Aviation has an overall economic impact far in excess of the turnover, since the network of air transport services facilitates growth in output and employment, international trade and investment, tourism, and living standards. Air travel is a vital artery that reinforces the process of globalization, allowing it to transform the way in which many other industries carry out their business.
‘Fly Together' is a new airline, which will meet the demand of the higher quality passengers by operating internationally. Since demand is relative to the economic importance of business location, the airline will operate in three different markets, which are England, Germany and Switzerland. The company has chosen the city of London as a base. London. In order to enhance the sales, contact with local travel agencies will done by the company, as they have better understanding of the customer's requirements.
Company will obtain Air Operator's Certificate (AOC), from ‘Civil Aviation Authority, Operating Licenses, UK, Safety Regulation Group'. Then company need to acquire Operating Licenses - Type-A (20 or more than 20 seats). This license enables the carrier to fly on most routes with in EEA without further licensing.
The final stage includes Capital Structure with ownership specification, registration of the company and obtaining all the required certificates. All this procedure will complete after final meeting between bankers, advisors, tax consultants, auditors and perspective investors. Company ownership will be in the hands of investors. This will increase the capital and avoid large-scale debts.
1.1 Company's Motto:
‘Customer satisfaction and convenience is our priority'.
Mission of the company is to provide high quality service to the customers and to achieve 100% level of ‘exceptionally good' airline.
- Maintain minimum 10% of Net Profit in the second year of operation and increase the percentage every year by minimum of 2%
- To be perceived as ‘exceptionally good' airlines within the period of three years.
- Business should be customer oriented.
- Provide convenient payment mode (cash, credit card, debit card or cheque) to the customers of the airline.
- Try to establish own database of customers and providing them beneficial membership. Utilise these database for focused advertising and further promotional offerings.
2. Explanation of the operations of the new venture:
This section will elaborate main function areas of ‘Fly Together' Airline:
Leasing or purchasing of two jet aircraft followed by two more aircrafts by the end of first operating year. ‘BAe 146' and ‘Avro RJ 85' aircrafts are under consideration at first stage for purchasing or leasing. ‘BAe 146' is under consideration because of quick conversion facility (passenger- cargo conversion). British Aerospace manufactures ‘BAe 146' (BAe 146, Product Services, 2009). ‘Avro RJ 85' is the upgraded development of BAe 146 (Avro RJ 85, Product Services, 2009).
2.1.2 Technological Features
- Internet marketing and Online Reservation will give quick and easy access to airline flights and eliminate commissions, which will provide e-tickets at cheaper rates to the customers. It may save the cost of paper ticketing.
- Electronic Check-In will eliminate the waiting times in queue for check-in and reduce the last minute problems. It will also reduce the staffing cost.
- Electronic Baggage Tracking will give the facility to track the baggage of the customer from the point of check-in to the point of luggage claims at the destinations.
- Electronic Cargo Tracking will also facilitate to track the cargo from the point of handing over to the point of receiving at various destinations.
- Electronic Financial Control will give the benefit of clear picture of financial position of the company. Using the latest technology as SAP and SAGE (Business Software and Application Solutions) will improve the transactions quality.
The company will fulfil its financing requirements through share financing and short-term borrowings to make it sure that there is sufficient cash reserves to cover the financing and operating expenses. Following table, outline the start up cost (Figures assumed)
2.3 Organisational Structure
2.3.1 Levels of Organisation on ground
- The President and chief Executive Officer report to the Shareholders.
- The Vice president and Chief Financial officer will look after all the financial activities of the company.
- The Directors will take care of other commercial side of the business like marketing, collaborations, operations and human resource.
- The Managers of the particular department like sales and marketing, administration, finance and human resource will manage the operation of the company.
- The company will recruit the professional, engineers, field specialist and experts to give advice to propel the company in the right direction.
2.3.2 Level of Organisation on Air
- The Pilots will have the authority and responsibility to take decisions under emergency conditions.
- There will be First Officers to supervise the crewmembers and support pilots.
- The crewmembers take care of the customers.
2.4 Company Location
Location decision to base the new airline depends upon following considerations:
- The accessibility of parking and landing facilities of the airports;
- The availability of technical support at the airports of the destinations and origins;
- Tax considerations and other government rules and regulation related to ongoing operations of the aircrafts;
- Availability of skill worker at low cost;
- Growth potential of market and environment (Political, economic and social);
- Possibility to interconnect with one or more major airlines in future
2.5 SWOT Analysis
- New airline will hold high tech equipment, which will facilitate the customers in relation to speed and time.
- Low cost facilities will attract more customers.
- Promotional offers will help to make the customer database.
- Financial resources are appropriate to meet the financial obligation as and when they arise.
- Airline industry is in its mature stage that can affect the profitability.
- There is a huge investment requirement for the project.
- Many certificates have to obtain before actually starting the business.
- To meet the unmet demand of the routes competitors do not frequently cover those.
- To obtain finances from Export Credit Guarantee Department of Germany
- Technological changes are the big threat to the business.
- Established airlines those can reduce the fares to increase their market share.
- There is no restriction on entry in this business so more competitors.
2.6 Strategy to check the performance of the company
The business officials, for the following areas, will monitor the performance of the business:
- Monthly and annual sales
- Customer satisfaction
- Continuality of business
- Monthly and annual net profits
The close monitoring of these factors will facilitate business to achieve continuous growth by providing high-quality services. The customer's satisfaction and remarks can help in great deal to improve the administrative services. Monitoring profits will help business to maintain the level of earnings.
2.7 Personnel Plan
Personnel plan reflects the use of technology more than the staff. All the functional staff will take support from the professionals. The staff in marketing and sales will focus on the customer requirements, market research and promotion of the airline services. All the directors will provide the back up support to the managers in their respective areas.
3. Financial statements
Evaluation of financial performance of the planned business is very important to be done because it gives an idea of how profitable will be this business. This section provides the financial statements (Profit and Loss Account, Cash Flow Statement, Balance sheet and Ratio Analysis) to evaluate the performance of the planned business in terms of investment and return. Assumptions have made on the core revenue and expenses but the revenues are likely to be higher than the assumed revenues.
3.1 Basis of preparation
The company will prepare the consolidated financial statements, complying with International Financial Reporting Standards. All the statements will be prepared under historical cost convention except for those measured at fair value.
3.2 Operating Assumptions
Operating Assumptions (Table 4) has made to decide about leasing the aircrafts or to purchase the aircrafts using the Export Credit Guarantee.
3.3 Consolidated Income Statement
Table 3 give an idea about the Profit and Loss pattern of the airline for the period of three years. It shows a great balance between revenues and expenditure. The gross profit margin and net profits confirm the concrete growth prospective of the airline. Profit and loss account is very significant as it presents the true picture of the trading activities during the year. The chart below presents the entire depiction about the total sales.
Chart1 show the projected Total Sales Volume distributed into different sections of Profit and Loss account for the period of three years.
It is easy to understand that profitability is increasing each year leaving a substantial amount for stakeholders and retained earnings.
Table5: Projected Consolidated Profit and Loss account of ‘Fly Together'
(All the figures are assumed but strictly considered the actual environment)
3.4 Consolidated Cash Flow Statement
Projected consolidated Cash Flow statement of ‘Fly Together' airline:
Projected cash flow statement has made to know the cash inflows and cash outflows during a particular period. A net profit denotes the profits that the company will earn but they do not confirm how much cash will go out and comes into the business. Sometimes, it happens that the business is showing net profit but actually, the cash flow statement shows the negative balance. This implies that actually business is short of cash to pay day-to-day obligations. James Stancill comments, “Any company, no matter big or small, moves on cash not profits. You cannot pay bills with profits, only cash. You can't pay employees with profits, only cash.” (James Stancill, 1987) The main characteristic of business venture is to generate cash not the profits.
3.5. Consolidated Balance Sheet
Projected Consolidated Balance Sheet used to state the financial position of the company foe a given period. It includes assets and liabilities, which illustrate the worth of the company at particular time. Balance sheet is very important for the calculation of ratios. Balance sheet of company presents a healthy position of the finances as the net worth of the company is increasing every year. The management team of the company believes in retaining the profits for number of years in the initial stage to secure the future growth aspect of the company.
3.6 Financial Ratios
Financial ratios are the indicators of the financial performance of the company for the setting up of goals and targets for the future. Ratios are the easiest way to assess the strengths and weaknesses of the company. Financial ratios of the company have calculated to analyse the monetary fitness of the company using projected financial statements of the company. Ratios have calculated for the period of three years to give a better view of comparison.
The sales growth proves the practicability of the project. The current ratio clearly indicates the capacity of the company to pay off its liabilities as and when they arise. Net profit margin is also increasing every year, almost double in three years. Interest coverage ratio indicates that the company has the capacity to increase the debt financing, if required in the future. Currently, Interest coverage ratio is very high which is good for the company. The gearing ratio has not calculated because at present company is not using debt financing because of expected Export Credit Guarantee.
4. Incorporating Foreign Exchange Risk
The company will enter into derivatives transactions in order to maintain risk. The board will decide the guidelines for derivatives transactions. The company is not only exposing to foreign exchange risk but it is exposing to other market risks as well such as fuel price risk. The company is not exposing to Capital risk in the near future, as debt financing has not used as a source of funds. Liquidity risk does not seem to effect, as the current ratio is very high as compared to thumb rule i.e. 3.83 in 2010, 5.23 in 2011 and 6.83 in 2012.
As the company will operate in three different International Financial markets, it will expose to Foreign Exchange risk between Sterling Pound, Euro and Swiss Franc. This is a conservative company dealing mainly with equity capital instead of debt so it is less likely to effect. In future, the company will closely monitor the exchange rates and their impact on the revenues, to make sure that exchange differences least bother the financial position of the company. ‘Fly Together' will be in net surplus position for other currencies. Approximate inflows of 60% in Euro and 70% of Swiss Franc will hedge. Company will use either forward foreign exchange contracts or buying currency options. In forward foreign exchange contracts, company will make buying or selling decision about the currency at a fix rate on or before the fix date, keeping in mind the fluctuations of the currency. In buying currency options, company will get the right to sell the currency at specific exchange rate on or before specific date. Board will take all the related decisions keeping in mind the current scenario of the risk and hold the right to change the way to hedge the risk.
The company is also exposing to Interest Rate risk on cash surplus, operating lease rentals (if company decide to lease the aircrafts) and long-term debt obligations (if company use debt financing in coming future). Company planned for even-handed portfolio approach to acquire maximum benefit out of market movements.
The company is expecting to effect by Fuel Price risk as a part of airline industry. To minimize the effect of fuel price risk, it is very important to keep an eye on the actual and forecasted fuel price. Company will take advantage of number of derivatives available on Over the Counter Market, but within the limits.
‘Fly Together' is a big project, which requires a lot of consideration to make before the commencing of the business. This is a flexible plan regarding aircrafts and other requirements. SWOT Analysis of the airlines clearly indicates that, in this cutthroat competitive world only those companies can survive who keep a strict eye on demanding forces, customers and competitors, political and technological changes. The company should try to grab the opportunities to expand the customer base. In the projected plan of new airlines, there seem growth opportunities. The financial ratios of the company clearly indicate that the company is having strong financial position. They will not face the problem of liquidity because of surplus cash. However, company has to take care of foreign exchange risk because of operating activities in different countries. The policy of company to hedge the foreign exchange risk sounds very appropriate. The business plan has developed by keeping in mind the survival and performance of the company.