Air Freight and Corporation as Portfolio of Investments

Kalitta and Kitty Hawk: Forecasting Prices and Margins with Incomplete Information for Independent Air Freight Companies

Kitty Hawk and Kalitta were two independent freight airline companies that merged and went bankrupt. I worked a little bit on the case more than 25 years ago and I did not recognize how difficult the whole forecasting business was. It seems not too difficult to build a model from the number of planes and then assume different pricing and costs for the planes. The problem comes about because the price of used planes in the market can crash if there is a surplus of old planes. Further costs are very heavily affected by maintenance capital expenditures for existing planes. I began with analyst reports that made very simplistic forecasts derived from management forecasts. They turned out to be very wrong. Forecasts should have been made from models of the pricing of new planes. These forecasts should have recognized that pricing can fall very fast when there is a surplus of old plane capacity on the market. The forecasts should have also recognized the importance of maintenance capital expenditures.

In addition to the very difficult economic issues, there I have used the models to illustrate other corporate modelling issues. In particular the corporate models demonstrate how to be careful with depreciation and retirements in a capital heavy industry. The models also include different ways to make scenario analyses in corporate models when the focus is on projected earns per share and other items from financial statements. The video below is a long video that shows how to compute a target capital structure in a model that adjusts share buy-backs or share issues to meet a target capital structure. I am sorry about the length of the long length of the video that walks through how to construct a user-defined function to resolve the issue.

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