Project Submission: Acquisition ProposalPrevious Next Scenario You are a former Navy officer and fighter pilot, and you are now the controller of a division of TransGlobal Airlines, a large organizat
MBA 620 Company A Information Loca tion, Size, and Age of the Firm • Name: • Location: Miami, FL • Size: 165 employees • Age: began operations in 1981 Customer Segment and Target Market • Market: Caribbean Islands • Destinations: 15 (Guadeloupe, Guyana, Martinique, Puerto Rico, St. Kitts, St. Lucia, St. Maarten, St. Thomas, St. Vincent, Trinidad, Antigua and Barbuda, Barbados, British Virgin Islands, Dominica, Grenada, and Tobago) • Market segment: luxury tourist and b usiness class • Aircraft capacities: 20 to 60 • Market share of Caribbean destination airlines: 4th at 18.9% • Customer segment: vacationers, tourists, Caribbean business, and government clients • Retention: 66% return customers • New customer growth: 22% annua lly • Seat occupancy average: 74% (top quarter of benchmarks) • Average customer fare: $450 US D Major Competitors • Delta Connection • American Eagle • Bahamas Charter Airlines • Cape Air • Seaborne Airlines Company Leadership Privately held, with a board, president, VP admin, CFO, COO, VP sales Company Strategy and Direction The company is well positioned for a transition and strategic investment. Its cash position is especially positive, providing ample flexibility. Long kn own as a premium upscale provider, there is an awareness of the need to broaden the customer base, attract younger travelers, and modernize both the fleet of aircraft and customer -facing technologies. The president and leadership team have adopted these g oals for the coming five years: • Improve public image and brand in ways that attract new customers • Improve employee retention; reduce turnover by half • Address aging fleet of aircraft; reduce average age of fleet to eight years • Achieve 20% improved fuel efficiency; leverage this into brand and public promotions • Reduce on -ground aircraft turnaround time from two hours down to 45 minutes (industry average is 90 minutes) Current Financial Highlights • Annual revenues: $28 –29 million • Annual growth YoY: 2.5 –2.9% • Gross profit margin: 45% • Net profit margin: 8% • Aircraft in fleet: 55 • Average age of aircraft: 14 years (25 years of useful life is typical) • See financial statements for further details Background • The company is recognized as a premium provider. • In 2016, the company sold a portion of its fleet and its real estate holdings, resulting in a substantial influx of cash. • Employees (excluding pilots) have frequently discussed unionizing, but have not act ed in this direction. • The management team is experienced and focused on revenue growth and customer satisfaction. • Customer feedback at or above industry benchmarks (at industry benchmarks 60th percentile o r higher; positive feedback): o On -time arrivals/departures o Airplane cleanliness o Amenities o Employee courtesy o In-flight entertainment • Customer feedback below industry midpoint (negative feedback): o Frequent flier program (none) o Check -in convenience and speed o Baggage handling o Convenient departure times Internal Process Highlights • The reservation system is an early version of Radixx Galaxy; cloud -based upgrades have not been implemented. • Customer check -in and ticketing is manually processed using har d-copy tickets. • Bookkeeping is accomplished using QuickBooks and an external accounting firm. • HR hiring and benefits packages are administered by a third -party provider. • On -ground operations teams rated very good against industry -standard benchmarks. Human Resource Highlights • Employees: 165 • Employees with a post -secondary degree (two -year or higher): 75% • Average turnover rate: 12% annually • Internal training offered: o FAA Basics (five -day course, required of all new employees) o FAA Safety Assurance S ystem (online two -hour course; all new hires) o Customer Service (eight hours annually) o Regulation refreshers (20 hours per year) o Quality Control Through Six Sigma (optional, up to eight hours per year) o Using MS Office (on -demand, online offerings; optio nal
Project Submission: Acquisition ProposalPrevious Next Scenario You are a former Navy officer and fighter pilot, and you are now the controller of a division of TransGlobal Airlines, a large organizat
MBA 620 Company B Information Loca tion, Size, and Age of the Firm • Name: • Location: Orlando, FL • Size: 98 employees • Age: began operations in 1988 Customer Segment and Target Market • Market: Florida and nearby destinations • Destinations: eight (the Bahama Islands; Savannah, Georgia; Atlanta, Georgia; Tampa, Florida; Fort Myers, Florida; Miami, Florida; Tallahassee, Florida; and New Orleans, Louisiana) • Market segment: tourists and busi ness • Aircraft capacities: 12 –50 seats • Customer segment: vacationers, tourists, business travelers • Retention: 40% repeat customers • Seat occupancy average: 62% (middle of industry benchmark data) • Average customer fare: $249 US D Major Competitors • Delta Connection • American Eagle • Sun Country • Frontier Company Leadership Privately held, with a board, president, VP admin, CFO, COO, VP sales Company Strategy and Direction As a smaller player, the company is more of a follower than a leader; however, the new president has a desire to shake things up. The image of the company as cheap transportation is no longer sufficient, and the leadership team seeks to demonstrate that ev en a small company can be an innovation leader. They hope to do this by emphasizing the potential benefits of agile problem solving and a lean and clean working environment. These 10 -year goals were adopted in 2015; they were reaffirmed in 2019 shortly b efore the arrival of the new president: • Demonstrate adaptability, flexibility, and speed in decision making and innovation • Build the best workforce; be a winning team • Do the right thing; provide excellence in customer service • Enjoy the short run; inve st in the long run Current Financial Highlights • Annual revenues: $26 -27 million • Annual growth YoY: 3% • Gross profit margin: 33% • Net profit margin: 0.2% • Aircraft in fleet: 40 • Average age of aircraft: 18 years (25 years of useful life is typical) • See financial statements for more information Background • The company is known as a value leader. • In 2016, the company sold its ownership in a regional hotel chain, resulting in subs tantial cash holdings. • The company has strong business relationships with area employers in the theme park industry. • The company president is new this year; prior experience has been heavily influenced by organizational transformation initiatives. • Turnover among employees is higher than many airline companies, but average for the central Florida economy; maintenance employees are increasingly more difficult to find and retain; overtime is common in the maintenance department. • Wage levels in the Orl ando area are growing, resulting in upward pressure in compensation. • Customer feedback received that is at or above industry benchmarks (at industry benchmarks 60th percentile or higher; positive feedback): o Short wait times at counter o Ease of modifying reservations o Cost o Overall value • Customer feedback received below industry midpoint (negative feedback): o Airplane cleanliness o Amenities o Food and beverages o In-flight noise Internal Process Highlights • Within the last 30 days, an investment and joint v enture was established with SITA Horizon software system, including an industry -standard customer portal and a hospitality industry interface functionality. • Bookkeeping is integrated with the new SITA system; an external accounting firm will still be used for audits. • HR function is provided by a consortium partner in the local area (outsourced). • On -ground operations teams rated fair against industry -wide efficiency standards. Human Resource Highlights • Employees with a high school diploma or higher: 95 % • Employees with a post -secondary degree or diploma: 60% • Average turnover rate: 18% annually • Internal training offered: o Regulatory refresher courses (as needed, with supervisor approval) o Quality and Customer Service Principles (self -study )
Project Submission: Acquisition ProposalPrevious Next Scenario You are a former Navy officer and fighter pilot, and you are now the controller of a division of TransGlobal Airlines, a large organizat
MBA 620 TransGlobal Airlines Information Loca tion, Size, and Age of the Firm • Name: TransGlobal Airlines • Home Country: USA • HQ Location: Miami, FL • Size: 40,000 employees • Age: began operations in 1951 Customer Segment and Ta rget Market • Class: global airliner with dominant U.S. presence • Market: global • Destinations: 242 destinations serving 52 countries across six continents • Market segment: first class, luxury, business class, and economy • Global market share: 18% (ranked 2nd, American is number one at 18.6%) • U.S. market share: 18.3% (ranked 2nd, Southwest first at 19.1%) • Retention: 80% return customers • New customer growth: 27% annually (prior to COVID) • Passenger kilometers: 278 billion (American is number one at 287 billion) Major Competitors All international and domestic U.S. airlines Company Leadership Publicly held with a board, president, VP admin, CEO, CFO, COO, VP sales, division VPs, subsidiaries Current Financials • Annual gross revenues: $ 20.683 billion • Annual net income: $ 2.099 billion • Adjusted earnings per share of $ 3.22 , a 28 % increase year -over -year • Delivery of 88 new aircraft during the year • Number of aircraft in fleet, end of period: 1,062 • Average age of aircraft: 13 years • Domestic revenue grew 7.7% in the last quarter on 1.6% higher passenger unit revenue (PRASM) and 6% higher capacity . Domestic premium product revenue grew 11% and corporate revenue grew 6%, driven by strength in business and leisure demand through the holiday period. Revenue and margin improved in all domestic hubs, with revenue up 10% in coastal hubs and 6% in core hu bs. • Atlantic revenue grew 0.8% in the last quarter on 2.4% higher capacity and a 1.6% decline in PRASM, driven almost entirely by foreign exchange rates . • Latin revenue grew 6.7% on a 6.3% increase in unit revenue and 0.4% higher capacity. This revenue im provement was driven by continued double -digit unit revenue growth in Brazil and Mexico. • Pacific revenue was down 0.5% vs. the prior year on a 4.4% decline in unit revenue primarily due to continued softness in China. This was a 3.2 point improvement vs. the September quarter on improved trends in Japan. Strategic Plans and Goals The board of directors has recently approved a comprehensive plan identified as TransGlobal 2030. The plan is the result of eight months of data collection, customer focus gro ups, leadership retreats, and employee input. The TransGlobal 2030 vision is to lead the industry in three critically important areas: safety, excitement, and stewardship (SES). This SES vision has been translated into a collection of guiding principles and goal statements: • SES Principles o We will always treat our customers with respect. o We will value our employees and business partners. o We will innovate to provide our c ustomers with the most forward -thinking and exciting travel experience. o We will build lifelong relationships with our customers. o We will protect our planet. • SES Goals o Safely re -introduce and promote the MAX 737 aircraft 1. o Expand the fleet of regional aircraft with capacities below 7 0. o Upgrade the reservation and ticketing experience, including smartphone apps and integration with apps associated with lodging, ground transportation, and attractions. o Achieve top -10 status in the 2030 World’s Best Workplaces rankings (currently not ra nked in top 100). o Reach net -zero carbon footprint by 2075. o Accelerate adoption of fuel -efficient aircraft and alternative fuels. o Expand use of carbon offset measures. o Improve our Airlines.com safety rating from 5 stars to 7 stars. o Build brand awarenes s and customer loyalty. o Address workplace inequities and build an inclusive culture. o Train every employee in the basics of FAA’s SAS (Safety Assurance System) via 2 -hour web – based training. 1 The popular 737 aircraft has been the subject of considerabl e controversy and safety concerns worldwide. ASSETS (in millions) Current Assets Cash and cash equivalents: $1,268 • Accounts receivable: $1,256 • Fuel inventory: $321 • Expendable parts and supplies inventories, net: $229 • Prepaid and other expenses: $559 • Total current assets: $3,629 Other Assets: • Property and equipment: $13,776 • Operating lease right -of-use assets: $2,476 • Goodwill: $4,304 • Identifiable intangibles: $ 2,272 • Cash restricted for airport construction: $280 • Other noncurrent assets: $1,657 • Total other assets: $24,765 Total assets: $28,394 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities • Current maturities of long -term debt: $806 • Finance leas es: $200 • Current maturities of operating leases: $352 • Air traffic liability: $2,251 • Accounts payable: $1,437 • Accrued salaries and related benefits: $1,628 • Loyalty program deferred revenue: $1.416 • Fuel card obligation: $ 324 • Other accrued liabilities: $474 • Total current liabilities: $8,888 Noncurrent Liabilities • Long -term debt: $3,000 • Finance leases: $904 • Pension, postretirement Related benefits: $3,719 • Loyalty program deferred revenue: $1,544 • Noncurrent operating leases: $2,329 • Deferred income taxes: $641 • Other noncurrent liabilities: $610 • Total noncurrent liabilities: $12,747 • Total liabilities: $21, 635 Stockholders’ equity: $6,759 Total liabilities and stockholders’ equity: $28,394 Margins • Operating margin: 14.08% • Net profit margin: 10.14% • Operating cash flow margin: 41.7% • Debt to equity: 3.20 • ROE: 31.04% • ROA: 7.39% • Receivables turnover: 16.47% • Aircraft capacity: 98% • Current ratio: 0.408 • Quick ratio: 0.2839
Project Submission: Acquisition ProposalPrevious Next Scenario You are a former Navy officer and fighter pilot, and you are now the controller of a division of TransGlobal Airlines, a large organizat
Page 1 of 3 pages Confidential – For Internal Distribution Only TransGlobal Confidential Internal Memo Interviews with Company Leaders: Company B The notes below are a summary of recent conversations with company leaders at Company B. As much as possible, I have summarized these in a question -and -answer format. I tried to transcribe actual statements as they were made, but I was unable to capture ev ery detail of each conversation. I’ve also included some background from recent messages and last quarter’s reports. As an introductory note, I’ll observe that smaller firms tend to be far less structured and less bureaucratic than TransGlobal. This so metimes translat es into quicker and more flexible decision making. It also can result in some elements of good management falling through the cracks to some degree. Also, I’ll note that my opportunities for discussions were quite limited, so these notes a re not comprehensive. Interview #1: President The Company B president is a new arrival to the company. She had prior experience in some high -tech fields, but not in commercial aviation. Her strongest beliefs are that the way to move the company forward is through the adoption of an agile culture , empowering employees , and placing emphasis on innovation. She’s thrilled that the firm has recently entered into a strategic partnership with a software company and that they will soon bring new levels of travel convenience to the customers right in the palm s of their hands. The IT team believes this will be a five -year effort; the president is hoping f or one year. It seems that she’s been hired to make corrections in the financial trajectory of the company. About two years ago, some costs got out of hand and resulted in a small loss for the year; the past 12 months have been more favorable. She’s not an expert on aircraft, but she did express interest and enthusiasm for new planes, with a specific focus on the Bombardier line. Company B has used the Bombardier CRJ -700 and CRJ -200 in the past with very good records of performance, safety , and reliabili ty. She feels that it would be advantageous to continue using those aircraft and possibly investigate alternative (newer) Bombardier models. At times, she expresses some truly visionary perspectives. Enhancing hand -held passenger convenience and integrati ng the flight experience with other aspects of travel seem like excellent new directions. Page 2 of 3 pages Confidential – For Internal Distribution Only She’s also committed to the overall notion of environment al stewardship and moving toward net -zero carbon as soon as possible. On the other hand, a few of her ide as seem a bit like science fiction. As a hobby interest, s he’s interested in ornithopters, for example, and she’s actually asked the engineers in maintenance to look into electric airplanes! A few folks have even heard her mention drones as a possible futu re business line. Some employees wonder if she’s perhaps a bit offbeat . Interview #2: Sales The Company B sales team is relatively complacent. They perceive their marketplace and their routes as mostly fixed and not likely to shift much in the coming decade. Passenger volumes over the past few years have generally remain ed flat, plus or minus a f ew percentage points. The last two quarters have shown a 5% decline in overall seat occupancy compared to the prior year. Interview #3: IT Manager The IT manager is a transplant from a much larger airline and also has experience working at Disney. He’s always willing to try something new, and he has recently pushed the company into a business relationship with a software company. They hope to reimagine vacation travel, bringing an integrated and seamless experience from start to finish for the custo mer. Others in the company have been skeptical and sometimes describe his approach as reckless and fraught with excess costs. They were also a bit perturbed with the expense associated with the software partnership, since a year ago , many of them had take n an obligatory temporary pay reduction. He insists that “we need to be strategic and skate to where the puck is going to be ,” using a strategic metaphor of some kind involving Wayne Gretzky. Interview #4 : Operations and Maintenance Page 3 of 3 pages Confidential – For Internal Distribution Only The company has some very seasoned individuals in the maintenance and operations areas, several of whom have prior military experience. They pride themselves on a positive performance record, especially pointing to the statistic that their aircraft, while older than many fleets, are well maintained and average a 90% availability rate , consistent with industry averages . The crew is innovative and hard working, but there has been substantial turnover in recent years. Several current mechanics are in probation ary status, still acquiring their technical certification credentials. There is some concern that the core of expertise resides in the employees that are approaching retirement age and that there is inadequate knowledge transfer. Interview #5 : Human Resou rces Company B employs an outside provider to handle most of its HR functions. The firm is located in Orlando and handles a variety of travel -related clients. Their strength s are in union negotiations and rapid onboarding.
Project Submission: Acquisition ProposalPrevious Next Scenario You are a former Navy officer and fighter pilot, and you are now the controller of a division of TransGlobal Airlines, a large organizat
Page 1 of 3 pages Confidential – For Internal Distribution Only TransGlobal Confidential Internal Memo Interviews W ith Company Leaders : Company A The notes below are a summary of recent conversations with company leaders at Company A. As much as possible, I have summarized these in a question -and -answer format. I tried to transcribe actual statements as they were made, but I was unable to capture every detail of each conversation. As an introductory note, I’ll observe that smaller firms tend to be far less structured and less bureaucratic than TransGlobal. Sometimes, t his translates into quicker and more flexible decision making. It also can result in some elements of good management falling through the cracks to some degree. Also, I’ll note that my opportunities for discussions were quite limited, so these notes are not comprehensive. INTERVIEW #1: Vice President of Sales Why do your customers come to your airline? Why do some customers choose other airlines? How do your customers make their buying decisions? “Our customers are very often repeat customers; close to two -thirds of our sales each year go to individuals who have flown with us before. Plus, we have extraordinarily positive word -of-mouth advertising . This is supported by our Bring a Friend promotional program , which encourages customers to send us additional customers. This has been very popular. Just last year, we conducted a poll and learned that 75% of our customers would recommend us t o a friend or family member. “Also , we provide our customers with some special features on our flights, and we don’t charge for the first checked bag, either. Customers appreciate the feeling of going first class . We also add in little extras at times to p rovide our passengers with a sense of excitement and entertainment. This is generally done by flight staff and ground staff; they use little things like special treats or small toys for kids, things like that. A year ago, we overdid this a bit and added un necessary expenses to our Cost of Goods Sold , but we’ve corrected that in the past 12 months. “We hold about 19% of the overall regional market, though that is about three points down this year from prior years. A few of the bigger companies have started moving into regional specialty markets in the past 10 years, cutting into our traffic. We’re still competing well, though, especially because our fleet is built around the smaller volumes. “As a contrast, our competitors usually emphasize low price , and w e do lose some customers to them for that reason. A few of them have also started bundling services, for example , including hotel Page 2 of 3 pages Confidential – For Internal Distribution Only arrangements, destination -specific restaurant dining packages , and golf and recreation options along with their flights. We’ve looked into this a bit, but our present IT systems aren’t built for that sort of complexity; it would take a sizable investment to go in that direction. We could afford such an investment, but even so , we’re not sure it’s justifiable. ” NOTES: The VP of Sales also indicated that he would like to hire additional personnel and use a New York advertising firm to boost traffic in the off -season. He indicated some difficulty in selling this idea to others in the company ; he seemed confident that he could boo st overall gross revenue by $1 –2 million with an investment of just $100,000. INTERVIEW #2: Chief Financial Officer How would you describe the company’s financial picture? Are you optimistic about the future? “We’re coming off a great year. Our revenue s hit an all -time high (above $29 million) ; year -over -year growth is favorable ; and p rofit -wise, our latest net earnings are bouncing back nicely from the prior year. The prior year was a bummer in many ways —we had some excess costs and a variety of issues with quality. “On the other hand, some trends are worrisome. Our two largest costs are personnel and fuel … and the third is our payments on capital equipment. With a fleet of 55 aircraft, we’ve got a lot of maintenance, too . As a company, we’re dedica ted to safety first, but some of the more cosmetic and customer -friendly upgrades hav e been deferred over the years. “It’s been difficult to acquire new aircraft over t he past 10 years, so our fleet is now showing some age. There are some more advanced aircraft available, and we do have the available cash to build up our fleet. Despite the age of our aircraft, they’re still fully safe, of course, but the luxury feel that we’d like to offer our customers isn’t always apparent, if you know what I mean.” INTERVIEW #3: Chief Operating Officer Tell me a bit about your operating processes. Where does your firm excel in delivering value? Where are there issues or process improvements needed? Do you use total quality management methods? Are you an innovative company? “Well , let me start by telling you that I am somewhat new on the job; I’ve only been here for two months. When I was recruited, the company president advised me that there might be some quality issues and productiv ity challenges, too —and wow , was she right about that! Our team is really good at managing t o meet the FAA and other legal and regulatory requirements, but beyond that, this place is locked somewhere in the last century! “Don’t get me wrong , we keep our customers happy , sure, but at a large cost. We probably have twice as many baggage handlers, check -in attendants, customer service specialists , and so on as our next Page 3 of 3 pages Confidential – For Internal Distribution Only competitor has , all because we’ve not employed technology to the level that w e should have. The result is buried costs , and these will likely jump up and bite us in the shorts someday soon. “I’m also concerned about recruitment , especially for pilots and for skilled technicians. Because we operate in a great location, we have not b een keeping up on our compensation levels, and this may ma ke recruitment difficult soon. “On the bright side, our on -time arrival performance is top notch (88% on time , improved from the prior year at 84% ); lost or delayed baggage is at 2%; and customer sa tisfaction is in the top 10% in the industry. We get , oh, maybe three passenger complaints a week … and none of those ever amount to anything much.” NOTES: The COO went on to explain that his prior employers had emphasized efficiency in all processes but that the Company A leaders seemed somewhat lax in the pursuit of cost savings and standardization. He plans to focus on process improvement in the next quarter, starting with what might be g ood opportunities for staff reductions in some supporting roles. INTERVIEW #4: HR Director How do the company’s employees contribute to the success of the company? How would you describe the culture of working here? What challenges and opportunities do you have? “We’ve got a strong workforce, from the custodians and cleaning crews all the way to the pilots and management team. Everyone who needs to take annual refresher courses get s them … but we have no budget for extras. Sometimes I worry that we’re falling behind and that we’re losi ng our most valuable employee s. “Last week, I learned that 15% of our employees had left in the past year —a third of those were retirements, but the others were all because of more attractive job offers elsewhere. I did some digging and found that this has been typical for us for the past three years. And, by the way , that happens to coincide with the arrival of our president, Ms. Huntington.” NOTES: The HR director made it clear that the company does not make substantial investments in training and development beyond what is strictly required for licensing and safety. She feels that this limits the opportunities for creativity and innovation, but she also understands budget restrictions. Among her concerns are the limited opportunities for upward career mobility and too few career pa th opportunities in the company. I gained the impression that the HR Director was feeling some sense of burnout and counting the days until retirement.