Our group began to run the simulator with only 3 aircrafts and 165 employees in People Express
(PE), after 10 years operation, now PE becomes an airline company owning 20 aircrafts and 529
employees, with $251.5 Million revenues and $84.0 Million net incomes at the 10
year. Now let’s
look in detail to see how we got here.
For each quarter of the total 10 years, we have the opportunity to make five decisions, which are
Aircraft Purchase per Qtr, People Fare, Marketing as Fraction of Revenue, Hiring, and Target Service
Scope. At the beginning of running the simulator, the Quarter 4 of Year 0, PE didn’t plan to purchase
new aircraft; priced the routes at an average of $0.09/seat-mile; spent 10% of revenues in marketing;
kept the staff constant by hiring replacements for the 9 employees who left during the last quarter;
and sticked target service scope to 0.60.
From all those preconditions, we realized that PE is a no-frill airline, with few assets (only 3
aircrafts), and low customer demand growth rate. However, because PE only owned 3 aircraft but
had 165 employees, the service quality is pretty high, up to 1.0. Thus, for the 1
Quarter of the 1
year, we decided to increase the marketing cost by changing the Marketing as Fraction of Revenue to
0.30, to increasing the demand growth rate. Meanwhile, in order to generate more cash for future
investment, we increased the People Fares from 0.09 to 0.11, which was still much lower than the
competitors’ average of $0.16/seat-mile. However, we sticked with the initial fleet of three, and kept
the Hiring and Target Service Scope unchanged, owing to lack of cash. We kept this strategy for 5
quarters, until the end of the Quarter 1, Year 2.
Because of this strategy, PE’s stock price was constantly increasing, from $1.88/share up to near