TITLE

An evaluation of risk management and corporate strategy in

low budget airlines
A case study of fast jet airlines.
 CHAPTER ONE

• Background
• 1.1 Introduction
• In order to gain a background understanding, this section will look at the general strategy and corporate
issues experienced by the low budget airlines, before then going on to examine the risk management and
corporate strategy that is used, especially by the likes of FAST JET. Consideration will be given as to how
this strategy can then be evaluated as, although delineating the actual way in which the strategy operates.
Once this has been achieved there is the need to verify whether or not this strategy has been successful and
how exactly success should be defined in this context. During this research proposal one issue that needs to
be delineated is why FAST JET is being looked at as a case study and why this is being done after the
theoretical background has been looked at. It is contended here that choices of business strategy are
theoretical and need to be understood generically before then looking at how this choice plays out in the
‘real world’ through the use of FAST JET. Understanding the choice of strategy is just one stage of the
proposal, with the main value being added by the ability to evaluate the strategy in the context of the
industry and to look at ways in which the strategy could be improved or altered, in order to achieve
sustainable success, in the future. For this reason, the background literature review and current
understanding has been looked at here before setting out the structure for the research paper in more detail. .
 CHAPTER ONE

• 1.2 Research Aim and Research Question

• The overall research aim is to evaluate risk management and corporate strategy in low budget airlines using FAST
JET as a case study. The research will analyze the working methods of the budget airline industry and to consider its
overall and generic corporate strategy and positioning as an industry, as well as to look at individual examples
within the industry, such as FAST JET.
• 1.3 Research Objectives
The research objectives are as follows:
• To gain an understanding of the ethos of the no frills airline industry, as a whole, considering strategies and
approaches that are being accepted as the norm within the budget airline industry. A specific consideration of the
risks facing low budget airlines to evaluate risk management and growth strategies across the industry and identify
how these can then be mitigated in the long run.
• To evaluate the processes and strategies operating within FAST JET
By following this approach, the aim is to look at the industry, as a whole, but then to use the knowledge gained as a
means of evaluating the current approach and looking to the future for both FAST JET and others within the same
industry. Recognizing this will enable a rounded and directed discussion for the management team of both FAST
JET and other similar airlines.
 CHAPTER TWO

2. Literature Review
2.1The Concept of Budget Airline Strategies as Background Understanding
The Tanzania airline industry has, as an industry, gathered considerable pace in recent years, with the number of
passengers flying in the last decade increasing to a point whereby it is becoming part of day to day life, rather than
an activity that is reserved for the wealthy, perhaps once a year for their annual holiday. According to Statistics there
are million air journeys made a year from in Tanzania. This general change in the demographic of those relying on
these airlines is such that it has fundamentally changed the budget airline industry. In particular, one of changes is
the appearance of budget airlines, such as Precision and FAST JET, as well as the growth within the regional
airports across the country, again supporting greater access for all. Prior to the growth of the low cost airline
industry, commercial flying was something that was reserved for those in a much more financially stable situation,
yet the marketing and branding of the budget industry has encouraged a much broader range of appeal. There is a
question as to which way round this has occurred and as such this will need to be explored during the wider paper.
there has been an increasing pressure on the airline industry from the low cost arena, with more and more people
viewing airlines such as FAST JET and Precision as a viable travel option, thus attracting a broad range of
individuals who will now consider, particularly local and short haul travel, as a means of enjoying cheap holidays,
on a regular basis (Gross and Schroeder, 2007).
 CHAPTER TWO

• 2.2 Corporate Strategy employed by FAST JET

• FAST JET is being used as a case study in this scenario. Therefore, consideration will be
given as to how the specific corporate strategy as indicated by Porter’s model, has
worked within the company itself and how this can then be evaluated and the risks
associated with the strategy managed, appropriately. As noted by Porter in 1996 (p.62),
it was stated that: “A company can outperform rivals only if it can establish a difference
that can preserve. It must deliver greater value to customers or create comparable value
at lower cost or do both”. It is this approach that is used as the fundamental strategy
which has been established by FAST JET. Porter, as a result of his analysis, created
three generic strategies, one of which is relevant here, namely that of cost leadership. In
this case, the aim is to be the lowest cost supplier and to achieve profitability based on
having a strong price cost margin (Dobson, Starkey and Richards, 2004). This is an
extension of the understanding established initially by Porter in 1985, where he stated at
p.13 “Low-cost producers often sell a standard, or no-frills, products and place
considerable emphasis on reaping scale or absolute cost advantages from all
sources”. Although the discussions here were aimed at those that generically follow
these strategies, they are clearly very relevant to the way in which FAST JET has formulated
itself.
 CHAPTER TWO

• Furthermore, the airline typically utilizes regional airports, as they charge less than
central airports and this then allows the company to provide cheaper flights to the
region. This will, of course, reduce the number of people who are willing to travel
to that region, as some will place a premium on a direct flight to the centre of the
city but, in many cases, an alternative airport within a few miles will be acceptable
and is a great way of achieving a cheaper flight. This will also be the approach
when providing the flight element of cheap package holidays.
• 2.3 Concept of Risk Management within the Budget Airlines
• Based on this strategy, there are clear needs to look at risk management as a means
of maintaining the strategy. When following a cost leadership approach, there is the
need to consider that competitors may simply innovate to copy and to be able to do
the same, so that companies such as FAST JET need to ensure that they stay ahead
of the game and are constantly looking towards improving their position and cost
savings and therefore gathering greater market shares.
 CHAPTER TWO

• 2.4 Principal risks and uncertainties

• The Group is subject to various risks, including those that derive from the nature of the aviation industry
and from operating in Africa. Risk assessment and evaluation is an essential part of the Group’s planning
and an important aspect of the Group’s internal control system.
As more fully described in the Going Concern statement in the Financial Review below, there are a number
of material uncertainties that may cast significant doubt upon the Group’s and the parent Company’s ability
to continue as a going concern.

• The risk management and internal control systems encompass the Company’s policies, culture,
organizational behavior, processes and systems. The Group has a risk management framework and process
that identifies and monitors its principal risks regularly identifying and associating mitigating actions to
those risks. Given that many commercial and financial risks were realized during the period, in January
2017 the Company commenced a complete review of its risk management approach and expects to have a
fully functional ISO31000 compliant risk management framework in place by the end of June 2017.
 CHAPTER TWO

• The following list sets out the Group’s principal risks and uncertainties, many of which are inherent in the operation
of an airline in any jurisdiction, and also provides details as to how these are managed. This list is not intended to be
exhaustive:

▪ Safety: A major safety incident could adversely affect FAST JET's operational and financial performance and
reputation. FAST JET’s quality and safety management systems provide the key risk mitigation together with
additional assurance from the license post-holders in Tanzania and Zimbabwe and oversight from the Plc Board’s
Safety Committee;

▪ Strategic: The continued operation of existing routes, the commencement of operations in new markets and the
selection of fleet type can have a material impact on the Company’s current financial performance and future
prospects. The new management team, through the Stabilization Plan, has fundamentally reassessed the Company’s
services and fleet and introduced more rigorous criteria against which new services will be considered;

▪ Commercial: Network and fleet planning and the need for effective competitor and market analysis are important
to ensure effective on-going revenue growth. The Group now has in place an experienced management team using
in-house marketing tools and external market analysis where appropriate;
 CHAPTER TWO

• ▪ Operational: Maintenance of a safe, reliable and low cost airline is essential. The Company
has in place the necessary systems and internal controls to ensure sufficient crew levels to
operate the schedule and effective contract management around key supplier relationships,
such as aircraft lessors, maintenance providers and ground handlers;
• ▪ Finance: Ensuring the Group has the financial resources to continue operations and deliver
its strategic objectives is essential. The Group seeks to ensure it has appropriate and effective
budgeting, reporting, forecasting and cash management systems in place underpinned by a
strong internal control environment;
• ▪ Regulatory: The retention of regulatory approvals and licenses is essential for services and
operations to continue uninterrupted. The Company has the management and systems in place
to ensure compliance with aviation regulations in the licensed markets -Tanzania and
Zimbabwe – in which we are based and markets we operate to, such as South Africa and
Zambia; and
• ▪ Litigation: During 2016 FAST JET was notified that FAST JET Aviation Limited had been
served with an order for a creditor instructed liquidator to be appointed over FAST JET
Aviation Limited. To date, no indication has been made by the liquidator of any proposed
action seeking to set aside the Loan notes as a preference or undervalue. Legal advice
obtained by the company suggests that there is no recourse to FAST JET PLC, that any claim
is unlikely and, even if there was a claim, that it is unlikely to succeed.
 CHAPTER TWO

• One of the key benefits of relocating the head office from Gatwick to Africa is
that it will position the senior management team much closer to our operations,
our customers and our regulators. This will help ensure that, in addition to
providing more efficient management, risks will be able to be monitored and
controlled more effectively.
• The Board will ensure there is a robust assessment of the risks in relation to the
approved business model and strategy and the ability to continue to meet this
strategy in light of the risks and associated mitigating actions.
• 2.5 Industry Background
• In order to understand the role of FAST JET it is necessary to briefly
understand the generic industry situation. FAST JET Plc is the holding
company of the low-cost airline FAST JET which commenced flights under the
FAST JET brand in Tanzania in November 2012. By adhering to international
standards of safety, quality, security and reliability; FAST JET has brought a
new flying experience to the African market at unprecedented low prices.
Utilizing a fleet of modern jet aircraft, FAST JET has a long-term strategy to
implement the low-cost carrier model across Africa to become the continent's
first low-cost, pan-Africa airline.
 CHAPTER TWO

• The results of the second quarter 2016 customer satisfaction surveys showed that an average of 73% of
customers were likely to recommend FAST JET to a friend. In developing its strong brand and identity,
FAST JET has won and been nominated for a number of awards, including Africa's Leading Low-Cost
Airline 2016 at the 23rd World Travel Awards, winning three Transform awards for the rebrand and launch
of FAST JET, the award for "Brand Strategy of the Year" at 2014's Drum Marketing Awards in London, and
the Transport Innovator Award at the 8th Transport Africa Awards 2015 in Johannesburg.
• This announcement contains inside information for the purposes of the Market Abuse Regulation.
• FAST JET Plc is quoted on the London Stock Exchange's Alternative Investment Market (“AIM”).
•
• 2016 was a year of both challenge and transformation for FAST JET. During the year FAST JET continued
to face weak economic conditions and increased competition in its key markets - Tanzania and Zimbabwe
and these combined challenges had an adverse effect on the Company’s full year results. In the first half of
the year, FAST JET’s ability to effectively meet these challenges was significantly impeded by a number of
structural and operational vulnerabilities within the Company. With the appointment of Nico Bezuidenhout
as Chief Executive Officer on 1 August 2016 these issues were immediately addressed through the adoption
of a comprehensive Stabilization Plan designed to positively transform the Company, while staying true to
the low-cost model and FAST JET’s vision to be a pan-African airline
 CHAPTER TWO

• While we are pleased with the progress we have made in implementing this Plan,
many of the benefits from these key interventions, such as a reduced cost base, will
only be fully realized during, and increasingly through, the new financial year.
• During the second half of the year, FAST JET withdrew from a number of loss-
making routes, and eliminated surplus capacity by reducing the number of
scheduled flights and commencing a re-fleeting to smaller aircraft. From July to
December 2016 while capacity was reduced by 25% passenger numbers were down
by only 3% and revenues were improved by 5%.
• The head office relocation from London to Johannesburg, initiated as part of the
Stabilization Plan, is nearing completion and we are already beginning to realize the
cost benefits of this move. In addition to saving costs, we are also focused on
improving the overall efficiency of our operations, including the interaction
between the Commercial, Operations and Finance functions of the business, and the
relocation of our head office will aid this process.
• Today FAST JET has three aircraft - two Airbus A319s (one currently out of service
and in the process of being returned to the lessor) in Tanzania and one Solenta
Embraer E145 in Zimbabwe. This will change to two E190 aircraft in Tanzania by
October 2017 and a second Solenta E145 to be deployed to.
 CHAPTER TWO

• The actual notion of a low cost airline can be seen to have emanated in the 1970s, when
Southwest Airlines established itself as a cut price airline providing a very basic but
nevertheless acceptable service to American internal travelers. It aimed to appeal to those who
were interested in price, rather than convenience, comfort or timeframe; it was often aimed at
the student market and was referred to by many as the ‘Hippie’ Airline. From this point,
several longer haul efforts emerged, but never fully gathered speed in comparison to the short
haul equivalents, arguably due to their inability to differentiate themselves across the markets
(Porter, 1980). That said, from the late 1990s through to the current day, several short haul no
frills airlines have gained considerable success. Others have failed such as Zoom, in 2008,
which suffered from problems associated with higher costs, most notably in the area of fuel.
(Zoom, 2014)
• Despite certain differences pursued by the various carriers, on the whole, they pursued the
approach of having uniform airplanes that reduced purchase and maintenance costs, as well as
sticking to those airplanes that have minimal operations requirements and can therefore retain
a low level of costs
 CHAPTER TWO

• Other operational benefits are gained through the use of requiring personnel to undertake
multiple roles and to ensure that there are less people required to service customer needs, both
on the ground and in the air. Whilst this may somewhat reduce the efficiency and the quality
of service provided, on balance, it provides a basic service at a cheap price. Certain principles
are seemingly consistent across the low cost airline industry, such as the use of secondary
airports which are cheaper, the removal of non essential features, the imposition of charges for
any added extras, e.g. additional baggage handling, so that individuals can simply pay more
for what they actually require or want as added extras. The primary example of this is the
removal of inflight meals as standard, thus allowing flyers to purchase what they wish, if
indeed they wish to purchase food at all. Again, this reduces automatic costs and also offers
opportunities for added revenue to be generated through the sale of snacks.These basic
principles are common across the entire industry, although certain aspects have been more
readily pursued by FAST JET and will form the focus of the main discussions.
 CHAPTER THREE

• 3.1 Research Methodology

• The research methodology for the paper is considered to be important for the
purposes of identifying how the overall aim of evaluating the strategies and risk
management available to low budget airlines and, in particular, FAST JET can be
achieved. Firstly, it is considered to be necessary to undertake a deductive approach
to the literature review, whereby the basic theory of the no frills airline is taken and
then explored and observed. For example, there are accepted principles which are
part of the no frills airline as a generic cost leadership strategy. Therefore, by taking
the essence of the cost leadership strategy and then observing the industry in light
of this, it is then possible to create a further theory as to the success of the industry
and, more specifically, FAST JET. At this point, it is then necessary to take an
inductive reasoning approach and to use observations as a means of developing a
further theory of how these approaches can be evaluated and how these can then be
better dealt with, in the future, for both FAST JET and the industry, as a whole.
With this in mind, there is a shift in reasoning that needs to be clearly delineated in
the structure of the research paper and will be looked at in these sections, below.
 CHAPTER THREE

• Introduction and Industry Background – this will form the backbone of the
deductive reasoning and will take the accepted theories of the no frills airline, with
the strategy that is considered to be appropriate for this industry, most notably the
cost differentiation, as noted in the introductory section above.
• Literature Review – this will need to transcend both aspects and will involve a
detailed secondary analysis of existing understanding, including the need to look at
general strategies that can be employed within the commercial arena. This will then
need to be applied more rigorously to the case of the budget airline and how the
generic strategies work within the budget airline industry. It will also look to
identify specific areas of failure and to use a more deductive reasoning to establish
a new theory of how the industry can now evolve.
• Case Study – these theories will then need to be tested by using a case study as a
further form of secondary research, which is then capable of testing the theories
raised and also developing them further, with specific examples in mind. A case
study is seen to be the most appropriate means of achieving this, due to the need to
take theories, test them and then potentially create new theories as to how this
matter can be progressed.
 CHAPTER THREE

• Analysis and Evaluation – This will then pull together the various aspects of the research, to
create an overall evaluation and an ongoing theory that can be used including,
recommendations for the future for FAST JET as to how it can use its own strengths to create
a new strategy or approach, as well as being able to evaluate its existing approach.
• This research methodology, which relies entirely on secondary research, may be seen to be
limited, due to the lack of primary research; however, it is felt to be appropriate in this case,
due to the need to gather such a broad range of opinions, if primary research were to be relied
upon. With this in mind and the specific thought that consumers are likely to have in relation
to the industry, it was determined unhelpful to collate a large amount of primary research.
• Although there is a large amount of information available in the general domain, this is not in
itself going to provide sufficient depth of understanding and therefore additional databases are
going to be required, in order to add the necessary value to the discussion.
• Economic and financial journals may also prove useful in this regard, as they are readily
available in the University library and will provide the background theoretical understanding.
• The starting points for the references and resources to be used are contained below; however,
it is anticipated that this will be increased dramatically, over the course of the first two stages
of the research and, in particular, during the literature review. Key words will include, budget,
strategy, airlines and FAST JET
 CHAPTER THREE

• 3.2 Timescale
• The overall duration of this research is to take place over one academic year,
consisting of ten months. This is also a large deciding factor in the determination
not to rely on primary research, at all. There would need to be a large amount of
primary research gathered and this simply would not be possible with the time
frame allocated if a suitable level of reliability were to be obtained.
• The following time frame is to be followed, with a degree of flexibility allowed in
order to ensure that all aspects of the research are completed diligently.
• Weeks 1 – set out the research question, consider the available literature as well as
the access to case study information and delineate any possible limitations that may
arise in terms of information available.
• Week 1 – 2 – establish the introduction and industry background, looking solely at
literature relating to the generic theories of business development, as well as the
theory of the no frills airline.
• Week 3 – 4 – undertake case study analysis of FAST JET, which will require
detailed information to be gathered from the company, from the commentary
relating to the company and from any other source that could offer guidance as to
how the company has been successful or, indeed, where the company has failed.
 CHAPTER THREE

• Week 5 – 6 – analyze case study, in light of the literature review and

evaluation structure set, going forward. A key component of this research is
to evaluate the strategy being employed and to evaluate the way that the
company may manage its risk. With this in mind, the evaluation process
should be considered over a long period of time and with sufficient depth,
revisiting issues, if required.
• Week 7 – 8 – pull together all the research and revisit any areas that seem
lacking or where additional questions have been raised; most notably,
ensuring that the aims and objectives are fully established and any gaps
have been dealt with or, at the very least identified, so as to form part of the
limitations and future research statements in the end report.
• Week 9 – 10 – review and present findings, undertake any other final areas
of research that may be required and ensure that the findings of the research
paper are presented fully. Any further areas of research will be identified at
this stage and laid out for future use by others. Any limitations of the
research will also be established
 CHAPTER THREE

• 3.3 Resources Required

• The primary research is not being undertaken due to the required timeframe. For the
analysis itself, there is a need to have access to a variety of literature data bases,
including the standard academic databases and industry information relevant to the
airline industry. It has been identified that sources such as Euro monitor may
provide a particularly useful insight into the industry itself, but are paid for
databases. However, there are certain databases that may present industry
information and are provided to the University which need to be looked at, in more
detail. Specific databases that are appropriate include:
• DataStream
• EconLit
• JSTOR
• Data monitor
 CHAPTER THREE

• 3.4 Conclusions
• In summary, therefore, the aim is to evaluate the strategies used by the
no frills industry, with particular reference to FAST JET. In this context,
the next step is to undertake a reasonable amount of background
reading, to ascertain the areas that are then going to be pursued as part
of the literature review. The main initial stage will be to look at the
various aspects of the corporate strategy and to split the areas of
reading and literature into sub headings. This will then be pursued
when looking at the FAST JET case study; therefore, it is necessary to
establish these strands of the argument and the support for this
argument, from the outset.
• Establishing the main aims, strands of analysis and the way in which
the findings will be presented will all be part of this initial fact finding
and preparatory stage.
 REFERENCE

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Game Theory to Shape Strategy”, Harvard Business Review, July-
August pp 57 – 71
2. Calder, S. (2003), No Frills: The Truth Behind the Low-Cost
Revolution in the Skies, UK: Virgin Books
3. Doganis, R. (2001), The airlines business in the 21st century,
London: Routledge
4. Galbraith, C. & Schendel, D. (1983), “An Empirical Analysis or
Strategy Types”, Strategic Management Journal, 4:2 153 – 173
5. Gross, S and Schroeder, A. (Eds.) (2007) Handbook of Low Cost
Airlines – Strategies, Business Processes and Market
Environment, Berlin.
6. www.fastjetplc.com