Flying Club Costs

Flying Club Costs

Enthusiasm is an essential ingredient in the success of every flying club, but enthusiasm alone is not enough to keep a club solvent. That takes money, enough money to meet all capitalization and obligations, plus fixed and operating costs.

Clubs do help lower the cost of flying, but it's unrealistic to believe they can bring back the good ol' days when an hour's worth of flying with an instructor could be had for only $10.00 and a good cigar cost 5 cents. The primary purpose of a club is to keep flying costs to members as low as possible while still being able to meet all of the club's financial obligations. That means setting realistic fees for initiation, annual dues, and hourly rates.

A club's costs can be divided into three categories:

  1. Capitalization
  2. Fixed, and
  3. Operating.

To keep cash flowing to cover these costs it is important that all club members pay their bills on time. Allowing just one or two members to put off paying annual dues, monthly fees, or flying expenses can stifle a club's cash flow and hurt the entire membership.

Capitalization

Capitalization costs are finite in nature, but they are an important part of starting a flying club. They usually require a substantial outlay in cash and may also require the assumption of a loan. Capitalization costs include the purchase price (including sales tax, licenses, registration, reconditioning, "base" reserves, etc.) of an aircraft if it is purchased outright, or the down payment and monthly principal payments if it is financed.

There are many ways to gather money for purchasing an airplane and capitalizing a flying club. The outright purchase of the club airplane can greatly reduce the monthly financial burden on club members and the financial liability of the club itself. All founding members contribute an equal share of the purchase price and receive an equal interest in the aircraft. If an individual member needs financing, it is an individual matter and does not result in a lien on club property.

A second option for funding capitalization costs is to have each founding member contribute an equal share towards the down payment on an aircraft with the club collectively assuming responsibility for the balance. Each month members pay an equal share of the monthly loan payment. This method of capitalization could be combined with the monthly dues, but in setting up a payment system, club members should remember that capitalization costs are finite. Once the mortgage is paid off, the monthly mortgage payment disappears, although other fixed costs remain. So, initially, monthly or annual dues must be set high enough to cover the temporary capitalization costs as well as the permanent fixed costs. Once an aircraft is paid for, club members should take a look at their dues program to see if restructuring is needed.

A third way of paying club capitalization costs, and the option that requires the most accurate record keeping, is to let each member contribute whatever amount of the down payment he or she can afford. Again the club would assume the responsibility for the balance. Each member would still contribute to the monthly payment, but the amount would be in inverse proportion to the amount of down payment he or she made. In other words, members who contributed a large amount to the down payment would be paying a small amount towards the monthly payment and vice versa. Again, the capitalization cost would be finite, and once the aircraft is paid for the dues program should be reassessed.

Major financing of the club aircraft or other club assets by individual club members carries with it the potential for conflicts of interest between "owners" and "other members." Such arrangements should be examined carefully.

Fixed Costs

Fixed costs are the costs that must be paid regularly whether or not club aircraft ever fly. They are a basic part of owning an airplane and the fundamental reason for operating a club. These fixed costs become the "shared costs" of club flying and, if split among enough members, can substantially reduce the price of a member's total flying cost.

Typical fixed costs include the following:

Insurance:

  1. Liability
  2. Hull
  3. Medical

Storage:

  1. Hangar
  2. Tie-down

Administration:

  1. Legal fees for incorporation
  2. Accounting
  3. Management staff
  4. Office supplies
  5. Rent for a club room

Miscellaneous:

  1. Training aids
  2. Social events
  3. Additional equipment
  4. Aircraft registration fee (if required by the state)
  5. Property taxes (if required by the state)
  6. Annual maintenance inspection
  7. Interest on loan
  8. Depreciation

Not all costs listed are applicable to every club. Some clubs may list an operating cost on the fixed cost list or vice versa, while other clubs may consider certain costs as special or onetime expenses. But no matter how costs are categorized, members should give careful thought to the process, making sure that no fixed expense is overlooked when computing costs and assigning membership dues. Such an oversight could be very embarrassing and expensive!

The money used to pay fixed costs should come from a club's fixed income, specifically fees or dues, which are assessed on a monthly, quarterly, or annual basis. It is important to set the dues high enough to cover all fixed costs for one year. It's better to initially overestimate fixed costs and have a few extra dollars in the kitty than to come up short when the bills are due. Any extra money can be refunded to the members or used to expand or upgrade equipment.

Fixed membership fees should be designated and used only for paying fixed costs. They should not be used to fulfill capitalization or operating costs, and, conversely, money collected to pay capitalization or operating costs should not be used to pay fixed costs. By following this policy, a club has a better chance of remaining financially airworthy.

Operating Costs

Flying clubs can get into financial problems quickly if they do not carefully determine an adequate hourly rate for use of their aircraft.

AOPA provides an online interactive cost calculator that will help you estimate operating costs for a broadly defined group of aircraft. A series of questions will guide you in the process of calculating operating costs for the aircraft you choose. When complete, you will be shown a detailed breakdown of operating expenses on an annual and per flight hour basis.

Problems frequently stem from the fact that some clubs try to recover a portion of their fixed costs along with the direct operating costs. This often forces the total hourly rate, which should equal the direct hourly operating cost, higher than necessary. It may also compel members to pay for a minimum number of hours per month whether or not they fly. The result is a vicious cycle with members flying less because the hourly rate is high which, in turn, pushes the hourly rate higher because members fly less. In some areas, a spate of poor weather may be all that it takes to reduce flying hours and begin the vicious cycle.

All clubs should remember that fixed costs should be covered by membership dues, and they should always be kept separate from operating costs. Relying on the number of hours an airplane is flown to help offset fixed costs is courting financial disaster. Fixed costs should be met before the plane leaves the ground.

Operating costs are determined by computing the actual cost per hour for operating an aircraft, including gas, oil, reserves for overhaul, etc. Operating costs should not be dependent on the number of hours an aircraft is flown, and do not vary except with an increase in the cost of fuel, oil, or a limited number of other variables. Keeping this rate as low as possible will help increase the aircraft's utilization and give each member the maximum chance to fly.

It's true that most manufacturers provide guidelines for computing the operating costs, but these should be considered no more than a starting point. When an airplane is tested by a manufacturer, it is flown by a highly skilled test pilot who knows how to get the maximum performance from that particular type of aircraft. And all the figures found in the operator's manual are based on ideal conditions rarely found in the real world of flying. These typically optimistic figures are unlikely to apply to a plane flown by a "squadron" of different pilots.

Probably the best way to begin estimating real-world operating costs is to talk with a local mechanic who has experience working on the type of aircraft in which the club is interested. The mechanic can give accurate, realistic estimates on the cost of inspections and maintenance, and can point out the strengths and weaknesses of the airplane. Other sources of information are fixed base operators or friends who operate the same type of airplane.

As in estimating fixed costs, it's better to overestimate operating costs from the beginning than to charge rates that do not cover the necessary expenses and then be faced with the problem of catching up on a shortfall. Once a club gains experience with its aircraft it will be able to establish a very accurate hourly operating cost.

Clubs should set up a method for collecting payment from members that ensures a steady cash flow. Two common ways to do this are to require payment immediately after each flight or to bill members monthly.

Allowing members more than 30 days to pay their bills is asking for trouble. Credit companies know that the longer a bill is overdue, the harder it becomes to collect. Unpaid flying time stifles cash flow and makes it harder for a club to meet monthly obligations. It's the treasurer's job to issue monthly bills for dues and aircraft use charges, and to collect any other money owed the club. In that respect, the treasurer has to be especially alert. To keep members informed and involved with the club's finances, the treasurer should also issue the club's financial statements at least quarterly. In small clubs, formal billing procedures may be unnecessary, but accurate bookkeeping is still a must.

Members who fail to pay their bills on time should be penalized. If a backlog of overdue income accumulates because of a few inconsiderate members, the club can quickly find itself in a tight financial situation.

No club should overextend itself financially for any reason. It's a wonderful feeling to have a brand new airplane on the ramp, but cash reserves should be built up and maintained so that reliable resources are available to guarantee that a club can successfully meet its obligations without facing financial difficulty.

Depreciation and Equity

Depreciation and equity must be considered if members are to have a true picture of how much it costs to belong to a club and fly its aircraft. Depreciation refers to the difference between a piece of equipment's purchase price and the current market value of the equipment. Most likely, the actual depreciation will not be the same as depreciation computed for tax purposes.

It is possible for a used airplane to hold its value for a long time after it is purchased, but as a rule of thumb, a new aircraft generally will not hold its value well. Many factors determine current market value, including an aircraft's age, condition, and desirability. Periodically, a club should check the marketplace to determine the current value of its aircraft and to get a clear picture of how depreciation is affecting that value.

Equity in an aircraft is equal to the amount of money that's been invested minus the amount of accumulated depreciation. As an example, imagine a case where a five-member club pays cash for an aircraft costing $40,000. Each member contributes $8,000 toward the purchase. A few years later, the club aircraft has a market value of $24,000. (For the sake of keeping the illustration simple, assume that the decline in the aircraft's market value is entirely due to depreciation.) Each member of the club would then have an equity value of $4,800, or $24,000 divided among five members. Any member leaving the club would be entitled to sell his or her share for $4,800 to recover the equity.

Some clubs have considered a cash reserve account to collect money to cover real-world depreciation so as to maintain an original equity share value. This approach is difficult when percent of flying is not equal between members and has the effect of increasing monthly costs unnecessarily.

In review, a club's costs can be divided into:

  1. Capitalization,
  2. Fixed, and
  3. Operating.

Capitalization costs should be paid from initial contributions or in special monthly payments to finance the start-up cost of a club.

Fixed costs such as tiedown fees, office rental, and insurance should be paid from the regularly scheduled fees or dues assessed members, and should not be dependent upon income from flying.

Direct operating costs of an aircraft should be paid entirely from the hourly rate charged for flying. Each club should establish a list of fixed costs and generate enough fixed income each month to be able to pay all regularly scheduled bills on time.

Members should be billed monthly and be expected to pay on time. Those who don't should be penalized so as to encourage more conscientious attention to the club's financial health.

Money makes the world go around. And it certainly helps keep flying clubs in the air. Financial mismanagement or inadequate funding is responsible for the collapse of the majority of unsuccessful flying clubs. But with proper records, and sound judgment, financial problems can be avoided.

Updated October, 2011