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Flight-Department-Fiscal-Flight-Plan

by David Wyndham 31. July 2015 13:40
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"Those who fail to plan, plan to fail." Now is a good time to start planning the next year's budget for your flight department. If you are a public company, you have two, or perhaps three quarters of your fiscal year already reported. How are things going? If your 401(K) is loaded with your company stock, you know that answer. That answer can also help with your 2016 budget, too.

A budget is a very important tool for planning an organization's use of its most limited resource - cash. Managing the cash is critical for any business, or individual. Failure to plan for the incoming and outgoing cash has ruined many a business. And that can limit your aviation operation’s ability to carry out its mission.

A budget is just estimate of the future showing the peaks and valleys of cash flow. A budget can also serve as a benchmark for evaluating actual versus planned-for expenses. Every organization must budget whether it goes through a formal or an informal process. Like any tool, used correctly it can be an asset in managing your aviation cash rather than a one and done exercise.

As an aviation manager, the budget should be more than just filling a square for your upper management reporting. It is a very useful tool that can enable you to track the effectiveness of your aviation operation. It can also alert you to the future peaks in expenses, such as scheduled major maintenance or an aircraft upgrade.

I like to think of the budget as a fiscal flight plan for the aviation department.

First, you need a destination. As a corporation, that destination is coming from the leadership. What are the corporate goals for the next year? How is the flight department going to support the goals of the company? Do you have the right assets (aircraft and people) to support that goal? Have you asked the boss what to expect for next year's flying? Understanding how your flight department supports the corporate goals gives you that higher level view of what to expect next year. Asking the main users gives you more details as to how or if your flying will change.

You need to check the weather. What are the restrictions or conditions that your flight department will face next year? Do you have a senior pilot retiring? Do you need to hire a new maintenance technician? Does your hangar need repaving in front? Did the word come down that your budget is frozen for next year?

Next up and maybe most critical is to preflight the aircraft. This is literal and figurative in that what condition the aircraft is in now, and at the end of the "flight" (year) determines its airworthiness. This is often the easiest part. Once you know to how much you expect to fly, you can forecast what maintenance inspections, overhauls, and part replacements will come due. You should have that running list of service bulletins that you'd like to have done. How does that interior look? What do you need, and want, to keep the aircraft flying in good condition for next year?

The cost details for your budget depend on who its for. You really need to have a budget for two people. The budget that gets rolled into to company budget is needed for reporting and overall measurement of costs. I had one client who had three line items for their budget to send to corporate: salaries, facilities, and transportation. That worked for the CFO's management reports but is insufficient for managing the flight department. You need a lot more cost detail in order to adequately measure your flight department. You need to know what is driving your aircraft costs, what your high cost maintenance costs are, most frequently replaced parts are, and much more.

Fodder for another article - how much detail is needed? Enough to see small problems become they become too big to control. You can't manage what is not measured.

Just as you monitor the weather and aircraft performance during the flight, so must you monitor the budget. Too many see a budget as a static "one and done" exercise. This misses the point of a budget. The budget at its best is a living tool that guides you through the fiscal year. It can alert you to small changes that are manageable. The budget should also be adjustable as the assumptions that went into it change. If you add an important new trip that you fly twice a month, that will increase your flight hours and could pull a big maintenance item into the upcoming year, or impact your ability to have the aircraft down for three weeks for that scheduled inspection. Not to mention if our sub-$50 a barrel oil goes back up, what will that do to your fuel budget?

You should be doing routine "actual versus forecast" reviews of the budget as well. It may be monthly or bi-monthly or whatever fits with your activity level. You also should have a documented set of assumptions that went into the original budget.  This is so much easier to do during the budget preparation than six months later trying to figure out where that number came from.

Ideally, your budget is a living document that can guide your finances throughout the year. You cannot make all the right assumptions, but with documentation and regular reviews you can keep the budget a useful document.

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David Wyndham | Flight Department

Older Aircraft (revisited)

by David Wyndham 6. July 2015 10:47
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Fall of 2013, I wrote on the subject of what is old for a business aircraft. That article dealt with the issues regarding whether older business aircraft are easily sellable, and tried to put a number on what is old. I think it important enough to revisit again. 

At the recent NBAA regional meeting at Teterboro,  I sat in on briefings about the state of used aircraft sales and residual values. Much like with similar briefings at last two years' NBAA Annual Meeting & Convention, older business aircraft are still not selling. For financing, a general consensus for turbine airplanes is still this: the Aircraft Age + Length of Lease/Loan should not exceed 20 years. Age 15 allows for a five year financial deal. Some lenders are using a younger age than even 15! 

The factors I mentioned in 2013 are still valid:

- A good supply of relatively young, up-to-date, turbine business aircraft are listed as for sale.

- Future air navigation systems requirements such as NextGen and FAA 2020 are still making the ability to update older aircraft in question, both with the cost and timing.

- Markets outside of the US wanting new or nearly new aircraft.

- Increasing operating costs of older aircraft make them less desirable.

While the supply of used business jets is lower as a total percent of the market, the global market is sufficiently large that there is a good selection of aircraft to choose from across most categories. The FAA deadline for new navigation equipment is still January of 2020 and the FAA shows no signs of changing the date. The airframe manufacturers and third party companies are still trying to certify equipment for  the last 10 or 15 years' worth of models. With cheap oil and a strong US dollar, the non-US market is having a tougher time affording these new aircraft. But when they do purchase, they still look at the nearly new models. 

In this article I want to look at the operating costs again, from a different perspective.

You can buy a 30-year-old Gulfstream GIII for about $1 million. A 20-year-old GIVSP sells for about $4.9 million. A 10-year-old G450 sells for around $16 million (source Vref). According to AMSTAT, the GIII models offered for sale have been listed for an average of 491 days - about 16 months. The G450s listed for sale have been on the market about 6 months. So the average G450 is selling before the average GIII. 

Provided both aircraft have the range and cabin that fit your needs, why spend $16 million when you can spend $1 million? For much less than $15 million, you can buy a lot of maintenance and upgrades for the older GIII. It's relative, that's why.

An engine overhaul on a Spey or Tay can run to over $1 million each. Include all the other airframe and avionics maintenance and you can have a maintenance budget of from $3 million (G450) to $5 million (GIII) over five years' typical flying. The G450's maintenance budget is far less relative to the value of the aircraft:

Aircraft Value       Maintenance Budget (5 yrs) Maintenance as Percent Value

G450 $16 million $3 million                                      19%

GIII $1 million $5 million 500%

The maintenance quoted above is required to keep the aircraft in an airworthy condition. In other words, the GIII owner might spend $3 million to keep the GIII in a $1 million sellable condition. The math doesn't work from an investment perspective. A company called Asset Insight does this analysis on business aircraft to a far more detailed degree. Time and time again, their analysis shows that buyers are not willing to spend even close to the value of their aircraft for maintenance. 

If you are the GIII owner, you can shift your perspective about your current aircraft. First, accept that you are likely the last owner of the entire aircraft. Second, spend your maintenance dollars wisely. You may not want to do the engine overhauls, but instead might be able to secure a pair of Spey engines with a two or three years' life remaining for far less than the overhaul. Better yet, keep those engines on a guaranteed hourly maintenance program if they are on one. Or you may elect to sell the aircraft for salvage (keeping someone else's GIII flying for a few more years), and upgrade to the GIVSP or G450. 

I used the GIII as an example. The GIII is still a fine airplane and mechanically, most can be flown for many more years. You can replace the example of the GIII with any other business aircraft of its time. Aircraft buyers are not generally willing to buy low and pay for maintenance bills that equal or exceed the value in the aircraft. That is how the market works. 

 

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AIRCRAFT SALES | David Wyndham | Maintenance

Is It Time To Replace Your Aircraft?

by David Wyndham 2. June 2015 16:00
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In general there are two reasons to replace an aircraft. One is that the mission changes rendering the current aircraft unable to perform the job in an effective manner. The other reason is that the aircraft is no longer cost effective in doing its job.

Mission changes can be obvious. The regional company goes national. Or the company goes global with acquisitions and mergers in different companies. Big changes tend to happen from the top down.

Mission changes may also be subtle. Passenger loads may be increasing at a gradual rate. The users will understand the limit of how many passengers the aircraft can hold. They tend to adjust their requirements to fit the seats, versus asking for more seats. Passengers may avoid the company aircraft due to its lack of range, but if you don't know the travel needs within your company, you may not notice the opportunity. 

The aviation manager needs to be on the lookout for unmet travel needs within the company that the business aircraft can serve. This can be done by user survey and spending time in meetings. Make sure the entity responsible for corporate travel is aware of the capabilities of the flight department and that aviation is able to understand the corporate travel needs. There may be a potential for both efficiencies and cost savings by creating a corporate shuttle but if the flight department doesn't know of the need, they can't respond. 

Falcon 10

The cost effectiveness of the aircraft is measured in terms of dollars and time. Our data shows that aircraft  age has a profound impact on maintenance costs. The early years when the aircraft are young and warranties are in effect show very low maintenance costs – less than half of what they are at year five. As the aircraft ages, wear and tear is takes its toll. Maintenance costs can easily be double or triple for the older aircraft. The increased maintenance cost is due to increases in unscheduled maintenance and the cost of major airframe and engine maintenance.

Aircraft age also extracts a toll in the areas of reliability and availability. Availability is defined as the number of days an aircraft is available for flight operations divided by the total number of days in the operating year. Reliability is usually measured as the percentage of departures that leave within a specified number of minutes of the scheduled departure time and is referred to as the “dispatch reliability”.  In order to keep dispatch reliability high, older aircraft tend to spend more time in for maintenance. This detracts from the time the aircraft can be made available for flight. Our data suggests that availability drops from the 95% range for aircraft up to 15 to 20 years of age to an average of 70% at age 25 and 55% at age 30. Thus, it typically takes two older aircraft to have the same availability as one newer one!

Spare parts availability can also wreak havoc on aircraft downtime, especially for aircraft with limited production runs or that have components from vendors no longer active in producing spares.  At some point, the fleet will be too small to warrant extensive support. This will be due to the lack of a supplier for some critical components and lack of incentive of another supplier to enter a shrinking market. If you fly a lot of hours, the TLC needed for an older aircraft may not be possible with your flying schedule.

Aircraft aging issues can be subtle, like increased downtime. It can be a shock, as in finding corrosion or getting the quote for that second begin overhaul. We recommend that operators keep track of these key parameters:

- Mechanical Dispatch Reliability

- Aircraft Availability

- Maintenance Cost per Flight Hour (parts and labor)

LearJet 45

Upgrading your aircraft can help extend its economic useful life. New avionics can keep an aircraft capable of using the air navigation system, as well as increase safety. Some older aircraft models benefit from having a robust airframe but lack modern, fuel-efficient engines. For some, an engine retrofit is a good alternative. 

Costs for these turbine aircraft upgrades can run several hundred thousand dollars to several million dollars. Today's resale market does not give much value to older turbine airframes. Upgrading a 20-year old aircraft may not be cost-effective in terms of adding market value, but if it has value to your operation, it may be worth doing just for the operational benefits. 

Each case for when to replace the aircraft needs to be evaluated on its own. You need to look at the costs of keeping your aircraft and the costs and benefits of the alternatives. Don't forget to keep in mind the ability to maintain the desired flight schedule. The replacement questions needs to be thought out in advance and not done in an ad hoc manner. Manage your time by managing the time-machine asset that is the aircraft. 

What factors do you look at for decing it's time to replace your aircraft ? 

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Aviation Technology | David Wyndham

Scary Thoughts

by David Wyndham 7. May 2015 10:14
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It is May, not September or October, but I'm starting to have scary thoughts about where the global economy and business aviation in particular are headed. There is mixed negative news out there. Here are some things that have me wondering what is to come.

The US Standard & Poor's listing is close to all all-time high for its P/E Ratio. A stock's P/E ratio is equal to the stock's market capitalization (or simply, value of its shares)  divided by its after-tax earnings over a 12-month period (think about profitability). Companies with high P/E Ratios are generally considers as more risky investments as investors are will to pay more for the company's profitability. Right now, the Standard & Poor's index P/E ratio is very high relative to the average. This could indicate an overheated market and foretell a coming downtown in stock prices. If high net worth individuals fear a downturn, they are not as likely to be buying aircraft. Similarly companies fearing a downturn will also spend less, thus be less likely to purchase business aircraft.

There are business aviation reports that support this. Jim Donath of Donath Aircraft Sales puts out a very well researched quarterly report on the pre-owned business jet market. From the first quarter of 2015, news isn't good. Flying activity is higher than in 2014 in the US, but down in the EU. Pre-owned business jet inventories are up for the second consecutive quarter. Donath reports 465 aircraft listed in inventory, the highest since the last recession. Transactions are not keeping pace relative to the growth in inventory. Many of these are older business jets and thus, values and selling prices are low, and the time it takes to sell them is increasing. 

Asset Insight's quarterly market report supports Donath. They state: 

Quality assets are readily available, but increasing maintenance costs are accelerating financial obsolescence for many aircraft.  With nearly 47% of the models we track averaging an ETP Ratio in excess of forty percent, as much as half the “for sale” fleet may be resting with the aircraft’s final owner.  

As mentioned earlier, flight activity in the EU is down 2.7% from 2014 with very light jet activity down 11% in April. Emerging markets for business jet sales, like China, although still growing, are not showing the strenth as in the past.

All of this is at a US or global level and may have a lot or little impact on your business aircraft operations. Still, be cautious and look for warning signs within your own organization.  What is the business climate for your industry?  What is your flying schedule looking like for the rest of the year. Are you flying more trips or more hours than you forecast? Ask your customers what they are anticipating for their air travel needs in the next 12 to 18 months. This can impact your expected maintenance budget for the year.

How are your actual costs compared with your budgeted costs? I bet your fuel expenses are down, but what about overall? I know your flight operation is operating pretty lean, but are there more cost savings to be had without sacrificing safety or service? 

If you are looking at selling your aircraft soon, look at the comparable models for sale. How does your aircraft fit in? Do you have a prime example or just an average aircraft? Are your turbine engines on a guaranteed hourly maintenance plan? If you want your aircraft to sell, you may wish to accelerate upcoming major maintenance to offer the buyer 12 to 24 months without having to do any heavy maintenance. Same thought with avionics upgrades - plan on them before offering your aircraft for sale in order to better define your aircraft as the one to buy.

For us as a company, we are having a good year so far. But we are watching our expenses and being watchful with our cash flow. My question y=to you is this:

Will 2015 end up as a better or worse year for your flying activity than 2014 was? 

 

 

 

 

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AIRCRAFT SALES | David Wyndham | Aircraft For Sale

Choosing among on-demand charter, jet cards

by David Wyndham 1. April 2015 15:34
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I'm working on a little project right now for a high net worth individual. I'm generalizing his needs for this article. He flies from his home in Northern California to Colorado once or twice a month (not the Bay Area to Denver). He stays there a week or so and then returns. He currently charters either a light jet or turboprop. Since he stays in Colorado at least a week, the trips are all one-way. He finds himself paying positioning or deadhead fees on every trip. Thus, his average trip cost is quite high. He loves the convenience of on demand travel, but wants a more cost effective option. His utilization, in a light jet, is probably no more than 50 hours per year.

He's happy with the level of service with his current charter providers and has no desires to own his own aircraft. All the travel is personal, so taxes and depreciation are not a factor. He just wants to see if he can get the same level of service for less than he is currently paying. He'd also like to keep the scheduling as simple as possible and know up front what he will pay.

I looked at the costs of leasing a fractional share. The costs for a light jet share are greater than what he pays right now, and he's not interested in a long term commitment. His flying habits may change in a year or two. 

Next to look at were the various Jet Cards available. While Jet Cards used to be just pre-paid block charter with a guaranteed price, there are now many choices of providers and many different ways to customize the card experience. Item one was to keep the high level of safety. Using card providers who guarantee an Argus or Wyvern top rated carrier (or the equivalent) are needed.

Next requirement for him is the one-way pricing.  While one-way pricing does have a cost allowance for the positioning or deadhead, the card programs that we are evaluating offer some incentives to lower the cost. Many Jet Card programs have a minimum 2.0 hour billing. In a light jet, his trips range from 1.7 to 2.1 hours so the 2.0 hour minimum might be a deal breaker. Fortunately, some card programs will customize and one already stated they would reduce the minimum billable to 1.5 hours per leg.

Another customization is newer aircraft versus "standard" aircraft. You pay more for the newer models but again, the card programs guarantee an equal level of service and comfort. Think of it as the Beechjet 400A versus a Beechjet 400XP: up the steps, turn right and you don't notice the difference. But if you prefer newer, it is available at a higher price.

My client knows his travel several days in advance. So a 10-hour or 24-hour minimum scheduling window is not an issue for him. But it could be a nice feature.

He needs about 50 hours per year, perfect for a 50-hour program. While the hours do not expire, the price per hour guarantee does. He's currently in a sweet spot, but if his flying declines, he may face an increase in his hourly cost. 

Another price consideration is, are the funds in an escrow account? And for how long is the price guarantee? While not necessarily advertised, a 14-month guarantee is worth asking for in order to make a 50-hour card sale.

So far, he's looking at an all-inclusive cost (taxes and fuel surcharges) from about $4,250 to $5,500 per hour depending on his options and "newer" aircraft preferences. On a per trip cost, it is very competitive to what he's paying on most trips. There is still more research to be done and a couple more vendors to evaluate.

The toughest part is, if the Jet Card meets his requirements, and he has two or more to pick from, who does he choose? At this point I'd say it comes down to two things. First is how is he treated when he contacts the card vendor? Are they really asking him what he needs? Can he talk with the person who would be his account manager or his scheduler? Doe they offer references for him to talk to? In other words, do the people he's dealing with reflect the promise of the card program?

Second is to pick his top two and take a charter trip. Fly one vendor out to Colorado and a different vendor back to California. What is the experience like? He needs to realize that unless he uses a vendor from a fractional program like Marquis, he will likely get different charter vendors from trip to trip. But still, this is a fair test of the card program scheduling, flight following and follow up. Unless he's after the absolute best price, I'd say one that costs a bit more may be worth the extra expense if he's more satisfied - that is his call.

Today's Jet Card programs are not one size fits all. There is a lot of competition and if you know your travel pattern and requirements are consistent, you can find one that is a good fit. Don't overlook fractional.  Traditional charter may still be a best fit if you need a lot of options. But, the Jet Cards are evolving to offer a nice mix of convenience and flexibility that for many, is just right.

 

 

 

 

 

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David Wyndham





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