Consider that Blue Sky Airlines has the following options:
- The government has offered a potential "gift" to cover the incremental cost of fuel. This will be an elimination of a 6% fuel excise tax as well as an interest-free $100 million gift in return for agreeing to purchase only U.S.-manufactured aircraft over a three-year period with no reduction in aircraft cost financed by an additional debt at 10%.
- The company has been offered a fuel-hedging program that involves a one-time investment of $10 million but will guarantee a 4% annual price increase in operating costs.
- The company has been offered a five-year union contract for no wage increases in return for a guarantee of no reduction in jobs.
- The company has been offered a 10% reduction in the cost of a planned $600 million aircraft order by a foreign supplier financed by a debt at 10% or the company can forego buying new aircraft but will incur a 10% higher ongoing cost in fuel and labor.
- The company has the option to create a low-cost structure that will replace its existing labor structure. This will involve taking the company into bankruptcy to void union contracts, will reduce overall labor costs by 25%, and will involve a 40% premium in ongoing debt expense.
Compare and contrast the options given above, choose the best options for the company, and create a three-year pro forma for Blue Sky. The pro forma should include an income statement and a balance sheet. Assume that revenues will continue to rise by 5% in year-2 but by 25% in year-3 when marketing initiatives take effect.
