62 Long Range Planning Vol.

13 February 1980

Airline Corporate Planning-

A Conceptual Framework
M. A. Bouamrene* and R. Flavell

In the current economic recession, efficient planning is of who, in conjunction with the Finance division, would
paramount importance. This paper constructs a con- perhaps modify and eventually approve the plans.
ceptual framework for the long term corporate planning
of an airline: the framework suggested is an integrated
This planning is characterized by a total lack of inter-
approach rather than the divistonal one that is wide- action between the divisions, resulting in plans based
spread in the industry. The paper attempts to identify the upon conflicting assumptions and incompatible fore-
long-term objectives of an alrline, the various types of casts.
constraints under which it must operate, and the
decision variables that are under its control.
Most of the airlines we have talked to are, at the present
time, concerned with short-term survival and hence
with short-term plans. Such plans, we would
acknowledge, could, and in general should, be pro-
duced on a divisional basis if, by doing so, sight of the
Planning is essentially a process of preparing for the commitment company’s overall objectives is not lost. But for an
of resources in the most economical fashion and, by preparing, of airline to survive and develop, long-term, i.e. longer
allowing this commitment to be made faster and less disruptively. than 5 years, plans and guidelines are also essential,
Warren’ particularly if one considers that the lead time for a new
aircraft can be up to 2 years and that such an aircraft
Introduction can then be on the books for another 12. We present
in this paper an integrated approach to long-term
Over the past 50 years the airline industry has enjoyed planning, whereby the company as a whole is examined
an exponential growth in demand. This has meant that and the various interactions explicitly considered. We
numerous uneconomic activities and inefficient prac- start by discussing the philosophy underlying our
tices could have been supported without any apparent approach, then briefly consider the different areas of
ill-effects on the industry or the individual companies. planning and finally describe some of the work we
Today, however, the recent very substantial increases in have done to make this approach practical for airlines
the fuel price coupled with the major economic re- to adopt.
cession in the world have forced companies to con-
sider realistically their use of resources and to attempt to
use those resources more eficiencly if at all possible. The Model Philosophy
Our argument in this paper is that planning, in the sense
In theory, because an airline is a highly complex system
of the above quotation, is of paramount importance to
of interactions both within itself and also with its
the airline industry, particularly in today’s economic
environment, any attempt in modelling the airline
climate.
would result in a very large and complicated model.
But because such a model is generally unworkable,
Perhaps because of the cushioning effect of the rapid
what happens in practice is that the modelling process
growth, the airline industry has generally adopted a
is broken down into a sequence of interlocking sub-
‘divisional’ approach to planning; Figure 1 shows the
problems. The conceptual sequence used in this paper is
divisional planning areas of a typical airline. Planning
shown in Figure 2.
would occur in one or all OftheEngineering, Operations,
Programme and Commercial divisions in isolation. The
After a derailed analysis of the environmental con-
plans would then be submltted to the General Manager
ditions and the available airline resources, a preliminary
set of company objectives can be formulated. Next the
‘The authors are members of the Department of Management
Science at imperial College of Science and Technology and Mr.
practicality of these objectives is assessed taking into
Bouamrene was formerly Deputy General Manager, Air Algeria. consideration information from market researches and
 Airline Corporate Planning-A Conceptual Framework 63

fb

Maintenance Network Scheduling Traffic Budgeting Manpower

costs Analysis and IForecasting Training
Short Term Cash Flow
Development IMarket Management
Ground Capacity Ground Equipment
Equipment Aircraft route I7esearch
Aircraft Land and Buildings
Investment Performance
Route Variability
Analysis ,of Demand Overhead and
New Aircraft Allocation Working
Direct General
Types Time Tables IElasticity Capital
-
Introductory Operating - -Administration Costs
,3f Demand
costs costs
Seasonality
Technological Airport Terminal Iof Demand
Forecasting Facilities
- IDegree of
-Investment
Competition
in Existing
Market
Diversification
/Opportunities
Clientele
Survey
Market
Segmentation
Yields and
L -Revenue

Figure 1. Divisional planning arcas in a typical airline

traffic forecasts. Then it is necessary to examine the network as it is based upon a complex involving,
operational and economic implications of achieving amongst other factors, population changes, industrial
these objectives and a strategy has to be devised to growths and shifting political alliances.2 Since the
accomplish this achievement. Finally, an appraisal of acceptance by the airline industry that it is in the total
the strategy and its implications, e.g. fleet retirement transport business, other emerging commercial re-
and procurement policies, route profitability and key sources are hotels, catering, charter tours, car hire, etc.
financial indicators, has to be performed. If the strategy It is important to note that, in this appraisal, consider-
is not approved, then the objectives have to be modified ation must also be made of competitors’ efforts in the
and the whole process repeated until a satisfactory set of same markets.
objectives and a consistent set of plans have been found.

The productive resources of an airline are essentially its

This section briefly describes the entire approach; in the
fixed and current assets, in particular its aircraft and
succeeding sections we will consider the detailed
their supporting equipment, fuel and oil. Because the
operations that must be performed.
ratio of the annual charge on these assets to the marginal
operating costs is far higher than in most industries, it
1. Corporate Appraisal of Airhe Resources
follows that any analysis of the suitability of these
Five major stocks of airline resources can be identified,
resources to present and future levels of operations is
namely commercial, productive, manpower, organiz-
of vital importance.
ational and financial. The last one will be discussed in
some detail in a succeeding section. The purpose of this
appraisal is to examine not only the existing resources The manpower resources should be examined in a
but also what the resources might be in the future and similar fashion. Firstly, the existing manpower should
the possible ways in which these future resources might be identified, and then the future supplies of manpower
be calculated. need to be forecasted. The final stock, organizational
resources, has already been discussed briefly. The main
The main commercial assets of an airline are its network task under this head is to dcterminc the adequacy of the
and licensing rights. These are normally determined by organizational structure to accomplish the assigned
bilateral agreements which may also impose capacity corporate objectives; hcrc we would criticisc the struc-
and/or frequency constraints on the airline’s operations. ture of a typical airline which is often too rigid and too
It is extremely difficult to assess the future pattern of a functionally-oriented to enable a company-wide view
 Long Range Planning Vol. 13 February 1980

7
Feedback

4. Market Research
1. Corporate Appraisal
of Airline Resources
Airline Product
Airline Market
Commercial General
Variability of Demand
Production Social Elasticity of Demand
Manpower Economic Frequency/Capacity
Organization Environmental Speed, Comfort, Prices

Specific
Market Share
Rate of Return

Forecasts
Economic Factors
Economic Historical Traffic Data
Social Macro/Micro Analysis
Technological Micro Forecasts
Demand Distribution
Market Share

-7
1 6. Operation, Analysis 1 , 7. Economic
Analysis
Operating Costs
Identification of Competitive Aircraft
Direct
Network Structure and Development
Indirect
Procurement/Retirement Policies
Economies of Scale
Aircraft/Route Performance Analysis
Standardization
1 Revenue I
+
I 4
+
8. Fleet investment Plan
9. Appraisal of Plans
Investment Plans
Aircraft Procurement/ Retiremen Aggregation of Operating Results
Key Indicators
Operating Plans l
Aircraft/Route Allocation Forecasts of Investment
Expenditures
Financial Plans Annual Accounts
Additional Capital Financial Ratios
Borrowings
I
10. Corporate Plans

Production
Operating
Economic 4
Financial

Long Term
Short Term

Figure 2. The airline corporate planning process (detailed interdependencies arc not shown)

to be taken. In this context, it is of interest to note that economic activity, say GNP, and business travel is well
British Airways, in changing their name recently, also established as is the relationship between
changed their structure from a market basis to a func- income and holiday travel. 3 The social enviror
tional basis. be considered in two parts. Firstly, the elect of com-
peting non-air transport on the industry as a whole,
2. Environntrntal Appraisal especially as this transport becomes faster and secondly,
The environmental appraisal, as displayed in Figure 2, the competition between the airlines which, because of
can be broken down into four major segments. The the international restrictions on fares and frequencies,
influence that the economic environment has on the tends to be on the basis of intangibles such as quality of
operations of an airline has been widely investigated; service and sales promotion. The efficacy of such factors
for example, the correlation between some measure of on the travelling public needs to be assessed.
 Airline Corporate Planning-A Conceptual Framework 65

The technological environment has experienced many objectives are exogenous and as such the airline has very
rapid changes over the past 40 years. There is therefore little freedom of action. These objectives are therefore
an obvious need for technological forecasting of the reflected as constraints that must be satisfied if at all
highest calibre if long-term planning is to merit any possible. Given that, we regard the maximization of
close attention. It is interesting to comment here as to profitability or profit making capacity in the long-term
whether the operations of the aircraft manufacturers as the prime airline objective. This view will be further
would be curbed if long-term planning became wide- discussed in more detail later in the paper.
spread, because it has always been in their interests to
promote the sales of the most recent aircraft before older 4, 5. Supply and Demand
ones become either technologically or economically The next two stages in the integrated approach we have
obsolete. The other aspect of the environment, political, adopted both study the factors influencing the relation-
has generally dominated the growth of the industry. It ship between supply and demand in the airline industry.
is obvious that no airline can disregard political inter- This is a very necessary step in the construction of a
vention in constructing its plans and yet this is an area in long-term plan because to assume that demand is
which forecasting is extremely difficult. exogenous and independent of supply contradicts
numerous previous studies, e.g.5a 6 The airlines face a
3. Objectives difficult task; as their sole product is perishable, it is
The first two sections have examined where the airline essential that the supply is matched as closely as possible
is at the moment, its resources and its environment. with demand. If supply exceeds demand, then resources
The next step is to consider some preliminary objectives are wasted and, conversely, if demand exceeds supply,
for the airline in the light of these sections. Any airline passengers are turned away and revenue is lost.
will have multiple objectives; these may be classified
under two heads, social and economic. If we consider The estimation of the demand for air transport on a
the latter head first, financial objectives probably come particular route is a highly complex process. In theory,
to mind most easily. Such an objective would be the the problem could be split into two parts. First, estimate
maximization of profitability, i.e. return on resources in the maximum potential demand that would exist on a
the long term; this is, of course, of vital importance to route at any point in time; this would be a function of
any privately-owned airline. Other financial objectives economic and socio-demographic data. Second, estimate
that could be proposed, e.g. the satisfaction of debt the actual demand that would have to be satisfied; this
policies or the minimization of costs, are surrogate for is much more a function of endogenous factors under
the profitability objective but only concentrate on the control of the airlines. However, the difficulty with
limited aspects of the problem. Similarly it is possible this method is that it is virtually impossible to obtain
to consider other economic objectives such as fleet estimates of past potential demand on a route with
standardization, diversification, productivity, growth which a model could be calibrated, whereas past
and market share. Again, whilst some of these may passenger figures could be easily obtained.
appear of importance in the short term, in the long term
they must all work ultimately to maximize profitability. The approach we have followed in this aspect of the
overall plan is bottom-up. Firstly it is clear that, on any
When we consider the social objectives of an airline, route, the passengers may be segmented into more
then there is a change of emphasis. Unlike the economic homogeneous groups. The segmentation can typically
objectives, which are all (hopefully?) operating towards be carried out in two ways-by purpose ofjourney or
one end, the social objectives tend to act in opposition by fare paid-and the choice depends upon the infor-
to that end. There are three main types of social mation available to each individual airline. Suppose for
objectives, i.e. political or governmental, environmental the sake of explicitness that the passengers on all the
and participant. Air transport, particularly in Europe, routes operated by an airline could be segmented into
is regarded as a public service and as such is subject to business and pleasure. The next step would be to relate
political pressures and constraints, e.g. having to fly the actual business demand to exogenous and endo-
unprofitable routes for prestigious reasons. There is a genous factors, see Table 1 for some typical factors.
recent and rapid trend that businesses that violate
‘acceptable’ standards of environmental pollution will Table 1. Some factors that determine business demand
not be able to continue in existence. This is obviously of on any airline route
prime concern to airlines whose major problem in this
area is noise and to a far lesser extent pollution of the air Economic activity of both termini
with fuel and exhaust gases. Participant objectives are Frequency of flights
perhaps the least considered in planning. It is a truism to Age of the route
argue that ‘organizations do not have objectives, only Relative time of transport in comparison to other means
people have objectives’,* and yet this is often ignored. Relative cost of transport
Individual persons can affect the development of a Relative ‘quality of service’, e.g. comfort, safety, etc.
company, so that if there is a serious misalignment of the
individual and the corporate objectives, it is often the
corporate one that is not achieved. Treating all business trips on all the routes as homo-
geneous, it would therefore be possible, by multi-
In this paper, we take the view that most of the social regression analysis, to produce forecasts of business
66 Long Range Planning Vol. 13 February 1980

fmin Frequency if)

Figure 3. Theoretical relationship between demand and frequency(s)

demand; see Verlege? for a form of this analysis in saturation frequency. The actual optimal operating
which is used a modified gravity model. However, we frequency is dependent upon the marginal revenues and
think that, for long term forecasts, such an approach is costs incurred by an additional flight.
too simplistic and static. In the times of rapid growth,
it is relatively easy to produce reasonably accurate This brief discussion on supply and demand has, by
forecasts using such a model, but in the present climate necessity, omitted numerous facets of what is one of the
a more dynamic model based upon lagged changes in airline’s most complex and challenging tasks. In the
the factors would probably be more realistic. The prob- above, reference to ‘demand’ has in fact implied average
lems of using a static model are highlighted by con- demand; the variability of demand (daily, weekly and
sidering, for example, the ICAO forecasts for the total seasonal) greatly limits the control the airlines have over
North Atlantic trat7ic;8 up to 1974 the forecasts were the average achievable load factor.
quite accurate, but in 1974 itself, the forecast was 30 per
cent out due to an insufficient recognition of the elas- the short term, if various data, e.g.
ticity of demand with respect to economic activity.
distribution of demand by time of day and day of
Ultimately we feel that the only methods such as time
week;
series are only useful in periods of high stability. We
are still considering this area in some depth and hope to distribution of the frequency and available capacity;
have reached some harder conclusions at the end of the
airline’s overbooking policy and those of its com-
research period.
petitors;

One very important aspect in this problem is the elas- average percentage of no-shows and go-shows;
ticity of demand with respect to the frequency of
passenger turnaway risk;
flights (E). It has been found that, whereas most of the
factors in Table 1 directly affect the potential demand on
can be estimated, then it is theoretically possible to
a route, the actual demand, utcris pnrihs, is related to
calculate a load factor that will minimize the financial
the frequency. Figure 3 is drawn from Peyrelevade’ ; the
implications of not exactly matching dcnland.10 Because
potential demand (Q) would be satisfied only by an
the airline is able to switch different types of aircraft
infinite frequency (implying a zero waiting time for all
onto routes in the l~iig term, the seasonal variation is a
passengers). fm tn is the frequency of maximum load
less critical problem. The year may be simply divided
factor, so that for any change in frequency away from
up into peak and trough periods which may be treated
this point, the load factor must be reduced. This of
as separate for planning purposes.
course is directly opposite to the argument that is
heard within some airlines, namely that a decrease in
As a result of the above appraisal, the objectives could
frequency would bring about an increase in load factor,
be modified to take into account such aspects as:
if the airline is operating below fmln. Furthermore,
because it has been found that, for all types of passengers, minimum quality of service on individual routes;
E < l,g it may be shown that airlines should try to development of new routes;
increase the frequency on any route above&,,. In the
quality requirements for aircraft and equipment;
long-term model we have built, we have assumed that
frequency is a decision variable under the control of the target markets (segments of passengers or fares);
airline but that it is restricted berween &in and a advertizing and promotions.
 Airline Corporate
6, 7 Operational and Economic Analysis
Once the previous sections have been completed, the
airline is in a position to produce forecasts of demand on
both existing routes and proposed routes as a function
of exogenous and endogenous factors. In this section we
will discuss the technical and economic implications of
future operations designed to satisfy those forecasts. In
particular we will examine the parameters that may be
used to select a new aircraft and the interaction between
this choice and the route network. This is because we
argue that the selection of an aircraft to suit an existing
network is not a realistic problem, and that the ultimate
problem is to estimate the best combination of fleet mix
and route network so as to optimise some objective.
Superficially an initial conclusion about the best fleet
mix might be to select the aircraft type with the lowest
relative cost; this would imply the largest possible air-
craft. But in fact the higher cost per ton-mile of the
smaller aircraft is, to some extent, compensated by its
improved flexibility and ability to generate more traffic
by a higher frequency-see Figure 3. Indeed, in practice,
an upper limit to the size of the aircraft on any par-
ticular route must be set, otherwise the minimum
frequency constraint discussed above would be violated.
The main parameters that influence the choice of an
aircraft type can be divided into three classes : operational,
technical and marketing. Without examining these
parameters in any great detail,2 it is probably true that
the operational parameters-e.g. speed, payload and
range -are the most significant in this choice. However,
the technical parameters-e.g. ease of maintenance,
reliability, compatibility with existing fleet, etc.-
should not be overlooked, as such factors can con-
siderably effect the profitability of the airline.
In order to plan effectively, it is necessary to quantify
the economic influence of these parameters. A common
approach is to consider only the operating costs of
competing aircraft, but in long term this cannot be
appropriate. Capital and financing charges must also be
relevant and therefore should be examined. The
operating expenses of an airline may be classified into:
Overhead or indirect costs, e.g. general adminis-
tration, buildings, etc.
Standing direct operating costs, e.g. depreciation,
insurance, unavoidable maintenance, etc.
Hourly direct operating costs, e.g. fuel and oil,
avoidable maintenance, etc.
Staging direct operating costs, e.g. landing and
parking fees, handling charges, etc.
The indirect costs are concerned with the organization
and administration of the airline, the first class of direct
costs involves the unavoidable costs of possessing an
aircraft irrespective of whether or not it ever flies. The
second class of direct costs is the expenses dependent upon
the hours flown by any given aircraft, whilst the last
class are those incurred in the operation of a particular
route. For a known aircraft on a given route, it is
possible to assess the direct operating costs; the Air
Planning-A Conceptual Framework 67
Transport Association of America and the Society of
British Aerospace Companies have developed formulae
for the forecasting of many of these factors.” However,
these formulae were derived under a standard set of
conditions and care should be taken to take into con-
sideration any local anomalies. Specific drawbacks to
the use of the formulae are that no account is taken of
either the fleet size or the nature of the route network.
The indirect costs are best assessed on an historical
basis.
Turning to the capital side, one of the principal benefits
of a long-term plan is the identification of a retirement/
procurement policy. Because airlines often partially
finance the purchase of new aircraft by the retirement
and sale of obsolete aircraft, the two sides of such a
policy cannot be separated. When considering replace-
ment, the important factor is whether or not the
reduction in operating costs due to the new aircraft
offsets the net capital expenditure. If a new type of
aircraft is to be introduced, then there are other major
costs other than the initial capital cost, e.g. spare parts
and equipment, training of flight and engineering staff,
and the loss in revenue due to low initial utilization.
Indeed, it has been estimated that BOAC, between
1950 and 1960, incurred introductory costs of RlSrn in
conjunction with four new types of aircraft.2
The remaining question is that of the route network.
For a small to medium sized airline, it is possible to
consider explicitly each route in the network, either
present or proposed, to estimate the demand on the
route and then calculate the optimum fleet mix that
could satisfy that demand. For a large airline, it is
probably necessary to consider routes of similar
characteristics, e.g. same distance, same pattern of
demand and do the planning in aggregate.
8. Fleet Investment Planning
The previous sections have attempted to outline the
information that would be required to undertake a
company-wide corporate plan. In this section we want
to concentrate on the financial implications of fleet
planning because, ultimately the long-term survival of
the airline depends upon financial viability. To consider
this viability systematically, the sources and uses of
funds, the working capital and cash flow requirements,
and the long-term profitability, all have to be examined
in some detail.
Looking first at the working capital requirements, given
a particular fleet mix and route network, it is relatively
simple to estimate receivables and inventory, and
accounts payable (consisting in the main of advance
payments by customers, credit from suppliers and
accrued expenses) from historic information. Again,
given the same information, the fixed assets and long-
term liabilities on the balance sheet may also be easily
forecast. But the implied causal relationship, first frx
the fleet and network and only then work out the
financing, is incorrect; the two sides must be performed
simultaneously. The cost and availability of funds must
be investigated alongside any consideration of a
retirement/procurement policy.
68 Long Range Planning Vol. 13 February 1980
If one examines the sources of finance available to an
airline, namely internal (e.g. retained earnings, sale of
assets and accumulated depreciation) and external
(e.g. fresh equity capital, 1oan stock, credit and govern-
mental monies), then a corporate plan must consider the
effect of using some or all of these sources in the pro-
curement of new aircraft. For example, if retained
earnings are used for financing, then the immediate
dividends payable to the shareholders may be lowered,
thus resulting in a depression of the stock value of the
company. Conversely, if long-term loans are used
for the financing, as indeed many of the major airlines
have done,l 2 then this implies that there would be high
priority external demands on the generated profits,
thus reducing the freedom for action of the airline and
the flow of funds into retained earnings. This reduction
becomes extremely serious in times of economic
recession and may leave the airline in a very vulnerable
position.
Our argument is that the operational plans must be
made along with any decisions about the future capital
structure of the airline. The two cannot be separated and
a final conclusion is only reached by considering the
effect of both the plans and the structure on some
company objective. We also argued above that such an
objective must ultimately be financial; the form it
could take is open to considerable discussion. Rather
than repeat this discussion’3 we will simply state our
view that the objective ought to be to maximize the
stream’ of time-adjusted net equity cash flows, or the
value of net assets at the time horizon which is very
similar.
9. Appraisal of Plans and Feedback
Having established a set of objectives, evaluated their
implications and planned actions in order to achieve
them, the appraisal stage of the planning process is one
of evaluating the effectiveness of the proposed actions.
If such an evaluation results in unsatisfactory actions,
then a feedback phase is necessary to re-examine the
objectives of the company.
Effectiveness we would define as a measure of the
fulfilment, or otherwise, of an objective, goal, standard
or target, e.g. the achievement of at least a minimum rate
of return on capital invested, the reduction of air
pollution, etc. One measure that has not been discussed
thus far is efficiency and, in particular, changes in it
over time and in comparison with the rest of the
industry. Pearson l4 has suggested a method of calculat-
ing the efficiency of an airline. Based upon multiple
regression analysis, this method would appear to be
especially valuable in inter-airline comparison. Another
facet worthy of mention is aircraft utilization; various
airlines and airframe manufacturers have their own
formulae for this.15. I6 Intra-company comparison of
the utilization may again be of considerable interest.
There are obviously a large number of possible measures
that could be considered under the heading of effective;
e.g. available tonne-kilometre, tonne-kilometre per-
formed, the ratio of the two (load factor), average
revenue yield per available seat-kilometre, etc.
As well as measures of operating effectiveness, in the
long run one should also turn to financial measures and
particularly to ratios. These ratios-financial (including
leverage and liquidity), activity and profitability-
provide a wide ranging searchlight on the performance
of the company as a whole. In the models that we our-
selves have produced, the plotting over time of 24
ratios is performed automatically.
Summary and Conclusions
We have tried to show in this paper how the long-term
corporate planning of an airline could be undertaken.
The above sections have identified the long-term
objective that we think airlines should use, the various
types of constraints under which airlines must operate
and finally the decision variables, primarily the mix
and size of the fleet and the route network at each point
times, that are under the control of the airlines. In
particular, we have attempted to show how the decision
variables relate to the objective and the constraints so
that a realistic framework for corporate planning could
be constructed.
What we have not discussed is how the decision variables
may be calculated so as to satisfy the contraints and yet
produce a good value of the objective. This, we would
argue, is not the most difficult of tasks, provided that the
preceding analysis has been performed. There are a
variety of methods that have been proposed, e.g. most
of the major airframe manufacturers offer a planning
model, as have some of the international air transport
organizations as well as interested academics. A brief
survey of these models is available in Bouamrene.l?
The methods are generally either based on mathematical
programming, with or without some integrality
conditions, or deterministic simulation_
This paper has been produced as the first product of a
research project, finishing in the Spring of 1980. Our
aims in this project are to produce a practical method-
ology for integrated corporate planning in the airline
industry and also to formulate a suitable set of tools.
We think that we are well on our way to achieving our
aims and our current thinking is described in far greater
depth in a draft report.l* We have had numerous
discussions with airlines, airframe manufacturers and
academics, but would naturally be interested in re-
ceiving any further comments on this work.
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R. M. Cyert and J. C. March, A Behavioural Theory of the
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