A Report on the Balanced Scorecard for Yunnan Lucky Air

A Report on the Balanced Scorecard for Yunnan Lucky Air The Chinese airline industry is a heavily regulated industry which provides limiting flexibility to both new as well as growing airlines. In the recent years many low-cost airlines have mushroomed, Lucky Air being one of them. Lucky Air was founded in July 2004 with an initial capitalisation of US$2.2 million. The ownership of the airline is with Hainan Airlines, Shanxi Airlines and Yunnan Shilin Tourism Aviation.The airline exists in a crowded field of around 15 low-cost Chinese airlines. The airline, though growing, anticipates a potential squeeze in its business. The management of Yunnan Lucky Air, hereinafter referred to as Lucky Air, approached us to advice them on monitoring their performance closely so as to achieve their organisational mission and objectives. After initial discussions with the management of the airlines, my team has recommended the use of a Balanced Scorecard to monitor its performance. I present in this report a Balanced Scorecard for Lucky Air that translat es the airlines mission and strategy into a comprehensive set of performance measures. Recent Trends in Lucky Air Lucky Air is currently based in Kunming in Peoples Republic of China. The airline has its main base in Dali airport and runs its flights between Dali to Kunming and Xishuangbanna. The routes in this region have greatly contributed to most of its profits. It is slowly reaching out to other regions in China. The overall growth of the airline has been facilitated by the limited route licensing policy of the Chinese government that has given Lucky Air a near monopoly status within Yunnan. The number of passengers carried by the airline has grown from 500,000 passengers over 5,746 flight hours in 2006 to 1.2 million over 17,875 total flight hours. During the same period, its operating revenue tripled from US$31.2 million to US$104.3 million. Over the recent years, Lucky Air has also grown in terms of flights to and from destinations outside the Yunnan province. As in early 2008, the additional routes represented almost 87 of its 150 weekly flights by the airline. Lucky Air Strategy Lucky Air operates as a low-cost, high-efficiency airline. This is the basis of its key strategy. The low-cost and high efficiency is maintained through: Using single type of aircraft leading to reduced maintenance and operational costs. Having only one category of seat class, thereby simplifying pricing. Having no seat assignments or in-flight entertainment. Increasing on-time departure and arrival by having short haul point-to-point routes. Operating mostly in secondary cities to avoid congestion and reduce landing costs. As a part of its expansion strategy, in recent times Lucky Air has tried to build its competitive advantage by focusing on e-commerce. Customers can buy and refund tickets online by paying 5% to 20% less than anywhere else. The airline has created an online community for its passengers and hopes to reach more customers directly via its website and build more brand recognition and a loyal customer base. In addition, Lucky Air has invested in own call centres to facilitate ticket booking. Balance Scorecard for Lucky Air Lucky Airs strategy rests around it being a low-cost, high-efficiency airline. A scorecard can measure the airlines performance across four different but linked perspectives that are derived from its vision, strategy and objectives. These perspectives include: Financial, Customer, Internal and Learning Growth. The left-hand side of the diagram represents the cause-and-effect relationships across the four perspectives that describe low cost and high-efficiency strategy. (Refer Appendix A for an explanation of the Lucky Air Scorecard and Appendix B for Cause and Relationship between perspectives) Benefits and Limitations of the Scorecard Like any other performance measurement tool, a Balanced Scorecard is not foolproof. Before the scorecard that has been designed for Lucky Air is implemented, the benefits and limitations of the scorecard need to be examined and understood. Benefits of Lucky Air Scorecard Balance Scorecard has led companies to develop a variety of corporate scorecards suggesting a process approach to innovations in performance measurements. (Source: Epstein and Birchard, 2000 and Hoque and James 1997). The benefits that can be obtained from a Balanced Scorecard depend on not just its design but also what it is used for and how it is applied. In general, a Balanced Scorecard will help Lucky Air: Enhance traditional financial accounting measures of Lucky Air by including certain non-financial measures. Thus, Lucky Air, through a Balanced Scorecard, can examine the drivers of financial performance by focusing at least three other perspectives: customers, internal business processes, and learning and growth. (Source: Kaplan and Norton, 1992, 1996). Acquire an effective means for clearly translating a firms vision and strategy into tool for communicating the firms strategy to the various sections of the organisation. In the case of Lucky Air, the Balanced Scorecard can show how focusing on the customer and the services can lead to increased profits. (Source: Chow, 1997; Source: Kaplan, 1992) Motivate performance against established strategic goals. A handful of critical measures have been identified for each perspective and the corresponding targets have been defined. The performance measures force managers to focus on the measures that are most critical. The targets provide managers with a framework to manage the various activities in line with the corporate objectives. For example, a manager can clearly see that managing on ground time is critical and it needs to be kept below 20 minutes. Ensure that its employees understand the long-term strategy of the organisation and also the association between the employees actions and the chosen strategic goals. It can provide strategic feedback and promote learning within the airline through the monitoring of short-term strategic results. Allocate resources and set priorities based on the initiatives contribution to long-term strategic objectives. (Source: Kaplan and Norton, 1996). Evaluate and judge the decisions, policies, plans of the airline. For example, the success or otherwise of the decision of adopting e-commerce as an expansion strategy by Lucky Air can be examined in terms of the four perspectives and its impact on the profitability of the airline. Fosters organisational learning and continual improvement when it is used as a strategic management tool. Limitations of Lucky Air Scorecard Though Balanced Scorecard may be an effective tool for many organisations, it may not help in improvement of performance of all organisations. A Balanced Scorecard is only a tool and the deployment of the tool rests with the airline itself. It is not easy to provide practical guidance for deployment of the scorecard. Some of the key limitations that can cause a Balanced Scorecard initiative at Lucky Air to fail are as follows: Effectiveness of a balanced scorecard depends on a well defined strategy and an understanding of the linkages between strategic objectives and metrics. (Source: Howard Rohm pp.4). If this is lacking its deployment will be unsuccessful. The biggest limitation of the Lucky Air scorecard is that it has been designed by an external team of consultants who have been in discussion with some key players in the airline. It did not involve a cross-section of the airline in developing the system. Thus if the scorecard of Lucky Air fails to link the correct drivers in the internal and learning and growth perspective to the desired outcomes in the financial and customer perspectives, it will not be effective. A scorecard may not be effective if it includes a few measures for each perspective. For example, success of Lucky Air is not only a result of the training and motivation of the ground crew but the entire staff. Thus a scorecard with too few measures may not depict enough of Lucky Airs strategy and does not represent a balance between desired outcomes and performance drivers of the outcomes. Likewise if too many measures are included, the managers attention may get so diffused that he may pay insufficient attention to those measures that can make the maximum impact. No balanced scorecard can be flawless with respect to its design. The Lucky Air scorecard too may have certain design flaws which may not be visible now. These will only be detected when the scorecard is implemented. It is only over a period of time that a company will learn about the effective drivers of performance. (Source: Norreklit, 2000) The scorecard on its own will not be effective if Lucky Airs top management is not committed to it. The top executives may end up looking at Balanced scorecard as a quick fix that can easily be installed in the airline. The scorecard may have its limitations if the top management simply uses it as a checklist for operational improvements or to expand the compensation system to include non-financial measures. (Source: Atkinson, A. et al, 2004) The scorecard seems to have too much internal focus. The scorecard is only depicting incentives for desired behaviour changes in the ground crew and not focusing on other employees. Conclusion and Recommendation A scorecard balances traditional financial measures of success such as profits and return on capital with non-financial measures of the drivers of future financial performance. It can prove to be an effective tool for Lucky Air if it is appropriately deployed by the airline. Appropriate deployment will require complete commitment from all levels in the organisation by making its implementation everyones job. Moreover, the initial Balanced Scorecard should only be taken as a starting point and needs to be looked upon on an ongoing basis. Frequent reviews of the scorecard are required and new performance measures identified as a Balanced Scorecard evolves over a period of time. Data on various measures or metrics needs to be collected on a regular basis and the targets of the metrics should be sufficiently linked to rewards and incentives to motivate their accomplishment. APPENDIX Appendix A: Explanation of the Lucky Air Scorecard The classes which can be formed and the parameters which may be put in the balance scorecard are: Financial: How is success measured by Lucky Airs owners, namely, Hainan Airlines, Shanxi Airlines and Yunnan Shilin Tourism Aviation? The financial parameter can be evaluated by assigning values to parameters like total revenue or increase in revenue from tickets, total amount refunded due to cancelled tickets etc. It is also measured in changes in the plane leasing costs, maintaining and operating costs etc. Customers: This is the customer perspective. It focuses on how the airline creates value for the customers. Customer perspective provides an insight into the perceptions customers hold for Lucky Air. Internal: What internal processes should Lucky Air excel in to satisfy customers and shareholders? Internal Processes can be known from turnaround time, on-ground time, arrival and departure delays, number of ticketing errors, customer care services etc. This would help in attaining an idea of the operations of the organization in question. Learning and growth: What employee capabilities, information systems and Lucky Airs climate does the airline need to continually improve its internal processes and customer relationships? It focuses on the motivation and training of the crew members. Starting at the bottom of the diagram, the strategy has a learning and growth objective to train and motivate ground crew with the expectation that this will lead to better improved ground turnarounds, from arrivals to subsequent departures, for its planes. This internal objective enables Lucky Air to have its planes depart on time and to get better utilisation of its airplanes and flight crews, further enabling it to earn profits even at prices that are lowest in the industry. It also focuses on improvement of internal processes to realise bigger revenue opportunities. The low prices and on-time departures attract more customers, improve customer loyalty and lead to a growth in revenues. The combination of revenue growth and low costs finally results in high profits and high return on assets. The strategy is clearer through the cause and effect relationships among objectives in each of the four balanced scorecard perspectives. These can be stated as follows: Increase revenues through increased sales to existing and new customers (financial) Grow to be service oriented ( customer perspective) Excel in providing services through continuous process improvements ( internal) Bring into line employee incentives and rewards with the strategy (learning and growth)