Question 2: The airline industry is extremely cyclical. For instance, due to a pandemic of Corvid 19, the airline indust
Posted: Wed Mar 30, 2022 3:42 pm
Question 2:
The airline industry is extremely cyclical. For instance, due to
a pandemic of Corvid 19, the airline industry has found itself with
too many seats and too few passengers as people are afraid to
travel. Several airlines have filed for bankruptcy. Some have fully
recovered, while others have been forced to liquidate. Narrowing
profit margins have prompted airlines to develop creative survival
tactics.
Sempoi Airlines has successfully found its niche in the industry
by providing direct flight service to less-traveled routes such as
those to and from smaller cities and focusing on low-cost carriers.
Since these routes do not generate nearly as much revenue as major
city routes, Sempoi has found ways to reduce its costs. Costs are
reduced by following a no-frills policy that the travelers refer to
as "peanut flights." This means that instead of serving costly
meals (the quality of which passengers have historically complained
about anyway), Sempoi serves just a bag of peanuts and a soft
drink.
With the recent success of short, direct flights, Sempoi is
considering the purchase of one such additional route. Before an
airline applies to the federal government for a new route, a
lengthy analysis is performed to determine the feasibility of the
route. Expenses to consider include airport costs such as gate and
landing fees and labor costs such as local baggage handlers and
maintenance workers. Many times the airline will provide its own
employees to load and unload luggage or to provide upkeep for their
planes, but in the case of Sempoi, they have so many small cities
to service that the outsourcing of these jobs is not uncommon.
Table 1 provides a summary of the after-tax cash flows
associated with the acquiring of an additional small route. All
costs and revenues are reflected by the following numbers.
Table 1: Projected Net Cashflows
Year
Net Cash Flow (RM)
0
-41 600 000
1
9 000 000
2
12 600 000
3
10 400 000
4
7 800 000
5
4 200 000
6
2 600 000
7
1 000 000
8
1 000 000
The initial costs of the venture (i.e. year 0) reflect the
expenses involved with moving employees, MAB filing fees, the
initial offering of low fares in order to gain customers, and the
high advertising costs necessary to make the public aware of the
new route offering.
The airline industry is extremely cyclical. For instance, due to
a pandemic of Corvid 19, the airline industry has found itself with
too many seats and too few passengers as people are afraid to
travel. Several airlines have filed for bankruptcy. Some have fully
recovered, while others have been forced to liquidate. Narrowing
profit margins have prompted airlines to develop creative survival
tactics.
Sempoi Airlines has successfully found its niche in the industry
by providing direct flight service to less-traveled routes such as
those to and from smaller cities and focusing on low-cost carriers.
Since these routes do not generate nearly as much revenue as major
city routes, Sempoi has found ways to reduce its costs. Costs are
reduced by following a no-frills policy that the travelers refer to
as "peanut flights." This means that instead of serving costly
meals (the quality of which passengers have historically complained
about anyway), Sempoi serves just a bag of peanuts and a soft
drink.
With the recent success of short, direct flights, Sempoi is
considering the purchase of one such additional route. Before an
airline applies to the federal government for a new route, a
lengthy analysis is performed to determine the feasibility of the
route. Expenses to consider include airport costs such as gate and
landing fees and labor costs such as local baggage handlers and
maintenance workers. Many times the airline will provide its own
employees to load and unload luggage or to provide upkeep for their
planes, but in the case of Sempoi, they have so many small cities
to service that the outsourcing of these jobs is not uncommon.
Table 1 provides a summary of the after-tax cash flows
associated with the acquiring of an additional small route. All
costs and revenues are reflected by the following numbers.
Table 1: Projected Net Cashflows
Year
Net Cash Flow (RM)
0
-41 600 000
1
9 000 000
2
12 600 000
3
10 400 000
4
7 800 000
5
4 200 000
6
2 600 000
7
1 000 000
8
1 000 000
The initial costs of the venture (i.e. year 0) reflect the
expenses involved with moving employees, MAB filing fees, the
initial offering of low fares in order to gain customers, and the
high advertising costs necessary to make the public aware of the
new route offering.