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Shared Light Aircraft Ownership Options for Getting Work Done

by David Wyndham 30. July 2013 14:41
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With a light aircraft, sharing the costs among two or more owners is common. If you own a small business, using a light aircraft may be ideal and time-efficient. Sharing the costs with another owner can bring down the threshold of cost.

Successful shared ownership requires consideration of the Three C's: Compatibility, Compromise and Contracts.

There needs to be a degree of compatibility between the owners. The type of aircraft must be suitable to the owners' missions. A Cessna 206 and a Mooney Ovation have different strengths. So do a PC-12 and a Piper Meridian. If you are becoming a second (or third) owner, make sure the aircraft will be effective at what you need to do: big load hauler or speedy cross-country machine. Just as important as the mission is NOT having similar flying schedules. If both owners need to use the aircraft every Monday thru Wednesday, sharing cannot work. Ideally owner #1 is a weekend flier and owner #2 is a business-weekday flier. Discuss in advance what your expectations are and how you will schedule the use of the aircraft.

Even if the owners have compatible aircraft requirements and complimentary travel schedules, there needs to be compromise. There will be times when you need to allow for flexibility in the schedules. Visiting family for Thanksgiving? Maybe this year you get the plane and your partner gets it for next year. Other compromises may involve the maintenance and upgrades. If you are a heavy-IRF flier and your partner isn't, then your requirements for upgrading the avionics will differ. If you fly for your business and take passengers, the interior standard you have may well exceed the pleasure-pilot.

Lastly, there needs to be a contract outlining the sharing of the costs and the responsibilities of each owner, and perhaps most important: a way to end the shared ownership. Will you split the fixed costs like hangar and insurance along ownership share? Will you set up a reserve account to pay in advance for the maintenance? What about unscheduled maintenance, how will you split the costs? The engine may cost $38,000 for an overhaul, or cost well over that if you want to do an exchange. How soon do you want that engine back? What do you do if one owner wants out (or cannot afford to stay in)? What if you ant to take on an additional partner? This should be in writing to keep the relationship as amicable as possible.

Before entering into a shared ownership, sit down and really look at the costs. The hourly rental at the local FBO may seem high until you figure out the cost of the initial investment and fixed costs. Sharing the ownership of an aircraft can lower to cost to access ownership, but everyone involved needs to work together to maximize the utility of the aircraft.

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Don't Sell, Upgrade Your Aircraft

by David Wyndham 1. July 2013 16:19
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If you are looking to upgrade to a newer aircraft, here are three things to consider:

1. The value of your current aircraft has taken a beating since 2008 and you will not be happy with the loss in market value.

2. While you should be able to negotiate a good purchase price for a newer aircraft, many owners still may not be willing to part with their aircraft at today's prices (see #1 above).

3. Your financial institution may not be willing to lend on terms that you find desirable. If the aircraft you are buying is new or nearly so, this isn't an issue. But it is for older aircraft.

If you need "more" as in seats, payload or room, your only alternative is acquiring a larger aircraft. If you need more speed or more range, and want newer avionics, but are happy with your aircraft's cabin, there is another alternative: upgrade your current aircraft. 

Companies like Aviation Partners, Raisbeck and Blackhawk have been quite popular for many years.  They, and others, have performance and engine upgrades that allow your current aircraft to fly faster, further, or both. There a top notch avionic shops offering upgrades that can turn your old steam-ship panel into a modern marvel. Recover the seats and add a new paint job, and voila — a new plane. Is it worth it? Before you undertake such a major project, here are some things to consider:

Why You Might Not Want To Upgrade Your Existing Aircraft

Older aircraft cost more to maintain than newer ones. Wear and tear items, aging aircraft issues, second or third engine overhauls all drive the cost up. Your aircraft must be in excellent mechanical condition and essentially free of corrosion, otherwise don't consider the upgrades.  

You think that the upgrade will add enough value to pay it back when you sell your aircraft. Some upgrades add value to your aircraft while others add value only to you. With today's market, do the upgrade if it has value to you. If it has value in the market place, so much the better but do it for you.

If your current aircraft cabin is plenty suitable, here are some upgrades to consider:

Enhanced Aerodynamics & Engines

Performance enhancements can range from winglets to engine retrofits. Given the cost of fuel, things that make the aircraft go faster on the same fuel, or engines that burn less fuel, can be desirable. 10 knots more speed on 3% less fuel may not sound like  much, but over time will add up. Do the gains make sense to you and your operation?

Glass and More Glass

Update the avionics. There are impressive upgrades that can turn your old analog cockpit into a glass heaven. This can range from updated Nav gear to a full panel replacement. When looking at new systems, look at what the current variant of your aircraft (or closest relative) has for its avionic system. Done right, these systems enhance both safety and reliability.

Budget carefully and talk to other operators who have done the same upgrades. As long as your current aircraft is in excellent mechanical condition and you plan to keep it for the next few years, the added utility and flexibility of the upgrade can add all the value you need.

 

 

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Metrics - Measuring What’s Important

by David Wyndham 3. June 2013 10:00
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Metrics are a simply set of measurements that we use to quantify results. In business, they are commonly used to measure important, limited resources. A metric can be used as a measurement of success — how well we are using what is being measured.

If you are operating an aircraft for business, you should have some metrics that show the value of the aircraft to your organization. Some measurements are easy: hours flown and passengers carried. Many metrics involve costs to operate the aircraft, whether that is done via a budget or by other means. Those measurements are all important, especially costs are I’ve discussed before. But, which of those help establish the value of the aircraft to your organization?

Seth Godin writes a blog that deals with being productive and creating value in your work. He comes from a tech background, but the topics he covers apply to all sorts of skilled work. In a recent blog post, Seth brings up two important things about measurements:

  1. The thing that you measure should be something that you want to improve.
  2. Many organizations measure what is easy, not what is important.

He makes the point that many organizations pick an easy metric and then that becomes their focus. Be wary that the easy metric may have the unintended consequence of improving something that has little value to the organization.

The use of an aircraft for business most often involves a finite resource: time. The richest person in the world and the poorest all have only 24 hours in their day. The value to the organization of the individual’s time is in relation to the impact they have within the organization. The business aircraft can help reduce the low value use of time spent traveling and allow for the high value time spent being with important customers or in creating things that add value to the business.

So time could be a good metric. But is hours flown the metric you want to measure? If we are focusing on “improving” this metric, would a decrease in hours flown represent an improvement? Maybe, but maybe not. If you are a commercial operator who is being payed a fixed price to deliver something, reducing the time needed is one good metric. 

In aviation, we have to measure the hours flown. But the use of those hours flown may not be a good measure of how well your operation is accomplishing its mission. If you are involved in the transportation of senior executives, more valuable but harder to measure metrics might include:

  • Time avoided traveling by less productive means (airlines for example).
  • The value of that time (based on the executive’s salary and worth to the company).
  • The number of high value trips that the aircraft enables.


These are not easy measurements, but they can be used to clearly show the value of the aircraft. Then the cost metrics of how much this service costs can be placed into its proper perspective. The improvement focus can be in increasing the use of the aircraft in flying those most valued trips in a cost effective manner. 

The value of the executives’ time is a difficult measure and one that the aviation department has no authority to declare. But, successful companies do value their employees’ time and should be making efforts to increase their productivity. This is where the business aircraft has no equal.

There are many more metrics that can be used (dispatch reliability, aircraft availability to throw out but two). What metrics do you report and how many are being used to generate improvements in your services?  Click reply and let us know.



 

The Value of the Aviation Maintenance Engineer

by David Wyndham 7. May 2013 09:29
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I just returned from the NBAA Maintenance Management Conference. This year it was held in Fort Worth, TX. The NBAA Maintenance Committee and NBAA staff did another great conference. If you are an Aviation Maintenance Engineer, or manage the maintenance function in any capacity, this is for you. There were exhibitors and a series of presentations designed to further advance the professionalism of the maintenance career field. The presentations of all the awesome speakers are available online: NBAA_Maint_Mgr

I was invited to give a presentation on “Maintenance and the Art of Aircraft Acquisition Planning.” I had 50 minutes to go over the acquisition process. Suffice to say it was the 40,000 foot overview. While I could tell them nothing they didn’t already know about a pre-buy inspection, I did want to give them the overview that would encourage them to be a part of the whole acquisition process from the very start.

Notice that I used a term Aviation Maintenance Engineer (AME). While we still use A&P or mechanic in the US, other countries have used the term Engineer. Like we do in Flight Engineer. I think this term better fits the level of commitment and professionalism of this group. Too many AME’s toil in obscurity in the hangar and are not involved in the day-to-day process of the running of the aviation operation. This is a shame, and perhaps a travesty.

AME’s are in, and part of the every day life of the aircraft. They have intimate knowledge of the aircraft, its systems, and the level of support available locally and globally for every component on the aircraft. That is enough to make them an important team member in the aircraft acquisition process. AME’s also interact with the crew and passengers as the board and deplane. They, along with your pilots and everyone else at the hangar, are the first face of your company when you bring in clients and prospects to visit your company.

AME’s are no better or worse prepared to be managers than pilots. While it seems a natural progression to go from first officer to captain to chief pilot to aviation manager, most AME’s go from technician, to shift leader, and top out at the maintenance manager level. Through education like the NBAA CAM as well as degree-level schooling, AME’s develop into excellent managers. Many pilots, when promoted into manager positions, try to maintain proficiency in the aircraft and develop proficiency as managers. For a small operation this can be done. For larger operations, the Aviation Manager/Director of Aviation position can be a full-time job. The skills required to be a manager and leader do not require an Air Transport Pilot rating (nor an A&P).

If you a fortunate enough to have in-house maintenance staff, get them more involved in the running of your operation. They see and know a lot. Get them more education and encourage their professional development. In addition to motivating a great employee, you develop team leaders and future managers with the skills needed to keep your aviation operation running well.

Aircraft Chargebacks - What Are They?

by David Wyndham 1. April 2013 14:33
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In some companies, the term chargebacks sends shivers up the spine of the aviation manager. In others, it is a fact of life and a challenge that is met by aggressively marketing the value of the aircraft to the users. Chargebacks can drive utilization, but you can still prosper.

A chargeback is an attempt to allocate the cost of providing the air transportation service to the departments those that use it. In general, the business aircraft, due to its cost and limits to its availability, is restricted to providing air transportation to high value individuals or teams of individuals. How the use of the aircraft is restricted is fundamentally important key in deciding on a chargeback scheme.

If the aircraft is limited to a very small circle of senior executives, or even to one individual (e.g.,the CEO), then the cost of the aircraft can be allocated 100% to the (C-level) headquarters budget. The total cost of the corporate headquarters function is then allocated to the various business units by a common method.

If the aircraft use is made available to different departments, divisions or subsidiaries, then some method of charging those business units for its the use of the aircraft may be appropriate. The general chargeback principle is that those who use the aircraft pay an equitable share for that the use of the aircraft. Chargebacks can range from a 100% reimbursement of all costs to something less than full cost recovery.

There are three considerations pertaining to as to the charge backs method to be used:

1. Metering: How much is utilization of the aircraft to be restricted? High chargeback rates will reduce the aircraft usage while low (or non-existent) chargebacks encourage aircraft usage.

2. Consistency: Is there already an established protocol pattern at the corporate level for distributing other centralized costs? Can an existing policy may be applied to the aircraft?

3. Relevance: When using chargebacks, there must be an accurate accounting of the aircraft costs that supports the chargeback method.

According to the NBAA, about 44% of its corporate members use chargebacks.

When allocating the aircraft costs in proportion to its use, the corporation can elect to recover all or a portion of the costs. Again, the higher the cost, the less likely a business unit is to use the aircraft. With the aircraft, two of the most common chargeback allocations are the fully loaded cost allocation and the operating cost allocation.

Fully Loaded Cost Allocation

A fully loaded cost allocation is an attempt to allocate 100% of the aircraft costs among the users of the aircraft. If headquarters used the aircraft 67% of the time and sales, 33%, then sales should pay 33% of the aircraft budget.

Where this gets difficult is in budgeting and setting the rate. Rates can be by the hour, mile, or seat-mile. If the actual costs exceed the budget, how are the added costs to be recovered? Or, if costs are lower than budgeted, will funds be returned to the business units? Does the full allocation include depreciation of the aircraft or just its operating costs?

This method requires a clear understanding of the aircraft costs and an accurate budget.

Operating Cost Allocation

The operating cost allocation involves some formula to cover the Variable Operating Costs (fuel, maintenance, etc) and the Fixed Operating Costs (crew salaries, hangar, insurance, training, etc). The options range from a percentage of the variable costs to recovering 100% of those the operating costs.

This chargeback method, which can be in the form of an hourly cost or a seat-mile cost, also requires a clear understanding of the aircraft costs and an accurate budget.

This chargeback can be in the form of an hourly cost (if using the whole aircraft) or a seat-mile cost (if “buying” seats on a scheduled trip).

Other companies my use an external source for their chargeback. Most common Are the US URS SIFL rates and First-Class airfare.

SIFL rates

In the US, the Internal Revenue Service uses Standard Industry Fare Levels in imputing the value of private air travel for non-business/personal use. These IRS SIFL rates can also be used for the chargeback cost of the business aircraft. The IRS SIFL formula is based on distance and seats, not the actual cost of operating the aircraft.

First Class Airfare

This chargeback avoids the requirements for detailed aircraft accounting and assigns a predetermined First Class Airfare cost to the use of the aircraft.

There may be other formulas in use such as per mile allocations, an allocation of the depreciation of the aircraft, or a hybrid-mix of the above formulas.

“Flight Department Companies”

Business aircraft operate in the US under FAR Part 91 and are classified as noncommercial transportation, whereas FAR Part 135 allows for commercial transportation for which compensation is collected. However, the IRS may question the aircraft chargebacks and in some cases, may reallocate them during an audit. Care must be taken to avoid any action that either suggests or creates a separate company to provide air transportation services to the corporation (even between subsidiaries within the corporation) unless that separate company holds a Part 135 certificate. For corporations that own an aircraft for its own use, However, chargebacks are an acceptable way to allocate the use of the business aircraft among the company’s users.

The chargeback allocation needs to reflect how the company values the use of the business aircraft. If done with that value in mind, it can be useful to assign a cost to a limited asset of the business aircraft. Thus entities within the company are using the business aircraft when it is most effective to do so. Using chargebacks just to throttle use of the aircraft can be disastrous.

Does your company have a chargeback system? What is it and how bad or good has it been?

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David Wyndham





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