Engine Reserves?

tmyers

tmyers

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Tim Myers
Just curious what others do with regard to engine reserves.

When I purchased the Arrow the engine had around 1300 hours. I did some research and found that the IO-360 could be R&R and rebuild for around $26K. I figured some inflation in and settled on $30K and said hey, it might only make it to 1800 before it needs an overhaul. With that I settled on a $60/hr Mx reserve. Aggressive yes, but I now have about $4500 in the engine reserve.

I am starting to think I am overdoing this as the engine runs strong, has good compressions. Oil consumption is about a qt every 12 to 15 hours. This is a first run engine (never rebuilt) and has had one jug replaced in it's 1300 hours. With proper Mx and baring a major fubarb I should be able to run it past the recommended TBO of 2000 hrs.

Whats the consensus on engine reserves. Do most have an engine rebuild reserve or do you just plan on a $30K loan when rebuild time comes. Perhaps it is something in the middle but I am curious how the more experienced owners have handled this over the years.
 
tmyers said:
Just curious what others do with regard to engine reserves.

When I purchased the Arrow the engine had around 1300 hours. I did some research and found that the IO-360 could be R&R and rebuild for around $26K. I figured some inflation in and settled on $30K and said hey, it might only make it to 1800 before it needs an overhaul. With that I settled on a $60/hr Mx reserve. Aggressive yes, but I now have about $4500 in the engine reserve.

I am starting to think I am overdoing this as the engine runs strong, has good compressions. Oil consumption is about a qt every 12 to 15 hours. This is a first run engine (never rebuilt) and has had one jug replaced in it's 1300 hours. With proper Mx and baring a major fubarb I should be able to run it past the recommended TBO of 2000 hrs.

Whats the consensus on engine reserves. Do most have an engine rebuild reserve or do you just plan on a $30K loan when rebuild time comes. Perhaps it is something in the middle but I am curious how the more experienced owners have handled this over the years.
Click to expand...

Do you have partners?

For me I'm a sole owner/flyer of the airplane. Any financial transfer of funds for an engine reserve is just a paperwork exercise, because it would be going from my savings account back to my savings account. I've budgeted for the eventual overhaul, but I don't charge myself for it. The way I see it, it would just make the incrememental cost of flying more expensive and provide a disincentive to fly. The last thing you want to do is have a plane that sits because it is too expensive to fly.

I also consider the overhaul to be a capital improvement. It increases the overall value of the plane, like avionics or autopilot. I don't charge myself a per hour cost for those either.

I'm also of the belief that you should have the funds to tap 100% of the cost of the overhaul at anytime.
 
No partners, just me. I could have the funds if I pulled from some investments but to be honest the interest rates on a loan would probably be less than what I would loose by pulling money out of the investments.

Regarding the cost being a disincentive; I have experienced that thought process when looking at a potential trip and figuring what it would cost, so I understand your position on that.

Will be interesting to hear how others feel.
 
neither. An engine is a part (or collection of parts depending on your perspective). If a part breaks I'll fix it. I don't pretend to save money in a phony account for potential failures of parts.

What does a "reserve fund" mean anyway ? Do people really pretend that they are setting aside engine money in an al gore style lock box? Does that mean that if one of your children needs surgery and your other savings are depleted, you say "sorry johnny, you'll have to lose that leg because my airplane engine reserve is already locked in"
 
My engine was running strong until a piston went through the cylinder head at 1000 feet and thrashed the shaft and core. $36,000 at about 1600 hours.

But I agree with Brad. With no partners you will be paying for it out of savings or equity or a loan. But you don't which emergency you will have first so just make sure you have Ssets you can tap if for whatever comes up.
Edit: I have an O360
Please excuse typos. On An iPhone a d I have fAt fingers
 
Brad Z said:
Do you have partners?

For me I'm a sole owner/flyer of the airplane. Any financial transfer of funds for an engine reserve is just a paperwork exercise, because it would be going from my savings account back to my savings account.
Click to expand...

While I completely understand that, I can also appreciate the value of doing the paperwork exercise. Its just another way of budgeting.

My guess is that there are a lot of owners who fly their planes for many hours/years, then when the first big bill comes get all agitated and sell the plane thinking "I should just rent, I can't afford this". When really - if they had been "charging" themselves like the plane was a really cheap dry rental, all the costs would be covered.
 
Thanks Ren.

I do have a separate account for the airplane and I do have a monthly budget to track expenses. I deposit a set amount from my income to the aviation account every month and keep track of all that comes in and all that goes out so I know where I stand So when I say I have $4500 in the engine reserve I can show that of the $XX000.00 I have in the account $4500 is set aside for an engine rebuild. I also set aside money for the insurance, annual, chart subscriptions and so on.
 
A lot of it depends on how you need to budget for yourself, and how the plane is set up.

For the 310, which is owned by Cloud Nine, the plane has a budget that it needs, and so we do plan reserves for major expenses. The Aztec did similar since it was in an LLC, but I also just ended up writing checks as expenses came up if the money wasn't there. This methodology works if you have a club/partnership or other separate entity for the plane.

Personally, I do not keep a separate flying fund. It comes out of the general fund. If you know that you're able to pull off paying for expenses as they come, I would just do that rather than have a separate account. A lot of this comes down to owning a plane that you can reasonably afford, which you do.
 
Bottom line: As an owner, you may need to overhaul your engine At Any Time. How you budget for it is your business. The engine is free until one day it's a very big number. You can and should do due diligence when buying a plane, but there's still no guarantee.

The only other issue is to plan for the total cost at overhaul. That means removal and installation, accessories, shipping, exhaust, engine mount repairs, baffling etc.
 
I have no reserves as an owner. O/H the engines, or anything else for that matter, can't be budgeted correctly anyway. My engines are 350hrs over TBO and I'll run them a little bit longer as they're behaving quite well. I just see any O/H as the cost of ownership. Nobody keeps a reserve for oil, unexpected repairs or tire wear on a car, so why so fastidious with aircraft? If it's for hire, and part of a financial tool in a business, then of course it needs a little closer attention.

Also - nothing is as depressing as knowing the actual hourly cost. Blissful flying is not knowing..:D:yes:;):)
 
all the same, maybe there is something to this reserve business. The 540 in my pawnee is at about 3600hrs and 20-something years SMOH. If I had an engine reserve for it I could probably scrap the plane and retire by now.
 
jonnyjetprop said:
The only other issue is to plan for the total cost at overhaul. That means removal and installation, accessories, shipping, exhaust, engine mount repairs, baffling etc.
Click to expand...

..And this is where the numbers start getting fuzzy. My preference for a field overhaul and IRAN repairs might be construed as a false economy to the guy who prophylactically overhauls an otherwise fine bottom end to factory-rebuilt expense levels. The difference can quickly exceed 10 AMUs. That's a lot of money, particularly on these sub-$50K airframes with yearly total operating budgets of around that difference.

My philosophy in running post-TBO engines successfully is that everybody is in the same bathtub curve luck-o-meter between 0-200SMOH. After that, you're largely in the clear. The remainder of the longevity of that overhaul will depend on the operating style of the owner and statistical luck of individual component failure, which is fairly low on these tractor engines.

My assumption is that the OP treats his engine rather well (i.e. not rental power 100% of the time). As such, his only worry for early overhaul is just bad luck due to component failure leading to catastrophic in-flight powerplant damage, which could happen to any one of us.
 
tmyers said:
Just curious what others do with regard to engine reserves.

When I purchased the Arrow the engine had around 1300 hours. I did some research and found that the IO-360 could be R&R and rebuild for around $26K. I figured some inflation in and settled on $30K and said hey, it might only make it to 1800 before it needs an overhaul. With that I settled on a $60/hr Mx reserve. Aggressive yes, but I now have about $4500 in the engine reserve.

I am starting to think I am overdoing this as the engine runs strong, has good compressions. Oil consumption is about a qt every 12 to 15 hours. This is a first run engine (never rebuilt) and has had one jug replaced in it's 1300 hours. With proper Mx and baring a major fubarb I should be able to run it past the recommended TBO of 2000 hrs.

Whats the consensus on engine reserves. Do most have an engine rebuild reserve or do you just plan on a $30K loan when rebuild time comes. Perhaps it is something in the middle but I am curious how the more experienced owners have handled this over the years.
Click to expand...

How many hours a year do you anticipate flying? Assuming you are the average owner flying 50-100 hours a year, your 2000 hour TBO expects the engine to be in service 20-40 years. Corrosion is certainly going to be a risk over that long a period and its doubtful you will own that plane that long.

Look at the various levels of engine overhaul and get what meets your needs.
 
Tim,

I am greatly biased against reserves especially calculated by the hour.

If operating as a business, FBO, flight club or partnership you need to allocate a fair expense to each user. In this case it becomes a necessary evil.

However if a sole owner, I believe reserves get way carried away and do more harm than good.

1. In your case for example $60 reserve does not represent your engine cost of flying. Arrows regularly make 2000 hr tbo and or go longer. So your engine costs can be calculated at $15 per hour.

Your using 800 hrs and $30k in the assumption you are being conservative is exactly the type of thing I think we all should avoid. It misrepresents it so if you are planning a 10 hr trip and in your head, you add the 10 gallons per hour fuel, fees and then add the $600 engine reserve. You might well convince yourself not to fly or use your airplane.

I'd prefer to take $4-5k per year and just put it into an a/c maintenance account not tied to number of hours I flew. This way when you do that mind calculation to go or not to go using your Arrow you just calculate the out of pocket costs of fuel, oil and tie down.

I also see many clubs, partnerships that make the hourly flying reserve so high as to penalize the guys actually flying to the extent of benefiting the guys who never fly but still own a piece of the plane as they undoubtedly take that excess reserves to buy an auto pilot and new avionics.

If that is what a partnership or club wants to do fine but do it through special assessment not as a cost per hour of flying. This is one thing to cause me to walk away from a partnership.

The hourly flying reserve should accurately as possible reflect the cost of engine use, not a fund to buy an autopilot or GPS down the line. That is an abuse of other partners.

tmyers said:
Just curious what others do with regard to engine reserves.

When I purchased the Arrow the engine had around 1300 hours. I did some research and found that the IO-360 could be R&R and rebuild for around $26K. I figured some inflation in and settled on $30K and said hey, it might only make it to 1800 before it needs an overhaul. With that I settled on a $60/hr Mx reserve. Aggressive yes, but I now have about $4500 in the engine reserve.

I am starting to think I am overdoing this as the engine runs strong, has good compressions. Oil consumption is about a qt every 12 to 15 hours. This is a first run engine (never rebuilt) and has had one jug replaced in it's 1300 hours. With proper Mx and baring a major fubarb I should be able to run it past the recommended TBO of 2000 hrs.

Whats the consensus on engine reserves. Do most have an engine rebuild reserve or do you just plan on a $30K loan when rebuild time comes. Perhaps it is something in the middle but I am curious how the more experienced owners have handled this over the years.
Click to expand...
 
dell30rb said:
While I completely understand that, I can also appreciate the value of doing the paperwork exercise. Its just another way of budgeting.

My guess is that there are a lot of owners who fly their planes for many hours/years, then when the first big bill comes get all agitated and sell the plane thinking "I should just rent, I can't afford this". When really - if they had been "charging" themselves like the plane was a really cheap dry rental, all the costs would be covered.
Click to expand...

They should be renting. that is renters mentality.
 
Plane broke write check. It doesn't really matter what pile the money comes from as long as you have a pile.
 
Clip4 said:
There is nothing wrong with a real budget for expenses you anticipate in life.
Click to expand...

Sometimes it's false economy. If you considered all of your expenses and tried to wrap them up neatly into an hourly price it would be more expensive than renting. You'd never fly, the plane would sit, and become even more expensive.

I'm not trying to run a business with my airplane any more than I'm trying to run a business with my car parked in the driveway. Does anyone set aside $.50 a mile every time they run to the grocery store or pick up the kids from practice?
 
tmyers said:
Just curious what others do with regard to engine reserves.

When I purchased the Arrow the engine had around 1300 hours. I did some research and found that the IO-360 could be R&R and rebuild for around $26K. I figured some inflation in and settled on $30K and said hey, it might only make it to 1800 before it needs an overhaul. With that I settled on a $60/hr Mx reserve. Aggressive yes, but I now have about $4500 in the engine reserve.

I am starting to think I am overdoing this as the engine runs strong, has good compressions. Oil consumption is about a qt every 12 to 15 hours. This is a first run engine (never rebuilt) and has had one jug replaced in it's 1300 hours. With proper Mx and baring a major fubarb I should be able to run it past the recommended TBO of 2000 hrs.

Whats the consensus on engine reserves. Do most have an engine rebuild reserve or do you just plan on a $30K loan when rebuild time comes. Perhaps it is something in the middle but I am curious how the more experienced owners have handled this over the years.
Click to expand...

I like the idea of 'budgeting' for maintenance, etc. I suppose for me it's psychologically easier to swallow the pill if the plane is drawing from it's own 'account'. I do this for my boat, my rentals, etc however the money is all my money and in dire straights the pots would be mixed. I operate on a monthly dispersement principle, not hourly. I put $xx in each account each month. It gets you to a place to plan for the future but it doesn't dissuade you from using the equipment. So far that seems to work well for me.
 
Brad Z said:
Sometimes it's false economy. If you considered all of your expenses and tried to wrap them up neatly into an hourly price it would be more expensive than renting.
Click to expand...

That depends on how much you fly, and how mechanically savvy you are.
 
I'm with Bill, write check when the time comes.
No money to write the check, work harder.
Can't work, sell plane and live off the government.
 
For some reason, I found that I could own, cheaper than renting, even by paying myself an hourly rate for the costs. I found that I could own a Cherokee 180, with one partner for less than $60/hour plus fuel. The rental on an old beater C150 is about $130/hour.
So I cannot afford to rent.
 
Bill Jennings said:
Plane broke write check. It doesn't really matter what pile the money comes from as long as you have a pile.
Click to expand...

Exactly! I think it makes much more sense to work on making a pile than having small piles for engine reserves (or prop, paint, gear,...roof, car, a/c reserves).

An engine is just one of many expensive surprises that need planning for. Just spend less than you earn and put some away for the future. No need to make separate piles for every possible surprise.
 
I like to build a fund to cover annuals on going maint and money for unexpected breakdowns ,hopefully that will build in time to do an overhaul when it comes time .
 
tmyers said:
When I purchased the Arrow the engine had around 1300 hours. I did some research and found that the IO-360 could be R&R and rebuild for around $26K. I figured some inflation in and settled on $30K and said hey, it might only make it to 1800 before it needs an overhaul. With that I settled on a $60/hr Mx reserve. Aggressive yes, but I now have about $4500 in the engine reserve.
Click to expand...
Somebody else may have already pointed this out, but at $60/hr, if you're figuring $30K for an overhaul you will be there at 500 hours not 1800. Maybe that was your plan all along, and sure your engine could die at 500 hours (or even at 200, or 20). It could also be running strong at 2500 hours and then die when the overhaul cost has gone up to $50K or more. But in case it's a math error I thought I'd mention it.

If you're sole owner I don't think an engine "reserve" is really necessary. (In fact there are many partnerships/clubs that don't figure a reserve into the flying rate -- I was seriously considering one with that policy about 5 years ago.) The engine will need it when it needs it, and as a sole owner, the day I can't afford the overhaul cost out of my pocket is the day I sell my airplane.

Anyway based on a $30K overhaul at 2000 hours, the "book" reserve would be $15/hr. If I was saving for overhaul I would probably say $20/hr was reasonable, and I would also count on a $40K overhaul by then.
 
On a side note; every time I buy a "used" (car, boat, airplane) I try to have something left in reserve for post purchase "gotchas". And invariably, I've been glad I did. Because even when everything checks out good, Something will break after the purchase.
So let's say I have $40k to buy an airplane with, I'll be looking at $30k airplanes, and may pull the trigger on one for $35k, but I'll not spend the whole $40k because I know that there will be something jump up to bite me after the purchase. (usually happens at first annual).
Same with cars. And Boats, Motorcycles, etc.
 
azure said:
Somebody else may have already pointed this out, but at $60/hr, if you're figuring $30K for an overhaul you will be there at 500 hours not 1800. Maybe that was your plan all along, and sure your engine could die at 500 hours (or even at 200, or 20). It could also be running strong at 2500 hours and then die when the overhaul cost has gone up to $50K or more. But in case it's a math error I thought I'd mention it.

If you're sole owner I don't think an engine "reserve" is really necessary. (In fact there are many partnerships/clubs that don't figure a reserve into the flying rate -- I was seriously considering one with that policy about 5 years ago.) The engine will need it when it needs it, and as a sole owner, the day I can't afford the overhaul cost out of my pocket is the day I sell my airplane.

Anyway based on a $30K overhaul at 2000 hours, the "book" reserve would be $15/hr. If I was saving for overhaul I would probably say $20/hr was reasonable, and I would also count on a $40K overhaul by then.
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Liz

The grey box has 1300 hrs, hedging that it would only last to 1800 leaves 500 hrs to save $30k hence $60/hr
 
Pretty surprising the tide is against his budgeting. For those where flying is not easily affordable, and/or for those that prefer to manage their money closely, seems a perfectly normal process to me. I'd be doing it exactly the way he is.
 
tmyers said:
Liz

The grey box has 1300 hrs, hedging that it would only last to 1800 leaves 500 hrs to save $30k hence $60/hr
Click to expand...
Ah okay, you did say that but I missed it. :redface:

Personally I would think it makes more sense (if you're going to budget) to put in the 1300 hours worth of reserve as a lump sum from the get-go. Budget the cost of the airplane with a new engine into the acquisition cost.

The flying club I belong to just had an engine failure in a 182 they bought just a few months ago with a high time (1700 hour) engine. There is no engine reserve saved up to speak of, so we are looking at increased monthly dues to cover the cost of a new engine. They budgeted only the agreed-on price and gambled the engine would last at least a few hundred hours. Crap happens.
 
Actually this may be a moot point. I am looking at a 5 person partnership in a Debonaire that would actually net me about $40 k back in the bank if the Arrow sells. More airplane, better avionics and costs less per mile to fly than the Arrow.
 
tmyers said:
Actually this may be a moot point. I am looking at a 5 person partnership in a Debonaire that would actually net me about $40 k back in the bank if the Arrow sells. More airplane, better avionics and costs less per mile to fly than the Arrow.
Click to expand...

This is what I eluded to in my post.

In any partnership there are a few guys who fly actively and the rest sort of just hang on as owners. So for whatever reasons they up the reserves so that the guys flying most pay all the maintenance.
It gets so rediculous some might have x reserve for prop, x reserve for engine, x reserve for landing gear OH, x for new interior upgrade and x for avionics.

Next thing you know is no one is flying as the reserves are too high.

I think a better way to do it is:

Take all annual inspection and ad maintenance and allocate that per month or year as it is paid. Then take all variable cost maintenance and come up with a reasonable reserve for them.

When figuring cost of the engine and such I would go with a medium reasonable price as most likely by the time comes for a new engine you can sell the airplane, take the reserves and net sales receipts and buy another airplane with better engine times and avionics.
 
I can buy into the Deb for about $24K, hourly rate dry is $45 plus fuel. I could potentially put $40K back in my pocket when the Arrow sold and if my calculations are correct the Deb is actually less expensive to fly at $0.74/mile vs $0.92/mile for the Arrow. But I am sharing it which is something I have not had to do for the last two years.

Lots to think about.
 
tmyers said:
I can buy into the Deb for about $24K, hourly rate dry is $45 plus fuel. I could potentially put $40K back in my pocket when the Arrow sold and if my calculations are correct the Deb is actually less expensive to fly at $0.74/mile vs $0.92/mile for the Arrow. But I am sharing it which is something I have not had to do for the last two years.

Lots to think about.
Click to expand...

$24,000 for a 1/5 share of a debonair is a good deal? :yikes:
 
dell30rb said:
$24,000 for a 1/5 share of a debonair is a good deal? :yikes:
Click to expand...
Originally it was $25K for a 1/4 share. The group recently allowed a fifth person in and used his payment to pay off the note on the aircraft.

The guy I am working with is trying to sell his share and the $24K is even negotiable. I wasn't aware of the fifth guy and when he told me I asked if the group had a limit on how many they would allow in the group and he said no. That has raised a red flag to me. The reason I quit the Aero club I was in was because of the lack of availability of the aircraft.

Don't want to get into that again. I need to keep crunching numbers to see what makes sense and have a huge list of questions to ask.
 
tmyers said:
Originally it was $25K for a 1/4 share. The group recently allowed a fifth person in and used his payment to pay off the note on the aircraft.

The guy I am working with is trying to sell his share and the $24K is even negotiable. I wasn't aware of the fifth guy and when he told me I asked if the group had a limit on how many they would allow in the group and he said no. That has raised a red flag to me. The reason I quit the Aero club I was in was because of the lack of availability of the aircraft.

Don't want to get into that again. I need to keep crunching numbers to see what makes sense and have a huge list of questions to ask.
Click to expand...


5 is pushing it. Many insurance companies are picky about having more than four people. Then it becomes a 'club' and more expensive.

Is it $45/hr but no monthly fee? Do they have a reserve fund already?

Seems to me the best way to run a partnership would be to have the fixed costs split evenly between all 5 members to be paid monthly/quarterly/yearly whatever. Then base the hourly cost on maintenance/engine overhaul fund (calculate those separartely and add up).

Those fixed costs should be shared by all members regardless of how much they fly individually. The costs don't change if the airplane flies 50 hours a year or 250.
 
Agreed, the owner I talked to stated that the group had decided to charge themselves a higher then normal monthly fee to build up the engine reserve, then reduce it to normal at the end of the year. I think their monthly is high but to be honest the numbers work when compared to owning the Arrow so who am I to say. The Engine had 995hrs on it so it is mid life. Can't remember if the gold 520 has a 200 or 1800 TBO
 
azure said:
Ah okay, you did say that but I missed it. :redface:

Personally I would think it makes more sense (if you're going to budget) to put in the 1300 hours worth of reserve as a lump sum from the get-go. Budget the cost of the airplane with a new engine into the acquisition cost.

The flying club I belong to just had an engine failure in a 182 they bought just a few months ago with a high time (1700 hour) engine. There is no engine reserve saved up to speak of, so we are looking at increased monthly dues to cover the cost of a new engine. They budgeted only the agreed-on price and gambled the engine would last at least a few hundred hours. Crap happens.
Click to expand...

Bingo. In partnership/club-speak this would be called an assessment, and would be done at the time of the expense. For you, since you know it will happen eventually, have the money available in a liquid account for when the time comes.

If you want, put a grand or two aside for maintenance each month if that's what it takes to be disciplined to save the money. But also budget for 8-12 hours of flying every month. Whether you yourself hourly, or as things break, you're still paying for it. The only reason clubs and partnerships charge by hour it to fair attribute costs across the membership. When the membership number is 1, this is not necessary.
 
On my personal plane, which maybe gets 50hrs a year, I don't bother with reserves, I just put gas in and go, change oil at 25hrs and pay the 500-700 a year for my annuals. Anything that comes up I take care of.

When I hit TBO she'll be flown to Oklahoma for a overhaul (WAY less expensive then any of the blue states). I'll pay for it or trade for it when that time comes.


On working planes we calculate reserves.
 
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