Paul Tomblin wrote:

[...]
Well, we're financed by debt - our planes are valued at $500,000 and we've
got a $500,000 line of credit. If we need two engines at the same time,
we just go further into debt and need more time to pay it off. But the
goal is not to get totally out of debt, just to keep the debt at a
managable level - I think right now we're $100,000 right now, because of
the aircraft upgrades and engines we've put in in recent years.

therefore to be taken from the monthly). But, if I've understood
correctly (and as I wrote above) your club is paying for upgrades out of
hourly.

No, out of monthly.

I'm still not following how this works. To my mind, the debt merely acts
like a buffer which permits tomorrow's dollars to pay for today's upgrades.
So it shouldn't change the overall structure.

Perhaps I should be asking how you repay that debt. Is it all paid out of
monthly fees? If so, and if you use debt to fund engine overhauls and
such, then the monthly fees are being used to pay for engine overhauls.

I know that my club wouldn't go for that, and I tend to agree with that.
Paying for overhauls and such - items that occur based upon flight time -
should be charged to the members that fly. A member flying twice as much
as another should pay twice as much into the overhaul reserve.

Paying for overhauls - or indirectly, by repaying the debt of an overhaul -
out of monthly causes all members to pay equally regardless of how much
they fly.

One interesting aspect of my club is that, steady state, we run completely
debt free. Any debts are transient. For example, I mentioned earlier that
we slowly increased our equity to buy a new plane. Rather than await the
completion of the equity increase process, we bought the plane with owed
dollars (some owed to our various reserves, some owed to members that
loaned some money, and - perhaps - some owed to a bank).

The equity growth has long since finished, though, so we're debt free again.

This appears to be a big deal. At least, some of the club members view this
as a significant benefit. As I see debt as a buffer, I'm not sure why this
is a big deal (although it's nice to not be paying finance charges, I agree
{8^).

Well...one nice aspect of avoiding debt for costs like overhauls is that the
users today pay for the wear and tear they put upon the equipment today.
Funding that with debt means that next year's user is paying for this
year's wear and tear.

But if costs are continually rising, paying for last year's use may be the
better deal. Hmm. Then why are owners supposed to accrue reserves rather
than fund the overhaul with debt and then pay that back?

- Andrew