Teaching Note

Pegasus Travel.com: Fasten Your Seatbelts!

Case Abstract:

Pegasus Travel.com ("Pegasus" or "the Company") is a niche online operator specializing in customized
and package tours for the age group of 55 and over (referred to as seniors). It is based on the belief that, as
an increasing number of seniors become users of the Internet, combined with an interest in traveling, they
will provide a lucrative market for Pegasus. The Company provides the option for flexibility in its tours,
allowing the consumer to decide on length of stay, budget, destination and so forth. Apart from the
customized tours, tour packages will also be sold. Through its web site, seniors are able to gain insight into
tours they might be interested in as well as chat with other similarly oriented people. The comprehensive
web site provides links to relevant sites, free e-mail addresses and a sense of community. Pegasus will align
itself with a well-known travel agency, Carlson Wagonlit Travel. Its reputable name will give Pegasus’
customers assurance and trust. The Company can also take advantage of Carlson’s expertise and
operations in many parts of the world.

Length: 30 pages

Objectives:

(1) Process: Study the process entrepreneurs use to effectively present their ideas to potential investors and
sources of capital
(2) Analysis: Provide students with a sample, full-length business plan, and lead them through the process
of rigorous analysis, highlighting the plan's positive and negative attributes.
(3) Strategy: Assessment of strategic options available to Pegasus Travel.com as it attempts to raise
$2,105,185, with an emphasis on its marketing and financial strategy and projections.

Teaching Approach:

This teaching note assumes a 90-minute class to teach this case. The instructor should take the class
through each section of the business plan (see suggested timing), highlighting many of the concerns listed
below.

I. Introductory (5 minutes)
 Nothing is written under co-owners
 Unclear why this type of venture requires bank loans. What collateral would be available to lend
against? Also, interest expense is not included in financial statements.
 Legalese under confidential disclaimer has obviously not been written by an attorney, and already
makes the business plan appear suspect.

Boston College Professors Michael Peters and Gregory Stoller prepared this teaching note as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2007, Michael Peters and Gregory Stoller. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording or otherwise—without the permission of the writer.
II. Executive Summary (10 minutes)
 The case is based in 2007. Online travel industry growth from $77 billion to $300 billion over a
five-year period represents a CAGR (compound annual growth rate) of 31% per year (PV=$8
billion, FV=$20 billion, n=2, PMT=0, solve for i). For a still very fragmented industry, these
projections seemly overly optimistic.
 The Executive Summary violates a basic principle of business plan writing: On the very first page,
describe in-depth what competitive advantages the Company brings to the marketplace and how
the venture makes money.
 The third paragraph is far too general. For example, what is meant by customer retention through
"advertising and services?" How many banner ads will be placed and what advertising frequency
is planned?
 It's obvious the Executive Summary was written first, instead of last, as some of the industry
forecasts later on in the business plan (see pages #5, #9, and #14) are inconsistent with those in the
Executive Summary.

III. Industry Outlook, Forecast & Trends (15 minutes)

 It would have been helpful to present the travel industry statistics with a graph. This is a good
example of solid research losing its edge, and effectively becoming useless to the reader, due to
poor presentation.
 When presenting increases to key statistics (increase in European travelers, pages #6 and #7), it's
important to provide a reference basis. While it's impressive that the European demand for online
travel will continue to grow based on anticipated receipts, without knowing the starting point, the
statistic is almost useless.
 It's unclear what value the statistics on rental cars, railways and cruise lines provide. This space
could have been used more effectively by continuing the discussion from the previous paragraph
on the growth and development of the online travel and tourism industry.
 The European market should have received top billing in this section of the plan since it's the
Company's main future target market (see bullet #7 below). By placing it at the end of this
section, its importance is reduced.
 There are two main problems with the Forecast section: (1) Industry forecast data is inconsistent.
For example on page #5 Jupiter Research reports that online bookings reached $77 billion in 2005.
They also report that this was 29% of all travel revenue. Another source (unnamed) states that
total travel spending in 2005 was $685 billion. This would mean that the $77 billion in online
business is about 11% of the total travel market. Or alternatively the $685 billion is an inflated
projection. There needs to be consistency in the industry data. (2) There's no revenue forecast
included! The business plan simply provides a hypothetical in terms of market share possibilities.
In short, the presentation of the numbers is confusing, and they do not "tie" with one another. No
footnotes are included anywhere in the entire plan (this is most important for the Industry Analysis
section as outside data is almost primarily always used).
 It's unclear how the Market Segmentation section adds any value to the business plan. While it
correctly highlights price, age and travel purpose as important factors, it doesn't address how the
Company will effectively capitalize on those areas. In addition, price is a result of market
segmentation, not a factor affecting it.
 The Target Market section is confusing. While the plan provides good demographic information
on seniors, it fails to demonstrate the crucial evidence of online travel spending by seniors. In
addition, the management team refers to this segment as baby boomers, retirees, the over 55
population, and "older users" without any explanation, or proof, that these groups are identical to
one another practically or statistically. Also, there is no evidence that the European market’s
senior segment is a legitimate target market for Pegasus in future years.
 While the Competitive Sectors portion of the plan is well written, including exhibits #1 and #2, the
writers stop short of providing detailed evidence or implications for the Company on:
(1) How much of a decline in the need for traditional travel agencies is projected?
(2) How much of a threat are companies like travelociy, expedia and hotwire.com? Can
any revenue, market share or earnings statistics be provided?
(3) Bottom line: How do each of these competitors affect the Company, and what will
the Company's competitive response be to each player?

Page #2
 (4) The Competitive Advantage section should have provided quantifiable evidence
detailing Pegasus' edge, with information on projected margins compared to industry
competition. It's also unclear how the Company will be able to remain competitive,
if the majority of tours are customized…

IV. Description of Value (5 minutes)

 This section of the plan never really comments on the "value add" of Pegasus. It is more of a
continuation from the Competitive Advantage paragraph preceding it.
 Beacon Street is a major thoroughfare in the Brookline, Massachusetts area, and as a result is a
coveted "address" for offices and retailers alike. Rent expense in the hot areas of Brookline is
anything but reasonable.
 It's unclear how the backgrounds of the entrepreneurs directly contribute to the venture. They
have no relevant experience in the travel industry.

V. Operational Plan (5 minutes)

 While this section of the plan is well written, it fails to provide any data on Information
Technology (IT) capital expenditure requirements.
 This writers of this section used "open ended phrases" to make the plan appear more professional.
For example, what are "necessary arrangements?"
 How do the extras described on page #12 affect Pegasus' projected gross margin?

VI. Marketing Plan (20 minutes)

 The market share statistics (.03%) of page #15 of the case were calculated by taking the 2010
projections of $100 billion and multiplying by .03% to achieve its year #3 sales projection of $2.9
million.
 It's unclear why specific financial projections are included in the marketing plan. Usually market
share is calculated via units, not based on financial projections. However, it's important to note
that there's no one "right way" to write a business plan with respect to the contents of each section.
Although Chapter 7 of Entrepreneurship (Hisrich/Peters/Shepherd, [McGraw-Hill/Irwin]), gives a
good overview on business plan writing, this text, and others like it, should be merely as guides, as
the content and presentation requirements for each specific business plan will vary.
 Instead of providing market share projections for the general travel and tourism industry, the
management team should have focused on the online segment instead.
 This would have been an ideal section to describe:
(1) Typical revenue and cost model
(2) Projected unit projection and mix for different services/tours
(3) Detailed advertising strategy
(4) Estimated cost of achieving market penetration targets
(5) Return-on-investment forecasts for strategic alliances
(6) Results of initial focus group and/or direct mail campaigns
(7) Competitive intelligence on items #1 - #6
 While the SWOT analysis (Strength - Weaknesses - Opportunities - Threats) is on the right track,
the following enhancements could have been included:
(1) Quantification of each SWOT attribute
(2) Consistency with other section of the business plan: if Pegasus is targeting European
seniors, why are Japanese, Cantonese and Indonesian important languages?
(3) Consideration of exogenous factors, such as foreign exchange, transaction costs and
travel visas.
 Although the Service Development Strategy section is innovative, it's unclear whether Pegasus has
a core competence in all of the suggested areas.
 The financial projections do not include the direct and indirect costs of staffing a 24-hour
Emergency Customer Service hotline for the Company (Customer Service section)
 It would have been helpful to provide a pricing example in this section.
 ARC and TATA are mentioned for the first time in the Distribution section of the business plan,
further indicating that the business plan was written by a group of different writers who didn't
compare notes prior to printing the final version of the business plan.

Page #3
  The business plan's promotion section should have been included in the Goals and Objectives of
the Marketing Plan section. In addition, frequency and individual ad cost should have been
highlighted.
 It's important to avoid the use of "far reaching" or "strategy simplification" type comments in a
business plan. For example, on page #17, the management team states "as the Company grows,
the need for alliances will diminish." Unless evidence is provided to support this statement (i.e.
based on Pegasus' past operating history, other travel start-ups, or the actions of existing
incumbents, once a certain growth level is reached alliances become unimportant), it should be
eliminated. It's all a matter of credibility. When reading this sentence, industry experts might
instantly discount the ability of the management team to execute against its vision, since they
know how vital strategic alliances are throughout the life of a travel venture.
 One should eschew the words "significantly" (page #16) and "reasonable" (page #19 / #25), as
each person has a different interpretation of their meaning and/or relative value. Business plans
should provide their own logical conclusions, and not allow the reader to form his/her own based
on incomplete information.

VII. Organizational Plan (5 minutes)

 Non-US citizens cannot be members of an S-corporation (it's assumed that the members of the
management team are also the original owners of Pegasus).
 Instead of providing a description of an S-corp, it would have been more helpful to provide
justification for this incorporation choice. For example, has an S-corp been chosen due to the
personal tax situation of the management team members?
 The duties of the main members of the management team are usually self-explanatory and should
not be included (especially since Pegasus has a relatively straightforward business model).
Instead, this space should be dedicated to a discussion of how the management team members'
backgrounds can increase the probability of success for this venture. This section of the plan
might also be used to address any key hires the management team is planning, in order to fill any
"holes" which exist with respect to functional areas, knowledge, etc..
 The Board of Advisors should include a combination of key investors ("who you raise money
from is more important than the money itself") and individuals selected for their strategic
contributions. There are too many professors represented on this panel. In addition, until the
Company prepares a prospectus for an IPO, compensation and equity stake data should be
excluded.

VIII. Assessment of Risks (5 minutes)

 This section could have been improved far more by providing a qualitative and quantitative
contingency plan for each of the highlighted risks.
 Sensitivity analysis for the financial projections should have been included here.
 A description of the key strategic "levers" affecting Pegasus should also have been listed.

IX. Financial Projections (20 minutes)

 Income Statement:
(1) None of the expense categories vary over the 3-year projection. Although revenue
will increase by over 150%, these projections imply the Company will be unable to
achieve any economies of scale.
(2) It appears a 50% gross margin has been chosen arbitrarily. What is included in
COGS?
(3) Do selling expenses include commissions, or have these been budgeted elsewhere?
(4) Without a detailed breakdown of capital expenditures, it's almost impossible to
evaluate whether the budgeted technology development expenses are reasonable. In
addition, why are these expensed, rather than capitalized?
(5) Advertising expenses do not detail the breakdown between the different types of
media described in the text.
(6) If the founders aren't receiving any direct compensation, how many staff members
are included in these amounts? In addition, have benefits of 30% been included?
(7) Office supplies is the one item with a reasonable estimate.

Page #4
 (8) Based on a 1,000 square-foot retail space, the cost / square foot is only $17-- this is
far too low for a Beacon Street address.
(9) Real estate taxes have not been included in the Utilities section.
(10) Does insurance also cover general liability and E&O (Errors & Omissions)
insurance?
(11) What does Depreciation cover? Where is the capital expenditure worksheet?
(12) If bank loans will be used, where is the Interest expense?
(13) What is meant by "reasonable portion of equities?"

 Statement of Cash Flows

(1) This section should have been named "Sources and Uses" of cash.
(2) Sales has to be broken down by either unit or transaction mix.
(3) Capital expenditures are notoriously absent from the Uses of Cash section.
(4) A proper Statement of Cash Flows detailing Cash Flow from Operations, Investing
Activities and Financing Activities should have also been included.

 Balance Sheet
(1) A basic balance sheet should be provided (Assets, Liabilities and Owner's Equity), or
at the very least, a simple statement detailing the mix between equity and bank loans.
However, most banks will not lend to this type of start-up, due to lack of collateral.

 Revenue Rationale
(1) Although the text attempts to provide a rationale and key assumptions for its
financial projections, this should have been included at the beginning of the financial
section.
(2) It's unclear why Travelocity has been chosen, since it was only mentioned once on
page #11.
(3) A 30% increase per year is slightly less than the 31% CAGR provided in the
Executive Summary. This implies Pegasus will grow more slowly than the market
each year…
(4) It would have been helpful to include a Seasonality Index to account for annual
travel changes, and the associated expenses.
(5) It's unreasonable to assume that the "rest of the operating expenses" do not vary
throughout the year (i.e. real estate taxes are paid quarterly, utilities will be higher in
the summer and winter due to weather changes, rent will increase at some point
during the year, etc.)

 Financial Statement Presentation

(1) Chapter 9 of Entrepreneurship (Hisrich/Peters/Shepherd, [McGraw-Hill/Irwin]), and
the ProForma Financial Section of the GoTradeSeafood.com case (Stoller) provide a
basic overview of the required financial components and transaction breakdown.
(2) Search the EDGAR database (http://www.sec.gov/edgar/searchedgar/webusers.htm)
to view how your specific industry presents its income statement, balance sheet and
statement of cash flow statements. Different accounts will be included and/or
emphasized. Form 10-K (annual report) will provide the best overview. Make sure
to select the HTML version for best viewing. Entrepreneurs with poorly presented
financial statements lose credibility almost instantly.
(3) "Ratio Comparisons" in the Quotes section of Yahoo's Finance Section will provide
a good basic overview of the financial levers affecting company performance. This
will be an effective departure point for entrepreneurs to begin considering the other
qualitative and quantitative levers affecting their start-up's operations.
(4) After "crunching the numbers" for bullets #1-#3, at the very least entrepreneurs
should present different scenarios of their data under the following assumptions to
determine their impact on the cash balance:
 Revenue +/- 10%
 Unit Mix change
 COGS +/- 10%
 Capital Expenditures +/- 20%

Page #5
The objective is to calculate a start-up's "financial staying power." This is entirely
different than a best case/worst case scenario, and instead shows how changes in
individual assumptions affect an entrepreneur's most precious resource: cash. Ideally,
instead of presenting the data based on a +/- change, a range of values should be used
(i.e. how low can revenue go and still enable the company to "stay alive" the following
year? What growth rate will be necessary to match the industry's CAGR? What is the
maximum profitability possible, on paper, if we hit the high end of each of our
benchmarks?)

After completing these computations for financial levers, the process should be repeated
for each of the strategic levers affecting the business. Once again, whenever possible,
quantification of each lever should be attempted.

(5) One of an investor's first "jobs" after receiving a plan should be to re-engineer the
financial statements presented, in order to determine the venture's bottom-line-- the
probability of the investment becoming a total loss, and what the extent of the
financial exposure would entail.

The second task is to then realistically compare the business plan's financial projections
with those of its direct competitors. 15 companies in the same market cannot each
"conservatively project" a 10% market share! What justification does the business plan
contain that this company will be able to beat the odds?

Lastly, investors are "kept up at night" by the answers to 2 key questions, as noted above,
which should be quickly answered by a well-written Executive Summary:

a. What competitive advantages the company brings to the marketplace and how does
the venture make money?
b. Why do I believe this team will enable this venture to be successful?

Page #6