Analysis of Capacity Management in Airline Industry: A Case Study

1. Yield Management
With the PROS Airline Solution Suite, Royal Jordanian will benefit from proven scientific
forecasting and optimization techniques and sophisticated decision support tools to establish a
competitive advantage in formulating revenue management and pricing strategies. The solution
maximizes revenue for Royal Jordanian by optimizing inventory with the appropriate fare mix, by
evaluating the right price for groups and managing the entire group business process, and by
rationalizing the pricing structure to leverage network traffic mix.
The company studies the long term demand forecast continuously as part of Yield
Management and update its capacity of flights. As stated 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. They’ve
also shown the capacity expansion plan that the company is planning to implement in 2016 in
response to the long term demand forecast. As shown in their chart, some aircrafts will be
added and some will be eliminated from the fleet.
Another is included in the medium and short term capacity planning in Royal Jordanian Airline,
the company is working continuously to increase the number of destinations and/ or the number
of weekly departures according to medium and short term demand forecasts (Royal Jordanian
2014, p.16).
2. Managing Stochastic Demand:
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)
3. 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.
Airlines have always been very oriented at capacity planning mainly because of the impact
on revenues. Airlines have to fill as many seats as possible to help cover high fixed costs and

Lazo, Myles N. BSA I-A

Analysis of Capacity Management in Airline Industry: A Case Study

this requires planning in advance to ensure full flights. Carriers has this need to take many
variables into account to maximize their capacity (people in seats), including:

 Fuel requirements
 Catering considerations
 The number of flights
 The types of planes for each route
 The size of the crews for each plane
These are just a few of the variables that carriers analyzed to determine their capacity not just
for the peak summer travel, but they also have to estimate capacity several years out based on
an increase or decrease in air travel.
4. Alliance Agreement and Airline Subsidiaries
According to businesswire.com "After an extensive evaluation of all solutions available,
Royal Jordanian is pleased to select the state-of-the-art PROS Revenue Management Airline
Solutions Suite," said Royal Jordanian President and CEO Samer Majali. He further states, "As
Royal Jordanian continues its expansion and prepares for membership in the oneworld alliance,
our objective is to find the absolute best solution from the best provider. We are delighted that
we have achieved this through our new partnership with PROS. Our expectation is that the
PROS Suite of systems will enable us to maximize revenue from all segments of passenger
business with renewed strategic and tactical focus."
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).

1. Yield Management
This Airline 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). Additional 75 aircrafts were
delivered in 2015 and 112 aircrafts were disposed.
They have this logic on yield management that focuses on the planning department
which determines airline’s flight schedule and fares, next is the combination between flight
schedule and fares defines the products that can be offered to the public followed by the Yield
Management system that is used to determine how much of each product to make available for

Lazo, Myles N. BSA I-A

Analysis of Capacity Management in Airline Industry: A Case Study

sale. Then, the sales and cancellations transactions which is fed into Semi-Automated Business
Research Environment (SABRE) and updating the reservation if yield management controls
permit.
Critical to an airline's operation is the effective use of its reservations inventory.
American Airlines began research in the early 1960s in managing revenue from this inventory.
Because of the problem's size and difficulty, American Airlines Decision Technologies has
developed a series of OR models that effectively reduce the large problem to three much
smaller and far more manageable subproblems: overbooking, discount allocation, and traffic
management. The results of the subproblem solutions are combined to determine the final
inventory levels. According to jstor.com, American Airlines estimates the quantifiable benefit at
$1.4 billion over the last three years and expects an annual revenue contribution of over $500
million to continue into the future.

2. Managing Stochastic Demand

Adaptive stochastic airline seat inventory control lies at the heart of airline revenue
management. This problem concerns the allocation of the finite seat inventory to the stochastic
customer demand that occurs over time before the flight is scheduled to depart. The objective is
to find the right combination of customers of various fare classes on the flight such that revenue
is maximized. 
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",
 "Fears of terrorism or war",
 "Fare initiatives",
 "Fluctuations in fuel prices",
 "Labour actions",
 "Weather and natural disasters" and
 "Outbreaks of disease".
3. Long term capacity Planning
American Airlines constantly monitored and adjusted their capacity, sometimes years out
when it comes to how many aircrafts it will need to purchase and support. They also need to be
able to forecast fuel costs as well as how travel on a specific route will increase/decrease and
shift resources accordingly. This requires a long term view on capacity planning so they prepare
for hiring, fuel hedging, and orders for new aircraft (and which type/size) and to satisfy
regulations.
The long term capacity planning in the group is essential to ensure continuous capacity
to meet future demand.

Lazo, Myles N. BSA I-A

 Analysis of Capacity Management in Airline Industry: A Case Study

4. Alliance Agreement and Airline Subsidiaries

It has a great relationship with alliances and subsidiaries for it affect its operations
globally. The company also has different capacity purchase agreements with subsidiaries and
third party companies (American Airlines Group 2015, p.45) including:

oneworld® airline Other airline partners  American Airlines

partners  British Airways
 Air Tahiti Nui 
 Cape Air
 American Airlines 
 Alaska
Airlines/Horizon Air   Cathay Pacific
 British Airways 
 Etihad Airways
 Cape Air 
 Cathay Pacific 
 Fiji Airways
 China Southern  Finnair
 Finnair 
Airlines 
 Hawaiian Airlines
 Iberia 
 Etihad Airways 
 Iberia
 Japan Airlines 
 Fiji Airways 
 Japan Airlines
 LATAM Airlines 
 Hawaiian Airlines   Malaysia Airlines
 Malaysia Airlines   Qantas Airways
 Interjet 
 Qatar Airways
 Qantas 
 Seaborne Virgin
Islands   Royal Jordanian
 Qatar Airways 
Airlines
 Royal Jordanian Redeem miles on aa.com  S7 Airlines
Airlines 
 Seaborne Virgin
 Air Tahiti Nui Islands
 S7 Airlines 
 Alaska Airlines  SriLankan Airlines
 SriLankan Airlines 

Lazo, Myles N. BSA I-A

Analysis of Capacity Management in Airline Industry: A Case Study

1. Yield Management

Yield management within the airline industry may be a prerequisite, but in the budget
airline sector it is still developing. Whether it is called yield management, revenue management
or revenue maximization its aim or purpose is clear: to achieve the highest possible income
from every single flight within an airline’s portfolio of flights and routes. easyJet has developed
an effective and efficient operation, a single positive brand image and a successful marketing
strategy.
Why is yield so important to easyJet?
1. Unlike the major airlines, easyJet has a price structure with only a small degree
of flexibility: the range in price available for any destination at easyJet is low. For
example, Nice starts off at a low of £35 per seat, extending up to £129 depending
upon level of bookings and number of days out from take-off. At BA, for a similar
flight, the prices ranges from £284 standard fare, to £351 for business class, and
the reduction can be very wide nearer take-off, depending upon source, e.g.
bucket shop, travel agents’ special late offers. This gives the major airlines a
larger range of discounting opportunities, and more chance of a contribution to
their fixed costs. (Both examples of prices are current at time of writing and one
way.)

2. easyJet offers no agency bookings, and passengers can only book or inquire
directly via the telephone sales staff and the internet. Therefore it is essential to
have an easy and quick reservation system that shuts out and opens the various
pricing levels as the take-off date nears, and the booking pattern becomes
clearer. Any problems or delays within the computer yield management booking
system could result it: a staff giving different rates b lower rates than are
necessary being given, and therefore loss of revenue occurring c staff being able
to differentiate prices as a personal choice d customers receiving unequal
treatment, and thus becoming dissatisfied.

3. A system which instils confidence in the operation for management, sales staff
and customers.

4. This system permits the staff to achieve a high level of operator efficiency, due
to certainty, accuracy and simplicity, which is important to the company, and the
operators who are paid on results (bookings achieved).

5. The easyJet internet system is only possible with the use of a real-time yield
management system. This system has proved so successful that during

Lazo, Myles N. BSA I-A

Analysis of Capacity Management in Airline Industry: A Case Study

November 1999 it set a world record for airline bookings achieved via the net, 60
per cent of all bookings for a specific day.

2. Managing Stochastic Demand

They’ve also projected the measures that the company tracks. Price may act as a signal
to consumers, who then wait for the last-minute deal. Thus in both cases, as compared with the
two-period game, employing last-minute deals is not an equilibrium. The empirical results
support the main assumption in their model development that there are heterogeneous groups
of customers with differing price responses. The empirical results also support the main results
or predictions of their model that the seat price increases over time, but the rate at which price
increases declines as capacity increases, Last-minute deals are often made very close to the
actual flight time. For example, in some European airports, one can buy tickets at a greatly
reduced price for same-day flights. Thus in actual practice, as well as in our models, last-minute
deals are rendered irrelevant for the business segment. If the price in Period 3 (last-minute
period) is low, then the firm has to worry about consumers from the tourist segment waiting to
buy tickets in Period 3 instead of buying them in Period 1. Indeed, some of them will, but the
question is how to fence the higher utility consumers out of this segment. The reason that the
high-utility consumers do not wait for last-minute deals is their uncertainty with respect to the
existence of such deals. They know that if demand is high enough, the airline will not bother
reducing the price. Moreover, if capacity is low relative to demand, then by waiting, they take the
risk of finding themselves without a ticket.
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). 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).
4. Alliance Agreement and Airline Subsidiaries
Their 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.
New partner airlines with complimentary networks join Worldwide by easyJet, selling stand-
alone tickets on easyJet’s website.

 Italian long haul airline NEOS signed up to offer flights from Italy to a range of exciting
holiday destinations in Africa, Asia, the Caribbean and the Middle East. 
 Guernsey’s airline Aurigny signed up as a partner airline provides Channel Island
services.
 Exclusive French business-class carrier La Compagnie offers direct connection between
Paris Charles de Gaulle and New York.
 Corsair to offer flights from Paris Orly to a variety of long-haul destinations across Africa,
the Caribbean and Indian Ocean.
 ‘Worldwide by easyJet’ to be included in Google Flights.

Lazo, Myles N. BSA I-A