Monday, November 15, 2010

Aircraft Cost Comparison Example

The following is an example of my own research of a hypothetical aircraft owner contemplating replacing an existing aircraft. It has no bearing on any real circumstance.

SUMMARY AND RECOMMENDATIONS

The owner/pilot of an existing Mitsubishi MU-2 turboprop aircraft desires to upgrade his current aircraft that is used for business and personal trips. The majority of flight is from the home base in Denton, Texas (airport identification KDTO), a single runway field with a length of 6,000 feet. The new aircraft, however, must be able to utilize a 5,000 foot runway. Ninety percent of his flights are within a 500 mile radius of Denton.

Additional trip considerations include Carlsbad, California (KCSQ), Monterrey, Mexico (MMMY), and Christmas holiday trips to St. Croix, Virgin Islands (TISX).
A maximum cash outlay of $5M (USD), including costs of selling and/or trading the current aircraft, has been set by the owner. Other aircraft specification requirements include a must-have stand-up lavatory, a minimum cabin height of five feet, and a capacity to carry eight passengers and their personal gear, exclusive of crew.

The reason for this evaluation is to select a jet aircraft to replace the MU-2 that will perform the skeletal requirements provided by the owner, and remain within the budgetary constraints; while at the same time provide enough extra capacity for future needs.

The aircraft chosen for this mission is the Hawker 800XP, a proven model, derived -from the Hawker 700. Selected data for this choice is in the following narrative.

CURRENT SITUATION AND NEEDS

The owner uses his existing aircraft flying out of his home base of Denton, Texas, Denton Municipal Airport. It is a single-runway field with a length of 5,999 feet (information available at Airnav.com); however, the new jet will be required to use only 5,000 feet, presumably to access smaller fields for better business utilization of the owner’s time and resources. Personal travel will use a portion of the flight time of the new aircraft. Business use constitutes approximately 324 hours annually, including a block of approximate flight time for personal use of 30 hours. Presumably, flight time will grow as the new jet proves its usefulness.

Current aircraft performance and payload is not suitable for the future needs required by the owner, as the MU-2 is configured to carry a maximum of seven passengers, with a useful payload with full fuel of approximately 1,275 lbs. (Laver, 2010) A larger payload is required for the owner’s new specifications (eight passengers with an assumed 40 lbs. of baggage each is about 1,680 lbs.).

The MU-2 range of 1,275 nautical miles compares to the Hawker’s at nearly 2,600 miles (see Table 3 below). The limited range of the MU-2 would require two hops to reach St. Croix (a hop distance of 989nm each). 
Table 1: Direct Operating Costs MU-2
Item Cost per Hour
Fuel(1) (89 gal. per hr. fuel burn) $536.67
Maintenance Labor 136.84
Parts 132.91
Engine restoration 138.44
Component overhauls 58.43
Landing fees/parking 9.55
Crew expenses 30.00
Supplies/catering 24.00
Total $1,066.84

Note: 1. Fuel at $6.03/gal. (Huber, 2008)

Although the hourly cost is less than the Hawker 800, it is an older airframe. Due to its reputation, albeit undeserved, as a plane prone to crashes (Unknown, 2008), it has not been privy to modern upgrades as other aircraft of similar age.

The current value of the MU-2 is a necessary component of this report, therefore a search of MU-2 aircraft for sale was made from the website of Avbuyer.com, (Avbuyer, 2010) returning an average price for the aircraft at around $600,000, with an average age of 32.5 years (seven aircraft were considered).

Table 2 MU-2 Used Aircraft Summary (partial)
Mitsubishi MU-2 Price Comparison

Average Age: 32.5 (years)
Average Hours: 7,255 (total time on the airframe in hours)
Average Price: $599,286

Funds must be set aside to prepare the MU-2 for sale, including inspections, appraisals, listing costs and advertising, and flight time for previewing by prospective buyers. These funds must be a portion of the $5 million dollar outlay limit set by the owner. Stories of the MU-2 as an unsafe aircraft have been disproven; (Searles, 2008) pilot error is to blame. Owners of these aircraft, transitioning from piston twin aircraft to this turboprop aircraft were not wise to the characteristics of a turbine powered airplane, (Goyer, 2010) and thus would find themselves “behind the power curve,” pushing full throttle too late for the turbines to wind up and provide proper power before the airplane contacted the ground. These concerns, and anecdotal stories passed around hangar bays, may hinder the sale of the existing MU-2 with the effect of remaining too long on the market, so funds must be available for this contingency.

The new jet aircraft will require a range of 2,000 miles (find distance information at Airnav.com) in order to reach the St. Croix airport without a refueling stop. With the owner’s requirement for 5’-0” headroom and stand-up lavatory, a mid-size cabin jet will be needed. 

KEY MISSIONS AND EVALUATION PARAMETERS

The key mission of an airplane for this owner is local, five hundred mile and closer trips for his business use. Airports in more remote areas will have shorter fields that may accept jet aircraft, but must have fields shorter than 5,000 foot in length. Some trips may have a full complement, which requires the aircraft have the ability for a short-field landing, and similar for takeoff—landings are generally shorter than takeoffs. The area surrounding Denton and other places like Monterrey are generally hot weather airfields, and above sea-level altitudes, two aspects of flying that are most critical to safely piloting an aircraft (hotter, humid air is less dense providing less lift capability and must be accounted for in aircraft performance).
Secondary missions are personal trips to vacation locales, or other non-business trips where the aircraft may carry a full complement. A long hop to the one of the owner’s preferred destinations, St. Croix, has the other considerations of amount of fuel available based upon the loading of other items (people and baggage).

EVALUATION PARAMETERS

For consideration, a Hawker 800XP is evaluated herein. A jet listed for sale at Controller.com (Leading Edge Aviation Solutions, 2010) is a 1999 model with a listing of $4.295 million. The aircraft has a total of 6,832 hours with 4,765 landings. That is approximately 1.43 hours per flight, which indicates an average flight distance of about 575 miles. This particular aircraft appears well-suited to satisfy the owner’s key mission requirements, that ninety percent of flights will be approximately 500 miles in length.

Table 3 Selected Flight Data (Jane's, 2010)
Hawker 800/850
Payload w/maximum fuel 1,790 lbs
Long-range cruising speed at FL390 402 kts
Time to FL390 at MTOW 20 min
T-O balanced field length at MTOW 5,030 ft
Range w/6 passengers, NBAA Reserves,
at long range cruise 2,598 miles

Notes: Kts = knots; MTOW = max takeoff weight; NBAA = Nat’l Bus’n Aviation Assoc.;
T-O = Takeoff

Table 4 Direct Operating Costs 800XP:

Fuel(1) (291 gal. per hr. fuel burn) $1,754.73
Maintenance Labor 133.50
Parts 126.06
Engine restoration 320.23
Thrust reverser 3.21
Aux. Power Unit allowance 35.81
Landing fees/parking 23.10
Crew expenses 70.00
Supplies/catering 36.00
Total $2,502.64

Note: 1. Fuel at $6.03/gal. (Anonymous, 2008) Figures based on 324 hours annually

Table 5 Annual Fixed Costs 800XP:

Captain $100,100
Copilot 72,000
Burden 51,630
Insurance – Hull 26,910
Insurance – Admitted Liability 1,750
Insurance – Legal Liability 13,750
Recurrent Training 47,200
Aircraft Modernization 35,000
Charts Service 4,166
Refurbishing 28,480
Computer Maintenance Program 9,500
Weather Service 700
Total $425,866
Note: (Anonymous, 2008) 

The total annual operating costs for the Hawker will be approximately $1,236,221. This compares with $623,640 (Huber) for the MU-2, $612,581 more, or nearly a 100% premium. However, there are other considerations. Based upon projected yearly flight time, the MU-2 can only provide approximately 89,100 miles of travel (324nm at 275kts), or $6.99 per mile, whereas the Hawker can provide over 130,000 miles of travel for the same block of hours (402kts), or $9.49 per mile, only a 35% premium in hourly costs. Also, trip times will be reduced using the jet and one’s perception of the value of time is a contributing factor in justifying the additional hourly costs of the jet.

Table 6 (below) lists a comparison of the present value for the jet comparing purchasing vs. leasing. The actual discount rate will depend on the owner’s credit worthiness; these data are for comparison only.

Table 6 Present Value Purchase vs. Lease
6% Finance Rate on $4,577,6001 1.0% Lease Rate on $5,154,0001
Year
1 $4,440,272 $4,985,800
2 4,211,392 4,728,800
3 3,936,736 4,420,400
4 3,753,632 4,214,800
5 3,524,752 3,957,800
6 3,295,872 3,700,800
7 3,158,544 3,546,600
8 2,929,664 3,289,600
9 2,792,336 3,135,400
10 2,655,008 2,981,200

Note: 1. See also Table 7 (Al Conklin, 2005)

The present value of money is least for the financing option. The residual value of the Hawker is expected to be $2,019,045 (51% of its current price in ten years). (Al Conklin, p. 185)

The jet can either be purchased outright or leased. Purchasing leaves ownership of the aircraft to the purchaser, leasing will leave ownership to the leasing company (whoever that may be). Interest rates are low in today’s economic climate, and may remain rather low for the next several years; of course, this can only be surmised. For comparative purposes, however, lease rates of up to 1.1% are compared to a finance rate range of five to eight percent, as shown in Table 7:

Table 7 Financing vs. Lease Payments
5% Finance rate $437,329
6% $457,760
8% $500,258
.9% Lease rate $463,860
1.0% $515,400
1.1% $566,940
Note: Assumed 20% down payment for financing; 100% lease for financing.

If interest rates remain low, financing with a down payment may be the better course of action. Using a 6% financing rate and 1.0% lease rate Table 8 below compares the costs over a ten year span:

Table 8 Ten Year Cost Analysis
Finance at 6% Interest $4,577,600
Operating Costs 5,845,835
Residual Value 2,019,045
Net Costs 10 Years 8,404,390
Annual Cost of Ownership 840,439
Cost per Hour (324 Hours) 2,594


Anecdotal stories concerning the 800XP, along with some relevant data, indicate the aircraft is well-liked by the users and owners of the jet. An analysis by Fred George of Aviation Week (George, 1996) paints a good picture of the aircraft handling and flight characteristics, range, payload and other pertinent specifications, and comfort and convenience features provided by the aircraft, and the article is generally praise worthy of the aircraft.

Based upon the preceding analysis, and opinion of an aviation writer, the 800XP offers one of the most comfortable interior environments for its passengers (George, 1996). The Hawker mid-cabin jet series has always offered a more generous cabin than competitors. The lavatory offers hot and cold water, and is externally serviced. Baggage storage, however, is all inside the cabin, although there are two large storage closets for bags.

The 800XP fits within the specified budget with funds remaining to sell the existing turboprop aircraft. The 800XP will provide the service required, is able to reach the destinations desired, is a worthy and able platform with high marks from within the aviation community. This aircraft fulfills the requirements of the owner.

References
Al Conklin, B. d. (2005). Aircraft Acquisition Planning. Orleans: The Conklin & de Decker Institute of Aviation.
Anonymous. (2008). Hawker 800XP. Orleans: Conklin & de Decker.
Avbuyer. (2010). Business Turboprops. Retrieved 2010, from Avbuyer.com: http://avbuyer.com/aircraft/Results.asp?ListId=2&ManId=107&ModelId=740&Corp=true&Gen=
George, F. (1996, June). Hawker 800XP. Aviation Week .
Goyer, R. (2010, may 31). Making the Leap from Pistons to Jet. Flying .
Huber, M. (2008, February 1). Mitsubishi MU-2. Business Jet Traveler .
Jane's. (2010, January 21). Hawker 800 and 850. Retrieved June 9, 2010, from Jane's All the World's Aircraft: http://www4.janes.com.exproxy.libproxy.db.erau.edu
Laver, M. (2010). MU-2 Model Comparison. Retrieved 2010, from Air1st.com: http://air1st.com/shortbody.php
Leading Edge Aviation Solutions. (2010). Listings Detail. -Retrieved 2010, from Controller.com: http://www.controller.com/listingsdetail/aircraft-for-sale/HAWKER-800XP/1999-HAWKER-800XP/1148724.htm
Searles, R. A. (2008, May 1). Special Rule Sets New Requirements for MU-2B Operators. Business & Commercial Aviation , p. 242.

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