Strategic subjects include:
- The anticipated route or routes – this determines the range the aircraft must fly;
- The anticipated market opportunity which defines the expected passenger numbers and or cargo to be carried;
- Having established the aircraft type and numbers required to meet the business plan an essential element of the business model is the decision to buy or lease. More on this later;
- The service level drives the ticket pricing – is the product going to be premium service or low-cost carrier as these decisions impact both revenue and cost modelling. More on this later;
- There is a plethora of services to be considered these can be in house services using employees and owned equipment or third-party services. For our model we will decide that initially all services will be provided by third parties. Over time costs can be reduced by transitioning services in house;
- Is the ticketing selling system to be fixed price or algorithm based so that as the tickets are sold the seat costs increase. More on this later;
- What is the Carbon Emission strategy – is the airline to be carbon neutral from the outset or some percentage of carbon neutral. This policy will impact costs;
One and two above are vital as this determines the types of aircraft that can fly the business opportunity. Getting the type of aircraft right is vital to business success. If the aircraft is too small, it will not be able to generate the anticipated revenue. If the aircraft is too big then costs are higher than the revenue from the market can cover. For the purposes of our model the ideal aircraft is either an Airbus A321 or a Boeing B737 800.
With strategic decisions made it is possible to develop a financial model and I would recommend some aspects are kept in mind:
- Where possible cost model alternatives – especially with respect to the cost of “green credentials”.
- Where data is not factual and must be assumed identify the difference and keep a note of the basis of the assumptions and the degree of confidence.
- Where there are big options which cannot be reversed such as A321 or B737 develop models within models to assist with decision making.This allows the main model to become specific as opposed to generic.
Finally, there are strategic decisions regarding both operating and business continuity risks. In essence these risks can be mitigated through insurance and operational diversity. The decisions made will impact the costs associated with mitigating the risks.
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