CASE

Delta's New Song:

A Case on Cost Estimation in the Airline Industry

INTRODUCTION

Founded in 1924, Delta Airlines is the third largest U.S. airline in operating revenues and revenue passenger miles flown. 1 Traditionally, Delta's primary competition came from the other full-service airlines, including United Airlines and American Airlines. However, in recent years, the major airlines have increasingly been forced to compete with low-cost, no-frill airlines pioneered by "fly for peanuts" Southwest Airlines. The significant downturn in passenger volume in the third quarter of 2001 (following the September 11 attacks) served only to increase the head-to-head competition between the majors and the low-cost competitors.

AIRLINE LABOR COSTS

Industry Challenges

Airlines must operate within a low-margin, high-fixed-cost environment, making profitability particularly sensitive to decreases in volume, either from environmental factors (e.g., the September 11,2001 attacks) or from competition. Moreover, the airline business is labor-intensive. Labor costs as a percentage of revenues ranges from a low of about 25 percent for the low-fare airlines to almost 50 percent for the large, full-service airlines such as United (see Exhibit 1).

For many airlines labor unions at various levels of the organization are strong, presenting an additional challenge in the management of costs. Labor union (re)negotiations were on the rise during 2003, as airlines tried to pass along an increasing share of the cost cutting to its employees. In the summer of 2002, US Airways won concessions from its workers corresponding to a 27 percent reduction from its prior year labor costs. Plans to terminate the airline's pilot pension plan, however, met with objections and will likely be resolved in US Airway's bankruptcy hearings. In January of 2003, American Airlines requested an $8 billion concession from the three labor unions representing its labor force. Northwest similarly argued for salary concessions as part of a $ 1 billion cutback (Gary and McCartney 2003).

"Labor costs, especially pilot-labor costs, are on the point of the spear again," Capt John Prater, chairman of the pilot union at Continental Airlines, recently wrote to his members. "Airline managements, Wall Street, the [Bush] administration and Congress are once again looking for a scapegoat to blame for the industry's ailments; so-called 'high-priced, under-worked' pilots have once again become their primary target." A senior pilot in the industry typically earns about $250,000 a year, while a senior mechanic would make about $70,000 and a senior flight attendant about $40,000. (Gary and McCartney 2003)

Delta Airlines

With over 81,000 employees, salaries are a significant component of Delta's cost structure, accounting for over 42 percent of the company's total operating expenses and over 46 percent of total revenues in fiscal year 2002 (see Exhibit 2). As with other airlines, Delta pilots and flight attendants are paid for hours flown. Contracts for unionized personnel guarantee a certain level of hours to unionized employees (with federal regulations providing caps on the number of hours that can be flown by an individual in a month). As a consequence, salaries are largely fixed in the short term for unionized employees. However, Delta is the least unionized of the major airlines. In fact, Delta's pilots are the only unionized employee group (with the exception of a very small contingency of flight operations personnel). Delta's flight attendants and ticket agents are not under union contract; consequently, their salaries, as well as hourly personnel (e.g., ticket counter and ramp operations personnel), represent salaries that are more variable in nature. Moreover, contracted maintenance work creates additional flexibility in salaries costs for Delta.

Since interim wage concessions by pilots of United Airlines (which also filed for bankruptcy protection in December 2002), Delta pilots are the highest paid in the industry with an average hourly wage rate for a Boeing 757 captain of $245. The same pilot would earn $178 per hour at Continental Airlines and only $172 per hour at United (post-concession) (Harris 2003b). In February 2003, the Airline Pilots Association (ALPA) successfully blocked Delta's plan to furlough an additional 1,700 pilots (Delta had already furloughed 1,600 pilots citing September 11 traffic declines as "circumstances beyond its control"). The ALPA, however, argued that the furloughs were in fact the result of the general economic difficulties the industry was experiencing and, therefore, were in violation of ALPA contracts that prohibit layoffs due to the company's economic

and financial situation. Delta representatives continue to assert the "continuing need to address overall pilot costs to enable Delta to return to a competitive cost structure and to preserve Delta's long-term future" (Setaishi 2003).

DELTA'S SONG

In November 2002, Delta Airlines announced that it would form a new low-cost carrier, Song. Song began service on April 15, 2003 with its first flight between John F. Kennedy International Airport in New York and West Palm Beach, Florida (Wong 2003). This was not Delta's first attempt to enter the low-fare market. A previous attempt, Delta Express, was initially profitable but eventually failed because of "a lack of a management team to fight budget wars, cost creep, and brand confusion" (Daniel 2003). Despite this prior unsuccessful attempt to operate a low-cost carrier under the Delta umbrella, Delta asserts its belief that Song will be able to successfully compete in the low-fare industry segment, a segment that has been relatively prosperous amid the industry downturn.

Song operations will be based on the low-cost model of Southwest Airlines (e.g., low fares, low frills, and quick turnarounds) and is targeted to compete with successful newcomer JetBlue. Song will be supported by a single-airliner fleet of 36 Boeing 757s and will provide service to Florida and the East Coast. Like JetBlue, Song flights will feature in-flight entertainment competitive with JetBlue's satellite televisions (Harris 2002).

Can Delta Succeed Where It Has Failed Before?

Overall, Delta expects cost per available seat mile to be about 20 percent lower for Song than it is for its current operations. John Selvaggio, Delta executive and future Song president indicates that airplane utilization will be increased and pilots and flight attendants will experience "more flying and less sitting time" (Harris 2002). What Delta won't do, however, is pay its Song pilots less than the current Delta pilots. Given that Delta pilots' per hour wage rates are, on average, $100 more than those of Southwest and JetBlue, industry analysts are skeptical of the ability of Delta to compete in the low-cost carrier segment. "It's very hard for me to see how they can come very close to the costs of JetBlue and Southwest without closing the labor-cost gaps," said Michael Roach, an associate with Unisys R2A Transportation Management Consultants in Hayward, California (Harris 2003a). In fact, Roach estimates that JetBlue and Southwest would still have 10 percent and 30 percent cost advantages, respectively, over Song.

Delta is in a position of evaluating entry into a new product market, namely, the low-cost carrier market. The question is, can Delta succeed where it has failed before? Can the airline create for itself a business model that can compete with the JetBlues and Southwest Airlines of the industry? Moreover, it may be that their options for operational investments are more limited than those of a brand new carrier such as JetBlue, thereby putting Song at a disadvantage. For example, they will be using their current airline fleet and, as a result, will be unable to take advantage of favorable lease terms offered to new carriers (Daniel 2003). The key to success for this endeavor lies in the ability to create a very different cost structure than the one under which it currently operates. Delta must understand how its current costs behave and, more importantly, anticipate how they will behave in the new business model outlined for Song. Can Delta rely on historical data to predict costs into the future for Delta and for Song? Or has the business model (and the environment) changed in such a fundamental way that Delta can no longer assume "business as usual"?

Questions:

What would be the effect of a sharp decline in passengers for a firm with a microeconomic structure such as the one Delta had in place during 2001? Is Delta’s operating leverage high or low?

Analyze the proposal to launch Song as a response to the situation the firm is facing.

Estimate the salary cost function for Delta. Despite the fact you can choose between some feasible drivers, please use Revenue Passenger Miles for this part of the case. Use the High Low method.

Estimate the salary cost function for JetBlue. Use the high low method.

What conclusion can you make out of the comparison of both cost functions?

Maybe it the method. Please redo 3 and 4 by using simple linear regression?

Did the result of your analysis change?

Can Delta be successful on the new segment? Is the strategy aligned with the microeconomic structure of Delta? (THIS IS A VERY RELEVANT QUESTION)

Some years after Delta’s case situation, salaries were no longer the highest cost for Delta. Fuel prices increased dramatically after 2001. How can you deal with this new profitability threat from a cost management perspective?

If costs cannot come down, how can we improve the profitability of a firm such as Delta? While answering this question remember the components of a profit function.

Case Study Deutche Bank

Deutsche Bank was founded in Berlin in 1870 as a specialist bank for foreign trade by Georg Siemens and L. Bambeger.  During the early years  major projects included the. Northern Pacific Railroad in the US and the Baghdad Railroad in Iraq.  During WWI the Deutsche Bank lost most of its foreign assets and had to sell of many holdings.  At the same time, however the bank helped to establishment of the film production company, UFA, and the merger of Daimler and Benz.Darker days fell upon the Deutsche Bank after Hitler came to power, instituting the and the Deutsche Bank dismissed its three Jewish board members, and in subsequent years, took part in the confiscation of Jewish-owned businesses.  The bank itself fell into German government hands during which time it provided banking for the Gestapo and loaned the funds used to build the Auschwitz and IG Farben facilities.  It later contributed to a $5.2 billion in compensation fund following lawsuits brought by Holocaust survivors. In October 2001, Deutsche Bank was listed on the New York Exchange.  It was later named one of the major dirvers of the collaterized debt obligation market during the 2004-2008 housing bubble.In spite of Deutsche Banks’ involvement in these historical issues, it has recently made a commitment to both social endeavors and to the environment.  Deutsche Bank has invested in social projects such as StreetSmart, a campaign to raise money for charities for the homeless in the UK, and Surviving Winter, a campaign to help older and vulnerable individuals stay warm and well. Deutsche Bank has a commitment to long-term environmental sustainability. This includes reducing waste and working towards becoming more carbon neutral, and supporting innovative new technology. Since 2008 all electricity needs in the UK were met with renewable energies, and  85% of Deutsche Bank staff are now part of the Bin the Bin recycling initiative, reducing unrecyclable waste by 72% in two years.   

Case Study The HCT Group

HCT Group is an established bus operation with services across the UK , running including ten red London bus routes, Park and Ride services, and NHS staff transport.  HCT was launched in the 1980 to provide community transport in Hackney, London. At that time it was just one of many small community transport organizations that provided low-cost minibus transportation for marginalized communities, non profit organizations and social clubs.  It also provided transportation for disabled persons who had difficulty using public transportation.  HCT relied on grans and donations to support the operation.   However, in 1993, HCT like many similar companies found it hard to get grans to support their service.  Since the need in the community was just as great, HCT set out to find bold, new ways to meet their financial needs. This required rethinking how they conducted business and developing a new business model that would not rely on grants but on winning commercial transport contracts. HCT believed that if they could win such contracts, they could reinvest the profits into projects for the community that would have strong social impacts.  Part of this model included training the disadvantaged people of the community to take on the roles of drivers, passenger assistants and other jobs that not only provided them with income but allowed them to gain life-changing skills. HCT develop their own training skills to pass on to their employees and landed their first contract.  They went on to become the only accredited center for passenger transpotation training in Hackney, training 392 long-term unemployed people who became qualified in 2010-2011. By 2001 HCT had developed their skills as leaders in the transportation business to the point where they could compete for contracts with major transportation companies and won their first red bus route, opening them up to rapid growth.  Partnerships with other organizations opened up new depots and routes.  HCT now provides over 12 million passenger trips every year.  All profits are reinvested into the communities they service and fund training for long-term unempolyed.  At HCT it is not shareholders who reap the benefits but the skateholders.

Case Study:  Coca Cola

Coca Cola was invented by Doctor John Pemberton, a pharmacist, in 1886 in his back yard in Atlanta, Georgia.   His bookkeeper, Frank Robinson came up with the name and the flowing letters that don coke cans until this day.  The drink was initially sold at one soda fountain in Atlanta, bring in about $50 a day in revenue, while production costs equaled over $70, obviously operating at a loss.  A year after its inception, another pharmacist, Asa Candler bought the formula from Pemberton and through aggressive marketing made Coca Cola one of the most popular fountain drinks in America.  As the soda fountain era came to an end, the era of bottled soft drinks and fast food restaurants began to rise and opened up a new distribution channel for Coca Cola.  Today more than 1.4 billion drinks are consumed per day around the world in over 200 countries. The Coca-Cola Company is currently the world's largest beverage company, with more than 500 brands. They are the number one provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks in the world.According to Coca Cola’s 2012-2013 Sustainability Report, “At Coca-Cola, sustainability is a critical component of our business strategy. It is about improving lives, creating jobs, increasing opportunity, preserving resources and meeting needs for the communities we proudly serve around the globe,” said Muhtar Kent, Chairman and CEO, The Coca-Cola Company. “There are no issues that will more shape or define the 21st century than the global empowerment of women; the management of the world’s precious water resources; and the well-being of the world’s growing population.”Coca Cola’s sustainability focus is based on a framework of “Me, We, World” and has three leadership priorities:  Women, Water, and Well-being.  The focus on women addresses women entrepreneurs to help them overcome barriers to starting and operating businesses from fruit farmers to artisans in 22 countries.   In the area of sustainability, Coca Cola’s water initiative with companies and organizations throughout the world to reduce water use and deliver safe drinking water to communities in need. Coca Cola partnered with DEKA to provide Slingshot ™, a vapor compression water purification machine that can produce about 30 liters of water an hour on minimal energy usage, to communities in need of clean water in rural parts of Latin America and Africa.  In the area of well-being Coca Cola has focused on addressing obesity through production of low or no calorie products and has decreased its average calories per serving in its drinks by nine percent.   In addition, they support healthy living programs in many countries.Coca Cola maintains a philanthropic arm of the company that supports many community based initiatives, investing over $101.6 million in 2012 alone.  They have maintained their policy not to market to children, and address global climate issues through an ambitious goal of reducing their carbon footprint by 25% by 2020.

Case Study:  Intel and Corporate Social Responsibility

Intel Corporation is a semiconductor chip maker corporation headquartered in Santa Clara, California. Based on revenue, Intel is one of the world's largest semiconductor chip makers with an multinational presence. Intel Corporation was founded in 1968,  by semiconductor pioneers Robert Noyce and Gordon Moore under the executive leadership and vision of Andrew Grove. Intel makes motherboards, network interface controllers, integrated circuits, flash member, graphic chips, and processors, combining advanced chip design capability with a leading-edge manufacturing capability. Until 1981 the majority of its business was devoted to SRAM and DRAM memory chip manufacturing.  Currently Intel is actively developing the 3-D transitor and 4th generation core processors.  As a socially responsible corporation, Intel is actively involved in improving lives, the community, and the environment.  In 1988 Intel established the Intel Foundation to fund educational and charitable endeavors.  Intel corporate leadership has a history of investment and engagement in programs to support social issues that has generated significant value both for Intel and for their stakeholders.  Intel is especially active in developing “conflict free” mineral products. Many product made by Intel, as well as countless others in the marketplace, contain tin, tantalum, tungsten, or gold, that are know as "conflict minerals". These minerals are often sold by rebels to fund violent conflict.  Intel is partnering with other organizations to find conflict free smelters for its resource supplies.Intel supported Mike Mick Ebeling’s Not Impossible Lab’s to develop Project Daniel that initially set to provide a boy with new arms and his village in South Sudan with the Intel® technology, Ultrabooks™, using 3-D printing to develop prosthetics to help other civil war victims.  In other areas, Intel’s She Will Connect program strives to close the Internet gender gap for girls and women that excludes them from 21^st century jobs and opportunities. This is especially critical in sub-Saharan Africa.  The project is intended to empower women, improve digital literacy training, provide online peer interaction, and gender relevant content.  It is expected to transform African economy and families.  Additionally, Intel supports educational projects especially for girls in Egypt, Tanzania, and 65 other developing countries through project such as Smart Girls and Girls Rising. Intel emphasizes the benefits communities and developing countries obtain when girls are educated leading to healthier and safer people, and less child marriage.  Intel India’s Empowering Women in Jharkhand, provides education and local economic support, Into empower underserved tribal women with education to start prosperous micro-businesses. Intel’s corporate culture has as its foundation a value for its people, the environment, human rights, and empowering the next generation.  Their commitment to the environment includes projects to improve energy efficiency, reduce emissions, conserve resources, and use innovative ways for sustainability.

Work through the Case Studies on Coca Cola, Intel, Deutsch Bank, HTC Group

For each company, analyze:

• How do each of these companies address sustainability?
• How does the focus on sustainability provide a strategic position for the company, if any?
• Analyze why the company engages in social activities.
• What form of corporate governance best fits a sustainable company?

Jeffery Smith founded Smith’s technology in 1994 in Melbourne, Australia, with $10,000 and a unique
vision of how technology should be designed, manufactured and sold. More than 5 million customers later
and with an annual IT budget of approximately $500 million per year, Smith has made an indelible mark
on the computer industry—and the world. The enterprise sells more than 1,000 apps every day to
customers in 120 countries and employs 40,000 people worldwide.

Covid has had a significant impact on the organisation where they have realise that a lot of their systems
across Australia (i.e. Sydney, Perth and Melbourne) are not integrated and therefore it is very difficult for
them to reconcile their accounts and inventory stocks using their Enterprise Resource Planning system
(ERP) and Supply Chain Management (SCM) at the end of the every financial year. This year was worse
because their chief accountant could not travel to the other centres because of the Covid restrictions. As
the Chief Enterprise Architect, you have been hired to help their IT Strategy and Technology Department
to design a solution that would enable real-time updating of information across the three locations. You
would therefore have to map out future directions for the IT company, with a three-year roadmap which
involves investments in the tens of millions of dollars such as SAP ERP, Microsoft Dynamics CRM, Data
Warehouse Systems and Business Intelligence Reporting Systems.

Discuss the business problems faced by Smith’s technology and is it a problem associated
with the lack of good enterprise architecture practice?

Federal Express (FedEx) was founded about 50 years ago. It handles on an average of 3 million package-tracking requests on a daily basis. To remain ahead of its competitors, FedEx strives on customer service by keeping a comprehensive website, FedEx.com. It increases customer service and reduces costs. For example, each request for information which can be retrieved from the website rather than by the call centre help FedEx to save an estimated $1.87. The costs for FedEx have been reduced from more than $1.36 billion per year to $21.6 million per year by customers using the website instead of the call centre calculating each package-tracking request costs Federal Express 3 cents.

Another know-how that improved its customer service is Ship Manager, an application installed on customers’ sites so users can determine shipping charges, weigh packages, and print shipping labels. Customers can also tie their invoices, billing, accounting and inventory systems to the application, Ship Manager.

Nevertheless, Federal Express still spend almost $326 million annually on its call centre to reduce customers’ annoyance when the website is down or when customers have difficulty using it. It uses CRM software called Clarify in its call centres to ensure customer service representatives’ job easier and to speed up response time.

Answer the following questions:

a)     What is the importance of technology to ensure high-quality customer service?

b)    Can you estimate Federal Express’ annual savings from using information technology?

c)     Can you give a few examples of information technologies used by Federal Express?

d)    What is the role of the application ‘Ship Manager’?

e)    Your overall observations and learning from the above case study.

Federal Express (FedEx) was founded about 50 years ago. It handles on an average of 3 million package-tracking requests on a daily basis. To remain ahead of its competitors, FedEx strives on customer service by keeping a comprehensive website, FedEx.com. It increases customer service and reduces costs. For example, each request for information which can be retrieved from the website rather than by the call centre help FedEx to save an estimated $1.87. The costs for FedEx have been reduced from more than $1.36 billion per year to $21.6 million per year by customers using the website instead of the call centre calculating each package-tracking request costs Federal Express 3 cents. Another know-how that improved its customer service is Ship Manager, an application installed on customers’ sites so users can determine shipping charges, weigh packages, and print shipping labels. Customers can also tie their invoices, billing, accounting and inventory systems to the application, Ship Manager. Nevertheless, Federal Express still spend almost $326 million annually on its call centre to reduce customers’ annoyance when the website is down or when customers have difficulty using it. It uses CRM software called Clarify in its call centres to ensure customer service representatives’ job easier and to speed up response time. Answer the following questions:

a) What is the importance of technology to ensure high-quality customer service?

b) Can you estimate Federal Express’ annual savings from using information technology?

c) Can you give a few examples of information technologies used by Federal Express?

d) What is the role of the application ‘Ship Manager’?

e) Your overall observations and learning from the above case study.

Founded in 2018, MGMT Crypto Inc. is a fledgling cryptocurrency exchange looking to make a big name for itself in the “blue ocean” sea of opportunities promised by this emerging technology. Cryptocurrency exchanges are websites where you can buy, sell or exchange cryptocurrencies for other digital currency or traditional currency like US dollars or Euros. Basically, an exchange is where buyers and sellers conduct their business.

“Crypto-currencies have the potential to transform fundamental aspects of industry and society and make a considerable difference to the activities of government bodies and policy-making. They are perhaps the truest form of digital economy technology that has yet emerged – sitting at the crossroads of technology, economics, social sciences and business – where cryptography has managed to disrupt our established practices and notions of trust, identity and value. “

Exchanges come in a few flavours and the company is exploring the following structures:-Trading Platforms – These are websites that connect buyers and sellers and take a fee from each transaction.Direct Trading – These platforms offer direct person to person trading where individuals from different countries can exchange currency. Direct trading exchanges don’t have a fixed market price, instead, each seller sets their own exchange rate.Brokers – These are websites that anyone can visit to buy cryptocurrencies at a price set by the broker. Cryptocurrency brokers are similar to foreign exchange dealers.

The company has rented traditional office space in a small building, but expects the world to know it from its website and online presence in all its various forms e.g. blogs and social media.

Whatever its final form, MGMT Crypto Inc. will be a user centric online service, and by positioning itself as the hub in an emerging infrastructure, hopes to become the de facto exchange for several cryptocurrencies.

You got a lucky break and have been hired as a management intern by the new start-up. You instantly realize you need to do some research, as words and phrases like cryptocurrency, blue ocean, exchange, ATH, block chain, bitcoin, satoshi, ethereum etc. mean nothing to you. Your boss soon presents you with some historical data as well as a point-in-time dataset on currency trades for a subset of the more than 1500 cryptocurrencies in existence. As a new management intern, you are tasked with analysing the provided information and reporting your findings and possible recommendations at an upcoming meeting.

Cybercrimes, security breaches, election hacks and advertising blacklisting have been in the news recently and these are of concern to the company Also, remember that surge in Oct 2017 (Power BI)? Well recently, there has also been much volatility in the market with huge volumes moving between “fiat” and crypto currencies. Many start-ups, like your employer, have been trying to position themselves to ride the next wave of expected growth.Your company wishes to be the one leading the pack! This requires them to anticipate the true demand but also to know which products and likely to fail, but more importantly they have to decide on the final business model, and safeguard their electronic assets!

Still glowing from the praises for your earlier analysis, you have been given a new enormous responsibility. You are to assume the role of a functioning manager in the company, and report some findings and possible recommendations at the upcoming meeting.

REQUIRED                                                                                

Management Reporting

You need to research/analyse the above business models (don’t over think it, just the highlights), propose one to implement and also how the company will organize itself to handle security.

You are attending a number of routine meetings that are conducted online. You are to post questions and response with information related to your analysis. Posts can be conversational among managers asking and responding to questions. There is no requirement for groups to meet outside of the course for this discussion, as it is expected that the meetings/posts will proceed in a manner similar to messaging with acorporate collaboration tool.

1: Introduce yourself Identifying your Management Level and your Functional Area and your proposed company structure

My Management Level and Functional Area and proposed company structureis: Tactical Manager,Accounting and Finance, investigating Direct Trading.

2. Discuss your business structure

From the perspective of your department and management level, describe your business structure.

Suggest ONE contributing factor that may make yours the preferred structure.

Request information from TWO other departments that could assist in your investigation. Please specify both the TYPE, and specific CONTENTS of the report you are requesting (Unit 3 types of output)

3: Discuss the security implications

From the perspective of your department and management level, discuss the implications of a security breach in the company’s infrastructure (all forms - human, technology etc.)

Suggest ONE reason why such a breach could occur.

Critique TWO post made by group mates from other departments

4: Create the process diagram

DESIGN and DRAW a high level “as-is” process diagram depicting how a trade would be made, under your proposed structure. The diagram should be for the model you are supporting and should show the bands, process flows, roles and/or cross functional interactions required.

5: Summarise and make Recommendations

Summarise the information shared thus far, and discuss TWO findings about your analysis from your management level that can be used to decide on the final company structure. Make TWO recommendations to prevent security breaches.

Please assist in answering questions 2 - 5. Due at 12:00 p.m today, so would appreciate a quick yet thorough answer. Thank you.

Ragan, Inc. was founded nineteen years ago by brother and sister Carrington and Genevieve Ragan. The

company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan,

Inc. has experienced rapid growth because of a proprietary technology that increases the energy

efficiency of its units. The company is equally split between the two siblings. The original partnership

agreement between them gave each 500,000 shares of stock. The company has since gone public. At

that time, the siblings retained their shares and 1,000,000 shares of new stock were issued.

The firm anticipates needing to raise a large amount of capital ($10 million) in the coming year to

facilitate further expansion and are evaluating several financing options. The first option is to issue

zero-coupon bonds that mature in 20 years. Similar zero-coupon bonds currently have a YTM of 4.5%.

The second option is to issue 4% coupon bonds that mature in 20 years. Similar bonds have a YTM of

4%. The third option is to issue preferred stock with a fixed dividend of $0.85 per share. These

preferred stock would have a required return of 7.5%. The firm currently has no preferred stock

outstanding. The fourth option is to issue common stock.

The stock is currently trading on the market for $20 per share. The firm most recently paid a dividend

on common stock of $0.50 and plans to increase that dividend by 25% per year for the next five years.

After that, the firm will level off at the industry average of 5% per year, indefinitely. Carrington and

Genevieve estimate the required return on the stock to be 15%.

1. The firm already has some public bonds outstanding. Those bondholders may not be

comfortable with the idea of issuing new bonds. How might the firm reassure existing

bondholders?

2. What additional (qualitative) considerations must be made with respect to issuing preferred

stock? How might existing shareholders feel about this?

3. Are there any additional factors you believe should be considered? If so, what are they and how

might they impact your recommendation?

Federal Express (FedEx) was founded about 50 years ago. It handles on an average of 3 million package-tracking requests on a daily basis. To remain ahead of its competitors, FedEx strives on customer service by keeping a comprehensive website, FedEx.com. It increases customer service and reduces costs. For example, each request for information which can be retrieved from the website rather than by the call centre help FedEx to save an estimated $1.87. The costs for FedEx have been reduced from more than $1.36 billion per year to $21.6 million per year by customers using the website instead of the call centre calculating each package-tracking request costs Federal Express 3 cents. Another know-how that improved its customer service is Ship Manager, an application installed on customers’ sites so users can determine shipping charges, weigh packages, and print shipping labels. Customers can also tie their invoices, billing, accounting and inventory systems to the application, Ship Manager. Nevertheless, Federal Express still spend almost $326 million annually on its call centre to reduce customers’ annoyance when the website is down or when customers have difficulty using it. It uses CRM software called Clarify in its call centres to ensure customer service representatives’ job easier and to speed up response time. Answer the following questions: a) What is the importance of technology to ensure high-quality customer service? b) Can you estimate Federal Express’ annual savings from using information technology? c) Can you give a few examples of information technologies used by Federal Express? d) What is the role of the application ‘Ship Manager’? e) Your overall observations and learning from the above case study.