Contents

1 Introduction 465
2 The Airline Industry 465
Types of passenger airlines 465
Airline business models 465
Employees 466
Regulations 467
Air miles schemes 467
3 The Airline Industry in Oceania 467
History and recent developments 467
Factors affecting the airline industry in Oceania 467
4 Oceania National Airlines (ONA) 468
Image, service and employment 468
Fleet 469
Recent performance 469
5 Extracts from ONA’s website 469
Our mission 469
Governance 470
6 Key Performance Indicators 470
Key operating performance indicators 470
Financial highlights 471
1. Introduction
Oceania National Airlines is the national airline of Oceania.

The company offers services to both business and leisure travellers, and aims to provide all passengers
with a comfortable journey.

ONA has a financial year end of 31 December.

It is currently March 20X7.

2. The Airline Industry

Types of passenger airlines
An airline is a business that transports passengers from one location to another via the air. It is a global
industry. Airlines can be categorised as follows:

Global Airlines - these are the large Airlines whose routes cover the globe. Their routes include long,
intercontinental flights, such as between Europe and Asia. The global airlines also operate shorter
international routes within particular continents, which often act as feeders to the larger international
airport hubs from which passengers can joint intercontinental flights. They use the largest passenger
planes on their intercontinental journeys, such as the Airbus A380 or the Boeing 74-7, which can typically
carry around 4-00 passengers. They also operate medium sized planes on their shorter routes, such as the
Boeing 737 or the Airbus A330.

National airlines - offer services within their home country (internal flights) and may offer international
flights, usually to a limited number of destinations within their own continent. They typically operate
medium sized planes such as the Boeing 737 or Airbus 320 on international flights, and smaller planes
such as the Embraer RJ14-5 jets on their internal flights.

Regional airlines are the smallest airlines, whose flights are limited to a particular region - this may be a
region of a continent (eg Southern Africa) or entirely within a single country in the case of larger countries,
such as the United States.

Passenger airlines tend to carry cargo on their flights, but this is incidental to their main purpose of
transporting passengers. Some of the airlines have freight divisions that transport cargo, and many of the
international logistics firms operate their own cargo flights.
Airline business models
Three business models have evolved in the passenger airline industry:
a) Full-cost service carriers
b) Low-cost airlines
c) Charter airlines

Full cost service carriers

Full-service carriers offer the traditional airline services. Traditionally, flying was associated with luxury.
Airlines would aim to ensure that passengers were comfortable on board, and would provide drinks and
meals.

In current times, full cost airlines typically operate two or more tiers of service.

Business class customers receive excellent service - this includes bigger seats that recline into beds on
long haul flights. They also receive unlimited drinks, a wide selection of choices of food, and their own TV
from which they can choose from a wide selection of films or programmes. Business class passengers can
have access to a comfortable lounge while waiting for their flights in the airport, where they can enjoy
drinks and snacks. Business class tickets typically cost three times that of a standard class ticket.

Standard class passengers generally have smaller seats. They may still be provided with a meal and drinks,
but the quality of the meals will be lower than those in business class, and there may be no choice of
meals, other than vegetarian and non-vegetarian. They also do not have access to the business class
lounges at the airports. Some airlines do not provide food to standard class passengers on short flights
(less than four hours in duration).

Some airlines operate more than two tiers of service - for example first class, business class and standard.
In these cases, first class aims to provide an even better quality of service than business.

Most full-service carriers allow passengers may take a bag of up to 10 kg in weight with them on the plane,
and the airline will also allow them to check luggage onto the “hold”, which means that the bag is dropped
off at the check in desk at the airport, loaded onto the under carriage of the plane by baggage handlers at
the airport, and the passengers collect the luggage from a luggage reclaim point at the destination airport.
Most airlines have limits on how much baggage can be booked into the hold - typically 20kg for standard
class passengers and 30kg for business class. There is no additional charge for this luggage - it is included
in the ticket price.

Low-cost airlines
Low-cost airlines have existed for many years in the United States of America, but have only really become
popular in Oceania over the last 15 years. The low-cost airlines operate a cost leadership business model
whereby they aim to operate as efficiently as possible, and pass on the savings through lower tickets. The
lower ticket prices means that the load factors is much higher on low- cost airlines than on traditional
airlines. (The load factor is a measure of how full the flights are on average, and is the percentage of
available seats that have been filled by passengers). In spite of the lower fare, the low-cost airlines have
managed to operate very profitably, with some earning more profits than established full-service carriers.
Low-cost airlines achieve cost efficiency using the following methods:
 The ticket price does not include various services, and customers must pay extra for these. The
additional services may include meals, carrying baggage and checking in at airports. Rather than
checking in for the flight at the airport, the customers must check in online, and print off their
boarding card (or load it onto the airline’s mobile app).
 Low-cost airlines often use very new planes, as these are more aerodynamic and fuel efficient, and
this reduces fuel costs.
 Flights are scheduled to depart at unpopular times - such as early morning, or late evening. At these
times, the airlines pay lower ‘landing fees’ to the airports.
 The flights often use secondary airports, which charge lower landing fees than mainstream airports.
 Flights are sold online only. Traditional airlines sell their tickets through travel agents, who typically
charge a commission of 10%. By selling direct online, the agents fees are saved.

In spite of the lower costs, the airlines aim to employ staff with excellent customer service skills. These
staff are well trained. However, the airlines employ the minimum number of cabin crew required by law.

Charter airlines
Charter airlines do not sell tickets directly to passengers, but enter agreements with tour operators who
hire planes for a number of journeys, and then sell tickets to their customers. Many holiday companies
charter flights from Charter airlines.

Charter airlines also hire out planes to groups for single flights - for example, sports teams flying abroad
for competitions or matches will often charter a flight to allow the athletes or players to arrive at the
competition feeling relaxed.

Employees
Airlines hire a large number of employees. The pilots, who fly the planes, must have pilot’s licenses. Pilots
generally receive a high level of remuneration. Long haul flights must have at least four pilots, while short
haul flights in most countries must have at least two pilots.

Flight attendants are the staff who assist the customers on board the plane. Their primary role is to ensure
customer safety, and they must explain all the safety procedures to passengers at the start of each journey
as well as checking that passengers adhere to the safety regulations during the flight. They also serve food
and beverages to customers, and help them with any concerns. Generally flights must have at least one
flight attendant for every 50 passengers, with a minimum of 2 attendants.

Ground staff deal with customers in the airport, before and after their flights. Their tasks include helping
customers to find their connecting flights or ensuring that customers with poor mobility are provided with
wheelchairs or lifts around the airport.
Check in staff at the airports check staff in, and take their baggage, ensuring that suitcases are tagged with
the name of the passenger and the destination airport before the baggage is transferred to the baggage
teams.

Baggage handlers load the customers baggage onto the planes and take it off at the destination airport
and deliver it to the baggage delivery systems.

Maintenance staff check the planes before each flight, to ensure that they are fit to fly. Planes must also
undergo more thorough service and maintenance periodically.

These staff are supported by back-office functions, such as human resources, sales, marketing, finance,
and management.

Regulations
The airline industry is highly regulated. Regulations include safety regulations on flights, maintenance
requirements for planes, and staff training requirements for the flight attendants to ensure flight safety.

Air miles schemes

Some airlines offer customer loyalty schemes known as air miles. Under the schemes, regular customers
are given points every time they travel with the airline. More points are given for longer flights, which is
why they are termed air miles. The points can then be used to pay for flights or other services, such as
upgrades from standard to business class when they fly with the airline.

Some airlines form alliances, such as the Star Alliance, which includes a number of established global
airlines such as Lufthansa and Air China. Passenger will earn air miles when they fly on any flight operated
by an airline within the alliance.

3 The Airline Industry in Oceania

History and recent developments
Oceania has four main airports, a large airport in the Capital City Lublin, and three regional airports. The
Lublin airport carries more than 60% of passenger flights that land in Oceania. The regional airports
operate flights to Lublin and a small number of international flights. The majority of flights into Lublin are
international flights.

Historically, most of the international flights into Lublin carried tourists. Oceania has a long history and its
green countryside contains hundreds of ancient building such as ruined castles. The country has a
reputation for providing good hospitality, and visitors have a wide choice of hotels and country inns where
visitors can stay and enjoy the welcoming culture of the local people of Oceania.

Around 10 years ago, a very pro-business government came to power with a vision to make Oceania a
magnet for foreign investment. Corporate tax rates were cut to 15% for all companies. At the time, the
government received much criticism for this bold move, but within five years, a number of multinational
companies had set up regional headquarters in Lublin. This has led to a large increase in the number of
business passengers visiting Lublin. ONA enjoyed a boom in passenger numbers and revenues and profits
reached new highs.

In 20X4- however, a number of foreign low-cost airlines began to operate services to and from Oceania
from other cities in the continent. The prices charged by these airlines is often less than half of the price
charged by ONA and the other established full-service carriers. The advent of the low-cost airlines has led
to a huge increase in the number of passengers travelling. Established international operators now each
offer, on average, three low-fare flights to Oceania every day.

Factors affecting the airline industry in Oceania

Several external factors have influenced the profitability of airlines in Oceania:
 Economic growth in Oceania over the past decade has been very high. Over the past five years, GDP
per capital has risen by 4-0%. This had led to families having more disposable income, which leads to
higher demand for foreign holidays.
 Concern about climate change - airlines emit large quantities of carbon monoxide and other
greenhouse gasses. Climate activists have been very critical of the impact that airlines have on the
environment and this has led to some individuals and businesses avoiding taking flights and using
alternative forms of transport such as international rail, or taking vacations in Oceania rather than
travelling abroad. The impact of this has not been large, but it may become more of an issue in the
future.
 The growth of low-cost airlines has increased the supply of flights to and from Oceania. The lower
prices charged by the low-cost airlines has harmed sales of full-service airlines, with leisure travellers
in particular switching to low-cost airlines rather than pay the higher prices offered by the full-service
airlines.
 Oil prices - fuel is one of the biggest costs for airlines, typically accounting for around 40% of the
airline’s revenue. The cost of fuel is linked to the price of crude oil on international markets and this
can vary considerably. In 20X1 for example the price of 1 barrel of crude oil was around $40 while on
20X3 it rose as high as $120 per barrel. In the last three years (20X4 to 20X6) the price has been fairly
stable at around $80 per barrel.

4 Oceania National Airlines (ONA)

ONA was formed ten years ago by the merger of two large airlines, Oceania Air and Transport Oceania.
ONA serves two main market sectors:

Regional sector - the first sector is a network of routes to the major cities of neighbouring countries.
ONA’s management refer 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 businesspeople 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.
International sector - the second sector is what ONA management refer 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. Twenty cities are served in this sector with, on average,
one return flight per day to each city.

Most leisure travellers, in both sectors, 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.

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 accidents recorded. ONA has placed great
importance on its staff providing a high quality of service, and its service levels have been recognised by
the airline industry itself. Two years ago, in 20X5, ONA was voted Regional Airline of the Year by the
International Passenger Group (IPG) and one year later the IPG voted ONA as the provider of the best
airline food in the world.

The courtesy and motivation of its employees (most of whom are residents of Oceania) has come to be
recognised throughout the region. ONA has developed a reputation as an excellent employer. It pays
above industry average salaries, offers excellent benefits (such as free healthcare) and has a generous
non-contributory pension scheme. In 20X4 ONA employed 5,400 people, rising to 5,600 in 20X5 and 5,800
in 20X6.

95% of ONA employees belong to recognised trade unions.

Fleet
Fleet details are given in Table 1. Nineteen of the Boeing 737s were originally in the fleet of Oceania Air.
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. ON A also
use three Embraer RJ145 jets in the regional sector.

The board has been considering taking advantage of new technology in aircraft engines by investing in
new low-noise, fuel-efficient aircraft in an effort to reduce the possible complaints surrounding aircraft
noise, and also to cut fuel costs.
Fleet details
Boeing 737 Airbus A320 Embraer Rjm5
Total aircraft in service
20X6 21 27 3
20X5 21 27 3
20X4 20 26 2
Capacity (passengers) 147 149 50
Introduced 16 years ago 19 years ago 8 years ago
Average age 12.1 years 12.9 years 6.5 years
Utilisation (hrs per day) 8.70 7.41 7.50

Recent performance
‘No frills’ low-cost budget airlines are having some impact on the regional sector. A number of very small
airlines (some with only one aircraft) have been established in some regional capitals and a few of these
are offering low-cost flights to Oceania.

A recent survey showed that ONA’s average international fare was double that of its low-cost competitors.
In the last three years, ONA’s financial performance has not matched its operational success. Although
global passenger air travel revenues increased by 12% in the period 20X4--X6 (and revenue from air travel
to Oceania increased by 15% and cargo revenue by 10%), ONA only recorded a 4-.6% increase in passenger
revenue.

ONA’s board recognise the importance of e-commerce, and the company has recently redesigned its
website with a view to increasing the number of passengers who check in online and so will require less
assistance from staff at the airport. The majority of ONA’s competitors already require passengers to
check in online.

It is also hoped the new design will increase the number of passengers who book their tickets directly
through ONA’s website rather than through booking agents or other intermediary websites.

5 Extracts from ONA’s website

Welcome to ONA.Com, the website of Oceania’s favourite airline

Our mission
Our mission is to ensure our passengers arrive at their destination safely, feeling refreshed, and ready for
a new adventure.

Our vision is to continue to be the number one airline in Oceania, to provide excellent service to our
passengers and excellent returns to all our stakeholders

We have the best safety record in Oceania, and strive to continue this.
Governance
At Oceania, we understand the importance of good governance to ensure that ONA meets the needs of
all of its stakeholders in a responsible fashion, while accepting our responsibility to society for the impact
that our business has.

Our board structure complies fully with the Governance Code of Oceania. The chair of the company is an
independent non-executive director. Over half the members of the board are nonexecutive directors. The
current directors of the company are:
 Elizabeth des Forges , non-executive chair - Appointed to the board in 20X6
 Imran Nazir, Chief Executive - Appointed to the board in 20X4
 Sally Moneypenny, Finance Director - Appointed to the board in 20W6
 Brent Miles, Director of Fluman resources - Appointed to the board in 20X5
 Sonja Axis, Director of Sales and marketing - Appointed to the board in 20X5
 Maxine Peacock, non-executive director - Appointed to the board in 20X4
 Chris Parkinson, non-executive director - Appointed to the board in 20X5
 Sarina Wiegman, non-executive director - Appointed to the board in 20X6
 Steve Parry, non-executive director - Appointed to the board in 20X7
 Pritti Singh, non-executive director - Appointed to the board in 20X6

6 Key Performance Indicators

Key operating performance indicators
Regional International
Average annual pilot salary $106,700 $112,500
Source of revenue
Direct bookings (via company website) 40% 60%
Third-party bookings ** 60% 40%
Average age of aircraft *** 12.9 years (Airbus) 12.1 years
6.5 years (Embraer)
Utilisation (hrs per day) *** 7.41 (Airbus) 8.70
7.50 (Embraer)
 Regional International
Average annual pilot salary $106,700 $112,500
Source of revenue
Direct bookings (via company website) 40% 60%
Third-party bookings ** 60% 40%
Average age of aircraft *** 12.9 years (Airbus) 12.1 years
6.5 years (Embraer)
Utilisation (hrs per day) *** 7.41 (Airbus) 8.70
7.50 (Embraer)

* Passenger load factor = % of carrying capacity which is used (ie % of available seats booked)
** Travel agents; intermediary websites

*** Data for ‘International’ relates to ONA’s fleet of Boeing 737s; while data for ‘Regional’ relates to ONA’s
Airbus and Embraer aircraft

Financial highlights
Year ended 31 December 20X6
Passenger revenue $m 680
Cargo revenue $m 50
Other revenue 119
Total revenue 849
Gross Profit 314
Profit after tax 42
Return on capital employed 9.6%
ACCA
Strategic Business Leader (SBL)

Mock Exam 5

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