What are some of the common myths I hear relating to business aircraft ownership? Let’s dive in…
Myth 1: You Can Make Money Chartering Your Aircraft
When accounting for the acquisition cost as well as the operating costs, there would be a need to fly over 2000 charter hours annually. Why? There are two parts to the answer.
First: Charter rates are a relative bargain. While $8000 per hour to charter a Long-Range Jet may seem like a lot, the operating expenses are significant: The variable expenses of fuel and maintenance alone average about $4000 per hour. The annual fixed costs, including items such as a crew, hanger, and insurance, training and airborne internet run to $1.4m.
A typical charter payback to the owner is 85% of the listed hourly rate, and the owner pays for the aircraft expenses. So on that basis, our $8000-per hour charter provides the owner $6800 per hour. Deducting the $4000 variable hourly costs leaves $2800 per hour. To accumulate the $1.4 m fixed costs takes 500 charter hours.
So, after that isn’t it all profit? In short, no. Our owner paid $60m for his global business jet. Current market depreciation is about 7% per year (or a loss in value of $4.2 m per year). And that would require another 1,500 charter hours to make the deficit up. Hence our 2000-hour break-even point.
Second: money is not free. Our owner has a cost of capital or an opportunity cost. If he paid $60m in cash for the jet, he ant invest that money in his company or other ventures. If you add in a 10% return on capital, there is $6m per year in the lost opportunity of having his money tied-up in the jet. There is almost no way an on-demand charter operator can book enough charter to cover the costs of owning their own business jet. When an aircraft owner utilizes a charter operation to charter their aircraft when not in use, both parties can win.
The charter operator gets the use of a business aircraft without the cost to acquire it. Te owner gets some revenues to offset their operating costs.
Myth 2: You Should Focus On Only One Cost… “Acquisition”
Every pilot report and airplane review article mentions three things:
1. Cabin and amenities
2. How far the airplane flies,
3. Acquisition cost.
Whenever I do an analysis of costs, I look at the total life cycle cost. This includes not only the acquisition cost, but the operating costs, and disposition.
While the acquisition cost-less the recovery at resale- is significant, the operating costs can amount to just as much over time.
Myth 3: Operating Costs Are Consistent
At least a couple of times each year I have a client who is shocked when confronted with their maintenance costs. The bottom line is that maintenance costs are cyclical. Unless you are on a guaranteed hourly maintenance program provided by the OEM or a third-party provider the cost in any given year can fluctuate greatly.
All of the above misconception can be cleared up by listening, explaining and budgeting correctly. It also helps to have someone who understands both the costs and the operation to assist in the understanding.