Reference no: EM133335913

The Case of Eagle Air

Eagle Air is a UK-based airline that used to specialise in long haul flights to a wide range of destinations across the world. Originally a publicly-owned state enterprise, Eagle Air (EA) was privatised and floated on the stock market eight years ago. This event drew a lot of attention from large companies and individuals alike who rushed to buy shares. Other important changes also happened in the wake of EAT's privatisation and floatation, including a revision of the terms and conditions of employment for all staff. The salaries of pilots and cabin crew were substantially increased - where they benefitted from a hefty 30% rise in pay and could respectively earn up to £180, 000 and £60 000 per annum. As for ground crew and other support and frontline staff, their terms and conditions were unrivalled across the industry as they were paid 25% more than their counterparts in other airlines alongside a reduction in working hours.

An Alarming Financial Situation

However, this rosy picture has been exacerbated by changes in the tourism industry brought on by the recent pandemic, which inevitably has had adverse effects on all airline operators, with a sharp fall in demand for travel. Last financial year during the height of the pandemic, the airline reported a £200 million loss. The loss for the last three months of the current year was over £90 million and the figures for the rest of the year look like being just as bad, with losses running at over £120, 000 a day. Several other factors also served to bring about this alarming situation.

These include continued uncertainty with respect to the travel situation and continuing low passenger numbers, an escalation in fuel prices, a substantial rise in airport tax, and a general increase in the prices of commodities related to passenger travel (such as food and beverages, toiletries and other passenger comfort items) - resulting in a persistent fall in revenues and profit margins. The situation is compounded by increasing competition with other airlines offering less generous terms and conditions of employment, and the pressure to invest in 'green technologies' to reduce carbon emissions and become more eco-friendly, whilst sustaining service modernisation.

A Twofold Strategy to Deliver Competitive Advantage

In response to the financial crisis facing the company, top management called for an urgent board meeting to carry out a fundamental review of the current situation and develop a new business model that can deliver unique value and long-lasting competitive advantage. After careful deliberation, top management voted in favour of a twofold strategy: (i) a merger with Air Fast which operates short haul flights within the UK and across Europe and (ii) joining the Proxima Alliance, a huge global partnership that brings together some of the most reputed airlines in the world.

Top management believed that their twofold strategy would bring about the following benefits:

· The newly formed venture would retain the company name, Eagle Air, which already carries considerable 'brand power' and would become one of the largest airlines in the world in terms of both fleet size and route network.

· EA would enlarge its service portfolio by targeting both long-haul and short-haul markets; and with offices in desirable locations such as Edinburgh, London, Paris, New York, Singapore, Sydney and Johannesburg, the new company would be able to carry passengers to any of its destinations in less than two days.

· The merger would enable a major restructuring exercise and the implementation of significant cost-cutting measures. The number of staff would need to be reduced by about 10%. Moreover, the salary structure of Air Fast would be applied across the new organisation. As a result, the existing terms and conditions of employment would be brought closer to those applied across the wider airline industry - enabling the company to achieve massive cost savings and make up for the severe losses it has incurred over the past two years.

· Joining the Proxima Alliance would enable EA to leverage its capabilities and resources in providing a more comprehensive end-to-end service for its clients and develop a range of benefits such as smoother transfers and faster journeys, priority check-in, boarding and baggage handling, upgrades and airport lounge access worldwide, and more flexible frequent flyer programmes.

In view of the above anticipated benefits, top management were confident that their twofold strategy would transform the company into a larger yet leaner and fitter organisation, well equipped to deliver competitive advantage and greater shareholder value in the longer term.

A Mixed Response from the Union and a Deadlock for Management

Top management are now faced with the challenging task of detailing and implementing their newly developed strategy. Their first action was to call a meeting with the union to present the strategy with a view to implementation as soon as agreement could be reached. The union's reaction was one which combined approval and anger: approval of the multiple benefits that the merger could bring to the company and anger at the proposed levels of compulsory job cuts and changes in terms and conditions of employment. The meeting broke up without any agreement.

The union questioned the unilateral decision of management to change the existing terms and conditions of employment without any room for negotiation. They also deplored the fact that management could terminate the contracts of so many employees without even thinking about the disastrous effects this could have on staff morale and commitment, let alone their personal lives. They also invited top management to go back to the drawing board and reflect on how a strike action could cripple the implementation of their new strategy.

Top Management were quite 'shaken' by the union's reactions and felt that they had reached a deadlock. They realised that expert opinion was urgently needed and decided to hire the services of a top consulting firm to conduct a review of the proposed strategy and advise on the best course of action to ensure its successful implementation.