Making a Profit

July 1, 2001

Making a Profit

Focusing on managing expenses and revenues

By Bill de Decker July 2001 There is no direct connection between high quality aircraft maintenance work and profitability. Performing high quality work does not guarantee a profit — it only sets the stage for making a profit. And, the skills involved in managing any business profitably are very different than the skills required for successfully maintaining aircraft.

Profit = Revenues – Expenses
The following compares costs associated with doubling the size of a facility as well as when an organization adds another shift. Organization #1
(Doubles facility size) Organization #2
(Institutes 2 shifts) Original situation
(pre expansion) Facility Cost $250,000/Yr $250,000/Yr Billable hours 25,000 25,000 Cost per billable hour $10.00 $10.00 After expansion Facility Cost $500,000/Yr $275,000/Yr Billable hours 50,000 50,000 Cost per billable hour $10.00 $5.50

An analysis of the factors involved shows very quickly that a manager does not have direct control over the profitability of an operation.
Profit is what is left over after all the expenses have been subtracted from the available revenues. This also means that to make a profit, we need to focus on managing expenses and revenues.
Expenses are divided into two broad categories – fixed and variable. Fixed costs include all salaries for management, maintenance personnel and inspectors, hangar rent, utilities, insurance, training, tooling, inventory, etc. The variable costs, such as the cost of parts and contracted services, are primarily incurred in connection with a particular maintenance job and are usually billed to the client. While parts and contracted services do have an impact on profit because of the markup they carry, they don’t have nearly the impact on profitability that fixed costs have.
It’s important to remember that while these costs are incurred on a calendar basis (weekly, annually, etc.), the revenues to pay for them are earned through billings on jobs. The revenue for a particular job is composed of two components — the parts and the labor. The parts, as discussed before, are a variable cost and are only incurred as a result of the job. The labor consists of a number of billable labor hours multiplied by the hourly labor rate.

Productivity – a powerful tool
In fact, there is a direct connection between billable labor hours and fixed costs. Let’s say we have an organization that has $100,000 in fixed costs. With 1,000 billable labor hours, the fixed cost per billable hour is $100. With 2,000 billable labor hours, the fixed cost is $50 per hour. Many fixed costs, such as hangar rent, insurance, and maintenance labor salaries, are not under the control of a typical maintenance organization’s management. But, the number of billable labor hours produced by that organization is under their control. It’s called productivity and it is a powerful tool for making a maintenance organization profitable. Let’s look at two kinds of productivity – labor productivity and facility productivity. Billable Hrs/Yr Cost/Billable Hr 1000 $50.00 1250 $40.00 1500 $33.33

Labor productivity

A maintenance technician is paid for 2,080 hours per year, that includes at least two weeks vacation, 10 days of national holidays, one or two weeks of sick leave and usually several days for training or recertification. Detailed studies have shown that the typical professional person is available for productive work to their organization for about 1,800 to 1,840 hours per year. Studies have also shown that a poorly managed shop will only obtain 1,000 or fewer hours of billable time from that person. Well-managed shops on the other hand can schedule 1,500 to 1,600 hours or more for each technician. This difference has a big impact on cost per billable hour, as shown in Chart 1. Let’s look at this for a technician that makes $20 per hour. This equates to just about $50,000 per year, including benefits at 25 percent.
This data puts a real focus on the importance of job scheduling, parts expediting and all the other means available to make sure the maintenance technicians are fully focused on the customers’ aircraft. After all, they are the only ones whose work generates revenue. When they are required to chase down maintenance manual pages or worse, wait around for parts to show up, the organization is losing money hand over fist.

Facility productivity
The other half of the productivity equation concerns the facility and its management personnel. Other than the cost of inspection, the fixed costs for a facility and its management has very little direct relationship to the amount of work performed in it. Hangar rent, insurance, building maintenance, and utility costs vary little whether the facility is used for one shift, five days per week or three shifts, seven days per week. Similarly, the burden on accounting, marketing and general management increases a relatively small amount when the productivity of the facility is doubled. As an example, consider the case of two similar organizations. Both operate one shift, five days per week, both are expanding and both have outgrown their current facility. One decides to double its hangar space. The other decides to go to two shifts per day. Basically, one will double its facility cost, while the other one will increase its facility cost by perhaps 10 percent for extra utilities and greater wear and tear, as illustrated in Chart 2.
Admittedly, real world examples are never as clear-cut as these examples, but what is clear-cut is the impact of productivity on profitability. There are of course other factors on the expense side that impact profitability, but experience shows there is little question that productivity is a powerful tool to secure high quality maintenance and increased profits.