All Aviation Articles By David Wyndham

You Need A Methodology For Comparing Aircraft Costs

When comparing aircraft costs, it is important to understand what costs are included and what aren't. Otherwise, you can end up comparing "apples and oranges." This can lead to making a decision with wrong or incomplete information. What we often see if that the "number" is smaller than the total cost. The big items are usually included, but adding up a lot of smaller numbers can alter the total cost considerably.

What is a good methodology to use when analyzing the cost of an aircraft? I’m glad you asked. Life Cycle Costing can ensure that all appropriate costs are considered.

Life Cycle Costing includes acquisition, operating costs, depreciation, and the cost of capital.

Amortization, interest, depreciation, and taxes also play a part in what it costs to own and operate an aircraft and can be included in the Life Cycle Costing as appropriate. As the term Life Cycle implies, it looks at a length of time versus a snapshot in time.

How long of a cycle depends on how long you plan on operating the aircraft.

If you plan on keeping the aircraft 10 years, then that is the length of the Life Cycle to use.

The costs should cover the period of ownership 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. Taxes should be included. Depending on where and how the aircraft is operated will determine the tax impact.

Leases, loans and cash purchases also change the cash flow and total cost.

If you are looking at those options, then you should account for the time-value of money. A Life Cycle Cost can also account for this in a Net Present Value (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.

As an aside, what is NPV? 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 total amount of that item. Paying cash is cheaper in total dollars, except that you have all that cash tied up in the aircraft. A lease or loan allows the cash to flow out over time. NPV runs on the assumption that a dollar today can be worth more than a dollar a year from now. Thus, implicit in the NPV is a time cost of money, called an internal rate of return (IRR) or return on investment (ROI).

Life Cycle Costing allows you to compare different aircraft, or different types of acquiring and operating an aircraft. Using the same period and general assumptions with the analysis of different options gives you a balanced comparison of those options. Regardless of the complexity of the aircraft deal, the Life Cycle Cost method should yield a useful result provided you populate it with as accurate a data as you can.

What sort of tool(s) do you use to compare aircraft costs?

 

How Decreased Utilization Can "Increase" Costs

A user of our cost database asked about the effect of utilization on total cost per hour. His question was with higher utilization do the fixed and total costs decrease on a per hour basis?

First a quick review. Variable Costs are those costs that as activity increases, the total cost will increase but the cost per unit of time will remain constant. An easy example is fuel cost per hour. The next hour you fly will consume so much fuel. If you don't fly, then there is no fuel consumed and thus, no cost.

Fixed Costs are costs that for a given level of activity or period, remain essentially constant. Hangar rent is an example of a fixed cost. You pay so much per year to rent a hangar regardless of how much you fly.

For our discussion, we assumed that Total Cost per Hour was the Variable Cost per Hour plus the Annual Fixed Cost divided by the Annual Hours flown. The example I used was an aircraft with a variable cost of $1,250 per hour and fixed costs of $400,000 per year.

For 200 hours per year = 200 x $1,250 + $400,000 = $650,000 per year divided by 200 hours = $3,250 per hour average.

For 400 hours per year = 400 x $1,250 + $400,000 = $900,000 per year divided by 400 hours = $2,250 per hour average.

You spread the annual costs over more and more hours so the total average cost per hour decreases as utilization increases.

The reverse is also true. Decreasing utilization by a certain percentage will not drive down total costs by the same percentage. If your aviation budget were reduced by 15%, you'd have to reduce flying by a lot more than 15% to make your savings. From our earlier numbers:

400 hours per year = 400 x $1,250 + $400,000 = $900,000 per year divided by 400 hours = $2,250 per hour average.

To reduce our $900,000 budget by 15% to $765,000 by only reducing flight hours, we'd need to reduce flying to 292 hours - a 27% reduction:

292 hours per year = 292 x $1,250 + $400,000 = $765,000 per year divided by 292 hours = $2,620 per hour average.

Also note that our average cost per hour went up by 16%. So if you were tracking that metric too, things would look bad. Decreased flying and increased average cost per hour.

This can result in the "flight department death spiral" of reduce hours, average cost per hour increases, reduce hours some more because the cost per hour goes up, average cost per hour increases again... until at some point the aircraft is sold for being too expensive.

In some cases this cannot be avoided as the company is in dire straits and simply cannot afford the expense regardless. However, as aviation managers you need to be aware of the perception of your aircraft costs and be prepared to both defend and explain them so as to avoid a knee-jerk "the planes too expensive" reaction to reduced flying.

I hate to ask, but have you been there?

Three Tips for an Effective Aircraft Evaluation

Buying on impulse often leaves you disappointed. What looked or sounded great in the moment can turn out not to be what you thought you were getting. This applies to love and fast machines. With aircraft, it then applies double!

The first tip when looking at what aircraft to acquire is to be objective. Objective means choosing criteria that can be measured. In this way you avoid the subjective trap: what was great last night can be less than desirable come morning. With objective criteria, you can compare more than two aircraft and rank order them. Be as specific as possible. Non-stop to West Palm Beach is good. Non-stop to West Palm Beach with four passengers is better. Non-stop to West Palm Beach with four passengers, IFR fuel reserves against a 25 knot headwind is best. If what you are measuring isn't in units of some kind, it's doubtful that it is objective. The joy of an aircraft used for transportation is in proportion to its utility.

Objective criteria should also be specific to the mission assigned to the aircraft. That way you can avoid over-buying - getting far too much aircraft than you really need. If you are clear about what you need, it is easier to set up your criteria. "Go anywhere, anytime" might set you up for a supersonic tilt-rotor amphibian, but can you afford that?

The second tip is to separate your criteria into desired and required criteria. Required criteria are criteria that the aircraft must meet in order to do the mission (job) assigned to it. If the aircraft does not meet the required criteria, it should not be considered any further.

Desired criteria are those that enhance or expand the capability of the aircraft to perform its mission. Generally speaking desired criteria go beyond the minimum needed for the mission, or perhaps they make accomplishing the mission easier, or faster. Once you have your aircraft that meet the required criteria, you can use the desired criteria to differentiate between them. This is helpful in rank ordering the aircraft. Here is a basic example:

Mission Criteria
Required
Desired

Range with 4 passengers (NBAA IFR Reserves 200 NM)

1,800 NM
2,100 NM

Range with 6 passengers (NBAA IFR Reserves 200 NM)

1,500 NM
2,100 NM
Passenger Seats
6
8
Hot food galley?
Microwave
Convection Oven

If you understand your mission, then you can your criteria to reflect what you need to do, and also choose desirable criteria that are meaningful. In the above example, the aircraft buyer was OK stopping for fuel on the 2,100 NM trip, but not for 1,800 NM trip with 4 passengers, of which there were quite a few.

The third tip is to prioritize before you analyze. If you group your criteria into sub groups, then you can not only rank order within those sub groups, but also prioritize which sub groups are more important. Again, this is best shown in the below example. Do you value more range over a bigger cabin?

Mission Score:
Range 60%
Cabin 15%
Payload 15%
Speed 10%

In this case, once an aircraft meets the required cabin size, an aircraft with a larger cabin has value, but not a lot. But, once an aircraft meets the required range, additional range will be greatly valued. This can be done once again after looking at the costs and supportability:

Total Score:
Mission 50%
Life Cycle Cost 35%
Product Support 15%

Here, an aircraft that costs a little more but offers more capability may be the best ranked aircraft in the group.

A big caveat: set this up before evaluating your aircraft. If you really, really want that supersonic tilt-rotor amphibian, you may ignore the fact that you really don't need to land on the water! OK, a bit of a stretch there but the warning is to set the rules first and then perform the evaluation second. What is important to have in your aircraft?

All of this can help you identify the "Best Value Aircraft." We do a lot of our work on the cost side, but we always stress that a large gain in performance at a small increase in cost may be well worth the added expense. At the end of the analysis, it is the responsibility of the decision maker (the one who writes the check) to arrive at that best value. An objective analysis should be done first.


Have you had any experience with this topic? If so, Discuss it with us by clicking "Reply"

Pros and Cons of Placing Your Aircraft On Someone Else's Charter Certificate

If you are like many business aircraft operators, your aircraft is not being used as much as in the past. Your costs are up and utilization is down, and you are under pressure to keep the budget under control. Your friendly local charter operator suggests having you place your aircraft on their Part 135 charter certificate to gain income from charter.

Why Would You Want To?

To off set your operating costs. A typical charter agreement has the owner paying for all the operating costs. The owner gets the revenue from the charter less a 15% commission to the certificate holder. This is the basic cost/revenue structure, but there are variations.

You will not make money doing this. If this were the case, wouldn't charter operators always own their aircraft? The charter revenues should exceed the variable expenses of operating the aircraft leaving the excess amounts to offset the fixed expenses, thus lowering the total cost to the aircraft owner.

Other benefits may include:

Reduced liability to the owner if all flights are flown under the charter operator's certificate. If your own flights are under Part 135 then the operational control for the flight rests with the charter operator, not the aircraft owner. Although if this is a big issue, don't even own an aircraft in the first place, just charter.

Access to lower costs. Bulk fuel, reduced hangar rates, possible fleet discounts on insurance, and lower personnel costs if you fly with the charter operator's crew.

Why Shouldn't You?

One is control. If you are a control freak, then you should own your aircraft and hire and manage the crew. Then you have 100% control over who flies, and when and where the aircraft is used.

Depending on the aircraft, conformity to Part 135 may increase your costs. Additional maintenance may be required, plus you will have more stringent crew rest regulations. Seating needing to meet current fire-blocking rules may be an issue as well. These costs are dependent on the aircraft type and configuration.

Increased utilization (especially by others) will increase the wear and tear on the aircraft. Plan on refurbishing the interior more often.

Decreased values. The more hours an aircraft flies the greater decrease in value at the time of sale (other factors being equal). A 10-year old airframe with 6,000 hours will have a reduced value and take longer to sell than one in the same overall condition, but with 4,000 hours.

Increased aircraft management and operational issues if operating both Part 91 and Part 135. The FAA adds restrictions on how the aircraft agreements (and contracts for crew) can be structured and can affect how easy it is for you to fly under both Part 91 and Part 135. Flying all Part 135 is easier, but you may want the flexibility that Part 91 offers. .

However, the biggest reason not to place your aircraft on someone's charter certificate is if you already use your aircraft a substantial amount, then there will be little opportunity for offsetting charter revenues.

If you have infrequent use and a predictable schedule, then you might want to look into charter. If you have a constantly changing flight schedule, and take the aircraft on the road for long trips, the charter operator won't have access to your aircraft and you won't get much revenue.

There are also issues that involve legal, tax and FAA. Rental income is generally considered as a passive income. Passive income (and losses) may impact the ability to fully tax depreciate the aircraft. State and local taxes are often different for commercial operations. You need tax guidance from an aviation-tax specialist to full understand the ramifications.

If done under the correct circumstances, placing an aircraft on an operator's charter certificate can be a win-win situation. The owner gets revenues to offset costs, and the charter provider gets an aircraft to charter without having to fully support the costs of owning and operating the aircraft with charter revenues. However, don't go into it without carefully researching all the requirements and conditions, especially legal and tax.

Have you experience with placing an aircraft on someone else's charter certificate? Click reply and let me know your experiences.

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