How Long Should I Own My Airplane

I’ve always found it interesting that there is no industry accepted standard for how often you should replace your aircraft. If I asked 10 operators I might get 5 different answers ranging from 5 years to 15 years or longer.

For a manufacturer, the answer to how long you should own your airplane is easy.  At 5 years you run out of warranty and you have fully depreciated your asset. Buy another one.  On the other side of the coin, we have customers who replace their airplanes very 15 years.  If you asked them why they’d probably tell you because they always have.  So who’s right?

From a Life Cycle Cost (LCC) viewpoint they both are.  The reason there is no industry standard is there is no significant advantage to either term.

As my airplane gets older it gets more expensive to maintain.  New airplanes have price increases at the same time your older airplane is losing its value.  The new airplane price increase may be a smaller percentage than the residual hit my older airplane takes every year but e actual dollar value of those activities might be closer than you think.

In an effort to quantify this we came up with our Optimal Ownership Interval study. A series of cash flows are used to determine the Average Annual Life Cycle Cost over different terms.  LCC is defined as the total cost of purchasing operating, applying tax benefits, and selling an aircraft.

In this study we look at a 15 year period during which we model trading aircraft for 15 different terms, trading every year, trading every two years, every three years etc., until we trade every fifteen years.  The results of a study on a new Gulfstream G550 are below.

Ladder We would all intuitively expect that trading in your aircraft every year or two would be prohibitively expensive.  The graph and table support this.  The most expensive term studied was replacing every year.  What was surprising to us how quickly the curve flattened out and how long it stays flat. This supports the notion that there is no bad answer.

Where the curve flattens out on the graph, around the 6 year mark is where we begin to recommend replacement.  After the curve flattens there is no significant penalty for choosing any term in the study.  Said a different way, you could own a new G550for 15 years for roughly the same cost as owning two new aircraft during that same 15 year period.

The G550 works particularly well with this model largely because it does well in terms of retaining its value over time. An aircraft model that gets slaughtered in resale value does not fare as well.  Which is as strong an argument for buying an aircraft type that has maintained a good residual value history as I can come up with.  Every airplane is different and should be studied but the model works with used as well as new.

It is important to consider that these are costs predicted in a perfect world. There are many other factors involved when deciding how long to own an aircraft including:

Residual Value Risk

In a volatile economy like we experienced in 2008 and 2009, newer aircraft maintain their residual value better than older aircraft of the same type. When a recovery happens the newer aircraft will recover quicker. What we are seeing today is that older aircraft are not likely to recover at all.

Regulatory Compliance

Newer aircraft have far less risk of becoming non-compliant in the increasingly more complex regulatory environment. Compliance on an older aircraft can come at a cost that is a significant percentage of the value of the airplane.

Life Cycle Cost is only one way to look at the capital issues surrounding aircraft ownership and optimal ownership intervals. It is important to view your capital expense in the same format as your company looks at it.   Do you lease aircraft, finance them, or pay cash?  Is P&L important or earnings per share?  However your company looks at capital we recommend you take a good look at ownership interval.  You might be able to replace your aircraft sooner than you think..

This entry was posted in Aviation Industry, Business Aviation, Guardian Jet, Ownership and tagged , , , , , , , . Bookmark the permalink.

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