2. 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.
3. Types of Budgets
Incremental
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.
4. How Airline
Budget Differs
Airline Budget is slightly
different from the budgets of
other business types. Basically
the numbers are purely
statistics, %, and available
resources.
5. 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.
7. 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.
8. Cost Effective Alternatives
Many cost effective alternatives are
available in airline operations. IN ZBB,
Business Managers will prompt to think
cost effective alternatives.
9. 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.
10. 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.
11. 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
12. 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
14. Process of activity based cost
(ABC) analysis
ACTIVITY
UNIT COST
ANALYSIS
RELEVANCE
USAGE
REDUCTION
COST
EFFECTIVE
ALTERNATIVE
15. 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
16. Insights from ABC system support
many current applications
View of cost & profitability of a
division by product across the network.
Activity based forecasting to
integrate 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
17. 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.
19. COST UNDERSTANDING
CONCLUSION
In 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
20. “A budget tells us what we
cant afford, but it doesn’t
keep us from buying it.”
William Feather
Hinweis der Redaktion
There are many types of budget practices available. However, I wish to explain 2 major types of budgets. These are mostly in use with airline companies.
Incremental Budgeting – ie: increase of expenses budget to the % of next years increased planned sales by a %.
Zero based Budgeting – ie: Analyzing the expenditure based on the changes in the market, cost effective, and qualitative alternative.
Airlines production unit are what??? Aircraft & routes
As mentioned in the previous point
Before creating business plans, it is important to scan the external environment. IE: an investigation of the social, legal, economic, political, & technological influences (SLEPT analysis)
IE: High Oil Cost, Maintenance cost, etc.
Whole set of costs will be linked to the operating plan
In an airline set-up, we can initiate budget set-up in 2 lines: Centralized & departmental. Examples of certain cost elements in each are:
What routes are needed to get the pax to their destination.
What information resources were required
What share of resources were used for that pax travel
What did these activities & resources cost?
Budgetary control simple now due to automation. 1. Generated monthly
Viewed by business unit & product
Electronic report format
Data allows multi-period reporting/format
Information in the ABC system is continually updated