The ILFC/Alaska Airlines case offers students an insight into an industry in a state of flux, in terms of capital financing methods and industry consolidation. Prior to the subject period, the industry maintained stable and traditionally employed methods of acquiring capital equipment. As is brought out, the rise of the operating lease industry changed the means by which many airlines built their fleets. Through the 1970s, the players that made up the industry remained independent from each other. In the 1980s, however, the landscape would be dramatically changed by mergers and acquisitions.

This case examines, in relative isolation, two companies which explored, and then entered a business relationship. The case initially explores the airline industry, to which both companies are constituent. The leasing industry and ILFC are profiled to provide a background of the changes in aircraft financing. The case then discusses the issues confronting Alaska Airlines, in terms of their capital needs and also their reaction to industry consolidation trends.

The relationship between Alaska and ILFC, formalized with the agreement signed in 1990, can be considered a vertical one since ILFC was, and is, a supplier to Alaska. More importantly, with the agreement, the relationship between the two companies can also be seen as a strategic partnership, particularly from Alaska’s perspective, since the airline was able to enter into an equity arrangement with a concern whose goals were complimentary to its own. Prior to the alliance with ILFC, Alaska took a number of measures aimed at ensuring its independent, such as selling off a limited number of its aircraft assets and issuing debt with a clause requiring redemption upon a buyout. The deal with ILFC involved the placement of a large number of ILFC-ordered aircraft with Alaska; additionally, ILFC purchased a $60 million issue of Alaska Air Group preferred stock. Simultaneously, Alaska developed stock ownership plans for its employees.

Alaska’s continued independent status in the airline industry is evidence of management’s will in a period when similarly sized airlines were routinely bought out, particularly in the Western U.S.

Or primary importance in this case, in terms of discussion, is whether Alaska’s management was acting in the best interests of the company’s shareholders in executing the bid for the airline'’ independence. With the airline industry once again exhibiting signs of a trend toward consolidation, the lessons learned from the Alaska/ILFC partnership warrant current attention.
 

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Case Overview

The Donna Karan company has been expanding rapidly in the fashion industry in the 1990’s. Increases in working capital requirements, as well as certain non-recurring expenses, have grown faster than the cash generating ability of the business. The firm has had to top external financing sources in growing amounts on a regular basis. These loans have come from banks, for short-term needs, as well as the capital markets for longer-term funds.

Ms. Karan and Mr. Weiss must decide whether or not to continue the firm’s growth in the 20 percent range. If this growth continues, other financing sources will surely be needed. An equity partner on a private placement basis is one option, as is an IPO, which would result in a public company, compared with a closely held private operation up to the time of the case.

Another viable alternative is to reduce the firm’s sales growth rate to the 5 – 10 percent range, taking some pressure off financing of assets. However, in the competitive fashion industry, this policy may not enhance the long-term viability of the firm.

Case Objectives

A number of objectives may be addressed in this case.

• Although the Donna Karan company has been profitable over the last few years, it still has needs for external financing on a continuous basis. Why is this situation occurring? Explore the distinction between profits and cash requirements.
• Evaluate the estimates may by Ms. Karan concerning the size of external financing needs in the next year. Should the firm borrow these funds, and on what terms, or sell equity in the company?
• Explore the wisdom of continuing to grow the firm at a rapid rate (about 20% annually) or slowing down to 5-10 percent. Heavy external financing needs place tremendous market based pressures on Ms. Karan and her firm. Consider the financing sources that might be utilized to meet the firm’s need.

• All of these questions provide students with the opportunity to develop their skills of financial analysis and identifying a company’s financing problems and challenges.
• Additional elements of the case allow students to bring into the analysis considerations of a firm managed and controlled by its major shareholder. The total compensation package of Ms. Karan and her husband must also be evaluated in relation to costs to their firm and the cost structure of some major competitors.
• If the firm goes through with its planned IPO as a way of obtaining external financing, evaluate the "financial signal" being given to the financial markets. More than 80 percent of the proceeds are used to refinance company debt and make payments to Ms. Karan and Mr. Weiss for past activities beneficial to the corporation. If these payments had been made on a current basis, reported profits would have been reduced and external financing needs would have been greater.

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The task for the student is to dissect and examine the possible financial effects of the arrival of EMU and change over to a single currency for a company with about 80% of its revenues from export activities. The primary objectives for the case are:

In September 1997, the financial manager of Industries Del Norte, S.A. (INSA) one of the largest manufacturers of capital goods and providers of mechanical engineering services, was examining the possible effects that European Monetary Union (EMU) and the introduction of the single currency (the Euro) might have on INSA’s financial structure. Given the high probability that the market was placing on Spain’s joining the proposed EMU from its initiation date (about 97% probability, given in Exhibit 3 of the case) the analysis of the introduction of the Euro and its possible financial side effects received considerable top management attention because of its potential impacts on the INSA competitive position in an ever-increasing competitive industry.
 
 

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This case introduces the environment of a voluntary not-for-profit organization. Issues of appropriate financial reporting and internal control are addressed. Students have the opportunity to analyze and critique the information content of the organization's existing cash-basis financial statements. Students also have the opportunity to suggest improvements thatstrengthen the cash controls and organizational procedures. The case was written for use in an undergraduate accounting course. Financial reporting issues of the case would be appropriate for a nonprofit accounting course. Internal control issues would be appropriate for an introductory accounting course, auditing course, or other course where internal control is introduced.
 
 

The Springfield Medallion Club is a 100-member organization comprised of business leaders and professionals, a local affiliate of the International Medallion Society. The club is funded primarily from member dues and holds a major annual community fund raiser to further support its community service activities. Club members meet weekly for a luncheon meal and program. Chris Johnson has served as treasurer of the Club for one year. Chris is frustrated by the accounting and reporting system used by the club and decides to make recommendations for improvements to the present system.
 

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Contact Person: Laurie A. Turner, Truman State University, Kirksville, MO 63501
Mail: Truman State University, Division of Business and Accountancy, 100 E. Normal,Kirksville, MO 63501
Voice: (660) 785-4369; FAX (660) 785-7471; e-mail: lturner@truman.edu
 

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Case Objectives and Use

A key objective of this case is to illustrate how business finance is an integral part of management decision-making in a small, family owned, technology-driven, growth oriented firm. Students learn that financial analysis, forecasting & planning, budgeting, capital planning, funding decisions and valuation are only meaningful in the larger context of the firm’s overall vision, mission, goals, strategies, culture, business action plans, career plans and personal preferences of the owners.

The case can be used in financial management courses at the graduate level or upper level business finance courses at the undergraduate level. It is an appropriate case for small business finance courses. Since the case is integrative of several disciplines it might be adopted by business strategy and policy courses that strive to link business strategy and financial management.

Case Synopsis

Scranton Systems Company finds itself at a critical stage in its life cycle. It is a $25 million, family owned business that has achieved leadership worldwide with innovative products and technologies. In many market segments it sets the quality standard in the industry. The company has provided wealth, security and prominence for the Scranton family. Nevertheless, the company is vulnerable to increasing competition and a variety of internal weaknesses that will have to be overcome for it to achieve its goal of becoming a $50-$100 million company. Strategic planning in a global context and supporting financial strategies along with issues of management succession, possible sale of the company and its valuation are addressed.
 

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Contact person: Professor Jonathan B. Welch, College of Business, 413 Hayden Hall, Northeastern University, 360 Huntington Avenue, Boston, MA 02115.
Voice: 617-373-4572 or 781-545-3552; FAX: 617-373-8798: e-mail: jwelch136@aol.com