DALLAS — Profitability of an airline’s route network is a decisive factor in an airline’s success. The process of planning and maintaining an optimal route network is complex. It requires consideration of various factors such as market demand, competitors on the route, operational and regulatory restrictions, and others. 

Route planning and network management encompass planning new routes, reevaluating existing ones, collecting and validating numerical data for future forecasts, and ensuring that multiple factors align to benefit the airlines.

Demand in the Market

Demand Forecasting

Demand is the driving factor behind the decision to fly on a selected route. When planning or reevaluating routes’ performance, airlines need to identify current market demand and future trends, including seasonality, traveller profiles (business or leisure, sensitive or insensitive to prices, willingness and ability to pay), and psychographic and demographic profiles. 

For forecasting future demand, airlines use mathematical models such as the quality or service index (QSI) or gravity models.

QSI Model 

The QSI model is used when airlines have access to reliable data on demand. In the past, other means of transport, such as buses, trains, and ships, were also considered as competitors on the route. 

The model uses different variables such as means of transport, ticket prices, size of the aircraft, carrier type (Low cost vs Full Service Carrier), flight frequency, number of stops, departure and arrival times, and many others. The exact list of variables is determined by the airline depending on the route they are evaluating. 

Each variable is assigned an index highlighting its importance in passengers' decision-making, and every travel option on a selected city pair is evaluated based on the chosen variables. 

Based on QSI scores of different travel options on selected city pairs, airlines can determine their potential market share, or in other words, how many passengers will potentially select their travel option among others.

Gravity Model 

The gravity model is used when no historical data on demand is available. The gravity model uses a similar principle of route evaluation, but with different variables such as GDP, education level in a region, level of income, and many others.

A set of specific variables is chosen for every city pair to ensure the reliability of the model data output. Forecast results from the gravity model need to be validated by comparing forecasted data with real-world observations. The gravity model is considered more complex and is used less often than the QSI model.

Data Sources

The reliability of model forecast data is directly related to the reliability of input data. The most reliable source of data is an airline’s records; however, they are not sufficient as they do not cover competitors’ data. Various freeware and payware data sources, such as IATA, Eurostat, or OAG, can be used to obtain missing data required for demand forecasting.

Competitors on the Route

Which Airlines to Compete With? 

The aviation industry is highly competitive; thus, it is crucial to research competitors on the route that the airline is planning to fly. Competitors on a route are any transportation company offering a connection between selected cities, such as airlines, buses, ferries, or train companies.

Competitors are not limited to companies that provide a direct non-stop transportation on a chosen city pair. 

The Role of Competition Analysis

Competition analysis enables airlines to determine their potential market share and maximize their competitive advantage on the route by identifying the strengths and weaknesses of their competitors. Using the QSI model allows us to identify a set of factors making the route more attractive for passengers and consequently create the optimal solution for the selected city pair.

Competition Influence on Ticket Prices

Competition can influence ticket prices. Routes with increased competition tend to have lower ticket prices. Furthermore, to remain competitive on popular routes, airlines are forced to adjust their fares for unsold seats to match their competitors' prices, unless they stand out among their competitors in any way, for example, by offering premium travel services. 

Cost and Revenue

Airlines' Route Network Profitability

Airlines have to maintain their network profitability. Comparing costs and revenues allows airlines not only to determine the profitability of single routes, but also to evaluate which routes are most beneficial for their network financially.

On a route where the airline is a monopolist, they have more flexibility in adjusting their fare to compensate costs resulting from operating flights and even increase their profit margins, provided that there is a demand on the route.

More often, airlines face competition on a route, thus their competitors can influence their price. If average competitors’ fare results in a negative profit margin for the company, the route becomes significantly less attractive. At the same time, increasing fares might result in reduced demand, an equally undesired outcome. 

State-Subsidised Routes

Public Service Obligations (PSO)

Some routes are crucial for economic development and connectivity in the region. States can impose public service obligations (PSO) on such routes. When a route by itself is not attractive for carriers, one operator is chosen through public tender to operate a route and gets compensated for operational losses resulting from PSO. 

When airlines determine that they can carry out PSO flights, they can neglect low demand and financial downsides on a route, as they get compensated for their losses. In addition, PSO can help airlines to increase their fleet utilization, thus reducing costs resulting from aircraft standing still on the ground.

General Network Profitability

Hub-and-Spoke Network

Airlines that implement the hub-and-spoke network model determine one or more hubs, where they focus their operations. Spokes are secondary airports, often located in regions where very few or no direct connections are available. Passengers are routed from a spoke to any selected destination on the airline's network via a hub. 

The main idea behind hub-and-spoke is elementary: airlines bring passengers from spokes to their hub, who then continue their journey to other selected destinations on the airline's network. In other words, spokes are feeding passengers into hubs, thus increasing load factors on other flights connecting airlines’ hubs with major destinations. 

While flights between spoke and hub can be unprofitable on their own, they play a crucial role in filling flights that are designated to generate a significant portion of airlines’ ticket revenue, which can also compensate for losses from unprofitable flight connections. Consequently, airlines can operate these unprofitable routes to keep entire networks profitable. 

Legal, Operational Factors

Air operator certificate (AOC), operations specification (OS), and air carrier operating license (ACOL)

Airlines need to have a valid AOC, OS, and ACOL issued by the local civil aviation authority (CAA) of the state where the airline is registered. Mentioned documents cover essential information such as permitted types of operations, area of operations, aircraft type and details, special approvals, and limitations.

In some instances, information on AOC, OS, or ACOL needs to be updated before commencing flights on a new route. Such cases most often include the addition of new aircraft to the fleet, adding a new area of operations, or adding a new type of operation.

No flights can be commenced on a new route unless all required approvals and certifications are covered in AOC/OS/ACOL. 

High-risk Areas, Political Restrictions

Certain geographical regions can be considered unsafe to fly due to various reasons, such as military activity or political tensions. Depending on the risk, authorities can either recommend avoiding high-risk areas or entirely prohibit entrance into airspaces with high risks.

Airlines prefer to avoid landing in or overflying high-risk airspaces, so they tend to avoid routes that require such landings. However, if the level of risk is acceptable for the airline and procedures to enhance safety and security are in place, the route can still be considered to become a part of the airline's network.

Adequate Aerodrome

An airline’s operations manual, Part A, should include requirements and procedures for aerodrome evaluation and approval. Airports are assessed based on factors such as runway width and length, availability of emergency services, availability of air traffic control (ATC) services, navigational aids, communication systems, lighting, meteorological reports, etc. 

Airports meeting the requirements can be considered adequate aerodromes. Adequate aerodromes can serve as a destination aerodrome, take-off/en-route/destination alternate. An airport without an adequate destination alternate aerodrome is regarded as an isolated destination aerodrome, and special rules apply to such aerodromes.

Operational Planning, Scheduling

Airlines should determine whether their aircraft's range is sufficient to reach the destination safely or if an adequate aerodrome is available on the flight route to be used as a fuel stop. In case an airline operates different types of aircraft, it should determine which aircraft are suitable for the route.

Airlines should ensure that the route is planned under regulations and adhere to the following factors: availability of alternate aerodromes, adequate fuel planning, compliance with operating minimums, and aircraft performance meets aerodrome and en-route requirements.    

Depending on the airport’s capacity and traffic volumes, airlines must coordinate arrival and departure times or acquire a slot to ensure the airport can accommodate the aircraft and provide necessary handling services. 

Breakdown of the Route Planning Process

The Five Stages of Route Planning

After a thorough overview of various factors influencing the route planning process, it is time to break down the planning process into stages. The method of route planning and launch can be divided into five steps:

1. Market research and demand forecasting

Airlines are constantly looking into potential new markets and opportunities in the market where they already fly—using QSI or gravity models to forecast their market share on selected routes and identify routes that could potentially benefit their network.

2. Financial assessment 

After identifying routes that fit their demand requirements and network development plan, costs and revenue analysis are carried out for each route to determine the most profitable routes. It is important to assess not only the route's performance, but also its influence on general network profitability.

3. Regulatory and operational preparations

Airlines must ensure their AOC, OS, and ACOL permit flights on desired routes and update them as necessary. Arrival and departure times are agreed with the airport authority, and slots are acquired in WASG Level 3 airports. 

Agreements with local ground handling, technical/AOG support, transportation, and accommodation suppliers are commenced at this stage. 

Airlines must research the requirements for their crew to fly to a new destination. In some airports, such as Funchal, Madeira, pilots require additional training and certification to land. Equally important is researching the country’s entry requirements for the airline's crew. 

4. Route launch 

This is considered the final stage of planning a new route, where airlines publicly announce the launch, release tickets for sale, and market the route to their customers.

5. Continuous monitoring and adjustments 

When a route is already launched, it needs to be continuously monitored to keep it optimal. Passengers’ preferences and market conditions tend to change, making it crucial to keep the route network up to date by adjusting flight frequencies, capacity, and flight times, or by removing and adding routes from the network.