aircraft co-ownership

  • Tracey Cheek posted an article
    Innovative Private Aviation Options see more

    NAFA member, Amanda Applegate, Partner at AERLEX LAW GROUP, discusses innovative private aviation options.

    In 1986, when Richard Santulli created NetJets, it was considered revolutionary. NetJets opened up private aviation to a new segment of customers. Flexjet followed in 1995. The pool of potential private aircraft users was made even greater with the advent of Marquis Jet in 2001. Now more than 15 years after the launch of Marquis Jet, there are over 200 jet card products, private aviation membership programs, co-ownership and fractional programs in existence.

    The private aviation market, particularly the charter market, remains fragmented. Because of the fragmentation, many consumers find there is not just one solution that fulfills all of their private aviation needs. More than ever, we are seeing consumers use several solutions to meet their range of private aviation needs. Many of my clients own a whole aircraft and supplement their ownership with a membership program, fractional share and/or utilize the charter market. Often each category is sourced with a different provider, which adds unwanted complexity and inefficiencies to scheduling and tracking the multiple private aviation providers.

    We have seen some consolidation in recent years. OneSky, LLC, part of Directional Aviation Capital, has acquired Flight Options, Flexjet, Sentient Jet and most recently PrivateFly. PrivateFly is a digital booking service for private jet charters and the company plans to use PrivateFly along with its current digital on-demand charter broker, Skyjet. Further recent consolidation was announced with Vista Global acquiring XOJET, an on-demand business aviation company in North America with 43 aircraft. Vista Global will position XOJET as its entry level product into private aviation. Vista Global is attempting to eliminate the need to use multiple private aviation providers by offering a variety of products.

    While most agree that further consolation is needed, there is also a need to leverage technology. Arranging charter is often a manual process, with paper charter request forms for each charter segment and without an efficient payment system. The private jet charter market is not searchable on one software platform, mostly due to the number of Part 135 operators who haven’t yet found a system to consolidate all of their data, thus customers have to search multiple sources to evaluate their options. There are many companies working towards digitalizing the charter market, but until there is more consolidation of current, up to date data, inefficiencies will persist.

    In addition to consolidation of fragmented private aviation solutions and the implementation of new technologies to create efficiencies and grow the market, we will also see new product offerings continuing to emerge. Recently I attended, a conference organized by Corporate Jet Investors. This two day conference highlighted the vision of the future of aviation. Billions of dollars have already been invested this year in new aviation solutions. While many have likely heard of Uber Elevate, an urban aerial ridesharing solution currently in development, there are hundreds of other aviation solutions, software programs and aircraft currently in development. The solutions in development are focusing not only on urban mobility, but also the transportation of goods, including important medical needs like the movement of organs and blood. Within the next several years many new solutions, software programs and aircraft will be developed that could significantly change the way we use air transportation on a daily basis.

    This article was originally published in BusinessAir Magazine, October 2018, Vol. 28, No. 10.

  • Tracey Cheek posted an article
    Lien On Me - The benefits of aircraft co-ownership. see more

    NAFA member, Adam Meredith, President of AOPA Aviation Finance, writes about the benefits of aircraft co-ownership. 

    You could make good use of a light jet for your business, but you’re not likely to fly it more than 100 hours per year. And the capital cost of a brand new aircraft, plus the fixed operating costs, are a bit more than you want to spend, even considering the benefits of warranties and less downtime with a new versus a used aircraft. Instead of looking at a used and/or less capable aircraft, you decide you want a partner.

    Co-ownership of an aircraft can be beneficial for you and your partner. (See: “Giving Half a Whole Lot of Thought,” BAA Sept/Oct 2017). A carefully structured partnership can provide many benefits not otherwise available to you by using charter or owning a fractional share, including access, tax advantages, and a dedicated crew, while dividing the cost of ownership in two.

    Good news! Another like-minded business owner – either someone you know, or one who has been identified for you by an aviation professional – would like to partner with you on the purchase and operation of an aircraft.

    You’re ready for the purchase, but either you or your intended partner prefers to deploy the cash elsewhere, in your primary business or other investments. So one partner requires a loan while the other does not – your first potential conflict. How will you proceed?

    The path of least resistance is for the partners to agree to seek financing together, then to arrange some preferential treatment for the less-willing partner, such as a lower allocation of fixed overhead expenses. After all, he or she is agreeing to an unwanted loan.

    When one partner is adamant about not taking a loan, you can look for a lender who is willing to work with you, and has procedures in place to help facilitate your purchase.

    Here’s how it might work. The non-financing partner signs an acknowledgement with the lender (i.e. a subordination agreement or an extra signature on the security agreement). This gives both partners a formal relationship with the lender. Typically, the documentation will have an acknowledgment that the non-financing partner either will assume any deficiency from the borrowing partner or turn over the aircraft to the lender. The agreement also will ask the non-borrowing partner to acknowledge that the bank has first priority should a problem arise.

    For example, an airplane costs $9 million, so each partner must contribute $4.5 million. The non-borrowing partner pays cash, and the other partner makes a down payment of $900,000 and takes a loan for $3.6 million.

    Four years later, the airplane has depreciated to $6.75 million, and there remains a $3.1 million balance on the loan. The equity in the plane is $3.65 million. At that point, the borrowing partner has an unexpected life event (e.g. divorce, or major lawsuit), and cannot continue to make the loan payments.

    He/she also is in arrears with the partner on hangar rent and other maintenance-related expenses and so decides to surrender his/her equity to the partner. The non-borrowing partner then “cures” any default with back payments and inherits all the equity. At that point he/she either may find a new partner or sell the aircraft for $6.75 million, after originally having invested $4.5 million. If sold, the partner recovers all of his/her original investment, plus $2.25 million to cover any back owed expenses. This scenario also would apply with more than one partner, with each non-borrowing partner agreeing to the same terms as above.

    Shared ownership can be an excellent option when your proposed annual flight requirements aren't large enough to justify owning a dedicated aircraft. But when one of the partners prefers to finance his/her share, make certain that the lender selected can structure a deal that protects both borrower and cash buyer alike.

    This article was originally published on July 3, 2018 in Business Aviation Advisor