HONG KONG DRAGON AIRLINES LIMITED (B) Harvard Case Solution & Analysis

HONG KONG DRAGON AIRLINES LIMITED (B) Case Study Analysis

Recommendations

From all the above qualitative and quantitative analysis,it could eb seen that the third option is excluded because it poses same characteristics as compared to sale and leaseback agreement. Further, it will not be beneficial because at last the spare engine will be purchased by the IAE.

The actual analysis is between the purchase option and the sale and leaseback option. Both options yielding positive NPV’s along with potential characteristics. For sale and leaseback, the company has to purchase the equipment from IAE. And in the case of purchase same option will work. The sale and leaseback option are long term and carries monthly leasing payments along with the threat of ownership. Thus, it is recommended that the upfront purchase option is best and yields higher returns. The company has no money capitalization problem;thus, the company poses enough cash to afford this purchase at that time with the stated proposal requirements. The company should go for upfront purchase by depositing 15% initial cash.

Sensitivity Analysis

The sensitivity analysis has been performed in order to analyze the potentiality of each option with regard to quantitative as well as qualitative measures along with identifying the key drives. The board of directors required a detailed plan analysis of the capital investment and any other options that it has to replace spare V2500 engines.

The key drives were the economic market of aircraft industry which was representing an increasing trend. It has an option to acquire the engines at sale-and-leaseback or direct lease that qualifies for operating lease and it requires monthly rental payments and expenditure on the maintenance of the engine as prescribed by the lessor or the guidelines for the maintenance of the engine whichever the market practice is.

The lease providers require a sufficient cash reserve balance with the company for the lease rentals along with the maintenance expense reserves. The company has to maintain sufficient cash balance if it undertakes such lease arrangement. The aircraft industry was too diverse, Airbus has been formed by the merger of two companies and consisted over 14 aircraft models which includes A318 to the A380 models.

However, the company was successfully managing its A320 aircraft family but unbale to provide timely delivery of its A380 aircraft. Additionally, the main thing was the list price of the engine which was not fixed- subject to escalation. Furthermore, the maintenance was one of the main concernsbecause of its complex procedure.

Conclusion

In 1985, a regional airline- Dragonair was founded in Hong Kong by a local businessman. Dragonair was providing regional passenger services and has twenty-one Airbuses along with three Boeing 747 for facilitating its customers. The analysis has presented that from both the discounted rate the NPV is yielding positive return. With the help of WACC and Cost of debt, the NPV is positive. But, if we consider the best potential discount rate, we should first consider the greater positive amount.

Thus, it is recommended that the upfront purchase option is best and yields higher returns. The company has no money capitalization problem; thus, the company poses enough cash to afford this purchase at that time with the stated proposal requirements. In January 2006, Hong Kong Dragon Airline’s management recognized that one of its spare engines should be replaced by a new engine because it could not be repaired (“BER”)............................

 

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