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Price Deconstruction: The ups and downs – and ins and outs – of charter pricing
The price of crude oil has fallen significantly over recent months, after a long period of increase. So marked is the downturn that many assumed it would similarly cause a reduction in the price of jet fuel, and thus the price of flying. But so far that has not been the case.
In this article we look at how much of the cost of a charter flight is accounted for by fuel, and what makes up the rest of the price. Industry professionals give their opinions and we put forward an overview of the pricing issues concerning operators in the business aviation industry. Are the oil companies or the operators keeping the prices artificially high? Or is setting a price really a function of many and diverse factors?
Ian Davies, director of UK brokerage Air Charter Global, says: “It has been noticeable that while the price of crude oil has been decreasing considerably since late 2014, it has taken a very long time for the benefits to reach certain sectors of the aviation industry. In our experience we have seen both operators and brokers taking a financial hit on what we would consider to be out-of-date prices. While speculative, this could mean that the major fuel suppliers have been reaping the profits for as long as they can.
“It is only recently, perhaps in the last three months, that we have seen fuel prices reflect real world changes whereby the average price per litre for Jet-A1 has been between $2.49-$2.67, excluding taxes. Unfortunately, the charter industry as a whole has seen a downturn in bookings for the past year. However, we are confident that the honest reflection in worldwide oil prices has been the catalyst for a slight increase in aircraft requests.”
What are the main pricing components? Claire Brugirard, vp aircraft management and vip charter at aviation group Comlux, explains: “Charter prices are influenced by a number of different factors, and these will always be relevant to price setting. Operational costs such as fuel, handling charges, crew salaries and insurance fees will vary depending on economics and market conditions. However, other impacts are those of time and place. In the summer, prices go up because demand goes up, just as for commercial airlines, so seasonal demand is an issue, as is the time of day of the flight. For example, if the airport opening hours need to be extended this may incur an additional cost. The geographic area of the flight is important as navigation fees are more expensive in Asia than in Europe, so if we are flying to Asia we will generally add some surcharges. War risk premiums may apply for operations to certain countries, and the number of passengers flying will affect the catering cost and passenger taxes.”
Mark Hardman, operations director of ExecuJet Middle East, says: “The cost of a charter flight can be split into three basic elements: direct operating costs, overnights/demurrage and then a margin. The direct operating costs are principally made up of fuel, catering, handling and airport fees, permits, permissions, crew transport and hotels, and some elements of maintenance. Fuel, handling and catering prices are generally the biggest variables. Handling in Moscow, Baku, Cannes, Geneva and London is very expensive in terms of FBO charges and catering, and these need to be factored in. Although as an industry we tend to try and absorb these additional costs, it is not always possible.”
Puja Mahajan, coo at Slovenian operator Elit'Avia, says: “Key factors such as fuel, parking and landing fees can all drive prices much higher depending on the location of the charter activity. Also, availability of the aircraft in the exact departure airport does influence the price: positioning costs can drive the cost of a charter flight up significantly. Competition and seasonality can influence pricing in a positive way for potential clients, simple supply and demand.”
Fuel and its impact on pricing
Jet fuel is partially refined crude oil and less refined than, for example, petrol – more like diesel. Business jets use Jet-A/Jet-A1 fuel, and there are those who consider it to be priced artificially high in light of the fall in the price of crude oil over the last couple of years. Is it simply that underlying discounts are not being passed on?
Jet fuel
In the cost of operating private aircraft, jet fuel is usually the largest variable factor, as evidenced in a 2013 SherpaReport analysis of the operating costs of the Embraer 300 at $1,292 per hour. The pricing per gallon of Jet A fuel can vary significantly more than for automobile fuel, often up to almost 50% depending on the airport. Not only is variability geographic, but it can also be affected by the size of the airport and by the levels of competition at each airport. As for the burn rate, in general, older jets will burn through more fuel than newer jets, and larger jets will burn through more fuel than smaller jets.
Platts vs the market price Fundamentals play a big role in determining the price of jet fuel according to Andre Sterchi, managing director of global aviation-jetfuel reseller aster JETFUEL: “Most important is the underlying price of crude, out of which Jet-A1 is manufactured. Then there's supply and demand influenced by shortages due perhaps to wars or civil unrest. And then there's market sentiment, reflected mainly in the futures market, which is influenced by hedgers, the airlines, and by speculators such as large investment banks.”
There are two price variations in Jet-A: Platts prices and market prices. Sterchi explains:
“For instance,” continues Sterchi, “since February 2014 when CIF NWE Jet-A1 Platts quotes started dropping, Jet-A1 'should' have decreased by 124.91 CAG until April 2015, at those airports whose basis is CIF NWE HI. If you had Platts prices you would have got that decrease, but if you had market prices then I'm not sure that the big suppliers and resellers would have passed that on. In other words Platts prices are always better, but only if one has comparative quotes and an idea what the differential 'should' be.”
A recent Conklin and de Decker analysis for Air Partner Jet Card advised that one of the most difficult to estimate costs for any aircraft operator is fuel. Most card programmes make a baseline assumption as to their fuel cost and then add on a fuel surcharge. This added cost is based on the fuel consumption of the aircraft and the cost of fuel at the time of billing. Most card programmes place a surcharge that can range up to $16,300 per flight hour, or more.
Brugirard notes: “While there is a correlation between the crude oil price and the price of jet fuel, this correlation does not necessarily extend to the average charter price of a business jet. As an example, if we compare 2015 with 2014, the cost of fuel has dropped around 20-25%. However, the impact on the overall operating cost is much smaller and the real reduction that reflects on the average hourly cost is more around 5%. At the same time, handling costs and navigation fees have increased, which brings the average cost to pretty much the same level. Comlux puts out a tender each year in order to manage our fuel supply and cost; thanks to this tender we are able to offer our aircraft owners a significant benefit from economies of scale.”
Fuel surcharges
A fuel surcharge is an additional fee added to the price of a flight to cover any additional cost of fuel if fuel prices rise. It is a means for an aircraft owner to offset the cost of fuel when it rises unexpectedly.
When oil prices began to go up around ten years ago, air fares increased alongside, and the sharp rise in the price of oil in 2011 saw a similar rise in surcharges. So why haven't surcharges fallen now that the price of crude has dropped? It comes down, in part, to hedging.
Aviation companies buy their fuel in advance to protect against potential unfavourable price movements. These hedges may be taken out a year or two ahead of time. Typically companies will hedge only a certain portion of their fuel requirements for a certain period, and often contracts will overlap, with different levels of hedging expiring over time. In the last year or so jet fuel has fallen from around $1,000 to $600 per tonne, so companies could still be paying up to nearly twice the current market rate for their fuel. Thus hedging inhibits the ability to adjust prices alongside those of the oil market.
Neither can pressure be brought to bear on companies to reduce these costs where clients sign up for long-term contracts or subscriptions that have a set price for travel. Such fractional or jet card arrangements do not allow leeway for price negotiation; only when these contracts come up for renewal can clients put pressure for prices to reflect lower fuel costs. Adam Twidell, ceo of UK brokerage and online booking platform PrivateFly, says: “Our private jet charter prices are on a pay-as-you-go basis, with customers being able to choose the best offer (from different operators) each time they fly. So price competitiveness is at its most keen and reflects changes faster than fractional ownership, where clients pay in advance for a block of flying hours from one supplier. When customers are already committed to that single supplier there is less motivation for them to drop their prices. And in the meantime, that supplier benefits from improved margins.”
Twidell continues: “Many charter operators are now reviewing their fuel buying and their charter pricing, to ensure that they stay as competitive as possible. Their ad hoc charter customers will feel the benefits of reduced fuel prices earlier than fractional owners. This is being seen already on our platforms at PrivateFly. Multiple operators in our network compete to provide aircraft options and pricing for every customer's flight, and our technology allows operators to benchmark pricing against competitors. So as some operators start to reduce prices due to falling fuel prices, others must follow or risk losing business. “If fuel prices stay at current levels, or drop further, we expect to see a clear impact on pricing from our operator suppliers over the next few months, and those price drops will be passed on directly to our customers.”
These unfavourable hedge positions will gradually unwind over the next year or two and new, cheaper hedges will be set up, bringing down the cost of fuel in the future. It is worth noting also that because fuel is priced in US dollars, currency exchange rates exert an influence and if the euro, for example, gets weaker, the cost of fuel rises.
Asian companies tend to hedge much less, which leaves them more exposed to fuel price swings. Thus at the moment many are currently benefitting more from a strong boost to profit from lower oil prices than elsewhere in the world. Jet fuel accounts for as much as 50% of Asian operating costs, higher than the global average of around 30%.
Other factors that make up the price of charter
All fees, taxes and other tangibles become components of the charter price. They are many in number and may not be applied universally. We have a look at the most important of them below:
Flight time
Fuel aside, the hourly rate for aircraft charter makes up the rest of the price, so length of journey and time taken are factors. The distance between departure and destination will also help define the size of the aircraft to be chartered; the further the distance, the larger the size of aircraft needed, unless refuelling stops are made.
Economies of scale, such as they are, come with longer flights. As a general rule, an average of two hours of flight time per day is necessary to leave an aircraft with a client, therefore trans-oceanic flights compare favourably on a per-head basis with commercial airfares, particularly for groups of 30 or more. However, the number of passengers on board may have little impact on the handling costs, for example, where a set fee may be paid for the use of the facility rather than a per capita one.
As with commercial flights, charter prices can increase during periods of peak demand. Operators may charge a premium for holidays and special events, and even the time of day of the flight has an influence. Major airports will have more slots to cope with busy periods, smaller airports may have curfews and after-hours issues. After hours are more expensive than regular hours and with slot issues, landing at a busy time can cause handling costs to go up as more staff are pulled in. If an aircraft is chartered for a one-way flight, the cost of flying it back empty will be incorporated into the charter price. For two-way trips, committing the aircraft to remaining with the clients may be an acceptable offset to the cost of empty ferry legs. But operators have different pricing structures, so where one may layover for three or four days at the destination and incur overnight costs, another may fly the same trip as two one-ways.
Positioning fees
Positioning fees are incurred pre-charter when the empty aircraft is moved to the airport where the flight begins. Typically the cost of charter will be lowest when using a local aircraft based at the airport of departure.
Comlux's Brugirard says: “One of the big elements here is the positioning and repositioning cost of an aircraft. Unless you are able to sell the ferry sectors, the cost of these will reflect in the overall charter price we quote. Most trips include at least one ferry sector to either position the aircraft to the departure city and start from there or fly back to the home base after the drop off of the passengers at their destination. This obviously increases the price dramatically.
“Several online platforms have come up in the last couple of years which are able to synchronise the ferry sectors of the operators with the demand of the charter market. The Comlux scheduling system is synchronised with most of these platforms so that brokers can have an overview of what empty legs are available day by day. Our aircraft are based in several places around the world and therefore there is a good chance that we will have a matching empty leg available especially for longer sectors and the transatlantic flights.”
ExecuJet's Hardman warns, however, that while nomadic charter models can work well for the operator and client, they are reliant on selling charter on a point-to-point basis so can also lead to losses. Landing fees
Each airport operator will set its own landing fee, usually in the range of $100-$500, depending upon the size and weight of the aircraft. This fee may be waived if the aircraft is refuelling at the airport, but generally landing fees are used to fund airport operations and to maintain runways and airport buildings.
Handling fees
When an aircraft is parked at a non-domestic airport for a length of time, between outward and return flights for example, the operator will incur handling fees for using a private jet terminal facility or FBO. Handlers will often expedite clearance arrangements, and the fees will also cover such costs as arranging fuel, toilet servicing, passenger transport to and from the terminal and crew rest facilities.
Crew fees
Most private jets have two pilots, perhaps with a flight attendant on-board too, and an operator will pass on crew salaries and expenses, overnight hotel costs and any cars and taxis needed for crew and passengers into the charter price. Overnight fees can be between $150-$600 per night per crew member for food, transportation and lodging, and crew per diem fees will be around $75 per person for food on day trips.
Short leg fees
A short flight is a journey of less than around 400 nm. The aircraft has to fly at a lower altitude over a short distance, which uses more fuel. In addition, some companies will impose a minimum flight time charge for each day the aircraft is away from its home base, which is usually billed as one or two hours at its hourly charter rate.
Incidentals
On top there are international fees for permits, customs and taxes when travelling to foreign countries. De-icing fees may apply if the trip encounters cold and snow. Catered meals will be added to the bill, and contingency charges may be applied to cover delays, diversions or cancellations.
Margins for owners
Hardman notes: “In terms of the Middle East charter market, prices have been stagnant over the last five years and this has affected charter viability and returns. Charter is one of those businesses where margins are tight and which often lose money when fixed costs and depreciation are taken into account. It is important for aircraft owners to understand that charter revenues contribute to the fixed cost of ownership under our business model, rather than profit in the true sense; the fixed costs being crew salaries and training, insurance, AOC and management fees and subscriptions. The recent downward trend in fuel prices has made charter a little more appealing to aircraft owners, although margins are still fragile and extra holding or a weather diversion can eliminate the yield. “A view held by a number of operators is that charter prices need to increase by 10-20% to ensure fair margins are made, these being key to having a successful and sustainable business. My personal view is that we will continue to see operators amalgamating to reduce costs and deal with over capacity in the market.
“Charter yields have for a number of years been below sustainable levels so lower fuel prices do not always reflect in the charter price. Presently the charter operator market has a number of quality players. Going forward, I believe we will see growing charter demand for large cabin and ultra-long range aircraft, with clients insisting on newer airframes, the best operators and Wyvern approval,” concludes Hardman.
Fuel is just a small part of the charter price
Twidell says: “Obviously there are a number of components which comprise a private charter price, but fuel is a major one, making up around 25% of the total. While short term fuel price fluctuations do not get passed on to the private jet customer, the direction of long term prices of crude oil does have an impact. And with the recent downward trend, we may begin to see changes in private jet charter pricing.”
Sterchi comments: “There are too many scenarios to consider for the future and I wouldn't like to speculate on price forecasts. Low prices will be good for the industry but not for global economic development and investments. Don't forget that oil companies, producers and OPEC all favour high prices. According to Vagit Alekperov, the founder of Russian oil giant Lukoil, 'The price is set by God'.”
The crude effect
If fuel makes up around a quarter of the charter price, crude oil in turn makes up only a small portion of the cost of fuel. The difference covers taxes, distribution, marketing and refining, and these factors are not affected by the underlying price.
Since so much of the price of Jet-A1 is not affected by crude oil prices, when crude does go down in value the consumer sees only a small portion of the drop. The supply of oil especially from new US fields is rapidly increasing, but even if crude oil prices fall away almost to zero, the cost of aviation fuel will still be high because the cost of crude comprises only a portion of the price paid at the pump.
Has the emergence of online booking platforms had an effect on charter pricing?
Claire Brugirard of Comlux says: “Online charter platforms have dramatically changed the world of private jet charters for both passengers and aircraft operators. In fact these platforms, if developed well, create win-win situations for everybody. The passengers have an opportunity to pay up to 60% less than the regular charter rate that would normally apply, and the operator is able to significantly optimise its yield.
“I believe the importance of online platforms will increase even further in the next few years. Comlux attaches great importance to these platforms and we strongly believe that such platforms will allow a much more transparent marketplace for a somewhat complex industry.”
PrivateFly's Adam Twidell adds: “Charter pricing used to be opaque and confusing for the private jet customer. Transparency and price comparison were becoming commonplace in other travel sectors, so why not in business aviation? Putting charter operators together in an online marketplace has had a major impact on charter pricing. It wasn't just a case of operators overcharging in the past, the advent of technology such as PrivateFly has given operators the visibility to benchmark their prices against their competitors. So their pricing has become more consistent, which is great news for the customer.
“This greater consistency in pricing has also helped to put charter nose-to-nose with fractional ownership. With more confidence in charter and in today's economic climate, it is getting harder and harder for many business aviation customers to justify paying a premium for being tied to one supplier. I think this will only grow in the future. And the undoubted benefit of online marketplaces is business efficiency, which lowers the cost of providing quotes to the customer.”
But Elit'Avia's Puja Mahajan notes that: “Brokers are a reality of the business aviation market, and they assist greatly in giving operators access to a wider market than simple web-based marketing. They also serve as useful intermediaries with clients in situations where flights don't go as planned. Becoming a broker is a very popular business start-up idea for aviation professionals.”
