Question

KDHK Corporation ( A “C” Corporation)

KDHK is a private, not for profit, corporation that owns an airplane.

The plane

is a Cessna 182 high performance four seat aircraft The plane is 28 years old but in spite of it’s age is in very good condition. It is equipped with less than state of the art avionics, but all of the systems are in excellent shape and meet all regulations of the FAA. The engine has less than 100 hours of flying time after being replaced several months ago but the propeller is approaching replacement time and will be replaced in approximately 40 flying hours. The outside paint is new and in excellent condition. The interior is in good condition, but aging and will be replaced in the next 3 years.

The owners

There are five private pilots with many hours of flying time they are between the ages of 50 and 65 and all have been owners for at least 10 years. Each owner holds 1 share of the company stock (20%) and there are no other shares outstanding. The corporation is a not for profit company and pays no taxes. As a corporation it’s liability is limited to the worth of the company which consists or the value of the plane and a small bank account that contains cash reserves for major maintenance and unusual events. The account is now worth $2,568.00

Airplane costs and facts

The recently appraised value of the plane is approximately $175,000.00. The expected life in it’s present condition is 4000 flying hours. The five pilots combined usage of the aircraft is 200 hrs. per year.

The propeller is valued at $6,000.00 and has approximately 1000 hours of useful life at this point. A new propeller will cost $17,000.

Annual maintenance costs are approximately $1,700 which includes an annual inspection, parts changes, labor and documentation.

Fuel cost $6.15 per gal and the plane consumes 13 gals per hour.

Oil is $5.40 a quart and is consumed at .25 quarts per flying hour.

Other annual fixed costs:

Altimeter check          $650.00

Annual State cert.       $500.00

Insurance                   $1800.00

Hanger fees                $5,000.00

Filters, hoses, misc. $800.00

Other costs include Tires $250.00 each (2) Each tire can be used for 250 hours. The tires are new. Battery cost $350.00 and will last 300 hours, it is also new.

The Project

The owners now pay a monthly fixed payment to the corporation plus the cost of all variable costs (gas and oil). Fuel is replaced and paid for by the using pilots before returning the plane to the hanger after each trip. The owners also maintain all of their own licensing fees, training certifications, medical exams and their own biannual testing by the FAA and any other costs that are of a personal nature. The fee structure is supposed to pay for all of the costs of operating the airplane and the cost of any unexpected or catastrophic expenses such as unexpected engine damage, prop damage or major instrument failure. Any shortages, not covered in the regular fees paid, are assessed equally to the owners by the corporation each year end.

The owners are considering renting the airplane to other pilots on a fee per hour basis in order to defray operating cost of the plane. The added costs to the corporation if the plane is rented include; added liability insurance of $5,000 annually, added maintenance inspections of $1,500 annually, administration cost of $4,000 annually. Each pilot applying to fly the plane would be responsible for their own costs of background checks, certification and personal insurance.

If the owners not to rent out the aircraft, how would you structure the monthly fees paid by the owners.

If owner do rent the plane to other pilots, how would you structure the fees paid by the owners and the hourly rental fees paid by the renting pilots.

An aircraft of this type and configuration rents in the Chicago area for approximately $225.00 per hour.

Your can make any assumptions you feel make sense under both proposals. An example would be maintaining a reserve to cover unusual issues to prevent the annual assessment or reserves for future capital to be used for upgrades.

Be brief, but use the numbers in the above scenario, or ones you feel appropriate to construct the fee structures.

Answer 1

If flying hours of the plane is restricted to 200 hours per year then aircraft should not be rented out since total cost is higher than the market rate. If flying hours can be increased then renting can be considered as option.