Hourly Cost Maintenance Program

  • Tracey Cheek posted an article
    Nacelle Coverage - New Protection for Your Engine see more

    NAFA member, Anthony Kioussis, President of Asset Insight, shares information on expanded Hourly Cost Maintenance Program (HCMP) coverage for your business aircraft.

    As a business aircraft owner or operator, you may not know exactly which components your engine Hourly Cost Maintenance Program (HCMP) covers. Is it just the aircraft fuselage and actual engine? The nacelle (the aerodynamic engine cowl and its support system)? The nose cowls, cowl doors, and thrust reverser units? Are all line-replaceable units covered? And if so, are there any exclusions for damage such as corrosion? 

    When an uncovered event occurs, a villain is born – whether it’s the director of maintenance who didn’t budget a $200,000 repair to a thrust reverser unit (TRU), the principal who invited friends for a weekend in Nice but now is faced with a grounded aircraft, or the Original Equipment Manufacturer (OEM) who is happy to address the problem, but will send a costly bill to do so. All parties involved share the pain.

    To avoid the financial expense, and decrease the response time required, to alleviate the problem, inform yourself so that you understand the actual coverage of your engine if it is enrolled on an HCMP (a.k.a. “Long Term Service Agreement”). Until recently, engine manufacturers excluded such hardware coverage in their HMCPs, despite having installed the subcontracted assembly built to their own specifications, with the nacelle and thrust reverser manufacturers. Recent changes should have a positive impact on aircraft reliability, asset value, annual budgeting, and your peace of mind.

    Rolls-Royce has led the way by introducing its CorporateCare® Enhanced program late last year. Including nacelles for the first time, the program covers all maintenance and troubleshooting on the engine cowls, TRUs, and engine build-up on engines powering numerous aircraft, including the Bombardier Global 5000/6000, Global 5500/6500, and Gulfstream 550, 650, and 650ER. By covering repair and replacement costs, as well as key nacelle-specific service bulletins and spares, reliability of enrolled aircraft is likely to improve. 

    Rolls-Royce is not alone. GE recently announced that it would now also provide complete engine and nacelle coverage for the new Passport engine on the Bombardier Global 7500. 

    Why not simply rely on the warranty? Warranties are designed to cover severe defects, or items that break long before their designed useful life ends, causing their financial value to decrease over time. Additionally, warranties generally do not cover engine transportation costs, engine-specific logistics (e.g. an exact pre-specified truck type with a specifically designed suspension) or loaner spare parts while the component is being repaired. Expanded component coverage, which includes nacelles and TRUs, also adds to the asset’s value. The HCMP service coverage ensures that when it’s time to trade or sell the aircraft, its value remains comparable to other aircraft with such coverage. That also enables faster pre-owned transactions due to a decided market preference for aircraft covered by HCMP.

    From an operational standpoint, make sure that you have such contingency plans in place when reviewing your aircraft’s annual budget. A new complete nacelle on a large cabin aircraft easily can cost more than $5 million per side, an unwelcome surprise in any fiscal year. A new TRU alone can cost more than $2 million, and unfortunately, an issue discovered on one side of the aircraft often is also found on the other side: a painful doubling of cost. Even if a component can be repaired, a repair scheme on the TRU could be in the $100,000-$200,000 range, per side.

    Business aviation commands operational reliability, financial predictability, and asset value optimization, both for your own peace of mind and for a swift aircraft sale in a competitive second-hand market. Expanded HCMP coverage that includes nacelles and thrust reversers can increase your aircraft’s value while concurrently improving its re-marketability. 

    This article was originally published by Business Aviation Advisor on December 27, 2018.

  • Tracey Cheek posted an article
    “Low Price” or “Good Value”? see more

    NAFA member, Barbara Spoor, co-Founder of Asset Insight, LLC, discusses the difference between a low price and a good price and how prior planning produces a premium sale price.

    What do you need to know before you purchase an aircraft to ensure that you get the best possible price when it’s time to sell?

    While the terms “price” and “value” often are used interchangeably to describe an aircraft’s worth, they actually have different meanings. “Price” is what the buyer pays, while its “value” is the relative worth, utility, and/or importance placed on that asset. Since emotions can run high during the aircraft acquisition process, determining whether an aircraft carrying a “low price” represents “good value” requires a detailed analysis – one that focuses on its future maintenance requirements and estimated Residual Value (RV).

    Consider the length of time you plan to keep the aircraft, and how many hours you intend to fly annually. Such data can help project the aircraft’s scheduled maintenance costs during your ownership term. This calculation is neither linear nor simple; costs assumed to be minimal actually can be much higher than anticipated.

    For example, scheduled maintenance costs increase over time due to more comprehensive airframe inspections, required either by the manufacturer or new regulation. While some view airframe maintenance costs as relatively minor, they are not. If you plan to own the aircraft for five years, and it will need a double-engine overhaul within ten years, the value of the airplane may be reduced by what the next owner will have to spend: approximately half the cost of the overhaul, perhaps more for an older aircraft. That could run from the high six-figures to several million dollars, depending on make and model.

    Carefully consider the cost of scheduled engine maintenance if the aircraft is not enrolled on an Hourly Cost Maintenance Program (HCMP), as maintenance expenses based on “time and materials” undoubtedly will increase over time. Opting to not enroll the aircraft on an HCMP upon purchase will increase your financial risk during your ownership period. And the aircraft still may require HCMP enrollment at resale to make it marketable, due to its “Maintenance Exposure to Ask Price Ratio” (“ETP Ratio”).

    The ETP Ratio is a useful indicator of an aircraft’s marketability. It is computed by dividing an aircraft’s Maintenance Exposure (the financial liability accrued for future scheduled maintenance events) by the aircraft’s Ask Price. An analysis of “Days on Market” shows that when the ETP Ratio exceeds 40%, the Days on Market increase by more than 30%. For example, aircraft with ETP Ratios exceeding 40% during Q2 2018 were listed for sale an average of 72% longer than aircraft with ratios below 40% (169 days versus 291 Days on Market, respectively).

    The Residual Value Projection

    A traditional RV forecast starts with an assumed Current Value that then is degraded based on the aircraft model’s average historical annual depreciation percentage. But the aircraft’s future maintenance condition, perhaps the most important value influencer, is not accounted for appropriately, if at all. Since historical values and trends play no role in an aircraft’s future financial behavior, it’s best to obtain Residual Value figures using objective methodology that assesses the aircraft’s value independently, based on current maintenance condition, future requirements, and proven forward-looking market indicators.

    A “low price” is easy to determine. “Good value” is derived by optimizing your investment by:

    • Acquiring an aircraft able to perform your mission requirements, at a reasonable price;
    • Stabilizing maintenance costs during your ownership period with HCMP enrollment;
    • Limiting scheduled maintenance expenses not covered through an HCMP, based on the aircraft’s future maintenance requirement at time of purchase;
    • Securing an objective, science-based Residual Value analysis; and,
    • Remarketing an HCMP-enrolled aircraft at a predetermined date to ensure that the ETP Ratio is well below 40%.

    Taking these steps can help you enjoy the best possible return from your aircraft – both while you own it and when you are ready to sell.

    This article was originally published in Business Aviation Advisor on November 1, 2018.