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admin | Nov 12, 2018

Six reasons why allowing aircraft management firms to manage private aircraft (for private and charter use) can benefit all private aviation stakeholders

Context: The Ministry of Civil Aviation has been recently working on a proposal to allow aircraft management companies to manage aircraft which can be operated under private or commercial category.  Aircraft management is a popular service availed by aircraft owners worldwide, but not implemented in India so far. Per DGCA, the aircraft owner should be responsible for its operation and cannot outsource it to any third party professional firm.  The existing thought process is that this structure creates more accountability with the aircraft owner.

However, I think otherwise.  Aircraft ownership is unlike car ownership.  An aircraft is a complicated asset to operate and maintain and requires a solid team of domain expert professionals to manage it.  Not every aircraft owner can establish such a team. Hence allowing professional aircraft managers to manage private aircraft can only benefit all stakeholders – DGCA, aircraft management companies, aviation professionals as well as the aircraft owners and following are my arguments.  But first, I’ll cover some background.

Background data: Due to highly fragmented nature of the business, governing general aviation industry in most countries is highly challenging for the aviation regulators. The situation is same in India as well. Per DGCA data, there are 109 registered Non-Scheduled Operator Permit (NSOP) holding companies which operate 346 fixed wing airplanes and helicopters in India.  Thus India has an average of 3 aircraft per NSOP company. If we exclude large helicopter operators (fleet size of more than 25) such as Pawan Hans and Global Vectra, this average falls down to 2.5 aircraft per NSOP. The number is less than 2 for aircraft registered under private category. This creates a huge problem for the DGCA to oversee and regulate the maintenance and safety activities of more than 100 operators as the organization is already stretched for manpower and resources.

On the other hand, apart from a handful of charter operators, most of the NSOP companies are owned by large corporate companies.  Establishing and operating an NSOP with its own team of industry experts is not a preferred method of operating an aircraft for the companies due to extensive regulatory compliances and organizational set up.  However, they do this because of taxation, which is another topic of discussion.

Result: As a result, DGCA is required to monitor and audit more 100+ organizations which consumes significant resources, which the regulator lacks.  Moreover, only few NSOP companies are managed in the most professional and organized manner. There is a lack of experienced and professional accountable managers who can maintain the NSOP companies to the highest compliance levels.  The parent corporate companies don’t always prefer spending resources behind hiring and managing an able team of professionals. Therefore in many companies safety oversight could occur and quality of services to the aircraft owner is not always at the most desirable levels.  

Therefore following are six reasons why outsourcing of aircraft management could improve industry standards in India.
1. Better regulatory oversight:  In case an existing NSOP holding company, private owner or a new aircraft owner chooses to outsource its aircraft operation to a professional aircraft management company then all operational and regulatory compliances pertaining to the asset would be the responsibility of the aircraft management company and not directly of the aircraft owner.  As the aircraft owner is saved of all the operational hassles of maintaining an NSOP, which is not its core business anyway, then majority of the aircraft owners would opt to outsource their operational responsibilities to professional aircraft management firms. Doing this would significantly reduce the number of companies that DGCA would have to audit and monitor on regular basis.  This will tremendously reduce DGCA’s work load and lead to better regulatory oversight of few companies managing large number of aircraft on behalf of their owners.

2. Ease of compliance:  Managing compliances such as liaising with regulator, managing third party contracts, ensuring timely maintenance and preparing up-to-date documentation is a huge task for any aircraft owner and not its core expertise. Whereas aircraft management firms have a core expertise in managing complex aircraft operations and maintenance management.  They invest in training and compliances. Such firms have internal processes and team of experienced professionals who can manage multitude of aircraft types and meet their operational and maintenance requirements. Management firms are experienced and well networked in the industry and understand the technicalities and nuances when dealing with the regulatory agency and various service providers.  

Further, say an OEM has issued an advisory or a mandated action, the aircraft manager can plan and schedule it’s compliance on its managed fleet and the DGCA will only have to monitor one agency to ensure compliances on several aircraft.  

Thus it is easy for an aircraft owner to manage compliances when its asset is managed by a reputed and experience aircraft manager.

3. Efficiency of scale and resource light solution:  There are several companies which operate similar type of aircraft.  Currently all companies have teams which use different types of operational, management and financial systems.  Now say five companies use one Gulfstream model aircraft and each company has its own set of flight crew sets, maintenance engineers (if not outsourced), procurement and quality control and administration staff.  An option for all the aircraft owners could be to outsource their aircraft to aircraft management company. The aircraft owners need not hire pilots, procurement, quality control and administration staff. With right contractual framework and KPIs (aircraft availability), the aircraft manager would be responsible for hiring qualified staff to support five similar type of airplanes and make the airplane available to the owner whenever she/he needs to use it.  In such cases, the number of flight crew could be optimized to service five airplanes, just like in an airline. The same set of quality and administration teams could service five airplanes instead of each team supporting just one. Further, most aircraft management companies receive discounts on fuel, training, maintenance, and insurances which leverage the volume of multiple clients and can be passed on to the clients.

The aircraft manager would be able to provide better fixed monthly pricing to the owner which would be lower than maintaining an exclusive team of its own.   This is how the aircraft management companies provide efficiencies of scale and provide a resource light solution for the aircraft owners.

4. Transfer of knowledge and best practices:  Typically large aircraft managers operate similar fleet as well as various other types of aircraft.  As a result, they come across several operational and maintenance issues, which increase their knowledge base and experience of solving various types of problems.  Say a firm notices a particular technical or operational problem on a Cessna aircraft which impacts dispatch reliability. The firm can take proactive actions such as storing a replacement part or taking specific troubleshooting actions when they start seeing similar problem on other similar model Cessna aircraft in its managed fleet.  Thus the knowledge transfers from one airplane to the rest which currently cannot happen in case of individual owner operators.

5. Opportunity to charter:  One of the key capabilities of aircraft management firms is that they are also aircraft charter brokers and are well networked within the air charter community.  Such firms can market the aircraft for third party charters when the aircraft owner is not using it. This creates revenue opportunity for aircraft owner and helps to cover some portion of the fixed costs such as insurance, pilot salaries (if the crew is on the owner’s payroll), finance costs etc.  

6. Better maintenance of asset quality: An aircraft owner expects that the aircraft be available to her/him whenever it is required, the in-flight service is top notch, the overhead costs are controlled and when the time comes to sell the asset or return it to the lessor, the asset resale value is high or the deductions are minimal during lease return.  Fulfilling these expectations mean that the asset should well maintained, documents should be well updated and industry defined top standards are followed.

Some NSOP companies do a very good job of maintaining their aviation assets to the highest quality. However, not every NSOP company has the capability or the motivation to do so, partly due to hesitation from the owner to dedicate resources and partly due to lack of experience of the team.  

The core job of reputed professional aircraft managers is to meet the above expectations of aircraft owners.  Thus they have industry defined operational, management and documentation systems which assure that maintenance is carried out at pre-defined intervals, airplane documentation status is up-to-date and quality of service provided is per expectation by aligning all service providers.  Hence when the asset is transferred, the new owner or lessor is certain of the quality of documentation and asset quality when it is maintained by a firm which has reputation of providing above par aircraft management service.

Owner concerns and their mitigating actions:  

1. A concern that is put forward by one of the key stakeholders is there may be few professional aircraft management companies, their management fees may be disproportionate to the level of services provided.  

However, this concern could be easily alleviated by the fact that aircraft management companies will compete with each other for undertaking aircraft under their management.  In fact, my argument is that the quality of services will increase and pricing will decrease. This is because aircraft management companies will also earn some portion of the revenue from aircraft charters to third parties.

2. Second concern is over the control of aircraft. Aircraft owners are often advised that once the aircraft is managed by an aircraft manager the owner loses control over the operation of the asset. This advice is not correct.  The account manager at the aircraft management company is essentially someone who reports to the aircraft owner and is responsible for making it available whenever the owner needs it and ensuring coordination of operations and maintenance when due.  Further, the right contractual framework puts responsibility on the aircraft manager to deliver to the owner’s expectations.

Note of caution:  

1.  In some cases Aircraft management firms also end up becoming aircraft sales consultants.  This could be disadvantageous to the aircraft buyer as the firm may be biased on selling aircraft of the type that it already manages.   The key motivation would be that when the aircraft is bought, the management firm would get to operate it as it already operates the type in its managed fleet.  Hence aircraft buyers should have an independent sales consultant during the procurement process at least to vet the aircraft management company’s recommendations.

However, if the aircraft buyer is looking for an aircraft purely for functional use and is comfortable about the aircraft’s  capacity, mission suitability, price and operating costs and is convinced about the value proposition of the aircraft manager, then this could be a suitable option for hassle-free operations.

2.  Aircraft owners should do a thorough due diligence on the quality of aircraft management firms before they trust and handover their expensive asset to the firm.  Owners should check the operational history of the firm, qualifications and experience of the staff and quality of internal systems and processes before deciding whether handing over the aircraft to the firm is the best option or to simply manage it by oneself.   

I would be interested in hearing your comments.  

Sudhir S. Rajeshirke is Vice President – Sales at Arrow Aircraft.  He can be reached at sudhir.rajeshirke@arrowaircraft.com