p3-2007-dec-a

AnswersProfessionalLevel–EssentialsModule–PaperP3BusinessAnalysisDecember2007AnswersTutorialnote:Thesemodelanswersareconsiderablylongerandmoredetailedthanwouldbeexpectedfromanycandidateintheexamination.Theyshouldbeusedasaguidetotheform,styleandtechnicalstandard(butnotinlength)ofanswerthatcandidatesshouldaimtoachieve.However,theseanswersmaynotincludeallvalidpointsmentionedbyacandidate–creditwillbegiventocandidatesmentioningsuchpoints.1(a)Strengths(1)StrongbrandidentityparticularlywiththecitizensofOceania.Aquotedrecentsurveysuggestedthat90%ofpeoplepreferredtotravelONAforregionalflightsand70%preferredtotravelONAforinternationalflights.85%ofrespondentswereproudoftheirairlineandfeltthatitprojectedapositiveimageofOceania.(2)ONAhaveanexemplarysafetyrecord.Therehavebeennofatalaccidentssinceitsformationin1997.(3)ExcellentcustomerservicerecognisedbytheRegionalAirlineoftheYearawardandtheGoldenBowlasproviderofthebestairlinefoodintheworld.(4)Highbusinessclassloadfactors,particularlyintheregionalsector.ThisappearstosuggestthatONAareparticularlystronginthebusinessmarket.(5)Relativelystrongcargoperformance.Intheperiod2004–2006whenpassengerairtravelrevenuehadincreasedby12%(andairtraveltoOceaniaby15%)andcargorevenueby10%,ONAincreasedcargorevenueby11%,justabovetheindustryaverage.(6)Financially,althoughthenetprofitmarginhasfallen(seeweaknesses),thegrossprofitmarginremainsrelativelystable.Hencethecostofsales(excludingwages,salariesandfinancing)hasmovedroughlyinlinewithrevenue.Thegrossprofitmarginfor2004is37·04%andfor2006itis36·98%,verylittlechange.(7)Thesettlementofdebtisanimportantissueforanorganisation.Theaveragesettlementperiodforreceivablesisconcernedwithhowlongittakesforcustomerstopaytheamountsowing.ThisislowatONA(29days)andreducing,suggestingeffectivecreditcontrolandanindustrywheremanycustomerspaybeforetheyareabletousetheservice.Itislikelythatmuchofthedebtistied-upwithcommissionsalesandcargoservices.(8)Thegearingratiomeasuresthecontributionoflong-termlenderstothelong-termcapitalstructureofthebusiness.GearingforONAremainedrelativelystableduringtheperiod2004–2006.Itstoodat71·13%in2006,amarginalincreaseonthe2004figureof71·05%.(9)Convenientlyscheduledflightstobusinesstravelfortheregionalsector.Allowsbusinesstobeconductedinoneday,withaflightoutinthemorningandaflightbackintheevening.Mostcitiesinthissectoralsoreceiveanextraflightinthemiddleoftheday.(10)Highlymotivated,courteousemployees.Weaknesses(1)Highcostbase.ThemosttangibleevidenceofthisistheaveragepilotsalarygiveninTable1.Pilotsalarycostsappeartobeover10%higherthantheircompetitors.ThescenarioalsosuggeststhatONApayaboveindustryaveragesalaries,offerexcellentbenefits(suchasfreehealthcare)andhaveagenerousnon-contributorypensionscheme.Otherhintsofhighcosts(insourcednon-coreactivitiessuchascatering,highlyunionised)arealsomentionedinthescenario.HighcostsarealsohintedatinTables1and2,withONAhavingrelativelyolderaircraft,presumablyrequiringmoremaintenance,andlowerutilisationhoursthantheircompetitors.Theaveragewageofanemployeerosebyabout7%duringtheperiodunderconsideration.(2)Poorgrowthrate.Thescenariomakesthepointthatintheperiod2004–2006,passengerairtravelrevenuehasincreasedworld-wideby12%(andrevenuefromairtraveltoOceaniaby15%).However,ONAonlyrecordeda4·6%increaseinpassengerrevenueinthisperiod.(3)Lowfrequencyofflightsintheinternationalsector,wherethereisonaverageonlyoneflightperdaytoeachdestination.Thismakesitverydifficultfortheairlinetogainanyoperationaleconomiesofscaleinthissector.(4)ThemixedairlinerfleetislargelyaresultofthemergerofthetwoairlinesthatformedONA.Theairframesforthebulkofthefleetarefromtwocompetingmanufacturers(BoeingandAirbus).TheinformationgiveninTable1suggeststhatthetwoaircrafttypes(Boeing737andA320)areverysimilar.Theneedtoserviceandmaintaintwoaircrafttypescreatesanunnecessarycost.(5)Althoughtheairlineofferson-linebooking,itdoesnotcurrentlyofferon-linecheck-in.Henceoverheadsstillremainintheembarkationprocess.Businesstravellersparticularlyfavouron-linecheck-inasitmeanstheycanleavetheirhomesandmeetingslater.In2006theNewStraitsTimesreportedarecentglobalsurveythatshowedthatairtravellersspendanaverageoffourdaysinayearinqueuesatairlinecheck-incounters.(6)Table2showsbelowaverageloadfactorsinstandardclassseating.Thisisparticularlysignificantoninternationalsectorflights.(7)Returnoncapitalemployed(ROCE)andreturnonordinaryshareholdersfunds(ROSF)areimportantmeasuresofprofitability.Bothoftheseratiosshowasignificantfallin2006.Thefallcanbelargelyattributedtoadeclineinnetprofitduetoincreasesincostsoutstrippingincreasesinrevenue.(8)Thereductioninprofitabilityisalsorevealedbythenetprofitmarginwhichhasreducedfrom12·10%in2004to9·66%in2006.However,thegrossprofitpercentageremainsrelativelystableandsoitappearsthatitistheincreasedcostofwages,salariesandborrowingthathascausedONAprofitabilityproblems.13(9)Efficiencyratiosareusedtoexaminehowwelltheresourcesofthebusinessaremanaged.Thesalesrevenueperemployeehasreducedduringtheperiod,perhapssuggestingareductioninproductivitythatneedstobeinvestiga