The recent rise in inflation has caused many businesses across the aviation industry to start thinking about what this will mean for them moving forward.
Recently it’s very difficult to turn on any news media or digital device without hearing something about inflation. According to The Mises Institute Inflation is defined as, “when a government increases the quantity of paper money, the result is that the purchasing power of the monetary unit begins to drop, and so prices rise”. Also, according to Investopedia, Inflation is the decline of purchasing power of a given currency over time. In simple terms, inflation is the sudden or gradual increase in the general cost/price of goods and services. Inflation is generally measured by the consumer price index (CPI) for consumer goods, and by the producer price index (PPI) for capital or business goods and services. According to The Bureau of Labor Statistics (BLS), the current CPI is at 6.9%. While the PPI is currently at 8.63%. This means that for businesses including flight schools and Aviation businesses, on average the cost of the raw materials and inputs to do their business has gone up by 8.63% relative to the same time last year.
While these numbers may seem benign, they have significant implications for flight schools and aviation businesses across the country. In this article, we will discuss what those implications are, and make some recommendations as to how flight schools and aviation businesses can cope or even thrive in spite of these rising numbers.
- Inflation is the gradual or sudden increase in the cost of goods and services for consumers and companies.
- Flight schools and aviation businesses can deal with inflation in three ways. They can absorb the cost of inflation, they can pass these costs off to their customers and clients at higher prices, or they can increase their efficiencies across the entire organization that allows them to deal with higher costs without increasing prices.
- Flight schools and aviation businesses could become more efficient at operating their businesses which allows them to deal with inflation and rising cost, not having to pass this on in higher prices to their consumers, and possibly increase their profitability in the process.
In 2020 in the midst of the pandemic, businesses across the country had to cope with many uncertainties surrounding the future. With most people not being able to go to work to produce goods and services that cause a limited supply of goods and services in the market space, and the limited supply of capital goods, those goods and services that are used by businesses such as flight schools and aviation businesses become limited in supply. With a reduction in the supply of capital goods and services, it was perceived that this would cause amongst other factors the price of those goods and services needed by businesses to increase. Now that we are seeing increases in those goods and services needed by businesses, Flight schools and aviation businesses are now trying to figure out how to deal with the rising cost of doing business.
The Implications of Inflation
Flight schools and aviation businesses are affected by rising costs as a result of inflation in a number of ways. In return, these businesses try to cope with inflation in ways they feel are necessary to survive.
How does higher cost as a result of inflation affect flight schools and Aviation Businesses? The effects of inflation on these businesses are primarily two-fold. It affects the cost of raw materials, and it affects the cost of services.
Inflation causes the cost of raw materials to increase
Flight schools and aviation businesses, though service-based business primarily, employs various raw materials in providing their services to their clients and customers. Take for example the cost of repair – parts for aircraft and other ground equipment, the cost of fuel necessary to operate the aircraft, the cost of all the consumables such as engine oil, cleaning materials, etc. There is also another cost that is particularly related to the pandemic. This is the cost of extra cleaning and sanitation and providing personal protective equipment (PPE) to their staff and customers.
Inflation causes the cost of Input services to increase
Flight schools and aviation businesses are generally personnel heavy and a great deal of the cost of operations is the cost of personnel. The personnel includes pilots, instructors, management staff, maintenance staff (Internal or outsourced), supporting staff, and other outsource services. As with raw material costs, it can be quite difficult to control these costs, as these costs of services rise with other costs. Particularly if much of the Service is being used by the institution is outsourced.
Responding to Inflation
Flight schools and aviation businesses try to respond to inflation in the most appropriate way they deem fit in order to survive. Getting the response to the inflation right is key to the very survival of flight schools in particular because their margins are generally low relative to other businesses. This means that they do not have much buffer to work with when dealing with rising costs.
1. They absorb the rising cost
If a particular flight school or aviation businesses believe that inflation is transitory, meaning it is not going to last for a very long time, they will more likely to absorb the increased cost rather than increase their prices to their customers and clients in order to compensate for the increased cost of producing their goods and services. Whether or not the Institution chooses to absorb cost is based on the following:
- What do they hear from the authorities? For example, the federal reserve, that makes them believe that inflation is actually transitory.
- What are their competitors doing? If competitors are also absorbing the cost, it is more likely that the individual flight school or aviation business will absorb the cost as well. They might feel that if they pass on these costs to their customers and clients then these customers and clients will switch to the competition that is not increasing prices. On the other hand, if competitors are increasing prices and not absorbing cost this is a strong incentive for a particular institution to follow suit and do the same.
- What is the size of the flight school or aviation business? Size can play a role here, this is because larger institutions may have greater economies of scale. Therefore, while others may have to raise prices to compensate for a higher input cost, a large institution may be able to spread these costs across larger factors of production and be better able to absorb them rather than increasing prices to their clients and customers.
- Are there any built-in buffers? Built-in buffer is in reference to whether or not a flight school or aviation business has a large enough profit margin or cash and capital reserves to absorb the cost for some time.
2. They pass the increased cost to their customers and clients
If a particular flight school and aviation business believe that inflation is NOT transitory, meaning it is going to last for a very long time. They will be more likely to increase their prices to their customers and clients in order to compensate for the increased cost of producing their goods and services. Whether or not the Institution chooses to pass on cost is based on the same factors discussed above.
3. A Third Approach
Some flight schools and aviation businesses employs a third way either by themselves or in combination with the two discussed above. They try to become more efficient at what they do. They tend to do this in the following ways:
They increase efficiencies across the organization.
Flight schools in aviation businesses can increase efficiencies across their organizations by using various techniques and tools. One of the easiest ways they’ve done this is by employing greater technology in managing their entire business. There are dedicated flight school management software solutions that enable schools to manage their entire business more efficiently. This leads to increased aircraft utilization, process optimization, and more. This allows the institution to not only absorb the increase in the cost of inflation, not have to pass this on in higher prices to their consumers. Also, they may even be able to increase profitability in the process by squeezing out excess inefficiencies.
They retrain staff and personnel to deal with the changes in the economy.
This is a powerful way of reducing costs and increasing efficiencies. By retraining personal and staff, they can be equipped for the new market and economic conditions.
They make longer-term deals with their clients and customers.
Locking their customers in for the long-term reduces uncertainty and ensures that processes are crafted properly ahead of time to deal with serving those customers since they would’ve already known their needs way in advance.
In sum, while it is clear that rising cost due to inflation has significant implications for flight schools and Aviation Businesses, it is also clear that there are ways to cope with these changes. The more equipped an institution is to deal with rising costs, and the earlier they act it is more likely that they will be able to cope much better and not only survive but thrive throughout periods of high inflation.
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Orlando – On Aviation™