Reference no: EM132126702
Costs are Soaring: Rent, Own or Share an Airplane
One of your friends, Chris, is a licensed pilot and currently owns a Piper Cherokee Six airplane. Although Chris enjoys the convenience and freedom of owning an aircraft, he knows that there are other options such as joining an ownership club (sharing a plane) or even simply renting an airplane when he would like to fly. Either of these alternatives may be less expensive than sole ownership. There are some disadvantages to renting or sharing (e.g. potential scheduling difficulties, lack of “equity” in an asset with the rental option, the need to share the airplane with other pilots and losing the pride and flexibility of ownership), but he may be willing to accept such disadvantages if economic reality prevails. Because Chris does not trust himself to be objective, he has asked you to analyze the situation and make a specific recommendation regarding one of the following three options:
1. Continue owning his Piper Cherokee Six, a single-engine airplane
2. Rent a single-engine airplane
3. Share a single-engine airplane via an ownership club
Regardless of the choice of airplane, Chris estimates that he will fly an average of 100 hours per year. He has provided you with the following information regarding his current situation and the expected costs of the other two options. If Chris chooses option 2 or 3 he could sell his current plane for its estimated fair market value of $75,000 and use the money to pay off his home mortgage on which he is paying interest at a rate of 4% per year.
Other information:
Estimated fuel consumption: 16 gallons per flight hour (for Scenarios #1 and #3)
Estimated fuel cost: $4.60 per gallon
Pilots’ Association Dues: $100
ForeFlight electronic chart subscription (annual): $200
Annual flight physical: $120
Scenario #1 – Continue Owning the Existing Piper Cherokee Six
Annual fixed hull & liability insurance: $1,000 per year
Monthly fixed hangar rent: $200 per month
Estimated oil usage: One quart every ten flight hours
Estimated oil cost: $5.50 per quart
Estimated fixed annual repairs & maintenance: $2,000 per year
Estimated variable repairs & maintenance: $20.00 per flight hour
Estimated variable reserve for engine overhauls: $14.00 per flight hour
If Chris continues to own the Piper Cherokee Six he will have the flexibility to fly when and where he de-sires for as much time as he wants without worrying about other pilots who have reserved the airplane. He can keep his personal effects (headset, iPad, etc.) in the aircraft and will be confident that other pilots and their passengers will not abuse the aircraft. However, he will be solely responsible for ensuring proper maintenance of the airplane, including all of the related costs of ownership.
Scenario #2 – Rent a Single-Engine Aircraft
Hourly rental rate (including fuel): $160 per flight hour
Annual fixed cost of renter’s insurance policy: $1,000 per year
If Chris rents an airplane, the rental company will charge a minimum of four hours per day “penalty” if he takes the plane for an entire day. For example, if he operates a rental aircraft for three hours to fly up north for a two-day weekend, the rental company will charge him eight hours of rental fees (four hours for Saturday and four hours for Sunday) instead of merely the three actual hours flown. However, he will only be charged for actual hours flown if he takes the airplane for a small portion of a day. Chris anticipates that he will incur the “penalty” when he flies the airplane on three three-day trips that will each require only seven hours of flight time and four two-day trips that will each only require three hours of flight time. The balance of the 100 actual flight hours will brief, local flights which will not involve the “penalty.”
Although the rental scenario does not offer the benefits of ownership, it avoids the burdens faced by an aircraft owner. As a renter, Chris will not need to keep detailed maintenance records or deal with the regu-latory requirements owners must satisfy. The rental company will assume most, if not all, of the hassles that would be encountered by an airplane owner.
Scenario #3 – Share a Single-Engine Airplane in an Ownership Club
Cost to purchase a one-fifth share in the club: $20,000
Hourly operation rate (not including fuel): $60 per flight hour
Monthly fixed club dues: $140 per month
If Chris shares an airplane via a club arrangement, he will not incur the “penalty” that is associated with the rental scenario. However, he will need to coordinate usage with other club members and there will likely be occasions when the plane is unavailable because another pilot has reserved the aircraft. Also, even though he will own an asset (the club membership is a transferrable interest) he will not have the ul-timate flexibility permitted by sole ownership. He will need to adhere to the time limits of his reserva-tions. He may not be able to extend a family vacation or business trip because he is expected to return the airplane to its home airport at a specified time.
The club scenario is a hybrid of the ownership and rental alternatives. Chris would have satisfaction in-volved with owning a portion of an asset, but would relinquish some flexibility and autonomy. Certain ownership burdens (e.g. scheduling and tracking maintenance) would likely be shouldered by a club member (perhaps the club’s maintenance officer). However, Chris may be asked to assume certain re-sponsibilities that are expected of active club members (perhaps serving as a scheduling officer, training officer or some other duty).
Your Analysis and Recommendation
Your analysis should consider the important differences between ownership and rental costs. You may use any information or analytical techniques you feel are necessary to prepare a thorough analysis and make your specific recommendation. However, your analysis must at least include the concepts of relevant costs and decision-making. Your evaluation should contemplate the non-financial benefits and burdens of each scenario that extend beyond pure cost analysis. You must include detailed calculations and data which support your ultimate recommendation to choose one of the three scenarios. Chris has requested that you use Microsoft Excel to prepare your analysis and Microsoft Word to draft your recommendation. Grammar, professionalism, accuracy of analysis, completeness, spelling and presentation are important to making your case.
Requirements:
1. Prepare an analysis showing Chris the relevant costs of owning a plane vs. giving up flying.
2. Assume that Chris has no intention to give up flying. Prepare a second analysis comparing the relevant annual cost of owning, renting or sharing a plane. (NOTE: The one-time cost of purchasing a share in the club is not an annual cost but an investment in another plane).
3. Write a memo (in proper form) to Chris indicating what you think he should do and explain your reasoning. Be sure to include other issues which should be considered in addition to cost.