All posts tagged 'Aircraft Costs'

Use Caution When Comparing Aircraft Costs

When comparing aircraft costs, understand what costs are included, what costs aren’t, and how the costs are calculated. If you don’t take all three into account, you can end up with cost data, that although technically correct when viewed alone, is an invalid comparison.

Let’s take an easy one. Fuel How much do you spend on fuel? We did this for a benchmark client, asking what their cost per gallon was for fuel at home and on the road, as well as their annual fuel budget. Seemed straightforward until I started looking at the results. At home, several operators reported fuel costs of less than $2.50 per gallon. This was when then national average was over $5 per gallon. I was able to follow up with the operators and I found out two things:

1. These operators had their own fuel farms.

2. The cost of fuel to them was the wholesale cost when the truck pumped the fuel into their storage tanks.

These operators correctly and accurately reported that their fuel cost at home was less than $2.50 per gallon. The cost of the installing and maintaining the fuel tank and operating their fuel truck, as well as the taxes and fees were all excluded from their cost of fuel. Those costs were in the cost of the hangar and grounds throwing that benchmark off as well. So my intent was to arrive at the “Total cost of fuel inclusive of every cost of every item needed to get the fuel into the aircraft tank.” But without a lengthly definition and explanation, how is an operator to know exactly what I need?

When comparing costs, you need to be clear and consistent in what costs are included and how those costs are calculated.

Another area where costs can be reported in disparate ways is maintenance. “What is your cost of maintenance?” is such an open, and loaded question. Do you get your aircraft maintained at a service center? Do you have in-house maintenance staff? Do you have inventory and how/where does that cost get recorded? Did you record the costs as an accrual or as they occurred?

As an example, take a major airframe inspection due every six years on a large business jet. The cost of that inspection is $240,000. As an answer to “what is your cost of maintenance?”, it could be:

1. $240,000 this year as the inspection was done this year ($600 per hour if flew 400 hours)

2. $40,000 per year accrual for six years (or $100 per hour is flying 400 hours each year)

While in our costing we look at the $100 per hour as the cost of the above inspection, neither accounting is incorrect. When comparing costs, we stress using an accrual method. This way the cost of something is allocated over the time it took to accrue that cost.

If budgeting, then you need to look at the timing of the cost. Comparing costs by looking at a budget can be helpful as it shows not only what the costs are expected to be, but when they are likely to occur. If you are evaluating the acquisition of a used aircraft, when the major airframe inspection is next due can be important. So while Both Aircraft A and Aircraft B can have a similar budget, Aircraft B may face that major inspection sooner than Aircraft A. This information is good to know.

Comparing aircraft costs should be done using a fair and consistent method. The timing of major costs should also be considered. While no one method is the best method, the comparison should be done on an “apples-to-apples” basis and then relative differences are what adds meaning to the comparison.

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