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BENCHMARKING COSTS

Tips and tricks for fully understanding the costs of operation.

Spring is in full bloom- and with it Conklin & de Decker is working with one of its good customers benchmarking their operation. This is the sixth year we’ve worked through this process with this particular client- starting near the beginning of spring - so the initial phone call begins: 'It’s spring- so let's launch our survey.'

Admittedly- a lot more effort goes into the benchmark survey than that - and the following article is designed to help explore the process of benchmarking a little more...

OPERATION EVALUATION
Firstly- benchmarking is a process where you evaluate various aspects of your operation in relation to the best practice for your business or industry. Regarding our aviation operations- things that may be benchmarked relate to safety and operations- management and costs.

For a safety benchmark- the lowest common denominator is the FAA (or other aviation authority) regulations. Those regulations don't really constitute a best practice- despite their often high-level of requirement. A best-in-class type of benchmark here could be IS-BAO certification. IS-BAO seeks to establish the best practices for business aviation safety.

Management benchmarking involves the ‘business’ practices and can cover record keeping- training- communication and other areas related to running any organization. Benchmarks from various business schools can be adapted to your organization.

In addition is the issue of costing. You need to ask how your aviation operation compares against a standard for costs?

VALIDITY:
A requirement of any benchmark is validity. Does it measure what it is supposed to measure? This is of vital importance. If certain costs are included or excluded- then you are comparing apples to oranges while benchmarking your operation. There are some less obvious areas in which you will need to be careful while assessing validity...

FUEL COSTS:
As simple as it may sound- what is your cost per gallon- and moreover- what goes into that cost? Operator A might purchase fuel from its local FBO and pay $4.00 per gallon. Operator B- meantime- has its own fuel farm- and the cost of fuel is simply the wholesale cost of $2.00 per gallon. However- the FBO includes the cost of running their fuel farm- taxes- and overhead. Operator B may look at their fuel farm cost as a facility cost- and not allocate that in the per gallon cost.

The lesson from that example is that when we examine fuel costs- we have to look at all the costs that go into getting the fuel into the aircraft- including taxes- fees and overheads.

MAINTENANCE:
A huge benchmark item- and another potential hazard. What is included and excluded when comparing costs of maintenance? As an example- an aircraft that just had a major inspection during the benchmark period will show significantly higher costs than one that didn't. In-house maintenance labor may be tracked and allocated very differently than that shown on an invoice from the service center. We tend to look at maintenance as if it were done at a service center - with itemized billing.

Parts costs from a guaranteed maintenance plan are averaged over time while ‘pay as you go’ parts costs fluctuate over time. One unscheduled repair can drive up the part cost in any given period. You need to understand how long and what is included and excluded. For us- a basic part cost allocates routine scheduled- and unscheduled parts costs over their time interval. Benchmarking other items such as hangar (lease- rent or own?)- insurance (what liability limit?) and salaries (how many pilots- engineers- administrative staff?) all require knowing what is included in that cost category.

REPEAT BENCHMARKING:
Repeating a benchmark over time is needed to be able to measure trends. In any given year- there may be an abnormality in a benchmark item- so trends and long-term data are always more useful.

It is also helpful to be able to identify actionable items that can be taken to improve your operation. This may be pursuing fuel discounts- or reviewing the pros and cons of overhaul-exchange versus new parts purchases.

Benchmarking is a process essential to improvement - but you will need to ensure it is set up correctly- and that you fully understand just what it is you are benchmarking.

There needs to be an answer…

David Wyndham is an owner of Conklin & de Decker. The mission of Conklin & de Decker is to furnish the general aviation industry with objective and impartial information in the form of professionally developed and supported products and services- enabling its clients to make more informed decisions when dealing with the purchase and operation of aircraft. With over 1-800 clients in 90 countries around the world- Conklin & de Decker combines aviation experience with proven business practices.

More information from www.conklindd.com; Tel: +1 508 255 5975


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