Estonian Air

Business-Level Strategic Analysis:

Estonian Air

October 15, 2012

Business-Level Strategic Analysis:

Estonian Air

October 15, 2012

Take 2 Consulting GroupTake 2 Consulting Group

Agenda

Problem

Statement

Problem

Statement

11

Summary of

Analysis

Summary of

Analysis

22

Presentation of

Alternatives

Presentation of

Alternatives

33

Recommended

Action Plan

Recommended

Action Plan

44

Implementation

Strategy

Implementation

Strategy

55

Risks and

Contingencies

Risks and

Contingencies

66

Statement of Intent

Develop a detailed strategic plan for Estonian Air

moving forward to address rising demand while

taking into consideration the inherent risks of

expansion and economic uncertainty.

Five Forces Analysis

Industry:Industry:European Aircraft Carriers

Threat of Substitution: HighThreat of Substitution: High

Customers may be willing to

substitute flying for alternative means

of transport. There is sometimes a

price advantage, but a longer time

constraint.

Key Substitutes:Key Substitutes:Trains, Ships

Threat of New Entrants: HighThreat of New Entrants: High

Economies of scale: Min Size = 1 Saab; 30 seats

Differentiation: No brand loyalty; commodity

Switching Costs: No switching costs

Distribution Access: Easy access to distribution

Capital Requirements: 24 million EEK for used Saab

Cost Advantages: Access to geographic sites

Government Policy: Regulatory hurdles exist

Expected Retaliation: Specialization, demand growth

Five Forces Analysis

Bargaining Power of Suppliers: HighBargaining Power of Suppliers: High

Plane Manufacturers: Concentrated suppliers, no

substitutes, differentiated, high switching costs

Airports: No substitutes, limited differentiation [location &

scale], moderate switching costs

Fuel Distributers: Commoditized, no substitutes, focal

industry of importance to supplier, suppliers vital to industry,

no differentiation, switching costs, or fwd integration

Industry:Industry:European Aircraft Carriers

Key Suppliers:Key Suppliers:Mfgrs, Airports, Fuel

Five Forces Analysis

Bargaining Power of Buyers: HighBargaining Power of Buyers: High

Low concentration of buyers, purchases account for

huge fraction of buyers’ costs, minimal differentiation, no

switching costs, consumers are price sensitive, buyers

have full information on costs

Industry:Industry:European Aircraft Carriers

Key Buyers:Key Buyers:Consumer, Charters, Freight

Five Forces Analysis

Rivalry Among Competitors: MediumRivalry Among Competitors: MediumNumerous competitors unequally balanced,

growth industry, high fixed costs, low

switching costs and differentiation, capacity

added in low increments, sometimes

different rules to the game, firms aren’t very

diversified (low stakes), high exit barriers

Industry:Industry:

European Aircraft Carriers

Key Competitors:Key Competitors:AirBaltic, Easyjet, AeroAir

Five Forces Analysis

Industry Competitiveness Conclusions:Industry Competitiveness Conclusions:

The industry is

cutthroat. If Estonia

is going to continue

to compete, they

must do so on the

basis of a Low-Cost

Carrier.

Five Forces Analysis

SWOT Analysis

Strengths [Internal]:Strengths [Internal]:

�Partially government owned

�Well established

[Hub at largest airport in Estonia]

�Enviable on-time record

[99.1% of flights on time in 2006]

�Experienced 11% increase in ASK in 1 year

Weaknesses [Internal]:Weaknesses [Internal]:

�Experienced net loss in 2006

�270% increase in other operating expenses in 2006

�No contingency plan for technical problems

[Forced to rely on temporary & high cost capacity

leased from other carriers]

�Only 325 operating days per year typical per plane

SWOT Analysis

Opportunities [External]:Opportunities [External]:

�Demand expected to increase 10-14%

�1,500 new regional aircraft needed by 2016

�Estonian economy growing rapidly

�Estonia entered EU & NATO

[Eligible for billions in “cohesion funds”]

�Estonia increasing seen as tourist

destination

SWOT Analysis

Threats [External]:Threats [External]:

�Fuel costs up 32% in 3 years [26% of operating costs]

�LCCs like Ryanair are picking up market share

�Maastricht & Single European Act boost LCCs

�European economic integration provided

opportunities for start-up LCCs and Legacy carriers

�Country’s development is heavily dependent on

European investments

SWOT Analysis

SWOT Conclusions:SWOT Conclusions:

There is growing demand

and increased opportunity

within the regional

market, but it is heavily

hedged by rising fuel

costs and dependence on

European markets

SWOT Analysis

Financial Analysis

Financial Analysis

Presentation of Alternatives

Work to cut current costs by reconfiguring fleet while

aggressively expanding

Work to cut current costs by reconfiguring fleet while

aggressively expanding

11

Expand conservatively by adding aircrafts only on an

as needed basis.

Expand conservatively by adding aircrafts only on an

as needed basis.

22

Position the company for a merger with an LCC to

gain cost competitiveness & territory expansion

Position the company for a merger with an LCC to

gain cost competitiveness & territory expansion

33

Comparison of Alternatives

Comparison of Alternatives

11,338

Pro Forma for Alternatives

Recommendation

Work to cut current costs by reconfiguring

Estonian Air’s fleet toward a single model

[Q400] while aggressively expanding

Work to cut current costs by reconfiguring

Estonian Air’s fleet toward a single model

[Q400] while aggressively expanding

11

Implementation Strategy

Reconfiguration & Procurement of FleetsReconfiguration & Procurement of Fleets�Replace fleet with Q400s �Leasing: more cost-effective

Implementation Short-Term

0-6 Months:0-6 Months:

� Immediately begin searching for Q400’s to lease

�Begin negotiating an end to current 737 leases

�Begin planning restructuring flights to maintain

continuity of service as fleet is reconfigured

�Begin training crucial employees for new aircraft

�Add additional employees in maintenance roles to

increase quality and reduce problems

Implementation Short-Term

6-12 Months:6-12 Months:

�Replace 737’s one at a time as opportunities to lease

Q400’s arise

� Implement restructured flight scheduling as changes

are made to avoid lapse in service

�Begin hiring additional employees/reassigning current

employees to accommodate changes

Implementation Long-Term

1-2 Years:1-2 Years:

�Switch fleet over to 5 Q400’s in 1 year

�As demand increases, meet additional capacity

requirements through leasing more Q400’s

�Purchase leased aircrafts gradually as finances allow

�Expand routes into locations currently being considered

2-5 Years:2-5 Years:

�Consider further expansion of routes additional capacity

Contingency Plan

Decline in

EEK value

Decline in

EEK value

11Continued issues

with maintenance

Continued issues

with maintenance

22Demand forecast

was overstated

Demand forecast

was overstated

33

�Switch fleet to Q400’s to reduce

interest payments

& fuel usage�Hedges against

reduced demand and increased

fuel prices

�Purchase currency

derivatives

�Shields airline from

volatility with regards to

currency

�Hire dedicated maintenance and

service division to

reduce downtime �Strive to exceed

quality expectations through TQM

processes

Concluding Remarks

Thank you for your time.

Any Questions?

Thank you for your time.

Any Questions?