Business Justification: Subject Overview

Business Justification

Subject Overview

Developed by the Aircraft Owners and Pilots Association

Should an employee use a private aircraft in the conduct of company business? What are the benefits and liabilities involved? Some management personnel are unfamiliar with general aviation and, unfortunately, make an emotional decision based on perceived risk without a thorough understanding of the facts. These companies miss out on the many productive and competitive advantages of private air transportation.

Private airplanes fly on business more than four million hours each year — safely and efficiently. The following information is provided to assist management in ascertaining the value private air transportation would have for their company.

There are four basic management considerations:

  1. Productivity
  2. Safety
  3. Cost
  4. Liability protection

Productivity

Although there are a plethora of businesses and circumstances, all have a common factor — time is given equally to all. No company gets more than 24 hours in a day. There are two basic ways in which businesses can make more productive use of time. One is to increase the number of individuals who are working and thus increase the man-hours. The other is to make the hours on the job more productive. Air travel can assist in making available hours more productive. Airlines provide scheduled service to 655 airports, and regional air service is available to an additional 288 airports. However, general aviation aircraft have access to 5,152 public use airports across the nation, flying directly into thousands of communities not accessible by the airlines or regional air carriers!

Safety

General aviation comprises 96.6% of all civil aircraft, 92% of all pilots, 59.2% of the total air hours flown, and is currently experiencing the lowest total accident rate since 1938 (320 fatal accidents in 27.1 million hours flown in 1999). AOPA's Air Safety Foundation provides detailed general aviation safety statistics in its annual Nall Safety Report http://www.aopa.org/asf/publications/00nall.pdf. The general aviation airplane is a safe vehicle. The rarity of accidents is demonstrated by the news attention given to them when they do occur. If general aviation accidents were as common as automobile accidents, there would scarcely be news coverage.

Cost

When looking at the cost of operating a private airplane, consider more than reimbursement for miles and out-of-pocket expenses. Hidden costs, alternative costs, and benefit cost ratios should be examined. Some of the considerations in preparing a cost analysis would be:

  1. Cost per hour of employee's time (loaded rate including benefits)
  2. Will general aviation travel provide more productive hours?
  3. Will use of general aviation reduce other expenses such as motels and meals?
  4. Will more than one person be traveling in the same airplane?
  5. What would individual transportation by an alternate means cost?

There are less tangible factors that should also be considered. Will use of private aircraft provide time advantages over competitors? Will use of private aircraft provide favorable impressions on clients or customers? Will use of private aircraft improve employee morale by fewer overnights away from home?

The National Business Aircraft Association (NBAA) suggests a different method for determining the value of an employee's time. Divide the amount of revenue and/or expense for which the employee is responsible by the number of his/her working hours. A sales person, for example, who produces $500,000 worth of business a year and is on the job 2,000 hours, has a value to the company of $250 an hour.

For most businesses, a simple examination of costs coupled with sound judgment is adequate for determining the financial advantages of the use of a general aviation aircraft by employees. For those companies wanting a more detailed analysis, there are many resources for additional help. Professional consultants, aircraft companies or their dealers and distributors may provide personalized consultation.

Liability Protection

Next to safety, liability is the subject of most concern to management. There are specific considerations depending on whether the aircraft is owned, leased, chartered, or borrowed and whether in the corporation's or the individual's name. An aviation insurance company will address the particular situation. It is advisable to have two or more aviation insurance companies present coverage proposals. If an insurance company does not deal in aviation coverage as one of its major fields, that company may find it easier to simply discourage private flying than to seek out the correct actuarial information.

There are three basic categories in general aviation aircraft that require different approaches to liability protection:

  1. Flight in a company-owned aircraft.
  2. Flight in a rented or leased aircraft in which the employee acts as pilot in command.
  3. Flight in the employee's own aircraft.

In any of these, the employee may also involve others as passengers, customers, suppliers, or consultants. These contingencies should be included in coverage. Some companies limit flight to employees only, which substantially reduces liability potential for passenger bodily injury since employees would be covered by workers compensation.

For workers compensation, many states recognize the National Council on Compensation Insurance ( www.ncci.com). The Council has a code assigned for employees who fly aircraft in the conduct of employer's business. It is code 7421. The rate is proportional to the amount of time spent flying. For example, suppose a salesman flies an airplane on company business two days the first week, none the second week and two days the third week. His payroll for the first and third weeks will be assigned to Code 7421 and his payroll for the second week to the salesman Code 8742, providing he maintains records showing the weeks in which he flew on company business.

A part of a week will be considered a full week in determining the average weekly payroll. If there are no records of how many flights were made, then the pilot's entire annual salary will be assigned to Code 7421 rather than to the code under which it would otherwise apply.

When non-employees are carried as passengers, some companies find it advisable to have admitted liability coverage. This is an automatic payout of the specified amounts and reduces the prospect of litigation causing adverse publicity in the event of an accident.

Employees who use their own or rented aircraft for their employer's business can, for a small additional premium, add the employer to the owners or renters insurance policy as an additional insured. Management will want to make sure that the limits of coverage are adequate. The extent of the coverage must be an individual company decision based on many factors. One note of caution, the insurer may not add your employer as an additional insured if the employer's business is aviation related.

Companies that provide personal travel insurance for their employees occasionally face increased premiums if employees fly for business. To avoid this, employees who fly their own airplane may agree to carry their own flying accident coverage in the amount of the master company policy for the individual. Such coverage from an aviation specialty insurance firm is available at a modest rate. This satisfies the employer while not disturbing the master policy.

All companies should have well-defined written policies relating to the use of private aircraft. These rules will vary with the type of business, the reason for the use of the aircraft, even the areas of the country in which flights are made.

Summary

Business flying offers both benefits and risks. In any endeavor, management seeks to minimize the risks and maximize the benefits. A properly maintained airplane, flown by a competent pilot, is a safe, efficient, and effective means of transportation.

The thousands of aircraft, tens of thousands of pilots, and millions of business flight hours annually testify to the satisfactory liability protection available to the many businesses that are benefiting from the speed, efficiency, and effectiveness of flying.