The planning officer of your airline has been gathering information concerning several opportunities for your firm. Since the climate seems good for additional common stock sales and bank loans, the possibilities of expansion through merger and acquisition seem very good. An opposite twist has also presented itself—an offer to purchase your airline. A thorough investigation and analysis by a competent financial analyst specializing in such matters will cost approximately $3,000 for each item listed below and will be completed in three to nine months. This would be a necessary first step in pursuing any of these business opportunities.

 

Although these opportunities may not be possible before the end of the simulation, your instructor wants you to select those you feel are appropriate.

 

Risk factors as shown below are on a scale of very low risk (1) to very high risk (10). The risk factor takes into account the economic stability of that particular type of business, the difficulty in operating it, competition, and the profit potential.

 

ANSWERS 

 1. Acquire a food service company that serves several airlines. It is in the airline's largest hub. The cost is $500,000 and the Return on Investment (ROI) is estimated to be in the 12-20% range with a risk factor of 5.

 

 2. Go into the car rental business at one of your high-traffic cities. The facts are the same as presented in Incident: "Diversification—Auto Rental" except it is in a different city than depicted in that incident. Risk factor 5.

 

 3. Begin a new company that would refurbish commuter aircraft. Because of the increasing cost of new aircraft, it is felt that many airlines would be interested in rebuilding and refurbishing their current fleet instead of purchasing a new fleet. The cost would be $2,000,000 and the ROI is estimated to be in the 15-28% range with a risk factor of 6.

 

 4. Acquire a ground service business that serves eight cities, including three that you are currently serving. This type of business handles all baggage, refueling, interior cleaning and restocking of rest rooms, etc. for airlines. The parent company of the service wants to concentrate on businesses more in line with its other holdings and is willing to sell for $1,000,000. The ROI is estimated at 14-25% with a risk factor of 6.

 

 5. Purchase a small airline that is currently competing in two of your markets. The firm is operated efficiently and has seven Metroliners and one Jetstream; all aircraft and facilities are leased. The owner wishes to retire and is asking $2,000,000 with liberal credit terms. ROI estimate 20-30%; risk factor is 7.

 

 6. Purchase a building for the firm's offices in a renovated downtown building with a prestigious address. A ten-year, 6% historical development loan is available. Cost $300,000. Savings in rent would be $30,000 per year.

 

 7. Open a Fixed Base Operation (FBO) at one of your hub cities. An FBO fuels and maintains airline, business, and private aircraft; rents, leases, and sells aircraft. The facility could also serve as a minor repair station for your aircraft. The cost is $1,000,000 and ROI 10-33%. The risk factor is 5.

 

 8. Open a training facility for airline pilots. The center would specialize in offering the recurrent training required by the FAA to smaller airlines that cannot afford a facility of their own. A modern simulator would be acquired, which would be very enticing to many airlines. This diversification would allow your own pilots to train with the very latest technology. The cost would be $250,000; ROI of 15-20% and risk factor of 4.

 

 9. Lease three cargo jets which you would operate exclusively for a large air-package service firm. The firm is willing to give a four-year contract with a clause that automatically adjusts the fees to reflect the current cost of fuel. The cost to establish the business (crew training, additional maintenance facilities and equipment) is $300,000. The ROI is 20% and the risk factor is 3 to 4.

 

 10. Become the regional distributor for a new 19-passenger airliner built in Spain. It is a cabin class, pressurized, propjet aircraft with a restroom. The aircraft's strong features are its luxurious interior design and state-of-the-art cockpit. The manufacturer is willing to lease one of the aircraft to you to put in service and concurrently serve as a demonstrator for $72,000 per quarter. The aircraft sells for $4,200,000 with a sales commission of 5%. The cost of establishing a sales office, critical parts inventory, and first-year marketing expenses is $250,000. The ROI could be negative or as high as 1000% if a large order is obtained. The risk factor is 7-8.

 

 11. Refurbish waiting areas in all cities served with a new, upbeat motif, including new counters, signs, and furniture. Cost: $20,000 per city. This cost would be to conduct a market research study to ascertain whether passengers really care about waiting-area ambiance.

 

 12. Investigate the possibility of self-insuring all aircraft for any damages to the aircraft itself. Liability insurance would continue to be placed with an insurance company. The banks and leasing companies would require that you deposit $300,000 per aircraft in an escrow account as a reserve against any damage. You would receive interest on this deposit at 2% above prime. You haven't had any hull damage in three years. Hull insurance premiums average $5,000 per year per aircraft.

 

 13. Make a recommendation to the board of directors to accept or reject the offer of a large conglomerate to purchase all the common stock of your airline at 20% above market price. Each member of the management team would receive a "golden parachute" contract that paid $100,000 if involuntarily separated from the firm.

 

THIS INCDINT TIME I CHOOSIE special decision ANSWER  option is 6th AND 8th 

now i need help for

- the pros and cons of choosing that special decision 6,8

 

Why we didn't choose the rest as an option ? Summary. Don't speak of each unchosen option individually.