Launching a New International Airline
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Warren Buffet said that investors would have been better off if the Wright brothers had not invented the airplane in 1903. Investors have lost billions of dollars in international airlines that have gone bankrupt over the years (TWA, Pan Am, Braniff to name a few). Discuss why you think that many international airlines, both long-time market participants and start-ups gave gone bankrupt. Discuss how deregulation, labor issues and the increase in demand elasticity due to the internet led to the bankruptcy of almost all of the so-called "legacy airlines" that were founded prior to 1980. Discuss the barriers to entry a new international airline would face. Then, assume you are given the task of creating a new international airline. Using the economic concepts discussed in this course, create a business plan for your new international airline.
Be sure to include:
An executive summary of the business plan
Pro-forma financials
The issue of high fixed costs
How you plan to deal with U.S. and Foreign airline regulation
How you expect to raise capital
How you will address currency risk
What pricing strategies you will employ
Estimates of the elasticity of demand for your service
What type of employee compensation policies you will pursue
What it would take for you to personally fly on a start-up international airline
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Solution Summary
This posting discusses the plan for launching a new international airline
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An executive summary of the business plan:
The new international airline will have three fixed costs which are the cost of aircraft, the cost of terminals, and the salaries paid to employees. The airlines will comply with regulations of both the United States and those of the country to which the aircraft is flying. Initially, the capital will be raised through a debenture issue, and after the operations of the airline are profitable, capital will be raised through an equity IPO. The currency risk will be hedged by using forward contracts. The pricing strategy will be the lowest fare for economy class and premium pricing for the business class. The elasticity of demand in the economy class segment is elastic but the demand in the business class is inelastic. Employee compensation will match the best in the industry.
Pro-forma financials: Please see the attachment
The issue of high fixed costs:
The issue of high fixed costs has three main components. The first is the cost of hiring/buying aircraft, the second is the cost of terminals either hired or bought at airports, and the third is the high cost of paying salaries to employees (a). My strategy will be to leverage each of these three costs to provide a competitive advantage to my airlines. I will only purchase Boeing 737-800 which is a narrow-body aircraft, the terminals ...
Education
- MBA, Indian Institute of Social Welfare and Business Management
- BSc, University of Calcutta
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