All Aviation Articles By David Wyndham

Aircraft Data-Driven Management

That which is measured improves…

For professionals who fly with precision and leave nothing to chance, Business Aviation leaders need to apply metrics in their managerial duties.

Conventional Wisdom has a quaint, comforting sound to it. Unfortunately, when challenged or tested, much of it can be found to be based on half-truths. Aviation is a science. Professional pilots pride themselves on the precision of their flying. The management of the flight departmental also requires precision. Thus, as an aviation manager, you should be looking for useful ways to measure your Flight Department’s performance and the value of the company aircraft as a business tool.

One area that is ideally suited for measurements is the maintenance condition of the aircraft. Today, Business Aviation recognizes the use of data tracking for maintenance. In fact, it is difficult to sell a turbine airplane that does not have some sort of electronic record keeping and maintenance reporting. For the aircraft and engines, we are moving toward measurements and data reporting in real-time.Aircraft Data-Driven Management

The civil helicopter community has taken a leadership role in maintenance monitoring with Health and Usage Monitoring Systems, typically known as HUMS. With over a decade of experience, the civil helicopter industry has discovered that not only does aircraft reliability increase when aircraft condition is monitored, there also are benefits to safety and operational control too.

For example, Gulfstream’s PlaneConnect is an aircraft health, trend and monitoring system that collects reams of data on the aircraft’s status and datalinks that information to the maintenance team on the ground for analysis as the aircraft begins its descent for landing. Ground crews are aware of any issue that must be addressed prior to the aircraft’s next departure. Their latest version, introduced on the G650 series, the Health and Trend Monitoring (HTM) system anticipates when a part or component is nearing a maintenance review and sends the alerts its land-based technician.

Dassault Falcon is implementing a similar system with its newest models. The Falcon 6X will be equipped with an on-board self-diagnosis system called FalconScan, which will monitor the aircraft systems and collect about 10,000 parameters in real time. The technological advancement that has enabled monitoring of aircraft condition is the ability for near instant communication.Aircraft Data-Driven Management

With the advancements in airborne connectivity, most turbine aircraft can have real-time data collection and reporting to the flight department.

But there are many more opportunities to make use of data in the management of the aviation operation.  While quality control engineer and statistician W. Edward Deming is often credited with saying “What you don’t measure can’t be managed” (he didn’t), measurements for measurement’s sake leads to data overload and an inability to see the trends that matter. With regards to measurements, the corollary statement is, “If you step on the scale, you’d better do something about it.” Raw data without a system for analysis and a mindset to use the information data provide, are of little value.

Aviation Management’s Role

Data-based management starts at the top. A corporation thrives on profit and loss. Management has a number of metrics that indicate not only the current profitability of the company, but trends that will affect long-term profitability. To be useful, a metric needs to be tailored to the business function, or in our case, the aviation business function.

Business Aviation is a means of transportation for the firm’s personnel and clients. As such, immediately after safety, service should be your Flight Department’s top priority. With safety, accidents are a terrible measure, but they are indeed a metric. Organizations that value safety seek smaller measures like incidents as well as counting or measuring processes and procedures that are not followed properly, to track their quest for safe operations. Using such measures, intervention can be instituted before tragedy happens.

The level of service provided extends beyond hours flown and passengers carried. Things like denied trip requests and days the aircraft is unavailable due to maintenance can lead to a discussion of whether the current aircraft is adequate or whether it is time for another aircraft. Tracking sales made by passengers flown on the business aircraft as well as new contracts signed as a result of meeting with clients also are very important metrics of a business aircraft’s usefulness.

There are other ways to develop and maintain various metrics to improve the levels of service as well as better manage costs.  Measuring things such as staffing, additional duties, and days away from home can provide both efficiency metrics and be an leading indicator for turnover.

Organizations like the National Business Aviation Association and Helicopter Association International are supporting these measurements though education and industry cooperatives. The leadership of this effort comes from forward-looking aviation managers who understand and support the needs of the corporation.

There are many different measure of success.  Choose ones that fir both your operation and what it is that you want to measure. More on that later...

 

David Wyndham - David joined Conklin & de Decker in 1993. His primary responsibilities include developing and managing new programs for the company, conducting consulting studies, managing aircraft cost and performance databases, and providing customer computer support.

 

Misconceptions about Aircraft Costing

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. 

Misconceptions about Aircraft Costing

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 that 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. 

If you are currently in the market for an aircraft please review Globalair.com and their Aircraft Exchange.

(This is a 2nd edition of this article and may be found on other websites)

 

 

Quick Tips - Aviation Tax Planning

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.

------------

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

 

Financial Analysis Part 2 - Time Value of Money

Aircraft Financial Analysis

In the previous blog post I introduced the criteria for a financial analysis.  Recall that the goal of the financial analysis is to identify the aircraft that does the job for the least money.

The financial analysis should analyze all of the costs associated with the aircraft: acquisition cost, operating costs, depreciation and taxes, and the potential residual value after a set term. If the aircraft is to be used in a commercial operation, you will need to make assumptions regarding potential revenues as well. All of these considerations are important and needed to complete the analysis. Use the same set of assumptions for each aircraft to ensure that you get a true comparison.

The analysis tool to perform the financial analysis is the life cycle cost. In addition to showing the expenses, revenues, taxes as necessary, and a cash flow, there is one more thing remaining. The time-value of money.

The cash flow, or the monies in and out for pre and post tax, may be very different for the aircraft and the scenario. For instance, option A may be a cash purchase, option B, a loan, and option C, an operating lease. For the same aircraft, the cash flows will be dramatically different. Option A has a large cash outflow at the start in the form of the acquisition cost. Option B just has a down payment, but also has interest on the outstanding balance of the loan. Both of these purchase options do have the revenue in the form of the residual value estimate at the end of the term. The lease has no acquisition cost, but no revenue at lease end either. 

For a commercial operation, cash flow is king. At any given time if the money leaving in the form of expenses is not covered by the revenue coming in plus the money in the bank, you are not in business much longer. For a not-for-hire operation, the cash flow remains negative until you sell the aircraft where they may be a “profit.”

There is one more important consideration to consider, the timing of the expenses and revenues. Regardless of for hire or not, when the expenses occur as well as their magnitude is important. 

The time-value of money places importance on the timing of a revenue or expense occurs. Think of interest. If I invest $1,000 at 5% per year, I'll have $1,050 at the end of a year. Similarly, if I owe you a $1,000, and I pay you today, I need $1,000. But, if I can wait a year to pay you, I can invest $953 at 5% and end up with $1,000 after a year. Taking the time-value of money into account allows you to compare different streams of revenues and expenses  (i.e. cash flows) to see which one has the better time-value. Each future revenue and expense has a value in today’s dollars, or a Present value.

The Net Present Value is the sum of the present values of these future cash flows (revenues and expenses) less my initial investment. It takes into account my assigned value of money and inflation. An NPV greater than zero means I’ve made a profit. A zero NPV is break-even while a negative NPV is a loss. For a not-for-hire operation, minimizing the loss is the goal.

Terms used to describe the time-value "interest rate" include return on investment (commercial operations) and net present value (non-revenue operations like a corporate flight department or government). These are usually abbreviated as ROI and NPV respectively. 

What is a typical percent to use for the ROI/NPV analysis? You usually don't have to make one up. Government agencies usually look at the cost of borrowing money - Treasury Bill interest rates for example. Corporations have expected returns and use that for all major purchases. If you are in a large organization, just call the financial department, the CFO, comptroller, etc. and ask them for the relevant rate and your organization's marginal take rate. They will be impressed at your level of understanding!

Now that you have your costs, ROI/NPV rate, and marginal tax rate, how do you perform the analysis? Prior to spreadsheets, it was a time-consuming process. Today, there are spreadsheet applications that, given the proper data entry, will quickly calculate cash flows and ROI/NPV. Our company has a tool, Life Cycle Cost, that has a built in aircraft database that allows you to do all of the analysis mentioned here. I believe it is the only database plus software of its kind that does all these calculations specifically for aircraft.

The financial analysis with NPV takes into account all of the variables and calculates the net return for the option. This financial analysis allows you to rank order the capable aircraft to find the one that does the required job for the money.

One last warning, never let a spreadsheet make your decision for you. 

Aircraft A may be technically adequate for your mission and have the most favorable NPV. Aircraft B may exceed all your requirements but have a less attractive NPV. Since both Aircraft A and Aircraft B meet your technical needs, Aircraft A is the financial best alternative. But, the financial decision maker may feel that Aircraft B has a better value, or “more bang for the buck” and favor that option. As a consultant or analyst, my job stops at the technical and financial ranking. The decision maker, the person who signs the check, gets the final word.

 

Financial Analysis - Part 1

It seems that in aviation there are some who think finances are scary (read as job threatening) and those who think finances are just simply boring. Both groups try their best to avoid the subject. There is a middle way, those whose knowledge of finances gives them a powerful and convincing tool for making the right aircraft decision!

To do a proper financial analysis, you will need the initial investment required, the variable and fixed costs of operation, and the estimated residual value of the aircraft at the end of the term. Taxes and revenue potential can also play an important part in the analysis. The objective of a financial analysis is to determine which of the qualified aircraft provides the optimum combination of these elements.

Before doing a financial analysis, you will need to establish financial criteria and options. This process starts in the same manner as when you are selecting an aircraft. First you choose the criteria by which you will select an aircraft. With aircraft, we think in terms of things such as range, payload and cabin size. In aircraft financial analyses, we think of things like:

Amount of utilization. For point to point travel, do this in miles (or kilometers). Trips from Point A to Point B have a set distance. Add up those trips' distances. Then divide by the aircrafts' typical trip speeds to arrive at the utilization in hours. 160,000 nautical miles is 400 hours at 400 knots or 500 hours at 320 knots. This will have an impact on the fleet size as well. A large amount of utilization (in miles) can spell three slower aircraft or two faster ones.

Type of ownership. Full ownership, co-ownership, fractional ownership. Maybe not even owning at all. Utilization under 200 hours per year can suggest a form of charter or perhaps fractional ownership. Between 200 to 300 hours, fractional ownership and full ownership should be considered. Over 300 hours tends to favor full ownership. There may be extenuating circumstances to consider as well. 

New versus used. Do the lower maintenance costs, added tax depreciation benefits, and the ability to specify the exact configuration of the new aircraft outweigh the used aircraft's lower acquisition cost? There may be other considerations favoring the new aircraft such as updated avionics.

Lease or Purchase? A lease typically has a very low initial payment, and depending on the type of lease, may not be considered "long term debt" on the corporation's balance sheet. Purchase includes both finance and full payment up front. With a purchase, you do have ownership and after the payment(s), have an asset with a definite value.

Trade-in Value. If you currently own an aircraft, you need to get an idea of its current worth in the market. Price guides such as the Aircraft Bluebook Price Digest, Vref , and The Official Helicopter Bluebook offer a good starting point for determining the value of an aircraft. Nothing beats an appraisal by a qualified appraiser. The National Aircraft Appraisers Association is one place to start. An appraiser will give you the real-world value in today's market that will aid you in negotiations with buyers.

Acquisition Price. For used aircraft, see the references above. You can also look at aircraft-for-sale web sites to see what the "asking" prices are. Keep in mind that there can be a considerable margin between asking and final selling price. An appraiser can also give you some information on used aircraft prices as well. For new, start with the manufacturer's list price. In today's market, most sellers are willing to make a deal, so don't count out a new model that is "just a little bit" outside of the target acquisition price.

Length of ownership. When you analyze each aircraft, use an equal length of ownership. Looking at cash flows and costs over different lengths of time can give you a distorted picture. This is very important when considering the time value of money. When income or expenses occur can be as important as how much.

The methodology to do all the calculations is called Life Cycle Costing. 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.

Once you have calculated the life cycle costs of the various options, you can compare the total costs. However, this may not be enough. While the magnitude of expenses and revenues is critical, their timing is important, too. In general, it is preferred to pay the bills as far into the future as we can without penalty. 

The next step is to use the concept of the time value of money. We all can agree that being paid today and paying our bills next week is the preferred way to manage our finances. This is the simple version of the time value of money. Next month, we will explain it in detail and complete the financial analysis.

End of content

No more pages to load