Operational Excellence of the Company - Term Paper Example

Operational Excellence of the Company INTRODUCTION INDUSTRY OVERVIEW AND BACKGROUND Passenger airline industry is one of the fast growing industries in the United States. It has a key contribution in the economic growth because it promotes the globalization and tourism between the different countries of the world. According to some rough estimates the airline industry has grown by up to 10% in last decade. The main reason for the growth is that majority of people prefers airline service for business and luxury purpose. The world is moving towards the 5th generation. The trend of globalization is increasing with the speed of bullet. Business travels are a great contribution in the growth of airline industry. The passenger airline industry is considered as largest market around the world. In 1990s there was over 40% increase in total passenger travels in comparison with 1980s. In this decade, some of the airlines have gone to bankruptcy due to high level of competition. Competitive trends forced the airline companies to reduce their fares and travel cost. In recent days, there are 10-15 major airline companies operating in the United States. Some the companies have captured the market share in material manner due to their stunning services and cost behaviours. DESCRIPTION OF SELECTED COMPANIES Delta Airlines Delta Airlines is the world 2nd largest and one of the major airline companies in the United States. The company started their business operations first time in 1924. The Delta Airlines has also acquired the northeast airline to capture the market share in airline industry. Delta group has approximately 80,000 employees. On the side of performance, in 2010 the revenue was increased approximately up to13.5% in comparison with year 2009. The company is also in recovery stage after the recession period. Net income has increased from $1.23 m loss to $593 million in income (wikinvest). Delta Airlines has captured over 20% of market share of the airline industry of the United States. Gross Profit margin of Delta Airlines is increased approximately 55.45% on average basis from 2007 to 2011. In 2007, the company had a gross profit margin of 42.98%. The company achieved the maximum profit margin of 62.08% in year 2010. US Airways US Airways is a group of several commercial airlines in United States. US Airways provides its services to over 95 destinations in the world. The company has captured a huge share in the market due to its competitive behaviour and performance. The last five year financial report of the company shows the approximately 12% increase in revenues. According to the financial reports of the US Airways, the company made the revenues of 11.7 B in the year 2007. On the other hand, the company made the revenues of 13.06 B in the year 2011. The consolidated statement of comprehensive income shows the net profit figure of 427 m in year 2007. The company made a loss in next two years due to some unusual expenses. At the end of year 2011, US Airways made a net income of 71 M. Although there is a significant decrease in the profits in last five years, positive flows in 2011 indicate that the company is on the way of its previous track. OPERATIONAL OBJECTIVES Delta Airways Delta Airways aims to capture the market share by its operational excellence. In addition, Delta focuses to build an emotional connection with the disability community. US Airways US airways focuses to provide the quality services to its valued customers. In addition, US Airways aims to capture the market share by providing high quality satisfaction and safety to its customers. INDUSTRY CHALLENGES Time delays: The tarmac delay rules of department of transportation establish tough time limits for delays. How they handle the tarmac time delays is the challenge for airline companies. The rules set out the limits on the amount of time airlines can keep passenger on board in the case of delayed flight. There is also the responsibility of airline company to provide the necessary services e.g. water, food to their customers in the case of long delays. If the airline company is not able to comply with the rules properly, then it can hurt the customer satisfaction and company’s reputation. Government Regulations: Government has imposed new regulations and laws on the airline industry. The legal compliance requirements create the additional costs for airline companies. For example, time to time maintenance required extra expenditure. How they manage these costs in efficient manner is the challenge for the companies. Some other regulations such as taxes and airport costs have also increased the level of operational costs for the airline companies. It is also a vital challenge for the airline companies to address and manage each cost in effective manner. Competitive and dynamic environment: There is a material competitive behaviour in airline industry. Lower cost structures force the airlines to reduce their cost to win the race in competitive environment. Lower cost companies have affected the industry revenue in material manner. Some of the lower cost carriers capture the customer attention and grab the customer levels from major established airlines. This is the challenge for the companies operating in airline industries to set a competitive plan to stand at top of the crowd. In addition, there is also the need of managing resources in an efficient way. In recent tough economic trends, there is a huge increase of the oil prices. Some companies could not meet these though economic trends and have gone in liquidation. For the airline companies to face the economic and competitive challenges to fulfil their operational objectives is a difficult task. OPERATION METRICS There is a number of operations metrics in the airline industry. Some of them are mentioned below separately. Utilization: Aircraft is one of the major assets of an airline entity that can produce the economic benefit. Aircraft utilization is a basic metric of this industry. The aircrafts that are on fly make money for the airline company. The Aircrafts that are on the airports or in the maintenance condition cannot make the money on the behalf of airline entity. In this way, utilization is a true value of company’s performance. So there is a need to utilize the aircrafts in efficient manner to achieve greater results. Revenue passenger miles: “Revenue passenger miles” is one the major metrics of airline industry. “Revenue passenger miles” is also known as RPM in airline industry. This shows the level of company earned revenues. RPM is a ratio between the numbers of filled seats to number of miles flown. Fuel Cost: Fuel cost has a great influence in the airline industry. In recent years, the fuel prices have increased in material manner. Increase in fuel price has a great effect on the profitability levels of airlines. Some companies have also gone in liquidation because of high level of fuel prices. Fuel is treated as a major part of inventory of any airline company. According to some recent surveys, fuel prices increased up to $2 per gallon on average basis for the last 3 years. In this way, fuel prices are treated as a big matric for the airline industry. Availability in Specific period: This factor is also referred to as a load factor. It measures the percentage of available seats during specific period. It is treated as the major metric in airline industry. Flight Delays and Cancellations: Flights delay and cancellation is also one of the main metrics of the airline industry. According to some recent surveys, poor weather conditions were the main reason of flight delays and cancellation in recent years. HOW HAS EACH FIRM ADDRESSED THESE INDUSTRY CHALLENGES? Time Delays Delta Airways US Airways Delta Airways has introduced a comprehensive plan to manage the time delays. Delta has the aim to minimize the lengthy time delays while the passenger is on the board. On the other side, all the plans are designed in the light of maximum safety of the customers. It is also the possibility of hard time in some cases. For example, due to safety and security reasons or busy airport schedule the company has also taken many of key steps to minimize this issue. For example, the company has introduced communication and station plan to communicate effectively with responsible people to avoid any unfavourable situation. US Airways has introduced a contingency plan for the lengthy tarmac delays. The US Airways also focuses to meet the rules and regulations that are made by department of transportation on time delays. The company provides all the necessary series to customers in the case of lengthy time delays. The company has also introduced a coordination plan to minimize the level of contingency time delay. US Airways has also ensured the available resources to implement all these plans. Government Regulations Delta Airways US Airways New government regulations such as new taxes, landing fees, airport charges and etc. have increased operation cost up to a significant amount. Delta Airways aims to produce quality results and maximum satisfaction for their customers. They are dealing with all these matters in efficient manner. They aim to cut off their unnecessary cost to fulfil the requirements of new extensive government regulations. In addition, they also mentioned these regulations as a risk factor in their annual reports. US Airways has yet not stated any clear representation of the new extensive regulations. In addition, the company has not considered this as a risk factor. This indicates that the company has enough resources available to meet these costs. Competitive and dynamic environment Delta Airways US Airways Delta company is trying to meet the competitive demand to remain in competitive environment. Company has the main risk from the low cost companies. The company is trying to cut off their expenses to reduce their operating and unnecessary cost. In addition, the company focuses its attention to make emotional connection with disable community to capture the attention of potential customers. US Airways has the main aim to provide quality of services to its valued customers. They aim to win the competitive race by providing maximum satisfaction and safety to their customers. For this purpose, US Airways has recruited quality staff and service plans to achieve these objectives in efficient manner. Performance From the perspective of operations management some financial data of both companies have been mentioned below. This data will help to identify the performance level of both companies. Valuation US Airways Delta Air Lines P/E Current 15.98 9.28 P/E Ratio (with extraordinary items) 15.99 9.26 P/E Ratio (without extraordinary items) 11.52 8.01 Price to Sales Ratio 0.06 0.19 Price to Cash Flow Ratio 1.76 2.41 Enterprise Value to Sales 0.29 0.51 Total Debt to Enterprise Value 1.32 0.83 Efficiency US Airways Delta Air Lines Revenue/Employee 0.41 0.45 Income Per Employee 0.00 0.01 Receivables Turnover 40.92 23.30 Total Asset Turnover 1.62 0.77 Liquidity US Airways Delta Air Lines Current Ratio 0.96 0.61 Quick Ratio 0.89 0.58 Cash Ratio 0.62 0.31 Profitability US Airways Delta Air Lines Gross Margin 17.74 15.44 Operating Margin 3.46 5.28 Net Margin 0.54 0.54 Return on Assets 0.88 1.86 Return on Total Capital 1.54 5.98 Return on Invested Capital 1.70 6.96 Capital Structure US Airways Delta Air Lines Total Debt to Total Capital 96.82 111.26 Total Debt to Total Assets 54.78 31.70 Long-Term Debt to Total Capital 87.57 95.98 Findings: On the basis of the above financial data, it is evident that both companies are operating effectively in the airline industry. Sales statics shows approximately 84% increase in the revenue of Delta Company forthe last five years. On the other hand, there is only 10% increase in the sales revenue of US Airways from 2007 to 2011. This clearly indicates that the Delta Company has captured a large market share for the last five years. The net profit figure of US Airlines also shows a decreasing trend. There is approximately 84% decrease in the net profit figure from 2007 to 2011. The main reason of this decrease is the heavy loss in 2008 and 2009. On the side of Delta Airways, there is approximately 46% decrease in the net profits for the last five years. This decrease is due to unusual losses in 2007-08. These losses have a negative effects on the entire airline industry. In the light of the above analysis, the “Delta Airways” is operating its functions in efficient manner. DEMONSTRATETION TO XYZ V.C. GROUP Operations management strategy is simply a tool which can help the organizations to carry out their business in efficient manner. Operations strategies are the key of measurement of performance of any business entity. The main concern of business entities is how they will survive and can continue their functions in effective manner. For this purpose, an efficient operations management strategy sets the long term directions for the business, and these directions ensure the future success of any organization. Delta Airlines and US Airways can both adopt more operation management techniques to achieve more quality results. For example, both companies can conduct customer surveys and make changes in their operation where necessary. Customer feedback can also help in efficient operations management. The primary aim of both companies is to provide services to the customers. So, there is a need for both companies to train their employees to provide the quality services to their valuable customers. The company can also use other operations management techniques for efficient performance. In short, efficient operations management techniques can help the both entities to stand at a top of the crowd in competitive environment. References: Delta Inc. (2011). Annual reports 2011. Retrieved from images.delta.com.edgesuite.net/delta/pdfs/annual_reports/DeltaAirLines_10K_2011.pdf MarketWatch. (n.d.). Delta air lines inc. Retrieved from http://www.marketwatch.com/investing/stock/DAL/financials MarketWatch. (n.d.). Us airways group inc.. Retrieved from http://www.marketwatch.com/investing/stock/lcc/financials Wikiinvest. (n.d.). Delta air lines inc. (dal). Retrieved from http://www.wikinvest.com/stock/Delta_Air_Lines_Inc._(DAL) US Airways. (2010). Annual reports. Retrieved from http://www.sec.gov/Archives/edgar/data/701345/000095012311017132/p18649e10vk.htm Klassen, R. D., & Menor, L. J. (2006). Cases in operations management: Building customer value through world-class operations. Thousand Oaks, CA: Sage Publications. Read More