Maintenance Costs: Significant but tricky

It is probably a pretty safe assumption that you've either worked in or around the maintenance department most of your aviation career. And, it's probably equally safe to assume that maintenance costs are a frequent topic of conversation within your organization.

Whether it's management asking for an explanation about certain costs or trying to pull information together to complete the budget, maintenance costs are a high priority. But have you ever been curious about why maintenance costs are worth so much attention?

Two reasons seem to cause the attention. The first deals with the significance of maintenance costs when compared to an organization's total operating costs. The second, which is less obvious, deals with the behavior or timing of maintenance costs as an aircraft or the fleet accumulates flight hours.

Significance of costs
The significance of maintenance costs is a well-documented and therefore well-known subject so that not many in aviation would argue against this as a reason that causes attention. (I am not attempting to relate value with the incurrence of maintenance costs. Each organization should have determined the value of using an aircraft before starting to operate one.) Due to its familiarity, I will cover the significance of maintenance costs briefly.

Maintenance costs will vary according to the class of aircraft, for example jets vs. turboprops vs. pistons vs. helicopters. Maintenance costs will also vary according to aircraft type, i.e., a light jet vs. a medium vs. a long range. Regardless of the class or type of aircraft, industry literature, surveys, records, and conversations indicate that maintenance costs can range from 10 to 45 percent of the total yearly operating expenses. Ten percent may not seem significant but when total operating costs can be in the hundreds of thousands or millions of dollars, then even 10 percent becomes significant.

If a cost category is significant, that alone will catch the attention of the executive management team. However, maintenance costs have an additional characteristic that attracts attention - their behavior over a period of time or flight hours.

Behavior of costs

As a technician you are aware that certain maintenance events require more time and parts to complete than others. For example, a major event such as a D check will take more resources to complete than an A check. But while you are aware of this difference from a technical perspective, you may not be aware of the related cost differences. The two go hand in hand. If one inspection requires more time and parts to complete than another, then the cost should also be greater. But cost-wise certain questions come to mind. How much of a difference? When do the differences occur? And, what causes the differences?

The following three scenarios will help to answer those questions, which in turn, will illustrate how the behavior of maintenance costs attracts attention.

Figure 1 chartScenario 1 - Figure 1 illustrates the maintenance costs per flight hour for an aircraft over a 13-year period. Without going any further, you can already see that the maintenance costs vary widely from year to year. This type of behavior can cause difficulties for the financial function of an organization.

Let's assume that you've just completed the 11th year. A representative from your executive management team walks into your office. He states that the executive team has been reviewing the maintenance costs for the last year and has concluded that the current aircraft is too expensive to operate. And that perhaps it's time to get rid of the aircraft or get out of aviation altogether.

What is your response? Can you point out to the representative that in actuality, the average cost per year over the 11-year period is about 33 percent of the cost of the most recent year? The average maintenance cost per flight hour for the 11 years has been about $210 while the cost per year for the most recent year, as shown, was $625. This is a very significant point to make especially if it ensures longer-term employment.

There is another factor to consider that would affect the maintenance cost per flight hour. How many flight hours were flown in each year? If the flight hours varied significantly each year, that factor alone would affect the maintenance cost per hour, even if maintenance costs remained the same from one year to the next. However, the increase in maintenance costs per flight hour is compounded if you experienced both a reduction in flight hours and an increase in maintenance costs in a given year. This is a very likely situation in a year of heavy scheduled maintenance. Is this a possible cause of the high maintenance cost per flight hour in the 11th year?

If this were the situation in the 11th year, then perhaps you would want to discuss this with management so that an important decision is not based upon an incorrect assumption about the behavior of maintenance costs.

Scenario 2 - In this scenario, let's assume that it is late in the 10th year of operation as illustrated in Figure 1. And in this case, late means it's time to budget for the 11th year. At this point, you can only rely upon the historical maintenance costs. Therefore, you would know that with a little research, the average maintenance cost per hour for the first 10 years is about $170. If you projected that same rate for the 11th year, you would be about $40 (11-year average of $210 less the $170) short per hour for the upcoming year.

It is doubtful that your financial folks would appreciate this error in estimation. Generally, they are a conservative group and do not like surprises, especially surprises that cause a cash shortage. However, realize that using cost per hour has a fundamental shortcoming.

As mentioned in the first scenario, total annual maintenance costs or the number of flight hours can affect the resulting maintenance cost per flight hour. Rather than using maintenance cost per flight hour, build your budget on predicted total maintenance costs, which should yield a more accurate estimate.

For this scenario, let's assume that the information in Figure 1, maintenance costs per flight hour, is all that you have to work with. Is there something else that you can do to better understand and predict maintenance costs? Viewing costs from a slightly different perspective could help with budgeting.

Figure 2 takes the total maintenance costs as shown in Figure 1 and breaks out the scheduled costs so that what remains are the on-condition costs. (On-condition represents those costs that are associated with items that get replaced due to their condition and are not based upon a schedule.) Figure 2 reveals that through the 10th year, this aircraft has averaged about $110 of on-condition maintenance costs per flight hour. Also the last three years have varied little but have been above the 10-year average. That must mean that the difference between the 10th year in Figure 1 ($625) and the same year in Figure 2 ($150) is attributed primarily to scheduled maintenance costs.

Fortunately, scheduled maintenance costs are:

  • More predictable because they are normally tied to a scheduled event and
  • Easier to estimate because they are larger in amount, therefore, they receive more attention, which causes better available information and with some research will generally yield an average cost.

As a result of breaking your costs down, what appeared to be a very large gap between the total maintenance costs and on-condition maintenance costs is not as intimidating.

Figure 2 ChartThere is another indirect message when comparing Figures 1 and 2. The explanation for the behavior of maintenance costs may not be readily apparent when viewed in total. However, breaking the costs into smaller categories (on-condition vs. scheduled) may reveal more predictable behavior. For example in the 11th year, scheduled maintenance costs accounted for about 75 percent of the total maintenance costs. Additional ways to break costs down might include:

  • Engine vs. airframe vs. accessories,
  • Location or system (ATA codes) on the aircraft, and
  • Mean-time-between-removal.

Scenario 3 - Let's assume you've just completed the 13th year, as reflected in Figure 1. You're working for the same organization as in Scenario 1. Again, a representative from the executive management team walks in and says that he has been talking to someone from another company that operates the same type of aircraft. The other company mentioned its maintenance cost per hour which is significantly less than what your organization has experienced. Being somewhat new, the representative is a little emotional and somewhat suspicious of the maintenance department.

What is your response? First of all realize that the representative has performed what has become one of the popular buzzwords in our industry. The person has benchmarked the cost of your aircraft against that of another and in doing so, has made an assumption: Your aircraft should cost about the same as the other company's. And in total, over a long period of time, with a similar number of flight hours, perhaps the total cost will be similar. But as you are probably aware several factors can make the representative's comparison a bad one.

You will probably want to clarify several points to make sure the comparison is valid. Listed below are some of the factors that could explain the differences. They are all reasons that can help to explain the actual and perceived behavior of maintenance costs.

  • One of the first items to determine is where each aircraft is in its life cycle. You know that your aircraft is mature, as you have operated it for 14 years. What about the other aircraft? Making an assumption that its costs have and will behave similarly to yours then, if it has operated through the fourth year, its average cost per flight hour would be about $100 less. Even after the somewhat expensive eighth year, the other company's aircraft would still be about $40 per flight hour less.
  • Even if the other company had operated the aircraft for 14 years, that does not permit a meaningful comparison. The other company may have flown significantly less hours during the 14 years and as a result, that aircraft has not yet encountered the scheduled maintenance that you experienced in the 11th year.
  • How operators have used the aircraft can create differences in cost. Take helicopters as an example. Lifting heavy loads vs. flying from point to point on lengthy routes can create total maintenance and timing maintenance cost differences. Aircraft with high cycle counts compared to those with lower can cause similar differences.
  • Your aircraft may have experienced an incident or accident. Obviously that can create higher maintenance costs.
  • Make sure maintenance costs are separated from major refurbishments and modifications. Your organization may require more of this type of capital expenditure, which does not represent ongoing and regular maintenance costs.

The behavior of maintenance costs can be a tricky and deceiving topic. Add to that, the expensive and significant nature of maintenance and you have a subject that attracts a great deal of attention. Throw in the fact that you may be dealing with inexperienced executives in aviation and the subject of maintenance costs can become more difficult. Most of you have been in the industry so long that you do not remember your initial reaction to the expensive nature of aircraft maintenance. I do. My benchmark was automotive maintenance. My first reaction was sticker shock, while my second reaction was disbelief that perfectly good functioning parts would be either retired or overhauled and at a great deal of expense.

Since maintenance costs do attract so much attention, do what you can to gain a better understanding of their significance and behavior. And at the least develop a system that will allow you to capture and eventually analyze your organization's maintenance costs. But then that is a subject for another article.

Brandon Battles is a partner with Conklin & de Decker. He has spent more than 15 years in aviation working with maintenance organizations in the areas of cost collection and analysis, systems review, inventory analysis, and management training.

 

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