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The Value of the Aviation Maintenance Engineer

by David Wyndham 7. May 2013 09:29
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I just returned from the NBAA Maintenance Management Conference. This year it was held in Fort Worth, TX. The NBAA Maintenance Committee and NBAA staff did another great conference. If you are an Aviation Maintenance Engineer, or manage the maintenance function in any capacity, this is for you. There were exhibitors and a series of presentations designed to further advance the professionalism of the maintenance career field. The presentations of all the awesome speakers are available online: NBAA_Maint_Mgr

I was invited to give a presentation on “Maintenance and the Art of Aircraft Acquisition Planning.” I had 50 minutes to go over the acquisition process. Suffice to say it was the 40,000 foot overview. While I could tell them nothing they didn’t already know about a pre-buy inspection, I did want to give them the overview that would encourage them to be a part of the whole acquisition process from the very start.

Notice that I used a term Aviation Maintenance Engineer (AME). While we still use A&P or mechanic in the US, other countries have used the term Engineer. Like we do in Flight Engineer. I think this term better fits the level of commitment and professionalism of this group. Too many AME’s toil in obscurity in the hangar and are not involved in the day-to-day process of the running of the aviation operation. This is a shame, and perhaps a travesty.

AME’s are in, and part of the every day life of the aircraft. They have intimate knowledge of the aircraft, its systems, and the level of support available locally and globally for every component on the aircraft. That is enough to make them an important team member in the aircraft acquisition process. AME’s also interact with the crew and passengers as the board and deplane. They, along with your pilots and everyone else at the hangar, are the first face of your company when you bring in clients and prospects to visit your company.

AME’s are no better or worse prepared to be managers than pilots. While it seems a natural progression to go from first officer to captain to chief pilot to aviation manager, most AME’s go from technician, to shift leader, and top out at the maintenance manager level. Through education like the NBAA CAM as well as degree-level schooling, AME’s develop into excellent managers. Many pilots, when promoted into manager positions, try to maintain proficiency in the aircraft and develop proficiency as managers. For a small operation this can be done. For larger operations, the Aviation Manager/Director of Aviation position can be a full-time job. The skills required to be a manager and leader do not require an Air Transport Pilot rating (nor an A&P).

If you a fortunate enough to have in-house maintenance staff, get them more involved in the running of your operation. They see and know a lot. Get them more education and encourage their professional development. In addition to motivating a great employee, you develop team leaders and future managers with the skills needed to keep your aviation operation running well.

Aircraft Chargebacks - What Are They?

by David Wyndham 1. April 2013 14:33
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In some companies, the term chargebacks sends shivers up the spine of the aviation manager. In others, it is a fact of life and a challenge that is met by aggressively marketing the value of the aircraft to the users. Chargebacks can drive utilization, but you can still prosper.

A chargeback is an attempt to allocate the cost of providing the air transportation service to the departments those that use it. In general, the business aircraft, due to its cost and limits to its availability, is restricted to providing air transportation to high value individuals or teams of individuals. How the use of the aircraft is restricted is fundamentally important key in deciding on a chargeback scheme.

If the aircraft is limited to a very small circle of senior executives, or even to one individual (e.g.,the CEO), then the cost of the aircraft can be allocated 100% to the (C-level) headquarters budget. The total cost of the corporate headquarters function is then allocated to the various business units by a common method.

If the aircraft use is made available to different departments, divisions or subsidiaries, then some method of charging those business units for its the use of the aircraft may be appropriate. The general chargeback principle is that those who use the aircraft pay an equitable share for that the use of the aircraft. Chargebacks can range from a 100% reimbursement of all costs to something less than full cost recovery.

There are three considerations pertaining to as to the charge backs method to be used:

1. Metering: How much is utilization of the aircraft to be restricted? High chargeback rates will reduce the aircraft usage while low (or non-existent) chargebacks encourage aircraft usage.

2. Consistency: Is there already an established protocol pattern at the corporate level for distributing other centralized costs? Can an existing policy may be applied to the aircraft?

3. Relevance: When using chargebacks, there must be an accurate accounting of the aircraft costs that supports the chargeback method.

According to the NBAA, about 44% of its corporate members use chargebacks.

When allocating the aircraft costs in proportion to its use, the corporation can elect to recover all or a portion of the costs. Again, the higher the cost, the less likely a business unit is to use the aircraft. With the aircraft, two of the most common chargeback allocations are the fully loaded cost allocation and the operating cost allocation.

Fully Loaded Cost Allocation

A fully loaded cost allocation is an attempt to allocate 100% of the aircraft costs among the users of the aircraft. If headquarters used the aircraft 67% of the time and sales, 33%, then sales should pay 33% of the aircraft budget.

Where this gets difficult is in budgeting and setting the rate. Rates can be by the hour, mile, or seat-mile. If the actual costs exceed the budget, how are the added costs to be recovered? Or, if costs are lower than budgeted, will funds be returned to the business units? Does the full allocation include depreciation of the aircraft or just its operating costs?

This method requires a clear understanding of the aircraft costs and an accurate budget.

Operating Cost Allocation

The operating cost allocation involves some formula to cover the Variable Operating Costs (fuel, maintenance, etc) and the Fixed Operating Costs (crew salaries, hangar, insurance, training, etc). The options range from a percentage of the variable costs to recovering 100% of those the operating costs.

This chargeback method, which can be in the form of an hourly cost or a seat-mile cost, also requires a clear understanding of the aircraft costs and an accurate budget.

This chargeback can be in the form of an hourly cost (if using the whole aircraft) or a seat-mile cost (if “buying” seats on a scheduled trip).

Other companies my use an external source for their chargeback. Most common Are the US URS SIFL rates and First-Class airfare.

SIFL rates

In the US, the Internal Revenue Service uses Standard Industry Fare Levels in imputing the value of private air travel for non-business/personal use. These IRS SIFL rates can also be used for the chargeback cost of the business aircraft. The IRS SIFL formula is based on distance and seats, not the actual cost of operating the aircraft.

First Class Airfare

This chargeback avoids the requirements for detailed aircraft accounting and assigns a predetermined First Class Airfare cost to the use of the aircraft.

There may be other formulas in use such as per mile allocations, an allocation of the depreciation of the aircraft, or a hybrid-mix of the above formulas.

“Flight Department Companies”

Business aircraft operate in the US under FAR Part 91 and are classified as noncommercial transportation, whereas FAR Part 135 allows for commercial transportation for which compensation is collected. However, the IRS may question the aircraft chargebacks and in some cases, may reallocate them during an audit. Care must be taken to avoid any action that either suggests or creates a separate company to provide air transportation services to the corporation (even between subsidiaries within the corporation) unless that separate company holds a Part 135 certificate. For corporations that own an aircraft for its own use, However, chargebacks are an acceptable way to allocate the use of the business aircraft among the company’s users.

The chargeback allocation needs to reflect how the company values the use of the business aircraft. If done with that value in mind, it can be useful to assign a cost to a limited asset of the business aircraft. Thus entities within the company are using the business aircraft when it is most effective to do so. Using chargebacks just to throttle use of the aircraft can be disastrous.

Does your company have a chargeback system? What is it and how bad or good has it been?

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David Wyndham

Use Caution When Comparing Aircraft Costs

by David Wyndham 1. March 2013 13:44
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When comparing aircraft costs, understand what costs are included, what costs aren’t, and how the costs are calculated. If you don’t take all three into account, you can end up with cost data, that although technically correct when viewed alone, is an invalid comparison.

Let’s take an easy one. Fuel How much do you spend on fuel? We did this for a benchmark client, asking what their cost per gallon was for fuel at home and on the road, as well as their annual fuel budget. Seemed straightforward until I started looking at the results. At home, several operators reported fuel costs of less than $2.50 per gallon. This was when then national average was over $5 per gallon. I was able to follow up with the operators and I found out two things:

1. These operators had their own fuel farms.

2. The cost of fuel to them was the wholesale cost when the truck pumped the fuel into their storage tanks.

These operators correctly and accurately reported that their fuel cost at home was less than $2.50 per gallon. The cost of the installing and maintaining the fuel tank and operating their fuel truck, as well as the taxes and fees were all excluded from their cost of fuel. Those costs were in the cost of the hangar and grounds throwing that benchmark off as well. So my intent was to arrive at the “Total cost of fuel inclusive of every cost of every item needed to get the fuel into the aircraft tank.” But without a lengthly definition and explanation, how is an operator to know exactly what I need?

When comparing costs, you need to be clear and consistent in what costs are included and how those costs are calculated.

Another area where costs can be reported in disparate ways is maintenance. “What is your cost of maintenance?” is such an open, and loaded question. Do you get your aircraft maintained at a service center? Do you have in-house maintenance staff? Do you have inventory and how/where does that cost get recorded? Did you record the costs as an accrual or as they occurred?

As an example, take a major airframe inspection due every six years on a large business jet. The cost of that inspection is $240,000. As an answer to “what is your cost of maintenance?”, it could be:

1. $240,000 this year as the inspection was done this year ($600 per hour if flew 400 hours)

2. $40,000 per year accrual for six years (or $100 per hour is flying 400 hours each year)

While in our costing we look at the $100 per hour as the cost of the above inspection, neither accounting is incorrect. When comparing costs, we stress using an accrual method. This way the cost of something is allocated over the time it took to accrue that cost.

If budgeting, then you need to look at the timing of the cost. Comparing costs by looking at a budget can be helpful as it shows not only what the costs are expected to be, but when they are likely to occur. If you are evaluating the acquisition of a used aircraft, when the major airframe inspection is next due can be important. So while Both Aircraft A and Aircraft B can have a similar budget, Aircraft B may face that major inspection sooner than Aircraft A. This information is good to know.

Comparing aircraft costs should be done using a fair and consistent method. The timing of major costs should also be considered. While no one method is the best method, the comparison should be done on an “apples-to-apples” basis and then relative differences are what adds meaning to the comparison.

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Aviation Fuel | David Wyndham | Maintenance

2013 Outlook for General Aviation

by David Wyndham 1. February 2013 09:37
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For our small company, 2012 was a decent year. We saw solid growth in our product sales. We were careful with our expenses and stayed profitable.  One thing I was encouraged about was that more of our customers are seriously looking at acquiring aircraft.  Based on last year, and whatever stuck me, here is my 2013 Outlook.

Globally, the economic recovery is expected to continue, slowly. Corporate profits and the stock market are generally improving. Developing nations globally are expected to grow Gross Domestic Product (GDP) at 4% to 5% with China closer to 7%.  So the global economy is expected to limp along with spots of higher growth. No inflation fears, yet.

One bright spot continues to be oil prices. Crude is back down around $100 a barrel with prices expected to stay stable into 2014. Look for fuel prices to be stable with one caveat.

Flying is still down. FBOs need to pay their bills and to offer those “free” services that we have come to expect. If five years ago that could be done at $0.30 per gallon added to the fuel price, with reduced fuel sales volume, today they might need $0.60n per gallon. So if you are seeing fuel prices increase, the cause is not the direct cost of the fuel, but the cost to provide all the other services that come with using the FBO. 

Regarding aircraft sales, I sound like a broken record: it is a buyers’ market. Still. Here in the US, 2013 will have the 50% Bonus Depreciation available for new aircraft and capital upgrades. This will be a help for selling new aircraft to profitable companies who are in need some short-term tax write-offs. 

These new aircraft sales will have an increasing adverse effect on used prices. None of the new aircraft manufacturers want to inventory used aircraft. So if they do take one in on a trade, they will be very anxious to resell it. 

According to Vref, the jet market still has falling prices across most of the jet market. Even the large-cabin jets. Turboprop prices are flat. Piston pricing is still down with few bright spots. Buyers continue to be very price sensitive. As always, aircraft in excellent condition will still sell first. But most important is price.

If you are selling, don’t think prices will creep up anytime soon (soon as in the next two years). If your turbine aircraft is older than age 10 to 15 years, its value will not recover. Don’t plan on buying an older turbine aircraft thinking its retail value will improve enough to earn a profit. But if the older turbine aircraft meets your needs, then now is a good time to buy.

The helicopter industry is one that is, partly joking, dependent on disaster! High oil prices mean more oil and gas exploration. That isn’t likely this year. Who knows what the fire-fighting season will hold, but government agencies won’t be wanting to support big price increases unless justified. Health care: costs are too high and insurance companies are fighting every aspirin and hip replacement. Don’t expect a willingness for insurers to pay more for EMS services. I do not see a strong year for the commercial helicopter industry. There is hope as developing nations start to expand their infrastructure for helicopters but that is still years away. Still, from what I hear, the single-turbine sales market should be OK this year, provided the price is right.

I see weak growth in aviation for at least the next two years, but growth nonetheless.  Now is the time to prepare for that growth, stay lean, and to invest in improvements in your business.

What about from where you sit? What do you see for 2013?

 

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David Wyndham

Pilot to Executive Speak

by David Wyndham 3. January 2013 17:19
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I think a requirement for being called a profession is to develop a set of buzz words and acronyms that only insiders, those of us in the loop, can know. Sort of the equivalent of a secret code so that we can identify each other. To a pilot, FAR, IFR and VFR all have very specific meanings. But a government contracting officer, FAR means Federal Acquisition Regulation. To a military researcher, FAR means Fuerzas Armadas Revolucionarias, Cuba’s military forces! To most people, FAR means a long way to go.

While acronyms facilitate communication within the loop, it obfuscates things for "outsiders." In aviation, most of our customers are outsiders: the executive, the accountant, the aircraft owner, etc.  To them, aviation folks might as well be teenagers texting - ROFL!

Effective communication depends on the sender and receiver being on the same frequency. It is all to common for us to misunderstand what was said, and also too common to remain silent rather than ask someone to restate it in plain English. Here are a three tips to help communicate airplane speak into common English.

Tip #1. Keep It Simple (Stupid) KISS.
If two pilots are talking about the weather, you can throw in acronyms to make the discussion clearer, and fast. But when the passengers get on board, you need to soften it a lot. You may need to explain what the term alternate airport means. "Because the weather is poor at our destination, we need to carry extra fuel in case we need to land somewhere else. Today, that alternate if further away than normal, so we need to carry even more fuel." This may ease the pain of the request to offload baggage or a passenger or re-plan the trip in extreme cases.

Tip #2. Be wary of the word "safety".
All our flying is "safe." But, sometimes, we need to or have to operate to different levels of safety. A Part 91 flight has more flexibility in what the rules call safe than a Part 135 flight. Excuse me: Part 91 means flights that are privately flow and not flown for hire, such as a corporate flight department's trip or an owner-pilot flight. Part 135 applies to charters and similar flights. Different rules, different requirements. Both are safe. In the case of in-house rules, the boss/aircraft owner needs to understand that your rules may be different than another operator's rules even though they may have the same aircraft.  When safety is the issue, by all means use that term. In other cases, maybe "margin for error" is a better term?

Tip #3. Understand that the same term may have different levels of meaning to the non-flyer.
An owner just had his plane in for a 2400 hour airframe check. During the check, the maintenance facility found corrosion in the tail. To the pilot or mechanic they know the corrosion is small, perhaps even invisible to the naked eye. The aircraft owner, however,  may think of a rusted bumper on a old car! So when explaining the corrosion to the aircraft owner, we need to explain that, for an aircraft, any corrosion is too much. We don’t want the owner to think the aircraft is about to fall apart in flight (thus violating Tip #2 above).

Why do you think those "Dummies" books sell so well? They take complex subjects and remove the acronyms and jargon to explain the basics in a refreshingly simple manner. In aviation we need to communicate with non-aviators on a daily basis. Technical jargon can confuse those who don't have the training and knowledge to interpret it. We need to explain what it means to them in terms that make sense - to them. Explain things in terms that your listener will understand in terms of their own experience.

(Please feel free to print this off and bring it to your next Doctor’s visit)

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David Wyndham





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