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Keep Your Banker Happy

by David Wyndham 4. May 2016 13:19
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Financing rates for loans and leases are very low. Yet it isn't easy to get financing and the paperwork can be daunting. If you are looking for a lease or a loan for an aircraft, here are a few tips to help you help your financier.

Educate your financier as to how your lease or loan is a great risk. There is plenty of money to lend and financial institutions want and need to do business. They need to do transactions, but they also need to carefully manage their risk. It is up to you to provide them the information they need demonstrating you are a good credit risk. That means lots of financials of course. But is also means that the individual you are working with needs to understand your business.  Much of the decision is based on analytics, but there is room for judgment.

Your local banker with whom you have had a long term business relationship may be more likely to support your need for financing, even if they don't know much about aviation. Educate them on the lower depreciation that aircraft have relative to other transportation forms. Yes, since 2008 aircraft resale values have not fared well, but relative to trucks, they are a much better risk with a much longer life. That may not be obvious to your banker.

Pick your aircraft like a banker or risk manager. New aircraft are easier to finance, but older aircraft do get financing. Turbine financing rule of thumb: aircraft age at the start of the lease/loan plus the length of the term should not exceed 15 years. Example: your should be able to get a five year term on a 10-year old aircraft. Don't expect the five-year term on the age 20 aircraft. Also expect to put 20% down on the loan - more if the aircraft is older. That down payment is the cushion the banker needs to keep what is owed well under what the outstanding debt is at any time.

Reducing financial risk also means that the banker will favor, or even require, a guaranteed hourly maintenance program on at least the engines. This is routine with leases. Lease return conditions generally require all components have at least 50% of their useful life remaining or you pay a detriment adjustment. The engine guaranteed hourly maintenance program both covers the time to overhaul adjustment plus makes the returned aircraft at lease-end more popular in the resale market, either in another lease or as a sale.

Plan on time to research and secure your financing. Talk to your banker early in the acquisition process and see what information they will need. You may need to check out several sources. One banker that deals with turbine equipment up to $5 million in value isn't likely to want to do a deal on a new mid-size business jet. Know who and what your options are.

There are a lot of financial uncertainties in any time. Right now the oil/energy markets, China, the Middle-East, and the US election are in the front of their anxieties. When looking for financing or a lease, don't add to them! And yes, cash is and always will be King. 


 

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David Wyndham | Leasing

"Whatever Lola Wants"

by David Wyndham 28. March 2016 15:01
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Most of the consulting my company does focuses on making recommendations for the getting most cost effective aircraft for the mission. As part of that we look at many different things, all quantifiable. What is the primary, or key mission for the aircraft?  What must this aircraft do to be considered successful? We work with the aircraft owner, the major users, and, with input from the flight department, develop the measurements of success.

We translate that key mission into quantifiable measures like range, cabin size, speed, payload, take-off and landing performance and many other measures. The mission (VIP transport, EMS, wildlife management, you name it) defines the criteria. We look for the aircraft capable of meeting or exceeding these requirements. Next comes the financial analysis. We know to look at more than just the cost to acquire the aircraft. We take into account all the costs associated with the aircraft . We look at the operating costs of the options. We estimate a residual value at the end of a predicted ownership term. We may look at new versus used, or leases, financing, and cash purchases. And don't forget the ownership structure and tax considerations. 

All this time we work to translate the needs of the customer (aircraft owner) into quantifiable items that we can compare, rank order, and look for a best value option. Some owners state outright that they never lease, or that the aircraft must be in a separate legal entity to mitigate some of the ownership risk. Some will not consider chartering their aircraft while they are not flying. At all times, we seek the middle way between cost and performance.

Business aircraft are business tools whose main return on investment is maximizing the use of time by minimizing the travel time. We look to show the benefits of this "time machine" along with the costs to use it. Sometimes this means a single-engine piston. Other times it can work all the way into a global business jet. Again, the mission defines the requirements which define the aircraft types. 

At the end of our analysis, we present a report with supporting documentation.  We avoid jargon so that the CEO, the CFO, and the aviation manager can all understand the analysis. The report ends with a summary and recommendation. We always aim to show several options and the costs of those options. Option one may be the most cost-effective aircraft. That aircraft may do what is required, but not a lot more. A second option may exceed many of the performance criteria but at a higher total cost. It feels good when discussing the report to see agreement and nods of approval.

But, every once in a while...

Anyone involved in the acquisition process has seen this. You do the analysis, get the charts and photos and spreadsheets ready. The numbers are clear, Aircraft A is the best option. Aircraft B would be a good second choice. Its all there in black and white. A few days or weeks later you get the news. The owner decided on Aircraft D! In your analysis, Aircraft D was not even a third option. What happened! What did we fail to take into account.

Emotion. Our analysis and recommendations are all based on quantifiable measures that take into account the stated mission of the aircraft. It did not account for how  gorgeous Aircraft D looks, especially with that optional interior and paint job! It did't account for the fact that the owner's golf partner has Aircraft A, which is smaller than Aircraft D. Maybe the sales person for Aircraft D really hit it off the with owner. There are many emotional "reasons" that the top choices are not selected. We did our job and presented the facts. I'm not the one writing the check.

Remember, Lola gets what Lola wants

 

Happy Flying

 

 

 

 

 

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AIRCRAFT SALES | David Wyndham

Why you should have a guaranteed maintenance program

by David Wyndham 7. March 2016 13:57
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We are working with someone who has a business jet. They have had the aircraft on guaranteed hourly maintenance programs for the engines and also for the airframe and avionics. The aircraft is coming out of warranty and the hourly rates are going up considerably, especially for the airframe. They are trying to figure out (a) whether to keep the aircraft and (b) if the keep it, what would be the future maintenance costs if they take it off one or more of the guaranteed hourly maintenance programs (GHMP). Within the next five years, that aircraft’s engines will need overhauls, to the tune of almost one million dollars, each!

The make and model aircraft they operate is doing the job quite well. The feel no need to change models. So if they sell the current aircraft, it would be to buy a new version of what they now have.  The aircraft is worth about half what it was since new. While they can negotiate on the new aircraft price, they still need to come up with a significant investment. Given the current economy and the company profitability, they do not want to undertake a capital acquisition – even if financed or leased.

Turboprop and turbine helicopter engine overhauls can run to $300,000 and turbojet engines, over one million. Within the engine are a number of components that will have different cycle limits. Typically they can last to the second overhaul, or perhaps even the third. These turbine wheels, blades, etc can add significantly to the cost of the heavy maintenance. More and more turbine business aircraft are heading into their twenties and will be facing these cycle-limited items’ additional expenses. Budgeting for these major inspections and overhauls can be difficult. In good times, reserving cash can be difficult for a company, and in today’s economy, the cash may not be available.

All the major turbine engine manufacturers offer some form of a GHMP. Plus, there is one major third party provider of these plans that cover most popular business turbine engines.  Many current production jet aircraft have GHMP for the parts provided by the OEM. Some of the major avionic manufacturers also offer hourly programs covering their systems.

What are the advantages of GHMP - guaranteed hourly maintenance programs?

Budget Stability

 

Under a GHMP, the aircraft owner pays in an hourly set-aside to the plan provider. The monies go into an escrow account. As engine maintenance expenses occur, the money is drawn out to pay for the expense.

The amount to be paid in is set by contract, and thus, a GMP offers a stable budget. Accountants love stability in budgeting. So should you. Take the hourly rate times the number of hours to be flown, and your engine budget for next year is mostly done. You need to budget for minor line maintenance. There are no unplanned for costs and no surprises. An GHMP offers a financial peace of mind.

GHMP Limits your maintenance exposure

A full-featured GHMP also offers insurance against the rare, but costly unscheduled maintenance event. While turbine engines are reliable, when an unscheduled event occurs, they can result in significant expenses. Once an engine is opened for inspection, the cycle-limited components are also subject to replacement or repair. I’ve heard from a few operators who went in for a $50,000 Hot Section Inspection and came out with a $150,000 repair bill. Similarly, for major airframe inspections, the flat-rate tends to be about half the total cost once all repairs and overages are accounted for.  Today’s modern avionics tend to be reliable. When they fail, however, it tends to need a full replacement rather than a repair.

GHMP can be less costly in the long run

Engine removal, shipping, and loaner engines can all be covered by a GHMP.  Loaner engines alone can run several hundred dollars an hour to rent. Also, until you get a quote on your engine, the “typical average overhaul cost” is just that, an average. An engine GHMP will cover those items and pay the actual overhaul cost, even if those costs are over budget. Airframe parts are tougher to quantify. The GHMP may specify an exchange-overhaul versus a new part. Your Director  of Maintenance may want a new part. Labor, if done an an approved repair facility, is usually covered.

GHMP preserves the residual value

A GHMP will add value to your aircraft. Aircraft sale price sources such as Vref and the Aircraft Bluebook Price Digest either include the engine GHMP in their typical selling price and subtract for engines not on a program, or the program itself is a added value.  If you are selling your aircraft, and the GHMP transferring to the new owner has accrued $350,000 in its account, that is value added to the aircraft in three ways:

 

  1. The cash value of the GMP account itself. 
  2. The reduction of risk to the future buyer as to the risk for future maintenance, especially the engines. 
  3. A reasonable level of assurance that the maintenance is being done to standards.

 

 

One last possible advantage to a business is that the cost of the GHMP may be a tax deductable expense.  Cash accrual accounts are not “expenses.”  Consult with your tax advisor, but this can be a definite advantage for the GHMP.

Leases favor the GHMP

Many financial institutions may require that at least the engines be on a GHMP to help guarantee the value of the asset. It is common for an end of lease requirement that all major components have at least 50% of their life remaining and an adjustment (to the detriment of the lessee) is made for less than half-life remaining components such as the engines. Guess what dollar value per hour they may use in adjusting for engines nearing the overhaul at the end of a lease?

Why not go with a GHMP?

If you are purchasing an older aircraft not on a program, the typical buy-in amount is to pay the hourly rate times the total hours flown up front. Or, you may face a pro-rata share of the next overhaul. For example, if you place an engine on GHMP that is just completed a mid-life inspection, the GHMP will cover half and you will cover half of the next major event.

With airframe GHMP, it can be tough to calculate the accrued value versus the to-be-used amounts. If you are halfway to the C-Check or 96-month, will a buy-in cover all the costs at the event? Read the buy-in terms carefully.

Low utilization operations may not see the value. Some of the engine programs have minimum annual flight-hour requirements. If the GHMP requires 300 annual hours and your flying dips to 200, you may either face a rate-adjustment with much higher hourly costs or have to pay for 300 hours. Contracts vary, and most GHMP providers will work with you should your flying hours change.

GHMP are a good way to insure your aircraft value, provide stable budgeting and perhaps even save money over a pay as you go maintenance. You’d be wise to evaluate these programs for your next aircraft.

 

 

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Does your aircraft make "cents"?

by David Wyndham 1. February 2016 12:14
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It used to be that the choice of what business aircraft to acquire was a decision made by the CEO and the Chief Pilot. The boss said "I want this aircraft" and the pilot either got it or tried to dissuade the boss for reasons of speed, cabin or range. Today, opportunities to use business aircraft are sufficient only if the numbers make sense, and make "cents."

Some years ago I did a study for a manufacturer who was expanding from the Americas into Asia, particularly China.  They already had a larger-cabin business jet, but the senior leaders were considering a much larger airplane with global range to better meet their expanded travel needs. The CEO and Senior VP were clear on what they needed—the  ability to go global.

The CFO was just as clear on what he needed—financial justification. There was no way would he stand for a what he called "A Royal Barge."  In other words,  the aircraft had to earn its keep, or he would recommend the board veto it. This is exactly why you hire a CFO. It is their job to make sure every dollar gets spent wisely.  Our goal then was to recommend an aircraft upgrade that could handle the global travel of the CFO and SVP, both as flying-office and as restful-space, so that these rainmakers could do business right after landing. But since, the the CFO and board were not going to write a blank check, we needed the financial justification for the global jet.

Going from the corporate headquarters to to Asia was two-stops with the aircraft available at the time. One-stop to Asia was technically feasible but only if the weather was perfect and the headwinds were light. Our analyses identified two sets of aircraft.  A 4,100 NM range aircraft  could get them to or from Asia with one-stop 95% of the time. A 6,000 NM range gave them the desirable non-stop capability. Aircraft in these categories all have comfortable cabins with the latest navigation and communication systems. The seats could fully recline allowing for the executive to rest, if necessary. The galley could prepare the meals needed to fuel people for a 10 to 14-hour trip.  The financial differences that had to be addressed were:

 

  • Any new aircraft would cost more to acquire than the sunk investment in their current, smaller business jet.
  • Operating costs would go up with a bigger jet. However, given the newer aircraft's more fuel efficient engines and advanced systems, the cost jump was minimal.
  • Acquisition had to make sense financially.

 

We were able to show the added days in the office and the business jet’s more productive travel environment en-route were valuable to the company. The reduced travel time and more restful experience en route was seen as significant by the CFO. The saved travel days, the productive work environment on the business jet, and the secure work environment were good financial reasons for the new aircraft. Still, the question remained— do they obtain the 4,100 NM jet or the 6,000 NM jet? 

Looking at the Asia trips, we compared the added costs to acquire and operate the larger jet with its 6,100nm range with the cost of the fuel stops and added travel time of the 4,100 NM jet. We looked at the difference in the ownership costs - acquisition and residual value after 10 years in this case.  Based on the trip frequency, we arrived at a cost savings of about $600,000 per year by accepting the one-hour fuel stop needed with the 4,100 NM jet on Asian trips. The CFO was not sold on the 6,100 NM aircraft as adding that much more value. The flight department, CEO and Senior VP were satisfied with the 4,100 NM jet, which is the aircraft they purchased.

Given the frequency of their Asia trips, the 6,000 NM jet was not financially justifiable.  Operationally, the flight department favored the shorter stage lengths with a break, even with the added crew member.  For this company, the numbers made send for the 4,100 NM jet. For another company with higher trip frequencies or greater passenger loads, the 6,000 NM jet would make better sense. In all cases, you have to look at the costs and the benefits to do what makes "cents" financially within the parameters of the mission requirements. 

 

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Aviation Technology | David Wyndham

Add Value or Leave

by David Wyndham 5. January 2016 10:51
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When you get down to the basics, we humans must cooperate with each other in order to survive and prosper. Each one of us takes up space and uses resources. If we don't add back more than we consume, we are draining or depleting resources needed by others. Read into that whatever resources you wish - food, money, relationships, etc. At work, we are the same. As employees we also are taking up the company's resources. We are provided space to work, heat/AC and light in that space, computers, telephones, etc. Periodically, we receive a paycheck. If we don't add back to the company at least what we consume, we may not be in that job very long. This holds true for janitors, engineers, and the CEO. This applies for all the assets of the company, like the business aircraft.

The corporate aircraft and flight department use resources. If they are not adding value to the corporation, they are not needed and should be gone. It is up to you to maximize the value of yourself and the business aircraft your operate.

Organizations and groups like NBAA, GAMA, AOPA, No Plane No Gain and others all provide us with great examples justifying and proving the worth of business aircraft. They start with the obvious, that use of an aircraft maximizes use of time. Most touch on the value of that time to the corporation. But as members of the aviation department, you need to take that generalization and make it apply to your corporation. 

Understand how the use of business aircraft adds value to your company. What are the unique benefits that your business aircraft adds to the accomplishment of your company's goals?  Yes, the aircraft allows for more usable time. But who's usable time is being increased and what does the aircraft enable them to do with that time?  Time is a nonrenewable resource. Employees are often called a company's most valued asset. The effective use of an aircraft allows valued employees to effectively use their limited time to drive the profitability of the company. 

Develop ways to measure and document how the aviation department adds value. There are many ways to accomplish this. They need too apply to your situation. If your business is EMS, the measures are different than for a corporate shuttle. If the company is using the aircraft to reach new clients,  can you document this and assign some value? Does your aircraft utilization strategy support the corporate goals and mission?

You need to also understand your costs. What are the costs to operate and own the aircraft? Are you able to minimize the market depreciation on the aircraft by keeping the aircraft updated and in a "ready to sell" condition? Use this to develop a Cost-Benefit Analysis for the aircraft and the aviation department. You may calculate the aviation department has an annual operating budget of $1.75 million. Can you calculate the value to the corporation? If the aircraft use was critical in winning a billion dollar contract, some of the value of that contract can be "awarded" to having the aircraft, no?

Things to consider trying to quantify regarding the contributions of the business aircraft:

- Adding to the company's market share

- Adding to the profitability of the company

- Enabling the (key) employees to maximize use of their time

- Increasing employee and customer satisfaction or loyalty

- Keeping senior leadership secure 

Whether it is business courses at the local university, online education, or the NBAA CAM program, find and use resources that help you to understand and communicate the "business" part of business aviation. Become a marketer of the aviation department both within the company and within the community. Develop your leadership skills and people skills. Add back more than you consume.

 

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David Wyndham | Flight Department





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