Recently, it seems United Airlines got themselves into a bit of a bad public relations scenario by ejecting passengers (with force) from a domestic US flight. I’ve never used United and based in this, I never will, as it seems they commonly overbook flights.
First, in the age of technology we live in, how the hell a system allows overbooking I cannot fathom. Maybe if a smaller replacement aircraft transpired in an emergency, I can understand, but this would not be an overbooking issue.
You can read an article about the event at the link above, but here’s a brief rundown:
- United over book
- They look for four volunteers
- They offer $400, then $800
- Nobody volunteers
- They forcibly remove four passengers
And all of this to get their own crew to a location for the next day – this alone says a lot about their ability to manage the business, not having a standard way to get staff, or reserving x seats for staff.
Back to management accounting, and we know that an avoidable cost is one which can be eliminated by not doing something e.g. close a production line. We also know that in the long term, all costs are avoidable. So what about the United story. Well, one thing that will no doubt happen is a string of expensive law suits – and I personally hope United get screwed. This is an avoidable cost, and surely are the costs associated with the apparent regular overbooking. I’d even have a wild guess that it may have been cheaper to charter an aircraft for the staff than what this will ultimately cost United. Even $5000 a passenger to entice volunteers would be cheap too, or maybe $50000. Regardless, United need to find a long term solution to avoid such costs. They have apparently now increased the offer to passengers to $10,000 to give to give up their seats.
The Health Service Executive (HSE) is responsible for Ireland’s public health service. It has been the subject to criticism over the years for being inefficient and it is one of the largest items of public expenditure.
Thankfully, I have not been a frequent user of HSE services – that is, I have been generally healthy. My son had a mild concussion recently, so we had to attend the A &E department in our local hospital. On attending A & E, every patient is charged €100. The idea of this fee is two-fold 1) to stop the use of A & E by people with non-urgent issues and 2) to help reduce budgetary cost pressures. Both of these are fine in my view.
So, good law-abiding citizens as we are, we asked to pay as we entered. We were told “come back when you leave”. So we did, and were told “we’ll post the invoice”. So now, reflecting on this as an accountant, that’s two opportunities missed to collect payment. Then we get the invoice. There is no bank account details on it, and I cannot pay online. I have to call a number which was always busy. I could pay at a Post Office – fine if I am not working or have one close to work – I do work and I don’t have one close. Eventually we paid! If I do a quick media search I can find one hospital owed €600,000, and some reports from a few years back suggest the HSE are owed €200m . Apparently, people who do not pay are pursued, but how much does this cost? A lot more than the amount collected perhaps, which is not good for a cost stretched organisation.
To me, the process of payment should be much easier. Twice we asked at the hospital. I did not check if they had a credit card machine there, but why would they not. Why can I not pay online or to a bank account, or by PayPal? I shared my story with some friends, and they tell me some hospitals accept online payment. This made me even more annoyed, not even a common system! The lesson here is, and it applies to all businesses and organisations, you have to collect monies owed. The first thing then is to make it easy to pay, and to me the HSE fails badly in this regard.
This blog post appeared in my LinkedIn recently. Have a read. It’s basically claiming that British accountants are worse than their American counterparts because they don’t use technology as much as. Now, I’m a big fan of technology, but I’m also old enough to have worked before the internet and all other things which make our life easier (supposedly). The author of the blog should know that all technology is a series of instructions in some or other code, and that code is only as good as the person writing it! We are becoming way too reliant on technology and it’s no harm to do it the old way, or use less technology from time to time. If I were recruiting an accountant tomorrow, while their grasp of technology would be something I’d look out for, it’s not the only thing.
And to end, Irish accountants are best 😀
I don’t not normally do political views and similar on my blog, but read this article by Bloomberg which makes for very poor reading on accountants, auditors and bankers. And here’s the political thing, Germany’s political elite have been scorning Ireland and other countries in Europe about things like tax policy. After reading the above article you might be thinking about the old saying on throwing stones in a glasshouse.
IAG, or the International Airlines Group, is the the parent of Aer Lingus, British Airways and Iberia. In my university, we were lucky enough to have their CEO, Willie Walsh, speak to us before Christmas.
Some things he mentioned are relevant to this blog, and of course interesting. One thing Mr Walsh noted was how only in recent years has the airline sector actually made a return on capital. This must be attributable in some way to a focus on cost by the sector in recent years. The chart below from IATA shows what I mean. As you can see, the cost of capital was higher than the return until 2014.
As my last post indicated, a focus on cost and efficiency has been a feature of the airline sector in recent years. To give another example, Mr Walsh cited an example of using two larger aircraft on a route without a loss in passenger capacity. So fuel, crew and capital cost all decrease in such a scenario. In addition, it freed up a slot at London’s Heathrow airport, which can then be used to generate more revenues.
A few weeks ago, I read a nice article in The Telegraph by David Millward on one of my favourite topics, airlines and all things to do with airports – I was born close to Dublin Airport and it was a big part of my growing up.
Anyway, many of us have witnessed the phenomena of low-cost airlines emerge of the last 20-30 years, and as an accountant it’s the constant actions to reduce costs that amaze me. As Millward said in his article, one of the things that airlines have done is unbundle. This means you get the basic fare from origin to destination for as low as possible. If you want more you pay more. This is fine by me, on a shorter flight, but now as longer-haul low-cost carriers appear I am not sure – I have no experience yet, so I dare not say. The low-costs have of course eaten into some of the legacy carrier market, but they have also expanded the market by making flying more accessible. Millward suggests that the low-costs have by now probably stripped out all they can to reduce costs, but the legacy carriers can do more – if they wish. I read another article recently which mentioned how WestJet, a low-cost transatlantic carrier remove the in-flight screens to save 500 kg in weight and thus save fuel. They replaced the screens with a wi-fi system and the BYOD idea – most people have their own device on-board anyway. Surely such simple steps could be taken by any carrier.
In recent years, I have become interested in the broader role and use of accounting in society. In particular, accounting for water has caught my eye and in Ireland it’s been great fun in the past two years or so.
As you may know, one of the things we need in accounting is measurement. In business accounting, it’s relatively easy, as the unit of measurement is rather simple – it’s the unit of currency normally. Currencies are broken into various units – euro and cent for example – and we can use the decimal system easily communicate and measure larger numbers.
In accounting for water, the measurement unit is normally cubic metres, or 1000 litres. To measure (or account) for our water usage, we need a measurement device – a meter. Once a meter is in place, we can see how much water we use and take measures to reduce it if necessary – as water is a precious resource.
In Ireland, there has been much debate about billing for water. A recent (December 2016) expert commission report on domestic water billing has within its remit to explore if metering should occur. This, in my view, was/is a completely daft request. The report itself is full of statistics on water usage – none of which are possible with a meter. For example, it suggests usage on average of 111 litres per person per day or 20.8 cubic metres per person per year. In my own house, we have used on average 11 cubic metres per month for 4 people. Annually this is 33 cubic meters, so we are quite above average. And like any management accounting scenario, now that I have some information (on water usage) I can now take corrective action, or pay extra for my somewhat excessive usage. The latter is the subject of much debate in Ireland of course.
A review report by the Irish National Transport Authority published in 2016 makes for some interesting reading. It highlights the issues faced by many rail companies world-wide in that not all routes are profitable. When this occurs, many States subsidise services in the general public and social interest.
The 2016 report includes an interesting use of a breakeven approach to identify poorer performing routes. The analysis calculated the cash per journey required to breakeven. This was done by taking total cash costs less revenue divided by the passenger journeys on each route. The report notes that all government subvention, capitalisation, depreciation and exceptional costs were excluded. It identified four poorly performing routes, as shown below.
What this graphic shows taking the first route as an example is that about €550 per passenger journey is needed to cover what we might classify as the running and maintenance costs.I like its simplicity, and I don’t think anyone would be prepared such a fare. Using such figures, the rail company or the State has to decide if it can subvent to that amount on an on-going basis. The latter to routes seem to be more workable in terms of a combination of increased fares, cost cuts and/or subvention.
I can remember my time working in a manufacturing company as a financial controller and later a systems manager like it was yesterday. One of the great experiences I had was working with and configuring SAP.
One thing it changed in the company was the Accounts Payable (AP) process. My company at that time was quite good at ensuring only genuine suppliers were created. But that’s been newly 15 years ago now and I know the AP processes have become even more automated.
So this article in the Journal of Accountancy really interested me. It seems proper AP controls evade some companies still, but when managed well add to the bottom line. Have a read of the full article
According to a report on Fortune, the US Army accounts certainly do not eek of military efficiency. The report notes “the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year”. That’s trillion, with 12 zeros, yes!
The military is of course the biggest spender of government funds in the US. The budget for 2017 is nearly $600 billion (that’s 9 zeros), but the errors noted above seem to have been accumulating over time. The Fortune article notes:
- The Army lost or didn’t keep required data, and much of the data it had was inaccurate
- there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money
- DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions
- the Army lacked receipts and invoices to support those numbers or simply made them up.
If this were any normal business, I would have to say it seems to be lacking in minimal and even simple accounting and management controls. But there again, one can imagine how difficult it may be to “control” spending in war zones, or even trace assets or expenses. I can’t imagine an auditor for example going to Iraq or Syria to verify a tank or similar asset has actually been lost
Okay, the title is a cliche…but in business size (or scale) can mean a lot. Take aircraft for example. An article in the Irish Times reveals how smaller planes like the Boeing 737 Max and the Airbus 320neo are now more fuel efficient and capable of crossing the Atlantic. These smaller planes are not only more fuel efficient, but have less crew and other lower running costs. They can thus offer lower fares than the same or similar flights on larger and more expensive aircraft. According to the article, many airlines from the more western parts of Europe are purchasing such aircraft, with an eye to serving smaller US airports, which are also cheaper to land at.
So, even with these smaller aircraft, it seems airlines will be able to offer cost efficient routes, for both passengers and their bottom line.
Probably my favourite (spectator) sport is motor cycle road-racing. There aren’t too many places it still happens – doing 180mph on public roads is not for everyone – but thankfully it still happens here in Ireland, the Isle of Man (IOM) and a few other places.
The IOM TT is probably the pinnacle of road-racing – it’s two weeks of fund each June. imagine my delight when I read an article featuring news on the 2016 TT and creative accounting! The article notes the number of TT visitors for 2016 to be similar to 2015 – based on data from the IOM government. The article also suggested a revenue of £738 per visitor for the economy, based on this same data. In the comments beneath the article, the fun starts.
One comment notes:
“This year’s TT races in June brought a £4.1 million benefit to the island’s exchequer, according to government figures just released.” OK, so that is the claimed revenue, now let’s see the total costs. And by total, I mean the total cost to the island not just the cost of TT preparations. How much for a fatality or serious injury involving medevac? How much for the road closures and effects on businesses as well as the public? These are real costs and the list goes on.
I note the total expenditure of £738 pp is not broken down into for example travel costs and monies spent on island. Therefore that figure is meaningless If the figures of £31.3M, £22.5M and £4.1M are based on the £738pp they are also meaningless. Creative accounting it is for sure. In addition, if the government can come up with a figure for the benefit to the island they must be in possession of all costs, such as DOI, medical, policing, helicopters etc. So why do they never produce such figures?
These two sharp commentators highlight many things -the subjective major of accounting, where costs and revenues are attributed, and what are the relevant costs, for example. I’ll be using this example in my teaching at some future point.