Review of the Options for an Air Combat Capability
(February 2001)
Annex B - Costing Assumptions
Operating Costs
Level of Capability
The standard assumption for the baseline, Option 1 and Option 2 is the ongoing operation of the air combat force at DLOC.
Cost Changes Included
Cost changes arising directly from decisions on the capability of the air combat force are included. These decisions include capital investment for the existing aircraft and their replacement.
The cost changes due to a base closure are not included. The closure of a base is taken as a separate decision in this costing.
Baseline
The costing baseline is the budgeted personnel and operating expenses and depreciation costs for FY 2001/02 in Vote: Defence Force Output Class D11 – Air Combat Forces. As the basis for comparison, the budgeted personnel and operating expense, and revenue, adjusted for the termination of Nowra-based operations after FY 2001/02, are extrapolated across the ten period of the review. Baseline depreciation is the forecast amount by year from the NZDF accounting system for the A-4 and Aermacchi fleets.
Transition
It is assumed that the cost of the transition from the A-4 to a replacement aircraft can be managed within the total operating costs presented.
Fuel
The base fuel prices used are those current in February 2001.
Other Costs
Capital charge is excluded because it is not a charge against the Government's operating provisions.
It is assumed that all reductions in asset value will be met from the NZDF's revaluation reserve ($387 million at 30 June 2000).
Revenue
The forecast ENA costs and revenues are based on the FY 2000/01 cost sharing ratio.
GST
GST is included to provide consistency with the requirement for Cabinet submissions. Any exceptions are noted as GST exclusive.
Inflation
Price and wage inflation are excluded from personnel and operating costs.
Materiality
Cost effects rounded to the nearest NZD $1 million.
Capital Expenditure
Foreign Exchange Rates
Financial data are presented in New Zealand dollars. The exchange rate applicable to asset purchases in each year are:
| Year | Rate: NZD:USD |
|---|---|
| 2001/02 | 0.475 |
| 2002/03 | 0.536 |
| 2003/04 | 0.533 |
| 2004/05 | 0.525 |
| 2005/06 | 0.52 |
| 2007/08 | 0.52 |
| 2008/09 | 0.52 |
| 2009/10 | 0.52 |
| 2010/11 | 0.52 |
| 2011/12 | 0.52 |
These figures are Treasury projections using averaged forecast quarterly rates for each year through 2004/05 inclusive; remaining years use approximately the 2004/05 average.
Aircraft Values
A-4 Skyhawk
A revaluation of 19 A-4s at both FY 2001/02 and 2004/05 is included with the consequent changes in depreciation. The revaluation is based on the value of F-16 C/Ds as the replacement aircraft, plus initialisation, support and air weapons. The capability factor used in the revaluation is estimated at 40 percent.
Capital expenditure of $26 million (GST exclusive) is required on the 19 A-4s to keep them airworthy and usable for training to FY 2007/08. For a reduced fleet of 14 A-4s the figure is $11 million (GST exclusive).
All Options exclude expenditure on upgrading the internal avionics and weapons control systems for the A-4 to enable it to interface with a targeting pod or electronic counter measures pod. Given the A-4s limited remaining service life, expenditure on such equipment would be uneconomic. Accordingly, all Options also exclude expenditure on self-protection, air weapons, and targeting and ECM pods during the remaining life of the A-4 (see Replacement Aircraft section below).
A-4disposal value will be nil by FY 2007/08. Earlier disposals in whole or part will not produce material sale proceeds. Partial disposals would be used for rotables/spares for the remaining fleet.
Aermacchi
Full or partial disposals of the Aermacchi fleet may generate material sales proceeds, however due to considerable uncertainty as to the level of such proceeds they are not included in the cash flows.
Replacement Aircraft
The cost of used replacement aircraft is estimated at $49 million each (GST exclusive), including fatigue monitoring, initialisation, hush house, and air weapons, with the airframe alone at $29 million, i.e., USD15 million. New, standard F-16 C/D airframes sell for USD 24 million each (GST exclusive).
The replacement aircraft are assumed to be ten years old with about twenty years remaining service life for depreciation purposes.
Alternatives to outright purchase of the aircraft may be possible. There are examples of finance lease options for air combat aircraft overseas to suggest that New Zealand may well be able to secure such an offer. While this would be at a higher interest rate (and hence total cost) than the Crown's usual cost of debt, it would relieve pressure on capital funds due to payments being spread over a longer period, allowing depreciation funding to keep. For this reason, a ten-year finance lease option has been included for costing the airframes.
Self protection and reduced radar cross-section are assumed to be included because it is reasonable to expect F-16 C/D models to come fitted with these capabilities as standard. Targeting and ECM pods are omitted from all costings on the basis that it is unknown what other capabilities a replacement aircraft would already have, and the pods represent a material capability increase which would be a separate capability / investment decision.
Capital expenditure for asset purchases is spread over the FY 2008/09 to FY 2010/11 period.
Other Capital Expenditure
Runway reconstruction is planned at both Ohakea and Whenuapai in the ten-year period. The expenditure, estimated at $16-18 million (GST exclusive), is dependent on the continued operation of the base rather than on the type of aircraft flown.
