Task 7

[John Bashunov]

[Dana T]

anyone get started on this one?  if so, any initial thoughts? are you comparing the results in task 7 to a single scenario in the model (task 2-6 file) and then going on from there to discuss what could/should be change in model and whether or not BBA should continue with the venture?

 

 

 

 

On Thursday, July 25, 2013 10:28:41 PM UTC-4, John Bashunov wrote:

[Dana T]

Also, is the excel document that you all have just contain on worksheet with like 12 rows and 4 columns of info?  I was looking at Task 7 posts from other groups and I am feeling like I am missing something so just want to be sure my file downloaded correctly. thanks!

[Dana T]

*one worksheet

[John Bashunov]

Didn't get started really, but crunched some numbers. The IRR for the venture in the 3 years is -68% and there are still 16 mil miles to be cashed out. 

Based on the current fuel price of $5, and using the average of the average fuel/labor expense over the 3 years, I get an outstanding Liability of around $2.5 Million left over from the 3 year contract. Granted this is amortized over about 10 years or so, but this would need to be addressed in the renewal. 

If they were to keep this thing going, then they'd have "Other Expenses" to take care of as well. Basically, unless the price of an Air Mile is increased 10-fold, this venture is a lost cause. 

Let me know how you're thinking of approaching this.

[Dana T]

I follow the IRR but not sure I follow average fuel/labor, I think part of the reason is because I was thinking labor was in the other expenses given the the set up and ongoing admin were both essentially known for year 1 and the "other expenses" exceeds the set up and ongoing by the exact labor cost, given the initial assumption of .005 per mile redeemed.

 

I was thinking I would discuss how year 1 differs from the model's results and then move into how inflation differed over the years.

 

I can't decide if I will recommend that they continue or not - earned miles are increasing each year which may be reason to contine the venture?

[John Bashunov]

I thought this at first as well, but you have to see the flip side to that. Since earned miles is your only source of revenue (now that the bag fees are gone), where else are you going to make your money to pay out the redeemed miles and keep the whole operation running, especially if you are already in debt from the last 3 years? 

Also, I don't think you should approach this with the mindset that it is just like the model provided. I think they just want you to go into this exercise knowing which variables are related and how. Then make an argument that this venture will meet management's goals in the future. 

[Dana T]

Ah yes, that is a very good point!

 

ok that makes sense.  I think I got bogged down thinking in more detail and with respect to current model because it says recommend any changes to model assumptions - but I can see how there could be a more generl discussion/way of responding to the task.

[ancl...@gmail.com]

We know that the current book of business will result in a loss but this loss will be there even if you decide to not continue the venture...so I think the question is: are you willing to give it another shot under the condition that prices will be renegotiated.

On Thursday, July 25, 2013 9:28:41 PM UTC-5, John Bashunov wrote:

[John Bashunov]

Agreed, and I think under the right circumstances (high enough profit margin), I would gladly continue down this path.

But you can't ignore the fact that you are going into the situation already down some, so you'll need to make up for that difference in the new run. The question then becomes: is it risk really worth the reward? If yes, then at what price? Is that renewal price reasonable?

Let me know what you think.

[Dana T]

I went with not to coninute the venture given the profit level of year 2 & 3 (3 was low) - just didn't seem sustainable.

 

submitted a few mins ago, so now the waiting game begins, good luck to all!!