Swift Airlines has a significant profit dilemma on their hands based on the information provided in the case study. According to the case study, SA flights traveling from Nice to London are breaking even, which indicates that the airline is gaining no profit on these routes. Rather, they are only selling enough tickets to cover the costs of that route. On returning flights, SA is earning a revenue of $14,195 by selling 87 tickets:
SA is losing $1,305 on these returning flights. The proposed idea of implementing a 48-hour ticket purchase for a new fare of $40 is productive, yet is insufficient to increase profit with the existing numbers. If SA were to implement these new tickets, selling the expected 15 tickets per flight, SA would only gain $600 in revenue which leaves a remaining $705 in losses. With the outgoing flights only breaking even, there is no profit to offset this loss of $705, therefore, as the proposed “production manager”, I feel as though this new ticket is insufficient to cut SA’s losses effectively.
To expand, introducing this new ticket option presents a significant risk of reducing revenue even more. Business and Economy Regular tickets make up 52% of sales and 77% of the revenue for outgoing flights from London to Nice. These tickets are by far the most profitable to our company. By introducing another, cheaper option, you run the risk of reducing our most profitable tickets to replace them with less profitable options because they are cheaper. There is no guarantee that those business and economy regular customers will not be attracted by a cheaper option. What SA needs to focus on is how to increase sales of our most profitable tickets. A profitable company needs to do more than breakeven, they need to make a profit. At this current time, SA is not profitable. In order to do this successfully, lets consider the following factors:
Cost of Quality: Defined as the difference between actual costs of production, selling and after-sales service and the costs that would be incurred if there were no failures during the production and/or usage of products (Collier, 2015). Cost of quality includes conformance costs (costs incurred to achieve the specified standard of quality) and non-conformance costs (cost of internal and external failure) (Collier, 2015). The cost of quality is an important factor to consider because the results are essential in on going improvements in quality of performance and processes (Collier, 2015). We do not have a lot of this information in this case study, but before implementing a new marketing option, perhaps running these reports and gaining a better understanding of SA’s cost of quality, we could determine where we could improve our quality, make equivalent and cheaper substitutions and if there are necessary quality cost cutbacks that we could make.
Total Quality Management: This approach emphasizes continuous improvement through a systematic approach to quality management that focuses on customer expectations, business processes, quality of goods, and ensures employees are committed to quality improvement (Collier, 2015). SA would benefit greatly from evaluating their quality management. For SA, they should consider their flight times, on-time percentage, customer reviews, quality of food served, quality of employees (customer service), technology (buying tickets, ease of check-ins, etc.) and baggage handling (percentage of bags lost or damaged). Ticket prices are not the only factor that attracts customers. Especially business (higher paying customers) who travel for work rely on timely flights, comfort, ease of booking flights and baggage checking/claiming services. Having the cheapest tickets does not make a difference if our competitors have better total quality management than SA.
Statistical Process Control: A method for monitoring, controlling and “ideally, improving a process through statistical analysis” (Collier, 2015). According to Collier (2015), SPC philosophy states that all processes exhibit intrinsic variation: however, some processes exhibit excessive variation that produces undesirable or unpredictable results. SA can utilize specialized SPC software that can control these variations in statistical analysis to ensure that quality and useful statistical analysis can result. When considering SA, this kind of software could be useful when there are variations in ticket sales, changes in software, or discounts that may account for unpredictable or undesirable results.
Six Sigma: The Six Sigma approach was developed by Motorola and is a measure of standard deviation (Collier, 2015). This approach aims to improve the quality of products/services by removing defects and the causes of defects (Collier, 2015). This tool/approach can also be used to measure quality and services/products that need to be improved. Perhaps customer reviews show that customer service is down or perhaps there have been significant issues with flights being on time. Using this approach, we can identify which areas of quality need to be eliminated or improved.
Relevant Costs: Are costs that are relevant to a particular decision (Collier, 2015). “Relevant costs are the future, incremental cash flows that result from a decision” and are considered avoidable costs (Collier, 2015). First, let’s identify our variable and fixed costs in this case. The flight costs and route costs are fixed costs because no matter how successful the sales are, these costs will remain the same. The passenger costs are the variable costs in this case because this cost will be impacted by the amount of sales. As along as the airline functions, the fixed costs will exist. For example, regardless of the number of passengers, plane leases, airport charges and business overhead will not change. Therefore, the passenger costs are the relevant costs in this case.
Sunk Costs: Are costs that were incurred in the past and there is nothing we can do to change those earlier decisions (Collier, 2015). If SA made any down payments towards airport fees or whatever costs went in to marketing, these are considered examples of sunk costs.
Cost Volume Profit: Is a method for understanding the relationship between profit, cost, and sales revenue (Collier, 2015). “CVP is concerned with understanding the relationship between changes in activity (the number of units sold) and changes in selling prices and costs (both fixed and variable) (Collier, 2015). This method would really help SA identify which tickets were most and least profitable, how reducing prices may affect profits, and what the break-even points would be with changes in volume and costs. As the “production manager”, this information is going to be what we focus on. This method will help us understand what reducing the prices of our more expensive tickets may do to our profits or what increasing our least profitable prices may do. We need to figure out how to reach our break-even point in returning flights and what possibilities we have to reach that goal. If we can establish how to reach our break-even point, we can propose how to further increase our revenue in order to become profitable.