Conference PaperPDF Available

Choosing financial Key Performance Indicators: the Airline Industry case

Conference Paper

Choosing financial Key Performance Indicators: the Airline Industry case

Abstract and Figures

Selecting relevant Key Performance Indicators (KPIs) involves an assessment of both cost-and revenue-driven measures. Cost driven allocation usually predominates, due primarily to a traditional accounting mindset coupled with the need for cost savings in the current eco-nomic environment. Using data from the airline industry in all of the major markets in the world, this paper demonstrates that revenue-or profit-driven KPIs, consistently applied, will likely lead to bet-ter financial performance than "flying" the business based on cost-driven metrics or those, representing a mixture of revenue target and cost-driven metric. Specifically it examines the effectiveness of models that characterize performance based on two performance indicators in particular – seats and passenger-kilometers. We document strong evidence indicating that Operating Profit per Passenger or per Pas-senger-Kilometer is the most significant variable when it comes to explaining the variation in airline profitability, arriving at the conclusion that despite the traditional belief that measuring per seat is only appropriate for point-to-point destination services typically provided by Low Cost Carriers, the same model also fits Full Service Network Carriers and, thus, can be used by them as a meaningful tool for financial targeting and strategic decision-making. Acknowledgements This paper would be incomplete if it did not contain the fullest expression of my gratitude to Professor Dr. Hany Shawky, who has so generously given of his time and expertise; and not only with this paper but throughout my PhD project. He has prompted and men-tored my attempts to achieve a level of excellence with an open and gentle manner that created an environment for ideas to bear fruit and for me to believe in my own potential. His contribution has been invaluable and I thank him most sincerely! 2
Content may be subject to copyright.
A preview of the PDF is not available
Article
Full-text available
The study is aimed at analysing how social and economic development indicators, global and regional economic indices are influencing low-cost carriers (LCC), AirAsia Group Berhad (AAGB) in particular. It is crucial not only to define the impact-factors, but to embed them in management framework for further decision-making. Passenger traffic is the main indicator of LCC performance, unlike the Full-Service Network Carriers (FNSC) that taking advantages on both passengers and freights. However, both categories depend on the macroenvironment and business environment dynamics, and KPIs should be reconsidered to face the current global challenges. The global GDP, GDP per capita are commonly used to access the economic and social development trends, the passenger numbers per annum, unemployment rate and else are used to understand the status of operations in LLC performance management. This study deals with several overlapped categories of research, such as low-cost carriers business model, impact-factors of air transport development, global trends in several industries. The research methodology is combination of comparative analysis, correlation analysis, regression analysis and forecasting, using secondary data from annual reports and quaternary financial reports. The comparative analysis gave us the understanding of the general performance trend of the group and subsidiaries. One of the study components is the correlation analysis that revealed the most correlated factors for the economic development of AAGB, such as global GDP, regional GDP, regional GDP per capita, population growth. The global and regional dimensions were presented in the research to reveal what affects the airline performance the most. Global GDP is the most correlated indicator for the global and regional development within AAGB, and the regional GDP per capita comes the second by its significance. The population size has a great influence on performance indicators (globally and regionally), and if this indicator is taken into account for forecasting the potential growth is expected in the next five years. These findings enable to design the business-model of LLC more accurate in accordance to the forecast analysis towards innovative costs decisions.
Article
Purpose This study explains how a multi-market firm develops the motivation to forbear from competition. Design/methodology/approach A two-way fixed effects model with Driscoll and Kraay standard errors investigates the research question with panel data collected from the U.S. scheduled passenger airline industry. Findings Results demonstrate that although the interaction of multi-market contact with strategic similarity impairs a firm’s forbearance from competition, the same interaction promotes it as firm performance deteriorates, supporting the hypotheses. Research limitations/implications Performance explains not only how forbearance emerges out of coincidental multi-market contact but also reconciles the mixed evidence for the impact of the two-way interaction between multi-market contact and strategic similarity on forbearance. Practical implications Antitrust authorities should pay more attention to low performing firms than to high performing firms in their investigations. Also, managers of multi-market firms should identify multi-market rivals with low performance as targets for the initiation of forbearance. Originality/value This study revises the mutual forbearance theory to align it with the accumulating empirical evidence that otherwise refutes its assumption and thereby improves theory’s descriptive and predictive power.
Article
Full-text available
Quantifying subjective aspects is a difficult task that requires a great dedication of time from researchers and analysts. Nevertheless, one of the main objectives of it is to pave the way for a better understanding of the focused aspects. Fleet standardization is one of the subjective aspects that is extremely difficult to turn into numbers. It is of great importance to understand the benefits that may come from a higher level of standardization for airlines. A more standardized fleet may represent lower costs of operations and maintenance plus a much better planning of routes and flights. Author's Notes: This study presents the first step on developing an index that would allow senior airline planners to compare different fleets and also simulate some results from maintaining or renewing their fleets. The index is herein called the Fleet Standardization or IPF (for the initials in Portuguese of Indice de Padronizacao de Frotas). Although being a preliminary study, the results obtained may already be tested to compare different fleets (different airlines) and also analyze some possible impacts of a fleet renewal before it takes place. Therefore, the main objective of this paper is to introduce the proposed IPF index and to demonstrate that it is inversely proportional to the number of different airplane models, engines and other equipment, such as avionics.
Article
Full-text available
While management-accounting research continues to focus on cost drivers, research has recently begun to examine revenue drivers. We review the research on revenue drivers with reference to five revenue-driver models in the accounting literature. The revenue drivers identified by quantitative empirical research are located in a revenue-driver model based on their levels of analysis (customer, product, organization, industry) and other characteristics of a revenue driver–revenue relation. Implications of this model for research are discussed.
Article
Recent pressures on airline profitability have increased interest in cargo revenue management (RM). In particular, some industry figures have proposed that passenger and cargo RM should be integrated, either through use of a single revenue management system (RMS) or through a single RM team. This paper argues that these approaches are unlikely to succeed. Instead, it proposes a simple business process framework for coordinating passenger and cargo access to aircraft capacity through the use of displacement-based transfer prices.
Article
Purpose – The purpose of this paper is to outline a range of short- to medium-term recession-specific strategies designed to drive growth and ensure that a company survives this downturn and emerges from it competitively advantaged. Design/methodology/approach – The paper examines recession-specific strategies designed to drive growth and ensure that a company survives. Findings – Even after the eventual economic recovery, heightened uncertainty and volatility will remain permanent features of the business environment. As a result, resilience – the ongoing ability to anticipate and adapt to critical strategic shifts – will become an increasingly important driver of future competitive advantage. Given the likelihood that the strategic environment will remain uncertain even after the recovery, the company must institutionalize the lessons learned during the downturn. And go further to adjust the customer offering and business practices (new services, new features, new pricing models, enter or exit markets, band with other businesses in cooperative relationships). Practical implications – The consensus is growing among economists, business leaders, and governments that the world is in the midst of a prolonged slowdown of unpredictable duration and that even when the upturn comes, the post-crisis strategic and operating environment will almost certainly be quite different. Originality/value – The authors warn that some of the classic strategies for gaining competitive advantage – for instance, focusing on scale – have been losing their power. Senior managers need to heed these warnings when they review their growth and survival plans.
Article
Over the past decade, international full service airlines have moved strongly towards alliances as an organisational form. This reflects, at least in part, the inability of the industry to rationalise through cross-border mergers and acquisitions, as the international traffic rights required for operation are tied to the Chicago Convention of 1949, and generally require the majority of an airline's ownership to remain in the hands of its nationals. While airline sales teams identify alliance membership as a critical sales tool, the value of this alliance membership is not always perceived as equally valuable by customers, nor is it captured by airline pricing models. This paper uses analysis of net pricing in the highly contested Sydney to London market to demonstrate that the perceived value from alliance membership is not captured in business class airfares.Journal of Revenue & Pricing Management (2005) 4, 219-227; doi:10.1057/palgrave.rpm.5170143
Article
Midwest Airlines, as a medium-sized, specialty carrier operating in the midst of the highly competitive and dynamic US domestic market, must strive for both the cost efficiencies and the market competitiveness of the US majors and the new low-cost entrants. Pricing is one area where this dynamism is most noted, with huge numbers of fare and rule changes being implemented every day. Without significantly increasing staff, how can one ensure that the airline's fares are competitive in all markets? The potential for lost revenue is very large. Midwest Airlines decided that it was preferable to maintain a small, top-class pricing group but to leverage their effectiveness with advanced systems support, rather than increasing personnel, with the challenges of retaining efficiency and effectiveness that this brings. This paper describes the process, from both a business and a selection viewpoint, that was followed to implement the fare analysis control and tracking system-automated fares module (FACTS-AFM) product from SMG Technologies successfully into the Midwest Airlines pricing department. Although this process was completed nearly three years ago and applied specifically to the US market, the lessons learnt and the actions taken are just as relevant today and can also be applied to many of the international airlines still using largely manual processes.Journal of Revenue & Pricing Management (2003) 2, 116-119; doi:10.1057/palgrave.rpm.5170056