Are your flights subsidized?

Jan 22, 2017 - 9:00 PM

What’s the true cost of your charter flight? Not the figure on the invoice, but the actual total of operating and prorated fixed costs for your time aboard the aircraft? Exact numbers are hard to come by, but if you’re a heavy charter user, there’s evidence you’re getting a bigger subsidy than a corn farmer does. (Annual direct payments of agricultural subsidies are limited to $40,000 per person.)

Let’s look at some figures. A new G450 flown a little over 400 hours per year costs about $6.8 million annually to own, assuming the book-depreciation rate, according to aviation data supplier Conklin & de Decker. With market depreciation (with a longer write-down period), the tab is $4.2 million. That’s more than $15,500 and $9,500 per flight hour, respectively. Meanwhile, you can find late-model G450s on the charter market for about $5,600 per hour, with most of the copious inventory below $7,000 per hour—and that’s before brokers start beating up on prices.

A new Embraer Phenom 300 flown about 400 hours a year has ownership costs of more than $2 million or $1.5 million annually and about $4,500 or $3,500 hourly with book or market depreciation, respectively. Yet 300s can charter for under $2,500 per hour, with late models available in the $3,000 range.

But is it really costing owners more than you pay to have you burn up hours on their jets?

The answer depends largely on whether the airplane comes from a managed or an owned fleet. U.S. charter aircraft come from two basic sources. Companies like Executive Jet Management, Clay Lacy Aviation, and Priester Aviation contract with aircraft owners to charter out their jets and turboprops. Then there are companies like XOJet, JetSuite, and VistaJet, which own and operate (O&O) their own airplanes and use them only for charter.

Operating a G450 costs about $9,500 to $15,500 per flight hour, depending on how you figure depreciation. Yet, you can find late-model G450s on the charter market for $5,600 per hour.

In the managed-aircraft world, charter revenue is understood to be no more than a way to defray some ownership and operating costs. (Management companies receive a commission for arranging charters.) Given historical rates, it’s accepted that owners can’t actually profit from chartering out their aircraft—the O&Os notwithstanding. Softening the implicit financial hit is the fact that owners don’t actually write a check for the difference between all their costs and your charter rate. The extra usage, though, does add to total flight time—and while most owners limit the number of hours they allow their airplanes to be chartered, this usage nonetheless impacts value and costs them when they eventually sell the airplane.

O&Os, which are far outnumbered by managed fleets, face unique challenges. No one subsidizes their fleets, pays them a management fee, or relieves them of responsibility for maintenance costs. Whatever efficiencies unfettered use of a fleet affords them seem inadequate to compensate for the resulting expenses. That’s why some charter management executives have long surmised that the owned charter-fleet model can’t survive.

Yet O&Os have become more dominant in the charter world. Today they drive the low rates that management companies are forced to match, as the O&Os strive to “make sure every asset is moving every single day,” as Scott Wise, president of TMC Jets, says of his O&O fleet of Hawker 400XPs and 800XPs. “We’re better off at times with a lower yield to generate more hours.”

Yet surely the old dictum remains true: if you’re losing money, you can’t make it up on volume.

“Most people in our industry don’t truly understand the economics of how to make money in the owner-operated business,” says Brad Stewart, president and CEO of XOJet, the data-driven O&O. XOJet shook up the charter world as an upstart a decade ago when it introduced low, transparent, point-to-point transcontinental rates for Challenger 300s and Citation Xs. Stewart cites “principles you need to understand intimately, and put into practice” as the keys to owner profitability. Among them: “The plane cannot be [purchased] new; it’s got to be more than 50 percent depreciated.”

The lower annual ownership costs of that asset can make charter profitable for an O&O at the rates cited above—and can eliminate your charter subsidy. But keep in mind that many aircraft in managed fleets weren’t purchased new, lowering their ownership costs, as well.

Another principle: “You’ve got to believe in dynamic pricing,” says Stewart, referring to the ability to adjust charter rates based on fluctuating demand. That’s a tactic that the airlines employ, but that the charter industry until recently largely ignored. So do owners of managed aircraft really subsidize their charter customers?

“It’s certainly true in low-demand periods, competing with a lot of excess capacity,” Stewart believes, though he adds that, “in many cases, in high-demand periods, the owner is making money.”

Whatever the true cost of charter, its fair market value, like that of preowned aircraft or anything else, is whatever someone will pay for it. For owners, dividing costs over the hours of use may make sense from an accounting point of view but not from an ownership perspective. The owner isn’t paying just for hours of use but for hours of availability, and those total 8,760 per year (365 days times 24 hours). Divide expenses accordingly, and ownership costs only about $775 or $480 per hour for the G450 and $230 or $170 an hour for the Phenom 300, with book or market depreciation, respectively.

Using those numbers, the charter revenue appears more attractive. And it can be argued that time onboard should cost less if you’re a charter customer than it would if you were an owner. After all, you have no guaranteed access to those flight hours while owners can use them whenever they want.