Plane Conversations

The Charter Cost and Pricing  Side of the Analysis

In part 1 of this series, I discussed briefly the basic economics of aircraft ownership, the fixed and variable costs of ownership.  The fundamentals of economics don’t change from the pure cost side of the equation whether you are a commercial operator (charter provider) or an owner operator. The only things that change the numbers are utilization and, to some smaller degree, economies of scale.

When you consider whether to buy an aircraft or to charter from a commercial operator and you are looking solely at the numbers.  you may conclude that it makes more sense to charter an aircraft if any of  the following conditions exist:

• You have a good, reliable provider of charter aircraft close to your location.
• This operator has the aircraft that will fit your needs most of the time.
• Your need for private aircraft transportation doesn’t require full use of an aircraft

Most charter operators don’t own the aircraft they operate.  The business model that has worked best for charter operators is to manage aircraft for owners who allow the operator to charter the aircraft out when the owner is not using it.  With this business model, the operator usually takes a percentage of the income generated from charter revenues as a profit for managing and marketing the service while the owner gets the majority percentage of the revenue to offset the fixed costs of ownership.  Under-utilized aircraft  are put to work in the charter business while reducing the cost of ownership for those who choose to own.  Sounds very much like the concept of renting your vacation home out when you are not using it, doesn’t it?

This business model has been good for our industry.

In a perfect world, and to the benefit of the owner, an operator would evaluate the fixed and variable costs of ownership and build a rate structure for chartering the aircraft that covers all of the variable costs plus the fixed costs based on optimal utilization – what we would call “cost plus pricing.”  In the current environment, the consumer of private jet travel is the beneficiary of a supply of charter aircraft that is greater than the demand.  Therefore, pricing for chartering a private jet cannot be built on a cost plus basis but must be built on what the market will bear.  When you pay to charter a jet, in most all cases, you are covering the variable costs for the flight but not the fixed costs for the owner spread out over optimal utilization.  The owner still receives some benefit of fixed cost reduction; so, it can be a win-win scenario, provided, that is, that the owner has reasons other than purely economic ones to own the aircraft that is in charter service.

There are many different ways to use private jet aircraft including pure ownership, fractional ownership, leasing, and charter.  Inside each of these different models are variations based on utilization that will change the costs.

The best place to start is to find a good charter operator close to you and try the service.  The good thing about chartering is that you only have to commit to one trip at a time.  It’s a great way to try out the value proposition of private jet travel without the long term commitment and risks of aircraft ownership. The more knowledge you gain over time will allow for a more rational decision about ownership versus renting or chartering.

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