Airline The Strategy Simulation

Airline
The Strategy Simulation
Jerald R. Smith, Florida Atlantic University

Peggy A. Golden, Florida Atlantic University
Michael Deighan, Interpretive Simulations
Charlottesville, Virginia, USA

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Copyright © 1986–2007 Jerald R. Smith and Peggy A. Golden; Copyright © 2008–2011 Interpretive Software, Inc.;
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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
Print Date 2/1/2011

ABOUT THE AUTHORS
Dr. Peggy Golden is currently Professor of Management and International Business at Florida
Atlantic University teaching graduate and doctoral courses in Strategy and the Environment of
Business. She has also taught courses on global competition in Spain and to computer industry
executives in Asia. Prior to her arrival at FAU, Golden taught at the University of Louisville for
five years in a variety of areas including the management of information systems. All courses
are taught through extensive use of cases, experiential exercises, and simulation experiences to
reinforce the learning process.
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.
In this simulation, we have attempted to illustrate the strategic

challenges facing an airline in the real world, but simplified somewhat
to make it a manageable task. Each simulated quarter, your decisions,
In Airline, you will along with all of your competitors’ decisions will be modeled along
have a "hands on"
with changes in the environment to reveal how your company performs
experience of
manipulating key
in this dynamic marketplace. The relative success of each team's
strategic variables in decisions will be displayed in the simulation newsletter and in the many
a dynamic setting. reports furnished each decision quarter.
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.
Key Simulation Objectives

Your team's performance might be judged against the goals you have
formally or informally set, or ones set by your instructor. However,
remember that at the end of the day, an airline must eventually make a
profit, have positive cash flow, and create a positive return for investors
in order to stay in business. As in the real world, your firm will not
have enough funds to implement every available option. You will have
to make strategic choices regarding investing limited resources.
To understand the general process of the Airline experience, please

review the approach outlined on the following pages.
Page 2—Airline Student Manual

Section 1 (Case) of this manual presents a description of your
firm and your industry's current situation. A thorough
understanding of your firm, its current situation, and the
Read Section 1 general operating environment will help your group decision-
of the Manual making process. The case provides a great “quick start”
overview of the simulation.
Section 2 (Operations Guide) provides detailed information on

how to use the simulation and each menu option. In order to
quickly learn the functions of the menu commands and
Learn How to
become familiar with operating the program, it will be helpful
Operate the
to have access to your simulation as you work through this
Simulation section.
Industry market and competitive reports are available for

purchase to improve your decision process. Here, your firm
will find comparable performance measures for all the airlines
in your industry, future demand forecasts for your airline
based on business conditions, compensation packages for each
competitor, competitive fares, sales by company and route,
Develop Goals and and relative advertising, promotional, and sales force
decisions. From this information, you will devise and
Strategic Plan
implement an appropriate strategic plan for your company and
gain insight into how other firms in your industry are
performing and positioned. Just as in real life, however, some
information and reports will prove more useful than others.
Part of your decision process will include deciding which
information is most useful to your firm.
After reviewing information about your firm, the

environment, and the competition, your team will decide how
to manage your company in light of your strategy. This
“management” must be translated into a set of decisions each
Implement your period—the implementation. In the words of management
Strategy guru, Peter Drucker, “The important decisions, the decisions
that really matter, are strategic . . . but more important and
more difficult is to make effective the course of action
decided upon.” In other words, having a good strategy is
essential, but the real challenge is implementation.
Implementation is what often separates a successful firm from
the rest of the pack.
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.
The simulation will be advanced at a specified time

according to your course schedule so that everyone
competing in the industry will have a chance to enter
Advance to the their decisions. Make sure your decisions are entered
Next Period before the deadline as once the simulation is
advanced, it is impossible to go back and make
adjustments.
Once the simulation is advanced, information will be

updated, and your firm will have access to the
Review Results updated results. Compare your results with those of
the entire industry and consider how well your
strategy is working.
Repeat the decision-making process until all periods

Repeat have been completed. At the end of the simulation,
you will be able to see how your firm performed over
the entire game and view comparative results with
other teams.
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.

Team Organization
Getting off to a good start is critically important in managing a firm or
participating in a simulation. Your team should be organized as soon
as it is formed. Specific duties should be assigned with each person to
be held accountable for his/her responsibilities. It is recommended that
you assign a "lead" person to head up the team, perhaps with the title of
President or CEO. This position could be assigned on a rotating basis
to give everyone an opportunity to take a leadership role.
If you do decide to operate as a self-managed work team, you should

consult your course textbook or other resources in order to learn how to
make it work. Picture your team functioning as a team, rather than as a
"group"—can you visualize the difference?
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.
The Strategic Planning Process

Planning is the process of preparing for the future. While thoughtful
and detailed planning does not ensure success, the vast majority of
successful organizations practice good planning and strategic analysis.
Of course, a firm can do too much detailed planning and not be flexible
enough to react to environmental changes and opportunities. On the
other hand, operating without a plan also has its drawbacks; if an
organization doesn't know where it's going, how will it know when it
gets there?
There is a hierarchy to the planning process—from the broad and

general direction set by top management to the detailed planning
required at the operating level. The outline that follows indicates this
process.
THE STRATEGIC PLANNING PROCESS
I. Establish the Purpose (mission, master strategy) of the Organization
II. Analyze the Firm's Environment
a) The External Environment (termed industry study)

• Environmental Threats
• Environmental Opportunities
b) The Internal Environment

• Organizational Strengths
• Organizational Weaknesses
III. List all Possible Courses of Action
IV. Select Best Course(s) of Action
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
In narrative form, the outline answers these questions:
• Where are we now?

• Where could we go?
• What could we do?
• What is the best thing for us to do?
• How are we going to do it? Who is going to do what parts?
• How are we going to measure our progress?

The Airline Manual
The remainder of this manual is divided into three sections:
Section 1: The Airline Case
This section presents the information about the overall operating

environment in a form similar to a business school case. This will
also serve as an introduction to the current situation at the start of the
simulation.
Section 2: Airline Operations Guide
This section outlines the operational aspects of using Airline,

including how to get started, the menu and help systems, and a
detailed description of each report and decision screen.
Section 3: Decision-Making in Airline

.
This section provides guidance on how to analyze information and

create a strategic framework for making decisions.
Appendix
The Appendix includes sample incidents (special events in the

simulation), several forms, and a glossary of terms used in the
simulation, and an index.
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.
History of the Airline

The regional air carrier you are taking over is well known to thousands
of people living in small communities near your current hub. Like
other regional or commuter airlines, the company has been providing
air service to cities and towns that were unattractive to large carriers
because of the population size or the limited facilities at the local
airport.
When the Federal government deregulated the entire airline industry,

all companies were able to compete for passengers by creating
Analyzing the airline competitive fare structures and competitive routes. One response by
industry and this case major carriers was to diminish service to the less profitable markets and
will help prepare create hubs in large cities. Regional airlines jumped in to fill the
your team for the service vacuums left in many medium-sized and small cities,
internal and external establishing their own mini-hub operations in these smaller markets.
environmental
factors in the
Your airline was originally established as a "mom and pop" business
simulation.
when NC Airlines stopped serving your local region. The company
grew from a fledgling carrier that transported 2,700 passengers in its
first year, to a regional airline that was carrying 20,000 passengers last
year. Though steadily growing, the airline has had a cyclical history of
profitability, ranging from small losses to small profits as shown in the
operating history table below.
OPERATING HISTORY (Preceding 8 Quarters)

Yield per
Revenue Available Revenue Yield per Load Fuel
Qtr. Passenger Seat Passenger Available Factor Net Spot /
# Miles Miles Miles Seat Miles % Profits Contract
0 4,259,321 8,147,200 0.350 0.183 52.3% $22,234 .96/.96
-1 3,976,427 8,147,200 0.375 0.183 48.8% $8,450 1.01/.93
-2 3,492,145 7,465,400 0.389 0.182 46.7% $3,520 .99/.94
-3 2,897,566 7,465,400 0.464 0.180 38.8% ($205) .98/.96
-4 2,680,345 7,465,400 0.500 0.180 35.9% $5,872 .94/1.01
-5 2,344,965 5,320,650 0.415 0.183 44.0% $2,156 .92/1.00
-6 2,202,798 5,320,650 0.437 0.181 41.4% $435 .93/1.00
-7 1,983,388 5,320,650 0.486 0.181 37.2% ($6,310) .95/.96
The Airline Case—Page 9

DECISIONS Markets and Routes
MENU In the world of Airline, there are seven market types designated by
letters (A–F, R). These market types each have their own unique set of
*Generally, demand
associated characteristics in terms of geographic location, flight
is an expected firm
average under distance, population base, etc. In addition to the market type, there are
normal economic and also routes, which are numbered from 1 up to a maximum of 52. These
competitive routes represent a unique airport-to-airport flight. Thus, market / route
conditions. As more designation "A1" represents a unique route (#1) to a market type A.
companies come to
market with different In addition to having unique market characteristics, each market type
pricing / schedules / starts with a different level of competition. Market types A-D all start
amenities, these with 2 competitors. Each market type E only has one firm serving its
averages will population (a temporary monopoly position for a firm). Finally, market
probably hold. At types F and R are not currently served by any firm, and are open
some point the
markets. However, it is important to note that because of deregulation,
market may become
saturated. You'll any firm can now enter any of markets A–F and R.
want to monitor this
as companies enter The table below provides a helpful description of these market types,
new markets. estimated demand (passengers per day), and the level of competition at
the start of the simulation.*
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 airlines generally fly routes that terminate in larger cities that
have major airline connections. Passengers prefer nonstop flights at
convenient times and this factor can stimulate demand. However, since
the demand may be small at any particular stop, regional airlines will
often provide direct service (on the same plane) to a hub city, making
one or more stops along the way. Please see the generic route system
below to help you visualize the available markets and their
relationships.
ROUTE MAP FOR AIRLINE FIRMS
Regional Hub
A C R
600 MILES 600 MILES

340 MILES
Your Mini-Hub
420 MILES
B F
360 MILES 400 MILES

400 MILES
D STOPOVER
E
B
D

Flight Scheduling
The number of flights per day is a crucial factor to the success of an
airline. Too few flights prompt prospective passengers to drive to the
nearest competing hub and too many can be too costly to maintain.
With the exception of the resort and foreign runs, it is not practical to
fly only one or two round trip flights per day into a market; there would
be no passenger loyalty and the cost to maintain a station there would
be prohibitive. The careful balancing of flights and seats in a market is
an important decision for your firm as the passenger load percentage
(number of paid seats divided by total seats) is a major driver of
success. At current prices, the breakeven point for a flight is 45 to 55%
load.
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

nonflammable cabin materials. Since there is an abundance of pre-
owned equipment available as other, larger and more profitable airlines
“traded up,” the airline has a large choice of aircraft to choose from if
they decide to expand. The present fleet consists of three 19-passenger
Beechcraft 1900s.
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.
Refer to the table below for aircraft specifications and costs.

Max.
Cost # of Cruise Cabin Quarterly
Aircraft Type / Name Daily Type Notes
(M) Seats MPH Class Lease
Miles
Beechcraft 1900 Prop Min. headroom; no toilet; no
$2.0 19 268 No 1800 $80,000
(Firm owns 3) Jet flight attendant. required
Prop Standing room; toilet; no flight

British Aero 31 $2.2 18 253 Yes 1800 $82,000
Jet attendant required.
Prop Standing room; toilet, requires
Embraer Brasilia $3.1 30 294 Yes 2000 $132,000
Jet flight attendant.
Saab 340 $3.4 34 272 Yes 1800 $144,000
Jet flight attendant.
Standing room; toilet, requires
Embraer ERJ135 $4.3 37 400 Yes 2400 Jet $184,000
flight attendant.
Aerospatiale ATR42 $4.4 46 300 Yes 2000 $185,000
Jet flight attendant
Standing room; toilet, requires
Canadair CRJ100 $5.8 50 450 Yes 2400 Jet $240,000
flight attendant.
Note: You start the simulation with 3 Beechcraft 1900s.

Airplanes do not generate revenues when they sit on the ground.
Therefore, utilization is a variable that can affect successful operations.
A typical aircraft can be flown for 10 to 14 hours a day, which allows
for overnight maintenance and an average of 10 to 12 legs per day.
This calculates at 1800 miles flown per day per aircraft (for the airline’s
current fleet of Beechcraft 1900 aircraft).
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.
Assets are financed through several channels. Aircraft may be leased

for a period ranging from 1 to 15 years. Leasing provides advantages
to an airline that does not have cash available for a loan down payment,
does not have sufficient collateral, or wants to use a specific type of
equipment for a limited period of time. Airplane leases may be either
operating or capital leases. Operating leases do not appear as assets on
the balance sheet and do not increase the value of the company to its
owners. A capital lease appears as an asset and as a long-term liability
on the financial statements.
Other financing options available to the airlines include conventional

loans, lines of credit, and stock issues. Loans require down payments
plus some assurances to the lender (collateral) that the payments can be
made. The typical loan period is 10 to 12 years.
Fledgling airlines frequently need a line of credit to finance current

assets and meet ongoing expenses (working capital). This is usually
handled by a line of credit (demand notes) that ranges upward from 2%
over the prime interest rate. As with other businesses, an inability to
meet current expenses can be the downfall of an otherwise solvent
commuter/regional airline. The risks in acquiring all of the necessary
funds are higher but a well-managed company may be able to finance
purchases for a lower cost of capital by issuing stock.

Fares
Airline fares are one of the more complex pricing systems in the free
enterprise world. All airlines post a standard fare for each portion of a
route in the Department of Transportation listings; this is known as the
"Y" fare. These fares are set artificially high and are used as a baseline
for discounts and to calculate portions of tickets that are issued in
conjunction with other airlines. In addition, airlines develop
promotional fare packages from time to time to introduce new service
or offset sluggish demand. Promotional fares stimulate demand but
reduce revenues, sometimes creating a loss in that market. 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.
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.
Your company also subscribes to multiple airline listing services. This

results in the imposed additional variable cost per ticket of
approximately 1%.
As a member of the Airline Reporting Corporation (ARC) and by virtue

of bilateral agreements with major carriers, your airline currently has
interline ticketing and baggage arrangements with all major carriers.
The agreement allows you to issue tickets to any destination at

competitive rates and to offer the convenience of baggage checked
through to the final destination.
Advertising and Promotion Budgets

Airlines spend a significant amount of money to attract passengers. A
unique aspect of this industry, however, is that much promotional
activity is directed toward online travel services, travel agents, and
other specialists who dispose of extra seats. These sources are
responsible for 75% of the tickets sold.
Last quarter, your firm spent $2,500 on promotional and $2,500 on

advertising activities; this is a very minimal amount. As your fleet
increases and you expand into new routes, you will need to budget
substantially more. Promotions include packaged vacations, incentive
plans for travel agents (who sell large numbers of tickets), frequent
flyer programs, familiarization (FAM) trips for travel agents, etc.
NOTE: Airlines advertise through a variety of media: billboards, magazines,

Advertising and television, radio, and newspapers. Firms trying to attract the business
Promotion budgets traveler will use different media than those that target the casual
are crucial to a firm's traveler. Some firms participate in customized "in-flight" magazines
strategy and are a placed on board the aircraft to enhance and promote their image. Your
reflection of each firm has not been producing an on-board magazine for your passengers;
firm's target market. the cost for this would be $500 per aircraft per quarter in addition to
your normal advertising budget.
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.

Organization
Organizational Chart
Your airline is organized into five small
departments: operations, flight, maintenance,
PRESIDENT passenger service, and administration. There is little
(also pilots a flight when necessary) overlap between the areas, and employees must have
specialized training as required by regulatory
Chief Pilot agencies.
Chief of Maintenance These departments handle all functions, including

marketing, ticketing, and computer information
services. Creating an efficient organization is
Accountant
difficult for regional operators, as well as costly in
terms of personnel. Those airlines that are dual
Manager of Station
Operations and Passenger
designators with major airlines may receive services
Service such as ground operations or computer information
systems as part of the agreement. Remaining
autonomous is costly in terms of organizational
Dispatcher
design as well as in attracting passengers.
Human Resource Development

Currently, your company has 81 employees. Because of its small size,
the salaries and wages of employees have been below the "market" for
airline employees of national and major airlines. Station personnel are
frequently paid minimum wage; this salary differential holds true for
pilots and ground crews. Thus, they have become a training ground for
the larger airlines, with relatively high employee turnover (15% or
more) causing additional expense to the airline. Strategies used by
other regional airlines to counteract this problem:
Your employee a) Encourage a sense of ownership in the company through stock

compensation has an options and profit- sharing. Employees are called "managers" of
effect on retention as the position they hold. (e.g., a ticket agent becomes a customer
well as your ability to service manager).
attract the optimal
work force for your
airline. b) Job design of ground crews includes rotation through several types
of positions.
c) Development of clearly defined "career paths."
The relationship between salaries and turnover is not clear, since the

major airlines are thought to have higher status. This may diminish the
effect of increased remuneration. Historically, your company has been
passive about the turnover problem and views it as a cost of doing
business. In some small cities, the airline’s success in ground crew and
station personnel retention has been a function of the available job
markets in those locations.
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—Revenues
Gross revenues equals the total revenue passenger miles flown
multiplied by your price less any fare sales offered in the previous
quarter. This represents all of the ticket proceeds from your
passengers. Below the gross revenue figure are two cost of sales items
– commissions and refunds. Commissions represent the amount paid to
travel agents and internet travel sites. Refunds are the amount repaid to
passengers who are unable to fly due to equipment problems, weather,
overbooking, etc. The reliability factor represents the percent of
revenues that are unaffected by refund related issues. Net revenue is
calculated by subtracting commissions and refunds and adding interest
income to gross revenues. This is the total amount of revenues
generated from the last quarter of operations and what you have to run
your airline.
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.
ITEM CENTS per SEAT MILE % of TOTAL

Flight Operations 3.60 ¢ 30%
Fuel 2.74 ¢ 23%
Maintenance 3.25 ¢ 27%
Passenger Service 2.41 ¢ 20%
Total 12.00 ¢ 100%
Flight operations include crew cost, dispatching and weather services,

baggage/mail/cargo handling, and aircraft handling on the ground.
Maintenance is the cost associated with servicing the planes. Passenger
service includes the cost of the reservation and ticketing service, ticket
counters, terminal baggage service, and rent of terminal passenger
areas. There is a one-time cost of $10,000 to open a new market, and
that cost is added to passenger service expenses in the quarter the
market is entered.

Fuel is also one of the most unpredictable expenses incurred in
operations. Fuel can be purchased either on the open market (as needed
at various airports) or on a three month contract that holds a fixed rate.
The contract price can either be somewhat higher or lower than the
"spot" price at the time the contract is negotiated, depending on the
forecasted price of fuel for the next quarter. Your fuel has been
purchased on the open market in the past. (Note: Fuel prices in the
simulation will not equate to prices in the "real world" due to the
variability of prices there. They have been set in relation to other
simulation variables.)
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.

Conclusion
The owners of the Airline believe that they are at a crossroads. In the
new environment of increasing competition in their own routes and the
opportunities in new markets now available, there was no question that
their business was about to change dramatically. Staying on the same
course was unlikely to a path to success. While they do have access to
capital markets for either a loan or issuing stock, they are concerned
about the risk associated with taking on debt or the dilution effects of
selling stock on shareholder value.
The decision was important enough to get some advice from a

consultant, Dr. Peggy Golden, who was a certified pilot and had been
the CEO of a small but successful commuter operation. After several
days of studying the situation, Dr. Golden met with Jerald Smith,
current President of your airline to report her findings. (Editorial
remark: Later these two wrote the simulation and subsequently were
married.)
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

suppose that if we tightened our belts and tried to get some short-term
credit at a couple of banks in the small cities we serve, we could do it.
We can't grow because of our slim profits, and because we can't grow
we can't improve our profit picture. It seems like a vicious circle."
"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."
Smith responded thoughtfully, "Yes, having a few hundred grand

would sure get us out of the hole and we would be able to take
advantage of some markets that are opening up. Giving up some
ownership position through selling common stock just sticks in our
craw a bit. On the other hand, there would be no interest payments to
make each quarter, which would lower financial risk and improve
profitability.”
"If we keep the airline, what kind of strategies would you suggest?"
asked the president.
Golden responded "The possible strategies are about the same

regardless of who owns the Airline. The crucial thing is to maximize
the use of your equipment and serve markets that will provide you with
a greater than breakeven load. You may have to give up some markets
for which you have an emotional attachment because you have served
them for such a long time.
"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

to the strategic-planning principle of creating a structure that aids in
implementing a new strategy. Some commuter airlines are looking
outside their traditional business for new ways of generating revenues.
Package freight services and junkets to ski resorts provide revenue
beyond passenger service."
Smith replied, "Although we are using our Beechcraft 1900s in a 300-

mile market, there are better planes for the longer routes. In addition,
passengers on junkets and vacation runs prefer more luxurious aircraft
than you currently own."
"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."

SECTION 2: AIRLINE OPERATIONS GUIDE
Simulation Navigation
Airline is designed to be easy to use and is compatible with most
Internet browsers. This chapter contains the information needed to
make the decisions for each quarter and an interpretation of the results
found on the analyses and reports. This section will give an overview of
the decision-making process of Airline.
Each page of the Airline site contains an easy-to-use menu system

consisting of three parts: (1) specific menu options and links to decision-
making tools and input screens, found on the left side of the Airline
browser window; (2) green navigation and general control buttons
across the top; and (3) pull-down menu to show the current period in the
upper right-hand corner.
Sample Screen Change the

Period # view
Firm name
Navigation buttons and user info
Menu system:
six categories
& choices
Airline screen
display
Airline Operations Guide—Page 25

SIMULATION
NAVIGATION The left-hand menu is divided into six
parts: Startup, Decisions, Analysis,
NOTE: Company, Industry, and Simulation. Each
Until you make your part includes menu links that correspond to
startup decisions, no different reports, decisions, or actions. For
other menu options example, under Startup there are links for
will be available. Case and Startup Decision. The menu
system is expandable and collapsible. For
instance, click on the button to the left of
Startup, and the Case and Startup Decision
will collapse back into Startup.
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.

Role of the Team Leader in Entering Decisions
When playing Airline as a team, one member will be designated "team
leader". The team leader is ultimately responsible for gathering the
various decisions made by the team, making sure the decisions are
entered correctly. In addition, the team leader may exercise the option to
"lock" out other team members from entering decisions. Thus, it is
important that the team leader be carefully chosen by the team and that
they be a capable leader and accessible by the members of the team and
by your instructor. The team leader must finalize the startup decision at
the beginning of your simulation event.
Making decisions is the culmination of your analytical process. It is

important to realize that some of your decisions will have more of an
immediate impact, while others may have longer-term implications. In
any case, they should be part of an integrated strategic plan that is well
thought out and appropriate in the competitive environment.

DETAIL OF
MENU CHOICES The links on the left of the Airline window lead to all the information
and tools you will need to analyze your current position, plan a strategy,
and input your decisions. These links are divided into six categories:
Startup, Decisions, Analysis, Company, Industry, and Simulation. One
of the easiest ways to find out more about an option is just to try it out.
If you need more information, use the on-screen [HELP] button to
consult the student guide. All of the menu links may be expanded or
contracted. For instance, after entering your firm name (under Startup),
you can click on Decisions to expand that menu to see all the different
decision areas for your decision process.
STARTUP MENU Consultant's Briefing

This option on the STARTUP menu will open a flash file that
summarizes a conversation between the previous owner of your airline
and a consultant who was brought in to assess the current situation. The
consultant has been brought in to offer for a fresh perspective on the
current situation facing the airline.
Startup Screen: Briefing

STARTUP MENU Case
Analyzing the airline
industry and the case Under the STARTUP menu you will find a copy of the Airline Case.
will help prepare The case presents information on your firm in a form similar to a
your team for the business school case and also serves as an introduction to the situation
internal and external at the start of the simulation. Remember that not everything discussed
environmental in the case is immediately available to you. For example, you may not
factors in the be able to enter a decision in response to an incident unless your
simulation. instructor has activated that option. Please make sure to carefully read
the case before making any decisions.
Startup Screen: Case
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.

STARTUP MENU Startup Decision
One of the most important decisions a company makes is naming the
NOTE:
business. It is important to select a name that could stand the test of
At the beginning of
time and perhaps even be adaptable to a new strategy should you later
the simulation, you
will be required to
decide to change your strategy. In the simulation, once you have
create a name for selected a name and finalized your decision, you will not be able to
your company. Your change it, except if your firm undergoes major restructuring and your
company name must instructor allows it, so choose your firm's name carefully at simulation
be completed and startup.
finalized before you
can proceed past the When your team has thoughtfully agreed upon a name, the team leader
startup menu. will need to enter the company name into the simulation decision
screen. When this has been entered and finalized, all remaining
simulation menu items will become accessible.
Startup Decision Input Screen
Enter your company's name.
Finalize and then submit your

decisions.
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.

DECISIONS Fares
MENU In the Fares decision screen, you will need to select the fare structure
(discount, normal, or luxury) and set a fare price (cents per seat mile
flown). Each fare structure has an appropriate corresponding fare price
range. Last quarter, the firm charged 35 cents per seat-mile-flown for
NOTE: its fare but the airline is not very profitable at that level and managers
Whichever fare believe that fares could be increased one or two cents without much
group you choose to decrease in demand. While the 35 cents fare has generated enough
represent, it is
revenue to cover the costs associated with the current small fleet, as
suggested that you
make fare changes
you purchase or lease additional planes, your firm may require an
one or two cents at a increase in fares.
time and observe the
demand difference. Cabin / Food Services refer to your choice of food and beverage(s)
A large change in served on flights. Your choice here applies to your entire fleet. In
price structure other words, whatever level of cabin service you choose becomes a
usually ends in blanket policy for all your routes. For non-cabin type aircraft, food and
unsatisfactory beverages would be provided to each passenger as they board since no
results. flight attendant is on duty. Remember the simulation assumes round
trip tickets, the cost of cabin service will be two times the number of
seats sold.
Select Fare Structure

and enter Fare Price
NOTE: (cents per mile).
Fare price is an
average of all types
of fares your airline
may have on a "Seat Select Cabin Service.
Miles Flown" basis.

DECISIONS Marketing
MENU Marketing decisions include: promotion and advertising budgets, a
cargo marketing budget, sales personnel hired or fired, and whether or
not you’d like to offer an in-flight magazine.
Examples of promotions include: packaged vacations, incentive plans

for travel agents selling large numbers of tickets, frequent flyer
programs, familiarization (FAM) trips for travel agents, etc.
Airlines advertise through various media: billboards, magazines,

television, radio, websites, and newspapers. The particular choice of ad
placement and media reflect the market routes and fare structure
selected.
NOTE:
You will incur an
automatic $3,000 You may choose to enter the cargo business at any time, or not at all.
hiring cost for each To enter the cargo business, you will need to establish a cargo
new passenger sales marketing budget which includes advertising as well as additional
person acquired (you overhead costs associated with entering the cargo segment. Budget
do not need to enter a $10,000 for overhead, plus an additional amount for marketing
budget amount for expenses such as cargo sales reps and advertising. Once you begin to
this). build up your cargo business, keep your cargo budget intact as it will
take a few quarters to begin making profits.
Salespersons are generally trying to expand your company’s presence

by calling on travel agents. Sales personnel cost $12,000 each per
quarter you may not hire or fire more than four salespersons per
quarter. To fire a salesperson, just enter a negative value. There is a
$3,000 one-time cost for each salesperson hired.
To indicate you want to produce an in-flight magazine, select the In-

Flight Magazine "Yes" check box. The cost for the magazine is $500
per aircraft per quarter.

DECISIONS
Enter amounts for
MENU Promotion and
Advertising Budgets.
NOTE: Select "Yes" to add in-

flight magazines to your
Advertising and flights.
Promotion will be an
important part of
Enter number of Sales
developing new Personnel to Hire or a
markets. negative number to Fire.
Enter amount for Cargo

Marketing Budget.

DECISIONS Compensation
MENU Compensation decisions include a quality and training budget and
adjusting wages and employee benefits by employee class. If you wish
to add a benefit only (with no wage increase), enter 0% into the wage
% increase box and select the appropriate radio button. Once a given
level of additional employee compensation is begun, you should make
every attempt to maintain it, since employee morale would be hurt by
NOTE: increasing compensation one quarter and lowering it the next.
If you wish to pay
additional wages,
The quality & training budget amount provides additional employee
start modestly and
increase pay as your
training beyond the legally required training of flight crews and
profits increase (for maintenance personnel. Average training and development costs are
example, increase by $40 per employee per half-day workshop. In addition, you may initiate
only 1 or 2%). quality programs on a department-by-department basis ($5,000 per
quarter per department) or all at one time (which would be considered a
Total Quality Management system) at a minimum cost of $20,000 per
quarter. If you want to emphasize quality even more, you may budget
more than this amount. Once you start a quality program, you should
continue it indefinitely.

DECISIONS Fleet
MENU Fleet decisions are focused on issues having to do with acquiring,
maintaining, and fueling your fleet of aircraft. Fleet decisions are
probably the most important part of your operating strategy. It is
important that the type and number of aircraft in your fleet are aligned
with your markets / routes decisions.
First select your policy on aircraft maintenance. Level 1 is the

minimum required maintenance and permits you to fly with some
assurances of dependability. This provides a good level of safety at no
additional charge and many airlines operate at this level. Higher levels
(2 or 3) can increase reliability somewhat as well as improve company
image. Level 2 cost: $2,500/aircraft/quarter; Level 3 cost:
$3,500/aircraft/quarter. (NOTE: These amounts are in addition to
regular maintenance costs.)
NOTE:
The contract price
Next, choose your method of fuel purchase. You may switch from one
for fuel can be either
somewhat higher or
type of fuel purchase to another from one quarter to the next with no
lower than the "spot" penalty for doing so.
price depending on
the forecasted price The acquisitions button allows you to purchase or lease any of the
of fuel for the next seven types of aircraft available. You may make two acquisitions
quarter. (purchase or lease) per quarter, and each acquisition may be for up to 4
of the same type aircraft. Remember to sell stock and/or take a loan to
provide cash to purchase aircraft.
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.

DECISIONS
MENU Select a Maintenance Level for your fleet.
Select type of Fuel Purchase.
To Acquire Aircraft, click the "Edit To dispose of aircraft, select the

Acquisitions" button and then select: specific aircraft by clicking into the
the Aircraft type from drop-down adjacent "change" button. When the
menu, Quantity (0–4), and type of "Disposal" input screen opens, use
Acquisition (Purchase or Lease). the drop-down menu to make the
appropriate selection (Keep, Sell,
etc.).

DECISIONS Routes
MENU The routes decision screen is where you will enter all decisions related
to the markets / routes you serve and whether or not to provide a sale
fare for a particular route. In addition, to help estimate the fleet
capacity necessary to serve these routes, you will be asked to also select
the number of daily flights to provide by choosing particular aircraft for
each flight. Using this information, the program will calculate the total
number of seats available to each market. Your entries will also be
used as the basis for aircraft scheduling provided in the analysis menu
NOTE: (discussed later in the operations guide).
If you have zero
flights and zero seats
To enter changes to number of flights or seats offered daily, or to
available in a Route,
when the simulation
promote your airline through a sale on fare prices for a particular route,
is advanced, the click into the "Change" button for that Route. Use the dropdown box to
Route will select a fare sale. All fare sales except resort markets revert to regular
automatically be fare the next quarter. Therefore, if you want to continue a fare sale for
deleted from your more than one quarter, it must be entered EACH quarter.
active Routes list,
and the $10,000 fee To increase flights (and therefore seats) available to a market, choose
will not be incurred. an aircraft from the list at the left and click on the “Schedule” button.
This will add an additional flight. You may cancel a scheduled flight,
by selecting the aircraft under scheduled flight and click on the
“Remove” button. To abandon a route completely, just cancel all
flights. As you adjust your decisions, at the top of the screen, the total
flights and available seats will be updated appropriately.
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.

DECISIONS
MENU
Select the Route to enter
To add a new your changes. Then
Route, click the Schedule or Remove
"Add a New Route" Aircraft (to change the
button. Select the number of flights & total
market you wish to seats) and select the
add from the drop- type of Fare Sale, if you
down menu. wish to promote a sale.
1– TO 3–MONTH AVERAGE TICKET REVENUE FROM FARE DISCOUNTS

Avg.
Discount
Sale Type Fare Based on 35 cents per mile Ticket
NOTE: %
Revenue
The chart at right No sales this quarter; usually used in
describes each Regular Fare developed markets. (Fare = 0.35 per mile $140.00 0%
sale type and what x 400 miles)
1/3 off the regular fare for one month.
their effect would
1-month Sale The next two months the fare would be $124.44 11%
be on the ticket the normal $140.00 rate.
price of a 400- 1/3 off the regular fare for two months and
mile flight. 2-month Sale then reverts to the regular fare for the third $108.92 22%
month.
1/3 off the regular fare for all three months
3-month Sale $93.33 33%
of the quarter.
Critical Note on Over- and Under-Flying Your Maximum Mileage

NOTE: If you enter more flights than your aircraft can fly in a day (maximum
Operating costs will varies per aircraft: from 1800–2400/per day), the maintenance program
increase if you fly will suffer, and your aircraft could experience serious mechanical
over or under an problems. In addition, the FAA will issue a substantial fine to your
aircraft's optimum firm for lack of required maintenance. All costs of flying the aircraft
mileage. (maintenance, flight operations, fuel, and overtime for passenger
service personnel) will also increase.

DECISIONS Corporate
MENU To establish a Social Performance Budget, enter an appropriate dollar
amount in the decision input screen and select the radio button next to
the social responsibility category you would like your funds to support.
You may budget any amount in even thousands, with a $1,000
minimum.
Social responsibility is an important aspect of any business. A firm has

a responsibility to many "publics" (employees, suppliers, creditors,
competitors, government, the local community, ecological
environment) in addition to its stockholders. While it would be
difficult to ascertain a cost benefit for this budget item, many firms
believe strongly in supporting the communities in which they do
business. Many believe that a "strong community is good for business"
in the long run.
Enter a
Performance
Budget amount (in
even thousands;
$1,000 Minimum).
Select the Social

Performance Area
to direct your
Budget funds.

DECISIONS Financing
MENU Stock Sold: To sell stock, enter the dollar amount in the entry field;
funds become available immediately. You may never have less than
150,000 shares (your starting amount), as required by your corporate
charter. Maximum redemption per quarter is $500,000 or 10% of your
outstanding shares, whichever is less. You may repurchase stock (after
Quarter 5) by placing a minus sign before the dollar amount you want
to redeem.
NOTE: Short-term Loan: Enter loan amount in the entry field. This 90-day
When you acquire loan automatically renews each quarter unless you enter the full
new aircraft, you
repayment amount as a negative number. The interest rate at
must enter the
appropriate stock
simulation startup is 10% per annum or 2.5% per quarter.
and loan value(s)
into the Financing Long-term Loan: Enter the loan amount in the entry field. To make a
input screen to payment (beyond the 2% automatic payment), enter that amount as a
finance this negative. If you want to obtain a new loan AND pay off an old loan,
purchase. The enter the net value. For example, old loan balance = $500,000. New
simulation will not do funds required: $750,000. Enter the difference, of $250,000. Long-
your financing for term loan interest remains at 9% per annum or 2.25% per quarter.
you.
92-day CD: Enter the dollar amount you wish to invest. Cash placed in
CDs will not be available for other transactions during the quarter in
which CDs are purchased. CDs expire the first day of the next quarter.
Interest paid on CDs is 5% per annum or 1.25% per quarter.
Dividends Paid: Enter the dollar amount in the entry field. 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. To enter this decision, click on the stock dividend box.
.
Enter a dollar amount for:

The bank will lend Short- and/or Long-term
UP TO 80% of the Loan(s), Stocks Sold,
value of an aircraft Dividends Paid, and/or CDs.
being purchased; Select the "5% Stock Dividend"
checkbox, if desired.
obtain the balance
through the sale of Note: Your total Line of Credit
stock or cash on is given in this input screen.
hand.

DECISIONS Special: Incidents
MENU Each quarter has a mini-case, which is termed an Incident. Your team
will need to debate the issues being presented by the Incident and enter
the appropriate response here. If you don't like any of the choices, you
must still select the one closest to your opinion. An Incident response
is a required decision and is not optional. Incidents represent a
NOTE: "window of opportunity" for you, and due to simulation constraints, an
There is no absolute incident will only be available during the quarter in which it is offered.
right or wrong Any costs will be automatically charged against your budget and will
response to most appear in your company financial reports.
incidents although
there may be some To read the full Incident, click on the Incident title link, and the text
responses that are will open. You may need to scroll up or down to the appropriate page.
more correct than
others. Your response to the Incident may or may not have an effect on your
firm's sales or costs in the current or subsequent quarters. Once the
simulation is advanced, feedback on your response will be reported in
the simulation Newsletter, in addition to an announcement about the
current quarter's Incident.

DECISIONS Decision Summary
MENU Refer to the Decision summary to review your current quarter
decisions. In addition, select a different period to review former period
decisions. It may also be worthwhile to print this out for your records,
though you may always view previous decisions by selecting a quarter
(number) from the drop-down menu at the top right of the screen. This
printout condenses information from each decision input screen for the
period, all in one place. Displayed are the following decision
categories: Staffing, Wages, Benefits, Training, Programs, and Special.
IMPORTANT: Remember to check the DECISION SUMMARY

screen at the end of your decision process to make sure all your choices
have been entered and saved correctly. Also note that you can change
your decisions as often as you like until the simulation is advanced.

ANALYSIS MENU Market Profitability
The Market Profitability analysis calculates a break-even point for a
particular market / route based on your cost and fare inputs. Select the
market / route using the drop down menu which automatically adjusts
the round trip miles. Next, enter the total number of available seats
(found on the Routes decision summary screen). Your cost per seat
mile displays automatically (you can adjust this figure if you wish).
Combining these inputs will calculate your total estimated operating
cost for a particular market / route.
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.

ANALYSIS MENU Aircraft Scheduling
The aircraft scheduling report can assist you with your routes decisions
(scheduling aircraft by market / route). For optimal efficiency, each
aircraft should fly as close as possible to its daily maximum number of
miles. Some aircraft may be a few miles over (100) as long as other
aircraft are a few miles short. Use this analysis screen to ascertain the
total miles per day you may fly.
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.

ANALYSIS MENU Financial Analysis
This analysis will show the various cash sources and uses for the
quarter. In the interest of space, some items are combined (e.g.,
Commissions and Refunds). Note that depreciation is not included in
the Cash Flow Analysis (Outflow). This is due to the fact that
depreciation is basically an accounting entry for tax purposes and does
not impact cash at the time.
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.

COMPANY MENU Company Reports
The simulation begins in Quarter 0. The COMPANY Menu contains
financial statements, revealing the financial condition of your firm.
You take over the airline at the beginning of Quarter 1. The reports
you receive each quarter consist of an Income Statement and a Balance
Sheet, along with Cash Flow, Operations, and Fleet Status reports. The
format of Quarter 0 reports is identical to the reports you will receive
each successive quarter during simulation play.
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.

COMPANY MENU Income Statement
The COMPANY Income Statement lists all income generated, i.e.:
Gross Revenues and Interest, less Commissions and Refunds. It also
lists all expenses incurred during the quarter. The expenses are
subtracted from net revenues resulting in your firm's quarterly net profit
(or loss).
In subsequent quarters, you will be able to access a "year to date" view

of the income statement, as well as the current quarter.

COMPANY MENU Balance Sheet
The COMPANY Balance Sheet includes a summary of your assets,
liabilities, and shareholder’s equity. Assets include cash, short-term
investments, accounts receivable, and your aircraft (less depreciation).
Liabilities include accounts payable, short-term loans, and long-term
loans.
The net amount of the fixed asset "Facilities/Equipment" value is minus

depreciation of $5,000.
Total assets should be equal to total liabilities plus equity; however, due
to rounding errors the two totals may be off slightly.

COMPANY MENU Cash Flow Statement
The COMPANY Cash Flow Statement will show the various cash
sources and uses for the quarter. In the interest of space, some items
are combined (e.g., commissions and refunds). Note that depreciation
is not included in the cash flow analysis. This is due to the fact that
depreciation is an accounting entry for tax purposes and not an actual
cash outlay.
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.

COMPANY MENU Operations Report
The COMPANY Operations Report displays detailed data of your
firm's daily operations. It includes items such as: Total Aircraft Seats,
Total Revenue Passengers, Daily Miles Flown, Passenger Load Factor,
Cost per Available Seat Mile, etc. Use this report to review and
analyze your firm's overall performance. This report also provides the
number of total employees, employee turnover percent, and employee
resignations.
The public's perception of your firm, in terms of quality, will be

published each quarter as a "Quality Index" and displayed on your
Company Operations Report as well as in the Industry Operating
Statistics Report. Your actual quality may be higher than this Index,
but it represents how the public perceives your airline.

COMPANY MENU Sales
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.
Fleet Status Report

This report provides a summary of your current fleet of aircraft by
serial number, along with information on their book value, quarterly
cost, and accumulated depreciation if applicable. Depreciation is
calculated at 1.75% of the cost of an aircraft and is applied to purchases and to
any aircraft acquired through capital lease agreement.

INDUSTRY MENU Newsletter
Cost: None
The INDUSTRY Newsletter provides the business conditions forecast

for the upcoming quarter. A message may appear here announcing
various types of economic activity in certain markets which may
necessitate adding flights or beginning service in these markets.
Analyzing your existing and potential markets is a key element in
managing your airline.
In addition, messages to your firm will be reported here, alerting you to

potential cause-and-effect relationships that your team will want to
respond to with corrective action. Other messages may require no
action on your part as they may pertain strictly to an accident of fate in
operating an airline. Some messages on your team's newsletter will be
factual, while others will be industry rumors. Your team will need to
discuss the importance of the messages and discern which is which.

INDUSTRY MENU Operating Statistics
Cost: None
This report provides multiple financial measures for your firm

compared to the industry average. At a company level, you can
compare available seats, number of aircraft, revenue, net profit, and
stock price for each airline.

INDUSTRY MENU Market Research Reports
Most airline industry research focuses on counting passengers and
NOTE:
reading timetables. However, there are certain studies that can be more
The reports in the
first period/quarter useful for planning purposes. The reports found under the INDUSTRY
have been pre- menu include: Demand Forecast, Compensation, Fares, Sales, and
purchased, so you Marketing. Their costs vary from $1,000 to $16,000 and are updated
will see the charge each quarter as conditions change. You may purchase any or all of the
from these on your reports. If you purchase all 5 reports, the total cost would be $31,000.
company income Costs for any report purchased will appear on your Income Statement
statement when the next quarter.
simulation is
advanced.
Demand Forecast
Cost: $1,000
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.

INDUSTRY MENU Compensation
Cost: $2,000
This report displays the Average Industry Quality / Training Budget

along with the Employee Compensation plan for each airline. Compare
the pay approach and training with your relative performance. If you
are lagging behind your competitors in both pay and performance,
perhaps these are related.
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?

INDUSTRY MENU Sales
Cost: $8,000
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
This report displays the average promotion and advertising budgets

among all airlines, the number of salespeople for each airline, plus a list
of airlines in the cargo business.
SIMULATION Logout
MENU To end your session, simply click the Logout link (visible on all
screens) to exit the site.

SECTION 3: THE STRATEGIC PLANNING PROCESS
Airline gives your team the opportunity to design, implement, and refine your strategy in a
dynamic context where the environment and competition are always changing. The purpose of
this section is to provide your team with some direction as to how to create a strategic plan,
discuss one possible approach to organize your team and assign tasks, and finally, to explore in
more detail than the operations guide, some of the decisions and analysis for each of the
functional areas.
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:
• Where are we now?

• Where could we go?
• What could we do?
• What is the best thing for us to do?
• How are we going to do it?
• How are we going to measure our progress?
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).
VISION and MISSION

INTERNAL ANALYIS (Purpose of the
STRATEGY Organization)
(How the firm intends to

meet its objectives)
GOALS and OBJECTIVES
EXTERNAL ANALYSIS
(Measurable)
Format for a Strategic Plan

With that general framework in mind, the following format may be useful to your team as a
guide for preparing your strategic plan. Of course, your instructor may provide a somewhat
different structure, and if so, please follow that format instead.
The Strategic Planning Process—Page 57

I. The Internal Environment
a) List the strengths and weaknesses of the organization. Areas include:
Relations with and strengths in dealing with competitors, customers,
employees, and suppliers; financial strength; physical facilities and
equipment; employee and manager expertise, morale, and training.
II. The External Environment / Environmental Scan / PESTEL Analysis

a. List the opportunities and threats found in the environment
b. List the specific factors in the external environment that pertain to this industry
and company. Examples include:
Social Forces; Social Structure and Change
Political Influences and Forces
The Legal Environment and Governmental Regulations
Economic Factors and Trends
Energy and Raw Material Costs
Technological Development and Change
Industry Atmosphere and Trends
Competitive Structure, Atmosphere, and Trends
Consumer Desires, Changes, and Values
Financial Environment
NOTE:
The internal and external analysis answers the question, "Where are we now?" and establishes the
foundation for looking toward the future in preparing goals and objectives. The outline below can be
used for the remainder of the strategic plan.
III. Overall Purpose or Mission

Denotes what the firm should be doing and why it exists. It answers the question
"What business are we in?" in terms of market needs.
IV. Objectives or Goals

Specifies what the firm is striving for, what it wants to achieve. It is highly
desirable that targets be established that are quantifiable and measurable. There
are ten areas for which objectives should be established:
• Market Standing • Profitability

• Productivity • Innovation
• Worker Performance • Manager Performance and Development
• Physical Facilities • Public (or Social) Responsibility
• Stockholder Responsibility • Financial Targets

V. The Action Plan for implementing the objectives and goals
VI. Policies to aid in implementing this objective or goal
VII. Standard procedures

(Methods or operating plans that need to be established to implement the
objective/goal.)
VIII. Methods of control and feedback
Simple Strategic Plan (sample)

Purpose or Mission: To transport cargo by air.
Objective: To attain a 20% of total market share in 10 markets, within 18 months.
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.
Standard Procedure: Upon receipt of a new customer contract:

1. The salesperson will ascertain that all details and agreements are executable.
2. A credit check will be made before the goods are shipped.
Organizing Your Team

Generally your team will determine your initial strategy as equals with general knowledge.
However, after your team has formalized your strategy, the task now becomes how best to
operate your business and complete quarterly responsibilities and tasks. Your team should
discuss the various strengths of its members and the academic and work background of each.
This will allow each team member to assume a position in the airline that matches his or her
experience and/or knowledge. The organization chart below indicates some of the key positions
one might find in a small commuter airline.
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.

SUGGESTED DUTIES FOR TEAM MEMBERS
Overall coordination, encouragement, peacemaker, strategic planning; sets
President lead times, and assures that deadlines are met. Reviews financial ratios for
insights for opportunities for improvement.
Vice-President of Financial analysis & control; managing cash flow, lease/purchase analysis; fuel
Finance purchase (spot or contract) and financial decisions (loans/CD's).
Recommends marketing budget and fares, cabin service, research studies;
Vice-President of analyzes strategies of competitors. Researches new route opportunities and
Marketing expansion or contraction of current routes, potentially working with the VP of
Operations.
Vice-President of Recommends compensation, quality and training budgets, crew training and
Human Resources retention; tracks reliability trends. Works with the VP of Operations to review
Analyzes all markets and service to those markets for potential improvements
Vice-President of in efficiency; makes recommendations to changes in existing routes.
Operations Recommends aircraft procurement and disposal. Maintenance level and fuel
purchases.
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.

Record Keeping
Your instructor will tell you which of the following organizational assignments will be required:
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).
2. Corporate Strategic Plan:

Each company should prepare its objectives and goals; implementation strategy; and
operating plans and procedures for the firm. You may follow the format presented
earlier in this section or use one provided by your instructor.
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.
4. Comparative Charts and Graphs:

It is often very helpful to have historical information organized so managers can spot
early trends and trouble spots. The following list is not all-inclusive but is offered as a
reference point of departure.
a) Cash position each quarter
b) Mileage flown as a percentage of maximum mileage available
c) Fare and industry average
d) Earnings, dividends paid, and stock price
e) Sales forecast and actual sales (by total passengers, dollar sales, and revenue
passenger miles)
f) Passenger load factor (this is a key indicator of success)
g) Yield per revenue passenger mile, cost per available seat mile, and yield per
available seat mile
h) Employee compensation, training expenditures, and turnover
i) Various expense categories should be carefully monitored against some
meaningful performance standard. Examples include: maintenance cost per
mile flown or passenger service cost per passenger handled; marketing
expense per sales dollar; administrative expense per passenger or per revenue
passenger mile.

j) Tracking competitor behavior in markets served can be extremely useful
information.
k) Seats sold in each market as a percentage of the total (this requires purchasing
the relevant market research study)
l) Quality expenditures and quality index
m) Various standard financial ratios (forms provided in this manual.)
Minutes of Company Meetings

Your instructor may make this a requirement to be handed in or kept in your company logbook.
In either case, the minutes should be recorded when the meeting occurs, not re-created from
recall later.
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.
Understanding Differences in Sales Totals between Teams

Often a team will declare to the instructor that they cannot understand why they are not selling
as many seats in a given market as a competitor. The factors that determine a given team's
demand in a given market are very complex and would defy a simple explanation by your
instructor. The reasons may include some or all of the following factors: Number of quarters in
the market, type of aircraft flown (some passengers do have a preference), number of flights in
the market by your firm versus your competitor, total flights in the market, relative advertising
and promotion budgets, reliability, cabin service differences, a pleasant workforce, a reputation
as having excellent quality in aircraft and waiting areas, and clean aircraft—both interior and
exterior. One other factor that may affect demand is the financial health of the airline. If given
the choice of flying with a financially healthy airline versus one which was having financial
problems, one might choose the financially healthy airline based on the assumption that its fleet
is more up to date and maintained beyond the minimum legal standard. Some of these
differences may be the direct result of a particular decision, whereas others may not be so easy
to discern.

Functional Decision-Making
Now that you’ve organized your team, let's discuss decision-making in each of the functional
responsibilities in more depth. These sections should be reviewed by the appropriate team
members to make sure they are thinking through all the dimensions of their responsibilities.
Other team members (especially the President) may also want to review these sections to better
understand how to integrate the different perspectives.
The Finance Function

The manager of the finance function should be focused on understanding the financial
implications of decisions. For example, what will be the impact on net income and cash flow of
the purchase of a new plane, and what are the ramifications of lease versus outright purchase?
The finance function should understand the key ratios and measures that would be important to
shareholders and creditors. The manager of the finance function should also fully understand
the income statement, balance sheet and cash flow statement, all of which were briefly explained
in the case and operations guide, but a few more items are discussed here.
Lease / Buy Decision

Aircraft acquisition options available to your firm are lease and purchase. This choice applies to
each individual plane. For example, you may acquire one aircraft through leasing and two
through purchase. If purchasing, you can finance your purchase through loans, cash, issuing
stock, or a combination of these.
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.

Below is a reference table that summarizes many of the key cost and cash flow issues with the
lease versus purchase decision. This table is based on relatively simple calculation and does not
take into account the present value of money nor future income streams. It assumes a 12-year
loan. A spreadsheet program (constructed by you) could give a more explicit comparison.
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.
AIRCRAFT LEASE/BUY CALCULATIONS: Part 1

Col. 1 Col. 2 Col. 3 Col. 4 Col. 5 Col. 6
Annual Total
Annual Annual
Quarterly Purchase Interest Interest &
Lease Cost Depreciation
A/C TYPE Lease Cost Price Cost Depreciation
Col 1 x 4 Col 3 x .07
(000) $million Col 3 x .09 Col. 4+ Col. 5
(000) (000)
(000) (000)
Beechcraft 1900 80 320 2.0 180 140 320
British Aero 31 82 328 2.2 198 154 352
Embraer Brasilia 132 528 3.1 279 217 496
Saab 340 144 576 3.4 306 238 544
Embraer ERJ135 184 736 4.3 387 301 688
Aerospatiale ATR42 185 740 4.4 396 308 704
Canadair CRJ100 240 960 5.8 522 406 928
AIRCRAFT LEASE/BUY CALCULATIONS: Part 2

After-Tax After-Tax Lowest Asset Base You need to
Annual Interest + First-Year being calculate
Lease Depreciation Difference: built each additional
A/C TYPE
Cost Cost Lease (L) vs. year if cash flow
Col 2 x .60 Col 6 x .60 Buy (B) purchasing required if
(000) (000) (000) aircraft purchasing
Beechcraft 1900 192 192 Equal cost 140
British Aero 31 197 211 L by 14 154
Embraer Brasilia 317 297 B by 20 217
Saab 340 345 326 B by 19 238
Embraer ERJ135 441 413 B by 28 301
Aerospatiale ATR42 444 422 B by 22 308
Canadair ERJ100 576 557 B by 19 406
Managing Cash Flow

In a capital intensive business such as airlines, managing cash flow is essential. If you choose to
purchase aircraft rather than lease, you will need to make sure you have sufficient funds
available to purchase the aircraft needed for successful operations. Both the cash flow statement
and the financial analysis will be helpful tools available in the simulation.

Sources of Cash
Should your decisions require obtaining additional capital, you have several options available,
including selling stock and obtaining a short or long-term loan.
Selling and Redeeming Stock

Your company may choose to raise capital by issuing common stock; it will be sold at the
closing price from previous quarter with funds becoming available immediately, during the
quarter in which the stock is sold. The current market price of your stock is posted on your
quarterly Operations Report and is the price at which your stock will be sold.
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.

Line of Credit (For Short-Term and Long-Term Loans)
Your bank has granted your firm a line of credit, which includes both long-term and short-term
loans. This line of credit is posted quarterly Operations Report. There is no mechanism in the
simulation to prevent you from borrowing above the maximum allowed. It is your responsibility
to stay within your bank's lending policy. Your line of credit is based on several financial
factors. If your firm does not have a good method of cash planning, your cash position may be
in jeopardy.
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.
An example of financing an aircraft:
Cost of Aircraft $2,200,000

Sell Stock for 20% of the New Loan + 400,000
New Long-term Loan Required $1,800,000
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%.
Automatic Overdraft Loans

Any time the cash outflow is greater than cash income, the bank will automatically issue an
emergency loan for the exact amount of the overdraft; adding to the short-term loan balance
already in existence. The interest charged will be twice the usual short-term rate (20 to 22%) for
one quarter. The rate then reverts to the current short-term rate.

The interest will be charged the first day of the next quarter. You can determine quickly if you
have had an emergency loan issued because your cash balance will be zero. You are not
required to make a separate decision screen entry to pay off an overdraft loan, as it becomes part
of your current short-term loan. However, you can pay all, part, or none of it as your cash
position allows.
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.
92-Day Certificates of Deposit

If your firm grows and becomes profitable, it may have extra funds that should be invested in a
Certificate of Deposit that pays interest at 3% less than the prime lending rate (5% annual).
Although some portion of your cash must be set aside for current expenses incurred but not yet
paid (i.e., accounts payable), excess cash can be used to generate some investment income.
These CDs expire on the first day of the coming quarter and the cash used to purchase the CDs

will NOT be available as cash during the quarter in which CDs are purchased. Thus, if you have
a cash flow problem, it is possible to need an emergency overdraft loan while you hold a
certificate of deposit. Since the cost of a loan is greater than the interest paid on a CD, it is not
wise to borrow funds just to purchase a CD. Another alternative for using excess cash is to pay
off any short-term and/or long-term loans. You should not finish the simulation with a large
cash balance AND bank loan balances.
Additional Items on the Income Statement

Please refer to the case for the most important issues regarding these financial statements.
However, for the finance function (and possibly others), it may be important to understand some
of the other items as these can add up and be the difference between running the business at a
profit or loss.
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:
(100% - Reliability of 92% = 8% refunds) x gross income, e.g., $1,490,761 x 8% = $119,260

Expense Details:
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.
Hiring/On-the-Job Training Costs

The total cost of replacing an employee due to turnover is $3,000. This amount includes the
cost of termination of the former employee; selection, interviewing, and hiring costs; on-the-job-
training (OJT) costs; and the cost of lower productivity by the new employee during the early
quarters of employment. Three factors will affect employee turnover: additional employee
compensation, training, and reliability.
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:
Short-term loan interest

+ Previous Quarter's Overdraft loan interest
+ Long-term loan interest__
= Total Loan Interest Expense
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).

Depreciation is the total current depreciation calculated at 1.75% of the cost of each aircraft
owned per quarter. This seemingly low rate takes into account the salvage (resale) value of the
aircraft at the end of any given number of years of use. In addition, the facilities and equipment
account is depreciated at $5,000 per quarter.
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.
Financial Analysis with Ratios

The following pages provide you with forms to help you calculate a number of financial ratios.
These ratios can be tracked both against previous quarters’ performance as well as against
competitors’. You should be concerned if you find your performance steadily decreasing over
time or if your performance lags behind that of your competitors.

FINANCIAL RATIO ANALYSIS
Prepared By ________________________________________ Industry ___ Co ____
In order for this information to be meaningful, it should be compared to the ratios from the
previous quarter and against industry averages. Then indicate which of the ratios are lagging
against industry averages and state why there is a variance. All of these measures are
provided in the simulation, but one should understand the components of the ratios to get at
the underlying reasons for variance. Your instructor may ask you to do this manually several
times during the simulation.
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)
Divide by Sub-total Current Liabilities (b) / $ (b)

=
Industry
Net Working Capitol
Ratios
Sub-total Current Assets $

Plus Sub-total Current Liabilities + $
= $
(Continued on next page . . .)

(. . . Continued from previous page.)
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
Total Quarterly Passengers

Divide by 80 (80 Flying Days per Quarter) / 80 =
Divide (Amount from Line Above) by Total Seats =
= $
Leverage Measures: These indicators show the portion of the financing of the company that can be
claimed by contract in the event of bankruptcy. They also show the level of fixed expense that cannot be
reduced.
Industry
Debt-To-Debt Assets
Ratios
Total Liabilities $
Divide by Total Assets / $
= $
Industry
Debt-To-Equity
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)
Divide by Sub-total Assets (from (d) above) / $ (d)

= $

FINANCIAL RATIO ANALYSIS
Profitability Measures: These are indicators of the profitability of the company to the claim
holders (banks, lessors, stockholders).
Gross Margin Industry Ratios
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
Profit Before Tax $

Plus Interest Expense + $
Divide (Total from above) by Total Assets / $
Equals Return on Assets: = $
Return on Investment Industry Ratios
Net Profit $
Divide by Total Assets / $
Equals Return on Investment: = $
Return on Equity Industry Ratios
Net Profit $
Divide by Total Equity / $
Equals Return on Equity: = $
Return on Sales Industry Ratios
Profit After Taxes $
Divide by Gross Revenues / $
Equals Return on Sales: = $

Marketing
The marketing budget, airfares and cabin service have been covered previously in the case and
operations guide. However, it is worth revisiting a few issues regarding analyzing current
market served and adding (or exiting) a market. These decisions will often be done working
with the manager of operations who often has insights on operating efficiency and load factors.
Analysis of Markets Served

Your overall strategy will be reflected in your decisions regarding which markets to serve, and
how many flights to schedule with which size aircraft. You may "mix" the types of aircraft
serving a market. For example, you may schedule two flights with a 19-seat aircraft and two
flights with a 30-seat aircraft for a total of four daily flights and 98 daily seats in market number
X (19+19+30+30 = 98). This is easily accomplished using the simulation by selecting the
aircraft for a particular market / route combination.
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.
Operating Outside of Market Region

Due to longer distances involved when a firm operates out of its usual geographic region, there
may be slight additional costs of serving those markets. These costs include overnight expenses
for the crew, maintenance runs to airports without maintenance facilities, and purchasing fuel at
the destination regardless of the price at that location. Thus, direct flight expenses may be
slightly higher for markets served outside your region. While the additional expense is not
prohibitive, you should be aware of this possibility.

As the length of the flight increases (termed "stage" length), the average seat mile cost declines;
thus it is more efficient to operate aircraft over longer stage lengths. However, to simplify
financial reports, all of these factors are taken into consideration and an average cost per seat
mile is calculated. At the beginning of the simulation, each firm's region is assumed to be those
markets on the line corresponding to each firm's company number as shown in the MARKETS
SERVED table (below).
MARKETS SERVED (Quarter 0)

Markets (ABCDEFR) and Routes (1-51)
Served by each firm at simulation startup
The Closest The Closest
Market Routes with Market with
Foreign Market Resort Market
Firm Existing Competition no Existing
Route no one Route no one
# Served Competition
is Serving is Serving
A B C D E F R
1 5 6 17
1 2 3 4
2 7 8 17
3 13 14 17
9 10 11 12
4 15 16 17
5 18 19 20
21 22 23 24
6 25 26 20
7 27 28 29
30 31 32 33
8 34 35 29
9 36 37 29
38 39 40 41
10 42 43 44
11 47 48 49 50 45 46 44
12 38 39 40 41 51 52 44
Miles 600 400 340 360 400 420 600
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.

Human Resources
The HR function is responsible for compensation decisions, quality and training budgets, crew
training and retention, and also should track reliability trends. We’ve provided a little more
explanation of each below. The HR function may also be tasked with some of the record
keeping tasks for the group and other team process responsibilities.
Wage Increases and Additional Benefits

Wage increases are easy to enter in the simulation, but it is also important to understand the
implications of these increases. Several examples are provided below to illustrate the impact of
wage increases.
$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)
If ALL employees are to be given an 3 (aircraft)

additional wage %, base the total wages
x $140,000 (wages per aircraft operated)
on $140,000 per aircraft operated.
Example of 4% increase to all = $420,000 (total wages for 3 aircraft)
employees: x 0.04 (0.04% wage increase)
= $16,800 (added cost per quarter)
Additional Training and Quality Programs
Some airlines provide training beyond the minimum level to increase
pilot effectiveness and find increased employee competence, customer
satisfaction, and employee commitment to high-quality service.
However, the commuter/regional airlines that provide extensive training
lose a great portion of their pilots to larger airlines who can provide better
compensation. A direct benefit of employee (and thus organizational)
NOTE: development activities is that they seem to be related to retention of
Minimum levels of
personnel, which can also affect the reliability of your airline.
on-the-job training
for flight crews and
other employees Quality programs cost $5,000 per quarter per department. There are four
are mandatory and major departments to consider: Customer Service, Aircraft Servicing,
become a cost of Maintenance, and Administrative. Thus, starting a program for the entire
doing business. company would cost a minimum of $20,000 per quarter.

Stock-bonus Plan
The cost of the stock-bonus plan cost is set at $5,000 per aircraft operated. Employee
Compensation is charged for the cost of this stock. In addition, the "Stock Sold" amount on the
Cash Flow Statement shows the sale of the stock to the employee stock fund. The shares of
stock outstanding will also increase due to the sale of this stock.
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.
Scheduling and Aircraft Issues

Your existing fleet of three Beechcraft 1900s is serving several markets. Cabin service is not
provided; it is not practical on this type of aircraft, as it does not have enough headroom for
stand-up serving. The major advantage of this aircraft is its bullet-shaped fuselage; it has a
higher cruise speed than most of its competitors. While the current fleet of three 19-passenger
aircraft is serving the airline at the present time, increased demand will place a strain on your
fleet. Please review the case for a summary of the various aircraft options available to you in the
simulation.
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 Acquisition
At the start of the simulation, you own three Beechcraft 1900, 19-seat aircraft. All aircraft
available for purchase are pre-owned but are in excellent condition. The key to aircraft selection
is in matching equipment to the market. This does not mean that you can't use aircraft above or
below their optimum mileage but the costs will be slightly higher if you do. All simulation
aircraft have very acceptable safety and maintenance records and there is no attempt in the
simulation to suggest that one aircraft that is "better" than another.
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.
Because there is a sufficient number of manufacturers of commuter aircraft, delivery time is

very short; you may order an aircraft for either purchase or lease and expect to put it into service
immediately. Used aircraft are selling very well and you can expect to sell your used aircraft
quickly, obtaining the cash in the same quarter in which they are sold. Some aircraft
specifications and guidelines are given in the table below.
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.

NOTE:
Most manufacturers advertise that the breakeven load for their aircraft is in
the 45-55% range; this covers all operating costs but not fixed costs.
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.
Maintenance levels are described in the table on the following page.

AIRCRAFT MAINTENANCE (Level Descriptions)
1. Legal minimum maintenance; aircraft interior cleaning; exterior cleaning every 9 There is no additional
months; reasonable parts inventory. cost.
2. Legal minimum maintenance; some additional interior cleaning; exterior cleaning of Cost at simulation
the aircraft every 6 months; additional 20% spare parts inventory, which should result startup: $2,500 per
in less downtime for repairing aircraft. aircraft per quarter.
3. Legal minimum maintenance; frequent interior cleaning of the aircraft; exterior Cost at simulation
cleaning every 3 months; an additional 40% of spare parts in inventory, and a full startup: $3,500 per
preventive maintenance program. aircraft per quarter.
Items to keep in mind:
• 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.
• A 2- or 3-month fare sale is expected in resort markets (Type R).
• 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.

A GUIDE TO COSTS AND COMMON VALUES
FINANCIAL ITEMS
Commissions
10% of the value of the ticket on 80% of gross revenues which calculates to
(Paid to Travel
8% of gross revenues.
Agents)
Based on the # seats in plane. If the number of seats in plane is 20 or less,
the cost is $180 per seat. (Total insurance cost = $180 x # of seats.) If the
Insurance Cost
number of seats in plane is greater than 20 seats, the cost per seat rises to
$300 per seat. (Total insurance cost = $300 x # of seats.)
Hiring / On the
Job Training $3,000 per each new employee hired.
Cost
Marketing
Advertising + Promotion Budgets + $12,000 (for Each Salesperson).
Expenses
1.75% per Quarter per Aircraft Owned + $5000 (on Facilities and
Depreciation
Equipment).
Market
Entire package costs $31,000; prices range from $1,000 to $16,000.
Research Cost
Interest
5% per annum or 1.25% per quarter that is paid on your firm's CDs.
Income
Lease payments represent the amount due for all aircraft that are leased.
Since these are operating leases, the aircraft do not appear on the balance
Lease Payment sheet as an asset. Leases will be granted for an indefinite period, but there
is a $50,000 fee to cancel the lease and return the aircraft to the lessor. The
firm does not have any aircraft under lease at the start of the simulation.
Income Tax 40% of net profits.
LOAN INTEREST RATES
Short-term
10% per annum or 2.50% per quarter (beginning rate).
Loan
Long-term
9% per annum or 2.25% per quarter (fixed rate throughout simulation).
Loan
Appendix—Page 81
AIRCRAFT PURCHASE COSTS
COST TO PURCHASE AIRCRAFT
Cost Quarterly Cruise Cabin
Key Name ($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

MISCELLANEOUS EXPENSES
Cabin Service
$1, $2, or $5 per passenger.
Costs
Sale on Fares Usually an entry of 1(which is 1/3 off ticket prices for one month.)
Flight Need one if aircraft has more than 30 seats. (This cost is built into "Flight
Attendants Operations" cost amount.)
Demand Displayed in the Newsletter and is just a forecast; not a guaranteed rate of
Forecast demand increase or decrease.
Cost to Sell an
2% of book value.
Aircraft
Cost to Break
$50,000 per aircraft.
a Lease
Cost to Enter a
$10,000.
New Market
Flight
Operations $ 0.12 (twelve cents) at start of simulation.
Cost per Mile
Fuel Price $1.00 per gallon at beginning of simulation.
MAINTENANCE COSTS
Level 1 No additional charges
Level 2 $2,500 per aircraft per quarter
Level 3 $3,500 per aircraft per quarter
Appendix—Page 83
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.
A list of the contents follows below:
• Naming Your Airline

• Passenger Bill of Rights
• List of Policies
• Airline Decision Log
• Aircraft Scheduling Worksheet
• Management Audit Worksheet
• Management Audit Form
• Annual Report for Stockholders' Meeting
• Executive Bonus Recommendation
• Debriefing Questionnaire
Appendix—Page 85
NAMING YOUR AIRLINE
Industry________________ Company # ___________
1. List your service (major purpose or mission):
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:
(Continued on next page . . .)

(...Continued from previous page.)
7. From the data above, list at least four possible names:

a. _____________________________________________________
b. _____________________________________________________
c. _____________________________________________________
d. _____________________________________________________
8. Select the best name: ___________________________________
9. Describe the overriding reason for its selection:
Some considerations in naming your business and some right/wrong examples are
given below:
1. Is the name descriptive of what you do?

Pony Express vs. Trans-American Airlines
2. Is the name descriptive of your service?

Luxury Airline vs. Northeast Lines
3. Is the name an ego trip or does it contain meaningless names/words representing

the owners?
DWT Airlines (first initials of the owners) or We Three Airlines
4. Is the name distinctive, perhaps catchy, and easy to remember? Will it be

conducive to future advertising jingles and logos?
Eastern Econo Airlines vs. JanSanMark Airlines
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.

LIST OF POLICIES
Most firms have an Employee Handbook, which describes all employee policies. This assignment
will accomplish the same objective except it is to be a concise list (not a book) of the policies you
have for your employees. It should cover everything of importance, including vacations, sick
leave, absence without notification, insubordination, promotion policy (promote from within or go
outside, and the circumstances for each), child care policy, etc.
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.)
State the major issues and/or problems to be discussed at the meeting:
List each MAJOR decision or change in previous operating policy you are going to make this
quarter and give the rationale behind the decision:
Members of the team present at this meeting on _____ day of _____________
1. ______________________________________________________
2. ______________________________________________________
3. ______________________________________________________
4. ______________________________________________________

AIRCRAFT SCHEDULING WORKSHEET
Form 5: Aircraft Scheduling Worksheet
Aircraft Total Miles
Mkt / Miles Mkt / Miles Mkt / Miles Mkt / Miles Mkt / Miles
# this Aircraft
1 / / / / /
2 / / / / /
3 / / / / /
4 / / / / /
5 / / / / /
6 / / / / /
7 / / / / /
8 / / / / /
9 / / / / /
10 / / / / /
11 / / / / /
12 / / / / /
13 / / / / /
14 / / / / /
15 / / / / /
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.
Number of Aircraft in your fleet
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?
3. If this firm were to begin again, what should it do differently?
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?

5. Does the firm have a prudent dividend policy? What would a committee of
stockholders say about this firm's treatment of its stockholders?
6. Did the team make decisions on a rational basis or did it often "stab in the dark"?
7. What are the firm's strengths and weaknesses?

What are the threats and opportunities facing the firm at this time?
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
Industry _____ Co _____
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) _____
4. Total dividends paid: $_________. Total amount per share: ______

List the quarters in which you made a dividend payment and amounts (per share)
of that payment:
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)? ________%
9. Total passengers flown (for the 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): _______%

13. Return on equity for entire simulation (Total profits before taxes divided by average
total equity):_______%
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? _______
18. List your fare for each quarter:
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.

EXECUTIVE BONUS RECOMMENDATION
(Peer Evaluation normally used at mid-semester)
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.
Fill in names of the executives of your firm, Fill in the Executive

including your own. Bonus Amount
Your Name:
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
Please check with your instructor to ascertain if this is to be anonymous.
Your Name____________________________ Industry_____ Company #___
1. What did you like about the simulation?
2. What didn't you like about the simulation?
3. To what extent did the simulation help you understand the operation of an
organization from the viewpoint of top management?
4. An objective of a simulation is to help participants understand the TOTAL firm and

interrelationships between the different functional areas. To what extent did the
simulation achieve this objective?
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

9. How many hours per decision quarter did you spend (excluding team meetings) in
preparing for the team meeting or in doing outside work, gathering data, analyzing
data, working with a spreadsheet program, etc.?
_____ 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?
15. Do you feel the simulation is a valuable learning experience? Why?
Appendix—Page 99
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.
Gross Your Gross Revenue is calculated multiplying passenger miles flown by

Revenue the average fare on a passenger-mile basis.
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.
Market A "market" consists of a round trip between two cities.

If the total cash available is not sufficient to meet cash demands, your bank
Overdraft will automatically issue your firm an "overdraft" loan. This loan will cover
Loan your cash shortage exactly and your Ending Cash will show a zero balance.
The interest for this loan is not charged until the following quarter.
Your PASSENGER LOAD FACTOR is a ratio of revenue passenger miles
Passenger divided by available seat miles. This indicates the average percentage of
Load seats occupied. You will need from 50 to 56% to break-even. The YIELD
Factor PER REVENUE PASSENGER MILE is obtained by dividing revenues by
revenue passenger miles.
REVENUE PASSENGER MILES is that portion of available seat miles that
Revenue
actually had a paying passenger. This is calculated by multiplying the total
Passenger
passengers flown on each flight by the length of the flight in miles by the
Miles
total flights each quarter. (This is a difficult calculation but it is done easily
(RPM)
by the computer program.)
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
employee turnover ..................................................... 69
A flight attendant ........................................................... 83
fuel .............................................................................. 83
accounts payable .................................................. 20, 67, 82 incident ....................................................................... 70
accounts receivable .................................................... 20, 82 insurance............................................................... 69, 81
aircraft leasing ......................................................................... 64
acquisition ....................................................... 35, 63, 78 market research .................................................... 54, 81
disposal .................................................................. 35, 79 new market ..................................................... 69, 74, 83
lease ...................................................................... 14, 35 OTJ (on-the-job-training )............................................ 81
lease, terminate........................................................... 35 per available seat mile .............................................. 101
leasing costs ................................................................ 13 per flight mile .............................................................. 83
maintenance ........................................ 13, 14, 19, 35, 79 per seat mile ......................................................... 43, 75
maximum mileage ................................................. 77, 80 sales personnel ........................................................... 32
purchase prices............................................................ 82 stock bonus plan ......................................................... 77
scheduling.................................................. 37, 44, 74, 77 to sell aircraft .............................................................. 83
specifications ............................................................... 78 to terminate lease ........................................... 35, 79, 83
type.................................................................. 12, 21, 64
utilization ..................................................................... 14 D
ANALYSIS
Aircraft Scheduling ...................................................... 44 DECISIONS
Financial Analysis ......................................................... 45 Compensation
Market Profitability ..................................................... 43 wages, benefits, quality and training budget......... 34
Corporate
B social perfomance budget, distribution of budget 39
Decision Summary ...................................................... 42
balance sheet .......................... 14, 18, 20, 48, 63, 64, 69, 96 Fares
breakeven load ............................................................... 101 fare structure, fare, cabin / food service ............... 31
budget............................................................................... 62 Finance
advertising ....................................................... 16, 32, 56 loans, CDs, stock, dividends ................................... 40
cargo ...................................................................... 32, 56 Fleet
marketing .................................................................... 74 maintenance, fuel, acquisitions ............................. 35
promotional ..................................................... 16, 32, 56 Marketing
quality and training ......................................... 34, 55, 76 promotion / advertising cargo budgets, sales
social performance ...................................................... 39 personnel, in-flight magazine ........................... 32
total quality management system (TCM) .................... 34 Routes
training and quality programs ..................................... 76 schedule aircraft, flights, add or abandon market,
fare sale ............................................................ 37
C Special
incident .................................................................. 41
cabin / food service .................................................... 31, 77 demand ...........................................................10, 11, 15, 31
cargo business ......................................... See budget: cargo aircraft effect on ......................................................... 13
cash flow ................................................... 20, 49, 63, 64, 68 build up ....................................................................... 74
CDs ........................................................................ 40, 67, 68 market ......................................................................... 62
interest income ........................................................... 81 stimulate / hurt ........................................................... 15
commission ....................................... 16, 19, 45, 47, 68, 101 demand forecast .................................................... 3, 54, 83
COMPANY demand index................................................................... 54
Balance Sheet .............................................................. 48 demand note .................................................................... 66
Cash Flow..................................................................... 49 depreciation ...................... 20, 45, 48, 49, 51, 63, 70, 79, 81
Fleet Status .................................................................. 51 aircraft, annual amount .............................................. 64
Income Statement ....................................................... 46
Operations ................................................................... 50 E
cost
abandon market .......................................................... 74 employee
aircraft disposal ........................................................... 79 training ........................................................................ 17
aircraft maintenance ....................................... 35, 77, 83 turnover ........................................................ 17, 50, 101
cabin / food service ..................................................... 83 wages .............................................................. 17, 34, 76
employee training ................................................. 34, 69 expense
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

S options ........................................................................ 17
price ............................................................................ 53
sales personnel ................................................................. 32 selling .............................................................. 35, 40, 65
hiring cost .................................................................... 16
simulation
T
navigation .................................................................... 25
SIMULATION tax credit .......................................................................... 70
Logout.......................................................................... 56 tax expense ...................................................................... 70
STARTUP taxes ................................................................................. 70
Case ............................................................................. 29 income tax .................................................................. 81
Consultant's Briefing.................................................... 28 team leader role ............................................................... 27
Startup Decision .......................................................... 30 tools
stock decision-making .......................................................... 25
bonus plan ................................................................... 77
dilution of value ........................................................... 65
dividend ................................................................. 40, 67
V
issuing .............................................................. 14, 62, 63 view previous decisions.................................................... 42
maximum redemption per quarter ............................. 65
Index—Page 105

Airline The Strategy Simulation

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Airline The Strategy Simulation

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Airline

The Strategy Simulation

Jerald R. Smith, Florida Atlantic University

Charlottesville, Virginia, USA

Limited Warranty on Media and Manuals

Discover a Better Way to Learn. Active Learning through Business Simulations.

Print Date 2/1/2011

In this simulation, we have attempted to illustrate the strategic

Key Simulation Objectives

To understand the general process of the Airline experience, please

Page 2—Airline Student Manual

Section 2 (Operations Guide) provides detailed information on

Industry market and competitive reports are available for

After reviewing information about your firm, the

The simulation will be advanced at a specified time

Once the simulation is advanced, information will be

Repeat the decision-making process until all periods

Page 4—Airline Student Manual

If you do decide to operate as a self-managed work team, you should

The Strategic Planning Process

There is a hierarchy to the planning process—from the broad and

I. Establish the Purpose (mission, master strategy) of the Organization

II. Analyze the Firm's Environment

a) The External Environment (termed industry study)

b) The Internal Environment

III. List all Possible Courses of Action

IV. Select Best Course(s) of Action

In narrative form, the outline answers these questions:

• Where are we now?

Page 6—Airline Student Manual

The remainder of this manual is divided into three sections:

Section 1: The Airline Case

This section presents the information about the overall operating

Section 2: Airline Operations Guide

This section outlines the operational aspects of using Airline,

Section 3: Decision-Making in Airline

This section provides guidance on how to analyze information and

The Appendix includes sample incidents (special events in the

History of the Airline

When the Federal government deregulated the entire airline industry,

OPERATING HISTORY (Preceding 8 Quarters)

The Airline Case—Page 9

Page 10—Airline Student Manual

ROUTE MAP FOR AIRLINE FIRMS

600 MILES 600 MILES

360 MILES 400 MILES

The Airline Case—Page 11

Page 12—Airline Student Manual

Refer to the table below for aircraft specifications and costs.

Prop Standing room; toilet; no flight

Note: You start the simulation with 3 Beechcraft 1900s.

The Airline Case—Page 13

Assets are financed through several channels. Aircraft may be leased

Other financing options available to the airlines include conventional

Fledgling airlines frequently need a line of credit to finance current

Page 14—Airline Student Manual

Your company also subscribes to multiple airline listing services. This

As a member of the Airline Reporting Corporation (ARC) and by virtue

The Airline Case—Page 15

Advertising and Promotion Budgets

Last quarter, your firm spent $2,500 on promotional and $2,500 on

NOTE: Airlines advertise through a variety of media: billboards, magazines,

Page 16—Airline Student Manual

Chief of Maintenance These departments handle all functions, including