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owner would pay an additional $150,000 to the maintenance provider. If the owner then continued operating the aircraft until TBO, an additional $300,000 would have been paid through the contract. The new owner would have paid $450,000 for $600,000 of scheduled maintenance plus any other covered maintenance over their ownership. Of course, they would have also incurred expenses for non-covered maintenance during their 3,000 hours of operation.
If the purchaser decided in favor of the airplane without a program, their direct cost for an HSI would be $100,000 and $500,000 for the full overhaul at TBO. They would lose some time value of an alternative investment since one-quarter of the time before overhaul passed prior to purchasing the aircraft. Using our same 200 hours per year, investment model and $20,000 of unscheduled maintenance, they would be ahead at HSI by $50,000. Since they would be starting with a lower reserve balance after HSI, at TBO they would have a negative balance of approxi- mately $70,000.
The advantage between the two paths is with the used aircraft not on the engine programs at HSI by $50,000, with the advantage reversing by a slightly larger amount at TBO. If you don’t consider the cost of any expensive repairs that might be covered by the service contracts, then the aircraft not on a program should sell for $50,000 to $70,000 less than the program-protected jet. With this scenario, the value of the engine program during the first 1,000 hours on our hypotheti- cal jet has depreciated 46 to 67 percent. The first owner did receive value for his payments during ownership since they were protected for covered maintenance. So, it makes sense that the engine pro- gram value has depreciated along with the airframe.
As the used aircraft under consider- ation increases in hours, the comparison changes. The new owner would have even less time for an alternative investment if they didn’t participate in the engine pro- grams. With two aircraft at 1,500 hours, the jet covered by an engine program would have a $25,000 to 30,000 advantage at HSI and $120,000 to 160,000 lead at TBO.
Of course, all the above examples as- sume the owner without engine-program coverage directly invests the equivalent service contract funds and their engine
does not incur significant expenses not covered by the programs. Covered re- pairs, outside of scheduled maintenance, can be a considerable expense far exceed- ing most alternative investments.
Conclusion
How lucky do you feel? There is no clear conclusion with a preference for, or against, the engine programs. I wanted to illustrate just a few of the myriad sce- narios that are possible. The programs are worthwhile for individuals and busi- nesses that want to limit their risk and have a known engine operating cost, at least for covered events. For pre-owned turbine aircraft, the existence of a current engine maintenance program enrollment does add value. However, it is depreciated from the full investment before the sale, and the exact residual value is difficult to determine. For my recent turbine pur- chase, it was clear that obtaining a plane on an engine program was cost-effective in comparison with other options.
For those operators that understand the risks of operating without coverage and the advantages of alternative invest- ments, the choice is clear for them. Over time, as the fleet ages, there are also more serviceable parts, complete engines and PMA options available at a lower cost, which can be utilized by the operators to reduce their maintenance costs if they are not covered by an engine program.
For purchasers of used aircraft not on programs, there are hybrid service programs offered by the engine manu- facturers and others that allow them to reduce their upfront expenditure and share in the future repair risk with the providers. Owners also have the option of purchasing a used engine with time remaining on it or joining hybrid service programs that allow them to share the risk with the contract providers.
Concorde
After 11,000 hours of piloting over 90 aircraft models, Rich Pickett still has a passion for flying. Rich holds an ATP, CFII SME, SES, glid- er licenses, and type ratings in the L29, L39, Citation 500/510s/525s, Eclipse 500S and DA10. His company, Personal Wings, provides training, mentoring and aircraft services. You can contact Rich at rich@person- alwings.com.
March 2019
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