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Plans to Expand Operation: Acquisition Options of Seven Aircrafts

Introduction

A market analysis quantitatively and qualitatively assesses an industry’s market. It assists in understanding market size and value, the customer segments and their buying patterns, and the economic environment’s barriers. The airline industry provides passengers with transportation services via flights. The companies acquire the aircraft through various means, including purchase, rent, or lease. Moreover, the airline industry is characterized by acquisitions, mergers, and consolidation.

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The airline industry has evolved over the years and only has room for significant players who have a monopoly over the market and decide on asset and transport prices. The new entrants into the airline industry have characteristically exploited two specialty segments, the price niche and the route niche (Gunarathna, 2020). These segments focus on offering more convenient and superior, less costly service for its customers. However, today, price positioning alone is no longer a concept when building an airline since the flying public expects low fares. Therefore, service mix and route selection have become the real market segment opportunities today.

The expansion of any business is a strategic exercise and requires the identification of specific reasons for the implementation. In most cases, it increases current sales or introduces new goods into the market. The expansion process of an airline involves planning, market analysis, and the use of funds to ensure the acquisition of quality assets (Bakır and Atalık, 2021). Some specific considerations are required for an airline company before expanding the business. These factors include customers, employees, vendors, and procurement contracts. Analyzing the customers is necessary to identify whether it is beneficial regarding money, time, and resources.

On the other hand, consideration of employees is vital since more staff are required in the new locations. Vendors are also considered to identify who is capable of continuing with service delivery. Finally, the procurement contracts of the business are a necessary factor. This paper elucidates the various acquisition options and recommends the best choice for expanding the company’s operation by adding seven aircraft.

Acquisition Options

The acquisition option of business equipment is dependent on the type of situation. The situation depends on the company’s number of funds and the reason for acquiring the items. These considerations assist in knowing how to purchase the equipment. Despite the uniqueness of each business, the decision of whether to buy, rent, or lease equipment has to be made on a case-by-case basis (Joshi et al., 2019). The airline industry has to consider various factors when procuring a new fleet, whether it is more beneficial and advantageous to lease the aircraft over purchasing them. If the organization hires the seven jets, it will require them to define terms and conditions under which the owners will agree to rent the items. The lease will allow the organization to continue using the aircraft as long as they make regular payments.

Leasing

Leasing of equipment by the company will provide flexibility and preserve capital but may lead to a rise in costs in the end. However, there are numerous advantages to this mode of acquisition. First, there are fewer initial expenses; it enables companies to acquire assets with minimum initial costs. Besides, leased equipment requires no down payment, and companies can receive items with minimum effect on the cash flow. Secondly, hired equipment is tax-deductible and can lower the lease’s net cost. Thirdly, there are flexible terms; this equipment is simpler to obtain and has more flexible terms for purchasing them. Finally, upgrading the equipment is straightforward; hence, the problem of obsolescence can be simply addressed. A lessee can shift to other high-end equipment once the initial lease is done. Despite numerous advantages to leasing, there are also disadvantages, including high overall cost, lack of ownership of the property, and obligation to pay for the entire lease.

Purchase

Buying equipment is another option for acquiring property for the business. This model is very advantageous. However, the high initial cost makes it difficult for people to use it. The main benefit is the company will have full ownership of the item. In addition, it becomes more advantageous when the equipment can be used for a long without quickly getting outdated. Tax incentives are another advantage of buying compared to the other acquisition modes. The revenue code permits companies to deduct the costs of some items purchased in the first year. Finally, this mode has a possibility of depreciation deduction, which will provide the company with tax savings. However, there are two main disadvantages of buying the equipment: high initial expense and being stuck with old equipment.

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Whether the company should buy or lease the aircraft is mainly dependent on the net cost of the planes, tax breaks, and the resale value. Once the procurement team or the purchasing department has determined a cost-effective option, we consider other factors, including the possibility of the aircraft becoming obsolete or damaged before the lease time ends. Also, we must consider the length of time the company will need the airplanes, whether the organization values convenience more than cost, and whether the organization’s needs are constantly changing.

Recommendation

The recommended form of acquiring the two additional wide-body jets (Airbus A320) and the five additional narrow-body jets (BOEING 767-200ER) is to purchase. The option of buying the seven aircraft is more convenient and will save more money for the organization in the end. I believe the available cash budget is sufficient to procure quality aircraft without the need for leasing. Furthermore, the possibility of the equipment becoming obsolete is very low since the technology used in their creation is high-valued. Engineers and other experts in the aviation industry have taken it through various tests and simulations. Moreover, upgrading the aircraft is not difficult since the producers have amicable terms and manufacture high-quality spare parts in line with the current technological trends.

In addition, ownership of the aircraft is more convenient for the organization since it will ensure its independence and prevent the possibility of the competitors or the lessors themselves exploiting the company or the asset itself. Additionally, by owning, the availability of the investment will always be guaranteed, and the company can do anything it wants with it, which provides excellent flexibility. Moreover, through cash purchases, the company can customize the aircraft according to its own unique needs. Finally, there are very few aircraft suppliers and manufacturers in the airline industry. This low number makes it possible to differentiate the different brands of aircraft. Below is the proposed budget for buying the seven jets.

Purchase of 2 WB Jets: Airbus A320 – $77,400,000 x 2 = $154,800,000

Purchase of 5 NB Jets: BOEING 767-200ER – $20,000,000 x 5 = $100,000,000

Total – $254,800,000

Acquisition Process and Timeline

A formal acquisition process is essential when acquiring goods for an organization. It ensures reduced fraud, theft, and rogue spending caused by non-optimized, undocumented buying habits. In addition, it creates an efficient buying process for direct and indirect expenditures, optimal supply chain management, provides a clear audit trail for external and internal review, and assists in managing supplier relationships. Regardless of the organization’s size, a formalized purchasing process is required to compete in the modern market. A formal purchasing process follows a set of well-established steps, each with its unique advantage.

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Process and Timeline

Purchasing the aircraft will incorporate two stages, pre-purchase inspection, and closure of the deal. A pre-buy review of the airplanes is meant to allow research and analysis of every aspect of the potential investment. This stage primarily includes a detailed inspection of the plane, including both the cosmetic and mechanical conditions. The research is also crucial for determining the right aircraft for the company’s operation. Once the airplanes are verified to be in good condition, the acquisition process then begins,

The acquisition process has several steps that need to be followed for the transaction to be successful with minimum errors and minimum resources. The first step in the acquisition is needs analysis (Kuang, 2020). At this stage, the organization identifies and records the problems that procuring the aircraft will solve. The need to purchase the seven additional airplanes is to assist in expanding the company’s operation. The addition of jets into the fleet will mean that more passengers will be able to travel from various destinations simultaneously. This will enable the company to solve people’s problem of booking their flights a week before the trip. Also, this will ensure a significant increase in the company’s profits, hence can compete with the tough competitors who have been in the industry for a long time.

The second stage of acquisition is purchase requisition to purchase order. After identifying the needs to be met by the additional jets, the procurement team develops a purchase requisition that is submitted to the purchasing manager or the department responsible for acquisitions. The purchase requisition has a detailed description of the aircraft the organization intends to obtain. When the purchase request is below the budget, they are immediately updated to purchase orders, and the organization contacts the preferred supplier. Those purchases that are more expensive or not present in the budget are submitted for review by appropriate individuals. The rejected purchase requests that do not meet the expected threshold are returned to the issuing party for clarification, review, and correction. The $250 million cash budget available for acquiring the extra fleet is sufficient for purchasing the two additional WB and the five additional NB aircraft instead of leasing or renting. The suppliers in the airline industry deliver high-quality jets with costs that are even lower than those stated in the budget.

The acquisition orders that the purchasing department has approved are sent to accounting to check whether the available funds are sufficient to cover the requested item. The next step after approval is the request for proposal step. These requests are made once Pos receives the budget approval, and the procurement department is made aware. These RFQs are sent to various suppliers to solicit bids to secure the order for goods. The interested vendors submit their proposals, which the organization reviews based on their compliance records, performance history, and other factors, including price, reputation, and lead times.

The fifth stage in the acquisition process is contract negotiation and approval. The company then gives the contract to the supplier who wins the bid. The organization and the supplier then do further negotiation to guarantee favorable terms and conditions for both parties before they agree to sign it. Once they are done with signing the contract, the order will legally bind the buyer and the seller. The timeframe for delivery of the item is then agreed upon, and the supplier is expected to meet the deadline (Ritorto and Fisher, 2017). Once the organization receives the goods, it carefully reviews them to ensure the supplier delivered what was promised. In case of any issues, they notify the vendor through the procurement department. The supplier then issues the invoice, and three-way matching is done to compare shipping documents with the initial order of purchase. In case of discrepancies, they must be corrected quickly to prevent extra charges, damage to supplier reputation, and delays in payment or production. The orders that match are then approved for payments, and if additional charges are required, another layer of approvals is made before issuing the payments. Payments are usually made early to score discounts and to avoid extra charges due to late payment fees. Completed orders are then documented in the company’s book and securely kept in a central location.

Conclusion

There are various acquisition options to consider when acquiring aircraft. The options include renting, leasing, or purchasing. The choice of an option is based on the organization’s needs, the amount of funds available, and the length of time the asset is needed. Since the airline industry has very few known suppliers who are well known and have a reputation to keep, it is easier to keep track of purchases. I recommend that the best option for acquiring the seven aircraft for expansion is to purchase them since the available budget is sufficient to procure them, it guarantees ownership of the property, and the company can customize them according to their needs.

Reference List

Bakır, M. and Atalık, Ö. (2021) ‘Application of fuzzy AHP and fuzzy MARCOS approach for the evaluation of e-service quality in the airline industry’, Decision Making: Applications in Management and Engineering, 4(1), pp.127-152.

Gunarathna, D.S. (2020) The Impact of safety on fleet acquisition and management in US commercial airlines (Doctoral dissertation, The University of North Dakota).

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Joshi, N., Singh, G., Kumar, S., Jain, R. and Nagrath, P. (2019) Airline Prices Analysis and Prediction Using Decision Tree Regressor. In International Conference on Recent Developments in Science, Engineering and Technology (pp. 170-186). Springer, Singapore.

Kuang, W. (2020) Load factor, baggage fees, and merger and acquisition in the US airline industry. Michigan State University.

Ritorto, R. and Fisher, S.A. (2017) ‘Exploring airline contracts of carriage and european union flight delay compensation regulation 261 (EU 261)-A bumpy but navigable ride’. J. Air L. & Com., 82, p.561.

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