Starting a business Low-cost airline - Free Essay Example

Introduction The goal of this project is to develop an estimate on the framework of starting a low cost airline. The requirements for this will be to develop costs, strategies and actual plausible routes for which the airline could be created. As the creation of an airline takes sometimes years of work and analysis, for this project cost estimation will be used based on policies used by other companies such as EasyJet and Rynair. Current Airline Economics Still recovering from the effects of 9/11, airlines are continuing to lower prices on all flights. With this many airlines have sprung up over the years with lost cost alternatives. These include the two European front-runners known as Easyjet and Rynair. Introduction into this market is fiercely competitive but with the current trends of the public gravitating towards low cost options, there is much room for gaining market share. Currently passenger numbers is at an all time high from the new economic availability from price drops and it continue to grow. 2004 current has seen a drop in stock by almost 12%; meaning competition is getting fiercer as they try to create more value for the consumer. 2004 as well has seen an increase of customer complaints of over 70%. This leads for room of a new airline entering markets with low cost but maintaining quality for the consumer to gain market share. The industry is growing despite previous value problems which means more then ever there is opportunity for a new comer who operates to combat current weaknesses while taking advantage of the current low cost trend. Current Competition The main two competitors to consider when forming the airline is EasyJet and Rynair. Both have been able to profit over the new focus on low cost airlines. Their strengths lie in the size of their company’s resources along with an ability to use their networks to expand further. To develop a company to compete with this, it is going to be important not only take their advantages of cost saving engines but also to be creative to give customers a reason to buy from this organization. Secondary competition comes from the form of alternative transportation. Rail systems within Europe are very effective and relatively low cost in comparison to many flights. This needs to be a concern when marketing Mobilize-you.com but only secondary to the strength or rival airlines as nothing is as fast as a plane. Company Registration As one of our major hubs is Rome, it makes sense to base our business there to ensure management is close to any potential problems. Italy has unrestricted foreign investment into the country that will enable for easy entry. On the other side Italy is well known for their complicated bureaucratic processes, which will mean during registration we must make sure that everything is done perfectly by the book. The company will be registered as a Joint stock company (Società   per Azion) (SpA) that is for companies who are not a limited company but has a sizable amount of foreign investment. The governing body for this will be Italian Organization for Economic Co-operation and Development which is the basis for all regulatory actions for new business. The company name will be called Mobilize-you and the web name will be called Mobilize-you.com. Taxation Within Italy, Mobilize-you will be required to pay the normal corporate taxation rate of 33% pl us. This taxation rate is standard for most of the world and the local rate is lower then most other countries meaning this neither gives nor takes away any advantage from being based within Italy. Licensing Other then registration within the Italian government Mobilize-you must also be registered with the CAA (Civil Aviation Authorities) and the required license will be a Class A that enables the transport of passengers in Aircraft with over 20 seats. To acquire this license the operators must first pass the Air Operators Certificate (AOC) which is regulated by the CAA as a testing procedure for safety regulations, this will need to be written in Italy as it is where the company will be started. Once that is done Mobilize-you must prove that they have the required financial backing to start the airline and then show a standard business plan that will highlight why they will be a successful venture. After this Mobilize-you then needs to show they have proper insurance to cover the capacity in which they will operate. The final step in licensing is the requirement for all planes operating within the European Union to obtain an EEC route license that imposes additional transport laws on the applicant. This license is required for allowance to land within any EU airports and normal regulations involve payload size etc. Basic Company Management The organizational structure for Mobilize-you will be kept simple and small with high involvement of the whole team. Out sourcing will play a key role in this so that costs can be kept low and related to cash flows instead of incurring large fixed costs. The main team will consist of five people, all of whom will be paid a yearly salary of $100,000. Their structure will be used as a board of directors voting system with myself being places as the CEO. CEO The CEO will be required to oversee the entire operation and determine future company direction. The CEO take full responsibility for the actions of the company and liable for mistakes. The responsibilities will involve management of the senior team along with strategy development. CFO Chief financial operator will be responsible for handling the accounting contracts with outsources supplier and for developing accounting procedures to promote solid business practices. As CFO, the person is also responsible for developi ng efficient cash flows and determining investment requirements. Within these duties the CFO also needs to produce income statements for analysis and negotiate with investors and suppliers in terms of payment. Head of Human Resources Responsible for handling the negotiations with the crew of Mobilize-you. Also needs to develop recruitment strategies and pay packages for staff along with account management for the outsourced administrative staff. Head of Strategic Marketing This manager handles the account management and direction of the advertising budget. The responsibilities includes budget management, developing of strategies and brand creation for Mobilize-you. Head of Operations Is responsible for handling the aircraft maintenance along with the contracts involved with leasing of aircraft and overhead. Responsibilities involve budgeting and overall ensuring that the airline will operate. This involves negotiating with airports service teams. Choice of Routes The choice of routes is vital for the survival of the airline. Routes must be chosen to keep load factors high, ideally 100%, to get maximum revenue from each flight. Competition from other airlines must be considered, more so from competing low cost airlines than premium carriers like British Airways or Air France as they target a different market. If Ryanair or EasyJet are not currently operating in an area that greatly increases the allure of the market as there is less competition. A key to survival in the low cost airline business is to minimize the competition with other low cost airlines while operating in the same general market. The reason I didn’t choose any Paris-London or Dublin-London routes was the large amount of other low cost airlines operating those routes. To enter these route markets is to enter into a direct price war with established service providers. As a startup airline that would be a dangerous maneuver without sufficient financing and the willin g to operate at a loss until the competition has been finished. As a startup I don’t have those resources so I mainly looked at routes open for entry that were lacking a low cost provider. Choosing routes that were useful to business as well as recreation travelers was also an important consideration. Making your airline available to both types of traveler is important to maximize potential clients. This was also taken into account when drafting the timetable of flights as well. Brand recognition also received consideration in planning routes. By traveling to five different nations the airline is able to build a reputation and hopefully this will translate into customer confidence and increased sales. Good brand recognition combined with efficient advertising and a reliable service will help draw customers to the airline and increase revenues. 1.Vienna to Frankfurt (Frankfurt Hahn) à ¯Ã¢â‚¬Å¡Ã‚ ·Gets both business travelers and vacation seekers. à ¯Ã¢â‚¬Å¡Ã‚ ·With a base of 505,869 passengers in 1995 the number of passenger in the last 10 years has surely increased. Vienna International Airport has experienced consistent large gains in passenger numbers so the number of passengers going on this route is undoubtedly much larger. à ¯Ã¢â‚¬Å¡Ã‚ ·If the average of 99 passengers is obtained using the Boeing 717 then the load factor will be 93% which is excellent and allows extra room in peak seasons. Since the number of passengers has most likely increased though there is no data for the increase in the number of flights the same average of 99 passengers per plane is used. à ¯Ã¢â‚¬Å¡Ã‚ ·Entry frequency is 28% that is relatively high but no low cost airlines do this route. Neither EasyJet nor Ryanair operate on this route. Swiss Air and Lufthansa are the main operators on this route. 2.Vienna to Amsterdam à ¯Ã¢â‚¬Å¡Ã‚ ·Vacation seekers and business people will utilize this route. à ¯Ã¢â‚¬Å¡Ã‚ ·With over 360,000 passengers fl ying this route in 1995 the figure in 2005 would much higher if it followed market trends. The figure of 99 passengers per plane is assumed to be constant and flying with the Boeing 717 the load factor will by 93%, just enough to allow for extra passengers during peak periods. à ¯Ã¢â‚¬Å¡Ã‚ ·Ryanair and Easyjet have not yet exploited this market so it lacks a true low cost operator. à ¯Ã¢â‚¬Å¡Ã‚ ·A 39% entry frequency is high but I feel that by choosing Vienna as my base I can overcome these obstacles and be able to survive and prosper in this market. 3.Rome (Ciampino) to Athens à ¯Ã¢â‚¬Å¡Ã‚ ·Vacation seekers and business people will utilize this route à ¯Ã¢â‚¬Å¡Ã‚ ·EasyJet and Ryanair do not fly this route so I feel that a low cost airline will be able to be highly competitive on this route. à ¯Ã¢â‚¬Å¡Ã‚ ·With an average of 186 passengers per route it has the potential to be highly profitable. Flying with a plane capable of carrying 220 passengers this gives a good load factor at 85% à ¯Ã¢â‚¬Å¡Ã‚ ·The market size of over 500,000 in 1995 has surely bloomed and the low 18% required entry share is highly attractive. By having a high load factor I should be able to enter the market and prosper. 4.Rome (Ciampino) to Madrid à ¯Ã¢â‚¬Å¡Ã‚ ·Vacation seekers and business people will utilize this route à ¯Ã¢â‚¬Å¡Ã‚ ·Through Ryanair and Easyjet both have hubs at Ciampino, they do not cover this route. The lack of a low cost carrier on this route makes it more attractive. à ¯Ã¢â‚¬Å¡Ã‚ ·With 125 passengers per plane on average the carrying potential is high. By using a plane that potentially seats 150 people that will result in a load factor of 83% which is an excellent figure. à ¯Ã¢â‚¬Å¡Ã‚ ·The 19% required share value is also low for a route with potential for new entry. This is another positive factor that influenced my decision. Choice of Hubs Hubs were chosen primarily for low cost and solid increases in passenger traffic. Financial incentives offered by airports were attractive and those with the best packages offered were considered favorably. Location also played a factor, as the airline must choose strategic locations to expand in the future. Vienna: Vienna International Airport has shown excellent growth in passenger volume and is committed to lowering costs to assist in attracting airline companies. Incentive packages for frequent departures and landing combined with free parking and fees. Their commitment to reducing costs relative to neighboring airports was a major factor in selecting this airport as a hub. The location of Vienna as a hub was also a factor. Being central in Europe’s geography flights from Vienna can easily reach all Western Europe and provides a gateway for the rapidly developing countries in Eastern Europe. The addition of Eastern European nations to the EU will increase busine ss traffic and wealth of the general population resulting in more flights. Having a hub here prepares the company for such a shift into Eastern European markets as they become available. Rome: Ciampino Airport. The choice of Rome as a hub was a more difficult one. The financial information on the airport is not readily available though it is assumed to be cheaper to operate from than larger airfields in the same region. The region is attractive as Rome is a major destination for tourists and business people alike so high volumes of traffic are assured. The market is large and low cost carriers abound. Ryanair and Easyjet both have hubs located here but they do not fly the routes I have chosen so they should have little effect on the airline. If my airline undergoes expansion or Ryanair or Easyjet enter competition with me on the routes I have chosen from this hub it will bring me into direct competition with these carriers. Rationale for Airport choice Vienna: Vienna International Airport. This airport was chosen for the growth in passenger volume and for the financial incentives offered. By flying from Vienna I am able to save 40% on airport fees by making more than 21 trips per week with similar reductions for fewer departures a week. The fact that other low cost airlines don’t have flights to this location was a major factor in selecting the destination Rome: Ciampino Airport. This airport was chosen over Leonardo Da Vinci International due to expectation of lower costs at the smaller airfield. Exact costs are not available for the airport but Ryanair and other discount airlines use this airfield over Leonardo Da Vinci International. The airport is already the destination of choice for low cost carriers and is adapting its facilities to deal with increased demand expected from these activities. The airport is actually closer to the city than Leonardo Da Vinci International and this is helping increase its popul arity. Frankfurt: Frankfurt Hahn Airport. I choose this airport over Frankfurt International Airport that is larger and closer to the city centre for cost and slot availability. Ryanair is based from this airport and EasyJet doesn’t operate to or from this city at all. The airport is only 120 km from Frankfurt city centre and can be reached in 70 minutes by modern bus and rail services. There may be bad for some travelers who would prefer to be in the city centre but the low price of the flight should offset any time lost or associated traveling costs. The airport is well served by the transport system so even people who have never been to Frankfurt before should be able to navigate to the city. Landing outside the city may be beneficial for people who’s main destination is not the city centre but on the outskirts somewhere. Amsterdam: Schiphol Airport. This airport is the only major airport in the Netherlands located close to the city of Amsterdam. Other a irports such as Groningen, Rotterdam, Eindhoven Airport and Beek were considered but all of them are a considerable distance from the city and extra transport would be required to reach Amsterdam. Though in previous cases airports were chosen that were outside the city centre I felt that these alternate airports were too far to justify the possible savings in airport fees. Madrid: Barajas International Airport. This airport was chosen mostly for lack of options. There are no other major airports within striking distance of Madrid and this airport is a high traffic zone with more than 40 million customers per year. A positive aspect is the construction of a new terminal that is expected to be open in 2005. This new terminal is expected to double airport capacity. This will increase slots available and allow us to operate from this location where otherwise slot competition would have had a negative influence on choosing Madrid as a destination. Athens: Eleftherios Venizelo s International Airport. This is the only major airport in Athens. Other airports are present in Greece but none conveniently located to the city centre. The airport is modern; having begun operating in 2001 so the facilities should be able to handle my planes with little problem. There is a good rail system connecting Olympic venues and other major destinations and since the airport is 20km outside the city these are vital to Athens tourism and for our customers. Calculations for the timetables of each route To construct the timetables for the flight routes it was necessary to determine the flight time between each city in the route. Using the formula that assumes the use of a jet is given as t = 0.65 + (distance in km / 850). This formula gives the travel time in one direction. I will use the Vienna to Frankfurt route as an example Vienna to Frankfurt t = 0.65 + (distance /850) = 1.38 hours per trip To convert 1.38 into hours:minutes format it is necessary to take the remainder after the whole number, divide it by 100 and multiply it by 60 minutes. The result is the whole number is the hours and the converted fraction is the minutes. 1.38 hours is 1 hour plus (38/100) * 60 = 22.8 minutes which is rounded up to 23 minutes. This gives a total flight time in one direction of 1 hour and 23 minutes. This is the value used from departure to landing time in the timetables. To determine the maximum flights possible per day a maximum 16 hour operating day was assumed. The 16-hour day was used to simulate typical average aircraft usage. Another factor that needed to be taken into account was the time used to disembark, reload the plane and take off again. This time was assumed to be 30 minutes and was used between every landing and takeoff. To calculate trips per day in a 16 hour work day: Trips per 16 hour day = 16 / (t + 0.5). The t comes from the above equation and the 0.5 represents the  ½ hour turn around time. Therefore Trips per 16 hour day = 16 / (1.38 + 0.5) Trips per 16 hour day = 16 / 1.88 = 8.51 trips This figure of 8.51 accounts for trips in both directions. To get the round trip total divide this number by 2. This result is 8.51/2 = 4.25 return trips per day possible. Since 0.25 of a trip is impossible 4 return trips are possible. Each trip takes 1 hour and 23 minutes. These calculations are repeated for each of the routes and the numbers used to fill in the timetable of scheduled departures. Timetable for Flights To choose the departure times for the flights between destinations a critical evaluation of potential customers was necessary. A business traveler needs to arrive before the start of the business day while the typical traveler would find it more suitable to leave after the end of the workday. The choices on this timetable are oriented to find a compromise between business and vacation travelers. Since it is not cost effective to allow a plane to sit and wait unnecessarily in between departures the last departure time had to be coordinated with the first departure of the day that makes it difficult to orchestrate. Those flying at the lowest possible cost typically expect inconvenient departure times but here I have tried to strike a balance. The times of departure are not the typical multiples of five and this is done on purpose to maximize the flying potential of my aircraft. If I tried to round off the flight times that would waste both time and money. For instance if I were to round the numbers up for aircraft 1 on Vienna to Frankfurt that would constitute a loss of 33 minutes just to make the numbers multiples of five. As a low cost operator 33 minutes of wasted time each day per aircraft is unacceptable so the departure times are for maximum flight hours. Aircraft 1 Boeing 717 Vienna to Frankfurt 1.38 hours per trip is 1hr and 23 minutes 4 trips per day Same time zone. Depart Vienna 0600 Arrive Frankfurt 0723 Turn Around Time 0030 Depart Frankfurt 0753 Arrive Vienna 0916 Turn Around Time 0030 Depart Vienna 0946 Arrive Frankfurt 1009 Turn Around Time 0030 Depart Frankfurt 1039 Arrive Vienna 1202 Turn Around Time 0030 Depart Vienna 1232 Arrive Frankfurt 1355 Turn Around Time 0030 Depart Frankfurt 1425 Arrive Vienna 1548 Turn Around Time 0030 Depart Vienna 1618 Arrive Frankfurt 1741 Turn Around Time 0030 Depart Frankfurt 1811 Arrive Vienna 1939 Turn Around Time 0030 A 0600 depart time for Vienna is chosen in this case to maximize the ability for business use and travelers who need to arrive in Frankfurt early. The timing also allows noon arrivals at Vienna which is good for business as well as an after dinner departure from Frankfurt for people who are leaving on their trips after work. A 5th flight leaving later in the evening is the obvious o ption that is missing but with an operating time of only 16 hours it was deemed that the 0600 departure would be better than a 2200 departure. These timetables may need to be adapted to customer demand in the future. Aircraft 2 Boeing 717 Vienna to Amsterdam 1.776 hours per trip is 1hr and 47 minutes 3 trips per day Same time zone Depart Vienna 0800 Arrive Amsterdam 0947 Turn Around Time 0030 Depart Amsterdam 1017 Arrive Vienna 1204 Turn Around Time 0030 Depart Vienna 1234 Arrive Amsterdam 1421 Turn Around Time 0030 Depart Amsterdam 1451 Arrive Vienna 1638 Turn Around Time 0030 Depart Vienna 1708 Arrive Amsterdam 1855 Turn Around Time 0030 Depart Amsterdam 1925 Arrive Vienna 2112 Turn Around Time 0030 A 0800 departure from Vienna is chosen in the case for diversification. By leaving, foregoing the red-eye flight I am able to provide service later into the evening with the final departure from Amsterdam at 1925 to allow people to leave that city after the work day and arrive in Vienna in time to catch public transport to their destinations. If the first departure were to be a 0600 then final departure from Amsterdam would have been a 1725 which would inconvenience people and hence lower the probability that th ey would take that flight. Here the later departure time in the evening was chosen over the early morning flight. Aircraft 3 A321 Rome to Athens 1.91 hours per trip is 1hr and 55 minutes 3 trips per day Athens is +1 hour Depart Rome 0600 Arrive Athens 0855 Turn Around Time 0030 Depart Athens 0925 Arrive Rome 1020 Turn Around Time 0030 Depart Rome 1050 Arrive Athens 1345 Turn Around Time 0030 Depart Athens 1415 Arrive Rome 1510 Turn Around Time 0030 Depart Rome 1540 Arrive Athens 1835 Turn Around Time 0030 Depart Athens 1905 Arrive Rome 2000 Turn Around Time 0030 The departure time of 0600 from Rome was chosen for business purposes as people going to Athens can arrive at the start of the business day. Though this is certain to be a popular flight for recreation seekers the 0600 start time does not come at the sacrifice of a later departure from Athens that leaves at 1905. Aircraft 4 A319 Rome to Madrid 2.215 hours per trip is 2hrs and 13 minutes 3 trips per day Same time zone Depart Rome 0600 Arrive Madrid 0813 Turn Around Time 0030 Depart Madrid 0843 Arrive Rome 1056 Turn Around Time 0030 Depart Rome 1126 Arrive Madrid 1339 Turn Around Time 0030 Depart Madrid 1409 Arrive Rome 1622 Turn Around Time 0030 Depart Rome 1652 Arrive Madrid 1805 Turn Around Time 0030 Depart Madrid 1835 Arrive Rome 2048 Turn Around Time 0030 For Rome to Madrid I believed that business travelers would benefit from the 0600 departure from Rome. Then the departure from Madrid to Rome is sufficiently early for business people to make it to Rome for the better part of the business day. The last departure of the day is at 1835 which is not good for vacation travelers who will find it difficult to get off work and reach the airport in time for departure but this is a necessary sacrifice for the first flight time of the day. Startup Costs The main strategy for Mobilize-me strateg ies for the low cost airline is to outsource as much as possible to lower startup costs. With this there is only the requirement to invest a large initial sum into a head quarters and initial marketing launch. I felt that the initial marketing launch is very important, as the company needs to be established as quickly as possible into a known brand. Trust is very important in the airline industry so in order to ensure the public knows the high standards that Mobilize-me stands for I have decided to invest $10,000,000 on the marketing launch. Also within this I feel it is a requirement to have an established headquarters that I have budgeted another $5,000,000 for. I also will require a float of 1,000,000 to handle any unforeseen costs outside of general operations. The total startup capital is $16,000,000. Fleet Specifications Plane Choice In today’s first world market, you really only have the choice of jet engines. Using a jet engine gives more thrust during the very fuel consuming take off which during the journey saves money. Of the major suppliers Airbus and Boeing offer the most widely acceptable aircraft. Both brands are at the forefront of the market and offer cost effective technology to increase bottom line profit. The other advantage of using these two companies is both are currently in fierce competition with each other which enables for top of the line maintenance contracts and leasing options. Fleet 2 Boeing 717-200 1 Airbus A321 1 Airbus A319 Plane Choice for Vienna to Frankfurt Vienna to Amsterdam Alternatives An obvious choice for these routes would be the widely used Boeing 737 with their large 180-passenger capacity and fuel-efficient technology. Average passenger sizes for these routes did not meet the capacity requirement for the Boeing 737 as to make it effective w e would need to be pushing maximum passenger amounts to be cost effective. With this it would be better to use the smaller Boeing 717 for these routes. The other viable alternative is using the Airbus lines like the A318 with a passenger capacity up to 130 that leaves room for growth. Problems with the Airbus are that they are not very fuel efficient with their fat bodies so high frequency short travel is not very effective. In the end I feel using the Boeing 717 is the best bet for effectiveness and efficiency. Boeing 717-200 Passengers- 106 Boeing’s 717 was the optimal choice for the short turnaround trips with lower passenger requirements that Vienna to Frankfurt and Amsterdam requires. This plane was created for these and due to this they have made great improvements on fuel consumption and costs. More effective cruising technology enables the 717 to save between 5% and 8% on fuels costs after reaching cruising altitude. Companies such as Air Tran airways has been able to lower costs considerable since introducing the 717 to their fleet by taking advantage of their greater fuel economy. Another draw of the 717 is that Boeing offers full maintenance coverage on their aircraft with their leasing and buying plans. The Boeing team are the absolute experts on their craft and have all the required replacement parts to lower any down time. Economic The Boeing 717-200 was introduced in 1999 to capitalize on the strengthening high frequency, low passenger load market. It’s rear twin jet technology allows for a more economic flight that will lower operational costs. Fuel consumption on the 717 is very low in comparison to its competitors and it also requires less maintenance as they have copied the tough framework of the DC-9 of the late 1970’s. Leasing versus Buying Purchasing a new Boeing 717 would cost around 38.0 42.0 million USD, while leasing a plane would be considerable less. Current leasing prices with Boeing include their standard maintenance agreement that ensures that all planes will be maintained properly. The advantage of leasing from Boeing is three fold. The first is the initial startup for the company will be less. Even in a standard lease situation where financers want to charge a normal 5% amortization rate to cover the 20 year life span on the model compounded yearly with a lease agreement of 20 years would still only have a first year cost of 2.1 million. The down side to Boeing lease agreements is the will handle the cost of your maintenance as well but own a 15% share in the company‘s seat sales from the craft. As this is a startup we need to consider cost first as the more money required to get off the ground, the harder it will be to succeed. Buying a fleet of planes is just currently outside the range that can be afforded from the start. The end result is to lease the current craft then as years pass on to gain enough capital to purchase the craft completely . Cost over Routes with Aircraft The range on the 717 is 1,430 nautical miles with a fuel capacity of 3,670 U.S. gallons. This gives a fuel economy of .39 miles/ gallon. Current fuel prices have been fluxuating from a high of 1.55USD this year to around 1.10USD so we will average it to around 1.30USD for this project which is high for now but fuel prices are ever increasing. The basis for my cost modeling is going to be used from calculations done from AirTran airways on savings from previously using DC-9-30. This is due to lack of actual numeric data on flight costs other then percentage saved. AirTran airways claims that the 717 is 24% more efficient in concerns to maintenance and fuel then the DC-9-30. 2000 figures for the DC-9-30 show that the hourly cost for running one is $2,157.00 which is broken down to 633.00 for fuel costs (at .7 a gallon) and 1524.00 for maintenance and upkeep. Altering this figure for today’s fuel prices (.70 cents per gallon 1.30/gallon) w e see hourly cost of fuel increase from 633 to 1175.58 making total cost 2699.57. Cost for running the 717 is then .74* 2699.67= 1997.68$/ hour Yearly Costs of Plane 1- Boeing 717 Vienna- Frankfurt 1 trip= 1hr 23 min air time= 1.38hrs*1997.68= $2756.80/trip Yearly= $2756.80/trip* 4trips/day*365days/year=$4,024,928.00 *2 for full return trip= $8, 049, 856.00 operating cost Amortization cost= $42,000,000 *.05= $2,100,000.00 Yearly Costs of Plane 2- Boeing 717 Vienna- Amsterdam 1 trip= 1hr 47 min air time= 1.78hrs*$1997.68=$3555.87/trip Yearly= $3555.87/trip*3trips/day*365 days/ year= $3,893,678.10 * 2 for full return trip = $7,787,356.20 operating cost Amortization cost= $42,000,000*.05=$2,100,000.00 Plane Choice for Rome to Athens Rome to Madrid A321 A319 Alternatives Rome to Athens has an average passenger load of 186 that will require a larger aircraft then the 717. Going larger in that range you can debate using the 747 but the y are notoriously used for long distances and still do not carry enough people, from here we look at the Airbus line. Airbus is fantastic for carrying people with the larger passenger capacity in commercial airlines. This is a trade off with slightly higher operating costs but low airtime makes them a good choice when moving a lot of people over relatively short distances. The trip to Athens needs a larger plane to accommodate the large market. With this I chose the A321 as it can hold 220 passengers, this may seem like a bad choice but when considering that in busier times more passengers will be required, in opening year we are trying to establish a name and being foolish with capacity could hurt our bottom line. I would rather have all 220 seats and be ready for increase passenger load then paying less and hoping no more then 200 show up passengers each trip. For the small Rome to Madrid route I feel that the Airbus A319 would be effective as they can meet demand accurately with a passenger load of up to 145. It has a slightly larger wingspan then most planes of its class that allows for slightly better fuel efficiency in the air. Airbus A319 Airbus A320 Economic factors The A321 and A319 both contain many of the same features like a large range so multiple trips can be made without fueling and increased aerodynamic designs to increase fuel efficiency. Another advantage of using the Airbus line is they have the capabilities to be altered into a more cargo carrying aircraft. This could be used to supplement income if ticket sales are low. Leasing vs. Buying Buying an A319 would cost between 44 and 49 million USD and purchasing an A321 would cost considerable more with a range of 51-56million USD. As with previous the most cost effective way to operate is to lease the plane at 5% while giving up 15% of each seat. As the company gains money over the year, they can start to purchase the planes so that there will be no loss on the revenue. C ost for Routes with Aircraft More published statistics on the Airbus line is available. Keeping current statistics with fuel prices currently being used at 1.30USD per gallon we can alter past statistics to give a current cost per hour. A321 hourly cost $1,736.00+ $787.00($1.30/$. 7)= $3197.57 Yearly Cost Plane 3- A321 Rome-Athens 1 trip=1hr 55min= 1.33hrs= $4252.77 Yearly= $4242.77/trip*3trips/day*365 day/ year= $4, 656, 781.10*2 for full return= $9, 313, 562.2 Amortization cost= $56,000,000* 0.05= $2,800,000 A319 hourly cost $1,458.00 +$698.00($1.30/$.7)= $2754.28/hr Yearly Cost Plane 4- A319 Rome-Madrid 1 trip= 2hr 13min= 2.217 hrs= $6106.24 Yearly= $6106.24/trip*3trips/day*365days/year= $6,686,331.44*2 for full return= $13, 372,662.88 Amortization cost= 49,000,000*0.05= $2, 450,000 Human Resources- Staff Flight Crews Advantage of low range, high frequency flights is you can get away with the minimal requirement for staffing as long as you ensure the quality is maintained. The 717 flights will employ one captain per flight and one co-captain. For support there will be three attendants (one of which is a senior attendant) to handle the needs to the passengers. In my opinion I would rather pay more for experienced staff to ensure a high quality service is given to c ustomers. The Airbus A321 and A319 will be staffed in the same way. Flight Attendants Easy jet currently pays attendants $36,000/ year and senior attendants $44,000 year. To compete with this I would like to offer these salaries with a profit sharing scheme that could be worth up to another $4,000 per year. Pension plan will also be added to this for any employee after 1 year that will equal to the standard 5% per year. Added to the bonus scheme we will be offering 32 yearly holidays that includes bank holidays. All flights will be offered to employees at free of charge as long as there is seat availability. Pilots/ Co-pilots Once again basing salaries on EasyJet as their pricing model will be similar to ours, Pilots are paid $130,000 per year and Co-Pilots will be offered $70,000. Bonus scheme for pilots will be worth up to $10,000 per year and co-pilots $7,000 per year. Pension will still be 5% of salary and they will receive 32 yearly holidays. Again flights will be offered free if seats are available. Staffing Requirements and Cost The most effective way to judge this is to completely separate the routes to determine need and required crew. I also feel to increase quality to the client that having crews who work together all the time on the same path will be able to perform best so each will be staffed separately with a small float to cover holidays, sickness etc. Route Vienna to Frankurt Daily Flights- 4 Time per Flight including turnaround- 3hrs 46min Total hrs working day- 15hrs 3 min Weekly Time- 105hrs 21min Employee Supply To cover this route, it is going to require 3 full crews. Each crew will be required to do nine trips per week along with alternating each week taking one other trip. This will equal to working an average of almost 39 (9*3hrs 46min+ 1.33*3hrs 46min= 38.7hrs) hours per week. Holiday time will covered by our float crew and any other adjustments will need to be handled by contractors. Annual Cost for this route Attendants= 6*36,000=216,000+bonus of 4,000*6=216,000-240,000 Senior Attendants= 3*44,000=132,000+bonus of 4,000*3=132,000-144,000 Pilots= 3*130,000=390,000+bonus of 10,000*3=390,000-420,000 Co-Pilots= 3*70,000=210,000+bonus of 7000*3=210,000-231000 Total=$948,000-$1,034,000 Route Vienna- Amsterdam Daily Flights- 3 Time per Flight including Turnaround- 4hrs 33min Total hr in working day- 13hrs 39min Weekly Time- 95hrs 33min This route will require 3 full crews as well with the requirement to do seven routes per week. This can be split at their discretion based on individual requirements which also makes this job more marketable. Also within this as their workweek is under 32 hours, the will be asked on occasion to take extra routes to cover holidays or sick leaves. Annual Cost for this route Attendants= 6*36,000=216,000+bonus of 4,000*6=216,000-240,000 Senior Attendants= 3*44,000=132,000+bonus of 4,000*3=132,000-144,000 Pilots= 3*130,000=390,000+bonus of 10,000*3=390,000-420,000 Co-Pilots= 3*70,000=210,000+bonus of 7000*3=210,000-231000 Total=$948,000-$1,034,000 Route Rome Athens Daily Flights- 3 Time per Flight including Turnaround- 4hrs 49min Total hr in working day- 14hrs 28min Weekly Time- 101 hrs 16min Once again 3 flight crews should be able to handle this route with 7 roundtrips per crew being the standard. The weekly time worked on this would be 33hrs 45min. As this is low, flight crews may be required to take additional routes every once in a while depending on demand. Annual Cost for this route Attendants= 6*36,000=216,000+bonus of 4,000*6=216,000-240,000 Senior Attendants= 3*44,000=132,000+bonus of 4,000*3=132,000-144,000 Pilots= 3*130,000=390,000+bonus of 10,000*3=390,000-420,000 Co-Pilots= 3*70,000=210,000+bonus of 7000*3=210,000-231000 Total=$948,000-$1,034,000 Route Rome- Madrid Daily Flights- 3 Time per Flight including Turnaround- 4hrs 6min Total hr in working day- 16 hrs 18min Weekly Time- 114 hrs 6min As before 3 flight crews should be able to handle this route with 7 roundtrips per crew. The weekly work time will be just over 38 hours a week that is very manageable. Annual Cost for this route Attendants= 6*36,000=216,000+bonus of 4,000*6=216,000-240,000 Senior Attendants= 3*44,000=132,000+bonus of 4,000*3=132,000-144,000 Pilots= 3*130,000=390,000+bonus of 10,000*3=390,000-420,000 Co-Pilots= 3*70,000=210,000+bonus of 7000*3=210,000-231000 Total=$948,000-$1,034,000 Supply Crew On top of regular working time, all employees get 32 vacation days a year. This amount of time over multiplied by the 13 flight crews equals enough to warrant having 2 additional separate supply crews to handle the time, 32*13= 416 working days. The total cost for additional flight crews equals $632,000- $689,332 in annual costs. Overall Annual Cost for Flight Crew Vienna to Frankfurt$948,000-$1,034,000 Vienna- Amsterdam $948,000-$1,034,000 Rome- Athens $948,000-$1,034,000 Rome- Madrid $948,000-$1,034,000 Supply Crew$632,000- $689,332 Total$4,424,000- $4,825,332 Overhead Costing Developing a costing strategy for support workers is hard to estimate so it is best to use established suppliers. These fees are becoming more and more regulated as the European laws are becoming more and more uniform. With this I believe using EasyJets cost model would give the most accurate depiction of costs for this paper. As we are trying to compete as a low cost airline it is safe to say that EasyJets model should be the goal of our organization. The other advantage of using their model is they are far larger then Mobilize-you so we may be able to be more efficient from a cost standpoint making their numbers a little too high. Judging high in these situations will allow for a solid risk management of operations as even though costs should be lower I am taking actions to protect against them being higher. The cost breakdown can be found on sheet one of the attached spreadsheet. Support/ Handling/ Station Costs/ Passenger Services Cost analysis is going to estimate using the Easyjet model from 2004. This is based on revenue percentages will be linked to proposed ticket prices. The reason for this is the costs are separated into two main blocks, one is fix costing and the other is variable. Ticket prices will need to be set to cover the fixed costs along with the minimal variable costs to break even. Ground handling charges were run at 10.2%. Suppliers will be used from the local airports services departments. Airport Charges The average airport charges are around 17.5% of revenue for Easyjet. This is a substantial cost to the airline but still needs to be taken into affect. Sadly due to airport choices, we have a higher cost for airport charges that increases the %change on the Easyjet models airport choices at over 1.5% making the total airport charges at 19% of revenue. This has been based by looking at the EasyJet airports used and then comparing airport costs from the CAA website and developing a percentage difference. EasyJet and Ryanair are able to operate at 1.8% insurance costs. They have been able to lower these costs over years of proven service to the consumer. Our airline will need to use the introductory costs that Ryanair was forced to use which is at 2.3% of revenue. Data for this was found on financial statements from Ryanair 1995 financial statements as that was the year they started to truly expand their market. A hidden cost of airlines is the charge required for navigate flights and payments made to the control center. The average amount paid by easy jet was 8% that is a stable based on flight volume so should be used with the same ratio. The competitors already have made a name for themselves in the industry. To steal some of this market it will be required for Mobilize-you to invest a considerable amount more into marketing and advertising. I propose an initial launch cost of $10,000,000 followed up with a 5% of revenue advertising budget. The 5% will not be used in the startup year cost judging, as it is a future cost. The most effective way to keep costs down is to outsource to people who charge you based on volume of work completed. Contracting this way ensures you are not wasting salary on administrative staff; an estimated cost for this has been 2% of sales Breakeven Ticket Prices As we aimed low for passenger capacity, we can judge payload to be at 80% capacity. The following calculation descriptions will describe the theory behind the breakeven ticket prices Vienna to Frankfurt The total fixed cost of operations has been estimated at $11,731,189 per year. With this, the estimated percentage cost of operations will be 55.5% of revenue based on the Easyjet model. To breakeven then, 44.5% (100-55.5%) must equal the fixed costs of $11,731,189. $11,731,189/ 0.445= $26,362,222.47 Passenger numbers= 106 capacity*.8= 85 passenger per flight*4trips/ day*365 days/ year= 124,100 $26,362,222.47 of required revenue/ 124,100 passengers= $212.43 per ticket to break even. The total fixed cost of operations has been estimated at $11,468,689 per year. With this, the estimated % cost of operations will be 55.5% of revenue based on the Easyjet model. To breakeven then, 44.5% (100-55.5%) must equal the fixed costs of $11,468,689. $11,468,689/ .445= $25,772 ,334.83 Passenger numbers= 106*.8= 85 passengers per flight* 3trips/ day* 365 days/year= 93,075 $25,772,334.83 of required revenue/ 93,075= $276.90 per ticket to break even The total fixed cost of operations has been estimated at $13,694,895 per year. With this, the estimated % cost of operations will be 55.5% of revenue based on the Easyjet model. To breakeven then, 44.5% (100-55.5%) must equal the fixed costs of $13,694,895. $13,694,895/ .445= $30,775,044.95 Passenger numbers= 220*.8= 176 passengers per flight* 3trips/ day* 365 days/year= 192,720 $30,775,044.95of required revenue/ 192,720= $159.69 per ticket to break even The total fixed cost of operations has been estimated at $17,403,996 per year. With this, the estimated % cost of operations will be 55.5% of revenue based on the Easyjet model. To breakeven then, 44.5% (100-55.5%) must equal the fixed costs of $17,403,996. $17,403,996 / .445= $39,110,103.37 Passenger numbers= 145*.8= 116 passengers per flight* 3trips/ day* 365 days/year= 127,020 $39,110,103.37 of required revenue/ 127,020= $307 .91 per ticket to break even Competitor Prices Basically as a company, Mobilize-you will have two main components to determine what ticket sales are. The first is operational cost that will set an absolute low and competitor costs that will determine the high. Anything lower then competitor prices and higher operational costs can be used to generate a profit. The previous cost analysis has shown what is required to breakeven now the following data gather from travelocity.com will determine what prices we need to beat to be considered a low cost airline. All booking dates were made over one month in advance to ensure no extra costs were incurred. FlightCostCompetitor Vienna to Frankfurt$234Austrian Airlines $284Swiss International $293Czech Airlines Frankfurt to Vienna$212Austrian Airlines $260Czech Airlines $311Alitalia Vienna to Amsterdam$292Swiss Internat ional $312Air France $326Austrian Airlines Amsterdam to Vienna$286Austrian Airlines $297Alitalia $298KLM Royal Dutch Airlines Rome to Athens$232Olympic Airlines $269Alitalia $298Aegean Aviation Athens to Rome$233Aegean Aviatoin $235Alitalia $255Swiss International Rome to Madrid$205Alitalia $205Air Europa $221Iberia Madrid to Rome$166Air Comet Plus $166Air Europa $169Iberia Ticket Prices The chosen ticket prices are based on what is required to establish a respectable profit after the first year to start to payback the startup costs and begin to buy back the aircraft. Vienna to Frankfurt can easily be undercut with a ticket price of 220$ one-way. Savings of over 5% against the competitors should allow for an easy steal of market share. Vienna to Amsterdam will have prices set at $282 one-way to once to be low enough to gain market share while gaining a profit. Athens to Rome will have prices set at 220$ one-way which gives strong savings while making a larger profit per ticket. Rome to Madrid will require prices to at $309 to break even, even though competitors offer lower prices. This route may require restructuring and possible removal after the first year to lower costs. Sales Strategy The majority of the sales strategy will be done over the internet. Along with having our own e-commerce site for Mobilize-you.com we will also ensure that we are listed with all the major travel booking companies such as lastminute.com, expedia.com and travelocity.com. The purpose of this is that we need to ensure that we have maximum exposure, consumers need to see an airlines names attached to proven brands such as expedia to gain confidence in our company to purchase that first ticket. The sales/ marketing team will also look into teaming up with vacation companies to be included into get-away deal to gain more market share. Current computer software such as oracle makes booking of flights easy and can be done anywhere in the world. Shared databases enables us to by-pass the cost of hiring our own call center team and instead we can outsource the work to a call center company. This will allow for cost flexibility as we pay for usage only and as the company grows the supplier will have the capabilities to handle our growing needs. This will require an account manager who is a mobilize-you.com employee that will work with costumer probl ems that fall outside normal protocol laid out for the call center and monitor performance based on the service agreement given to the supplier. IT support will involve outsourcing as well until the volume of traffic increases enough that it can warrant a full time employee. Advantages of a sales strategy that is based mostly via the internet lets people book at a flight at anytime of the day and our company does not require a physical entity to handle the transaction. This will lower costs in terms of overhead and human resources. Marketing/ Promotional Initial Launch As consumer confidence plays a large role in airline performance, it would be key to invest some money into a published launch celebration. Consumers need to think that an airline is large, stable and confident for them to want to fly with them. An official launch celebration along with encouragement from introductory low fares should help erase some of the concerns people have and increase business from the start. Marketing Strategy The main strategy for the company is being a cost leader but that does not mean you cannot be creative in the business. Companies such as West Jet in Canada offers a cross Canada low cost option but during the wait for the flight, the crew can be seen giving out prizes and even drawing for the one first class seat they always leave open. This kind of excitement can add much competitive advantage to the company as people enjoy something different to make their flight more entertaining. Keeping with the main ideals though, Mobilize-you.com airlines will advertise and market themselves as a low cost airline. Promotional Ideas Credit Card Advantage- Ticket Prices A main idea I had with sales if instituting a sliding pay for tickets. The advantage of using credit card transactions is the actual payment does not need to go through until later so you could set a standard fare for the customer but as the plane fills up you end up paying less. The standard fare would be competitive and just slightly higher then normal but a person would find out how much they actually paid when they arrive at the airport based on occupancy. Could even have an internet tool which shows amount paid as more people book flights. This is a service that would be instituted after the airline has established some cliental. Frequent Flier- Company Seats As our flight patterns are based on holidaymakers and business people we should try and institute a frequent flier program. This program would be similar to other airlines and be offered for any routes that we use. Advantage of this is it establishes a relationship with the customers and enables us to lower risk of filling up flights for the future. Advertising Disadvantage of not having a physical building is people can completely forget about the brand. Marketing team needs to ensure that constant advertising is being done to establish a brand identity for Mobilize-you. This is important for competitive advantage against rival companies, as we do not want to be recognized as the startup company but as an established one that the customer just hasn’t used yet. Profit Analysis Please see attached spreadsheet. Sales for the year look promising with the exception of the Rome to Madrid route which may be required to be dumped after the first year as ticket price expectation are just too high. Operating a very conservative profit of $3,786,694.99 that is after tax will allow for some repayment of debt that places the company on track to gain more equity each year and start owning aircraft and expanding routes. As this is a low estimate as all costs were boosted from the Easy Jet model it is safe to say that the company should at least operate on the positive within their first year. Data Referenced The following Websites were referenced in formulating this paper www.easyjet.com www.ryanair.com www.expedia.com www.finance.yahoo.com www.boeing.com www.economist.com www.airbus.com www.airlinenews.com