Guest Editors’ Introduction: Approaches to Improve Efficiency and Profitability of Airlines

Selected Articles from the ATRS World Conference, Sydney, Australia, 2011

For this special issue of the Transportation Journal we have selected four papers from 217 papers that were presented at the 15th Air Transport Research Society (ATRS) World Conference, held in Sydney in June 2011. With the Asia/Pacific region experiencing vast growth and huge opportunities in aviation, it was hardly a surprise that no fewer than 256 participants from 34 countries attended the many sessions, workshops, and presentations, including keynotes from the CEOs of Sydney Airport and Air Asia X. While the opportunities for further growth were clearly a key theme of the conference, the other, even more pressing theme was the question of how airlines and their stakeholders can benefit from that growth in the sense of improved efficiency and profitability within the airline industry.

It is well documented that airlines are the weakest link in the aviation value chain when it comes to financial performance, with a 40-year annual average of some 0.1 percent annual post-tax profit (net of debt servicing costs) of revenues across IATA-registered airlines (IATA 2011, 17). The airline industry has become increasingly challenging, given the enormous volatilities of fuel prices and foreign exchanges rates, the increasing global pressure from the low-cost carrier sector (for further details see, for example, Pearson and Merkert 2012), as well as uncertain demand resulting from the ongoing global financial crisis. Thus, it is of paramount importance for airlines to control and if possible improve cost efficiency and profitability in order to remain competitive. Research in this area is, hence, in high demand. As such, this issue is dedicated to papers related to the unifying theme of innovative approaches to improving efficiency and profitability of airlines. Although the selected four papers investigate and propose solutions to problems related to very different areas of airline management, they are all interrelated with respect to the need for cost control and profit optimization.

As the cost differential between low-cost carriers (LCCs) and full-service carriers (FSCs) narrows in both business models, much emphasis has lately been placed on ancillary revenues (e.g., de Wit and Zuidberg 2012). While commission-based ancillary revenues offer interesting opportunities for profitable revenue growth, unbundling of the traditional seat/ticket as well as investments into even more sophisticated revenue management systems are key trends of the 2011/2012 airline industry. In the first article of this special issue, Huang, Peng, and Wu present their findings on models that evaluate multifare pricing mechanisms of LCCs. They argue that the innovative dynamic pricing of a single-fare approach employed by LCCs results in much increased revenues compared to the traditional legacy multifare mechanism where much of the decisions are based on seat inventory control policy. It was long known that LCCs are not necessarily associated with lower average yields compared to FSCs once all charges, such as luggage or credit card fees, are included. However, this article shows that the dynamic approach to revenue management produces much higher revenue compared to the classic seat inventory model, which, combined with the low-cost structure of LCCs, results in improved profitability. An interesting aspect of this article is that it incorporates the latest developments in the LCCs sector, namely that many LCCs, such as easyJet, now also offer multiple-fare schemes. However, even within the LCCs space, Huang, Peng and Wu’s numerical experiments revealed that based on willingness to pay and purchase probability, dynamic pricing can achieve higher revenue than the classic seat inventory revenue management with predetermined prices.

The second article takes a supply-driven approach of airline and, in particular, legacy carrier management. Wang and Li discuss fleet assignment problems that are solved by multiphase approaches and linear programming. Fleet assignment, along with route, schedule, and crew planning, is one of the most complex challenges that renders real potential for efficiency improvements of today’s network carriers. Wang and Li evaluate different models for assigning different types of aircraft with different capacities to the scheduled flights based...