Dry and Wet Leasing
Worldwide Sourcing Agreements
We assist with Helicopter Acquisitions
We assist clients to set Operation Oversight
Advantage of Rotorwing over Fixedwing
The obvious advantage of a rotorwing over a fixedwing aircraft is that it can land almost anywhere. Ten or fifteen years ago, helicopters were rare but their popularity has increased with the realization that it is useful to be able to get from A to B. Though it may be faster flying in a fixedwing, if the locations don’t have the necessary landing strips, having to get to and from there by road can entail additional time and expense.
Understanding Your Costs
In organizing your aviation costs, it helps to consider the behaviour of the cost. How will costs change with changes in utilization? Will a 10% increase in hours flown mean a 10% increase in operating costs? One way of looking at this is 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 get charged as a per hour cost, and thus are considered to be a variable cost. 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. If the pilot makes $6,000 per month and flies 40 hours a month, the cost per unit (hour) is $150. If activity increases to 60 hours per month, the cost per unit becomes $100. The hangar cost, insurance, cost of refresher training, flight publications are all considered as fixed costs.
Multiplying your variable cost per hour by the hours to be flown and then adding in the fixed costs will give you a total cost. This is straight forward for a single aircraft operation. However, what about for a multiple aircraft operation? What happens to the hangar cost? The mechanic's salary? How do you calculate the aircraft's cost when you have more than one aircraft?
You then need to look at the traceability of the cost. A Direct Cost can be tied directly to an activity or a product. An Indirect Cost does not have a direct link to an activity or product. This classification will change depending on the situation!
In determining whether an aviation cost is a direct or indirect one, you first need to know in relation to what activity. If you want to know the cost of the aircraft, you'll need to track costs by aircraft. Any cost that can be directly tied to the aircraft is a direct cost for that aircraft.
If the aircraft goes away, what happens to the cost? If the cost goes away, then it is a direct cost. Fuel, inspection labor, and insurance are all direct costs for an aircraft. If the aircraft goes away, I don't need to purchase fuel.
Examples for an indirect cost for an aircraft might be the aviation manager's salary, the cost of utilities for the hangar and administrative support costs such as a secretary's salary. These costs exist independent of the aircraft. A secretary for a Gulfstream G-IV operation is no different than if you had a King Air. If you go from four aircraft to five, the indirect costs won't vary.
Things change when you look at costs from the perspective of the Aviation Department. The Aviation manager's salary then becomes a direct cost. It is directly associated with the flight department. If the aviation department goes away, so does the hangar, the pilots, mechanics, etc.
Indirect costs for an aviation department might be the legal and human resource support provided by the parent organization. If the aviation department goes away, the parent organization still needs those functions.
Many corporate and government flight departments "charge" their internal users' departments for use of the aircraft. This is to allow for sharing the cost of the aircraft to the various departments that use the aircraft. You may be directed to charge for the variable expenses such as fuel and maintenance. Where this gets "fun" is when you are directed to allocate your entire aviation department's costs among multiple aircraft. Then you must devise a fair method for allocating indirect aircraft expenses.
When you are comparing your costs to another's, it is important to understand the costs included. This sounds self-evident, but when some says their aircraft costs $1,000 per hour, it isn't so clear. What went into that cost?
In addition, looking at costs will vary greatly depending on the period covered. Your aircraft is "less costly" to operate the day before a major inspection is done than the day after! When calculating costs, it is a good idea to allocate the costs of major maintenance items over the period it took to accrue. For example, assume an engine overhaul costs $250,000 every 4,200 hours. In the year the engine overhaul occurs, you might fly 400 hours. What is the cost per hour for the aircraft's engine? Is it $625 (250,000 divided by 400)? It took 4,200 flight hours to accrue the $250,000 expense so I'd say the cost per hour for the engine was $59.52 per hour.
When comparing or reviewing costs, it is vital to understand how those costs were derived. Similarly, when reviewing costs with your financial team, it is important that they too understand the nature of these costs.
We are finishing a bench marking study for a client. We collected aviation cost data from different companies and guess what? They make different assumptions! Some companies assigned depreciation to the aviation department while others did not. Some engines were on a guaranteed maintenance program, some accrued for engine maintenance and others recognized the cost when it actually occurred. This makes it difficult to draw conclusions without understanding these differences.
Tracking, reporting and understanding your costs are vital to your aviation department's health. We all have limited financial resources and need to allocate those resources as efficiently as possible. You need to make financial decisions from a position of objective knowledge and not over an emotional reaction to a major expense. Your understanding of costs will also help to shape your organization's opinions.
"You Can't Control What You Can't Measure."