Production & Operations Management

Yield management originated with the deregulation oI the U.S. airline industry in the late
1970. EIIectively managing capacity is a challenging aspect oI the airline business. Emirates
airlines also use the industry wide concept oI Dynamic Pricing. This assignment will discuss
Emirates Airline's Iocus on the revenue perspective oI capacity management i.e., yield
management in an eIIort to improve the airline`s perIormance. It will also discuss the key
concepts oI capacity management, impact on the airline industry and challenges Iaced in
capacity management. Critical analysis on a Iew Iunctions and trends oI capacity
management alongwith capacity Iluctuations will be discussed with appropriate
recommendations. Break even point and best operating levels will also be discussed brieIly.

Emirates Airline is the world`s Iastest growing airline. Currently the Ileet oI Emirates is 66
aircraIts. By 2012 the Iigure is likely to go up to 169 aircraIts. Presently the airline is serving
77 destinations around the world, New York and Christchurch being the latest additions.
Primarily in the business oI carrying people Irom one place to another, the market oI
Emirates covers almost the entire globe and iI Emirates currently does not serve a destination
then it enters into strategic partnerships and alliances with other carriers which also increase
capacity Ior the airline.

EIIectively Managing Capacity- The Perishable asset

In the airline industry, plane seats are reIerred to as inventory. II the plane leaves the gate
with empty seats, this inventory cannot be stored and is lost. II an airline can minimize the
inventory waste, then it can operate more eIIiciently. Yield management determines the load
level to try and maximize revenue. Hotel rooms and cars at a car rental company also Iorm a
similar sort oI perishable asset. From an Emirates perspective the management oI capacity is
twoIold- Operations- wherein the Iocus is on maximum utilization oI existing resources,
while maintaining on-time departures and convenient Ilexible schedules conIirming to best
aviation saIety and service standards and secondly Revenue-wherein the Iocus is on
maximization oI revenue being a trade oII between Ilexible capacity and the existing capacity
constraints. Low cost airlines are making a big impact on the proIit margin oI large carriers
so in the uncertain environment and injection oI private airlines in the aviation business
increasing, the subject oI proIitability management becomes ever more important. The term
yield management has been coined in the airline industry and its objective is to manage the
product inventory in such a way as to maximize revenue. The intelligent use oI the yield /
revenue management concepts and principles is to increase proIitability in service industries.

One oI the greatest potentials Ior proIit improvement comes Irom improved management oI
airline's capacity (seat inventory). A typical airline's annual seat inventory is worth over $ 1
billion. Hence a mere 1 improvement in the eIIective utilisation oI inventory would be
worth a $10 million annually.

(Source Managing Uncertainty- Airline Business Magazine)

Capacity can be deIined as the maximum level oI value-added activity over a period oI time
that the process can achieve under normal operating conditions. (Slack et al 2004).

Markets determine the way organizations need to manage capacity. II the market is strong the
organization could be working at peak output and still not able to meet the demand whereas iI
the market is strong then most organizations try to evolve a new product or enhance the
product thereby slowing the supply eIIectively managing capacity.

Capacity planning iI managed eIIectively can result in maximizing revenue and proIits.

An appropriate balance needs to be maintained between capacity and demand which can
generate high proIits and customer satisIaction but getting an imbalance will result in
potentially disastrous consequences.

Capacity planning can be both strategic and tactical.

Strategic Long term Capacity Planning

Strategic capacity planning is an approach Ior determining the overall capacity level oI
capital-intensive resources, including Iacilities, equipment, and overall labor Iorce size.
(Slack et al 2004).

II you cant Measure it you cant Manage it. As a company Emirates careIully plans the
growth oI the company. The current Ileet size will be almost doubled in the next six years
and also Emirates would have their Iirst Iull Ireighter aircraIts. All these is careIully planned
and managed by the Emirates Groups strategic Planning department manages strategic
capacity planning. An eIIective monitoring system is in place which uses passenger
Ieedback, market research and surveys to identiIy potential growth or change opportunities.
E.g. Emirates Ilights to Bombay were operated in only a two class conIiguration but market
research identiIied the need to include Iirst class on the sector. By changing the class oI travel
in the aircraIt Emirates was able to improve on their yield. Similarly new stations on the
routes are planned as per the delivery schedule oI the aircraIts E.g. With the introduction oI
the Airbus A340-500 in the EK Ileet, passengers were now oIIered a option oI directly Ilying
to JFK thereby eliminating the need oI a stopover in London and also at reduced time and
cost. Long term capacity planning improves supply chain processes to isolate vendor delivery
risks, which may potentially impact revenue.

Tactical short term Capacity Planning

Due to demand Iluctuations, capacity may be adjusted by swapping aircraIts around which
would enable the output to be Ilexed Ior a short period, either on a predictable or on a short
notice. Operations managers can decide how to manage the capacity oI the aircraIt in the
medium term, which could range Irom 2-18 months or even short term.

Emirates analyses the route perIormance periodically and conduct audit (with Market
Research) and evaluate the cause Ior non-perIormance to review drivers such as demand,
pricing structure, competitor activities.

This enables the airline to react to market changes immediately to realize revenue
opportunities, reducing Iinancial risk and operating costs.

Figure 1: A deIinition oI capacity planning & control

(Source- Slack et al, 2004, Operations Management Fourth edition)

The term capacity implies an attainable rate oI output but says nothing about how long that
rate can be sustained. The concept oI best operating level is the level oI capacity Ior which
the process was designed and is the volume oI output at which average unit cost is minimum
When the output oI the Iacility Ialls below this level (underutilization), average unit cost
increases, as overhead must be allocated to Iewer units. Above this level (over utilization),
average unit cost increases. (ReIer Iig 2)

(Source: http://www.pom.edu/p304/ch8ppt/sld001.htm)

Under utilization over utilization

Utilization is a key measure oI perIormance Ior an airline industry. Capacity utilization rate
reveals how close a Iirm is to its best operating point, i.e., design capacity.

(Source - http://www.hn.psu.edu/Iaculty/lsinger/blog/chapter7.pdI)

The best measuring tool Ior an airline 'Best Operating Level is to calculate the airlines Ileet
or capacity utilization. Currently Emirates airlines has the highest Ileet utilization in the
industry. Whereas the industry average oI Ileet utilization is between 7-11 hours a day,
Emirates aircraIts are utilized Ior about 13.3 hours a day which is very high by the industry
standards. II the capacity is over utilized, the maintenance cost, staII overtime, in other words
production costs would rise and there could be a compromise in quality oI the product and
saIety. SaIety is paramount in Emirates and the advantage Emirates has over other competitor
airlines is that the average age oI the Ileet, the industry average is about 160months emirates
has an average oI 46 months which help in keeping the costs substantially lower. (ReIer Iig 3)

(Source- Emirates Annual Report 2003- 2004)

Over the last year Emirates has also managed to get the break-even seat Iactor down to 59
Irom 64 which is also a measure on how well the capacity is utilized. The break-even seat
Iactor is the minimum seat-Iactor required to cover the operational costs. The average seat
Iactor is 73.4which indicates that Emirates is operating at the optimum level, and is
constantly looking to improve this level by reducing costs and other strategies. (ReIer Iig 4)

(Source- Emirates Annual Report 2003- 2004)

OIten, though, organizations Iind themselves with some parts oI their operation operating
below their capacity while other parts are at their capacity 'ceiling'. (Slack et al 2004).

Due to bilateral agreements and government regulations there is a restriction on the number
oI Ilights that can be operated to a particular country E.g. India. This prohibits the company
Irom using its inventory (seats) to the maximum and has to operate below capacity. Other
Iactors which could also induce capacity constraints are airport Iacilities like runways,
parking stands, etc E.g. when the A380 is introduced in 2006 though Emirates on that single
aircraIt will be able to sell about 600 seats it will be restricted as the A380 will not be able to
Ily to all airports around the world due to runway and parking stand limitations.

How Capacity Management aIIects the airline industry

In an airline industry the objective oI the intelligent use oI capacity management is to
generate revue to the maximum. Revenue Management (RM); sell a seat to the right type oI
customer, at the right time and Ior the right price. It is the science oI manipulating available
capacity to meet market demand in order to maximize revenue. Revenue is the total money
out oI a market Ior a given Ilight or a set oI Ilights. It is the day-to-day monitoring and
control oI seat availability in each Iare group on each Ilight to ensure that total revenue Ior
that Ilight is maximized.

(http://www.horand-vogel.de/members/moreym.asp)

YM is very well suited Ior service Iirms, and a Iew characteristics that make yield
management eIIicient are:

II capacity were Ilexible, there would be no need Ior a tradeoII. II airlines could add or
remove seats there would be no need Ior capacity management.

The airline must seek a trade-oII between maximum load Iactor and highest paying
passengers. A good comparison would be between the time-sensitive business person and the
price-sensitive customer. Such a strategy allows airlines to Iill seats that otherwise would be
empty.

In the airline industry, plane seats are reIerred to as inventory. II the plane leaves the

Gate with empty seats, this inventory cannot be stored and is lost. II an airline can

minimize the inventory waste, it can operate more eIIiciently.

The tradeoIIs occur when the question arises should the ticket be sold early at a discounted
price so you guaranteed a sold seat or wait till the last time and hope a higher Iare paying
passenger arrives. II all tickets were sold at once, the right tradeoII would be a Iixed Iigure.

Historical data can be used to analyse the traIIic pattern during the year. In peak

Season, the airline can increase its revenue by increasing the Iare on its tickets and in

low season, it can increase capacity utilization by oIIering low prices.

(Source Strategic Revenue Management training handbook Emirates Airline, 2001)

Functions oI Revenue Management: (in relation to Emirates Airline)

RM plays a key role in achieving the Emirates business strategy Ior proIitability, with
decreased operating costs and increased revenues. (ReIer Iig 5)

Figure 5: Emirates Business Strategy Ior ProIitability

Forecasting demand Iluctuations enables an airline to plan their capacity more eIIiciently.
The ability to Iorecast accurately is an enshrined principle oI Revenue/Yield management.
(Raeside 1997; Glover et al 1982).

The most errors occur in Iorecasting resulting sometimes Ilights going with seats not sold or
resulting in an overbooked situation. Based on the Iorecasts operational managers try to make
inIormed decisions with regards to usage oI aircraIt types, scheduling, and maintenance
(ReIer Iig 6)

Figure 6: Variance Iorecast Vs Actual data

The above graph gives an analysis oI the Iorecast variance Vs actual data. Emirates Ilight
EK502 variance is -12seats 120 days beIore departure and on the day oI departure its 4
seats. EIIectively managing the variance in the liIe span oI the Ilight will result in higher
incremental value.

In Emirates, Passenger Revenue Optimization System (PROS) is used to Iorecast Iinal
bookings and boarding`s on day oI departure. PROS system tells airlines how many seats to
sell at each price. (ReIer Iig 7)

Inventory

Figure 7: The working oI PROS System

(Source Houston Chronicle - Business Finance & Markets magazine)

Capacity management systems manage this uncertainty oI passenger behavior using
mathematical models to balance risk oI denied boarding with the revenue loss due to empty
seats. Historical data helps in analyzing the trends oI variance and helps in arriving at an
optimal overbooking solution with minimal error Iactor. II the calculations go awry then the
airline has to Iace huge costs in re-booking, accommodation etc.

ORG DES BKNG NOSH NOSH BKNG NOSH VAR

DXB BOM 15146 917 6 13673 1360 10 -4

The above statistics is a sample oI the no-show percentage Ior diIIerent sectors. The variance
Iluctuates at diIIerent times and Ior diIIerent sectors. Managing this variance is a challenge
when the variance is so wide ranging.

Dubai being an expatriate city there are clearly identiIied periods during which the traIIic is
at it is peak and other periods the traIIic being a bit low like the seasonal holidays etc. Clearly
with the number oI stations that Emirates now serves the transit traIIic is about 60-65 oI the
total load. Emirates Revenue Management comes into play only when demand exceeds
capacity and during low demand period. Revenue management then uses pricing tools and
other business strategies to simulate the market. Revenue managements block a certain
number oI seats at each Iare on each Ilight (ReIer Iig. 8). Enough seats are protected oI the
higher priced seats Ior the last minute traveler. The allocation is constantly reviewed and
changes to the allocation considering the demand. All this is done with the sole objective oI
increasing revenue.

Wherever possible, to exploit increased demand, higher capacity aircraIt are deployed to
improve revenue. Alternatively, where the demand is lower than the capacity on a given date,
smaller aircraIt iI available is used to reduce direct operating costs.

Reducing operating costs and increasing revenues by capturing excess demand is the key to
Revenue Management. Emirates airline revenues Ior year 2003-2004 were close to 13.3
Billion AED and Revenue Managements contribution is estimated to be approx. 3.5 to 4
oI this revenue.

Revenue Management Tactic: Address short-term Iluctuations Iirst with price, then with
capacity. (Robert Cross, 1999)

EK 502 30AUG MON VFL DISPLAY FOR FLIGHT LEG FORECAST



ROUTING DXB-BOM



PHY CMP PRS CLS NOW

DATE LEG CLASS CAP BKD FCT BKD AVL

30AUG DXBBOM BD-F 12 10 11

ID-F 10 2

ID-Z 0 0

ID-A 0 0

ID-O 0 0

BD-J 42 30 35

ID-J 30 16

ID-D 0 2

ID-C 0 2

ID-I 0 0

BD-Y 183 113 131

ID-Y 10 106

Figure 8: Sample oI the diIIerent booking classes in the Emirates Reservation System

(Source MARS Emirates Booking System)

All the airlines have diIIerent pricing structures and policies. The earlier you buy a ticket the
cheaper it is the later you buy a ticket the more expensive it becomes. A similar policy is
Iollowed by Ryan Air and Southwest Airlines and many other low cost carriers.

This is also known as discount allocation. It is the process oI determining the number oI
discount Iares to oIIer on a Ilight. The ratio oI discount Vs Iull Iares are not Iixed during the
reservation period and are moved appropriately as the departure date approaches.

To introduce itselI in the airline market a low cost carrier Irom Sharjah is oIIering special
discounted rates. The tickets are no-reIundable, non-exchangeable, and valid Ior a Iixed
period (month). Instead oI the regular price oI AED 650 the discounted price oIIered is AED
450 Ior a round trip Iare. The aircraIt used has a capacity oI 150 all economy class
passengers. Past data analysis showed that the demand Ior Iull Iare tickets Iollows a normal
distribution with mean oI 60 and a standard deviation oI 15. Let Cu be the average cost, i.e.
the cost associated with reserving too Iew seats at Iull Iare. Co Ior the overage cost, i.e. the
cost associated with reserving too many seats at Iull Iare. Cu is the lost opportunity oI
additional AED200 i.e. the diIIerence between Iull and discounted Iare. ThereIore Co
AED450 because we assume the extra seats reserved Ior Iull Iare passengers can now only be
sold at a discount.

Where I is the demand Ior Iull Iare tickets and x the number oI seats reserved Ior Iull Iare
passengers. The critical Iractile value P(I




Bibliography:
Bibliography


1. N. Slack, S. Chambers, and R. Johnson, Pitman` 'Operations Management, 2004
4th edition

2. Emirates Group Annual Report 2003-2004

3. Raeside 1997; Glover et al 1982

4. http://www.pom.edu/p304/ch8ppt/sld001.htm

5. http://www.hn.psu.edu/Iaculty/lsinger/blog/chapter7.pdI)

6. BradIord handouts, 2004

7. Robert G Cross` ' Revenue Management, 1997

8. EK Strategic Revenue Management training handbook Emirates Airline, 2001

9. Interviews and discussions with Yield Management`s managers, trainers and
controllers, Emirates Airline.