Replacing the Current Mode of Commuting by a Share and Own Aircraft
It is true that the executives of Acme manufacturing with the HO at Akron, Ohio are in need of commuting to remote sites at Chicago — ORD, Seattle and Miami — MIA and is a weekly affair at least for seven executives who have to travel to these satellite locations. The basic problems are that unjustified costs for travel have mounted to $75,000 per month and the executives have to depend on many airlines’ schedule. Another $15,000 is thus incurred for travel expenses and there are issues related to productivity. This report is an indicator for a possible solution to this problem. While owning an aircraft entirely for the company may actually be more costly and cumbersome in maintenance and other expenses and the additional salaries to maintenance staff, pilots and fuel, the alternate solution suggested is to use the services of airways that offer exclusive planes for the service of the company at a fraction of the whole cost and eliminating the need to garner experience in aircraft maintenance and use their services which will be more effective. A solution is provided in considering the services of Flexijet Company which offers this sought after service.
Preliminaries:
Commuting is important for the executive because the commute reflects many things like where to live, where and when to work and is in turn influenced by the values of the employees of home, their employers, and so on. (Boarnet; Crane, 2001) In this regard what has to be considered is if there is a possibility of avoiding this delay and problems of travel and at the same time to reduce the costs. Clearly if owning and running the aircraft is the solution then the overheads are going to be more and there is no guarantee that the delays will not occur. The alternate is to find if aircraft can be shared, and this is a viable proposal that is practical and which is available in the market. The cost of these services that are available in the market as an alternate to owning and operating ones own aircraft largely depend on the type of aircraft that is required and sought to be used. Therefore the aircraft most suited is considered first.
The Choice of Aircraft:
The Lear Jet 45 is the ideal aircraft for this project because it is the most ideal plane. The aircraft is being chosen for the traits which would fit the travel plans and the comforts for the executives. The vehicle will be manned by a crew of 2 persons, and can carry nine passengers at a time. In this document irrelevant things like the technical specs are left out, except for the fact that the Floor-Level Width is 1 meter, and the Maximum Height 1.5m and useable Floor Area 6.1m2 with a baggage compartment 1.4m3 and requires fuel at 2,155kg weight per flight. It is fitted with two Turbofan Engines 2 x Honeywell TFE731-20 and has a maximum range with 4 passengers, to a distance of 3,926km traveling at 859km/h. The noise level is 74.4EPNdB at take off, and therefore is ideal. (aerospace-technology.com, 2011)
It can be noted that at a time only one or two executives may travel the plane and secondly the reach of the plane is capable of covering all the distances where the satellite offices are. Thus in comparison with the other planes the Lear Jet 45 is taken to be ideal for the requirement at hand. Thus the aircraft that can be recommended is the Lear Jet 45 and accordingly the types of charter and other contracts that aviation companies offer are considered. At this point the idea of entirely owning a place and making use of it is abandoned for the simple reason that the company will have to run a separate aviation business and more than one plane is necessary. This is therefore more costly than the current flight operations.
Then the alternate that can be considered are many. For example flights can be chartered, ‘shared’ and a partnership may be entered into with a transport company to provide for the plane, maintain it, and carry passengers on demand to destinations as and when necessary. There are airlines offering these services. Since the Lear Jet 45 is found to be ideal the companies that provide these services are researched and their best points have been presented. It can be seen that Flexjet offers the most comprehensive solution for the service and is examined in detail. Thus it is sought to see which type of on-demand aviation method offered by the company is suited to the charter.
Basic Types of Services:
In this section the answer to the questions on-demand aviation methods are explored. Taking the Flexjet as the best case study the various options can be explored. Before exploring the possibilities it is necessary to emphasize the economics behind the analysis. The principle in the comparison will be the marginal costs. The economic principles have been outlined by the economist Hotelling based on marginal cost pricing. He suggested that the differential travel rates according to travel distances can be used to compute the gain from one system to another and the option with the consumer surplus must be taken. (Ward; Beal, 2000) Thus one of the important factors that would make up the profitability of the venture is the cost aspect. In comparing with other on-demand charter brokerage, the Flexjet on-demand charter brokerage is normally calculated by using the selections of aircraft, the availability and it will include the “flight charges, fuel surcharges, applicable taxes and estimated international fees” as per the company policy. (Flexijet, 2011b)
This is pretty much the same for all airlines. The scheme also may bring about additional costs and this would therefore not meet the needs of the company. The better option that Flexijet has shown is the round trip price program. (Affluent Magazine, 2011) Where there is a possibility of having 100 flight hours per year is new in the fractional jet ownership market, and is cost-effective, and the company has fractional ownership, it can but opt out any time with three months notice. Thus the possibility of owning a fraction is better than to try and justify the purchase of an entire aircraft. This option no doubt removes much of the botheration with maintaining aircraft and so on, and since the ‘purchase’ is only to the extent of the air space needed, the entire management is by Flexjet and the service is available exclusively all round the clock on all days. (Affluent Magazine, 2011)
This is one program that can be considered by the Acme Company instead of trying for buying a plane. Other flexible programs are available that can be contracted as a single option or can be tailored for the user. Some other programs include the Versatility Plus where the unused hours by the purchaser (Acme Company) can be sold to other users. The Flexijet claims that over $26 million flowed back to Flexjet partial owners and this is also a good option. Additionally the AnyTime options allows the customer to buy additional run time program benefits and all these contracts are flexible. (Affluent Magazine, 2011)
The problem of delays and executive distress at having to put up in odd locations has also been attended to in this program. This company Flexijet offers unique travel package options and room upgrades where there is a compelling need for an overnight stay. This is exclusive to its customers. The accommodation is at the Rosewood Hotels & Resorts or where ever they are available. This is an additional feature that Flexjet gives to the customers. (Flexijet, 2011c) These features make this type of arrangement as the best option for the Acme Company and are highly recommended. While the convenience and quick setup and service are features, the only factor remaining is to estimate the costs that would be incurred in taking the step and comparing it to the costs that is incurred now. In this context the marginal costs of using the shared service must be lesser than the current expenditure.
Costs in Flexijet Program:
The five components that make up the cost of purchasing and operating the fractional aircraft is the purchase price. This is the capital spent by the Acme Company in getting ownership interest in a specific aircraft we want. This covers costs of buying the share in the aircraft. Thus the cost is not of the entire aircraft. For all purposes this investment is safe because it can be sold at the fair market value after the contract closes. The purchasers will contribute to the monthly up keep and this is a pooled cost where all the owners pay. This cost includes the hangar costs, insurance, salaries and training and upkeep. The hourly rate is calculated based on the amount the flight is used. (Affluent Magazine, 2011)
This includes fuel charges, airport charges, catering, and other incidentals. The overall costs for this program thus come basically to the credit for an hour for the Learjet 45*/45*XR at $2,190, and the cost per hour is $2,710 which about adds up to the total costs. (Flexijet, 2011d) The cost of the fractional ownership amount at 1/8 share and at 100 hours per year for the Learjet 40 is calculated thus: The cost of the purchase: $800,000, per hour cost $1,985 and fees 16,300 and the fuel at $1,391 per hour. (Flexijet, 2011a) Thus the overall costs will always be less than what the company is now spending for the executive travel. Thus this is a better flexible option. What remains is to see if this expenditure will be less than the cost of using airlines.
Cost Comparisons:
The total costs came to $75,000 per month with $15,000 for travel expenses and other expenses not included still brings about a total cost of $95,000 — 100,000. That being the case and the added pressure of travel and finding flights and other formalities on the executives can be more costly. In comparison the cost of use of the Flexijet package would include the one time $800,000, which is refundable and is also an investment in the sense that free air time can be sold. This is so because the fliers of the aircraft are only three or four executives and the rest of the space can be booked and revenue generated. Since the costs can be depreciated there will be tax savings, and added to that it can be sold in the market and thus becomes an asset. The costs, excluding this totals to about $65,000 — 72000 per annum. Therefore this option is in any case better than the mode of travel used now.
Recommendation:
It is therefore strongly recommended that Acme negotiate with the Fexijet Company and see if there can be further gains made in the package and try it out for a stipulated period of one year with the option of continuing thereafter for mutually agreed terms.
References
aerospace-technology.com. (2011) “Lear Jet Specs” Retrieved 1 July 2011 from http://www.aerospace-technology.com/projects/learjet/specs.html
Affluent Magazine. (2011) “Flexjet’s Innovative Round Trip Pricing Program” Affluent
Magazine, Retrieved 1 July 2011 from http://www.affluentmagazine.com/articles/article/309
Boarnet, Marlon G; Crane, Randall. (2001) “Travel by Design: The Influence of Urban Form
on Travel.” Oxford University Press: New York.
Flexijet. (2011a) “Flexijet Costs: Pricing” Retrieved 1 July 2011 from http://www.flexjet.com/programs/fractional_ownership/pricing/
Flexijet. (2011b) “Flexijet pricing — Charter” Retrieved 1 July 2011 from http://www.flexjet.com/programs/charter/pricing/
Flexijet. (2011c) “Flexjet Forms Alliance with Rosewood Hotels & Resorts, Customers Gain
Exclusive Benefits” Retrieved 1 July 2011 from http://www.flexjet.com/admin/uploads/c353ef94-b8b0-4d6e-91ba-2f2f12d5473arosewoodpressreleasefinal.pdf
Flexijet. (2011d) “The versatility brochure” Retrieved 1 July 2011 from http://www.flexjet.com/pdf/Versatility_Plus_Brochure.pdf
Ward, Frank A; Beal, Diana. (2000) “Valuing Nature with Travel Cost Models: A Manual.”
Edward Elgar: Cheltenham, England.
