Hong Kong Dragon Airlines Case Study

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Hong Kong Dragon Air is Hong Kong-based international airline, belonging to of the Cathay Pacific Group. The airline was established in 1985, and operates a fleet of narrow-body A320s and A321s, which were both powered by V2500 engines manufactured by International Aero Engines AG (“IAE”) for both passenger and cargo service to destinations to destinations across the Asia-Pacific region, and China. Their vision is to be the World’s best regional airline serving China and beyond. Their missions; places emphasis on safety and operational excellence with customer focus. The airline seeks to embrace innovation by implementing ideas that improve their business. (REF). In January 2006, the management of Hong Kong Dragon Airlines…show more content…
The most significant component of cash outflows in case of purchase option was the cost of the replacement spare engine. Our cash flows included the tax shield on depreciation, and maintenances costs associated with the purchase and use of the engine. We determined the after tax cash flows under both options, in case of Hong Kong Air purchase option, the after-tax cash flows are, cost of the V2500 spare engine, the tax shield on depreciation and maintenances costs and the after tax discount rate was used. In case of the lease option, the after-tax cash flows are; include; monthly rental at 8% of engine price, rate per flight hour, rate per engine cycle all over the period of the lease not less than 10 years.(ref) The discount rate used was the after tax cost of debt. We worked out and the net present values of each option and thereafter picked the option that has lower present value of cash outflows.
Our NPV calculations for both options were backed with sensitivity scenario analysis of both the buy and leas options.
Sensitivity Scenario Analysis Sensitivity analysis scenario is used to show how changes in one or more variables below and above the used variables would affect the intended results. I our sensitivity analysis scenario for Dragon Air lease vs buy decision we varied the cost of capital between 1% and 5% as the main driver in the case. The tables below show the results.
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Maintenance records. Leased engine must be maintained to certain standards, and Dragon Air must keep accurate maintenance records to ensure they comply with lease requirements.
5. Dragon Air would take on the risk of engine return penalties if they do not meet the engine return conditions are not met at the end of the lease.
Having exhausted the financial analysis and sensitivity scenario analysis, we determined the best option for Dragon Air in their buy vs. leas decision.
Best option for Hong Kong Dragon Air in this case
5. Which option did you chose? Why? Provide quantitative support
Based on the financial analysis and sensitivity analysis scenarios the buy option has NPV cash outflow of ………… and the lease option has NPV cash outflow ……. . The sensitivity analysis scenarios in both the buy and lease option and the respective pros and cons of each option we found the best option for Dragon Air buy versus lease decision would be to buy the replacement spare engine.as opposed to leasing it. We attach the excel spreadsheet with supporting quantitative financial analysis.

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