Part 3: Not All Engine Programs are Created Equal. And, Some are Like Having Dental Insurance for Heart Surgery…
May 31, 2019
This is the fourth segment of jetAVIVA’s Comprehensive Guide to the Citation 560XL Series. You can subscribe to future releases by clicking the button at the bottom of this story.
Whether you’re buying or selling, it’s always good to know the value of the engine program on your XL series aircraft, or really any aircraft for that matter, as they can affect the value by as much as US$2M! I’ll admit, I’m a bit of a nerd when it comes to airframe and engine programs for business aircraft. As a former VP for a provider of engine and airframe programs, it was my job to know the competition, their contracts, and the pitfalls of each. A lot of these contracts have changed over the past ten years since I left my role at that programs provider, but the they’re still complicated and fraught with nuances that can cost you tens of thousands of dollars if you don’t know what you’re looking at. Furthermore, you could end up over-paying for an aircraft if you don’t fully understand the value of the engine program you’re getting as part of the sale.
Here’s the thing: the XL series is one of the most complicated airplanes, if not the most complicated, when it comes to the options and coverage levels available with the engine programs. There are twelve, yes TWELVE, options when it comes to coverage on the XL series aircraft, and that doesn’t even take into account any program deferments that you need to concern yourself with. Below are the options and a link to the company’s associated webpage for their engine programs so you can see what each plan covers. These links will also keep me out of hot water if you’re reading this article ten years from now.
When referencing the aforementioned “deferments”, I am referring to deferred buy-in/enrollment options that exist on both the ESP and JSSI engine programs. On one hand, these deferred buy-ins allow owners of in-service aircraft to enroll their aircraft onto an engine program with little or no up-front capital, which would otherwise be required for the hours already accrued on the engines at the time of enrollment. This is a great way to get coverage for unscheduled maintenance from day one and start saving for future scheduled maintenance going forward.
For the aircraft buyers out there: it’s up to you and your broker to fully understand the level of coverage on an airplane and if any deferments exist. To be safe, always talk with the engine program provider to confirm which level of coverage is in place. If it is on the ESP Flex plan, check the amount that has been deferred, or, if it’s on JSSI, request a copy of the contract’s Exhibit C to see what prorates exist on covered items. Furthermore, you’ll want to ensure the program is fully paid up through the hours and cycles at the time of closing. And if that wasn’t complex enough, you also need a signed document pre-positioned into escrow showing that the JSSI program will be transferred to the new
owner upon closing. This is because the JSSI program is transferrable from one airplane to another through a trust account that is in the owner’s name and will not be transferred to the new owner unless specifically requested.
Now, here’s where it gets complicated (yeah… sadly that was the “easy” part above): How do we value each of the programs and levels of coverage highlighted above? The answer: Magic.
Not really, but sort of. I wish I had a crystal ball that could tell me what the market would be willing to pay for each of these programs. Instead, I continue to rely on my super-secret squirrel spreadsheet that I have referenced in earlier articles, that I have continued to hone after several years closely watching this market.
Both Aircraft BlueBook and Vref Aircraft Value Reference guides use the “full engine program” buy-in numbers when valuing this market. “Which ‘full engine program’ are they referencing,” you ask? Good question. They don’t say in either guide, but I use ESP Gold as a good baseline for my spreadsheet, and it seems to work. Furthermore, Vref values the fleet assuming it is ON a full engine program (and to deduct the buy-in if it’s not on a program) and BlueBook values the fleet assuming the airplane is NOT on a full engine program (and to add the buy-in value to the base price). The reality is, neither approach is really accurate because the market places less emphasis on the buy-in numbers the further away from overhaul the engines are. In other words, using a buy-in value is not linear, rather, it’s weighted. For example, if the aircraft in question was 500 hours from overhaul, you would likely use 90-100% of the buy-in number to come up with a value. However, if the aircraft had mid-time engines (halfway to overhaul), I’d likely only apply 50-60% of the buy-in to the overall value. Like I said… magic.
At the end of the day, valuing your aircraft or the one you’re considering buying is a skill in itself; there is so much interpellation between the engine programs, type of FMS installed, what year the airplane was painted, and about 20 other variables, that a spreadsheet is the only way for me to compare each airplane apples-to-apples. As an example: a five-year old paint job on an airplane that sits outside most the time may look worse than a 15 year old paint job when the airplane never sits outside. So, my advice: start with the facts and a spreadsheet, but nothing replaces going to see the airplane and logs in person.
As for engine programs, feel free to peruse the website links I provided above if you have trouble sleeping at night. Reading through all the information may feel like you’re studying for a PhD. Or, just give me a call and get the cliffs notes version of what you need to know.
Want to get unlimited cliffs notes and have me help you buy or sell a Citation? Please contact me anytime at [email protected] or (512) 410-0295.
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