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Misconceptions about Aircraft Costing

by David Wyndham 12. October 2018 09:01
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Over the years I have written a number of articles discussing aircraft operating costs and methodologies for analyzing them. This month, I’d like to review some common misconceptions about costs that I run into on a regular basis. Most of these result from connecting something that we are familiar with, like the cost of running an automobile or building a house, and using those as an analogy for the unfamiliar cost of owning and operating an aircraft. 

The biggest misconception is focusing on the acquisition cost to the detriment of operating costs and asset value over time. I have a client whose maximum acquisition budget is $20 million. This is a real limit and not one to exceed. Where the misconception arises is that if we are looking at Aircraft A with a selling price of $20 million and Aircraft B which sells for $17 million, the former aircraft is the less costly option. But is it?

Assume the both aircraft have similar capabilities in terms of range and cabin.

The only way to know which one costs “less” is to evaluate the total costs to acquire, operate and dispose of the aircraft. Two major costs are the operating costs, to include maintenance, and the estimated residual value after a set length of time. Looking at our current scenario, Aircraft A has a lower fuel consumption than Aircraft B. Aircraft A also has engine and airframe maintenance costs similar to Aircraft B. Looking at the costs per hour:

Variable cost.                        Aircraft A.                  Aircraft B. 

Fuel                                        $1,376                        $1,521

Engines                                  $ 580                          $560

Maintenance                         $ 784                          $677

Per Hour                                $2,740                        $2,758

There is more:

Aircraft A flies faster than Aircraft by 8%. Remembering the aircraft fly from origin to destination, the faster aircraft uses fewer hours to fly the same trips. If Aircraft A flies 400 annual hours, this requires Aircraft B to fly 432 hours. The annual variable cost is

Variable cost.                        Aircraft A.                  Aircraft B. 

Per Year                                $1,096,000                $1,191,456

Aircraft A costs almost 10% less in variable cost per year than Aircraft B. If both have about $650,000 per year in fixed costs, the annual operating budget favors Aircraft A slightly. While not enough to make up the $3 million price difference, it does account for about $1 million over 10 years. There is still more.

Aircraft A is a popular model and is currently selling better than Aircraft B. Current market values are being maintained better than for Aircraft B. After 10 years the estimated residual (resale)  value in dollars and percent is higher for Aircraft A. Now our 10-year life Cycle Cost is:

10 YEAR COST.                               Aircraft A                               Aircraft B

Acquisition                                        $20,000,000                         $17,000,000

Variable costs                                   $ 10,960,000                         $11,914,560

Fixed Costs                                       $ 6,500,000                           $ 6,500,000

Resale value                                     ($10,000,000)                       ($ 7,500,000)

10-Year TOTAL                                $27,460,000                          $27,914,560

Aircraft A costs about the same to own and operate as Aircraft B. Making the purchase decision just on acquisition price doesn’t tell the entire story. In the above example, we need to evaluate of parameters in addition to just costs to determine which aircraft is the best value. 

There could be other considerations like product support. Not only the perceived quality but where are the service centers located? If Aircraft A has a service center on your home field while Aircraft B’s nearest service center is 300 miles away, Aircraft A will be easier to maintain and, if AOG at home, might be repairable in less time.

Consider the equipment? What if Aircraft B has a more advanced SVS than Aircraft A? But what if you prefer the usability and displays in the avionics system on Aircraft A?

Never let a spreadsheet make a decision for you.  Never just look at a single cost item when evaluating aircraft costs. Aircraft are not commodities sharing essential the same characteristics. That is why I stress to my clients to look for a best value when making the aircraft decision. Costs are a very important part, but even the total costs do not tell the total story. 

(A version of this was previously published in AvBuyer magazine.)

 

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