Demand Forecasting

Airlines · 7 min read · Feb 11, 2022
demand forecasting

Aviation is a very dynamic industry where business growth depends on the capability of adapting to the specific present and future situations that are very likely to happen, which is where demand forecasting becomes important.

On the one hand, traveling has different peak seasons through the year, and down seasons need to be cared for to keep the business afloat.

On the other hand, long-term decisions such as business expansion, getting into new markets, among other important decisions should be made by considering macro-level factors that may result in increased or reduced customer demand. Therefore, it is very important for managers to have accurate information to make smarter decisions, and this information can be obtained from demand forecasting.

Now, you may be wondering what demand forecasting is and how demand forecasting can provide such important information for organizations in the aviation industry. Well, we invite you to keep reading as we are about to give you all the details.

What is demand forecasting?

Demand forecasting can be easily defined as a process of predicting and estimating customer demand for a product or a service over a specific period in the future by leveraging historical sales data and applying predictive analysis.

While it is true that no one can really predict the future, demand forecasting allows us to have a better picture of what opportunities and risks may lie ahead. These predictions are possible due to information from market research and demand forecasting techniques, forecasting models, and even special demand forecasting software algorithms to leverage the historical data.

A crowd of passengers at an airport waiting to board a flight at sunset.

What is the purpose of demand forecasting?

As the name suggests, demand forecasting is intended to help businesses predict future customer demand for their products or services. This helps in different aspects of the business such as financial planning, pricing policy, marketing planning, capacity planning, future expansion, manpower planning, and capital expenditure. To illustrate the importance of demand forecasting better, we are going to explain briefly some of the benefits businesses can obtain from demand forecasting.

Budget construction

Every single business requires a clear budget to cover all its expenses while keeping the profit margins at reasonable levels.

With demand forecasting, organizations can reduce possible risks, thus making more efficient financial decisions that impact their profit margins and cash flow. Moreover, they can have a better idea of how they should allocate their resources.

Among demand forecasting examples in aviation that help budget construction, we could mention an airline studying the sales trend during a peak period like summer and planning how much they would allocate for leasing extra aircraft to cover for a peak period or to cover for the extra staff they will require in the same period according to the information provided by the demand forecast.

Improving supply chain management

By analyzing historical data, businesses can ensure their supply chain will match the demand forecast and can take measures to reduce the risk in case of an unexpected event. They can develop better production processes and inventory planning that can match their suppliers’ capabilities.

Also, through market research, organizations can find supply chain alternatives that may be more suitable to the demand forecast they have made, thus improving their supply chain operations.

For airlines, this could be more difficult as most of them rely on two big aircraft suppliers, Airbus and Boeing. However, as we mentioned above, airlines can also lease aircraft to cover demand. They could negotiate better contracts if they have a highly accurate demand forecast.

But supply chain does not end here for an airline. A study by Logistics Consulting Partners on the supply chain of British Airways reported that each time a Boeing 747 took off, around 40,000 items were moving through the supply chain. This included blankets, headphones, napkins, cutlery, and food among other things. All these can have an important impact on the perception a passenger may have of the airline, so it is important to have it well planned, something that is much easier when demand forecasting is applied.

Pricing strategy development

Demand forecasting provides more than the ability to create strategic and operational plans. It also allows businesses to use past sales data in order to learn how they should price their products and services according to demand.

This is a key factor for business growth since demand forecasting allows them to better understand the market and create a more competitive pricing strategy accordingly.

For example, low-cost airlines have developed interesting pricing strategies from learning about their passenger’s behavior through market research and demand forecasting. They know that during off-peak periods they can be very competitive by offering lower prices and getting extra profits from additional offers such as extra luggage, better seating, or car rental sales.

Implementing the right marketing strategies

Marketing has become more and more critical for organizations to be successful. And aviation marketing is not an exception.

Forecasting demand allows airlines to discover periods where the demand may go very low, thus creating a challenge for their business. However, using the right marketing strategy can turn things around and create a boost in demand.

A visualization of demand forecasting during the pandemic with a red arrow indicating a downwards trend.

6 Types of customer demand forecasting

Now that you know how important and beneficial demand forecasting can be for any organization, it is time for you to learn what are the different types of demand forecasting that can be used depending on the specific situation and objectives.

The way demand is forecast can be varied. It is possible to make different forecasts from different models. Some models help you see how sales will happen. Other forecast model options can also help to identify variations between forecasts, thus suggesting that there should be broader research or more data input. Keeping this in mind, here are the 6 types of customer demand forecasting.

Internal business forecasting

One factor that limits a company’s expansion is its internal capacity. Internal business forecasting systems will identify limitations that may hinder the growth of the organization, and it can show untapped potential opportunities within an organization.

This forecast model includes financial management, cash available for the organization and its employees, production operations, and workforce. Internal business demand analysis provides useful data to create real-life forecasts and estimates.

With internal business forecasting, airlines may be able to identify whether the number of aircraft within their fleet or the number of people in their staff is actually their limitation for expansion, for example. Or perhaps is the number or types of routes that are limiting them to be more competitive and profitable.

Short-term projections

This type of demand forecasting looks at only the next three- or twelve-month period. These tools will help manage a quick supply chain.

The quick view of a short-term demand helps adjust projections based on real-time market data, and it can help you to adapt quickly to dynamic customer demands, something really useful in a constantly changing environment like the aviation industry.

If your market is constantly changing, short-term forecasting demand may be essential. However, for many companies, forecasts in the short term are merely an important piece in the larger puzzle, which is why short-term demand forecasting techniques are usually combined with others that help forecast demand in longer time frames.

Passive demand forecasting

Passive demand forecasts are the easiest to apply. When forecasting demand passively, the sales data from the past is used for the prediction of what will happen next. However, you must use information from the same periods that you want to predict in the future, especially when your industry experiences seasonal changes.

For example, the passenger’s demand is not the same for months like March or April as it is for Christmas time, so you need to use the information of the previous holidays if you want to predict demand for the next one.

Passive forecasting models are very useful for generating solid sales figures. Moreover, this model can be used by companies aiming towards stability rather than growth. It is important to highlight that this is approach assumes similar sales for the previous year, so whenever a big change is expected, other approaches should be used.

Long-term projections

In order to perform proper demand forecasting with long-term projections, the forecast should give a projection of around 4 years. Typically this forecast model has the goal of guiding your growth plan.

Although long-term plans are often largely based on market research and data about sales, they are also ambitious, so we could think of demand forecasting as a roadmap for long-term objectives.

The method can be used to prepare for future market development, investment, or supply chain management. Getting ready for unexpected things in the future is critical when building the growth of an organization.

For example, long-term demand forecasting can be critical for a local airline that is trying to become international and get into other markets.

External macro forecasts

External macro forecasts incorporate trends in economic growth in global markets. These projections show how external changes at the macro-level impact the objectives set by an organization. In some cases, an external macro demand analysis can help guide the plan for the next stage of organizational expansion.

However, it is important to also take into account the external market forces for sales forecasting. External macro forecasts may also affect raw material availability, or other factors directly impacting supply chains.

Most airlines must have applied this type of demand and sales forecasts recently, as an external macro force like the current pandemic has created new risks and new opportunities within the industry.

Active demand forecasting

Active demand forecasting may prove useful when the business is just being launched or in the process of growing. Market research, marketing efforts, and growth plans are essential for forecast accuracy during the active demand forecasting process.

A proactive forecasting model, as opposed to passive demand forecasting, is accompanied by external factors. This may include the economic outlook and future growth projections for the market sector. When there is a lack of actual sales data or historical sales data as would be the case of a new business, the projection must be based on data that can be derived from external sources.

What are the four basic steps of demand forecasting?

If you are trying to predict future demand and future sales, the first step is to set the objectives you want to achieve with the projections obtained. Without a clear purpose, you may spend more time and resources than you should and still end up with information that has no use.

Now, after your goals are clear, it is time to follow these 4 steps:

  • Select one or a combination of the demand forecasting methods described above. Knowing your goals and the period of time you are aiming for will make it easy to decide whether you need short-term or long-term demand forecasting, for example.
  • Establish the most appropriate way to obtain and register the required data. In the end, these methods are useless without the appropriate input.
  • Use the statistical methods and available tools to measure and analyze the data you obtain.
  • Perform your inventory management, demand planning, and any other required operation based on the results and objectives you have established.
A visualization of a demand forecast with many different graphs and pie charts printed on a piece of paper.

Final words on demand forecasting

Demand forecasting is a great tool for organizations to improve the quality of the information they use to make the decisions that will have the biggest impact on the future of their business.

Moreover, forecasting passenger demand can be critical for any airline trying to improve its business profile, including being more competitive and more profitable.

We are grateful you have read this far, and we know it means you are really interested in how demand forecasting is used within the aviation industry and the economic impact it may have.

We want to invite you to take a look and enroll in our course called Airline Demand Forecasting and its Impact on Revenue Optimization, as it will provide you with all you need to know to forecast passenger demand accurately for increased revenue and improved system optimization.

In any case, feel free to contact us if you have any doubts. We’ll be more than happy to help you.

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Jet pilot @NASA

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