Case – PAN AM WORLD AIRWAYS
Pan Am World Airways operated for decades as an American flag carrier to the world, many of those years in a near-monopoly shared with Trans World Airlines. The Pan Am “flying boats” brought passenger air travel to the furthest reaches of the globe at a time when air service was elegant and limited to the wealthy or adventurous. (When the original, chief engineer of the Panama Canal, John Stevens, visited the completed mega-project years later, he was asked about his impression. He found the Canal interesting, as expected, but commented that his bigger excitement was the flying boat!)
Much of the company’s expansion and profits were made possible by cozy political connections and high-priced contracts to provide air mail services to the government. The company drove many technical developments in the entire airline industry with an aggressive push for manufacturers to build passenger jets and, about ten years later, Pan Am was the launch customer for the Boeing 747 jumbo.
In the opening era of passenger air service that Pan Am helped develop, flying was an elegant experience reserved for the rich. (Instructor comment: Passenger service was available years before radar and electronic navigational aids, so air travel was only done during daylight hours. Port Columbus got its name from its role as a connection hub for daytime flying to/from New York and overnight rail into/from the Midwest, where daytime air service was resumed.)
Over time the industry changed. More U.S. airlines were receiving authority to provide international services and travel “democratized” as more passengers took advantage of the new jet era that opened more routes and faster services with lower prices. Pan Am promoted its reputation as the original United States carrier to the world offering elegant service throughout its network. Competitors nipped at profitable and high-density routes to European capitals and Hawaii while Pan Am clung to its original business model, which included being the only airline offering through, around-the-world service in either direction, Pan Am flight 1 eastbound and 2 westbound. Also, attempting to keep air service as a special, high-end experience, Pan Am fitted out its 747s with bars on the upper deck with minimal additional seat capacity.
Further developments witnessed the rise of national carriers in the post-WW II era, as a matter of economic necessity and national pride. The United States could no longer dictate nor control routes without giving equal treatment to these competitors. Pan Am assumed that Americans would continue to favor an “American” carrier. Their dominant industry position peaked in the 1960s as they faced increasing competition and declining profitability with less and less direct help from the U.S. government. In addition, Pan Am strategy emphasized the more profitable and glamorous overseas routes while domestic competitors, including TWA, were also building up a domestic network to feed their own international flights. This meant that using Pan Am outside major cities usually required an inconvenient connection from another airline.
A new management team decided to re-assess the direction of the company. They decided to study their Capacity performance and Financial metrics. For Capacity, the industry Utilization measure is “Load Factor” or % of Available Seats Occupied. (Instructor Note: This era pre-dates the frequent-flyer program proliferation, so there was almost no concern about “non revenue”, occupied seats- i.e. free travel- since these would be limited to employees only on a standby basis.) While a truly full plane might be economically attractive, Pan Am felt that its service suffered at Load Factors > 85%, and therefore planned on a 15% cushion as ideal. The notion of efficiency of Capacity is not really relevant, since an available seat between point A to B cannot perform any better than another seat between these points.
Some of the data presented at one these meetings follows:
Table 1- 1973 Competitive Comparison
| Company | Aircraft3 | Average Fleet Age | Return on Sales4 |
| Pan Am | 200 | 12 | 3.5% |
| TWA | 320 | 8 | 5.5% |
| Domestic Competitors1 | 550 | 6 | 6.0% |
| Foreign Competitors2 | 800 | 5 | 7.5% |
1 U.S. owned airlines offering or requesting rights for international service
2 Foreign flag airlines offering international service to the U.S.
3 Not all aircraft are deployed in international service
4 Return on Sales = Pretax profit / Sales in %
Capacity
Pan Am chose to increasingly standardize its long-haul fleet with the new Boeing 747. This provided more capacity, lower costs per available seat, and symbolized the newest technology that Pan Am sought as part of its image. Since Pan Am was the launch carrier for this aircraft, they had precedence on the delivery schedule. Since each plane added a significant amount of seats over a year, the airline chose to phase them into service gradually to better match supply and demand. A secondary reason was that the longer Pan Am could stretch out its deliveries prevented competitors from adding this elegant aircraft into their own fleets.
At the time the new management team was doing its assessment, the airline had 5 new 747s in service. This was March. They had delivery commitments for one additional aircraft at the beginning of each month for the next nine months (i.e. as of April). The analysts felt that a ten month review (March through yearend) would be a representative time period for their evaluation. This was also important since the date was approaching when Pan Am had to make a decision about additional 747s in the original order that were classified as “options”.
The Pan Am seating configuration for all its planes offered a total of 350 seats with 30 designated as First Class and 320 for Coach passengers. (Instructor Note: At this time, there was no Business Class.) Since accounting methods remained primitive internally (there was more attention paid to the wine selection onboard than in upgrading computer services in Accounting), it was hard to isolate passenger load between the different classes of service. So, using the actual, average monthly data for March- the base month of the study- analysts determined that the average passenger load on a 747 was 260 filled Coach seats per aircraft per flight.
This was an optimistic era in America. The economy was going well; the United States had fulfilled the exciting Kennedy challenge of landing a man on the moon by the end of the decade, which coincided with the introduction of the Boeing 747. Pan Am capitalized on its association with the aerospace industry by publically announcing with much fanfare that it would be taking reservations for manned flights to the moon since, certainly, the historically innovative Pan Am would be the FIRST carrier to offer such flights. In this environment of technical advance and optimism, and with the newest aircraft flying the most popular routes in the world, Pan Am estimated that it would experience 20% monthly growth in passenger demand during the peak travel months of April through September. The next six months (i.e. October through March) – despite short term spikes in demand for the holidays- would be flat, or 0 growth. This was still ambitious since many carriers projected LESS passengers during these off-peak months.
Strategy and Financials
Pan Am is a public company with a legendary reputation. The business strategy was directed at maintaining the image of excellence and technical innovation. More and more people were flying because large jets made travel more accessible and cheaper, but Pan Am focused its niche on the elegance and romance of flight. Its blue globe logo was one of the most recognized brands in the world, and the company continued to adorn its aircraft with American flags in order to promote the notion of Pan Am as THE American flag carrier even as more airlines such as United and American were stretching their route networks overseas. These companies competed to attract the large proportion of the population that had never flown before while Pan Am continued to emphasize the romance and elegance of air service for those few willing to pay premium fares.
The Pan Am focus on flying as a special event or elegant occasion forced it to control all aspects of its supply chain. As newly expanding carriers used local, contract help at foreign airports, Pan Am maintained its own full-time employees in all key markets, a far more costly approach. Further, to support its commitment to service, Pan Am scheduled routine maintenance on a rotating basis in order to allow one plane to be available as a back-up in the key destination regions of Europe and Japan. In its glamorous JFK Airport hub, it had no less than two aircraft at any time available to minimize delays due to mechanical failure or other reasons in its network.
While no one disputed the Pan Am commitment to a first class experience in the air, the increasing competitiveness of the industry meant that revenues per available seat were falling at the same time costs were rising. A 747 was very expensive to fly half-full during the off-peak season. Still, the company looked at its continuing growth in annual profits (see Table 2) and viewed 1970 as a temporary blip reflecting the start-up costs of integrating a new, dramatically different aircraft into its fleet. The financial performance provided to the new management team appears to indicate, despite all these challenges, that profits were continuing to grow and that the airline was on solid footing:
Table 2- Historical Profit Performance ($000)
| Year | Profits | Sales Revenues
|
| 1968 | 61,622 | 560,200 |
| 1969 | 66,986 | 705,112 |
| 1970 | 65,488 | 818,600 |
| 1971 | 68,299 | 1,004,400 |
| 1972 | 70,289 | 1,211,880 |
Pan Am’s strategy focused on their reputation for servicing foreign destinations with exceptional cabin service. No other carrier served as many destinations outside its home country. This meant keeping prices high and promoting better service.
The Route Network
In the United States market, more people were flying overseas, which should have been good for Pan Am, especially. But its weak domestic network allowed newer entrants to retain a large share of these travelers. When Pan Am responded by introducing 747 service on select, long haul domestic routes such as Los Angeles, San Francisco, Chicago and New York (also its world headquarters with an iconic building that straddled Park Avenue), they had much higher costs than any other airline in a competitive landscape in which domestic air fares per mile were far less than what could be generated from overseas flights. Some of these domestic destinations were incorporated in the around-the-world route; Pan Am was the only carrier in the world to offer a continuing, one-plane service in a complete circumnavigation of the globe.
While this was a marketing windfall, it was an operational nightmare. Flying about 27,000 miles with eleven stops imposed a long usage without major cleaning. Airport operations in Asia at the time were notoriously inefficient and extremely prone to bad weather delays. This meant any small delay at any airport amplified into longer delays at subsequent stops. As a result, the flashy advertising of around-the-world service was also the highest cost and with the poorest reliability. (Instructor Comment: In celebration of some anniversary in 1980 or 1981, Pan Am offered a special promotion of a standby around-the-world ticket for $999. My wife and I actually did take advantage of this offer on a four week journey. It was a harrowing experience since you did not clear until about one hour prior to take-off, and not every destination was served on a daily basis. Towards the end of the loop the 747 tended to be rather worn and unattractive, matched by the equally unappetizing meals for which airline “rubber chicken” became famous. It may have been a great deal, but we were witnessing the decline of a once-great airline.) Even with good cabin service, foreign nationals, in particular, started abandoning Pan Am in the early 70s for their own national carriers, which provided more frequent service and oftentimes on newer (and usually cleaner) planes.
The Action Plan
Management was committed to maintaining the service image of Pan Am. Since other airlines could add the magnificent 747 to their fleets, Pan Am decided its point of difference would be configuring the upstairs passenger space into a flying bar and restaurant for which premium passengers could make “reservations” as an alternative to eating at their seats. Of course, this required a significant project undertaking with key vendors to redesign the interior space, but with the approval of the Board, a project plan was organized to accomplish this with a target deadline within one year at a Budget = $1 million. The plan is summarized in the following Table 3:
Table 3 – Upper Cabin Upgrade
| Activity | Description | Predecessor | Time |
| A | Engineering structural analysis | – | 12 |
| B | Preliminary Configuration & Design | – | 9 |
| C | Develop menus and ingredients list | B | 13 |
| D | Vendor Certification for Airworthiness | B | 10 |
| E | Finalize specs on kitchen facilities | B | 24 |
| F | Coordinate plan with Boeing & suppliers | A | 10 |
| G | Food preparation trials; Focus groups | C | 24 |
| H | Finalize vendor, pricing, specs for design | D | 26 |
| I | FAA certification | A | 15 |
| J | Installation on first aircraft | E, G, H | 4 |
| K | Air trial (JFK to LHR) | F, I, J | 6 |
Table 2 – Project Cost and Time Lines
| Activity | Normal Time | Activity Cost ($000) | Crash Time | Crash Cost ($000) |
| A | 12 | 125 | 8 | 149 |
| B | 9 | 90 | 7 | 126 |
| C | 13 | 60 | 11 | 100 |
| D | 10 | 50 | 7 | 110 |
| E | 24 | 120 | 22 | 122 |
| F | 10 | 75 | 7 | 90 |
| G | 24 | 125 | 24 | 125 |
| H | 26 | 145 | 25 | 157 |
| I | 15 | 70 | 15 | 70 |
| J | 4 | 40 | 2 | 60 |
| K | 6 | 50 | 5 | 54 |
The Passenger Experience at the Airport
Pan Am focused its operations on customer service and providing an exceptional flying experience, even in Coach. This emphasized all aspects of travel- check in, boarding procedures, drink and meal service, and reliable, timely operations. When the Customer Service department conducted Marketing Surveys in the United States, they were surprised by the priorities American flyers focus on. After years of poor service in cramped planes, these travel discomforts almost became an accepted norm. But the one service area that passengers specifically cited as an irritant was long lines at the check-in counter.
Much of this reflected mandatory security and FAA requirements to have fairly extensive information about each international traveler. Also, some passengers were interlining with other carriers and took more time with questions about baggage handling and airport facilities. In order to control the first experience customers would have with the airline, which was usually the check-in for the flight, Pan Am insisted on staffing with its own employees rather than contract services offered at most international airports throughout the world.
Pan Am Worldport at John F Kennedy Airport (JFK) in NYC was a design original, opened in 1960. At the time, JFK offered more international services than any other U.S. airport, and Pan Am was its dominant carrier. Each flight check-in experience was a separate operation with dedicated ground services. The focus on an airport experience that represented the customer’s first point of contact with Pan Am meant that the check-in process had to be consumer friendly and time-sensitive. This was particularly true because the 747 represented such a leap in aircraft capacity that all supporting systems had to be custom designed for this new plane. First class passengers were handled in separate, private facilities at the airport and therefore were excluded from the studies of managing Coach check-in procedures.
In order to maintain its service standards, the airline had to staff on the assumption that the Coach section was full rather than at the desired 85% utilization. But, half of the Coach passengers (assumes a full Coach section) on its international service from JFK would be connecting from other, domestic Pan Am flights or competitors and not require any further check-in at JFK. Also, of the remaining passengers originating travel in NYC, another 50% would not have checked bags and/or use the limited self-service facilities available. Pan Am’s research concluded that these remaining Coach passengers needing service were the foundation upon which its customer service reputation must be built. This would be the population upon which Pan Am would design its check-in support staffing.
Recent experience with the 747 suggested that passenger arrivals for check in would average 90 per hour following a Poisson distribution. Service requirements for these customers varied widely but were expected to average an estimated 5 minutes each, approximating an Exponential distribution.
The new team wanted to breathe fresh air into an old brand that seemed to have lost its way. So, they decided upon a novel approach to get new thinking. They chose a consulting team with neither airline nor business experience or education to address their business model- in fact, they hired YOU! They decided it would be more useful to not have an open-ended assignment, but rather to focus your analysis on some specific questions that they considered most important. So, proceed to the next page for your assignment, and good luck getting Pan Am back on track, oops, back in the air!
| INSTRUCTOR COMMENT: This case was written by the instructor to demonstrate course topics. While many of the statements and descriptions are factual, the data in all instances are not. In answering the case questions, please limit your work to ONLY what is provided to you herein. Any research into actual Pan Am history or performance will NOT contribute to the solution nor improve your team grade. In all answers, focus on course topics! |
CASE QUESTIONS
BONUS A- From the bottom of page 5: “ …the profits were continuing to grow ..”. Do you feel that Pan Am is performing well and on “solid footing”? Support your answer with two reasons, limited to ½ page. (Instructor Comment: The answer here does not relate to specific course content but rather to your analytical ability to extract clues.)
- PART A- Prepare a Capacity analysis (Utilization) for the 747 over the ten-month study period. Attach a one page Table or Excel spreadsheet to show Utilization by month, March through December. (HINT: There are data supplied throughout the case to prepare this work, but we are never told how many flights per month each aircraft makes. Since we are only given average data and growth rates per each 747 aircraft, and we are given how many of these aircraft are operating during the study period, do your own work in the same framework using average data per plane for the number of planes in service each month.)
PART B- From the presentation in Part A, comment on the Capacity management over the course of the ten month study period. What happens in the following year and what step(s) might you recommend? (1/2 page)
- For the project to upgrade the upper deck of the 747:
PART A- Prepare a network diagram
PART A BONUS- Show ALL time lines by Activity- ES, EF, LS, LF. There is no partial credit.
PART B- Identify the critical path, duration of the project, and total cost
PART C- From the case, a project plan was organized to accomplish this
with a target deadline within one year at a Budget = $1 million. (Instructor
Comment: A one year schedule satisfies this deadline; it does not have to be less.)
If this is NOT accomplished according to your work in PART B, what
specific steps would you take to meet the project goals and what are
the results (i.e. final duration and cost) ?
- Prepare a Queuing analysis of the Coach check-in process at JFK to determine the proper staffing (i.e. how many agents) would be needed to holding waiting time to 21 minutes on average.
PART A- Back-up calculations for the Q model input
PART B- Include a copy of the Q file printout (REMINDER- select page 1 ONLY for printing) and highlight the Number of Servers needed.
CASE SCORING
- BONUS A- 1 point
- #1- PART A- 3 points
- #1- PART B- 1 point
- #2- PART A- 3 points
- #2- PART A BONUS- ½ point; no partial credit
- #2- PART B- 1 point
- #2- PART C- 3 points
- #3- 4 points
These point values include consideration of format and clarity. TOTAL possible points = 15 + 1.5 BONUS with scores > 15 allowed.
CASE FORMAT- Deviations in format, sequence or length are subject to a 10% penalty- FOLLOW INSTRUCTIONS!
Please follow these specific instructions, even if they differ from the generic guidelines in the syllabus:
Your Page 1- Cover Sheet listing assignment and team members in
alphabetical sequence on last name
Page 2- BONUS QUESTION A and Question #1 Part B
Page 3- Question #1, Part A- Table or copy of Excel File on Utilization
Page 4- Question #2, Part A- Network Diagram OR (OPTIONAL)-
Question #2, Part A BONUS- Include all Activity time lines
The network diagram does not have to be computer-generated but
should still be neatly presented.
Page 5 and 6 (if needed)- Question #2, Parts B and C (include detail)
Page 6 and 7 OR 7 and 8- Question #3- Show calculations for the Q model
input. Second page = copy of page 1 of the Queueing file solution
with the answer highlighted or circled
