Budgeting against TBO/Reserves?

[BlueSky247]

Just curious how you guys are handling long term budgeting for known big stuff like engine overhauls and prop replacements. 
 

I’m hoping to pick up a mid time J soon. I plan to put a lot of hours on it in a relatively short amount of time. So I’m thinking about putting $50 per flight hour into a seperate account as I go. Does that make sense or is there a better way to do it?

[Rick Junkin]

It's an easy equation.

Projected cost of overhaul divided by hours remaining to TBO = hourly set-aside for overhaul

For a mid time engine on a J $50/hour is probably a little low.

[PT20J]

Figuring out the inflation rate on a specialty product like an engine overhaul perhaps ten years hence is going to be the hard part of the equation. I'd be generous in my estimates if you are really going to set aside the money in the hopes of not having to tap other sources. Also, keep in mind that TBO is just a guess and Lycoming TBO is really x hours or 12 years, whatever comes first. An engine has a much better chance of exceeding TBO hours if they are used up in ten years or so. But, an engine 20 -30 years old? Corrosion does take a toll.

[M20F]

59 minutes ago, BlueSky247 said:

So I’m thinking about putting $50 per flight hour into a seperate account as I go. Does that make sense or is there a better way to do it?

Next week you pick it up and fly 10hrs that week depositing $500 in your new HYSA.  

The following week the motor blows up, what now? 
 
For an IO360 I would say get $30K in the fund and then buy the plane.  I would figure $20K year one in additional expenses unless you are buying a well known plane.  
 
It does get better but it is a very expensive and unpredictable hobby.  Figure on 10 days, not 10 years. 

[MikeOH]

I look at the engine elephant in the room a bit differently: I either can afford to own an airplane or I can't.  

Part of that decision is being able to drop $40K on an engine at any given time.  Unless you are running an actual business as opposed to a hobby (which is what flying is for me) the idea of keeping an accrual account and 'paying' into it every month just seems silly.  As @M20F says, what happens when the engine goes TU and you only have $10K saved?

Personally, I think that 'approach' explains why many aircraft are rotting on ramps...in reality the owner really couldn't afford to own and the plane was sent to the ramp when a big item like an engine OH raised its ugly head and the 'reserve' was insufficient to cover the unplanned expense.

Apologies if that comes across harsh.

[BlueSky247]

No apologies needed. That’s the reason I made this thread - to find out how others plan for those events. I appreciate the info and candor!

[Pinecone]

I just try to keep a slush fund for whatever jumps up.  Aircraft engine.   Car accident.   Life.

[BlueSky247]

17 minutes ago, Pinecone said:

I just try to keep a slush fund for whatever jumps up.  Aircraft engine.   Car accident.   Life.

Thank you Sir. This is probably what I will end up doing. I was just thinking it would be a good idea to have a kind of limiter or reminder in place when the plane is new to me and I'm wanting to take it out all the time.  It would suck to wake up one morning to find out it's time to write a check for the overhaul and not have the money for it. 

[Paul Thomas]

I handle it the same way I do for car or house expenses; I pay for things as things come due.

I don't know people that have a fund to redo their roof every 20 years, new AC every 10 years, etc... but maybe that's the way some people budget for things?

[Rick Junkin]

8 minutes ago, Paul Thomas said:

I handle it the same way I do for car or house expenses; I pay for things as things come due.

I don't know people that have a fund to redo their roof every 20 years, new AC every 10 years, etc... but maybe that's the way some people budget for things?

Indeed we do 

[Pinecone]

1 hour ago, Rick Junkin said:

Indeed we do 

 

But do you have a roof fund?  And an AC fund?  And an engine overhaul fund?  All separate?

[Rick Junkin]

1 minute ago, Pinecone said:

 

But do you have a roof fund?  And an AC fund?  And an engine overhaul fund?  All separate?

Ok ya got me - we have a separate house fund and airplane fund, but only on paper. It's the same as having a general emergency fund, just divided and earmarked for two separate things. It's a psychological crutch to reassure us that we have planned for what we need for the must-haves and the want-to-haves.

[Vance Harral]

People who point out an overhaul could be needed at any time are correct, but there's a separate aspect of this that may or may not matter to you: valuation.

Even though you can't predict when an overhaul might be needed, everyone still appraises aircraft based on engine hours, and sales prices generally reflect that.  For example, it would be reasonable to appraise M20J airplanes with a $20/hour engine time adjustment, based on an estimated $40K overhaul cost and 2000 hour TBO.  A specimen with a fresh overhaul might be advertised at $140K; while an otherwise identical specimen with 2000 SMOH might be advertised at $100K.  Now, the former could suffer infant mortality and need major engine work next week; while the latter might go another 1000 hours with no trouble.  But because valuation is a statistical betting game, the difference in asking/sales price is going to be close to the cost of an overhaul, and therefore the value of an airplane really does decline significantly with engine use.

So... if you have reason to preserve the value of your aviation enterprise, you might put $20/hour into an engine kitty, such that the value of the actual airplane plus the value of the kitty stays relatively constant (modulo market fluctuation, inflation, etc.)  If you sell the airplane before overhaul, you likely get out about what you put in, from the sale price plus reclamation of the kitty.  If you overhaul the engine before you sell the airplane, you'll have to come up with additional funds because the kitty won't cover it.  But at that point you'll have an airplane that is worth more than when you bought it - probably about as much more as the out-of-pocket funds you used to cover the difference between the kitty and the actual overhaul cost.

It's fair to say this is kind of a silly exercise for a private owner using an airplane for pleasure - I agree with @MikeOH that you can either afford it or you can't.  But it can make a lot of sense to fund an engine overhaul kitty in a partnership, or in an airplane that is primarily a business asset.