Determining the True Cost of Aircraft Rental

Aircraft rental and instruction rates are too low in many places around the country. I know, this sounds blasphemous and like I am advocating that companies raise their rates just so they can make more profit. There is no doubt a concern that any increase in rates may drive more potential pilots out of the world of aviation when they are not able to afford the prices. I have the same concern, but there is another concern that I think is even more important. If businesses that provide instruction and aircraft rental don’t increase their rates, they aren’t charging enough to break even or make a profit from a business viewpoint. The result of not charging enough to cover costs is simple to determine, they will go out of business and we won’t have places to rent aircraft.
Many providers of rental aircraft set their prices relative to other providers of similar aircraft in their market area. In many instances this is done without consideration of what the real hourly operational costs for the aircraft are and what is required for the aircraft to support its own cost. This is less than scientific from a financial perspective and does nothing to ensure business success.

To accurately determine costs of an aircraft a business must consider any fixed costs, hourly variable costs, reserve costs needed for future maintenance, and overhead costs for the overall operation (think staff, buildings, etc.). When this is done with a real consideration of the costs, it many times results in much higher required rates that a business would charge to its customers than any operators have ever charged before. Sticker shock is normal at the end of an exercise in calculating proper rental rates.

That same sticker shock is likely to be seen in customers who are introduced to higher rates. Some may not be able to afford the costs. For a flight school, the reality is that a customer that can’t afford the price is also unlikely to be able to afford a long term commitment to aviation and, as a result, may not be a reliable long-term customer.

Many aircraft rental and flight training operations have not taken the time to complet this process or simply do not have the internal skills to know how to make these computations. I know about this first hand. I owned a flight school and learned the hard way. But over time, I learned, so I believe others can too. If you are a provider that does not have the skills or ability to calculate these costs on your own, spend the time, and potentially a little money on finding someone that can come in and help you do this or do it for you. The small cost this will incur may save your business and make it more successful in future.

Some will argue that if they charge higher prices, they will lose their customers. While this may be true, if they charge a rate that is lower than their break even or a profitable level, they will lose something worse than a few customers, their business. A business that is operating at a loss will eventually go out of business. Which is better for the aviation community, losing a few potential customers or losing a business that serves numerous customers?

One of my concerns is that if we don’t get aircraft rental operators to charge proper rates, many of them will go out of business, leaving major gaps in service provision throughout the country.

Some will not see this logic and will continue to charge undervalued rates because they are not taking into consideration costs for maintenance reserves, engine replacements, avionics upgrades, and other things that customers will ultimately expect. As these providers fall behind in technology, an opportunity does exist for other providers to differentiate themselves in the view of customers by providing better equipment, better service, and more stable service. This will take time, but by doing so, customers in many cases will choose to pay higher rates for a better provider of services.

There are some things that providers can do to keep costs down through levels of efficiency, increased hourly usage per year of aircraft assets, managing their overhead and fixed costs, but the hard math does show generally we are not charging enough.

Is the alternative to buy a personal aircraft? Maybe, but that depends. In most cases, unless you are going to operate an aircraft more than 250-300 hours per year personally, it is actually cheaper to rent aircraft. Aircraft operations become profitable (or even affordable) when they fly more hours per year. It is an economy of scale calculation and it is relatively simple math. Owners of aircraft who fly less hours per year than this are in reality paying a higher per hour operational cost when they fly. Many times these costs are hidden in the fixed costs they have become accustomed to such as insurance, annual inspections, or hangar rental. If more aircraft owners were really honest with themselves about the true costs of owning and operating their aircraft, they might find that renting from a quality local provider might be a better financial decision. In many cases, aircraft owners have limited their flying because of the higher costs of ownership; something that could be avoided by renting instead of owning. I could even theorize that this might actually do more to help the aviation community by supporting local aircraft rental providers.

In the interim and until aircraft providers update their pricing models it means that many renters of aircraft are actually able to take advantage of underpriced services. I estimate that many times prices are undervalued by 50-60%. To the customer I would advise, take advantage of this as much as possible while you are able. The market won’t be able to successfully continue this way forever.

What does this really mean for the aviation community? It can actually be a positive thing. If we work with our aircraft rental and flight training providers to develop pricing models that they espouse it will increase their potential to be profitable, and as a result, produce long term, stable providers of services to our aviation community. It will also increase the ability of our aviation community to count on them as a cost effective provider of aircraft that pilots can utilize in personal and business flight as an alternative to personal aircraft ownership.

While the math may be difficult, it is not something that we should be intimidated or ashamed to attempt. This is business, and any customer who would expect us to operate as a charity instead of a profitable business model in this industry is delusional. We are not a charity. Aviation is fun, it is enjoyable, and it is expensive. To survive and to be able to continue to offer aircraft rental services to this community, we must charge rates that meet or exceed our break even costs.

Want to take this concept one step further? Coming soon is a way to look at the costs of flight training and how you can work with your students and potential pilot candidates to evaluate budget considerations for flight training and future activity as a pilot. The same math that flight schools need to do for considering their budgeting and pricing is important for an individual considering learning to fly or aviation as a lifetime hobby. Check back soon for this upcoming post.

If you are an aircraft rental operator or a group that works with aircraft rental and would like to learn more aboutthe skills and computations needed to calculate aircraft profitability, contact me. I offer a seminar as well as consulting services on aircraft pricing for flight training and aircraft rental operations. More information here.


Comments

Determining the True Cost of Aircraft Rental — 2 Comments

  1. What an informative article. It is great to know these things on the real cost of aircraft rentals. People who are into aircraft renting should know about all these pieces of information especially those who are in the business world in order to have an accurate estimate on the real cost of such transaction.

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