Route and network profitability - the basic principles February 2000

Profitability measurement capability is a vital element in the management of an airline’s network and cost base. Key resource allocation decisions are made on the basis of the information provided, from frequency changes, to route closures/launches, to fleet reduction/expansion, to hub investment all the way up to short–haul vs. long–haul network trade–offs. The system and approach are a potential source of competitive advantage — or disadvantage.

The information has to be right, and management must know and understand how to interpret what is being presented. The challenges of achieving such a capability can be most easily encapsulated in three expressions of management consulting motherhood:

Robustness: Is data captured accurately at source? Are cost and revenue allocation mechanisms (to routes and/or O&Ds) appropriate?
Consistency: Is data handled/processed consistently with other MIS tools? Are the Route Profitability, Sales Performance Monitoring and central MIS (management accounting and planning) systems sufficiently integrated to provide a consistent platform for decision–making?
Transparency: Are reports easy to understand and interpret? What are the key measures and analyses to focus on? Are the network impacts of routes and decisions clear? What is the revenue/ profit impact of code–shares and alliances?

Alongside all this, there are multiple technology issues: how and where to process/warehouse such huge volumes of data; integration with existing architecture; meeting data and information availability and timeliness goals; designing data quality control processes; enabling flexible online/ ad–hoc analysis; and so on.

In this section of Aviation Strategy we will be publishing a series of articles focusing on this potential management nightmare:

Setting the objectives and principles;
Allocation of costs and revenues to flights/routes;
Report strategy and content; and
Achieving a network orientation.

Development principles

This article covers objectives and principles, and is intended as a scene setter. The aim is to alert senior management, system owners and developers to the need to build a platform for future competitiveness. Some of it may sound like motherhood, but it is rare to find an airline that has followed all these "statements of the obvious". People and technological history often get in the way. Most airline managers in today’s business environment need the following:

Fast reporting of changes in the market place;
A focus on profit;
An ability to dig behind and analyse profit issues;
Visibility of the impact (forecast) and performance (actual) of decisions;
A sound and common basis for decision–making. The technology available today allows these needs to be satisfied. However, very few airlines have yet reached this state. Those that have know that such a development is most definitely evolutionary rather than revolutionary.

Technology is continuously changing. New systems take time to develop, integrate and implement. And because of the scope of systems and functions involved in Network Profitability Measurement, once one technology or system is implemented, another part of the whole needs upgrading.

And management requirements are slow to develop and mature as well. It takes time to define, refine and agree the analyses that become the foundation of decision–making because:

Network performance measurement is by its very nature cross–functional, encompassing, for example, sales, network planning, scheduling, finance, and each constituency has its individual needs and biases;
The amount and sophistication of available information is increasing;
It takes time to align data and information needs with an ever–changing and complex market place.

Leading airlines typically quote a period of three years before a stable set of "core" management reports are established and consistently used. So, while accepting that change will be evolutionary, senior management needs to establish the following principles for development.

Minimise the duplication of data processing and storage Ideally, cost and revenue information should be fed into MIS tools from a set of integrated data warehouses that capture, check and store base data in one place. Duplication is full of dangers. For example, an airline that feeds coupon data from its revenue accounting system into more than two separate data warehouses to feed different MIS tools risks increasing the cost of data processing, degrading the revenue accounting system and causing data reconciliation and consistency problems.

Establish a centralised control or guardianship over data definitions An airline’s management team must develop a common language and understanding of key measures. Too often, terms such as gross revenue and net revenue have completely different inclusions/exclusions across and even within departments.

Build quality into the core data as early in the data flow as possible At the heart of Network Profitability measurement is an airline’s internal cost and revenue accounting systems. The more robust and accurate these sources, the less reprocessing is required and the overall data integrity improves. For example, best–practice airlines will endeavour to allocate year–end/backend ALP or CLP (Agency or Corporate Loyalty Programme) commission payments to coupons within the revenue accounting process. This requires centralised customer contracts and identification number database, integrated into the revenue accounting process.

Define a plan for the data flow Almost inevitably, management will be facing an existing information and data infrastructure that does not reflect the above principles. A path to move from here to there has to be laid out. In an IT sense, this plan represents a system architecture strategy. The first step is vital — focus on building really solid foundations, i.e., state–of–the–art revenue accounting and data warehouse capability. The plan sets in stone the goals of minimal duplication and accurate/early data capture.

Functionality objectives

Involve the users and get buy-in The system may employ the best technology in the world. However, if it is not accepted by the users, if the data capture, processing and quality control are not believed to be rigorous and sufficiently transparent, then the full potential of the system will not be realised. Do not create impenetrable "black boxes". Functionality requirements driving the MIS systems (data sources and tools) are tough and multi–faceted:

Profit analysis by: flight number, city pair, region, O&D, country, fleet type, hub, distribution channel, operator;
Sales and yield analysis by: O&D, point of sale, compartment, city pair, flight number, agent, distribution channel, flight number, city pair, fare type, passenger type, booking class;
Breakdown of yield trends by cause, including mix, average revenue and currency variations;
Transparency of the network contribution of flights (up–line/downline revenues net of spill);
Transparency of performance of alliances, code–share agreements and hard/soft–block deals;
Data available and analysable at the coupon level;
Ability to handle multi–leg flights and "utilisation–driven add–ons"
Reflection and transparency of cost variability in network modelling and planning;
Reprocessing flexibility as business rules and requirements change;
Storage of adequate history to support indexing and trend analysis;
Integration with the planning and budget process;
Drill–down capabilities for detailed investigation;
User–friendly interface;
"Parameterisable" O&D building;
Standard tool design requirements: accessibility, timeliness, speed;
Feedback loops to improve forecast/estimation accuracy e.g., ALP/CLP payments

This is a fairly exhaustive list, and users and developers must recognise the need of learning to "walk before you can run". Management of the network on an O&D basis — particularly revenue management — is the latest area for serious investment by the large, technically–sophisticated carriers. Getting basic route profitability reporting right — good data, robust allocation mechanisms and actionable information — is the first challenge for some.