TransGlobal Airline Case Analysis
Over the last few decades, TransGlobal Airlines has maintained a monopoly status on all domestic air travel. There are many benefits to this status, but it has also allowed TransGlobal to become lax in areas, for example quality of customer service and consistency of on time flights. However, the air travel market environment will be changing considerably in the new few months with the impending election of a new president leading to competitors obtaining Beyond Rights into our country. This will also allow for our country to obtain Beyond Rights into other countries, which may be a profitable venture. We currently travel internationally, domestically to large cities, and regional cities.
This study will examine our current income statement divided by market segment, analysis of our SOF-PLE regional route and breakeven quantity of passengers for that route, SWOT analysis, and recommendations on how to proceed in the approaching market environmental changes.
Segment Profitability
TransGlobal Airlines has enjoyed a comfortable and profitable past. Little to no competition has allowed our company to operate without a need to evaluate our operations. To remain strong in the newly competitive market, TransGlobal needs to understand each segment of its business. TransGlobal Airlines’ Income Statement does not provide insight into the profitability of each segment. During an executive committee meeting our CFO shared a Condensed Income Statement by Market Segment which showed revenues and costs per segment, International, Large City, and Regional City. The costs were allocated to the segments based on passenger-miles-flown. We decided to do further research into how the costs should be allocated to each segment. Exhibit 1 shows the resulting Income Statement by market segment. The original Condensed Income Statement reported net income for the International, Large City, and Regional City segments as Kr -32.0, Kr 53.3, and Kr 2.8 respectively. Based on the new allocation of costs Exhibit 1 shows that the net income for the International, Large City, and Regional City segments to be Kr 2.2, Kr 33.7, and Kr -11.8. The new analysis shows that the International segment is more profitable than previous assumed, but the Large City and Regional markets are significantly less profitable. The Regional City segment is currently operating at a loss of Kr -11.8. The decrease in profitability warrants further research and analysis into how the segment is operating.
Breakeven Analysis
In order to understand why the Regional City market is operating at a loss, we will look specifically at the SOF-PLE route and perform a breakeven analysis. A one-way flight from SOF to PLE will be our cost object for the breakeven analysis. Fixed costs for the cost object are fixed fuel costs, depreciation, pilot salaries, cabin crew salaries, gate charges, and ground staff salaries. Variable fuel costs are the only variable cost associated with the cost object. The fixed costs were allocated to the SOF-PLE annual route as follows:
Fixed fuel is $500.00 per flight and does not need to be allocated further.
Annual depreciation for the Regional segment was Kr 1,900,000. The annual regional amount was divided by the 15 regional routes.
Annual pilot salaries for the Regional segment were Kr 4,200,000. The annual regional amount was multiplied by an allocation rate of 4.4% (annual one-way SOF-PLE flights / annual regional one-way flight).
Annual cabin crew salaries for the Regional segment were Kr 900,000. The annual regional amount was multiplied by an allocation rate of 4.4% (annual one-way SOF-PLE flights / annual regional one-way flight).
Annual gate charges were split into the gate at SOF and the gate at PLE. The annual SOF gate charge of Kr 200,000 was divided the 5 routes traveling from SOF. The annual gate charge for all other regional gates of Kr 500,000 was divided by the 15 regional routes.
Annual ground staff
