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When to replace an aircraft is more than just simple math

by David Wyndham 2. September 2016 11:22
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Our company co-founder, Bill de Decker, and I recently finished a major aircraft review for a government entity. They had several missions and several types of aircraft that were necessary for the mission. We looked at the missions and their current aircraft. We identified shortfalls in capability and desired utilization. We looked at the current costs, the reliability, and projected out future costs. We identified future mission changes as best we could. We did look at whether it was cost effective for the government or a contractor to own and or operate the aircraft. At the end was a series of business cases for each aircraft and an overall acquisition plan for their aviation operation. None of the missions were simple passenger-carrying missions and, given their requirement to look out 20 years, a lot of long term assumptions had to be inferred. What they now have is a plan with dates and actions that are needed, along with mission and financial justification. All this work was fun and the folks we worked with were a joy. It all came down to this:

There are two major reasons to replace your current aircraft. One reason is the mission has changed and the current aircraft is no longer capable of effectively supporting that mission. The second reason is the economics of owning and operating the aircraft render it too costly as compared to the alternatives. Both can combine to demonstrate and support the value of a business aircraft. 

Both reasons are simple but involve a lot of complexities. 

With respect to missions of a business aircraft, changes tend to fall into sub sets

1. Passenger loads change requiring a different aircraft. If you need nine seats, six won't do. Or perhaps decreasing passenger loads make the idea of a smaller aircraft appealing.

2. Trips change requiring either longer range aircraft or aircraft with different capabilities such as operations from shorter runways or flights into and out of high altitude airports.

3. Utilization also factors into the equation. Either the need for more hours or simultaneous aircraft can drive the decision to add additional aircraft.

Upsizing in capability tends to have an upsizing in budget. What needs to be considered is the added value the aircraft change will bring. Will more passengers enable greater benefits to the company? Does avoiding that fuel stop, and the time avoided, add enough value to make the acquisition and operational costs of the larger aircraft worthwhile? 

I did one analysis that showed Jet B with greater range than the current Jet A. To meet the non-stop range Jet B had to fly at long range cruise. Allowing an hour for a fuel stop, Jet A can fly the two legs at high speed cruise and still arrive within 20 minutes of Jet B. We looked for another option as the value of replacing Jet A with Jet B didn't deliver enough value. 

When looking at costs, make sure to look at all the costs: acquisition, operating costs, fixed costs, taxes, and depreciation (tax and market). Balance that against the mission for a "best value." 

Age is a factor, too. As aircraft age, their maintenance requirements, and costs tend to increase. With that comes decreased availability as the aircraft spend more days in maintenance. What makes this difficult to analyze is the cyclical nature of maintenance can hide this long term increase. 

Many operators when they do a major event like an engine overhaul or heavy airframe maintenance do paint, interior and even avionics upgrades. The costs are significant and not seen again for many years. One decision point here is whether to sell the aircraft a few years before those costs occur, or incur those costs and operate the aircraft for a few more years. This is because most buyers prefer not to have significant costs for the first few years when the acquire a pre-owned aircraft. But if you do the overhaul, etc. the market is not likely to award you with 100% of the cost in an increased value. See, not so easy to decide?

Having a plan in place makes the process easier. Then every year, review the plan, and when appropriate, update it. When to replace is not a simple equation, and it can involve qualitative and quantitative measures. Be proactive and work with the owners/stakeholders in the aircraft to be ready with the justification well in advance of any issues arising. 

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Aircraft Sales | David Wyndham



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