Aircraft Chargebacks - What Are They?

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?