You can’t manage what you can’t measure. Flight Department managers need the financial analysis tools and training to manage and control their costs, as David Wyndham explores below.
One Fortune 100 client uses three cost categories for its flight department: facilities, travel and personnel. While sufficient for reporting at the executive level, such trifurcation is far too broad for management of Business Aviation costs.
In less than five years, a firm typically will spend about as much owning and operating an aircraft as the cost of acquisition—more if purchased on the pre-owned market. Except for overhauls and refurbishments, most of the operating costs go out the door in small enough increments that managers don't realize their total magnitude unless the company has a specific way to measure them.
First, let's review the predisposed views that some managers have when talking about aircraft costs...
• A company’s executive leadership, Board and CFO tend to focus on asset management, and their review may only consider a few major categories. The aviation management team, however, needs much more detail to effectively manage its costs.
• The Aviation Department Manager is concerned with all the operating costs of the aircraft, plus the fixed overhead items such as hangar, training, insurance and aviation salaries. Those items need to be separated so that the manager can see the differences between actual and budgeted costs, and explain why those variances exist.
• The Maintenance Manager looks at what it takes to maintain the aircraft to an airworthy condition. That individual needs to know overhaul costs, part costs, shipping costs, labor for required inspections, and more. A high-dollar expense like an engine overhaul gets everyone’s attention, but routine functions also must be closely monitored. The Maintenance Manager needs to know the aircraft’s highest cost systems and most frequently replaced parts. Maintenance labor should be tracked in a similar way. Much of the variability in the Flight Department budget is under the purview of this person.
Flight Department Managers should collect and track the costs for each aircraft tail number and for each location if there are multiple bases. This information is vital in deciding when to replace an aircraft due to increasing costs. While the maintenance team will know which aircraft is the ‘maintenance hog’, supporting documentation is essential.
What if one aircraft has higher costs than all the others? What if one location has issues managing their costs? If all aircraft are grouped together under one cost account, you may never know what is happening until costs are out of control.
The basic minimum requirement for cost accounting is that it must collect and organize the costs in a way that is useful to the Flight Department Manager and Maintenance Manager.
Remember, you can’t manage what you can’t, or don’t, measure. The measurement system should be flexible enough to allow differentiation in costs between aircraft tail numbers and, if needed, operating locations. Your maintenance tracking software should include cost tracking. If not, hopefully the controller’s office can set up something specific for the Flight Department.
Detailed costs at the Flight Department level must roll up into the reporting categories needed by the CFO.
Aviation and maintenance managers need to understand how costs behave and how to use the company’s cost tools to manage their use of funds. For aviation-specific cost management for your Aviation Manager, I recommending looking at courses offered by NBAA’s Certified Aviation Manager program.
Additional Benefits of Cost Accounting
In addition to managing the aviation budget, detailed cost measurements are needed in benchmarking/metrics and in allocating costs for internal charge-backs.
When comparing costs between different Flight Departments, it is important to understand what the costs include. This sounds self-evident, but when a company reports that its aircraft costs $5,000 per hour, the information is ambiguous. What went into that cost? Whether for internal metrics or external benchmarks, the Flight Department Manager must know what costs are included and how they are computed.
Many Flight Departments ‘charge’ other business units for use of the aircraft. This procedure allows for allocating the cost of the aircraft to business units that use the department’s product (air transportation). While relatively straightforward for a small company, the process becomes complex when allocating costs among multiple aircraft.
While the Flight Department isn’t generating a profit via the sale of a widget, the transportation service it provides is a valuable business asset that needs proper detail in order to be effectively managed.
Read more Flight Department Management articles? Read more articles by David Wyndham.