Plane Conversations

Private Aircraft cost more to maintain per seat mile than airliners. Is it worth the expense and what do you get for the extra money?

In a previous post I described the two basic components of aircraft maintenance programs:

1. Aircraft are maintained under inspection programs that are required based on flight time (utilization)
2. Aircraft are maintained under inspection programs that are required based on calendar age (chronological)

You can see that there is a variable cost component to aircraft maintenance (flight hour driven inspections) and a fixed cost to aircraft maintenance (calendar driven inspections).

I also stated in the previous post that a typical airliner may fly ten hours or more every day of the year. The more typical utilization on the private jet may range from 200 to 600 hours per year depending on the owner and type of use (business versus personal).

The maintenance requirements on private jet aircraft are heavily weighted towards calendar items because the manufacturer really doesn’t know when they sell the aircraft how many hours the owner is going to use it. In our industry we call these programs “low utilization maintenance programs.” We look at items on aircraft on a calendar basis.  Most inspections don’t reveal problems early on in the life of private jets because the accumulated use has not taken its toll on the inspected areas.   These inspections drive up the costs of maintenance per flight hour simply because they are calendar driven and have to be spread over fewer hours. Whether you own or charter a private jet the costs to maintain it are going to be more than the airliner on a per seat basis; thus, the cost of use is higher. There are many other factors that drive the economics of private jet operational costs versus the airliner but we are just considering maintenance in this post.

Here is the Upside

The private jet you are considering climbing aboard has gone through more inspections in relation to the time flown than the airliner you flew in last week. Additionally, the private jet has lived a much more pampered life, usually spending its non-flying time inside a building (aircraft hangar) out of the weather as opposed to spending its days and nights out on the tarmac in the weather. Would you rather fly on an aircraft with 35,000 flight hours or one with 3,000 flight hours? I am not insinuating that the 35,000 hour airliner is not safe. I ride on them all the time, as do you, and they are safe, but they’ve had a much harder live than the 3,000 hour privately owned aircraft.

On the horizon I believe the costs of maintenance of private aircraft will go down as technological innovation will bring more reliability and lower repair costs for aircraft components. We are already seeing this in new generation aircraft in things as simple as the use of LED lighting to replace old style light bulbs.

All machines wear over time and use. Use is usually harder on the machine than time. The private jet gets less use than the commercial airliner. The expense of maintaining the private jet is always going to be higher than that of the airliner due to the inspection requirements based on time and use. Is it worth the extra money? I think so, but I happened to be biased in my thinking as an insider. Most seasoned owners of private jet aircraft would agree that it is worth the extra costs. The care of an aircraft becomes more personal to you when you own and fly on the same aircraft all the time.  What do you think?

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Tall and tan and young and lovely

The girl from Ipanema goes walking

And when she passes, each one she passes goes ”a-a-ah!”

She’s not tan and she’s not from Ipanema, but she is lovely and on the evening of October 30, 2009, a group of Corporate Flight Management staffers gathered on our Smyrna (TN) Airport ramp for a first look at this new plane from Brazil, an addition to the company’s charter fleet.  And each one of us went, “a-a-ah.”  She taxied in, bringing with her an exciting new future for CFM and our entire industry.   But, before continuing with this story a brief bit of history is in order.

Over the past decade NASA and corporate aviation trade associations proposed a “clean sheet” design process for business jets.  The VLJ (Very Light Jet) would be both fuel efficient and environmentally “green.”  The quest to establish market dominance in this new technology led to intense competition among the leading designers and builders of executive aircraft.  Additionally, new players like Honda (yes, that Honda) Adam and Eclipse joined the race.  Most of the established manufacturers’ VLJ designs were primarily based on smaller and lighter versions of existing products.  Two of the new entrants proposed radical departures from conventional airframes.

And then there was the Brazilian entry.

If you have flown on commuter airlines over the past 20 years, chances are that you have logged time aboard an Embraer turboprop or regional jet.  When procuring aircraft for their fleets, airlines demand fuel efficiency, dispatch reliability, low maintenance cost and passenger satisfaction.  For decades, Brazil-based Embraer produced a series of turboprops and regional jets that exceeded every airline standard.  Brazil’s entry into the VLJ competition would be built to the same demanding standards as their airliners.  Thus were born the Phenom 100 and 300, which brings us back to CFM’s Smyrna ramp and the exciting future for us and our industry. 

You see, the aircraft that taxied up that evening was a Phenom 100, fresh from the factory and ready to begin its life with a corporate operator in the U.S.  It is one of hundreds that will be going into service in domestic and global markets.   I asked our CEO, Allen Howell, for his impression of the plane from Brazil.  And he said: 

“The Phenom series of executive jets will be real game changers for charter operators and corporate flight departments.  As we grow our charter fleet and aircraft management businesses over the next 5-10 years, Embraer Business jets will be our number one choice.”

With Embraer’s range of business jets in development and production, the story should become very exciting, indeed.  Stay tuned.

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I have been fortunate in my career to get to travel to interesting places that don’t show up in the top ten tourist destinations. Our company sells regional airliners all over the world and often times those aircraft sales result in  deliveries and follow up visits to customers who end up becoming friends. In the past five years, we have sold and delivered aircraft to operators in Europe, South America, Asia, the Middle East, Australia, Caribbean Islands and Africa.  This particular delivery started at the factory in Brazil will end up at the aircraft’s new base in England.

The journey started with an airline flight out of Nashville, a seven-hour layover in Atlanta and a nine-hour connecting flight to Sao Paulo where we were met by a driver who took us to Embraer’s headquarters and airline manufacturing facilities at Sao Jose Dos Campos.  We had 20 hours there before turning right back around and heading to the United States in the new Phenom. In Sao Jose Dos Campos, Bill Minkoff and I met up with Rob Posselt who works and lives in England.  Rob assists European clients with deliveries of Embraer business jet aircraft. Bill, Rob and I were to be the crew for the first stage of the delivery.  

On my last visit to Sao Jose Dos Campos two years ago, I was able to see the first three Phenom 100s going through the flight tests that ultimately led to aircraft certification one year ago. I also saw the fuselage and engines for what would be the first Phenom 300 to be used in certification testing.  That aircraft was certified last week.  This visit, I was impressed to see a hangar full of Phenom 100s and Legacy 600s going through their final, detailed inspections before delivery.

The Phenom 100 has a range of 1,250 nautical miles; so, delivering outside of Brazil includes multiple fuel stops. Our route from Brazil to Tennessee followed this route: San Jose Dos Campos, BR – Brasilia, BR – Belim, BR – Georgetown, Guyana – St. Maarten – Fort Lauderdale – Nashville.

Getting through Brazil requires careful planning and a degree of patience as things don’t happen as quickly as they do in the United States with flight plans and handlers. As you fly north out of Sao Paulo state, you get into less populated areas of the country including the Amazon forest. There are not a lot of airports in this region of the country; so, we planned stops every 800 miles for fuel, leaving enough fuel on board for alternates in the event of weather or maintenance issues.

All of our stops were uneventful with the exception of minor delays.  The handlers were friendly, and weather cooperated along the route of flight and stops.  In the case of this trip, flying the Phenom ended up being the highlight of the trip. We were never in any one location long enough to see the sights.  But we still have a few good ones.

As we were flying over the equator, something I have done a few times now, we were able to capture the position on the display showing the latitude of 00.00.01.  

 The terminal in Georgetown, Guyana, gets the award for the most colorful as they were decorated up for Christmas.

This was my first time to fly a new jet out of the factory and the experience did not let me down. The aircraft performed flawlessly, as have the other Phenom 100s we have delivered.  It is stable in all flight regimes and the technology up front is fantastic. Everything the pilot could possibly want to know is available.   

Although tiring, flying for me isn’t work.  But, after two hard days of flying, I did have to get back to work.  Another CFM pilot, Will Rowell, gets on board with Bill and Rob to complete the next legs of the journey from Tennessee to England.  Out of Nashville the route continues to Bangor, Maine – Goose Bay, Newfoundland – Sondre Stromfjord, Greenland – Reykjavik, Iceland - Wick, Scotland and then to the aircraft’s new home in Leeds, England. The most challenging part of the journey remains as the crew flies over the North Atlantic, dealing with harsh weather and little daylight.  

By journey’s end, the new bird will have flown over 10,000 miles from the Southern Hemisphere through South America  into the Northern Hemisphere through the Caribbean Islands, the United States and Canada, and over the North Atlantic before arriving at its new home in England. The journey started in tropical Brazil, almost touched the Arctic Circle in Greenland where there are only three hours of daylight per day this week, before turning back south to England. Hey, it’s all in a days work (or, is that fun?)

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Why Own a Private Jet?

In previous posts I have compared the cost of ownership of private or corporate jets with the cost of chartering a jet from an operator.  From a purely economic standpoint, jet ownership for a company or individual may not be cost-effiective unless utilization hits a level high enough to spread out the fixed cost of ownership.   Even in low-utilization situations there are certain scenarios where ownership makes sense.  Is there a magic number of annual flight hours you must hit before you can justify owning the aircraft? Not necessarily.  It varies within each situation depending on capital or acquisition costs of the asset and other fixed costs, as well as the availability of suitable aircraft in the immediate area to lease or charter.

So, why do corporations and individuals buy jets when they could charter or rent?

Companies that travel on short notice and require guaranteed access to aircraft are good candidates for ownership.  If your clients need you right now and are willing to pay for your time, then you need the jet when you need it, not when someone else may get it to you.  There is a premium to pay for this convenience, but if it is an integral part of delivering whatever service you are providing, the premium is justifiable.

If you follow the adage of “working where you have to and living where you want to,” you might find yourself in an area of the country where there is neither airline service nor aircraft charter service.  In that case, access to any kind of air travel is only going to happen when you own an aircraft. There are more corporate aircraft located out in small town America than most people would think.  Some people just do not want to live in the big city.  Go figure.  If you are a business located in a micro-urban area, the corporate aircraft may be the only way to get to other markets. The trade-off may be higher transportation costs off-set by the lower general operating costs of doing business in a small town.

Companies and individuals also own aircraft for reasons of security and privacy.  If you own your aircraft, you have total control over who flies in it, when they fly and where they go.  You also have total control over who is flying and maintaining your aircraft.

Last, but not least, you might own the jet just because you can.  A lot of criticism comes from the have-nots against the haves, especially when it comes to flying around in the private jet.  Is it excess or is it simply exercising your right to spend your money as you see fit?  As Oprah Winfrey noted in her commencement speech at Duke University, “It’s great to have a private jet. Anyone that tells you that having your own private jet isn’t great is lying to you.”  If you have earned your money in a free market economy, you deserve to spend your money how ever you want.  I can understand the outrage over companies that used their big, private jets to go to Washington, D.C. and ask for a bail-out funded by our tax dollars.  However, I see no reason or logic in critizing successful entrepreneurs and business people just because they have earned good money and want to spend it on private jet travel.  I hope our country never gets to the point where the government tells us how to spend our money just to appease the masses.

In the end, there are many factors to consider when choosing whether to own an aircraft or to charter one:  Will your usage of it justify the costs?  Do you need to travel with little or no advance notice?  Given your location, do you even have other options?  Do you need the control over equipment quality and pilot experience?  Or, have you worked hard all of your life and see private jet ownership as a just reward?  Only you can answer those questions and determine if, despite what the casual observer might think, aircraft ownership makes sense for you.

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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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Charter (rent) versus Owning a Private Jet
Part 1: Aircraft Ownership Economics 101

There are varying reasons why people choose to charter or rent aircraft versus buying them. Not all reasons are purely economic, but let’s start at the most basic level of the economics of these choices.

There are two basic components of aircraft operating costs.

1. Fixed Costs include the capital investment in the aircraft, insurance, storage of the aircraft, property taxes, salaries for those employed to fly and maintain the aircraft and, in some cases, certain maintenance requirements for an aircraft since they are driven by the calendar rather than by aircraft utilization.

2.  Variable Costs: These costs happen only when the aircraft flies. They include things like fuel, engine costs, maintenance requirements that are driven by utilization (flight hours on an aircraft versus miles driven on an auto). Other variable costs could be landing fees, in-flight catering, and pilot / crew expenses when the aircraft is out on trips.

In most cases these costs, both fixed and variable, remain fairly constant whether you own the aircraft or you are chartering it from someone else who either owns or manages it for its owner. The aircraft burns the same amount of fuel and requires the same maintenance regardless of the ownership. There are some economies of scale that can be obtained by larger operators to reduce the variable side of the equation, but let’s set that aside for now to talk about the relationship between fixed and variable costs of operating an aircraft.

Variable costs are a constant and the measure to use is dollars per flight hour. For example, let’s say that the variable costs per flight hour for your favorite jet are $1000 per flight hour. Every hour you fly the aircraft on trips whether business or pleasure costs $1000. Simple enough!

Fixed costs for your favorite jet are measured in dollars per calendar time. You can use a month or a year, whichever works best for you. If your favorite jet costs $300,000 per year for all of the fixed costs mentioned above, that expense happens whether you fly one hour or 300 hours. For simplicity’s sake, let’s say you use the jet 300 hours per year. If I spread the fixed costs over those 300 hours of use then the fixed costs are costing me $1000 per flight hour.

At this rate of use it is costing the owner $2000 per flight hour to own and operate the aircraft.  Double the use to 600 hours per year and the costs go from $2000 to $1500 per flight hour.
The aircraft doesn’t really care who owns it and who uses it. Those of us in the business get emotionally attached to these flying machines but the secret is out - they are just machines. The cost side of the economics only changes with the utilization and possibly some economy of scale.

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Just as women stereotypically gather to coo over a new baby and men gather to look under the hood of a new or classic car, pilots and prop-heads alike gather to look at the features of and climb into the cockpit of any new aircraft. The aircraft garnering all of the attention today was, hands down, N777JQ, our Phenom 100 just arrived from Brazil literally minutes ago.

She performed like a dream, flying straight and true, burning fewer than 100 gallons of fuel per hour each hour of the long trip.  Her fuel consumption is less like jet performance and more like turbo-prop.  But, make no mistake, she is all jet.  Her sleek white fuselage is accented with hunter and beige swooshes making her look fast even just sitting on the ramp.  And inside?  Well, inside she’s luxury.  With four, club seats covered in soft, beige leather, mocha carpeting and walnut cabinetry and lavatory pocket-doors, the interior is comfortable, welcoming and remarkably spacious.

We are so thrilled to have this addition to our fleet.  If you would like to come take a tour some time, just give us a call.  We’d be glad to introduce you to our newest aircraft.

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Today Bill Minkoff, our VP of Marketing / Business Development  is arriving from Sao Jose dos Campos, Brazil, flying our new Embraer Phenom 100 – N777JQ.  This is a day that we have anticipated for almost two years, from when Bill came on board with us as a partner in JetQuik and brought an order for the new Embraer Phenom 100 with him.  Our company will be managing this new generation business jet for owners in our hometown and chartering it out to the traveling public.

Besides his role as our VP of Marketing and Business Development and partner in our new venture, Bill is also a highly experienced pilot having started his aviation career as a Naval aviator flying the A7E  fighter off the US Midway aircraft carrier.  He moved on to Delta  Air Lines flying as an international Captain and Line Check Airman, finally retiring on the Boeing 767.  Even having made night landings on aircraft carriers, and flying 767’s internationally, I think Bill is enjoying this flight more than anything he has done in a long time.

For our company, as it is for many other charter operators, owner pilots, and corporate flight departments, the arrival of a new aircraft is an exciting event.  I try to be objective about aircraft and focus on numbers – operating costs, performance, cash flow, etc., but when you see the new bird for the first time you set the objectiveness aside and let the emotions and excitement take over.

This aircraft represents a new generation of business jets and a new era for our company.  Like many aircraft charter companies around the world, we have operated the workhorses of the industry for 27 plus years now – King Airs, Lear 35’s and Cessna Citations, to name a few.  All of these aircraft have been safe and reliable and have delivered day in and day out for our owners and charter customers.

The smell of new leather, the sleek design and a simple looking but sophisticated cockpit make this new aircraft exciting.  For a numbers person like me, what is equally exciting is that the new jet will deliver that same safe and reliable transportation as the older workhorses at a much lower operating cost.  

Lower costs for us means lower pricing to the users, which translates into new customers, who have not previously been able to justify using a business jet for travel - if the formulas of supply / demand / price that I learned in college still hold true, that is.  I feel sure that they do. 

I like to use analogies to make a point.  I tell people this new jet is like the Toyota Prius of the new jets.  It isn’t a hybrid (maybe some day) but its fuel efficiency and cost to operate is unmatched for a jet of its size, speed and performance.

N777JQ will be arriving this afternoon from Fort Lauderdale on the last leg of the journey to its new home in Nashville, TN.  

Estimated flight time is 2:37 at a cruising speed of 378  knots (434mph), a cruising altitude of 40,000 feet and an inflight fuel burn of 88 gallons per hour.  Impressive numbers for such a good looking aircraft.

I can hardly wait to see it! 

Our latest addition N777JQ leaving her birthplace in Brazil enroute to her new home in Smyrna, TN.

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I was sitting across the table from prospective clients at lunch recently talking about the two aircraft they own.  We were discussing the opportunity to put one of these aircraft into charter service since it was not being used enough by the owner and selling at this point was not the best option.

One of my lunch guests is an industry veteran pilot who has been flying corporate jets since the 1960’s when Bill Lear first produced the Learjet.  He has been in corporate aviation as well as the aircraft charter business and has flown thousands of hours with executives and entertainers alike in the back of his aircraft.  The other guest was the financial manager for the aircraft owner and comes from the perspective of the cost side of our business.

The discussions migrated to the costs of this business and the question that comes up so often - does this business aviation make economic sense to those who own corporate jets and those who use them?

I made the statement that from a pure economic rationale, the corporate jet may not be the best investment. I was speaking about buying an aircraft to put into commercial service as a charter aircraft. The seasoned pilot was quick to correct me that what we offer is a tool that creates time and, that if you look at an executive’s time value, it makes perfect sense.  He was speaking from the perspective of the user of the asset and not the commercial owner of the asset - and he is right.  What we sell is time with a measure of privacy, security and first class treatment thrown in to make it a more pleasurable experience.  But, at the core, it is still about the value of time.  

I asked the question of these two guests, “Does anyone ever want to go back and fly on the airlines once they have experienced riding on a corporate jet?”  The answer I got was the same one I get every time I ask that question – a resounding NO!

Setting aside the economics of business aviation and speaking only of the pure experience, corporate and charter aircraft provide a service that people really like, especially in comparison to the alternative of the airlines.  In fact people don’t just like our form of air travel; they love it and are passionate about it.  Could it be that deep down these people put a high value on that most precious of resources – time?

The airlines have tried to emulate what we do by providing service extras like pre-boarding for premium fliers, but you can’t turn a pumpkin into a carriage, you can’t turn a bus ride into a limousine experience, and the airlines can’t save you the time that we can.

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In a recent article in Aviation International News Online, Chad Trautvetter writes that the fractional jet industry is undergoing a major transformation.  He quotes business consultant Brian Foley, who says, “The problem is that the existing business model is geared to rapid growth…So long as fleets expanded, providers could profit by buying new aircraft at discounts and selling them at list price to customers.  But now, with fleet size nearly constant, the emphasis must be on making the operational side profitable, or changing the business model altogether.” 

Understanding the operating economics of aircraft, I have long wondered when the industry would realize that you can’t sell a product for a profit, then commit to losing all that same profit (plus some) on the service contract after the sale.

The Fractional Jet Programs have been good for our industry.  They have brought in a whole new group of users of private jet transportation.  The premise that it is a better deal to own a 1/8 share of an expensive asset, spreading the cost of ownership is sound.  High utilization of that asset across a number of users to spread the other fixed costs is also a great idea.  So far so good – two great ideas, so what went wrong?

The problem was the pricing of the variable part of the service.  When I bought a fraction of a jet I got to use it some specified number of hours per year.  I paid a variable rate for those hours and paid only when I was occupying the aircraft.  I was promised that I would always have an aircraft at my disposal within a few hours notice.  Seems simple enough, and it is  – for the consumer.  Thus the sales guys had an easy job selling the product.

The problems came with the poor guys in flight operations who had to execute the service.  What happens when all 16 owners of the same jet want to go flying on the same day? One want to be picked up in Des Moines, IA, but the other 15 owners want to be picked up in 15 other cities.  In addition to having 16 different points of origin, the owners have different destinations; so, none of the trips will patch together.  Now my head starts to hurt thinking about how you put all that together and make it work both operationally and financially.

As the fractional business expanded rapidly, the providers had to start chartering aircraft from their aircraft management affiliates and traditional air charter companies.  It didn’t matter if the cost of the charter was more than the variable revenue received for the flight.  The owners had a contract in hand and expected the service.  In honoring the contracts, reputable fractional jet companies covered the trips and swallowed the losses (making it up by selling more fractions).  The not so reputable companies (or maybe just not so well-funded) went broke.

So where does this industry go now?  In this unforgiving economy, there will be some shakeout and turmoil.  It will be Suvivor on the island of fractional ownership.  The not so smart and under-funded guys will get booted off.  The smart guys will fix the broken model by adjusting prices as their contracts turn over innovating and creating a better model.  The island will stand firm because the consumers are now hooked on an efficient and pleasant method of travel and don’t want to go back to the airlines.

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