Sharing light A/C
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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.
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.
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Originally Posted by Backpacker
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 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.
Group A = 5000 Euro
Group B = 4375 Euro
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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.
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.
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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.
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.
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I was going to give up but what the hell
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.
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.
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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.
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.
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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.
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.
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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
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
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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.
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.
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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.
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?
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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?
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.
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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?
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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"...
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"...
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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.
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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.
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.
Last edited by Chilli Monster; 15th May 2007 at 13:25.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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?
The fund belongs to the aircraft not the shareholders.