Why you should have a guaranteed maintenance program

We are working with someone who has a business jet. They have had the aircraft on guaranteed hourly maintenance programs for the engines and also for the airframe and avionics. The aircraft is coming out of warranty and the hourly rates are going up considerably, especially for the airframe. They are trying to figure out (a) whether to keep the aircraft and (b) if the keep it, what would be the future maintenance costs if they take it off one or more of the guaranteed hourly maintenance programs (GHMP). Within the next five years, that aircraft’s engines will need overhauls, to the tune of almost one million dollars, each!

The make and model aircraft they operate is doing the job quite well. The feel no need to change models. So if they sell the current aircraft, it would be to buy a new version of what they now have.  The aircraft is worth about half what it was since new. While they can negotiate on the new aircraft price, they still need to come up with a significant investment. Given the current economy and the company profitability, they do not want to undertake a capital acquisition – even if financed or leased.

Turboprop and turbine helicopter engine overhauls can run to $300,000 and turbojet engines, over one million. Within the engine are a number of components that will have different cycle limits. Typically they can last to the second overhaul, or perhaps even the third. These turbine wheels, blades, etc can add significantly to the cost of the heavy maintenance. More and more turbine business aircraft are heading into their twenties and will be facing these cycle-limited items’ additional expenses. Budgeting for these major inspections and overhauls can be difficult. In good times, reserving cash can be difficult for a company, and in today’s economy, the cash may not be available.

All the major turbine engine manufacturers offer some form of a GHMP. Plus, there is one major third party provider of these plans that cover most popular business turbine engines.  Many current production jet aircraft have GHMP for the parts provided by the OEM. Some of the major avionic manufacturers also offer hourly programs covering their systems.

What are the advantages of GHMP - guaranteed hourly maintenance programs?

Budget Stability

 

Under a GHMP, the aircraft owner pays in an hourly set-aside to the plan provider. The monies go into an escrow account. As engine maintenance expenses occur, the money is drawn out to pay for the expense.

The amount to be paid in is set by contract, and thus, a GMP offers a stable budget. Accountants love stability in budgeting. So should you. Take the hourly rate times the number of hours to be flown, and your engine budget for next year is mostly done. You need to budget for minor line maintenance. There are no unplanned for costs and no surprises. An GHMP offers a financial peace of mind.

GHMP Limits your maintenance exposure

A full-featured GHMP also offers insurance against the rare, but costly unscheduled maintenance event. While turbine engines are reliable, when an unscheduled event occurs, they can result in significant expenses. Once an engine is opened for inspection, the cycle-limited components are also subject to replacement or repair. I’ve heard from a few operators who went in for a $50,000 Hot Section Inspection and came out with a $150,000 repair bill. Similarly, for major airframe inspections, the flat-rate tends to be about half the total cost once all repairs and overages are accounted for.  Today’s modern avionics tend to be reliable. When they fail, however, it tends to need a full replacement rather than a repair.

GHMP can be less costly in the long run

Engine removal, shipping, and loaner engines can all be covered by a GHMP.  Loaner engines alone can run several hundred dollars an hour to rent. Also, until you get a quote on your engine, the “typical average overhaul cost” is just that, an average. An engine GHMP will cover those items and pay the actual overhaul cost, even if those costs are over budget. Airframe parts are tougher to quantify. The GHMP may specify an exchange-overhaul versus a new part. Your Director  of Maintenance may want a new part. Labor, if done an an approved repair facility, is usually covered.

GHMP preserves the residual value

A GHMP will add value to your aircraft. Aircraft sale price sources such as Vref and the Aircraft Bluebook Price Digest either include the engine GHMP in their typical selling price and subtract for engines not on a program, or the program itself is a added value.  If you are selling your aircraft, and the GHMP transferring to the new owner has accrued $350,000 in its account, that is value added to the aircraft in three ways:

 

  1. The cash value of the GMP account itself. 
  2. The reduction of risk to the future buyer as to the risk for future maintenance, especially the engines. 
  3. A reasonable level of assurance that the maintenance is being done to standards.

 

 

One last possible advantage to a business is that the cost of the GHMP may be a tax deductable expense.  Cash accrual accounts are not “expenses.”  Consult with your tax advisor, but this can be a definite advantage for the GHMP.

Leases favor the GHMP

Many financial institutions may require that at least the engines be on a GHMP to help guarantee the value of the asset. It is common for an end of lease requirement that all major components have at least 50% of their life remaining and an adjustment (to the detriment of the lessee) is made for less than half-life remaining components such as the engines. Guess what dollar value per hour they may use in adjusting for engines nearing the overhaul at the end of a lease?

Why not go with a GHMP?

If you are purchasing an older aircraft not on a program, the typical buy-in amount is to pay the hourly rate times the total hours flown up front. Or, you may face a pro-rata share of the next overhaul. For example, if you place an engine on GHMP that is just completed a mid-life inspection, the GHMP will cover half and you will cover half of the next major event.

With airframe GHMP, it can be tough to calculate the accrued value versus the to-be-used amounts. If you are halfway to the C-Check or 96-month, will a buy-in cover all the costs at the event? Read the buy-in terms carefully.

Low utilization operations may not see the value. Some of the engine programs have minimum annual flight-hour requirements. If the GHMP requires 300 annual hours and your flying dips to 200, you may either face a rate-adjustment with much higher hourly costs or have to pay for 300 hours. Contracts vary, and most GHMP providers will work with you should your flying hours change.

GHMP are a good way to insure your aircraft value, provide stable budgeting and perhaps even save money over a pay as you go maintenance. You’d be wise to evaluate these programs for your next aircraft.