How profitable is your ag aircraft?

by Samuel L. Miller
www.aircraftcostanalyis.com

Is your pricing correct?

Before you answer these questions, let’s analyze the profitability of one ag aircraft in a typical operation. After completing this exercise, then examine your ag aircraft operation in the same manner. Most assumptions are provided in the tables so I won’t repeat them in the text.

Table 1 provides the Annual Fixed Expenses, Variable Expenses Per Hour, and the Annual Expense Summary for the whole year assuming 499 total flying hours (includes revenue hours plus dead head hours). The pilot salary is calculated as 25% of the $399,306 gross revenue shown in Table 2 (odd numbers are due to the ROI percentages being even numbers). Fuel prices start in year one at $2.37 per gallon and average $2.52 over the five-year period. Notice that Table 1 inflates all expenses by an inflation factor of 3% each year. A 3% inflation rate might be conservative with major spending on the war and changes in Congress and the President in 2008.

Table 2 presents the year-to-year cash flow for a five-year period. An AT-502 is purchased in year one for $657,500 with financing, operated for five years, then sold for $460,250 (70% of the purchase price) at the end of year five. The hourly revenue is $800 per hour in year one and is increased by an inflation factor of 3% each year. The average hourly revenue over the five years is $849 per hour. The “Total Ownership Profit” over the five-year period is $78,699 or $32 per flying hour. The Return On Investment (ROI) is 15% on the invested capital.

Table 3 shows the percent ROI on invested capital for various combinations of flying hours per year and year-one hourly revenue rates. As is shown in this table, the ROI increases if you fly more hours per year or if you charge more per hour for your services.

Take a few minutes and review Table 1, 2, & 3. Make sure you understand the numbers and how they were calculated. One number that deserves a quick explanation is “Tax (Due) Savings from gain/loss on disposal” near the bottom of Table 2. This is the tax paid on the gain realized from the sale of the aircraft because the aircraft sold for more than the aircraft depreciated book value.

OBSERVATIONS:

Let me emphasize that we are examining one scenario assuming the numbers detailed in Tables 1 and 2. The inputs used in Table 1 and 2 will differ from yours, but using these inputs produces the financial results shown in Table 1, 2 and 3. The after tax calculations assume a tax rate of 38%. If the owner tax rate is less, then the cash flow is worse due to the decreased tax benefits. The cumulative after tax cash flow is never positive until the aircraft is sold in year five. To avoid borrowing additional funds for operation during the five years, it is necessary to invest $93,376 cash in the first year. On a year-to-year basis, only years two and three produce positive cash flows. Table 3 shows that if the aircraft flies 417 hours per year then the return on invested capital is 2% while flying 592 hours per year yields a 27% ROI. Although it is not shown in the Table 1, 2 or 3, the following observations were calculated and presented here as a matter of interest. Flying 417 hours per year requires $164,768 in operating cash to avoid borrowing additional funds, while flying 575 hours per year requires only $75,906 cash in the first year. Flying more hours per year or charging more per hour increases the ROI. If the price of fuel was $3.00 per gallon, you flew 499 hours per year and you left your hourly charge at $800 per hour then you will need $122,637 cash to avoid borrowing additional funds and your ROI drops to 4.13%. NOTICE: Fuel cost per gallon is the only number changed. Fuel cost increased from $2.37 to $3.00. Cash requirements increased by $29,261. The ROI decreased by 10.87%. Pay attention to fuel cost and consider charging a fuel surcharge. This is just one example of how price increases in expenses will impact your profit if you don’t change your hourly charge.

So you can see the impact of the utilization and the hourly charge, two additional tables are shown. Tables 4 and 5 show cases where the application rate is $1,000 per hour. Table 4 shows a utilization of 500 hours per year while Table 5 shows 600 hours per year. Compare these cash flows to the cash flow in Table 2.

QUESTIONS & COMMENTS:

How does your ag aircraft compare to this example? What is your utilization and hourly charge? How profitable is your ag aircraft? What should your hourly charge be based upon your annual flying hours in order to produce the return on investment you are trying to achieve? Knowing your situation concerning the profits generated by your operation does determine whether your business will survive. This example causes me a lot of concern for many ag operators. There seems to be a lot more risk than reward in this example. With the price of equipment and exposure to erratic fuel prices, the major emphasis for the ag operator should be increased utilization and/or pricing increases. Run the numbers for your operation and pay attention to the results to ensure the success of your business.

The AircraftCostAnalysis program can be used to produce profitability analysis on any type aircraft using all your cost numbers. Analyze the cost of your aircraft and make sure your business remains profitable. Obtain the details at www.aircraftcostanalysis.com.