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When Costs Occur

by David Wyndham 1. December 2005 00:00
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First off, I'd like to send wishes of peace (http://www.columbia.edu/~fdc/pace/), compassion and understanding to everyone. Not just in celebration of the season, but because these things always seem in short supply. If we can preach "peace on earth" we can achieve it.

I've talked a lot about costs this year and in previous years as well. How about one more time! Picture this; your eight year old aircraft was in for engine heavy maintenance this year to the cost of about $500,000 for engine overhauls of both turbine engines. While doing that, you also refurbished the interior and repainted the aircraft and installed some new avionics and took care of a few optional service bulletins. Total for every thing came to $750,000.

Of course, all that took time – let's say 45 days. So your normal yearly utilization of 480 hours dropped to 420 hours for the year. Last year, your total operating costs (variable and fixed) were $1.1 million, and having flown 480 hours gave you an average cost per hour of $2,291 per hour ($5.73/nm). This year, with the engines and refurbishment, your total operating costs were $1.80 million and with 420 hours flown that gives you an average cost per hour of $4,285 per hour ($10.71/nm). That's an increase of 64% in terms of your hourly or per NM cost!

Wait, things get worse! You have a new CFO and she's not familiar with aviation. She looks at the data and is certain that (a) airplanes are too expensive and (b) you are mismanaging the company's money! That, combined with disappointing fourth quarter results leads her to conclude that getting rid of the airplane is financially justified. Next thing you know, your fighting for your job. Not a pleasant New Year's thought.

What need to be done is not to get a new CFO, but to educate the CFO, and any other C-level executive, just what the nature of costs are in aviation. The best time to do this is before the above events occur. The first thing you can do is to educate yourself about how costs behave in general and then look at your aviation operations. Then, when you meet with the CFO you have a basic understanding as to their point of reference.

The big thing the C-level executive needs to know is the cyclical nature of aircraft maintenance costs. Maintenance costs can be significant, and they are viewed as something that is totally under your control. Let's look back to the pair of engine overhauls above. While the $500,000 expense was realized this year, how long did it take to accrue that expense? With a 4,200 hour overhaul interval, and our 480 hour per year average utilization, it has taken almost nine years to get to the point where the overhaul was required. So the accurate way to allocate that $500,000 is to spread it over the 4,200 hours it took to get to the overhaul, or less than $60 per engine per hour ($120/hr for both engines). Compare that to the $1,000 per hour for fuel (that occurs with every hour flown) and those engine overhauls aren't such a bad deal!

Similar arguments can be made for most heavy maintenance items. Major maintenance items such as overhauls or airframe checks are cyclical. They occur infrequently but tend to be a major expense. Rather than allocating them to the year they occur, they need to be taken in context to how long it took to accrue that expense.

One way to ease the burden of those major maintenance items is to evaluate guaranteed maintenance programs such as those for the engines, airframe and even avionics. In those programs you pay a set hourly fee. That amount is put into a reserve account from which you pay for maintenance. Those programs also include allowances for unscheduled maintenance, with some restrictions. You pay steadily into the account and withdraw as needed. No spikes in cost. That's fodder for another article, but suffice to say that if your CFO is the nervous type, that might not be a bad idea.

If your aircraft has a guaranteed maintenance program available (for the engines, airframe or avionics), do you use it? Why or why not? If you haven't succumbed to an excess of eggnog or Figgy Pudding, send me an e-mail and let me know.


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