Mimis Orlando Shuttle

MGQ606 SPRING 2013 - CICHOCKI

Well, that commitment we made on fuel costs should allow for some stability. I have locked in fuel costs for the next 12 months, said Mimi McAulley, owner and operator of Mimis Orlando Shuttle, I will pay $4.25 per gallon of jet fuel (price quote September 30, 2012), now on to a reservations strategy. Mimi has operated a daily round-trip Buffalo/Orlando airline service since 1992. The business has been profitable, and in 2003 went from one to two round-trip flights per day. However, the fuel crisis of 2008, coupled with a long time problem with no-shows has seriously impacted the bottom line. The service has standard 6 am and 2 pm departures from Buffalo and 10 am and 6 pm departures from Orlando. Historical data indicates a pretty steady 10% no show rate. No deposit is taken for reservations and no fee is imposed for cancellations. Mimi has steadfastly refused to overbook the flights in part because she has no policy for compensating bumped passengers. Mimi leases a single Boeing 737 for $3.65 million per year. The plane seats 150 passengers. The lease entitles Mimi to use of a plane 7 days per week and the charges include maintenance. Mimi also has a replacement clause in her lease whereby the owner of the airplane guarantees a replacement within one hour in the event Mimis plane is unable to fly. Additionally, Mimi pays an annual insurance policy of $650,000. Flight time is calculated to be 2.75 hours per takeoff. While actual flight time varies, Mimi used this figure in locking in the fuel costs and committing to 6,022,500 gallons for the year. Fuel is delivered to the two airports systems and there is no need for Mimi to pay for the fuel in advance. Mimi has a staff of 15 20 full and part-time employees at each airport. Each airport staffs the equivalent of 8 employees working an 8-hour shift. There are numerous part-time and flex schedule arrangements (youre welcome for not having to deal with them!). The bottom line for staffing can be figured as the equivalent of 8 employees for 8 hours each at each airport (Orlando and Buffalo). The staff handles reservations, baggage and miscellaneous duties. Their rate of pay averages $45/hour, including benefits. The $45 rate includes any holiday or overtime pay. Orlando airport charges a fee of $6000 per day and the fee includes access to runways, as well as gate and Jet-way usage and personnel. Buffalo charges $4000 per day. The plane is staffed by a Crew of 6 people; 2 pilots and 4 attendants. Mimis 6 pilots each earn $5000 per week and the 12 attendants earn $1500 per week. The weekly figures include benefits. Yes, this means one of the crews of 6 people gets a free day off each week. (example: Crew 1 works the first round trip of the day M, Tu, F, Sa, Su, Crew 2 works the second round trip W, Th, F, Sa, Su and Crew 3 works the second round trip on M and Tu and the first round trip on W and Th. The crews rotate through as Crew 3 would assume Crew 2s schedule the next week and so on). Mimis contract with the pilots and attendants includes no changes to scheduling or rates for 2012-2013. There is an automated reservation system. All fares are booked at the same price and the credit card is not charged until the flight occurs. The credit card company charges 3% of all fares. Taxes, TSA fees and incidentals amount to $35 per passenger, per ticket. (that is one charge per round trip) Mimis calculations show a loss of money at the current level of passengers per flight (even at a fare of $430 per round trip!) She has tried to institute some changes; snacks have been cut back to a cost of $1.75 per passenger per flight. However, she is not interested in eliminating snack service, as it has become a matter of pride as well as identity. Additionally, since the fare is a bit higher than the major carriers sometimes charge, it is incidentals such as not charging for baggage and inclusion of snacks that Mimi feels help her maintain her fairly loyal base of customers. Thus, at this point do NOT suggest that she change these policies.

Mimi has posted the top on-time rating in the United States for 8 consecutive years. For 2011, Mimis Shuttle had 97.3% (1421/1460) of its departures officially listed as on-time. This has caused an incredibly loyal clientele, even when major carriers have lower fares. You have been assigned the task of proposing a reservation strategy to Mimi. She leads a modest lifestyle and so is not looking to become a billionaire overnight, but.in these difficult economic times it would be beneficial to make more money. While you be thinking she should propose a cancellation fee, one might argue you have no idea whatsoever as to the impact of such a fee. So I advise you against imposing any fees at this time. Right now your task is to present Mimi with a reservations strategy. She is currently ONLY allowing 150 reservations for her 150 seat plane. With a 10% no show rate, on average, the plane is not full. This produces a loss. As you investigate whether Mimi should allow for 151 or 152, or even 160 reservations each flight remember it is important to be sensitive to the fact that Mimi is not accustomed to overbooking her flights. Her plane only seats 150 passengers. Allowing for additional reservations will ultimately result in customers arriving for a flight only to find that they do not have a seat on the plane. That typically equals, unhappy customer and Mimi takes much pride in her Customer Satisfaction ratings. Mimi is modest and conservative. You will need to ease her into the idea of an overbooking strategy. Show her the cost benefit of such. Do not attempt to push her into this new process. Having more than 150 passengers show up at flight time every day will make her a nervous wreck. Having more than 150 passengers show up at flight time every 2 weeks is even out of her comfort zone. That said you need to be cautious, but do not be too conservative either. Surely you can provide data that will show her the cost benefit of such at least every 3 weeks or so. Remember, the more Mimi makes the more she can pay you! But, if you make her uncomfortable she will have no problem taking her business elsewhere. Your reservation strategy is to include a policy for handling any over-booked customers you are unable to seat on a flight (insulting them until they leave is NOT an option since it will jeopardize her high customer service ratings!) You will need to provide a recommendation as to what you will offer the seat-less passengers as compensation based on your analysis of the profits gained by allowing more than 150 reservations per flight. You may assume the following: 365 days of service per year. No shows occur independently. Crews fly both legs of a round trip. Snacks are not perishable. If you do not use them on a flight, they are available for the next flight. In your PPT be sure to include Mimis CURRENT bottom line. She claims she is losing money and is pretty confident of that fact. In your humble opinion she seems pretty bright, however, be sure to prepare a financial report. One of your slides should break down ALL her expenses in terms of their YEARLY cost**. Also calculate the YEARLY revenue and compare. Is there a loss? If not, someone has missed something! Remember currently she ONLY allows 150 reservations. With a 10% no show rate you need to determine for the revenue and certain expenses how many passengers you will use for your calculations (there is a best guess here!) **Be mindful of your units days/weeks/years.as you convert all expenses to a yearly cost. In your PPT also be sure to include a plan for a new reservation strategy. Keep in mind that Mimi is hesitant to overbook (take on more than 150 reservations). Your goal is to show her why it would make sense to allow more than 150 individuals to reserve a seat. However, take it slow with her. There is a small range of possibly correct answers here based on the information given in this case concerning Mimi and her willingness to move forward with a proposed strategy.