Blog about aviation & marketing

THE AIRPORT LEASE/OPERATING AGREEMENT – ONE MORE TIME! By Rod Beck

Airplane Business No Comments

As a result of last months feature article concerning the significance of the airport lease and operating agreement and receiving several e-mail’s on this topic, I thought it may be helpful to emphasise two of the major areas of this vitally important document.

TERMS OF THE LEASE

This would include the length of the lease; years, months, options, monthly rental rate, and assignment/early termination (exit) clause. Another important consideration is this; since you’re not going to have much business (cash flow) in the first 1-6 months, “ask” for rent abatement or basically “NO” (free) rent for those months. Second, if for  example the airport landlord insist he wants/needs an average of $2,000/ mo or $24,000 rent for the first year, proposed a “sliding scale” rent structure; instead of the $2,000/mo, offer $1,000 for the first 3 months, $1,500 for months 4-6, $2,000 for months 7-9, and $2,500 for months 10-12. This will be more in line or parallel with you’re “gross income” during the start-up (first year) phase. Year 2, however, will then revert back to $2,000/mo figure.

Banks and other financing sources will rarely extend credit beyond the terms of your lease, so keep in mind that if you have aircraft financed for 5-10 years, you’ll want at least a lease for10+ years to assure the lender you have continued airport operating rights and business longevity. On larger investments such as hangars/offices, this should extend for a minimum of 25 years.

Almost all municipal or county owned/operating airports have a “Standard of Service” or minimum criteria. Simply, they may state or require that if you wish to open or purchase an existing fight school, you MUST have a minimum of “X” aircraft; say 4 training and rental aircraft 2 of which must “4 place” i.e. Cessna172, Piper Archer, etc available.

But what IF you don’t require or can’t justify 4 aircraft from “day 1” or opening date? Propose 2 aircraft at the onset with a 3rd in “X” months and a 4th by the 6th month, for example. Why pay “fixed costs” or loans on aircraft before you have a need or sufficient customer/student demand?

Other prerequisites might include adequate financial ability and the stability to perform the services you propose. You also may be required to be a “full service” FBO offering not only flight training, but maintenance, fueling, storage and maintain a 16-18 hr a day 7 days a week presence. Obviously this may change your financial ability or not something you wish to do.

THE OPERATING AGREEMENT

This is the part of the lease which will spell out “what you can do – and what you can’t”. Be very careful here; even though your initial business may be that of flight training, INCLUDE the option to perform other services such as aircraft sales, maintenance or fueling, even if later you decide it’s not in your best interest or on airport or if other area competition deems it wouldn’t be profitable.

An area that requires a word of caution, however, is when the airport landlord proposes a “percentage of the gross” of your income for rent obligations. Frankly, this is cause for immediate concern and indicates, in most cases, an “unreasonable” and seldom used method of satisfying monthly/annual lease/rental payment. If, for example, the airport is asking 5% of your gross and your “profit margin” is only 5%, essentially, you haven’t made ANY money!

A well thought out business/marketing plan will include “permitted use” of all of these additional profit centers regardless if you implement them or not – at least it shows forward planning and ambition and if nothing else will also impress airport management that you’re a visionary.

Since this is NOT your run of the mill “apartment lease”, best to get professional advice from an aviation consultant (US!) and, ideally, an aviation attorney familiar with airport leases. The rent to the airport is your number one financial priority every month and a fixed expense.  And historically, fixed expenses demand higher gross incomes to “break-even” and therefore, ideally, should reflect realistic income and obtainable sales goals!

REAL WORLD CASE HISTORY

In 1977, I proposed a lease for an FBO takeover on the then Toledo-Metcalf Airport, (KTDZ) with a monthly rental rate of $2,000. This included a hangar of 100 x 100, and attached offices of 20 x 100, In addition 22, T-hangars and a ramp area of 200 x 600, were part of the package.

My idea was IF I could “cover” the monthly lease term of $2,000 from income derived from storage and tie-downs, I had a good part of my “fixed” expenses covered. As it turned out, my proposal was accepted; and I had $200 “excess” as my storage/tie-down income was $2,200/mo!

A conservative and realistic pro-forma income/loss statement prepared for your operation BEFORE signing and negotiating the lease includes a rent budget that is “do able” based on sales and income projections, as previously stated, is highly recommended.

Finally, keep this in mind; your proposed lease/operating terms are only as good as your ability to perform and honor them!

Rod Beck – Aviaiton consulting, aviation consultant

Aviation and Marketing – How general aviation has to figure this out to survive

Aviation Marketing 7 Comments

Aviation and marketing seems to be a seperate terminology that is not very familiar to most aviation entrepreneurs, flight schools, and to some extent the manufacturer of airplanes.  Being that aviation is a low volume business, it makes sense that target marketing is the most effective way to gain a new prospect, yet aviation has the approach that advertising isn’t really necessary if at all.  It seems that more often than not, and I can show many examples of this, it seems that throwing money at the problem without any measurable result, is something that aviation enjoys doing, if they market at all!  Those that have done so always remind me that spending money advertising in “Cigar Aficionado” isn’t going to bring us any new business…and I tell them they are right! Whether it is charter business, a flight school, or aircraft sales, the key is to IDENTIFY who the best prospect is and figure out a way to market to that client.  Ever heard of NetJets?  Yeah, they figured it out.  Consider NetJets is an alternative to aircraft ownership, it is an expensive way to have access to an airplane…yet they do very well!  Read More

Operating a flight school – can anyone say PROFITABILITY?

Flight Training 2 Comments

I was recently going over a few aviation subjects with a non-flyer, and the person was astounded by the number of people who start flying and never complete their pilots license.  I was quoting somewhere in the 87% range, which was an amazing stat considering most people show up at the airport knowing the amount of training and money it will take to achieve their goal.  The industry believes this is a problem with the CFI, when in reality this is a flat out management problem that needs to be fixed.  The answer to the drop-out rate of student pilots:  Flight schools need to start tracking their results like a business, and operating the flight school as a business. Read More

Selling airplanes and market demand – why airplane prices are so low!

Airplane Business No Comments

It is always funny putting an airplane on the market and posting it on-line the first time…because you get so many calls on the airplane from people (note I did not identify them as buyers), who have an interest in the airplane.  I think it is like a house that has been on the market for a long time, after a while you cannot even GIVE the house away because everyone believes there is a problem with the house and that is why it hasn’t sold.  Nonetheless, my approach to selling an airplane is that of a different angle, in that price isn’t discussed at all and it is why “discovery” is so important in the process…because in reality, I don’t want to talk about price if you are not ready to buy the airplane until June of next year!  Nonetheless, the used airplane market for high performance airplanes is definitely depressed, one may look to the banks as the problem to get financing, the other is the TYPE of buyer that is in the market. Read More

WILL “BUSINESS” EVER COME TO RECREATIONAL AVIATION? By Rod Beck

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Okay, there are many true stories about MBA’s getting into the aviation business, only to discover that this industry has a few unique characteristics that have lead to many business failures.  However, one of the most intriguing aspects of the aviation business, is that the emotion of being in aviation is so intoxicating, that although an MBA should be able to figure out whether an opportunity exists or it doesn’t, the fact is if it involves an airplane, then that fact alone covers all the sins of not following a professional business practice.  The question that a lot of people have regarding aviation, is “can a person make any money on the recreational side?”  The answer is an emphatic yes!  An example would be the LSA (Light Sport Aircraft). It was meant to solve a lot of problems (lower the cost of flying), yet it has been a disappointment because the hard part is marketing and selling the airplane, and not just thinking that everyone is going to love the product because it is an airplane! Read More