1

Capacity Management in Airline Industry: A Case Study

The purpose of this case study is to analyse the capacity management in three
companies, and to identify a set of critical success factors in this area. The
companies are: Royal Jordanian Airline, American Airliners and Easy Jet. The first
two companies were selected as examples for 'full-service carrier', while the last one
was selected as an example for 'low-cost carrier'. The complete companies' profiles
are shown in Appendix A, B and C respectively.

Critical Success Factors for Capacity Management in Airline Industry

With reference to the three case studies, fours critical factors are needed for a
successful capacity management in airliners, which are:
1. Yield management: yield management plays a key role in capacity
management for industries that have a perishable inventory, utilize a
reservation-based demand system, operating with a high fixed cost and a
market that is divided into segment. The above conditions are available in
airline industry; therefore, yield management is a critical aspect in that
industry.
2. Managing stochastic demand: The demand in airline industry is affected by
many external conditions that lead to a stochastic demand. Analysing these
external factors-such as politics, economy and diseases - is crucial so
companies can put the right response and right capacity in place.
3. Long term capacity planning: the capacity in airline industry is measured by
'seats' which reflects the size of the aircraft at a wider context. Given that
airliners cannot change the number of seats in each aircraft easily, optimizing
the load factor per each flight is very important. Additionally, the lead time that
is needed to produce an aircraft by the OEM (Original Equipment
Manufacturer) could be several months, therefore, long term capacity
planning and determining the needed capacity in terms of addition/ deletion of
aircrafts is critical.
4. Alliance agreement and airline subsidiaries: airliners can improve their
load factor by getting into alliance agreements and subsidiaries partnerships
where shared capacities can be managed using Code-Sharing. These
approaches reduce the fixed cost needed for capacity expansion and the risk
that is associated with demand fluctuation. As a result, alliances and such
partnerships are important for a successful capacity management.

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 2

Appendix A: Royal Jordanian Airline

Background Information
Royal Jordanian is the national airline company in the Kingdom of Jordan. It was
established in December 1963 and was operated with two aircraft only to provide
flights between three cities. Today, the company provides regular flights to 45 cities
all over the world (Royal Jordanian 2014, p.16).
Competition, fuel prices, political situation in the Middle East to name but a few of the
reasons that are affecting the company negatively. Within capacity management
context, these challenges resulted in a very small load factor for some flights and
eventually led to cancel them (Royal Jordanian 2014, p.23).

Long Term Capacity Planning

As a part of the long term capacity planning in Royal Jordanian airline, the company
is planning to introduce five Boeing 787 aircrafts in 2016 alongside with plans to
upgrade the medium and long haul fleet. Additionally, four Airbus 340 aircrafts and
one airbus 330 had been removed from the fleet.

The company studies the long term demand forecast continuously and update its
capacity of flights. For example, destinations such as Alexandria, Colombo, Milano,
Delhi, Mumbai, Lagos and Accra were deleted. Flights such as Tripoli, Benghazi,
Misrata and Mosul, Damascus and Aleppo have been suspended. The company also
has a commercial alliance agreement with different airliners in order to manage their
shared capacities with other companies such as “American Airlines, USAirways,
Iberia, Siberian Airlines, Air Berlin, Malysian Airlines and Sri Lanka airlines”. As a
result, more than 100 destinations are available for Royal Jordanian airline (Royal
Jordanian 2014, pp.31–33).
The company will continue to participate in Oneworld Alliance and Code Sharing
which provides extra 1000 destinations for the company (Royal Jordanian 2014,
p.37).

Medium and Short Term Capacity Planning

As an example for the medium and short term capacity planning in Royal Jordanian
Airline, the company is working continuously to increase the number of destinations

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 3

and/ or the number of weekly departures according to medium and short term
demand forecasts (Royal Jordanian 2014, p.16).

Capacity Measures
Some of the capacity measures in Royal Jordanian Airline are shown below. Figure
A.1 shows how the company measures its capacity by Available Seat Kilometre
(ASK). The company works continuously to improve seat load factor in order to
generate the maximum Passenger Revenue Kilometre (PRK).
Royal Jordanian Airline Company- Capacity Measures

Figure A.1 Capacity- Related Measures in Royal Jordanian Airline

(Source: Royal Jordanian 2014, p.23)

Table A.1 shows the capacity expansion plan that the company is planning to
implement in 2016 in response to the long term demand forecast. As shown below,
some aircrafts will be added and some will be eliminated from the fleet.

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 4

Table A.1 Number of Aircrafts in Royal Jordanian Airlines Company

Type 2015 2016
Boeing 787 5 6
Airbus A330 2 2
Airbus A320 7 7
Airbus 321 2 2
Airbus 319 5 4
Embraer EMJ195 2 2
Embraer EMJ195 3 3
Airbus 310 (cargo) 2 1
Total 28 27
(Source: Royal Jordanian 2014, p.36; Royal Jordanian 2015, p.41)

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 5

Appendix B: American Airlines Group

Background Information
American Airlines Group was founded in 1929 and became the world's largest airline
company in 2013 after the acquisition of US Airways. The company provides an
average of 6,700 daily flights to more than 50 countries with a total of 350
destinations (American Airlines Group 2015, p.5).

Long Term Capacity Planning

The long term capacity planning in the group is essential to ensure continuous
capacity to meet future demand. The company has a mainline fleet which consists of
946 aircrafts. Additional 75 aircrafts were delivered in 2015 and 112 aircrafts were
disposed. The company also has different capacity purchase agreements with
subsidiaries and third party companies (American Airlines Group 2015, p.45)
The detailed seating capacity in the groups is shown on figure B.1.

Figure B.1 Fleet Inventory in American Airlines Group for the Year 2015
(Source: American Airlines Group 2015, p.45)

Medium and Short Term Capacity Planning

Capacity management and revenue management in American Airlines Group are
widely affected by the stochastic seasonality demand in airline industry. Some of the
factors that cause seasonality demand pattern are (American Airlines Group 2015,
p.20):
 "Seasonality where greater demand for air and leisure travel during the
summer months",
 "General economic conditions",

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 6

 "Fears of terrorism or war",

 "Fare initiatives",
 "Fluctuations in fuel prices",
 "Labour actions",
 "Weather and natural disasters" and
 "Outbreaks of disease".

Yield Management
American airline group uses yield management approach to manage its capacity
under three basic functions (Smith et al. 1992):
1- Overbooking which is “the practise of intentionally selling more reservations
for a flight than the actual seats on the aircraft”.
2- Discount allocation which is “the process of determining the number of
discount fares to offer on a flight”.
3- Traffic management which is “the process of controlling reservations by
passenger origin and destination to provide the mix of markets (multiple flight
connecting markets versus single flight market) that maximize revenue”.

The three major changes in the yield management in American airline happened due
to (Smith et al. 1992):
1. The implementation of SABRE (semi-automated business research
environment) In 1996.
1- The adaption of super-saver discount fares in 1977.
2- The deregulation act in 1979.
The logic behind yield management in American Airlines Group is shown in figure
B.2.

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 7

Figure B.2 Yield Management in American Airlines Group

(Source: adapted from a discussion in Smith et al. 1992)

Capacity Measures
The detailed operational capacity measures in American Airlines Group is shown
in figure B.3.

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 8

Figure B.3 Operational Capacity Measures in American Airlines Group

(Source: American Airlines Group 2015, p.67)

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 9

Appendix C: EasyJet Airline

Background Information
EasyJet company, which celebrated its 20th anniversary in November 2015,
succeeded in becoming the second largest short-haul airline in Europe, with a total
revenue of £686 million by end of 2015 (EasyJet Company 2015, p.8).
The core business model of this British Company is a low-cost point- to-point short-
haul airline (EasyJet Company 2015, p.6). With more 10,000 employees, the
company serves 70 million passengers per year in 31 different countries, through 735
routs and using 241 aircrafts (EasyJet Company 2015, p.3).

Long Term Capacity Planning

The long term capacity planning in EasyJet Company is well- understood by looking
at their continuous effort to increase the number of routs and destinations it offers. As
an example for that, the company added 95 new routes to new destinations in 2015
such as Stuttgart, Pula and Preveza, and it has future plans to add another 90 routs
in 2016 (EasyJet Company 2015, p.4). This long term plan includes an agreement
with Airbus Company to deliver additional 36 A320 aircrafts to meet the expected
demand increase between the year 2018 and 2021. The new fleet consists of two
models with 186 seats each; 30 aircrafts from the type A320s and 6 from the type
A320s (EasyJet Company 2015, p.8,9).

Medium and Short Term Capacity Planning

The successful medium and short term capacity planning in EasyJet was translated
into an increase in revenues per seat in 2015 by 1.5% in response to a 6% increase
in passenger volume. In addition, Load Factor increased by 0.9 percentage points
and reached 91.5% (EasyJet Company 2015, p.9).

Capacity Measures
Some of the capacity measures, operational and financial, that the company tracks
are shown in figures C.1 and C.2 respectively.

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 10

Figure C.1 Operational Measures for Capacity Related KPIs

(EasyJet Company 2015, p.23)

Figure C.2 Financial Measures for Capacity Related KPIs

(EasyJet Company 2015, p.23)

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom
 11

References
American Airlines Group, 2015. American Airlines Group Annual Report. Available
at: http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-reportsannual.
EasyJet Company, 2015. EasyJet Annual Report.
Royal Jordanian, 2014. Royal Jordanian Airlines Annual Report. Available at:
http://www.rj.com/en/reports?cat=1&_=205.
Royal Jordanian, 2015. Royal Jordanian Airlines Annual Report, Available at:
http://www.rj.com/en/reports?cat=1&_=205.
Smith, B.C., Leimkuhler, J.F. & Darrow, R.M., 1992. Yield management at American
Airlines. Interfaces, 22(1), pp.8–31.

@ 2016 AYAT A. SALEH, submitted as a part of the 'Logistics and Operations Management'
course in the University of Warwick, United Kingdom