Strategic Management CASES

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1 Walt Disney Company — 2009 Mernoush Banton Adjunct Faculty/Consultant DIS www.disney.com High unemployment, lingering recession, slow economic growth, and reduced consumer spending all contributed to a 7 percent drop in revenue and a 46 percent drop in Walt Disney’s profitability for the first quarter of 2009. For eight decades, the Walt Disney Company has captured the attention of millions of people, offering family entertainment products and services such as theme parks, resorts, recreations, movies, TV shows, radio programming, and memorabilia. Walt Disney brought Mickey Mouse and Donald Duck to the world. Walt Disney offers a variety of family entertainment all around the world. History Mr. Walt Disney and his brother Roy arrived in California in the summer of 1923 to sell his cartoon called Alice’s Wonderland. A distributor named M. J. Winkler contracted to distrib- ute the Alice Comedies on October 16, 1923, and the Disney Brothers Cartoon Studio was founded. Over the years, the company produced many cartoons, from Oswald the Lucky Rabbit (1927) to Silly Symphonies (1932), Snow White and the Seven Dwarfs (1937), and Pinocchio and Fantasia (1940). The name of the company was changed to Walt Disney Studio in 1925. Mickey Mouse emerged in 1928 with the first cartoon in sound. In 1950, Disney completed its first live action film, Treasure Island, and in 1954, the company began television with Disneyland anthology series. In 1955, Disney’s most suc- cessful series, The Mickey Mouse Club, began. Also in 1955, the new Disneyland Park in California was opened. Disney created a series of releases from 1950s through 1970s, including The Shaggy Dog, Zorro, Mary Poppins, and The Love Bug. Mr. Walt Disney died in 1966. In 1969, the Disney started its educational films and materials. Another important time of Disney’s history was opening the Walt Disney World project in Orlando, Florida, on October 1, 1971. In 1982, the Epcot Center was opened as part of Walt Disney World. And, on April 15, 1983, Tokyo Disneyland opened. After leaving the network television in 1983, the company was ready to get into its cable network, The Disney Channel. In 1985, Disney’s Touchstone division began the suc- cessful Golden Girls and Disney Sunday Movie. In 1988, Disney opened Grand Floridian Beach and Caribbean Beach Resorts at Walt Disney World along with three new gated attractions: the Disney/MGM Studios Theme Park, Pleasure Island, and Typhoon Lagoon. At the same time, filmmaking hit new heights as Disney for the first time led Hollywood studios in box-office gross. Some of the successful films were: Who Framed Roger Rabbit, Good Morning Vietnam, Three Men and a Baby, and later, Honey, I Shrunk the Kids, Dick Tracy, Pretty Woman, and Sister Act. Disney moved into new areas by starting Hollywood Pictures and acquiring the Wrather Corp. (owner of the Disneyland Hotel) and television station KHJ (Los Angeles), which was renamed KCAL. In merchandising, Disney pur- chased Childcraft and opened numerous highly successful and profitable Disney Stores. By 1992, Disney’s animation began reaching even greater audiences with The Little Mermaid, The Beauty and the Beast, and Aladdin. Hollywood Records was formed to offer a wide selection of recordings ranging from rap to movie soundtracks. New television shows, such as Live with Regis and Kathy Lee, Empty Nest, Dinosaurs, and Home

2 MERNOUSH BANTON Improvement, expanded Disney’s television base. For the first time, Disney moved into publishing, forming Hyperion Books, Hyperion Books for Children, and Disney Press, which released books on Disney and non-Disney subjects. In 1991, Disney purchased Discover magazine, the leading consumer science monthly. As a totally new venture, Disney was awarded, in 1993, the franchise for a National Hockey League team, the Mighty Ducks of Anaheim. In 1992, Disneyland Paris opened in France. Disney successfully completed many projects throughout the 1990s by venturing into Broadway shows, opening up to 725 Disney Stores, acquiring the California Angels baseball team to add to its hockey team, opening Disney’s Wide World of Sports in Walt Disney World, and acquiring Capital Cities/ABC. From 2000 to 2007, Disney created new attractions in its theme parks, pro- duced many successful films, opened new hotels, and built Hong Kong Disneyland. Internal Issues Organizational Structure and Mission As indicated in Exhibit 1, Disney operates using a strategic business unit (SBU) type orga- nizational structure. Note that Disney’s four SBUs consist of (1) Disney Consumer Products, (2) Studio Entertainment, (3) Parks and Resorts, and (4) Media Networks and Broadcasting. Disney’s mission statement is “To be one of the world’s leading producers and providers of entertainment and information. Using our portfolio of brands to differentiate our content, services and consumer products, we seek to develop the most creative, innov- ative and profitable entertainment experiences and related products in the world.” Disney does not have a vision statement. Walt Disney Company Disney Consumer Products 1. Disney Hard_Lines 2. Disney Soft_Lines 3. Disney Toys 4. Disney Publishing 5. Disney Press 6. Disney Editions Studio Entertainment 1. Walt Disney Pictures 2. Touchstone Pictures 3. Miramax Films 4. Buena Vista Home Entertainment 5. Buena Vista Theatrical Productions 6. Walt Disney Records 7. Buena Vista Records 8. Hollywood Records 9. Lyric Street Records 10. Pixar Studio Parks and Resorts 1. Walt Disney World 2. Disneyland 3. Tokyo Disney 4. Disneyland Paris 5. Hong Kong Disneyland 6. Disney Cruise Line 7. Disney Vacation Club Media Networks Broadcasting 1. Disney-ABC Television 2. ESPN Inc. 3. Walt Disney Internet Group 4. ABC-Owned Television Stations 5. ABC Radio EXHIBIT 1 Disney’s Corporate Structure

CASE 1 • WALT DISNEY COMPANY — 2009 3 EXHIBIT 2 Consolidated Income Statement (in millions, except per share data) 2008 2007 2006 Revenues $ 37,843 $ 35,510 $ 33,747 Costs and expenses (30,439) (28,681) (28,392) Other (expense)/income (59) 1,004 88 Net interest expense (524) (593) (592) Equity in the income of investees 581 485 473 Income from continuing operations before income taxes and minority interests 7,402 7,725 5,324 Income taxes (2,673) (2,874) (1,837) Minority interests (302) (177) (183) Income from continuing operations 4,427 4,674 3,304 Discontinued operations, net of tax — 13 70 Net income $ 4,427 $ 4,687 $ 3,374 Diluted Earnings per share: Earnings per share, continuing operations $ 2.28 $ 2.24 $ 1.60 Earnings per share, discontinued operations — 0.01 0.03 Earnings per share $ 2.28 $ 2.25 $ 1.64 Basic Earnings per share: Earnings per share, continuing operations $ 2.34 $ 2.33 $ 1.65 Earnings per share, discontinued operations — 0.01 0.03 Earnings per share $ 2.34 $ 2.34 $ 1.68 Weighted average number of common and common equivalent shares outstanding: Diluted 1,948 2,092 2,076 Basic 1,890 2,004 2,005 Source: Walt Disney Company, Annual Report (2008). Consolidated Financial Statements Disney’s recent income statements and balance sheets are provided in Exhibits 2 and 3, respectively. Note the increase in profit from 2006 to 2007, and the decline from 2007 to 2008. The most recent Disney’s Consolidated Balance Sheet, shown in Exhibit 3, reveals over $22 billion in Goodwill and nearly $11.1 billion in Long Term Debt. Financials by Segment Exhibit 4 demonstrates the company’s revenue and operating income by each business seg- ment. Note that Disney’s Media Networks brings in the most revenues and operating income for the company. This division, as well as the Parks and Resorts segment, is grow- ing. However, the company’s Studio Entertainment business segment and their Consumer Products businesses have experienced declining revenues in the last three years. As shown in Exhibit 5, Disney derives 76 percent of its revenue and 77 percent of its operating income from businesses in the United States and Canada. The company’s rev- enues and income are growing in all regions of the world, with Europe being second behind the United States/Canada in both revenues and income. Disney Business Segments In percentage terms, Disney revenues in 2008 were derived from Media Networks (43 percent), Parks and Resorts (31 percent), Studio Entertainment (20 percent), and

6 MERNOUSH BANTON Entertainment Services, A&E Television Networks, E! Entertainment, ESPN, History Channel, The Biography Channel, Hyperion Books, and Disney Mobile. The increase in revenue in this segment was primarily due to growth from cable and satellite operators, which are generally derived from fees charged on a per subscriber basis, contractual rate increases, and higher adverting rates at ESPN. The increase in broadcasting revenue was due to growth at the ABC Television Network and increased sales of Touchstone Television series as well as an increase in prime-time advertising revenues. Increase in sales from Touchstone Television series was as a result of higher international syndication and DVD sales of hit dramas such as Lost, Grey’s Anatomy, and Desperate Housewives, as well as higher third-party license fees led by Scrubs, which completed its fifth season of network television. Two major TV networks of Disney (ABC and ESPN) recently struck a deal with cable operator Cox Communication whereby these companies now offer hit shows and football games on demand. Although advertising in the network is a source of additional revenue for the broadcasters, it requires selectivity for charging for each episode. Video- on-demand is a major industry and is expected to grow to $3.9 billion by 2010. Disney recently unveiled Disney Xtreme Digital, a networking site aimed at children younger than 14 years of age. This service will be competing against MySpace (owned by News Corporation). Disney has reported an increase in fiscal 2009 second-quarter net income mostly as a result of strong gains at cable network ESPN. Higher advertising rev- enues are reflected due to NASCAR programming at ESPN, an increase at ABC Family primarily due to higher rates, higher other revenues by DVD sales primarily from High School Musical, and a favorable settlement of a claim with an international distributor. Exhibit 6 provides specific segment information for the Media Networks division. Disney’s domestic broadcast television stations are listed in Exhibit 7. Disney’s international media network operations are described in Exhibit 8. In prime time, higher advertising rates and sold inventory were partially offset by lower rating from some of the problems. Increased sales of ABC Studios productions reflected higher international and DVD sales of hit drams such as Desperate Housewives, Grey’s Anatomy, and Ugly Betty. Parks and Resorts Disney owns and operates Walt Disney World Resort & Cruise Lines in Florida, Disneyland Resort in California, ESPN Zone facilities in many states, 17 hotels at the Walt Disney World Resort, Disney’s Fort Wilderness Camping and Recreation, Downtown Disney, Disney’s Wide World of Sports, Disney Cruise Line, 7 Disney Vacation Club Resorts, Adventures by Disney, and 5 resort locations with 11 theme parks on three conti- nents. With theme parks, Disney has 51 percent ownership in Disneyland Resort Paris, EXHIBIT 6 Media Network Segment: Revenue and Operating Income Change 2008 2007 vs. vs. (in millions) 2008 2007 2006 2007 2006 Revenues: Cable Networks $ 10,041 $ 9,167 $ 8,159 10% 12% Broadcasting 6,075 5,937 6,027 2% (1)% $ 16,116 $ 15,104 $ 14,186 7% 6% Segment operating income: Cable Networks $ 4,100 $ 3,577 $ 3,001 15% 19% Broadcasting 655 698 480 (6)% 45% $ 4,755 $ 4,275 $ 3,481 11% 23% Source: Walt Disney Company, Annual Report (2008).

8 MERNOUSH BANTON EXHIBIT 9 Disney’s Offerings Under Parks and Resorts Hong Disneyland Kong Tokyo Disney Walt Disney Disneyland Resort Disneyland Disney Cruise ESPN Walt Disney World Resorts Resort Paris Resort Resort Line Zone Imagineering Epcot Disneyland Disneyland Hong Tokyo Park Kong Disneyland Disneyland Disney-MGM Disneyland’s Walt Resort Tokyo Studios California Disney Facilities DisneySea Adventure Studios Park Magic Kingdom Resort Facilities Disney’s Animal Kingdom Resort Facilities Source: Walt Disney Company, Form 10K (2008). 43 percent ownership in Hong Kong Disneyland, 100 percent ownership in Tokyo Disney Resort as well as Disneyland in both California and Florida. Exhibit 9 summarizes Disney’s key parks and resort holdings. Disney revenues at its Parks and Resorts division increased 7 percent in 2008, or $701 million, to $10.6 billion due to increases of $483 million and $218 million at its domestic and international resorts, respectively. Domestic Parks and Resorts revenues increased due to increased guest spending, theme park attendance, and hotel occupancy, as well as higher sales at Disney Vacation Club. Higher guest spending was due to a higher average daily hotel room rate, higher average ticket prices, and greater merchandise spend- ing at both resorts. Disneyland Resort Paris experienced increased revenues, offset by a decrease at Hong Kong Disneyland Resort due to lower theme park attendance. Some of the increase in revenue was due to favorable impact of foreign currency translation (weakening of the U.S. dollar against the euro). Operating income from the Parks and Resorts segment increased 11 percent, or by $524 million, to $1.897 billion. Exhibit 10 presents Disney’s attendance, per capita theme park guest spending, and hotel statistics for its domestic properties: EXHIBIT 10 Disney Parks and Resorts Data (2008 vs. 2007) East Coast West Coast Total Domestic Resorts Resorts Resorts FY FY FY FY FY FY 2008 2007 2008 2007 2008 2007 Increase in Attendance 6% 5% (1)% 6% 3% 5% Increase in Per Capita 3% 1% 2% 8% 3% 3% Guest Spending Occupancy 89% 86% 92% 93% 89% 87% Available Room Nights 8,614 8,834 810 810 9,424 9,644 (in thousands) Per Room Guest Spending $217 $211 $309 $287 $225 $218 Source: Walt Disney Company, Annual Report (2008).

CASE 1 • WALT DISNEY COMPANY — 2009 9 The company also has been hosting VIP tours (additional fees applies), offering added-value services such as number of attractions being covered along with personal guide tours, preferred seating, and front-of-line access to rides. The company also offers package deals for major corporations and schools. Disney has plans to change its concept of the theme parks from the masses to a more concentrated perspective. This move allows Disney to offer more stand-alone theme parks and resorts in cities and beach resorts, as well as Disney-branded retail and dining districts, and smaller and more sophisticated parks. This permits the company in using the Disney brand name to expand in other areas of the travel business. The company has built time- share vacation homes in popular places in the United States. Some of the challenges in this marketing strategy have been tailoring the niche attractions to the local markets while keeping the Disney brand reputation. However, there is a challenge of avoiding cannibalization of existing parks and attractions. The goal would be entering into new mar- kets without harming or cannibalizing Disney’s brand. Studio Entertainment Disney produces live-action and animated motion pictures, direct-to-video programming, musical recordings, and live-stage plays. Disney motion pictures are distributed under the names Walt Disney Pictures and Television, Touchstone Pictures, Hollywood Pictures, Miramax Films, and Buena Vista Home Entertainment International, which includes Walt Disney Records, Buena Vista Records, Hollywood Records, Lyric Street Records, and Disney Music Publishing. Disney owns Pixar, a computer animation leader, and produces feature animation films under both the Disney and Pixar banners. The company also pro- duces stage plays, musical recordings, and live entertainment events. As of September 2008, Disney had released 928 full-length movies, 80 full-length animated features, and 546 cartoon shorts. Product offerings include Pay-Per-View, Pay Television, Free Television, Pay Television 2, and International Television. Consumer Products The Consumer Products segment includes partners with licenses, manufacturers, publish- ers, and retailers worldwide who design, promote, and sell a wide variety of products based on new and existing Disney characters. The product offerings are Character Merchandise and Publications Licensing, Books and Magazines, Buena Vista Games, DisneyShopping.com, and The Disney Store. Products include books, interactive games, food and beverages, fine art, apparel, toys, and even home decor. In 2008, the revenues from this segment increased 26 percent to $2.9 billion. Sales growth at the Disney Stores was due to the acquisition of the Disney Stores North America. Sales growth at Merchandise Licensing was driven by higher earned royalties across multiple product categories. Operating income of this segment increased 14 percent to $718 million, mostly due to growth at Merchandise Licensing partially offset by a decrease at the Disney Stores due to the acquisition of the Disney Stores North America. In April 2008, Disney acquired inventory, leasehold improvements, and certain fixed assets of the Disney Stores North America for approximately $64 million. The acquisition included the assumption of the leases of 229 stores. Competition Disney’s competitors differ in each segment of business. Time Warner is a major competi- tor to Disney and is composed of five divisions: AOL, Cable, Filmed Entertainment, Networks, and Publishing. Time Warner owns Time Inc., AOL, Warner Brothers, and TBS Networks. Walt Disney generally is classified as Entertainment-Diversified, which directly competes with Time Warner, Inc. (as shown in Exhibit 11). CBS Corporation and News Corporation directly compete with the Walt Disney Company in the Media Network segment, but they are not rivals in the Consumer Products and Parks and Resorts segments. CBS Corporation was a part of Viacom, Inc., but now operates independently under CBS Corp. News Corporation is a diversified international media and entertainment company that operates in eight segments: Filmed Entertainment,

10 MERNOUSH BANTON EXHIBIT 12 Disney Rival Firms in Media Networks/Broadcasting Major Competitors % Attractiveness* Discovery Networks 72% Disney/ESPN Media Networks 68% MTV Networks 52% Turner Entertainment Networks 48% Scripps Networks 43% NBC Universal Cable 39% Comcast Cable Networks 34% Fox Cable Networks 31% *To consumers ages 18 to 24. Source: Based on Multichannel News 28, no. 10 (2007): 30; ISSN: 0276-8593. Television, Cable Network Programming, Direct Broadcast Satellite Television, Magazines and Inserts, Newspapers, Book Publishing, and Other. Due to recent corporate restructuring for both CBS Corporation and News Corp., there are no industry data available for compar- ison purposes. Next we discuss the competition for each segment of Walt Disney. Competition: Media Networks/Broadcasting The global media industry is a $1 trillion business that includes advertising, cable firms, newspapers, radio, and television. This industry is dominated by conglomerates Walt Disney, Time Warner, Inc., New York Times, News Corp., and CBS Corporation. Typically, these companies prosper during election years due to heavy advertising revenue invested by the politicians. Special events such as the Olympics also generate additional advertising revenue for such companies. Disney competes for viewers primarily with other television networks, independent television stations, and other video media such as cable and satellite television program- ming services, DVD, video games, and the Internet. Radio networks likewise compete with other radio network stations and programming services. Disney also competes with other advertising media such as newspapers, magazines, billboards, and the Internet. Exhibit 12 reveals some major competitors to Disney in this segment of business, as well as percentages that indicate attractiveness of that venue to consumers ages 18 to 24. CBS Corp. is composed of five segments: Television, Radio, Outdoor, Interactive, and Publishing. CBS Television is composed of CBS Network and its own television stations, EXHIBIT 11 Disney vs. the Industry: Comparative Data DIS CBS TWX Industry Market Cap 39.00B 4.31B 26.28B 499.59M # of Employees 150,000 25,920 87,000 7.51K Qtrly Rev Growth -8.20% -6.20% -2.70% 5.10% Revenue $ 36.99B 13.95B 46.98B 930.87M Gross Margin 17.81% 37.99% 41.92% 41.92% EBITDA $ 8.18B 2.69B 13.34B 166.44M Oper Margins 17.81% 15.48% 18.62% 10.39% Net Income $ 4.02B -11.67B -13.40B N/A EPS $ 2.100 -17.428 -11.224 N/A DIS = Walt Disney Company CBS = CBS Corporation TWX = Time Warner Inc. Source: Based on finance.yahoo.com (April 2009).

CASE 1 • WALT DISNEY COMPANY — 2009 11 television production, and syndication, Showtime, and CSTV Networks. In 2008, the Television segment of CBS contributed 64 percent of company’s total revenue (approximately $8.99 billion). The Radio segment derives revenue primarily from advertising sales. In 2008, the Radio segment generated 11 percent of CBS’s total revenue (approximately $1.5 billion). News Corp., with $33 billion in revenue, operates in eight industry segments: Filmed Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television, Magazines and Inserts, Newspapers, Book Publishing, and Other. For the fiscal year 2008, the Filmed Entertainment, Television, Cable Network Programming, and Direct Broadcast Satellite Television contributed approximately 65 percent or $21.2 billion to the company’s total revenue. The company has been moving aggressively toward digital technologies such as broadband, mobility, storage, and wireless. News Corp. owns MySpace.com, one of the Internet’s most popular social networking site, and IGN.com (a gaming and entertainment site). Fox TV, owned by News Corp., ranks as one of the most popular networks on television with an average audience of 7.6 million every night, fol- lowed by CBS with 6.7 million viewers during each prime time, Walt Disney Company’s ABC with 5.4 million viewers per night, and finally NBC (owned by General Electric Company) with 4.8 million viewers during each prime-time period. News Corp. recently acquired Dow Jones & Company and Liberty Media Corporation, which included approxi- mately 41 percent interest in the DIRECTV Group, Inc. Time Warner’s media and entertainment segments include AOL, Cable, Filmed Entertainment, Networks, and Publishing. The Cable segment services primarily analog and digital video services, and advanced services such as VOD and HDTV with set-top boxed equipped with digital video recorders. The Filmed Entertainment segment produces and distributes theatrical motion pictures and television shows. The Network segment con- sists of HBO and Cinemax pay television programming services. The Publishing segment publishes magazines and Web sites in a variety of areas and has a strategic alliance with Google, Inc. Exhibit 13 demonstrates Time Warner’s revenue by segment. Competition: Parks and Resorts Disney’s theme parks and resorts compete with all other forms of entertainment, lodging, tourism, and recreational activities. Many uncontrollable factors may influence the prof- itability of the leisure-time industry such as economic conditions, including business cycle and exchange rate fluctuations; travel industry trends; amount of available leisure time; oil and transportation prices; and weather patterns. Seasonality is another concern for this seg- ment because all of the theme parks and the associated resort facilities are operated year- round. Peak attendance and resort occupancy generally occur during the summer months when school vacations take place and during early winter and spring holiday periods. According to a survey conducted by the International Association of Amusement Parks and Attractions (IAAPA), there are more than 400 amusement parks in the United States, gen- erating approximately $11.5 billion in revenues. The Magic Kingdom at Walt Disney World in Florida was the most visited amusement park in the world. The amusement parks in the United States employ approximately 500,000 year-round and seasonal employees. EXHIBIT 13 Time Warner, Inc., Revenue (in millions) by Segment (2007) Segment Percentage of Operating Revenue Total Sales Income Cable $ 17,200 35.44 $ (11,782) AOL 4,165 8.58 (1,147) Filmed Entertainment 11,398 23.49 823 Networks 11,154 23.00 3,118 Publishing 4,608 9.49 (6,624) Total 48,525 Source: Time Warner Inc., Form 10K (2008).

12 MERNOUSH BANTON The second largest amusement park company after Disney is Six Flags, Inc., based in Oklahoma City, Oklahoma, with 20 parks across the United States, Mexico, and Canada and soon in Dubai and Qatar with more than $1 billion in revenue (2008). Six Flags recently acquired Dick Clark Productions, which owns television hits such as the American Music Awards, The Golden Globe Awards, the Academy of Country Music Awards, Dick Clark’s New Year’s Rockin’ Eve, and So You Think You Can Dance. Ocean Park in Hong Kong has been aggressively competing with Disney. Ocean Park is a theme park that covers over 870,000 square meters and receives more than 5 million tourists each year. In March 2009, Ocean Park launched two new sightseeing locations in Shanghai to attract tourists from regions such as the Yangtze River Delta. Ocean Park has the advantage of understanding the local market because they have been in business for more than 30 years. They offer a range of transportation facilities to link Hong Kong with major cities in the Pearl River Delta. In 2008, Ocean Park established an office in Shanghai. Ocean Park plans to complete construction of four new themed travel attrac- tions between 2010 and 2013. It also seems that the residents in Hong Kong are not very impressed with the small version of Disney built there because many have visited Disneyland in Tokyo or Anaheim, California. Disney in mid-2009 reached an agreement with the Hong Kong government to enlarge Hong Kong Disneyland. That city government owns 57 percent of that Disney theme park. Competition: Studio Entertainment The success of Studio Entertainment operations depends heavily on public taste and pref- erences. Operating results fluctuate due to the timing and performance of releases in the theatrical, home entertainment, and television markets. Release dates are determined by competition and the timing of vacation and holiday periods. Many companies produce and/or distribute theatrical and television films, exploit products in the home entertainment market, provide pay television programming services, and sponsor live theater. Disney also competes to obtain creative and performing talents, story properties, advertiser support, broadcast rights, and market share. Movies have historically been a reasonable priced entertainment for families, and comprise more than $150 billion in revenues annually. The most important regions con- tributing to this industry are the United States (49.8 percent), Europe (33 percent), and Asia and developing countries (14 percent). Consolidation has been very common in the movie and entertainment industry. As such, a few companies dominate the industry and control the production and distribution of most movies, including: Warner Brothers (17.10 percent), Walt Disney (11.70 percent), Twentieth Century Fox (10.3 percent), Viacom (6.3 percent), and other (54.6 percent). Competition: Consumer Products Leading competitors to Disney in this segment are Warner Brothers, Fox, Sony, Marvel, and Nickelodeon. Disney competes in its character merchandising and other licensing, publishing, interactive, and retail activities with other licensors, publishers, and retailers of character, brand, and celebrity names. Disney is perhaps the largest worldwide licensor of character-based merchandise and producer/distributor of children’s film-related products based on retail sales. Operating results for the licensing and retail distribution business are influenced by seasonal consumer purchasing behavior and by the timing and performance of animated theatrical releases. Risk A wide range of factors could materially affect the future and the performance of the Disney, such as: 1. A prolonged recession in the United States and other regions of the world could have an adverse affect on the company’s business. 2. The success of the business depends on the ability to consistently create and distribute programs/products (movies, films, programs, theme park attractions, resort services, and consumer products) that consumers want. As such, heavy

investment is required in such product/service offerings in order to earn consumer acceptance and attention. 3. Changes in technology and in consumer consumption. 4. Technologies such as peer-to-peer, high-speed digital transmission, illegal digital video recorders, and so on are vulnerable to piracy. Disney must devote substantial resources to protect its intellectual property. 5. Changes in travel and tourism could impact the company’s business, such as adverse weather conditions, natural disasters, terrorist attacks, health concerns, international concerns, political or military developments, and war. 6. High unemployment rates. Source: The Walt Disney Company, Form 10K (2008). Conclusion Walt Disney’s net income fell 26 percent for the third quarter (2009) with no division or segment of the company reporting an increase. The worst performing division for the quar- ter was Movie Studio, which reported an operating loss of $12 million on a revenue drop of 12 percent. Disney’s DVD sales slowed dramatically. As the economic recession lingers and consumers still spend money on what the need rather than what they want, Disney needs a clear strategic plan for the future. Shareholders do not want to see a repeat of the firm’s third-quarter type results. Let’s say Disney asks your assistance in developing a strategic plan. Help Disney reverse its slipping revenues. References Datamonitor Industry Market Research finance.yahoo.com Investor’s Business Daily Multichannel News, available from www.multichannel.com News Corporation, available from www.newscorp.com The Wall Street Journal, available from www.wsj.com The Walt Disney Company, available from www.disney.com TheStreet.com, available from www.thestreet.com Time Warner, Inc., available from www.timewarner.com Standard & Poor’s, available from www.standardandpoors.com USAToday.com, available from www.usatoday.com CASE 1 • WALT DISNEY COMPANY — 2009 13

2 Merryland Amusement Park — 2009 Gregory Stone Regent University In September 2009, the “Support Merryland” advocacy group was started to draw public interest in the historic Merryland Amusement Park. Anthony (Tony) Kenworthy is cur- rently aligned with this Kansas historical preservation group for the purpose of gaining federal government influence toward a “historical site” designation, which would help to secure the property and its assets for potential investors for the purpose of site restoration. There is also a growing grassroots level interest throughout Kansas in seeing Merryland restored to its previous days of carnival-like splendor. Tony is fully aware of this state sen- timent and intends to use it to move a state-based initiative forward for just that purpose. Tony has to make a decision! The owners of Merryland Amusement Park, a derelict “50 acres of fun!” amusement park located in Kansas City, have again put the attraction up for sale after several failed attempts to reopen the park. Merryland officially closed its entrance gates to the public in 2009. If Tony waits too long, his colossal theme park dream will vaporize. If he acts too quickly, he might get the keys to the Titanic. Poor financial management and other factors contributed to the owners’ decision to close and sell the park. Tony has three investment options, and investors associated with each are ready to move, even in the face of poor park performance—or, in this case, nonex- istent performance. Tony’s entrepreneurial magic is just what the amusement park needs, if not more of an entrepreneurial miracle. The park is the perfect fit for providing fun activi- ties for disabled children—Tony’s personal passion. Tony’s first option is to buy the park, make the renovations, and reopen it under his management. Altria, a major corporation, has offered all the cash he needs to make the pur- chase representing Tony’s second option. Finally a local consortium of entrepreneurs gives him more control, but far less cash. Choosing the right option could make or break Tony’s career, his finances, his life, his reputation, and even his personal relationships. Background Merryland is a local theme/fun park that originally opened in 1955. The park was started and managed for 33 years by Stanley Merry, a nephew of the man the park was named after. In 1988, Stanley Merry died and left the park to his only heir, his widowed daughter- in-law, Samantha Steinberg. Samantha had little interest in owning, and much less in operating, an amusement park. Her second husband, Alan, took up the responsibility for most of the day-to-day operations. Although the couple operated the park from 1988 to 2008, Samantha’s heart was never in the business. Maintenance budgets and the total number of employees were annually reduced to the detriment of the park’s operations. They simultaneously, however, kept annually increasing park entrance fees, “to suck every last dime we can get out of the park,” according to Samantha. Falling revenues and a noticeable degrading of the park’s facilities prompted long- time owners Samantha and Alan Steinberg to put the park up for sale in the fall of 2006, with an asking price of $5.8 million for the 50-acre facility. Twenty of those acres were still in woods and fields behind the 30-acre theme park area. Two other groups tried unsuccessfully to take over the operations and keep Merryland going prior to the amusement park officially closing in 2009, but both found refurbishing costs and operating costs were far more than anticipated. Rising liability

CASE 2 • MERRYLAND AMUSEMENT PARK — 2009 15 insurance costs were equally challenging. In late 2007, Alan Steinberg, now 85, and Samantha Steinberg, herself 87 years old, again had full control of the park and desire a minimum of $2 million this time around. “It has to be cash,” Samantha stated adamantly. “This time there is no leasing or holding the note.” She did quickly add that she and her husband, however, would consider proposals to do something else with the undeveloped land, such as building a corporate headquarters, expanding the park, or some other kind of development opportunity. Although Merryland only closed its doors in 2009, it has since become a target for vandals, with more than 20 break-ins recently reported. Police arrested two men a month ago after they found spray-painted swastikas and other graffiti on buildings. “They were really reckless,” Alan Steinberg lamented. “They turned over ticket booths, broke into the office, and threw furniture out the windows.” Tony, Just Another Hard-Working Entrepreneurial Guy Born in Chesapeake, Virginia, Tony graduated from the University of Richmond with a double major in economics and accounting. He served as president of his fraternity and improved the overall quality of the food, house services, negotiated better utility rates, and achieved all of it without having to increase monthly member rent rates. Tony’s Love for the Summer Camp Kids Between his freshman and sophomore years, one of Tony’s fraternity brothers hired him to work during the summer at an eastern Virginia youth camp. It didn’t take long for Tony to work his entrepreneurial magic again. He was instrumental in helping the camp managers get a grip on cash flow and a better system of managing camp expenses. As he imple- mented his new marketing initiatives, they quickly measured increases in both new campers and the subsequent revenue generated from the steady increase in the number of camp attendees. He was the leader, the hero, and garnished the attention once again. The campers loved the camp programs, the parents loved the camp, the camp managers loved Tony, and Tony discovered that he really, truly loved working with the kids. The camp finally had a brand identity in the marketplace, a focus, and was gaining a positive reputation through- out the community and state. Although Tony enjoyed working with the camp managers, he soon found that his one true camp love was working with the actual campers. He especially thrived from seeing kids with disabilities tackle their obstacles and discover their unique talents. The corporate sponsorship opportunity he created significantly increased the num- ber of kids who could finally attend the camp. Working with “his kids” would often cause him to tear up as he watched them learn about their special abilities and skills. His love for the kids and his ability to make them happy made this the perfect summer job throughout his college career. Sure, the pay wasn’t the best, but he got to work with his fraternity brothers. Tony was able to maintain as much fun off the clock as he had during the day with the kids. His “panty raid” attempts occasionally sparked the ire and disdain of the women counselors who felt he should have long outgrown such childish pranks. Graduation from the university landed Tony the position of business manager for the camp. The work was fun but didn’t allow the level of daily involvement with the kids, and he sorely missed that. His position did, however, bring him into increased contact with Jennifer, and she actually seemed to be “warming” up to him. Managing a not-for-profit organization put a cap on his entrepreneurial drive and prevented him from deriving finan- cial dividends from the increased profits he brought to the operation. He was far more the capitalist, with the desire to be rewarded for a job well done. Without the creativity and opportunity to innovate, he quickly lost motivation—especially in light of the lack of financial gain. Tony as a Showbiz Pizza Business Manager The job as a business manager for a Showbiz Pizza franchise in nearby Camden, Virginia, got Tony’s entrepreneurial DNA quickly engaged again. The franchise was a combination pizza parlor, game room, and bar. A local favorite for children’s birthday parties and a

16 GREGORY STONE EXHIBIT 1 Merryland Income Statements for 2004–2008 2004 2005 2006 2007 2008 Sales Revenues 1,245,000 1,450,000 1,253,000 1,020,000 890,000 Cost of Goods Sold 310,000 465,000 403,000 323,000 301,000 Gross Margin 935,000 985,000 850,000 697,000 589,000 Operating Expense 736,000 796,000 780,000 595,000 502,000 Operating Income 199,000 189,000 70,000 102,000 87,000 Interest Expense 15,000 18,000 15,000 12,000 9,500 Net Income Before Taxes 184,000 171,000 55,000 90,000 77,500 Taxes 73,600 68,400 22,000 36,000 31,000 Net Income 110,400 102,600 33,000 54,000 46,500 Key Financial Ratios 2004 2005 2006 2007 2008 Current Ratio 2.3 2.4 1.9 1.6 1.4 Total Asset Turnover Ratio 1.5 1.7 1.3 1.1 0.9 Net Profit Margin 0.089 0.071 0.026 0.053 0.052 Other Data 2004 2005 2006 2007 2008 Employees 10 full, 10 full, 8 full, 7 full, 5 full, 32 part 35 part 30 part 25 part 30 part Maintenance Expenditures 54,000 44,000 45,000 36,000 29,000 Average Number of Rides Operating per Day 22 22 20 19 15 place for area families to have their family night out, Tony was able to interact more fre- quently with kids again. During his three years as business manager, he implemented numerous small operational changes that increased corporate profitability (see Exhibit 1). He entered into a lease agreement with a local vendor to develop the business model to lease the gaming equipment to all the Virginia Showbiz franchises. This enabled Showbiz to offer its owner/operators the most current games all while reducing operating and repair costs. He also shut the restaurant down at 10 PM to families and children, and then reopened the bar operation an hour later until 2 AM for locals to drink, dance, carouse, play pool, play video games, and have good clean adult fun. Then Tony heard from one of his fraternity brothers that Merryland Amusement Park was up for sale, and he knew his dream job had arrived! The Sale of Merryland During the unsuccessful sale attempt and subcontracted operation of Merryland, general park maintenance was neglected. Falling revenues were also attributed to the growing interest in nontraditional theme park attractions fueled by the cost of gasoline and increas- ingly tight economic conditions (see Exhibit 1). Local real estate values, the lack of main- tenance, and no new investment into the park resulted in steadily declining values from 2004 to 2008 (see Exhibit 2). Other local patrons were more willing to make the longer drives to stay for several days or a week to the larger “mega” theme parks such as Six Flags St. Louis as a family vacation. Although there were no directly competing amusement parks in Kansas, the Steinbergs never seemed to fully grasp the significance of that opportunity (see Exhibit 3). Consequently, small niche amusement centers based in malls had begun to spring up. The bigger, more lavish

CASE 2 • MERRYLAND AMUSEMENT PARK — 2009 17 EXHIBIT 2 Merryland Amusement Park Balance Sheets 2005–2009 ASSETS FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Current Assets Cash $102,600 $33,000 $54,000 $46,500 $0 Other Current Assets $ 0 $ 0 $ 0 $ 0 $0 Total Current Assets = $102,600 33,000 $54,000 $46,500 $0 PROPERTY, PLANT, & EQUIPMENT FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Land $4,225,675 $3,877,925 $2,722,583 $2,077,748 $1,893,932 Land Improvements $ 37,500 $ 32,250 $ 25,500 $ 5,000 $ 0 Buildings $ 202,600 $ 183,000 $ 172,000 $ 156,500 $ 125.000 Equipment (Rides) $ 425,000 $ 375,000 $ 325,000 $ 225,000 $ 175,000 Total Prop Plnt & Eqmt = $ 4,890,775 $4,468,175 $3,245,083 $2,464,248 $2,193,932 Total Assets = $4,993,375 $4,501,175 $3,299,083 $2,510,748 $2,193,932 LIABILITIES & CAPITAL FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Current Liabilities Accounts Payable $ 75,702 $ 80,950 $ 68,064 $ 89,325 $ 98,783 Current Borrowing $ 72,146 $ 75,388 $ 72,466 $ 74,539 $ 107,414 Other Current Liabilities $ 26,723 $ 28,943 $ 24,889 $ 29,385 $ 31,845 Subtotal Current Liabilities $ 174,571 $ 185,281 $ 165,419 $ 193,249 $ 238,042 Short-term Liabilities $ 54,723 $ 50,630 $ 46,598 $ 42,554 $ 39,784 Total Liabilities = $ 229,294 $ 235,911 $ 212,017 $ 235,803 $ 277,826 Net Worth = $4,764,081 $4,265,264 $3,087,066 $2,274,945 $1,916,106 EXHIBIT 3 Kansas Entertainment Attractions Name Address Facility Type Attraction Description All Star Adventures (East) 1010 N.Webb Road Wichita, KS 67206 Amusement Park Wichita’s only amusement park with rides for kids and go karts. Wild West World 7300 North Wild West Drive Valley Center, KS 67147 Theme Park Featuring cowboys and Indians, Wild West World is the first major theme park in Kansas and the world’s only one sport- ing an all-Western theme. The park opened in May 2007 and closed in July 2007. Its owners declared bankruptcy and were hoping to sell the park so that it could reopen. Those plans failed, however. The rides were sold to other parks. Zonkers 20070 W. 151st Street Olathe, KS 66061 Theme Park Zonkers (previously Jeepers!) is an indoor theme park serv- ing families with children of all ages. The park provides a diverse mix of arcade games and amusement rides built to scale for indoor use. Rides include the popular Python Pit (roller coaster), Yak Attack (mini-Himalaya), Venetian Carousel, Train, and Banana Squadron (airplane ride).

18 GREGORY STONE Name Address Facility Type Attraction Description Carousel Park 3834 W. 7th Street Joplin, MO 64801 Amusement Park This is a family fun park for young and old. Park features dozens of amusement rides, two 18-hole miniature golf courses, multispeed batting cages, the fastest go karts in the area, water-spraying bumper boats, an exciting indoor arcade, indoor and outdoor birthday party areas. Silver Dollar City 399 Indian Point Road Branson, MO 65616 Theme Park Park for all ages combines the wholesome family fun of a major theme park with the timeless appeal of crafts and a dedication to preserving 1880s Ozarks culture. Six Flags St. Louis P.O. Box 60 Eureka, MO 63025 Theme Park Six Flags St. Louis is a major amusement park featuring eight themed lands of adventure. The six flags that fly over the park represent the countries and states that have influ- enced St. Louis history—France, Spain, Great Britain (which at one time had jurisdiction over the area), Illinois, Missouri, and the U.S.A. The park features more than 40 attractions and game areas, more than 25 food outlets and gift shops, live shows, and a tropical paradise water park called Hurricane Harbor. Worlds of Fun 4545 NE Worlds of Fun Drive Kansas City, MO 64161 Theme Park The park is themed around the Jules Verne book, Around the World in Eighty Days, and is divided into five major sections—Scandinavia, Africa, Europa, the Orient, and Americana. Rides, attractions, shops, shows, and restaurants are named according to the area theme. The park also has an attached water park called Oceans of Fun. EXHIBIT 4 Missouri Entertainment Attractions theme parks, however, offered highly attractive water parks, modern steel coasters, entertain- ers, and an endless array of promotions, discounts, and family fun “packages” that made it worth the several-hundred-mile drive to be thrilled and entertained (see Exhibit 4). Merryland’s lack of marketing and promotion in lieu of higher ticket prices further contributed to its own declining backyard patron interest. Alan and Samantha, unlike the previous owners, were far removed from the changing needs, wants, and desires of a new generation of amusement park children, teens, and adults that began to take shape in the early 1990s. Customer demographics had shifted, and Merryland didn’t shift with them. The Steinbergs initiated a lawsuit against the interim operators. In the lawsuit, they listed Louie the Clown as one of the items damaged or taken from the park. The interim operators all said they knew nothing about the missing clown’s whereabouts. The Steinbergs were also attempting to collect $450,000 in back rent and damages, but the former operators have said that they don’t owe anyone any rent for anything. Merryland’s “Screamer” Roller Coaster For residents of Kansas City, there was only one reason to go to Merryland—the roller coaster! Some people nicknamed it the “scream machine” and with good reason. The history of the “Screamer” reflected a constant search for greater and more death-defying thrills. Merryland Park’s Screamer roller coaster was a product of the Philadelphia Toboggan Company and one of the last surviving original wooden coasters designed by Herbert Paul Schmeck. Along with the Screamer, another of the trademark attractions was the park’s Wurlitzer organ with Louie the Clown in front of it. Patrons always loved the wooden coaster and would swear they noticed a big differ- ence in the ride of Merryland’s over others. Although it wasn’t all that tall and not as fast as those in other parks, Merryland’s made up for all those shortcomings with its sway— the back-and-forth motion that created the “out-of-control” sense of pending disaster, especially on the curves. That was due primarily to the Screamer’s state-of-the-art wheel technology.

CASE 2 • MERRYLAND AMUSEMENT PARK — 2009 19 The Screamer was one of the first coasters to have some of the newly developed coaster wheel technology of its day. Once underway, the different types of wheels on the coaster work together to keep the ride smooth. The running wheels guide the coaster on the track. The friction wheels control the lateral sway (movement to either side of the track) motion. The final set of wheels keeps the coaster on the track. Those would have kept it firmly glued to the rails even if it had been inverted. Improved compressed air brakes stopped the train as the ride ended, adding a somewhat last moment of unintentionally designed thrill. The Screamer provided a distinctively rough, noisy, and out-of-control feeling for its riders, and its reputation was known throughout Kansas. Tony’s Interest in Merryland Tony’s believes that operating a theme park would enable him to directly serve disabled kids and their families of Kansas and surrounding states. Additionally, he would have his own business where he could put his creativity and innovative marketing skills to work. And, he could derive compensation commensurate with the work and profits. He could achieve the independent financial success he had not yet accomplished but still very much desired. During his investigation into purchasing the park, Tony discovered that many of the rides were old and their deterioration was reflected on the company’s balance sheets (see Exhibit 2). Although antique rides are considered to be an attractive and uniquely distin- guishing characteristic for a theme park, it also requires the rides to be in a high-quality refurbished condition. That was not the case for those at Merryland. Maintenance alone would not help their survival; a major renovation of all the rides along with the park’s infrastructure would have to be undertaken. New machinery along with several new primary attraction park rides would need to be purchased and installed. A major renovation of several classic rides also had to occur, and those were expensive to stay true to the original engineering designs, paint schemes, and operational format. Many of the replacement ride parts would have to be custom manufactured. Rotational Motion Consultants Tony needed an amusement park ride expert, preferably a contractor who knew the indus- try and could visit Merryland with him. That’s when he found Rotational Motion, a com- pany based in Maryville, Tennessee, that sells all types of new and used amusement rides for theme parks, carnivals, family centers, and equipment for location-based entertainment venues. They also have a large inventory of rides available for short- or long-term lease and are willing to install/lease for a week, month, or even up to a year. James Millner, account representative with Rotational Motion. arranged to meet Tony at Merryland on a crisp fall day. “The park is over 50 years old, but they have those old carousels and that big old roller coaster,” explained Tony, pointing at the per- manently parked coaster train. “Obviously some people lack the appreciation for roller- coaster history. Sure, the roller coaster looks as if it could fall apart at any given moment, but the locals say it’s still one of the best roller coasters they’ve ever ridden. This was one of those places you could go with your friends and family on weekends— and have fun!” James spent two full days with Tony evaluating the rides, and his early estimates indi- cated the necessary renovations could not be done for anything less than $5 million. Rotational Motion is a full service equipment rebuilder. They specialize in working with the best engi- neers in the industry to ensure all restoration work is done to current safety standards. Their modern company has the machine shops and fabrication facilities capable of working with rides in any state of deterioration. All their refurbishing work is conducted under the direction of structural and electrical professional engineers. Their electrical system work always meets or exceeds current American Society for Testing and Materials (ASTM) standards. “This place should have closed 10 years ago based on the equipment condition,” lamented James. He continued, “Simple and old-fashioned are appealing qualities, but ragged, rusty, and scary aren’t. Merryland is proof this region must be highly resistant to change.”

20 GREGORY STONE Tony explored options for the 20 acres of land behind the park. He reasoned that it could be sold to an expanding industrial park for about $1 million or perhaps leased for a long-term income option. On discussing the possibility of using the acreage for other pur- poses with the contractor, he noted that the land could also be used to expand the park by adding more rides or even a water park. James explains that more rides, such as a scenic train ride, can be added for about $1 million. He notes, however, that a water park will be considerably more expensive, costing upward of $10 million. Tony soon realizes the land parcel is not large enough to add both a water park and expand the park with new rides. The Steinbergs sent Tony a market psychographics report that had been prepared for them two years earlier by a local university marketing class. Tony believes the most impor- tant information in it is that kids under seven like simple rides while kids over seven (including adults) want a variety of rides including water-based attractions. The Purchase Options Available to Tony Several organizations with ties to Kansas City have strong interest, albeit different moti- vations, for seeing Merryland continue. Each group, however, lacks amusement park management experience to adequately tackle the obstacles facing the operation. The Steinbergs did keep them informed of Tony’s interest, and they subsequently contacted him to discuss their various levels of interest. As Tony met with each, he soon found that three funding options are potentially good matches for the talents he can bring to Merryland. Option 1: Altria’s Cash Offer to Purchase An executive for Altria had become aware of Tony’s growth performance with Showbiz Pizza and was genuinely impressed with his ability to build business, profits, and market share. They originally wanted Tony to work for them but soon realized that he would fit best in an entre- preneurial setting. Their expansive U.S. market interests had them aware of Merryland, and it wasn’t long before they learned of Tony’s interest in the amusement park. Such a venture would help diversify their corporate holdings while providing market penetration. Altria meets with Tony and offers to carry the entire cost of the renovation and add a water park, something Altria deems necessary for the park to reopen as a profitable opera- tion. Altria’s finance executives place a call to Tony and offer to invest $25 million in the existing park. That amount will include the purchase price, all the required renovations, and the new water park. Additionally, many of the park’s attractions will be included in a new climate-controlled energy-efficient “green dome” for year-round operation. Tony is genuinely interested but wants to know more about the company that is mak- ing such a lucrative offer. His research discovers that on January 27, 2003, Philip Morris Companies, Inc. changed its name to Altria Group, Inc. Philip Morris USA was a wholly owned subsidiary of Altria Group. Even under this new name, Altria continued to own 100 percent of Philip Morris USA. In the fall of 2003, Philip Morris moved its headquarters from New York City to Richmond, Virginia. Philip Morris USA had split from Philip Morris International in 2008. The resulting drop in cigarette exports motivated Philip Morris to plan a shutdown of its Concord, North Carolina, manufacturing facility and move all domestic production to Richmond. The shutdown is planned to be completed by 2010. Some view the name change as an effort by Altria to deemphasize its historical association with tobacco products. Altria also formerly owned Kraft Foods but spun the company off in March 2007 to focus on its tobacco business and products. Despite the problems that Altria faces, its sales continue to grow as evidenced by its third quarter 2009 revenue increase of 5 percent to $5.2 billion, primarily from higher sales of its Phillip Morris USA cigarette brands. Altria Group has a 28.7 percent economic and voting interest in SABMiller, the world’s second-largest brewer. Several consumer groups, however, have called for boycotting all Miller Beer products to put pressure on Altria/Philip Morris to really end smoking by children and underaged teens.

CASE 2 • MERRYLAND AMUSEMENT PARK — 2009 21 Altria’s specific funding conditions are fourfold: 1. The park must promote only the Altria product line. This will include displaying the Altria name prominently around the park, having all of the rides and game kiosks offer prizes that emphasize the Altria product line, and banning the sale of all other competitors’ products. 2. As manager, Tony must offer/honor free tickets and/or discounts to customers who mail in a certain number of points from Altria product cartons and packages. 3. The name of the park must be changed to Altria Gardens and Water Park. 4. Altria wants 10 percent of the gross profit. They agree to give Tony total control of operations but insist that he consult with them before he makes any single expendi- ture over $50,000. Altria will promote the theme park on its product packages and cartons during pre- and early-season promotions in March and April, and again during July for a fall push. Option 2: A Consortium of Local Business Entrepreneurs A consortium of local Kansas City business entrepreneurs also contact Tony with an offer to purchase the park. Having grown up with Merryland as a part of their community life, strong feelings of nostalgia have motivated them to consider the investment to preserve Merryland as a historical site. Several of them are actively involved with the Kansas City Historical Preservation Society. They laid out the following offer to Tony: 1. They will allow Tony to make the renovations to the existing park and let Tony completely manage and control the daily operations. 2. These “venture capitalists” want 40 percent of the park’s net income but will give Tony total autonomy in running the park’s day-to-day operations. 3. They also want the additional 20 acres of land signed over to their control for addi- tional purposes they will not disclose. They state their primary interest in rebuilding the park is to offer the people of Kansas and surrounding states the same experience as they had while growing up. 4. Each of the investors currently runs at least one other business and guarantees park promotion and publicity through those existing enterprises. Option 3: Getting a Loan The final option Tony considers is getting a conventional business loan himself. One of his former fraternity brothers is an investment banker in Norfolk, Virginia. 1. This friend believes Tony could get a loan for the purchase of the park without any difficulty, but he does not believe he can get the full amount needed to renovate Merryland and build the water park. An initial inquiry reveals that Tony could get $9.2 million for the purchase and renovations. 2. His friend believes that if the park is profitable for the first two years, then he can obtain another $10 million to build the water park. His friend, however, did not specify what is considered “profitable.” The Things to Consider Those who leave the Kansas City area say other theme parks just aren’t the same. One of Tony’s fraternity brothers, Franklin, grew up in Kansas City and was a Merryland Park regular. He explained to Tony, “Just last year I moved back to Virginia near the DC area, and I’ve been to parks around the United States—from California to Texas, Maryland to Virginia, Florida, and places in between. I still prefer, and horribly miss, my Merryland experience!” Merryland Park was an integral part of Kansas City’s history, and it’s been a fine part of it (see Exhibits 5, 6, and 7). Where else could you ride a 50-plus-year-old coaster? The “old” part of that is the thrill. Merryland Park was dirt cheap and a nice place to take children. It may have been considered a beginner’s theme park, but at those prices, how could you resist going without kids? It was a great place for first dates and senior citizens as well.

22 GREGORY STONE EXHIBIT 5 2008 General Kansas City, Kansas, Population Demographics Subject Number % Subject Number % Total population = 146,866 100.0 BY SEX AND AGE Male 71,769 48.9 Female 75,097 51.1 Under 5 years 11,953 8.1 5 to 9 years 11,868 8.1 10 to 14 years 11,388 7.8 15 to 19 years 11,314 7.7 20 to 24 years 10,975 7.5 25 to 34 years 21,341 14.5 35 to 44 years 21,946 14.9 45 to 54 years 17,717 12.1 55 to 59 years 6,253 4.3 60 to 64 years 5,072 3.5 65 to 74 years 8,973 6.1 75 to 84 years 6,056 4.1 85 years and over 2,010 1.4 Median age (years) 32.3 (X) 18 years and over 104,917 71.4 Male 50,196 34.2 Female 54,721 37.3 21 years and over 98,122 66.8 62 years and over 19,964 13.6 65 years and over 17,039 11.6 Male 6,830 4.7 Female 10,209 7.0 RACE One race 142,481 97.0 White 81,910 55.8 Black or African American 44,240 30.1 American Indian & Alaska Native 1,103 0.8 Asian 2,527 1.7 Asian Indian 219 0.1 Chinese 250 0.2 Filipino 107 0.1 Japanese 35 — Korean 134 0.1 Vietnamese 206 0.1 Other Asian 1,576 1.1 continued HISPANIC OR LATINO AND RACE Total population = 146,866 100.0 Hispanic or Latino (of any race) 24,639 16.8 Mexican 20,597 14.0 Puerto Rican 253 0.2 Cuban 178 0.1 Other Hispanic or Latino 3,611 2.5 Not Hispanic or Latino 122,227 83.2 White alone 71,870 48.9 HOUSEHOLD BY TYPE Total households = 55,500 100.0 Family households (families) 36,226 65.3 With own children under 18 yrs 18,032 32.5 Married-couple family 22,878 41.2 With own children under 18 yrs 10,246 18.5 Female householder, no husband present 10,108 18.2 With own children under 18 yrs 6,176 11.1 Nonfamily households 19,274 34.7 Householder living alone 16,180 29.2 Householder 65 years and over 5,512 9.9 Households with individuals under 18 years 20,826 37.5 Households with individuals 65 years & over 12,720 22.9 Average household size 2.62 (X) Average family size 3.25 (X) SCHOOL ENROLLMENT Population 3 years and over enrolled in school 39,564 100.0 Nursery school, preschool 2,812 7.1 Kindergarten 2,286 5.8 Elementary school (grades 1–8) 19,158 48.4

24 GREGORY STONE Subject Number % Subject Number % VETERAN STATUS Civilian population 18 years & over 104,921 100.0 Civilian veterans 13,780 13.1 INCOME Households 55,533 100.0 Less than $10,000 7,289 13.1 $10,000 to $14,999 4,310 7.8 $15,000 to $24,999 8,784 15.8 $25,000 to $34,999 8,694 15.7 $35,000 to $49,999 9,962 17.9 $50,000 to $74,999 9,683 17.4 $75,000 to $99,999 4,222 7.6 $100,000 to $149,999 2,005 3.6 $150,000 to $199,999 280 0.5 $200,000 or more 304 0.5 Median household income (dollars) 33,011 (X) With earnings 43,921 79.1 Mean earnings (dollars) 1 41,825 (X) With Social Security income 14,879 26.8 Mean Social Security income (dollars) 1 10,923 (X) With Supplemental Security Income 3,063 5.5 Mean Supplemental Security Income (dollars) 1 5,774 (X) With public assistance income 2,545 4.6 Mean public assistance income (dollars) 1 2,492 (X) With retirement income 8,804 15.9 Mean retirement income (dollars) 1 14,900 (X) Median earnings (dollars): Male full-time, year-round workers 30,992 (X) Female full-time, year round workers 24,543 (X) EXHIBIT 6 2008 Kansas City, Kansas, Marriage Status, Income, and Employment Data—continued Employed 62,940 57.6 Unemployed 5,851 5.4 Percent of civilian labor force 8.5 (X) Armed Forces 67 0.1 Not in labor force 40,348 36.9 Females 16 years and over 56,961 100.0 In labor force 32,977 57.9 Civilian labor force 32,968 57.9 Employed 30,301 53.2 Own children under 6 years 13,044 100.0 All parents in family in labor force 7,737 59.3 INCOME Families 36,581 100.0 Less than $10,000 3,064 8.4 $10,000 to $14,999 1,903 5.2 $15,000 to $24,999 5,208 14.2 $25,000 to $34,999 5,718 15.6 $35,000 to $49,999 7,257 19.8 $50,000 to $74,999 7,773 21.2 $75,000 to $99,999 3,561 9.7 $100,000 to $149,999 1,649 4.5 $150,000 to $199,999 225 0.6 $200,000 or more 223 0.6 Median family income (dollars) 39,491 (X) Per capita income (dollars) 1 15,737 (X) 1 If the denominator of a mean value or per capita value is less than 30, then that value is calculated using a rounded aggregate in the numerator. — Represents zero or rounds to zero. (X) Not applicable.

CASE 2 • MERRYLAND AMUSEMENT PARK — 2009 25 Conclusion Tony ponders the following guestions as well as his three options: • Who exactly are Merryland’s customers? • What are their needs, wants, and desires? • What is the best way to market/advertise/promote the park to its consumers/ customers? • Is control of the operations really important for Tony as an entrepreneur? • What is the right balance of control/risk for each of the purchase options? • How will Tony’s core values impact his ability to make important decisions? • Is Tony’s passion to help disabled kids overshadowing his ability to bring corporate life back to Merryland? The Steinbergs have just notified Tony that by next Friday they intend to put Merryland up for sale on eBay—lock, stock, and barrel—at a starting bid of $1.6 mil- lion, unless they hear from him definitively within a week. Prepare a strategic analysis for Tony. EXHIBIT 7 Kansas Employment Summary by Industry 2008 2009 Level Change Percent Change Total Nonfarm 1,384,042 1,387,871 3,829 0.3% Production Sectors 260,502 260,838 336 0.1% Natural Resources, Mining, & Construction 74,329 75,006 677 0.9% Manufacturing 186,073 185,333 -740 -0.4% Durable Goods 120,175 120,431 256 0.2% Nondurable Goods 65,898 64,901 -997 -1.5% Trade, Transportation, & Utilities 261,824 258,253 -3,571 -1.4% Wholesale Trade 60,476 60,895 419 0.7% Retail Trade 147,394 144,713 -2,681 -1.8% Transportation & Utilities 53,954 52,645 -1,309 -2.4% Service Sectors 601,921 607,922 6,001 1.0% Information 40,614 39,179 -1,435 -3.5% Financial Activities 74,139 74,963 824 1.1% Professional & Business Services 147,037 149,603 2,566 1.7% Educational & Health Services 172,545 175,496 2,951 1.7% Leisure & Hospitality 115,457 116,230 773 0.7% Other Services 52,129 52,451 322 0.6% Government 259,795 260,858 1,063 0.4% *Annual values are derived from average quarterly observations and projections. Detail may not sum to total due to rounding.

JetBlue Airways Corporation — 2009 Mernoush Banton Adjunct Faculty/Consultant JBLU www.jetblue.com In April 2009, the fear of a swine flu outbreak shocked the airline industry and airline stocks dropped by almost 16 percent. JetBlue’s stock slipped by 7 percent to $4.91. A bad outbreak could be disastrous for this industry because most airlines already are suffering from high unemployment, slow economic growth, and significant drops in business and leisure travel. The stake is particularly high for JetBlue, which is on track to generate free cash flow this year for the first time in its nine years of flying. A low-fare, low-cost passenger airline headquartered in Forest Hills, New York, JetBlue expects its 2009 full year revenue and profit to rise slightly. It is ranked as the number-ten U.S. airline by traffic. Southwest Airlines, based in Dallas, Texas, is 1. JetBlue employs over 11,000 crew members and recently achieved the number-one customer service ranking among low-cost carriers, according to J. D. Power and Associates. The company offers passengers new aircraft, roomy leather seats with lots of leg room, 36 channels of free DirecTV, 100 channels of free XM satellite radio, and for purchase, premium movie channel offerings from multiple major movie studios. JetBlue’s onboard offerings include free and unlimited brand-name snacks and beverages, and for purchase, premium beverages and specially designed products for overnight flights. As of mid-August 2009, JetBlue operates 650 flights per day, serving 56 cities in 19 states, Puerto Rico, Mexico, and five countries in the Caribbean and Latin America. JetBlue in mid-2009 began international flights to Montego Bay (Jamaica), Cancun (Mexico), Barbados, Saint Lucia, Kingston (Jamaica), and Santa Domingo (Dominican Republic). History JetBlue was incorporated in Delaware in 1998 and commenced service in 2000 with primary base of operations at New York’s John F. Kennedy International Airport. The company’s goal has been to establish itself as a leading low-fare, low-cost passenger airline by offering its customers high-quality customer service and a differentiated product. The airline focused on serving “underserved markets” and large metropolitan areas that have high average fares with a diversified geographic flight schedules that includes both short- and long-haul routes. From its first day of operation, JetBlue differentiated itself from other airlines by: • Starting the business with a lot of money—the only carrier with over $100 million startup capital • Flying new planes that are more reliable and certainly more efficient. Seats are covered in leather with individual monitors for viewing programs from DirecTV. • Hiring the best people by screening the employees rigorously, offering exceptional training, and equipping them with best tools. The employees are highly motivated and are trained to be service oriented. • Focusing on service by listening to customers and ensuring their flight is joyful and friendly. 3

Much of JetBlue’s business model of low faces came right out of Southwest Airlines’ playbook. This is no surprise since JetBlue founder, David Neeleman, was fired by Southwest in 1999. In 2006, JetBlue published its first corporate sustainability report, the “1st Annual Environmental and Social Report 2006,” addressing its environmental efforts concerning greenhouse gas emissions, conservation efforts, and social responsibility initiatives. In regard to community services, the company also is committed and has aligned itself with not-for-profit organizations that focus on children, education, communities, and the envi- ronment. The company also encourages its crew members to help make a difference by enriching the lives of the individuals and communities they serve. Like Southwest, JetBlue prides itself on providing superior customer service. In 2007, JetBlue introduced the JetBlue Airways Customer Bill of Rights, which provides compensation to customers who experience avoidable inconveniences (and some unavoidable circumstances). The Bill of Rights commits JetBlue to perform at high service standards by holding it accountable if it does not. The company is the first and currently the only major airline to provide such a fundamental benefit for its customers. In 2008, JetBlue introduced refundable fares and new payment options for cus- tomers, and it also launched jetblue.com en español, a Spanish version of their Web site, http://hola.jetblue.com/enes/. JetBlue was also able to maintain cost per available seat mile, excluding fuel, of 5.94 cents, which is among the lowest reported by all other major U.S. airlines. By scheduling and operating aircraft efficiently, JetBlue has high aircraft uti- lization as it spreads fixed costs over many flights and available seat miles. For the year ended December 31, 2008, their aircraft operated an average of 12.1 hours per day, which is the highest among all major U.S. airlines. Exhibit 1 shows the JetBlue organizational chart. For years, JetBlue and Southwest avoided head-to-head competition, but in 2009 the companies began battling each other in the same airports, such as New York, Baltimore, Washington, D.C., and most recently Boston. These two lost-cost carriers use to cross each other only in a few cities. Marketing JetBlue offers a variety of in-flight entertainment such as DirecTV with 36 channels of free programming. Thus far, no other airline offers such live satellite TV option for free. The company is planning to increase the number of channels from 36 to 100+ channels. The aircraft are equipped with an in-seat digital entertainment system. Each individual seat has a monitor with armrest remote with channel and volume controls. JetBlue is well positioned in the New York metropolitan areas, which is one of the largest travel markets. In 2008, JetBlue completed a state-of-the-art terminal in its main David Barger CEO Russell Chew President & COO James Hnat Head of Legal Dept Ex. VP of Corp. Affairs Sec. & Gen. Counsel Rob Maruster Sr. VP of Customer Service Edward Barnes CFO, CAO, Executive VP EXHIBIT 1 Organizational Chart (2008) CASE 3 • JETBLUE AIRWAYS CORPORATION — 2009 27

hub (Terminal 5 in John F. Kennedy Airport in New York). The new terminal offers many modern amenities and concession offerings. Southwest now flies out of New York’s LaGuard: an airport eight miles from Kennedy. JetBlue continuously markets itself through advertising and promotions in newspa- pers, magazines, television, radio, and on billboards. The firm relies on word of mouth because it believes this is the most effective advertising for the company. The primary dis- tribution channel is through the company’s Web site (www.jetblue.com), promoting its low-fare partnership with American Express Rewards, discounts, and customer loyalty program (TrueBlue Flight Gratitude). TrueBlue Flight Gratitude is an online program designed to reward and to recognize the company’s customer. This program offers many incentives; the members earn points for each one-way trip flown based on the length of the trip. Points accumulate for each member in an account and then expires after 12 months. The member receives a free round-trip award to any JetBlue destination after attaining 100 points within a consecutive 12-month period. Through American Express, JetBlue offers the JetBlue Business Card, which pro- vides small business owners with a 5 percent discount on JetBlue travel and automatic enrollment in the American Express OPEN Savings program. In addition, small business owners with any American Express OPEN small business card receive a 3 percent discount on JetBlue travel. Every time card members make a purchase, either by their JetBlue Card or a JetBlue Business Card from American Express, they earn points. The company also has an agreement with American Express allowing its cardholders to convert their Membership Reward points into JetBlue TrueBlue points. E-Commerce The percentage of JetBlue’s total sales booked on their Web site averaged 77 percent for the year ended December 31, 2008. In 2008, their bookings through global distribution systems, or GDSs, and online travel agencies, or OTAs, became their second largest distri- bution channel, accounting for 13 percent of our sales. They booked the remaining 10 per- cent of their 2008 sales through the 800-JETBLUE channel. The number of estimated travel awards outstanding at year-end 2008 was approxi- mately 196,000 awards and includes an estimate for partially earned awards. The number of travel awards used on JetBlue during 2008 was approximately 297,000, which represented 4 percent of the total revenue passenger miles. Due to the structure of the program and low level of redemptions as a percentage of total travel, the displace- ment of revenue passengers by passengers using TrueBlue awards has been minimal to date. Financial Conditions Behind labor, the second largest operating expense for airlines is fuel. JetBlue enters into crude oil option contracts and swap agreements to partially protect itself against significant increases in fuel prices. Exhibit 2 provides JetBlue fuel costs. Exhibits 3 and 4 provide a historical data on company’s finances since 2006. EXHIBIT 2 JetBlue Fuel Cost Year Ended December 31 2008 2007 2006 Gallons consumed (millions) 453 444 377 Total cost (millions) $1,352 $ 929 $ 752 Average price per gallon $ 2.98 $ 2.09 $ 1.99 Percent of operating expenses 41.2% 34.8% 33.6% Source: JetBlue, Form 10K (2008). 28 MERNOUSH BANTON

CASE 3 • JETBLUE AIRWAYS CORPORATION — 2009 31 Industry Overview Airline profitability is influenced by the state of the economy, international events, industry capacity, and offerings by other airlines in the forms of bundling and packaging (with hotels, cruise lines, etc.). The airlines also compete through flight scheduling, availability, fares, routes served, safety records, on-time arrival, and customer service reputation. Passengers are increasingly interested low price as well as comfort and amenities of the aircraft. Therefore, airlines are designing more living space into new planes and retrofitting old ones. For example, Delta Air Lines and American Airlines are rewiring their planes to provide Wi-Fi access and enhanced in-flight entertainment options, including live TV. According to the Air Transport Association, in 2008, the operating expenses in the industry increased 4.1 percent to $163.9 billion. Flying operations, the industry’s largest func- tional cost center at 37.9 percent, climbed 3.9 percent to $62.1 billion. Fuel drove the major share of this category as crude oil prices averaged $72.34 per barrel in 2007, up $6.29 from 2006, and the average jet fuel crack spread—the additional amount charged for refining—rose from $16.69 to $18.59. Consequently, even after factoring in the airlines’ fuel hedging programs, the average price paid for jet fuel, excluding pipeline tariffs, tank fees, and state and federal taxes, rose 7.0 percent, from $1.97 per gallon in 2006 to $2.10 per gallon in 2007. Transport-related expenses, principally payments from mainline carriers to their regional airline partners, constituted the industry’s second-largest cost at 16.9 percent, up 4.3 percent to a total of $27.6 billion. Demand for regional airline capacity remained strong as mainline carriers continued to align capacity more closely with demand across their respective networks. Aircraft and traffic servicing, and maintenance were the industry’s third and fourth largest functional costs, respectively. Notably, general and administrative EXHIBIT 4 JetBlue Corporation: Consolidated Statements of Operations (in millions, except per share amounts)—continued Year Ended December 31, 2008 2007 2006 Depreciation and amortization 205 176 151 Aircraft rent 129 124 103 Sales and marketing 151 121 104 Maintenance materials and repairs 127 106 87 Other operating expenses 422 389 328 Total operating expenses 3,279 2,673 2,236 OPERATING INCOME 109 169 127 OTHER INCOME (EXPENSE) Interest expense (232) (225) (173) Capitalized interest 48 43 27 Interest income and other (1) 54 28 Total other income (expense) (185) (128) (118) INCOME (LOSS) BEFORE INCOME TAXES (76) 41 9 Income tax expense — 23 10 NET INCOME (LOSS) $ (76) $18 $ (1) EARNINGS (LOSS) PER COMMON SHARE: Basic $ (0.34) $ 0.10 $ — Diluted $ (0.34) $ 0.10 $ — Source: JetBlue, Form 10K (2008).

32 MERNOUSH BANTON expenses rose 8.1 percent. At U.S. passenger airlines, a 2.7 percent increase in average salary and wage was more than offset by an 11.9 percent reduction in average benefits and pension expenses and a 3.4 percent reduction in payroll taxes, pulling the average cost of a full-time equivalent (FTE) employee down 0.9 percent to $74,786. Salaries and wages com- posed 75 percent of total compensation. A major problem that airlines face is union labor contracts. Typically, labor contract negotiations in the airline industry take as long as 1.3 years. Once negotiation is finalized, then it goes through several months of federal mediation. In most cases, the duration of negotiation is to be attributed to which airline and unions are bargaining and not necessarily to the eco- nomic conditions. Unions such as the International Association of Machinists and the Aircraft Mechanics Fraternal Association worked hard to negotiate contracts on behalf of ramp workers and customer-service agents with United Airlines in order to avoid a U.S. bankruptcy ruling. Such a ruling could void the current labor contracts and allow United Airlines to impose new terms. The pitfall is that such unions can plan to strike if no agreements are reached. The Bureau of Transportation Statistics reports in Exhibit 5 that airline fuel cost and consumption has been increasing annually. The U.S. Federal Aviation Administration (FAA) says that an increase in fuel costs is not just from more flights or high oil prices but also due to the level of obesity in the United States. One study reported that in 2000, obese passengers cost airlines an extra $275 million in fuel costs by forcing aircraft to burn 350 more gallons of fuel due to extra weight. The fuel cost could increase further as passengers may have additional or heavier carryon or luggage weights. The additional fuel also is a problem for environment as it releases additional 3.5 million tons of carbon dioxide into the air. Congress placed a security reform after the terrorist attacks of September 11, 2001. In November 2001, the Congress decided to take responsibility for airline security. By November 2002, the Transportation Security Administration (TSA) was to assume opera- tional control of security at the nation’s 429 commercial airports. TSA also hired 429 federal security directors (FSDs) with a salary range of $105,000 to $150,000; most of them are former military and law-enforcement officers. TSA was responsible for installing over 1,600 explosives detection systems (EDS) machines and 4,500 explosives detection trace (ETS) at airports, with an estimated cost of $2 billion. In February 2009, President Obama outlined his administration’s 2010 budget plan, which proposes to increase passen- ger fees to $2.50 per-segment Aviation Passenger Security Fee for airport security and additional investment in subsidies for small community air service and further to fund next-generation air traffic control projects. Rising break-even load factor is also threatening airline finances. Since 2000, most passenger airlines have been suffering in a sharp increase in their break-even load factor, EXHIBIT 5 Airline Fuel Cost and Consumption (U.S. Carriers Scheduled): 2000–2009 Year Domestic International Total Consumption (million gallons) 2003 12,417.0 10,315.4 0.83 4,451.0 3,838.2 0.86 16,868.0 14,153.7 0.84 2004 13,380.0 15,141.2 1.13 4,764.7 5,690.7 1.19 18,144.7 20,831.9 1.15 2005 13,284.2 21,682.9 1.63 5,040.3 8,600.8 1.71 18,324.5 30,283.7 1.65 2006 13,019.4 25,105.4 1.93 5,220.3 10,535.2 2.02 18,239.7 35,640.6 1.95 2007 12,998.8 26,899.9 2.07 5,428.0 11,685.0 2.15 18,426.8 38,584.9 2.09 2008 12,451.3 37,158.2 2.98 5,508.9 17,773.5 3.23 17,960.2 54,931.7 3.06 Source: Bureau of Transportation Statistics. Cost (million dollars) Cost per Gallon (dollars) Consumption (million gallons) Cost (million dollars) Cost per Gallon (dollars) Consumption (million gallons) Cost (million dollars) Cost per Gallon (dollars)

CASE 3 • JETBLUE AIRWAYS CORPORATION — 2009 33 measured by the number of seats they have to sell to cover operating expenses. The break- even load factor is determined by passenger yield, which has been fallen due to recently bankrupt carriers and unit costs that have been rising due to many factors such as labor wages and fuel costs. Available seats per mile (ASM) is another indicator that measures the total number of seats in the active fleet, multiplied by the number of miles flown. An additional source of revenue for airlines has been fees they charge for cancelation, premium seats, flight changes, and so on. Airlines charge from $20 to $150 for curbside baggage checks depending on the distance, weight, and other restrictions. Other fees are for premium seat selection, food and beverage charges, processing fees for frequent-miles trav- eling, itinerary changes, booking fees via calling the airline directly instead of using their Web site, and many others. Per USA Today, higher fee revenue will help pay companies to offset the increase cost of jet fuel and other operating expenses. In August 2008, US Airways announced it expects $400 million to $500 million annually from its à la carte pric- ing strategy, which includes charging for a first checked bag, nonalcoholic beverages, and processing frequent-flier-award tickets (see Exhibit 6). Airlines also are compared against each other for mishandling of luggage. Carriers posted a mishandled baggage rate of 3.6 reports per 1,000 passengers in February 2009, an improvement over both February 2008’s rate of 6.4 and January 2009’s 5.2 rate. On-Time Statistics and Causes of Delays An important part of airline selection for a passenger is the reliability and on-time arrival of the carrier. The delay or cancelation of a flight could vary from bad weather conditions, unsafe environment, emergencies on the tarmac, airport congestion, to late arrival of the crew from another flight, maintenance, and so on. For example, Northwest reported the most number of flights—10—that had tarmac delays of more than three hours. US Airways flight 1165 from Philadelphia to Charlotte on February 3 was delayed on the tarmac for 4 hours 19 minutes before being canceled (Exhibit 7). Taxes and Fees Along with other expenses that airlines have, such as payroll, operations, and maintenance, there are also taxes and fees that may not be visible to a passenger. U.S. and foreign taxes have grown in number, amount, and scope since the advent of air transport. Exhibit 8 shows the breakdown of taxes and fees. EXHIBIT 6 Airline Bookings 2008 Book Ticket Preferred Ticket Airline by Phone ($) Seat ($) Change Fee ($) 1 AirTran 15 6–20 75 American 20 NA 150 Continental 15 NA 150 Delta 25 NA 100 Frontier 25 NA 150 JetBlue 15 10–30 100 Northwest 20 5–35 150 Southwest 0 15–20 0 Spirit 0 Up to several 80–90 hundred dollars United 25 14–149 150 2 US Airways 25 5–25 150 1 Ticket bought from a travel agent may have different fee. 2 Some routes may have a smaller fee. Source: USA Today, August 8, 2008.

36 MERNOUSH BANTON EXHIBIT 12 Airline Industry: Leaders in Total Revenue (April 2009) Company (Symbol) Total Revenue (ttm) Southwest Airlines [LUV] $ 11.0 B LAN Airlines SA ADS [LFL] $ 4.5 B JetBlue Airways Corporation [JBLU] $ 3.4 B AirTran Holdings, Inc. [AAI] $ 2.6 B Source: http://finance.yahoo.com. American Airlines, Inc., provides services to approximately 150 destinations through- out North America, the Caribbean, Latin America, Europe, and Asia. They also offer a range of freight and mail services to shippers. AMR Eagle Holding Corporation, another subsidiary of AMR, and under the name of American Eagle, owns and operates two regional airlines and provides connecting service from nine of American’s high traffic cities to smaller markets throughout the United States, Canada, Mexico, and the Caribbean. On May 2009, American Airlines announced that its traffic fell 4.7 percent during April. They flew 10.28 billion revenue passenger miles (revenue passenger miles equal one passenger flown 1 mile) during April, down from 10.79 billion a year ago. The company reported a profit of $504 million in 2006 versus a loss of $2,071 million in 2008. Southwest sells frequent flyer credits to those who participate in their Rapid Reward frequent flyer program. Southwest remains the nation’s leading low-fare carrier and continues to distinguish itself from other airlines by offering reliable and exemplary cus- tomer service. The company also differentiates itself by not charging the customers for their first two bags (size and weight limits apply), no additional fees for window or aisle seat, and continues offering complementary snacks, sodas, and coffee. What Is Next for JetBlue? Southwest in mid-2009 announced it would begin offering flights from Boston to Baltimore for $49.00. A week later, JetBlue began offering the same flight for $39.00. The rivalry between Southwest and JetBlue has reached an all-time high. Develop a clear strategic plan for JetBlue. References JetBlue Inc., Annual Report, 2008. http://www.jetblue.com http://www.airlines.org http://www.airliners.net http://finance.yahoo.com http://www.bts.gov http:///wsj.com http://www7.nationalacademies.org http://www.usatoday.com/money/industries/travel/2008-08-11-rising-airline-fees_N.htm

AirTran Airways, Inc. — 2009 Charles M. Byles Virginia Commonwealth University AAI www.airtran.com In July 2009, AirTran became the first airline to offer Wi-Fi on all flights—all 136 of its Boeing 737 and 717 jets. Based in Orlando, Florida, the low-fare carrier now lets all cus- tomers access the Web from a handheld device or laptop for $7.95 to $12.95 per flight, depending on the device and length of the flight. Rival firms are more slowly equipping their planes with wireless, including Virgin America, Delta, United Airlines, Air Canada, and American. The Airline Quality Report released April 6, 2009, had good news for AirTran. The airline was ranked second in overall quality following its number-one ranking the prior year, and had been ranked in the top three for the last five years. However, the airline industry overall is not doing well. Earlier, on March 24, Giovanni Bisignani, the director general and CEO of the International Air Transportation Association, summed up the industry situation as follows: The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. Our loss forecast for 2009 is now US$4.7 billion. Combined with an industry debt of US$170 billion, the pressure on the industry balance sheet is extreme. AirTran’s profit loss in 2008 was the airline’s only loss in the last nine years. The company’s first quarter of 2009 was grim with passenger unit revenue down 7 to 8.5 percent, total unit revenue down 2 to 3.5 percent, and nonfuel costs up 8 to 9.5 percent. But AirTran seemed upbeat in its view about the outlook for all of 2009. It expects profits in all quarters of 2009, assuming fuel remains at current prices. The company views its low-cost strategy as a strength in the current economic downturn. History The 1978 deregulation of the U.S. airline industry resulted in the entry of several low-cost airlines such as AirTran Airways (then known as ValuJet Airlines). Although it came close to failure in 1996, AirTran was able to recover, and today it is one of the most successful low-cost carriers. In 1992, the predecessor of AirTran, ValuJet Airlines, Inc., was founded by an executive group from the former Southern Airways, and pilots, mechanics, and flight attendants from the recently bankrupt Eastern Airlines. ValuJet’s first commercial flight was between Atlanta and Tampa on October 26, 1993. Although profitable, ValuJet was plagued with several safety incidents, the worst being the May 1996 crash of flight 592 in the Florida Everglades killing 110 people. ValuJet was held partially liable and grounded for four months by the Federal Aviation Administration. Although it resumed flying, the ValuJet name was so tarnished that the airline needed to reinvent itself. On July 10, 1997, ValuJet Inc. (the holding company for ValuJet Airlines) announced the acquisition of Airways Corporation Inc. (the holding company for AirTran Airways, Inc.) of Orlando, Florida. Later, ValuJet Airlines and AirTran Airways merged, the resulting airline retaining the name of AirTran Airways. Since then, AirTran has gained a reputation 4

38 CHARLES M. BYLES as a safe airline through its commitment to safety and the use of new state-of-the-art aircraft. In the last nine years (with the exception of 2008), AirTran has been profitable and recognized for a number of achievements, most recently the good service quality ratings mentioned earlier. Internal Factors AirTran Airways, Inc., is a subsidiary of AirTran Holdings Inc. and operates scheduled airline service in the United States (and one destination in Mexico—Cancun), primarily in short-haul markets in the eastern United States. Although the company has its headquarters in Orlando, its main hub of flight operations is Atlanta, where it is the second-largest carrier. As of March 2009, AirTran operates 86 Boeing 717-200 aircraft (117 seats) and 50 Boeing 737-700 aircraft (137 seats) offering 700 daily flights to 57 destinations in the United States (including San Juan, Puerto Rico) and Cancun, Mexico. The airline is classified by the U.S. Department of Transportation as a “major airline” because of its $1 billion or more annual revenue. Mission, Guiding Principles, and Values AirTran’s mission statement is: “Innovative people dedicated to delivering the best flying experience to smart travelers. Every day.” AirTran also has some guiding principles. The first and most important is safety, which appears as the first guiding principle (“Taking personal responsibility for the safety of each traveler and every crew member) and the first value (“A Total Commitment to Safety—in every decision and every action, every time, every day). The second important aspect of air travel addressed in these statements is service. The mission of AirTran is “Innovative people dedicated to delivering the best flying experience to smart travelers. Every day.” Other guiding principles are courtesy, pride, teamwork, and innovation. A full statement of the company’s mission, guiding principles, and values is given on its Web site. Management and Human Resources AirTran’s leadership team consists of Robert L. Fornaro, chairman, president, and CEO; Stephen Kolski, executive vice president, operations and corporate affairs; Steven A. Rossum, executive vice president of corporate development; as well as senior vice presi- dents, vice presidents, and other managers. The board of directors consists of 10 members including Fornaro. Robert L. Fornaro joined AirTran Airways in March 1999 as president and chief financial officer. He became chief operating officer and was elected to the board in 2001 and was appointed chief executive officer on November 1, 2007. Fornaro had prior airline expe- rience at Braniff International Airways, Trans World Airlines, Northwest Airlines, and most recently at US Airways, where he directed the airline’s route planning, pricing and revenue management, and overall corporate strategy. Fornaro’s total compensation for 2008 was $1.5 million (including a bonus of $375,000), a 69 percent drop from his 2007 total compen- sation, which was $4.9 million. During 2008, AirTran’s stock price fell nearly 36 percent. Exhibit 1 contains a list of AirTran’s leadership team as identified on the company’s Web site (which also gives a detailed biography of each executive). AirTran operates from a functional (centralized) organizational structure with no profit centers or divisions. Note there is only one female among the top 17 executives. AirTran employs over 9,000 crew members in a variety of job positions as follows: • Administrative/Professional/Technical (e.g., finance, accounting, information technology, human resources, and marketing) • Customer Service—Airport Operations (e.g., ticketing, baggage operations, managing arrival and departure gates) • Customer Service—Reservations/Call Center (e.g., providing flight information, making reservations) • Ground Operations (e.g., loading and unloading baggage, mail, and cargo, catering and cleaning aircraft) • Flight Operations—flight attendants, pilots, flight operations, management • Maintenance/Engineering (e.g., aircraft maintenance and repairs)

CASE 4 • AIRTRAN AIRWAYS, INC. — 2009 39 EXHIBIT 1 AirTran’s Leadership Team Robert Fornaro Chairman, President, and Chief Executive Officer Stephen Kolski Executive Vice President, Operations and Corporate Affairs Steven Rossum Executive Vice President of Corporate Development Loral Blinde Senior Vice President, Human Resources and Administration Klaus Goersch Senior Vice President, Operations Arne Haak Senior Vice President of Finance, Treasurer and Chief Financial Officer Kevin Healey Senior Vice President, Marketing and Planning Richard Magurno Senior Vice President, General Counsel and Secretary Jack Smith Senior Vice President, Customer Service Rocky Wiggins Senior Vice President and Chief Information Officer Tad Hutcheson Vice President, Marketing and Sales Mark Osterberg Vice President, Chief Accounting Officer Peggy Sauer-Clark Vice President, Inflight Service Jim Tabor Vice President, Operations Kirk Thornberg Vice President, Maintenance and Engineering Jean-Pierre Dagon Director, Corporate Safety Jeff Miller General Manager, Flight Operations Source: “AirTran Airways—Investor Relations.” Retrieved March 12, 2009, from http://investor.airtran.com/phoenix.zhtml?c=64267 &p=irol-IRHome. Aircraft Fleet and Maintenance According to its 2008 Annual Report, the average fleet age of AirTran’s 86 Boeing 717 and 50 Boeing 737 aircraft is 5.6 years (as of February 2009). How does this average fleet age compare to AirTran’s competitors? The most recent comparison data of fleet age is available from AirSafe.com and is based on 2007 data. That comparison placed AirTran at an average fleet age of 4.5 years, JetBlue at 3.2 years, Southwest at 9.8, and Delta at 13.8 years. Although not current, the comparison suggests that AirTran has a relatively young fleet compared to its direct competitors, which should contribute to lower operating and maintenance costs. Aircraft maintenance is completed by both AirTran and outside contractors at the cities served by the airline. AirTran’s maintenance, materials, and rent costs per Available Seat Mile (ASM) only increased 1.5 percent between 2007 and 2008 (see Exhibit 4, which appears later in this case). In its 2008 Annual Report, AirTran notes that its long-term air- craft maintenance costs will be within industry norms. Strategy AirTran’s strategy is one of low cost within a narrow geographic area (the eastern United States) with a target market of both business and leisure travelers. AirTran attributes its low-cost advantage to a company-wide emphasis on cost controls, an emphasis on higher labor productivity, and higher asset utilization. In addition, the use of only two aircraft types and a fairly young Boeing 737 fleet contributes to overall efficiencies. Many of AirTran’s competitors, however, have similar advantages, especially JetBlue and Southwest Airlines. JetBlue operates only two aircraft types (Southwest operates only one) and has a younger fleet; Southwest has a slightly older fleet. Both JetBlue and Southwest have cost advantages over AirTran (as discussed in the later section on operating perfor- mance). As such, AirTran does not appear to have a low-cost advantage when compared to JetBlue and Southwest. It does, however, have a low-cost advantage over Delta and most likely other legacy carriers with which it competes. The Atlanta-Hartsfield Airport is the major hub for AirTran (62 percent of system daily flights) and is where it has its major competition with Delta. Although AirTran’s leading strategy is focused low cost, it differentiates itself from other low-cost carriers

40 CHARLES M. BYLES in a number of ways. First, AirTran has business class seating on all aircraft and oper- ates a hub-and-spoke system (as opposed to point-to-point). Second, it offers free digi- tal XM Radio, a student travel program, and requires no roundtrip purchase or minimum overnight stays. Finally, AirTran has food for sale on flights. In early 2009, AirTran began offering Sky Bites on all flights, which are à la carte food items ranging in price from $1 to $4 (Kraft Foods snacks such as Oreo Cakesters or Chips Ahoy! cookies) or combination packages ranging from $4 to $6 (Kraft Foods snacks and drinks). One new dimension of AirTran’s business strategy is the increasing use of ancillary revenues as a means to generate profits. These are optional fees for advance seat assignments or call center services, in addition to fees for pets, alcoholic drinks, excess baggage, and fees related to the transportation of unaccompanied minors. In its 2008 Annual Report, AirTran noted significant increases in its ancillary revenues, especially fees for the second bag ($25) and a fee for the first checked bag ($15). According to a recent Wall Street Journal article (February 9, 2009), AirTran collected $77 million in ancillary revenues in 2005. That amount increased to $233 million in 2008 and is expected to grow to $300 million in 2009. A comparison of fees among AirTran and its main competitors Delta, JetBlue, and Southwest can be seen in Exhibit 3, which appears later in the chapter. The exhibit reveals that AirTran is more similar in its fees to the legacy carrier Delta than to its low-cost competitors. Of these competitors, Delta clearly charges the highest ancillary fees, followed by AirTran, JetBlue, and Southwest (which has the lowest fees charged). The rationale behind the use of ancillary fees is that they do not appear in most reservation systems when consumers are shopping for fares because airlines are not required to advertise fees that only some travelers will pay (such as fees for checked bags). If the fees were included in the fares, customers may make different choices in booking tickets and would shop around for airlines with lower fees. A recent Wall Street Journal article (March 10, 2009) says by the end of 2009, consumers will be able to comparison shop for airfares with the ancillary fees included in the price quote. Web sites such as TripAdvisor.com and Flying.fees.com already offer a way of calculating ancillary fees. Later in 2009, advanced technology will include fees in fare quotes from travel agents, online vendors, and airline Web sites. Two major airline booking companies, Sabre Holdings Corp. and Amadeus IT Group SA, are expected to have tools available to travel agents, Web sites, and airlines later in 2009 that will add fees into ticket prices. TripAdvisor (a company owned by Expedia) has added to its differentiation by providing its users with a “fee estimator” based on the services that the traveler is intending to use. As such, it provides the traveler with a more realistic price of the price offering. The somewhat similar Flyingfees.com does not provide ticket prices but instead has data on ancillary fees for 27 airlines includ- ing some international carriers. When the traveler enters the airline name, a list of all ancillary fees is presented. Service Quality The nationally recognized 2009 Airline Quality Rating (AQR) (for the year 2008) ranked AirTran second in overall quality ahead of its competitors Delta (number 12), JetBlue (number 3) and Southwest (number 6) (see Exhibit 2). The specific comments given in the report are as follows: AirTran Airways (FL) On-time performance remained the same in 2008 (76.8% in 2007 compared to 76.7% in 2008). AirTran’s denied boardings performance (0.15 per 10,000 passengers in 2007 compared to 0.34 in 2008) was worse. An increase in customer complaint rate to 1.10 complaints per 100,000 passengers in 2008 was higher than the 2007 rate of 0.83. The mishandled baggage rate of 4.06 per 1,000 passengers in 2007 was improved to 2.87 for 2008. This was the best mishandled baggage rate of all airlines rated for 2008. (http://aqr.aero/aqrreports/ 2009aqr.pdf)

CASE 4 • AIRTRAN AIRWAYS, INC. — 2009 41 EXHIBIT 3 Airline Bag Fees Airline First Checked Bag Second Checked Bag Additional Bags AirTran $15 $25 $50 per bag, after first two Delta $15 $25 $125 for 3rd (domestic), $200 (international), $200 (bags 4–10 US), $350 (bags 4–5 international) JetBlue Free (less than $20 $75 50 lbs.) Southwest Free Free $25 (bag 3) $50 (bags 4–9) Source: Based on “Airline Fees: A Snapshot of Carrier Policies,” Wall Street Journal, February 23, 2009; http://blogs.wsj.com/middleseat/2009/02/23/airline-fees-a-snapshot-of-carrier-policies/tab/print/. Operating Performance Operating costs per available seat mile (CASM) increased 15.5 percent from 2007 to 2008 (see Exhibit 4). Aircraft fuel had the greatest increase in CASM of 41.8 percent from 2007 to 2008. AirTran’s fuel price per gallon (including taxes and into-plane fees) increased 45.7 percent from $2.23 in 2007 to $3.25 in 2008. In 2008, however, AirTran realized a $15.7 million gain from fuel-related derivative financial instruments that reduced fuel expenses. Other costs that increased are distribution expenses (7.7 percent), landing fees and other expenses (7.4 percent), and depreciation and amortization costs (19.0 percent). The cost per available seat mile is operating costs divided by ASM and is frequently used to compare operating efficiencies of airlines. How does AirTran com- pare to its competitors? Yahoo! Finance identifies Delta, JetBlue, and Southwest as AirTran’s main competitors. The 2008 CASM data in Exhibit 5 shows AirTran (11.02¢) to be more efficient than Delta (18.72¢) but less efficient than JetBlue (9.87¢) and Southwest (10.24¢). AirTran’s operating expenses for 2008 rose by 15.5 percent (see Exhibit 4) compared to JetBlue’s increase of 20.6 percent and Southwest’s increase of 12.5 percent. The greatest increase in operating expenses for all three airlines was fuel (AirTran, 41.8 percent; JetBlue, 43.1 percent; and Southwest, 33.3 percent, respectively). EXHIBIT 2 Airline Quality Rating Ranks for 2007 and 2008 2008 Rank 2007 Rank AirTran 2 1 American 9 9 American Eagle 16 15 Atlantic Southeast 17 16 Continental 8 6 Delta 12 10 JetBlue 3 2 Northwest 4 4 Southwest 6 3 United 11 8 US Airways 10 11 Rankings for 2008 reflect the addition of Hawaiian to the airlines tracked. Source: Based on 2009 Airline Quality Rating, by Brent D. Bowen, St. Louis University, and Dean Headley, Wichita State University, April 2009, http://aqr.aero/aqrreports/2009aqr.pdf.

42 CHARLES M. BYLES EXHIBIT 4 AirTran’s Operating Costs per ASM* (CASM)** Year Ended December 31 2008 2007 Percent Change Aircraft fuel 5.02¢ 3.54¢ 41.8% Salaries, wages, and benefits 1.99 1.99 — Aircraft rent 1.02 1.07 (4.7) Maintenance, materials, and rent 0.68 0.67 1.5 Distribution 0.42 0.39 7.7 Landing fees and other rents 0.58 0.54 7.4 Aircraft insurance and security services 0.09 0.10 (10.0) Marketing and advertising 0.17 0.18 (5.6) Depreciation and amortization 0.25 0.21 19.0 Gain on sale of assets (0.10) (0.03) 233.3 Impairment of goodwill 0.04 — — Other operating 0.86 0.88 (2.3) Total CASM** 11.02¢ 9.54¢ 15.5% *ASM = Available Seat Mile and is a measure of an airline’s carrying capacity. ASM is the number of seats available multiplied by the number of miles flown. **CASM = Cost per Available Seat Mile and is operating costs divided by ASM. CASM is frequently used to compare the operating efficiency of airlines. Source: Reproduced from “Securities and Exchange Commission Form 10K for AirTran Holdings, Inc., 13 February 2009, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” p. 42; http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6412237-160691- 264193&type=sect&dcn=0000948846-09-000005. AirTran’s load factor (the percentage of seats occupied by revenue-paying passen- gers) increased slightly in 2008 to 79.6 percent (see Exhibit 5), but is well below the break- even load factor of 89.3 percent. In 2006 and 2007, the load factors were above the break-even point. Exhibit 5 shows that AirTran’s load factor is higher than Southwest’s but slightly below Delta and JetBlue. Finally, the average yield per RPM (the average amount one passenger pays to fly one mile, or a measure of the airline’s efficiency in generating revenues) is the highest for Delta (14.52¢) followed by Southwest (14.35¢) AirTran (12.73¢), and JetBlue (11.72¢). Financial Performance Exhibit 5 shows that AirTran had an operating loss of $72 million, a net income loss of $273.8 million for 2008, and an earnings loss per share of $2.51. In its 2008 Annual Report, AirTran attributed this loss to a deteriorated economic environment, increases in jet fuel prices (see Exhibits 4 and 5 for data on fuel cost increases), and tightened credit markets. Exhibit 8 shows a direct competitor comparison showing the strongest financial performance coming from Southwest Airlines. Of the direct competitors, Delta Air Lines had the worst financial performance with an $8.82 billion net income loss and a $19.064 EPS loss in 2008. External Factors Fuel Prices Aircraft fuel is the highest operating cost for AirTran. In Exhibit 4, fuel cost per Available Seat Mile (ASM) is 5.02¢ out of a total cost per available seat mile (CASM) of 11.02¢, or about 45.6 percent of its CASM. Of all its expenses, fuel prices have increased the most (41.8 percent). AirTran’s 2008 Annual Report notes that fuel price increases are a major risk for the airline because its main source of fuel (80 percent of supplies) is concentrated in the Gulf Coast. This fuel source concentration is attributed to AirTran’s concentration of

CASE 4 • AIRTRAN AIRWAYS, INC. — 2009 43 EXHIBIT 5 AirTran’s Selected Financial and Operating Data In 000s except per share data 2008 2007 2006 Operating revenues $2,552,478 $2,309,983 $1,892,083 Operating income (loss) $ (72,010) $ 144,160 $ 40,861 Net income (loss) $ (273,829) $ 52,683 $ 14,714 Earnings (Loss) per Common Share Basic $ (2.51) $ 0.58 $ 0.16 Diluted $ (2.51) $ 0.56 $ 0.16 Total assets at year-end $2,062,860 $2,058,466 $1,603,582 Long-term debt and capital lease obligations including current maturities at year-end $1,117,300 $1,057,889 $ 811,110 Operating Data Revenue passengers 24,619,120 23,780,058 20,051,219 Revenue passenger miles (RPM)* (000) 18,955,843 17,297,724 13,836,378 Available seat miles (ASM)** (000) 23,809,190 22,692,355 19,007,416 Passenger load factor 79.6% 76.2% 72.8% Break-even load factor 89.3% 73.2% 71.8% Average fare (excl. transportation taxes) $ 98.04 $ 92.47 $ 90.51 Average yield per RPM*** 12.73¢ 12.71¢ 13.12¢ Passenger revenue per ASM 10.14¢ 9.69¢ 9.55¢ Operating cost per ASM 11.02¢ 9.54¢ 9.74¢ Gallons of fuel consumed (000) 367,169 359,759 310,926 Average stage length (miles) 728 695 652 Average cost of fuel per gallon including taxes and fees 3.25 2.23 2.17 Average daily utilization (hours: minutes) 11:00 11:00 11:06 Number of operating aircraft in fleet at end of year 136 137 127 Comparison Data Delta passenger load factor 81.1% JetBlue passenger load factor 80.4% Southwest passenger load factor 71.2% Delta average yield per RPM 14.52¢ JetBlue average yield per RPM 11.72¢ Southwest average yield per RPM 14.35¢ Delta operating cost per ASM 18.72¢ JetBlue operating cost per ASM 9.87¢ Southwest operating cost per ASM 10.24¢ Notes: *The number of scheduled revenue miles flown by passengers. **The number of seats available for passengers multiplied by the number of miles the seats are flown. ***The average amount one passenger pays to fly one mile. operations in the southeast United States and Atlanta in particular. Any disruption of those sup- plies because of weather or other reasons could severely affect the operations of the company. Labor Costs In its 2008 Annual Report, AirTran notes that increased labor costs, union disputes, employee strikes, and other labor-related disruptions are risks facing the airline and the industry because labor costs are a significant percentage of total operating costs. Exhibit 4

CASE 4 • AIRTRAN AIRWAYS, INC. — 2009 45 EXHIBIT 8 Direct Competitor Comparison (2008) AirTran Delta JetBlue Southwest Industry Market Capitalization 603.43M 4.64B 1.20B 5.08B 608.35M Employees 7,600 84,306 8,902 35,499 5.4K Qtr. Rev. Growth 1.00% 43.30% 9.70% 9.70% 13.10% Revenue 2.55B 22.70B 3.39B 11.02B 1.48B Gross Margin 13.29% 13.33% 26.18% 22.07% 22.07% EBITDA -21.86M 1.28B 304.00M 1.05B 90.07B Oper. Margins -3.40% 0.50% 2.77% 4.07% 7.45% Net Income -273.83M -8.82B -76.00M 178.00M N/A EPS -2.509 -19.064 -0.336 0.241 N/A P/E N/A N/A N/A 28.46 8.44 Source: Reproduced from Yahoo! Finance, April 5, 2009, http://finance.yahoo.com/q/co?s=AAI. EXHIBIT 7 Income Statement (all numbers in thousands) Period Ending 31 Dec 08 31 Dec 07 31 Dec 06 Total Revenue $2,552,478 $2,309,983 $1,892,083 Cost of Revenue 2,234,935 1,796,048 1,572,270 Gross Profit 317,543 513,935 319,813 Operating Expenses — — — Research and Development — — — Selling and General and Admin 345,770 327,524 248,874 Non Recurring (14,835) — — Others 58,618 48,485 30,078 Total Operating Expenses — — — Operating Income or Loss (72,010) 137,926 40,861 Income from Continuing Ops Total Other Income/Expenses Net (147,157) 15,730 21,714 Earnings Before Income and Taxes (219,167) 153,656 62,575 Interest Expense 72,725 66,304 37,918 Income Before Tax (291,892) 87,352 24,657 Income Tax Expense (18,063) 34,669 9,943 Minority Interest — — — Net Income from Continuing Ops (273,829) 52,683 14,714 Non-recurring Events — — — Discontinued Operations — — — Extraordinary Items — — — Effect of Accounting Changes — — — Other Items — — — Net Income (273,829) 52,683 14,714 Preferred Stock and Other Adjustments — — — Net Inc Applic to Common Shares ($ 273,829) $ 52,683 $ 14,714 Source: Reproduced from “Income Statement for AirTran Holdings,” Yahoo! Finance, http://finance.yahoo.com/q/is?s=AAI&annual/.

46 CHARLES M. BYLES EXHIBIT 9 Airline Domestic Market Share February 2008– January 2009 Airline Share American 14.3% Southwest 13.0% United 11.0% Delta 10.8% US Airways 8.3% Continental 7.6% Northwest 6.4% JetBlue 4.3% AirTran 3.3% Alaska 2.9% Other 18.1% Market share is based on Revenue Passenger Miles for February 2008 to January 2009. Revenue Passenger Miles (RPMs) is a measure of passenger traffic calculated by multiplying the total number of revenue-paying passengers aboard by the distance traveled in miles. Source: Adapted from Research and Innovative Technology Administration (RITA), Bureau of Transportation Statistics, April 29, 2009, http://www.transtats.bts.gov/. shows that labor costs are AirTran’s second-highest cost category. Much of the workforce is represented by labor unions with different unions for flight attendants, pilots, dispatch- ers, and maintenance technicians and inspectors. Each group is covered by collective bargaining agreements that provide for annual pay rate increases. AirTran has reduced its labor costs in 2008 through voluntary leaves of absence and early exits. Exhibit 4 indicates that the labor costs (salaries, wages, and benefits) per ASM were the same for 2007 and 2008. AirTran stated in its 2008 Annual Report that it may reduce workforce levels and/or seek new wage concessions in response to significant fuel price increases. A recent article in the Associated Press (April 10, 2009) noted that AirTran pilots recently voted to become part of the Air Line Pilots Association (ALPA), the largest pilot union in the world. The Airline Industry and Competition Several of which compete using the low-cost model (such as AirTran and JetBlue). The intensity of competition and high fuel prices contributed to many airlines declaring Chapter 11 bankruptcy, including many legacy carriers such as Delta, Continental, Northwest, United, and US Airways. Within the last year, at least six airlines declared bankruptcy (and some have ceased operations): Aloha Airlines, ATA Airlines, Skybus Airlines, Frontier Airlines, Eos Airlines, and Sun Country Airlines. Of these six, only Aloha Airlines and Eos Airlines are not low-cost carriers. As such, within the industry, AirTran, JetBlue, and Southwest would be considered examples of airlines that have successfully implemented the low-cost model of competition. More recently, several airlines have cut back on flights in response to the economic recession. For example, Delta announced plans to cut overall flight capacity by 8 percent in 2009. AirTran in its 2008 Annual Report stated that it reduced capacity in the last four months of 2008 and plans additional capacity cuts in 2009. AirTran, Delta, JetBlue, and Southwest all have the U.S. Department of Transportation “major airline” classification because of their $1.00 billion or greater revenues (Exhibit 8). Exhibit 9 shows that in this competitor group, Southwest has the highest domestic market share (13.0 percent), followed by Delta (10.8 percent), JetBlue (4.3 percent), and AirTran (3.3 percent). Exhibit 8 shows that for 2008, Delta has the most employees (84,306) and highest revenues ($22.7 billion) compared to AirTran, which has the fewest employees (7,600) and smallest revenues ($2.55 billion). The most profitable competitor was Southwest

CASE 4 • AIRTRAN AIRWAYS, INC. — 2009 47 EXHIBIT 10 AirTran’s Top Domestic Markets* (February 2008–January 2009) Market Volume Share** Atlanta, GA 8,178,000 20.98% Orlando, FL 2,030,260 12.85% Baltimore, MD 1,422,490 14.35% Tampa, FL 749,370 8.75% Boston, MA 641,050 5.87% Other 11,576,050 2.07% *Based on the total enplaned passengers at all airports in a city. **The table shows the airline’s share in each of the markets. Source: Reproduced from RITA BTS Airline Data, 2009 Carrier Fact Sheets, April 29, 2009; http://www.transtats.bts.gov/printcarriers.asp?Carrier=FL. with $178 million in net income, and the least profitable was Delta with a net income loss of $8.82 billion. Dependence of AirTran on the Atlanta market brings it into intense competition with the much bigger Delta Air Lines. When looking at key markets for AirTran and its main competitors (see Exhibits 10 through 13), most market overlap occurs between AirTran and Delta in the Atlanta market. Both airlines have most of their total enplaned passengers in this city, and for both it represents the market for which each airline has its largest mar- ket share, although Delta has a significantly larger share (53.22 percent) than AirTran (20.98 percent). AirTran does, however, have a cost advantage over Delta as shown earlier and has not sustained as large financial losses as Delta. The Future The airline industry continues to be a turbulent one in which some airlines are able to operate profitably while others are near bankruptcy. Prepare a strategic plan for AirTran considering challenges such as the following: 1. How should AirTran improve its low-cost position given the cost advantages of JetBlue and Southwest Airlines? 2. Should AirTran continue to focus on the eastern United States (and the Atlanta market in particular) or should it expand to other regions? If so, which regions provide the most opportunities? EXHIBIT 11 Delta’s Top Domestic Markets* (February 2008–January 2009) Market Volume Share** Atlanta, GA 20,750,000 53.22% New York, NY 3,920,000 16.81% Salt Lake City, UT 3,810,000 40.03% Cincinnati, OH 2,030,000 33.85% Los Angeles, CA 1,980,000 9.73% Other 26,680,000 4.89% *Based on the total enplaned passengers at all airports in a city. **The table shows the airline’s share in each of the markets. Source: Reproduced from RITA BTS Airline Data, 2009 Carrier Fact Sheets, April 29, 2009; http://www.transtats.bts.gov/printcarriers.asp?Carrier=DL.

48 CHARLES M. BYLES EXHIBIT 12 JetBlue’s Top Domestic Markets* (February 2008–January 2009) Market Volume Share** New York, NY 5,800,000 24.86% Boston, MA 1,820,000 16.68% Orlando, FL 1,570,000 9.95% Fort Lauderdale, FL 1,380,000 14.78% Long Beach, CA 1,100,000 77.47% Other 8,680,000 1.49% *Based on the total enplaned passengers at all airports in a city. **The table shows the airline’s share in each of the markets. Source: Reproduced from RITA BTS Airline Data, 2009 Carrier Fact Sheets, April 29, 2009; http://www.transtats.bts.gov/printcarriers.asp?Carrier=B6. 3. How sustainable is the practice of having separate ancillary fees as a means of gener- ating additional revenues? Should AirTran make any changes? 4. What are the main external opportunities and threats facing AirTran? List these in order of priority. 5. How important are fuel prices (compared to other costs) as a determinant of profitability? Is AirTran taking appropriate action to manage these costs now and in the future? References “A unique airline philosophy—one that works,” AirTran Web site, March 12, 2009, http://www.airtranairways.com/about-us/corporate_info.aspx. “Airline Classification,” U.S. Department of Transportation, March 22, 2009, http://ostpxweb.dot.gov/aviation/airlineclassifications.htm. “Airlines Look to Fees for a Financial Edge,” Wall Street Journal, February 9, 2009, http://blogs.wsj.com/middleseat/2009/02/09/airlines-charging-more-baggage-fees- refreshment/. “AirTran,” Raymond James Institutional Investors Conference, March 2009, http://www.sec.gov/Archives/edgar/data/948846/000094884609000006/ex99-1.htm. “AirTran Airways History,” AirTran Web site, March 21, 2009, http://www. airtranairways.com/about-us/history.aspx?print=true. EXHIBIT 13 Southwest’s Top Domestic Markets* (February 2008–January 2009) Market Volume Share** Las Vegas, NV 7,600,000 39.20% Chicago, IL 6,690,000 18.73% Phoenix, AZ 5,640,000 30.39% Baltimore, MD 5,280,000 53.28% Dallas, TX 3,800,000 95.39% Other 72,240,000 12.98% *Based on the total enplaned passengers at all airports in a city. **The table shows the airline’s share in each of the markets. Source: Reproduced from RITA BTS Airline Data, 2009 Carrier Fact Sheets, April 29, 2009; http://www.transtats.bts.gov/printcarriers.asp?Carrier=WN.

“AirTran Airways Launches Buy-On-Board Food with Sky Bites (SM),” AirTran Press Release, February 11, 2009, http://pressroom.airtran.com/phoenix.zhtml? c=201565&p=irol-newsArticle_print&ID=1255586&highlight. AirTran Airways 2008 Annual Report, http://investor.airtran.com/ phoenix.zhtml?c=64267&p=irol-reportsAnnual. “AirTran CEO received $1.5M in 2008 compensation,” Yahoo! Finance (AP), April 3, 2009, http://finance.yahoo.com/news/AirTran-CEO-received-15M-in-apf- 14843920.html. “AirTran pilots vote to join largest union,” Yahoo! Finance (AP), April 10, 2009, http://finance.yahoo.com/news/AirTran-pilots-vote-to-join-apf-14902119.html?.v=1. “Average Fleet Age for Selected Carriers,” AirSafe.com, April 26, 2009, http://www. airsafe.com/events/airlines/fleetage.htm. “Awards and recognition,” AirTran Web site, April 11, 2009, http://www.airtranairways. com/about-us/awards.aspx Bowen, Brent D., and Dean E. Headley. 2009 Airline Quality Rating, April 2009, http://www.aqr.aero/aqrreports/2009aqr.pdf. Gardner, Amy, and Spencer S. Hsu. “Airline Apologizes for Booting 9 Muslims,” Washington Post, January 3, 2009, http://www.washingtonpost.com/wp-dyn/ content/story/2009/01/02/ST2009010201697.html. “Grim Prospects—Deep Recession, Bigger Losses,” IATA Press Releases, March 24, 2009, http://www.iata.org/pressroom/pr/2009-03-24-01.htm. McCartney, Scott. “Airfare Quotes That Lay Bare Hidden Fees,” Wall Street Journal, March 10, 2009, http://online.wsj.com/article/SB123664662318478683.html. McCartney, Scott. “The Next Airline Fee: Buying Tickets,” Wall Street Journal, March 3, 2008, http://online.wsj.com/article/SB123604492886515417.html. Mission statement,” AirTran Web site, March 12, 2009, http://www.airtran.com/Jobs/ mission_statement.aspx/ Prada, Paulo, and Susan Carey. “Airlines Plan Further Reductions in Flights, Staff,” Wall Street Journal, http://online.wsj.com/article/SB123672652139988491.html. CASE 4 • AIRTRAN AIRWAYS, INC. — 2009 49

5 Family Dollar Stores, Inc. — 2009 Joseph W. Leonard Miami University FDO www.familydollar.com As the economy limps along in mid-2009 and pushes more households into lower incomes, Family Dollar Store’s CEO Howard R. Levine is overseeing continued expan- sion and growth. His father, Leon Levine, founded the company when he was in his early 20s in 1959, and the elder Levine now sports the title chairman emeritus. Family Dollar offers customers a variety of high-quality, good-value merchandise. The company caters to the low- to low-middle income group (defined as households under $30,000 or $35,000 of annual income) with offerings of competitively priced merchandise in conve- nient neighborhood stores. Family Dollar Stores has 31 percent of its items priced at a dollar or less. For 2008, the Dow Jones Average was down 34 percent, the worst year since 1931. Of the S&P 500 stocks index, only 24 stocks were up in 2008. Family Dollar Stores led the way with an increase of 35 percent. Will this solid performance continue? History In 1959, when Family Dollar opened its first store in Charlotte, North Carolina, Leon Levine offered customers a varied of good-valued merchandise for under $2. The concept was simple, “The customers are the boss, and you need to keep them happy.” Family Dollar went public in 1970, achieved annual sales of $100 million with just under 300 stores by 1977, opened its 1,500th store in 1989 and its 2,500th store in 1996, and grew to nearly 5,000 stores and sales approaching $5 billion when he retired as chairman in 2003. In his high school and college years, his son Howard Levine worked for Family Dollar. Howard was named CEO in 1998, and when his father retired in January 2003, he became chairman and CEO. At age 49, he continues today as chairman and CEO. Today’s Facts and Financials Family Dollar operates more than 6,600 stores in 44 states plus the District of Columbia. The company does have a small role in international business because about 51 percent of its merchandise is procured from international manufacturers often through agents but also from direct importing from the manufacturers. No single supplier accounts for more than 8 percent of the merchandise purchases. Family Dollar Stores is ranked number 359 on the Fortune 500. Family Dollar continues its strategy of geographic expansion and new store openings. Headquartered near Charlotte, North Carolina, Family Dollar employs 44,000 people, about 25,000 full time and the others as part-timers. Family Dollar’s revenues of $6.984 billion in FY2008—the 12 months ended August 2008—showed an increase of 2.2 percent over the year ending August 2007. As indicated in Exhibit 1, the operating profits during FY2008 were $365 million, a decrease of 6 percent from FY2007. The net profit in FY2008 was $233 million, a 4 percent decrease from FY2007.

CASE 5 • FAMILY DOLLAR STORES, INC. — 2009 51 Divisions of the Company For FY2008, Family Dollar Stores broke revenues into four broad product categories: consumables, home products, apparel and accessories, and seasonal and electronics. Making comparisons from FY2007 to FY2008, three of the broad product categories had increased sales, but apparel and accessories decreased. Consumables increased by 6.1 percent and represent 61.1 percent of FY2008’s total revenues of $6.984 billion. Home products increased by 3.2 percent and make up 14.3 percent of revenues. Apparel and accessories decreased by 6.9 percent and make up 13.1 percent of revenues. Seasonal and electronics increased by 0.8 percent and make up 11.5 percent of revenues. Exhibits 1 and 2 reveal Family Dollar’s recent balance sheets. Since May 1998, the company has provided quarterly cash dividends to its shareholders. The amount per share of these dividends has increased each year (from 4.5 cents per share on July 15, 1998, to 13.5 cents per share on July 15, 2009). This latest dividend yield is about a 1.7 percent return per year, well ahead of the industry average. Family Dollar continues to seek good locations and contractors to build and maintain stores. The company is involved in real estate management, construction, and store main- tenance. Family Dollar has about 15 to 20 percent of its stores up for lease renewal each year. On February 28, 2009, Howard Levine said that the company would definitely try to “leverage the current market to negotiate better rents.” In 2008, Family Dollar opened 205 new stores, closed 64 stores, relocated 17 stores within the same shopping area or market area, and expanded 80 stores. In 2007, the com- pany opened 301 new stores and closed 43 stores. EXHIBIT 1 Income Statements for Family Dollar Income Statements for Years Ending August 2008, 2007, 2006 (in millions, except for EPS & Dividends) Aug 08 Aug 07 Aug 06 Revenue $6,983.6 6,834.3 6,394.8 Cost of Goods Sold 4,637.8 4,512.2 4,276.5 Gross Profit 2,345.8 2,322.1 2,118.3 Gross Profit Margin 33.6% 34.0% 33.1% SG&A Expense 1,980.5 1,933.4 1,756.0 Depreciation & Amortization 149.6 144.1 134.6 Operating Income 376.3 399.3 324.2 Operating Margin 5.4% 5.8% 5.1% Nonoperating Income 0.0 0.0 0.0 Nonoperating Expenses (3.5) – – Income Before Taxes 361.8 381.9 311.1 Income Taxes 128.7 139.0 116.0 Net Income After Taxes 233.1 242.9 195.1 Continuing Operations 233.1 242.9 195.1 Discontinued Operations – – – Total Operations 233.1 242.9 195.1 Total Net Income $ 233.1 242.9 195.1 Net Profit Margin 3.3% 3.6% 3.1% Diluted EPS from Total Net Income ($) 1.66 1.62 1.26 Dividends per Share 0.49 0.45 0.41 Source: www.familydollar.com

52 JOSEPH W. LEONARD Competition and Industry The small-box discount retailers industry reported strong performance in the last half of 2008 and the first half of 2009. The three largest small-box discount retailers are Dollar General, Family Dollar, and Dollar Tree. These three dollar stores realize that they are different from the giant Wal-Mart in many ways, including offering lower prices. All three of these small-box companies have to deal with many rivals, including Fred’s, 99 Cents Only, Wal-Mart, Big Lots, CVS, J.C. Penney, Kmart, Meijer, Sears, Target, Walgreen, Costco, Kroger, and many other small regional chains and one-of-a-kind retailers. Exhibit 3 compares the three largest small-box discount retailers. Dollar General Headquartered in Tennessee, Dollar General’s stores are typically located in small towns, but big-city stores (usually situated in lower-income neighborhoods) account for 30 percent of its total. About 35 percent of its products are priced at $1 or less. Dollar General was taken private by affiliates of KKR and Goldman Sachs in 2007. Dollar Tree Headquartered in Virginia, Dollar Tree stresses the $1 price points and offers a range of merchandise including housewares, seasonal goods, food, toys, personal accessories, health EXHIBIT 2 Family Dollar’s Balance Sheets for Years Ending August 2008, 2007, 2006 (in millions) Assets Aug 08 Aug 07 Aug 06 Current Assets Cash $ 158.5 87.2 79.7 Net Receivables 7.0 44.4 2.4 Inventories 1,032.7 1,065.9 1,037.9 Other Current Assets 145.9 339.8 298.9 Total Current Assets 1,344.1 1,537.3 1,418.8 Net Fixed Assets 1,071.9 1,060.7 1,077.6 Other Noncurrent Assets 245.8 26.2 26.6 Total Assets 2,661.8 2,624.2 2,523.0 Liabilities and Shareholders’ Equity Aug 08 Aug 07 Aug 06 Current Liabilities Accounts Payable $ 570.7 644.1 556.5 Short-Term Debt – – – Other Current Liabilities 498.3 486.2 429.6 Total Current Liabilities 1,069.0 1,130.3 986.1 Long-Term Debt 250.0 250.0 250.0 Other Noncurrent Liabilities 88.7 69.2 78.5 Total Liabilities 1,407.7 1,449.5 1,314.6 Shareholders’ Equity Preferred Stock Equity – 0.0 0.0 Common Stock Equity 1,254.1 1,174.6 1,208.4 Total Equity 1,254.1 1,174.6 1,208.4 Shares Outstanding (mil.) 140.2 140.2 140.2 Source: www.familydollar.com

EXHIBIT 3 The Three Largest Small-Box Discount Retailers Dollar General Family Dollar Dollar Tree 2008 Annual Sales $9,454 Million $6,984 Million $4,645 Million Sales Growth 2.9% 2.2% 9.5% 2008 Net Income ($13 Million) $233 Million $230 Million Long-Term Debt $4,130 Million $250 Million $268 Million # of Stores 8,400 6,600 3,600 Store Size (sq ft) 7,000 7,500 to 9,000 5,000 to 10,000 # of States 35 44 48 # of Employees 71,500 44,000 46,000 # of Distribution Centers 9 9 9 Year Started 1939 1959 1953 Fortune 500 Rank 359 499 Source: Company Form 10K Reports. and beauty care products, party goods, greeting cards, and books, mostly for $1 even. Dollar Tree operates stores called Dollar Tree, Dollar Bill, Dollar Express, Only 1.00, and Only One. About 40 percent of the company’s merchandise is imported, mostly from China. Dollar Tree does offer online sales. Dollar Tree Inc. recently sneaked into the latest Fortune 500, now at number 499. Mission Family Dollar’s mission statement is provided in Exhibit 4. Operations Even compared to Wal-Mart, Family Dollar is considered to be a leader in keeping costs low. The company continues to review and improve each step in the supply chain, from vendor selection to stocking store shelves. Family Dollar has undertaken initiatives to improve supply chain effectiveness. Nearly all Family Dollar stores range in size from 7,500 to 9,000 square feet and are operated in leased facilities. The company pursues this strategy of relatively small stores as a way to open new stores in rural areas, small towns, and large urban neighbor- hoods. Whenever feasible, Family Dollar likes to have a parking lot located immediately near the store’s entrance, and nearly all stores have only one entrance. The size of the stores (about 1/22 the square footage of a typical Wal-Mart Supercenter) has appeal to customers who like the convenience and short walk, which cannot be matched by some of the large store chains. Over the past few years, Family Dollar has improved its logistics network and is moving toward a world-class distribution system. CEO Howard Levine said. “It’s a Wal-Mart formula. We have to deliver goods efficiently to the stores, and we’ve been able to do that.” EXHIBIT 4 Mission Statement and CEO’s Comment Family Dollar’s mission states the three most important relationships critical to making our business successful: our customers, our associates, and our investors. For our customers, we offer a compelling place to shop by providing convenience and low prices; For our associates, we offer a compelling place to work by providing exceptional oppor- tunities and rewards for achievement; For our investors, we offer a compelling place to invest by providing outstanding returns. CASE 5 • FAMILY DOLLAR STORES, INC. — 2009 53

EXHIBIT 5 Family Dollar, by State and Number of Stores—continued # of Stores # of Stores per 100,000 Population Minnesota 71 1.36 Iowa 32 1.07 Missouri 96 1.62 North Dakota 11 1.71 South Dakota 22 2.73 Nebraska 31 1.74 Kansas 35 1.25 SOUTHWEST & MOUNTAIN Oklahoma 128 3.51 Texas 817 3.36 Wyoming 20 3.75 Colorado 104 2.14 New Mexico 90 4.54 Arizona 130 2.00 Utah 60 2.19 Idaho 31 2.03 Nevada 24 0.92 Aggregate Information 44 + DC 6,572 2.61 one store per 38,380 population There are no stores in Montana, Washington, Oregon, California, Alaska, and Hawaii. Source: Family Dollar Stores, Annual Report (2008); www.infoplease.com/ipa/A004986.html. Family Dollar’s transportation technologies include a Web-based Transportation Management System (TMS) that allows vendors to release purchase orders electronically. Family Dollar Trucking, Inc. (FDTI) provides a private fleet of trucks that have received safety rewards. More recently, Family Dollar is beginning to use some of these same sys- tems in international transportation. Family Dollar is now using POS (point of service) systems that provide access to both centralized and decentralized store applications, enabling higher employee productivity, improved customer service, and some new revenue streams. Family Dollar is working with Toshiba TEC American on this. According to Howard Levine, the company is “accelerating the completion of the POS rollout by January or February of 2010, which we’re well on track of doing.” In these endeavors, Family Dollar continues to partner with Toshiba TEC America and Microsoft. Family Dollar recently hired Sylvania Lighting Services (SLS) to install new lighting to save energy, reduce maintenance, drive down operation costs, and improve store light (brightness) levels in all its stores. “The new lighting program is a huge win for Family Dollar, which yields a reduction in overall lighting maintenance costs, budget future light- ing expenses over four years at fixed costs and allows them to achieve tremendous energy savings while integrating environmental sustainability,” said Scott Agnew, SLS executive account manager. The lighting upgrades also gave Family Dollar some tax breaks. Marketing While other retailers have courted a more upscale clientele by adding designer clothes and fine jewelry, Family Dollar has stayed true to its roots. A typical shopper earns just $35,000 per year. According to Howard Levine, “We want our customers to know they can afford anything in our store.” CASE 5 • FAMILY DOLLAR STORES, INC. — 2009 55

56 JOSEPH W. LEONARD Beyond the four broad product categories, Family Dollar’s merchandise assortment are divided into 11 product classifications that include apparel, food, cleaning and paper products, home decor, beauty and health aids, toys, pet products, automotive products, domestics, seasonal goods, and electronics. Family Dollar’s merchandise includes national brands, Family Dollar private labels, and unbranded items that sell for less than $10. Whereas some other discount retailers focus on factory closeouts, these make up only about 2 percent of Family Dollar’s sales. The com- pany carries many name-brand items found in supermarkets, such as Tide, Colgate, and Clorox. Some analysts estimate that Family Dollar’s prices are 20 to 40 percent cheaper than those found in traditional supermarkets and are roughly on par with big-box discoun- ters such as Wal-Mart and Target or lower. Family Dollar emphasizes convenience for its customers. It sees the typical scenario as based on easy-to-shop neighborhood locations that allow “Mom to get what she needs, close to home to take care of her family.” In 2008, the company introduced a new logo to facilitate achieving this emphasis. Along with the new logo, Family Dollar has developed a new tag line: “My family. My family dollar.” These recent updates assist the company toward conveying its commitment to providing value and convenience with a family focus. Family Dollar does not make use of Web site sales. The company has lagged behind many other retailers in accepting food stamps and other payment forms. Family Dollar and its dollar-store direct competitors still face an image problem of a perception of an old, cluttered, and dirty store. One customer complained that one week the store might carry Green Giant canned corn and then Libby’s the next. From the management of Family Dollar’s perspective, this would be termed “opportunistic buying.” By late 2009, Family Dollar plans to introduce 250 new edible items, including Triscuits and Double Stuf Oreos as a way to attract more cus- tomers. Some would categorize the company’s increased emphasis on food and slightly increased plan to put more stores in urban areas as a differentiation strategy. Human Resources About 15 percent of Family Dollar’s top 41 executives are women. Family Dollars’ corporate board of directors has 10 members ranging in age from 47 to 78 (with a mean and median age in the mid-60s), which includes three women but only one insider (Howard R. Levine) with the other nine being nonemployees of the company. In July 2006, Family Dollar lost a federal court case in Tuscaloosa, Alabama, that amounted to $35.6 million. This decision was upheld on December 16, 2008, by the U.S. 11th Circuit Court. The case involved store managers not being paid for overtime. The class action judgment was on behalf of 1,424 managers. The affected managers were awarded back pay. The managers had argued that Family Dollar owed them overtime wages under the Fair Labor Standards Act (FLSA). Family Dollar’s corporate management contended that the managers held executive authority and were thus exempt from the FLSA requirements. Partly because the store managers had no power to hire and fire staff, they reportedly often worked 60 to 70 hours per week doing a variety of nonmanagerial work activities such as operating cash registers and manual labor such as stocking shelves, unloading trucks, and cleaning floors. Conclusions and the Future Family Dollar believes it can prosper in a limping U.S. economy and perform even better in a strong economy. But with issues such as litigation, competition, increasing labor costs, and efficiency issues in supply chain management and elsewhere, Family Dollar faces challenges as it continues to grow toward 10,000 stores. In April 2009 as the economic recession continued, Family Dollar’s Public Relations Manager Josh Braverman said, “Thrift is in. Saving money is in. And it still will be even after the economy recovers.” Although penny-pinching moms are important to Family Dollar, the future is not a sure thing. Can Family Dollar perform well both in good economic times and in bad economic times? To many business experts, it seems unreason- able to be able to have it both ways. As indicated in Exhibits 6 and 7, Family Dollar’s third-quarter (ending May 30, 2009) results were excellent. Compared to one year earlier (May 31, 2008), net sales

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