The article discusses the financial benchmarking concept as a tool for strategic marketing analysis, as well as a method for evaluating the financial component of an airline’s competitiveness, including the calculation of the forecast probability of bankruptcy based on mathematical statistics and the formation of an integrated assessment. The study proposes a set of financial indicators and the method of their “borderline” values calculating. It is also should be mentioned, that an algorithm for the formation of a rating assessment of the competitive position of the airline has been developed. On the example of the airline “Ural Airlines” the study presents the results of its testing. The proposed method of financial benchmarking is intended for rating airlines. Its advantage is the use of available factual data of public reporting and industry average indicators, the low complexity of the calculations, as well as the possibility of its simple automation. The methodology can be used by the International air transport Association in forming the airline competitiveness rating along with the calculated ratings obtained during benchmarking by international consulting companies.
Keywords: Financial benchmarkingcompetitivenessevaluationaviation company
In contemporary economics any serious company that wants to break out and stay in top positions both on the domestic and international markets should analyze business processes and find functional solutions of successful business representatives in order not to miss the constantly rotating “progress wheel”. In order to do this, companies supposed to work constantly on their image and improve competitiveness by using all possible tools, including benchmarking as well. Benchmarking is a creative approach, which supposes company planning based on competitive analysis. This approach involves comparative analysis of products, services, business processes of an organization with peers from other organizations, as well as calculating and comparing reference values of comparable indicators. There is also an opinion that financial benchmarking is a management technology of intra-industry comparative analysis of company financial management processes.
This article deals with the applying financial benchmarking method (benchmarking based on financial indicators), which provides a comparative analysis of companies’ operating financial indicators in the same sector of the economy.
The purpose of the study is to develop a method of financial benchmarking for rating airlines based on the use of public reporting factual data, industry average indicators and methods of mathematical statistics. The methodology can be used by the International air transport Association (IATA) for the formation of the competitiveness rating of airlines along with the calculated ratings obtained during benchmarking by international consulting companies (Pwc.com, 2019).
During the study, the answers to the following questions were received:
The result of the study is the development of conducting financial benchmarking methods and its approbation on the example of the Russian airline “Ural Airlines”.
Literature Review and Theoretical Framework
The nature of Benchmarking
Management theory and practice have long established a link between effective performance measure and effective management (Drucker, 1995). For performance measurement to have useful information for the users, it’s necessary to make comparison. The comparison evaluates progress in achieving goals or targets, assess trends in performance over time, or weigh the performance of one organization against another (Poister, 2003). Benchmarking is in the area of strategic marketing analysis, which purpose is to identify what others are doing better and to study and improve these methods (Andersen & Pettersen, 1995). After studying of the improved methods, the benchmarking method supposes the usage of the information received as a guide to action or, in other words, to introduce changes and improve the situation in order to achieve higher standards, commonly referred as best practices. This approach is not an innovation for the majority of enterprises. It is carried out as a part of a competitive analysis, but it is functionally more detailed and streamlined (Zeng, 2018). The method involves the continuous study of the competitors’ experience, the selection of effective technologies for doing business and their adaptation in a particular organization. Benchmarking method provides the increasing of the company's competitiveness indicators according to the situation on the financial and economic market (Kazakova, Bolvachev, Gendon, & Golubeva, 2016). The concept of benchmarking method is based on the analysis of the excellence (the desire to be ahead of the competition) and underlies the methodology of collecting and consolidating the information needed by the company to maintain its level of competitiveness, including resource productivity, product quality, work and services level (Kotler & Keller, 2016).
The analysis of excellence is a study of an internal functions, business processes and accumulated experience to identify the best in its market segment, obtain information for self-assessment. This study provides the analysis and identification of shortcomings in operation, as well as self-improvement work. It should be mentioned, that benchmarking method can be conducted on products, works or services, business processes, strategies, financial indicators. There are several types of benchmarking methods today, among which: internal, competitive, functional or industry, common or applicable approaches for any industry (Grant, 2011).
The definition of financial benchmarking is to run a financial analysis and compare the findings to other companies in order to evaluate the competitiveness, efficiency and effectiveness of their business activities. Benchmarking is a method of comparing the performance criteria and business activity processes of a company to other companies. Per the APQC (American Productivity & Quality Center), benchmarking is the process of comparing and measuring your organization against others, anywhere in the world, to gain information on philosophies, practices, and measures that will help your organization act to improve its performance (Lu, Wang, Hung, & Lu, 2012). Financial benchmarking involves defining, collecting, analyzing, and using internal and external financial data to improve financial processes, deliver cost efficiencies, and increase productivity (Ajuwon, 2018).
Financial benchmarks are key financial ratios drawn from information provided by businesses through activity statements and tax returns. Benchmarks are updated with new financial-year data on an annual basis. The update ensures benchmarks reflect the performance of businesses over time (Gaikwad, Doan, Bossy, Baude, & Abergel, 2012). Financial benchmarking was used by consulting company Frost & Sullivan in a study of 17 global airline groups and focused on the competitive profiling of these airlines. The 10-years profiling (2008 to 2017) of these airlines and airlines groups includes financial performance, major traffic, capacity metrics, and key strategic highlights (Frost.com, 2018). Financial benchmarking is very useful for developing a long-term corporate strategy, driving growth, improving financial and operational performance and developing strategic partnerships (Rai, 2013).
In our opinion, financial benchmarking is the process of analyzing and comparing of a company’s financial performance using special criteria to other companies with aim to evaluate a company’s competitiveness, productivity and effectiveness. Financial benchmarking is estimating and producing standard rates for leading financial indicators in the industry. Financial benchmarks standard rates primarily used for settlement purposes in financial strategies of a company. The authors can name direct and indirect aims of financial benchmarking:
The methods of financial benchmarking can be following:
Nevertheless, financial benchmarking method does not solve all the strategic issues of assessing business competitiveness, but it allows to quantify the company's own achievements, to understand the existing imbalances, to determine the reserves for business growth and, which is the most important, the financial benchmarking method can be carried out at relatively low cost using public information.
The methodology of the conducting financial benchmarking can be summarized in the following order.
The selection of regulatory or benchmark comparable financial indicators
The algorithm for the formation of the integral assessment (rating) consists of the next steps: selection of the information base for analysis; formation of indicator groups; determination of normative or reference values - evaluation criteria; formation of a rating assessment mechanism based on a comparison of actual and reference values of financial indicators (Linebarger & Hussain, 2018). Aggregated indicators of financial statements are used for the information base for assessing the financial component of competitiveness, that include large companies’ publicity of annual reports conditions. It formats in order to taking into account the International financial reporting standards (IFRS) and mandatory independent audit, which can be a positive factor in the availability and reliability of the information used (Kazakova, 2008). Table
It should be also noted, that there is no officially approved regulatory and methodological framework for determining and calculating company performance indicators. That’s why analysts and practitioners offer their own, sometimes significantly different set of coefficients. By using the compilation of the extensive practical experience and the scientific research of scientific analysts this research managed to form a minimum set factors that most fully characterize the financial and economic state of companies. Table
The definition of standard or reference values of compared financial indicators
To determine the normative values of the selected indicators, this research uses the methods of mathematical statistics (Avrashkov, Grafova, Grafov, & Shakhvatova, 2014). First of all, it is necessary to start the analysis with financial sustainability indicators. The autonomy ratio has a maximum value of 1, which means that the company carries out its business activities and forms assets only on the expense of its own capital. The minimum acceptable value of the indicator is set at 0.5. The average between these values will be the upper limit of the autonomy coefficient value of 0.75. For the subsequent rationing, we will calculate the ratio of current and non-current assets, for which we will use the indicators of the leading airlines in the industry (E-disclosure.ru, 2019), which are presented in Table
Assessment of the competitive position of the company
The presence of the financial indicators’ matrix of normative values allows to recommend the following algorithm for the formation of a rating assessment of a company's competitive position, which includes the following five stages of the assessment:
Thus, this approach raises the question of the significance of individual groups of indicators in the formation of a rating. In contrast to the equivalent significance of each of the four groups, the variant of their differentiated significance seems preferable, as evidenced by domestic and foreign practice. Thus, in E. Z. Altman's well-known five-factor “Z-accounts” model for predicting the probability of bankruptcy of enterprises, two out of five factors are represented by profitability indicators (Altman, & Hotchkiss, 2005). According to this approach, while assessing the significance of individual groups of indicators, the following can be taken as an indicative option (E-disclosure.ru, 2019):
The rating assessment of the company’s competitive position
The rating assessment of the company's competitive position is based on a summary of the analyzed company’s comparative analysis of the financial indicators results, of the comparative analysis of the competing companies’ financial indicators in a given sector of the economy for a period of at least three years. At the same time, regulatory ranges for estimating coefficients are formed on the basis of Rosstat’s average statistical data for a period, which exceeds the period of competing companies’ comparative analysis (Russian statistical yearbook, 2019).
In this part of the paper we tried to apply the proposed method for evaluating the financial component of an airline’s competitiveness and to evaluate the probability of the company’s bankruptcy using mathematical statistics methods with the formation of an integral assessment. “Ural Airlines” has been selected as the company under investigation.
The selection of regulatory or benchmark financial indicators
The average value of the ratio of long-term and current assets of 0.32 to 0.68 is taken as normal and sufficient for the aviation industry. In order to this statement, the calculated values of the aggregates are respectively:
A1 = 0.02 × 0.68 = 0.01
A2 = 0.47 × 0.68 = 0.32
A3 = 0.52 × 0.68 = 0.35
A4 = 0.32
On the basis of the calculating algorithm for the coefficient of maneuverability of own working capital (Net Working Capital to Current Assets), we obtain:
where 0.5 is the upper limit of the NWC / CA according to the Methodological Recommendations for analyzing the financial and economic activities of organizations.
Hence, L1 + L2 = 0.68 + 0.75 × 0.5 = 0.08.
In turn, L3 = TC - L4 - (L1 + L2) = 1 - 0.75 - 0.08 = 0.17.
If we accept that L1 = L2, then the structure of balance aggregates will have the values presented in Table
On the basis of the obtained boundaries of the aggregates, it is possible to calculate almost all the boundaries of the selected indicators for company’s benchmarking. Table
Thus, the weighted average return on assets for the period is equal to 4.1%. If we take into account the corporate income tax rate which is equal to 20% in Russia, that ROA indicators will be estimated by 3.28% (ROA, % = (1 - 0.2) × 0.041 = 0.0328, or 3.28%). Based on these data, the estimated weighted average ratio of profitability of total assets is equal to 3.28%; this will be taken as the lowest level of ROA acceptable for airline industry (see Table
The same calculation approach was applied to another financial indicators.
Calculation of standard values of financial indicators
The methodology for the formation of “borderline” values for the evaluation criteria is used in relation to the rest of the benchmarking indicators of the company. As a result of the calculations, we obtain a system of reference values for the boundaries of the assessment in the rating (Table
Rating of the competitive position of the airline company
Conclusion and Discussions
After summarising the obtained results of the calculation, it is possible to conclude that the rating of the competitive position of the considered airline for the period under review is below the satisfactory level estimated at 3 points; moreover, this result is achieved in the last year only.
Despite the positive dynamics of the rating, the management of the air company should pay attention to the problematic indicators. The airline has a substantially high debt level, which stipulates the company dangerous dependence on borrowed funds, thereby increasing the risk of insolvency in the future. This fact reduces the level of business attractiveness for investors. The airline has a relatively high equity turnover, and the return on capital and profitability of services are at the level of industry averages; it demonstrates the demand for aviation services of this company in the Russian air transport market. However, taking into account other financial indicators, it can be argued that the company should pay the most serious attention to improving financial management and financial policy. Otherwise, the company may face risks of competitiveness loss and the possibility of bankruptcy.
Therefore, the method of assessing the financial component of airlines competitiveness, offered by the authors and supplemented by the forecast calculation of the probability of bankruptcy, is aimed at computing the integrated financial assessment of the competitive position of the air company; it can also serve as a tool for benchmarking the financial performance of any airline. The proposed method of financial benchmarking allows quantitative estimation of the company achievements based on the publicly available information, to identify the possible imbalances and reserves for improving competitiveness and business development. The low complexity of calculations becomes an important advantage of the considered method of financial benchmarking; other advantages are its simple automation and availability of information base.
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30 October 2019
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Kuzmina-Merlino*, I., & Kazakova, N. (2019). Financial Benchmarking as an Airline Competitiveness Assessment Tool. In M. Özşahin (Ed.), Strategic Management in an International Environment: The New Challenges for International Business and Logistics in the Age of Industry 4.0, vol 71. European Proceedings of Social and Behavioural Sciences (pp. 288-298). Future Academy. https://doi.org/10.15405/epsbs.2019.10.02.26