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A Methodology For Comparing Aircraft Costs

by David Wyndham 13. July 2017 15:16
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When comparing aircraft costs, it is important to understand what costs are included and what aren't. Otherwise, you can end up comparing "apples and oranges." This can lead to making a decision with wrong or incomplete information. First off, let's review the predisposed views of some folks when talking about aircraft costs:

The Maintenance Director looks at what it takes to maintain the aircraft in an airworthy condition. The maintenance director can bid out major repairs to get the best price for quality work. Talk to maintenance professional and he/she will take that one "maintenance cost" item and really go into detail. As an example, a maintenance reserve for a twin-engine turboprop can be about $455 per hour ($180 for parts and labor, and $275 for the engine reserves).

The Pilot is responsible for the safe and efficient operation of the aircraft. That person is usually most concerned with fuel, maintenance (as one number), and travel expenses. The pilot can choose fuel vendors who have competitive prices. For our turboprop, that operating cost figure would amount to about $1,000 per hour. What else might be missing?

The Aviation Department Manager is concerned with the cost of the aircraft, plus the fixed overhead items such as hangar, training, insurance, and pilot salaries. Those items for our turboprop example can be about $300,000 per year, plus the hourly cost of the aircraft. For a nominal 400 hours per year operation, the Aviation Department Manager's budget for a turboprop is $700,000 annually, or $1,750 per hour average.

Lastly, the Executive/CFO is concerned with acquisition costs, amortization, interest, depreciation, taxes and the cost of capital. That can easily add another 70% onto the Aviation Department Manager's "costs" depending on the value of the aircraft. If the aircraft is operated for business use, the corporation has the ability to write off the expenses of ownership and operation. After taxes and depreciation, the total figure to own and operate an aircraft can change dramatically. An educated Executive will also consider not only what the costs are, but when they occur and the value of the aircraft at the end of a specified amount of time.

What is the general methodology to use when analyzing the acquisition of an aircraft? 

When analyzing the potential acquisition of a whole or share of an aircraft, Life Cycle Costing ensures that all appropriate costs should be considered. The Life Cycle Costing includes acquisition, operating costs, depreciation, and the cost of capital. Amortization, interest, depreciation, and taxes also play a part in what it costs to own and operate an aircraft and can be included in the Life Cycle Costing as appropriate.

The assumptions used need to be clearly spelled out. The costs should cover a specific period and take into account an expected aircraft value at the end of the term. Comparisons of two or more options should also cover the same period of time and utilization. This provides a fair (or "apples-to-apples") comparison. A complete Life Cycle Cost also accounts for the time-value of money in an NPV analysis. This way, the differing cash flows form two or more options that can be compared and analyzed from a fair and complete perspective. 

What is a Net Present Value? An aircraft acquisition involves a very complex financial decision. Accurately judging the financial impact of such a major acquisition project can best be done with a Net Present Value (NPV) analysis. An NPV analysis takes into account the time value of money, as well as income and expense cash flows, type of depreciation, tax consequences, and residual value of the various options under consideration. When an expense (or revenue) occurs can be as important as the amount of that item.

By using the time-value of money, an organization can thus judge whether a project will yield a better or worse return than the average return experienced on a company-wide basis. Thus, the NPV analysis allows the comparison of different cash flows based on a set target return. It also allows comparisons of buy versus lease versus finance options of the same aircraft. This type of analysis is also the only effective way of judging whether it is better to purchase, finance, or lease, even if different conditions and interest rates apply to each alternative, and is the standard financial analysis technique used by the chief financial officers of major organizations.

The Net Present Value calculation applies a time value of money rate to when income and expenses occur. This time value of money is referred to as internal rate of return (IRR) or return on investment (ROI). Many organizations have a published IRR or ROI target. For those that don't, a way to estimate it is by dividing the profit before taxes of the organization by the equity and expressing as a percentage the return the organization expects to make on the money it invests in the enterprise. For many organizations, such as Fortune 500 companies, this is typically from 10% to 25%. Government agencies can use the current rate of return for Treasury Bills or State Bonds.

An NPV of zero means that the target return has been met. A negative (less than zero) NPV means the target return has not been met. A positive (greater than zero) NPV means the target return has been exceeded.

When analyzing the potential acquisition of a whole or share of an aircraft, Life Cycle Costing ensures that all appropriate costs should be considered. The Life Cycle Costing includes acquisition, operating costs, depreciation, and the cost of capital. Amortization, interest, depreciation, and taxes also play a part in what it costs to own and operate an aircraft and can be included in the Life Cycle Costing as appropriate.

The assumptions used need to be clearly spelled out. The costs should cover a specific period and take into account an expected aircraft value at the end of the term. Comparisons of two or more options should also cover the same period of time and utilization. This provides a fair (or "apples-to-apples") comparison. A complete Life Cycle Cost also accounts for the time- value of money in an NPV analysis. This way, the differing cash flows form two or more options that can be compared and analyzed from a fair and complete perspective.

For a commercial operator, they expect a return on the money spent - or profit. An NPV of zero means that they have earned enough money to pay off their initial investment, plus pay all expenses and have generated a profit equal to their expected rate of return. 

Business aircraft do not directly generate revenue except for the sale of the aircraft. Thus, the NPV results are typically negative. When comparing negative NPVs, the "least negative NPV" is the more favorable. In other words, if option A has an NPV of ($5,000,000) and the NPV of Option B is ($6,000,000), Option A has the better NPV.

You don't have to be a financial expert to do an NPV.  There are spreadsheet programs that can do the math for you. Or leave it to the experts in finance, but understand what it means.



David Wyndham

Thoughts From The National Waco Club Reunion Fly-in

by Tori Williams 2. July 2017 12:30
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Last weekend I had the opportunity to attend an aviation event that truly inspired me. The 58th annual National Waco Club Reunion was held at Wynkoop Airfield in Mount Vernon, Ohio. My husband and his father have flown into this particular fly-in for several years. This was my first year being able to join them, and I am so glad that I did.

Our trip to Wynkoop was a little over 200 nautical miles. We arrived Thursday evening and did our best to prepare for the incoming thunderstorms on Friday. The rain definitely hit full force and pilots were grounded for the majority of the day. Thankfully all was not lost, and the skies opened up to beautiful sun and favorable winds on Saturday. It was the perfect weather and a great backdrop to the 22 unique Waco aircraft that flew in.

There were several factors that made this fly-in so special. First, the majority of the Waco aircraft flown in are project planes that have been meticulously restored from the ground up. The passionate aviators who have dedicated thousands of hours to their planes aim to honor historical accuracy. These are friends that go back decades and have watched the progress of each other’s projects over time. They call it a reunion for a reason!

Second, the pilots at this fly-in wanted to do just that – fly! At any point in the day there would be several beautiful biplanes whirling around the field, doing low passes, and occasionally taking the lucky passenger for a ride. I like this aspect better than events like AirVenture because you are able to go up whenever you’d like, whereas it can be difficult to get into the air at AirVenture if you aren’t in an airshow.

The third special thing about the National Waco Club Reunion is the locals who come out to see the planes. They are always respectful and curious about general aviation. Unlike some fly-ins where the public seems to come just for the entertainment value, these people have a much deeper passion and respect for the work that goes into restoring and maintaining these aircraft.

An important part of every fly-in is the food that is available. There was a hearty breakfast served Saturday as pilots prepared for the day ahead. In the afternoon attendees enjoyed brats, burgers, and hotdogs with all of the fixings. Another great option was the homemade ice cream food truck parked outside the FBO. The Saturday night banquet was especially delicious and the catered buffet was served on the field!

The fly-in is not heavily publicized in the area. Locals just know that near the end of June the biplanes will come in, and they will show up after they see them flying around town. I had a good experience with every single person that I interacted with from the town of Mount Vernon. They were enthusiastic about the airplanes and we had several of them thank us for coming to town.

My husband especially enjoyed taking the locals up for rides during the fly-in. He said it’s important to him to show people that aviation is a lot more than a way to get from point A to point B. General aviation is more than a hobby, but rather a lifestyle for many. The more that the general public knows about it, the more they will be willing to support pilots and airports in legal matters they may have a voice in. Giving a face to general aviation and the people who enjoy it is an important mission for both of us.

Overall this fly-in was a great experience and I highly recommend attending in the future. The enthusiasm and zeal for aviation shared by the pilots is very clear as soon as you step onto the field. This fly-in truly serves as a great example of success for all other types of aviation events.

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Flying | Tori Williams | Vintage Aircraft

Whose Letter Of Authorization Is It Anyway?

by Greg Reigel 30. June 2017 13:41
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A scenario I see more regularly than I would like involves an aircraft management company that manages a turbojet aircraft and provides pilot services to multiple users of the aircraft. Since the managed aircraft is capable of flight up to and beyond flight level 41,000, the aircraft needs FAA approval to operate in the Reduced Vertical Separation Minimum (“RVSM”) flight levels from 29,000 feet to 41,000 feet. For reasons that are not always clear to me, the management company applies for and obtains an RVSM letter of authorization (“LOA”) in its own name for the aircraft, but then operates the aircraft on behalf of the operators. And, unfortunately, by doing so it has exposed not only itself, but also the operators to the wrath of the FAA for violations of the regulations.

In order to understand why this is the case, we need to first look at why an LOA, or its counterpart letter of deviation authority (“LODA”), is necessary. LOAs and LODAs are issued to Part 91 operators to provide authority to operate in a particular manner. An LOA authorizes an operator to engage in a particular activity, such as operation in RVSM airspace. A LODA permits an operator to deviate from a regulatory requirement with which the operator would otherwise be required to comply, such as permitting an instructor to operate an experimental aircraft for hire for the purposes of type-specific training. LOAs/LODAs are generally only applicable to Part 91 operators. (Operators under Parts 121, 133, 135 etc. receive similar authority in the form of operations specifications or waivers.)

LOAs and LODAs are “voluntary” and are issued by the FAA based on certain specific situations. That is, an operator doesn’t have to request an LOA or LODA unless the operator wants to do something that requires FAA authorization. In the RVSM context, if a Part 91 aircraft operator wants to operate in RVSM airspace, the operator will need to obtain the necessary LOA. But the aircraft operator is also free to avoid operating in RVSM airspace, in which case the operator would not need an RVSM LOA.

A Part 91 operator is the party who has “operational control” of the aircraft for a particular flight. What does that mean? Well, 14 C.F.R. 1.1 states “[o]perational control, with respect to a flight, means the exercise of authority over initiating, conducting or terminating a flight.” Thus, the FAA takes the position that the true operator of the aircraft is the party who has operational control for a particular flight.

Why does operational control matter when we are talking about LOAs and LODAs? Because LOAs/LODAs must be issued to the “operator” of the aircraft, i.e., the party that exercises operational control during the flight. And the party with operational control may not necessarily be the owner or manager of the aircraft.

For example, when we are looking at operation in RVSM airspace, 14 C.F.R. §§ 91.180 and 91.706 state in part:

“ . . . no person may operate a civil aircraft (of U.S. registry) in airspace designated as Reduced Vertical Separation Minimum (RVSM) airspace unless:

  1. The operator and the operator’s aircraft comply with the requirements of appendix G of [Part 91]; and

  2. The operator is authorized by the Administrator to conduct such operations.”

Thus, identifying the party who is the operator of the aircraft is critical because that dictates who must have the authorization.

So, who should apply for and be issued an LOA/LODA? Registered owners who are conducting personal or business flights under Part 91 for their non-air-transportation use; and parties assuming operational control under “dry” lease or use agreements such as Part 91 and Part 135 operator lessees conducting operations under Part 91. Keep in mind that if multiple parties are operating the aircraft, multiple LOAs/LODAs may be required!

Who should not apply for or be issued an LOA/LODA? “Flight Department Companies” (e.g., holding companies/single purpose entities); Owner Trustees (e.g. where a trust is the registered owner of the aircraft but the aircraft is operated by the party holding the beneficial interest in the trust); and Part 91 aircraft management companies that simply assist aircraft owners and Part 91 operators with their ownership and/or operation of the aircraft.

What can you as an operator do to make sure you have the necessary authority you may need or want from the FAA? First, do your research! Make sure you understand both your and the FAA’s obligations in the LOA/LODA process. Next, when you are applying for an LOA/LODA ensure that your application is as complete and correct as possible. (Remember, garbage in = garbage out). If necessary, ask for meeting with FAA personnel to submit your application in person. And finally, follow-up with the FAA on a regular basis to confirm the status of your application and whether the FAA has questions or needs additional information to process the application.


Residual Values To Drop for Non-ADS-B-equipped Aircraft

by GlobalAir.com 12. June 2017 17:05
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Owners of business aircraft that are not ADS-B-compliant or in the queue to have equipment installed risk seeing already depressed residual values fall even further in advance of FAA’s Jan. 1, 2020 deadline, according to GAMA president and CEO Pete Bunce. “The value of your asset is going to start dropping even before 2020—this is for rotorcraft and fixed-wing—if you don’t have a slot to upgrade,” he said last week during a panel at the National Air Transportation Association’s Business Aviation Conference. “If you’re in the business aviation category and you hit 2020 [without an upgrade], the price [of your aircraft] is going to just plummet.”

While the FAA is adamant that the ADS-B deadline will not be pushed back, Bunce said that too many operators are holding out hope that the date will slip. “Because of that belief, right now, we are not on pace to get the fleet equipped by the 2020 mandate,” he warned.

GAMA is working with the aircraft-valuation community to collect data that will help quantify the problem, Bunce said. The association plans to make the data available to encourage equipage while there is still time to shift momentum. “We have the industrial capacity to get the fleet modified,” Bunce said. But, he cautioned, “If everybody waits until 2019, then it’s not going to happen."

By Sean Broderick – June 8, 2017



Co-ownership Tips

by David Wyndham 12. June 2017 14:49
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When I was in high school I worked as line crew at an FBO at the small airport in Rochester, NH. When I started work, my employer rented out Cessna 150s for $19 per hour and a Cessna 172 for $29 per hour. AvGas was less than a dollar per gallon. One local pilot owned a mid-1960s Cessna 172. He flew only on severe-clear days, which in New England was infrequent. At best he maybe flew 40 hours per year. I asked him why didn’t he just rent. He replied that he could buy AvGas to fly 3.5 hours for the cost of one hour of a rental. I did some quick math as I knew what his recent annual cost and what he paid for the tie-down space he rented. Throw in a wild guess for insurance and I came up with over $100 per hour for his 40-hour “bargain.” I asked about these costs. A few months later he took on a partner to co-own his plane.

Most turbine aircraft fly less than 400 hours per year. Many operators since 2008 have reduced their flight activity and it is not uncommon to see utilization below 300 or even below 200 annual hours. For private owners, the 200 annual hours is maybe toward the high side. If you are flying 200 annual hours, your aircraft is sitting idle most of the time. 

Aircraft are also expensive. Fixed expenses like crew salaries, hangar and insurance when the are spread over a small number of hours drive up the average hourly total costs. If you are not using your aircraft, why not get some revenues by having someone else use it? Putting your aircraft onto a charter operator’s certificate receives a lot of attention and is the first thing I think of for helping to offset the total costs of owning your own aircraft. But there are other options like my long-ago Cessna 172 owner found out.

My general discussion will use co-ownership and joint-ownership interchangeably as it involves the day-to-day functioning of the shared arrangement. We do define them slightly different. Co-Ownership is when two or more organizations share the use and expenses of an aircraft but the aircraft is operated by a management company. Joint Ownership is when two or more organizations share the use and expenses of an aircraft and the aircraft is operated by one of these organizations (not a management company). There are legal and tax subtleties between the two that I won’t cover.

The significant advantage of co-ownership is that the two individuals share not only the costs of operation, but also the acquisition cost. Thus, a $1 million acquisition budget is all that is needed for a $2 million aircraft. You can either get a larger aircraft for the money or apply it to a newer model of the desired aircraft. Which leads me to tip number one.

Don’t buy more aircraft as a co-owner than you can afford to buy alone. 

Co-ownership works best when both partners are financially sound enough not to “need” the other in order to make the payments or pay the bills. When (not if) one of the two of you wants to sell, when you can afford the whole aircraft then the negotiations can be less stressful and less likely to result in the complete sale of the aircraft. Maintain your financial independence with respect to the aircraft. Look for a co-owner who also has the financial resources to operate the aircraft.

Second, find someone who flies “not like you” to co-own. Best case is owner A flies for business during the week and owner B takes the aircraft on vacations and holidays. You will need to schedule your travel. Avoid disputes over needing the aircraft at the same time but having complimentary schedules.

Speaking of scheduling, “first come, first served” is not likely to be successful all on its own. I saw one partnership come unraveled when scheduling issues turned into one owner scheduling the aircraft every other week for the entire year. All week. One thing to consider is “on and off” weeks. When its your “on week” you get priority scheduling and when you are “off” the other owner gets first use. To make things work, you’ll both want to accommodate each other.  

Best scheduling tip is to both have travel schedules set well in advance with limited conflicts. Agree up front about who pays what costs when the aircraft is away for several nights. Owner A takes the aircraft away and plans to on vacation for two weeks. Owner B needs the aircraft during the interim while owner A isn’t needing to fly. Who pays for the repositioning trip?  Have an agreement that spells out all use and scheduling policies.

Make sure that both owners share similar financial goals with respect to the aircraft. Want the aircraft cosmetics maintained to the highest standards? Maintained only at the service center? Spell out the level of maintenance and upkeep of the aircraft. Also spell out exactly how expenses are to be shared. Separately discuss fixed cost sharing like hangar and insurance versus variable costs like fuel and maintenance. Set up a maintenance reserve account and possibly put the aircraft on a guaranteed hourly maintenance program for at least the engines. Have a budget.

Last tip is to plan for the sale of the aircraft and terms for the sale. A long running partnership may see another aircraft. Partnerships dissolve with the current aircraft when needs and finances of one owner change. Again, if both co-owners can afford the aircraft, the loss of one owner is inconvenient but not disastrous. 

A successful co-ownership lets two owners get 80% to 90% of their aircraft needs met for 50% of the cost. Advanced planning and written agreements along with both parties being transparent with respect to the aircraft are critical, but it can work. It worked for a Cessna 172 and it can work for a much bigger aircraft, too.



Aircraft Sales | David Wyndham | Flying


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