Airline Project Content
• Module 1: Company Overview (5%)
● Mission Statement
● Milestones of your company history
• Module 2: Industry Analysis (20%)
● Use Porter's Five Forces Model to Analyze Airline Industry
● Identify Key Success Factors for Airline Industry
● Overall Attractiveness of the Airline Industry
• Module 4: Business-Level Strategy (25%)
● Identify generic strategy and then describe it terms of your business (Cost leadership, differentiation, focus, etc.)
● Does the strategy build on Resource and capabilities?
• Value-Chain Analysis (Refer to Chapter 3 slides in Week 4)
• Identify Tangible and Intangible Resources along value chain
• What are your firm's core competencies? Are they valuable, rare, costly to imitate, or non-substitutable?
● Your Business Model: How do you achieve competitive advantage?
• Module 3: Cooperative Strategy (5%)
● Supplier Relationships (Aircraft, Fuel etc.)
● Cooperation with large carriers (Dual-designation)
• Module 5: Corporate Strategy (15%)
● Identify product diversification strategy
● Routes, Market types
● Car Rental, Cargo
● International strategy, if any
● How do you leverage core competencies? How do you coordinate your businesses?
• Module 6: Strategy Implementation (10%)
● Key Tactical and Strategic Decisions (Integrate at the firm level. Don't list the decisions quarterly)
● Team Dynamics (Human resource, knowledge, leadership, culture issues) - That's about you!
● Key structure and incentive issues (Compensation)
• Performance Evaluation: Competitive Advantage (15%)
● Purpose of Financial Ratio Analysis (Important and pertinent ones)
● Graph you company's ratios along with the industry ratios (in industry news, if available):
● Vertical axis will be the ratio
● Horizontal axis will be time periods (12 quarters)
• Possible Dimensions of Performance Evaluation:
● Liquidity Analysis (Current & Quick)
● Efficiency Analysis (Inventory Turnover, Fix Assets Turnover, etc.)
● Leverage Analysis (D:E, L-T Debt:Equity)
● Profitability Analysis:
● Return on Sales
● Return on Equity
● Return on Assets
• Performance Evaluation (continued)
● Discuss your analysis of them:
● What does the ratio tell you about the condition of your firm?
● How does it compare to the industry average (or the average of the major competitors)? Does it indicate a problem?
● Assess your ratio trends, relative to the industry (major competitors), and what it tells you about the overall condition of the firm?
• Performance Evaluation (continued)
● Competitive Advantage = Above Average Industry Returns
● Competitive Parity = Average Industry Returns
● Competitive Disadvantage = Below Average Industry Returns
● How Sustainable is your competitive advantage?
● If your company's competitive status changed over the simulation periods, then discuss why you think it did.
• Learning Experience (10%)
● What did you learn from the Simulation?
● What were the good and not-so-good decisions for your company?
● What would you think the company could do differently?
Hawk Airlines is a company with has normal fare structure. We want to improve our firm's performance by developing the way we are serving existing routes as our customers prefer and by entering new markets.
Our aim is to serve safe and positive flight experience for our customers in the highest standards with affordable prices and to create friendly and reliable relationships with our customers.
Porter's Five Forces Model
Bargaining Power of Customers
Buyers have an important power in the airline industry. However, they do not determine the overall attractiveness of the industry. Bargaining power of customers in the airline industry is medium/high. There are a significant number of customers relative to airlines. There are several options when they are choosing an airline. Every customer looks for different kinds of features in an airline company. Some of them are price sensitive, some of them care about their comfort and safety etc. Buyers can get similar services from other suppliers. That is why the switching cost is low. Also, customers have good access to information. They can reach a lot of information about airline companies and they can compare them. Our company, Hawk Airlines, tries to satisfy our customers' needs. We are expanding our routes and entering new markets. Also, we offer cabin/food service like free soft drinks, snacks, and small snack meal for certain flights for our customers. Additionally, we care about cleanliness and maintenance of our aircraft because we want our customers to have a better flight experience.
The threat of Substitutes
There is a medium threat of substitutes in the airline industry. Many people prefer traveling by planes nowadays. It is the fastest and convenient way to get destinations. There are many other types of transportations such as car, bus, train or boat. These options are much better for short distance travels. Customers can choose them to arrive at their destination. However, there a cost of switching. Other transportations might be costlier than planes. Also, they take much more time to get the destination. Sometimes people choose other options if they are not traveling far. Our company offers the fastest and the safest way for our customers to get their destination at an affordable price. We have short and long-distance flights and we increase our number of fleets day by day. Our customers can reach their destination fastly, safely, comfortably, and without paying too much money.
Threat of new entrants
Threat of new entrants is another major aspect of the five forces. This aspect has a low threat for the airline industry. There are low switching costs for airlines and entry barriers are high because airline industry needs high capital. Because of this, existing firms have big cost advantages. So existing firms can lower ticket prices or taking a loss to prevent new entrants' success.
Power of suppliers
In this case the major suppliers are the airplane manufacturers. There are few aircraft manufacturers and they are selling their aircrafts to only airline brands. Cost of breaking a lease is $50,000 per aircraft. Cost to sell an aircraft is 1% book value of the aircraft. Hawk Airlines trying to use leasing option for their aircraft inventory. Bargaining power of suppliers has a low threat because of the low switching costs.
Rivalry Among Existing Competitors
The rivalry in the airline industry is very intense for many reasons. The fixed costs are extremely high in this industry. The rivalry of existing players is high and will push out any firm that doesn't have enough capital. This is very though because when there is a price war between existing competitors, all of the firms in the industry be affected and this leads to decrease the profitability of the market.
Identify Key Success Factors for Airline Industry
In our company we focus primarily on the service provided to our customers, that's our number one success factor. Secondarily, the financial management of the company so we can see where we can minimize cost and increase revenues without jeopardizing the quality of service. Last, but not least, its important to study the market to see the routes we service, the aircrafts we provide, and the excellent service.
The first key success factor of, Hawk Airlines is proud of providing a great service to our customer, keeping the prize on the low end of a normal fare of 25 cents per mile. Also, we decided to invest in free soft drinks, snacks and small meals for certain flights. Since we started this case, Hawk Airlines decided to spent an extra $2500.00 in addition for cleaning and maintenance in all our aircrafts; always providing a better service for our clients.
As the following chart would indicate, the quality of Hack Airlines is always above all our competitors.
The second important key of success for Hawk Airlines is our strong management in Finance and Corporate decisions. As a company, we try to minimize our expenses and increase revenues in different forms. One of them would be the service promotions Hawk Airlines offers. During each quarter there are sales in some of the routes lasting for 1-3 months. Hawk Airlines lowers its prices during these promotions but also increase on sales.
The third success factor has been to have the right Aircraft Fleet and select the most connivance Route Systems providing an excellent reliability to all our customers. Hawk Airlines enters new markets on the third quarter to expand our services and be more profitable.
Overall Attractiveness of the Airline Industry
During recent years the airline industry has become more competitive, with new airlines or mergers, between airlines to become more competitive. In Hawk Airlines we're still very competitive with our prices and while offering a remarkable service. As of today flying is one the fastest and most safest way to travel around the world making Airline Industry very attractive.
Module 4: Business-Level Strategy (25%) Erinc Eyuboglu
Identify generic strategy and then describe it terms of your business
When we want to analyze our company and our rivals, we need to keep away from getting distracted by the small differences between different firm's business-level strategies. We should focus on the big picture. That is why we should focus on business-level strategies as generic strategies.
Generic strategy helps us to analyze general positioning of a firm in a industry. This allows us to focus on and analyze core elements of firm's business level strategy. The generic strategies described by Michael Porter and then improved by Harvard Business School researches.
According to generic strategy, firms compete on two dimensions;
· The source of competitive advantage
Based on competitive advantage of company which can be cost or uniqueness. Keeping costs down or by offering something unique can be the key role to beat rivals. For example, Walmart is keeping prices low by buying large quantities of goods from their suppliers.
· Scope of operations
Based on the focus of the companies which can be narrow or wide range of consumers. Firms can try to target wide range of consumers or a small segment.
To sum up, there are four generic strategies that companies can focus on selecting and implementing the best generic strategy for themselves to establish the best competitive advantage among their rivals.
1) Cost Leadership
Strategy of the firms that focused on wide range of customers and low-cost strategy. Works well on standardized products and services that wide range of customer's demand. The key of this strategy is having the lowest price in the industry. To obtain cost advantage companies should determine and control their costs and also configure their value chain as needed. Most common risks of this strategy are technology improvements, imitation and tunnel vision.
Strategy that providing unique and characteristic features on products and services in different customer segments. It is making your product and services different and unique than your competitors. It involves features, functionality, durability, support and brand image. To be successful with implementing differentiation strategy, organizations need to focus on;
· Good research, development and innovation.
· Ability to deliver high quality product and services.
· Effective sales, marketing and advertising.
3) Focus Strategy
Strategy that companies focus on concentrating their resources and capabilities to enter or expand in a narrow market or segment. To be successful companies should understand market, competitors and also customers of that market very well. In this strategy, companies serve customers uniquely well, so they need to gain strong brand loyalty among their customers to prevent new entrants to market. On its own, focus strategy will not be enough to sustain competitive advantages.
Does the strategy build on Resource and capabilities?
At the beginning of the simulation, we made our decision to build our strategy based on differentiation. When we look at our resources and capabilities in the beginning of the simulation, we can clearly saw that what we have as resources and capabilities do not match with our strategy. We had 3 Beechcraft's which are low quality aircrafts. Our fare structure was discount model and also cabin services are low. We don't have a high marketing budget which was only 22.000 dollars in total. We did not have a high training budget. To sum up, what we had as resources and capabilities in the beginning was closer to cost leadership. We had to make big improvements to match our resources and capabilities with differentiation strategy.
Inbound Logistics Hawk Airlines using;
Aircraft Manufacturers Embraer (Brasilia), British Aero (31), Embraer (ERJ135), Aerospatiale (ATR42).
Food Service Company Mid-level Cabin/Food Service
2 dollars for certain flights
Airports All markets
Transportation(local) Car Rental
Fuel All fuels purchased on contract
Maintenance and continuous repair are crucial in this industry. It is very risky. So, it has to be efficient and innovative. We tried to be careful about maintenances of the airplanes to reduce risky situations. We used level 2 until 3rdquarter and then passed to level 3 to eliminate risks. Also, we are always good at the reliability results.
For the airline industry, companies make sure that ticket prices are easy to find for customers and also make ticket order easier for customers. It can be internet, phone or agency order. We used promotions, advertisements, In-Flight Magazines, Salespersons and also in the late run we also start to make cargo marketing too. But when we compare with our rivals, we were not very good at management of outbound logistics.
Marketing and Sales
This primary activity is about promotion, advertising and sales channel. Nowadays the most important channel to reach to customers is internet. Customers can find too much deals and they can also be able to comparison brands in each way. For companies it is a direct reach for customers. It is important to reach potential and current customers. By this way, efficiency of sales will increase.
We tried to use potential of our empty seats with giving sale discounts. When we had lower than 60% load factor, we used this strategy to beat our rivals in these routes.
Includes how to increase the value of the company, customer service, repairs and efficiency. Having good technicians, hostesses, office assistants and mechanics can keep company valuable. Our service level was good at overall.
Includes accounting, legal, finance, PR, quality assurance and strategic management.
Human Resources Management
Recruiting, retention and compensation of employees and managers. Besides it is important because without any human/labor force, the company cannot be operated effectively. In some context it is true that airline industry requires lots of retention. Therefore, company has to choose employees accordingly.
If a company plans to be an industry leader, then it has to upgrade itself continuously. With research and development activities, company makes sure that they provide better service for customers. We maintained telephone bank and open a website for our own ticket sales.
Raw materials, service providers, insurance and locations.
Identify Tangible and Intangible Resources along value chain.
Our resources can be any asset that we can use when we are building our strategy. Tangible resources are physical and measurable assets that Hawk Airlines can benefit from. Aircraft, Equipment, Machinery, Inventory, Securities like stocks, bonds, and cash
On the other hand, our intangible assets are Hawk Airlines as a brand, brand equity of our company, our service contracts and valuable employees.
We always managed our cash well. In 12th quarter Hawk Airlines revenue is $8,093,325
We diversified our fleet to meet all customer needs. The size of the fleet is 6 aircrafts including;
We maintained telephone bank and open a website for our own ticket sales.
Hawk Airlines had increased their employee strength 58 to 170 employees in total. Companies management team consists of Erinc Eyuboglu, Anthony Ordonez and Merve Kabasakal.
Quality and reliability of our company shows that our brand value is one of the best in industry and always greater than industry average.
As Hawk Airlines, we have a very dynamic team. Members of the team always helped each other's position and be professional in their key areas.
In 12th quarter we reached 15 different routes to give the best service to our customers.
We keep our marketing budget lower than industry average.
Human Resource Management
In the long run we hold our compensation policy 2.00% above prevailing wages and plus stock bonus for all employees.
What are your firm's core competencies? Are they valuable, rare, costly to imitate, or non-sustainable?
High quality cabin service Quality of customer service is one of the key elements of competitive advantage in the airline industry. Customers always want to get their money's worth. It is highly valuable especially if you hold the ticket prices lower than your competitors. On the other hand, it is not rare among competitors which are in medium and high price range. Also, it is not costly to imitate. What distinguishes us from our competitors as Hawk Airlines is giving these values to our customers from the beginning till the end of the simulation. We always care about service quality for our customers. Our service was the best, in quality and also in relaiblity.
High standards in aircraft fleet One of the most important resources of Hawk Airlines is always having better standards in aircraft fleet. We focused on not having low quality aircrafts to give higher standards for our customers. Which assist us to gain more market share. Our aircraft fleets are one of our key success to gain sustainable competitive advantage.
Convenient route systems We always care about the timing of our flights. To be sustainable in departures and landings, we spend most of our time on calculations and route decisions. It was one of our strong capabilities to calculate and evaluate best selection of the routes and airplanes. It was also one of our sustainable competitive advantages.
Strong management in finance and corporate decisions Our management team is the strongest intangible asset that we have. We have valuable managers to gain sustainable advantage in the market.
Buying and selling aircrafts have also additional costs and disadvantages. We made a specific research also for the long-term effects of using leasing option for aircrafts. Finally, we come up with a decision to use leasing option. By using leasing option, we had a chance to start and expand our aircraft fleet with higher quality aircrafts. This was a result of having good capabilities of our staff.
Your business Model: How do you achieve competitive advantage.
As Hawk Airlines, firstly we focused on differentiation strategy in order to create a sustainable competitive advantage. For achieving this, firstly we had to get rid of our poor-quality aircrafts and replace them with higher quality aircrafts. But also, we tried to lock our ticket prices in the middle of the market prices. So, we tried to give a higher quality service for mid-range prices. The opportunity was being the cheapest airline company in the normal fare structure of the industry in terms of fare/per mile. To achieve this, we build our resources and capabilities to achieve our competitive advantage. For example, at the beginning of the simulation we sold our Beechcraft's which has low service quality and we leased some higher quality aircrafts to gain competitive advantage. Leasing option gave us more liquidity and also lower risks. So lower cost for aircrafts for the short run gave us the chances to give customers higher quality service and also making some investments for the future.
We mostly spend our time to get the best results in financing and making the best corporate decisions to gain competitive advantage. We tried to lock our cash in the minimum amount to get maximum benefit from our liquid assets by increasing maintenances and services, leasing more aircrafts to expand our routes and making long term investments.
Buying and selling aircrafts have also additional costs and disadvantages. We made a specific research also for the long-term effects of using leasing option for aircrafts. Finally, we come up with a decision to use leasing option.
Module 3: Cooperative Strategy (5%)
Supplier Relationships (Aircraft, Fuel etc.)
One of the most important decisions made by supplier relationship management is to purchase all fully on contracts for all quarters from the beginning until the last quarter of this project. This will help our company to avoid any surprises if the price of fuel fluctuates it would not affect our company. As a company, we like to have security in what we offer to our clients. Even though purchasing in full does not guarantee that we will save money, it would only guarantee that we would not spend extra money if gas prices go up. It also makes it easy for us to work on our budget for operational expenses. Another great benefit of having the fuel on contract, it makes it easy for our company to negotiate the prices of fuel. Let's say the more planes and flights we do, the more fuel the company will use; thanks to that we can negotiate prices on a lower end.
Q0 Lease Embraer Brasilia, Purchase British Aero 31:
Hawk Airlines did a few changes in our first quarter, on aircrafts and we decided to sell the cheap aircrafts since they did not go with our mission statement. We strive to provide the best possible service to our customers. As a company, we decided to lease the Embraer Brasilia and purchase the British Aero 31. Both planes are not luxurious but it was a good start for our company since our prices for tickets were on the lower side of a normal price. Also, to complement our service on this aircraft we always provided free drinks, snacks and some small meal for certain flights. In the following quarter and the fourth quarter the company decided to lease Embraer ERJ135; to provide better quality service and expand our markets.
Cooperation with large carriers (Dual-designation)
During the 4th quarter the company accepted the offer to dual-designate with the major carrier. A cooperation with a large carrier would help us grow and learn. We can take advantage of the technology and the procedures they use. We can now implement all of this in our small company. Even though the expenses are really high at $30000.00 per plane to paint, the results are great each quarter, bringing an increase in revenue and our stock prices going up.
Module 5: Corporate Strategy (15%)
Identify product diversification strategy
Routes, Market types
In the beginning we decided to stay local with our small planes, learn from the demand and look for opportunities to grow. Every quarter we tried to spend in a new market, it wasn't until quarter 4th that we decided to service routes to resorts. We saw that it was a lot of seats to sell so we decided to grow a little more and enter different resort routes and longer flights. As of right now, we service 12 different routes with 2 flights per route, giving passengers the opportunity to travel. We believe in diversification, so we service all types of markets with the same quality and quantity. If any market was not selling above the 60% then we did not discontinue the route, we gave promotions of one , two or three months. That way we would help clients and we would sell more tickets.
Car Rental, Cargo
The rental car, was a decision made to help and improve our services to our clients. We saw that the revenue for this was not big enough for our company. However, we decided to do it so our clients can rent a car closer to the airport and they would use our airline to fly to those destinations , with no worries about renting a car.
After three quarters (the 9th 10th and 11th) we came to the conclusion that cargo business was a bad investment for us. We kept loosing money in the cargo business. As a company, we are trying to change this and hopefully in the last 2 quarters we can break even in the cargo business or make some income.
International strategy, if any
For foreign markets we have 6F, 8F and 14F. When we started to serve foreign markets we made the decision of changing the maintenance of our planes from Level 2 to Level 3, provide more frequent cleaning, and full preventive maintenance. The cost for doing this was high but we felt that it was more important to provide a better service to stay in agreement with our mission statement . However, to help with costs, we also raised the price on our fares to 38 cents per mile instead of 35 cents like we had it at the beginning of the project. Another strategy that we took was to permanently have our international market on sale. It could be one month or two months of sales. In conclusion, we raised the service to a higher price but with monthly promotions.
Module 6: Strategy Implementation (10%)
Key Tactical and Strategic Decisions
Our Strategy decision was to offer tickets at a cheap price for a luxurious service. For the first 10 quarters our fares were 35 cents per mile. After the 10th quarter we raised the rate to 38 cents per mile, still being at the lower end of a normal fare. However our service was always the best, in quality and reliability. Also, to compensate with the raise in fares we gave 3 month of sales in some of our routes.
The maintenance of our planes we started with level 2 and then increase the maintenance to level 3 to provide the service our customer needs and also to keep our planes in the best possible shape during different seasons.
Team Dynamics (Human resource, knowledge, leadership, culture issues)
For team Dynamics we focused on our personal experiences flying in different airlines. Personally in the last 3 years I flew more than 20 times. Most of the time because of connections I had to take 2 planes each way. After flying in different airlines I learned that not always the cheapest flight is the best choice for multiple reason.
1st Location, I would rather spend more money in a flight and travel from a local airport than traveling to the city (traffic, tolls, parking) for a cheaper flight.
2nd Airline, I also learned that if you are committed to just one airline you can get a lot of benefits. For example, 80% of my flights are always with Jet Blue; Even though its not a large airline, it has a lot of partners. Since I traveled a lot with Jet Blue I decided to get their Credit Card and create an account with them. For every dollar that I spend in flights with Jet Blue or any of their partners, I get 6 points . I would say in the last three years I took 3 free trips thanks to these free points. Another great advantage of being a member of an airline is its benefits that you get for example: free check in luggage and free alcoholic drinks onboard .
3rd Multiple Flies, Another great benefit that I learned in my research is if you travel long distances or a lot of flights in one calendar year. Airlines give you other benefits like being the first one to board a plane and the first one to get out. Also, they give you upgrades for free if there are empty seats on first class.
Key structure and incentive issues
After the 5th quarter we implemented an increase between 2 % to 5% salary to all of our employees, and after the 7th quarter we started to pay dividends. We believe that doing this helped clients and shareholders to have more faith in our company. After the 7th quarter we also began to bring in more revenue, helping us increase incentives to our employees.
Performance Evaluation: Competitive Advantage (15%)
Graph you company's ratios along with the industry ratios (in industry news, if available):
This graph is the comparison of our ratios with the industry. We can understand our financial performance by looking at ratios and we can evaluate our position in the industry. Generally we had successful financial performance. Our company was improving quarter by quarter. However, we had the lowest ratio which was very below the industry ratio in the quarter 2. Our company's financial performance went down when we compare to other company ratios and overall industry ratios.
Possible Dimensions of Performance Evaluation:
Liquidity Analysis (Current & Quick)
This graph shows our liquidity analysis which includes current ratios and quick ratios. Liquidity ratios show company's ability to pay short-term obligations; in other words company's ability to sell assets quickly to increase cash. The current ratio measures company's ability to pay-off its current liabilities. The higher ratio, the better company's liquidity position. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. We have the highest current ratio in quarter 11 when we compare with other quarters. That means that we have the best liquidity in this quarter. Our company has the lowest current ratio and quick ratio in quarter 2 which means that we were not doing well in this quarter and we had bad liquidity position. However, after quarter 2, we started to increase our ratios in following quarters and made company's liquidity position better.
Leverage Analysis (D:E, L-T Debt:Equity)
Performance Evaluation (continued)
Net Profit graph shows us how much of our money ended up as profit at the end of each quarter. This is our net profits quarter by quarter. It does not show stable increases. We started with $22,234 in quarter 0. Our highest net profit is $484,620 in quarter 10 and our lowest net profit is $-92,389 in quarter 2. Our company was increasing its net profit constantly in between quarter 7 and quarter 10. However, our net profit decreased in quarter 11 from $484,620 to $240,796. The reason behind the decrease in between q1 and 2 is leasing an aircraft which is Embraer ERJ135. We were changing the aircrafts that we had in the beginning with bigger and more qualified ones to serve better flight experience to our customers. This caused a decrease in between q1 and q2. However, our company started to make profit again after quarter 2.
This graph shows our net profit compared with our two main competitors, Infinity & Beyond and Coastal American. We all started with the same amount of net profit in the beginning. In quarter 2, Hawk Airlines and Infinity & Beyond showed their lowest net income while our competitor, Coastal American was increasing its net profit. Our net profit line shows sharp changes among quarters. We showed constant increase in our profits between quarter 7 and quarter 10. We reached the highest net profit amount which was $484,620 in quarter 10. When we look at the quarter 11, we are the third highest net income company.
What did you learn from the Simulation?
What were the good and not-so-good decisions for your company?
What would you think the company could do differently?
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