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Cyprus Airways

Forecasting usage in Airline Industry


By George Loizides1
gloizides@cyprusair.com May 2009

Certified Airline Revenue Management Analyst (CARMA) under IATA association

Introduction The deregulation in US airline industry in 1978 brought many changes in the airline industry, a new era price to the extent in whatever the market would bear. Effects : Excess capacity Reduced margins Low cost carrier a big threat for all major airline companies (Current Days e.g. Blue Air Vs Cyprus Airways) Due to the cost-line basis matching concept of fares cannot even be profitable. So the implementation of a new science called Revenue Management. Using Seat Inventory Control RM manages to maximize revenues based on the fare class allocations. RM makes used of the concept of differential pricing that is prices set up according to the market segmentation (customer groups) which are willing to pay more or less for the same homogeneous product (i.e airplanes seats) at the market. The questions need to be answered by RM are the followings; -How many late-booking can I expect to come? -How many seats to be saves for each class?

Historical Booking Data

Forecasting Procedure

Allocations of Spaces Among Fare Classes

Seat Optimization Algorithm EMSR-b

SIC Process

American airlines by using RM techniques and that each 10% forecast accuracy improvement in the models increases their annual revenue at about 60 million dollars. Prediction of passenger pick-up and short term demand Paasengers pick-up is the incremental bookings received between two Reading days: Reading Day 10 : 10 2

Reading Day 15 : Pick-up :

5 5

Forecasting Techniques: Qualitative, Quantitative Airline Booking Process 1. Reservation Phase 2. Confirmation Phase 3. Boarding Phase It occurs at the date of departure A fare class is a grouping of similar published fare class created for the purpose of controlling reservations Economic perspective of airline booking process Two parts game: between a consumer seeking to maximize his utility function and the producer the airline maximize profits. Consumers generate demand for air transportation. Favorability , likeness of a particular alternative is considered as utility function Decision making process: travel Dates, Price, Service, Restrictions. Business and Leisure Travellers act independently so demand elasticities are very different between these groups. It is mainly due to this fact that the RM and DFP exists.
WTP-Willingness To Pay CY-336
120% 100% 80% 60% 40% Business 20% 0% WTP 2007 WTP 2008

C 3% 2%

D 7% 7%

I 9%

WTP 2007 WTP 2008

15% 16% 22%

31% 40% 49% 88% 98% 100% 32% 39% 49% 87% 96% 100%

10% 15% 16% 21%

Discretionary vs Non-Discretionary

120%

% Booked

100%

80% Month Cabin N Year 6 - C - 2008 6 - Y - 2008

60%

40%

20%

0%

13 337 16

17

24

42

63

91

13 337 123

17

24

42

63

91

6 - C - 2008 6 - Y - 2008

97%

94%

89%

89%

73%

59%

51%

35%

16%

11%

4% 100% 100% 98% 97% 92% 85% 82% 72% 57% 51% 29%

0 Day Flt_No Reading Day

Fig.2 From fig.2 we observe that leisure travellers are early bookers whereas the business travellers are late bookers. We can see in the prune graph for leisure travellers price sensitive customers the flight is booked at 50% at reading day 42 instead of 50% for the business at 7 reading day.

What makes difficult forecasting: 1. Unpredictability associated with the choices travellers 2. Responses to certain circumstances The two factors comprised the stochastic variation that leads to the forecast errors

However seasonal variations are typical subject in the airline demand which comes along with surges in demand (e.g. Christmas, Summer, Thanksgiving. Cyprus airways, undergoes off-season at the period of mid January to the end of February. Supply of Air transportation We refer here to some terminology: 1. A route map is a geographical network connecting the cities to be served. 2. A link (route segment) connects two cities in the route map if it is flown non-stop by any aircraft. 3. A route is a series of consecutive links starting from the origin and ending at the final destination with intermediate stops. 4. A flight segment is the portion of a flight over a link.

Fleet Assignment Problem which is solved by Subramanian in Delta Airlines using Stochastic Linear Programming is considered the costs of different aircraft types and the associated costs of the crew and the revenue in relation the capacity (an upper constraint to the model) The way of selling seats to individuals is considered another problem of airline supply. In Cyprus Airways there are two cabin configurations in its aircrafts e.g. the Business Cabin and the Economic (Coach) Cabin. In order to gain the max customer revenue mix potential airlines provide a range of fare products. A published fare for a specific market includes: 1. The price 2. Level of Service 3. Cut-off Dates Air Tariff Publishing Company (ATPCO) is used form the airlines to make changes overnight to its publishing fares. Farebasis codes are used by most of airlines and Cyprus Airways to spot the different fare classes and seasonality. The first letter designate the fare class and the last if it is either one way or return ticket (e.g. QEARLY2: 149.5 EUR for LCA-BRU) The Necessity of forecasts The main reason for forecasting is to assist the planning of supply of services to respond to that demand There are a variety of forecasts according to the goals. Short Term Forecasts (< 6 months) are used for decisions in catering services, pricing seat inventory control (SIC). Medium term traffic forecast for over 6 months to 16 months help the operating plan and the upcoming fiscal budgets. Long Term forecasts are used for the creation of new routes.

Departure Zero fuel Weight < 3 Days flight Meal Ordering <1 Month Cargo Load Planning <1 Year Revenue Management 3 Days < 1 Aircraft Assignment ,<Year 1 Month<, Budgeting <1 Year <1 Year Strategic Planning Forecasting Applications within Time Frames

The global growth of passenger (traffic) must be forecasted on a route and group of routes according to their behaviour and in some point at geographical basis. What is the purpose is that the airline can predict how can change their scheduling planning and if its current traffic can have similar patterns as those in the past. Changes that may affect demand are the following: Frequency (e.g. In Dubai wrongly has been assigned a third flight per week) Capacity Existing Fares Departure Times Competitors Actions Market segment forecast is more accurate than targeting the whole traffic including business and non-business travellers.

DOW 5 Bookings

60 50 40 30

Bookings
0

20

2 4 6 8 10

12

10

14

21

28

42

56

70

Days out

TF

Figure 1.5 Q class(lowest fare class) for a specific flight (CY334) in December 2008 The traditional forecasting is different from the forecasting techniques used in revenue management cause for the traditional forecasting there is only one variable for time. However when we deal with the forecasting in ARM we have to consider two time factors: the time of execution (Departure Time /Consumption Time) and the time of booking prior to departure (specified reading day).

05/12/2008

19/12/2008

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This two dimensional variable space with time of booking and the time of departure time are illustrated in the graph above. Analytically the graph represents the departure date of every Friday in December 2008 and the days prior to departure of the flight. The two dimensional frame express the challenges face by the Revenue Management Analyst.

Revenue Data

Historical Booking Data

Actual Bookings

No-Show Data

Forecasting Model

Optimization Model

Overbooking Model

Recommended Booking Limits Model Figure 1.6 The Automated Booking Limit System

Variables used in Forecasting The dependent variables in forecasting are as following Unconstrained demand : Number of reservations that would be accepted if restrictions or capacity constraints were not in place. Holy Grail of Revenue Management Forecasting Bookings : Actual reservations that being held at a particular time. Incremental Bookings or Pick-up demand No shows Cancellations there is usually time to recapture the cancellations Go shows Sell-ups and recaptures

Forecast Models Selection Criteria Simplicity Ease of application Representative of Industry practice Representative of the spectrum of complexity

Methods 1. Simple Mean of Final Bookings 2. Simple Exponential Smoothing of Final Bookings 3. Regression Models 3.1 Simple Regressions We have to present here some models used for the third category:

Fbkdt=0+*BkdDay7t
Where the Fbkdt is the final bookings for a departure on week t and BkdDay7t is the bookings on hand at 7t days before departure. The assumptions for the forecast formula is that the bookings in all fare classes are interrelated.

Fbkdt=0+*BkdDay7tYa
Where Ya denotes the higher class. For all models the largest forecast horizon is set to be 5 weeks. 3.2 Multiple Regression

Fbkdt=0+Sumi(*BkdDay7ti)
Using multiple regression we can apply another forecast model (using dummy variable for months, for day of week, and trends-single variable-for number of week in the year and number of days prior to departure)

3.2 Combination Hybrid Models Classical Pick-up models using differences like the one below:

PUday(x,0)=Bkbday0n-BkddayXn
Where BkddayXn is the average over the n departures. Alternatively can be estimated using SES (Simple Exponential Smoothing) i.e. :

BkddayXt=a*BkddayXt+(1-a)* BkddayXt-1
3.5.Advanced Pick-up Model LHeureux exploit the current data by incorporating the valuable information they have to build a new model. The basic idea for this model is to sum up aggregating pick-up estimates over smaller disaggregate intervals. For example the pick-up between two days X, X-7 is the difference of bookings between these days and it is formulated below as:

PUday(X,X-7)=BkbdayX-BkddayX-7
To find this PU as an aggregate of each week (has to be applied for Week-1, Week2, Week-3 prior to departure) weeks we can use either the simple average or the exponential smoothing with a factor (=0.4 or =0.2) 3.6 Synopsis In this paragraph we summarize the main forecast aforementioned models to be examine at the next chapter.

Model
1 2 3 4 5 6 7 8 9

Classification
Time Series Time Series Single Linear Regression Single Linear Regression Multiple Regression Classical Pick-up Classical Pick-up Advance Pick-up Advance Pick-up

Description
Simple Mean of Final Bookings Single Exponential Smoothing of final Bookings (SES =0.2/=0.4, opt) Fbkd=f(Bkdt) :same booking class Fbkd=f(Bkdt) :different booking class More than one variables available also for long term forecast Simple Mean of Total Pick-up Single Exponential Smoothing of Total Pick-up (SES =0.2/=0.4, opt) Simple mean of Incremental Pick-up Single Exponential Smoothing of Incremental Pick-up(SES =0.2/=0.4, opt)

4. Manipulation of Data and Calibration of the Models All the forecasting methods need to be evaluated under the same conditions data in order to have a fair view of comparatives. The usual time horizon for short term forecasting is 8 weeks. 4.1 Data Matrix The data is taken from AirMax Database System Sabre of Cyprus Airways over 18 week period 01 Sep 2008 to 31 Dec 2008 for the BRU Market for all booking classes specific day of weeks (DoW=2,5) . We examine basically the discounted fare Q and full-fare Y.
Q Class Day Day 21 28 0 1 3 13 4 0 9 13 11 4 9 34 27 0 19 10 9 0 2 15 0 6 7 15 10 14 6 25 38 37 0 1 2 10 4 0 6 13 9 4 13 34 25 0 15 13 7 0 0 14 0 2 7 12 6 11 4 22 35 35

DoW

Week 37 38 39 40 41 42 43 45 47 48 51 52 53 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52

Day 0 1 3 11 12 9 8 12 8 14 4 10 38 35 4 20 10 8 1 7 14 9 10 17 22 12 17 10 23 33 30

Day 7 1 6 12 13 7 0 11 9 17 4 11 44 30 5 23 9 14 2 9 12 8 10 19 28 11 21 9 30 37 33

Day 14 1 5 10 13 6 0 10 10 16 4 9 34 27 3 20 12 10 0 3 13 4 5 8 25 9 19 13 25 51 36

Day 35 0 0 2 8 1 0 3 12 7 4 9 34 20 0 14 12 7 0 0 10 0 2 5 9 4 3 3 19 28 33

Day 42 0 0 2 4 0 0 0 7 5 4 9 28 20 0 14 11 7 0 0 8 0 2 2 6 4 3 4 9 23 30

Day 49 0 0 2 3 0 0 1 6 3 4 6 30 21 0 14 7 6 0 0 5 0 4 1 5 2 4 4 9 18 27

Day 56 0 0 2 3 0 0 0 4 3 1 4 35 17 0 11 5 3 0 0 5 0 3 1 4 2 3 2 7 12 23

Bookings History Matrix for Booking Class Q for the Market BRU

Friday (5)

Tuesday (2)

10

4.2. Forecast Procedure An appropriate sample size for our data is defined as follows: A confident interval assuming a normal distribution sample with n observations and mean x is taken by X+/- z(/2)(sigma/sqrt(n)) Set h = z(/2)(sigma/sqrt(n)) then n= sigma^2[z(/2)]^2/h^2 Forecast Errors is in the vicinity of 35% n=47 Test scenarios Unconstrained

DOW 5 Bookings

30

Bookings

25

20

15

10

2 4 6 8 10

12

14

21

28

42

56

Days out

70

Figure 4.1 Constrained Booking Profiles

TF

02/11/2007

02/01/2009

91

11

Constrained and Unconstrained Demand Constrained Demand arises when the booking class is closed How to manipulate constrained (truncated demand): Step1. Identify the departures that are not constrained over the period and the working market. Step2. For these n departures construct the unconstrained booking profile by using the average method Step3. Compute the percentages of bookings at day t in respect to day t-7 Step4. Calculate the unconstrained booking profile given the constrained by divided the constrained bookings at day t with the ration Class Q LCA-BRU (CY 334)
Month 9 10 11 11 12 12 DoW 5 5 2 5 2 5 _7,0 1.75 0.857 1.214 1.118 1.1 1.125 _14,7 0.714 1.083 0.941 0.789 0.818 1.148 _21,14 0.9 1.154 0.688 0.733 1 0.839 _28,21 0.778 0.933 0.818 0.818 1.444 0.923 _35,28 1 0.714 0.778 0.556 0.692 0.833 _42,35 1 0.8 0.714 0.6 1 0.8 _49,42 0.857 0.625 0.6 1 0.667 0.875 _56,49 0.5 1 1 0.667 0.667 0.786

Table 4.3. Unconstraining Booking Process by Month by Dow

Q class LCA-BRU (CY 334)


DoW 2 5 _7,0 1.167 1.167 _14,7 0.857 0.952 _21,14 0.833 0.85 _28,21 1.1 0.882 _35,28 0.727 0.8 _42,35 0.875 0.75 _49,42 0.571 0.889 _56,49 0.75 0.75

Table 4.2 Unconstraining Booking Process by Dow

Illustrative Example of Untruncated Booking Process We assume first that the constrained demand is affected by the date the class has been closed even if it would be opened at some day in the future prior to departure So the procedure is applied at the first time the class closed and onwards .

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For example we have the constrained demand for the flights below:
Q - Class Week Departure 36 37 37 38 38 39 40 40 41 41 42 43 43 44 45 48 52 53 Specific Day prior to Departure class closed 119 119 49 175 35 77 4 287 91 119 119 147 147 21 42 203 49 42 First Weekly class closed 19 20 30 13 33 28 39 11 28 24 25 22 22 41 39 19 45 47

FltDate

DoW

05-Sep-08 09-Sep-08 12-Sep-08 16-Sep-08 19-Sep-08 23-Sep-08 30-Sep-08 03-Oct-08 07-Oct-08 10-Oct-08 14-Oct-08 21-Oct-08 24-Oct-08 31-Oct-08 04-Nov-08 25-Nov-08 23-Dec-08 30-Dec-08

5 2 5 2 5 2 2 5 2 5 2 2 5 5 2 2 2 2

Table . Constrained Flights

Now for the shaded constrained flight we can find the unconstrained bookings 1. First we match the levels Day of Week, Month, Market (i.e. LCA-BRU) with the ratios above. 2. After we look at which date the class was closed column 3 /4. In our example we have to apply for all of the range of dates starting from day 56. See below: Table 4.4 Historical Booking Profile 12/09/08 Friday
Class Q DoW 5 Week 37 Day_0 20 Day_7 23 Day_14 20 Day_21 19 Day_28 15 Day_35 14 Day_42 14 Day_49 14 Day_56 11

Corrupted Data 3. After the conversion from constrained to unconstrained data we get the table Table 4.3 Unconstrainining Booking Profile 12/09/08 Friday
Q-class
DoW 5 0 17 7 24 14 24 21 22 28 19 35 19 42 16 49 19 56 15

13

25 20
Bkg

15 10 5 0 Constrained Unconstrained

Day_0

Day_7

Day_14

Day_21

Day_28

Day_35

Day_42

Day_49

Days out

Figure 4.2 Unconstrained Booking Profile 4.4 Division of data set into historical and future departures In order to compare the estimated final bookings to be compared to the actual ones We have to divide the data matrix as it follows: Table 4.6 Division of Data Matrix
Week -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 Day 0 4 20 10 8 1 7 14 9 10 17 22 12 17 10 23 33 30 Day 7 5 23 9 14 2 9 12 8 10 19 28 11 21 9 30 37 33 Day 14 3 20 12 10 0 3 13 4 5 8 25 9 19 13 25 51 36 Day 21 0 19 10 9 0 2 15 0 6 7 15 10 14 6 25 38 37 Day 28 0 15 13 7 0 0 14 0 2 7 12 6 11 4 22 35 35 Day 35 0 14 12 7 0 0 10 0 2 5 9 4 3 3 19 28 33 Day 42 0 14 11 7 0 0 8 0 2 2 6 4 3 4 9 23 30 Day 49 0 14 7 6 0 0 5 0 4 1 5 2 4 4 9 18 27 Day 56 0 11 5 3 0 0 5 0 3 1 4 2 3 2 7 12 23

Actual Data From Future Flights

Constrained Unconstrained

Day_56

Artificial Present Day Line

Departures denoted by negative values in number of week are considered as historical data whereas positive values below the artificial line are deemed as future data.

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5.Results In the following table the performance of forecasting models are given under some forecast errors :

Model Classical Pick-up Advanced Pick-up SES 0.4 SES Opt SA SES 0.2 Regression

MAD 3.561 5.766 7.550 7.571 8.118 8.667 9.376

MPE -0.041 0.250 -0.025 -0.253 -0.277 -0.371 -0.589

MAPE 0.189 0.469 0.391 0.354 0.342 0.382 0.589

RMSE 3.970 5.773 8.927 9.529 10.951 6.433 9.403

Theils 0.009 0.032 0.021 0.022 0.025 0.015 0.022

Table 5.1 Performance Ranking for the Models

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