Bizjet and turboprop direct operating costs
Safety, utility, value, and risk management of business jet and turboprop aircraft operations are enhanced by monitoring, analyzing, managing and understanding related expenditure.
By Don Van Dyke
ATP/Helo/CFII, F28, Bell 222.
Pro Pilot Canadian Technical Editor
In every sense, well-versed professional pilots are asset managers who can apply their knowledge, oversight, and intuition to inform and influence decisions benefiting operations of business aircraft and safeguarding both their efficiency and value. Elements of jet and turboprop (TP) aircraft life cycle costing (LCC) offer important financial perspectives of ownership and operations.
The following selected definitions clarify and help to understand the meaning, use, and function of related but often complex financial concepts:
• Expenditure is the money or resources that a business spends to operate, maintain, or improve its assets or liabilities.
• Cost is expenditure contemplated for the use of business aircraft. Traditionally, it’s categorized as non-operating (NOC), indirect operating (IOC), or direct operating (DOC).
• NOCs are unrelated to core operations, often described as administrative overhead, and usually provided by the parent organization (eg, governance, human resources management, accounting, legal services, etc).
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 overarching application and control, such as office rent, utilities, furniture, supplies, equipment rental, and office technology.
DOCs are charges clearly attributable to a given aircraft, type, aviation activity, or product, such as those examples presented in Table 1.
Typically, only a portion of NOCs and IOCs are allocated to flight activities, while DOCs comprise the largest and most impactful of the 3 aircraft cost categories.
Accounting for DOCs should pool charges by aircraft type or location to provide a statistical foundation for predicting exposure to their likely influence, frequency, or reoccurrence.
Although the terms are often used interchangeably, expenses refer to costs after they have been paid. Certain expenses, such as consumables, are cash-based. Others, such as depreciation, are non-cash.
Sources and applications of DOCs
For initial and comparative purposes, baseline DOCs are available from several sources, including the original equipment manufacturer (OEM), organizations such as the National Business Aircraft Association (NBAA), and specialist companies such as JSSI or Conklin & De Decker. In-house cost accounting and understanding will build on this foundation to monitor and control operating costs, as well as to identify opportunities for their improvement.
Reliability (R) and maintainability (M) are intrinsic characteristics of aircraft design. Reliability reflects the response to service-level drivers, such as customer needs and satisfaction, lead time, service quality, etc. Maintainability seeks to reduce repair time, as distinct from maintenance which is the act of repairing or servicing an item.
DOCs are important metrics for evaluating the quality of reliability and maintainability as well as providing an accurate means to provision for future resource demands, particularly regarding scheduled, unscheduled, and unplanned maintenance.
Graphic 1. The DOCs illustrated are derived from a range of popular small, medium, and large business aircraft to model a generic operation. Variable DOCs (VDOC) change with the duration of an activity (or cost driver), shown as based on a common utilization of 400 flight hours per year. Fixed DOCs (FDOC) recur at set calendar intervals (days, months, years). Depreciation, while a significant FDOC, does not require the outlay of capital and is therefore not shown in these graphs.
DOCs and aircraft maintenance
Maintenance labor, parts, and reserves comprise the largest portion of aircraft DOCs.
Scheduled aircraft maintenance is preventative maintenance performed at intervals specified by the OEM to verify that the aircraft is airworthy. Scheduled aircraft maintenance programs are based on a component or system rate of occurrence of failure (ROCOF) – the number of failures per interval unit (eg, 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 (SDRs), lessor claims, and industry publications. Their predictability makes calculating financial provisions for scheduled maintenance relatively uncomplicated and straightforward.
Unscheduled aircraft maintenance is consequential to a concept which holds that random failures or malfunctions are unavoidable throughout hardware life. The hypothetical failure rate curve (or “bathtub” curve) shown in Graphic 2 plots ROCOF versus time or calendar age, and is widely used in reliability engineering and deterioration modeling, quantifiable as a Mean Time Between Failures (MTBF). The result is significant unscheduled maintenance being performed during routine scheduled maintenance, usually requiring additional time, labor, and materials.
Ever more complex systems and technology can make effective and timely fault diagnosis difficult, thus further eroding system maintainability. Current system designs can experience a 40% or higher equipment false removal rate resulting from ambiguous and labour-intensive test procedures.
Unscheduled maintenance may also be due to the unavailability of spare parts, supply chain issues, and other causes as well.
Graphic 2. The bathtub curve describes 3 failure regions as functions of time – infant mortality (due largely to installation or manufacturing defects), normal life (failures due to stress exceeding component strength), and wear-out (fatigue or depletion failures).
Unplanned aircraft maintenance is a reactive, run-to-failure process which awaits an observed event before reacting. Unplanned maintenance may also include the cost of complying with service bulletins (SBs), airworthiness directives (ADs), local regulatory mandates, and unforeseen OEM tasks.
These events are the most nebulous to forecast and resolve. The impact on efficiency from any repetition of this process – which happens when corrective repair is not initially effective – can be profound.
Unplanned maintenance is the most risk-based and the type accompanied by the greatest financial and operating consequences, because:
• There usually is no immediate plan to restore aircraft airworthiness;
• It is difficult to outsource since the driving defect is usually detected during normal operations and must be rectified before the next departure;
• It usually demands resources and labor at awkward times, unusual circumstances, and in unfamiliar situations;
• It reduces organizational efficiency involving downstream delays, diversions, in-flight turnbacks, and late releases;
• Likely flight delays or cancellations require alternate aircraft and crew; and
• The affected aircraft suffers wear-and-tear from disconnecting, removing, and reinstalling components, additional engine cycles for diagnosis, consequential faults in which still-good parts were previously replaced – draining inventory and polluting logistics calculations with bad data – ultimately worsening aircraft reliability.
The pilot, who interfaces most often and most intimately with anomalous aircraft behavior and marginal performance, is in the best position to identify, prevent, or mitigate the effects of an unplanned maintenance event.
Pilot monitoring should involve analysis of related technical records and DOCs as well as discussions with maintenance and accounting.
Graphic 3. Specific MRO reserves should be considered, even when their foundation is uncertain. These include obsolescence, product returns, and damages from product recalls.
Maintenance reserves
Maintenance reserve payments are contingency DOC funds provisions accrued for those events that may require significant aircraft grounding and/or turnaround time for component overhauls, as illustrated in Graphic 3.
Turbine engines typically have 2 DOC maintenance reserves. The first covers life-limited parts (LLP), including blades, seals, disks, etc. The second covers power restoration.
However, unlike DOCs per se, maintenance reserves are risk-based, which makes them relatively difficult to forecast and quantify, rendering them the most contentious part of an aircraft lease agreement.
A core purpose of maintenance reserves is to assure that the calculated cost of consuming an aircraft’s utility is predictably restored at defined intervals. A maintenance reserve usually covers 3 main management concerns:
1. Technical engineering issues.
2. Contract negotiation.
3. Financial aspects.
The use of predictive analytics will increasingly feature as a central pillar of aircraft maintenance scheduling.
One 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 the aircraft owner (or lessor) and the operator (or lessee). DOCs are a key indicator of needed maintenance or operational attention.
Company practices of accounting for maintenance reserves are diverse, confusing, and conflicting. Most expenses of owning and operating a business aircraft can be deducted to offset taxes on current income. Depreciation, however, is not currently deductible. There are 4 main points of judgement when accounting for aircraft maintenance:
1. The transportation application mix (ie, personal use, corporate use, client use, etc).
2. Leased vs owned aircraft.
3. Major vs minor events.
4. The period over which the events have occurred.
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. If the cost does not meet this test, it must be capitalized.
In other jurisdictions, expensed major cyclical maintenance checks (for both owned and leased aircraft) are capitalized and depreciated over the shorter of:
1. The scheduled usage period to the next major inspection event; or
2. The remaining life of the aircraft; or
3. 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.
Graphic 4. This MRO reserve cash flow chart illustrates how income may be accumulated for expenditure on scheduled, unscheduled, or unplanned maintenance. On delivery, engines represent roughly 20% of new aircraft value. As aircraft age, engines account for up to 80% of their value. For this reason, MRO reserves tend to focus on provisioning powerplants.
Environmental reserves
The ICAO standard for zero aircraft emissions is 2050. Compliance will be met either by technological improvements or by carbon offsets, in either case evidenced by additional costs. It is suggested that environmental reserves be accumulated (and expended as DOCs) in much the same way as maintenance reserves currently accrue.
Conclusion
Hopefully important distinctions between unscheduled and unplanned maintenance have been clarified. Aspects of aircraft operating cost management – often unforeseen – are identified as critically in need of maintenance and environmental reserves.
The role of DOCs in formulating, monitoring, and controlling these provisions is clear. With requisite ambition, analytical experience, and financial skills, collaborative DOCs oversight by pilots can lead to insights into evidence-based decision-making regarding cost classification, tracking, reporting, and analysis leading to improved operational value of a business jet or turboprop. Given the finite resources of typical aviation departments, this will enhance needed abilities to navigate volatile futures.
This article is neither complete nor authoritative. Operators and owners are therefore encouraged to seek qualified professionals to quantify and customize management of their DOCs.
Don 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.