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Can You Make Money In Charter As the Owner?

by David Wyndham 19. March 2017 15:16
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I recently received a call from a past client. He’s looking to acquire a business jet with a partner. When they are not using it, they want to put it on their management company’s charter certificate. He was told that the charter would offset the costs making his aircraft “almost zero to operate.” He was wondering if that was feasible.

Before answering that (no), here’s how this can be set up. The aircraft owner who is looking to reduce the cost of operating their aircraft, places the aircraft onto a commercial Part 135 certificate. When the owner is not using their aircraft, it can be earning revenue by flying charter. You will generate revenue that will offset the cost of owning and operating the aircraft.  You will not “fly for free.”

As a rule of thumb, the aircraft owner typically gets 85% of the base charter rate while the certificate holder keeps the remaining 15%. The aircraft owner typically pays all the aircraft specific charter expenses such as fuel and maintenance. The excess of charter revenue over those expenses helps offset the fixed costs resulting in a net decrease in total cost to the owner.

Charter rates in the US are very low relative to what these aircraft cost to operate. An aircraft that charters for $3,200 per hour can cost about $1,700 pr hour for the variable expenses. Since the charter operator gets 15%, the owner gets $2,720. So far they are ahead $1,020 per hour. But there are fixed costs such as hangar, insurance, pilot fees, etc. that might run $400,000 per year.

Also, this jet costs the owner $3 million to acquire. Lease payments can run to $300,000 per year. If the owner paid cash, there is a cost of capital to the owner as they cannot invest this money elsewhere. Adding the lease expense plus the fixed expenses, you get $700,000 per year. At an income over operating expenses of $1,020 per hour, our owner needs 687 hours of charter revenue to break even before tax considerations. Very, very few charter operators can generate that much revenue flying in a year. 

If this were easy to do, the charter operator would buy the aircraft and keep 100% of the revenues. When you factor in the fixed costs and cost of capital or leasing, charter rates don’t pay enough. But, for the owner who flies infrequently or on a very fixed schedule, the revenues from charter can help reduce their cost of flying. 

If the jet in the example above generated 200 charter hours and the owner flew 200 hours personally, this works to everyone’s advantage. The owner gets $204,000 in income, in effect cutting their fixed expenses in half. They also get to use their aircraft about 25 times per year at eights hours per round trip. The charter operator get the use of an aircraft without the large capital investment. Thus, they get to provide a service and stay in business at today’s charter rates.

For an aircraft owner placing their aircraft onto someone else’s commercial certificate requires careful planning and compromise. The arrangement can be beneficial for both aircraft owner and charter operator, but only if both parties compromise, cooperate and communicate. 

 


 

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David Wyndham

When you "assume"

by David Wyndham 3. February 2017 15:00
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The old saying goes that when you assume something it makes an "ass" out of "u" and "me." That's been demonstrated numerous times. The word assumption does have several definitions. The one in reference above is listed first below. I want to discuss the second definition in relation to the first.

1. a thing that is accepted as true or as certain to happen, without proof

2. the action of taking or beginning to take power or responsibility

The key term to the first definition is "without proof." If we invoke definition two, and take responsibility for defining and offering a level of proof to the assumption, then we have a powerful tool for communication and negotiation. 

In a talk given by James Lara of Greystone Partners at the 2016 NBAA annual meeting, he was discussing the difficulties many of us find in developing a budget. Many times we get into struggles or face the limits of "do more with less." James stated that if you agree on the assumptions to use in developing the budget, the rest becomes straightforward.  With respect to the budget, first agree what the assumptions are. How many trips or hours are needed this year by how many passengers? How many days on the road are needed? What standards do we train to and what are the crew-rest and time-off policies? If fuel cost, salaries, insurance levels, and other costs are mostly a given, then all that remains is the calculation of the total costs to deliver the transportation, safety, and service levels we have just agreed to (assume). If there is a disagreement on the numbers, refer back to the agreed-to assumption that leads to the number. 

This applies to all sorts of communications and relationships. What are the assumptions we are dealing with and are we in agreement? We had this recently at work. We were discussing an issue with one of our software products. When several of us got on a call to discus it, we first had to decide whether it was a problem with the software feature not working correct or whether we didn't communicate to folks what the feature was supposed to do. Once we decided that the issue was the feature didn't do what it was supposed to do, we then set out to reconfigure the feature. And yes, to communicate with our customers better is needed, too. We avoided a lot of wasted time by agreeing what the assumption was in relation to the software before we went down the path to fix it.

This also helps in our relations with other people. With one client, we were tasked to look at their staffing. One area where the assumptions were quite different was in respect to the "free time" when the pilots were on the road. If the aircraft owner went to Barbados for a week, the plane and crew stayed down there as well. On one hand, it sounds good to have a few days in Barbados.  But the pilots are not with family. They are not able to be totally free with their time in case the aircraft owner changes plans. So is this assumed to be work or time off? 

If you are creating a new position or moving someone into a new position, you need to make sure they understand what the job duties and performance criteria are. Helping a client select an aircraft? Do they assume a single-engine turboprop is a safe and cost-effective alternative or are they nervous fliers who want two engines and two pilots at all times? 

Too often we assume the other person has the same assumptions, goals, and reasons for being as we do. When we run into resistance, we can be taken aback to find that is not always true. Checking that your assumptions are in alignment with the other person can avoid many issues and miscommunications. Make it your responsibility to check in with the other person to at least agree on what the baseline considerations are. It's time well spent.

 

 

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Aircraft Sales | David Wyndham | Flight Department

2017 Thoughts - No Recovery Quite Yet?

by David Wyndham 8. December 2016 14:51
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I recently returned from the excellent Corporate Jet Investor CJI-Miami conference. The two-day conference was attend by over 200 financiers, brokers, lawyers, manufacturers, appraisers, consultants and others involved in the transactions of buying and selling corporate aircraft. This includes helicopters, too (see footnote) . There were individual speakers and panel discussions. And way too much good food. Congrats to the CJI team for putting on a great event. Much of the discussion centered around the state of aircraft sales, residual values, and when the "recovery" is coming and where. Here are some things that stood out for me.

Flying is still down. There were three sets of data points supporting this. Jet Support Services (JSSI) has their Business Aviation Index built from the utilization of about 2,000 aircraft flown by their program customers. For third quarter 2016 (2016Q3) flight activity was up 1.4% versus 2015Q3. Sounds good until you see the number, about 29 hours per month, is only 84% of the overall peak utilization. Separating out Part 91 operations showed utilization of 22.5 hours per month - only 270 hours per year. That is not high utilization for the business jet fleet. 

Wingx, using FAA data, was not promising either. They show an average of 101 hours per year for all light jets and 159 annual hours for heavy jets. Not sure how accurate the FAA data is, but trends are trends and they are well off peak levels. Promising is that turboprop and light jet activity is on the rise. 

JetNet's JetNetIQ report also showed increasing aircraft fleet cycles. But total fleet cycles flown this year are only at about 2003 levels even though we have 50% more aircraft in 2016 versus 2003. So we have more business aircraft flying fewer hours and cycles versus peak periods. But flying is slowly increasing. The utilization trend is positive.

Aircraft sales, new or pre-owned, are still flat and pre-owned values overall show no signs of recovering. Several commentators blamed an over supply of business aircraft and buyers in general just not being all that interested in acquiring aircraft.  A couple brokers did note increasing sales activity in turboprops and light jets here in the US. 

Here is a tidbit I got from looking at AMSTAT's data. For business jets globally, about 25% of the fleet, 4,140 jets, is aged over 25 years. Heavy jets are the youngest fleet with only 17% of their number aged over 25. For midsize jets, 24% and for light jets, 33% of the fleet are aged 25 years or older. On the surface, I'd say the time is ripe for those older jet owners to upgrade. Why aren't they doing so in big numbers? 

Data that we see at Conklin & de Decker suggest that as aircraft age, they require increased maintenance to maintain their reliability. This increased maintenance is in dollars and downtime.  As aircraft age, the increase in unscheduled maintenance associated with scheduled inspections also requires a great deal more maintenance down time. Similarly it will take more and more maintenance to achieve any kind of acceptable dispatch reliability. Both detract from the availability of the aircraft for flight operations. Data shows that availability drops from the 95% range for aircraft up to 15 to 20 years of age to an average of 70% at age 25 and 55% at age 30. 

    Aircraft Age        Availability

      0 – 20 years up to 95%

      25 years up to 70%

      30 years up to 55%

By age 30, many aircraft are spending as much time in the shop as being available to fly. Normally this is a big problem and justification enough to acquire younger, more productive, aircraft. But if utilization is low, then maybe this is not such a big deal. The JSSI data are for aircraft under their guaranteed hourly engine maintenance plans. This aircraft are likely to be newer models. Even so, 270 annual hours for a Part 91 business aircraft is not a lot of flying. The Wingsx analysis of the FAA data showing 100-160 annual hours also shows there is plenty of downtime left in the year for scheduled maintenance while meeting g the required flight schedule. 

If operators with these older aircraft are able to meet the flying schedule and they realize the residual value of their aircraft is likely close to spare parts' values, maybe they see little need right now to upgrade. What about FAA NextGen? ADS-B is due by 2020, but for many of these older aircraft with analog equipment, the upgrade may only require a new transponder. If they cannot upgrade, then they might as well fly them until December 31, 2019 and park them. If this is the case for these operators, they may see little benefit to upgrading for another year or two.  

Overall, the general mood at CJI was that things are very slowly improving. But pay close attention to the US. Europe is moribund for business aircraft. As long as oil prices stay low, along with political instability in the Middle East, sales activity there will be slow. Same for Africa.  China and India, although they have the highest rates of GDP growth globally, are growing more slowly than in the past and account for a very small percentage of business aircraft sales. Mexico? Trump, NAFTA, and other trade worries impact there. Brazil's economy isn't promising right now, but Argentina, small a market as they are, is promising. Oceana, another small market for aircraft, is stable. The US has the globe's largest business aircraft fleet. The US, with a pro-business president and Congress combined with the current economic growth that's already underway offers the best hope for the next few years' aircraft sales. 

Personally, I think as 2020 approaches, we will see an uptick in aircraft sales for those aircraft with the ADS-B mods already installed. As supply of these aircraft may be limited, that may help with new aircraft sales.  But given the supply of pre-owned aircraft, that uptick might not be noticeable for another year, or 2018. Food for thought (as if after both Thanksgiving and the CJI buffets I have any room left). 

 

Footnote 1. Most of the helicopter manufacturers are highly dependent on large multi-turbine helicopter sales. Most of those are in oil & gas.  The CJI panel offered little hope for sales unless the price of oil goes up further. However, a recent energy find in West Texas combined the shale oil recovery and fracking technologies getting cheaper point to more land-based oil exploration. Stay tuned.

 

 

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Aircraft Sales | Aviation Technology | David Wyndham | Flying | NBAA | News

Recurring Thoughts

by David Wyndham 16. November 2016 11:33
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I have done some reflection on the past year. This was fueled by several conversations and sessions during the recent NBAA convention in Orlando. It has been supported by some of the consulting work I've done this year as well. I come to several recurring themes. I think all combined, they can help business aviation tell, and sell, our story.

Learn the language of business.We need to understand the languages of business as well as aviation.  Acronyms and jargon shorten the conversation for "insiders" but serve to confuse and exclude those not in the group. Aviation leaders  need to be bilingual in understanding the language and needs of aviation and business. An example of this is building the case to replace your aircraft. You need to explain the value of the new aircraft to the business in terms of being more effective and safe at accomplishing the mission. You better brush up on Net Present Value when talking to the CFO about the costs, too.

Run the aviation department like a business.The business aircraft adds value to the effectiveness of those who fly on it.  Your customers are the passengers and the product is the transportation. You are responsible to the shareholders (CEO, Board, etc). You know you need to develop a budget.  Use it like a "profit & loss."  The profit is the increased effectiveness and flexibility the aircraft provides. Take care of your people and look for ways to do a better job with the assets at your disposal. Develop meaningful metrics that tie into the effectiveness and efficiency of using the aircraft. Track and report them.

First, define and agree on the assumptions.This is for both developing a budget and for discussing options for the aviation department. Before you submit your budget, first have the discussion with the users and financial team about what they expect. If the users need 700 flight hours and expect simultaneous aircraft available one or two days per week, then get that agreement up front. Then you can provide the budget necessary to accomplish that mission. You can't do that with one aircraft and two pilots. If your flying is increasing, then it is reasonable to expect that your budget will, too. If the priority is that your budget must be reduced by 15%, then users need to understand how that affects your ability to deliver. If your budget is based on $3.50 per gallon fuel, what happens if fuel costs go up next year? This works for the mission as well.  If we agree that non-stop range with four passengers must be 2,300 NM, that will set up a set of requirements for the aircraft specifications. By agreeing on the assumptions, the discussion then becomes what resources are necessary to meet the obligations.

Use data, not opinions.If you need additional staffing, it can't be based on a feeling.  Likewise, justifying replacing your current aircraft needs to be supported by data. Gather your facts and be prepared to develop and explain the logic used.   If your assumptions are agreed to up front, and your recommendation is fact-based, then the discussion can be handled with reason.  When I consult with individuals and companies about their aircraft, I keep everything fact based. The  person signing the check can use emotion in the aircraft decision, but not me.

Listen actively.

Active listening is a communication technique that requires that the listener fully concentrate, understand, respond and then remember what is being said.  Two tips for you. Remember what mom said, "Look at me when I'm talking to you." Mom was right. No checking your email or multitasking of any kind. It does not work. Maintaining eye contact in a conversation tells the other person that they are important as well as is what they have to say. The second tip is to suspend judgment while you listen. Many of us start  forming our reply while the other person is talking. Talk the time to concentrate on what is being said and how the person is saying it. So often we jump to the conclusion before someone is finished talking and miss their point entirely. Think of listening like a checklist, you take each step in order and confirm that it was accomplished. 

Business aircraft are productive and efficient tools. Their main value is in enabling the face to face communication we humans need in order to understand and be understood. All the above can help us be better in justifying, selling, and communicating the value aircraft add to a business. 

 

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Aviation Technology | David Wyndham | Flight Department

Consultants Can't Make Your Decision

by David Wyndham 5. October 2016 14:32
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A consultant is just that—a consultant, not a decision maker. When we work with people on an analysis of their aircraft needs, acquisition or tax strategy, we give them options. Its up to the decision-maker to make the decisions. 

Recently a client asked, "If it were your money, which aircraft would you purchase?" I replied, "It is not my money, so you need to be happy with what you choose. All three aircraft under consideration will do the job. Take the demo flights and go from there."  If I really thought there was a clear best answer, I'd of pointed her in that direction, but since it is not my money, the final call is always the client’s to make. 

Consultants can be (more) objective. We all have preconceived concepts and ideas, and sometimes those ingrained opinions blind us to what is going on. Especially when the choice of outcome is important to us. A consultant should be objective. They don’t have a vested interest in any one outcome.  A good consultant looks at the issue from different angles and may offer fresh insights to a situation. Getting the complete picture and exploring competing points of view are reasons to work with consultants.

In a typical scenario, an Aviation Manager recommends to the CEO that they replace their current aircraft.  “Great,” said the CEO.  “Get me a report making the case for your recommendation, and do so as soon as you can.” The Aviation Manager had all the data—in his head, not in a document! He knew that with his busy schedule, he did not have the time to prepare a thorough report outlining the follow-on aircraft that was addressed all the concerns of the CEO and the Board of Directors. Furthermore, he felt that a second opinion from an independent third party added credibility to the recommendation./span>

He called us in, we asked the questions, listened intently and talked with the boss. Then we did the analysis, and in the end we delivered a report stating that the company indeed needed a new aircraft and confirmed that the selection the Aviation Manager suggested indeed was the best option. 

Did our client waste his money? The Aviation Manager saved himself a few weeks of his time, got a third party review of his requirements, and had all the documentation needed to secure the CFO’s and Board’s support for the new aircraft.  I think that was a good value.

When selecting a consultant, beyond the technical qualifications, remember it is a relationship.  Consultants need to relate to you and be able to understand what you and your company executives are really asking. In some ways, the consultant is your “aircraft therapist—one who listens, asks questions and keeps your best interests (and that of the company) in mind.  How far do you want the consultant to go in the analysis? Is it just an advisory consult or will this relationship extend all the way through contract negotiation and aircraft delivery?  You decide.

A consultant’s recommendations should be objective and focused on the choices you need to make. A consultant who also sells aircraft can be very knowledgeable and a source of valuable insight, but there is at the very least the appearance of conflict of interest in the relationship. If the consultant is also brokering a great mid-size business jet and your company’s need might be met by such a jet, maintaining objectivity is paramount.  Be sure the aircraft being offered is right for your firm.  Trust is the key issue in a successful engagement with a consultant, whether independent or part of a brokerage.    

When dealing with the Aviation Department and Executive team, the consultant must be “bilingual”.  They need to be able to talk with the pilots and discuss operational issues like runway lengths and range. Just as important as the “plane talk” is the need to speak the language of business to address the financial concerns and the business management decisions needed in making the aircraft decision. 

Consultants can add value in the acquisition process, but also can add value to the staffing, training, operations and safety of the operation. When done well, relationships with consultants give an impartial perspective, add value and save time.

 

 

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Aircraft Sales | David Wyndham | Flight Department



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