April 2010

Is it the engines, the wings or the Administrator that will keep the airlines flying?

Published on: 30 Apr 2010

Earlier this week the European Transport Commissioner relaxed strict rules banning state subsidies for airlines. This follows reports that the cancellation of approximately 100,000 flights earlier this month due to the volcano in Iceland was going to cost the industry in the region of £2 billion.

Inconvenient as the closedown of European airspace was for travellers, the interruption of cash flow could potentially be ruinous for a lot of airlines.  Sadly, this probably means that we could see some seeking administration orders, with a view to helping them trade through the short-term cash flow problems that they are encountering.

But, what exactly is an administrative order?

An administration order under the UK legislation is similar to US Chapter 11 protection, though different in certain key ways.

An administration order is generally sought by directors of a company, who can otherwise be at risk of personal liability if they keep trading without a realistic expectation of being able to pay the creditors.

An Administrator is appointed to oversee the company’s position and to take over management of the business.  As a result:

•    Creditors cannot commence a winding up of the company.

•    The powers of the directors to manage the business are transferred to the administrator.  At the end of the administration, the administrator has the option to reappoint the directors.

•    The directors must produce a statement of affairs for the administrator which will be the starting point for a revised business plan.

•    The administration order is publicised.

The effect is to give the company a chance to stabilise itself, save jobs, minimise losses to creditors and minimise disruption to stakeholders generally.  It’s a very useful device that has saved lots of companies from avoidable bankruptcy.  Hopefully though we won’t see too many administration orders in the coming months.

Is it really an auction for 3G licenses or is it an auction for the ultimate barrier?

Published on: 28 Apr 2010

Mobile phone companies have recently started placing bids in the auction for India’s 3G phone licenses with the government likely to receive over $8 billion in the process.

3G technology provides users with the ability to download content such as music and internet pages at higher speeds.

There has been a dramatic increase in the number of mobile phones in India over recent years with the number of phones sold increasing from 35 million five years ago to 130 million last year.

This is going to be an interesting auction but what exactly will they be bidding on?

Most people will say that they are trying to buy a 3G mobile license but students of Porter’s 5 forces will argue that they are in fact buying a barrier to entry. One of Porter’s 5 forces is “Potential Entrants”. A key element in connection with this force is the concept of barriers to entry. As the name suggests these are barriers that can either prevent or make it difficult for new entrants to enter a particular market.

The 3G licenses are great examples of barriers to entry as without the license it is simply not possible to enter the 3G mobile market. The license is the ultimate barrier.

In summary therefore, surely the headline should be “Companies in bids for barrier to entry”?

£1 million for two weeks work? Not bad, but what about exchange rates and discrimination?

Published on: 23 Apr 2010

One of the highlights of the summer as far as I’m concerned is the Wimbledon tennis tournament that takes place in London in June.  The atmosphere, the skills of the players and the event itself are fantastic.

Whilst tennis clearly gets priority, running the Wimbledon event is very much a business.

Earlier this week the All England Club (the organisation that runs Wimbledon) announced increases in the prize money for the 2010 championship.

The total prize money for the event will be £13.725 million. Both the men’s and ladies’ champions will each receive £1m, an increase of £150,000 over last year.

The increases over recent years emphasise that tennis is now big business. Roger Federer, the 2009 men’s champion, for example, was born in 1981. In 1981 the prize money was nowhere near £1million being only £21,600.

Tim Phillips, Chairman of the All England Club was quoted as saying “Wimbledon exists in a highly competitive global marketplace ….  it is important that we offer a level of prize money which is both appropriate to the prestige of the event and which gives the players full and fair reward.”

It certainly is a global marketplace with players and spectators coming from all over the world and TV rights being sold to many countries.

It was also reported that there were pressures to increase the value of the prize in sterling terms due to sterling weakening against the dollar and euro over the last year. It remains to be seen though if they would decrease the value of the prize in future years if sterling strengthens!

As well as currency issues there’s also an interesting debate to be had concerning discrimination between the men’s and ladies’ championship. Up until 2007 the men’s champion was paid more than the ladies’ champion. This was then changed to avoid discrimination but as every tennis fan knows the men’s game is played over 5 sets whilst the ladies’ is over 3. Does this mean that the men are being paid proportionately less?

An interesting debate but I’m sure that when it comes to the finals this year the players will be more concerned with winning the championship than discussing discrimination issues!

The laws of probability require very improbable events. This includes volcanoes in cold places interrupting the supply of fruit from hot places.

Published on: 21 Apr 2010

It’s now about a week since the Eyjafjallajoekull volcano in Iceland exploded, aircraft were grounded, passengers frustrated and radio and TV newsreaders frenziedly tried to find somebody to tell them how to pronounce Eyjafjallajoekull.

Our blog on Monday discussed the links between the volcanic eruption and some of the ACCA papers. It also mentioned the challenges that supermarkets would face in their supply chain.

I am writing this in Manchester, a major city in the north of England and home to many restaurants that include things like asparagus, strawberries, passion fruit and many other things that tend to grow poorly in the north of England in April.

I was chatting to the chef at one of these restaurants last night and he mentioned that his restaurant was presently redesigning its menu to ensure that they were able to put food onto customers’ tables in a couple of days’ time.  Without doubt, the exotic fruit and vegetables will disappear soon. To be honest though the replacement menu the chef was talking about sounded absolutely delicious.

Any ACCA P1 students reading this should be aware of COSO compliance issues. It seems unlikely that a COSO compliant restaurant manager would seriously have considered the possibility that exotically named volcanoes might interrupt the supply of exotic ingredients, but they ought to have considered possible interruptions in the supply chain inwards.

The restaurant I ate at last night was well prepared and did have contingency plans in place. When I returned home after the meal I heard that the flight ban had been lifted so the shelves should remain full of the exotic fruit and vegetables. I’ll certainly go back to the restaurant though to see if they decide to stick with the new menu!

So, what does the Eyjafjallajoekull volcano eruption in Iceland have to do with your exams?

Published on: 19 Apr 2010

This is our 100th blog posting and a big thank you to all of you for following this blog and for all your kind comments. They’re much appreciated!

Please do contact us with any thoughts or suggestions on what you’d like to see on this blog going forward.

The news over the weekend has been full of the flight disruptions over Europe. The cloud of volcanic dust from the eruption of the Eyjafjallajoekull volcano in Iceland has resulted in airspace in nearly 20 European countries being closed with thousands of flights cancelled.

This is unprecedented in recent history but what does this have to do with your exams? There are some nice links to some of your papers.

Certain businesses are obviously impacted more than others (a nice topical link to a short term environment issue within PESTEL analysis). Airlines for example are estimated to be losing £130 million a day as a result of their planes being grounded. The courier companies such as TNT and DHL are also facing pressures as their planes cannot take off.

The ash cloud has also had some other less direct consequences. Just in time stock control methods are used by supermarkets for a number of their perishable products. Whilst supermarkets source a lot of their products from within the UK where delivery is made by road, there are a number of “exotic” goods that have to be shipped by air into the UK.

Heavier, lower value items that do not have a particularly short perishable life are generally shipped to the UK by road or sea freight. Items such as bananas are shipped by boat rather than plane although as mentioned in a previous blog entry they have their own issues to look at!

It’s likely however that the supermarket shelves will soon be empty of perishable items such as exotic fruits and flowers that are prepared and packed overseas and then shipped to the UK by air freight.

Whilst customers will miss out on their purchases of these exotic items, it’s less clear what the impact will be on the supermarkets. The reports are that whilst less than 1% of British imports by quantity are transported by air freight, this figure increases to approximately 25% when looking at it as a percentage of British imports by value.

Will the customers switch to less exotic but available alternatives? From a personal point of view, my favourite fruit is a banana so I’m lucky!

Free drinks at work but not too much otherwise you’ll get locked out…

Published on: 16 Apr 2010

Denmark is famous for many things. One of them is that it is home to one of the most recognized beer brands in the world, Carlsberg.

Carlsberg beer was first brewed in the mid 1800s and today is drunk around the world in 140 countries.

They have been in the news recently when nearly 800 workers in Denmark went on strike as a result of proposed changes to Carlsberg’s rules for drinking beer at work.

Currently, there is free beer (and soft drinks) in the canteen at lunchtime but the drivers of the delivery vehicles are eligible to have up to three free beers per day outside of lunch hours. The argument for this is that as they are on the road a lot they do not have the opportunity to have free beers in the canteen.

The warehouse staff went on a five day strike arguing that they should also be entitled to the additional free beers that the drivers get. Earlier this week the strike came to an end with an agreement to discuss matters.

Having an awareness of current worker relations issues is important in a number of exam papers but walking out on strike as a result of not having free beer is probably a relatively unusual issue! The vast majority of organizations have a no drinking policy in place.

There is also a big health and safety issue present. Having drivers that drink beer when they are on the road has some obvious dangers.

Carlsberg though have already thought about this and have identified a novel solution. All of their delivery trucks are fitted with alcohol sensing ignition locks that will not start if the driver is drunk.

Ready to go to the movies? Don’t forget your drink, your popcorn and your derivatives…

Published on: 14 Apr 2010

Students are probably aware of what currency futures are. To quote our ExPress notes:

“These are contracts, transacted over an exchange, representing a standard amount of currency which can be bought or sold with a specified future settlement (delivery) date, at a rate expressed in another currency. Settlement is guaranteed by the exchange, which acts as counterparty.”

Currency futures, interest rate futures and even relatively obscure items such as soya bean futures are all currently traded.

Last week however an application was made to the US futures regulator to create a contracts market for film futures. If the application is successful this will mean that there will be a “movie derivatives” exchange.

In simple terms this will enable people to “bet” on whether a movie makes money or is a financial failure. Traders will be able to buy and sell contracts speculating on how much money a movie will make at the box office.

As an example of how movie futures could work, a futures contract could be bought by a trader valued at say $1 for every $1m in expected ticket sales during the first month. Therefore, if the market believes a movie would make $100m, traders would be able to buy a futures contract for $100.

If box office estimates were to rise to say $150m because of positive movie critic reviews in the run up to the movie launch, holders of existing contracts would be able to resell them for $150. This would result in a profit of $50.

Of course, if the reviews aren’t very good then the box office estimates would decrease and the value of the contracts would go the other way and there would be a loss!

There are two opposing views to this.

Some people say that this offers a new, novel way for movie producers to manage their financial risk.

Last week however, the Motion Picture Association of America (MPAA) joined forces with producers and cinema owners to oppose the move on the basis that it would encourage speculation, financial irresponsibility and could be harmful to film releases.

To be honest though as an ACCA P4 tutor I find all this so interesting that I personally think they should make a film out of it – surely it would be a box office hit?

Despite the recession, one food product is now 35% more expensive than last year. You’d be bananas not to know the reason.

Published on: 09 Apr 2010

I had dinner with a group of friends earlier in the week and there was a nice mix around the table between finance people and marketeers.

When the dessert menu was brought out and one of the group decided to go for the “banana split” dessert an interesting discussion started.

According to the marketeers around the table, bananas are considered to be “known value items” by the large supermarkets. These items are considered by the supermarkets to be products where the average customer has a reasonable knowledge of how much they should cost. These include items such as bread and milk (and bananas!).

They are therefore always priced competitively by the supermarkets as it is the price of these products that customers most commonly compare between the supermarkets. If the supermarkets can attract customers to their shops with attractive pricing of these “known goods” then they can maybe be more relaxed with the pricing of other goods!

According to a recent report in the trade magazine, the Grocer, banana prices are heading towards the critical point of £1 per kilo. This is approximately 35% higher than the price one year ago. This is a huge increase in percentage terms and customers are noticing.

And the reason for the increase in prices?

Well, this was where the finance people around the table suddenly came into their own.   Apparently, there are two main reasons for the increase in prices.

Firstly, the increase in oil prices. Shipping companies that transport the fruit over to Europe have been hit by the increase in their shipping fuel costs as a result of the increase in oil prices.

Secondly, banana importers have been hit by the weakness of sterling. As a dinner companion put it succinctly, “the bananas are more expensive as it’s simply costing the importers more pounds to buy the same amount of bananas they were buying for less pounds last year”.

Luckily for my dinner companions though, just as I was about to start talking about exchange rate risk and hedging facilities the desserts arrived and we suddenly forgot all about the price of bananas!

So, how would you feel? Re-assured or spied upon? It’s a good ethical question.

Published on: 07 Apr 2010

We mentioned in a previous blog about Nike publicising their CSR (Corporate Social Responsibility) policies on their website.

Asda, Britain’s second biggest supermarket chain has gone one step further in being transparent with regard to their CSR policies.

In the past they have been criticized by some campaigners for the low wages and poor conditions that were present at some of their clothes manufacturing locations in Bangladesh. Their company website states that as part of their efforts to increase transparency it has now put in webcams at two if its clothing factories in Bangladesh.

This should help reassure customers that they are treating their suppliers ethically and are not employing them under “sweatshop conditions”. The webcam shows clothes being made and you can clearly see the conditions that are present.

The supermarket chain has said that it has also installed webcams at its head office and at an automated cow milking machine at one of their suppliers.

Press reports however have indicated that not everyone is happy with the webcams with some people arguing that it is a case of spying on the workers as opposed to proving how ethical and transparent the company is. Either way, it’s certainly a novel way to utilise technology.

I guess the question we should be asking ourselves though is how would we feel if we had a webcam looking at us at our workplace – would we feel reassured or spied upon?

The latest adventure of “Harry Potter and the case of the extending tail”.

Published on: 02 Apr 2010

Earlier this week Bloomsbury released their latest set of financial results. Bloomsbury are a publisher and their list of titles includes the ubiquitous Harry Potter books.

Their 2009 results showed a fall in pre-tax profits of 35% with earnings falling from £11.6 million to £7.7 million.

As keen muggles know (if you don’t know what a muggle is then ask somebody that has read a Harry Potter book!), there hasn’t been a new Harry Potter book for a while now and such was the success of them that without new ones coming into the pipeline there was bound to be an impact on the results.

Students will be aware of the product life cycle where products go through different stages ranging from introduction, growth, maturity and ultimately to decline. The decline stage of the product life cycle is often referred to as the “tail”.

Efforts are often made to extend the tail by use of the marketing mix (product, price, place and promotion).

Bloomsbury have announced that in November of this year they are planning on re-releasing all seven Harry Potter books.

Will the stories be different?

No they won’t but what will be different are the covers. Each book cover will be illustrated by artist Clare Melinsky. In other words, the product will remain largely the same (in terms of the story) but there will be small changes (the “collectors” covers).

This is a good example of amending the Product within the marketing mix to extend the tail.

Of course, the launch date of November 2010 is no accident as I’m sure there will be some happy people on Christmas day opening some new gift sets of Harry Potter books.

The ExP Group