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Horizon Lines Inc Case Solution

Solution Id Length Case Author Case Publisher
1324 1084 Words (4 Pages) Kenneth Eades, Daniel Hake Darden School of Business : UV6617
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The primary cause of the problem is the inability of Horizon to satisfy its debt obligations. However, this issue originated from two separate and distinct complications. Firstly, the global recession of 2008 proved fatal for Horizon as the oil prices increased, and the shipping business suffered major setbacks. This resulted in a sharp decline in revenues.

Following questions are answered in this case study solution

  1. What was wrong with Horizon? 

  2. Which of these problems were unlucky and which were mismanagement?

  3. Discuss what went well in Horizon. 

  4. Is this an operational problem or a financial problem?

  5. What are the alternatives for the administration? Discuss the three choices shown in the case. Does management is limited to these three options?

  6. How refinancer’s debt projections assuming Exhibit 6 correct? The negotiation of debt restructuring with creditors is voluntary. 

Case Analysis for Horizon Lines Inc Case Solution

As a direct consequence of the crises, Horizon lost one of its key strategic alliance. Moreover, the huge costs incurred in the income statement in the form of the legal charges and fines decreased the net income to a huge extent. As a result of the amalgamation of these issues, the net losses of Horizon do not allow it to satisfy the interest and principal payments on its senior and unsecured debts. As a result, Horizon is at the brink of bankruptcy as it will fail to pay the bondholders the desired interest payments.

2. Which of these problems were unlucky and which were mismanagement?

Broadly speaking, there were two key issues with Horizon that led to the problem of probable bankruptcy. The first one was related to the sharp decrease in revenues in the aftermath of global financial crises. This crisis affected the entire shipping business via the increased oil prices. It is unwise and illogical to assume that the management of Horizon must have had the knowledge of such future events. Hence, this issue couldn’t have been foreseen. Therefore, it can be said that the loss of revenue and strategic alliance was unlucky for Horizon. However, on the other hand, the huge amount of fines and legal fees amounting to more than $50 million in the income statements was a direct consequence of the mismanagement of Horizon. Horizon’s management was aware of the fact the collusion can result in legal recourse. Therefore, the inability of the management to have a visionary and integral approach in the business led to the huge unwanted loss of income. Moreover, this mismanagement also hampered the public image of the company.

3. Discuss what went well in Horizon.

Firstly, the legal penalties and fines of Horizon were only limited to $52 million. In the case of high penalties, Horizon was going to be in such a state where immediate filing of bankruptcy was evident. Moreover, it is also crucial to note that in spite of the global recession and increase in prices, the revenue only decreased by 11.55% in 2009. However, in 2010, the revenue increased by 2.52%. This is a success of Horizon’s management that it was able to increase its revenue in spite of the external market conditions. It is also a success of Horizon that it managed to maintain its cost structure. The cost of goods sold to revenue ratio only increased by 4% from 82% to 86%. Hence, in spite of the rising oil prices, Horizon strengthened its revenues and also maintained its cost structure.

4. Is this an operational problem or a financial problem?

Categorizing this issue as either an operational or financial problem will be a mistake. If the underlying cause of a financial problem lies in the operational side of the business, it becomes acutely difficult to separate the two categories. The current problem of Horizon is the probable bankruptcy and its bears a financial connotation. However, how can this issue be classified solely as financial when the operational side generates direct inputs to the financial model?

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