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When Is It Time to Consider Retiring an Aircraft?

In the old days, some flight department managers simply flew the company aircraft and waited for their boss to tell them when to buy a new one. However, many of today's aviation managers are taking a more scientific approach, using asset management principles to determine when to retire an aircraft.

Flight department managers are expected to run their departments like a business and minimize the costs of their operation. That’s why asset management – a systematic process of operating, maintaining, upgrading and disposing of high-value properties cost-effectively – is so important.

Especially in light of the dramatic drop in aircraft values several years ago, aviation managers need to be proactively managing the company airplane using sound financial principles that will minimize the company's capital outlay, lower the cost of aircraft ownership and ensure that the company extracts maximum value from its substantial aviation investment.

Proper asset management requires that flight department managers craft an ownership strategy; develop a fleet plan; collect and analyze key operational, financial and corporate data; and use presentation methods that will communicate to company executives how they are managing the company’s multimillion-dollar asset.

“You want to actively manage the aircraft just like the CFO manages any other significant asset in your company,” says Michael Dwyer, president of Guardian Jet, a CT-based aircraft brokerage and consulting firm.

Managing Your Aviation Portfolio

The decision whether to retain or retire your aircraft is akin to picking stocks – should you buy, sell or hold? And if you decide to sell, when should you replace your existing airplane? The timing depends on a myriad of factors, most of which can be quantified.

Dwyer recommends that aircraft operators develop a business plan for managing the aircraft and then review and adjust that plan on a regular basis, taking into account numerous financial factors, as well as changing business travel requirements, the age and condition of the aircraft, and the state of the used aircraft market.

Because an airplane is a tool used to support and grow a company’s core business, Dwyer suggests beginning by ensuring that the flight department is aligned with the strategic goals of the company and is able to meet current and projected travel requirements.

Next, aviation managers should identify reliable sources of operational, financial and corporate data; use advanced analytical tools to interpret that data; and develop a presentation format to convey that data clearly and concisely to senior management. Current and projected flight operations numbers are important, as are actual versus budgeted expenditures. Aircraft book value, fair market value, residual value and the impact of tax depreciation are also key metrics.

The aircraft ownership strategy should strive to deliver maximum utility at minimal cost. Successful asset managers will buy aircraft with solid residual values, making capital improvements only as needed. They will continuously analyze life-cycle costs of their aircraft by tracking operating costs and projecting major inspections and downtime while keeping an eye on replacement-option costs. By tracking the hours, cycles and warranty time remaining on their existing aircraft – while simultaneously monitoring aircraft market trends – they are poised to change course as needed.

Running the Numbers

Dwyer says, “Three things drive replacement timing: the condition of the aircraft, the condition of the marketplace and the condition of the company [operator].”

Dwyer suggests creating an aircraft ownership plan that anticipates disposing of the aircraft at a set time, usually between five and 15 years. Companies don’t often sell an airplane that is less than five years old because it is still under warranty and the direct operating costs are predictable. On the other hand, an aircraft more than 15-years-old is one or two generations behind in terms of avionics, performance, safety and communications improvements. Upgrading such older aircraft can be cost prohibitive relative to the value of the asset, and the maintenance expense of older airplanes is a much larger percentage of direct operating costs.

“Beyond 10 years and 5,000 hours you are leaving the optimal residual-value phase, a considerable component of life-cycle cost,” explained Dwyer. “‘Jurassic jets’ used to refer to aircraft that were obsolete due to age, excessive fuel consumption and the inability to operate in certain areas because of noise restrictions. In today's significantly tougher airplane resale market, especially as it relates to light and midsize jets, an airplane that is not in premium resale condition can be effectively obsolete from a supply and demand perspective because of the oversupply of airplanes in a down market.”

In the final analysis, precisely when to trade in an aircraft is best determined using an asset management matrix that incorporates all pertinent operational, financial and market data. But remember, asset management is an ongoing process that may require changes to the plan as circumstances and market conditions dictate.

Updating and Communicating the Plan

The director of a Fortune 100 flight department who actively manages his assets suggests that aviation managers should have a proactive ownership strategy that involves revisiting fleet plans regularly and reporting to upper management on at least a quarterly – and preferably a monthly – basis.

“It isn’t just what you report, it’s how you report it,” he added. Dwyer agrees: “I want to be able to go to the CFO and speak his language. I want to talk about aviation in his terms.”

Dwyer notes that graphing key data helps non-aviators digest complex financial and operational information. And besides providing numbers on your company’s aircraft, it is helpful to include data about your competitors’ aircraft fleets. Also, an “Optimal Timing Ladder” – which calculates the buy and sell prices, operating costs and tax benefits of an aircraft over three, five and 10 years – is instructive. Finally, a “Fleet Option Summary” that offers several recommendations based on different scenarios is helpful.

Crunching the numbers on an ongoing basis will also help operators avoid being “trapped” with an airplane, said the Fortune 100 flight department manager. He said operators that only use a short-term budget strategy can save money “until the day you have to sell. That’s what sets up the trap: a short-term outlook on asset management. You can hold the airplane so long that you can’t afford to replace it” because the replacement cost of the asset increases the longer you delay.

For this manager, leasing has been the way to go in today’s market because it “transfers the depreciation risk to the lessor.” His seven-year lease strategy optimizes replacement timing, reduces the need for capital improvements, and helps him benefit from an aircraft under warranty for the first five years, which in turn helps to deliver a budget that is predictably flat while minimizing down time. The agreement also includes an early buy-out clause at 60 months so he can capture any potential aircraft appreciation if market conditions improve. Perhaps best of all, the aircraft replacement decision isn't adversely influenced by other company units’ need for capital.

Every Flight Department Manager is an Asset Manager

Whether they call it “asset management” or not, every flight department manager has an asset management style, asserts Dwyer. It can be “inactive” (keeping the status quo), “reactive” (waiting until your boss asks you about the value of the airplane and how long the company should keep it) or “proactive” (actively seeking out opportunities to maximize value while minimizing costs).

Proactive asset management is business strategy that companies have come to expect the person responsible for providing on-demand air transportation to use. “From the day an aviation manager takes delivery of an airplane, until the day it is retired, an aviation manager should be managing the asset,” declared Dwyer.

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