Q:

Why does airplane X cost $95/hour to rent?  Where does
all that money go?  It doesn't seem like it should be
that much.


A:

When we talk about airplane costs, there are two types of
costs: fixed costs and variable costs.  Fixed costs are those
things that an airplane owner must pay for whether that airplane
flies or not.  These are things like insurance, tiedown fees,
and some kinds of maintenance.  Variable costs are things like 
fuel, oil, or time-in-service maintenance.

In order to talk strictly in terms of dollars per hour, we
must make an assumption about how many hours per year an
airplane will fly and then divide both the hourly and fixed
costs by this figure.   Also, we must take into account the
major expenses that only come around every 5 or 10 years,
such as required engine overhauls.  A common number of operating 
hours outlined for engine overhauls is 2000 hours, so we will use
that in our figures below. 

Let's assume we're talking about a Model XYZ airplane (fictitious)
that rents for $95/hour and burns 6 gallons of fuel per hour
during normal operation.  Let's assume it flies 300 hours per
year, is relatively well treated, and is parked on the airfield 
at Palo Alto.  Let's assume it's engine is good for 2000 hours
and an overhaul of the engine is $12,000 (in line with what
an overhaul on a Cessna 172 or Piper Warrior might cost).

Here's the math for one year of ownership under the above conditions:


Engine overhaul reserve:   (300/2000) * $12000 =  $1800	   (variable)
Monthly outdoor tiedown:   ($120 per month)    =  $1440    (fixed)
Yearly insurance cost:                         =  $4000    (fixed)

Fuel costs (300 hours * 6 gal = 1800 gallons)
	   (As of 4/27/08, fuel is $5.40/gallon)
  	                      (1800 * 5.40)    =  $9720    (variable)

100 hour maintenances (preventative, every     
           100 hours.  $1000/each)             =  $2000    (variable)

Annual maintenance/inspection                  =  $1200    (fixed)
(The annual counts for a 100 hour and must
be done once per year regardless of how often
the aircraft flies)

Flying club management fee (they promote the
airplane, manage it's scheduling, and take care
of minor things as they come up.)  $12/hour    =  $3600    (variable)

=======================================================
Total 						 $23760



We're at almost $24k for one year and we haven't actually had 
to fix anything on the plane yet!  Tires, brakes, avionics, 
carpet, corrosion, paint, instruments - these all wear
out and need to be replaced eventually.  If we lump all
those items together into a $15/hour maintenance reserve,
that adds $4500/year.  And that's probably not enough of
a reserve.

Adding this reserve to $23760, we get $28,260.   Divide that 
by 300 and you get $94.20 as a total hourly operating cost.   
The owner then publishes a $95/hour rental rate and hopes that the 
airplane flies that much.




Now let's assume the airplane only flew 200 hours in that year.  What
changes?  The fixed costs do not, the variable ones do.  Here's the
same table, but at 200 hours/year:


Engine overhaul reserve:   (200/2000) * $12000 =  $1200	   (variable)
Monthly outdoor tiedown:   ($120 per month)    =  $1440    (fixed)
Yearly insurance cost:                         =  $4000    (fixed)

Fuel costs (200 hours * 6 gal = 1200 gallons)
	   (As of 4/27/08, fuel is $5.40/gallon)
  	                      (1200 * 5.40)    =  $6480    (variable)

100 hour maintenances (preventative, every     
           100 hours.  $1000/each)             =  $1000    (variable)

Annual maintenance/inspection                  =  $1200    (fixed)
(The annual counts for a 100 hour)

Flying club management fee (they promote the
airplane, manage it's scheduling, and take care
of minor things as they come up.  $12/hour     =  $2400    (variable)

=======================================================
Total 						 $17720

Plus $15/hour maintenance reserve: (15*200)       $3000

For a grand total of $20,720.  But wait, we only had
200 hours of rental income at $95/hour.  That's $19,000 in 
rental income, and $20,720 in expenses - a loss of $1720.  
The 200 hour/year rental rate should be $104/hour.


Now things like competition come into play.  Market forces
dictate what is fair, and the same plane may rent at one club
for $95/hour and at another club $110/hour.  One must watch the 
rental market and be competitive in order to keep the aircraft 
flying, given a resonable comparison of aircraft condition and
comparable rental aircraft elsewhere.

So what's the takeaway from this exercise?  It is very unlikely that
the owner of the airplane you are renting is making any profit
from your hourly rental costs.

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