Wow Air and the thin line of airline profitability

What is Wow Air?

Wow Air is an ultra-low-cost carrier based out of Reykjavik in Iceland.

I am sure most of you have heard the recent news that Wow Air will be offering flights from U.S./Canada to Iceland for $99. Furthermore, they will have $149 flights from U.S./Canada to Europe via Iceland. Obviously, this sounds like a very good deal for travelers going from a major city in one continent to a major city in the other. The rest might just have to take a 2+ stop flight, which might not be so bad considering the price. But Wow Air knows how to make their passengers smile.

Deep Dive 

Network: Wow Air has been operating to and from Europe since 2011. They use a hub-and-spoke model. As of late 2014, they had a substantial reach into Europe with Dublin, Amsterdam, London-Gatwick, Copenhagen, Paris, Barcelona and more as destinations. It began operations to USA this year with Boston and Baltimore. Adding to their network, they will start flights to Montreal and Toronto in 2016. Not bad for an ultra-low-cost carrier in terms of progression.

Fleet: Wow Air operates 3 Airbus A320 aircraft to Europe and operates 2 Airbus A321 aircraft to North America. As of today, they do not have any more aircraft on order.

Schedule: A fleet of 5 aircraft is not too difficult to manage in terms of schedule optimization. Wow Air operate out of Keflavik airport close to Reykjavik and not surprisingly, slots are not a problem.

Pricing: As most ultra-low-cost airlines do, Wow Air has very low base price on all tickets which include absolutely no frills. They charge fees for luggage, seat preferences, in-flight meals and other extra benefits. The most important aspect of pricing that is noteworthy is the dynamic pricing model. The prices increase based on the proximity of the travel date.

Outlook

Although the business model has had a turbulent history in North America with the demise of airlines like JetsGo and Canada 3000, discount airlines like Ryan Air, Aer Lingus, EasyJet and others have had success offering short-haul flights between destinations in Europe.

Only recently have discount carriers started expanding their reach across oceans.

Canadian carriers WestJet and Air Canada have both announced plans to offer more and cheaper flights to European destinations.

With a strong start and the required financial baseline, Wow Air has the momentum to transition from a startup to a stable business. But will they? That depends on their medium-term and long-term strategies. Their competition with respect to network and pricing will get stronger in the next 2 years. After that, it’s about value proposition and competitive product placement. At that time, it will be critical that they have consistent net profits in every quarter in order to survive.

Strategy

Wow Air’s strategy, like most airlines trying to operate on an ultra-low-cost business model, will have to be centered on optimal pricing and revenue management. Their flights obviously seem attractive for travelers that like to plan their trips well in advance. But for those who need to plan their trips 2-3 months in advance, the prices will be comparable to most other (probably more direct airline fares)

As they add more routes, they will also have to keep a very close eye, and I cannot stress this enough, on scheduling. With 4-5 destinations in each continent, it is very easy to optimally align schedules to minimize travel duration for customers. But once those destinations increase, so do the routes, which lead to slot management issues and scheduling headaches.

In 2016, they will absolutely need to focus on obtaining high load factors. Why? Because that’s the only way they will come close to being profitable. Pricing models cannot be altered in 2016 after months of advertising for rock-bottom prices. Once they achieve high load factors, most airlines make the mistake of expanding and adding more routes. This is a big no-no for Wow Air because it will not only increase their debt but it will also increase their market competition. At this point, they will need to focus on customer retention, customer service and optimal pricing adjustments. After a consistent performance in 2017, they should have travelers in other cities begging and wishing for them to start operating from there. That’s when they should expand, very cautiously and only to cities where demand is on the higher side. This is the easy part. The hard part is their medium-term strategy, and that can only be well-defined once they actually have some initial numbers coming in after they begin operations.

With current momentum, largely driven by somebody’s deep pockets and endless PR initiatives, Wow Air should be successful in North America in the operational months of 2016. But the word successful is a very relative term in this case, especially since it could range from achieving high-load factors to meeting investor expectations. It is in 2017 that Wow Air and the rest of the world will realize on which side of the line they are treading on – the thin line of airline profitability for an ultra-low-cost airline.

The codes in your Boarding Pass

The next time you’re thinking of throwing away a used boarding pass with a barcode on it, consider tossing the boarding pass into a document shredder instead. Two-dimensional barcodes and QR codes can hold a great deal of information, and the codes printed on airline boarding passes may allow someone to discover more about you, your future travel plans, and your frequent flyer account.

Earlier this year, I heard from a longtime KrebsOnSecurity reader named Cory who said he began to get curious about the data stored inside a boarding pass barcode after a friend put a picture of his boarding pass up on Facebook. Cory took a screen shot of the boarding pass, enlarged it, and quickly found a site online that could read the data.

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An older Delta boarding pass with a bar code that does not include a frequent flyer number. Source: IATA.

“I found a website that could decode the data and instantly had lots of info about his trip,” Cory said, showing this author step-by-step exactly how he was able to find this information. ‘

“Besides his name, frequent flyer number and other [personally identifiable information], I was able to get his record locator (a.k.a. “record key” for the Lufthansa flight he was taking that day,” Cory said. “I then proceeded to Lufthansa’s website and using his last name (which was encoded in the barcode) and the record locator was able to get access to his entire account. Not only could I see this one flight, but I could see ANY future flights that were booked to his frequent flyer number from the Star Alliance.”

The access granted by Lufthansa’s site also included his friend’s phone number, and the name of the person who booked the flight. More worrisome, Cory now had the ability to view all future flights tied to that frequent flyer account, change seats for the ticketed passengers, and even cancel any future flights.

The information contained in the boarding pass could make it easier for an attacker to reset the PIN number used to secure his friend’s Star Alliance frequent flyer account. For example, that information gets you past the early process of resetting a Star Alliance account PIN at United Airline’s “forgot PIN” Web site.

After that, the site asks for the answer to a pre-selected secret question. The question in the case of Corey’s friend was “What is your Mother’s maiden name?” That information can often be gleaned by merely perusing someone’s social networking pages (e.g., does your aunt or uncle on your mom’s side have your mother’s maiden name as their last name? If so, are they friends with you on Facebook?)

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The readout from the barcode on Cory’s friend’s boarding pass (redacted).

United Airlines seems to treat its customers’ frequent flyer numbers as secret access codes. For example, if you’re looking for your United Mileage Plus number, and you don’t have the original document or member card they mailed to you, good luck finding this information in your email correspondence with the company. When United does include this code in correspondence, all but the last three characters are replaced with asterisks. The same is true with United’s boarding passes. However, the full Mileage Plus number is available if you take the time to decode the barcode on a boarding pass.

Interested in learning what’s in your boarding pass barcode? Take a picture of the barcode with your phone, and upload it to this siteThis blog on the same topic from several years back includes some helpful hints on how to decode the various information fields that get dumped by the barcode reader.

Finally, the standards for the boarding pass barcodes are widely available and have been for years. Check out this document (PDF) from the International Air Transport Association (IATA) for more on how the barcode standards work and have been implemented in various forms.

AOCC Processes and Resources

An airline operations control center (AOCC) is the focal point of all operations. It is an environment that includes different decision-making entities like the PAX Manager, Crew Manager, A/C Manager, Operations Superviser, etc. The interaction between these entities requires processes and the decisions taken must utilize all pertinent information. The following are the processes and resources that need to be considered when taking operational decisions in real-time.

1) Operation Monitoring: The flights are monitored to check if anything is not going according to the plan. The same happens in relation with crew members, passenger check-in and boarding, cargo and baggage loading, etc.

2) Take Action: If an event arises, such as, a crew member being late or an aircraft malfunction, a quick assessment is performed to check if an action is required. If not, the monitoring continues. If an action is necessary then there is a problem that needs to be solved.

3) Generate and Evaluate Solutions: Having all the information regarding the problem the AOCC needs to find and evaluate the candidate solutions. Usually, a sequential approach is adopted when generating solutions. First, the aircraft problem is solved. Then, using this partial solution, the crew problem is solved and, finally, using the previous solutions the passenger problem is also solved. It is understandable that the AOCC adopts this approach. Without good computer tools, it is difficult to handle the problem, considering the three dimensions (aircraft, crew and passengers) simultaneously. Although there are several costs involved in this process, we found that the AOCC relies heavily on the experience of their controllers and in some rules-of-thumb that exist on the AOCC.

4) Take Decision: Having the candidate solutions a decision needs to be taken.

5) Apply Decision: After the decision was taken, the final solution needs to be applied in the environment, that is,
the operational plan needs to be updated accordingly. An example of a solution to be applied is: exchange aircraft
between two flights, call a reserve crew member to replace an absent one and send a disrupted passenger in another
flight.

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Crew Costs: the average or real salary costs of the crew members, additional work hours and per diem days to be paid, hotel costs and extra-crew travel costs.

Flight Costs: airport costs (approach and taxiing taxes), service costs (cleaning, handling and line maintenance services, etc.), average maintenance costs for the type of aircraft, ATC en-route charges and fuel consumption.

Passenger Costs: passenger airport meals, passenger hotel costs and passenger compensations. Finally, there is a less easily quantifiable cost that is also included: the cost of delaying or cancelling a flight from the passenger point of view. Most airlines use some kind of rule-of-thumb when they are evaluating the impact of the decisions on passengers. Others just  assign a monetary cost to each minute of delay and evaluate the solutions taking into consideration this value.

In a fast-paced decision-making environment like an AOCC, it is critical to use all available resources at hand to make the most optimal decision, every one of which affects the financial bottom line of an airline.

Airline Fleet Planning

Along with choosing the routes and destinations it will serve, each airline must decide which aircraft it will operate and how many it needs. Whether the airline is a low-cost carrier (LCC) operating a single model fleet; a large network carrier operating several different aircraft types; or a large group with diverse operators, fleet planning is a crucial process.

Fleet planning has four core components: airlines must decide which aircraft suit the network; when they are needed; how many are required; and whether they are needed for replacement or for growth.

Almost universally, LCCs operate a fleet consisting of one model or family of aircraft, often the A320 or 737. The choice delivers operational simplicity and economies of scale vital to budget airlines. “As a new airline that launched in 2007, our fleet is now [comprised of a] single-type – all Airbus A320-family aircraft,” a Virgin America spokesperson told AFM, citing a number of sources. “We’ve been very pleased with the low operating costs, cabin comfort and carbon-efficient design of our all-new Airbus fleet and believe it will continue to fuel our growth and success in the North American market.

Our single fleet type is a core component of our business model. It reduces costs, streamlines maintenance and otherwise fits within our low-cost carrier business model. Every one of our pilots and in-flight team mates are trained to fly every aircraft in our fleet. There are tremendous benefits to keeping to a single fleet type, from hiring and training team mates to operations, maintenance, spare parts and managing the guest experience. It also allows us to deliver a consistent onboard experience – with all of our Airbus A320-family aircraft [A319s and A320s] undergoing Virgin America’s signature modifications [such as] mood lighting, custom seating, touch-screen entertainment platforms.”

But while LCCs usually start out operating a single model fleet, some older budget carriers are moving away from this as a result of mergers or competition with traditional network carriers on longer-haul routes.

Airlines’ perspective

Few other airlines take fleet planning as seriously as the Lufthansa Group. Lufthansa has been known for decades

for its technical standards and fleet organisation – a sizeable feat as it consists of 11 airline subsidiaries (not including BMI) and owns sizeable shareholdings in another three carriers.

Lufthansa had to decide whether to conduct its fleet planning at group level, or by individual airline. It chose to combine input from both levels, says Nico Buchholz, EVP of fleet for Lufthansa Group. “The fleet planning is done centrally, at group level, but the planning at the requirement level comes from the [individual] airline.” He explains: “The basic requirement comes from the airline because it is closer to its customer requirement and to its own market.”

For example, its subsidiary, Swiss International Air Lines, was operating A330-200s ordered before it became part of Lufthansa Group. However, it was decided that the best way to leverage SWISS’ membership to the group was to switch to the larger A330-300. The A330-300 was suitable for coping with the carrier’s traffic growth on transatlantic routes and Lufthansa and subsidiary, Brussels Airlines, already operated the aircraft.

International Airlines Group (IAG), parent of British Airways and Iberia and fellow airline group, says the ability to integrate its existing fleet is crucial but it notes a variety of other important factors. These include network fit, fuel efficiency, improved environmental performance and value for money.

According to Virgin America, a “young and growing airline,” the carrier must balance aircraft efficiency, fleet flexibility and simplicity, up-front and operating costs.

Acquisition cost is important to Lufthansa, “because it happens up-front,” says Buchholz. But he adds that operating costs are of more concern because they are “for the rest of the asset’s life.” As such, the onus will be on such things as fuel burn, carbon and noise emissions.

Lufthansa believes an environmental view of aircraft performance is increasingly important to economics – particularly in Europe, which is sensitive to carbon emissions and noise. An aircraft’s environmental performance not only affects emissions surcharges, but also aircraft utilisation. Many airports have noise curfews for aircraft that do not meet specified noise performance levels and these curfews can hinder operations.

Another factor in Lufthansa’s fleet planning is maintenance-related costs. Direct maintenance costs are clearly important, but so too is downtime during shop visits. “We want an aircraft [to offer] longer intervals between shop visits. The less unscheduled maintenance, the better,” says Buchholz. Although Lufthansa gains savings by performing most maintenance in-house or at its MRO joint ventures, the group does not want aircraft that spends much of its time on the ground.

Parallel processes

Lufthansa runs its network development and fleet planning processes in parallel. The group uses economic analyses and market development assumptions to plan for network growth and plot capacity requirements. This process is continuous and looks years ahead. When the group places an order, it usually allows about a year of lead-time; however smaller orders can be incorporated over a much shorter period – as little as four months.

Analysis for these short-term decisions is performed well in advance, when Lufthansa makes its initial assessment of the aircraft and its overall requirement. Combining long-term fleet planning with near-term aircraft buying “is not a contradiction”, says Buchholz. “We always prefer to under-order the aircraft we need. We’d rather buy one too few aircraft than too many. That’s a very costly thing to do, as some airlines have found out.”

Virgin America describes a similar process. The San Francisco-based carrier says that its route-development planning and fleet decision-making “are closely tied.” However, while “typically, most fleet planning is done several years out, one of the advantages of being smaller is that you can be a bit more flexible within those constraints based on market opportunities.”

The five-year-old carrier is still in its early stages of fleet growth. It currently has 46 aircraft and plans to raise this to 52 by the end of the year. By 2019, it aims to operate over 100 aircraft though it will retain flexibility in its plan, which will allow it to adapt to the market and its needs.

Contingencies and the virtues of ownership

When developing a long-term fleet plan for a specific aircraft size, Lufthansa always maintains a back-up fleet plan to ensure it has enough capacity if deliveries of the new type are delayed. This has happened twice in recent times: deliveries of its A380s and 747-400 Intercontinentals incurred considerable delays. However, Buchholz says that not being able to take the new aircraft on the dates originally promised did not hurt Lufthansa’s operational plans because it was able to keep flying aircraft planned for retirement until the new aircraft were delivered.

This strategy has one major prerequisite: the airline must have financial control of its aircraft, rather than short-term operating leases. Many airlines, including Virgin America, feel that taking a portfolio approach to lease start dates, termination dates and extension options when negotiating operating leases can provide significant flexibility and allow appropriate reaction to market fluctuations.

But Lufthansa looks at things differently. Some of its subsidiaries – such as Swiss, Austrian Airlines and Brussels Airlines – hold some aircraft on operating leases. The ability to return an aircraft gives an airline the opportunity to modernise its fleet with a newer aircraft type or upgraded model.

However, Lufthansa as an airline believes owning its aircraft outright provides it with the greatest fleet flexibility. Lufthansa can retain existing aircraft if replacements are delayed and it notes that purchasing and owning confers strong financial discipline. “I know it’s a very onerous approach, but it ensures we don’t overstep our limits,” says Buchholz.

It costs Lufthansa nothing in operating-costs to park an aircraft in order that it can reduce capacity during a market downturn. “If we park an aircraft, there is no cash cost – [though] we would still have depreciation, so it’s not nice for the balance sheet,” Buchholz notes. The same cannot be said for parking an aircraft that is on operating lease.

The Lufthansa Group operates most aircraft types. However, with the exception of Lufthansa itself, most of it subsidiary airlines operate only one or two types. Buchholz says that additional economies of scale do not apply beyond a certain fleet size, which is much smaller for widebodies than single-aisle aircraft.

It was this that pushed Norwegian Air Shuttle (NAS) to order both the 737 MAX and the A320 neo, allowing it to obtain maximum negotiating leverage when it wants to order the next generation of single-aisle jets.

Lufthansa has not ordered either the A350 XWB or the 787. Buchholz says there are two reasons for this. “Lufthansa has a modern fleet and an owned fleet, so we’re not being pushed by lease terminations or having old aircraft,” he says. This is part of the “comfort zone” the group designs into its fleet-planning process. Buchholz adds: “We have been working extremely closely with the manufacturers on all their new products and we have our own risk assessment [process] regarding when to order. That risk assessment may also have played a role.” Other carriers may be wishing they had been as careful.

Courtesy: Airline Fleet Management

Air India’s shuffle up

There is a new air of optimism at Air India.

Air India’s recent plan to shift around 19,000 of its employees to its ground handling and engineering subsidiaries hinged on the decision of its employee unions. That fact alone speaks volumes. In all, seven unions were involved in the talks in April; and whilst negotiations were difficult, a decision was finally made.

It has taken a long time for the carrier to realise that splitting up the employee body and creating a separate entity for the ground handling function would be ultimately to its advantage. Analysts believe that such a trimming of the workforce to service the carrier’s needs ought to bear fruit. This step, though, is only part of the approach that will see it try and rid itself of the reputed US$4bn level of debt that is hanging around its neck. Other actions will include the delivery of several B787 Dreamliners, the first of which should start service next year. Their acclaimed frugality should help the airline to the tune of a 20% operational saving. Finally, debt restructuring, courtesy of the country’s banks, will assist in keeping the carrier aloft – and hopefully put it on course for a profitable future.