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Aircraft Management Solutions - Chose Wisely

May 17, 2018

The US economy is doing well and most indicators point toward sustained economic growth and wealth generation for the foreseeable future.   This prognostication usually bodes well for the private business aviation market.  As more people and companies can afford to fly privately, enjoying the significant benefits and advantages thereof, the various segments of the industry typically show an uptick.  The aircraft charter market is usually the first place to show the increased demand, followed by pre-owned aircraft sales.  This is true due to the fact aircraft charter is the least expensive way to gain access to a private aircraft.  Moving up the cost and convenience scale comes block charter, Jet Cards and fractional ownership followed by whole aircraft ownership.  

 

During strong economic periods, individuals and companies may decide the aforementioned charter and fractional ownership products are not fulfilling enough, possibly due to the increased utilization of private aircraft travel, need for dedicated availability and/or consistency in the quality of the product or service.  So the aircraft buying surge begins and the previously abundant inventory in the pre-owned market gets ”picked over“ quickly leaving the undesireable aircraft. When good quality pre-owned aircraft are no loner readily available, the new aircraft orders increase and OEMs like Gulfstream, FalconJet, Textron, Embraer and Bombardier develop large back logs. Most of these trends are happening as this article is being written which means there are more aircraft owners and more aircraft to support. Once the purchase is made it is time to put the aircraft into service.

Aircraft Management:  There are many ways to own and operate a private aircraft.  Some individuals and companies will do so themselves with “in-house” flight departments.  The advantage to this approach is high quality control, discretion, dedicated aircraft availability and consistent service from the team.  The downsides can be the added burden of managing the department personnel, back office support and slightly higher costs since the department is buying aviation products and services for only one aircraft.  

 

Another popular solution is to have the aircraft managed by a professional aircraft management company that may or may not provide charter revenue offset. Either way, these organizations strive to achieve economies of scale on behalf of the aircraft owner by providing back office services, departmental management oversight and leveraging the buying power of the fleet.  How they share these savings with the aircraft owner varies from company to company and definitely needs to be understood when comparing one management company to the other. This is the primary value proposition of fleet management companies.  

 

However, when selecting an aircraft management solution it is important to understand how the company reinvests in the underlying infrastructure and back office to ensure the quality of customer service and support does not degrade as the fleet grows.  Their business model requires continuous growth for profitability. The area of reinvestment has consistently proven to be a common failure point in the various aircraft management models available in the market ultimately resulting in high client turnover.  Although switching aircraft management companies can be time consuming, complicated and very costly to aircraft owners, sometimes it is the only choice.  So chose wisely to avoid the pit falls by using an experienced aircraft broker/aviation consultant.

 

Charter Management: If the aircraft owner desires a revenue offset from the aircraft when they are not using it, placing the aircraft with a charter management firm that operates the aircraft under FAR135 is a popular option. The challenge of aircraft charter management is that the management company is typically financially motivated to charter the aircraft more than the owner may desire.  There is a built in conflict in this model between the aircraft owner and the charter management firm.  The more the management company charters the aircraft, the less available the aricraft will be for owner utilization.  If there is a schedule conflict, and the aricraft is already out on a charter trip, the owner may have to charter another aircraft to fulfill their travel needs...which defeats the purpose of owning your own aircraft.

 

Charter Economics: It is important to understand the total economic picture of chartering the aircraft. When the aircraft is made available for charter, the net contribution margin can be negligible when compared to the underlying cost of the asset to own and operate, not to mention the additional hours and cycles on the engines and airframe compounded by the wear and tear charter clients may put on the aircraft interior.  There is no right or wrong answer. I have found the decision to make the aircraft available to charter is a philosophical one that only the aircraft owner can make. Some argue they would never rent out their living room and others see the aircraft as a dormant under-utilized asset when it is in the hangar. This is a subjective decision that only the aircraft owner can make.

What is very true is that any aircraft owner who expects to own an aircraft and place it with an aircraft charter management company to make a profit has been poorly advised and will be sorely disappointed.  Charter management solutions are purely cost offset programs.  Whereby the charter revenue, minus direct operating costs of the charter trip yields a contribution margin for the owner.  This amount of money is used to offset the fixed overhead of the aircraft (flight crew salaries/benefits/training, hangar, insurance, etc.).   In todays market the charter contribution margin may only offset the cost of flight crew salaries which is typically the largest fixed cost in the equation.  That is the good news.  The bad news is charter aircraft typically have higher crew retention issues, resulting in higher recruiting and training costs and less crew consistency for the owner. This is a more critical element today than in previous years due to the profound crew shortage the industry is facing. Hence it is important to use an experienced aircraft broker/aviation consultant when analyzing the best solution for your operation.

 

Conclusion: The key to enjoyable aircraft ownership is to make the experience as seamless as possible. How the aircraft is managed and by whom is critical to this goal. Analyze and study the aircraft management options in advance of the purchase and put together the best solution based upon your personal goals for the aircraft. This is not an area where trial and error is recommended due to the high cost associated with getting it wrong including poor fiduciary responsibility of the management company, significant aircraft downtime and poor flightcrew retention.

An experienced aircraft broker/aviation consultant can help the aircraft owner navigate the myriad of available solutions to find the aircraft management solution that is the best fit for their needs and requirements. Most importantly their recommendation will be objective and not biased toward a particular management model.

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