aircraft buying

NAFA member, David Wyndham, Vice President at Conklin & de Decker, details the process of a Life Cycle Cost analysis and underlines its importance to any aircraft buyer.

A consulting client I worked with was evaluating Large Cabin business jets. Initially the client was more concerned with minimizing the operating expenses and less concerned with the capital costs. As long as the acquisition price fitted within their $25m budget, they would be satisfied.

Yet those evaluating business jet ownership should be concerned with more than just the acquisition costs. They should also factor operating costs (variable and fixed), amortization, interest, depreciation, taxes and the cost of capital. Items like depreciation, interest and taxes – for example - can add as much as 60% to the Aviation Department’s costs depending on the value of the aircraft.

Furthermore, you should also consider when the costs occur.

General Methodology for Life Cycle Costing

When analyzing the potential acquisition of a whole aircraft or a share of one, Life Cycle Costing ensures that all appropriate costs should be considered.

The 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.

The first step is to know what aircraft to evaluate. This is achieved with an understanding of the key missions and the technical analysis of all potential aircraft. You need to be sure you are not buying more (or less) aircraft than you need.

There should be no room for assumption in the process. The costs should cover a specific period and take into account the aircraft’s expected value at the end of the term of ownership.

Comparisons of two or more aircraft should cover the same period of time and utilization, ensuring an apples-to-apples comparison is provided.

On the subject of utilization, you are advised to use miles if the aircraft is flying point-to-point and convert each aircraft to hours based on their speed. To have an accurate comparison, you will need to measure performance using the same criteria. Different aircraft fly at different speeds. Using a mile-based measurement accounts for the speed differences between aircraft.

I also recommend that you have a baseline. If an existing aircraft is to be replaced, that aircraft becomes the baseline. If you charter or own a fractional share in an aircraft, then continuation of that charter or fractional share would be the baseline.

The baseline essentially forms a basis for the comparison, establishing whether the new option under consideration costs less than the current baseline or more. If the cost will be more, what is the value of the increased cost?

Net Present Value Analysis

A complete Life Cycle Cost accounts for the time-value of money in a Net Present Value (NPV) analysis. Using NPV enables the differing cash flows from two or more options to be compared and analyzed from a fair and complete perspective.

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 amount of that item. This is useful in the comparison of Cash Buy vs Lease vs Finance options for the same aircraft.

Business aircraft do not directly generate revenue except for the sale of the aircraft. Thus, the NPV results are typically negative.

When comparing negative NPVs, the "least negative NPV" is the more favorable. In other words, if Option A has an NPV of $5m and the NPV of Option B is $6m, Option A has a better NPV.

You may want to run several scenarios. For example, what if you owned the aircraft for five years? How about ten? What if utilization was increased? What is the break-even point to move from fractional ownership to whole ownership? There may be many possible best alternatives when you adjust the important criteria.

In Summary

Regarding the client mentioned above, we evaluated new and used business aircraft and found several options that were at the top of the acquisition budget had lower total life cycle costs than aircraft with lower acquisition prices.

A Life Cycle Cost analysis is an important decision-making tool, but it is not the answer all by itself. I like to use the term "Best Value" in combining both the capabilities and the costs of the various options analyzed.

Run the numbers and use them in your decision - but remember: Never let a spreadsheet make the decision for you.

This article was originally published Conklin & de Decker in AvBuyer on June 25, 2018.

NAFA member, Brant Dahlfors, with Jet Transactions, shares the 2018 Q3 Bombardier Market Update.

2018 continues to grow and show strong signs of stability. Q3 was exciting for new product certifications led by Gulfstream announcing the certification of the all new G500 and followed by Bombardier's certification of the Ultra-Long Range Global 7500. On top of new large aircraft product announcements at EBACE in May, confidence in future growth is apparent.

Overall, in the segments we track, Q3 reflected the normal seasonal variations (vacation time) and new deliveries and pre-owned transactions were down 20+% over Q2. Shops are full with pre- buys and NextGen upgrades in addition to their normal maintenance customers. The pre-owned inventory continues to fall, down another 8.1% this quarter. In many cases, popular late model aircraft are below 5% of the fleet being available for sale. Gross numbers of pre-owned transactions will continue to decline for the foreseeable future as the market is seriously supply constrained.

How does this affect the Bombardier pre-owned market? With a whirlwind of new options coming to market soon, factory new buyers should soon start the migration from the existing product line to the latest and greatest offerings. Bombardier is well positioned with three new models to discuss – all available for delivery in the next 1-2 years. Overall pre-owned transaction levels dropped significantly across the Bombardier tracked models, with a slight uptick in inventory for sale. New deliveries also edged downward, the largest drop across all three OEM’s, though not uncommon traditionally for the third quarter.

Read the full report here.

The original market update was published by Jet Transactions on October 15, 2018.

NAFA board member and President of AOPA Aviation Finance Company, Adam Meredith writes about how to fairly split the costs of buying an aircraft. 

You finally found it—that first turboprop. The aircraft looks good, but there are inspections, demonstration flights, and paperwork prior to any sale. Who pays for what as the purchase proceeds? The answer is all about fairness.

Know in advance
Have a consensus gathering meeting with the seller before the pre-buy inspection about how you are going to handle any problems found with the aircraft. What will happen if there are so many squawks that you no longer want to continue with the purchase? When you agree, put that information in the purchase-and-sale agreement. It’s much better than getting halfway through the purchase and discovering problems without a plan for addressing them.

If the pre-purchase inspection is also an annual inspection, include that in the purchase-and-sale agreement, adding who is responsible for the costs in the event the sale falls through. 

Who pays what?
Obviously, the buyer pays for a pre-purchase inspection. Any airworthiness directives that need to be complied with are almost always the responsibility of the seller. Nice-to-have items that don’t affect the aircraft’s airworthiness—especially those that are expensive—usually end up getting negotiated. However, if there’s a service bulletin item, those too are generally the seller’s responsibility. In general, if something needs to be done, the seller pays. If it would be nice to repair or replace something, the buyer pays. 
Here’s an example. Maybe the emergency quick-donning oxygen masks for the pilot and copilot could use an upgrade, the old ones work but are looking a bit tattered. The buyer may pay for that. But if the aircraft is approaching a limit for a landing gear overhaul, the seller will likely reduce the price to reflect the future cost. Alternatively, the buyer could just request the landing gear be overhauled as part of the inspection. In the end, negotiations tend to ebb and flow based on not only the personalities of the buyer and seller but also the supply and demand of the particular make and model aircraft. 

Title and escrow costs
Not everyone recognizes the benefits  to both the seller and buyer of closing a transaction with a title and escrow company. Both parties have a vested interest in making sure the documents are properly filed and thus should split that cost. Here’s a scenario that should give pause to the value from a seller’s perspective: Your buyer flies off on a “pink slip,” nothing is filed with the FAA and there’s an incident with the aircraft. Who do you think the attorneys are going to come after? Whoever has the deepest pockets! Even if it’s meritless, you may have to defend yourself and it’s going to come out of your pocket. 

Demonstration flights
If the buyer is going to the seller’s location for a demonstration flight, generally the seller won’t charge the buyer for the fuel, but may limit the flight time. However, if the buyer is requesting to meet the seller away from the aircraft’s home airport, the buyer should expect to pay fuel costs. If the buyer wants to use his or her own shop for the pre-purchase inspection, same thing, the buyer should expect to pay for the fuel to get it there, and to get it home if the buyer declines the purchase. These are a few of the issues facing buyer and seller expenses, but the answer in all cases comes from asking, “Does it seem fair?”

This article was written by Adam Meredith and originally published in AOPA Finance on June 29, 2018.