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Bizjet direct operating costs

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Maintenance reserves are financial provisions, additional to the base costs of operating an aircraft, accumulated to ensure that the financial impact of major maintenance is covered.


By Don Van Dyke
ATP/Helo/CFII. F28, Bell 222
Pro Pilot Canadian Technical Editor

Business jet activity has risen impressively to meet the demands of economies recovering from the effects of the global pandemic. The financial and accounting systems under which an aircraft is managed affect the way operating costs and risks should be viewed and reported

A business aircraft has current or intrinsic value, or can be used to generate future revenues. Costs related to the use of business aircraft for transport are traditionally categorized as non-operating (NOC), indirect operating (IOC), or direct operating (DOC).

NOCs are unrelated to core operations (eg, corporate management, accounting, human resources management, legal, litigation, restructuring). They are often described as administrative overhead, and usually provided by the parent organization. IOCs are closely but not directly related to core operations.

IOCs are not easily traceable to a specific activity or aircraft, but rather to their high-level management, oversight, and control (eg, office rent, leases, utilities, furniture, supplies, equipment rental, office technology).

DOCs are charges clearly attributable to a given aircraft, type, aviation activity, or product, changing as the level of flying increases or decreases.

Common examples of DOCs are provided in Table 1. Variable DOCs (VDOCs) change with the duration of an activity (or cost driver), and may be expressed as a charge per flight hour. Fixed DOCs (FDOCs) are based on fixed calendar intervals (days, months, years).

Accounting for DOCs should pool charges by aircraft type or location to provide a statistical foundation for predicting exposure to their likely recurrence.


Table 1. Common aircraft direct operating costs (DOCs)

Variable (activity-based) DOCs ($/hour) Fixed (calendar-based) DOCs ($/annum)
ATC charges
Crew expenses
(accommodation, transportation, meals)
Consumables (fuel, oil, fluids)
Landing and parking fees
Maintenance (periodic, on-condition, ADs/SBs)
Maintenance (labor/parts)
Cabin supplies and inflight catering
Cabin subscriptions and services
Concierge services
International trips and support
Salaries and benefits
Hangarage
Crew initial and recurrent training
Insurance (all risks, combined single-limit liability)
Insurance (financial interest)
Aircraft upgrades (optional and mandated)
Refurbishment (interior/exterior)
Subscriptions (flight planning, MRO management)
SMS, technical records
Inventory management
Uninsured damage

 


Scheduled aircraft maintenance

The upper timelines shown here represent the flow of a common scheduled maintenance event. The lower timelines illustrate the effect of additional time required to complete a scheduled maintenance event. This would be deemed unscheduled maintenance.

Reliability (R) and maintainability (M) are intrinsic characteristics of aircraft design. Reliability reflects the response to service-level drivers: customer needs, customer satisfaction, lead time, service quality, etc.

Maintainability seeks to reduce repair time, as opposed to maintenance, which is the act of repairing or servicing an item.

Scheduled aircraft maintenance is preventative maintenance performed at intervals specified by the original equipment manufacturer (OEM), as well as pre-flight checks, to ensure the aircraft is airworthy and ready to be flown. It seeks to apply the features of maintainability in promoting reliability.

Development of scheduled aircraft maintenance programs is based on a component or system rate of occurrence of failure (ROCOF) – the number of failures per interval unit (flight hours, flight cycles, calendar time).

ROCOFs tend to vary with age, and are based on numerous data sources, including OEM-published information, service difficulty reports, lessor claims, and industry publications. Their predictability makes calculating financial provisions for scheduled maintenance relatively straightforward.


Why does unplanned maintenance tend to be the most expensive?
• It is also known as reactive, corrective, or emergency maintenance, since usually there is no immediate plan to restore the aircraft to airworthy condition.

• It is difficult to outsource because the driving defect is usually detected during normal operations, and must be rectified prior to the next departure.

• It demands maintenance resources and man hours at awkward times, often in unusual circumstances and unfamiliar environments.

• It reduces organizational efficiency involving knock-on effects of delay, diversions, inflight turnback times, and late release.

• Flight delays or cancellations are likely, often requiring substitution of alternative aircraft and/or crew.

• The affected aircraft itself suffers additional wear and tear from disconnecting, removing, and reinstalling parts, additional diagnostic engine cycles, consequential faults in which still-good parts were previously replaced – draining inventory and polluting logistics calculations with bad data, and ultimately worsening the reliability of the airplane.

• The impact on efficiency from any repetition of this process can be profound. This happens when corrective repair is not initially effective.


Unscheduled maintenance

The timeline of an unplanned maintenance event begins when airworthiness is compromised by unforeseen and unexpected events, often at remote locations away from maintenance facilities. The task is made more lengthy pending diagnosis to begin planning for the complexities of provisioning maintenance crew, equipment, and spares in a location away from home base.

Unscheduled aircraft maintenance responds to failures or malfunctions arising unexpectedly during scheduled maintenance, usually requiring additional time, labor, and materials.

The mean time between failures (MTBF) concept holds that random failures are unavoidable throughout hardware life. Such failures lead to significant unscheduled maintenance being performed during routine scheduled maintenance.

Increasingly complex systems and technology can add difficulty to effective and timely fault diagnosis, thus eroding system maintainability.

Current system designs can experience a 40% or higher equipment false removal rate resulting from ambiguous and labor-intensive test procedures.

Aircraft downtime related to unscheduled maintenance may also be due to the unavailability of spare parts and other causes.

Maintenance reserves

Maintenance reserve payments are accrued for those events that may require significant aircraft grounding and/or turnaround time for component overhauls. Maintenance reserve payments are collected, usually in arrears, during the term of an aircraft lease to provide for the consequential costs of failing to meet expected availability, safety, and performance targets of service-level drivers.

They may also be used to improve economic management of the closed-loop spares supply chain and inventory. And, because they are risk-based, maintenance reserves – unlike DOCs – are relatively difficult to forecast and quantify, often making them the most contentious part of an aircraft lease agreement.

The goal of calculating a maintenance reserve is to balance cost levels and operating performance, and to allocate costs in a way that is fair to both lessor and lessee.

Unplanned maintenance

Maintenance reserve provisions for specific costs can be made even if the amounts are not known with any certainty. These include inventory obsolescence, product returns, restructuring costs, and damages from product recalls. Again, such forecasts must be founded in good data aggregation, although, in today’s aeronautical environment, obtaining quality data may be difficult.

An unplanned maintenance event is a reactive, run-to-failure process which awaits an observed event before reacting. Unplanned maintenance needs can occur whenever a problem is found during pre-flight or post-flight inspections, or during ground or flight operations.

This compromise of airworthiness voids the aircraft’s availability for use and commits it to aircraft on ground (AOG) status. These are also the most nebulous events to forecast and resolve.

Examples of unplanned maintenance needs include everything from a worn tire, low landing gear strut, or sheared pump, to issues such as control or thrust reverser malfunction.

Upon discovery, the pilot reports the problem to the maintenance technician and completes a service difficulty report (SDR) and maintenance request.

At this point, the aircraft is grounded until the problems are repaired and the aircraft is deemed to be airworthy by the technician.

Unplanned maintenance may also include the cost of complying with service bulletins (SBs), airworthiness directives (ADs), local regulatory mandates, and OEM tasks.

Accounting for reserves

Company practices of accounting for maintenance reserves are diverse, confusing, and conflicting. Most costs of owing and operating a business jet (except depreciation) can be deducted at present to offset taxes on current income.

There are 4 main points of judgement when accounting for aircraft maintenance – transportation mix (ie, personal use, corporate use, client use, etc), leased vs owned aircraft, major vs minor events, and the time period over which the events have effect.

This MRO reserve cash flow chart illustrates how income is accumulated for expenditure on unscheduled or unplanned aircraft maintenance.

Under generally accepted accounting principles (GAAPs), the US IRS usually declares that MRO costs are current expenses if they do not add materially to the asset’s value, appreciably prolong its life, or adapt it for a new use, so the cost must be capitalized.

In other jurisdictions, the costs of major cyclical maintenance checks (for both owned and leased aircraft) are capitalized and depreciated – as appropriate – over the shortest of (1) the scheduled usage period to the next major inspection event, (2) the remaining life of the aircraft, or (3) the remaining lease term.

In reviewing GAAPs and international accounting standards (IASs), it is often difficult to determine which MRO events qualify for capitalization and which should be expensed as incurred. Reliance on expert opinion is essential.

Conclusion

The core purpose of maintenance reserves is to ensure that the calculated cost of consuming an aircraft’s utility is restored predictably and at defined intervals. A maintenance reserve is a provision for aircraft maintenance, and usually covers 3 management concerns – technical engineering issues, contract negotiation, and financial aspects.

The use of predictive analytics will increasingly feature as a central pillar of aircraft maintenance scheduling. Since unplanned maintenance is the most risk-based and the type accompanied by the greatest financial and operating consequences, it is the genre that depends the most on the pilot to identify, since it is the pilot who interfaces most often and most intimately with anomalous aircraft behavior and marginal performance. In short, the pilot is most sensitive to the need to prevent an unplanned maintenance event.

This article has clarified important distinctions between unscheduled and unplanned maintenance. Aspects of aircraft operating cost management, often unforeseen, have been identified as critically in need of maintenance reserves. Since this article is neither complete nor authoritative, business jet operators and owners are advised to seek qualified professionals to quantify and customize their provisions for maintenance reserves.


DonDon Van Dyke is professor of advanced aerospace topics at Chicoutimi College of Aviation – CQFA Montréal. He is an 18,000-hour TT pilot and instructor with extensive airline, business and charter experience on both airplanes and helicopters. A former IATA ops director, he has served on several ICAO panels. He is a Fellow of the Royal Aeronautical Society and is a flight operations expert on technical projects under UN administration.