Case Study no.

5 on Trans Global Airlines

In Partial Fulfilment of the Course Requirement, in

ACC535M Management Accounting and Control
Term 2 S.Y 2016-2017
March 19, 2017

Members:
Groups 1 & 6
Charisse Jollins Ang
Jan Paul Francia
John Paulo Pineda
Aerolyn Gindap
Edmond Reyes
Gabriel Sison

Submitted to:
Dr. Arnel Uy

I. General Case Background

 A. Rationale

Corporate managers have the goal of maximizing shareholder wealth. However

given that no obvious single course of action leads to fulfillment of that goal, managers

must choose a specific course of action and develop plans and controls to pursue that

course. Because planning is future oriented, uncertainty exists and information helps

reduce that uncertainty. Controlling is making actual performance align with plans and

information is necessary in that process. Much of the information managers use to plan

and control reflects relationships among product cost, selling prices and sales volume.

Changing one of these essential components will cause changes in other components.

This case focuses on analyzing how cost, volume, and profit interact with one another.

Understanding these relationships helps in predicting future conditions as well as in

explaining, evaluating, and acting on results. (Raiborn & Kinney, 2011).

TransGlobal Airlines is facing a major change in the firm’s operating

environment. Before, they were enjoying the monopoly status on all domestic routes but

with the upcoming change in the government administration, the airline might be

privatized and be open to competition. To keep up with the change, the CEO is thinking

to either expand the international market or focus on improving the local services.

B. Company Background

TransGlobal Airlines is a government-owned, national flag carrier of a small

republic. Domestically, TransGlobal operates out of a primary hub in the capital city

(SOF) and two subsidiary hubs in PLO and VAR. The company serves six international

destinations, four large domestic cities (including the two subsidiary hubs), and five

small regional cities from SOF. There is direct service between PLO and VAR. In
addition, there are six small regional cities served from PLO and four regional cities

served from VAR. The company is operating with three major market segments namely

international routes, large-city routes, and regional-city routes. Though the company

was operating in a nominally democratic government set up; the country was ruled by

the same president for more than 40 years, During this time, stringent controls were

placed on all aspects of the economy. Furthermore, the country’s wealth was focused in

the hands of few powerful supporters of the president. Due to these circumstances, the

economy slowed down, basic infrastructures fell into despair which resulted in violence

and protest. In light of these, the president announced his retirement. Several political

parties have been organized for the position. All of the major parties agreed that

opening the country to competition is necessary for the country’s financial recovery.

The company is currently using a Passenger-Miles-Flown costing system which

means that they are splitting the cost per market segment by allocating operating to

each based on relative number of passenger-miles-flown in each market.

II. Point of View

For this case, the group will take the point of view of “The CEO” which was given

the task to reshape the current organization for the upcoming changes that will take

place once the airline is privatized and becomes open for competition.

III. Statement of Problem

How will Transglobal Airlines remain competitive and profitable with a potential

open/competitive market?
IV. Objectives

The group aims to fulfill the following objectives:

1. To continue market leadership despite threat of competition.

2. To sustain profitability of TransGlobal amidst the privatization of the company.

3. To improve the efficiency of the flight routes of TransGlobal airlines.

4. To recompute the profitability performance of each market segments to

determine which of them needs more attention.

V. Areas of Consideration

AIRLINE INDUSTRY

Typically, airline industry faces intense market competition. According to the US

Department of Transportation, airlines serve four categories:

● International – 130+ seat plane capacity which can produce $1billion of revenues

● National – 100-150 capacity with revenue ranging from $100 million to $1 billion

● Regional – short distance flights locally and generates less than a $100 million

revenue.

● Cargo – airlines that transport goods.

In the industry, the usual factors they have to weigh in are airport capacity, route

structures, technology and the costs to lease or buy aircrafts. The huge costs for their

day-to-day operations are from fuel consumption and labor. According to the Air

Transportation association, labor and fuel expense are the first and second expense of

the industry, respectively.

There are 3 Key ratios for evaluating service of the airlines, these are:

Available seat mile = (Total seats available for passengers) x (Miles flown during
 period

Revenue Passenger Mile = (No. of Revenue-paying passengers) x (Miles flown

during period)

Revenue per Available Seat Mile = Revenue/No. of seats available

For their revenue, airlines consider business travelers as their most reliable source. As

this kind of passengers are the ones to travel frequently, many services are dedicated to

them. Compared to leisure travelers who are price sensitive and will usually decline in

number in time of economic uncertainty. (Investopedia, n.d.)

PORTER’S FIVE FORCES

According to Michael E. Porter, there are five competitive forces that affects every

industry, and helps determine their strengths and weaknesses and these are:

These forces determine the level of competition in the industry, and the stronger the

competitive forces, the less profitable it is.

1. Threat of new entrants – although the entry to the airline industry is costly,

availability of bank loans and credit must be considered. If borrowing is cheap, then it

may be possible to enter the industry. With new airlines in the market, it becomes

saturated. It is therefore important to establish brand name, as this can play as a huge

advantage.

2. Power of Suppliers – there mainly two supplier of aircrafts, Boeing and Airbus. Due

to this, they have strong bargaining powers, they can either demand higher selling price

or provide low quality materials, which can affect the company’s services and costs.

3. Power of Buyers – in this industry, the power of buyers is quite low as there very few

factors to consider on what airline to choose besides the price they can offer.
4. Availability of substitutes – for international flights, there is no available substitute,

however for regional, the use of other modes of transportation can only be from trains or

long drives.

5. Competitive Rivalry – competitive industry yields low returns, as such the company

has to ensure big market share. (Investopedia, n.d.) (Jurevicius, 2013)

PRIVATIZATION OF AIRLINES

A similar case has happened to Kenya Airways. According to Ochieng and Ahmed,

“Privatization of government-owned airlines has been one of the preeminent

transformations in air transport.” Kenya airways was incorporated in 1977, owned by the

government and their flag carrier. Over the last decades, the airlines suffered financial

losses. To ensure continued operations, the government decided to privatize the airline.

The study of Ochieng and Ahmed focused on the financial performance of Kenya Airways

before and after privatization. In their findings, the liquidity and debt ratios highly

improved, their financial efficiency leading to improved services. “It was found that

profitability and financial efficiency increase after privatization.” However, the study also

indicated decline in employment after privatization. The study pointed out that generally,

the privatization of the airlines resulted to improved performance, increased profitability

and better financial efficiency, and increase in capital expenditure. (Ochieng & Ahmed,

2014)

VI. SWOT Analysis

Strengths Weaknesses

● Current Monopoly status in the industry ● Poor customer service (Operations)

within the country ● Outdated airplanes because of
● Exclusive Industry knowledge with the outright purchasing strategy
airline industry (Management) (Operations)
● Company is in an excellent financial
position as the company has no debt
(Finance)
● Prioritization of passenger and aircraft
safety resulted to minimal accidents
(Operations)
● Preferred mode of transportation by
locals as roads are not well developed
(Management)
● Inefficient use of airplanes because
of idle time, especially for
international flights
(Operations/Business
Development)
● Frequent flight delays (Operations)
● A possible loss of majority control
with the potential growing influence
of investors (Management)
● Division between the young and old
employees (Management/Human
Resources)
● Limited points of entry in
international destinations (Business
Development/ Management)

Opportunities Threats

● Influx of tourists and international ● Change of government leads to

representatives (Social)
● Faster planes decreasing the travel
period and increasing the number of
travelers (Technology)
● Growing consumer trends on traveling
(Social)
● Increasing number of international
events (Social)
● Increasing openness and ease of
access to different points of entry per
country (Political/Legal)
forcing the company to be open to
competition
● Alternatives likes development of
roads and Inter-state/country train
lines (Technological)
● Stricter requirements in visa
approval (Political)
● Legislation increasing the standard
of requirements for airlines
(Political)
● Stricter labor laws (Legal)
● Increased number of budget airlines
(Social)

VII. Alternative Courses of Action

ACA 1: Focus development on international routes

By allowing the ‘beyond rights’ on international routes, TransGlobal can also serve more

than one city in a country. Since international routes has 2.34% of revenue prior to

privatization of the company, TransGlobal may expect more revenue if they are able to

service other international cities as well. TransGlobal will focus on improving

international flights. With the increased point of entry per country, the utilization of

TransGlobal’s international aircraft will significantly increase and improve its profitability

in international destinations.

Advantages

● There will be more international routes to serve, increasing market base for

international passengers.

● Locals may opt to take direct flights internationally with TransGlobal rather than

connecting flights with other airlines.

● Focused development on international flights may encourage locals to travel

more internationally, thereby creating bigger revenue, as international flights are

more expensive than regional and city routes.

● Higher utilization of aircrafts

Disadvantages

● Due to the history of TransGlobal of low customer satisfaction, big changes might

be required of their services to meet international standards.

● The increased number of international flights might force them to purchase

additional jumbo jets.

● Few improvements on local flights might make some customers to choose other

airlines

● Bounded by “Beyond Rights” agreement, opening more international routings

also opens up the current tightly held domestic market to other foreign airline

carriers.

ACA 2 Focus development on large-city and regional-city route

Since majority of their revenue is from the large city routes, TransGlobal may focus on

improving their services here to ensure loyalty of the locals. TransGlobal can implement

preventive maintenance and proper scheduling of maintenance to reduce flight delays

and customer inconvenience. This way, locals will prefer TransGlobal since they are

more familiar to its services rather than the new airlines that will enter the market. On

the regional-city route, TransGlobal may opt to terminate routes that are not able to

make break-even sales or negotiate for government subsidies as these routes promote

economic development.

Advantages

● Ensured loyalty of customers for local flights

● TransGlobal may expect bigger revenue with their improved service locally, and

reduce revenue loss on flights that do not break even

● Does not require high capitalization as proper activity scheduling will improve

utilization and turnover

Disadvantages

● Loss of customers due to potential flight cuts

● Customers for international routes may prefer other airlines

VIII. Decision Matrix

The decision criteria and weights below aims to serve as a basis in choosing the

best option with regards to the case. This serve as a guide in determining the most

appropriate course of action that the company may adopt in order to achieve the
objectives mentioned above.

Decision Criteria Weight Rationale

Increases profitability 40% This criterion aims to

determine how the ACA
will affect the financial
position of TransGlobal

Creates and maintains 30% This criterion aims to

competitive edge determines the advantages
of the ACA and how it will
improve and provide
continuity to TransGlobal’s
profits, market share and
consumer loyalty

Market Feasibility 30% This criterion aims to

determine the viability of
the preferred ACA and
assess if such will be
compatible/competitive
environment coupled with
a distressed government
set-up.

Total 100%

Analysis of alternative courses of action

Criteria ACA 1 ACA 2

Increases profitability 3 4

Creates and maintains competitive edge 3 5

Market Feasibility 3 4

Total 3 4.3

1-5, 5 being the highest

The chosen course of action is ACA 2 which will focus on improving the domestic

market. This will leverage their established company name and familiarity with the local

customers. This course of action will be more cost efficient as it is more expensive to

acquire or capture a competitor’s market share versus retaining your current consumer

base. Since the company has established ties with the government and airport

authorities, they can also negotiate for subsidies to cover expenses especially for small

regional locations as this service improves the economic conditions of the area. They

can also adjust the pricing for regional locations with limited market potential to achieve

a margin of safety for those routes.

X. Implementation plan

Action Responsible Department

Formulate a new mission and vision statement Management

Conduct Market Research on what exactly the Marketing

company needs to improve Customer Satisfaction

Implement preventive maintenance on aircrafts to Maintenance/ Operations

avoid unnecessary delays

Conduct consumer traffic study to reschedule flights Operations

and increase utilization of aircrafts

Improve basic services such as a beverage selection Operations/Marketing/

or entertainment systems and other findings based Purchasing

from the market research

 Create customer loyalty programs and benefits to Marketing

ensure market share despite entry of competitors

Negotiate with government to provide subsidies to Management/ Finance

reduce expenses for small regional routes, especially

for areas listed for priority economic development

Adjust pricing of small regional routes to compensate Finance

for the lack of customers to generate profits

X. Annex

Appendix A:

Table 1: Adjusted Income Statement by Market Segment

International Large City Regional City Total

Revenues 180.7 116.90 19.30 180.7

Aircraft Costs

Fuel
98.50 18.20 158.1
41.40

Aircraft
44.4
Depreciation 30.00 12.50 1.90

Flight
Personnel
Costs

Pilot Crew
24.8
12.60 8.00 4.20
 Cabin Crew
17.7
12.00 4.80 0.90

Ground Costs

Gate Rental
0.70 2.1
1.50 0.60

Ground Staff 1.70 1.51 2.84 3.21

Corporate
Costs

Marketing 12.26 7.93 1.31 21.5

General
17.4
Administration 7.90 5.41 4.09

Net Income 4.24 37.41 (14.84) 24.14

Table 2: Profitability Percentage Analysis: Old and New

International Large City Regional City

New Profitability 2.34% 29.73% -76.90%

(%)

Old Profitability (%) -17.71% 45.59% 14.51%

Appendix B:

Table 3: Breakeven Passenger Volume for SOF to PLE Routes

Number of seats on Turboprops (seating 25

capacity)

Two-way distance (170 miles * 2) 340

Round-Trip Flights Per Day 2

Days Flight Operates (excluding holidays) 365

Maximum Annual Passengers Miles- 6,205,000

Flown

Actual Annual Passenger Miles-Flown 4,200,000

Annual Average Flight Capacity 67.69%

Number of seats 25

Average capacity per flight 17

Total one way flights ((2*365)*2) 1,460

Cost per one way flight (Krevna) 49

Annual Revenue (Kr) 1,216,180

Appendix C:

Table 4: Inter-city Routings Analysis

REFERENCES

1. Investopedia. (n.d.). The Industry Handbook: The Airline Industry. Retrieved from

Investopedia: http://www.investopedia.com/features/industryhandbook/airline.asp

2. Jurevicius, O. (2013, may 27). Porter's Five Forces. Retrieved from Strategic

Management Insight: https://www.strategicmanagementinsight.com/tools/porters-

five-forces.html

3. Ochieng, M., & Ahmed, A. (2014, January). The Effects of Privatization on the

Financial Performance of Kenya Airways. Retrieved from International Journal of

Business and Commerce: http://www.ijbcnet.com/3-5/IJBC-14-3502.pdf

4. Raiborn, C. A., & Kinney, M. R. (2011). Cost accounting. Singapore: South-

Western Cengage Learning.