As Christmas approached- you knew what came with it. Credit card bills! But only after you’d been out to buy a bunch of presents! Have you noticed how the stores try their best to hook you on the upgrades and impulse buys? While buying a DVD- they have a display of the latest DVD players…and that new player works best with that new big screen to watch it on! For the unwary- the $19.95 DVD totals out to over $1-500.Back to Articles
Avoid Impulse Decisions!
Planning for your aircraft replacement.
As Christmas approached- you knew what came with it. Credit card bills! But only after you’d been out to buy a bunch of presents! Have you noticed how the stores try their best to hook you on the upgrades and impulse buys? While buying a DVD- they have a display of the latest DVD players…and that new player works best with that new big screen to watch it on! For the unwary- the $19.95 DVD totals out to over $1-500.
In reality- an ‘impulse buy’ of that big screen 3D TV had some advance planning (or desire). Impulse buys may include the DVD player- but not the TV. The bigger the purchase- the more the planning and decision- making needed.
GAMA data shows that the last quarter of the year accounts for a disproportionate share of aircraft deliveries - sometimes as much as 40% of the year's total for business aircraft. Well before December- a decision was made to replace the company aircraft. And with the new aircraft (or newer aircraft) comes new decisions to be made as to when to replace the existing aircraft.
One operator we are working with is in the process of deciding on when to replace their current business aircraft. It currently does a fine job for them and their future mission requirements indicate no need for different capabilities. But the aircraft is about 14 years old. It is on a Guaranteed Maintenance Program (GMP) and they are seeing significant price increases in both their GMP rates and overall maintenance.
Within the next few years the aircraft will need paint and interior refurbishment- some major engine work and a significant airframe inspection. Even with having the reserves in the GMP- they are facing some big out-of-pocket expenses. If they sold their aircraft soon- the next operator would have a few years' operation before facing those major maintenance events.
But the market today is down- especially for older business jets. If they wait for the market to turn- which may be a year or more away- they are that much closer to the major maintenance events and there is no certainty that the residual value for their aircraft will recover. If they hang onto the aircraft and spend the money- will it add value or just make it easier to sell?
Meanwhile- newer avionics such as enhanced and synthetic vision are making newer aircraft more attractive- as well as enhancing the safety of operations. As their aircraft ages- the increase in unscheduled maintenance means an increase in maintenance down-time. Our data suggests that availability drops from the 95% range for aircraft up to 15 to 20 years of age to an average of 70% at age 25 and 55% at age 30. Looking at it another way- it typically takes two older aircraft to have the same availability as one newer one!
The in-service rate of older aircraft parallels the availability rate. We looked at a number of popular business jet and turboprop models. We looked at the number produced in any given year and how many were still listed as 'actively in use' after a number of years.
Up to age 20- almost 100% of the aircraft produced are in-service. At age 25- the average in-service rate is 90% but can be as low as 75% for some makes/models of aircraft. At age 30- the average in-service rate is just under 80% and below 50% for some makes/models- and at age 35 the average rate is just about 50%. This declining in-service rate means higher costs- reduced availability and perhaps the need for additional lift.
Since the client has utilization- aircraft availability is important to their mission. They also would like to have the safety and mission effectiveness of today's newer avionics. So they face a number of options:
• If they sell now- they lose on the depressed residual value of their current aircraft.
• If they buy now- they gain more on the discounts available with a new aircraft.
• If they keep their current aircraft and sell later- they still lose on its resale but don't know about any possible discounts off the cost of new.
• If they keep the current aircraft- operating costs will increase- and availability is likely to decrease.
We are in the process of looking at all their options and the costs of each of them. The final decision will also depend upon various value judgments on their part regarding more modern avionics- their desire for increased capability of new models- etc. We know the operating costs are less with new aircraft- but the acquisition cost of a new aircraft must be part of the evaluation equation. The ultimate answer will only be correct for them!
Each case is different- and the value to each aircraft owner of the various options can change with each owner's specific requirements. The important thing is that they are working the numbers and discussing the pros and cons of the various alternatives. So when they make their decision- it will be one based on analysis- rather than the last minute impulse decision!
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