Tracey Cheek posted an articleAvoid Overpaying for Your Jet Operation see more
NAFA member David Wyndham with Conklin & de Decker considers ways for you to safeguard against being taken advantage of when it comes to aircraft bills and ways to manage operating costs efficiently.
A recent Bloomberg article described how high net worth individuals are potentially being taken advantage of by aggressive overcharges on their aircraft bills. David Wyndham considers this, and highlights ways to understand and manage your operating costs.
Few specific examples were cited in the Bloomberg article, and unsurprisingly no aircraft owner was willing to attribute their name to such a story, but what it highlighted is that there are many different costs associated with owning and operating an aircraft. These will vary significantly from trip to trip.
While transparency is offered as one solution to the issue of overcharging, that approach misses one important area: understanding.
Aviation, like medicine or law, has a complex language that seems designed to confuse the layperson. With medicine and law, you have a professional at your disposal to assist with questions such as, "What do you mean I have hypertension?" or, "Just what is a waiver of subjugation?"
Many aircraft owners, when faced with complex aircraft bills, have accountants to review and authorize bills for payment. But the accountant often lacks the expertise to fully understand the aircraft costs they are responsible for paying.
How Should Aircraft Costs be Presented?
Each bill submitted to an aircraft owner should be itemized with taxes, fees, labor, services and parts. Even with that level of detail, however, many are still unsure as to what the bill means and whether it is too costly.
I have assisted several owners recently with a detailed review of their costs. While I have yet to come across fraudulent bills or blatant overpricing, it is easy to see why a reasonable question may be, "Why are these bills so high?"
The first place to start to understand these costs is with a budget. The management company or aviation department must provide a budget based on the expected utilization of the aircraft. At the financial management level there needs to be enough detail so that individual accounts have differentiation, but not so many details that the complexity outweighs the benefits of detail.
Operating Cost Categories to Consider
Fuel: A major cost driver for most aircraft, the cost of fuel per gallon will vary and, in many instances, cheap fuel will beget add-on fees away from home. For example, itemized bills will often contain ramp fees and other services.
Other Trip Expenses: These need to be verified too, and include items such as the catering, hotel and meals for the crew. I had one owner who stayed at high-end hotels. Wanting the crew to be immediately available, he had them stay at the same hotels. As a result, crew travel costs were far greater than what many would consider ‘normal’.
Maintenance Costs: More detail is required for this within the budget than just one item. Categories should specify whether the bill is for scheduled maintenance (i.e., an 800-hour inspection), or for unscheduled maintenance (i.e. changing a flat tire or replacing a burned-out landing light).
Component overhauls and life-limited part replacement should also be noted.
The annual budget should note the scheduled inspections with the expected flat rate, or the cost to inspect and replace mandatory items, and allow for the on-condition or unscheduled items that may also require service.
The management company or flight department should get quotes for major maintenance from at least two qualified sources, if possible. And when requesting quotes, you should account for what is included and excluded. If, for example, there are scheduled parts to be replaced, is labor included or only the cost of parts?
You must also consider time. For example, a low-cost bid that takes 60 days to accomplish may be worse than the higher cost bid with a 30-day return to service.
Maintenance costs vary from year-to-year and major inspections will cause a large increase in expenditures.
These major scheduled inspections can occur every 6–10 years on the airframe; sometimes longer. Older airframes exceeding 20 years may see more age-related checks, and these should be accounted for.
Engines are a separate consideration and require a major service very infrequently. For most private and corporate operations, an engine may have a 4,000-hour mid-life inspection and run 8,000 hours before it gets overhauled. At 400 annual hours, that overhaul is going to occur when the aircraft is 20 years old. Unscheduled events tend to be rare for turbine engines, but they do occur and can be extremely costly.
How to Make Maintenance Costs Predictable
Guaranteed hourly maintenance programs (GHMPs), as the name implies, set a fixed guaranteed rate for the maintenance. An engine GHMP is very common for jet engines. In fact, since the financial crisis many lenders and lessors now require them as a standard term of condition.
There are also airframe and parts-only programs available for many turbine aircraft.
A GHMP will usually have a contracted price based on utilization and aircraft age and may incur a calendar and hourly fee, or just an hourly fee. A GHMP provides budget stability and peace of mind, as well as added resale value for the aircraft.
There needs to be good communication and clear expectations between the owner and management company or aviation department. Cost overruns need to be communicated as soon as they are known, and not after submitting the bill.
Someone should spend a little time with the owner or accountant to review the major bills and, importantly, ensure there are no surprises. When in doubt, seek the opinion of a professional. Aircraft are complex machines that, when well-maintained, will provide safe and comfortable service for many years.
More information from www.conklindd.com
This article was originally published in AvBuyer on May 24, 2019.
Tracey Cheek posted an articleAvoid Misconceptions About Aircraft Costing see more
NAFA member, David Wyndham with Conklin & de Decker, discusses the costs to owning an aircraft after the initial purchase.
What are some common misconceptions about aircraft costs? David Wyndham details some that he comes across on a regular basis, providing advice on how to avoid them…
Most misconceptions about aircraft cost result from connecting something that we’re familiar with (such as the cost of running an automobile or building a house) and using those as an analogy for the unfamiliar cost of owning and operating an aircraft.
The biggest misconception is focusing too heavily on the acquisition cost, to the detriment of operating costs and asset value over time. Let’s illustrate with an example…
I have a client who has a maximum acquisition budget of $20m. This is a real limit and not one to exceed. There is, however, a possible misconception that can arise if we were to look at Aircraft A (with a selling price of $20m) and Aircraft B ($17m) and conclude that Aircraft B is the less costly option.
The only way to know which aircraft costs “less” would be to evaluate the total costs to acquire, operate and dispose of the aircraft. Two of the major costs that must be factored are the operating costs (including maintenance) and the estimated residual value after a set timeframe.
Hourly Variable Costs
Looking at our current scenario (represented in Table A), Aircraft A has a lower fuel consumption than Aircraft B while the engine maintenance costs are similar. Aircraft B has lower airframe maintenance costs, meanwhile.
Yet even in factoring variable costs, there’s more to consider. For example, Aircraft A flies 8% faster than Aircraft B. The faster aircraft will use fewer hours to fly the same trips form point of origin to destination. Therefore, if Aircraft A flies 400 hours annually, Aircraft B will require 432 hours to cover the same missions.
Annual Variable Costs
Table B sets out the annual variable cost for each aircraft, factoring the required annual hours. As depicted, Aircraft A costs almost 10% less in variable cost per year than Aircraft B.
With both aircraft having about $650k per year in fixed costs, the annual operating budget favors Aircraft A slightly. While not enough to make up the $3m price difference, it does account for about $1m over 10 years. But before we can draw any conclusions, there is more…
Life Cycle Costing
Let’s assume Aircraft A is a popular model and is currently selling better than Aircraft B. Current market values for Aircraft A are being maintained better than for Aircraft B – therefore, after 10 years the estimated value (in dollars and percent) is higher for Aircraft A. Table C represents our ten-year Life Cycle Cost for each aircraft.
Aircraft A costs about the same to own and operate as Aircraft B. Our analysis has shown that making the purchase decision based on acquisition price alone doesn’t tell the entire story.
In the above example, we needed to evaluate parameters beyond the costs alone to determine which aircraft would provide the better value. And once you’ve achieved a solid cost analysis, there are additional factors to consider. Does Aircraft A have better support and a longer range than Aircraft B, for example?
Never let a spreadsheet make a purchase decision for you. And, never just look at a single cost item when evaluating the aircraft that best fits your budget. Aircraft are not commodities sharing essentially the same characteristics, which is why I stress to my clients to look for a best value when making the aircraft buying decision.
Costs are a very important part, but even the total costs do not tell the entire story. For the record, my client has yet to make the final decision on which aircraft to purchase…
This article was originally published on AvBuyer.com on July 16, 2018.