Module 9 – Homework Help

COMPANY A Three-Year Data

INSTRUCTIONS

BigCo_BalanceSheet2019

Big_INCOME_2019

BIGCASHFLOW2019

MBA 620 Company A Information

Location, 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 business 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% annually • Seat occupancy average: 74% (top quarter of benchmarks) • Average customer fare: $450 USD

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 known 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 goals 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 acted 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 or

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 hard-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 System (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; optional

MBA 620 TransGlobal Airlines Information

Location, 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 Target 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 hubs.

• 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 improvement 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 groups, 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 customers 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 aircraft1. o Expand the fleet of regional aircraft with capacities below 70. 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 ranked 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 awareness 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 considerable 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 leases: $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

COMPANY B Three-Year Data

MBA 620 Company B Information

Location, 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 business

• 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 USD

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 even 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 before 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; invest 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 substantial 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 Orlando 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 venture 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)

Page 1 of 3 pages Confidential – For Internal Distribution Only

TransGlobal Confidential Internal Memo

Interviews With 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, this 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 to 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 provide 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 unnecessary 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 we 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 boost 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 revenues hit an all-time high (above $29 million); year-over-year

growth is favorable; and profit-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 dedicated to safety first, but some of the more cosmetic and

customer-friendly upgrades have been deferred over the years.

“It’s been difficult to acquire new aircraft over the 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 productivity challenges, too—and wow, was she right about that! Our team is really good

at managing to 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 we 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 been keeping up on our compensation levels, and this may

make 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 satisfaction 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 good 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 gets them … but we have

no budget for extras. Sometimes I worry that we’re falling behind and that we’re losing our most

valuable employees.

“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 path

opportunities in the company. I gained the impression that the HR Director was feeling some sense of

burnout and counting the days until retirement.

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 every 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 sometimes 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: 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

palms of their hands. The IT team believes this will be a five-year effort; the president is hoping for 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 reliability. 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 integrating 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 environmental stewardship and moving toward net-zero

carbon as soon as possible.

On the other hand, a few of her ideas seem a bit like science fiction. As a hobby interest, she’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 future 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 remained flat, plus or minus a few 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 customer.

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 taken 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

probationary 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 Resources

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 strengths are in union negotiations and

rapid onboarding.

Balanced Scorecard-Company A

Balanced Scorecard-Company B