There is an active, competitive leasing (i.e., rental) market for most

QUESTION

There is an active, competitive leasing (i.e., rental) market for most standard types of commercial jets. Many of the planes flown by the major domestic and international airlines are not owned by them but leased for periods ranging from a few months to several years.Gamma Airlines, however, owns two long-range DC-11s just withdrawn from Latin American service. Gamma is considering using these planes to develop the potentially lucrative new route from Akron to Yellowknife. A considerable investment in terminal facilities, training, and advertising will be required. Once committed, Gamma will have to operate the route for at least three years. One further complication: The manager of Gammas international division is opposing commitment of the planes to the AkronYellowknife route because of anticipated future growth in traffic through Gammas new hub in Ulan Bator.How would you evaluate the proposed AkronYellowknife project? Give a detailed list of the necessary steps in your analysis. Explain how the airplane leasing market would be taken into account. If the project is attractive, how would you respond to the manager of the international division?
The key question is: Will Gamma Airlines be able to earn economic rents on the Akron-Yellowknife route?The necessary steps include: a.Forecasting costs, including the cost of building and maintaining terminal facilities, all necessary training, advertising, equipment, etc. b. Forecasting revenues, which includes a detailed market demand analysis (what types of travelers are expected and what prices can be charged) as well as an analysis of the competition (if Gamma is successful, how quickly would¦

mpetition spring up?). c.Calculating the net present value. The leasing market comes into play because it tells Gamma Airlines the opportunity cost of the planes, a critical component of costs If the Akron-Yellowknife project is attractive and growth occurs at the Ulan Bator hub, Gamma Airlines should simply lease additional aircraft.

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