Management Accounting Report: British Airways (BA) Financial Analysis

ABSTRACT
British Airways (BA) is one of the biggest airlines in the United Kingdom and it serves over 75 countries. The airline provides quality services to consumers to meet their needs and maintain its market share. However, the airline faces challenges that could impair its competitive advantage, including labor issues, safety issues and stiff competition from its rivals. Management accounting is critical in helping the management solve the problems affecting the company by providing financial and non-financial information. Managers use financial and non-financial information to make decisions, solve issues and develop plans to achieve the organizational goals. They determine the best action based on the advantages and disadvantages. BA management can utilize different management accounting techniques to address the problems affecting the firm and make sound decisions in the future. They include sensitivity analysis and activity-based costing. Activity-based costing helps determine the cost of activities and eliminate activities that are considered not profitable or ineffective. Activity-based costing is imperative in decreasing overheads and improving the airline’s competitiveness by enabling it focus on profitable activities and activities that enhance competitiveness. Sensitivity analysis is used to determine the risks associated with projects and investments such as mergers and alliances.BA can evaluate its merger with Iberia and the AIG alliance. The cash expenditure budget enables companies like BA determine the investments and how they will be financed. Cash budget is used to project the cash inflow, outflow, deficit and surplus. The analysis included a detailed description of management accounting role and techniques and British Airways. However, other techniques including standard costing and variance analysis were not reviewed as they are not relevant to BA situation

BACKGROUND OF THE COMPANY: BRITISH AIRWAYS (BA)
British Airways (BA) is the flag carrier in the United Kingdom. The airline operates a fleet of over 250 aircrafts, comprising of Boeing and Airbus aircraft (Hoover’s Inc, 2015). Some of the countries served include the United Kingdom, the United States, Middle East, Europe, Africa, and Asia. It is one of the biggest airlines in the airline industry globally, and it is recognized for offering quality and excellent services and products to customers. British Airways established the Oneworld alliance with the American Airlines, Quantas, Canadian Airlines and Cathay Pacific. The company has expanded the network to over 400 destinations through joint business agreements and code-sharing relations with the Oneworld alliance and AMR’s American Airlines. British Airways face stiff competition from other airlines including Air France, Lufthansa, EasyJet, and Virgin Atlantic among others (Hoover’s Inc, 2015). It faces competition from EasyJet on the short-haul sector. EasyJet provides low-cost services to customers and it is an attractive option to customers. British Airways competes with other airlines including Lufthansa and Air France. Both airlines provide similar products and services but differentiate themselves based on membership in alliances. British Airways faces competition from Japan airline, a member of Oneworld alliance. The airline carried 39 million passengers in 2013 and provides ground, maintenance, and cargo services. The British Airway has experienced growth since it was privatized in 1987 and it merged with Iberia to enhance its competitiveness. Also, the establishment of AIG made the airline stronger and gave it a competitive edge. The company started offering premium services to customers. British Airways is facing numerous challenges that affect its operation (Hoover’s Inc, 2015). The challenges include a history of poor relation with workers due to the numerous strikes by cabin crew members and safety issues. Apart from employee relationship, the stiff competition from rivals is a concern. British Airways serves the long haul and short haul markers and faces competition due to the little differentiation of products and services offered and prices. The competition between Virgin Airlines and BA is fierce as Virgin Airlines has opposed the decision by BA to merge with other airlines. It has opposed BA merger with Iberia Nevertheless, British Airways has merged with several airlines and created alliances to improve its competitiveness (Hoover’s Inc, 2015).
MANAGEMENT ACCOUNTING ROLES AND TECHNIQUES
Management accounting helps managers perform the management functions including decision-making, planning and controlling (Debarshi, 2011, p.1). Managers use the information provided to make decisions, solve problems and develop future plans. Decision-making and planning are important activities as they influence the operation of the organization and achievement of organizational goals (Debarshi, 2011, p.1). The benefits should outweigh the costs for the option to be considered. Planning entails defining the organizational goals and determining the cost- effective action to take to attain the goals. The managers should be aware of the organization’s resources and future objectives to effectively plan and ensure the company runs smoothly. Control involves comparing the real performance with the plan to identify differences and take actions to correct them (Debarshi, 2011, p.1).
Management accounting reports financial and nonfinancial details that aid managers make decisions to achieve the organizational goals. It concentrates on internal reporting, and it is not limited by the accepted accounting principles. Management accounting plays a significant role in airline companies such as British Airways as it provides information that is used to make decisions and planning. For instance, management accounting provides information regarding the cost of including another flight on a route, flying certain routes and increasing the fleet to meet customers’ needs. Besides, management accounting is vital in assessing the airline’s competitiveness and ensuring the company remains competitive. For instance, they compare how the airline has performed against its rival in setting the ticket price, handling baggage, handling customer complaints, departure and arrival times and safety.
Management accounting techniques are used to supplement the function of the management accounting. Some of the techniques include activity-based costing, sensitivity analysis, variance analysis and standard costing. Activity-based costing (ABC) entails identifying the activities in a company and allocating cost to every activity and resources based on the consumption by each (Leitner, 2007, p.3). Activity- based costing is a technique used to cost and monitor activities by tracing how resources are used and costing the output. The method is effective as it enables the organization to determine the cost elements of services, products and activities. It informs the organization’s decision by identifying and eliminating activities, services and products that are not profitable (Basu, 2004, p.122).
Also, companies use the information generated by ABC to reduce the prices of services, activities and products that are overpriced (Leitner, 2007, p.3). Moreover, the method is used to identify and get rid of ineffective production processes and assign processing concepts that lead to the production of similar products and services at a cost- effective method. Activities refer to the kind of work done and the usage of resources in the organization. A cost pool is the total costs obtained from diverse departments linked to the activity. Cost driver refers to an item that triggers the activity. Activity based costing is based on the notion that products generate activities that drive costs (Basu, 2004, p.122). Besides, sensitivity analysis is another technique used to evaluate risks and facilitate decision-making and planning. The technique is utilized to incorporate uncertainty in the decision-making process by taking into account the uncertain factor and determining the changes necessary before changing the original decisions.
BUDGETING AND COSTING
The management is supposed to make decisions concerning the future profitability and the process of making plans is called budgeting. Budgeting for capital expenditure is vital for an organization to operate and grow from a healthy financial position. Capital expenditure is expenses that an organization makes to produce financial benefits in a year. The management and shareholders determine the capital expenditures and evaluate the investments to determine whether they are worth the cost and how they should be financed. British Airways capital expenditure in 2013 and 2014 totaled £1,378 and £1,494 million and £1,378 million respectively. The fleet-related spend accounted for £1,296 million. The cost of property, software, landing rights and equipment was £198 million (British Airways Plc, 2014, p.7).
Cash budget shows the amount of the cash receipts, payments and balance of cash, projected cash inflows and outflows, deficits and surplus during the budget period. Cash budget is imperative in planning and controlling the sources and usage of cash to make sure it is available when needed (Tulsian and Tulsian, 2009, p.28). Organizations can prepare the budget on a weekly, monthly and quarterly basis. British airways can use different methods to prepare the cash budget including the receipt and payment technique, adjusted profit and loss account technique. The adjusted profit and loss account is used to prepare long term cash budgets and make the cash forecast. The firms assume the profits made during the period should lead to an increase in the cash balance. Items that do not entail cash outlays including reserves, transfers and depreciation are subtracted from the company’s gross profit. However, the amount deducted from the profit remains in the business. The receipts and payment technique is used to prepare short-term cash budgets. Companies take into account the cash receipts and payments and ignore accruals and adjustments.
Cost refers to the value of acquiring products and services and it is measured based on the decrease in assets and liabilities incurred. Therefore, information regarding different kinds of costs and their behavior is essential in decision-making. Cost per decision-making refers to the cost of each decision the management makes. For instance, BA management has to determine the cost of decisions made to increase fleets, diversify and form alliances and mergers and determine whether they are worth the cost identified. The management looks for methods of cutting costs including cutting back, changing suppliers and moving to less costly plans. Organizations like British Airways are supposed to earn revenue and control costs to remain profitable. The profit margins are low if the costs are high and make it hard for the firm to succeed against competitors (Klychova, Faskhutdinova and Sadrieva, 2014, p.79).
RECOMMENDED METHODS
BA can use the method to determine how risky investment projects are including mergers. The sensitivity analysis is important in evaluating the risks associated with the decisions and actions the company takes to enhance its competitiveness improve passenger safety and resolve labor issues. The sensitivity analysis can be used to evaluate the risk associated with some mergers and alliances and only form mergers and join alliances if the risk is low. The method is effective in improving British Airways’ competitive and financial position as it influences the financial performance of firms (David, 2003, p.105).
The method provides information on the costs and performance of different processes, activities, products and services. Hence, British Airways can use the information to determine products, services, activities and process that are profitable and eliminate those that are not. Also, the technique enables the organization to deal with severe competition as it enables it to control the overheads and price its products and services competitively (David, 2003, p.105). Different airlines such as the British Airways have used ABC to reduce overheads and improve their competitiveness. British Airways can use the method to evaluate mergers with other companies such as Iberia and determine whether they are worthy. The companies have to consider the consequences associated with the merger, including assigning costs for employee compensation and labor contracts. The company will have a better understanding of the overheads, control of operating expenses and accurately allocate resources to each activity.
STRENGTHS AND WEAKNESSES
The strengths of the analysis include the provision of a detailed analysis of the role of management accounting. The significance of management accounting has been discussed from the British Airways perspective to show how managerial accounting affects controlling, planning and decision-making in the organization. Further, the analysis of two techniques that are relevant to BA situation is imperative in helping the company make appropriate decisions to improve its operations, labor relations, customer safety and the competitiveness. In addition to that, I have provided a detailed analysis of how the company can use the activity-based costing and sensitivity analysis to address the problems (Holloway, 2008, p.281). However, the analysis has weaknesses including the failure to discuss other management accounting techniques including standard costing and variance analysis. I would have liked to learn more about these techniques in order to include them in my analysis.

BIBLIOGRAPHY
Basu, R., 2004. Implementing quality: A practical guide to tools and techniques. Stanford, CT: Cengage Learning EMEA
British Airways Plc. 2014. Annual report and accounts year ended 31 December 2014.1-79
Klychova, G. S., Faskhutdinova, M.S and Sadrieva, E. R. 2014. Budget efficiency for cost control purpose in management accounting system. Mediterranean Journal of Social Science, 5(24), pp.79-84
Holloway, S., 2008. Straight and level: Practical airline economics. Farnham: Ashgate Publishing, Ltd
David, Y., 2003. Techniques of management accounting. New York City, NY: McGraw-Hill
Leitner, A., 2007. Activity-based costing. Munchen, Germany: GRIN Verlag
Debarshi, B., 2011. Management accounting. India: Pearson Education India
Hoover’s Inc., 2015. British Airways PLC. Retrieved from http://www.hoovers.com/company-information/cs/company-profile.BRITISH_AIRWAYS_PLC.928eb1e2e869dc06.html
Tulsian,P.C and Tulsian, S,D. 2009.Comm. Studies $ Application 10. New Delhi: Ratna Sagar