Why a SR22 leaseback is the worst financial decision an airplane owner can make

Airplane leaseback seem like a really good idea - your airplane becomes a business, generates income, which pays for maintenance, insurance, storage, and might even put a few bucks in your pocket. You'll hear this from flight schools, FBOs, airplane brokers and airplane manufacturers. The proposal I received for leaseback on my own plane looked very good, $72,000 income per year!

The ugly truth is you leasebacks are a terrible financial decision. You're better off to park your plane in a hangar and not fly it at all. This was the proposal I received:

Profit calculation for G2 SR22 in KFRG

$300/hr rental rate

-20% management fee $60

$240/hr income

300 hrs flown = $72,000 income per year

First, there are some baseline increases due to more expensive commercial insurance and higher cost tiedown and required maintenance. These numbers are for an SR22 that was to be based out of KFRG.

Annual fixed-cost increases to go to the flight school

Flight school tiedown: +$840

Commercial insurance: +$2100
Inspections assuming 300 flying hours:

3x 50hr inspection ($600 each) (@ 50, 150, 250): $1800

2x 100hr inspection ($2600 each) @ 100, @ 200 hrs: $5200

(the required annual will happen at 300hrs, so not counting it above)

Total annual increase in cost to go with flight school: $9940

If I don't fly the plane at all, my annual base cost increase is $9940 to put it with the flight school. This money goes to insurance companies and mechanics. 

After the flight school generates $9940 in profit I start to see net income. That is assuming nobody breaks anything, which is unlikely. Renters break stuff.. I should budget another $3000 for incidental repairs, but I'm omitting them.

Due to mandatory 50/100hr inspections, my own per hour increases by $32/hr.

Based on $300/hr wet rate, the 20% management fee is $18,000 per year ($60/hr fee * 300hrs). That's what the flight school gets.

Now if I look at my own hourly costs based on 300 hours a year, I come up with $202.40 / hr operating costs (I have a spreadsheet I can show you that takes into account fuel cost, engine depreciation, maintenance reserve, etc). My profit off the $300 is $43.60/hr. That means the plane must fly 228 hrs just to break even (228 * $43.80 = $9986). The next 72 hours are supposed profit for me. 

So that's $3100 in profit if it flies 300 hrs with the flight school alone.

But I want to fly the plane too. If I fly 100 hours and the flight school does 200, due to my own increased per-hour costs of $32/hr, I am actually losing money. How?

$9940 (base cost increase due to flight school)
- $8720 (revenue from 200 hours of rental)
+ $3200 (my personal cost increase for flying 100 hours, 100*$32) = -$4420 LOSS

That number above is important. If I flew the same 100 hours, but didn't put it with the flight school, I would have $4420 in my pocket. And that's not calculating the loss of flexibility and wear and tear of a renter plane.

Lowering the management fee

If you can negotiate a management fee of 10% it looks better. My income goes to $73.60/hr. That means I break even at 136 hours. So at 200 hours I generate $4672 profit.  My own flying will still cost me $3200 more so I'm left with $1472 profit at the end of the year. Your management fee for the 200hrs @ 10% would be $6000. For the record the flight school said absolutely not lowering 20% fee. $1472 profit still sucks and does not offset the risks described at the end of this article.

The 20% management fee is a lie (61% fee)

The 20% fee is actually a 61% fee. It is incorrectly based off hourly rate. You must calculate it off the profit margin. For my plane:

$300 rental fee

-$202 operating cost

-------------------

$98 profit margin

20% of $300/hr = $60/hr (flight school's profit)

$60/hr of $91/hr profit = 61%.

The flight school's $60/hr fee is actually 61% fee.

Highlights of financial pitfalls

Below are the 3 main financial pitfalls I discovered.

1. Huge increase in cost for commercial insurance, higher tiedown fees
2. Mandatory, expensive 50hr and 100hr inspections
3. The 20% fee is actually a 61% fee.

I did not include the tax exemption here, leaving as exercise to you.

Hidden costs of leasebacks

We talked about financial costs of leasebacks,but this is just half the picture. Let's look at hidden costs next. These are more important than what's covered above.

Renters will wear down your engine

Renters will fly at 100% power because they're paying an expensive wet hobbs rate. They won't lean correctly if at all, taxi too fast and ruin your brakes.

I think all pilots have the right intention, but after a 25 minute "hold for IFR release" and a 1 hour weather diversion, you're thinking about that $300/hr hobbs rate and not thinking about flying 55% power LoP. The $3500 bill waiting for your outweighs care for someone else's engine. You're thinking this trip was supposed to cost me only $1500 (and the black knob goes forward).

Renters will break your plane

Let's say a renter forgets to put the dip stick back in the engine and breaks the engine. The overhaul will cost you $40k. The flight school and insurance are not going to help.

This happened to a friend who leased his plane to a flight school in FRG. Renters forgot to put in dipstick, flew the plane, engine seized and they managed to land. His very expensive commercial insurance didn't cover it, $40k overhaul out of pocket. He's lucky they didn't crash the plane, then he'd be liable too, and potentially dealing with loss of life.

Renters will put your life in danger

There is another hidden risk. Renters put your life in danger. If a renter breaks something, while some renters will report it, some will try to cover it up. Every time you fly the plane you inherit this risk of not knowing what happened last flight. You could pop a tire on landing, or lose a cylinder on takeoff. This is tough to catch in preflight.

If you are leasing your plane back to a school, you either didn't do the math at all, or you did it wrong.  Don't be stupid about this. Build a spreadsheet, get non-commercial insurance quotes, subtract your 50hr/100hr inspections and do your own oil changes instead.

Loss of flexibility

• You have go log in to a website before and after flights to track hours and schedule
• Your plane might be booked so last minute trips are never guaranteed
• Your plane will be in servicing for 50hr/100hr inspections at random times and unavailable

My advice to owners who lease their planes back

If you don't fly enough hours to justify sole ownership, get into a FRACTIONAL OWNERSHIP with 2 or 3 partners. 

• Baseline cost increases disappear (normal insurance, cheap tiedown, no 50/100hr inspection)
• All pilots are vested, experienced and incentivized to be good to the plane