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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

Look ahead or get left behind

by David Wyndham 10. March 2015 10:41
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Back in early 2007, the Blackberry was The Smart Phone. They had corporations and governments wrapped up and knew they were the dominant player in the smart phone market. If you asked them how they were doing on June 28, 2007, they would have been very optimistic. On June 29, 2007 the first iPhone was released. In 2014, Blackberry reportedly sold 7 million phones. Apple sold 74.5 million phones in the last quarter of 2014. So how are things looing ahead in your flight department?

Image Bornfree / Shutterstock.com

Blackberry's parent, RIM, did not see nor did they understand what was happening with society and technology that lead to the original iPhone.  They never saw the warning signs. Today they are almost irrelevant in the mobile device market. The same can happen to any business. If you are a flight department, here are some of the danger signs that this problem is happening in your operation. 

The business aircraft is used by only a few individuals within your organization.  

The number of people using your service is decreasing.  

The company (or your client's companies) are once again growing at a torrid pace, but your annual flight hours are onstant or increasing only slowly. 

If the company is doing better, why aren't you flying more? What is everyone else using for their air transportation needs?  

The elemental reason for each of these danger signs is the same - the service your organization provides is not as relevant to the needs of the potential users as it used to be. There are a number of possible reasons, including:

The prices are perceived to be too high

The capabilities of your operation do not meet the needs of the potential users

Your operation does not have the technology needed by the potential users

The potential new users do not know your service exists or think it is irrelevant to them

If you are only at the airport and not involved in the daily dealings and changes within your company, then you may be missing out on valuable information. If all you know is that you serve the big boss extremely well, what happens when there is a new big boss? 

There are three things to avoid being irrelevant. One is to get away from the airport and get downtown. The aviation operation is not the big boss' personal air taxi. It is a business asset. You need to understand your business's mission and how the flight department serves the corporate mission. You need to read the reports and sit in on meetings as appropriate. You need to walk around the halls of power and let folks know who you are and what the aviation team is all about.

The second thing is to find out what your current and potential users think or don't think about your service. It is quite easy to get people to tell you how they perceive your service, even busy people. Yes, think of the flight department as a business unit whose customers are in the corporation. Spend time with your current customers and users and listen to find out what they like about the service, what they don’t like and how they would like to see your organization improve. 

The third thing is to understand the future plans of the company. Then be proactive and plan ahead for the flight department so that you can be ahead of what the corporation needs. Don't assume that the current aircraft which does the job quite well will be effective next year, or five years. Where is the company changing? What are the growth opportunities? Or, is the company getting smaller and if so, how can you adjust? 

Just as corporations like RIM can miss out on what the future holds, so can the flight department miss out on what its future holds. Be proud of the quality service you provide, but seek to improve and always be on the lookout for new opportunities with your own company to further advance the company's mission. 

 

 

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Aviation Technology | David Wyndham

Time Value of Money & Net Present Value

by David Wyndham 11. February 2015 15:14
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Money is valuable. So is Time.

Back in 2011, I wrote about the time value of money in the aircraft acquisition process. A financial decision involves not only what the total costs are, but when the expenses and revenues occur. That article prepares you for the Net Present Value (NPV) discussion.

An NPV analysis takes into account the time value of money, as well as income and expense cash flows, type of depreciation, tax consequences, and residual value of the various options under consideration. When an expense (or revenue) occurs can be as important as the amount of that item. For example, taking into account an aircraft's resale value, a cash purchase will have lower total costs than the finance option or lease option (for a long term lease). The cash purchase is due up front. The principal and interest, or lease payments, are paid over time. 

The NPV calculation applies a time value of money rate to when income and expenses occur. This time value of money is referred to as internal rate of return (IRR) or return on investment (ROI). Many organizations have a published IRR or ROI target. For companies that don't, a way to estimate it is by dividing the profit before taxes of the organization by the equity and expressing as a percentage the return the organization expects to make on the money it invests in the enterprise. For many organizations, such as Fortune 500 companies, this is typically from 10% to 15%. The rate could be higher when accounting for financial risk. Government agencies can use the current rate of return for Treasury Bills or State Bonds. High Net Worth individuals may use their current returns they are getting from investments, or the interest rate when they borrow money.

Paying cash may not have the best NPV when the value of money is high. In general, if internal rates of return are greater than the financing terms, and allowing for the tax depreciation of the aircraft, the NPV favors the finance option over the lease for most of our corporate clients. Lease NPVs tend to be favored when there is little or no tax depreciation benefit, or the term is very short - under five years. 

By using the time-value of money, you can judge whether a project will yield a better or worse return than the average return experienced on a company-wide basis. Thus, the NPV analysis allows the comparison of different cash flows based on a set target return. It also allows comparisons of buy versus lease versus finance options of the same aircraft. This type of analysis is also the only effective way of judging the finances of a purchase, finance, or lease, especially if different conditions and interest rates apply to each alternative. It is the standard financial analysis technique used by the chief financial officers of major organizations.

An NPV of zero means that the target return has been met. A negative (less than zero) NPV means the target return has not been met. A positive (greater than zero) NPV means the target return has been exceeded. For something like a business aircraft acquisition, the only revenue generated is if there is some charter revenue  and when the aircraft is sold. Business aircraft, and privately flown aircraft, will have a negative NPV. In order to compare non-revenue NPV, the NPV closet to zero (or "least negative") is the most favored financial option.

Companies will compare at the NPV of very different projects.  The NPV comparison may include the purchase of an aircraft along as compared to the acquisition of land for a factory. $20 million buys a very nice business jet, or a lot of land. The finance terms and tax advantages of both can be very different. They company may decide to purchase the aircraft and use financing for the land. They may not finance either due to wanting to avoid too much long term debt on their balance sheet. Companies may avoid financing an aircraft simply to avoid having the aircraft debt on the balance sheet.

When I'm doing a financial analysis for a corporation, they may have me provide only the cash expenses. They then run their own internal NPV analysis so they can look at the corporate debt and taxes at a  higher level. Sometimes, the company will purchase the aircraft for cash without an NPV analysis as a matter of internal policy. Government agencies tend to have very clearly defined criteria for their capital acquisitions.

For any aircraft acquisition, the assumptions used need to be clearly spelled out. The costs should cover a specific period and take into account an expected aircraft value at the end of the term. Comparisons of two or more options should also cover the same period of time and utilization. This provides a fair (or "apples-to-apples") comparison. A complete Life Cycle Cost also accounts for the time-value of money in an NPV analysis. This way, the differing cash flows form two or more options that can be compared and analyzed from a fair and complete perspective.

The NPV may not be the final determinant in an acqusition, but it should be considered. The smart money says so.

 

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