Why 'Price Per Hour' May Not Always Be The Right Metric
If you didn't know by now, almost all of aviation is measured by-the-hour. This includes:
- Time Between Overhauls (TBO) or Time Since Major Overhaul (SMOH)
- 600, 1200, 1800 hour inspections
- Fuel burn, per hour
- Maintenance programs, per hour
- Pilot Hours (1500 hours to fly for a US airline)
- Chartering cost per hour
- Fractional cost per hour
I propose to you that "by the hour" is not always the perfect metric when considering cost.
Some Disclaimers Going In
We're going to make some aircraft comparisons that you might find silly and will claim that they're completely unrelated and no one would choose between those two aircraft. I am aware of that, my point is looking only at cost-per-hour.
Also, we're going to talk in very round and general numbers. For fixed costs, acquisition costs, and hourly costs we'll round out based on some generalities and quotes I've pulled for customers.
...The need, for speed
To consider the cost-per-hour as the only comparison metric between two different aircraft, the fallacy is with speed. There are some models where the cost-per-mile actually is lower on the aircraft with the higher cost-per-hour equivalent. I am going to be using the trip comparison tool from Aviacost, who have a free 3-day trial if you want to play along at home.
Also, all of these are based on average block speed and are not reflective of their top-speeds.
TBM 850 vs. PC-12 NG
If you selected the PC-12 NG simply at $47 cheaper per hour ($15k annually), you wouldn't actually save money, because the TBM will fly less "hours" over the same distance which results in a lower trip cost.
Now, this is a bit like comparing a Porche 911 to a Tahoe, and you don't choose between those based on the top speed nor for how many MPG each gets.
Example 1 of why cost-per-hour might not be the right measure.
CJ3 vs. King Air 350i
I was recently doing an analysis for a client who was leaving Wheels Up and deciding to purchase their own aircraft. Their main mission is short hops (middle of the country to the Southeast or Midwest) and from time-to-time go to NYC or Orlando with their family.
The major difference in functionality between these two? Number of seats. The King Air 350i is about 3.5' longer and will seat 8 comfortably with two crew. The CJ3 will seat 6, you might be able to squeeze a 7th on the belted lavatory.
Purchase price is going to be very similar on these two airplanes. Yet, its all about the mission. If you want to take 8 people with two pilots, the CJ3 just might not work.
An interesting argument here from X
Citation CJ1 vs. Citation M2
These two aircraft have ~ the same published variable cost per hour. The same 750 mile trip, would be almost $400 cheaper in the M2 compared to the CJ1 because speed matters. For the same variable cost per year and relatively similar fixed costs per year, in the M2 you will fly 9,600 more nm.
Where's big the difference? Acquisition price.
Here is a 2006 CJ1+ listed by Soljets with 2,330 hours on it for $2,495,000.
Here is a 2016 M2 listed by Soljets with 2,359 hours on it for $3,695,000.
Monthly finance payment on the CJ1 would be around $18k per month and the M2 would be around $26.5k per month, a difference of $8500 per month or $102,000 per year.
Aviacost gives us an annual budget of 300 owner flown hours:
- $977,875 in the CJ1+ vs. $956,925 in the M2 ($20,950 to the M2)
- 6300nm less (a $33,440 difference to the M2)
- $54,390 cheaper to fly the M2 than the CJ1+, all things considered
What is the point of all of this math? To point out that there is more costs to aircraft ownership than just cost-per-hour, especially when comparing like-models.
Lear 45XR vs. Citation XLS
I can already hear your cries, "The XLS is 9" taller and 5" wider and has 1 extra seat."
On paper, the XLS is technically $150 cheaper per hour, but when accounting for speed, the Lear 45XR is cheaper on a per mile basis.
What is more important here is OEM support/parts availability, training costs, pilot costs, and your personal preference on size. While technically cheaper-per-hour, and technically cheaper-per-trip, the Lear 45XR and the Citation XLS are not really comparable.
So what's the point here?
My point here is that cost-per-hour is not the perfect metric when considering whole aircraft ownership or partner ownership.
Scroll back to the first two examples and you'll notice that the Citation M2 was only $398 more than the PC-12. This may seem appealing until you realize that the fixed cost of ownership (crew, hangar, insurance, etc) is estimated at $160,000 more annually on the M2. So the headline number of direct operating cost per hour isn't always the right consideration.
There are probably 30 to 50 different variables that go in to selecting the right airplane. As someone who has been involved in many transactions, I've seen good brokers help their clients understand these, and I have seen not-so-good brokers push clients into the wrong airplane.
Here's my plug to using a great buy-side broker team. It will save you a lot of money in the long run. If you need a recommendation, reply to this email and I'll help.
Fractional Hourly: The Math Doesn't Always Math
As a reminder in case you missed the introduction email, a fractional program is where you buy a portion of a jet and then fly on it at a reduced rate, while sharing the fixed expenses. The largest operator (by far) is NetJets, followed by FlexJet, and then there are a lot of other smaller providers that don't have national fleets. (More on competition in fractional next week).
NetJets: Perceived Hourly Rate $4,000
If you remember back, a subscriber that sold their CJ3 to switch to a 75 hour NetJets Phenom 300e. It had more to do with the reduction of operational complexity, but breaking down what the effective hourly was what was so interesting.
Let me refresh your memory:
- Hours per year: 75
- Purchase Price: $1,500,000
- Monthly Management Fee: $16,000
- Hourly when flown: $4,000
- All-In hourly (management + hourly): $6,560
- Annual Budget: $492,000
Zoom in on the headline hourly cost. When flying, this client pays $4,000 per hour. The headline number sounds great rate, considering Aviacost tells us that a Phenom 300 operating cost is $3,449. Fractional owners are essentially operating at cost.
When you consider the $16,000 per month fixed costs, the effective hourly creeps up to $6,560.
If you assume a 30% real depreciation over the life of your 5 year commitment, your hourly creeps up to $7,760.
Let's Use a Praetor 500 from FlexJet: $5,473
- Hours per year: 75
- Purchase Price: $1,921,875
- Monthly Management Fee: $22,139
-
Hourly Cost: $5,473
- Occupied Hourly: $3,463
- Hourly Fuel Variable: $1,975
- Hourly Tax: $35
- All-In hourly: $9,015 ($8,515 for select 2.5 hr+ domestic flights)
- All-in hourly downgrade to Phenom 300: $6,311
The headline cost of $5,473 per hour versus the actual cost of $9,015 per hour, plus the capital cost and depreciation cost (not shown here) makes the number a lot different. Yes, you save on Federal Excise Tax (7.5%) and you can depreciate the $1.9m capital cost, but there is depreciation recapture to consider as well.
A few other things here that effect the headline "cost per hour" number.
Another thing to drill down on is the hourly fuel variable cost, which is pushing off the jet fuel price risk to the customer. Check out this chart. If someone bought a fractional in 2020 they have watched their cost per hour really go up (and everyone else flying privately for that matter.)
So why is "by the hour" not the perfect measure of time for fractional? Because "by the hour" doesn't measure all of the costs.
Jet Cards: Hidden Fees be Damned
When I golf with my charter broker friends, they will go on a tirade against Jet Cards and how they are a rip off. Always consider the incentives when having a conversation (charter brokers don't like it)... but if you want an "easy button" and are ok paying some premium for it, great.
They do have a point on some jet cards. There are hidden fees that can make the "advertised" price misleading.
Let me explain how these programs work.
There is a guaranteed "base rate" per hour on a specific type of aircraft. For instance, you may buy a 25 Light Jet jet card from Sentient Jet for $174,375 with a "Base Hourly Rate" of $6,975 per hour. This is always the advertised rate to bait you in. Then when you get the reconciliation statement
Peak Days/Dynamic Pricing
This is a cheap way of saying that you're not guaranteed the pricing offered to you.
What the majority of jet cards do (unless you are with an on-fleet provider like Nicholas Air, NetJets, of FX Air) is go to the open market and source a charter when you're ready to book. That means, if they can't find you something below your "guaranteed rate" they're going to charge you some sort of premium fee to make up for it. At the end of the day, its simply market pricing and is no different than calling up a charter broker and scheduling your flight, without any of the monthly subscription fees etc.
Also be on the lookout for "blackout days" in some of these programs. They can range significantly from provider-to-provider and are especially prevalent on owned and operated fleets. They're usually major holidays, sporting events, or other days where you're going to be SOL.
Fuel Surcharges
Similar to fractional, there is fuel variations built into jet card pricing. The price of jet fuel fluctuates drastically (even by airport... for instance, was flying out of Columbia, Missouri and they had really cheap gas) and charter operators will get you with a "fuel surcharge" fee on top of your base rate.
Remember our example of the 25 hour light jet card from Sentient Jet earlier? Tacked onto that hourly rate will be a "fuel surcharge" calculated per hour, around $440 per hour as of this past summer.
Repositioning Fees
Moving an airplane is not free. To get to you, especially if you're in an area that doesn't have a lot of private aviation travel, costs the operator money and they pass those fees along to you. Some programs like Jettly will advertise that they don't charge you a repositioning fee, but their hourly rate is higher than someone else. The repositioning fee is baked in to the price of the charter. Other times, the repositioning cost comes as an "out of market" fee. This covers moving the airplane.
How about junk fees on private jets, Joe?
Federal Excise Tax
When you fly Part 135, you are subject to Federal Excise Tax (FET) of 7.5%. Often times, this isn't advertised in jet card rates so it will be an additional fee on your charter.
Risk Free Rate of Return Cost
When you buy a jet card, you're parting with your cash and giving them cash. If you missed last week, I explained how the balance sheet works for these jet card programs. You can find it here. You can buy a 6 month t-bill with your $250,000 and earn $10k pre-tax. That's like a free hour and some change. Plus, the deposit on the jet card is not risk free in the event the provider goes under. There's an actual cost here
So what's my point?
If you're focused on choosing between two jet card operators or membership programs based on advertised price per hour, that may not be the right way to think about it. You want to consider all of the other factors that could effect your cost. My friend Doug Gollan at Private Jet Card Comparisons has created a decider custom analysis, which you can sign up for here.
Wrap it Up
Alright, I hope that this newsletter helped you understand that 'by the hour' while industry standard, isn't a perfect number when considering all of the options. One thing that's interesting about owning a business in this space is seeing people be very cheap on hiring the right consultant, the right broker, the right finance provider, the right tax professional on the front end who's fees are a fraction of the overall budget for the project and the flying, and then it ends up costing them multiples of those fees in the long run. There are things that aren't transparent about this world (and it drives me crazy) but that means that you need to have people on your side that will help you make the right decision. I hope I'm one of those people for you.
Until next week,
Preston Holland
P.s. forward this to someone you know who owns a plane, owns a jet card, a fractional, or even flies private with one of their friends. I bet they'll like it.
