06.03.20-Articles-Aircraft Management
06.03.20-Articles-Aircraft Management

Offsetting Aircraft Ownership Costs With Charter Revenue

By Joe Barber, VP Fleet Development, CAM
January 18, 2018 | Updated June 10, 2020

I am often asked, “How much revenue should I expect from chartering out my jet?” My response is that they are asking the wrong question. The more valid question is, “How much of my fixed costs should I expect to save from chartering out my jet?” Here is why.

While the industry has seen brief windows of time where a windfall of favorable factors (high demand, low fuel costs, depressed asset values) can create a positive cashflow, time has proven that it’s not a good basis for ownership. However, the revenue received from chartering your jet, when not in use, can lower your operating ownership costs by up to 80 percent, though keep in mind this doesn’t include capital costs or depreciation. The answer to this question is not always an easy “yes” or “no”—and will be different for every client, based on many factors.

Should you charter? Pros and cons.

Determining whether it is in your best interest to charter your jet demands a personalized analysis of your goals, flying schedule, and type and age of the plane. In fact, our operating cost forecasting tool takes into account over 80 factors to give accuracy to our customers annual budgets. Anything less detailed is at best oversimplified, and at worst deceptive.

When speaking with clients who are interested in chartering their private jet, I take a straightforward approach. Some aircraft owners have an appetite for charter and some do not. Charter is an excellent way to offset fixed costs incurred, regardless of how much or little you fly your plane. The savings can total well over one million dollars per year. When a jet is chartered correctly, this additional flying will not diminish the resale value of the aircraft. However, allowing other people to charter your jet is not for everyone. It is important to discuss both the positive and negative aspects to make sure everyone involved has proper expectations.

Charter is an excellent way to offset fixed costs incurred, regardless of how much or little you fly your plane. The savings can total well over one million dollars per year.

How can I make jet revenue?

The easiest way to make jet revenue and offset your ownership costs is by offering your jet for charter when you are not using it. To do this legally, your jet must be added to a FAA Part 135 Air Carrier certificate. Contact an Aircraft Management Company like Clay Lacy who has authority form the FAA as a Certified Air Carrier.

Key question: How many hours will you fly?

The answer given is commonly expressed in hours per year. A simple way to estimate annual flight hours is to list your most common destinations and the number of times per year you anticipate visiting. Then, add a margin for unanticipated trips, resulting in an estimate of total annual hours to expect. Add 25 percent to this number, because once you own a jet, you are going to love using it.

If you anticipate flying less than 150 hours per year, charter is probably a better option (if evaluating on purely financial considerations). All of the costs incurred through jet ownership will never be fully recouped; no matter how much charter you accept. The ‘why’ behind that is due to crew member optimization: the human capital factor.

Human capital: Pilot and other crew costs.

Sometimes overlooked, human capital is necessary to consider where your team’s ceiling really is, because the cost of turning over a pilot can be 200 percent of their salary.

A typical jet has a two-person crew, who can fly around 350 hours per year (which, according to JetNet, also happens to be the national fleet average for annual uset). This allows time off for training, vacation, sick days, moderate quality of life etc., which can account for about 100 days per year. You can use replacement crew members on a market availability basis, but at a daily rate, those costs can add up quickly.

The average cost to employ and train a professional pilot is about $200,000 per year. If you net $2,000 per hour from charter, after direct operating costs (the variable cost per hour incurred by flying the jet), you will need to fly 100 hours just to recoup the added expense of a third pilot. In addition to needing more pilots, maintenance costs will increase when flying over 500 hours per year.

Sometimes overlooked, human capital is necessary to consider where your team’s ceiling really is, because the cost of turning over a pilot can be 200 percent of their salary.

Fixed and operating costs: It’s all about the margins.

The make and model of jet—the “type” in aviation jargon— plays a critical role in determining how much offsetting revenue you should expect from charter. Some aircraft types have higher margins between the charter rate and direct operating costs. Factors that contribute to this are fuel burn, costs of engine and maintenance reserves, etc. Beyond the direct operating costs, there are fixed costs. These include crew salaries and training, hangar, insurance, subscriptions, etc. For the most part these costs don’t change based on how much you fly.

In some cases, this can significantly work to your benefit. Take for example engine reserves— which are typically expressed as an hourly expense. However, many engine companies require a minimum annual dollar threshold. If you do not fly enough hours to meet the minimum dollar contribution, then you still owe the balance. In this example, the ability to charter your aircraft, and let the charter customer pay toward your engine minimum, is a direct reduction in your annual fixed costs.

Age matters: Newer aircraft can earn more.

High demand aircraft in today’s charter market are typically 10 years old or newer. JetNet reported that the average age of the US fleet is 18.3 years. Even with upgrades there is an effect on demand and trailing price per hour. For instance, if a nine-year-old Gulfstream is competing with an 18-year-old Gulfstream for the same trip, the older one needs a lower equilibrium price to earn that trip (which means a reduced margin in many cases).

Aircraft owners, depending on the type of aircraft, may request parameters pertaining to the specific charters that they will accept. However, keep in mind that the same client who may charter your plane on a long flight may need to take a short one too from time to time. The critical data point to watch is average hour-to-cycle ratios. If your aircraft’s ratio is beyond the norm, this can increase maintenance costs and negatively affect resale value.  However, when properly managed, and in moderation, short flights can be highly profitable.

Ultimate goal: Getting the most from jet ownership.

The ultimate goal of aircraft ownership is to enjoy the extraordinary freedom, flexibility, speed, comfort and privacy that comes with owning your own aircraft. As with anything, the costs associated with ownership are important to consider, and the revenue provided by chartering your plane— when not in use— can significantly lower your cost of ownership without impacting the value of your aircraft.

With so much information to consider regarding jet ownership, it is essential to have a team of specialized and experienced individuals working together on your behalf. This often includes an aircraft management company, aviation attorney, CPA, financier and aircraft broker. Together they provide an aircraft owner a holistic view of their asset and ensure the owner’s best interests are protected.

Using charter as a tool to offset the cost of aircraft ownership requires careful thought and analysis, backed by an experienced team of advisors. The demand for private jet charter has increased since the global health crisis and though you shouldn’t expect to make money owning a plane, today is an outstanding time to take advantage of declining asset values. If part of your consideration is to optimize cost savings, we are glad to conduct a comprehensive analysis to help you decided if charter revenue offset is for you.

Joe Barber, VP Fleet Development, CAM
Connect on LinkedIn

For more information about the costs of owning a business jet, request a proposal here. You can also utilize our charter revenue tool to run the revenue potential of your aircraft. Facing any challenges? We’ll let you know how our aircraft management solutions can help solve these common frustrations.