Report on Monarch Airlines economic and managerial problems and the solution to these problems.
Monarch Airlines financial struggles and eventful closure has been an extremely controversial issue in the media. This report will explore the economic and managerial issues Monarch may have faced which led to their closure.
Informational asymmetry can be described as one party having more knowledge than another. (Brickely, J. Smith, C. Zimmerman, 2016). During the publicity surrounding Monarchs' supposed financial struggles, the company made claims they were ‘trading well' (R. Wright, L. Fedor, 2016, Financial Times) and even advertised holiday offers up to 24 hours before going into administration. This informational asymmetry existed in the sense that customers were led to believe Monarch was a safe bet when booking with them, despite their critical finances; this was likely to be their only option as a marketing strategy in their desperation for sales. (P.Milgrom, J. Roberts, 1987, The American Economic Review).
If Monarch was still in operations today, its likely solution would be attempting to regain customers who may have resented their methods; reaching out possibly via social network to keep customers more informed of any changes that could impact them, could have been an option as customers of today demand more transparency and honesty with businesses in which they transact with. Additionally, it is likely Monarch felt they were not acting unethically by continuing to sell flights when their future was unclear as their customers were ATOL protected and so this gave them the ability to take risks and know that in a worst-case scenario such as having to go into administration, their customers would be taken care of and compensated. This is a case of ATOL protection being a moral hazard.
Similarly, informational asymmetries may have existed between Monarch and their staff. Employees of Monarch in various news articles described themselves as ‘shocked' over the company's closure. (www.bbc.co.uk/news, Accessed 24.10.17). This may mean that despite cutbacks that staff would have experienced, they may not have known the depth of the situation concerning Monarchs financial struggles and therefore never seen closure coming. A solution to this issue would've been clearer channels of communication within the company. This would've ensured that everyone was working towards the same goals, which would've been survival in the case of Monarch. Therefore, staff would have felt they are trusted and valued enough that internal information is always communicated to them, potentially a tool to motivate them.
External factors have considerable influence in a business' success (L. Moreno-Izquierdo, Ramón-Rodríguez, Perles Ribes, 2015,'The impact of the internet on the pricing strategies of the European low-cost airlines', European Journal of Operational Research) and by examining the external profile, which focuses on changes in general market conditions, (Moon, Bates, Core analysis in strategic performance appraisal, 1993) it is evident that these factors contributed to Monarch's decline; particularly Brexit and the occurrence of terrorist attacks.
A decline in the value of the pound due to Brexit uncertainty caused problems for Monarch, due to most of their income being in pounds and their costs such as fuel in US Dollars. As a result, many handling costs have increased and contributed to Monarch's trading losses. (home.kpmh.com, Accessed 24.10.17). Previously, Monarch has operated in a niche market through providing Middle Eastern holidays to consumers. However, due to increasing terrorist threats and actual attacks in Egypt and Turkey demand fell sharply. The government banning flights to certain countries contributed to already falling profits which forced Monarch to enter the saturated European low cost, short haul market; in which obviously they couldn't compete. Although unforeseen external circumstances cannot be planned for, Monarch should have had a contingency plan in place to respond effectively and minimise disruption to normal operations.
Monarchs' closure may have been avoidable had they invested time to their business strategy and model sooner; ideally when they were still a successful company who had created and captured value in the industry through their unique packaged holidays. However, Monarch did not respond to changes in trends and demand resulting from advancements in technology, thus they lost the competitive advantage they had achieved in their market. Monarchs' over-reliance in their previous strategy and late transformation into a low-cost airline, ultimately resulted in Ryanair and other low-cost competitors having a more dominant presence in which they couldn't compete with. (Douma, Sytse and Hein Schreuder, 2017, Economic Approaches to Organizations, sixth edition). Managers in Monarch should have used forecast planning to recognise the changes and moved into the low-cost market sooner. In addition to this, a solution strategy profile or a strategy set should have been created to outline all the possible strategies that the business could have taken. This would have been beneficial in the long term as well as the short term as they would have had a strong market position and perhaps first mover advantage, thus giving Monarch time to explore the new market and adapt their business structure accordingly.
The market, in which Monarch existed, was highly competitive. It can be characterised as having many buyers and sellers and product homogeneity. (Brickely, J. Smith, C. Zimmerman J, 2007). For a company to strive in this market, it requires a comparative advantage and the ability to move rapidly to take advantage of transitory opportunities, which could lead to pioneering brand advantages. Customers within the low-cost market have more bargaining power which makes them disloyal, thus no single business has control over price, making it extremely competitive. (L. Moreno-Izquierdo, Ramón-Rodríguez, Perles Ribes, 2015, 'The impact of the internet on the pricing strategies of the European low-cost airlines', European Journal of Operational Research).
Monarch failed to possess an edge over its rivals, due to its inability to adapt to the market and provide the lowest prices for the customer. Monarch struggled to minimise fixed and semi fixed-costs such as reducing staff expenses due to previous contracts which aimed to reduce labour turnover. Minimisation of fixed costs and full capacity was needed to optimise each fair and make them profitable, therefore leaving Monarch outdated and disregarded. (R. Aydin, R. Morefield, 2010, Hub-And-spoke airlines vs low-cost airlines and price discrimination, Journal of Business & Economics Research).
Due to Monarchs' late entrance into a highly competitive market, the company should have tried to merge or create an alliance with one of their low-cost competitors, possibly through the co-operation game in terms of game theory. This would have helped the business to have a better standing in the market as well as improved financial benefits. This is because it has been proven that joint profit is maximised under mergers. (T. Kawamori, 2013, 'Airline mergers with low-cost carriers', Economics of Transportation).
Monarch, an airline with enormous potential, eventually went into administration on the 4th October 2017. On examination of the airline and the marketed it existed; it was clear that external factors beyond their control, coupled with their inability to seize opportunities for economic benefits lead them to their demise.
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