October 17, 2023
World's Leading Business Aviation Consulting & Brokerage Firm
Engine maintenance is of vast importance to not only safe, dependable operation of your jet, but also to residual value.
When considering whether to enroll an aircraft on an engine program, start from the perspective of your personal scenario. If your aircraft is new from the manufacturer, you’ll evaluate the decision differently than for a pre-owned aircraft. This is because understanding the history of participation in an engine program for pre-owned jets is paramount. If you are early in the acquisition process, you might decide to target an aircraft for purchase based on that history.
Further, the enrollment decision has a number of variables that must be taken into account. These factors depend on the specific engine in your jet, the prospective engine program options, your disposition as the operator, and of course, the market.
All scenarios and factors may be evaluated in a logical way using reasonable calculations and assessing risk. We’ll walk you through 4 essential steps to help you find an answer: to enroll or not enroll?
First, as mentioned, the assessment has various scenarios that steer the perspective of analysis:
Second, use the lens of your situation when evaluating the variables involved in the enrollment decision. These variables are categorized in 4 buckets for investigation: the engine, the program, the operator, and the market.
1. On Condition Intervals: The engine undergoes trend monitoring where diagnostic information is shared with the engine manufacturer and the health of the engine is monitored. When the parameters diagnose a condition that warrants maintenance, it is performed.
2. Hard Time / Calendar Intervals:
3. OEM Mid-life / Overhaul Cost: The engine manufacturer (Rolls Royce, Pratt & Whitney, Honeywell, Williams, GE) performs a mid-life or overhaul for a flat rate plus discrepancies. As an example, it could cost $1.5M per engine at midlife, and $3M per engine to overhaul.
4. Annual Maintenance Cost: There are yearly airframe engine inspections covering routine maintenance and, in some cases, the on-condition monitoring.
5. Distance from Significant Interval: The further the engine is from a mid-life or overhaul, the less financial concern. If an inspection is looming, it will typically affect the value of the aircraft as a multiple of the expected cost to cover the exposure to the next owner (think 1.25 times the estimate).
6. Overhaul Sequence: Second and third overhauls on an engine can be significantly higher cost than the first because engines have several high time / high cycle components (such as compressor impellers, turbine discs, etc). These items will not need to be replaced in the first or possibly second overhaul.
7. Population (number in service):
The Engine Program
1. Monthly Contract: A contract is signed for a specified term, number of hours flown per year, and an hourly rate is collected monthly. This pay-as-you-go hourly amount means the maintenance events are at no additional cost when they occur. Programs are typically transferable as they build equity in the engine.
2. Hourly Rate: Often there are different levels of service included in the hourly rate, denoted by naming conventions such as Platinum, Gold, Silver. The highest premium may include no restrictions, loaner engines during overhaul, and priority over other levels of service. Lower hourly rates will exclude items such as high cost, hour/cycle limited parts, and loaners.
3. Provider: Engine programs are provided by one of the following:
4. Utilization Minimums: Some engine program providers require predetermined annual minimum flight hours per year, despite how many hours you fly per year.
5. Annual Fees: Regardless of program, there are fees for the administration of the program in addition to the hourly rate paid.
6. Transferability of Program: Engine program equity is transferable to the next owner, subject to a new contract which can have different hourly rates, annual minimums, etc.
7. Transferability of Equity: Under certain conditions with third party vendors (such as JSSI), the equity in the engines can transfer back to the owner who paid in, or to another airframe that the owner purchases.
8. Mid-Stream Enrollment: Enrolling in a program mid-stream is usually accomplished at a buy-in equal to the sum of the payments that would have been made, had the airframe been enrolled. It can be researched quickly by asking the program provider to prepare a quote. There can be discounts applied based on the program manager’s willingness to add the engines to the pool.
9. Program Impact to Financing: Engine program enrollment status usually impacts financing terms. If you are financing an aircraft in a debt or lease structure, this should be considered as debtors and lessors prefer enrollment and may make their proposals reflect that preference.
1. Insurance Philosophy: Not only do program participants pay as they go, but they also receive coverage for unexpected events such as Airworthiness Directives or Service Bulletins that may occur during an engine’s life after the original warranty has expired. This can be comforting in the case of new engine designs that do not have a large population or a long of history of mid-life and overhaul inspections.
2. Level Payment Philosophy: This can be helpful to pay for the engine restoration as you go, as opposed to a large one-time expense when the event occurs.
3. Maintenance Capability: Fleet operators with significant experience operating and maintaining numerous engines are often secure with managing the exposure of not being covered. It also keeps operating costs lower.
4. Operational Experience: An operator with years or decades of experience operating a turbine engine they know well is sometimes comfortable with the exposure of self-insuring.
5. Few Annual Hours Flown: Commonly, hours flown per year will dictate the feasibility of enrolling. If an owner flies 100 hours per year and must pay for 400 hours as the annual minimum, this is prohibitively expensive.
6. Ownership Sequence: Depending on whether the operator is the first owner versus second, third etc. can impact the decision to enroll. Initial owners may never expect to see an engine event based on their annual flight hours and typical ownership term. Second owners may want to capitalize on an airplane not enrolled for the same reasons as the first owner above. Conversely, they may want to take advantage of the equity in an airplane enrolled as it approaches an engine event.
7. Time Value of Money Calculation: At an owner’s specific discount rate, the present value or future value of money paid into a program over time may exceed the cost of an engine event.
1. Predominance: It is helpful to understand what percentage of the fleet’s general population is enrolled in an engine program to see the market acceptance.
2. Popularity: It is useful to compare the percentage of enrolled aircraft using two categories: what is for sale versus what is sold. If enrolled aircraft constitute a larger percentage of sold than the for-sale population, that is meaningful information.
3. Sales Premium / Discount: Every confirmed sales price can be measured against an appraised or intrinsic value. It is important to measure a premium or discount based on an apples-to-apples comparison of enrolled and not enrolled aircraft.
4. Time to Sell: Measuring the time to sell for enrolled versus not enrolled aircraft can prove whether enrollment puts more money in your pocket. A shorter time to sell can add value to an aircraft in markets where pricing is falling at an average of 2% per quarter.
Third, the decision-making process includes both finite financial math and overall risk assessment. Use the factors applicable to your scenario to continue your evaluation.
Start by doing the math:
Then assess the risk:
We developed Guardian Jet's Program Enrollment Study to run the calculations using industry expertise and partner with clients to assess risk. The assessment of risk is always subject to the aircraft operator's and/or company's principles. The enrollment decision will lend to alignment with that disposition after factoring all variables into the math.
Last, the best way we can advise on engine programs is to examine the information discussed above and then pose a series of “if, then” statements.
Reviewing the responses from your perspective with all factors in mind will help you make a confident decision. For illustration:
In the end, the answer reveals itself in the data and the business mind of the operator.
As a consultant/broker, I like enrollment because it provides liquidity to the asset with essentially zero-time engines every step of the way. It’s tough to sell airplanes within sight of a major event without taking a significant discount. And as an adviser charting a safe, predictable ownership experience, I prefer engine programs.
But when the math, aircraft particulars, and client disposition say otherwise, I favor any well thought out, calculated decision.
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