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A 300 words evaluation of the recommendations for American airlines - Essay Example

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The calculations of ROCE, payback period and discounted cash flow have made it easier for me to evaluate our first recommendation. To evaluate second recommendation, we have used cost benefit…
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A 300 words evaluation of the recommendations for American airlines
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A 300 words evaluation of the recommendations for American airlines

Download file to see previous pages... We have found that acquiring Jet Blue is a good strategic option for American Airlines because cost of the project is $787 whereas; discounted cash flow is $848. The payback period is only 2.76 years and after this period; American Airlines will cover its costs and will incur positive cash flows. Moreover, ROCE is 0.3830 which means that after acquiring Jet Blue, the company may earn significant return on its total capital employed. Second, American Airlines should give more focus on hedging fuel prices because if fuel prices increase, it will incur a profit of $836 million and if fuel prices decline then it may incur a loss of $836 million. However, in consideration to previous fuel prices trend, a 10 percent increase in fuel prices is expected. Third, hiring a training company is a very good recommendation because company may improve its teamwork performance, crew coordinator, customer services and ultimately the revenues.
Acquiring Jet Blue should be the first, hedging of fuel prices should be second and hiring a consultant should be third on priority list because company is already hedging prices and it needs to be get more aggressive in it and hiring a consultant does not incur that much efforts therefore, they are on second and third.
We have assumed that Net worth of JetBlue is 12 percent3 of its assets which means that if its assets in 2009 were $6554 million then its net worth is $787 million. This will be the cost of the project for American Airlines.
To project the net revenue, the growth rate of 1.68 has been used. It has been calculated by subtracting the net revenue of 2008 from net revenue of 2009 and dividing it by the net revenue of 2008. I have assumed that average revenue generate per year will be about $285 million, which has been calculated by (155+416)/2.
In 2008 and 2009 the cost of fuel has increased by 10 percent. The current hedging fuel price of American Airlines is $2.48 per gallon ...Download file to see next pagesRead More
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