Air Utopia case study MIM version

Update: september 2014

AIR UTOPIA Case Study

PART 1

Air Utopia is the national airline of Wonderland, a principality located in the heart of Europe.

For ten years now, it has been operating five A320 aircraft between the capitals of neighbouring
countries and its main base at Utopia City, the capital of the principality. The average seat
occupancy rate (load factor) is about 60%, depending on the destinations being served, and may
reach as high as 80% in response to special promotions the company runs during the high tourist
season. The airline carries little debt, but its profitability ratio (net income to turnover) has never
exceeded 2% in the last five years. Initially, profit was not the primary aim of this state
company. At the time of its creation, the goal was to improve transit so the principality would
become less isolated. With its recent privatisation, however, profitability has become a key
concern.

Mr Moullart, the new CEO of Air Utopia, wants to make his mark on the newly-privatised
company and in particular wants to satisfy shareholders. In terms of financials, Mr Moullart
wants to attain a profitability ratio of around 5% in three years. In his view, achieving this goal
will require growth in order for the company to reach a critical size. Given Air Utopia's
historical positioning as the only national carrier, Mr Moullart wants to maintain the company
as a traditional airline, resisting the current trend to go "low cost". During the last IATA
conference, of which he is a member, he came to understand that the way to achieve growth
and preserve a traditional market positioning would be to create and develop a hub at their main
base, in order to enhance their offering in terms of destinations and connecting flights.

Indeed, Utopia City boasts all the key requisites to become the hub of Air Utopia: the city is
located in the heart of Europe, the construction of a third runway is being planned, and Air
Utopia is regularly consulted about the airport expansion plan. Because of this, Air Utopia is
pushing hard for hub-style infrastructure: seamless boarding (where passengers have direct
access to planes through boarding bridges), easy access to connecting flights, baggage sorting,
maintenance facilities on hand, etc.

Finally, as Mr Moullart wishes to make a clear break with the past situation and demonstrate
his competence as a manager, he would like to implement a cost-cutting plan, particularly for
airport terminal services and in-flight service.

Mr Moullart has called a meeting with his board of directors to present Air Utopia’s business
strategy for 201x. The director of strategy explains the various actions and investments needed
to create the hub as well as all the other projects to restructure the Air Utopia company:

 The acquisition of four new A319 Airbus aircraft to spur the growth of the business
expected with the development of the hub and also to reduce fuel costs.
Authors: Brigitte Dugas, Claire Dambrin, Françoise Giraud, Olivier Saulpic, Philippe Zarlowski 1
Air Utopia case study MIM version
Update: september 2014

 The acquisition of ground support equipment: pushback tugs, container loaders, etc. to
be able to handle several flights at the same time.
 Hiring of airport terminal staff on short-term contracts to deal with larger numbers of
transit passengers passing through the terminal.
 Using temporary workers and external service providers to handle passengers, baggage
and aircraft (turn-around activity: all ground activities related to aircraft between
landing and next take-off) in order to better adjust the company's cost structure to
fluctuations in business activity.
 Hiring of additional air crew members: cabin crew (flight attendants) and cockpit
(pilots, flight engineers) in view of the expected increase in the number of shifts and the
expansion of the fleet.
 Staff training.
 Reprogramming flight routes and times to better position Air Utopia in GDS (Global
Distribution Systems) such as Amadeus. In these computer reservation systems, flights
are shown according to flying time. Operating an airport as a hub aims to reduce waiting
times between two flights. The industry standard for connection times is 45 to 60
minutes. With these programmes, it is obviously essential to ensure the punctuality of
flights.
 "Tags" to measure customer satisfaction throughout their experience with Air Utopia:
at the time of the ticket purchase, at the departure and arrival airports, and during the
flight.
 Introduction of a frequent flyer programme: points earned depending on the price of the
ticket bought, which can later be used (burnt) to pay for a ticket.
 A cost-cutting plan for airport terminal services.
 A cost-cutting plan for in-flight services.

This new business plan is approved by the board of directors with some reservations: Mr
Moullart is not allowed to hire new airport terminal staff. He must use internal resources
instead.

Originally, Mr Moullart had also planned to restructure the sales department and to upgrade its
website (which currently only accounts for 10% of sales) as this sales channel was growing
quickly. In the end, he decided that project was not a priority, because he felt it was difficult to
pursue it at the same time as the creation of the hub. But the board's reservations have caused
him to reconsider his position: in addition to the benefits to be gained in terms of sales, such
restructuring would also be the opportunity to convert sales staff into airport terminal staff. For
this idea to work, he feels that the website would have to become the company's primary selling
channel.

After having a benchmarking study conducted to compare the Air Utopia website with those of
other major airlines, Mr Moullart decides to:

 Reduce over-the-counter ticket sales (city and airport agencies)

 Increase agency booking fees and charge for call centre bookings
 Reduce the booking fee for all direct online sales
 Offer all ticket types through the website (all categories of tickets, unaccompanied child
tickets, open jaw tickets, tickets paid for with frequent flyer points, etc.)
 Allow the online modification and reimbursement of flexible tickets
 Accept different forms of payment: credit cards, bank transfers, direct debit
 Make real-time flight status (arrival and departure times) available online
 Offer travel insurance on the website
 Offer pre-travel services: allow passengers to print their own boarding cards, choose
seats and meals, and pay for additional baggage.
 Make it possible for passengers to book a hotel room or car rental through the website.

Ms Gastout, the newly-appointed manager of the Air Utopia website, wishes to boost website
traffic. She is therefore looking into online search engine optimisation and page link building
methods. She wants sales to be made directly on the company website rather than through those
of online travel agencies.

The board members ask Mr Moullart to meet with them the following year to review the
progress made on reaching the objectives he has presented.

Mr Moullart asks his controller to build a performance management dashboard (no more than
20 indicators otherwise he won't be able to follow them) in order to keep track of progress on
this project and make mid-course corrections if the expected results are not being achieved. In
addition, he wants part of the dashboard to be published internally in order to make staff
accountable for performance.

You are this controller. Begin putting together your proposal by answering the following
questions:

Questions :

1. Who are the company's stakeholders and what are their expectations? How
would you define Air Utopia's corporate goals?
2. What are the various components of Air Utopia’s strategy?
3. Identify the priorities defined by Mr Moullart. Compare these priorities
with the analysis from previous questions. What conclusions can you draw
from this?
4. Build an O/CPV grid at the company-wide level
a. Based on the priorities identified in question 3, define the priority
objectives for the coming year – which will be the objectives used to
build the O/CPV grid.
b. Identify the critical performance variables and build a suitable
O/CPV grid.

Authors: Brigitte Dugas, Claire Dambrin, Françoise Giraud, Olivier Saulpic, Philippe Zarlowski 3
Air Utopia case study MIM version
Update: september 2014

5. Based on the O/CPV grid, choose indicators for the performance

Authors: Brigitte Dugas, Claire Dambrin, Françoise Giraud, Olivier Saulpic, Philippe Zarlowski 4
Air Utopia case study MIM version
Update: september 2014

PART 2

However, six months after the launch of the hub, and in spite of encouraging financial results,
ticket reservations for the coming months are in sharp decline. Mr Moullart does not understand
what is going on with these figures, which are totally unexpected. Indeed, there were no warning
signs of this drop in sales.

During the following month's executive committee meeting, he learns:

 From the sales director, that customer complaints have risen dramatically despite the fact
that the absolute flight punctuality index remains stable at 70%. There must be some
passenger dissatisfaction that does not appear in the dashboard.

 From the HR department, that airport staff are about to explode and a strike is said to be
planned for the start of the holiday season. In reality, the quality of the services furnished
by external service providers has left a lot to be desired: a high rate of staff absenteeism,
work slowdowns, etc.. The shortfalls have had to be made up by Air Utopia staff.

 From the hub director, that the transfer desk staff in charge of handling passenger
connections are overwhelmed by lost passengers who have missed their connecting flight.
The hub director also complains of a lack of training for new airport staff.

 From the finance director, that the cost of last-minute passenger accommodation has
increased sharply despite mild weather (the main driver of the need for passenger
accommodation is usually bad weather, which causes flight delays).

Questions:

1. Some of the indicators listed in appendix 1 might have helped Air Utopia
management to spot these problems. Which ones?

2. Is a performance management dashboard sufficient to monitor Air Utopia's

Authors: Brigitte Dugas, Claire Dambrin, Françoise Giraud, Olivier Saulpic, Philippe Zarlowski 5
Air Utopia case study MIM version
Update: september 2014

Appendix 1
Performance indicators
Load factor1 PKT*/SKO* as %
# of tickets sold point to point figure
Aircraft flight hours figure
2
PKT Passenger kilometres transported in 1000s
Connecting passengers as %
Online market share in terms of sales and tickets as %
Online market share Air Utopia and travel agencies as %
Look-to-book ratio Number of sales per 100 visits
Quality of service indicators
Absolute punctuality within 2 minutes of schedule as %
Corrected punctuality within 15 minutes of schedule as %
Successful connections baggage and PAX* as %
Lost baggage as %0
3
Average transit time by aircraft type in minutes
Passengers disembarked figure
Passengers downgraded figure
# of hot meals served
# of passenger complaint letters figure
# of support calls per ticket sold figure
AOG (aircraft on ground) (aircraft grounded for technical reasons) as %
Sales
Average fare (tickets sold) Sales/#of tickets sold in €
Income/ PKT Sales/PKT in cents
Additional online sales car rental, hotels, insurance In K€
Frequent flyer points burnt
Frequent flyer points earned
Bookings for next month4 In € or nb of tickets
High contribution share5 €/PKT
as % of baggage
Online share of additional baggage6 weight or sales in €
Costs
Cost/ SKO (seat kilometre offered) in cents
Brent barrel price7 in USD
Amount of fuel hedging8 in millions USD
Cost of a ticket sold online9 in €
Cost of a ticket sold by call centre 10
in €
Cost of website affiliation per ticket sold online11 in cents
Cost of ground handling (by aircraft type) In K€

1 This indicator keeps track of both actual and forecast sales. For example, on a one month horizon it shows sales already recorded for that time horizon. PKT :
Passenger kilometres transported / SKO= number of seats offered multiplied by the number of orthodromic kilometres covered. The load factor helps comparing
airlines whatever the distance and the type of plane (number of seats).
2 PKT : Passenger kilometres transported = number of passengers transported multiplied by the number of kilometres covered (1PKT = 1 passenger transported
on 1 kilometre). Distance is most often orthodromic, "as the crow flies".
3
Average transit time of an aircraft at a stop between a landing and a take-off: disembarkation (passengers, baggage, freight, crew), cleaning, refueling,
catering, and boarding (passengers, …). In case of a late landing, this allows reprogramming the next flight: from 30 minutes for a A319 to 150 minutes for a
A380.
4
Number of tickets already sold for a travel one month later.
5
High contribution corresponds to the tickets sold in an upper-class (first class and business class). This indicator is round 20%
6
Online sales for additional baggage divided by sales recorded at stop, which are more expensive. Which explains the calculation both in weight and euros.
7
World reference price for crude oil.
8
Fuel hedging is a contractual tool some large fuel consuming companies, such as airlines, use to reduce their exposure to volatile and potentially rising fuel
costs. A fuel hedge contract allows a large fuel consuming company to establish a fixed or capped cost, via a commodity swap or option.
9
Total website costs (development, WEB agency, search engine and GDS) divided by the number of reservation files
10
Total costs linked to sales by call centre (labour costs, office, IT...) divided by the number of reservation files sold by call centre
11
Total affiliation costs (traffic oriented toward Air Utopia website) divided by the number of reservation files sold by affiliation programs
Authors: Brigitte Dugas, Claire Dambrin, Françoise Giraud, Olivier Saulpic, Philippe Zarlowski 6
Air Utopia case study MIM version
Update: september 2014

Staff
Full time equivalent staff Figure
Number of Air Utopia staff Figure
Number of unworked days (disease,
maternity,extraordinary absence)/ nb of
Rate of Air Utopia staff absenteeism working days planned as %
Number of strike days By category and by service
Work-related accidents by seriousness
Training days per FTE staff As %
Aircraft flight hours per crew member (pilots/ flight attendants, etc.)12 Figure
Financials
Net profit margin net income / sales as %
Debt LT debt In K€
Most profitable route Sales – Direct costs In K€
Most profitable connecting flight Sales – Direct costs In K€
Amount of compensation paid to passengers justified complaint
# of frequent flyers points awarded to passengers justified complaint

* PAX: number of passengers PKT: passenger kilometres transported SKO: seat kilometres offered

12
Per category (pilots, flight attendants, etc.). These flight hours start at boarding time for flight attendants and when engines are started for the pilot
Authors: Brigitte Dugas, Claire Dambrin, Françoise Giraud, Olivier Saulpic, Philippe Zarlowski 7