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

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.


It's also right up my street Kirstey ;)
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

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....

One can see why sole ownership is so attractive :)

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?

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 ;)

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.....

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 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.:{

Yes

Yes

$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 :) )

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!:}

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........ :)

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:

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.

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

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 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 ;)

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.

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

A liability is defined as 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

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?

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).

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.

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).

Obviously not
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.:\

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.

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

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)

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 :)

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:

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

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.

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

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.

IF you mean in post 30 (http://www.pprune.org/forums/showpos...4&postcount=30) and assuming nothing else on the balance sheet, the answer you gave is correct.

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!

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.

They might be female Poles, DP ;)

Supermodel female poles??

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

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?

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.

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.

And why not? As you pointed out yourself this is money put aside by the seller 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.:}

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?

You need to go back up the page - but here it is again:-
And I certainly cannot see how I am using cash to buy more cash the way you say.:confused:

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