Fly-Nice: Decision Analysis

FLY-NICE: DECISION ANALYSIS

1. Introduction

Fly-Nice is an airline company which provides customer-friendly, point-to-point short-haul, low-fare service, although 60% of flights go to or leave from the same hub airport. The corporate strategy of Fly-Nice is to remain in the low-price market, but to expand passenger miles sold. Now there are two proposals have been made for the companyЃfs strategic development: One is to enter the long-haul, international market. The other is to offer a web site booking facility to customers.

This essay aims to conduct research on both proposals. Firstly, it will analysis particularly on the viability of the first proposal, which suggest to enter the long-haul, international market. Secondly, it will consider some proper techniques and theory which would be helpful for making a choice between the two alternatives.

2. The viability of entering the long-haul, international market

In this section, it will conduct a careful decision analysis of the first proposal. Above all, it will calculate the potential costs of taking an action to enter the long-haul, international market. Next, it will assess the risk and income by constructing a decision tree. A few valuable sources of data in supporting the case will be mentioned as well.

2.1 Potential costs

Before making a decision of investing to the long-haul, international flights, it should be firstly considered the potential cost of the action. In the problem formulation step, two problems are identified: (1) Deciding where is the operating cost and how much would it be. (2) Deciding what others information are required and how to gain them.

For the first problem, it could begin with taking into account the traditional categorization of airline operating costs. The published operating cost data of British Airways (Doganis: 2002), whose cost structure is fairly typical for a major international airline are present in Figure 1.1. Since the company is going to introduce the new Airbus that carries many more passengers than all existing aircraft to adapt to the long-haul, international flights. An additional cost for purchasing or hiring the new aircraft would be consider as a fixed direct operating cost besides the other operating costs that state in Figure 1.1. The total costs which have mentioned above could be approximatively calculating base on the relevant data which could be obtained from relevant database.

Figure 1.1 British AirwayЃfs costs in terms of escapability, 1999-2000

FIXED DIRECT OPERATING COSTS-Fleet size related-Escapable medium term27.1% INDIRECT OPERATING COSTS-Route/product related-Escapable medium or long term32.8% VARIABLE DIRECTOPERATING COSTS-Activity related-Escapable short term40.1%

% % %

Aircraft standing charges 14.4 Station 5.2 Fuel and oil 11.5

Flight crew salaries/training 3.8 Ticketing, sales promotion 18.8 Flight/cabin crew 4.4

Cabin crew salaries 4.1 General and admin. 5.0 Direct engineering 5.5

Fixed engineering 4.4 Depreciation ground equipment 1.6 Airport and en-route 7.7

Passenger insurance 0.4 Cargo specific 2.2 Handling and parking 3.0

Passenger services 5.9

Cargo specific 2.1

Source: Flying off course 3rd Edition

Figure 1.2 Attributes of airline passenger forecasting techniques

Attribute Qualitative methods Time-series projections Causal models

Executive judgement Market research Delphi Annual average growth Exponential smoothing Linear trend Linear trend on moving average Regression analysis Gravity model

Accuracy:

0-6 months Good Good Fair/good Fair/good Good Fair/good Good Good Good

6-24 months Fair Good Fair/good Poor/fair poor Fair/good Poor/fair Fair Fair/good Fair/good

5 years Poor Poor/fair Fair Poor Poor/fair Poor Poor/fair Poor/fair Poor/fair

Suitability for forecasting:

Traffic growth Good Good Good Good Good Good Good Good Good

Traffic reaction Fair Good Fair n. a. n. a. n. a. n. a. Good Poor

Traffic new routes Poor Fair Poor n. a. n. a. n. a n. a. Fair Good

Ability to identify turning points

Poor/fair Fair/good Fair/good Poor Fair Poor Poor/fair Good Poor

Ready availability of input data

Good Poor/fair Poor Good Good Good Good Poor/fair Fair

Days required to produce forecast

1-2 90+ 30-180 1-2 1-2 1-2 1-2 30-90 20-60

Cost Very low Very high Moderate Low Low Low Low High High

Note: n. a. =Not applicable

Source: Flying off course 3rd Edition

For the second problem, there are other two chance events with which the company is faced:

(1) Demand of the long-haul, international market;

(2) Competition between the rivals.

Time and money must be paid to cover these two uncertainties before making a decision. A market research study would be helpful for obtaining the information. For example, the files of SWOT analysis of Fly-Nice and its key competitors are required. In addition, an attributes of airline passenger forecasting techniques (Doganis: 2002) which present in Figure 1.2 could be also considered as a useful method. Besides the primary data, the secondary data, which cost less money and time, could be obtained from relevant database.

2.2 Risk and income

A decision tree (Anderson: 2001) can be constructed to describe the process. It is presented in Figure 1.3. The squares are used to depict decision nodes and the circles are used to depict chance nodes. At each decision node, the branch of the tree that