DOCUMENT : EMAIL FROM CEO TO NEWLY QUALIFIED CA(SA)

Summary

Summary of trigger Aviation industry

Information in the case Dynamic Skies Airways Limited (DSA) is a
study company listed on the JSE Limited and operates
in aviation industry.
Page 4
Discipline and topics Financial management

Aviation industry in SA

Regulatory bodies

 The South African Civil Aviation Authority (SACAA) is charged with promoting, regulating and
enforcing civil aviation safety and security.
 The Air Service Licensing Council is responsible for regulating domestic air services, and the
International Air Services Licensing Council is responsible for regulating international air
services.
 The Air Traffic and Navigation Services Company Limited (ATNS) provides air traffic
navigation services.

Applicable Acts:
 The Civil Aviation Act No. 13 of 2009 and the Regulations, 2011 provide for the control and
regulation of aviation within the Republic.
 The Carriage by Air Act No. 17 of 1946 (as amended) gives effect to the Convention for the
Unification of Certain Rules for International Carriage by Air, signed in Montreal on 28 May
1999, and for the unification of certain rules relating to international carriage by air.
 The Air Services Licensing Act No. 115 of 1990 provides for the licensing and control of
domestic air services; and the International Air Services Act No. 60 of 1993 provides for the
licensing and control of international air services.
 The Convention on the International Recognition of Rights in Aircraft Act No. 59 of 1993
provides for the application of the Convention on the International Recognition of Rights in
Aircraft.
 The Convention on International Interests in Mobile Equipment Act No. 4 of 2007 enacts the
Convention on International Interests in Mobile Equipment and the Protocol to the Convention
on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the
Cape Town Convention).
 The Mortgage of Aircraft Regulations, 1997 (as amended).
 The Air Traffic and Navigation Services Company Act No. 45 of 1993, and Regulations,1976,
provide for air traffic navigation services.

How to obtain licence

International air services

 An applicant who wishes to use an aircraft other than a South African aircraft in providing an
international air service must satisfy the Council that an appropriate certificate of
airworthiness has been issued in respect of the aircraft concerned in the country in which that
aircraft is registered.

Domestic air service licence

 The granting of a licence is founded on the applicant’s ability to satisfy the Council that: the air
service will be operated in a safe and reliable manner and that the operator is financially
capable of operating an air service; if the applicant is not a natural person who is a national of
South Africa, at least 75% of the voting rights are held by residents of the Republic; the
person referred to will be actively and effectively in control of the air service; and the aircraft is
a South African-registered aircraft.
 Things to note
 Geopolitical threats are building, notably the ongoing US-China trade dispute and the
impending departure of the UK from the European Union (EU).
 Interest rates are rising globally but particularly in the US: This impacts currencies as a higher
US dollar exchange rate pressures airlines with revenues in non-dollar currencies, slicing
margins
 Labour costs are becoming a more significant issue for airlines, specifically in relation to pilots
and skilled technicians
 Maintenance costs are also rising due to more expensive labour and rising interest rates,
which is pushing up prices for airlines and aircraft owners.
 Passenger travel continues to grow above the long-term ten-year average of 5.5%.
 An emerging trend is for airlines to push for shorter leases on aircraft from 12 to eight, or even
six years. This would have a positive impact on the airlines balance sheet under IFRS 16.
 While the low interest rate environment has helped airlines and lessors raise competitively
priced funds, it has also impacted banking margins with pricing remaining at very low levels.
 Sale-leaseback transactions are being used more and more frequently by airlines due to the
competitive pricing

Financial distress and government intervention…

Internal and external factors
 bad management decisions, including excess capacity investments, inflated personnel,
excessive bureaucracy, unprofitable routes and ineffective network planning

KPIs in the aviation Industry

Note: KPIs need to match/correlate to the business strategy as a whole. Determine this and work
backwards.

Differentiate KPIs into categories:

Strategic (Performance to Strategy) ·

Competitive (Industry)

Finding (Informative)

NB Ratios (Examples of KPIs)

Misconnex Quota (percentage of connecting passengers that miss their onward/ Complete number
of connecting customers.

Arrival punctuality: (Percentage of flights that arrive on time at the planned destination airport/ in
relation to all operated flights.

Normally a flight is counted as on time if the arrival delay is not greater than 15 minutes.

Utilization ( or seat load factor): Is calculated as a percentage of checked-in passengers/ in relation

to available seats of an aircraft.

It shows that customer satisfaction or product quality are considered as the main drive and goals of
airline operational performance.

Delay in minutes:

Regularity flights: ( percentage of operating flights /in relation to planned flights)

It indicates how many flights have been cancelled.

Departure punctuality: (percentage of flights that depart on-time at the planned origin airport/ in
relation to all operated flights)

This is the most important significant quality KPIs for airlines – especially when it comes to
competitive advantages.

Relevant post – COVID airline KPI’s

Grounded aircraft or recovered air craft: (Recovered/ percentage of fleet)

Number of flights: It shows the number of scheduled flights for a day and the value of already
operated flights.
Number of passengers:

Recovered routes: Number of operated routes

Advantages of KPIs:

· Something against which to benchmark

· Drives performance
· Healthly competition between divisions
· Extremely informative (what is working vs
what isn’t) · Can be assessed regularly

Disadvantages of KPIs:

· Manipulation to achieve - Introduce Individual, Divisional and Group KPI as a KPI on

it’s own · Beware of Competition
· Can be demotivating - Needs to be regularly monitored and
transparent
· Can deviate from actual company strategy (So focused on
meeting KPI)

Insurance in the Aviation Industry

The principal insurance coverages:

Hull – damage to the aircraft itself.

Passenger – liability for death or injury.

Third party – liability for death and bodily injury (BI) and property damage (PD) external to
the aircraft.
Global Airline Industry Trends in 2020

IATA: State of the Industry and Global Economic Outlook…………………………….1

Digital Security System…………………………………………………………………...2

Robot Helpers in Airports…………………………………………………………………3

Biometric Entertainment…………………………………………………………………...4

Book a Taxi in the Sky……………………………………………………………………..5

The growth of Low-Cost Airlines………………………………………………………….6

VR pushes last-minute upgrades…………………………………………………………….7

Green Airports…………………………………………………………………………………8

IATA: State of the Industry and Global Economic Outlook

 According to IATA India will displace the UK for third place in 2025 as per current trends in
the aviation industry
Highlights of expected 2020 performance include:
 A slight decline in the operating margin to 8.1%.
 2019 will mark the fourth consecutive year of sustainable profits
 An improvement in net margin to 4.7%.
 A rise in overall revenues to $824 billion.
 A rise in passenger numbers to 4.3 billion.
 A rise in cargo carried to 62.5 million tonnes.
 Slower growth for both passenger and cargo demand.
 Average net profit per departing passenger of $8.90.
The Shocking death of business class? And the rise of a premium economy!!
 Premium economy bookings are expected to get a high boom in the mid of 2020
 Emirates is launching a premium economy cabin,
 many premium economy seats now offer features such as support for laptops and
connectivity options that help enable in-flight working.
Digital Security System
 State-of-the-art technology has been used to develop advanced concepts such as “walk
through security” to reduce passenger wait times
 biometrics can be used to automate verification processes and reduce staffing burden.
 Suppliers have moved swiftly to incorporate cyber-security services into their IT solutions.
Robot Helpers in Airports
 airport guide robot which can speak in several different languages to help out the passengers,
communicate with transiting passengers, and give directions
 the other is a cleaning robot which mops up spills and keeps the airport clean.

Biometric Entertainment
 in-seat immigration, biometric payment, and choosing entertainment options based on
personal preference
Book a Taxi in the Sky
 Moving map FlightPath 3D is trialing a way for passengers to book taxis via the IFE flight path
on their seatback screen.
The growth of Low-Cost Airlines
 LCC are developing hubs around the world and starting to fly a greater number of long-haul
routes.
Risks in the aviation industry

Risks
1. Volatility in the geopolitical and economic environment:
Most airlines have a global footprint and are, thus, vulnerable to external factors such
as:
 political tension and economic conjunctures
 The US-China trade dispute is causing instability in markets around the world,
 Uncertainty of Brexit: The departure of the UK from the European Union (EU) is
categorised as a restrictive and protectionist measure that could severely impact the
aviation industry
 An economic slowdown will result in tightening in the credit markets, low liquidity; and
extreme volatility in the credit, currency, commodity and equity markets
2. Investment to fund new programmes and technologies: The cost to develop new
initiatives, such as additive manufacturing, must be recouped on volume production, but
the investment might initially leave companies more financially exposed, thus posing a
risk to the entire aviation supply chain.
3. Competition in domestic and international markets
4. Managing and retaining talent in the aviation industry;
 Due to the influx of new technologies and processes and the relentless focus on
cost reduction, companies in the aviation industry will require, perhaps more
than any other industries, a talented, engaged and increasingly specialised
workforce in the future.
 The issue of work-force shortages in the aviation industry is very real indeed
and it will be a challenge for the industry in the future as well
5. Compliance with a wide range of regulations and restrictions
 commercial aerospace industry has to comply with a long list of requirements for
aircraft design, maintenance, pilot training activities and safety regulations.
 Aviation companies own a series of intellectual property portfolios, consisting of
patents, unpatented know-how, data, software, trademarks and so forth. They
enter into different types of confidentiality agreements with employees and
suppliers, but these measures are not always enough to deter the misuse of IP
and this could pose a threat to the aviation
 companies operating in a large number of foreign countries may be exposing
themselves to IP infringement which could ultimately pose a series of issues for
all sorts of aviation companies.
6. Incapacity to innovate
7. Failure to realise the benefits of M&As and partnerships: overvaluation of the acquired
business, failure in achieving synergies, inability to retain talent, and financial
challenges
8. Exposure to cybersecurity events
 failure to have appropriate cybersecurity measures in place
9. Foreign currency and commodity price fluctuations
 large amount of aviation companies operate globally, a large portion of their
revenue streams are earned in a variety of currencies, making them vulnerable
to fluctuations in currency exchange rates.
  currency fluctuation also affects the receivables, payables and return on assets
denominated in foreign currencies.
 Financial performance is also affected by price fluctuations in key commodities
or raw materials, such as aluminium, titanium and composites that have a
significant effect on the manufacturing costs as well as the profitability of the
entire supply chain.
 Fluctuation in commodity prices can lead to issues along the aviation supply
chain. For instance, it might lead to late delivery and increased failure probability
by smaller suppliers.: Commodity price fluctuation risks are generally mitigated
via structured contracts or financial hedges
10. Competition in domestic and international markets
 Airbus and Boeing are the only players in the wide-body market, and they
dominate the narrow-body-segment as well

Aviation industry PESTEL analysis

Political environment
1. There are strict regulations for the aviation industry
- Several policies have been devised to protect passengers;
- Insecurity or war factors that affect particular countries always have a
negative impact on the airline industry.
- As a result of the above the airline industry may loose customers in the areas
that have high-security threats.
Economic factors
- Airline are under pressure to cope up with the increasing fuel prices.
- Airlines are struggling with the increasing demands from the part of the
employees
- Economic recession due to covid 19 and other factors
- As a result most of the airline have filled for business rescue
- Airline industry is facing completion from low-cost airlines,
- Abiding with the rules and regulations imposed by the government as well as
change in the profile and demand of consumers
- Recent crashes and attacks have affected the industry negatively.
Social Factors
1. As a result of changing demands of customers, air lines are required to
incorporate changes:
- Passengers prefer airlines which are providing extended services at low
fares.
- Automation: People make use of skype features or hold a conference call
instead of travelling. Which led to a reduction in business class travelling.
Technological changes
- Passengers now prefer to access ticketing and check in through their hand-
held devices
- Increased technological advancements can make airlines gain profits through
offering safety and enhanced services.
- Advertising is also done on social media platforms
Legal issues
- There are many laws devised for air traffic and safety and security
passengers.
- Air lines are made responsible for air crashes or any other type of damage or
disaster.
Environmental aspects
 - Fuel is the major expenditure of the industry and airlines are required to
invest in environmentally friendly and fuel efficient aircraft.
- Climate changes: Airlines are now required to practice ‘green flying’
procedure for protecting the environment and this involve huge finances

Aviation industry SWOT analysis

Strengths
- High income: Fare of airlines is very high
- Growing tourism: The tourism industry have been growing , tv and media
have made people to be more adventurous and would like to travel more.
- Safe and speed: Airplanes are the fastest mode of transport and Staff are
highly trained and well equipped
Weakness
- Slow rate of infrastructure: On ground infrastructure is the same old
airports
- High spoilage rate: Spoilage rate means that passengers miss their flight – if
they miss their flight, then they would have to refund the fare thus the
company make losses
- Huge investment: It requires a huge investment
- Competitive market: In the off seasons small air companies have to reduce
their fare, therefore it becomes necessary for bigger companies to reduce
fare as well.
- Huge work force: Airline companies require a huge workforce for the smooth
running of various operations at one time.
Opportunities
- Inviting new stakeholders: This would bring more capital and improve
various functions of the company.
- Use technology to minimize costs: Airlines should invest in the use of
technological development at different levels (the cost might be high at once)
but it will reduce the long term miscellaneous expenses
- Market expansion: The airline industry already works beyond borders,
management should take this as an opportunity and expand their operations
into the new airports and target more people.
- Better deals with supplier: If companies manage to lower the operational
cost, then they can get better with them.
- Timely service: Effective communication customer and sending reminders
can remove spoilage rate and refunding and it will also be good for the
reputation of the company.
Threats
Global economic crisis:
- The economy of all countries is on the downturn,
- The tourism industry is declining
- Government intervention: Government policies can intervene in the airline
industry and have a very bad impact. e.g. pressure to lower or increase
prices, delays in flight due to the security;
- Environment threats: the industry is helpless to the environment. I,e heavy
storms and strong wind could result in a form of delay, customers cancelling
their flights thus the company has to make refunds.
- Seasonal threats: when few customers travel in the off season, then the fare
would barely cover the fuel expenses.
- Pandemic: I,e, covid 19: people are stuck in their countries and spending
their savings as a result things wont go back to normal immediatelt.