A decades-old system for cost classification and reporting inherited from industrial era still dominates management practices across the airline industry. Airlines continue to use this system partly driven by collective inertia and partly by the lack of alternative solutions that would empower decision makers with understanding of true origins of operating costs, essential for making informed cross-functional decisions of strategic and operational nature. Traditionally, costs derived from financial reports are statistically distributed to segmented business units in order to be calculable at functional levels and easy to control. This practice ignores the fact that costs are more than just sums of numbers - they are nonlinear, interrelated, and consequently cannot be measured in a conventional way. This is why answers to questions related to true effectiveness of cost saving measures, route network, aircraft and hub operation, outsourced services, or investment in additional resources, remain stumbling blocks for improvement in cost efficiency and operational performance. To inject more life into the planning processes, upset by limitations of traditional costing system, senior executives need to be regularly informed about the cost critical but avoidable changes in planned operations and their root causes. This will bring profound changes in the way airlines plan and control their business resulting in measurable improvement in operational and cost efficiency. Jasenka Rapajic www.beyondairlinedisruptions.com

1. Jasenka Rapajic | www.astuteaviation.com
1
How to Overcome
Limitations of Traditional
Costing Practices
Jasenka Rapajic
Astute Aviation

2. Jasenka Rapajic | www.astuteaviation.com
2
A decades-old system for cost classification and reporting inherited from industrial era still
dominates management practices across the airline industry. Airlines continue to use this
system partly driven by collective inertia and partly by the lack of alternative solutions that
would empower decision makers with understanding of true origins of operating costs essential
for making informed cross-functional decisions of strategic and operational nature.
Traditionally, costs derived from financial reports are statistically distributed to segmented
business units in order to be calculable at functional levels and easy to control. This practice
ignores the fact that costs are more than just sums of numbers - they are nonlinear, interrelated,
and consequently cannot be measured in a conventional way. This is why answers to questions
related to true effectiveness of cost saving measures, planned route network, aircraft and hub
operation, outsourced services and investment in additional resources remain stumbling blocks
for improvement in cost efficiency and operational performance.
Answering these questions by using cost apportioned to operational units without knowing their
true origins turns the decision making into a pretty risky process. This is not only because this
information is simplistic, but also because it is just a historic snapshot of data collected mainly
at the time of budget drafting. As soon as the ‘budget schedule’ starts to change (normally
months before the start of a new scheduling season), it triggers changes in cost matrix, making
the planned costs even less suitable for decision making.
This may, at least partly, answer the question why airlines with long established practices make
so many changes in planned operations once the season starts. We have seen traditional and
even some low cost carriers incurring significant losses in cost, revenue, and reputation by
reducing the planned operation in the middle of scheduling season due to planning and strategic
errors described as ‘overexpansion’, ‘overstretched capacities’ or ‘to avoid more operational
problems'. What were the causes of such serious misjudgements resulted in change of decisions
made just several months ago? How many of these changes and related losses were associated
with wrong evaluation of disruption risks, or poor understanding of system limitations. How
much does the cost planning process contribute to this situation?
Let's see how the typical process of cost planning looks like.
'The typical process of cost planning starts with projected traffic, cost, and revenue for the
coming year. The company’s finance director then sets a target figure for net results including
the necessary return to shareholders. This is further broken down into management units and
transmitted to senior directors, responsible for squeezing the savings out of their respective
departments. The initial figure may be adjusted several times during the year. There are reviews
after the IATA slot coordination meetings and regular refinements in the light of information
received on forward bookings, interim revenues, and yields. These adjustments can result in
even tighter cost controls. The intense cycle of setting targets and searching for further
departmental cuts is giving an early warning if a director is going to exceed the budget. If this
happens, there are generally negotiations between the director and the CFO’s office to reach a
satisfactory result. The process could be tightened further if necessary using various
management techniques.' (Described by a senior manager of a major network carrier)

3. Jasenka Rapajic | www.astuteaviation.com
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There are the two major setbacks in this process. The first one relates to the sources of
information used for cost projection for the coming year based on too many assumptions. The
second is the management aspect of cost control. Led by the nature of traditional cost
information, managers put too much emphasis on cost control of departmental performance
rather than on interrelated problem areas. As unforeseen problems start to emerge, senior
directors have no other choice but to put even more pressure on middle managers and, through
them on other staff to save more. The next round of ‘unexpected’ events includes the reset of
targets, and continual search for new cuts from already well squeezed departmental cost - good
for justifying efforts, but not good enough for improving business performance.
How can we overcome limitation of these costing practices?
Take the fuel saving measures as an example. The process is usually assigned to the Flight
Operations department. There is a whole set of principles used to minimise fuel consumption
on the day of operation. They include things like flying at optimum speeds and flight levels,
fuel tankering policies, careful weight and balance control or flying the ‘cost efficient’ air
routes (not necessarily the shortest ones). In reality, however, most of these principles cannot
be applied. Fuel consumption will be increased every time when flight cannot operate at
optimum flight level, ATC diverts the aircraft to a longer route or put it on hold over a busy
airport, and in many other situations. According to industry research, about 10% of fuel
consumption is attributable to changes in operational performance. Reducing it at busy airports
is becoming more and more challenging. Still, the fuel-saving programs circulate around these
traditional measures.
Much bigger potential for reduction of fuel costs comes from inside the airline, from people
who decide which airports and routes to fly to, which aircraft can best serve these routes, how
many hours it should fly, when to replace old aircraft or introduce new aircraft type. Then,
there are schedule creators that have to make all these ideas workable by balancing
requirements coming from many different sides inside and outside of an airline, people who
negotiate fuel prices, repair and maintain the aircraft, provide service to passengers, and many
other specialists and generalists – the cost architects. The impact of this process of creation and
preparation for service delivery remains invisible to senior decision makers focused primarily
on cost output expressed in numbers. Reinstating the connection between numbers and their
origins requires a refined, selective approach based on identifying the cost critical operational
problems, bringing them to the attention of cost architects that have knowledge and power to
fix them, and finally pass it on to senior decision makers who can balance their acts to achieve
what is best for the organisation.
The same principle can be applied to every area of business management. Costs allocated to
departmental units shouldn't be an obstacle if we don't stop there. Departments are integral
parts of a company's organism. When problem arises in one part of the body and its root causes
are not identified, the treatment applied to the wrong part will harm other parts the body and
weaken the organism. This reminded me of the case of a European Airline where crew

4. Jasenka Rapajic | www.astuteaviation.com
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shortages were being reported as a cause of costly disruptions for about three months, starting
at the beginning of the new season. The C-Officers received the signal, decided that saving
company's reputation surpasses the investment in additional crew, and some time later 24 new
crew members joined the company. To cut the story short, as there were no signs of
improvement, the top team required a more thorough analysis of the root causes of problems.
The analysis showed that crew shortages were only the last in the chain of disruption causes
triggered by problems with aircraft maintenance, which was related to tight schedules, which
appeared to be the consequence of strategic requirements for increased aircraft utilisation (a bit
over tolerable level). The sunk investment could have been avoided if disruption costs and
associated causes of problems were diagnosed at early stage.
To inject more life into the planning processes upset by limitations of traditional costing
system, senior executives should be regularly informed about the cost critical but avoidable
changes in planned operations and their root causes. This will bring profound changes in the
way airlines plan and control their business resulting in measurable improvement in operational
and cost efficiency.