Pricing flight hours

[Andrew Gideon]

I'd like to acquire the available wisdom on pricing flight time (though I'll
forgo standing on a single leg for now {8^). This is for a club, but I'm
sure it's the same problem for a partnership or even a single owner. The
only difference is that a club has multiple aircraft, but we price such
that no airplane can subsidize another. So that we've multiple aircraft
shouldn't be much of a difference (at least as far as I can see).

My question: How do you decide what it costs to fly for an hour?

I know the basic idea is to accumulate all the variable costs and fit this
into the price somehow. But, as far as I can tell, this makes an
assumption: that each hour costs the same.

For fuel, this is probably not too far off. But I've some small evidence
that, for maintenance, this can be quite a bad assumption.

The scenario that's raised this in my mind is actually, on the face of it, a
Good Thing. My club recently went from three to four aircraft. But we
still fly about the same amount of time as before. So aircraft utilization
rates have gone down.

This is a Good Thing, in that booking an airplane is now far easier.

However, the drop has impacted one particular airplane more than any of the
others. It's the "middle" airplane: neither a 172 nor a 182RG; "just" a
182.

As I wrote, the change to availability is terrific. But the reduced
utilization has a pricing impact, and I'm afraid that it's going to worsen
the utilization over time.

While variable maintenance costs on this airplane may be lower than in
previous years, they're still higher on a per hour basis because of the
smaller number of hours flown. This will drive the price of the plane up,
causing utilization to drop further. Repeat.

If we were correct in our assumption that all hours cost the same, then this
wouldn't happen. The cost of maintenance would drop proportionally with
the hours flown, and the aforementioned cycle of rising price and dropping
use wouldn't occur.

But the drop in maintenance cost is not fully proportionate, and the
per-hour maintenance cost is going up.

So...how does one avoid the cycle of rising price and dropping use that I've
described. One obvious choice is to bring in enough members to drive
utilization up again, but that would cost us our good availability.

Any other possibilities?

- Andrew

[Dude]

It sounds like your 182 is now playing the role of back up to the 182RG.
Also likely, it is a plane used by 172 users when they need more plane.

Also, it sounds like you have been treating the planes as individual units
up to now, and that no longer works for you.

Could you stop treating the planes as individual entities? Or could you
charge the other planes a "Backup Plane Support Tax"?

It seems this will be the cost of keeping the extra 182 around for
availibility reasons. Its going to need some funding from the other planes.
So instead of raising costs on just the 182, raise the costs on all the
planes a little bit.

This is going to be a big change for your club, but having a plane sitting
around under utilized costs money. It has to come from somewhere.

[George Patterson]

Andrew Gideon wrote:
>
> My question: How do you decide what it costs to fly for an hour?
>
> I know the basic idea is to accumulate all the variable costs and fit this
> into the price somehow. But, as far as I can tell, this makes an
> assumption: that each hour costs the same.

Each hour costs the same for only a certain period of time (usually one year).
You add up all the costs and divide by the number of hours flown that year.

George Patterson
There's plenty of room for all of God's creatures. Right next to the
mashed potatoes.

[Mark Hansen]

On 5/5/2005 09:14, Dude wrote:

> It sounds like your 182 is now playing the role of back up to the 182RG.
> Also likely, it is a plane used by 172 users when they need more plane.
>
> Also, it sounds like you have been treating the planes as individual units
> up to now, and that no longer works for you.
>
> Could you stop treating the planes as individual entities? Or could you
> charge the other planes a "Backup Plane Support Tax"?
>
> It seems this will be the cost of keeping the extra 182 around for
> availibility reasons. Its going to need some funding from the other planes.
> So instead of raising costs on just the 182, raise the costs on all the
> planes a little bit.
>
> This is going to be a big change for your club, but having a plane sitting
> around under utilized costs money. It has to come from somewhere.
>
>

I agree. I think the members have joined a club that has 4 aircraft.
The fact that there are 4 aircraft is part of their agreement (similarly,
they were part of the decision in adding the fourth - at least in some way).

If the club decides that the 'cost' of having 4 airplanes is just
too much (and not worth the convenience of having the spare airplane)
then it may want to go back to having only 3. The membership may be
willing to pay a little more, in general, for the added benefit of
the fourth plane.

--
Mark Hansen, PP-ASEL, Instrument Student
Sacramento, CA

[Mike Rapoport]

If maitenance costs per hour go up as utilization goes down then those costs
aren't strictly variable.

I would try to set prices so that every plane get reasonable utilization.
If you follow your current philosophy some airplanes may go into a virtuous
cycle where high utilization lowers cost which raises utilization and the
182 enters a vicious cycle where lower utilization results in higher cost
driving even lower utilization.

Mike
MU-2


"Andrew Gideon" > wrote in message
gonline.com...
>
> I'd like to acquire the available wisdom on pricing flight time (though
> I'll
> forgo standing on a single leg for now {8^). This is for a club, but I'm
> sure it's the same problem for a partnership or even a single owner. The
> only difference is that a club has multiple aircraft, but we price such
> that no airplane can subsidize another. So that we've multiple aircraft
> shouldn't be much of a difference (at least as far as I can see).
>
> My question: How do you decide what it costs to fly for an hour?
>
> I know the basic idea is to accumulate all the variable costs and fit this
> into the price somehow. But, as far as I can tell, this makes an
> assumption: that each hour costs the same.
>
> For fuel, this is probably not too far off. But I've some small evidence
> that, for maintenance, this can be quite a bad assumption.
>
> The scenario that's raised this in my mind is actually, on the face of it,
> a
> Good Thing. My club recently went from three to four aircraft. But we
> still fly about the same amount of time as before. So aircraft
> utilization
> rates have gone down.
>
> This is a Good Thing, in that booking an airplane is now far easier.
>
> However, the drop has impacted one particular airplane more than any of
> the
> others. It's the "middle" airplane: neither a 172 nor a 182RG; "just" a
> 182.
>
> As I wrote, the change to availability is terrific. But the reduced
> utilization has a pricing impact, and I'm afraid that it's going to worsen
> the utilization over time.
>
> While variable maintenance costs on this airplane may be lower than in
> previous years, they're still higher on a per hour basis because of the
> smaller number of hours flown. This will drive the price of the plane up,
> causing utilization to drop further. Repeat.
>
> If we were correct in our assumption that all hours cost the same, then
> this
> wouldn't happen. The cost of maintenance would drop proportionally with
> the hours flown, and the aforementioned cycle of rising price and dropping
> use wouldn't occur.
>
> But the drop in maintenance cost is not fully proportionate, and the
> per-hour maintenance cost is going up.
>
> So...how does one avoid the cycle of rising price and dropping use that
> I've
> described. One obvious choice is to bring in enough members to drive
> utilization up again, but that would cost us our good availability.
>
> Any other possibilities?
>
> - Andrew
>

[Andrew Gideon]

Mark Hansen wrote:

> On 5/5/2005 09:14, Dude wrote:


>> Could you stop treating the planes as individual entities? Or could you
>> charge the other planes a "Backup Plane Support Tax"?

[...]

>> This is going to be a big change for your club, but having a plane
>> sitting
>> around under utilized costs money. It has to come from somewhere.

In fact, this is one idea I've proposed.

However, it assumes that there's a cost to having that airplane sitting
around underutilized. The fixed costs are covered, so - if we're pricing
correctly - why should there be a cost to having that airplane sitting
around underutilized?

That's where I'm "stuck" now. If we can price each hour more accurately,
then the issue disappears.


[...]
> The membership may be
> willing to pay a little more, in general, for the added benefit of
> the fourth plane.

That's a perspective I haven't yet included. Thanks. But still, I'd like
to eliminate the issue by more accurate pricing...if that's possible.

- Andrew

[Andrew Gideon]

Mike Rapoport wrote:

> If maitenance costs per hour go up as utilization goes down then those
> costs aren't strictly variable.

Or they may be variable, but with a more complex function than we've been
assuming.

> I would try to set prices so that every plane get reasonable utilization.

That would be a dramatically different approach to what has been done in the
past. I've "snuck up on this" by proposing (well: brainstorming about) an
"availability tax". This is the idea mentioned by Dude where there's a
charge added (presumably to the rates of the more frequently flown
aircraft) that goes under the budgetary heading of "paying for our good
availability".

Actually, when I write that I've snuck up on this, it sounds too much like
I'd thought of the effect of the price change on the utilization of the
more frequently flown aircraft. I'd not thought of that.

So you've given me a new motivation for this idea.

Thanks...

Andrew

[Al Gilson]

Andrew Gideon wrote:
> I'd like to acquire the available wisdom on pricing flight time (though I'll
> forgo standing on a single leg for now {8^). This is for a club, but I'm
> sure it's the same problem for a partnership or even a single owner. The
> only difference is that a club has multiple aircraft, but we price such
> that no airplane can subsidize another. So that we've multiple aircraft
> shouldn't be much of a difference (at least as far as I can see).
>
> My question: How do you decide what it costs to fly for an hour?
>


Charge a per hour usage based on tach time for each aircraft. You
should be able to calculate your fuel and oil usage reasonably close,
then set an hourly rate for that aircrafts' maintenance and engine
reserve. Your monthly fees should support your fixed costs, such as
hanger, insurance, annual inspection for the planes (the inspection
portion, not repairs of things found), licenses, registration, etc. for
the entire fleet.

Using tach time is great for fuel use because an hour in the pattern
with the engine at low rpm's for a good portion of the flight is fairly
inexpensive.

Al

[Andrew Gideon]

Al Gilson wrote:

> set an hourly rate for that aircrafts' maintenance

This is the part that's the problem. From the evidence available to me,
there is no simple/fixed relationship between hours flown and maintenance
costs (even excluding fixed items like annuals).

- Andrew

[Dude]

> This is the part that's the problem. From the evidence available to me,
> there is no simple/fixed relationship between hours flown and maintenance
> costs (even excluding fixed items like annuals).
>

You are absolutely correct, Sir!

This has got to be one of the most irritating things there is about managing
a plane. If it flies too little, it costs more. If it flies too much, it
costs more.

I suppose one thing is true - it will cost more no matter what!