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The Compelling Case for Business Aviation

Posted on: September 29th, 2012 by Pete Agur

The Compelling Case for Business Aviation

 

By Peter v. Agur, Jr., Managing Director & Founder

The VanAllen Group, Inc.

 

 

“The truth is more important than the facts”, according to Frank Lloyd Wright.  The truth is business aircraft are extremely valuable tools… and the economic facts have created a lot of confusion.

 

The truth is:

 

  • Decision makers (be they buyers, sellers, partners or entrepreneurs) nearly always make their biggest deals and commitments face-to-face.  Those decisions are often measured in the millions or billions of dollars.

 

  • Nearly all the major software, hardware and communications, companies routinely use business aircraft.  There is no technological substitute for being there.

 

  • The success of most businesses, no matter how big or small, is reliant upon the impact of a handful of people.  They are the creators of ideas, markets, relationships, commitment and change.

 

  • The impact of that small team of leaders is most greatly limited by time and place.  The demands on their time are extreme and nothing leverages their impact more than being “in place”.

 

  • The cost of business aircraft is a tiny fraction of a company’s annual budget.  Proportionately, it is a much smaller share than your cars are of your personal budget.

 

  • Dozens upon dozens of high net worth entrepreneurs have bought business aircraft with their own money.  A number of them use those aircraft for business purposes, without the benefit of tax breaks, to avoid concerns over the ethics of mixed business and personal aircraft use.

 

  • The vast majority of executives are extremely careful about their use of business aircraft.  In practice, they are often too conservative about flying via private air.

 

  • Fat Cats are an endangered species.  Like other people with aberrant behaviors, they do deserve “special” attention.

 

And the fact is, despite all the hoopla, the cost of using business aircraft isn’t the driver!  Even so, the costs are important and they continue to be confusing.  I’ll explain.

 

Early in my business aviation career I sold aircraft for four different airframe manufacturers.  Each company tried to present a positive financial case for their products.  All of them used very favorable economic assumptions.  Those assumptions were routinely greeted with unfavorable reactions.  Executives recognized the aggressive “financial analyses” for what they were, sales tools.  As a result, those analyses were typically rejected.

 

After I completed my MBA and started my consulting practice I strove to create an economic model that was not only factual but conservative.  My goal was to have the green eyeshaded Doubting Thomas understand and accept the real costs of both business aviation and the airlines.  The models we developed have been consistently accepted by the CEOs, CFOs, COOs and Boards of Directors of FORTUNE 1000 companies and their peers.  What follows is a general explanation of my analyses.  But what is more important is what I have learned from my many conversations with our clients when they have seen the analyses’ results.

 

I’d be a wealthy man if I had a nickel for every time I heard a C-suite officer say, “You cannot justify the use of business aircraft economically”.  Yet nearly every time those words were uttered it was within the context of that same executive ratifying the use of business aircraft.  Why is there such a gap between what they are saying (“we cannot justify the cost”) and what they are doing (approving the expenditure)?  Understanding the “gap” begins with recognizing that the use of business aircraft is often not driven by economics.  It is driven by the goals of the business.  The strategic objective of most businesses is to grow and prosper.  To achieve these objectives they are in a race against time and place.  They have very few people who can achieve the “win”.

 

For the same reasons that we don’t put firemen on city buses, many companies cannot afford to put their key players on the airlines.  The assurance of time-place certainty is too critical to be cost driven.  In other words, a business aircraft is part of a company’s infrastructure just like a fire truck is part of a city’s infrastructure.  It is essential.  Just like its headquarters facilities and its IT systems.

 

There are over 7,000 business jets currently in use byU.S.companies.  If the detractors are to be believed, that is a lot of poor economic decision making.  Let’s give the naysayers the benefit of the doubt that a few outliers simply want a shiny toy to show off.  But that leaves a huge number of executives who have invested their personal reputations and some of their company’s money in something they believe in.  Having been witness to their deliberations, I know they make their decisions extremely carefully.  After all, they know it has the potential for attracting a lot of criticism.

 

Despite the barriers, what is it that causes executives to make the business aircraft commitment?  They know they have a small team of people who are responsible for the company’s overall success.  They know that facilitating the time-place positioning of those people leverages their impact.  And they know taking care of those people’s safety and quality of life is critical.  They know that making the investment in business aircraft services pays off.

 

Business aircraft cannot be all things to all people.  The airlines do a great job, in their areas of strength.  The data shows that theU.S.domestic airlines do very well on hub-to-hub legs of 1,000 miles or more.  And the flag carriers for first world countries do a very good job, hub-to-hub, too.  But traveling onU.S.regional airlines and remote international carriers is much riskier.  Those airlines’ performance, when it comes to safety, service and time efficiency, is not acceptable to many companies.  Managing those risks is a significant factor in many executives’ decision to invest in the business aircraft option.

 

But how much of a premium is safety, security, and time efficiency worth? I have asked a number of business leaders what premium they are willing to pay for their executives to travel via private air.  Universally they indicate the decision is not based on a premium or economic hurdle.  They know there is no other option.  One entrepreneur billionaire put it clearly, “I don’t fly in my jet because I like it.  If I could step into a booth here and step out of another booth at my destination, I would.”

 

Despite the fact that cost savings are not the reason most companies have business aircraft, their cost is a huge lightening rod for controversy.  And those costs are grossly misunderstood because the costs, and their comparisons, are complex.

 

The basis for comparison should be apples-to-apples and comprehensive.  With that goal in mind, I constructed a massive fully integrated Excel spreadsheet.  The assumptions used in the analysis were selected to be conservative enough to pass the inspection of an aviation-agnostic CFO.  Differing trip distances and passenger loads were used.  I then compared the costs (dollars and time) of each major category of business jet and the airlines and flexed key variables to gain insights from the results.

 

The analysis was for passengers travelling door-to-door between airline hub service cities (the best time and dollars case for the airlines).  A variety of assumptions and variable data points were applied.

 

In order to gain a comprehensive comparison of the cost of airline versus business aircraft travel I analyzed four composite trip lengths:

  • Regional travel of less than 600 statute mile leg lengths,
  • Mid-content travel of 600-1,500sm leg lengths,
  • Transcontinental travel of 1,500-3,000sm leg lengths, and
  • Transoceanic travel of 3,000-6,000sm leg lengths.

We compiled the data for five routes per leg length.  We then averaged the data to create a composite summary for each.

 

 

Sidebar – The Regional Travel Case Elements

Our sample city pairs were

Atlanta–Charlotte

Atlanta-Cincinnati

Atlanta-Orlando

Atlanta- St. Louis

Atlanta-Washington,DC(DCA)

 

Composite Ticket Cost

The average distance for Regional Travel was 408 statute miles (sm) with an average 7 day advance refundable Coach fare of $366 via Expedia.com.  This yielded a ticket cost of $0.96/sm per passenger.

 

Composite Time Cost

Average flight time was 1.03 hours or 1+02.  The calculations for the cost of the passenger’s time added up fast.

 

The Mid-Continent Travel Case Elements

Our sample city pairs were

Atlanta–Dallas-Ft.Worth

Atlanta-Newark

Atlanta-Minneapolis

Atlanta- Denver

Philadelphia-Dallas-Ft. Worth

 

Composite Ticket Cost

The average distance for Mid-Continental Travel was 976 sm with an average 7 day advance refundable Coach fare of $425.  This yielded a ticket cost of $0.44/sm per passenger.

 

Composite Time Cost

Average flight time was 2.20 hours or 2+12.  I guess you’ve figured out I live nearAtlanta.   It is a major hub city with multiple carriers competing on most routes.

 

The Transcontinental Travel Case Elements

Our sample city pairs were

Atlanta–Phoenix

Atlanta-Los Angeles

Seattle-Washington (IAD)

Los Angeles-New York(LGA)

Boston-Oakland

 

Composite Ticket Cost

The average distance for Transcontinental Travel was 2,195 sm with an average 7 day advance refundable Coach fare of $575.  This yielded a ticket cost of $0.26/sm per passenger.

 

Composite Time Cost

Average flight time was 4.82 hours or 4+49.  The calculations for the cost of the passenger’s time added up fast.

 

The Transoceanic Travel Case Elements

Our sample city pairs were

New York(JFK)-London

Chicago-Paris

Seattle-Tokyo

Los Angeles-Hong Kong

Los Angeles-Sydney

 

Composite Ticket Cost

The average distance for Transoceanic Travel was 5,270 sm with an average 7 day advance refundable Business Class fare of $4,971.  This yielded a ticket cost of $0.94/sm per passenger.

 

Composite Time Cost

Average flight time was 10.85 hours or 10+51.  The calculations for the cost of the passenger’s time added up fast.

 

 

Door-to-door Airline Travel Costs

  • Domestic airline ticket cost per passenger – The lowest available 7 day advance refundable Coach airfare found on Expedia.com.
  • Transoceanic airline ticket cost per passenger – The lowest available 7 day advance refundable Business Class airfare found on Expedia.com.
  • Door-to-door time cost per passenger – This is the extra time invested to travel on the airlines as compared to business jets.  It includes:
    • Drive time differential for using closer business aviation airports.
    • The differential in airport ground time (parking, checking in, security checks, boarding, deplaning, retrieving baggage, and getting to the car).
    • Average duration of unscheduled arrival delays.
    • Flight time differential due to the speed differences for refueling stops.
      • The total average for domestic flights is 2.0 hours per leg.
      • The total average for transoceanic flights is 3.0 hours per leg due to longer customs and boarding times.
      • En route useful time differential.  We have surveyed hundreds of passengers to determine their productive time en route on both the airlines and business aircraft.  The difference is 40% of the flight time (85% of the time was reported to be productive on business aircraft versus 45% of the time on the airlines).  No factor is used to calculate the quality of that useful time difference.
      • We varied the lead passenger full cash compensation rate (salary plus bonus) from $250,000 to $4,000,000 per year and added 30% for the cost of benefits.
      • All other passengers were assumed to be compensated at one-half the rate of the lead passenger.
      • We used much lower compensation rates for the Shuttle analysis.
      • Routinely, passengers tell us these allowances are conservative.  That is fine by us.  It adds credibility to the analysis.

 

A special note about executive compensation:

There has been a lot of emotional publicity about executive compensation of late.  However, we are here to deal with the truth.  According to my friend Thomas J. Stanley, Ph.D., author of The Millionaire Next Door and The Millionaire Mind, there are 360,000 people in the U.S currently being paid $1 million dollars or more per year.  When you extract all the movie and sports stars (including Tiger Woods’ caddy), you still have a huge number of executives and entrepreneurs whose time is extremely expensive.  Most of these people travel a great deal for business.

 

Door-to-door Business Aircraft Costs

  • Annual Fixed Costs – These are the costs incurred even when the aircraft doesn’t fly.  Crew salaries, insurance, training, hangar costs, etc.  We used Conklin & de Decker’s latest numbers from their Aircraft Cost Evaluator plus 10%.  The 10% adjusts the Conklin de Decker numbers to more closely approximate the budgets of aviation departments with three pilots per aircraft and other typical additional costs.
  • Annual Variable Costs – These are the costs incurred that were directly attributable to the trip (fuel, catering, landing fees, crew trip expenses, etc.).  These costs were also directly taken from Conklin & de Decker’s latest figures.  We then added 10% to take into consideration the cost impact of an average of 10% flight time dedicated to positioning legs.  For the VLJ analysis we added a one hour fuel stop half of the time it flew on mid-continental length legs and two one hour fuel stops for transcontinental length legs.  For the Light Jet we added a one hour fuel stop for all transcontinental length legs.
  • Annual Market Depreciation – This is the actual change in the market value of the aircraft averaged over the term of ownership.  These costs are also taken from Conklin & de Decker’s Aircraft Cost Evaluator.  Taken over a typical lifecycle of 8-10 years, you will find that the Conklin & de Decker’s established average market devaluation rate of 4% per year is reasonable.
  • We did not include any credit for costs that can be avoided through the use of business aircraft (reduced number of hotel nights, meals and rental car fees, etc.).  Again, this was perceived by our clients as adding to the conservative position and credibility of the end numbers.

Taken all together, the annual fixed costs, variable costs and market depreciation equate to the yearly real or “green dollar” cost of business aircraft use.  Once the commitment is made to own a business aircraft, the incremental cost of the next hour or mile is its marginal cost.  Many decision makers we talked with use the marginal cost as the hurdle rate for considering additional application of the asset.

 

We compiled a composite of three aircraft in each category (except the Very Light Jet group, since there are only two models certified – although Cessna prefers not to categorize the Mustang as a VLJ).  We attempted to represent all the major OEMs.  (See the sidebar for the list of aircraft.)

 

Sidebar – Aircraft used in the economic models

  • Very Light Jets
    • Citation Mustang
    • Eclipse
    • Light Jets
      • Citation CJ3
      • Hawker Beechcraft 400XP
      • Learjet 45XR
      • Mid-Sized Jets
        • Citation Sovereign
        • Hawker Beechcraft 900XP
        • Learjet 60XR
        • Large Cabin Jets
          • Challenger 605
          • Falcon 2000LX
          • Embraer Legacy 600
          • Ultra-Long Range Jets
            • Falcon 7X
            • Global Express XRS
            • Gulfstream 550
            • Shuttle Jets
              • 328 Envoy
              • Challenger 850 CS
              • Embraer 135 Shuttle

 

Findings and Observations

The facts are you can economically justify business aircraft, under certain conditions.  And the facts also bear out most companies don’t invest in business aviation to save money.  But the cost differential between a business aircraft and the airlines can be a lot less than is commonly believed.

 

Let’s look at the results by aircraft class.

 

Very Light Jets and Light Jets

As you can see in Graph Set A, despite all the arguments against the economic benefits of business aircraft, the Very Light Jet and the Light Jet classes are the exception.  The VLJs and Light Jets are designed for regional travel.  This is the airlines’ worst area of performance because their costs and time are front loaded and those costs are distributed over the least number of miles.  So, the full costs of a VLJ or a Light Jet that is routinely flown regionally with moderately paid passengers ($200k+) are less than those of the airlines.

 

When we did the calculations for the VLJ going on 600-1,500 sm we added in a one hour fuel stop for legs over 1,000 sm.  Even with the delay enroute the VLJ was very cost efficient for more highly paid passenger loads.  The greater capital and operating cost of the Light Jets was still, generally less than those of the airlines on those longer legs.

 

For transcontinental trips the VLJ was required to make two one hour fuel stops as well as be limited in its block speed (354 mph), so it fell of the charts.  Moreover, who besides a pilot wants to spend over six hours in a small tube going slow?  On the other hand, the marginal or direct cost, including time, of a Light Jet making one stop on a cross country trip is at or below the cost of using the airlines.

 

These aircraft are cost productive.  In fact, the cost-benefit of VLJs is so strong, and the airlines are so weak in the regional travel arena that it would not be surprising to see this class of aircraft more than fulfill its promise for growth in the near future.

 

Medium Jets

In Graph Set B it is plain to see the Medium Jet is like the Light Jet on steroids.  It is also relatively efficient and its economics, in contrast to the airlines, are excellent for regional legs and still very good for mid-distance legs (600-1,500 sm).  It is marginally cost beneficial for almost all passenger load combinations (numbers and compensation) inside of a mid-continent radius.  It is fully cost effective for highly compensated passenger groups for all domestic leg lengths.

 

However, the benefits need to be much more than economic for Medium Jet use on transcontinental legs carrying passengers whose annual salary is less than $2,000,000.  And that sets the stage for each of the larger aircraft.

 

Large Cabin Jets

As you can see in Graph set C, even the direct cost of three key people traveling on a Large Cabin jet on medium length legs and shorter is less expensive than sending them on the airlines.  If the leg is transcontinental, the lead passenger needs to be salaried in the $2 million plus range to achieve marginal cost effectiveness.

 

Doing a transoceanic leg with a refueling stop causes the Large Cabin aircraft’s marginal cost to exceed the full airline cost in Business Class.  Here, again, the benefits must be other than financial to justify the use of business aircraft.

 

Ultra-Long Range Jets

In Graph D, even the largest corporate jets are more efficient than the airlines on mid-to-regional trip legs.  The data also points out these aircraft are most effective for the demographic they target: large multinational companies and very high net worth individuals.

 

Corporate Shuttles

When you consider the high airline costs for regional travel it seems intuitive that corporate shuttles make sense.  But the data goes beyond that.  Recently the NBAA hosted a shuttle working committee.  They estimated there were about 50 shuttle operations active across the country.  Our analysis of the regional or mid-continent use of a purpose-built shuttle aircraft, Graph Set E, with an average passenger load of 12 mid-level or higher folks is a financial homerun.

 

For the part timers, I assumed the aircraft was a mid-sized jet that was primarily used for on-demand executive use but provided shuttle support two or three times each week.  Again, the passenger load was modeled at three-quarters capacity at 6.  The results are very beneficial when the economic hurdle is marginal, or direct, costs versus the airlines (Graph Set E).

 

Summary

These analyses drive home a number of critical points:

  • Short range trips (legs of less than 600 miles) are the airlines’ greatest weakness.  The regional airlines tend to have less experienced staff, constrained resources and poorer service and safety records.  The trip experience on regional airlines is so challenging that a large population of travelers would rather drive 300 miles than fly.  Driving or flying on the regional carriers are much more expensive than using a business aircraft.  In other words, this is the strongest economic case for a business aircraft (especially a Light Jet or VLJ).  I would not be surprised to see all the predictions for this aircraft market segment being overshadowed by the long term reality.
  • The longer domestic trips in Mid-sized and Large Cabin jets generally create a cost premium in comparison to using the airlines.  The substantial popularity of these aircraft for this mission confirms there is an undeniable non-financial need to support the success of the enterprise through business aircraft services.  Even so, there remains substantial positive benefit for using even these aircraft for regional trips.
  • The Ultra-Long Range aircraft are impressively cost effective on short haul trips.  That fact is counter-intuitive and can be offset by social concerns about using a very large aircraft on a one hour leg.  But this type of aircraft has an extremely important and greater purpose.  For many companies the best sources of new markets and profits are offshore in remote destinations.  These places are rarely served by high quality alternatives.  The safety, security and time efficiency of key personnel make these aircraft a required tool for many multinational firms.
  • According to the data, shuttle operations are one of best underdeveloped opportunities for business aviation and its customers.

 

In closing, business aviation is a tool that leverages the impact of an organization’s leaders.  Their impact is needed most when the challenges and threats to the enterprise are greatest.  The increased results that business aircraft create by assuring key people’s time-place positioning far exceed any traditional cost-benefit analysis.  The fact that this cherished tool can also be economically beneficial is merely icing on the cake.

 

How obvious are those benefits?  The chairman of one of our client companies asked me what he must have thought was a “gotcha” question: “Have you ever not recommended the use of business aircraft?”

 

I smiled and said, “No.”

 

He pressed on, “Why not?”

 

“Because by the time your peers finally get to the point of hiring us, the need is apparent.  What they are really looking for is a third party expert who can confirm what they are doing makes sense.  But, their conservative business nature and their concern for the perceived costs of business aviation cause them to wait until the need is so great that the case for business aircraft services is compelling.”

 

And that is the truth.


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