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Three Reasons Why You Should Have a Guaranteed Aircraft Maintenance Program

by David Wyndham 1. November 2009 00:00
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We are working with someone who has a long range business jet. Within the next five years that aircraft's engines will need overhauls, to the tune of almost one million dollars, each! We are looking at keeping versus selling that aircraft and the budget spike for those engines in year five is huge. That aircraft's engines are not on any guaranteed maintenance programs, so the owner pays 100% of whatever the costs are. Sell the aircraft before the overhaul, and it may lose a lot of value and take longer than average to sell.

Turboprop engine overhauls can run to $250,000 and turbojet engines, up to a 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.

What are the advantages of these guaranteed engine maintenance programs?

Budgeting for these major cost events 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 engine guaranteed maintenance program (GMP). Plus there is one major third party provider of these plans that cover most popular business turbine engines.

Under a GMP, 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. Yes, you have some minor line maintenance, but that is minor. There are no unplanned for costs and no surprises. An engine GMP offers a financial peace of mind.

A GMP also offers insurance against the rare, but costly unscheduled maintenance event. Most turbine engines make it to overhaul, but some do not. Even on-condition engines face similar heavy maintenance events at some time in their life. 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. While turbine engines are reliable, when an unscheduled event occurs, they can result in significant expenses. An engine GMP provides protection against unscheduled engine maintenance costs.

An engine GMP can also be less costly than a pay-as-you go engine. Even without the unscheduled coverage, there are other plusses that come with a GMP. Engine removal, shipping, and loaner engines can all be covered by a GMP. 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 GMP will cover those items and pay the actual overhaul cost, even if those costs are over budget.

An engine GMP will add value to your aircraft. Aircraft sale price sources such as Vref and the Aircraft Bluebook Price Digest either include the GMP 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 GMP has accrued $350,000 in its account, that is value added to the aircraft in two ways:

  1. The cash value of the GMP account itself.
  2. The reduction of risk to the buyer as to the status of the engines.

Remember that long range jet's $1.8 million overhauls? Over the next five years, they will be flying about 1,500 hours, so their "accrual" would be $1,200 per hour if they are to pay for a pair of overhauls in five years.

One last possible advantage to a business is that the cost of the GMP can be a tax deductable expense. In house cash accrual accounts are not "expenses." Consult with your tax advisor, but this can be a definite advantage for the GMP.

Lastly, many financial institutions may require that the engines be on a GMP 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?

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


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