Management Fewer market restrictions mean more carriers are free to plan their networks with the passenger's complete journey in mind and can adapt their pricing and distribution policies to match. By Richard Bond.Deregulation brings with it plenty of changes but none so great as in the area of network management. In protected markets carriers are mainly limited to competing on service and advertising, but liberalisation is a completely different ball game. For the first time effective management of the network - the airline's core product - and its integration with pricing and distribution policies becomes paramount.

As liberalisation proceeds apace in Europe and other regions, the successful airlines will be those that recognise this new challenge by focusing on the customer's full itinerary. Typically, airlines strive to maximise profits on flights, routes and regions on a standalone basis. But these so-called 'business units' do not take into account many customers' full itineraries or the growing number of alternative routings available to them. Furthermore, trying to maximise the performance of such business units can reduce the benefits to the bottom line. According to one senior airiline executive: 'It can be a zero-sum game when the customer travels from one business unit to another.'

Network management acknowledges the inter-dependency of typical airline business units and capitalises upon it. It aims to maximise the profit of the airline's entire network by focusing all resources and capabilities on the true origin and destination (O&D) travel needs of customers for both non-stop and connecting flights. In a sense, the customer becomes the business unit, and the revenues and costs that accrue from serving the customer's itinerary determine network profits.

Many external factors are driving the need for this approach. They include:

1 Economic, social and political systems are integrating on a global scale, extending customer travel requirements beyond the end points of many airline networks, let their alone individual business units.

2 Geopolitical changes are opening up a large number of new travel markets that offer significant opportunities for airlines to rethink the scope of their networks.

3 Deregulation and privatisation have led to aggressive competition and the airline business has become increasingly complex in many markets.

4 Travel information resources and technology are advancing at a very rapid pace. On the one hand, this gives airlines better tools for managing complexity. On the other, it is encouraging airlines, and their intermediaries and customers to rethink how they interface. Ultimately this could shift the current base of power.

Despite the present upturn in their performance many airlines have not yet made the kind of changes needed to survive the next decline in the business cycle. This is not to say that every airline has been idle. Indeed, most carriers have restructured in one way or another, and some are still at it. But many have only concentrated on separating into business units and outsourcing or otherwise removing the emphasis from their non-core activities. Too little effort has gone into strengthening the core business functions and defining how to manage them for optimal results.

Network management can enable airlines to succeed through the 1990s by achieving superior levels of profit. However, it requires a degree of customer focus which is not common in the industry today and can only be achieved by integrating the airline's core functions and putting them to work in true O&D markets. The core functions interface directly with the customer, both physically and electronically, and therefore outsourcing functions such as flight operations and airport services could be misguided.

Scheduling, pricing, revenue management, distribution and loyalty programmes - all driven by a customer O&D market strategy - are the 'backbone functions' of network management. They determine where an airline will compete and what the details of the product on offer should be:

1 The core product (the route network, schedule and aircraft assignments).

2 Product enhancements or service features, such as cabin configuration and ground services.

3 Prices and frequent flyer loyalty incentives.

4 Availability through promotion and distribution channels.

Airlines operating in deregulated markets have varying degrees of experience with all these elements; those in regulated markets have little. Regulation limits competition primarily to the use of product enhancements and promotion and thus prevents carriers from taking a network approach. But deregulation forces them to change how they compete and to make use of all the elements. Most importantly, it gives them the freedom to develop their core product, and pricing and distribution capabilities into strong competitive weapons. Increasingly, market positions will be won and lost on the strength of those three factors and on a carrier's ability to integrate decisions concerning them.

Defining the core product is probably the most important decision an airline makes. The route network, scheduling and aircraft assignments establish the carrier's capacity for revenue - the more they match O&D requirements, the higher the revenue potential. However the core product also determines most of the costs that must be covered before making a profit. Research by Arthur D Little consultants shows that 85 to 90 per cent of most airlines' costs are driven by decisions to acquire aircraft and put them into the schedule. When decisions on scheduling and other primary functions such as pricing, revenue management, distribution and loyalty programmes are effectively integrated, network management provides considerable leverage for increasing profits.

Network management represents a fundamental change in philosophy for many carriers and therefore requires the commitment and determination of top management to succeed. Putting network management into practice requires a set of integrated decision-making processes and tools that can readily determine the impact on network profits of serving specific O&D markets. A large number of airlines will have to redesign many of their major processes and install new automated tools to achieve the required level of integration. One independent senior airline advisor says that, of the carriers in Europe, only Lufthansa is close to the required level of integration.

Process redesign for network management involves four major steps. First, it must analyse the strategic and tactical processes in each function and determine how to carry them out to optimise network profits. Processes that focus on business units will have to be given a network focus (see table). In some cases, entirely new processes will be needed, especially if the airline has not yet operated in a deregulated environment. Pricing is one area where carriers typically need new processes, such as for anticipating competitors' pricing behaviour and determining optimal short-term fare actions.

Second, processes should be linked to achieve close functional integration. Integration increases the likelihood of better decision outcomes through the sharing of information, skills and O&D market analyses. The results of schedule decisions for a specific O&D market for example could be improved by assessing the impact of various alternatives on CRS screen presence. Therefore, scheduling and distribution processes need to be linked. Similarly, when contemplating a short-term fare action, awarding bonus frequent flyer miles should be considered as an alternative. This requires a linkage between pricing and loyalty programmes. (see table for other examples of process linkage).

Third, the redesign programme should define the information required by each process and determine how to collect, analyse and share it. Network management processes need good O&D market data which most airlines lack. Also, airlines typically have a poor understanding of their costs on an O&D basis. Developing sound O&D cost information is a prerequisite for determining the profitability of O&D markets.

Fourth, automated tools should be developed or acquired to support and improve network decisions. Decision-making in a network environment is extremely complex; a large carrier such as British Airways serves tens of thousands of different O&D markets. Increasingly, new tools are becoming available to help manage this complexity. For example, systems for optimising schedules, managing yields on an O&D basis, and simulating CRS displays are marketed by companies such as Pros Strategic Solutions, Sabre Decision Technologies and Speedwing Technologies.

Implementing network management is a significant undertaking. The initial redesign work performed at one major European carrier involved about 50 strategic and tactical processes in the major marketing functions alone. Therefore, a rigorous and systematic methodology must be used. The work should be done in phases best defined by the potential for process integration and network profit improvement. This potential is greatest between scheduling and pricing and distribution processes, as well as between pricing and revenue management and distribution.

But integrating processes and installing new tools are not sufficient for implementing network management. The airline's marketing and sales organisation must establish 'ownership' of the multi-functional processes in order for them to be effective and achieve network profit goals. The organisation also needs to be highly responsive and flexible, as well as capable of involving all the major functions simultaneously.

The marketing and sales organisations of many airlines are not suitable for this mission. Airlines that have established business units along route and regional lines, as Air France did last year, do not encourage optimal network results because business units focus on their own flights and routes. By endeavouring to maximise their results, they can easily ignore the customer's full itinerary and weaken the performance of other business units and the entire network.

Furthermore, such organisations require every business unit to have first rate knowledge of their markets and routes. This tends to delay the development of strong functional skills and can lead to conflicts across the airline over issues such as scheduling methodologies and fare structures. An example is Lufthansa's recent decision to abandon its separate Lufthansa Express unit. The consequences can be serious and conflicts may include:

1 Incompatible strategies and approaches to similar situations encountered by different route or region managers within the same airline.

2 Internal competition for shared resources which prevents their efficient allocation to serve customers' O&D requirements.

3 Weak strategic and tactical analysis due to the lack of resources, skills and time in some business units.

4 Divided accountabilities for decisions that impact the entire network (eg in scheduling and pricing).

5 Little or no sharing of valuable market data, knowledge and expertise.

Other airlines have strictly functional marketing and sales organisations. However these cannot cope very well with the complexity of network management or with the rapidly changing competitive environment. While such a structure encourages the development of strong functional skills, it is relatively weak in developing sound market insights and in sharing both knowledge and skills with other functions. Consequently, it does not encourage the cross-functional integration required for network management. Indeed, this type of structure can easily deteriorate into an array of isolated entities, and it drives accountability for network results to the highest level in the airline.

A more suitable organisational concept for network management is a functional one which deploys cross-functional teams that own and carry out the processes and are accountable for their results. How this organisation works in detail will depend on the priorities and preferences of each airline. Nevertheless, team leadership should be defined by the nature of the decisions that need to be made. Team membership should be determined by the processes involved and the knowledge and skills required. And field sales must have an active role in order to provide an up-to-date knowledge of local markets and the level of competition.

Organisation structures have to be 'personalised' for every company. Therefore, each airline will develop the marketing and sales organisation which best suits its culture and skills, as well as its view of business requirements. Nevertheless, airlines that choose to implement network management will need a structure which integrates the major functions and can be held accountable for network profit. This will need product development to concentrate on customer O&D requirements and encourage a balanced network strategy, making simultaneous use of all the major functions. Finally, it should be fluid enough to enable the airline to leverage its functional talents by allocating skills when and where required to make better network decisions.

While not widely practised today, such network management will rapidly become the predominant approach in airline management. Already we can observe it driving the quest for alliances that enable carriers to serve the true O&D requirements of ever increasing numbers of customers.

Customers are certain to benefit. They will have a greater choice of flights as more and more airlines respond to their O&D needs. They will get improved products that match their true itineraries. And they will become more aware of what they are getting for their money, because prices and availability will increasingly reflect product quality.

Airlines will benefit too. Their objectives and priorities for allocating resources in a rational manner will be based on tangible market needs, increasing flexibility and market responsiveness. Airline territorial thinking and the time needed to respond to the market will decline. And profits will grow. Clearly, these are compelling benefits for all airlines and their customers.

Source: Airline Business