Assignment Record Form

Student Name : WAI PHYO KYAW

IC / Passport Number : 12/DAGAMA(N) 013898

Nationality : MYANMAR

IPE Index Number : MM16002

Teamie Index Number : RSIM-0102416

Learning Centre : RIVER SIMON INSTITUTE OF MANAGEMENT

Course : MBA

Term : 2016T3-AUGUST2016-FALL-M2-IPE-MBA-MA

Module Title : MANAGINGERIAL ACCOUNTING

Centre Facilitator Name : DAW THIN THIN AYE

Assignment Submission Due Date : 07 DECEMBER 2016

Status : ACTIVE

WORD COUNT : 3720

I declare that this is an original piece of work undertaken by me.

I confirm that I have read and understood the IPE regulations with regard to referencing and
plagiarism.

YES NO

Note: Please read the Instruction to Upload the Assignment on TeamieLearning Portal before uploading your assignment.

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Contents
1. Executive Summary................................................................................................... 3
2. Introduction............................................................................................................. 3
3. The Analysis of Routes Revenue....................................................................................4
4. Analysis of Operational cost......................................................................................... 7
5. Fleet Status & Utilization of aircraft............................................................................... 8
6. Cost Reduction Strategy.............................................................................................. 8
6.1 Fuel saving........................................................................................................ 8
6.2 Improvement on employee efficiency.......................................................................9
6.3 Ground handling service & Aircraft Maintenance.........................................................9
7. Capital Budgeting and Decentralization Decisions............................................................10
8. Financial Ratio Analysis............................................................................................ 13
8.1. Short term solvency ratio analysis..........................................................................14
8.2. Long term solvency ratio analysis..........................................................................14
8.3. Profitability ratio analysis.................................................................................... 15
9. Brexit Infection....................................................................................................... 16
10. Conclusion......................................................................................................... 16
11. References.......................................................................................................... 17
12. Appendix (Ration Calculation).................................................................................17

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 1. Executive Summary
May airline has been front runner in airline service industry over past decade. Company is facing
turbulent time over past 3 years due to world financial crisis and increase competition from
LCCs provider in the region. May Airline need to restructure the whole fleet operation to
optimize the employee productivity, cutting down the operation expense through aircraft
replacement, equipment upgrading, simplified the working procedure, decentralizing of decision
making and setting up the own maintenance team to have total control. The company decided to
partnership with Africa local airline to maintain the market size and will utilize the aircraft in
North Asia market which is more demand for business than economy class. By doing so, the
company profit level will improve slowly over the year and will gain back to profitable airline
business.

2. Introduction
In the current globalization trend, the transportation industries had played a big role due to time
concern by human. The airline industries have the solution for fast transportation. There are
many airlines in globally providing service across the world. May airline is one of the airline that
operating as carrier in its own country and internationally. May airline is a leading organization
in transportation industry in past (10) years and facing the stiff competition and global economy
slowdown. The result lead to implement new scheme of pricing strategy and better managing
cost to maintain market share in home country, Asia & Australia and South America market from
Hong Kong and Australia LCC (Low Cost Carrier). If we are aiming to growth the market share,
we should analysis our six present routes revenue for past five year. The past five years financial
performance for May Airline as shown in below table:

2016 2015 2014 2013 2012

Total Revenue 15,121,204 13,756,411 13,901,421 13,585,559 11,605,511
(13,485,355 (12,288,452
Total Expenses (16,314,775) (14,162,738) (16,485,693)
) )
Profit before tax (1,193,571) (406,327) (2,584,272) 100,204 (682,941)
Taxation (16,501) (5,937) (8,441) (44,690) 31,116
Profit after tax (1,210,072) (412,264) (2,592,713) 55,514 (651,825)
Profit after tax as (1,168,839) (430,738) (2,521,325) 237,346 522,948

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 per question
Shareholder
4,033,923 2,123,144 1,042,508 3,524,166 699,683
Fund

3. The Analysis of Routes Revenue

Base on past five years financial performance, May airline was facing the huge losses due to
high expenses and stiff competition from other service provider. Lets zoom to individual route
performance to know where went wrong in operation strategy. The individual route revenue for
past two years as follow:

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[MM16002 Wai] Page 5
Revenue 2016 2015 Changes (%)
Home Country 1,906,700 2,015,200 (5.38)
Asian 2,001,300 1,576,200 26.97
Europe and Middle east 2,286,600 1,962,800 16.50
Australia and New
1,514,500 1,517,300 (0.18)
Zealand
Africa and South
18,100 (100.00)
America
Orient and North
1,690,300 1,635,000 3.38
America
Total Revenue 9,399,400 8,724,600 7.73

Network Size- KM 302,884 359,632 (15.78)

Time Flown-Hours 461,912 404,509 12.43
Distance Flown-000 KM 264,979 244,769 7.63
Available Capacity-000
8,214,384 7,292,377 11.22
TKM
Available Passenger
59,931,781 51,223,973 14.53
capacity 000 seat KM

Base on the data, May airline doing very well in Asia and Europe market which generated the
total revenue 4287 mil compare to 3539 mil in year 2015. That contributed about 46 % of total
revenue (9399 mil) and increased by 21 % compare to previous year. This is the good
improvement of the May airline in year 2016. But May airline is losing the revenue in Home
country and Australia market to competitors who are LCC service provider.

In the nature of airline industry, the home country routes are producing the profit for airline
usually. But May airline faced intense competition from its competitor in domestic routes during
last five years. May airline has the largest domestic network which covered urban and rural
routes within home country. It should take this point to advantage and make an aggressive
pricing strategy to gain back the market share in future.

Australia & New Zealand routes are producing the loss in revenue by 0.2 % compare to years
2015. It mainly affected by LCC service provider from Australia & Hong Kong for medium haul

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routes. May airline should consider about the direct costing and utilizing of aircraft in those area
for more competitiveness. Base on the current revenue (1514.5 mil) in year 2016, May airline
has a quite good market share and does not lost too much market share to competitors compare
to last year 2015 revenue (1517.3 mil). We just need to do some minor adjustment to gain back
our profit level such as creating better reservation system, tie down with travel agency,
improvement in employee efficiency and cutting the cost of operation expenses.

For long haul routes like Africa and South America market, we need to look for partnership with
local airline or other reputable airline (Emirate Airline) to gain back the market revenue and
maintain the network size since Africa has lowest grow rate in airline industry. By code sharing
practices, we can maintenance the present of our network and cut down the aircraft and operation
cost. We might able to lease our current fleet to our partner or utilize the aircraft at other new
routes like North Asia region which growing demand for strong business class.

4. Analysis of Operational cost

In order to bring back to profitability, we need to breakdown all major cost of operational
expenses. The airline business is the lowest profit margin in the service industries which
contributed by fuel and crew cost is more than 50 % of its total expenses. The other 50% should
contributed by Aircraft Maintenance cost, Handling and landing cost, Aircraft hiring and
equipment cost, depreciation Cost, sales & marketing cost and other cost. Please see below
breakdown cost by segment in below table (Malaysian Airline System Berhad (10601-W), 2013):

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 5. Fleet Status & Utilization of aircraft

B737-400 17
B737-800 (New Purchase) 26
B737-800 (Commercial Lease) 23
B777-200 15
B747-400 4
A330-300 (New Purchase) 14
A330-300 (Commercial Lease) 3
A380-800 6

Total 108

May Airline have a lot of medium and long haul aircraft with wide body type. May airline need
to increase the narrow body type aircraft in its fleet to accelerate the growth at short and medium
haul routes. May airline might consider eliminating the business class in home country routes
with more competitive seat fare to attract the local traveler and add in more destination to
utilization the aircraft.
May airline need to slate 3 or 4 number of A380-800 aircraft to leaser due to higher maintenance
cost and lack of demand from customer in long hauls route. From the reported data, Middle East

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and Europe market was growing demand for airline service which is around 17% grow from
previous year. This sign that adding more aircraft to increase the ASK for Middle East and
Europe market will create more revenue.

6. Cost Reduction Strategy

May airline must start to work on improving the profit margin to gain back the shareholder trust.
The cost cutting on the unnecessary expand and improving the management system to reduce the
cost to gain back the require profit margin.

6.1 Fuel saving

Fuel is the biggest expenses in the airline industry which contributed around 38 % of total
expense. That mean we can reduce fuel cost by using man type of strategies. We can breakdown
the fuel usage of aircraft as follow

A. Trip Fuel,

B. Contingency Fuel and

C. Additional Fuel.

The trip fuel was calculated base on route distance and it difficult to reduce the consumption
significantly. But there is the way to improve is:

Look after the aircraft engine condition and maintain properly

Better flight management system and

Single Engine Taxi.

Contingency fuel consumption was around 5 % of trip fuel usage usually. It can reduce down to
3% by reducing the weight of equipment on the plane and improving on Zonal Drying system of
aircraft. According to International Aviation Transport Association (IATA)s report, we can save
up to 144 USD per year if we reduce the weight of one kg on the plane (IATA, 2004). Another
improvement on Zonal drying system can save around 29000 USD/ year/aircraft (IATA, 2004).

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 6.2 Improvement on employee efficiency
There is no service business that can run successful without manpower. In the airline service
industries, the flight crew pay is highest in the company. We need to improve their productivity
and working schedule to avoid the any extra payment. We might need to re-negotiate with the
current crew member, ground handling staff for working hour according to flight schedule and
new Job description. May airline need to do upgrading the some airport facility to reduce the
manpower usage like self check-in counter, online check-in system. Review the employee
performance closely and take necessary action on KPI.

6.3 Ground handling service & Aircraft Maintenance

Ground handling has various segments between aircraft landing and take-off (For example the
marshalling of aircraft, refueling, baggage handling, passenger handling, loading/unloading,
aircraft maintenance and so on).Assume that May airline taking own control for ground handling
service at all airport which in the routes. We need to change the way to handle with two different
categories as (1) Home country ground handling and (2) oversea airport ground handling.

For home country ground handling, we need to maintain as our service and try to improve in
turnaround process, reducing in unit labour cost by better procedure or practices and try to
negotiate with other airline to use our service with reasonable price. The ground handling service
business is growing in the world and its worth over 80 USD billion per annual. If we can
negotiate with other airline to use our service, we can utilize our current manpower to do more
task with specific scope. This process will work both ways for cost cutting per units and earning
some revenue parallel. But we need to take very closely monitor the operation delay in the same
time. The operation delay might cause compensation payouts to company. The company needs to
initiate to improve better flight route plan with technology such as SkyTrack. The upgrading of
the airport equipment likes Sliding Carpet, Ramp Snake and Power Stow for baggage
loading/unloading. It can reduce down the manpower of crew member by up to 60% and better
efficiency.

For Oversea Airport ground handling, we should negotiate with individual airport authority to get
better deal without cutting service level. The outsourcing the ground handling service to airport
service provider will reduce the cost of own crew member with better pricing.

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The aircraft maintenance service is most crucial for utilization of aircraft over the year. The bad
maintenance can create huge lost to company and Brand. So, May airline should step forward to
establishing the own maintenance team to control all preventive maintenance process. It will lead
to total control of whole maintenance process in own hand such as purchasing cost and
manpower allocation, aircraft service condition. We can make fast decision to lay off old aircraft
in time and replacing with new aircraft to reduce down the maintenance cost. In total control of
maintenance schedule, the plane routes plan can be improve which can create revenue grow.

7. Capital Budgeting and Decentralization Decisions

Airline industry can not directly compare with other services industries when come to financial
investment return. The emerging of market size in the industry leads the airline operator to
Now-or-Never Opportunities (Morrel, 2005) build the market share. So the capital budgeting
projection is the most critical part for airline business. Every business needs the investment to
run the business to gain back the profit. There is an investor if there is project estimation plan to
maximize their worth. Capital budgeting process as following path:

The Opportunities: Growing market demand in Asia and Middle East Market (Amadeus, 2012)

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The Idea: Creating new routes to North Asia Region

The Project Plan & Analysis:

The project plan is to create new routes to North Asia region with 737-800 aircraft type with
premium economy and business class services which is growing demand in recent year. All
routes in this region are medium haul route which we can avoid the LCCs airline and make better
revenue per available seat per kilometer. The company need to analysis itself before doing some
investment in new sector.

SWOT analysis tool is the best way to know how May Airline can implement the project
successfully.

Strength: May Airline has bigger network size than competitor, experience in medium and long
haul routes with well trained crew.

Weakness: Financial, Cost control system and Marketing approach

Opportunity: The strong growing demand for business class

Thread: Local airline Competitor, Political and new rule & regulation.

Base on SWOT analysis, May airline need to negotiate with aircraft manufacture for better
pricing or lease term to get the aircraft. Our biggest weakness is the financial investment for new
aircraft & modification work.

The state holder and creditor are always interesting about the NPV (Net Present Value) for any
investing in new project. NPV can be calculated in below formula:

NPV = Ct/(1+r)t Co

Co = Outlay require in initial stage

NPV= Net Present Value

Ct = Cash return over the time

r = Discount rate

Project Implementation: May airline will allocate additional capacity generated by new 737
aircraft to expand several destinations in India and North Asia region. The new destination under
consideration is secondary cities in India and China. The north Asia region has sufficient demand
to expand the air routes according to CAPA focus report for Asia region and Chinese tourist
visiting rate increase by 35% according to Tourism Malaysia report.

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(CAPA, 2016). The cost of new aircraft 737-800 is around 84.4 millions which can carry up 150
to 200 pessanger per route. The cash inflow from new route as shown in below table:

Description Amount
Revenue
Economy Class (120 seats @ 247 29,640.0
USD) 0
Business Class (50 seats @ 750 37,500.0
USD) 0
23,000.0
First Class (10 seats @ 2300 USD)
0
Cargo (10% of total revenue) 9,014.00
Other Revenue (5 % of revenue) 4,507.00
103,661.
Total revenue
00

Operating Cost 35000

Food 8000
Allocated Fixed cost 7500
Contengency cost 6500
Total cost 57000
46,661.0
Total Profit
0

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Project Control & Monitoring: The control and monitoring task to work proper and better
decision making, the company need to impletment the decentralized system to whole network.
The decentralized system brings together various improvement in airport management with
greater financial transparency. It will lead to less destortions in competition among the service
provider. Once transparency is in place, we can see through the project performance and take
necessary action with no time delay.

Project Review: Every process need to review after implementation of it procedure and make
necessary change to current procedure or reporting system for improvement.

8. Financial Ratio Analysis

The financial ratio analysis used to forecast the profitability and efficiency of May Airline for its
investors. The analysis will involve with following parts:

8.1. Short term solvency ratio analysis

In order to measure the short term solvency or ability of May Airline, we need to convert current
assets to cash to reduce current liabilities. The analysis of current ratio, quick ratio and Average
collection period will show how stability of May airline.

2016 2015

Current Ratio 0.80 0.55

Quick Ratio 0.77 0.08

Average Collection Period 24 38

As shown in the table above, May airline liquidity as increase (0.80) over last year but it
remained below the acceptable ratio 2:1. The quick ration is below benchmark value (1) as 0.77
which is below industries average. May Airline have a better position to meet its short-term
financial obligations in generally. But bear in mind that the ratio will increase dramatically by
new financing on aircraft or airport facilities.

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Average Collection Period (ACP) was improved to (24) days from (38) days last year (2015).
Which means the airlines was moving toward to better collection time frame by cash or credit
card payment on tickets sales. But there is always room to improve for ACP which can be raise
up to 7 to 10 as per industry best standard.

8.2. Long term solvency ratio analysis

This analysis aimed to access the debt level of May Airline by using the debt ratio and gearing
ratio. This analysis is most critical part for both creditors and shareholder. They want ratio is to
as low as possible by all mean to withstand the insolvency or suffering the net lost to company.
The ratio are most powerful tool to analysis the company performance compare to its
competitor.

2016 2015

Debt Ratio 0.81 0.88

Gearing Ratio 259.71 379.81

The above table shows that we are improving the debt ration and gearing ratio at the same time.
The stable grow will improve the long term process for re-payment without putting in the
company in high risk.

8.3. Profitability ratio analysis

Profitability ratio used to evaluate company expenses and profit earning on committed resources
by business. The most efficient company will get the higher ratio by using their assets. Please see
below ratio comparison for year 2016 and 2015 of company data.

2016 2015

Net Profit Ratio (8) % (3) %

Earning Per Share (8.70) (6.10)

Return on Shareholder Fund

(28.85) % (20.15) %
(ROCE)

Return on Total Asset (0.05) (0.02)

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Base on Net profit ration, the company was making the significant loss (8 %) compare to
previous year losses. May airline make a relatively making the loss via high operation cost (Such
as fuel cost, maintenance cost, crew overtime cost and traffic delay cost).

The high expenses lead to lower the return on state holder asset ratio too. May airline is not
utilization enough to get back the revenue as per total asset. The company must implement the
new strategy to improve efficiency of manpower and maximize the asset usage to gain more
revenue in future.

EPS (Earning Per Share) is the best indicator of the current net income in limited time frame to
number of outstanding share of stock. The sign of negative EPS will not be a good sign to
convince our shareholder to put in more investment. The cost cutting strategy in operation
expenses will generate the better EPS on future.

Base on all analysis of the ratio, May airline has a long way to recover from the current
saturation. In order to get back to profitable airline, May airline must implements the company
restructure strategy step by step without compromising the current service level.

9. Brexit Infection
Base on current IATA data, the world most travelers from Europe and Asia. The recent
announcement of Brexit from UKs parliament will directly affect to EU aviation sector. EASA
set a common standard to follow in Europe aviation sector and total control of traffic rights and
access to routes for commercial air transport services (whether within or to and from the EU).
The departure of UK from EU would deprive European airline automatic access to UK market,
which is the most important for Europe revenue. As a third country service provider outside of
Europe, May airline might have would probably not change as a matter of the UK leaving the
EU. What could change though is the right to operate into the UK, at least if such right follows
from a horizontal agreement between the EU and the relevant third country. Should this be the
case, the UK's departure from the EU could potentially require the UK and the relevant third
country to negotiate a new bilateral agreement to ensure continued market access.

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 10. Conclusion
May Airline has experienced turbulent time currently, has to implements as soon as possible
through cost cutting strategy on operation expenses, replacement of old aircraft with new aircraft
to lower the maintenance cost, optimizing the employee performance & working procedure to
create more revenue through new marketing strategies, upgrading the necessary equipment,
simplified the communication flow to have more efficiency on work, dispose the low revenue
routes and utilize the aircraft to create new route at North Asia region to generate more revenue
with lowest expense to gain back to profitable airline conditions. By implementing the cost
reducing strategy in operation expenses up to 35 % (which is contributed by 15 % deduction on
GHL service and 20% deduction on maintenance cost) (CAPA, 2016) in seven years with the
better performance fleet will maintain company market share and make a good return to state
holder. The cost saving strategy will bring back the requirement profit level for company and
increase the revenue over the years.

11. References
1. (Amadeus, 2012)

2. (CAPA, 2016)

3. (CAPA, 2016)

4. (IATA, 2004)

5. (Malaysian Airline System Berhad (10601-W), 2013)

6. (Morrel, 2005)

7. (Brewer, n.d.)

8. (Malaysia Airline, 2014)

12. Appendix (Ration Calculation)

2015 2016

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Liquidity Ratio
Current Ratio

3,908,16 5,825,95
Current Asset 9 2

7,153,99 7,279,09
Current Liabilities 2 8

0.55 0.80

Quick Ratio

5,572,18
CA- Inventory 597,005 7

7,153,99 7,279,09
Current Liabilities 2 8

0.08 0.77

Cash Ratio

2,148,47 3,870,62
Cash 8 2 3,870,622,000

7,153,99 7,279,09
Current Liabilities 2 8 1,290,207,333.33

0.30 0.53

Asset Turnover Ratios

Average Collection Period

Credit Term
Policy

1,379,96 1,596,15
Account Receivable x365 5 2
Sale (Assume Credit Sale)
13,286,6 24,548,1

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 12 64

(good based on
38 24 year)
(days) (days)

Average Payment Period

Page 113 (Reference)

Financial Leverage
Ratios

Debt Ratio

15,274,2 17,803,0
Total Debt 20 22

17,412,2 21,855,1
Total Asset 11 53

0.88 0.81

Gearing Ratio (Debt to Equity

Ratio)

8,120,22 10,523,9
Long Term Liabilities 8 24 control loan

2,137,99 4,052,13
Capital Employed 1 1 10,523,924,000

3,507,974,666.67

379.81 259.71

Profitability Ratio

Net Profit Ratio

(430,738 (1,168,8
Net Profit (Sale- Revenue) ) 39)

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 13,286,6 14,548,1
Sale (Revenue) 12 64

(3) (8)

Return of Shareholder Fund

(ROCE)

(430,738 (1,168,8
Net Profit after tax ) 39)

2,137,99 4,052,13
Equity (Shareholder Fund) 1 1

(20.15) (28.85)
% %
3,342
Number of Share (Amount) ,156

Number of Share (Share) 33,42 41,776,

(Ordinary Share) 1,560 950 8,355,390

Earning Per Share

Net Profit after tax
Number of Share

Reference from Page 58 (6.10) (8.70)

Return on Total Asset

(430,738 (1,168,8
Net Profit after tax ) 39)
1741221 2185515
Total Asset (NCA+CA) 1 3

(0.02) (0.05)

Airlines 108

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