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You Need A Methodology For Comparing Aircraft Costs

by David Wyndham 29. April 2010 16:33
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When comparing aircraft costs, it is important to understand what costs are included and what aren't. Otherwise, you can end up comparing "apples and oranges." This can lead to making a decision with wrong or incomplete information. What we often see if that the "number" is smaller than the total cost. The big items are usually included, but adding up a lot of smaller numbers can alter the total cost considerably.

What is a good methodology to use when analyzing the cost of an aircraft? I’m glad you asked. Life Cycle Costing can ensure that all appropriate costs are considered.

Life Cycle Costing includes acquisition, operating costs, depreciation, and the cost of capital.

Amortization, interest, depreciation, and taxes also play a part in what it costs to own and operate an aircraft and can be included in the Life Cycle Costing as appropriate. As the term Life Cycle implies, it looks at a length of time versus a snapshot in time.

How long of a cycle depends on how long you plan on operating the aircraft.

If you plan on keeping the aircraft 10 years, then that is the length of the Life Cycle to use.

The costs should cover the period of ownership and take into account an expected aircraft value at the end of the term. Comparisons of two or more options should also cover the same period of time and utilization. Taxes should be included. Depending on where and how the aircraft is operated will determine the tax impact.

Leases, loans and cash purchases also change the cash flow and total cost.

If you are looking at those options, then you should account for the time-value of money. A Life Cycle Cost can also account for this in a Net Present Value (NPV) analysis. This way, the differing cash flows form two or more options that can be compared and analyzed from a fair and complete perspective.

As an aside, what is NPV? An NPV analysis takes into account the time value of money, as well as income and expense cash flows, type of depreciation, tax consequences, and residual value of the various options under consideration. When an expense (or revenue) occurs can be as important as the total amount of that item. Paying cash is cheaper in total dollars, except that you have all that cash tied up in the aircraft. A lease or loan allows the cash to flow out over time. NPV runs on the assumption that a dollar today can be worth more than a dollar a year from now. Thus, implicit in the NPV is a time cost of money, called an internal rate of return (IRR) or return on investment (ROI).

Life Cycle Costing allows you to compare different aircraft, or different types of acquiring and operating an aircraft. Using the same period and general assumptions with the analysis of different options gives you a balanced comparison of those options. Regardless of the complexity of the aircraft deal, the Life Cycle Cost method should yield a useful result provided you populate it with as accurate a data as you can.

What sort of tool(s) do you use to compare aircraft costs?

 



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