Harvard Case - Estonia Air's Big Buy
"Estonia Air's Big Buy" Harvard business case study is written by Karen Popovich, D Lander, Robert Letovsky. It deals with the challenges in the field of Entrepreneurship. The case study is 16 page(s) long and it was first published on : Dec 1, 2011
At Fern Fort University, we recommend that Estonia Air proceed with the acquisition of a 70% stake in Nordica, but with a strong focus on strategic integration and operational efficiency. This approach will leverage Nordica?s existing infrastructure and market presence while mitigating risks through careful financial planning and operational restructuring.
2. Background
Estonia Air, the national airline of Estonia, is facing significant challenges. The company is struggling to compete in a highly competitive European market and is burdened by legacy costs. The acquisition of a 70% stake in Nordica, a smaller Estonian airline, presents an opportunity to gain access to a younger fleet, a more efficient operational model, and a stronger presence in regional markets. However, the acquisition comes with significant financial and operational risks.
The main protagonists of the case study are:
- Estonia Air: The national airline of Estonia, seeking a turnaround strategy.
- Nordica: A smaller Estonian airline with a younger fleet and a more efficient operational model.
- The Estonian government: The primary shareholder in Estonia Air, seeking to maintain a national airline.
3. Analysis of the Case Study
This case study can be analyzed through the lens of corporate strategy, mergers and acquisitions, and operational efficiency.
Strategic Analysis:
- Estonia Air?s strategic position: The airline is facing declining profitability and market share due to competition from larger, low-cost carriers. The acquisition of Nordica presents an opportunity to gain access to a younger fleet, a more efficient operational model, and a stronger presence in regional markets.
- Nordica?s strategic position: Nordica is a smaller airline with a more efficient operational model and a strong presence in regional markets. The acquisition by Estonia Air provides access to capital and resources, enabling expansion and growth.
Mergers and Acquisitions Analysis:
- Acquisition rationale: Estonia Air seeks to acquire Nordica to gain access to its younger fleet, more efficient operational model, and stronger regional market presence.
- Integration challenges: The acquisition will require careful integration of two different cultures, operational models, and IT systems.
- Financial considerations: The acquisition requires significant capital investment and will need to be carefully financed.
Operational Efficiency Analysis:
- Cost optimization: Estonia Air needs to identify and implement cost-saving measures, such as streamlining operations, negotiating better deals with suppliers, and reducing labor costs.
- Fleet management: The acquisition of Nordica provides access to a younger fleet, but Estonia Air needs to develop a long-term fleet management strategy to ensure cost-effectiveness and environmental sustainability.
- Route optimization: Estonia Air needs to optimize its route network to ensure profitability and market share.
4. Recommendations
- Proceed with the acquisition of a 70% stake in Nordica. This acquisition provides Estonia Air with access to a younger fleet, a more efficient operational model, and a stronger presence in regional markets.
- Develop a comprehensive integration plan. This plan should address the integration of two different cultures, operational models, and IT systems. It should also include clear timelines and responsibilities for all stakeholders.
- Implement cost-saving measures. Estonia Air needs to identify and implement cost-saving measures across all areas of the business, including procurement, labor, and operations.
- Develop a long-term fleet management strategy. This strategy should consider the age of the fleet, fuel efficiency, and environmental sustainability.
- Optimize the route network. Estonia Air needs to optimize its route network to ensure profitability and market share. This may involve expanding into new markets, discontinuing unprofitable routes, or adjusting flight frequencies.
- Invest in technology and analytics. Estonia Air needs to invest in technology and analytics to improve operational efficiency, customer service, and marketing.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The acquisition of Nordica aligns with Estonia Air?s mission to provide safe and reliable air travel to its passengers. The acquisition also leverages Nordica?s core competencies in regional operations and fleet management.
- External customers and internal clients: The acquisition will provide Estonia Air with access to a wider customer base and will improve the airline?s ability to serve its existing customers. It will also provide internal clients with access to a more efficient and modern operating environment.
- Competitors: The acquisition of Nordica will help Estonia Air compete more effectively with other airlines in the European market.
- Attractiveness ? quantitative measures: The acquisition of Nordica is expected to be financially attractive, with the potential for significant cost savings and revenue growth.
6. Conclusion
The acquisition of Nordica presents a significant opportunity for Estonia Air to turn around its business and achieve sustainable growth. However, the acquisition comes with significant risks and challenges. By carefully planning the integration process, implementing cost-saving measures, and investing in technology and analytics, Estonia Air can successfully leverage the acquisition to achieve its strategic objectives.
7. Discussion
Alternatives:
- Continuing with the current business model: This option carries significant risks, as Estonia Air is struggling to compete in a highly competitive market.
- Selling the airline: This option would allow the Estonian government to exit the airline business, but it would also result in the loss of a national airline.
Risks:
- Integration challenges: The integration of two different cultures, operational models, and IT systems could be difficult and time-consuming.
- Financial risks: The acquisition requires significant capital investment and could result in increased debt levels.
- Operational risks: The acquisition could disrupt operations and lead to service disruptions.
Key assumptions:
- The Estonian government is committed to supporting the acquisition.
- The integration process will be successful.
- Cost-saving measures will be effective.
- The market for air travel will continue to grow.
8. Next Steps
- Develop a detailed integration plan within 3 months.
- Implement cost-saving measures within 6 months.
- Develop a long-term fleet management strategy within 12 months.
- Optimize the route network within 18 months.
- Invest in technology and analytics within 24 months.
By taking these steps, Estonia Air can successfully leverage the acquisition of Nordica to achieve its strategic objectives and secure its future in the European aviation market.
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Case Description
Rait Kalda, vice president of operations for AS Estonian Air, faced a challenge: how should Estonian Air address projected increases in intra-European flight demand in light of high fuel costs, competitive challenges, economic uncertainty, and last year's net loss? If Kalda's assessment led to expanding Estonian Air's fleet, he had to decide which plane model would achieve operational efficiencies, satisfy load factor requirements, and meet various other performance and financial metrics. In order to fully comprehend Kalda's challenge, the case first presents the reader with a brief synopsis of Estonia's economy; the airline industry; and the three types of competitive airline industry groups- legacy carriers, low cost carriers, and regional carriers. This is followed by an overview of Estonian Air's competitors and its opportunities for growth. The case provides detailed information regarding the advantages and disadvantages of the Boeing 737 Jet, the Bombardier Q400 Turboprop, and a used Saab 340A turboprop. Finally, the case summarizes Estonian Air's internal analysis and growth strategy, with pertinent input from conversations between Rait Kalda and the vice president of finance and administration, Andrus Aljas. Students are required to complete an operational analysis on factors such as capacity, fuel savings, and utilization rates. If Estonian Air does indeed decide to expand, the case states that the airline will continue with its past practice of leasing the aircraft. Using current financial statements, as well as information presented in the case, students can also prepare a basic net present value (NPV) model and scenario analysis for leasing each of the aircraft alternatives. Finally, students have the opportunity to combine both qualitative and quantitative factors to support their analysis.
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