Subject Code : | ACC80018 | Country : | Australia |
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Business Overview
Australian Aviation Academy (‘AAA’) is a flying school that provides aircraft pilot training and specialist instruction services to individuals (‘clients’) which was incorporated in the State of NSW in 1980. Michael Nash and Mary Saunders are the Directors of AAA, in addition to being the Chief Flying Instructors accredited by the Australian Civil Aviation Authority (‘ACAA’).
AAA is located at Newcastle Airport, a private airport on the outskirts of Sydney. Each year Newcastle Airport is the location of the annual air-show and AAA is a key participant in the air show’s program. Michael and Mary view the expense of the air show as a marketing exercise aimed to attract new prospective students.
AAA employs three Grade 1 Instructors and five Grade 2 Instructors, in addition to six administrative staff who manage the accounts receivables and payable functions, and student licensing confirmations with the ACAA. The instructors receive company benefits of “free” independent (non-instruction) flying time of 200 hours per year to any location in Australia; however, this flying time is the minimum required by the ACAA to maintain the Instructor rating licence.
AAA is generally a highly profitable business, however in the 2018/19 financial year student enrolments were at an all-time low and a tax loss of $220,000 was reported.
Strategic Business Transactions & Key Client Matters
The Directors have provided the following statement of the strategic business transactions and key client matters which have occurred over the 2019/20 financial year.
i. To improve AAA’s profitability, AAA decided to diversify the scope of services offered to their clients and to widen their client base. After discussions with various international airlines, on 14 October 2019, Michael and Mary signed a pilot training contract with BBA Airways Inc. in London, United Kingdom. The contract provided for the exclusive training for all new Australian based and recruited flight crew. This cost BBA Airways AUD $1,500,000 per annum, payable to AAA in a lump sum on 1 November of each year for five years. It was agreed between the parties that the annual lump sum would be paid into a AAA’s Australian bank account.
ii. Owing to the potential expansion of AAA, on 11 November 2019 AAA purchased the adjoining two blocks of land from Newcastle Airport at a total cost of $9 million (each block had equal value). To finance the purchase AAA borrowed 85% of the funds from the Commonwealth Bank at an interest rate of 5.7% per annual repayable over 30 years. Due to the risky nature of the loan, security was provided by way of title to Michael Nash and Mary Saunders personal homes, both located in exclusive harbour side suburbs of Sydney.
AAA’s intention was to consolidate the land titles and build a large training facility, to train students to fly commercial aircraft using flight simulators. However, when the planning application to consolidate the land titles was lodged, AAA met heavy opposition from Newcastle Airport together with the ACAA. Both organisations argued that the airport facility was only suitable for training of pilots for light aircraft.
As a result, AAA incurred $440,000 in solicitor and court fees to assist with the application approval; however the Land Tribunal on the advice of the ACAA, ruled AAA unsuccessful and the Tribunal instructed the Council to reject the planning application. In light of this, AAA sold both recently purchased blocks of land back to Newcastle Airport for a total sum of $9.70 million on 8 February 2020, with settlement on 11 April 2020. A deposit of 10% was paid on contract date.
iii. AAA was approached by the Combined Airports Corporation (CAC) with the offer to lease a commercially zoned flight-training centre, located on the outskirts of Sydney’s international airport. CAC also offered a $70,000 cash incentive and twelve months rent free valued at $120,000, if AAA relocated their entire business to the new facility. AAA accepted the offer and moved premises on 2 May 2020.
iv. For the effective training of commercial pilots for in-the-air “emergency” scenarios, AAA leased a special flight simulator from Flight Services Ltd. The lease agreement contracted AAA for the period of four years for a cost of $180,000 per annum.
v. Earlier Michael Nash had travelled to London for three months to attend the BBA Airways training program for English and European based flight crew. Whilst overseas, Michael decided that his passion was to fly light aircraft for private purposes. He realised that the direction AAA was heading no longer left a place for him in the company. As a result, Michael tendered his resignation to Mary effective 20 June 2020. Mary worried about the intellectual property Michael had gained whilst training with BBA Airways, entered into a restrictive covenant agreement with Michael which prohibited Michael from training commercial pilots in Australia for the period of 5 years at a cost of $550,000.
vi. After heavy marketing, Mary managed to secure a training contract with an Australian based commercial airline, Wings Ltd. The contract provided for AAA to train their first officers for a period of six years, commencing 2 May 2020 at a cost of $700,000 per annum. However, on 10 June 2020, Wings Ltd decided to terminate their contract, effective immediately due to undisclosed reasons. Wings Ltd refused to compensate AAA and AAA engaged their solicitors to recover the loss in revenue. On 30 June 2020, Wings Ltd agreed to pay compensation of $1,000,000 after lengthy legal discussions.
Please note that the list above only contains information of AAA’s strategic transactions which have occurred in the 2019/20 financial year. Other transactions are detailed below in the Statement of Cash Receipts and Payments and the notes.
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