With a shortage of used aircraft in the market, jet owners can expect to find demand for their aircraft, but how can they ensure that they sell their aircraft at the best price?
The answer lies in the aircraft's powerful engines.
Actionable Insights:
- High cost of Hot Sections
- Returns on Power by the Hour
- Brokers Back Engine Maintenance
- Complicating Factors
- Profiting on Downtime
- Plan Ahead, Stay Ahead
One engine-shop operator uses a rule of thumb that overhauls will cost one-third to one-half of the engine's cost when new.
—Dave Higdon, AvBuyer.
Engine maintenance can boost the sales price of private jets, make the purchase easier to finance, and reassure potential buyers that they are making a wise, hassle-free investment. But engine maintenance requires planning to cover the expense and manage aircraft down-time.
High Costs of Hot Sections
Flight crew perform routine visual checks on the engine condition after every flight, but engines require thorough maintenance checks at different stages of their operational cycles. One of the more expensive tests is the hot section inspection (HSI).
“For engines with a proscribed TBO (Time Between Overhaul), HSI events tend to arrive at the mid-point between zero hours and the TBO limit. For engines with an on-condition TBO cycle, however, HSI times are typically set on a firm schedule, whether 1,500 hours, 1,800 hours, 2,000 hours, or more," Dave Higdon of AvBuyer explains.[1]
“The downtimes vary and costs vary…but anticipate a low six-figure fee to be a starting point for engines that cost in the high six-figures new. Anticipate seven-figure fees for power plants with new-production prices well into eight-figure sums. One engine-shop operator uses a rule of thumb that overhauls will cost one-third to one-half of the engine's cost when new."
Returns On Power By The Hour
It's not all bad news. Think of engine maintenance costs as an investment that improves the asset value, by reducing the maintenance exposure for potential buyers.
Hourly engine maintenance programs, which can be purchased from independent maintenance firms, like Jet Support Services (JSSI), or directly from engine manufacturers, like General Electric's OnPoint program[2], spread out maintenance exposure and can become an advantage when it comes time to sell.
GE Aviation estimates that its OnPoint service for business jets can increase the mid-life aircraft value of Bombardier Challenger 604 and 604 aircraft by as much as $2 million.
As Jeff Dunn, Head of Aviation Asset Management at PNC explains, "The engine overhaul is the single most expensive event that an aircraft will incur over its life, be it a scheduled mid-point inspection around 4,200 hours or on condition. And the hot section runs half of what the overhaul can cost."
This looming large capital expense must be balanced against general depreciation of the aircraft as an asset. While the costs of maintenance are likely to rise over time, the market value of the aircraft will depreciate. For this reason, an aircraft that is under maintenance contract—where the maintenance costs are known and covered—is more valuable.
"Maintenance costs rise, the different types of precious metals used in maintenance rise over time, and labor costs go up," Dunn says. "Whereas the engine maintenance program costs are fixed costs. If you have already paid into it, the value is massive. Whoever bought the aircraft can look at the asset as a zero-time maintenance. And all of these programs are transferrable to the future buyer."
Beyond predictable costs factors, there can also be performance surprises on some aircraft that can impact maintenance—either making it more expensive or pushing up the schedule for major overhaul. Dunn shares the example of the Rolls Royce engines on Bombardier Global Express aircraft.
"When these aircraft were coming out, you would have expected somewhere between $1.5 to $2.0 million engine maintenance investment at half life. But they had planned that to be an 8,000-hour event, and they've been having to go in for their overhauls at 5,000 hours. And as time has gone by, the overhaul costs have risen to as much as $4-$5 million. If you're not on a program—now that the word has gone out to the industry about the issues with these engines—if you are trying to sell an aircraft you'll be at the end of the list of what people want to see, and you will get pummelled in asset value."
Engine maintenance programs are, in this sense, an asset insurance program, avoiding variable maintenance costs and protecting against unpredictable performance, while reducing these risk not only for the current owners but also for future buyers.
However, acquiring an engine maintenance program later may be difficult, which may also complicate a re-sale by making it harder for future buyers to obtain financing.
"When you have two nearly identical aircraft side-by-side, any financial institution is going to offer you much more favourable financing terms on the aircraft that is on an engine maintenance program where there's no maintenance risk," Dunn says. "Again, it's zero time, as long as the aircraft owner is paying for the program and and the aircraft that is on a program depreciates at a much slower rate."
Brokers Back Engine Maintenance
As Corporate Jet Investor reports, more than 96% of aircraft brokers recommend[4] that buyers have a long-term plan in place for maintenance, enrolling in an hourly engine maintenance program and an hourly airframe program, or at least in an engine maintenance program.
Jim Donath, founder of Donath Aircraft Services, described enrolling business jets on an engine maintenance program as an essential part of aircraft resale. “If a significant majority of that model's fleet is enrolled in an engine program, then the market will perceive that an aircraft should be enrolled," he said. “If it is not, most buyers will, at best, deduct the value of enrollment from the price of the aircraft; and at worst, disregard the aircraft altogether."
Complicating Factors
Not all aircraft maintenance is planned, or even foreseeable, and sometimes multiple regulatory requirements can complicate things.
For example, with the FAA's ADS-B Airworthiness directive comes into effect on December 12, 2019, and MRO (maintenance, repair and overhaul) center demand is expected to increase.[5]
“We estimate that this AD will affect 1,550 engines installed on airplanes of U.S. registry."—Federal Aviation Administration.
Engine Assurance Program (EAP), a Dallas-based hourly maintenance center, has warned that the ADS-B upgrade requirement coincides with Airworthiness Directive AD 2012-17-05.[7] First introduced in 2012, the AD will come due for many of the affected aircraft by Oct. 20, 2020, and could prompt a mass retirement of affected aircraft.
This AD applies to some Honeywell TFE731 engines fitted on older Dassault Falcon, Hawker, and Cessna Citation business jets—many of which are not enrolled in hourly engine programs.
The FAA explained that the AD came about because of reported rim/web separation of a first stage low-pressure turbine (LPT1) rotor assembly.
"We are issuing this AD to prevent uncontained disk separation, engine failure, and damage to the airplane," the FAA states. "We estimate that this AD will affect 1,550 engines installed on airplanes of U.S. registry. We also estimate that it will take about 1 work-hour per engine to perform the actions at next access and 165 work-hours per unscheduled engine disassembly, and that the average labor rate is $85 per work- hour. Replacement parts will cost about $175,000 per engine. Based on these figures, we estimate the total cost of the AD to U.S. operators to be $35,195,488 per year."
According to AIN Online, EAP estimates $90,000 cost of compliance for ADS-B. This would be combined with a cost of $325,000 per engine for LPT1 replacement work, to be performed along with a major periodic inspection, which might bring the total costs somewhere between $740,000 to $1.065 million.
Aircraft owners should have a financing strategy in place for unexpected maintenance requirements which may allow them to keep aircraft in service longer.
Profiting on Downtime
“Some operators choose to schedule an [engine] overhaul for a time when the airframe itself faces a lengthy inspection process," Dave Hingdon, AvBuyer.
Planned or unplanned, keeping an aircraft on the ground for maintenance can be disruptive and expensive. Owners can consolidate the types of maintenance performed, including engine maintenance with ADS-B compliance or other maintenance.
“Some operators choose to schedule an [engine] overhaul for a time when the airframe itself faces a lengthy inspection process, say a C-Check or D-Check period. HSIs can often be accomplished simultaneously with an annual or 100-hour inspection," Dave Hingdon writes for AvBuyer[1]. “Making the timing work may enable performance of some work to become a little earlier than might otherwise happen, or conversely a little later (where regulations and conditions allow)…[A]n overhaul for which everything checks out in spec and the removal, tear down, reconditioning and replacement processes for a pair of powerplants proceeds predictably and smoothly, can see the aircraft out of action for several weeks. But the end product is an aircraft with a renewed residual value, as well as a restored level of owner confidence in the safety and efficiency of the engines."
Plan Ahead, Stay Ahead
A good rule flying is that nobody likes surprises in the skies.
Planning ahead for engine maintenance events — either unplanned, scheduled, or pre-purchased through an HCMP contract— and reducing maintenance exposure for potential buyers is a smart way to get a greater return on your asset.
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