Why monitoring airline capacity in the market matters to your bottom line.
As a travel agent there is a lot going on at any point of time with regards to customers and suppliers. However one area that probably slips under the radar frequently and does not get noticed may be impacting your bottom line with regards to back end incentives.
We are talking here about airline capacity changes. Air sales on a carrier are pretty much directly proportional to the capacity they bring into the market. So what happens when this changes?
An extreme example is probably Malaysia Airlines after its twin disasters back in 2015, pulled back significant capacity from the Australian (and other) markets. They cut a daily A330-300 flight from Brisbane completely as well as reducing Melbourne and Sydney flights from 3 daily to 2 daily, Adelaide from daily to 4 times a week and Perth ended up from 12 services weekly to a daily service. That was a massive reduction of capacity by 36% or more.
So the obvious question to those who had back end incentive targets on MH for that year – how many went back with this analysis and renegotiated the target and tiers before the target period ended?
The above example is a bit extreme as MH was forced to do so – others could be more subtle.
AA switched its LAX-SYD service from a 777-300ER with a capacity of 308 seats to a 787-9 with 285 seats a reduction of approximately 7.5%. Did that then mean a downward readjustment of your flown revenue targets on AA?
Generic capacity for a B777-300ER could be approximately 365 passengers Vs a B787-9 which could cater to just 280 passengers. A massive 23% differential!
Whist airlines promote the improvement in their product due to the change of equipment the onus always falls on the agency to recognise the impact of this on their bottom line. As soon as you hear of changes your analyst team must proactively calculate the impact on revenue and renegotiate current or future targets to align with such changes. There is no point in having a growth target which most carriers love to implement when there is negative growth in capacity.
The flip side is also the increase in capacity and how that would impact your sales targets. If this has not been adjusted accordingly and it takes you to a higher tier level – it may just come back to bite you in the following year’s negotiations with higher expected growth rates.
So next time you see glitzy press releases on change of capacity by an airline remember it is time to pull out the calculator and work out how much this may impact your profit margins.