finding hidden value in your flight data · 2016. 2. 1. · ryan de moor, amway doug stewart,...
TRANSCRIPT
Finding Hidden Value in Your Flight Data
PRESENTED BY:
Ryan De Moor, Amway
Doug Stewart, AircraftLogs
Jordan Pfahl, AircraftLogs
Tax, Regulatory & Risk Management Conference | Orlando, FL | October 19 – 20, 2014
Wednesday, October 22, 2014 | 1:30 p.m. – 2:30 p.m.
2
Introductions
• Ryan De Moor, MBA & CAM
Financial Analyst - Aviation, Amway
• Doug Stewart, CPA
President
AircraftLogs
• Jordan Pfahl
Acct. Manager - Administrative Services
AircraftLogs
3
Agenda & Objectives
• Review a Standard Flight Dept.
– Company with two planes
– Looks “pretty good” on the surface (DOC’s, fuel burns, taxes)
– DoA is asked to cut costs
• Drill into Fuel Purchases
• Drill into Fuel Burns (the “de Moor Method”)
• Find Overlooked Tax Dollars
• Find Hidden Measures of Value in Metrics
• Become a Corporate Hero
Case Study Overview
5
How’s the Year Look?
2014 Expense SummaryItem N100G N200G Common Costs Total
Hours Flown 390 420 810
Personal Use (Seat Hours) 17% 14%
Gallons Purchased 127,920 137,760 265,680
Lbs Burned 863,460 929,880 1,793,340
Fuel 927,420$ 998,760$ -$ 1,926,180$ 32%
Engine Reserves 324,223$ 349,163$ -$ 1,682,468$ 28%
Maintenance & Parts 237,939$ 256,242$ 494,181$ 8%
Crew Travel 113,326$ 122,044$ -$ 235,370$ 4%
Misc. Expenses 79,560$ 85,680$ 165,240$ 3%
Direct Operating Costs 1,682,468$ 1,811,888$ 4,503,439$ 74%
Flight Crew -$ -$ 700,000$ 700,000$ 12%
Hangar & Facilities -$ -$ 250,000$ 250,000$ 4%
Insurance -$ -$ 100,000$ 100,000$ 2%
Scheduled Maintenance 500,000$ 500,000$ 8%
Interest -$ -$ 0%
Total 1,682,468$ 1,811,888$ 1,550,000$ 6,053,439$
Fuel Burns Look “OK”
Item N100G N200G Total
Lbs Burned 863,460 929,880 1,793,340
Conv to Gallons/6.75 127,920 137,760 265,680
Flight Hours 390 420 810
Gallons/Hour 328 328 328
Published Industry Average /gallons hour 328 328 328
7
Tax Time!
The Tax Guys Have a Big Impact Too
N100G N200G Total
Year Purchased 2006 2013
Original Purchase Price 13,000,000$ 8,000,000$ 21,000,000$
Deductible Costs
Flight Department Operating Costs 1,682,468$ 1,811,888$ 3,494,356$
Pro-Rata Share of Common Costs 775,000$ 775,000$ 1,550,000$
Tax Depreciation (MACRS, half yr) 0.0% -$ 20.0% 1,600,000$ 1,600,000$
Bonus Depreciation 0.0% -$ 50.0% 4,000,000$ 4,000,000$
SubTotal 2,457,468$ 8,186,888$ 10,644,356$
Disallowance 17% (417,770)$ 14% (1,146,164)$ (1,563,934)$
Deductible Costs 2,039,698$ 7,040,724$ 9,080,422$
Cash Cost of the Disallowance at 40% (extra tax) (167,108)$ (458,466)$ (625,574)$
Can’t We Do Better?
• Budget cycle is
approaching
• Corporate still “loves
aviation”
• But you’ve been asked
to cut costs
8
Let’s Take a Deeper Look at The Data
Fuel Purchases
Been There, Done That
• Our home base has expensive fuel – we are always complaining
• We sure do hate “Brand X”
• My guys are told to negotiate whenever they can
• The passengers control where we park
• One of our pilots has a tankering spreadsheet…
“We work fuel prices every day!”
Fuel Purchase Breakdown
11
Facility Gallons Ave. Price Cost %
MORNING AVIATION 95,757 $5.90 $ 564,966 31.7%
WALLACE AVIATION 33,404 $5.38 $ 179,714 10.1%
HORN AVIATION 16,409 $4.63 $ 75,974 4.3%
WAPANOKE AVIATION 13,457 $5.05 $ 67,958 3.8%
CRAIGS FLIGHT SUPPORT 10,138 $5.09 $ 51,602 2.9%
JAMES JET CENTER 8,326 $5.33 $ 44,378 2.5%
JACKSON AVIATION 7,657 $4.53 $ 34,685 1.9%
RODGERS AVIATION 6,387 $4.97 $ 31,743 1.8%
STAR AIR CENTER 5,840 $5.40 $ 31,536 1.8%
MOON AVIATION SERVICES 5,821 $5.39 $ 31,375 1.8%
SEA AVIATION 5,915 $5.25 $ 31,054 1.7%
TAHOE FLIGHT SVC 5,700 $5.02 $ 28,614 1.6%
TRIANGLE AVIATION 5,898 $4.70 $ 27,721 1.6%
BEAN FLT SUPPORT 5,656 $4.55 $ 25,733 1.4%
CIRCLE AVIATION SERVICES 5,218 $4.74 $ 24,733 1.4%
REMAINDER 98,823 $5.35 $ 528,247 30.1%
Total 330,405 $5.39 $1,780,033 100%
Negotiating with Morning Aviation
Facility Gallons Ave. Price Cost %
MORNING AVIATION 95,757 $5.70 $ 545,815 31.7%
WALLACE AVIATION 33,404 $5.38 $ 179,714 10.1%
HORN AVIATION 16,409 $4.63 $ 75,974 4.3%
WAPANOKE AVIATION 13,457 $5.05 $ 67,958 3.8%
CRAIGS FLIGHT SUPPORT 10,138 $5.09 $ 51,602 2.9%
JAMES JET CENTER 8,326 $5.33 $ 44,378 2.5%
JACKSON AVIATION 7,657 $4.53 $ 34,685 1.9%
RODGERS AVIATION 6,387 $4.97 $ 31,743 1.8%
STAR AIR CENTER 5,840 $5.40 $ 31,536 1.8%
MOON AVIATION SERVICES 5,821 $5.39 $ 31,375 1.8%
SEA AVIATION 5,915 $5.25 $ 31,054 1.7%
TAHOE FLIGHT SVC 5,700 $5.02 $ 28,614 1.6%
TRIANGLE AVIATION 5,898 $4.70 $ 27,721 1.6%
BEAN FLT SUPPORT 5,656 $4.55 $ 25,733 1.4%
CIRCLE AVIATION SERVICES 5,218 $4.74 $ 24,733 1.4%
REMAINDER 98,823 $5.35 $ 528,247 0.0%
Total 330,405 $5.33 $1,760,881 70%
Fuel Purchases:
Do You Have All of Your Data?
13
N100G N200G N200G Total
Gallons Purchased (Invoices) 390,000 420,000 420,000 1,230,000
Std. Conversion 6.75 6.75 6.75 6.75
Converted to Lbs 2,632,500 2,835,000 2,835,000 8,302,500
Lbs Burned (Flight Logs) 2,769,000 2,982,000 2,982,000 8,733,000
Potential Missing Purchases (Burn)
In Pounds (136,500.00) (147,000.00) (147,000.00) (430,500.00)
In Gallons (20,222.22) (21,777.78) (21,777.78) (63,777.78)
Others
• Are you reconciling the fuel ticket to the fuel bill?
• Is your crew confirming they are being charged the
quoted price?
• Consider building a pre-flight fuel purchase plan for
each trip
• Consider rules which would reveal when you should
DH the plane home to offset expenses
Fuel Burn Analysis
Sample Data – Two Falcon’s
• Analysis of burns over four years
• Eight pilots
16
0%
10%
20%
30%
40%
50%
0 - 500 501 - 1000 1001 - 1500 1501 - 2000 2001 - 3000 3001+
Nautical Miles
Distribution of Flights
Expected Fuel Burn
17
1,800
1,900
2,000
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
Po
un
ds
per
Ho
ur
Bu
rned
Mileage Bracket, in Hundreds
Fuel Burn / Hour
Actual Burns by PIC
18
1,800
1,900
2,000
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
Po
un
ds
per
Ho
ur
Bu
rned
Mileage Bracket, in Hundreds
Fuel Burn / Hour
Co. Average Jenkins Orton Wilson
Beard Shannon Berkenour Lochen
Vincent Mfg Target Power (Co. Average) Power (Mfg Target)
Deviations from Company Average
(600)
(400)
(200)
-
200
400
600
800
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38
Lbs/
Ho
ur
Dev
iati
on
fro
m A
vera
ge
100 Mile Brackets
Pilots Deviations Over(Under) Average by 100 lbs/hour Jenkins
Orton
Wilson
Beard
Shannon
Berkenour
Lochen
Vincent
Impact of Above Average Burns(Or “Let’s talk to Jenkins….”)
- 5,000 10,000 15,000 20,000 25,000 30,000
Jenkins
Orton
Wilson
Beard
Shannon
Berkenour
Lochen
Vincent
Excess Lbs of Fuel Burned on "AboveAverage Burners"
The Broadest Opportunity
- 25,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000
Jenkins
Orton
Wilson
Beard
Shannon
Berkenour
Lochen
Vincent
Multi Year View: Cumulative Value of Segments with Above Average Burns
Over Company Ave.
Over MFG Target
Synopsis
• A single fuel burn target is insufficient
• Fuel burn analysis requires analysis of stage length
and lots of data
• In this case, initial target in reducing fuel burns are
significant:
– Eliminating above average burns saves 90,000 pounds of fuel
– Moving 50% closer to manufacturer’s burn saves XXXXXX
pounds of fuel.
Hidden Value in Your
Passenger Load Can Provide
Tax Benefits
Your Non-Deductible Costs
• IRS Tax Laws Require you to Disallow the proportioatecost of your flight department for personal entertainment use of the Aircraft by “Specified Individuals”
• Most companies will have 5 -10% of their use be deemed “personal entertainment”, unless:
– They’re large public companies with a very heavy employee load
– The company has made time-sharing or other arrangements to offload PE flights
• It is often higher for companies with smaller passenger loads
Cash Impact of the Disallowance
• Handled by your Tax Department
• The issue – it deals with all costs
• Your percentage is not deductible
• A simple $10 million example
– A $5 million flight department
– Plus $5 million of depreciation
• 10% PE use will cost your company $400,000
• 1 million of $10 million is not deductible
• Overall corporate tax rate is about 40%
• Your company has $1 million more profit because the expenses were disallowed
• The tax on that “extra” profit will be $400,000
25
A $10 Million Example
• A $5 million flight department
• Plus $5 million of depreciation
• If PE = 10%, $1 million not deductible
• Overall corporate tax rate is about 40%
• Your company has $1 million more profit because the expenses
were disallowed
• The tax on that “extra” profit will be $400,000
26
10% PE use will cost your company $400,000
How you Decided to Disallow $1 Million Becomes Very Important
A Look at the 10%
• The 10% is a weighted average of your passenger load
• The IRS originally ruled you must calculate the total cost per seat
hour
– Actual operating costs, depreciation, interest, … all the aircraft-
related costs on your company’s tax return
– Calculate an average cost per seat hour and a cost per seat mile
• Requires all passengers and their purposes to be tracked
– Multiply that cost by the PE seat hours
• The effect – your PE percentage is equivalent to the portion of
your costs which will become non-deductible
27
The IRS Gives You Alternatives
• You can compare all four methods:
1. Weighted Average using Seat Hours
2. Weighted Average using Seat Miles
3. Flight-By-Flight Method, using Seat Hours
4. Flight-By-Flight Method, using Seat Miles
• Your flight patterns and passenger load each year determine
which is the best.
• The Hidden Value: Most companies only test 1 – 2 methods - its
too difficult to prepare the data if you aren’t using a database tool
supported by programmers.
28
How to Choose? Its in Your Data!
Flight Patterns Matter!
29
Example 1 - Frequent Spousal/Family Travel
Flight Hours
No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs
Bus. Pax 1 1.0 2 4.0 1 4.0 1 4.0 8 32.0 13 45.0 75%
PE Pax 3 3.0 2 4.0 1 4.0 1 4.0 0 0.0 7 15.0 25%
Total Pax 4 4.0 4 8.0 2 8.0 2 8.0 8 32.0 20 60.0
F-B-F PE Hours 0.8 1.0 2.0 2.0 0.0 6 38%
15.0
Monday Tuesday Weds Thursday Friday Total
1.0 2.0 4.0 4.0 4.0
Example 2 - Weekend Trip for the CEO and 7 Guests
Flight Hours
No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs No. Pax Seat Hrs
Bus. Pax 3 3.0 3 6.0 3 12.0 3 12.0 0 0.0 12 33.0 51%
PE Pax 0 0.0 0 0.0 0 0.0 0 0.0 8 32.0 8 32.0 49%
Total Pax 3 3.0 3 6.0 3 12.0 3 12.0 8 32.0 20 65.0
F-B-F PE Hours 0.0 0.0 0.0 0.0 4.0 4 27%
15.0
Total
4.0
Friday
4.04.0
Weds
2.0
Tuesday
1.0
Monday
Seat Hours may be the best method when routine PE guest travel occurs.
Flight By Flight – May work well for companies with intermittent spikes in PE travel.
Example: Two Falcons
• N100G - Acquired in 2006 for $12 million
– Zero Depreciation in 2013
– Direct Operating Costs: $1 million
– Fixed Costs: $1 million
• N200G - Acquired in 2013 for $17 million
– 2013 Depreciation: $5.5 million (6 year MACRS, half year)
– Direct Operating Costs: $1 million
– Fixed Costs: $1 million
• Uses of the Aircraft
– Transport sales and marketing teams
– Transport project managers to work sites
– Provide personal transportation to CEO & family
These aircraft will generate about $9.5 million of expense and potential tax deductions in 2013 …
Disallowance Impact on N200G
Just a 1% Swing Equals $74,000
31
Costs Subject to Disallowance
Direct Operating Costs 1,000,000$
Fixed Costs 1,000,000$
Depreciation 5,500,000$
Add Back SIFL (140,473)$
Total 7,359,527$
Disallowance Methods Disallowance
A. Seat Hours 34.29% 2,523,582$
B. Seat Miles 34.44% 2,534,621$
C. Flight by Flight, Flight Hours 25.44% 1,872,264$
D. Flight By Flight, Flight Miles 25.66% 1,888,455$
Difference between B and C 662,357$
Cash Impact at 40% corporate tax rate 264,943$
Hidden Metrics
The Value You Found
33
Baseline Data Low High
Opportunity to Reduce Fuel Burns 1,780,053$ 5% 89,003$ 15% 267,008$
Potential To Improve Fuel Purchases 1,513,045$ 5% 75,652$ 10% 151,305$
After Tax - Reduced Disallowance - N200G 7,500,000$ -$ 264,943$
After Tax - Reduced Disallowance - N100G 2000000 -$ 70,651$
Total Opportunity 164,655$ 753,907$
Thank You