How to Measure BizAv’s Value to Shareholders

What is the value of a business aircraft to the company's shareholders, and how exactly do you quantify that value so it's easily understood? René Armas Maes explores...

During the Covid-19 pandemic, the scheduled airlines have been trying to keep afloat, stimulating customer demand and optimizing passenger loads as flight cancellations have risen. Some of the global airlines have been adjusting their operations to cover only half of their route networks with one-third of their fleets.

This airline survival strategy focuses on operating direct services to only their larger (Tier 1) markets, refocusing on hub flying and avoiding non-stop flights to lower density Tier 2 and Tier 3 markets as they try to rebuild travel confidence and stimulate passenger demand once more.

The current situation highlights all the more clearly why the world’s most recognized firms are significant users of Business Aviation.

FIGURE 1: Valued Brands as Business Aviation Users

Source: NEXA Report

Even without the pandemic, there are a number of factors (including check-in times, and scheduled airline service delays and cancellations) that negatively impact an executive’s and/or managerial team’s productivity, and justify their use of business aircraft.

The US airline passenger load factor averaged 37% percent during Q2 2020. Even as airlines reduced their capacity to cope with diminished demand, passenger load factors fell across all regions (see Figure 2).

FIGURE 2: US Airline Passenger Load, By Region (Q2 2020)

Source: US DOT T2 Traffic

Therefore, it is expected that companies and their teams’ labor productivity will be negatively impacted while flying aboard scheduled airline services as they are likely to continue restructuring and cutting regional routes and frequencies as the second (and maybe third) wave of COVID arrives.

Productivity Enhancement of Business Aviation

While the negative impact of scheduled airline travel on corporate productivity correlates with diminished revenue growth, profitability, earnings and other value-creation drivers, Business Aviation is itself a productivity enhancement tool.

The use of business aircraft provides flexible scheduling, and helps entities optimize revenue growth opportunities, as well as facilitate more valued face-to-face customer and team interactions. Other benefits include enabling the increased agility and mobility of executive and managerial teams, who may even be able to visit multiple destinations in one day.

Further benefits to the use of Business Aviation includes:

• Faster door-to-door travel
• Increased productivity in-flight and on the ground
• Increased revenue generation opportunity (ability to respond faster to market opportunities)
• Improved customer relationship management (better customer retention)
• Better strategic deployment (exploring new markets, road shows, etc.).

To the surprise of many, it is not just large corporations that use, and benefit from, Business Aviation. Figure 3 shows that companies with 500 employees or less represent the majority of the business aircraft users. Small and mid-size companies combined (<1,000 employees) represent 70% of users.

FIGURE 3: Total Number of Employees in Companies Using Business Aviation

Source: The Real World of Business Aviation

How to Measure the Value Creation of Business Aviation

Nevertheless, when discussing how to measure enterprise value creation in the context of a business aircraft operation, I have observed that – beyond the typical benefits of Business Aviation – very few prospective owners understand how to measure value creation.

In these ‘liquidity preservation and cost reducing’ times, it is paramount for any organization that operates, or plans to operate, a business aircraft to understand and communicate how this asset adds value to their organization.

For many years, the leading aircraft OEMs and the Associations within BizAv have covered the correlation between shareholder value creation and the use of Business Aviation. Most operators tend to conduct an assessment, based on the quantifiable benefits and costs, as published in our previous article, How to do a Corporate Travel Profile Analysis.

Overall, under such an assessment, if the quantifiable benefits are greater than the quantifiable costs, business aircraft utilization can be said to enhance and create shareholder value. 

However, if you really want to understand the correlation between shareholder value creation and Business Aviation, the next step is to identify the drivers of growth and efficiency that are used to measure how well a company is growing through the way it utilizes its assets and resources.

To illustrate, let’s take the example of revenue and market share growth. Corporations should evaluate new product and service development activities as well as what strategies are being used to optimize sales (per customer), as these can help a corporation grow faster than its competitors, capturing a larger slice of the market.

Next, consider how quickly those products and services are accelerated to the market, helping produce important economic benefits to the corporation.

Then, connect the dots: Understand the extent to which the business has grown faster owing to the use of business aircraft, especially in terms of quicker market expansion, ability to tap new sales territories, ability to attend to – and resolve – key customer issues without delay (helping build customer relationships to the next trust level—think repeat business and word-of- mouth promotion—while maximizing sales). In addition:

• Focus on profit margin and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) growth;
• Evaluate the business profit margin growth associated with the business aircraft;
• Think strategically about the relationship between top-line revenues and costs. If the top line is not growing (due to fierce competition, price discount strategy, or product and portfolio line stagnation, for example), then cost-control becomes even more important as the corporation tries to optimize EBITDA and its profit margin);
• Measure how lean the management structure is as a result of using a business jet and how that reflects in quantifiable employee time-savings.

Asset Efficiency

In addition, you should consider asset efficiency. While employee productivity is important, so is how effectively a company utilizes its assets and capital investment to both grow the business and bring new technologies to the market to simplify processes.

Meanwhile, it also needs to stay ahead of the competition and implement leaner management structures, while reducing cost.

Evaluate the impact of customer and employee satisfaction, as both will impact shareholder value creation. Which strategies can enhance their satisfaction? 

A low level of employee turnover, high employee morale, high customer retention levels, and revenue growth (per customer) are core to shareholder value creation.

Business aircraft can improve employee and customer quality of life, translating into higher productivity and value creation. A business aircraft can improve employee motivation, decreasing travel-related stress and aversion to travel while enhancing productivity.

Other drivers, indicators and ratios should also be evaluated, including price-earnings (P/E), earnings per share, return on equity, asset turnover, and return on assets, measuring how efficiently a company is using its assets to generate profit.

How Does the Value Creation Compare?

Comparing your company value creation with that of your competitors is the next step. Identify whether your company is performing better or worse than the industry average. How does the return on assets compare? This will help determine whether you, or your competitors, are making the most efficient use of assets.

It is best to choose between three and five listed competitors (for example, using a stock market index such as the S&P 500) to measure your performance over time, across a number of economic cycles, using the same drivers identified and analyzed previously.

The evidence repeatedly highlights that Business Aviation contributes meaningfully to a company’s enterprise value and is a powerful tool used by the best-managed companies, whether small, medium or large.

As Warren Buffett, CEO, Berkshire Hathaway, Inc. once said, “Berkshire has been better off by having me in a corporate jet available to go and do deals.”

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