Aircraft Operating Costs: Their Impact on Purchase and Ownership

Aircraft Operating Costs: Their Impact on Purchase and Ownership — Originally published in BusinessAir Magazine, July 2014, Volume 24, No. 7.

Last year I helped a client acquire an aircraft. This was a replacement aircraft, and he was not a first-time buyer. As is often the case with repeat buyers, the replacement aircraft was newer, larger and faster than the aircraft being replaced. I am now working with that same client to sell the replacement aircraft. Why is he selling after only a year? When the client purchased the aircraft, he underestimated what it would cost him to operate it on an ongoing basis.

Typically, during the negotiations for the acquisition of an aircraft, the purchase price is the focus of discussion and, at the end of the negotiations, the buyer and seller settle on a number. However, buyers often do not give as much consideration to the ongoing costs of operating the aircraft as they do to the purchase price. Certainly, purchase price is usually significant and all buyers want to insure that they received the best value for their investment. However, proper planning and budgeting of operating costs can be even more important in the long run. Furthermore, if the purchase price is considered in isolation, the buyer may miss out on the best aircraft available on the market for his mission.

Since no two pre-owned aircraft are exactly the same, understanding the pedigree of the aircraft being purchased and the status of key maintenance items is imperative to selecting the right aircraft. For example, an aircraft with freshly overhauled engines at a higher price may actually be a better buy than an aircraft at a lower price which will need both engines overhauled in the next year or so.

There are few things worse than receiving an unexpected bill in the mail for an unplanned expense. With an aircraft, this may happen even with the best of planning because aircraft are complicated machines with millions of moving parts than can break without notice. However, owners can minimize the unexpected invoices by planning a detailed and realistic budget for operating costs.

As with any budget, some costs are fixed and some are variable. For aircraft, you can easily predict your fixed costs which include insurance, hangar rent, taxes, pilot training, cleaning and maintenance tracking software costs. Variable costs are harder to predict but can still be estimated. The largest variable expense for aircraft is fuel. Fuel prices are consistent enough over time that if you can estimate your utilization then fuel can be properly estimated as well.

Maintenance costs, including overhauls, labor and parts are also variable costs and often the hardest to estimate. Scheduled maintenance can be predicted and bidding out major work can help keep the costs in line with what is reasonably supported by the industry. However, unscheduled maintenance can often occur at the most remote locations where either maintenance technicians have to be sent to the aircraft or where there is only one repair station nearby and therefore competitive bidding isn’t possible. While unscheduled maintenance can be difficult to budget, it is not impossible. We know that as aircraft age, their maintenance needs and costs increase. Therefore, year over year, unscheduled maintenance should account for more of the aircraft budget. Also, a careful review of the records or logbooks can reveal repeating patterns that, while unscheduled, are reasonably likely to occur.

Once you establish the budget for operating costs, using a system that supports the necessary tracking is important. A simple spreadsheet or an elaborate expensive software pack-age can both serve this purpose. The key is to use a system that works for the user tasked with maintaining it so the information is entered on a regular and timely basis.

Many aircraft owners allow a third party such as a pilot, management company or consulting firm to handle budgeting of the operating costs. There is no single right choice, but if an aircraft owner utilizes the services of a third party to assist them in budgeting, the owner should make certain that the person or company has the knowledge, experience and expertise to perform the budgeting task competently. In the case of the buyer I mentioned at the beginning of this article, that client relied on third-party operating cost estimates that later proved to be inaccurate and inadequate.

The key is to try to predict the unexpected and put enough away in reserve for when the unexpected happens. One thing that is always true is that unexpected costs will definitely occur when owning an aircraft. Next month we will explore various ways to mitigate unknown maintenance costs including the use of maintenance reserve programs.

Please contact Amanda Applegate at 877-237-5398 or aapplegate@aerlex.com.