Data Driven

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That which is measured improves…
For professionals who fly with precision and leave nothing to chance, Business Aviation leaders need to to apply metrics in their managerial duties as they do in the cockpit.

Conventional Wisdom has a quaint, comforting sound to it. Unfortunately, when challenged or tested, much of it can be found to be based on half-truths. Aviation is a science. Professional pilots pride themselves on the precision of their flying. The management of the flight departmental also requires precision. Thus, as a Board, you should be looking for useful ways to measure your Flight Department’s performance and the value of the company aircraft as a business tool.

One area that is ideally suited for measurements is the maintenance condition of the aircraft. Scheduled Airlines were the first drivers of reliability-centered maintenance. Conventional wisdom years ago suggested that old parts fail most frequently and that the best way to prevent a problem was to over-build a part initially and replace it while much of its useful life remained.

Research driven by data and expanded over many years led to aircraft maintenance systems that now are both robust and cost-effective. Today, parts are replaced when their condition warrants replacement—hence the name “on-condition” for such a maintenance protocol. Business Aviation was late to adopt this view, but today this community is a leader in data-driven maintenance.

In particular, the civil helicopter community has taken a leadership role in maintenance monitoring with Health and Usage Monitoring Systems, typically known as HUMS. With over a decade of experience, the civil helicopter industry has discovered that not only does aircraft reliability increase when aircraft condition is monitored, there also are benefits to safety and operational control too.

CAMP Systems started out with basic computerized maintenance tracking. Today the company has developed advanced systems for tracking and reporting the maintenance condition of the aircraft, and has expanded into engine health monitoring for Pratt & Whitney and Honeywell engines. Other third party companies also work on data collection systems for business aircraft.

Factory Furnished Equipment
Meanwhile, Gulfstream’s PlaneConnect is an aircraft health, trend and monitoring system that collects reams of data on the aircraft’s status and datalinks that information to the maintenance team on the ground for analysis as the aircraft begins its descent for landing. Thus ground crews are aware of any issue that must be addressed prior to the aircraft’s next departure.

Dassault Falcon is implementing a similar system with its newest models. The Falcon 5X will be equipped with an on-board self-diagnosis system called FalconScan, which will monitor the aircraft systems and collect about 10,000 parameters in real time. The technological advancement that has enabled monitoring of aircraft condition is the ability for near instant communication. The Internet, Wi-Fi, cellular data and satellites have provided real-time data collection and reporting to the flight department.

Today, Business Aviation recognizes the use of data tracking for maintenance. In fact, it is difficult to sell a turbine airplane that does not have some sort of electronic record keeping and maintenance reporting. For the aircraft and engines, we are moving toward measurements and data reporting in real-time.

But there are many more opportunities to make use of data in the management of the aviation operation. Tracking internal engine temperatures can lead to better understanding of the wear inside an engine. Tracking the operations of the flight department itself can also yield valuable metrics that aviation managers can use to minimize fuel burn and fly more efficiently.

While quality control engineer and statistician W. Edward Deming is often credited with saying “What you don’t measure can’t be managed” (he didn’t), measurements for measurement’s sake leads to data overload and an inability to see the trends that matter. With regards to measurements, the corollary statement is, “If you step on the scale, you’d better do something about it.” Raw data without a system for analysis and a mindset to use the information data provide, are of little value.

Management’s Role
Data-based management starts at the top. A corporation thrives on profit and loss. Management has a number of metrics that indicate not only the current profitability of the company, but trends that will affect long-term profitability. What are some of the metrics your company uses for its various business units?

Yardsticks need to be tailored to the business function. A metric that works for Human Resources might lack meaning and usefulness in the manufacturing process. What are the metrics, or “keep” measures, that can help determine how well your flight department is doing its job?

Business Aviation is a means of transportation for the firm’s personnel and clients. As such, immediately after safety, service should be your Flight Department’s top priority. Measuring customer service, however, is not a familiar activity. With safety, accidents are a terrible measure, but they are indeed a metric. Organizations that value safety seek smaller measures like incidents as well as processes and procedures that are not followed properly, to track their quest for safe operations. Using such measures, intervention can be instituted before tragedy happens.

The concept of developing and using metrics can be applied by the aviation manager to identify problem areas before they become debilitating. Successes also can be measured. Knowing what to measure and tracking trends will yield small, but meaningful improvements.

Data to be measured can be more than hours flown and passengers carried. Things like denied trip requests and days the aircraft is unavailable due to maintenance can lead to a discussion of whether the current aircraft is adequate or whether it is time for another aircraft. Tracking sales made by passengers flown on the business aircraft as well as new contracts signed as a result of meeting with clients also are very important metrics of a business aircraft’s usefulness.

Flight departments should be led by managers who appreciate the need to be data oriented. Part of this mindset comes from the corporation’s culture. I’m working with several companies to develop and maintain various metrics that the flight departments can use to improve the levels of service as well as better manage their costs. Staffing, additional duties, and days away from home are also being looked at by this group. Using a data-driven philosophy, the group is making positive progress to improve as a flight department and service organization for the corporation.

Just as the flight department needs to focus on supporting the goals of the company, so must metrics support the ability of the flight department to use their assets wisely and cost effectively. Organizations like the National Business Aviation Association and Helicopter Association International are supporting these measurements though education and industry cooperatives. The leadership of this effort comes from forward-looking aviation managers who understand and support the needs of the corporation.

Data Driven

Upgrade or Replace Your Aircraft?

The owners of a 10-year old light jet were facing the possibility of significant avionics upgrades in the next few years. They were also considering replacing the aircraft during the same timeframe. While the upgrade would add value to the aircraft and might make it easier to sell, what path was best for the owners?

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There are many types of upgrades available for popular aircraft that can change them from unacceptable burdens to mission capable assets while reducing their costs of operation. When does it work to do the upgrade, and when doesn’t it?

Certain avionics upgrades may be required just to keep an aircraft flying. The FAA “NextGen” navigation system is requiring new avionics equipment be installed by 2020 to allow aircraft to use the air navigation system. Modifying the aircraft can be costly. This is especially true for older models with low values. Some aircraft may require even more avionics upgrades to operate globally, especially  or in Europe. Do you do only the FAA-required upgrade and avoid trips to Europe? Do you acquire a new aircraft? Your flight department must consider several options to evaluate the upgrade/replace decision.

When to Do the Upgrade
Upgrades fall into two categories: adding new safety features and adding new capabilities. Certain upgrades associated with the FAA’s NextGen program will be required by 2020 just to maintain the aircraft’s operational viability. Either you spend the money or sell the aircraft for parts. If you require new avionics but don’t need the advantages of a new aircraft, such as more range, speed or cabin volume, the upgrade path may work.

Possibly you seek to add performance, such as better fuel efficiency or range. Companies like Aviation Partners, Raisbeck and Blackhawk have been quite popular for many years. They, and others, have aerodynamic and engine upgrades that allow your current aircraft to fly faster, further, or both. Sierra Industries offers Williams engine upgrades for older Citations that add speed and range.

Nextant Aerospace is remanufacturing older Beechjets into Nextant 400XTi’s – complete with new engines, new avionics and a new interior. Nextant is being joined by an engine upgrade from Textron. Other companies offer engine modifications as well.

There are a number of avionic upgrades available from Avidyne, Garmin, Honeywell, Rockwell-Collins and others. Third party specialists are also doing modifications that range from updated navigation gear to a full (glass) panel replacement. When looking at new systems, consider what the current variant of your aircraft (or closest relative) has for its avionic system. Done right, these systems enhance both safety and reliability.

For the passenger cabin, interior specialists offer all sorts of options for in-flight entertainment and airborne Internet as well as new seat designs and modern materials.

It’s Personal
Before you undertake such a major project, however, here are some things to consider:
If you need “more” as in seats, payload or room, your only true alternative is acquiring a larger aircraft.

Aircraft age is also an issue. Older aircraft cost more to maintain than newer ones. Wear and tear items, aging aircraft issues, and engine overhauls all drive costs up. Your aircraft must be in excellent mechanical condition and essentially free of corrosion, otherwise don’t consider the upgrades.

Some upgrades add value to your aircraft while others add value only to you. With today’s market, do the upgrade if it has value to you. If it has value in the market place, so much the better but do it primarily for you. Unique is great with art, not with aircraft. Stick with established programs with a successful track record. Do equipment upgrades that mirror the new models or closest equivalents. Those will tend to have the best impact on resale value and also maintenance supportability.

There is a trade off between putting money into an existing aircraft and replacing it. A decade or two ago, you could always avoid the upgrade analysis and sell the aircraft to a buyer outside the US. That is not so easy anymore. Countries in South America, Africa and Asia are upgrading their air traffic and navigation systems. Many of them are looking toward Europe’s airspace as their model. In today’s economic conditions, spending money on an upgrade may not result in a 100% return on the investment, especially on older turbine-powered airplanes.

For example: upgrading the engines on a King Air C90 can run to over $700,000. A 20-year old C90B sells for just over $1 million. Looking at today’s market, its doubtful that the upgraded C90B can recoup 100% of the upgrade at resale. The engine upgrade will add to the aircraft’s value, but don’t do it just to resell the King Air after the retrofit. The likelihood of recovering all your money is very low. Do it because it adds value to you.
If you are upgrading just for a significant mission, but that mission is infrequent, consider the alternative.

It might be more cost effective to charter an aircraft for the occasional European trip rather than upgrade your company’s existing aircraft?

Budget carefully and talk to other operators who have done the same upgrades. Ask your accountant to run the numbers, including all tax considerations as well as your cost of borrowing the funds needed to upgrade or replace. As long as your current aircraft is in excellent mechanical condition and you plan to keep it for the next few years, the added utility and flexibility of the upgrade may add all the value you need.

Upgrade or Replace Your Aircraft?

Benchmarking for Business Aviation

 

Benchmarking is much more than asking a golfing friend questions about his Flight Department.  It is a disciplined approach to measuring performance.

You cannot manage what you do not measure. Benchmarking is a measurement against a norm or set of standards. It is a management tool for assessing an organization’s performance against its stated goals. Internal benchmarks relate to key performance indicators established by management.  External benchmarks are measurements against the performance and norms of firms in the same or related businesses. You can benchmark against an industry standard or benchmark among peers.

Benchmarking against an industry standard is helpful to see how your company compares to an external set of best practices or measures. You need to know the basis for the standard since measurements should compare apples with apples, not oranges (so to speak). For example, benchmarking against a standard set of aircraft operating costs is common.  To be meaningful, however, you must know how the standard is calculated and what are the assumptions.  When benchmarking with other Flight Departments, ask your peer to explain how his or her metrics aligned with the means you use to calculate costs.

Peer-to-peer benchmarking can be useful when the peer group is comparable.  A manufacturing company benchmarking with a pharmaceutical company may not yield a fair comparison. What are the organizational, cultural and strategic elements of the peer group? Are they all public companies? Does everyone in the group fit in well organizationally? No two companies can compare exactly, but vast differences among peer companies can lead to misinformation or poorly stated and understood benchmarks.

Four Elements of Good Benchmarking

Benchmarks must be relevant. Average passengers carried is a great measure for a passenger shuttle operation. But if the business aircraft is used to carry the CEO and family as part of a security program, load factor is of little relevance.Also, what you benchmark should be impactful as it relates to your corporate goals or industry practices. Who can authorize the use of the aircraft? Do you have chargebacks for the use of the aircraft and if so, what are they based on? How your Flight Department compares to others can be insightful only if the measures and benchmarks used align with your own organization’s goals.
A benchmark should be simple to collect. For example, you and your doctor feel that you are carrying too much body fat. You can either take a number of body measurements with calipers, do a bioelectrical impedance analysis, or you can just step on a scale. Which measurement will help you lose weight most effectively and with the lest effort? Your Flight Department already counts things like hours flown, passengers carried, destinations served, etc. Comparing those figures with the performance of Flight Department in the same region of the country and in a similar business is a simple way of assessing performance.

A benchmark measure also needs to be consistent. When you are benchmarking things like costs, how they are calculated and compared must be consistently measured with the same yardstick. For example, what you are paying for aviation fuel can be misleading. Operator A buys fuel at its local airport fixed base operator (FBO) and pays $4.50 per gallon. Operator B just installed a private fuel farm and pays wholesale $2.50 per gallon. But excluded from Operator B’s fuel figure is the cost of the fuel storage tank and fuel truck used to refuel the aircraft. Consistency year-to-year is needed in order compare performance over time. A benchmark’s definition may need to change to reflect changes in how business is done, but be careful that the usefulness of the historical trend remains intact.

If you step on the scale, you’d better be prepared to do something about it.

Perhaps the most important element of effective benchmarking is what you do with the data.

Benchmarking should lead to action, or at least the contemplation of action. If you benchmark salaries and find that your department wages are below the national average or below your peer group average, you may wish to look at increasing salaries and benefits (especially if you have high employee turnover). Being above or below the norm in a benchmark should lead to the question why.

Benchmarking Must Align with Company Goals

Your company’s strategic goals and mission determine how you benchmark. A utility company with nuclear power plants has one aircraft and crew on standby 24-hours a day in case of an emergency. They have a different requirement for how many pilots to employ versus a company that uses their business aircraft during normal business hours, five days per week. You need to determine benchmark criteria that relate to the outcomes your company wants to achieve.

Benchmarking can be a powerful tool that can help your flight department stay focused on the corporation’s goals and provide feedback critical to improving the quality of the services provided.

 

 

 

 

Benchmarking for Business Aviation

The Virtue of Data-Driven Management

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That which is measured improves…

For aviation professionals who fly with precision and leaves nothing to chance, it is time for them to apply metrics in their managerial duties.

Conventional Wisdom has a quaint, comforting sound to it. Unfortunately, when challenged or tested, much of it can be found to be based on half-truths. Aviation is a science. Professional pilots pride themselves on the precision of their flying. The management of the flight departmental also requires precision. Thus, as a Board, you should be looking for useful ways to measure your Flight Department’s performance and the value of the company aircraft as a business tool.

One area that is ideally suited for measurements is the maintenance condition of the aircraft. Scheduled Airlines were the first drivers of reliability-centered maintenance. Conventional wisdom years ago suggested that old parts fail most frequently and that the best way to prevent a problem was to over-build a part initially and replace it while much of its useful life remained.

Research driven by data and expanded over many years led to aircraft maintenance systems that now are both robust and cost-effective. Today, parts are replaced when their condition warrants replacement—hence the name “on-condition” for such a maintenance protocol. Business Aviation was late to adopt this view, but today this community is a leader in data-driven maintenance.

In particular, the civil helicopter community has taken a leadership role in maintenance monitoring with Health and Usage Monitoring Systems, typically known as HUMS. With over a decade of experience, the civil helicopter industry has discovered that not only does aircraft reliability increase when aircraft condition is monitored, there also are benefits to safety and operational control too.

CAMP Systems started out with basic computerized maintenance tracking. Today the company has developed advanced systems for tracking and reporting the maintenance condition of the aircraft, and has expanded into engine health monitoring for Pratt & Whitney and Honeywell engines. Other third party companies also work on data collection systems for business aircraft.

Factory Furnished Equipment
Meanwhile, Gulfstream’s PlaneConnect is an aircraft health, trend and monitoring system that collects reams of data on the aircraft’s status and datalinks that information to the maintenance team on the ground for analysis as the aircraft begins its descent for landing. Thus ground crews are aware of any issue that must be addressed prior to the aircraft’s next departure.

Dassault Falcon is implementing a similar system with its newest models. The Falcon 5X will be equipped with an on-board self-diagnosis system called FalconScan, which will monitor the aircraft systems and collect about 10,000 parameters in real time. The technological advancement that has enabled monitoring of aircraft condition is the ability for near instant communication. The Internet, Wi-Fi, cellular data and satellites have provided real-time data collection and reporting to the flight department.

Today, Business Aviation recognizes the use of data tracking for maintenance. In fact, it is difficult to sell a turbine airplane that does not have some sort of electronic record keeping and maintenance reporting. For the aircraft and engines, we are moving toward measurements and data reporting in real-time.

But there are many more opportunities to make use of data in the management of the aviation operation. Tracking internal engine temperatures can lead to better understanding of the wear inside an engine. Tracking the operations of the flight department itself can also yield valuable metrics that aviation managers can use to minimize fuel burn and fly more efficiently.

While quality control engineer and statistician W. Edward Deming is often credited with saying “What you don’t measure can’t be managed” (he didn’t), measurements for measurement’s sake leads to data overload and an inability to see the trends that matter. With regards to measurements, the corollary statement is, “If you step on the scale, you’d better do something about it.” Raw data without a system for analysis and a mindset to use the information data provide, are of little value.

Management’s Role
Data-based management starts at the top. A corporation thrives on profit and loss. Management has a number of metrics that indicate not only the current profitability of the company, but trends that will affect long-term profitability. What are some of the metrics your company uses for its various business units?

Yardsticks need to be tailored to the business function. A metric that works for Human Resources might lack meaning and usefulness in the manufacturing process. What are the metrics, or “keep” measures, that can help determine how well your flight department is doing its job?

Business Aviation is a means of transportation for the firm’s personnel and clients. As such, immediately after safety, service should be your Flight Department’s top priority. Measuring customer service, however, is not a familiar activity. With safety, accidents are a terrible measure, but they are indeed a metric. Organizations that value safety seek smaller measures like incidents as well as processes and procedures that are not followed properly, to track their quest for safe operations. Using such measures, intervention can be instituted before tragedy happens.

The concept of developing and using metrics can be applied by the aviation manager to identify problem areas before they become debilitating. Successes also can be measured. Knowing what to measure and tracking trends will yield small, but meaningful improvements.

Data to be measured can be more than hours flown and passengers carried. Things like denied trip requests and days the aircraft is unavailable due to maintenance can lead to a discussion of whether the current aircraft is adequate or whether it is time for another aircraft. Tracking sales made by passengers flown on the business aircraft as well as new contracts signed as a result of meeting with clients also are very important metrics of a business aircraft’s usefulness.

Flight departments should be led by managers who appreciate the need to be data oriented. Part of this mindset comes from the corporation’s culture. I’m working with several companies to develop and maintain various metrics that the flight departments can use to improve the levels of service as well as better manage their costs. Staffing, additional duties, and days away from home are also being looked at by this group. Using a data-driven philosophy, the group is making positive progress to improve as a flight department and service organization for the corporation.

Just as the flight department needs to focus on supporting the goals of the company, so must metrics support the ability of the flight department to use their assets wisely and cost effectively. Organizations like the National Business Aviation Association and Helicopter Association International are supporting these measurements though education and industry cooperatives. The leadership of this effort comes from forward-looking aviation managers who understand and support the needs of the corporation.

The Virtue of Data-Driven Management

Making the Upgrade/Replace Decision

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This post examines whether upgrading or replacement of your business aircraft is appropriate.

The owners of a 10-year old light jet were facing the possibility of significant avionics upgrades in the next few years. They were also considering replacing the aircraft during the same timeframe. While the upgrade would add value to the aircraft and might make it easier to sell, what path was best for the owners?

There are many types of upgrades available for popular aircraft that can change them from unacceptable burdens to mission capable assets while reducing their costs of operation. When does it work to do the upgrade, and when doesn’t it?

Certain avionics upgrades may be required just to keep an aircraft flying. The FAA “NextGen” navigation system is requiring new avionics equipment be installed by 2020 to allow aircraft to use the air navigation system. Modifying the aircraft can be costly, especially for older models with low values. Some aircraft may require even more avionics upgrades to operate globally, especially in Europe. Do you do only the FAA-required upgrade and avoid trips to Europe? Do you acquire a new aircraft? Your flight department must consider several options to evaluate the upgrade/replace decision.

When to Do the Upgrade

Upgrades fall into two categories: adding new safety features and adding new capabilities. Certain upgrades associated with the FAA’s NextGen program will be required by 2020 just to maintain the aircraft’s operational viability. Either you spend the money or sell the aircraft for parts. If you require new avionics but don’t need the advantages of a new aircraft, such as more range, speed or cabin volume, the upgrade path may work. Possibly you seek to add performance, such as better fuel efficiency or range. Companies like Aviation Partners, Raisbeck and Blackhawk have been quite popular for many years. They, and others, have aerodynamic and engine upgrades that allow your current aircraft to fly faster, further, or both. Sierra Industries offers Williams engine upgrades for older Citations that add speed and range.

Nextant Aerospace is remanufacturing older Beechjets into Nextant 400XTi’s – complete with new engines, new avionics and a new interior. Nextant is being joined by an engine upgrade from Textron. Other companies offer engine modifications as well. There are a number of avionic upgrades available from Avidyne, Garmin, Honeywell, Rockwell-Collins and others. Third party specialists are also doing modifications that range from updated navigation gear to a full (glass) panel replacement. When looking at new systems, consider what the current variant of your aircraft (or closest relative) has for its avionic system. Done right, these systems enhance both safety and reliability.

For the passenger cabin, interior specialists offer all sorts of options for in-flight entertainment and airborne Internet as well as new seat designs and modern materials.

It’s Personal
Before you undertake such a major project, however, here are some things to consider:
If you need “more” as in seats, payload or room, your only true alternative is acquiring a larger aircraft.

Aircraft age is also an issue. Older aircraft cost more to maintain than newer ones. Wear and tear items, aging aircraft issues, and engine overhauls all drive costs up. Your aircraft must be in excellent mechanical condition and essentially free of corrosion, otherwise don’t consider the upgrades.

Some upgrades add value to your aircraft while others add value only to you. With today’s market, do the upgrade if it has value to you. If it has value in the market place, so much the better but do it primarily for you. Unique is great with art, not with aircraft. Stick with established programs with a successful track record. Do equipment upgrades that mirror the new models or closest equivalents. Those will tend to have the best impact on resale value and also maintenance supportability.

There is a trade off between putting money into an existing aircraft and replacing it. A decade or two ago, you could always avoid the upgrade analysis and sell the aircraft to a buyer outside the US. That is not so easy anymore. Countries in South America, Africa and Asia are upgrading their air traffic and navigation systems. Many of them are looking toward Europe’s airspace as their model. In today’s economic conditions, spending money on an upgrade may not result in a 100% return on the investment, especially on older turbine-powered airplanes.

For example: upgrading the engines on a King Air C90 can run to over $700,000. A 20-year old C90B sells for just over $1 million. Looking at today’s market, its doubtful that the upgraded C90B can recoup 100% of the upgrade at resale. The engine upgrade will add to the aircraft’s value, but don’t do it just to resell the King Air after the retrofit. The likelihood of recovering all your money is very low. Do it because it adds value to you. If you are upgrading just for a significant mission, but that mission is infrequent, consider the alternative. It might be more cost-effective to charter an aircraft for the occasional European trip rather than upgrade your company’s existing aircraft.

Budget carefully and talk to other operators who have done the same upgrades. Ask your accountant to run the numbers, including all tax considerations as well as your cost of borrowing the funds needed to upgrade or replace. As long as your current aircraft is in excellent mechanical condition and you plan to keep it for the next few years, the added utility and flexibility of the upgrade may add all the value you need.

Making the Upgrade/Replace Decision

New or Pre-owned: Part 3 — Financing

This concludes the 3-part series of pivotal considerations for companies and entrepreneurs seeking to acquire a business aircraft.

In the previous articles of this series, I touched on only two aspects of the new vs. per-owned question: acquisition cost and operating costs. While those are two significant areas in arriving at a purchase decision, we always recommend looking at the full life cycle cost of owning and operating the aircraft.  Some fixed costs such as crew salaries, hangar and liability insurance may be unrelated to the new-vs-pre-owned question. But what about financing the acquisition? Are there more favorable terms for new aircraft? What about residual value of the aircraft at the end of your ownership? For business use, taxes and tax depreciation are also important.

Financing

When looking at the costs to acquire, operate and dispose of the aircraft, used aircraft can often have a significant cash advantage. Consider the new and five-year old mid-sized business jets we used as illustrative in Parts 1 and 2 of this series as an example:

screen-shot-2016-12-19-at-12-20-59

 

 

 

 

 

 

 

 

New aircraft tend to secure better financing or leasing rates than pre-owned equipment. Post-2008, aircraft values took a major tumble, and they have not fully recovered. Newer aircraft remain on the market less time than older aircraft. Several aviation finance experts believe that the aircraft must be less than age 20 at the end of the finance/lease term for the deal to be financially safe. While that advice is a generalization, financing terms and rates support that position.

Financial institutions do not mind taking a residual value risk on an aircraft that is five or ten years old at the end of the lease or finance term. They are much more wary of 20-year and older aircraft, however. For a new business aircraft, 100% financing at low single-digit rates are available for the best credit risks. Older aircraft tend to require 20% to as much as 50% down to secure financing. Lease rates and terms also favor the new business aircraft: a 10-year lease on a new business jet is not a problem, while the bank may balk at longer than five years for a 15-years old business jet.

This fact of financing recognizes that selling a newer aircraft in excellent condition is easier than selling a much older aircraft, even when it is in very good condition. As one example, according to AMSTAT, older Challenger 601-3A models for sale take longer to sell then their new variant, the model 605.

Aircraft                    Percent Fleet for Sale         Average # Days For Sale       Years Built

Challenger 601-3A             12.21%                     495 days                                   1987 – 1993

Challenger 605                    8.55%                      275 days                                    2007 – 2014

In general, newer aircraft sell quicker than their older brethren.

Depreciation: 

Tax Depreciation can narrow the new-versus-used price gap. But the tax advantages are greatest for the first time buyer of the new aircraft. How?

If the aircraft is 100% used for business, 100% of the acquisition price can be depreciated as a business expense. The United States Internal Revenue Service (IRS) allows full depreciation in as little as five years for non commercial operators. Depending on the tax law and whether you can qualify, there has also been a 50% bonus depreciation law that allows up to half the purchase price to be taken in the first year of use for the aircraft. That feature is not available for pre-owned aircraft. So the tax depreciation in the first year of service may allow for a $13.3 million deduction for our new aircraft example. The used aircraft does not qualify for other than the standard IRS allowance. (Note that accelerated depreciation only changes the timing of depreciation, not the duration or amount of total depreciation.)

Aircraft Maximum tax deduction during the first year following acquisition (US)

  • New $13,300,000 if qualify for 50% Bonus
  • Used $ 2,600,000 (MACRS 5-Year)

At a 35% tax rate, the new aircraft with bonus depreciation can have a tax advantage of $3,745,000 ($10.7 million depreciation difference at 35% rate).

This situation often skews the analysis if only the first year is considered.

What happens when you sell the aircraft?

There are two options depending on your subsequent actions regarding aircraft ownership. There will be a capital gains tax on the difference between the sale price and the depreciated value of the aircraft that can negate a significant part of the early deduction. In order to avoid having a capital gains tax on the aircraft sale price less depreciated value, you may be able to defer the gains tax with a 1031 Like Kind Exchange. But in deferring this gain, the basis of the next aircraft you purchase will carry the impact of the depreciated amount, thereby making you unable to depreciate the full value of the replacement aircraft. This can get quite complicated and requires the advice of a tax expert. The huge depreciation advantage of the new aircraft is really only useful in the initial purchase year; its value lessens over time.

Tax planning overseen by a person knowledgeable in the ways of the IRS is required.

Looking at the costs and assuming 100% business use and a 35% tax rate:

screen-shot-2016-12-19-at-12-26-23

 

 

 

 

 

 

 

 

Source: Vref for aircraft values, Conklin & de Decker Life Cycle Cost for operating costs

In the example shown above, the pre-owned aircraft has a net after-tax advantage. This benefit, however, may not always hold true. That is why we always recommend looking at the life cycle costs for each option. Taxes and financing/leasing options may favor one option under particular circumstances.

In summary, new versus pre-owned should take into account mission requirements, aircraft capability, owner preferences and life cycle costs. It can be complicated, so having a consultant’s help can make the decision easier.
Remember to focus on the objective—safe and efficient transportation using a business aircraft.

New or Pre-owned: Part 3 — Financing

New or Pre-owned – Part 2, Pre-Owned

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This is part two off of a three-part series on evaluating options for achieving the benefits of Business Aviation.

Acquisition price is the biggest reason for selecting pre-owned versus new. Since the 2008 recession, the spread between new and used prices has increased. For example, a popular mid-size business jet sells for $26.6 million in 2015. According to Vref Aircraft Value Reference, the 2010 model currently sells for under half that price, at $13 million. A 10-Year old model value is $7 million.

Mid-size Business Jet

Price New = $26.6 million

5-Year old model = $13 million (49% of new)

10-Year old model = $7 million (26% of new)

Rather than buying the same model aircraft new, another option is to upgrade to a large pre-owned aircraft using the same $26 million. We do not normally recommend this option, however: you should buy the aircraft that meets your needs and that you can afford to operate. Operating a large aircraft will cost more, sometimes much more.

Another advantage of the pre-owned aircraft is the time to put the acquisition into service. Popular new aircraft can have waiting times of 12 to 18 months or longer between order and delivery. Even if the new aircraft is in stock, selecting interior appointments and equipment options will take time. A pre-owned aircraft can be put into service quite quickly, depending on the time needed for the financial, legal and contract processes, plus scheduling and accomplishing a pre-buy inspection. For a cash deal it may be possible to put an aircraft into service in a matter of weeks.

Budget for upgrades. You may spend $300,000 to $500,000 in new avionics, repainting the aircraft, and perhaps refurbishing the interior, so budget accordingly. Paint is cosmetic and easy to change. As long as the interior is in good physical condition, new soft-goods (leathers, fabrics, carpets, etc.) are relatively inexpensive and easy to change. New avionics for an aircraft manufactured in the past 15 years or less, while not inexpensive, tend to be technologically feasible and able to meet all the future air navigation requirements. These upgrades to the used aircraft also add value when it comes time to resell.

 

 
Operating costs will be higher for the pre-owned aircraft compared with new equipment. The used aircraft probably is no longer in warranty. If an item needs an unscheduled repair or replacement, you are likely to bear the full cost. New parts do come with warranties, but they are far shorter than the new aircraft warranty coverage. An aircraft’s life is measured in flight-hours and cycles (or landings). Even a 10-year old aircraft with 4,000 hours is still young if it has been maintained properly.

As aircraft age, they tend to require more maintenance. For example, one large business jet has routine scheduled checks every six months or 300 hours. These are relatively minor. Every six years there is a major inspection that costs upwards of $500,000. The likelihood for unscheduled maintenance also increases with ag. Our Conklin & de Decker data suggest that the maintenance costs for an older aircraft can be 25% to 50% higher if it has been in service for 5 to 10 years. For a mid-size business jet, maintenance costs (excluding the engines) can add about $200 to $400 per hour to the averaged maintenance cost reserves, compared with a new aircraft of the same design. So for our hypothetical medium-cabin business jet, purchasing used adds about $300 per hour to the operating costs and requires $500,000 expense to put it into service. How is this cost package still an advantage?

The $13.6 million saved by purchasing pre-owned will easily cover the extra maintenance and refurbishment costs over the next ten or more years! The differences in the operating costs by themselves do not negate the pre-owned option. Part of the higher expense of the new aircraft does get returned when the aircraft is sold, however.

Do not overlook the fact that the well maintained used aircraft also loses less in terms of absolute dollars in its market value. When looking at the costs to acquire, operate and dispose of the aircraft, pre-owned aircraft can often have a significant cash advantage.
So in terms of cash, the pre-owned aircraft in the example presented here should stimulate thought, but the devil is in the details, so they say. We always recommend a thorough life cycle cost analysis as the numbers can be very different for each case.

New or Pre-owned – Part 2, Pre-Owned