Introduction
The airline industry mainly focuses on extensive planning, strategy and decision-making towards sustaining profitability and viability in operations. Through the inculcation of plausible operational policies, organizations manage to position themselves within an individual profitable niche. As such, various players within the airline sector inculcate diverse and individualized approach in operations that lead to differentiated outcomes. Thus, Allegiant Air is a performing company within US airline industry that has sustained its operations through specialized approach in operations. As such, the company has incorporated a low-cost approach that is driven by effective policies and performance approach. As a leisure and travel based carrier, its success has been as a result of various fleet planning approaches and performance mandate. Thus, this paper will evaluate Allegiant Air as per the case questions for in-depth comprehension of its operational success and future options.
- What is the strategy and business model of Allegiant Air? What makes the airline special? How is the composition of the current fleet related to the way Allegiant Air conducts its business?
First and foremost, Allegiant Air inculcates a low-cost strategy construed towards offering its customers with bundled up service packages within a cost effective mandate. Furthermore, the low-cost approach is intertwined to its policy of charging fees for most facets within the travel mandate. Through what most pundit’s term as ancillary sales revenue model, the airline manages to offer various products such as seat arrangements, advance seat assignments, priority boarding, carry-on baggage, and beverages and snacks. Its low-cost approach that aims towards opening up cities that are deemed less profitable by diverse airlines. Through offering various products being sold at a competitive and cost effective platform, the organization has positioned itself profoundly within the low-cost business model.
Secondly, the airline company is special since it focuses on linking diverse travellers in small cities with plausible vacation packages. Travellers from underserved airports that exude limited service to the various top leisure destinations are the plausible targets for Allegiant Air. Its approach to various underserved cities has significantly reduced the prospect of competition from other low-cost airlines. Its operational mandate is highly special and based on both standalone criteria and travel products. The travel products that the airline offers include hotels, car rentals coupled with entertainment tickets. Through the provision of bundled packages within attractive prices, Wensveen (2013 p34-78) affirms that Allegiant Air is both affordable and convenient.
Thirdly, the current fleet is highly related to the way Allegiant Air conducts its business. As a low cost based operational airline, its performance mandate is based on extensive cost reduction measures. As such, cost reduction measures should include aspects such as the buying price of the planes, cost of fuel and so forth. The current fleet consists of mainly MD-80 planes that cost a meagre $ 3 million as compared to the exorbitant costs of $40 million in regards to new B737. Moreover, the organization purchases second hand MD-80s. Purchasing of second-hand planes is plausible due to the seasonality nature of Allegiant Air’s customers. Operations fluctuation results into lower yearly utilization. However, in the instance of Allegiant Air, the cost of ownership is low hence the utilization cost does not significantly increase the ownership costs per the remaining block hour. Thus, through the extensive approach in regards to the current fleet, the company manages to reduce its cost of operation and sustain its model that it inculcates in conducting its business.
- What are the underlying prospects for Allegiant Air in terms of traffic growth and how big is it likely to be in terms of passenger numbers and numbers of employees in 2015 and 2020?
There are tremendous prospects in regards to growth of Allegiant Air in regards to traffic coupled with its future performance mandate. Thus, from the evaluation of the organization reports, the company had seven million passengers in 2012. Allegiant Air growth in regards to passenger numbers is highly plausible as evident from its expansion in regards to customer seats. As at 2012, the company had undertaken an initiative to enhance its seats from 150 to 166 which is highly plausible to meet the customer traffic growth. Furthermore, the airline has been growing significantly evident from its average stage length of 1500 km as at 2012. The growth factor has been highly plausible with the average being pegged at 2.7. Banfe (2013 p70-103) emphasizes that the company has been investing highly into its airline in order to suit the expanding novel markets. As such, the company has 1900 employees with each aircraft being served at an average of 35 staff. Its growth factor has mainly been as a result of novel airplanes with the organization possessing 52 MD-80 airlines as at 2014. The growth mandate of the organization is highly plausible as evident from its extensive investment into increase in MD-80s coupled with extensive investment into travel packages. Wensveen (2013 p34-78) affirms that its growth mandate in employees in 2015 and 2020 is bound to prevail emanating from passenger increase. From the evaluation of the organization records, the company in 2015 will be evidenced by an average of 7.8524 million passengers per travel whereas in 2020 an average of 8.6629 million will be evident. The low-cost business model that aims at extensive strategies should capture novel markets in other regions such as Canada thus the need for expansion in its human resource coupled with increased passengers for the organization.
- What is your opinion about the composition of the current fleet?
The current fleet composition of Allegiant Air is highly beneficial from the evaluation of the organization’s business model coupled with the prospect of profitability. Through the inculcation of 52 MD-80 planes, the organization can manage to offer exclusivity coupled with the ancillary services to its customers. The size of the planes ensures that the company can rake in more profits through charging fees for various services such as booking seats and so forth. Furthermore, as aforesaid, the ownership costs of the MD-80 planes are low thus playing a significant role to the organization sustaining its business model. Thus, incorporating the majority of the aforesaid aeroplanes, in my opinion, Allegiant Air will manage to sustain cost effectiveness in operations and increase its profit margins. Additionally, the purchase of larger planes such as Boeing 757 and A320 is a noble approach towards meeting the increasing demand. Its business model denotes venture into cities that most rivals regard as not worthy to venture into. The expansionary approach by Allegiant Air needs to be plausible through larger planes that can meet the expanding consumer spending into the travel packages.
- How can Allegiant Air be successful using old aircraft when many other airlines are moving towards acquiring new, fuel efficient types?
Allegiant Air can sustain its success in using old aircrafts based on three main business approaches. First and foremost, the company should continue maintaining its average of 7-hour utilization of its aircrafts per day. Through maintaining a low utilization rate per day the company will sustain a low-cost of ownership of its aircrafts. The low-cost of ownership is highly plausible for the organization towards sustaining low-cost charges to its clienteles. Secondly, the company should maintain its customer targeting approach. Accordingly, the organization targets leisure coupled with discretionary customers. The aforesaid customer target offers a lucrative source of revenue emanating from ancillary services. The leisure coupled with discretionary customers subscribe extensively to services such as pre-booking coupled with describing the seat position. Thirdly, despite the notion that old planes consume more fuel, the ownership costs are highly minimal and the fuel expenses can be mitigated through additional revenue streams. Allegiant Air should enter into a partnership with intermediary companies. The growth of online business has led to the emergence of travel agencies coupled with hotels that extensively advertise their services to customers. Through mutually beneficial contracts with the intermediary companies, Allegiant Air can recommend travel agencies or hotels to its customers. The intermediary contractual approach will ensure proper revenues to meet the fuel expenses incurred from the old aircrafts.
- Is Allegiant Air’s president correct to suggest that the operating costs of old MD-80s are as low as more modern aircraft types?
- Using the GGGF Nutcracker 1B spreadsheet, explore the effects of different fuel prices, lease rates, MRO costs and aircraft utilization and report on your findings
The fluctuations on the utilization rates have an impact on the diverse planes. As such, an increase in utilization in regards to MD-80 leads to an increase in operating costs for the plane that is impactful on the profitability of the organization. On the other hand, the increase in utilization of A319 and A320 will result into reduced utilization costs considering the capacity coupled with the margins incurred from both planes. On the other hand, the fuel prices have a significant impact mainly on the MD-80. The increase in fuel prices is bound to increase the operating costs of the aircraft per passenger that is impactful on the profitability of the organization. On the other hand, the fuel increase is not significantly impactful on the other planes due to the increased passenger capacity coupled with the number of travels that the new airlines can undertake. Nonetheless, the lease rates are highly impactful on the new models, A320 and A319. The new models feature higher lease rates which are exorbitant as compared to the latter. Finally, the MRO rates are high in reference to MD-80 whereas the other planes are extensively low.
Fleet commonality
As one of the most fundamental aspects in fleet planning, fleet commonality plays a pivotal role based on two main reasons. Firstly, the purchase of common aircrafts generates similarity in type rating requirements which forms a distinctive advantage to the carriers in regards to passenger planning and targeting. Provision of identical cockpits or seats provides airlines with a plausible avenue in making decisions on the routes and the various marketing approaches that the organization will inculcate.
Noise restrictions
Majority of countries within the developed countries have inculcated restrictions on noise pollution. As such, there prevails extensive regulations on the levels of noise that are deemed plausible or legal in regards to aircrafts. Thus, through considering the noise restrictions, an organization can purchase the right airlines thus avoiding the prospect of Litigations. Litigations result into payment of fines or in other instances elimination of the aircraft model from the portfolio.
Current carrier resources
The carrier current resources in reference to Wensveen (2013 p34-78) denote the prevailing fleet inventory, financial coupled with technical data. Most fundamentally, the financial data denotes the acquisition costs. Through financial data, the organization can make extensive decisions. The decisions may focus on whether to undertake a leasing approach or purchasing new aircrafts within their fleet planning mandate. On the other hand, technical data denotes various information on the runway requirements and parts coupled with service availability. Through information on technical data, the organization can decide on physical characteristics of the fleet needed.
Corporate objectives
The top management objectives for the carrier denote various facets such as projected profitability, operational income, the net earnings, return on investment and so forth. Through the corporate objectives, decisions can be made regarding the plausible fleet plan that is bound to sustain and meet the targets set by the organization.
Projected industry environment
The projected industry environment denotes the national economic outlook coupled with the carrier’s performance within a given industry. Within the fleet planning mandate, the facets of gross national income, per capita income coupled with national economic projections significantly impact on the fleet planning mandate. Through the projected industry environment, the organization can decide whether to expand or maintain its fleet to suit to the prevailing economic environment.
- Although the airline has begun to acquire a small number of used A319s and A320s, it has over 50 MD-80s. What are some of the options for the future? Would an investment from GGGF influence the fleet planning strategy?
- Extensive investment into third party services to boot revenue and mitigate extensive fuel expenses from MD-80s. Allegiant Air should embark on an aggressive marketing approach of third party services such as hotels, rental car purchases coupled with selling vacations. Through making ancillary services a major part within the purchasing process the organization will sustain a steady income that will extensively offset the operating costs from MD-80 planes. Investing into its online site will ensure more customer traffic to its site in order to boost sales and maintain profitability. Despite the notion that ownership costs of the old aircrafts are low, the prospect of increased fuel expenses and MRO rates should necessitate the need for additional income.
- The company should seek financing to incorporate novel models of aircrafts. The airline industry is changing at a fast pace in regards to fuel efficiency coupled with various technical gadgets that ensure effectiveness within the transport sector. To sustain competition coupled with plausible operational margins the company should make a huge investment into the state of the art aircrafts.
Additional financing from GGGF would change the fleet planning strategy at Allegiant Air. Most fundamentally, the need for more aircrafts that are fuel efficient requires extensive financial investment. Through the extra finances, the company will manage to purchase more A319 and A320 aircrafts to sustain competitive rivalry and cost effectiveness. From the evaluation of the projected purchases, the company intends to possess 4 and 7 A319 and A320 respectively by the end of 2014. The financing mainly emanates from internal revenues. However, the extra financing will play a pivotal role towards additional aircrafts to meet the expansionary approach by the organization.
- We both recognize that you have limited data about the airline at present and that you have not had the resources to carry out a very detailed analysis. However, taking into account of the fact that GGGF might in the right circumstances invest in Allegiant Air-and having identified all possible fleet options- could you set out your preliminary recommendation for the future fleet plan?
Conclusion
The operational facet of Allegiant Air focuses on low-cost, proper targeting coupled with effective approaches in acquisition of its fleet. From the above evaluation, the company has sustained its low cost performance mandate through effective strategies such as ancillary services that are charged fees, purchase of second-hand aircrafts thus sustaining low ownership costs. Through the aforesaid performance approaches, the organization has sustained a pole position in regards to profitability and viability in operations. Nonetheless, the prospect of highly fuel efficient planes has become an aspect of concern that the company needs to inculcate plausibly within its fleet plan mandate. The extra financing from GGGF can sustain the acquisition of more fuel efficient planes and ensure that the organization can expand to new markets.
Reference List
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Wensveen, John, (2013). Wheels Up: Airline Business Plan Development. Belmont, CA: Thomson Brooks/Cole.
