Among strategies to ensure aircraft airworthiness, minimize costs, and preserve aircraft value, it’s important to understand, monitor, and manage DOCs.
By Don Van Dyke
ATP/Helo/CFII, F28, Bell 222.
Pro Pilot Canadian Technical Editor
Business aviation is a critically important part of our global economy which provides reliable, flexible, and secure links to connect destinations sharing multiple commercial interests.
It is used to transport key employees, personnel, customers, and goods to and from areas not accessible by other means, including airline service.
And its history reflects a unique ability to serve during particularly challenging times. Business aviation often provides services within a larger enterprise, or to high-net-worth individual or owner settings.
In many situations, the aviation organization is comparatively small in terms of headcount, but its financial impact is likely significant.
Ownership or use of business aircraft entails costs that are frequently described in complex terms, especially when involving different aircraft types. Aircraft life cycle costing (LCC) includes acquisition, operating costs, depreciation, and the cost of capital.
Certain of these expenses are cash-based (for consumables, for example), while others are non-cash (such as depreciation). This involves responsibility for overseeing related finances with the same level of precision with which the aircraft are flown and maintained.
A central question is why pilots are encouraged to become familiar with concepts related to financial oversight of aircraft and related operational controls. If the fleet operated comprises only 1 aircraft, treatment of related costs is relatively simple.
However, operating multiple aircraft in several locations complicates operational, maintenance, and financial data management. In every sense, pilots are asset managers who can apply these notions to inform and influence related ownership, management, and operating decisions.
Well-versed pilots can contribute their experience, perspectives, and operating practices to identify operationally relevant expenses; prioritize actionable items leading to identifiable improvements; improve financial performance and return on investment (ROI); establish aviation needs based on agreed and quantifiable operating assumptions; suggest additional reporting categories; budget for, procure, and schedule maintenance and training downtime; ensure operations remain within an acceptable variance range to avoid unapproved operations and spending; understand how maintenance costs may be affected by punctuality and scheduling; and evaluate the financial impact of new regulatory mandates.
The Covid-19 pandemic is an example event that affects aviation on a global scale and underscores the need for pilot assistance to agree acceptable use and expectations, avoid unscheduled maintenance events, benchmark (compare) operations, validate financial decisions, and optimize operating costs.
Aircraft cost categories
Expenses related to business aircraft are traditionally categorized as non-operating, indirect, or direct costs (NOCs, IOCs, and DOCs, respectively). The following example costs are each allocated to a distinguishing category and may be reallocated as circumstances warrant or change.
NOCs are general and unrelated to core business aviation activities. These are the so-called administrative overheads for services often provided by the parent organization and which cannot be attributed more specifically. Examples include accounting, human resources management, legal and litigation services, and restructuring expenses.
IOCs are not directly, obviously, or easily traceable (related) to a specific aviation activity or aircraft type, and are incurred for a period of time (or an operating season). They include office supplies, furniture, equipment rental, and office technology (desktop computers, cellphones). IOCs tend to be fixed (administrative services, rent, and leases) provided by the parent organization, while variable IOCs include office/hangar utilities, like electricity and gas.
DOCs. Of the 3 aircraft cost categories, DOCs comprise the largest and most impactful share. By definition, DOCs are traceable or relatable (attributable) easily and accurately to an individual aircraft, type, activity, or product. At the operating level, DOCs are either aircraft-related (insurance, training, capacity, cabin subscriptions) or traffic-related (personnel/cargo transport, aerial observation, humanitarian).
DOCs may be fixed for a term, or variable, depending on application or demand. Variable DOCs fluctuate in proportion to levels of activity (flight hours) but at a constant rate (per flight hour), tending to dominate the total cost structure – particularly in small organizations.
Contract flightcrew, as opposed to salaried, would be considered as a variable cost. Commonly, the 3 largest variable DOCs are consumables (fuel, oil, fluids), maintenance (labor, parts), and reserves (parts replacement, overhaul), amounting together to 83%.
To recover a variable DOC, the organization must charge a corresponding rate per flight hour. Fixed DOCs remain essentially constant for a given period or level of activity. In the illustration above, the 3 largest fixed DOCs are salaries and benefits, recurrent training, and insurance, which comprise roughly 94% of the total.
The fixed DOC share typically increases with organizational size due to greater infrastructure and related support demands. Total DOCs are aggregated variable and fixed costs. For a single-aircraft operation, this is straightforward. For operations involving multiple aircraft, traceability becomes critically important to allocate costs properly (hangarage, technical records maintenance).
In either case, allocations are important for purposes of comparison (benchmarking) or review. It’s important to note that, as operations grow, mature, and evolve, allocations also may change.
While innovations in many industries can produce significant savings, this does not generally apply in aviation, due to the prescriptive and procedural nature of operations.
Nonetheless, alternatives and opportunities to reduce DOCs should periodically be given multidisciplinary consideration and trial. Importantly, underlying assumptions should be open to pilot validation or dispute.
Operational strategies. While observing regulatory constraints, the ways in which an aviation department operates and can be managed to achieve DOC savings remain numerous and varied.
For instance, the basis of recurrent training can change from 6 to 9 months, the use of supplemental lift can be modified or curtailed, preferred fuel uplift points and tankering strategies can be amended, planning should carefully evaluate flight levels versus expected traffic, and flights at reduced Mach numbers can also be considered.
Provisions and reserves. The value of an airframe and its engines is determined principally by component age, life cycle positioning, and maintenance status. An important management goal is to balance safety and profitability. Over time, maintenance accounts for up to 35% of an aircraft’s annual operating budget.
When an aircraft is taken out of service, funds to cover related maintenance costs should already be available. Maintenance reserves are contingency DOC funds collected to cover the expected costs of base maintenance (C-/D-checks, annual checks, mid-life checks) of airframe, engine, landing gear, APU, and, in the case of turboprops, propeller overhaul.
Accruals are typically calculated on flight hour, flight cycle, and/or calendar basis, and comprise a major portion of variable DOCs. A turbine engine has 2 reserve DOC funds essential to retain market value. The first covers replacement of life-limited parts (LLPs) such as blades, compressor, seals, and disks. The second covers performance restoration. APU power restoration is typically based on flight hours.
Purchases and payment methods. Major maintenance events should be subject to competitive bidding, recognizing that quality and timeliness may be more important than related cost.
Fixed DOCs, like insurance, must be reviewed and negotiated regularly. Many aircraft insurance and workers’ compensation policies provide a premium refund to reward favorable loss experience. The policy terms should indicate that refunds will be credited annually.
The time-value of money is also an important DOC consideration. And purchases settled with cash, upfront deposits, or credit cards can be expensive, so alternatives should be weighed.
Structural adjustments. The personnel headcount and/or number of aircraft owned or operated can be altered to permanently slim the DOC impact.
However, these changes are generally difficult to make, and usually incur other related costs (severance, lease termination fees, etc), so a multidisciplinary, carefully-considered approach to such material restructuring is imperative.
DOCs are time-sensitive variable costs accruing in the short term, and fixed costs most often declared on an annual basis. The percentages shown are approximate and are presented to indicate the extent to which they may affect total operating costs.
IOCs, while broadly related to operations, are typically unable to be allocated more specifically than either clearly fixed or variable DOCs. They are illustrated here to account for their presence and their typically longer terms. However, there is no prohibition on submitting one or more IOCs for allocation according to some scheme acceptable to authorities on reporting.
Pilots are responsible for the safe and efficient operation of the aircraft under their command. Through what they control, they affect a significant portion of the aircraft operating costs. In this, fuel consumption is an important concern.
Optimizing this DOC involves applying a relationship called the cost index (CI) – an effective, flexible tool used by airline flight management computers (FMCs) to balance the time-related cost of an airplane operation ($/hr) and the cost of fuel ($/lb) between the extremes of minimum time and minimum cost.
Although airlines now use CI-based tactical flight planning, business jet operators are generally concerned only with meeting landing slots and tending toward fuel efficiency sufficient as a driver to meet this goal.
While few business aircraft FMCs incorporate CI for performance calculations, it is possible to calculate this independently, but description of an effective method is beyond the scope of this article. Variable fuel prices, fuel tankering, and fuel hedging are additional strategies that deserve consideration.
DOC sharing principles
Sharing of DOCs depends on the business model (full ownership, joint ownership, fractional) within which the aircraft operates.
Fixed DOCs are allocated according to ownership percentage, while variable DOCs are allocated to the operator of the subject flight. A maintenance event required by the OEM to be performed is designed to protect both the aircraft owner and operator.
Continuing airworthiness of an aircraft or component is ensured through associated maintenance, repair and overhaul (MRO) activities broadly related to aircraft make, model and age, and types of operation. Over time, aircraft maintenance accounts for as much as 35% of an aircraft’s annual operating budget.
How this is allocated depends on whether the expense covers wear-and-tear or the extent to which the asset value of the aircraft is restored.
Overseeing and managing the costs of owning and operating business aircraft requires care, diligence, and regular review. Effective business aviation department planning and budgeting regards airworthiness, operational demands, and cabin/galley esthetics while pursuing opportunities to improve effectiveness and utility.
The potential benefits of evidence-based decision-making are greatest when considered collaboratively and appropriately with the other strategies. Tracking, reporting, and understanding DOCs are critically important to an aviation department’s financial health, especially recognizing that finite financial resources must be allocated and employed as efficiently as possible.
In cases of government grants or other forms of external funding, identifying direct and indirect costs becomes doubly important. Grant rules are often strict about what constitutes a direct or an indirect cost and will allocate a specific amount of funding to each classification.
A strong case can be made for a pilot to oversee the DOCs of operating a business jet or turboprop. With the requisite desire, analytical experience, and financial skills (or the ability to acquire them quickly), DOC oversight in the hands of a pilot can lead to just the efficiencies so needed for the foreseeable economic climate.
Don Van Dyke is professor of advanced aerospace topics at Chicoutimi College of Aviation – CQFA Montréal. He is an 18,000-hour TT pilot and instructor with extensive airline, business and charter experience on both airplanes and helicopters. A former IATA ops director, he has served on several ICAO panels. He is a Fellow of the Royal Aeronautical Society and is a flight operations expert on technical projects under UN administration.