Finding Growth in a Changed World see more
NAFA member, David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares his perspective of business aviation amid the pandemic.
Shifting markets are creating new opportunities in a world altered by COVID-19. Here are some to consider.
WITH EVERY NEW YEAR COME HOPES FOR A BETTER WORLD, and 2021 is fairly bristling with them. Of particular relevance to equipment finance companies is the Equipment Leasing & Finance Foundation’s 2021 Equipment Leasing & Finance U.S. Economic Outlook, which forecasts 7.8% growth in equipment and software investment this year, and 4.7% growth in the U.S. Gross Domestic Product. Heartened by plans for widely distributed vaccines against COVID-19, industries and the companies within them are re-tooling to apply permanently many of the technologies and efficiencies necessitated by the pandemic. Equipment Leasing & Finance spoke to leaders in several equipment sectors experiencing changes that are leading to growth.Here’s what we learned:
There’s a Window in Trucking
Howard Shiebler is President of Crossroads Equipment & Finance LLC and Chairman of Velocity SBA, both in Rancho Cucamonga, California. Financing commercial trucks for transportation companies gives him a strategic view of one of the largest and most dynamic sectors in equipment finance. “We’re in an abnormally strong market now, both with values and the demand for tractors and trailers,” he says. “For those financing in this space, new business volume is up and repossessed inventory is selling quickly, and at good prices.”
The big question is how long current conditions will last. Increased consumer spending, much of it done online, helped freight markets recover quickly from initial pandemic shock. If economic recovery continues, Shiebler expects the strong transportation market to last well into 2021.
“Additionally, manufacturers of trucks and trailers have had their supply chains and work forces impacted by the pandemic, and the corresponding shortage of new equipment has driven demand and prices for used equipment to unusually high levels,” Shiebler notes. He adds, “I think some e-commerce-driven demand will become permanent, and manufacturers will eventually catch up with market demand, leading to a more typically cyclical transportation finance market.”
Nonetheless, Shiebler says equipment finance companies must still do a thorough job of underwriting in the space or risk getting into trouble. “When the economy slows, we’ll see freight rates drop, defaults increase and used truck prices drop fairly quickly,” he warns. “Lenders that understand this cycle underwrite to it, and they also properly staff collections and remarketing operations to deal with increased defaults.”
Healthcare Providers Want More Options
Jon Biorkman is President of Healthcare Financial Services at GE Healthcare. As the dynamics of the medical equipment market change, he sees healthcare providers revisiting budgeting, capital structure and other fundamentals of corporate finance to re-evaluate strategy and develop multiple scenarios for use in times of economic uncertainty.
“To account for variability, leadership teams are examining operating and non-operating cashflows, liquidity sources and cash on the balance sheet,” says Biorkman. “And as market dynamics continue to change, we’re bringing optionality to the table. This can be in terms of structure that allows for the deferment of a more permanent position, or increased liquidity to protect against unpredictable variability in patient volumes, payors and reimbursement trends.”
One such option is an escrow agreement that pre-funds capital for future equipment acquisitions. “The benefit is to lock in interest rates today, and secure capital for upcoming needs,” says Biorkman. Another option shortens the lease term, enabling equipment usage without full capital outlay.
“Creativity is something that matters to customers, and if we look at the market we’ve been operating in, it’s been incredibly dynamic,” Biorkman observes. “We view our role as providing customers with options for a future that may not be certain. We’re having candid conversations with them, being very grounded as it relates to financial projections—where they were before, where they are now, where they’re going. Liquidity and cash on the balance sheet have always been important, but today, customers are placing a premium on both—and alternative financial structures can really provide more tools.”
Aircraft Has Pockets of Promise
David Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, in Dallas, says the COVID crisis created a potential cash crunch for some owners of aircraft, and that a significant number of these are refinancing or entering into sale-leasebacks to cash out their equity in the equipment. “This is a global phenomenon, also driven in part by lower interest rates,” says Mayer. The upshot: opportunities exist in sale-leasebacks for those able to take residual risk, not just in tax leases, but in true or operating leases.
Mayer says there are also leases in which the credit advanced is fully paid out and the asset is sold for a purchase price at the end, which can be as low as $1 or another agreed price. “These deals have been active since the emergence of the pandemic and since rates have dropped,” he says. “I expect this trend to continue into 2021.”
Mayer has handled a number of such transactions and sees a particular market for the refinancing of larger jets with a value of $7 million or more. “One challenge for equipment finance companies will be to persuade customers that they won’t suffer ‘brain damage’ from engaging in a financing transaction,” says Mayer, tongue in cheek. “I say that because, compared to purchasing or borrowing, leasing is a more complex transaction.” Another deterrent among high-net-worth individuals and companies is pride of ownership and reluctance to use a financing product or allow a lessor or lender to control use of their aircraft.
“Make no mistake, the market is under stress and the pandemic is not helping,” Mayer cautions. “Companies that buy, lease or charter aircraft are leaving the business. But financiers are ready, able and willing to finance, and are doing more secured loans than true leases because they’re unable or unwilling to take the risk on the value of these assets.”
The aircraft market was on a downslope that started in 2019, and prices dropped another 10 to 15% at the start of COVID-19 before showing later indications of stabilizing. “But owners didn’t panic and sell; they were smart enough to stand by and wait—unlike what happened in 2008,” says Mayer. “Now equipment finance companies can provide these owners with smart and viable solutions in the form of true leases, tax leases, loans and sale-leasebacks.”
Small Businesses Need Your Capital
Marlin Capital Solutions provides equipment financing, working-capital loans, vendor financing and franchise financing to approximately 100,000 small businesses throughout the U.S. Thus, the company’s portfolio is a small-business index for sentiment and economic health, and CEO Jeff Hilzinger says the pandemic put the company “right at the center” of the 2020 economic storm.
“After ensuring the safety of our employees and the stability of our financial portfolio, we transferred people from our front office to our servicing team and immediately began reaching out to customers,” says Hilzinger. “We processed almost 6,000 requests for payment relief, most of them during April and May. And because we own a bank, we have an SBA license and were able to lend under the PPP program. We quickly created a platform to do that. Along with the payment relief we were providing, our goal was to preserve as much liquidity for our borrowers and in our own portfolio as possible.”
As Marlin helped its customers, the company also saw an opportunity to help itself. “The PPP platform we obtained was digital, and we’d always known we needed to become more digital,” says Hilzinger. “Once we took care of our employees, partners and customers and saw that the pandemic would last a while, we realized it could be a crisis of opportunity for us. We decided to dramatically accelerate our digitization and have been focused on it since June.”
In 2015, the New Jersey-based, small-ticket Independent had introduced a working-capital loan product to compete against fin techs. “We were always careful with it, because it hadn’t gone through a complete business cycle,” says Hilzinger. “But it turns out that the product performed much better than we expected, so now we’re redoubling our efforts
Because the small-business market resides next to the consumer market, Hilzinger says much of what consumers do with their personal credit can be projected for use in small business. “Once customers can access us digitally, we’ll be able to offer lines of credit and other micro-ticket products that were too much work to provide when our processes were manual,” he says. “Now we can offer these in ways that will be exciting to small businesses, and of economic benefit to us. Going digital definitely opens up new opportunities.”
Schools Urgently Need IT
Insight Financial Services (IFS) in Costa Mesa, California began studying the nuances of the k-12 school market about six years ago with the goal of doing business there. Through networking, they were introduced to OETC, an Oregon-based consortium that offers contracts for products supplied to K-12 schools and universities throughout the Pacific Northwest. “Needs were starting to change for schools at the time, and one of our customers suggested we talk to OETC about the consortium developing an RFP for school districts to lease IT,” says Andy Hashimoto, Vice President.
Over the next year, Hashimoto and Colleen O’Donnell, IFS Senior Vice President of State, Local and Education Business, explained to OETC the benefits municipalities and schools could leverage through leasing. A contract with IFS would allow OETC-member schools to acquire equipment without requesting proposals.
“What we found with many schools is that their previous plan had been to put equipment in the classroom with teachers and keep it until it didn’t work anymore,” says O’Donnell. “But the idea was evolving that schools need a sustainable strategy for IT and a budget to support it. They need technology that matches the curriculum, technology for both students and teachers that brings digital learning to life.”
COVID-19 greatly accelerated the need, and this past October, IFS was awarded a three-year contract as an approved IT equipment leasing services vendor in California. The contract is in addition to a nationwide agreement IFS already has with OETC, and expands the services the company can provide in California.
“This is a growing market for us, and we’ve experienced significant growth over the last couple of years,” says Hashimoto. “Today, school districts need large numbers of devices, and these can be acquired through a leasing contract that manages the entire life cycle.”
To that point, Hashimoto says much of IFS’s growth in the school market is attributable to asset management services included in the company’s contracts. “The asset management is geared to specific devices and allows school districts to be in control of what happens to the equipment,” he says. And because IFS tailors its leases to individual school-district budgets and needs, IFS is able to serve every customer. “We invest the time with each school district to customize the solution so that it works specifically for them,” says O’Donnell. “We structure from beginning to end to help them have the technology they need to support learning in the classroom and from home.”
Asked for suggestions for other equipment finance companies considering the school market, Hashimoto and O’Donnell have several thoughts. “Colleen and I have joked that we are evangelists for leasing, but it’s true that customers need to be educated about how leasing can help them,” says Hashimoto. “Our message about this has been the same since we started with the education market, but with COVID-19 driving and accelerating the need for IT equipment, what we had to say became that much more important and understandable. Communicate often with your customers, and explain clearly how leasing can be a solution for budgets, for obtaining the equipment they need, and for controlling what happens to that equipment at the end of the lease.”
Adds O’Donnell, “I’d say the willingness to be nimble, to explore the market deeply and invest time communicating with prospects and building relationships, is extremely important. Working this way is a cornerstone of our business, and by doing it, we’re in a position to respond immediately when needs change or a crisis arises. It’s how we provide solutions our customers are looking for.”
This article originally appeared in Equipment Leasing & Finance Magazine's Jan/Feb 2021 Issue.
Top 5 Myths About Business Aircraft Operating Leases see more
NAFA member, Global Jet Capital, explains myths commonly associated with business aircraft operating leases.
There are more options today for accessing a business aircraft than ever before: from charter, to fractional ownership, to operating leases, to traditional financing. When dealing with large, highly-regulated assets that could cost tens of millions—or more—to own, weighing the options to find what makes sense for your specific requirements can be difficult. To make navigating the sometimes-complex landscape of business aviation a little easier, we’re going to clear up five common myths around operating leases—and explain some of the advantages of this frequently misunderstood financing option:
1. OPERATING LEASES ARE TOO RESTRICTIVE—IT’S BETTER TO OWN.
Operating leases let you keep your aircraft for the duration of the lease, which means consistently using your crew, being able to leave your personal effects on board, and enjoying the experience of ownership while putting your capital to better use. Some restrictions on customization that could potentially impact residual value and other usual lease terms apply, but limitations fall within normal patterns of ownership. With the right lessor, you can expect contract terms that are flexible and fit your unique needs, which make the experience of having an operating lease feel anything but restrictive.
Additionally, an operating lease with a predictable term makes disposition as simple as turning the aircraft back over to the lessor at end of lease—no additional planning or contingencies needed. Compare that to attempting to sell an aircraft when it’s time to upgrade or make changes to your operations. From hiring a broker, to waiting for months (or even years, in extreme cases) to find a buyer, to paying the costs of maintenance, insurance, and storage in the meantime, you may be looking at millions lost in the process.
2. YOU’RE STUCK IN A CONTRACT WITH AN OPERATING LEASE, WHICH MAKES IT INCONVENIENT WHEN YOUR BUSINESS CHANGES.
It’s true that operating leases are contractual, while owning a business aircraft outright is not. But, contracts can be created that adjust easily to a changing mission—including allowing for moves to larger or smaller aircraft, the option to extend, or the option to prematurely end the lease altogether. With the right financing partner, you can expect a flexible, custom-tailored contract that feels right.
In fact, ownership may have risks and limitations that exceed the limitations of a contractual obligation in an operating lease. If a major uptick in your international markets means that your newly purchased mid-range aircraft is no longer up to the task of supporting your business goals, you bear the risk of waiting a long time to sell with capital tied up in an asset that doesn’t suit your needs. When you’re finally able to sell and need to purchase a new business aircraft with a longer range, you’re looking at a potentially lengthy process to secure traditional financing from a lender, coupled with a much larger capital outlay than the refundable security deposit for a lease.
3. OPERATING LEASES MAKE SENSE IN BAD RESALE MARKETS OR WHEN INTEREST RATES ARE HIGH, BUT NOT WHEN RESALE VALUE IS STRONG OR WHEN INTEREST RATES ARE LOW.
Even if there is a strong resale market or low interest rates when you choose to purchase an aircraft, consider the risk that you’re taking on with the large outlay of an aircraft purchase. Traditional financing typically requires large down payments and due to volatile geo-political situations, emerging technology, and the natural realities of market fluctuation, there’s no guarantee that a strong resale market for your aircraft will be there when you choose to sell. That low interest rate environment may be gone, which won’t help entice buyers to purchase your pre-owned aircraft. In the meantime, you may have paid more for a depreciating asset.
Operating leases eliminate residual value risk and provide predicable costs for the duration of the lease. Budgeting stays precise, liquidity stays high, and the future becomes clearer. The resale market doesn’t come with any guarantees—an operating lease contract does.
4. OPERATING LEASES ARE ONLY FOR CERTAIN KINDS OF AIRCRAFT. YOU CAN’T JUST GET WHATEVER YOU WANT.
Whether you have your eye on a new or pre-owned aircraft, or if the pre-owned aircraft you’re interested in is a little older than what you would typically expect for a leasing arrangement, there are very few limitations to what can be obtained with an operating lease today.
Specialists in business aviation financing like Global Jet Capital look to spread risk across a large portfolio, encompassing aircraft from every major manufacturer, every global market, and a variety of age ranges.
5. YOU CAN ONLY ACHIEVE PRIVACY BY PURCHASING AN AIRCRAFT, NOT LEASING.
If privacy is important to you, a leased aircraft may actually provide an additional layer of anonymity. An operating lease reduces visibility to an aircraft’s end user, as the public records of the FAA identify the lessor as the owner of the aircraft, giving you greater privacy.
This article originally appeared in Business Jet Traveler, February 2021.
Four Actions to Increase Quality Charter Revenue for Your Aircraft see more
NAFA member, Clay Lacy Aviation shares ways to increase your aircraft's charter revenue.
Aircraft owners routinely ask aircraft management companies: How can I maximize charter revenue for my aircraft? The most common answer is often something like “charter the aircraft more hours.” It is a simple answer—it is also wrong. While flying more hours increases gross revenue, you will sacrifice hourly profit margin which does not maximize revenue for the aircraft owner. Why? The rules of supply and demand, and variable expenses. The largest variable cost, accounting for 51 percent, is fuel. More fuel is burned in the first hour of flight, due to climb, than in hours two, three, four and so on, which means the owner earns less revenue on that first hour. Monitoring average leg segments is something your manager needs to manage.
Historically, aircraft owners will require approval for each charter before it happens—often adding surcharges to make the trip more profitable. This owner release, as it is known in the industry, makes the plane less competitive in the market and drives charter customers to the next best alternative.
The recent introduction of the branded charter model (Wheels Up, XO, VistaJet) has made owner approval charters even less competitive. Branded charter jets are owned by the company, dedicated to charter and do not need additional barriers. It is an attractive proposition for the customer.
So how can aircraft owners maximize charter revenue and compete in the current market? Here are four actions to take.
One: Establish clear revenue expectations.
Establish clear revenue expectations for each annual period, with your management company. Then ask for quarterly reports to track how the aircraft is performing. Quality management companies will dynamically flex pricing on a trip-by-trip basis. Giving the company this flexibility will ultimately provide the aircraft owner with higher hourly returns, more consistent revenue and allow the aircraft to compete in a rapidly changing market.
For each aircraft, there is an optimal rate where the contribution margin is highest and most efficient. But owners have two options to pursue when offering their aircraft for charter: One, the optimal margin or two, operating cashflow goals. Just be aware that adding hours beyond the most efficient price will diminish returns.
Two: Keep restrictions to a minimum.
The more restrictions you place on the aircraft and management company, the less attractive your aircraft will be in the highly competitive charter market. A long, detailed list prohibiting things like red wine, children under eight, pets, short cycles and so forth will make your aircraft nearly impossible to charter. Instead, trust your management company to protect and maintain your aircraft properly. If the plane requires additional cleaning or a repair, the management company should cover the cost and charge the charter customer accordingly. Lastly, check your aviation services agreement to make sure that is defined for your protection.
Three: Co-locate your pilots with your aircraft.
Owners often allow their pilots to live in cities far from where the aircraft is located. While this is a perk for the pilots, it means they must fly commercially to and from the jet’s location before and after every charter flight. This not only adds additional cost to the charter, making it less competitive, it also significantly reduces the duty time and/or availability of the aircraft. The smarter and far more profitable move is to co-locate plane and pilots. If your aircraft is based in a city with multiple airports, there is usually one airport with significantly higher demand, but correspondingly higher parking and fuel prices. Your manager can provide an airport base comparison to help you make an informed decision (demand, fuel, hangar, maintenance resources and repositioning costs) if that relocation would help achieve your goals.
Four: Release owner approval of individual charters
Finally, remove the sales barrier created by owner releases. Instead, require quarterly trend analysis on the hourly contribution margins. This simple and profound adjustment allows flexibility of the sales process, optimizes availability and allows adequate time to generate trends. In today’s highly competitive “look-and-book” market, where charters are increasingly confirmed online in real time, this gives your aircraft a competitive advantage.
This article was originally published by Clay Lacy Aviation on November 2, 2020.
To Charter or Not see more
NAFA member, Brian Proctor, CEO of Mente Group, discusses the benefits of charter.
There have been numerous articles exploring the benefits of charter.
There have been innumerable cases of management companies telling owners and potential owners that they will “make money” owning and chartering a jet.
In this article we will review a client case where we studied the true marginal return of chartering, explore the “make money” assertion, and analyze the situations when operating Part 135, in a charter environment truly makes sense.
The Client Case: To Charter or Not to Charter
Recently, we were approached by a long-time client who owns a Challenger 604. The client was approached out of the blue by an aggressive management operation, offering to manage the client’s aircraft, put it on a Part 135 certificate and to hold it out to third-party users of the aircraft. The manager provided a very detailed operating proforma showing the “profits” that the client would make, along with a slick brochure indicating that the aircraft would “pay for itself”.
We recommended to the client that we perform a true “Margin Analysis” based on a per-hour return. In the analysis, we assumed three-hundred charter hours per year. We factored in the Charter Revenue and Fuel Surcharge, along with the Direct Operating Costs and brokerage Fees for the aircraft. In addition, we factored in non-cash costs associated with each hour of flying, including:
- Blue Book based residual value charge per hour
- Wear and Tear to the Paint allocated per charter hour
- Wear and Tear to the Interior allocated per charter hour
As part of the analysis, we did not factor in any costs relative to fixed maintenance for the aircraft, including the 96 Month Inspection, lesser inspections, gear overhaul, etc.
As a net result, the client would receive Five-Hundred Eleven ($511) Dollars per hour of net charter margin, or $153,300 on an annual basis. When compared to the owner’s fixed cost of operations, approximately $600,000 annually, the charter margin offset approximately one-quarter of the fixed costs. When factoring capital (or a better analysis of residual value loss), chartering does not come close to “making money”
As you can imagine, Mente Group is often asked to study charter as a way to “have the aircraft pay for itself”. We’ve run hundreds of scenarios. Most typically, we will be asked to review 150-250 hours of owner usage, augmented with 100-200 hours of third-party charter. The findings generally point to the same conclusion. Under most usage patterns, we’ve found that, at best, chartering your aircraft helps to offset the fixed cost burden of the aircraft.
So, you’re probably asking, “at what point does charter pay for the plane?” We’ve done the analysis. But, before we go to the answer, you must remember that as utilization increases, pilot staffing needs to increase as well. So, based on the findings, a 4.5 pilot organization, flying 100 owner hours a year and 700-750 hours of charter comes close to covering the owner’s usage and covering the fixed costs. (it still won’t cover the major fixed maintenance inspections.) Not until you approach 1000-1200 hours of charter alone (depending on aircraft type) do you approach break even. To approach this level of utilization, along with the increased crewing requirements, your airplane must ‘float’ becoming nomadic without a traditional home base or hangar. Additionally, your aircraft becomes part of the wholesale market, with a client base focused on the lowest price, not the best aircraft. Clearly, it is very difficult under normal operations to ever make money chartering an aircraft.
When Chartering Makes Sense
As we’ve worked with clients all over the US, we’ve come across several situations where chartering does make sense:
- Sales/Use Tax Mitigation: There are several US states that waive sales / use tax on aircraft used primarily in commercial operations. Some of the states call this a “Rolling Stock Exemption”. In this case, the owner is advised to work closely with aviation tax counsel to structure an operating model that not only exceeds the requirements, but also has appropriate record keeping systems in place to defend against almost certain audit.
- Property Tax Mitigation: Like sales tax, certain property taxing authorities around the country waive or significantly reduce property tax on aircraft used in commercial operations. Taxing authorities vary greatly on this, and the analysis needs to be conducted at the state, county and even the city level.
- Related Party Usage and Reimbursement: In a situation where an owner wants to allow a related party (friends, colleagues, a business, etc.) use of an aircraft and get reimbursed, operating Part 135 and chartering the aircraft to them is an easy way to achieve the desired results. This avoids the pitfalls of unintentional illegal charter –a hot issue today with the regulatory authorities
- Optics: Often times, client companies will charter their aircraft to improve the optics of ownership by having the aircraft “making money” when the corporation isn’t using it.
- Liability: This ties back to an FAA concept of “Operational Control”. When a Part 135 Operator is operating your aircraft, operational control of the aircraft shifts from the owner to the operator. Theoretically, this then shifts liability in case of an accident or incident to the operator.
- Fixed Cost Offset: As mentioned above, chartering allows an owner to reduce the fixed cost of ownership, but rarely eliminates them.
Obviously, the decision to hold-out your aircraft for charter is a complex decision. In many ways, it can simplify operations and reduce the cost of ownership, but there’s no way to eliminate it. Much like renting out your vacation home, once you make the purchase decision, you can consider whether you want to rent it out to offset some of your costs. But it won’t pay for the asset – including capital and operating expenses – much less make money. Otherwise, we’d all own money-making charter airplanes as part of our investment portfolio. And we don’t. Feel free to reach out to the team at Mente and we can help you explore this topic in greater detail.
This article was originally published by Mente Group on October 30, 2020.
Aircraft Share Options Explained: Fractional Jet Ownership vs. Charter vs. Jet Card see more
NAFA member, H. Lee Rohde, III, President and CEO of Essex Aviation, discusses discusses private jet share options.
Flying private has long been a popular alternative to flying commercial due to the luxury, privacy, and convenience it affords — but now, in these uncertain times, flying private also provides a much-needed sense of security and peace of mind. As a result, a growing number of individuals are starting to explore private jet share options, particularly fractional ownership, charter programs, and jet card programs, each of which offer the same amenities as outright acquisition with less of a commitment.
In this blog post, we’ll compare fractional jet ownership vs. charter program vs. jet card program to help you find the private jet share option that best meets your unique travel needs.
Table of Contents
- What is a Private Jet Share?
- What is Fractional Jet Ownership?
- When Does Fractional Jet Ownership Make Sense?
- What is Private Jet Chartering?
- When Does Private Jet Chartering Make Sense?
- What Are Membership & Jet Card Programs?
- When Do Membership & Jet Card Programs Make Sense?
- At a Glance: Fractional Jet Ownership vs. Charter vs. Jet Card Programs
- Fly Safer with Essex Aviation
What is a Private Jet Share?
As implied by its name, a private jet share refers to any private aviation program in which you own or lease a share of an aircraft rather than own it outright. There are multiple private jet share options to choose from, including fractional aircraft ownership, private jet membership or card programs and private jet chartering. How a private jet share is structured depends entirely on the program, aircraft model, and number of hours utilized.
What is Fractional Jet Ownership?
Those interested in fractional ownership purchase a share of a specific aircraft type and agree to an annual amount of allotted flight hours. Most fractional ownership programs require a minimum size share of 50 hours of flight time per year, though this can vary depending on the provider. The maximum share size is 800 hours of flight time per year, which is roughly equivalent to ownership of an entire aircraft.
Fractional ownership shares are acquired from the company that operates the aircraft and that has a designed shared ownership program and services agreement in which all share owners participate. This company also employs pilots, cabin crew and flight operations coordinators, administers maintenance and covers airport and hangar fees and insurance, which can be attractive to individuals who want the benefits of aircraft ownership without the responsibility. Some fractional ownership programs even provide the option to upgrade or downgrade the size of the aircraft depending on your trip requirements.
When Does Fractional Jet Ownership Make Sense?
Although the total cost, including the share acquisition or lease, is more expensive than other alternatives, fractional ownership doesn’t require you to pay a “deadhead cost” — that is, any costs incurred from positioning the aircraft at your departure point. Additionally, it’s possible to sell fractional shares back to the program provider, though these shares tend to depreciate more due to their high level of annual utilization, resulting in lower residual values.
Fractional ownership is a popular option among those who frequently travel for business-related reasons because it offers tax benefits. Frequent fliers also appreciate the consistency and continuity that fractional ownership offers. Most groups that operate fractional programs, such as NetJets, FlexJet and AirShare are highly reputable and have well-documented, standardized procedures for everything from how they vet operators to how they sanitize aircraft between one flight and the next.
Fractional aircraft ownership is ideal for individuals who want the experience of flying with an organization with a dedicated fleet of aircraft, pilots, and crew, and who require the flexibility to avoid duty times and other restrictions.
What is Private Jet Chartering?
Private jet chartering is an on-demand service that enables you to compare pricing and amenities for various aircraft types and book the one that best meets your travel needs in much the same way as you’d book a seat on a commercial flight. Those interested in chartering have the option of working with either a charter operator or a charter broker, though it’s best practice to work with a private aviation consultant before considering either option.
When Does Private Jet Chartering Make Sense?
Of the three types of private jet share presented in article — fractional jet ownership vs. charter vs. jet card — private jet chartering requires the least commitment, both in terms of time and expense.
In fact, chartering is the most popular private aviation option due to the fact that it doesn’t require a significant capital cost upfront or fixed costs associated with maintenance and staff salaries — all you have to pay for is the utilization of the aircraft on a trip-by-trip basis. This makes chartering ideal for anyone who wants the private aviation experience without any of the responsibility. It’s important to note, though, that what you save on chartering, you’ll make up for in terms of non-guaranteed availability in a specific aircraft type: It can sometimes be challenging to find an aircraft that meets both your specific needs and your schedule, so you may be forced to choose between one and the other.
What Are Membership & Jet Card Programs?
Membership and jet card programs, though often referred to interchangeably, are structurally unique. With a membership program, you agree to a fixed cost per hour at the start of the contract and are billed after each flight. You’re also typically subjected to either monthly management or annual membership fees.
There are two types of jet card programs: a dedicated service with a predetermined number of hours on a specific aircraft type or size category, and a debit card service that enables you to fund an established travel account and select the aircraft category on a trip-by-trip basis with agreed-to hourly rates. Depending on the program, the provider will either quote you for a certain number of hours during booking and bill actual time upon completion of the trip or deduct the final total cost of the trip from your balance after it is completed.
When Do Membership & Jet Card Programs Make Sense?
Much like chartering, membership and jet card programs are best suited for individuals who want a short-term commitment and require a much lower investment than fractional ownership. Jet card programs, in particular, are appealing because they come at a fixed rate. There’s no need to negotiate the price for each flight — just add money to your jet card account and go. In some cases, you can even cancel your membership and get a refund for unused hours if you’re dissatisfied with your service, which makes jet card programs one of the most accessible points of entry to the private aviation market.
Another compelling reason to consider a membership or jet card program is because most major private aviation companies offer them, making them a reliable option. When evaluating either membership or jet card programs, be sure to work with an experienced private aviation consultant who can steer you toward a reputable company and help you understand the relationship between the program provider and the aircraft you intend to utilize.
If you’re interested in joining a membership or jet card program, keep in mind that they often come with a longer advance notice requirement to schedule an aircraft. This is less of an issue if you’re the type of traveler who books their trips well in advance but can be challenging if you frequently make last-minute travel arrangements, especially during peak periods such as holidays.
At a Glance: Fractional Jet Ownership vs. Charter vs. Jet Card Programs
Fly Safer with Essex Aviation
If you’re in need of private aviation assistance, Essex Aviation Group is here for you. From private jet charter consulting to new aircraft acquisition to aircraft completion management, we offer a wide variety of services tailored to support the travel needs of each and every customer. Contact us today to let us know how we can help you find the private jet share option that’s right for you.
This article was originally published by Essex Aviation.
Clay Lacy Aviation Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. – Feb. 4, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that Clay Lacy Aviation has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Clay Lacy to our association,” said Ford von Weise, President of NAFA.
Founded in 1968 by an aviation legend and industry pioneer,Clay Lacy Aviation is considered one of the world’s most experienced operator of private jets. For the past 50 years the company has managed, maintained and globally operated jet aircraft from every major manufacturer- serving business and world leaders, Fortune 500 companies, government agencies, professional athletes, sports franchises, celebrities and dignitaries.
“NAFA brings together talented leaders from across the business aviation industry and we are delighted to support and participate in their efforts,”said Scott Cutshall, VP Brand Development with Clay Lacy.
Clay Lacy Aviation is a trusted partner for aircraft management, charter, maintenance, avionics, interiors and FBO services. The company has aircraft operations and regional offices across the U.S., including a full-service FBO at Van Nuys Airport in Los Angeles, and aircraft maintenance centers in Los Angeles, San Diego, and Oxford, Connecticut. They are also the authorized dealer for the Quest Kodiak 100 Series II in the Northeastern U.S.
Waterbury-Oxford Airport, Oxford, CT
The company prides itself on having the resources of a large organization, with the agility, responsiveness and personal attention of a small, private flight department. Their highly knowledgeable team of aviation professionals manages every facet of their clients’aircraft- whether one aircraft or a fleet, a light jet or an airliner- anticipating needs, reducing costs and protecting assets.
Much like NAFA, Clay Lacy Aviation is dedicated to the continuous improvement of safety, service and value throughout the industry.Clay Lacy and NAFA foster highly trained, knowledgeable and passionate aviation professionals worldwide with their expanding networks of experienced and trusted businesses.
For more information about Clay Lacy Aviation, visit claylacy.com.
Van Nuys Airport, Los Angeles, CA
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
Blue Ridge Jet Management Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. - Jan. 16, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that Blue Ridge Jet Management has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Blue Ridge to our association,” said Ford von Weise, President of NAFA.
Blue Ridge Jet Management is a multi-faceted private aviation company offering services designed to evolve with the needs of their customers, including aircraft management, charter brokerage, aircraft sales and acquisitions, business aviation consulting and flight crew services. Their team encompasses over 100 years of aviation experience and supports their clients’ private aviation needs throughout the various phases of growth and development.
Many of their clients start with charter, transition through jet cards or a fractional share program and ultimately end up owning an aircraft. The goal at Blue Ridge Jet Management is to foster the client relationship by finding the right solution for every need, now and in the future.
“Blue Ridge Jet Management shares the commitment of the National Aircraft Finance Association to our mutual clients who require the expertise of a team of professional partners to receive the best guidance, advice and counsel regarding the complex process of aircraft acquisitions, financing, operations and management. It is an honor to be associated with NAFA and its Members,” stated Greg Kinsella, Co-founder of Blue Ridge.
Much like NAFA, Blue Ridge Jet Management promotes the highest standards of customer service in private aviation. Blue Ridge and NAFA contribute greatly to the aviation industry as committed partners with their clients.
For more information about Blue Ridge Jet Management, visit www.blueridgejet.com.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero
Time for a New Aircraft - or Not? see more
NAFA member, Lee Rohde, Founder, President and CEO of Essex Aviation, writes about what to consider when your aircraft needs change.
Perhaps your travel mission recently has changed, and you’ll be flying to new destinations. Or you’re interested in having more cabin space, amenities, and upgrades. Maybe the lease on your current aircraft is coming up for renewal and you want to be sure you’re using the most appropriate aircraft. Or your aircraft is fully depreciated and there are tax considerations to your continued ownership.
Is buying a new aircraft your only – or the best – option for you? Today’s business aviation market offers current aircraft owners a broad range of options to meet those evolving needs. Here are three different avenues to consider:
ONE: Upgrade or Refurbish Your Existing Aircraft
The first option is to refurbish the interior and exterior of your current aircraft while also considering upgrades to meet your new mission or regulatory requirements (see “Time Flies …Will Your Aircraft? BAA January/February 2018). This option offers the obvious benefits of not having to go through the search, inspection, and purchase process inherent in buying a new aircraft. It also reduces the unknowns, since you are familiar with and know the history of the aircraft you currently own. The downside is that you will have to take your aircraft out of service while the refurbishment and/or upgrades are completed. You’ll have to weigh the costs of the refurbishment and/or upgrades coupled with the costs to use alternative lift while the work is being completed.
Depending on your mission requirements, typical upgrades to consider would include but are not limited to:
- Avionics upgrades
- FANS/ADS-B Compliance
- Enhanced Vision Systems
- Cabin Management Systems
- In-Flight Connectivity and Entertainment Systems
- Galley Layout and Equipment
Interior and exterior aircraft refurbishment can involve all or some of the following:
- Exterior Paint
- Floor plan Modifications
- Seating Design and Upholstery
- Cabinetry Veneer
- Headliner and Sidewall Covering
- Improved Lighting
Upgrading and/or refurbishing your existing aircraft is usually recommended if you plan to keep your aircraft for at least four or five more years. If you’re thinking of selling sooner than that, work with your aviation advisor to consider which upgrades will help with the aircraft’s resale value and marketability, and which probably would not provide a substantial return.
TWO: Supplement Your Existing Aircraft
Another option is to keep your current aircraft and supplement it with an additional asset — such as charter, fractional ownership, or a membership or card program. This option can be an ideal combination if you enjoy your current aircraft but have encountered additional travel requirements that it is not best suited to support.
For example, perhaps you currently own a large cabin aircraft and need to make regular short trips throughout the Northeast, to Long Island, or to one of the several island destinations during the summer months. That may be much more aircraft than is needed and not cost effective given the short distances to be flown. In many cases, using a fractional share, charter, or membership/card program for these trips can be more efficient, and frees up your aircraft for other travel. Some options for supplemental, alternative lift are:
When you charter an aircraft, you are essentially renting the aircraft for a certain mission and period of time. Charter is best for quick trips since you’ll keep the plane with you for the duration of the trip, and the aircraft is exclusively available to you. If you are traveling for a two-week vacation and plan only to use the plane to get you there and back, retaining the chartered aircraft can be expensive compared to other options. One of the benefits of chartering is schedule flexibility, which normally allows you to change your travel plans as needed.
With fractional ownership, you are either purchasing or leasing a share and percentage of allotted flight time in a specific aircraft type. Typically, fractional programs require a minimum of 50 hours per year to participate. Fractional ownership does not offer as much flexibility in terms of scheduling change as does charter. Fractional shares can be beneficial if you plan to stay at your destination for a longer period of time, since you pay only for the occupied flight time you use, albeit at a higher per hour cost than for occupied round trip charter.
Membership/Card Programs are ideal if you don’t need to fly frequently during the year, and if you appreciate flexibility in the aircraft available for each trip. On these programs, you typically will be required to use a minimum of 25 hours per year. When evaluating these programs, it is critical to understand how each provider sources its aircraft and the safety ratings of the operators they use, as well as the terms and conditions of the funds being put on the account.
THREE: Replace Your Existing Aircraft
You also may choose to replace your existing aircraft altogether. For example, if your destinations have changed and you need an aircraft capable of landing on shorter runways, you need a larger aircraft to travel internationally, you want to stop less frequently to refuel on longer flights, or you just need more room for more passengers.
As you think about replacement, you will need to consider several questions, including but not limited to:
- How will you be using the aircraft? For business or personal use, or a combination of both?
- How many trips do you take annually? What is the average duration?
- Do you travel to airports with runway restrictions or that are limited to certain size/performance aircraft?
- For how many passengers do you need seating?
- Is international travel anticipated? If so, where and how often?
- Do you want a cabin with stand-up headroom?
- How many and what type of sleeping locations do you desire?
- Do you carry a lot of baggage or other equipment when you travel?
You also will have to decide whether you want to buy a new or pre-owned aircraft. Purchasing a new aircraft will allow you to fully customize it, but will require a longer time for final delivery. Or you could acquire a “white tail,” which is an aircraft that has already been built and completed, but whose original purchaser failed to take delivery. While you don’t have the same ability to customize, you’ll benefit from a much quicker final delivery and entry into service. A pre-owned aircraft also offers you the option, if desired, to refurbish or upgrade the aircraft to meet your needs.
If your mission requirements have changed or you anticipate a near term change, consider all the options. An unbiased aviation consultant or advisor, not affiliated with a specific operator or third-party provider, can help you evaluate your options and offer recommendations based on your current and future travel needs.
The original article was published in Business Aviation Advisor on March 1, 2018.
Your Asset on the Line - Customizing Your Charter Management Contract see more
When seeking to generate extra revenue to help offset the overhead costs of owning and operating your aircraft, you’ll likely hire a properly licensed aircraft charter management company (a “certificated air carrier” in FAA-speak) with the authority to make it available to the public for charter flights.
Normally, you would set up a “dry” lease (a.k.a. “charter management contract”) to that charter operator. While the FAA will impose some restrictions on what such a contract can require, it is your aircraft, so you may seek to impose some guidelines that most charter operators won’t necessarily initially offer to help protect your valuable asset.
Any good charter management contract will have standard clauses dealing with the term and termination rights of the parties, the services the charter operator will provide (crew, maintenance, record keeping, etc.), the basic obligations of the airplane owner to pay for the maintenance of operations of the aircraft (in exchange for receiving most, if not all, of the generated charter revenue), insurance requirements and related indemnification and risk-of-loss issues, key legal provisions such as statements addressing the FAA’s rules on “operational control” of the aircraft, and common “boilerplate” provisions dealing with notice requirements, confidentiality, and so forth.
- What else might you consider asking for that does not typically appear in the first draft of a charter management contract? Examples of such provisions include:
Limitations on who can charter the aircraft, such as:
- “Hard partiers” (e.g. rock bands)
- Young children
- Customers who refuse to submit to credit checks.
- Limitations on substances you might not want on your aircraft:
- Red wine (See “Something to Hide” BAA Nov/Dec 2016)
- Marijuana, even if legal under your state law
- Smoking of any kind.
- Beyond what is typically covered under aircraft insurance provisions, areas where you may not want your aircraft to be operated, such as:
- Any region on the U.S. State Department’s Travel Advisory list, or even outside your country at all
- Into a weather-challenged zone, such as a hurricane area, forest fires, or after a recent blizzard
- To a country that imposes tariffs that you might end up having to pay after the fact.
- Specific items you may not want on board, such as:
- Animals, whether caged pets or exotic species
- Other materials you might find objectionable.
- Additional safety items or restrictions, such as:
- Requiring the pilots to be trained by a particular training company
- Imposing crew duty requirements more stringent than the FAA’s
- Requiring every flight to have a corporate flight attendant (See “The Corporate Flight Attendant: Safety and Service,” BAA April 2014).
- Any timing limitations on use of your aircraft, such as:
- The requirement to provide at least 48 hours’ notice before a charter so that you can make sure it won’t conflict with your planned use
- No weekday charter (if you use your airplane primarily for business during the week), or conversely
- No holiday weekend charter (if your use is primarily personal).
All of these suggestions are subject to some very important restrictions. The Department of Transportation’s anti-discrimination rules make it very clear that you cannot seek to limit the use of the aircraft based on race or gender, for example. And the FAA has significant rules regarding placing so many restrictions or guidelines on the charter management company that you have, in effect, failed to give them the operational control of the aircraft they are required to maintain.
But it is your aircraft, so discuss with the charter management company just how it will – or will not – use your aircraft.
This article originally appeared in Business Aviation Advisor September/October 2018.
- What else might you consider asking for that does not typically appear in the first draft of a charter management contract? Examples of such provisions include: