Welcome to GlobalAir.com | 888-236-4309    Please Register or Login
Aviation Articles
Home Aircraft For Sale  | Aviation Directory  |  Airport Resource  |   Blog  | My Flight Department
Aviation Articles

Who is your boss? (For the Aviation Department)

by David Wyndham 12. September 2017 13:44
Share on Facebook

If you are a new first officer, its obvious that your boss, on any given flight, is the Captain, the pilot in command. Then the day comes that you are on your first trip as a Captain. Yet, you still have a boss. Now it is whoever is sitting in the back of the aircraft, or the person who authorized the trip. You also have another boss, the aviation manager. That individual has a boss, typically the CEO. Even the CEO does not escape having a boss, someone to whom they are responsible. They have many bosses.

A CEO needs to be concerned with the shareholders and their returns.  He or she must listen to the Board of Directors, yet communicate effectively with employees.  The CEO who cannot inspire employees to further the corporation’s Vision and pursue its Mission will face difficulties in meeting corporate goals. For officials of public corporations, there are regulators who also have oversight.   Yes, a corporate CEO has many masters.

Like the CEO, the Aviation Manager also has many bosses, even if the Aviation Department’s sole purpose is to be the CEO’s transportation.  At the end of the day, it is the corporation and its shareholders who must be served. It is where they meet that the Aviation Manager can add value.

The Aviation Department must integrate with the corporate structure and understand how it supports external and internal business units within the entire enterprise.  While it is tempting to cater to the CEO, the enlightened Aviation Manager focuses on addressing the goals and objectives of the company as a whole.  Woe be the Aviation Manager who seeks only the favor of a single executive. A key to longevity of the Aviation Department is how well it is enmeshed into the activity of the corporation.

The Aviation Department benefit the entire corporation at three levels.

- The Shareholder Level: profits, market share, returns are examples.

- The Enterprise Level: quality, asset management, cost control.

- Executive/Employee Level: productivity, team collaboration, product development

One recent client’s experience shows all three levels being met by the effective utilization of the corporate aircraft. The company had a goal to double the number of retail locations in the Northeast US.  The Aviation Department used the corporate aircraft to transport corporate teams to the Northeast to oversee and manage the opening of the new locations and to coordinate the training needed for the new mangers and employees. It flew senior management to speak at the regional meetings. Other times they flew sales and marketing teams to train new employees at multiple sites over a few days.  

The aviation department benefited the corporation at all three levels. They helped meet Shareholder expectations by: increasing market share by opening new stores. At the Enterprise Level they helped the management teams maintain quality of service at the new locations. For the Employees, they helped maintain executive staff productivity while training new staff.

Here are a few tips.

Focus on Corporate Goals and consider how Aviation can help achieve those goals: Relate trip fulfillment to corporate goals.  For the retailer cited above, the utilization strategy was supporting trips to the Northeast US during the corporation’s expansion in that region.  The Aviation Department knew the corporate goals and developed tactics for how aviation personal and resources would support the company. Not all executives may readily see how aviation is able to help.

Use Key Performance Indicators (KPIs) to measure the efficacy and value-added nature of the Aviation Department. As a quick review, for a KPI to be valuable, it must be understandable, meaningful and measurable. In general, a KPI can follow the SMART criteria: Specific, Measurable, Achievable, Relevant, Time-based. Tie KPI’s into the utilization strategy to aid in the measuring of the benefits to the company. 

Beware of measuring activity rather than productivity. One client managed the flight schedule to maximize filling the seats on the aircraft traveling to their main operating locations. Sometimes that strategy meant coordinating trips to fill the aircraft seats. For the Aviation Department, they maximized the productivity of each trip (passengers carried), knowing that the productivity benefit to the company was maintained while managing costs. While hours flown is an important metric, the Aviation Department maximized measures of productivity that supported the executive team and thus the corporation.

With respect to costs, be sure to include costs that are avoided in terms of travel expenses such as overnight stays, lost worked time/productivity and other elements of inefficiency. Time saved results in money saved.

Throughout the process of helping met the company’s strategic goals, the Aviation Department will need feedback from the corporation’s executive leadership. In addition to focusing on corporate goals, feedback is essential to guide the Aviation Department in its quest to serve the many bosses who demand satisfaction. Doing so benefits the company, the shareholders, the employees, and of course, the aviation department.

 

 

Tags:

David Wyndham | Flight Department

Making an Upgrade Decision

by David Wyndham 9. August 2017 09:53
Share on Facebook

The owners of a turboprop were facing the possibility of significant avionics upgrades in the next few years. In addition to adding in ADS-B, they were considering a major upgrade to their avionics suite. They also had a good offer on a new aircraft that, when delivered, would have everything they were looking for, albeit at a higher initial cost.

The upgrade would add value to their current aircraft and might make it easier to sell.  What path was best for the owners? When does it pay to do the upgrade, and when doesn't it?

The FAA requires ADS-B to be installed by 2020 to allow aircraft to use the air navigation system. If not done, the aircraft is essentially no longer flyable in its current capacity. Avionics installers have been warning that there is not enough capacity to complete ADS-B installs in all the remaining aircraft before the deadline. With residual values already low for most models, an older, non-compliant aircraft in 2020 may be unsellable except for parts.

Some long range turbine aircraft may require even more avionics upgrades to operate globally, especially in Europe. These FANS requirements and similar also can add considerably to install. But, as with ADS-B, they won’t add value but just allow you to retain the value in the aircraft and keep it flyable in the future airspace.

When to Do the Upgrade

After keeping the aircraft compliant with air navigation standards, upgrades fall into two categories:  adding new safety features and adding new capabilities.   If you need the advantages of a new aircraft, such as more range, speed or cabin volume, but don’t want the acquisition expense, the upgrade path may work.

There are a number of avionic upgrades available from companies like Avidyne, Garmin, Honeywell, Rockwell-Collins and others. Third party specialists are also doing modifications that range from updated navigation gear to a full (glass) panel replacement. When looking at new systems, consider what the current variant of your aircraft (or closest relative) has for its avionic system. Done right, these systems enhance both safety and reliability.

Possibly you may seek to add performance, such as better fuel efficiency or range.  Companies like Aviation Partners, Raisbeck and Blackhawk have been quite popular for many years.  They, and others, have aerodynamic and engine upgrades that allow your current aircraft to fly faster, further, or both. Sierra Industries offers Williams engine upgrades for older Citations that add speed and range. 

In between refurbishment and new is remanufactured. Nextant Aerospace is remanufacturing older Beechjets into Nextant 400XTi's - complete with new engines, new avionics and a new interior. Nextant is being joined by an engine upgrade from Textron. Other companies offer engine modifications as well.

For the passenger cabin, interior specialists offer all sorts of options for in-flight entertainment and airborne Internet as well as new seat designs and modern materials. If you need "more" as in seats, payload or room, your only true alternative is acquiring a larger aircraft.

Considerations

Before you undertake such a major project, consider your current aircraft’s age. Older aircraft cost more to maintain than newer ones. Wear and tear items, aging aircraft issues, and engine overhauls all drive costs up. Your aircraft must be in excellent mechanical condition and essentially free of corrosion, otherwise don't consider the upgrades.  

Do the upgrade if it has value to you. If it has value in the market place, so much the better but do it primarily for you. Unique is great with art, not with aircraft. Stick with established programs with a successful track record. Do equipment upgrades that mirror the new models or closest equivalents. Those will tend to have the best impact on resale value and also maintenance supportability.

For example: upgrading the engines on a King Air C90 can run to over $700,000. Adding in a new avionic system can run to another $750,000 or so.

A stock 20-year old C90B sells for about $1 million.  Looking at today's market, its doubtful that the upgraded C90B can recoup 100% of the upgrade at resale. The engine upgrade will add to the aircraft’s value, but don't do it just to resell the King Air after the retrofit.  The avionics are great and add to the capability and situational awareness of the pilots.  

If you are planning to sell in the next few years, these major upgrades won’t pay a full return and you won’t enjoy them long enough to benefit. Best just to do the ADS-B and start shopping for a replacement. Budget carefully and talk to other operators who have done the same upgrades. Look at the tax considerations as these upgrades may need to be capitalized. Consider the cost of borrowing the funds needed to upgrade or replace.  As long as your current aircraft is in excellent mechanical condition and you plan to keep it for the next few years, the added utility and flexibility of the upgrade may add all the value you need.

The turboprop owner above elected to acquire the new aircraft and retain the current turboprop while adding just the ADS-B.

Tags:

David Wyndham | Maintenance

A Methodology For Comparing Aircraft Costs

by David Wyndham 13. July 2017 15:16
Share on Facebook

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. First off, let's review the predisposed views of some folks when talking about aircraft costs:

The Maintenance Director looks at what it takes to maintain the aircraft in an airworthy condition. The maintenance director can bid out major repairs to get the best price for quality work. Talk to maintenance professional and he/she will take that one "maintenance cost" item and really go into detail. As an example, a maintenance reserve for a twin-engine turboprop can be about $455 per hour ($180 for parts and labor, and $275 for the engine reserves).

The Pilot is responsible for the safe and efficient operation of the aircraft. That person is usually most concerned with fuel, maintenance (as one number), and travel expenses. The pilot can choose fuel vendors who have competitive prices. For our turboprop, that operating cost figure would amount to about $1,000 per hour. What else might be missing?

The Aviation Department Manager is concerned with the cost of the aircraft, plus the fixed overhead items such as hangar, training, insurance, and pilot salaries. Those items for our turboprop example can be about $300,000 per year, plus the hourly cost of the aircraft. For a nominal 400 hours per year operation, the Aviation Department Manager's budget for a turboprop is $700,000 annually, or $1,750 per hour average.

Lastly, the Executive/CFO is concerned with acquisition costs, amortization, interest, depreciation, taxes and the cost of capital. That can easily add another 70% onto the Aviation Department Manager's "costs" depending on the value of the aircraft. If the aircraft is operated for business use, the corporation has the ability to write off the expenses of ownership and operation. After taxes and depreciation, the total figure to own and operate an aircraft can change dramatically. An educated Executive will also consider not only what the costs are, but when they occur and the value of the aircraft at the end of a specified amount of time.

What is the general methodology to use when analyzing the acquisition of an aircraft? 

When analyzing the potential acquisition of a whole or share of an aircraft, Life Cycle Costing ensures that all appropriate costs should be considered. 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.

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. 

What is a Net Present Value? An aircraft acquisition involves a very complex financial decision. Accurately judging the financial impact of such a major acquisition project can best be done with a Net Present Value (NPV) analysis. 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.

By using the time-value of money, an organization can thus 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 whether it is better to purchase, finance, or lease, even if different conditions and interest rates apply to each alternative, and is the standard financial analysis technique used by the chief financial officers of major organizations.

The Net Present Value 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 those 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 25%. Government agencies can use the current rate of return for Treasury Bills or State Bonds.

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.

When analyzing the potential acquisition of a whole or share of an aircraft, Life Cycle Costing ensures that all appropriate costs should be considered. 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.

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.

For a commercial operator, they expect a return on the money spent - or profit. An NPV of zero means that they have earned enough money to pay off their initial investment, plus pay all expenses and have generated a profit equal to their expected rate of return. 

Business aircraft do not directly generate revenue except for the sale of the aircraft. Thus, the NPV results are typically negative. When comparing negative NPVs, the "least negative NPV" is the more favorable. In other words, if option A has an NPV of ($5,000,000) and the NPV of Option B is ($6,000,000), Option A has the better NPV.

You don't have to be a financial expert to do an NPV.  There are spreadsheet programs that can do the math for you. Or leave it to the experts in finance, but understand what it means.


 

Tags:

David Wyndham

Co-ownership Tips

by David Wyndham 12. June 2017 14:49
Share on Facebook

When I was in high school I worked as line crew at an FBO at the small airport in Rochester, NH. When I started work, my employer rented out Cessna 150s for $19 per hour and a Cessna 172 for $29 per hour. AvGas was less than a dollar per gallon. One local pilot owned a mid-1960s Cessna 172. He flew only on severe-clear days, which in New England was infrequent. At best he maybe flew 40 hours per year. I asked him why didn’t he just rent. He replied that he could buy AvGas to fly 3.5 hours for the cost of one hour of a rental. I did some quick math as I knew what his recent annual cost and what he paid for the tie-down space he rented. Throw in a wild guess for insurance and I came up with over $100 per hour for his 40-hour “bargain.” I asked about these costs. A few months later he took on a partner to co-own his plane.

Most turbine aircraft fly less than 400 hours per year. Many operators since 2008 have reduced their flight activity and it is not uncommon to see utilization below 300 or even below 200 annual hours. For private owners, the 200 annual hours is maybe toward the high side. If you are flying 200 annual hours, your aircraft is sitting idle most of the time. 

Aircraft are also expensive. Fixed expenses like crew salaries, hangar and insurance when the are spread over a small number of hours drive up the average hourly total costs. If you are not using your aircraft, why not get some revenues by having someone else use it? Putting your aircraft onto a charter operator’s certificate receives a lot of attention and is the first thing I think of for helping to offset the total costs of owning your own aircraft. But there are other options like my long-ago Cessna 172 owner found out.

My general discussion will use co-ownership and joint-ownership interchangeably as it involves the day-to-day functioning of the shared arrangement. We do define them slightly different. Co-Ownership is when two or more organizations share the use and expenses of an aircraft but the aircraft is operated by a management company. Joint Ownership is when two or more organizations share the use and expenses of an aircraft and the aircraft is operated by one of these organizations (not a management company). There are legal and tax subtleties between the two that I won’t cover.

The significant advantage of co-ownership is that the two individuals share not only the costs of operation, but also the acquisition cost. Thus, a $1 million acquisition budget is all that is needed for a $2 million aircraft. You can either get a larger aircraft for the money or apply it to a newer model of the desired aircraft. Which leads me to tip number one.

Don’t buy more aircraft as a co-owner than you can afford to buy alone. 

Co-ownership works best when both partners are financially sound enough not to “need” the other in order to make the payments or pay the bills. When (not if) one of the two of you wants to sell, when you can afford the whole aircraft then the negotiations can be less stressful and less likely to result in the complete sale of the aircraft. Maintain your financial independence with respect to the aircraft. Look for a co-owner who also has the financial resources to operate the aircraft.

Second, find someone who flies “not like you” to co-own. Best case is owner A flies for business during the week and owner B takes the aircraft on vacations and holidays. You will need to schedule your travel. Avoid disputes over needing the aircraft at the same time but having complimentary schedules.

Speaking of scheduling, “first come, first served” is not likely to be successful all on its own. I saw one partnership come unraveled when scheduling issues turned into one owner scheduling the aircraft every other week for the entire year. All week. One thing to consider is “on and off” weeks. When its your “on week” you get priority scheduling and when you are “off” the other owner gets first use. To make things work, you’ll both want to accommodate each other.  

Best scheduling tip is to both have travel schedules set well in advance with limited conflicts. Agree up front about who pays what costs when the aircraft is away for several nights. Owner A takes the aircraft away and plans to on vacation for two weeks. Owner B needs the aircraft during the interim while owner A isn’t needing to fly. Who pays for the repositioning trip?  Have an agreement that spells out all use and scheduling policies.

Make sure that both owners share similar financial goals with respect to the aircraft. Want the aircraft cosmetics maintained to the highest standards? Maintained only at the service center? Spell out the level of maintenance and upkeep of the aircraft. Also spell out exactly how expenses are to be shared. Separately discuss fixed cost sharing like hangar and insurance versus variable costs like fuel and maintenance. Set up a maintenance reserve account and possibly put the aircraft on a guaranteed hourly maintenance program for at least the engines. Have a budget.

Last tip is to plan for the sale of the aircraft and terms for the sale. A long running partnership may see another aircraft. Partnerships dissolve with the current aircraft when needs and finances of one owner change. Again, if both co-owners can afford the aircraft, the loss of one owner is inconvenient but not disastrous. 

A successful co-ownership lets two owners get 80% to 90% of their aircraft needs met for 50% of the cost. Advanced planning and written agreements along with both parties being transparent with respect to the aircraft are critical, but it can work. It worked for a Cessna 172 and it can work for a much bigger aircraft, too.

 

Tags:

Aircraft Sales | David Wyndham | Flying

Five Tips for Aircraft Financing/Leasing

by David Wyndham 3. May 2017 14:39
Share on Facebook

There is money available today if you are interested in financing or leasing a business aircraft. Interest rates are still low. Here are five rules for getting financing or leasing.

Rule #1. Dance with the one you brought.

Relationships matter. Financial institutions are looking for long-term relationships. If you have done significant business with one institution over the years, they are the first ones to approach for any aircraft financing or leasing. One private banker told me "If you have $300 million in assets with (my bank) there is no way we won't do an aircraft deal with you." Part of this is the significant investment the financial institution has made in keeping you, and your cash, in the bank. The other is that in cultivation and supporting your business, they have a very good idea as to your character.

Rule #2. Character counts.

The Four C's of financing are Character, Credit, Collateral, and Cash Flow. Do you have the credit available for the deal in mind? Aircraft deals can be far more complex than other assets. Any financial institution needs to manage and measure their financial risk and it starts with your credit. Another part in managing the risk is what other assets do you have to guarantee the aircraft deal? Standalone, the financial institution may not want to do interest-only financing, but if you have cash, stocks, and other investments well in excess of the aircraft value, then the risk is lessened. Can you keep the aircraft flying? For $2 million you can buy a 15-year old turboprop or a 22-year old large cabin jet. However, the annual operating budgets are going to be vastly different. Can you afford the $3 million engine overhaul on the jet? Character, whether are you a person of your word, counts more than all the above.

Character ties into rule number one above. The financial institution wants to know, not only from a balance sheet perspective, but from who you our your company is, will you stand by the deal? Given enough money for lawyers, it seems like most contracts can be broken or amended. The financial institution is looking for a trustworthy account.

Our company founder and dear friend, Al Conklin, told me that he measured every sale by the value of the person's handshake. If he didn't trust the person, no amount of legal contracts and forms would make him feel good about the deal.

Rule #3. Get what you need, don't overbuy. 

Aircraft are wonderful business tools. They get you to many places far faster than any other mode of transportation. They enable you to make the out of every minute and do so in a safe and secure environment. Given the availability of pre-owned aircraft you can easily step up in size nod capability for not a lot more money. Get the aircraft that does the majority of your flying in a cost effective manner. Need or want the big cabin plane? Then charter one when necessary. 

I had one client who would not consider a plane in which he could not stand up in the use the lavatory! The smaller cabin jet was less costly to own and operate, but he wanted and was willing to pay to stand. He ended up not buying and continuing to charter. If you do decide to upsize, make sure you understand the ramifications of the budget and are willing to pay.

Rule #4. Communication is key. 

For the lessor, lender, or insurance broker to make sure you get the best service, make sure they understand how you plan to use the aircraft. Will you be doing charter? Will it stay in North America or spend a lot of time in other locations? Are their management agreements? If so, is the financial institution protected adequately in terms of a loss or lien?

Rule #5. Plan.

While a cash-only transaction can be done in the time it takes for a wire transfer to occur, even the aircraft registration process will take more time than that. A US-only financed deal can take three to four weeks at the absolute fastest. Better plan on a month or more. If there are two countries involved, if the Ex-Im Bank is involved in the financing, plan on three to four months minimum for the deal and the importation of the aircraft. 

Financing or leasing a business aircraft is complicated and involves significant finances. You should have qualified aviation legal and tax advice. 

 

Tags:

Aircraft Sales | David Wyndham | Aircraft For Sale



Archive



GlobalAir.com on Twitter