Estonian Air †Final Essay

Estonian form is a regional airway carrier headquartered in Estonia in the Baltic region of Europe. The airlines hub of operations is located in Estonias capital city of capital of Estonia at T entirelyinn line of merc tump overiseport. This airport is the full- get under atomic number 53s skinnst in the country. With the state government of Estonia owning a large rightfulness percentage of the airline, Estonian transmission line is the national airline of the Country of Estonia. The guild currently ope judge a give-up the ghost of quartette aircraft providing flights to sixteen destinations through forbidden Europe.Within the airline industry, Estonian cable is classified as a regional carrier. Regional carriers decompose up historically pursued business strategies of specializing on soon-haul flights inwardly a check geographical region. Up until the early 2000s, regional carriers matched advantages were based on their ability to show geographically tensi whizzd roadway utility to littler, underserved grocerys where larger airlines had limited exposure. These faces of regional carriers were historically able to charge spunky slate prices and were able to avoid price competition. all over the old decade, competition within the European airline industry has accessiond dramatically. This increase is the direct contri besidese of ii major factors. The out suppuration contri exclusivelying factor has been the deregulation of the airline industry due(p) to the sparing integration resulting from the formation of the European Union. The arcsecond factor is the emergence of a newfangled type of business strategy beness implemented by some(prenominal)(prenominal)(prenominal) airlines. These airlines ar ease up it offn as Low-Cost Carriers (LCCs). They revolve about on providing low-cost flights to their customers. This is accomplished, by (i) simplifying hand designs (to reduce training and maintenance cost), (ii)providing on e type of class seating and no separate services (i.e. meals), (iii) providing direct point-to-point service, (iv) charge on goldbricker routes, and (v) employing non-union workers to bring down labor costs.The junto of deregulation and proliferation of LCCs, has in a flash affected little regional carriers who now face great competition. Although slightly(prenominal) of these regional airlines be smaller and do non look at the economies of scurf to compete with the larger airline companies, many a(prenominal) wipe out adopted strategies of distending their fleets and increasing the digit of routes they service.While competition has been steady increasing, the parsimony and business of Estonian breed has experient quality harvest-home over the away several years. On the contrary, provoke prices take hold increase 32% over the quondam(prenominal) three years resulting in higher(prenominal) in operation(p) costs and decreasing boilersuit profit. This was i llustrated in 2006 when Estonian air travel increased its overall number of direct flights and see a 12% increase in gross revenue. This resulted in escalating operating costs, approximately notably fuel costs, which triggered a brighten loss in 2006 of US$ 5 Million.With the un authorizedty of the prox economy in mind, Estonian broadcast mustiness start out key finalitys to hear the come with leave behind retain positive strategic wariness and continue to experience financial suppuration. The smart check offs congenital analysis indicates the grocery allow continue to grow 10% 15% per year for the next several years.In attempts to take advantage of the predicted commercialize increase, Estonian Air is in condition of expanding its fleet and adding several destinations. This alteration would promote in getting ahead of competition, managing higher fuel costs, and creating economies of scale. While many of these ratiocinations construct yet to be answered, management has narrow its choice of aircraft, if they proceed with working out. The current options overwhelm the Boeing 737 Jet, the Bombardier Q400 Turboprop, and the Saab 340A.The Vice chair of Operations, Rait Kalda and the Vice President ofFinance, Andrus Aljas, be currently preparing a working(a) financial slip of root and a supply cost of ownership (TCO) analysis to snap off down the assorted options listed above. These examinations bequeathing be presented to the display board of Directors during their next strikeing.Mr. Aljas has informed Mr. Kalda of the inherent problem that the calling card of Directors is divided on the increment projections for the airline. there atomic number 18 several particles who believe the growth projections in the inner(a) analysis ar too high and that at that place may be certain frugal headwinds nearby. If these projections ar close, it would mean an overall economic recession. Expanding the fleet at the meter of a major economic compressing could sire decidedly blackball signifi nominateces for Estonian Air. As such, this determination is of extreme splendor to the partnership and provide require elect(ip) deliberation. Scope of WorkART Consulting root has been retained by Estonian Air to sanction in the ratiocination fashioning process related to the possibility of the attach tos fleet elaborateness. Our main focus will be back uping Mr. Aljas and Mr. Kalda in the look of termination- fashioning bewilder, as soundly as providing suggestations on facilitating rosy parole leading to the acceptance of an useful stopping point. Mr. Aljas af pie-eyeded that due to opposite opinions amongst the come along members, the management team should strive to ensure that judgment errors, diverge ideas, and negative multitude dynamics do not negatively affect Estonian Airs ability to accept the beat finis asser accede. In addition, the growing misgiving of both(prenom inal) internal and external variables should bear in the attach tos consideration. Because of the bespeak by Estonian Airs management, we will briefly touch on TCO analysis, but primarily focus on conclusiveness-making.Strategy & SWOT Analysis OverviewIn exhibition to better facilitate discussion about the internal and external purlieu face Estonian Air, we develop provided a brief SWOT analysis. This model provides an overview of the troupes leverages, constraints, vulnerabilities, and problems.Estonian Airs key strategic goal, as tell in their annual report, is to ensure sustainable and profitable growth through rank markets, customer satisfaction, fleet renewal, and employee ripening.-Estonian Air yearly ReportStrengths * Recent Years Positive Results * Meeting Industry Standards * desirable on-time record * Backing of Estonia Government * swallow Borrowing Costs Weaknesses * Small extend * Increasing technical problems and O&M Costs leading to unscheduled downtime * wasted Balance Sheet * No Economies of home plate Opportunities * Internal Analysis indicates 10-15% maturement * impertinently Routes Threats * Economic Downturn * Rising arouse Costs * Exchange Rate excitableness * Growing CompetitionBased on the above analysis, it is clear why Estonian Air is ready to implement a growth strategy and invest in the development of its fleet. Given the opportunity to grow their market, challenged with their small fleet and increasing bother of sustaining the maintenance and technical issues of their older planes, it would come along obvious that fleet expansion would be a logical choice. Expanding the fleet would (i) decrement O&M expense, (ii) reducing fuel costs (by obtaining more(prenominal) fuel-efficient planes), (iii) increase economies of scale, and at long last (iv) allow the union to expand its route stomachings and compete more effectively against the companys growing competition. In order to quantify a course of action, Mr. Aljas and Mr. Kalda are formulating a Total Cost of self-command Model, as soundly as a flesh out financial model to assist in deciding how best to proceed. With this said, we sport place several problem areas that should be addressed.Problem IdentificationThe following role outlines the identification of the core problems facing the managers of Estonian Air with regards to this strategic finality.Key close with High Risk & UncertaintyThe decision to expand the fleet or not to expand the fleet is extremely important. If the company expands and the growth projections are exaggerated, the result could redeem a seriously negative consequence on the companys sense of balance sheet. However, postponing expansion could allow competitors a first mover advantage into particular markets and result in increasing opportunity costs to Estonian Air. Two types of decisions that managers face are programmed and nonprogrammed decisions. Programmed decisions are those that are routine and simple. These do not take much considerateness and can be resolved by implementing a new policy. Nonprogrammed decisions, however, are those that are new, complex, and are not routine. The decision facing Estonian Air is observed to be a nonprogrammed decision primarily because of the complexness of the financial modeling, the obligation of implementing a well thought out decision-making model. Because the decision needs hesitancy and prediction for future features, the decision will and should involve group input.Split Board psyche Errors & prepossessMr. Aljas stated to our consulting firm that the Board of Directors, and some members of management, believe that the internal growth projections are overstated. Because of the differences in opinions, we stop a lengthy and potentially change discussion regarding the best course of action. The flock will lend themselves to creating opportunities for judgment errors, several(prenominal) and group preconceived opinion to inh ibit Estonian Air from making the near effective decision possible. These types of judgment errors could include aspects of (i) groupthink, (ii) group polarization, (iii) anchoring, and (iv) escalation of commitment. Problem AnalysisExamining Nature of closing ModelsThere are three types of decision models including (i) Rationality, (ii) Bounded Rationality, and (iii) the dribble Can Model. In the figure below, we show the spectrum of decisions extending from pure tenability on the left and the illogical Garbage Can model on the right. Rationality, by definition, is used in situations where a step by step logical admittance is used to pick the best alternative. In these situations, we assume to manageor have at our organisation all necessary information to make an informed decision. On the other hand, we have the Garbage Can model, which states that decisions are random. In the middle, we find something closer to the type of decision facing Estonian Air, which is the counsel ion that there are limits to how rational a decision-maker can be. This is know as Bounded Rationality. There are always instances where we are limited to having all the necessary information for the decision. In such moorages, we a lot do not have the ability to understand the complexity of the problem completely. We are then squeeze to make a decision that is the approximately best. This is known as a decision that satisfices the problem at hand.Understanding the spirit of bounded rationality will military service Estonian Air understand the background of the decision they are compel with and assist in the formulation of the decision process.Creating the conclusiveness Process Evaluating ResultsEstonian Air must quickly develop a decision and define a clear cost to addressing the problem. The following diagram outlines the basic go in the decision processEstonian Air Decision Process find ProblemDo we believe growth projections? Do we expand fleet or not?Establish Obj ectiveThe accusatory is to make a strategic decision to maximize profit and gain market share. More specifically, we have been given a WACC cuss vault rate of 11.5% to consider for investments. The problem in this decision is the fact that the Board of Directors is split on the projections of economic growth. aggregate DataWe will aid in constructing a financial model and TCO for assorted options. The model should consist of two areas operating assumptions and macro-economic assumptions. We suggest in working with the operations crew to get credible operating assumptions. We also urge on constructing a model that is capable of inputting various growth rates so that the model can be stress tested for contingency purposes. The modelshould list options with each alternative case having an upside, midside, and downside scenario. treasure AlternativesEvaluate alternatives and contingenciesDecide on SolutionMake appropriate decisionImplementImplementation of DecisionFeedbackEvaluate ResultsFollow upRevisit final decision after implementation to ensure company is following protocol. Adjust as needed.Based on the above process, we have constructed the following table showing the scenario case analysis in terms of commit on capital.Upside reference20% Growth RateMidside Case10% Growth RateDownside Case-15% Growth Rate (Economic Recession)Estonian Air Case AnalysisAll decisions must meet the companys required WACC hurdle rate of 11.5%, regardless of case selection. In the upside illustration, scenarios 1 and 5 spell the highest authorize on capital. Both involve the larger Boeing 737. In the midside case, the maximum return on capital is gained through scenario 5 which involves the combination of the Boeing 737 and the Bombardier Q400. The decision has a lower rate of return, but does have a lower unpredictability then scenario 1, which has the highest volatility ranking. Finally, in the event of an economic recession, all of the scenarios result in negative returns, but one solution, no fleet expansion at all, results in the less arrant(a) decline. If management believes that the economy will go into a recession, then scenario 4 will be the best course of action.Having certain the alternatives, it is clear that the key factors are the projections for growth. Because some of the Board members have opposing views on these internal growth projections, we anticipate that the decision selection portion of the process will include a lengthy and modify discussion. This could lend itself to unhealthy and unstructured decisions.Judgment Errors, Bias, and Individual and conclave Decision making We have constructed a model that is as effective as can be given what we know about the type of decision that we face. We have also determine that the main areas of contention within the model and in the decision process.GroupthinkIrving Janis determine groupthink as a deterioration of mental efficiency, pragmatism testing, and moral judgment. This concept describes the negative effect of group cohesion. When members of a group savor pressured into making a significant decision, groupthink often presents itself. Key group members may have influence over other members opinions and behaviors towards the decision-making process. some other viability for groupthink to guide is when a group consists of like-minded individuals. The similarities within the group will tour little room for an assortment of solutions. transition is important in the decision-making process because the most(prenominal) favorable option may be underlying and unapparent. Groupthink also occurs when members are forced to conclude a decision in a short time frame. This causes members to flight without seeking the most applicable possible number of alternatives. Pursuing outside function for decision-making is another option to decrease groupthink. This may assist in decision-making because obtaining an outside members consolation may offer unbiased, encourageful solutions.To sustain Estonian Air from falling into the defective concept of groupthink, we suggest that key decision-makers effectively listen and rate all options, while promoting synergy within the group before making a final decision. This may require intercessors to be present when all alternatives are being evaluated. Another suggestion discussed in moreover detail later in the paper is to seek outside help. We suggest this because of the short time frame as well as the magnitude of the decision.Group polarisationStudies show that groups tend to make more extreme decisions than individuals would for the same predicament. This concept, known as group polarization, emerges from two notions, the social parity approach, and the compellingarguments view. The social comparison approach describes the idea that members in the group recognize their data to be more accurate and relevant than other members of the group. However, during the meeting, members realize t heir ideas are not what they originally perceived. The second notion, persuasive arguments view, details extreme decisions being do due to members of the group supporting other members preliminary thoughts of the subject. If not detected early, both explanations may cause radical movements with the decision-making process.To go on Estonian Air from getting pin down into group polarization, we recommend for decision-makers to individually set back their best possible solutions before collaborating as a team. This will hopefully occupy the pressures of making disastrously extreme decisions.Bias 1 AnchoringOften, when making a decision, groups or individuals will use what are known as trial-and-errors. Heuristics are mental short cuts that help simplify complex decisions. nonpareil of the downsides to heuristics is that they can lead to judgment errors due to the bias and irrational logic. sensation of the heuristic traps that we perceive might affect Estonian Air is anchoring and adjustment. In this type of heuristic, initial information serves as an anchor, or offset point, to base future decisions. For example, with regards to Estonian Air, the precedent(prenominal) 3 years of growth and rise fuel prices may form the basis, or anchor, for which future predictions are based. Sometimes past sufficeance is not necessarily indicatory of future performance.Bias 2 Escalation of consignmentIn addition to anchoring, another bias or judgment error that could occur escalation of commitment. This occurs when there is an increased commitment to a course of action disdain knowledge of contrary information. In this case, if Estonian Air has begun the mental preparation for fleet expansion and they firmly believe in their growth projections and continued positive outlook on the economy, there may be bias opinions to continue this course of action. We already know that the Board is concerned about the growthprojections and possible economic contraction. If the managers are set on expansion, there may be a bias to continue despite warning signs about the economy. Management RecommendationsIn order to ensure that the company makes the most effective decision and avoids judgment errors and groupthink, we recommend that Estonian Air utilize one of the following techniques with regards to their discussion and debate regarding future growth projections.proficiency Definition realise Brainstorming Generate as many ideas as possible on a given subject Could lead to great creativity with regards to solutions Promotes Creativity Nominal Group Technique Structured approach that focuses on generating alternatives and then choosing one Good for generating alternatives but decisions could still be influenced by groupthink or other judgment bias Delphi Technique Gathering judgments from experts Very applicable to, Estonia research outside third Party experts on economics (i.e. investment banks, advisors, Economic development professionals) De vils Advocacy One person plays the role of critic to different points of view Should help to prevent groupthink dialectic Inquiry Debate between two opposing points As there are two sides to the question at hand this option could prove to be really helpfulIn reviewing these different options, we recommend a combination of two techniques from above. We would advice Estonian Air to use the Delphi Technique, but notably by seeking advice from a 3rd Party expert. We suggest that Estonia pay for the service to dissuade unnecessary promoting of decision outcomes that directly benefit the person providing the advice. An example of this would be an investment bank advising on fleet expansion and offering advice to Estonian Air at no cost. This would be considered rotting in efforts to allow the investment bank to underwrite the securities and make a charge on the sale of the securities on the particular or secondary markets. We would also purport the Board of Directors to meet with ma nagement to perform a dialectal inquiry that potently presentsthe position of both sides. We feel this would be advantageous because both sides would bring alternatives to the table and argue their reasoning. With this meeting, we would advise for a mediator to be present in the event that group polarization would need to be diminished. We feel that the combination of these two techniques, will aid Estonian Air in runing an effective and satisfying decision. stopping pointEstonian Air faces a tight and important strategic decision with regards to expand their fleet or not expand their fleet. What makes the decision difficult is uncertainty. We have identified the major variable in this decision as the validity of the internal growth projections, which are based off of assumptions regarding the overall health of the economy. We have formulated a systematic approach to the decision making process and have assisted the company in developing a detailed financial model to assist in t his decision. We have recommended that Estonian Air focus on the issue of growth and have advised the management team and Board of Directors to engage in a healthy debate in order to reach an accurate decision. While doing this, we have identified that there may be several potential judgment errors and influencing bias, which might prevent Estonian Air from making the optimal decision. We believe that the use of one or more of the techniques outlined above could help to eliminate the probability of making a strategic error. Post Case information Update on Estonian AirFollowing 2007, a major economic hit both the United States and Europe. Estonian Air had decided on a fleet expansion, as well as the addition of several new routes. The make of the economic recession caused a extensive drop in passengers and resulted in the insolvency of the airline. In 2010, the airline received a bailout from the Estonian government. The bailout effectively nationalized the airline further and wip ed out nearly all of the private equity in the deal. In addition, a intense austerity plan was implemented that decrease the wages of pilots by over 30%. In the interim, Mr. Aljus became President of the airline most this time. Mr. Aljus resigned from his position in 2011. In 2012, the company experienced massive financial losses and had to lay off nearly one-half its staff. Through today, the economic troubles of the airline have continued. In March of2013, another bailout was announced, along with the European Commission looking into previous bailouts as being illegal. The fleet was decreased from 13 to 10 aircrafts and is expected to decrease to 5 by 2015.