Does your aircraft gross enough per hour?

by Bill Lavender
Are you ready for a contestable, detailed dissertation on the per hour costs of running an ag operation? Do you believe it is a function of fuel and engine time only? When calculating your per hour costs, do you really take into consideration all of your business expenses?

In a recent discussion with JD Dunson of Airforce Turbine Service in Texas, the topic of operating costs came up. I had just talked with an operator who had attended one of JD’s convention seminars. This year JD presented certain facts to his audience that shined an impending light upon true operating costs. I asked for his notes, as this is one of my favorite things to ponder. If you can’t honestly look at costs, you can’t succeed.

There are too many parameters for calculating operating costs to cover in this article. So, I’ll take the simplest example possible and work from there. It’ll give you an idea how it works, and from that, you can interpolate your costs.

To start, let’s assume we are discussing a single, turbine aircraft operation flying 500 hours a year. From my travels, I’d say this scenario is probably the most common with small adjustments here and there. The values I use are provided by respected individuals in the marketplace, as well as from attendees to JD’s seminars. The values are conservative, which really means, “it costs more” than what I’ve portrayed here. See chart below

Of course, anyone can tear holes into the above numbers. But, for the most part, the dissection will only raise the total cost. $572 per tach hour works out to almost 200 acres an hour at $3.00 an acre. In many cases, consistently spraying 200 acres an hour can be a challenge with a 500-gallon aircraft. Plus, everyone knows that an ag-plane is not productive 100% of the hours logged in a season. There we go, chewing away at our average.

Where is the profit? In the above scenario, most likely the operator and pilot would be the same person. Does this mean you are satisfied with pilot’s pay, while accepting the risk and responsibility of being an operator as well? Then, why not just be a pilot? This is where honesty begins to come into the equation, being honest with one’s self.

In 1985, I sold my flying service. I could not pay myself pilot’s pay (25%) after collecting the season’s revenues. So, I decided to sell to my competitor with the agreement I could fly my old customers and at least earn pilot’s pay, but without the headaches of being an operator.

Without a doubt, there are perks for being an operator that would help offset the lack of pay for those duties. Are these perks enough? How do you allow for hidden costs? Now, the serpent raises its head.

You simply cannot operate a business on pilot’s pay that requires a $400,000 piece of equipment with untold thousands of more dollars in support equipment. There has to be a cushion of sorts that allows for hidden costs. The lack of this cushion has been the downfall of many businesses. There’s always the possibility of an unscheduled engine expense that is more than your engine reserve (if you are really setting aside an engine reserve). Being both the pilot and the operator, you expose yourself tremendously, as the entire operation is dependant upon your good health. Any day you could wake up ill and have to call in another plane and pilot. Where are these costs in the $572 per hour gross?

As an operator, are you as valuable as the pilot? If so, then should you make the same percentage of the gross as the pilot? Somewhere in the above budget there has to be an allocation for operational profit. A rule of thumb would be 20%. Plug that factor into your hourly gross and you are now at $715 per tach hour.

This is not your final figure. Did you plan on such incidentals as utilities at the airstrip? What about your personal health and life insurance premiums, the costs to earn CEUs, attending conventions, etc.?

What is really going on here is the need for a budget. In that budget, there has to be profit for the company in order for it to accept its responsibilities, which include a salary for the manager of the business (the above 20%). How much are hidden costs? No one knows for sure, but a good starting place are the hidden costs incurred during the last three years. I’ll bet you’ll find it will easily require another 10%. It won’t be a fixed amount. Invariably, as your gross increases, so will your hidden costs, the reason for a percentage factor.

Ok, where are we now with our hourly gross? How about $794! For the sake of simple math, let’s round that up to $800 per hour with a 500-hour season. Now appears that magical rule of thumb (that should not work out by any reasoning). An operation should gross the value of the aircraft, $800 X 500 = $400,000, that happens to be the value of the aircraft.

Don’t count on this rule of thumb to be an easy way to calculate your costs. There is no reason this should work out the way it did, it just did. You’d be remiss not to examine your expenses over the last three years, with adjustments according to any significant changes. Undoubtedly, adding another aircraft to the calculation will not double your expenses, some can be shared and your hourly cost would be reduced. But, your breakeven cost (a new figure), will go up!

It is doubtful an operation with a 500-gallon turbine aircraft can operate 500 hours in a season for less than $4.00 an acre average. Sure, rate of applications and ferry distances play a huge role in costs. But, so does the “break-even factor”, where you have to get past a certain point in your gross to even make a profit.

Knowing how much it cost to operate your aircraft is a complex issue. You may never know exactly, but you must have some gauge to go by. You must be honest with yourself. Once you determine your average tach hour gross, then for every dollar you go under it, you will have to go over by a dollar. Can you do that?

In closing, we’ve discussed a 500-gallon turbine ag-plane, assuming it is the median aircraft for our industry. If you use a smaller aircraft, for instance a piston-powered one with less than a 500-gallon hopper, you really find yourself in a dilemma. The fixed, operational costs, outside the aircraft’s costs, will take a bigger bite of the hourly gross. On the other hand, you could say this works in the inverse with a larger aircraft, say with an 800-gallon hopper.

I’ve seen data where an AT-802 with a 500-hour season cost $1,206 per tach hour; 350-hour season $1,520 per hour and 100-hour / 100-day firefighting at $4,946.50 per hour!

There are a lot of assumptions with these calculations. But, they should point out the apparent need for each operator to come up with his own true costs with room for a margin of error. If you are operating for less than your true costs, you are only eating up equity and living on borrowed money (and time). There simply is no other way around these facts. Where are you with your pricing?

To see how SLM Cost Analysis was calculated using data from this article click here SLM Cost Analysis