In the last posting that I made on this topic of Real Costs: What Your Own Business Jet Really Costs – The Formula Explained, we explored the existence of a “Magic Formula” which becomes very evident after analyzing the comparative numbers for the utilization of a Jet-Card, a Fractional Share, Charter or Direct Ownership, so you can use business aviation as your chosen method of transportation. We learnt that you will have the lowest operating cost, per flight-hour ‘overall’, if you own your aircraft when your annual utilization is above 240 hours of flight-time.
The next logical step for us to explore in this topic, is what a typical Annual Operating Budget will look like, when you choose to own or lease a business aircraft either directly in your name, or the name of your company.
I have decided to stay with the Cessna Citation 750, or how most people know it: “The Citation X.” Some of you may ask “Why the Citation X?” That’s easy for me to explain…It is a small to medium sized aircraft. It only has two engines, but is very fast (see my previous post: The Supersonic Business Jet: Why Are We Still Not Privately Flying at Mach 3?) and lastly, it is the most prolific aircraft in the domestic fleet of the World’s largest Fractional Provider and therefore many readers here would likely have had some exposure to this aircraft.
So what does an Annual Operating Budget consist of? Well to begin with an aircraft must be purchased either outright with your own cash, outright with a banks cash loaned to you; or outright with a bank or leasing companies cash, and then leased to you. Either way, you will be out of quite a bit of money that must be accounted for, therefore we shall start off with the “Monthly Nut.”
Banks are like any commercial entity; they exist to make money. Mostly in huge amounts, unless of course their Machiavelli traders choose to invest in junk investments, like they did before the U.S. government had to introduce the Troubled Asset Relief Program (TARP) in late 2008 to bail them out. Even though many complain that they are still unable to obtain a loan, the modus operandi of the majority of banks is un-changed, i.e. they prefer to loan money to people or entities that which really don’t need the financing based upon their liquid wealth. To simplify, banks have always preferred to lend to rich people, who are virtually zero-risk. Thus if you have the liquid assets sufficient to cover the purchase of an aircraft straight out of your own pocket, then I guarantee you that the banks that specialize in financing aircraft transactions, will all clamor for your business.
With this understood, what is available to you?
Some banks will still offer to finance based upon 90% of the market value of the aircraft that you wish to purchase. Don’t ask for a loan on any aircraft that are older than 15 years of age because you will not get it. Beyond this target, the resale value of the aircraft is considered just too risky. The sweet-spot for banks is 10 years or less.
You will easily find several packages that feature fixed rate or variable rate mortgages with amortization terms up to 20 years.
The rates are typically based upon the London Inter-bank Overnight Rate (Libor), plus 1% right up to 4%, depending on the size of the down payment that you make up-front, and your credit quality. You will also be offered either a Tax or Non Tax, operating lease (these usually come with a balloon payment at the end of the term), or a straight purchase. Virtually all of the aircraft mortgages come with an early pay-off penalty, unless of course you negotiate this clause out of your contract before you sign.
Okay now let’s go back to the ‘meat and potatoes’ of a ‘monthly nut’ on a typical bizjet. For the purpose of illustrating a typical annual budget, you will remember that I selected the Cessna Citation model, most commonly known as the Citation X, as our guinea pig.
As I write this, there are currently a total of 29 Citation X Aircraft that are actively advertised for sale, which is approximately 9% of the 307 Citation X Aircraft that are in existence. This percentage figure actually indicates that this particular model is still experiencing an improving “Bear Market” when viewed in Stock market terms.
To be clear about Market Condition Terminology:
A normal “Bear Market” for most bizjet aircraft is trended when the number of “available aircraft” versus the “active fleet” moves above or >10%, in this case, though, *the Citation X has historically been trading at an average of 5% of fleet availability and therefore this normal rule-of-thumb must be tempered accordingly.* The worst percentage for the Citation X was 11.15% back in November of 2009. This market is slowly improving like others are too.
- A “Stable, or Healthy Market” is normally trended when the number of “available aircraft” versus the “active fleet” remains at 10%
- A “Bull Market” is trended when the number of “available aircraft” versus the “active fleet” moves below or <10%. Please see my *note above for the Citation X.
Prices/Values have for a large part now “stabilized.” Since October/November of 2008, all values, all across the board for every aircraft in the fleet has dropped to between 40% and 60% from the numbers seen prior to that period in history. It will be a very long time before “Parity” (present day value equals the original ‘new’ delivered price) is once again reached by half of the younger fleet models; most will never see “Parity” again. The bubble of 2004-2008 saw many aircraft trading as much as 15% above “Parity.”
The Lowest Advertised Asking Price for a Citation X Aircraft is $6,750,000; the Highest Advertised Asking Price is $14,600,000.
The Lowest Total Airframe Time of the 29 Citation X Aircraft that are advertised for sale is 400 Flight Hours; the Highest Total Airframe Time of this same group is 10,512 Flight Hours.
The average number of days on the Market = 286, i.e. the average time-span between listing to a completed sales transaction. Some of the quoted figures are provided by Amstat Corporation: http://www.amstatcorp.com/
The current ‘new price’ of a 2010 Citation X is about $21,700,000. If you have the stomach or desire to buy new (Bonus Depreciation makes an excellent case for this: The Bonus Depreciation Extension to Create Jobs Act (S. 3513) was introduced by the Senate Finance Committee Chairman Max Baucus (D-MT) and ranking member Chuck Grassley (R-IA.) The new bill would reinstate the 50% bonus depreciation retroactively for new aircraft purchases through 2010. On June 29, Chairman Baucus offered the bonus depreciation provisions in Senate Bill 3513 as an amendment to the Small Business Lending Fund Act (H.R. 5297) which passed the House on June 17. Although there is certainly no assurance that either the amendment or the original bill will pass, bonus depreciation has a strong bipartisan support for it and has long since been recognized as an effective job-creating incentive.) If you are not Tax-Driven, then you might want to hold-off until next year though, because-beginning in 2011, Cessna will be delivering the Citation X with the Honeywell Primus Elite avionics systems and a new Honeywell cabin management system featuring MP3 player inputs and high definition monitors. Not to worry if you do buy used, because this upgrade will also be available as a cockpit retrofit option at the factory service centres.
We are going to buy used in this article, and the price that we have agreed to pay is $10,000,000.
Our wealth permits us to qualify for a 5% loan for 10 years, with a down payment of 10%, which in this case is $1,000,000. Our resulting loan schedule would look like this, with no balloon payment due at then of the 10 year term:
Monthly Payment = $ 95,458.96
Total Payments = $11,455,075.65
Therefore our Monthly Nut for Debt Service, alone, is about $95,000; or specifically $1,145,507.52 per annum.
Before you close the sales transaction and you become the proud owner of your own Citation X, you must first arrange insurance. Your hull rate will likely be calculated, based upon 14% of the Hull Value, which in this case is $10,000,000. The accepted normal liability coverage is $200,000,000, but there does vary-fairly widely, based upon the type of ownership, and aircraft use.
Your annual insurance premium will be about $30,000 per annum. I do expect that this period of extremely low premiums will start to rapidly increase, because insurers have been living through a price-war for too long now.
Next you will need to house this valuable piece of machinery. Since the real-estate bubble burst, there is quite a good supply of hangar spaces available to you, depending on which region you select to base your aircraft. It is not unusual to have to pay over $5,000 per month for hangarage at top-class amenity fixed based operators (FBO’s) near Los Angeles, San Francisco, Phoenix or New York. However away from these hot-spots, you will probably find a deal somewhere around $3,000 per month.
Thus your annual hangarage cost is $36,000 per annum.
Even if you never flew your Citation X, it will still need to be maintained on both a calendar schedule, as well as an hourly schedule. With zero flights flown per year, inspections and component replacements will continue to come due every 3, 12, 24, 36, 60, 72, 120, and 144 months, otherwise it will quickly become un-licensed and un-airworthy.
This calendar schedule of maintenance is also supplemented by an hour based schedule that ranges from 270 to 15,000 hour intervals. Failing to take your motor car in for its oil-change probably won’t kill you, but failing to observe the defined limits of the maintenance schedule on your jet, actually might. Maintenance is exactly what it says as stated. Spending money on it will not increase the value of your aircraft, but instead it will maintain its value, as well as its utility. I will come back to the cost amount that you should budget for, in a separate section of this article, because I find it easier to roll it into the hourly expense denoted by the Direct Operating Cost (D.O.C.)
Okay so now you have the aircraft bought, insured and housed. Next you will want to fly it, or at least have it flown for you if you are not appropriately rated in the aircraft yourself. You will need to hire pilots. My esteemed friend Jeffrey Reich, from Elevon Consulting, and a contributor to the Blogs at the Forbes website http://www.forbes.com/, can expand upon the issue of how many pilots should you have in your employ, to run a safe and efficient flight operation, see: http://blogs.forbes.com/wheelsup/2010/07/13/single-or-multiple-executives-or-pilots/ for some insight into this issue, I will not talk on this subject in this article, except for saying that you will need to hire a Captain and a Co-Pilot for your Citation X. So how much will this cost you?
I would budget $300,000 per annum for salaries and benefits, and a further $50,000 for their recurrency training (Flight Safety-Simuflite, etc.) Total annual expense = $350,000. Of course if you like to fly with a flight attendant, then that persons cost must also be rolled into your budget. A Citation X is a mid-size aircraft, and is often flown without a flight attendant, however another fellow Forbes blogger, Susan Friedenberg from Corporate Flight Attendant Training & Consulting, will always recommend that you fly with a third crew member. See why here: http://blogs.forbes.com/wheelsup/2010/06/16/is-the-person-in-the-back-of-your-private-aircraft-trained-to-save-your-life/
Depending on where you fly to and from, you are likely to have to pay landing fees, handling fees, and possibly even navigation fees, i.e. there is a cost to fly through much of the world’s airspace, we are fortunate that this cost is charged in the United States, by the payment of a Federal Excise Tax (FET) on the fuel that we consume, thus making the charge a little fairer across the general aviation spectrum. Don’t ever be fooled into believing that the airlines, and air-taxi folks are paying the lion’s share, because they pay no FET whatsoever, and instead charge it to their passengers. Do I sound bitter here, well maybe, and this is because Business and General Aviation is constantly under attack from the airlines especially, because they accuse us of causing congestion without paying for the right to be in the same airspace as them. Well now you know the truth. They are paying naught to be there! Read the truth here: http://blog.globalair.com/post/Aircraft-User-Fees.aspx Anyway, lets add $20,000 a year for these fees, except for the FET, which is charged at a rate of 7.5% of the cost of each U.S. gallon of Jet A/Jet Fuel that you purchase.
I will leave you to assign your own figure to how much you want to spend each year on catering, snacks, drinks, etc. because each to his own tastes in this department. However I do believe that you want to fly in a clean aircraft, both inside and out, therefore let’s assign $6,000 a year to keep your pride-and-joy looking spic, and span.
All right, now for the penultimate expense, before we conclude this article with the grand finale cost breakdown summary; the Direct Operating Cost.
The lighter an aircraft is, the less fuel it burns to fly. In the real world, for every hour an aircraft flies, its specific fuel consumption goes down. In the case of the Citation X, the fuel burn schedule looks like this: 430 u.s.g. per hour fuel burn in the take-off and climb-out. 350 u.s.g. per hour fuel burn during the initial cruise, dropping down to 300 u.s.g. per hour, after a couple of hours of sustained cruise flight. If you elect to fly slower (but why would you want to?) you can get the fuel burn down to as little as 230 u.s.g. per hour. For the purpose of this analysis I will use a standard fuel burn of 360 u.s.g per flight hour.
Do you remember that earlier I spoke about the maintenance cost of the Citation X, without actually quoting any figures? Well now I am going to roll this cost into the hourly fuel burn cost including engine reserves (what I mean by engine reserves is the cost per hour allotted based upon the cost to overhaul the engine including component replacements), and restoration and refurbishment, i.e. the cost refurbish your interior due to wear, fading, etc. and also to strip and repaint the exterior, all into one number.
Therefore your Hourly D.O.C. = $2,370. This is based upon 400 hours of flight operation per annum, and the fuel price, including FET being $4.50 per u.s.g.
Now we have all of the figures necessary to see what your own business jet costs you to own.
Owning and flying the Cessna Citation X over the course of one year, while on a mortgage, will cost you as follows:
Annual Mortgage Payment = $1,145,507.52
Annual insurance Premium = $ 30,000.00
Annual hangarage Cost = $ 36,000.00
Annual Flight Crew Cost = $ 350,000.00
Annual Navigation Fees, etc. = $ 20,000.00
Annual Cleaning Cost = $ 6,000.00
Annual D.O.C. (400 hours) = $ 948,000.00
TOTAL ANNUAL EXPENSE = $ 2,535,507.52
Don’t forget that you also paid-out $1,000,000.00 initially, as your down payment on your aircraft; therefore your first year’s Annual Budget Spreadsheet should read $3,535,507.52.
If you are a company, you can both depreciate, and expense a lot of this annual cost. I strongly urge you to speak to a savvy aviation accountant about what tax benefits and liabilities apply to your situation.
Please call me if you have any questions. You can reach me by calling my direct number at: +1.636.449.2833, or emailing me at: email@example.com