Supporting a Guaranteed Maintenance Program
I just purchased a new computer for work. It's fast- dependable (a MacBook Pro)… and did I mention that it is fast? One thing offered at the sale was an extended warranty. It is a sort of guaranteed maintenance program in that if my new computer breaks- Apple will fix it.
After discussing with a friend (and Mactech)- I decided that the cost of the extended care outweighed the potential for needing to use it. [Check back with me in three years and I'll let you know if I was right. Computers are expensive- but nothing compared to an aircraft.]
I was just talking with an operator who has several business jets. It’s safe to say they are a large corporation! We were discussing the pros of having their engines on a Guaranteed Maintenance Program- even for a fleet. His CFO was not in favor of letting someone else collect money for future engine maintenance- even with guaranteed costs. He feels that with multiple engines in their fleet- the law of averages would be on their side- and they would spend less money over time by paying for engine maintenance as it occurred- versus paying in advance into an escrow fund. Let's take a look at this from a financial perspective.
All the major turbine engine manufacturers offer some form of an engine Guaranteed Maintenance Program (GMP). Plus there is one major third-party provider of these plans that cover most popular business turbine engines. You pay into an escrow account to cover the future engine maintenance. The GMP provider manages the money and pays the bills.
REASONS TO CONSIDER A GMP
Guaranteed Maintenance Programs cover the scheduled maintenance expenses- plus all unscheduled maintenance- line checks- and depending on the program options selected- rental engines and removal/re-installation and shipping for the overhaul. These programs pay the full cost of the overhaul- not just an 'average' cost. Save for negligence and 'acts of God' which are covered by your insurance- there isn't much that they don't cover.
GMPs offer a stable budget: Accountants love stability in budgeting - so should you. Take the hourly rate multiplied by the number of hours to be flown- and your engine budget for next year is mostly done. Yes- you may have some line maintenance- but that is minor. There are no unplanned-for costs- and no surprises. An engine GMP offers financial peace of mind with contracted- guaranteed rates.
GMP fees can be a business deduction: Aircraft used for business have deductible expenses. However- setting aside cash for future expenses is not a deductible item. Thus- the ever growing 'cash reserve account' can increase the corporation's tax liability. GMP payments can be a tax-deductible expense as the money flows to a third party.
Insurance against costly unscheduled maintenance events: Most turbine engines make it to overhaul- but some do not. Even on-condition engines face similar heavy maintenance events at some time in their life. Once an engine is opened for inspection- the cycle-limited components are also subject to replacement or repair.
I've heard from a few operators who went in for a $50-000 Hot Section Inspection and came out with a $150-000 repair bill. While turbine engines are reliable- when an unscheduled event occurs they can result in significant expenses. An engine GMP provides protection against unscheduled engine maintenance costs.
An engine GMP will add value to your aircraft: Aircraft value sources such as Vref and the Aircraft Bluebook Price Digest either include the GMP in their typical selling price and subtract for engines not on a program- or the program itself is an added value. If you’re selling your aircraft- and the GMP has accrued $350-000 in its account- that is value added to the aircraft in two ways:
1. The cash value of the GMP account itself; and
2. The reduction of risks to the buyer as the engine maintenance cost is covered.
Assume that you are contemplating buying a twin engine business jet that has an estimated $600-000 engine overhaul for each engine: If those engines have 1-500 hours until overhaul is due- the new owner is looking at $800 per hour accrual for their upcoming engine overhaul ($600K x two engines divided by 1-500 hours).
Since that budget is just an estimated cost- the actual cost could be higher. If the engines were on a GMP- that new owner may only be paying $450 per hour GMP rate. Plus- with the engines on a GMP- the new owner has a guaranteed coverage of those engines' maintenance. With engines not on a GMP- the new owner has to assume 100% of the risk and cost of all maintenance. All other things being equal- most turbine buyers will favor the aircraft with engines on a GMP and will pay the premium that these aircraft command.
Lastly- many financial institutions may require that the engines be on a GMP to help protect the value of the asset. It is common for an end of lease requirement that all major components have at least 50% of their life remaining and an adjustment (to the detriment of the lessee) is made for less than half-life remaining on major components such as the engines.
Guess what dollar value per hour they may use in adjusting for engines nearing the overhaul at the end of a lease? Engine Guaranteed Maintenance Programs are a good way to maintain your aircraft value- provide stable budgeting and perhaps even save money over a pay-as-you-go engine. You'd be wise to evaluate these programs for your aircraft!
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