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Feature Story

Chargebacks Can Offset Operating Costs, but What’s at Stake?

One of the most important considerations for any company or organization that owns and operates a business aircraft is how to account for its ongoing cost of operation. An intra-company chargeback system can be an effective way of allocating those costs among various company subsidiaries, departments or users. Basically, an internal chargeback – as defined in Business and Corporate Aviation Management by author John J. Sheehan – “is an attempt to recover all or part of the cost of air transportation services from a corporate user.”

While it may appear to be nothing more than an internal accounting tool, far more is at stake in deciding whether to use chargebacks and establishing the proper rate. Implementing chargebacks for internal use of the company aircraft also can affect the perceived value of the company’s flight department and business aircraft. So there’s a lot to consider.

Cost Allocation Varies Among Companies

“In this era of increasing competition amid a difficult economic environment, companies want to operate more efficiently,” said Mike Nichols, NBAA vice president of operational excellence & professional development. “So, many companies assign operational costs to internal users of the company aircraft. From NBAA’s perspective, it’s good for flight department managers to be aware of the ability to do chargebacks, particularly if it is in-line with the company’s normal accounting processes for other travel expenses.”

However, many companies large and small don’t use chargebacks, choosing instead to write off the cost of the internal operation of the company plane as an overhead expense. In fact, the 2012 NBAA Compensation & Benchmark Survey found that just under a third of companies with annual sales under $100 million had implemented a chargeback program for aircraft usage. Meanwhile, more than half to as many as two-thirds of companies with sales over $500 million were utilizing internal chargebacks.

Looking at business segments, the survey found that utilities companies were the highest users of chargebacks (69.2 percent), followed by engineering and construction firms (66.7 percent) and financial, insurance and banking firms (59.1 percent).

Public companies, while not required to allocate costs for business aircraft use, often use chargebacks, as do public and private companies with numerous operating divisions or subsidiaries.

“Sometimes you do need to do allocations,” said the controller of a large financial services company who has been involved for many years with the company’s aviation department. “You might have government contracts, and you want to assign your costs. Or if you’re a utility, you want to get your costs in the right place, because you need to show the expenses so you can justify charges to your rate payers and the public service commission.”

Chargeback Methodology

There are many methods for establishing a chargeback rate. According to Business and Corporate Aviation Management, two-thirds of companies implementing chargebacks allocate those costs by the flight hour. The next-most-popular method is to charge by the distance flown.

Some companies seek to recover all of the aircraft’s operating costs, but this often can result in a rate of several thousand dollars per hour, which can be too expensive for some department managers and lead to underutilization of the plane. Other companies set chargeback rates designed to recoup only a portion of the aircraft’s operating expense.

Deciding whether or not to use chargebacks begins with the company’s overall purpose in owning a business aircraft. “A lot of it depends on what the company culture is,” said the controller. “Is it looked on as an asset for the [entire] business or is it just used as a tool for senior management and nobody else? If it is looked at as a full asset, then the fact that you are not allocating carries less of a negative connotation.”

At Luck Companies, which operates four subsidiaries, the company decided to implement chargebacks simply as a method to control use of the company plane, said Scott Moore, aviation department manager.

“The philosophy of the company is, we decided to have an aircraft,” said Moore. “So all the salaries, maintenance, fixed expenses, insurance and such are paid for by the company. It’s an overhead expense.”

Moore set a chargeback rate of $500 per hour to pay for fuel costs. “It’s a direct expense,” he said. “If the plane is flown more in one month, my fuel costs go up, but I generate more income to cover those costs.”

Moore said the full-rate chargeback for use of the aircraft – a nine-passenger King Air 350 turboprop – would run about $1,200 per hour. “But then nobody in the company would fly on the aircraft,” he said.

Selecting the proper method for allocating chargebacks gets even more complicated for companies with operating subsidiaries. For instance, if a subsidiary company is not fully owned by a parent company, there could be a federal excise tax implication if using a chargeback. For that reason, the experts say the subsidiary should be included in the company’s overall consolidated tax return.

With so much to consider, the issue of setting chargebacks can be too complicated for some to justify their use. But in today’s operating environment, there are many practical reasons to allocate aircraft expenses.

For More Information

NBAA’s Compensation & Benchmark Survey provides details on companies that utilize chargebacks and other operational and salary data. Results of the 2012 survey are available at www.nbaa.org/admin/cbs.

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