Airline

Budgeting

Elizabeth Conley

ITT - Project Management

What is Budgeting

A written plan or

estimate of future

income or

expenses of an

activity covering a

definite time

period.

The word BUDGET

taken from the old

French word

bougette, means

purse.

Types of BudgetsIncremental

Budgeting

Increase on the

previous year

budget to a % or

on a fixed value

and converting it

to the next years

budget.

Zero Based Budgeting

Process of building up the budget as fresh from 0 by evaluating the socio-economical, business conditions, find out alternatives to arrive on a real time expenses or revenue.

How Airline

Budget DiffersAirline Budget is slightly different from the budgets of other business types. Basically the numbers are purely statistics, %, and available resources.

Zero Based Budgeting (ZBB)

Zero based budgeting is a technique of planning & decision making which reverses the working process of traditional budgeting.

In traditional incremental budgeting, departmental managers justify only increases over the previous year budget & what has already been spent is automatically sanctioned.

By contrast, in zero-based budgeting, every department function is reviewed comprehensively & all expenditures must be approved, rather than only increases

No reference is made to the previous level of expenditure. Zero-based budget requires the budget request be justified in complete detail by each division manager starting from the zero-base.

The zero-base is indifferent to whether the total budget is increasing or decreasing.

Advantages of ZBB in Airlines

Technological Changes

Aviation is a field of advanced technology .

Automation brought huge amounts of reduction in

manual tasks. High tech equipments & services are

added to operations & infrastructure. This will

change the behavior of operating costs.

Cost Effective Alternatives

Many cost effective alternatives are

available in airline operations. IN ZBB,

Business Managers will prompt to think

cost effective alternatives.

Changes in the Economical

Conditions

While thinking about ZBB, department

Managers can consider the possible

socio-economical conditions.

• Air transport drives economic & social progress

• It connects people countries & cultures

• It provides access to global markets

• It generates trade & tourism

• It forges links between developed & developing

nations.

Activity Based Cost (ABC)

Analysis

During ZBB, in order to justify the expenditures business,

managers will run through the “activities” through which we can find out the items of high cost impact & the method of

controlling the cost.

Advantages to ABC systems

used in other Businesses

• Link operating behavior to Product & Customer segment cost

• Support existing & new product pricing decisions

• Report consistent & reliable profitability results by product

Behavior Cost Profitability Value

Base of Airline Budget Process

•Blue Print of future operation. First step toward Budget.

•Frequency of operation, type of A/C used, available seats for sale, capacity to carry cargo available on it.

Operating Plan

•Revenue projections based on the available seats & expected load factor with an average cost @ ticket @ class @ section

•Revenue adjustments from the Customer Loyalty programs

•Ancillary revenue from onboard sales, souvenir shops, etc.

Revenue Projection

•CAPEX commitments such as A/C purchases, pre-delivery payments, Engine purchases, Rotables, spares, stocks, etc.

•CAPEX are HUGE numbers therefore have a big impact on Budgets

Capital Committments

Airline Budget Approach

Centralized

Airport charges

Handling charges Overflying/navigation

Catering

Fuel & technical

Manpower/crew cost

Taxes & insurance

Foreword depreciation

Departmental

Admin Expenses

Temp manpower

Phone/utilities

Local station exps

Departmental CAPEX

Local taxes

Projects

Other expenditures

Process of activity based cost

(ABC) analysis

ACTIVITY

UNIT COST ANALYSIS

RELEVANCEUSAGE

REDUCTION

COST EFFECTIVE

ALTERNATIVE

ABC OVERVIEW

Airlines have a highly efficient network of

shared assets that constantly adjusts to

meet demand

Resources are shared across product lines

making it difficult to identify unique cost

differences

Analysis of pax market segments provide

a framework to answer such questions as:

THE CHALLNEGE

Insights from ABC system support

many current applications

View of cost & profitability of a division by product across the network.

Activity based forecasting tointegrate financial business plans

with profit objectives.

Database of cost information for internal cost comparison analysis.

Tool to ensure appropriate pricing.

Monitoring System to track performance by customer & account rep.

Data mining techniques to segment customers

Performance

Measurements

Planning &

Forecasting

Cost Reduction

efforts

Pricing

Scorecard

Budgetary Control

Budgets without proper budgetary control

have no use!

Monthly variance analysis should be

forwarded to the cost centre managers

to explain the variances.

Considering the recurrent changes in the

airline operations, it will be good to have

periodical budget reviews.

SMOOTH TAKE OFF

PLAN CONTROL

COST UNDERSTANDING

CONCLUSIONIn todays competitive market, companies will not survive without a firm understanding of product cost.

Cost is measured at a fine level of detail.

Detailed work measurement standards encourage improvements.

Combining cost detail & work measurement is a leading edge of ABC analysis.

Allows airline to accurately measure financial performance & make effective decisions in pricing, cost control, quality improvement, reengineering, forecasting, & customer relationship management.

REVIEW

“A budget tells us what we

cant afford, but it doesn’t

keep us from buying it.”William Feather