NETWORK CALCULATIONS
Schedule Consult applies a specific and unique method of cost and revenue calculations. As expert centre for airline network optimization, we are always confronted with the discrepancies between traditional profit and loss calculations and the practice of network management.
Many airlines use integral profit and loss calculations to define profitability of flights or routes. However, this accountancy method is hardly applicable in airline network management. It causes wrong decisions which in this industry can be very expensive.
To resolve this, Schedule Consult has developed the Network-CALC method.
Read more about:
- The principles of Network CALC.
- Why traditional calculations show discrepancies.
- The problems that are caused by these discrepancies
- How Network CALC works in practise
- Revenue calculations in Network CALC
- The benefits for the company of using Network CALC
THE PRINCIPLES OF NETWORK CALC
An important key to understanding network profitability is to abandon the presumption that total company results can be divided into complementary results per flight and that these sub-results are a measure of the contribution to overall profitability of the network.
Instead, Network CALC recognizes that flights or other elements of the production do not stand alone. There is interdependence between them (for example because they are operated by the same aircraft, or because they connect) and profitability depends on context of that planning.
So instead of striving for figures that are
compatible with a virtual mathematic framework, Network CALC looks at the types of decisions that
are realistically feasible in the practice of network management. The math must correspond with
this practise.
Feasible decisions concern operating flights,
operating aircraft, pricing traffic flows, opening or closing destinations, routings of rotations,
timing of flights etc.
The figures of Network CALC are based on these feasible decisions and determine what the
impact of these decisions is on company results.
THE DISCREPANCIES OF ROUTE P&L RESULTS
What is the fundamental problem with route P&L results?
Integral results represent the idea of fairness that every flight should carry an even part of the fixed costs. This involves allocation of costs by for example the block-hours as well as pro-rating of revenues. In the old days, this was a firm basis for pricing purposes.
However, the development of most costs is not linear with the block-hours. Neither is the pro-rate a reliable measure of the revenue effects.
In fact block hours and pro rates are arbitrary keys. For example, crew costs are driven by the planning of duties. There may be some parallel with the block hours, but much more decisive is the type of pairings that are possible.
Examples of other discrepancies are:
- Long ground times: Whether a flight operates with a long turn time in an out-station makes no difference for the block hours, but it can have a large opportunity cost in overall fleet utilization.
- Handling costs: A flight operated at peak times has a totally different impact on ground handling costs than a flight at shoulder times.
- Differences in demand: A day has attractive times and less attractive times. One flight at an attractive time may generate good revenues, but the profitability of an aircraft depends on how it is deployed throughout the day.
- Overhead costs: A large airline needs more overhead than a small airline. However, network decisions hardly have any impact on head-office costs. These are affected by separate management decisions.
- Revenue Allocation: When a flight connecting to other flights is cancelled, more revenues will be lost than only the pro-rated route revenue.
ROUTE P&L RESULTS AS POOR GUIDELINE
These and other examples make integral calculations often point the wrong way. The figures may say the a flight is loss-making, but the reality may be that company profits would be less without the flight.
More disturbing is that they say nothing about
hidden costs. A maintenance check at commercial important times has different effect on profits
than a check off-peak. An optimal tagesrand schedule can conflict with optimal utilization of the
aircraft. All this kind of effects are not visible in route P&L's as they are evened out over
the entire network.
Many network professionals are aware of the discrepancies. There are several types of patches in use (special pro-rates, feeder values, contribution after variable costs, etc.) but none of them forms a comprehensive answer to the problem.
This is not a workable situation for airline professionals. It is not fruitful when management keeps seeing figures that suggest that route A is a problem, while in fact aircraft B is causing the losses. A lot of precious energy is lost in these types of discussions while the outcome is rarely satisfactory both sides.
With such high stakes, it is essential that there is no discussion about the figures and that they create full unbiased insight in what is really going on. For professionals i t is critical to know as good as possible what the impact of decisions will be on company results.
The Network-CALC method deals with the mentoned problems.
By its nature, it closely relates to the purpose of network optimization. It defines four levels of profitability: Traffic flow, flight, aircraft and network.
Network-CALC distinguishes nine different cost drivers. All company costs are allocated to one of these drivers. This allocation does not come with artificial sub-divisions. The trade-off of these costs happens at the level where they can be allocated without arbitrary divisions. The levels are chosen in such way that every cost element is evaluated, including all the fixed costs.
Thus, Network-CALC is the basis for a logically structured order to optimization efforts. It evaluates all elements of the production in a logical order, starting with the least complex optimization options working all the way through to the fundaments of the schedule. This working order is reflected in the 4-level Profit Screening method.
This enables Schedule Consult unique approach on Quick win screenings or profit screenings. Profitability evaluation with Network CALC is water-tight.
REVENUE CALCULATIONS IN NETWORK CALC
Revenue calculations follow the same principle of no arbitrary allocations. So they are pro-rate free! All related costs are included in the equation.
Nevertheless, Network CALC applies a fundamental difference with straight forward adding of feeder values; counting the entire revenue of a traffic flow is conditional to the possibility of filling the capacity on any of the sectors involved with other revenues.
This is a detailed and complex calculation at city pair/class of travel level.
For evaluation of future schedules, Network CALC uses the results of OMP Strategy traffic forecasting.
PREVENT ADVERSE DECISIONS BY IMPLEMENTING NETWORK CALC
The best way to get acquainted with Network-CALC is to see it work in practice. That is why implementation of the method is best started with an analysis of the network with the method.
You'll see how all cost items are linked to the relevant Network-CALC drivers and how they are used to derive conclusions. This exercise also identifies what changes to organization and processes are needed to implement the method in your organization.
The benefits of applying Network-CALC are large. It helps your company to make sharper decisions. The level of uncertainty in financial estimations is considerably less. Better insight in cost and revenue dynamics and Network-CALC's implicit optimization structure also stimulate creativity to find better solutions.
All in all Network-CALC is indispensable to maximize an airline's profitability.
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