Guide for the Presentation of Helicopter Operating Cost ... for the... · Guide for the...

Guide for the Presentation of Helicopter Operating Cost Estimates

2010

Economics Committee Helicopter Association International

1920 Ballenger Avenue

Revised October 2010

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Alexandria, VA 22314-2898

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Acknowledgements HAI Guide For The Presentation Of Helicopter Operating Cost Estimates

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. Section I, Operators Bill Kingsley Nel Stubbs AirSure Limited, LLC Conklin & de Decker Section II, Airframe Manufacturers Stefan Domenge Warren Moseley Eurocopter Bell Helicopter Alan Todd Brandon Battles American Eurocopter Corp. Conklin & de Decker Eric Walden Chairman, Manufacturers Committee

PREFACE / INTRODUCTION HAI Guide For The Presentation Of Helicopter Operating Cost Estimates

Page 1 Date Revised: October 2010

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



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.



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.

- Section I, 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

- Section II, 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.



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.

- Section III, 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 on-condition 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.

OPERATORS, SECTION I HAI Guide For The Presentation Of Helicopter Operating Cost Estimates

Section I Page 1

Date Revised: October 2010

Section I

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


Section I Page 2


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.


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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

Fixed Costs - Cost per Flt Hr

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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

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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.


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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.


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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 Section II, Airframe Manufacturers, in the Guide.


Section I Page 8


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


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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


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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.


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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.


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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.


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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, Section II 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, on-condition engines have made the budgeting process more difficult because two factors have become unknown, the timing and cost of the eventual maintenance event.


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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


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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, Section II 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.


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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 life-limited 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, Section II 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.


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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-of-production, 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, Section II 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?


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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, Section II 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.


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b. Fuel Cost – At first review, what would appear to be a fairly straightforward factor in the overall cost of fuel is not. One variable that will have a significant affect on the cost of fuel is how fuel is purchased, at wholesale or retail. As would be expected, fuel purchased at wholesale will cost less than that purchased at retail. Another factor that can affect the average cost of fuel is where fuel is purchased. Generally, fuel purchased at larger airports which have a large infrastructure to support (overhead costs), or where little competition exists, will have a higher cost.

A final factor to consider involving any published fuel cost estimate is its inability to reflect current prices in a volatile fuel market. Historically and generally, fuel volatility has not been an issue; however, in recent years, operators should consider this factor when relying upon any published estimate. In many cases, customers have come to accept certain fuel risk mitigating clauses in contracts. The clauses may allow the benchmarking of fuel costs or perhaps a not-to-exceed price. Customers have grown to understand these principles, given the volatility is not caused by the customer or the operator.

2. Lubricants – Selected systems on helicopters require lubrication, some of

which involve fluids, such as oil and hydraulic fluid, while others require solids, such as grease. Examples of systems requiring some form of lubrication are transmissions, main rotor hubs, hydraulics, and engines.

Generally, lubricants are not a significant cost driver in the overall maintenance of the helicopter. Historically, the Guide has suggested using a percentage of fuel costs and suggested 3 to 4%. In this revision, the manufacturers are using a 1% factor. Alternatively, the operator can use a more detailed approach by calculating estimated costs based on the various systems’ capacities, frequency of servicing, and cost of lubricants.


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C. Insurance The HAI’s Survey of Operating Performance indicates that insurance is a significant category of cost and represents just less than 20% of the total operating costs for an organization. Due to its significance, there are a few elements about insurance that operators should be aware of. The insurance policy will often dictate how the operator can use the helicopter and who may fly it. As no insurance company providing insurance for commercial helicopter operators will negotiate directly with an operator, the first step in securing insurance for a helicopter operation is choosing a competent helicopter insurance broker. The broker will represent the operator to the various insurance markets and guide the operator through the process of placing and maintaining adequate insurance coverage during the life of the business. Though the insurance broker will serve as the conduit between the operator and the insurance company in negotiations, the operator is encouraged to be a part of the process to ensure accurate representation. This may be accomplished through either in-person meetings or question and answer sessions with the broker. Ultimately, the more information the insurance company knows about the operator, the more accurately the insurance rate will reflect the operator’s business. Just as each helicopter operator is unique in their experiences and business plans, insurance for helicopter operators is written on an individual basis to meet each operator’s specific needs. Therefore, it is incumbent upon the operator to review its insurance program with the broker on a regular basis to verify the insurance program in place is adequate as the operator’s business grows and evolves over time. The operator should discuss specific options and capabilities that may benefit the company within the policy. Examples might include

- Layup credits when aircraft are not used, - Ability to add and subtract aircraft throughout the year, - Allowances to repair the operator’s own helicopter in the event there is damage

with a predetermined labor rate, - Selection of a specific adjuster in the event of a claim, and - Many other areas that the insurance broker will be aware of.

Almost all commercial helicopter operators will need three basic types of insurance policy: Aircraft Hull & Liability, Aviation General Liability, and Workers Compensation. In addition, insurance for the loss or damage to property, business automobile insurance, environmental liability insurance, and many other types of insurance coverage are available and may be needed by the operator to meet specific needs.

Aircraft Hull & Liability Insurance

Hull and Liability insurance is generally written on an annual basis and does not vary in cost with flight time. Hull insurance is designed to cover the aircraft, including its propulsion system(s), parts, and equipment installed in or on the aircraft. Almost all hull coverage includes a deductible, which is typically 2.5% to 10% of the aircraft value.


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Hull insurance premiums are based upon many factors including, but not limited to

- Aircraft value(s), - Operator’s experience levels, - Mechanic and pilot(s) experience levels, - How the operator intends to use the aircraft, - Where the helicopter will be based, - The overall size of the operator’s fleet of aircraft, and - The loss experience of the operator and/or pilot(s).

Aircraft liability provides insurance against the cost arising from the liability of the operator to pay for damage or injury to third parties resulting from the ownership, use, or maintenance of the operator’s helicopter. Aircraft liability insurance also obligates the insurance company to provide a legal defense to the operator if a third party claims the operator was negligent.

One of the most important considerations in purchasing an aviation insurance policy is choosing the appropriate limit of liability. The following considerations should be discussed with an aviation insurance broker when deciding what limit of liability to purchase.

- Cost to purchase. - Availability of the requested limit of liability, as not all insurance

companies will offer the highest limit of liability to all operators. - Requirements as specified in a contract. - The personal preference(s) of the operator, as some individuals are more

“risk-adverse” than others and are thus willing to pay more to purchase the higher limit of liability.

Aviation General Liability

Aviation General Liability is also referred to as Commercial General Liability or General Liability insurance. Aviation General Liability insurance insures against the cost arising from the liability of the operator from their use of premises, their negligence if their work on or servicing of a third party helicopter is found to be negligent, or their damage to a third party aircraft that is in their care, custody or control. There are many additional coverages available with this type of insurance policy to meet the individual needs of each operator.

Generally, the limit of liability that is purchased with this policy will equal the limit of liability purchased on the aircraft hull and liability insurance policy. Most landlords and nearly all airports require each tenant to carry an aviation general liability insurance policy as a requirement within the written lease.

Workers’ Compensation Insurance

Workers’ compensation is insurance designed to pay the medical costs and certain statutory benefits of employees who are injured while on the job. Most states require the employer provide workers’ compensation insurance, with a few states declaring that


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failure to do so can bring significant civil and even criminal charges against the employer. Workers’ compensation insurance is based upon the operator’s actual payroll. Thus the operator can expect an annual audit from the insurance company to determine if additional premium is warranted or a credit can be given.

By providing workers’ compensation insurance, the employee is generally barred from bringing suit against the employer for negligence. In addition, most state statutory guidelines provide lower benefits and payments than what is generally awarded by a jury if the same case were brought to trial.

Other Insurance Considerations

All helicopter operators have other insurance needs which should be considered as a part of their business plan. This includes everything from the cost of properly insuring the personal property used in the business, including the cost of insuring any automobiles or trucks, to other more esoteric types of insurance such as: environmental liability, business interruption, and even life or “Key Man” insurance.

Summary

Unfortunately, it is simply impossible to give any sort of pricing guidelines or premium estimates for the various insurance products discussed due to the unique makeup of each operator’s business. In addition, the overall pricing for helicopter insurance varies each year due to industry losses, the operator’s specific policy capabilities, and market conditions. A good aviation insurance broker should be able to give a prospective operator general or “ballpark” pricing information after a casual conversation. A formal quotation of insurance necessarily requires much more information from the operator, but should be requested from a broker prior to the start of any business.


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D. Personnel In the HAI’s Survey of Operating Performance, operators indicate that personnel (also known as employees) are the second largest category of costs (estimates range from 20 to 30 %). The percentage of cost in relation to the overall business is dependent on the size of the operator’s fleet, value of the aircraft, and the internal resources or capabilities in terms of training and maintenance. Due to its significance, there are a few elements operators should be aware of concerning its personnel.

The first element involves the scope of the term personnel. Personnel encompasses more than the obvious category of pilots. Personnel can also include (but is dependent upon the individual operator) maintenance (e.g. technicians, quality assurance, component and avionics shops), mission (e.g. medical crew, observers, crew chiefs), and helicopter support staff (e.g. ground handling, fuelers, passenger handling, cleaners, baggage handlers, mission support). It is important for the operator to consider all of the personnel categories, whether they are directly or indirectly associated with the operation of the helicopter. Omitting them could lead to a contract or reimbursement rate that is less than the operator’s actual costs.

A second element is the direct cost associated with employees. The base salary and/or hourly wages are readily acknowledged as part of the cost of personnel but many other types of cost are also associated with employees. The following are a few of the other direct costs that an organization will encounter but may not recognize initially. It is important to note that individually or as a group, these costs can be significant and overlooking them could have a detrimental effect on the organization.

- Overtime/Compensatory Time – Costs or time-off for working more than

the standard time. - Incentive Pay – Bonuses and profit sharing. - Insurance costs – Medical (e.g. health, dental, vision), workers’

compensation, life, etc. - Benefits/Appendages – Vacation, illness, pension/retirement payments,

tool allowances, etc. - Training – Certain positions in the organization (e.g. pilots, mission

personnel) require initial, recurrent, upgrade, and mission-specific training to meet or remain current with regulatory requirements. (See the following category, Training, for a further discussion about the typical costs associated with training of personnel.)

- Drug and Alcohol Testing – Similar to training, certain positions within the organization require this type of testing to remain in compliance with contracts and/or regulatory requirements.

- Uniforms


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- Payroll taxes - In most cases the function associated with payroll taxes is withholding, an administrative function. However, certain taxes require the organization to pay a certain portion of the tax on behalf of the employee. (e.g. In the U.S., employers must pay half of the Social Security and Medicare taxes.)

A third element, also focused on cost, is the indirect costs associated with personnel. Generally, these are the type of costs that are borne by the organization but do not tie directly to an individual and are commonly referred to as overhead costs. Examples of indirect costs are administrative costs for human resources, which would include recruiting, counseling, payroll management, and records management.

The proper recognition of personnel costs is important for a number of reasons, but the contracting process is probably one of the most critical. During contract negotiations, the operator should recoup personnel costs, as well as other types of costs. With many contracts, the vendor asks the operator to quote their price in two elements. The first, generally viewed as a fixed cost, is often expressed as a daily amount, while the second, a variable cost, is expressed as an amount per some unit of measure (e.g. flight hours).

While the methodology employed to arrive at a daily fee is beyond the scope of this resource, a simple explanation can help to illustrate how some operators establish their rates to cover costs associated with personnel. Considering the base compensation and various benefits as outlined previously, operators will divide the total cost by a number of days that is relevant to their situation to arrive at a daily rate. The operator then considers the length of the contract in days and multiplies the daily rate by the length of the contract. The result is a daily fee that serves as the basis for the eventual contract, bid, and/or budget.

For example, daily cost can be computed by dividing the annual salary plus benefits of $100,000 by 250 days to arrive at a daily cost of $400. (250 days is based on the assumption of five days a week, 50 weeks a year.) The operator can easily determine the total number of personnel that is necessary to complete the mission and add the daily cost for each to determine the full daily cost of the mission. A key factor to consider when calculating the daily cost is to determine the working days a person can generate during a contract period. Using the previous example, how many days will the employee work during the 250-day contract? The operator must consider nonproductive days associated with activities such as training, vacation, and sick days, which prevent the employee from performing on the contract. The operator must account for nonproductive time since additional personnel would be required.


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Additional costs the operator should consider that can affect the daily rate are

- Travel and per diem, - Costs incurred to relieve personnel for time off, and - Variables that cause differences between job locations for a variety of

reasons including varying governmental and customer mandated employee benefits and taxes.


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E. Training

The HAI’s Survey of Operating Performance indicates that training costs represent almost 5% of the total operating costs for operators. While training costs are not as significant as fuel, maintenance, and personnel costs, comments indicate many factors will affect the total costs experienced by operators.

One factor that affects the total training cost for the organization is the many different types of positions that require training. Pilots are the most obvious group that has the need for periodic training but so too do maintenance technicians, mission specialists (e.g. mission observers, crew chiefs, medical crew), administrative and financial individuals, and support personnel to helicopter operations (ground handling, fuelers, passenger handling, mission support). Additional types of training also occur in the typical organization that are less obvious and classified as indirect costs such as first aid, safety, hazardous material handling, and communications.

The different types of training can create wide variations of costs for the organization. For example, pilots can receive training from a variety of sources, which can be classified into three primary categories: ground school, flight training devices (i.e. simulators), and helicopter flying.

Common sources for training include manufacturers, operators, and third party vendors. If training occurs off-site, additional costs need to be considered such as travel, meals, and lodging.

As a final note, the HAI Survey indicates that operators do experience a wide range of costs to train individuals in their organizations. For pilots, 47 % of the operators estimated they spent over $5,000 per pilot annually. Unfortunately, the survey did not reveal if the cost included some of the peripheral costs or just the actual cost of the training. Maintenance technicians also experienced a wide range of costs with 35 % spending over $5,000. Contacting third party training companies will help the operator determine the amount that may be incurred for initial or recurrent training. Special consideration must be applied when operating more complex aircraft and working for specific companies. Operators can easily spend more than $30,000 a pilot per year training in simulators or attending factory schools. Looking at the current trends, expensive training devices and instruction will become more common to both large and small operators. When planning for training expenses, operators should also plan for attrition and employee turnover. Consider the difference in cost for the operator that retains the same employee for five years versus the one that experiences turnover each year. The prior operator will incur costs for one initial training event and four recurrent events, which is much less than what the second operator will experience with initial training every year for five years.


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F. Depreciation

Depreciation is an accounting tool created to recognize the deterioration or “using up” of an organization’s assets. In essence, it allows the organization to recognize an expense in an orderly and systematic manner without directly involving cash. The annual depreciation expense amount can be significant due to the initial purchase price of helicopters and associated equipment. As with so many accounting subjects, depreciation is simple in concept but when applied it can become quite complicated. The purpose of this section is to explain the basic elements of depreciation, identify the difference between financial and tax depreciation, and share what information the industry has related to common practices of the operators. Basic Elements of Depreciation - When an operator purchases a helicopter, there are three basic decisions that need to be made as it relates to depreciation.

- How long will the operator own the asset? - What will the helicopter be worth at the end of ownership? - How will the helicopter “deteriorate” during the period of ownership?

Based on the answers, the operator will establish its depreciation schedule. An example will help to illustrate how depreciation works. An operator buys a helicopter for $5 million, estimates that it will be owned for 10 years, predicts the helicopter will be worth $3 million at the end of the 10 years, and the asset will decline in value at a steady rate (straight-line) during the 10 years. The annual depreciation expense would be calculated as (Purchase Price ($5 mil) – Value at 10 Years ($3 mil)) = Amount to be Depreciated ($2 mil) / 10 Years = Annual Depreciation Expense ($200,000). As a side note, the sum of the depreciation expense over the 10-year period is referred to as accumulated depreciation. Also, notice that cash is not involved with the depreciation concept. Financial versus Tax Depreciation – The brief example illustrates the process and calculations an operator would go through when calculating depreciation for financial accounting purposes. Actually, the methodology, despite the use of estimates, is based on logic and is an attempt to reflect reality as it relates to the operator’s plan for the helicopter. Financial accounting depreciation is based upon a concept of representing reality as closely as possible in a financial sense. However, depreciation for financial accounting purposes is not necessarily the first type of depreciation that comes to mind when the subject is discussed. Although not necessarily known by its name, depreciation calculated for tax purposes is probably more frequently discussed due to its effect on tax liabilities. In short, tax depreciation is a way to reduce the operator’s tax liability. And depending upon a country’s economic situation, its government can change certain factors to accelerate or decelerate the depreciation expense.


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The previous three questions in financial depreciation can help to illustrate the concept that supports tax depreciation in the United States. While the details may be different, other countries probably follow a similar methodology.

- How long will the operator own the asset? - What will the helicopter be worth at the end of ownership? - How will the helicopter “deteriorate” during the period of ownership?

In the United States, the length of ownership is mandated to be five years, which is probably shorter than the typical actual ownership period. The helicopters value is zero at the end of the five years, which is certainly not what the market typically reflects. The “rate of deterioration” (double declining method) is higher in the earlier years of use, which requires higher expense recognition in the early years. In the years beyond five, the operator will not have depreciation expense to reduce its tax liabilities. The inclination might be to reinvest in a new helicopter, which in turn stimulates the economy. In short, depreciation calculated under each method has a different underlying concept or purpose, which can lead to significant annual differences of expense recognition. Common Depreciation Practices –

Financial Accounting Depreciation - As discussed, operators have some choices when calculating depreciation for financial accounting purposes. The table reflects how operators responded to the 2005 Survey of Operating Performance.

Airframe Engine

Years to Depreciate 20% of Respondents said 10 Yrs20% - Greater than 10 Years

23% - 10 Years 13% - Greater than 10 Years

Residual Value 44% - Less than 10 Years 23% - 10 to 20 Years

38% - 10 to 20 Years 26% - 20 to 30 Years

As the table reflects, some operators will separate engines and their related value from the airframe and depreciate them individually. Operators must also decide how to handle significant expenditures for overhauled components. Operators must decide whether or not to capitalize and depreciate overhaul expenditures or simply expense them. While the survey did not gather the information, informal inquiries indicate that operators use both methods. Regardless of the method chosen, an operator must apply it consistently. Tax Depreciation - A helicopter used for business, whether commercial or non-commercial, is depreciated using the 5-year MACRS (Modified Accelerated Cost Recovery System) method. This enables the owner to write off the helicopter over a 6-year period as follows:

Year Rate 1 20.00% 2 32.00%


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3 19.20% 4 11.52% 5 11.52% 6 5.76%

In order to use the MACRS schedule, the helicopter must be used more than 50% of the time in business.

For additional guidance on depreciation, please consult an accountant.


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G. Taxes

Unlike the previous cost categories, taxes are more difficult to express as a percentage of the total expenses an operator experiences. Regardless of the difficulty, it is reasonable to assume that all operators will pay taxes to some degree. For example, all operators, whether they are commercial, private, or public service, will pay payroll taxes. Additionally, taxes are applied at varying levels of government from the local to the federal level. The remainder of this section briefly covers the type and nature of federal and state taxes in the United States. While international taxes are relevant, they are beyond the scope of this version of the Guide. The commercial Federal Excise Tax (“FET”) applies any time the helicopter is used to carry passengers or property for compensation or hire; this does not matter whether it is FAR Part 91 or Part 135. The transportation-of-persons tax is 7.5%, plus a $3.60 per person per leg segment fee; the transportation of property tax is 6.25% of the amount paid to transport the property. If the commercial FET is due, then a portion of the non-commercial fuel tax is refundable. There are some exemptions and exceptions to the application of the commercial FET; however, it should be noted that these are often very narrow and must be closely adhered to. State taxes on helicopter ownership and operations are a bit more complex, as this usually involves more than one state, and each state has a different way of imposing and enforcing their taxes. State taxes involve not only sales and use taxes, but also personal property taxes, aircraft registration fees, license taxes, operating fees, fuel taxes and other similar taxes. Typically, these taxes apply in the state where the helicopter is primarily based, hangared, maintained, etc. In some circumstances different areas within a state may assess taxes differently. States have the right to tax the operator based on the value of the helicopter. Many times the helicopter may operate predominately outside the state, but if the helicopter was located within the state on a specific date in the year, the state may assess a full year’s worth of taxes on that helicopter. Other states will ask the operator to disclose the amount of business the helicopter performed in the state, and the tax will then be assessed. However, as helicopters frequently operate in more than one state, it would be a good practice to understand how other state taxes could or do apply to each operator’s situation. For additional guidance on taxes, please consult with an accountant or, as is often the case, advice from resources outside of the organization that specialize in aviation tax issues.


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H. Finance Costs

Another category of expense that operators indicate as significant is the finance cost associated with obtaining a helicopter. While transaction costs are also part of this category, interest expense is the single largest type of expense within this category. According to the 2006 HAI Survey of Operating Performance interest expense represents 3% of the total operating costs.

Interest expense is normally associated with the debt that an operator will incur to obtain a helicopter or financing expense associated with leasing a helicopter. Also there can be interest expense associated with the use of credit to finance day-to-day operations.

Consider the following as an example of the significance of interest expense when purchasing a helicopter. To finance the purchase of a $9.15 million helicopter with a 10 % down payment financed over a ten-year period with an interest rate of 6 %, the total interest expense would be approximately $2.74 million or 30 % of the purchase price of the helicopter.

When delivery slots from the manufacturers are less than demand by the market, it has become customary for operators to place large sums of money down on a helicopter as a deposit to guarantee a specific delivery date on a new helicopter. These deposits can be between 10 and 30 % of the helicopter’s value. A 30 % deposit on a $9.15 million dollar helicopter is $2.745 million. Using 10 % for an interest charge, if an operator had to borrow capital to buy this helicopter, the operator will incur $274,500 a year just in interest. Depending on market conditions, this deposit can be held by the seller for sometime up to two to three years. That means the operator may incur $549,000 to $823,500 in interest costs before the aircraft is even delivered to the operator for its maiden flight.

Please consult with a financial institution to gain more insight about the issues associated with finance costs.


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I. Overhead Costs

Overhead costs are normally separated into two primary categories, Operating (a.k.a. factory or shop) and General and Administrative. Operating overhead, as the name implies, are departments of the organization that are closely associated with the operation of the helicopter. Maintenance, flight operations, quality assurance, record keeping, component overhaul shop, avionics, inventory, and ground support are examples of departments whose primary function are to support operations. Certain expenses or costs (e.g. technician performing maintenance, pilot flying helicopter) within each department or function are direct costs, while others (e.g. director of maintenance, office supplies, hangar utilities, facility rental, facility cleaning, shop rags, manuals, office supplies, car expenses) support the functions of the departments and are not as closely associated with the actual operation of the helicopter. These are indirect and more commonly called overhead costs. (Refer to Operating Cost Categories in this section for a further explanation about the difference between direct and indirect costs.) General and Administrative (G&A) overhead is more closely associated with the running of the organization from a broader perspective. Typically the activities associated with G&A would include accounting, legal, human resources, marketing and advertising, executive staff, and clerical/support personnel associated with the executives. Also included would be the facilities, utilities, office supplies, transportation, and other related costs to run these elements of the organization. As with operating overhead, G&A overhead costs are considered indirect. Indirect expenses require some logical method to assign their costs, so the organization can better determine its total cost to operate the helicopter. The logical method may be based upon the number of hours flown during the year, the size of the helicopter, or some other method as determined by the organization (Refer to Operating Cost Categories in this section for a further explanation about assigning indirect costs.) Both operations and G&A overhead costs are considered fixed costs. In essence, the operator will encounter these fixed overhead costs for a given period of time (e.g. a year) regardless of the helicopter activity. It is important to remember that differing levels of helicopter activity have the potential to change the hourly operating costs dramatically. Despite this effect, it is important for the operator to assign the fixed costs to the total cost of operation so the operator, if revenue-producing, will charge enough to cover its costs. To reduce confusion about the factors driving the total cost, the operator should separate fixed costs from the variable costs.


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Typically, in small operations the “burden” of overhead can be very low, often as little as 5 to 10 % of total labor and materials. In larger operations, the overhead increases to 20 to 25 %. In very large organizations, the overhead burden representing heavy investment in facilities and in personnel can run as much as 300 % of direct labor and materials.


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III. Expression of Operating Costs

Capturing and categorizing operating costs is just part of the equation for success as an operator. Understanding how the industry expresses operating costs as well as understanding the corresponding limitations is equally as important. Almost without exception, operators and the rest of the industry have historically expressed operating costs as a cost per flight hour. Using a very general example, if an operator experienced operating costs of $100,000 in a year and flew 1,000 hours, a common way for the operator to express its operating costs would be as $100 per flight hour. Of course, there are exceptions (e.g. cost per acre sprayed, cost per pound lifted, cost per passenger carried) since helicopters are used in a variety of ways. Expressing operating costs using one simple unit of measure such as flight hours has the potential to be misleading. The following items are common situations that face helicopter operators and highlight the need for a more in-depth understanding about how various factors can affect an operator’s expression of its operating costs.

- Cycles - Historically, some of the most significant maintenance costs have been associated with components and service-life-limited items, whose time-between-overhauls, or lives, were measured in flight hours. That trend has changed over the last several years, so that many restrictions are now expressed in flight hours and/or cycles. Cycles can be based on such things as lift loads, torque events, and/or temperature events. If the mission is of a certain nature, then cycles can become the limiting factor. Under this situation, continuing to express costs as per-flight-hour can become misleading unless the cycles are equated to flight hours.

Certain situations can magnify the effect of cycles when the manufacturer requires the operator to multiply the actual number of cycles by a factor if specific circumstances occur. For example, a typical cycle might be counted as a take off and landing. However, the manufacturer may require that anytime a helicopter operates within 5 % of its maximum allowable weight, the operator must multiply the cycles by a factor. In essence, the operator has incurred a higher cost to perform the mission than would be initially perceived.

- Fixed Maintenance Costs – Many maintenance events such as inspections

occur based on a flight-hour and/or calendar interval. Sometimes the event is based on a calendar interval only (e.g. daily inspection). If the calendar life takes precedence, then expressing operating costs for that inspection as a cost per flight hour could be misleading. It is better in this case to recognize the calendar inspection as a fixed cost and to express it as a daily, weekly, monthly, or annual cost.


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- Other Fixed Costs – Fixed costs such as pilot salaries, insurance, training, management salaries, financing costs, hangar rental, utilities, support equipment, etc. can be expressed as a cost-per-flight-hour but are more accurately expressed in a manner similar to the calendar maintenance items.

- Actual Maintenance Costs – Due to their nature, helicopter maintenance costs

can vary widely from year to year. Significant costs associated with overhauls, major inspections, and SLL items may occur in one year but not the next. If the total flight hours remain consistent from year to year, the cost per flight hour will vary significantly due to the varying amount of actual maintenance costs per year. Using the previous simple example, let’s assume the second year’s costs increased to $200,000 due to major maintenance. The cost per flight hour would be $200 if the operator still flew 1,000 hours. Without understanding the maintenance cost variable, the cost per flight hour may be misleading.


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IV. Factors Affecting Costs

As mentioned previously in the Guide, many factors can affect the operating costs that each operator may experience. The following information highlights some of the factors that can have a significant effect on operating costs.

- Environment – The variables associated with the environment that can affect

operating costs are many and can include corrosion due to salt water conditions, erosion due to sand or other similar harsh materials, the effects of temperature, both high and low, and altitude, where high altitudes can affect engine performance and fuel burn.

- Mission- Operators use helicopters for a variety of missions. Each mission has the potential to place different demands on the helicopter in the areas of weight, speed, cycles, landings, passenger loading and unloading, and aerodynamic alterations (i.e. exterior-mounted mission equipment). All are factors that create greater levels of stress, vibration, and wear, which can contribute to higher costs of operation.

- Personnel – There are various factors associated with pilots and maintenance technicians that can affect the operational costs. For example, a pilot that regularly operates at or exceeds the operational limits will more than likely increase the operational costs. Maintenance technicians can affect costs based on their trouble shooting skills. Personnel’s training, or the lack of, is another factor that can affect the level of operating costs.

- Other – Facilities such as lighting, tooling, research material, and spares availability can also affect operating costs for an organization.

Throughout the years, operators have shared their thoughts about additional factors that might be easy to overlook or are associated with completing a particular mission. The following items are a compilation of the items that operators have mentioned and should be considered as each operator works to identify its total operating costs.

Additional or special support vehicles (e.g. four wheel drive, fuel tankers,

cherry picker) Additional special tools and ground support equipment Additional spare parts and component inventories required Additional support facilities Location of work area (e.g. remote, temperature, altitude) Allowance for crew sick leave, overtime, etc. Audits or additional inspections required by the customer Catastrophic failure not covered by warranty or insurance Commissions Crew lodging and meals Deductibles on insurance claims Environmental impact such as corrosion, cold weather, etc. Environmental and hazardous material costs


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Ground vehicle costs including depreciation, insurance, debt service, and maintenance

Incorporation of Service Bulletins and Airworthiness Directives Information services (e.g. weather, bulletins, spares) Interest on financed assets and operating funds Lawsuit expenses not covered by insurance Lost revenue due to aircraft down time Mission-specific equipment (radios, rigging equipment, safety equipment,

etc.) Personnel recruitment and training costs due to turnover Premature contract cancellation and associated costs Regulatory or political shutdowns or delays Replacement aircraft costs while awaiting parts or repairs Risk Management program ( safety programs/initial and recurrent training) Scheduled crew changes including transportation Unscheduled crew changes including transportation Specialized or additional training such as long-line mountainous operations,

etc. Supplier price increases and inflationary trends Transportation costs for personnel, equipment, and supplies Unanticipated expense due to new government regulations Unusual wear and tear on the aircraft (transporting linemen vs. inspectors) Weather shutdowns and delays


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V. Recommended Operating Cost Estimate Qualities As operators wrestle with the subject of operating costs and rely upon sources of information within and outside of their organization, manufacturers and operators have made the following suggestions about the qualities that operating cost estimates should possess. Operating cost estimates must be

- CLEAR – Information should be clearly presented to prevent ambiguities that cause misunderstanding. Poorly worded statements, incomplete estimates, and over or underestimating of costs can often cause unnecessary and expensive negotiation and explanation. When not clarified in the process of reaching agreements, estimated operating costs can cost an operator money or cause the end-user to feel overcharged.

- DATA DRIVEN –

Numbers relative to the dollar values of maintenance man-hours should be generated from historical statistical data, usually available from operator records.

Operators attempting estimates on a helicopter with which they have no experience should work with the manufacturer to reconcile its “average” cost estimates to a more customized cost estimate reflecting the resources available to the operator, the operating environment, and the type of operation under consideration.

Manufacturers attempting to aid operators with estimates on new models on which no service data has been accumulated should be sure to explain the rationale employed in arriving at the estimated cost. This generally can be accomplished by honest comparison with known cost history on previously fielded models that is aggregate in nature and sanitized to prevent cost comparisons among competitors.

Both manufacturers and operators must realize that the manufacturer can only issue generic direct maintenance costs for a “standard” configuration.

Many operator-created modifications or added options can add significantly to cost and must be considered in the final estimate.

- ADAPTABLE – Both operators and manufacturers must continually bear in mind

that helicopter operating costs vary widely among various operations for reasons other than hours of use. Significant cost differences are driven by such factors as environment, climate, stage length, distance from base, cycle fatigue, skill levels of both pilots and technicians, necessity for special tools and ground support equipment, and type of operation, such as offshore crew transport, logging, firefighting, or HEMS, etc. Average costs must be adjusted for each situation.

- COMPLETE – Especially for those not familiar with helicopter operations, operating cost estimates will be more meaningful if they are complete, that is, if they arrive at the TOTAL operating cost. While the manufacturer can and should supply maintenance and fuel usage average costs, the operator must supply those


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costs that cannot be estimated outside his operation. These costs would include pilot and technician salaries, depreciation methods, insurance rates, method and cost of financing, overhead, and profit objectives.

- REPRESENTATIVE – All estimates should clearly state the exact economic time period or date to establish dollar values in relation to inflationary and global economic pressures. All estimates should also clearly state exact model manufacturing time period or date. A recent production aircraft of a given model for which the manufacturer makes his estimates may incorporate technological improvements lowering direct maintenance costs that are not incorporated on earlier versions of that same model. In this situation, both the manufacturer and operator of an older version can have much different, yet equally accurate, cost estimates.

- FLEXIBLE – When estimating anticipated labor costs, material costs, overhead

costs, and general and administrative costs, operators should consider the many variables that “real world” operations can impose on the best-laid plans. While not an addition to the Generally Accepted Accounting Practices (classic accounting) categories of expense, such as labor, material, facility overhead, and general and administrative, they are certainly items of consideration when estimating future costs. Care should be taken on such items as “Incorporation of Service Bulletins and Airworthiness Directives” as some manufacturers include provisions for these costs in their published estimates. While it is important not to underestimate costs, it is equally important not to “double-dip” or overestimate costs for obvious reasons. The amount by which you adjust your estimates for labor, materials, overhead, and general and administrative expenses will depend on your knowledge of your own situation and environment.


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Conclusion There is no such thing as a single representative cost of operations estimate that will suffice as serviceable for all operators. Drastic fluctuations in inflation, insurance costs, individual incident/accident history, pilot and maintenance personnel skills, mission application, and environment all serve to cause high variances in cost experience. The Guide is intended to help individual operators determine their proposed cost profiles using factors known only to themselves and that may apply only to their operation. As the philosopher Socrates once said, “The definition of terms is (truly) the beginning of wisdom.” The terms of costs, e.g., indirect cost, direct cost, and average cost, can mean many different things in different situations. They may seem contradictory, yet be entirely correct, depending on the facts and situations. It is extremely important that operators take the time and expense to come up with the most exact estimates, and to keep the most exacting cost records possible. The benefits to the whole industry through better cost awareness are as significant as the danger of treating costs, and cost estimates, lightly. As an operator it is important to analyze the many attributes of costs carefully since they present challenges and risks. If properly managed with a strong commitment to planning, operating a helicopter can be rewarding. However, there is one final measure that illustrates the importance of managing and controlling costs especially for commercial operators, profitability. Pricing to customers is a key ingredient that will ensure certain levels of profitability. Pricing includes the completion of a very thorough evaluation of the customer’s statement of work. Once the detailed work of identifying all associated costs is complete, the operator must ensure it builds a profit margin into the pricing structure. Profits allow an operator to grow and build equity, which, in turn, builds a strong organization.

AIRFRAME MANUFACTURERS, SECTION II HAI Guide For The Presentation Of Helicopter Operating Cost Estimates

Section II Page 1


Section II

Guidance for Airframe Manufacturers Preparing Helicopter Maintenance and Fuel Cost Estimates

Introduction Airframe manufacturers publish operating cost estimates for their respective helicopters. The published estimates, which appear primarily in literature intended for marketing and sales purposes, are normally presented as an average cost per hour. The manufacturers often provide varying levels of additional cost categories (detail) that support the overall average cost per hour. 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. The objective of the Airframe Manufacturers section of The Guide for the Presentation of Operating Cost Estimates (Guide) is to:

- Provide a guideline for manufacturers to develop and present their operating cost estimates for the industry.

- Serve as a resource for operators and others to better understand what the manufacturers’ estimates actually represent.

This section consists of an explanation of the basic assumptions that support the presentation of operating cost estimates and of the various cost categories and their presentation.


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Basic Assumptions

Categories of Cost - The industry has commonly referred to the manufacturers’ published estimates as direct operating costs; however, a more accurate description is direct maintenance costs plus fuel and lubricants. Direct operating costs, or more accurately, operating costs, describes a larger portion of operational costs to include facilities, insurance, training, direct maintenance costs, fuel, taxes, finance expenditures, and crew costs. Figure 1 illustrates the cost categories that are commonly referred to as operating costs.

Figure 1

However, this section will limit its discussion to the categories of cost for which manufacturers have a more direct responsibility or influence over, direct maintenance costs (DMC) and fuel and lubricants.

Figure 2

The direct maintenance cost categories defined in this section are:

- Service-Life-Limited Items - Overhaul Components - Inspections - On-Condition Maintenance

Fuel

Lubricants

Direct Maintenance Costs

Manufacturers’ Cost Category Responsibility

Fuel

Crew

Facilities

Insurance

Training

Lubricants

Finance Expenditures

Taxes

Direct Maintenance Costs

Operating Cost Categories


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- Engine Restoration Costs Each category of maintenance includes the costs of parts and labor. Fuel Costs and Labor Rates - As a departure from previous manufacturers’ published estimates, this section of the Guide will not recommend that manufacturers include the cost of fuel or labor rates. Fuel will be represented by a fuel consumption rate in gallons per hour, while the labor will be presented as maintenance hours per flight hour. Therefore, fuel cost per gallon/litre and labor rate per hour will not be included due to the effect of the constantly-changing and widely variable global economy. Length of Operation - Another important assumption underlying the manufacturers’ DMC estimates is the length of operation. Two common methods that represent different lengths of operation are full-life and first-life (i.e. early years of operation). Full-life represents a long period of operation that includes all service-life-limited (SLL) items and overhaul components regardless of their limits and/or intervals. For example, an SLL item with a 10,000-hour limit would be included in the estimate and shown with a respective cost per flight hour. On-condition cost estimates (full-life presentation) will represent an average cost over a long period of operation, not limited to the early years of operation. A first-life estimate would represent a shorter period of operation and may not include all costs associated with SLL items or overhaul components. For example, an estimate based on the first five years of operation or 2,000 hours would not include an SLL item or overhaul component beyond this period. A presentation based on this method does not provide an accurate average cost over a long period of operation. For the purposes of this version of the Guide, manufacturers will use the f ull-life assumption in calculating DMCs. Warranty - Although warranty affects the DMC in the early years of operation, its overall affect is not significant when using the fu ll-life methodology. Ther efore, it is not included to offset the costs associated with DMC. Helicopter Configuration - The configuration of a helicopter can also significantly affect the DMC and fuel consumption rate. Due to the variety of helicopter missions and potentially unlimited number of configurations, the Guide will assume the following:

- Single-Engine Helicopter - Basic operational VFR aircraft (lowest level certified with VFR package). In addition to this standard package, the manufacturers will include these common items. (Rotor brake, heater/demister, navigation/communication radio, global positioning system (GPS), transponder/encoder, emergency locator transmitter (ELT), compass system/directional gyro, attitude directional indicator (ADI)/artificial horizon indicator)


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- Twin-Engine Helicopter - Basic operational single or dual pilot IFR aircraft (lowest level certified with IFR package). In addition to this standard package, the manufacturers will include the common items in the single-engine list plus equipment specified for single or dual pilot IFR operations. (e.g. Dual navigation communications, auto pilot (if required by the regulatory agencies), radar altimeter (when required), required displays (glass, dials, “steam” gauges))

Any specific mission equipment not identified above will be excluded from the manufacturers’ DMC estimates. Additional Factors -There are additional factors that will influence the manufacturers’ published DMC estimates, such as

- The environment, - Fleet maturity, - Size of operator, - Experience of the operator and/or maintainer, and - The mission.

The operator should be aware of the influence of these items on the published DMC and that they can cause significant deviation. Figure 3 illustrates how the various factors can move an operator’s experience away from an average estimated DMC. An operator should make every attempt to know the effect of the items individually and in total on their DMC.

Figure 3


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Cost Categories

Service-Life-Limited Items Discussion:

Helicopter airframe manufacturers and certification agencies frequently assign maximum service life limits to various sub components within major components, or to those parts subjected to fatigue such as rotor blades, rotor head components, flight controls, landing gear, etc. Service-life-limited (SLL) items are found in maintenance manuals or related airworthiness documents. Generally, Chapter 4 of the manufacturers’ maintenance manual is probably the best known source for service-life-limit information. A variety of ways exist for measuring SLL items. Historically, the most common measure has been associated with flight hours. While flight hours are still prevalent, manufacturers have more recently moved to measurements that are commonly based on load, stress, and temperature variables. A common generic industry term that represents these variables is cycles. A third common measure is based on calendar time and can be expressed in days, months, and years. Because helicopter operating costs are often expressed as an amount per flight hour, it is common to convert SLL items that have cycles and/or calendar items into a cost per flight hour. To do this, the operator must estimate a relationship between the alternative counting method and flight hours. For example, the operator in a given mission may accumulate two cycles per flight hour. In this case, the cycle SLL would need to be divided by two to convert it into an hourly cost. Due to the fact that service lives can vary by part, care should be taken to make sure each item is examined to determine its relationship to hours. SLL items, which are established by the manufacturer, represent a maximum life to which the part can remain in service. It does not represent a guarantee that the item will reach the service life limit. The removal of a part prior to reaching its service life limit is referred to as unscheduled. Generally, an item with a longer service life limit has a greater probability of an unscheduled removal than does an item with a shorter limit. The reason for removal may vary from a need-to-repair to a need-to-replace. For example, an item that has a service life limit of 20,000 hours is more likely to have an unscheduled removal than an item with a 5,000-hour life. The reason for the removal will influence the associated cost. If a repair is required, the cost will be less than the cost associated with a replacement of the same item. A repair cost should be classified in an on-condition category, while a replacement should be classified in the SLL category.


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Estimating the cost associated with the premature replacement of an SLL item can be difficult. The method employed in the Guide will be based on the service life limit. Method/Assumptions Employed in Manufacturers’ Estimates: For the purposes of computing and presenting the costs associated with (SLL) items, the airframe manufacturers will incorporate the following assumptions:

- Include for each SLL item the description, service life (if multiple methods for counting are used, (display each method), quantity per aircraft, list price for each, total cost, and a calculated cost per hour.

- Obtain the latest parts/components configuration and service life limits from the current version of Chapter 4 of the maintenance manual. No credit for projected or estimated service life limits will be allowed. If an item has a service life extension program, the manufacturer should include a footnote explaining the projected extension.

- Include only the items from Chapter 4 for the lowest certified aircraft, as identified previously in the helicopter configuration discussion, which means some optional items will be not included.

- Each SLL item will be shown at retail or list price. No discounts. - Assume two cycles per flight hour for SLL items that have cycle limits. - Assume 500 flight hours per calendar year for SLL items that have calendar

limits. - Recognize the effect of the unscheduled (premature) retirement of an SLL item by

using the following percentages, which are based upon the actual service life limit of the item:

Unscheduled Factor

Service Life Limit of:

Use this Percentage

of the List Price

0 to 4,999 Hours 5 5,000 to 9,999 10 10,000 to 20,000 20 Greater than 20,000 50


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Recommended Presentation: For each SLL item in Chapter 4 of the maintenance manual, the manufacturer should display its information in a manner similar to the following example.

Part Description

List Price

A/C Qty

Total Cost

Service Life

Cost per Hour

Unscheduled Factor

Total Cost Per Hour (2)

Tail Rotor Blade (1) $3,000 4 $12,000 5,000 Hours $2.40 10% $2.64 Flight Control $6,000 1 $6,000 3,000 Cycles $4.00(3) 5% $4.20 Bearing $3,000 3 $9,000 3 Years $6.00 (4) 5% $6.30 Total $12.40 $13.14

(1) Manufacturer has a service life extension program in progress to raise the life of this part to 6,000 hours. (2) (Cost per Hour x Factor) plus Cost per Hour = Total Cost per Hour (3) Assumed 2 cycles per hour. (3,000 cycles / 2 cycles per hour = 1,500-hour life.)

(4) Assumed 500 flight hours per year. (3 Yrs x 500 Hrs per Yr = 1,500-hour life.)


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Overhaul of Major Components

Discussion: Helicopter airframe manufacturers, in conjunction with regulatory agencies, require that operators overhaul (may also be referred to as special detailed inspection, scheduled component inspection, and/or restoration) certain helicopter components on a periodic basis. Examples of dynamic and airframe components that commonly require an overhaul are the main transmission, tail rotor gearboxes, main and tail rotor drive shafts, flight control systems, hydraulic systems, and starter/generators. (Engines and related accessories are covered in the Engine section (Section III) of the Guide.) While the components that require an overhaul can vary between helicopter types, Chapter 5 of the manufacturer’s maintenance manual is the common source that identifies which components require overhaul at specified intervals. Any discussion about the overhaul of major components would be incomplete if it did not point out a recent manufacturer trend, components that do not have a specified overhaul interval. The industry commonly refers to these components as on-condition. (The Operators section (Section I) of the Guide discusses this concept further.) However, it is important to point out that whether a component has a clearly defined overhaul interval or not, 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. An overhaul restores the component to a specified standard and primarily consists of the following activities:

- Disassembly of the component, - Inspection and testing of individual parts to determine their airworthiness, - Repair and/or replacement of parts with excessive wear, damage, or that have a

service life limit, - Reassembly of the individual parts, and - Testing of the component prior to its return to service.

Similar to items that have service life limits, the most common measure that determines the frequency of an overhaul is flight hours. Cycles and calendar measurements can also be used. The period of time between overhaul events is commonly referred to as the time-between-overhaul (TBO) or overhaul interval. The TBO is a manufacturer’s recommendation and does not represent a guarantee that the component will reach the interval. A component that is removed prior to reaching its overhaul interval is referred to as an unscheduled removal.


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As with SLL items, a component with a longer TBO interval has a greater probability of an unscheduled removal than does an item with a shorter interval. For example, a component that has a TBO of 8,000 hours is more likely to have an unscheduled removal than an item with a 2,500-hour TBO. Another variable that can affect the removal of a component prior to its scheduled overhaul interval is the maturity of the helicopter type. Generally, newer-designed helicopters will have components that are more likely to have unscheduled removals than mature helicopter types. Mature helicopters have more reliable components due to continuous improvement based on field experience. Estimating the cost associated with a premature component overhaul can be difficult. The method employed in the Guide will use an average percentage that is applied to the TBO interval for the respective components. Some manufacturers have programs that will allow specific operators to extend the TBO on a component. Normally, extensions are based upon a lead-the-fleet type of analysis, where the entire fleet will eventually benefit, or the type of mission flown by individual operators (some missions are more demanding than others). Also, some manufacturers may grant a temporary extension to a TBO to give the operator a certain degree of flexibility related to the actual overhaul event. For example, a component with a 3000-hour overhaul may have a 10 percent tolerance, which in essence allows the operator to delay the maintenance event by up to 300 hours. When a component reaches the point at which it requires an overhaul, the operator may or may not have options as to who will perform the overhaul. The respective manufacturers’ support philosophies will normally influence the availability of certain options. Common options for the operator include

- Overhauling the component in the operator’s facility. - Sending the component to the manufacturer/vendor or manufacturer’s network for

overhaul. - Contracting with an organization (service center), independent of the

manufacturer’s network, to perform the overhaul. - Exchanging the component with a vendor or the manufacturer. - Enrolling the component in a guaranteed maintenance program, in which case, the

operator will pay a certain amount per hour or cycle and exchange the component with the vendor or manufacturer at the time of overhaul.

Generally and based upon a simple cost comparison, a component overhauled by the operator will cost less than the other options. However, a more meaningful comparison may be obtained by also considering other less obvious costs or factors, such as

- Overhead costs (i.e. training, tools, facilities, inventory carrying costs) associated with performing component overhauls within the operator’s organization.

- Indirect costs associated with aircraft downtime while a component is overhauled. - The risk of encountering significant costs due to unexpected (unscheduled)

overhauls earlier than expected.


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Most importantly, when multiple options are available, the operator should weigh the various factors that are most relevant to the organization before making its choice. Method/Assumptions Employed in Manufacturers’ Estimates: For the purposes of computing and presenting the costs associated with component overhauls, the airframe manufacturers will incorporate the following assumptions:

- Include for each component a description/nomenclature, TBO interval, (if multiple methods for counting are used, display each method), quantity per aircraft, the average cost to overhaul (refer to discussion below), and a calculated cost per hour.

- Include only the components from Chapter 5 for the lowest certified aircraft, as identified previously in the helicopter configuration discussion, which means some optional items will be not included.

- TBO Interval – Use the latest configuration as identified in Chapter 5 of the maintenance

manual for each component. Do not use projected or estimated TBO intervals or interval-extension programs for selected operators. (Manufacturers are encouraged to include footnotes that identify efforts of this nature.).

Do not include temporary extensions or tolerances. Assume two cycles per flight hour to calculate a relevant cost per hour for

components that have cycle intervals. Assume 500 flight hours per calendar year to calculate a relevant cost per hour

for components that have calendar intervals. - Average Cost to Overhaul –

Based on the previous discussion, manufacturers may or may not offer a choice as to the method of overhaul. Therefore, the most important objective underlying a manufacturer’s estimates is to provide an average overhaul cost that is representative of what an operator can expect to experience. Towards that end, manufacturers should use the following elements in their component overhaul estimates:

Include flat-rate parts as well as parts replaced and repaired based on their

condition. Use list or retail prices. No discounts. Use flat-rate labor hours, as well as labor to repair and replace parts. Also

use a labor rate that represents an industry average, not an internal rate. Include the costs associated with relevant testing (i.e. non-destructive

testing) Do not include SLL items as they are accounted for separately.

- Apply a 15 percent factor for each component to recognize the effect of

unscheduled or premature removals.


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If a manufacturer does not allow for its operators to overhaul their components or does not offer a network of service facilities to overhaul its components, then the manufacturer will need to consider alternate methods of estimating (e.g. manufacturer’s average overhaul cost). If component exchanges are offered, use the average exchange price minus the credited amount for core exchange. If guaranteed maintenance programs are offered, use a rate that represents a basic program based on two cycles per hour. Many guaranteed programs exist with varying levels of coverage, but manufacturers should remember the intent here is to give operators an idea of expected costs.

Recommended Presentation: For each component with an overhaul interval in Chapter 5 of the maintenance manual, the manufacturer should display its information in a manner similar to the following example.

Component Description

Avg. Overhaul

Cost

A/C Qty

Total Cost

Interval

Cost per

Hour

Unscheduled Factor

Total Cost Per Hour **

Transmission $45,000 1 $45,000 5,000 Hours $9.00 15% $10.35 Landing Gear $15,000 2 $30,000 10,000 Landings $6.00* 15% $ 6.90 Total $15.00 $17.25

* Assumed 2 cycles (Landings) per hour. (10,000 cycles / 2 cycles per hour = 5,000-hour life.) ** (Cost per Hour x Factor) plus Cost per Hour = Total Cost per Hour


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Inspections

Discussion: While the type and frequency of inspections can vary between helicopter types, Chapter 5 of the manufacturer’s maintenance manual is the common source identifying the respective inspections. Generally, inspections require the user to examine the helicopter on a recurring basis and can involve the airframe or specific systems.

While the respective manufacturers may refer to their inspections with different terminology, inspection intervals are measured in a few common ways: flight hours (e.g. 50-hour, 100-hour, 300-hour, 5,000-hour), calendar time (e.g. daily, 7-day, annual, 5-year), and cycles, which is a generic term that can represent a variety of measurements methods (e.g. landings, temperatures, loads). Inspections can vary in the amount of resources they consume and the length of time they take to complete. The typical manufacturer’s inspection program will consist of routine or phased inspections, which occur on a regular basis. The inspections are normally performed by an operator’s maintenance personnel and are generally inexpensive in parts and labor and do not cause a great deal of downtime. (Inspections in this explanation do not include the fixes that are required or found during the inspection. Items of this nature would be classified as on-condition.) Another important part of the typical inspection program involves “major” inspections. Typically, these inspections are less frequent than routine inspections but require a more extensive tear down and thorough examination of the helicopter’s structure and systems. As a result, the inspection itself and the fixes that it generates typically create significant costs and downtime for the operator. Due to their size and infrequent nature, many operators will contract with a third party facility to perform major inspections. Another category of inspections, but one that hopefully is never encountered, is conditional inspections. The need for a conditional inspection occurs due to an incident or event involving the helicopter and may include such things as hard landings, over temps of the engine, over torque of the drive system, and sudden stoppage of the rotor system. An operator will expend resources when performing the tasks associated with inspections. The operator will most certainly expend labor and in some cases replace parts as required or suggested by the maintenance manual. For the purposes of this Guide, costs associated with fixes or problems found during the inspection are classified as on-condition. Method/Assumptions Employed in Manufacturers’ Estimates:


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For the purposes of computing and presenting the costs associated with inspections, the airframe manufacturers will incorporate the following assumptions.

- For each inspection that is listed in Chapter 5 of the maintenance manual, estimate the cost of the parts and labor hours required to complete each. Do not include the costs associated with

Pre-flight, daily, or post-flight inspections. Conditional inspections. Service bulletins. (Operators should be aware that bulletins add cost to the

maintenance of the aircraft, both parts and labor. Refer to the operator section for additional information.)

- The estimates will reflect the resources required to complete just the inspection tasks. Some in the industry would refer to this as a “clean” or flat rate inspection. Issues that are found during the inspection and that require maintenance resources to address will be accounted for in the on-condition category.

- To calculate the part cost for each inspection Identify the parts that are commonly replaced or required to be replaced as

indicated by the maintenance manual. Examples of inspection parts are filters, seals, packings, o-rings, and standard hardware such as screws, washers, and nuts.

Determine the costs for each part. Take the total cost of parts for each inspection and divide by the respective

inspection interval. For inspections with intervals expressed in calendar time or cycles, use 500 flight hours per year and/or 2 cycles per hour to convert into a cost per flight hour.

Add the calculated cost per hour for each of the inspections to calculate the inspection part cost per hour.

- To calculate the labor hours per flight hour for each inspection Estimate the labor hours required to perform the tasks as indicated by the

maintenance manual. Maintenance labor hours include

Preparation of aircraft for inspection. Opening/closing or removal/installation of cowlings and

fairings. Removal/installation of assemblies or components for

access to the area that requires inspection. Coupling/uncoupling of controls and rigging, if required.

Maintenance labor hours do not include the time required for Sealing and curing. Draining, filling, or bleeding of components (oil, hydraulic

fluid, fuel, nitrogen, etc.) Take the labor hours for each inspection and divide by the respective

inspection interval. For inspections with intervals expressed in calendar time or cycles, use 500 flight hours per year and/or 2 cycles per hour to convert into a cost per flight hour.


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The calculation will yield the maintenance hours per flight hour (MH/FH) for each inspection. (This calculation should not be confused with elapsed time to complete an inspection. If multiple technicians are involved with the inspection, the elapsed time should be shorter than the estimate calculated in this exercise.) Add the MH/FH for each inspection to calculate the overall MH/FH for

the inspection category. Apply a factor of 1.5 to account for labor hours the operator will likely

expend accomplishing activities above and beyond the inspection tasks as identified by the maintenance manual. Examples of these activities are

Troubleshooting, Aircraft cleaning, Maintenance manual research, Part solicitation and preparation, and Gathering and monitoring tools

It is optional to apply an average labor rate to the estimated MH/FH. The following illustrates one method to calculate the published inspection information.

Parts Labor – MH/FH

Inspection Est. Part Cost

Cost per

Hour

Estimated

MH per FH

Factor

Adjusted Estimate

Total

MH/FH ***

100-Hour $400 $4.00 15.0 1.5 22.5 0.23 4,000 Cycle * $100 $0.05 20.0 1.5 30.0 0.02 12-Month ** $3,000 $6.00 40.0 1.5 60.0 0.12

Total $10.05 0.37 * Assumed 2 cycles per hour. (4,000 cycles / 2 cycles per hour = 2,000-hour life.) ** Assumed 500 flight hours per year. (1 Yr x 500 Hrs per Yr = 500-hour life interval.) *** (Est. MH per FH x Factor) / Inspection Interval = Total MH/FH Recommended Presentation: The presentation of inspection costs is relatively straight forward when compared to the overhaul and SLL items. For the inspection category, an estimate for part cost and MH/FH should be provided and as illustrated.

Category Parts (Cost/FH) Labor (MH/FH) Inspections $10.05 0.37


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On-Condition Maintenance

Discussion: On-condition maintenance is probably the most difficult category of maintenance costs to estimate for both the manufacturer and the operator. As its title implies, costs in this category will occur when the condition of the part or system requires maintenance. Predicting when a part or system will require maintenance is difficult enough, but estimating the cost associated with on-condition maintenance adds another level of difficulty. An example will help to illustrate this point. A door handle and its latching system are considered on-condition items. Who knows for certain when a door handle and or the latching system will require maintenance? Many factors could influence the timing of the maintenance such as the number of times the door is opened and closed, the environment in which the helicopter operates, and the type of work that the helicopter performs. Once the door handle and latching system require maintenance, what type of maintenance will occur? Will the maintenance technician trouble shoot the problem and if so, for how long? Will another organization just replace the system immediately and not perform any troubleshooting or repairs? And once the door handle is repaired or replaced, when will it require maintenance again? Does subsequent maintenance become predictable or not? Another factor that makes the estimation of on-condition costs more difficult is the large number of items on a helicopter that meet the definition. In the previous cost categories, the cost estimates involve items that had scheduled maintenance intervals (SLL, component overhauls, inspections) While those categories tend to include the high profile items, the number of them is much less than items classified as on-condition. Historically, there has been one category of on-condition items; however, that has changed. The original category involves parts that are similar to the earlier example involving the door handle and latch. This category is more general in its nature and involves items such as radios, pumps, avionics, doors, cowlings, windows, seat belts/harnesses, interior items, fuel cell, airframe, lights, etc. The newer or second category of on-condition costs involves those items that historically have had overhaul intervals or life limits but due to improvements by the manufacturers have seen those restrictions eliminated. However, reclassification from a scheduled to on-condition status does not imply that the item is free of maintenance. These items are still mechanical and therefore will require maintenance at some point.


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The second category includes the major systems on a helicopter, such as the drive train components (i.e. transmission, other gearboxes, and drive shafts), rotating flight control components (i.e. swashplate), and electrical systems (charging and storage). Also included in the on-condition category are the repair and maintenance costs associated with SLL items and overhaul components that still have their respective lives and overhaul intervals. For example, if a set of main rotor blades has a retirement life of 10,000 hours, it is likely that the operator will incur maintenance and repairs to keep the blades in operational condition prior to reaching the retirement life. The interim repair costs should be accounted for in the on-condition category. Regardless of the category, estimating the costs associated with on-condition items is difficult, as mentioned previously. Generally, manufacturers use two approaches. Currently, the most common method is estimation. Estimation includes either theoretical estimates or estimates by experts on maintenance events. Manufacturers’ estimates typically represent an ideal work situation with experienced personnel. This situation may not exist for every operator. To make these estimates more reflective of actual maintenance events, the operator may want to adjust the manufacturers’ estimates. The second and more reliable approach is for the manufacturer to present more detail about the individual items that drive on-condition costs. Disclosing information at this level of detail requires that the respective manufacturers have a robust data collection and analysis system. However, not all of the manufacturers posses this capability or have a desire to disclose that much detail about their maintenance costs. Method/Assumptions Employed in Manufacturers’ Estimates:

- Base on-condition estimates on actual field data or internal calculations. Regardless of the method used, the estimate should represent a longer period of time (e.g. 5 to 7 years), since on-condition costs will typically increase as a helicopter, and its respective systems and parts, age, both in use and calendar time. Either methodology will be noted in the assumptions section of the published literature. This will provide the operator with a starting point for building their own estimates.

- Include provisions for all general (radios, pumps, avionics, doors, cowlings, windows, seat belts/harnesses, interior items, fuel cell, airframe, lights, etc.) and major on-condition maintenance (transmission, gearboxes, drive shafts, rotating flight controls, and electrical systems).

- Include estimates for parts and labor hours. Estimates for parts will include consumable and other low dollar costs. Labor hours should represent the maintenance hours required to remove and replace a failed part, as well as any related troubleshooting.

- Base the cost of parts that need to be replaced at list price, discounts not considered, and average repair price for items that are repaired rather than replaced.


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Recommended Presentation: The presentation of on-condition costs is relatively straight forward while the calculations are not. For this category, at the least, an estimate for part cost and MH/FH should be provided as illustrated in the following table.

Category Parts (Cost/FH) Labor (MH/FH) On-Condition * $20.85 1.15

* Based on actual field data.


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Engine Costs Maintenance costs related to the engines on a helicopter represent a significant percentage of the total DMC. Historically, airframe manufacturers have included engine maintenance costs in their published estimates. However, the source of the estimates has been engine manufacturers. Engine manufacturers have a similar section in the Guide to assist them when compiling engine estimates. (Refer to Engine section (Section III) of the Guide.) The working group recommends that this arrangement continue. Airframe manufacturers’ published DMCs should contain estimates for engines and that engine manufacturers should be the primary source for the estimates. In general, the estimated costs for the engines should contain all costs associated with overhauls, SLL items, engine accessories, and line maintenance.


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Fuel and Lubricant Costs

Discussion: Fuel - Computing the operating costs associated with fuel consists of two primary components, the consumption rate and the cost of fuel.

Consumption Rate - A number of factors will affect a helicopter’s fuel consumption rate. Listed below are the more significant ones.

- Gross Weight - Altitude/Temperature - Speed - Externally mounted accessories - Sling loads

Manufacturers should be able to extract information from their respective flight manuals without excessive manipulation, thus making their task easier. Just as importantly, the assumptions should represent a common or typical mission profile for the operator. Also, when converting fuel flow from pounds-per-gallon (kilograms to liters) to gallons-per-hour (liters per hour), the typical fuel density of 6.7 pounds-per-gallon or .802845 kilograms per liter should be used. Cost of Fuel- Cost per gallon data is not mandatory in the Guide due to several factors, including the current volatility in pricing, variations due to geographic location, and options for fuel purchasing, such as wholesale or retail. However, while not mandatory, manufacturers may want to include a typical or average fuel value to give the operators a more complete cost summary. If the fuel price is not representative, the operator can adjust for its specific situation.

Lubricants – Helicopters use a variety of lubricants in various systems. For example, oil is in gearboxes and engines, hydraulic fluid is commonly used with the flight control systems, and grease is used on bearings and in various places of the hubs or drive shafts. Normally, lubricants are checked and/or changed during inspections or post inspection events. The costs associated with lubricants, while considered small, will be included in the manufacturers’ estimates. Method/Assumptions Employed in Manufacturers’ Estimates:

Fuel - For the purposes of estimating the fuel consumption rate (gallons or liters per hour), the manufacturers will use the following conditions:

- Gross Weight – 90 percent of maximum internal gross weight.


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- Altitude/Temperature – 2,000-foot pressure altitude at International Standard Atmosphere (ISA)

- Speed - Manufacturer’s recommended cruise speed for calculating maximum range. (The speed selected should be stated in the manufacturers’ publications.)

- No consideration for externally mounted accessories or sling loads. - Standard inlet on the engine (no snow baffles, etc.) - Only cruise flight. (No consideration for start, take-off, climb, descent, and landing

maneuvering.) As mentioned previously, manufacturers are not required to use an estimated rate for fuel due to the many factors that can affect it. However, they are encouraged to use a rate with the underlying assumptions clearly stated so operators can obtain an overall average-cost-per-hour that is based on fuel/lubricant costs. Lubricants - Engine oil and replenishment of other airframe lubricants can be approximated either by utilizing manufacturers’ estimates based on system capacity and frequency of replacement or on the basis of a percentage of the fuel cost estimate. A survey of operator experience indicates an average of one percent (1%) to be realistic. Recommended Presentation:

Category

Consumption Per Hour gal (liter)

Cost per Gal (liter) (Mfr option)

Fuel Cost Per Hour

1 % of

Fuel Cost Fuel Cost 100 gal $4.00/gal $400 Lubricants $4.00

ENGINE MANUFACTURERS, SECTION III HAI Guide For The Presentation Of Helicopter Operating Cost Estimates

Section III Page 1


SECTION III

Guide for Engine Manufacturers Preparing

Helicopter Operating Cost Estimates Introduction Having reviewed the previous editions of this Guide, and also participating in and reviewing the Preface and Introduction to this Guide, the engine manufacturers subcommittee realized that the most significant amount of new material being introduced into this Guide was that dealing with the actual process of estimating and presenting operating costs for single- and twin-engine applications. The subcommittee felt it was important to publish engine-related material in an understandable manner that would permit operators to make their own evaluation of those elements that make up engine-related maintenance costs for the operators real world. Towards the achievement of this objective, and with the emphasis on description of engine terminology, the following outline was established.

- Scope of and Factors Affecting Operating Costs - Reasons for Engine Removal (scheduled/unscheduled) - Definition of Terms (modular/non-modular) - Definition of Cycles (mission profiles) - Definition of Flight-Line Maintenance/Inspection - Definition/Discussion of TBO and On-Condition Engines - Overhaul of Accessories - Maintenance Options (parallel paths of power-by-the-hour and warranty)

Scope of and Factors Affecting Operating Costs The types of cost discussed in this Guide relate to direct operating costs only. Some examples of direct operating costs relative to engines that must be addressed include the following:

- 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

Other costs (i.e. indirect) are not evaluated by the engine subcommittee. The engine subcommittee does not intend to spell out details on how individual operators track


Section III Page 2


indirect costs as the operator is in a much better position to quantify these costs. However, items such as spares, overhead, and other indirect operating expenses should be recorded and analyzed by the operators. Engine operation costs are accounted for as dollars per engine operating hour and, to avoid misunderstandings; these costs apply to an engine functioning unit as supplied by the engine manufacturer. It should be kept in mind that ancillary equipment will vary from manufacturer to manufacturer and with each installation. Configuration also must be considered. In the case of a twin-engine power section with gearboxes driving an airframe manufacturer-supplied gearbox, the maintenance costs will be considered separately. On the other hand, a twin-engine power section driving through a combining, engine-manufactured- supplied gearbox will be accounted for as one unit. Comparing the hourly maintenance costs of the two configurations can be misleading. Engine shop visits are a significant portion of engine maintenance costs and are subject to the wide variations due to two primary factors, engine configuration and the maintenance concept. A major factor in the maintenance concept is whether or not shop visits will occur due to scheduled time-between-overhaul (TBO) intervals or due to engine performance (a.k.a. on-condition maintenance). Fleet size can also significantly affect maintenance costs. From engine manufacturers’ point of view, engine or engine module removals may incur additional costs, which can vary depending upon whether the operator requires loaner or exchange engine/engine module services, or is supported by inventory replacements. Another factor to be considered is whether the operator dedicates or shares heavy maintenance facilities, or relies on fixed-base operations or contractor overhaul services. The applicability of these factors should be taken into consideration when accounting for engine operating costs. Variation in engine maintenance costs between operators with identical engine and helicopter models is likely to occur as a result of differing environments and missions. There are several factors that may be used to extrapolate individual operator maintenance estimates from a generic use but, in the case of unique or rigorous missions, the operator should seek individual analysis from the engine manufacturer. Reasons for Engine Removal (scheduled/unscheduled) Scheduled removals normally fall into the following categories:

- Overhaul - Internal inspections - Life-limited-item replacements - Results of performance monitoring


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- Time stagger for all of the above To be considered a scheduled removal, based on performance monitoring, an engine or component must be selected for removal on the basis of age/configuration considerations and monitored performance level and be removed prior to failure or prior to exceeding established limits that are in themselves cause for removals. This category of removal is intended to reflect the effectiveness of performance monitoring programs as a means of minimizing unscheduled removals and thereby maintaining a higher degree of operation reliability. Generally, service bulletins (SB) are incorporated when the engine is in maintenance for other reasons. If maintenance is performed on the engine solely to incorporate a SB, the event is considered to be in the unscheduled category. Unscheduled removals are basic or inherent (engine caused) engine removals that occur as a result of malfunctioning of an engine while being used in the manner for which it was designed and for which the incident or malfunction was not externally induced. Non-basic or non-inherent (externally caused) engine removals are a result of externally induced conditions unrelated to the basic engine. Examples of causes for non-inherent removals include foreign object damage (FOD), airframe manufacturer-supplied component failures, build error (other than original equipment manufacturer (OEM), line replaceable unit (LRU) failures, and improper maintenance action. Engine removals based on maintenance monitoring procedures are to be classified as basic unscheduled removals. These procedures include (but are not limited to) oil filter analysis, chip detector analysis, spectrographic oil analysis program (SOAP), borescope inspections, and visual inspections. Definition of Terms (modular/non-modular) Most engine manufacturers have developed the concept of modularity to reduce engine maintenance costs. In the concept, engines may be split by the operator into different modules and independently replaced, which avoids the return of complete engines to the factory. Modularity is advantageous in the case of premature failure or in the case of different life limitations affecting engine parts. This concept is consistently used on modern engines as a design rule and is currently used in the field on the new engines. This concept brings costs savings in the following areas:

- Reduced maintenance man-hours. - Lower transportation costs (lower weight/size of modules compared to

engines).


Section III Page 4


- Better usage of TBO or life limits for different engine sections. Definition of Cycles (mission profiles) It is universally agreed that cycles of the rotating machinery in gas turbine engines may be life limiting. However, there is no industry-wide method of defining or counting these cycles. Each engine manufacturer has evolved its particular system. Operators should clearly understand how each engine manufacturer defines a cycle. Nevertheless, since the life-limiting factors are rotational speed and temperature, in general, a cycle can be said to be from start-up to shutdown of the engine. The severity of the cycle in helicopters usually depends upon the aircraft mission profile and it is here that the engine manufacturer factors the cycle in order to recognize, for example, long periods or frequent excursions at high rpm or temperatures. Thus, for a particularly severe mission an engine could be judged to have exceeded one cycle from engine start to stop. Recording of engine cycles in helicopters is at this time achieved in one or more of the following ways:

- Manual count that is performed by flight crew. - Mission/usage definition that is an acceptable method for an aircraft flying a

repetitive mission. - Mechanical counter that counts engine starts. - Mechanical counter that requires a sophisticated device to take care of the

manufacturers’ factors, (i.e., do more that count engine starts). The possibility of onboard Health and Usage Monitoring Systems (HUMS) in light and medium helicopters opens up a new dimension in recording engines usage. The current practice of counting cycles will become obsolete. Definition of Flight-Line Maintenance/Inspection Engine line maintenance cost includes the labor and material to perform (a) preflight and post inspections, (b) scheduled inspections, (c) special inspections, and (d) minor repairs and modifications to the engine at the field level. Although operators and engine manufacturers may define the categories of line maintenance differently, the tasks are generally the same. Preflight and post-flight inspections are generally visual inspections. Scheduled inspections are made at periodic intervals in an effort to prevent engine malfunction and to serve in the role of preventive maintenance for the engine. Special inspections are required when the engine has been subjected to abnormal operating conditions, when engine damage is suspected, or when associated parts are removed from the engine. Special inspections usually include the labor and material to remove and install engines,


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modules, and engine accessories. The minor repairs and modifications performed at the field level will vary considerably between operators. Engine manufactures typically project line maintenance cost by summing the labor hours and material required to perform the scheduled inspections. As previously stated, manufacturers have difficulty in estimating the time required for special inspections. Thus, it is important that operators with knowledge of specific area conditions make their own assessment. It should be remembered that engine manufactures quote fleet average values and it would take a more detailed study of the local environment conditions before making more accurate predictions. Although performed at the line maintenance level, some engine manufacturers include the projected cost of hot sections inspections in the overhaul or repair cost of the engine. Operators using engine manufacturers’ estimates of maintenance cost should be aware that this cost may be included by engine manufacturers in either line maintenance cost or the overhaul and repair cost of the engine. Some engine manufacturers include the overhaul and repair cost of LRUs in the overhaul and repair cost of the engine or engine accessories. However, other manufacturers include it in the cost of line maintenance. The operators’ estimate can differ significantly from an engine manufacturers’ estimate for many reasons:

1. The engine manufacturer may not have included the material and labor to perform preflight and post-flight inspections and special inspections in the line maintenance cost calculations. 2. Time spent in getting ready to perform the specific task, to troubleshoot the problem, or to study maintenance manuals and technical publications may not have been included by the engine manufacturer in the line maintenance cost calculation. 3. Time spent servicing, cleaning, or waiting for the helicopter to return for maintenance may not have been included in the engine manufacturers’ estimate of the maintenance cost. 4. As mentioned previously, engine manufacturers typically assume work is performed in environmentally controlled, well-lighted hangars with complete facilities. However, operators frequently work outdoors and have to improvise facilities. 5. Some operators may choose to have “dedicated” line maintenance mechanics that, in actuality, perform other tasks.

Many of these items are difficult for engine manufacturers to project unless actual data from operators are available. In preparing line maintenance cost estimates, engine


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manufacturers should use actual data from operators if possible. However, such data are difficult to generalize for estimating other operators’ line maintenance cost and the factors affecting the data need to be listed explicitly. Such factors include when the data were collected, the operating area and climate, type of service experience of crew with the aircraft, engine use, experience and training of maintenance personnel, and maintenance facility capabilities. When an engine manufacturer estimates line maintenance cost for an engine with no field experience, the engine should be compared to an existing similar engine and application for which there is data available. Comparing the amount of maintenance required, ease of access, and other factors of the new engine should make projections to the existing engine. The manufacturers should detail the rationale used to arrive at the projected line maintenance cost for the new model. In calculating costs for line maintenance, an allowance should not be made for indirect labor or maintenance burden. Maintenance burden includes such costs as unallocated shop labor, maintenance supervision, record keeping, stocking of spares, and other indirect maintenance-related expenses. The estimated direct cost for line maintenance labor, in the case of operators who employ their own mechanics, can be calculated by multiplying the labor hours per flight hour by the average wage paid to the mechanics. Alternatively, in the case of operators who do not employ mechanics directly but have required work done by an outside agency, the fully burdened hourly rates charges are considerably higher than the hourly mechanic’s direct wage. However, indirect cost may be proportionately lower. The cost of material used for line maintenance can be calculated by dividing the total cost of material used over a time period by the actual hours flown during the same time period. Definition/Discussion of TBO and On-Condition Engines When presenting engine maintenance costs, manufacturers should be sure to state clearly if the analysis was based on an on-condition maintenance program or whether a time-between-overhaul (TBO) was assumed and an engine overhaul cost included in the calculations. Some engines are required to be overhauled at published time intervals. For example, if an engine has a 3000-hour TBO, it must be overhauled by the time it accumulates 3000 hours of operation. Use of an on-condition maintenance program requires an operator to perform additional engine diagnostic checks or performance trend monitoring to ensure the serviceability of the engine. There is a general trend in the industry toward the incorporation of on-condition maintenance programs and it is expected that this trend will continue in the years ahead. On-condition maintenance programs are the natural outgrowth of improved engine reliability and are usually less costly to the operator than scheduled engine overhauls. In the DOC calculation of a TBO program, it should be clearly stated by the manufacturer exactly what the overhaul consists of, since there is some difference among manufacturers in how an overhaul is defined. Some manufacturers have engine/module


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overhaul exchange program whereby an operator simply exchanges the time-expired unit for a recently overhauled or new unit. If this is the case, the manufacturer will have published exchange prices that may be used for overhaul costs. If exchange units are not available, the manufacturer should be able to provide average overhaul cost estimates based on actual field history with that particular engine model or another similar model. Overhaul of Accessories Another point of difference among engine manufacturers lies in the area of accessories overhaul and repair. Many of the engine control system accessories, such as fuel controls, pumps, governors, etc. are also required to be overhauled at published time intervals. While all manufacturers agree that these costs must be included in a total engine maintenance cost, some include these costs as line maintenance, since the components are replaced on the flight line. However, other engine manufacturers represent accessories overhaul costs and line maintenance costs as two separate DOC categories. Confusion may be avoided if the manufacturers’ methodology for computing maintenance costs is clearly stated. Maintenance Options (parallel paths of guaranteed maintenance programs and warranty) When the operator has purchased a helicopter, most engine manufacturers now offer two different options for handling maintenance. The traditional way consists of operating the engine through the warranty period and overhaul or exchange programs that manufacturers offer. This system does not give the advantage of a known operating cost for the particular operation and usually requires a large sum to be available at the time of the overhaul or engine exchange. It also requires the operator to maintain a pool of spare parts. Some engine manufacturers are now offering guaranteed maintenance programs (GMPs) to the operators. GMPs include elements of DOC and such other features as spare engines and spare parts support. GMPs make it easier for operators to budget, diminish the amount of spares carried by the operator, and spread payments through the engine operation as opposed to the large sums requested punctually at time of overhaul. GMPs can be attractive to many operators who find such an arrangement more practical than making an up-front investment in spare parts. Every helicopter operator knows engine repair and maintenance is just as important as selecting the right equipment to satisfy specific operating requirements, but only the operator can evaluate factors unique to each operating scenario that leads to a meaningful decision about which alternative to select.

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