Some conundrums never die, no matter how often they’re proven wrong.
“We lose money on every sale, but we’ll make it up in volume” is one of bizav’s oldest favorites. Its latest incarnation is driven by the 2019 surge in flight activity, driven by a healthy economy and reduced commercial airline schedules as a result of the 737 MAX grounding. Virtually every segment of our industry, starting with Part 91 owner flying, is up month over month, according to the latest numbers from ARGUS.
That increase in owner flying drives increased use of supplemental lift, whether by ad hoc or contract charter, jet card, or fractional share.
And the increased demand for supplemental lift enables charter management companies to deliver on their revenue commitments to their aircraft owner management clients whose aircraft are available for charter. Almost 90% of turbine aircraft available for charter are enrolled in a management program, in which the owner receives a large percentage of the Part 135 charter revenue.
The downside? When flying is up, so are scheduling conflicts, whether from crew duty day limits, from scheduled and unscheduled maintenance events and related downtime – or from increased flying by the aircraft’s owner.
No charter management company wants to refuse a trip request from an end user or charter broker. It’s too easy to find an alternative operator, thanks to the internet and mobile apps that facilitate access to charter aircraft worldwide (see “Fifteen Shades of Grey Market Charter,” BAA Special Report, August 2018). Consequently management companies today are scrambling to add available aircraft to their fleets to accommodate the increased demand.
They tout their Argus, Air Charter Safety Foundation, and Wyvern safety ratings, operational experience, customer service orientation, and ability to generate that third party revenue, which helps offset the cost of owner flying.
But to win the competition when all else fails, they cut their own net revenue by reducing management fees or increasing the owner’s percentage of charter revenue. The charter management company needs that net revenue to cover their overhead costs: salaries, marketing, rent, insurance, legal, communications, etc.
That’s where the “good guys” will cut. Others may cut their service capabilities … or their safety management.
More than a decade ago, management companies’ standard charter revenue cut was 15%. Today, if charter companies have to keep dipping below that to compete for new aircraft or to keep current ones, then some “good guys” won’t be able to cover overhead and turn enough profit to stay afloat.
So be mindful when negotiating. Don’t be blinded by low management fees, high commission rates, and charter hours. Success based on volume remains a myth, when the company is losing on every deal. BAA