American Airlines is a corporation that exhibits all of the characteristics of a firm in anindustry where good tactical management is the key to long term sucess andsurvival.
The airline industry is a prime example of a market where cutthroatcompetitive activity is the status quo. Airlines that survive in this environment do sothrough the understanding and continued improvement of the way in which tacticalmanagement tasks are addressed. Success is dependent upon doing all of thesetasks well including demand forecasting, logistical programming, marketing andproduction. The key point to remember is that since American Airlines is a tacticalentity, its key area of concentration is equilibrium maintenance. A continual endeavormust be made to match supply closely to demand, especially anticipated demand. Ifit is not likely that production can be amended to more closely match demand, thenpromotion should be used to affect demand. American Airlines dedicates large amounts of time and resources to the types offacilities necessary to support the tactical management tasks noted above.
Thisreport is an attempt to illustrate the types of information system requirements ofeach task in the tactical management sequence, as well as describe some of thesystems and methods used by American Airlines. In addition, this report offers someoff the shelf alternatives, where they exist, which could handle many of the samerequirements, albeit on a smaller scale. Since demand forecasting is one of the keydrivers of production, i.e. how many products a firm should supply, this will be thefirst management task to receive consideration.
All firms engaged in activities as a tactical entity will, in some form or another,attempt to get a handle on expected demand for their products within a certainfuture time period such as a week, month, quarter or year. The main thing to bear inmind is that this is a tactical environment and, aside from any earth shattering newdevelopments or shocks to the existing environment, forecasts for expecteddemand/maximum-likelihood share of market may be made with a fair degree ofaccuracy with little variance. There are several key points that are important to thisprocess which must be considered when making a next period forecast of demand.These items include, but are not limited to, intelligence concerning activities ofcompetitors, market projections for the industry by industry insiders/analysts, and agreat deal of historical data.
Competitive intelligence is a parameter which attempts to add subjectivebackground to the environment in which demand forecasting is carried out.Information comes from a variety of sources such as secondary information gatheredfrom written sources, direct observation, and from competitors themselves throughpress releases, industry gatherings and trade journals. This information providessome indication of what the competition plans to do as far as pricing, new products,promotions and distribution/sales.
This data has a dual purpose since it may also beused within model based contingency planning when management scrutinizescompetition in an effort to uncover developing threats and opportunities.Experienced tactical managers have the valuable ability to incorporate this type ofinformation, which is not easily quantifiable, as a complement to the numericalaspects of demand forecasting. However, this is not to say that there is noinformation system requirement for this input into the demand forecasting processsimply because it is difficult to assimilate into an objective, quantifiable form. On thecontrary, a database should be set up in the context of an expert system to containinformation gathered on competitors. It must be readily accessible, updated andaccurate in order to aid tactical management in this process.
Another input item for demand forecasting comes from aggregate marketprojections. These types of analyses are readily accessible, mostly in the form ofsecondary information found in trade journals and economic publications. Airlinesand transportation in general comprise a large industrial group within the economyof the United States and, accordingly, there is a large interest in its economic future.
Wall Street brokerage firms and other financial firms are resplendent with analysts,some of which are charged with the task of tracking the airline industrys pasteconomic performance, as well as anticipated future projections. All of thisknowledge is available from many sources and, again, wise tactical managers willtake the time to incorporate it. System facilities required for this type of support fordemand forecasting are databases which can contain quantifiable economicinformation. Since this input to demand forecasting is quantifiable, a database withanalytical utilities for ranking and analyzing stored economic projections and rawdata are used. This facility may also be presented to management in the guise of adressed up expert system containing decision table constructs which will allow themto adjust many demand forecasting parameters in order to make the most accurateforecast. Arguably the most important input into the demand forecasting process is a firmsactual historical data from its own internal records sources. Historical sales data maybe thought of as the most dependable and accurate input into demand forecastingsince it is derived by the firm itself rather than arriving in a second hand fashion fromsources outside of the organization.
Historical sales data is helpful not only indeveloping a demand forecast, but is also used as a check against post productionperformance when the time arrives to compare actual demand to the forecast. Thisinformation will likely come from another massive record keeping database whichrecords sales transactions from the point of sale. For American Airlines, as well as therest of the airline industry in general, this requirement is served through areservation system of some kind. The reservation system must be capable ofhandling queries, data inflows and other types of processing from thousands ofnodes.
Dummy terminals, which simply display data, will not be sufficient to satisfyreservation system requirements, and any implementation will involve connectionsand terminals designed to carry two-way traffic. Additional discussion of reservationsystems, including specifically what American Airlines has installed, will follow later inthis paper. After satisfying system requirements for generating and handling inputs into thedemand forecasting process, the actual forecast derivation may be viewed assomewhat mechanical. The main management decision at this point is determiningwhich type of probabilistic instrument to use with which analytical utility to yield themost accurate results. Some tactical managers may even require an expert systemthat does nothing more than aid them in selecting the proper mathematical tool toaddress the forecasting process. There is an array of probabilistic techniques that cansatisfy this management requirement including least squares regression analysis,weighted scenarios, Markov-based stochastic projections and others. Many tacticalmanagers may use a combination of these facilities to arrive at a forecast with whichthey feel satisfied.
A key point to bear in mind when discussing demand forecasting for a tactical entityis that it is central to two important aspects of the firm. The demand forecast isviewed foremost as the progenitor of the firms production for which it is the main,direct input. However, it is also an indicator of the general trend of the firmsrevenues over time. A forecast whose extrapolation to the next period indicates adecline in revenues may be an early warning of something novel in the industry orindicative of a paradigm shift toward a new era. This aspect of troubleshooting willbe discussed more at length in a later section concerning requirements for processcontrol. The demand forecast sets the stage for the next management task– logisticalprogramming and its accompanying system requirements.
Logistical programming isthe task charged with accumulating proper amounts of the factors of production inthe proper place at the proper time. The four factors of production (material,finance, equipment and manpower) have certain input requirements whichdetermine the amounts of each factor to apply to the production process. Each ofthese inputs will necessitate the use of some type of information system to aidtactical managers in allocation of these factors to production. One of the first inputsinto logistical programming is the supply schedule, which is the main determinant ofthe amount of products or services offered by a firm. For the airline industry, supplyschedules manifest themselves in the form of the magnitude of flights offered to thepublic. A demand forecast is the main force behind the supply schedule, but othernormative microeconomic factors play an important role in its composition. One ofthese factors, optimal scale of plant, exerts a direct relationship against the supplyschedule and, for American Airlines, consists of the optimal terminal/gate layout at itsbusiest hub cities.
The goal of proper terminal design is to optimize the number andsize of the complexes which converge on a hub terminal throughout the day. Acomplex consists of a group of inbound flights which land within minutes of eachother and take-off within minutes of each other. This is the very heart of a hub andspoke system which allows a large number of flights due to the number of possibleconnections in the hub. Inbound passengers from many cities will all arrive atapproximately the same time, disembark, and make connections to many outboundflights which leave within minutes of each other.
This occurs many times throughoutthe day and the system requirement for solving this problem and optimizing theoperation is available in the form of CADD design stations. CAD/CAM design workstations may be used to solve terminal optimization problemsand allow engineers to simulate the capability of the terminal to handle certainscenarios. This is, in fact, exactly what American Airlines did when it was searching forthe optimum design for its $80 million expansion of its main hub in Dallas/FortWorth in 1983. This simulation model was used by senior management to aid themin their decision on the best design to handle the desired flow of traffic in the narrowoperational time constraints necessary for the hub to work. In addition to optimizingthe terminal layout, the system was useful in optimizing other related areas. Thesystem/model was used to determine dynamic gate assignments in order tominimize baggage handling costs and passenger delays. Another byproduct of themodel was a useful algorithm designed to automatically program and update signsfor directing passengers around the terminal.
The functional facility was even used todetermine the best layout for short-term parking in the face of expected increases inpassenger traffic. Though optimal scale of plant through optimal terminal design is an importantaspect of American Airlines supply schedule determination, the most important partof the supply schedule lies in determining the number of flights to and from certaindestinations. For American Airlines and most of the airline industry, flight schedulingis not a simple matter. Flight scheduling is one of the most important tasksperformed by tactical airline managers because it is central to where and how thefactors of production are allocated. The technical system requirements are myriad,and they must meet the daunting problem of properly scheduling thousands offlights per day between hundreds of domestic and international destinations using afleet of over 500 aircraft. One main requirement is for a system capable of analyzingpast flight offerings in search of patterns of overbookings and empty flights in orderto adjust schedules to better meet forecasted demand. Technical requirements for an airline scheduling system would include a data basestructure to house the body of past and present schedules from which managerscould choose when composing a new schedule.
The problem is compounded sinceairline schedules are determined months in advance. In addition to usingoptimization techniques, the system requires certain expert system facilities such asdecision table constructs to aid in schedule development. Diagnostic remedial aidsare used in order to spot bottlenecks in the proposed schedules where patterns offrequent overbookings are occurring.
In addition, remedial systems capable ofoffering solutions by reshuffling proposed schedules provides valuable information toflight scheduling managers. Historical data is fed into the scheduling model from thedatabase containing past schedules and data concerning past parameters whichinfluenced those schedules. The system takes this data and combines it with thedemand forecast in order to develop a preliminary schedule. The process requiresdiagnostic and remedial systems to optimize the schedule so that the expecteddemand will be met in the most efficient manner possible. Even with an optimal schedule in place, there will always be disruptions due toweather and shortages of planes and crews; thus forcing scheduling managers toconstantly rearrange flights. Before 1991, this was a complex task for AmericanAirlines since dispatchers had to scan data from many different mainframe databasesin order to get a handle on managing daily flights. The schedule was constantlybeing reconfigured to meet anticipated external obstacles such as delays due toinclement weather.
In 1991, however, American Airlines invested in a new systemknown as Smalltalk which made schedule maintenance easier and more efficient.Smalltalk uses of object-oriented programming techniques in order to keep flightsrunning smoothly. The dispatcher simply clicks on an object representing a flightand, when he changes the flight, the system automatically updates other objects(flights) in the system in order to propagate the change throughout the entiresystem. In fact, it only took three programmers eight months to write the programwhich contained only two errors. Once an optimal schedule has been developed through simulation and optimizationtechniques, the next step is to arrange the factors of production in order to generateenough products and/or services to meet prospective demand. Since manpowercosts equal over one-third of all expenditures for American Airlines, it is the firstfactor to receive consideration. Manpower for an airline takes on many forms;however, almost all of the employees of American Airlines can be classified into oneof three different broad categories.
The first category represents the aircraft crewwhose duty stations are on the aircraft: pilots, copilots, navigators and flightengineers, as well as the cabin crew or flight attendants. The second category isreferred to as maintenance workers, and they are the people that maintain theaircraft, which includes anything from refuelers to engine mechanics. The finalclassification includes all of the ramp workers such as baggage handlers, ticketingpersonnel and office workers. By far the most difficult category to allocate within themanpower group is the aircraft crews. Manpower requirements for airline crews are derived from the flight schedule. Themain goal for crew schedulers is to develop a schedule for the entire following monthwhich will ensure that all of the upcoming flights for the month are properly staffed.Flight crews at most airlines bid by seniority for the flights that they will fly in thenext month and crew schedulers develop flight packages for them.
The flightpackages are known in the industry as bidlines. The bidlines in turn are composed offlight segments called trip pairings, and they customarily cover a one to three daytime frame. Compounding the problem for the schedulers are FAA and union workrules designed to minimize the risk of accidents resulting from crew fatigue.Therefore, the main requirement of a generation and optimization system is that it isable to find the optimal set of bidlines (i.
e. the set which yields the lowest cost)which maximize the utilization of each crew member, evenly distributes flying timeamong the bidlines and covers every scheduled flight. The properties inherent in the crew scheduling dilemma require an expert systemdesign. The first part of the system uses manpower loading algorithms, the currentand previous months schedules (from various databases) and optimizationtechniques in order to develop the set of trip pairings, which would adequately coverall scheduled flights for the upcoming month within FAA and union work guidelines.The trip pairing process is made even more onerous because American Airlinesoperates several fleets of different aircraft and most pilots are trained to fly only onetype.
The following diagram illustrates the requirements for a crew assignmentsystem. Source: “Recent Advances in Crew -Pairing Optimization Techniques at AmericanAirlines”, Interfaces, Jan-Feb. 1991, V.21, p. 66. The second part of the system takes trip pairings and bidlines and analyzes them(subject to optimization techniques) in order to constantly search for a solution(schedule) which yields the lowest cost for flight crews possible for a given flightschedule.
The system will continually runs through iterations of the optimizationroutine and, if the set of bidlines it determines is more optimal than the last, replacesthe former with the latter. Naturally, the faster the iteration speed of the system,mainframe or LAN, the sooner the system arrives at the optimal solution. Thefollowing flow chart describes the subproblem iteration methodology. Source: “Recent Advances in Crew -Pairing Optimization Techniques at AmericanAirlines”, Interfaces, Jan-Feb. 1991, V.21, p. 67.
American Airlines as well as 9 other airlines and a railroad, makes use of a system ofthis design and it accounts for an annual cost savings of $20 million. Scheduling for ramp workers, gate crews and ticket counter personnel is lesscomplex and also dependent on the flight schedule. Scheduling systems for thesepersonnel are less complex but also involve optimization techniques in order toarrive at the lowest cost for labor while ensuring that arrival and departure times ateach gate are as close together as possible. Manpower loading algorithms are usedto assign more personnel to cover peak times and less personnel in each station foroff-peak hours during lulls in the hubs. Office personnel and repair crews usuallywork regularly assigned hours, in the absence of strikes and/or emergencies, and arequite simple to schedule.
It should be noted that Human Resources and PayrollDepartments need to maintain a database containing each employees work record,salary history and personal information in order to keep track of thousands ofemployees. The next factor of production for consideration is the equipment to be used inproduction to meet forecasted demand. As mentioned above, American Airlinesoperates two large fleets of aircraft, as well as several smaller fleets. The main aircrafttypes are the McDonnell Douglas 80 and Boeing 727. The smaller fleets arecomprised of Douglas Corporation 10, British Aerospace 146, Boeing 737, Boeing747, Boeing 757/767 and Airbus 300 aircraft.
A particular flight or route might lenditself to a particular type of aircraft which best matches characteristics of the flight. Allairlines have an extremely high capital/labor ratio which is indicative of the largedollar expenditures made for aircraft. The airline industry is a mature, tacticalindustry and, therefore, lends itself to a capital intensive posture yielding a highcapital/labor ratio. Fleet assignment problems lend themselves to integer linearprogramming, which is a good way to arrive at a solution.
Unfortunately, the best aircraft for a certain flight may not be available because ofmaintenance routing, flight schedule disruptions due to inclement weather or evenpilot strikes. Objectives that must be maximized include utilization of the mostefficient types of aircraft and determining the mix of aircraft to yield the lowestoperating costs. Other operational constraint parameters the system will be requiredto deal with include the fact that certain flights will need to use certain aircraft types,limits on number of aircraft remaining overnight at each station and the number ofslots available per airport per day.
The decision model uses the linear programmingmethodology and schedules two or more fleets to a flight schedule simultaneously inorder to ensure the availability of aircraft to meet demand. The flight schedule,availability of aircraft (which aircraft to use on a particular flight) and gate availability,as well as other parameters, are fed into the system. It must be ensured that eachflight and its following connection, known as a turn, are served by the same type ofaircraft. Equipment continuity is very important to the models integrity and a turncannot use two different types of aircraft. Each aircraft must be kept track of andcounted within the system so the model will know whether an aircraft is available.
Anaircraft cannot be assigned to two different flights in different areas at the sametime. In addition, a provision or adjustment variable must be made to the modelwhen the station is not balanced. An unbalanced station occurs when there are morearrivals than departures or there is an imbalance between the aircraft types used. Byusing decision aids and technical utilities, the model will arrive at the optimal fleetassignment through continuous iteration much the same as the crew bidline modelfor flight crew scheduling described above. The third factor of production which tactical managers must develop systemrequirements for is in the area of finance.
Aircraft and other related equipmentpurchases are a large part of the capital budgeting requirement of an airline the sizeof American Airlines. An issue which is central to the capital budgeting plan foraircraft is the age-old decision, “Should we lease or buy our aircraft?” Leasing andbuying both have very real advantages and disadvantages over each other, andtherefore this type of decision tends to be objective based on whichever method willachieve the least detriment to the bottom line. Accordingly, there are several verywell-developed methods employed by financial and accounting managers whenevaluating capital budgeting plans.
These popular methods include net presentvalue, internal rate of return, payback period and accounting rate of return. Whether or not to undertake capital budgeting is not an issue for a capital intensivefirm such as American Airlines. The key problem to be solved in capital budgetingthen becomes which analytical model is the best application for evaluation of variousscenarios such as which aircraft to buy, when to buy and whether to purchase themor lease from the manufacturer. A capital budgeting system will has to be a technicaland/or analytical utility in the form of an expert system to assist tactical managers incapital budgeting. One of the main inputs into a capital budgeting system is theforecasted incremental cash flows per time period attributable to the prospectiveproject. Data for this requirement comes from historical revenue records for theaircraft in question. A lease scenario and a buy scenario can be run for eachprospective capital budgeting plan in order to determine which project will mostincrease the profits of the firm.
Algorithms to perform the number crunching can beprogrammed into the system without much trouble since these are well developedmodels. Again, the main purpose of capital budgeting is to act as a decision aid toindicate which analytical methods/models will prove to be the most evaluators of aprojects viability. After evaluating the project, the system should aid management inwhere and how to obtain the needed funds to proceed with an acceptable capitalproject. The final factor of production and its attendant information facility requirements toreceive consideration in the report before discussing production is the materialaspect of the firm. For an airline, materials for production can include, but are notlimited to, items used in delivery of services such as aircraft parts, beverages servedon flights, in-flight meals, office supplies and many, many more.
The main objectiveis to effectively determine the correct amount of supplies and where to purchasethem at the lowest cost. Another goal is to minimize materials carrying and handlingcosts through a quick response system between airline and suppliers akin to the typeendorsed in The Virtual Corporation. Inventories of aircraft repair an