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When To Do Life Cycle Costing
Know what you’re paying for your prospective or current airplane.

We are working with several clients who are looking at acquiring their first aircraft. Initially they were attracted by the decline in aircraft values over the past year. However- in our analysis- we are looking beyond just the great buys available- to evaluate all the costs associated with owning and operating an aircraft. We are referring to Life Cycle Costing.

Life Cycle Costing takes into account not only what the acquisition cost is- but also operating expenses- leasing or financing costs- and takes it to a length equal to the expected length of ownership.

Really- there are only two reasons to do one. When acquiring an aircraft. New versus used- versus different hours/ages: all can have an effect on the costs. You can compare the costs for different types of aircraft. Some may have higher maintenance costs; others may have higher fixed costs.

What are the major maintenance items and when do they occur? How does a guaranteed maintenance program change the equation? You can also compare different aircraft of the same model. One may have high time- one may be older than the other- and one may have fresh paint and interior. All of these and more change the costs and market value.

Life Cycle Costing is also useful in comparing different forms of ownership. What about a loan or a lease? Shared or co-ownership versus full-ownership? Fractional ownership? All have their place and depending on your situation- you will likely need to consider more than one option.

What if you put the aircraft on someone's charter certificate to gain charter revenue? Along with the charter revenue you will have increased operating costs associated with the higher utilization. Will the revenues offset the costs enough to make it worthwhile?

Life Cycle Costing allows you to evaluate the costs of these options and compare them side-by-side. It also allows you to see the timing of major costs and the effect that changing a variable such as acquisition cost or utilization will have on the total costs.

The second time to do Life Cycle Costing is as part of your annual budgeting for next year. Rather than comparing one aircraft to others- in this case you focus in on the short-term as well as review the long-term costs of your current aircraft.

In comparing your costs to previous years- you may start to see a pattern emerging - such as steadily increasing costs. As you see your costs changing over time- you can begin to get a feel for when you need to evaluate replacing your current aircraft.

A spreadsheet (such as our Life Cycle Cost) will make the calculations a snap. You need sufficient detail so that you can see where the dollars are flowing. You will need to know your costs- whether they are pre-loaded or your own. Use the same assumptions when comparing different aircraft. You may wish to set up a table showing the options and the costs.

A big variable is how long to run the costs? If you are evaluating new or replacement aircraft- how long do you expect to own it?

While the average length of ownership for turbine airplanes is six to eight years- your own situation is the determining factor. Beyond that length- the variability in costs will increase and thus- the validity of the numbers will decline somewhat. So while you can run a 20-year Life Cycle Cost- you need to use those numbers as relative costs and not a firm budget.

If you are doing Life Cycle Costing for your own aircraft- the next 12 months are crucial- and deserve your careful analysis. Still- you should look out about five years to understand your long-term costs and to be aware of when major maintenance items are scheduled to occur.

Once your initial analysis is set up- it is easy to update and adjust. Life Cycle Costing is a useful tool in both the acquisition process and in the management of your current aircraft's operating costs.

David Wyndham is an owner of Conklin & de Decker. The mission of Conklin & de Decker is to furnish the general aviation industry with objective and impartial information in the form of professionally developed and supported products and services- enabling its clients to make more informed decisions when dealing with the purchase and operation of aircraft. With over 1-800 clients in 90 countries around the world- Conklin & de Decker combines aviation experience with proven business practices.

More information from
www.conklindd.com; Tel: +1 508 255 5975

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