Airline Simulation Business Strategy

I. Corporate Governance

BaronsAir has a dynamic group of people in its management team. Each has their own duties to benefit the success of the airline. Organization, responsibility, and knowledge will drive the airline and each of the team players to success.

was a former manager of Mid-Continent Airlines. The new company re-formed, BaronsAir, was named after her after she came up with the idea to have the employees buy all the company stock. The three other executives were former board of directors’ members that haven’t served the board that long.

was designated President of BaronsAir. His responsibilities are to take charge of the company , oversee, and delegate responsibilities to his team members. Because he has an extensive background in aviation, he consults with his colleagues outside of the company for advice on making strategic decisions; such as aircraft purchasing, leasing, and selling, as well as maintenance levels, fuel contracts and certain incident decisions.

was chosen to be Vice President. Her individual duty is to preside over the meetings of the group. Alexandra controls the tasks of the company and determines when each will be discussed at a meeting. She plans the meetings locations and times. She has the duty to notify each member of any changes to the schedule. Alexandra is also in charge of quality control and training, and handles the corporate social performance budget.

is the head of the marketing department. Each week, when the marketing information is available to the team as a whole, she analyzes the data concerning everything that does not regard the internal accounting of the company; such as maintaining a high quality index for BaronsAir. She sets the promotion and advertising budget each quarter. Sophonie is also in charge of hiring salespersons for the company; including those especially for the cargo market.

Is our Chief Financial Officer. Each quarter, when our statements are available, he analyzes them using Microsoft Excel. He compares the company’s numbers from the previous quarter and determines what adjustments to the accounting structure need to be made for the following quarter.

When decisions regarding the next quarter are being made, all members of the team have a vote. A majority vote rules, unless the proposal is vetoed by the President.

II External Environment Assessment

One opportunity for the firm is new developments in technology. These forces eventually occur, making new costs for the firm and lowering others. Telecommunication is one example of how technology can affect the firm. Teleconferencing can reduce travel expenses for general and upper managers. This will delete the need for travel. Automation is a major concern for the aviation industry. New costs for hardware and software would occur. In turn, less labor would be needed to complete a job that an automated machine can do.

The introduction of the internet into airline travel has surged in the past years. Travel agents have become obsolete. Now, customers can make their own reservations via the net without the hassle of paying a travel agent. Also, certain internet sites offer lower cost tickets than directly buying from the airlines and travel agents. Customers have more of a choice for their flying needs.

Airline regulations are always going to be present in the aviation community. Political and legal forces may become a threat. With terrorism escalating, security measures have been heightened for safer travel. Airlines must pay for a part of this new expense. With terror looming in the air, some previous frequent fliers are now frequent drivers.

On the other hand, the airline Deregulation Act of 1978 made competition easier. It lowered the barriers of entry, allowing for more airlines to enter the market and compete with other airlines on cost and service. This caused a surge in passenger travel. Average middle-class citizens could now afford to fly. Flying was not only for the rich any longer.

Demographics also have a large part in the effect on an airlines strategic plan. More and more people are moving from the more populated areas, such as big cities, to rural areas with small airports. There is plenty of potential for this firm to capitalize on the new markets. Serving more cities will increase passenger load, eventually increasing profits.

Advanced training programs have been put in place for as opportunity for an airline to operate safer. Huge facilities have been constructed, such as the American Airlines Training Center in Dallas/Ft. Worth, TX. Pilots are trained to handle emergencies better. They are trained on various things such as terrorism, water landings, engine failures and accidents on the ground.

Flight attendants also go through extensive training before working on an airplane. They are ultimately for the safety of the passengers. They must know how to effectively evacuate an airplane during water landings and fires. The cost for these training centers are high, but they save money in the end.

Tools to analyze this industry are: The issue priority matrix, the Michael Porter approach analysis, and the EFAS and IFAS. The issues priority matrix will determine the external variables that should be consistently tracked. Management chooses to create this matrix in order to minimize strategic myopia that might affect the company due to personal values. This matrix will help to scan environmental trends in more efficient manner by prioritization.

PRIORITY MATRIX

Probable Impact on Firm

High Medium Low

Probability of Occurrence

Low Medium High

Competitors

Economy

Media Produced Image

Loss of Control of Market

Terrorism

Price Wars

Political Environment

Accident

Air Worthiness Directives

*Competitors, economy, and media image are our priorities. It is our analyzing of the Smith Econometrics Demand Forecasts for market substitutes. In an effort to maintain a profit, this firm monitors fuel costs, inflation, and social world incidents. We must also maintain a first-class relationship with the media. If something goes wrong, the firm doesn’t want the situation to be sensationalized.

* Because terrorist attacks are out of our control, this firm can only put the highest levels of security for the safety of our passengers and our crew members. Accidents are bound to happen. This firm, in conjunction with the FAA and NTSB, are working on measures such as pilot, flight attendant, and ground crew training. The idea is not to prevent accidents but to decrease the number of accidents and to provide sufficient training to our crew members in such a situation. The current political environment is dependent
on our lobbying for air regulations in our favor. Money is involved. It is in our benefit to pay to assure that fewer regulations are imposed on our industry.

* An AD (Airworthiness directive) is a recall on a part of an aircraft. There is currently an AWD out for the Boeing 737’s rudder stabilizer. Again, a situation out of our control. The firm could just hope, with proper maintenance, that our fleet of aircraft will remain safe for use. Recalls are mandatory and can cost the firm money when planes are out of service due to these recalls.

* Price wars and market share go hand in hand. We currently have control of market number 14. This market, which is from our mini-hub to a foreign city not too far from the border, has a diversified industry and tourist trade. There is also a fare sale for this flight. One of our many competitors can enter the market with better prices and secure the market for themselves. Usually, in this case, an airline will counter attack with even lower prices; sometimes taking a loss and falling below the break even point.

FORCES DRIVING INDUSTRY COMPETITION

Potential Entrants

Threats of New Entrants

Bargaining Power Industry Competitors

Suppliers of

Suppliers

Bargaining Power Buyers

Rivalry among

existing firms

Threat of Substitute

Products or Services

Substitutes

*Threats of Entry- To start an airline from the bottom, one must have a lot of capital. Buying aircraft, equipment, training of flight and ground crew, setting up marketing strategies, and buying space at airports can be very costly. This makes the barriers of entry very high for someone to enter into the aviation community.

*Rivalry Among Existing Firms- BaronsAir only has 3 competitors. Each quarter this firm obtains market research for the past quarter. At some points, this firm was not performing as well as others. We were flying fewer routes and filling fewer seats. At times it seemed we were the underdog. We manage to stay competitive and dominate some markets and keep our stock prices high.

*Bargaining power of buyer- Power is high due to low switching costs. There are many competitors that can match prices so this pressures companies to lower their prices in order to keep up the competition.

*Bargaining power of suppliers- The bargaining power of suppliers is very low due to high competition and price dependency. This supplier is not meeting a critical need of the buyers, so the supplier has no bargaining leverage.

*Threats of Substitutes- There are many different ways for people to travel. There are planes, trains, and automobiles. One consciously makes a choice whether or not to fly. Our firm must advertise in such a way that consumers will WANT to fly our airline.

II. Internal Environmental Assessment

Strengths and weaknesses of an organization play a major role in that company success and advancement. BaronsAir has many strengths, which help the company to identify its competencies and capabilities. This firms works on weaknesses to become better and bigger.

The structure of a company basically investigates how to secure and motivate efficient management, which often improve the financial performance. It is the system by which business corporations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the corporation.

Corporate Culture is a system of shared meaning within an organization that determines how employees behave. BaronsAir understands that culture is very important to have, because once you understand your current culture, you can create a vision for how you want your company to run and be successful. Our values define us, they definitely give us perspective, and most importantly they make sure we never lose focus on what has made us great.

We have our own beliefs expectations that identify us. The culture of a company keeps all employees in the same page and work toward the same goals. The key values: integrity, respect, people development, a good spirit and high performances are deeply held and widely shared. We at BaronsAir are value-driven and also results-oriented.

As technology continues to change, we at BaronsAir do our best to keep up with the technology environment, For example, E-ticket is very easy for the customers to do and also saves time. Electronic meeting is being used mostly for internal communication in order to get operations to move faster and efficiently.

The corporation operates under a control-balanced strategy, with our Strengths, Weaknesses, Opportunities, and Threats in mind. Our planes are well maintained with quality work and supervision. As we serve our clients we continue to advertise for new market opportunities. At this time BaronsAir is in stable condition financially, with no short-term loans. As our sales continue to increase, we keep our prices at a competitive and consistent level.

By maintaining our planes and focusing on advertising, in addition to our marketing campaigns, BaronsAir is moving forward with great equity ratios, new training classes and customer service skills. We make our customers feel comfortable with good quality service, at a consistent price. BaronsAir is looking forward to expand the resort destinations as we continue to serve faithfully our current fleet.

IV. Mission Statement

BaronsAir’s mission is to carry our passengers safely and comfortably from place to place by using quality staff and the highest safety standards possible. We are also dedicated to providing our employees with a steady, fun, team-oriented environment with value and professionalism.

V. Top four Objectives

1- Our first and most important objective is to provide a better service that will attract more customers and allow us to conquer a bigger percentage of the market. “Better service” will help us to achieve all of the other objectives. For an airline, good service is vital for its ability to survive. BaronsAir focuses on satisfying customers’ needs and fulfilling their expectations. As BaronsAir’s executives, we were aware of the financial situation of the company at the time we took over. So, we decided to take small steps as the company started to grow and increase its revenues; we made larger investments to improve the quality of our service. “Quality service at a fair price” is becoming one of the characteristics that distinguish BaronsAir from other airlines.

Strategies to achieve this objective:

a)Hire 1 new sales person in quarter 1 and 2. This decision will help our company to provide customers with a faster service so the time they would have to wait in line will be reduced.

b)Acquire new and dispose of old aircraft in quarter 1 and 2. Customers are more attracted to flying in comfortable, but more importantly, safe planes. BaronsAir takes safety very seriously. By getting new planes, we are reducing the possibilities of having mechanical problems. Our new planes are also better looking inside and out, more in line with the new image of the company. They have more space between seats, standing room and toilets.

c)Increase employee benefits to improve retention. Improving employee retention will decrease training costs and make customer service more efficient. New employees take time to master their duties, therefore they tend to be slower and make more mistakes than those with experience. This decision will practically pay for itself because eventually it will reduce our hiring on job training costs.

d)Increase maintenance level from level 1 to 2 in order to have our planes clean inside and out more often. This will reduce our downtime for reparation of the aircraft resulting in fewer delays.

2- Creation of customer recognition and improvement of BaronsAir image:

Our original executives were extremely conservative when making major decisions related to investments in publicity. We are living in new times where marketing is one of the most important factors for the success of any company. We needed a creative person who would look at the big picture and be prepared to make major changes. Sophonie Eristhenes is that person. She proposed the increases in the marketing budget. After discussing it with the other executives we came with the right budget and strategies. Customer recognition cannot be built in days or weeks; it takes years to develop a lasting and positive recognition by the public.

Strategies:

a)Increase of marketing budget in quarter 1 and 2.

b)aggressive promotion in new markets (cargo and resorts) quarters 1 and 2

c)Initiation of social performance: the community should perceive us an altruistic company, one that cares about social problems and participates actively in finding solutions. Social relations are fundamental to obtain the positive public recognition that our company needs. To achieve this, we give back to the community each quarter a generous contribution designated to different causes.

d)Acquisition of 7 new aircraft with a different more refreshing logo, helped to develop the image of a more sophisticated BaronsAir.

3- Increase total sales by 50 percent for the next 5 years.

The first two objectives by themselves will help us reach the third one. A better service and a more effective marketing campaign will be the key to increasing sales and company growth.

Strategies:

a)We decided to be a discounted airline in the first quarter. Using the formula [0.31 x 400 = 124.00], we raised our sales 79% in the first quarter. We discontinued the discounts after that quarter because we were afraid that our competitors would copy the strategy and cause us to lose prospective customers. It was a one-time discount that gave us an advantage over our competition.

b)We gave fare sales level 1 and level 2 during the first quarter and level 1 in the following quarters. Airline costumers are price sensitive. They are always looking for the best price or offer. We want to provide them with quality service at a great price. This is especially important in quarter one when we are initiating our new campaign “BaronsAir, the best service at the best price.”

4- Increase revenues:

This is the most basic objective, the essential goal of any company. Increasing revenues will help the company grow, and we will be able to provide our employees better salaries and benefits. Incrementing our revenues will allow us to keep improving our customer service and quality.

To achieve this goal we have used the following strategies:

a)Increase our number of flights and seats by acquiring more aircraft. Increasing passenger capacity will increase revenues.

b)Experiment in new markets such as resorts and cargo service.

c)Temporarily promote reduced fares until the company establishes enough clients.

Policies of BaronsAir

1)Passengers will be sent on the next available flight if they miss their flights.

2)Passengers will not lose their plane tickets because they don’t board the plane the day it was scheduled. They will not have a limited time to report it, but a penalty will be charged.

3)BaronsAir will guaranty a safe trip for all passengers and their belongings. If the company loses his/her luggage, BaronsAir will reimburse them for their loss.

4)BaronsAir will keep track of its loyal customers and start a club for those customers who always chose to fly with us. We’ll offer special discounts to their usual destinations by e-mail or other means.

VI. Performance measurement

BaronsAir has come a long way since its inception as far as performance measurement is concerned. We believe that part of our success comes from keeping our evaluation and control process simple and easy to manage. What separates companies like Wal-Mart and Southwest from the rest of the pack is that these two companies have been able to close quarter after quarter with profits. Our believe is that focus is lost when a company tries to pursue vague, intermediate objectives like “excellence” or when middle management is burdened with complex business strategies. Over the course of years, BaronsAir’s attitude has shifted slightly from being a “market mover” to being a careful planner. After our first quarter with red numbers this change in attitude has become more pronounced. The following exhibit illustrates our evaluation and control process.

Step 1, 2 and 3. BaronsAir has developed the following performance measures:

Customer perceived performance measures.

-1. Quality Index (0-100): Our ultimate goal is to reach a quality index ratio of 100.

-2. 0 -1 % customer refunds: We believe that refund percentages of 1 percent or lower are acceptable in this industry.

Efficiency based performance measures.

-3. Maximum passenger load: We have estimated our break-even load to be around 55%. To achieve the desired contribution margin per plane of 15% or greater, we have calculated BaronsAir’s target passenger load at 70% or greater.

-4. Lowest possible operating expense: We particularly keep track of the expenses related to Flight Operations-, Fuel-, Maintenance- and Passenger Service expenses.

Financial performance based measures.

We basically keep track of every single financial performance measurement but the most important ones are:

-5. Gross Revenue growth: of 10% or more per quarter or 30% per year.

-6. Sustained net income: of at least 4% of growth revenues per quarter.

-7. Optimal capital structure: based on the projected long-term capital investment commitment needs, BaronsAir tries to minimize its cost of capital (borrowed funds vs. internal equity) by reaching an optimal debt to equity level.

-8. All other financial performance based measures: like return on investment (ROI), Earnings per Share (EPS), Price Earning Ratio’s (P/E) etc.

Step 4. Does performance match standards? When the predetermined performance measures are not met, BaronsAir’s top management calls for an urgent meeting based on the seriousness of the situation. During this meeting all department managers are asked to elaborate on explaining the reasons why the performance measures are not being met. An example of this can be observer after BaronsAir’s second quarter of operation under the new BaronsAir’s name. During the first two quarters BaronsAir achieved better than expected revenues growth and net income growth. This seemed to reaffirm that management was doing a good job. This resulted in BaronsAir’s executives feeling over-confidence about the companies’ future and as a result the company decided at that time to seek a risky “all out” market penetration strategy.

This resulted in a third quarter loss that exceeded the combined operating result of the previous 3 quarters (quarters 0 through 2). The company has since been able to turn around its course by implementing a refined financial modeling based decision-making system depicted on page 20. All our performance measures are being monitored on a quarterly basis and the CFO is responsible for addressing the right department about not meeting these standards. Also a list of recommendations for future improvements is generated 1 week after the quarterly financials are published to insure that BaronsAir is able to sustain its current leadership position as quality oriented regional carrier.