What It Costs To Run An Airline

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While the strategy of marching capacity to demand using five airplane types seems simple enough, the plan could have expensive implications. What do you do with the aircraft that doesn't match demand on a certain flight? The usual rule of airline management is high utilization, a rule PBA breaks often for much of its equipment. The secret is buying used equipment that you can pay off fairly quickly. According to John Van Arsdale Jr., chief executive officer, "You got to own 'em if you're going to park 'em."

As an example, Van Arsdale says that if you were paying $30,000 a month for a Bandeirante, or roughly $1,000 a day, and flew it 5 hours a day, it would cost you $200 dollars an hour toward principal and interest. If you flew it 10 hours a day it would cost only $100 dollars an hour. Your operating costs go down as your hours of operation go up.

On the other hand, PBA owns its fleet of 12 DC-3s outright, all purchased for $20,000 to $120,000 and refurbished for up to $150,000 each. The problem is that if you fly a DC-3 hard, it can cost $25,000 a month just in maintenance. The more hours it flies, the more it costs.

The key is to "fly it full, then park it the rest of the time because you don't owe a dime on the airplane," says Van Arsdale. "What you target is high utilization of your expensive equipment and low utilization, high load factors, of your inexpensive equipment."

Van Arsdale is still a well-known tire-kicker around the used airplane markets, and he sees an advantage in both new and used airplanes. Although the seven Bandeirante airplanes were purchased new, representing a $10 million investment, PBA recently bought four 58-passenger YS-11s for $6 million from Piedmont Aviation Inc. Spare parts cost an added $500,000. In contrast, the de Havilland Dash 7, a plane with comparable capacity, cost $6.5 million new, and its spare parts cost $1 million extra. It is suggested that a minimum of two aircraft be purchased. PBA recently bought another used Cessna 402 (bringing the size of its fleet to 63 planes) for $150,000, compared with $375,000 for a new plane.

"It's a question of our tax situation nud our financial situation," says Van Arsdale. "We buy new when we need the tax advantage, and we buy used when we see a financial advantage."

The busier the airline, however, the more new planes make sense. "When your utilization gets up too high, your solution is to buy efficient, new airplanes. At that point you've got enough business to keep the new airplanes going," says Van Arsdale.

PBA expects to pay off its present debt within four years then go buck into debt for five new 30-pussenger Em braer Brasilia aircrnft at $5 million each, scheduled for delivery in 1986. "We need to do this to get the investment tax credits and depreciation to keep us from paying incredible taxes," says Van Arsdale. "You don't want to be debt-free at 7.5%."

Another factor in the choice of airplanes, one with a big impact on PBA's profitability, is the availability and price of fuel. The company's planes burn about 5 million gallons of fuel annually, costing $6.3 million in 1982, 22% of expenses. (A major airline's fuel would be a much larger portion of its expenses because of longer flights.)

One of the advantages of the Bandeirante and YS-11 is that they burn jet fuel, at $1.07 a gallon, rather than aviation gasoline, at around twice that price in New York. PBA has other scheines for lowering its fuel bill. After paying $1.75 a gallon for aviation gas in Boston, VArsdale bought two tanker trucks ut $42,000 und $15,000, respectively. They allow him to buy fuel at the wholesale price of $1.30 a gallon, store it in a tank for 4 cents a gallon, and truck it onto the ramp, avoiding the Boston airport retail rate. In New York, he encouraged Texaco to write a favorable contract with him by leaving $75,000 on deposit.

The other major expense, amounting to 25% of all expenses, is labor. While the captain of a DC-9 for a major airline may earn about $90,000, at PBA, a nonunion carrier, the captain of a YS11 earns $35 to $40 an hour,with a guarantee of 75 hours a month. The guarantee, which Van Arsdale says he chokes on now and then, works out to a base salary of $31,000. However, during peak season, PBA pilots fly the legal maximum of 100 hours a month, which means that nobody makes just the base salary. PBA's top pilot is paid $40,000 a year