REAL OPTION OF NEW ROUTE EXPANSION (CASE STUDY OF GARUDA INDONESIA)

• Main Author: Aulia Cahyani (NIM 19014177), Rani
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/23839
• Institution: Institut Teknologi Bandung

INTRODUCTION - After the Federal Aviation Administration (FAA) announce the rating of Indonesia aviation, Garuda Indonesia as the biggest airline in the country immediately plan the expansion investment to the United States after absent more than two decades. And every new investment needs a valuation before it is executed. <br /> <br /> The real options model is one of the ways to evaluate investment project instead of traditional discounted cash flows. The traditional Net Present Value (NPV) method is insufficient to consider uncertainty during the decision making process. The manager should be able to consider the value of the investment as the option and make flexible decision before it isexecuted. Since the decision regarding the expansion plan of an airline is a major decision to the future of the company, the management should have the liberty to make adjustment <br /> <br /> decision along the way in order to gain positive output. <br /> <br /> METHODOLOGY – The writer use Real Option valuation to find the answer to the research problem. The method that used in this study is Black-Scholes model as one of the method in Real Option that consider five variables into the calculations including uncertainty level that is missing from traditional NPV model. FINDINGS - The initial finding in this research show that the fare that Garuda offer for this route is unable to cover all the expenses. If this number is decided as the base fare into the calculation, then it always produce negative cash flow during the operation. After the writer <br /> <br /> takes initiative to calculate Break Even Price, it shows that the fare should at least $781.00 per flight in order to get positive cash flow. After the price adjustment, the Black-Scholes Model shows that the NPV of this expansion plan is $394,612,817.28. it is higher than the result of traditional NPV. Those difference is the option’s value.With the result above, the writer suggests Garuda Indonesia to revise the fare price to keep the competitive advantages. The other suggestion is to find alternatives suppliers or partners to reduce the costs and make the financial analysis as the main important thing to consider beside networking aspect before make permanent decision as the financial condition in Garuda is not stable. RESEARCH LIMITATION – The limitation in this research come from the scope of this study which only assess one company in the one industronly which is Garuda Indonesia in aviation industry. Therefore, the result may need some adjustment if it want to implemented in the whole industry. In this research, the writer assumes that there is no dividend payment a ithe project can not be exercise before the maturity time. While in reality, those two usually <br /> <br /> exist in corporation. If there is a research in the future with the related topic, they may consider <br /> <br /> to use the possible adjustment to the calculation.