4 minute read
How to Budget your Operating Costs
The ongoing costs of running a business aircraft should factor in the budget of any aircraft owner. But what comprises the operating costs of an aircraft, and how can owners control these? Dave Higdon provides some basic tips…
Simply put, a potential aircraft owner needs to know the operating costs of an aircraft in order to budget adequately, both on an hourly and annual basis. Understanding the costs will also help anticipate where expenses are likely to increase or decrease over time, thus helping owners build and maintain medium-term operating budgets.
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There's no substitute for knowledge in Business Aviation, and even the seemingly predictable elements of business aircraft ownership should be revisited, and reexamined. That’s because even items labelled as ‘fixed’ costs can change over a period of time.
Determining which ownership costs are ‘fixed’ and which are variable is essential to successful aircraft cost management. If you are a potential aircraft buyer or operator, knowing these can help determine whether an aircraft is affordable.
An aircraft’s fixed costs for a period remain the same no matter how many hours the plane flies. However, the ‘cost per unit’ of a fixed cost will increase (or decrease) depending on the level of activity of the airplane.
For example, if one of your fixed costs is insurance, you will pay the same rate irrespective of how much the airplane flies each year. If your insurance costs $1,200 per year, and you fly the airplane for 100 hours annually, your hourly insurance cost is $12 per hour, whereas if you fly the airplane 200 hours annually, then your insurance could be interpreted as $6 per hour.
Conversely, fuel – a variable cost – will increase with additional flying, or decrease if the aircraft flies less. And that doesn’t factor the swings in fuel costs per gallon (or liter).
What are the Fixed Costs?
Fixed costs can be identified relatively easily as those which don't change with the number of hours flown. Often, they’re covered with a single payment. Examples of fixed costs include: • Aircraft financing (whether it’s on a lease or loan payment basis) • Insurance • The cost of books, charts, and materials • Hangar rental • Taxes and FAA registration fees • Aircraft accessories • Crew salaries (assuming a fixed annual salary).
individual numbers and divide the total by the number of hours you anticipate flying to calculate the fixed cost of operation per hour.
Variable Costs
As already mentioned, the other number that factors into aircraft ownership, the variable costs, will fluctuate depending on annual usage, and market forces. Variable costs generally include fuel and oil, maintenance, catering, crew expenses, carbon offsets, cleaning services, and cabin upkeep.
Though they fluctuate, there are strategies that can be utilized to help make the variable costs more predictable/controllable.
For example, let’s assume your business jet consumes 300 gallons of fuel per hour. If the average cost of fuel was $4.50 per gallon, the hourly cost of fuel would be $1,350. That would equate to $3,375 for a 2.5 hour one-way flight, and $6,750 for the round trip (five hours flying). For the company flying 200 hours over the course of a year, the cost of fuel would calculate as $270,000.
Of course, that annual fuel cost calculation assumes the same $4.50 price, per-gallon, throughout the year, which is wishful thinking at best. That’s where research into airport fuel prices plays a role. The one way to control the varying fuel cost is fuel cards or fuel accounts with specific FBOs at specific airports that will ensure a price as close to the projected $4.50 as possible. (Read more about Fuel Cards on p?? of this issue.)
Similarly, maintenance costs can be made more predictable with enrolment onto an hourly maintenance program covering the engines, and perhaps the avionics and MPUs, too. These programs require an hourly fee to be paid into an account, based on the number of hours you fly, which accrues towards coverage of maintenance events.
Some of these programs, offered by the engine and avionics OEMs or by third-party providers, give single, comprehensive levels of coverage, while others have different levels, ranging from basic through comprehensive. The more comprehensive coverage you purchase, the fewer maintenance variables there will be.
Meanwhile, staying proactive in shopping for the best insurance price (and the many of the other variables) helps control the costs of operating the company jet.
‘Knowledge is power’ as they say. That’s certainly the case when it comes to understanding and controlling your aircraft’s operating costs.
Only by understanding the fixed and variables, benchmarking the normal costs, can you work towards shaving costs off your fixed operating costs, while controlling the variables. Only then can you fly confident that your jet is yielding the greatest value to you and your business. ❚
DAVE HIGDON
