Government regulation's impact on capital budgeting in airlines
This paper addresses the topic of capital budgeting in the market driven economies in the west. It is also described how government regulations impact both negatively and positively. There is also description of airline industry and how different governments seek to protect the shares of national flag carriers while not frustrating the home work done by the WTO.This paper addresses the topic of capital budgeting in the market driven economies in the west. It is also described how government regulations impact both negatively and positively. There is also description of airline industry and how different governments seek to protect the shares of national flag carriers while not frustrating the home work done by the WTO.
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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.
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.
New capital investment is also under governmental scrutiny as the foreign direct investment is although preferable but has certain conditions attached in the airline industry. To improve the efficiency of consuming the capital for new projects, the governments' encourage that capital investments are made to expand the business operations. Fig 1
Source: (Chao, Yu & Yu, 2009)
The aforementioned figure indicates that the there are significant amount of government induced capital taxes in some economies emerging around the globe of the world.
Conclusion
Managers are faced with different challenges while making decision regarding expansion of business operations. To mitigate the impact of environmental uncertainty, there are different channels of investments that managers have to decide amongst. Venture capital, merger and acquisition (M&A) and capital investments are some of the main options available with the managers while conducting capital budgeting. To induce growth within and outside the company, capital investments are the safest bet that managers make. M&A are subject to significant scrutiny by the governments as there are different government regulations to prevent monopoly and to promote investment and trade in the host country.
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- Chao, C. C., Yu, E. S., & Yu, W. (2009). Government budget, public-sector wages and capital taxes in a small open economy: A Hong Kong case. China Economic Review, 20(1), 54-64.
- Denis, D. K., & McConnell, J. J. (2003). International corporate governance. Journal of Financial and Quantitative Analysis, 38(1), 1-36.
- Fawcett, S. E., & Farris, M. T. (1989). Contestable markets and airline adaptability under deregulation. Transportation journal, 29(1), 12-24.
- Morck, R., Shleifer, A., & Vishny, R. W. (1988). Management ownership and market valuation: An empirical analysis. Journal of financial economics, 20, 293-315.
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- Rubach, M. J., & Sebora, T. C. (1998). Comparative corporate governance: Competitive implications of an emerging convergence. Journal of World Business, 33(2), 167-184.
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