MIS of Air India Under Dr. Kinnarry Thakkar

A Project Report On "Management Information System” Of Finance In Air India SUBMITTED TO SMT. K.G. MITTAL INSTITUTE OF MANAGEMENT, I.T., & RESEARCH IN THE PARTIAL FULFILLMENT FOR THE DEGREE OF MASTER OF MANAGEMENT STUDIES SUBMITTED BY Ashvani R. Bhagat Under The Guidance Of Dr. Kinnarry Thakkar

Smt. K.G. Mittal Institute Of Management, I.T. & Research Malad (West), Mumbai - 400064

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Declaration I, Ashvani R. Bhagat the under signed that this project report entitled “Management Information System” for Air India Ltd. is my original work. The empirical finding in this report is based upon the information collected by me and not copied from elsewhere. I understand that the detection of any such copying by me for this report is liable to punished in any way the institute deems.

[Ashvani R. Bhagat]

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ACKNOWLEDGEMENT “No man can live as an island, journey through life alone” These words aptly describe the theme of this short but essential page of the report. In our highly professional field, we need help from time to time from the people around us. Be it simple suggestion or little words of encouragement, weird ideas or morale boosting talks. Through these lines I humbly acknowledge the contribution of all those who have helped me and to whom I am highly indebted. I take this opportunity to convey my deep sense of gratitude towards the Director, , Smt. K.G. Mittal Institute of Management, I.T. and Research and Prof. Annie Joseph for permitting me to undertake this project. “I am extremely thankful to Ms. Surekha Neelkantan Ma'am (Sr. Manager Finance)and Mr. Vinod Hejmade (Dy. General Manager) who has extended his full support and co-operation in the successful accomplishment of the project. We would also like to thank Mr. Bindu Madhav Katti(Manager), Mrs. Shraddha Gandhi(Manager, Finance),Mr. Uday Donwalkar, Mrs. Bharati Tambaku(Assistant Manager, Finance), Praful Bhagat, Sujata Broker, for providing me this opportunity for taking up this challenging project. We are also thankful to all the employees of Air India who have helped us in completing the project.

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EXECUTIVE SUMMARY MIS is something we all do. Planning and preparation for the future is not important for an individual, but also for a business. Successful companies are constantly improving their ability to predict their future operations and their related resource requirements, enabling them to adjust their plans as needed and stay ahead of the competition. A Budget is our best estimate of what our business will achieve during the budget period. It is planning tools, which provide us with forecasts of what might happen and also target that we aim to achieve financially. By considering the importance of the MIS, this report focuses on the following areas • Preparation of the Annual Revenue & Expenditure Budget of the Corporation in the form of the booklet for submission to the board for its approval • Intimation of the Annual Budget allotments, to the Outstations as well as the departments at

headquarters

• Comparison of Actual Expenses with the Budget Allotments • Preparations of Monthly Report on Estimated Financial Result for submission to Headquarters • Preparations of Quarterly Report, Performance Budget and other returns for submission to Government Agencies • Preparations of Cost Analysis Statement • Submission of Data to the IATA • Information Required from the Stores & Purchases

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TABLE OF CONTENT Chapters

Particulars

1

Company Profile a. Historical Background

Page No. 7

b. Wholly Owned Subsidiary Companies c. Organization Structure Types of Departments

2

a. Finance Department subsections

12

b. Financial Performance 3 4

Merger of Air India and Indian Airline Research Hypothesis a. Research Methodology

5

22 24

Working of MIS a. Introduction b. Management information System in Air India. c. Role of MIS in the financial Aspects of air India

30

d. Route Analysis e. Preparation of Route Analysis Report 6

Direct Cost / Revenue Ratio a. Introduction

40 b. Preparation Of Direct Cost / Revenue Ratio Statement c. Analysis Of Report Revenue Expenditure Budget

7

a. Work of the section b. Preparation of Revenue Expenditure Budget c. Layout of Preparation of Revenue Expenditure Budget

8

ERP 5

62

a. Introduction b. ERP - Financial Accounting Graph

70

c. ERP SAP

9 10 11 12

SWOT Analysis Of Air India Findings and Interpretations Implementation of Study - Cost Accounting Tool Limitations

75 78 84 89

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Conclusion Recommendation Future Scope Bibliography

91 93 94 96

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15 16

Chapter 1. Company Profile Historical Background

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Tata Son’s Ltd has taken birth in the year October 15, 1932.Mr. J.R.D Tata who was the first Indian to get his license in India. Mr. Neville Vincent a formal Royal Air Force (RAF) pilot came to India in 1929 from Britain. He saw immense potential for aviation in India. By consider future globalization of the world. Mr. J.R.D Tata has taken the first step with an air service. On consultation with Mr. J.R.D Tata Mr. Vincent brought out a scheme to operate an Air service. They got this to the notice of Mr. Peterson a director of Tata Son Ltd. After the approval they operate the first Air service “Karachi to Bombay” via Ahmedabad. In the first full year of operation, Tata airline flew 1,60,000 miles, carried 155 passengers and 10.71 tones of mails. When a light single engine Puss Moth aircraft took off from Karachi with J.R.D Tata as its pilot and landed on grass strip at Juhu. There was no runway, no radio facility in the aircraft or on the ground and no Aerodrome officer on the ground. The Government initially bought 49% of the airline’s shares in 1946, making it a public company and renaming it as Air India. On 8th march, 1948 Air India international has been incorporated then they launched its first service to London via Cargo and Geneva on the date 1st Jan 1949 with a twice weekly service. In the year 1952 the planning commission recommended the nationalization of Air transport industry. This resulted in creation of two nationalized corporations. Air India International which retained its identity and international flag carrier status & Indian Airlines to operate at domestic level.

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WHOLLY OWNED SUBSIDIARY COMPANIES (A) Hotel Corporation of India Limited: As part of the disinvestments programmer an advertisement was issued in all the leading newspapers in India and abroad inviting bids from the prospective buyers for the remaining properties comprising of Hotel Corporation of India, a wholly owned subsidiary of Air India viz the Centaur Hotel Delhi Airport and Chef air units at Delhi and Mumbai.

(B) Air India Air Transport Services Limited (AIATSL): With a view to improve the quality of Ground Handling services to Air India flights and those of Customer Airlines, AIATSL was registered as a fully owned subsidiary of Air India on 9 June 2003. While the Company has been growing at a moderate pace, the year 2005-06 has been a very eventful year with its wings being spread to many Indian international airports. 8

AIATSL took over handling services at Calicut, Pune Ahmedabad and Amritsar in a major way. While comprehensive handling was taken over at Calicut with the commencement of AI Express flights effective 1August 2005, similar arrangement commenced at Pune effective 12 December 2005. Terminal handling was taken over at Ahmedabad and effective 1 May 2005 and 15 May 2005, respectively. Resources for provision of security services have been inducted on three year contract by AIATSL at these locations, the other handling activities are being availed through outsourcing.

(C)Air India Engineering Services Limited (AIESL): Air India Engineering Services Limited was incorporated on 11 March 2004 with Authorized Capital of Rs. 10 cr. and is still awaiting Government’s approval. The Certificate to Commence Business was obtained on 17 January 2006. The Paid-up Capital of the Company stands at Rs.5lacs. It is planned to develop this subsidiary company into a Maintenance, Repair and Overhaul (MRO) facility in this Region with Air India providing the necessary initial support in terms of infrastructure and domain knowledge.

(D) Air India Charters Limited: Air India Express: Air India Express, which operates under the flagship of Air India Charters Limited, launched the first flight to Abu Dhabi from Thrivananthapuram on 29 April 2005. As on 31 March 2006, four aircraft had been inducted as follows: VT-AXA23 February 2005 VT-AXB08 April 2005 VT-AXC19 April 2005 VT-AXD16 March 2006

In April/May 2006, three more aircraft were inducted as follows: 9

VT-AXG06 April 2006 VT-AXF 10 May 2006 VT-AXG24 may 2006 All the above aircraft have been taken on dry lease for a period of five years.

ORGANIZATION CHART 10

Director Finance

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Chapter 2. Types of Departments Air India has been divided into different departments for the purpose of smooth administration and operations. Each department is further sub-divided into sections that expertise in their respective categories of skill. The departments are as listed below: 1 Air Safety Department . 2 Airport Services Department . 3 Commercial Department . 4 Civil Works & Properties Department . 5 Department of Information Technology . 6 Engine Overhauling Department . 7 Engineering Department . 8 Finance & Accounts Department . 9 Human Resources Development Department . 10. In-flight Services Department 11. Medical Services 12. Operations Department 13. Planning & International Relations Department 14. Public Relations 15. Security & Fire control 16. Stores & Purchases Department 12

Air India generates revenue through sales of passenger tickets sales, cargo and mail handling, maintenance of other airlines and revenue sharing with other airlines. The finance department is an important backbone of the company’s roles at different levels of operation. Due to the large number of activities involved in business and to facilitate division of labor, the finance department is divided into eighteen subsections. Each of these subsections has an important role and specialized role in the day-today functioning of the organization. Although the functions have been assigned to different subsections, some of the subsections are inter-related functionally to perform effectively and efficiently.

Finance Department subsections 1. Capital Budget Capital Budget deals with budgeting requirements of the company. The main function of the department is to forecast budget requirements of the upcoming financial year. The elements that need to be taken into consideration are the requirements of new assets in terms of aircraft, maintenance machinery, property and man power. This department is responsible for deciding the capital structure to be used for the purpose of asset procurement. Since most of the decisions taken by this department involve high cost and longer decision making duration, each task is classified as a ‘Project’. The objective of a project is to improve benefits and reduce cost and risk to the company. Decision making for a project requires considering many elements that are important to the cost and risk factor of the project. For example: Decisions regarding procurement of aircrafts and simulators is a project under Capital Budget department. 2. Financial Accounts Air India has a large number of operational and non-operational stations. Until 2005, each station maintained its own accounts and these were later consolidated for the purpose of creating the financial statements of the company. This was a very tedious, complex and time consuming task. To overcome these difficulties, an ERP was implemented for the purpose of centralized accounting. As a result, all accounts are now maintained on a common platform. 13

This makes it easy to draw decisive reports and generate financial statements easily. An ERP section also exists to impart training related to ERP and control the ERP activities.

3. Management Information Systems and Statistics The main role of this department is its contribution to analytics. The Management Information System (MIS) implemented in the section is capable of generating around 100 reports at regular intervals. The reports provide a trend of the past performance for the chosen parameters. These reports are forwarded to the management for decision making as support tools. The reports along with some other decision factors form the basis for creating future plans. The reports thus act as a bridge between the finance department and the management. It provides an indication of the company’s performance in all areas. 4. Fuel and Oil For an airline, fuel accounts to 60 percent of the operational expenses in an accounting year. Thus, it plays a major role in the financial bills payable by the company. The fuel and oil department is responsible for ensuring the procurement of fuel to the airline at the best cost. The department also decides on method of payments for fuels to vendors viz. fixed rate, floating rate or mixed rate. Fixed rate involves buying fuel from a vendor at a fixed cost. Usually, this cost is higher than the current market price. This pricing is done taking into consideration the future changes in fuel prices. If the market price increases beyond the fixed price company still continues to pay the price fixed between both parties. In floating rate, the fuel prices are paid as per changes in the market price. In mixed rate, certain portion of the amount is paid on fixed rate and the remaining at floating rate.

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Decisions regarding fueling strategy of aircrafts are decided by this section. If an aircraft travels from Mumbai to London and then from London to New York, depending on the fuel prices at different locations, it can decided how much fuel should be filled at Mumbai and London.

5. Banking Banking section deals with handling transactions with banks where Air India holds accounts for operational purposes. These accounts are used to meet operational expenses at the current station or any other station. Transfer of funds among bank accounts is done in order to facilitate funds at stations facing shortage. Treasury management is another important function of banking section. It controls the cash inflow and outflows at the stations.

6. Passenger Sales Passenger sales deals with revenue generated exclusively from sale of tickets to passengers. This section is further classified into two subsections: Offline section and Commercial section. •

Offline section

Revenue generated from ticket sales to passengers from stations where Air India does not operate its flights are handled by this section. Air India has signed provisos with other airlines that help in moving passengers from offline stations to operated destinations from where Air India can fly them to their destination. The provisos cover revenue sharing agreements between the airlines that outline fares to be shared and their percentages.

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•

Commercial section

Commercial section deals with passenger handling at Air India operated stations. It handles all cash sales, credit sales and agent sales of passenger tickets. Invoices are raised on daily basis for passengers of other airlines who have used Air India’s services and issued to the respective airlines. Also, it settles invoices issued by other airlines in lieu of Air India passengers who have used other airlines’ services. General Sales Agent (GSA) commissions and other payments are settled by commercial section.

7. Cargo and Mail This department functions similar passenger sales section. It deals with revenue from cargo and mail services. 8. Station Expenses Reconciliation (SER) Station expenses reconciliation is responsible for handling expenses occurring at the stations due to operations. It generates the statement of expenses and clears the dues. Statement includes sharing of rent, telephone charges, conveyance with GSA, electricity, government taxes etc. 9. Accounts Receivable Control (AR Control) AR Control is responsible for ensuring the accuracy of entries in the ERP system. Part of this system is outsourced to Kale consultants, an outsourcing agency. It handles revenue documentation of passenger ticket audit coupons. Based on usage or cancellation of passenger ticket effective revenue is calculated and credited to the respective sales station. Before effective revenue realization, station is the debtor. 10. Insurance Insurance section deals with all insurance needs of Air India. Insurance is mandatory 16

for assets like aircrafts, property, maintenance facilities, passengers, cargo and employees. In case of aircrafts and passengers, the insurance cost is very high and thus it involves high risk to the insuring company. In most of the cases, the insurance company reinsures part or the full amount with a third party to pass the risk factor and reduce liability. Each aircraft also needs to be insured with the manufacturer i.e. Boeing and Airbus for Air India. For property and maintenance facilities insurance is required to safeguard in case of any unexpected events like natural calamities or terrorist attacks.

11. Billing Billing is the largest section in the finance department. It deals with payments that are to be done to external parties by the airline. These are classified as •

Miscellaneous Billing

•

Local Billing

•

Billing

It includes all payments that are to be done by the company to outside parties like fuel vendors, other airlines, airport payments, legal charges etc. Policies regarding priority payments are done by this department. 12. Store Accounts Stores accounts deals with acquiring spares as required. Procuring inventory for stationery and aircraft spare parts required for maintenance from the company approved vendors at the lowest price is the responsibility of this department. 13. Income Tax 17

Income tax department handles all income tax transactions for the airline. All these factors are consolidated to help in filing the company’s overall tax returns. The various transactions handled are: •

Earnings and employee taxes

•

Corporate taxes

•

Service taxes

•

Employee tax returns

•

Tax deducted on source (TDS)

14. IATA International Air Transport Association (IATA) is the regulatory authority for all airlines across the world. This section deals with all payments that need to be routed through IATA. Payments to invoices raised by other airlines for passenger and cargo services are performed by IATA section. 15. Revenue Pools Revenue pools are responsible for identifying areas that can be used for better revenue earnings. It helps in measuring the current level of efficiency and comparing it with the expected results. This can help in planning for future based on new revenue opportunities. 16. Pay Accounts Pay accounts section deals with payments that are to be done for staff. Salaries and other incentives to be credited to staff accounts are handled by this section. Air India houses staff belonging to 38 categories and each category is further divided into grades. Pay accounts section arranges for funds required for monthly salary payments. Along with monthly payments, work related conveyance charges, other claims and dues are paid through 18

the pay accounts section. 17. Staff Claims Along with salaries, some categories of staff are also eligible for allowances like telephone charges, vehicle claims etc. These non claims are non taxable and are handles by the staff claim section. Other claims like outstation expenses and expenses incurred on travelling for business related reasons for Air India are also settled by this section.

18. Refunds & Recoveries The refunds section is responsible for handling all refunds and recovery related to employees. Refunds like payments of unused staff tickets (fare and tax as applicable) are handled by the refund section. The recovery section deals with recovering extra payments that have been provided to staff for different reasons like advance taken for outstation conveyance, salary paid in advance etc.

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Financial Performance Revenue Earned:During the year 2005-2006, the total revenue of the company consisting of passengers, Excess Baggage, Mail, Cargo, Pool, Charters, Block Seat Arrangement, Royalty from Air India Charters Limited and Handling/Miscellaneous Revenue was Rs. 92,449.5 Million as compared to Rs. 77,268.9 Million in the year 2004-2005, representing an increase of 19.6%

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Expenditure Incurred:During the year, the total expenditure of the company likewise was Rs. 92,325.2 Million as against Rs. 76,617.5 Million representing an increase of 20.5%.

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Chapter 3. Merger of Air India And Indian Airlines

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As you would all be aware on 1 March 2007 Government of India approved to merger of Air India and Indian Airlines known as National Aviation Company of India Limited (NACIL). The Indian aviation industry to create a single mega national carrier which is also poised to become South Asia’s largest airline Touted as the mother of Indian aviation mergers. The merger of Air India and Indian is expected to form India’s largest airline with a clout to take on the domestic and international competition. The formal approval given for the merger by the Union cabinet on March 1, 2007 cover the way for the birth of the Rs. 15,500 cr. Airline which is almost thrice the size of it’s closest domestic rival, Jet Airways. Though the cost of integration of the merger is estimated to be around Rs. 200 cr. The past couple of years many players like Kingfisher, Air Sahara, Jet Airways, Go Air, Air Deccan, Spice Jet, Paramount, Indigo and Indus have entered the air space. Jet Airways and Kingfisher, closest rival of the public sector airlines, have around 44 & 23 fleets respectively and gearing up to induct about 20 &109 aircrafts. All these factors challenges for the government owned airlines which have been witnessing declining market shares. In attempt to increase their market shares, both Indian and Air India have started eating into each other market shares. The Indian Government, the owner of these two airlines, has finally decided to merge these to companies to protect the economic interests. The merger formalities are expected to be completed by 2010, forming a 23

new entity with over 33,000 employees and a fleet size of 112 new generation aircrafts. The government has already placed a orders for 68 and 43 planes from Boeing and Airbus. The merger of the two airlines can be envisaged as the beginning of the consolidation efforts in the Indian aviation space which is the fastest growing in the world at a rapid pace of 40% compared to 15-20% growth at the global level. New airline introduce Boeing 777 aircraft on August 1st, 2007 the Non stop daily flight Mumbai - New York - Mumbai.

Chapter 4. 24

Research Hypothesis A hypothesis is a preliminary or tentative explanation or postulate by the researcher of what the researcher considers the outcome of an investigation will be. It is an informed/educated guess. It indicates the expectations of the researcher regarding certain variables. It is the most specific way in which an answer to a problem can be stated. Research hypotheses are the specific testable predictions made about the independent and dependent variables in the study. Hypotheses are couched in terms of the particular independent and dependent variables that are going to be used in the study. The research hypothesis of this study is as follows. 1) Ho: There is significant relationship between performance and profitability. Std. Deviation

Mean

N

Performance

1.72

.573

20

Profitability

1.50

.707

20

Correlations Incentives Cost

Pearson Correlation

1

.655(**)

Sig. (2-tailed)

.

.000

16.080

13.000

.328

.265

50

50

.655(**)

1

.000

.

13.000

24.500

.265

.500

20

20

Sum of Squares and Cross-products Covariance N performance

Pearson Correlation Sig. (2-tailed) Sum of Squares and Cross-products Covariance N

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Employee performance

** Correlation is significant at the 0.01 level (2-tailed).

Inference: Since the Correlation is significant at the 0.01 level (2-tailed) the null hypothesis that is “There is significant relationship between Performance and Profitability” is rejected and an alternative hypothesis is framed. H1: There is significant relationship between incentives and employee’s performance.

2) Ho: There is no significant relationship between Cost Control and Poor Quality Services

Mean

Std. Deviation

N

career development opportunities

3.70

1.035

20

extent of motivation

3.36

1.317

17

Correlations

career development opportunities

career development opportunities

extent of motivation

Pearson Correlation

1

.909(**)

Sig. (2-tailed)

.

.000

52.500

52.111

1.071

1.184

50

45

Sum of Squares and Crossproducts Covariance N 26

extent of motivation

Pearson Correlation Sig. (2-tailed) Sum of Squares and Crossproducts Covariance N

.909(**)

1

.000

.

52.111

76.311

1.184

1.734

18

17

** Correlation is significant at the 0.01 level (2-tailed).

Inference: Since the Correlation is significant at the 0.01 level (2-tailed) the null hypothesis that is “There is no significant relationship between Cost and Poor Quality Services” is rejected and an alternative hypothesis is framed. H1: There is significant relationship between Cost and Poor Quality Services.

3) Ho: There is significant relationship between MIS and Marketing.

Mean

Std. Deviation

N

Performance appraisal system

2.40

1.143

20

Extent of Motivation

2.60

1.355

20

Correlations 27

performance appraisal system Performance appraisal system

Pearson Correlation

1

.962(**)

Sig. (2-tailed)

.

.000

64.000

73.000

1.306

1.490

50

50

.962(**)

1

.000

.

73.000

90.000

1.490

1.837

20

20

Sum of Squares and Crossproducts Covariance N Extent of Motivation

Extent of Motivation

Pearson Correlation Sig. (2-tailed) Sum of Squares and Crossproducts Covariance N

** Correlation is significant at the 0.01 level (2-tailed).

Inference: Since the Correlation is significant at the 0.01 level (2-tailed) the null hypothesis that is “There is significant relationship between MIS and Marketing” is rejected and an alternative hypothesis is framed.

H1: There is no significant relationship between MIS and Marketing

RESEARCH METHODOLOGY

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Research is a systematic method of finding solutions to problems. It is essentially an investigation, a recording and an analysis of evidence for the purpose of gaining knowledge. According to Clifford woody, “research comprises of defining and redefining problem, formulating hypothesis or suggested solutions, collecting, organizing and evaluating data, reaching conclusions, testing conclusions to determine whether they fit the formulated hypothesis”

Sampling Design A sample design is a finite plan for obtaining a sample from Air India. Simple random sampling is used for this study.

Universe The universe chooses for the research study is the MIS & Statistics of Air India ltd.

Sampling Procedure The procedure adopted in the present study is probability sampling, which is also known as chance sampling. Under this sampling design, every item of the frame has an equal chance of inclusion in the sample.

Methods of Data Collection The data’s were collected through Primary and secondary sources.

Primary Sources Primary data are in the form of “Direct Cost / Revenue Ratio Statement” to which statistical methods are applied for the purpose of analysis and interpretations. The primary sources are discussed with employees.

Secondary Sources 29

Secondary data’s are in the form of Budget Estimation as they have already been treated statistically in some form or other. The secondary data mainly consists of data and information collected from records, company websites and also discussion with the management of the organization. Secondary data was also collected from journals, magazines and books.

Nature of Research Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied. Descriptive research answers the questions who, what, where, when and how. Although the data description is factual, accurate and systematic, the research cannot describe what caused a situation. Thus, descriptive research cannot be used to create a causal relationship, where one variable affects another. In other words, descriptive research can be said to have a low requirement for internal validity.

Sample A finite subset of population, selected from it with the objective of investigating its properties called a sample. The response to various elements under each questions were totaled for the purpose of various statistical testing.

Variables of the Study The direct variable of the study is the working of MIS in Finance Dept. in Air India. Indirect variables are the Region wise Budget Estimation, Region wise Budget allotment, Direct Cost/Revenue, Cost Profitability Ratio etc.

Tools and Techniques for Analysis Correlation is used to test the hypothesis and draw inferences.

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Chapter 5. Working of MIS Introduction A management information system (MIS) provides information that is needed to manage organizations efficiently and effectively. Management information systems involve three primary resources: people, technology, and information or decision making. Management information systems are distinct from other information systems in that they are used to analyze operational activities in the organization. Academically, the term is commonly used to refer to the group of information management methods tied to the automation or support of human decision making, e.g. decision support systems, expert systems, and executive information systems.

Types •

Management information systems (MIS), per se, produce fixed, regularly scheduled reports based on data extracted and summarized from the firm’s underlying transaction processing systems to middle and operational level managers to identify and inform structured and semi-structured decision problems.

•

Decision support systems (DSS) are computer program applications used by middle management to compile information from a wide range of sources to support problem solving and decision making.

•

Executive information systems (EIS) is a reporting tool that provides quick access to summarized reports coming from all company levels and departments such as accounting, human resources and operations. Office (OAS) support communication and productivity in the enterprise by automating work flow and eliminating bottlenecks. OAS may be implemented at any and all levels of management.

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Management information System in Air India Initially in Air India, Internal Reporting was made manually and only periodically, as a by product of the account system and with some additional statistic(s), and gave limited information on management performance. Previously, data had to be separated individually by the employees -in Air India as the requirement and the necessity. In the year 2007-08, the Management Information System was also implemented in Air India. Thus the data was distinguished from information, So instead of the collection of mass of data, important and to the point data that was needed by the organization was stored. This information’s retrieved from the raw data was used for preparation of entire management report and these report helped in analysis. Thus the MIS that was implemented and helped in providing the manager with information about sales, inventories, profitability and other data that would help would help in managing Air India as an organization. MIS provides for reports based upon performance analysis in areas critical to any plan, with feedback loops that allow for titivation of every aspect of the business, including recruitment and training regimens. In effect, MIS not only indicates how things are going, but why they are not going as well as planned where that is the case. These reports include performance relative cost centers and project that drive profit or loss and do so in such a easy that identifies individual accountability and in virtual real time.

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Role of MIS in the financial Aspects of air India Management Information System (MIS) in finance have been widely adopted in Air India since 2007-08. They are information system with capacity to maintain large data base enabling organization to store, organize and access financial information easily. These systems are primarily used for accounting operation and generation of financial reports. Increasingly they are also used to support budgetary, planning and decision making processes. These systems are credit with increasing financial transparency, efficiency and accountability. Management Information System in the Finance department of Air India helps  In providing timely, relevant and accurate information related to finance in order to support better business decisions  Provides integrated financial information  Helps in flexibility of report and additional control over expenditure  Helps in providing a clearer view of budgets versus actual

Budget Planning Financial budget planning uses project financial statements that serve as formal document of management’s expectations regarding sales, expenses and other financial transactions. Thus financial budget are tools used both for planning as well as control. MIS in finance helps organizations evaluate “what if” scenarios. By modifying the financial ratios, management can fore see the effects of various scenarios on the financial statement. MIS thus serves as a decision making tool, helping in choosing appropriate financial goals.

Route wise analysis reports The route wise analysis reports that are generated in Air India gives a summary of all the aircraft that do not meet fuel cost, aircrafts that meet fuel cost but do not meet cash cost, aircraft that meet the cast but do not meet the total cost and aircrafts that meet the total cost. Thus based on this report generated various decision are taken by the management. 33

Direct cost / Revenue ratio The direct cost / revenue ratio gives the ratio of direct cost to revenue and thus helps in planning and controlled the cost. It gives region wise and region wise station wise summary reports of the direct cost / revenue ratio. Thus giving clearer view of how and where cost is incurred.

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ROUTE ANALYSIS Introduction To soar over turbulent times, it is vital for airlines to save every single penny and optimally utilize their assets to reduce costs and increase profitability. This calls for careful analysis of various data and talking well - informed decisions. One of the key factors which decide the future of an airline is Route Profitability. Route profitability reports help in determining whether a particular route is profitable or not during a given period of time. Route profitability analysis enable the management to take decision on whether to change, add or eliminate routes from airline's schedule. The focus of the Commercial/Planning department of Air India is to improve revenues on route from various points of sales. Towards this, the commercial function is expected to have a thorough understanding of the route and take actions on a regular basis to improve the performance. In a continuously evolving market place the only constant for the commercial function is a focused analysis of routes on a regular basis. Thus the MIS section of the Air India generates the "Route Analysis Reports" monthly in order to study the routes and to analyze and monitor them. Route analysis is the technique to study routes and analysis to study routes and analysis hem a give time interval.

Features •

Review performance on existing routes

•

Determine the viability of proposed new routes

•

Validate the actual flown information with defined masters

•

Build route studies for domestic and international destinations

•

Providing to define specific rates for landing, parking, technical handling, ground handling and cargo handling based on time slots and aircraft types

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Preparation of the report:

MASTERS (internal system)

EXPENDITU RE

FINANCIAL SYSTEM KALE CONSULTAN TS

FLIGHT MANAGEMENT

36

REVENUE ROUTE ANALYSIS REPORTS

Preparation of Route Analysis Report The MIS in Air India has facilitated the development of comprehensive framework for analysis of route performance and identifying revenue drivers to evaluate route performance against identified revenue drivers to provide on demand analysis. The revenue report of Air India is generated by Kale Consultants by extracting the data from the respective stations. It is then forwarded to MIS Section of AIR India where the revenue report is then combined with expenditure report, which is generated in the MIS section using the FoxPro software. The update rates are taken from the internal system and the report is generated. This report is then forwarded to Management, the Marketing department and the Commercial/Planning department. Analysis of the Report The Route Analysis is done separately for domestic flights and international flights. These flights are then categorized based on the following four conditions.  Services not meeting ATF cost  Services meeting ATF cost but not meeting Cash cost  Services meeting Cash cost but not meeting Total cost  Services meeting Total cost

Services not meeting the ATF cost are those flights that do not meet the fuel cost i.e. the revenue generated by the route is insufficient to even meet the fuel cost. Since fuel forms almost 40% of the total expenditure, if the service does not meet the ATF cost then it cannot meet the other costs too. Services meeting the ATF cost but not meeting Cast Cost are those flights that meet the fuel cost but fail to meet the other costs like aircraft landing fee, navigation charges etc. Cash cost is variable cost which is incurred when an aircraft is used. Services meeting Cast cost but not meeting Total Cost are those flights that meet the cash cost but fail to meet the cost. Total cost includes the operating cost as well as the non operating costs. 37

EXAMPLES: The two major factors considered for the route analysis are the cost and the load factor. Passenger Load Factor (PLF) is the ratio of Passenger kilometers (PKMs) to Available Seat Kilometer (ASKMs), usually expressed as percentage. PKM is the product obtained by multiplying the number of fare playing passengers by the distance in kilometers flown by them. ASKMs are the product obtained by multiplying the number of passenger seats available in an aircraft by the distance flown in kilometers.

The Cost considered for the route analysis can be explained as follows: A.

CASH COST Aircraft Fuel And Oil Material Consumption Including Outside Repairs Aircraft Landing free Navigation Charges Charges for Handling by other Operators Cabin Crew expenses and insurance Operating Crew expenses and insurance Legal Liability Insurance Booking agency Commission Food and cabin service amenities Hire of aircraft Dry lease rentals PLI

B.

FIXED COST (Direct) Operating Crew salaries Cabin crew salaries allowances Engineering, stores, GSD staff salaries Engineering dept stores, GSD Staff Aircraft insurance Depreciation aircraft Obsolescence on spares Material consumption including outside repairs

C.

DIRECT OPERATING COST (A + B)

38

D.

FIXED COST (Indirect) Publicity Sales And Tourist Promotions Salaries other than crew and engineering Depreciation – other assets Other fixed costs

E.

OPERATING EXPENSES (C + D)

F.

NON OPERATING EXPENSE Interest and other Charges on aircraft Loans Interest on borrowing Finance charges TOTAL EXPENSE (E + F)

The Summary of ROUTE ANALYSIS is as given below: SUMMARY How does the Route Analysis Report help the Management? Route profitability analysis can be broadly classified into two based on business drivers:  Past Performance Analysis – This is mainly done to determine whether the existing routes are profitable or not  Forecast – This to understand the viability of new route and the profitability forecast of existing routes based on future prediction of cost and revenue.

39

Past performance analysis: Whenever the report is submitted to the management, the decisions are made keeping into consideration the performance of the route for the past 5 to 6 yrs. The management also checks whether the marketed section had done enough marketing for the route. If the route was not well marketed then the changes of the load factor being less is more. Thus the route does not meet the required load factor due to the lesser marketing done by the marketing department and thus it cannot be shutdown. Also if the number of passenger is less as compared to the available seats then the aircraft type also needs to be adjusted. Moreover if the fuel price increases every year then the previous reports of the route cannot be the only source of decision making. Also the bilateral agreements are considered before taking any decision on the routes. Forecast: While past performance analysis gives a clear indication on the performance of the routes, forecast indicates how a particular route is likely to perform based on various parameters provided in these system. While some of them are more or less fixed there are components which can vary dramatically. Components that may have relatively low variations and thereby better control includes cost like depreciation, interest, insurance, landing, navigation, ground handling, etc. A component that has a great impact and which cannot be controlled by Air India or other airline is the fuel cost.

On the revenue side, the airline has limited control though the sale and marketing functions tries to keep this as high as possible. While the break even Load factor can be arrived at by feeding various parameters based on experience and expectation, some of the following questions will remain a challenge and can affect the profitability factor drastically.

What will be the fuel cost be 6 months form now?

40

Chapter 6. Direct Cost / Revenue Ratio INTRODUCTION Every organization generates revenue and also uses the revenue for various activities. Thus it is necessary to keep a control on the expenditure by the various activities. This cans be done by calculating the ratio between the costs incurred to the revenue generated. As a result it becomes easy to figure out which activity needs more expenditure. In this way we can control the cost incurred by the particular activity.

41

Direct cost/ revenue ratio statement is a statement that gives the ratio between the costs incurred to the revenue generated by the stations. A lower percentage is better since that means expenses are low and earnings are high. Direct cost/ revenue ratio statement is prepared for both, the online stations and the offline station. An offline station normally refers to a station that is not represented by an airline, but still capable of supporting that airline i.e. the airline might not fly there, but do have officers around that area so that the station is still capable of supporting that aircraft should it need to land there is an emergency.

EXAMPLE Sr. No. 1 2 3

Region USA Europe Southern India

Station Houston, Los Angeles Geneva, Amsterdam Coimbatore, Trichur

An offline station is a place or station that the airline flies etc. EXAMPLE Sr. No. 1 2 3

Region USA Europe Southern India

Station New York, Chicago Frankfurt, Paris Cochin, Mangalore

Preparation of the report:

REVENUE

MASTERS (internal system) 42

FINANCIAL SYSTEM EXPENDITURE

DIRECT COST/REVENUE RATIO STATEMENT

PREPARATION OF DIRECT COST / REVENUE RATIO STATEMENT The statement of direct cost / revenue ratio of stations are generated based on the data collected in one year. It is generated only once in a year unlike the route analysis reports. The report is generated from the data received from the stations. The revenue and the cost of every activity is received from the station by the MIS section of IAr India and the the report is generated. ANALYSIS OF THE REPORT: The direct cost/ revenue ratio statement is a report that gives the details of the station’s performance and also the performance of the region.

43

The total cost incurred by a particular station is calculated on the various parameters. These parameters include Pay Allowance, Staff Cost, Landing, Handling, Publicity, Motor, Insurance, Commission, Rent Rates, Printing and Stationery, Communication and Miscellaneous. The major cost that is the fuel cost is not considered during the preparation of the direct cost / revenue ratio statement. There has to be an effective use of the above mentioned parameters in order to control or reduce cost. The Pay Allowance can be controlled by reducing new recruitments or by avoiding overtime performance. The Staff Cost can be reduced by controlling the conveyance cost and the welfare cost. The Landing fee depends on the operations. IF the cost related to the landing has to be reduced or controlled then there has to be use of better equipment etc .The handling Fees is based on the contractor. The only way to reduce the cost is to negotiate about the costs or to wait for the contract to get over and give the contract to another contract that can provide the same service at a lower cost. The publicity cost is incurred on entrainment etc and can be controlled by use of barter system. The insurance cost is the cost related to the employee insurance etc. It does not include the aircraft insurance. This cost cannot be reduced. Commission is directly related to the revenue generated; this parameter too cannot be controlled. The rent rates can be reduced by checking out region with lower rent. The Printing and Stationery, Communication and Miscellaneous Cost can be reduced by controlling the use of the stationeries available. The analysis is done keeping into consideration the report generated form past 5 t o 10 years. The bilateral agreements are also considered before taking any decisions. How does the route analysis report help the management? These reports are helpful to both management as well as the station heads for following reasons: •

The Management is able to judge the performance of each online/Offline office

•

Station head are in a position to take effective steps in controlling expenditure and increasing revenue, as any deterioration in their performance will be reflected in the percentage of the region and the corporation as a whole.

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Chapter 7. Revenue Expenditure Budget Work of the section: •

Preparation of the Annual Revenue & Expenditure Budget of the Corporation in the form of the booklet for submission to the board for its approval

•

Intimation of the Annual Budget allotments, to the Outstations as well as the departments at headquarters

•

Control over the expenditure of outstations by calling for quarterly returns of the actual expenditure incurred within the approved allotments under certain specific heads, and calling for explanations regarding variations

•

Comparison of Actual Expenses with the Budget Allotments

•

Preparation of Direct / Revenue ratio of station for submission to the Commercial

45

department and bringing out in detail the performance of individual stations on the basis of their direct expenditure viz-a-viz revenue •

Preparations of Monthly Report on Estimated Financial Result for submission to Headquarters

•

Preparations of Quarterly Report, Performance Budget and other returns for submission to Government Agencies

•

Preparations of Cost Analysis Statement

•

Submission of Data to the IATA

•

Information Required from the Stores & Purchases

Data obtained from the outstation and department at Headquarters: The Corporation’s Overall revenue expenditure budget estimates for the current year (revised) and next financial year are based on the information collected from outstation and departments at headquarter. The information in the form of ” Budget Estimates” is called for the month of October. For this purpose standard formats (separate for online and offline) are sent to outstation. (From 1) The format lists out the various Revenue Expenditure Account Heads along with the account codes so that no errors may be made in grouping various accounts under these specific heads. The outstations are also required to submit the worksheets for the certain account heads such as Landing and Handling Fess, Route Navigation Charges, Rent Rates and Taxes, Crew Allowances and Hotel Expenses etc. as per prescribed formats, in support of the estimates. The Budget Estimates for the current year and next year are required to be sent by the outstation to the Budget Section by 30th November every year. The Actual expenditure incurred during the first half (April/September) of the current financial year, and the estimated expenditure for the second half (October/March) of the current financial year are required to be given in the Budget Estimates Form. The total actual plus estimated expenditure of the current financial year together with the actual expenditure of the previous year

form the basis on which the budget Estimates for the next financial

year are required to be prepared. The Winter Time table for the next year circulated to stations also forms the basis for preparation of Budget Estimates.

46

Some of the information called for department wise is a given below: Planning Traffic Revenue: •

Scheduled Services: The Estimates of Revenue from Scheduled Services in respect of each route, and each aircraft type in fleet with detail working for the remaining period up to March and also for the next year is provided category wise as follows: 1. Passenger 2. Excess Baggage 3. Mail 4. Freight The above information is broken down month wise by Planning Department

•

Revenue Pools: The revised Estimates of Receipts / Payments in the revenue pools for current year and estimates for the next year.

•

RTKM and PKMS: Aircraft type wise, category wise and route wise for both years with month wise years.

Commercial Department: •

Opening of new Online / Offline offices Particulars relating to opening of new online / offline offices during the remainder of the current year and the next year giving estimated recurring expenditure

•

Closure of Online / Offline Offices

47

Particulars relating to the effective date of closure transfer of sales staff and available details of saving in cost / estimated loss of revenue. Charters: The estimate of number of flights, flying hours, route, revenue and load factors should be give for the following: •

Open Market Charters

•

Cargo Sub-Charters

The information is given for each aircraft type Billing: •

Handling and servicing receipts (Current year – revised and next year) 1. Handling Revenue: - An estimate of station wise handling revenue shows the revenue from regular contracts and casual operations. Details of additional handling contracts which are likely to be obtained during the above period and information on any of the existing contracts I likely to be terminated. Above information is given aircraft wise.

2. Servicing Revenue: - The estimated revenue under this head covers overhaul and defect rectification jobs form outside parties.

3. Aircraft type wise number of flights of other carriers handled at Indian Stations.

•

Miscellaneous receipts under the following heads 1. Sale of Scrap 2. Hire of transport to outside parties 3. Loan of equipment to outside parties 4. Storage Commission

•

Number of staff to be taken for calculation of ATKM per employee

48

Operations Fuel and Oil (Aircraft) Block fuel and oil consumption (US gallons per hour) in respect of scheduled flying on each route and by aircraft type. Estimates of overflying Charges payable during the current year and next year country wise. As regards Euro control charges, the anticipated percentage increase in charges and the effective period is also advised by Engineering Department. Estimated expenditure on “Procurement and Issue” Of Operating crew uniforms during current year and next year separately giving details of item wise uniforms long with cost thereof and the number of crew entitled for such uniform. A current list of Operating crew, category wise stating Name of the Crew, Staff Number and Type of aircraft operated. The crew layover pattern for the current year (winter time table) and the next year. Information is given station wise, on number of sets and weekly layover days. In-flight Services: •

Estimated expenditure on “Procurement and Consumption” during the current year and next year, in respect of: 1. Cabin services material (Consumable) 2. Cabin services material (Non Consumable)

•

Estimated expenditure on “Procurement and Issue "of cabin crew uniforms during current year and next year given separately, giving details of item wise uniform along with the cost thereof and the number of crew entitled for such uniforms.

•

Aircraft type wise cabin crew complement

•

Crew layover pattern for current year and next year. Information is given station wise and aircraft type wise

Airport Services: 49

•

Estimated cost of consumption of spares for maintenance of ground support Equipment and Transport Separately-Station wise

•

Estimates station wise cost of consumption of fuel and oil on operation of Ground Support Equipment and Transport separately

•

Estimated station wise cost of outside repairs to above equipment

•

Estimated cost of spares on maintenance of Equipment, Provision required for replacement of existing equipment and additional equipment is to be furnished separately

•

Aircraft type wise number of flights handled for other carriers

•

Number of staff handling such flights category wise

This information is required both for the current year (revised) and next year the basis on which the expenditure on Ground Support Equipment to be allocated to each aircraft type. The other departments that give in their information are Publicity, Engineering, Stores, Computer Division, Communication Division, Pay Accounts, Staff Claim, etc.

PREPARATION OF REVENUE – EXPENDITURE BUDGET The Preparation of the revenue – expenditure budget is done in MIS section of the Finance department in Air India. The MIS section sends a circular to the various stations and the departments regarding the estimates needed for the preparation of the budget, This circular is sent in the month of October – November every Year. The stations and departments are 50

supposed to submit their budget Estimates by December. The estimates received from the outstations and the departments are thoroughly scrutinized and subjected to various checks based on the latest available data in MIS section

as well as the other sections of the

Accounts Department. The estimates after scrutiny are tabulated Account Head wise to arrive at total estimated expenditure of the corporation for each account head. The estimated for some expenditure Account Head such as Landing Fees, Handling Charges, Route Navigation Charges, Crew Layover and Crew Hotel expenses etc. are independently worked out in MIS section and compare with the station’s estimates and differences if any investigated. The outstations are advised to breakdown the annual allotment into monthly/quarterly allotments according to the expenditure anticipated to be incurred by them during each month/quarter. The reasons for increase or decrease in the allotment as compared to the estimates given by the station are mention in the “remarks” Column.

LAYOUT OF PREPARATION OF REVENUE EXPENDITURE BUDGET Budget preparation

Revenue 51

Scheduled services revenue

Expenditure The approved Profit and Loss A/C is then allotted to the stations and Other revenue Preparation of Profit and Loss Department A/Cdepartments to submit to accordingly the Board

Stations

Estimates are scrutinized, checked and tabulated account head wise Estimates of some expenditure account heads such as landing fees, handling fees etc. worked out independently in finance department.

Stations are required to monitor the progress of actual expenditure vis-à-vis budget allotments under individual Heads of account on month to month basis to ensure that the same does not exceed the allotments. If for any reasons, revision to the budget allotments is required by stations, the proposal for revision with detailed justification is required to be forwarded by the Station Head to the MIS section, duly vetted by Regional Finance and Accounts Manager/Regional Accounts Manager. On receipt of the proposals for revision of 52

the budget allotments, the same are examined in the MIS section after which the allotments are revised or the status quo maintained according to the merits of each case and stations advised suitably.

Chapter 8. Enterprise Resource Planning Introduction Enterprise Resource Planning or ERP is an industry term for integrated, multi module application software packages that are designed to serve and support multiple business 53

functions. An ERP system can include software for manufacturing, order entry, accounts receivable and payable, general ledger, purchasing, warehousing, transportation and human resources, Evolving out of the manufacturing industry, ERP implies the use of packaged software rather than proprietary software written by or for one customer. ERP modules may be able to interface with an organization’s own software with varying degrees of efforts, and, depending on the software, ERP modules may be alterable via the vendor’s proprietary tools as well as proprietary or standard programming languages The advantages of implementing ERP in an enterprise are: •

ERP systems allow companies to better understand their business.

•

Companies can standardize business processes and more easily enact best practices.

•

By creating more efficient processes, companies can concentrate their efforts on serving their customers and maximizing profit

ERP Oracle Oracle delivers a comprehensive portfolio of applications and technology solutions to help airlines reduce costs and enterprise risk by modernizing their operating platforms; increase agility and operating efficiency by simplifying their application architecture; increase customer loyalty personalized customer service; and enhance regulatory compliance through automated controls. ERP Oracle provides a comprehensive platform to manage back-office processes ranging from financial management and human capital management to procurement and enterprise asset management. ERP Oracle also offers a comprehensive suite of solutions for customer relationship management to help airlines identify, manage, track and provide differentiated personalized service to customer at all airline touch-points: pre-travel, and post-travel. ERP Oracle also delivers a powerful platform for aircraft maintenance, Repair, and overhaul that’s designed from the ground up for airframes, engines, and components. ERP Oracle in Air India The ERP – Oracle System is implemented within the enterprise with the objective of making information in Air India in the year 2007 – 08. The System is designed to integrate all areas of the enterprise including financial accounting and inventory. ERP –Oracle improves the 54

performance of the organization in terms of resource planning, management control and operational control. By the implementation of Oracle, Air India could easily reduce costs, maximize asset utilization, and enhance the customer experience so that they can retain and grow their customer base in an intensely competitive environment The benefits of implementing ERP – Oracle in Air India: •

TIME SAVING: The implementation of ERP – Oracle has led to speeding up all of the activities of Air India. Since the database is large, the data can be stored and accessed whenever needed. The retrieval of data is also done fast.

•

ACCESSIBILITY: Information can be easily accessed throughout the enterprise in real time.

•

HELPS IN DECISION MAKING: Gives managers and senior executives the ability to monitor activity, strategically Plan and make timely decisions.

•

INTEGRATION: Integration can be the highest benefit of them all. The only real project aim for implementing ERP is reducing data redundancy and redundant data entry.

Drawbacks of ERP – Oracle: •

Any software will give accurate information only if the data is entered in it accurately and on time.

The ERP system designed for the Finance Department of Air India

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ERP – FINANCIAL ACCOUNTING

Accounts payables Supplier

Cash Management

Invoices & Payments

(Bank

Purchasing & Inventory

ORACLE GENERAL LEDGER

Fixed Assets

Treasury Accounts Receivables

Transfer of Funds

s GL INTERFACES AR INTERFACE • •

DSDC (Booking Office Sales) Misc. Billing System

ERP SAP 56

• • • • •

Revera (Pax Revenue) Cargo sales AIEAS (Staff Disbursements) Payroll IGT (AICL Revenue)

While confronting current challenges, Air India must prepare for new opportunities in emerging markets, modernize their fleets with more fuel – efficient air craft, and leverage technology to personalize the customer experience across the travel lifecycle. In order to have a better interface between the new modules in the enterprise, Air India is planning to implement ERP – SAP in the coming years. ERP SAP provides cargo and financial business process optimization for Air lines managing freight. Relentless focus on cost effectiveness, yield maximization and regulatory compliance requires comprehensive visibility of business performance and the agility to manage change effectively. To help address this Air India has teamed up with IBM, a world leader in financial and enterprise resource planning (ERP ) solutions, to create a new, dedicated air freight ERP platform which will enable airlines and freight handlers to realize important cost savings, optimize revenue-generating opportunities, and rationalize all aspects of operations. The Board of directors of National carrier Air India on 28th September 2010 approved the implementation of the SAP Enterprise Resource Planning Project. The implementation of the ERP Project is in line with the business objectives and strategy of the company for affecting a turnaround. ERP SAP aims at creating interfaces between the modules which will help in better communication between the various departments of AIR INDIA. This reduces the redundancy of data and helps in faster accessibility. Some of the interfaces to be implemented are •

PSS (Passenger Service System) – which will have all the data regarding the passenger information that can be further used for processing.

•

HRMS/ payroll,

•

AMBER- cargo interface,

•

IOCC (Integrated Operations Control Center)

•

MBS

57

The benefits which will accrue to Air India are •

ERP-SAP will help in analyzing data in terms of profits centers and cost centers.

•

Integration of key business functions in the erstwhile NACIL(A) and NACIL(I)

•

Seamless integration with other systems and ensuring availability and consolidation of critical data and information.

•

Improved profitability by availability of real time information on route network and profitability. It will help in analyzing data generated flight wise, route wise etc. Thus helping the management in better and faster decision making

•

Better reliability in revenue accounting.

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Chapter 9. SWOT ANALYSIS OF AIR INDIA STRENGTHS: •

Air India has been the largest air carrier in India in terms of traffic volume and company assets.

•

It owns the most updated fleet and competent repairs and maintenance expertise.

•

Its information systems are advanced and compatible with its operation and service.

•

Air India does not serve it customer but treat like a god (atithi devo bhava)

•

It has a good reputation in both international and domestic markets, quality service and the age-old Goodwill that has still kept it alive in the interests of the rescue operators.

•

Has financial backing of the Government.

WEAKNESS: •

Air India is operating across broad international and domestic markets competing with world leading giant airlines as well as local small operators. This lack of clarity on the strategic direction largely dilutes its capabilities and confuses its brand within markets.

•

Low profitability and under utilization of capacity.

59

•

Growing Competitor base and entry of Low-Cost Carriers (LCC’s).

•

The airline’s high-cost structure and the compulsions of being a public sector unit are the reasons and it had been making a loss and shall continue to make losses for some more quarters.

•

Payment of Employee :- 27000 employee are working, so giving the payment to huge number of employee in not a easy thing.

OPPORTUNITIES: •

India airline industry is growing faster and will continue to grow as the GDP increases, and the trend is predicted to continue once the slowdown recedes.

•

Worldwide deregulations make the skies more accessible; the route agreement is easier to be achieved. The number of foreign visitors and investors to India is increasing rapidly.

•

Complementary industry like tourism will increase demand for airline service. The Civil Aviation Ministry’s strong regulation and protection provides opportunities for consolidation and optimization.

•

Customers are getting wealthier, tend to be less price-conscious and prefer to choose quality service over cost.

•

Best time for introducing LCC’s.

•

Untapped market where bilateral agreements are there

THREATS:

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Air India faces imminent aggressive competition from world leading airlines and

•

price wars triggered by domestic players.

The Indian Railway Ministry has dramatically improved speed and services in their

•

medium/long distant routes, attracting passengers away from air service, with prices almost at par with the low cost carriers.

OBJECTIVES OF THE STUDY Primary objective •

To study the important factors which are needed to implement on MIS

Secondary Objective •

To study the effect of monetary and non-monetary benefits provided by the organization

•

To study the effect of Cost profitability ratio on Organization

•

To provide the practical suggestion for the improvement of organization’s performance

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Chapter 10 Findings and Interpretations Cost driver rate is the basis on which cost drivers can be associated to the cost categories in co-ordination with the volume-based cost drivers and related operation-based cost drivers. Cost driver rate depends on the factors upon which the cost of individual elements is calculated and the manner in which these cost drivers can be used in calculating the overall expenses. Fuel Cost Fuel costs depend on the quantity of fuel uplifted during a flight. The operation-based cost driver rates are: 1. Estimated block hours This depends on the aircraft to be operated and also on distance between the origin and the destination. 2. Average consumption per block hour This depends on the aircraft to be operated and also on the sector to which it is to be operated. 3. Average cost per gallon This depends on the quantity of fuel uplifted by the aircraft and the cost of fuel at each uplifted station. Hence, the technique of allocation fuel cost per flight is: Fuel Cost = Estimated Block hours x Average fuel consumption x Average Cost per per block hourgallon fuel 62

of

Average Cost per = ∑ (Fuel uplifted at station i x Price of fuel per gallon at station i) gallon

of∑ Price of fuel per gallon at station i

fuel where i = 1,2,3,…..n

Crew Cost Operating crew and cabin crew cost for a flight depends upon the number of crew operating an aircraft on its scheduled flight. The operation-based cost driver rates are: 1 Crew salaries . This is a fixed cost as salaries for operating crew are fixed. The salary can be allocated to the flight based on the total flying hours of a crew member in a year. In a year, an operating crew and cabin crew members can operate for a maximum of 1000 hours and 1800 hours respectively. Assuming that every operating crew member completes the 1000 hours time limit and cabin crew completes 1800 hours of service; their salary can be allocated to the flight. 2 Crew allowances . In addition to salary, crew members are eligible to receive flying allowances for the operated block hours. This allowance is directly proportional to the flying hours operated by the crew members. 3 Crew expenses . Air India is responsible for arranging the conveyance, accommodation and lodging of crew members when they are on duty or stationed at any destination away from their base station. Conveyance of the crew members needs to be facilitated from the residence to the airport and vice versa at the origin and destination. These expenses are directly proportional to the number of crew required for a flight. Hence, the technique of allocation crew cost per flight is: 63

Operating Crew = (Total Salary/1000 + Flying Allowance) x Flying hours Cost+ Operating Crew Expenses x Number of Operating Crew Crew = (Total Salary/1800 + Flying Allowance) x Flying hours Cost + Operating Crew Expenses x Number of Cabin Crew

Maintenance Staff Cost Maintenance labor cost is directly proportional to the maintenance performed on an aircraft. The maintenance performed on an aircraft is directly proportional to the flying hours of the aircraft. Thus maintenance labor cost can be allocated as per the flying hours of the aircraft. The operation-based cost drivers rates are: 1. Engineering department salaries This is a fixed cost as salaries to engineering department staff are fixed. Aircrafts are subjected to maintenance checks depending upon the flying hours of the aircraft. Thus, each flying hour of the aircraft contributes towards maintenance. Engineering department salaries can be allocated based on flying hours of aircraft. 2. Additional hours staff cost This is the cost incurred due to unexpected maintenance arising apart from the scheduled checks. Staff is then required to work for extra hours for which they are paid overtime allowances. This is a variable cost since there is no basis for expecting such maintenance. 3. External Maintenance Overhead This is the cost incurred due to maintenance activities being outsources to external parties. When maintenance facilities cannot be performed within Air India’s engineering facilities due to lack of resources, unavailability of facilities, machinery not functioning etc. 64

maintenance functions are performed by external companies that are capable of performing the required maintenance services. This component is variable, since the occurrence of such events cannot be exactly forecasted. Hence, the technique of allocation maintenance labor cost per flight is: Maintenance = Engineering Department Salaries + (Additional Engineering Labor Cost + Labor Total block hours of allExternal Maintenance Cost + aircrafts Cost in a year online station

Block hours of the aircraft in a year AB = (A + B) x Block hours of the flight Operation Statistics Operation statistics are the methods used for measuring the efficiency and profitability of operating a flight. It involves comparison of volume based drivers, operation expenses and operation revenue. The operation statistics are benchmarks for decision making process. The statistical measures used are: 1. Passenger Load factor It is the ratio of RPKM to ASKM. It presents the capacity utilization of aircraft in terms of passenger seats. Passenger Load factor = RPKM AKSM 2. Overall Load factor It is the ratio of RTKM to ATKM. It presents the capacity utilization of the aircraft in terms of passenger seats, cargo, mail and excess baggage. Overall Load factor = RTKM ATKM 65

3 Cost per ASKM . It is the ratio of total operating expenses to ASKM. It presents the cost incurred by the airline for operating one passenger kilometer. Cost per ASKM = Total operating expenses ASKM

4. Passenger Revenue per ASKM It is the ratio of passenger revenue to ASKM. It presents the revenue earned by the airline per booked passenger for operating one passenger kilometer. Passenger Revenue per ASKM = Passenger Revenue ASKM 5. Total revenue per ASKM It is the ratio of total revenue to ASKM. It presents the revenue earned by the airline for operating one passenger kilometer. Total Revenue per ASKM = Total Revenue ASKM 6 Cost per RPKM . It is the ratio of total operating expenses to RPKM. It presents the cost incurred by the airline for operating one revenue passenger kilometer. Cost per RPKM = Total operating expenses RPKM 7. Passenger revenue per RPKM 66

It is the ratio of passenger revenue to RPKM. It presents the revenue earned by the airline per booked passenger for operating one revenue passenger kilometer. Passenger Revenue per RPKM = Passenger Revenue RPKM 8. Total revenue per RPKM It is the ratio of total revenue to RPKM. It presents the revenue earned by the airline for operating one revenue passenger kilometer. Total Revenue per RPKM = Total Revenue RPKM 9 Cost per RTKM . It is the ratio of total expenses to RTKM. It presents the cost incurred by the airline for operating one revenue ton kilometer. Cost per RTKM = Total operating expenses RTKM 10. Passenger revenue per RTKM It is the ratio of passenger revenue to RTKM. It presents the revenue earned by the airline per booked passenger for operating one revenue ton kilometer. Passenger Revenue per RTKM = Passenger Revenue RTKM 11. Total revenue per RTKM It is the ratio of total revenue to RTKM. It presents the revenue earned by the airline for operating one revenue ton kilometer. Total Revenue per RTKM = Total Revenue RTKM

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Chapter 11. Implementation of Study - Cost Accounting Tool Implementation of study is the final stage when the findings from the study will be implemented in the form of a tool that can be used for aircraft operation related forecasting to take real-time decisions. The tool will act as a decision making mechanism by considering past operational data and utilizing it for future operational situations for the airline.

Tool creation methodology Understanding the target users The tool can be used by staff of Air India involved not only in the planning function but also in the budgeting and costing functions. Planning and budgeting would make use of historical data whereas costing can be done by use of actual data. To ease the use of tool, it will consist of automatic calculations by the tool when the required selections and data are provided to the tool. This tool is designed in a manner such that it can be used for middle level and top level management decisions. Middle level decisions regarding cost involved in each category and sub category will require details of the costing model. Top level decisions 68

regarding reaching the decision requires statistics that can be used as benchmark and support for decision making. Selecting appropriate platform The department staff is well acquainted with the use of Microsoft Excel. Most of the reports and invoices are in the form of Excel worksheets that are used on a daily basis. Thus, using the same technology to implement this tool will help in easy understanding and better utilization of the tool by the staff. Creation of tool The tool is a physical implementation of relations found in the analysis. The tool accepts values in the form of estimated number of passengers, cargo load, mail load and excess baggage load. It also accepts values from users related to costs of various cost drivers. Using the relations computed from analysis operating cost and revenue per flight is achieved. Operation statistics provided in the tool can be used for decision making. Using the tool 1 Tool structure The tool mainly consists of 13 worksheets. Each of these sheets provide supporting functions to the tool. The 12 worksheets are: 1. Costing Model This is the main worksheet of the tool that houses the costing model. It accepts estimations of capacity utilization and cost of various cost drivers. 2. Aircraft Comparison This worksheet is a single window view of the operation statistics for all aircrafts operated by the airline for values provided in the costing model. 3 Backend . This worksheet contains all the information relating to aircrafts and sectors. This information is used for calculations relating to cost drivers in individual cost categories. 69

4. Aircraft worksheets The tool houses 10 worksheets which represent the cost model for each aircraft type. These sheets have been provided to get a detailed understanding of the changes in cost for each aircraft model and to allow the user to make required changes in the costs for individual aircrafts. The sheet is divided into 5 parts: a. Demographics This is the basic information required for the tool to be used. This includes information relating to: Aircraft model, Sector, Distance and Volume-based drivers. These fields are to be filled appropriately by the user.

b. Cost Categories This includes information relating to operation-based cost drivers associated to each cost categories. These fields are to be filled appropriately by the user. c. Operating Expenses This information is calculated by the tool automatically based on data input in demographics and cost categories. It provides the actual operating expenses incurred per flight based on provided inputs. d. Revenue This information is calculated by the tool automatically based on data input in demographics and cost categories. It provides the revenue gained by the airline per flight based on provided inputs. e. Operation Statistics This information is calculated by the tool automatically based on Operating expenses, revenue and volume-based drivers. These statistics are useful in reaching a final decision about selecting the appropriate aircraft for operation

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2 Assumptions 1. Demographic assumption This assumption states that the user has a rough idea about an aircraft model that can be chosen for operation before using the tool. This assumption is for initially selecting an aircraft for computation of volume and operation based cost drivers. 2. Volume assumption This assumption states that the user has enough information about the estimated volume utilization of the aircraft model selected in the demographic assumption. 3. Operation assumption This assumption states that the user possesses information relating to the operation cost drivers for each aircraft model. 4. Aircraft assumption This assumption states that all information provided in the costing model worksheet is completely applicable to all aircraft models. There are provisions of including any changes for individual aircraft models in the tool. 3 Tool Executions Stage 1: Backend worksheet: Any changes relating to data contained in the backend worksheet should be updated in the worksheet. This sheet contains information about: 1. Aircraft type and seating configuration 2. Crew compliment of aircrafts for each sector 3. Revenue for each passenger, ton of cargo, mail and excess baggage for each sector 4. Block 71

Hours by each aircraft for each sector

5. Total flying hours of aircrafts in a year 6. Fuel consumption of aircrafts for each sector 7. Landing and navigation changes per aircraft for each sector Stage 2: Costing Model worksheet: Based on assumptions, provide demographic and cost category information. Stage 3: Individual aircraft worksheet: In case of change in volume or cost category information for any aircraft type from the information provided in the costing model sheet, it is necessary to include those changes in the worksheet for the particular model. User needs to make the appropriate changes in the category for the required aircraft. Stage 4: Aircraft Comparison worksheet: The aircraft comparison sheet highlights the top 3 options in terms of aircraft models for each category of operation statistics. Based on management’s priority and objective of operation a decision can be reached.

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Chapter 12. Limitations The study incorporates all physical and tangible attributes associated with aircraft operation. However, there are many other factors involved in decision making related to aircraft operation. Air India being a national carrier and Public Sector Undertaking (PSU) is also a major factor contributing to operational decisions. The limitations related to selection of aircraft operations to sectors that have not been incorporated in this study are: 1. Government Intervention Air India being a PSU, government policies play a major role in the decision making process. Most of the decisions require approval by the Civil Aviation Ministry of India. As a result, many of the decisions taken by the management may get delayed for implementation at the right time due to wait for approval. A decision unapproved by government cannot be 73

implemented. Thus, even if a decision has been taken by the management, its execution depends upon the approval received. 2. Role as National Carrier Air India being the national carrier, represents India to the aviation world. The services provided by Air India do not focus primarily at gaining profits. Instead, the main focus is delivering service to the society and propagating the traditions and cultural heritage of India through the Air India brand. Thus, even though operating to some sectors is not profitable, the airline continues to operate even during financial crisis due to its liability as a national carrier. Air India’s services during the Gulf war and rescuing Indians from Lebanon during civil war are evidences of its incomparable services.

3. Availability of aircrafts The number of aircrafts in an airline’s fleet is limited. Buying or leasing additional aircrafts requires large amount of finance. An airline may not always be in a favorable condition to procure aircrafts at all times. Also, costs are linked to grounding aircrafts existing in the fleet. Thus, even though operating to a sector using a particular aircraft model would be profitable, it might not be practically implemented due to unavailability of aircraft. 4 Agreements with countries . Aviation operations to countries are governed by agreements signed between different countries. These agreements specify the number of times a country can operate its services to another country. Some agreements also specify limitations about aircraft types and cargo handling. Due to this, an airline may be forces to operate to those sectors using aircrafts that are less profitable. 5. The report is prepared in accordance with information provided and certain assumptions, as real values are confidential. 74

6. The study is limited to eight weeks therefore I can’t learn much detail about the project. 7. Due to various sections within Finance Dept (17 section), it is difficult to gather information

Chapter 13. Conclusion The study shows that the operation cost incurred depends not only on the operational inputs but also the output volumes. The cost inputs can be classified into following categories: 1. Operation dependent These are the cost categories that are directly linked to operation. The change in cost occurs due to change in operational factors. 2. Volume dependent These are cost categories that are directly linked to volume of service consumption. As factors related to volume of output consumption differ, cost of operation changes. These are 75

mainly linked to passenger numbers and cargo volumes utilizing services of the airline. 3. Operation and volume dependent These are cost categories that are linked to operation and output volume consumptions. These factors cannot be linked independently either to operation or volume. As the operation decisions change, volume level of output changes and hence consumption of service levels also differs. The entire system of working of the Revenue Budgeting section is laid down by IATA and all airlines follow similar procedures. The system is left with no or minor scope for loopholes because there is only disadvantage of this system i.e. delay in receipt of estimates and even this is rectified with the help of actual which are already available with this section and also the ledgers give the exact figure. Over the years, the major transformation that has been in this system is that earlier the system was not computerized and so they did not have or were unable to get the actual and they had to make allotments based on estimates only. Thus the level of accuracy was very low, since the exact costs were not available. At present and in future there is vast improvement because actual are obtained and there is constant effort to make allotments as close to actual as possible and the section has been quite successful in it. The challenge for Air India here would be managing a host of ‘residual’ risks arising out of hedging operations, since ATF is not being traded in most leading exchanges. Imply that Air India would either have to hedge through OTC ATF contracts or use proxy hedging in exchanges with a more liquid commodity, such as crude. The key is to develop a dynamic hedging strategy, by varying the hedge ratio and instruments over the oil price cycle.

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Chapter 14. Recommendation  ERP system implementation should be done very quickly so that data collection and processing becomes in real time.  More focus should be given on infrastructural development such as aircraft purchasing, advancement in air control and navigational technology, by giving higher allotment in revenue budget.  Maximum limit for fuel hedging in Air India is 25% of its total uplift, but the company only goes for 10%. This should be increased to 25% and beyond it.  To get maximum benefit in hedging of fuel, company should study the market condition properly and take authorized advisors opinion. 77

 The Company should work out a strategic plan by varying hedge ratio and using various instruments for minimizing risk.

Observation The study provides details of the expenses incurred by the airline for operating its scheduled flights. The costs incurred vary in nature based on various factors. Some costs are fixed while others are variable. Some costs depend on operational factors or volume factors while some depend on both factors. Scaling down on all the costs factors is not possible due to regulatory factors linked to it. However, Air India needs to ensure that it eliminates expenses that can be avoided by efficient operational decisions. The study indicates that along with operational factors political and policy decisions need to be considered while selecting an aircraft for operating to a sector. Airlines incur expenses for aircrafts operated on sectors. However, the extent to which the expenses will be recovered from a flight depends upon the volume of passengers and cargo onboard an operated flight.

Chapter 15. Future Scope This study restricts its boundaries to aircraft selection decisions in terms of budgeting, forecasting and costing. Addition and advancement to this study is possible in combination with other spheres of airline management. The scope of this study can be extended to the following fields: 1. Aircraft scheduling Aircrafts can be selected for operation on different routes by the airline and then the available fleet can be scheduled in manner that leads to maximum utilization of aircrafts, optimal utilization of resources, least cost of operation and maximum revenue from operations.

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2 Route . selection Aircrafts operate on multiple routes. Based on the cost accounting model, it is possible to visualize revenue gained from operation from different combinations of routes operated. This would help to select the most optimal route to be operated using an aircraft in combination with aircraft scheduling. 3. Aircraft acquisition and fleet expansion Fleet expansion and acquisition of aircrafts can use the costing model as basis for operational expenses and route selection. 4. Activity based management Activity based management is an extension of ABC from a product costing system to a management function that focuses on reducing costs and improving processes and decision making. This can be used for the airline to focus on reducing costs in areas that can be reduced. 5. Value added and Non value added activity Activities can be classified as value-added and non value added activities. Value added activities increase the worth of a service provided. Non value added activities add to the cost of service provided but do not add value to the service. Identifying these activities and adequately looking into minimizing the costs related to non value activities and enhancing the value added activities will help in reducing operating expenses and providing better services.

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Chapter 16 Bibliography Abbreviations: AbbreviationExplanation AGM Assistant General Manager

Available Seat Kilometers: A seat-kilometer is available when a seat is flown ASKM one kilometer. It is obtained by multiplying the total seats on an aircraft to the Distance to the destination in kilometers. 80

Available Ton Kilometers: A ton kilometer is available when one ton of payload capacity is flown one kilometer. It is obtained by multiplying the overall load ATKM carried by the aircraft to the distance to the destination in kilometers. Passengers are converted into load based on load factor conversion. Cargo Ton Kilometers: It is the actual quantity of cargo carried to a sector by a CTKM aircraft. It is obtained by multiplying the actual cargo loaded on an aircraft to the distance to the destination in kilometers. DGM Deputy General Manager Mail Ton Kilometers: It is the actual quantity of mail carried to a sector by an MTKM aircraft. It is obtained by multiplying the actual mail loaded on an aircraft to the distance to the destination in kilometers. Passenger Ton Kilometers: It is the conversion of passenger load into weight load. The number of passengers carried is multiplied by a factor representing the PTKM average weight of the passenger plus both normal baggage allowance and excess.

Baggage: This conversion factor is left to the discretion of the operator. However, it is recommended that 90 kilograms be used. Public Sector Undertaking. It refers to a government owned corporation. PSU Government owns majority (51% or more) of the company’s equity in a PSU. Revenue Passenger Kilometers: It is available when a revenue passenger is RPKM carried to one kilometer. It is obtained by multiplying the number of revenue passengers onboard a flight to the distance in kilometers.

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References The information provided above has been consolidated from different sources. The sources have been listed below: 1. Websites a. Wikipedia - www.wikipedia.org b. Air India website - www.airindia.com c. International Civil Aviation Organization - www.icao.int d. Global Airline Industry Program - web.mit.edu/airlines 82

e. International Air Transport Association - www.iata.org 2. Books a. Accounting and Finance for Non-Specialists, Prentice-Hall, London by Atrill P. and McLaney E. b. Airline Finance by Peter S. Morell c. Section Manuals from Air India 3. Whitepapers a. IATA Cost Benefit Model - Published by IATA b. An Empirical Study of Cost Drivers in the U.S. Airline Industry - Published in 1993 in ‘The Accounting Review’ journal by Rajiv D. Banekar (University of Minnesota) and Holly H. Johnston (Rice University) 4. Presentation a. Airline Operating Costs by Peter Horder, Senior Vice President, SH&E International Air Transport Consultancy

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THANK YOU

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