Michaels Aviation, Inc. (MAI)

1. Michaels Aviation, Inc. (MAI) • Risk Management Hypothetical Company Analysis

2. Contents of Presentation • Company Overview • Basic Information • Financial Data • Flowchart • Pictures • Examination of Six Loss Exposure Areas • Property • Liability • Personnel • Management Liability • Net Income • Corporate Governance • Recommendations for Six Loss Exposure Areas • Summary

3. MAI Overview • MAI is a flight school that offers private, instrument, commercial, multi-engine, numerous training programs; • Offers aircraft rentals to qualified pilots; • Based at the Houston Municipal Airport located at 1234 Airport Drive; • MAI is organized as a corporation with three principal shareholders who are not active in daily operations; • There are 20 employees, including five flight instructors; • 90% of the employees are male; average age is 48; • Flight Instructors’ average earnings are $7,000 per month.

4. MAI Overview (cont.) • Gross Monthly revenue averages $75,000; • Employees are provided a retirement plan that pays 5 percent of income into a company managed fund. • The Manager and contact person is Sam Smith; • 70 percent of sales comes from UM students and alumni who charter planes to travel to athletic events.

5. Hypothetical Financial Data • GROSS INCOME FROM INSTRUCTION/RENTALS • $75,000 per month • TESTING Fees • $4,00 per month  • INSTRUCTOR SALARY • $7,820 per month  • OTHER EMPLOYEES PAY • $3,160 per month • MAINTENANCE COST • $5,000 per month • INSURANCE COST • 4,400 per month • FUEL COST • $25,000 per month  • MONTHLY REVENUE • $24,763 This does not include the cost of rent for the building or taxes (which the manager did not disclose but emphasized cost a lot of money)

6. Feasibility Analysis • NPV of MAI as a going concern • Analysis of last five years of Revenues and Cost • Opportunity Cost of Capital for investors vsIRR of MAI

7. Shutdown and Securing Ground Lesson Engine Start Preflight Inspection Taxi Takeoff Flight Landing Taxi Flowchart of Normal Operations

8. Michaels Aviation MAI Class Buildings

9. Property Loss Exposures • Aircrafts • Pilot Supplies • Building • Hangar (where the aircraft is stored) • Computers • Radios • GPS • Simulators • Tractor - used to tow aircraft • Training Devices

12. Liability Loss Exposures • Crash and hurt people on the ground • Crash and damage property on the ground • Crash and hurt students • Crash into other planes and hurt people • Run into other planes while taxiing on the ground

13. Liability Loss Exposures (continued) • Crash and damage planes in the air • Start a fire while fueling aircrafts • Building is connected to the main airport building so a fire could damage property that isn’t theirs. • Pollution Liability • Injury to unsupervised people near the airplanes

14. Personnel Loss Exposures • Instructor might leave for a better job once they build enough flight time • Instructors can be killed in a crash • Instructors can be temporarily disabled in a crash • Instructors can be permanently disabled in a crash • Instructors can get sick from giving instruction to sick students.

15. Personnel Exposures (continued) • Employees might have to move with their family away from the area • Employees could retire • One of the instructors is in the Air National Guard, so he could get deployed and have to leave work. • One employee usually goes to get lunch for everybody and runs miscellaneous errands for the company. He could be hurt while driving to and from the airport. • Employees could be kidnapped

16. Management Liability Exposures • Employment Practices Liability (EPL) – no unequal treatment or discrimination • Misrepresentation to acquire new investments • Sexual harassment exposure. • Making changes in their assets • Mismanagement of day to day business decisions

17. Management Liability (continued) • Hiring new employees (EEOC) • Wrongful termination • Monitoring the internal controls to ensure accurate information is provided • Retaliation lawsuits

18. Net Income Exposures • If a flight instructor is hurt or sick the company cannot give instruction and make money. • If the aircrafts are down for maintenance the company cannot give instruction and make money. • If the runway is under maintenance/construction the company cannot give instruction and make money. • Sometimes temporary flight restrictions are issued, like during every MTSU football game, and the company cannot give instruction and make money. • Whenever there are crashes or emergencies, people often become afraid to fly and will not take lessons.

19. Net Income (Continued) • During emergencies such as 9/11 all flights were grounded so the company could not fly and make money. • Pilots must pass medical exams, so if the instructor fails a medical exam he/she cannot give instruction • If the company that does maintenance on their airplanes goes out of business Michaels Aviation will not be able to keep the planes maintained and will not be able to give lessons. • Long periods of bad weather prevents the company from flying and giving lessons. • New law requiring more flight time to get a pilot job might deter people from entering the profession and taking lessons.

20. Corporate Governance • Michaels Aviation does not have a strong process for oversight of decision-making; • The internal bookkeeper is the only one to audit any financial information; • The owners use this company as an investment only and claim to be silent partners.

21. Sample Recommendations • Property Loss Exposures • Liability Loss Exposures • Personnel Loss Exposures • Management Liability Exposures • Net Income Loss Exposures • Corporate Governance Loss Exposures

22. Property Recommendations • Aircrafts • Loss prevention – Routine maintenance and use of checklists will prevent accidents • Financial transfer – No matter how careful the company is there will always be a chance of loss. Insurance is a must because the cost to replace aircrafts is too much to retain.

23. Property Exposures (cont.) • Pilot Supplies • Exposure avoidance – At times there is not an employee in the office where the pilot supplies are stored which could lead to supplies being stolen. Also many of the charts they sell expire before they are sold and can no longer be used so I think it would be best to stop selling some of these supplies. • Loss prevention – recommend always having somebody in the office to prevent the loss of the supplies.

24. Property Recommendations (cont.) • Start a fire while fueling aircrafts • Loss Prevention – Only allow instructors to fuel aircrafts. • Loss Reduction – Have a fire extinguisher nearby to immediately put out the fire. • Loss Prevention and Reduction – Require all employees to undergo fire prevention and first aid training.

25. Property Recommendations (cont.) • Damage to aircraft while on the ground • Separation – Park aircrafts in different hangars or tie down areas. This way if something happens to the hangar, such as a fire, not all of the aircrafts will be damaged. • Duplication and Non insurance transfer – have an alternative “supply” of aircraft that may be utilized via rental or lease.

26. Liability Recommendations • Crash and hurt people on the ground or crash and damage property on the ground • Loss prevention – Routine maintenance and the use of checklists will help prevent crashes. • Financial transfer – No matter how careful the company is there will always be a chance of loss. Insurance is a must because liability lawsuits could cost more than the company would be able to retain. • Contractual Transfer – Use of a rental contract could transfer liability to the pilot if the crash was caused by something beyond the company’s control such as pilot error.

27. Liability Recommendations (cont.) • Injury to unsupervised people near the airplanes • Loss prevention – Put a lock on the gate that requires a code to unlock; • Loss Control - Install cameras to monitor the area.

28. Management Liability Recommendations • Misrepresentation to acquire new investments • Loss prevention – Ensure that everything is properly documented so that any potential investors are provided accurate financial information. • Separation – Keep some records off the premises

29. Personnel Recommendations • Instructor might leave for a better job once he/she build enough flight time • Loss prevention – During the interview the company should ask employees about career goals • Loss control - Hire instructors of different ages and experience levels.

30. Personnel Recommendations (cont.) • Instructors can be killed in a crash • Loss prevention – Routine maintenance and the use of checklists will help prevent crashes. • Financial transfer - No matter how careful the company is there will always be a chance of loss. Insurance is necessary to cover any workers compensation claims.

31. Personnel Exposures (cont.) • Mr. Smith could leave suddenly and no other knowledgeable person is available to take over as manager • Have one or two of the most seasoned employees alternatively shadow Mr. Smith on a regular basis; • Have Mr. Smith compile a handbook for employees and management trainees, outlining all of the important processes.

32. Net Income Recommendations • If a flight instructor is hurt or sick the company cannot give instruction and make money. • Loss reduction – Have sick employees stay home to keep other employees from becoming sick • Loss prevention – Hire enough instructors so that if one is sick it will not prevent the company from being able to provide instruction.

33. Net Income Recommendations (cont.) • If the aircrafts are down for maintenance the company cannot give instruction and make money. • Duplication – Acquire several aircrafts so that if one is down for maintenance a student can receive instruction in a different aircraft. • Diversification – rent additional hangers to private owners for additional income.

34. Corporate Governance Recommendations • Separation – Hire an outside auditor yesterday! • Loss prevention and reduction – Install a system of reporting revenues, costs, and losses on a weekly basis;

35. Summary • Michaels Aviation could enhance its current risk management focus and likely improve the company’s performance in several areas; • While all of the liability exposures appear to be problematic, the Corporate Governance exposures appears to need urgent attention; • Implementing additional risk management initiatives could alleviate potentially catastrophic losses as well as enhance the financial strength of the company and the improve the value of its shareholder investments.