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Business Aviation & The Boardroom - Measuring Relevant Costs

Cost per hour is a commonly-used metric for the efficiency of a flight department’s fleet and the desirability of different aircraft. Its value- however- is over-rated- asserts David Wyndham.

David Wyndham   |   1st March 2012
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David Wyndham David Wyndham

As an Instructor Pilot in the U.S. Air Force- Dave's responsibilities included aircrew...
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Measuring Relevant Costs
Cost per hour is a commonly-used metric for the efficiency of a flight department’s fleet and the desirability of different aircraft. Its value- however- is over-rated- asserts David Wyndham.

If an aircraft’s cost per hour of flight were all-important- the operating profile to maximize cost per hour would be to remove all passenger seats- takeoff and climb to the highest possible altitude- loiter overhead the departure airport until reaching an absolute minimum fuel state- then spiraling down to a landing. The resulting cost per hour would be at its lowest. So would the aircraft’s value to the company.

Obviously- for a business aircraft to be productive- it must carry passengers (or something of value) to a destination. An effective measure of that productivity must take into account the service (transportation) and the cost of that service. Consider a typical variable hourly cost for a midsize business jet represented in Table A.

What service was performed for the company in return for that cost? In most cases- it is the transportation of persons from one place to another. In our example- let’s assume that the typical trip is 600 nautical miles (NM) and this airplane takes 1.5 hours to fly the trip. So our cost to fly the trip is $3-615 ($2-410 per hour x 1.5 hours). Now we have a cost for providing our service: $3-615 for a 600 NM trip.

If the purpose of this trip is carrying passengers- how many passengers are being carried? The cost per passenger is a valuable measure. If our trip carries four persons- we have a measure on the cost per person for our trip at $903.75 per person for a 600 NM trip ($3-615/4 persons).

Now we have a better metric to compare the cost of our airplane to the cost of an alternative- say an airline ticket. But we are still missing one more vital piece of information. If all our trips were 600 NM long- cost per person per trip would be sufficient. But trip lengths vary in length- as do the number of passengers. Therefore we need to look at the length of the trip (NM) and take into account that we could be carrying as many passengers as we have seats available.

The cost per passenger mile is the cost to carry a single passenger one mile. As our hypothetical business jet costs $2-410 per hour and takes 1.5 hours to fly 600 NM- it averages 400 NM per hour. Our cost per mile is $6.025 per NM ($2-410/400). Thus- if our airplane has eight passenger seats- the cost per passenger mile is $0.753. If our job was carrying freight- then replacing passenger seats with pounds (or tons- or 1-000-overnight-letters) returns the basic cost for that type of service as well. This approach equates the cost of the job with the value or service returned.

In the case of business travel- using available passenger seats is a constant- so the cost per seat-mile is a useful measure for the aircraft’s potential productivity.

An aircraft’s true productivity is realized when the company’s use policy encourages broad access to Business Aviation. For example- when Teams travel the cost per passenger mile can be very competitive with other forms of transportation- particularly when the mission requires reaching locations without convenient (or any) airline connections.

Ticket prices are noticeably higher for city pairs with limited demand for scheduled service. Cost per passenger mile also is valuable for comparing different aircraft. What if we were evaluating another aircraft that costs $2-800 per hour? Compared to our current aircraft at $2-410- it costs more… doesn’t it?

Table B shows that our “New” airplane costs more- but flies faster and carries an additional passenger. If we just compared the cost per hour figures- the “New” airplane has variable costs 16% higher than “Our” airplane. But when we take into account the productivity of carrying passengers on trips- our “New” airplane actually costs 1.7% less than our current airplane.

When costing and comparing aircraft- it is important to look at costs in terms of the job the aircraft is performing. Then the productivity of the aircraft can be evaluated.

Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com

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