Activity-Based Budgeting on a Zero-Based Model

Building an Activity-Based Budget on a Zero-Based Model for Airlines: A Roadmap to Precision and Profitability

Budgeting is an integral part of an airline's operational strategy, serving as the backbone for financial planning, resource allocation, and decision-making. Every year, airlines prepare their annual budgets to forecast revenues, control costs, and ensure profitability. Common approaches to budgeting include Incremental Budgeting (adding a percentage increase to last year’s numbers), Value-Based Budgeting, and Zero-Based Budgeting (ZBB). Each methodology has its merits, but the nature of airline operations—with its complexity and variability—demands precision and a clearer understanding of cost structures.

Here, I present a hybrid model: Activity-Based Budgeting (ABB) on a Zero-Based framework, integrated with Activity-Based Cost Analysis and Route Profitability Analysis, underpinned by a five-level profitability structure. This tailored approach equips airline management with actionable insights for data-driven decision-making and cost management at a granular level.

Why an Activity-Based Budget Works for Airlines

Airline profitability hinges on understanding where revenue is generated and costs are incurred. A Zero-Based Budgeting approach—where every expense is justified from scratch—paired with an analysis of activities across the operational workflow, enables airlines to:

• Align resources directly to value-generating activities.
• Identify cost drivers and inefficiencies in operations.
• Make proactive decisions on profitable or non-viable routes.

This methodology moves away from the traditional one-size-fits-all approach and focuses on the activities that directly impact route profitability, which lies at the core of any airline’s financial sustainability.

Laying the Foundation: The Five-Level Route Profitability Model

To implement an Activity-Based Budget (ABB) on a Zero-Based Model, the first step is to classify airline activities and costs under well-defined categories. These classifications structure your budget and enable cost tracking down to specific activities. For an airline, the costs can be grouped into the following header accounts:

1. Revenue: Total income generated from all routes.
2. Direct Operating Costs – Variable: Costs that vary with operations, such as fuel, ground handling, and navigation fees.
3. Direct Operating Costs – Fixed: Costs incurred regardless of operations, such as aircraft maintenance contracts or crew salaries.
4. Aircraft Ownership Costs: Costs associated with leasing/ownership, depreciation, and financing.
5. Administrative Overheads & Miscellaneous Expenses: All indirect costs and expenses not classified elsewhere.

Linking these high-level header accounts to sub-accounts ensures traceability and precision while setting the budget. Once the classification is complete, attach these headers to a detailed Chart of Accounts (COA), mapping them to each activity.

Capturing Activities: From Budgets to Costs

ABB and ZBB require identifying cost-driving activities within each revenue or expenditure group. Consider this method (sample):

• Group: Operating Expenses
• Header: Direct Operating Costs – Variable
• Sub-Account: Specific routes
• Activity: Air Turbine Fuel (ATF)
• Unit: Quantity burned per leg (in USG/Kg)
• Rate: $XX per USG/Kg
• Cost: Total burn × Rate

Such a systematic mapping allows for activity-level clarity. For instance, fuel consumption varies significantly across routes based on aircraft type, distance, and load factor. Understanding this at an activity level is critical for calculating profitability per route accurately.

This mapping exercise should be repeated across all operating expenses and revenues. Activities like ground handling, navigation fees, catering, and maintenance costs must be allocated similarly. The end goal is a segmented Route-Level Profitability Report, showcasing the contribution margins of each route.

Real-Time Data Integration for Accuracy

Budgeting at an activity level isn’t just a one-time exercise. Airlines generate massive volumes of operational data daily. By integrating these datasets directly from existing enterprise systems (e.g., flight operations systems, daily flight logs, maintenance repair and overhaul (MRO) systems, payroll systems etc.), airlines can:

1. Enhance Invoice Accounting: Capture costs at the same activity level used for budgeting to maintain consistency.
2. Improve Accuracy: Automate invoice verification with integrated data, minimizing errors and omissions.
3. Support Decision-Making: Use real-time cost data to adjust budget allocations or reprice routes during the year.

When implemented effectively, this approach not only improves the quality of financial reporting but also drives substantial savings by reducing inefficiencies.

Benefits of Activity-Based Budgeting on a Zero-Based Model

1. Route Profitability Analysis During Budgeting: With activity-level costs mapped to routes, airlines can identify profitable and non-profitable routes upfront. This empowers management to allocate resources more effectively and even discontinue unprofitable routes before incurring losses.
2. Establishing KPIs for Cost Centers: Activity-based budgets provide clear benchmarks for each cost center. Managers are better equipped to track performance and meet goals supported by data-driven insights.
3. Error Reduction and Cost Savings: Automation and integration of operational data reduce risks associated with manual accounting or discrepancies between systems.

Transforming Airline Budgeting Practices

In my experience with implementing this hybrid model for leading airlines, the benefits have been substantial. Breaking costs into activity-based components allows organizations to operate more strategically by focusing only on value-added activities. Moreover, integrating these activities into a Zero-Based Budget ensures there are no assumptions or legacy inefficiencies inflating costs.

To ensure success, it is crucial to not only define and align costs accurately within the framework but also adopt the right technology to streamline data integration. Airlines already use mandatory systems like flight operations software, maintenance systems, and payroll—leveraging these ensures real-time accuracy during budget creation and execution.

Final Thoughts

By combining Activity-Based Budgeting and Zero-Based Budgeting, airlines can achieve unparalleled clarity over their operations and finances. This approach links operations and finance seamlessly, enabling management to make informed decisions on route profitability and cost allocation. If implemented correctly, it significantly elevates financial effectiveness and operational efficiency, reducing costs and driving profitability.

For anyone looking to explore this budgeting method further, feel free to connect. I'd be delighted to share insights and provide guidance on implementing this model in your organization!