Nine-Step Problem-Solving Process Applied to Classic Airlines - Assignment Example

? Problem Solution: ic Airlines Kenneth Barney Marketing: MKT 571 July 29th, Krista Borders The airline industry is one of the richest and most important industries in the world. The industry generated $774 billion in revenues in the United States and $1986 billion global revenues in 2010 (Plunkett Research, 2010). The industry is extremely important because it allows for the formation of a global tourism industry and air travel serves a vital role in international commerce as thousands of items are transported each day through airplanes. A company that has enjoyed success in the industry for over 25 years is Classic Airlines. Classic Airlines has enjoyed the benefits of participating in an oligopoly marketplace. In an oligopoly there are few companies that control the entire market. The purpose of this paper is to find a solution to solve the problems at Classic Airline using a nine step problem solving process. Step 1) Describe the Situation Classic Airlines is operating in an industry that has seen a long term reduction in business as a consequence of the catastrophic events of 9/11. Since that terrorist attack the industry has seen a steep rise in operating costs associated with security measures. The volatile petroleum marketplace has made fuel cost the highest cost factor in the airline closely followed by employee costs. As a consequence of external and internal factors Classic Airlines had seen its profitability declined tremendously. Last year the net profit margin of the company was a diminutive 0.11%. The net margin of the company is 2.29% below the industry standard (Dun & Bradsteet, 2011). The marketing department at Classic Airlines is in a complete disaster. One of the largest indicators of failure in the department is reflected in the results of its customer rewards program. The customer rewards program at Classic Airlines experience a 19% reduction in its total members and a 21% reduction in the frequency of purchases by those customers. Customer retention is imperative for the success of a business enterprise. The 80/20 rule states that 80% of business comes from 20% of a company’s customers. The loyalty of the customer has declined significantly which will hurt the ability of the company to stay profitable in the long term. There are internal problems occurring within the human resources of the company. Employee morale is at the lowest point it has ever been in the history of the company. Employee morale is important because when morale goes down so does the productivity of the workers. The worries from the staff are justified and legitimate. One of the vice-presidents, Doug Sheffin who is also a union member, is concerned about the company’s ability to meet its current and future obligations with the employees in the future months. He realizes that the firm may incur into operating losses soon if the firm is not able to turn things around. The company’s ability to pay its short term obligations can be measured by its current ratio (Kennon, 2011). Step 2) Define the Problem   Classic Airlines faces some serious problems that require immediate attention since the future of the company is at stake. Due to the decreasing profitability of the company and the fact the company cannot reduce prices any lower to spur demand the company’s Board of Directors has mandated a 15% cost reduction across all departments within a timeframe of 18 months. The situation is so delicate that if the company does not meet the cost reduction mandate the firm faces the possibility of bankruptcy. The most recent indicator that clearly demonstrates the firm’s declining performance is the 20% reduction in the customer rewards programs in terms of both number of participants and frequency of purchases by the remaining customers. Step 3) End State Goals The company has several end state goals the firm must achieve. One of those goals is to increase the profitability of the company to reach the industry standard of 2.4% net margin within 18 months. A second end state goal of Classic Airlines is to fix its rewards program in order to recover the loss clients and as consequence increase the customer retention of the firm. The third end state goal is to achieve a cost reduction of 15% across all departments. A fourth end state goal of the company is to eliminate the possibility of filing bankruptcy by the company Step 4) Identify Alternative Solutions Alternative solution #1: Downsizing Classic Airlines Classic Airlines can implement a massive cost cutting plan by downsizing the firm. The firm would start a blowout sale of fixed asset in order to reduce the size of its global operations. The company would reduce the number of terminals operated by the company at international airports. The most unprofitable routes will be eliminated. The firm will sell a portion of its airline fleet through an auction mechanism exclusive for companies that participate in the airline industry. The average price of a 2010 commercial airplane manufactured by Boeing is $189.5 million (Boeing, 2010). Since the company would be selling used airplanes we are going to estimate the value of each airplane at a conservative $100 million. The sales target of the blowout sale is to sell $2 billion in airplanes by selling 20 units. The auction would take place in a span of three weeks and there would be one auction per day for 20 consecutive days. Alternative Solution #2: Strategic Marketing Alliance with Skyway Airlines This solution involves starting a marketing alliance with a competitor. The firm currently has a no marketing alliance policy based on the philosophy of its current chief executive officer, Amanda Miller. Since there is no real legal reason behind the company past policy of not ever entering into marketing alliance with competitors the firm can choose this alternative and get it approved by the Board of Directors. Change management requires flexibility and the ability to adapt to market changes in order to survive. At this point in its history the company is facing some tough dilemmas and the economic situation of the company requires solutions that can be implemented at low costs. Alternative Solution #3: Selling off the company to a competitor Classic Airlines is still running an operation that generates profits, despite its thin margins. The company has brand value accumulated through many years of service in the industry. The firm has billions of dollars in fixed assets including a large fleet of 375 commercial airplanes. The company is a public firm, a fact that creates liquidity of the common stocks of the airline. These attributes makes Classic Airline an attractive investment opportunity for a competitor that is seeking market share growth. Classic Airlines is the fifth largest airline in the world with global sales of $8.7 billion. This solution would maximize shareholders wealth because it would obtain the maximum value for the common stocks of the company. The shareholders have to realize that the firm has a serious threat of bankruptcy in the short term.   Step 5) Evaluate Alternatives The downsizing Classic Airlines alternative has lots of potential. The solution would enable the company to meet the required cost reduction targets by lowering fixed and variable costs such as employee salaries, insurance costs, and building rents. One of the greatest virtues of the option is that the company would receive a significant cash flow injection into the company. The firm only generated a measly $10 million in revenues last year. The cash reserves of the company are low, evidenced by statement from the Board of Directors that indicated bankruptcy as a legitimate threat. A $2 billion cash injection will fix the liquidity problems the firm faces. The marketing alliance solution can be implemented at a low cost because two companies would share expenses. The firm already has a CRM system in place that can be used as the tool to integrate both systems. The solution targets the issue associated with the reduction in participation in the Classic rewards program. The human capital of the firm would increase because the company would receive access to a staff of employees with new insight and creative ideas. The third option of selling the company is a viable solution that must be considered because bankruptcy is the worst outcome an investor in the equity markets can obtain. Common stocks are at the end of line once bankruptcy occurs; lenders and bondholders have first rights to collect the money generated from the liquidation of assets. Selling 100% of the equity would ensure the shareholders receive some money. It is essential to negotiate a good deal that offers fair market value or above for the common stocks of the company. Step 6) Assess the Risk There are risks associated with the option of downsizing. The firm might have problems during the blowout sale portion of the plan. At the auction the bidders could collude against the company in order to decrease the value of the bids to lower prices. There are two ways to reduce this risk which are mechanisms that are often used in auction settings. The first mechanism is reserve price. The reserve price which is unknown to the bidder guarantees a minimum price for the item. The second mechanism to improve the participation motivation of bidders is to have a buy-in to participate in the auction. All bidders must pay $5 million to enter the auction. The buy-in money would be reduced from the final price of any auction sale won by the participant. If an auction participant does not buy anything at the auction they lose their $5 million. A risk associated with the marketing alliance option is resistance to change. The CEO does not believe in marketing alliances. If the plan is approved the CEO could sabotage the operation which would increase the chances of failure of the alliance. Another risk associated with this option is theft of intellectual property. The new employees from Skyway Airlines could have hidden agendas such as spying on the company to gain an edge over them. The selling the company solution also has risks. The shareholders may receive a low-ball offer that pays them below market value. Also if the company is successful at implementing its 15% reduction plan the firm would increase in value because profit margins are going to increase. Holding on to the stocks would generate them more money in the long run. Step 7) Optimum Solution The optimum solution for Classic Airlines is the downsizing of operations. The company is facing liquidity problems. The sale of 20 commercial airplanes can generate the company $2 billion dollar within a month. The money can be invested in programs to increase the customer retention of its clients. The firm can also invest money to improve its customer service. A large fund at least 60% of generated by the sale of the planes would be placed in an account as reserve money for emergency purposes. For example an emergency would be not having money to pay off its payroll obligations or other significant special problems. Step 8) Implementation Plan The firm would perform an internal analysis of the operations that will be eliminated as part of the downsizing initiatives. Reducing the number of reservation centers has already been identified as one the downsizing initiatives. The company will eliminate hundreds of flight destinations. The most unprofitable routes will be eliminated. This will increase the net margin of the company because the losses these destinations were causing will be eliminated. The sale of the 20 airplanes will occur in a span of 3 weeks with a daily auction of a plane. The planes will be appraised prior to the auction. The bidders will know the appraisal value of the plain prior to start the bidding. There is going to be a reserve price for each plane and bidding starts at 60% of the appraisal value. The reserve price will be higher than the lowest bid possibility. This means that an action cannot be won by one bid of the minimum amount ensuring the participation of two or more players which can create bidding wars and raise the final price of the auction. Step) 9 Evaluate the Results One of the most important goals of any business organization is to maximize shareholders wealth (Ehow, 2011). Classic Airlines was on a path that put at risk the full value of the common stocks of the company. The firm has a sound business, but past mistakes have accumulated and the profitability of the company decreased. As a result the company currently faces liquidity problems. The downsizing alternative provide the company with a realistic plan to reduce the company’ operating expenses. The company’s original plan of cutting cost 15% across all departments lacks substance and objectivity. It contradicted their goal of achieving operating improvements, better customer service and higher customer retention. Most companies are in agreement that it is good to have good customer retention (Wallinger, 2005). The firm can attempt to reduce cost across the board, but the downsizing option creates savings that will be achieved immediately with the implementation of the plan. The company will acquire much needed capital that can be used for process improvement projects to improve the operations of the airline. The company has to provide a better product than the competition to differentiate itself. The money that the sale of the 20 airplanes will generate will give the company a huge injection of cash that can be used for savings, investing, and process improvements. Improving the customer service of the company is imperative for the future success of the company. References Boeing.com (2011). Commercial Airplanes – Jet Prices. Retrieved July 29, 2011 from http://www.boeing.com/commercial/prices/ Dun & Bradstreet (2011). Key Business Ratios: Transportation by Air. Retrieved July 15, 2011 from http://kbr.dnb.com.ezproxy.apollolibrary.com/KBR_Main.asp. Ehow.com (2011). Strategies for Maximizing Shareholders Wealth. Retrieved July 29, 2011 from http://www.ehow.com/way_5697673_strategies-maximizing-shareholder-wealth.html Kennon, J. (2011). The Current Ratio. Retrieved July 15, 2011 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/current-ratio.htm. Kertesz, V. (2011). Bidding War Basics For Buyers. HGTV. Retrieved July 29, 2011 from http://www.hgtv.ca/articles/articledetails.aspx?ContentId=1901&cat=3&by=1 Plunkett Research (2010). Airline, Hotel, and Travel Industry Overview. Retrieved July 29, 2011 from Plunkett Research database. Wallinger, L. (2005). The Importance of Customer Retention – Part I. Arteka. Retrieved July 29, 2011 from http://www.arteka.co.uk/The%20importance%20of%20customer%20retention%20part%201.pdf Read More