NOSES – QUIZ

Do you think you know your aircraft? Then take the quiz and identify the noses.  It is not an easy quiz,  some of the aircraft are no longer in service.  If you can’t immediately identify an aircraft, some have the aircraft registration numbers are on the nose wheel covers or else try to identify the airline livery.  Then look it up on the internet. That’s how we checked the answers.  A long shot is to enlarge the picture and see if you identify the Airline Alliance logo or the registration numbers on the GSE.  If all else fails, ask someone.  That is how we all learn.

Photographs courtesy of Alastair Gordon and Airports Company of South Africa.

1.

    

2.

Another aircraft from the same manufacturer as the first.

 

 3.

 

4.

This one’s easy!

 

5.

This is a tricky one. It is used in Africa for light transport.  It was also a military aircraft.

 

6.

This aircraft is manufactured by a French/Italian company. This is also a very obscure clue to the above aircraft.

 

 

7.

I am sure you know the aircraft but what model?

 

8.

Again, you know the aircraft but what model is it?

 

9.

Name the one nearest the camera.

 

10.

The manufacturer has stopped making these particular aircraft but there are still many flying.

 

11.

If you don’t know the aircraft look closely at its name and registration.  It is an African Airline.

 

12.

The aircraft’s name might be misleading unless you look it up.

 

13.

Widely used because of its STOL capabilities and its quietness This was Britain’s most successful jet airliner.

 

14.

You think you know the aircraft, but do you?

 

15.

These very old but reliable aircraft are sometimes seen in Africa.

 

16.

Not many of these still flying, The SAA museum has one.

 

17.

This is a tough one. The SAA Museum has one.

 

18.

This picture separates the aviation enthusiast from the merely interested.

 

19.

Something more modern from a country lately has become one of the biggest builders of commercial aircraft.

 

20.

This was one of the best aircraft built by this company and they built some excellent aircraft but, unfortunately they could build aircraft better than they could manage a company and they were taken over by a rival. Actually they were taken over by another aircraft manufacturer and then by a rival company.

 

ANSWERS

  1. Airbus A319
  2. Airbus A330
  3. Airbus A340
  4. Airbus A380
  5. Piaggio Aerospace P166 Albatross
  6. ATR72
  7. Boeing B737-300
  8. Boeing B747F
  9. Boeing B747
  10. Boeing B757
  11. Boeing B777
  12. Boeing B787 Dreamliner
  13. Bae 146
  14. Boeing B707
  15. Douglas DC3
  16. Douglas DC4 – Did you notice the tricycle undercarriage?
  17. De Havilland Dove
  18. De Havilland Heron – Did you count the number of engines?
  19. Embraer ERJ145
  20. McDonnell Douglas MD83

Do you know what the A and B prefixes to the aircraft names mean?  Just in case you never noticed. If you did pat yourself on the back.

A as in A380 means it was manufactured by Airbus and B as in B737 means it was manufactured by Boeing. Careful, this does always apply – ATR is not manufactured by Airbus and Bae is not Boeing.

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THE WHAT AND WHY OF AUDITING

What is an Audit?

An audit is an appraisal of an organization’s compliance with its procedures by either internal or external bodies. External parties such as the External Financial Auditors, ISO and IATA examine the organization’s processes and procedures and evaluate compliance with them. In the Ground Handling industry, the airport management, airlines, trade unions and government departments such as Labour, Environment and the Civil Aviation Authority may also conduct audits of the organization.  The External bodies have an interest in the safety, effectiveness and viability of your organization. In addition, Legislation may require that regular audits are performed.

What is its purpose?

To evaluate the company’s procedures and it’s compliance with them.

The purpose depends on the external party;

1)      Financial: To determine if the Final Accounts of the organisation accurately reflect the financial state of the business

“Normally, independent auditors, also known as chartered accountants (CAs), conduct audit work to ascertain whether the overall financial statements of a company are, in all material respects, in conformity with the generally accepted accounting principles (GAAP). Generally speaking, what auditors do is to apply relevant audit procedures, in accordance with GAAP, in the examination of the underlying records of a business, in order to provide a basis for issuing a report as an attestation of that company’s financial statements.”[1]

2)      Others: To ensure that the standards set by agreement between the Ground Handler and for example, ISO or the airport, are being maintained. For example, ISO certification needs evidence of a system of performance improvement and learning. “Performance improvement may be based on the regular meeting of performance improvement teams. In practice these teams must have been established, held meetings and the meetings minuted.”[2]

Why is it necessary to achieve this purpose?

1)      To help ensure that the business continues to function,

2)      To ensure the safety and health of the workers and the environment,

3)      To ensure that service quality standards are being maintained.

What are the benefits of the operation?

To be able to continue working at the site and/or to continue to hold the qualification issued by the examining body, for example, ISO or IATA.

Why may this work be unnecessary?

The Internal Audit department may be doing this work effectively.

What are the disadvantages of external audits?

It may interrupt the daily work.

What Operational Resources are used in the Audit process

1)      Office space,

2)      A senior person in the department being audited will spend time explaining the organisation of the department.  Where necessary, accommodation and transport may be arranged or supplied.  The company’s staff must arrange this.

3)      The company has an audit liaison department; it will check that anything the auditors may require is available.

What does it cost?

Audit fees and in a widely geographically spread operation, the travelling and accommodation costs may be high.

What methods are used?

Whatever the audit program says and may include testing for:

1)      The presence of Process documentation, for example, Work Instructions or Manual of procedures,

2)      The availability of documentation to staff.  We saw an Operations manager once who had the emergency manuals locked away in his cupboard.  We asked him what would happen if there was an aircraft crash late at night.  He said that his staff would phone him and he would come in to the airport and get the manuals and give them to his staff.  We wanted to know that if the aircraft was burning, would there be enough time?  He said there would be.  Duh!

3)      Compliance with documented procedures,

4)      Quality and performance management,

5)      Fraud prevention procedures,

6)      Fraud detection procedures,

7)      Security control,

8)      Reporting quality,

9)      IT systems development procedures,

10)   Maintenance quality,

11)   Customer problems – quality, account balances, payment problems experienced.

When is it performed?

Periodically, for example, financial and ISO auditing is usually done twice a year. However, this may depend on the findings in the last audit – too many findings may mean more frequent audits.

What is the scope of the operation?

Whatever the auditor deems relevant.

What are the inputs?

1)      A long-term audit plan.

2)      Depending on the area being audited:

1)      Financial and Management Accounting records,

2)      Operations records, bus, tug movements etc.

3)      Customer complaints,

4)      Quality – Statistical Process Control charts,

5)      Maintenance records, for example, Job Cards,

6)      External audit findings,

7)      Internal Audit’s previous audit papers.

What are the outputs?

Audit papers, findings and recommendations for remedial action.

How is the effectiveness of the operation measured?

By the company’s audit committee.  The findings of the external auditors should be reviewed for quality and usefulness.

No major control breakdowns that External Audit should have discovered? (We once saw a company that implemented an Asset Management system that depreciated assets past zero.  It took Internal Audit 2 years to discover this. The External Auditors never did.)

References

[1][Supatcharee Sirikulvadhana, Data Mining As A Financial Auditing Tool, M.Sc. Thesis in  Accounting, Swedish School of Economics and Business Administration, 2002, p4]

[2] Quality systems in the small or medium-sized enterprise. A guide to the adoption of the ISO 9001:2000 standard.  IQA, ABCD, FSB, p19]

Tom Considine

BREAK OUT OF THE RUN-TO-FAILURE MAINTENANCE MANAGEMENT CYCLE

Stuck with an asset management system based on Run-to-failure? Want to break out of the cycle?

The fundamentals of sensible maintenance are quite simple, actually changing the way you do maintenance is a lot more difficult. Remember the acronym, F-CILARR which stands for:

F= FMEA

C= Cleanliness

I = Inspection

L = Lubrication

A = Adjustment

R = Repair or replace

R = Records

FMEA

A Failure Modes and Effects Analysis (FMEA) will indicate the effects, probability, and consequences of failures. If you estimate Criticality as well, you have an FMECA.

Machines have different failure rates and effects. Some will fail often but are easily fixed, others will fail rarely and may easy or difficult to fix in a reasonable time. A reasonable time means that your customers will not be affected by the breakdown. Some equipment is critical to your work, other is not so critical. If you have only one toilet truck and it breaks down, you are in trouble. If one of the computers in maintenance or accounts breaks down, that is not nearly as critical. A FMEA or FMECA done well will indicate which equipment is likely to fail, the effects of the failure and the criticality of the failure. Use this information to plan your maintenance.

If you go to our website, on the right-hand side scroll down until you find categories. You will find, either under Failure analysis or under quality, some ideas on how to do FMEAs. If you look in the Blog roll, towards the top on the right-hand side, you will find the Resource Library. In the library are downloadable examples of FMEA forms.

Cleanliness

The first principle of effective maintenance is to keep it clean. Keep equipment so clean that you can eat your lunch on it. A few years ago, at OR Tambo airport one of the ground handlers was a company called Commuter Handling Services. Their equipment was that clean, really! So it is not impossible. Apart from making maintenance easier, which saves lots of time and improves technicians working conditions, it creates a good impression for customers and prospective customers. Cleanliness includes keeping the paintwork fresh. Chips in paintwork attract rust which only adds to maintenance cost. Additionally, If a GSE unit is dented, rusty and has no padding on the seat, one more dent doesn’t matter. If the GSE is in beautiful condition, operators will try not to damage it.

Inspection 

Make it easy to inspect, if the unit is clean, it is easy to inspect. Make it easier, where possible, by marking the inspection points in a bright colour. Inspection methods can be easy or complex. As simple as feeling the unit for overheating or for unusual vibration. You can do the same thing with instruments, of course, and in the case of critical equipment, you should do so.

Lubrication 

Ensure that everything that should be lubricated is lubricated to the manufacturers specified level. This is important as many technicians think that you can’t over-lubricate. Mark lubrication points with bright paint so that they are not missed.

Adjustment 

Adjustment means that you tighten nuts and drive belts, and liquids like hydraulic fluid are kept at the levels specified by the manufacturer.

Repair or Replace 

When inspection indicates that parts need or will need repair or replacement, do so taking into the criticality of the unit. Predictive replacement is cheaper than replacing parts at regular intervals as the parts may still have useful working life left. Let me give you example, my car dealer changes my brake pads at regular intervals. Now I am light on brakes so I could easily use the pads for a few more months. If this case, there is not much choice as I cannot send my car in for servicing every week or so. However, when you can inspect equipment much more frequently than I can, as you can do on the ramp, you can save the cost of unnecessary replacements.

Records 

All of this requires that you need to keep records of inspections, lubrication, adjustments, breakdowns, and replacements. You need this information for your FMEA exercises which you should do annually. You can keep the records on paper or in a computer system, it is up to you. Keeping the records on paper will need storage space and someone to file and retrieve all the documents. Keeping the records in a computer system will take up less space and, if you take backup regularly reduce the risk of loss in the event of a fire, for example. Extraction and analysis of data is also easier than having to pull data from a pile of papers.

IMPORTANT! 

Don’t let anyone interrupt someone when she is doing an inspection, lubrication, adjustment, or repair. Make interruption an offence requiring a written warning. Research has shown that interruptions are the major cause of mistakes.

Of course, it is not as easy as we have shown, there is a lot of complex mathematics involved in calculating the FMEA failure probabilities or on deciding whether to scrap or repair a unit, for example. However, if your current maintenance management plan is Run-to-Failure and you want to improve your uptime and save money, this article is the basis of improving your maintenance management.

For more details on the subject Google for “Reliability Centred Maintenance.” Relex Software and Reliasoft publish many helpful articles on the web.

 

 

SO YOU WANT TO START AN AIRLINE!

SO YOU WANT TO START AN AIRLINE!

 

These days no one can make money in the airline industry. The economics represent sheer hell.

Cyrus Smith, past president of American Airlines

 

A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you’ve lost your trousers – you’re in the airline business. Sir Adam Thomson, founder and chairman of British Caledonian Airlines

 

CHARACTERISTICS OF THE INDUSTRY

Service industry

Capital intensive

Labour intensive

Trade unionism

Seasonal

Vulnerable to weather

 

Let us explain what these mean:

 

SERVICE INDUSTRY

There is no tangible product.

The product is perishable; you can’t sell seats on yesterday’s flight today or put cargo in yesterday’s holds.

 

CAPITAL INTENSIVE

New aircraft may cost between USD 70,000,000 and USD400,000,000
depending on the size and configuration.

You will need maintenance equipment and spares, for example, a RR Trent 900 engine costs around USD30,000,000.

You will also need Flight Simulators to train the pilots. You may be able to borrow these from other airlines who use the same equipment – at a cost. A Flight Simulator will cost USD10,000,000 upwards. For a full motion Flight Simulator reckon on it costing about the same as the aircraft it simulates.

As you have seen, you will need lots of money.

WHERE TO GET THE MONEY

Banks

Depending on the country, you operate in and it’s banking laws, it may be difficult to borrow money from banks or, in other countries, they may put a gun to your head and force you to take an unsecured loan.

 

State assistance

Governments generally are very free with taxpayers (you) money. They probably won’t be as generous if there is already a state subsidised airline in existence.

 

Stock exchange listing

This, like banking, depends on the country and its stock exchange regulations. In South Africa, for example, it is very difficult to get a listing and even more difficult to keep it. Other countries are not nearly so fussy; in some countries you can be listed without having any aircraft, staff, offices, or routes and people will queue to buy your shares.

 

Leasing

Finance companies will purchase the aircraft and lease them to you.

 

Cash flow

If you make a profit, which is unlikely, you can finance new aircraft out of the profits.

 

LABOUR INTENSIVE

Who works at an airline?

Pilots

Pilots are the men and women who fly the aircraft. Actually, that is not entirely true; aircraft are flown most of the time by a system of computers; the Flight Management System, sometimes even taking off and landing the aircraft. The aircraft’s Flight Management System does the routine flying but pilots fly the difficult phases like take-off and landing and problems. Pilots are people with very rare abilities as many thousands of passengers who are alive today, will gladly testify. For this reason, pilots earn high salaries. For safety purposes, pilots are limited to a certain a number of flying hours in a month. If delay might cause a pilot to exceed the limit, another pilot will have to take over the flight. This can cause havoc with crew scheduling.

Cabin crew

These are men and women seen by passengers. They serve the meals and drinks and clean up after airsick passengers. They are also responsible for ensuring that the passengers are as safe as they can make them. For example, they ensure that seat belts are fastened, seats are in the upright position, and cabin (carry-on or hand) luggage is safely stowed away.

The job requires great tact and patience, qualities which are not common.

Trainers

These people train the flight and cabin crew. They also train the ground staff.

Ground staff

These are the check-in staff and all the other support staff whom you may never see. For example, airlines will have one or more people in the baggage area in case passengers have lost their luggage.

Check-in / gate staff

These people weigh your luggage, charge you for overweight bags, take your ticket, and issue you with a boarding pass. The boarding pass is taken from you at the aircraft gate and you are given another piece of paper. This, of course, depletes the world’s forests which are needed to take up the carbon-di-oxide released by aircraft in flight.

Technicians

These are the staff that maintain and check the aircraft. This is highly skilled work and your life and that of your fellow passengers depend on their conscientiousness.

 

TRADE UNIONS

Airline staff are unionised, as are their supplier’s staff! You may be the best employer in the Galaxy but if your ground handler’s staff goes on strike, your aircraft can’t be loaded and you can’t operate.

It doesn’t matter if the strike is right or not, you will lose money; as we saw before, passenger seats are perishable. The same applies to perishable cargo – you can’t transport week-old fresh fish.

 

SEASONAL OPERATIONS

You will fly more passengers during holiday seasons, weekends, and sporting events like the Soccer World Cup and the Olympic Games. This means you will need bigger aircraft which will fly almost empty during off-peak periods. This will cost as they will use more fuel and require maintenance that is more expensive.

 

THE WEATHER

Passengers like to arrive at their destinations more or less on time. However, with the best will in the world, weather conditions will affect their airlines schedules. No airline will fly its aircraft or passengers in a thunderstorm or typhoon so teams of meteorologists are continually busy trying determine wind patterns and precipitation that may delay flights. Severe weather like hurricanes in North America and snow in Europe can cause delays which will affect flight schedules all around the planet. For example, if a 380 is due in Johannesburg from Europe with most of the passengers transiting onward to Cape Town is due in at 08:00 then allowing for offloading most of them will take flights around 9:30 to Cape Town. The airlines will have booked those passengers on the Cape Town flights, possibly scheduled a larger aircraft. If the flight doesn’t arrive until 10:00, there may not be places on later flights to Cape Town. The airline may then decide to play with the schedule and put on a special flight for the stranded passengers. This will affect all their other flights causing delays on other routes. Aircraft are very expensive so airlines cannot afford to have aircraft standing idle, just in case.

 

HOW DO YOU PLAN AIRCRAFT YOUR AIRCRAFT FLEET AND SCHEDULES?

 

AIRCRAFT FLEET PLANNING

Considerations

You must have the right size aircraft for the route and the season and destination.

Some airports may have short runways suitable for smaller or specialised aircraft only. London City airport and Pietermaritzburg airport, for example.

Air traffic Control en-route may be poor or non-existent. This might prompt you to use longer-range aircraft to avoid unsafe areas or to operate more modern aircraft which have more capable navigation systems.

Governments may impose restrictions on the size of aircraft, number of flights, number of passengers, amount of freight carried on foreign airlines serving their country.

 

THE AIRCRAFT USED BY AN AIRLINE

Factors

If a distant aunt has died and left you an airline, you will want to evaluate:

The age of the current fleet; modern aircraft can fly for up to 50 years; older aircraft with the exception of the Douglas DC3, have much shorter lives. Older aircraft are also more expensive to operate. There is currently, very rapid development of more efficient aircraft and Environment friendly aircraft. This means that a 50-year lifespan is of not much practical importance. On the other hand, new aircraft models are more expensive.

 

ROUTE PLANNING

The routes you operate will depend on the amount of business you can expect on the route modified by the Fleet-Planning factors we mentioned before. Some governments see aviation as an easy way to raise money. So, different countries and/or airports charge widely differing rates for services like flying over the country, landing at an airport or parking at an airport. These charges can be very high which will affect the profit you can make on the route.

 

 

LOW COST AIRLINES

How does the right mix of aircraft apply in Low Cost airlines? Low Cost Carriers have lower input costs by reducing administration and labour costs. These airlines generally use only one type of aircraft as this saves maintenance and pilot training costs. Low Cost Carriers operate only profitable routes unlike State-owned airlines which are often obliged to operate loss-making routes for country marketing or political purposes. Some countries discourage Low Cost Carriers.

 

 

REVENUE AND COSTS

 

WHERE DO AIRLINES GET REVENUE – NOTICE, WE DIDN’T SAY MAKE A PROFIT.

Passenger fares are the bulk of airline revenue. These days’ ticket sales do not account for as much of airlines revenue as it did in the past. Airlines, these days, make a large portion of their revenue from ancillary services such as, early boarding, overweight or oversize bags, meals, and many more.

Cargo charges.

Mail – charges for carrying mail on behalf of the State Post Office.

 

WHAT ARE THE COSTS OF RUNNING AN AIRLINE?

I really don’t know one plane from the other. To me they are just marginal costs with wings.
Alfred Kahn, an American professor, an expert in regulation and deregulation, and an important influence in the deregulation of the airline and energy industries in the United States.

 

Costs are either direct or indirect costs. Both have fixed and variable elements.

Direct costs are incurred when and aircraft is used. In other words, they can be traced to an activity.

Indirect costs are those which are not directly associated with operating aircraft.

 

Fixed costs are those which you incur whether the aircraft operates or not.

Variable costs depend on the volume of the activity.

 

DIRECT FIXED

Interest on loans

Depreciation of equipment

Aircraft and equipment must be insured.You will also need liability insurance in case of accidents.

Lease charges on aircraft and equipment

 

DIRECT VARIABLE

These depend on the number of cycles flown.

Fuel

Fuel taxes

Aircrew salaries

Ground staff salaries

Maintenance of aircraft

Landing and navigation fees. These vary from country to country and airport to airport. Some airports are very expensive

Ground handling; loading and offloading aircraft

Crew refresher training    

Catering

Government taxes and fees

 

INDIRECT FIXED

Airport charges – if an aircraft is parked at an airport, whether it operates or not, you will pay.

Administration

IT systems and Web sites

Maintenance of non-aircraft equipment, airlines may handle their aircraft rather than outsourcing handling.

 

INDIRECT VARIABLE

Passenger services which depend on operational activity

Ticketing, sales, marketing, travel agent commissions

Compensation for bumped passengers

Accommodation costs for badly delayed pax

 

As you will have deduced, you may classify some costs differently from the above depending on your company and country accounting policy. For example, in a country which has bad weather an airline may treat “accommodation for badly delayed pax” as a direct variable cost.

For the purposes of this piece, it makes no real difference, just as you are aware of the broad distinctions.

 

Airlines, generally, have a very high cost structure which results in a very low return on capital which discourages investment.

 

I think historically, the airline business has not been run as a real business. That is, a business designed to achieve a return on capital that is then passed on to shareholders. It has historically been run as an extremely elaborate version of a model railroad, that is, one in which you try to make enough money to buy more equipment. Michael Levine, Executive VP Northwest Airlines

ARE YOU OVERTRADING?

Is your business suddenly short of cash? Maybe you are overtrading. When a business expands too quickly and is making fantastic profits it can find itself in this situation. It is like the Gimli Glider*, everything is going well, then, suddenly, you are short of fuel or money. 

Overtrading means selling more than you can handle as a business. It means you might have an order backlog longer than a B777, but there is no fuel (money) to fund the orders and you are, figuratively, stuck on the ramp. 

This will only last until your creditors take legal action to get their money. You probably have no fixed assets that you can sell or raise loans against as they are probably already being used as security for your overdraft. If you sell the machinery, you can’t stay in business and, in any event, you will not realise much in a forced sale. 

Examples: 

Let’s take a couple of real-life examples to see how easy it is to overtrade inadvertently.

You repair containers for airlines. To do this you need to buy aluminum. The aluminum you need is not available in your country so you have to import it. You get a rush order to repair 6 containers which you do and deliver to your customer together with the invoice. But you have used most of your supply of aluminum and need to order more which you do. Your customer is happy with your work and sends you more containers for repair. Suddenly the exchange rate moves against you and you haven’t got the money to pay for the aluminum. To add to your problems, your customer has not yet paid for the first lot of repairs.

Or

You sell GSE spares to airport handlers. Your suppliers want their money either at COD or at 30 days or no spares. Your customers pay you when they feel like it; they are protecting their cash flow. Your bank won’t advance you any money as they are not sure that you can repay the loan. You have trouble sleeping.

Or

You are a new airline. Everything looks promising; you are just breaking even but your load factors are increasing nicely, and then the fuel price goes up.

Warning signs that you’re overtrading

  1. Payment terms are slipping – customers are paying after 60 or 90 days, although you set 30-day terms. They make all sorts of excuses. We had a customer once who would not pay an invoice because they didn’t like the format. The fact that they had paid other invoices in the same format in the past meant nothing to them,
  2. You are giving your suppliers very generous discounts to encourage quick payment,
  3. You may be factoring your debtors,
  4. You’re hitting your overdraft limit every month,
  5. You have to beg your bank manager for cash to pay wages on Friday,
  6. You are paying your own suppliers late because you haven’t got the money to meet their payment terms,
  7. You are using your personal credit card to buy stock,
  8. You have rapidly increasing sales,
  9. You may be working lots of overtime,
  10. The quality of your goods or services has decreased which is indicated by an increase in the number of customer complaints.

What to do when Overtrading strikes

Reduce Revenue

Increase selling prices

The business can increase selling prices thus increasing the profit.

Advantage:

Demand may be reduced which give you a respite during which you can try to solve your problems.

Potential problems:

  1. This is, admittedly something of a balancing act; increase prices fairly slowly so as not to frighten your customers away. Your success with this will depend on your reputation as a prompt supplier of quality goods and services and the current market prices. If your work is not as good as the competition and your deliveries are not reliable then charging more than market will cut sales volumes very quickly,
  2. Of course, if you have a contract for a fixed term with fixed prices, your customers will be reluctant to accommodate you as they have customers too and they will probably not like increased prices particularly if they have customers on fixed term, fixed price contracts as Airlines might have with their handling agents.

Supplier management

Setting new payment terms

Re-negotiate payment terms or introduce new terms for future orders. Try to negotiate agreements with your suppliers in which you pay them after you’ve received payment from your own customers.

Advantage:

You may have time to delay payments until your customers pay you. 

Potential problem:

The success of this action depends on the relative strength or weakness of the company in the industry or its competitive position in the market. Some suppliers may refuse to continue to trade with the company at the proposed new credit terms.

Customer management

Setting new payment terms

You may try to set shorter payment terms; 15 days or even COD.

Advantage:

You will get paid sooner, hopefully, before you have to pay your creditors.

Potential problem:

If the new terms are not attractive to customers the company may lose business.

Offering discounts for prompt or early payments

Advantage:

This will accelerate payments, boost cash flow and reduce bad debts.

Potential problem:

It can be expensive to the business if the offer is attractive but customers may not take it if it isn’t. 

Online payments

Advantage:

This will prevent the risk of bounced or lost cheques. Remember the old one; “the cheque is in the post.”

Potential problem:

Customers may not want to do this as they use “the cheque is in the post” ploy as a way of delaying payment.

Collect the cheque in person

If you suspect that debtors are using the “the cheque is in the post” ploy as a way of delaying payment, try going to the debtors offices, preferably when the Accountant is not there and ask the clerk for the cheque saying that the boss asked you to collect it.

Advantage:

You will get your money sooner rather than later.

Potential problem:

You can’t do this more than once.

Cash flow Management

Invoice discounting or factoring

Factoring means selling invoices to an expert finance company who take over the administration and the cost of recovering the payments. 

Advantages:

  1. Provides your business with immediate cash flow from your debts which facilitates smooth growth,

  2. Improved cash flow for the business with less risk of being sabotaged by your customers,

  3. Reduces the cash cycle time enabling you to purchase stocks, sell them and collect payment quickly. To put it another way; you could increase your cash cycle rate,

  4. It helps to protect the business from bad debts especially when using non-recourse factoring,

  5. Inexpensive debt collection by the Factor who does the work for you.

Potential problems:

  1. Factoring can be an expensive method of obtaining financing; selling debts at a discount will adversely affect your working capital,

  2. The Factor may influence your business practices. This will depend with the contract or agreement you enter into and whether or not it allows the Factor to change your business practices,

  3. The way the Factor handles your customers, especially those who delay payments, could negatively affect your relations with them,

  4. Factoring could adversely affect your business’ image,

  5. If the customer does not pay, perhaps because they have also overtraded, the Factor will expect you to reimburse them depending, of course, on your contract with them.

Manage your Working Capital 
It is very important to manage working capital efficiently. This is important from the point of view of both liquidity and profitability. Even the most profitable business can quickly become insolvent if it has insufficient liquidity.

A fast growing business requires increased levels of money, stock and debtors to support the growth rate. This means that the working capital requirements increase. When this increase becomes permanent, it should be financed with additional long term capital. When it is financed from a bank overdraft and a shorter operating cycle, the business could easily run into severe liquidity problems.

Improve stock control

Holding stock costs money

You need to understand that too little stock of goods for sale results in unnecessary costs of lost sales and customer satisfaction, while too much supply leads to inventory, liability and excess capacity. Capturing demand uncertainty with range forecasts and minimizing the cost of flexibility with range plans enable you to focus on sizing flexibility to balance these costs and optimize performance. [Blake Johnson, Consulting Professor, Stanford University. Industry Week, 10 Sept 2013]

Advantage:

Quicker stock turnover will cut the time between paying some suppliers for stocks and customers payments. 

Potential problem:

You may not be able to offer a full range of goods and services which may induce customers to go to someone who can.

Improve debt management

Make sure you are very firm with customers about payment terms. Invoice immediately and send reminders to encourage payment.

Advantage:

This should reduce your cash flow cycle time.

Potential problem:

Customers who normally delay payments may take their business elsewhere.

Forecasting

Improve sales forecasting

Don’t just make one sales forecast – make three: best, worst and medium-case scenarios.

Estimate the probability of sales for each of your product lines. For example if you sell GSE spares, you may a have strong demand for brake spares and weaker demand for lighting spares; headlights, indicators and so on. With regard to brake spares you may be able to estimate demand with 90% accuracy. Lighting spares you might estimate that you can forecast with 50% accuracy. Seasonal spares like windscreen wipers you can probably estimate with 80% accuracy. A product’s margins may justify holding inventory or capacity to meet demand that has a 50% chance of occurring, but not demand with a 25% chance. When you have this information about demand uncertainty, flexibility costs and product margins, you can make these decisions with more confidence. . [Blake Johnson, Consulting Professor, Stanford University, Industry Week, 10 Sept 2013]

Improve cash flow forecasting

Draw up cash flow forecasts at least four weekly (to avoid differing month lengths and numbers of weeks,) to go with each of the scenarios, but always assume worst case scenarios for payment periods. So, forecast what would happen if you achieved best-case (high probability) sales, but were paid late by a majority of your debtors. Then make sure you’ve have enough money to see you through the potentially difficult periods. 

Advantage:

You should have no surprises when it comes to working capital availability. 

Potential problem:

None at all.

Lease/Hire purchase assets

Advantage: 

This will help smooth cash flows to acquire non-current assets.

Potential problem:

Leasing is more expensive than paying cash for an asset.

Sell fixed assets like buildings, land, Ground support equipment and aircraft

Advantage:

Selling the fixed assets, then leasing them back will generate cash.

Potential problem:

If you don’t manage the money properly you will inevitably go insolvent.

Introduction of new capital
The company can issue new share capital or obtain long term loans.
Advantage:

 Low cost.

 Potential problem:

This may dilute your control over the business.

Reduce profit distribution

Advantage:

Avoiding payment of dividends will improve cash flow.

Potential problems:

  1. This may not be welcomed by the shareholders,

  2. There may be tax implications with undistributed profits.

Don’t pay yourself a salary

Advantage:

This will help cash flow.

Potential problem: 

Your family may be a little upset.

Costing 

Cost reduction

Advantage: 

Cost reduction should increase cash flow and reduce the risk of over- trading.

Potential problem:

Cost cutting does not mean reducing quality!

Improve the costing system

Have you got a costing system? If not, now is the time to implement one. Consider Activity-based costing.

Advantage: 

You will know what your goods and services really cost. You may find that some of these may be unprofitable.

Potential problem:

Putting in a costing system is time-consuming and you probably haven’t got the money to pay outside consultants.

Analyse your customers for profitability

Advantage:

 You can stop serving unprofitable customers. Sometimes you may want to serve these customers to keep your equipment and staff busy, for example, but in an overtrading situation it is best to drop them.

Potential problem:

When your business improves you may have difficulty in getting them back on your terms.

Review your purchasing policies

Are there suppliers out there who may have better prices and service?

Advantage: 

Better prices and service which will reduce your costs.

Potential problem:

If you don’t do a careful investigation into potential new suppliers you may find that they don’t live up to their publicity.

Improve efficiency

Improving efficiency should increase cash flow and reduce the risk of over- trading. Ask yourself the following questions:

  1. Are you getting optimum use of your equipment? This is not an easy question to answer.  Bad weather, for example, can disrupt schedules and generate demand for equipment that may stand idle when the weather is fine.

  2. Is your staff properly trained?

  3. Do you have too many accidents?

  4. Does your equipment breakdown too often?

Advantages:

  1. Reduced costs,

  2. Improved service to customers which may enable you to increase prices.

Potential problem:

None

Summary

Do all the things we said and you’ve got a good chance of keeping that deadly trap called overtrading away from your business.

PS

It will have occurred to the more astute reader that your customers or suppliers may be over-trading as well in which case you may be hit badly when they go out of business. Keep your eyes open for the symptoms we have described.

* Gimli Glider:

Air Canada Flight 143 which ran out of fuel and was forced to Land at Gimli Airport.  That no-one was injured was due to the flying ability of the pilot.

Definitions

Overtrading

Operating a business entity with insufficient long term capital to support the current volume of business.

Working Capital

This is the difference between current assets and current liabilities. It is used to finance the enterprises day-to-day activities. [Principles of Financial Management, Posthumus, Basson, Olivier, Watney. Published by Juta.]

Cash flow

The movement of cash in and out of a business.

Factoring

This is the practice of selling debts to a Factor who will, depending on the contract, take responsibility for credit control, debt collection and credit risk.

RISK ASSESSMENT MATRIX

Risk assessment is a process by which organizations try to discover and prioritise critical problem areas so that they can implement appropriate countermeasures, hopefully, before they actually happen.

The Risk Assessment Matrix process is very similar to a Failure Modes and Effects Analysis (FMEA) in that they both assess risk. The difference is that it has one less number and a lot less detail like Prevention Controls, Detection Controls, etc. In a FMEA, you multiply three values; severity, occurrence probability and detection probability together and the product is the Risk Priority Number which is essentially the same as the Criticality factor in the Risk Assessment Matrix which is the product of severity * occurrence probability without the detection probability factor.

Using the Risk Assessment Matrix you will be able to:

  1. Identify your or your customer’s critical products, services, processes and activities. If you seriously damage a customer’s aircraft you may be preventing them from maintaining their schedule.
  1. Identify the threats most likely to damage those products, services, processes and activities like mishandled baggage, improperly handled Dangerous Goods or causing a departure delay.
  1. Determine the vulnerability of critical products, services, processes and activities to those threats. Frozen fish waiting for loading are vulnerable to damage. Too long in the sun will drastically reduce their saleability and price.
  1. Prioritise the high risk products, services, processes and activities to determine which require countermeasures, which require contingency plans and which can be safely ignored.
  1. Allocate your resources to implement countermeasures so that you can either prevent a major failure from occurring or if does; you or your customers will still be able to continue operating.

Single Point Failures

The risk assessment will identify operations that are subject to a “single point failure.” This is a failure which will prevent the system from working. For example, if you have one tug to service A380s and it breaks down you are in lots of trouble. Implementation of effective countermeasures such as spare equipment will eliminate some threats and significantly reduce the impact of others.

What areas should be assessed?

  1. Company services and products and the personnel and equipment needed to provide or produce them. Try your personnel training and GSE maintenance, for starters.
  1. Products and services provided by suppliers, especially single source suppliers. If you need spares for your A380 tug and the only source is in France and they are on strike, you are in even more trouble.

Some examples of potential failure areas:

Safety, Health and Environment

  1. Environmental damage caused by air pollution or fuel or toilet spills or incorrect disposal of waste food.
  1. Unsafe driving such as speeding on the ramp.
  1. Unsafe working, like moving too close to an operating jet engine or not placing safety cones.
  1. Poor equipment maintenance causing, for example, oil drips or air pollution.

Management failures

  1. Lost opportunities in delaying in or not launching new services.
  1. Not providing adequate training.
  1. Not providing adequate financial and control systems such as Internal Audit or Quality Control.
  1. Poor personnel management leading to sub-standard quality, safety and performance.
  1. Bribery and theft.
  1. Delaying creditor’s payments with the object of “making the accounts look good.”
  1. Reducing GSE maintenance which will lead to early replacement and maybe even accidents.
  1. Poor GSE selection process.

Security failures

  1. IT system security failure causing data loss.
  1. IT system security failure allowing access to customers, competitors and fraudsters.
  1. Accounting system failures which may cause a financial loss such as debtors who don’t pay on time.
  1. Physical security breakdowns like fuel theft.
  1. Workshop equipment and access, GSE access or office security failure which may lead to safety failures and human danger or financial loss.

Regulatory contraventions

Various government departments and NGOs set standards to which you must adhere or stand in danger of losing your operating licences. Government examples are the Civil Aviation Authority, and the Labour department. Private examples are: the airport, IATA, ICAO and ISO.

  1. Unsafe working conditions.
  1. Not maintaining a Quality Control system.
  1. Tax evasion.

There are many more failures that could possibly happen. You probably won’t have some of those listed but you will have others which are peculiar to your airport, for example, flooding during the rainy season or dust storms in North Africa. Don’t ignore those potential failures which may affect the religious, cultural or national sensibilities of your country, staff or customers.

Failures in these areas could lead to:

Human or Physical Loss

  1. Death or injury.
  1. An incident or accident such as a crash, a fire or an explosion.
  1. Environmental damage.

Income loss

  1. Unrecoverable financial loss like debtors going insolvent.
  1. Customers refusing to pay for poor service.

Costs

  1. The correction of failures that could have been prevented.
  1. Service Level Agreement failure and similar penalties.
  1. The cost of supplier changes, lost spares replacement.
  1. The cost of forensic and other investigation, e.g. accident investigation.
  1. Legal costs and damages.
  1. Insurance excess payments.
  1. Increased insurance premiums.
  1. Cleaning up of or compensation paid for environmental damage.
  1. Management time lost due to investigation and correction of failures.

This is a small sample of the costs of failures. Work out your own, preferably in a group as this drives home to the group that there are always costs associated with failures.

Secondary effects

Customer loss.

Reputation loss leading to loss of investor, customer, airport, supplier or regulator confidence. We have seen suppliers that insist on COD only because they have lost confidence in the financial management of a handler.

Government and private regulators and airports may consider revocation or suspension of your operating licences which will inevitably lose you customers.

Secondary effects outcomes

There may both negative and positive effects of the various failure modes for each business activity.

Analyse both the negative and positive effects for secondary threats. The secondary threats may not occur immediately but at some unknown time in the future.

Risk assessment factors

The risk assessment process focuses on two types of information to calculate risks; the severity of the potential failure and the probability of the failure occurring.

Once the severities and probabilities have been calculated you can calculate the criticality .You may use any scale that suits your organisation; 3, 4, 5 and 10 degrees of severity or probability are common.

For all the identified failures it will help to calculate the human and/or financial loss that will result from a failure based on the list above. Use this as the basis for estimating the severity in the Matrix.

Estimating the financial risks will not be easy. Human safety is easier; will someone be injured or killed? You should take into account the exposure of the person to the hazard; for example, brief exposure to engine noise is not a hazard but over time will result in hearing loss. The human and financial calculations assist aid you in determining the ‘criticality’ of a business process or activity so that you can plan and assign priorities for countermeasure implementation and contingency planning.

Expect bias on the part of members of the team. This is normal in us humans so you should be aware of it. For example, a technician may have a horror of GSE breaking down on the Apron which may not seem as important to an accounting type who is more concerned with fraud, especially on the part of technicians.

By now you will have realised that the process will take much time which is why constructing the Risk Assessment Matrix first is useful. It gives a quick insight into the most critical problems which should be tackled first. Fix these problems quickly, otherwise you will find that top management will tire of the project and it will be given to some person with no clout buried in a back room somewhere. That person may be you!

Given the difficulties, it is still worth it; if a Risk Assessment study had been done before AeroPeru 603 took off, the incident of not removing the pitot head covers after cleaning, the subsequent crash and loss of life would not have happened.

Risk Assessment Sequence

  1. Do a Risk Assessment Matrix to identify the critical problems.
  1. Do an FMEA to see if the problems can be prevented or at least, detected before they do damage.
  1. Develop countermeasures to the potential failures.
  1. Evaluate the countermeasures by re-doing the Risk Assessment Matrix and the FMEA.
  1. The risk that is left is the “residual risk.”

When the residual risk is still unacceptably high, additional countermeasures will be necessary, either to try and control or to reduce the risk or, failing that, to provide warning/s to the current or subsequent users of the product, service, process or activity of the failure risk remaining in the system.

Calculating the criticality

Multiply the severity by the probability of the failure actually occurring.

Example: a severity rating of 5 * probability of a failure rating of 4 = a criticality score of 20.

What degree of Risk is acceptable?

The acceptability of the risk depends on the criticality of the risk. For example, loss of life is not acceptable. Since you measured the severity by cost as well as safety you have a good idea what is acceptable or not from a financial viewpoint. For the risks which are ranked lower than Not acceptable or not. You should do a cost benefit analysis to help you decide on the countermeasures that should be implemented. There is no point in spending large sums of money on risks which have a low to medium severity and a low probability if the money spent is more than the potential loss.

See the Risk Assessment matrix example below. Note that the terminology used is not the same as in the text of the article. This is to show that the exact terminology is not important only the numbers are.

If you go to our Resource Library you will be able to copy the Risk Assessment Matrix and instructions for completion. Go to the Home page; the link is on the right of the page.



SAFETY IS MORE THAN A “NICE-TO-HAVE”

Martin Preuss, vice president of government and legislative affairs for the Canadian Business Aviation Association has some thoughts I would like to share with you. In AINsafety of 13 May 2013 he makes a good point about Safety. Speaking at the Business Aviation Safety Seminar last month; he recommends treating safety as a core value of the business not just a priority.Safety is good for business. It’s a cliché but it’s true.”

We all know that there are many who treat safety as a “nice-to-have” which shouldn’t get in the way of business. But in the long term, it doesn’t pay. Long-term; it doesn’t pay in the medium term! Ask yourself; how many airlines are NOT using your airspace, airlines or airports because of safety concerns? Ask yourself another question; how do your workers, on the soccer field, manage to keep their hands away from the ball but can’t seem to keep their hands out of unsafe areas on the ramp? This illustrates Martin’s point, on the soccer field; not handling the ball is a core value not a “nice-to-have.” Think about it.

If you have not read any on the AIN (Aviation International News) publications, you should, they have lots of good stuff.