Evaluating Tallink’s Decision

Tallink is considering a decision to invest in a new ship and reroute one of its existing fleet to a new route – Tallin-Helsinki-St. Petersburg route. An analysis of the cost implications for such a decision indicates that a decision to build and reroute one of its fleet will lead to an operating loss of approximately €32 million during the first year that the ship will come to operation (Excel sheet for calculations). However, if the entity follows the status quo, i.e., remains with current fleet and aborts a decision to start a new route, it stands to make an operating income of approximately €77 million. As such, it will not be prudent for the entity to invest in the new ship and start a route to St. Petersburg.

Buying the ship with such projections will also make it difficult for the entity to recover the capital investment of €150 million on such a venture. This will be the case since, with a negative return, it will be difficult for the entity to realize a payback for such investment in the near future (Bamber, Braun & Harrison, 2008). More so, such payback may prove impossible with the expected expenditure in replacing three vessels built in the 17970s during the next five years (Michell, 2005). Various other factors also make it difficult for the entity to achieve a positive return on such an investment. One of these is that with the accession to the EU the year that the entity will commission the new ship, the entity will lose the possible increase in on-board sales for duty-free products (Michell, 2005). This will be the case since such accession will lead to loss of the advantage to sell duty-free products. Even with the proposal to reroute the fleets through non-EU countries to sell take advantage of such duty-free sales allowance (Michell, 2005) may not benefit the entity since the costs will increase with the increased route length. Currently, the majority of Tallink’s income arises from direct shipping (passengers and cargo; Michell, 2005, exhibit 3). As such, Tallink’s decision ought to focus on such major segment of its business. The Visa challenges for Russian clients may also place a challenge for Tallink in achieving the growth projections, which may facilitate the failure of the project and a subsequent loss of between €10 million and €12 million. Undertaking a project for a new route currently may not be prudent without evaluation of the effect of Estonia’s accession to the EU on Tallink’s profitability.

References

Bamber, L. S., Braun, K.W., & Harrison, W.T. (2008). Managerial Accounting, Prentice Hall, New Jersey.

Mmichell, J. (2005). Tallink: Connecting Estonia to Finland, Sweden and Russia. Ontario: Ivey Management Services.