How to Budget for your Flight Department

A sense of entitlement combined with a lack of understanding of the budgeting process has hastened the demise of several aviation endeavors, cautions David Wyndham.

For the preparers, budgets are often thought of as a painful but necessary practice that is to be endured. For a few, budgets are nothing but a tool that is used to assign blame. Like a child whose first exposure to a dog is a bite, a bad experience early on can make any future budgeting processes unwelcome.

Like them or hate them, budgets are a necessary fact of corporate life. Flight departments are business units, and all business units must adhere to corporate norms regarding fiscal planning and oversight. Done correctly, budgets are straightforward and highly instructive. Done poorly, they can be millstones around the neck of aviation managers.

Within flight departments I’ve seen budgeting done poorly in two ways. One results from the aviation manager’s failure to appreciate the needs of the Chief Financial Officer.

At the CFO-level, the aviation budget is used for financial reporting and is often tied into the budget for the corporate headquarters, or perhaps to the business unit to which the flight department is assigned.

For example, a Fortune 500 aviation manager prepared a budget for three items: transportation costs, facilities costs and salaries, based upon the assumption that those costs were all that mattered. While appropriate for reporting, this limited approach provided insufficient detail to effectively manage the day-to-day costs of the aviation department.

The other impediment to proper budgeting that I have experienced occurs when the aircraft is seen as the “Chairman’s Jet”. With such ‘protection’, the manager feels that the flight department always gets the funds it needs, thus a budget has no real meaning and is not taken seriously. That reflection of entitlement may have been tolerated decades ago, but today flight departments must conform to the norms of the corporation.

Being a Business Unit

Aviation managers must treat their department as would the head of any other business unit. They need to understand that budgeting is a very important tool for planning the organization's use of an essential resource - cash. Funds must be allocated and managed to deliver the best value to both the company and the shareholders. A well-prepared budget is an asset in managing aviation operations to achieve company objectives and to function successfully within the environment of corporate accountability.

Aviation managers need to think of their budget from three levels: tactical, operational and strategic. A tactical budget is the lowest level of budgeting. For example, this pertains to what the head of maintenance needs to manage the department’s parts inventory or prepare for the next inspection. The scheduler may use this level of budgeting to manage catering costs. The flight department’s budget may even include the cost of a temporary pilot to fill in a busy flying schedule.

These costs provide the background for building the department’s operational budget.

The operational level of budgeting provides the aviation manager with the best tool for overseeing day-to-day fiscal issues. It covers the main areas of functional responsibility. For an aviation operation, maintenance is one of the largest expenses, and one in which the aviation organization can have the most control. Fuel and training are two more categories. However, in order to effectively manage those expenses, the aviation manager needs to measure and track them during the year.

Strategically, the CFO examines the Flight Department budget to see how well that business unit is aligned with the company’s goals and objectives. The fact that a temporary pilot costs $1,000 per day is not immediately important to the CFO, but the acquisition of a $20m business jet is.

While it is useful to look at budgeting from the three perspectives discussed above, the final product is one document—the flight department budget, which is usually prepared annually and monitored monthly. Variances between budgeted and actual expenses are noted and addressed as needed.

For all levels of budgeting, relevance is essential. The numbers submitted by the aviation manager must be based upon corporate experiences and anticipated needs. To be credible, budgets must be generated from the ground up, not lifted from last year’s numbers and boosted by 6.0 percent.

Serious Stuff

There are two things that the aviation manager can do to obtain good data for budgeting purposes. The first is to ensure that all parties understand the importance of accurate and relevant numbers.

The second is to be sure that corporate management communicates with the aviation manager regarding corporate goals and expectations. For example, what is the intended aircraft usage for the next year or, ideally, the next several years? Will there be more or less flying, any new destinations, etc.? Does the aviation manager understand (or even have access to) the financial goals of the company? And does he or she know where to obtain help regarding budgeting as it is practiced in the company? Just as a good pilot gets initial and recurrent training, part of a manager’s training needs to be budgeting.

For the aviation manager, the budget is more than just filling in a square for reporting to upper management. It is a critical tool that enables tracking the effectiveness of the corporation’s aviation operation. It can also alert the aviation manager to future peaks in expenses, such as scheduled major maintenance or an aircraft upgrade.

In a future article, AvBuyer will address the aviation budget from the perspective of benefits and costs to the corporation. Can aviation be more than just a cost sink? Intuitively we know this to be the case. Can the value of the aviation unit be expressed in the form of an income statement? Let’s find out.

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