ECON 135 | Corporate Finance

Financial Analysis Project Prompt

You are working as a financial analyst for the CFO of Southwest Airlines. The CFO has asked you to evaluate the profitability of a new route: daily flights from Monterey Airport to Las Vegas McCarran International Airport. The plan is to offer three flights a day, every day of the year, in each direction (three round trips). Assume that there are no technical or legal impediments to offering the proposed service. Your marketing department has done a preliminary market study and expects operating revenue to be 8.0 cents per Available Seat Mile (ASM) in year 1 of the new route and then to increase linearly to the current (2024) average by year 4. It is estimated to remain constant at that level thereafter. Assume that all cash flows occur at the end of the year. Southwest currently has two surplus Boeing 737-300 jets that are not used for anything and are parked on a runway in Arizona. The jets were bought for $76 million each 12 years ago. Jets of the same model, age, and condition currently trade for $11 million in the used jet market. Both jets would require a refurbishment costing $2.5 million. The jets and the refurbishment fall into the 7-year MACRS category. Both planes can be safely operated for another 10 years, after which they will be sold for parts. The value of parts will be $1.8 million. You need to put up $0.8 million to finance the day-to-day operations of the jet, such as paying staff on time, paying bills from the catering company, airport landing fees, etc., before launch. An additional $50,000 in working capital is needed every year until year 10, when all outlays will be recouped. (One-time increase of $50,000 compared to the pre-project level.)