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Paper 5:

Strategic Cost Management & Performance Evalution

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ZA is the second largest airline in the Country “X”. Aviation industry in the Country “X” is growing fast. In 2011, 45 million people travelled to/ from/ or within the Country “X”. By 2020 that doubled to 100 million. This number is expected to treble to 300 million by 2030. Also, by 2025, Country “X” is expected to be the third largest air transport market in the world, behind the US and China. Government is trying to meet the significant growth potential of aviation Industry. However, it will create challenges also for the airline industry and its industry partners. Government also wants to ensure that broader business and policy environment should not place hurdles which inhibit growth and reduce the level of benefits that aviation can deliver to the nation. The industry, its supply chain partners, and the government and policy makers have a clear mandate to work in collaboration towards the common goal of ensuring that aviation’s economic and social benefits are fulfilled.

Despite of operating in World’s fastest growing market ZA struggles for passengers. Also, ZA is facing following problems:

▪ Aviation Turbine Fuel (ATF) prices constitute about 40% of operational costs in Country “X” and are taxed higher here than anywhere else in the World. The Central government charges 14% duty on ATF. While the state government pile on their own local tax that can go as high as 29%.

▪ The currency depreciation is hitting Airline harder. About 25% to 30% of their costs, excluding ATF, are dollar denominated, from aircraft lease rents, maintenance costs to ground handling and parking charges abroad etc.

▪ With the entry of Low Budget Carriers, full-service carrier like ZA that have higher overhead costs have been forced to offer discount to passengers looking for great bargain.

▪ Continuous improvements in tourism infrastructure, tourism policies, human resources development, airport infrastructure density are among the areas that could further enhance Country “X”’s competitiveness. Ease of doing business over the last five years has risen.

▪ The intense competition among domestic airlines carriers, the need to capture a slice of the everexpanding market and passenger price sensitivity makes the airlines difficult to raise ticket prices.

Together, these factors have now plunged Country “X”’s aviation industry to its most precarious phase in the last three years or so.

ZA is facing huge competition as a “year of sharp U-turns” for “X”’s aviation industry from record profit in Financial Year 2019-20 to mega losses, resulting in direct need of recapitalisation. ZA has been appealing to the government for a decade for a reduction in taxes on fuel, but all in vain. ATF is 35 -40% more expensive in Country “X” than in the rest of the world, because of relatively high tax rates.

Required :

Advise the strategy that ZA should follow in order to gain superior performance and competitive advantage over its competitors.

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