private aviation solutions for companies...february 22, 2011 private aviation solutions for...
TRANSCRIPT
February 22, 2011
PRIVATE AVIATION SOLUTIONS FOR COMPANIES
PRIVATE AVIATION SOLUTIONS
FOR COMPANIES
Prepared for:
2011 U.S. Corporate Aviation Summit
Prepared for:
2011 U.S. Corporate Aviation Summit
Comments on Aircraft Ownership & Operating ModelsComments on Aircraft Ownership & Operating Models
1
1. Brief Introduction to SH&E
2. Overview of Aircraft Ownership & Operating Options
3. Determining the Appropriate Aircraft Ownership & Operating Model
4. General Comparisons of Aircraft Ownership & Operating Models
TopicsTopics
Section 1Section 1
BRIEF INTRODUCTION TO SH&EBRIEF INTRODUCTION TO SH&E
3
SH&E is a unique consultancy serving clients with many forms of aviation expertiseSH&E is a unique consultancy serving clients with many forms of aviation expertise
� Specialty consulting firm of 80+ staff dedicated exclusively to aviation
� In business 48 years since our founding in 1963, performing over 8,000 engagements worldwide
� Organized into five practice areas mirroring client needs
– Management and Strategy Consulting
– Financial & Technical Services
– Decision Support
– Airport Services
– Safety, Security & Operations
� Full-service offices in London, New York, Boston, and Washington
� Professionals recruited from airlines, airports, academia, finance, government agencies, manufacturers, and IT
� Acquired by ICF International in December 2007
Unparalleled Expertise · Independent OpinionConsulting Experience · Client Service
4
� Fleet Evaluation / Planning
� Aircraft Sourcing
� Aircraft Re-Marketing
� Contract Negotiation
� Management of Completions, Refurbishment, and Modifications
� Asset Management
� Aircraft Financing
� Selection of Ownership & Operating Models
� Design of Organizational Structure, Processes, and Staffing
� Manual Preparation
� Operator Certification
� Safety Evaluations & Audits
� Operational Evaluations
� Commercial & Operational Due Diligence
� Market Research
� Operational & Financial Forecasting
� Valuation of Businesses & Assets
� Business Plan Development
� Expert Witness Testimony
Types of Assignments SH&E Performs in Private AviationTypes of Assignments SH&E Performs in Private Aviation
SH&E has deep expertise in many aspects of private aviationSH&E has deep expertise in many aspects of private aviation
5
� Charter Operators
� Fractional Ownership Programs
� Corporate Flight Departments
� Head-of-State & Royal Family Flight
Departments
Areas of the Private Aviation Industry Covered by SH&EAreas of the Private Aviation Industry Covered by SH&E
� Aircraft Manufacturers
� Engine Manufacturers
� Component Suppliers
� Completion, Refurbishment, and
Modification Centers
� Maintenance, Repair, and Overhaul (MRO)
Providers
� Fixed Base Operators (FBOs)
� International Flight Support Service
Providers
� Aircraft Lessors and Lenders
OperatorsOperatorsManufacturers & SuppliersManufacturers & Suppliers
Service ProvidersService Providers
SH&E has worked with organizations in nearly every segment of the private aviation industrySH&E has worked with organizations in nearly every segment of the private aviation industry
SH&E’s private aviation experience includes assignments in the U.S., Middle East, Europe, and Asia
SH&E’s private aviation experience includes assignments in the U.S., Middle East, Europe, and Asia
Section 2Section 2
AIRCRAFT OWNERSHIP & OPERATING OPTIONSAIRCRAFT OWNERSHIP & OPERATING OPTIONS
7
Companies have a variety of ownership and operating options for fulfilling their business aviation needsCompanies have a variety of ownership and operating options for fulfilling their business aviation needs
Ownership & Operating Options for Business AviationOwnership & Operating Options for Business Aviation
Aircraft Operations
Company Operates Third-Party Operates
Full Ownership 1. Full Ownership of Aircraft - with 2. Full Ownership of Aircraft - Using a
Own Flight Department Third-Party Aircraft Management Firm
Operating Lease 3. Lease Aircraft - with
Own Flight Department
Partial Ownership 4. Co-Ownership Aircraft - with 5. Co-Ownership Aircraft - Using a
Own/Shared Flight Department Third-Party Aircraft Management Firm
6. Fractional Ownership Program
No Ownership 7. Card Program
8. Charter - Block Agreement
9. Charter - Ad Hoc
10. Air Taxi (an emerging industry)
Air
cra
ft O
wn
ers
hip
Section 3Section 3
DETERMINING THE APPROPRIATE AIRCRAFT
OWNERSHIP & OPERATING
MODEL
DETERMINING THE APPROPRIATE AIRCRAFT
OWNERSHIP & OPERATING
MODEL
9
Given the substantial investment/cost typically associated with private
aviation, decisions about whether and how to use this tool should be
subject to the same scrutiny as any other major expenditure
Given the substantial investment/cost typically associated with private
aviation, decisions about whether and how to use this tool should be
subject to the same scrutiny as any other major expenditure
� Determining the most appropriate ownership & operating model should involve a rigorous financial and qualitative assessment of the relevant options available to the company
1. Develop a profile of the company’s expected travel using private aviation (volume and trip
characteristics)
2. Develop a private aviation activity profile
3. Estimate the net cost of the private aviation activity profile under each ownership &
operating model
4. Evaluate each ownership & operating model in terms of qualitative factors important to the
company
Determining the most appropriate ownership & operating model for a
company should not be a one-time exercise once – it should be re-
assessed periodically (e.g., every 5 years) or upon significant changes in usage, costs, etc.
Determining the most appropriate ownership & operating model for a
company should not be a one-time exercise once – it should be re-
assessed periodically (e.g., every 5 years) or upon significant changes in usage, costs, etc.
10
Volume CharacteristicsVolume Characteristics
� the number of annual passenger trips (in aggregate, by employee group, by
trip type, by employee group & trip type)
� the number of annual trips (in
aggregate, by employee group, by trip
type, by employee group & trip type)
� the average number of passengers per trip (in aggregate, by employee
group, by trip type, by employee group
& trip type)
Financial and qualitative assessments should be based on a profile of the company’s expected travel to be accomplished using private aviation
Financial and qualitative assessments should be based on a profile of the company’s expected travel to be accomplished using private aviation
� frequency of travel between city pairs – based on the number of passengers
and the number of trips
� distribution of trips and passengers by distance band (e.g., less than 500
miles, 500-1,000 miles, etc.)
Trip CharacteristicsTrip Characteristics
1. Developing a Profile of the Company’s
Expected Travel Using Private Aviation
1. Developing a Profile of the Company’s
Expected Travel Using Private Aviation
11
Based on the profile of the company’s expected travel using private
aviation, an activity profile is developed
Based on the profile of the company’s expected travel using private
aviation, an activity profile is developed
� The company’s expected volume & trip characteristics are “fitted” to one or more aircraft categories (based on passenger
capacity and range)
� Trip volume is converted into an activity profile for the company (i.e., annual flights and flight hours by aircraft category)
2. Developing a Private Aviation Activity Profile
for the Company
2. Developing a Private Aviation Activity Profile
for the Company
Each ownership & operating model alternative should be assessed
using the same activity profile
Each ownership & operating model alternative should be assessed
using the same activity profile
12
The net financial cost should be estimated for each ownership &
operating model under consideration
The net financial cost should be estimated for each ownership &
operating model under consideration
3. Estimating the Net Cost of the Private Aviation Activity Profile
Under Each Ownership & Operating Model
3. Estimating the Net Cost of the Private Aviation Activity Profile
Under Each Ownership & Operating Model
� The most appropriate financial basis for comparing ownership & operating models is the present value of net costs to the company over a multi-year period (e.g., 5 years)
� Factors considered in the financial assessment may include (as applicable):
– All Variable and Fixed Operating Costs
– Net Profits from Third-Party Charter Operations
– Excise, Sales, and Income Taxes (including income tax shields due to
interest and depreciation)
– Depreciation in the Market Value of the Aircraft
– Capital Charge for Funds Invested in the Aircraft, Flight Department,
Spares, etc.
13
Each ownership & operating model should be assessed in terms of those
qualitative factors important to the company
Each ownership & operating model should be assessed in terms of those
qualitative factors important to the company
4. Evaluating Each Ownership & Operating Model in Terms of
Qualitative Factors Important to the Company
4. Evaluating Each Ownership & Operating Model in Terms of
Qualitative Factors Important to the Company
� Factors considered in the qualitative assessment may include (as applicable):
– Lead Time
– Degree of Control over Service Type and Quality
– Degree of Control over Pilot and Mechanic Training
– Degree of Flexibility
– Degree of Control over Aircraft Interior & Exterior
– Ability to Use Different Aircraft Models for Different Missions
– Legal Liability
� The inclusion of specific factors, the weightings assigned those factors, and the overall importance of qualitative factors (relative to financial costs) will vary by company
Section 4Section 4
GENERAL COMPARISONS OF AIRCRAFT OWNERSHIP &
OPERATING MODELS
GENERAL COMPARISONS OF AIRCRAFT OWNERSHIP &
OPERATING MODELS
15
General Comparison of Ownership & Operating ModelsGeneral Comparison of Ownership & Operating Models
� The next few pages provide general comparisons of the leading ownership & operating models
– Naturally, there are exceptions to these generalizations
� Determination of the appropriate ownership & operating model should be customized to the individual company, reflecting its specific needs and preferences
16
On a strictly financial basis, the expected number of annual flight hours is the single-most important factor in determining the most appropriate ownership & operating model
On a strictly financial basis, the expected number of annual flight hours is the single-most important factor in determining the most appropriate ownership & operating model
General Illustration of Relative Unit Costs with Low and High Utilization
by Ownership & Operating Model
General Illustration of Relative Unit Costs with Low and High Utilization
by Ownership & Operating Model
Cost per Flight Hour
Ownership & Operating Model
Low
Utilization
High
Utilization
Full Ownership of Aircraft - with
Own Flight Department
Lease Aircraft - with Highest Lowest
Own Flight Department
Co-Ownership Aircraft - with
Own/Shared Flight Department
Full Ownership of Aircraft - Using a
Third-Party Aircraft Management Firm
Co-Ownership Aircraft - Using a
Third-Party Aircraft Management Firm
Fractional Ownership Program
Card Program
Charter - Block Agreement Lowest Highest
Charter - Ad Hoc
Air Taxi (an emerging industry)
17
A general rule of thumb for determining the appropriate ownership &
operating model based solely on annual utilization…
A general rule of thumb for determining the appropriate ownership &
operating model based solely on annual utilization…
� under 25 hours Charter, Air Taxi
� 25 - 75 hours Charter (Block Agreement), Card Program
� 75 - 250 hours Fractional Ownership Program, Co-Ownership
� 250 - 750 hours Full Ownership Using a Third-Party Aircraft Management Firm
� above 750 hours Full Ownership with Own Flight Department
Annual Flight HoursAnnual Flight Hours Leading Ownership & Operating Model(s)Leading Ownership & Operating Model(s)
18
General Comments on Qualitative Differences
Among Ownership & Operating Models
General Comments on Qualitative Differences
Among Ownership & Operating Models
� While most charter operators, fractional providers, and aircraft management firms adhere to stringent requirements with regard to training and operational standards, the owned & operated model provides the highest degree of control over training and standards
� However, control does not guarantee outcomes
� Under models where it owns the aircraft, the company has the freedom to:
– purchase the particular aircraft it wishes
– customize the aircraft according to its wishes
– select when to upgrade, downgrade, or sell the aircraft
� With the fractional and charter models, the company’s choices are limited to the aircraft type offered by the provider (and no customization)
� Under the fractional model, the company would have to wait until it reached a minimum calendar time requirement before being able to downgrade, sell its share, or withdraw from the program without penalties
Training & Standards for Flight Crew, Cabin Crew, and Maintenance Personnel
Training & Standards for Flight Crew, Cabin Crew, and Maintenance Personnel
Aircraft Acquisition, Customization, and Disposition
Aircraft Acquisition, Customization, and Disposition
19
General Comments on Qualitative Differences
Among Ownership & Operating Models [cont.]
General Comments on Qualitative Differences
Among Ownership & Operating Models [cont.]
� Under the owned & operated model, the company has sole liability
� Under the aircraft management and fractional models, the company shares liability with the aircraft management firm / fractional provider
� Under charter models, the company has no liability
� Fractional providers offer guaranteed availability (subject to notification requirements)
� While the company is able to dictate when its aircraft will be used under the owned & operated and managed models, it would not have access to back-up capacity like fractional and charter operators do in case aircraft become non-operational
LiabilityLiability
Aircraft AvailabilityAircraft Availability
20
General Comments on Qualitative Differences
Among Ownership & Operating Models [cont.]
General Comments on Qualitative Differences
Among Ownership & Operating Models [cont.]
� The owned & operated model provides the company with the highest degree of control over the type of cabin service provided and the quality of service
� In addition, the owned & operated model provides the company with the highest degree of control over security and confidentiality
� The managed model allows the company to specify the type and quality of service; however, the delivery of that service may be inconsistent
� Fractional and charter operators seek to provide a consistent experience across all flights; therefore, the company would not be able to customize its in-cabin experience
Control Over Service QualityControl Over Service Quality
Section 5Section 5
SUMMARYSUMMARY
22
Companies have a variety of ownership and operating options for fulfilling their business aviation needsCompanies have a variety of ownership and operating options for fulfilling their business aviation needs
Ownership & Operating Options for Business AviationOwnership & Operating Options for Business Aviation
Aircraft Operations
Company Operates Third-Party Operates
Full Ownership 1. Full Ownership of Aircraft - with 2. Full Ownership of Aircraft - Using a
Own Flight Department Third-Party Aircraft Management Firm
Operating Lease 3. Lease Aircraft - with
Own Flight Department
Partial Ownership 4. Co-Ownership Aircraft - with 5. Co-Ownership Aircraft - Using a
Own/Shared Flight Department Third-Party Aircraft Management Firm
6. Fractional Ownership Program
No Ownership 7. Card Program
8. Charter - Block Agreement
9. Charter - Ad Hoc
10. Air Taxi (an emerging industry)
Air
cra
ft O
wn
ers
hip
23
A hybrid of ownership & operating models often is often optimal –particularly for large companies with varied private aviation needsA hybrid of ownership & operating models often is often optimal –particularly for large companies with varied private aviation needs
However, many companies do not take full advantage of hybrid modelsHowever, many companies do not take full advantage of hybrid models
Hybrid Ownership & Operating ModelsHybrid Ownership & Operating Models
ExampleExample Potential BenefitsPotential Benefits
� Lower Investment & Operating Costs
– aircraft, parts, tooling, etc.
– personnel
– higher utilization (of a streamlined asset
base and flight department)
� Reduced likelihood of investing in higher-performing aircraft whose full performance capabilities are seldom required
� A company owns and operates a core fleet to perform the primary travel missions
� The company also uses supplemental lift (from fractional programs, charter operators, and/or card programs)
– for periods in which demand exceeds fleet
capacity
– when undertaking trips that are best
accomplished by aircraft types that are not
in their fleet
– when fleet aircraft are not proximate to their
passengers
– when fleet aircraft are removed from service
for maintenance
24
� Given the substantial investment/cost typically associated with private aviation, decisions about whether and how to use this tool should be subject to the same scrutiny as any other major expenditure
� Determining the most appropriate ownership & operating model for a company should not be a one-time exercise once – it should be re-assessed periodically (e.g., every 5 years) or upon significant changes in usage, costs, etc.
� While there are rules of thumb, determination of the appropriate ownership & operating model should be customized to the individual company, reflecting its specific needs and preferences
� A hybrid of ownership & operating models often is often optimal – particularly for large companies with varied private aviation needs; however, many companies do not take full advantage of hybrid models
Summary of Key MessagesSummary of Key Messages