Can Sunk Costs Sink Us?
Private Aircraft & Sunk Costs
One of the hardest things to stomach as a jet owner is accepting how high the fixed costs are before you even get to use the plane. The insurance, the hangar and the calendar driven inspections. While fixed costs are often viewed as “sunk” costs and ones that cannot be avoided, jet owners can get relief by using their aircraft more (making each hour cheaper) or by selling the jet and chartering it.
The more the plane flies, the more you can amortize those monstrous big bills that leave you slack jawed. Due to low total utilization, compared with commercial aircraft, fixed costs – to a jet owner – are the cost center that drives the pricing, logic and viability of the aircraft’s ownership. Without high utilization, high fixed costs become the number one reason owners sell, share or abandon the concept of jet ownership.
Consider this: How much additional charter flying is really going to happen? How can you be sure all the incentives are in the right place to make the entire exercise of buying the aircraft even worth your money and time in the first place?
Sophisticated jet owners and managers use direct billing to the extent possible without running afoul of Part 135’s operational control mandate. Your manager is responsible for the aircraft and the crew (they retain operational control) but this does not preclude the jet owner from being privy to the exact amount of fixed costs.
Explore These Five Fixed Costs ASAP
Like many things in aviation, fixed costs are also a profit center. The following five places are worthy of clear contractual language:
Insurance
Who paid the bill to who, and can the owner see it? Being part of an aggregated insurance program is great if the fleet is large, but are you benefiting from the declared group savings?
Payroll
If you pay a monthly fee for crew, how does it compare with what they actually receive? Some owners have seen 50 to 70 percent disparities between the crew charge vs. what actually went into their hands. Furthermore, statistics have shown that “freelance” or “per diem” use of pilots is not consistent with an ideal safety environment.
Hangar and Storage
Is there a real hangar cost associated with your aircraft? Is the aircraft “in” the hangar when you are not at the airport? Hangars are an airplane’s best friend (for longevity) – just be sure you are actually getting full use of it.
Maintenance
Some of the most difficult discussions to have with a management company are the questions around “excessive” maintenance. If your manager also owns and runs an FBO and / or repair station, look for the conflict of interest. The best relationships have maintenance clearly controlled and predicted by the management agreement.
Training
While keeping crew current is important, it is essential to know what the charged costs are vs. actual costs. Did the training you paid for even take place for all crew members that you fly with all the time?
Ready to Float those Sunk Costs?
Interested in learning how employ additional bullet points to help you reduce your cost of ownership and enhance your overall ownership experience?
If you found these points to be useful, why not give us a call and find out some more? We are the people behind RSVPair.com, the Fractional Forum and now the Jet Owner Group, and we provide tools to evaluate operators, managers and fractional programs. Give us a call at 212-937-8857 ext. 502, or drop us a mail at sales@rsvpair.com.
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