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