Direct vs Annual costs?

[Firkin L]

With respect to the ANO and recovery of costs (direct and annual) does anyone know where I can find examples of each? I am assuming that direct costs are those like fuel, oil, wear and tear, maintenance and annual costs are insurance, hangarage, etc. Any ideas? Thanks.

[Chilli Monster]

Article 155 - Definitions

‘Direct costs’ means, in respect of a flight, the costs actually and necessarily incurred in connection with that flight without a view to profit but excluding any remuneration payable to the pilot for his services as such;

So - what does your aircraft cost you to operate per hour? That would be a good starting point I'd say.

[Mark 1]

I agree that the definition is a bit wooly when it comes to provisioning for things like unscheduled maintenance, wear & tear etc..

But I take it to mean that direct costs should be allowed to cover those costs that are proportionate to aircraft use (inc. overhauls and lifed components).

Annual costs, I would take to be those costs that would be constant irrespective of flying 1 or 1000 hours a year e.g. hangarage, annual inspections, insurance etc.

[bookworm]

http://www.caa.co.uk/docs/122/summary_of_public_transport.pdf

suggests

Direct costs and annual costs are defined in the Order. Direct costs means those directly incurred in relation to a flight (e.g. fuel) but excludes any remuneration payable to the pilot. Annual costs means the cost of keeping, maintaining and operating the aircraft over a period of one year (e.g. maintenance and hangarage). There must be no element of profit in either direct or annual costs.

That document, while useful in summarising the CAA's thinking, is not law, and you may be able to make a case for some maintenance to be a direct cost.

[IO540]

I looked into this carefully when I was on G-reg, including writing to the CAA, and I recall two points

1) Nobody in authority ever produced a proper list listing the various aircraft operating costs and stating which category they belong to;

2) Nothing I have seen, including the ANO, rules out the cost of a 50hr and 150hr check as a part of the costs "directly incurred in relation to a flight"

It would take somebody completely and utterly ignorant to suggest that the cost of the above checks does not feature in the cost of a particular flight; being as they are based on airborne time!

It would also be rather rich for the CAA to argue otherwise, while requiring the 50hr and 150hr checks !!!

Same argument for the engine fund. Slightly weaker if on a Transport CofA due to the 12 year engine life limit.

I suppose somebody could argue that if a plane does only 40hrs/year then it will never have a 50hr check (and similarly one that does 140hrs/year not ever needing a 150hr check) so the hourly cost of these should not be used, but I have not come across anyone trying this one.

[robin]

>>>I suppose somebody could argue that if a plane does only 40hrs/year then it will never have a 50hr check (and similarly one that does 140hrs/year not ever needing a 150hr check) so the hourly cost of these should not be used, but I have not come across anyone trying this one<<<

For us it is 50 hours or 6 months whichever comes first, so we account for all the planned maintenance for the year (annual and 50hr/6month), the additional cost of the Star Annual in year 3+ a bit more for unexpected maintenance + engine fund all in the hourly rate. Similarly we need to build up a small margin on top of the monthly cost for other items.

Unfortunately, the strict letter of the law states that this is not allowed, as the engine fund and contingencies could be construed as profit, in a group owned aircraft.

This seems to be an outrageous interpretation, as I would doubt many groups could dip into their pockets at a moment's notice and pay for a new engine.

Some tell me it is better to run the group as a company, where these limitations don't apply

[bookworm]

Unfortunately, the strict letter of the law states that this is not allowed, as the engine fund and contingencies could be construed as profit, in a group owned aircraft.

What gives you that impression? Depreciation is a perfectly standard accounting concept that is distinct from profit. Likewise, providing the contingency fund is actually used for maintenance and not withdrawn by the shareholders, it would be difficult to construe it as profit.

[IO540]

Robin: reference please.

[robin]

I'll see what I can do - certainly it has appeared in previous threads and the CAA have recognised the issue in the past. I would doubt they are likely to take any action over it, given that it is a common practice

[IO540]

A lot of stuff appears in previous threads on here and other pilot forums and a great deal of it is complete bo11ocks :O

If one deleted all the rumour from pilot forums, it would free up an awful lot of server space :O

The ANO does not answer this question precisely enough, and neither has anything from the CAA that I have seen. If someone can find something that would be interesting, otherwise I am with Bookworm on this and would challenge any challenge in the courts.

Provided of course that the plane really does more than 50hrs every 6 months and more than 150hrs every year. However this proviso doesn't affect the engine and prop funds; they accumulate regardless. Unless the plane is on a Transport CofA regime in which case it would need to be doing enough hours to reach TBO before 12 years.

Just my opinion :O

The situation with limited company ownership is something that I have checked out with the CAA, in writing. There is a potential problem in that if person X owns the company and draws a salary from it, and takes up 3 passengers and recovers 75% of the cost of the flight under the PPL cost sharing scheme, the fact that X draws a salary means that he will in fact be recovering more than the 75%. CAA legal department replied that this isn't a problem; unsuprising as it would prevent any employee of a business that does aircraft rental from fully utilising the PPL cost sharing sheme! I checked this out because I was in the X position myself and didn't want to do something illegal.

However it does mean that X (being a controlling director presumably also) can tell his company to charge him 200 quid an hour for the plane (say an old PA28) and then he can recover 150 quid from 3 passengers. There is an obvious profit element which X can then draw out as salary or dividend.

However I can't see this being relevant except in a pure renting operation i.e. not in a syndicate where the costs are merely dished out between the members. I would imagine that running this to excess (say 10000 quid an hour) would get chucked out on a challenge, but at reasonable levels it is exactly what every flying school does.

One has to remember that the primary purpose of these restrictions is to prevent cowboy operators setting up passenger carrying operations and unfairly competing with "proper" businesses that carry the higher cost burden :O That is the scenario (i.e. getting reported by a school, or worse still an AOC operator) where the CAA jumps on people.

[robin]

On the guidance from the CAA on flight charging, they are very vague.

They take direct costs to mean the actual cost of the flight and annual costs to be the annual expenses in a single year (eg hangarage, insurance and maintenance) - no mention of depreciation or cost of replacement though

But there are exceptions

5.5 Exception No 5 - Jointly owned aircraft (Article 162) 5.5.1 Many aircraft are jointly owned by groups of persons. The most sensible way of operating such a group owned aircraft is for all the members to pay into a central fund a contribution related to the number of hours they fly, so as to ensure that the central fund has sufficient money to pay the costs of operating the aircraft over a period of time. Such a contribution by a group member to that central fund is however, in law equivalent to the payment made by a person hiring an aircraft from, e.g. a flying club. This payment has the effect of making a flight public transport for airworthiness purposes so that the group owned aircraft ought to be maintained to the public transport requirements. 5.5.2 An exception has been established so that the continuing airworthiness requirements applicable to public transport aircraft do not have to be applied. This is provided: (a) payments are made by members of the group to a central fund which amount to no more than direct and annual costs of operating; and (b) the group comprises no more than 20 persons (each with at least 5% share) whose names have been notified to the CAA. The exception applies whether the aircraft is jointly owned directly by no more than 20 persons or by a company which is owned by no more than 20 shareholders. The shareholders must be individuals and not companies.


A colleague who is not 'the Oracle' states that charging extra on the hourly rate for an engine and repair fund for use 10 or 12 years down the line amounts to making a profit and not strictly covered under these rules

[IO540]

Yes, this is out of the CAA flyer entitled Public Transport guidelines or something like that. The problem always comes back to the phrase "direct and annual costs" (or similar) remaining undefined.

It would be easy, IMHO, to argue that maintenance dictated on an hourly basis is in the direct hourly cost.

Until there is a court case, and I doubt there will be one unless some clown does something really provocative, nobody will know.

Aviation is full of vague rules which are debated endlessly, and this is one of the more popular ones.

[DFC]

To profit is to gain an advantage or benifit from doing something. It is the money gained in a "business" transaction or otherwise defined as the excess of returns over outlay.

If 20 people each equally put £5 per week into a savings account for 5 years and at the end of that period, they use the monies acumulated to purchase an aircraft which they equally and jointly own, there is no way that anyone could say that they made a profit from they actions. They simply saved suficient money collectively to purchase an aircraft. A group with an engine fund is doing the same form of saving equally for a future purchase they will also share equally.

What would be profit is the interest gained on the monies deposited. That profit would in no way be linked to aviation since they could have gained such a profit regardless of why they decided to save. The taxman may however be interested in the interest.

What would also be profit is if the group saved up and purchased an aircraft and then sold it for more than they paid for it. However, again that would simply be of interest to the revenue not the CAA.

I honestly can not see how people who own an equal part of an aircraft and take equal responsibility for the costs involved and who have equal access to the facility that the aircraft provides could be deemed to be making a profit when they are simply covering costs and saving for the future rainy day.

To go into such lengths to show profit would be rediculous because one could then claim that a single seat privately owned aircraft being flown by it's owner was operating for the purposes of public transport simply because the insurance company was making a profit on the aircraft's premium!

Overall, there would have to be some intent along with everything else.

If I calculate that the family car which my wife an I drive costs £1.50 per mile to operate but we put £2 per mile + £25 each per month aside to cover costs and perhaps have a surplus at the end of the year does that make it a taxi or public service vehicle? NO and the same logic should apply to aircraft.

Regards,

DFC