Question:

What appears to be the single greatest risk in the Decision to Build DIA

Answer

The single greatest risk in taking the decision to build Denver International Airport is that the construction at DIA began without DIA Authorities being able to sign even a single contract with the two airlines, i.e United Airlines and Continental Airlines, which were the major stakeholders. These two Airlines comprised 80% of all flights in and out of Denver’s Stapleton Airport and these two were estimated to be the largest revenue sources for the new Denver International Airport.

It was imperative to take the two Airlines on board in the design phase of the airport. Non involvement of these two Airlines could create havoc in the very rationale for constructing the DIA.

Yet even with this great amount of risk, the construction of the airport was underway, without a signed agreement from Continental and United.

The above risk was further aggravated by the fact that Continental, in December of 1991, had filed for bankruptcy protection and thus authorities feared that Continental Airlines would drastically reduce the size of its hub at the Denver International Airport. Others feared that it might pull out completely. Any such action on part of continental would have thrown the estimated of DIA haywire and would jeopardize the very rationale for the construction of the new Airport.

All this reduced the bargaining power of DIA, as later on, when DIA attempted to take the two Airlines on Board, they imposed various conditions along with modifications to the existing designs, increasing both the scope and cost of the project significantly. However the airlines had still not signed any firm agreement and this kept the bond interest rates high, which implied that project was losing on money, which could have been avoided. If the two later on decided not to operate at DIA they could not be forced to do so as they were not legally bound by any contracts. At the same time a few people believed that both the Airlines were keeping DIA hostage in order to attempt an agreement to their demands.

The predicament accelerated when United wanted a Destination Coded Vehicle (DCV). The complexity of the system could not be realized especially regarding the software and everyone was at a loss about how to go ahead. This could add significant chunks to the already rising cost of the project.

It was the single greatest risk as we see that the other risks percolated down from this risk. Risks such as non functioning baggage handling system, conflicts of interest between maintenance and aesthetics of the Airport, risk of degrading of the credit rating of DIA were all direct or indirect consequences of the above risk. By March 1991, the credit rating agency ‘Standards and Poors Corporation’ had lowered the rating of DIA bonds from BBB to BBB- which could prove very costly for DIA.

Problem

The opening of the Denver Airporthad to be delayed four times due to problems in the baggage handling system. The enormous increase in complexity of the baggage handling system is the root of the problem. The total delay was 16 months. The total costs were $4.5 billion.

Statement of Objectives

To improve ground efficiency, to reduce close-out times for hub operations and to minimize time – consuming manual sorting and handling

SWOT Analysis

Strengths

The New Denver Airport represents a model airport of the future. It was also planned to be the second largest hub, having huge local commitment and it was financed by a lot of different sources.

The baggage handling system is unique being integrated and automated. The BAE automated systems had enjoyed the reputation of being among the best and on the strength of its good work has been responsible for most of the major baggage systems recently installed in the United States.

Weaknesses

The baggage handling system has poor scheduling, new and untested technology, complexity of the system and changing requirements, highly visible mechanical problems, does not deliver productivity and efficiency, lower cost-effectiveness of the system.

The Denver Airport did not open as scheduled; there were enormous costs on the part of the owners due to delays and high costs of maintaining the airport.

On the management system, there were also a number of weaknesses: resignation of the DIA project head; death of the Chief Airport Engineer Walter Slinger who was the key player in the

negotiations; communication was a problem from the beginning channels between (a) the city (b) the project management team (c) Consultants were never well defined; the city did not get airlinestogether to ask them what they wanted or needed to operate; the management team had no experience of baggage handling systems and treated it as being similar to pouring in concrete or fitting air-conditioning ducts; poor management relationships.

BAE had to change its working structure to conform to DIA’s project management team structure. BAE felt restricted with the breaking over their agreement on unrestricted access which occurred everywhere. Other contractors’ work was impeding BAE progress. (key point in original negotiation).

Opportunities

The City of Denver’s 1983 mayoral race precipitated initiatives to improve the airfield infrastructure. The Mayor of Denver put a very high emphasis on jobs and trade for the city. Denver’s geographic location and the growing size of its population and commerce made it an attractive location for airline hubbing operations. There was a growth on the determination of the “pro New Airport”.

Threats

There were a number of threats which are the following: expensive for the airlines due to delays; economic free-fall in 1987, airlines are likely to limit operations below the level for which the airport was designed – fewer flights

and passengers increase the cost per passenger thus encouraging airlines to route connecting traffic through alternative and competitive hubs; the new mayor who was elected inherited the project with no commitment to it by the major airlines; City of Denver invited reporters to observe the first test of the baggage system without notifying BAE.

Alternative Courses of Action

The alternative courses of action are:

1. Denver Airport considering automated baggage system should start out by assessing their design and performance of these devices cautiously and far in advance of their use.

The advantages may include: upgrades Airport performance; when done properly and cautiously, this will improve ground efficiency; airport competitiveness.

The disadvantage would be causing time and more money

2. Airlines building their own baggage system

The advantages may include: baggage system will depend on the airline’s budget and needs.

The disadvantage may include: affects airport competitiveness; different design lay-out for each airline.

Recommendation

This case study assumes the point of view of the Management Consultant specializing in Production. Therefore, Denver Airport considering automated baggage systems should start out by assessing their design and performance of these devices cautiously and far in advanced of their use. They should certainly do this before they allow architects to fix the layout of the airport passenger buildings. This is because a realistically conservative estimate of what automated systems can achieve should influence the design of these facilities. Though this may take time and money, the benefits of a good and reliable baggage system will be reaped at the end.

Plan of Action

To be able to implement the said recommendation, BAE should do the following activities:

1. Have the research and development team do an extensive research and testing on integrated automated baggage systems. This includes computer simulationsand the like.

2. Have the production manager develop an efficient control system. An effective control system for any automated baggage system is likely to take a long time to develop successfully.

3. BAE should work with people who understand the technology and its needs4. Form a team which everybody has the same goal5. Have the Projects control staff develop a proper schedule

Potential Problem Analysis

Since automated baggage systems are run by computers, there might be a number of potential problems. Since computer simulations will be done, R&D will have to do hundreds if not thousands of scenarios. Doing this properly requires a simulation of essentially every bag over an extended period. Another potential problem may be on the operating stage. If an error may occur on the computers, bags may move slower. The airport will have aggravated travellers waiting for bags failing to make connected flights on time. If the bags move too fast, the airport may have bags making connecting flights that passengers miss.

Fallback Analysis

If the recommendation will not push through because of lack of funds and time, relying on their back up system is another option. The airport will not have to spend a lot of time and money on research and development of a complex baggage system. But this will greatly affect the airport’s ability to attract or keep a major airline hub. Unlike BAE’s automated baggage system, bags move from point to point as fast as the travellers can.

SWOT Analysis

Strengths*

Denver is a growing and profitable ADI (Area of Dominant Influence).* Its central location does make it convenient for air connections.* Dynamic and mixed industrial base to support financing referenda.* A city with a reasonable bond rating.

Weaknesses*

Although a beautiful location, the environment is hostile to safeflying, with problems ranging from high wind-shear problems to thinatmosphere.* Bad management planning* Poor assumptions about the needs of the traveler, as opposed to the needs of the airlines.

Opportunities*

A successful airport could enhance income base* A successful airport could generate new sources of revenue for the city.

Threats*

Airline boycotts* Government regulations* Consumer boycotts* Consumer noise and environmental activism3