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Budget Tips for your aircraft

by David Wyndham 3. January 2014 10:36
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As 2014 rolls into the Northeast with a big snow storm, this is as good a time as any to look ahead while waiting for the snow plow. A big part of looking ahead is your aircraft's annual operating budget.

If you operate on a calendar budget, you should have already completed your aircraft operating budget for the year. If this is the last time you look at your budget until the end of the year, you are not taking advantage of the work you have done.

A budget is a best estimate looking forward at what you think expenses will be. As such, you made a number of assumptions regarding things like utilization, fuel costs, etc that factor into those costs. As you advance through the year, you will learn how accurate those assumptions were. Is your budget capped? If you were planning on fuel prices remaining stable, what happens if they increase? Where does the money come from if you exceed your allotted budget amounts?

Maintenance costs will depend on the utilization. What if, having planned on 360 annual hours, which puts the next major inspection into 2015, you end up flying 400? If a major maintenance bill comes due earlier than expected, will you be ready for this? You should be plotting major, know expenses, forward at least two to three years. Things like engine overhauls, paint & interior, major checks, hangar rents, even training and insurance costs are coming on a predictable schedule. 

Your budget should be reviewed and updated as the year progresses. Planned versus actual should be a standard metric. If you have a tight budget with little room for overages, you'd better know early if there will be unforeseen issues. As you start seeing variances in your budget, have the explanation ready as to why. No one really knows what the price of fuel will be next month, let alone at the end of the year. When that cost of fuel changes from what you anticipated, note it and any possible explanations if you know of them.

The key thing is to track and report your costs in detail. Then when there are small variances in the budget actuals, you can see them (hopefully) before they become a major event. Save for a significant unscheduled maintenance event, this is doable. Then  you need to communicate to those with the money what is going on, and what actions that you recommend. If at 360 hours, the major inspection would be due in January 2015, but flying jumps to 400 annual hours: (1) major expenses in outlying years should already be noted and (2) the inspection costs need to be planned for well in advance. Tracking, reporting and understanding your costs are necessary to avoid financial surprises.

Budgets should be a financial tool that you use to manage the fiscal resources of your operation. It should not be a once and done exercise. Used appropriately, a budget should provide you with operating cost metrics that you can use to measure and manage your aircraft throughout the year.

Aircraft Maintenance Costs Can Sting!

by David Wyndham 31. August 2010 11:26
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A friend was recently stung by a wasp. He was doing some yard work and apparently disturbed the wasp who took umbrage at his summer nap being interrupted. The sting hurt and caused several days of uncomfortable swelling. I was joking with him that aircraft operating costs can be like that. They seem small at first compared to the big amount of the aircraft acquisition, but ignoring them can sting and cause you discomfort.

We find this in two areas when we review costs with operators. The first is failing to understand the cyclical nature of maintenance costs. Things like fuel are very stable and predictable. The more you fly the more your annual fuel cost grows. Maintenance tends to come in chunks. Yes, brakes and tires come at a predictable pace, but those inspections and component replacement/overhauls do not. A heavy maintenance inspection that occurs at infrequent intervals can have a high cost. More...

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David Wyndham

Aircraft Technical Analysis Tips

by David Wyndham 25. July 2010 13:31
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When evaluating aircraft, we tend to focus in on the things we know best. Once we get a feel for those, we then hope the other information we turn up is OK as well. When I’m working with a financial type, she’s interested not in how fast the aircraft flies, but in the costs, how we account for major maintenance, what we show for the acquisition price, etc. With the pilots, we focus in on the specs and performance, the technical analysis.
 
With the pilot, we focus in on size, features, range, and performance. The mission drives these requirements. Many of the aircraft acquisition plans we do focus on requirements such as passenger seating, cabin size and range. The general way we approach this is to:
 
* Determine the most (likely) demanding payload, range, cabin size and/or passenger seating requirement as defined by your key mission.
 
* Compare those mandatory requirements against the capabilities of a range of aircraft from the sources of information you have gathered.
 
* Eliminate all those that do not meet the requirements.
 
* Eliminate those aircraft that are vastly more capable than required. The cost of acquisition and ownership does up dramatically as size, range and speed increase.
 
Here is where it can get tough. Just how are the numbers derived? I’ve had pilots distrust our data initially until we’ve discussed the ground rules used.
 
If you need a range of 1,450 nautical miles (NM) with four passengers, what exactly do you mean? For the range, do you mean VFR range? IFR range? IFR range with what sort of alternate airport? 100 NM alternate, 200 NM alternate, something else? In general, literature on turboprops and very light and light jets refer to ranges with a 100 NM alternate that follows the NBAA IFR Fuel Reserve format. Somewhere in the light jet category, the 200 NM alternate becomes “standard.”  Our numbers for an aircraft such as the PC 12 are with a 200 NM NBAA IFR Fuel Reserves. Very different than IFR 45-minutes that an owner-pilot may be thinking about.
 
Passengers are passengers, right? No. Most published data assumes each passenger (with bags) weights 200 lbs. But some data may refer to 170 lb passengers, while the FAA and airline data suggest the average American airline passenger with bags runs well over 200 lbs. So when we discuss how far with how many passengers, I like to make sure that we are talking about 800 lbs instead of four passengers.
 
The same passenger weight comment applies to the Basic Operating Weight (BOW) of the aircraft as well. BOW includes crew. Is your aircraft to be flown single pilot or with two pilots? That 200 lb difference in weight can, when carrying near full loads, mean 200 lbs plus or minus on the fuel load, or almost 30 gallons. If your aircraft burns 120 gallons/hour at 240 knots, 30 gallons is 20 minutes or 80 NM. That may be enough to move the aircraft from acceptable to not acceptable due to its range.
 
The last area where things can be confusing is that much of the published data on aircraft are “maximums” and may not be achievable under most conditions. As an example, the Certified Ceiling is the maximum ceiling the aircraft is certified to be able to operate safety. That does not mean that the aircraft can climb that high on an everyday basis. Just because the aircraft has a Service Ceiling of 51,000 feet does not mean that the aircraft routinely flies there.
 
We look at Service Ceiling at max take-off weight. How high can the aircraft initially climb? The 51,000 certified jet may initially climb to 43,000 feet, where it sits until it can step climb the FL450, then FL470. That initial figure is a good basis for comparison, one I favor over an absolute maximum.
 
When evaluating aircraft performance and technical specifications, you need to understand the assumptions that went into the number. Especially as they relate to your aircraft requirements. When comparing data for different aircraft, you need to have the data based on the same assumptions – the old “apples-to-apples” comparison.

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David Wyndham

Is Now A Good Time To Lease An Aircraft?

by David Wyndham 1. July 2010 14:28
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If you are looking at acquiring an aircraft, you may be evaluating whether to lease or buy the aircraft.

What is a Lease?

In a lease, the owner such as a bank (the lessor) allows you (the lesee) the use of an aircraft for a fixed period of time. An operating lease is a lease whose term is short when compared to the useful life of the asset. For example, an aircraft which has an economic life of 30 years or more may be leased to a company for five years as an operating lease. This can be a simple leasing transaction where at the end of the lease, the aircraft is returned to the lessor. There may also be the option to buy the aircraft at Fair Market Value (FMV) at a set point during the lease and/or at the end of the lease itself.

In an operating lease, the residual value risk shifts to the lessor.

In today’s market, pre-owned aircraft values have plummeted and selling prices are relatively low.  Most aircraft values are likely to recover in the next few years. In such a market, why would you want to have the lessor accept the residual value risk? You, as the lessee, have a lower residual value risk than at any time in the last decade. Buying a good quality aircraft now leaves you with a minimal risk of the aircraft losing a substantial amount of its value in the future.

Leasing is better than financing if you do not need the tax write-off from tax depreciation. Aircraft can be written off to zero value for tax purposes in eight or fewer years. If your company isn't making a profit, tax depreciation is of reduced or no value anyhow. Your business, as the lessee still can write off the lease payments as an expense.

You can't use the tax write-off for a personal aircraft. In that case, lease payments/terms may be more favorable than a loan.

If you are a company, leases may be "off balance sheet" as far as long term debt goes.

As a company, the operating lease may be considered as “off the balance sheet” as it is not technically a long term debt. This can improve the financial ratios used to evaluate the fiscal heath of a company. However, the SEC and investors are getting savvier about "off balance sheet" deals. New rules may also affect the ability to qualify a lease for this accounting treatment. This consideration requires tax advice from someone knowledgeable about your business.

Getting out of a lease early is easy, just pay it off!

Are you certain to need the aircraft for the full lease term? You can walk away from a lease at any time: just pay off the remaining lease payments. This can get quite costly. Read your lease terms carefully. If there is a possibility that you will want out of the lease early, you may not be a good candidate for a lease.

Lease or loan: both require financial disclosure.

Credit is tough these days, the financial institution will want to know your full financial picture. If you don’t want to disclose your full finances, then a lease (or loan) may not be in the cards for you.

Need it now, pay cash.

I wrote in 2009 that cash is king in the aircraft transaction. That is still true. You will get the best deal and the quickest closing in a cash transaction. There is no need for pending approval of financing conditions in the purchase and sale.

Leases can work for some companies and individuals. You need to examine your ownership, tax and risk requirements and review the lease documents carefully to fully understand all the terms and restrictions.

 

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David Wyndham

Use Caution When Comparing Costs

by David Wyndham 1. June 2010 11:38
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Last month I talked about a methodology to compare costs. I suggested that Life Cycle Costing is the preferred method in order to fully understand the total costs of owning and operating an aircraft. Even if Life Cycle Costing, I want to bring another point of caution to you.

What is covered?

We've done many benchmark reports and analyzed the costs of hundreds of aircraft. It is vital to understand exactly what went into the number is that you have.  If you have used Life Cycle Costing yourself, then you will have put forth the effort into your costs. But what about costs from other sources?

If your analysis suggests that an aircraft costs $1,200 per hour and your friend, who operates the same type, tells you $900 per hour, who is correct? Well, you both can be. Just what was covered in each number and what were the underlying assumptions?

Fuel cost is an easy example. For each hour that you fly, your aircraft consumes so much fuel. The $1,200 per hour assumed fuel at $5.25 per gallon while your friend used $4.50 per gallon. At 85 gallons per hour, you are different by $63.75 per hour.

Next up in variable costs is maintenance. But what maintenance is included? Scheduled, unscheduled, retirement items, engines? Are major cost items such as engine overhauls accrued as a cost per hour, or just shown as an average or an interval not equal to the time accrued?

Say you spent $252,000 on an engine overhaul due at 3,600 hours. The accrual cost is $70 per hour. If you have had the aircraft for only two years and flew 600 hours during that time, the “cost per hour” to you is $420 per hour. Quite a difference!  While that cost jumps out as obvious, add up a lot of $1,000 and $500 items. Taken individually, they seem insignificant. In total the effect can be substantial.

Maintenance costs can vary considerably and their cyclical nature adds to the fog surrounding using a single number. While Life Cycle Costing helps, you need to be consistent in the methods and length of time used. Even so, a five year cost period for a new aircraft will differ than a five year cost for a 10-year old aircraft. What maintenance happens when is important.

Training costs, new avionics, upgrading paint and interior, how much insurance coverage you have, whether you have three full time crew or two full time crew and one part time contract pilot, and so on all can add up to significant differences in the cost. 

When you are analyzing and comparing costs from different sources, you need to know what methodology is used and what the numbers include (or exclude). The more detail the better as you can easily be lulled into a false sense of security when two big numbers are close together. Ideally you should run all the numbers yourself using as close to the same assumptions and sources as possible.

Lastly, please keep in mind that every serial number of a single model does not cost the same to operate. In the real world some folks will see higher costs than others, especially in the area of maintenance. Ask questions and understand that "your actual results may vary."



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