Sharing light A/C [Archive]

BackPacker

14th May 2007, 08:33

So... Before you buy into it, get a financial statement and some financial history, and check whether the "wet" rate indeed does include all maintenance and reserves for replacement parts and such, and that these reserves are, at present, sufficient. (So if the engine is half-time, there should be 50% of the cost of a new engine in the engine fund.)

If you manage to get hold of the financial overview of the last three to five years, then you can easily see if the members were ever required to pay anything above and beyond the monthly and wet price, and see if this was because of bad planning, or because of unlucky circumstances.

And remember that planning your maintenance cost for a very common type (a PA-28, C-172 or something) is fairly easy since there are a lot of maintenance firms and lots of these shared planes around, so lots of experience with the actual maintenance cost of the type. But if you're buying into something unique, less people have experience with maintaining it over a long period, and it is harder to predict the costs of that maintenance.

But at the end of the day you've got to accept that you're owner (even if only part owner) of an aircraft and that you may be unlucky with the engine or whatever, requiring unplanned repairs that are not covered under warranty or insurance, and thus requiring additional funds. If you don't want to run that risk, go rent. (And this equally applies to cars, houses, caravans and other capital goods.)

And there's another tricky thing too. Everybody is interested in low flying cost. So a share in a plane with a 60 euro wet rate will sell more quickly than a share in an identical plane with a 70 euro wet rate. That's because the only thing mentioned in the small ad in the magazine is the monthly fee and the wet rate. Not the present state of the engine fund (if any). So from a marketing point of view it is a good idea to lower the published wet rate, while the members of the group know that they're going to have to put up more money at some point in time to pay for repairs. Not a problem as long as this is out in the open, and you know what you're getting into.

Me, I would get the financial data and prefer buying into the group which seems to have its finances in order, with the wet rate covering all the expected maintenance plus a bit of reserve, both for the 3-5 years past and 3-5 years to come, than buying into the group with the lowest "wet" rate.

Mike Cross

14th May 2007, 09:42

Chilli

I think where we differ is in how you value the a/c compared with how I value it.

To me the a/c has a market value, which is what someone would be prepared to pay for it, as it stands, now, in the condition it is in now, with the accumulated hours it has now. This is not related to what was paid for it when it was bought or what was paid for the share last time it changed hands, how many hours it has done since it changed hands, or what has been spent on it since it changed hands. Nor is it related to whatever engine fund or spares holding comes with it.

It's a price you think the aircraft would fetch now on the open market.

However the buyer may not just be buying a share in the aircraft, he might indeed be buying a share in the engine fund, and one fifth share of 5k in the bank is 1k.

I suspect you're looking at what the vendor paid for his share as the basis for valuation, I'm looking at the value of the aircraft.

Mike

Chilli Monster

14th May 2007, 14:35

Mike - I don't think we differ that much, just in how we present it.

The aircraft share is worth the market value - agreed? (judging by your posting I'm guessing yes).

Now - if there's money in the engine fund then the share is still only worth the market value - there is no premium to add on to the price for that money. (which your post suggests there is).

However - if there is no money in an engine fund that aircraft (and proportionally the share) is worth LESS than market value by that amount, and if I were buying I would offer accordingly.

Your post suggests that money in the bank is worth a premium on the share price at market value. (Forgive me if I read it wrong). My attitude is I don't care what's in the bank - aircraft depreciate, they have a market value, that's all I'm paying - I'm not buying a chunk of engine fund, that comes with the aircraft.

Hope that's slightly more clear.

foxmoth

14th May 2007, 15:20

I rather think that Mike and Chilli are looking at the same thing just from different directions. At the end of the day you are looking at a share of the group assets no matter how those assets are made up, aircraft/cash/hanger full of spares/farm strip (if owned)/hanger on said strip/teapot in the hanger. If the group own it it comes into the assets and forms part of the share value.:p

Mike Cross

14th May 2007, 15:58

OK Chilli, Here's the deal.

You go and buy an aircraft, let's say you drive a hard bargain and are satisfied that it's worth the 30k you paid for it and that it's market value is therefore 30k.

Now put 10k of your own money into an engine fund. I'll buy a half share of the aircraft and engine fund for half the market value, 15k. Fair dos?:ok:

Alternatively if you reckon that 5k should be knocked off if it doesn't have an engine fund I'll buy a half share without the engine fund for half what you paid less 5k. Can't say fairer than that can I?:p

Chilli Monster

14th May 2007, 16:46

Mike

It transpires we're probably both right.

Your example - owner who buys an aircraft outright and then decides to sell a share. In that case yes - add the representative amount of the fund to the share value if you have added that amount of cash to the fund, without putting the time on the engine.

My example - existing syndicate, say 5 shares (for example) which has built up an engine fund through use. 1 shareholder decides to sell his share. His share is worth market value - NOT market value plus what they've put into the engine fund because they've paid for their use of the aircraft and engine in the hourly rate. In that scenario the engine fund is ringfenced.

Make sense now?

tangovictor

14th May 2007, 16:53

to start, I have no interest in sharing, however I wonder about Insurance ? I assume that all group members would contribute a share towards it, what happens if ( god forbid ) one member has a momentary lack of reason, and say clips a hedge on landing, causing severe damage to the ac, The insurance would pay, who would be liable to the considerable excess ? all or the group member ?

rateone

14th May 2007, 17:02

The insurance would pay, who would be liable to the considerable excess ? all or the group member ?

I guess you can handle it how you like. In my group we are signed up to a syndicate agreement - if you dent it you pay the excess. We have enforced it and it has worked - nothing serious just paintwork but like everything, costly and time consuming

Mike Cross

14th May 2007, 17:04

Down to the Group Rules.

Ultimately you have to consider a winding up scenario. You all fall out or there is an expense you can't afford or the a/c is totalled. In that case the assets are disposed of, the debts paid off and the balance distributed among the shareholders in proportion to their shareholding, just like winding up a Company.

SlipSlider

14th May 2007, 21:56

Re Tango Victor's question, in the first group of which I was a member, just after purchase the aircraft promptly had a mechanical failure and a hefty resulting bill, mostly covered by insurance. It just so happened I was P1 at the time but the incident was evidentially not down to me; by consensus, we split both the excess and the uninsured cost.
The second group I was in, a group of friends, decided that we would not want to fall out about linking 'blame' with responsibility for the excess (we can all make mistakes, after all), so we decided to put in the bank, up front, a float to cover the insurance excess as well as some working capital. When the aeoplane was unfortunately written off, the unlucky member on this occasion accepted responsibility and, as a true gentleman and good friend, reimbursed the other members pro-rata for the loss of the remainder of the annual premium, and also covered the full excess.
I make no comment as to whether these two instances are typical of groups in general; I strongly recommend that rules are agreed and written before they're needed!
Slip

foxmoth

15th May 2007, 09:20

His share is worth market value - NOT market value plus what they've put into the engine fund because they've paid for their use of the aircraft and engine in the hourly rate. In that scenario the engine fund is ringfenced.
Sorry Chilli I don't see how you work that. If the aircraft is worth 15,000 and you have £5,000 engine fund then the group assets are £20,000 and a 1/5th share is £4,000 not £3,000, otherwise if you sell the aircraft and close down the group where does the extra £5,000 go? It may be that you bought the aircraft for £20,000 and built up the engine fund, but with the hours flown off the engine the value of the aircraft will be (say) £15,000 instead of £20,000 because of the lower engine life - Just the same as our aircraft has had the engine zero houred so the aircraft is worth a lot more than it was but we now have no engine fund.
Also I would point out that the person selling his share has donated into the engine fund so why should he not benefit from it? The way you seem to have it a new member can buy into a group that is just about to replace the engine, he buys in for £3,000 (1/5th share of £15,000 aircraft), the group replaces the engine from the engine fund and the market value is now £20,000 so he can sell his share for £4,000 - let me know of any group you know that operates like that as I could do with a quick £1,000.:}

Chilli Monster

15th May 2007, 10:30

Foxmoth - disregarding the group winding up scenario (because that's not what the original poster asked - RTBQ), ask yourself this:

Why should the share buyer pay the share vendor for the use the vendor has had of the aircraft?

That is, in effect, what you're saying should happen.

S-Works

15th May 2007, 10:50

I am with chilli on this. the engine fund has grown out of the hourly rate and is ring fenced. think of it as deferred expenditure. it will have to be spent eventually.

if there are 4 in a group, the aicraft is valued at £20k then a share is worth £5k. If the engine needs replacing then then engine fund is spent on it as the fund exists to cover the flying that has already occured. The remaining bill is covered by the group.

Perhaps it would be easier to think of it as paying the engine fund money directly to the maintanance company every hour and when the engine fails you get a cheap engine with the cost split between the group.

IO540

15th May 2007, 11:18

The engine fund should be there to cover a growing liability in the group accounts and is not an asset which is partly owned by the members.

Unless the group is dissolved in a scenario where the aircraft is scrapped, in which case all bank balances can be divided up between members.

The problem is that there are countless ways one can work out what the engine fund should be, and it will never be exact because engine overhaul costs vary so much according to where you go and what they find needs doing. One could be conservative and budget for a new engine (or some other known-cost option). But if you are conservative on this, you will have a higher hourly rate than other groups... and if you are not conservative then new members will end up subsidising the flying of previous members.

And that's just the engine fund. On the average 30 year old spamcan there is usually a constant stream of bits that need fixing, and somebody selling a share will know more about this than somebody buying a share ;) This is pretty significant; for example the engine fund might need topping up at £15/hour, but if the next Annual brings a suprise £5000 bill and the group did just 100 hours, that is another £50/hour. I suspect that on most old planes the normal maintenance cost well exceeds the engine fund.

There is no perfect way to do this.

BackPacker

15th May 2007, 11:52

Check out the finances over the last three to five years and you've got a pretty good idea on how much the "reserve" in the wet rate (with this I mean you take the wet rate, deduct direct expenses such as fuel, so that you are left with an amount of money that goes into a reserve fund, regardless of whether this is called "engine fund" or something else) is enough to cover the unexpected expenses, or the expected but unpredictable expenses (such as an engine overhaul).

Very easy to do this. Look at the financial statements and point your finger at any income of the group that's not the monthly fee or the wet rate. Ask questions, see if you're satisfied with the answers.

I'm with foxmouth on how to value the engine fund. Suppose you have two groups who fly completely identical aircraft - their serial numbers are only one-off. Each aircraft is in the same condition with the same equiment, number of hours flown and each engine is exactly half-time. Both aircraft are officially and accurately 1valued (if such a thing would exist) at, say, 20.000 euro and this value takes into consideration the current time on the engine. Both aircraft are operated by a group of four, but the groups are managed differently, leading to the situation where group A has an "engine fund" which contains, at this moment, half the expected amount of money for an engine overhaul. For arguments sake, assume the engine fund contains 2.500 euro. The other group is managed differently, and has no engine fund at all - it relies on the members to cough up the money as and when required.

Both groups have a 1/4 share for sale. Which share shall I buy?

If I buy into group A, I get a 1/4 share of the aircraft, valued at 20.000 euro, and I get a 1/4 share in whatever the other assets are of the group, meaning 1/4 share in the engine fund. So a fair value for this share would be 5625 euro (1/4 of the airframe + 1/4 of the engine fund).

If I buy into group B, I only get a 1/4 share of the aircraft, but no share in any reserves because there aren't any. So a fair value for this share would be 5000 euro.

If the shares for A and for B are indeed priced as calculated, then a second consideration would come into play. And that's whether the group is well managed, has its finances in order and has an idea on the future costs. With group A, at least somebody has done some homework and came up with a plan. Whether the assumptions in that plan come true is another matter, but at least someone tried to forecast the future costs and build reserves for that. With group B, although the share price is lower and the hourly rate is lower, I'm also buying into a big liability, because I have no idea whatsoever on the additional costs I'm going to have to pay for in the near future.

I do agree with bose-x though, in that the engine fund and any other reserves are ring fenced. They cannot be used by the members as a checking account for paying their daily bills and such. In fact, if done properly, the administrator of the group should produce a balance sheet regularly (at least once a year) with separate entries for "engine fund", "paint job", "unexpected repairs" and a number of other reserves split out, even though the money might be collected into one big checking/savings account. But that's just good bookkeeping.

Obviously not all costs are predictable, as IO540 has said. There's a thread somewhere here on new aviation sayings and quite a few are applicable. One I like is "an aircraft is a hole in the sky that you throw money in." The older and more unique the airframe is, the more the costs become unpredictable, but they're always higher than expected.

Chilli Monster

15th May 2007, 12:05

If I buy into group A, I get a 1/4 share of the aircraft, valued at 20.000 euro, and I get a 1/4 share in whatever the other assets are of the group, meaning 1/4 share in the engine fund. So a fair value for this share would be 5625 euro (1/4 of the airframe + 1/4 of the engine fund).

If I buy into group B, I only get a 1/4 share of the aircraft, but no share in any reserves because there aren't any. So a fair value for this share would be 5000 euro.

However, it's a buyers market:

Group A = 5000 Euro

Group B = 4375 Euro

S-Works

15th May 2007, 12:14

You are still missing the point (except Chilli). The engine fund is taken from the per hour costs and covers wear and tear that has ALREADY occured but you have not yet had to pay for. It does not exist to meet future bills.
So a share is worth a percentage of the airframe value.
Look at it like this: A new engine is £10,000 with 2000hr TBO. Thats £5 per hour put away for wear that has ALREADY occured. The engine fails at 1000hrs you have £5k in the fund that pays for those 1000hrs that were used. The group members split the outstanding £5k and it all starts again.
You don't pay into an engine fund in advance of flying the hours you pay into it after the event. So you should not expect to value a share based in what is sat in the bank raised to cover wear that HAS happened.
If you are buying into a group with no engine fund then the share is worth less than the market value of the aircraft divided by the shares as you are taking on greater risk.

BackPacker

15th May 2007, 12:22

True enough, Chili, unfortunately.

I assumed that the appraisal of the aircraft would be for true current market value, taking into consideration things like the hours on the airframe and the engine, and such. Unfortunately we have the situation where appraisals can easily be inflated (for sales, insurance-payout or mortgage purposes) or deflated (for tax, insurance-premium or buying purposes), depending on who pays for the appraisal.

Appraisals would be much fairer if there would be a rule that said that if somebody appraises the value, he could be forced by the person who ordered the appraisal to buy the item in question for, let's say, 90% of the appraisal value, or sell a similar item for, let's say, 110% of the appraisal value.

Nevertheless, Chili and Bose-x, I'm glad you all agree that the contents of the engine fund does have an effect on the purchase price of the share, all other factors being equal. The difference is probably in how we define "market value". I defined it as "the current state of the aircraft, considering the current hours on the engine", while bose apparently defines it as "the current state of the aircraft, but assuming it has a zero-timed engine". In the one case the engine fund is a premium on top of the market price, in the other case it's the balance between the actual current value and the market value. At the end of the day, it all comes to the same thing.

Mike Cross

15th May 2007, 12:26

I was going to give up but what the hell:rolleyes:

If you can't sell it for the prices backpacker mentioned then the valuation is not accurate. The Market Value of something is not what you offer it for sale at, it's what someone will pay you for it.

Chilli and bose are I suspect not working on Market Value. The Market Value of an airframe with a half-life engine in it is not the same as one of similar age and condition with a zero-timed engine in it.

So you get an airframe with a zero-timed engine worth 30k, you then fly 1000 Hrs in it. Is it still worth 30k? Of course not. Let's say the group put 15 quid an hour into an engine fund. Is the airframe worth any more because they did this? No.:ugh: :ugh: :ugh:

BackPacker

15th May 2007, 12:30

Mike, exactly.

Aircraft valued for fair market value, zero-timed, at 30K. Since then 1000 hours flown, meaning 15.000 in the engine fund. If everything (particularly the engine fund uplift) has been predicted correctly, the airframe (with its 1000 hour engine) should now be worth 15K on the open market, meaning the total assets of the group are still 30K.

A share in the group should cost 15K airframe + 15K engine fund divided by the number of shares.

Unfortunately most light aircraft are bought with emotion rather than reason and not every buyer does this calculation properly.

S-Works

15th May 2007, 12:33

Market value is market value. If it is worth £10k today and £8k in 1000hrs thats normal depreciation. Put a new engine in and the value will not rise back up to £10k despite what you may hope. The engine fund is just a way of buying your way free of a massive bill when the donk fails. Think of it as HP for liability. This is nothing to do with the value of the airframe.

I was only involved in a group once I bought a share for £8k. The engine fund stood at about £10k. I flew a few hundred hours in it and paid the wet rate. £20ph went into the engine fund to offset my libaility for the hours I had "worn" on the engine. When I sold the share the buyer bought my share and continued to pay into the engine fund offsetting there own liablity. Effectivly they were buying into the group knowing they did not have to cover my wear and tear on the engine but knowing that they were buying into possible liablity if the engine failed early.

englishal

15th May 2007, 12:47

Surely a share in an aeroplane with an engine fund is worth more than a share in an identical plane without?

In the same way, we paid £10,000 for a hangar for 5 years, which means £2500 each. So if any of us sold a share of the aeroplane, it'd be the market value of the aeroplane /4, plus the pro-rated remainder of the £2500 for hangarage. This is the TRUE price of the share, if not nescessarily the true value of the aeroplane.

As it happens, we don't have any funds at all. We pay £40 per hour wet which so far has managed to cover fuel and the annual. For all other bills we split 4 ways, with majority rule. I'm going to start my own engine fund ;)

S-Works

15th May 2007, 12:57

Indeed a share without an engine fund is worth less than a share with an engine but that is buyers choice not a valuation of the aicraft itself. The straight value of a share is the value of the aicraft divided by the number of shares. No engine fund I would be knocking money off the value of the share but would not add value to the share just because a fund existed. Putting a new engine in does not magically restore the devaluation of an airframe that arises from an extra thousand or two hours being put on it!

Lets buy a diamond DA40 new. £100k (easy maths) spllit it 4 ways, £25k each. Fly it for 2000hrs. Put a new engine in, is it still worth £100k? No it has devalued in addittion to the engine wear. But a new engine in using the engine fund is the share still worth £25k? I would say by that point you are looking at a 5 year old aicraft and would say the share is only worth £20k now.

dublinpilot

15th May 2007, 13:00

Mike has it right.

An open market value is what a willing buyer will pay for it, from a willing seller, in the condition that it is in. Is is not what the airframe is worth with a zero timed enging.

Market value is market value. If it is worth £10k today and £8k in 1000hrs thats normal depreciation. Put a new engine in and the value will not rise back up to £10k despite what you may hope.
Quite true, but if you have the choice of two aircraft in identical condition, and one has 1000 hours on the engine, and one has a zero timed engine (straight sale, no engine fund) which would you pay more for?

___________________________________________________________

Lets ask a different question.
There is a 1/5 share in a group aircraft for sale.
The engine in the aircraft has a 2000hr TBO. It currently has 1000 hours used up, and is expected to be good for the other 1000 hours. The cost of replacing the engine is £20,000.

On the open market, the aircraft would sell whole (no engine fund, just a straight sale) for £50,000.

How much would you pay for the share if

A) there was no engine fund?
B) there was £10,000 in the group engine fund?

BackPacker

15th May 2007, 13:06

Englishal, if everything you say here is open and said to a prospective buyer of a share, then that's a perfectly legitimate way (legally and morally) of running the group. The buyer knows what he/she's getting into, and can expect bills (possibly rather large bills) above and beyond the monthly fee and wet rate. Setting up your own private engine fund is a good idea then if your personal financial situation is tight.

Personally, if the aircraft required an "annual" instead of a "100 hour check" I would make sure the annual would be covered by an uplift in the montly fee, instead of an uplift in the wet rate. But that's just me and my personal opinion on how to make "fixed" cost "variable"...

S-Works

15th May 2007, 13:08

I am not arguing that a share with an engine fund would be more attractive, its a buyers market. But the engine fund is ring fenced not divided by the number of shares. You cant as suggested here divide the engine fund by the number of shares and add it to the value. The fund belongs to the aircraft not the shareholders.

Chilli Monster

15th May 2007, 13:09

Mike Cross

15th May 2007, 13:29

I bought a share for £8k. The engine fund stood at about £10k. I flew a few hundred hours in it and paid the wet rate. £20ph went into the engine fund to offset my libaility for the hours I had "worn" on the engine. When I sold the share the buyer bought my share and continued to pay into the engine fund offsetting there own liablity.

Exactly!

You didn't pay 8k because that was the Market Value of the share in the airframe. You paid it because 8k was the Market Value of the share in the airframe AND the share in the 10k engine fund.
So what did you sell it for? did the buyer pay Market Value for a share in an airframe or did he pay Market Value for a share of the airframe AND a share of the (now enchanced) engine fund, exacly as you had?
The fund belongs to the aircraft not the shareholders.Ye gods! The concept of ownership by inanimate objects, whatever next? Does it have its own bank account and credit cards as well?

BackPacker

15th May 2007, 13:31

Bose-X, I agree that depreciation is another factor you have to take into account. And this is possibly an even more complex subject than the valuation of the engine fund.

For years, the depreciation on the 30-year old spamcans (PA-28s, C-172s) was virtually negligable. But since a few years I've got the feeling that they're depreciating like mad again, due to two factors:
a. The advent of modern composite airframes (Diamond and Cirrus being examples) and a whole class of new ultralights, microlights and whatnot that are far cheaper to run & maintain your license for.
b. The advent of new engines, particularly the Rotax 912 and Thielert diesel, which all promise to make fuel costs in the aircraft that have them, far less. And generally live up to these promises (admittedly with a few teething problems).

As a result of this, the average 30-year old spamcan now has so much competition from newer designs that are cheaper to operate, insure and sometimes even to purchase (2nd hand spamcan vs. new microlight) that they now depreciate like mad again.

To give you an idea, at my club the IFR DA-40 is cheaper per hour wet than a VFR PA-28! Now you can discuss the flying qualities and training properties of the DA-40 vs the PA-28 but my wallet is the overriding factor in choosing the DA-40 if it is available.

For me, at this point in time I would not buy a share in a 30 year old spamcan under any condition. If I had a share I would try to get rid of it while I could still find a sucker to buy it off me for a good price.

I've got the feeling that a lot of owners of 30 year old spamcans will be very disappointed in the years to come, when they're trying to sell their airplane/share and find that simply nobody is interested anymore.

IO540

15th May 2007, 14:04

The bottom started to fall out of the certified market 2-3 years ago. Prices actually paid have fallen some 30% just in the past year or two.

Now, a 5 year old IFR tourer in perfect condition, bought for £200k and with another £100k spent on it, might fetch £130k. An original model would have "merely" halved in value in 5 years. And this is aluminium - composites are worse affected (for whatever reason).

Planes have turned into cars. It's going to take a while for people to accept this though!

The only way to get one's money out of a plane is to do what one would do with a car: keep it for a long time, 10 years at least.

Kirstey

15th May 2007, 14:16

Everyone arguing their corner and repeating the same things each time - this is right up my street!!!

Take the share out of the equation - If I have a C150 and buy it for £16,000 fly it for 1,000 hours and put some cash to one side to cover a new engine, do I sell it for £16,000 and give them the engine fund? no i sell it for a figure commesurate with what it's now worth (say £14,000). It may equate to what I have in my engine fund, it may not.

If I'm buying a share in an aeroplane I'll look at it's value and offer a share of that. If there is an engine fund then I'll count myself fortunate, I won't buy a share of the cash in the fund though. Someone has already paid that for the time THEY flew it.

I agree with Bose and Chilli. An aeroplane isn't worth more because it has a fund, it's worth LESS because it DOESN'T.

IO540

15th May 2007, 15:46

Take the share out of the equation - If I have a C150 and buy it for £16,000 fly it for 1,000 hours and put some cash to one side to cover a new engine, do I sell it for £16,000 and give them the engine fund? no i sell it for a figure commesurate with what it's now worth (say £14,000). It may equate to what I have in my engine fund, it may not.

You are right in the drift, but you won't get 14k for a C150 with a genuinely run-out engine. And if your engine has done 1000hrs and your fund is 16k, that implies a C150 engine can be overhauled for 32k. Actually it can be done for far less than that, and your fund is well overfunded.

Look at the prices paid for old piston twins - close to the engine value; the hull is close to worthless.

Kirstey

15th May 2007, 15:56

Yes I know my figures were a bit random and wild - I'm counting on £10-12k to sort out our 150 engine!

foxmoth

15th May 2007, 17:27

If I have a C150 and buy it for £16,000 fly it for 1,000 hours and put some cash to one side to cover a new engine, do I sell it for £16,000 and give them the engine fund?
No, but you still have that cash, with most groups any cash belongs to the group, if you sold the aircraft and folded the group then the cash would be split amongst the group, selling a share though you do not normally get your share of any cash in the fund when you sell your share so you must also sell your share of that cash - if not you are giving the new share owner your cash!:=

The fund belongs to the aircraft not the shareholders. And you are buying a share of the aircraft not the shareholder so if the fund goes with the aircraft you must also be buying a share of the fund!

dublinpilot

15th May 2007, 18:03

Dublinpilot:

A) £8000

B) £10000

Stop thinking of the engine fund as an asset (it isn't, unlike EA's paid for hangarage, which is), and more like IO540's explanantion of hedged funds to cover a liability.

CM,

I'm not sure if you've missunderstood my proposition, or if you fundamently disagree. I possed the financial question, because I think we all actually agreed on the figures, but just arrived at them in a different fashion. So I'm actually a little surprised that you have come up with different figures.

When I said

On the open market, the aircraft would sell whole (no engine fund, just a straight sale) for £50,000.

I meant the aircraft, in it's present condition, with only 1000 hours left on it's engine.

To me, I'd value it as follows:

A) £10,000. The reasoning being, I could buy all five shares, and sell the aircraft for £50,000 and have made neither a profit nor a loss (ignoring sale and purchase costs).

B) £12,000. The reasoning being, I could buy all five shares, and sell the aircraft for £50,000, and pocket the £10,000 in the engine fund, and as a result have made neither a profit nor a loss.

I don't agree that there is a liability. An aircraft without an engine is still an asset with its own value. An owner could always sell the aircraft without an engine....no liability...just an asset. That is why airlines usually value aircraft not as a whole, but in sub-divided units, such as airframe, and engines......sometimes the divided them up into much smaller assets. There will be a seperate depreciation policy on each type of asset.

Everyone arguing their corner and repeating the same things each time - this is right up my street!!!

It's also right up my street Kirstey ;)
An aeroplane isn't worth more because it has a fund, it's worth LESS because it DOESN'T.
I'll agree with you that a share is one asset, but I can't agree that an aircraft and a fund is a single asset. They are two very seperate assets, and neither is dependent on the other. Each should be valued seperately before attempting to value the whole ;)

dp

gasax

15th May 2007, 18:30

Why are there so many aircraft stashed away in sheds?

Because so many owners have pretty unrealistic valuations and after advertising for 2 years they quietly put it in a shed......

And years later when you talk to them they still come up with silly money prices - neglecting the rusty engine and peeling fabric.

The market price is another country in many cases.

I've been a memeber of one large and well organised group. The share value was largely not market related - shares were sold by the group - not individuals - they had to be sold back to the group. It had an engine fund and with generally 20 members it was well funded.

But we still had a number of arguments - much like these about costs and engine funds. People wanting money back when we had a large 'excess' and not wanting to pay when there were big bills.

If the group ios small these 'tensions' are likely to be bigger and potentially more destructive. If the group does not buy the share back then the arguments above about 'market value' are important.

But if you start by asking such an open question I would suggest you do a lot more research and talk to members of several groups - they will all have different views. It was my route into operating an aircraft and gave me an insight that made ownership much easier - I've never much aspired to bigger and more complex machines. But if that is what you want then sharing may be the only route - but only in a group you can get on with.

Talk to them and make sure you understand the rules. Many groups are run by poeple who consider themselves more than equal....

IO540

15th May 2007, 18:33

One can see why sole ownership is so attractive :)

S-Works

15th May 2007, 18:36

For gods sake the fund pays for the wear and tear that has already occured. It is not a rainy day savings club.

Would you understand it better if every hour you flew you gave the money to the overhaul company straight away so that there was no cash fund just what seems like a cheaper engine when you come to buy it?

Chilli Monster

15th May 2007, 18:39

To me, I'd value it as follows:

A) £10,000. The reasoning being, I could buy all five shares, and sell the aircraft for £50,000 and have made neither a profit nor a loss (ignoring sale and purchase costs).

B) £12,000. The reasoning being, I could buy all five shares, and sell the aircraft for £50,000, and pocket the £10,000 in the engine fund, and as a result have made neither a profit nor a loss.

And (B) is where your reasoning is flawed - if you were to buy all 5 shares in an aircraft, in a group, do you think that group is going to hand over £10K cash? No - they're going to split it amongst the 5 of them BECAUSE THE GROUP WILL HAVE BEEN DISSOLVED.

I have not misunderstood your proposition in the original question - I've just answered it, pure and simple. You asked how much 1/5 of a share would be worth under the 2 scenarios you posed of someone buying it. Changing the proposition in your latest post to fit your present answer is hardly a cogent form of argument - Read your original question first.

Of course - if you're stupid enough to pay for someone else's flying - feel free, it would be your choice after all ;)

gasax

15th May 2007, 18:46

How many angels can dance on the head of a pin?

If there is some money in the fund the share is notionally worth more - but there are a million buts..

My group (well the 'old guard') insisted all maintenance was done by x. They were much more expensive and I could see no benefit. If we went there for the new engine it wouldn't have mattered how big the fund was - they would have asked for more!

Either the group has a market value share or it has a share value - share values are often nothing like the 'market value' - engine funds and aircraft value versus the numbers often mean that groups try to sell shares at significantly more than the market value divided by the number of shares.

And that is a reflection of their often inflated view of the aircraft value and the 'worth' of the group.

Research the market and drive a sensible bargain.

Would I join another group? Things would have to be pretty bad before I even thought about it!! And that is before you start on about people leaving it empty, dirty, in the wrong place, not leaving it at all.....

foxmoth

15th May 2007, 19:23

For gods sake the fund pays for the wear and tear that has already occured. It is not a rainy day savings club.

The wear and tear that has already occurred has either already been paid for or it has reduced the market value of the aircraft! so any group funds are extra to this market value and if a new member does not buy his share of this fund he is getting it for free!

And (B) is where your reasoning is flawed - if you were to buy all 5 shares in an aircraft, in a group, do you think that group is going to hand over £10K cash? No - they're going to split it amongst the 5 of them BECAUSE THE GROUP WILL HAVE BEEN DISSOLVED.

And that is why if you buy a share you should be buying the share of the fund!
Lets try another way to look at this. A group has a £25,000 aircraft and a £10,000 fund. Those that say you do not include the fund are saying you sell a 1/5th share for £5,000. The group now sells the aircraft for £25,000 (its market value) and buys a new one for £35,000 as that is how much the group funds are - seems to me the new member has done pretty well and the old member who paid in his share of these funds has got a pretty raw deal.:{

Chilli Monster

15th May 2007, 19:39

Lets try another way to look at this. A group has a £25,000 aircraft and a £10,000 fund. Those that say you do not include the fund are saying you sell a 1/5th share for £5,000.

Yes

The group now sells the aircraft for £25,000 (its market value) and buys a new one for £35,000 as that is how much the group funds are

Yes

seems to me the new member has done pretty well and the old member who paid in his share of these funds has got a pretty raw deal

$hit happens - kudos to the new member for joining at the right time. You could, of course, ask them if they'd like to contribute £2K and buy a £37K aircraft. But if they choose not to it's the group's own fault for not mentioning the possibility of the aircraft purchase to the new member before they joined, and getting his feelings on the matter.

(I love the way people keep trying to change the question to fit their answers :) )

foxmoth

15th May 2007, 20:01

I love the way people keep trying to change the question to fit their answers
Not the way I see it - my whole argument is that you are buying into a group with assets and I was just changing the way those assets are in the group, in order to show the same argument from a different viewpoint. To my mind as I said before it does not matter if the group assets are in aircraft,cash,hanger or the group teapot - after all, if you got a group together and each put £5,000 in to buy the aircraft you would not let someone else join free just because the market value of the aircraft you have is zero!:}

S-Works

15th May 2007, 20:07

The group DOES NOT HAVE ASSETS. The group has DEFERRED LIABILITY the engine has already run so the engine fund covers this. The fund exist to cover the wear that has already taken place.

I give up. But then I guess thats why I own 2 new Porsches, I can understand the difference between asset and liabilty........

Preperaring to face my next ban for grinding people down...... :p

Chilli - How am I doing for airways joins........ :)

foxmoth

15th May 2007, 20:29

I can understand the difference between asset and liabilty........

You obviously understand this better than me then, I cannot see though how you have it as a liability when selling as a share but not when selling the whole aircraft -when that wear would be reflected in the aircraft price.:confused:
Also, if I were buying a company for example I would be looking at assets and liabilities and valuing the company on the whole. My understanding is that Normal practice would have the wear and tear reducing the market value on an asset with any cash definitely coming in on the asset side, either that or it is the wear and future engine purchase that is the liability - but that liability exists with or without the fund and the fund itself is still an asset. Also this is not a good way to run a group since it is more likely to push the group into selling the whole aircraft then split up the cash fund - but how can you split it up, because as a liability it must cost you money, not make it for you.:hmm:

IO540

15th May 2007, 20:58

I think foxmoth you are trying to understand it too deeply. There isn't any sense to this business so there is little point in looking for some.

The price of a share is basically the appropriate fraction of what most likely punters might think is the market value of the plane, with a big variation.

Most of them are way overpriced in today's depressed spamcan market (because prices actually paid for used planes are way below advertised figures, but a novice buying a share won't know that) but they still sell because you are purchasing an entitlement to cheaper flying, compared to either self fly hire, or 100% ownership.

Anybody who can actually afford to own 100% should just sod it and do exactly that and save themselves all the hassle. When you are flat on your back with terminal cancer you aren't going to wish you spent LESS money on something you like doing.

And if you can't fly yourself often enough to keep the engine in good nick (say 1 hour per week) then you can always find somebody who can borrow it and give you some cash (make sure he's a "named driver") or even rent it properly.

I know of groups that work well but they tend to be close knit, made up of old mates and shares in those rarely if ever get offered.

Chilli Monster

15th May 2007, 21:27

Bose - never a problem. Tonights my 2nd night shift so you'll have to wait until Sunday a.m for my dulcet tones ;)

dublinpilot

15th May 2007, 22:16

And (B) is where your reasoning is flawed - if you were to buy all 5 shares in an aircraft, in a group, do you think that group is going to hand over £10K cash? No - they're going to split it amongst the 5 of them BECAUSE THE GROUP WILL HAVE BEEN DISSOLVED.

That wasn't the question. Buying one share gives you ownership of 1/5 of the benefits that flow from the fund. If you later buy a second share then you have 2/5 of the benefits of the fund and so on. You buy all five of them, then you have the full benefits of the fund.

I have not misunderstood your proposition in the original question - I've just answered it, pure and simple. You asked how much 1/5 of a share would be worth under the 2 scenarios you posed of someone buying it. Changing the proposition in your latest post to fit your present answer is hardly a cogent form of argument - Read your original question first.

I have not changed my question. I clarified it a little, because I thought that you had missunderstood it. If you haven't misunderstood it then fine. You're just wrong, and I haven't managed to educate you yet ;)

$hit happens - kudos to the new member for joining at the right time. You could, of course, ask them if they'd like to contribute £2K and buy a £37K aircraft.

You can't just ignore Foxmouths proposition. Value has come from somewhere, and an investor would be stupid to ignore that value. If they don't get that value in the form that Foxmouth has described, then they will get the value when the new engine must be purchased. ;) The value is real, and to simply ignore it because $hit happens, results in an incomplete valuation.

The group DOES NOT HAVE ASSETS. The group has DEFERRED LIABILITY

Bose-x, I can't agree that there is a liability here.

A liability is defined as Liabilities are obligations of an entity to transfer economic benefits as a result of past transactions or events.

The group has no obligation to transfer the fund to anyone. It can keep it for as long as it likes. Nor is it under any obligation to replace the engine if it doesn't want to. It can either sell the aircraft engineless or leave the airframe rot away in a shed. Having a fund does not create an obligation to transfer economic benefits, and therefore it does not met the defination of a liability.

dp

foxmoth

16th May 2007, 00:16

OK Bose/Chilli etc.:ugh:
Just before I stop banging my head against the wall a last question :-
2 otherwise identical groups with the same £20,000 value aircraft, the second having a £4,000 fund. According to your arguments both groups 1/4 shares will be worth £5,000 - so which group would you buy into, the first at £4,950 (obviously a bargain), or the second at £5,300?

Chilli Monster

16th May 2007, 03:12

Foxmoth - you still haven't got it yet have you ;)

I'd buy into the second aircraft, but I'd only pay £5000.

(If I had to buy the first share I would be paying considerably less - nearer the £4K figure than the £5K it's supposedly worth).

IO540

16th May 2007, 05:54

dublinpilot is exactly right in his financial analysis; however I doubt most share buyers look at it that way.

Most of them buy a share because it's a much cheaper way to get to fly than self fly hire, and they can't afford to buy a whole plane.

If everybody had say £30k+ to spend on a plane, there would be virtually no market for shares in spamcans. Whereas loads of people have say £5k - in general if you can't dig out 5k somehow then you are either unemployed or you have ended up in a tight situation where every penny is going straight out elsewhere.

This is where the market for shares (at the price level we are talking about) comes from. The asking price doesn't get analysed for value, and IMHO if it did get analysed for value then share prices would plummet. Most planes are worth a lot less than the share price x # of shares, and most groups don't have a fund anywhere near big enough to go forward without major top-ups.

And there isn't much choice of shares to buy. You can buy one only if there is one for sale, and they usually come on the market because somebody is unhappy with the group.

Chilli Monster

16th May 2007, 06:29

And there isn't much choice of shares to buy. You can buy one only if there is one for sale, and they usually come on the market because somebody is unhappy with the group.

I disagree.

I've had 3 shares, all were what I wanted, at the price I was prepared to pay, and were there when I was in the market.

In addition, I was perfectly happy with the groups. No.1 I sold because I moved away from the area. No.2 I sold because I spent more time flying other people's aircraft with no time to spare to fly my own. No.3 is currently on the market because I've got my eyes on something with a view to sole ownership.

(anyone in the South Yorks / North Notts area interested in a Complex 4 seater share drop me a line).

foxmoth

16th May 2007, 06:41

Foxmoth - you still haven't got it yet have you

Obviously not
I'd buy into the second aircraft, but I'd only pay £5000.
Not if they won't sell to you for that price - and if you were to buy the whole aircraft how much would you be prepared to pay (without the fund of course)?

If you are saying you would pay £20,000 for the aircraft but not 4 x £5,000 for a share then the argument is that a share is not worth the same as that portion of the market value of the aircraft. If you are saying you would pay less than £20,000 then it is actually the market value you are in disagreement over and I do not see how you can say that unless you know how I (or the groups) have arrived at that valuation.
Either way this is a different argument from the one that has been going on here because up to now you have been saying that you do not pay more for an aircraft because it has a fund.:\

S-Works

16th May 2007, 08:39

Not if they won't sell to you for that price - and if you were to buy the whole aircraft how much would you be prepared to pay (without the fund of course)?

Thats the point. You are trying to combine two different arguments into one to prove your point. What the share is worth, what you pay will pay for it and what they will sell it to you for ad different things.

DB. Deferred liability comes from the fact that the engine fund is built from the hours actually flown. A person flying the aircraft pays for the wear and tear on the engine as they go rather than paying getting a large bill in the post long after they have left the group to cover the wear that THEY put on the engine.

Go back to my previous comment. The engine fund belongs to the engine overhauler.

Another analogy: If you are on PAYE you pay your tax as you go. If you are self employed you pay it at the end of the year and the wise person makes provision as they go for this expected bill by keeping a fund, the fund covers the liability for money already earned. When it becomes due you hand it over. If you don't work for the next 2 years they don't knock allow you to keep that money as credit for having 2 years off because you already incurred the liability. If you have your assets assessed the money in the bank is not YOUR asset, you are just holding it for the taxman, although the interest is!

An engine fund works the same way. You are saving for the wear already incurred. The monthly fees are the speculative funds to cover what could happen.

slim_slag

16th May 2007, 08:50

I think people are trying to prove how clever they are, and it's having the opposite effect :)

foxmoth

16th May 2007, 11:28

Go back to my previous comment. The engine fund belongs to the engine overhauler.

What rot - If this were the case you would have to have this fund as a private owner and pass it on to the buyer (or to the engine shop) when you sell. With whole ownership you just put any fund in your pocket - with a group this does not happen, the fund stays with the aircraft - and the new share owner needs to pay for it.
As far as liability goes, the liability for the new engine is there with or without the fund and is why the same aircraft costs (say) £30,000 with a new engine, £28,000 mid life and £25,000 time expired, and I STILL cannot see how you can say the share is worth the same with or without the fund.
(And you did not say which share you would have gone for Bose)

slim_slag

16th May 2007, 11:43

1) Assets - liabilities = shareholders equity

Part used Engine = asset
Cash in bank = asset

(Eventually part used engine becomes unfit for purpose purely because of regulatory law, it is still an asset though as it has at least scrap value, but has to be replaced because CAA says so.)

Invoice for new/overhauled engine = liability

Liability 'removed' from balance sheet using cash (so also removing asset)

New/overhauled engine = asset

------------------------------------

Your shareholders equity is dependent on how many shares you own, and how shares are classed. Now, the trick is sell your shareholder's equity for more than (assets - liabilities), and the trick is to buy it for less than (assets - liabilities). That is where the free market value comes in, if you like it enough you will pay more than it is worth.

One drives a 4 year old Ford Mondeo Estate that gets >50mpg and cost me £3500 at auction. Thus proving that the car one owns has nothing whatsoever to do with one's business acumen :)

Chilli Monster

16th May 2007, 12:21

That is where the free market value comes in, if you like it enough you will pay more than it is worth.

Which gives us the biggest rule in aircraft / share ownership:

Don't get emotionally involved - it's a business transaction, treat it as such :ok:

S-Works

16th May 2007, 12:35

I give up.....

Just don't be winging about how you can't afford to fly because everything is so expensive when you cant even grasp the basics.

Enough from me, I am going to go and wash the Poles wash my car. :p

foxmoth

16th May 2007, 12:35

2x £5,000 (nominal value)shares available in the same location - 3 buyers, shares will probably go for £5,200+, only one buyer that share will probably go for £4,700 or less depending on how desperate the sellers are - those are market forces - but it is how you get your nominal value that is being argued over here.

dublinpilot

16th May 2007, 12:59

I am going to go and wash the Poles wash my car.

Seems like a strange agreement to me.....you wash the Poles, they wash your car??? :}

Bose, I'd be interested in the values you'd place on my earlier senario. I somehow suspect you'd arrive at the same values as me, just with a different logic. If you do, then it make little difference that you hold a different understanding on an asset and a liability. The final result is all the matters.

If on the other hand you come up with the same values as CM then :eek:

dp

BackPacker

16th May 2007, 13:04

Chili - exactly. It's first and foremost a business transaction. First you need to value what the share is worth. For that you need to know the value of the aircraft and any other assets and liabilities (mortgage anyone?) that are part of the share you intend to buy. Then you decide on an offer price.

Best advise here is if you don't know how to read a balance sheet, value assets and liabilities, make sure to get some advice from someone who does! That would mean a licensed mechanic to determine the condition of the aircraft, and an accountant of some sort to take a look at the books.

slim_slag

16th May 2007, 13:23

I'd be interested in the values you'd place on my earlier senarioIF you mean in post 30 (http://www.pprune.org/forums/showpost.php?p=3289854&postcount=30) and assuming nothing else on the balance sheet, the answer you gave is correct.

Kirstey

16th May 2007, 13:24

But you don't backpacker.. you work out the market value of the AEROPLANE and then pay a share of that.. that's it. Simple as that. The Cessna 150 I'm starting a group with has no engine fund, but 1100 hrs to get a fund (with luck!!). Everyone is paying a 10th share of 16000. If there was an engine fund I'd pay... yup a 10th share of 16000.

In three years there may be an engine fund of 6000. The aeroplane maybe worth £12,000. I'll sell my share for 10 % of 12,000 NOT 18,000. How can my share increase in value for an aeroplane that was even sh1ttier than when i started!!???

in reality i'll probably ask £2,000 for it.. but that's me, not the market!

slim_slag

16th May 2007, 13:28

How can my share increase in value for an aeroplane that was even sh1ttier than when i started!!???Because in your example the value of the cash asset in the bank has increased more than the value of the engine asset has decreased.

Assets - liabilities = shareholders equity

Cash is the ultimate asset until you have spent it. You have only spent it when you have paid the invoice. (There are things like tax which might be considered due before they are in real life, but not engine maintanance)

The only purpose of the engine fund is to prevent cash flow problems i.e. having to put a liability (loan) on the books at a later date. It is an asset until spent.

IO540

16th May 2007, 13:44

They might be female Poles, DP ;)

dublinpilot

16th May 2007, 13:49

Supermodel female poles??

Hell, I might offer to help wash his car.....or the Poles :}

foxmoth

16th May 2007, 13:54

Kirstey,
If you owned the aircraft by yourself you would sell the aircraft for £12,000 and pocket the £6,000 fund - not pass it on for free to the new owner,netting you £18,000, so why when you sell a share shouldn't you pocket your share of that fund in the same way?

BackPacker

16th May 2007, 14:03

Kirstey, If indeed in 10 years time the aircraft is worth 12.000 (actual market value) and has a 6.000 engine fund, and you're still prepared to sell your 1/10th share for 1200, give me a call. In fact, please encourage all the other members to do likewise.

That means I pay 12.000 in total and get a 6000 engine fund thrown in for free. Sounds like a good deal to me.

===

Think of this. If I buy your share of the aircraft, who becomes the owner of the engine fund? You're no longer the owner, since you've got nothing to do with the aircraft. As part of the transaction, you're selling your share in the engine fund to me. Because despite all the hoopla about deferred liability, there is a bank account somewhere with 6000 pounds in it. This bank account is owned by somebody, or has joint/shared ownership. And neither the money nor the bank cares whether that account is called an "engine fund" or something else. It's money, and it's owned by someone. So it's an asset. And you're selling it to me as part of me buying a share in the group.

If you want to do it real properly as a bookkeeper, what you need to do is deprecate the aircraft engine with each flying hour, and offset that depreciation with the formation of an engine fund.

Here's an example for your case, where I assume that the engine, zero-time is worth 10.000 and to get it overhauled or replaced at TBO costs 6000, and needs to be done after 1000 hours.

First, everybody in the group puts up 1600 UKP. Balance sheet

Debit (asset) side
======
Money in the bank - 16.000 UKP

Credit (liability/private equity) side
=====
Private equity - 10 shares @ 1600 UKP = 16.000 UKP
Total assets: 16.000 UKP

The group buys an airplane:

Debit side
====
One airframe- 6.000 UKP
One aircraft engine, 1000 hours to TBO - 10.000 UKP
(Split into two for bookkeeping reasons - because they depreciate differently)
Total assets: 16.000 UKP

Credit side
====
Private equity - 10 shares @ 1600 UKP = 16.000 UKP

Now everybody starts flying and generally having fun. The engine overhaul will cost 6000 UKP after 1000 hours so for each flying hour they put 6 UKP in the engine fund. Here's what the balance looks like after 100 hours flying

Debit side
===
One airframe @ 6000 UKP
One aircraft engine, 900 hours to TBO - 9400 UKP
One engine fund, stored in a bank account - 600 UKP
Total assets: 16.000 UKP

Credit side
====
Private equity - 10 shares @ 1600 UKP = 16.000 UKP

See that the balance does not change? Your private equity is still worth 16.000 UKP, or 1600 per head.

Now the engine is totally run out. It did its 1000 hours and all that's left is a recyclable core which indeed happens to be worth 4000 UKP:

Debit side
===
One airframe @ 6000 UKP
One aircraft engine, at TBO, recycle value - 4000 UKP
One engine fund, stored in a bank account - 6000 UKP
Total assets: 16.000 UKP

Credit side
====
Private equity - 10 shares @ 1600 UKP = 16.000 UKP

The engine is overhauled for 6000 UKP:

Debit side
===
One airframe @ 6000 UKP
One aircraft engine, 1000 hours to TBO, recycle value - 10000 UKP
One engine fund, depleted - 0 UKP
Total assets: 16.000 UKP

Credit side
====
Private equity - 10 shares @ 1600 UKP = 16.000 UKP

But now for the interesting bit. Suppose after 500 hours of flying someone in the group decides to sell his share. Here's the situation at that point in time:

Debit side
===
One airframe @ 6000 UKP
One aircraft engine, 500 hours to TBO, recycle value - 7000 UKP
One engine fund, stored in a bank account - 3000 UKP
Total assets: 16.000 UKP

Credit side
====
Private equity - 10 shares @ 1600 UKP = 16.000 UKP

As part of his pre-purchase survey, the aircraft is valued against current market value, taking into account that the engine is half-time. The surveyor finds that similar aircraft, in the current market, sell for 12.000 UKP, but also confirms that an engine with 500 hours left is still worth 7000 UKP if sold separately, so it's the airframe which has depreciated (or valued too high to begin with) and is now worth 5000 UKP. This information leaks to the group and they realise that their aircraft (more precisely the airframe) needs to be depreciated. So they rewrite the balance sheet and it now looks like this:

Debit side
===
One airframe, now depreciated by 1000 UKP: 5000 UKP
One aircraft engine, 500 hours to TBO, recycle value - 7000 UKP
One engine fund, stored in a bank account - 3000 UKP
Total assets: 15.000 UKP

Credit side
====
Private equity - 10 shares, nominal value 1600 UKP, now worth 15.000 UKP

So each owner now has been 'had' due to the depreciation for 1000 UKP. Nevertheless, a fair value for each share of the group is 1500 UKP: total assets minus debts (of which there aren't any) divided by number of shares. Now depending on the hurry of the seller and the buyer of the share, the actual share sale price as negotiated between the buyer and seller may be more, or less, than 1500 UKP. But 1500 UKP is what the negotiations should start with.

To sum it up: the shareholders are the owners of all the assets in the group, minus any debts that the group might have (which they don't in this example). An airframe is an asset, an engine is an asset, and money in the bank is an asset. If you buy or sell a share in the group, all the assets should be taken into account.

S-Works

16th May 2007, 14:12

They might be female Poles, DP

Well there is a rather attractive young lady who has joined the team and does seem to enjoy washing my car....... :O

And I have lost interest in this conversation with people manipulating the facts to meet their arguments. We have gone from an engine fund to a whatever you want to call it fund.

If the group sold all the shares to one person the would sell the aicraft at its current market value which will represent as Kirstey points out its real value depreciated and they would pocket the "whatever you want to call it fund".

When you buy an aircraft share you are not buying the cash reserves. When you leave you don't take the cash reserves with you (unless point above).

There was an AA5 group at our place, the decided to end the group, had the aircraft valued and sold it. They split the proceeds between the group and bought an new aircraft.

foxmoth

16th May 2007, 14:41

When you buy an aircraft share you are not buying the cash reserves.
And why not? As you pointed out yourself this is money put aside by the seller I was only involved in a group once I bought a share for £8k. The engine fund stood at about £10k. I flew a few hundred hours in it and paid the wet rate. £20ph went into the engine fund to offset my (my italics - Foxmoth) libaility for the hours I had "worn" on the engine. so why give the money you have set aside for your liability to the next guy?
And going back too my 2 groups you have still not said which one you would go for if you had to - or is that too difficult.:}

S-Works

16th May 2007, 14:46

what 2 groups? I was ignoring you just lost with all of the explanations of how you are using your cash to buy more cash in a group..... Is it a new method of money laundering?

foxmoth

16th May 2007, 14:50

You need to go back up the page - but here it is again:-
OK Bose/Chilli etc.
Just before I stop banging my head against the wall a last question :-
2 otherwise identical groups with the same £20,000 value aircraft, the second having a £4,000 fund. According to your arguments both groups 1/4 shares will be worth £5,000 - so which group would you buy into, the first at £4,950 (obviously a bargain), or the second at £5,300?
And I certainly cannot see how I am using cash to buy more cash the way you say.:confused:

slim_slag

16th May 2007, 15:00

foxmouth, your logic makes perfect sense, just remember not everybody is able to see it that way.

S-Works

16th May 2007, 15:44

You need to go back up the page - but here it is again:-
Quote:
OK Bose/Chilli etc.
Just before I stop banging my head against the wall a last question :-
2 otherwise identical groups with the same £20,000 value aircraft, the second having a £4,000 fund. According to your arguments both groups 1/4 shares will be worth £5,000 - so which group would you buy into, the first at £4,950 (obviously a bargain), or the second at £5,300?
And I certainly cannot see how I am using cash to buy more cash the way you say.

Sorry I don't understand the question. If you are asking what I would pay to buy into the groups. Well group A I would be offering around £4k for the share and Group B would probably get closer to the £4700 region. What I would pay for a share is nothing to do with the discussion we are having. But I would certainly not pay over the 1/4 value of the aircraft.

Say I pay your £5.3k figure to "buy" 1/4 of the engine fund on top of the value of the aircraft and the engine goes tits up I have paid for 1 quarter of the aircraft and I have paid £300 towards someone else's flying and I still have to pay 1/4 of the repair bill.

Better idea...... I pay 1/4 the value of the aircraft. The engine goes bang, the group uses the money in the bank to pay the repair bill and I am liable for 1/4 of the balance after that money has been spent. So the money in the bank covers the wear and tear that has already occurred which is why it was collected in the first place and I cover my % of the bill.

I am glad I am not in group........

foxmoth

16th May 2007, 16:05

This actually seems to go against what you were saying earlier - that the share is only worth the portion of the market value of the aircraft, because you now seem to accept that the cash fund (Yes the term Engine fund has been used but I think most people who have been in groups accept that this fund is used for unplanned expenses of all types) adds value.
What you do now seem to be saying is that a 1/4 share is NOT worth 1/4 of the market value of the aircraft (i.e. what it would be worth if sold on the open market) - this is actually a different argument from the one you have put forward before - are we getting somewhere now?:hmm:
Also, if you buy your own aircraft and the engine goes bang just after buying you have to cough up ALL the costs, with no money having come with your purchase.

S-Works

16th May 2007, 16:12

No I have not changed my position but it is a nice try on your part to make it seem that way. So let me make it totally clear I do not consider the amount of money a group has in the bank to be any part of the value of the aircraft.

However I would find a group with cash in the bank more attractive than a group with non. I am not stupid!

However I would not pay more than the market value of the airframe to get into the group that had more cash in the bank. For either group I would be aiming to pay below the market value of the airframe. I am not stupid.

Enough of this. When I was accused of grinding people down to my point of view I got a 10 day ban. Rob???????????

foxmoth

16th May 2007, 16:23

OK Bose - I do not agree with you, but I can almost see where you are coming from -one more question and I might get there -if you were to buy one of these £20,000 aircraft as a sole owner then what would you expect to pay (no fund of course)?

S-Works

16th May 2007, 16:30

What would I pay? Well thats a leading question. Nowhere near the asking price. The point of the question?

foxmoth

16th May 2007, 16:39

Nowhere near the asking price. The point of the question?
The point is to try and see how you perceive value. Note, I did not say the asking price was £20,000 - if I were selling anything which I believed I would get £20,000 for I would be asking more for it and aiming to accept as much as I could, hopefully more than £20,000, how much it actually goes for either above or below this amount depends on demand and is the "actual" market value.

S-Works

16th May 2007, 17:03

Mike Cross

16th May 2007, 17:14

I gave up long ago, Bose does not understand that the market value of the aircraft is what someone will pay for it, not what the vendor thinks it is worth.

If the asking price was 20k and he buys it for 18k then its value is 18k. If he offers 18k, his offer is not accepted, and it's subsequently sold for 19k then it's value is 19k.

It follows that you can't determine the market value until you've sold it (although you can have a guess at what it might sell for).

As for the concept of the engine fund being a liability, I'd be delighted to offer to take such a liability off anyone's hands for say 50% of the value of the liability? The fund itself is an asset, held for the purpose of meeting a future and as yet uncrystallised liability.

An understanding of basic accounting, the concept of Sales, Purchase, Income, Expenditure, Asset and Liability nominals and how they build into a Profit & Loss account and a Balance Sheet would be helpful if people want to pontificate.

Mike Cross

16th May 2007, 17:21

No the actual market VALUE is the valuation of what it is perceived to be worth what it sells for is a different matter.
For example if we have a house valued at £1mil what it sells for could be more than market value or less.
You're continuing to talk bollox
market value
–noun 1. the value of a business, property, etc., in terms of what it can be sold for on the open market; current value (distinguished from book value).

book value
–noun 1. the value of a business, property, etc., as stated in a book of accounts (distinguished from market value).

asking price
–noun the price originally demanded by the seller, as before any reduction resulting from bargaining, discount, etc.
[Origin: 1745–55]

All definitions from dictionary.com

S-Works

16th May 2007, 17:22

But we are not running a balance sheet when we are valuing a share. What you are suggesting would probably work around a share or a trading entity like a ltd company where shares in the business are sold based on the balance sheet. What we are referring to is a private share with a structure generally formed around a gentleman's agreement.

We are obviously not going to agree on this so I am calling it a day.

foxmoth

16th May 2007, 18:26

We are obviously not going to agree on this so I am calling it a day.
Well I think that is the first thing you have said in this thread I would agree with - I can, now (just) see where you are coming from though I do not accept it as correct.:ugh:

dublinpilot

16th May 2007, 18:27

Some light at last....

Say I pay your £5.3k figure to "buy" 1/4 of the engine fund on top of the value of the aircraft and the engine goes tits up I have paid for 1 quarter of the aircraft and I have paid £300 towards someone else's flying and I still have to pay 1/4 of the repair bill.

Better idea...... I pay 1/4 the value of the aircraft. The engine goes bang, the group uses the money in the bank to pay the repair bill and I am liable for 1/4 of the balance after that money has been spent. So the money in the bank covers the wear and tear that has already occurred which is why it was collected in the first place and I cover my % of the bill.

This is obviously where we are looking differently at things.

I don't understand why you would think you'd have to pay a full 1/4 of the repair bill? I can't see anything happening in such a senario other than what you suggest is a better idea in the second paragraph. The engine fund pays for the repair bill so far as is possible, and then the balance is split four ways. After all that's the whole point in having an engine fund.

If you don't see it being used for the repair of the engine, how do you see it being used?

dp

foxmoth

16th May 2007, 18:44

The engine fund pays for the repair bill so far as is possible, and then the balance is split four ways. After all that's the whole point in having an engine fund.

And this increases the market value of the aircraft - hopefully to somewhere near the sum of the value before the new engine + what the engine cost.:ok:

slim_slag

16th May 2007, 19:00

Exactly.

Some people want to have their cake and eat it. That's fine in the dog eat dog world of commerce, but not the sort you want in an airplane group.

Mike Cross

16th May 2007, 20:22

Felix
If you're still with us, apologies for the way everything's gone away from your original question.

I've shared boats and aircraft. How well it works will be dependent on how well you get on with your partners. Most of us have neither the time, the money, or the obsessiveness to want to spend all of our leisure time playing with the toy. However there are some who want to do lots of hours and want the machine to be available whenever they want.

If you buy it yourself you end up with all of the cost and all of the risk, and have it available to you whenever you want. You'll also know that it hasn't been mistreated.

If you share it you share the costs and risks but you give up some autonomy and availability. The dictum of "buyer beware" applies equally to buying an aircraft outright as much as to buying into a group, but you need to be more careful with a group because, while things may unexpectedly go wrong with the aircraft, they can equally go wrong with the personal relationships within the group.

Don't pay more for the share than it's worth. Make sure you understand the value of what you're getting. Don't value the aircraft by asking prices, think of what similar aircraft sell for, rather than the price they are advertised at. Make sure you understand what expenditure is likely, will the engine need an overhaul, will it need a repaint or re-cover, will it need a prop overhaul? What will the costs be? Is the pattern of expenditure likely to be similar to what it has been (in which case the group accounts are likely to be a good guide) or is there something expensive looming like an engine overhaul? Are changes like the increasing cost of Avgas going to increase or decrease the attractiveness of the aircraft to future purchasers?

All of these are things you should also be condidering of you're thinking of buying outright.

One could go on ad infinitum, at the end of the day it's what you feel comfortable with.

Some people want to have their cake and eat it.
Nothing wrong with that, it's having someone else's cake and eating it that gets you into trouble.;)

IO540

16th May 2007, 21:47

If you don't see it being used for the repair of the engine, how do you see it being used?

This is another valid angle. Sometimes, the engine fund isn't used towards a new/overhauled engine. The group might get disbanded (let's say the plane gets wrecked and the insurer won't cover it, or is scrapped because some huge problem is found which would cost too much to fix. Then, the fund might get used towards buying another plane.

In the group accounts, one would normally work things on a going concern basis i.e. you assume that the "business" will continue, and you make a provision for the anticipated engine work by building up the fund. But the fund isn't held in any kind of escrow and can be used for anything at all. In an extreme case, the group might get disbanded altogether in which case the current members will pocket the fund!

There is NO way to work this with perfect fairness, in any group that has some member rotation. Somebody will benefit from the others, depending on luck, or inside knowledge.

It's a bit like the treatment of fuel duty drawback within groups. Many groups, to my amazement, allow the pilot going abroad to pocket the drawback. This pilot is then screwing those who might fly it abroad (still on the same fuel load) later; they can't make the drawback. When I used to rent my plane out, I didn't have any rules set on this and one renter (an instructor, no less) pocketed the drawback of about £100 which completely covered the cost of his trip to LeTouquet and back... another instructor/renter pocketed a drawback without even telling me and it was by accident that I avoided making a duplicate claim.

I think a lot of the arguments in this thread come from the lack of appreciation that there is no perfect way to run these maintenance funds, in any group that has any member rotation. Only if all members remained for the entire period the plane is in the group could one work it out fairly to all.