The island of Oceania is a very popular tourist destination, but its importance as a business centre is also
increasing, due to its relatively low tax rates. Oceania has four main airports, and until ten years ago it
had two main airlines - Oceania Air and Transport Oceania. However, ten years ago the two companies
merged into one airline-Oceania National Airlines (ONA) - with the intention of exploiting the
opportunities for growth in business and leisure travel to and from Oceania.
You have recently joined ONA as a senior finance manager. You report to the Finance Director (who is a
professional accountant) and advise on special projects and strategic matters.
The following exhibits (1-8) provide information relevant to your work:
Exhibit 1-An introduction to the company, produced by the Finance Director
Exhibit 2- Summary of operating and financial performance
Exhibit 3-Notes about Frequent Flyer Programmes (prepared by the Sales Director)
Exhibit 4-Extracts from local newspapers
Exhibit 5- Memo from the head of internal audit
Exhibit 6- Transcript from the most recent board meeting - HR and payroll systems
Exhibit 7 - Notes from the Chief Executive Officer (CEO) about a potential new route, forwarded to
you by the Finance Director
Exhibit 8-Extract from a voicemail the Finance Director left you
The case requirements are as follows:
1
The board are going to discuss ONA's strategy at their next meeting, and the Finance Director has
asked you to help him prepare the board report for that meeting.
Required
From the information you have been provided, write the sections of the board report which:
(a) Evaluates ONA's strengths and weaknesses, and their impact
on the company's performance
(16 marks)
Professional skills are available for demonstrating evaluation skills relating to ONA's
strategic capability and performance
(4 marks)
(b) Analyses why moving to a 'no frills' low cost strategy would not be appropriate for ONA
(14 marks)
Professional skills are available for scepticism skills in questioning appropriateness of the
proposed strategy.
(2 marks)
(Total = 36 marks)
2
The Sales Director and the CEO recently attended a conference about the future of the airline
industry, and the opportunities and threats it faces.
Following the conference, the CEO is now very concerned about cyber risks, and the related
need for ensuring that ONA has robust cyber security policies in place.
On the other hand, the Sales Director's main concern after the conference is that ONA should
introduce a 'Frequent Flyer Programme'. He has circulated his notes from the conference about
this, and has suggested in an email to the other directors that there is no need to make a formal
business case for it, because the Programme's justification is so self-evident that defining a
business case, and undertaking benefits realisation, would just be a pointless exercise. It will
slow us down at a time when we need to speed up."
These issues are also going to be discussed at the next board meeting.
Required
The Finance Director has asked you to produce a briefing paper which:
(a) Explains why establishing a business case and undertaking benefits realisation are
essential, despite the apparent 'self-evident' justification of introducing a Frequent Flyer
Programme.
(5 marks)
Professional skills are available for commercial acumen skills in demonstrating awareness of
the importance of business cases and benefits realisation.
(2 marks)
(b) Explains the increasing importance of cyber security, identifies the key control areas which
ONA needs to consider in relation to its cyber security.
(6 marks)
Professional skills are available for communication skills in clarifying key control areas in
relation to cyber security.
(2 marks)
(Total = 15 marks)
3
It is now three months since you started working at ONA.
(a) Recent news reports, as well as internal meetings and memos, have highlighted that ONA is
facing a number of issues which could damage its reputation.
Required
The Finance Director has asked you to prepare sections of a report to the board which do the
following:
(i) Recommend the risk management procedures that ONA should adopt to deal with the
risks that the recent security alerts have highlighted.
(5 marks)
Professional skills marks are available for communication skills for explaining clearly what the
procedures are.
(2 marks)
(ii) Identify the key stakeholders who will be interested in the disputes over maintenance
procedures, and discuss the nature of their interest.
(12 marks)
Professional skills marks are available for commercial acumen skills in demonstrating awareness
of who the most important stakeholders are.
(2 marks)
(b) The HR Director thinks that ONA needs to review a number of its HR systems, and -as the
transcript shows-these systems were discussed at the last board meeting. However, the HR
Director is also concerned about the other directors' approach to implementing new
systems, and she has emailed you to ask for your help in trying to convince the other
directors not to focus solely on the IT aspects of the project.
Required
Explain why it is important for ONA to consider people, organisation and processes when
implementing business change projects.
(6 marks)
Professional skills marks are available for demonstrating analytical skills in applying a suitable
model to support the HR Director's argument.
(2 marks)
(Total = 29 marks)
4
New route
ONA has been looking to increase the number of airports it flies to, and has recently become
aware of the possibility of securing prime landing slots at Hiapop airport. However, securing
these slots is contingent on the payment of an initial facilitation fee to a senior official at Hiapop
airport.
The Finance Director has told you the board members are divided over whether or not ONA
should agree a contract with Hiapop airport. However, he has specifically asked you for your
thoughts about the potential ethical issues it raises.
Required
Assess the potential ethical issues which the board should consider when deciding whether or
not to agree a contract with Hiapop airport.
(6 marks)
Professional skills marks are available for demonstrating commercial acumen skills in showing
awareness of relevant issues and their potential impact on the decision.
(2 marks)
(Total = 8 marks)
5
The Finance Director has been very impressed with all your work since you joined ONA, and has
asked for your help with one further project he is working on.
ONA's annual report currently focuses primarily on its financial and operating performance in
the last year. At the last board meeting, the CEO suggested ONA introduces integrated reporting
but a number of the other directors weren't sure what this is.
Required
The Financial Director has asked you to prepare TWO presentation slides, with supporting
notes which describe the advantages to ONA of adopting integrated reporting (<IR>), and how
the information provided in an integrated report will differ from that in traditional financial
reports.
(10 marks)
Professional skills marks are available for demonstrating communication skills in producing
information which could be presented to the directors.
(2 marks)
(Total = 12 marks)
Exhibit 1: An introduction to the company, produced by the Finance Director
ONA's markets
ONA serves two main market sectors.
Regional sector - The first sector is a network of routes to the major cities of neighboring countries
ONA's management refer to this as the regional sector. The average flight time in this sector is one and a
half hours and most flights are timed to allow business people to arrive in time to attend a meeting and
then to return to their homes in the evening. Twenty-five major cities are served in the regional sector
with, on average, three return flights per day. There is also significant leisure travel, with many families
visiting relatives in the region.
International sector - The second sector is what ONA management refer to as the international sector.
This is a network of flights to continental capitals. The average flight time in this sector is four hours.
These flights attract both business and leisure travellers. Twenty cities are served in this sector with, on
average, one return Right per day to each city.
Most leisure travellers, in both sectors, pay standard or economy fares and travel in the standard class
section of the plane. Although many business travellers also travel in standard class, some of them
choose to travel business class for which they pay a price premium.
Image, service and employment
ONA is the airline of choice for most of the citizens of Oceania. A recent survey suggested that 90% of
people preferred to travel ONA for regional flights and 70% preferred to travel with ONA for
international flights. Eighty-five per cent of the respondents were proud of their airline and felt that it
projected a positive image of Oceania.
The company also has an excellent safety record, with no fatal accidents recorded. ONA has placed great
importance on its staff providing a high quality of service, and its service levels have been recognised by
the airline industry itself. Two years ago, in 20X5, ONA was voted Regional Airline of the Year by the
International Passenger Group (IPG) and one year later the IPG voted ONA as the provider of the best
airline food in the world.
The courtesy and motivation of its employees (most of whom are residents of Oceania has come to be
recognised throughout the region. ONA has developed a reputation as an excellent employer. It pays
above industry average salaries, offers excellent benefits (such as free healthcare) and has a generous
non-contributory pension scheme. In 20X4 ONA employed 5,400 people, rising to 5,600 in 20X5 and
5,800 in 20X6. Ninety-five per cent of ONA employees belong to recognised trade unions.
Fleet
Fleet details are given in Table 1. Nineteen of the Boeing 737s were originally in the feet of Oceania Air.
Boeing 737s are primarily used in the international sector. Twenty-three of the Airbus A320s were
originally part of the Transport Oceania fleet. Airbuses are primarily used in the regional sector. ONA
also use three Embraer RJ145 jets in the regional sector.
The board has been considering taking advantage of new technology in aircraft engines by investing in
new low-noise, fuel-efficient aircraft in an effort to reduce the complaints surrounding aircraft noise,
and also to cut fuel costs.
Table 1: Fleet details
Total aircraft in service
20X6
20X5
20X4
Capacity (passengers)
Introduced
Average age
Utilisation (hrs per day)
Boeing 737
Airbus A320
Embraer RI145
21
21
20
147
16 years ago
12.1 years
8.70
27
27
26
149
19 years ago
12.9 years
7.41
3
3
2
50
8 years ago
6.5 years
7.50
Performance
Since 2004 ONA has begun to experience significant competition from 'no frills' low-cost budget airlines,
particularly in the international sector. Established international operators now each offer, on average,
three low-fare flights to Oceania every day.
'No frills' low-cost budget airlines are also having some impact on the regional sector. A number of very
small airlines (some with only one aircraft) have been established in some regional capitals and a few of
these are offering low-cost flights to Oceania.
A recent survey showed that ONA's average international fare was double that of its low-cost
competitors.
(Some of ONA's key operational statistics for 20X6 are shown separately, along with summary financial
information -[see Exhibit 2].)
In the last three years, ONA's financial performance has not matched its operational success. Although
global passenger air travel revenues increased by 12% in the period 20X4-6 (and revenue from air travel
to Oceania increased by 15% and cargo revenue by 10%). ONA only recorded a 4.6% increase in
passenger revenue.
ONA's board recognise the importance of e-commerce, and the company has recently redesigned its
website with a view to increasing the number of passengers who check in online and so will require less
assistance from staff at the airport. The majority of ONA's competitors already require passengers to
check in online.
It is also hoped the new design will increase the number of passengers who book their tickets directly
through ONA's website rather than through booking agents or other intermediary websites.
Future strategy
The board are keen to develop a strategy to address the airline's financial and operational weaknesses.
One suggestion has been to re-position ONA itself as a 'no frills' low-cost, budget airline. However, the
CEO has questioned whether such a move would be appropriate for the company.
Exhibit 2: Summary of operating and financial performance
(a) Key operational statistics for ONA in 20x6
Regional
International
Contribution to revenue ($m)
Passenger
Cargo.
Low-cost
Competitor average
400
35
280
15
Not applicable
Not applicable
Passenger load factor *
Standard class
Business class
73%
90%
67%
74%
87%
75%
$106,700
$112,500
$96,500
40%
60%
84%
60%
40%
16%
12.9 years
(Airbus)
6.5 years
(Embraer)
12.1 years
4.5 years
7.41 (Airbus)
7.5 (Embraer)
8.70
Now allows 9.10
Average annual pilot salary
Source of revenue
Direct bookings (via company
website)
Third-party bookings**
Average age of aircraft ***
Utilisation (hrs per day)
*: Passenger load factor = % carrying capacity (ie % of available seats booked)
**: Travel agents; intermediary websites
***: Data for 'International’ relates ONA's fleet of Boeing 737s; while for 'Regional’ relates to ONA's
Airbus and Embraer aircraft.
(b) Summary financial information
EXTRACTED FROM THE STATEMENT OF FINANCIAL POSITION
20X6
$m
788
60
Total
848
20X5
$m
785
56
841
20X4
$m
775
64
839
8
68
289
365
7
71
291
369
7
69
299
375
Total assets
1213
1210
1214
Total shareholder's equity
Non-current liabilities
Interest-bearing long-term loans
Employee benefit obligations
Other provisions
Total non-current liabilities
Current liabilities
Trade payables
Current tax payable
Other current liabilities
Total current liabilities
250
259
264
310
180
126
616
325
178
145
648
335
170
143
143
282
9
56
347
265
12
26
303
255
12
35
302
Total equity and liabilities
1213
1210
1214
680
50
119
849
675
48
112
835
650
45
115
810
Gross profit
535
535
314
525
525
310
510
510
300
Wages & salaries
215
198
187
Non-current assets
Property, plant and equipment
Other non-current assets
Inventories
Trade receivables
Cash and cash equivalents
Total
EXTRACTED FROM THE STATEMENT OF PROFIT OR LOSS
Revenue
Passenger
Cargo
Other revenue
Total
Cost of sales
Purchases
Total
Director's salaries
Interest payable
Total
Net profit before tax
Tax expense
Net profit after tax
17
22
254
16
21
235
15
18
220
60
18
42
75
23
52
80
24
56
Exhibit 3: Notes about Frequent Flyer Programmes (prepared by Sales Director)





Many airlines have developed Frequent Flyer Programme (FFP). [Why doesn't ONA have a
similar programme??]
FFP is loyalty programme offered to customers (members) allowing them to accumulate
points for flights booked. Members can then redeem their accrued points in future (*) in
exchange for free air travel(**)
FFPs have helped airlines improve customer loyalty, operating performance and load factors
Passenger loyalty is critical as competition becomes more intensive on certain routes
FFPs can also be valuable marketing tool (eg gather data on members' profiles, flying habits)
*: Members often take up to 2-3 years to redeem their points.
**: Check with Finance Department: apparently need to consider 'deferred revenue' here. (If airline
sells a ticket for, say, $200 need to defer the portion of revenue corresponding to the points granted
until they are redeemed or they expire.)
Exhibit 4: Extracts from local newspaper
Oceania Daily Reporter
Turbulent times at ONA
Oceania's national airline, ONA, has always been proud of the fact its staff are dedicated to providing
the highest possible quality of service to its passengers. Recently, however, the board has come under
increasing pressure to cut costs. The airline's two largest costs are fuel and staff costs, and pressure to
control staff costs has led to considerable unease.
The company has faced several difficult employee relations issues in the last few months. It has
encountered demands for higher pay from ground staff (including maintenance staff and baggage
handlers), and improved working conditions and reduced working hours from air crew (pilots; flight
engineers) and cabin crew.
Negotiations resulted in some improvements in pay for baggage handlers and reduced working hours
for air crew and cabin staff. However, the demands made by the trade unions were not met in full,
and are on condition that productivity targets are achieved.
In addition, ONA has faced problems with its outsourced catering service (AirChef) which have been
reflected in an increasing level of complaints from passengers in recent months. In turn, AirChef has
complained that ONA has negotiated the price it pays for its contract down so far that it is barely
profitable. Relations between ONA and AirChef have become so strained that the AirChef's CEO has
threatened to withdraw from the contract altogether unless ONA agrees to renegotiate the price. In
response, ONA has stated that it will only renegotiate on price when the quality of the service has
improved over a sustained period.
ONA has threatened legal action for breach of contract if AirChef withdraws its service.
Oceania Times
Airline disruption and security alerts
Oceania's national airline, ONA, and its passengers, have recently experienced disruption to a number
of flights as a result of security alerts at one of Oceania's airports. In every case except one, the
reason for the alerts had nothing to do with ONA. The exception, however, was when a member of
AirChef's staff, who was delivering meals to an ONA aircraft, failed to comply with airport security
procedures. The delay was prolonged when checks by airport security staff revealed that the
individual had not received security clearance to work in restricted areas of the airport.
ONA has been holding talks with the local airport authority over plans to prevent the delays and long
queues which followed the security alerts recurring in future. (As well as the inconvenience caused to
passengers, delays result in significant costs for ONA, due to additional staff costs - for cabin crew I
ground staff-plus additional. costs if planes are kept waiting to take off).
However, the relationship between ONA and the airport authority has become strained after ONA's
Operations Director is alleged to have said that 'much of the recent disruption and the delays could
have been avoided if the authority had reacted more effectively."
Exhibit 5: Extract from memo from the head of internal audit
Safety is critical at ONA, we carry regular audit reviews on safety and maintenance procedures at ONA.
In our latest audit, we observed that some maintenance procedures on the aircraft not been carried out
correctly, which meant that a number of aircraft did fully comply safety checks.
This matter was raised with Engineering Director who advised that safety procedures were being
improperly applied by three technicians, who had now been dismissed. The Director stated that he
believed maintenance procedures being applied now all perfectly safe.
Given the potential importance of these issues, we commissioned an independent engineering consultant
to carry a review of maintenance procedures.
The consultant's report identified there were serious faults in ONA’s maintenance procedures as a whole,
and the Engineering Director should have known about these.
The consultant also raised concerns that maintenance budget needs to be reviewed, because it is currently
inadequate for carrying out the maintenance procedures which ONA should be doing. The faults
procedures means that it is simply a result of good luck that there have been no serious incidents with
ONA’s planes.
The trade unions are now arguing that three technicians who were dismissed have been used by the
management as scapegoats to cover up the failings at a more senior level.
These maintenance issues have further strained relationships between management and staff at ONA.
The trade unions have now called for the three technicians to be reinstated, but also to have the pay and
working conditions for all maintenance staff reviewed.
The Trade unions have not ruled out strike action of their discussion prove unsuccessful. Strike action by
the maintenance staff would mean that all of ONA's flights would have to be suspended.
Exhibit 6: Transcript from the most recent board meeting
HR Director: As I have been suggesting for a while, I believe it is time to upgrade the payroll system. We
have worked with the current system for a number of years now, but it is becoming increasingly
inadequate for our needs. It does not support payment increments for non-standard working, such as
overtime roles. To allow this, payroll staff currently have to change an employee's standard hourly rate
for the time period in question and then change it back again. This is lime consuming and payment
errors have been made when payroll staff have forgotten to change the rate back again.
The human resource management system is also becoming increasingly inadequate with the result that
we are facing increasing difficulties in getting the right numbers and types of staff (both ground crew
and cabin crew) in the right place at the right time.
CEO: I agree we need to upgrade our systems. However, we have to be conscious of budget limitations
here. We do not have the funds - or sufficient IT system developers - to build our own bespoke system,
so I suggest that we select and implement a commercial off-the-shelf solution, as there should be one
which can fulfil our requirements.
IT Director: I think the point about internal IT resources is important. We have previously purchased
commercial, off-the-shelf packages in other areas of the business, and members of the IT support team
then had to find workarounds when users found problems with the functionality of the system.
Can I suggest we adopt a four-stage process for evaluating and implementing any new systems:




First, evaluate whether a commercial, off-the-shelf solution is an appropriate approach
Second, define the requirements for the new software
Third, evaluate competing packages
Finally, implement the selected package
HR Director: It is important that we don't focus only on IT though. Our business is large and complex,
and we need to consider people, organisation and processes as well as the IT itself. If we ignore the first
three areas, and focus purely on the IT, we could find ourselves faced with another failed software
project.
Exhibit 7 Notes from the CEO about a potential new route, forwarded to you by the Finance Director
We need to look opportunities for growth, and flying to new airports is one potential source of growth.
We don’t fly to Hiapop airport, but it is becoming an increasingly popular destination.
Several established international operators already fly to Hiapop.
In order to secure landing slots at Hiapop, ONA will have to pay an initial, one-off fee, of about $1
million, to senior local official.
Once the fee paid, ONA will be guaranteed landing slots for at least 10 years.
Forecast figures suggest that these slots could generate $50 million in additional gross profits ONA over
10 years.
Hiapop would be the first airport ONA serves in its country, so securing the slots could be instrumental
in delivering additional growth for the airline.
Concerns about idea of paying initial ‘facilitation fee’. Apparently, such fees are perceived as normal
business practice in Hiapop's country, but I'm a bit uneasy about this.
Can we discuss please? I’d be keen to get your thoughts on this.
Exhibit 8: Extract from a voicemail message left for you by ONA's Finance Director
'At the last board meeting, I raised the idea that ONA should think consider Integrated Reporting (<R>).
I explained that the company has only ever disclosed the minimum information it is required to by law,
but that an increasing number of companies are now broadening the amount of corporate information
they publish.
In my opinion, the primary objective of <IR> is to demonstrate the link between a firm's competitive
strategy, governance system and financial performance, alongside the social, environmental and
economic context within which it operates.
I believe that by integrating these different areas, our board will be in a much better position to allocate
its valuable resources more effectively and thereby make more environmental and socially sustainable
decisions, which should be good for ONA's overall reputation.
The Chairman seemed supportive of the proposal, and suggested that it will demonstrate that ONA lakes
its corporate social responsibility seriously by being more accountable to stakeholders' interests. In
addition, he said that simplifying the financial information we report should show people more clearly
how the company is really performing.
The CEO also commented that encouraging shareholders to think more about our long-term strategy
should help to strengthen ONA's competitive position, and move away from their current, apparent
focus on cutting costs.
However, most of the other directors said they weren't really sure what <R> is all about, so this will need
to be discussed further at the next board meeting.'