Costs vs. Benefits

Nov. 1, 2000

Costs vs. Benefits

It's Not What You Pay - It's What You Get That Counts

By Bill de Decker November 2000 The price of jet fuel is at an all-time high. At over $2.50 per gallon at many places, it is now higher than the high it reached during the Persian Gulf War. And, it is likely to go higher. So, if you focus on the cost per gallon alone, you might come to the conclusion that the price is reaching crisis proportions. However, there is more to the cost of fuel than the price! Like so much in aviation, the real question is not: How much does it cost? but rather, How much do I get for my money?
The first part of the answer is to look at what has happened to purchasing power over the years. It's not so many years ago, 1970 to be exact, that jet fuel cost 50 cents per gallon so one could argue that the cost of fuel has increased five times. Or, looking back to 1970, a nicely equipped Ford cost about $3,000 to $3,500 and that today, a similarly equipped car cost six to seven times as much. Thus, the argument can be made that the impact of inflation has meant that fuel is a bargain. The graph below shows that the truth is somewhere in between - until just this year the actual cost of fuel was somewhat less than it would have been if the price of fuel had kept pace with inflation. In fact, what this graph shows is that from 1970 to 1980, from 1987 till 1990 and again from 1993 until just recently, the actual cost of fuel was about the same as the 1970 cost adjusted for inflation. On the other hand, from 1980 to 1987 and again from 1990 to 1993, the actual price was well above the inflation adjusted one. The 1980 to 1987 peak was obviously initiated by the 1979 oil crisis and the high prices did not really come to an end until the price of oil was effectively deregulated in the mid 1980's. The 1990 to 1993 peak clearly was the result of the Persian Gulf War. What will happen in the current situation is anybody's guess. One thing is clear though - when actual or imagined shortages threaten, prices increase rapidly and after the supply is restored or the scare is over, price decreases are slow. At the same time, when supplies are plentiful, the cost of fuel increases at about the same rate as inflation. The other half of the question is: What do you get for one gallon of jet fuel? And, that is where the improvement has been pretty spectacular. When you compare the aircraft that were in their prime in 1970 with aircraft using current technology, the difference is startling. Table 1 compares the efficiency with which various aircraft convert one gallon of fuel into miles flown. The aircraft are grouped very roughly by size. Type of Aircraft 1960/1970 Technology 1990/2000 Technology

Small jets
1970: LJ 24, Sabre 40
2000: CJ 2, Premier 1

.85 NM/Gallon .44 NM/Gallon Medium Jets 1970: HS 125, Falcon 20 2000: Galxy, Horizon 1.03 .70 Large/Long Range Jets 1970: Jetstar, G II 2000: F 2000, CL 604, G V 1.59 .83 Average 1.16 .66

Engineering efficiency
In other words, today's jets are between one-and-a-half and two times as efficient in converting fuel into distance flown as were the aircraft of 30 years ago! Combining this with the cost of fuel, which adjusted for inflation is no different than it was 30 years ago, means that the net cost of fuel per mile has been cut almost in half in the last 30 years.
This is a spectacular achievement and a real credit to the ingenuity of the designers of the aircraft and the engines. But, how does this apply to the day-to-day business of running a maintenance operation? Well, what this example does is to clearly illustrate the importance of looking not just at the cost, but also at the value or benefits received.

Cost-benefit analysis
The formal name for this analytical approach is cost-benefit analysis and the concept extends to overhauls, upgrades, service bulletins, tools, test equipment and contract services. For example, the OEM manufacturers offer a never-ending stream of service bulletins and upgrades, that, if you believe the literature, you cannot possibly live without. The downside is that all these service bulletins and upgrades cost money - sometimes a lot of money. The best way to analyze whether your operation can benefit from a particular service bulletin or upgrade is to do a cost- benefit analysis. This is accomplished by listing all the advantages (benefits) and disadvantages (costs) on a piece of paper and then assigning a dollar value to each. Once the dollar values are assigned, the alternatives can be weighed against each other and a rational decision can be made.

Doing the math
For instance, consider a component with a TBO of 1,500 hours and an overhaul cost of $7,500. The OEM has a service bulletin available that increases the TBO to 2,500 hours and the overhaul cost at that point is $10,000. Thus, the cost of overhaul for this component decreases from $5/hour to $4/hour with the addition of the service bulletin. However, the service bulletin costs $5,000. What this means is that the value to your operation of this service bulletin becomes a function of how many more times you will be overhauling this component. If the $5,000 cost is spread over one overhaul, the net cost is $6/hour [($10,000 + $5,000)/2,500], which is more than the cost per hour if the service bulletin is not applied! If the cost is spread over two additional overhauls, the net cost per hour will be $5/hour. It is only if the cost of the service bulletin is spread over three additional overhauls that the net cost per hour decreases to $4.67/hour, which is below the current cost. Three overhauls equates to 7,500 flight hours. At a typical corporate utilization of 500 hours per year, this equals 15 years. Therefore, this service bulletin is probably not justified for this operation. On the other hand, for a regional airline flying 2,500 hours per year, the lower costs would be achieved in three years, which probably justifies the additional expense.
In short, the key is to focus not just on either the cost or the benefits, but to weigh both so that you can establish the real value for your operation.