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Seven Biggest Mistakes (Part 2)

Last month I started on the seven mistakes people make with operating costs- including Mistake #1: It's all about the acquisition cost; Mistake #2: You can't make much impact on the costs; and Mistake #3: Not tracking costs in sufficient detail. While those were the ‘big three’- the following are also worthy of your attention.

David Wyndham   |   1st May 2011
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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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The biggest mistakes people make about aircraft costs (Part 2).

Last month I started on the seven mistakes people make with operating costs- including Mistake #1: It's all about the acquisition cost; Mistake #2: You can't make much impact on the costs; and Mistake #3: Not tracking costs in sufficient detail. While those were the ‘big three’- the following are also worthy of your attention.

Mistake #4 - Not understanding ‘cost behavior’: A variable cost is one that changes in proportion to the amount of activity. If the activity goes away- the variable costs move toward zero. If you fly 20% more hours next year- your fuel consumed will increase by 20%. If your aircraft is on a guaranteed maintenance by the hour plan- its total cost will increase by 20%.

Fixed costs (hangar cost- insurance- a pilot's salary) do not vary in proportion to the level of activity. They are essentially constant. Before you even fly one hour- you need to have a place to store the aircraft- someone to fly it (and maintain it)- and insurance to share the risk of operating it. Training- publications- uniforms and office space are all part of those fixed costs. If you increase or decrease your flight activity- these costs do not change. Once you incur these fixed costs- the next hour that you fly only costs you the variable part - fuel and maintenance.

Mistake #5 - Misunderstanding cost behavior impact: If you are directed to cut your budget by 20%- then all you need to do is cut back flying by 20%- right?

Wrong. If your budget is cut 20%- just cutting your flight activity by 20% only impacts your variable costs. Your fixed costs have remained unchanged. Depending on how much you fly- those fixed costs can be 25% to 35% of your operating budget (before taxes- depreciation and interest/lease payments). If you were to reduce your operating budget 20% by reducing flight hours alone- you'd need to cut your flying by about 33%!

Let's assume that you cut your flight activity by 33% to reduce your operating budget by 20%. Your total expenses are down- but someone else in your organization looks at your cost per hour as a measure of efficiency. It has gone up 15%! Your fixed costs (unchanged) are now allocated over 35% fewer flight hours.

Your variable cost per hour has remained about the same- but your fixed expenses are divided by fewer hours- driving up your hourly costs.

Mistake #6 - Misunderstanding availability on costs: Aircraft availability is defined as the amount of time an aircraft is available for flight divided by its annual operating year. When an aircraft is awaiting or in maintenance- it is not available to be flown.

We did a study for a fleet operator with four very old turbine aircraft. As their operation went- one aircraft was nothing more than a spare parts bin as spares could be hard to get. Another one of the aircraft was typically in for maintenance. Another would be a backup to the primary aircraft- and everyone would hope for the best when they needed two aircraft airborne at one time.

When we first suggested newer aircraft- they stated that there was no way they could afford to buy four newer aircraft. We showed them two things: First- newer aircraft had greater availability and second- with more aircraft availability (and better spares support)- they didn't need four aircraft.

Many operators cannot afford the downtime needed to maintain older aircraft. They use other forms of acquiring an aircraft such as charter- fractional or a jet card. When looking at the costs of an aircraft- you need to factor in these external costs to the equation.

I've seen a number of fleet operators maintaining high rates of utilization (and high availability). They all operate new or nearly-new aircraft. Their cost analysis favors paying up front (the acquisition)- rather than through higher maintenance costs and reduced availability.

Mistake #7 - Misunderstanding the aircraft 'value': Often it seems like people fall into two opposing camps regarding aircraft and costs. One disregards costs. They want their aircraft. Don't try to sway them with arguments about the costs of that aircraft versus another suitable aircraft. These individuals- however- are in the minority. The other group just looks at costs and goes for the lowest-cost solution.

We take the middle ground- however. The mission demanded of the aircraft drives the requirements. Aircraft that do not meet the mission critical requirements should not be considered acceptable.

Among the acceptable aircraft- you may have aircraft that exceed one or more mission requirements by a greater degree than the other aircraft. Those aircraft may have higher costs than those other mission capable aircraft- yet the increased capability as it relates directly to the mission may make them a better value to the operator than other less capable aircraft.

Assume your mission requires a range of 1-800nm with four passengers. Aircraft A has 2-000nm range while Aircraft B has 1-835nm range with four passengers. Aircraft A has greater mission capability than Aircraft B and it may be worth a little bit more to operate Aircraft A. That doesn't justify a GIV when a CJ4 is capable of flying your mission! Before making a best value judgment- you have to first understand the mission and understand the costs.

Collecting- analyzing and comparing costs: It doesn't give you all the answers- but it does give you the ammunition for making informed decisions.

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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