ISSN 1940-204X
An Ethical Dilemma: A Case from the Aviation Industry
John R. Ledgerwood, CMA, CFM, CPA, CGMA
Associate Professor of Accounting
Embry-Riddle Aeronautical University
Anastassia Vilderson
Business Analyst
Finnair Group
Tamilla Curtis, DBA
Associate Professor of Management
Embry-Riddle Aeronautical University
INTRODUCTION
TENSIONS WITH FLIGHT CREW UNION
Emma Banks was excited about securing her new job as
onboard services manager at EastJet, a regional airline,
based in Eastern Europe and governed by the civil aviation
authorities and tax laws of its home country.
Prior to accepting this new position, Emma spent three
years at a midsize accounting company, acquiring experience
in management accounting practices and working on earning
the CMA® (Certified Management Accountant) credential.
Now she is happy to take the next step in her career
development, a path into the exciting world of aviation.
EastJet is known as one of the most desirable employers in
the region and is constantly in the midst of regional news and
social media attention. While the company enjoyed steady,
modest growth in passenger numbers during past years, the
latest financial crisis and the increasing competition from other
air carriers continuously reduced the airline’s profit margins.
As a small air carrier, EastJet primarily focuses on serving
direct routes between the region’s capital and major hubs
that are strategically important for local businesses. EastJet
also adds occasional seasonal flights to popular tourist
destinations. EastJet’s fleet consists of seven Boeing 737500 aircraft, each of which has a total seat capacity of 106
passengers divided between premium and economy service
classes. Three flight attendants and two pilots are required
for each flight.
As a newly appointed onboard services manager, Emma’s
major job tasks include responsibilities directly related to
passenger inflight services and onboard sales as well as being
in charge of flight crew catering expenses. This includes
negotiations with suppliers, budgeting, cost control, and
reporting. Catering services for the crew on duty are regulated
by the flight crew union agreement, which describes in detail
various aspects of flight crew working procedures, working
hours, rest day policies, and the minimum meal requirements
for the flight crew on duty (see Table 1).
During her first weeks at EastJet, Emma attended
management meetings with the representatives of the flight
crew union, where they discussed the terms of a proposed
new union agreement with the airline. The current union
agreement with EastJet seems to be outdated, written at
a time when the company enjoyed rapid growth rates, less
competition in its main markets, and continuous profitability.
The current agreement gives the flight crew many extra
benefits not common in the airline industry.
EastJet’s top management requires that any new
union agreement reflect actual airline industry standards
established by regulatory authorities. But the flight crew
union wants to keep the current benefits and increase salary
levels to compensate for the rise in inflation.
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Table 1:
Panel A: Excerpt from Flight Union Agreement
Flight crew union agreement with airline states that:
1. Airline guarantees one cold meal for each crew member whose work hours per day do not exceed six hours.
2. Airline guarantees one hot meal for each crew member whose work hours per day exceed six hours but do not exceed eight hours.
3. Airline guarantees one additional hot meal for each crew member whose work hours per day exceed eight hours.
Panel B: Flight Crew Minimum Meal Requirements: Excerpt from EU legislation (EU.OPS.FTL> OPS 1.1130 Nutrition)
1. A meal and drink opportunity must occur in order to avoid any detriment to a crew member’s performance, especially when the flight duty period (FDP)
exceeds six hours.
2. The operator is obliged to specify in the operations manual how the crew member’s nutrition during FDP is ensured.
EQUIVOCAL INVOICES
Negotiations between the flight crew union and
EastJet’s top management have gone on for several
months but achieved no significant compromises. One
hot topic is EastJet’s responsibility under the current
agreement to provide the flight crew with meal services.
The flight crew union wants to maintain the current
meal requirements, while top management argues that
the minimum requirements established by the industry’s
regulatory agencies is considerably lower (see Table 1,
panel B). Tensions between the flight crew union and top
management escalated during the most recent meeting.
EastJet is in a very tough financial position, so
management has to cut costs in all aspects of the business.
The current company budget calls for all departments to cut
operating costs to a minimum. One focus is the inefficient
flight crew catering system, which requires a lot of checking
and monitoring. Management wants to cut flight crew
catering costs and improve the system. Emma’s task is to
analyze the overall costs of the system and explore possible
savings from management’s newly proposed system.
During the meeting, Emma was shocked by the degree
of tension between top management and the flight crew
union. Neither side seemed interested in compromise. She
left thinking about how the new system of crew catering rules
could improve the entire process and save money while also
maintaining the quality and quantity of crew meals. She began
gathering the information needed to do a cost/benefit analysis.
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Over the following days, Emma reviewed many invoices sent
to EastJet by Sky Catering, a local airline catering company
that was the only licensed catering service with all the
required certifications for EastJet’s base airport. Enjoying a
monopoly position there, Sky Catering charged high prices
yet made sure to negotiate favorable terms in its agreements
with airlines, especially EastJet. About 70% of Sky Catering’s
revenues came from providing services to EastJet, making
EastJet a highly valuable customer. Both companies depend
strongly on each other. Without Sky Catering, EastJet would
be unable to provide timely catering services on its flights;
at the same time, Sky Catering’s business would not be
economically viable or efficient if EastJet ceased operations.
Emma’s job is to diligently check all the monthly invoices
received from Sky Catering, verifying that they correspond
to the services Sky Catering provided, approving the
invoices, and forwarding them to the accounting department
for payment. Going through the invoices, Emma noticed
a separate invoice not mentioned in the invoice control
instructions that her predecessor provided. Some “general
catering services” were invoiced, but Emma was unsure
what services these were for or why they were all invoiced on
a separate bill. Emma decided to share her concerns with her
direct supervisor, Director of Customer Services Jillian Wood
(see Figure 1).
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Figure 1: EastJet’s Organization Chart
Chief Executive Officer
Human Resources
Public Relations
Chief Financial Officer
Chief Commercial Officer
Chief Operational Officer
Department of Finance
Department of Marketing
Department of
Flight Operations
Department of
Revenue Control
Department of Sales
Department of Planning
and Crew Resources
Department of Accounting
Department of
Customer Services
Rebecca Adams,
chief accountant
Jillian Wood, director of
customer services
Emma Banks, onboard
services manager
During lunch with Jillian that day, Emma mentioned the
unusual Sky Catering invoice she received. Jillian said that
the invoice referred to a separate verbal agreement between
EastJet’s and Sky Catering’s accounting departments. “These
are some complicated accounting matters you shouldn’t
worry about,” Jillian said. “They know better how to properly
invoice everything.” Jillian advised Emma to just sign her
approval of the invoice and forward it to the accounting
department for registration and payment.
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Later at home, Emma continued thinking about the
mysterious invoice. The situation seemed unusual to her.
As a manager responsible for the costs associated with
passenger and crew catering services, she is required to know
the nature of all invoices she approves for payment. Signing
invoices with unknown background did not seem right or
ethically acceptable to her. She felt it is her responsibility
to investigate this situation further despite her supervisor’s
advice to drop the matter.
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EMMA’S INVESTIGATION
possible methods to show even the slightest improvement
in the company’s margins and a continuous decrease in
EastJet’s costs. One strategy was to make sure the company
paid as little in taxes as possible. Rebecca explained, “All
catering services related to the flight crew are actually
subject to additional taxation for EastJet. There’s a tax-free
limit of $10 a day per crew member, but the actual catering
cost is way above this limit, and because of that we are taxed
considerably more, around 30% more, compared to what
we would pay for overall crew catering costs. In order to
avoid these extra taxes, we agreed with Sky Catering that
the amounts over the $10 limit would be billed separately
as ‘extra passenger services.’ It’s wrong, I know, but nothing
can be done, I guess. Sky Catering will never decrease the
prices, and the flight crew union will never agree to changes
in the meal services.” (See Table 2.)
Emma was shocked by what Rebecca told her. She
decided to discuss it with her closest friend, Susan Smith,
who worked as a senior auditor in a major audit company.
Susan confirmed that there are certain limits established for
crew-related expenses and sent Emma an excerpt from the
appropriate law, Foreign-Based Tax Code: Taxation of Civil
Service Aircraft Crew Collective Catering Needs:
Emma researched the catering services agreement to
determine the nature of the invoice. No additional services
or terms seemed to be discussed in the agreement, but she
did find that the prices for crew meals and crew catering
services were not listed in the general agreement’s appendix.
To get more information, she called Bob Stark, financial
director of Sky Catering, to ask why essential information
was missing from the agreement and to clarify the contents
of the strange invoice. Bob was quite unconcerned about
the situation, saying, “If something is missing from the
agreement, then we of course should fix that. From our side,
however, we always make sure to have all the important
information in the agreement. And I am 100% sure that all
the services delivered are invoiced correctly.” Bob hurried to
end the conversation.
Emma was extremely confused. Nobody would give her
a clear explanation about the mysterious invoice. Her last
hope was EastJet’s Chief Accountant Rebecca Adams, who
had worked for the company for seven years and should
be aware of the accounting processes and policies related
to catering services. At first, Rebecca seemed a bit nervous
about Emma’s questions, saying, “I think you should have
been told about all these matters before. Your predecessor
was aware of all this, and Jillian knows as well.”
Rebecca explained what was going on. As EastJet
started facing continuously diminishing profit margins
and increasing pressure to improve its financial stability,
the company’s chief financial officer (CFO) employed all
“Tax-free ration is $10 per day per person. If the
employer compensates the catering cost $10 per
day per person, the income is not taxed. If the
daily catering cost per person is more than $10, the
amount exceeding the tax-free limit is additionally
taxable under fringe benefit taxation law.”
Table 2: Flight Crew Catering Cost Calculations:
Average Number of Flight
Crew Members on Duty
Current Price per
Crew Member per Day ($)
55
Tax-Free Allowance ($)
16.50
Current total cost per day
Fringe Benefit Tax
10
$907.50
Current total cost per year
$331,237.50
Fringe benefit tax to pay per year
Total current cost per year
$43,060.88
$374,298.38
Total cost per day if price = $10
$550.00
Total cost per year if price = $10
$200,750.00
Difference in costs
$173,548.38
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6. What are the possible outcomes in this case? Discuss the
After listening to Emma’s story, Susan suggested Emma
write an anonymous letter to the related authorities and
reveal the fraudulent practices. This would enable her to
remain unknown as a whistleblower so that she would not
lose her job. Emma understood that revealing fraudulent
practices could result in unprecedented regulatory actions
against the company, including fines, ruined brand name,
and possible hysteria in the mass media if the information
became public. At the same time, she also felt an ethical
responsibility to take further action to resolve the matter.
In addition, Emma was truly concerned about becoming
the whistleblower and losing her job at EastJet. Emma
decided to research her ethical responsibilities and
obligations as a CMA. She read the IMA Statement of Ethical
Professional Practice and decided to follow the steps outlined
in the section titled “Resolution of Ethical Conflict” (see
http://bit.ly/2b5y21o).
Please discuss the following questions before learning
Emma’s actions.
potential consequences of each outcome. What can be
done to prevent similar problems in the future? Propose a
plan of changes to implement at EastJet and analyze what
obstacles can occur when implementing these changes.
TAKING A STAND
After studying the IMA Statement of Ethical Professional
Practice, Emma followed the steps outlined in the
“Resolution of Ethical Conflict” section, and called the
IMA Ethics Helpline. Emma discussed the problem with an
ethics hotline counselor. The helpline is free and provides
confidential guidance on ethical issues. After a preliminary
discussion of the problem to determine the kind of ethics
matter being reported, an ethics counselor will respond to
the caller. Confidentiality is maintained at all times. The
counselor will not provide a specific resolution but will
explain how the dilemma relates to the provisions of the
IMA Statement. As a result of her discussion, Emma contacted
the company’s audit committee and revealed the fraudulent
actions. She refused to sign approvals of the invoices unless
the issue was resolved in an ethical manner.
Coincidentally, EastJet’s CFO left the company during
the following weeks, and a newly assigned CFO promoted
the ethical decision making. He actively engaged in the
resolution of this conflict, and hired independent auditors
to advise EastJet on minimizing the negative impacts of
unethical behavior.
CASE QUESTIONS
1. Discuss the major ethical problem Emma encountered
in her new workplace. What could be done in order to
prevent such a dilemma from occurring in the first place?
What main premises might have contributed to the
development of unethical decision making at EastJet?
2. What parties are involved in the situation described? Is
unethical decision making silently supported only by
EastJet employees? Analyze possible economic, legal,
and ethical consequences of the unethical decision
making for all the parties and central characters involved.
ABOUT IMA®
IMA, the association of accountants and financial professionals
in business, is one of the largest and most respected associations
focused exclusively on advancing the management accounting
profession. Globally, IMA supports the profession through
research, the CMA® (Certified Management Accountant)
program, continuing education, networking, and advocacy of the
highest ethical business practices. IMA has a global network of
more than 80,000 members in 140 countries and 300 professional
and student chapters. Headquartered in Montvale, N.J., USA,
IMA provides localized services through its four global regions:
The Americas, Asia/Pacific, Europe, and Middle East/Africa.
For more information about IMA, please visit www.imanet.org.
3.Discuss the three steps outlined in the “Resolution of
Ethical Conflict” section of the IMA Statement of Ethical
Professional Practice. Did Emma follow these steps?
What other actions could or should she have taken to
successfully resolve the ethical conflict?
4. Did Susan give good professional advice to Emma? Why?
If you were Emma, what steps would you take in the
situation described? Why?
5.What are the four principles outlined by the IMA
Statement? Discuss how these principles promote ethical
discipline in the workplace. Why is ethical behavior
important for a company’s employees? Is ethical behavior
important
for a sustainable business practice?
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