The following is the business plan for Viva Airlines, Inc., our only active
subsidiary:
On September 17, 2002, Viva Airlines, Inc., was incorporated as a Puerto Rico
Corporation. It's principal office are located in Traverse City, Michigan.
The founders of Viva have extensive experience in consumer aviation.
The intent of Viva is to introduce a new consumer airline being organized to
take advantage of a specific gap in the Caribbean air travel market and the
Caribbean to the United States air travel market. Presently, there is a gap
that exists in low cost service out of Puerto Rico and the Dominican Republic
to the United States and other Caribbean destinations. The gap in the
availability of low cost service in and out of these hubs coupled with the
local demand for passenger travel on selected routes from the Caribbean
indicates that a new entrant airline is needed for current air travel business
from those hubs. Viva's research and projections indicate that air travel to
and from the Caribbean hubs in San Juan, Puerto Rico and the Dominican Republic
is sufficient to establish a new carrier utilizing eight aircraft and selected
routes. The Viva plan has the potential for a more rapid ramp-up due to the
nature of the routes, the demand for travel currently in the targeted markets
served and the proposed acquisition of Aerocontinente Dominica, S.A. On
February 19, 2003, Viva formed Viva Dominicana, Inc., S.A., a Dominican
Republic corporation and agreed to acquire Aerocontinente Dominica, S.A.
on or before April 30, 2003. The proposed agreement provides for the
acquisition of 100% of the issued and outstanding common stock in exchange of
$1,200,000 in cash.
In the first year of formative operations of Aerocontinente Dominica, we expect
that we will burn excessive cash until revenue can fall into place as
additional routes are established. This is due to the organizational and
regulatory obligations of a new air carrier. Investment activity is needed
to handle the expenses of this phase of the business.
Viva has the following objectives:
1.To obtain required D.O.T. and F.A.A. certifications on or before May 1,2003.
2.To commence revenue service on or before May 15, 2003.
3.To raise sufficient "bridge" capital in a timely fashion to financially
enable these objectives.
4.To commence operations with two Boeing 727 series aircraft in month one,
five aircraft by the end of month three, and eight aircraft by the end of month
four. Viva Airlines has a mission to provide safe, efficient, low-cost consumer
air travel service. Its service will emphasize safety as its highest priority,
will strive to operate timely flights and will provide friendly and courteous
"no frills" service.
Viva believes that the keys to success are:
Obtaining the required governmental approvals.
Securing financing.
Experienced management and crews.
Marketing; either dealing with channel problems and barriers to entry; or
solving problems with major advertising and promotion budgets. Targeted market
share must be achieved even amidst expected competition.
Product quality. Always with safety foremost.
Services delivered on time, costs controlled, marketing budgets managed.
Rapid growth will be curtailed in order to keep maintenance standards both
strict and measurable.
Cost control. The over-all cost per ASM (available seat mile) is pegged
at 10 cents or less in 2003 dollars.
In the second year of operations, Viva intends to add flights to the most
demanded and popular routes in current operation. This will serve to make its
schedule the most convenient to these destinations. The expected expanded
routes will initially include Chicago, Boston, and Orlando. Second level
expansions would include Mexico City, Madrid and Rome.
The following sections describe Viva's description of service, competitive
comparison, technology, fulfillment, and future services.
Service Description
Viva is in the business of providing lower cost, "price competitive" air travel
to selected destinations from their Caribbean hubs. The service approach is
"no frills" with emphasis on safe, courteous handling of domestic and
international passenger travel. All consumer surveys still indicate that the
air travel customer's preference is for "low fares." However, he or she is not
willing to compromise on issues of safety or on-time performance. Customers
will however, settle for lower levels of in-flight service in order to reduce
the cost of travel.
Viva provides the type of service today's air travel passenger demands.
Competitive Comparison The primary competition in our market is American
Airlines and Continental Airlines, which account for 80% of the air travel
volume in this market. This is as high a single market dominance that exists
in any United States market. Also, this results in the highest fares in the
nation for travel in-and-out of the Caribbean. Viva feels that it can obtain
a significant portion of this business. Our costs will be lower than either
airline (10 cents per ASM vs. 12 cents per ASM). American Airlines is already
in financial difficulty. This identifies a gap for only a "hub-based" carrier
in the Caribbean market. Operation of a single type of aircraft will have
significant cost, maintenance, and training expense reduction.
Viva's aircraft will operate out of these two hubs with high utilization based
on price advantage. Viva will have an over-all competitive advantage since we
don't have aircraft or operations outside of our limited focus. Other airlines
must maintain "system-wide" load factors and utilization, while Viva will
operate profitably within its "niche" market. This will serve as a barrier to
entry from other competitors once Viva is entrenched in this market. It is
unlikely that larger airlines will be able to compete with Viva's low fares
nor will they probably have the desire as they focus on more profitable
"long-haul" routes with larger airplanes.
Viva will achieve its target cost of $0.10 cents or less per available seat
mile by a combination of cost saving measures. Savings will come in the areas
of labor costs and from operational economies. Viva will utilize its flight
crews significantly more than its competition. Flight crew utilization will
be 60% above industry average. Both pilots and flight attendants will be
deployed an average of 85 hours per month vs. an industry average of 50-60
hours per month. Viva will realize additional savings in the insurance and
benefits areas by virtue of having fewer crew members. Efficiently operating
the meal service in-flight will save approximately $3.00 per seat
per flight. It is Viva's goal to utilize its fleet an average of
11 hours per day, 7 days per week.
All aircraft will be configured to a coach seating capacity of 131 seats
and a business class seating of 10 seats. This will maximize revenue on
short-haul flights. Boeing 727 series will be the only aircraft initially
operated by Viva. Our state-of-the-art reservations system will save time,
allow us to employ fewer reservation employees, and save training costs for
new reservation personnel.
Fulfillment
Aircraft will be obtained on a "dry lease" basis (without fuel) from one of
several aircraft lessors at an approximate cost of $100,000 per month. Viva
management has already been in contact with ROHR, a division of Goodrich.
Generally, first and last month's lease payments are required in advance.
Lease is usually a five-year operating lease and most often qualifies as an
expense item to the lessee. Terms of renewal are negotiable and no buy-out
provision is included. There may or may not be an additional deposit required
by the lessor as a maintenance reserve. Viva management feels that this will
not be a requirement but is prepared to make such a deposit if it becomes
required to obtain necessary aircraft for operations. It is expected that up
to 20 airplanes will be available over the next two years with
an average of 120 days lead-time required.
Outsourcing of services are as follows:
Maintenance:
All regular "A" and "B" maintenance will be performed by Falcon Air Express
personnel at their own facilities in Miami Florida. Viva management feels that
it is both necessary and prudent in today's regulatory environment to outsource
this regular and routine maintenance. Periodic "C" and "D" overhauls and major
maintenance will also be outsourced. Costs are budgeted at $452 per flight
hour for maintenance reserves and $500 per flight hour for line maintenance
and parts. It is common for many carriers in the aviation industry
(including some large carriers) to "sub-out" "C" and "D" scheduled maintenance.
Thus, it is not viewed as a competitive or regulatory disadvantage to Viva to
do likewise.
Ground Handling:
Airplane parking services, baggage loading and unloading, and baggage and
freight handling services will be outsourced at all airports other than the
Caribbean hubs where these services will be performed by Viva personnel.
Food Service:
All condiments and beverages served on Viva flights will be purchased from
in-flight food service providers.
Technology
All equipment and systems that will be utilized by Viva have been carefully and
diligently evaluated. Management feels that it is an advantage to be starting
an airline today vs. using many of the systems that burden even the largest
domestic carriers with extra cost due to outmoded technology. The technological
advantages to management's choices are outlined below:
Airplane advantages:
Management is well acquainted with all facets of operation of its airplanes
from prior experience.
Reservation advantages:
The predominate reservations systems in the airline industry today, "Sabre"
and "Apollo," are outmoded and obsolete. The major carriers are slow to change
because of the huge capital requirement to "roll over" their entire
reservations system at one time. Therefore, they keep using the old and
outdated systems. The GABRIEL reservations system that Viva will use has
three main advantages that all contribute to cost savings: 1) Speed,
2) Learning Curve, and 3) Integration. Since today's PC's operate much faster
than earlier versions, Viva's reservation employees will be able to complete
a typical reservation procedure up to 75% faster than industry averages.
Most reservations will be completed in two minutes or less (as opposed to the
frequent 8 to 10 minutes that almost everyone has experienced from time to
time). The system simply searches and retrieves data faster. The result
is not only higher levels of customer satisfaction but also substantial
savings in communications cost to Viva.
Training costs are also reduced exponentially. There is characteristically high
turnover among airline reservation employees. "Sabre" and "Apollo" take two
weeks to learn. Viva's use of GABRIEL will enable a basic computer literate
employee to learn the system in only one day.
The GABRIEL system also integrates with other management information systems
used by Viva. It is also designed to operate in a "ticketless" environment,
something the other
systems have difficulty accomplishing.
Operational advantages:
Over-all operations will be seamless from area-to-area of Viva's management
information systems as a whole. Most systems utilized by the major carriers
today were put in place more than 20 years ago. Thus, there is a constant
need for each operational area to "talk" or "re-transmit" essential data.
Not only will Viva's information systems operate "seamlessly" but they will
also enhance the ability to conform to all FAA compliance requirements.
The biggest and toughest compliance issue facing carriers today is
"record keeping." It is not enough to comply, but one must be able to prove
compliance as well as have full and clearly defined and documented internal
accountability.
Future Services
Viva's service will be coach and business class with all aircraft configured
for a seating capacity of 131 coach class passengers and 10 business class
passengers. Reservations will be handled predominately by Viva's own
reservation system (even though Viva has budgeted travel agent commissions
as 10% of sales). Paid service will be for alcoholic beverages only. Meals
will be served on long-haul flights, and Viva has allowed a $7.50 cost for
all coach seats sold.
Market Segmentation
The airline industry is dominated by the major carriers. It is an industry
characterized by merger, acquisition, and consolidation. Like so many other
industries it has quickly evolved into an industry that has room only for
major players and smaller "specialty" or "niche" participants. There are two
specialty segments that have characteristically been exploited by new entrants.
One is the "price" niche and the other is the "route" niche. One focuses on
charging less, the other on providing either the only service between two
given points (the "commuter" or "feeder" concept) or else superior or more
convenient or less costly service between two heavily traveled destinations.
In today's marketplace the "price" positioning, in and of itself, is no longer
a sufficient concept on which to build an airline. Since de-regulation the
flying public has been inundated with low fares. Low fares have become an
expectation, not a promise. Thus, the true market segment opportunities today
have become a combination of service mix, price, and route selection. The
more critical decision has become one of deciding on service mix and price in
conjunction with length of route. The specialty carrier is now relegated to
either "short-haul" or "long-haul" concentration. There is room for a
long-haul carrier who efficiently serves limited routes with only the
equipment designed to serve those routes and, conversely, there is room for a
short-haul carrier to take advantage of similar economies available with new
technology and the proper equipment. Viva feels that the likelihood of
competition from major carriers is less likely in the Caribbean segment.
This enables consolidation of services and economies of down-sized scale.
At the same time, the revenues available from short hauls are comparatively
higher than long hauls on a per-passenger-mile basis.
Thus Viva may be said to target the short-haul, dual hub, discount fare
Caribbean market segment. This is a new segment defined by the demands of
today's traveler.
Service Business Analysis
The Federal Government de-regulated the airline industry in 1978. Prior to
that time the government virtually guaranteed the profitability of the airline
industry, at the expense of the consumer. Routes were restricted. Fares were
fixed. Costs got out of control. Today some of the major carriers still
continue to operate at less than optimum efficiency. This has spawned the
success of various "discount" carriers, most notably
Southwest Airlines and the Jet Blue.
The low cost carriers have proven that they can operate profitably, can garner
market share, and have even spawned an increase in travel by luring those who
would previously have traveled by bus, rail, or automobile or who would not
have traveled at all. Many major airlines today are experiencing significant
losses.
The management of Viva feels that these losses can be traced directly to the
high cost of labor, operational inefficiency, and poor management. Management
further believes that the major carriers cannot profitably compete against
start-up carriers with limited and specific market focus and lower over-all
cost structures. In retrospect, de-regulation has succeeded in providing air
travelers with better service but has not necessarily provided service at a
lower price. In the recent times of financial trouble many airlines have
complained of an under supply of air travelers, when in fact there is an under
supply of affordable seats. It is Viva's goal to provide these affordable seats
while maintaining a profitable airline.
Business Participants
The major air carriers in the U.S. are not the focus of Viva's business plan.
They are not viewed as competition to a single hub, short-haul, low cost
entrant.
The following three airlines are our competition: Southwest, Jet Blue and
US Air. Southwest Airlines is the model for operating a safe and successful
discount carrier. Even though Southwest has the lowest cost per ASM in the
airline industry for short-haul carriers they have never experienced a fatal
crash in more than 25 years of operation. Viva management has studied
extensively the history of the above three airlines. All three have grown
to substantial revenue size amidst the major airlines. None of the three
existed in the not-too-distant past. Viva has taken the best parts of each
growth story. The result is Viva Airlines plan. Distributing a Service
Sales of airline tickets have historically been either direct from the
airline itself or through various travel agents. Modern computer technology
and communications capability are changing the mix dramatically. Travel
agents once accounted for 80% of ticket sales. This channel of distribution
has been one of very high cost to the airlines. Travel agent commissions at
one time became the highest individual cost item to an airline. The physical
cost of printing and distributing tickets is also substantial. Travel agents
estimate that it costs them an average of $30 in total cost to originate an
airline ticket. Many of them have begun to add their own service fees to
the actual cost of a ticket.
Available technology has now afforded the opportunity both to sell one's own
tickets and to eliminate the physical ticket altogether. The critical element
for both strategies to be successful for an airline is simply to create the
demand for travel on one's airline. If the airline makes it desirable for the
consumer to want to fly it then it is just as easy to order tickets directly
from the airline as it is from any other source. Viva will have its own
reservations agents available via an 800 number (the service will be 24 hours
from an available pool of 90 agents in total). In addition, we will have an
Internet site where schedules are available and customers
can book their own reservations and buy tickets via credit card.
Viva expects to sell as much as 90% of its air travel "direct" and
"ticketless." It has budgeted 10% of sales as commission to sales agents.
"Ticketless" travel has an additional advantage since Viva will not wait 30
days for collection of clearinghouse funds from other airlines on
combined-carrier tickets.
Also, it is not expected to be a competitive disadvantage for Viva's
passengers to connect to other airlines. They will want to fly Viva to
available destinations to save money even if they need to buy a paper ticket
on another airline. Viva flights will be listed in all available flight
information systems.
Competition and Buying Patterns
The most critical factor for Viva or any new airline to overcome is the issue
of brand awareness and name recognition. Customers prefer to fly with carriers
they know and trust. There is little doubt that Viva will need to spend heavily
and frequently to advertise and promote its product. The needed amounts are
budgeted in this plan. The advantage is that local media can be utilized which
is more cost effective on a per-impression basis. It can also be highly
targeted. It has been proven in the past that market share can be achieved for
a new airline.
Critical in today's environment is safety. Consumers will switch for lower
costs, but not at the expense of a perception of a safety risk, or not at the
expense of expected on-time performance. Viva will emphasize these two main
themes. In the Caribbean market, Viva expects to appeal to a mix of business
oriented travelers and personal travelers. One issue is whether or not
"frequent flier miles" are needed to compete and sell tickets. Management feels
they are not. Industry estimates show that as many as 10% of occupied seats on
domestic flights are currently "no revenue" as a result of redemption of
premiums earned. It is also very expensive for an airline to administer its
frequent flyer program. Viva feels that our cost advantage in our market will
outweigh the lack of "incentive" rewards. It expects that casual and personal
travelers don't fly often enough for "points" to be significant. At the same
time, Viva will initiate a concerted sales effort directly to all major
corporations in our market.
Main Competitors
In the past, a major competitor in our market was US Air. At one time Eastern
Airlines and Piedmont dominated the market. Eastern Airlines went out of
business and Piedmont was acquired by US Air. US Air was highly vulnerable
because of its high operating costs. ASM short-haul cost is currently the
highest in the United States.
US Air's problems can be traced to two main factors. The first is the fact that
their growth strategy was by acquisition. The consolidation of these carriers
did not produce the operational cost advantages that were anticipated.
Secondly, and most important, has been out-of-control labor costs. US Air's
stronghold was in the Northeastern United States. The strongest labor unions
are located in this part of the country and prior management was completely
ineffective in obtaining any concessions from these unions.
In spite of high costs, US Air had grown to become the nation's sixth largest
carrier. However, bankruptcy and recent press articles indicate a large measure
of uncertainty in their future path.
Viva concludes that the Caribbean opportunity is likely to be free from
imposing competition unless it comes from another start-up. If Viva is
able to attack the market first with sufficient capitalization, it feels it
will be difficult to overcome and should be able to build critical mass
within two years.
Strategy and Implementation Summary
Viva's market presence will be achieved by relying on the strategy of
identifying and serving a specialized niche market well.
Media executions will utilize local media, which is highly targeted and cost
effective on a cost-per-impression basis.
Air operations will be centralized and cost effective.
Reservations will be centralized and cost effective.
Marketing will be media generated to the leisure market and combined
media/direct sales generated to corporate accounts.
Marketing Strategy
Marketing is targeted locally. The advantage of a local and highly identifiable
market is that media selections can be limited in scope. There is no need for a
national media program to launch Viva. The most effective media is expected to
be outdoor billboards and radio.
Other media will be local spot TV on highly visible programs such as local news
and sports and local radio. Newspapers and other print will not be used.
Pricing Strategy
Due to its low cost operating structure Viva will be able to offer service at
25% less than the competitive airfares to its selected destinations from
Caribbean hubs.
Projected round trip fares are as follows:
ROUTE ADVANCE
SDQ-JFK $309
MIA-SDQ $289
STI-JFK $309
MIA-STI $329
SDQ-SJU $199
SDQ-HAV $779
SDQ-CUN $643
SDQ-GEO $359
Promotion Strategy
Promotion will be primarily outdoor advertising, radio and TV targeted at the
business and leisure traveler.
In addition, Viva will employ a public relations firm for both consumer and
financial purposes. The combined amount budgeted for advertising, public
relations, and reservations will be held under 5% of sales. Thus, the first
year expenditure in these categories is expected to be $1.8 million.
Past experience has demonstrated that this expenditure is sufficient to launch
airline service in a dual hub.
Distribution Strategy
In addition to other marketing programs outlined, Viva will also market via the
World Wide Web. It will establish its own website with reservation, purchase,
and payment capability.
Sales Strategy
In order to attract the business traveler without the use of frequent flyer
miles, Viva will make direct sales contacts with the travel departments
based corporations and businesses. It is expected that its cost structure
will be attractive to these businesses. It expects business travel to amount
to at least 25% of its over-all revenue.
http://www.sec.gov/Archives/edgar/data/1088734/000121537003000010/auxer10ksb2002.txt
subsidiary:
On September 17, 2002, Viva Airlines, Inc., was incorporated as a Puerto Rico
Corporation. It's principal office are located in Traverse City, Michigan.
The founders of Viva have extensive experience in consumer aviation.
The intent of Viva is to introduce a new consumer airline being organized to
take advantage of a specific gap in the Caribbean air travel market and the
Caribbean to the United States air travel market. Presently, there is a gap
that exists in low cost service out of Puerto Rico and the Dominican Republic
to the United States and other Caribbean destinations. The gap in the
availability of low cost service in and out of these hubs coupled with the
local demand for passenger travel on selected routes from the Caribbean
indicates that a new entrant airline is needed for current air travel business
from those hubs. Viva's research and projections indicate that air travel to
and from the Caribbean hubs in San Juan, Puerto Rico and the Dominican Republic
is sufficient to establish a new carrier utilizing eight aircraft and selected
routes. The Viva plan has the potential for a more rapid ramp-up due to the
nature of the routes, the demand for travel currently in the targeted markets
served and the proposed acquisition of Aerocontinente Dominica, S.A. On
February 19, 2003, Viva formed Viva Dominicana, Inc., S.A., a Dominican
Republic corporation and agreed to acquire Aerocontinente Dominica, S.A.
on or before April 30, 2003. The proposed agreement provides for the
acquisition of 100% of the issued and outstanding common stock in exchange of
$1,200,000 in cash.
In the first year of formative operations of Aerocontinente Dominica, we expect
that we will burn excessive cash until revenue can fall into place as
additional routes are established. This is due to the organizational and
regulatory obligations of a new air carrier. Investment activity is needed
to handle the expenses of this phase of the business.
Viva has the following objectives:
1.To obtain required D.O.T. and F.A.A. certifications on or before May 1,2003.
2.To commence revenue service on or before May 15, 2003.
3.To raise sufficient "bridge" capital in a timely fashion to financially
enable these objectives.
4.To commence operations with two Boeing 727 series aircraft in month one,
five aircraft by the end of month three, and eight aircraft by the end of month
four. Viva Airlines has a mission to provide safe, efficient, low-cost consumer
air travel service. Its service will emphasize safety as its highest priority,
will strive to operate timely flights and will provide friendly and courteous
"no frills" service.
Viva believes that the keys to success are:
Obtaining the required governmental approvals.
Securing financing.
Experienced management and crews.
Marketing; either dealing with channel problems and barriers to entry; or
solving problems with major advertising and promotion budgets. Targeted market
share must be achieved even amidst expected competition.
Product quality. Always with safety foremost.
Services delivered on time, costs controlled, marketing budgets managed.
Rapid growth will be curtailed in order to keep maintenance standards both
strict and measurable.
Cost control. The over-all cost per ASM (available seat mile) is pegged
at 10 cents or less in 2003 dollars.
In the second year of operations, Viva intends to add flights to the most
demanded and popular routes in current operation. This will serve to make its
schedule the most convenient to these destinations. The expected expanded
routes will initially include Chicago, Boston, and Orlando. Second level
expansions would include Mexico City, Madrid and Rome.
The following sections describe Viva's description of service, competitive
comparison, technology, fulfillment, and future services.
Service Description
Viva is in the business of providing lower cost, "price competitive" air travel
to selected destinations from their Caribbean hubs. The service approach is
"no frills" with emphasis on safe, courteous handling of domestic and
international passenger travel. All consumer surveys still indicate that the
air travel customer's preference is for "low fares." However, he or she is not
willing to compromise on issues of safety or on-time performance. Customers
will however, settle for lower levels of in-flight service in order to reduce
the cost of travel.
Viva provides the type of service today's air travel passenger demands.
Competitive Comparison The primary competition in our market is American
Airlines and Continental Airlines, which account for 80% of the air travel
volume in this market. This is as high a single market dominance that exists
in any United States market. Also, this results in the highest fares in the
nation for travel in-and-out of the Caribbean. Viva feels that it can obtain
a significant portion of this business. Our costs will be lower than either
airline (10 cents per ASM vs. 12 cents per ASM). American Airlines is already
in financial difficulty. This identifies a gap for only a "hub-based" carrier
in the Caribbean market. Operation of a single type of aircraft will have
significant cost, maintenance, and training expense reduction.
Viva's aircraft will operate out of these two hubs with high utilization based
on price advantage. Viva will have an over-all competitive advantage since we
don't have aircraft or operations outside of our limited focus. Other airlines
must maintain "system-wide" load factors and utilization, while Viva will
operate profitably within its "niche" market. This will serve as a barrier to
entry from other competitors once Viva is entrenched in this market. It is
unlikely that larger airlines will be able to compete with Viva's low fares
nor will they probably have the desire as they focus on more profitable
"long-haul" routes with larger airplanes.
Viva will achieve its target cost of $0.10 cents or less per available seat
mile by a combination of cost saving measures. Savings will come in the areas
of labor costs and from operational economies. Viva will utilize its flight
crews significantly more than its competition. Flight crew utilization will
be 60% above industry average. Both pilots and flight attendants will be
deployed an average of 85 hours per month vs. an industry average of 50-60
hours per month. Viva will realize additional savings in the insurance and
benefits areas by virtue of having fewer crew members. Efficiently operating
the meal service in-flight will save approximately $3.00 per seat
per flight. It is Viva's goal to utilize its fleet an average of
11 hours per day, 7 days per week.
All aircraft will be configured to a coach seating capacity of 131 seats
and a business class seating of 10 seats. This will maximize revenue on
short-haul flights. Boeing 727 series will be the only aircraft initially
operated by Viva. Our state-of-the-art reservations system will save time,
allow us to employ fewer reservation employees, and save training costs for
new reservation personnel.
Fulfillment
Aircraft will be obtained on a "dry lease" basis (without fuel) from one of
several aircraft lessors at an approximate cost of $100,000 per month. Viva
management has already been in contact with ROHR, a division of Goodrich.
Generally, first and last month's lease payments are required in advance.
Lease is usually a five-year operating lease and most often qualifies as an
expense item to the lessee. Terms of renewal are negotiable and no buy-out
provision is included. There may or may not be an additional deposit required
by the lessor as a maintenance reserve. Viva management feels that this will
not be a requirement but is prepared to make such a deposit if it becomes
required to obtain necessary aircraft for operations. It is expected that up
to 20 airplanes will be available over the next two years with
an average of 120 days lead-time required.
Outsourcing of services are as follows:
Maintenance:
All regular "A" and "B" maintenance will be performed by Falcon Air Express
personnel at their own facilities in Miami Florida. Viva management feels that
it is both necessary and prudent in today's regulatory environment to outsource
this regular and routine maintenance. Periodic "C" and "D" overhauls and major
maintenance will also be outsourced. Costs are budgeted at $452 per flight
hour for maintenance reserves and $500 per flight hour for line maintenance
and parts. It is common for many carriers in the aviation industry
(including some large carriers) to "sub-out" "C" and "D" scheduled maintenance.
Thus, it is not viewed as a competitive or regulatory disadvantage to Viva to
do likewise.
Ground Handling:
Airplane parking services, baggage loading and unloading, and baggage and
freight handling services will be outsourced at all airports other than the
Caribbean hubs where these services will be performed by Viva personnel.
Food Service:
All condiments and beverages served on Viva flights will be purchased from
in-flight food service providers.
Technology
All equipment and systems that will be utilized by Viva have been carefully and
diligently evaluated. Management feels that it is an advantage to be starting
an airline today vs. using many of the systems that burden even the largest
domestic carriers with extra cost due to outmoded technology. The technological
advantages to management's choices are outlined below:
Airplane advantages:
Management is well acquainted with all facets of operation of its airplanes
from prior experience.
Reservation advantages:
The predominate reservations systems in the airline industry today, "Sabre"
and "Apollo," are outmoded and obsolete. The major carriers are slow to change
because of the huge capital requirement to "roll over" their entire
reservations system at one time. Therefore, they keep using the old and
outdated systems. The GABRIEL reservations system that Viva will use has
three main advantages that all contribute to cost savings: 1) Speed,
2) Learning Curve, and 3) Integration. Since today's PC's operate much faster
than earlier versions, Viva's reservation employees will be able to complete
a typical reservation procedure up to 75% faster than industry averages.
Most reservations will be completed in two minutes or less (as opposed to the
frequent 8 to 10 minutes that almost everyone has experienced from time to
time). The system simply searches and retrieves data faster. The result
is not only higher levels of customer satisfaction but also substantial
savings in communications cost to Viva.
Training costs are also reduced exponentially. There is characteristically high
turnover among airline reservation employees. "Sabre" and "Apollo" take two
weeks to learn. Viva's use of GABRIEL will enable a basic computer literate
employee to learn the system in only one day.
The GABRIEL system also integrates with other management information systems
used by Viva. It is also designed to operate in a "ticketless" environment,
something the other
systems have difficulty accomplishing.
Operational advantages:
Over-all operations will be seamless from area-to-area of Viva's management
information systems as a whole. Most systems utilized by the major carriers
today were put in place more than 20 years ago. Thus, there is a constant
need for each operational area to "talk" or "re-transmit" essential data.
Not only will Viva's information systems operate "seamlessly" but they will
also enhance the ability to conform to all FAA compliance requirements.
The biggest and toughest compliance issue facing carriers today is
"record keeping." It is not enough to comply, but one must be able to prove
compliance as well as have full and clearly defined and documented internal
accountability.
Future Services
Viva's service will be coach and business class with all aircraft configured
for a seating capacity of 131 coach class passengers and 10 business class
passengers. Reservations will be handled predominately by Viva's own
reservation system (even though Viva has budgeted travel agent commissions
as 10% of sales). Paid service will be for alcoholic beverages only. Meals
will be served on long-haul flights, and Viva has allowed a $7.50 cost for
all coach seats sold.
Market Segmentation
The airline industry is dominated by the major carriers. It is an industry
characterized by merger, acquisition, and consolidation. Like so many other
industries it has quickly evolved into an industry that has room only for
major players and smaller "specialty" or "niche" participants. There are two
specialty segments that have characteristically been exploited by new entrants.
One is the "price" niche and the other is the "route" niche. One focuses on
charging less, the other on providing either the only service between two
given points (the "commuter" or "feeder" concept) or else superior or more
convenient or less costly service between two heavily traveled destinations.
In today's marketplace the "price" positioning, in and of itself, is no longer
a sufficient concept on which to build an airline. Since de-regulation the
flying public has been inundated with low fares. Low fares have become an
expectation, not a promise. Thus, the true market segment opportunities today
have become a combination of service mix, price, and route selection. The
more critical decision has become one of deciding on service mix and price in
conjunction with length of route. The specialty carrier is now relegated to
either "short-haul" or "long-haul" concentration. There is room for a
long-haul carrier who efficiently serves limited routes with only the
equipment designed to serve those routes and, conversely, there is room for a
short-haul carrier to take advantage of similar economies available with new
technology and the proper equipment. Viva feels that the likelihood of
competition from major carriers is less likely in the Caribbean segment.
This enables consolidation of services and economies of down-sized scale.
At the same time, the revenues available from short hauls are comparatively
higher than long hauls on a per-passenger-mile basis.
Thus Viva may be said to target the short-haul, dual hub, discount fare
Caribbean market segment. This is a new segment defined by the demands of
today's traveler.
Service Business Analysis
The Federal Government de-regulated the airline industry in 1978. Prior to
that time the government virtually guaranteed the profitability of the airline
industry, at the expense of the consumer. Routes were restricted. Fares were
fixed. Costs got out of control. Today some of the major carriers still
continue to operate at less than optimum efficiency. This has spawned the
success of various "discount" carriers, most notably
Southwest Airlines and the Jet Blue.
The low cost carriers have proven that they can operate profitably, can garner
market share, and have even spawned an increase in travel by luring those who
would previously have traveled by bus, rail, or automobile or who would not
have traveled at all. Many major airlines today are experiencing significant
losses.
The management of Viva feels that these losses can be traced directly to the
high cost of labor, operational inefficiency, and poor management. Management
further believes that the major carriers cannot profitably compete against
start-up carriers with limited and specific market focus and lower over-all
cost structures. In retrospect, de-regulation has succeeded in providing air
travelers with better service but has not necessarily provided service at a
lower price. In the recent times of financial trouble many airlines have
complained of an under supply of air travelers, when in fact there is an under
supply of affordable seats. It is Viva's goal to provide these affordable seats
while maintaining a profitable airline.
Business Participants
The major air carriers in the U.S. are not the focus of Viva's business plan.
They are not viewed as competition to a single hub, short-haul, low cost
entrant.
The following three airlines are our competition: Southwest, Jet Blue and
US Air. Southwest Airlines is the model for operating a safe and successful
discount carrier. Even though Southwest has the lowest cost per ASM in the
airline industry for short-haul carriers they have never experienced a fatal
crash in more than 25 years of operation. Viva management has studied
extensively the history of the above three airlines. All three have grown
to substantial revenue size amidst the major airlines. None of the three
existed in the not-too-distant past. Viva has taken the best parts of each
growth story. The result is Viva Airlines plan. Distributing a Service
Sales of airline tickets have historically been either direct from the
airline itself or through various travel agents. Modern computer technology
and communications capability are changing the mix dramatically. Travel
agents once accounted for 80% of ticket sales. This channel of distribution
has been one of very high cost to the airlines. Travel agent commissions at
one time became the highest individual cost item to an airline. The physical
cost of printing and distributing tickets is also substantial. Travel agents
estimate that it costs them an average of $30 in total cost to originate an
airline ticket. Many of them have begun to add their own service fees to
the actual cost of a ticket.
Available technology has now afforded the opportunity both to sell one's own
tickets and to eliminate the physical ticket altogether. The critical element
for both strategies to be successful for an airline is simply to create the
demand for travel on one's airline. If the airline makes it desirable for the
consumer to want to fly it then it is just as easy to order tickets directly
from the airline as it is from any other source. Viva will have its own
reservations agents available via an 800 number (the service will be 24 hours
from an available pool of 90 agents in total). In addition, we will have an
Internet site where schedules are available and customers
can book their own reservations and buy tickets via credit card.
Viva expects to sell as much as 90% of its air travel "direct" and
"ticketless." It has budgeted 10% of sales as commission to sales agents.
"Ticketless" travel has an additional advantage since Viva will not wait 30
days for collection of clearinghouse funds from other airlines on
combined-carrier tickets.
Also, it is not expected to be a competitive disadvantage for Viva's
passengers to connect to other airlines. They will want to fly Viva to
available destinations to save money even if they need to buy a paper ticket
on another airline. Viva flights will be listed in all available flight
information systems.
Competition and Buying Patterns
The most critical factor for Viva or any new airline to overcome is the issue
of brand awareness and name recognition. Customers prefer to fly with carriers
they know and trust. There is little doubt that Viva will need to spend heavily
and frequently to advertise and promote its product. The needed amounts are
budgeted in this plan. The advantage is that local media can be utilized which
is more cost effective on a per-impression basis. It can also be highly
targeted. It has been proven in the past that market share can be achieved for
a new airline.
Critical in today's environment is safety. Consumers will switch for lower
costs, but not at the expense of a perception of a safety risk, or not at the
expense of expected on-time performance. Viva will emphasize these two main
themes. In the Caribbean market, Viva expects to appeal to a mix of business
oriented travelers and personal travelers. One issue is whether or not
"frequent flier miles" are needed to compete and sell tickets. Management feels
they are not. Industry estimates show that as many as 10% of occupied seats on
domestic flights are currently "no revenue" as a result of redemption of
premiums earned. It is also very expensive for an airline to administer its
frequent flyer program. Viva feels that our cost advantage in our market will
outweigh the lack of "incentive" rewards. It expects that casual and personal
travelers don't fly often enough for "points" to be significant. At the same
time, Viva will initiate a concerted sales effort directly to all major
corporations in our market.
Main Competitors
In the past, a major competitor in our market was US Air. At one time Eastern
Airlines and Piedmont dominated the market. Eastern Airlines went out of
business and Piedmont was acquired by US Air. US Air was highly vulnerable
because of its high operating costs. ASM short-haul cost is currently the
highest in the United States.
US Air's problems can be traced to two main factors. The first is the fact that
their growth strategy was by acquisition. The consolidation of these carriers
did not produce the operational cost advantages that were anticipated.
Secondly, and most important, has been out-of-control labor costs. US Air's
stronghold was in the Northeastern United States. The strongest labor unions
are located in this part of the country and prior management was completely
ineffective in obtaining any concessions from these unions.
In spite of high costs, US Air had grown to become the nation's sixth largest
carrier. However, bankruptcy and recent press articles indicate a large measure
of uncertainty in their future path.
Viva concludes that the Caribbean opportunity is likely to be free from
imposing competition unless it comes from another start-up. If Viva is
able to attack the market first with sufficient capitalization, it feels it
will be difficult to overcome and should be able to build critical mass
within two years.
Strategy and Implementation Summary
Viva's market presence will be achieved by relying on the strategy of
identifying and serving a specialized niche market well.
Media executions will utilize local media, which is highly targeted and cost
effective on a cost-per-impression basis.
Air operations will be centralized and cost effective.
Reservations will be centralized and cost effective.
Marketing will be media generated to the leisure market and combined
media/direct sales generated to corporate accounts.
Marketing Strategy
Marketing is targeted locally. The advantage of a local and highly identifiable
market is that media selections can be limited in scope. There is no need for a
national media program to launch Viva. The most effective media is expected to
be outdoor billboards and radio.
Other media will be local spot TV on highly visible programs such as local news
and sports and local radio. Newspapers and other print will not be used.
Pricing Strategy
Due to its low cost operating structure Viva will be able to offer service at
25% less than the competitive airfares to its selected destinations from
Caribbean hubs.
Projected round trip fares are as follows:
ROUTE ADVANCE
SDQ-JFK $309
MIA-SDQ $289
STI-JFK $309
MIA-STI $329
SDQ-SJU $199
SDQ-HAV $779
SDQ-CUN $643
SDQ-GEO $359
Promotion Strategy
Promotion will be primarily outdoor advertising, radio and TV targeted at the
business and leisure traveler.
In addition, Viva will employ a public relations firm for both consumer and
financial purposes. The combined amount budgeted for advertising, public
relations, and reservations will be held under 5% of sales. Thus, the first
year expenditure in these categories is expected to be $1.8 million.
Past experience has demonstrated that this expenditure is sufficient to launch
airline service in a dual hub.
Distribution Strategy
In addition to other marketing programs outlined, Viva will also market via the
World Wide Web. It will establish its own website with reservation, purchase,
and payment capability.
Sales Strategy
In order to attract the business traveler without the use of frequent flyer
miles, Viva will make direct sales contacts with the travel departments
based corporations and businesses. It is expected that its cost structure
will be attractive to these businesses. It expects business travel to amount
to at least 25% of its over-all revenue.
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