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This simulation experience is sold, "as is," and you, the purchaser, are assuming the entire risk as
to its quality and performance. The warranty and remedies set forth above are exclusive and in
lieu of all other, oral or written, express or implied.
For more information about other products from Interpretive Software, please contact:
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manner whatsoever without written permission of Interpretive Software, Inc.
TABLE OF CONTENTS
Introduction ................................................................................................................................................. 1
Overview of Airline................................................................................................................................... 1
Key Simulation Objectives ........................................................................................................................ 2
Team Organization ................................................................................................................................... 5
Peer Evaluation ........................................................................................................................................ 5
The Strategic Planning Process ............................................................................................................... 5
The Airline Manual................................................................................................................................... 7
Section 1: The Airline Case ....................................................................................................................... 9
Section 2: Airline Operations Guide ...................................................................................................... 25
Simulation Navigation ............................................................................................................................ 25
Detail of Menu Choices .......................................................................................................................... 28
Startup ................................................................................................................................................ 30
Decisions ............................................................................................................................................ 31
Analysis .............................................................................................................................................. 43
Company ............................................................................................................................................ 46
Industry............................................................................................................................................... 52
Logout ................................................................................................................................................ 56
Section 3: The Strategic Planning Process ............................................................................................. 57
Analyzing an Industry ............................................................................................................................. 57
Establish Goals and Objectives .............................................................................................................. 58
Organizing Your Team ........................................................................................................................... 59
Record Keeping ...................................................................................................................................... 61
Functional Decision-Making .................................................................................................................. 63
Finance ............................................................................................................................................... 63
Marketing ........................................................................................................................................... 74
Human Resources ............................................................................................................................... 76
Operations / Planning ......................................................................................................................... 77
Appendix .................................................................................................................................................... 81
Guide to Common Costs and Values ...................................................................................................... 81
Worksheets and Analysis Forms ............................................................................................................. 85
Glossary................................................................................................................................................ 101
Index ......................................................................................................................................................... 103
In addition to teaching college courses, Dr. Golden has also conducted numerous workshops in
the development of competitive strategy, general management principles, special topics for
women managers, time management, decision-making, and team-building. Consulting activities
include strategic planning, systems analysis and design, and management of change.
Dr. Golden is an active researcher and writer. She is currently studying corporate reputation and
the interaction of corporate governance on top management team pay disparity. She has
published seven management simulation games and numerous articles and papers in the area of
strategy formulation and implementation, and simulation development and use. Visit Dr.
Golden's homepage at http://professorgolden.net
Dr. Jerald Smith is Professor Emeritus of Business Strategy and Policy at Florida Atlantic
University. He is the author of eight simulation games spanning many interest areas in
Management and Marketing. He has taught a broad range of courses at the undergraduate,
masters, and doctoral level. He was one of the first to teach a course on the Internet as a host for
professional MBA's who are on the go. Dr. Smith has consulted for Fortune 100 companies in
diverse areas such as ethics training, supervision, and has helped formulate strategic initiatives
for these companies. He is the author of numerous articles. Visit Dr. Smith's homepage at
http://www.fau.edu/~jrsmith
Michael Deighan is a co-author on the new web-based editions of Airline, Entrepreneur, and
HRManagement. His expertise, insight, and creativity proved invaluable and made it possible to
convert these models to their current web-based versions. Michael joined Interpretive
Simulations in 1989 as lead software developer, and is now Chief Technology Officer. He is co-
author on a number of Interpretive simulations: PharmaSim, AutoSim, BizCafe,
StratSimMarketing, StratSimManagement, StratSimChina, ServiceSim, CountryManager, and
MarketShare. In addition to developing software, he has been teaching computer programming
classes at Piedmont Virginia Community College, in Charlottesville, Virginia, since 1990.
Michael received his B.A. in German and Economics from Washington and Lee University, and
an M.A. in German from the University of Virginia.
ACKNOWLEDGEMENTS
Simulation games such as Airline: A Strategic Management Simulation becomes realities only
because of the cooperation of many people and organizations. We wish to acknowledge some
of the individuals and groups that gave their time and expertise in the development of this
simulation.
Special thanks go to many kind people. Bryce Appleton, former CEO and owner of Midstate
Airlines, for his willingness to teach us the commuter/regional airline business.
A special thanks to the management team at Florida Atlantic University's College of Business
and Graduate School of Business for encouraging simulation technology including Dean
Dennis Coates.
We also appreciate the many professors in the academic field who believe in the unique
benefits of learning through simulations, including Thomas Hudson, Joseph Peyrefitte, Mark
Meckler, Peter Goumas, Joe Wolfe, Bernie Keys, Marshall Schminke, Howard Feldman,
Wayne Koprowski, Herman Wassons, Ron Ryan, Jenniver Ettling, Chunyan Yu, Ron Spense,
Steve Harrington, Miguel Hidalo, Douglas Marshal, Jaou Merkt, Tina DeBrass, Margaret
O'Rouke-Kelly, Pierre Louis Agnes, Jerry Terrell, David Ackerman, John Myhre, Virginia
Smiley, Ronald Levy, William March, Cliff Ingari, Chris Graham, J. Bakki, Seema Pissaris,
T. K. Hudson, Risa Morimoto, Stephan Tvorik, Ron Ryan, C. Daniel Prather, Eric LAU,
Ann Lombardi-Butt, Joseph Cacciola, P. Jegede, Pinky Au, Dave Swanson, Kim Milnes,
Michael Wright, Tim Rogers, Guido Harling, Sharon Frank, Jennifer Malarski, Dave
Swanston, Laura Hart, John Cipolla, Edward Conrad, Tim Bliss, Chad Depperschmidt, Lars
Askholm, Keith Mew, David Klein, Tara Radin, Robert Govers, Carole Bonanni, and Curt
Moore.
There are many others whose names were lost when we lost some files during one of Florida's
hurricanes. We are sorry and will add you—just let us know.
Most adopters of a simulation are a special breed. They understand the benefit of "learning by
doing" and are willing to suffer the pain as the authors try to get everything "right." They
know that a simulation is never finished but is a project in constant change and tuning.
Usually by the time we get everything "right," it is time to start on a revision to update the
information. This is very true in the airline business as new aircraft and strategies are in
constant change.
Special thanks go to Marshall Schminke who is our best critic and loyal fan, giving us many
corrections and suggestions down through the years, Vivek Patel for his technical assistance,
and Michael Forte for his expertise in the field.
Finally, we are blessed with a wonderful extended family who sometimes wonders why we
stay up so late when developing simulations. We answer, "We have the simulation disease!"
INTRODUCTION
Welcome to the exciting world of simulation! Unlike most education
and training exercises, this simulation provides you and your team the
ability to practice managing all the aspects of running a business, in this
case, a regional airline carrier. You will have the unique opportunity to
make decisions, see how the decisions work out, and then try again.
Thus, you will get a "hands on" experience with manipulating key
strategic variables in a dynamic setting.
Overview of Airline
You will be managing a regional airline that will be competing with
other teams (up to a maximum of 12 total teams). This browser-based
application will give you the opportunity to design and implement a
strategy, make decisions in a team environment, and learn business by
experiencing it first-hand. It is strongly recommended that you
approach the simulation as if you were managing a regional airline in
the real world. In the real world, managers must make decisions
without perfect information, under conditions of uncertainty, and within
time constraints. Of course, it is also important that you understand the
rules of the simulation.
Each team will manage their own firm in the simulation. Typically, the
team's organization is left up to the members of the team. Teams are
expected to establish objectives, plan their strategy, and then make the
decisions dictated by these plans. Decisions are entered on-line in the
simulation. After all team’s decisions are made, the simulation is
advanced, and all of the reports and research are updated. This process
is done for several decision periods. Airline has up to 12 possible
decision periods (simulated quarters). Your instructor will inform you
of the number of periods in your particular game.
Introduction—Page 1
It is recommended that you not use the "stab in the dark" method of
making decisions but rather to think carefully about the variables you
change and their particular impact. A thoughtful process will allow you
to better determine which elements are more effective in obtaining
desired results. Do not rely on information gathered from others who
have competed in the simulation in the past, as your instructor can
change the simulation environment for each class. All teams will make
a few mistakes throughout the simulation but mistakes happen in the
real world, too. Remember to keep your enthusiasm and competitive
spirit high and do not allow a few setbacks to affect your play.
Introduction—Page 3
As you enter your decisions, they are automatically
saved, so there is never the need to upload them to the
server. When you are finished entering your
decisions, please review the decision summary to
Enter Decisions check for errors.
NOTE:
You may find it helpful to print out some Competing firms will be following their own
reports and step back from the computer strategies and reacting to your decisions. The
from time to time. Analyzing simulation always starts from the same position, but
information and determining an each game will proceed on a unique course depending
integrated strategic plan is a complex on the strategy that each team chooses. This will
task. It is important to take time and allow competitive comparisons and illustrate how
reflect on the information, especially businesses can evolve differently.
when working in groups.
Peer Evaluation
Your instructor may ask you to complete a written or online peer
evaluation either at mid-term and/or at the end of the semester. When
duties have been clearly assigned at the beginning, a peer
(performance) evaluation will be easy to accomplish. This evaluation
is to be completed without consultation with other team members. You
should be very honest in evaluating the performance of your team, as
your instructor will have insights from observing your team processes.
Introduction—Page 5
THE STRATEGIC PLANNING PROCESS
V. Establish Goals and Objectives Which Will Accomplish the Desired Course of
Action
VI. Prepare an Action or Strategic Plan that Describes How the Objectives Will be
Accomplished
VII. Establish Policies, Standard Operating Procedures, and Methods Which Will
Expedite the Accomplishment of the Objectives
VIII. Establish a Control and Feedback System to Keep the Organization on Track with
the Strategic Plan
Appendix
Introduction—Page 7
Page 8—Airline Student Manual
SECTION 1: THE AIRLINE CASE
This section presents the case of a firm that was used as a model for the
simulation. The case was written after extensive research into this real
commuter airline.
MARKET CHARACTERISTICS
Qtr. 0
Daily Qtr. 0
Round
Market Seat Number of
Trip Description
Type Demand Competitors
Miles
per in Market
Firm
From your mini-hub to a medium city with light manufacturing and
A 18 2 600
service businesses.
Service between 2 medium cities. One has a large number of service
B 36 2 400
businesses and the other a military base.
From your mini-hub to a regional hub that has a large number of heavy
C 18 2 340
manufacturing firms.
From your mini-hub to a medium city that has a major university and
extensive business services, with a stopover halfway out from the hub at
D 36 2 360
small but growing technology cluster. For simplicity, fares are the same
to either destination.
From your mini-hub to a medium city that has a new and growing
E 36 1 400
industrial park.
From your mini-hub to a foreign city not too far from the border that has
F 30–60 0 420
a diversified industry and tourist trade.
R 20–30 0 600 From your mini-hub to major resort/recreation area.
Regional Hub
A C R
Your Mini-Hub
420 MILES
B F
When entering a market for the first time, your management team
should recognize that there is a certain "lag" effect of developing that
market. It may take one or more quarters to fully develop a market.
You will find that customers are NOT very "brand loyal" and look for
attributes such as frequency of service (which also translates into
NOTE: number of seats provided in a market per day), and, to a lesser extent,
One Beechcraft 1900 price of the fare.
aircraft can cover
approximately 1800
miles per day.
You can differentiate yourself in individual markets by your frequency
of service (flights per day in a given market), seats flown per day in
that market, aircraft choice for that route, and fare sales (when desired).
Three or more round trip flights per day in a market is typical while two
round trip flights is minimally acceptable. The exception to this rule
are the Resort (R) and Foreign (F) markets; you may successfully serve
these markets with only one flight per day.
Airline Equipment
Your airline competes with other commuters as well as some national
airlines for modest numbers of passengers departing from a location.
This smaller market is reflected in the type of equipment flown. The
available aircraft range in size from 19-passenger propjets to 50-
passenger fanjets. Although some of the equipment dates back to the
1950's, newly developed commuter aircraft contain state-of-the-art
technology in materials, fuel efficiency, noise abatement, and
Since there is no perfect aircraft for all markets, airlines have the
discretion of selecting from a variety of aircraft types. Smaller aircraft
work well on shorter routes, providing the convenience of multiple
flights per day, which is important in the A–E markets. Larger, faster
aircraft are better for the longer routes, especially the resort and foreign
markets. While discount passengers are willing to fly in the
Beechcrafts, luxury customers insist on cabin-class service (i.e.,
standing head room, toilet, and a flight attendant on longer flights), and
NOTE: have a preference for jets.
The composition of
the fleet of any
airline should reflect
In addition to the impact aircraft selection will have on customer
corporate strategy. demand, keep in mind the cost of replacing your existing aircraft. The
additional revenues generated by an expanded fleet may be offset by
the higher cost of equipment, speed, fuel efficiency, or other variables
that affect the cost of operating and maintaining the equipment. Thus, a
successful commuter/regional airline may have a fleet that includes a
mix of equipment, including smaller craft.
Financing Assets
Your company has several types of fixed assets: airplanes, ground
equipment (i.e., ground power units, tugs, de-icing equipment, baggage
carts, and trucks), maintenance hangars, office facilities, and
computers. In addition, preventive and corrective maintenance require
an inventory of spare parts that may include extra engines. This
inventory can tie up significant amounts of cash. Some fluctuation
occurs based on the size and the composition of the fleet.
Fare prices must also align with a company’s overall strategy. Thus,
pricing as a low-cost airline may help stimulate demand, but one must
also watch expenses very carefully. Pricing as a luxury / high-end
airline may improve your margin, but only if the service provided is
seen as enough of a benefit to be able to charge a higher price without
hurting demand. Positioning your company to provide improved
Approximately 75% service will also require an upgrade to your fleet as customers will not
of the tickets sold are see your small Beechcraft 1900s as a luxury flying experience
booked through
(insufficient seating, no toilet, no cabin service).
travel agents or
through internet
travel sites. Ticketing
Although many airlines maintain independent ticketing services,
approximately 75% of the tickets sold are booked through travel agents
or through internet travel sites. The fee for this service averages 10%
of the ticket price, and therefore it is common practice to forecast net
revenues at an amount that is 90% of the sales forecast for the coming
financial quarter.
Sales Personnel
Your firm does not have any sales force now due to its small size.
However, as you grow you may want to add salespersons. The cost of
each salesperson is $12,000 per quarter, which includes the employee's
salary, travel allowance, and fringe benefits. You will also incur an
automatic $3,000 fee for each sales person hired to cover hiring
expenses. Airlines employ a sales force to act as a go-between to
promote business with corporations and travel agents. One advantage
of building a sales force, in addition to increased sales, is the possibility
of greater volume of direct sales to corporations and tour promoters,
thus lowering the amount paid as commission to travel agents.
The relationship between salaries and turnover is not clear, since the
Financial Statements
Each quarter your team will receive an income statement and balance
sheet, as well as cash flow, operations, and fleet status reports. Your
firm’s last quarterly income statement and balance sheet are provided
below for reference. There are quite a few line items on each report,
but here we will focus on a few of the most important issues.
NOTE:
Any remaining short- or long-term loan balance
will be shown on the current Balance Sheet.
.
Income Statement—Expenses
Airlines are expensive to operate. The largest portion of expenses is
direct flight expense which includes flight operations, fuel,
maintenance, and passenger service. Historically, direct flight expenses
represented approximately 65% of gross revenues, so these four items
are clearly very important to monitor. These expenses are directly
related to miles flown and currently average about twelve cents per seat
mile as shown in the table below.
There are two other major expense items to discuss. First is the cost of
Fuel costs are one of owning / leasing the planes. This cost will show up as either a lease
the largest line items payment or depreciation (and don’t forget about interest on the loan if
in the expense you’ve financed the planes using that approach). The second major
statement.
expense item is administrative expense. As fleets become larger, costs
increase incrementally as management, support, personnel,
administrative space, and maintenance facilities are required.
Administrative expense varies based on the total number of seats in
your fleet. While these costs may change, the cost at the beginning of
the simulation is as follows:
NUMBER OF SEATS ADMINISTRATIVE COST PER QUARTER
0–76 $100,000
77–102 $150,000
103–134 $200,000
135–168 $250,000
169–199 $300,000
200–230 $350,000
231–279 $400,000
> 279 $450,000 + $1,700 per seat over 280
Balance Sheet
The balance sheet is where you will find the current book value of your
assets (primarily your plane and accounts receivable) and your
liabilities (primarily your accounts payable and loans). One of the key
issues with cash flow is that only 60% of your gross revenue each
quarter flows to your balance sheet as cash in. While 40% remains as
accounts receivable. Similarly, 70% of your expenses are paid each
quarter, and the remaining 30% shows up in your accounts payable on
the balance sheet. The following quarter, the remainder of accounts
receivable and payable is processed.
The Options
"I have studied your flight operations, finances, and marketing
strategies and can find strengths and weaknesses in each area. My
greatest concern is that your aircraft are not the best type for the 600
(round trip) mile markets and that you are not taking advantage of some
markets that are wide open," commented Dr. Golden.
Smith replied, "I am aware of this but the FAA has had us under
scrutiny lately. Our oldest Beechcraft needs updated instruments and
radios. In addition, one aircraft is 18 years old and all were purchased
"used." The oldest one is beginning to be more costly to maintain at
this point. You can see how maintenance problems with their
associated costs and the weather have kept us from flying at an optimal
level. We have cash problems that are exacerbated by overhead costs.
We need a certain level of support personnel to maintain a three-aircraft
fleet; however, we could add two more aircraft at little or no additional
overhead cost."
The president continued, "There are markets that are not currently
being served in our area and I think we could lease a couple of new
aircraft. But it takes from 6 to 12 months to get to the breakeven point
in a new market, and we just don't have the working capital for that. I
"I have evaluated the two options that are available to you," said Dr.
Golden. "Taking out a significant loan has the potential to provide
enough cash to improve your maintenance program and add a
substantial amount to your working capital. This would make your
firm much more attractive to a leasing company and you would be able
to lease some additional aircraft. In fact, there are aircraft
manufacturers who have gotten very aggressive lately in order to sell
pre-owned aircraft that have been traded in for new planes; I think they
would be able to offer you good leases. Right now the going rate for a
pre-owned, newly refurbished British Aero 31 is $2.2 million and the
quarterly lease is $82,000."
"If we keep the airline, what kind of strategies would you suggest?"
asked the president.
"The airline can remain small and the owners can have fun and some
sense of satisfaction out of it. You are both in your mid-50s and in
excellent health. You do have a positive cash flow and are making a
decent living. On the other hand, there is potential for growth in the
industry at this time. If the airline expands, the organization will have
to change in order to accommodate this new strategy; this would adhere
"That is correct," Golden pointed out. "Some of the new ideas might
require larger aircraft, such as the Canadair CRJ100, Saab 340, or
Embraer Brasilia."
Smith looked out the window of his office at a plane being serviced and
replied, "Well, thanks for taking a look at our operation and giving us
your opinion. There’s a lot to consider."
Golden gathered her papers from off the desk and said, "It was nice
meeting you. Good luck on whatever direction you decide to go."
Firm name
Navigation buttons and user info
Menu system:
six categories
& choices
Airline screen
display
The navigation and general control buttons found at the top of the
simulation screen are: Back, Home, Print, Spreadsheet, Help, and
Logout. The Print button applies to the report currently on the screen.
For instance, if you click on the Print button when viewing the
Balance Sheet, the report will be sent to your default printer. Clicking
on the Spreadsheet button will allow you to download data to a
spreadsheet. Clicking on the Help button will open the operations
guide. The Back button lets you reach the last page you visited and
the Home button brings you to the homepage of the simulation.
The box in the upper right-hand corner of the simulation screen has a
pull-down menu that lets you choose which quarter you would like to
view. It will automatically default to "current quarter" unless you
change it. Changing this will show you your results for previous
quarters once the simulation has been advanced. This can be helpful
for reviewing historical information.
NOTE: The Authors strongly recommend that you read the Airline
Case before entering any decisions. Based on a small Midwestern
airline that was faced with a "grow or go" decision for their firm, it
provides the environment for this simulation.
NOTE:
All costs that are quoted in this operations guide
are the costs at the beginning of the simulation.
Demand in a particular market may change at
any time. Costs are not fixed; they may increase
or decrease without notice, as the simulation
progresses.
If you wish to downsize your fleet, click the "Change" button adjacent
to the specific aircraft you wish to terminate the lease or sell. When the
dispose input screen opens, make the appropriate selection from the
NOTE:
drop-down menu (keep, sell, terminate lease, etc). Note: the cost to sell
Do not acquire large
capacity aircraft an aircraft: 1% of book value; the cost to break a lease: $50,000 per
until you have built aircraft.
up customers in a
market. NOTE:
If you want to convert a leased aircraft to a purchase, talk with your
instructor and he/she may refund the $50,000 lease disposal fee. Note
however, that any payments you have made while under the lease agreement
will NOT be applied toward your purchase.
Enter a new Market by clicking the "Add a New Route" button. Click
on the drop-down menu and choose a new route. If adding more than
one Route, click back into the drop down menu and make your next
selection, repeating as desired. Remember that each new route entered
costs $10,000 and is charged to Passenger Service Expense when the
simulation is advanced.
Enter a
Performance
Budget amount (in
even thousands;
$1,000 Minimum).
Your fare (cents per mile) automatically displays along with the
estimated revenue per seat. If you wish to experiment with a fare sale,
click into the Fare Sale drop-down menu and make a selection (Normal,
One-Month Sale, etc.). Adjusted figures will automatically be
displayed. In addition, if you wish to experiment with an increased fare
price, you may enter a revised fare (cents per mile) and click
"Calculate."
Finally, your total operating cost is divided by your revenue per seat to
calculate the number of passengers necessary to cover your costs
(breakeven) on this particular flight.
This report can also be a helpful planning guide for quickly seeing
which markets are being offered the most flights and seats daily.
Remember, the maximum number of resort market flights per team is 4.
Enter your anticipated load factor % and click the "Calculate" button to
display your projected cash balance. Keep in mind that your actual
Cash Balance may be lower or higher than the balance shown here but
this analysis will help you estimate your financial needs for the next
quarter. Please refer to the financing decisions to review the different
methods available for raising capital.
Enter your
anticipated
Passenger Load
Factor % and
click "Calculate."
Your Projected
Cash Balance is
displayed here.
You are purposely not given more past performance data than the last
quarter because the simulation represents a "new beginning" for your
airline. Major carriers are pulling out of markets and changing their
markets served daily, thus presenting new opportunities that were not in
the past.
Total assets should be equal to total liabilities plus equity; however, due
to rounding errors the two totals may be off slightly.
NOTE:
The entry "70% of
operating expenses"
on the Cash Flow
statement is 70% of
operating expenses
LESS depreciation,
since depreciation is
not a cash expense.
This report shows the total number of seats sold daily in each of your
market / route combination and the corresponding fare sale, if any. In
addition, the number of flights daily, number of available seats, number
of seats sold, and the passenger load for each market / route are
displayed. This report is a good place to start when analyzing the
performance of routes and fare sales. The seats sold and passenger load
can be used when working with the Market Profitability Analysis.
NOTE: This report provides the business conditions for the next four quarters.
Most teams do not Quarter 0 demand index is based on a starting index of 100. Future
order enough market forecasts of demand may be obtained by purchasing this report in
research to keep subsequent quarters. Remember that a forecast is a forecast, not a
informed about certainty. Demand forecasts are updated each quarter and a new four-
competitor's strategic quarter forecast is made.
moves. In a research
study by the authors, Overall demand is affected by several factors, including general
the data showed that
business conditions, availability of flights, fare structures, the optimism
the teams who do
better on the of the traveling public about economic conditions, and whether
simulation usually vacation plans via air are in order. Therefore, do not assume you can
bought the most purchase a demand forecast once every four quarters and have up-to-
market research. date information.
If the current demand is 100 and forecasted demand the next quarter is
110, this would indicate a 10% increase in overall industry demand. If
additional flights are added to a market, there can be some demand
stimulated as travelers switch from ground to air transportation. A fare
sale should add demand in a market but it is not a certainty. As is the
case in the real world, many marketing strategies are trial and error.
Fares
Cost: $4,000
This report displays the average fare for all airlines and the fare and
cabin / food service policy for each airline. Compare your fare and
service with your competitors. Then compare your sales with your
competition in similar routes. Do you think your fare structure is
driving the difference in sales?
This report shows the total number of seats sold daily in each market /
route for each airline and the corresponding fare sale, if any. Thus,
2/18/N means two flights daily, 18 seats sold, and no fare sale. This is
an extremely important research item and should be purchased each
quarter. The most important information this report provides is where
each airline is competing and with how much emphasis. However, this
report, when combined with competitive fares, may also provide some
insight into how fares affect demand.
Marketing
Cost: $16,000
SIMULATION Logout
MENU To end your session, simply click the Logout link (visible on all
screens) to exit the site.
In this manual, we are using a fairly generic approach to strategic planning; however, your
instructor may have a preferred method or format other than the one suggested below. No
matter what method you use, one is generally trying to discuss and answer the following
questions:
Using more standard strategic language, a visual diagram of this process is provided below. As
the diagram illustrates, a strategic plan must combine internal and external analysis in the
context of the vision and mission of the company. The plan is then implemented through a
company’s management team. As the plan is implemented, the strategy may be refined based
on changes in the underlying assumptions or in how the plan is accepted internally (by
employees and stakeholders) and externally (by partners and target markets).
Strategy: Increase the sales force to two full-time salespersons and increase advertising by
25%.
Policy: Fly the first 200 pounds of cargo for a new customer, free of charge.
If there are fewer than five people on your team, you will need to double up on some of the
duties. In particular, the president may want to assume the duties of the VP of Human
Resources. In a simulation, the president does not have veto power or the final word. Of
course, your team may make any rules it wishes, but if the president is too heavy-handed, team
members may become frustrated. Another approach is to rotate the duties of President among
team members.
The president should be chosen carefully. Choose someone who can provide the team with time
discipline and keep everyone working. The president must take the lead in planning meetings,
delegating work assignments, and other leadership duties. If the president is not working out,
the team may gently suggest a change. If someone tries any position and does not like it, the
team should be open to switching positions. In fact, if the accountant in the group takes the role
of financier, others won't learn some of the areas of accounting and finance that may come in
very useful later in their careers.
Airline is a sophisticated interactive simulation and should not be taken lightly by your team.
Success in the game, both in terms of the learning experience and company profits, is directly
related to the degree of organization and cooperation among company (team) members. Game
results are directly correlated to well-thought-out analysis and strategic planning in the decision
process. An early and complete familiarization with the contents of the student manual will
increase the chances of success; knowledge of the proper use of analysis forms (or the same
work accomplished on a personal computer spreadsheet) is imperative if one is to stay abreast of
the game.
1. Organization Chart:
Prepare an organization chart to include your team members' names and include what
you think would be the next lower level of personnel on your chart (i.e., who would
report to each of your officers).
3. Company Logbook:
Each company should keep a logbook of the important data accumulated while playing
the simulation. Logbooks are analogous to the written records that firms maintain during
the course of normal operations. All data, information, charts, copies of forms that were
turned in, graphs, and narratives should be included. Your instructor will inform you
whether this is to be turned in at the end of the simulation or be available during class
periods for spot checks.
Minutes do not need to be written following Roberts Rules of Order but rather should indicate
the rationale of the key decisions that were made; minority views should be indicated as well as
those of the majority. Discussion that may be considered relevant should be recorded; in all
cases major decisions and the rationale behind those decisions should be recorded. Examples
include: fare changes; aircraft purchases and why a certain type of aircraft was chosen; changes
in cabin service; major shifts in advertising, promotion, or training budgets; major changes in
employee compensation and why one alternative was chosen over others; which method of
acquiring and financing new aircraft was chosen and why (lease or buy, bank loan or stock
issue). The "Airline Decision Log" (see: Analysis Forms and Worksheets) can be used to record
your meetings and rationale for decisions.
Leases in Airline cover only aircraft financing costs; they do not include staffing or maintenance
costs. An operating lease requires no immediate financial outlay and the aircraft reverts to the
lessor at the end of the lease. Under a capital lease,* the aircraft value will appear as an asset on
your COMPANY Balance Sheet and a depreciation deduction is claimed (similar to a purchase
agreement). Under operating leases, the aircraft do not appear on the balance sheet as an asset
and no depreciation expenses can be claimed. Leases will be granted for an indefinite period,
but there is a $50,000 fee to cancel the lease and return the aircraft to the lessor. The firm does
not have any aircraft under lease at the current time. Your present fleet is financed through a
combination of debt and equity; their values and accumulated depreciation are reflected on your
quarterly COMPANY Balance Sheet and Fleet Status Reports. Lease payments are displayed in
your COMPANY Income Statement and represent the amount due for all leased aircraft.
NOTE:
*Your lease will be an operating lease unless your instructor has allowed the option of a capital lease.
Teams may terminate their lease and purchase a new aircraft. Normally, there is a fee for the
termination of any lease, but if the same aircraft is purchased in that period, the instructor can choose to
waive the termination fee. There is nothing for the team to do, the fee will be charged or waived
automatically by the model.
Leasing is a straightforward approach to acquisition. One benefit of purchasing is that you are
building assets on the balance sheet. However, this also requires obtaining extra capital to pay
the principal each quarter. The repayment of principal has no effect on profit and loss but does
require additional capital acquisition.
For each additional $1 in equity, the long-term loan limit increases $4. You may sell stock and
borrow this larger amount during the same quarter. Maximum redemption is $500,000 per
quarter or 10% of your outstanding shares, whichever is less.
Keep in mind:
• You may never have less than 150,000 shares (your starting amount) as required by your
corporate charter.
• If financial conditions warrant, your stock may be repurchased at market price anytime after
quarter 5. However, your bank requires that you have no greater than a 1:4 equity-to-debt
ratio at all times as a condition of your loans. That is, you should have at least $1 in equity
for each $4 in loans (including long- and short-term loans).
• Stock price can be very volatile from quarter to quarter, so do not be discouraged by
temporary setbacks.
• Do not make decisions with the single goal of increasing your stock price. You will be
"chasing" the stock price the entire duration of the simulation and not applying your strategy
in operating the firm. If you stay focused on your operating strategy, profits should/will
follow.
• Remember that the Earnings per Share figure (see: Operations Report) is affected any time
additional stock is issued. This is termed "dilution of stock value" but can be overcome with
improved earnings in future quarters.
• If you give shares of stock to employees (Compensation Decision: Benefits), the number of
shares of stock will increase by the number required to make the stock-bonus payment.
Long-term Loans
For the purposes of this the simulation, long-term loans will be issued at 9% interest for an
approximate 12-year term for the purchase of aircraft. This interest rate is fixed for the duration
of the simulation; with 2% of the balance is automatically deducted from your cash balance each
quarter. Your long-term interest rate will be posted on your Operations Report each quarter.
NOTE:
The bank will lend UP TO 80% of the value of an aircraft being purchased. Thus, you may borrow less
than 80% of the price of an aircraft, obtaining the balance through the sale of stock or cash on hand.
Short-Term Loans
Short-term loans are based on a 90-day demand note. You may expect the bank to renew ("roll
over") these notes every 90 days automatically. However, during certain "tight" fiscal
conditions, a bank may "call" the demand note for payment. For this reason, firms should be
very careful about borrowing long-term capital needs on a short-term (demand) note basis.
Repayment of short-term notes is your responsibility, i.e., the loan will automatically renew
each quarter unless you place the desired repayment amount in the decision input screen. Your
short-term interest rate will fluctuate with your firm's overall financial condition; it will be
posted on your Operations Report each quarter. Quarter 0 short-term loan annual rate is 10%.
Uses of Cash
As mentioned previously, the largest potential use of cash is the purchase of aircraft; however,
cash may also be necessary to sustain operations, especially if operating at a loss. Two
additional uses of cash discussed below are dividends and purchase of a CD.
Dividends
The firm paid its shareholders $2,000 in dividends last quarter. A dividend payment will be
adjusted based on the amount of quarterly profits if the payment exceeds the profits OR if the
firm has negative retained earnings.
In addition to a cash dividend, your firm may declare a 5% stock dividend. This grants 5% more
shares to each shareholder without any direct cash cost to the firm. The number of shares
outstanding will be adjusted on the firm's quarterly report. By law, if you have negative retained
earnings (no profit), your dividend will be canceled. Remember that declaring a stock dividend
will increase the total number of shares and can dilute the earnings per share.
• It should be noted that the shareholders are the owners of the firm and expect dividends as
soon as it is prudent.
• A dividend payment request will be cancelled if the firm has negative retained earnings or
the firm has a loss.
• Do not declare a large dividend at the end of the simulation to make your firm "look good."
Your instructor will be looking for such end-gaming tactics.
Revenue Details:
• If other sources of income become available during the simulation, the net income after
expenses will be shown under the category "Other Profits or Losses" on the Income
Statement. If you have more than one additional source of income in a quarter, both will
be totaled in this figure.
• The winter quarter is particularly difficult to keep an airline on schedule; you may expect
your usual reliability to be reduced about 2 to 4% during the winter quarter (Quarters 4,
8, and 12).
• Commissions paid to travel agents are 10% of the ticket price; however, not all tickets
are sold through agents so the commission expense will be calculated at about 9% of the
gross revenues (at the beginning of the simulation).
• Refunds must be made when passengers are not able to fly as a result of equipment
problems, weather, overbooking, incorrect ticketing, employee discourtesy, or baggage
problems. This airline has a reliability factor of about 92%, which means that about 8%
of its flights are affected in some manner. The reliability for the quarter will be printed
beside the "Refunds" figure on your firm's Income statement each quarter. Following is
an example of the method used to compute the reliability rate:
Flight Operations include crew cost, dispatching and weather services, baggage/mail/cargo
handling, and aircraft handling on the ground.
Passenger Service expenses includes the cost of the reservation and ticketing service, ticket
counters and terminal baggage service, and rent of terminal passenger areas. The $10,000 cost
associated with opening a new market is charged to passenger services.
Insurance costs are based on the total seats in the fleet and the size of the aircraft. The current
cost of $10,260 is based on the following calculation: 3 aircraft with 19 seats each = 57 seats x
$180 per seat per quarter = $10,260. Larger-capacity aircraft have a higher insurance rate. Any
aircraft in the fleet with more than 20-seat capacity are charged $300 per seat per quarter.
Marketing Expenses include Advertising and Promotion Budgets as well as the salaries for
outside Salespersons at $12,000 per quarter. All three of these items will be included in the total
for "Marketing Expenses" on the Income Statement.
Interest Expense is the cost of your short-term and long-term loans. Interest is calculated on
loan balances. If an overdraft loan was needed, its interest cost will appear the quarter after the
loan was required. The reason for this is the loan was granted on the last day of the quarter and
is due to be paid off in the following quarter along with all interest due.
The total interest expense shown on the Income Statement and will consist of:
Lease Payment represents the amount due for all aircraft that are leased. If you obtain
operating leases, the aircraft will not appear on the balance sheet as an asset (as it will under a
capital lease agreement).
Other Expenses refers to expenditures that may occur from time to time but do not fit into other
categories. This includes the brokerage fee when selling an aircraft or the fee to break a lease
and other costs associated with your Incident response selection. There is often more than one
item making up the "other expense" total.
Taxes are calculated at 40% of profits. If a firm has losses, the tax credit will carry forward in
the amount of the losses. Therefore, a quarter in which you use up all your tax credits may show
less tax expense than usual, as the 40% rate will apply to the non-sheltered profits only. While
the 40% rate may appear high, it includes not only income taxes, but property tax, licenses, and
VAT in the areas where that tax is in effect.
Liquidity Measures: These indicators show the availability of cash to meet current expenses.
Industry
Liquidity Measures: Current Ratio
Ratios
Cash $
Plus Short-term Investment + $
Plus Accounts Receivable + $
Sub-total Current Assets(a): = $ (a)
Accounts Payable
Short-term Loan +
Sub-total Current Liabilities (b): = $ (b)
Sub-total Current Assets (a) $ (a)
Industry
Net Working Capitol
Ratios
Efficiency Measures: These indicators show the efficient use of assets of the company.
Industry
Asset Turnover
Ratios
Gross Revenue
Divide by Total Assets /
= $
Industry
Daily Seat Productivity
Ratios
Short-term Debt $
Plus Long-Term Debt + $
Sub-total Debt: = $ (c)
Common Stock
Plus Retained Earnings +
Sub-total Assets: = $ (d)
Sub-total Debt (from (c) above) $ (c)
Profitability Measures: These are indicators of the profitability of the company to the claim
holders (banks, lessors, stockholders).
Gross Revenue $
Plus Fleet Cost + $
Plus Fuel Cost + $
Plus Maintenance Cost + $
Plus Passenger Services Cost + $
Plus Commissions + $
Plus Refunds + $
Sub-total Gross Revenue: = $
Return on Assets Industry Ratios
Adding a Market
In addition to your current markets (A, B, C, D, and E), you may begin service in any market in
the simulation at any time. The cost to open a new market is $10,000. This cost is
automatically charged to Passenger Service Expense on your quarterly Income Statement. The
new market is opened immediately; there is no waiting period. The $10,000 charge is processed
when the simulation is advanced to the next period; therefore you incur no cost should you
change your mind and add no flights in that market before the simulation is advanced. Your
aircraft are currently flying at their maximum mileage so if you want to add one or more
markets, or increase the number of flights in a current market, you must acquire more aircraft.
NOTE:
It takes two to three quarters to develop a new market and build a passenger base. Advertising and sales
promotion will be an important part of developing new markets.
Abandoning a Market
Your team may abandon a market at no cost. However, once you have abandoned a market and
want to reenter it, it will take the usual three quarters to again build up demand in the market.
There is no carry over effect. You will be charged $10,000 for opening the market again.
Fare Sale
One last note on fares. A fare sale stimulates demand but reduces revenues. The competitive
market is very reactive to fare changes; thus fare reductions tend to be copied by competitors
and the benefits to a single airline are short-lived. Teams should be very aware of the large
losses that could occur if the sale on fares is used in all markets during the same quarter. Using
a 3-month fare sale in a resort market creates losses in that market.
Charter flights by tour operators keep the pressure heavy in Markets F and R thus fare sales are
expected by the public. Cabin Class aircraft and fare sales should be utilized in these markets.
While no airline is flying in the resort markets now, it is thought that demand can be developed.
$40,000 (pilot)
Quarter 0 quarterly wages are
+ $60,000 (manager)
computed as follows:
= $100,000 (combined quarterly wage cost)
3 (aircraft)
The following example shows the cost of x $100,000 (pilot and manager wages)
a 5% wage increase given to managers = $300,000
and pilots in Quarter 1: x 0.05 (5% wage increase)
= $15,000 (added cost per quarter)
The profit-sharing plan is based on 20% of the previous quarter's profits and the actual cost is
charged; if there are no profits, nothing is to be distributed, and therefore there is no cost.
Operations / Planning
The Operations and Planning function is responsible for analyzing all markets and service to
those markets for potential improvements in efficiency. This function will also be involved with
new route planning and aircraft procurement and disposal.
The maximum mileage is calculated on a fleet basis; therefore, if the total mileage scheduled is
somewhat less than the maximum, you may be able to squeeze out one more flight. The
simulation will optimize your daily aircraft schedules and your schedule overall. It is your
responsibility to make sure the overall flight capacity is sufficient.
While there may be a slight decrease in maintenance costs if you fly less than 100% of the time,
if you exceed the aircraft's maximum number of miles (varies according to aircraft type: 1800–
2400 per aircraft per day), you will be fined by the FAA. You may also expect additional
maintenance costs and "downtime," with the accompanying loss of passengers as flight
schedules are canceled. Use the Aircraft Scheduling report in conjunction with your routes
decisions to properly utilize your available aircraft. A small amount of additional mileage will
be accommodated to allow for minor mathematical errors on your part. Keep in mind that it is
good strategy to fly the maximum miles in order to more completely utilize your fleet.
Aircraft with more than 30 seats require a special certification by the FAA and are required to
have a flight attendant. The paperwork to document compliance with these regulations can
result in increased staff. Compliance with regulating agencies is costly to airlines in terms of the
staff needed, the paperwork required, and the direct costs incurred. The labor cost of a flight
attendant is included in the operating cost of the larger aircraft available in the simulation.
NOTE:
The composition of the fleet of any airline should be in alignment with your corporate strategy.
AIRCRAFT SPECIFICATIONS
Beechcraft 1900
British Aero 31
Embraer Brasilia Optimum Round-Trip Range: 280 – 420 Miles.
Saab 340
Aerospatiale ATR42
Embraer ERJ135
Optimum Round-Trip Range: = or > 400 Miles.
Canadair CRJ100
British Aero 31 May be used for Luxury Service but with poor passenger acceptance.
Embraer Brasilia
Saab 340
Must be used for Luxury Service. Operating cost includes the additional
Embraer ERJ135
labor cost of a flight attendant.
Aerospatiale ATR42
Canadair CRJ100
British Aero 31
Embraer Brasilia
Saab 340 May be used for Foreign Markets; headroom facilitates walking upright in
Embraer ERJ135 aisle; ability to serve food and drink.
Aerospatiale ATR42
Canadair ERJ100
Beechcraft 1900 Should not be used in Market F or in Market R.
Firms should attempt to match markets, demand, and amenities with the type
of aircraft placed into service.
Disposal of Aircraft
Although it is somewhat costly to dispose of an aircraft that your firm has purchased or leased,
you should do so if the aircraft no longer fits your strategy. You may dispose of up to three
(leased or owned) aircraft per quarter. The cost to dispose of a leased aircraft is $50,000. An
owned aircraft will be sold at book value (cost less accumulated depreciation). A brokerage fee
of 1% of the book value of the aircraft will be assessed. The disposal costs will be shown as
"Other Expenses" on your quarterly Income Statement.
Aircraft Maintenance
Due to federal safety requirements, minimum equipment maintenance schedules are specified
and monitored by government agencies. In addition, each manufacturer provides a required
maintenance schedule based on the maintenance record of each model of aircraft. This requires
extensive record keeping. In addition, some airlines choose a maintenance program in excess of
Federal requirements to decrease unplanned, out-of-service time and to increase real and
perceived safety and reliability. Extra maintenance provides the same marginal benefits to the
company that an insurance policy might; it is difficult to determine the most cost effective level.
The fewer types of aircraft you have, the lower your maintenance costs will be. As different
types of aircraft are added, a greater number of parts must be stocked, mechanics must be
trained to work on a new type of aircraft, and specialized tools and equipment must be procured.
The Quality Index is a measure of how others perceive your firm and will be impacted by your
maintenance and HR decisions.
It should be noted that Level 1 is a very safe level of maintenance. Many airlines adhere to this
level and have very good safety and reliability records. However, other firms believe that higher
levels of maintenance enhance their overall reliability record and customer image. Recent
articles in aviation periodicals suggest that consumers are affected by the overall appearance of
the craft, including both aircraft exterior and cabin cleanliness. The firm has been operating at
Level 1.
• Each aircraft type has a maximum daily mileage (from 1800–2400 per aircraft per day).
• For each team, the maximum number of flights per resort market is 4.
• Both Discounters and Luxury airlines must not fly too many flights in any one market as
there is limited demand for specialized types of service.
• Total Miles Flown-Daily is a reflection of all of your trips in all of your markets. Whereas,
the "Maximum Mileage-Daily" is the number of miles your fleet may fly safely and
efficiently.
• Your airline operates 80 days per quarter, which includes 5 weekdays and more limited
service on weekends. The Maximum Number of Seats in any market/route combination is
around 200.
• It takes two to three quarters to develop a new market and build a passenger base.
• Finally, remember that costs are relatively fixed in the airline business (e.g., it costs nearly
the same amount to transport one or nineteen passengers between two points). Sometimes
the difference between a profit and loss is one additional passenger per flight per day.
Appendix—Page 81
AIRCRAFT PURCHASE COSTS
COST TO PURCHASE AIRCRAFT
Cost Quarterly Cruise Cabin
Key Name ($M) Lease (MPH) Class Seats
A Beechcraft 1900 2.0 $ 80,000 268 No 19
Aircraft B British Aero 31 2.2 $ 82,000 253 Yes 18
Purchase Costs C Embraer Brasilia 3.1 $ 132,000 294 Yes 30
D Saab 340 3.4 $ 144,000 272 Yes 34
E Embraer ERJ135 4.3 $ 184,000 400 Yes 37
F Aerospatiale ATR42 4.4 $ 185,000 300 Yes 46
G Canadair CRJ100 5.8 $ 240,000 450 Yes 50
ADMINISTRATIVE COSTS
Administrative expense is a variable amount based on the total number of
seats in your fleet. While these costs may change, the cost at the beginning
of the simulation is as follows:
Number Administrative
of Seats Cost per Qtr.
0–76 $100,000
77–102 $150,000
103–134 $200,000
Administrative
135–168 $250,000
Costs
169–199 $300,000
200–230 $350,000
231–279 $400,000
> 279 $450,000
Plus $1,700 per seat
over 280
The increases in cost at various levels of fleet size are the result of extra
management, support personnel, administrative space, and maintenance
facilities required as fleets and firms become larger.
ACCOUNTING BALANCE
Accounts
40% of gross revenues.
Receivable
Accounts 30% of gross revenues.
Payable
Appendix—Page 83
Page 84—Airline Student Manual
ANALYSIS FORMS AND WORKSHEETS
This section contains various forms and worksheets to aid your team in making better
decisions and to keep abreast of your performance in relation to the industry averages. A form
for recording your decisions each quarter is also included.
There are two types of Market Profitability Analysis worksheets included. We have found
that some prefer one over the other, so we have included both versions.
Appendix—Page 85
NAMING YOUR AIRLINE
Industry________________ Company # ___________
2. List other services you think you might want to add in the future, if any (for example, you
will be given the opportunity to begin cargo service and auto rental in the simulation):
3. Describe your target market (the demographics of the segment of the population you want
to serve. (Example: Scot Air, the low price leader.)
4. List some advertising mottos, jingles, or lines you think your target market might relate to
(Example: "Fly Sublime, the On-time Airline."):
5. Describe the motif (cabin design, color schemes, aircraft paint design) you may use.
(Example: A recent airline chose the color blue and chose the name "Jet Blue.")
6. Describe any other factors that you want to consider in naming your business:
Some considerations in naming your business and some right/wrong examples are
given below:
5. Does the name lend itself to future changes in services or expansion of the
product line (i.e. cargo, charters)?
Pete’s Passenger Express vs. Americana Airlines
Appendix—Page 87
PASSENGER BILL OF RIGHTS
Most airlines have either been pressured to create or have created on their own, a Passenger Bill of
Rights. This is usually a short list of the responsibilities the airline has to its customers. The list
should include everything from passenger rights when a passenger is "bumped" or has a flight
canceled, to lost baggage. You may want to search the web sites of airlines for some ideas.
You may use a "bulleted list" to keep the document from being too wordy. Keep the language
concise and clear. Write it at the ninth or tenth grade level.
Submit ONE statement per team. Keep a copy for your firm's records.
It is suggested that you use a "bulleted list" to keep the total length reasonable. Write at a level
that even an employee without a high school diploma can understand it.
Submit ONE list per team. Keep a copy for your firm's records.
Appendix—Page 89
AIRLINE DECISION LOG
Industry ___ Qtr # ___ Co # ____
Reproduce as many copies of this form as needed. (Use additional pages if required.)
Please attach a print out of your quarterly decision summary to this document.
State any major change in your overall strategy (e.g., long-term objectives) and how it differs
from the original. (For quarter 1, please state your overall strategy.)
List each MAJOR decision or change in previous operating policy you are going to make this
quarter and give the rationale behind the decision:
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________
4. ______________________________________________________
Objective:
Total miles flown for each aircraft should be as close as possible to its maximum daily number
of miles. Some aircraft may be a few miles over (100) as long as other aircraft are a few miles
short. Use the calculation below to ascertain the total miles per day you may fly.
X Multiplied by maximum miles per day / per aircraft (max. varies from 1800–2400)
= Equals your fleet total maximum miles per day
Use this worksheet as an alternative to the simulation analysis screen, Aircraft Scheduling.
Appendix—Page 91
MANAGEMENT AUDIT WORKSHEET
Your team should be prepared to make a short (8-10 minute) presentation to the class. Your
instructor may also want a written report; if so, the report should be typed and be well
organized.
Make sure you turn in any additional analyses you performed in order to make better
decisions, including charts, graphs, etc., for which you have not received credit. You may
want to prepare a short handout for the class indicating the main points of your report.
For the purpose of this audit, assume that your firm is a case study out of the textbook.
Investigate the performance of the firm as though you were management consultants brought
in to determine what kind of job the firm's management team has done. Of course, there are
several methods of approaching this assignment and you are encouraged to be creative. The
major point you will be graded on is your OBJECTIVITY AND HONESTY in reporting your
findings; i.e., be brutally frank. Your instructor has been following all the teams closely via
administrator reports furnished by the simulation, and any attempt to "whitewash" or omit
critical points will be dealt with unkindly.
Listed below are some key questions to help you get your thinking caps on. However, your
report (both verbal and written) may follow any creative format you wish; just try to address
in some way or other most of the points covered below.
Your instructor may ask you to conduct the audit by playing the role of a consultant firm to
encourage objectivity on your part.
1. Refer to the original goals and objectives. Did the strategies work as planned? What
strategies, goals, objectives, policies, etc., were changed? Why? How closely did the
firm end up doing what it said it was going to do? (You will not be penalized if your
goals did change substantially.)
2. The functions of the manager are planning, organizing, directing work, and
controlling.
a. To what extent and how were these functions handled by this team?
b. Comment particularly on the controls that you may or may not have used.
Were they effective?
c. Did the team have enough records, controls, and worksheets to manage
effectively?
4. If the management team were going to be transferred, what advice should it give to
the new team coming in to manage this company?
6. Did the team make decisions on a rational basis or did it often "stab in the dark"?
8. At this point, is the firm a healthy, going concern? Is there any evidence of "end
playing" the simulation? Such evidence would include a large dividend payment at
the end, reducing all budgets, buying or selling stock to influence the stock price,
etc.
9. Was there any evidence of lack of teamwork in the firm? If so, what
communication, decision-making, and cooperation efforts need improving?
NOTE:
Most Instructors will penalize a team heavily if the team does anything at the end of the simulation that
attempts to make the firm look better. See Number 8 above.
Appendix—Page 93
MANAGEMENT AUDIT FORM
1. How many times did the team have a zero cash balance (overdraft loan)? _____
2. How many times was there an excess amount of cash that was not invested in CDs
(excessive is defined as over $300,000)? _____
3. How many quarters did you have aircraft utilization of less than 95%? (From the
Mileage Analysis form) _____
5. In view of your dividend record above, do you think you were fair with the owners
(stockholders) of the firm? Why or why not?
6. How many markets did you abandon during the simulation? ______
If you abandoned a market and re-entered it, count it. Why did you abandon the
markets, if any were abandoned?
7. Total amount spent on market research for the entire simulation: $__________
Do you think this was sufficient? Too much?
8. What was Average Passenger Load Factor (for entire simulation)? ________%
10. What are your profits after taxes and before dividends since quarter 0? $
______________
11. Profit per passenger flown for all quarters being reported (total profits before
dividends divided by total passengers for all quarters): $ __________
12. Return on sales for the entire simulation (total profits before dividends divided by
total revenues): _______%
14. What was your average stock price for entire simulation? ____.___
15. What was your reliability at the end of the simulation? _______%
16. What was your employee turnover at the end of the simulation? ______%
17. How many quarters did you exceed the maximum mileage? _______
Qtr. Qtr.
1 0.___ 7 0.___
2 0.___ 8 0.___
3 0.___ 9 0.___
4 0.___ 10 0.___
5 0.___ 11 0.___
6 0.___ 12 0.___
19. Indicate any other factors that are relevant to this audit of your airline:
20. Indicate any other positive factors (strengths) that are relevant to this audit of your
airline:
Appendix—Page 95
ANNUAL REPORT FOR STOCKHOLDERS' MEETING
Corporations report the state of the organization to their owners (stockholders) on an annual
basis. Sometime after your first year of operations, you may be asked to conduct an annual
meeting with members of your class acting as stockholders. Your instructor will assign the
actual length and format of the oral presentation. The annual meeting is used to communicate
the condition of the corporation to the owners and is a public relations vehicle for the general
public, investment bankers, and prospective stock purchasers.
Each team will be expected to prepare a short Annual Report to its stockholders and reproduce
sufficient copies for each of the "stockholders" and the instructor. You should check the
annual report section in the library to get a more complete idea concerning what should be
included. Some items that the firm should include in the written portion are: a brief synopsis
of sales and earnings trends; an explanation of start-up problems and how they are being
overcome; a general statement of the financial health of the firm; and a discussion of dividend
plans and policy, expansion plans, and future prospects, etc.
In addition to this brief narrative of operations, you will need to include the financial report for
your firm. The financial report includes, at a minimum, an income statement, balance sheet,
statement of changes in financial conditions, and explanations that include comparisons to
prior-year data. This listing is not meant to limit other financial information you may want to
include in your report. Since all financial reports use the previous year with which to compare
current performance, use the beginning balance sheet for Quarter 0. For an annual Profit and
Loss statement, multiply the quarter 0 sales and expenses times 4 to obtain a full year of profit
and loss information for the previous year.
Each member of each team is responsible for analyzing the annual reports of the other teams
and asking questions during the presentations.
HINT:
Do not feel you must "tell all" and reveal all your future plans in detail. Likewise, you may merge
certain expenses on the financial statements you prepare, e.g., under Marketing Expenses you could
include promotions budget, advertising, marketing research, and salespersons expenses.
Co # _____
As a member of your firm's Executive Compensation Committee, you have been assigned the
task of allocating $40,000 among the managers of your firm.
In addition, or in place of, your instructor may require you to fill out the online Peer
Evaluation form. This form can be accessed from Simulation menu on your class website.
TOTAL: $ 40,000
NOTE:
A fair, firm, and objective performance evaluation is a crucial function of the manager. While peer
evaluation is not an easy task, your instructor expects you to complete this task honestly.
Appendix—Page 97
AIRLINE DEBRIEFING QUESTIONNAIRE
3. To what extent did the simulation help you understand the operation of an
organization from the viewpoint of top management?
5. To what extent did the simulation help sharpen your ability to analyze problems
and recommend solutions (i.e., decision making skills)?
6. What other skills did you learn because of the simulation and group decision
making that occurred?
7. How many hours per decision quarters did your team meet as a team (either face-
to-face, phone, or via Internet: _____ hours at the beginning ______hours after
Quarter 4
8. How many hours per decision quarter should a team meet to make decisions?
_____ Hours
_____ Hours
10. Please make any comments you feel (pro and con) about any of the incidents:
11. Please make any comments you feel (pro and con) about any other part of the
simulation:
12. Do you have any other suggestions concerning the simulation or the method in
which the instructor handled it?
13. Suppose that another student told you she was going to take this course next
semester. She has the choice between a course that has case studies only and a
course like this one that has a business simulation. What would be your advice
about course choice?
14. What would be your advice to her about the simulation if she were to take the
course with the simulation?
Appendix—Page 99
Page 100—Airline Student Manual
GLOSSARY
The AVAILABLE SEAT MILES FLOWN for all of your routes can be
calculated by multiplying the seats available per flight by the miles in the
Available Seat
particular market. Then add all the individual markets for the total.
Miles Flown:
Example: maximum miles per Aircraft per day x 80 flying days per
quarter x total seats in fleet.
The breakeven load for most small commuter aircraft is a 40 TO 50% load
factor, e.g., a 19-passenger craft would be 19 x .40 = about 8 full fare
passengers. This would include direct but not fixed costs of operating the
aircraft. Total costs would require 55% load or 19 x .55 = 11 passengers.
Breakeven
Load
To determine your BREAKEVEN LOAD, divide the cost per Available
Seat Mile by the Yield per Revenue Passenger Mile. Quarter 0 example:
0.178 / .35 = 0.509. Therefore a 50.9% passenger load is the airline's
Breakeven Point.
The COST PER AVAILABLE SEAT MILE is calculated by dividing total
operating costs (including commissions and refunds) by seat miles. This
Cost per
will indicate how much it is costing to fly one seat one mile (whether
Available Seat
occupied or not). The YIELD PER AVAILABLE SEAT MILE is total
Mile
revenues divided by available seat miles; this indicates the revenue for
each seat flown one mile.
Total employees at the end of the quarter and employees lost due to
Employee turnover during the preceding quarter are shown on your firm's Operations
Turnover Report each quarter. To decrease employee turnover, the firm must pay
higher wages and increase the training budget.
FUEL PRICES are quoted for the open market in the current quarter (spot
prices) and for the three-month contract for next quarter. There is no
Fuel Prices
forecast for spot fuel prices as they are determined on a day-to-day basis
during the quarter.
Interline ticketing and baggage arrangements can be made with all major
Interline carriers. This agreement allows a small regional airline to issue tickets to
Ticketing any destination at competitive rates and to offer the convenience of
baggage checked through to the final destination.
Appendix—Page 101
The LINE OF CREDIT for each firm differs as a function of the bank's credit
Line of practices at the time a loan is negotiated and the firm's financial health and
Credit financial history. Normally, the line of credit is equal to four times the total
equity of the firm less total liabilities.
The SHORT-TERM INTEREST RATE for each firm can differ, according to
Short-
the overall financial condition of the firm. At the start of the simulation, the
Term
firm is being charged 2% over the current prime rate for short-term loans
Interest
(10%) and 9% for long-term loans. The firm's interest rates as well as the
Rate
prime rate could vary during the course of the simulation.
Index—Page 103
administrative........................................................ 20, 82 investment income........................................................... 67
categories .................................................................... 61
direct flight ............................................................ 19, 74 L
fuel............................................................................... 20
hiring ........................................................................... 16 lease
hiring sales personnel .................................................. 32 payment ................................................................ 69, 81
in-flight magazine ........................................................ 32 lease vs purchase ............................................................. 63
interest ........................................................................ 69 line of credit ....................................................... 14, 66, 102
leasing.......................................................................... 20 loan
marketing ........................................................ 32, 69, 81 increase limit ............................................................... 65
new market ................................................................. 19 interest rates ............................................................... 81
new route .................................................................... 37 long-term, short-term .................... 14, 35, 40, 66, 68, 69
operating ..................................................................... 49 overdraft ..................................................66, 68, 69, 102
operating outside market region ................................. 74 short-term interest rate ............................................ 102
other ............................................................................ 70
passenger service ............................................ 19, 69, 74
M
quarterly ...................................................................... 47
market characteristics ...................................................... 10
F market research ............................................................... 54
maximum mileage ............... See aircraft:maximum mileage
fare sale .................................. 12, 19, 37, 51, 54, 56, 75, 83 menus
fares .................................................................................. 15 brief descriptions of..................................................... 28
effect on demand ........................................................ 56 pull-down .................................................................... 25
financial ratio .................................................................... 70
financial ratio analysis................................................. 71, 73 N
FORMS / WORKSHEETS
Aircraft Scheduling Worksheet .................................... 91 navigation buttons, green ................................................ 26
Airline Debriefing Questionnaire ................................. 98
Airline Decision Log ..................................................... 90
O
Annual Report for Stockholders' Meeting ................... 96
Executive Bonus Recommendation ............................. 97 operations
List of Policies .............................................................. 89 guide ............................................................................. 7
Management Audit Form ............................................ 94 other profits ..................................................................... 68
Management Audit Worksheet ................................... 92 overhead .................................................................... 21, 32
Naming Your Airline..................................................... 86
Passenger Bill of Rights ................................................ 88
P
G passenger load factor ............................................... 50, 102
promotional fare .............................................................. 15
gross revenue ........................................................... 19, 101
Q
I
Quality Index .............................................................. 50, 79
INDUSTRY
Compensation ............................................................. 55
R
Demand Forecast......................................................... 54
Fares ............................................................................ 55 refund
Marketing .................................................................... 56 lease disposal fee ........................................................ 35
newsletter ............................................................... 1, 41 refunds .............................................. 19, 45, 47, 49, 68, 101
Newsletter ................................................................... 52 reliability factor .......................................................... 19, 68
Operating Statistics ..................................................... 53 retained earnings ............................................................. 67
Sales....................................................................... 51, 56 revenue passenger miles ................................................ 102
input screens .................................................................... 25 review
insurance policy ................................................................ 79 historical information.................................................. 26
interest Route Map........................................................................ 11
short-term loan ........................................................... 66
interest expense ................................ See expense: interest
interline ticketing ............................................................ 101
Index—Page 105