a) Business risks

(i) Leasing of equipment and specialist staff:
As Citilink Airlines leases its equipment and the most specialized of its staff from another airline, there is a risk that its equipment and/or pilots could be withdrawn, leaving it unable to operate.

(ii) Conditions of exclusive right:
The MOA requires Citilink Airlines’ aircraft engines to be overhauled biannually. There is a risk that Citilink Airlines will be unable to meet this condition if the lessor company does not agree to regular overhaul or that it will be too expensive for Citilink Airlines to meet this requirement, and it could lose the right to operate or its exclusivity, opening it up to competition. There may be other conditions which Citilink Airlines has to meet, such as the two weekly flights being a minimum.

(iii) Necessary service suspension:
As Citilink Airlines is required to overhaul its engines every two years, there will be a significant period every two years where Citilink Airlines will either have to incur the cost of leasing other planes (assuming this is possible) or will have to suspend services. The cost of leasing other planes might be prohibitively expensive, or the disruption to service might mean that conditions relating to the right to operate might not be met. As Citilink Airlines only has one plane, service would also be interrupted if there was an emergency relating to the plane, such as fire or a crash.

(iv) Age of aircraft:
The aircraft being leased is old. This raises operational risks (it may not always be able to fly due to necessary maintenance), finance risks (it may require regular repair), and compliance risks (it may not meet environmental or safety standards, now or in the future).

(v) High proportion of expensive seats:
The plane leased by Citilink Airlines has a high proportion of unrequired expensive seats and therefore insufficient (overbooked) cheaper seats. Although Citilink Airlines can appease customers by upgrading them, this means the airline is operating well below capacity.

(vi) Cargo:
The flight route results in the airline carrying a large amount of horticultural produce. This raises various risks—that Citilink Airlines might be liable to passengers if their cargo degrades in transit, that the airline might be liable for any breaches of law by its passengers (for example, if prohibited items are transferred into or from each country). Many countries prohibit the importation of animals or meat products or plants.

(vii) On-board services:
Customers are currently dissatisfied with the food provision on the flight, and there is a risk that food prepared in Accra may become less appealing and even dangerous when served on a Johannesburg to Accra flight (when it has been prepared a substantial time earlier, given a six-hour flight, at least an hour’s turnaround time, and time for getting to the airline in the first place). If the food makes customers ill, Citilink Airlines might be faced with compensation claims.

(viii) Pricing:
There is a complex system of pricing and a large number of sales agents, and Citilink Airlines is at risk of operating at a sales value less than required to cover costs (for example, if too many of the cheapest tickets are sold).

(ix) Safety:
The airline industry has stringent safety conditions, and Citilink Airlines may face customer boycott or difficulty in recruiting staff if safety requirements are not met.

(x) Fuel:
The aircraft cannot fly without fuel, which can be a scarce or high-cost resource. If fuel prices escalate due to world conditions, the company might not be able to meet the costs of operating.

(b) Managing risks

(i) Lease:
Citilink Airlines must ensure that the terms of the contract with the international airline ensure that aircraft and staff cannot be withdrawn without reasonable notice and that in the event of withdrawal, substitutes will be given.

(ii) Conditions:
Citilink Airlines must ensure that all staff are aware of any conditions and the importance of meeting them. However, this risk must simply be accepted as there is little Citilink Airlines can do about conditions imposed on them by the governing body of their industry.

(iii) Service suspension:
Citilink Airlines must have contingency plans for service suspension, such as ensuring their contract with the international airline ensures alternative aircraft will be made available to them in the event of maintenance or damage to the aircraft, or by making arrangements to lease from a different airline in the event of emergency. As a minimum, Citilink Airlines must ensure that the airline they lease from would give them financial compensation in the event of aircraft or staff not being available so that Citilink Airlines’ customers could be compensated.

(iv) Age of aircraft:
Citilink Airlines should have plans in place to be able to lease/afford newer planes if required by law. Again, this could be written into their contract with the airline. Citilink Airlines should manage cash flow and borrowing facilities so as to be able to afford ongoing maintenance when required.

(v) High proportion of expensive seats:
Citilink Airlines should negotiate a reconfiguration of the plane with the lessor so that business and first-class seating could be reduced and more economy seats made available. If this is not possible with the current lessor, Citilink Airlines should investigate leasing differently configured planes from another company. If it is not feasible to adjust the plane seating, Citilink Airlines should consider its pricing and onboard facilities policies to make business and first-class seats more attractive to customers. As the seats are not being sold anyway, it is probable that a reduction in prices would increase overall revenue, although this might reduce potential profit.

(vi) Cargo:
Citilink Airlines should publish a cargo policy to ensure that customers are aware of their legal obligations. They should ensure that staff are sufficiently trained to discuss the contents of baggage with customers and are aware of what items Citilink Airlines should not carry. They should insure against lost and damaged cargo.

(vii) On-board services:
Citilink Airlines should consider entering into a contract with a company in Johannesburg to provide food for the Johannesburg to Accra journey. Obviously, they must not breach any existing contract with the Accra company and so in the meantime should review the type of food provided. For example, it might be safer to only offer cold food, for example, sandwiches and cake until a Johannesburg contract can be set up. Even if a new contract is set up, it might still be best to offer cold food as there is less chance of health problems arising as a result of serving cold food rather than hot food.

(viii) Pricing:
As discussed above, Citilink Airlines should review the pricing policy. They should also establish limits on how many of certain types of tickets (non-refundable/single, etc.) can be issued for one flight and they should institute a centralized system to ensure that each agent is aware when limits have been reached. As the agents must be linked to a similar system already (to be aware of whether tickets are available for sale), this should not be too difficult to achieve.

(ix) Safety:
The company should appoint a member of staff to be specifically responsible for safety operations (such as training, updating for legal requirements, educating passengers) and should ensure that staff are regularly appraised about safety issues.

(x) Fuel:
The company could take out hedging contracts against the cost of fuel. Other than this, there is little they can do about this matter, and it is another risk that has to be accepted.

(Any 5 points for 5 marks)