Data takes driving seat on strategy
Managing complex airline operations requires close control over a multitude of different factors, any of which can mean the difference between profit and loss
In the highly complex airline business, particularly in the crowded Middle East sector, having a firm understanding of the airline’s balance sheet is essential. The sector operates in a highly competitive environment, with large, long term capital investments in aircraft, complex supply chains, including the whims of fluctuating fuel prices, and the vagaries of seasonal highs and lows and numerous other factors. Keeping track of financial performance is a complicated process, and anything that can grant a deeper insight into underlying factors in profitability becomes a major asset.
For most airlines, route profitability analysis systems are exactly such an asset, an essential tool in determining which routes give the best return, and indicating how best the company should utilise its resources. For Gulf Air, the Bahraini national carrier, better understanding of its profitability is especially important to restoring its fortunes.
The region’s oldest airline is going through a restructuring process, with the aim of turning around its loss-making business, which according to some estimates has cost Bahrain approximately $2.65 billion in the past four years. While the company has been adopting various elements of route profitability analysis for several years, it recently completed a five month project to develop its own solution, with a business intelligence twist.
Dr Jassim Haji, director of Information Technology for Gulf Air, explains the importance of route profitability analysis: “A solution to report on route profitability for airlines is of extreme importance, it shows the airline from where the revenue is generated - which routes and destinations are cash cows - and where the haemorrhage is - which routes are burning money. Without such solutions an airline is blind to why and how they are making or losing money.”
Applications to determine route profitability go far beyond the average ERP or financial solution, because of the wide range of factors that need to be considered. In terms of expenses, airlines have to account for long term investments in their aircraft, as well as variables such as fuel charges and ground handling charges, which can vary from one destination to another or will change over time. In terms of the revenues, there can be multiple sources of profit for any given flight or route, direct ticket sales or sales through travel agents, excess baggage charges, onboard duty free sales, cargo revenue and so on. An accurate accounting of all these different factors is the only way to know where the airline can make money, and is vital in planning what different sizes and types of aircraft should serve what routes, and in what frequency.
“In the old days, decisions were based on feelings and perceptions of how demand is, but when you come to actual calculations, you find out whether you will actually be making money or not. All in all, if I know my total costs, and then I can make very sound and accurate decisions on running not only the sectors, but the frequency, the size of the aircraft we choose, and reporting of such magnitude really drives all the decisions that we make in terms of our daily operations, and our short term and long term strategies,” Haji says.
While there are a number of off-the-shelf solutions available for route profitability analysis, Gulf Air chose to develop its own solution inhouse, in order to get a solution that would have a proper fit with its different variables, and because of the costs involved in customizing a ready-made solution.
“Each airline has very unique financial reporting requirements route-wise. Available solutions, for example, follow the general classifications of revenues and costs, but this does not suit all airlines,” he says. “We in Gulf Air have very specific classifications that aid us in monitoring our operational and commercial results. When you choose a ready-made solution you either loose the flexibility in defining your own requirements, or pay dearly for the customization. In order to gain the flexibility we opted for in house development.”
Haji assigned a three-person team from IT to develop the solution full time, with other resources added as needed. Integrating the diverse systems, to include all factors, was the most challenging part of the project, he explains.
“We have several key systems that are core airline business applications, like reservations, check-in, revenue accounting, are feeding this system, and the more we grow, the more interfaces we have got, it is not an easy task to have interfaces with different systems from different suppliers and based on different technologies,” he notes.