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In Part 3, I discussed about potential marriage between a perfect stranger. In real life, this kind of mix marriage often result good quality of "products" ! Anyone disagree with me ? If not, just look around us, and you will understand where I am coming from.
So, trust the proposed marriage between MAS and
KLM shall result, all situation "cateris paribus" , operational efficiency, cost saving, cost reduction and better financial position with focus on cash and cash equivalents position of the respective airlines.
Before I further discuss about managing both revenue and cost and bottom line, an overview and appreciation of terms, measurements and indicators of an airline business would help me and reader have an overview and understand the topic of managing cost and yield.
Available Seat Mile (ASM): The Basic Measure of Capacity
- One seat (empty or filled) flying one mile is an ASM
- A 140-seat MD-80 flying a 500-mile segment creates 70,000 ASMs.
- System ASMs are simply the sum of each of these individual segment calculations
- In a typical day in 2007; American made available about 465 million ASMs
Revenue Passenger Mile (RPM): The Basic Measure of Production
- A paying passenger flying one mile creates an RPM
- 100 passengers flying 500 miles generates 50,000 RPMs
- System RPMs are the sum of this calculation for each of the revenue segments we fly.
- In a typical day in 2007, American produced 380 million RPMs.
Load Factor: Production Compared to Capacity
- To calculate system-wide load factor, divide RPMs by ASMs; in 2007 it's 138.5 billion RPMs divided by 169.9 billion ASMs, or 81.5 percent.
- For an individual flight, divide the revenue passengers on board by the aircraft capacity; in the MD-80 example above, it is 100 divided by 140, or 71.4 percent.
- High load factors are not necessarily desirable - How much each passenger pays is also important, as we see in the next measure.
Yield: Revenue per Passenger Mile
- To calculate system yield, divide passenger revenue by total RPMs; For American in 2007, this is $18.2 billion divided by 138.5 billion RPMs, or 13.1 cents per mile.
- To calculate a customer's individual yield, divide ticket price by mileage; if a customer pays $98.00 for the 500-mile segment above, the yield would be 19.6 cents per mile.
Revenue per Available Seat Mile (R/ASM): The Best Basic Measure
- Multiply load factor times yield to get the measure of how much revenue we generate per increment of capacity; using the 2007 example above, it's 81.5 percent times 13.1 cents or 10.7 cents.
Cost per Available Seat Mile (C/ASM): The Basic Measure Of Cost
- Unit costs represent how much it costs to fly one seat (empty or filled) one-mile.
To calculate unit costs, divide total operating expenses by Total ASM capacity; For American in 2007, this is $19.24 billion divided by 169.9 billion, or 11.3 cents per mile.
Revised June 2008
Sample calculation of CASM
For instance, Southwest flies from
Baltimore Washington International (BWI)to La Guardia International (LGA) and the distance is 185 Miles / 161 Nautical Miles between the origin and destination. Southwest is operating this flight with a B737-700 (140 seat max) aircraft, and it cost Southwest $2,700 for this flight (Direct Operating Cost) often referred to as DOC in aviation. To calculate the CASM,
CASM = Direct Operating Cost / Available Seat Mile
= $2,700 / (140 x 161 = 22,540)
Where 140 is the number of available seats and 161 is the distance in miles .
= $2,700 / 22,540 = 0.1197 or 12 cents per mile
It would cost Southwest $0.12 per seat per mile for a flight to New York. In addition, the cost for each seat for total miles would be
Seat Cost = $0.12 x 161 miles = $19.32
It would in turn cost Southwest $19.32 per seat to New York.
| ATA Cost Index for U.S. Passenger Airlines: 3Q 2010 | Index(2000=100) | % of Operating
Expenses |
| FUEL per gallon | 270.8 | 25.4 |
| LABOR per full-time equivalent employee | 137.3 | 24.7 |
| AIRCRAFT RENTS & OWNERSHIP per operating seat | 100.7 | 6.7 |
| NON-AIRCRAFT RENTS & OWNERSHIP per enplanement | 104.4 | 4.4 |
| PROFESSIONAL SERVICES per available seat mile | 116.8 | 8.3 |
| FOOD & BEVERAGE per revenue passenger mile | 59.4 | 1.6 |
| LANDING FEES per capacity ton landed | 164.5 | 2.2 |
| MAINTENANCE MATERIAL per aircraft block hour | 80.9 | 1.7 |
| AIRCRAFT INSURANCE as % of hull net book value | 167.5 | 0.1 |
| NON-AIRCRAFT INSURANCE per revenue passenger mile | 172.3 | 0.4 |
| PASSENGER COMMISSIONS as % of passenger revenue | 27.3 | 1.2 |
| COMMUNICATION per enplanement | 75.3 | 1.0 |
| ADVERTISING & PROMOTION per revenue passenger mile | 58.4 | 0.7 |
| UTILITIES & OFFICE SUPPLIES per full-time equivalent employee | 102.6 | 0.6 |
| TRANSPORT-RELATED per available seat mile | 522.7 | 13.9 |
| OTHER OPERATING per revenue ton mile | 100.7 | 7.1 |
| TOTAL OP. EXPENSES | nmf | 100.0 |
| INTEREST* as % of outstanding debt | 123.1 | nmf |
| COMPOSITE (PRETAX) EXPENSES* | 209.8 |
I hope the above piece of information helps us to better understand why certain decisions are made by airlines and to rationalize for such decision. Of course, being an outsider we will not have privilege of inside information, but that I believe shall not stop us rationalizing, before jumping into any conclusion.
I concur with ex-MD/CEO MAS in one of his speech that there is no rocket science about improving company bottom lines, but because it is very basic that people lose sights as focus are given to more complicated concepts, theories and big words and jargons about "strategic" revenue and cost reduction, "strategic" management - oh yeah the word " strategic" scares me already ! So, understanding what goes inside into the books i.e. income statement, cash flow statement and financial position are those that need to be addressed and focused in airline business.
So, my view on possible marriage between MAS and KLM is basically two folds - improving the revenue per passenger or yields and at the same time managing the cost of available seat mile through collaboration and partnership based on established trust, goodwill and relationship rather than through merger and acquisition and business combination through " equity marriage", bearing in mind MAS is a national entity representing national interest and pride, and owned by Malaysian government. As such, partnership through " equity marriage" is somewhat not in the distance future, so do I believe.
So, how this marriage will benefit both airlines ? To be perfectly frank, I do not know but below are some of the points that I think that make the marriage works ;
1. Enhancing " Hub and Spoke Concept "
Asia is just to huge to be ignored for airlines business based on its population figures . Below are statistics about the fact ;
Asia is the world's largest and most populous
continent, located primarily in the
eastern and
northern hemispheres. It covers 8.6% of the
Earth's total surface area (or 29.9% of its land area) and with approximately 4 billion people, it hosts 60% of the world's current
human population. During the 20th century Asia's population nearly quadrupled.
[2]
Figures for the population of
Europe vary according to which
definition of European boundaries is used. The population within the standard physical geographical boundaries was 842 million in 2005 according to the United Nations. In 2010 the population is 857 million, using a definition which includes the whole of the transcontinental countries of
Russia and
Turkey.
Population growth is comparatively slow, and
median age comparatively high in relation to the world's other continents.
Again, Asia is just too big enough to be ignored with good growth economic growth prospects in 2011 and beyond which means increase in purchasing power. While Europe, they have the purchasing power and traveling have been part of their " routines" but combined the two factors of this two continents, it is just too huge and important market to be ignored especially a good prospects for low cost carrier segment- i.e. Fireflyz -MAS while KLM is mulling to have one.
This potential collaboration will provide the customers from both continents to have a seamless travel experiences connection to/from Europe and Asia and provide a wider travel options and network, which will spur tourism between the two continents.
So, virtually what I can see from this collaboration is that, MAS next virtual hub will be in Schiphol Amsterdam International Airport for European markets and beyond, while KLM next virtual hub shall be Kuala Lumpur International Airport [KLIA] for its Asia market and Australasia.
2. Both MAS and KLM aim to be providing, low cost fares with full services;
Some skeptics and critics say, it just won't work ! They can't be a full service carriers with low cost concept. However, my view on this is that it may work in the distant future. Why I said it so ? Recently, I bought a ticket fro my dad from KLIA to Jakarta from KLM, and it cost me only RM 363 return ! For me, for that price with the full services, it is indeed a good value for money. For sure, other customers like me for instance, will not switch to low cost carriers easily, if both KLM and MAS can offer the price below RM 500 for the route. I had the same experience for MAS where one way ticket to Jakarta cost RM 250 one way, still reasonable [ and mind you I bought it on the traveling day itself]. For one, I will not hassle myself with all the "add-on stuff" . All I care that my traveling needs are taken care off in a single price ! What I am trying to share here is that, there is a market segment of customers who are behaving just like I do, and this market segment is huge too.
3. Increase the distribution channel of reservation and ticketing
Reaching the customers through and effective and efficient distribution channel is very critical in any business. For instance MAS does not fly directly to Brussels, Belgium. However, through code share agreement with KLM and Alitalia airline, a customer from all over the world can purchase ticket from Kuala Lumpur -Brussels-Kuala Lumpur.This have been possible via MAS online booking system.
| MH14 | Sat, 22 Jan |
| Economy |
| |
| Departure | Kuala Lumpur | 23:45 |
| Arrival | Rome | 05:30 (+1) |
| MH9356 (!) | Sun, 23 Jan |
| Economy |
| |
| Departure | Rome | 08:55 |
| Arrival | Brussels | 11:10 |
| MH9302 (!) | Sat, 29 Jan |
| Economy |
| |
| Departure | Brussels | 06:20 |
| Arrival | Amsterdam | 07:15 |
| MH17 | Sat, 29 Jan |
| Economy |
| |
| Departure | Amsterdam | 12:00 |
| Arrival | Kuala Lumpur | 06:45 (+1) |
|
|
| Source and read more Kuala Lumpur-Brussels-Kuala Lumpur |
So, with the potential collaboration, in the future " selected KLM destinations" shall appear in MAS online booking and reservation and " selected MAS destinations" shall appear on KLM online booking and reservations both for the code-sharing and non-code sharing destinations, and the mechanism of revenue and cost sharing which is equitable for both parties can be included in the framework of the collaboration agreement.
This is what I would imagine ;
Say, I want to fly to Mlabo in Equatorial Guinea. MAS does not fly directly to Mlabo but KLM does.
I did my booking via MAS online booking and reservations. In the system, I can choose to fly with KLM or MAS for route from Kuala Lumpur to Amsterdam with the same ticket cost [ or +- variances] , no matter which airline I fly with be it with MAS or KLM. For Amsterdam -Mlabo route, I will fly with KLM through codeshare with MAS with the same ticket price [+- variances]. Will this ever happen ?
However, both airlines have to make assessment on the profitability of each routes, as it is only make sense to collaborate on profitable routes, or potential profitable routes in the future. It is like the investment and cost to establish a profitable routes are now being shared with two entities, rather than merely by AirFrance-KLM with transparencies in managing the cost to achieve operational efficiencies.
4. Managing the cost
As we can see from the tables, the 3 biggest cost contributors for an airline operations are ;
1. Fuel ;
2. Labour ;
3. Transportation related cost ;
This represents 64 % of the cost and the next biggest 18.2 % of the cost is related to aircraft and non aircraft ownership cost . These are the cost that both airlines shall focus on should they would want to collaborate. Potential collaboration between the two is technical and best practices sharing such as of hedging strategies for the fuel requirement, interest rates and foreign exchange fluctuations. In addition, the establishment of shared facilities and services -outsourcing for common services such as marketing, sales and distribution, advertisement, finance, procurement, training [ cadet and cabin crews] , information technology, MRO through common warehouse for spare parts, supply chain, foods and beverage, ground handling which include check -in [ with the online checking shall be the focus in the coming years] , and I believe Malaysia have a good value proposition for KLM with regards to this business outsourcing collaborations to drive and optimize the cost further with capable manpower and resources, lesser requirement on employees unions and associations [ with potentially lesser strikes among the employees], relative lower cost operations as compared to other countries, relatively politically stable country, investment friendly with Economic Transformation Plan [ETP] and the list can go on.
5. Collaboration of new technology
With the fuel cost represents almost 25 % of the cost, Malaysia is promoting biofuel industry and Holland is a country with strong track records of research and development , looking at bigger picture that the potential collaboration will not only limited to airline and tourism, it is beyond that. Perhaps, both airlines will make a breakthrough to be the first two airlines in the world who are able to reduce the fuel consumptions in the future.
Also, potential collaboration for reduction of carbon emission to safeguard the environment as part of the two airlines bigger agenda.
6. Collaboration is the social medias and network as part of branding exercise for both airlines
This a potential areas to reach the customers worldwide especially in the airline industry. It provide a more cost effective and to do business more efficiently. The younger generations are the future customers of the airlines for the years to come, resulting loyalty to the brand from one generations to another.
All those items discussed [ excluding the holidays related packages, cargo business, the next question that might be asked is whether it will ever happen without any "tying" the knot at equity levels. Am I being to idealist when it comes to this ? I always believe in two things.
1. All the risks and rewards being addressed adequately and each parties are well protected ;
2. Both parties winning. Is that possible ? Yes ! I would say as one is not trying to cannibalize the others;
I leave it to both airline companies to make it happens, as I trust that they have a capable teams to make it a reality. With Open Skies agreement is looming and nearing the deadlines, MAS and KLM is indeed on right track to explore all the possibilities.
Learning from develop countries of Canada and USA -
The bilateral “Open Skies” agreement with the United States in 1995 had greatly facilitated business and leisure travel. It authorized any Canadian or U.S. airline to offer transborder services without restriction in terms of fares, flight frequencies or aircraft types. The capacity of scheduled airline services between the two countries experienced strong growth starting in 1995 – with a sharp increase of 25% in the first year alone.
Source :
US-Canada Liberalization
Malaysia's promises ;
Malaysian Prime Minister Datuk Seri Najib Tun Razak said the Asean roadmap would fully liberalise air services arrangements in the region by 2015, as quoted by the Malaysian Daily, the STAR.
He said Malaysia was also working closely with other Asean member countries to look into the possibility of a single aviation market along the line of the European Union
Source :
Open Skies
Yes, for MAS and KLM the future is ASIA and Malaysians, let us today- dreams and tomorrow -realization of our dreams
I end my entry with this quote to recap what have been reported in the media about the potential collaborations;
"The preliminary agreement signed with KLM will pave the way for greater connectivity and better schedules, Malaysian Air said during trading hours yesterday.
“We are positive on this development as it could help Malaysian Air ride on KLM’s global network and possibly drive cost efficiency,” Wong Ming Tek, an analyst at HwangDBS Vickers Research Sdn. wrote in a report today. “This could strengthen its position in the market in the face of a competitive environment.”
Source :
Business Week
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