Quality Control Group Project Company Overview US

Quality Control Group Project

Company Overview

US Airways Group Inc. is one of the major U.S. airline companies that delivers air transportation services for cargo and passengers. The company is the 5th largest airline company in the United States as being measured by available seat miles and revenue passengers. The U.S. Airways Group was formed in 2005 through its merger with former U.S. Airways Group and American West Holdings. The company scheduled passenger services for approximately 3,100 flights daily to more than 200 communities in the United States, Europe. Canada, Mexico, Central & South America, and the Middle East. U.S. Airways is owned by the U.S. Airway Group with headquarter in Tempe, Arizona, and the company uses 1,818 U.S. Airways Express and 1,210 U.S. Airways Mainline for its daily flight operation. The U.S. Airway is a member of Star Alliance Network that utilizes fleet of 285 regional jet, 346 mainline jet aircraft and turbo-prop aircraft. As of January 2013, the U.S. Airline employs approximately 32,213 people globally. The challenges facing the airline industry in the last few years has extremely affected the U.S. Airway Group. In 2008, the company recorded the annual operating loss of $1.8 billion. Although, the company recovered between 2009 and 2012, however, the company net income was still behind the TTM (Trailing Twelve Month) figures.

Objective of the report is to use the DMAIC (Define, Measure, Analyze, Improve and Control) methodology to solve the problem facing the U.S. Airways. To identify the key problems facing the company, the report carries out a comprehensive audit using DMAI model.

Define the Problem

The purpose of this section is to clearly articulate the business problem facing the U.S. Airways Group. The section defines the problem, and the customer's voice that is critical to the quality of the service delivered by the company.

Starting from 2000, the U.S. Airways Group has suffered from the financial decline due to a reduction in the number of air passengers. After September 11, 2001, there has been a drastic reduction in the number of air passengers forcing the company to declare bankruptcy in 2002. Unlike other airline companies that recover and emerge stronger following the introduction of Chapter 11 protection, however, the U.S. airway never recovers until 2009. The combination of tough labor negotiation and fuel costs has forced the company into the financial problems. In June 2007, a Consumer Report survey of approximately 23,000 readers revealed that U.S. Airway ranked as the worst airline that delivered customer satisfaction. A follow-up survey also revealed that U.S. Airways remained in last place making the company to be rated as the worst airline in the United States. Typically, the U.S. Airway scored 5/30 for food, 10/30 for comfort, 15/30 for the online reservations system and 10/30 for service. (Farolino, Gathje, & Hudes, 2008). The U.S. Airways has been accused of constantly delaying and cancelling air schedule that irritate customers.

Similar problem facing the company is that the U.S. Airway ceased to provide its passenger with complimentary beverages in 2008. The company also requires passenger to purchase soda or bottled water for $2. Customers were also asked to pay $1 for tea or coffee. However, the company resumed serving complimentary drinks to passengers in 2009. The overall problems made the U.S. Airway to be ranked last out of the 20 major domestic Airlines in the United States in 2007. In 2008, the U.S. Airway ranked seventh in term of on-time arrivals. Moreover, the U.S. Airways has a very poor record of addressing client's complaints, and the company has been accused of answering only 50% of the telephone calls directed to the customer service department. The company also has higher record of customer delay. According to the U.S. Department of Transportation (2013), the company records 234 flight delay in the September 2013.

The entire issues make the company financial record to be deteriorated. In 2009, the U.S. Airway incurred a net loss of $205 million, which represent 90% reduction in the company net income. In 2008, the company lost $2.22 billion from its entire revenue of $12.12 billion. The company also faces a stiff competition from low cost airlines. Major competitors of the U.S. Airway include:

American Airlines (AMR),

Delta Air Lines Inc. (DAL),

United Airlines (UAUA),

Continental Airlines (CAL),

Southwest Airlines Company (LUV),

JetBlue Airways (JBLU), and AirTran Holdings (AAI).

The high cost of fuel has also been the major problem facing the company. Over the years, there has been a constant fuel rise making the company to record the increase in the cost of operations. Richard, & Carl (2006) argue that the U.S. Airway has not been profitable since 1999, and since 2002, the company filed for bankruptcy twice. The company has faced the external obstacles such as rising in the cost of fuel. The increase in the fuel costs has made the U.S. Airway business to become less profitable.

" Similar to most airlines, rising crude oil prices pose a significant risk to U.S. Airways' profitability, as unhedged fuel costs now account for more than 20% of the firm's expenses. The company also faces financial covenants and significant commitments over the coming years, which could result in future equity raises. Additional risks include government regulation, terrorist activities, and inclement weather." (Morning Star, 2011 P. 2).

The increase in government regulations has also been the major problem facing the company. The Federal Aviation Administration (FAA) is a federal government agency in charge of monitoring the airline companies operating the United States. The constant increase in the government regulations has made the company to incur cost of operation in order to comply with the regulations. The excessive government taxes are becoming a burden to the industry. The company is forced to pay 7.5% from air tickets as tax. Airports also impose PFCs (passenger facilities charges) of up to $4.50 on each passenger who board at the airport. These taxes are excessive on the company because they lead to the rise in the cost of operations.

Apart from particular problem facing the U.S. airline industry, the recessional industrial cycles also cause problem to the airline companies. Starting from 2000, travelers are seeking for alternative solutions to travel due to constant increase in airfares. The 9/11 terrorist attack also contributed to a decline in market opportunities within the airline industry making the industry to record a net loss of $30 billion starting from 2005.

Borenstei, (2011) contributes to the argument by point outing out that the U.S. airline industry has secured a total loss of $60 billion as of 2009 in the domestic market. The problem has been attributed to the market deregulation; fuel costs shocks, and competition from low cost airlines. Between 2000 and 2002, the airline industry suffered a drop of 20% in the overall demand. By 2009, the demand was 11% lower. The overall problem within the industry makes the U.S. Airway to record a drop in the market demand. The identification of the problems facing the company makes the report to establish the basis for improvement.

Measure

This step establishes current baseline for the improvement of the U.S. Airway Group, and the step collects data by which the report establishes the performances baseline. The report compared performances baseline with the performance metric and make a decision on the appropriate method for improvement.

To create a performance capacity baseline for the U.S. Airways Group, the report collects the financial data of the group and compares with the airline industry data. The report collects the 5-year financial data of the group to present financial outlook of the company and identify the areas where there are problems. Crook, et al. (2003) argues that data collection is the method to access a company strategic position. "To assess a firm's strategic position, managers must collect and interpret data regarding the firm itself, its competitors, its stakeholders, and the industry." (Crook, et al. 2003 p44). Equipped with the necessary information, "the management must use the information to develop market and non-market strategies by matching internal resources with external opportunities." (Crook, et al. 2003 p44).

Between 2007 and 2012, the company has recorded the increase in the total revenue. In 2007, the company recorded the increase the total revenue from 2007 to 2012 fiscal years making the company to record an increase in the gross margin from 2007 and 2012. Despite the increase the gross revenue over the past 5 years, the company recorded a huge operating loss of $1.8 billion in 2008. (See Table 1 and Fig 1). The operating loss that that the company recorded at the end of fiscal year 2008 made the company to record the operating margin loss of 14.9%. Similarly, the company recorded a net income loss $2.21 billion in 2008. The earning per share of the company also declines revealing $22.06 loss.

Despite the loss that the company recorded at the end of 2008 fiscal year, the company financial record improved between 2009 and 2012. The company recorded the operating income gain of $118 Million in 2009 and increase to $856 million at the end of 2012 fiscal year. To establish the gap between the current and required performances, the paper compares the company financial data with the industry as being revealed in table 2.

Fig 1: U.S. Airways Operating Margin

Table 1: U.S. Airways Group Inc.

TTM

2012-12

2011-12

2010-12

2009-12

2008-12

2007-12

Revenue USD Mil

14,378

13,831

13,055

11,908

10,458

12,118

11,700

Gross Margin %

49.4

47.1

44.8

65.9

51.4

62.4

66.2

Operating Income -- USD Mil)

1,137

-1,800

Operating Margin %

7.9

6.2

3.3

6.6

1.1

-14.9

4.6

Net Income USD Mil

71

-205

-2,210

Earnings (Per Share USD)

2.82

3.28

0.44

2.61

-1.54

-22.06

4.52

Dividends USD

Payout Ratio %

Shares Mil

96

Book Value ( Per Share USD)

7.64

4.86

0.93

0.52

-2.20

-4.33

15.72

Operating Cash Flow ( USD Mil)

1,280

1,017

59

-980

Cap Spending (USD Mil)

-1,422

-775

-593

-201

-683

-1,068

-603

Free Cash Flow (USD Mil)

-142

-121

-624

-2,048

-161

Free Cash Flow (Per Share USD)

1.19

-0.74

3.00

-4.69

-20.45

-1.68

Working Capital (USD Mil)

-111

69

-458

-626

Key Ratios Efficiency Ratios

Margins % of Sales

TTM

2012-12

2011-12

2010-12

2009-12

2008-12

2007-12

Revenue

COGS

50.61

52.95

55.20

34.09

48.59

37.60

33.81

Gross Margin

49.39

47.05

44.80

65.91

51.41

62.40

66.19

SG&A

29.99

30.03

30.08

37.04

36.35

36.93

38.79

R&D

Other

11.50

10.84

11.46

22.30

13.92

40.33

22.85

Operating Margin

7.91

6.19

3.26

6.56

1.13

-14.85

4.56

Net Int Inc. & Other

-2.55

-1.58

-2.57

-2.34

-3.45

-3.38

-0.85

EBT Margin

5.36

4.61

0.69

4.22

-2.32

-18.24

3.71

Profitability

TTM

2012-12

2011-12

2010-12

2009-12

2008-12

2007-12

Tax Rate %

24.16

21.11

1.61

Net Margin %

4.06

4.61

0.54

4.22

-1.96

-18.24

3.65

Asset Turnover (Average)

1.34

1.56

1.62

1.56

1.43

1.59

1.50

Return on Assets %

5.46

7.19

0.88

6.57

-2.80

-28.98

5.47

Financial Leverage (Average)

8.02

11.89

55.57

93.08

5.59

Return on Equity %

51.61

60.68

-473.23

35.45

Return on Invested Capital (RIC)%

5.00

5.71

-4.06

-60.98

3.70

Interest Coverage

3.20

2.86

1.28

2.53

0.20

-7.74

2.59

Period Ending:

12/31/2012

12/31/2011

12/31/2010

12/31/2009

Liquidity Ratios

Current Ratio

96%

84%

Quick Ratio

99%

89%

94%

75%

Cash Ratio

72%

62%

65%

47%

Profitability Ratios

Gross Margin

38%

36%

41%

39%

Operating Margin

6%

3%

7%

1%

Pre-Tax Margin

5%

1%

4%

2%

Profit Margin

5%

1%

4%

2%

Pre-Tax ROE

81%

60%

68%

After Tax ROE

81%

47%

58%

The data in the table 2 compare the financial data with U.S. Airway with the airline industrial leader. The outcome of the comparison assists indenting the gaps that have existed in the company financial performances. The data reveal that U.S. Airway ranks 5 out of 33 in the revenue growth and 3 out 33 in the return on equity growth. The company also ranks 13 out 33 in the long-term growth and 17 out 33 with reference to market capitalization. The report identifies that U.S. Airways has not been able to efficiently increase its revenue compare to other industrial leaders. Inability to increase the revenue compared to other leading airlines in the industry is affecting the company return-on-equity. The shareholder theory argues the major goal of a business is to create value for shareholders. Comparatively, the U.S. Airways Group has not been able to create values to shareholders compared to other industrial leaders because the company ranked 3 out of 33 in the industry in its performance to the return-on-equity.

Table 2: U.S. Airway LCC vs. Industry Leaders

Statistic

Industry Leader

U.S Airway

LCC Rank

Market Capitalization

RYANAIR HOLDINGS

8.07B

4.63B

17 / 33

P/E Ratio (ttm)

Aer Lingus Group PLC

22.70

8.04

19 / 33

Revenue Growth (Qtrly YoY)

Spirit Airline Inc.

33.40%

9.10%

5 / 33

Long-Term (Growth Rate 5 yr)

China Southern Airlines Company

9.40%

13 / 33

Return on Equity (ttm)

Delta Air Lines

51.61%

3 / 33

Analysis

Analysis is one of the steps in the DMAIC model and the analysis is used to identify, select and validate the root cause of the problem. In the model, the top three causes of the problems are selected using consensus tool for validation, and data collection is used to establish the root cause of the problem.

Major cause of the problems facing the company is as follows:

Cost

Competition

Profitability

Consolidation

Demand

Risk

Financing.

U.S. Airways face stiff competitions from newer low cost carriers such as Jet Blue and Southwest. Typically, the passenger revenues for the company have accounted for more than 90% of the company operating revenue. The year 2008 was extremely challenging for the company, and the company operates in an extremely challenging environment in 2008. The fuel has been the largest single cost of operation for the company and the company incurred a significant loss due to hike in fuel prices in 2008. Typically, fuel alone represents 32.3% of the company total operating cost. Between 2003 and 2008, the costs of fuel rose from U.S.$34.7 to U.S.$126.7. The constant rise in fuel is followed by the increase in the price of crude oil.

The company also faces the internal industry rivalry. The U.S. Airways faces the intense competition from low-cost carriers (LCCs) and service hub-and-spoke airlines. With the Airline Deregulation Act 1978, the industry is highly fragmented by selling largely undifferentiated product. The deregulation has led to the constant fall of airline ticket making consumers to save billion of airline tickets. The increase in competition has also brought about the cut of airfares leading to the drop in the company profit margins.

The greatest threat to the U.S. Airways has been from low cost carriers. Typically, their growth has affected the company revenue, and based on the threat from low cost airfares, the company try to decline its operating costs by using less congested and cheaper airports. However, low cost airlines are increasingly offering amenities to passengers making them to receive increasingly number of operating rights.

Other aspect of competitive landscape in the airline industry is that customers are becoming less loyal and price sensitive. Since 2000, the internet technology has exposed customers to low cost airline, which has intensified competition. Although, U.S. Airways has been able to compete by providing promotion fares and discount airfares, however, the company's ability to compete efficiently is limited by the costs of operations.

Power of supply is also strong in the industry. The aircraft, fuel and labor have the key inputs in the airlines operations. Airlines generally purchase or lease aircraft from manufacturers. By 2008, the U.S. Airways operates 354 aircraft, where 63 of the aircraft were owned and the company leased the remaining 291. The company mainly uses Airbus, and Boeing companies aircraft. Although, both Boeing and Airbus 7 have power of supplier over airlines, however, the competition between the two companies prevents monopoly. Moreover, some airline companies have formed a strategy to purchase aircraft in a bloc thereby achieving higher bargaining power.

More importantly, the airline industry is labor intensive putting U.S. Airways at a disadvantage. In 2008, wages and salaries represent 18% of the company operating expenses. The company controls approximately 37,500 full-time equivalent employees, where 87% of the employees are in the labor unions. Thus, union membership gives supplier power to employees which can threaten the operations of the company.

"Unionized workers represent roughly 90% of U.S. Airways' active workforce, which could lead to higher costs as current contracts become amendable during the next few years. Intense competition is also a threat, as surplus capacity puts downward pressure on ticket prices." (Morning Star, 2011 P. 2).

Based on the supplier power of employees, this makes the U.S. Airway to be in a relative disadvantage position compared its competitors such as Jet Blue that enjoys a non-unionized workforce.

Moreover, the U.S. airway has little power over air fuel pricing. The increase in the price of fuel affects the cost of operation of the company. With the increase in the price of fuel, the costs of operation of the company increase. However, the hedge assists airline companies to limit the uncertainties posed by the airline. In 2008, the U.S. Airways recorded a net loss of $356 million from the fuel hedging activities because of the significant decline in the fuel price. Increase in dependence of fuel could lead to the increase in the cost of operation, which consequently pose a great threat to the company.

Overall problems facing the company are as follows:

Unprofitable operations between 2008 and 2009 made the company to secure a huge financial loss.

Overdependence on the U.S. market that account the 81.9% of the company revenue,

Poor customer relations record,

Volatility of fuel costs making the company to incur high cost of operations

The economy downturn leading to a decline in air ticket demand.

Intense competition from low cost airline leading to a decline in the market shares.

Increase in environmental regulation such compliance to lower emission aircraft. which may make the company to incur a significant costs,

Customer opposition to higher pricing that could make the company to lose market to low-cost carriers.

Improve

This section identifies and provides solutions to the problem facing the company. The section creates innovative, easy and simplest solutions to the problem. Based on the results of the audit, the report recommends that the company should implement an efficiency-enhancing technology to streamline the company into modern business strategy. The company should expand on its international operations. The findings of the report reveal that the company operations are based in the United States making the company to lose markets that would have come from European and Emerging markets. Overdependence of the U.S. market makes the company to be susceptible to the economic and political problem facing the country as evidence of the decline in market demand due to the recessionary U.S. economy.

The company will benefit by expanding its services to the international routes because the competition at the international route is far less than domestic competition. At domestic routes, the low cost carriers are continually snatching market from the U.S. Airways. Essentially, the company derives more than 82% of its total revenue from the U.S. market; the company should expand to the international operations to drive in the revenues. The international operations will make the company to face less intense competition that it is currently facing in the U.S. market.

Thus, U.S. Airways should take advantages of its economic of scale and strong network infrastructure to draw market from international routes.

The U.S. Airway Group should invest in training and development for all employees to equip them in order to carry out the company policy efficiently. Operation inefficiency is the key problem to the company and most registered complaints are related to customer service, ticketing, and boarding. This is defined by the rude method that employee communicate to customers. Typically, poor training that staff has undergone reflect their relationship with customer. The company could strengthen its operations by providing effective training for employees.