“There are always opportunities through which businessmen can profit handsomely if they will only recognize and seize them.” J. Paul Getty
The general economy continues to struggle. Fuel prices are rising, stock market is questionable, housing market meltdown, credit market is tight, big banks are still in business due to government intervention, declining dollar, high commodity and food prices, record used aircraft inventories and declining values, the "American Recovery and Reinvestment Act of 2009" allowing 50% bonus depreciation and increased Section 179 deduction, etc. Sales and profits are down. Thousands of employees have lost their job. The government is attempting to stimulate the economy. The remainder of this year could be critical.
So what should you do? The answer is simple. Concentrate on what you can control. Recognize and seize your opportunities. “Procrastination is the grave in which opportunity is buried.” Concentrate on your business and plan your success by knowing your cash flow and what must be changed to keep a profitable operation. The importance of cash flow has become apparent from the companies requiring bailouts from our government. Preparing a sound financial plan requires the projection of cash flow. What happens to companies that have no sound financial plan? Look at the companies bailed out by our government.
The key to survival is meeting the cash flow requirements of your business. For the commercial aircraft operator, this means evaluating the financials of each aircraft in the operation. Concentrate on your cash flow and the calculation of Return on Investment (ROI). Prepare budgets and financial plans for each aircraft in your fleet. How?
Review the expenses on each aircraft over the last several years. Identify any large upcoming cash requirements or expenses (aircraft improvements, overhauls, special inspections, etc.) for each aircraft. Will cash be available to pay the large expenditures? If not, then additional capital will be required. Project the normal annual fixed expenses as well as the hourly operating expenses. Be especially careful to adjust expenses that might change significantly. Examples could be fuel or increased aircraft maintenance expenses due to aircraft being out of warranty or just being older aircraft.
Evaluate the revenue that each aircraft has produced. Has the revenue exceeded operation expenses? Was utilization and revenue rate high enough to cover the fixed expenses as well as the variable expenses? Are adjustments in rates or utilization required? Identify any areas where adjustments are required to survive.
Analyze the financial impact that different scenarios produce in your business. Concentrate on the cash flow of each aircraft you operate. To answer the financial impact question, compare the after-tax cash flow of keeping your present aircraft against trading for another aircraft. The after-tax cash flows should consider: capital expenditures, down payment, principal and interest payments or lease payments, fixed expenses, hourly expenses, major upcoming expenses, warranty, utilization, depreciation, tax rate, revenues and resale value. Use a financial model to simulate the cash flows by varying different items that have major impacts on cash. Use Net Present Value (NPV) to provide the relative values of the different cash flows in today's dollars. Remember; concentrate on what you can control and seize opportunities.
AircraftCostAnalysis is a financial model that can perform this type of analysis. It will save you many hours of building and checking the math in your own financial model. See www.AircraftCostAnalysis.com for the details.