Who’s Managing Your Aircraft Management Company?

In Business Aviation, there are three very expensive mistakes people could make when evaluating their lift requirements. These include poor aircraft selection, underestimating the impact of residual value, and a poor choice of aircraft management company.

The first two errors can be minimized by having a thorough understanding of your travel needs (see ‘How to do a Corporate Travel Profile Analysis’ and ‘Eight Steps to Evaluate Business Aircraft’). The third error requires due diligence, benchmarking, along with having initial and follow-up audits.

Which value-added metrics should be used for such audits? At the bare minimum, an aircraft management company should be able to provide maintenance and management services, flying and operating your aircraft.

Services should be carried out in a professional way, and the aircraft management company should help you to reduce your operating costs, ultimately, due to its large fleet size which enables it to take advantage of volume pricing in key areas such as fuel, insurance, and training, to name a few.

Why the Selection Process Matters

There is a significant choice of aircraft management companies for aircraft owners to consider. Some focus on specific needs of owners and fleet types. Some operate large fleets of 100+ aircraft, and have strong negotiating powers with fuel, catering and trip planning vendors (among others).

Others, while being more niche-focused, have strong brands and offer a variety of programs at different price points.

However, too many times I’ve seen aircraft owners focusing only on the cost side. The key to selecting the right aircraft management company should be to find a provider that guarantees peace of mind, and meets or exceeds your travel needs at a price (and under contractual terms) where both parties are happy.

The Work Continues After the Contract is Signed...

The contract will need to be reviewed and understood thoroughly, and negotiated. Many aircraft owners mistakenly believe the work is done once the contract is signed. That simply isn’t true. As with any business relationship both parties need to work together to maintain and grow a mutually beneficial relationship.

This includes reviewing bills, financial and operational performance, and service metrics. 

An audit should be conducted at least once annually. And the competitive landscape needs to be reviewed during the contract term, along with whether the travel needs have changed.

Auditing is essentially your opportunity to review your agreement, and see whether potential exists to lower your aircraft ownership costs.

What Should be Reviewed?

In my experience, more than 60% of customer complaints come from billing inaccuracy and additional costs that are unexpectedly passed on to customers by the management company. So it is not only crucial to understand the contract, but other specifics such as which additional costs should be passed on to the owner, and which should not.

To keep a firm handle on the management company, all invoices should be reviewed carefully every month, and special attention should be given to significant cost items such as fuel, maintenance and engine maintenance programs (and others).

The goal is to identify cost trends, variations, and increments, while reviewing special contractual clauses that may allow the costs to rise under special and abnormal circumstances.

As an example, over the last ten years, Brent oil has averaged a daily high price of US$73 per barrel. However, during the first month of the Russian-Ukrainian war, this increased to $139 (see Chart A, below).

As a matter of fact, fuel costs may continue to escalate faster than any other operating cost over the coming months. Prior to the Russia-Ukraine crisis, the spread between oil prices and jet fuel prices averaged 20%, but this is expected to increase to 30-40%.

As a result, many aircraft management companies have reviewed their fuel cost clauses to ensure that any abnormal cost escalations are passed on to their customers. Aircraft owners should check their fuel bills to make sure that any additional costs are being passed on fairly, and accurately.

Although these are extraordinary times, they highlight the need for owners to regularly check that their hourly direct operating costs continue to align with those stipulated in the existing management contract.

Tips on Management Company Oversight

Meeting with your aircraft management company (or having an industry expert meet with them on your behalf) at least once per year makes financial sense.

Use these meetings to focus on reviewing how the relationship is going generally, and any particular contractual discrepancies identified (including billing errors) and misalignment in expectations for customer service (aircraft availability, alternative lift, catering, and more).

Table A, below, provides an example of how you could go one step further in reviewing the aircraft management company’s performance.

In Summary...

In order to find the most suitable aircraft management company for your needs, and then continue to manage the relationship with your aircraft management company, you will always benefit from sourcing expert advice.

Management of the relationship requires due diligence, expertise across a wide spectrum of areas, and close attention to detail. An aircraft management company audit executed at least annually by experts in the sector will allow you to keep the costs of aircraft management down, and keep a close check on the cost variances.

Where no billing errors and savings are identified, many consider an audit an unnecessary expenditure, but in my experience audits are essential not only for reviewing invoice accuracy, but also ascertaining potential cost escalations, and other trends that may open the door for contract negotiations later.

In fact, some auditing firms are open to the idea of commission-based audits, where they only get paid based on a percentage of dollar-savings realized.

Finally, don’t be afraid to ask questions (either direct or through a hired expert) seeking further clarifications and information about the aircraft management company’s financial/operational performance, and its service metrics.

After all, if the answers suggest too much of their business is not under control, it may imply added risks and potential extra costs for you later. Those questions will save you a headache further down the line.