Global Airlines Harvard Case Solution & Analysis

The Value of Flexibility at Global Airlines

Real Options for EDW and CRM

Q1: Explain the difference between a conventional NPV and an expanded or strategic NPV?

Conventional NPV (NPV) is a process through which capital budgets are prepared and customary NPV analyzes the profitability of proposed investment. Present values of a venture is based on the future estimated cash flows associated with proposed investment project, which will occur over the useful life of the venture that are discounted at the appropriate risk adjusted WACC. Moreover, in order to reach at the NPV, initial investment is deducted from the NPV generated by future cash inflows. In other words, present value is today’s value for money that will be received or paid in some future time. Moreover, constant cash flows can be discounted by using annuity discount factor but fluctuating cash flows will be discounted by yearly discounted rate. The decision criteria of selecting proposed investment project that is based on the conventional NPV is to select the NPV; which has at least zero or positive NPVs, however, the projects with negative NPVs should not be accepted and in case of capital rationing dilemma investment projects, the most higher NPV will be selected in order to generate higher returns using the limited capital. Meanwhile, zero NPV means that project will generate returns that equals to WACC and positive NPV will generate higher return than WACC used in discounting the cash flows, however, conventional NPV has been calculated with passive management that means the implied project commitments cannot be changed.

Meanwhile, the conventional NPV considers time value for money because the value for money decreases with the passage of time and cash flows that the venture will generate in future, therefore, NPV methodology is used in order to reach at the real value for money at the present.

Extended or Strategic NPV is calculated with active management, which means the project associated commitments can be altered in future and these possible alterations can be in the form of different options available to management such as the option to delay means that the management can delay the decision to invest in a particular project, the option to abandon means that the management has the option to close or sell the project if it feels that the venture is less attractive after the project has been initiated and so on. Moreover, in order to reach at extended or strategic NPV, value of option is built-in in the normal NPV as calculated above.

Extended NPV increases the flexibility of management while making investment decisions, which let the management to wait for favorable conditions that will enhance the NPVs of project. Further, existence of real options will enable management to effectively cover the risk and uncertainty associated with the specific project.

Q2: Describe Global Airlines problems and the contemplated solutions?

Global Airlines had faced extreme level of difficulties during the past years. Earlier recession period and 911 events had exposed airline companies to the danger of business closure due to the high losses that were caused by the two events and in order to overcome these losses, airline companies were very much active in cost cutting. However, Global Airlines has also played an active role in cost cutting that has led to severe consequences. While recovering from these crises, Global Airlines had to postpone their capital investments; moreover, these crises also led to the decline of airline growth potentials. However, continuous efforts towards crises management through cost cutting strategies enabled Global Airlines to rise once again.

Meanwhile, Global Airlines has failed to effectively manage the customer service issues. Recent events in the airline industry have affected the Global Airlines’ customer services operations and it has been noticed that customers are not happy with the eminence of service that they receive. Therefore, Global Airlines has conducted customer survey in order to indentify the improvement areas in their customer service operations, however, the survey has helped in identification of problematic areas but it has also spread the fear amongst the management. Moreover, the recent mishap with the board member of Global Airlines who had received bad customer service also contributed towards spreading the panic. Additionally, Global Airlines’ information technology system is not efficient enough to support its data management capabilities because the data mart will help in improving the customer service and they also need to concentrate on such investment project that yield high returns. Furthermore, it needs to invest in compatible projects, which are better suited to the company’s overall operations.

However, Global Airlines can analyze the option available to it while encountering the problems that it is facing because the option will provide the accurately measured value of projects; which helps in selection of more attractive investment projects. Moreover, the option to deploy the information technology system will enable the management to reduce the risk of failure of system and additional developments can be made by exercising the option to deploy information technology system.......................

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