Kevin O’Leary Ph.D. is the President of Jet Advisors. He has a Ph.D. in Aviation Operations from Embry-Riddle Aeronautical University.
Owning an aircraft is basically a small business with millions of dollars of ownership and operating expenses and revenue flowing in and out of the organization. Therefore, understanding the revenue model for an aircraft that is being used for subcontract charter can be difficult. Let’s go over some of the factors you will need to keep in mind.
There are many different entities involved. The owner of the aircraft is the first entity, and the aircraft manager or certificate holder is the second. The FAA requires an aircraft to be on a certificate in order to be made available for charter. The manager maintains the aircraft and takes operational control of the aircraft during charter flights. “Operational control” is a legal term that means that the manager is responsible for the safe operation of the charter flight. This is like a taxi company that is held responsible for the safety of the paying passengers.
There are other entities involved in a charter trip. The client is the person or company that is paying for the flight and most often is the lead passenger onboard. In a direct charter trip, the owner, manager and client are the entities involved, but in many cases, there are also charter brokers involved. A charter broker is someone who finds the client and locates the manager with the appropriate aircraft and availability to fly the requested trip.
Charter brokers fill an important role because they take care of most of the arrangements, research the manager and provide continuity for the client. Much like a travel agent for a trip, they are a go-between to find the right solutions for the trip at hand. Many clients use brokers because one or two managers usually cannot provide a client with all their needs, so the broker does all the legwork finding the best solution for the client’s travel needs. Brokers take a commission for their services.
Without getting overly complicated, after accounting for reserves and commissions, the owner of a midsized private jet can typically expect to net between $800 and $1,500 per flight hour, in my experience. For the purpose of this article, we will use a net revenue of $1,000 per hour for each hour the aircraft is chartered.
Earning $1,000 per hour seems like a good return for an asset that is already owned and would otherwise be sitting idle with pilots on staff. Chartering an aircraft does make good sense when the aircraft is not being used and the pilots are available. If the annual ownership costs (fixed, cost of capital/opportunity and market depreciation) are $1.2 million, an owner just needs to charter the aircraft for 1,200 hours per year and the fixed costs could be paid for … right?
Not so fast. Flying a private jet for 1,200 revenue hours per year is highly unlikely. Even if a manager could find the demand, the pilots cannot fly that many hours in a year, so additional crew members are needed to achieve this lofty goal of 1,200 revenue hours in a year. Each additional crew member would cost about $200,000 per year, which would translate into 200 additional hours of charter to pay for each additional crew member.
In order to fly an aircraft 1,200 hours, an owner would need to hire four additional crew members, which would cost an additional $800,000 per year. These additional pilots would increase the annual ownership costs to $2 million … meaning the aircraft owner can’t keep up with the incremental fixed costs of hiring additional crew to fly enough hours to pay for all the ownership costs.
Based on my experience in the aviation industry, the best way for an owner to maximize value is to set the level of crew to their flying needs. Once the number of crew members is set, then the owner can make the aircraft available for charter. For example, if the owner flies 200 hours with a crew of two (assuming there is a contract pilot occasionally), the aircraft could fly an additional 150 to 200 hours in charter without hiring an additional pilot. This could bring in $150,000 to $200,000 of net revenue to put toward the fixed costs.
This is a reasonable plan, but also remember that making your aircraft available for charter in some states reduces sales/use tax exposure, which is a great bonus for the owner. Also remember not to “chase” revenue. If a charter trip requires a contract pilot at $2,000 per day, the net revenue needs to be well over $2,000 per day to accept the trip—otherwise, the aircraft isn’t making any meaningful money on that trip.
The aircraft must satisfy the owner’s travel needs first and foremost. After your needs are satisfied, then fill in those gaps in the schedule with charter to offset a portion of the fixed costs. You should not pursue revenue because the margins are small and do not justify the incremental fixed costs. Remember, you won’t be flying for free.
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