Diversification planning

Read the incident in the Diversification Planning document (SEE BELOW). In your post, indicate which action from the list of 13 possibilities you would recommend spending money to investigate and your rationale for recommending it. Also, identify the ethical implications of your recommended action.

The planning officer of your airline has been gathering information concerning several opportunities for your firm. Since the climate seems good for additional common stock sales and bank loans, the possibilities of expansion through merger and acquisition seem very good. An opposite twist has also presented itself—an offer to purchase your airline. A thorough investigation and analysis by a competent financial analyst specializing in such matters will cost $3,000 for each item listed below and will be completed in three to nine months (with the exception of selection M which costs $6,001). This would be a necessary first step in pursuing any of these business opportunities.

Although these opportunities may not be possible before the end of the simulation, your instructor wants you to determine which you feel are appropriate. Select the total amount (in the decision input screen) you want to spend for the investigation(s), e.g., $6,000, 9,000, 12,000, etc.

Risk factors as shown below are on a scale of very low risk (1) to very high risk (10). The risk factor takes into account the economic stability of that particular type of business, the difficulty in operating it, competition, and the profit potential.

1. Acquire a  food  service  company  that  serves  several  airlines.  It is located  in  the  airline's  largest hub.  The cost is $500,000 and the Return on Investment (ROI) is estimated to be in the 12-20% range with a risk factor of 5.
2. Go into the car rental business at one of your high-traffic cities. The facts are the same as presented in Incident: "Diversification—Auto Rental" except it is in a different city than depicted in that incident. Risk factor 5.
3. Begin a new company that would refurbish commuter aircraft.  Due to the increasing cost of  new  aircraft,  it  is  felt  that  many  airlines  would  be  interested  in  rebuilding  and  refurbishing  their  current  fleet  instead  of  purchasing  a  new  fleet. The cost  would  be  $2  million and the ROI is estimated to be in the 15-28% range with a risk factor of 6.
4. Acquire a  ground  service  business  that  serves  eight  cities, including  three  that  you  are  currently  serving.    This  type  of  business  handles  all  baggage,  refueling,  interior  cleaning  and restocking of rest rooms, etc., for airlines.  The parent company of the service wants to concentrate on businesses more in line with its other holdings and is willing to sell for $1 million.  The ROI is estimated at 14-25% with a risk factor of 6.
5. Purchase a  small  airline  that  is  currently  competing  in  two  of  your  markets. The firm is  operated efficiently and has seven Metroliners and one Jetstream; all aircraft and facilities are  leased.    The  owner  wishes  to  retire  and  is  asking  $2  million  with  liberal  credit  terms.  ROI estimate 20-30%; risk factor is 7.
6. Purchase  a  building  for  the  firm's  offices  in  a  renovated  downtown  building  with  a  prestigious  address. A ten-year, 6% historical development loan is available. Cost $300,000.  Savings in rent would be $30,000 per year.  
7. Open a Fixed Base Operation (FBO) at one of your hub cities. An FBO fuels and maintains airline, business, and private aircraft; rents, leases, and sells aircraft. The facility could also serve as a minor repair station for your aircraft. The cost is $1 million and ROI 10-33%. The risk factor is 5.
8. Open a training facility for airline pilots. The center would specialize in offering the recurrent training required by the FAA to smaller airlines that cannot afford a facility of their own. A modern simulator would be acquired, which would be very enticing to many airlines. This diversification would allow your own pilots to train with the very latest technology. The cost would be $250,000; ROI of 15-20% and risk factor of 4.
9. Lease three cargo jets which you would operate exclusively for a large air-package service firm. The firm is willing to give a four-year contract with a clause that automatically adjusts the fees to reflect the current cost of fuel. The cost to establish the business (crew training, additional maintenance facilities and equipment) is $300,000. The ROI is 20% and the risk factor is 3 to 4.
10. Become the regional distributor for a new 19-passenger airliner built in Spain. It is a cabin class, pressurized, propjet aircraft with a restroom. The aircraft's strong features are its luxurious interior design and state-of-the-art cockpit. The manufacturer is willing to lease one of the aircraft to you to put in service and concurrently serve as a demonstrator for $72,000 per quarter. The aircraft sells for $4.2 million with a sales commission of 5%.
11. The cost of establishing a sales office, critical parts inventory, and first-year marketing expenses is $250,000. The ROI could be negative or as high as 1000% if a large order is obtained. The risk factor is 7-8.
12. Refurbish waiting areas in all cities served with a new, upbeat motif, including new counters, signs, and furniture. Cost: $20,000 per city. This cost would be to conduct a market research study to ascertain whether passengers really care about waiting-area ambiance.
13. Investigate the possibility of self-insuring all aircraft for any damages to the aircraft itself. Liability insurance would continue to be placed with an insurance company. The banks and leasing companies would require that you deposit $300,000 per aircraft in an escrow account as a reserve against any damage. You would receive interest on this deposit at 2% above prime. You haven't had any hull damage in three years. Hull insurance premiums average $5,000 per year per aircraft.
14. Make  a  recommendation  to  the  board  of  directors  to  accept  or  reject the  offer  of  a  large  conglomerate to purchase all the common stock of your airline at 20% above market price.  Each  member  of  the  management  team  would  receive  a  "golden  parachute"  contract  that  paid $100,000 if involuntarily separated from the firm.  NOTE: The fee for analyzing this proposal is $3,001.  

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