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Cash Realities of Warranty Programs

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How often does a new owner hear that “there is no need to worry because the aircraft is under warranty protection“? New airplanes usually come with a manufacturer’s airframe parts warranty program plus a subscriber based engine warranty program so the owner doesn’t immediately feel the full financial brunt of the maintenance work being performed.  But sooner or later maintenance bills will begin to accumulate, more likely sooner and in larger amounts than the new owner expected.

 

 Coverage Limitations

 

Warranty fine print needs careful review.  Typically there are exclusions built into the programs which are sometimes not listed in discrete detail.  This can lead to rude surprises later and unanticipated owner costs.

Shop labor cost coverage is often either absent entirely or limited, again leading to unexpected costs for the owners who thought they were fully insured.  Again an understanding of the details is important.

 Extension and Renewal Costs

 

A manuafcturer’s warranty will be both limited and will typically expire after three or five years depending on the model of airplane.  At this stage the owner must decide to extend the warranty with a parts insurance company like JSSI or MSP or Smart Parts or any number of equivalent companies or go without coverage.  These programs will also be subject to renewal as the years go by.

The terms of renewal can vary.  Each maintenance program renewal is typically based on the maintenance history associated with the specific aircraft. If poor maintenance practice results in unnecessary parts being thrown at an airplane, the program renewal costs will be higher and the value of the airplane will be lower in residual terms as a result when its books are reviewed by a new buyer.  For the owner this is a double whammy – first the owners pays too much for poor workmanship and then pays again because he paid too much!

 Residual Value Impact

 

Frequently aircraft with up-to-date warranty coverage will command a premium price in the used market.  But this may not be a good reason for incurring the costs of such programs.  The savings from self-insurance coverage are often substantial to the point that owners are frequently better off financially to decline extended coverage.  The savings will often more than offset whatever value impacts may be faced in the used market when the airplane is sold.

The massive decline in aircraft residual values post 2008 virtually wiped out any prospective residual upsides from full warranty coverages almost overnight. The value today remains questionable and should be reviewed with care on a case-by-case basis.

Owners need to read between the lines and second guess recommendations to extend coverages.  Managers are frequently provided with incentives from maintenance program suppliers to push their policies.  But even without this, management companies like programs because they are able to avoid confronting an owner with a lumpy invoice for a large maintenance event when they least expect it.  Even with the odd costly maintenance item over an aircraft’s life, it is often to an owner’s financial advantage to self insure and pay such costs as they arise.

 The Best Maintenace Program is a Having a Superior Maintenance Team

A decision between self insurance and extending a maintenance program should come down to comparative costs.  Well-trained, experienced and transparent suppliers should win every time in terms of owner costs.  There are often many opportunities for a dedicated team of engineers to reduce owner expenses.

For example, an alert maintenance team will frequently negotiate “warranty coverage” long after the warranty has technically “expired”.  Two recent illustrations we reviewed involved a Challenger 605 windscreen and the delta-fins of a Learjet 45.  The manufacturers (OEMs) were willing to cover both under an implied warranty of fitness given that the failures involved manufacturing defects.  Large amounts of money were saved. The team in charge of the aircraft went the “extra mile” and successfully made the case to the manufacturers in compelling terms.

We know of reported cases that produced less favorable outcomes.  In one maintenance example case the manager simply didn’t bother to challenge the manufacturer, and another instance the manager reportedly received a substantial manufacturer credit which was pocketed.  The owner was charged for the parts cost at full rates.

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