The scenarios presented by the project incur sunk costs amounting to 2 million per year irrespective of the scenario. Therefore, the optimal scenario will attempt to minimize costs while maximizing the possible returns of the project. However, while making a decision on the best scenario, risk factors of the project must be considered. Hence, the higher risk of the project, the higher the expected returns. Therefore, scenario 2 has a higher risk factor, hence the optimal choice for the project. The scenario has a higher savings margin given the 50% probability of success.
The underlying principle illustrated by the project’s scenarios is business risk. The scenarios illustrate the extent of risk taken should the project choose to adopt either of the scenarios presented. Business risk is significant in making strategic investment decisions. Therefore, the riskiness of a business should be critically analyzed to ensure that the optimal choice is made.
Customer demands and requirements are critical in profit maximization. The availability of a body scanner in the shop reduces significantly wastage of materials; therefore, jeans are custom-made for customers at lower material cost. Meeting the customer’s needs increases the sales while reducing production costs.
The body scanner should not be perceived as a cost center but, as an asset whose value should increase the manufacturer’s capital assets. However, the variable costs incurred by the machine are compensated by the increased sales and minimal abnormal losses as a result of unfitting jeans produced. The scanner will provide a basis in which the manufacturer will extrapolate the jeans sizes to meet the customer’s requirements across demographic trends. The body scanner provides the manufacturer with a strategic advantage in minimizing production costs while optimizing production and maximizing profits.
The benefits accruing to the firm depend on consumer loyalty to the firm. The initial investment made by the customer and the commitment made on learning how to use the product will ensure the customer remains loyal to the firm. However, any attempts to recruit new customers may prove to be difficult given the conditions provided for subscribing to the product considering the maintenance and upgrade costs.
Though the firm will earn maintenance and upgrade fees, the business aspect of the firm will be impaired given the hefty demands imposed on new, potential customers. This form of customer lock-in has the effect of impairing the growth and development of the customer base, hence, impairing the growth of the business. The strategic option for the firm is to make a product that is easily adaptable to the customer’s needs while giving the customer freedom to make informed choice based on product affordability, effectiveness and efficiency.
The stream of fees from maintenance and upgrades provides the basis of the firms constant income. Therefore, the presence of competition in the market for maintenance and upgrades poses a significant danger to the firm’s profitability given its customer lock-in strategy. However, some percentage of the customers may prove loyal to the firm and refuse alternative services. Despite this, a significant number of the customers may feel aggrieved on the basis of the costs and time incurred; while learning to use the product and continued dependence on the firm to provide maintenance and upgrade services. Therefore, a competitor will provide a sense of free market where services are purchased from the optimal bidder. Competition in the market would be detrimental to the firm.
The issue is that the price paid by American to American Eagle is exceedingly high in contrast to other airlines. This has resulted from increased operating costs on the part of American Eagle. Despite the effects of the recession, American Eagle uses aircrafts, whose fuel efficiency is lower in contrast to other airlines, which have more fuel efficient aircrafts. However, the high prices have been characterized by increasing fuel costs. These have the effect of making the aircrafts that American Eagle operates to be uneconomical given their small sizes and fuel inefficiencies. These lead to additional operating costs being transferred to the passengers through high travelling costs.
Therefore, given the prevailing economic conditions and high maintenance aircrafts in American Eagle’s asset base, the costs of regional flights are significantly higher in contrast to the costs of other airlines. Hence, the issue concerning the spin-out of Eagle from AMR is strategic to cost reduction and profit maximization. However, this can only be realized by the reducing operating costs significantly and acquiring economical and fuel-efficient aircrafts.
American Eagle has a competitive advantage given its established and defined airline network. The necessity for a defined network is critical since it ensures continuity of established operations while seeking new business opportunities. American Eagles will be able to compete effectively given its autonomy as a business enterprise able to negotiate as a single independent entity. Its previous managerial affiliation with AMR made it impossible for American Eagle to negotiate for new contracts, therefore, becoming bound by any contractual decisions and costs made by the parent company.
The American Eagle's operations covering up to 93% of America’s regional flights and its asset base of 281 aircrafts and servicing 182 cities is critical in validating its bids. The transference of American Eagle’s significant debts and leases to AMR reduce the airlines business risk, hence, a viable investment. These factors make American Eagle an economically sound investment, therefore, providing the airline with a significant competitive edge. Risk reduction, significant asset base and market presence are critical factors in favor of American Eagle’s investment bids.
American Eagle will be more cost-efficient as a stand-alone than as a subsidiary given the significant reduction in operational costs. While, as a subsidiary, American Eagle is subject to the parent company’s costs. American Eagle finds difficulty in maintaining its own marginal costs while the parent company costs are apportioned across the company. However, as a stand-alone entity, American Eagle will be effectively managed. The reduction of debts reduces the airlines obligations and liabilities.
The airlines asset base of aircrafts at its disposal creates a significant competitive edge. Its autonomy makes it possible to manage efficiently while improving its service delivery to customers. The spin-out from AMR enables American Eagle to market itself on the merit of its cost-efficiencies and service delivery. However, the airline's asset portfolio is critical to significant investors given its market presence and established airline networks. The airlines market efficiency, assets and business viability are strategic to its autonomy and success as a profitable stand-alone enterprise.
In instances where American Eagle faces liquidity difficulties in financing its operation it would be significantly difficult to raise funds as a stand-alone entity for the mitigation of financial issues. In instances where operational costs exceed the incomes accruing from operations, the airline may face liquidity issues since it would be operating at a deficit. Therefore, under these circumstances it is difficult to raise funds as a stand-alone entity, unlike a subsidiary. As a Subsidiary, American Eagle could channel funds from the parent company from other profitable branches of the company to refinance its liquidity problems. This also applies to resource allocation. American Eagle may be in need of additional resources like airplanes, which can be easily acquired from the parent company. However, as a stand-alone entity, resources may not be available where and when needed.
The liquidity problems can be mitigated by operating within the balance sheet’s constraints, while seeking capital investors by floating shares to the public and issuing redeemable bonds. These would ensure that the capital is raised to expand its operations while acquiring new resources to cover existing and new markets. The airline should consider viable financing options that will not strain the available, operating capital.
The spin-out creates economic significance for both American and American Eagle while creating strategic opportunities for business expansion. The American Eagle airline is placed in a strategic position to make contractual alignments with leading carriers like Delta Air lines Inc. and United Continental Holdings Inc. The spin-out provides the airlines with a competitive edge while making each an attractive business to potential investors. American is in a strategic position to acquire efficient and cost-effective assets while selling off old, inefficient aircrafts. This creates a strategic option of reinvesting in new models, which are economical and fuel efficient thus reducing operation costs.
Each entity realizes a degree of strategic significance in the spin-out. The viability of each is critically improved while reducing significant operational costs which led to reduced revenues and profitability of the airlines. Thus, the spin-out creates economies of scale where each operates within its costs while optimizing its profitability and market presence.
The difference between operational conduct in contractual and individually owned flights is characterized by the image and profit function. The direction of flights to less congested airports via contract is critical to the carrier. The preferential treatment of contracted flights is aimed at painting a positive image to the contractor in lieu of future contractual relationships. Therefore, contracts are perceived as significant profit centers. The direction of contract flights to less congested airports is a strategic attempt to impress and create a positive image towards the airline; while minimizing potential liabilities and losses in aircraft mishaps.
However, airlines readily direct flights operated by their own subsidiaries into congested airports. This is attributed to the fact that such flights are heavily insured in the case of accidents, while the airlines do not wish to incur additional costs by redirecting the flights into more conduce airports. These can be construed as strategic approaches to minimizing costs while attempting to maximize revenues despite the potential effects to the passengers.