Strategic Financial Management of Two Airline Companies

Introduction

The airline industry is a tricky sector to invest in as it calls for maximum efficiency as one cannot gamble with people’s lives. Safety and security is paramount as people’s lives are involved, and the way the business is presented to people determines the duration the business will withstand. Passengers have to feel secure as they will be travelling miles high from the ground, therefore, planes should meet all the prerequisites to operate smoothly. Meeting these prerequisites calls for additional cost by ensuring everything is in order. Efficiency is paramount too in this sector. Planes have to leave at the designated time and arrive at the expected time. Delays and flight cancellations do not promote a formidable image for an airline that wants to sustain its operations.

Since the costs of running such a business venture are exceptionally high due to the prerequisites involved, companies have to find ways of staying atop the risky business venture (Hughes & Beatty 2005). They have to seek for new markets so as to increase their market shares and remain relevant in business. These new markets will call for additional fleets which translate to additional costs. Boeing and Airbus companies have experienced this need to expand and increase their market shares. This called for formulating plans on how they would achieve the task. Each company had a different approach to achieve the goal (Corbell 2009). One factor that seemed to influence the decisions was cost as the two companies weighed their options to go ahead with their plans.

Discussion

Boeing and Airbus have been having different opinions concerning the future of commercial airlines. Boeing is affiliated to the U.S.A while Airbus owes its allegiance to the European conglomerate. Boeing had come with an idea to build a new plane that had a larger capacity than the 747 it had built earlier (Trikha 2011). This idea appeared to fade once it emerged that sufficient orders were lacking to promote the commencement of such a task. Only two companies had shown the least interest in the new plane, was it to be built. Singapore Airlines and British Airways had shown some interest, albeit infinitesimal and this made the venture unfeasible. There was no need to risk on such a taxing venture if there would be no returns on investment (Pisapia 2009).

Lack of interested buyers for the planes was not the only reason why Boeing decided to halt that plan. Another reason was the risks involved in ferrying of about 550 passengers all at the same time. Boeing was concerned about the safeties involved in carrying such a large number of passengers in a single flight. There were capacities that seemed unsafe around airports and these had to be considered. For these reasons, Boeing had to shelf the idea.

On the other hand, Airbus decided to build a plane that could carry 555 passengers in a single flight. Unlike their business opponents, Airbus got orders for their plane and, therefore, their business venture was feasible. Airbus proceeded to build the plane which had been codenamed A380. The fact that Airbus got orders for their large plane made Boeing want to reconsider their decision to halt their plans. But on further assessment of the business environment, Boeing decided to stick with their plans of halting to build the 500 seat plane, and instead embarking on building another plane whose size was about half the original jumbo. This new plane was meant to travel faster, further, higher and quieter than the previous models. This idea too did not go well with the airliner who felt the plane was not cost effective, which is what guides airlines, and not speed and distance. Boeing had to halt that plan as well and concentrate on a plane that had lesser capacity although speed would be greatly reduced. This showed that in the airline industry, much emphasis is on cost efficiency and not on the distance a plane could fly without stopping, or the speed it could manage. There is every reason to minimize costs in the airplane building phase, so as to get returns on investment once the planes start operating.

For this business to be feasible, there has to be lots of considerations to be made. One may be tempted to introduce advanced technology which may lead to additional costs on the customers. Boeing had an excellent idea to reduce the time taken by airplanes to get to their destinations, but this proved costly in the end as it would add about 15 percent in fares (Baker & Powell 2005). This means that it was possible for the company to experience a low customer turnout due to the cost compared to other airplanes. This shows there has to be a balance between innovations and their impacts on the overall cost that will be transferred to the customers. This is an industry that requires proper forecasting so as to assess the market situation (Wang, Jen & Ling 2010). This would assist in making informed decisions which are paramount in such a costly business. The business requires strict observance of the budgeting process as any deviation from the budgeting may hurl a company into murky waters.

Each of these companies had a desire to increase the capacity of their passengers which in return would have increased their return on investments. Increasing the number of customers called for additional carriers which were to take care of the challenge. Additional carriers cost money to build and care was paramount not to build if there were chances of not getting ready market for the planes. The desire to build one big plane was to achieve maximum return on investments. The companies argued that instead of building two planes, it was financially feasible to construct one plane that would carry a capacity of the two planes it would have built. It would be cheaper running costs of maintenance for one plane instead of two.

Variables influencing the investment decisions made by the companies

Strategy of the competitor

Airbus and Boeing have been offering competition in the airline industry for years. This competition is responsible for the existing row between the US and the European countries over the subsidies given to the airlines. The U.S, who own the Boeing feel that the subsidies given by the European group to Airbus should cease. The U.S feels that Airbus is already profitable and should not be given subsidies. The reason behind this allegation from the United States is because they feel the pressure already exerted by Airbus (Hitt, Ireland & Hoskisson 2010). The pressure to succeed is so much that Boeing would like to trend alone in the industry without worrying about Airbus. The fact that the European countries continue to offer subsidies to airbus to a tune of $ 15bn makes US certain that this money would be used to make a plane that will offer competition to the Boeing’s Dream liner. Boeing had formulated plans of building an airplane which had been named Dream liner. Boeing Company was getting a subsidy of $23 billion from the state. Even with this amount, Boeing still felt threatened by Airbus, who had vowed to launch a twin-aisle airplane. This has been the bone of contention between the two companies.

Airbus’s twin-aisle craft was estimated to cost about $11 billion while offering 49 percent more room. This is in addition to the fact that the running costs of the plane would be lower by 20 percent (Airbus 2012). This strategy by Airbus to invest in this direction led Boeing to rethink its strategies. Any decision made by Boeing was being prompted by the investment strategies of Airbus. Before each company made an investment final decision, it had to be fully aware of the intentions of the other company so as to be safe. These strategies of the competitors influence decisions made by the companies in their investments (Nutt & Backoff 1987).

Management Outlook

Both Boeing and Airbus companies were in dire need of leading the airline industry which was offering stiff competition. Their respective management was always on the lookout for new markets so as to increase the market shares (Westley & Mintzberg 1989). This increase in market shares is only viable when the management is aggressive on marketing and growth strategies. The goals of these companies were to have large fleets of aircrafts and to expand to untapped regions. Airbus wanted to expand to Japan despite the fact that Boeing had invaded Japan on business terms. Boeing was determined to expand its market share and this prompted the management to settle for the building of an aircraft that would be burning less fuel, while maintaining a cheap cost. The “Dream liner” as it was codenamed by Boeing was to be an effective long range plane. This plane was designed to have a less pressurized cabin, and cost effective. Passengers, who are the most important in an airline industry, would experience less headaches and dehydrations as a result of the less pressure. This was a managerial outlook meant to increase the number of customers and maintaining low costs of production.

Opportunities brought about by technology change

When Boeing decided to build the Dream liner, it was to use the technology already used in the 747 model (Boeing 2012). This however was not enough as it emerged that new technology was required. This prompted the company to go for the “fly-by-wire” technology, as it did not exist in the 747 model. This technology change prompted the company make decisions based on its existence. Airlines had demanded for the new technology and therefore, Boeing had to go for the said technology in the hope of remaining relevant and “out of reach” of its competitor, Airbus. Because Boeing acquired the technology, it thought it had an excellent chance against its business opponents, Airbus, whom Boeing thought did not have, access to the said technology.

Market forecast

Both companies conducted market forecasts so as to assess and predict the future of the business environment. This was paramount so as to remain prepared in the highly competitive industry. Boeing forecasted market share for the large planes would reduce by about 2 percent, while market share for airplanes such as the Dream liner would increase by 3 percent to stand at 21 percent from 18 percent. Boeing continued to assert that the need for double-aisled planes would decrease tremendously. This prompted a need to concentrate on building single-aisle planes that were cost and fuel efficient. This forecast led companies like Boeing to decide on concentrating to build single-aisle planes whose market share appeared viable in both the short and long terms (Trikha 2011).

Risk factors faced by the companies and how to manage them

Losing investment money

Both companies would be at risk of losing billions of money if they made unviable investment decisions. If Boeing decided to build the Jumbo without assessing the strategies of its competitor, it would experience significant loss. Before injecting monetary resources in an investment, one has to be certain of earning returns on investment. Failure to consider that would easily result to loss of investment money. Boeing and Airbus are at the risk of losing money in their investment undertaking if they were unable to predict the future of the industry. Since the airline industry is a highly competitive industry, there is a need to undertake a thorough forecasting so as to have an idea of the business trends in the near future. Forecasting should involve assessing the market trends while assessing the companies budgeting process so as to undertake investment decisions that are within each company’s budgeting. Losses are bound to occur when an organization decides to allocate money to an undertaking that had not been properly planned for in the budget. Plans to undertake business investment projects should be taken when the investment plan has been identified, assessed and proven to be viable and well within the budget allocation (Kurtzman 2010). This would prevent increasing the risk of undergoing loss. Boeing and Airbus should ensure they formulate a budgeting process and stick to it. They should indulge in investing procedures when sure that there are enough funds to allow for such undertakings. Failure to undertake proper decisions would find them at the risk of losing money and even customers.

Corporate Failure

The stiff competition experienced by both companies may lead to failure in the companies. This may easily result if the companies decided to invest blindly in the hope of outdoing each other (Freedman & Tregoe 2004). By engaging in building double-aisle planes, whose demand seem to reduce in the future, may result in massive losses for the companies. This in the long run may lead to the collapse of the companies. Companies may collapse when a lot of monetary resources are injected into a business venture that resulted into losses. The companies may find they have limited monetary resources to maintain the planes, and running other important aspects of its very existence. Their workers have to be paid in addition to maintaining the planes. With improper investing decisions coupled with poor leadership skills, the companies can easily fail.

One way to overcome this failure is to have quality leadership at all levels of the companies (Westly, & Mintzberg 1989). These leaders will assist in making strategic decisions concerning any decision to invest. Strategic leaders would be capable of evaluating all investment options and assess their viability. The leaders utilize strategic risk management in an effort to reduce risks in investment (Salder & Craig 2003). Strategic Risk management involves discovering, gauging and overseeing any threats and uncertainties caused by both domestic and foreign factors. These factors if not contained properly may inhibit the achievement of a company’s goals and objectives. By undertaking the said measures, strategic leaders would be implementing the ultimate goal which is creating and offering protection to the value of the shareholder(s). Shareholder(s) values should be created and protected as any loss to the company would directly affect the shareholders. There should be firm methods utilized to protect shareholder value.

The management of the two companies do not have to possess rigid mindsets. Organizations being led by leaders with rigid mindsets are at risk of failing as such leaders are uncomfortable to change (Freedman & Tregoe 2004. These leaders prefer sticking to the old methods of handling businesses. Boeing and Airbus’s leadership should ensure they have flexible mindsets accommodating change. Boeing seems to have leaders with flexible mindsets. This is explained by the idea of deciding to forsake the “Jumbo” project as it seemed unviable and willing to try something new which would not put the company at risk.

Another way to ensure companies do not suffer corporate failure is ensuring they never overlook any blind spot in their business. Due to time constraint and pressure to perform in this strict business environment, a company may overlook its blind spot. This would later haunt the company if the investment decision proved unfeasible. All risk exposure items should timely and effectively be fixed, lest they result to crumbling of a business (Mulvey, Roshenbaum & Shetty 1997).

If a company is determined to make it in the business environment, all set goals should be met. No company should embark on making business goals and objectives that it would not accomplish (Finkelstein, Hambrick & Cannella 2008). Airbus decided to build the A380 airbus, and although there were many obstacles on the way, the company made sure the objectives were achieved in 2005 when the airbus was unveiled officially. By meeting the set objectives, the company has a chance of growth and it can concentrate on acquiring returns on investments. Growth is depicted by setting attainable goals and objectives whereby, all parties must be dedicated to achieving the set goals. Employees play a very important role in achieving the set goals. Employees must be in high morale which is boosted in the workplace. This takes place when employees are appraised thus feeling appreciated and in return, dedicate their energy to the tasks ahead in anticipation of acquiring the set goals (Hewson 1997).

  • Achieving company’s set goals is impossible without the unmistaken roles played by employees. For the company to continue experiencing growth and development, the management must formulate ways to recognize and appreciate workers. There are various ways of undertaking employee appraisal mechanisms (Harris 1985). The main aims of conducting employee performance appraisals are;
  • To discover any training needs of the workers
  • To aid effective communication between the employer and the employee
  • To provide a feedback to the employees on how they have been performing.
  • To offer ways of selecting effective techniques for selection to meet the set requirements of the equal employment opportunity.
  • To provide an opportunity to diagnose and develop any organizational needs.

There are various methods used to ensure employee appraisals and the most common are:

  • 360-degree appraisal
  • MBO (Management by Objectives)
  • Use of rating scales that are behaviourally anchored
  • Use of observation behavioural scale
  • Human Resource Accounting, and
  • Anchored centres

Management by objectives

Management by objectives is an approach allowing the management to focus on achievable goals using systematic and organized manner. This is done in order to achieve the preeminent results possible from the resources at the disposal. Without Management by Objectives, it would be extremely hard for companies to achieve their strategic goals (Drucker 2001). All the top management officials should be involved in strategic planning and not a chosen few. When only a few managers are involved in overseeing strategic planning, the goals may not be easily achievable (Bass 2007). It takes a combined effort of all managers from all sectors. For Boeing and Airbus to achieve their organizational goals, all managers in the different departments should ensure they work together in implementing the plans. The decision to build the A380 and the dream liner is not an easy task and for the venture to succeed there has to be teamwork from all departments.

In managing by objectives, the activity is not paramount; on the contrary, the result is what drives the management (Taylor & Smith 1987). When Boeing and Airbus decided to undertake their respective goals, what was important is achieving the results. The objectives of these companies were broken down into small achievable parts so that the overall goal was achieved. All goals set should be achievable so as not to encounter losses (Ring & Perry 1985).

It is paramount to understand that under management by objectives, all players are informed of the aims and set objectives of the company. Once everybody understands the aims and objectives of the company, they are enlightened on their respective roles to make the roles achievable (Davies & Davies 2010). Both companies need to implement management by objective so as to achieve the set goals. Any investment option should be clearly scrutinized, to assess its feasibility and avoid investment risks (Weaver & Weston 2007).

360 Degree appraisal

This is a form of appraisal where everyone is accountable to everybody else. Colleagues are treated as customers by employees. This means that employees appraise each other including their seniors, thus making one complete “circle”, hence the 360 degrees. Top management team gets appraisals from their juniors and subordinates and this makes the management watch their conduct so as to get best results.

Behavioural observation scale

This is used to measure behaviours in the working places in relation to the various jobs available. To effectively use the above method, one has to undertake some considerations, namely; always ensure the method is carried out by qualified personnel, a critical incident procedure executed to reduce the bias for measuring performance. Companies like Boeing and Airbus should ensure they apply this method in their assessments to ensure they are always on the right track.

Use of rating scales that are behaviourally anchored

The following method is used to assess definite behaviours obligatory for a personage position in an individual company. This method requires a deep understanding of the entire range of behaviours exposed by individuals in undertaking tasks. Behavioural characteristics of each worker are assessed and rated accordingly. Then each behaviour are anchored to points relayed on a rating scale from where it can be judged as being excellent, exceptional, satisfactory or unsatisfactory. The results will give an insight on behaviour characteristics of the employees, from where the management can take further action depending on the results.

Shareholders

Both companies owe their allegiance to the respective states. Boeing has to undertake any investment challenge with the US government in mind as any loss pertaining to an investment gone sour, would highly impact on the said government. On the other hand, Airbus has stakeholders from Spain, France, Britain, and Germany. Passengers are also involved as stakeholders of the companies in question. The European countries provide Airbus Company with necessary to undertake all its investment decisions and projects with the intention of gaining from any achievement made (Airbus 2012). The success of such a company will be the success of all the players in the European partners. On the other hand, if a loss is experienced, the players will feel the pinch of the loss. The same pertains to Boeing Company whereby, the US government oversees the financial support to the company. If the company succeeds in its undertakings, the government partner will reap from the company and if the opposite is true, it will feel the loss. Passengers are also affected by the success or failure of a company investment project. When a company undergoes a loss, there is a tendency to raise the price of its products or services in an effort to recover the lost money (Kouzes & Posner 2006). In such an undertaking, the passengers may be forced to pay higher for the services until that time the company has recovered and broke-even.

Liquidity and Capital Resources

Cash Flow Summary

(Dollars in millions)

Years ended December 31,                                                2010                2009               2008

Net earnings                                                                      $ 3,307            $ 1,312            $ 2,672

Non-cash items                                                                    2,679               2,381               1,829

Changes in working capital                                             (3,034)              1,910             (4,902)

Net cash provided/ (used) by

Operating activities                                                             2,952               5,603               (401)

Net cash (used)/provided

By investing activities                                                       (4,831)             (3,794)             1,888

Net cash (used)/provided

By financing activities                                                        (1,962)             4,094             (5,202)

Effect of exchange rate

Changes on cash and cash equivalents                              (15)                   44                    (59)

Net (decrease)/increase in

Cash and cash equivalents                                                 (3,856)             5,947              (3,774)

Cash and cash equivalents

At beginning of year                                                              9,215               3, 268              7,042

Cash and cash equivalents

At end of year                                                                        $ 5,359            $ 9,215            $ 3,268

The above is an example of an extract from Boeing Company finance results. The report is a summary of finances represented in a cash flow. It can be deduced that in 2010, the company experienced a decline in net cash compared to the same period a year earlier (Boeing Company 2010).

This was because there was an increase in working capital which raised cost of operating activities. In such a financial year, it is indispensable for the management to utilize strategic financial managements lest the company undergoes losses. Investing should be kept at the minimum (Venkatraman 1986).

Impact of Dreamliner on Boeing

The dream liner would ease the monetary pressure experienced by Boeing. This is because of its cheap maintenance cost. The dream liner will not need much money to maintain as the airplane possesses over a half of its total size is made of composite materials. The plane will also burn 20 percent less fuel (Trikha 2011). Operation costs on Boeing’s accounts will reduce significantly, as the plane will be cheaper to maintain (Boeing 2012). Boeing can save maintenance money for other activities. Since the dream liner will not require cabin pressurising, the cabin will not be under duress as they travel and this will boost their morale, translating to increased productivity in the long run. Prior to the dream liner, the plane had to be pressurised but this will no longer be the case for the dream liner. Other companies may purchase the dream liner for their cabin crew as it is not pressurised, and this would translate to increased sales.

References

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