loading Loading please wait....
Login

If you are a registered, please log in. If not, please click here to register.

Three steps towards building the Boardroom or personal business case for Business Aviation ownership

STEP 3: Factoring the costs of a company business aircraft Having already explored Value Proposition and Mission Profile Analysis (Steps 1 and 2)- let us assume the Boardroom Team has decided to proceed to buy an aircraft. Now the Board and its Trusted Advisors are faced with the task of logically viewing the results of the gathered data and choosing the right path forward.


It is now time to build the budget for aircraft ownership. 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’.

Variable Costs to Factor
The variable costs are those that are directly related to each hour of use- including- for example- Hourly Fuel Costs and Hourly Maintenance Labor Costs.

For instance- using a fleet average for the Gulfstream GIV-SP- for every hour flown there may be 2.01 hours of maintenance labor. For the sake of this article- let’s imagine the average hourly labor rate in your local area is $90 USD (592.00 Yuan) per hour: you would assign $180.90 USD (1-189.92 Yuan) for every flight hour (2.01 hours x $90 (592.00 Yuan) per hour = $180.90 (1-189.92 Yuan)).

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 sometime in the future are also calculated on an hourly basis.

Other costs that should be applied are Airways Access Fees- Landing Fees and Catering Costs. Obviously- the more hours per year you fly- the greater the total annual Variable Costs will be.

Fixed Costs to Factor
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 and co-pilots as well as in-house maintenance and administrative personnel. Hangar and Office Expenses- Management Fees (if applicable)- Insurance and Training Costs also are fixed on an annual basis. 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.

Capital Costs to Factor
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. You 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 PLAN
It is wise to build these budgets over a five-year period to allow the Board or your personal accountant to determine the running costs and properly add major maintenance events and their corresponding costs into the appropriate 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 of your period of ownership and you are 200 flight-hours from a major maintenance event (such as a “Hot Section” inspection) on your engines and have no pre-established program paying for the event- the value of the aircraft may be reduced in the near-term years leading up to the event- and may increase in value in the near-term years following the event.

This strategic view will also help the Board and your advisors plan transition considerations and expenditure planning.

Concluding our Three-Step process
The set of tools laid out in the three-step process highlighted within this publication will help the Board evaluate the possibility of 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 definite answer and ended up finding ambiguity. 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 areas that seem ambiguous.

In the last 20 years the Business Aviation 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 access to business aircraft.

Charter- jet cards- fractional- and shared-ownership are all viable ways to proceed with business aircraft travel if whole aircraft ownership is not the right solution for you. All enable you to meet face-to-face with your customers and move ahead of your competition efficiently and effectively.

It is hoped that the preceding three-step approach will have illustrated a clear path that you can use in exploring the viability of Business Aviation in maximizing the efficiency and productivity of your own company’s travel plans.

 

Related Articles