This is the study that explore the solution of point to point model then extend it to multistops operating model for the purpose of improving profit

1. Doing Business
Right
Re-defining Right Assets
And Profitable Network
For Local Transportation
Company
By: Mohammed Salem Awad
Consultant
Tel : 00967734777518
Email: smartdecison2002@yahoo.com
1-10-2007
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2. Re-defining Right Assets and Profitable Network
For local Transportation Company
(Practical Case Study)
Setting:
Local Transportation Company is public sector company, owned by government, it
serve most of Yemen cities, from south to north and from east to west territories, its
structure is governed by a bureaucracy system controlled by the government, its goals
to serve the
society and be a
profit
organization, it has a wide fleet of buses and many maintenance centers in the main
governorates, that support the network operation.
The corporation has three branches
i.e Sana'a , Aden and Al-Mukalla, the last two are belong to the southern territories,
after a unification of Yemen, it become one main transportation company in Yemen,
with a huge manpower, so to derive the company to the profitable track., the
governments approved its privation, while lead to realize more 3000 workers , to
adopt a restructure program, but still the company does not reported a profit situation.
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3. Defining the Problem:
One of the major issues of local transportation company is surviving in very
competitive environments, in 2001 the company carried about 391442 Pax while in
2005 it carried 224933.
The frequency also reduced significantly from about 10,000 to 6000 trips.
The general passenger trend is going down and that part of losing the local market is
due to establishments and penetration of new private transportations companies, as
Al- Rowshan and Al-Ayessai, and. The company loses many markets as Albaidah,
Mareb, Sa'adah, and many destinations from other branches.
Why the situation become deteriorated and becomes worse and worse while the
private sector is doing well.
The problem is concerning a management, government's policy and lack of support.
no clear and competitive fare strategy, no renewed for fleet, no vision and strategy,
poor handling and service poor management teams, the company shrinkage and
become small and definitely if we refer to the income statement it will show a
sequence of loses for the period of 2001 to 2005.
So what are the right assets to operate, how to create a competitive fare strategy and
how to develop an effective network that will enhance and maximize the profit.
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4. Analysis and discussion:
The company situation can be improve by applying many concepts of the accounting
study
1- Selecting Right Assets
2- Developing Competitive Fare Strategy
3- Cost Targeting ( by developing optimum unit cost )
4- Maximize the profits – by using right decision management
5- Maximize the profits - by utilize the capacity.
And that can be done by a sequence of analysis concerning operating network as
shown below
Point to Point Approach Multi- Stops Approach
Fleet Competitive Redefining Profit
Defining Fare Fare
Reposition Optimum Maxim-
Demand Analysis Strategy Network ization
In this study we developed a number of sequences analysis, deriving us into two
directions. First: Point to Point Operating Network. This is the initial solution of
the problem, based on U curve techniques, and reflects Input Data, Demand
Passengers and Market Fare, Fleet Repositioning, Fare Analysis, and Competitive
Fare Strategy. Second: Multi Stops Operating Network (Realistic) In this part we
extend the problem to a more practical and realistic situation, using the concept of
multi stops operating, to redefine the optimum operating network by implementing
the seat allotments ratios (Marginal decision) that will maximize the profit.
While the opportunity of increasing the seat pitch of the buses shows a significant
increases in profit.
The cost deriver factor in this study is ASK (Available Seat Kilometers).
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5. Data Collection:
Three inputs we need
1- Demand of passengers per city ( 2001 data base – we can use forecast data but
company situation is going down )
2- Market Fare ( Applicable current market fare - 2007 )
3- Distance between Cities ( in kilometers )
Defining Demand:
Based on 2001 passenger carried we started and used these data as basic
Defining
and selecting a lowest market fare in market. Demand
While a network of the routs is setup (point to point)
U Curve Technique:
This technique on to two costs
1- Cost of Offering Service (Cost
COST IN US$
of Seat).
2- Cost Losing Opportunity –
Total Cost
(Cost of Losing Revenue).
A Cost of Seat
B Cost of Lose
Revenue
Total Cost is the sum of the two.
We use the above relevant data No. Of Seats
mentioned above to develop a solution
while the Right Capacity is a function of
Size of Traffic Passengers - point to point 
 Applied Market Fare 
 
f = 
 Network Structure - Stage Length 

 Cost of ASK 

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6. and the frequency is a function of Traffic Size Passengers.
But Frequency and Capacity are two terms interrelated, if capacity increase frequency
will decrease and vs versa.
INPUT
1
1 DATA
So what is the right capacity and optimum frequency to operate?
And by considering the input of a passenger, market fare, and distance between cities
while the cost is consider as step function, as shown in Input Table, a number of
spread sheet solution is created but 1 shows a loses market due to improper fare
structure at a cost of ٠.٠١٥ cent / ASK
So by using the spread
sheet solution and
putting the cost as step
function from ٠.٠٠١
Cent/ ASK to ٠.٠١٧
Cent/ ASK (cost
driver).
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7. A graph plotted for the optimum results of seats against the cost used for the specified
input. As shown in graph.
Since the typical seat configuration of the buses range from ٤٤ seats to ٥٠ seats, so
the corresponding optimum cost will be from ٠.٠١٣ to ٠.٠١٧ Cent/ASK which tends
us to select ٤٨ seats as the best and typical solution at ٠.٠١٥ cent/ASK.
We recalculate the analysis again but this time at ٠.٠١٥ Cent/ASK to reflect the
optimum seat required (U Curve Tech) as shown in the figure.
It shows a ٤٨ seat is the optimum results, while the corresponding cost for ٤٥ seat is ٠
.٠١٢٥ cent /ASK Which current applied layout or seat configuration for the buses of
the existing companies as Al- Rweeshan and Al Ayissai ,having the type of bus i.e Al-
Rweeshan operate Mercedes and Al –Al Ayissai operate a Musobitshii buses. Each
company has its own evaluation cost of the buses per ASK (Confidential). But we
derive it as ٠.٠١٢٥ cent/ASK for our existing network.
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8. Fleet Reposition :
The Fleet Company can be positioning its fleet (assets) on the
optimum operating curve by considering two factors Fleet
1- Configuration of the Bus per company ( Number of seats Reposition
– normally from ٤٠ to ٥٠ seats)
2- Actual Cost of Available Seat kilometers for each fleet per company
(confidential cost )
Only three transportation companies
The company that lies on the line (blue) and have minimum cost value is the best one.
While the other companies should targeted the cost to achieve the optimum
operation cost values.
Optimum Operating Curve:
If the thumb has ٣٢ characters, and if the Eye has ٥٢٠ characters so how we can
characterize the operation of the company, as each company has which so called a
learning curve, also in transportation company owned a optimum operating curve that
define the characterize of the company in terms of Distance , Demand, Market Fare,
and Cost , defining the best solution and positioning the current assets, ( Buses )
Al –Rewshan Al Ayssai Local Company
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9. Fare Analysis:
The concept of fare analysis is to apply idea of changing
market fare, to achieve the right fare structure, and that can be
Fare
identified when the number of frequency become ١ ( As it is Analysis
constrained by the lowest value in the spread sheet. So the
decisions can be hold as the following:
1- Cost of Seats + Cost of Losing Opportunity = (Minimum) tend to develop the
U curve.
2- By lowering the market fare, this will tends that the cost of seat will be equal
or greater revenue earned so the spread sheet will report ١ frequency rather to
calculate the number of frequencies this will define the losing routes as it is
shown in the following table while if we increase the percentage this will
show at which increase percentage will recover.
Two sectors already reported loses in the first analysis as 1 now we try to develop
this range by change percentage of Market Fare.
Unfavorite % Fare Favorite % Fare
Range Range
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10. Competitive Fare Strategy:
In the above analysis it shows many of the routes are subjected to
loses, so will develop a competitive fare strategy to response the Competitive
competitive market fare. Our analysis will be in two directions Fare
Strategy
1- Omitting losing routes and develop a profitable Margin of the
Fare Structure.
2- Dealing these loses routes with multi-stops operation approach, so these routes
are subsides by another profitable routes
5%
And here we are going to apply the first step.
Reductio
n
Which shows we can reduce the overall percentage Fare structure by ٥ % without
effecting our profit margin (off course will reduce but still we are in the profit margin
range). The company can set up an individual fare policy, and apply the right fare
until it phase out the other competitors.
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11. Redefining Optimum Network:
Since our pervious approach, point to point, shows some routes are
unprofitable, so we will demonstrate a multi stops approach to Redefining
Optimum
improve the profit of multi stop segment operation Network
So let us consider
SANA'A – TAIZ- ADEN – MUKLEA
In this routes some sectors profitable and the other sectors are unprofitable, we apply ٠
.٩٥ fare competitive strategy for profitable sectors ( SANA'A-TAIZ , SANA'A-
ADEN , TAIZ-ADEN , ADEN-MUKALLA ) while Fare of unprofitable sectors is
unchanged i.e remain at the level Market Fare as shown by Yellow strips ( SANA'A-
MUKALLA , TAIZ-MUKALLA) .
So by considering a ٤٥ seat and optimum cost at ٠.٠١٢٥ cent/ASK, While the demand
of unprofitable routes remain unchanged, but demand of profitable routes can be
adjusted to take only the share that maximize the profits, in multi stops operation
while the remaining profitable routes can be treated as direct operating service
between the cities (point to point approach – as it is a profitable routes)
Even SANA'A – MUKALLA and TAIZ – MUKALLA are unprofitable sectors, but
the overall results of Multi stops operation is profitable one = ١٨,٨٣٠ USD.
Also the cost of one trip by this case = total cost / no. of frequency
= (٥٨٨.٣٧٥ = (٢٩١)/(١٧١٢١٧ USD
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12. And that is done at ٣٤ (inch) pitch (distance between the heads of two seats in
sequences)
While the load factors of the cabin of the bus is always greater than ٩٠ %.
i.e the cabin load factor ( annual operation ) =
SANA'A-TAIZ = ٩٧ %
TAIZ-ADEN = ٩٩ %
ADEN-MUKALLA = ٩٣ %
Profit Maximization:
Since the normal distance between seats is ٣٤ inches, at seat
configuration of ٤٥ seats as indicated by a blue color seats, but
there is an opportunity to maximize the profit, by utilizing Profit Maxim-
ization
maximum possible capacity of the seat cabin i.e by reconsidering
the pitch distance of seats to ٣٠ inch (which is a normal high density seat
configuration of economic airlines – seat layout) this will lead to increase the number
of seats by one row i.e ( ٤ seats ) which indicated by yellow seats, leading to total seat
numbers of ٤٩ seat, and that will definitely improve the profit .
34'' 30''
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13. Summary:
The problem of local transportation is solved by implementing and defining the right
assets to operate and designing a profitable operating network, based on two
approaches or scenarios First : point to point and the second multi stops operation,
bearing in minds the cost deriver in a transportation situation which is ASK
( Available Seat Kilometer ) while in a multi stop operation a marginal decision
factors play an important rule in maximizing the profit i.e seat allotment ratio, which
is based on demand , market fare and cost, deriving to get a maximum cabin load
factor with a high yield, while in point to point approach , companies can easily
positioning their fleet by using optimum operating curve to achieve high performance
and they improve it by targeting the cost .
Also a competitive market fare strategy is developed based on U curve techniques and
mapping a frequency factor to define Favorite and Un-favorite percentage range of
Market fare which consequently defining the profitable and loses routes in the
network.
Contact :
Mohammed Salem Awad
Consultant
Tel : ٠٠٩٦٧٧٣٤٧٧٧٥١٨
Email: smartdecison٢٠٠٢@yahoo.com
Accounting for Managers Course 13