Engine Service Plans, should or should-not?

Manufacturer or third-party Engine Service Plans are expensive to enroll your engines into, however you may find that later on in your ownership, having not enrolled may have proved to be even more expensive. Let me explain. Enrolling your engines into a program is always the absolute least expensive either at the new aircraft delivery, or immediately after your engines have been overhauled. The program usually works in one of two ways, but it is not uncommon for programs to combine both types or systems:

The first type is the ‘Fully Vested Program.’ This type of program means that the subject engines are analyzed  for their current condition, hours, cycles and modification status, then a lump sum is paid to the service provider up-front, thus ensuring that from that moment on, as long as the agreed hourly rate is paid to the provider for every subsequent hour flown (usually at the end of each month), all future required engine maintenance, inspections, repairs, and overhauls are paid by the service provider on your behalf, instead of directly out of your pocket, when due. Obviously you have paid for these future events up-front both with your initial ‘up-front’ buy-in, and also the hourly payments.

The second type is the ‘Progressive Buy-In’ or ‘Pro-Rata’ Program. This type of program means that after your subject engines have been analyzed  for their current condition, hours, cycles and modification status, then a nominal sum is paid to the service provider to enrol and start the program. Then as the engine accumulates more hours and you have paid the provider for these hours, monthly as they are flown, your engines gradually accumulate a balance of credit against which future maintenance is paid by the provider equal to the percentage of coverage that has been accrued in the account, i.e. you have 50% of Pro-Rata accrual vested into the program, you and the service provider shall share the maintenance events equally 50/50. It is normal that the actual inspections are covered by the provider 100%, however the parts replacement and repairs are subject to the pro-rata vesting calculation. Check the fine print of your service plan to understand what is actually covered.

When you are purchasing an aircraft that has engines that are currently enrolled on a program, be absolutely certain what type of plan they are covered by. If it is the fully vested plan, great! If they are on a pro-rata plan you must get a detailed report of the percentage value of coverage. Don’t be surprised if you find that each engine component disk, shaft, blades, etc are all covered at different percentage rates.

As an example of the costs normally associated with engine service plans, a ‘fully vested’ program buy-in can vary from zero cost at new delivery, to $500,000 or more per engine. The buy-in amount is variable considering the time, cycles and status of the engines. Obviously if the engine is close to being due for overhaul, and most of the major rotating components (disks, shafts, blades, etc.) are coming due for replacement at the same as the overhaul, the buy-in will reflect these upcoming expenses, and may even be proposed at a higher cost than what may be reasonably expected without enrollment and buy-in. The per hour rates can vary from less than $200 per engine to more than $1,000 per engine, depending on the age, model and condition of the subject engines.

As previously mentioned, the fully vested programs usually cover the engines for all instances of failure, except of course foreign object damage (F.O.D.), which is always covered by your insurer separately. Upgrades and improvements that are developed by the engine manufacturer, as in-service experience is gained by the operational fleet as a whole, are normally also covered. This level of care and coverage does not normally follow with a pro rata program. In fact, other than the coverage for catastrophic failure, many other items just are not covered, and must be paid for out of the subscriber owner’s own pocket. Getting upgrades and improvements incorporated into your engines, can be a true battle under the pro-rata program. Often when components are to be replaced at Hot Section or Overhaul, the pro-rata program provider will normally arrange to put used replacement parts in your engines. This then boils down to an issue of resale value.

Almost all of the programs will never refund your accrued cash balance that you have accrued against your engines. However it is usually possible to transfer the accrued credit over to a different aircraft within your fleet, if you are a multiple aircraft owner. There is no ‘cash in’ facility.

So with all of this said, should you, or should you not, enroll your engines onto a plan? The normal rule of thumb is that if you own two or more of the same aircraft type, you are better off self insuring and accruing your own funds for the future maintenance events on your aircraft engines. If you are buying an aircraft that is already enrolled, you might as well keep it enrolled by paying the minimal transfer fee and continue making the hourly payments.

If you are thinking about enrolling your engines into a program, I strongly suggest that you first research what exchange or out-right purchase engines are costing out in the open market, along with what the projected cost is expected to be several years subsequent. A case in point where an engine program is a sheer waste of money, is on the Honeywell TFE-731-2-1C engine as installed on the Falcon 10. A full buy-in can be as much as $550,000, while engines are available for purchase for less than $200,000 each.

Unfortunately most people really don’t understand the nuances of the pro-rata programs, from the standpoint of added resale value. An aircraft that has engines paid-up and current on a fully vested program, will normally command much higher resale values than aircraft that have no engine program. At te time of resale, your asking and selling price must reflect this aspect of value for it to sell in a timely manner.

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