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How much information do you need to effectively manage your costs? Part 1

by David Wyndham 1. July 2014 14:23
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TLDR (1): If you don't have time to read the entire post, I'll summarize it for you: To manage your costs, you need all the cost information available. It needs to be organized and presented in a manner that has meaning for you.

 

Step one with the costs is to collect them. You have to pay the bills, so the collection is part of making sure the bills are valid.  Information is in the invoice, the credit card receipt, and in your email. But just having collected this information does not lead to effective management. You have to make some sense of it. 

Step two is to organize the costs into accounts, or categories: fuel, insurance, hotels, parking fees, catering, salaries, taxes, and so on. If you have more than one aircraft, then you should separate the costs by aircraft, even if they are the same model. If your maintenance costs for two jets are $1,000 per hour, are they $500 per hour per aircraft, our $300 per hour for one, and $700 per hour for the other? There is a difference. Once organized into categories then next step if to also organize by behavior.

To manage the costs collected, you also need to understand how they behave. In further organizing your costs, consider the behavior of the cost. How will costs change with changes in utilization? How does the cost behave with a change in activity? Two categories are variable and fixed costs.

A Variable Cost will vary in proportion to the level of activity. As activity increases, the total cost will increase but the cost per unit will remain constant. A good example of this is fuel. An increase in hours flown will have a corresponding increase in fuel consumed. However, the cost per gallon of fuel will not be affected. Hourly guaranteed maintenance programs will also vary in relation to the hours flown. If you use contract flight crew, that would also be considered as a variable cost.

A Fixed Cost as the name implies, remains essentially constant for a given period or level of activity. A pilot's annual salary is a fixed cost. Whether you fly a little or a lot, the pilot still is paid their same salary. The cost per unit will change with a change in activity. A pilot making $100,000 annually and flying 250 hours would be a cost of $400 per hour. If the pilot flies 300 annual hours, the salary as a per hour cost is $333.33. Your hangar cost, hull and liability insurance, cost of refresher training, and property taxes are all considered as fixed costs.  

Two other ways to differentiate the behavior of a cost is to look at how well you can connect the cost to a particular function. If the elimination of the function would also eliminate the cost, then that cost is directly associated with that function, and thus, is a Direct Cost. If the cost is not closely tied into that function, then it is an Indirect Cost. If the function is eliminated, the Indirect Cost won't go away. Depending on the function, or the levels within the organization, a cost can be classified as Direct and Indirect.

Consider the pilot salary from before. If that pilot flies a single aircraft, say a Hawker 800, then the pilot salary of $100,000 is a direct cost for the Hawker 800. If the pilot also flies a Bell 206, then the pilot salary is not directly associated with just the Hawker 800 as it is also associated with the Bell 206. If the Hawker is sold, but the pilot still is flying in the Bell 206, the pilot still gets paid. So with regard to the Hawker 800, the dual-rated pilot salary is an indirect cost. 

If the aviation department consists of the Hawker 800 and Bell 206, the $100,000 pilot salary is a direct cost. Close the aviation department and the pilot salary goes away. If your aviation department is just a single aircraft, then the direct versus indirect distinction can be ignored. But for operations of two or more aircraft, the distinction will be important as you track, allocate, and budget your costs.

Now that these costs are collected and organized by cost category and behavior, you are ready to start the process of managing these costs. It is necessary for creating a budget, for planning for future costs, and for understanding what changes in costs will have on your total cost of operations. Next month we'll continue the article.

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David Wyndham

Having an AMT on Staff makes Financial Sense

by David Wyndham 29. May 2014 14:19
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Having an Aviation Maintenance Technician (AMT) on staff can be invaluable to a business aviation flight department. Some operators will whole-heartedly agree with this, and others may not be so sure. Lets take a look at the numbers.


Reduction in unscheduled maintenance. Prior to trips, the AMT can perform a more thorough pre-flight than the pilot can do. When the aircraft is not flying, the AMT will be doing minor tasks and cleanup items versus waiting to have them done during a scheduled check. A little TLC can help keep an aircraft reliable.

Higher rates of dispatch reliability. The response time of an in-house AMT is immediate. A flat tire or burned-out landing light can delay a trip by many hours when waiting for the local FBO to send someone over to look at the plane. Plus, they may not have the tire or bulb needed.

What is the cost of a delayed or missed trip? It isn't easy finding a last minute charter. A minimum delay needed to find, book and have a charter aircraft on hand may be four to eight hours, if you are lucky. If there are three senior executives cooling their heels in the pilot lounge, how much is their time worth? If they have a combined salary of $1 million, their worth to to corporation can be 5-10 times that. So $5 million annually could be costing you $2,500 per hour in waiting time for those executives! A four-hour delay can cost $10,000 in lost productivity of the passengers.

The cost of the charter itself is not inconsequential. Assuming $3,500 per hour for a mid-size business jet, and an 8-hour round trip, the charter cost is $28,000. You avoid the operating cost of your own aircraft. Accounting for that variable cost, assuming $2,000 per hour, still results in an increased cost for the trip of an added $12,000 (more if an overnight and waiting times are needed).

What if the trip is cancelled? What if the cancelled trip results in a delayed opening of a new factory, or a lost opportunity to land new business? There is no way to easily calculate this lost opportunity cost, but it can be huge. It was important enough to have an aircraft and schedule the trip.

It isn't too hard to see a single lost or significantly delayed trip can easily cost a company $100,000 or more. One trip saved by your in-house AMT can be the break-even point!

Other areas the AMT is well worth having around is in the ability to save money on scheduled maintenance. Turbine aircraft maintenance facilities charge around $85 to $125 per hour shop labor. The AMT typically has the tools and facilities to do much of the minor, routine checks. If that capability is outsourced to a facility an hours' flight time away, the travel time and costs are higher.

When major maintenance is being performed, the AMT can monitor the progress of the tasks and represent the aircraft owner. This "babysitting" of the aircraft can result in an on-time, on-budget completion of the maintenance task. A great service center will make every effort to get the job done right, and having your AMT on hand will enable them to do just that.

Lastly, a good AMT knows his or her aircraft better than anybody else. I've seen maintenance manuals with pages of handwritten notes in them. Those notes represent the knowledge of your AMT with respect to your aircraft and are much more valuable than the manuals themselves.

If your flight department has more than two aircraft, the decision to hire an AMT is an easy one. Even for a small, turbine flight department, the AMT can make sense from both a financial and effectiveness perspective. When considering hiring an AMT, look at the benefits and you will likely agree the cost is worthwhile. 

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Aviation Technology | David Wyndham | Maintenance

Develop Your Next Aviation Manager with CAM

by David Wyndham 28. April 2014 13:58
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Professional development is a given expectation within management. Within aviation, this expectation clearly extends to aviation-specific training. Pilots get recurrent training in simulators, maintenance technicians get recurrent training on the airframe, engine or avionics. But we do these men and women a disservice when we promote them from a technical position into a managerial position without giving them the tools they need to be successful managers.

I have seen instances where a senior captain who has done an exemplary job in the cockpit is congratulated and promoted into the aviation department manager position. What seems like a logical move turns sour when the pilot-turned-Manager finds himself facing a budget cut, a problem employee, and OSHA regulatory issues in the hangar. None of these situations was addressed during engine-out training! They got frustrated and either seek a return to the cockpit or leave for another flying position with no management duties. Future aviation leaders need training and experience in the managerial arts.

Commanding a second person in the cockpit takes special skills. But those skills need additional development for leading a large team. Corporate aviation leaders need to understand the vision and mission of the corporation and how aviation is an essential business tool. They need to know how to  align their aviation department goals with the overall corporation's goals. They then need to develop a leadership and communication style appropriate to their personality that will inspire they aviation team.

Aviation department leaders need to develop skills in operations management. This extends well beyond aircraft operations to include business risk analysis, cost benefit analysis, record keeping and audit requirements, OSHA and hazardous materials regulations, and more. As part of their operations management the aviation leader is often a facilities manager. 

Lastly, the aviation manager needs skills in all the remaining business management skills. The aviation manager is running a small business. They need financial skills in budgeting, forecasting, cost management, and taxes. They need to know what the record keeping requirements are and to be able to understand asset management of the aircraft and facilities.  The aviation manager needs to understand the corporate HR domain, and be able to communicate those policies to all the employees. This training combines both regulatory requirements and personnel management skills, or soft skills.

Within business aviation, we are fortunate to have a customized program geared to develop aviation professionals into management professionals: The National Business Aviation Association (NBAA) Certified Aviation Manager (CAM).

The NBAA CAM certification and education program offers credit for professional experience, college courses, and professional development programs offered within the aviation community. The CAM program is a rigorous professional certification that is designed to maximize a busy aviation professional's time in developing the skills need to be managers in leaders.

Don't overlook maintenance technicians for this CAM training. I see the pilot career path progress from First Officer to Captain to Chief Pilot to Aviation Department Manager. But too often the maintenance technical career path ends at Chief of Maintenance. Even that position requires management and leadership skills. Maintenance Technicians are an overlooked source of future aviation department leaders. They often have a significant understanding of the aviation operation beyond the toolbox that the pilots have yet to learn. 

Promote personal development for your flight department personnel, just as a company does for middle managers seeking career advancement.


 

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David Wyndham | Flying

The Business Mission Drives The Aircraft Mission

by David Wyndham 24. March 2014 15:24
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Image: Gulfstream G650

The Gulfstream G650 and Citation Ten vie for the world’s fastest business jet. But if you need to get an accident victim from the accident scene to a hospital fast, you most likely need a helicopter. Business jets are not designed to land beside the highway and helicopters won't do for a long cross-country flight. I'm stating the obvious, but how many aircraft choices seem to ignore this?

"To execute the corporate mission" is the answer to the business question "Why do we have an aircraft?" If the aircraft is a personal aircraft, the "why" may be "to enjoy flying." What type of flying is fun to one person can be very different from another. In the world of business aircraft, whether the business is high tech, services, hospitality, acute care, etc., the why of the aircraft must be tied into the why of the company. If it isn't, then the aircraft may be a mismatch to the company mission.

The closer the aircraft's mission can be tied into the reason for the corporation's existence, the more secure the aircraft (and aviation employees' jobs) will be. If IBM were having a tough year financially, no one would ever suggest that they get rid of all their computers! How close does the mission of your business aircraft fit into the reason your company exists? If the aircraft went away, would it have a negative impact on the ability of its users to successfully execute the company's mission?

Our own company mission is: The mission of Conklin & de Decker is to enable the general aviation industry to make more informed decisions when dealing with the purchase, operation and disposition of aircraft by furnishing objective and impartial information.

We are much too small to afford a corporate aircraft, but if/when we get there, the aircraft better directly support our ability to "enable the general aviation industry to make more informed decisions." The added value to the business from the person(s) using the corporate aircraft must exceed the costs of having that aircraft. If the leader of a corporation is worth $1 billion dollars to the corporation, and their use of the company aircraft enhances that value, then the $1 million budget for the aircraft should be easily defensible. If the mission of the health services company includes providing critical care to a large community, then the EMS helicopter should be easily defensible.

A company has a written mission statement that is used to guide its daily business. The aviation department should also have a written mission statement. That mission statement should support the mission of the corporation. The aviation department should be part of the corporate structure just as legal, human resources, IT and other departments. Your may not be making widgets, but you are making the making and selling of the widgets easier and more productive.

After that, the next step is developing the measurement criteria for the aircraft to enable management to determine how well the aircraft is at meeting its mission needs. Then, and only then, can you start the analysis of speed, range, payload, cabin, and performance needed to make a wise aircraft choice.

What you then end up with is measureable criteria that can be used to evaluate the aircraft choices. Each of those criteria stem from the assigned mission of the aircraft. The assigned mission of the aircraft is directly supporting the mission of the corporation. Thus, the answer to the question of why do we need eight seats and 2,400 NM range, is to support the corporate mission.

A caution here is that in some situations, supporting the senior leadership can be mistaken for NOT supporting the corporation. There are no easy answers to the “big boss uses company jet for private retreat” headline. But, that personal use of the corporate aircraft better be documented and reported.

Business aircraft of all types can be used to further the successful mission accomplishment of the corporation. These missions need to be in writing and clear enough so that the justification of the use of a business aircraft can easily be done.

What is your mission statement? Does your choice of transportation reflect it? Let us know in the comments section below!

How Do You Measure the Success of a Business Aircraft?

by David Wyndham 4. March 2014 11:02
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Many years ago, our company founder, Al Conklin, sold a new twin-engine business aircraft to a very successful entrepreneur. He had established a bit of a rapport with the individual and, after the sale, asked him straight out, “How can you justify the cost of this airplane?”  His reply? “What is the cost of a divorce?”

Business aircraft enable your passengers to manage their time in the most productive manner. They enable face-to-face contact within your company, with prospects and your customers. How to you measure the success of your aircraft in accomplishing this role for your company? Here are some places to start. 

Key Employee Travel Time Saved. If the aircraft saves travel time, then how much time? Increased time spent traveling is decreased productive time or decreased rest/recuperation time. You should have some data and a good feel for when the time saved is worth the use of the business aircraft. How do you measure the worth of the time saved?

Time has value. If using the business aircraft saved three senior executives eight hours’ apiece, then the total time saved was 24 person-hours. If those hours were spent with a major customer, what is the value of that customer? At a minimum, what is the value of the executive’s time to the corporation?  The executives' time is worth well over their salary and benefits, but this is a minimum value.  Calculating the time saved should not be a big project for the flight department. It can be just another blank in the travel documentation. It can be estimated, tracked and reported on a regular basis.

Customer Travel. One study at UCLA indicated that up to 93 percent of communication effectiveness is determined by nonverbal cues. These cues can mean the success or failure of a contract negotiation or new business venture. Who are the company’s largest customers? How often do they receive visits from senior executives? How often does the company bring them to the corporate headquarters for meetings? Do you track this?

Getting new customers typically takes more effort than retaining the ones you have. Show up for the big presentation with a team of two or a team of seven? Is the business aircraft used to facilitate these meetings? Again, it should be easy to track what the business purpose is for the aircraft: new client visit, sales visit, engineering support, etc.

Travel Between Corporate Locations. Many companies have operating locations in hard to reach areas. One company that I’ve done a study for has four major operating locations is four non-airline-hub locations. The business aircraft keeps the senior executives at each of these locations connected in person with the headquarters. It also enables short-notice travel for a vital meeting. This company tracks the number of overnights executives spend away from their home office (or how many overnights were saved by the business aircraft). Another client uses a helicopter to visit multiple job-sites that cannot be done in a day via ground transport.

Non-tangible Rewards. Many of the rewards we value are non-monetary. The buyer at the beginning of this article had not really estimated the cost of getting a divorce in dollars, but in the loss of a valued relationship with his wife and family. Turnover in key positions means a loss of continuity, a loss of the team’s effectiveness and time spend searching for the new executive that cannot be spent elsewhere. The business aircraft saves on the wear and tear of travel and yes, enables the spouse to make it home for the child’s soccer game on Friday afternoon. Zappos founder, Tony Hsieh is well known for his rise to the top. He’s well known for his corporate culture of happiness. Tony Hsieh also uses business aircraft.

There are many uses for the business aircraft. They all center around making the most effective use of the time available. There needs to be some measures of how the business aircraft is contributing to the success of your company’s mission. What to measures are depend on your use of the business aircraft.

 

 

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