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Purchasing a Corporate Aircraft: Part 1

by David Wyndham 1. December 2006 00:00
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It seems that in aviation, there are two large groups, those 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 third, a small but growing group that I want you to join -- those whose knowledge of finances gives them a powerful and convincing tool for making the right aircraft decision!

Before the financial analysis, you need to identify the aircraft capable of performing your mission. This analysis needs to cover performance, cabin/baggage/comfort, and support. Once you have a group of capable aircraft identified, the next step if the financial analysis.

For any aircraft financial analysis you will need the investment required, the cost 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.

In aircraft financial analyses, we also need:

- Amount of utilization. Do this in miles and then divide by the aircrafts' typical trip speeds to arrive at the utilization in hours.

- Type of ownership. Full ownership, co-ownership, fractional ownership. Maybe not even owning at all. Differentiating among these is a subject for another newsletter. For this month, let's assume a form of full ownership.

- New versus used. Do the lower maintenance costs, increased availability, added tax depreciation benefits, and the ability to specify the exact configuration of the new aircraft outweigh the used aircraft's lower acquisition cost?

- 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 Assumption. 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. 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 manufacturers 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 aircraft operating costs. This includes the fuel and maintenance. Also needed are things such as hangar, insurance, training, and crew salaries. Don't forget the miscellaneous things like charts and pubs, too.

Taking all the above into account over a defined period provides you with a Life Cycle Cost. This is step one. Step two will be to use the concept of the time value of money to differentiate between the cash flows. 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.

If you have any ideas, suggestions or experiences you would like to share with this discussion we would like to hear about them.  Please respond below.


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