Budgeting: designing the necessary inputs to achieve goals Jul/Aug 2002

Successful management of an airline, or of any corporation for that matter, requires effective planning, budgeting and control. Moreover, airlines provide one of the best examples of the need for these disciplines because achievement of profit objectives is often elusive in the face of revenue and cost volatility, operating and financial leverage, as well as competitive pressures.

Planning determines the nature, design and quality of the product to be brought to market. The Operating Budget analyses and applies the optimum mix and utilisation of resources required to create the planned product. In this sense, planning creates the goal of the corporation, whereas budgeting designs the necessary inputs. Control is the discipline essential to insure that input usage is effectively monitored.

An airline’s flight schedule is the culmination of the planning process. Given available assets, rights, obligations, regulations, resources and personnel, a carrier attempts to offer desired services to the public, of a quality necessary to establish and maintain a favourable niche among its competitors. The flight schedule displays what the airline is, and what the airline wants to be.

The subject of this series of articles is primarily operational budgeting, thus the subjects of planning (scheduling) and control (monitoring) will be discussed only briefly. Suffice it to say that the planning function is split between two disciplines: market research and schedule optimisation.

Market research determines the where, when, quantity and value of traffic available to the airline; schedule optimisation attempts to utilise aircraft assets to capture as much of this traffic as possible. Market research deals with significant uncertainty and unknowns, scheduling relies on asset utilisation, time, mathematical models and precision. Control is the policing technique expended to adhere to hoped–for expectations. It is a human process in which people (managers) are measured against their organisational objectives and commitments.

A financial exercise

Budgeting is a financial exercise, governed by accounting disciplines and rules. The process involves the creation of a financial model of what the airline hopes to achieve, and hopes to be able to report to the airline’s owners and lenders. The annual budget is produced in profit/loss form, with corresponding balance sheets and cash flow forecasts.

This model becomes the performance commitment of management, and the expectation of company owners and lenders. Normally, detailed budgets are prepared on an annual basis to encompass a complete seasonal cycle. Actual financial performance is routinely compared to budgeted expectations, deviations analysed and explained, and adjustments to operations made as necessary.

Budgets are also often prepared two–to five years out. However, these "budgets" tend to be probabilistic forecasts for long term goal creation, equipment acquisition requirements, and capital raising purposes.

Long–term budgeting tends to be relatively vague, in less detail and flexible. With so many business variables impinging on potentially volatile results, long–term budgeting must remain fluid, and viewed with the uncertainty inherent in future trending.

All airlines engage in budget preparation in some form and with varying degrees of management participation. At some carriers the "budget," no matter how detailed, is created by a small, select group of accounting experts who construct a forecast of future financial events. The resulting proforma performance estimate often guides senior managers.

Without wide company inter–disciplinary participation, the budget fails to become the airline managers' "commitment."

While the proforma form of budgeting is better than none, it fails to act as the cohesive force necessary to achieve objectives.

Some carriers assign specialists within each major company department the task of preparing spending forecasts. These departmental forecasts are then consolidated at the corporate level, and when paired with the market research revenue forecast, a preliminary annual profit estimate is achieved. Still, this method really falls short of the ideal process because it fails to involve line managers specifically. The accounting specialists become the crutch separating those responsible for managing work from those who estimate costs and spending.

The importance of involvement

Most successful carriers engage the lowest managerial levels in the budgeting process. In this way each manager is made aware that the tasks and people he or she supervises cost money. And because of this awareness, motivation to become increasingly efficient can be instilled through establishment of individual goals and objectives.

Dissemination of budgetary responsibility to all levels of management is the best way to get the job done.

Managers expect feedback. If a supervisor has made the effort to provide his company with the detailed spending forecast for which he/she is responsible, frequent comparison of actual spending to the budget is obligatory. Herein finds a source of frequent difficulty. For the budget process to work, the airline’s finance department must have the systems in place to provide accurate periodic (monthly) profit/loss statements for management scrutiny.

The monthly account closing schedule must be sacrosanct. Ideally, monthly account closings and budget comparison print–outs will occur together. The process should be automated and simultaneous. Without guaranteed, accurate and timely feedback of actual versus budget spending results, the cohesive and driving force potential of the budget reporting process falls apart.

Budgeting is unfortunately heuristic, and thus lengthy, time consuming, and very often frustrating. Recall that the process begins with the planning effort to create the airline’s product, or schedule. The airline’s flight schedule attempts to capture maximum revenue within the limits of time and resources.

As created, the schedule produces what is known as the "Level of Operations."

The "Level" describes the schedule in cost–driving terms: number of hours flown by equipment type, number of takeoffs and landings at individual airports, the times of day landings occur, length of equipment time on–the–ground, aircraft routings, assumed aircraft acquisitions and retirements, ASKs, etc. Dissemination of the Level of Operations to all airline departments is the event that initiates the annual budgeting process.

Each airline department, or "responsibility center," then must craft its departmental spending in conformance with the Level. For example: the Customer Services Department must staff the ticket counters at each station to conform to scheduled arrivals and departures; the Flight Operations Department must estimate flight payrolls given union contract obligations, and ensure that enough qualified cockpit crews and cabin attendants are available; the Fuel Management Group must forecast the cost of fuel and oil purchases at all locations at appropriate forecast prices; the Maintenance Department must plan for all aircraft maintenance events, scheduled and unscheduled, and the cost to fix repairable parts, etc. No cost element should be overlooked.

And next...

The next part of this serialised article will deal with the duties of budget builders and the difficulties of budgeting tasks and events. The significance of the processes, the corporate mindset that can develop and far reaching benefits obtained by the use of the budgeting discipline will be explained.