Question

Phoenix Airways Inc. is an airline company headquartered in Hong Kong. It was founded in 2010 and currently provides passenger and cargo services to more than 50 regional and international destinations. The passenger service is operated by Phoenix Airways under the brand name of “Phoenix” while the cargo service is provided by its wholly owned subsidiary, Phoenix Cargo. The airline operates a fleet consisting of Boeing 737, Airbus 320, Airbus A330, and Airbus A350 aircrafts. In September 2016, the airline launched a new passenger route between Hong Kong (HKG) and Los Angeles (LAX) in hopes of competing with the larger carriers in the market for long-haul flights. However, this route between Hong Kong (HKG) and Los Angeles (LAX) has continued to lose money to the point where the airline has been forced to consider whether to discontinue it. Required: Discuss factors that will affect the company’s decision to discontinue the HKG-LAX route, including quantitative and qualitative factors.

Answer 1

                        Discounted Operation- Discounted operation are essentially the portion of an entity that no longer function within core business and this should be reported separately . In above case , we noticed that Airline carrier not able to make money from longest passenger route between Honk Kong to Los Angeles . Airline company identified that they are spending more operation cost (+ portion of fixed cost) as compared with revenue generation from this route . Management decided not to continue with this route passenger airline .

In this situation , company has to segregate financial into two parts – business from continue operation and business from discontinue operation.

Business must present a clear definition of the portion of the business that is discontinued and a clear indication by management that the discontinued operation is absolutely no longer part of the core business. This information help creditor and investor .

With separate disclosure of discontinued operation , investor can clearly distinguish the profits and cash flows from continue operation

The total gain or loss from the discontinued operation is thus reported , followed by relevant tax matter . This tax is often a future tax benefit because discontinue operation often incur losses