Group assignment presentation 7 : Case study analysis

PAN Am's Exit

Pan American World Airways eventually passed away. The company had been

flying since 1927, and for many decades had been the dominant global airline. In fact,

some said that the Pan Am logo may have been the most widely recognized corporate

logo in the world at one time.

The death came as no surprise. Pan Am had lost money in every year -losses that

totaled nearly $2 billion. It had officially declared bankruptcy. But what life support

system delayed the exit of Pan Am from commercial aviation? How can our economic

model account for a company that makes losses for a decade and even continues to

operate after it has officially declared bankruptcy ?

The model of entry and exit based on cost curves gives a useful explanation of

why Pan Am would not exit after a single year of losses. As long as a firm can charge a

price above average variable costs, it makes economic sense to stay in business, even if

the price is below average costs and the firm is making losses.

To stay in business while making losses, though, a company must have assets to

sell. In its many profitable years, Pan Am had built up many such assets and it proceeded

to sell them off. The company sold the Pan Am Building to Metropolitan Life insurance

for $400 million, its Intercontinental Hotels subsidiary for $500 million, it Pacific

operations and later its London routes to united airlines, and a considerable amount of

Tokyo real estate. Moreover, Pan Am was proposing to sell off most of its other routes to

Delta and become a small airline based in Miami, serving mainly Latin American

destinations. In other words, although Pan Am continued to fly during the years while

losing money, it was slowly exiting during most of that time. In the real world, an "exit"

often means a reduction in size.

In fact, economists sometimes disagree over whether a market economy forces

exit to happen quickly enough. As the case of Pan Am demonstrates, exit can be a drawnout process. This surely benefits some workers who could avoid switching jobs for a

longer time. But shareholders in Pan Am would have been better off if the company had

been sold off in the early of the year before it had a chance to lose more money.

Discussion questions

1. How can you understand the term "Exit" refereed to in the above Pan Am's situation ?

2. Why does Pan Am continue to operate even after it makes losses for a decade ? Can

you explain and illustrate by using the graph of cost curves ?

3. What are implications for managers from the case ?