Dec 15 2011

Break Even Point Posted 13 years 15 days ago ago by Admin

Where and what is the breakeven point in commercial helicopter operations?

By Bijan Moazami, ATP, CFI, CFII & DPE

Often times I hear stories of how a helicopter company in Florida charters a Jet Ranger for $550.00 an hour or so, and another company in Texas charters his A Star for $600.00 per hour and this has caused me to think, do these people really know their cost of operations and do they have a realistic break even point? Maybe that is the reason in the course of 30 years that I have been in the commercial civilian helicopter charter business, I have seen so many companies come and go.

The cost to operate a helicopter for any commercial operation with intention of a proper return and profit on the investment(s) (hopefully) consists of 2 major items:

1-    Fixed cost

2-    Variable cost

Fixed cost (Indirect costs),  which is there all day long even though you do not fly at all, can consist of :

a-    Monthly payment on the purchase of the helicopter

b-    Insurance

c-     Crew pay and benefits

d-    All other monthly expenses i.e.; hangar, /office rental, phone / electricity.

Variable cost (Direct Costs),  which only occurs when you fly generally consists of:

e-    Fuel

f-     Reserve for schedule maintenance and overhaul of components.

g-    Reserve for non-schedule maintenance.

Each manufacturer produces a DOC (Direct Operating cost). Obviously they will attempt to make the figure very attractive. For example, their calculations could be based on $2.50/ gallon for Jet fuel and labor of $65.00/hr., for which both of these figures are low. Also it is based on a brand new helicopter in which all the components have are new and have many hours left on them until TBO   (Time Before Overhaul).  If you purchase a used helicopter in which its hot section has only 700 hours to go before overhaul, then you must put more money aside to cover the cost of this overhaul.

Also manufacturer calculations are based on a very qualified and experienced pilot flying the machine and that he will not cause premature failure. 

Now lets calculate some break-even point on a helicopter as a test or example. 

Lets assume we are a single ship operator and we are going to buy and operate a used 4-seat turbine helicopter for $600,000.

a-    At 7% interest and 7 years payoff our monthly payment is = $9000.00/month

b-     Insurance, if you have a very qualified pilot with 0 accidents, incidents and no violations, type qualified or graduate of manufacturer school, possibly the hull coverage will be around 7 to 10% plus the liability, for this article I estimate $7000.00/month.

c-     Crew salary, lets assume there would be only one pilot in this company (for ease of calculations). Further assume this pilot is safety conscious, experienced, and is a loyal and hard worker (not easy to find and are not cheap) for this calculation, our cost is $5000.00/month (Salary and benefits).   

d-    Lets say it is a small operation and we just have one office, Hangar space for one helicopter and utilities, for this purpose lets say we pay $2000.00/month.

Total fixed Cost is:  $23000.00/month

For variable cost:

e-    Fuel 25/Ghr @ $6.00/Gallon =  $150.00 for fuel

f-     Reserve for Schedule and non schedule maintenance and all components overhaul (according to some 4 seat turbine manufacturer publications is $200/hr) but this is based on $65.00/hr labor at $85.00/hr labor this figure should be $250.00/hr. so the total Variable cost for this helicopter is: $400.00/hr.  

Now we need an hourly rate that we are planning to charge our customers, lets say we are going to charge $800.00/hour, following chart will precisely shows where is the breakeven point.

 

 Hours       0 hrs         5      10       15     20     25     30     35     40      45   50   55    60    65

·      *    Thousands of dollars (X$1000.00)

·      ** Fixed cost ($23,000) plus 5 hours x $400.00 (variable cost) = $25,000.00

 

Now this clearly indicates that the breakeven point on this helicopter is above 55 hours flight per month at $800/hr. 

How can we reduce this breakeven point?  Several ways

·      Increase the hourly rate  (example: $900/hr the breakeven point will be lower

·      Reduce the fixed costs by shopping for better and more reasonable insurance.

·      Better and innovative helicopter finance

·      Leasing helicopter (if it was less expansive than owning)

·      Have your own fuel

·      Have your own mechanic and accept outside work to reduce the cost of employee. And indirectly reduce the variable costs.

·      Increase your flight hours by innovative ways, Aerial photos, motion pictures, sight seeing rides, etc…. etc.

Things that can cause your cost to go even higher and increase your breakeven point (and you should never do them anyway)

·      Operate without insurance

·      Cheating on your scheduled and non scheduled maintenance (one accident and you are out of business)

·      Never shop for used parts, always buy brand new from a reputable place.

·      Shop for better fuel prices.

·      Stay away from questionable customers, a few unpaid invoices can increase your cost of operations.

·      Hire knowledgeable, positive thinking, safe and cooperative employees. What would you expect of an employee who is always broken, cannot manage his finances and will not take care of his/her personal equipment? Do you think she/he will care about your company and equipment? 

The calculation above also works for flight schools to analyze how many students/hours they need to make profit. 

Happy, safe and profitable flying. Write me at [email protected] if you have any comments or questions.