Magic Formula? — No, but educated guesswork is required to figure hourly operating costs

As a result of my recent columns about cost of operation, I was asked if I had a “magic formula” for my calculating those costs. No, there is no magic formula. Certainly some “educated guesswork” has to be employed where specific numbers are not available, but there is nothing magic about it. So, for this issue, I will share my chart for determining actual or anticipated cost of operation.

First we must remember that there are two kinds of operating costs: Fixed costs and direct costs. Fixed costs are those yearly costs that you pay regardless of whether you fly the plane. They include your monthly investment, insurance, storage, and taxes. You can also include, as I do, the cost of the basic annual inspection (without any repairs) in the fixed costs, since the annual is required.

Some argue that you don’t have to do the annual unless you intend to fly, and therefore it should be a direct cost assigned to maintenance. This is a good argument and it is up to the individual owner as to how it is treated. For the purpose of this article, I’ll assign the cost of the basic annual to the fixed cost segment, but we’ll deal with the other method as we go along.

Direct costs are those which occur only if the plane is flown. These include reserve for engine and prop overhaul, maintenance beyond the basic annual inspection, fuel, oil, avionics repair reserve and all other fees, such as chart subscriptions.

For our sample airplane, we’ll use general numbers for the model. You can easily insert your own numbers for your own plane. As you get along in years with the same plane, your numbers become more refined and the costs become more accurate.

The first important number is your annual usage of the airplane. If you’re just starting out, or trying to determine what a particular plane you’re interested in might cost per hour, you’ll have to estimate your usage. If you’re not sure, guess on the low side, which will increase your cost of operation figure. Better to be prepared for higher costs and be nicely surprised, than to plan for lower costs and be unpleasantly surprised. For this model, I’ll figure on 150 hours per year usage.

The first direct cost category I mentioned is cost of investment. Let’s say your payment is $1,000 per month, plus $200 per month interest. If you are comparing total cost of operation and actual cash flow out of your pocket to hourly rental, you want to put the whole thing into the formula. Sure, if you sell, you probably get your investment, and often more, back. But it’s cash flow we’re talking about, for the present.

Others elect to include only the interest expense as a fixed cost and assign only that figure. That’s how I do it, and how I’ll show it here. So, at $200 per month interest, we get $2,400 per year divided by 150 hours, which equals $16 per hour. Write it down.

Next is insurance. Let’s say the cost is $1,200 per year. Divided by 150 hours we get $8 per hour. Hangar rent at $200 per month also would be $16 per hour. Write those down. If we say the “basic” annual inspection, without any repairs, is $750 then the cost per hour is $5. Assuming property taxes at $300 per year, we’d get $2 per hour for 150 hours of use.

If we add all of these together, we get $7,050 in annual fixed costs. Divide that by 150 hours and we get $47 per hour. Fixed costs per hour would be $5 less if you elected to move the annual to the direct operating cost segment. It only matters if you are really concerned about separating fixed versus direct expenses. For those who want TOTAL cost of operation, it’s a moot point.

Now we come to direct operating costs. The first of these is engine overhaul. Let’s say we have an engine with 1,000 hours left before overhaul, and we know that the overhaul, plus removal and installation, will cost $20,000. Your direct cost for that is $20 per hour. If you have a fresh engine, with a 2,000 hour TBO, then it would be $10 per hour BUT, if you’re not reserving that $10 in the bank for each hour flown, then your cost is actually creeping up each hour. This is one of those games owners can play to make their cost whatever they want to say it is, but you fool everyone except yourself, ultimately. I had a new engine two years ago and my cost per hour reflects this. But I also have a maintenance reserve account.

The same goes for the prop overhaul. Let’s say you have an overhaul cost of $1,500, required every 1,500 hours or 5 years. Since we’re only flying 150 hours per year, then the 5 years will come into play first. We’d fly 750 hours in those 5 years, so the prop cost is $2 per hour. Sure, you might push the prop for a couple of more years. I can’t account for your personal plans here. I have to stick by the book. If you have any repeating ADs that are due over time, then they must be considered. Take the action item cost (like a mag inspection) and divide it, either by the number of hours allowed between each inspection or, if it’s required annually, then divide it by the number of hours you will fly annually. I won’t put any of those in here.

Fuel expense is easy. Cost per gallon times gallons per hour gives you your answer. Let’s say we burn 12 gallons per hour at $2.75 per gallon. That’s $33 per hour. Oil is next. Let’s say we burn a quart every 6 hours, at $3 per quart. That’s $.50 per hour. In my oil column, I also include the cost of an oil and filter change each 50 hours by taking that cost and dividing it by 50 hours. That’s another $1.48 per hour for my plane so I’ll use it here, which makes my total hourly cost for oil $1.98.

Avionics cost is next. This is a tough one. If you have a new panel, then you have made a large capital investment but your maintenance cost should be low. However, if you’re flying an older panel, then you will be spending more at the shop. Start with this formula, which has worked well for me: Determine the cost to replace your current radios with like-kind new units. Let’s say $20,000. Now, calculate 5% of that number, which would be $1,000 for our example. That’s the annual number I assign to radio maintenance. Therefore, $1,000 divided by 150 would equal $6.66 per hour. I’ll have a new avionics stack put in next month. That should bring my number to near zero for awhile, but I’ll be spending $20,000 to get there. Now what do I do? This is a first for me so I’m still deciding the way to go with that, as an hourly expense. For our example, I’ll use the $6.66 per hour.

Maintenance beyond the annual is next. If you don’t have a history with your plane, do this: Take your basic annual cost and multiply it by 1.5. In our example, $750 times 1.5 equals $1,125. This is what you should plan on for yearly maintenance in addition to just inspecting the plane, which can include extra maintenance during the annual. That $1,125 divided by 150 equals $7.50 per hour. After you get some history with your plane, you can fine-tune that number. If you have a chart subscription and want to include it here, go ahead. I won’t, for this example. (One more note about maintenance. If you are just buying the plane and have no detailed knowledge of it’s history, plan on spending roughly 10% of the purchase price in additional maintenance cost for the first year of your ownership, beyond the basic cost of an annual.)

Adding up the direct costs, I get $71.14 for our example. TOTAL cost per hour is $47 plus $71.14, or $118.14.

I must repeat that this method has worked very well for me over the past 28 years and I am happy to share it. I have applied this model hundreds of times, without ever being disappointed or caught by surprise. I am also aware of the fact that some can get lower per-hour costs, cheaper annuals, or use a different accounting method. That’s great. Whatever makes you happy. Understand, too, that I am aggressive in my maintenance, use a quality shop that is fairly priced but doesn’t cut corners, and that if I spend it on my plane, I account for it in my formulas. That will never change.

Now, get out your calculators, and good luck.

Guy R. Maher is a business owner and aircraft appraiser with more than 12,000 hours in general aviation airplanes and helicopters. He is an independent buyer’s agent and flight instructor for type specific initial and recurrent training. He can be contacted through the above e-mail address, or by calling 704-287-3475.

Leave a Reply

Your email address will not be published. Required fields are marked *