Ontario Gateway Case

#Ontario-Gateway-Case

The Global Airline Industry

#The-Global-Airline-Industry
  • A cargo airline in Canada
  • Extremely competitive industry
  • EU Airlines more deregulated that their counterparts
  • ... thus EU based firms had a competitive advantage over non-EU firms
  • Air Prix reached out to Ontario Gateway to discuss a potential merger

Ontario Airlines

#Ontario-Airlines
  • Began upgrading its fleet in 1994
  • The first of 47 Boeing 757 delivered in the fall of 1994
  • Firm had an option to buy 28 Boeing more aircraft at same price and financing in the next 3 years

Air Prix

#Air-Prix
  • "Southwest style" in France
  • In 1993 negotiated with Airbus and Boeing to acquire new aircraft
  • A deal was finally reached for the EU to finance the purchase of 29 Airbus A340 aircraft
  • By Spring of 1995 Air Prix was flying its fleet of A340s within France and parts of Europe, but was having difficulty competing with British Airways
  • Eventhough it enjoyed generous financing subisidies, it had trouble filling up the larg A340s on a consistent basis

The Merger Strategy

#The-Merger-Strategy
  • Both small airlines
  • Merger would create a global firm serving both US and EU
  • Synergy on assets (move A340 to US or use the option to buy 28 Boeing's to expand in EU)

Managing Risk

#Managing-Risk
  • Ontario Gateway is currently highly leveraged, requiring much of its cash flow to service its substantial debt obligations
  • The firm can't issue new debt for five years
  • Besides business risks, the firm faced exchange rate risk, political risk and accident risk
  • Exchange Rate Risk: Standard hedging strategy
  • Legal Risk: Firm legal grounds to ward off protectionist regulatory attacks. Also media strategy pinpointing the positive externality
  • Accident Risk: Was managed through insurance that cover loss-of-life liability claims and aircraft loss coverage.

Aircraft loss coverage insurance

#Aircraft-loss-coverage-insurance
  • 340's ensured by Lloyd's, terminates on March 1 1997
  • Would like to have all of the aircraft (340s and 757 covered)
  • Would like to have a more cost effective policy than Lloyds
  • Mantain current level of liquidity is important too (i.e. replacement of aircraft should be covered by the policy)

Enclosure 1: Insurance Proposal Breakdown

#Enclosure-1:-Insurance-Proposal-Breakdown
  • Likelihood of crash proportional to takeoffs
  • Industry accident rate 1 in 5MM flights

RNC1

#RNC1
  • 100% accident replacement cost
  • Annual fee of 0.45% of fleet value
  • 10% deductible on all aircraft losses
  • 20% rebate of any cumulative profits (premiums minus claims) at the end of 5 years

RNC2

#RNC2
  • Annual fixed premium of 0.1% of fleet value
  • Plus annual variable premium paid EOY min(90% of all losses during the year, 1.0% fleet value)

CTC

#CTC
  • $13MM Annualy
  • 90% of losses up to $80 million of annual aircraft losses
  • Losses in excess of $80 million will not be covered

HIC

#HIC
  • 0.165% premium of fleet value
  • will pay for all fleet losses above $24MM
  • HIC will rebate 3.5% of any cumulative profits to be paid at the end of five year term of plan

Mandate

#Mandate
  • We must be insured so we do not incure a liability for more than $41 MM in aircraft crash losses and insurance costs combined in the next year
  • Fore safety we should minhimize the chance of losses exceeding $37 MM during next year
  • Contingent on this our other major goal is to obtain insurance coveragfe at the lowest cost over the entire 5 year period

Simulation Model

#Simulation-Model

Constants

#Constants
Loading output library...

Random Variables

#Random-Variables
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...

Path Realizations

#Path-Realizations

What we really want is a full path (5 years) per each realization

Loading output library...
Loading output library...
Loading output library...

Different Policies

#Different-Policies
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...
Loading output library...