AIRLINE
A Strategic Management Simulation
4th Edition
INSTRUCTOR'S MANUAL
Revised September 2001
Simulation Manuals and Computer Programs
Written by
Jerald R. Smith
and
Peggy A. Golden
2002 Prentice-Hall, Inc.
CONTENTS
Contacting the authors ............................................................ iv
Changes in the Fourth Edition............................................... iv
Administering the Simulation B an Overview .................... v
Section 1
Installing the Software and Running the Programs
Computer Requirements .......................................................... 1
Installing the Software ............................................................. 1
Running the Program on Your Computer ............................ 3
Printer Details ........................................................................... 5
Error Messages .......................................................................... 6
Establish Correct Setting for Attachments .......................... 6
Using Yahoo Mail Program ..................................................... 6
Section 2
Classroom Topics
General Description of the Simulation ................................. 7
Time Requirements................................................................... 8
A Typical Syllabus ..................................................................... 8
Debriefing Student Teams....................................................... 9
Analysis Forms and Log Books ............................................... 9
Peer Evaluation .......................................................................... 9
Grading...................................................................................... 10
Weekly Analysis ...................................................................... 10
The Mid-Continent Airline Case .......................................... 10
Size and Makeup of Student Teams ..................................... 11
Special Classroom Activities ................................................. 11
An Exercise in Structure and Strategy ................................ 12
Stock Price and Performance Points ................................... 12
Counseling and Advising Teams .......................................... 13
Section 3
Simulation Topics
Demand Algorithm.................................................................. 14
Calculating the Breakeven Load Factor .............................. 15
Bypassing a Team If They Do Not Submit Decisions ...... 15
Parameter Changes ................................................................. 16
Administrator’s Report ......................................................... 19
Instructor Prints Quarterly Financial Report .................... 20
Students Print Quarterly Financial Report ........................ 20
News Messages to Students................................................... 20
Incidents .................................................................................... 20
Changing Parameters ............................................................. 22
Typical Questions from Students ......................................... 24
Examples of Takeovers and Mergers .................................. 28
Airline Fourth Edition Instructions for Students……….31
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Other Simulations by the Authors
Published by: Prentice Hall
Corporation: A Global Business Simulation
4th Edition
Collective Bargaining Simulated
4th Edition
Human Resource Management Simulation
CONTACTING THE AUTHORS
If you have any questions or problems, please call, fax, or email. If we are not at school, leave both your
office and home numbers. We can avoid playing telephone tag if you can call us at home at 8:00 a.m. or
9:00 p.m. EST or EDT. If you have to leave a message, always mention that the call is in reference to
the Airline simulation--we always return simulation users' calls first. Please give your office hours. Give
us your fax number if you have one. If you are on email, we can usually contact you even faster. Thanks
for your interest and text adoption!
Jerald Smith 954-462-5220
Email: esim@bellsouth.net
Peggy Golden 954-762-5220
Email: peggygolden@attglobal.net
CHANGES IN THE FOURTH EDITION
Note: The student manual must be purchased in order to obtain the site access instructions and
registration code. This will allow students to download the student programs.
1. A MAJOR CHANGE: The simulation does not need to be initialized, nor do the student disks need
to be initialized. This also eliminates the need to RESTORE a team’s disk if it becomes unusable.
The consequence is that each team must know the number of teams playing the simulation, the
incident order and the Industry (A - Z) before they can enter decisions.
2. Aircraft choices and costs have been updated to the new third generation aircraft including two
types of regional jets.
3. Maintenance choice sequence has been changed from 0, 1, 2 to 1, 2, 3 in order to dispel the negative
connotation of a zero maintenance level.
4. The three price levels have been shifted somewhat.
5. Cabin service costs have been adjusted to reflect current food costs.
6. Markets served for odd numbered firms has been simplified and a one-stop route has been added. In
addition, a route that does not include a hub has been added.
7. An item that needed changing, the cost of fuel, was not made as the entire algorithm would need to
be rewritten. This is a job we did not want to tackle this edition. The important fact to get across to
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students is that fuel prices do fluctuate and are not simply a given.
8. The buy- versus lease-costs have been changed so that it is slightly more efficient to buy the
aircraft. In the past students have been averse to assuming loans; This should make the playing field
more level.
ADMINISTERING THE SIMULATION B An Overview
(More detailed coverage of the following information is later in this manual)
The steps below should give you a general idea how the administration is executed.
1. Both students and instructor should read Pages 1-39 in the student manual.
2. Establish teams (up to 12) of from one to six students. We strongly recommend teams of three to
four if possible. Teams will select a name for their airline and make a set of decisions for the first
quarter (quarter one).
3. The instructor must decide whether students are going to submit decisions on their own (team)
disk, or submit the decisions on a (paper) decision form. In this case, the instructor will be entering
the decisions on the computer. If you have teams enter decisions on their own disk, ALWAYS use a
virus checker on each student disk as you put it into your floppy disk drive. If the students are
entering decisions on their own disk, the instructor should prepare the required disks and/or the
computer's hard drive, following instructions in this manual.
If students are entering decisions on a disk, they must be informed of the TOTAL
NUMBER OF TEAMS PLAYING the simulation before they begin. The decision entry
program will not let them proceed without this information.
You will also need to establish the name of the industry (A, B, C, D, etc.) and assign a
team number to each team.
4. Merge the decisions for quarter one. During this process you will be asked for the number of teams
playing. Then you will compute the results. This will take from five to 20 minutes, depending on
how many teams you have and whether you are entering the decisions or whether you are using
student disks.
5. Print the administrator's report for yourself. We like to print it before printing the student reports
as there may be some information on the administrator's report that may be passed on to the
student teams via the instructor's news message (which is printed on each team's report).
6 There are two methods of printing the student reports. If the teams are entering their own
decisions, they will also have a program that allows them to print the quarterly report. You may
print the student reports for them. You may also want to print page one of the report for yourself.
This will take from five to 30 minutes depending on your choice of printing options and printer
speed.
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7. The whole process repeats, beginning with a new set of decisions. In most classroom situations,
decisions are made once a week.
8. Please help us to keep you informed of any changes by visiting the Airline home page 2-3 times
during the semester. The location is: http://home.att.net/~simulations/airline/airline.htm
You may be advised to download a more current copy of the software from the publisher's internet
site.
Computer-Related Problems
We would like to ask a favor. If you are having any kind of computer problem, please try to get
someone around your school to look at the problem first. Many cases of that #$%#$@*&#$%
simulation is a result of a program not being copied onto a disk, a disk drive door was left open, or
(often) the wrong file location was entered into the program (e.g., Entering A: as the location when the
files were in C:\AirlineHistory). If you've never worked with a computer, it would be very helpful to
get someone more experienced to show you how to install the program and make copies of student
disks. We encourage you to become familiar with running the simulation before turning it over to a
student or an assistant to run--you'll feel much more in control of the situation. This is very important
to new users. More on this on page 5.
IMPORTANT NOTICE - USED BOOKS
The used book market has become very efficient. In fact, too efficient, because used simulation manuals,
most with pages missing, are being shipped from one part of the country to another. We have seen some
used simulation manuals missing as much as 40% of the book--with no forms whatsoever.
In addition, the previous user has often written their team's decisions in the manual, giving the
purchaser an unfair advantage.
Please put on your book order form that you want new books. You will be doing your students, and us,
a favor.
Thanks from the authors!
BECOME FAMOUS! ADD YOUR NAME!
Note: We want to add the names of the professors who adopt AIRLINE to the acknowledgments
page of the student manual. However, we don’t know who you are! If you will drop us an Email
note, we will place your name in it the next time we print a new run of student manuals. Thanks!
v
CORRECTIONS TO FIRST PRINTING OF THE STUDENT MANUAL
Instructor: Please copy and distribute to your students. If the student manual version is greater than 1,
these do not apply as they will have been incorporated into the new printing. It is the first printing if
the list of numbers in the lower left corner of the back of the cover page is 10 9 8 7 6 5 4 3 2 1.
Note: The student manual must be purchased in order to obtain the site access instructions and
registration code. This will allow students to download the student programs.
Page 4: Advertising and an on-board magazine (Substitute this more complete example):
To indicate you want to produce an on-board magazine, enter a 1 as the right-hand digit in your advertising
budget EACH quarter plus the total cost of the magazine plus your normal advertising budget (example:
$2,500 advertising + [10 A/C  $500 each] = $7501).
Page 10: Long term Loans
Add the following note: The decision entry program will not prevent you from entering an amount greater
than the maximum allowed. It is your responsibility to stay with in your bank’s policy regarding the
maximum amount of a long term loan.
Page 13: Table 4: Aircraft Specification Data
Change cost from Amonthly” lease cost to quarterly lease cost.
Page 14: Fourth item in Market Research Studies
to “The estimate of total seats sold daily in each market (not the seats sold for each airline)”
Page 17: Number of Markets: Table 6
The total number of markets if 7 teams are playing is 35 not 29
Page 26 and 28: Depreciation
Calculated at .0175% of the cost of an aircraft and not 2%.
CRITICAL NOTE IF SENDING AND RECEIVING DATA BY EMAIL:
You will need to set the options on your Email program, e.g., Outlook Express so attachments do not
open in the BODY of the message. When your instructor sends you the history so that you can print
your report, it will come as an attachment to a message. DO NOT ATTEMPT TO OPEN THIS
ATTACHMENT as it is simply a file with data in it and is NOT a self-executing program, (thus the
name, DATA1.A3 or whatever). COPY THIS FILE to either your A: drive or to C:/Airline if you are
storing data on your hard drive. Then use the Student simulation program to open the file and print
it.
USING YAHOO AS THE EMAIL PROGRAM
If a team is using YAHOO for email, they must ascertain the program option is set so “INLINE TEXT” is
not selected. They should go to “Check Messages,” then select the message from the instructor, and on the
top line of tabs, select the (center) box that will have two options, “Inline Text” (which unfortunately is
the default) and “Attachment.” Select the latter.
vi
SECTION 1
INSTALLING THE SOFTWARE AND RUNNING THE PROGRAMS
COMPUTER REQUIREMENTS
AIRLINE requires an IBM-PC (or compatible) with one floppy disk drive and a hard (fixed) disk; either
system needs 256K memory. The program requires Windows 95 or higher. It will not operate with
Windows 3.1. A printer is also necessary. Complete instructions for installing the simulation are given
below.
You will obtain the program files from the publisher. Contact your Prentice Hall representative for
information on obtaining a password to access the download program on the web. The files will include
files to install the program and a program which are the operating programs which you run in order to
access the menu and run the program.
Make certain you place an extra copy of the Airline programs around your office or home. If your
C Drive crashes, you will not be out of business!
Creating Directories for the Programs
Create the following directories:
C:\Airline
This is where all the programs and files are installed.
C:\AirlineHistory
This is for the administrator’s history and it is set up in the program to
recognize this directory.
C:\AirlineStudentHistory This is for the team’s decision files and data Files. It is set up in the program
to recognize this directory.
To Recap: You can use the AirlineHistory directory for your history files and the AirlineStudentHistory
for the student decision files.
If you enter decisions, you should use the AirlineStudentHistory directory for the student decisions. Or,
you may use a floppy disk in the A: drive for student history, whichever you choose. If you are receiving
decisions from students via email, you will want to use the C:\AirlineStudentHistory directory for
accumulating those files, as it will be easier. If you want to transport the files to another location for
processing or printing, then use a floppy for student history.
INSTALLING THE SOFTWARE
1. There are three files that are used to install the instructor's programs: Airline.CAB, setup.exe, and
setup.lst. We will assume you have saved the program files from the publisher in a temporary directory.
Go to that directory via Windows Explorer and go to START, then RUN, then type setup.exe.
During the installation process you will be given a chance to rename the location where the program is
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going to install the software. We strongly suggest you rename this location, as the typical installation
program will bury the programs three-layers deep and it will be very hard to find them later unless you
make the changes shown below. On the screen that is titled (see below for a mock-up of the screen):
_____________________________________________________________
AIRLINE Setup
_____________________________________________________________
Image
of a
Computer
Directory
C:\Program Files\Airline\
_______________________________________________
FIRST, CHANGE THE DIRECTORY TO C: \AIRLINE
This will place it on the main portion of your C: drive and much easier to find it to run it.
SECOND, DOUBLE CLICK ON THE BOX WITH IMAGE OF A COMPUTER.
This will continue the installation process.
Follow the remaining instructions on the screen and your programs will install automatically.
==============================================================
NOTE: If for any reason you need to correct an error that either you or the team
made, you can add or deduct from their Other Expenses the following quarter and
make up for the error. This is a feature in the Parameter menu which is accessed
during the Compute routine. A negative entry will subtract from other expenses and
increase profits. A positive number will increase other expenses and decrease profits.
The latter action is normally used to fine a firm for not submitting decisions or not
submitting decisions on time.
==============================================================
If your program is acting erratic, do what Microsoft always advises for any and all
problems, RE-BOOT YOUR COMPUTER and we add, with a complete COLD boot
(turn switch off, wait 10 seconds and then turn switch back on.
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RUNNING THE PROGRAM ON YOUR COMPUTER
A Note on Your Computer’s Memory:
In order to clear all previous programs from your computer, we strongly suggest that you turn your
computer off and then back on again before running the Airline simulation.
There are two methods of running the Airline administrator's program.
1. You may go to START (at the bottom left of your screen), then RUN, then type:
C:\Airline\airline
Or you may use Windows Explorer to locate the Airline Directory. Double click on the file
named Airline.exe The program will begin with the Title Page of the simulation. You do not
have to type the .exe as it is the extension of the file name but is shown so you can
find it easier if you need to.
The program will go to the configuration screen and you will enter the designation of the industry (A, B,
C, etc.), and the desired location of your history files. On a succeeding screen you will be asked for the
number of firms (teams) playing the simulation. You will be transferred to a menu screen.
The menu has the following options. You will be utilizing the programs in the order given.
Enter Decisions by Instructor
Merge all Team Decisions
Compute Routine: Calculate all Values
Print Administrator Report
Print Student Reports
Exit
There are two methods of entering decisions:
1. Students enter decisions on the student disk and submit the decisions by either turning in the disk or
sending the team decision file via email.
If students have given you their decisions via disk, or in an email attachment; you do not need to use the
Enter Decisions by Instructor routine. In this case, Go to Merge Student Decisions and follow
instructions.
IN ALL CASES, MAKE SURE YOU INDICATE ON THE CONFIGURATION SCREEN THE
CORRECT LOCATIONS FOR YOUR HISTORY AND DECISION FILES.
FILE NOT FOUND
IF YOU EVER GET AN ERROR ‘FILE NOT FOUND,’ it is probably because you did not enter the
correct location of the decision files, e.g., A: or C:\AirlineHistory or
C:\AirlineStudentHistory
3
Here is how to run a test round (run an actual set of decisions).
1. Press Instructor Enters Decisions. We suggest that you enter Industry A. (You can use from A to Z.
This is to allow more than one group to play at the same time. If you only have one class playing, it is
easiest to use industry A. If you are running more than one class, you could name the industry so that it
means something, like A for an evening class, T for a Thursday class, etc.
2. Enter one for the team number.
3. Enter decisions from the student’s paper forms. If you are doing a test run, you can use the button named
“use default values” and a set of default decisions that replicate quarter zero decisions will be entered for
you. Do this for all 4 teams in your trial run.
4. When finished entering all decisions and saving them to either a floppy or to a specific drive on your hard
drive, go to Merge all Team Decisions.
If you decide to save your decisions on the hard drive, it is assumed you have created a directory
named AirlineHistory. This is the default selection on all the directory file selection screens and
you can run the simulation is less time.
5. The Merge Student Decisions routine will take the individual student decision files, named Team#.IQ
where # is the company number, I is the industry, and Q is the quarter number. Example: Team1.A1
Follow the instructions on the screen.
The result will be a “master” decision file that contains all teams. It is named History.IQ
where I is the industry and Q is the quarter number.
Example: History.A1
6. Then go to the Compute Routine: Calculate all Values routine. After the preliminary information, you
will be shown a screen on which you can change one or all parameters. For the test run, we suggest no
changes, although you may want to take a look at the various values you could change and you can exit
without needing to make any changes. The program will compute the values and notify you that the
History file has been stored in the directory you have chosen.
A Note on the Parameter Change Screen:
One change you may want to make when actually running teams decisions is on the Parameter
Selection Menu and is titled Change Demand for Entire Industry. This will allow you to make a small
to large change in the overall demand. You can experiment with the various changes and see the results on
the final results screen. As long as you do not SAVE the program at this point, you can try different
demand settings until you get the results you want.
The results of the program will be printed out on the last screen of the Compute program. This allows the
administrator to ascertain that all values are within reasonable bounds and that the run is a good one. To
continue, simply press Exit to Menu and you will be transferred back to the main menu again.
4
7. Next go to Print Administrator Report. You may enter the number of copies of the stock price page. We
usually print one if we post the report, or one for each team. Wait until the administrator’s report is
finished printing before sending any other print jobs to the printer. The question concerning the stock price
reports is so you may print one report per team, or just one and post it in a place the students can access.
A Note on Your Printer’s Memory:
If you have been printing other materials before running AIRLINE, we suggest that you turn your
printer off, wait a few seconds, and then turn it back on. This will clear previous data from the printer’s
memory.
8. Next go to Print Student Reports and print as many reports as you want. It may be faster to use your
copier to copy the number of reports you desire.
PRINTER DETAILS
If you have any problems with columns not lining up, it is due to the printer substituting a
proportional font for courier. So make sure you have either Courier or Courier New selected. We can
send you the Courier New size 10 Font if you don’t have it installed. Email esim@bellsouth.net or if
an emergency, phone 954-462-5220.
There are so many types of computers and printers that a program is hard-pressed to perform with all
combinations. If you are having problems and are using a local area network printer (shared), try
connecting a printer DIRECTLY to the computer. This may solve your problem. Otherwise, contact
your computer expert or help desk for assistance as we are miles away and cannot help much without
being right there with you.
9. When the reports are finished, follow the instructions on the screen to return to the main menu and
then exit out of the program.
10. You may want to use the default values for company one, and change the values for companies two
and three and compare results of your experimentation.
11. This is the end of your test run. You may want to check the contents of your history file location and
note that the files that are created for each quarter are Decis.a1 and Hist.a1. In quarter two, the files
are named Decis.a2 and History.a2. This scheme allows you to return to any point in the simulation
and rerun the data.
=====================================================================
If you want to re-run the COMPUTE program after changing the demand or other expenses, you
must start the program from the beginning, e.g. go to START, RUN, etc. Windows programs use
up the computer’s memory and it is just safer to have a fresh start.
=====================================================================
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ERROR MESSAGES
1. An “Unable to write to disk” or “permission denied” errors are caused when the plastic write protection
notch was accidentally pushed open or closed on the floppy disk.
2. A “File not found” (Error #53) is displayed when the program cannot find the industry or quarter
number file on the history disk. You may have used the wrong history disk, or entered the wrong industry
designation, or entered the wrong location on the configuration screen, e.g., A: instead of
C:\Airlinehistory
3. A “subscript out of range” or “divide by zero” error usually occurs because a team has entered a value
that is out of the normal range for the simulation. While we try to trap the decisions as they are entered,
something may have slipped by. Check the values and if one seems really out of line, correct it and run
the simulation again.
4. We encourage you to become familiar with running the simulation before turning it over to a student or
an assistant to run the program. You'll feel much more in control of the situation. This is very important to
new users.
A REMINDER CONCERNING START-UP INFORMATION NEEDED by STUDENTS
Note: In the third edition students needed their previous decision file in order to enter decisions. In this
version they do not need it. This is a great improvement as you will not need to restore lost files for teams
and any team member with the student decision routine can enter the decisions. However, before entering
decisions, teams must know how many teams are playing as well as their team number and Industry
designation. While the message “Use Incident XX next quarter” is given on their quarterly report, they
must know the maximum values for that incident so they do not enter an invalid value. The decision entry
program cannot check for this value, as it does not have the previous file to cue from.
CRITICAL NOTE IF SENDING AND RECEIVING DATA BY EMAIL
You will need to set the options on your Email program, e.g., Outlook Express so attachments do not
open in the BODY of the message. Some Email programs automatically open the attachment. The
attachment MUST stay intact as a text file. DO NOT ATTEMPT TO OPEN THIS ATTACHMENT as it
is simply a file with data in it and is NOT a self-executing program, (thus the name, TEAM1.A3 or
whatever). COPY THIS FILE to either your A: drive or to C:/AirlineHistory. Then use the MERGE
STUDENT FILES program to open the file. When you send the DATA file back to the students your
Email program must have the option set so that the DATA file will not open up in the body of the
message they receive (usually termed “inline text”).
USING YAHOO AS MAIL PROGRAM
IF YOU CONTINUE TO HAVE A PROBLEM WITH CERTAIN EMAIL PROGRAMS, YOU MAY
HAVE TO “ZIP” THE DATA FILE BEFORE ATTACHING IT. If a team is using YAHOO for email,
they must ascertain the program option is set so “INLINE TEXT” is not selected. They should go to
“Check Messages,” then select the one from the instructor, and on the top line of tabs, select the (center)
box that will have two options, “Inline Text” (which unfortunately is the default) and “Attachment.”
Select the latter.
6
SECTION 2
CLASSROOM TOPICS
GENERAL DESCRIPTION OF THE SIMULATION
Airline is the first strategy simulation based on a service industry. It is based on an actual case of a small
airline as deregulation in the industry began. This case is included in the student manual, although the
dates have been updated so students won't think it is an old case. The authors suggest that the students
begin with an airline industry study and the case. Then students are organized into teams that allow them
to truly implement their recommendations in an ongoing simulation. However, a class may begin the
simulation without writing the case.
The simulation can accommodate from four to twelve teams. If you have more than one class, you may
designate each class with an industry identification (A-Z). The route between two cities is termed a
“market” (e.g., Dallas to Houston). The number of markets is adjusted according to the number of teams
playing (17 markets for 4 teams; up to 52 markets for 12 teams).
In order to aid busy instructors, the student manual contains many ancillary forms needed to analyze the
game. Also included are instructions on how to do an industry study, make a strategic plan, do a strategic
management audit, and conduct a stockholder’s meeting.
There is no one winning strategy! There are many successful strategies including becoming a luxury
airline, a discounter, catering to business travelers, or serving one or more of the resort markets. There are
seven different types of markets with unique demographic and industry characteristics. If you care to, you
may use local cities and hubs in setting up the simulation markets; this will add a realistic touch to the
simulation environment. Students make decisions in seven categories:
*
Overall Strategy: Type of airline and market segment; overall plans, decision to haul cargo.
*
Marketing: Pricing of tickets, advertising, promotion, number of salespersons, promotional fares in
each market served, type of cabin (food) service, market research studies.
*
Operations Management: Scheduling of aircraft and number of trips in each market, maintenance
level, fuel forecasting/pricing, quality programs budget.
*
Human Resource Development: Wages paid, bonus or other incentive plans, training and
development.
*
Financial: Lease or buy new aircraft, capital acquisition through equity or borrowed funds (short or
long term), cash management through the purchase of CDs, Dividends.
*
Asset Management: Equipment acquisition and disposal. Firms may choose between seven different
configurations and sizes of aircraft (actual manufacturer's specifications are given).
*
Behavioral Elements: There are 15 different mini-cases (incidents). You may choose which order you
want to use them. Teams must respond to each of these. They include social responsibility/business
ethics issues, environmental forces, and the international environment.
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TIME REQUIREMENTS
A caveat: the simulation can take as much or as little time as the instructor wishes to devote to it. If used
only as a peripheral activity, it would take less time than described here. However, the authors use the
simulation (and several related analysis-type activities) as the core of the strategy course, so the time
prescribed is perhaps at the maximum side of the continuum.
Students should read the student manual carefully. This would normally take a minimum of two hours.
The instructor will also want to do this. The first decision takes longer than usual and teams normally take
3-4 hours; this may be spread into two sessions. How much class time is devoted to simulation activities is
up to the instructor. The authors normally split the time with students, devoting 1/3 to 1/2 of the class time
to simulation activities (e.g., 1.5 hours per week; student teams will then meet outside class time for
another hour or so each week). If individuals are to be effective team members, they may want to prep
themselves for the team meetings by analyzing the data in their particular area of responsibility and
prepare various types of documents for presentation to the team (charts, graphs, computer spreadsheets,
financial ratios, etc.). This could require 1-2 hours per week.
A TYPICAL SYLLABUS
(Optional activities are shown with an asterisk *)
Week 1 *Assign Mid-Continent Airline Case (in student manual) as a formal, written case. Includes an
industry study as outlined in the student manual. It is usually 5-10 pages. An alternate method
is to have the students read the case and prepare a 1-2 page synopsis of recommendations
and/or key issues. Another option is to do an industry study. In a summer semester, we have
them do a 1-2 page analysis of the mid-continent case.
Week 2 Continue preparing the case. Instructor has classroom activities concerning the “big
picture” in strategic planning for these first 2-3 weeks, covering as much of the policy text as
possible.
Week 3 *Airline Case is due. Hand in the written case and discuss in class. Students should read the
student manual pages 1-42.
Week 4 First decision is due. The authors also have teams turn in their formal strategic plan-- which
admittedly is tentative, but at least they have been forced to consider their overall strategy and
not just a series of disjointed decisions.
Week 5-11 Continue making decisions. A total of 8 to 12 decisions are made.
End-of-semester. One or more of the following activities are accomplished:
1. Stockholders report
2. End-of-semester management audit
3. Team debriefing
4. Instructors debriefing (we also give out different types of awards and/or certificates).
Both the audit and stockholder's meeting are described in the student manual.
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DEBRIEFING STUDENT TEAMS
If you have not used a simulation before, let us emphasize the importance and the tremendous learning
experience of a thorough debriefing of the simulation. This should include a strategic management audit
(e.g., self-study) presented formally by each team to the class. After the presentations, the instructor can
lead a discussion of the simulation and hear about the learning outcomes.
ANALYSIS FORMS AND LOG BOOKS
The student manual contains forms for analyzing appropriate ratios, conducting individual market
analyses, and lease/purchase analyses. Students who conduct such information analysis can justify their
decisions more easily for audits as well as articulate their decision-making behavior if they are having
performance problems. We require each student to turn in an analysis of their choice EACH WEEK. The
forms in the book can be readily adapted to personal computer spreadsheet programs and we give extra
credit to students who create spreadsheet programs.
It is VERY useful for students to keep a logbook of their analyses and decision rationales. This
documentation helps you discuss any strategic problems that may occur. In addition, it provides a written
record that expedites their strategic audits and stockholders' reports. A loose-leaf binder with dividers
(one per team) is a good medium for this purpose.
The authors recommend that teams provide a short written rationale of their incident (mini-case) response
each decision period. This forces them to think through their position more carefully. It can be turned in
on the page the incident is printed on. A copy should be maintained in their logbook or the instructor can
return it so the team can retain it in the log.
The student manual includes an exercise in strategic planning and a strategic audit. These may be used at
the discretion of the instructor. Our experience suggests that teams who engage in these strategic
processes show improved performance. A format for a management audit is provided to guide teams in
assessing their performance. We strongly urge teams to discuss the interpersonal aspects of the team and
how they are coping with decision-making and problem solving. The stockholders' report provides an
opportunity for students to understand the special interest of this important constituency. We recommend
the stockholders' report at about the midpoint of simulation play and the management audit at the
conclusion.
PEER EVALUATION
In order to help ensure cooperation by all members of a team, two different types of peer evaluation forms
are included in the student manual. We emphasize the responsibility of the manager in doing performance
evaluations and thus provide an opportunity for students to practice this duty. If students know they are to
be evaluated by their peers and that this evaluation will be factored into their grade, most students are
more motivated to do their fair share of the work.
We normally have the students turn in the salary bonus evaluation at the mid-term point when the
stockholder's meetings are held and the final evaluation form is done at the end of the semester. We do the
evaluations in class (after we've asked everyone to reposition themselves around the classroom so they
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won't sit next to a teammate). If you have them do it out of class, the team will get together and score its
members very high! We use the peer evaluation only to spot the students who are not doing their fair
share or who are doing a lot of extra work for the team.
GRADING
We weigh the simulation activities from 30 to 50 percent of the total grade for the class, depending on our
emphasis on the simulation. This includes the written exercises, including strategic plans and audits as
well as the stockholder’s reports. A sample percentage breakdown is shown below:
Peer evaluation
Quantitative finish
Annual stockholder report
A management audit(s)
Weekly analyses
5-10%
5%
10%
5-15%
5-10%
(Forms are in student manual)
(A mid-term and/or end of the semester)
(Each student responsible for turning in
some type of analysis of some aspect of the
______ simulation or as an extra credit activity)
30-50% of semester grade
WEEKLY ANALYSIS
Students learn a lot if they must analyze some aspect of the airline's operations. You may either require
some type of quantitative analysis each week or use it as an extra credit activity. In any case, we always
give extra credit if a student builds a spreadsheet using their own ideas for incorporating useful
information.
THE MID-CONTINENT AIRLINE CASE
The authors have used both case study and simulation for many years. We have felt a weakness of case
analysis is that it is difficult to prove the validity of a student's analysis and recommendations. The idea
of “putting your money where your mouth is” (pardon the colloquialism) gave rise to combining this case
with a simulation.
We do two things to prepare students for the simulation. First, they must do an industry study of the
airline industry about the second week of class. This can be as short or as long as you prefer. The critical
factor is that it sets the stage for the environment found in the simulation. Second, we have them analyze
the mid-continent case found in the student manual. The case ends at the same place the simulation
begins--a small airline pondering what to do. Again, how much written work they do on the case is your
choice, but we have found that it is a good opportunity for students to do their first formal case analysis
and then prove how good their recommendations were by applying those to the simulation decision
variables.
If you feel that the Airline case is being handed down from one class to another, you could assign any
other current airline to study. Some interesting ones would be Alaska Airlines, Southwest, and any of the
new upstart airlines. Regardless, by the third or fourth week of class they have been well prepared to
begin actual decisions for the simulation. If you are on a quarter basis, you may want to combine the
industry study and case so decisions can be started no later than the end of the second week of class. We
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have found that it takes a minimum of seven decision periods for the simulation to have a learning impact.
Every decision period that you can run greater than eight adds greatly to the learning experience; the
learning curve is well in place by then and teams can fine tune their strategic plans. An ideal number of
quarters to play are probably in the 8-10 range.
SIZE AND MAKEUP OF STUDENT TEAMS
We have found that four students are the optimal number for a team. Five is acceptable but an introverted
(or unmotivated) student on a five-member team tends to be able to hide from group interaction and
responsibilities for company management. At the other extreme, a competent two-person team can
manage a successful game as long as the analyses performed are kept to necessary pro forma statements
and marketing analyses. The three-person team is well suited to graduate level classes. However, the
authors have often assigned a team of two in a smaller graduate class where we need to get the total
number of airlines up which increases the number of markets available and enhances competition.
SPECIAL CLASSROOM ACTIVITIES
The simulation can create an environment for additional strategic activities to occur. These events usually
involve play-acting current events in the business environment (e.g., takeovers, advertising campaigns).
We recommend that teams not engage in additional activities until after quarter four. We have been able
to engineer a hostile takeover event in the following manner:
1.
The takeover team buys 5 percent of the stock of another team on the open market through loans or
excess cash. These funds are kept in the CD account. At that time, the acquirer must issue formal
notice to the Department of Transportation and the SEC (accomplished with the news message) of
their intention to acquire the firm. They may then complete their takeover after a one-quarter lag to
give the targeted team time to respond (adopt a poison pill, sell a lot of stock to dilute the earnings,
dispose of cash by purchasing aircraft, etc.).
2.
If after one quarter the acquiring team still wants to purchase the company, the acquiring team must
place an amount (in CDs and leave it there) equal to the total shares outstanding times the current
stock price. There is no way to transfer this cash anywhere else (e.g., to the stockholders who sell
their stock), so we just allow it to sit in the CD account.
3.
The team being acquired may ward off the attempt by taking steps to increase their company's stock
price or by diluting shares so that the acquiring company is unable to obtain the balance of 95
percent of the stock. It is important that students understand the ethics involved in their responses.
For example, issuing new shares and keeping the funds in their cash accounts might offend their
stockholders.
If a team succeeds in acquiring controlling shares, they are given a one-time opportunity to review the
records of the company and present suggestions to management. The acquired team must respond to each
of the suggestions but is not obligated to implement all of them.
This exercise can enrich the simulation by permitting students to gain a greater understanding of the
issues facing the strategic manager. Special debriefing is necessary to complete the process. In the above
example, the acquiring company should be encouraged to verbalize the issues that led them to select the
target and the environmental conditions that made it desirable. The acquired company may express
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feelings of being violated or lack of control. The impact carries over to other student teams who may
begin to see new opportunities and threats facing their companies; in this manner, the entire class benefits
from the exercise.
We have included documents at the end of this manual that pertain to takeovers. They have been prepared
by some of our student teams and we have made no attempt to edit them. We think, if left to their own
devices, teams can be innovative and clever!
AN EXERCISE IN STRUCTURE AND STRATEGY
Although every business policy textbook discusses strategy/structure, most instructors are hard pressed to
find an interesting method of driving the point home. The following exercise permits students to draw
their own conclusions. At the end of quarter six or seven, most teams have accomplished some level of
growth. In general, their attention has been focused on expanding markets and capitalizing on their
investments.
At this point, the instructor announces that each team is to evaluate its organization chart. Teams should
be allowed to meet for approximately 45 minutes and then present their findings to the class. Inevitably,
they will discover that the size of their company has grown without consideration to the configuration,
formalization or complexity of the formal organization. This will be especially true of those companies
that have engaged in diversification strategies. The exercise can then be debriefed according to the
instructor's favorite perspective on strategy and structure.
This exercise requires about one hour.
STOCK PRICE AND PERFORMANCE POINTS
Students are always extremely concerned about what factors are used to determine stock price. We are
VERY careful not to disclose this other than as some broad sweeping generalizations, as follows:
A combination of factors are much like the real world: ROI, ROS, ROA, EPS, and dividends. Factors that
would lower stock price are overdraft loans, lower than average quality, high employee turnover, and lack
of sufficient market research.
If students knew exactly what the formula was, they would play the game to maximize the stock price
formula and not to learn something about business strategy! Although we would like to, we cannot base
the stock price very heavily on earnings per share. It would favor the teams that leased all their aircraft
and discriminate against teams that sold more stock to raise capital to purchase aircraft.
Performance points are the cumulative stock price to date, with five points subtracted for poor cash
management in any quarter that cash is zero or greater than $350,000. Performance points give a better
game-to-date evaluation while stock price indicates the team's short-term position.
We are always interested in your suggestions pertaining to a fair algorithm for the stock price. Please let
us know. We will continue to fine-tune this particular item!
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COUNSELING AND ADVISING TEAMS
We have discovered that we must force poorly performing teams to meet with us for advice. Somehow
the ego stands in the way--they think, like the gambler on a losing streak, that a rainbow is just around the
corner! One way to do this without being obvious is to meet with every team for a few minutes
periodically throughout the term. For example, meet with Teams 1, 3, 6 in quarter 10; teams 2, 5, 7 in
quarter 11, etc. Make sure that teams that are struggling are seen more often.
It is very easy to offer too much advice. It is best to use the Socratic method to get them to see new
alternatives. Instead of “You MUST raise your fares!”, have them calculate the difference in the price of
a ticket at their fare vs. the price of the ticket at two cents higher. They will see that it is a relatively small
increase and hopefully conclude that most prospective customers would not switch to another carrier or
make the decision to use an alternate form of transportation.
Other good questions come to mind:
“Do you think if you were paying a luxury price you would patronize an airline that was flying non-cabinclass aircraft?”
“Assume you were a citizen that lived in Lancaster, Pa, and the airline was flying only two flights a day.
This is equivalent to a flight in the morning and a flight at night, perhaps 12 hours apart. What proportion
of the total population that need to get to an airline hub would fly at such inconvenient times?”
“I notice you are spending a relatively small amount for advertising and/or promotion. If I remember my
advertising rates correctly, that would be equal to about the quarterly rent on one roadside billboard in
each city you are serving. Do you think that is enough exposure?”
“I realize you want to obtain a good work force by paying high wages, but are you retaining enough profit
to provide working capital during this growth stage?”
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SECTION 3
SIMULATION TOPICS
THE DEMAND ALGORITHM – Confidential! Not for student eyes.
We have had requests to include a detailed description of the demand algorithm in the instructor's manual.
Due to the sensitive nature of this information, and the fact it could get into student hands, we cannot do
it. However, in order to advise poorly performing teams, we are including a few key observations and
hope you do not share these verbatim with your students. We think the trial-and-error system of learning
is much better in the simulated environment. Some generalizations:
1.
Two flights in a market is barely sufficient. Three is better and four is optimum. However, it should
be noted that the point of diminishing returns is reached when a market is served by more than 12
flights per day (total for all firms).
2.
Cabin service does not normally have a positive payoff. It is one of those necessary evil things; only
needed if the competition is doing it. Luxury airlines should always have the highest level; while
discount airlines should have none.
3.
Advertising and promotion should increase as the size of the fleet increases: Since the beginning
expense of $5,000 is termed small in the student manual, students should realize that this particular
expenditure should be increased. A combined budget of $20,000 might be sufficient for a company
with four aircraft, but much too small for a company with 10 aircraft Suggestion: Have the students
call a local newspaper and ask about advertising rates.
We always urge teams to buy the market research studies giving the industry average for these items
and to decide on a strategy of being below, at, or above the average. Remind them that the industry
average (since it is a mean) may be too high or too low.
4.
Sales force budget: Hopefully it is obvious (or maybe it isn't!) that since a large percentage of the
airline's tickets are sold through travel agents, you don't need too many missionary salespeople out
on the streets. While salespeople could convince larger companies that have a travel clerk to call the
airline directly, this is a fairly small portion of their business. The correct number of salespersons is
relative to the size of the firm's fleet. For purposes of confidentiality, let's just say that a firm should
have somewhere between two and eight salespersons.
5.
Quality and Training Budget: Again, the budget is somewhat small at the beginning. It should be
increased in proportion to the number of employees in the firm.
6.
Maintenance level: Directly influences reliability of the airline and therefore the amount of refunds
made. Luxury airlines should always have the highest level.
7.
Lease vs. buy: Since the cost of purchasing an aircraft is higher in both cash flow and direct costs
than the leasing option, the algorithm gives a little demand boost to firms that purchase aircraft. We
do this not only to help level the playing field but also under the assumption that a firm will maintain
something it owns a little better than something it leases. Thus, a bit better reliability, pride of
ownership, etc. In terms of profits, it matters little whether a firm buys or leases. However, after
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running the numbers most teams think that they will take the lowest cash flow alternative, leasing.
Counter this a bit in class by saying that in purchasing, the firm is building assets on its balance
sheet and that someday (although not during the duration of the simulation), it will probably profit
when selling its used aircraft, due to appreciation.
8.
Type of aircraft: Teams should never have more than two types of aircraft at any one time because
maintenance costs increase dramatically (too many parts to stock, different systems to train
mechanics, etc.). The student manual warns about this.
Strategically, it is better to increase the number of flights in a market with smaller aircraft so
breakeven loads don't need to be so high. As demand builds in a market, teams should replace the
18-, or 19-seat aircraft with 30- or 36-seat aircraft for some of the more popular flight times, e.g.,
three flights a day: morning, late afternoon, and evening.
9.
Reliability: It is affected by maintenance level and employee turnover. Tell the class this fact.
Sometimes teams forget about the winter quarters (4, 8, 12) and ask "What happened to our
reliability." It dropped a full 2 percent!” Remind them of the winter quarter. (It is in the student
manual.)
10. Employee turnover: Affected by additional wages paid and training.
CALCULATING THE BREAKEVEN LOAD FACTOR
As you look over a firm's printout with the team, it is often useful to check the sales in each of their
markets to ascertain if they are at the breakeven point in each market. Remember, though, it takes three
quarters to build up sales in a NEW market. From the OTHER DATA section on page 1 of their printout:
Divide the cost per available seat mile by the yield per revenue passenger mile. Example from Quarter 1
in the student manual:
.178 divided by .35 = .508 or 50.8 percent load to break even
BYPASSING A TEAM IF THEY DO NOT SUBMIT DECISIONS
Regardless of the methods of entering student decisions, both versions allow the bypassing of a team that
has failed to turn in a set of decisions. They will be given the previous quarter's decisions with financial
and capital equipment decisions zeroed out to prevent a catastrophic quarter. The bypass is made when
the MERGE routine is executed. When you come to the team in question, a message box will appear and
to inform you of the missing file. You will answer affirmatively to the query concerning using default
values.
We always fine a team that is late and place a message about it on the instructor’s message box. Start out
with a fine of $5,000 or $10,000 and increase it every time it happens. With notification given in the news
message, the chances of it happening again become slim. A typical message is, “The FAA has fined team
three $5,000 for the late submission of quarterly decisions. A spokesperson for the FAA stated the fines
are going to increase until every firm is in line with the FAA regulations.”
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PARAMETER CHANGES
You have the opportunity to change some of the parameters in the simulation. A brief summary of these
parameter changes is given below. Our advice is to run the simulation "as is” your first semester and then
make mild changes the second semester.
1. Fuel Prices
The simulation will automatically set up a table for future fuel prices. You may alter these values if you
choose. You may change the fuel price on the spot market for the current quarter as well as the contract
price for the following quarter. The SPOT PRICE is the current fuel price on the open market. The spot
and contract fuel prices can provide an interesting dimension of play, since they are charged on a seatmile-flown basis. It provides an opportunity for students to play a commodity market. The CONTRACT
MARKET PRICE that you set will be posted for the following quarter of play; that is, if you set it in
quarter one, it will take effect in quarter two.
2. Demand Index
The simulation has automatic demand generators that will keep the overall demand close to the intensity
of industry growth. You may change the demand for the current quarter by creating a stable environment,
an upbeat economy, or a recession economy. If you alter the economic environment, it is advisable to alert
student teams about this in the news message, in the report routine, one quarter prior to the change. They
have been buying the demand forecast which may have indicated another type of economy and thus
complain about wasting money on worthless market research.
3. Demand Forecast
You will be provided with a demand forecast (for the next four quarters) that is calculated from the
current demand. The forecast for the subsequent four quarters can be changed on a quarter-by-quarter
basis; this is market research or environmental information that can be purchased by students.
Consequently, the forecasts indicate environmental turbulence or stability that affects decision-making. It
should be noted that the forecast has nothing to do with the demand index. It is the demand index that
establishes the base demand for the simulation. The forecast is a linear regression of past quarters of play.
4. Individual Company Demand
You may adjust the demand for any team. This may be done as credit for outside assignments such as an
advertising layout or plan, or it may be done to temporarily help a struggling team. You may also use it to
take the wind out of the sails of a team that is doing too well, either because of blind luck or because the
team expanded rapidly. (Due to the automatic demand generator, a team may expand rapidly early in the
game and get firmly established in many markets, to the detriment of other teams.) We did not want to
place any artificial constraints on the simulation expansion so occasionally you will need to slow down
the sales of a certain team.
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Due to the fact that most costs are relatively sunk once flights are established, extra passengers added or
deducted from demand directly affect profits -- there is little additional variable cost in transporting one
extra passenger or conversely, little savings if one passenger fewer is flown. Therefore, be very
conservative in applying the addition or deduction to a team the first time until you get a feel for the
sensitivity of this parameter. A plus or minus two to 4 percent will usually be sufficient.
5. Modify Company Names
Teams may modify their name at any point in the simulation if they decide to change their image or take
advantage of the dual designation option in incident F. If students are using student disks for entering
decisions, they can also change the company name at any point.
6. Adjust Other Expenses
This allows you to adjust a firm's expenses by adding to or subtracting from other expenses. We use this
to pay back a team that has made an innocent input error which hurt sales and profits more than it should
have. It can also be used to fine a team for whatever reason you choose (e.g., being late in turning in their
decisions). In one instance we used it to fine two teams $200,000 each for collusion: they had agreed to
stay out of each other's markets! In another case, a team did not realize the high cost of disposing of
owned aircraft; so in order to save money they sold three new (large) aircraft so they could lease them
back.
The brokerage fee for selling aircraft is 2 percent of the book value so its cost was over $600,000 to
dispose of these aircraft. We felt a loss of that size at the beginning of the game was too great a fiscal (and
mental) handicap, so we refunded $500,000 -- thus charging them $100,000 for their error (which was
simply a case of not reading the fine print in the manual).
7. Alter Algorithm Parameters
The list of these parameters is printed at the end of this section. Be VERY careful in changing anything
except cost parameters. The simulation algorithm is a delicate balance of many factors, with literally
thousands of possible combinations, all depending on decisions by competing firms. One suggestion:
increase the cost of maintenance about the 5th quarter. See if any firms reduce the level of maintenance
when faced with higher costs.
After completing these parameter changes, the COMPUTE program will compute all values.
At the end of the COMPUTE program, each firm's profits and stock price will be printed on the screen.
You can determine if you have a good run or not. If you want to tweak or fine-tune the entire simulation,
or perhaps one team, you can rerun the compute program at that point. If not, you can proceed to the next
step: printing the administrator's report.
Rerunning the Simulation
At the end of the COMPUTE program, the profits or losses are displayed on your computer screen. If it
looks like a reasonable run, simply press ENTER and the values will store on your HISTORY disk. If the
simulation needs some fine-tuning or you want to boost a team's demand for whatever reason, you have
17
an opportunity to rerun the simulation at this point. In order to clear out all of the old values that were
created in the first run, always start the program from scratch.
Reasons to Rerun the Simulation
You may have a very aggressive industry which has expanded too rapidly and a majority of firms are still
showing substantial losses after the third quarter of play. For the sake of keeping the classroom
atmosphere upbeat, you may want to make another run. You can increase the business index somewhat
and compute the quarter again.
If any team's profit or loss is out of the range that you feel is normal, you may go back and rerun the
compute program, changing the demand for any team whose results you want to modify. It will only take
about two minutes too re-compute the simulation.
Since the fixed costs are high in comparison to variable costs in the transportation industry, it is relatively
easy for a firm to have too low or too high sales (and profits/losses). While the algorithm is very
complicated and has many checks and balances, it could not cover every possibility; thus the reason for
giving this opportunity to re-compute the game at this point.
Normal Profits
In this regard, let us share our experiences. If an industry is conservative in its decision-making and adds
aircraft very slowly, teams will usually lose $50,000 to $100,000 per quarter as new aircraft are acquired
and new markets are opened. Although the student manual does not state this (we didn't want it to), it
takes a full three quarters for a new market to become profitable. If a firm is very aggressive and acquires
a number of new aircraft and markets very quickly, it can experience losses in the $500,000 to $800,000
range each quarter. They normally turn the corner by the fourth quarter and begin making a profit.
Suggestions to Increase or Decrease Fares
While many instructors do not believe in helping teams stay solvent and therefore do not give teams
suggestions, we do to a certain extent. After all, your students have never operated an airline(!) not played
this simulation before. If we can give a tip or two to keep teams solvent, we do so. We never give teams
that are profitable any hints! So, here are some ideas if you are so inclined.
You may also need to prod a team to raise its fare if it has acquired new aircraft but not raised fares. The
35-cent fare at the beginning of the simulation is appropriate for the current fleet with very low loan
payments and is almost depreciated off, but a somewhat higher fare is necessary as new, very expensive
equipment is obtained. It will need to be in the .36 to .37 range for the normal fare range, .31 if a discount
airline, and .48 to .50 if a luxury airline.
Fares at the .28 - .29 range are definitely money losers as the added passengers do not make up for the
loss in revenue. Fares in the .50 -.51 range are too high and passengers switch to a lower priced airline.
Teams that have a substantial number of markets with promotional fares can also experience such a loss
of revenue as to suffer substantial losses. This is very much the case in the real world of air transportation.
I give a tip to my classes and then don’t dwell on it any more that they should use the #1 or #2 fare for a
new market and then revert back to a “no fare sale” policy for that market.
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ADMINISTRATOR'S REPORT
The administrator's report provides the following information:
Section 1 - Recap of Key Decisions
This section contains a recap of key student decisions. Advertising and promotion have been combined to
save space. The column listing salespersons indicates the total number hired to date, not just those hired
this quarter. The wage items conform to the key shown on the student decision form, as do the decisions
regarding maintenance, fuel purchasing policies, capital equipment acquisition, and market research.
Dividends are shown in total dollars paid this quarter, and not dollars per share. (Dividends per share are
listed on page 4 of the administrator's printout.)
Section 2 - Key Operating Data
Section 2 contains production data for each company, including a daily seat productivity ratio that
indicates the number of times per day that each available seat flew a passenger (a larger number is better).
It is optimal to increase yield per available seat mile and load factor simultaneously.
Section 3 - Key Financial Data
The ratios in this section are calculated by the formulas shown in the student manual. Return on assets
may be somewhat meaningless in this simulation since a company that has a policy of choosing operating
leases will have minimal assets, thus inflating this ratio. Large debt-to-equity ratios are common in the
airline industry and should not be construed as poor financial management, although the simulation has
the flexibility to support equity companies. We have found return on sales to be the best single
performance indicator. It may run between two and 12 percent.
Administrator’s Report - Page 2
Interpreting the Market Report
The market report shows the activity in each market for this industry. The total sold item indicates the
total number of seats sold for the entire market. The next set of numbers show the company number,
number of flights, number of seats sold by that airline and the type of fare in that market. This report may
help explain losses for an airline that shows a high load factor but a low yield per available seat mile on
page 1 of the report (i.e., it may be flying in highly competitive markets with promotional fares).
It is usual to have three or four airlines competing in one market. However, WHEN THERE ARE MORE
THAN 12 FLIGHTS IN ONE MARKET, there are not enough passengers to cover variable costs and
contribute significantly to fixed costs.
Administrator’s Report - Page 3
Page 3 of the report shows the market research information that is sold to each company that purchases
this information. Note that the $8,000 Market Research Report (total sales in each market) is always listed
on page 3 of the student printout. We make a note of this here as students sometimes ask where their
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$8,000 company sales report is.
Administrator’s Report - Page 4
Page 4 is an industry report that is printed in duplicate so that a copy may be posted for student teams.
The ratios are calculated as arithmetic means. The fleet status is cumulative and reflects activity for the
simulation to date, rather than for the current quarter.
INSTRUCTOR PRINTS QUARTERLY FINANCIAL REPORT
Although you may print several copies of the report, it is a time-consuming process. Therefore, we
suggest that you print only one copy of the report and make the student teams accept responsibility for
duplicating copies for their team members. You will probably want to make one extra copy for personal
use. If so, you can use the Print 1 page or Print 2 pages reports selection to save paper.
STUDENTS PRINT QUARTERLY FINANCIAL REPORT
If you are using student disks, the report program has a routine that allows you to record the student
results on each student disk allowing them to print their own reports. They must use Courier or Courier
New 10 point font for proper column alignment.
NEWS MESSAGES TO STUDENTS
You will be asked if you care to provide a 4-line message to the entire industry. This can be considered
environmental information, or it may contain some class-specific assignment. For example, one parameter
option permits a dip in the economy. The instructor may enter a news message that predicts this dip. Some
examples are given later in this manual.
A description and analysis of the student report may be found in the player's manual.
INCIDENTS
The incidents are mini-cases that provide an additional element of environmental uncertainty. The
students may be given a message on their printout that indicates the outcome of their decisions on these
items. However, there may be messages that only obliquely refer to the incident and/or its outcome; in
two cases, they are kept guessing as to the outcome. In some cases, the impact is felt over a substantial
period of time and may not be evident in the quarter immediately following the decision.
You have the option of choosing in which order the incidents are used. We always change the order in
each class if we are running more than one class. That way, a team that gets its printout back before the
other class makes a decision can't pass on how a certain response affected the simulation results. If
Incident N is used, it must be used for the last simulation quarter, as there is no real effect on the
simulation. It is just a good exercise in forward planning and decision making.
CRITICAL NOTE – INCIDENT ORDER
Teams MUST be informed in which order the incidents are going to be used. There is no mechanism in
the program to do this.
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Industry and Instructor’s Messages
The student printout will contain automatic messages of interest to the industry. Often students attempt to
find a cause-and-effect relationship concerning an event that is purely an accident (a minor mechanical
failure, etc.). In other cases, the message is directly attributable to a previous decision (e.g., a firm may be
doing a poor job of baggage handling because it has a low training budget. We do not answer questions
regarding these messages except to advise teams that they should discuss whether they think there is a
cause-and-effect relationship, and if so, what to do.
You may also input a (four-line) message which will be printed on all team printouts. You may give
logistical messages or industry-related messages.
Company-specific Messages Entered by Instructor
“Eastern Metro Express has introduced a new in-flight magazine.”
“Mid-American Air has repositioned as a luxury airline and changed its name to Lux-Aire Airways.”
“Link Aire has purchased the industry's first ERJ145 Regional Jet.”
Examples of Industry-related Messages
“Three firms hired salespeople from competitors. Four firms have started an employee involvement
program. Two firms are now purchasing from Apex Suppliers.”
“Average additional employee compensation is usually in the 3 percent range.”
“Sixty percent of all aircraft in the industry are owned and 40 percent leased.”
“Remember, quarter four is a winter quarter. Reliability and sales will fall off.”
“A boom year for the U. S. should boost the resort markets.”
Backing Up the History Disk
It is critical that you maintain a backup history disk in case your main history disk becomes inoperative.
You will need to copy four files each quarter to the backup disk: HIST.IQ DECIS.AQ. In the examples
above, the A indicates the Industry (A, B, C, etc.) and the Q indicates the quarter that file was created
(quarter 1, 2, 3, etc.).
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CHANGING SPECIFIC PARAMETERS
In case you want to fine-tune the simulation algorithm or increase costs of one or more items, we have
printed the parameter catalog below. Some items which we commonly change (after quarter 4) include
maintenance costs, salesperson cost, cost of cabin service, and the prime interest rate (which changes the
interest rates of loans).
Parameter Catalog
Variable
Number
1
2
3
4
5
6
8
9
10
13
14
15
23
24
25
26
27
29
30
31
33
34
35
36
37
38
39
40
41
42
37
44
45
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Item
Value
% subtracted from revenues for each month of promotion fares
.11
Add to demand for cabin service if other firms don't have
.022
% added to demand for one month fare sale
.02
% added to demand for two month fare sale
.04
% added to demand for three month fare sale
.06
% of total available seats as a base demand
.552
Luxury airline coefficient
.07
Discount airline coefficient
.042
Prime interest rate
.08
Increase in reliability each quarter for maintenance level #2
.004
Increase in reliability each quarter for maintenance level #3
.006
Quarter in which the added maintenance level takes effect
3
Added cost of level 2 maintenance
$ 2,500
Added cost of level 3 maintenance
$ 3,500
Cost of cabin service level 1
$1.00
Cost of cabin service level 2
$2.00
Cost of cabin service level 3
$5.00
Cost per salesperson per quarter
$ 12,000
Insurance cost per seat (for aircraft under 20 seats)
$ 180
Insurance cost per seat (for aircraft over 20 seats)
$ 300
% of the cost per seat mile flown applied to flight costs
.30
fuel
.24
maintenance
.26
passenger service
.20
Administrative cost up to 76 seats
$ 100,000
Administrative cost up to 102 seats
$ 150,000
Administrative cost up to 133 seats
$ 200,000
Administrative cost up to 168 seats
$ 250,000
Administrative cost up to 199 seats
$ 300,000
Administrative cost up to 230 seats
$ 350,000
Administrative cost greater than 230 seats: $400,000 plus
$1,700 each seat above 230 seats
Cost per market for added fuel when the firm is flying out
of its region (applied when total markets flown is >7).
$ 10,000
Salesperson coefficient
.006
46
47
48
49
Promotion coefficient
Advertising coefficient
Effect of employee compensation on turnover
Effect of training budget on turnover
.0135
.0135
.003
2
YOU MAY WANT TO CONFER WITH THE AUTHORS BEFORE MAKING ANY OF THESE
CHANGES.
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TYPICAL QUESTIONS FROM STUDENTS
The most upsetting event in the simulation to students is when a perfectly managed airline with perfectly
maintained aircraft have a major accident or engine failure that requires re-scheduling the fleet. It is
placed in the simulation because “Bad things happen to Good people” regardless….. We have put this
statement first as it does upset students the most!
1.
Why do the teams have such a liberal line of credit during the first quarter?
Although the firm is in relatively poor condition at the start, we are assuming the bank is very
optimistic about the new management team's ability to turn the company around. The real reason is
to allow teams to make the buy or lease decision from the start.
2.
What is the winning strategy?
There are many winning strategies, depending on the team's actions versus its competitor's. A wellmanaged small company that monitors costs closely may outperform an inefficient large firm.
3.
Can a firm merge (an option in incident F) if they have dual-designated in an earlier quarter?
Yes. Since the merger assumes that the firms will be operated as (separate) strategic business units.
4.
When should we pay a dividend? How much should we pay?
Pay a dividend when you feel the firm is financially strong enough. Remember that the stockholders
ARE the owners of the firm and you are working for THEM. Any size dividend is appreciated by the
stockholders; however, of U.S. firms that pay a dividend, the average is one-half of the current
profits.
5.
Why didn't a declared dividend payment show up on the income and expense statement?
The computer program zeros out any dividend payment that is greater than the profits that quarter. It
will not allow a dividend payment if there are negative retained earnings.
6.
We tried to put in a wage increase but the program wouldn't accept it. Why?
A team must declare the TYPE of compensation policy (Entry #6) before it can enter the amount of
a wage increase.
7.
What is the long-term loan interest rate?
Unless the instructor changes this parameter, it will remain at 1% above prime:
8 + 1 = 9%. If the instructor changes the prime rate, all long-term loans will revert to the new rate.
Thus, the long-term loan has a variable rate clause.
8.
If cash is invested in a CD, is the cash available that quarter?
No! It is not available until next quarter. The student manual is clear on this.
9.
How is interest earned on the CD paid?
It is credited against your current interest expense. If all your loans are paid off, the interest
expense will appear as a negative number, thus giving you credit for the interest earned.
10. Can the long-term loan be paid off early?
Yes, you may make an extra payment at any time.
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11. How do we pay off an overdraft loan?
You are not REQUIRED to do anything. It is automatically applied to the short-term loan the next
quarter. The additional interest is charged at that time also. If you have sufficient cash, you may pay
any amount you desire on the short-term loan.
12. Can a team lease two different types of aircraft during the same quarter?
No. It's a matter of trying to keep the decision inputs simple. However, they could lease one type and
purchase another type.
13. What is the most common input error?
Failing to correctly note that a market is abandoned on the decision form. Place the market number
in the first column, and zeros in the next three columns.
14. Is the stock price a good indicator of a team's relative position?
Perhaps, but take it with a grain of salt. A firm may be in a growth mode and a lack of profits may
hinder the stock price. However, the team with the highest stock price in a quarter is doing better
financially than the team with the lowest stock price.
15. What determines the stock price?
The same type of factors that one would find in the investment world: profits, return on sales, overall
health of the firm (inclu
airline.
16. What do the messages at the bottom of the student printout mean?
Sometimes they are trying to tip the team off to certain events:
“The cities represented by market type A are expected to have increasing demand next quarter.”
This should trigger a discussion by the team on whether they should add a flight to that market.
Some messages are just industry (and company) rumors. As in the real world, teams must decide
whether there is a cause-effect relationship in the message. The engine failure is a good example. Is
it just a statistical accident, something that is going to happen every 10,000 hours of flight? What
should be done about it? Increase the maintenance level; sell that aircraft; or do nothing?
17. What is the single most critical measure of efficient performance?
Passenger load factor, overall and in each market.
18. Can you revert to a lower maintenance level?
Yes, at any time. Basically, this reduces your spare parts inventory.
19. Can you revert to a lower wage or compensation level?
Yes, and you may need to do so in case of lower earnings. However, you may experience the same
effects as found in the real world, e.g., greater turnover and lower reliability, because aircraft are
being serviced by fewer experienced people.
20. What can we do with excess cash at the end of the semester?
Pay off loans and perhaps buy back some stock. However, make sure you cannot be accused of
stock manipulation by the instructor, e.g., alternately selling and buying stock as the price fluctuates.
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Remember that you are in the business of operating an airline, not as a stock speculator!
21. Can our firm get too large?
Yes. The markets are not elastic. While adding flights to certain markets will stimulate demand, this
is not the case in all markets. Making a careful analysis of each market each quarter in the simulation
is extremely important. Also, remember that as your firm gets larger, a certain amount of
bureaucracy can set in, making it less able to react quickly to changing market conditions and adding
costs. This is not to say you can't go for growth, but there IS a limit.
22. What happens when we over fly our maximum mileage?
If is perfectly acceptable to fly at the maximum mileage allowed. Although you may go over this
limit by a few miles, any mileage over the limit will begin to have an effect on the maintenance of
your aircraft and your firm will pay for this sooner or later (including the loss of an aircraft for a
quarter to do a major airframe and engine overhaul). Operating costs will also rise dramatically. You
may be fined by the FAA for not keeping up with required maintenance.
23. What if we entered more seats in the markets flown section of the decision form than we actually
have?
You will always be charged the cost of operating those seats for every mile flown. In addition, other
serious consequences will occur (such as losing an uninsured aircraft caught overnight in a strong
storm!).
24. Is cabin service really a factor in attracting customers?
It can be, if your competition is offering it and you're not. This is one reason to buy market research
so you can keep an eye on the competition.
25. How do the hospital charter flights affect profits?
The direct costs for this service are not charged to the direct cost categories (fuel, maintenance,
passenger service, flight operations) on the income statement. Therefore, the profit of the ambulance
operation as shown under OTHER PROFITS is the net contribution toward fixed expenses.
26. Can a firm become unionized?
If a firm is operating profitably and its wages are not keeping up with the industry, there is a
possibility of unionization. Those teams that become unionized will be informed in their news
messages. They are instructed to raise their additional compensation by x percentage points in order
to avert a strike.
27. How are total passengers calculated on the OTHER DATA portion of the printout?
It is calculated by multiplying the number of round trip seats sold by 70 days in a quarter times two.
Thus, a round trip ticket represents two passengers flown by the airline. Cabin service charges are
based on the total passengers flown.
28. Why does the printout indicate we sold more stock than we put on the decision form?
You probably had an employee stock bonus plan. The company must sell stock to the bonus plan
administrator so he can give it to the employees.
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29. We received an error message about the printer when trying to print. What's wrong?
Many the times, the students have selected a computer that is not connected to a printer or forgot to
turn the printer on. If the computer is using a local area (shared) network printer, that printer must be
correctly identified when the “Select Printer” screen appears.
30. Why do we have other expenses this quarter?
It can be due to costs of the current incident, aircraft disposal fee, lease cancellation fee, or ongoing
costs of selecting certain incidents.
31. Why do aircraft in excellent shape have engine problems?
Because nothing is perfect in an imperfect world. There is nothing you did to cause this nor nothing
you could have done, such as having a higher level of maintenance, that would have prevented it.
While we are on this topic, let us point out that in all organizations, negative and well as positive
things happen.
32. Why can’t we figure out the relationship between the value of Common Stock on the balance sheet
and the calculation of stock outstanding multiplied times current price per share?
The value carried on the balance sheet is what the company sold its stock for at various times. The
current price of the stock is the value that the stock market has recently placed on the stock. This
value multiplied times number of shares may be greater than, equal to (unlikely), or less than the
value carried on the balance sheet.
27
-Aire, Inc.
Coastal Airlines EXAMPLES OF TAKEOVERS AND MERGERS
These were submitted by student teams. No responsibility for grammar will be assumed!
COASTAL AIRLINES
1000 Millionaire's Way
Suite #1, Victory Tower
Jacksonville, Florida 32914
FAX: 954-XXX-9466
Professor ___________:
Dr. Golden,
This letter will officially notify you, in compliance with SEC regulations of the purchase of over 5
percent of the outstanding shares of common stock of Alliance Airline, as reported in the 1989
shareholders report. The cost to Coastal Airline is $50,000 plus any brokerage fees.
Please be advised that this will take effect as of quarter 16 in the simulation.
Faithfully submitted, this fourth day of April 2002,
The Board of Coastal Airline
Alliance Airlines
1 World Trade Center
Penthouse Suite
New York, New York 136
Phone (516) CO. NUMBER 1
TO: Coastal Airlines
FROM: Alliance Airlines
RE: Proposed Stock Purchase of Over Five Percent
DATE: April 4, 2001
Board Members, Stockholders, and Distinguished Management:
This Letter is to inform you that Alliance Airlines accepts your offer for 5 percent stock purchase in
accordance with our Articles of Constitution. It is required that companies attempting hostile takeovers
meet criteria as stated in Article Ten, Section 1:
1. Creditors to both Short- and Long-Term Loans be paid in full by
Coastal Airlines before any exchange of stock takes place.
2. Cash bonuses of $150,000 be paid to each of the four Executive
28
Officers of Alliance Airlines by Coastal Airlines.
If said conditions are approved, the Executive Committee of Alliance Airlines welcomes our new
shareholders.
It should be noted that the Executive Committee of Alliance Airlines each own 15 percent of company
stock.
Respectfully submitted,
The Executive Committee
Alliance Airlines
JOINT VENTURE AGREEMENT
April 17, 2001
Link-Aire, Inc. and Coastal Airlines, Inc. do hereby enter into agreement for the express purpose of
purchasing Executive Express, Inc. (a.k.a. company #4). This agreement supersedes all prior agreements
between Link-Aire, Inc. and Coastal Airlines, Inc. which contain specific references to the exchange of
money between the two corporate parties of said Link-Aire, Inc. and Coastal Airlines, Inc. Henceforth,
all promises to pay the amounts specified in prior written agreements are hereby declared null and void
upon the successful acquisition of Executive Airlines, Inc. This renunciation of prior commitments
extends only to those debts which occurred outside the operational sphere and which involved training.
Link-Aire, Inc. will retain majority control and ownership of this venture. Of the outstanding stock at the
time of purchase, 67 percent of the shares will accrue to Link-Aire, Inc. and the balance will accrue to
Coastal Airlines, Inc. These shares will have full and equal voting rights. The full purchase costs of this
acquisition will be distributed according to the aforementioned stock ownership ratio. In the event that it
is deemed necessary by either party to sever this joint venture and subsequently assign ownership to
either Link-Aire, Inc. or Coastal Airlines, Inc., severance will take the form of a private opening of sealed
bids between Link-Aire, Inc. and Coastal Airlines, Inc. to determine the total value of the venture. The
highest bidder will retain ownership of the venture and will pay the losing corporate bidder its current
stock ownership ratio multiplied by the winning bid amount. Due immediately, this will be paid in cash
or other form of settlement. On no condition will the winning bidder be permitted to raise funds for
payment to the losing bidder by attempting to secure those funds against the assets of the venture. Such
an action will disqualify the winning bid and make the winning corporate party liable for damages.
Due consideration in the amount of $1.00 (one dollar) will be paid to the contract administrator, Peggy
Golden, by both parties upon signing of this agreement. The undersigned of each party, being official
corporate representatives with authorization and capacity to make binding agreements for said
corporations, do hereby affix their approval, consent, and acknowledgment of all terms presented herein.
Link-Aire, Inc.
Coastal Airlines, Inc.
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TENDER OFFER BY THE LINK-COASTAL JOINT VENTURE
April 18, 2001
The Link-Coastal Joint Venture, as referred to by a prior agreement between the corporate parties of
Link-Aire, Inc. and Coastal Airlines, Inc., do hereby make a tender offer to purchase all outstanding
stock of Executive Express, Inc. (a.k.a. company #4). This offer, made on April 18, 2001, is valid for the
financial structure and obligations of Executive Express, Inc. in existence at the time of official
presentation of this offer to Executive Express, Inc. Should any significant changes be made to Executive
Express, Inc. with regard to its financial position and/or obligations, this offer is subject to a subsequent
review by the members of the joint venture's management team, whereupon the offer to Executive
Express, Inc. will be reconsidered in the light of significant new information. At the option of LinkCoastal Joint Venture's management team, this offer may be modified or withdrawn as a result of this
reconsideration process.
We do hereby offer payment of $85.00 per share (Eighty-five) for all outstanding stock of Executive
Express, Inc. We further offer to pay all standard fees which are reasonable and customary in the proper
conveyance of this transaction.
The undersigned of each party, being official corporate representatives with authorization and capacity to
make binding agreements for said corporations, do hereby affix their approval, consent, and acknowledge
of all terms presented herein.
Link, Inc.
30
AIRLINE Fourth Edition INSTRUCTIONS FOR STUDENT PROGRAM
These instructions may be reproduced for students. It is set in small font to copy on one page.
The student manual must be purchased in order to obtain the site access instructions and registration code.
This will allow students to download the student programs and establish a legal right to use the program.
After you have downloaded the student program from the publisher’s web site, make a backup copy for safety.
There are two methods of submitting decisions. You may submit the decisions by turning in your decision disk, or
by sending the file the disk creates via email to your instructor. Your instructor will inform you which is to be used.
In either case the file that is created with your decisions is named TEAM#.IQ where the # is your team number, I
is the industry designation (A, B, C), and Q is the quarter number (1,2,3,4).
The program will also print a recap of your decisions. You can use this to check if what you think you entered is
really what is stored on the disk. Another feature on the disk is the ability to print your report once the decisions have
been computed by your instructor. Do not try to use this feature if your instructor is printing reports for your team. For
this feature to work, your instructor will furnish you with a file named DATA#.IQ where the # is your team
number, I is the industry designation (A, B, C), and Q is the quarter number (1,2,3,4). In short, the TEAM file goes
TO your instructor, the DATA file comes FROM the instructor.
Installing the student program; The student program is named AirlineStudent.Exe.
1. Install the program on your hard drive if you are going to send the decision file to the instructor via Email.
Create the directory C:\Airline and copy the Airline student programs to it.
You may use this same directory to store your decision files (Team) and History files (Data). Your program is
already set up to recognize this directory.
2. Install the program on a disk if you are going to turn in the disk each decision quarter.
CRITICAL NOTE: Each member of the team should purchase a student manual and obtain the student program in
order to establish their legal right to use the program.
RUNNING THE PROGRAM ON YOUR COMPUTER
To run the program go to START (at the bottom left of your screen)
Then RUN and type C:\Airline\Airlinestudent (no spaces)
if you are using the hard drive.
For Floppy drive, type A:\Airlinestudent
(no spaces)
in both cases, press return. The program will load and go to a menu. The menu has these options:
AIRLINE STUDENT MENU
! Enter Decisions
! Print Decisions (Do immediately after entering your decisions to check entries)
! Print Reports (Use if you are printing reports from the DATAx.xx file from the instructor)
Once your instructor computes the values and returns them via a DATA file, you may use the
this program to print your report.
! Exit
In all cases, make sure you indicate the correct file location when the program asks for the file location. If you get an
error message, file not found it is caused by not indicating the correct file location. Good Luck!
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