Aircraft on Ground: Case Study

Topics: Weighted average cost of capital Pages: 2 (527 words) Published: October 19, 2012
AOG Case Clarifications

Q: Exhibit 2 indicates that CML 19 does not fly on Saturday. Do other LAC flights such as CSM20 and American Airlines fly on Saturday? A: Every day, there are two LAC flights on the route Santiago - Miami, and also two flights on the reverse route, Miami - Santiago. Q: Clarify the flight time units A: Think of "flying time" (FT) as "hour spent flying". When you compute the fuel costs, a good way to check whether you're on the right path is that the end result is a "sensible" dollar amount (e.g., fuel for an entire flight better cost more than $20K !) Q: Clarify the depreciation formula and the use of weighted average cost of capital (WACC) A: The value is decreasing linearly, so that after 10 years, the piece is worth 0. This should allow you to compute the amount you expect to receive for the piece after 1 year, 2 years, etc. For the purposes of the case, think of WACC as a discount rate that LAC applies to all its future cash flows. Q: In the case of Bennett Solutions, if the support assembly does not fit, do we need to build the tree into a recursive model of considering buying another new part from Miami supplier or buying another from ARC, etc. or can we just end that branch of the tree taking into account the cost of returning the product and the reduced refund price? A: There is no set answer, so make whatever assumption you think is reasonable, state it clearly, and proceed with it. Q: Is the cost of rebooking per passenger another decision tree? What we are trying to figure out is the % of load (occupied seats) and % of passengers looking to rebook same day etc. that are to be used as fixed for calculations or as uncertainities. A: Try to make as few assumptions as possible. As a general guideline, when the case gives you enough data (e.g., historical numbers, estimates, etc), such that you can compute a number directly, try to do that, instead of introducing new elements in the decision tree. Q: Is it possible to fly an empty...
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