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Financial Analysis - Part 1

by David Wyndham 30. April 2018 12:11
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It seems that in aviation there are some who think finances are scary (read as job threatening) and those who think finances are just simply boring. Both groups try their best to avoid the subject. There is a middle way, those whose knowledge of finances gives them a powerful and convincing tool for making the right aircraft decision!

To do a proper financial analysis, you will need the initial investment required, the variable and fixed costs of operation, and the estimated residual value of the aircraft at the end of the term. Taxes and revenue potential can also play an important part in the analysis. The objective of a financial analysis is to determine which of the qualified aircraft provides the optimum combination of these elements.

Before doing a financial analysis, you will need to establish financial criteria and options. This process starts in the same manner as when you are selecting an aircraft. First you choose the criteria by which you will select an aircraft. With aircraft, we think in terms of things such as range, payload and cabin size. In aircraft financial analyses, we think of things like:

Amount of utilization. For point to point travel, do this in miles (or kilometers). Trips from Point A to Point B have a set distance. Add up those trips' distances. Then divide by the aircrafts' typical trip speeds to arrive at the utilization in hours. 160,000 nautical miles is 400 hours at 400 knots or 500 hours at 320 knots. This will have an impact on the fleet size as well. A large amount of utilization (in miles) can spell three slower aircraft or two faster ones.

Type of ownership. Full ownership, co-ownership, fractional ownership. Maybe not even owning at all. Utilization under 200 hours per year can suggest a form of charter or perhaps fractional ownership. Between 200 to 300 hours, fractional ownership and full ownership should be considered. Over 300 hours tends to favor full ownership. There may be extenuating circumstances to consider as well. 

New versus used. Do the lower maintenance costs, added tax depreciation benefits, and the ability to specify the exact configuration of the new aircraft outweigh the used aircraft's lower acquisition cost? There may be other considerations favoring the new aircraft such as updated avionics.

Lease or Purchase? A lease typically has a very low initial payment, and depending on the type of lease, may not be considered "long term debt" on the corporation's balance sheet. Purchase includes both finance and full payment up front. With a purchase, you do have ownership and after the payment(s), have an asset with a definite value.

Trade-in Value. If you currently own an aircraft, you need to get an idea of its current worth in the market. Price guides such as the Aircraft Bluebook Price Digest, Vref , and The Official Helicopter Bluebook offer a good starting point for determining the value of an aircraft. Nothing beats an appraisal by a qualified appraiser. The National Aircraft Appraisers Association is one place to start. An appraiser will give you the real-world value in today's market that will aid you in negotiations with buyers.

Acquisition Price. For used aircraft, see the references above. You can also look at aircraft-for-sale web sites to see what the "asking" prices are. Keep in mind that there can be a considerable margin between asking and final selling price. An appraiser can also give you some information on used aircraft prices as well. For new, start with the manufacturer's list price. In today's market, most sellers are willing to make a deal, so don't count out a new model that is "just a little bit" outside of the target acquisition price.

Length of ownership. When you analyze each aircraft, use an equal length of ownership. Looking at cash flows and costs over different lengths of time can give you a distorted picture. This is very important when considering the time value of money. When income or expenses occur can be as important as how much.

The methodology to do all the calculations is called Life Cycle Costing. The 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.

Once you have calculated the life cycle costs of the various options, you can compare the total costs. However, this may not be enough. While the magnitude of expenses and revenues is critical, their timing is important, too. In general, it is preferred to pay the bills as far into the future as we can without penalty. 

The next step is to use the concept of the time value of money. We all can agree that being paid today and paying our bills next week is the preferred way to manage our finances. This is the simple version of the time value of money. Next month, we will explain it in detail and complete the financial analysis.

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David Wyndham | Flight Department

Aircraft Technical Analysis

by David Wyndham 12. March 2018 10:15
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To continue our review of the components of a successful Aircraft Acquisition Plan, I will be discussing the technical analysis. The technical analysis is as varied as the types of missions. They keys are to adequately define the key missions and evaluation parameters. Use those to develop the objective criteria to judge candidate aircraft.

I just finished a fleet plan for a client. Before starting the report, the Chief Pilot was sure that the best aircraft for their mission was the "BelchFire Warp 2K." But to placate the boss, the Chief Pilot hired us to do an analysis. As it turned out, their preferred aircraft was number three on the list of best alternatives. The other two had similar speed and range capabilities and offered the bigger cabin the boss was looking for. While in many instances, your initial instinct is correct, the technical analysis can reveal other alternatives, some of which may be better suited for your mission than the initial pick.

Aircraft Technical Analysis

The focus of the technical analysis is on size, features, range, and performance. The acquisition cost, cost of operation, and other financial and ownership matters are for a second analysis.

Make sure the requirements are listed correctly. An eight passenger cabin and 2,500 NM range are different than a range of 2,500 NM with eight passengers. Perform the basic analysis with the objective of developing a short list of candidate aircraft that will be used in the detailed analysis. Then you are ready for the detailed analysis:

* Determine the most (likely) demanding payload, range, cabin size and/or passenger seating requirement as defined by your key mission.

* Compare those requirements against the capabilities of a range of aircraft from the sources of information you have gathered.

* Eliminate all those that do not meet the requirements.

* Eliminate those aircraft that are vastly more capable than required. The cost of acquisition and ownership does up dramatically as size, range and speed increase.

How many aircraft should you end up with the do a detailed analysis? An absolute minimum would be two aircraft but three to nine aircraft is the preferred goal. If you end up with only one aircraft to analyze, go back and review your key missions. It is rare than there would be only one aircraft that can perform your mission. If that is the case, it is likely that the aircraft seller may know that and thus, you will have little room to negotiate on price. More than nine aircraft and your analysis gets unwieldy - better to go back and come up with some more restrictive requirements.

The detailed analysis is designed to outline clearly the various capabilities of the candidate aircraft in relation to your key mission. Depending on your key mission, the following may be included:

* Weight buildup. This includes passenger payload, baggage capacity and even weight and balance considerations. Also include baggage size considerations. Four sets of skis may not weigh much, but will require a longer baggage compartment than will four overnight bags. Four fully-equipped SWAT Team members will weight a lot more than four medical personnel. Remember the mission drives your requirements.

* Range and reserves. Given your weight for the key mission, can the aircraft fly the required trip? Make sure the fuel reserve calculation is correct for your mission. Run specific scenarios to make sure the aircraft will perform as required. Do you need to lift two med-evac patients from a high altitude location on a hot day? What about navigation requirements such as FAMS-1, ADS-B,  minimum engine inoperative altitudes if operating over mountains, etc. can be important considerations.

* Airport restrictions. Do you fly into a short runway? Narrow taxiway? What is the weight limitation on your parking ramp? Where you operate will define things such as runway requirements, climb and obstacle clearance criteria, etc.

* Have a hangar with a twelve foot opening? Don't find out that your new aircraft is 12 feet 2 inches tall after the sale is completed! 

* Features and Equipment. This can be a short list or an extensive one. It can include things such as auxiliary power for ground and air use, a private lavatory, single point refueling capability, crew rest areas, a separate cargo door, and required ground support equipment. WiFi here in the US is a different requirement than WiFi with global capability. Again, the key mission defines the parameters.

* Reliability and Support. This can be hard to quantify as very little quantitative data exists. A good source of this type of information is to talk to other operators of the type of equipment that you are evaluating. In addition, magazines conduct and publish product support surveys. Locations of factory approved service centers can be important, as can spares support. If the manufacturer is still producing the same or similar aircraft that you are evaluating, support could be better than trying to find qualified support for old, out of production models for which there is no major spares supplier.

These are some of the major items. Your evaluation parameters may likely include others. Once you have performed the analysis, it is time to rank order the aircraft.

Determine how many criteria each aircraft meets, did not meet, or exceeded. The minimum Key Mission criteria is mandatory - failure to meet them will result in the aircraft being removed from consideration. Other criteria should be rated as desired in that it will enhance mission effectiveness or add extra capability. Not meeting desired criteria can still result in a mission capable aircraft. See which aircraft, having met all the required criteria, also meet some or all of the desired criteria. Adding the deficiencies and excesses can result in a numerical score. You may add your own multiplier to favor one criterion over another.

If no aircraft meets the required criteria, what do you do? Go back to your key mission and carefully evaluate each of the evaluation parameters and how, if changed or removed, would affect the key mission. In other words, find out what you can live without.

There still may be an occurrence where no one make/model will adequately perform your missions. In that case, maybe acquiring one aircraft to do 90% of the missions and chartering an aircraft to perform the remaining 10% may be the solution. I had one client with a lot of trips with four to six passengers of 150 NM and under. The next requirement was for three to four passengers to fly 2,000 NM. In their case, a turboprops served the short trips quite well and since the longer trips were infrequent, a fractional share was a good alternative for those trips.

The technical analysis is as varied as the types of missions. The keys are to adequately define the key missions and evaluation parameters. Use those to develop the objective criteria to judge candidate aircraft. It is better to explain to the boss why his favorite pick (1) can't perform the mission and to offer alternatives than to acquire a less than desirable aircraft and find that out after the fact.

Note (1): Yes, I’ve seen a thorough analysis identify a best-fit aircraft only to have the decision maker get a different, less capable aircraft because of personal reasons. My job is to provide the factual data to allow for a fully informed decision. 


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Aviation Technology | David Wyndham | Flight Department

The Aircraft Acquisition Plan - Sources Of Information

by David Wyndham 12. February 2018 11:00
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In the two previous issues, I discussed that the foundation of the Aircraft Acquisition Plan is to understand the aviation mission. That understanding leads to identifying the key missions of the aviation function. Those most important missions are what allow you to derive a set of objective evaluation parameters. Those mission-specific parameters can include payload, passenger seats, range, runway performance etc.

Given a set of parameters, you will need to find out which aircraft are capable of meeting those parameters. For example, if you are an Emergency Medical Services (EMS) operator, you may need to carry 2 liter patients plus two attendants. You may also need to lift that load from a 3,000 foot elevation on an 86F (30C) day. You know the capabilities of your current EMS helicopter. Where do you get the information about possible replacement helicopters? What about performance on specific trips such as London City airport to Cairo, Egypt? What about the maximum payload you can depart Eagle, Colorado and make Charlotte, North Carolina non-stop? There is generally available data and specific data calculations. 

There are three generally available categories of published sources of information and data. Trade publications, off-the-shelf databases and the manufacturer published data.

Trade Publications. There are a number of excellent publications that publish surveys, list performance reviews/pilot reports, and have new aircraft pricing. These magazines are readily available via subscription. In addition to hard copy, many have electronic copies and some maintain past issues on their website. The cost to receive them is nominal. This is a good first step to get general information. The ones with pilot reports may have more technical information versus general product reviews. These articles may not answer your detailed questions or cover all the aircraft models you are interested in.

Published Databases. There are a number of databases published in the US that can provide a great deal of useful information. They cover four areas: acquisition costs, operating costs, performance and specifications, and specialized data. While trade magazines usually do a good lob of listing new aircraft process, they don't have a lot of information on pre-owned process. Information that is published on acquisition costs relies on sellers or buyers reporting their transactions to the publisher. Not every transaction is reported and there is a time lag in the reporting of a transaction and the ability of a publisher to analyze and publish their data. When markets are changing rapidly, this data has less value than in a stable used market.

Operating cost databases focus on the day-to-day costs of owning and operating aircraft, including taxes and fixed costs such as insurance.  Operating cost databases also have limitations. No two operators operate their aircraft in the exact same way.  Some operators do much of the routine maintenance in-house while others use a service center. Unscheduled maintenance is just that, unscheduled. There is no way to predict unscheduled maintenance save for using generalities and defining assumptions. Guaranteed hourly maintenance programs may help, but each manufacturer or program seller will use different assumptions and many allow for some variability in charging based on utilization. As they say with automobiles, “your mileage may vary.” These databases can be a valuable tools for comparing relative costs, but aircraft costing is not an exact science!

Performance and specification databases are useful provided that the person using them is knowledgeable about aircraft performance.  They go into more detail than many magazine articles and they tend to have standardized formats for each category of aircraft. These generally come in software versions. Unless you buy the flight manuals or subscribe to a database that offers that level of detail, the ability to change the data for your exact mission can be limited. Again, as a relative comparison tool, they can be invaluable. 

Costs of the above databases vary from several hundred dollars to over $1,000 for complete sets. They tend to offer a fair amount of detail, are impartial, and given the time involved in gathering each bit of information on your own, a very worthwhile investment. Our company has published a number of these types of databases for over 30 years.

Other specialized databases do exist. They can be for things such as charter listings, aircraft for sale listings, airport databases, and en route winds and temperature statistics. Depending on your mission, they still may not answer the very specific question that you may have.

Manufacturer's Data. The information from the aircraft manufacturer can range from the sales brochures' optimistic, best case information, to very specific performance analyses. Be cautious reading generalized sales information as they may or may not conform to standardized criteria. They may also be out of date. The flight manuals are the best source for specific calculations. Buying them for one-off comparisons can be quite expensive, especially when researching a number of different aircraft models. 

Detailed performance questions can be easily answered by the manufacturer. Contacting the manufacturer does inform them of your interest and usually generates sales calls and perhaps a visit form your local aircraft sales person.  If you wish to maintain your anonymity, you may wish to order a technical manual through the product support group. 

What are the other sources? Consultants can be paid to do all or part of the work in the Aircraft Acquisition Plan. When we do a study for someone, we work closely with both the aviation professionals and well as the end user to make sure all the right questions are asked, and answered. Other operators can be a wealth of "inside" information, as are maintenance facilities and training companies. When asking questions, be specific. Ask a general question, get a general answer. List price is not necessarily selling price, nor does a flat-rate cost for an inspection tell you what to allow for unscheduled and “over and above” maintenance.  

When gathering data, keep in mind the following:

What is the reliability of the source?

What assumptions went into the data?

How would specific information apply to your situation?

In general, starting with the publicly available data allows you to develop a short-list of candidate aircraft. If you want an aircraft with 2,800 nautical mile (NM) range, an aircraft with 2,300 NM is probably not going to be your top choice. Next time I’ll get into the analysis of the numbers.


 

 

 

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Key Missions & Evaluation Parameters

by David Wyndham 4. January 2018 13:05
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In the two previous issues, I introduced the Aircraft Acquisition Plan and your Acquisition Team. To be effective, your acquisition plan should consist of the following elements: - The organization's real aircraft needs. - Key missions and evaluation parameters. - Sources of information. - Technical analysis and ranking. - Fleet size. - Financial alternatives. - Financial analysis and ranking. - Tax Planning. This issue, I’ll focus on the first two items. 

“Mission drives requirements”

The foundation of the plan is to understand the mission assigned to the aviation function. Where does the aircraft add value to your company or owner? Yes, it makes better use of time. To what end? What is the importance of that time, and more over, the value of that time? Connecting the corporate goals and aspirations with the use of the aircraft enables you to define (and defend) the use of the aircraft as a valued business tool. Identify the most important mission for the aircraft as it relates to the achieving the corporations goals and vision. That is the mission which enables the aviation department to select the right aircraft by defining the parameters the aircraft must meet in order to help the corporation succeed. 

In defining the mission, we get to the importance of quantifying the mission. While a decision maker may select an aircraft from emotion, we need to make sure that they have the information needed to quantify their decision.  We need to quantify the mission, the aircraft requirements, and the costs. The decision maker can allow emotions in the process, as advisors, we cannot. Quantify every requirement to the greatest extent possible. 

Be proactive. If today’s mission is likely to change, focus your planning on what will come. While during times of rapid change, it is difficult to forecast, do it anyway. Ask the major users and decision makers for their inputs. Try to get a “probable” and a “best case” scenario. Or, if things are looking poorly, a “worst case” scenario.

Evaluation Parameters (Quantify!)

Evaluation parameters include cabin size, door size, cargo capacity, range, payload, etc. A key mission such as West Cost of the US to Asia could allow for a stop en route. If you can make it to Hawaii, every other over water leg can be made with less range.  The distance from the West Coast of the US to Hawaii is about 2,300 nautical miles (NM). Allowing for headwinds, you need at least 2,500 NM range to make it most of the time and 3,000 NM range to make it under almost any conditions. That Asia mission may require non-stop capability, but be aware of the available options.

Key missions allows you to define with the evaluation parameters needed to evaluate the possible aircraft. Identify aircraft that meet all the requirements and those that fall short in one or more areas. Include your current aircraft in this list as a baseline for judging other aircraft.  Once you have your aircraft criteria, it is usually good to list those in terms of “required” and “desired.” Required criteria are those which you must have to perform the key missions. Desired criteria are nice to have criteria that enhance the ability to perform the mission, but aren’t crucial to its success. 

If you don’t do your homework, you either end up with too much aircraft, or worse, end up with an aircraft that fails to do what was required. There is nothing worse than explaining to the boss why you can’t do the trip that was justification for the aircraft in the first place. Do this work up front and the rest of the analysis just falls into place. You’ll see. 

 

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The "Acquisition" Team

by David Wyndham 11. December 2017 13:37
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Remember the old TV show called the A-Team? A rag-tag bunch of former soldiers travel around fighting criminals and righting wrongs. The A-Team was borderline psychopathic (especially their pilot), but they were always on the side of good. Regarding an aircraft acquisition, it takes your own A-Team: an Acquisition Team. You need to know these people and, if they are not within your organization, know where to find them! 

As the leader of this team, you are responsible for defining the mission. What is the key mission of the aircraft? What defines success for the aviation operation? Does everyone on your team know what this mission is? Most importantly, will the decision maker agree to the definition of this mission. This is used to define the minimum deliverable product in terms of capability and performance.

The next team member is the technical analysis person. This person is responsible for developing the measurable criteria for judging the ability of the aircraft to perform its key mission. If you are the pilot, this will be you. That person should be familiar with aircraft performance measures, and have available information that enables them to predict passenger loads, trip lengths, etc. There may need to be runway analyses, equipment needs, and for helicopters, the vertical performance measures necessary for the operation. The technical person needs to be able to have the data needed for this comparison. This person will help to identify candidate aircraft and then to analyze the aircraft against the mission.

Part of the technical analysis deals with maintenance requiorements. If purchasing a pre-owned aircraft, what may be required in terms of upcoming maintenance or upgrades? Where and who can do the pre-buy? If you have in-house maintenance, they are the best as they already know your operation. 

The next person to get on the team is the financial analysis person. That individual needs access to what it costs to own and operate aircraft. There are different ways to finance an aircraft, and if it is for business use, different tax ramifications. This person needs to understand Life Cycle 

Costing and be able to look at the total cost of owning and operating the aircraft.  If leasing, what are the return and buy-out options? Many leases have significant penalties for early returns, and most have specific return conditions that can add cost. Leases can be a great way to acquire an aircraft, but they aren’t for everyone. This person needs to understand the nature of operating costs and be able to communicate with the maintenance professionals regarding the costs of upcoming maintenance as well as then communicate and understand the costs as looked at by the Chief Financial Office or accountant.

A close ally of the financial analysis person is the tax/ownership advisor. Tax planning should begin well before the purchase, not after the closing. Aircraft, by the nature of their mobility, may be exposed to taxes in multiple states. You need someone familiar with taxes as they apply to aviation. How do you plan to structure the ownership of the aircraft? Things to plan for are where and when will you take delivery? Are there sales or use taxes due and if so, who is responsible for collecting and remitting them? 

With the aviation tax person should be an aviation attorney. This person will  need to be consulted to ensure that the contracts are appropriate and that the various regulatory issues are addressed. Are there leases, timeshare agreements, charter? A document that looks good from a basic business perspective may not be legal in the eyes of the FAA or other aviation authority. The FAA can be strict in enforcing the regulations regarding "for-hire" operators and you need to make sure that you are operating legally. 

Don't forget your insurance broker. They need to be kept informed as to what, when and how the aircraft is to be used. If you don't mention all the uses for the aircraft you may not be insured. What are your insurance company's requirements for the training and currency? Will it be different if you acquire a different aircraft? If the aircraft is to be on a management agreement, who and how are each of the parties to that agreement covered?

Next is the aircraft sales professional. This individual needs to know the state of the aircraft sales market, what the availability and lead times are for various models, who to contact about pre-buy inspections and appraisals, and what sort of time it could take to dispose of your current aircraft. Anyone with Internet access can "find" aircraft for sale. The aircraft sales professional needs to act in an advisory role and as a facilitator to make sure the deal closes with all parties happy as a result. 

Lastly, don’t forget the a title search for used aircraft. They can also provide title insurance and provide the escrow entity for the closing as well as register the aircraft. The minor cost of this is well worth the piece of mind. 

If your are looking at large cabin jets, you may have requirements for crew rest, galley equipment, and internal baggage. If you have a cabin attendant, they need to be on the team. Same with the scheduler or dispatcher. Anyone with an interest in the successful outcome of the acquisition needs to be at least informed as to what is happening. Everyone has a different perspective and will see things that others may miss.

Acquiring an aircraft should never be done in a hurry. There are many issues to cover and remember the PPPPPP rule! (Prior Planning Prevents Pitifully Poor Performance). 


 

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Aircraft Sales | David Wyndham | Flight Department | Aircraft For Sale



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