May Airlines is a leading business in travelling industry and has experienced turbulent times during the past 10 years due to stiff competition and as a result of global slowdown in the world economy. It has now emerged from the recession to earn revenue of $15.121 million for the year 20X6 through many initiatives such as better managing costs while ensuring customers benefits with more choice. A new scheme of pricing strategy was implemented with a view to maintain market share and to position the airlines for future growth within the next seven years.
"The following table below contains figures extracted from the MAS (Malaysian airlines) financial report 2013 and preceding years"
| |
2016 |
2015 |
Change in % |
|
Route Revenue ($ Million)
|
|
|
|
|
Home county
|
1,906.7
|
2,015.2 |
(5)
|
|
Asian
|
2,001.3
|
1,576.2 |
30
|
|
Europe and Middle East
|
2,286.6
|
1,962.8 |
17
|
|
Australia and New Zealand
|
1,514.5
|
1,517.3 |
(0.2)
|
|
Africa and South America
|
Nil
|
18.1 |
(100)
|
|
Orient and North America
|
1,690.3
|
1,635.0 |
3
|
| Group Financial Performance |
2016
|
2015 |
2014 |
2013
|
2012 |
|
Total Revenue -$000
|
15,121,204
|
13.756,411
|
13,901,421
|
13,585,559
|
11,605,511
|
|
Total Expenses-$000
|
(16,314,775)
|
(14,167,738)
|
(16,485,693)
|
(13,485,355)
|
(12,288,452)
|
|
Taxation -$000
|
(16,051)
|
(5,937)
|
(8,441)
|
(44,690)
|
31,116
|
|
Profit/(Loss) after tax-$000
|
(1,168,839)
|
(430,738)
|
(2,521,325)
|
237,346
|
522,948
|
|
Shareholders' funds-$000
|
4,033,923
|
2,123,144
|
1,042,508
|
3,524,166
|
699,693
|
|
Net profit margin %
|
(7.7)
|
(3.1)
|
(18.1)
|
1.7
|
4.5
|
|
Returns on Shareholder's fund
|
(29.0)
|
(20.3)
|
(241.9)
|
6.7
|
74.7
|
|
EPS
|
(8.7)
|
(6.1)
|
(75.5)
|
7.2
|
25.3
|
|
Net tangible asset per Share
|
0.2
|
0.6
|
0.3
|
1.0
|
0.4
|
|
PRODUCTION
Network Size-KM
|
302,884
|
359,632
|
372,966
|
418,866
|
366,908
|
|
Time Flown-Hours
|
461,912
|
404,509
|
427,024
|
386,853
|
355,641
|
|
Distance Flown-000 KM
|
264,979
|
244,769
|
261,209
|
237,618
|
219,961
|
|
Available Capacity-000 TKM
|
8,214,384
|
7,292,377
|
7,872,485
|
7,893,689
|
7,366,845
|
|
Available passenger capacity 000 Seat KM
|
59,931,781
|
51,223,973
|
55,873,707
|
50,817,898
|
48,761,794
|
The assignment requires knowledge and the application of capital investment decisions (capital budgeting), gearing, contribution, financial ratios and budgetary controls.
Required:
You are asked to prepare a report to address the following matters that have been raised by the non executive director of the company.
(a) As a going concern, he wishes to evaluate the six revenue earning routes starting from the home country and the five others in light of stiff competition posed by the emerging in the Asia Pacific region. He has asked you to identify and assess:
- the routes that are producing of low level of profit and incurring huge working capital investment, and
- the implications of low profit yielding routes for adequate financial returns and profitability.
(b) He wishes to make a strategic decision about the long term viability of the three revenue losing routes of home country, Australia & New Zealand and South American divisions that face stiff competition from Singapore and Phillipines low cost carriers. As these divisions require considerable amount of capital expenditure and management cost information to improve efficiency and to make more competitive, he plans to dispose of the services to these three regions.
Critically evaluate the decisions to discontinue operations in these regions, even though the revenue from them still runs into many million dollars.
(c) Delays related to the Air Traffic Control let to heavy congestion in the skies over its own airports and this has been a major cause for concern. The CEO wants a close cooperation among its own team to improve various operational issues of the airport operations. The airline is required to identify the key areas for allocating finance resources to achieve a high return for the shareholders.
(i) Identify and analyse the factors which influence capital budgeting decisions that required efficient investment decisions over competing concerns
(ii) Critically analyse the relative importance of the management intention to reduce too much of borrowing through long term bank loan and other external lenders to continue with modernization programmes
(d) The Chairman advises on decentralization programme in which the decision making would be handed over to a new CEO to be appointed soon. It involves in online communication improvement and decision making techniques that would eventually cuts off staff up to 6 000 of them gradually over a three period. Effective use of regular reporting system using financial ratios and actual performance monitoring against budget is expected to spear headed.
(i) Advise the managing director on the reliance of using financial ratio analysis and budgetary controls for co-ordination and control of the group and the possible risks that the company may face.
(ii) Critically analyse how you would expect the management accounting function and ethical issues to be re-organized if the company expands its operations to number of different countries that affected by the ‘Brexit' decision of UK
(All relevant assumptions, fictitious statistics and calculations should be included in the report ( or as an appendix to it)