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What does it cost, really?

by David Wyndham 5. July 2016 10:24
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I had a call from a customer who's flight department flies a popular mid-size business jet. He was looking at the variable cost we publish and comparing it with his own. After adjusting for fuel cost, his variable cost was almost double what we publish. He called me to try and figure out the cause of the diffrence.

My company specializes in understanding and explaining the costs associated with owning and operating an aircraft. One of our published databases calculates an average hourly operating cost. Many in our industry and in Government use these numbers as benchmarks or as should-cost figures. We do publish an explanation of terms defining the ground rules we use, and I've spent many a phone call like the one above  discussing and explaining what we did it that way, or how to adjust them for your situation. 

My call that day led to a fruitful discussion that identified the discrepancy in costs as the maintenance costs. After a couple questions, we figured it out. His aircraft has predominantly calendar based inspections. Much of the scheduled maintenance inspections were based on the number of days since last accomplished and not the hours flown. For our costs, we were showing about 380 flight hours per year. His utilization was about 130 to 175 hours per year - less than half of our assumption. A quick bit of math showed his maintenance cost average per flight hour were more than double what we published. He was also on a parts by the hour program that also had hourly billing minimums. Knowing how much he flew and the fact the jet's maintenance was calendar based  led us to understand that there can be significant variability is the cost to operate that aircraft.

When did you last ask the question, “How much does our aircraft cost to operate?” The answer will vary in relation to where you are between scheduled inspection and maintenance work. Sometimes significantly.

Required maintenance schedules vary, but a typical one might look like this:

- Routine airframe & engine checks every 500 hours or 12 months.

- More complicated airframe checks every 1,500 hours or three years. 

- Engine mid-life inspection every 2,500 hours. 

- Airframe heavy maintenance every eight years. Often, while undergoing heavy maintenance, the aircraft gets paint and interior refurbishment, maybe some new avionics and cabin upgrades. Costs can be $500,000 to $1.5 million depending on the “extras” added.

- Engine overhaul at 5,000 hours. Cost could be $500,000 per engine unless engines are on a guaranteed maintenance program.

- Aging aircraft inspections once the aircraft reached 12 years of age or older.

If you fly the above aircraft under 500 annual hours, much of your scheduled inspections will be determined by the calendar. Fly 500 or more annual hours and the hours flown drive the maintenance.  Where the aircraft is in age and hours will also impact its costs.  What if at age eight the aircraft just had a major maintenance inspection, avionics upgrades, and refurbished paint and interior adding to the cost of an additional $1.0 million? Due to the downtime to accomplish all that, the hours flown that year might have been only 250 hours. That cost for this one year will have just consequently ballooned to $2.25 million, or $9,000 per hour! If the CFO were doing a cursory review of your aviation costs with an eye to reduces expenses, you'd better be prepared to explain all this!

Answering To answer the question "How much does the aircraft cost" really depends on who you ask and when you ask. Give someone a very broad question and you will get a wide range of answers depending on the individual's perspective and timeframe.  You need to track these costs at a level of detail that leads to understanding. You need to be able to communicate these costs, in plain words, to the management or financial executive.

None of the answers are "wrong" or "right," only they are merely different. Knowing this, when you are talking about aviation costs with various professionals, you should keep in mind who you're talking with (and their unique perspective) so that you can understand their needs when they ask "What does the aircraft cost to operate?"


 

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David Wyndham | Flight Department | Maintenance

There Must Be A Pony In Here Somewhere

by David Wyndham 31. May 2016 16:35
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A parent had twin boys. One was a pessimist and the other, an optimist. For their birthdays, dad gave the pessimist-twin a room filled with toys. The pessimist-twin was sad. When asked why, he replied that if he played with the toys, he'd surely break them all. For the optimist-twin, dad gave him a big pile of horse manure. The optimist grabbed a shovel and dove right into the pile exclaiming, "With all this manure, there has to be a pony in here somewhere!"  

Ronald Reagan was fond of this joke. And for the 2016 state of business aviation, I think it might be apropos. Three major new aircraft forecasts, two of which were related in the past month, all point to a healthy business aircraft market for new aircraft over the next decade. The forecasts expect from 7,900 to 8,300 new aircraft deliveries. Growth is expected to be solid in North America as it retains its title as the dominant business aircraft market fro at least 10 more years. But, still there are cracks.

Brian Foley recently released his look at the pre-owned business jet aircraft market. His prediction is for declining activity in the pre-owned market for the next five years. He thinks we have entered a slowdown in the pre-owned market. He's developing a pre-owned forecast model to get to the model and cabin-class level of detail. Lest you forget, Brian's firm, BRIFO, predicted a severe and lengthy downturn in the business jet market in September 2008. He has the input of some significant players in global business investing, so heed his call. 

In two recent events, at one of our Conklin & de Decker seminars, and again at the National Aircraft Finance Association annual meeting, forecasters and financiers were pretty flat on the state of the global economy.  A quarterly survey of leading CFO's by Duke University said these individuals think there is a 31percent chance of a recession in the US by year end 2016. Interestingly, 61% of the firms in the survey expect to increase employment in 2016. Top concerns in the U.S. include economic uncertainty, the cost of benefits, difficulty finding qualified employees and regulatory requirements. Don't forget, every four years, we worry with the uncertainty about the outcome of the Presidential election. Other concerns in the global economy include the price of energy and oil markets, China's slowing economic growth and currency problems,  terrorism in the Middle East, and economic and political turmoil in Brazil. 

Regardless of the forecast and opinions, aircraft will remain a vital tool for communicating and conducting business. You ned to have a plan, and a budget, and keep both up to date. Control what you can: your costs, your mission, your skills. Never miss an opportunity to market the effectiveness of the business aircraft. Buy now if you are in the market to do so. New aircraft manufacturers will be looking to make the year-end targets. As Brian Foley surmised, the pre-owned market will remain soft.  If you are selling, you are fine if you are upgrading. What you may "loose" in the value of your current aircraft will be made up in the value of a larger aircraft. If you are selling, and downgrading, might as well do it sooner rather than later. Don't walk away from qualified offers. Pick your broker carefully. Find one who is making deals and knows the market for your aircraft.  Communicate and listed to your customers. For the flight department, every person on your aircraft is a customer. And everyone in your company is important to your success.  Consider upgrading your aircraft if you are keeping it. Is your aircraft ready for ADS-B?

Last item, got a shovel?

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David Wyndham | Flight Department | Press Release

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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