People express


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A report on the People Express simulation

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People express

  1. 1. Kevin Tame Dan Morgan Tyler Christensen People Express Simulation The overall strategy employed in this simulation was to maintain growth across the 10 year period and do it in a way that was aggressive and sustainable beyond the simulated time. A problem that is faced in growing a company to quickly is that exponential growth will rarely sustain over a long period of time and eventually critical mass will be reached. In order to achieve fast growth without becoming too highly leveraged, an approach of aggressively purchasing planes while maintaining an acceptable debt to equity ratio will be used. Since marketing and a high service scope has little effect on customers perceptions, using little to now marketing and maintaining a service scope of .60 is the optimal way for People Express to generate the necessary growth to become sustainable and capture market share. The first major difficult challenge the company faces is setting the appropriate price. At first glance lowering cost to .09 seems to increase demand, however running on such a thin margin ultimately leads to a cost cutting strategy, overworked employees, poor service and a loss of customers. If People Express competes on price they will most likely go bankrupt or not grow quickly enough to capture market share. Raising the fare price to a more reasonable margin is considered appropriate. Setting the price to .13 or .15, just under the competitors price of .16, will give People Express more of a cushion during difficult times. However, as soon as market share increase to a noticeable amount competitors begin to lower their price to compete. This battle will not be won by People Express because the deep pockets of the larger airlines will take a loss for a few years in order to drive People
  2. 2. Express into bankruptcy. It is concluded that competing on price is not recommended and matching the price of .16 is ideal to generating the most income and growth. The next problem that needs to be addressed how to maintain sustainable growth. In growing a company, there is a fine line of optimizing the amount of debt used to generate income versus over leveraging the company into a dangerous situation. In a high growth company “Cash is King”, so every possible measure to generate cash was used to buy more planes. Levering the company is important and cash flow will be suppressed for a time but to reach the goal of becoming a large competitor in the airline industry, leverage is essential. This balancing act between too much leverage and under utilized demand is handled by when available net income is there. Buying aircraft only if equity is equal to or greater than debt is a numerical check that was used to safely purchase airplanes without buying too much. Airplanes are only purchased when funds are sufficient. In order to maintain a sufficient growth demand a marketing strategy is generally used. However, having available cash to sustain fast growth is more important so a strategy of little to no marketing will be used. This is a risky approach however it appears that a word of mouth approach is more than sufficient in building the appropriate reputation for People Express. Maintaining a service scope of 60 percent is far below the industry average of 100 percent and seems difficult to compete with. However, even though People Express is offering flights at a discounted rate it is able to compete at the industry average price with this strategy because People Express gives the customers more of what they really want. Even with a significantly lower scope of service People Express can achieve excellent perceived service quality through fulfilling the necessities significantly better than the
  3. 3. competition. These necessities include highly responsive service and a high quality flight experience. In providing a high quality flight experience it is believed that less is more and doing a few key things well is preferred over doing many things average or bad. Through maintaining a sufficient number of employees per plane and a moderate load factor People Express is able to always have enough employees to complete the necessary tasks without causing excessive demand on employees workweek. This creates happy and helpful employees which lead to happy customers. This high minimalistic approach minimizes the pitfalls which plague other airlines such as overbooking, delays, unresponsive personnel, lost luggage, unappetizing meals, etc. People Express’ commitment to excellence with a limited service scope has proven to be very effective in gaining market share from competitors. In summary, People Express should grow quickly while trying to avoid being over leveraged and competing on price. Marketing will not be used to generate demand and building reputation thorough word of mouth proves to me more effective. Providing excellent service by focusing on key concerns is a wise strategy. Too many frills cost too much and does not provide substantial increase to revenue. Keeping the employee per plane ratio above 55 people per plane keeps quality of service high and increases the customer’s perceived quality of service.
  4. 4. Experienced Workers O B5 Delay Experience % of Rookies S Hiring R2 Input S Rookie B4 Factor S S Inexperienced Hiring O Employees Productivity S S Purchasing R5 Airplane Input Productivity O Need for more Available Money employees S S B3 S O Total Employees O Growth Restriction R3 S S S Ability to Work Load Revenue Operating Service Planes Capacity Turnover Expense S S R4 S Price R1 Input Service Growth Ability Work Load S Market Share S S Customers Delay S S O B1 S Average S Price Workweek Reputation of Competitor's Attention Competition Airline of Dicounted Price S Load Factor O S O Price Competition Ability to do B2 good work Quality Customer preception S Quality of S of Airline Service Marketing Budget Service Scope Input Input