Aviation Finance (Part II)
by Douglas C. Wattoff & Justin A Marchetta
Fixed costs should be simple, consisting of hangar rent, insurance, crew salaries, benefits, training, avionics and chart services, aircraft management fees, a few miscellaneous items, and WIFI if equipped. Considering that crew related costs usually represent about 65% of fixed costs, they warrant special attention. If you can benefit from aircraft ownership, it is important to accept the fact that airplanes cannot fly without pilots and their related costs are an integral part of the airplane. Crew costs are a daunting number which has soured more than one prospective aircraft owner into the “a fractional or nothing” ultimatum. NetJets understands the challenge of large numbers and packages all pilot related expenses under their all-inclusive management fee. A typical 1/16th share (50 flight hours per year) on a Challenger 350 ($23,000,000 airplane), comes with a monthly management fee of $19,000 per month.. Doing the math, NetJets collects $3,648,000 per year in management fees which is about 75% of fixed costs. If you owned an entire airplane flying 150 hours per year, crew related expenses and management fees are usually less than $800,000. NetJets may be easy to understand, but it is far from a great value. To their credit, I’ve never heard a customer refer to NetJets as a great value, but it is usually credited as being easy and flexible.
An owner recently looked at the past month’s flight schedule and noticed his airplane few only 17 days out of the month. Predictably, he called his aircraft manager to complain based on the assumption that his pilots were under-worked. However, the owner quickly learned that charter pilots rarely get more than twenty-four hours’ notice for any given flight, so they seldom know how many days per month will be spent flying. Charter pilot scheduling uncertainty is not due to poor planning but, rather, it is a function of the on-demand nature of this peculiar travel industry coupled with the fact that clients sometimes have a only a day’s notice for any given trip. The result is that the owner’s pilots had no idea which 17 days they would be working over course of the past month. It’s hard enough scheduling appointments when you somewhat control your schedule, but try it when you have no control at all. However, picking the right crew combination for any given aircraft is essential to controlling the crew cost component of fixed costs. Two pilots and one co-pilot maximizes aircraft utilization and pilot retention. A three-pilot rotation provides a two-week on, one-week off, schedule which is reasonable and, these days, a necessity. Pilots working this rotation are able to better schedule their lives, cover for a sick co-worker, and meet annual training requirements with no effect on flight operations. Well scheduled pilots are sharper in the seat, stay longer, and simply take better care of the airplane.
On the subject of pilots, there are a few more important issues specific to those who fly chartered airplanes. It’s not practical to use contract pilots for charter operations as training is so specific and expensive that keeping contract pilots up to date is not practical. The FAA compounds this issue by mandating that training received with one operator can’t be credited to a new operator. The FAA requires all charter pilots to undergo aircraft specific training under the approved training program of the operator for whom they will be working. Pilots flying a Citation X for company A who go to fly a Citation X for company B will need to repeat the training regardless of when it was completed. A reasonable salary and benefits package, combined with a good schedule, is a great investment in the retention of good qualified pilots, and the best safety insurance available.
Another significant component of fixed costs are hangar expenses which, at airports with runways of 5000 feet or longer and within 90 miles of New York City, have risen more than 300% in the past few years. Other areas of the country have seen similar increases depending on locality, but overall it’s a noticeable percentage of fixed costs. Aircraft subscription services make up around 20% of fixed costs and include the entire electronic chart updates necessary for safe navigation. Newer aircraft have more information available in the cockpit, but require more expensive subscription services. WiFi (if equipped) will cost between $25,000 and $48,000 per year for unlimited services. Yes, data access in the sky is expensive and there are currently no other options if you’re interested in broadband WiFi. Other companies are working on entry into the aviation broadband market but for now, GOGO WIFI is the only game in town.
Variable flight expenses are straightforward with little ambiguity, including fuel, maintenance, and miscellaneous items. Maintenance and maintenance programs can be complex, but they tend to be relatively straightforward. Engines are also expensed hourly basis with a set number of hours before they need to overhauled. We know the approximate cost of the overhauls and the hours remaining which makes the hourly dollar figure easy to calculate.
Presenting costs as fixed and variable to potential buyers makes them easier to understand and digest. If you are considering charter, make sure the revenue projections that you receive do not include your flight usage. The first step in evaluating revenue projections is to determine how many hours of charter will be required to fully offset all fixed non-financing costs. Once this net benefit of charter has been determined, it’s easy to add in personal flight costs.
Offering your aircraft for charter is a method to reduce fixed costs and, when executed correctly, significantly lowers the cost of owning an airplane. A successful charter company can contribute enough net revenue in about 300 hours of charter, to completely eliminate all fixed costs other than finance. Many aircraft acquisitions eventually end up on a charter certificate, which we facilitate for the buyer.