AIRLINE SIMULATION

AIRLINE SIMULATION Key Issues for BA-462 Spring 2006 Key Components of Simulation Financial Projection Exercise Mid-Continent Airline Case Study Weekly (Quarterly) Operating Decisions Weekly (Quarterly) Incidents Annual Reports      Airline Financial Projection Exercise     Intended to prepare you for making weekly performance projections. Separate assignment document and Excel® template provided Exercise applies only to the set of conditions provided Due date is Sunday, January 22 Mid-Continent Airline Case Study     Section 7, Page 81 – 87 Due date for analysis: Sunday, 1/29 I will provide points of analysis; do not use questions in the text. Relevant information found in other parts of text Mid-Continent Case Study  Detailed SWOT – Should include:     Assume that owner will retain: What strategy     Detailed financial analysis Analysis of human and capital resources Market analysis  Type of strategy Type of routes Type of aircraft Overall characteristics of operations Breakeven Analysis on existing routes with new aircraft selected Weekly Decisions     Weekly (Quarterly) Decisions will include both operating decisions and incident responses. Use decision sheet (Excel) posted on web site All decisions due by midnight on Sunday nights First decision due on Sunday, 2/12 Weekly/Quarterly Decisions   Decision 1: Fare Structure Choose a “fare per seat mile flown” Choose a specific fare (cents) from:    28 – 31 cents per seat mile flown 35 – 40 cents per seat mile flown 48 – 51 cents per seat mile flown  You are currently charging 35 cents Weekly/Quarterly Decisions  Decision 2: Cabin Service Choose from four choices:     No cabin service (no additional cost) Free drinks and snacks ($1/passenger) Free drinks, snacks, and snack meals ($2/passenger) Free drinks, hors d’oeuvres, and meals ($5/passenger) Weekly/Quarterly Decisions     Decision 3: Promotion Budget Budget given in dollars Current budget is $2,500 per quarter (low) If you want to sell through third party web site, you must budget at least $7,502 (the ending “2” signals the desire to use the web site). You can add funds over and above this for other promotional efforts. Weekly/Quarterly Decisions    Decision 4: Advertising Budget Budget given in dollars Current budget is $2,500/quarter (low) One use of advertising funds is an onboard magazine ($500 per aircraft per quarter – add a “1” to the right-hand digit to signify the desire to have a magazine). Weekly/Quarterly Decisions Decision 5: Number of New Sales Persons this Quarter Enter a number (to a maximum of 4) Cost is $12,000 per quarter Once hired, do not continue to re-enter on subsequent decision forms Minus sign to discharge a sales person     Weekly/Quarterly Decisions Decision 6: Employee Compensation  Chose from coded choices “0” – “7” (see page 5 in text)  Note: Percentages accompanying the choice will be entered as Decision 7.  You are currently paying prevailing wages  Use the following codes: Weekly/Quarterly Decisions       Decision 7: Wage Increase Used in conjunction with Question 6 Enter percentage increase If pilots only, increases based on cost of $40,000 per aircraft quarterly If pilots and management, based on cost of $100,000 per aircraft quarterly If all employees, based on cost of $140,000 per aircraft quarterly Percentage must be entered each quarter Weekly/Quarterly Decisions Question 8: Quality Programs and Additional Training Enter in dollars…do not include anything other than 0 in right hand column You paid $1,000 last quarter The amount entered is over and above that legally required for flight crews    Weekly/Quarterly Decisions     Decision 9: Aircraft Maintenance Level Level 1: Legal minimum requirements Level 2: Legal minimum requirements plus more frequent cleaning and more spare parts Level 3: Same as two only more. Hint: The lower the number of different kinds of aircraft you have, the lower your maintenance costs will be. Weekly/Quarterly Decisions   Decision 10: Fuel Contract Applies to next quarter Chose from:    All fuel purchased on open (spot) market 50% spot market – 50% fixed contract All fixed contract   Contracts hold the price stable over period Last quarter, you bought on spot market Weekly/Quarterly Decisions    Decision 11: Cargo Budget Enter total dollars in budget None currently budgeted If you desire to enter the cargo business:     $10,000 overhead per quarter $12,000 per cargo salesperson (if desired) Any extra into cargo advertising Budget must be entered each quarter Weekly/Quarterly Decisions Decision 12: Corporate Social Responsibility Entered in total dollars Right hand digit denotes cause donated to (see page 9) Currently budgeting nothing for social responsibility    Weekly/Quarterly Decisions Decision 13: Selling and Redeeming Stock  Enter in dollars (positive for selling; negative for redeeming  Must maintain 150,000 shares (starting amount)  Must maintain 1:4 equity to debt ratio  Maximum redemption is $500,000/quarter  Earnings per share is diluted as you issue more stock, unless earnings are increased  Compensation of stock to employees increases outstanding shares Weekly/Quarterly Decisions      Decision 14: Short-Term Loans Entered in dollars (minus for loan payments) Based on 90-day demand note – renewable Short term rate is variable with firm condition Current rate is 10% May not be used for purchase of aircraft Weekly/Quarterly Decisions       Decision 15: Long-Term Loans Enter dollars (minus for loan payment) Line of Credit May borrow up to $4 for each $1 of equity Program will automatically make your payments (2% of outstanding balance) In order to increase your line of credit, you will need to issue more stock Loans can be used to finance up to 80% of cost of aircraft Weekly/Quarterly Decisions      Decision 16: Dividends Paid Enter in dollars Paid $2,000 in dividends last quarter May also declare a stock dividend (5% more shares to shareholders) Indicate stock dividend by placing “1” in the blank Declaration of unusually large dividend at end of game as stock price ploy will negatively affect your standing Weekly/Quarterly Decisions     Decision 17: Purchase CD 92-Day Certificate of Deposit Can be used to have excess cash earn money May not be accessed during the quarter in which purchased Pay 3% less than prime (5%) Weekly/Quarterly Decisions  Decisions 18 – 23: Acquisition of Aircraft Two sets of acquisitions    18/21. Number of aircraft (0 – 4) 19/22. Type of Aircraft (see page 13) 20/23. Lease (1) or Purchase (2)   Only four aircraft per quarter Be sure to arrange financing separately (long term loan or stock issue) Weekly/Quarterly Decisions Decisions 24 – 26: Disposal of Aircraft  Starting serial numbers are at the top of page 29  Cost to dispose of leased aircraft is $50,000  Owned aircraft disposed of at book value  Brokerage fee of 2% of book value  Maximum of three each quarter Weekly/Quarterly Decisions Decision 27: Market Research Studies  $1,000 – Industry forecast  $2,000 – Quality and compensation  $4,000 – Average fare/cabin service  $8,000 – Total seats sold daily/market  $16,000 – Promotion/Advertising/Cargo  $31,000 – All reports Weekly/Quarterly Decisions Decision 28: Incident Reporting (covered separately) Weekly/Quarterly Decisions       Decision 29: Changes in Markets Served Maximum of 14 changes per quarter Market # - See Page 18 Trip Flights per Day – Round Trips Total Seats – Flights x seats/aircraft Type of Fare Sale – See page 16 For saturated markets, maximum of four flights per company per day Incidents      One per week “Mini-case” – Requires action First incident – Name your airline (Incident A) All incidents identified and detailed in Section 4 of the text. Each incident description will direct how to respond on decision sheet Annual Report       Will cover all quarters Polished document Use examples from real companies Start with outline…I will review and consult Presentation at the end Due Midnight, Sunday, 4/23 Grading Distribution  Airline Simulation is worth 40% of your final grade      10% Financial Projection Exercise 10% Mid-Continent Case Study 5% Airline Standing 5% Management Skills/Application of Knowledge 10% Annual Report About Airline Standings   Complex algorithm – I do not have the algorithm Generally based on same factors that would affect real company      Points distributed based on standing. Top team gets 5 points. All other teams are assigned points based on their standing with scores evenly distributed. Stock price Profitability Reliability Public perception