Case Study
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Introduction
Mid-Continent Airlines is well known in the Great Lakes Region. Mid-Continent, along with other commuter airlines provides airline services to small and medium sized cities. Mid-Continent has had repeated history of profitability ranging from small profits to small losses. Mid-Continents current financial standing is not good. All of their current aircraft fleet was purchased used. Their oldest aircraft is becoming very costly to maintain. They cannot acquire traditional bank financing because of their inadequate earnings. Mid-Continent was offered a loan, but they would have to give up 30% of ownership in common stock. If they choose not to take the loan, the only other option is to sell the company.
Choosing to take the loan means they will have to readjust their current strategy. They have 3 options:
They may choose to stay totally independent of the larger airlines, and issue separate tickets.
They may have “interline” agreements with larger airlines for connecting routes to other cities not served by Mid-Continent.
They may actually use the designator or symbol of the larger airlines, paint their plane to the logo and colors, and establish a formal arrangement to feed the major carriers route.
There has been little flexibility within the company. Mid-Continent has reached a point if they do not change their strategy they will not be able to compete with their competitors. Mid-Continent needs to change their financial conditions, as well as the way they approach business.
SWOT Analysis
Strengths
Ground Operation: Mid-Continent uses contract services, as well as their own stations for station operation. The demand from a location determines whether or not Mid-Continent will choose to opens its own counter, or contract the service out. Running an autonomous station gives the company a competitive edge by allowing the company to better control passenger and flight operations. The downside to contracting out serviced is you lose some control in these areas, because the employees are not employed by Mid-Continent, therefore are not under the jurisdiction of Mid-Continent.
Brand Recognition: Mid-Continent is known to thousands of people living in small communities throughout the Great Lakes Region. This gives Mid-Continent an advantage over their competitors. Mid-Continent does not have a strong current financial position, but with some adjustments, they can raise their profits. Brand recognition will be one factor that will help to improve their profits.
Weaknesses
Organizational Design: Mid-Continent Airlines is a small carrier that chooses to handle all of their functions including marketing, ticketing, and computer information services. This is very costly in terms of personnel. It will be difficult for Mid-Continent Airlines to compete with companies that choose to become dual designators with larger airlines, if Mid-Continent chooses to remain autonomous .
Turnover Rate: Mid-Continent has a turnover rate of 15%. Mid-Continent is seen as a training ground for employees. Once trained, employees often leave for other companies. While it may be difficult for Mid-Continent to compete with the bigger airlines companies for employees, they can compete with the smaller companies by offering some incentives for employees to say. Mid-Continent currently views this situation as one of the cost of doing business. The total cost of replacing an employee due to turnover is $3,000. Mid-Continental currently has 81 employees. If 15% of those employees leave the company, Mid-Continent will have to spend $39,000 on training new employees .
Questionable Financial Condition: Mid-Continent is not generating enough revenue to cover their overhead cost. Mid-Continent functions as an autonomous company. Therefore, they incur all of the cost. If management does not decide to contract some services out, Mid-Continent will not stay in business. Management has also made poor choices in the way they choose to finance their assets. Their debt to equity ratio is extremely high. Mid-Continent has a large amount of financial risk associated with their company.
Opportunities
Opportunity for a specific strategic alliance: Mid Continent has an opportunity to join with a larger airline company. This would help to improve their financial standings by allowing them to pass on some of the expenses incurred by remaining autonomous.
Opportunity to profit from new equipment: The loan offered to Mid-Continent will allow an extra aircraft addition to Mid-Continents current fleet. This will allow them to expand into other markets that their competitors are in, as well as new markets not currently occupied. This new aircraft will allow Mid-Continent to increase profitability as well as reduce overhead cost.
Financing Assets: Aircraft may be leased for a period ranging from 1 to 15 years . Leasing gives companies an opportunity to use a specific type of equipment, for a specified period time without the financing. Leasing equipment will give Mid-Continent an opportunity to expand their fleet without tying up cash. Mid-Continent does not have cash available for a loan down payment, nor is their earning records high enough to receive traditional bank financing. Leasing will give Mid-Continent the opportunity to expand into other markets, as well as upgrade their current fleet.
Threats
Regulatory Environment: The airline industry is heavily regulated in several areas. Extensive record keeping is involved in meeting the specification set forth by the government. Compliance with the regulatory agencies mean increased cost to the airline industry in terms of the staff needed, paperwork required, and the direct cost that are incurred with compliance .
Extra Training: Some airlines choose to go beyond what is required, and choose a maintenance program to decrease unplanned, out-service time, and to increase safety. Some airlines choose to go beyond the required training for pilots to improve pilot effectiveness. The more training/experience a pilot has, the higher the risk of losing the pilot to a larger airline. Mid-Continent already has a high turnover rate. If they decide to invest in extra training, then they need to offer incentives for employees to stay.
The threats and weaknesses seem to outweigh the strengths of the company. Mid-Continent does have an opportunity