Environmental Scan for the Fly Light Concept - Assignment Example

Environmental Scan for the Fly Light Concept Fly Light Low-Cost Carrier Division – LH Group Executive Summary Introduction A ‘low-cost carrier’ also described as a no-frills or discount airline is one that endeavors to offer lower air fares to the business and other travelers. In order to arrive at affordable cost of flying there will be trade-offs with many of the traditional passenger amenities and services. Originated in the United States the concept spread to Europe in the early 1990s. The original idea on which the name was coined was that the airline company will operate with a lower operating cost structure than that of the competing firms. The term in the course of time is being used to describe any airline that offers lower ticket fare with limited service and the term has no more relevance to the operating costs of the airline company. (Ranjit Nair, 2007) Low-cost flying statistics indicate the number of European low-cost airline routes at 4410; number of airports with budget routes at 335; number of active low-cost airlines operating in Europe at 44. (flycheap.com)This statistics provide the base for the proposed venture. Based on this concept this presentation introduces the salient features of Fly Light a low-cost carrier proposed to be ventured into by LH Group. This section presents the environmental scan of Fly Light airline and the Strategic Plans of the company. Environmental Scan of the Fly Light Airline Fly Light Airline undertakes a complete environmental scan of the business so as to avoid surprises, specify threats and opportunities, acquire competitive advantage, and enhance its long-term and short-term planning (Sutton, 1988). To the extent that Fly Light Airline exhibits the ability to adapt to its outside environment will depend on how the airline managers interpret the external changes that are taking place. In a sense, environmental scanning constitutes a primordial aspect of business planning. The primary areas of analysis for the environmental scan are the applications of the competitive strategy of Michael Porter’s Value Chain, and Michael Porter’s Strengths, Weaknesses, Opportunities and Threats (SWOT Analysis) to Fly Light Airline. For most companies, information seeking constitutes the efforts to do environmental scan of the industry. Organizations scan in a variety of modes, depending on the organizations size, dependence and perception of the environment, experience with scanning and planning, and the kind of industry that the company is in. The information generated from the environmental scan will be used to do strategic planning. (Choi, 1998) The information from scanning will be used to drive the strategic planning process. Industry studies point out that effective environmental scanning and planning is linked to improved organizational performance and profits. (Choi, 2001:103) Figure 2 outlines these principal findings, placed in the conceptual framework shown earlier. Figure 2 Summary of Principal Findings from Research on Environmental Scanning (Choo, 2001: 103) PORTER’S VALUE CHAIN ANALYSIS The first part is inbound logistics. (Porter, 2008) Airlines must operate within a low-margin, high-fixed-cost environment, making profitability sensitive to decreases in volume. Environmental factors (terrorist attacks) and competitive action from other airlines have an impact on its customer volume. The airline industry is inherently labor-intensive. Labor costs as a share of revenues ranges from a low of about 25 percent for the low-fare airlines to 50 percent for the large, full-service airlines. (Dikolli and Sedatole, 2004). For many airlines, its labor unions are particularly strong, presenting an additional challenge in the management of costs. Labor union negotiations increased beginning 2003, as airlines tried to pass an increasing share of the cost cutting to its employees. For example, US Airways won approval from its workers regarding to a 27 percent reduction of labor costs. American Airlines got an approval from its three labor unions for a US $8 billion reduction of its labor costs. Northwest also got salary concessions worth US $1 billion dollars from its labor unions to decrease its payroll costs and dela with rising operational costs. (Cary and McCartney 2003). The second step is operations. The airline needs to check its efficiency and effectiveness in daily operations. The third fact is the outbound logistics which refers to the way it delivers the products and services for the clients. The airline needs to be efficient and deliver on time services to attract many new customers. The fourth factor is marketing and sales which the Fly Light Airline needs to focus on. At this point, Fly Light Airline is a newcomer and it is relatively unknown compared to other regional airlines. COMPETITION AND PORTER’S FIVE FORCES Threat of New Entrants Michael Porter’s competitive industry analysis is applied to the international airlines industry. (2003). There are many possible new entrants to the airline business. The potential competitors include suppliers of planes, large suppliers of plane spare parts who may want to do forward linkages by opening an airline. Freight forwarding and distribution companies can also do backward linkages by opening airlines to address the needs of their corporate clients. The triple benefits of higher fares, lower costs and strong travel demand can attract new players into the industry. For example, the United Airlines (UAL) reported a profit of $190 million in 2006 which was its second consecutive profitable quarter. Delta Air Lines, which had filed for bankruptcy protection in September 2005, and Continental Airlines also divulged strong third-quarter earnings which were considerably higher compared to its performance in the 2005. To address increasing market demand, Delta recalled 1,000 laid-off flight attendants in 2007 to service its new planes. In addition, the airline recalled about 130 pilots and some maintenance workers to mann its new fleet. Delta and Northwest are expected to emerge from bankruptcy in 2007. (The Washington Times, November 14, 2006) Power of Buyers The airline passengers or the customers are unable to establish a new airline company since it will require a huge capital outlay and a strong industry knowledge of the airline industry. The airline business is highly capital- intensive and labor-oriented. Strict government regulations in many countries covering the franchise agreement, landing agreements, cargo handling and security system arrangements cost considerable financial investments and loans to keep operations sustainable and competitive. Power of Suppliers The large suppliers of Fly Light will be unable to establish a new airline company unless they possess huge financial capital investments, enjoy important linkages with government agencies and possess reliable industry knowledge on the airline industry. The airline business is highly capital-intensive, process-oriented and labor-oriented. Strict government regulations covering the franchise agreement, landing agreement and security system arrangements also cost considerable financial investments. RIVALRY The competition in the airline industry is very close and intense. Fly Light can build on quality service, value pricing and excellent customer relations as a means to ward off the strong airline competitors. The specific market focus on the budget travellers is also a strong and stable strategy for the company. Fly Light presents these excellent features. First, there will be a single passenger class with no differentiation. The division will focus on standardizing the fleet with Boeing 737 aircrafts. This will reduce the training and servicing costs to a large extent. It will also be easier to switch pilots in case of exigencies. A simple single fare scheme will be adopted. Fares will be increased as the plane gets filled up which will induce the travelers to book in advance. This system is known as ‘yield management. It always will be a ‘free seating’ arrangement in-flight with no pre-allotment of seat numbers or preferences of seating. This will encourage the passengers to board quickly and early. The routes and destinations will be selected in such a way that the carriers will fly to cheaper secondary airports which are less congested. This will have the operational advantage of avoiding air traffic delays and a cost advantage of lower landing fees. In order to make a maximum utilization of the fleet only short flights will be undertaken as far as possible with lesser turnaround time. Routes will be simple and will not follow a complex one with the emphasis on point-to-point transit. No transfer at hubs will be attempted. This again will improve and contribute to the maximum utilization of the aircrafts. Maximum efforts will be taken to sell the tickets directly to the customers using the internet facility to avoid payment of fees and commissions to travel agents and corporate booking systems. The organization culture would insist on the employees taking multiple roles. For example the flight attendants will be expected to undertake the cleaning of the aircraft or substituting the gate agents. This will lead to a considerable reduction in the personnel costs. There will be no free in-flight food or drink and other complementary items will be offered during the flights. This system will be replaced by paid-for-in-flight food and drinks. The margin on these food and drinks items supplied in-flight will be an additional source of revenue. (Nationmaster) STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS (SWOT ANALYSIS) Strengths This section will present a discussion of the internal resources of Fly Light which enables it to achieve its revenue and profit goals. A primordial strength of the company is that it has the necessary financial capability to establish a major airline company. The company is willing to finance a US $600 million dollar project with US $400 million for Airbus 737 purchases, another US $50 million for infrastructure support and a US $15 million for operating expenses. The company plans to take out a US $450 loan from a Deutsch Bank consortium to finance operational needs. The company projects increasing revenues from US $2030 million dollars in the first year, US 4040 million dollars in the second year and US $5090 million dollars in the third year. The airlines will hit strong revenues of US $7130 million dollars and US $9150 million dollars in the fourth and fifth year of operations. The main strengths of Fly Light airline are a lean organization, a low-cost airfare, a strong infrastructure support and a strong brand in international airlines. Fly Light has operational efficiency brought about by a lean staff in the main headquarters and in the branches. The company will hire excellent and capable pilots, ground and cabin crew. (Clougherty, 2001). A key strength is that the low cost airfare of Fly Light will attract regular international travellers. The fifth strength is that after some years, the Fly Light brand will become a well-known brand since it presents affordable services at competitive costs. The sixth strength is that the company will make substantial investments in getting a new fleet of Airbus 737 planes worth US 400 million dollars assuring complete customer comfort and convenience. The company also invests US $100 million dollars for aircraft service and maintenance. The fifth strength is that Fly Light will offer a distinct and special brand of service. There will be a single passenger class with no differentiation.The division will focus on standardizing the fleet with Boeing 737 aircrafts. This will reduce the training and servicing costs to a large extent. This system will also enable the company to switch pilots in case of exigencies. A simple single fare scheme will be adopted. Fares will be increased as the plane gets filled up which will induce the travelers to book in advance. This system is known as ‘yield management. It always will be a ‘free seating’ arrangement in-flight with no pre-allotment of seat numbers or preferences of seating. This will encourage the passengers to board quickly and early. The routes and destinations will be selected in such a way that the carriers will fly to cheaper secondary airports which are less congested. This will have the operational advantage of avoiding air traffic delays and a cost advantage of lower landing fees.In order to make a maximum utilization of the fleet only short flights will be undertaken as far as possible with lesser turnaround time. Routes will be simple and will not follow a complex one with the emphasis on point-to-point transit. No transfer at hubs will be attempted. This again will improve and contribute to the maximum utilization of the aircraft fleet. Maximum efforts will be taken to sell the tickets directly to the customers using the internet facility to avoid payment of fees and commissions to travel agents and corporate booking systems. The organization culture would insist on the employees taking multiple roles. For example the flight attendants will be expected to undertake the cleaning of the aircraft or substituting the gate agents. This will lead to a considerable reduction in the personnel costs. There will be no free in-flight food or drink or other complementary items will be offered during the flights. This system will be replaced by paid-for-in-flight food and drinks. The margin on these items supplied in-flight will be an additional source of revenue. (Nationmaster) Weaknesses The first weakness of Fly Light Airline is its lack of sales networking with other regional airlines thus, driving up the costs of its daily operations. It needs to link with other airlines with respect to logistics and cargo operations to experience efficiency gains. Another weakness is it that it is relatively unknown in areas outside Europe and North America, Asia. There is a need for the company to have a presence in the growing Asian region in order to expand its consumer market. Opportunities Fly Light faces several opportunities. The first opportunity of Fly Light Airline is its budget fares. Fly Light Airline capitalized on the successful innovation of low cost airfare concepts which new carriers introduced into Europe. This was the provision of easily accessible scheduled short-haul services at very low unrestricted fares close to those of charter airlines but with no frills. (Doganis, 2001). Similarly its other low-cost competitors also registered profits. EasyJet said passenger numbers grew by 10% in the last three months of 2009 as the airline carried 10.1 million customers. EasyJet had outpaced its latest capacity increase. Chief executive Andy Harrison of EasyJet stated that they have more business passengers and leisure travellers who take long-haul breaks due to the cheaper airfare prices. EasyJets load factor which pertains to the proportion of seats sold, increased from 80.8% in the same period in 2007 to 83.4%. Total revenue grew by 32% to £550m while the average revenue per passenger rose by 14% in constant currency terms to £45.57. (Dan Milmow, Guardian, January 23, 2009) The second opportunity is found in offering efficient cargo handling services. Fly Light can offer more flexibility regarding cargo services and retain customer loyalty. The third opportunity is the Fly Light’s linkages with other travel-related companies. The airline will offer ‘Hertz’ rent-a car service. The service will offer car rental at all Fly Light destinations offering premium quality vehicles, premium service, and carefree driving. To meet the insurance needs of the customers, KarstadtQuelle insurers will be appointed as the official partner of Fly Light. Booking.com will be a partner of Fly Light. The portal offers perfect hotel booking at attractive prices in 67 countries and 10,000 world destinations. (Airberlin.com) Fly Light will promote a prepaid card calls system which will allow the customers to make cheap mobile calls.. The fourth opportunity is the new technology which has improved the handling of air traffic and improved the safety record of the air transportation industry. This will attract consumers to fly to their destination. The introduction of the GPS (Global Positioning System) had enhanced the operations of aircraft and the air traffic control system. The existing GPS has 24 satellites circling the earth in six separate orbits at an altitude of 11,000 miles. This system allows modern aircraft to know their location to within a few tens of meters. The new DGPS (differential GPS) uses a fixed ground station to compensate for the inaccuracy of satellite-based GPS. In this system, the ground station computes the difference between its known location and where the satellites say it is, and it projects a correcting signal to incoming aircraft, enabling the aircrafts to land with pinpoint accuracy. (Duke and Torres, 2005) The fifth opportunity is the multifactor productivity in the air transportation industry. Labor productivity also declined at a substantial 6.4-percent rate. Output dropped 6.6 percent, while combined inputs fell only 2.5 percent. The Air Transport Association of America (ATA) indicate that airline traffic grew a modest 2.8 percent in the first quarter, with no change during the second quarter. (Duke and Torres, 2005) The sixth opportuity is logistical compatibility which can decrease operational costs. Every airline can coordinate with other airlines in two ways. One, airlines can link their computer systems to allow an originating airline to check inter-network passengers through to their final destination. Two, airlines on which inter-network passengers originate can turn in their checked bags to the connecting airline. This will reduce the time and resources needed to reclaim and re-check the passengers’ baggages. These are the basic methods for supervising interconnection pricing: (1) impose a condition of reciprocity wherein all firms can charge the same rate for the same types of services; and (2) impose an imputation constraint on pricing wherein firms give its component flights to inter-network connecting passengers at the same price it charges its own intra-network connecting passengers. (Weidenhammer, 2004) THREATS The airline industry has to deal with multiple threats from various sources. One threat is the fluctuations in foreign currency. For example, British Airways blamed low profit performance on the weak pound which had pushed up costs that are incurred in dollars and euros. British Airways (BA) assumed an operating loss of £150m in 2009 which reversed pre-tax profits of £883m in 2008. The company saw a sharp decline in business-class bookings. Premium sales account for the majority of BAs profits. Profits slumped by 12% in December 2008 due to a reduction in consumer demand from its regular clients. The BA had relied on a falling oil price and high fares to keep operations profitable. Its dollar-denominated sales from US-based passenger had declined which meant the airline was unable to cancel out dollar-denominated costs. (Dan Milmow, Guardian, January 23, 2009) The second threat is the high cost of operations. Fly Light has to set a pay freeze among staff for 2009 to reach profitable operations. For example, the airline companies have to pay for air traffic control fees, baggage handling costs and airport landing fees in dollars and euros whenever it flies to the US and mainland Europe. (Insight on the News, March 29, 2004). The third threat facing airline companies are terrorist attacks from Islamic fundamentalists who want to target international airlines. (Philips, Washington Post, October 1, 2001). Strategic Plans Fly Light will implement four strategic plans for the next five years which will have a strong impact on company revenues and profits starting 2009. The first strategic plan is to promote intensive marketing and advertising of the lowest airfare in the industry. The aim is to generate substantial revenues in the first year of operations. These second strategic plan is to build a customer loyalty program by issuing a customer loyalty card which will pamper the needs of its customers. The third strategic plan is to focus on internet-based marketing and opening two major sales branches in order to save on operational costs. The fourth strategic plan is to establish a generous bonus scheme for all employees annually which will reward them if they are able to reach the revenue and profit goals for the year. This scheme will instill group cooperation and team effort among the employees. Tactical Plans Fly Light can implement three tactical plans to offer a firm support to the four strategic plans. First, it can offer the lowest airfare in the industry to snatch a 30% market share from the existing airlines. Second, it can offer a 90% turn-around rate for its plane fleet so as to maximize revenues. Third, the company can offer a 100% punctuality in all of its flights to project reliability and dependability for business and tourist travellers alike. Operational Plans Fly Light can build on quality service, value pricing and excellent customer relations as a means to project daily competitiveness. The company can implement five operational plans. First, the airline staff and crew will be given training in excellent customer service to build customer loyalty. Second, the company will maintain clean and pleasant facilities. The company will maintain a clean fleet with Boeing 737 aircrafts. The third plan is to increase fares as the plane gets filled up which will induce the travelers to book in advance. The fourth plan is to encourage the passengers to board quickly and early. The fifth plan is to fly routes and destinations with the highest customer demand. (Farrar, December 2003). Conclusion Fly Light Airline faces many business opportunities in the international airlines industry. It has a distinct competitive advantage in offering the lowest airfares, excellent customer service, complimentary ancillary linkages with travel-related companies and superb cargo services. The worldwide recession has shifted consumer sentiment in favor of discounted airfares thus, enhancing the competitive advantage of Fly Light Airline. The environmental scan has yielded a favorable preview of the numerous strengths and opportunities of this airline which can contend with the existing industry threats and weaknesses. The company’s strategic plans are very focused in achieving ambitious revenue and profit goals. The investments in a modern plane fleet and supporting services complement the thrust towards business viability and consequently, profitability. Correspondingly, the company’s tactical plans and the operational plans are also directed to achieve the over-all goals of the company. These plans will be carried out by an excellent human resource pool of cabin crew and ground support staff. References: Choo, Chun Wei. (2001). Information management for the intelligent organization: the art of scanning the environment. 3rd ed. Medford, NJ: Information Today, Inc. Choo, Chun Wei. (1998). The knowing organization: how organizations use information to construct meaning, create knowledge, and make decisions. 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Insight on the News. March 29, 2004. Page Number: 33. Online Sources: Carey, S., and S. McCartney. 2003. Reeling under losses, airlines turn to workers for big cuts. Available at: http://online.wsj.com/home/us (February 18). Nationmaster ‘Low Cost Carrier’ Encyclopedia available online at http://www.nationmaster.com/encyclopedia/Low_cost-carrier Accessed on 1st November 2008 Ranjit Nair (2007) ‘Low Cost Airline Industry’ available online at http://www.managementparadise.com/forums/archive/index.php/t-14734.html Accessed on 1st November 2008 Read More