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Airline Simulation: Management Audit Report

3 pages
802 words
University of California, Santa Barbara
Type of paper: 
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An audit report is a crucial item in running any type of business. The audit report has a wide range of users including the management, the stockholders, the employees of the organization, and other agencies such as the government. For an airline, the audit report analyzes the performance of the carrier focusing on the raw data. Notably, the airline has never had to use a loan overdraft since it began its operations. We have been able to maintain positive cash balances for the first three quarters this year.

We are pleased to report that the company has displayed an excellent performance. The number of aircrafts has improved over the three quarters. We started with 3 airplanes in the first quarter, and by the end of third quarter, we had bought our 6th plane. The number of daily flights has almost doubled from first quarters 14 flights to the current 27 flights. The airline is doing well in terms of total miles covered daily with a total 12, 080 miles. In fact, this figure surpasses the maximum miles of 11,800 by 280.

Market research is vital for the continued growth of the airline. New routes and passenger capacity need to be increased for the company to increase its profitability. To facilitate this necessity, the carrier has spent $55,000 in market research which is divided between promotion and advertising. The airline has also aggressively carried out cargo marketing by spending $30,000 in promoting its freight services. So far, we only have 2 salespersons who are evidently being overworked in the sales department. We plan to increase the number to five by the first quarter in the next fiscal year. Therefore, the amount of money spent in marketing will have to rise to ensure a wide reach.

From the income statement, we certainly need to improve on the expenses. In the third quarter, we had a net revenue of $4,086,470. Our total operational expenses amounted to $4,045,226 which amounts to $29,544 pre-tax profit. After paying the taxes, the airline has a net loss of $24, 2138. Unfortunately, with the losses have persisted for the last three quarters. It is for this reason that the shareholders have only received their dividends in the first quarter only. Total dividends for the period was $2,000.

The fare per mile was at $0.35 which we have maintained for the three quarters. While this fare is reasonable for our customers, we are considering revising it upwards to $0.38 per mile. This amount will still be affordable to our customers at it will increase the airlines profitability. Additionally, we plan to offer in-flight food services including soft drinks, pretzels, and peanuts.

One of the primary concerns for the airlines is the stock prices. If a companys stock keeps on rising, it implies that the public is confident the firms profitability. As noted, we have persistently made losses for the first three periods. Consequently, the stock prices have dropped from $25.00 in the first quarter to $20.00 in the third quarter. This indicates that the public is losing confidence in the company and wish to sell their shares before they lose even more value. Lack of dividends for the shareholders is the number one contributor to falling price of the stock. The airline, therefore, needs to work harder to improve its profitability.

From the financial ratios, the airline's progress is not consistent, one period the ratios are improving the next period there are fluctuations. For instance, the current ratio during the first quarter was 1.381 which improved to 1.897 in the second quarter. However, in the third quarter, the ratio decreased to 1.776. This means that we can pay our short-term financial obligations 1.776 times over our current assets. The shareholders are particularly interested in the return to equity ratio. Apparently, we are not doing well here either. In fact, for the third trading period, we have a negative value for return to equity. Our shareholders investments are not earning them any returns. Debt to equity ratio has also not been left out in this trend. The increase in the amount of debts used to finance our growth operations can be explained by the efforts of the airline borrowing money to increase its operations. This ratio is only expected to reduce in the near future (more borrowing may be necessary). The management is committed to seeing the conditions improve after all the development efforts are completed.

We are yet to hit our target of over 90% passenger load factor. In our 8 markets, the best performance is 63.2%, and the lowest is 42.1%. To increase the passenger load, the airline is proposing a various change in the fare pricing system. For instance, discounts will be offered on the weekends and major holidays. To improve customer loyalty, different incentives will be offered to the returning customers including reduced fares for three or more consecutive flights with us. The airline will still maintain its policy to increase its fare per mile to $0.38.

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