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Special focus - Containing Maintenance Costs: Knowledge is the key in the battle to contain engine and aircraft costs - Part 1
Unexpected bills can disrupt cash flow and even ruin businesses. Maintenance agreements and warranties, like insurances, direct debits and standing orders, are promoted on the premise that they provide "pay as you go" peace of mind, contain the growth of liabilities and help prevent costs escalating to dangerous levels.

Unexpected bills can disrupt cash flow and even ruin businesses. Maintenance agreements and warranties, like insurances, direct debits and standing orders, are promoted on the premise that they provide "pay as you go" peace of mind, contain the growth of liabilities and help prevent costs escalating to dangerous levels. However, while there are schemes designed to mitigate the expense of maintaining private aircraft and their engines, it seems that most, if not all, owners and operators will face a degree of uncertainty, not least because rises in costs will almost certainly be passed on even during current contracts.

Aircraft management companies are at the forefront when it comes to helping private owners smooth the cost of maintenance liabilities. Ocean Sky says that when it is asked to take on the management of an aircraft it looks closely at any cover options that may already be in place and then provides the necessary advice for the owner to make an objective and educated decision on which programmes to enrol.

Andrew Hughes, md aircraft management, points out: "There are a variety of schemes which allow the owners of aircraft to insure themselves against the potentially high cost of engineering-related costs that can result from any incident resulting in damage to an aircraft. These are principally divided between manufacturer backed and approved schemes or insurance schemes offered by third party suppliers. In general the schemes can be tailored to suit the needs of the client with the level of cover adjusted to match both the owner's budget and appetite for risk.

"It is vitally important that the owner is fully aware of the potential costs involved in an engine or airframe type incident where the bill can reach seven figures very quickly. In general cover can be restricted to just cover engines and APU or in some schemes whole airframe protection can be acquired at a premium. Clearly it is also important to consider both the age and value of the aircraft concerned when making the decisions about whether to opt in or out of an appropriate scheme and equally the provision of a specific level of coverage may be a requirement of a finance or mortgage provider who will always be looking to ensure that the value of the financed asset is protected where possible."

Hughes advises: "The impact on the residual value of the aircraft should also not be overlooked when making the decision on the selection of suitable schemes; the inclusion of the aircraft on an insurance scheme may not actually enhance the value of the aircraft but it will certainly make it a more attractive option when placed against a similar aircraft without coverage."

In general terms the various programmes operate by charging a fixed annual fee with additional per hour flying costs. Depending on the supplier they may insist on a monthly payment based on a fixed number of flying hours which would then be reconciled at the end of the year against actual flying hours where a calculation would be made whether any additional fees or refunds are required.

Hughes adds: "For pre-owned aircraft without existing cover then a buy-in premium will often be required subject to a technical survey on the history of the aircraft. In the case of new aircraft then the manufacturers will normally offer their own OEM backed schemes such as Rolls Royce Corporate Care, Bombardier Smart Parts Plus or Embraer Executive Care."

A typical airframe programme covers virtually every part, component, assembly and system on-board the aircraft, excluding the engines and APU for a limited contract term. Pricing for this type of programme is based on historical data for the aircraft type concerned along with data for the specific airframe being insured, any aircraft with unusual modifications can expect to be paying addi-tional premiums due to the higher risk associated with non-standard modifications.

Coverage can be arranged to include both scheduled and unscheduled main-tenance, including in some cases the parts, labour and shipping costs of the parts. The addition of other factors such as avionics, tyres and brakes and the levels of technical support required can all impact on the costs of the annual and per flying hour premiums payable. Cover can also be provided for the inclusion of future airworthiness directives or service bulletins which can again become significant and unexpected costs if the owner is not careful.

Hughes says: "The Tip-to-Tail programme offered by JSSI is ideal for an aircraft owner who is looking for a single source solution for the entire aircraft including the airframe, engines and APU. This allows an owner a degree of predictability in engineering costs, but it is worth noting that these schemes are a form of insurance with no rebates in the event of the owner not making a claim against the programme."

He adds: "The Bombardier Smart Parts programme is currently used by more than 900 aircraft owners and operators around the world and is available across the 15 aircraft types offered by the manufacturer. It provides coverage for the airframe components (including avio-nics) but not the aircraft's engines or APU which would more typically be covered by the respective manufacturer."

'Power by the hour', Ocean Sky says, is a good example of an OEM manufacturer scheme. It encompasses an after sale fleet support option that provides the owner with fixed engine maintenance costs over an extended period of time. The owner is assured of accurate budgets while avoiding the unexpected cost spikes associated with AOG events.

London Executive Aviation (LEA) uses 'power by the hour'-style programmes for the company's six Citation Mustangs (ProParts, PowerAdvantage and Pro-Tech), four Citation Excels (a mix of ProParts and PowerAdvantage depending on the aircraft) and five Legacy 600s (Embraer Executive Care for airframes and engines).

LEA md George Galanopoulos says: "We've only been operating the Mustangs for two years, so in these early days it is difficult to establish the cost-effectiveness of ProTech. But we know that ProParts, which we use for our newer Citations, has worked well. We have very rarely used parts over the total value of the programme, which means that, by the terms of the agreement, we usually receive back 65 per cent of the remaining unused fund at the end of the contract. At first this process might seem like an expensive way to maintain the aircraft, but it is actually an approach that brings you valuable peace of mind and enhances the resale value."

Galanopoulos adds: "So although the ProTech programme might appear expensive in the first years of an aircraft's operation, when jets are still under warranty, you enjoy peace of mind and predictable operating costs from the outset. And again, if you decide to sell the aircraft, a ProTech background is definitely a plus point."

Galanopoulos is happy with the service he receives from Cessna and Embraer, although he admits that waiting for Citation parts to arrive from Wichita, Kansas, can be frustrating. "Embraer operates a large parts depot in Paris, so aircraft-on-ground requirements are dealt with relatively quickly in Europe."

Are there negatives in the world of 'power by the hour'? Galanopoulos acknowledges: "You pay up front in effect, and you only see the benefits when parts are required, or the engine needs an overhaul, which could be 10 years down the line."

But: "ProParts simplifies the planning, budgeting and procurement of airframe and avionics spare parts requirements for Citation aircraft. Programme coverage includes all parts and consumables needed for line, scheduled and unscheduled maintenance events."

Galanopoulos says Power-Advantage helps the customer manage engine maintenance costs by providing dependable original equip-ment manufacturer (OEM) parts coverage for line main-tenance and scheduled and unscheduled engine events. All parts for hot section inspection and overhaul are included in the coverage.

ProTech is the latest addition to the Citation ProAdvantage family of programmes. As an option to ProParts, ProTech is a comprehensive main-tenance labour programme for Mustang owners and operators.

Partnerships with operators

Not surprisingly, the providers of cost smoothing maintenance programmes and arrangements have entered partnerships with operators. Jet Support Services, Inc (JSSI) and Avcon Jet of Austria provide an example.

Louis Seno, president and ceo of JSSI, says that, as one of the world's largest, independent providers of hourly cost maintenance programmes for the business aviation industry, the company is focusing on expanding its business in key regions and has appointed Vienna-based Avcon Jet as its new sales representative for eastern Europe, Russia, Ukraine and Kazakhstan.

Alexander Vagacs, ceo of Avcon Jet, says the part-nership with JSSI will help "protect aircraft owners from unexpected costs of main-tenance and provide peace of mind through a predictable maintenance budget."

JSSI, founded in 1989, stresses the importance of hourly cost maintenance programmes for aircraft engines and airframes. Seno says: "JSSI provides its customers with comprehen-sive, flexible and affordable financial tools for managing the often unpredictable costs of operating and maintaining nearly all types of turbine-powered aircraft, including jets, turboprops and turbine powered helicopters. JSSI serves customers globally and manages maintenance services through its worldwide infrastructure of certified technical service representatives."

Avcon Jet, which operates a fleet of 25 jets, says that such maintenance programmes should be "intelligently integrated" with complementary aircraft services and solutions such as sales and acquisition, financing and management etc.

Seno says: "There are three main reasons to consider an hourly cost maintenance programme; the need for budget stability, maintenance cost savings, and increased residual value of the asset. Reducing costs and achieving a stable and predictable maintenance budget are critical tasks in today's market. The challenge with self-reserve is that it is hard to forecast the true cost of an engine overhaul that will happen in the future, plus be prepared to cover any catastrophic or unscheduled event that could happen. So an hourly cost maintenance programme simply protects the owner/operator from the unpredictable cost of aircraft maintenance.

"For in-service aircraft, JSSI gives the owner the ability to enroll most aircraft onto an engine programme without the need to pay up front for hours already flown, often a staggering amount," Seno says. "Instead, JSSI offers the option to defer this buy-in until a future scheduled event occurs, allowing the owner to invest their precious capital elsewhere in their business. All the while they are also getting great peace of mind knowing that any unscheduled event is covered by JSSI."

He adds: "Enrolling aircraft engines with JSSI at the time of aircraft delivery is a smart decision. Not only will the owner or operator ensure complete budget stability throughout the life of the engines, but they will see an increased value of the aircraft at the time of resale. The market is proving that now, more than ever, we see that aircraft on a JSSI programme are selling at a higher price and more quickly than those not on a JSSI programme and this added value is even recognised in the Aircraft Blue Book published today."

JSSI, he says, is not tied to one aircraft or engine manufacturer, so it can cover an entire mixed fleet of aircraft that might consist of anything from an S-76 to a BBJ.

Seno says the company's technical service representatives have been with JSSI for many years and have experience with a wide cross section of engines and aircraft. "No single programme can meet everyone's individual needs. JSSI has a range of programmes that can be customised to meet aircraft owners' and operators' special requirements."

These include the comprehensive JSSI Premium, the JSSI Select which focuses on scheduled and unscheduled maintenance costs without coverage for life limited components and the Tip-to-Tail programme designed for the client desiring a single source option for the entire aircraft. "We are the only company in the industry that provides coverage for virtually any combination of airframe, engine and APU models," Seno says.

"It's not easy to manage the operating costs of an aircraft in today's market and our programmes will help lower overall maintenance out-of-pocket expenses. Our new Farnborough headquarters will be the European base for administration, which will enable JSSI to better serve European clients. We are extremely optimistic about the European market recovery, so our primary focus as a company is to further develop our infrastructure, making sure that we continue to implement the best practices that have distinguished JSSI over the years."

Aircraft manufacturers that have developed their own programmes designed to smooth the costs of maintenance for clients and their authorised centres all stress their specialist experience.

Rolls-Royce trademark

More than 400 Gulfstream aircraft are enrolled in Rolls-Royce's trademark-registered CorporateCare maintenance programme. These aircraft are the Gulfstream G550, G500, G450 and G350. The G550 and G500 are powered by the Rolls-Royce BR710 engines, while the G450 and G350 use the Tay 611-8C engines.

Gulfstream points out: "Power by the Hour is a registered trademark name owned by Rolls-Royce. The company has replaced that name with CorporateCare, at least for business aviation purposes."

CorporateCare will be available for the new Gulfstream flagship aircraft, the BR725-equipped G650, which is scheduled for entry-into-service in 2012. Gulfstream says: "CorporateCare is a fixed-cost engine maintenance management plan based on hours flown. It is made up of high-value services, including engine management, asset and logistics services, engine repair and overhaul and encompasses the experience and technical excellence unique to the OEM."

It adds: "CorporateCare, which started in 2002, is available for new and in-service engines. The most important financial benefit it provides operators is enhancing the aircraft's residual value. If the aircraft is sold, the CorporateCare maintenance plan is transferable. CorporateCare also gives operators predictable maintenance costs, reduces their need for capital investment in the form of spare parts and tools, and increases aircraft availability since a lease engine is included in the programme if your engine is in the shop."

Aircraft enrolled in the CorporateCare programme must be worked on at authorised Rolls-Royce facilities, which number 40 worldwide, or by one of Rolls-Royce's 250 authorised mobile technicians.

Most Gulfstream G150 aircraft operators subscribe to the Honeywell Maintenance Service Program (MSP) for the Honeywell 731-powered aircraft. MSP, similar to Rolls-Royce's CorporateCare, will be available for the HTF7250G-powered G250, which is scheduled for entry-into-service in 2011.

Engine maker Pratt & Whitney Canada offers its Eagle Service Plan, a pay-by-the-hour programme, for Gulfstream G200 operators. The aircraft is equipped with Pratt & Whitney Canada twin 306A engines.

Phil Lammiman, md Bourne-mouth, England-based CSE Citation Centre, says: "Having been a Cessna Authorised Citation Centre for 21 years we have grown up with the power advantage programmes that have been introduced by Cessna over the years. Originally the first programme was called Pro Parts. This programme consists of a contract between the aircraft owner or operator and Cessna for the supply of parts only for the airframe. The owner paid Cessna a rate per flight hour and CSE fitted all the required parts and claimed the cost back from Cessna."

He adds: "The programme ensures the customer receives genuine Cessna approved parts with all the associated warranty and good quality. To qualify the parts must come through Cessna parts department. The programme is very comprehensive and covers just about any airframe part on the aircraft with very limited restrictions. From a business perspective this has worked very well for CSE. Purchasing is made easier as we have one port of call for parts supplies. This reduces our overhead as we do not need a purchasing department to source parts. The other added benefit for the owner is a known expenditure on parts on a monthly basis and the effective reduction of the shock of high cost items that may be required for the aircraft. This helps our relationship with the customer as surprises are limited in the overall maintenance process."

Cessna has extended the programmes to take in engine scheduled maintenance including hot section and overhaul to varying levels of support and more recently labour contracts that support all scheduled and unscheduled servicing.

Lammiman says: "We have seen a high take up of the programmes on the Mustang. Out of the 18 Mustangs we maintain 70 per cent have the full suite of power advantage programmes. An added benefit of the support programmes is higher values on the aircraft. Any aircraft that has support programmes will command higher sales values than an equivalent aircraft without programmes."

Dassault offers FalconCare, a financial product that covers scheduled and unscheduled main-tenance costs based on hourly, monthly and per landing rates. Jacques Chauvet, svp worldwide customer service, says the programme will soon celebrate its 100th contract and has been very successful.

"FalconCare is based on the 'Pay as you Fly" philosophy. It means that the operator will be charged monthly according to its specific flight activity based on the flight hour numbers, the cycles (landings) and a fixed rate per month," Chauvet adds. "It was developed after extensive discussions with current Falcon operators and matches their requirements to take all the surprises out of budgeting for maintenance operations."

Dassault recently undertook a major review both of its company-owned and its authorised service centre (ASC) network. Chauvet reports: "The traditional network had worked well in areas with large Falcon fleets such as Europe and the United States, but had to take into account the development of the Falcon fleet in new emerging markets for business, as well as the growing number of transient aircraft in these regions. Dassault Falcon has five company-owned service centres and 26 ASCs strategically located throughout the world. These centres are now focusing on three different categories of maintenance and other service options are being added, making the network more flexible and accessible." The company has recently added five satellite service stations with 'GoTeams' positioned on four continents offering consistent access to high levels of service.

James Hebert, manager Smart Services Business Aircraft, says Bombardier launched Smart Parts for its Challenger 600 and 601 series in 1986. "Customers paid a monthly flight hour rate for comprehensive component coverage of a wide range of airframe systems including avionics." There was an innovative two step approach to flight hour rate pricing providing operators with lower rates during aircraft warranty. This approach was also applied to its engine coverage programme in later years. Hebert recalls: "Market acceptance was strong and additional programmes were developed with expanded aircraft coverage over the next 20-plus years, with Smart Services established as the umbrella of Bombardier's cost per flight hour solutions which include Smart Parts, Smart Parts Plus, Smart Parts Engine Coverage and Smart Maintenance Plus."

Six years after Bombardier's acquisition of Learjet in 1990 its Smart Services offerings were extended to include the then current Learjet aircraft models. Bombardier's cost per flight hour programme growth now embraces 17 of its models: the Learjets 31A, 40, 40XR, 45, 45 XR, 60, 60 XR; the Challenger 300, 601-1A, 3A/3R, 604, 605, 850, 870; the Global Express, Global 5000 and Global XRS.

"Total enrollment in Smart Services programmes is over 1000 aircraft and participation has surpassed three million flight hours," Hebert says. "Evolution of the Smart Services programmes expands on the initial Smart Parts offering with added coverage and transferability at aircraft resale. Buyers wishing to take advantage of existing coverage simply accept a programme transfer. Should the aircraft not be enrolled during resale buyers can enroll with a combination of flight hour rate price adjustments, enrolment fees and enrolment inspection."

Hebert points out: "Aircraft resale values can benefit as buyers are protected from upcoming covered maintenance costs as per the applicable programme and due to the pedigree of goods and services that were available and covered under the programme."

Common to all Smart Services programmes is the convenience of everyday maintenance items such as tire wear, brake wear, landing lights, expendable discard items such as gaskets, seals, o-rings and airframe system filters, he says. "In addition, and most difficult to predict for any flight operation, you will find coverage for most Bombardier issued alert and recommended service bulletin kits and components. By itself, this can be an important element of cost coverage. Beyond these items lies the area most sought after by operators for cost predictability and budget prot-ection. Major airframe systems are covered for most scheduled and unscheduled component replace-ments such as: air-conditioning, autopilot, communications, electrical generation and distribution, fire protection, flight control systems, hydraulics, ice and rain protection, indicating and recording, certain landing gear components, lights, navigation, crew oxygen, pneumatics, windshields, cabin windows, thrust-reverser actuators and switches."

Certain Smart Services prog-rammes such as Smart Parts Plus also cover select secondary structure items such as door steps, wing tip lenses, landing light lenses, thrust-reverser cascades and composite fairings.

In 1998 Bombardier entered the engine coverage market with its Smart Parts Engine Coverage (SPEC) on Challenger 604s. Hebert says: "Operators enrolled in Smart Parts Plus could pay an additional flight hour rate to benefit from SPEC coverage with single monthly payments for both airframe and engine programmes."

SPEC is available for Challenger 604, 605 and 850 as well as certain 601-3R aircraft with on-condition engine maintenance. "The programme covers virtually all engine components and associated removal and re-installation labour. Engine shop visits are also covered for engine caused events and lease engines under those conditions. Transportation of both the removed engine and lease engine is included. Engine manufacturer service bulletins category 1 through 6 are included at next access or shop visit and may have a maximum value cap over the contract term. Trend monitoring, filters and ignitors are part of the programme. Certain items may require a prorated cost sharing with the operator such as achieved life limits for repairs."

Continued programme releases provided operators of newly-delivered Bombardier aircraft Smart Main-tenance Plus starting in 2006. "This programme was designed for the operator frequenting Bombardier Aviation Services service centres and certain Bombardier authorised service facilities," says Hebert.

Smart Maintenance Plus added scheduled labour inspection cost coverage to all the features found in Smart Parts Plus. "With that, a truly comprehensive programme was available for the operators' choosing. All current Bombardier production models are eligible for enrollment at time of new aircraft delivery. In addition, for Challenger 605 and 850 models, unscheduled labour is included out of warranty in years four and five. Following the first term expiration operators may convert to Smart Parts Plus for continued participation in Smart Services."

Bombardier's actual Smart Services Agreements contain details of exclu-sion and coverage and their terms and conditions at all times prevail.

Impact on resale values

Owners and operators will suffer if they skimp on maintenance to the detriment of the resale price.

W Barry Smith of dealer-broker Business Air International says: "Whether you like them or have a philosophical objection to engine prepaid maintenance programmes, when it comes to private jets, they are absolutely essential when it is time to trade or sell your aircraft. Our experience shows that if the aircraft is not enrolled on such a programme, the owner will have to reduce the cost of the aircraft by whatever it takes to enroll the aircraft onto a programme. Virtually every buyer is fully aware that the largest exposure in acquiring a used aircraft involves unscheduled engine maintenance and repair. Importantly, the cost to enroll an aircraft on such a programme after several years' use is significantly more expensive than having paid to be continuously enrolled on such a programme. And this same concept is becoming almost as mandatory regarding airframe support programmes."

Smith adds: "We have noted a mild buyer preference for maintenance programmes over independent programmes, but being on such a programme is absolutely mandatory when it comes to resale."

When it comes to resale values, many owners and operators invest in bespoke cabin conversions and the advisability of looking at how to smooth maintenance costs is allied to preserving the records critical to preserving resale value.

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