Please solve breakeven analysis and include financial analysis. Address Quantitative and qualitative solutions to solve this case using any financial analysis necessary.

On Monday, June 6, 1995, Frank Behrendt, president of Skyward Aviation (Skyward), laid out the task for J.M. Smith, manager of business and corporate development: Calm Air is making a lot of money and Canadian North may be pulling jet service out of Thompson. Business travellers are sick and tired of getting up really early to catch a 7:00 a.m. flight out of Winnipeg to Thompson. Consumers are also tired of paying exorbitant fares. I think we should offer scheduled service into Winnipeg and other communities in Manitoba. I want you to see if this will work and present your findings and a marketing plan at the July 15 Board of Directors' meeting. Skyward Aviation was a regional aviation company providing scheduled, charter and aeromedical service. Skyward was based in Thompson, Manitoba, Canada, with additional aircraft and offices in Winnipeg, Manitoba; Norway House, Manitoba; and Rankin Inlet, Northwest Territories. COMPANY HISTORY Thompson, Manitoba, was a city of 22,000 people, located in central northern Manitoba and known as the Hub of the North. The main industries of Thompson Page 2 included a large nickel mine (International Nickel Company, Inco), transportation and government. Skyward was founded January 2, 1987, when three partners purchased a small local air service that was almost bankrupt. Skyward began with five aircraft, a hangar, a small office building and 15 employees. Frank Behrendt, one of the partners and a pilot in northern Canada for a number of years, was appointed president. Prior to the purchase, the company provided an air charter service for passengers, carried freight and performed the occasional medical evacuation from outlying communities around Thompson. Because of the company's poor reputation, the new partners wanted to deal with some of the obvious weaknesses of its operations. Customers had been unhappy with the level of service, the aircraft were aging, and the aircraft came from three different manufacturers. This had resulted in plummeting revenue, high maintenance costs and high inventory carrying loss. The partners immediately began a fleet renewal process, expanding the fleet with fewer aircraft from one manufacturer. SCHEDULED SERVICE After seeing a significant turnaround in customers' acceptance of the company, management decided to provide scheduled service to a number of communities where they had previously done a high volume of charter work. Scheduled service differed from charter service, in that a scheduled flight left a specific community on a pre-determined date and time and customers reserved seats on the aircraft. Charter service required customers to reserve an aircraft for their specific use. From a business perspective, scheduled service had more risk since revenue was not guaranteed for all seats on the aircraft. Skyward began scheduled service on September 1, 1988, from Thompson (Manitoba) to York Landing (Manitoba) and to Gods River (Manitoba). Currently, Skyward served 15 communities in northern Manitoba and the Northwest Territories (see Exhibit 1 for the company's brochure and the system schedule for Manitoba). With the introduction of new communities, Skyward used an entry pricing strategy of 30 to 40 per cent below the competition. Skyward management rationalized that prices were very high due to a lack of competition and Skyward wanted to give consumers a break. The competition responded and closed the price gap very quickly but Skyward was able to pick up a small market share. In the spring of 1994, Skyward purchased two Embrear Banditerantes (Bandits), 15-seat aircraft. A Bandit had short takeoff and landing characteristics with a high useable weight for an aircraft in its class, ideal for the conditions in northern Page 3 9 Manitoba. Each Bandit had a large cargo door in the back and was sent out in a configuration utilizing both freight and passengers. The freight was sent on standby so that the airplane usually realized very high load factors because the freight topped off the aircraft. Freight generated less revenue than passengers, but Skyward could guarantee next-day delivery into remote communities because of its daily service and could, therefore, charge a much higher per pound rate than its competitors. It was at this time that Skyward began to focus on increasing the number of passengers and revenue per flight (yield management). By the summer of 1994, Skyward had a significant market share of scheduled traffic in and out of northern Manitoba communities and had done this with no formal advertising. In early 1995, Skyward purchased two more Bandits. The purchase of these last two aircraft complemented the first two, because all routes could be served by Bandits. This helped enhance passenger appeal, and by June 1995, passengers carried were on target for 25 per cent growth over the 1994 level of 35,000. Skyward's growth in the scheduled service market was also attributed to aircraft flexibility and exceptional customer service. Skyward was currently operating seven types of aircraft, 16 aircraft in total. Because of the different types of aircraft, smaller aircraft could be substituted and costs reduced if passenger and cargo loads were down on certain days. The customer base in and out of Thompson was small and 90 per cent of business was repeat customers. The employees and management of Skyward were committed to serving the customer and customers often returned to Skyward in response to that commitment. Skyward was the first carrier in Thompson to provide food on flights, offer free shuttle service into town from the airport and run errands for out-of-town customers at no charge. Skyward's existing reservation system was very inefficient and much of the work was done manually. Skyward required all reservations and all data processing to go through head office. If a travel agent wanted to book a passenger on a flight from Thompson to Shammattawa, the travel agent had to call Thompson and ask a Skyward agent to check availability and make the reservation. The system also did not provide the necessary marketing information for management to make effective and timely decisions. THE MANITOBA MARKET Over the years, Frank Behrendt had toyed with the idea of providing scheduled service to Winnipeg from Thompson, but as other opportunities had presented themselves, resources were directed to those opportunities. Page 4 Scheduled air transportation in Manitoba was currently served by four main regional carriers: Canadian North Airlines, Calm Air Ltd., Perimeter Airlines and Skyward Aviation. There were also a number of other carriers which provided scheduled service to a few communities. Canadian North Airlines, based in Edmonton, Alberta, was a division of Canadian Airlines that provided Boeing 737 jet service (125 passengers) to a number of communities in northern Canada (Alberta, Manitoba, Northwest Territories, Quebec) (see Exhibit 2 for Canadian North system schedule for Manitoba). Because of Canadian Airline's cash flow problems, Canadian Airlines was continually reviewing operations and restructuring to cut marginal services and reduce expenses. Routes were being turned over to regional connectors to be served with smaller turboprop aircraft. It was believed that, within the year, the routes in Manitoba would no longer be served by Boeing 737 service. Calm Air, based in Thompson, Manitoba, was a Canadian Airlines Connector (45 per cent ownership by Canadian Airlines) and was the largest passenger carrier in Manitoba (see Exhibit 3 for Calm Air system schedule for selected routes in Manitoba). Calm Air had had very limited competition for almost 20 years and the owners enjoyed a healthy financial position. Perimeter Airlines served communities in southern Manitoba out of its Winnipeg base operation which was similar to Skyward Aviation. Perimeter Airlines operated 15 to 19 passenger aircraft and moved approximately 20,000 more passengers than Skyward. Air transportation customers in the north could be divided into two groups: business and leisure customers. Business travellers made up 65 to 75 per cent of passengers on the considered routes. Most passengers (70 per cent) travelling from Winnipeg to Thompson flew the direct flight in the morning and evening. More information needed to be gathered but it was known that passengers considered price, departure times, on-time departure, flight time, connections, food and other amenities, aircraft (size, cleanliness, appearance), employee courteousness, baggage handling and extra baggage charges as important factors in their decision. Leisure travellers usually made travel plans well in advance of flight date. RECENT DEVELOPMENTS In February 1995, Calm Air replaced its aging Hawker Siddely 748 (48-passenger prop aerocraft) aircraft with brand new SAAB 340B Plus (30-passenger turboprop aircraft, which were fast and comfortable) aircraft. Three more SAAB 340 B Plus's were on order along with one SAAB 2000 (50-seat turboprop aircraft, the fastest turboprop on the market). With the new aircraft, Calm Air offered direct flights from Winnipeg (Manitoba) to Thompson (Manitoba), Flin Flon (Manitoba), Page 5 and The Pas (Manitoba), complementing Canadian Norths service. It was estimated by Skyward's management that Calm Air would realize a profit of $750,000 per year on the SAAB 340. Calm Air's new afternoon flights from Thompson to Winnipeg had been successful and the Thursday and Friday flights were always full. Exhibit 4 shows the mileage between selected communities in Manitoba and the Northwest Territories. Fares and passenger loads for Calm Air and Canadian North are shown in Exhibit 5. Calm Air was involved heavily in the community-supporting races, radio programs and other community events. Calm Air heavily promoted the new direct service with the SAAB 340B Plus aircraft. Calm Air used the reservation system of its parent, Canadian Airline, and American Airlines (Sabre system). This system had features such as interactive display and sell which allowed travel agents to inquire and make reservations without the requirement of personal contact with Calm Air. The federal government, currently run by the Liberal party, as part one of its promises to aboriginal peoples of Canada in the 1994 election Red Book, was proposing the Strategic Procurement Initiative (SPI). SPI stated that the program is intended to apply to all procurement (purchases) by all federal government departments and agencies ... as long as there is at least one qualified and available aboriginal supplier (50 per cent-owned by aboriginal individuals), no further competition would be sought.Skyward's owners were not aboriginal people. Forty per cent of Skyward's current revenue was from direct federal government purchases. EXPANDED ROUTE CONSIDERATIONS There were a number of options to consider before making a decision to proceed with the expanded route structure. Aircraft Decision One alternative, which would require only minimal adjustment to existing operations, would be to use one of the Embrear Banditerantes on the Thompson to Winnipeg route. Prior to launching this service, the aircraft would need a new interior at a cost of $10,000. This renovation could be completed in one month. Another alternative would entail Skyward purchasing a new aircraft. Manufacturers required a lead time of four to six months for delivery of aircraft. Exhibit 6 lists cost and performance information for four appropriate turboprop aircraft, as well as Calm Air's SAAB 340B Plus and the Embrear Banditerante. With a new aircraft purchase, a number of variables would have to be considered: 'Public Works and Government Services document (Briefing SPI, January 1995, pp. 10,11) Page 6 cost, performance, payload, and the ease with which a new aircraft could fit into existing operations. Other Costs A number of things would happen once a decision was made to purchase a new aircraft. Approval from the National Transportation Agency for a transport category aircraft (greater than 12,500 pounds) would be needed since the aircraft would be larger than any of Skyward's existing aircraft. Second, certain operations procedures would need to be rewritten because different regulations applied. This would also require revisions to the operations manual. Third, the maintenance department would need to hire engineers with qualifications to maintain this type of airplane as well as purchase specialized maintenance equipment at a cost of $50,000 to $75,000. For each of the new communities Skyward would serve, Winnipeg being the exception, the company would need to invest $25,000 in ground support equipment such as ground power units, de-icing equipment and boarding/deboarding aids. Fourth, the flight department would need to recruit and/or train pilots that would have the qualifications to fly the new aircraft. If one aircraft was purchased, five pilots and three flight attendants would need to be recruited and trained. If two aircraft were purchased, eight pilots and six flight attendants would need to be recruited and trained. Training contracts would need to be negotiated with training schools in the United States. A three-week program would cost $25,000 per crew member. The average salary with benefits for a pilot would be $52,150 and for a flight attendant would be $22,000. With new scheduled service, the following other costs would be incurred: landing and terminal fees at all airports would be $50 per flight; food for passengers could be contracted out at $5.00 per passenger; newspapers and magazines would cost $1.00 per passenger. In Winnipeg, passenger check-in, boarding and baggage handling could be contracted from Air Canada for $120 per flight. Terminal operations in Thompson (rental, computer, communications, supplies, etc) would cost approximately $75,000 annually, if boarding was moved from Skyward's building to the main terminal. Terminal operations in other communities would be approximately $35,000 annually. Page 7 Automating The Reservation System Skyward was considering upgrading and automating the reservation system. Skyward had contacted Advantis Canada Ltd. to provide automation service. Advantis provided distribution (via computer) of an airline's flight schedules, gave fare information to travel agencies through the Galileo network and managed inventory (seats). The system allowed travel agents to enquire about specific seats on flights, reserve those seats and take payment from customers. With Advantis, collection of fares was done through a central banking group. Travel agents took an eight and one half per cent commission for a sale. To contract Advantis costs would include a $50,000 initial one-time setup cost and communication, hardware and miscellaneous costs of $25,000 per year, $1.20 per passenger for all passengers booked (by Skyward agent or travel agent) and an additional $1.20 per passenger for passengers booked on Galileo system (travel agent). Advantis required a lead time of five months to implement the system. The Manager of Business and Corporate Development began to review the above information to evaluate its feasibility and the time needed before beginning this new scheduled service. Skyward Aviation was a profitable company, but the size of the expansion and investment would require the majority of financing to be debt-financed. He had decisions to make about what communities to serve, the schedule, design and the pricing and promotional strategy to be implemented (Exhibit 7 gives cost information). The average North American airline spent three per cent of revenue on advertising on established routes. Exhibit 2 CANADIAN AIRLINES NORTH SYSTEM SCHEDULE - MANITOBA Date of the Week Destination Times Origin Winnipeg 12345 Thompson 07:00 08:15 12345 Thompson Flin Flon 08:40 - 09:20 12345 Flin Flon Winnipeg 09:40 10:40 135 Winnipeg Gillam 11:20 12:40 135 Gillam Churchill 13:05 - 13:45 135 Churchill Winnipeg 14:15 - 16:25 123457 Winnipeg The Pas 17:55 19:00 123457 The Pas Thompson 19:25 20:05 123457 Thompson Winnipeg 20:35 - 21:40 Exhibit 3 CALM AIR SYSTEM SCHEDULE SELECTED ROUTES IN MANITOBA Days of Week Origin Destination Times 123456 Winnipeg The Pas 07:30- 08:59 12345 The Pas Winnipeg 09:25 10:34 6 The Pas Flin Flon 09:25 - 09:46 6 Flin Flon Winnipeg 10:05 11:25 12345 Winnipeg Thompson 14:20 - 16:05 12345 Thompson Winnipeg 16:35 - 18:00 6 Thompson Winnipeg 08:40 - 10:24 6 Thompson 12:00 - 13:45 7 14:20 16:17 Winnipeg Winnipeg Thompson Winnipeg Thompson Winnipeg 7 16:35 18:00 12357 Flin Flon 18:30 - 20:00 12357 Flin Flon Winnipeg 20:25 - 21:45 Exhibit 4 MILEAGE BETWEEN SELECTED COMMUNITIES IN MANITOBA AND THE NORTHWEST TERRITORIES Destination Miles Winnipeg Thompson Winnipeg Flin Flon Winnipeg The Pas Winnipeg Gillam Winnipeg Churchill Winnipeg Rankin Inlet Thompson Flin Flon Thompson The Pas Thompson Gillam Thompson Churchill Thompson Rankin Inlet 409 388 326 458 627 923 171 207 127 249 526 Exhibit 5 FARES AND PASSENGERS BOARDED FOR SELECTED ROUTES IN NORTHERN MANITOBA AND NORTHWEST TERRITORIES Winnipeg - Thompson Winnipeg - Gillam Fares (return ticket not including taxes) Full Fare 7 day Advance Fare 14 day Advance Fare Average Fare *(70% full/15% 7 day/15% 14 day) Fares (return ticket not including taxes) $576 Full Fare $495 7 day Advance Fare $317 14 day Advance Fare Average Fare $524 *(70% full/15% 7 day/15% 14 day) $626 $538 $344 $571 Passengers Boarded (one way) **Canadian North *Calm Air Total Boardings Passengers Boarded (one way) 29,000 **Canadian North 12,000 *Calm Air 41,000 Total Boardings 5,000 1,500 6,500 Winnipeg The Pas Winnipeg - Churchill Fares (return ticket not including taxes) Full Fare 7 day Advance Fare 14 day Advance Fare Average Fare (60% full/20% 7 day/20% 14 day) Fares (return ticket not including taxes) $498 Full Fare $428 7 day Advance Fare $274 14 day Advance Fare Average Fare $440 (40% full/30% 7 day/30% 14 day) $778 $669 $428 $340 Passengers Boarded (one way) Canadian North Calm Air Total Boardings Passengers Boarded (one way) 7,500 Canadian North 4,500 Calm Air 12,000 Total Boardings 7,000 4,000 11,000 Winnipeg - Flin Flon Winnipeg - Rankin Inlet Fares (return ticket not including taxes) Full Fare 7 day Advance Fare 14 day Advance Fare Average Fare (60% full/20% 7 day/20% 14 day) Fares (return ticket not including taxes) $538 Full Fare $463 7 day Advance Fare $296 14 day Advance Fare Average Fare $475 (40% full/30% 7 day/30% 14 day) $1,262 $1,010 $618 $993 Passengers Boarded (one way) Canadian North Calm Air Total Boardings Passengers Boarded (one way) 5,200 Canadian North 7,000 Calm Air 12,200 Total Boardings 3,500 7,000 10,500 *Casewriter estimate **1993 Statistics Canada Exhibit 6 AIRCRAFT INFORMATION AIRCRAFT BA DORNIER 328-110 BEACHCRAFT 1400D SAAB 340B JETSTREAM J41 EMBREAR BANDITER. "BANDIT Payload Passengers 30 29 19 34 15 Payload (Pounds) 8,118 7,220 6,430 7,000 4,664 Speed (Knots) 345 250 284 272 225 Direct Operating Cost $4.02 per mile $3.29 per mile $3.76 per mile $4.23 per mile $2.50 per mile Purchase Price Cdn$ $12.0 million $8.1 million $5.4 million $12.5 million Note: Yearly fixed costs (include only insurance and financing costs as a percentage of purchase price) were 12.5 per cent of the purchase price. Exhibit 7 ADVERTISING AND PROMOTION COSTS 1. Free Press These prices were based on running an ad on the business page that is two columns wide (4.25") and 3.5" high. Casual/Open Rates: Sunday $325.00 Monday to Friday $625.00 per day Saturday $790.00 2. Bus Stop Benches $100.00 per bench per month (three-month contract required) $125.00 per bench for artwork/setup/installation 3. Hook Billboards $650.00 per billboard per month (drops to $600.00 if have four billboards) $700.00 for artwork/set-up/installation for two-color billboard ($900.00 total for four billboards) 4. Gallop + Gallop It did transit-related advertising 21" x 70' 25 GRPs (31) 50 GRPs (62) 30" x 139" 25 GRPs (27) 50 GRPs (53) $4,255.00 $8,165.00 $4,945.00 $9,315.00 5. Mediacom It did outdoor advertising. Its rates were as follows: Transit Shelters 4' x 5' $ 350.00 Billboard 10' x 200 $ 700.00 Superboard 10' x 44' $1,500.00 There were the production costs on top of that. For example, the superboard would be about $2,250.00 + $11.00 per square foot for anything that juts outside of the 10' x 44' space. 6. Manitoba Business Magazine Circulation is 8,000. For one-time advertising its rates were as follows: $ 515.00 (b&w) $ 735.00 (color) $ 990.00 (b&w) $1,415.00 (color) $1,640.00 (b&w) $2,350.00 (color) 1/6 page 1/3 page 1/2 page Exhibit 7 (continued) 7. Weetamah It published every two weeks. Its circulation is 9,000 in Manitoba. $132.00 $264.00 $360.00 1/2 page $540.00 1/8 page 1/4 page 1/3 page 8. Neechee Culture It published every two months. Total circulation is 300,000 with 10,000 in Winnipeg and 20,000 in Manitoba. Its rates for black & white ads were as follows: 1/8 page $250.00 $460.00 $650.00 $900.00 1/4 page 1/3 page 1/2 page On Monday, June 6, 1995, Frank Behrendt, president of Skyward Aviation (Skyward), laid out the task for J.M. Smith, manager of business and corporate development: Calm Air is making a lot of money and Canadian North may be pulling jet service out of Thompson. Business travellers are sick and tired of getting up really early to catch a 7:00 a.m. flight out of Winnipeg to Thompson. Consumers are also tired of paying exorbitant fares. I think we should offer scheduled service into Winnipeg and other communities in Manitoba. I want you to see if this will work and present your findings and a marketing plan at the July 15 Board of Directors' meeting. Skyward Aviation was a regional aviation company providing scheduled, charter and aeromedical service. Skyward was based in Thompson, Manitoba, Canada, with additional aircraft and offices in Winnipeg, Manitoba; Norway House, Manitoba; and Rankin Inlet, Northwest Territories. COMPANY HISTORY Thompson, Manitoba, was a city of 22,000 people, located in central northern Manitoba and known as the Hub of the North. The main industries of Thompson Page 2 included a large nickel mine (International Nickel Company, Inco), transportation and government. Skyward was founded January 2, 1987, when three partners purchased a small local air service that was almost bankrupt. Skyward began with five aircraft, a hangar, a small office building and 15 employees. Frank Behrendt, one of the partners and a pilot in northern Canada for a number of years, was appointed president. Prior to the purchase, the company provided an air charter service for passengers, carried freight and performed the occasional medical evacuation from outlying communities around Thompson. Because of the company's poor reputation, the new partners wanted to deal with some of the obvious weaknesses of its operations. Customers had been unhappy with the level of service, the aircraft were aging, and the aircraft came from three different manufacturers. This had resulted in plummeting revenue, high maintenance costs and high inventory carrying loss. The partners immediately began a fleet renewal process, expanding the fleet with fewer aircraft from one manufacturer. SCHEDULED SERVICE After seeing a significant turnaround in customers' acceptance of the company, management decided to provide scheduled service to a number of communities where they had previously done a high volume of charter work. Scheduled service differed from charter service, in that a scheduled flight left a specific community on a pre-determined date and time and customers reserved seats on the aircraft. Charter service required customers to reserve an aircraft for their specific use. From a business perspective, scheduled service had more risk since revenue was not guaranteed for all seats on the aircraft. Skyward began scheduled service on September 1, 1988, from Thompson (Manitoba) to York Landing (Manitoba) and to Gods River (Manitoba). Currently, Skyward served 15 communities in northern Manitoba and the Northwest Territories (see Exhibit 1 for the company's brochure and the system schedule for Manitoba). With the introduction of new communities, Skyward used an entry pricing strategy of 30 to 40 per cent below the competition. Skyward management rationalized that prices were very high due to a lack of competition and Skyward wanted to give consumers a break. The competition responded and closed the price gap very quickly but Skyward was able to pick up a small market share. In the spring of 1994, Skyward purchased two Embrear Banditerantes (Bandits), 15-seat aircraft. A Bandit had short takeoff and landing characteristics with a high useable weight for an aircraft in its class, ideal for the conditions in northern Page 3 9 Manitoba. Each Bandit had a large cargo door in the back and was sent out in a configuration utilizing both freight and passengers. The freight was sent on standby so that the airplane usually realized very high load factors because the freight topped off the aircraft. Freight generated less revenue than passengers, but Skyward could guarantee next-day delivery into remote communities because of its daily service and could, therefore, charge a much higher per pound rate than its competitors. It was at this time that Skyward began to focus on increasing the number of passengers and revenue per flight (yield management). By the summer of 1994, Skyward had a significant market share of scheduled traffic in and out of northern Manitoba communities and had done this with no formal advertising. In early 1995, Skyward purchased two more Bandits. The purchase of these last two aircraft complemented the first two, because all routes could be served by Bandits. This helped enhance passenger appeal, and by June 1995, passengers carried were on target for 25 per cent growth over the 1994 level of 35,000. Skyward's growth in the scheduled service market was also attributed to aircraft flexibility and exceptional customer service. Skyward was currently operating seven types of aircraft, 16 aircraft in total. Because of the different types of aircraft, smaller aircraft could be substituted and costs reduced if passenger and cargo loads were down on certain days. The customer base in and out of Thompson was small and 90 per cent of business was repeat customers. The employees and management of Skyward were committed to serving the customer and customers often returned to Skyward in response to that commitment. Skyward was the first carrier in Thompson to provide food on flights, offer free shuttle service into town from the airport and run errands for out-of-town customers at no charge. Skyward's existing reservation system was very inefficient and much of the work was done manually. Skyward required all reservations and all data processing to go through head office. If a travel agent wanted to book a passenger on a flight from Thompson to Shammattawa, the travel agent had to call Thompson and ask a Skyward agent to check availability and make the reservation. The system also did not provide the necessary marketing information for management to make effective and timely decisions. THE MANITOBA MARKET Over the years, Frank Behrendt had toyed with the idea of providing scheduled service to Winnipeg from Thompson, but as other opportunities had presented themselves, resources were directed to those opportunities. Page 4 Scheduled air transportation in Manitoba was currently served by four main regional carriers: Canadian North Airlines, Calm Air Ltd., Perimeter Airlines and Skyward Aviation. There were also a number of other carriers which provided scheduled service to a few communities. Canadian North Airlines, based in Edmonton, Alberta, was a division of Canadian Airlines that provided Boeing 737 jet service (125 passengers) to a number of communities in northern Canada (Alberta, Manitoba, Northwest Territories, Quebec) (see Exhibit 2 for Canadian North system schedule for Manitoba). Because of Canadian Airline's cash flow problems, Canadian Airlines was continually reviewing operations and restructuring to cut marginal services and reduce expenses. Routes were being turned over to regional connectors to be served with smaller turboprop aircraft. It was believed that, within the year, the routes in Manitoba would no longer be served by Boeing 737 service. Calm Air, based in Thompson, Manitoba, was a Canadian Airlines Connector (45 per cent ownership by Canadian Airlines) and was the largest passenger carrier in Manitoba (see Exhibit 3 for Calm Air system schedule for selected routes in Manitoba). Calm Air had had very limited competition for almost 20 years and the owners enjoyed a healthy financial position. Perimeter Airlines served communities in southern Manitoba out of its Winnipeg base operation which was similar to Skyward Aviation. Perimeter Airlines operated 15 to 19 passenger aircraft and moved approximately 20,000 more passengers than Skyward. Air transportation customers in the north could be divided into two groups: business and leisure customers. Business travellers made up 65 to 75 per cent of passengers on the considered routes. Most passengers (70 per cent) travelling from Winnipeg to Thompson flew the direct flight in the morning and evening. More information needed to be gathered but it was known that passengers considered price, departure times, on-time departure, flight time, connections, food and other amenities, aircraft (size, cleanliness, appearance), employee courteousness, baggage handling and extra baggage charges as important factors in their decision. Leisure travellers usually made travel plans well in advance of flight date. RECENT DEVELOPMENTS In February 1995, Calm Air replaced its aging Hawker Siddely 748 (48-passenger prop aerocraft) aircraft with brand new SAAB 340B Plus (30-passenger turboprop aircraft, which were fast and comfortable) aircraft. Three more SAAB 340 B Plus's were on order along with one SAAB 2000 (50-seat turboprop aircraft, the fastest turboprop on the market). With the new aircraft, Calm Air offered direct flights from Winnipeg (Manitoba) to Thompson (Manitoba), Flin Flon (Manitoba), Page 5 and The Pas (Manitoba), complementing Canadian Norths service. It was estimated by Skyward's management that Calm Air would realize a profit of $750,000 per year on the SAAB 340. Calm Air's new afternoon flights from Thompson to Winnipeg had been successful and the Thursday and Friday flights were always full. Exhibit 4 shows the mileage between selected communities in Manitoba and the Northwest Territories. Fares and passenger loads for Calm Air and Canadian North are shown in Exhibit 5. Calm Air was involved heavily in the community-supporting races, radio programs and other community events. Calm Air heavily promoted the new direct service with the SAAB 340B Plus aircraft. Calm Air used the reservation system of its parent, Canadian Airline, and American Airlines (Sabre system). This system had features such as interactive display and sell which allowed travel agents to inquire and make reservations without the requirement of personal contact with Calm Air. The federal government, currently run by the Liberal party, as part one of its promises to aboriginal peoples of Canada in the 1994 election Red Book, was proposing the Strategic Procurement Initiative (SPI). SPI stated that the program is intended to apply to all procurement (purchases) by all federal government departments and agencies ... as long as there is at least one qualified and available aboriginal supplier (50 per cent-owned by aboriginal individuals), no further competition would be sought.Skyward's owners were not aboriginal people. Forty per cent of Skyward's current revenue was from direct federal government purchases. EXPANDED ROUTE CONSIDERATIONS There were a number of options to consider before making a decision to proceed with the expanded route structure. Aircraft Decision One alternative, which would require only minimal adjustment to existing operations, would be to use one of the Embrear Banditerantes on the Thompson to Winnipeg route. Prior to launching this service, the aircraft would need a new interior at a cost of $10,000. This renovation could be completed in one month. Another alternative would entail Skyward purchasing a new aircraft. Manufacturers required a lead time of four to six months for delivery of aircraft. Exhibit 6 lists cost and performance information for four appropriate turboprop aircraft, as well as Calm Air's SAAB 340B Plus and the Embrear Banditerante. With a new aircraft purchase, a number of variables would have to be considered: 'Public Works and Government Services document (Briefing SPI, January 1995, pp. 10,11) Page 6 cost, performance, payload, and the ease with which a new aircraft could fit into existing operations. Other Costs A number of things would happen once a decision was made to purchase a new aircraft. Approval from the National Transportation Agency for a transport category aircraft (greater than 12,500 pounds) would be needed since the aircraft would be larger than any of Skyward's existing aircraft. Second, certain operations procedures would need to be rewritten because different regulations applied. This would also require revisions to the operations manual. Third, the maintenance department would need to hire engineers with qualifications to maintain this type of airplane as well as purchase specialized maintenance equipment at a cost of $50,000 to $75,000. For each of the new communities Skyward would serve, Winnipeg being the exception, the company would need to invest $25,000 in ground support equipment such as ground power units, de-icing equipment and boarding/deboarding aids. Fourth, the flight department would need to recruit and/or train pilots that would have the qualifications to fly the new aircraft. If one aircraft was purchased, five pilots and three flight attendants would need to be recruited and trained. If two aircraft were purchased, eight pilots and six flight attendants would need to be recruited and trained. Training contracts would need to be negotiated with training schools in the United States. A three-week program would cost $25,000 per crew member. The average salary with benefits for a pilot would be $52,150 and for a flight attendant would be $22,000. With new scheduled service, the following other costs would be incurred: landing and terminal fees at all airports would be $50 per flight; food for passengers could be contracted out at $5.00 per passenger; newspapers and magazines would cost $1.00 per passenger. In Winnipeg, passenger check-in, boarding and baggage handling could be contracted from Air Canada for $120 per flight. Terminal operations in Thompson (rental, computer, communications, supplies, etc) would cost approximately $75,000 annually, if boarding was moved from Skyward's building to the main terminal. Terminal operations in other communities would be approximately $35,000 annually. Page 7 Automating The Reservation System Skyward was considering upgrading and automating the reservation system. Skyward had contacted Advantis Canada Ltd. to provide automation service. Advantis provided distribution (via computer) of an airline's flight schedules, gave fare information to travel agencies through the Galileo network and managed inventory (seats). The system allowed travel agents to enquire about specific seats on flights, reserve those seats and take payment from customers. With Advantis, collection of fares was done through a central banking group. Travel agents took an eight and one half per cent commission for a sale. To contract Advantis costs would include a $50,000 initial one-time setup cost and communication, hardware and miscellaneous costs of $25,000 per year, $1.20 per passenger for all passengers booked (by Skyward agent or travel agent) and an additional $1.20 per passenger for passengers booked on Galileo system (travel agent). Advantis required a lead time of five months to implement the system. The Manager of Business and Corporate Development began to review the above information to evaluate its feasibility and the time needed before beginning this new scheduled service. Skyward Aviation was a profitable company, but the size of the expansion and investment would require the majority of financing to be debt-financed. He had decisions to make about what communities to serve, the schedule, design and the pricing and promotional strategy to be implemented (Exhibit 7 gives cost information). The average North American airline spent three per cent of revenue on advertising on established routes. Exhibit 2 CANADIAN AIRLINES NORTH SYSTEM SCHEDULE - MANITOBA Date of the Week Destination Times Origin Winnipeg 12345 Thompson 07:00 08:15 12345 Thompson Flin Flon 08:40 - 09:20 12345 Flin Flon Winnipeg 09:40 10:40 135 Winnipeg Gillam 11:20 12:40 135 Gillam Churchill 13:05 - 13:45 135 Churchill Winnipeg 14:15 - 16:25 123457 Winnipeg The Pas 17:55 19:00 123457 The Pas Thompson 19:25 20:05 123457 Thompson Winnipeg 20:35 - 21:40 Exhibit 3 CALM AIR SYSTEM SCHEDULE SELECTED ROUTES IN MANITOBA Days of Week Origin Destination Times 123456 Winnipeg The Pas 07:30- 08:59 12345 The Pas Winnipeg 09:25 10:34 6 The Pas Flin Flon 09:25 - 09:46 6 Flin Flon Winnipeg 10:05 11:25 12345 Winnipeg Thompson 14:20 - 16:05 12345 Thompson Winnipeg 16:35 - 18:00 6 Thompson Winnipeg 08:40 - 10:24 6 Thompson 12:00 - 13:45 7 14:20 16:17 Winnipeg Winnipeg Thompson Winnipeg Thompson Winnipeg 7 16:35 18:00 12357 Flin Flon 18:30 - 20:00 12357 Flin Flon Winnipeg 20:25 - 21:45 Exhibit 4 MILEAGE BETWEEN SELECTED COMMUNITIES IN MANITOBA AND THE NORTHWEST TERRITORIES Destination Miles Winnipeg Thompson Winnipeg Flin Flon Winnipeg The Pas Winnipeg Gillam Winnipeg Churchill Winnipeg Rankin Inlet Thompson Flin Flon Thompson The Pas Thompson Gillam Thompson Churchill Thompson Rankin Inlet 409 388 326 458 627 923 171 207 127 249 526 Exhibit 5 FARES AND PASSENGERS BOARDED FOR SELECTED ROUTES IN NORTHERN MANITOBA AND NORTHWEST TERRITORIES Winnipeg - Thompson Winnipeg - Gillam Fares (return ticket not including taxes) Full Fare 7 day Advance Fare 14 day Advance Fare Average Fare *(70% full/15% 7 day/15% 14 day) Fares (return ticket not including taxes) $576 Full Fare $495 7 day Advance Fare $317 14 day Advance Fare Average Fare $524 *(70% full/15% 7 day/15% 14 day) $626 $538 $344 $571 Passengers Boarded (one way) **Canadian North *Calm Air Total Boardings Passengers Boarded (one way) 29,000 **Canadian North 12,000 *Calm Air 41,000 Total Boardings 5,000 1,500 6,500 Winnipeg The Pas Winnipeg - Churchill Fares (return ticket not including taxes) Full Fare 7 day Advance Fare 14 day Advance Fare Average Fare (60% full/20% 7 day/20% 14 day) Fares (return ticket not including taxes) $498 Full Fare $428 7 day Advance Fare $274 14 day Advance Fare Average Fare $440 (40% full/30% 7 day/30% 14 day) $778 $669 $428 $340 Passengers Boarded (one way) Canadian North Calm Air Total Boardings Passengers Boarded (one way) 7,500 Canadian North 4,500 Calm Air 12,000 Total Boardings 7,000 4,000 11,000 Winnipeg - Flin Flon Winnipeg - Rankin Inlet Fares (return ticket not including taxes) Full Fare 7 day Advance Fare 14 day Advance Fare Average Fare (60% full/20% 7 day/20% 14 day) Fares (return ticket not including taxes) $538 Full Fare $463 7 day Advance Fare $296 14 day Advance Fare Average Fare $475 (40% full/30% 7 day/30% 14 day) $1,262 $1,010 $618 $993 Passengers Boarded (one way) Canadian North Calm Air Total Boardings Passengers Boarded (one way) 5,200 Canadian North 7,000 Calm Air 12,200 Total Boardings 3,500 7,000 10,500 *Casewriter estimate **1993 Statistics Canada Exhibit 6 AIRCRAFT INFORMATION AIRCRAFT BA DORNIER 328-110 BEACHCRAFT 1400D SAAB 340B JETSTREAM J41 EMBREAR BANDITER. "BANDIT Payload Passengers 30 29 19 34 15 Payload (Pounds) 8,118 7,220 6,430 7,000 4,664 Speed (Knots) 345 250 284 272 225 Direct Operating Cost $4.02 per mile $3.29 per mile $3.76 per mile $4.23 per mile $2.50 per mile Purchase Price Cdn$ $12.0 million $8.1 million $5.4 million $12.5 million Note: Yearly fixed costs (include only insurance and financing costs as a percentage of purchase price) were 12.5 per cent of the purchase price. Exhibit 7 ADVERTISING AND PROMOTION COSTS 1. Free Press These prices were based on running an ad on the business page that is two columns wide (4.25") and 3.5" high. Casual/Open Rates: Sunday $325.00 Monday to Friday $625.00 per day Saturday $790.00 2. Bus Stop Benches $100.00 per bench per month (three-month contract required) $125.00 per bench for artwork/setup/installation 3. Hook Billboards $650.00 per billboard per month (drops to $600.00 if have four billboards) $700.00 for artwork/set-up/installation for two-color billboard ($900.00 total for four billboards) 4. Gallop + Gallop It did transit-related advertising 21" x 70' 25 GRPs (31) 50 GRPs (62) 30" x 139" 25 GRPs (27) 50 GRPs (53) $4,255.00 $8,165.00 $4,945.00 $9,315.00 5. Mediacom It did outdoor advertising. Its rates were as follows: Transit Shelters 4' x 5' $ 350.00 Billboard 10' x 200 $ 700.00 Superboard 10' x 44' $1,500.00 There were the production costs on top of that. For example, the superboard would be about $2,250.00 + $11.00 per square foot for anything that juts outside of the 10' x 44' space. 6. Manitoba Business Magazine Circulation is 8,000. For one-time advertising its rates were as follows: $ 515.00 (b&w) $ 735.00 (color) $ 990.00 (b&w) $1,415.00 (color) $1,640.00 (b&w) $2,350.00 (color) 1/6 page 1/3 page 1/2 page Exhibit 7 (continued) 7. Weetamah It published every two weeks. Its circulation is 9,000 in Manitoba. $132.00 $264.00 $360.00 1/2 page $540.00 1/8 page 1/4 page 1/3 page 8. Neechee Culture It published every two months. Total circulation is 300,000 with 10,000 in Winnipeg and 20,000 in Manitoba. Its rates for black & white ads were as follows: 1/8 page $250.00 $460.00 $650.00 $900.00 1/4 page 1/3 page 1/2 page