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JQME

2,4 Aircraft maintenance


budgetary and costing
systems at the Saudi Arabian
32
Airlines
An integrated business approach
Mohamed Ali Mirghani
Department of Accounting and Management Information Systems,
King Fahd University of Petroleum and Minerals, Dhahran,
Saudi Arabia

Introduction
Aircraft maintenance as a critical success factor
Aircraft maintenance directly affects an airline’s ability to operate the aircraft,
sell its seats, and keep it flying. Due to the complexity of the equipment and the
severe consequences of failure, there are very strict standards for aircraft
maintenance. An airline is not the only party that controls the standards. Since
airlines engage in cross-boundary operations, maintenance standards are set by
the international community of which the airline is a member. Once an airline
agrees to the standards, it has to abide by them. In essence, aircraft
maintenance standards control the operator with respect to its domain of
operations. Aircraft maintenance could be done in-house by the operator, in
which case the sole responsibility lies with the operator. However, if aircraft
maintenance is outsourced, that should be to a maintenance facility certified by
a regulatory body.
Maintenance programmes for aircraft and components are set by a
maintenance review board (MRB) composed of:
• the Civil Aviation Authority of the country of the aircraft manufacturer;
• aircraft manufacturer;
• manufacturers of aircraft major components;
• a select group of airlines intending to use aircraft type.

The author gratefully acknowledges support from King Fahd University of Petroleum and
Minerals (KFUPM) and SAUDIA that made this research possible. During a sabbatical leave from
KFUPM for the 1995/1996 academic year, the author was associated with SAUDIA, where this
research project was carried out. The author deeply appreciates the valuable support received
Journal of Quality in Maintenance from SAUDIA’s Technical Services Vice-President and Director of Quality Assurance by making
Engineering, Vol. 2 No. 4, 1996,
pp. 32-47. © MCB University Press, their time available for conducting in-depth interviews that resulted in collecting vital
1355-2511 information for this research project.
The Saudi Arabian Airlines (SAUDIA) abides by all of the MRB’s requirements Aircraft
as well as by the Fedral Aviation Administration (FAA) rules and regulations maintenance at
which have been adopted in their entirety by the Presidency of Civil Aviation SAUDIA
(PCA). These rules and regulations cover aircraft manufacturing and spare
parts; operating into the USA (FAR 129); how to operate an aircraft
(certification to fly, FAR 121); and certification of aircrafts and related parts
(FAR 121, Part 25). 33
Also SAUDIA is bound by the International Civil Aviation Organization’s
(ICAO) common rules and regulations governing overflying, including
navigational rights, air routes, and criteria for identifying air corridors. In
essence, ICAO’s rules and regulations relate to anything dealing with air
transport from an international perspective.
Aircraft maintenance standards are directly related to the safety and air
worthiness of aircraft which are critical success factors for an airline.
Furthermore, aircraft maintenance is a major contributing factor to an airline’s
on-time performance (OTP), another critical success factor.

Aircraft maintenance and SAUDIA’s mission statement


SAUDIA’s mission statement is as follows:
To be a world class airline with a distinctive Saudi character, that is customer-driven, and a
caring employer.
To be a world-class airline depends on technical on-time reliability which is
directly related to despatch reliability of aircraft. SAUDIA’s despatch reliability
target is in excess of 95 per cent for all aircraft types. This indicates that
SAUDIA’s aircraft maintenance has to be reliability-centred to achieve target
technical OTP as well as impressive high records of passenger safety and
comfort. These are major factors for being a customer-driven airline.
Budgeting and aircraft maintenance. A properly functioning budgetary
system, would result in allocating adequate resources to aircraft maintenance to
accomplish objectives that are in line with the corporate mission and objectives.
The budget would be a quantitative expression of aircraft maintenance planned
actions and would serve as an aid to the co-ordination and implementation of
these actions. A well-formulated budget would add flexibility to the aircraft
maintenance management process by enabling them to deal with unexpected
situations, before the fact, through “what if ” analysis. Furthermore, a
budgetary system would provide a sound basis for evaluating aircraft
maintenance departmental and managerial performance in terms of
effectiveness and efficiency.
Organization structure of SAUDIA’s technical services. SAUDIA’s aircraft
maintenance is performed within the Technical Services Division which is
headed by a vice president, reflecting a high level of importance attached by the
corporation to this function. Technical services’ major activities are:
• aircraft maintenance;
• engines and components maintenance;
JQME • facilities and support equipment maintenance.
2,4 Technical services maintain SAUDIA’s commercial fleet and the Royal fleet of
the Saudi Government. The total fleet has 113 aircraft of different types, mostly
wide-bodied. Aircraft maintenance involves performing all types of checks (A,
B, C, and D), engines and APU’s overhauls. Some complete overhauls are
outsourced to maintenance facilities in and out-of-Kingdom.
34 Technical services’ organization structure is embodied in Figure 1.
Figure 1 reflects technical services’ core and support functions and indicates
how the various activities are organized for effective and efficient
organizational functioning.

Director general

EVP operations

Vice president Vice president Vice president


flight technical services materials
operations management

Manager Manager
maintenance product
control analysis group
centre

GM aircraft GM aircraft GM facility Director Royal


maintenance complete GM system and Aircraft
and overhaul maintenance equipment engineering and
overhaul maintenance maintenance

GM Director Director GM technical Manager


GM aircraft maintenance quality services technical
Figure 1. engineering inspection
planning and assurance training assessment
Technical service control and
development
organization

Organizational interfaces
Technical services maintenance interfaces directly and incessantly with:
• materials management;
• flight operations;
• marketing services;
• dining and commissary.
The interface with materials management involves ensuring availability of
needed materials on time, and at acceptable quality levels. The interface with
flight operations involves aircraft despatch reliability for scheduled and non-
scheduled flights, pre-departure checks; and unscheduled and scheduled
maintenance jobs. This interface also involves pilots and flight attendants with
regard to technical problems they record in log books and flight reports.
The interface with marketing services deals with in-flight services related to Aircraft
passengers comfort and entertainment, like audio/video systems, lavatories, maintenance at
cabin general appearance, and on-ground air conditioning. SAUDIA
The interface with dining and commissary involves in-flight kitchen
equipment and trolleys for serving beverages and food to passengers. Technical
services interface indirectly and intermittently with other SAUDIA
organizational units for administrative, medical, personnel, information 35
technology, and financial services.
These organizational interfaces are important for maintaining a certain level
of co-ordination and communication for effective organizational functioning.
The desired level of co-ordination and communication has implications for the
resource allocation process which lies at the heart of the budgeting system.

Literature review
Role of maintenance in world-class organizations
Effective maintenance management would enable the organization to gain
uptime – the capacity to produce and provide goods and services to the
customers’ satisfaction, consistently. This becomes quite critical in capital
intensive organizations because of the heavy investment in capital assets
needed for serving customers. An organization’s maintenance strategy has to
be in line with its business strategy[1]. Quality and the drive for continuous
improvement in world-class organizations is changing the philosophy and
attitude towards maintenance. Total productive maintenance (TPM) is one of
the outcomes of productivity improvement targets aimed at increasing uptime,
improving quality, and lowering costs[2]. The journey to world-class level of
excellence indicates that maintenance managers must take a leadership role in
improving the maintenance function[3].

Budgeting systems
A budget is a quantitative expression of a plan and is an aid to the co-ordination
and implementation of this plan. In addition to instilling the discipline of
systematic planning into the organization, the budgeting system provides a
two-way channel of communication for the various echelons of the
organizational hierarchy. This two-way communication capability (top-down
and bottom-up) is directly linked to the iterative nature of the budgetary process
through which the technical and financial feasibilities of planned actions are
assessed. Furthermore, well-formulated budgets provide a sound basis for
evaluating departmental and managerial performance[4].
A budget should not be perceived by the manager as only a mechanism for
securing departmental funding. Such a perception would make the budgetary
process a “number crunching” exercise. A properly functioning budgetary
system should help a manager understand that a budget needs to fulfil an
organization’s mission. This requires department managers responsible for
budget development to have a thorough understanding of the organization’s
mission and their department’s role in accomplishing it. This indicates that
JQME budget development should be designed so that a department manager’s focus
2,4 is on carrying out the mission effectively and efficiently[5].
In today’s competitive environment survival requires businesses to be flexible
and innovative mainly through the development of new products and services,
while continuously improving productivity and customer services. Building the
effects of innovation and continuous productivity improvement into the annual
36 budgets can only be achieved through continuous budgeting that rolls the
budget at the end of each quarter for the next four quarters. In this setting, the
budget also serves as a vital tool for ensuring that the corporate culture has a
unified understanding and commitment to strategic objectives. This world-class
budgetary practice has been reported about the Hon Company, the largest maker
of mid-priced office furniture in the USA and Canada. The office furniture
industry is characterized by cyclical demand, short-term uncertainties, and stiff
competition that make planning difficult, even in the short run[6].
Budget performance reports provide valuable feedback for controlling
operations and/or for revising plans if circumstances change. These budget
performance reports need to be custom-tailored to the appropriate level of
responsibility because this has implications for their timing, form, content and
level of aggregation.
The reports should establish control limits for budget variances so that the
manager can focus his attention on significant events. The budgetary control
system should keep track, over time, of the behaviour of variances that are
within the control limits so that upward or downward trends could be discerned
and reported in feedforward reports.

Maintenance as a business function


Several capital-intensive manufacturing and service organizations started
looking at maintenance as a source of revenue[7]. In the airline industry, British
Airways, for example, has placed its several engineering and maintenance units
into an arms-length business relationship with the airline, in an effort to make
them more competitive. The change is made with the objective of giving the
carrier the option of outsourcing its in-house maintenance. Top management
thinks that the internal competitive pressure is the best incentive for these units
to become more competitive and profitable[8].
Another example, LanChile’s maintenance base is now operated as an
autonomous business unit with 30 per cent of hangar’s capacity for in-house use
with the remaining 70 per cent available for third-party services. The base’s
target market segment is South American clients with the ambition of winning
international clients on the basis of cost competitiveness and high quality
services[9].

Organizational, behavioural and human resources aspects of maintenance


TPM and total quality management (TQM) are processes geared towards
making a company more competitive. They both involve interrelationships
among all organizational functions for continuous improvement purposes. The
real power of both TPM and TQM is to use the knowledge base and experience Aircraft
of all workers to generate ideas and contribute to the goals and objectives of the maintenance at
organization[10]. SAUDIA
Goal congruence between maintenance personnel and the organization
together with innovarive Japanese technology has given Japan Airlines (JAL) a
despatch reliability standard in excess of 99 per cent, the highest in the industry.
Advanced automation and mutual commitment between the organization and 37
the individual have resulted in significant savings in cost and manpower
requirements[11].
Airline industry officials are improving the working conditions for air
mechanics to boost productivity and decrease waste. The productivity
improvement effort is aimed at controlling the costs and improving the safety
margins of maintenance operations. The most singular advance made in the
mechanics’ ability to perform their jobs is that manufacturers and airlines are
beginning to consult them about maintenance problems[12].
A perquisite to improving maintenance and equipment efficiency is human
resources development through training[13]. A maintenance improvement
programme should require all involved employees to participate in training
courses that focus on what good maintenance and operation practices include
and the rationale for what needs to be improved in the organization[14].

Maintenance and inventory management


The problem of overstocking spare parts needed for maintenance could be
avoided by applying the same principles of just-in-time (JIT) systems used in
manufacturing. The precision controls department of Texas Instruments (TI) in
Attleboro, Massachusetts, implemented JIT to ensure spare parts
availability[15]. In the case of expensive spare parts, it is important to have the
least amount of spares that are consistent with management’s specification of
the likelihood of equipment availability for use when needed[16].

Aircraft maintenance budgeting at SAUDIA


Budgetary process
Aircraft maintenance budgetary process is a mirror image of SAUDIA’s
budgetary process with the following salient features:
• It is a tool for fiscal control rather than a tool for managerial planning
and control. In essence, it is a mechanism for securing departmental
funding without assuring that budget proposals relate to objectives that
are in line with overall corporate objectives.
• Follows the practice of line budgeting, whereas the budget for a
responsibility centre is broken down by individual categories (lines) –
telephone, travel, postage, salaries, equipment purchases, overtime, part-
time help, and so on. The manager of the responsibility centre is held
accountable for meeting each and every line, not just the total budget.
JQME Managers are not permitted to shift expenditures from one line to
2,4 another without express permission.
• Allows incremental budgeting which results in top management’s
approvals of next year’s budget on the basis of the current year’s spending.
• No specific measures are used to evaluate budget proposals. Budget
38 proposals either get blanket approvals at last year’s levels or depend on
the negotiating ability or bargaining power of the proponent.
• The cumulative effect of budget proposals is not reflected in pro forma
financial statements (income statement, balance sheet, and statement of
cash flows). A cash budget is not prepared to assure the availability of
cash for approved budget proposals.
• Expense budget performance reports (EBPR) provide detailed
information of actual expenses and related budget variances. Usually
cost centre heads do not pay attention to EBPRs, either because the
budget is invalid and/or the actual amounts are of questionable accuracy.
Furthermore, they find them not fulfilling a useful managerial purpose.
The dysfunctional consequences of the existing budgetary system could be
summarized as follows:
• Line management has lost faith in the budgetary process as a rational
resource allocation process.
• Unnecessary spending is encouraged, especially at the end of the fiscal
year, so that next year’s budget will not be reduced.
• Non-value added time is expended in negotiations and bargaining over
budget proposals.
• Budget proposals preparation becomes a clerical exercise with no
strategic direction or value.
• The approved budget does not relate to the underlying operation and
does not synchronize required resources with available resources.
• The budget becomes an end in itself and not a means to an end.
• No communication and co-ordination between the various organizational
units take place to assure effectiveness and efficiency of operations.
• The budgetary process is non-conducive to a unified corporate culture.
• The budgetary process does not compel a manager to look to the future
and plan to achieve objectives that are congruent with corporate
objectives.
• The budget does not provide a sound basis for judging departmental and
managerial performance.
When these dysfunctional consequences are looked at from the point of view of
technical services, the following adverse effects come to the surface:
• Absence of a rational goal-directed resource allocation process adversely Aircraft
affects despatch reliability of aircraft – a critical success factor for an maintenance at
airline aiming at world-class status. SAUDIA
• Unnecessary spending results in misallocation of resources that could be
utilized somewhere else in the organization.
• The time expended in negotiations and bargaining over budget 39
proposals diverts management’s attention from the core business of
providing services that are in line with the organization’s mission
statement.
• Great uncertainty surrounds the timing of funding the approved budget
which, in turn, jeopardizes the acquisition of resources needed by
technical services.
• The focus on “meeting the budget” is frustrating and counterproductive.
• Co-ordination and communication between technical services and other
organizational units is not formally done through the budgetary process
and that leads to bottlenecks that could have been anticipated and
avoided.
• Technical services perceive the overall organization as a number of self-
contained islands that lack a unified culture.
• EBPRs lack information content that technical services could use for any
managerial purpose.
It is quite apparent that the existing budgetary system is not serving SAUDIA
or its organizational units as a management tool. Its fiscal control orientation
could be attributed to the fact that SAUDIA has neither developed the culture of
a business organization nor adopted private sector thinking because it has been
highly dependent on financial support from the Saudi Government since it was
established. However, given its growth over the years, its changing markets, the
intense competition it is facing, a new CEO, a new reorganization plan, and a
strong direction towards privatization, its budgetary system needs to be re-
directed to serve it as a business organization embarking on a journey towards
world-class status.
In the following section prescriptions are made for “re-directing” the
budgetary system and the resultant benefits to SAUDIA, in general, and to
technical services, in particular.

Proposed budgetary system


Operating budget
As reflected on the master (comprehensive) budget flowchart (see Figure 2), the
budgetary system is driven by SAUDIA’s mission statement that provides the
framework for strategy analysis. Observe that all arrows are two-directional,
indicating that:
JQME Mission statement
2,4
Strategy analysis

40 General statement of objectives

Marketing budget

Sales budget

Flight operations
Operating
budget

Technical Materials Catering


services management services

Administration Medical I.T. Legal Personnel


services services services services services

Pro forma income statement


Financial
budget

Capital Cash Pro forma Pro forma


budget budget balance statement of
sheet cash flows
Figure 2.
Master budget
components

(1) the various components of the budgetary process are interrelated and
affect each other;
(2) the budgetary process is iterative in nature involving top-down and
bottom-up communication.
The outcome of strategy analysis is a general statement of objectives that
relates to SAUDIA’s strategic and long-range plans. This statement is a
reflection of top management’s expectation of where the organization should be
in terms of, for example, market share, competitiveness, profitability, cash
flows, and so on, by the end of the budget year. The focus is on key result areas
or critical success factors.
The marketing division, should translate its market research based plan into
a budget reflecting marketing objectives to be achieved and required resources.
The marketing budget should include strategies related to:
• market penetration and expansion; Aircraft
• pricing; maintenance at
• channels of distribution; SAUDIA
• customer service;
• competitive standing;
41
• research and development.
The marketing budget should be translated into a sales budget reflecting the
number of passengers, cargo and mail tonnage, and charter flights that need to
be sold in view of the marketing strategies related to the general statement of
objectives. The sales budget should provide target sales quotas by market
segment in terms of passengers, cargo, and charter flights. Pricing, advertising
and promotional campaigns, and customer service programmes should be
specified. A major component of the sales budget is total projected sales
revenue broken down by source, and projected market share. Projected sales
commissions, price discounts, and costs of advertising and promotional
campaigns, and administrative costs, should be disclosed.
The sales budget should be translated into capacity requirements through
the flight operations budget. Capacity will be expressed in terms of equipment
(aircraft), block hours, passenger kilometres, ton kilometres, cockpit crew
members (pilots), and cabin crew members (flight attendants). Optimization
techniques should be used to assign equipment and human resources in a
manner that maximizes profitability (or minimizes losses). Any excess capacity
needs to be communicated to marketing/sales so that the excess capacity could
be utilized in maximizing profits (or minimizing losses). An expected capacity
shortage should be communicated to marketing/sales so that their respective
budgets can be revised through optimization techniques which might, in turn,
necessitates changes in top management’s general statement of objectives
and/or strategy.
Technical services primary objective is to achieve an aircraft despatch
reliability factor in excess of 95 per cent for flight operations. Given the
budgeted block hours in the flight operations budget and aircraft past
utilization records, Technical services, should be able to project the number of
(in-house and out-of-Kingdom) A, B, C, and D checks by aircraft type for the
budget period. Through optimization techniques, technical services should be
able to schedule its work during the budget period to meet the aircraft despatch
reliability factor and improve on it. Effective co-ordination and communication
with flight operations is quite critical at this phase.
The technical services budget should identify the primary and alternative
means for achieving its objectives and the amount of resources needed for each
alternative. The resources should include:
• types and quantities of materials;
• labour skills by headcount;
JQME • support services;
2,4 • training and manpower development;
• maintenance equipment and facilities.
Through the budgetary process, Technical services could justify the acquisition
of resources for continuous improvements, improved working conditions, and
42 increasing the level of commitment of the individual worker.
The budgetary process should focus the attention of technical services
management on achieving objectives that are in line with SAUDIA’s objectives
and mission statement. The budgetary process should synchronize required
resources with available resources and identify constraints or bottlenecks that
could render the budget technically infeasible. Alleviation of constraints or
bottlenecks should be done through optimization techniques. Assuring the
technical feasibility of the technical services budget might trigger revisions to
the budgets of flight operations, sales, marketing, as well as the general
statement of objectives.
The budgetary process should also enable technical services to co-ordinate
and communicate effectively with materials management to assure the
availability of required materials in terms of quantity, quality, and timing. This
would prevent holding excessive inventory and pave the way for a JIT
environment. The same degree of co-ordination and communication should
prevail with marketing services for determining passenger services
requirements.
The technical services budget proposal should be structured to highlight its
objectives for the budget period; primary and alternative means of achieving
these objectives; resources required for each alternative and related costs. The
budget proposal should no longer be an extrapolation of the past, but a
management tool with a futuristic orientation.
The technical services budget should be subjected to rigorous “what if”
analysis to explicitly recognize uncertainty and add dynamism to the
budgetary process. Through sensitivity analysis, technical services would have
an action plan for coping with changing circumstances. The main advantage of
this approach is that the manager experiments with all possible plausible
scenarios “on paper” without running the risk of a crisis materializing or an
opportunity passing by. This adds significant flexibility to a manager’s ability
to deal with unexpected situations.
The same budgeting framework should be used for materials management,
catering services, and other support services appearing on the flowchart. The
individual budgets developed, thus far, make up SAUDIA’s operating budget.
The cumulative effect of these budgets is the projected result of operations
(income/loss) which will be reflected on the pro forma (budget) income
statement. If the bottom line figure of that statement is not consistent with
management’s expectations, revisions to components of the operating budget
will have to be made until management is satisfied or is willing to change its
expectations.
Financial budget Aircraft
On completion of the operating budget, the components of the financial budget maintenance at
will be assembled. The first component is the capital budget which justifies the SAUDIA
acquisition of capital assets and their relationship to current and future
operations. In the case of technical services, the capital budget should include
all capital assets and maintenance facilities to be acquired during the budget
period and their impact on current and future operations. Capital budgeting 43
techniques should be used to justify the investment in capital assets.
The second component of the financial budget is the cash budget which
synchronizes cash inflows and outflows for the budget period. The major source
of cash is operating revenue which appears in the sales budget. The magnitude
and timing of cash sales as well as the terms of credit sales and the effectiveness
of managing accounts receivable are the major determinants of cash inflows.
The payment terms for cash operating expenses and capital assets determine
the magnitude and timing of cash outflows. The cash budget is prepared for the
year as a whole and should be broken down by month or quarter to ascertain
availability of cash for operating and capital expenditures throughout the
budget year. The cash budget is a very critical document because it determines
the financial feasibility of the operating and capital budgets. A cash surplus (or
deficit) could be projected for the budget year and for shorter time periods
(months, quarters, etc.) so that the treasury department could consider all
possible alternatives for handling the projected cash surplus or deficit.
In the case of a persistent cash deficit, its impact on operating and capital
expenditures should be assessed by the treasury department. This requires
close co-ordination and communication between the treasury department and
operating departments so that necessary revisions to operating and capital
budgets, and, possibly, top management’s general statement of objectives can
be made. Available cash should be rationed among operating and support
departments by a system of priorities of cash outlays from the standpoint of
overall organizational effectiveness. Through this rationing system, each
organizational unit would be assigned its “fair share” of the pie to carry out its
activities to contribute positively toward achieving SAUDIA’s mission-related
objectives.
The implications of the cash rationing system for technical services is that it
will reduce the amount of uncertainty surrounding funding the acquisition of
resources needed for planned work during the budget period.
On balancing the cash budget, a pro forma balance sheet, and a pro forma
statement of cash flows can be prepared to project financial position by the end
of the budget period as well as cash flows for the period. These pro forma
financial statements should be analysed through tools of financial analysis. If
the results are not in line with management’s expectations, revisions to earlier
budgets become necessary to improve financial position and cash flows.
If the budgetary system operates in the fashion proposed in this section, it
will become a “business simulator” by which management could experiment
JQME with the possible effects of alternative operating and financing courses of action
2,4 for fulfilling the organization’s mission.

The budget cycle


A major prerequisite for an effective budgetary system is a time cycle for
effectively carrying out all phases of the budgetary process to produce an
44 approved master budget well before the beginning of the budget year. At
present SAUDIA’s budget cycle is not well defined and contributes to the very
low level of importance managers attach to the budget as a management tool. A
budget cycle time-table should be prepared to satisfy this prerequisite.

Top management support


Although SAUDIA’s annual budget’s final approval comes from the board of
directors, the budget is for fiscal control purposes with no active participation
from line management. Top management’s support for budgeting as a
managerial tool could be in the form of a Corporate Budget Committee (CBC) to
be chaired by the director general with its membership from senior executives
at the vice-president level. CBC’s main role is to drive the budget process and set
the various criteria to be met at the corporate, divisional, and organizational
unit levels. The CBC should operate on a presentation basis where the
concerned VPs will organize presentations of their respective budget proposals
with the assistance of their divisional controllers. CBC will review budget
proposals in terms of strategic direction, relevance, and accuracy. The CBC
should review the consolidated budget from the overall organization point of
view considering all plausible scenarios and ascertain its technical and
financial feasibilities. CBC should monitor budgetary performance monthly or
quarterly and, accordingly, roll the budget.

Budget performance reports


Budget performance reports should highlight effectiveness and efficiency of
operations. In the case of technical services the difference between budgeted
and actual achievements is a measure of effectiveness (i.e. closeness to
accomplishing objectives). Whereas the difference between resources consumed
and resources that should have been consumed for actual achievements is a
measure of efficiency (i.e. it is an input/output relationship). As was mentioned
earlier, the EBPRs have no information content with regard to effectiveness and
efficiency of operations.
A flexible budgeting system will have the capability of generating the
information needed for evaluating effectiveness and efficiency of operations in
technical services. The difference between the original budget and the flexible
budget (based on actual output) is a measure of effectiveness and should be
investigated if the variance is significant provided that the investigation is cost-
beneficial. The difference between the actual resources consumed and the
resources allowed for the output achieved is an efficiency variance. Efficiency
variances could be decomposed to any level of detail which the management
deems appropriate. Significance levels (control limits) for efficiency variances Aircraft
could be specified judgementally or statistically, so that only significant maintenance at
variances are reported to facilitate management by exception. Immediacy of SAUDIA
feedback is imperative for timely control actions. Although efficiency variances
that are within the control limits should not be reported to management, their
behaviour over time has to be tracked to ascertain that they are randomly
scattered within the control limits. However, if an upward (or downward) trend 45
is discerned, the system should feedforward the information to management for
investigating underlying causes and taking appropriate actions. A cost/benefit
approach should be followed in investigating significant variances.

Maintenance costing system


SAUDIA’s existing maintenance costing system captures aggregate costs of
materials and labour for the overall activity without the ability of tracing these
costs to hangar, shop, aircraft type, aircraft registration identifier (tail number),
check type, or by a particular task/job card. Overhead costs allocation is a
major problem and the basis that is used has no cause-and-effect relationship
with underlying overhead items. Furthermore, the system is incapable of
generating maintenance cost information for:
• Flight costing and related profitability analysis.
• Evaluating cost efficiency of maintenance work by cost objects of
interest to management (i.e. hangars, shops, aircraft type, tail number,
serial number, check type, etc.).
• Preparing quotations for third-party repairs.
• Outsourcing decisions.
The inadequacies of the maintenance costing system could also be attributed to
the lack of a business organization culture and private sector thinking in
SAUDIA because it has been highly dependent on financial support from the
Saudi Government over the years. However, this is now changing because of:
• Great emphasis on efficiency and efficiency of operations by the
Government.
• A strong move towards privatization.
• A business-oriented management style adopted by the current top
management.
To rectify the deficiencies in SAUDIA’s existing costing system, a costing
committee was formed by the director general to recommend reliable systems
and methods, using a bottom-up approach, for overall corporate costing with
emphasis on activity-based-costing (ABC). A number of sub-committees were
formed one of which is for maintenance costing.
The maintenance costing sub-committee has developed a proposal for a full-
fledged job-costing system for capturing direct materials and direct labour cost
by hangar, aircraft type, tail number, or task/job card. The overhead allocation
JQME proposed methodology is conceptually flawed because it assumes that all
2,4 overhead cost items are related to a single factor, like Available Ton Kilometers
(ATK) or could be allocated pro rata. The overhead allocation problem could be
overcome, to a large extent, by using ABC to develop multiple overhead rates
for applying overhead costs to maintenance jobs. These overhead rates will be
based on cause-and-effect cost drivers. For example, if the overhead cost of
46 material handling activities is driven by the number of parts handled, then
material handling overheads application rate should be based on the number of
parts. Since maintenance jobs vary significantly in consuming overhead
resources, these variations need to be reflected in the related job costs.
“Different cost figures for different purposes” should be the working rule for
generating cost information for managerial uses. This requires a technical
services cost data “warehouse” where data items could be pulled together to
generate the relevant cost information for a specific managerial purpose. The
cost data “warehouse” should not be tied to the general ledger system because
of its rigid structure and financial accounting orientation.
Finally, through “cost consciousness” programmes, all technical services
employees, at all levels, should be made aware of the cost implications of their
actions and how they can achieve cost efficiency as part of their commitment to
SAUDIA.

Conclusion
In this paper the existing maintenance budgetary and costing systems at
SAUDIA have been described. Deficiences of the existing systems were
highlighted and suggestions for improving them are given. The proposed
approach for budgeting for maintenance can be utilized by different
organizations that seek to treat maintenance as a business function that
contributes to the organization main line of business.
Properly functioning budgetary and costing systems provide indispensable
tools of management for any business organization, especially those that
operate in dynamic, continuously changing environments like SAUDIA.
Through these systems, effectiveness and efficiency of aircraft maintenance
could be facilitated, leading to the development of this vital service into an
independent business function and a valuable contributor to the airlines’
competitiveness and long-term profitability.

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