How to Know Your Jet’s Maintenance Costs

What happens when confusion over ‘cash versus accrual’ in business aircraft maintenance budgeting meets with miscommunication? How can this be avoided? Do guaranteed hourly maintenance programs impact the resale value of your aircraft? We’ll explore the answers to these questions over the following paragraphs.

In accounting for cash flows there are two general methods: ‘Cash’ and ‘Accrual’. The difference between the two is ultimately in the timing.

For example, do you count the cost when it’s paid or earned? Cash accounting only includes money when it changes hands. Accrual accounting recognizes revenues and expenses when the invoice is recorded.

One general example could be when you lease an aircraft. If you lease a $10m private jet for $100k per month for three years, the annual ‘cash’ expense is $1.2m. However, you have a contracted debt of $3.6m as you have a three-year lease. Many leases allow you to terminate the agreement at any time by paying the lease payments in full. Recognizing that the lease costs $3.6m and not $100k is key! 

With aircraft maintenance, the typical budget looks forward 12 months to forecast what the costs will be. If you have a $1.2m engine overhaul due this October, you will need to recognize that, planning to have the money available. Cash accounting is appropriate and necessary for this cost.

However, you will also need to have an accrual budget. For this example, the engine overhaul is due at 4,000 hours. An accrual budget for this expense is $300 per flight hour.

As mentioned last month, maintenance costs are part of the hourly operating expense. If it takes 4,000 hours to reach the $1.2m overhaul, your accrual method should account $300 per hour.

Thus, in your conversion each year to a cash budget for the finance folks you should highlight that you are closing in on that need for $1.2m, and that the expense needs advance planning. (Remember, your colleagues in finance do not like surprises!)

The other surprise that could crop up is this: For the first nine years, the financial team has been looking at published operating costs, benchmarking these with your average annual operating costs.

For nine years you’ve been coming in at $300 per hour lower than the benchmark. In year 10, however, your average annual hourly cost increases $3,000 per hour ($1.2 million divided by this year’s 400 flight hours)!

While it may be a footnote for the cash budget, the point is clear – this future expense needs to be recognized well ahead of time.

How do Hourly Engine Maintenance Programs Help?

Hourly engine maintenance programs are a form of pre-paying for the future maintenance requirements of an aircraft. The monies are usually put into an escrow or other account that’s set aside for paying the expected cost of maintenance.

These programs can be found for most turbine engines and are also available for specific airframes and avionics systems.

These programs will guarantee the cost of the maintenance, commonly covering scheduled and unscheduled maintenance. They are not insurance, and often do not cover insurable items such as Foreign Object Damage (FOD) or negligence. However, their advantages include:

• Costs payable over time which are predictable and stable, making maintenance budgeting easy and consistent.
• The money is paid for each hour flown into an account associated with the specific aircraft. When the aircraft is sold, these programs can often be transferred with the aircraft to the buyer.
• Hourly engine maintenance programs require detailed accounting of the expenses helping to ensure the maintenance records are complete and thorough, which helps verify the maintenance condition of the aircraft.

Hourly engine maintenance programs are proven to help retain aircraft value, and for many turbine business jets, a lack of program enrolment actually leads to a decrease in its market value.

In Summary

Ultimately, maintenance costs are a significant part of the wider expense of operating an aircraft. They tend to increase with the aircraft’s age, and the overall cost to maintain an aircraft over its life can exceed the initial outlay at acquisition.

Maintenance costs are generally associated with the variable hourly operating costs for an aircraft, but this can give a false understanding for two reasons.

1.    Maintenance requirements can have both a variable component (e.g. overhaul of engines at 4,000 hours) and a fixed component (inspection due every 48 months).

2.    A well-maintained aircraft can see relatively low costs for extended periods, followed by a significant expense when a major cost item – such as that engine overhaul – comes due.

Naturally, the variable nature of when maintenance costs occur can make budgeting difficult to understand. Hourly engine maintenance program costs are predictable and will stabilize your budget while preserving aircraft value by reserving funds for future maintenance.

It is important to understand the nature of maintenance costs if you wish to accurately predict them in your budgeting and long-term cost planning.

Did you miss the first part of this article? Read how to understand your jets maintenance costs here.