WRITTEN BY Stefan Oberender ON April 11, 2019.
Accurate charter pricing is the biggest commercial challenge in business aviation. It is a constantly moving target, with evolving schedules and the need to position the plane where the customer is. There is no “correct answer” to the problem and you need to be good at Game Theory in order to approximate it. However, once you get good at that game, it will give you a great advantage over the rest of the market.
As COO and co-founder of FL3XX I had the pleasure of talking with a great number of inspiring people in the business aviation industry. Together, we searched for the ‘Holy Grail’ of accurate charter pricing, and I want to share some of my findings with you. So, let us get to it; which elements are most important to calculate accurate prices?
The perfect price of a flight does not matter unless that flight can take off! Before you invest any additional time, the first step in your pricing should be a feasibility check. Typically it would be based on operational items such as airport opening hours, emergency services, and availability of aircraft and crew. There are plenty of options to automate these checks if you have the data available.
FL3XX automates the feasibility check by testing 15 elements in real time. It includes the first real airport opening hours data set, purposely developed for automated checks. We are working hard to continuously extend the scope even further, so by the end of this year, you can check for over 25 items with no extra effort.
Optimizing flight feasibility ties in with our goal to provide more efficient workflows by automating features. Our current automated feasibility check covers roughly 80% of the issues. We aim to automate 90% of the sales and dispatch workflows, to enable our users to work more efficiently and happily. It lets FL3XX complete the boring legwork so that you can use that energy to increase your profit and grow your company.
Now that you have set up a decent feasibility check, you can focus on pricing models. Many carriers prefer fixed-rate pricing models. Be it for simplicity, or to comply with owner contracts. While easy, this approach is unreliable because it cannot adjust to the profitability of a given trip. In short, fixed-rate pricing does not use valuable data to make an informed decision. Instead, it relies on the gut-feeling of charter sales.
An alternative model is Cost Plus. It is based on a more informed decision. It analyzes the exact costs of a trip (fuel consumption, routing, navigation fees, airport fees, taxes, etc.) before applying a margin to the end. This method provides flexibility for you to apply surge pricing (and profit more) during high season or peak events. FL3XX fully enables you to apply this pricing model. To further increase the precision we can integrate with your flight planning system or AirportCharges.org from RDC.
I support both models, although I believe that the second way allows better cost control, which leads me to the next element:
Successful pricing balances the operator’s cost-basis with a targeted contribution to margin or profit. This balance determines the lowest rate that the operator can charge to avoid losing money. To create better cost control, you need to be good at predicting costs (FL3XX’s Cost Plus Model is ideal for that). You also need to constantly check your predictions after the fact – comparing it to your actuals. With this approach, you can fine-tune your Cost Model and get better every day.
While many operators do have good cost control, I see that many fail in closing the loop between actuals and quoting. Not surprising, because it is a daunting task to follow up on that manually. We will add closed-loop prices to our software later this year.
Unlike other industries, business aviation pricing is weighted by a necessary evil: Positioning Flights. As far as I know, there is no universal method to beat this. That is why FL3XX enables different positioning strategies, customizable to a carrier’s business model.
By default, FL3XX calculates positioning flights on the actual aircraft schedule for the next 3 days, and from/to the home base after that. It will also position the aircraft to the next base if there is a larger gap in the schedule. All these parameters can, of course, be set by the carrier. As of recently, the user can also choose Floating Bases instead of one fixed home base. But these are all very mechanical approaches. We are currently looking into machine learning functions in order to determine the best strategy fully automatically. We firmly believe that if a sales optimizer is fed with enough data (costs, demand, competition, geography of airports, events, seasonality, …) it will produce better margins for the operator.
Taxes are already eating up charter profit margins. And while some business aviators operate in partial VAT-exempt h(e)avens, many governments are fighting to seize more from this hotchpot. Consequently, I foresee “VAT-exempt International Air Transport” being defined more strictly, thus increasing the items that are VAT taxable. I am convinced that implementing a system to safely monitor and charge adequate amounts of VAT will drastically improve your pricing accuracy.
Additionally, our software includes all Passenger Taxes like the UK Air Passenger Duty, the Italian Luxury Tax, or the French Solidarity and Noise Tax in Charter pricing. To accommodate these complicated rules, FL3XX tracks all applicable tax rates and includes them in the Charter price to provide you with knowledge about where your money is going. You can produce tax reports for any country with one click. Making the lives of your accountants easier.
Why is FL3XX investing so heavily in pricing? Because we can implement auto-pricing for business aviation. Simply put, this will enable an operator to provide accurate, reliable pricing immediately, without having to crunch numbers and fax fuel quotes by himself. When we implement auto-pricing, you will be able to sell more quickly via your website, online brokers, market-places, flea markets, or even on a GDS.
The Holy Grail of business aviation is in accurate charter pricing, and it is closer than you think.
What do you think is the next step in accurate charter pricing? I would love to hear from you, so we can continue to build our pricing guide.
Stefan Oberender is an entrepreneur, pilot and co-founder of FL3XX; Aviation Management Software. Since launching in 2010, he has been building a comprehensive suite of aviation management functionality that equips the small to mega-size enterprise with everything needed to build effective and efficient operations.
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