Setting up The New Hypothetical Airline Named United Airways - Assignment Example

Assignment Airline business is a capital intensive business that require significant investments for acquisition of aircrafts, training of employees (such as pilots, engineers, customer sales representatives, air hostesses and technical specialists), setting up booking centres and commercial sales outlets at public places, call centres and acquisition of buildings for establishing company headquarters. Indeed, this business venture usually remains unsuccessful in absence of staggering financial resources that are required to smoothly conduct airline operations. Airline businesses are facing stiff competition as the number of entrants has increased with the passage of time. Quite unequivocally, the emergence of low cost carriers and air travel service providers has further intensified this competition. In fact, these low cost carriers have become successful and received consumer acceptance because of decrease in purchasing power and real incomes of travellers. Consumers today demand more value for their money. In simple words, they demand top quality airline services at lowest possible prices that is why they have appreciated the concept of low cost carriers. In addition to competition, global airline industry has been severe challenges due to changes in macro environment and external factors that are beyond control of strategic planners and top management. In short, these factors have significant impact over policy formulation and effective implementation. This paper attempts to discuss the economic, technical and operational feasibility of setting up a new hypothetical airline namely United Airways that will be provide airline travel services between South Africa, Australia and New Zealand. The paper will discuss in detail the major difficulties which are likely to be encountered in establishing the operation and explaining how these may be addressed. The strategic planners are supposed to induct ‘Boeing 787 Dreamliner’ to conduct airline operations as these are fifth generation aircrafts manufactured from state-of-the-art plants equipped with the highly sophisticated technology. In fact, they offer comfortable seating, higher range, fuel efficiency and reasonable capacity for potential passengers and customers. Initial Operations: Operate through Johannesburg, Perth, Adelaide, Sydney, Brisbane, Auckland, Christchurch and Wellington. Difficulties as well as Solutions in setting up a new airline namely United Airways in Australia (Perth): 1- Analysis of Global Business Environment: This situation further aggravated in 2007 – 2008 when soaring trend in international oil prices resulted in a massive increase in cost of doing business. Indeed, the jet fuel costs take a considerable portion of total costs of airline’s flight operation. In addition, the rising trend in international prices of food commodities also affected the household budgets that in turn reduced purchasing power of potential travellers and visitors that have relatively price elastic demand for air travel services. Indeed, economics says that air travel should be considered as a luxury for these occasional travellers, families and groups as it takes considerable portion of their incomes. As far as demand of air travel by businesses is concerned, it is relatively price inelastic since these business executives and company officials have to travel abroad to finalise business deals, to negotiate with their partners and customers, to fulfil legal requirements and to market their products or conduct research for evaluating business potential in emerging or new markets. Hence, the demand for air travel in 2007 - 2008 was not adversely impacted by international oil price hikes. Indeed, the economic recession and global financial crises that started from USA after sub-prime property mortgage failure and subsequent collapse of financial institutions and businesses were among the major reasons that created trouble for all leading airlines including Qantas, Virgin Blue, British Airways, South African Airways, Emirates, Ryanair, Air New Zealand and many others. A majority of airline businesses observed steep fall in passenger revenues and booking ratios year-on-year basis. Indeed, many small and medium sized airlines preferred to either sell their operations to sustainable airlines (large) with extensive financial resources and technical expertise or to merge with other similar airlines to restore their competitiveness in the most challenging business environment. Air demand was also reduced substantially in Australia, New Zealand and South Africa because of negative economic growth and deteriorating business outlook that resulted in unemployment and uncertainty. Solution As far as business conditions in 2010 are concerned, it is worthwhile to mention the fact that demand prospect has improved after partial recovery in economic conditions in the advance or developed economies such as Australia, New Zealand, USA, United Kingdom, Japan, Germany, Italy and other nations where there is huge scope for air travel businesses due to economic sustainability and relatively stable purchasing power. Indeed, this situation is going to improve in upcoming future after complete recovery in all major economies from 2011 onwards. Hence, it can be concluded that if United Airways comes up with a comprehensive launch of its operations in Australia and the targeted destinations of two other potential economies, there is a greater probability that it will remain successful. Maintaining quality, superior customer service, reasonable fares, convenient, reliable and secure trip will lead to goal accomplishment and financial gains in the long run. Competition: United Airways is expected to face stiff competition with already operational Australian airlines including Qantas, Virgin Blue and Regional Express, with New Zealand’s Airline including Air New Zealand and with South Africa’s airline such as South African Airways, South African Express and Cameroon Airlines South Africa. It is worthwhile to mention that these airlines have already received wide consumer acceptance as they specialize in offering quality air travel services at affordable rates. In addition to these airlines, United Airlines would have to compete with many foreign airlines that are involved in flight operations in these countries. Solution Indeed, marketers and strategic planners employed at United Airways have to come up with better customer friendly airline packages (seat reservation plus accommodation) to entice customers towards this new airline. Similarly, for domestic (regional for example flight services between two Australian cities) operations, the company will have no other option but to offer better quality to lure customers towards the airline. The company managers have to be mentally prepared for any expected ‘price wars’ with rival operators when United Airways will announce the commencement of its operations and packages for potential travellers. Expected Increase in Global Oil Prices: The second major problem that United Airways could face is the increase in international oil prices after complete global economic recovery. Indeed, the airline has to taken into account this fact that improvement in global economy at one extreme will increase demand of air travelling services because of new employment and business opportunities for global customers. Similarly, on the other hand, it will also negatively impact this new airline that may find it difficult to assimilate the jet fuel price hikes. Hence, this will in fact be the most severe problem that has to be encountered when the airline will initiate its field operations. Ignorance of this foremost ground reality will lead to an immediate failure of this business venture. Solution As far as the solution is concerned, airline must sign contract with leading producer Boeing Company of United States to manufacture a highly fuel efficient, environment friendly, well designed (exterior and interior), secure, reliable, convenient and comfortable aircraft that could help making United Airways a truly cost effective airline. The airline in turn would be able to deliver safe and hassle-free air travel services that not only create value among customers but also result in long term business growth and financial profits. In addition, the society could be served and government would receive tax revenue from economic activities within the boundaries of home or host country. Seating capacity and other related Designing issues: It must be pinpointed that airlines decision-making is tested when they choose aircrafts for their business operations. The problems that an airline many encounter mainly arise from the interior designing of the plane. The designing faults may include incorrect seating arrangement for economy and business class passengers (very few seats for business class and greater number of seats for regular passengers for which load factor rarely meets the threshold of 80 – 90%). The second defect could be congestion that results from inadequate designing of seats. Third is about inappropriate space for luggage and lesser cargo volume that leads to customer dissatisfaction. Fourth is about inadequate washroom size as some planes have smaller wash rooms that cause distress among passengers. Solution In order to resolve above mentioned designing issues, United Airways has chosen the latest ‘Boeing 787 Dreamliner’ aircraft that has multiple capabilities. The aeroplane has seating capacity of 210 to 250 passengers with excellent interior designing that not only eradicates the chances of congestion (from short seats that are very closely located) but also contains sufficient number of seats for business class. It must be highlighted that revenue generated per business class seat is higher than revenue per seat from a normal passenger who prefers reduced fares. The total cargo volume offered by Boeing in this aircraft is 4,400 cubic feet that is significantly higher than previously manufactured Boeing 737 and 747 aircrafts. Hence it is justified to conclude that this aircraft is though costlier, yet it will remain cost effective in the long run. Indeed, airlines do not forecast financial profits and in fact a break-even position in first two years because of higher overheads and operational costs. Range capability Range of aircrafts has always created operational impediments because the decision about number of flights is absolutely dependent upon its range. Aircrafts offered 6 – 7 years back have lesser range compared to aircrafts offered at present. Solution Boeing 787 Dreamliner covers an extensive range of 7,650 to 8,200 nautical miles (14,200 to 15,200 kilometres). Induction of this plane or aircraft will enable United Airways to offer non-stop flights to various medium and long distance destinations. In simple words, this will not only provides competitive advantage in terms of costs, productive efficiency, per flight revenues and performance to the airline over various other operators that have been using old models of Boeing (737 and 747 that have maximum range of 7000 nautical miles) and Airbus Company, but also help in delivering top quality premium services for both business class and normal passengers that have their specific tastes, preferences and desires. (Web: Boeing.com) Passenger preferences Only that airline should expect success, survival and growth that can meet preferences of its passengers from diverse backgrounds and travelling experiences. Indeed, customers today demand top quality services at cheaper rates that can only be ensured if an airline has super efficient aircrafts. Examples of preferences include high quality on-flight food quality including breakfast, lunch and dinner meals, access to electronic media, cellular services etc. Other demands include no-frills services such as online ticket reservation, accurate travel guide, discounted accommodation packages and other etc. Solution In order to resolve this issue, the company will pay special attention to employee training, to develop call centres and an updated internet website, to contract with well reputed packaged and frozen food producers, to build partnerships with various 3-, 4- and 5-star hotels and restaurants etc. This will surely enable United in meeting passenger preferences. Manufacturer support Another problem that could be faced by United Airways is maintenance problems of its fleet and the costs associated with the availability of spare parts. Indeed, hiring of technical experts with relevant skills and experience is also a headache. Solution United has planned to resolve this issue by forming a maintenance agreement with its manufacturer Boeing company. United will try to gain the manufacturer’s support regarding training of its engineers and technical staff so that in-time maintenance of aircrafts could be ensured. Also, the airline will request Boeing for supplying spare parts on regular basis. Financing As mentioned previously, airline businesses require extensive financial resources and funds to smoothly conduct its routine business operations and purchase capital assets such as Aircrafts, office equipments and furniture, buildings and others. Solution United will not only receive investments from interested investors but also raise funds from leading commercial banks and financial institutions to cover around $200 million costs per Boeing 787 Dreamliner, to cover $1 million per office space and other associated fixed assets’ costs. 8 – 10 year Leasing of aircrafts is another possible option that could be used to acquire aircrafts from Boeing. The airline would also form agreements with airports to provide space for setting up booking offices / sales outlets and to provide airport services at lesser rates. Reduction in per passenger commission will also be discussed at destinations including Perth, Johannesburg, Cape Town, Auckland, Chiristchurch, Wellington, Sydney, Brisbane, Adelaide and Melbourne. Fuel efficiency One of the major issues that is normally faced by global airlines is availability of fuel efficient planes in this era of tough competition. Indeed, competitiveness of those airlines that do not have fuel efficient planes erodes, since there per flight costs go up. In addition, maintenance costs increase simultaneously. Solution United’s Boeing 787 is highly fuel efficient because it has been manufactured with the help of latest technology that reduces jet fuel consumption by 20%. In turn, the airline could expect greater cost efficiency, fewer maintenance and environmental costs besides offering services at affordable prices. No doubt, this will give United Airways a competitive edge over rivals in the long run. Weather Conditions: The adverse weather can result in cancellation of flights and airline operations that will not only increase costs but also affects reputation among clients if they are not informed in advance. Solution: United Airways will therefore form agreements with authorities at different airports in exchange of commission. The authorities will provide advance information about unfavourable weather conditions, which will then be used to adjust airline operations and guide passengers about any possible delays. In this way, brand reputation will be protected. Operating costs (economics) Capacity – 250 passengers Medium haul ( Read More