Introduction

An airline Company, ABC Airlines, which was a government linked Company in the 1980s by the Deeland Government. Due to its poor performance both financially and operationally, the national airline Company delisted itself from the stock market as the Company was facing losses and required substantial cash injection at that moment.

However, the privatisation only remedied the situation for a short period as the Company faced various operational and management problems. In year 2000 due to endless problems, the Deeland Government decided to dispose the Company to Tony Francesca and his partners for D$2.00, a businessman who had no prior knowledge and experience in the airline industry.

Background of the Company

ABC Airlines was the first airline Company founded by the Deeland Government in 1947 when the airline industry was still at its infancy in the country. The initial objective of ABC Airlines was to provide convenience for Deelands citizens to travel domestically and internationally. There was an economic boom in Deeland in the 1970s and ABC Airlines achieved significant growth during this period. In the early 1970s, ABC Airlines went public and its shares were listed on the stock exchange. The initial public offering (IPO) of ABC Airlines was overwhelming. Soon, ABC Airlines started to expand and it took all the domestic routes within Deeland and many international routes. ABC Airlines was flying to over 10 overseas. Customers praised the airline for its great service and affordable price. It could be said that it was one the best airlines at that time.

ABC Airlines operations

Since Tony and his partners took over the ABC Airlines, one of the strategies is to increase its marketing and competitive edge by expanding its international routes to more than 50 overseas, even some of it were unprofitable. In order to cater more routes, the Company had committed the orders of more aircrafts.

The Company had diversified its operations into a few unrelated industries and sectors. Despite operating a commercial airline as the main business, ABC Airlines has expanded its operations into the cargo business (ABCargo), catering business (ABCatering), tour operator (ABC Holidays). hotels (ABC Hotels) and financial services (ABC Money). These operations acted as supplements to the business and help to boost its revenue. ABCargo provided air freight services by delivering parcel using ABC Airlines while ABCatering supplied the in- flight meals for the passengers. ABC Holidays provided holiday packages and handled ground tours for its customers, and ABC Hotels provided accommodation, while all the passengers were flying using ABC Airlines. ABC Money offered affordable prepaid and loyalty cards as well as life and general insurance products.

Currently, the ABC Airline has a total workforce of 20,000 employees worldwide and the Company adopted an asset heavy business model. The working capital is mainly attributable to staff-related costs, variable costs, IT operating expenses and other general requirements.

The first fall of ABC Airlines

In the late 2010s, ABC Airlines had faced its first fall due to the financial crisis. The Companys revenue was affected because of the decreasing demand of flights. Everyone in the country was badly affected and travellers chose to reduce their expenses by postponing or cancelling their travelling trips. Some flights had hardly broke even and some flights even operated at losses.

At that time, the Company has a staggering accumulated total liabilities of D$35 billion owing to the creditors, mainly the airport management, financial institutions, maintenance providers, engine suppliers, lessors, trade creditors, travel agents and passengers.

Tony and his partners were confident that the Company would be able to weather the Companys financial woes and expected the tourism industry will pick up in the early of 2020.

The second fall of ABC Airlines

In the early of 2020, the world is facing the outbreak of COVID-19 pandemic. This presented an unprecedented challenge to the public health, food systems and the world of work. The economic and social disruption caused by the pandemic is devastating. Nearly every business in the world has been affected by COVID-19 particularly sectors related to tourism industry.

Tony and his partners initially thought that the pandemic would not impact much on the airlines businesses. However, it has been proven wrong that the pandemic would not see light at the end of the Covid-19 tunnel over the next two to three years.

With many countries imposed strict restrictions and the closing of its borders to curb the spread of the pandemic, this had led to a significant fall in demand for international air travel. Hence, the Companys revenue dropped to nearly zero coupled with the escalating of operating costs, Tony and his partners were concerned about the Companys financial liquidity and also the mounting liabilities.

ABC Airlines technically insolvent had suspended all payments to creditors in order to preserve liquidity due to the impact of the COVID-19 pandemic on its businesses. The Company had requested creditors to form a steering committee to evaluate a planned restructuring proposal. If the creditors disagree to the scheme of restructuring, then the Company will to seek court approval to voluntarily wind-up.

The passengers who had paid the air tickets in advance were furious and demanded the airline for a full refund of the flight tickets. As the Company was facing severe cash flows to reimburse the passengers, the Company decided to categorise them as one of the creditors. The Deeland Aviation Commission (DAC), the aviation regulator disagreed with the action undertook by the Company. DAC argued that under the Deeland Aviation Consumer Protection Code, the Company should not have classified passengers as such given the fact they paid for their tickets and did not loan money to the airline.

Discussion with the financial controller

ABC Airlines continued to face severe liquidity constraints to meet its creditors, passengers, working capital requirements and operational costs. Tony decided to hold a meeting with Mr Jason Young, the group financial controller, to seek his advice on the creditors and operational restructuring issues, and strategic option available to the Company to further strengthen its liquidity and competitive positions. Tony and his partners would need to convince the board of directors to endorse the proposal and hoping that the restructuring could be implemented successfully so that the Company could stay afloat and restart its operations when the international borders reopen.

Required

1. As a financial controller, you are required to write a proposal for Tony and his partners to present to the board of director. Your proposal should include the following points on debt restructuring, operational restructuring, corporate exercise and strategic option. (1800 words)