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Is the Business Model of Private Aviation Broken?

“If you had to do it all over again, knowing what you know today, would you pursue the same path?”  It's a question most people ask themselves at some point and one that I was asked in a recent meeting with two customers, both of whom have been very successful in their respective business careers. My answer was: knowing what I know today, I could have pursued a different path and, most likely, made more money for the hours of time that I have put into the business.

However, I would never have met the people I have met or worked with the people I have been privileged to work with in this business. And for those reasons, I am glad to have done what I have done, even if it meant less money.

It is unfortunate to be in an industry that seems to be short on profit over the long haul.   

The economic environment of the past 24 months has severely wounded our industry and the casualty count has been high.  One of the revelations that has come to me during this period is that maybe we are working with a broken business model. In some ways from a financial (not service) perspective, it looks like the airline industry.

In the supply chain of private aviation what has become apparent is that the end of the chain – the companies that operate aircraft and deliver air transportation services to the consumer are, for the most part, unprofitable. From NetJets, who lost $700 million last year and has lost over $150 million in aggregate since Warren Buffett bought them 12 years ago, to the small businesses like the one I run, many more people have lost money in aviation than have made it. There are no industry wide statistics for commercial operators of private aircraft but I would bet that in aggregate our industry, just like the airline industry, has lost money over the past 10 years. 

If you ask me to name operators who have consistently made a profit over any time period, I can’t do it. The failure rate of air charter companies and fractional operators is dismal. Many companies never make a profit and ultimately go out of business and many more maintain the basic status quo, winning in some years and losing in others.  

The old adage of how to make a million dollars in aviation – start with 5 million - is sad, but true.

Our company has had its ups and downs over our 28 years in business; but, in the aggregate, we have made money. We haven't made a lot of money, but we have always made the payroll. Is that something to be proud of? You tell me.  

If you count the hours we have put into this business and the sacrifices we have made, you might scratch your head and ask, “Why do you do this?”  We would say, “What?! And get out of aviation?!”

Something has to change!

All along the private aviation supply chain, suppliers make money or try to make money with no direct connection to the profitability of those at the end of the chain. The aircraft manufacturers, fuel suppliers and ground services providers (FBO), insurance companies and their agents, financial institutions that capitalize the industry, maintenance facilities,  parts manufacturers and suppliers all have to make a profit.  It is a big chain!

By the time you get to the end of the chain, where the rubber meets the road, where the market of travelers meets the end product , there seems to be no profit for the operator of the jet with pilots up front and passengers in the back.

Sometimes, I think that the problem in our industry is much the same as the problem in the airline industry – too much capacity (supply) and irrational pricing! Why does that happen? Here are a few ideas based on my experience.  

Problem 1: Inexperienced Owners.  For some reason, otherwise smart and successful business people, who did not make their fortunes in aviation, see and experience private aviation, and want to jump into the business, thinking they can do it better.  Maybe it is the glamour, or the fringe benefits of owning an aviation business, where you can get a free ride if you own the company. Once they are in the business they price their service not understanding the costs or worse yet price in desperation to make cash flow, both being a recipe for failure. 

Problem 2: The level (or not so level) playing field. The consumer goes for the lowest price, assuming that our government (FAA) is making sure that all operators are safe and meet the standards to the same required level.  The customer never suspects that this does not happen. Our own government does not trust itself to keep the playing field level from a safety perspective; so, they have independent auditing groups for their own departments because they don’t trust the FAA to do their job.  

Those operators who choose to do it the right way see their ability to make a profit disappear until such time as the substandard competitor goes out of business. Then the cycle starts over, as it is right now, coming out of a tough recession when the weak have been weeded out, or at least severely wounded. 

Problem 3: Supply and Demand – too much supply not enough demand.  As long as there is more supply of private aviation than the market demands, we are potentially doomed to undercutting each other for that ever elusive customer. We are all going after the same shrinking market. Unlike the airline industry where the capacity is controlled by the major airlines, private aviation has over two thousand operators in the US and the market is fragmented.   

I have mentioned three problems. What other problem doom our industry to the “no profit zone”?

Are we stuck in a never-ending cycle of repeated ups and downs - make a dollar, lose two and then make one back?

If we keep doing the same thing over and over again then most likely yes.  

As an industry on the macro level and as an individual operator on the micro level, something has to change. We have to do things differently in the future if we want a better result.  

So, what is needed to fix the broken model and is it even possible?

So far I have been on the negative side, but I am not a negative person. In fact I am an eternal optimist like most entrepreneurs.  I look for the sunshine; so, where is it in this business? Where are the solutions?  A good friend tells me that he sees the light at the end of the tunnel and that it doesn’t look like a train. I hope he's right! Maybe, just maybe, it is the sunshine of innovation!  

I am a strong believer in a free market; however, I do know that regulation must exist to keep a level playing field when is comes to safety. It is not reasonable to expect the consumer to know the difference in safety between operators, since their knowledge of the inner workings of aviation is limited, at best. As bad as I hate to say it, we do need the FAA, but more importantly, we need the FAA to be effective in their task of keeping the industry safe and the playing field level.

We cannot operate in an unregulated free market, at least not at this point in the game. Left to our own devices as an industry, some of us will continue to operate at the highest level of safety employing the best practices and others will allow greed to take over and cut corners.   

If we are to have a level playing field, the government needs to get better at their job of regulating the safety of the industry by either forcing the bad actors out or forcing them to behave.

Knowledge is power and knowledge in the hands of the consumer goes a long way in leveling the playing field. It rewards those who do things right and punishes those who don’t. If you don’t believe this, then you haven’t been online to buy lately. Take a look at the eBay or Amazon Booksellers rating system and you realize that the market has changed. Those who do it right are rewarded. Those who don’t? They get thrown off the playing field by the consumer. When the Web 2.0 arrives to private aviation, the consumer will be more informed and will be able to make decisions based on more than just price.

Eventually the internet will become a more effective vetting mechanism than the FAA for safety and quality.   

So maybe one of the answers to fixing this broken industry is knowledge in the right hands. What kind of knowledge?

How about this for starters:

  • Knowledge of the safety practices and records of operators. Transparent and open for all to see.
  • Knowledge about the people behind the company web site and slick brochures.
  • Knowledge that would allow consumers to find the best solutions to travel outside of the supply-side controlled silos of present marketing methods of our industry.
  • Knowledge that really educates the market about the solutions that our industry offers in contrast to other methods of travel such as the airlines.
  • Knowledge that would allow travelers to place a value on their time and even place a value on their experience so when they compare travel solutions it is not just about the ticket price. Tools to value time and the experience of travel might highlight the experiential value of the private aviation alternative over a simple dollar for dollar price comparison.

How do we get knowledge in the hands of the market so that they can decide to use our services or not? I can tell you that today, most people do not know that an alternative exists to airline travel that they believe they can afford. Why?  Because we are an industry fragmented in our efforts to communicate our value and we have done a poor job at letting the world know what we are about!

We live in an economy where the availability of information is increasing at an exponential rate; however, information is not knowledge. So, if we want to fix this industry and make it profitable can we take all of this information we now have at the click of the mouse and turn it into market knowledge that will help better define the value proposition of what we offer as well? And can that market knowledge drive out the inefficiencies so that price can come down and make our service affordable and a better value to more travelers?  

These thoughts I present are obviously not the only solutions. I have not even scratched the surface of solving the problem. There is no way one person or company can fix this broken model.  

What solutions do you have?

Let’s fix this broken model together and we all win!

Delivering a Call to Action to Your Government Officials

PLEASE ACCEPT THIS EXAMPLE AS YOUR "CALL TO ACTION."
 
Taking back Aviation in our own hands is the premise of this month's article. We have a choice. We can stand to the side if we are content in how our nation perceives our industry or passion by media experts or self promoting government officials, even our president. Or, we can stand up, unite and pull together our many resources and revive a once illustrious industry where kids dreamed of being a participant. The following is an example of how my organization and fellow aviators, Missouri Pilots Association (MPA) and the Greater St. Louis Business Aviation Association (GSLBAA), took the task at hand.

On Thursday, March 24th, approximately 100 General Aviation pilots, mechanics, instructors, flight attendants, directors, managers, consultants and technical sales people all converged into the marble portico of their State's Capitol Building, all with the same purpose: To make certain that their voices were heard by their elected officials. A quarter of this passionate group chose to deliver their message by way of a path that even automotive and other corporate executives now fear to take; they travelled to meet their legislative officials on board a corporate jet.

Now this was no ordinary jet. It was a 14 executive seat, 24 ton, Rolls Royce powered, 'Next-Gen' Embraer Legacy 600 that Mr. Gregory Babcock, the regional representative for Embraer Business Jets, made available to anyone from Missouri who wanted to take their General Aviation Message to the their State Capitol in Jefferson City.

The main proponents of this face-to-face meeting with State Lawmakers were the Missouri Pilots Association (MPA) and the Greater St. Louis Business Aviation Association (GSLBAA.) The MPA is more than just another flying club; it is a body of pilots and other like-minded people whose focus is on general aviation in Missouri both now and for its future. The MPA claims that it is successful and has become the envy of many a state for its strength and unity. The Association was founded in 1953 and has now grown into one of the largest non-profit state General Aviation organizations in the U.S.A. The goals of the MPA are to improve aviation safety, provide educational opportunities, promote a positive image for General Aviation, and to protect and preserve the rights of pilots and aircraft owners.

GSLBAA was formed in 1976 to create a voice at the local, state, and regional level, allowing the St. Louis area aviation community to be more proactive, and effective, when issues are presented. Its objective is to be in-tune to local level issues that affect aviation and related businesses. Members of GSLBAA have the opportunity to belong to a unique organization found in very few cities across the U.S. and one that will allows them to grow professionally, with other pilots and associates in the aviation industry. GSLBAA is one of the oldest local professional aviation organizations in the country. The Association claims that many other cities have patterned their organizations after GSLBAA.

The passengers on the Legacy 600 that flew out of the Spirit of St. Louis Airport (KSUS) included owners, presidents, directors, managers, pilots and flight department managers from 12 major companies that are based in St. Louis. These companies included:

One which is the World's largest private Coal Company (annual revenue $6+ Billion); an Agricultural seed and chemicals company (annual revenue $11+ Billion); a cable and telecommunications investment/management company (annual revenue $50+ Million); a 91-year-old corporation that sells heavy earthmoving equipment (private company/no revenue data); an investment corporation which owns 161 companies in 34 different industries (private company/no revenue data); a privately held petroleum products distributer (annual revenue $6+ Billion); and the World's largest car rental company (annual revenue $13+ Billion.) Most of the companies mentioned, do currently operate business aircraft.

The specific issues that both of the aviation delegations wanted their State Representatives to fully understand is important to them were as follows:

State Bill number 1000, which proposes the transfer of approximately $2.3 million from the State Aviation Trust Fund, which if approved, will delay or cancel airport improvement and safety projects at Missouri airports, should be 'killed-stone-dead!'

The State of Missouri should be designated as a 'Fly-Away' State, just like it's neighbouring states, whereby 100's of millions of dollars would be attracted to Missouri because foreign/non-Missouri aircraft owners could choose to bring their pre-buy inspections to Missouri, close the transaction and then stay while repairs, improvements and upgrades are performed to their aircraft before it is taken to its new home-base.

Additionally it is important that the State mandate that all of its Business Councils and Associations receive familiarity training on the importance and uses of a Business Aircraft as a valid business and sales tool that enables a corporation to leap ahead of its competitors. Commission a State endorsed study, or at least use the data available at the "No Plane - No Gain" website https://www.noplanenogain.org/

Lastly the politicians were all urged to sponsor and promote a General Aviation Business Trade Show for the State of Missouri. The purpose is to promote and encourage Aviation Businesses to move to, or 'start-up' in Missouri; to encourage the National Business Aviation Association (NBAA) to hold its Annual Meeting and Convention in a Missouri; to encourage the Aircraft Owners and Pilots Association (AOPA) to hold its Annual Meeting and Convention in a Missouri; and to encourage the National Air Transportation Association (NATA) to hold its Annual Meeting and Convention in a Missouri.

It is too early to report on the results that were achieved by this very positive and worthwhile outing to the State Capitol of Missouri. However, judging by the debriefing conversations that were heard on the return journey's home, it is safe to say that everyone believed that their message was heard "loud and clear."

So how does this recent proactive day-trip within the borders of Missouri affect you, is a fair question to ask? Well there are 50 separate States in this country, as well as there are 100's more government assemblies across the World. I would like this story and others like it (if you are willing to do a little research to discover them) to inspire you to organize and act within your own General Aviation Community. Take your local message of wants and needs necessary for General Aviation to prosper in your region, out into the offices of your elected officials. Deliver a clearly defined list of actions that they can use, consider and debate. Make them understand that your views are not to be ignored. You are effectively their ticket in office. If they want to stay in office for any length of time, they have already learnt the importance of hearing the opinions and ideas of their constituents.

To assist you in your plight of becoming an effective General Aviation Advocate and Lobbyist, please consider all of the following concepts:

Prepare for the meeting
Be informed on the issues that are important to you in General Aviation in your region, and on a national front. Research and place your local needs into the national and global environments as well. Gather and analylize data derived from the government that you are to present to, along with other sources. Then relate these statistics to your message.

Practice your message delivery
Once you have all of your ideas, concepts, statistics and data organized into simple bulleted action items. Think through the meeting before hand along with the approach that you shall take to deliver your message to your representative. Once you have practiced your delivery and adjusted its flow, its effectiveness shall be doubled or tripled when you 'go live.'

Identify both yourself and your influential connections
Government and Ministerial Officials are professional networkers. They live and die through their connections with influential people and organizations. If you are a member of an aviation association, work for a company that is involved in aviation, or you share the same point of view of a notable person that you know personally, it is critical to announce this connection to your targeted representative.

Be specific about what you want
The message: "I want government to back-off regulating how and when I can fly" is far less effective than: "The Large Aircraft Security Program, Docket Number TSA-2008-0021 that was proposed by the Department of Homeland Securities, Transportation Security Administration in 2008 and 2009, if brought back in a second run, shall cause my local airport to shutdown because it does not have sufficient funds to comply with the fencing and gate access requirements. Also employer: The XYZ aviation co. Inc. will also have to close-down because it cannot afford to relocate to another airport in another region or state, thus eliminating 23 jobs at this company that has a payroll that ranges from $27,000 P.A. to $93,000 P.A."

State your views clearly
A single sheet of paper with bullet points is the most effective tool for you to use as a 'hand-out.' Be practiced in delivering a clear and concise 'sound-bite' for each of the points on your sheet. Then be prepared to expand on anyone of them, when asked to do so.

Make yourself their expert
Lawmakers are usually kept on a very short leash with regard to the amount of time that they can spend listening to your face-to-face presentation. Often you are introducing concepts and ideas that they may never have 'heard of' or considered before. Offer to make yourself completely accessible to them and their staff, as their expert on the issues that you have brought to their office for action. Be honest.

Listen
There is a proverb that states: "A fool finds no pleasure in understanding but delights in airing his own opinions." Listen very intently to your message recipient after you have finished your delivery, because you may well miss the opportunity to take your argument to the 'next-step' in the required process for it to be acted upon if you still have your mouth open, and your ears closed.

Follow-up
Write a personal letter of thanks to every official that you met and delivered your speech to. Call their office regularly to remind them that you expect them to act upon your requests and concerns. What at first appeared to be a low priority issue will quickly make its way to the top of a governor's agenda if his constituents call about it almost every week to find out how he has dealt with it?

Don't burn any bridges
As much as you might find the political way of achieving things contrary to your own way of thinking, never make your mind up about a politician immediately based upon the first impression that you had of that person. Often if given the second, third or fourth chance even, you might be surprised by wide differences can be narrowed to a shared point of view.

If you are still not convinced that this example should be your own "call to action" to lobby on behalf of General Aviation, please allow me to share a letter that was written by Mr. Jonathan Rimington, the current President for the Missouri Pilot's Association, which reads as follow:

"...At an airport near you there is a mechanic scratching a living at what he loves.

There's an airplane lined up ready for takeoff with a mother and child aboard. The child is the only one wearing an oxygen mask. The hospital awaits them in a far-off big city. A twin-engine aircraft is circling well clear of the pattern freely offering priority to the mercy flight.

Aboard the inbound turboprop is a local businessman with a new contract in his briefcase, successfully signed at a meeting 300 miles away earlier in the day. He's both relieved and grateful that now his 73 employees will have work for the next several months while he negotiates a new contract with a new client. He also knows that it is the lower overhead his small-town factory enjoys that has kept his price competitive.
A student pilot, encouraged by hopes and dreams of a career as an airline pilot has just performed a wheelbarrow landing and is gently bouncing down the runway accompanied by a brave and patient instructor who is remembering his own early landing attempts many years before. They survive to have a serious talk before taking off and trying again.

Twenty-seven kids bubbling with enthusiasm masking just a little fear at their forthcoming first flight line up awaiting their turn to board one of the small planes standing by to take them. They are guests of the local MPA chapter. A teacher tries in vain to quiet the children but is drowned out as the aircraft hosting the first three children roars into life prop turning and the sudden rush of air is tearing at loosely worn jackets as it taxis away. The teacher does not know it but years from now one of two twins on that field trip that very day will one day fly fighters in the military while the other twin will eventually become head of the FAA.
The small restaurant will sell seventeen hamburgers and thirty-two ice cream cones to those kids on this same day.

A cab driver pulls up in front of the FBO to pick up a pilot and passenger to take them to the local hotel. They are there to view a local high school football game and are scouting for talent to recruit for the college they represent. In the meantime the FBO owner tops off the airplane with forty-one gallons of AvGas, one of seventeen aircraft he has refuelled today. It's been a good day.

A local contractor is putting up a new corporate hanger and the FBO has just agreed to supply Jet-A fuel as soon as the hanger is near completion. The hanger will house two turbo-prop aircraft for the owners of a new software company building their headquarters in town.

The Mayor is feeling pleased; ninety-three new jobs are coming to town. She is gratified to have supported the recent runway extension. The owner of the restaurant that was on the brink of closing and located across the street from the new software company is full of hope for the survival of their family business. The twenty hangars on the field currently house eleven aircraft. The others sit empty only because the aircraft they normally hold are in use. The hangars earn the city $36,000.00 a year in rent.

The student pilot is still trying to get his landings right and the mechanic is about to complete his fourth annual inspection to date this month at an airport near you. General Aviation airports are vital to local communities, our State and our nation..."

Now it is your turn to act as well.
 

FAA Enforcement Case Update

This month I thought I would provide you with another update regarding some of the recent NTSB cases involving FAA enforcement actions. They are instructive because they not only show you the FAA's and NTSB's positions regarding some of these issues, but they also provide some examples of problem areas a prudent airman should avoid.

NTSB Dismisses FAA Appeal For Untimely Filing Of Appeal Brief

In a recent NTSB case in which an administrative law judge awarded attorney's fees and costs to an airman under the Equal Access to Justice Act ("EAJA"), the Board dismissed the FAA's appeal of the EAJA award for failure to timely file an appeal brief. In Application of Hayes, the FAA timely filed its notice of appeal. However, the FAA did not then file an appeal brief by the deadline required by 14 C.F.R. 821.48(a). Although the FAA's appeal brief was dated the last day allowed by the rule and the certificate of service stated the brief was served by overnight mail on that date, the Federal Express tracking data indicated a pickup date of three days after the deadline for filing the brief.

Based upon the untimely filing, the airman subsequently filed a motion with the Board to have the FAA's appeal dismissed. The FAA did not respond to the motion within the time allowed, but did later file a notice of withdrawal. The Board ruled that the FAA's failure to show good cause for its untimely appeal brief, or to request, before the appeal brief was due, leave to file the appeal brief out of time, required dismissal of its appeal. As a result, the Board deemed the FAA's withdrawal of its appeal as moot.

Nice to know that, at least with respect to timing requirements for filing of appeals, the Board will treat the FAA the same as airmen.

ATP Receives 90-Day Suspension For Failure To Find Suitable Landing Site For Hot Air Balloon

In Administrator v. Chemello, the airline transport pilot landed a hot air balloon in a high school parking lot in the morning shortly before the start of classes. Of course, the balloon attracted a lot of attention from the teachers, students, local law enforcement and, not surprisingly, the FAA. The FAA investigated the incident and subsequently issued an order suspending the airman's ATP certificate for 90 days for alleged violation of FARs 91.119(b) (prohibiting operation of an aircraft over congested area below an altitude of 1,000 feet above the highest obstacle within a horizontal radius of 2,000 feet of the aircraft) and 91.13(a) (careless and reckless). The airman appealed the suspension to the NTSB.

After an evidentiary hearing, an administrative law judge ("ALJ") affirmed the suspension. Relying upon his determination of the witnesses' credibility, the ALJ held that the school parking lot was a "congested area" at the time of the landing and that no emergency was present that would have prevented the airman from landing the balloon in a different, suitable location. The airman appealed the ALJ's decision to the full Board arguing that the ALJ's credibility determinations were contrary to the evidence.

The Board initially observed that an airman's "selection of a suitable landing site for a balloon is dependent upon the balloon's proximity to power lines, buildings, and trees, and the availability of alternative landing sites." It also noted that, in addition to generally deferring to an ALJ's credibility determinations, the Board will specifically defer to an ALJ's "credibility determinations with regard to whether a respondent believes that he or she must land a balloon in a certain area due to wind conditions." The Board concluded that the airman had not presented any evidence to compel it to disregard the ALJ's credibility determinations. As a result, the Board affirmed the ALJ's decision.

Tough to get a decision reversed when it is based upon the ALJ's credibility determinations. Unfortunately, this is typically the situation when a case involves a factual dispute, as opposed to a case involving a determination of whether undisputed facts support a violation. The key is to convince the ALJ at the hearing. But that, too, is easier said than done.

NTSB Affords Airman With Second Hearing After 9th Circuit Court of Appeals' Rebuke

After getting its proverbial wrist slapped by the 9th Circuit Court of Appeals, the NTSB has afforded an airman a second hearing. In Administrator v. Klaber, the FAA charged the airman with violations of FARs 135.293(a)2 and (b) (requiring written/oral test and competency check within preceding 12 months), 135.299(a) (requiring line check within preceding 12 months), and, of course, the ever present residual violation of FAR 91.13(a) (the ever present careless and reckless). The FAA ordered a 90 day suspension of the airman's airline transport certificate as a sanction for the alleged violations. The airman appealed the order to the NTSB and, after a hearing, the administrative law judge ("ALJ") affirmed the FAA's order, but reduced the suspension from 90 to 85 days. The airman then appealed to the full NTSB.

On appeal to the full board, the airman argued that the ALJ made a mistake when he prevented the airman from cross-examining an inspector, the FAA's primary witness, regarding a number of issues including the definition "for compensation or hire", the inspector's understanding of flight maintenance logs, the inspector's internal deliberations concerning his investigation into the airman's conduct, and the inspector's experience. The Board rejected the airman's appeal, finding that the ALJ had not abused his discretion nor did any alleged errors result in prejudice to the airman.

The Board specifically found that neither the inspector's understanding of "compensation or hire," nor his general perception of flight maintenance logs, were directly relevant to the evidence that he reviewed concerning the airman's alleged violations. It also concluded that the inspector's opinions during the course of his investigation or his discussions with other investigators were not relevant to the issue of whether the airman violated the regulations as charged by the FAA. As a result, the Board affirmed the ALJ's decision.

The 9th Circuit Court of Appeals disagreed with the Board. In its unpublished decision, Ferguson v. FAA, the Court determined that the Board had abused its discretion in upholding the ALJ's decision and that abuse of discretion was prejudicial to the airman. The Court initially observed that "[t]he Rules of Practice in Air Safety Proceedings provide that each party has the right to 'conduct such cross examination as may be required for a full and true disclosure of the facts." However, because the inspector "was the FAA's lone witness as to the revenue-generating nature of the disputed flights," the Court determined that the ALJ erred in not allowing cross-examination of the inspector on the many aspects of his testimony regarding that central issue. The Court stated that the ALJ's "reliance on [the inspector's] testimony, particularly as to the contents of the flight logs, makes clear that the error was prejudicial." The Court vacated the Board's decision and sent the case back to the Board for further action.

Although clearly not happy with the Court's decision, the Board complied with the decision, stating "[d]espite our well-established precedent with regard to our law judges' evidentiary rulings, and the reasoning that forms the basis for our deference to such rulings, we recognize that the Ninth Circuit believes that the law judge should have allowed respondent's counsel to question [the inspector] more fully in this case. As such, we are compelled to remand this case to the law judge so that he may oversee an additional hearing at which respondent's counsel may again cross-examine" the inspector."

It is unfortunate that the airman had to appeal all the way to the 9th Circuit in order to get his full day in court. However, you have to wonder whether the additional information that will be obtained through a full cross examination at the new hearing will change the ALJ's mind or provide a sufficient basis for appeal if he doesn't. We'll just have to see how it plays out.

Conclusion

As airmen, we should always be learning. We can learn from current NTSB cases. The obvious lesson is to not do what these airmen did. These cases also reveal what an airman may be able to expect from both the FAA and the NTSB in these situations. Forewarned is forearmed.

How Decreased Utilization Can "Increase" Costs

A user of our cost database asked about the effect of utilization on total cost per hour. His question was with higher utilization do the fixed and total costs decrease on a per hour basis?

First a quick review. Variable Costs are those costs that as activity increases, the total cost will increase but the cost per unit of time will remain constant. An easy example is fuel cost per hour. The next hour you fly will consume so much fuel. If you don't fly, then there is no fuel consumed and thus, no cost.

Fixed Costs are costs that for a given level of activity or period, remain essentially constant. Hangar rent is an example of a fixed cost. You pay so much per year to rent a hangar regardless of how much you fly.

For our discussion, we assumed that Total Cost per Hour was the Variable Cost per Hour plus the Annual Fixed Cost divided by the Annual Hours flown. The example I used was an aircraft with a variable cost of $1,250 per hour and fixed costs of $400,000 per year.

For 200 hours per year = 200 x $1,250 + $400,000 = $650,000 per year divided by 200 hours = $3,250 per hour average.

For 400 hours per year = 400 x $1,250 + $400,000 = $900,000 per year divided by 400 hours = $2,250 per hour average.

You spread the annual costs over more and more hours so the total average cost per hour decreases as utilization increases.

The reverse is also true. Decreasing utilization by a certain percentage will not drive down total costs by the same percentage. If your aviation budget were reduced by 15%, you'd have to reduce flying by a lot more than 15% to make your savings. From our earlier numbers:

400 hours per year = 400 x $1,250 + $400,000 = $900,000 per year divided by 400 hours = $2,250 per hour average.

To reduce our $900,000 budget by 15% to $765,000 by only reducing flight hours, we'd need to reduce flying to 292 hours - a 27% reduction:

292 hours per year = 292 x $1,250 + $400,000 = $765,000 per year divided by 292 hours = $2,620 per hour average.

Also note that our average cost per hour went up by 16%. So if you were tracking that metric too, things would look bad. Decreased flying and increased average cost per hour.

This can result in the "flight department death spiral" of reduce hours, average cost per hour increases, reduce hours some more because the cost per hour goes up, average cost per hour increases again... until at some point the aircraft is sold for being too expensive.

In some cases this cannot be avoided as the company is in dire straits and simply cannot afford the expense regardless. However, as aviation managers you need to be aware of the perception of your aircraft costs and be prepared to both defend and explain them so as to avoid a knee-jerk "the planes too expensive" reaction to reduced flying.

I hate to ask, but have you been there?

Off-Shore Aircraft Registration

In the maritime world, a ship is said to be "flying a flag of convenience" if it is registered in a foreign country "for purposes of reducing operating costs or avoiding government regulations." The country of registration determines the laws under which the ship is required to operate under and also that which are to be applied in any relevant maritime legal cases that might come about.

In aviation there are a multitude of reasons why you might choose to register your aircraft off-shore under the flag of a foreign country. Some of these include:

Complete Anonymity, i.e. if you suffer from celebrity notoriety; or you are a powerful corporate leader who relies on discreet and untracked movement within the territory of your competitors; or simply for personal reasons requiring anonymity. When your aircraft has been registered off-shore your privacy protection begins. If a journalist, corporate competitor or other interested party seeks the registered owner of your aircraft; their search will end with the contact details of your registered agent or trustee, and not with you.

Sales Tax or other Tax Avoidance, i.e. generally speaking, it is fairly simple for you to avoid a multitude of forms of taxation that are normally associated with the ownership and operation of a private or business aircraft, by registering it off-shore. Neutral Nationality Registration, i.e. this issue has become very prominent since we have moved into the new age of terrorism and unrest. By registering off-shore, you can fly internationally without instant recognition as being from the U.S.A.

Most foreign registries require that the registrant be a citizen of that country. The United States is the same: A U.S. citizen by definition of 14 Code of Federal Regulations (CFR) section 47.2 can be an individual, or partnership where each individual is a U.S. citizen, or a corporation organized under the laws of the United States, state, territory, or possession of the United States of which the president and at least two-thirds of the board of directors are U.S. citizens and 75 percent of the voting interest is owned or controlled by U.S. citizens. A resident alien is considered to be a corporation other than classified as a U.S. citizen, lawfully organized and doing business under the laws of the United States or of any state thereof, if the aircraft is based and used primarily in the United States; or a government entity (federal, state, or local). How then do these off-shore registries allow a foreigner to register with them? This is allowed by the employment of a native 'Trustee' or 'Agent' who acts on-behalf for the foreign ownership entity, under the auspices of a formal 'Trust Agreement.' In all cases there are annual fees that are payable to the agent. The U.S.A. aircraft registration branch is the only authority that I know of, that does not charge any annual registration fees.

Internationally, the most popular off-shore countries of registration are Bermuda, the United States of America, and now the relatively new player: the Isle of Mann. The "M" Registration was first introduced in 2007 by the government of this small island tax-haven which is located in the North Sea between England and Northern Ireland; it is probably better known for its T.T. motorcycle racing history rather than for its aviation industry.

Even though the aircraft eligible for entry onto the "M" or "Manx" registration must all be Type Certificated by the European Aviation Safety Agency (EASA), the Isle of Mann has chosen to more closely mimic the Federal Aviation Regulations of the United States rather than the bureaucratic tangles and inconsistencies that are normally found within the rules established by the European Aviation Authorities. Interestingly though, no non-resident islander can register any aircraft that is non-turbine powered and below 12,500 lbs MGTOW, or in the case of Helicopters, a non-twin-turbine powered machine.

Since a convenient loophole in the Value Added Tax (VAT) Regulations was recently exorcised by the European Union from the Danish Ministry of Taxations' rolls, whereby a 'flat-tax' was charged for an aircraft run through their tax-registration system, instead of the normal 25% or so, being charged like everyone else. The Isle of Man registry has quickly taken the lead largely because of its zero tax ratings for both corporations and inheritances, and depending on an aircraft owner's tax domicile, the Manx government provides a pathway for owners to either significantly reduce or even eliminate the VAT charge on their aircraft purchase.

By the beginning of November, 2009 almost 180 business jets and turbo-props had already been enrolled onto the Manx aircraft register. I am certain that this number shall continue climbing at a high rate. How do you or your company handle the Registration of you aircraft? Please click on the link below which states "Reply to this Article", your thoughts and comments would be very much appreciated. Be funny, be inspired, but most importantly of all, please be nice.

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