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Introduction
The island of Oceania attracts thousands of tourists every year. They come to enjoy the beaches, the
climate and to explore the architecture and history of this ancient island. Oceania is also an important
trading nation in the region and it enjoys close economic links with neighbouring countries. Oceania
has four main airports and until 1997 had two airlines, one based in the west (OceaniaAir) and one
based in the east (Transport Oceania) of the island. However, in 1997 these two airlines merged into
one airline – Oceania National Airlines (ONA) to exploit the booming growth in business and leisure
travel to and from Oceania.
The board of Oceania airlines
The airline has been run for the last 20 years by James Christopher, who has vast experience in the
airlines' industry and started out as a member of the cabin crew for the airline and worked himself up
into the position of Chairman and CEO. The other members of the board are the financial director
James Murphy and HR director, Mary Howie.
John’s wife Jenny Christopher acting a non-executive director. The airline lacks the traditional
committee structures that are normally present in a large organisation and this was accepted when
the airline was growing strongly but the recent drop in profits had raised concerns among institutional
investors that the business needs to improve its board structure and overall governance.
Shareholder concerns
The shareholders were particularly concerned about the high levels of remuneration in the company
and a recent incident in which a hacker in the company was able to exploit the IT payment systems
and perpetuate a fraud amounting to several million dollars.
The shareholders in the company are also frustrated with the lack of information coming from the
company. They are provided with the statutory information but feel that they need to know more and
are frustrated by the lack of disclosure of non-financial performance information. This is becoming a
key issue in the as the institutional investors are more concerned about and they are putting pressure
on the company to include this disclosure.
Market sectors
ONA serves two main sectors. The first sector is a network of routes to the major cities of
neighbouring countries. ONA management refers 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. The second sector is what
ONA management refers 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. The leisure travellers are primarily holiday-makers from the continent. Twenty cities
are served in this sector with, on average, one return flight per day to each city.
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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. 85% 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 accident
recorded since the merging of the airlines in 1997. The customer service of ONA has also been
recognised by the airline industry itself. In 2005 it was voted Regional Airline of the Year by the
International Passenger Group (IPG) and one year later the IPG awarded the ONA catering
department the prestigious Golden Bowl as the provider of the best airline food in the world.
The courtesy and motivation of its employees (mainly Oceanic residents) are recognised throughout
the region. 95% of ONA employees belong to recognised trade unions. ONA is perceived as an
excellent employer. It pays above industry average salaries, offers excellent benefits (such as free
health care) and has a generous non-contributory pension scheme. Employees have to undertake at
least 12 hours of training each year.
In 2004 ONA employed 5400 people, rising to 5600 in 2005 and 5800 in 2016. The business makes
an active effort to employ people from the local community and has a policy of not outsourcing. They
are also active in making charitable donations and last year they provided a free flight for
underprivileged children to visit Oceanland a major tourist attraction in Oceania.
Fleet
Fleet details are given in Table 1. Nineteen of the Boeing 737s were originally in the fleet of
OceaniaAir. 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 used three Embraer RJ145 jets in the regional sector.
Table 1: Fleet details
Boeing 737
Airbus A320
Embraer RJ145
Total aircraft in service
2016
2005
2004
21
21
20
27
27
26
3
3
2
Capacity (passengers)
147
149
50
Introduced
October 2004 November 2005
Average age
12ꞏ1 years
12ꞏ9 years
Utilisation (hrs per day)
8ꞏ70
7ꞏ41
Emission levels (CO2)
113g/Km
114g/km
Equipment failures
12
12
Per 10,000 flights
January 2010
6ꞏ5 years
7ꞏ50
87g/km
2
Note: equipment failure will normally result in a delay to the airline taking off while the fault is repaired,
In serious case, this can result in total aircraft failure.
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Performance
Since 2004 ONA has begun to experience significant competition from Freshair a ‘no frills’ low-cost
budget airline, particularly in the international sector.
Freshair now each offer, on average, three low fares flights to Oceania every day. ‘No-frills’ low-cost
budget airlines are also having some impact on the regional sector. A recent survey for ONA showed
that its average international fare was double that of its low-cost competitors. Some of the key
operational statistics for 2016 are summarised in Table 2.
Table 2: Key operational statistics for ONA in 2016
Regional
International
Fresh air
Competitor(Average)
Contribution to revenue ($m)
Passenger
Cargo
400
35
280
15
Not applicable
Not applicable
Passenger load factor
Standard Class
Business Class
73%
90%
67%
74%
87%
75%
Average annual pilot salary
Average bonus for directors
$106,700
$500,000
$112,500
$400,000
$96,500
$250,000
Source of revenue
On-line sales
Direct sales
Commission sales
40%
10%
50%
60%
5%
35%
84%
12%
4%
Remuneration
Average age of aircraft See Table 1
Utilisation (hrs per day) See Table 1
4.5 years
9ꞏ10
Internet infrastructure at Oceania airlines
ONA have made a number of operational changes in the last few years. Their website, for example,
now allows passengers to book over the internet and to either have their tickets posted to them or to
pick them up at the airport prior to travelling. Special promotional fares are also available for
customers who book on-line. However, the website does allow passengers to check-in on-line. This
limited functionality means that the airline has very limited information on who their passengers are
this has hampered their ability to obtain relevant market information for decision making.
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However , asTable 2 shows, a large percentage of sales are still commission sales made through
travel agents. Direct sales are those sales made over the telephone or at the airport itself. This has
led to some complaints from the customers who have become used to using the internet and have
been used to the more advanced ticketing features provided by the budget airline.
Most leisure travellers 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. In the last three years, the financial performance
of ONA has not matched its operational success.
A recent report showed that Oceania was lagging behind the established competitors in the market,
especially in light of the recent competition from budget airlines. There was also a feeling that the
business is not making enough of the new technologies that are available in the market such as big
data.
The main financial indicators have been extracted and are presented in Table 3. In a period (2004–
2016) when world-wide passenger air travel revenue increased by 12% (and revenue from air travel
to Oceania by 15%) and cargo revenue by 10%, ONA only recorded a 4ꞏ6% increase in passenger
revenue.
Table 3: Extracted Financial Information all figures in $m
Extracted from the Balance Sheet
Non-current assets
2016
2015
2014
Property, plant and equipment
Other non-current assets
Total
788
60
848
785
56
841
775
64
839
Current assets
Inventories
Trade receivables
Cash and cash equivalents
8
68
289
7
71
291
7
69
299
Total
365
369
375
Total assets
1213
1210
1214
Total shareholders’ equity
250
259
264
Non-current liabilities
Interest bearing long-term loans
Employee benefit obligations
Other provisions
Total non-current liabilities
310
180
126
616
325
178
145
648
335
170
143
648
Current liabilities
Trade payables
Current tax payable
282
9
265
12
255
12
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Other current liabilities
Total current liabilities
Total equity and liabilities
56
347
1213
26
303
1210
35
302
1214
Extracted from the income statement
Revenue
Passenger
Cargo
Other revenue
Total
680
50
119
849
675
48
112
835
650
45
115
810
Cost of Sales
Purchases
Total
535
535
525
525
510
510
Gross Profit
Wages & Salaries
Directors’ remuneration
Interest payable
Total
314
215
32
22
291
310
198
16
21
235
300
187
15
18
220
Net Profit before tax
Tax Expense
23
18
75
23
80
24
Net Profit after tax
Future Strategy
5
52
56
The management team at ONA are keen to develop a strategy to address the airline’s financial and
operational weaknesses. One suggestion put forward by the financial director has been for ONA itself
to acquire the budget airline FreshAir, that has been partially responsible for their loss in sales.
However, this has been angrily dismissed by the CEO as likely to lead ‘to an unnecessary and bloody
revolution that could cause the death of the airline itself’.
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Oceania IT Proposed Ecommerce Upgrade project
Oceania has considered moving to a full e-commerce system which would allow passengers to
receive a full service including e-tickets and online check-in. Figure 1, extracted from the business
case, shows the financial appraisal of the project. It uses a discount rate of 8%. The NPV of the
project is $10,925.
All figures in $000s
Costs
Initial software
Software maintenance
Hardware upgrades
Security
Disruption
Total costs
Income/Savings
Additional income
Admin saving
Reduce fraud
0
1
200
200
50
––––
250
––––
Year
4
5
6
7
40
5
20
40
5
20
40
5
20
40
5
20
40
5
20
––––
65
––––
––––
65
––––
––––
65
––––
–––– ––––
65
65
–––– ––––
125
30
10
––––
165
––––
85
125
30
20
––––
175
––––
110
125
30
30
––––
185
––––
120
125
30
30
––––
185
––––
120
125
30
40
–––––
195
––––
130
0ꞏ857
0ꞏ794
0ꞏ735
0ꞏ681
0ꞏ630 0ꞏ583
40
5
20
15
15
–––– ––––
265
80
–––– ––––
50
20
125
30
40
–––
195
––––
30
Benefits – costs
––––
(250)
––––
20
––––
(245)
Discount factor
10
ꞏ926
Present value
(250) (226ꞏ870) 72ꞏ845 87ꞏ340 88ꞏ200 81ꞏ720 81ꞏ900 75ꞏ790
Total benefits
––––
3
2
NPV 10ꞏ925
Figure 1: Financial cost/benefit of the computer-based assessment project
An explanation of the costs and benefits is given below. Initial software – refers to the cost of buying
the computer-based assessment software package from the vendor. The software costs $375,000,
but a further $25,000 has been added to reflect bespoke changes which Oceania requires. These
changes are not yet agreed or defined in detail. Indeed, there have been some problems in actually
specifying these requirements and understanding how they will affect the administrative processes of
the Oceania.
Software maintenance – This will be priced at 10% of the final cost of the delivered software. This is
currently estimated at $400,000; hence a cost of $40,000 per annum.
Security – refers to the security provided to minimise the risk of fraud or hacking. This price has
already been agreed with an established security firm who has guaranteed it for the duration of the
project.
Disruption – refers to an expected temporary decline in staff productivity and staff morale during the
implementation of the computer-based assessment solution.
Admin saving – concerns reduction in the Oceania headquarters. The actual savings will partly
depend on the detailed requirements currently being discussed with the software package provider. It
is still unclear how this will affect the administrative process.
Reduced fraud is an estimate of reduced fraud by the ability of the system to check credit cards and
buyer credentials automatically.
Extra income – the IIA expects candidates to be attracted by the convenience of purchasing and
receiving tickets online. The extra income is the IIA’s best guess at the amount of income which will
result from this new assessment initiative.
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Interview with John Sykes founder of FreshAir
What was your idea behind introducing a budget airline?
FreshAir was set up in 2000 as a low-cost airline operating from several regional airports in Oceania.
Using these less popular airports was a much cheaper alternative to the major city airports and
supported FreshAir’s low-cost service, modelled on existing low-cost competitors. These providers had
effectively transformed air travel in Oceania and, in so doing, contributed to an unparalleled expansion
in airline travel by both business and leisure passengers.
At FreshAir we use one type of aircraft, tightly controlled staffing levels and costs, relied entirely on
online bookings and achieved high levels of capacity utilisation and punctuality. As Chairman and Chief
Executive of FreshAir , I am willing to challenge governments and competitors wherever they impeded
his airline and looking to generate positive publicity whenever possible.
What is the structure in the organisation?
We are family business and as such, we feel it's important to keep everything in the family. The board
of directors are all shareholders. I hold 40 % of the shares. My wife Brenda Sykes holds 30% of the
shares and my son Bill Sykes holds 30% of the share
What are the main challenges you expect to face over the next 10 Years?
John is now looking to develop a strategy which will secure FreshAir’s growth and development over
the next 10 years. He can see several environmental trends emerging which could significantly affect
the success or otherwise of any developed strategy. 2016 had seen fuel costs continue to rise reflecting
the continuing uncertainty over global fuel supplies. Fuel costs currently account for 25% of FreshAir’s
operating costs. Conversely, the improving efficiency of aircraft engines and the next generation of
larger aircraft are increasing the operating efficiency of newer aircraft and reducing harmful emissions.
The concern with fuel also extends to pollution effects on global warming and climate change. Coordinated global action on aircraft emissions cannot be ruled out, either in the form of higher taxes on
pollution or limits on the growth in air travel. On the positive side, Oceania governments are anxious to
continue to support increased competition in air travel and to encourage low-cost operators competing
against the over-staffed and loss-making national flag carriers.
What do you expect to happen to demand in the next few years?
The signals for future passenger demand are also confused. Much of the increased demand for lowcost air travel to date has come from increased leisure travel by families and retired people. However,
families are predicted to become smaller and the population increasingly aged. Besides, there are
concerns over the ability of countries to support the increasing number of one-parent families with
limited incomes and an ageing population dependent on state pensions. There is a distinct possibility
of the retirement age being increased and governments demanding a higher level of personal
contribution towards an individual’s retirement pension. Such a change will have a significant impact on
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an individual’s disposable income and with people working longer reduce the numbers able to enjoy
leisure travel.
Finally, air travel will continue to reflect global economic activity and associated economic booms and
slumps together with global political instability in the shape of wars, terrorism and natural disasters.
John is uncertain as to how to take account of these conflicting trends in the development of FreshAir’s
10-year strategy and has asked for your advice.
What about expanding the fleet, do you have any plans to grow the business?
Yes, we aim to expand the business into new areas and our objective is to increase is to double the
number of planes in the next few years. The key issue we face is how to raise funding for this expansion
and we are currently looking at several options to finance the business expansion. We also have an
offer from a venture capitalist who wishes to invest in our business so it’s something we will consider in
the next few months.
How is your strategy for using technology in your business?
We follow a strategy which is based around digitise everything. We ensure that ticketing, booking and
check-in can all be done online. We ensure that our business is mobile friendly and in fact most
passengers’ book on our app and use a QR code on their phone as their boarding pass.
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Question 1
There has been increased pressure on the company to review its governance arrangements and the
overall performance of the organisation. You are required to take the role of an independent consultant
commissioned by the institutional investor and produce a report which covers
(a) an explanation of the changes that are needed in the governance structure of Oceania airlines and
how such changes would benefit the airlines
(10 marks)
Professional skills marks are available for demonstrating scepticism of the existing governance
arrangements in demonstrating awareness of governance change required
(2 marks)
(b) Evaluate the overall performance of Oceania from an integrated reporting perspective.(12 marks)
Professional skills marks are available for demonstrating analysis of appropriate financial and nonfinancial issues
(2 marks)
c) Suggest ways in which Oceania airlines can improve their environmental footprint
(6 marks)
Professional marks are available for commercial awareness of way in which an airline can have a
positive or negative impact on the environment
(2 marks)
Total
(36 marks)
Question 2
The directors of Airtite are concerned about the rise of competitors in the market. They feel that there
is a need to understand key trends in the market which affect their Airline as a basis for planning the
next stage of their strategic development. They feel that an understanding of Macro trends that will
influence their business.
Draft a section of the consultancy report for the directors of which analyse
(a) The key elements of the environment they must take into account when planning their business
expansion in the future
(10 marks)
Professional skills marks are available for evaluation of how the trends can have a positive or negative
impact on the business
(2 marks)
Total
(12 marks)
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Question 3
Oceania feels that they need to make a makes a major strategic change in the business and one option
they are considering is to acquire the budget airline FreshAir and integrating into its business
operations. There has been some discussion among the board members as to whether this is the right
way forward for the company. The Oceania airlines board have called in a specialist consultant to
analyse whether this is good option for the organisation.
Write a report to the board of Oceania airlines which evaluates the potential acquisition of FreshAir and
recommend whether Oceania should acquire FreshAir
(16 marks)
Professional skills marks are available for demonstrating scepticism skills in assessing the issues the
potential acquisition of FreshAir.
(4 marks)
(20 marks)
Question 4
The E-commerce upgrade would be a major change for the organisation and the CEO wishes to ensure
that the change is financially viable.
a) Draw up briefing notes that critically evaluate the financial case (cost/benefit) of the E‐
commerce upgrade project.
(10 marks)
Professional marks are available for scepticism, when reviewing the reliability of the cash flow in the
NPV forecast
(2 marks)
Question 5
The board of FreshAir are discussing how to raise money to finance the planes they need to expand
their business. In preparation for the next board meeting the financial director has decided to write a
report where the different funding options for the business will be considered.
You are required to take the role of Brenda and produce briefing notes for the board which evaluates
the different financing options that are available for the business to fund the capital required in the
business.
(8
marks)
Professional skills marks are available for demonstrating analysis skills in relating the how the methods
of funding would have on FreshAir
(2 marks)
Total 10 marks
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Question 6
The board of directors of Oceania are increasingly concerned about the risk faced in their business.
They want to gain a better understanding of their risk profile and have employed a consultant to carry
out a risk review.
(a) Draft a section of the report to identify and briefly discuss THREE main risks which Oceania airlines
currently faces and plot them on a heat map, recommending appropriate strategies to manage those
risks using an appropriate risk management framework.
(8 marks)
Professional Skills marks are available for demonstrating commercial acumen in identifying and locating
the risks appropriately.
(2 marks)
Total
(10 marks)
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