Eagle Airlines A Case Study Essay

999 Words Sep 21st, 2013 4 Pages
Eagle Airlines
Keith Russell, president of Eagle Airlines, a small airline operating in south-eastern
Australia, had been considering expanding his operation and now the opportunity was available. An acquaintance had put him in contact with the president of a small airline in the west that was selling an aeroplane. Many aspects of the situation needed to be considered however, and Keith was having a hard time sorting them out.

The Company
Eagle Airlines (“Eagle”) owned and operated three twin-engine aircraft. With this equipment,
Eagle provided both charter flights and scheduled commuter service between several cities in eastern Australia (Melbourne, Sydney, Canberra, Adelaide, Hobart, Launceston and smaller communities in the
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Annual fixed costs, including insurance, were estimated at $160,000. Based on his experience at Eagle, Keith knew that he could arrange charters for around $1,900 per hour, or charge a rate of approximately $240 per person per hour on scheduled flights. He expected on average that the scheduled flights would be 60% full. He hoped to be able to fly the aeroplane for up to 1,000 hours per year.

Exhibit 1. The Piper Chieftain

Keith would fund the purchase out of the cash surplus of Eagle Airlines, and tax relief is available for the depreciation of the aeroplane over 5 years. Profits resulting from the operation of the aeroplane would be taxed at the normal corporate tax rate of 33%. The aftertax discount rate employed by Eagle Airlines to evaluate projects is 15%.

The Analysis
As Keith pondered this information, he realised that many of the numbers that he was using were estimates. Actually, there seemed to be a lot of uncertainty in most of the assumptions

he made about his business, and he realised that these uncertainties may have a significant impact on the decision whether or not to purchase the new aeroplane. He therefore decided to investigate this a little further.

Although the new aeroplane will certainly be operational for 5 more years, there is a chance that it can be used for one or two years more. However, given his experience in the past,
Keith was not

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