innovative solutions, but it also includes the sphere of information and communication solutions. Solutions in this area are used by the aviation administration6, airports7 as well as air carriers, who from the middle of the 20th century invest significant resources in reservation systems, which were then extended to the airline management systems (Nucciarelli, Gastaldi 2008). In the latter sector, the following areas of application of communication and information technology can be distinguished (hereinafter also „ICT”):

– Generation and sale of tickets (e-ticket), including using mobile applications (Grabińska, Grabowski 2016). The introduction of electronic tickets in the nineties of the twentieth century revolutionized the aviation industry. Since 2008, all members of IATA (International Air Transport Association) are obliged to use this type of tickets. The electronic ticket contains the same data that was previously included in traditional paper tickets, but it is an electronic record in the carrier’s reservation system, which greatly facilitates its availability to send, distribute, verify, etc.. Tickets are also often offered in global distribution systems (also referred to as „GDS”). Carriers who decide to use this distribution channel, must integrate their IT systems with the system of a selected GDS and obtain its approval to share their tickets in such a system. It is connected with the possibility of a very wide offer of tickets8 through travel agencies around the world, but is associated with very high costs at the same time (Bożyk 2015). It should be noted that GDS, thanks to the scale effect and high margins, generates large profits, while many air carriers using their services bear losses. The average cost of booking a ticket by Amadeus for the airline is USD 5.1 (at USD 9 average earnings per passenger of an IATA member). The airlines are therefore looking for a method of moving the profit zone from GDS towards their own side, for example by introducing additional fees for tickets offered through GDS (Piotrowski 2017).

– Airlines' mobile applications. In addition to the above-mentioned functionality in the field of finding and purchasing an airline ticket, these applications enable contact with carriers, route visualization, information on delays, loyalty programs, additional services (i.e. VIP lounges at airports), flight tracking, purchase of additional services/change of reservations, guidebooks for destinations and even games for users9. These applications are designed to improve the comfort of passenger service, build customer loyalty and the airline brand. They are free to use and they are available for the most popular mobile operating systems, i.e. iOS and Android. They give air carriers opportunities for managing passenger relations, due to the significant increase in the use of mobile technologies by the general public (Pabisek 2015).

– Fleet and personnel management; operating activities. In 2010, the Greek Olympic airline company introduced tablets for operating activities, which translated into several dozen kilograms of savings in the documentation required on board of aircraft. In addition to the practical aspect, the ease of access to the individual files, this solution resulted in measurable savings in the fuel used and in the cabin space (Woźniak 2010). In March 2011, the American Federal Aviation Administration (FAA) also allowed such a solution on board of aircraft, as a result of which United Airlines and Continental Airlines introduced iPads to switch to „paperless” cockpits of planes, which resulted in savings in the amount of ca. 1.2 million liters of aviation fuel per annum, which corresponds to the environmental benefits in the form of up to 3,200 tonnes lower greenhouse gases emissions (Brzuzek 2011).

Diversification and selection of distribution channels

According to the business idea of ​​air carriers, in a contrary to the frequent practice of generating revenues from other sources described above (including public funds), the main source of financing of this activity are the revenues from the sale of airline tickets. However, even regarding revenues from tickets, carriers use various optimization tools. These relate to transaction costs and distribution channels related to intermediary margins. As regards the former, it is necessary to indicate the huge expenses related to the use of payment cards. According to IATA estimations, payment card operators, i.e. Visa, or Mastercard, take 1-3 percent of each transaction, getting more than 8 billion USD annually from the airline industry. In response to the carriers' demand for reduction of these costs, IATA is currently developing its own alternative solution in which transaction costs should be much lower (Storbeck 2018). Regarding distribution channels, carriers prefer direct sales, in particular via websites. According to the comments above, the use of intermediaries significantly extends the scope of distribution, but is combined with high costs. Low-cost carriers usually do not use GDS support at all, and network carriers introduce additional fees when purchasing a ticket through such systems. Charter carriers theoretically operate in a different model, in which the revenue for the flight is generated from the ordering party, not from the sale of tickets, but for several years there has been a tendency to introduce some charter tickets for direct sale by carriers (e.g. EnterAir), or by travel agencies (e.g. Tui, Rainbow), which, among others sell flights alone, without the additional travel services10.

Summary

The above paper presents only a few selected tools for increasing the efficiency of aviation operations. However, they are important for the business strategies of air carriers and therefore belong to the most frequently selected solutions in this regard. Despite constant growth in the aviation sector, there are still bankruptcies and acquisitions in the industry. This will translate into the search for new tools to optimize the business models of these enterprises.

Stefan Chabier


BIBLIOGRAPHY

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1 See https://corporate.ryanair.com/news/umowa-miedzy-ryanair-a-air-europa-przedluzona/?market=pl [access 29/03/2018]

2 See. http://wiadomosci.gazeta.pl/wiadomosci/1,114873,4387376.html [access 11/12/2018].

3 See https://www.pasazer.com/news/39394/easyjet,oglasza,wspolprace,z,singapore,airlines.html [access 11/12/2018].

4 See http://bip.lubuskie.pl/system/obj/31535_6_Ogloszenie_o_zamowieniu_opublikowane.pdf [access 22/10/2018].

5 Cf. https://pl.scribd.com/doc/33124715/Ryanair-Business-Model-under-a-new-light, [access 22/10/2018].

6 e.g. navigation support systems, airspace management, etc…

7 A-CDM solutions ( Airport Collaborative Decision Making) – a platform for sharing information for supporting decision-making processes of all airport services, or advanced RFiD ( Radio-frequency identification) systems to track passengers and luggage.

8 It is estimated that in Europe alone, 36 million passengers a day use connections handled by Amadeus, which is available in 70% of travel agencies throughout Europe and serves 400 airlines around the world – see Муханова 2016.

9 See e.g. the Virgin Atlantic Flight Tracker application [access 18/10/2018].

10 In this arrangement, the revenue of the carrier still comes from the agency ordering the flight, and not from the sale of tickets.


Photo: Lotnisko Katowice / Piotr Adamczyk

Autor: Stefan Chabiera

MBA - doktorant w Katedrze Strategii i Metod Zarządzania na Wydziale Zarządzania, Informatyki i Finansów Uniwersytetu Ekonomicznego we Wrocławiu, uczestnik programu MNiSW pn. "Doktoraty Wdrożeniowe". Prezes Zarządu Bidadari sp. z o.o. oraz członek zarządu Towarzystwa Oświatowego im. Cecylii Plater-Zyberkówny. Członek Aeroklubu "Orląt".