Harvard Case - Preparing a Concession Bid at TAV Airports Holding
"Preparing a Concession Bid at TAV Airports Holding" Harvard business case study is written by C. Fritz Foley, Cigdem Celik. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Mar 9, 2016
At Fern Fort University, we recommend that TAV Airports Holding proceed with a strategic bid for the concession at the Istanbul New Airport, focusing on a balanced approach that combines financial prudence with operational excellence. This strategy should prioritize a long-term perspective, emphasizing sustainable growth and a commitment to maximizing shareholder value.
2. Background
TAV Airports Holding, a Turkish company with a strong track record in airport management and development, is presented with a compelling opportunity to secure a concession at the Istanbul New Airport. The project is ambitious, aiming to become a major international hub, and presents both significant potential rewards and challenges. TAV must carefully analyze the financial implications, operational requirements, and potential risks associated with this venture.
The key protagonists in this case are:
- TAV Airports Holding: The company seeking to secure the concession.
- Turkish Government: The entity awarding the concession.
- Potential Competitors: Other companies vying for the concession.
- Financial Institutions: Potential lenders and investors.
3. Analysis of the Case Study
This case study can be analyzed through the lens of several frameworks:
Financial Analysis:
- Capital Budgeting: TAV must carefully evaluate the projected cash flows, considering the initial investment, operating costs, and potential revenue streams. This includes assessing the profitability of the project using metrics like Net Present Value (NPV) and Internal Rate of Return (IRR).
- Risk Assessment: TAV needs to identify and quantify the various risks associated with the concession, including political instability, economic fluctuations, and potential competition. This involves developing a comprehensive risk management plan with mitigation strategies.
- Financial Modeling: Building a detailed financial model is crucial to project future financial performance, assess the impact of different scenarios, and inform decision-making. This model should incorporate assumptions about passenger traffic, operating costs, and revenue generation.
- Capital Structure Decisions: TAV must determine the optimal mix of debt and equity financing to fund the project. This involves considering the cost of capital, financial leverage, and the impact on the company's overall financial risk.
- Financial Statement Analysis: Analyzing TAV's own financial statements, including the balance sheet, income statement, and cash flow statement, is essential to assess its financial health and capacity to undertake this project.
Strategic Analysis:
- Growth Strategy: Securing the Istanbul New Airport concession aligns with TAV's growth strategy of expanding its global footprint and becoming a leading player in the airport industry.
- International Business: This project requires TAV to navigate the complexities of international business, including cultural differences, legal regulations, and currency fluctuations.
- Partnerships: TAV may consider forming partnerships with other companies, potentially including local players, to leverage their expertise and mitigate risk.
- Operations Strategy: TAV needs to develop a comprehensive operational strategy to manage the airport efficiently, including passenger flow, baggage handling, and security protocols.
- Pricing Strategy: Developing a competitive pricing strategy for various services offered at the airport is crucial to attract passengers and generate revenue.
Other Considerations:
- Government Policy and Regulation: Understanding the Turkish government's regulations and policies regarding airport concessions is essential for TAV to ensure compliance and navigate the bidding process.
- Environmental Sustainability: TAV should consider incorporating environmental sustainability into its plans, aiming for a green airport operation that minimizes its environmental impact.
- Technology and Analytics: Leveraging technology and data analytics can optimize airport operations, improve passenger experience, and enhance revenue generation.
4. Recommendations
TAV should adopt a multi-pronged approach to secure the Istanbul New Airport concession:
Financial Prudence:
- Develop a robust financial model: This model should project cash flows, assess profitability, and analyze the impact of various scenarios.
- Secure competitive financing: TAV should explore various financing options, including debt financing and potential equity partnerships, to secure the most favorable terms.
- Maintain a conservative financial strategy: TAV should prioritize a balanced capital structure, managing debt levels to minimize financial risk.
Operational Excellence:
- Develop a comprehensive operational plan: This plan should address passenger flow, baggage handling, security protocols, and other operational aspects.
- Invest in technology and analytics: Leveraging technology and data analytics can optimize operations, enhance passenger experience, and improve efficiency.
- Foster strong partnerships: TAV should consider partnering with local companies to leverage their expertise and build local support.
Strategic Positioning:
- Emphasize long-term sustainability: TAV should focus on creating a sustainable airport operation that prioritizes environmental considerations and long-term profitability.
- Develop a competitive pricing strategy: This strategy should attract passengers while ensuring profitability and market share.
- Highlight TAV's expertise and experience: TAV should leverage its strong track record in airport management and development to demonstrate its capabilities to the Turkish government.
5. Basis of Recommendations
These recommendations are based on the following:
- Core Competencies and Consistency with Mission: Securing the Istanbul New Airport concession aligns with TAV's core competencies in airport management and development, and supports its mission of becoming a leading player in the global airport industry.
- External Customers and Internal Clients: This project will benefit external customers, including passengers and airlines, by providing a modern and efficient airport experience. Internal clients, including TAV employees, will benefit from opportunities for growth and development.
- Competitors: TAV must carefully consider the potential competition and develop a strategy to differentiate itself and secure the concession.
- Attractiveness ' Quantitative Measures: The financial model developed by TAV should demonstrate the project's attractiveness based on metrics like NPV, IRR, and payback period.
- Explicit Assumptions: All assumptions regarding passenger traffic, operating costs, revenue generation, and other factors should be explicitly stated and supported by market research and industry data.
6. Conclusion
TAV Airports Holding has a strong opportunity to secure the Istanbul New Airport concession. By adopting a balanced approach that prioritizes financial prudence, operational excellence, and strategic positioning, TAV can maximize its chances of success and position itself for long-term growth and profitability.
7. Discussion
Other alternatives include:
- Not bidding for the concession: This would avoid the risks and costs associated with the project but also miss out on the potential rewards.
- Bidding with a more aggressive financial strategy: This could increase the chances of winning the bid but also expose TAV to higher financial risk.
- Focusing solely on operational efficiency: This could lead to a successful airport operation but may not be enough to secure the concession.
Key assumptions and risks include:
- Passenger traffic growth: The success of the project depends on achieving projected passenger traffic growth.
- Economic stability: Economic fluctuations could impact passenger demand and the project's financial viability.
- Competition: The presence of strong competitors could make it challenging to secure the concession.
- Government regulations: Changes in government regulations could impact the project's profitability.
8. Next Steps
TAV should take the following steps to implement its recommendations:
- Develop a detailed financial model: This model should be completed within the next two months.
- Conduct a thorough risk assessment: This assessment should be completed within the next three months.
- Develop a comprehensive operational plan: This plan should be finalized within the next six months.
- Secure financing and finalize the bid: This process should be completed within the next nine months.
By taking these steps, TAV can position itself for success in securing the Istanbul New Airport concession and achieving its strategic goals.
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Case Description
In 2013, TAV Airports Holding prepared a bid for the concession to build and operate the third Istanbul airport. This process involved input from various parts of the firm with operating and financial expertise. Burcu GeriΕ, the CFO of TAV Airports Holding, and her team created a model to evaluate the opportunity and formulate a bid.
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