As you ring in the New Year, you might be wondering if it is time to evaluate the lifespan of your aircraft. The question isn’t “should I replace it?” but “when?” Depending on who you ask, the answers can vary from anywhere between five to fifteen years. Here are the most important things to consider:
- Life Cycle Costs: This refers to the total ownership spending of your jet, including capital equipment, operating budget, and tax benefits. To calculate these costs, Guardian Jet uses financial projections called cash flows. So, if you buy an aircraft at the beginning of its cash flow, add in all the money spent operating, and sell the airplane at the end of the cash flow, the goal is to recover the value into the cash flow.
- Average Yearly Ownership Costs: Replacing an aircraft each year can be expensive; so typically, Guardian Jet will create graphs to look at the average yearly ownership costs. The data says that around the fifth year of ownership, the curve in market value bottoms out and then there is a little bump around the seventh and eighth years. This bump indicates that, to keep an aircraft sellable, paint and interior maintenance should be done every 7 to 8 years assuming that it is flown at the average for a corporate jet (around 400 hours.) After the eighth year of ownership, the curve continues to decrease. In terms of numbers, only about $25,000 per year is saved by replacing an airplane every fifteen years rather than every six years. Either option is fine from a capital standpoint.
- Regulatory Issues: Something a lot of aircraft owners do not initially take into consideration is the regulatory issues that continuously pop up. They are rapidly increasing in the U.S. and are very present if travelling to Europe, for example. This leads to a decision. Is it worth it to make investments to go along with constantly updated rules and regulations, which could possibly be millions of dollars, to update the aircraft or is it better to buy a new one?
- Residual Value: No one wants to invest in something that they can’t make money off of when they sell it later. In this volatile economy, a new aircraft drops in value about the way the Dow does, while older versions of the exact same aircraft can drop abruptly and to a great degree. When the Dow picks back up again, the newer plane is able to recover much more quickly and close to its original value than the older aircraft possibly can. The older airplanes just aren’t recovering the way the newer ones can, regardless of the economy. This alone may be a reason to consider shortening the length of ownership of your aircraft.
It makes sense to consider replacing your airplane prior to the fifteen year mark in order to decrease regulatory investment costs and maintain the plane’s residual value – but because there is no industry standard and no right or wrong answer from a capital point of view, Guardian Jet work closely with clients to ensure that the right decision is made.
For more tips and insight, make sure to take advantage of some of the resources we have in our Learning Center at www.guardianjet.com.