· If specified, adhere to the

02 Jan · If specified, adhere to the

Posted at 07:22h in Business, Chemistry by past papers

Embery MBAA523 Module 1.5 Assignment Problem Set 1

1. An airline is considering the purchase of an Airbus A-320neo which offers improved fuel efficiency over the previous generation of narrow-body aircraft. The finance department estimates the aircraft will generate a positive net cash flow of $6 million in the first year increasing by 5% annually owing to the aircraft’s fuel efficiency. The airline plans to operate the aircraft for 15 years, then selling it in year 16 for an estimated net cash price of $30 million. The airline targets a return on invested capital of 12% annually (use this rate rather than the interest rate to discount future cash flows). What is the maximum price the airline should be willing to pay for a new A-320neo? Note: This computation is easiest to perform using MS Excel. The Excel computations may be copied and pasted into MS Word.

2. Complete the following table and answer the accompanying questions. Note: This computation is best completed in MS Excel. Copy and paste the resulting table into this Word document.

Control Variable Q

Total Benefits B(Q)

Total Cost C(Q)

Net Benefits N(Q)

Marginal Benefits MB(Q)

Marginal Cost MC(Q)

Marginal Net Benefits MNB(Q)

100

1200

950

210

101

1400

102

1590

103

1770

104

1940

105

2100

106

2250

100

107

2390

110

108

2520

120

109

2640

130

110

2750

140

A. At what level of the control variable are net benefits maximized?

B. What is the relation between marginal benefit and marginal cost at this level of the control variable?

3. Approximately 90,000 students per year apply to the top MBA programs.

C. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue and M.B.A. degree.

D. What would you expect to happen to the number of applicants if the starting salaries of managers with an M.B.A. degree remained constant but the salaries of managers with bachelor’s degrees increased by 15%? Why?

4. A small airline recently sold to a private equity group for $145 million. The airline has earned profits of $9 million last year. The new managers believe they can grow profits at 5% per year. The private equity group borrows money from wealthy individuals to invest in acquisitions. Because of the significant risk involved, lenders are promised a 12% return on their loans to the equity group. Is the purchase price of the new airline reasonable? Explain.

Embery MBAA523 Module 2.4 Assignment Problem Set 2

MBAA 523
Problem Set 2

The popular and financial press regularly report on economic events, but the description is usually quite different from the theoretical model provided in a microeconomics textbook. This problem set provides an opportunity to practice supply and demand analysis using excerpts from articles published in the Wall Street Journal.

For each of the following 12 economic circumstances, show the shift of supply and/or demand curves; use an arrow to show the shift in the curves, the change in price and the quantity demanded. To insert lines and arrows in MS Word, click on “Insert” on the upper menu bar. Next, click the drop down menu under “Shapes.” Select the shape you’d wish to insert, then use the mouse to insert the line or arrow into the graph.

Below the graphical analysis, write a short explanation explaining your analysis. Here’s an example of the graphical analysis:

This example shows an increase in the demand curve, perhaps as a result of an increase in income. The shift in the demand curve leads to a higher price and quantity demanded. For each problem, explain why the curve(s) shifted.

Problem 1 – Conflict fears drive up crude prices.

A military conflict forces the shut-down of major crude oil pipeline. World oil prices soared to an 18 month high. Show the effects in the crude oil market.

Explanation:

Problem 2 – Egypt’s Gaza Crackdown Hammers Economy

An aggressive crackdown by Egypt’s interim government on smuggling tunnels between Egypt and the Gaza Strip is crushing the Palestinian enclave’s economy, sparking concerns it could fuel a militant backlash. To get around the blockade, Gazans smuggle goods, and the tunnels’ closure has sent prices soaring in the past three weeks. Many Gazans now buy the Israel-shipped fuel for seven shekels ($2) a liter — more than twice as much as that smuggled from Egypt. The cost of cement, another major smuggled item, has reached $1,500 a ton from $1,000, said Ahmad Abdul-Rahman, a merchant. Show the effects in the Gaza market for goods and services.

Explanation:

Problem 3 – Dutch Economy Faces Stagnation

The Albert Cuyp market here, famous for its offerings of cheap clothing and exotic foods, is one of the busiest in the Netherlands. But while it still attracts plenty of shoppers, customers are increasingly wary of spending their money there, said Nicolas Steur, a 50-year-old fishmonger. Revenue at his stall, where he sells fresh haddock, raw herring and other seafood, has fallen by 20% compared with four years ago. “We still have about the same amount of customers,” Mr. Steur said. “But they spend less money. People are cutting down on their expenses.” Show the effects in the Albert Cuyp market.

Explanation:

Problem 4 – Farmers Opt to Dump Supplies as Weather Forecast Dashes Hopes for Price Jump.

U.S. soybean supplies have been tight since last year’s severe drought cut production. Many farmers held some of last year’s soybeans in storage, waiting to see if they could sell them at a higher price this summer, when supplies are tightest before the next harvest. This week, many of those farmers decided it was time to sell. Weather conditions for this year’s U.S. crop are mostly favorable, which means a large harvest this fall could push prices lower. Historically high cash prices for soybeans early this week also lured farmers to start selling. The result has been a collapse in cash markets over the past two days. Show the effects of the changes in the last two days.

Explanation:

Problem 5 – China lures the world’s pilots.

The rising middle class in China means millions more people are taking to the skies. There’s a tsunami of retirement which is now under way in the airline industry. Chinese airlines have raised their pay offers to foreign pilots by up to 30% in the past 18 months. Show the effects in the global pilot labor market.

Explanation:

Problem 6 – Companies unplug from grid, delivering a jolt to utilities.

On a hill overlooking the Susquehanna River, two big wind turbines crank out electricity for Kroger Co.’s Turkey Hill Dairy in rural Lancaster County, Pa., allowing it to save 25% on its power bill for the past two years. Show the effect on the public electric utility company.

Explanation:

Problem 7 – Rising oil prices.

Rising oil prices cause airlines to adjust flight schedules. Show the effect on airline prices and quantity demanded.

Explanation:

Problem 8 – Federal Aviation Administration increases minimum pilot qualifications.

Regional airlines are concerned that higher flight hour requirements for new pilots will increase costs. Show the effect on passenger ticket prices and quantity demanded.

Explanation:

Problem 9: Europe levies new tax on airline tickets.

A new tax on airline tickets has raised concerns the European airline traffic will fall. Show the effect on airline ticket prices and quantity demanded.

Explanation:

Problem 10 – More Doctors Steer Clear of Medicare

Fewer American doctors are treating patients enrolled in the Medicare health program for seniors, reflecting frustration with its payment rates and pushback against mounting rules, according to health experts — just as millions of Americans are poised to gain access to such coverage under the new health law next year. Some Americans may have difficulty finding doctors who will take their new benefits or face long waits for appointments with those who do. Some experts attribute the rise in defections to Medicare payment rates that haven’t kept pace with inflation and the threat of more cuts to come. Under a budgetary formula enacted by Congress in 1997, physicians could see Medicare reimbursements slashed by 25% in 2014 unless Congress intervenes to delay the cuts, which it has done several times. Show the effects on Medicare patients. Hint: Note that some patients may have trouble finding doctors.

Explanation:

Problem 11 – Wage-Rise Report Sees Fewer Jobs, Less Poverty

President Barack Obama’s quest to raise the federal minimum wage to $10.10 an hour would eliminate about 500,000 jobs by 2016 but increase pay for millions of Americans and lift nearly a million out of poverty, a Congressional Budget Office report found. Analyze the labor market with a minimum wage of $10.10 per hour.

Explanation:

Problem 12 – Rent Control

Many of the proponents of price ceilings argue that government-mandated maximum prices, such as rent controls in New York City, simply reduce producers’ profits and do not affect the quantity supplied of a good on the market. If the relevant supply and demand curves are as pictured below, show whether this belief is correct.

Explanation:

Problem 13 – Price Controls

Rent controls limit the rent to Pc. Show the Lost Social Welfare (known as Deadweight loss). You can do so by inserting the curve shape which can be drawn around the deadweight loss.

Explanation:

Problem 14 – Supply and demand

Suppose demand and supply are given by Qd= 50 – P and Qs= 1/2P – 10.

A. What the equilibrium quantity and price in this market?

B. Determine the quantity demanded, the quantity supplied, and the magnitude of the surplus if the price floor is $42 is imposed on this market.

C. Determine the quantity demanded, the quantity supplied, and the magnitude of the shortage if a price ceiling of $30 is imposed on this market.

Problem 15 – Supply

Suppose the supply function for product X is given by Qsx= -50 + 0.5Px– 5Pz.

A. How much of product X is supplied when Px= $500 and Pz= $30?

B. How much of product X is supplied when Px= $250 and Pz= $10?

Embery MBAA523 Module 3.4 Assignment Problem Set 3

1. If the price for some good increases by 10% and the quantity demanded falls by 5%, (a) what is the price elasticity of demand, and (b) is this elastic or inelastic?

2. Last year the US low-cost-carrier Spirit Airlines entered the Dallas-Chicago market. The average ticket price for all airlines servicing the route fell from $200 to $180. After Spirit’s entry, the number of passengers increased from 700 to 800 per day (these number are hypothetical, but reasonable). Calculate the price elasticity of demand between these two points. Show the computation.

3. An airline consulting firm as determined that the income elasticity for leisure air travel in China is 1.5. If incomes increase by 5% next year, what is the percentage change in leisure passengers expected next year? Show the computation.

4. The state operates a toll road which currently charges $1.00 per car with 100,000 cars using the road daily. The state wishes to raise an additional $10,000 per day for road maintenance. A newly hired financial analyst proposes raising the toll to $1.10 per car. The analyst reports to you. Will you accept and forward her recommendation to your boss?

5. The demand curve for a product is given by Qdx= 1,000 – 2Px+.02Pzwhere Pz= $400. (Hint: If you’re not comfortable with the calculus alternatives, compute Q at the given prices, then again with a 1% increase in price. Then figure percentage change in Q over the percentage change in P, %?Q/%?P).

a. What is the own price elasticity of demand when Px= $154? Is the demand elastic or inelastic? What would happen to the firm’s revenue if it decided to charge a price below $154?

b. What is the own price elasticity of demand when Px= $354? Is the demand elastic or inelastic? What would happen to the firm’s revenue if it decided to charge a price below $354?

c. What is the cross-price elasticity of demand between good X and good Z when Px= $154? Are good X and good Z substitutes are complements?

6. The data are real US Gross Domestic Product (in billions of dollars) and Domestic Revenue Passenger Miles (in millions) for the years 1996 through 2012. Below this table is the MS Excel Summary Output regressing RPMs against GDP. Using MS Excel or another similar application, build a scatter plot and insert the regression line and equation. Next, interpret the regression output and explain the regression statistics. Be certain that the regression coefficients match those in the scatter plot equation. Finally, use the regression equation to predict RPMs for 2013 and 2014 assuming GDP grows by 3% each year from 2012. You may wish to check the actual RPMs to see how closely your estimate matched. Note: To build a scatter plot in Excel, select and copy the GDP and RPM data into Excel; select the data in Excel, then use Insert/Scatter to create a scatter plot. Finally, scroll down Chart Layout to select the format that creates a regression line and formula. Use the Excel Help function as needed.

Year

GDP

RPM

1996

8,100.2

419.07

1997

8,608.5

438.42

1998

9,089.1

448.58

1999

9,665.7

472.96

2000

10,289.7

500.12

2001

10,625.3

472.60

2002

10,980.2

469.96

2003

11,512.2

492.73

2004

12,277.0

542.82

2005

13,095.4

569.24

2006

13,857.9

574.52

2007

14,480.3

592.33

2008

14,720.3

568.25

2009

14,417.9

538.98

2010

14,958.3

552.85

2011

15,533.8

563.65

2012

16,244.6

568.70

SUMMARY OUTPUT

Regression Statistics

Multiple R

0.926457

R Square

0.858323

Adjusted R Square

0.848878

Standard Error

21.52755

Observations

ANOVA

Significance F

Regression

42114.69

90.87497

9.342E-08

Residual

6951.532

463.4355

Total

49066.22

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

275.7148

25.82438

10.67653

2.1E-08

220.6713974

330.7581059

GDP

0.019662

0.002063

9.532837

9.34E-08

0.015265596

0.02405796

Embery MBAA523 Module 4.4 Assignment Problem Set 4

1. Define the short-run and long-run and provide an aviation example.

2. In the short-run, Airbus manufactures aircraft at its existing factories; however, labor and other inputs such as those components purchased from suppliers (engines are one example) are variable. Airbus has received a substantial number of new orders and will increase its monthly aircraft production rate. Explain why the MPLwill decrease above some level of labor as more workers are added. How does this decrease in MPLresult in an increase in MC?

3. The table shows the marginal product of labor for a manufacturing firm in the short-run. The cost of an additional worker is $100 per day including benefits. The product sells for $2 per unit. Compute the value of the marginal product of labor. How many workers will the firm hire?

Labor (L)

MPL

VMPL

168

238

284

306

304

278

228

154

-66

4. NEW DELHI — Each fall at harvest time, Leela Dhar Rajput used to hire 25 farm hands to work from dawn to dusk every day for a week bringing in the rice crop on his 20 acres of land in the central Indian state of Madhya Pradesh. This year, he plans to use a combine harvester instead. With the machine and the help of two or three men, he expects to finish the job in a single day. Indian agriculture is belatedly engaged in a mechanical revolution, boosting productivity in a sector that has long relied on cheap, surplus labor to tend crops in the world’s second most populous country. Job opportunities in factories and services, plus the government’s rural job-creation program guaranteeing 100 days of employment a year on public-works projects, have drained the pool of workers in villages. “I just can’t find enough people to do the hard work in the fields anymore,” says Mr. Rajput. [Mukherji, B. (2013, October 29). India’s Farmers Mechanize. WSJ, B8.]

Show and label the amount of capital (K) and labor (L) employed with the displayed isocost line and then insert a new isocost reflecting a substantial increase in the price of labor. Mr. Rajput intends to harvest the same quantity of rice as last year. Show and explain the effect on the K and L employed.

5. Complete the table (the easiest method is to do the computation in MS Excel). Create a line graph of AFC, AVC, ATC, and MC (in Excel, select the 4 columns, then Insert/Line, and choose the first graph option). Explain the reason for the shape of each curve. The completed table and graph can be copied and pasted into this document. Hint: Be certain that your line graph looks similar to those in Baye (your graph will not be as smooth as in Baye). If not, there is likely an error in your computations.

AFC

AVC

ATC

$10,000

100

$200

200

125

300

133.34

400

150

500

200

600

250

6. Define economies of scale. Is there evidence of economies of scale in the airline industry? (Hint: Consider Low-Cost-Carriers). In large commercial aircraft manufacturing?1. Define the short-run and long-run and provide an aviation example.

Labor (L)

MPL

VMPL

168

238

284

306

304

278

228

154

-66

AFC

AVC

ATC

$10,000

100

$200

200

125

300

133.34

400

150

500

200

600

250

6. Define economies of scale. Is there evidence of economies of scale in the airline industry? (Hint: Consider Low-Cost-Carriers). In large commercial aircraft manufacturing?

Embery MBAA523 Module 5.4 Assignment Problem Set 5

1. For each of the following market structure characteristics, insert the correct Market Type(s). There may be more than one. Use these abbreviations: PC – perfect competition; MC – monopolistic competition; and M – monopoly.

Market Structure Characteristic

Market Type

Advertising is not effective for the individual firm.

MRMR

Product is unique.

In equilibrium, products cannot be produced at a lower cost or sold at lower price.

Economies of scale are often a barrier to entry.

Products have many close substitutes.

2. Assume a perfectly competitive market structure. Complete the diagram to show the profit maximizing price and quantity. Label each (use Insert textbox). Is the firm earning economic profits or losses? If so, what will occur over the long-term?

3. A firm sells its product in a perfectly competitive market where other firms charge a price of $80 per unit. The firm’s costs are C(Q) = 40 + 8Q + 2Q2. Show your computations.

a. How much output should the firm produce in the short-run?

b. What price should the firm charge in the short-run?

c. What are the firm’s short-run profits?

d. What adjustments should be anticipated in the long-run?

4. Complete the diagram showing the profit maximizing price and quantity. Label each. Show and label the deadweight loss (In MS Word, use Insert/Curved Connector, a curved line).

5. A firm is a monopoly with demand and cost functions given by P = 200 – 2Q and C(Q) = 2,000 + 3Q2respectively. Show your computations.

a. Show the equations for MR and MC.

b. Compute the profit maximizing quantity.

c. What is the price at the profit maximizing quantity?

d. Compute total revenue.

e. Compute total cost.

f. What are the profits?

Embery MBAA523 Module 6.4 Assignment Problem Set 6

1. You compete with many firms offering similar products (monopolistic competition). An economic consulting firm has estimated the own-price elasticity for your most profitable product is -1.50. Your marginal cost is constant at $75 across most of your production volume capability. What price will maximize profits? Show the computation.

2. Define the 3 types of price discrimination and explain why 1stdegree discrimination is very difficult to practice. Provide 1 example where a form of 1stdegree discrimination is practiced.

3. Complete and label the diagram showing the numbers of seats sold and price for leisure and business passengers. Answer the following questions:

a. If the price of fuel increases modestly, will fares increase?

b. Are all seats sold? If not, wouldn’t the airline make more money by selling more seats at a lower price?

4. Explain the conditions necessary for a firm to practice 3rddegree price discrimination and using airline conditions as examples.

5. Wall-Mart offers to match the price of any competitor. Why is this guarantee not necessarily a benefit to consumers?

Embery MBAA523 Module 7.4 Assignment Problem Set 7

MBAA 522

Problem Set 7

1. Between 1995 and 1997, American Airlines competed with several low-cost-carriers on routes from Dallas/Fort Worth. The US Department of Justice sued alleging predatory pricing. A judge disagreed. Read this article from the Wall Street Journal (available through the Hunt Library ProQuest database):

Wilke, J. R., & McCartney, S. (2001, April 30). American Airlines secures antitrust win — Judge dismisses U.S. case, says competitive moves were company’s right. Wall Street Journal(Eastern edition), pp. A.3.

The antitrust legal standard for predatory pricing is pricing below variable or marginal cost. Discuss why the plaintiffs lost this case in the face of what most lay people would consider predatory pricing. Hint: Consider how to compute marginal cost for an airline.

2. Most large airlines operate networks, or hub-and-spoke systems, which connect many spoke cities (or nodes) with flights to and from a hub airport.

a. A network carrier serves 39 spoke cities from a single hub. How many city-pairs does it serve? (A city-pair is City A to City B. City A to City B and City B to City A are consider just one city-pair)

b. This same airline adds a 40thspoke city to its network using a 100 seat capacity aircraft. On a flight from this 40thspoke to the hub, how many passengers, on average, does it need to attract to each destination to achieve an 80% load factor?

c. How can a network airline profitably serve smaller cities than a low-cost-airline? (Hint: Consider 2b above).

d. A network carrier serves some small cities close to its hub with regional jets which have much higher seat-mile-costs (CASM) than larger mainline jets. The average fare from these cities to the hub does not cover fully allocated costs. Is this rationale?

e. Networks are subject to negative externalities. How might such externalities affect a network carrier’s decision to add another spoke city to its network? Explain. (You may wish to use marginal benefit/cost analysis).

3. In the early 1990s, Airbus and Boeing were both considering building a new Very Large Aircraft (VLA). Airbus faced this decision tree. Boeing’s decision was similar. Why did only Airbus build the VLA, the A-380? The numbers in parentheses indicate the 20 years incremental profit in billions of dollars for Airbus and Boeing.

Embery MBAA523 Module 8.4 Assignment Problem Set 8

1. In oligopoly, each firm is acutely aware of the production and marketing decisions of all competitors and carefully considers the potential competitive reactions in all decisions. Discuss whether firms in other market structures consider the potential reaction of competitors when making important marketing decisions.

2. Part of the debate among economists on US airline deregulation in the 1978 involved the theory of contestable markets. List the four characteristics of contestable markets and evaluate how well airline markets meet these criteria.

3. Price outcomes of the 5 oligopoly models differ substantially. Which models produces the lowest and highest total profits (all firms combined)? What are the predicted prices? Provide aviation industry examples of routes or markets that might approximate each of these two outcomes.

4. Oligopoly is the predominant market structure in the airline industry. In the express package business, FedEx, UPS, and DHL compete in the global air express industry. In the US, FedEx and UPS are a duopoly. FedEx and UPS financial indicators such as net margin on sales and return on assets are near the average for US companies. What oligopoly model does this suggest and what characteristics of express package business would lead to this outcome.

5. The mission statement for the Organization of Petroleum Exporting Countries states, “the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.” Explain why the OPEC members often disagree on how much petroleum each country should produce.

Embery MBAA523 Module 2.5 Written Assignment 1

MBAA 523

Written Assignment 1: Estimating Regional Air Transportation Demand

The objective of this and the other written assignments in the course is to show how the managerial economic theory and tools presented in Baye are applied to a current airline industry problem. For this assignment, the objective is to develop an appreciation for the methods used by the two largest commercial aircraft manufacturers, Airbus (http://www.airbus.com) and Boeing (http://www.boeing.com/), to forecast demand for air travel and the market for commercial aircraft over the next twenty years. Fortunately, both make their forecasts available to the public. For this assignment, you are to review the Airbus Global Market Forecast and the Boeing Current Market Outlook. These reports are available on the Boeing and Airbus websites. The location of the forecasts varies from year to year but each can be accessed by a search within the website or from the site map. In your review, concentrate on the factors (independent variables) that Airbus and Boeing employ to estimate the demand for air travel growth and how these are used to generate regional estimates for specific aircraft types. First, look for sections in the reports that provide an overview of the forecast methodology. Regression analysis is used extensively, but the technical details are not provided or important for this assignment. An appreciation for how the estimates are generated is sufficient. After you look over the entire reports – they’re lengthy, it is not necessary to read all sections – choose a region of the world for more detailed study.

First, briefly explain how Airbus and Boeing develop their 20-year forecasts. Note the factors that influence projected air travel growth; some factors affect the demand curves while others influence supply. Be certain to distinguish between the two. The connection between the microeconomic theory of supply and demand as presented in Baye and Doganis should be explicit. Then explain the forecasts for growth in the chosen world region. Provide some perspective to forecast growth in the rest of the world.

The paper should be approximately three pages not including a cover page, reference list, and any appendices you may wish to include. Both forecasts provide a wealth of detail that could support a much longer paper, but the objective is an overview similar to an executive summary for one world region, not an in-depth analysis. Managers are often tasked with analyzing business environments or specific problems for senior management review. Senior managers are usually pressed for time and value concise evaluation and recommendation. Discerning and summarizing the critical facts succinctly is difficult. More is not necessarily better; the page limit is intended to foster this skill.

APA style is required including a title page and reference listing. You may have only a few references, but these must be cited in both the main body of the paper and in a separate reference list. An abstract and table of contents are not required. The sample APA paper at the Purdue Online Writing Laboratory provides an excellent overview of the APA style. Even if you believe you have a good handle on APA format, a review is highly recommended. Be certain to include APA elements such as running head, page numbers, headings, source citations, introduction, and conclusion in your paper.

Page 1 of 1

MBAA 523

Written Assignment Standards

The standards for written assignments are as follows. These standards will apply to all written assignments, unless otherwise indicated.

• Submit an original paper (one written by the student that has not been previously submitted to fulfill a requirement for another course).

• Apply APA style rules; use the current edition of the APA publication manual for guidelines. These rules affect any tables or charts, citations, references, running head, page numbers, and section headings.

• Provide a title page containing the name of course, title of paper, name of author, and date.

• Include a references page, if applicable, formatted to APA style requirements.

• Observe written assignment formatting requirements: Times New Roman font, 12-pt font size, double-spaced text, with numbered pages.

• The paper must be grammatically sound and free of spelling errors. See the Resources area in the course for helpful writing skills websites.

• Save your document as one of the following acceptable file types: .doc, .docx, or

.rtf.

• If specified, adhere to the minimum/maximum page number requirements as given in each assignment. Do not count the title page or the references page(s) as part of the minimum total.

• You will be required to use quality resources. Typically, this means that you should primarily use peer-reviewed journal articles. Note: If using a website as a reference source, use only quality material. For guidance, see Tips for Evaluating Websites from ERAU’s Hunt Library.

Additionally, review the evaluation rubric provided with each written assignment activity for details on grading criteria.

Embery MBAA523 Module 4.5 Written Assignment 2

Assignment 2: Fleet Replacement Analysis

Revised 7/15

This assignment has three objectives, to: 1) become familiar with the type and magnitude of mainline aircraft operating costs; 2) understand the operating economics of new versus older aircraft; and, 3) learn how net present value analysis is used in capital acquisition decision-making.

InselAir, a newer Caribbean airline based in Curacao, has engaged the aviation consulting firm SH&E to evaluate whether it should continue its fleet expansion with used McDonnell Douglas MD-80 aircraft or purchase new Airbus A-320s. You are the senior financial analyst with SH&E assigned to this project and will prepare a memorandum with your analysis and recommendations to InselAir’s Chief Executive Officer Albert Kluyver.

Note: The assignment has detailed requirements similar to those that would be given to a financial analyst. Be certain to read carefully before beginning work.

Background

InselAir is the national airline of Curacao and in 2015 staked its claim to be “one of the best airlines in providing international flexible connectivity to North and South America as well as the Caribbean region” (fly InselAir.com). From hubs in Aruba, Bonaire and Curacao, InselAir serves 27 destinations ranging from Charlotte in the US to Manaus and Quito in South America. The fleet comprises 19 aircraft: 8 McDonnell Douglas MD-80s, 3 Fokker 70, 6 Fokker 50 and 2 Embraer Bandeirante. InselAir plans continued fleet expansion.

Used MD-80 aircraft are available from several sources including the large MD-80 fleets at American and Delta which are gradually being replaced with new aircraft. US-based Allegiant Air has made used MD-80s the backbone of its fleet having acquired 18 of its early MD-80s from Scandinavian Airways System paying roughly $4 million dollars per plane in an all cash transaction. InselAir believes it could also acquire MD-80s for its expansion at similar prices. Though these aircraft are well used, service life is still 15 or more years. As with all older aircraft, the MD-80 burns more fuel and requires more maintenance than new generation aircraft of equal mission capability. Volatile fuel prices have added to senior management’s interest in evaluating new aircraft. As an alternative to the MD-80, Mr. Kluyver is considering purchasing new Airbus A-320s.

The Analysis

SH&E has developed an Excel template which is provided as an attachment for conducting your net present value analysis. You will need to insert costs and performance figures into the template. You may wish to review the template before reading further.

In order to complete your analysis, you will need to obtain current aircraft operating data and prices from authoritative sources. The sources listed below are sufficient and adequate for your project:

• Aircraft prices: Airbus publishes its aircraft list prices periodically. Search the Airbus Industries website or simply do a Google search for “Airbus aircraft list prices.”

• Aircraft performance data and operating costs: The Airline Monitor publishes extensive airline data needed for your analysis. The Airline Monitor is available through the Hunt Library Aerospace/Aviation electronic databases. When you’ve accessed The Airline Monitor, select Online

Edition, then Block Hour Operating Costs (pdf) . This is a large document. SH&E would have access to InselAir’s MD-80 operating data, but for this assignment, assume costs are very similar to Allegiant Air. For your analysis, use Allegiant’s reported data for the MD-80 and US industry data for the A-320 (use the data for the A-320, not the A0320neo). The data you need looks like this example:

• Fuel Prices: Your estimate of fuel prices over the next fifteen years is critical. Historical data on jet fuel prices are available from several sources. The Airline Monitor includes this data in the Block Hour Operating Cost document (above). Data are also available from the industry association Airlines for America. Select Economics & Analysis, then Traffic & Financial Results. Scroll down to select the appropriate reports. You may also find long-range forecast energy prices from the American Energy Information Administration useful.

Note that fuel prices increased dramatically during the global economic expansion of the mid-2000s peaking at nearly $4 per gallon in June 2008, but plummeted during the subsequent recession. Fuel costs seem likely to increase again when world demand recovers. You will need to estimate future fuel costs for the analysis. Be certain that the fuel price for the first year is the current jet fuel spot price (available from several sources via a web search). Because fuel prices are difficult to predict, develop estimates for a range of projected fuel prices. This is often done using optimistic, pessimistic, and most likely scenarios.

• Return on Invested Capital: The appropriate return on invested capital (the discount rate) varies by airlines; however, the following extracts from the financial press are illustrative. Alaska Air Group CEO Bill Ayer pointed to its target of 10% return on invested capital (ROIC). According to President Ed Bastian, Delta Air Lines is also targeting a 10% sustainable return on invested capital. Southwest Airlines is looking for a 15% ROIC. Your fleet replacement decision will depend on what rate you choose. Airlines with the best credit can borrow at the lower rates which also decreases the discount rate. You should perform a sensitivity analysis (work the problem with several discount rates) to better understand and defend your recommendation.

SH&E staff have surveyed InselAir’s management to arrive at several critical assumptions about aircraft costs and performance.

1. Airlines with solid balance sheets, such as InselAir, can normally obtain new aircraft for about two-thirds (2/3) of list price. After 15 years, an A-320 is estimated to be worth about half of the original purchase price (not list price) in the used market whereas an MD-80 will have only $100,000 in scrap value 15 years hence. Even if InselAir should continue to operate the new planes beyond 15 years, these values still represent an opportunity cost.

2. Because InselAir’s segment lengths are relatively long, it believes fuel burns (gallons per block hour) on a new A-320 will meet the lowest of any airline and that speed in miles per block will equal the highest of any airline.

3. Although InselAir’s business model does not provide for high aircraft utilization, because of the A-320 greater range capability, annual utilization (block hours per year) for the A-320 will be 25% higher than for the MD-80. Note: This annual utilization is for one aircraft, not the entire fleet.

4. InselAir plans to outsource its heavy maintenance, so it will pay another airline or maintenance repair facility for both direct and burden (overhead) costs. If it decides to purchase a new fleet type, it believes that its first year maintenance expense will equal the lowest for any airline operating the Airbus 320 but that these costs will increase by 2% per year. However, as the fleet of MD-80s age, InselAir believes that maintenance costs for this fleet type will increase by 5% per year.

5. InselAir configures its aircraft in high density, all-coach configuration (this assumption takes some liberty on InselAir’s actual configuration). It plans a seating capacity equal to the highest of any airline.

6. InselAir does not expect crew expenses to change with the choice of aircraft, so this and other immaterial costs are not included in the analysis (an extra flight attendant will be required but this cost is ignored here).

Task

Enter data into the Excel template. As you will see, this decision is critically dependent on your projection for future fuel costs and the discount rate employed. Run a few “sensitivity” analyses with varying fuel and discount rates to see how the fleet replacement decision changes. Remember that the net present value obtained is a total cost of operation. The spreadsheet computes the cost per available seat mile (CASM). The aircraft with the lowest net present value CASM is the best financial choice. Prepare a memorandum (not more than 2 pages not including appendices) to Mr. Kluyver summarizing your analysis and making a recommendation. Remember that executive management will need to understand how the analysis was conducted. Explain your assumptions and methodology concisely. Insert (copy and paste) and reference Excel worksheets as appendices to support your fleet replacement recommendation. Use other tables and graphs as appropriate to support your recommendation.

Notes

Check carefully to ensure the inputs and results of the discounted cost analysis are reasonable. The NP CASM should be between 3 and 6 cents depending on the input variables. This is lower than reported CASM for US airlines because many costs that do not affect the choice of aircraft type are not included. Total annual operating costs should be in the millions of dollars. The Airline Monitor report can be used to check for reasonableness.

You may wish to present your sensitivity analysis of projected fuel prices and discount rates in a single table. A 3 by 3 table with 9 combinations of prices and discount rates is one method.

Excel spreadsheets should not be submitted separately; Mr. Kluyver wants the entire report in a single document. The assignment is not in APA style. It’s a report for Mr. Kluyver in a business memorandum format. See Purdue OWL for guidance on writing business memoranda and memo format. Search OWL for “memorandum.”

Finally, remember that you are writing for Mr. Kluyver. You may assume that he understands aircraft operating costs and financial analysis including net present value, but do not assume that he is intimately aware of all the assumptions underlying the analysis or how the comparison between the aircraft was developed. Although he has not been directly involved in your analysis, he will need to explain the details to his senior management team. SH&E is a consultant hired to provide a carefully researched recommendation. Include sufficient detail in the memorandum and appendices so that he will not have to ask for additional information.

MBAA 523

Written Assignment Standards

The standards for written assignments are as follows. These standards will apply to all written assignments, unless otherwise indicated.

• Submit an original paper (one written by the student that has not been previously submitted to fulfill a requirement for another course).

• Provide a title page containing the name of course, title of paper, name of author, and date.

• Include a references page, if applicable, formatted to APA style requirements.

• Observe written assignment formatting requirements: Times New Roman font, 12-pt font size, double-spaced text, with numbered pages.

• The paper must be grammatically sound and free of spelling errors. See the Resources area in the course for helpful writing skills websites.

• Save your document as one of the following acceptable file types: .doc, .docx, or

.rtf.

• If specified, adhere to the minimum/maximum page number requirements as given in each assignment. Do not count the title page or the references page(s) as part of the minimum total.

Additionally, review the evaluation rubric provided with each written assignment activity for details on grading criteria.

Embery MBAA523 Module 6.5 Written Assignment 3

MBAA 523

Written Assignment 3: Airline Pricing Research Assignment

This assignment is designed to show how the economic concept of price discrimination is implemented in the airline industry and reflected in airline pricing. To obtain some limited price data, choose any city-pair and two competing airlines. A network and low-cost-carrier make an interesting comparison, but any airlines of interest are acceptable. For each airline, obtain the 4 prices for a typical round-trip itinerary with bookings 1 day in advance, and then for 1, 2 and 4 weeks in advance of the departure date. Itineraries with closer departure dates are more likely to be purchased by business travelers. Leisure travelers, on the other hand, usually book well in advance of the travel date.

To isolate the effects of advance purchase, the itineraries should depart and return the same days of the week at approximately the same times of day. Try to avoid the influence of holidays or other seasonal effects on demand. Use the airlines’ websites for all fare information.

In a short paper, first explain the theory of 3rddegree price discrimination as it applies to the airline industry including a graphical model. Explain how and why airlines would choose to practice price discrimination. Next, discuss your research methodology including the choice of airlines, the itinerary, and source data. Then, present the data. A simple table may be the best method for showing the itineraries and fares. Finally, discuss whether the data provide evidence of price discrimination. Draw appropriate conclusions.

There is no page limit, but 3 to 4 pages not including the title page, reference page, and any appendices, should be sufficient. Incorporate the standard elements of APA style including running head, page numbers, headings, citations, and references.

Page 1of 1

MBAA 523

Written Assignment Standards

The standards for written assignments are as follows. These standards will apply to all written assignments, unless otherwise indicated.

• Submit an original paper (one written by the student that has not been previously submitted to fulfill a requirement for another course).

• Provide a title page containing the name of course, title of paper, name of author, and date.

• Include a references page, if applicable, formatted to APA style requirements.

• Observe written assignment formatting requirements: Times New Roman font, 12-pt font size, double-spaced text, with numbered pages.

• The paper must be grammatically sound and free of spelling errors. See the Resources area in the course for helpful writing skills websites.

• Save your document as one of the following acceptable file types: .doc, .docx, or

.rtf.

• If specified, adhere to the minimum/maximum page number requirements as given in each assignment. Do not count the title page or the references page(s) as part of the minimum total.

Additionally, review the evaluation rubric provided with each written assignment activity for details on grading criteria.

Embery MBAA523 Module 8.5 Written Assignment 4

Airlines offer a variety of products ranging from the no-frills air transportation to international first class featuring amenity-filled cubicles with fully reclining seat/beds and attentive in-flight service. This assignment is intended to illustrate the variety of airline product offerings available and stimulate thinking about how best to serve the diverse wants and needs of passengers.

Europe’s Ryanair is well known for its cheap fares and bare-bones service. Europe’s old line network carriers including British Airways, Air France/KLM and Lufthansa, on the other hand, offer more choices and features within Europe and to major destinations worldwide. In Asia, low-cost-airlines are rapidly expanding in the marketplace. Air Asia and Jetstar are two of the larger LCCs (along with their various subsidiaries). Asia also is home to many full-service airlines such as Japan Airlines, Air China, Cathay Pacific, Singapore, and Korean Air.

In a short research paper, compare and contrast a chosen LCC with a full-service airline using Doganis’ 5 key product features as a framework (price, schedule, comfort, convenience, and image). Choose one or two city-pairsserved by both carriers on which to base the comparison. Summarize your findings and emphasize critical differences. Extensive data, such as the ancillary fee structure, may be best presented in a table. Discuss the passenger segment(s) targeted by each airline. Next, compare the airlines’ profit history using a common metric such as margin on total revenue. Conclude with an evaluation of each carrier’s overarching business strategy. Explain your assessment of the most profitable strategy.

Upon reading the paper, a potential passenger should have the information needed to choose between the two airlines on the selected city-pair(s). Note: Before beginning your research, ensure that the needed data are available from the airlines’ websites and other online sources.

Use APA style including a title page, table(s) or charts as appropriate, citations, reference list, running head, page numbers, and section headings. Of course, an introduction and conclusion are always appropriate. There is no page number requirement, but about six pages, not including title page, reference list, and appendices, should be sufficient.

MBAA 523

Written Assignment Standards

The standards for written assignments are as follows. These standards will apply to all written assignments, unless otherwise indicated.

· Submit an original paper (one written by the student that has not been previously submitted to fulfill a requirement for another course).

· ApplyAPA stylerules; use the current edition of the APA publication manual for guidelines. These rules affect any tables or charts, citations, references, running head, page numbers, and section headings.

· Provide a title page containing the name of course, title of paper, name of author, and date.

· Include a references page, if applicable, formatted to APA style requirements.

· Observe written assignment formatting requirements: Times New Roman font, 12-pt font size, double-spaced text, with numbered pages.

· The paper must be grammatically sound and free of spelling errors. See the Resourcesarea in the course for helpful writing skills websites.

· Save your document as one of the following acceptable file types: .doc, .docx, or

.rtf.

· If specified, adhere to the minimum/maximum page number requirements as given in each assignment. Do not count the title page or the references page(s) as part of the minimum total.

· You will be required to use quality resources. Typically, this means that you should primarily use peer-reviewed journal articles. Note:If using a website as a reference source, use only quality material. For guidance, see Tips for Evaluating Websitesfrom ERAU’s Hunt Library.

Additionally, review the evaluation rubric provided with each written assignment activity for details on grading criteria.

Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteEdu. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.

Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.

Do you need an answer to this or any other questions?

Do you need help with this question?

Get assignment help from WriteEdu.com Paper Writing Website and forget about your problems.

WriteEdu provides custom & cheap essay writing 100% original, plagiarism free essays, assignments & dissertations.

With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.

Chat with us today! We are always waiting to answer all your questions.

Click here to Place your Order Now

02 Jan · If specified, adhere to the

About Us

Quick Links

Recent Posts