Why network contribution reporting is vital to Airline success?
When it comes to performance management most industries will say they are different. In my experience passenger airlines are genuinely different and require some advanced management information techniques. The best example that I have seen of this is ‘network contribution’, and if you are a ‘hub and spoke’ or network airline, I hope you find this blog series interesting.
Network contribution is the operating contribution from a flight – the ‘target’, plus the marginal contribution from passengers joining the flight at a hub from a feeder flight - ‘upline’ or leaving the flight at the hub to take another flight – ‘downline’. Many airlines report the operating contribution to net profit at route level. Some report operating contribution from an individual flight. However, the best report contribution of a ‘target’ flight to the network. In the latter case two views of network contribution are reported – (1) target flight operating contribution plus upline feeder flight passenger contribution, and (2) target flight operating contribution plus downline flight passenger contribution.
So, why is this so important? Imagine a full 747 bringing 400 passengers (revpax) from New York to London - the target flight. Of these, 120 passengers are transferring to other short haul flights to different European cities. The target flight is probably profitable with this number of revpax, but if it expected to carry only 200 passengers for the next few months it will almost certainly make a loss. Looking only at a flight level profitability report there would be pressure to cancel or consolidate the flight. Such a decision might result in even higher losses because, say, 120 revpax can no longer connect on to downline flights and their passenger contribution would be lost. These decisions are not simple. Issues such as maintaining landing slots, competition, and alternative network flights need to be considered. Nevertheless understanding network contribution is vital management information to support these decisions.
At Profit& we have worked with clients to bring together the vital ingredients for network contribution reporting - identifying unique passenger journeys, limiting the complexity to material journeys, and understanding when additional analysis such as cabin class would add value.
Look out for my next post, when I will explain the difference between ‘flight level’ and ‘route level’ profitability modelling. Which approach is best? And why the right approach can make a big difference to quality of decision support information?