Choice of Economic Service Life (ESL) for FAA Analysis Purposes

January 1999

To ensure consistency across the entire FAA, a single set of economic service life (ESL) estimates is provided in Table 1 for use in all pertinent analyses (NAS Architecture development, capital asset depreciation, investment analysis, capital budget projections, regulatory rulemaking, etc.). These estimates, which will be updated periodically, should be used for all purposes, unless better, analytically justified information is available for specific cases⁽¹⁾.

FAA is currently undergoing a transition in its service life/support philosophy, which requires a distinction in ESL between "custom-built" systems and facilities and "COTS- based" facilities and equipment. In many cases, new FAA systems are being integrated from Commercial Off-the-shelf (COTS) components, whereas existing NAS systems frequently were custom-built to FAA specifications. Essentially, it appears to be no longer cost-effective or even possible to maintain new systems for as long a period as existing custom-built systems, because newer COTS-based systems cannot be maintained by FAA economically. Instead, greater reliance on periodic "refreshment" of COTS-based system components is required to ensure satisfactory performance and supportability at affordable costs.

1. For all custom-built systems (i.e., most existing FAA facilities and equipment that are currently in the National Airspace System), use the values in the left column of Table 1 labeled "Custom-built Facilities and Equipment". These values are derived predominantly based on using physical life.
2. For all COTS-based systems (i.e., most new FAA facilities and equipment), use the values in the right column of Table 1 labeled "COTS-based Facilities and Equipment". These values are derived based either on physical life (for facilities) or supportable life (for systems/products largely composed of commercial off-the-shelf components).
3. In most cases, it is recognized that actual FAA systems will be some mix of custom-built and COTS-based components. In these cases, each existing and future system must be decomposed to its component level, and service lives assigned to each component according to whether the component is or will be COTS-based or custom-based.
4. Three examples of the implementation of this guidance for new facilities and equipment are contained in figure 1. For planning and analysis purposes, component-level replacement is assumed throughout the mission life. An automation system will be refreshed at regular intervals with replacement COTS hardware and software components. A facility would receive regular periodic maintenance (painting, etc.), as well as infrastructure replacement (HVAC, power, etc.) every 20 years. An aircraft would replace its avionics suite after 10 years.

The Economic Service Life (ESL) of an asset is defined as the period of time during which the asset is expected to provide a positive benefit to the FAA. It begins when the asset starts producing useful benefits for the FAA (e.g., Beneficial Occupancy Date for a Facility, Operational Readiness Demonstration for a system) and ends when there is no longer a benefit (e.g., system is removed or replaced with an equal or better system).

While the term is used most often in economic analysis leading to a choice among competing capital investment options, it also has substantial ramifications beyond investment analysis when it is used for accounting and other purposes. For example, ESL may be useful in computing FAA annual depreciation expense. In the same vein, ESL can help predict future FAA capital funding requirements by projecting when capital assets must be replaced.

Generally, economic analysis literature states that the ESL should be taken as the shortest of three lives, each of which is determined separately:

1. The mission life, or the period of time for which a need for the asset is anticipated. This is sometimes called the requirement life.
2. The physical life, or the period of time over which the asset may be expected to last physically. For FAA purposes, "physical life" includes any special actions that may be taken to ensure long-term supportability, such as buy-outs of spare parts and repair parts and arrangements for extended organic support well past normal periods of economic life. For FAA, most existing systems and facilities have had ESLs based on physical life, with extraordinary efforts made in the past to extend service life and preserve operational services.
3. The technological life, or the period of time before which technological obsolescence would dictate the replacement of the asset, even if it were physically adequate. "Obsolescent" is defined by Webster as "becoming obsolete", or so outmoded in design, style or construction that it is no longer appropriately suited to the intended purpose. Essentially, a system is "technologically obsolete" when the benefits of a replacement, as augmented by new technology, exceed the costs of a replacement, also as augmented by new technology.

For FAA, a new definition of supportable life is being introduced, or the period of time for which the asset is satisfactory from an operational performance perspective and can be supportable at reasonable cost and with low mission risk. For FAA, new COTS-based systems and components generally will have ESLs based on this definition. This will usually be longer than technological life or "product life", which is the rate at which new commercial products enter the market, and shorter than physical life.

While technological life might be conceptually preferable to supportable life for FAA analytical purposes, it has several practical problems that weigh against its use, First, it is very difficult to predict ahead of time, since no one knows the rate of future technological change nor how it will actually impact NAS operations and economic performance. Second, its actual application would require continuous cost-benefit analysis – an unreasonable burden for IPTs and others seeking to plan and maintain a robust National Airspace system. Lastly, it is incompatible with FAA’s budgeting realities. The budget cycle is too long to accommodate technology-based rapid replacement, and there are insufficient funds to permit frequent replacement. Conversely, supportable life is more predictable and stable, because it is based on the historical and projected practices of vendors (i.e., how long they have (in the past) and will (in the future) support older models as they continually introduce newer models), and is more compatible with the actual manner in which FAA plans to support its NAS systems in the future (through technology refreshment and technology insertion).

Mission life tends to be indefinitely long for most FAA facilities and equipment, since the FAA missions tend to require the same functional capability year after year (i.e., surveillance, etc.) in the same geographic locations. Therefore, for FAA, supportable life tends to be the driver for determining economic service life at the lowest life-cycle cost.

To a large degree, the economic service life of an FAA asset is driven by FAA intent and by the system design and support concept; i.e., whether the system as originally built was custom-built using FAA specifications ("custom-built") or integrated from mostly commercial off-the-shelf products ("COTS-based"). In the past, most FAA systems were custom-built. When a product is custom-built to FAA specifications, and there is no substantial commercial market for the product, FAA typically intended to maintain and operate the asset for as long as it lasted. FAA built in a major in-house support capability to achieve a long service life. In these cases, the entire system was typically replaced at the end of its life. The values for systems and components in the left column of Table 1 are based on this philosophy and support concept.

The facility ESL of 40 years is the same ESL for all buildings used throughout the Federal Government. It assumes adequate funding is available for routine building maintenance (painting, fixing the roof, etc.), and that interim refurbishment (e.g., HVAC replacement) is accomplished during the ESL of the facility itself.