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Writing a business case: making the numbers add-up



Hand calculator.

Introduction

With the pick-up in demand for training, we regularly talk to people looking at starting up training centres and have helped some of these with, what is normally, the first step: to write a business case. These can be complicated to write, this blog takes a top-level look at the subject.


What are the issues that need to be considered?


Airline Vs Independent training centre - Airlines

For an airline the primary objective in considering the purchase of their first FSTD will be to save money; most fledgling airlines rely on Full Flight Simulator (FFS) dry lease time for recurrent training. However, as the number of aircraft in the fleet increases it can become more difficult to source all the recurrent training. Once the demand for FFS time exceeds 3,000 hours a year, approximately 50% of an FFS’ capacity, the likelihood is that it would be viable to have your own FFS, but it is a major capital investment and obtaining internal or external funding will rely on a good business case.


The first task is then to calculate the actual current costs, these may at first seem easy to calculate; just look at the invoices for buying FFS time. However, that is only the tip of the iceberg. To that the costs associated with your crews and instructors travelling to the FFS supplier’s training centre need to be added. So; hotel, living and travel costs as well as any associated qualification costs need to be added but even those are not the full picture. A more difficult assessment is the calculation of how many crew duty days have been lost due to training elsewhere and this is frequently the largest cost component. It is not unusual for a recurrent training session to consume three or four crew duty days. All this data will be available at the airline and needs to be collected and collated, not always a short task. What is more difficult is estimating the costs of running their training centre, we will look at that later.


A while ago we looked at the viability of training centres with only one FSTD (normally a FFS), one of the observations we made in that blog was that it was unwise to base the case on future, unsigned, dry lease sales. For an airline writing a business case, we would emphasise the principle of establishing your business case on your own training requirement; with any potential future dry lease income being considered as an opportunity.

What about a Flight Training Device (FTD)? Up until now we have, deliberately, been considering only the use of a FFS; because traditionally that is what smaller airlines have done. However, particularly in areas whose authorities are aligned to EASA, it is possible to offload a large portion of training onto an FTD; hence reducing the need for FFS hours. As well as doing the business case for FFS devices we would always advise to look at a phased approach, first obtaining an FTD and later a FFS.


Airline Vs Independent training centre - Training centres

For an independent training centre the motive is different, it is all about making money, the hardest thing for a new entry into this sector is often breaking the start-up catch-22; no one wants to sign with you for training until the FSTD is on order and obtaining funds is not possible without training commitments. For an existing training centre, with a track record, this is not as difficult but for a start-up it is by no means easy. Most independent training centres start with a single base customer who has a firm requirement for hours and wants to do their training locally but does not want to become an FSTD operator in their own right - yet. It will then be a matter of analysing the local market to estimate the possible demand and the rates likely to be achievable. 


The other big decision for the start-up training centre is whether they want to offer just dry training or if they want to become an Approved Training Organisation (ATO) and offer wet training. The setting up of an ATO is a major undertaking and our advice would always be to consider this separately after you have your first device in training; to use the old saying, don’t bite off more than you can chew.


As with the airlines considering starting a training centre the use of FTDs should be considered but, unfortunately, these would need to be in addition to FFSs; if your customers need to go elsewhere to complete either a Type Rating or Recurrent session you will have trouble retaining them.


Estimating the running costs

Whilst the costs may be easily calculated for a training centre with existing devices when looking to start a new FSTDO, an airline or independent training centre, it becomes more difficult. As with any start-up business, it is essential to have the help of someone who has the experience in running a training centre. You would think the FSTD Training Device Manufacturers (TDM) would be able to tell you this, they can’t. Yes they can give you estimates of power requirements and likely spares costs but the costs of labour, insurance, taxes, utilities, rent and many more are particularly local and dependant on factors only determinable locally. Then there is the cost of money, be that the interest needed to pay any loans taken out or to answer the question, should the organisation be fortunate enough to have sufficient cash, as to what return there is on the investment.


Structure of the Business Case

To summarise the elements that the business case needs to cover;

  • Start with your assumptions, how many hours per year usage, labour rates, staff numbers, etc

  • Quantify your set-up costs, including salaries for that period

  • Estimate your fixed running costs

  • Estimate your variable running costs

For an airline - estimate your savings compared with external training. For an independent training centre estimate your sales income.


How Do I get started

For an airline, the first steps are to accurately assess the real costs of your current training arrangements. As discussed above this needs to go beyond the costs of hours purchased from third parties. 


For both airlines and training centres the need is then to start to model the costs, both fixed and variable, in running an FSTD and the associated facilities.


How can Sim Ops Help?

At Sim Ops our partners have themselves started and operated training centres, helped both airlines and start-up training centres go through the process of writing and, more importantly, validating their business cases to justify the purchase of their first FSTD or subsequent FSTDs. We can also help you with the market analysis in your region to estimate the likely demand.

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