Enron Bankruptcy Analysis

Lavish Corporate Expenditures
Another reason for Enron’s bankruptcy was the unnecessary personal spending by corporate managers. It was a direct loss to the company’s shareholders. In the later stages before its bankruptcy, the luxuries were paid from the company’s borrowing, as it had no real profits. Therefore in the later stages, the creditors were at a loss rather than its shareholders.
One of the most common expenses was corporate airplanes. Such travel arrangements cost many fold compared to a commercial airline. The cost per hour would be close $5000. Moreover, these aircrafts would not carry any other passengers except for the corporate managers and would take them to their destination and fly them back. This put the entire cost of the aircraft on

the company. When the company was operating under Rich Kinder, he kept corporate airline expenses under control. There were five corporate aircrafts during Kinder’s time out of which two were Cessna Citations. A Cessna Citation is a low cost jet capable of carrying six passengers at 400 miles per hour and it would cost $1500 per hour for its operations. But when Kinder left, the company sold the two Cessna Citations and bought two Hawker 800s. These aircrafts were bigger, faster and more expensive than the Cessna Citations. Each aircraft was purchased for $10 million and required $4200 per hour to operate. Also the use of the company’s aircraft increased significantly after Kinder left. He had originally limited its use for company business only. For example Lou Pai owned a ranch in Colorado. Every time he used the company’s aircraft to visit his ranch, it would cost the company $45,000. Later the previously bought Hawker aircrafts were replaced by two Falcon 900s. Each Falcon 900 was purchased for $30 million and cost $5200 per hour to operate. In addition, another Hawker was bought to create a fleet of six aircrafts. This made no financial sense to the company. They could have just sold one of the Hawker aircraft and retained the other as buying a new one costs more money. In 2001, Ken Lay convinced the board of directors to purchase a Gulfstream V corporate jet which could carry 16 passengers and could fly nonstop from Houston to Europe. The company paid $42 million for the new aircraft in spite of incurring heavy losses in the first quarter of 2001. Another Corporate manager who was infamous for her extravagant air travel was Rebecca Mark. As mentioned earlier, she was the head of International Enron and was required to travel frequently around the globe. She insisted on using company’s aircrafts even when she would fly all by herself half way around the world. Also, when a corporate plane was not available, she would charter a plane which would cost the company $100,000. Such air travels would put corporate aircrafts to shame.

The Exploitation of Electrical Power in the California Market
When a company is the only supplier of a product or is a member of a cartel, it can make super high profits by withholding the supply of its product and raising the prices. A notorious Enron subsidy started to change the rules of the game in the California energy market. They were reducing the supply of electric power, as any monopolistic firm would do in order to raise prices. To top that, the company was dealing in a product with high inelastic demand which increased the price ten folds. As a result of this monopolistic behavior, the government intervened and established a control price hence regulating the market. Eventually the higher profits vanished as the company was unable to raise prices by reducing supply of energy.

Bankruptcy of Enron
The definition of bankruptcy is when a company in unable to meet it’s financial and contractual obligations and seeks protection by the court from its creditors.

However, the company does not cease to exist. In order to pay the deferred dues to its creditors, the court takes charge of the company’s assets and disposes them to satisfy the company’s debt. Enron had billions of dollars worth of assets. Some of the assets, like the Dabnol power plant in India, were white elephants. The problem was that its liabilities were more than its assets. It also had never ending cash flow problems. A white elephant asset is one which has no value at present but it is potentially valuable in the future. In 1999, Enron started raising cash by selling off its assets. Jeff skilling sold Enron’s 53% of interest in Enron Oil and Gas Company as it was one of the business units that was producing cash and was a marketable asset. Though the sale helped the company, other various projects of the company were burning cash at hundreds of millions of dollars. In 2000, Jeff Skilling tried to sell Enron’s herd of white elephant assets worth more than 7 billion to venture capitalists in the United Arab Emirates, but the deal fell

through.