Introduction
Airline simulation is a web-based aviation business simulation designed for virtual execution of various strategies whilst making decisions for a specific simulated airline regarding its marketing, Human Resources, finance, operations, and asset management.
An established US regional airline with three flights operating in region 1 with a stock price of $20 and $0.04 earnings per share was provided. It had a 90% reliability, a load factor of 59.7% and net profit of $5253 which showed opportunities existed in the market for further growth.
Strategy
The foremost task was to decide the name of the company. The strategy corresponded collectively was “brand positioning”; to position the brand uniquely in the mind of customers (Joyce Stuart, 2013). The company was thus named “Blue Skies”, a brand name that would appeal to customers.
A mission statement should not only guide the corporation but prove a stimulus to the customers (Meredith E. David, 2014). Within this in mind, the following mission statement was chosen to represent Blue Skies:
“Premium flight experience to everyone at affordable prices”
The initial strategy chosen was “Cost Leadership” from the Porter’s Generic Strategy framework (Porter, 1996).
It was decided to categorise Blue Skies as a low-cost airline with a discount fare price ranging from 28 to 31 cents. Added facilities including a normal flight layout as compared to the budget model and an increase in maintenance operations to level 2 was a step towards premium service at affordable economic prices with aim of attracting more customers.
SWOT analysis and Ansoff’s marketing model was used to better determine the required strategies to moving forward. An effective SWOT analysis cannot simply be a list it must be the basis for action (Arthur A. Thompson Jr., 2001).
According to SWOT Analysis (Refer to appendix figure 1):
- Strengths: Blue Skies is a well-known and reputed airline within the smaller communities with a sizable line of credit and positive cash flow. It has pre-owned aircrafts ready for use and an existing operational regional hub (region 1). The ticket price was relatively low, a perceived attractive feature to cumulate more passengers.
- Weaknesses: Blue Skies has a low-quality rating, a low PLF, smaller fleet with higher maintenance and low fuel efficiency aircrafts. Higher employee turnover ratio. Extremely low marketing budget. Low working capital for expansion and slim profits.
- Opportunities: Option to expand into new routes and regions. Addition of other revenue streams like cargo services and other chartered services. Ability to switch to newer, larger, fuel efficient and low maintenance fleet through leases which reduces the financial burden.
- Threats: Competition from other airlines, a smaller regional market and fuel price fluctuations. A threat of substitution in short distance routes by other modes of transport are the major threats.
According to Ansoff, strategic management requires “entrepreneurial creation of new strategies for the firm, design of new organizational capabilities and guidance of the firm’s transformation to its new strategic posture”. Using Ansoff’s matrix (Ansoff, 1980) further strategy modifications were made (Refer to appendix figure 2):
- Market penetration: increase in passenger load with an increase in number of routes served in the existing region.
- Market development: expand the number of regions served and growth in budget travelers.
- Product development: Improve passenger flight experience by addition of newer aircrafts and by better training of employees.
- Diversification: adding cargo services and serving international routes, luxury travel alongside other optional services (special decisions: air ambulance, charter trips).
Airline managers should focus on market penetration through fundamental airline attributes (price, time and reliability) to grow market share (Isaac Levi Henderson, 2019).
Based on the above SWOT analysis along with Ansoff’s matrix they determined the key success factors as, to improve quality of the fleet, improve quality of customer services provided, initiation of significant investment in marketing and sales functions to stimulate demand and adapting strategies suited to the fluctuating marketing conditions, choosing better routes to serve, improve on reliability and pricing strategy aligned to value proposition.
Each strategic decision in the management of Blue Skies was made to optimise the chances of building a successful airline by providing a holistic service in terms of both quality and reliability.
Business Objectives
The strategy concept has its main value in determining how an organization defines its relationship to its environment in the pursuit of its objectives (Bourgeois, 1980). Objectives are the “ends” and strategy is the “means” of achieving them (Arthur A. Thompson Jr., 2001). In this effect, strategy is the pattern of actions managers employ to achieve strategic and financial performance targets.
It is important to note that while business objectives are centred round results, these parameters should be as specific as possible rather than relying on vague, generic targets like increasing sales or decreasing costs. In addition, effective business objectives should outline not only performance target but also in timeframe in which to achieve it (Arthur A. Thompson Jr., 2001). The business objectives for Blue Skies were chosen as: stabling long-term substantial investment in service quality while maintaining their growth and profit margins; diversifying the fleet to lower operational cost while allowing for continual growth; an expansion of routes to cater for all customers looking for a superior flying experience; investment into vibrant marketing and promotional functions in a gradual yet sustained manner to attract more customers in the short, medium and long term; introduction and continual expansion of Sales Force capable of handling the significantly stimulating demand.
Operational Evaluation on Takeover
Marketing
The marketing expense at takeover was 1.6% of the revenue with a quality 65. Customer loyalty is positively affected by customer satisfaction which can be achieved by improvements in corporate image, personnel training on service quality and service customization (Kohsuwan, 2019). There were no sales persons hired at the time of take over either. Promotional and marketing budgets were low with no additional streams of revenue. Focus on internal investments was much needed to improve the operations of the company.
Finance
Financial situation at takeover was stable with a stock price per share of $20 and earnings per share of $0.04. The airlines had adequate cash balance, a decent available line of credit with a small net profit, sufficient for maintain operations and developing the company. However, operational expenses were high at take over which reduced our profit margins despite having inadequate work force.
Operations
Developing an understanding of the relationship between service quality and profitability is of central importance to operations management scholars (Mellat-Parast M., 2015). At the time of take over fleet was inadequate in terms of size, range, comfort and customer service which needed significant upgrade. Low fuel efficient and high maintenance fleet lead to increase in operational expenses which is the main area of concern. Employee training budget was also inadequate to meet the demand. Small fleet of aircrafts restricted the company from serving all the existing routs and expanding into other regions which needs to be address gradually as the company progress.
Scheduling
Influence of the schedule reliability is dominant and increased schedule flexibility could improve the operational performance (Burke E. K., 2010).
At the time of takeover, only region 1 was in-service with 3 operational flights. With a PLF of 59.7%, the company needed to fully exploit the passenger potential of this region. Expansion towards the remaining regions and added services including cargo and chartered services are need to be considered to increase the company revenue with the expanding the fleet.
Human Resources
At the time of takeover, the lower training budget of employees, lack of sales force and poorly motivated employees were considered as potential causes for employee turnover rate of 11.1%, which was higher than the market normal, resulting in added loss of revenue in hiring and training of new employees which needed to reduced with higher training and additional incentives.
Strategic Plan Implementation
Marketing
Change in visual identity is always related to the development of corporate identity with more complex changes in society (Eva Endrizalova, 2018). Rebranding with a new logo and change of fleet design on takeover created a visual brand image for the company.
While considering the strategy for marketing, the four P’s model (McCarthy, 1960) was chosen. It reflected as follows:
An increase in advertising and promotional budget increased the recognition of company within the industry. Initial allocations till Q4 was 1.9% of the revenue which showed promising results, but a sudden decrease of profit margin in Q5 resulted in the reevaluation of the present marketing strategies. A significant raise in marketing budget to 2.4% of the revenue in Q5 resulted in better profits. With gradual increase in marketing expense, the company noted an increase in share of the market even during times of fluctuating demand. Gradual increase in the sales force made a significant contribution to the company’s growth. Increase in number of channels of distribution via several consortiums for digital sales proved profitable. Activities of corporate social responsibility affects corporate reputation in the airline industry (Park E, 2019). Maintaining a social performance budget for local community causes had a positive impact on company reputation.
Despite being a low-cost airline, premium services were provided to increase the PLF and to gain a competitive advantage in the market. This reflected in better brand positioning and consistent increase in the gross revenue. Value for money is crucial for low-cost airlines to achieve customer satisfaction (Rajaguru R., 2016).
Finance
The service quality level of airlines has an indispensable influence on its development. Airlines should improve service quality as soon as possible to enhance market competitiveness and achieve sustainable development (Hang Zhou, 2019).
The primary focus when it comes to finances was to invest wise with prospects of long-term gains rather than projecting a short-term success. Leasing better flights which are fuel efficient and have a low cost of maintenance has reduced the operational costs significantly. Expansion into new region took a major share of the profits which was a decision made focusing on the long-term profitability. Addition of new flights to the fleet in a phase-wise manner rather than the all-out approach was more financially more viable for the company. Gradual increase in promotional, advertising and training budget have increased the quality and reliability of the airline thus increased the yield per ASM and stock price.
Operations
Initial focus was on market penetration and establishing Blue Skies in the given region (Region 1), and then market development by expanding to other regions.
Deploying operational hedging in conjunction with financial derivatives is much more effective as in combination, as they not only reduce unit cost but also increase profitability (Swidan H., 2019).
Strategically operating the fleet of given aircrafts by avoiding certain routes seemed profitable. However, maintenance and operational cost remained high with lesser seats per aircraft making it less cost effective. A gradual phasing out of leased TP300 and induction of TP340 by leasing strategy rather than buying aircrafts, saved the company from large capital investments. The TP340 provided more seats, better comfort, lower maintenance and more fuel efficiency. This made a huge impact in the 3-year period with increasing number of seats per aircraft which in turn provided a more strategic edge over the competitors in the highly contested route.
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