Indonesian Airlines Case Study Answer the questions below in a PowerPoint presentation, answer the question with brief explanation on why you chose that answer. (This case has three parts, please make sure you cover them all, you are asked to pay good attention to the details and the quality of the overall presentation)

Introduction

The CEO of Indonesian Airlines has consulted you for an investment problem, he is considering starting a new direct airline route from Surabaya, Indonesia to Jeddah, Saudi Arabia to direct mainly Umrah visitors and is unsure which investment path he should pursue, you are asked to conduct an analysis and provide a solid recommendation in 2 days. The Indonesian Airlines currently runs flights in and out of both countries but not directly between the two cities. The company is currently at maximum capacity on their existing jets so any new route would require the use of a brand-new airplane. Indonesian Airlines operates a flat pricing structure for its customers and would like to charge all passengers USD 500 for a round trip flight on this route (USD 250 for a one-way ticket). Luckily, the airlines strategy group has already conducted preliminary research and has discovered that in this current environment, this pricing could likely draw an average of 200 round trip passengers every day for the company. CEO has approached us to recommend whether to open this new route for the company. If the company decided to go forward with the route, he only wants to use one incremental airplane to avoid being over capitalized. Indonesian Airlines operates flights around the world and this new route would be a small addition to its global network. In addition, Indonesian Airlines is a subsidiary of a global conglomerate that also operates in the media and entertainment industry. However, CEO has wanted to provide direct transportation to Jeddah for Umrah visitors in for some time. As a benchmark, the company targets a 6-year payback period on its investments.

Part 1 (Plane Purchase)

If CEO decides to purchase one new plane to be used exclusively for the new route. Assume that demand, pricing, and costs stay the same year after year, and that a new plane has a useful life of 25 years at a cost of USD 75M.

Question 1) Why would the operational days per year be 300 days instead of 365?

Question 2) What are some examples of variable costs for this case?

Question 3) What are some examples of fixed costs for this case?

Question 4) Does the investment meet companys corporate investment criteria?

Supported Information:

Revenue	Expensed Costs	Payback Period
Daily passengers = 200 round trip passengers (or 300 one-way) Avg ticket price = USD 500 for round trip (or USD 250 for one-way) Days operational / year = 300 Daily revenue = Daily passengers * Average ticket Annual revenue = Daily revenue * days operational/year	Average variable costs = USD 40,000 for a round trip flight Fixed costs (excluding price of plane) = USD 3M / year Annual variable costs = Cost / round trip * Days Total annual costs = variable costs + fixed costs	Cost of purchasing a new plane (capital investment) = USD 75 M Payback period = Capital investment / Annual profit

Part 2 (Lease a Plane)

CEO comes back and tells you that instead of buying a new plane, the company can also lease a plane for USD 10M a year, renewable at the same cost year after year in perpetuity. Do you think the company should pursue this new route with this lease? Assume that demand, pricing, and costs stay the same year after year.

Question 1) Is leasing a new plane economically profitable for the company?

Question 2) What are the financial and risk implications of buying a new plane versus leasing a plane?

Supported Information:

Annual cost to lease a plane = USD 10M

Annual profit = Annual profit excluding lease costs annual lease costs

Part 3 (Upsides and Risks)

Aside from the pure economics of the route, what are some other potential upsides and risks to the plan?

Potential Upside (among others)	Potential Risks (among others)