- 25 Apr 2023
- Gerrard Cowan
- Aircraft Ownership
Buyers of pre-owned business jets face a range of costs beyond the ask price, some of which might be unexpected. What costs do they need to account for, and how can they avoid any nasty surprises? Gerrard Cowan asks the experts...Back to Articles
First-time buyers can often be ‘a little surprised’ by the high costs of ownership, which go well beyond the initial purchase price, says aviation analyst Brian Foley. The costs of hangaring, maintaining, insuring and crewing their newly acquired aircraft can amount to millions of dollars annually.
Indeed, there have likely been numerous one-time, after- purchase discoveries for those who bought without a Pre-Purchase Inspection, he says, “which could easily cost as much as the airplane did to get airworthy again. Some of these buyers have already cut their losses and returned to their Economy Plus airline seat or charter.”
Aircraft maintenance is a Pandora’s Box, according to David Caporali, Senior Vice President, Business Development for the Americas at Jet Support Services, Inc (JSSI), a National Aircraft Finance Association (NAFA) member.
Such maintenance costs take many buyers by surprise, he says, and this needs to be a vital consideration in the aircraft selection process. Indeed, it can be one of the largest variable costs in aircraft ownership, including all parts and labour, and can account for up to 35% of the aircraft’s operating budget.
“Outside of certain scheduled inspections and replacement items (that can be tracked through maintenance software) there is no way to anticipate when a part will break, making maintenance very difficult to budget for,’’ Caporali elaborates.
“‘Scope creep’ is common during any aircraft inspection, as additional squawks are often found. We have seen many work orders double or even triple the initial expected cost of a certain inspection.”
According to Caporali, an hourly maintenance program offers protection against the unexpected. Therefore, it is critical for a pre-owned aircraft buyer to learn if the aircraft comes with a transferable maintenance program, and if so, which elements (engine, APUs, avionics, airframe) are covered.
“When the aircraft transacts with a program, the financial risk of any future maintenance is not transferred to the new owner but stays with the program provider,” Caporali assures. “This helps the transaction process move faster and adds peace of mind for the new buyer.”
Philip Dickerson, JSSI Vice President of Business Development for the USA and Caribbean, agreed that programs are the best avenue to provide an effective maintenance budget. He highlights the significance of maintenance ‘reserves’ in particular. “A program accrues funds for future maintenance, provides budget stability, and helps mitigate financial surprises,” Dickerson explains.
“The maintenance reserves also protect and enhance the residual value of the aircraft. Through a program, the owner has a partner in proactive maintenance planning which helps maximize aircraft availability.”
Caporali recommends that any new aircraft buyer clearly defines a budget and risk parameters as they relate to aircraft operating costs and maintenance. “If the aircraft is not yet on a program, explore the options,” he suggests.
Jean de Looz, Head of Americas at MySky – which offers a spend management platform for Business Aviation – also highlights maintenance and crew costs, as well as fuel.
In terms of maintenance, he suggests intervals are a key factor in keeping costs down. “When maintenance comes up it can be very costly. It’s not a problem if you’ve accrued it properly, but it does require a lot of discipline and foresight.”
If relevant, it is vital to choose the right operator for your aircraft, he adds. “Transparency, advocacy, and a focus on maximizing asset value for the owner is important. Basically, the operator is entrusted to turn the conceptual into reality. Budget becomes cost through the lens of who is operating your plane.”
De Looz stresses the importance for buyers to do their homework and due diligence in all areas. “Make sure you analyse the different scenarios and do the math, it’s important to understand the qualitative and quantitative aspects and value of aircraft ownership.
“For example, it may be costly but if it provides you with an opportunity to [beat the competition to a valuable contract] on the other side of the globe, then it’s worth it. Aircraft are time machines and time is invaluable.”
Wendy Preston, Head of Asset Management at PNC Aviation Finance, said additional costs beyond maintenance and crewing could include any need to upgrade the avionics or other equipment.
“All of these ‘outside the asking price’ costs reinforce the need to have a strong relationship with a qualified broker/dealer and other industry partners, such as aviation finance experts, attorneys, tax consultants and maintenance professionals,” she highlights.
Preston also points to aircraft depreciation as a factor to be aware of, “especially in these times where many buyers are purchasing aircraft at premiums that are well above their prices a few years ago.”
Depreciation is the most difficult cost to predict, according to Adam Meredith, President of AOPA Aviation Finance, because “we go through cycles of buyer versus seller markets, which largely impact values and thus depreciation.” It can be a very complicated cost to factor in, he continues.
“The biggest wild card is, and likely always will be, depreciation. If you want or need a jet, expect that as a newer, more capable version of your model comes out, the value of your model will likely come down some.”
And Meredith says that insurance is another cost that often surprises buyers. “The one expense that has many surprised is just how much insurance has increased. This is largely the result of a period of long under-inflated pricing (too much competition) compounded by a bout of recent expensive claims causing underwriters to be much more conservative in their forecasting,” he explains.
The best approach, he suggests, is to do your research to truly understand the direct operating expenses in similar missions to those you’re contemplating. “The same goes for fixed expenses; by getting quotes ahead of time you can do a good job of budgeting.”
A reputable broker will help you perform the necessary due diligence and to ask the right questions, according to Michael J. Moore, Executive Vice President of Essex Aviation, provider of a wide range of private aviation acquisitions and consulting services.
In particular, Moore says that a full-service broker will not be purely “transactional”, but will help buyers understand an appropriate budget for a given aircraft, identifying the cost factors that might not be immediately obvious.
For example, an owner may plan to charter their aircraft to offset their costs but might have set an unrealistic goal, not including the incremental costs relative to the number of hours it will be chartered over a certain time period, he illustrates.
“On top of that, other annual costs will typically increase – perhaps in areas such as engine and APU program costs or basic parts and labor costs,” Moore says. Guidance to recognize these cost areas should be presented by a broker to help design a budget that forecasts expected and unexpected costs as far out as needed, he concludes.
More information from:
AOPA Finance: https://finance.aopa.org/
Essex Aviation: https://essexaviation.com/
PNC Aviation Finance: www.pnc.com
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