Avoid Misconceptions About Aircraft Costing

NAFA member, David Wyndham with Conklin & de Decker, discusses the costs to owning an aircraft after the initial purchase.

What are some common misconceptions about aircraft costs? David Wyndham details some that he comes across on a regular basis, providing advice on how to avoid them…

Most misconceptions about aircraft cost result from connecting something that we’re familiar with (such as the cost of running an automobile or building a house) and using those as an analogy for the unfamiliar cost of owning and operating an aircraft.

The biggest misconception is focusing too heavily on the acquisition cost, to the detriment of operating costs and asset value over time. Let’s illustrate with an example…

I have a client who has a maximum acquisition budget of $20m. This is a real limit and not one to exceed. There is, however, a possible misconception that can arise if we were to look at Aircraft A (with a selling price of $20m) and Aircraft B ($17m) and conclude that Aircraft B is the less costly option.

The only way to know which aircraft costs “less” would be to evaluate the total costs to acquire, operate and dispose of the aircraft. Two of the major costs that must be factored are the operating costs (including maintenance) and the estimated residual value after a set timeframe.

Hourly Variable Costs

Looking at our current scenario (represented in Table A), Aircraft A has a lower fuel consumption than Aircraft B while the engine maintenance costs are similar. Aircraft B has lower airframe maintenance costs, meanwhile.

Aircraft Hourly Variable Costs

Yet even in factoring variable costs, there’s more to consider. For example, Aircraft A flies 8% faster than Aircraft B. The faster aircraft will use fewer hours to fly the same trips form point of origin to destination. Therefore, if Aircraft A flies 400 hours annually, Aircraft B will require 432 hours to cover the same missions.

Annual Variable Costs

Table B sets out the annual variable cost for each aircraft, factoring the required annual hours. As depicted, Aircraft A costs almost 10% less in variable cost per year than Aircraft B.

With both aircraft having about $650k per year in fixed costs, the annual operating budget favors Aircraft A slightly. While not enough to make up the $3m price difference, it does account for about $1m over 10 years. But before we can draw any conclusions, there is more…

Aircraft Annual Variable Costs

Life Cycle Costing

Let’s assume Aircraft A is a popular model and is currently selling better than Aircraft B. Current market values for Aircraft A are being maintained better than for Aircraft B – therefore, after 10 years the estimated value (in dollars and percent) is higher for Aircraft A. Table C represents our ten-year Life Cycle Cost for each aircraft.

Aircraft Lifecycle Costing

In Summary…

Aircraft A costs about the same to own and operate as Aircraft B. Our analysis has shown that making the purchase decision based on acquisition price alone doesn’t tell the entire story.

In the above example, we needed to evaluate parameters beyond the costs alone to determine which aircraft would provide the better value. And once you’ve achieved a solid cost analysis, there are additional factors to consider. Does Aircraft A have better support and a longer range than Aircraft B, for example?

Never let a spreadsheet make a purchase decision for you. And, never just look at a single cost item when evaluating the aircraft that best fits your budget. Aircraft are not commodities sharing essentially the same characteristics, which is why I stress to my clients to look for a best value when making the aircraft buying decision.

Costs are a very important part, but even the total costs do not tell the entire story. For the record, my client has yet to make the final decision on which aircraft to purchase…

This article was originally published on AvBuyer.com on July 16, 2018.