Taylor: Accountants R Us
March 27, 2018 By Corey Taylor
As the extractive industries ramp up and enthusiasm spreads in our industry, the ever-pervasive fear that, once again, every operator will suddenly feel “expansive” is becoming more acute.
After a decade and a half of unprecedented growth, followed by an almost five-year downturn, let us hope that prudency is the watchword of the day!
Humphrey Neill, a famous investor, once said something along the lines of, “It’s amazing how many people mistake bull markets for brains.” We see this often in our business. In fact, the margins can be so high compared to the direct operating costs that once the fixed costs are covered the margins can be incredible. Of course, the caveat here is that if you don’t fly enough you may not even cover your fixed costs. What to do then?
My pilot instinct says to first reduce those fixed costs. The obvious target is your overhead structure. A few years ago, you had one person doing safety, HR and lease management. Now there is someone in every role and even HR has an assistant. Maybe it made sense to turn one position into four when times were good, but can you turn four into one when things go bad? It seems reasonable to identify the essential positions and then work down. We don’t want to see unemployment, but this is business. The whole must survive.
These measures might seem reasonable, but they’re not often seen, or at least not initially. The usual action is to do nothing the first year and panic the next. Then, hire more accountants. Next, start getting rid of aircraft, because eroding your revenue base somehow leads to better earnings. My microeconomics professor insists that if you’re covering your variable costs (fuel, component overhaul reserve, direct wages, flight pay, etc.) you should keep those things working, and he has all kinds of graphs to prove it. Well no accountant I’ve ever met has seen those graphs.
After watching more than one company struggle, I have concluded that the aforementioned famous investor’s witticism has an inverse: “It’s amazing how many people mistake bear markets for failed strategies.” I’m not advocating doing nothing and waiting for the market to turn, but bringing in more finance-oriented people to fix things hasn’t worked yet, or at least not as a sole measure.
To avoid the accountant invasion, manage your company prudently at a growth rate that allows for down cycles. We all know of companies that grew with wild abandon, but that is the exception, not the norm. The efficacy of a decision should not be based on its outcome, but on its likely outcome. Betting the family fortune might double it, but was that a good decision? Regardless of outcome, we know it wasn’t.
Back to the fixed cost structure. This includes insurance, rent, mortgage payments, the accountants, the safety people, the ops manager and chief pilot — pretty much every single penny spent that isn’t related directly to spinning rotors and collecting revenue. That bill at the end of the year needs to be divided among your revenue producing assets – the helicopters. If you “save” by reducing your fleet and leaving your fixed costs intact, obviously every aircraft takes a bigger load. The start of the death spiral!
It’s true that there is a fixed cost component to every aircraft. If you have helicopters, either owned or leased with no prospects of revenue, then you do need to downsize. However, if an aircraft can cover its individual fixed cost and its variable cost as well, taking no share of the overhead, it’s still better to operate it.
For example, I worked at a company that had Bell Medium aircraft, leased with no annual minimum from the lessor. A better deal could not be found, yet they were returned during a market downturn to “save money.” The height of stupidity aside, the aircraft made a tidy seven-figure return for the operators that took them on and weren’t overcome by accountants.
Before I’m killed in an alley by accountants, I want to say the accounting function is essential. But in our nuanced and relationship-based industry, operations and maintenance need to be included in decision-making — not told what to do by people who view operations as numbers on a page.
Corey Taylor is the vice-president of business development for Newfoundland’s Universal Helicopters.