How to Cut Fleet Operating Costs with Mixed Fleet Ownership Models

Global airlines manage substantial aircraft assets across leased, owned, and financed fleets worldwide. This mixed ownership model creates unique treasury challenges that can make or break an airline's financial performance.

When United Airlines improved its treasury operations for mixed fleet management in 2022, it unlocked $843 million in additional working capital. Meanwhile, the collapse of Norwegian Air Shuttle in 2021 stemmed partly from poor treasury management of its complex fleet structure.

As such, it is crucial for aviation companies with mixed fleet ownership models to carefully review their fleet operating costs and ensure efficient treasury operations.

The traditional owned-fleet model is no longer viable. Today’s leading airlines strategically blend ownership types to optimise capital efficiency and operational flexibility. The International Air Transport Association (IATA) reports that leased aircraft now constitute 58% of global commercial fleets, up from 10% a few decades ago in the 1970s.

This ownership evolution demands sophisticated treasury approaches. Treasury teams now coordinate multiple payment streams in various currencies while managing diverse risk exposures across fleet types. Centralising fleet data can enhance decision-making and provide transparency, enabling better management of expenses and performance. A single timing mistake or unhedged exposure can wipe out an entire quarter’s profit margin.

Airlines with mixed fleets face three fundamental treasury pressures. First, they must forecast and manage drastically different cash flow patterns - high upfront costs for owned aircraft versus steady payments for leases. Second, they navigate multiple currencies, with lease payments typically in US dollars while revenue streams vary by market. Third, they balance various debt covenants and financial requirements across fleet types.

Monthly lease payments for aircraft typically range from $200,000 to $1 million, with maintenance reserve payments adding an extra 15-20%. For owned aircraft, heavy maintenance costs can exceed $4 million per event, requiring careful planning and timing. Mistakes in managing these costs can quickly lead to higher capital expenses.

Fixed costs are the backbone of an aircraft’s financial structure, remaining constant regardless of how often the aircraft is flown. These costs include depreciation, insurance, maintenance, and storage. Effective management of these expenses is crucial for maintaining a healthy bottom line.

Depreciation: Aircraft lose value over time, and this depreciation should be factored into the overall cost of ownership. Fleet managers should consider the aircraft’s resale value and plan for its eventual replacement.

Insurance: Shopping around for insurance quotes can yield significant savings. It’s essential to find the best rates and coverage that meet the specific needs of the fleet.

Maintenance: A proactive maintenance schedule can prevent costly repairs and extend the aircraft’s lifespan. Regular inspections and timely repairs are key to managing maintenance costs effectively.

Storage: Storing aircraft in secure hangars protects them from the elements, reducing wear and tear and, consequently, maintenance costs. This investment in proper storage can lead to long-term savings.

Treasury teams need a clear framework to handle mixed fleet complexity. Leading airlines start with centralised cash management to maintain full visibility across all ownership types. They implement dedicated systems to track and forecast key metrics by fleet category. Most importantly, they establish clear protocols for when and how to adjust their ownership mix based on market conditions.

Fleet management software facilitates real-time tracking, route optimisation, and predictive maintenance, aiding in expense management and decision-making.

Air France-KLM demonstrates this approach in action. Their centralised treasury operation optimises working capital across 47 different leasing entities while managing owned aircraft investments. This structured approach reduced their working capital needs by €400 million in its first year of implementation.

Strategic Cash Flow Management with Fixed and Variable Costs

Mixed ownership models create intricate cash flow patterns that demand careful orchestration. Successful airlines map out all major cash flows by fleet type:

Fixed lease payments and maintenance reserves

Variable maintenance events and modifications

Debt service on owned/financed aircraft

Insurance and regulatory costs

Smart treasury teams use this mapping to identify opportunities. By aligning maintenance events with lease payment schedules or strategically timing aircraft modifications, airlines can achieve significant cost reductions.

Calculating Total Cost of Ownership (TCO)

The Total Cost of Ownership (TCO) is a comprehensive metric that provides a complete picture of the costs associated with owning and operating an aircraft. Calculating TCO involves summing up both fixed and variable costs, offering fleet managers a clear understanding of their financial commitments.

The formula for TCO is straightforward:

TCO = Fixed Costs + Variable Costs

Fixed Costs: These include depreciation, insurance, maintenance, and storage. These costs remain constant regardless of the aircraft’s usage.

Variable Costs: These encompass fuel expenses, maintenance events, and other operating costs that fluctuate based on the level of aircraft activity.

By accurately calculating TCO, fleet managers can make informed decisions about their fleet, identifying areas where cost savings can be achieved and ensuring that their financial strategies align with their operational goals. This comprehensive view of fleet costs is essential for optimising financial performance and maintaining a competitive edge in the aviation industry.

Risk Management for Complex Portfolios

Mixed fleets amplify standard aviation risks and create new ones. Market value fluctuations affect both owned assets and lease renewal terms. Interest rate movements impact financing costs differently across the portfolio. Currency exposure varies by ownership type.

Recent market volatility highlights these interconnected risks. The 2023 banking crisis drove aircraft lease rates up by up to 25%. Airlines with predominantly leased fleets saw costs surge while those with balanced portfolios maintained stability. Best-in-class treasury operations actively monitor and hedge these layered exposures.

Optimising Funding Sources

Modern aviation requires diverse funding sources to support mixed fleet strategies. Bank debt provides flexibility while capital markets offer scale. Operating leases preserve capital and finance leases build equity. Export credit agencies support new aircraft acquisition.

Successful treasury teams regularly rebalance their funding mix based on market conditions. Emirates maintains eight different funding channels, helping it secure nearly $5 billion in favourable financing during the post-pandemic recovery. This diversity proves critical during market disruptions.

Technology and Systems Integration

Treasury technology must evolve to handle mixed fleet complexity. Leading airlines invest in systems offering:

Real-time visibility across ownership types

Automated payment processing and reconciliation

Integrated risk management and hedging tools

Advanced forecasting capabilities

Regulatory compliance monitoring

While implementation costs range from $500,000 to $2 million, airlines report 15-20% reductions in financing costs after deployment. These savings stem from better cash utilisation, reduced manual errors, and improved decision-making.

Working Capital Strategy

Mixed fleets demand sophisticated working capital management. Traditional approaches focusing solely on days payable and receivable fall short. Modern treasury teams leverage portfolio effects across their fleet mix.

Air France-KLM pioneered new approaches here. Their treasury operations optimise working capital across owned and leased assets while maintaining strategic reserves. This holistic view helps them reduce costs while ensuring operational flexibility.

Aviation treasury management continues evolving. New aircraft financing structures emerge regularly. Digital payment systems are growing more sophisticated. Risk management tools become more powerful. Environmental considerations add further complexity.

Treasury teams must stay ahead of these changes. They need flexible systems and adaptable strategies. Those who master this complexity will create lasting competitive advantages for their airlines.

Effective treasury management delivers measurable competitive advantages in today's mixed fleet environment. Success requires sophisticated strategies, robust systems, and continuous adaptation to changing market conditions.

Modern treasury platforms help aviation companies navigate these challenges. Fyorin's integrated solution handles multiple payment streams, currency exposures, and risk factors while maintaining the flexibility needed in today's dynamic market. Airlines can optimise their treasury operations without sacrificing the agility required to thrive in an evolving industry.

Regular strategy reviews ensure treasury operations evolve with business needs. The most successful airlines treat treasury as a strategic function, not just an operational necessity. This approach will become even more critical as aviation continues its transformation.

What is Aviation Finance?

Aviation finance is a specialised field that deals with the financial intricacies of owning and operating aircraft. It encompasses a deep understanding of the various costs associated with aircraft ownership, including both fixed and variable costs. Fixed costs, such as depreciation, insurance, and storage, remain constant regardless of aircraft usage. On the other hand, variable costs, like fuel expenses and maintenance, fluctuate based on operational activity. Navigating aviation finance also involves exploring different financing options to acquire aircraft. This can include traditional aircraft loans, which provide ownership equity, or leasing arrangements that offer flexibility without the burden of ownership. By mastering aviation finance, fleet managers can make informed decisions that optimise their fleet’s financial performance, balancing the benefits and drawbacks of each financing method.

How can airlines manage fuel costs effectively?

Airlines can manage fuel costs by employing fuel hedging strategies to lock in prices, optimising flight routes to reduce consumption, and investing in fuel-efficient aircraft. Accurate forecasting and centralised treasury management also play a critical role in controlling this significant operational expense.

What is the difference between fixed and variable cost in aviation?

Fixed costs remain constant regardless of aircraft usage, including expenses such as depreciation, insurance, and storage. Variable costs, such as fuel and maintenance, fluctuate based on the level of aircraft activity. Managing both effectively is crucial for optimising an airline’s financial performance.

How do airlines reduce fuel consumption?

Airlines can reduce fuel consumption by implementing measures like optimising flight routes, using lightweight materials, and maintaining aircraft engines for peak efficiency. New technologies, such as real-time weather monitoring systems, can also help adjust routes to minimise fuel use.

What role does asset finance play in fleet management?

Asset finance allows airlines to acquire aircraft without large upfront payments by leveraging loans, leases, or other financial instruments. This strategy helps preserve working capital, enabling airlines to maintain operational flexibility and invest in other critical areas.