How we helped a Private Equity client in conducting a break-even cost analysis between two private jet contracts

March 17, 2023

The Context

The client, a Private Equity firm wanted the TresVista team to conduct an operational cost analysis between whole ownership and fractional ownership of an aircraft. The team was required to prepare a model to analyze the cost variables and use the model to return the break-even point for the most cost-effective asset utilization. Further, the variable, fixed and ancillary operating costs to be incurred as per contracts of both long–term assets needed to be identified. Additionally, the differential pricing to calculate variable operating costs at different usage levels for the Fractional Ownership Agreement needed to be identified as well. Lastly, the team was required to locate Inflection Point on the usage hours of both assets.

The Objective

To conduct a break-even cost analysis between two private jet contracts for ascertaining the cost efficiency between purchasing and leasing an aircraft.

The Approach

The TresVista team followed the following process:

  • Consolidating Operating Costs: Identified and consolidated all variable and fixed operating costs based on the contracts
  • Preparing Purchase Price and Depreciation Schedule: Prepared a purchase price matrix and built a depreciation schedule assuming the salvage value % and estimated life
  • Analyzing Hourly Usage: Analysed the total and hourly cost for different usage levels ranging from 100 to 1000 hours
  • Designing a Console tab: Designed a console tab where the client can select various parameters as required
  • Showing the Inflection Point: Created a graph using the analysis matrix, showing the inflection point between the hourly costs

The Challenges We Overcame

The major hurdle faced by the TresVista team were:

  • Under Contract 1, the long-term asset had future revenue potential based on usage, whereas Contract 2 had zero revenue potential due to which it was difficult to obtain parity between both the contracts

The TresVista team overcame this hurdle by calculating and then deducting the net revenue projections arising from the Contract 1 model for comparable analysis to achieve parity between Contract 1 and 2.

Final Product (Sanitized)

The Value Add – Catalyzing the Client’s Impact

The TresVista team created the model which incorporated estimated data for future years as well. Hence, the model could be used by the client to assess the costs for the upcoming years. Further, a console was created using data validation tools that extracted data from all input points to make it easier for the client to add/edit data at their end as well.