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CORPORATE AND PRIVATE AVIATION

COSTS

When asked by the CEO of a prospective purchaser the cost of operating a new corporate jet, one aircraft salesman was heard to say “A couple of million dollars for the first hour, thereafter a couple of thousand bucks an hour”.  This is a very simplistic but valid assessment of the principle.  The true overall cost per hour reduces significantly with each hour flown.  

Consider this…   A Chief Pilot prepares his budgets at AAA hours a year use, giving a perceived cost per hour of $BBB.   The Financial Controller issues an instruction that travel is to be on scheduled airline rather than the company aircraft if the total cost of the airline ticket(s) equates to less than $BBB multiplied by the flight time.  Consequently, aircraft use in the company may fall below the budgeted AAA hours per annum and thus the cost to the company of hours actually flown may become far greater than anticipated.   In reality, use of the company aircraft is clearly justified on a purely cost basis where the cost of airline flying is greater than the sum of the variable costs and the indirect costs.   If properly attributed, the business aircraft will also be used far more, adding efficiencies, saving time, limit nights spent unnecessarily away from home and in hotels, and help avoid lost business opportunities.  

The typical annual utilisation for a privately owned and operated corporate jet aircraft is between 400-800 hours.  Utilisation projections can be used to establish an approximate budget for planning purposes, however fixed and variable costs should be identified separately.  The fixed cost is the facility or opportunity cost, i.e. the ‘cost of the first hour’.   The variable cost is the actual cost of use, i.e. the cost of each subsequent hour.

 

Direct & In-Direct Operating Costs

ICAO defines direct operating costs (DOCs) as: the total of flight operations costs (flight crew salaries and expenses, aircraft fuel and oils, aircraft insurances, aircraft rentals, flight crew training – where not amortised, and other flight expenses), maintenance and overhaul costs, depreciation and amortisation (aircraft, required ground equipment and associated property).

Operators and analysts will further sub-divide DOCs into fixed and variable, with flight crew salaries, depreciation, aircraft rentals, insurances, and maintenance burden determined as fixed, while fuels and oils, flight crew and other expenses, and airframe and engine maintenance are considered variable.

Indirect Operating Costs (IDOCs) are defined as: the total of user charges and airport expenses (landing and airport charges, en-route facility and navigation charges, and handling expenses), passenger services costs, catering, security, general and administrative, and other operating expenses.  

Operators themselves may lack an accurate mechanism of attributing costs, particularly where several different types are operated and the proper allocation of true direct and indirect, function, capability and facility costs becomes arguably impossible.  Reporting formats vary, and, where published, may not provide a sound benchmark for comparison.

 

U.S. versus Elsewhere

Costs of operation and maintenance in the non-US environment are significantly different, indeed greater, than those experienced in the United States (the market from which most of the manufacturers’ quoted cost data is often derived).  This is due in main to often stricter operational and maintenance regulations and higher airport user fees and navigation charges.

 

Different Types & Models

Differences in cost of operation between the various aircraft types and models are largely a factor of:

  • Relative capital value hence depreciation, cost of capital and insurance hull rates
  • Relative maximum take-off weight, hence engine power and associated fuel burn
  • Consequential navigation charges and handling fees (which are linked to weight)
  • Relative complexity, hence engineering man-hour requirements and cost of maintenance
  • True residual or ultimate resale value

Other costs, such as pilot salaries, liability insurance, etc., are much the same for all types.

The difference in operating costs between aircraft types and models must, of course, be weighed against relative mission performance and comfort.

 

Maintenance Costs

Apportioning maintenance costs in particular is much dependent on the level of engineering work outsourced and operator accounting policies.

The individual aircraft maintenance history, the length of an average sector, runway length and surface, operating procedures, engine handling and braking techniques, the cost of shipping parts and supply lines, and general maintenance practices, also have a significant role to play in determining final costs.   

 

Operational Budget

An operational budget must consider each of the following costs of operation:

Fixed (Annual) Costs:

Market Depreciation – To more accurately attribute a true value for depreciation in terms of aircraft ownership and operation, a ‘market depreciation’ figure should be used in the budget, i.e. taking into account resale value retention.  Historically, this has been no more than approximately 3-5% per annum for a well-maintained unit in mid-life condition, depending on type and model.  

Cost of Capital – Varies from buyer to buyer.  

Rentals – If leased, actual monthly or quarterly rental charges should be considered in lieu of market depreciation and cost of capital.

Hull Insurance – This is typically based on Lloyds’ market rates and aircraft hull value.  War risk cover is also required for the hull while certain named current war zone countries may be excluded from time to time unless specific underwriter agreement is sought and expressly given.

Combined Third Party Insurance – This covers passenger, baggage and third party liability.  Many corporate aircraft financiers and airport operators establish minimum third party cover requirements.   We would recommend such cover in an amount of at least US$ 250.0 million.

Management Fees – Negotiable with the management company, typically based on size of aircraft and nature of operations envisaged. Provides for overall administration of aircraft operation, including licensing, human resources, flight safety and training, standards, maintenance planning and supervision, flight planning and flight watch, contracts and budgetary control. 

Hangar Rental – Negotiable, depending on (a) supply and demand at airport concerned, (b) the aircraft’s size, typically judged by weight, and (c) whether additional services (e.g. maintenance or handling) are co-sourced.   Will include towing to and from hangar and limited parking at base airport.

Flight Crew Salaries & Benefits – Market driven by the airlines and occasionally by other market conditions, though must be adequate to negate staff turnover not least due to relatively high type conversion and other training costs associated with each new pilot or engineer.  Due to duty and flight scheduling and allowances for leave, training and illness, and more particularly safety-led individual duty time and flight time limitations, a typical corporate pilot will fly no more than 600 hours annually (maximum permissible is generally 100 hours per month up to a maximum 1000 hours per annum).  Benefits, including allowances, pension contributions, medical insurance, and uniform may represent 20-30% of salary.

Annual Recurrent Training – Provision must be made for each pilot to be sent to an appropriate simulator training facility twice per year, also to include travel and accommodation for several days.  

Cabin Crew Salaries & Benefits  - Cabin crew duty and flight time will mirror those of the pilots at approximately 600 hours flight time per annum.   Benefits are similar and a 20-30% provision should thus be allowed.

Provision for Cosmetic Refurbishment – Seats, carpets and upholstery require regular care and attention to retain their looks.  A nominal provision should be made for cabin upkeep.

Other, Admin, Fees, Docs, etc. – A provision to include use of office facilities, licence fees, aircraft registration fees, annual certificate fees, manuals and publications, navigation chart subscriptions, parts shipping and carriage, etc.

Variable (Hourly) Costs:

Fuel – Aircraft engines burn more fuel per hour the shorter the flight or the heavier the aeroplane, hence budget fuel burn should be based on a fixed trip length typical of the user’s requirements.  On a shorter trip, or with a greater load, actual fuel burn per hour will be greater. Fuel prices fluctuate every 14 days, based on net bulk pricing f.o.b. at key locations (such as Rotterdam).   Posted Airfield Prices (PAPs) are published for each airport, however opportunities exist with certain multiple location suppliers offering the benefit of bulk contracts (as with airlines operating multiple aircraft fleets). 

Maintenance Labour – Maintenance labour is budgeted on the basis of a man-hour to flight-hour ratio appropriate to the aircraft type, model, complexity, age, check cycle, operating environment, warranty status, utilisation and general condition, and also the experience and efficiency of the maintenance organisation on both the aircraft type and individual unit.   We would consider a good well-maintained example of most business jet types maintained by an experienced maintenance organisation knowing the aircraft to require a provision of between 2.0 and 5.0 man-hours per flight-hour.

Engine Reserves – Normally based on contracted ‘power-by-the-hour’ basis for each engine individually, either with the engine’s respective manufacturer or other insurer.  Includes engine life-limited parts.  Where applicable, provision should also be made for thrust reverser overhaul, which will not be covered by the engine manufacturer scheme.

Parts & Consumables – An hourly allowance for parts, including, in particular, brakes and tyres.  Appropriate to the type of aircraft as experienced in service, adjusted for operating environment, runway length and surfaces.

Navigation Fees – Levied by national government air traffic control agencies for en-route services rendered.   In Europe, collected by centralised EuroControl on behalf of member states.

Landing Fees – Levied by airports for each landing, based on aircraft weight.  Local navigation fees, lighting fees, out of hours fees, noise surcharges, passenger and security fees may also be collected. 

Handling Fees – Levied by handling agents for assistance with passenger and baggage handling, use of VIP lounges, vehicle escorts, apron transportation, liaison with control authorities, submitting slot applications, and coordinating all related airport and ground services.  Negotiable at base and for regularly used airports, particularly where competition exists.  May include parking.

Other, Catering, Crew Expenses, Communications, etc. - An allowance should be made for passenger and crew catering, depending on trip length and average number of passengers, for crew hotel, food and transport expenses away from base, and local communications.   For extended winter operations, a provision should also be made for essential aircraft de-icing.

Taxes - VAT and other consumption taxes are applicable in many jurisdictions to certain charges associated with private (i.e. non-commercial) aircraft services, including in some cases fuel and maintenance.



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