- 13 Oct 2021
- Andre Fodor
- Flight Dept Mgt
When budgeting season arrives, what are the assumptions Flight Department managers should establish in order to plan accurately? How can you know where to cut costs without adverse impacts on operations? David Wyndham offers some pointers…Back to Articles
As year-end approaches, we enter ‘budget season’. This is a time that many aviation managers dread. Others simply use the previous year’s costs, add a few percentage points, and assume their budget to be complete. Neither approach works – but what does?
Budgeting for flight department operations during the coming year becomes easier once you get past the dread, expand your information, and agree on the assumptions. Here are some tips…
Agree on the Assumptions
For any given period, your operating budget is reliant on what missions you’re expected to accomplish with the company airplane. Inputs from senior leadership as to what types, how much, and where flight activity is expected to occur in the coming year will be vital. Armed with such information, the operating budget is simply the cost to accomplish that mission need.
The approach of allocating a total budget amount first, then trying to perform at or below budget, given any assumptions, is destined to fail and disappoint. Here’s why…
The wrong example: Assume that this year you will fly 300 flight hours and your operating expenses are approximately $2.5m. Senior leadership, still worried about COVID, labor costs, and supply shortages, has informed you that the coming year’s budget is being cut by 10% ($250k).
In this scenario, assume there has been no communication about flight hours, levels of service, changes in department structure, staffing levels; and no request has been made for your estimated minimum costs.
Assuming that $750,000 of your current budget is a variable cost, the $250,000 reduction for next year may result in a one-third reduction in flight hours, unless significant changes are made to the fixed expenses.
The right example: Senior leadership needs to let you know what air travel is expected, including where, and how frequently, since changes in your utilization will impact your variable operating costs. Your fixed operating costs will remain essentially unchanged. Once you have the mission defined, then your variable operating budget is set.
Fuel and maintenance will be the major variable costs. If fuel prices increase and a major maintenance inspection is due in 2022, your hourly variable costs will increase, and your variable operating budget will be higher if you fly the same number of hours as you have this year. (If your maintenance costing is based around a guaranteed hourly plan, then fuel is the major cost factor to consider.)
If senior leadership is requesting a budget cut, you first must know what the required utilization is to be. Only then can the assumption of a reduced budget be discussed in terms of the impact on mission accomplishment.
Where to Cut the Costs
Cutting down catering helps reduce the costs of operations, as does the use of lower-cost hotels while traveling. How much of your in-flight connectivity bill is a variable?
If there is to be a significant budget cut, however, it may not be possible to find significant savings in the variable budget alone. This is where you must have a clear understanding of all your costs.
How do you track your operating costs? Some operators only have a few categories of costs. Unsurprisingly, they typically find it hard to manage these effectively.
Those who we’ve helped establish more detailed accounts find it easier to manage and control their costs since they have the detail needed to truly understand their costs. Once you know where your dollars are flowing, then you can examine ways to reduce outgoings.
How to Reduce Fixed Expenses
Reducing the fixed expenses can come from two general areas; operational changes and structural changes.
Operational Changes: These center on how the department operates day-to-day. Do you use supplemental lift, such as jet charter or jet cards? That can be reduced or eliminated, as long as leadership understands the schedule ramifications.
Do the pilots train every six months? What impact on safety would there be if training slipped to eight months between classes?
Structural Changes: These involve the core organization of the aviation department. Downsizing aircraft cannot be done quickly, and not without a thorough mission analysis. Equipment leases also require advanced planning, as do hangar leases or rent.
Staffing reductions may negatively impact the culture of the aviation department. Hiring (or re-hiring) qualified employees takes time. Any staffing changes require careful planning and consideration of the long-term effects.
Changing the operations and structure of the aviation department (as with any organization) can impact the level of service that the aircraft users have been accustomed to receiving.
Always Start Here…
Begin with the assumptions: Have detailed cost data at hand, and discuss budget changes first, with respect to its impact on mission accomplishment. Once the assumptions are agreed with senior leadership, the remaining part of the process flows much more easily.