Welcome to GlobalAir.com | 888-236-4309 |    | Please Register or Login
Aviation Articles
Home Aircraft For Sale  | Aviation Directory  |  Airport Resource  |   Blog  | My Flight Department  | MaxTrax
Aviation Articles

Three Levels Of Budgets

by David Wyndham 1. December 2014 10:11
Share on Facebook

As 2014 is in its last month, many of you are looking toward the holidays. One item for those in management positions may be standing in the way of a happy holiday - your budget for the flight department. Too many organizations look at budgeting as a pain filled process. It need not be that way.

Budgeting is a very important tool for planning an organization's use of its most limited resource - cash. Managing  cash is critical for any business or individual. The budget is supposed to be an estimate of the future financial state of your organization. Used correctly, the budget can be an asset in managing your aviation cash rather than a once-and-done exercise.

Within your aviation organization, you probably need three levels of budgeting. Think of them as tactical, operational, and strategic. A tactical budget is the lowest level of budgeting. It may be your training budget for the flight department. You build up the training budget from the tactical level of who goes to train, the cost of the course, and cost of travel to attend the course. It may even include the cost of a temporary pilot to fill in a busy flying schedule. 

The operational level of budgeting is the one as an aviation manager, you need to be the most concerned with on a day to day basis. It covers the main areas of functional responsibility that you have. 

For an aviation operation, maintenance is one of the largest expenses, and one in which the aviation organization can have the most control. However, in order to effectively manage those expenses, you need to know what is expected and be able to measure and track them during the year. Planning for your maintenance may take the most time in your budget preparation. Rather than a single budget item of maintenance, you should have more levels of detail so that you can better manage those maintenance costs. This may include categories like unscheduled, scheduled, parts, external labor, refurbishment, overhaul, etc. 

The budget that you submit to the CFO is used to meet the strategic level of budgeting. The senior leadership and Board of Directors need to know how well the company is meeting its strategic, long-term goals and objectives. The fact that your temp pilot costs $1,000 per day is not important to them. The fact that you are acquiring a $20 million business jet is. One organization that I've worked with has three line items in the flight department budget that is  submitted to the CFO: personnel, facilities, and equipment. 

As the flight department manager, you need to build up to the strategic level of the CFO from the level of the tactical.  Things like training, maintenance, etc can be done with the help of your team. Assign the Training Captain and an admin to research costs for training. Work with your Director of Maintenance to make sure you cover the all bases for upcoming maintenance in 2015. 

Make sure you have a good estimate on your planned-for flight hours in 2015.   Ask upper management about their intended aircraft usage for the next year, or ideally, several years. Will there be more or less flying, any new destinations, etc? If you are budgeting any optional maintenance items or upgrades, ask if next year or the year after works better for the financial goals of the company. 

Document Your Assumptions. Things will be different next June than they were the previous December.  The biggest changes may be in the variable costs as you fly more or fewer hours than estimated. How will changes in hours flown affect when major maintenance is due? When conditions change, these recorded assumptions will better guide you on revising the budget better than relying on your memory.

As an aviation manager, the budget should be more than just filling a square for your upper management reporting. It is a very useful tool that can enable you to track the effectiveness of your aviation operation. It can also alert you to the future peaks in expenses, such as scheduled major maintenance or an aircraft upgrade.  

Think of a budget as your fiscal flight plan. After take-off you check the winds, your fuel status, and the level of coffee in the urn. Monitor the fiscal flight plan the same way with the same goal: to arrive at your (year end) destination safely and comfortably. 

 

 

Tags:

David Wyndham

Metrics and Measurements for Business Aviation

by David Wyndham 6. November 2014 13:54
Share on Facebook

A metric is nothing more than a measurement.  It is used to gauge or measure some sort of performance. Metrics for pilots can include flight hours flown, instrument approaches flown, cross-country or IMC hours, and landings. All of these metrics can be used to measure the level of proficiency of a pilot. If a pilot has not logged an instrument approach in the past 90-days,  how proficient would she be to fly an approach on a windy, rainy, foggy night?

In a business, metrics are used to measure the company's performance, typically connecting it to costs and profitability. Metrics like return on investment (ROI), employee turnover, the cost to acquire a new customer are a few.  For a pilot, hours flown can be connected to proficiency. Fly more hours and you should have a higher level of proficiency. For a business, generating more revenue per square foot of retail space is a sign of proficiency in profitability.

In business aviation, we tend to stick to the pilot-centric type of metrics. We report hours flown per month, average trip lengths, passenger loads and perhaps unoccupied legs (deadhead). But how do these measure the level of effectiveness for the business aircraft? If a business aircraft flew 35 hours in September and flew 45 hours in November, is it doing a better job or increasing its level of performance for the business? How does flying 10 more hours this past month justify the effectiveness of your business aircraft?

Metrics, by definition, must be measurable. But they must also be valid. A metric that is valid can be used as a predictor of performance. You could have flown 10 more hours last month in holding patterns due to ATC and weather delays. Or you could have flown 10 more hours helping the executive leadership earn a new client for the company. For a charter operator, were the 10 hours billable-hours or non-revenue positioning hours?

What metrics to have for the flight department depend entirely on the missions assigned to the flight department. For a corporate shuttle, passenger-miles flown could be an important metric.  That can mean that the aircraft is serving its corporate customers and saving them travel time. Hours flown per business unit might be a good indicator. If the sales team is flying more hours, might that be indicative of a future increase in sales? If legal and accounting are flying more hours, is that good (a major acquisition) or bad (trouble with Wall Street)?

Costs should factor into your metrics.  Are we getting value for the money? For a charter operator, cost per hour when compared to revenue per hour is vital.  But for the corporate shuttle, cost per hour might not be enough. What about cost per passenger mile? That is handy when looking at a 10-seat aircraft versus 15 seats.  A Gulfstream G150 costs less per hour than a G450, but if your travels take you transcontinental or longer, is cost per flight hour telling the story?

What does your company need to know to show that the business aircraft is being properly utilized? Are the priorities with the use of the aircraft aligned with the overall corporate priorities? Depending of the role of the business aircraft, many metrics will be different.

One metric I think every flight department should follow is Aircraft Availability. This metric is the amount of time an aircraft is available to be flown or is scheduled to be flown as compared to the total operating period. 

Hours aircraft available / Total hours of schedule

This metric is expressed as a percentage. The key is defining the operating period. For an emergency medical EMS helicopter, they need to be available   24 hours per day, seven days per week. For the senior executive transport, the business aircraft may be needed 12 hours per day, six days per week. Regardless of the schedule, if the measured aircraft availability rate is declining over time, that can indicate an increased maintenance load.  I have seen an operator who had such poor aircraft availability, in order to meet a two-aircraft per day flight schedule, they operated five aircraft. 

What is the role of your business aircraft as it relates to the goals and mission of the corporation? How best can you measure the effectiveness of your aircraft as it relates to the corporate goals? Seth Godin said that when you step on the scale, you'd better be prepared to do something about it. So in choosing metrics for your flight department, choose ones that tell the story and that you can use to show how well you are serving the company.

What do you see as an important metric for your operation and whay? Tell us in the comments.

 

 

Tags:

David Wyndham

2014 Business Jet Traveler Survey says...

by David Wyndham 3. October 2014 11:09
Share on Facebook

Business Jet Traveler magazine's fourth annual Reader's Choice survey is in their recent issue. They had over 1,200 readers respond, a new record for them. The big take-away from the survey is that things should continue to improve for business aviation. While about half stated their flying would remain at current levels, almost 40% stated they would fly a bit more or much more in the next year. Less than 10% said they would fly less in 2015.

The survey is to be posted online at bjtonline.com/2014survey. if you don't have access to the magazine. Here are my observations of that survey.

Why people fly privately doesn't really change. It saves time and general aviation serves many more airports than the airlines. The most important features people are looking for are range, economics, and cabin.  I see that in my consulting. What was interesting in that group was that cabin amenities, product support and baggage were at the bottom of the important features list. I think it is because product support is generally good and everyone expects the cabin amenities to be about the same within categories. Baggage is likely a tertiary item, especially since seats are rarely filled on many trips. Safety is important with over half stating they only fly with operators that have passed a safety audit (I think it should be 100%).

Of the non-owned methods of flying, fractional, jet cards, and charter, all three rated very good to excellent in customer service and cleanliness of aircraft.  Concerning choices of aircraft and age of aircraft, fractional and jet cards rated better than did charter. I was surprised at the charter choice of aircraft rating below the others. 

When it came to value for the price paid, fractional and charter rated better than jet cards. I think jet cards took a hit there as they also took a lower rating for transparency/explanation of charges.

For the owned aircraft category, BJT separated fixed-wing and helicopters. Since people valued range, economics, and cabin, I looked at those related ratings from the owned group. 

For the fixed wing: With respect to cost of maintenance, Embraer came out with the best ratings at 75.1% rating them excellent or very good. None of the other aircraft manufacturers listed had greater than 60% excellent or very good. Gulfstream rated over 99% excellent or very good for reliability. Everyone rated over 90% for reliability. Regarding cabin amenities, both Dassault and Gulfstream rated the best of the group. As both concentrate mostly on the large cabin jets, it makes sense that owners would be please with the offerings of the large cabin aircraft. Overall satisfaction was very good for everyone, but Dassault, Embraer and Gulfstream did rate a bit higher then the others. 

It looks like there were not a lot of responses from helicopter operators as only Airbus Helicopters (nee Eurocopter) and Bell were represented. Other than reliability, the helicopter manufacturers did not get as favorable ratings as did the fixed-wing. Cost of maintenance was a big knock against the helicopters with no one rating Airbus as excellent and Bell getting only 17.1% excellent ratings for their maintenance costs. I wonder if it is due to generally more complex maintenance requirements of a helicopter versus an airplane, especially with respect to time and cycle-limits on a helicopter's many components. 

BJT did ask its reader's that if they could get a year of complimentary flying, which aircraft would it be for various categories of aircraft? Read the article to see what folks favored. For me, they didn't list a P51 Mustang nor an amphibious Twin Otter so my top choices were not there. 

I'm hopeful that the BJT reader's interest in flying more in 2015 is representative of business flying in general. We shall see.

Tags:

AIRCRAFT SALES | David Wyndham | Flying | News

The New Normal For Used Business Jet Values?

by David Wyndham 1. August 2014 12:06
Share on Facebook

Since there is lots of new aircraft news coming out of Oshkosh, I though I'd tackle used aircraft.

As part of our aircraft cost database updates, we do keep a close watch on market values of used aircraft. We use residual value data from The Aircraft Bluebook Price Digest, Vref Aircraft Value Reference, and HeliValue$.  Many times those publications agree, but there is enough differences that we are not relying on a sole source for the numbers. I think the residual values have made a significant change since 2008. Of course 2008 to 2010 saw a significant recession and along with it, aircraft values plummeted. But since then we have entered a global recovery.  We are seeing a different market for used aircraft prices than pre-2008, especially among business jets.

The new normal is quite an adjustment. While aircraft still hold their values better than most other capital assets, the previous norm of appreciating values in a good economy followed by a correction in a down economy does not appear to be the norm any more. While the US is still the single largest market for turbine business aircraft sales, the percentage of global sales within the US has been close to or below 50% even pre-recession. New aircraft are showing up in numbers all over the world, and the market for used aircraft is also seeing a bigger global market. Buyers are smarter than ever, and no longer is a buyer going to by the aircraft just because it is US N-registered. They are looking for and getting great prices. Here is what we are finding is the new normal:

  • 2008 to 2010 saw an unprecedented drop in used aircraft values.
  • From 2010 to today, we have seen values continue to decline, but at a much lesser rate.
  • We are in an economic recovery, but aircraft values remain low.
  • Today, more than ever, requires buyers to know the individual model’s residual value history. 

Aircraft values are behaving more and more like stocks. While the stock market may be up, not all stocks are performing so good. What we are seeing is that different aircraft, again, especially among business jets, with vastly different market depreciation rates. Almost all are seeing declines, but there are differences between models. So while our cost database residual value curve represents an average, that average is based on a group of aircraft types. Within that group are significant variations. So we caution you to use our residual value data as a benchmark, but do additional due diligence when evaluating specific models. Much like the stock market, individual aircraft (stocks) will behave differently than the market as a whole.

Many thanks to Vref Aircraft Value Reference for the following charts.

This chart is one that Vref calls their Late Model/Mid-Size Jet Index. It is comprised of 2008 models of the Challenger 300, Challenger 605, Citation XLS+, Citation Sovereign and Gulfstream G150. These are all popular aircraft with good sales histories. From 2008Q1 to 2014Q1, that index dropped 50.5%. Look at the curve and while 2008-2010 saw the biggest drop, that past two years (in a recovery) are not seeing values of this group correcting back or leveling off significantly. 

Looking at Vref's market indices for the business jets shows this group fared pretty well by comparison:

  • Light Jets dropped 83% over six years.
  • Midsize jets dropped 73.5% over six years.
  • Large Jets dropped 74% over six years.
  • The Late Model Midsize Jets dropped 50.5% over six years.

Looking at one model, the Challenger 300, shows much more of a bifurcated curve.

The 2008 Challenger 300 dropped 50% since late 2007, slightly better than its index. But its value curve has a hockey stick shape. The 2008 CL300 dropped over 36% in the first two years of the recession. It has plateaued off since then and several brokers have mentioned this aircraft as a good value with a good future ahead of it. This aircraft has done quite well. 

Not to embarrass any models, but I've seen 75% to 85% drops in other 2008 business jets from 2008 to today. There are many excellent used aircraft selling for great prices. But among individual models there are significant variances. Two take-aways here:

  1. Don't plan on your used aircraft appreciating. A model here or there may be the rare exception, but don't plan on it.
  2. Looking at the general market is not the same as the market for your specific make/model/model-year. 

You need to know the macroeconomics of course, but also need the guidance of someone who knows the microeconomic climate for your aircraft. Despite all the great information available on the Internet and in the aviation news, you still need good advice from knowledgable professionals. 


 

 

Tags:

AIRCRAFT SALES | David Wyndham | Aircraft For Sale

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

by David Wyndham 1. July 2014 14:23
Share on Facebook

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.

Tags:

David Wyndham





GlobalAir.com on Twitter