Part Marks

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Q2
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Department of Finance and Investment Management

Performance and Risk Strategy

FNB18x7

Pre-Lecture Activity

Time: Marks: 100

Assessor: Mr B Mogapi, UJ

Name & Surname Student Number

COURSE: Performance and Risk Strategy (FNB18x7) Page 2 of 6

QUESTION 1

DEF Airport has been approached by S, the only low-priced airline that currently operates
from the airport and a major customer, generating just over 8% of DEF’s aviation revenue.
At the moment S operates two flights per day to each of two destinations (i.e. four landings
and four take-offs per day or eight flights). These flights have been popular and S is
considering an expansion to its operations.

S wishes to create a network of routes to European destinations from DEF Airport. Over the
next few years the number of flights arriving and departing would increase from 8 per day to
26. DEF Airport presently operates just over 80 flights per day and is operating at
approximately 80% of its capacity. The additional activity by S would take the airport close to
its capacity. DEF Airport operates on 360 days per year.

S proposal

In return for choosing to expand operations from DEF Airport, S has asked for the following:

 DEF Airport will build a special departure lounge for passengers flying with S. This will
be a small, basic facility that could accommodate up to 300 passengers. S has a policy
of offering the lowest fares and passengers do not expect to enjoy the same degree
of comfort as those flying on premium airlines. S commissioned an architect to design
a suitable extension to the main terminal building on land that already belongs to DEF
Airport. It is estimated that the building costs would be D$800,000.
 DEF Airport usually applies the following charges:

Charges per aircraft

Landing charges – large aircraft: D$300

Landing charges – medium aircraft: D$170

Parking charges for the first two hours are included in the landing charge. Thereafter,
a charge of D$200 per hour is imposed for each large aircraft and D$250 per hour for
each medium aircraft. The parking charge is lower for large aircraft because they take
at least two hours to clean and refuel, so they almost always have to pay for an hour’s
parking, and also because there is less demand for the parking areas used for large
aircraft. Medium aircraft tend to take off again within one hour of landing.
Approximately 10% of medium sized aircraft landings result in the airline incurring
parking charges for one hour. This is normally either because their scheduled
departure time requires them to park or because of delays imposed by air traffic
restrictions, technical malfunctions or problems with passengers.

Charges per passenger

Passenger Load:
Flights to European destinations: D$1.60 per departing passenger
Flights outside Europe: D$4.00 per departing passenger
Passenger security D$1.20 per passenger arriving or
departing
COURSE: Performance and Risk Strategy (FNB18x7) Page 3 of 6

The airport will modify its charges for S as follows:

 Landing charges will be D$140 per aircraft. S uses one type of aircraft which is
medium-sized and carries up to 130 passengers, with each flight being 90% full on
average.
 The passenger loading charge will reduce to D$0.80 per passenger because S does
not require any facilities at the airport. Passengers will check-in online from home and
print out their own boarding passes, so there is no need to provide check-in desks. S
does not permit passengers to check luggage into the aircraft, so its passengers will
have hand luggage only and will not require baggage handling facilities.
 Security charges will remain at D$1.20 per passenger.
 S will not pay aircraft parking charges. Typically, each aircraft will land with a load of
passengers and will take only 30 minutes to refuel and pick up the next load before
departing. It will simplify administration for S if it does not have to monitor time spent
parking for each flight. (According to DEF Airport’s records, S has a poor record for
delays, with 14% of its flights in 2009 having had to pay an hour’s parking charges.)

S has stated that the reduced rates are fair because the additional flights will give DEF
Airport an increased throughput of passengers and therefore increase its revenues from car
parking and the retail outlets at the airport. S will not negotiate these terms in any way and
has given DEF Airport 30 days to make a decision, after which time S will make this offer to
a competing airport.

DEF Airport’s Business Development Manager is currently trying to find ways of utilising the
airport’s current spare capacity and is in discussion with a number of other airlines. For
example, an Asian airline is considering operating two flights per day to its home country
(i.e. two landings and two take-offs per day). Each flight will arrive and depart with an
average of 300 passengers. This operator uses large aircraft. It is unlikely that any of these
discussions will reach a conclusion within the 30 day deadline for reaching an agreement
with S.

Required:

1.1 DEF’s board is considering the proposal offered by S, but the Directors are unsure whether
the risks that it will create are justified by the associated revenues.

(iii) Discuss the operational risks that DEF Airport could face if it accepts the proposal made by
S.
(10 Marks)

Answer Template
Present your answer in accordance with the following framework:

Risk Event Commented [MB1]: Describe the potential event with enough
detail to be understood in isolation.

Note: A risk event is a specific occurrence that, typically, brings

about an unfavorable variation from expectation.
COURSE: Performance and Risk Strategy (FNB18x7) Page 4 of 6

Cause(s) Commented [MB2]: Describe the potential causes of event

occurring

Consequence(s) Commented [MB3]: Describe the main impact of risk event

COURSE: Performance and Risk Strategy (FNB18x7) Page 5 of 6

QUESTION 2

Health and safety

In a recent internal report commissioned by the directors of B it was stated that the health and
safety laws in the countries in which B operates vary significantly. For example in some
countries it is required that all employees whose jobs involve manual lifting are trained so that
they can lift objects without risk of injury. The problem is further complicated by the definition
of “manual lifting” varying from country to country. Similar issues arise with the need to wear
protective clothing and the safe operation of forklift trucks.

B’s directors saw the need to provide a safe working environment for B’s employees
irrespective of the country in which they work. They asked the Human Resources Director to
develop a comprehensive safety manual that either matched or exceeded the minimum
requirements laid down by law or other regulation in any of the countries in which B operated.
Copies of the manual were then distributed to wherever B had employees. All of B’s
employees are required to adhere to the rules stated in the manual as a condition of their
employment. The manual also sets out a number of broad principles, such as making the
general manager of each store personally responsible for the safety of everyone employed at
that store.

A recent newspaper article published in B’s home country accused B of exploiting the weak
health and safety rules in some countries. The article provided evidence of unsafe operating
practices by describing a recent accident in one of B’s stores in Asia. The accident occurred
when an employee dropped a heavy box of tinned goods when he was restocking shelves.
The crate landed on his foot and this caused a serious injury because he had not been wearing
safety shoes. The store’s manager then dismissed the employee because his injury meant
that he would not be able to work in the foreseeable future. The accident was described on
another employee’s personal blog and was picked up by the newspaper.

The Regional Human Resources Director in Asia confirmed that the details reported by the
newspaper were correct. The employee had not been trained in manual lifting techniques and
had lifted the crate carelessly. He did not wear safety shoes because they were not as
comfortable as his ordinary shoes. The store’s manager had not implemented the health and
safety manual that had been issued because he said that compliance with the manual would
interfere with the efficiency of the store and that the procedures it contained were unpopular
with the employees because they preferred their own methods of work. The Regional
Director’s report concluded that the store manager’s attitude reflected the indifference to
health and safety in the workplace that was exhibited by all employees in that region.

Required:

2.1 Advise B’s directors of TWO risks for the company associated with health and safety in B’s
stores that could each be categorised as having both high impact and high likelihood. Your
answer should include the reasons why you have categorised each of the risks as such.
(10 Marks)

Answer Template
Present your answer in accordance with the following framework:
COURSE: Performance and Risk Strategy (FNB18x7) Page 6 of 6

Risk Event

Cause(s)

Consequence(s)

Impact Commented [MB4]: Based on the scenario describe the factors

which you believe make the plausible impact of the risk high.

Likelihood Commented [MB5]: Based on the scenario, describe the factors

which you believe make the likelihood of the risk occurring high.

Total = 20 marks