Introduction
In the eighties approximately, aviation began to expand its role in international and intercountry transportation, and the need to build new airports was crystallized. As Stapleton Airport’s capacity levels became insufficient to meet the needs of Denver’s growing economy during the period, the idea to build a new airport emerged. Consequently, city officials initiated the project to build Denver International Airport (DIA), which could be considered a megaproject by that time’s standards. Although presently, the airport is one of the busiest in the country, the history surrounding its construction is a source of valuable lessons in project management.
The Case Study Summary and Themes
DIA was planned to maintain national airport capacity and alleviate the pressure under which it was placed by the Airline Deregulation Act of 1978. The act led to the fall in ticket prices and thus a significant increase in air travel. After the deregulation, air travel became more accessible to the general public, and the need for Denver’s airport capacity expansion was clarified. The new project was envisioned to have multiple benefits, such as stimulating local and regional financial growth, attracting more business. Stapleton Airport was not able to satisfy the growing need due to its runway design that created constant airway bottlenecks. One of the options was to modernize Stapleton Airport, which later was dismissed, and the airport became DIA’s satellite meant to mitigate its abundant traffic. Thus, the city’s economic growth and democratization of air travel are the two precursors for the DIA’s construction that unpredictably took about ten years.
One of the main themes that can be traced in the history of DIA’s construction is consistent budget growth. Initially presupposed 1.2 billion dollars turned into 5.0 billion dollars by the middle of the nineties. The most cost increases can be attributed to the ongoing modifications in the airport’s construction scope. For instance, concourses’ design, their widening, and lengthening changed significantly since the original master plan was established. As budget became a problem, the number of gates that each concourse was supposed to host decreased, and none of the planned concourses were consequently built in their full size. The planned one hundred six gates were reduced to seventy-two. Furthermore, Continental and United Airlines profited from the city’s need for the airlines to join and made their own modifications to the project, such as moving international gates’ place, widening concourses, and roof redesign. Nonetheless, United Airlines, for which DIA presently serves as a hub, received twenty gates from initially requested forty-five. Overall, it could be stated that constant changes in the airport’s construction became one of the primary contributors to the budget increase.
Failure to perceive complexity and adequately analyze the involved risks is another central theme in DIA’s construction. The theme is embodied in the complications related to the airport’s destination-coded vehicle baggage handling system that United Airlines also requested. The new system was supposed to decrease the time that bags takes to be transported between gates, improving overall turnaround time and making baggage-related operations more efficient. Yet, the complexity and efforts needed to incorporate the destination-coded vehicle baggage handling system for all concourses were underestimated. The system’s intricacy, which surpassed what was originally believed about it, delayed DIA’s official opening for over a year. The airport’s project management team (PMT) did not ensure that the baggage handling system could be incorporated under the given timeframe and budget.
Although flexibility is an essential characteristic for efficient project management, the ongoing alternations that the airport’s PMT failed to curb contributed to the construction delays and budget increase. Multiple aspects of the project underwent considerable modifications, including the construction scope, roof design, and baggage handling system. For instance, the roof design was altered several times, since at first it put the budget under strain, and then it was not able to reflect the uniqueness of Denver. The overall airport’s planning also provoked arguments about its maintenance, resulting in additional requests to adapt the design. After overcoming numberless obstacles, DIA was opened ten years after the idea of it was conceived. Conclusively, the budget growth, deadline extensions, undervaluation of the project complexity, and resulting endless modifications are major themes in the case study.
Directed Research Relating to the Case
Project Feasibility Study Techniques and Go Decisions
A project feasibility study helps estimate possible costs and profits to establish whether a project should be pursued. These preliminary assessments serve to determine the viability of a project, its value to an organization. They provide several benefits – such studies prevent unplanned expenditures and serve as a basis for a go or a no-go decision. The end of the feasibility study commonly initiates requirements and design phases. On the other hand, a feasibility study can also show that a project is not viable, and consequently, it is terminated. Overall, conducting a feasibility study is a vital step before committing money and time resources.
A project’s viability can depend on multiple factors and encompass several areas. Hence, technical, economic, legal, operational, and scheduling feasibilities are distinguished (Mukherjee, 2017). Each field has its peculiarities regarding the subject: construction, for instance, entails investigation of “land purchase and sale review, constraint survey, cost/revenue models, permit requirements, risk analysis, etc.” (De Marco, 2018, p. 79). In order to assess project feasibility, several techniques can be combined. One of the approaches is discounted cash flow (DCF) analysis that aims to determine whether a project can generate enough profit to make it feasible and its monetary security (De Marco, 2018). Benefits/cost ratios are also applied to estimate a project’s feasibility, specifically in aspects where DCF analysis fails (social benefits, for example) (De Marco, 2018). The two outlined methods primarily revolve around the economic element of project feasibility.
Making a go or a no-go decision is the final step of feasibility assessment. Once the needed data gathering and analysis are performed, they serve as the basis for the final decision. Taufik and Karyadi (2018) propose a decision-making technique based on three processes – assumption exploration, assumption selection, and assumption testing (Taufik & Karyadi, 2018). More specifically, an organization should reflect on present competition, socio-economic prospect, technological advancement, and how these factors would affect the project in development. Although the outlined technique is initially applied in digital technologies, its conceptual framework seems to be adaptable to other fields as well.
In the DIA case, a feasibility study was effectuated and identified the project’s exceeding complexity but did not convince project executives to introduce changes to the design or rethink schedule. Following the project’s launch, the city council hired an engineering consulting company (Breier Neidle Patrone Associates) that performed an evaluation and concluded that it was too challenging and convoluted for the approved timeline (Huckle & Neckel, 2019). Such a complex project as DIA’s construction was restricted by the deadline that did not account for its intricacy. The main concern was the baggage handling system, which ultimately became a major problem that postponed DIA’s inauguration (Huckle & Neckel, 2019). Nevertheless, the project executives decided to proceed regardless and without changes. Thus, the main problem concerning feasibility and decision-making was that the performed study did become the basis for a no-go decision.
Using Bonds to Finance Projects and Factors that Affect Bond Ratings
Bonds is a funding source that can be used as an alternative to bank loans. The source represents a chance to collect funds for projects that necessitate sizable amounts of investment for their completion. Using bonds to finance projects is a business practice based on the need for strategic growth and sustaining assets in the state of good repair. This is particularly relevant to infrastructural projects that occur over significant periods (Oji, 2017). Bonds vary based on the interest rates they provide – fixed rates and floating rates that adjust periodically. The principal advantage of utilizing bonds is obtaining long-standing fixed rates that are more cost-effective than bank credits. According to Oji (2017), “bonds are long-term investments and hence suffer less from the day-to-day volatility that characterises many other types of securities” (p. 9). Nonetheless, bonds can also considerably augment the costs of a project. This alternative funding source is characterized by higher financial risks and rigorous restriction terms. Corporate bonds specifically, can entail default, liquidity, and inflation risks (Oji, 2017). Generally, the decision to use bonds and what type should be taken considering their numerous disadvantages.
Bond ratings can be affected by both internal and external factors. They can vary from AAA to D, reflecting the ability to meet financial commitments. Credit risk is one of the most significant factors in this regard: an organization’s ability to demonstrate higher creditworthiness directly correlates with corporate bond ratings (Sun et al., 2019). Moreover, large corporate events, negative and positive, impact bond ratings accordingly. Rating agencies also employ financial ratios to evaluate bonds, namely: profitability, growth, leverage, and liquidity (Sun et al., 2019). The enumerated elements are categorized as internal factors since they can be regulated by companies themselves. On the other hand, external components that can affect bond ratings include global and local economic situations and industrial peculiarities. Nonetheless, there seems not to be a unified opinion about the factors’ significance as some researchers claim that size is the most certain predictor for a company’s bond rating (Sun et al., 2019). This notion could be explained by the presumption that larger firms are less likely to default on their payment. Overall, to estimate bond rating, an array of factors relating to a company’s internal state and overall economic situation are considered.
Bonds appear to be frequently used in the United States for large-scale construction projects. To raise capital for DIA, the city council repeatedly issued bonds, which was done not to increase taxes to cover the construction (Kaps et al., 2018). Ultimately, this decision resulted in the airport’s growing bond debt. Numerous design problems and following delays in schedule impacted its stock, which began to fall. This situation, as well as the budget deficit, prevented DIA from issuing new bonds. Furthermore, the prolonged delay due to the baggage handling system issues led to the possibility of a default, since maintaining the airport without opening it is not cost-effective. To attract investors, the city council needed to provide better terms of interest (Kaps et al., 2018). Consequently, the airport’s bonds were evaluated, exceptionally low, obtaining nearly junk-bond status (Kaps et al., 2018). Therefore, it can be stated that the negative bond rating was a consequence of multiple adverse large-scale corporate events at DIA and its inability to meet financial commitments.
Recommendations and Conclusions
Even though the airport under consideration is presently fully functioning, the array of problems that emerged during its construction could prompt one to describe the megaproject as failed. The encountered in the process issues were not predicted, as the project was perceived as complicated, but also typical and low-tech except its one component that had revolutionizing potential – the baggage handling system (Huckle & Neckel, 2019). Yet, difficulties emerged before the attempts to implement the structure began and can be traced to the ongoing modifications in concourses and roof design. On the whole, the DIA case provides several valuable lessons in project management.
One of the primary PMT’s mistakes was disregarding the engineering consulting company’s recommendations about the project’s complexity and its infeasibility for the established timeframe. The situation demonstrates that the analysis of the early risks did not account for possible troubles associated with trying to implement the innovation. The PMT drastically underestimated the situation’s complexity; the case accentuates the need to incorporate experts’ recommendations. Furthermore, the project seemed to lack a unified vision and sense of direction, as the airport’s design was under ongoing modifications, which meant constant budget increase. PMT failed to predict how these sub-projects would affect the general project. Thus, the main lessons learned would be the need to perform a feasibility study before the project is initiated and rely on its results for the final decision. Additionally, the case shows that innovations should be handled with caution.
Planning and controlling projects of similar scope requires colossal and uniform efforts of numerous people. Since most projects are divided into several phases and sub-projects, it is essential to secure that these elements do not create barriers for one another. Although DIA’s PMT was forced circumstantially to agree to the Continental and United Airlines’ changes, they eventually disrupted construction and led to shifts in schedule and budget. Adjusting to numerous requirements presented by stakeholders, despite its necessity, should be balanced against the damage that it can cause. Potentially, if the airlines were involved in the design at earlier stages, the problem could have been avoided. Hence, the principal change regarding the project would be regarding the incorporation of the destination-coded vehicle baggage handling system – a decline to do so, or initial replanning.
Conclusively, DIA’s construction was obstructed by poor planning, lack of communication, frequent underestimation, inability to predict what modification requests entail, inefficient stakeholder management, and overwhelming schedule pressure. The case’s complexity could be further narrowed down to scheduling and prediction mistakes and the absence of constancy in the strategy. Still, the most important lesson that the case teaches could be that failure is not always irreparable. Despite the delay and over-expenditure, DIA was eventually opened and now constitutes one of the largest airports globally and serves as a departure point for hundreds of local and international destinations.
References
De Marco, A. (2018). Project feasibility. Project Management for Facility Constructions, 79–92.
Huckle, T., & Neckel, T. (2019). Bits and bugs: A scientific and historical review of software failures in computational science. SIAM.
Kaps, W. R, New Myer, D. A., Lanman, R. T. & Sigler, J.. (2018). The need for airport funding. Collegiate Aviation Review International, 19(1), 1–21.
Mukherjee, M. (2017). Feasibility studies and important aspect of project management. SSRN Electronic Journal, 2(4), 98–100.
Oji, C. K. (2017). Bonds: A viable alternative for financing Africa’s development. Economic Diplomacy Programme, 1–24.
Sun, K.-A., Park, S., & He, Z. (2019). Effect of franchising on restaurant firms’ risk evaluations in the bond market. International Journal of Hospitality Management, 83, 19–27.
Taufik, C., & Karyadi. (2018). Go/no-go decision-making method on business development of software development in Indonesia. Journal of Entrepreneurship, Business and Economics, 6(2), 71–90.