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Aircraft Engine Program Enrollment - Logical Analysis

By Michael Dwyer

September 27, 2022

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? 

Define Perspective

First, as mentioned, the assessment has various scenarios that steer the perspective of analysis:

  • Are you a new owner, enrolling from scratch?
  • Are you purchasing a new jet that has a known engine, or a new jet with an engine design that has never been in service before?
  • Are you purchasing a pre-owned airplane not currently participating, deciding to enroll or not?
  • Are you buying a pre-owned jet, targeting an aircraft already enrolled?
  • Are you buying a pre-owned jet, targeting an aircraft not enrolled?
  • Are you financing the aircraft with a debt or lease structure?

Assess Variables

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. 

The Engine

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: 

  • Hard Time - Significant inspections (typically a mid-life and overhaul) are performed at a set number of hours flown. As an example, if an engine's mid-life is due at 4,000 hours, then the overhaul is at 8,000 hours. 
  • Calendar Intervals - Limitations are added (typically on top of hours) by annual sums. In the same example above, mid-life is performed at 10 years or 4,000 hours, whichever comes first.  Then the overhaul occurs at 10 years or 4,000 hours from the mid-life, whichever comes first.

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):

  • Maturity of Engine, Years in Service - How long the engine has been in service, with how many different airframes, and whether the engine is a clean sheet or derivative design will all contribute to maturity. 
  • Number of Overhauls Completed - The more overhauls completed, the more facilities capable as well as available to complete overhauls for the particular engine, the more predictable the pricing.
  • Loaner Pool - When an overhaul is completed, it is typical to put loaner engines on the airframe. This allows the airplane to continue to fly while the engine maintenance is performed. The number of available loaners will be a factor of the number of same model engines produced.

 

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: 

  • Engine Manufacturer - All engine manufacturers will administer their own programs, sometimes dictating that only they can perform the maintenance.
  • Airframe Manufacturer - Some airframe manufacturers will administer the engine program to maintain a relationship with the owner. 
  • Third Party - JSSI (Jet Support Systems, Inc.) is the largest third party vendor to administer engine programs for a variety of airplanes. They offer customization for the operator such as labor, maintenance programs going beyond the engine (tip to tail), and financial opportunities such as transferring the equity to another airframe.

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. 

 

The Operator

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.

 

The Market

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. 

 

Calculate Risk

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: 

  • Is it less expensive to pay for the maintenance when it is due or pay as you go?
  • How does the equity in the engine program translate to the fair market value of the aircraft at time of purchase or sale?
  • What is the time value of the program money you spend or do not spend over the life of the engine?
  • What is the cost difference between a debt/lease proposal when the engine is enrolled versus not enrolled?
  • It is easy to calculate the decision to enroll or not enroll if you know with a certainty the:
    • Cost of the engine event in the possibly distant future
    • Cost of the engine program for the life of the program
    • Cost of any engine issues that could arise that are unexpected
    • Timing of exactly when the engine event will occur
    • And so on….

Then assess the risk:

  • The cost of the maintenance events far in the future cannot be predicted with certainty. You can't put it into a spreadsheet with guaranteed numbers, therefore calculations are built on proposals, industry averages, and projections. 
  • The intervals of the maintenance events are not known for “on condition” engines, which is the direction most engines are pursuing in the higher thrust categories.

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. 

 

Logical Deduction

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: 

  • If I am the first owner, will never be near an engine event, and believe the fair market value will be equal to the enrollment fee of a mature, bullet proof engine, then I’m either neutral or against enrollment.
  • If my ownership term will include an engine event and the airplane is already enrolled with equity I am paying for, then I am positive engine program.
  • If I favor operating expenses over capital improvement, then I like enrollment.
  • If I want to keep out-of-pocket operating costs down and believe my fair market value adjustment will be reduced by what I saved in engine program payments, then say no to enrollment.
  • If I prefer the devil I know, to the one I can’t perfectly predict, then enroll.
  • If I see enrolled planes selling faster, for more money after adjusting for enrollment, then enroll.
  • If my annual flight hours are well under the minimum required hours in a program, then I don't like enrollment.
  • If I like predictability and level payments, then I enroll.
  • If the engine is a new design, the engine is on-condition, the fleet size is small, and there have been no mid-life or overhauls performed yet, then I like enrollment.
  • If my debtor or lessor requires enrollment, then I'm for it. If they differentiate the cost of an enrolled or unenrolled engine in their proposal, then I include this difference in my mathematical calculation. 
  • If my aircraft is under warranty, then I don't have as much concern for maintenance events in the short term, and might not enroll yet.

 

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. 

Contact Guardian Jet

Posted in: Maintenance

Media Contact


Jill Henning

jill@forwardstmarketing.com
+1 203-453-0800

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