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Reactive BizAv Cost Management

Posted on: March 9th, 2015 by Pete Agur

March AvBuyerWhat do the recent fall in fuel prices mean for Flight Departments? Pete Agur cautions flight department managers to focus on facts…

One man’s boon is another man’s bane. The recent drop in crude oil prices has lowered Business Aviation costs significantly. But the oil producers are seeing greatly reduced revenues. As a result, many are cutting costs. Aviation services are a natural target for those cuts, some appropriate and some not.

The following are common Myths and Hits about corporate cost reductions as they apply to Business Aviation.

Number 1

Myth: If we do a great job, they’ll know it. Most aviation professionals love to serve. They bust their buns to do a great job. But few aviation professionals are effective marketers. They assume their customers know how valuable their aviation services are. But value is based on perception. Therefore, without reinforcement, yesterday’s daunting deeds are inconsequential in the harsh light of current crises.

Hit: Give them what they want and need…and show them what they got.

If the corporate strategy calls for boots on the ground, Business Aviation services are the tool of choice. Case closed? No…

If top management does not know the leveraged impact Business Aviation creates (deals done, customers saved, cycles shortened) it is too easy to forget that airplanes are about much more than just time and dollars, takeoffs and landings.

Getting the right person in front of the right client at the right time benefits the entire company. Your Business Aviation’s leveraged impact must be reinforced, even built upon, accounted for and reported. You must maintain your leader’s positive perception long before there is a threat or challenge.

Number 2

Myth: Business Aviation is the pervue of the powerful; therefore it is safe from attack. Most Business Aviation services report to the C-suite. Your executive passengers tell you how much better it is to soar in the company aircraft than to be mired among the masses on the airlines. Certainly a smart leader would not gore his own goat! But, Nero taught us that if you continue the good life (flying high) while the masses suffer (Draconian cost cuts), leaders lose power and followers do not follow willingly. That is why aviation services are often among the first targets, appropriately or not.

Hit: Business Aviation should lead the offensive in corporate cost management. Business Aviation is a very visible and significant cost that is easily perceived by critics as not directly benefiting the entire organization. That is one reason Business Aviation can be a lightning rod for criticism.

Defensive behaviors by executives or the aviation department can amplify the power of attacks. Wise aviation managers anticipate those threats and behaviors. They proactively present an array of cost-cutting options that would delight Goldilocks; ranging from too soft to too hard. Help the executives decide how much, if any, to cut.

Number 3

Myth: The aviation budget should be cut 10%, the same as everyone else’s. The annual budget, including depreciation, for a typical mid-sized jet is around $2.25 million. It is reasonable for the uninitiated to assume a 10% cost savings is not a stretch goal. After all, the rest of the company is being asked to make similar sacrifices.

Hit: Business Aviation supports the success of the core enterprise. And, its costs are unique. Recognize that fixed costs, which typically are over half of aviation’s total expenditures, plus accruals for maintenance and overhaul collectively represent about two-thirds of the flight department’s annual budget. Thus, you are left with only about a third of the budget that can be managed in the short-term.

So, what looks like an easy 10% saving really requires slashing about 1/3 of the controllable budget.

Even hacking that much doesn’t result in a 10% saving. When people don’t ride in the company aircraft, there are significant contra-costs incurred such as lost productivity, contacts not made or postponed, and missed opportunities (in addition to the costs associated with airline travel and overnight accommodations associated with scheduling difficulties). What looks like a 10% savings is actually much smaller.

Number 4

Myth: It’s all about the dollars. If the company is struggling through hard financial times, you just need to do your share, right? Everyone else is being asked to cut costs by 10%. Logically, if you present a plan to do the same, you’ve demonstrated good corporate citizenship. Illogically, you could be in for a nasty surprise! When it comes to airplanes, it is rarely really about the money.

Hit: Optics are more powerful than dollars. When word comes down to cut 1/3 of the costs from a three-airplane department, it may not be about costs. The real message may be to get rid of an airplane. Why? The C-suite is asking the rest of the company to cut costs. Top management must also demonstrate substantial cuts in the great sea anchor of corporate economics: General and Administrative Expenses (where many aviation departments’ budgets reside). The very visible reduction in the physical fleet that results in a significant savings in the G&A overhead is a powerful way for the C-suite to show they have skin in the game. If you misunderstand top management’s goal, you don’t understand the optics of the situation.

And speaking of optics, the message is clear; when it comes to reactive Business Aviation cost management, it is crucial that you be on target and proactive.

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