Would you know how to identify and then offset the costs of business aircraft ownership? Jet Tolbert highlights the multiple factors at play for a prospective buyer, offering some useful tips on keeping the costs of aircraft ownership down…
Would you know how to identify and then offset the costs of business aircraft ownership? Jet Tolbert highlights the multiple factors at play for a prospective buyer, offering some useful tips…
While understanding aircraft acquisition costs can be a complex business, the factors behind the operating costs are equally important to understand, and similarly multifaceted. Nevertheless, they must be analysed when piecing together a complete picture of aircraft ownership.
What are the costs of ownership? How can they be offset? These are among the Frequently Asked Questions prospective aircraft buyers raise during the early part of an acquisition. Here, we consider the answers…
What are the Costs of Aircraft Ownership?
When developing a spreadsheet for cost analysis it’s important to factor in the expected use for the jet. Once projected usage is fully understood the costs can be placed into two categories: The Fixed and Variable costs.
Fixed costs include:
- Crew salaries and fixed benefits
- Hangar costs
- Staff training
- Maintenance program
- Projected maintenance, modernization and refurbishment, and
- Aircraft management fee (if applicable)
Variable costs include:
- Fuel cost (per gallon)
- Reserves for unexpected maintenance
- Crew expenses
How can Costs be Offset?
When considering the costs of aircraft ownership, don’t forget that an owner’s time is a non-monetary expense that can affect the profitability of the Flight Department. By ensuring your jet is fully operational, you will maximize the use of the owners’ time, thus helping offset the costs.
Beyond maximizing the time of the aircraft owner, however, there are other ways to help balance the costs of operating your aircraft. Here, we provide two scenarios for two different levels of anticipated utilization…
Scenario 1: Assuming the projected annual usage of the jet is for 150 hours, a buyer could consider a lease arrangement for up to 300 hours annually, either to a private user (under Part 91) or to a charter operator (under Part 135).
Either arrangement could offset cost, though the charter option will most likely be the preferred choice due to a charter operator’s ability to apply fleet rate discounts for fuel, training and insurance that would benefit the owner.
In addition the charter lessee would offer more flexibility regarding the scheduling of their flights, helping secure the aircraft’s services when the owner needs to fly.
Indeed, if the owner’s airplane is unavailable, oftentimes the charter lessee might offer the owner the use of another aircraft from the charter company fleet.
Keep in mind, however, that the increased utilization from chartering/leasing your aircraft will incur increased costs in the maintenance area over time, which must be factored into the overall cost equation.
Scenario 2: Owners flying 300 hours annually might still consider a Part 91 dry lease arrangement or Part 135 lease to a charter company for a reduced 150 hours annually.
In this scenario, the owner would probably need to compromise more over their own aircraft usage to make the aircraft available for revenue-making flights.
The owner would need to weigh the reduced revenue from charter use against the cost of loss of usage.
Be aware that with the higher owner usage, there will be fewer charter providers willing to charter the airplane because of the restricted usage for them. In addition, the cost offset will be less, but increased maintenance costs would still apply.
In essence, the more hours you fly the less likely a solution chartering your aircraft will provide toward offsetting the actual costs of ownership.
Where are the Operating Cost Savings?
The above considerations inevitably lead to additional questions, including:
- Do I have to pay a management fee, or can I just hire pilots to take care of the airplane?
- Will I need an on-staff mechanic?
- Can’t the pilot watch these items and help with the fuel savings?
While the above questions are often asked, I am rarely asked how to create a system of accountability.
Though some smaller jets with simpler maintenance schedules can indeed be managed by the crew, the larger jets with more complex maintenance schedules will require a dedicated Director of Maintenance for scheduling and compliance, as well as a mechanic to perform regular light maintenance both pre- and post-flight.
Under both of our revenue-generating scenarios above, a management company could potentially bring discounts for crew training, fuel, insurance and hangar costs.
Indeed, working with the right management company could include access to a Director of Maintenance, as well as mechanics on staff within your area who could provide routine maintenance.
The management company would also hire and fire crew as well as audit their performance and aircraft operation. Thus, a management company brings benefits (even for an aircraft not placed into charter operation) that exceed the monthly management fee.
Sourcing Crew or Management Company?
When considering the question of sourcing crew and/or a management company, first look at the projected annual usage to evaluate whether charter is a serious option. What are the budgetary expectations for usage with and without the charter revenue?
Then analyse different pilots and operators, based not only on their fees but on the benefits they bring to help lower cost and increase dispatch reliability.
As an example, let’s assume you identify a management company with several of your aircraft type based in the same area as you. This could be a benefit or a hindrance depending on your intended usage…
You would potentially be placing your aircraft with an operator who has saturated the market demand for chartering your aircraft type, and would be selling your airplane at wholesale prices to charter brokers to keep it flying (thereby lowering your revenue).
If you were to choose not to charter, however, but work with the same management company, you could enjoy the benefits of their mechanics and pilots who already understand your aircraft and can keep it operating smoothly at a lower cost than a Flight Department potentially would.
The above should highlight that there are many decisions to be made when selecting your operational structure. The right adviser will help work through a daunting mountain of considerations to help select the best choices for you.