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Brief strategy example jan 26 2022
- 1. STRATEGY TO VENTURE INTO AIRLINE BUSINESS
- 2. Mission and Vision June 19, 2010 2 “To provide our community with safe, secure, high-quality, and cost-effective airport facilities and services.” “To be the first choice for air transportation services on the Prairies.” Safe & Secure High Quality Cost Effective
- 3. June 19, 2010 3 “To provide our community with safe, secure, high-quality, and cost-effective airport facilities and services.” “To be the first choice for air transportation services on the Prairies.” Safe & Secure High Quality Cost Effective Regional / National Competitive Environment Location & Cost Services Connections & Airlines Who are our competitors, where are they and what is making them successful?
- 4. Industry Key Success Factors June 19, 2010 4 Excellent Customer Service Ability to Attract New Airline Financially Independent Airport Authority Optimization of Resources Prudent Financial Management
- 5. Internal Analysis of Our company for this initiative June 19, 2010 5 • Good location along Trans- Canada highway • Good relation with City • Strong record of financial management • Debt free Weaknesses Strengths • Lack of in-house marketing dept. • Under-utilization of land • Customer complaint on ground transportation • Non-aeronautical split below Regional average PAA Region North American 56.1% 43.8% 52% 43.9% 56.2% 48.0% Aeronautical Non-Aeronautical Aeronautical Split Comparison (StatsCan) PAA Regional Avg A/R Collections Period 11.00 40.25 Debt Ratio 0.03 0.15 Excess of revenue % 46.8% 39.6% Revenue per Passenger 17.00 13.00 Expenses per Passenger 11.00 8.00
- 6. External Analysis for this initiative June 19, 2010 6 • Growing local economy in Prairieview • Growing cargo demand +7% worldwide end of 2010† • Developments around airports • Domestic air travelers +20% by 2015 Threats Opportunities • Uncertain global economy • Instability of airline industry • Competition from near-by airports • Increased environmental regulation 5% 6.90% 3.30% 4.70% 2009 2010 2011 2012 2013 Passenger Traffic Cargo Traffic Growth Projection in Canada †International Air Transportation Association
- 7. Constraints and Resources Available June 19, 2010 7 • Transport Canada ground lease • Maximum investment of $5M and external financing of $3.5M • Minimum cash flows $3M for next 5 years • Ending operating fund balance of $400K-$600K • Return on investment of 6% • Revenue split 85:15 by 2015, and ultimately 50:50 Resources Available Constraints/ Targets • $3M line of credit – Prime less 0.5% • 30 to 40% from AIF • 285 acres land available for commercial development
- 8. Strategic Alternatives June 19, 2010 8 Cargo and Courier Facility • Small - 25,000 sq ft • Large - 30,000 sq ft Office Building and Airport Office Park • National Build’s Proposal • Airport Office Park Airport Hotel • Rent Land to Hotel Chain • PAA as Equity Stakeholder
- 9. • Strong impact on revenue diversification • Mitigates against threats • Fast growing sector – +7% worldwide – +4.6% Canadian exports • Leverages prime location • Contributes to development of Prairieview • Sufficient capital without AIF Build a Cargo and Courier Facility June 19, 2010 9 Pros Diversify Revenues High Demand Benefits Prairieview
- 10. Build a Cargo and Courier Facility June 19, 2010 10 Limited Experience Potential Risk Cons • Potential financial risk • Incremental security risks • Limited experience • Three clients asking for below- market lease rates • Increased runway utilization – Traffic with passenger planes – Environmental impact – More frequent runway repairs
- 11. Small Cargo & Courier Facility June 19, 2010 11 • Strong push on revenue diversification – 72% non-aeronautical • Full capacity within 5 years • Positive NPV ranging from $55K to $805K • Lower risk on capital outlay than the larger building • Only 23% capacity remaining after three clients • Smaller revenue streams than large building – $2.3M vs. $3.1M in first 5 years • Negative NPV of ($434K) if only three clients are obtained Cons Pros
- 12. Large Cargo & Courier Facility June 19, 2010 12 • Larger revenue stream than small building • At full capacity, NPV range from $1M- $1.8M • 70% probability of securing a fourth cargo company • Higher capacity than smaller building • Revenue stream only 62% non- aeronautical – Lower impact vs. small building • Larger excess capacity could draw down market rates • Significant loss if only the three known clients are secured – ($1.3M) NPV • Risk-adjusted NPV of best case scenario not within risk tolerance Cons Pros
- 13. Office Building and Airport Office Park June 19, 2010 13 • Diversify revenue streams with minimal risk • Prairieview’s growing economy • Job creation for the community • Attract new airlines • Increase in business travelers and airport’s† revenue • Utilize idle land Pros Diversify Revenues Prairieview Benefit # of Travelers
- 14. Office Building and Airport Office Park June 19, 2010 14 Limited Experience Potential Lobbying Cons • Approval required from TC • Possible opposition from Prairieview • Lobbying against PAA’s developments (monopoly and NPO status) • Away from PAA’s primary function
- 15. Accept National Build’s Proposal June 19, 2010 15 • All risk transferred to developer (Board’s requirement) • NPV of $1M in 5years and $3.8M in 20 years • 80% of building already occupied • Revenue split closer to target • 90% occupancy constraint • First 13 months - no revenue • Short deadline to decide • Revenue split not achieved in the short term Cons Pros
- 16. Promote an Airport Office Park June 19, 2010 16 • Interested developers • Capitalize on the opportunities: – Low lease rate – Available land – Low construction costs • Minimal investment • Payback period of 3 years • Over $1M NPV in 20 years • Limited time ownership • Aggressive marketing and communication plans • High lease rates suggested by the appraiser Cons Pros
- 17. Airport Hotel June 19, 2010 17 • Competitive advantage against surrounding airports • High demand • Job creation for Community • Additional non-aeronautical revenue • Attracts brand loyal customers to the airport Pros Competitive Advantage Job Creation Diversified Revenues
- 18. Airport Hotel June 19, 2010 18 Tight Deadline Opt-Out Risk Cons • No experience in hotel industry • Opt-out risk • Board’s preference is to limit additional investment risk • Demand directly affected by economic conditions • Tight deadline on PAA to accept proposal Lack of Experience
- 19. Rent Land to Hotel Chain June 19, 2010 19 • No initial investment required from PAA • Constant revenue stream – Not affected by occupancy levels • Lease rates well below market, fixed for 40 years • Low NPV of $150K over 40 years in the best case scenario • $500K risk of developer abandoning project Cons Pros
- 20. PAA as Equity Stakeholder June 19, 2010 20 • Own 20% of the hotel shares • Premium rate charged for rooms • 40-year NPV up to $1.9M in best case scenario • Risk of abandonment in the first six months drops to 15% • PAA required to invest $3.5M • Against Board preference to limit risk investments • No control over investment or operations • PAA responsible for disposal and cleanup costs (potential loss of up to $4M) Cons Pros
- 21. Recommendation June 19, 2010 21 Situational Analysis Strategic Alternatives Recommendation Implementation Plan Conclusion
- 22. Decision Criteria June 19, 2010 22 Achieve Strategic Goals Satisfy Financial Constraints Resolve Operational Constraints Meet Key Success Factors Mitigate Key Risks, Threats & Weaknesses Meet Stakeholder Preferences
- 23. Recommendation June 19, 2010 23 Cargo & Courier Facility (25,000 sq ft) Accept National Build Proposal Promote Airport Office Park Financial Benefit and Targets • 85:15 revenue diversification achieved • >$3M annual cash flows until 2014 • Incremental funds for future development ... 50:50 Resourcing • $3.8M unrestricted capital fund • No AIF increase required • No long-term debt incurred • Adequate land available
- 24. Recommendation: Cargo & Courier Facility June 19, 2010 24 Cargo & Courier Facility (25,000 sq ft) Accept National Build Proposal Promote Airport Office Park • Increased competitive advantage • Capitalizing on growth of cargo demand • Mitigation against instability of passenger-based airline industry • New diversified revenue stream ... 72% non-aeronautical • Strongest push towards 85:15 target • Excess of revenues over expenses throughout 20 year life • Positive NPV across worst-base-best forecasts
- 25. Recommendation: National Build June 19, 2010 25 Cargo & Courier Facility (25,000 sq ft) Accept National Build Proposal Promote Airport Office Park • Low risk alternative fitting Board preferences • No initial investment required • Leverages unused land • 2 Major tenants already identified • Revenue stream 100% non-aero • Closes remaining gap on 85:15 target • 20 year NPV of $3.8M • Strongest push towards cash flow target • PAA gains ownership of building at end of lease
- 26. Recommendation: Airport Office Park June 19, 2010 26 Cargo & Courier Facility (25,000 sq ft) Accept National Build Proposal Promote Airport Office Park • Additional engine of growth for PAA and Prairieview • Leverages opportunity to lease land • Sets the stage for future revenue diversification • Success proven by other airports • Low risk • Increased PIA business travellers • Minimal investment ... Quick payback • Revenue stream 100% non-aero • 20 year NPV of $1M
- 27. Financial Forecast June 19, 2010 27 $18 M $20 M $21 M $22 M $22 M $23 M $23 M 2009 A 89:11 2010 F 89:11 2011 F 85:15 2012 F 84:16 2013 F 84:16 2014 F 84:16 2015 F 84:16 Revenue • Strong revenue growth • Targeted 85:15 achieved in 2011 • Savings indicator >90% • AIF sufficient for ATB expansion with limited long-term debt • Unrestricted cash for future development alternatives 2009 A $7M 2010 F $8M 2011 F $13M 2012 F $17M 2013 F $23M 2014 F $28M 2015 F $23M CashBalances AIF Restricted Unrestricted
- 28. Projected Revenue Split: 2008 – 2026 June 19, 2010 28 $0 M $10 M $20 M $30 M $40 M $50 M $60 M $70 M 2008 A 2009 A 2010 F 2011 F 2012 F 2013 F 2014 F 2015 F 2016 F 2017 F 2018 F 2019 F 2020 F 2021 F 2022 F 2023 F 2024 F 2025 F 2026 F 2027 F 2028 F 2029 F 2030 F 2031 F 2032 F 2033 F 2034 F 2035 F 2036 F 2037 F 2038 F 2039 F 2040 F 2041 F 2042 F 2043 F 2044 F AeronauticalRevenue Non-AeronauticalRevenue 2010 Implementation of Development Alternatives $20M 89:11 2016 Major ATB Expansion $23M 83:17 2044 Achieve Long- Term Revenue Diversification Target $61M 50:50 2011 Achieve 85:15 Revenue Split $21M 2018 Next Ground Lease Rent Tier $25M 80:20 Long-Term Revenue Diversification • Restaurants / Shopping Mall • Aircraft Maintenance • Duty-Free Shop • Concessionaires / Airport Lounge • Hotel and Golf Course
- 29. Implementation Plan - Operational Issues June 19, 2010 29 • Website • ATB Advertising • New Routes • Compensation • Performance Evaluation • Cross-training •Balanced Scorecard Strengthen Organizational Structure Create HR Manager Position Establish Performance Measurement System Implement Marketing Department
- 30. Implementation Plan - Operational Issues June 19, 2010 30 Ground Transportation • Offer shuttle and limousine services • Cancel agreement with taxi company Concessionaire Services • Build larger area for F&B services • Obtain license from coffee bar New International Flight • Pursue new flight to Salt Lake City • Offer incentive in year 1 Enhance Offering to Airport Users Cost: $0 Incr. CF: $55K/yr Cost: $515K Incr. CF:$80K/yr Incr. CF: $712K/yr Incr. AIF: $920K/yr
- 31. Implementation Plan - Operational Issues June 19, 2010 31 Firefighter Training Noise Environmen t Safety and Security Compliance and Sustainability • ScSM implementation • Employee training • Review of procedures • New PBS line • Cargo security • Keep up-to-date • Communication
- 32. Implementation Plan - Operational Issues June 19, 2010 32 Change Management & Communication • Organize Company Meeting • Communicate New Strategy & Strategy Map • Engage Employees in Change Process • Provide Regular Updates
- 33. Conclusion June 19, 2010 33 Diversify into Business & Commercial Activities Optimize Resources (People, Land, Funds) Strengthen Organizational Structure Improve Customer Airport Experience Comply with Regulations Mitigate Risks in Current Environment Balance Ecological, Economic & Social Goals Long-term Success in Serving the Needs of the Community First-Class Canadian Airport
- 34. Questions & Answers June 19, 2010 34 Questions & Answers
Editor's Notes
- Good afternoon everyone! Now that we’ve fully brought you up to speed on the need to make a strategic change, and also presented the pros and cons of each of the different options, I’m going to walk you the recommendation and outline why this course is the best one for your organization.
- In evaluating the different options, we weighed each one against these six key categories. In order for your organization to be successful in achieving your goals and in fulfilling the greater vision, the new course has to score highly in each one of these areas. And our recommendation does.
- What’s even better is that you will achieve your targeted revenue diversification...four years early. It will also meet the incremental annual cash flow target, which will allow you to save up significant funds that can be used for the major ATB expansion in 2016 or towards the future development opportunities to help the PAA achieve its long-term goal of a 50:50 revenue split. In implementing this recommendation, the PAA already has the $3.8M in unrestricted capital, and you won’t need to raise AIF rates or dip into the restricted AIF fund...this will allow the PIA to retain its cost competitive advantage over neighbouring airports.
- By investing the smaller cargo and courier facility the PAA will develop an increased competitive advantage by capitalizing on the growth of cargo demand. The new revenue stream will be 72% non-aeronautical, and is the strongest push towards the 85:15 target. This will generate an excess of revenues over expenses throughout the 20 year life of the investment, and shows minimal risk as there are positive returns over all sensitivity analyses.
- By accepting the National Build proposal, the PAA will get a financial return that meets your low-risk preference. This doesn’t require any initial investment and takes advantage of idle land that the PAA already has. There are two major tenants for this building that are already identified, and the resulting revenue stream is 100% non-aeronautical and close the remaining gap on the 85:15 target. This initiative has a very positive NPV, and has the strongest push towards the cash flow target of $3M each year. And, this initiative is a natural fit with the last tier of the recommendation...to promote an airport office park.
- This will meet the needs and preferences of many stakeholders by providing an additional engine of growth for both PAA and the Prairieview region. This utilizes the idle land around the PIA and sets the stage for future revenue diversification, in alignment with the PAA’s long-term goal of achieving a 50:50 revenue split. Other airports have already proven the success of office parks, and now the PIA will benefit from increased business travellers which are higher revenue generating travellers. The minimal investment earns a quick payback, which contributes to the low risk, and this also generates a revenue stream that is 100% non-aeronautical.
- By implementing this recommendation, the PAA will see very strong revenue growth and actually achieve its targeted 85:15 revenue split in 2011, which will be a huge milestone. Additionally, the PAA will continue to have a high savings rate, and will hit the 90% threshold for the first time. This will allow the PAA to accumulate significant cash balances. There will be sufficient cash in the restricted AIF fund to fund the major ATB expansion in 2016. The PAA will need to take on some long-term debt, but a modest amount that is lower than the regional average. And the incremental unrestricted cash can either be used to help fund the ATB expansion, or be used for future development alternatives, as we discussed before.
- Flipping over to the next slide, you will see a long-term revenue forecast for the next 35 years. The bottom line represents the aeronautical revenue stream, and the top shows the non-aeronautical. Over at the left, you will see the first five years of our projection, along with several milestones Implementing these development alternatives in 2010 Hitting the 85:15 split in 2011 Crossing the $25M revenue threshold in 2018 By accumulating the extra cash, the PAA can reinvest it in other development options after the ATB expansion. By chipping away at the revenue split by 1-2% each year, you have a better chance at hitting 50:50 by 2044. Some of these longer term alternatives include...
- HR: help motivate employees resolve inefficiencies retain skill & knowledge BSC: - Align better with strategic objectives identify key indicators to measure success
- Ground transportation: Additional non-aeronautical revenue provide community with reliable cost effective alternative F&B services: Improve customers experience reduce complaints make airport more competitive New Flight: Generate significant revenue and AIF Offset loss of 2 domestic flights Expand offering to international destinations
- Noise: runway rotation, awareness programs, noise barriers
- Strategy map: better understand the company’s objectives & strategy Minimize confusion & resistance, facilitate the change process