Are you ready for a contestable, detailed dissertation on the per hour costs of running an ag operation? Do you believe it is a function of fuel used and engine time only? When calculating your per hour costs, do you really take into consideration all of your business expenses?
In a discussion many years ago with JD Dunson of Airforce Turbine Service in Texas (now retired), the topic of operating costs came up. I had just talked with an operator who had attended one of JD’s convention seminars. According to him, JD had presented certain facts to his audience that shined an impending light upon true operating costs. I asked for his notes, as this is one of my favorite things to ponder. If you can’t honestly look at costs, you can’t succeed.
There are too many parameters for calculating operating costs to cover in this article. So, I’ll take the simplest example possible and work from there. It’ll give you an idea how it works and from that you can interpolate your costs.
To start, let’s assume we are discussing a single, turbine aircraft operation flying 500 hours a year. From my travels, I’d say this scenario is common. The values I use are provided by respected individuals in the marketplace, as well as from attendees to JD’s seminars. The values are conservative, which really means, it costs more than what I’ve portrayed here. I’ll itemize costs for a better visualization:
Per Hour Costs:
1. Average cost of a first-class, used turbine ag-plane – $650,000. With 10% down ($65,000) and financing the balance of $585,000 at 5.5% with seven annual payments = $103,000 a year, divided by 500 hours = $206
2. Aircraft insurance (hull/liability), based on $26,000 premium 60.00
3. Engine maintenance (PT6A-34AG/H80) 65.00
4. Airframe maintenance (includes prop, GPS, radios, etc.) 50.00
5. Pilot’s pay ($1,500 hr gross X 20%) 300.00
6. Fuel (50 gph X $2.50) 125.00
7. Ground Operations (loader truck repairs, trade pick-up
every fourth year, fuel, general maintenance) $25,000 a year. 50.00
8. Management (one employee @ $60,000) 120.00
9. Ground labor (2 @ $25,000 ea.) 100.00
10. Insurance/Other (Work. Comp., operations, etc.) 20.00
11. Office (hangar rent, phone, utilities) 50.00
Total Costs = $1146.00 per hour
Of course, anyone can tear holes into the above numbers. But, for the most part, the dissection will only raise the total cost. Treating 200 acres an hour at $7.00 an acre, works out to $1,400 which would give the owner/operator a $262 an hour profit (18.7%). In some cases, consistently spraying 200 acres an hour can be a challenge with a 500-gallon aircraft. Plus, everyone knows that an ag-plane is not productive 100% of the hours logged in a season. There we go, chewing away at our average.
Is 18.7% enough profit margin? In the above scenario, most likely the operator and pilot would be the same person. Is this enough profit to accept the risk and responsibility of being an operator? Why not just be a pilot? The pilot made almost $20,000 more without the financial risks. In shortcoming in the above calculations come out of the 18.7% profit margin. This is where honesty begins to come into the equation, being honest with one’s self. Of course, significant costs could be combined by the owner being pilot and manager and a significant other being one of the laborers.
In 1985, I sold my flying service. I could not pay myself pilot’s pay (25%) after collecting the season’s revenues and paying the bills. So, I decided to sell to my competitor with the agreement I could fly my old customers and at least earn pilot’s pay, but without the headaches of being an operator.
Without a doubt, there are perks for being an operator that would help offset the lack of pay for those duties. Are these perks enough? How do you allow for hidden costs? Now, the serpent raises its head.
You simply cannot operate a business on pilot’s pay that requires a $650,000 equipment expenditure with untold thousands of more dollars for support equipment, payroll and office/hangar space. There has to be a cushion to allow for hidden costs (advertising, work clothes, legal/accounting fees, etc.). The lack of this cushion has been the downfall of many businesses. There’s always the possibility of an unscheduled engine expense that is more than your engine reserve (if you are really setting aside an engine reserve). Being the pilot and any combination of manager and owner, you expose yourself tremendously, as the entire operation is dependant upon your good health. Any day you could wake up ill and have to call in another plane and pilot. Where are these costs in the $1,146 per hour gross?
As an operator, are you as valuable as the pilot? If so, then should you make the same percentage of the gross as the pilot? Somewhere in the above budget there has to be an allocation for operational profit. A rule of thumb could be 20%. Plug that factor into your hourly gross and you are now at about $1,400 per tach hour.
This is not your final figure. For example, what about personal health and life insurance premiums, employee benefits, the costs to earn CEUs, attending conventions, incidental meals? And, the list goes on. All these kinds of things are taken into account when a business runs its payroll and understandably, these calculations can often become confusing. It is for these reasons that most workplaces nowadays use payroll software to take care of these responsibilities. Moreover, some employers even choose to enlist the services such as those of cloudpay.net to help with the whole process.
What is really going on here is the need for a budget. In that budget, there has to be profit for the company in order for it to accept its responsibilities, which include a financial return for the owner of the business. If you think you are building equity in your aircraft, maybe even in your business, that could be another whole topic of debate. Ag-aircraft are high use and abuse equipment, making it difficult for them to retain value. As for the blue sky of the business, oftentimes it is only there because you run the company.
How much hidden costs to use in a budget? No one knows for sure, but a good starting place are looking at the hidden costs incurred during the last three years. You may find it will easily require a significant percentage of the gross dollars. It won’t be a fixed amount. Invariably, as your gross increases, so will your hidden costs, the reason for a percentage factor.
Ok, where are we now with our hourly gross? For the sake of simple math, let’s round that up to $1,400 per hour (every tach hour) with a 500-hour season. There used to be a magical rule of thumb (that should not work out by any reasoning) that an operation should gross the value of the aircraft, $1,400 X 500 = $700,000. Not quite the case here, but almost.
Don’t count on this rule of thumb to be an easy way to calculate your costs. There is no reason this should work out the way it did; it just did. You’d be remiss not to examine your expenses over the last three to five years, with adjustments according to any significant changes. We have still not added a line item for hidden costs. Another $100 a tach hour, driving the gross to $1,500 an hour? Adding another aircraft to the calculation would not double your expenses, some can be shared, and your overall hourly cost would be reduced. But, your break even cost (a new calculation) will go up!
Based on the above scenario, it is doubtful an operation with a single 500-gallon turbine aircraft can operate 500 hours in a season for less than $7.50 an acre. Sure, application rates and ferry distances play a huge role in costs. But, so does the “break-even factor”, where you have to get past a certain point in your gross to make a profit.
Knowing how much it cost to operate your aircraft is a complex issue. You may never know exactly, but you must have some gauge to go by. You must be honest with yourself. Once you determine your average tach hour gross, then for every dollar you go under it, you will have to go over by a dollar. Can you do that?
In closing, we’ve discussed a 500-gallon turbine ag-plane, assuming it is the median aircraft for our industry. If you use a smaller aircraft, for instance a piston-powered aircraft without the ability to gross $1,500 an hour, you really find yourself in a dilemma. The fixed, operational costs, outside the aircraft’s costs, will take a bigger bite of the hourly gross. On the other hand, you could say this works in the inverse with a larger aircraft, for example an aircraft with an 800-gallon hopper.
There are a lot of assumptions with these calculations. But, they should point out the apparent need for each operator to come up with his own true costs with a margin of error. Replace my numbers with yours and see if you are making or losing money. If you are operating for less than your true costs, you are only eating up equity and living on borrowed money (and time). There simply is no way around it.