Guide for the Presentation of Helicopter Operating Cost Estimates. Economics Committee Helicopter Association International 1920 Ballenger Avenue

Transcription

1 Guide for the Presentation of Helicopter Operating Cost Estimates 2010 Economics Committee Helicopter Association International 1920 Ballenger Avenue

2 Acknowledgements Acknowledgements The HAI Economics Committee was primarily responsible for oversight of the 2010 revision of the Guide for the Presentation of the Helicopter Operating Cost Estimates. Members of the committee are David Rath Chris Hansel Evergreen Helicopters, Inc. Columbia Helicopters, Inc. Ralph C. Rosenbrock Warren Moseley NiSource Inc. Bell Helicopter Textron, Inc. Gary Potochnik Tom oo Nakayama Rotorcraft Services Group ITC-Aerospace, Inc. Steve Sullivan Charles T. McGuire Aris Aircraft Services Assets Solutions Group Troy A. Rolf Brandon Battles GKG Law, Inc. Conklin & de Decker The committee would also like to thank the many other individuals for their contributions to the respective sections of the 2010 revision., Operators Bill Kingsley Nel Stubbs AirSure Limited, LLC Conklin & de Decker I, Airframe Manufacturers Stefan Domenge Warren Moseley Eurocopter Bell Helicopter Alan Todd Brandon Battles American Eurocopter Corp. Conklin & de Decker Eric Walden Chairman, Manufacturers Committee

3 PREFACE / INTRODUCTION PREFACE What does it cost to operate and maintain a helicopter? Upon first read, this is a simple question, but it is one that has created a great deal of debate and confusion for the industry. Several factors working together contribute to this situation. - Helicopters come in many different types and sizes. Therefore, one estimate does not fit all. For example operating costs for a twin-engine turbine heavy helicopter are not representative of costs associated with operating a single-engine piston helicopter. - Many variables can affect the operating costs for a given type of helicopter: For example, the size of an operator s fleet, the type of mission, cycles flown per hour, the environment of the mission, the environment when not flying, and the number of hours flown during a specified period. - Published operating costs from a variety of sources can represent a variety of assumptions. Sources might include operating costs from manufacturers, dealers, operators, industry publications, or independent third parties. Published estimates may represent varying lengths of time, various configurations (basic configured helicopter versus helicopter with optional equipment), different types of costs (fixed versus variable, direct versus indirect), may include different types of maintenance costs (heavy maintenance, labor costs, consumables), and different age helicopters, despite being the same type. Over time, the industry has taken steps to reduce the confusion. The first effort resulted in the 1981 edition of the Guide for the Presentation of Helicopter Operating Cost Estimates (Guide). The Guide s objective was clear. Close the gap between manufacturers and operators on the subject of maintenance costs. In brief, the gap existed because - Helicopter operators required greater realism in and improved clarity about intent of the information published by manufacturers on their helicopter airframe and engine maintenance cost estimates. - Manufacturers recognized the need for actual maintenance cost data to serve as the basis for published estimates. However, a lack of standardization among operators in tracking and reporting costs limited their efforts. By 1986, the Aerospace Industries Association of America (AIA) and the Helicopter Association International (HAI) recognized the need to update the 1981 Guide. A committee of operators and airframe and engine manufacturers believed the Guide could further serve as a catalyst in establishing communication, increasing standardization of term definition and accounting practices, and ultimately serving as a repository for the Page 1

4 PREFACE / INTRODUCTION developing knowledge of operating cost estimates. With that belief serving as their objective, the group produced the 1987 Guide for the Presentation of Helicopter Operating Cost Estimates. The 1987 revision expanded the original Guide from one to three sections. - A section for operators, by operators, providing the best and most current available advice on the tracking, estimating, and reporting of operating costs. - A section for airframe manufacturers, by airframe manufacturers, to aid in the standardization of estimating and presenting maintenance and fuel costs. The group also wanted to preserve and refine the emerging techniques that lead to increased accuracy and usefulness of published estimates. - A section for engine manufacturers, by engine manufacturers, to aid in the refinement of maintenance cost definitions and variables and to improve the standardization of estimating and presenting maintenance costs for engines. Since the 1987 revision of the Guide, the Economics Committee of the HAI has accepted the responsibility for updating sections of the Guide. Rather than establishing a new structure or foundation for the Guide, we have viewed our responsibility as refining existing definitions, clarifying methods for collecting and estimating costs, and developing tools for operators to use costs estimates in the management of their operations. Establishing our task was simple. Operators and other individuals in our industry requested it. The Economics Committee s first revision occurred in 2001 and involved the Operators section of the Guide. The current revision involves the Operators and Airframe Manufacturers sections of the Guide. The Manufacturers Committee of the HAI was the impetus for the update of Airframe Manufacturers section. The Engine Manufacturers section was modified slightly, in the areas of outline and editing rather than the basic content. We trust you will find the revised Guide for the Presentation of Helicopter Operating Cost Estimates a useful tool when wrestling with the subject of operating costs. Will it answer all of your questions about operating costs? Probably not. That is why the Economics Committee welcomes your suggestions for improvement in future revisions. Page 2

5 PREFACE / INTRODUCTION Introduction The Guide for the Presentation of Helicopter Operating Cost Estimates (Guide) is intended to help all segments of the civil and commercial helicopter industry. It is designed for new operators to serve as an introduction to the subject of operating costs, as well as more mature operators seeking a common resource for what is often a difficult subject. It is also designed to aid helicopter airframe and engine manufacturers in preparing realistic, understandable, and standardized operating cost estimates. As mentioned in the Preface, the Guide consists of three sections with the primary purpose of each discussed below. -, Guidance for Operators Preparing Helicopter Operating Costs Estimates While helicopter operating costs occur in varying amounts and categories, it is important to recognize that overall they can be significant and that many factors can affect them. The presence of many factors frequently results in misperceptions about operating costs. Throughout this section there will be examples to ensure the reader fully understands the respective content. Regardless of the cause, it is imperative to the health of the industry that each operator understands the true costs of operation. This section will reduce some of the misperceptions by examining the important subject of operating costs from the operators perspective in the following areas. Cost Characteristics Cost Categories Expression of Costs Factors Affecting Operating Costs Recommended Operating Cost Estimate Qualities - I, Guidance for Airframe Manufacturers Preparing Helicopter Maintenance and Fuel Costs Estimates Airframe manufacturers publish maintenance and fuel cost estimates for their respective helicopters. Operators and others frequently rely upon the published manufacturers estimates for uses that go beyond their intended purpose. Unfortunately, due to the lack of standardization and absence of underlying assumptions, the risk of misunderstanding and misapplying the estimates occurs. Page 3

6 PREFACE / INTRODUCTION This section will Provide a guideline for manufacturers to develop and present their maintenance and fuel cost estimates for the industry. Serve as a resource for operators and others to better understand what the manufacturers estimates actually represent. - II, Guidance for Engine Manufacturers Preparing Operating Costs Estimates Similar to the airframe manufacturers, engine manufacturers estimate operating cost information for their respective engines. Unlike the airframe manufacturers, engine manufacturers normally do not publish their estimates; rather they release their estimates to airframe manufacturers, who, in turn, publish the estimates. Regardless of who publishes the estimates, the requirement for standardization and clarification of assumptions and definitions is still required to reduce subsequent confusion. To accomplish the objectives of clarity and standardization, this section discusses various aspects of maintenance costs associated with the operation of engines. The types of costs include fuel and oil costs line maintenance labor, parts, and materials overhaul reserve unscheduled LRU (Line Replaceable Units) reserve unscheduled repairs reserve spare inventory amortization and maintenance This section also discusses the definition of modular and non modular engines, cycle accumulation based on different missions, and scheduled versus oncondition removals. We trust you will find the Guide a helpful tool as you deal with the often confusing subject of operating costs. We welcome your feedback and are continually looking for ways to make the Guide a more useful tool. If you have comments, please contact the HAI. Page 4

7 Guidance for Operators when Dealing with Helicopter Operating Costs Introduction If nothing else, one thing is certain when operating a helicopter, an operator will encounter costs. The industry frequently refers to these costs as operating costs, which can include categories such as maintenance, personnel, training, insurance, financing, taxes, and various overhead costs. While helicopter operating costs occur in varying amounts and categories, it is important to recognize that overall they can be significant and that many factors can affect them. The presence of many factors frequently results in misperceptions about operating costs. Regardless of the cause, it is imperative to the health of the industry that each operator understands the true costs of operation. This section will attempt to reduce some of the misperceptions by examining the important subject of operating costs from the operators perspective in the following areas. - Cost Characteristics - Operating Cost Categories - Expression of Costs - Factors Affecting Operating Costs - Recommended Operating Cost Estimate Qualities Page 1

8 I. Cost Characteristics This section will explain certain important characteristics, fixed versus variable costs and direct versus indirect costs, as well as common categories of operating costs and their effect on an operator s operation or business. Understanding a couple of fundamental characteristics about operating costs before discussing the specific categories of cost should provide additional insight. A. Behavior of Costs - One way for operators to view their costs is to categorize them based upon their cost behavior. In essence, classification is based upon how a given cost will respond as a level of activity changes. In the helicopter industry and as it relates to operating costs, a common measure of activity is flight hours. Other measurements of activity in our industry could include cycles, landings, lifts, and engine temperature changes. As the level of activity changes, up or down, some costs, in total, will not change (fixed costs), while other costs will change proportionately as the level of activity changes (variable costs). 1. Fixed Costs - In general for fixed costs, the total cost remains constant as the level of activity changes. As it relates to helicopter operations, fixed costs are those costs that the operator will incur whether the helicopter flies one hour or 1,000 hours. However, as the level of activity changes, in this case flight hours, the cost per flight hour will change. A pilot s salary is an example of a fixed cost. Assuming the pilot s salary is $60,000 per year, the operator will pay the $60,000 regardless of how active the helicopter is, within a reasonable limit. (An operator will not nor can it afford to pay a pilot for any extended period of time if there is not a sufficient level of flight activity.) While the total cost for the pilot will remain the same, the cost per flight hour will change based upon the number of hours flown. If the helicopter flies 100 hours during the year, the cost per flight hour for the pilots salary will be $600. If the helicopter flies 1,000 hours, the cost per hour would drop to $60. The following chart illustrates how the pilot s salary will behave on a cost per flight hour basis. Page 2

9 Fixed Costs - Cost per Flt Hr Cost per Flt Hr Annual Flight Hours Pilot's Salary The behavior of a fixed cost s cost-per-flight-hour is dependent upon the helicopter s activity. It is important for an operator to recognize the behavior of fixed costs because of the affect that it can have on the operator s estimated cost per flight hour. Using the previous example, if the operator estimates a level of activity of 500 flight hours, the estimated cost per hour for the pilot s salary would be $120. If the operator must recapture its costs through a revenue-per-hour rate, then the estimate of flight activity and in turn, the fixed-cost-per-flight-hour becomes important. If the operator over estimates the level of flight hours and actually only flies 400 hours, then the revenue rate will not cover the actual cost per hour of $125. In essence, for each hour flown in our simple example, the operator s actual costs are $25 more per hour than predicted. This situation compounds itself and becomes more extreme when the other categories of fixed costs are accounted for such as Insurance and Lease/Financing costs when the annual cost is not $60,000 a year but perhaps $600,000. Other typical fixed costs that an operator will encounter are rental or lease fees (hangar, vehicle, office, storage, etc.) utilities (telephone, electricity, water, etc.), aircraft insurance, personnel insurance (health, life, workers compensation, etc.), training, financing, depreciation, and management salaries. Most maintenance costs are considered variable costs; however, there is a category of maintenance costs that are not dependent upon the flight Page 3

10 activity of the helicopter: inspections that are tied to calendar time. For example, a daily or monthly inspection will occur whether the helicopter has flown or not; therefore, these inspection costs behave like fixed rather than variable costs. 2. Variable Costs - The behavior of a variable cost differs from that of a fixed cost. Whereas the total cost of a fixed cost will remain constant regardless of the level of activity, the total cost of a variable cost will increase as the level of activity increases. Stated simply, if a helicopter does not fly, then the total cost of a variable cost will be zero. However, as the helicopter flies more hours, the total cost will increase and will do so at a fairly consistent rate. Stated another way, the total cost varies depending upon the level of activity. Fuel cost is an example of a variable cost. If an operator does not fly the helicopter, the total fuel cost will be zero. As the helicopter flies more hours, the total fuel cost will increase at a somewhat constant rate. We use the term somewhat because the total cost of fuel depends upon two factors, the cost per gallon/liter and the rate of consumption. Ironically, these factors have their own level of variability. The cost per gallon/liter has been known to fluctuate over a period of time while various factors can affect the fuel consumption rate (i.e. type of mission, helicopter weight, speed, temperature, altitude). To keep our discussion simple, we will assume that these factors remain constant. Assuming the fuel consumption rate is 50 gallons/liters per hour and the cost of a gallon/liter of fuel is $2.00, then for every hour flown, the total cost of fuel will increase by $100 (50 x $2.00). If at the end of the year, the operator has accumulated 300 hours, the total cost of fuel will be $30,000. If the operator flies 500 hours, the cost of fuel will be $50,000. The total fuel cost changes, in this simple case, depending upon the level of flight-hour activity. The following chart illustrates how the fuel cost behaves in total and per flight hour over a varying number of flight hours. Variable Cost - Fuel Costs Total Cost (x 000s) Flight Hours Fuel Cost Page 4

11 A variable cost will increase as activity increases and will do so at a somewhat constant rate. It is important for an operator to accurately estimate the factors that contribute in the calculation of a variable cost because of the effect, as with fixed costs, they can have on the operator s estimated cost per flight hour. The previous example using fuel costs will help to illustrate this statement. If an operator estimates that its average cost of fuel will be $2.00 when in actuality it turns out to average $3.00, or the operator flies a more demanding mission than predicted, the operator will, more than likely, establish a cost-per-flight-hour that is too low. As is the case with fixed costs, the revenue amount will not cover the budgeted amount for fuel costs. This situation could compound itself if similar estimates are incorrect for other variable costs. The primary types of cost that would be considered as variable include maintenance, fuel, and if applicable, landing fees. B. Assignment of Costs - Another way for operators to categorize costs is based upon their attachability or traceability to an activity, product, or department within an organization. Basically, there are two categories used to describe costs that are categorized based on traceability, direct and indirect. 1. Direct - A cost that can be traced directly to an activity, product, or department is referred as a direct cost. 2. Indirect A cost that requires some method of assigning it to an activity, product, or department is referred to as an indirect cost. Sounds simple enough but a cost in one scenario may be direct, while in another, it may be indirect. An example will help to illustrate this somewhat confusing statement. An operator is interested in knowing the costs associated with one of the helicopters in its fleet. A maintenance technician who works on each of the helicopters in the fleet from time to time is paid a salary and does not record the labor hours expended on each helicopter. At the end of the year, the operator wants to know the labor cost it took to maintain the helicopters. In this scenario, the maintenance technician s salary must be assigned to the different helicopters in the fleet. The operator has a choice as to how it wants to assign the technician s salary. Possible methods could be based on the number of hours the flown by each helicopter during the year or the size of the helicopters. Regardless of the method, the technician s salary is an indirect cost of each individual helicopter because the salary has to be assigned or attached to each helicopter. Page 5

12 If the operator required the technician to record the time spent working on each helicopter in the fleet, then the technician s time becomes direct. No assignment of costs is necessary. Similar situations apply to many other categories of cost. Understanding this distinction becomes important because the phrase direct operating cost is used quite frequently in our industry. Based on our example, it is easy to see how the phrase can actually represent different cost categories. For one operator, direct operating cost may include one set of costs while to another it may mean something different. Therefore, it is important to understand the assumptions that underlie the phrase to make sure each discussion is an apples-to-apples comparison. Generally, in the helicopter industry the costs associated with operating the helicopter (i.e. technician and pilot salaries, insurance, maintenance repairs, parts cost, component and engine overhaul, depreciation) are considered direct costs. Costs associated with running the business or operation (i.e. executive salaries, office supplies, utilities, human resources) are considered indirect costs. Just remember, the classification does have the potential to change from operator to operator and is dependent upon their internal accounting and tracking systems. Page 6

13 II. Operating Cost Categories An operator will encounter a variety of costs when operating a helicopter. Due to the variety and how each operator chooses to categorize its costs, creating a standardized summary as reflected in a document of this nature becomes difficult. To overcome this issue, we used the cost categories as identified in the HAI s Survey of Operating Performance as our standard. Each year, the survey has asked operators to quantify (by percentages) their operating costs into the following categories: maintenance, personnel, fuel, insurance, depreciation, finance costs, training, general and administrative, and other. Operators have indicated 97 to 98% of their total costs are accounted for in the preceding categories. Just four categories represent almost 80 % of the total operating costs: maintenance, personnel, insurance, and fuel. A. Maintenance Costs - Helicopters are just like anything else that is mechanical; they require maintenance to keep them in a safe operating condition. The respective regulatory agencies, in conjunction with the manufacturers, establish the standards that ensure helicopters are maintained to a certain level of safety. With the proper oversight, operators actually see to it that the standards are met by performing the necessary maintenance. As with anything that requires maintenance, helicopters will consume an organization s resources. Said another way, maintaining a helicopter costs money. According to the HAI s Survey of Operating Performance, conducted since 1991, operators indicate that maintenance costs are its most significant category of cost. When combined with maintenance labor costs, total maintenance costs represent 35 to 40 % of an operator s total costs. Costs of this magnitude deserve special attention and need to be understood more clearly by the operator. One way to gain a clearer understanding is to classify maintenance costs into meaningful categories. Possible bases for classification could include the reason for the maintenance (e.g. scheduled, unscheduled), type of maintenance (e.g. parts, labor, repairs), and/or aircraft system (e.g. drive, fuel, landing gear, electrical). Regardless of the method used, it is important to know that certain helicopter maintenance costs can be significant, which creates the need for serious cash flow planning and budgeting efforts. Listed below are common maintenance cost categories that manufacturers and operators have developed. Certainly an operator could create more categories but separating costs into these primary categories is an initial step toward a better understanding and an eventual control of maintenance costs. For a complementary description about these categories, please refer to I, Airframe Manufacturers, in the Guide. Page 7

14 1. Service Life-Limited (SLL) Items - Also known as retirement items, certain parts on a helicopter have a finite life as recommended by manufacturers and accepted by regulatory agencies. When a part has reached its service limit, it is retired from further use, despite its appearance and seeming ability to continue in service. A life limit is the approved maximum life and does not represent a guarantee. The SLL is based upon a unit of measure. Historically, the most common unit of measure has been flight hours. However, recent trends have expanded the number of ways service lives can be measured. Other common measurements can be based on landings, torque events, loads associated with weight, and temperatures. Another term commonly used to describe these other measurements, but that is more general in nature, is cycles. The list of SLLs will vary by each helicopter type but systems that commonly have parts with life limits include the main rotor hub, flight controls, drive system, rotor blades, and certain engine rotating components. The replacement cost for a majority of SLL items is significant. However, and based on the average operator s annual flight hour rate, most SLL items will be replaced infrequently. The operator should exercise caution during budgeting exercises not to overlook any of these items, as an oversight could have a detrimental effect on an operator s cash flow and, for commercial operators, a potential to not charge a high enough revenue rate to cover costs associated with SLL items. When any component has an SLL, it is imperative to consider additional factors when developing an operator s estimated costs. (Refer to Other Maintenance Cost Categories). It discusses how the mandatory service life of SLLs may change regardless of the operator s specific aircraft and its condition. 2. Major Component Overhauls - Certain components or parts on a helicopter will, at some point in their operation, have significant maintenance (i.e. overhaul) performed on them. Generally, any component or part that is subject to wear and tear due to its continued operation will be a candidate for overhaul. At some point in its operation implies that the occurrence of the overhaul can be based upon the condition of the item or a predetermined point as measured in a variety of ways (e.g. flight hours, cycles, load cycles, calendar time). Historically, components subject to overhaul have had a previously-defined period of operation (e.g. interval) before an overhaul occurred. More recently newer components may not have a Page 8

15 defined overhaul interval. Instead the overhaul is contingent upon the condition or performance of the component. Overhaul normally implies an extensive inspection of the item which requires teardown, inspection, testing, and reassembly of the component. To perform overhauls, the item will normally be removed from the helicopter. Whether or not a component has a clearly defined overhaul interval, it will experience maintenance costs during its continued use. A component that is referred to as on-condition does not mean it is maintenance free or that it does not have maintenance costs. As with SLL items, the overhaul interval is a ceiling and does not serve as a guarantee that the component will reach the interval. Typically operators may adjust for this risk by adding a cost component to its operation called Contingency or Unscheduled Event. (Refer to Other Maintenance Cost Categories - Unscheduled, for more information.) The components that require overhaul will vary by helicopter type but common components requiring this type of maintenance are the main transmission, tail rotor gearboxes, main and tail rotor drive shafts, main and tail rotor hub components, flight control systems, hydraulic actuators and servos, starter/generators and landing gear. While engines commonly require overhaul their costs are accounted for in a separate category. (Refer to Engine Restoration in this section). As with SLL items, overhaul costs are typically significant and intervals are infrequent. The operator should exercise caution during budgeting exercises not to overlook any of these items. An oversight could have a detrimental effect on an operator s cash flow and, for commercial operators, a potential to not charge a high enough revenue rate to cover costs associated with overhaul components. An additional factor to consider during the budgeting exercise involves the estimated cost to overhaul a component. Ideally operators actual cost experience is preferred because it is more likely to be representative of future costs due to the factors that can affect costs (e.g. mission, flight profile, and environment). If the operator must rely on outside sources for overhaul estimates, be aware of what the estimates represent. For example, a common term in the industry, flat rate, can actually represent two different estimates. In some situations, flat rate represents the minimum cost of an overhaul and will not include costs associated Page 9

16 with parts that are replaced based upon their condition. These parts and their related costs are only possible to accurately identify when the component has been inspected. In other situations, flat rate will represent an average of the cost that is inclusive of the conditional parts. A flat rate that represents an average cost is the preferred estimate to use in budgeting exercises. There are additional perspectives an operator needs to consider regarding overhaul costs as illustrated in the following example. An operator purchases a used helicopter. The used helicopter has a tail rotor gearbox that will be in need of an overhaul in 200 hours. The gearbox has already consumed 1,800 hours of the 2,000-hour overhaul interval. The operator estimates the cost to overhaul the gearbox to be $30,000. The operator has a decision to make. How will it view the operational cost of the component prior to its overhaul? Will it price its future business based on $150 an hour for his gearbox ($30,000 divided by 200 hours left) or $15 an hour ($30,000 divided by 2,000 hours)? Also, regardless of how the operator estimates and budgets its cost, the operator must realize its cash flow will take a hit for $30,000 to pay for the overhaul. To continue the example, let s assume the operator overhauled the helicopter s gearbox for $30,000. The operator now has a gearbox that has the potential to fly another 2,000 hours without another overhaul. The next decision the operator needs to consider is, the amount to budget for the next overhaul. The operator must consider a number of variables. - When will the next overhaul occur five years, ten years? The answer depends upon developing an accurate forecast of the predicted flight hours. - How much will prices have increased (inflation rate) by the next overhaul event? The operator should not use the prior overhaul cost to predict the future cost. To do so would lead to an underestimate of the required resources. - What other factors may affect the cost of the future overhaul? The cost of labor, materials, overhead, and potentially the currency exchange rate, if receiving parts or services internationally, make the forecasting effort more important and must be carefully planned. Page 10

17 An operator may reduce the risks associated with the variables by purchasing the required components now. However, in making that choice, the operator should evaluate other costs that it will incur such as inventory costs. (Refer to Overhead Costs in this section for more information). Another option for operators is to enroll in a guaranteed maintenance program. In essence, the operator insures the cost of an overhaul by paying an hourly fee. Depending upon the manufacturer of the helicopter, an operator may have choices when a component requires an overhaul. Common choices are - Overhauling components at the operator s facility. - Sending the component to a vendor or repair facility. - Sending the component to the manufacturer or one of its designated facilities. - Exchanging the component. 3. Inspections All helicopters require inspections of the various systems to ensure continued airworthiness and that certain levels of safety are being met. Manufacturers will recommend inspections, their intervals, and the associated tasks. Some inspections occur on a more routine basis (e.g. 50- hour, 100-hour, weekly, annually, landings) while others have longer intervals (e.g. 5-year, 6000-hours) and involve a more thorough inspection of the helicopter s structure and its systems. The costs associated with inspections should include the labor and parts to complete the inspection tasks. For labor hours, the operator should consider the time associated with inspection preparation, research, and clean up, as well as the inspections tasks. For costs associated with parts, the operator should consider the parts that are required to complete the inspections such as filters, packings, and other hardware. Absent from this category are the costs associated with completing the discrepancies that are found during the inspection. These costs, also referred to as on-condition costs, could be lumped in with the inspections but can also be classified in the on-condition category. The important thing is to account for these costs somewhere. Whether the costs are combined or not, another common term to describe these types of cost is line maintenance. Major inspections and their related discrepancy costs would not typically be categorized as line maintenance. Page 11

18 Conditional inspections are another category of inspections but ones that hopefully are never encountered. The need for a conditional inspection occurs due to an incident or event involving the helicopter and may include such things as hard landings, engine over temps, over torque of the drive system, and/or sudden stoppage of the rotor system. As an operator, be aware that conditional inspections can occur and their related costs have the potential to be significant. Rarely, and due to their nature, do third party estimates account for costs associated with conditional inspections. 4. On-Condition Costs This category represents a melting pot of costs. As its name implies, costs that are classified in this category are associated with maintenance activity that involves parts, repairs, and troubleshooting of items that do not have an overhaul interval, a service life limit, or an inspection. It includes both parts and labor. Items typically considered as on-condition are tires, instruments, avionics, relays, pumps, brakes, filters, airframe hardware, windows, interiors, paint, and bearings not inside major components covered under the overhaul. On-condition maintenance will normally occur as the result of discrepancies found during an inspection or as discrepancies that occur in between inspections. From a labor perspective, a discrepancy may generate activity such as troubleshooting, repair, or removal and replacement of a part. From the parts perspective, a discrepancy may require the replacement or repair of parts. Maintenance that occurs on an SLL item prior to its retirement can be considered as on-condition or unscheduled. For example, a set of main rotor blades with a 10,000-hour life will, more than likely, require service and repairs at various intervals leading up to the 10,000 hours. Costs of this nature should be considered as on-condition or unscheduled, as well as the labor required to remove and replace overhaul components and SLL items. Another interesting trend on newer, more recently-designed helicopters is the elimination of overhaul intervals on components that historically have had them. The term commonly used by manufacturers to describe these components is on-condition. It is important to note, on-condition does not imply that the components are free of maintenance. On-condition components usually require periodic visual inspections or even inspections that require a partial teardown at which time an overhaul may occur. Regardless of the description, components of this nature do incur maintenance costs and the on-condition category is a logical location to collect these costs. Page 12

19 Due to the number and nature of on-condition items, their associated costs are not only difficult to estimate but also significant, which can make budgeting a challenge. Operators with experience or manufacturers can be a source for providing estimates for on-condition costs. If an operator relies on its historical data, use a sample of data over a long period of time (i.e. multiple years). On-condition costs can fluctuate widely from year to year depending upon the use of a helicopter and inspections that occur (i.e. a major inspection versus periodic and routine inspections). (Please refer to Airframe Manufacturers, I of the Guide, for additional comments about on-condition costs.) 5. Engine Restoration Engines, like the airframe and its related systems, require maintenance. Basically, engine maintenance consists of two basic categories, periodic line maintenance inspections (100-hour, 300-hour, etc.) and major maintenance (overhaul, interim component inspections). Engines also have accessories that require maintenance primarily at the overhaul level. Examples of accessories include systems that involve fuel flow, fuel injection, and air flow. While engine inspections are relatively insignificant with respect to cost, the overhaul of engines is not. As with SLL items and component overhaul costs, engine overhaul costs are significant and normally infrequent due to the usual time-between-overhaul periods. For those reasons, the budgeting exercises should also be handled carefully so as not to create surprises for the organization in the areas of cash and revenue rates. An additional factor to consider, similar to component overhauls, involves the estimated cost to overhaul an engine. Do not use a flat rate estimate for budgeting purposes. A flat rate does not include the parts that will be replaced due to their condition once the engine has been disassembled and inspected. The cost of the parts replaced due to their condition can be significantly higher than the cost associated with flat rate parts. Another option for operators is to enroll in a guaranteed maintenance program. In essence, the engine manufacturer, or other provider, insures the cost of an overhaul by charging an hourly fee. Second, the term on-condition, although frequently implied, does not mean without cost. As mentioned previously, all mechanical devices require maintenance and engines are not an exception. If anything, oncondition engines have made the budgeting process more difficult because two factors have become unknown, the timing and cost of the eventual maintenance event. Page 13

20 6. Other Maintenance Cost Categories a. Service Bulletins (SBs)/ Air Worthiness Directives (ADs) Manufacturers, vendors, and/or regulatory authorities will issue a document to address safety issues associated with a helicopter or a system on the helicopter. This action normally requires maintenance activity by the operator and, depending upon a variety of factors, will normally create costs for the operator, despite the best intentions of the manufacturer to bear the costs. Costs associated with bulletins are often difficult to predict as to when they will occur and how much they will cost. As a result, operators might want to review the history of bulletins issued against a helicopter type and estimate the costs that would have been incurred by the operator. Based on the review, a factor could be applied to the on-condition average cost-per-hour to account for costs associated with bulletins. The following information will help to illustrate the issues that an operator may encounter when dealing with SBs and ADs. Consider main rotor blades that have an SLL of 10,000 hours. The potential does exist that a regulatory agency or manufacturer may change the SLL by reducing the service life. Imagine that the industry has data that the blade is wearing prematurely and thus a requirement is sent to the operators that the main rotor blades now have a 5,000-hour service life. Obviously, no matter what the cost is for a main rotor blade, the future anticipated cost is now double of what may have been previously anticipated. This can have a severe effect on an operator specifically if the operator presently has main rotor blades that are approaching the 5,000-hour service life, or, even worse, the operator s blades are immediately affected as their blades have over 5,000 hours on them already. It is important to understand the arrangement you have with the manufacturer or what the manufacturer s policy is on AD s and SB s. Policies can range, and the manufacturer may - Reimburse the operator for all costs incurred. - Provide the part required to comply with the AD or SB free of charge but not reimburse for labor. - Not reimburse for labor or parts causing the operator to bear 100% of the cost for the AD or SB. b. Optional/Mission Equipment Most operators add optional or mission equipment to the basic-configured helicopter as offered by the manufacturer and third party vendors. Examples of optional Page 14

21 equipment include air conditioning systems, rotor brakes, enhanced communication equipment, enhanced avionics, wire strike protection, bubble windows, anti-icing systems, sliding doors, and main rotor blade protection. In addition to optional equipment, operators will frequently add mission equipment. Examples of mission equipment include searchlights, Forward Looking Infrared (FLIR), cargo hooks, fire fighting tanks or buckets, hoists, night vision goggles, moving maps, and medical equipment. There are really two categories of cost associated with optional and mission equipment, original purchase costs and maintenance costs. While the operator will expend resources to purchase and install this type of equipment, it is important not to mix the purchase costs with the ongoing maintenance costs. Optional and mission equipment will add maintenance costs to the basic helicopter in two ways. The first is the maintenance of the optional equipment itself. For example, hoists require periodic inspections and/or overhaul and have SLL items just as the helicopter does. The second involves the additional maintenance caused by the presence of optional or mission equipment to the basic-configured helicopter. For example, a medical interior is likely to cause additional labor hours during a routine inspection when that interior has to be removed to inspect the basic-configured helicopter. The maintenance costs associated with optional and mission equipment is difficult to estimate due to the variety of potential configurations, complexity and costs, and high number of installation on most helicopters. Due to the many variables, costs associated with optional and mission equipment should not be underestimated. The operator should adjust estimates received from other sources to account for their specific equipment. If an operator uses manufacturer-provided estimates, please refer to Airframe Manufacturers, I of the Guide, to see what assumptions underlie their estimates. c. Unscheduled As explained previously, the intervals associated with components and SLL items are ceilings or maximum values but not a guarantee that the limits will be attained. When an operator removes a component or item prematurely and is forced to retire or overhaul the item or component, the removal is referred to as an unscheduled event. Page 15

22 When building a budget, an operator needs to consider this element of cost due to its potential to significantly affect cash requirements of the organization and, in the case of a commercial operator, the effect an unexpected cost can have on its level of profitability. Because unscheduled maintenance events are difficult to predict, it is recommended that operators apply a factor to the overhaul and lifelimited categories to compensate for the possible occurrence of an unscheduled event. If an operator takes a less than conservative approach and believes that each of the scheduled SLL items and overhaul components will reach their approved life or interval, then a factor is not required. If an operator considers various factors such as type of mission, environment, flight profile and maturity of the helicopter type, then a factor is recommended. Please refer to Airframe Manufacturers, I of the Guide in the Overhaul of Major Components and Service-Life-Limited categories for a further discussion of how the manufacturers account for unscheduled costs. 7. Sources of Maintenance Cost Estimates Another important element for operators as they learn more about maintenance costs is to know where they can obtain cost estimates for their organizations as they build budgets and determine what to charge for their services. Common sources include - The operator s maintenance cost history. - Manufacturers published estimates. - Independent sources that publish estimates. - Industry periodicals - Other operators An operator s own experience, if the history is available, is probably the preferred source of information. The operator s history is a known quantity. The operator knows what conditions they have operated in, the experience of the maintenance staff, and how closely future missions relate to the prior missions. In other words, the operator knows what produced the history and knows how to adjust the data for future efforts. Manufacturers normally publish maintenance cost estimates for current production models. Historically, manufacturers have published information that serves as a starting point for operators to adapt to their mission and operating environment. These starting points often have a list of assumptions which need to be modified to better represent the operator s situation. Manufacturers potentially offer an additional benchmark regarding costs, as the acceptance of guaranteed maintenance programs has increased and program rates have become more available. Page 16

23 Estimates from independent organizations (independent of the sales process) also publish cost estimates. Independent organizations generally publish estimates for a broad scope of helicopters, current and out-ofproduction, as well as for the various manufacturers. Another important attribute is that an independent organization s estimates should be based on similar assumptions to improve the ability to make comparisons between the various helicopter types more meaningful. Industry publications on occasion will publish certain elements of estimated maintenance costs for selected helicopter types. The information is generally not comprehensive in its scope of cost categories but if used properly can offer another point of information. Other operators may serve as a reference for maintenance cost information. Although not common due to the proprietary nature of maintenance costs, some operators have been known to share selected information especially when dealing with new helicopter types or equipment. If an operator uses estimates from sources that are outside of its organization, remember an important fundamental. It is imperative to understand the assumptions that underlie the estimates. Regardless of the source, many assumptions are made, some of which can change the results dramatically. (Airframe Manufacturers, I of the Guide, is a good illustration of the number of assumptions that support a published estimate.) Listed below are just a few of the assumptions that can affect a published estimate. - What period of calendar time and amount of flight hours does the estimate represent? - Are all service-life-limited items included or just those up to a certain parameter (e.g. exclude those above 5,000 hours)? - Which components with overhaul intervals are included? - What labor rate and fuel cost are used? - Are discounted or list prices the basis for the parts acquisition? - Is mission equipment included? Page 17

24 B. Fuel and Lubricants 1. Fuel The overall cost of fuel is dependent upon two primary factors, the amount of fuel consumed and the cost of fuel. a. Fuel Consumption - The amount of fuel consumed by a helicopter is affected by a number of variables, all of which an operator should be aware. Manufacturers provide an average consumption rate per hour which considers a few of the variables (Please refer to the Airframe Manufacturers, I of the Guide). But as is the case with any average, it cannot be relevant for or representative of all situations. What are the factors that an operator should be aware of that can affect its fuel consumption rate? - Type of Mission Helicopters can perform many types of missions, which can include flying point to point, hauling external loads, hovering during search and rescue missions, circling during surveillance, performing line work for utility operations, and spraying for agriculture. It is likely that each mission will demand a different combination of performance parameters, such as cycles, speed, and weight. Each parameter is likely to create different rates of fuel consumption. - Environment Density altitude, a combination of air temperature and altitude, will affect the performance efficiency of the engine. Generally, a mission performed in hot temperatures at lower altitudes will consume fuel at a higher rate than a similar mission performed in cooler temperatures at higher altitudes. - Engine Performance As an engine accumulates time between major maintenance events, it may become less efficient in its performance, which, in turn, can lead to a higher fuel consumption rate. Examples of conditions that can lead to an engine with poorer performance include coking, turbine blade wear, fuel nozzle condition, and fuel control mechanisms. - Externally-Mounted Equipment Helicopters perform a variety of missions that require many types of mission equipment, most of which is externally mounted on the helicopter. Examples of mission equipment might include antenna, search light, Forward Looking Infrared (FLIR), floats, cargo hook, hoist, and wire strike protection. Generally, externally-mounted equipment creates drag during flight. For a given level of performance, drag will increase the fuel consumption rate. Page 18