Aviation Planning

What is best-in-class aviation business planning?

Done correctly and with the right software tools, true aviation business planning gives airlines the agility to succeed. It puts them in control of budgeting and forecasting, providing true visibility and foresight.

Making the breakthrough from cumbersome excel dominated planning processes to best in class normally follows the stages illustrated in the following maturity matrix.

‘Forecasting/budgeting Maturity Matrix’

Research has shown that there is a positive correlation between the forecasting maturity of a business and its competitiveness.

Full Enterprise Integration

Aviation combines several different business sectors, each with its own unique planning, performance, reporting and compensation practices and requirements. There are many interrelated parts, changing all the time.

Best practice dictates that an enterprise adopts a single flexible planning and decision support system that is aligned with business strategy and integrates across all the functions of the enterprise.

Business units across the aviation sector have a high degree of interdependence. Change in one area impacts the management of service delivery, productivity, cost and profit in others.

Management in each unit need to be able to act in harmony with clear insight into the full impact of their decisions across the entire organisation. For example, plan changes in the revenue unit can affect many, if not all, other business units.

Yield changes, or decisions to open or close routes, have implications for flight operations, airport operations, catering, fleet and MRO. The effects can be far-reaching and potentially impact operations, profitability and cashflow. Operational impacts include maintenance scheduling, passenger and baggage handling, as well as the number and configuration of aircraft.

For example, fuel price movements and foreign currency movements impact route viability, profit contribution and net operating profit.

In MRO, decisions on engineering or maintenance watch changes or severity can impact unit cost and net operating profit. Investment in rotable parts inventories needs to be optimised for complex factors such as location, turnaround time and AOG cost. Some estimates put AOG cost as much as $150,000 per hour.

Management can make better and more profitable decisions when they are able to assess their choices with full and early foresight.

In a competitive market with tight margins, the key to managing profitability is to focus on passenger yield in each part of the value chain. Insight into the dynamics of revenue and cost, by dimensions such as aircraft, route and often by origin and destination gives airlines the knowledge to maximise return on investment and outperform their competitors.

Driver Based Planning

Driver based planning, an approach that bases financial forecasts and budgets on key operational drivers, supports integrated planning and enables much greater planning agility, responsiveness and accuracy

Top down, bottom up budget differences are often fudged because neither approach is aligned fully with both strategy and operations.  Driver based planning can enable the insight needed to truly reconcile these differences.

As there is no such thing as the right number of drivers the focus should be on selecting the right drivers. The right drivers are those that are used by operational units to measure performance and compensation plans. Driver based compensation should be a key part of every planning model. For example, for low fare airlines, whose strategy is to generate profitable revenue at every stage of the value chain, auxiliary revenue/gross profit per pax should be used as both a planning and compensation driver.

The following illustration shows many of the drivers underpinning an integrated driver based planning model.

Multi Dimensional Profitability

When business managers have a detailed understanding of what drives costs in their business, they can know if their product or services offerings are profitable. They also know if resources are allocated optimally and if service/product mix and pricing are optimised for profitable growth.

For business leaders, using insights from multi-dimensional business profitability reports can be a game changer. With multi-dimensional insight into which services, products or customers are most profitable they can make much more informed decisions about what to sell, to which customers in what markets and at what price.

For many managers, particularly in service industries, their financial reporting and planning environment has been lead by regulatory reporting requirements, tax strategy or by cost centre budgeting models which lead to complex inappropriate cost allocation models that don’t reflect how cost is consumed within the value chain. This financial information does not accurately answer questions about the true unit cost of services, process or products.

How can an airline leadership team make sensible and informed decisions without knowing in detail the true total revenue, cost and profit of a particular route, a particular aircraft on that route or different customer classes on that route. Without having this information for origin and destination how can they know which routes that appear less profitable or loss making are in fact net contributors to profit. How can they align operational objectives, plans and compensation schemes to influence behaviour that drives true profitability?

Setting up a new structure to support multi dimensional net profitability may not always be easy but once in place great insights can take place at lightning speeds. Every month the profitability of every customer and every product can be available almost in real-time and plans can be re-cast just as quickly to understand the bottom line impact of customer wins/losses, new offerings, new routes, competitor moves, etc.

External Data, Benchmarking, Optimisation and Visualisation

The more mature planning environments use external data to drive aspects of their business and scenario planning. Airlines with leading edge planning systems integrate macro-economic tourist and airport traffic data to baseline their demand plans which in turn drive routes, sales, manpower, operations, maintenance and capex plans. These plans can be instantly flexed for different scenarios by simply adjusting a small number of KPI drivers.

Integrating external foreign exchange and/or interest rate data can support automated real time understanding of the impact the changes will have in reporting currencies.

Best in class enterprises don’t necessarily use external benchmarks as these are often not trustworthy. Even when external benchmarks are accurate comparing forecasts are not always comparable across different businesses.

In the airline industry high level benchmarks, such as those in the table below, are generally more reliable than in other industries but few airlines have incorporated these as part into a driver based integrated planning/reporting system.

The airline industry has a relatively successful history of applying optimization approaches to their many scheduling problems but optimisation plays little or no role in their financial planning systems. Best in class planning systems can leverage optimisation techniques and integrate with optimisation software in areas such as fare classes, flight schedules, fleet plans, aircraft routes, crew pairings, gate assignments, maintenance schedules and inventory, food service plans and inventory, training schedules, and baggage handling costs. 

Data visualisation in the form of insightful personalised self-service dashboards is an essential qualification for the best in class accolade. Indeed, best in class leaders have already started the move towards full prescriptive analytics.

Prescriptive Analytics

According to Gartner, Prescriptive Analytics is a form of advanced analytics which examines data or content to answer the question “What should be done?” or “What can we do to make ___ happen?”, and is characterized by techniques such as graph analysis, simulation, complex event processing, neural networks, recommendation engines, heuristics, and machine learning.

Best in class financial forecasting supports the use of prescriptive analytics in decision making. Although not currently fully deployed directly as an integral part of financial planning systems, best in class companies and vendors are actively looking at ways to incorporate more of these powerful features in their models and applications.

 Technology

Best in class cannot be achieved without the right technology. The big question is how do you choose the right technology?

To add agility and speed to your planning and reporting processes choose a modern cloud based purpose built solution – you need a solution that is designed from the outset for best in class integrated driver based planning, not one that is patched from old legacy systems or is an add on to another solution.

Make sure your finance leadership team retain control of the project, use IT only as a support service.

Given the cyclical nature of finance processes accountants are not always the project managers. Ideally you should appoint a strong project manager who is qualified and experienced in an established project management methodology.. Make sure the project manager reports directly to a senior member of the finance leadership team.

Experience is a good starting point in vendor selection. You want to work with a provider that understands your business – one that has a good grasp of the airline industry specifically and of the optimal way to design and implement complex planning models. This way, you benefit from best practice not only in your sector but across other industries that may be experiencing similar pain points.

The right partner should have strong skills in both finance and technology. Many finance projects struggle or fail because they are implemented by IT vendors using only generalist business consultants and not accountants. Make sure your vendor has strong accounting/finance skills as well as IT expertise.

The marriage of finance knowledge and technology expertise marks out the best partners.

Faster Financial Reporting

Slice and dice your management and financial data with corporate finance software, or drill down into details with self-service reporting on the web and in Microsoft Office.

LEARN MORE

Dashboards and Analysis

Track and share KPIs with self-service, interactive dashboards. Financial analytics software gives you the ability to understand and tell a complete story with financial and operational data.

LEARN MORE