MBA 620 Module 3 Acquisition Performance Evaluation example

Two Regional Airlines Under the Microscope: Financial and Operating Performance of Composite Acquisition Targets

[Student Name]

Southern New Hampshire University

MBA 620: Measuring Success in an Organization

Module Three Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Two Regional Airlines Under the Microscope: Financial and Operating Performance of Composite Acquisition Targets

Purpose

Meridian Airways, the composite mid-size carrier in this project, is weighing two acquisition targets. Coastline Air flies leisure routes in the Southeast; Prairie Connect flies business routes in the Midwest. Before applying the balanced scorecard developed in Milestone One, this assignment evaluates each airline's recent performance on its own terms, first financially and then operationally, using the latest full fiscal year. The goal is not yet to choose, but to understand what Meridian would be buying.

Financial Performance

Table 1 compares key financial measures.

Table 1

Financial Comparison of Acquisition Targets, Latest Fiscal Year

Note. Composite figures. Asking prices are $1.40 billion for Coastline and $1.25 billion for Prairie.

Interpreting the Financials

Coastline is the more profitable airline. Its operating margin is 2.7 points higher, its return on equity roughly double Prairie's, and its asking price is lower relative to what it earns. Prairie is larger by revenue and uses its assets slightly more intensively, but it converts less of that revenue into profit. The balance sheets point the other way: Coastline carries far more debt relative to equity, 1.9 times against 1.12, which means an acquisition would add more debt to Meridian's own balance sheet, a concern standard financial analysis treats seriously for capital-intensive firms (Brigham & Ehrhardt, 2020), and increase its vulnerability to a downturn or a spike in fuel prices. On financials alone, Coastline earns more but carries more risk, and Prairie is safer but earns less.

Operating Performance

Airline profitability is driven by operating measures, so Table 2 compares those.

Table 2

Operating KPIs Compared With the Buyer

Note. Composite figures.

Interpreting the Operating Measures

The operating data explain the financial gap. Coastline runs a low-cost operation, with a cost per seat mile below both Prairie's and Meridian's, and fills its planes well, but on leisure routes where fares are lower; its revenue per seat mile is the lowest of the three. Its reliability is weaker, with on-time arrivals at 76 percent, and its turnover among pilots and mechanics is higher. Prairie's costs are higher, partly because its older fleet burns more fuel and requires more maintenance, but its business routes earn more per seat, and it runs a more reliable operation with more loyal customers. Its fleet age of 16.5 years is a looming expense: aircraft replacements would likely be needed within a few years of the acquisition, a capital cost not reflected in its current profit.

Load factor illustrates why measures must be read together. Coastline's 84.1 percent load factor looks superior, but full planes at low fares produce less revenue per seat than Prairie's emptier planes at business fares. Performance measurement research warns that a single indicator can mislead unless it is placed within a set of related measures (Neely et al., 1995).

Direction Over Three Years

A single year can mislead, so the trend matters. Over the past three years, Coastline's revenue grew about 9 percent a year as leisure travel recovered, but its on-time rate fell from 81 to 76 percent and its pilot and mechanic turnover rose from 9 to 14 percent, suggesting that growth has outpaced its ability to staff and run the operation reliably. Its operating margin peaked two years ago and has slipped slightly since. Prairie's revenue grew more slowly, about 4 percent a year, but its margin has been stable and its reliability consistently above 80 percent. Its maintenance costs per aircraft, however, have risen each year as the fleet ages, a trend that will continue until the aircraft are replaced. The trends reinforce the snapshot: Coastline's strength is growth and low cost under increasing strain, while Prairie's strength is steadiness with a known, rising cost of renewal.

What Integration Could Change

Performance after an acquisition depends on what the buyer can change, not only on what the target does today. With Coastline, Meridian could improve reliability by applying its own operations practices and could route some leisure passengers through its hubs, but raising Coastline's lower pay scales to Meridian's standards would erode part of its cost advantage. With Prairie, Meridian could replace part of the aging fleet with its own newer aircraft types over time and consolidate overhead such as reservations and maintenance planning, while keeping the business routes and customer loyalty that make Prairie valuable. Estimating these effects is the purpose of due diligence, but the direction is clear: Coastline's advantages are partly at risk after integration, while Prairie's main weakness is one Meridian is well placed to fix.

What Each Target Would Bring

Coastline would bring a low-cost, profitable operation with strong demand on leisure routes, at a reasonable price, but with heavy debt, weaker reliability and higher staff turnover. It fits a strategy of cost and capacity more than one built on business travelers. Prairie would bring business routes, reliability and loyal customers that fit Meridian's stated strategy of serving business travelers through its hubs, with a stronger balance sheet, but it is priced higher relative to earnings and carries an aging fleet that will require major investment.

Questions for Due Diligence

The numbers raise questions that only due diligence can answer. How much of Coastline's cost advantage comes from lower pay scales that would rise if its workforce joined Meridian's contracts? What is the true cost and timing of replacing Prairie's older aircraft, and could Meridian's fleet absorb some of its routes? How many of each target's passengers would connect to Meridian's hubs, the central purpose of the acquisition? Would regulators object to overlap on any routes? The balanced scorecard in the next stage will combine these answers with the performance evidence to produce a recommendation (Kaplan & Norton, 1996).

References

Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage.

Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard: Translating strategy into action. Harvard Business School Press.

Neely, A., Gregory, M., & Platts, K. (1995). Performance measurement system design: A literature review and research agenda. International Journal of Operations & Production Management, 15(4), 80-116. https://doi.org/10.1108/01443579510083622