Corporate Finance --- Ana Airline

The ANA Airline (a noted Japanese Airline) currently sells a ticket from Hong Kong to Tokyo for $3,400. The variable cost is $2,000 per seat ticket, and the marketing operations, etc have fixed cost of $30,000,000 per yesr. Depreciation is $200,000 per year.

a) How would you define break-even analysis? What is the accounting break-even of ANA Airline? How does is differs from financial break-even?

Break-even analysis is a common type of scenario analysis that is useful for identifying critical levels of sales.

Accounting break-even:

Q = (FC + OCF) / (P – v)

= (30,000,000 + 200,000) / (3,400 – 2,000)

= 30,200,000 / 1,400

= 21571 tickets

Accounting break-even occurs when net income is zero, that operating cash flow is equal to depreciation when net income is zero, while a financial break-even point occurs when the Net Present Value of the project is zero.

Hence, we can conclude that in accounting break-even analysis, a project always just breaks even on an accounting basis has payback exactly equal to its life, a negative NPV and an IRR of zero; whereas for the financial break-even analysis, a project breaks-even on a financial basis has a discounted payback equal to its life, a zero NPV and an IRR just equal to required return.

b) What is operating leverage? What is the implications behind?

Operating leverage is a key determinant of break-even levels. It reflects the degree to which a project or a firm is committed to fixed costs. The degree of operating leverage tells us the sensitivity of operating cash flow to changes in sales volume, which is, the higher the degree of operating leverage, the