How to Make a Billion Dollars Annually in Business Aviation Part 2

Making A Billion Dollars Annually in Business Aviation: Part 2

A few weeks ago, I published a post on LinkedIn where I said you could make a billion dollars in business aviation. Naturally, I received a surprisingly high number of responses regarding that post.

The majority of the readers (and rightly so) were skeptical about the seriousness of my assertion that it is was possible to earn a billion dollars annually in the (operational) business aviation environment. It was pointed out repeatedly that only a few companies have ever made any money in business aviation, and those companies were definitely not in the billion dollar range.

So, I am doing a few follow-up posts to discuss why the existing operational aviation models are failures. And why the seemingly impossible (making a billion dollars annually) is very much possible.

The main point of contention about the model I have created directly deals with business aviation’s historical inability to make money.

Therefore, in this post, I am going to explain directly (something most people either do not understand or do not want to know) the primary cause-effect flaws of the charter and fractional operating models and why they will never be profitable under existing circumstances.

The primary reasons for these failures are two: 1) These specific models utilized in for-profit/revenue operations are now and have always been wrong. 2) The level/type of experience of the management operating these models in most cases is either ineffective or lack the knowledge of operations necessary to be successful.

Let’s begin with the existing models and the mechanics of why they do not make money.

The first model to look at is the traditional charter system and the current variant known as Piggy Back Chartering. Both models suffer from exactly the same issues. However, the burden of financial losses is shifted in the Piggy Back model to individual aircraft owners as opposed to the charter operators. Although the piggyback charter operators still struggle to make profits even with limited financial exposure.

At first view, the apparent and biggest problem with the charter model is simple; charter customers do not pay enough in charter fees to cover the operating costs of the aircraft they are chartering. One only needs to look at the Charter Guide or the Charter Hub to see the prices charter users pay to charter any jet or turboprop. Then look at the actual/real costs to own and operate the aircraft chartered. The discrepancies are seemingly obvious and alarming. The first thought for the uninitiated is, there is the answer. Up the rates. But then you will not have very many if any charter clients which is just as bad if not worse. So what is the answer you ask?

Surprisingly, right out of the box I can tell you the charter rate is typically correct. The real systematic deficiency in the charter industry is the direct result of underutilization of aircraft.

The charter industry is and always has been set up wrong. That error in the original charter systems created the insufficient and ineffective use of charter aircraft. The problem was built into the cake (in 1963) and will not change until the model evolves. The problem is, “no one” knows how to evolve the system…well not exactly “no one,” I have a simple and exquisite solution but first charter operators would have to understand they have a problem before they can fix it. Therein lies their other problem, they do not think they have a problem, even though they always lose money.

If you think I am wrong about insufficient utilization, do the math. Currently, most charter aircraft fly around 400 to 600 hours of revenue operations if they are lucky. But if you know what you are doing and understand the numbers, depending on the aircraft, it takes upwards of 900 to 1,200 hours just to break even under at the current charter rates. Now you can get cute with the books, and you can belabor depreciation and write off, but as a profitable business model, the current charter system is a bust.

So low income combined with low use is why charter is not a financially stable model. Something must change, either the prices need to go up substantially, or the usage has to.

Up until now, no one has an actual/real plan on how to increase usage effectively, I do, and it is quite simple.

The second failed system is Fractional. Fractional is an excellent model to sell overpriced aircraft to unsuspecting buyers. But as a working, money making model, it is just plain stupid.

What is stupid about fractional is as follows: multiple users on one aircraft are going to require mirroring the fleet many times over. That means the idea of diluting the costs of ownership by putting multiple users on one aircraft does not/will not/can not ever work. The fractional operators will always have to own several extra non-revenue aircraft and the crew costs that go with them. The extra aircraft are necessary to fulfill the requirements whenever different shareowners need to use their aircraft on the same day. Being realistic, what are the chances two, three, or four shareholders out of eight, sixteen, or thirty-two shareholders are going need the same aircraft on the same day. Think Super Bowl. So the fractional companies always have to have extra aircraft, crews, and even charter aircraft available all the time.

And where do you station those additional aircraft and crews? When you have clients scattered all over the country and no efficient back-end operating system, you have a huge problem. The fractional solution as mentioned is to have extra non-revenue aircraft, extra non-revenue crews, non-revenue repositioning, and non-revenue chartering to fill in as needed. And those extra aircraft, crews, chartering and repositioning all costs big money. None of which generates even an additional dime in revenue. That is the very definition of “stupid is as stupid does”. Talk about not thinking a thing through!

Additionally, for fractional to even have a chance to work, they absolutely must have a well-oiled and efficient back-end operating system, which fractionals do not have. They absolutely must eliminate repositioning costs to less than 10%, which fractional have never come close to. They absolutely will have to keep the share costs to a price well below where an individual shareholder can buy and operate his own aircraft for less than a share price, which fractional has not done, in fact, it is quite the opposite.

Current fractional operators fail on every one of these points. These are not difficult issues to overcome, but you must know what you are doing or be prepared to lose millions if not hundreds of millions of dollars annually.

That’s Not Your CEO Is It?

The next issue is, who runs these failed models. Well, there are going to be two types of individuals. #1) is going to be a pilot who wants his own an operation but has little to no business skills. #2) is going to be the MBA who has the business skills, but zero operational experience. Which is the best choice here, well lets looks at both types and see how they play out.

First is the pilot who starts, or takes over a charter company. Well, we already know the charter operations as they exist today are bad models and never make money. Now add to that mix a pilot who only wants to fly and who cares little or nothing about the numbers, systems, or things like costs. And there you go, a guaranteed financial disaster.

Then we have the MBA who knows numbers but has no operational experience. That is the worst possible scenario. The MBA’s only understand how to work with big dollars, and they spend big dollars without a clue about what they are doing. A former chief pilot (7 years) of one of the largest fractional companies explained to me in detail how his company (top heavy with MBA management) approached any issue. Metaphorically speaking, they use a fire hose that shoots out hundred dollar bills to resolve every problem. And MBA’s running aviation companies is how we wind up with half-baked operations like Piggy Back and Fractional.

However, there are solutions to the points and the problems listed above. The program I have developed addresses every one of these issues with straightforward solutions that actually make money (think a billion or more), while dramatically increasing client satisfaction and reducing client cost. A win-win.

So, there you have it, want to fail and lose huge amounts of money in aviation operations, just keep doing or follow the leads and concepts mentioned above. But if you want to revolutionize and evolve the aviation industry out of the 1960’s, and make a billion dollars annually in the process, contact me.

email me at rick.eriksen@cox.net or call me at 702 994 4491.

 

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