Estonian Air. Estonian Air. Business-Level Strategic Analysis: October 15, Take 2 Consulting Group

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1 Estonian Air Business-Level Strategic Analysis: Estonian Air October 15, 2012 Take 2 Consulting Group

2 Agenda Problem Statement Summary of Analysis Presentation of Alternatives Recommended Action Plan Implementation Strategy Risks and Contingencies

3 Statement of Intent Develop a detailed strategic plan for Estonian Air moving forward to address rising demand while taking into consideration the inherent risks of expansion and economic uncertainty.

4 Five Forces Analysis Industry: Key Substitutes: European Aircraft Carriers Trains, Ships Threat of Substitution: High Customers may be willing to substitute flying for alternative means of transport. There is sometimes a price advantage, but a longer time constraint.

5 Five Forces Analysis Threat of New Entrants: High Economies of scale: Min Size = 1 Saab; 30 seats Differentiation: No brand loyalty; commodity Switching Costs: No switching costs Distribution Access: Easy access to distribution Capital Requirements: 24 million EEK for used Saab Cost Advantages: Access to geographic sites Government Policy: Regulatory hurdles exist Expected Retaliation: Specialization, demand growth

6 Five Forces Analysis Industry: European Aircraft Carriers Key Suppliers: Mfgrs, Airports, Fuel Bargaining Power of Suppliers: High Plane Manufacturers: Concentrated suppliers, no substitutes, differentiated, high switching costs Airports: No substitutes, limited differentiation [location & scale], moderate switching costs Fuel Distributers: Commoditized, no substitutes, focal industry of importance to supplier, suppliers vital to industry, no differentiation, switching costs, or fwd integration

7 Five Forces Analysis Industry: European Aircraft Carriers Key Buyers: Consumer, Charters, Freight Bargaining Power of Buyers: High Low concentration of buyers, purchases account for huge fraction of buyers costs, minimal differentiation, no switching costs, consumers are price sensitive, buyers have full information on costs

8 Five Forces Analysis Industry: European Aircraft Carriers Key Competitors: AirBaltic, Easyjet, AeroAir Rivalry Among Competitors: Medium Numerous competitors unequally balanced, growth industry, high fixed costs, low switching costs and differentiation, capacity added in low increments, sometimes different rules to the game, firms aren t very diversified (low stakes), high exit barriers

9 Five Forces Analysis Industry Competitiveness Conclusions: The industry is cutthroat. If Estonia is going to continue to compete, they must do so on the basis of a Low-Cost Carrier.

10 SWOT Analysis Strengths [Internal]: Partially government owned Well established [Hub at largest airport in Estonia] Enviable on-time record [99.1% of flights on time in 2006] Experienced 11% increase in ASK in 1 year

11 SWOT Analysis Weaknesses [Internal]: Experienced net loss in % increase in other operating expenses in 2006 No contingency plan for technical problems [Forced to rely on temporary & high cost capacity leased from other carriers] Only 325 operating days per year typical per plane

12 SWOT Analysis Opportunities [External]: Demand expected to increase 10-14% 1,500 new regional aircraft needed by 2016 Estonian economy growing rapidly Estonia entered EU & NATO [Eligible for billions in cohesion funds ] Estonia increasing seen as tourist destination

13 SWOT Analysis Threats [External]: Fuel costs up 32% in 3 years [26% of operating costs] LCCs like Ryanair are picking up market share Maastricht & Single European Act boost LCCs European economic integration provided opportunities for start-up LCCs and Legacy carriers Country s development is heavily dependent on European investments

14 SWOT Analysis SWOT Conclusions: There is growing demand and increased opportunity within the regional market, but it is heavily hedged by rising fuel costs and dependence on European markets

15 Financial Analysis

16 Financial Analysis

17 Presentation of Alternatives 1 Work to cut current costs by reconfiguring fleet while aggressively expanding 2 Expand conservatively by adding aircrafts only on an as needed basis. 3 Position the company for a merger with an LCC to gain cost competitiveness & territory expansion

18 Comparison of Alternatives

19 Comparison of Alternatives 11,338

20 Pro Forma for Alternatives

21 Recommendation 1 Work to cut current costs by reconfiguring Estonian Air s fleet toward a single model [Q400] while aggressively expanding

22 Implementation Strategy Reconfiguration & Procurement of Fleets Replace fleet with Q400s Leasing: more cost-effective

23 Implementation Short-Term 0-6 Months: Immediately begin searching for Q400 s to lease Begin negotiating an end to current 737 leases Begin planning restructuring flights to maintain continuity of service as fleet is reconfigured Begin training crucial employees for new aircraft Add additional employees in maintenance roles to increase quality and reduce problems

24 Implementation Short-Term 6-12 Months: Replace 737 s one at a time as opportunities to lease Q400 s arise Implement restructured flight scheduling as changes are made to avoid lapse in service Begin hiring additional employees/reassigning current employees to accommodate changes

25 Implementation Long-Term 1-2 Years: Switch fleet over to 5 Q400 s in 1 year As demand increases, meet additional capacity requirements through leasing more Q400 s Purchase leased aircrafts gradually as finances allow Expand routes into locations currently being considered 2-5 Years: Consider further expansion of routes additional capacity

26 Contingency Plan Decline in EEK value Continued issues with maintenance Demand forecast was overstated Purchase currency derivatives Shields airline from volatility with regards to currency Hire dedicated maintenance and service division to reduce downtime Strive to exceed quality expectations through TQM processes Switch fleet to Q400 s to reduce interest payments & fuel usage Hedges against reduced demand and increased fuel prices

27 Concluding Remarks Thank you for your time. Any Questions?

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