Strategic Management Case Analysis Of Airtran Airways

This case analysis examines the impacts AirTran Airways has on the airline industry with respect to its competitors. AirTran Airways is an airline company that provides domestic flights (U.S.) to travelers flying in the United States. AirTran also became the first airline to offer Wi-Fi to its travelers. AirTran is the successor of its predecessor ValuJet Airlines that was founded in 1993 in Atlanta, Georgia. AirTran, better known as ValuJet Airlines in the mid 1990s, grew economically stable because of its low airfare prices. In 1995 and 1996 however, ValuJet also obtained the highest number of air-travel accidents than any other airline company. One example was the famous crash of “Flight 592” in 1996 that killed 110 people in Florida when the plane crashed into the Florida Everglades (river). After the accident and further investigation by the Federal Aviation Administration (FAA), the crash had resulted from several safety violations of ValuJet aircrafts. These violations also led the FAA to “ground” ValuJet Airlines. In order words, any new aircrafts purchased by ValuJet had to be approved by the FAA to determine the safety level and compliance to the FAA standards for aircrafts.

In 1997, ValuJet was experiencing financial hardships and was on the road to bankruptcy. As a result, ValuJet partnered with AirTran Holdings and move their operations from Atlanta, Georgia to Orlando, Florida. A short time after the merger of AirTran and ValuJet, ValuJet decided to remove its name from the merger, letting AirTran Holdings obtain control of the entire merger. As of September 2010, AirTran Airways (AirTran Holdings) has experienced financial hardships since the 2008 world-wide recession. As a result, AirTran made an agreement for Southwest Airlines to purchase the low-fare airline since AirTran was on the road again to bankruptcy. The information constructed and used for this case analysis pertains to proposed vision and mission statements for AirTran, internal and external audits of AirTran, types of strategies, and a conclusion that will determine what AirTran’s next plan of action should be.

Vision Statement

Actual:

Proposed

AirTran has NO actual vision statement.

“AirTran’s vision is to be recognized and become the leading competitor in the airline industry with affordable airfares, a safe environment, and excellent customer service.”

Mission Statement

Actual:

Proposed

“Innovative people dedicated to delivering the best flying experience to smart travelers. Every day.” (AirTran, 2008).

“Our mission is to supply safety and affordable flights to our travelers including our employees in the airline industry. We are committed to being honest and loyal to our travelers while providing a fun and safe environment for our crew members and our customers. We are focusing more on technology including offering Wi-Fi & satellite radio to our traveling customers. AirTran is also focused on teamwork and taking pride in everything we accomplish because communication among our crew members is the key for success here at AirTran.”

Discussion and Analysis of Mission/Vision Statements

In judging the actual vision and mission statements of AirTran, the proposed statements give a better insight on what AirTran is about. AirTran’s vision does not answer the question of “what we want to become”, because a vision statement for AirTran do not exist (David, 2011). Instead, a proposed vision was created in order to fill the void of a missing vision statement. The vision statement is the most important statement because it defines what the company plans to do and it is the foundation of defining the mission statement.

AirTran’s actual mission statement does not clearly answer what AirTran is about. For example, AirTran’s current mission statement only states what the employees’ goal is about, which is “providing the best flying experience to smart travelers”. It does not satisfy the mission statement components including customers, technology, concern for employees, or a philosophy the company can follow. The actual mission does not build a foundation for strategies, plans, and priorities for AirTran. In the proposed mission statement however, the mission includes customers, the services AirTran offers, the markets, technology and concern for employees. The proposed philosophy of AirTran is: “communication among our crew members is the key for success here at AirTran” (David, 2011).

Discussion and Analysis

An EFE matrix is a tool that is used by companies to determine and study economic, demographic, political, technological, competitive, etc. factors outside of its company (David, 2011). The unemployment factor under opportunities received the highest weight because it unemployment increases, more people will drive vehicles and travel less by plane to save gas and money. Currently, the unemployment rate is 9.2% in the US (U.S. Bureau of Labor Statistics, 2010). If the unemployment rate decreases, more people are likely to travel by airplanes, especially if the airfare cost is low and demand for air travel is high (Travel Agent Central, 2010). Another major opportunity is that one of AirTran competitors “Mexicana de Aviación” ceased operations in the United States and Mexico. The use of wireless technology and Wi-Fi is another opportunity that could attract potential travelers who don’t have access to the internet when traveling on other Airline company planes.

The largest threat to AirTran is the increased competition from Delta and Southwest Airlines. The increased competition factor received the highest weight because the most important factor that affects another business is the competition from its competitors. Another threat to AirTran is that it’s highly dependent on the fluctuations of fuel costs. Since fuel is one of the largest costs to AirTran a slight adjustment can mean the difference between a loss and a profit. Along of fuel, labor costs are one of the largest costs to AirTran and a slight adjust can mean the difference between a loss and a profit.

Political policies enforced by the US and other countries in which AirTran operates can have a huge impact on the company as a whole. With terrorism a top priority of the government, new policies can cause a huge burden on AirTran for new technologies or more labor costs (security and maintenance). As with any business, labor strikes can halt a company’s operations causing the company to lose millions in revenue. Labor strikes received a rating of 4 because it is a threat that could cause AirTran to be driven out of business. AirTran is performing average in their external environment. Most of AirTran’s opportunities and threats need to be addressed more aggressively, such as decreasing operating costs, expanding internationally, and increased competition (David, 2011).

Competitive Profile Matrix

Discussion and Analysis

A Competitive profile matrix for a business helps them determine major competitors’ weakness and strengths in their strategies (David, 2011). AirTran has the highest weighted score because AirTran has an advantage in charter services, business class services, and the navigation of their website. Based on the research found, the lowest fare costs ranked from AirTran being the lowest to Southwest Airlines being the highest and Delta Airlines falling between the two. AirTran received a rating of 4 under technological advances because it was the first airline company to introduce and provide Wi-Fi to travelers and customers. AirTran however, received a rating of 2 for both the market share and the financial position because AirTran is becoming bankrupt, in which AirTran was just bought out by Southwest Airlines. Airfare costs and market share are weighted heavily because if a company’s airfare costs are too high, many customers will reject the idea of buying airfare tickets. Charging too low for airfare tickets would attract more customers, but would decrease the market share since the company would be losing profits while selling at a low price.

Discussion and Analysis

An IFE Matrix is a tool that summarized the major strengths and weakness for many companies based on the functional areas of that business (David, 2011). Being the first airline company to provide Wi-Fi Internet to travelers is classified as minor strength because it provides an opportunity for travelers to surf the web or complete business objectives. AirTran also has a 1st place ranking in overall air quality from the Airline Quality Report of 2008 (AirTran Airways, 2008). Having rewards for frequent flyers encourages their frequent flyers to be a committed customer. AirTran includes their $1 billion annual revenue, which helps their airline purchases better equipped airplanes. Also, AirTran’s high number of daily flights helps their revenue while increasing their safety rating from by riding passengers to their destination safely. Lastly, their low cost structure encourages more customers which will result in an increase of their profit revenue.

Having customer complaints and a decrease in stock prices can result in negative effects. A weakness is a negative strategy of a business that has negative impacts upon that particular business (David, 2011). These are a few weaknesses that AirTran currently possess, which could cost them thousands of potential customers.. Another weakness of AirTran includes spending more money for maintenance equipments, which resulted in a net loss, which can also affect the liquidity of the business. High labor costs also have a negative impact on AirTran because it decreases net income.

Key Financial Ratios: (in thousands)

Discussion and Analysis

The financial ratios above are based off the 2009 balance sheet and income statement data from AirTran’s annual report. Financial ratios are statistical data that analysts use based on the company’s balance sheet and income statement for that fiscal year (David, 2011). Liquidity ratios help measure a firm’s capacity of meeting short-term obligations. Leverage ratios help determines how much a firm is in debt. Activity ratios describe how well a firm is allocating its resources effectively. Profitability ratios help determines the overall effectiveness of management based on the firm’s investments and sales. Growth Ratios help determine the firm’s ability to remain liquid during the growth of both the economy and the industry (David, 2011).

Strategy Analysis

SWOT Strategy Matrix:

Strengths

Financial stability

Global presence

Brand recognition

Low cost air fares

Weaknesses

Speed of customer service

High rate of accidents involving AirTran planes

Quality of airline services

Opportunities

Possible company expansion with Southwest Airlines.

Possible gain of new fleet

Increase in profits

Expanding AirTran into foreign countries.

SO Strategies

Utilize brand recognition by expanding operations and partnering with Southwest Airlines (S3, O1).

Increase global presence by expanding operations into foreign countries such as Mexico, Canada, and the Middle East (S2, O4)

WO Strategies

Eliminate high percentage of airplane accidents by acquiring new fleet that uses efficient technology to decreases the risk of accidents (W2, O2).

Improve the quality of airline and customer service with new methods such as customer surveys, questionnaires, and joining forces with their major competitor to improve quality (W3, O1)

Threats

1. Stronger Competition from competitors

2. Rising Labor Costs

3. Anti-terrorism policies and laws

4. Economic conditions

ST Strategies

Sustain financial stability by monitoring expenses and changes with the competition (S1, T1)

Maintain low air fares and maximum profits by monitoring the economic condition for the airline industry (S4, T4)

Eliminate retrenchment by expanding operations globally (S2, T4)

WT Strategies

Establish a positive public image regarding the high rate of accidents to avoid criticism from people who are affected by post 9/11 laws and policies (W2, T3)

Focus on improving customer services to help combat against other airline competition’s customer service (W1, T1)

Improve the quality of airline services by monitoring the competition that has a stronger competitive advantage (S3, T1)

Discussion and Analysis

The SWOT (Strengths-Weaknesses-Opportunities-Threats) matrix is an important type of framework used by companies to develop four types of strategies based on SO (strengths-opportunities), ST (strengths-threats), WO (weaknesses-opportunities), and WT (weaknesses-threats) (David, 2011). SO strategies are based upon the company’s internal strengths, which are used to capitalize upon the external opportunities outside that company. An SO strategy for AirTran would include using their brand recognition of low costs to expand their operations globally. ST strategies results from a company’s strengths that’s used to help eliminate or condense external threats. An ST strategy for AirTran would include monitoring their expenses and economic conditions to maintain financial stability. WO strategies are used to help capitalize on opportunities by improving the company’s internal weaknesses. For example, AirTran has a high number of plane crashes, which is a major internal weakness. A WO strategy for AirTran would be to acquire new technology advanced fleet and aircrafts to eliminate the high number of airplane accidents. A WT strategy is used to help a company not only avoid external threats, but to help improve internal weaknesses also. A WT strategy for AirTran may include focusing on better customer service to gain potential customers from its competition (David, 2011).

The SPACE Matrix for AirTran Airways

INTERNAL STRATEGIC POSITION EXTERNAL STRATEGIC POSITION

Financial Position (FP) Stability Position (SP)

Technological changes

Rate of Inflation

Competitive pressure

Price elasticity of demand

Price range of competing products

Financial Leverage & Liquidity

Inventory Turnover

Return on investment

Cash Flows

Earnings per share

Competitive Position (CP) Industry Position (IP)

Growth potential

Profit Potential

Financial Stability

Resource Utilization

Ease of entry into market

Market share

Product quality

Product life cycle

Customer loyalty

Technological know-how

Discussion and Analysis

A space matrix is a type of framework that companies use to designate which type of strategies should be pursued, whether those strategies are aggressive, competitive, defensive, or conservative (David, 2011). An aggressive strategy demonstrates that a company has great financial strength in that specific industry for that company while a conservative strategy indicates that the status of a company (positive or negative) in a industry that’s decreasing in growth and sales. A competitive strategy demonstrates that a company has major competitive advantage(s) in either a high-growing or low-growing industry. Companies categorized under a defensive strategy indicate that a company has competitive disadvantages in a low-growing industry. AirTran is currently taking a defensive position in the airline industry because AirTran has a weak competitive position in an industry that’s becoming more unstable as time progresses (David, 2011). The value assigned to the financial position is a “2” because of AirTran’s financial struggle to remain liquid as a business. AirTran received a “-6” under the stability position since competitive pressure is high and the high risk involved for AirTran. The Industry position received a score of 4 because AirTran has the potential to grow, but at the same time, the financial stability of AirTran is relatively weak. The competitive position received a “-5” because of the low market share and control AirTran has over its competition (David, 2011).

The Internal-External Matrix

Discussion and Analysis

An Internal-External Matrix is a tool that companies use by dividing their divisions into nine cells and basing the data from the IFE and EFE weighted scores (David, 2011). The “grow and build” section received a medium score because the EFE weighted score for AirTran fell around 2.68. Since it has a medium score of 2.68, it would also be classified as an average internal position. The IFE weighted score for AirTran fell around 2.70, which is also classified as an average internal position with a medium score (David, 2011). Since AirTran is struggling financially, the “harvest and divest” area received an average score also with the “grow and build” section being in the low quadrant score.

The Grand Strategy Matrix

Discussion and Analysis

A grand strategy matrix is a tool that analysts use in order to formulate alternative strategies for that business. There are four quadrants that represents whether a firm is classified in a competitive or market position based on the growth of the market (David, 2011). AirTran would be classified under quadrant III because the airline industry has slowed in growth and AirTran is on the verge of bankruptcy. AirTran needs to make changes quickly; however, due to the lack of financial support, Southwest Airlines has bought AirTran Airways from the owner of the company. Since all the other options have failed for AirTran, selling its business to another competitor is the only way to suppress bankruptcy (Schlangenstein, 2010).

QPSM for AirTran

The Quantitative Strategic Planning Matrix — QSPM

Strategic Alternatives For AirTran Airways

Discussion and Analysis

The QSPM (Quantitative Strategic Planning Matrix) is a type of framework that’s used by companies to determine the comparative attractiveness of alternative strategies (David, 2011). These new strategies are based upon the previous strategies formulated from the SWOT matrix. The key factors of the QSPM are generated from the EFE, IFE, and the competitive profile matrix strategies.

The alternative strategies formulated are based on what the company should consider implementing. In other words, AirTran decides to use product development as an alternative strategy. The alternative strategy involved intends to increase sales by creating an express lane for customers to quickly purchase airfare tickets. Some of the key factors involved for the new express lane strategy include an increase in Florida’s population, while studying the weakness of increased customer complaints. An attractiveness score is formulated based upon how well the alternative strategy can improve the key factors, whether it’s an opportunity, threat, strength, or weakness. For the express lane alternative strategy, an attractiveness score of 2 for the increased population of Florida factor indicates that the idea is “somewhat” attractive. On the other hand, one of AirTran’s competitors “Mexicana de Aviación” ceased operations and received an attractiveness score of 4 because AirTran can capitalize on this opportunity by gaining more potential customers (David, 2011).

Evaluation of AirTran worth analysis:

AirTran Worth Analysis **In Thousands (2009)

1. Determine Net Worth or Stockholders’ Equity Sum of Common Stock, Additional Paid-in Capital, and Retained Earnings (in thousands)

Discussion and Analysis

In evaluating AirTran’s worth, the worth can be categories into what AirTran owns, what AirTran has earned, and what AirTran can bring to the airline industry. The net worth of AirTran is approximately $525,740 (in thousands). The net worth includes common stock, paid-in capital, and AirTran’s retained earnings (David, 2011). The price-earnings ratio for AirTran is a (-$525.81 thousand), which is a negative earnings per share because of AirTran’s low stock prices. The current enterprise value of AirTran, according to yahoo.com is around 1.60 billion dollars. In other words, if Southwest Airlines decides to buy AirTran as Southwest have already done, Southwest would more than likely pay around 1.60 billion dollars (AirTran Holdings, 2009).

Recommendations:

Specific strategies and long term objectives that would benefit AirTran would include expanding its operations internationally to countries such as Europe, Asia, and Africa due to the high population, especially China. China’s economy is currently on the rise and AirTran moving its operations to China could greatly benefit the company. With nearly 1 billion people in China, if only 10% of the people buy airfares from AirTran at $50 each, that’s 100 million people per $50 ticket, which would equal to around $5 billion, 5 times the annual revenue. Moving from a domestically controlled environment to an international control environment is beneficial also because it will provide the US citizens an inexpensive opportunity to travel to foreign counties. The estimated time for expanding AirTran’s operations should take no more than 1 year, if not before. New policies that should be implemented for AirTran’s foreign operations would include outsourcing employees such as the employees that live in the country that’s holding AirTran’s operations. For example, if AirTran expands to China, then it is only logical that AirTran should only hire individuals from China and neighboring areas to run the operations. If AirTran however continues to experience financial instability, AirTran should sell all of its assets for their intangible worth, which would be classified as liquidation (David, 2011).

Discussion and Analysis

A projected income statement allows an organization to predicted expected results based on particular actions and approaches (David, 2011). Based on the above income statement, it is projected that AirTran will decrease in total revenue by about 50% because of the recent drop in sales and net income. Since AirTran also has negative retained earnings, it is only reasonable that the total revenue will decrease by a percentage. Since total revenue directly affects gross profit, the gross profit is projected to fall about 75% in the year 2010, based off 2009 financial data. Operating expenses are predicted to increase by 10% because of the decrease in profits and possible increase in expenses. Based off the projections, it is projected that the net income will also decrease by about 50% because of the decrease in revenues and gross profit.

Discussion and Analysis

A projected balance sheet is a financial statement that allows an organization to predict future total assets and project total liabilities based off the income statement (David, 2011). Since the revenue decreased on the income statement, the cash of the balance sheet would decrease around 9% since cash is created from total revenues. Inventory will decrease by 8% because AirTran will not buy as many aircrafts for their airline company due to the recent drop in net income and increased expenses. As a result, the total assets would decrease by 9.8 percent due to the decrease of inventory, cash, and other contra-asset accounts. The liabilities are project to remain about the same with exception to the long term debt. Since AirTran is losing money, they are not likely to purchase any new aircrafts that may require them to take out a loan. The long-term debt account is projected to decrease by 25% because of the decreased reliability of taking out a loan for inventory purchases. Common stock under owners’ equity will remain the same since the number of shares outstanding will not change from its previous value of 135,000. Since the retained earnings are currently at a negative value, a prediction of an addition of negative $6,000 is projected for the retained earnings account. In addition, the total assets and total liabilities/stockholders equity match, so the projected balance sheet is complete for 2010 (David, 2011).

Discussion and Analysis

The financial ratios above are based off the 2010 projected balance sheet and projected income statement data for AirTran. Financial ratios are statistical data that analysts use based on the company’s balance sheet and income statement for that fiscal year (David, 2011). The liquidity ratios for AirTran describe how well AirTran can meet short term liabilities. Both the current and quick ratios have a calculation of 1.02 based off the projected financial statements. The leverage ratios, which measure how much a firm is financial by debt include debt to total-asset ratio and debt to equity ratio. The debt to total-asset ratio has a calculation of 0.78, which indicates that AirTran’s total assets is about 22% higher than AirTran’s total debt. Activity ratios demonstrate how well AirTran is using its resources. The fixed assets turnover has a ratio of 1.00 exactly, indicating that AirTran is effectively using its resources and equipment utilization. The profitability ratios will measure AirTran’s overall effectiveness based on sales and investments. The net profit margin has a ratio of 6% indicating that after taxes, per dollar of sales, AirTran will receive a 6% profit. The growth ratios measure how well AirTran can growth depending on its economic positioning. Based on the net income data, net income has a ratio of about 50% because of the increase of net income from $67,331 to $134,662 in 2008 and 2009 respectfully.

Discussion and Analysis

A balance scorecard is a type of framework that companies use for evaluation of objectives such as financial performance and customer knowledge (David, 2011). The expected financial and nonfinancial objectives recommended for AirTran include customer service/loyalty, revenue growth, and quality of customer service. The desired measure for the customer objectives include customer feedback and rewards such as giving customers questionnaires to answer and provide an A+ reward to frequent travelers. The time expected to implement the customer objective will take around 1 month to complete. The desired measure for the financial objectives includes the changes in finances such as net income and stockholders’ equity. The estimated time to implement the financial objectives may take up to 6 months or a year because of the financial instability AirTran is currently experiencing. The operations/processes objective has a desired measure of a scale rating from A to F. The higher the letter grade, the better AirTran will look to potential customers, creditors, and investors (David, 2011).

Conclusion:

AirTran’s future plan is to sell its company to Southwest Airlines instead of shutting down its operations. Although AirTran will no longer be operated as AirTran Holdings, the owner feels that this is an opportunity for AirTran to become an even greater entity. AirTran could have possibly rethought the situation of selling its assets to Southwest Airlines and formed an alternative strategy. The alternative strategy could have been to expand its operations to foreign countries that will create opportunities to reach a new variety and number of people. However, it appears now that Southwest Airlines is back to the top as being one of the most dominant airline companies to exist today.