Airline Planning and Management Analysis - Business Plan Example

AIRLINE PLANNING AND MANAGEMENT BUSINESS PLAN Contents Existing services on the route 4 1 Background information of destination 4 1.2 Location of destination airports 5 1.3 Operating flights 6 1.4 Recent traffic data 8 1.5 Fares 9 2. Choice of airports 10 3. Estimated passengers for the new airline 12 3.1 Market share 12 Forecasted Passengers 12 4. Selection of aircraft type 13 5. Product features 14 5.1 Product features and strategic option 14 5.2 Airline name 15 6. Schedule 16 7. Estimated operating costs 18 8. Fare structure and projected revenues 19 9. Potential profit and loss 19 10. Critical appraisal of the results 20 References 20 List of Figures Figure 1: Location of Nuremberg Airport 5 Figure 2: Ryanair Flight Timetable from STN to NUE 6 Figure 3: Flight timetable from NUE to LST 7 Figure 4: Traffic Trend at NUE 9 List of Tables Table 1: PEST Analysis for Nuremberg 4 Table 2: Traffic information for NUE 8 Table 3: Fares for Ryanair 10 Table 4: Route from London to Nuremberg 10 Table 5: SWOT for current NUE - STN route 11 Table 6: Feature and prices of new airline 15 Table 7: Proposed schedule from NUE to LST 16 Table 8: Proposed schedule from LST to LUE 17 Table 9: Estimated operating cost for EuroPrime 18 Table 10: Fare structure and projected revenue 19 Table 11: Profit/Loss Estimation 19 1. Existing services on the route 1.1 Background information of destination Nuremberg is the selected destination, which is a city in German and located in the state of Bavaria under the Urban district and operating in the Middle Franconia administration region (McKay, 2012). Administratively therefore, the new airline will be operating on the administrative regulations of Middle Franconia. The 2013 population of the city is 498,876 with population density of 2,700/km2 (Skopje, 2014). The PEST analysis below gives summary of some of the major political, economic, social, and technological background of Nuremberg that is important for the operations of the new airline. Table 1: PEST Analysis for Nuremberg Political Social 1. Second largest city in Bavaria 2. Urban dominated 3. Enjoys administrative independence from Middle Franconia 1. Declining city population since 2001 (City of Nuremberg Economic Development, 2014) 2. Considered as a arts and history centre of Germany, attracting several travellers each year (McKay, 2012) 3. Considered a Christmas market with busy travelling schedule during the Yuletide Economic Technological 1. Considered a business centre which serves 3.5 million inhabitants in the European Metropolitan Area Nuremberg 2. Brisk economic activity in the hotels and restaurant industry 3. Benefits from a stable macroeconomic performance of Germany as a nation (City of Nuremberg Economic Development, 2014). 4. Advanced in technological infrastructure for the transport sector. 5. High level of official database for any market research. 6. Has adequate infrastructure for electronic commerce (City of Nuremberg Economic Development, 2014) 1.2 Location of destination airports There is only one airport in Nuremberg, which is the Nuremberg Airport. Nuremberg Airport is the second largest airport in Bavaria, having flight services to all major German cities and other European destinations, including London (Airport Nuernberg, 2014). Nuremberg Airport’s rush season is considered to be summer, when there is heavy traffic flying in and out of the airport (Airport NUE, 2015). Nuremberg Airport enjoys the full benefits of technological advancement in the transport sector as the airport has direct connection with the subway system through the use of the U-Bahn Line 2 (Airport Nuernberg, 2014). This provision makes the movement of people and goods very efficient and effective at the airport. As of the close of 2013, Nuremberg Airport had 3.3 million passengers with 67,720 aircraft movements and 115,000 cargo moved (Airport NUE, 2015). Figure 1: Location of Nuremberg Airport Source: Google Earth (2009) 1.3 Operating flights Ryanair is currently the only airline serving a direct route from London-Stansted (LST) to Nuremberg (NUE) from the. Below, the most current timetable for Ryanair from London-Stansted Airport to Nuremberg is provided. Figure 2: Ryanair Flight Timetable from STN to NUE Source: Ryanair (2015) There are three major departure times from LST to NUE, which are 14:10, 14:50 and 18:50. The flying time from LST to NUE is 1 hours 40 minutes(Ryanair, 2015). This means that once the flight departs at 14:50, its arrival time in Nuremberg is 16:30. Once departing at 14:10, its arrival time will be 15:50 and once departing at 18:50, its arrival time is 20:30. In a reverse manner, there are flights from NUE to LST as represented in the timetable below. Figure 3: Flight timetable from NUE to LST Source: Ryanair (2015) As far as return flights are concerned, the main departing times are 17:15, 17:55 and 21:55. This means that the arrival times at LST are 18:55, 19:35 and 23:35 respectively. 1.4 Recent traffic data As the second busiest airport in Bavaria and the international airport of Franconian metropolitan area, the Nuremberg Airport has some of the most impressive traffic data. The table below shows the number of passengers, aircraft movement and quantum of cargo from 2010 to 2014. Table 2: Traffic information for NUE 2010 2011 2012 2013 2014 Number of passengers in millions 4,073,819 3,967,301 3,602,459 3,314,524 3,476,099 Aircraft movements 63,000 65,000 67,750 67,720 68,334 Cargo in metric tonnes 107,100 107,132 99,355 90,973 101,000 Source: Airport NUE (2015) To gain a better understanding of the traffic performance of NUE, the data in the table is given a graphical representation. Figure 4: Traffic Trend at NUE Adapted from Airport Nuernberg (2014) From the data in table 2 and figure 4, it can be noted that from 2010, whereas the number of aircraft movements have been increasing, the number of passengers using these flights and the amount of cargo carried have been declining. 1.5 Fares Fares from LST to NUE have been very varying, depending on the airline in question. It can be said that there are generally two types of airlines, offering different fares for different services. These are airlines offering direct flight and those offering non-direct flights. As the new entrant seeks to offer direct flight, the main focus will be on such competitors. As mentions already, Ryanair is the only airline currently offering direct flight from LST to NUE and vice versa. Table 3: Fares for Ryanair Departure Ticket type Average fare (£) Destination STN Economy 161 NUE STN Business 300 NUE STN First class 350 NUE NUE Economy 70 STN NUE Business 200 STN NUE First class 250 STN Source: (Civil Aviation Authority, CAA, 2012) 2. Choice of airports Table 4: Route from London to Nuremberg Source: Google Maps As the focus of the plan has been all this while, the choice of airports shall be between the London-Stansted (LST) in UK and Nuremberg Airport (NUE) in Germany. From figure 4, it would be deduced that the economic performance of existing competitors working from NUE has not been very impressive. This is because of the declining trend of passenger number and cargo weight even though the number of flight takeoffs has been increasing. The situation cannot be said to exclude flights to STN (Ryanair, 2015). With STN selected as one of the airports therefore, it is important that the possible factors that have led to a declining performance of airlines using that airport from NUE be identified. To do this effectively, the following SWOT analysis is presented. Table 5: SWOT for current NUE - STN route Strength Weakness 1. Availability of different ticket type flights 2. Enhanced flight services through e-commerce 1. Limited number of direct flight, which is only one 2. Increasing fare for non-direct flights, which are the most number available Opportunity Threat 1. New entrants can introduce direct flights as a novelty flight option 2. Existing non-direct flights may change flight service to direct ones 1. Weakening Eurozone crisis serving a major factor against preference for air travel (Lewis, 2011) 2. Proposed future expansion on airport may lead to conjunction (Airport NUE, 2015) 3. Estimated passengers for the new airline 3.1 Market share Currently, the only competitor offering direct flight, which is Ryanair has almost 20-35% of market share of flights using the route. This means that 65-80% is shared among all other non-direct airlines including Air Berlin, Lufthansa and Germanwings (IATA, 2014). This shows that there is a high preference for direct fights, meaning the new airline can take a good share of the market from existing non-direct airlines. A proposed 20% market share is therefore estimated. Forecasted Passengers As depicted in table 2, with the exception of 2014, there has been declining passenger numbers since 2010. The situation has however been blamed on the limited number of direct flights operating on the route between STN and LUE. As the new entrant offers direct flight, it is expected that the ongoing trend will change significantly. Specifically, the average passenger number from 2010 to 2014 has been = 3,686,840 As a new entrant, it is expected that the promotional programmes put in by as part of marketing strategies will attract more new and existing customers (Fama & Jensen, 2013). There are however challenges for new entrants such as threat of alternative service, bargaining power of customers and intensity of competitive rivalry that cannot be denied (Hallberg, 2010). Balancing these two, it will be expected that the currrent average of 3,686,840 will only be increased slightly to 3,700,000 for the new airline. 4. Selection of aircraft type Both the PEST and SWOT analysis have showed the readiness of both airports which are LST and LUE to taking up large aircrafts given their levels of advanced development and expansion. In the light of this, big aircrafts such as Boeing 747-400F, Boeing 777-200R, and Airbus A380 can operate at these two airports comfortably. Another reason why big aircrafts should be adopted is that they have a large carrying capacity that would accommodate many passengers on the flight. Fama & Jensen (2013) when a company is offering low cost service, it important that unit sales will be more. Meanwhile, the new airline will emphasize more on low-cost cabins, stressing the need to have big aircrafts that can accommodate as many passengers as possible. Once this is done, the aircrafts will have what it takes to compete effectively with those offering high-class cabins but with little-carrying capacity. In addition, as found in the schedules, the number of passengers in HUE has decreased but the aircrafts movements have gone up. Therefore, if the new airline can have a large carrying capacity, it would be a big relief to the growing number of takeoffs as a single takeoff can accommodate as many passengers as possible. 5. Product features 5.1 Product features and strategic option As a new entrant, it is important that every applicable marketing strategy be used in ensuring successful competition with existing airlines that use the route, particularly Ryanair which offers the same service as what is proposed to be offered. In the light of this, the Porter’s generic options are reviewed and compared to the features of the airline that can help to make it competitive. Economy class: The economy class is also expected to be referred to as the type 1 ticket which will be used alone the cost leadership strategic option by Porter. In the cost leadership strategic option, companies produce products and services with lower cost and subsequently charge lower prices for these products and services (Porter, 2008). This will be done to ensure that as many people in the middle class segment as possible will be targeted. It will also be done to target regular tourists, students, and other leisure travellers. This is expected to be the major feature flight of the company and so will be used with the big aircrafts already referred to. Business class: The business class will also be known as the Type 2 ticket and be used along the focus strategic option by Porter. As part of the focus strategic option, there will be very unique or special target segment that will be identified and offered client-based services based on their specific travelling needs (Hallberg, 2010). The target segment for the focus strategic option to be used on will be the business executives of specific companies who use the London-Nuremberg route on frequent basis. It is expected that those using this feature will receive some special priledges in travelling services and so will pay a little higher than those using the economy class. First class: The first class will be used as part of the differentiation strategic option, where there will be further and better privileges offered to travellers (Porter, 2008). The target group for those using this feature is expected to be small and so they will use smaller aircrafts that come with higher ticket fares. Such people as celebrities, politicians and business tycoons will be considered for this feature. Based on the explanation given on the features, the table below shows various features and the single trip fares that will be charged for each. Table 6: Feature and prices of new airline Feature Fare (£) Economy 80 Business 180 First class 350 5.2 Airline name The airline is proposed to be called EuroPrime. This name simply suggests that the airline will be focused on offering prime services to clients in Europe. 6. Schedule Table 7: Proposed schedule from NUE to LST Days Flight type Departure LocA Arrival LOC B M,T,W,T,F Economy 6.00 Nue 7.40 LHR M,T,W,T,F Business 6.30 Nue 8.10 LHR M,T,W,T,F Economy 9.15 Nue 10.55 LHR M,T,W,T,F Economy 9.45 Nue 11.25 LHR M,T,W,T,F First class 11.30 Nue 13.10 LHR M,T,W,T,F Economy 12.20 Nue 13.50 LHR M,T,W,T,F Business 13.10 Nue 14.50 LHR M,T,W,T,F Business 14.50 Nue 16.30 LHR M,T,W,T,F First class 17.00 Nue 18.40 LHR M,T,W,T,F Economy 19.30 Nue 21.10 LHR Sat, Sun Economy 8.00 Nue 09.00 LHR Sat, Sun Business 10.30 Nue 12.10 LHR Sat, Sun First class 12.30 Nue 14.10 LHR Sat, Sun Economy 15.00 Nue 16.40 LHR Table 8: Proposed schedule from LST to LUE Days Flight type Departure Loc A Arrival Loc B M,T,W,T,F Economy 6.00 LST 7.40 Nue M,T,W,T,F Business 6.30 LST 8.10 Nue M,T,W,T,F Economy 9.15 LST 10.55 Nue M,T,W,T,F Economy 9.45 LST 11.25 Nue M,T,W,T,F First class 11.30 LST 13.10 Nue M,T,W,T,F Economy 12.20 LST 12.00 Nue M,T,W,T,F Business 13.10 LST 14.50 Nue M,T,W,T,F Business 14.50 LST 16.20 Nue M,T,W,T,F First class 17.00 LST 18.40 Nue M,T,W,T,F Economy 19.30 LST 21.10 Nue Sat, Sun Economy 8.00 LST 09.40 Nue Sat, Sun Business 10.30 LST 12.10 Nue Sat, Sun First class 12.30 LST 14.10 Nue Sat, Sun Economy 15.00 LST 16.40 Nue Based on table 7 and 8, it would be noted that more time will be given to economy, followed by business, before first class, based on the number of passengers expected from each of these groups of passengers. 7. Estimated operating costs The cost of operation is expected to be based on the type of service, be it economy, business or first class. Using average operational cost by CAA (2011), the following estimations are made Table 9: Estimated operating cost for EuroPrime Service type Expenditure Value Economy Total annual cost (£) 105,005,000 Available seat-km 1,200,500,000 Cost per seat-km 0.8765 Business Total annual cost (£) 90,500,000 Available seat-km 81,902,500 Cost per seat-km 0.9050 First class Total annual cost (£) 50,000,000 Available seat-km 55,000,000 Cost per seat-km 1.1 Total operating cost 245,505,000 Table 9 shows that the cost per seat-km of operating first class is expected to be higher, followed by business class, then economy. It is for this reason that the first class will pay higher followed by business class and economy class. 8. Fare structure and projected revenues The table below shows the number of passengers expected on an annual basis for each feature of service, how much will be paid for one trip, and the total projected revenue expected. Table 10: Fare structure and projected revenue Service type Number of passengers Fare (£) Revenue Economy 2,500,000 80 200,000,000 Business 1,000,000 180 180,000,000 First class 200,000 350 70,000,000 Total 3,700,000 450,000,000 Based on section 3.2, a total of 3,700,000 passengers will be expetced in a year who will be distributed among the different service features. 9. Potential profit and loss Using averages of bags and priority boarding for various classes of passengers as given by the CAA (2011), the following projected profit and loss estimates are established. Table 11: Profit/Loss Estimation Gross revenue Item Amount Service type Revenue Amount (£) Economy Fare 200,000,000 Bags 98,000 Business Fare 180,000,000 Priority boarding 150,000 First class Fare 70,000,000 Priority boarding 200,000 Total revenue 450,448,000 Gross expenditure Economy 105,005,000 Business 90,500,000 First class 50,000,000 Total expenditure 245,505,000 PROFIT(LOSS) 204,943,000 10. Critical appraisal of the results The results show an annual profit of £204,943,000. This result is attributed to several factors, the summary of which has been given in bullets below. Provision of different services and features that identifies different target segments of people is helpful in servicing the unique needs of all types of passengers. Selecting a service type which is the direct flight on the rought of LST and NUE is ideal as there is only one competitor offering same service. This means that the intensity of competitive rivalry will be less The schedule used offers an all round travel time from morning to evening, helping to meet the different traveling arrangements of people EuroPrime risks stiffer competitive opposition if existing companies such as Lufthansa AG which is offering non-direct flight decides to begin direct flights. References Airport NUE (2015). Arrival, departure, flights, parking, holiday. [Online] Available at http://www.airport-nuernberg.de/english [March 14, 2015] Airport Nuernberg (2014). Flugplan timetable. [Online] Available at http://www.airport-nuernberg.de/259223/Flugplan_NUE_Sommer_2013.pdf [March 14, 2015] City of Nuremberg Economic Development (2014). Key data for investors. Nuremberg facts and figures. [Online] Available from http://www.nuernberg.de/imperia/md/wirtschaft/dokumente/englische_versionen/key_data_for_investors_nuremberg.pdf [March 14, 2015] Civil Aviation Authority, (2007). Connecting the Continents: Long Haul Passenger Operations from the UK, CAP 771 Fama, E. & Jensen M. (2013). “Separation of Ownership and Control” Journal of Law and Economics, Vol. 26 No. 2: pp. 301-25. Hallberg, K. (2010). “A Market-oriented strategy for small and medium scale enterprises,” International Finance Corporation (IFC), World Bank, Washington D.C. Discussion Paper No. 40 IATA, (2014). World Air Transport Statistics, 58th Edition. Berlin: Ultimate Press Lewis, M. (2011). Boomerang – Travels in the New Third World. London: Norton. McKay R. (2012). Cities and People: A Social and Architectural History. Mark Girouard: Yale University Press Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard business Review. Vol. 34 No. 2, pp. 43-56 Ryanair (2015). Ryanair Flight Timetable. [Online] http://www.ryanair.com/en/timetables/ [March 13, 2015] Skopje (2014). Statistics for Nuremberg. [Online] Available from http://web.archive.org/web/20131028213821/http://www.nuernberg.de/internet/portal/index.html? [March 13, 2015] Read More