KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

SEMESTER DECEMBER 2017/2018
BBMF 3073 RISK MANAGEMENT
TUTORIAL 3 (WEEK 4)

Case study

Jetz, a limited liability company, was incorporated in Sepiana on 1 April 20X6. In May, the
company exercised an exclusive right granted by the government of Pewta to provide twice
weekly direct flights between Lyme, the capital of Pewta, and Darke, the capital of Sepiana. The
introduction of this service has been well advertised as ‘efficient and timely’ in national
newspapers. The journey time between Sepiana and Pewta is expected to be significantly
reduced, so encouraging tourism in Sepiana.

Jetz operates a refurbished 35 year old aircraft which is leased from an international airline and
registered with the Pewtan Aviation Administration (the PAA). The PAA requires that engines
be overhauled every two years. Engine overhauls are expected to put the aircraft out of
commission for several weeks.

The aircraft is to carry 50 Business Class (46%), 15 First Class and 76 Economy Class
passengers. The aircraft has a generous hold capacity for Sepiana’s numerous horticultural
products (eg. cocoa, tea and fruit) and general cargo. All meals are prepared in Lyme under a
contract with an airport catering company. Passengers are invited to complete a ‘satisfaction’
questionnaire which is included with the in flight entertainment and shopping guide. Responses
received show that passengers are generally least satisfied with the quality of the food especially
on the Darke to Lyme flight.

Ticket sales are made by Jetz and travel agents in Sepiana and Pewta. On a number of occasions
Economy seating has been over-booked. Customers who have been affected by this have been
accommodated in Business Class as there is much less demand for this, and even less for First
Class. Ticket prices for each class depend on many factors, for example, whether the tickets are
refundable / non-refundable, exchangeable/ non-exchangeable, single or return, mid week or
weekend, and the time of booking.

Required:
a) Identify and explain the business risks facing Jetz.

- License risk

According to the case above, the exclusive right of Jetz’s flights services between Lyme

and Darke was granted by the government of Pewta. There is a risk where Jetz’s license

will be revoked if the company is unable to provide twice weekly direct flights as

mentioned in the agreement.

- Reputation risk

Referring to the case above, the introduction of this service has been well advertised as

‘efficient and timely’ in national newspapers. Therefore, Jetz’s reputation will be affected

if the company is not able to provide punctual flight services or rescheduled flights for

delayed flights.

- Compliance risk

As stated in the case, the refurbished aircraft was 35 years old and needed to be

overhauled every two years according to the requirement of the PAA. There is a risk

where the company did not send the aircraft or delay the arrangement for overhaul.

- Market / Financial risk

As engine overhauls are expected to put the aircraft out of commission for several weeks,

there will be an impact to the business revenue that the aircraft will not be able to

generate revenue for the business during the period.

- Strategy / Management risk

As mentioned in the case above, the main purpose for the flight service is to encourage

tourism in Sepiana. At the same time, the generous capacity for numerous horticultural

products also shows that the aircraft is not only for passenger but also commercial use.

Therefore, it is deemed that there is too much business class and first class seating in the

aircraft which is too luxurious and does not meet the consumption level of the majority of

tourists.

Reputation risk

Referring to the case above, responses received show that passengers are generally least

satisfied with the quality of the food especially on the Darke to Lyme flight. The poor

food quality may affect Jetz’s reputation and lead to an unfavorable image in customers’

mind which may eventually affect its profitability.

- Human error risk

There is human error risk where economy seating has been over-booked on a number of

occasions. This is because the system is not fully computerized and still needs to rely on

manpower to manage customers’ booking.

- Market risk

Referring to the case above, economy seating has been overbooked and leaving business

class and first class with less demand. In this case, there is a market risk where the

company may face losses due to the mismatch of demand and supply of different seats.
b) Recommend how the risks identified in (a) could be managed and maintained at an

acceptable level by Jetz.

Compliance Risk

Since the PAA requires engines to be overhauled every two years, Jetz should prepare a

clear maintenance record as proof of maintenance to avoid the government revoking its

license. Also, Jetz should make sure that engineers come to check every time before the

plane takes off.

Reputation Risk

As the service has been well advertised as efficient and timely, Jetz had to make sure that

the flight had to run smoothly in the overall operation. In addition, Jetz must ensure that

flights are on time while no rescheduling or cancellations are permitted. If Jetz fails to

deliver on its promises, the government will revoke its license and affect its reputation.

Strategy / Management risk

Jetz should not provide a large number of business class as the majority of the passengers

are tourists. On the contrary, the flight should be affordable and convenient to people

since this flight is not only for commercial purposes..

Reputation risk

As the passengers are least satisfied with the quality of food, Jetz should develop menus

for target customer groups. For example, if the target customer is a foreigner, Jetz must

prepare international food such as sandwiches or spaghetti. Jetz must seek the taste of

international tourism instead of the taste for local people as the purpose is to encourage

tourism.

Human error risk

Since the economy seating has always been overbooked, Jetz should fully computerize

the system instead of using the old system. Systematic ticket purchases can focus on

fairness and promote first come, first served. For example, Jetz can fix one single price

with non-exchangeable or single price with exchangeable. Hence, the customer's

argument will effectively reduce and solve the overbooked problem.

Market risk/ Financial risk

Jetz should lease another new aircraft with more economy seats to solve the mismatch of

demand and supply of different seats. Meanwhile, the new aircraft can reduce business

costs as it does not need to be overhauled frequently.

c) Recommend TWO measures of operational performance and the evidence that

should be available to provide assurance on their accuracy.

To solve management risk, the airline management should set KPI for all the staff. It is to

keep track of the performance of staff. For example, KPI can encourage staff to work

more carefully so that management risk can be reduced.

However, another way to solve management risk is to have a performance appraisal. This

is to make sure every staff member is doing their work correctly.

To solve human error risk, the airline should improve their service by more

computerizing. For example, they should make a computer system for customers to book

their air tickets efficiently and reduce the risk of human error.