Companies are traveling more and more places.
In these times, major firms are no longer located in the heart of industrial regions. They move to more rural settings and away from the pollution, crime and over inflated land prices. Thus moving the market from the major airports. If many companies want to acquire the big sale or the big contract, they have to go to the client. In most situations airlines are the fastest of all available travel methods. But are airlines the best way and the most economical way to do business in this time and era? Corporate aviation is a viable way for many companies to reach the few and far between potential clients without using the major airports.
Therefore, wasting time by commuting to the major city where the airport is located is no longer necessary. By utilizing small aircraft and by landing at the small mom and pop airports, right to where the potential client is located, extra time can be spent selling the company. In this paper the idea of utilizing corporate aircraft will be discussed as well as choosing the right aircraft for the needs of a business. Also, there are many factors to decide upon once the aircraft has been considered and determined to be a viable option. A company would have many options to consider in trying to acquire an airplane. Whether to buy or lease, or to hire a separate firm to handle all maintenance and management aspects of owning an airplane. All these subjects will be touched upon and thus selling the prospective.
In order to do a comparison on which type of aircraft to buy, a base needs to be established. In this study a sample company and its travel habits will be used. A company in Omaha, Nebraska is in the business of selling widgets.
The company has been growing and therefore doing a fair amount of traveling to other states. Their travel habits have been one weekly trip to Colorado Springs. Also, to St. Cloud, Minnesota twice a week, 1 weekly trip to Dallas, Texas and finally one miscellaneous trip to any given metropolis hub, for example New York City, New York.
A combined total of $3320.00 is being spent on transportation. This amount doesnt include the executives time that is being wasted during travel. The executive sales person makes $200,000 per year not including yearly sales bonuses and an average 50 hour work week . The sales people make an average of $2,000,000 dollars a year in new profits for the company, thus making the salespersons hourly worth $845.00 dollars per hour plus the assistants worth $400.00.
A combined total of $1245.00 of revenue per hour. Now, time that is spent in airports and taxi rides and other time consuming problems, such as delays, there is less time spent with clients thus making the earning potential less than what it could be. Now, by utilizing a corporate aircraft, time can be more effectively spent on the customer. How can that be so? The small aircraft can be utilized by bringing the salesperson to the client in a faster and more efficient manner. By landing at a smaller and closer airport, less time is being taken by driving to and from the air field, therefore making it a very cost effective choice for a company to utilize a small aircraft. By following the chart available, the cost of the airplane tickets and time usage can be determined. Included in the time is layovers and driving times to and from the airport plus round trip air time.
All prices are coach because there is not a business class or first class available out of Omaha.Destination from Omaha PriceTime Colorado Springs$655.005.
0hrsAs one can see, flying out of Omaha is no small task and is very expensive. One cost that is also not depicted on this chart is the amount of revenue per hour each trip costs. A combined total of $37,800 of executive sales time is lost. All together the cost of flying commercial is $41,120 per week. How can this number be brought down? By the use of a corporate aircraft time can be saved. Roughly half the time can be recovered from this number. Most of the smaller, private air fields are located directly in, or close to the meeting city. This helps to avoid large crowds and the unwelcome layovers of the larger airports.
All of which can save valuable company time.Why choose to have a corporate aircraft? If the company executive using the airplane saves an average of five hours a week by using the airplane, it saves the company at least $6,000 per week in just travel time by the executive. The cost of the average seat mile of a business aircraft is between .
30 to .50 cents per seat mile. Therefore making it very affordable. Also, in order to be more adequately prepared than the competition the corporate team can prepare on the aircraft for the up coming presentation. This is saving time, and as shown on the last chart, the company representatives time is worth a great deal of money. The first impression in any new business meeting is very important. The customer realizes that a company means business when they fly into town on their own airplane. The use of a corporate aircraft can also be a great bargaining chip to enhance a new salesperson to the company.
Finally, the airplane is a great way to show progress to its competitors making them not likely to rival your corporation. Since the company shows potential for a corporate aircraft, what type of aircraft should it consider, new or used? That is a very difficult question because the company is very new to the airplane business. There are many more variables that need to be looked at when deciding upon a used aircraft compared to a new aircraft. The company has decided to go with buying a brand new aircraft rather than buying used. The company feels that a purchase of this size should be for an asset not a liability. They do not intend to use an aircraft brokerage firm, but decide to make the decision themselves. Another option they have available to them is whether to purchase a turbo jet aircraft or a turbo prop aircraft.
The comparison of the two is needed to establish what the companys needs are in order to make a choice that will be most cost effective for the corporation, not just now but in the future also. Both aircraft are roughly the same size and can sometimes have a considerable difference in price. For this study the two aircraft the company is looking at are the Beechcraft King Air 200 and the Beechjet 400A.First, a summation of both aircraft and how they operate. The Beechcraft Super King Air Be-200 is a twin turbo prop aircraft and a great starter aircraft for any small business.
It has seating for eight passengers plus one pilot. Its true air speed is 294 knots and a maximum range of 1,850 miles at 27,000 feet. The interior space is limited to a cabin width of 4.5 feet, cabin height 4.8 feet, and cabin length of 16.
7 ft. As one can see, this aircraft does not offer a great amount of space to get up and walk around in. The maximum load the aircraft can operate with is 2,940. The draw back of a turbo prop is the noise that the props make because of the placement of the engines to the fuselage. The range is not a problem here, the longest trip would be to New York and the pilot could refuel there. The runway needed to operate the airplane is 3000 feet.
This is good because a fair amount of runways are opened to this model. The overall cost would be $3.3 million dollars.
The Beechjet 400-A is an 8 passenger 2 pilot aircraft. It also is a great starter aircraft with growth potential. It has a cruising speed of 460 knots and a range of 1,560 miles. The interior cabin is 4.
9 feet wide and a height of 4.75 feet. The length of the cabin is 15.6 feet. The length of runway needed to operate the jet is 4,500 feet. The length of field to operate this aircraft inhibits its possibilities. The maximum load weight is 2,490 pounds and that includes 950 pounds of baggage. The main bragging right of this aircraft is its interior options.
It offers a wet bar and fully reclining seats. The cost of this aircraft $5.9 million dollars.Both aircraft offer similar options and are relatively close in operational distance. The choosing of an aircraft by price is not the only driving factor for aircraft selection. For example the amount of work that can be done on a turbo prop plane is less productive than on a jet. This is due to the noise and the lower altitudes that the turboprop must fly. The time saved by using the jet is more cost effective.
However, the jet needs more runway length for take off compared to the King Air thus making the jet more restricted to which airports it can land at, making the propeller plane more effective. The King Air has smaller interior space which can make the passengers cramped and will not be as forgiving as the Beechjet. The overall opinion within the company is to purchase the Beechjet.
It has more potential for growth considering the rapidly expanding company that it will support. The overall ride and safety of the jet far outweighs the necessity for a longer runway. The flying speed of 460 knots gives the Beech jet the capability to be anywhere at a moments notice. Thus making the it a more feasible choice for this business. Even though the Beechjet is $1.5 million more expensive, the cruise speed will make up the money in travel time by getting passengers to the destination sooner.
Since the business has decided that the Beechjet 400 will suit their needs the best, the company now needs to decide on how to purchase this aircraft. They can either use conventional financing, as you would with a vehicle, or by using a number of other options to cover its new investment. For example the use of joint ownership, wet leasing, or dry leasing. The company decides on sole ownership of the corporate jet and is going to finance the entire venture.
They based their decision on the profit that could be made through the selling of the used aircraft in the future and also deducting the maintenance costs of the aircraft from taxes. The following chart depicts the financing schedule that the finance company has shown them. The financing is based on a 120 month loan with 10% down payment. Financing termsAircraft Purchase Price $5,900,000Annual Usage 400Aircraft resale value(% of purchase price) 80%Sales Tax 6%Basis for Depreciation $6,254,000Down Payment 10%Aircraft Loan (including sales tax)$5,628,600 Monthly payments (120 months @ 7.
00%)$46,905By deciding to go with a corporate jet the company is now paying $47,000 in ownership costs per month. By using a corporate aircraft the company will show an initial savings of $117,480 dollars a month by way of the commercial aviation routes cost. The benefit of owning this aircraft is a definite improvement for the business and the financial strength for this corporation.Financing costs are not the only debit that the company will incur. The other two major areas that need to be covered are insurance and fixed base operation costs. Both are two very important bills that are required in order to own and operate an airplane safely and efficiently.Insurance for the aircraft is very similar to what an individual would need for a vehicle. However, one major difference in the decision for insurance between a vehicle and a corporate jet is a value of several million dollars.
Insurance is broken into three main areas; physical damage, sometimes referred to as hull insurance, aircraft liability insurance, and airport liability insurance. Hull insurance is basically what it sounds like. It covers the aircraft against any physical damage that it might incur. Aircraft liability insurance covers third parties that are associated with the aircraft. This type of insurance protects the owner of the aircraft from any liability suits that occur during flight operations. For example, any unforeseen accidents which may occur while passengers are on board the aircraft. Finally, airport liability insurance is used to cover the owner who rents or owns a hanger at an airport.
The insured is covered against any accidents that might occur at any of the ground locations around the aircraft. Insurance is very complicated and should be approached carefully with sound mind and a good lawyer. To make insurance as simple as possible, the insurance will be approximately 6% of the cost of the aircraft. In this scenario the insurance will be $30,087 per month.Now that the aircraft has been purchased, who will run the day to day maintenance of this aircraft? This company does not have the experience to handle all the maintenance schedules and employment that this aircraft demands. The company has decided to contract out to a fixed base of operations firm. This firm will basically run the everyday flight operations, hanger fees, refueling, inspection and safety schedules, and all general maintenance.
The price of this service, for example, would be dependent on the aircraft usage. About 10% of the initial investment of the aircraft will suffice as the operational costs. Finally making the monthly operations cost $49,166.This study has shown a number of different areas that must be considered to purchase an aircraft. One might ask if the whole investment was worth this companys attention. When the company was using strictly commercial schedules, it was losing very valuable time which cost the company $164,480 dollars per month. Now, by utilizing the corporate aircraft, operating costs would be $126,158 dollars a month. Using the jet aircraft instead of commercial aviation not only saves the company $38,000 dollars per month but it has the flexibility to go anywhere at anytime.
Bibliography:Works CitedFlint, Perry and Henderson, Danna K. (March 1997). American at Bay. Air Transport World, 28(September1998). American Airlines Homepage(online).
Available: http://www.aa.com/(October 1997). History of American Airlines(online).
Available: http://www.britanica.com(June 1998). Oneworld Alliance(online).