Having previously explored Value Proposition and Mission Profiling- the Board has decided to proceed to buy an aircraft. Now Jay Mesinger looks to help Directors logically view the results of the gathered data and choose the right path forward.
Jay Mesinger is the CEO and Founder of Mesinger Jet Sales. With over 40 years’ experience in the... Read More
It is now time to build the budget. This process allows the Board to match value with economic reality. There are three categories of costs to consider within the budget.
The first category is ‘Variable Costs’. These are the costs that are directly related to each hour of use- including- for example- Hourly Fuel Costs and Hourly Maintenance Labor Costs. For instance- on a fleet average for a Gulfstream GIV-SP- for every hour flown there may be 2.01 hours of maintenance labor. If in your local area the average hourly labor rate is $90.00 per hour- you would assign $180.90 for every flight hour (2.01 hours x $90 per hour = $180.90).
The manufacturer will also have a fleet average for Parts Costs that can be applied for each hour of flight. Airframe and Engine Programs that reduce the chance of an unpleasant- unplanned maintenance cost-related surprise down the line are also calculated on an hourly basis. Other costs that should be applied are Landing Fees and Catering Costs. Obviously- the more hours per year you fly- the greater the total annual Variable Costs will be.
The next category is ‘Fixed Costs’ - those that go on annually regardless of flight hours. These contain expenses- for example- that are associated with Salaries and Benefits for pilots- co-pilots- in-house maintenance and administrative personnel- as well as Hangar and Office Expenses- Management Fees- if applicable- and Insurance and Training. When determining the final hourly cost of operation- the Fixed Cost total will decrease on an hourly basis as the number of flight hours increases.
The third category is ‘Capital Costs’- consisting primarily of the Principle Payments for the aircraft- Refurbishments and Upgrades. Annual Property Tax and Use or Sales Taxes are also factors that need to be considered in the overall annual cost of the aircraft.
Depreciation- while a non-cash item- can have a significant tax effect. One should always engage a qualified aviation tax specialist when determining the correct method of treating these items. This evaluation by a specialist is critical when determining operational strategies and use methods.
FIVE YEAR PERIOD It is wise to build these budgets over a five year period to allow the Board to determine the running costs and to properly add major maintenance events and their corresponding costs into the required year. Allocation of major overhaul or modification expenses will be a determining factor in the residual value of the asset. Not only will this tool help the Board understand the annual expenditures- but it will also help predict the market value of the asset in relation to the event.
For instance- if you are in year three and you are 200 flight-hours from a major maintenance event (such as a “Hot Section” inspection) on your engines and have no program paying for the event- the value of the aircraft may be reduced in the near-term years leading up to the event- and increase in value in the near-term years following the event. This strategic view will also help the Board plan transition considerations and expenditure planning.
The set of tools laid out in the three articles of this series will help the Board evaluate the possibility of corporate aircraft ownership and utilization with good vision.
Vision- however is a funny thing. Sometimes you see things you don’t expect. If the Board was seeking to determine if whole aircraft ownership could be a viable reality- they may have started out looking for a black and white answer and ended up finding grey. The idea probably still remains solid and the Value Proposition still holds- but the problem is that costs exceed their expectation. There are alternative solutions for the grey areas.
In the last 20 years our industry has not only matured in ways that provide greater safety- better access to airspace- new technology and systems- but also in its options for providing lift. Charter- fractional and shared ownership are all very viable ways to proceed with executive aircraft travel- getting in front of your customers and moving ahead of your competition. Future articles within Business Aviation and the Boardroom will explore in greater detail these other means of capitalizing on the benefits of Business Aviation.