Nothing happening in your aviation department? And I mean literally nothing, no flight activity at all? Well, this end-of-the-world-as-we-know-it scenario actually presents an opportunity to fine tune aviation budgeting in a way that might make your operation more competitive down the road.
Some of you may have noticed that while you have no appreciable flight activity, you are still booking expenses to budget lines we normally call “variable” expenses. If these expenses are truly variable according to the number of flight hours per aircraft, when the hours are zero, shouldn’t the expenses be zero as well?
We normally budget for variable expenses by taking last year’s cost for that line item and dividing it by the number of hours flown, giving us a cost per hour. To forecast for next year, we may adjust that number by a factor to account for price inflation/deflation then multiply that times our forecasted flight hours for the coming year and, voila, we have our budget amount. In other words, we use this formula for variable costs: ANNUAL COST = COST PER HOUR x FORECAST HOURS.
What our current experience with zero, or near zero flight hours is showing us is that this formula may be somewhat inaccurate. This is because some of our “variable” costs actually have fixed cost components. Even though we are flying zero hours we are still racking up, for example, aircraft communication charges. This is because some communication services charge a base fee to keep the service active, then add usage charges on top of that. Depending on your arrangements, this might apply to ground handling, flight planning, aircraft security and other expenses normally considered variable.
We are seeing that the more accurate formula to calculate these costs is ANNUAL COST = FIXED PORTION + (COST PER HOUR x FORECAST HOURS). Our zero flight hour cost reports are reporting to us exactly what this “FIXED PORTION” is, making the accurate calculation easy. What this tells you is that some of your truly “variable” costs are lower than you thought, once you separate the fixed from the variable portion.
How does this make you more competitive? If, for example, you are selling charter trips in a competitive environment, the question of “exactly how much is this trip going to cost?” becomes extremely important. This trip is not going to affect the fixed cost portions of variable items. Using just the truly variable cost portions you can price your trip very competitively and win more business that will improve your bottom line.