Capital Budgeting and Government Regulations Airline Industry

Capital Budgeting and Government Regulations Airline Industry

LONG-TERM CAPITAL BUDGETING IN AIRLINE INDUSTRY

Government regulation: Why or why not

Major reasons for government involvement in a market economy

Interests of stockholders and managers: The convergence

Airline: Merger or new capital investment

LONG-TERM CAPITAL BUDGETING IN AIRLINE INDUSTRY

For profit organizations have shareholder's profit maximization as the main aim to pursue. Traditional managerial economics expects that all projects/investments having positive net present value (NPV) shall be initiated by the business managers. However, in real life there are different impediments to carrying out all investments having positive NPV. Main limitations that may restrict future investments arise from government regulations regarding merger and acquisitions (M&A), strategic fit to organization's long-term goals, and risk mitigation measures. In this paper it is analyzed that what are the main limitations that capital investment model faces with respect to government regulations. Although, different financial ratios analysis such as NPV, Internal rate of return (IRR), cash flows, and interest rates are important in making capital budgeting decision in corporate sector, government regulations are single largest source of opportunity or limitation for the firms to make decision regarding future capital investments.

Government regulation: Why or why not Direct investments have significant implications for the host countries. In case of the U.S., there are several federal and state government regulations that outline the parameters that should be complied with in order to make capital investments for business expansion. There are specific regulatory injunctions that governments have to invoke in case mergers, acquisitions, joint ventures, and other form of capital investments reduce the competition in market to try to create a monopoly. Managers have to consider the implications of their capital investments, specifically in context of labor market, capital structure, debt and other issues as well.

Government regulations are required in the context that countries face numerous challenges in stimulating growth in respective industries. Specifically, in the industries that have high capital and technology requirements, the government regulations provide the chance to stimulate growth by providing incentives to private investors. The governments regulations also help promote competition and prevent cartels and monopolies to exploit their strong position. Governments have specific interest in promoting investments as well as regulating the business environment to provide level playing field to each firm and industry operating in the country.

Major reasons for government involvement in a market economy

Venture capital markets are a perfect example as these markets are specifically assisted by the governments in early stages and this is to induce investment in the country. Risk capital programs are initiated by the government to provide a business friendly environment where people can earn handsome profits through trade and investments activities (Murray, 2007). New enterprise and entrepreneurship is encouraged by the governments in free market economies. In airline industry as well, the governments may provide the capital structure requirements of the industry to revive the slow economic growth whose implications are more on the government herself. Venture capital modes of investments are coming increasingly popular in all the developed and developing economies.

On the other hand, governments are also obliged to intervene through regulating agencies of the government established to ensure fair competition within businesses and compliance with the corporate social responsibility of firms. The regulating agencies through the powers vested in them may bring a smooth increment to tax collection.

In case those two companies may seem to be colluding to obtain larger share of the market thus leveraging her gain the largest province through operations and counter operations. Complexities that would arise under this new scenario of expansion via capital projects are managed by the governments. Market failure in context of self-regulation regarding environment and other issues are also indicators that governments may interfere in the market economy to prevent absolute disregard regarding environment.

Interests of stockholders and managers: The convergence

Rubach and Sebora (1998) have argued that corporate convergence is the convergence of interests of the management and the general shareholders of a company. Stock options provided to the executive employees encourage these employees to strive for the progress of the company. This phenomenon is also called the management's entrenchment. Power, status, and risk reduction are general reasons for the management to entrench themselves in the company Morck, Shleifer & Vishny, 1988).

Managerial ownership is also one such case whereby the interests of the mangers are directly related to the success of the company as a corporate entity. Board composition and equity ownership are two main aspects of corporate governance in large enterprises that indicates the control of management over the firm (Denis & McConnell, 2003). The external directors are now increasingly included in the U.S. corporations to promote accountability and risk mitigation.

Airline: Merger or new capital investment

Fawcett and Farris (1989) have argued that regulatory control over different industries such as airline industry was highest in the first 40 years of the industry. The government controlled the expansion of business operations by airlines. In present scenario, the merger may not allow the airline company to yield the desired results as are intended by the company. The resulting legal impediments in the company's way may not allow the management to operate the company efficiently.