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Understanding Your Costs

by David Wyndham 1. October 2005 00:00
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You are responsible for all the costs in your aviation operation. If you have little detail in those costs, then you have little control. You need to understand, collect, and organize your costs in order to manage them effectively. Otherwise, you may find the aviation function as fleeting as a summer vacation!

It's not enough to know how much your aviation cost last year, or that you hired a new pilot, or even that your aircraft cost $1,000 per hour to "operate." You should know more.

Why? You can't control what you can't measure. If you don't have sufficient detail in your aviation costs, you can't expect to be able to manage them. In about five years' worth of typical turbine aircraft utilization, you will spend as much money operating an aircraft as it costs. Other than overhauls and refurbishments, most of the operating costs go out the door in small enough increments that we don't realize their total magnitude.

You need to know the costs for each aircraft tail number and for each location. Because, if you have multiple aircraft even all the same make/ model, how will you make the case when to replace an aircraft?

You need to track your maintenance costs in detail. The high-dollar part deserves your attention, but so do the moderate cost parts that are consumed at a fast rate. What are your highest cost parts? What are your most frequently replaced parts? What system on the aircraft consumes the most parts dollars? You should track maintenance labor in a similar way.

Once the costs are collected, you need to organize them. Categories of costs may include insurance, training, marketing, maintenance parts, maintenance labor - contract, hangar lease, utilities, etc. Your situation will dictate what cost categories you need.

There are software applications that can enable you to track your aircraft costs – some as simple as a spreadsheet and other as complex as any accounting system. The basic minimum requirement for cost tracking is that it collects and organizes the costs in a way that is useful to you.

In organizing your aviation costs, it helps to consider the behavior of the cost. How will costs change with changes in utilization? Or, how does the cost behave with a change in activity?

A Variable Cost will vary in proportion to the level of activity. As activity increases, the total cost will increase but the cost per unit will remain constant. A good example of this is fuel. An increase in hours flown will have a corresponding increase in fuel consumed. However, the cost per gallon of fuel will not be affected. Guaranteed maintenance programs, catering costs, landing fees and overnight expenses will also vary in relation to how much flying is done. If you use contract flight crew, that would also be considered as a variable cost.

A Fixed Cost as the name implies, remains essentially constant for a given period or level of activity. A pilot's salary is a fixed cost. Whether you fly a little or a lot, the pilot still is paid their same salary. The cost per unit will change with a change in activity. The hangar cost, insurance, cost of refresher training, flight publications are all considered as fixed costs.

This just touches the tip of the iceberg that is operating costs. Before you can control and manage those costs, you need to collect and understand them. Because, "You Can't Control What You Can't Measure."

How do you collect and separate out your operating costs? What software (if any) do you use? Drop me a line and let me know. Give us your input it's, passing your knowledge to others helps us all in the long run.


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