What are some leading myths and realities rotorcraft operators should be clear about? David Wyndham addresses some common issues he encounters regarding helicopter ownership. Learn more here...
Previously, we looked at three myths about aircraft ownership. Much of what was discussed applies to all aircraft types but this time the focus is specifically on helicopter operations. While a couple of the myths have been ‘borrowed’ from the previous article, we approach things here from the perspective of the smaller commercial helicopter operator.
Myth 1: You Can Make Money by Chartering your Helicopter
This is not really a complete myth for a commercial helicopter operator. One caution, however, does copy over from last month: The break-even point can be quite high.
The issue, that many helicopter operators have, is that they face a lot of competition, and with that competition comes some highly competitive pricing. Current market prices would require high utilization for an owner to achieve profitability.
So, there isn’t a lot of extra cash to reserve for future costs or unexpected expenses unless you’re able to fly a lot of charter hours.
Myth 2: You Should Focus on Acquisition Cost Only
If you’re looking to buy a light single-engine turbine helicopter and selecting it solely on price, you do not have enough information to make a qualified buying decision. As an example, which of the two models below would you choose?
Initially, it seems like you would save $300,000 if you acquire the older model. But once you consider the residual value at resale after five years of operation, the older helicopter actually costs approximately $100,000 more to own and operate.
This can be attributed (in part) to maintenance costs, tax depreciation and adjusting the resale value based on the maintenance status at the time of sale.
Moreover, both helicopters also had negative cash flows in three of the five years (as addressed below).
Myth 3: Operating Costs are Consistent, so Budgeting is Easy... Isn’t it...?
Helicopter maintenance costs are cyclical. There are many different intervals for inspections, component overhauls, Life-Limited Parts and retirement items, however. While the basic inspection intervals may be 100 and 300 hours, there are several components with overhauls at different, but still very close, intervals.
For example, there are three components with overhaul intervals at 2,250 hours, 2,400 hours and 2,500 hours. Completing these on time would result in taking the helicopter off the schedule three times.
However, performing them all together at 2,250 hours would increase your costs. Some of the longer-term costs, such as replacing rotorblades and engine overhauls, can lure an operator into a false sense of security. And this brings us on to Myth #4...
Myth 4: If I Ignore the Long-Terms Costs, I’ll Figure Out how to Make it Pay...
The total cost to own and operate our two representative light single-engine turbine helicopters (above) works out at approximately $800,000 over five years.
As mentioned under Myth 2, using typical charter rates for basic commercial work (i.e., not firefighting or EMS), both had negative cash flows in three of the five years.
It took close to 1,000 charter hours per year to derive enough revenue to cover all the expenses in each year.
As implied in Myth 3, some operators don’t always budget for the longer-term high-cost items, such as rotorblade replacements and engine overhauls.
Therefore, those operators may not have the cash available when it’s due. Given the sometimes brutally competitive commercial rates, operators may make minimal profit just covering the routine expenses. With an unscheduled engine removal, tear down and replacement of internal components, there may not be money in the bank to pay the expense, however.
This is especially true for smaller commercial operators who can’t afford to have a significant percentage of their ‘fleet’ grounded. Guaranteed hourly maintenance plans will even out the costs and protect against the unscheduled repairs. However, many small commercial operators cannot afford the up-front accruals.
They would rather figure out how to pay $200,000 in repairs and then overhaul expenses two years down the line, instead of paying $100 per hour for every hour they’re flying in the meantime.
Some may plan to replace their helicopter before the next major maintenance event. The upside is they can maintain high utilization and avoid lengthy downtime for repairs or overhauls.
The downside is that they will take a significant reduction in the resale value when it’s time to sell since the buyer would be inheriting significant maintenance costs soon after purchase.
Many of these hits have an outsize effect on the smaller commercial helicopter operator: Larger operators can better absorb the costs, because they have enough helicopters in service to allow for a small number to be out of service at any one time while still meeting their commitments.
Regardless, operating helicopters in commercial operations requires careful budgeting, cost control, and great marketing skills to acquire and keep customers. The flying is fun, challenging, and varies from job to job. But you’d better have a handle on your costs, or the fun won’t last long...