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Misconceptions about Aircraft Costing

by David Wyndham 12. October 2018 09:01
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Over the years I have written a number of articles discussing aircraft operating costs and methodologies for analyzing them. This month, I’d like to review some common misconceptions about costs that I run into on a regular basis. Most of these result from connecting something that we are familiar with, like the cost of running an automobile or building a house, and using those as an analogy for the unfamiliar cost of owning and operating an aircraft. 

The biggest misconception is focusing on the acquisition cost to the detriment of operating costs and asset value over time. I have a client whose maximum acquisition budget is $20 million. This is a real limit and not one to exceed. Where the misconception arises is that if we are looking at Aircraft A with a selling price of $20 million and Aircraft B which sells for $17 million, the former aircraft is the less costly option. But is it?

Assume the both aircraft have similar capabilities in terms of range and cabin.

The only way to know which one costs “less” is to evaluate the total costs to acquire, operate and dispose of the aircraft. Two major costs are the operating costs, to include maintenance, and the estimated residual value after a set length of time. Looking at our current scenario, Aircraft A has a lower fuel consumption than Aircraft B. Aircraft A also has engine and airframe maintenance costs similar to Aircraft B. Looking at the costs per hour:

Variable cost.                        Aircraft A.                  Aircraft B. 

Fuel                                        $1,376                        $1,521

Engines                                  $ 580                          $560

Maintenance                         $ 784                          $677

Per Hour                                $2,740                        $2,758

There is more:

Aircraft A flies faster than Aircraft by 8%. Remembering the aircraft fly from origin to destination, the faster aircraft uses fewer hours to fly the same trips. If Aircraft A flies 400 annual hours, this requires Aircraft B to fly 432 hours. The annual variable cost is

Variable cost.                        Aircraft A.                  Aircraft B. 

Per Year                                $1,096,000                $1,191,456

Aircraft A costs almost 10% less in variable cost per year than Aircraft B. If both have about $650,000 per year in fixed costs, the annual operating budget favors Aircraft A slightly. While not enough to make up the $3 million price difference, it does account for about $1 million over 10 years. There is still more.

Aircraft A is a popular model and is currently selling better than Aircraft B. Current market values are being maintained better than for Aircraft B. After 10 years the estimated residual (resale)  value in dollars and percent is higher for Aircraft A. Now our 10-year life Cycle Cost is:

10 YEAR COST.                               Aircraft A                               Aircraft B

Acquisition                                        $20,000,000                         $17,000,000

Variable costs                                   $ 10,960,000                         $11,914,560

Fixed Costs                                       $ 6,500,000                           $ 6,500,000

Resale value                                     ($10,000,000)                       ($ 7,500,000)

10-Year TOTAL                                $27,460,000                          $27,914,560

Aircraft A costs about the same to own and operate as Aircraft B. Making the purchase decision just on acquisition price doesn’t tell the entire story. In the above example, we need to evaluate of parameters in addition to just costs to determine which aircraft is the best value. 

There could be other considerations like product support. Not only the perceived quality but where are the service centers located? If Aircraft A has a service center on your home field while Aircraft B’s nearest service center is 300 miles away, Aircraft A will be easier to maintain and, if AOG at home, might be repairable in less time.

Consider the equipment? What if Aircraft B has a more advanced SVS than Aircraft A? But what if you prefer the usability and displays in the avionics system on Aircraft A?

Never let a spreadsheet make a decision for you.  Never just look at a single cost item when evaluating aircraft costs. Aircraft are not commodities sharing essential the same characteristics. That is why I stress to my clients to look for a best value when making the aircraft decision. Costs are a very important part, but even the total costs do not tell the total story. 

(A version of this was previously published in AvBuyer magazine.)

 

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America’s Largest Fly-in Communities

by Tori Williams 1. October 2018 20:00
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Last weekend my husband and I flew to an EAA chapter meeting that was held at a beautiful private grass strip called Timberhouse. We quickly discovered that this was no ordinary grass strip. Each side of the runway was flanked by houses in various stages of construction, with a couple fully built houses scattered amongst them. This beautiful place was clearly becoming more inhabited every day. The owner of the field shared that they have had lots of sale on this flying community for 15 years, but in the last couple years has interest in buying lots increased exponentially.

The idea of being able to walk outside your house and get into your airplane, no driving to the airport required, seems like a total dream. Although this may seem like something out of a Bond movie, residential airports are all over the U.S. and some of the plots of land are just as affordable as buying off-airport land for your home.

According to the website Living With Your Plane, the three states with the most residential airports are Florida (71), Texas (67), and Washington (58). Even smaller states like Illinois and Ohio have 18 and 13 residential airports, respectively. When you take into account the amount of small public-use airports each state has, it’s no wonder the U.S. has the best General Aviation environment in the world.

Today I would like to inspect some of the biggest residential airports in the U.S. to help paint a picture of what living at an airport looks like. Most of these are exclusive, gated community type locations, but that’s not to say there’s not a more affordable option in the state as well.

Spruce Creek

Spruce Creek Airpark in Port Orange, Florida (seven miles south of Daytona Beach) is the perfect example of a thriving airport living community. The 4000 ft runway is surrounded by over 1,300 houses and 700 hangars. A large majority of the residents of this gated community have the luxury of private hangars in or beside their homes that are attached to over 14 miles of paved taxiways.

Jumbolair

Another Floridian airport of note is the Jumbolair Airport in Ocala, Florida. This one is different from Spruce Creek in that it has far less houses, but the runway is nearly twice as long at 7,550 ft. This airport is typically what people imagine when they think of flying communities, because actor John Travolta was one of the first people to purchase land and build a house. Travolta was drawn to this particular airport because the length of the runway allowed him to takeoff in his personal Boeing 707.

Poplar Grove

Located near the northern border of Illinois, Poplar Grove has made quite a name for themselves as being an extremely well maintained and fun airport. They are open to the public for flight training, but also have a prestigious residential community attached to the runway. 100 of the total 140 houses in their residential community are connected via taxiway to the runways. With one large asphalt runway and two grass strips, this airport is a heaven for pilots that enjoy antique and vintage aircraft flying.

RJW Airpark

Last but not least, RJW Airpark in Baytown, Texas claims to be the largest airpark in the state. Featuring a 5111 ft asphalt runway and a 3532 grass runway, this classic airpark has something for every pilot. The houses on this particular Airpark are in a realm of their own, because of course everything is bigger in Texas!

I hope this article has opened your eyes to some of the incredible flying communities that are out there! If you search online you might be surprised by how many are in your state. More flying communities are being created every year, so this type of lifestyle is also becoming more obtainable. If your dream is to someday taxi your plane away from your home towards a runway, never give up because that dream could very well become a reality.

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Aviation History | Tori Williams

Operation Safe Pilot All Over Again

by Greg Reigel 1. October 2018 10:29
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As some of you may know, the Department of Justice recently issued a Press Release announcing that it had indicted four pilots for lying on their medical applications. In each case, the airman failed to disclose that he was receiving Veterans Administration ("VA") benefits for a medical condition that would likely have either disqualified the airman from receiving a medical certificate, or would have certainly subjected the airman to additional scrutiny and/or testing requirements by the FAA's Office of Aerospace Medicine.

The airmen were "caught" when the FAA cross-checked its database of airmen holding medical certificates with the VA's disability benefits database. This is reminiscent of the FAA's 2002 Operation Safe Pilot in which it performed a similar cross-check, but with the Social Security Administration's ("SSA") disability database. Operation Safe Pilot resulted in prosecution of forty pilots who were receiving SSA disability benefits for conditions that would have either disqualified the airmen from receiving a medical or would have triggered further inquiry by the FAA.

After Operation Safe Pilot, the FAA revised the application for medical certificate to include language that specifically authorizes it to conduct this type of cross-check with SSA and VA. When an airman signs the medical application, he or she is agreeing that the FAA can perform this type of search.

Since the DOJ Press Release was issued, I have received multiple calls from airmen who believe they may be in a similar situation, but have not yet been "discovered" or received any notice from the FAA. In each call the airman is, perhaps justifiably, concerned regarding his or her liability exposure for criminal prosecution. Fortunately, options, albeit not great options, are available provided the airman is not yet in the FAA's cross-hairs.

Depending upon the circumstances, airmen have at least two options for dealing with the situation:

  1. An airman can contact the FAA via letter and disclose the previously omitted information regarding both the medical condition and the receipt of disability benefits. It is also helpful to provide an explanation for the non-disclosure, to the extent that the airman has a reasonable explanation for failing to disclose the information. This may persuade the FAA that the failure to disclose was not intentional, but merely a misunderstanding etc.; or

  2. The airman can apply for a new medical certificate and disclose the medical condition and receipt of benefits on the application. Then when the airman goes to his or her aviation medical examiner ("AME") for the medical examination the airman can explain the situation to the AME.

In either instance, the airman will want to have all of his or her VA medical/disability records available to provide to the FAA. However, an airman should keep in mind that any information he or she provides to the FAA could be used against the airman in a criminal prosecution. So it is important for the airman to be very careful about what he or she says to the FAA or AME.

Although pursuing one of these two options does not guarantee that the FAA will not prosecute the airman, coming clean and correcting the record before the airman is "caught" may convince the FAA that prosecution is unnecessary. However, even if an airman is not prosecuted, it is quite likely that the FAA will follow its standard playbook and revoke all of the airman's certificates as a sanction for falsifying the airman's medical application(s).

If you find yourself in this situation, please call and I will be happy to help you through the process.

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Greg Reigel

7 Elements of a Great Fly-in

by Tori Williams 1. September 2018 22:37
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As summer comes to a close I’ve been reflecting on all of the amazing fly-ins we were able to go to this year. Our fly-in season began with the National Waco Club Reunion, peaked with a week at Oshkosh, and ended with a laidback gathering in Delphi, IN. There were several smaller fly-ins and hangar parties peppered in the mix, and we were thrilled to attend a personal record number of events this year. Next year we plan to go to even more, and perhaps host our own hangar party for our flying and non-flying friends. Aviation is all about community, and fly-ins are the most amazing expression of that.

I would like to share what I believe are all essential elements of a successful fly-in. Of course all events are different, but keeping these common themes in mind when planning a fly-in will help elevate the event from good to great. A personal goal of mine has been to host a fly-in for a long time, so let me know in the comments if you have any recommendations for elements that you believe to be important!

1. Food

At almost every single fly-in we attended this summer, the first thing on our minds when we landed was where the food was. This was especially true for the fly-in breakfasts, where we had woken up extremely early and avoided food so we could gorge ourselves on the pancakes and bacon being served at the airport. At events that aren’t centered around breakfast, having food trucks options on-site is a great idea as well. Pilots are hungry people!

2. Flying

Something that really helps get people excited at fly-ins is if there is actual flying going on. You would be surprised at the number of fly-ins where planes stay parked and become static displays for the entire fly-in. It’s so much more exciting to hear the engines running, watch the planes do low passes, and really feel that general aviation is alive and well. Consider having an EAA chapter host Young Eagle flights, or planning an airshow during the fly-in.

3. Diversity

Some of the coolest fly-ins have a diverse group of attendees. You have young pilots, old pilots, professional pilots, recreational pilots, UAS pilots, military pilots, skydivers… The list goes on and on! At one fly-in there was a whole display of RC aircraft that I had never seen before. Celebrating diversity in aviation is a win for everyone, and opens up new opportunities to learn about a different aspect of the general aviation world. Beyond that, having vintage cars are great to have as well to admire their craftsmanship and history!

4. Youth

There’s nothing more adorable than seeing little kids totally in awe at fly-ins. They have no filter so the way they express their feelings of pure joy or excitement when they see a plane zoom by is so wholesome. I especially love it when little ones have toy airplanes and imitate the movements of the planes in the air. This is the kind of excitement that we need to encourage the next generation of pilots. Everyone screams “pilot shortage!” but that won’t change in the future if we don’t instill a love of aviation into youth right now.

5. Non-pilots

Inviting the general public to a fly-in adds a whole new dimension of fun. I spoke to people who came to the local fly-in every year, and others who were driving by and wanted to see what the commotion was. There are so many misconceptions about general aviation, and a lot of people don’t understand how fun and safe it actually is. Having a “fly-in or drive-in” type of event encourages those who normally stay away from the airport to give it a try and see some cool sights.

6. Safety

Safety should always be the number 1 priority in aviation, and fly-ins are no exception. Having clearly defined areas where planes are allowed to move around and ways to control the crowd are a must. Consider having members of the local Civil Air Patrol group assist with enforcing rules and educating attendees on when it is not safe to be near an airplane.

7. A Game Plan

Having a little structure for the event helps things run much smoother. Dinners or awards ceremonies with specific start times break up the action in an appropriate way. Some fly-ins even have scheduled fly-outs to other airports for breakfast or lunch. This keeps it interesting and fun, and a published plan helps everyone stay in the loop on what to expect during the event. Organization and communication are key!

What do you think of this list? Did I cover everything you think is important for a successful fly-in? Let me know in the comments, and let’s do our part to keep general aviation thriving!

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Tori Williams

Quick Tips - Aviation Tax Planning

by David Wyndham 31. August 2018 14:36
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In my previous blog post, the financial analysis identified the aircraft that does the best job for the money. This month, I'll touch on some of the US aviation tax basics to be considered.

Ben Franklin supposedly said that in life, there are only two certainties - death and taxes. The former I'll leave to others. Taxes can be significant, and if not properly planned for, can lead to spending more money than is necessary. 

My partner, [Nel Stubbs], is business aviation’s best resource on aviation taxes for the United States. If you are buying or selling an aircraft that will be based in the US, she’s your contact. However, here are some general tips.

You may be FAA Part 91 and still face “commercial” taxes! What?

At the Federal level, the tax laws are managed by the Internal Revenue Service. The IRS separates aviation into two groups - commercial and non commercial. Do not make the mistake that the IRS definition is in any way required to match that of the FAA Federal Aviation Regulations (FAR's) for commercial and non commercial operations. The IRS and FAA use different standards to define commercial operations and they have "agreed to disagree."

The FAA uses regulatory definitions for a commercial operator. It involves the "intent" to hold one's aircraft out for hire. The IRS looks primarily at whether there is "transportation of persons or property for compensation or hire by air." Whether a profit is intended is not the IRS' concern. There may be times when an operator is FAA Part 91 private but can be subject to IRS "commercial" taxes. Many operators run afoul of the IRS in incorrectly figuring out how or whether to apply the Federal Excise Taxes. Add in an election year with carriage of elected officials, transporting guests on corporate aircraft and international operations, and it can get confusing fast. Business and Personal use is a complicated subject on its own.

Aircraft Are Not Real Estate. But, its still Location, Location, Loacation

Add to that the 50 US States Departments of Revenue and local county/city tax authorities. They are all slightly different. Some apply sales taxes. The seller of an aircraft may be required to collect and remit sales taxes on the sale of an aircraft. Many states offer some exemptions or exceptions. Property taxes can be applied to aircraft - some being based on the percentage of time the aircraft spends in the state and others flat rated for aircraft based in their state.

Where the aircraft is based matters. It can be in a Delaware LLC or in a Trust, but if the aircraft spends any significant amount of time in (Name a US state), then your aircraft may be subject to taxes. There may be sales taxes, use taxes, and property taxes. You may even face taxes from two different states if the aircraft spends a lot of time in a second location over than its home base. 

There are use taxes and fuel taxes applied at the state and county level. Some of those taxes get applied to the state's aviation fund and other just go into the general fund. Again, there may be exemptions for commercial operators.

The biggest thing to remember is to Plan Ahead. Before taking action, find out what the options are and their costs. Trying to do this after the fact often proves costly. Secondly, document, document, document. Paperwork can be your friend as a "paper trail" can provide proof of the taxable/non-taxable activity and or its intent.

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October 16-18, I'll be at the 2018 NBAA BACE. Stop by Booth 1134 to say hi. 

 

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David Wyndham



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