- 25 May 2020
- David Wyndham
- Operating Costs - BizAv
What does a Life-Cycle Cost analysis include, how can you ensure you’re getting a fair measure when comparing business aircraft for sale, and how far should it inform your buying decision? David Wyndham offers tips…Back to Articles
When evaluating business aircraft that meet your mission need, economics is one of the most important aspects to consider. Combining mission capability with cost yields value...
Sometimes this is obvious (i.e. when comparing two different aircraft makes/models side-by-side). Yet, even if the choice is between different aircraft of the same type, the total costs to own and operate still need to be compared through a life-cycle cost analysis.
What Does a Life-Cycle Cost Analysis Include?
When evaluating business aircraft ownership, you should be concerned with more than just the acquisition cost. You should also factor:
A life-cycle cost analysis also looks at the aircraft market value after a period of ownership to arrive at the total cost to both own and operate the aircraft.
BizAv Life-Cycle Cost Analysis Case Study
A client I worked with was evaluating two Light Jets. They were assessing two models of the same pre-owned aircraft type. One was selling for $4.8m while the other had an asking price of $4.3m. At first glance, that should be enough for making a choice – but a Life-Cycle Cost analysis reveals there is more to consider.
While both serial numbers had similar equipment specifications, both had their engines enrolled on a guaranteed hourly maintenance plan, and each was essentially ‘turn-key’ as they could be placed into flight operations immediately after closing, the aircraft with the lower price had higher total hours.
A major inspection would be due on that aircraft in approximately 18 months, whereas the higher-priced aircraft had recently completed that same inspection, and also had undergone a paint and interior refurbishment when it had that inspection.
The basic comparison of operating costs would have accruals for the maintenance costs and, thus, the average cost per hour would be equal between the two. However, a life-cycle cost analysis would give more granularity into when those costs accrue.
In the above case, a five-year costing revealed the lower priced option had higher maintenance costs over the next five years to the extent that the total cost difference between the two Light Jets was negligible.
Moreover, assuming the aircraft would be used primarily for business, post-tax benefits such as depreciation may also reveal savings that change the total costs of owning the aircraft.
Tips for a Proper Life-Cycle Costing
Timeframe: Comparisons should cover the same period of time and utilization, ensuring an apples-to-apples comparison is provided. You should cover enough time to get a good sense of the costs, and use a time-span that seems reasonable to you.
Utilization: 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.
Benefits Analysis: Don’t omit the benefits analysis when comparing different makes/models. One aircraft may have higher total Life-Cycle Costs, but also have a roomier cabin or more range than the alternative. What is the cost of those additional benefits (assuming that all the alternatives have first met your mission requirements)?
Net Present Value: In addition to what those costs are, you should also consider when the costs occur. A Net Present Value (NPV) analysis accounts for the time-value of money. Using NPV enables the differing cash flows from two or more options to be compared and analyzed from a fair and complete perspective.
The NPV analysis considers when costs and revenues occur, as well as income and expense cash flows, type of depreciation, tax consequences and residual value of the various options. When an expense (or revenue) occurs can be as important as the amount of that item. This is useful in the comparison of Buy vs Lease vs Finance options for the same aircraft.
Comparing these costs requires basic spreadsheet skills, and the Net Present Value analysis requires the use of financial formulae. If you, personally, are uncomfortable with these, someone in your company CFO’s office should help, or you may hire a consultant to prepare the costs analyses.
Life-Cycle Cost Analysis in Summary…
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. Remember, though, never to let a spreadsheet make the decision for you.
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