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Financial ManagementAir Berlin Case

Executive summary

Airline industry has been faced with stiff competition due to the increased number of airline companies in the sector. The study will focus on the strategies that are deployed by Ryanair Airline Company, Air Berlin Company and Easy jet plc in ensuring that it meets with the competitiveness in the economy. The strategies for Ryanair Airline include; Low fare, Best Customer service, Short-haul route and destination, Reduction of operating costs, Internet services in its reservation system and Quality management. In the case of Air Berlin airline its strategies comprises of high service standards, blanket coverage, market positioning and segmentation, ticket booking, low price considerations, flight connections and safety of the passengers and staff and the overall efficiency in its operations. Easy jet plc articulates to its long term strategies which are customer service and safety, fare structure is simplified; unit costs are minimized, strong branding, articulation of multi-base network and strong corporate culture in the organization.

Air Berlin company need for IPO is highlighted and the reasons for its decision to go public. Calculation of the NPV for the company is provided which necessitates in the determination of the share value of its initial public offer.

Ryanair airline strategies

Ryanair airline wants to resolutely establish itself as the leading airline industry in Europe. The company is facing stiff competition from its rival companies and aims at achieving global advantage over its competitors. The strategies deployed by the company in the realization of its strategic objective include low fares which are aimed at stimulating consumer demand. This is in particular form the consumers who are fare-conscious and the business travelers who they would otherwise use other forms of transportation. The company imposes sales of seats on a basis of one-way travel thus ensuring that lateness and delays due to the stipulated minimum stay that is required by the passengers is eliminated. This effectively increases the company’s operations and in the long run increases its profitability.

In addition, best customer service deliverance is another strategy that the company deploys in the economy. The reports produced by the Association of European Airlines suggests that Ryanair has achieved the highest punctuality as compared to any other airline, fewer passenger bags have been reported to have lost and there have been mitigation of the air tickets cancellation. The company achieves this by focusing its services on consumer satisfaction and making it easy for the staff to satisfactorily attend to the consumers.

Frequent short-haul routes have been seen to be a common strategy that the company administer in an attempt to meet the competitive nature of the airline industry. The company provides readily available services and transportation to its clients with major focus on the point-to-point flights as they consider majority of the passengers travel on a short distance basis.

Management believes that for the company to be effective in the current competitive economy and to realize its overall strategic goals and objectives, the company should focus on the reduction of operating costs. Currently, Ryanair Company aims at reducing its operating costs by ensuring that its primary costs are curtailed. That is the equipment costs associated with the aircraft, personnel productivity costs, costs associated with customer service and the fees for accessing the airport.

Consequently the company aims at taking the advantage if technological advancement and incorporating the use of internet to its reservation system, ensuring quality management, safety realization, enhancing operating results, and growth plan that targets specific markets.

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Air Berlin Strategies

Air Berlin is considered among the leading airline companies in Germany. It is a low cost carrier and the uniqueness of its hybrid business mode l enhances it to be competitive in the value market. In an attempt to achieve high performances in the competitive economy, the airline industry specializes on the vocational and unrivalled price consideration. Among its long-term strategies that enhance its competitiveness include; high service standards, blanket coverage, market positioning and segmentation, ticket booking, low price considerations, flight connections and safety of the passengers and staff and the overall efficiency in its operations.

High service standards are achieved by the company when it fosters on the how the cabin crew treats its passengers, no charges levied to checking of luggage beyond the specified limits and the disabled passengers are given special treatment. This attracts more customers hence increasing the revenue outlay for the company. In addition, the blanket coverage is met by emphasizing on the airline’s direct departures from the stated regional airports in regard to hub-and-spoke system that is articulated by major airline companies.

Markets are positioned and segmented in such a way that the main customer segments are effectively attained. This customer segments include; holiday travelers, shoppers and corporate clients on business function. In the case of ticket booking, the company reserves two-thirds of the ticket sales to those taking single seats and the rest to tour organizers and tour operators. This is aimed to increase the efficiency of ticket sales and increase sales revenues.

Easy jet plc strategies

The company is listed in the London stock market. The company and the management group do not necessarily have to follow a fixed universal code that deals with the payments made to the suppliers but articulates to the terms of payments that is imminent to any business entity. In addition, the payment is made according to the underlying legal obligations and the contractual obligation that the company faces. The company’s business model and strategies are based on vital strengths that enhance scalability, sustainability of growth and its competitiveness. They include; customer service and safety, fare structure is simplified; unit costs are minimized, strong branding, articulation of multi-base network and strong corporate culture in the organization.

In regard to customer service and safety, the cabin crew ensures that the passengers are well catered for and that they are given maximum attention in order to make the satisfied with the company’s service. Articulation to passenger’s safety and services has seen the company increase its customer base over the last decade. As a result, the company has reported high revenue outlay enhancing its profitability.

The fare structure for the company is not complicated and there are no additional costs once the passenger has paid the fare stipulated by the board. Fluctuation of airline fare has seen most customers shun from using a given airstrip. In order to enhance large customer base, the simplified fare structure has been adopted by the company. Generally, the use of a well-outlined fare structure ensures that the customers are able to plan their budgetary activities in advance rather than being given inflated prices at the time of travel.

Minimization of unit costs has ensured that the revenue outlay is maximized. This is done by minimizing irrelevant expenses like compensating passengers due to lost luggage, delays among others. Focusing on a given market segment in the economy has also enhanced the company to minimize costs associated with the advertisement of its services. In addition, easy jet plc is considered to be strong brand and its competitors have been outshone by the activities that the company’s management is undertaking in ensuring that the airline offers excellent services to its customers.

In summary the strategies of the Easy jet plc, Air Berlin and the Ryanair airline can be given as;

Easy jet plc

Air Berlin

Ryanair airline

  • Low fare
  • Best Customer service
  • Short-haul route and destination
  • Reduction of operating costs
  • Internet services in its reservation system
  • Quality management
  • High service standards
  • Blanket coverage
  • market positioning and segmentation
  • Efficient ticket booking services
  • Low price considerations
  • Flight connections and safety of the passengers and staff
  • Efficiency
  • Minimization of operating costs
  • Customer service and safety
  • Simplification of fare structure
  • Minimization of Unit costs
  • Strong branding
  • Articulation to multi-base network
  • Strong corporate culture

Financial comparisons

As the three airlines focuses on the reduction of the operating costs as their main strategy behind their competitiveness in the economy, the operational financial comparison are highlighted for the three companies’ in an attempt to realize each of the company’s profitability. Easy jet plc profitability is seen to have increased from the previous financial period and in the case where the trend continues that way, in future the company will report high profit outlay. This has been facilitated by the increased number of employees due to the increased number of passengers requiring the company’s service. In regard to its operating margin, there is been a decline since 2005 to the financial period 2007. The company’s ability to conform to the technological advancements in the economy has seen its market capitalizations increase.

Easy jet plc strategy of reduction of operating costs has seen its gross profit skyrocket. Despite this, the operating costs were not effectively reduced as the operations for the company increased. It is clear that the operating costs, as compared to other financial periods, declined.

The increase in revenue outlay has also been perceived to be due to the quality management that the company articulates to. In the case of production of quality services, the consumer’s attention shifts towards the company’s services thus increasing the customer’s base in the economy. In addition to quality service provision, the low fare strategy has enhanced the company to serve low income earners. As the majority of individuals in the economy are low income earners, the company’s strategy aims at increasing its revenue outlay in the long run.

In the case of Ryanair airline, the financial statement shows an increase in the total revenue over the three financial periods. This was attributed to the management’s strategies of minimization of unit cost. In the case of price reduction or reduction of the fare charged to its passengers, the unit cost of production needs to be minimized effectively in an attempt to realize high turnover. This was also denoted by the increase in Sales to assets ratio from 0.87, 0.95 to 1.02 in the year 2005, 2006 and 2007 respectively. The sales turnover for the company was higher than is assets implying that there was efficient utilization of assets in the revenue realization.

The efficient customer service strategy deployed by the company ensured that its financial position as compared to other rival companies in the industry was stable. Customers will always prefer the airline that caters for their needs and they are well satisfied from the services they get from the industry. In addition, the increase in the revenue outlay was also facilitated by the company’s initial strategy of simplified fare structure. Most of the customers may not be willing to be “surprised” with the adversity of the price considerations in which they can part with. The simplicity of the structure ensures that the customers have a clear understanding of the amount of money they are going to pay.

Air Berlin, like the two other airline companies, reported an increase in its revenue outlay over the entire periods of analysis. Its sales to assets ratio incased but it was not at the same magnitude as that of Ryanair and Easy jet plc airline industries. The current price to earnings ratio was higher than those of the other two companies. An increase in the revenue outlay and the eventual profitability for the company is attributed to the management’s overall strategies. In essence, its low price consideration strategy enhances the company to have wide consumer base unlike where the prices are taken to be high. It is clear that most often customers rely entirely on price consideration in order to make their decision.

In addition, the customer’s safety is of imperative importance and it is in this regard that the management articulates in order to attract customers to the industry. The increase in revenue will only be realized when the company assures its customers of their safety. High service standards ensure that the customers are well satisfied with the services that the cabin crew offers to its passengers. The company has been reported to be amongst the companies which perform effectively in regard to the safety of the customers. Consequently, the market target and positioning has unveiled the need for the company to increase its operations to remote areas where it can effectively increase its operations.

Discount

Air Berlin IPO

Air Berlin IPO aims at ensuring the company’s capital base is increased. The IPO is to be made in the Frankfurt Stock Exchange which is owned by the Deutsche-Boerse. The purpose of the Initial Public offer is to raise the gross proceeds of approximately 350 million pounds and after underwriting charges of 290 million pounds. The company has been undertaking its operations through debt-financing and IPO will offset the company’s debts. As such the company has stipulated that overreliance on debt-financing will hinder its expansion strategy and aims at relying on equity-financing for its operations.

The funds realized from the public offer were aimed at meeting the company’s needs in enhancing its expansion. 50% of the funds were approximated to purchase new airbus that will enhance its operations up to 2011, 10% of the amount was aimed at offsetting the company’s indebtness which is approximated to be 345.4 million pounds while the remaining amount was aimed at funding organic growth which included launching of new routes and eventual offsetting of corporate expenses. The company had no incorporated any takeover plans for its airlines but aimed at acquiring them through prospectus in the near future.

In my opinion, I think that the company should not go public. The company is highly leveraged unlike its rival companies Ryanair and Easy jet. The company can increase its capital outlay through ancillary services like hotel bookings or car hiring. It is forecasted that the Company’s earnings before interest, tax, depreciation, amortization and rent is going to skyrocket from 153 million Euros in the year 2005 to 250 million Euros in the current financial period. The company needs to increase its operations rather than issuing an IPO which will affect its strategies and objectives in the long run.

NPV of Air Berlin

The rate of return for the investment will be taken as; 6.5%. This is because the company has been relying on debt-financing to finance its operations. The initial cash outflow for the company during that period of operation will be taken to be 250 million pounds. Therefore NPV calculation will be;

Period

Cash flow (million Euros)

(1 + r)-n

PV

2003

(250)

1

(250)

2004

136

0.9390

127.7

2005

(37)

0.8817

(32.6)

2006

(28)

0.8279

(23.2)

2007

(118)

0.7775

(91.7)

2008

52

0.7299

38

NPV

(231.8)

Generally, the Net Present Value for the company is negative implying that the operations for the company due not necessarily convey an increase in its profitability.

Taking the value for the end of 2004 to be 127.7 million Euros, the company’s value of shares will be approximated as follows;

Total number of shares expected = 20000000 shares (minimum)

Total earnings = 127700000 Euros

The share price will be;

= (Total earnings / total number of shares)

= 127700000 / 20000000

= 6.4 Euros per share

Conclusion

Air Berlin Company IPO is not efficient currently and needs to undertake the various strategies and operations in order to increase its capital base. The company initial public offer will not necessitate the increase in its equity base but will subject it to dire consequences like changing of its strategies. Generally, the company’s current debt-financing will only be reduced by increasing its operations so as to increase the revenue outlay that will enhance the offsetting of the company’s debts.