Esventures LLC Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. - Jan. 22, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that Esventures LLC 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 Esventures to our association,” said Ford von Weise, President of NAFA.
Esventures LLC is a leading service-oriented company with 13 years of experience, providing a broad spectrum of services and expertise in the areas of aviation, engineering, energy, oil and gas and financing. Esventures’ expanding capabilities enable them to offer customers a full range of services, including aircraft leasing/air transportation/operational management, project financing, engineering designs, procurement, construction, installation and maintenance management.
The company establishes strategic partnerships with specialized industry leaders to constantly improve the level of services they offer, striving to provide the highest quality project deliverables on time, within budget, and at the lowest blended rate in the industry.Esventures’ leasing services supply aircraft on a timely and affordable basis and ensure that clients reach their destination in safety and comfort.Their aircraft management services are meticulous in the care of all operations and maintenance so clients can focus on their business.
Much like NAFA, Esventures LLC is proud of their reputation for excellent service and promotes strict standards in the aviation industry. Esventures and NAFA consider safety to be of the utmost concern and are dedicated to fostering highly trained and experienced pilots, crews and aviation professionals.
For more information about Esventures LLC, visit www.esventuresllc.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.
Operational Control And Aircraft Leasing: What’s The Big Deal? see more
NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP., discusses operational control and aircraft leasing.
From the FAA’s perspective, operational control in aircraft leasing transactions is not just a “big deal”, it is “the” deal.
What Is Operational Control?
14 C.F.R §1.1 defines operational control as “the exercise of authority over initiating, conducting or terminating a flight.” In a “wet” lease situation, since the lessor is providing both aircraft and crew, the lessor maintains operational control of all flights. And in the absence of a specific exemption (such as under 14 C.F.R. § 91.501(c) the lessor who is operating an aircraft under a wet lease will need to have an air carrier certificate to legally operate the aircraft.
In a “dry” lease situation, the lessee provides its own flight crew, and the lessee exercises operational control over its flights. The lessee’s operations may be conducted legally under 14 C.F.R. Part 91 without an air carrier certificate.
It is important to keep in mind that the FAA will look beyond the actual written agreements to determine who has operational control. Although a lease may be written as a dry lease and says “Dry Lease” at the top of the agreement, for example, that does not mean the FAA cannot take the position that the arrangement is really being conducted as a wet lease. And if the FAA takes that position when the lessor who is actually operating the aircraft for the lessee does not have an air carrier certificate, then that will be a problem for the lessor, and potentially for the lessee as well.
Why Does It Matter?
If the lessor is exercising operational control, then the flight must be conducted in compliance with regulations that are stricter than Part 91 (i.e. Parts 121 or 135). Those regulations limit the types of airports the lessor may utilize, crew qualifications, crew rest and duty times, maintenance requirements etc. Additionally, the lessor under a wet lease arrangement is required to remit federal excise tax on the amount charged to the lessee.
Alternatively, if the lessee has operational control under a dry lease the lessee is permitted to operate under the less restrictive and less costly requirements of Part 91. And federal excise tax is not due on the amounts paid by the lessee to the lessor, although sales tax is often assessed on the lease rate.
How Do You Determine Who Has Operational Control?
The FAA has issued guidance for determining which party has operational control in a leasing arrangement. Advisory Circular 91.37B Truth in Leasing provides FAA inspectors with an explanation of leasing structures and how they may or may not be compliant with the regulations. Although AC 91.37B only applies to aircraft subject to the requirements of 14 C.F.R. § 91.23, and it is not regulatory in nature, FAA inspectors also use this guidance when reviewing leasing structures that are not subject to truth-in-leasing requirements.
Here are the types of questions an FAA inspector will ask when the inspector is trying to determine which party has operational control in an aircraft leasing situation:
- Who decides crewmember and aircraft assignments?
- Who accept flight requests?
- Who actually initiates, conducts, and terminates flights?
- Are the pilots direct employees or agents for the lessor, the lessee, or someone else?
- Who is responsible for aircraft maintenance and where is that maintenance performed?
- Who decides when/where maintenance is accomplished, and who pays the maintenance provider for that service?
- Prior to departure, who ensures the flight, aircraft, and crew comply with regulations?
- Who determines weather/fuel requirements, and who pays for the fuel at the pump?
- Who directly pays for the airport fees, parking/hangar costs, food service, and/or rental cars?
If properly drafted, an aircraft dry lease agreement should answer these questions and, to the extent the answer for any item is “the lessor”, then the lease should explain that answer and how it does not negate lessee’s exercise of operational control.
For example, if the aircraft is leased to more than one lessee, it may make more sense for the lessor to retain responsibility for maintenance to ensure that the aircraft is consistently maintained in an airworthy condition. Similarly, lessor maintaining an insurance policy insuring the aircraft and the various lessees may be necessary to make certain the aircraft is insured appropriately.
However, responsibility for maintenance or insurance are just two indicia of operational control. And the lessor’s responsibility for maintenance or insurance does not negate the lessee’s responsibility for ensuring that the aircraft is in an airworthy condition and the lessee’s is properly insured prior to any operations conducted under a lease. Appropriate language in the lease can explain these issues so an FAA inspector reviewing the lease does not misunderstand and draw the wrong conclusion.
Also be aware that some FAA inspectors rely upon AC 91.37B but do not fully or properly understand its guidance. For example, in one instance AC 91.37B states “[t]he FAA has taken the position that if a person leases an aircraft to another and also provides the flightcrew, fuel, and maintenance, the lessor of the aircraft is the operator.”
This language is sometimes misunderstood by inspectors to mean that a lessee does not have operational control when the lessor is responsible for maintenance. But that is incorrect.
The key indicia in the language above is lessor’s providing the flightcrew. However, lessor’s responsibility for maintenance by itself does not indicate that lessor is improperly exercising operational control over lessee flights. Although it may indicate that lessor is exercising some operational control, without other indicia of operational control by the lessor, performance of maintenance alone is not conclusive.
Operational control in aircraft leasing arrangements is, and will continue to be, an area of special emphasis for the FAA. Although the terms of the lease and other transaction documents are important, the FAA is not bound by those terms when it is making an operational control determination. Rather, it will also look at the actual arrangements between the parties, as well as the responsibilities of each party, especially if they are inconsistent with the lease.
When the FAA determines that lessor is exercising operational control in what is supposed to be a Part 91 dry leasing transaction, you can expect that it will act. Depending upon the circumstances, pilots and operators could be faced with certificate action and civil penalty action. It is important to understand the indicia of operational control and to be able to determine which party is exercising operational control in an aircraft leasing transaction. Only then will you be able to ensure that you are operating in compliance with the regulations.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP., on Feburary 5, 2021.
Extended Downtime? How to Maintain Your Jet see more
NAFA member, George Kleros, Sr. Vice President, Strategic Event Management & Fleet Support at JSSI, discusses COVID-19's impact on the economy, flight department extended downtime, and the maintenance needs of business aircraft.
If you are one of the flight departments anticipating some extended downtime, following are some areas to give attention to regarding the day-to-day maintenance needs of your aircraft...
As we begin to consider what the new normal entails on the other side of the coronavirus crisis, it’s clear this will not be an instantaneous recovery for Business Aviation. However, it’s unlikely we will see a return to what we experienced in 2009, one of the most difficult years our industry has ever faced.
In recent weeks JSSI has been performing claims oversite for insurance underwriters in addition to appraisals, lease returns and aircraft default recoveries for financial institutions.
Based on the cases we have seen so far, it is apparent that many similar issues that occurred in 2009 have resurfaced.
For example, although they may not intend to immediately sell their aircraft, many owners have no plans to fly for the foreseeable future, and the overarching behavior at this time is to severely reduce expenses wherever possible.
There are several important factors to consider when making the decision to cut operating costs and pause aircraft utilization. Here are five areas you should consider as part of financially responsible decision-making during a period of extended downtime.
Aircraft Inactivity Choices
When an aircraft sits unused, you have two choices:
- Exercise the aircraft, or
- Preserve the aircraft.
In the short-term, exercising the aircraft is going to represent better value for money. Proper preservation of the engines, avionics, APU and airframe requires an extensive, labor-intensive process that involves special equipment to perform correctly.
Furthermore, several preservation steps will need to reoccur periodically throughout the downtime for certain items.
At some point, there will be a need to fly the aircraft again, or there may be an opportunity to sell the asset which will require a quick turn to return to airworthiness.
The process to take an aircraft out of preservation is equally extensive and requires additional labor hours because of all the operational checks involved. The complex process makes sense if you plan to store the aircraft for more than six months, but it is not cost-effective for anything less than that.
In addition, taking steps to exercise the aircraft will help ensure all systems are working correctly and any issues can be addressed as and when they are discovered, not at the last minute.
Inspections Remain Necessary
When an aircraft is parked, it is obviously not accumulating hours or landings. This means hourly or landing-driven inspections are no longer accomplished because they are not due.
Despite this, it is still highly recommended to keep up with all scheduled calendar inspection events. These are in place for several important reasons, including to control corrosion and keep parts lubricated to prevent future damage.
The inspection of particular areas of the aircraft at specific intervals is pre-determined by OEM engineers and is based on their findings that a potential issue is most likely to surface within that period. Timely corrective action will allow for the issue to be resolved as efficiently as possible.
It should also be noted that performing inspections too early might mean missing an underlying problem that is not yet serious enough to be detected and treated.
Waiting until the next time the inspection is required may then put you past the critical point, ultimately requiring extensive repairs and special engineering that may contribute to a loss in aircraft value.
On the other hand, choosing to push the inspection out beyond the scheduled time could lead to the same scenario and extensive damage being incurred from not addressing the problem sooner. This is especially true for aircraft that spend most days outside on the ramp.
It is therefore highly important to follow the Chapter 5 calendar schedule and always remain within the designed inspection schedule for your specific aircraft.
Click here to read the full article.
This article was originally published by AvBuyer on May 11, 2020.
Asset Insight Podcast:CorporateCare Enhanced, Technology and Digital Advancements from Rolls-Royce see more
NAFA member, Andy Robinson, Senior Vice President Services & Customer Support for Rolls-Royce North America discusses the company’s CorporateCare Program, as well at the company’s technology and digital advancements with host and NAFA member Asset Insight's Anthony Kioussis.
Specific topics covered include:
- The importance of an engine Program and the true value of CorporateCare.
- What led Rolls-Royce to upgrade CorporateCare to Corporate Enhanced?
- The additional benefits now offered by CorporateCare Enhanced.
- Technology and digital advancements made by Rolls-Royce, in 2020, and what the industry should expect to see in 2021.
- Electronic Engine Health Monitoring – how it works and why it is important.
- Virtual Training, and how it is improving customer support.
- Sustainable Aviation Fuel, and where does Rolls-Royce stand in this initiative.
Click here to listen to the podcast.
This podcast was originally published by Asset Insight, Season 1, Episode 28.
Aircraft Management: The Aviation Professionals Every Jet Owner Needs see more
NAFA member, Joe Barber, Vice President of Fleet Development with Clay Lacy Aviation, discusses aircraft management and what you need to know.
Savvy business jet owners know how to maximize operational efficiency and safety, in the air and on the ground, while minimizing costs, complications and inconveniences. In short, how to enjoy the full benefits of jet ownership.
How to own a private jet?
There are five key people you need to have on your team to own a private jet.
1. Aircraft broker to help you find and buy the right jet.
2. Aviation attorney to provide critical guidance on ownership structure.
3. Aircraft manager to oversee daily operations, employ crew-members, and maintain the jet.
4. Flight crew to fly your jet.
5. Aviation CPA to ensure you avoid unnecessary tax liabilities.
Each professional fulfills a specific, highly specialized purpose—working in harmony to consistently and proactively insulate the client from liability and surprise costs, minimize tax exposure and operate efficiently and safely. Let’s take an in-depth look at the roles these aviation specialists play, and how they interact with an aircraft owner, and with each other.
Aircraft broker: More than buying and selling.
An aircraft broker sets the tone and lays the foundation for a smooth acquisition of the aircraft. The broker might be the client’s first contact within the business aviation industry, or introduced by an aviation attorney, aircraft manager or other professional. Aircraft brokers are often mischaracterized as simply wanting to make the sale, but keep in mind that they have a responsibility to the client beyond advising on the best type of aircraft that to meet their needs. An important part of their job is providing direction on building a team to facilitate a smooth acquisition and create long-term owner satisfaction. Ideally, aircraft brokers would like to be involved early on in the process to establish a productive dialogue with the owner, as well as communication with an aviation-focused attorney, management company and CPA.
Aviation attorney: Guiding you through a maze.
New aircraft owners might assume that they do not need an attorney who specializes in aviation. After all, they may already be represented by an excellent law firm or corporate legal department. The reality, however, is that aviation law is a highly complex field, demanding mastery of a bewildering array of separate laws, rules and regulations governing every aspect of ownership. It’s very much analogous to the world of medicine, where you might have a great internist, but you would seek a board-certified cardiologist to treat any heart issues.
The aviation attorney works closely with other team members—especially with the aviation CPA/tax specialist. This helps assure the correct structuring of all ownership and operational aspects. optimization of available tax benefits and compliance with aviation regulations—all of which requires considerable effort and experience.
An aviation attorney will have a less prominent role in the ongoing management and operation of a jet but is essential in the initial phases of aircraft ownership and delivery. This is when multiple team members are involved simultaneously and effective communications are so critical.
Aircraft manager: Your 24/7 trusted advocate.
A constant resource is the aircraft manager, who works for the aircraft management company and helps oversee every aspect of the jet ownership experience. Among many responsibilities, the aircraft manager assists in crew recruitment and management, aircraft scheduling and charter coordination, financial reporting, maintenance, avionics and cabin upgrades. “The best aircraft management is not the most expensive nor the least,” says Joe Barber, VP of Fleet Development at Clay Lacy Aviation. “Rather, it is the one who deals fairly, advocates in the client’s best interest and does what is right when action is required.”
Flight crew: On the job even on the ground.
It is paramount to set in place an experienced and personable flight crew—pilots, flight attendant and maintenance technician—that the owner likes and trusts. Once the operation and certificates are established, the flight crew has the most direct contact with the aircraft owner on a daily basis. The flight crew will work closely with the aircraft manager to handle the operational aspects and logistics of owning an aircraft—such as supporting scheduled maintenance events, advising on upgrades, crew performance review, and general maintenance and outfitting of the plane.
Aviation CPA/tax specialist: Helping you save money.
In the aviation industry, tax laws are not only complex and intricate, they often conflict with federal aviation regulations. Due to this fact, it is essential that the team include an aviation CPA who will provide guidance on how to lower or eliminate their tax exposure on a variety of federal, state and local issues, such as personal use of company aircraft, sales and use tax exemptions, property tax assessments and appeals, excise tax on transportation and fuel, and many other areas.
The aviation CPA coordinates with all of the professionals on the team and helps identify the specific needs and interests of the aircraft owner that must be considered to identify the proper structure. Just because a particular structure works for one client, doesn’t mean it will work for another.
Experience the full benefits of jet ownership.
Whether an owner has one plane or multiple jets— from an Embraer Phenom 300 to a Gulfstream G700— having the right team of aviation professionals in these five key roles is critical to an enjoyable, cost-efficient aviation experience. The sooner that team is in place, the better. Scott Cutshall, SVP Business Operations at Clay Lacy, stresses the importance of keeping time on an owner’s side. “Assemble your team early,” says Scott. “I can’t emphasis the importance of that enough. By putting your team in place early, before a letter of intent is drafted, an aircraft owner will save significant time and money.”
This article was originally published by Clay Lacy Aviation on July 15, 2020.
The Complete Guide to Corporate Flight Department Administration see more
NAFA member, Michael J. Moore, Executive Vice President of Essex Aviation, discusses options for managing your assets.
Businesses that own private aircraft (or, in some cases, a fleet of aircraft) find themselves faced with two options when deciding how best to manage their assets: Either hire a management company to take over operations or establish their own in-house flight department. Both come with unique advantages and disadvantages, so it’s important to carefully weigh all the travel, logistics, operational and management support requirements before deciding between the two. That said, it’s undeniable that an in-house flight department is an attractive option for organizations whose top priorities are privacy and more direct internal control over their aircraft operations and management.
In this article, we’ll explore everything that goes into forming a flight department, so that you can make the most informed decision whether it’s the right choice for your business.
Table of Contents
- What is a Flight Department?
- Flight Department vs. Management Company
- Things to Consider Before Forming a Flight Department
- Key Roles within a Flight Department
- What is the Flight Department Company Trap?
- Conducting a Flight Department Review
- A Trusted Partner
What is a Flight Department?
A flight department is the people and processes responsible for the ongoing management, maintenance and aircraft operations on behalf of its owner. A flight department can vary from a single pilot to an entire facility with an organization staffed by a wide range of aviation experts. Though these examples stand at opposite ends of the spectrum, they are essentially the same in that they involve qualified professionals tasked with overseeing business aviation operations on behalf of the owner.
A flight department’s responsibilities include, but are not limited to:
- Trip analysis
- Flight planning
- Ongoing maintenance
- Overall operations
- Aircraft scheduling
- Flight planning
- Crew management
- Operational cost management
- Regulatory oversight and management
- And more
Flight Department vs. Management Company
As mentioned earlier, corporations that own private aircraft have their pick of either forming their own in-house flight department or working with a management company. Before you take any additional steps to research the option of establishing a flight department, it’s important that you understand the difference between the two, as well as the benefits and drawbacks to each.
Let’s start with the basics: Both flight departments and management companies are responsible for overseeing day-to-day activities involved in aircraft maintenance, management and operation. The only substantial difference between the two is that, with a flight department, the owner and their flight department assumes full responsibility for business aviation operations, whereas with a management company, a third-party entity assumes the responsibility.
Read the full article here.
This article was originally published by Essex Aviation on August 1, 2020.
7 Avoidable Mistakes in Acquiring a Bizjet see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses mistakes to avoid when acquiring a private jet aircraft.
Acquiring a private jet aircraft is fraught with the potential to make expensive mistakes. Yet, a qualified aviation team can help a purchaser achieve optimal results by avoiding these seven missteps:
GOING IT ALONE
Assembling the right aviation team admittedly entails some cost and initial effort. But most purchasers quickly realize that buying a jet is not like buying a car, real estate, or other assets. Rather, a jet purchase or lease is complex and requires the assistance of aviation experts who excel in the subject matter and interact seamlessly on a deliberate closing schedule. Tax-intensive, cross-border, and novel purchases may require additional expertise beyond the core team members described below.
Aircraft broker. Purchasers buy aircraft solo, and that can work out. However, a purchaser might suffer buyer’s remorse or experience negative outcomes such as unnecessarily incurring taxes on the purchase. A skilled broker focuses on the purchaser’s needs and wants, knows the “market,” identifies the best available aircraft for the purchaser, and negotiates business and other terms with the team.
Consultants and pilots. Various consultants perform visual and record inspections, appraise aircraft, supervise pre-buy inspections, organize flight departments (Part 91-private aircraft operations), provide insights into choosing Part 135 managers (commercial/charter use), and may provide broker services. Pilots may support, perform, or lead on some tasks but must collaborate with the other team members.
Aviation lawyer. Aviation law is challenging, so non-aviation counsel should not act alone in aircraft purchases. Instead, they should hire an experienced aviation legal team that understands and regularly structures acquisitions amid conflicting tax, regulatory, liability, risk management, choice of owner entity, and other complex rules. They must also regularly draft and negotiate aviation-specific agreements and, importantly, have even broader financing expertise than just aircraft loans and leases.
Aviation insurance broker. The aviation insurance market is no place for a generalist broker. Aviation insurance brokers know how to navigate aircraft insurance markets and negotiate complex policy terms.
Escrow agent and FAA counsel. With few exceptions, purchasers and sellers should use escrow agents, comprised of escrow companies and FAA lawyers. These agents hold and disburse funds, collect and file documents at the FAA, register interests and parties on the International Registry, and may issue title insurance. FAA counsel can also offer legal advice, write title opinions, and draft multiple documents.
NOT SELECTING THE RIGHT AIRCRAFT
Despite the unquestionable benefits of owning or leasing a whole jet aircraft, notably during Covid-19, a prospective purchaser should first rule out other workable options to fly privately, such as chartering or buying a fractional share of a jet. After that, a purchaser should concentrate first on the aircraft/user’s “mission” before deciding on which new or used whole aircraft to buy or lease.
Generally, the term “mission” is aviation speak for a purchaser’s effort to identify aircraft that will serve all or at least most of the private travel the purchaser envisions. When completed, the mission profile informs the search by purchasers and their brokers in today’s active market with numerous jet makes and models for sale.
NOT PLANNING FOR TAXES BEFORE SIGNING AN LOI
Private jets attract the interest of tax authorities at the federal, state, and local levels. Before signing a letter of intent () to acquire a jet, if possible, a purchaser should use accountants and lawyers to develop tax minimization strategies and structures under federal tax law, including the use of bonus depreciation and other business deductions, state sales/use tax laws, and local property laws. Solid planning may be slower than purchasers expect but failing to do so can wreak tax and financial havoc.
NOT CREATING A LEGAL OR STRONG AIRCRAFT OWNERSHIP/OPERATING STRUCTURE
A purchaser should determine the person or entity, often an , that will own the jet, and then structure the operations of the jet in compliance with the s. An owner that violates the s invites FAA scrutiny and, sometimes, enforcement litigation by the FAA or the U.S. Department of Justice, easily causing owners to incur sky-high legal fees.
One of the most common problems stems from illegal charters, which take various forms. One rampant violation occurs when Part 91 operators lease their aircraft to many unrelated travelers, which is really a fake charter operation. Another violation often occurs when an LLC with no business enterprise operates the aircraft it owns or leases. The FAA views these flight operations as creating an illegal “flight department company.” When structured improperly, neither the leasing nor the LLC operator (allegedly) holds mandatory FAA certifications as commercial operators under the FARs.
Owners also frequently believe the same provides a liability shield for its owners (members) from third-party liability claims. However, in general, the LLC will not protect the owners from any lawsuit or liability that may ensue from illegal aircraft flight operations or violations of federal or state laws. Although insurance helps mitigate this risk, it is a false premise that insurance suffices or will respond to alleged liability. More risk mitigation structuring and financial exposure analysis can pay off.
SKIPPING AIRCRAFT INSPECTIONS
Although I have seen prospective purchasers bypass independent inspections in buying a new or used aircraft, that omission has led to surprises or disputes without an adequate legal remedy. Purchasers typically arrange a visual inspection of a jet and a review of its records.
If all goes well, an agreed maintenance facility then performs a pre-buy inspection, an in-depth aircraft checkup, and delivers an inspection report to the parties. This report identifies discrepancies that a seller usually fixes before the purchaser accepts or rejects the jet and closes the purchase. Leaving out this step is at best unwise. Beware—finding a facility and completing an inspection may push beyond a closing schedule.
NOT EXPLORING AIRCRAFT MANAGEMENT ARRANGEMENTS EARLY AND OFTEN
Aircraft management companies hold the life of jet owners and passengers in their hands. These companies differ significantly in size, experience, and services. It is critical to conduct due diligence on at least two companies covering safety, service, transparency, integrity, pricing, and FAA status. Choosing based solely on the lowest cost or a referral may needlessly raise personal, asset, and operational risks.
A purchaser that does not consult a manager during an initial jet inspection may forfeit valuable hands-on knowledge about the operations and maintenance of the subject aircraft. In contract negotiations, a purchaser, with certain team members, should secure balanced terms in such key areas as safety practices, including Covid-19 protocols, expense controls, travel scheduling, and services provided.
NOT CONSIDERING FINANCING BEFORE SIGNING A PURCHASE AGREEMENT
Even if a purchaser intends to buy a jet with cash, it is still worthwhile to inquire about leasing or borrowing to finance a jet acquisition before signing a purchase agreement. Most purchasers earn far more from their investments or businesses than the current very low rates. It is ideal to close a lease or loan at the purchase date, but either financing can occur later. Using a non-aviation lender or lessor is feasible, but may result in higher transaction fees, slower negotiations, and sub-optimal terms.
With the support of an experienced aviation team, a purchaser can complete a simple or complicated acquisition of a business jet smoothly and correctly. As aircraft deal activity rises amid Covid-19 safety concerns, it is worth understanding where mistakes can occur and how to prevent them.
This article was originally published by AINonline on November 13, 2020.
Choosing Your Aircraft Management Company: Five Keys to Successful Due Diligence see more
NAFA member, Joe Barber, VP Fleet Development, CAM with Clay Lacy Aviation shares five keys to successful due diligence when choosing your aircraft management company.
In a perfect world, the due diligence process to select the right aircraft management company would be straightforward and objective. Competing proformas would be formatted identically with the same terms for every line item. There would be no hedging or ambiguity. No hollow promises or questionable guarantees. No missing budget variables that appear as unpleasant surprises on the first invoice. Clients could easily compare and contrast, and make better informed decisions.
Instead, welcome to the real world, where proposals to manage business jet aircraft vary widely in organization and terminology, where the emphasis is often on salesmanship and showmanship, looking good rather than being thorough and transparent, and where the lowest estimate might end up costing you tens of thousands more in unexpected fees.
This should not be a beauty contest—but it often is.
Charles Porteus, president and founder of Seefeld Group, a leading business aviation marketing and research firm, notes that client surveys often show aircraft management is viewed as a “commodity.” For clients, there is little—or at least difficult to discern—differentiation among competing companies. The result is more like a beauty contest than the meticulous presentation and review of high-end business services to manage, operate and maintain a multi-million-dollar capital asset.
There’s a reason they call it due diligence.
The dictionary defines diligence as “persistent work and effort.” That sums up the challenge for business jet owners and their advisors as they seek to find not only the answers to questions, but to ensure that the right questions are being asked in the first place. Here are five guidelines that together are the key to finding the ideal aircraft management company for your specific needs.
1. Focus on objective metrics—yours as well as theirs.
You begin with the basics, of course. How many years has the company been in operation? How many aircraft do they manage? Part 91 vs. Part 135? Locations? Pilots? Management fees? Insurance? And so forth. Then dig deeper. Create constants for your comparison so you are comparing apples to apples. Fundamentally, you are conducting a gap analysis so you can more thoroughly understand what is being offered, what is different and what is missing.
Each company should be able to demonstrate objectively why they are a better choice than their competitors—although beware if they seem to be “tearing down” other companies in order to build themselves up. Turn the tables and ask what competitors might say about them.
2. Listen to what they are asking you.
At the same time, play close attention to the questions they are asking you. They should be probing to fully understand your unique requirements, mission profile, where you travel, how often and who goes with you. Your expectations of a management company, needs and preferences for meals and amenities, international issues, and other key details and concerns. If they are not asking these questions, you have to wonder if they are truly focused on your best interests.
3. Seek expert insights.
There are numerous professionals within the business aviation industry: the list includes aviation attorneys, CPAs and other financial advisors, aircraft brokers, insurance providers. Their knowledge of the industry and the major players, as well as their specific expertise, can be a valuable resource for you as you narrow your choices. Poll their opinions, while keeping an eye out for any possible conflicts of interest.
4. Challenge any “guarantees.”
The only thing that can be guaranteed is that nothing can be guaranteed. Not only is aircraft ownership inherently complex, our world is filled with variables. Who, for example, could have anticipated COVID-19? So it is wise to challenge any guarantees from a prospective management company.
Guaranteed charter revenue. How can they promise that? Instead, ask the company to demonstrate how they will work to generate charter revenue to meet your agreed-upon goals.
Guaranteed maintenance costs. Really? Ask them to show how will they work to minimize your maintenance costs without sacrificing quality or safety.
5. Watch out for what might be missing.
If a proposal is dramatically lower than others, it could be a sign that one or more variable budget items has been omitted or significantly underestimated. For example, international handing and other fees related to foreign travel. Or warranty and subscription costs. There are any number of candidates that can fluctuate wildly based on a number of variables specific to your use of the plane. This is the time to ask questions and demand answers. Otherwise you might find that the lowest bid was ultimately the most costly choice—a fact you might not discover until you see your first invoice.
Otherwise you might find that the lowest bid was ultimately the most costly choice—a fact you might not discover until you see your first invoice.
The bottom line is that this due diligence is worth it. With the right aircraft management company you will have an invaluable partner. Working closely with you, they can lower your ownership costs, add value, maximize efficiencies and ensure your asset is operated and maintained to the highest standards—so you can experience all the benefits and enjoyment of business jet ownership.
This article was originally published by Clay Lacy Aviation on July 9, 2020.
The Flight Department Company Trap see more
NAFA member, Greg Reigel, Partner with Shackelford, Bowen, McKinley & Norton, LLP., discusses regulatory issues with owning or operating aircraft.
Businesses and individuals face many regulatory issues in connection with owning or operating an aircraft. Aircraft owners or operators who are unfamiliar with the limitations imposed by the applicable regulations may unnecessarily expose themselves to liability for non-compliance.
For example, aircraft owners or operators commonly attempt to shield their liability by creating some form of business entity that is a subsidiary of the “real” operating company to own the aircraft. Or, rather than forming a subsidiary, they create a business entity to own the aircraft that is solely owned by the individual who really wants to use the aircraft.
In either scenario, the aircraft is the sole substantive asset of the company, and the business entity is used to maintain and fly the aircraft for the benefit of the parent company or individual owner of the business entity. By structuring the ownership and operation of the aircraft in this manner, the aircraft owner and/or operator has just fallen into the “flight department company trap.”
I recently presented a continuing legal education program on this very topic for Lawline. In my presentation, I discussed the various rules and regulations promulgated by the Federal Aviation Administration that have a significant impact on how businesses or individuals are permitted to utilize private aircraft, as well as how to identify the flight department company trap, understand the consequences of creating a flight department company, and available alternatives to avoid falling into the trap and legally conduct private aircraft operations.
If you would like to learn more, you can view a short clip from the CLE here. Otherwise, you can find other posts discussing this topic here on The Pre-Flight Brief or on our Aviation Law Articles page. And, of course, if you have specific questions or would like to discuss this topic further, please feel free to contact me.
This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP. on October 18, 2019.
What Does it Cost to Operate a Large Cabin Jet? see more
NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses the costs associated with operating a large cabin jet.
Any answer to questions asking what it costs to operate an aircraft must always start with, “it depends”. The following article discusses some of the dependent variables.
For the purpose of our discussion, Conklin & de Decker defines Large Cabin Jets as those that typically seat 10+ passengers, have a flat cabin floor, include a galley for preparing a hot meal, and a lavatory. Cabin height should allow for most people to stand up without much of a stoop (i.e., approximately 70 inches). And range should allow for at least 3,000nm non-stop.
Aircraft typical of this category are the Gulfstream GIV and G450 series; the Dassault Falcon 900 series; the Bombardier Challenger 600 (through 650) series; and Embraer’s new Praetor 600.
How Much Does it Cost to Buy a Large Cabin Jet?
Acquisition costs for new models in the Large Cabin Jet category run between $32m to $45m. Pre-owned prices vary as many of these models will have been in production for many years. However, a typical 20- year-old Large Cabin Jet can be purchased for between $4m and $6m.
Keep in mind that placing a pre-owned aircraft into service will probably require additional funds, and a buyer may elect to spend a further $1m to $2m on upgrades, paint and interior refurbishment.
Major maintenance checks may be due soon and must be budgeted for at the time of purchase. If the engines are close to overhaul and are not enrolled on a guaranteed hourly maintenance plan, then buyers should budget another $1m+ per engine for the overhaul. It’s essential that the pre-owned Large Cabin Jet buyer plans on these major expenses.
What’s the Operating Cost of a Large Cabin Jet?
Operating costs depends on the size and age of the aircraft. Below are some illustrative averages for a Large Cabin Jet, taken from the Conklin & de Decker Report. These have been rounded-off:
- Average variable cost per hour: $4,000
- Fuel*: $2,000
- Maintenance: $1,200
- Parts, Labor, Major Maintenance Reserves
- Engine Reserves: $800
(* Fuel cost depend on fuel price (per gallon) and fuel burn.)
What are the Data Costs of a Large Cabin Jet?
Another variable cost to budget for is Wi-Fi or airborne internet. The ultimate costs will vary, based on the type of connection, speed and amount of data used, and where you fly. If flying in the US, you could use an air-to-ground (ATG) system connected to cellular towers.
Large Cabin Jets are typically used to fly globally, however, and if flying over water or in remote regions, maintaining internet connectivity will require a satellite-based system.
There are different installation and rate plan options designed to fit the needs of both the passengers and pilots. New installations for a satellite system can run anywhere from $650k to $800k.
Monthly rates based on data used and download speeds can start at $25,000 per month. An approximate data estimate is $2,000 to download a movie in HD or $4,000 to stream a live sporting event.
What are the Fixed Costs of Large Cabin Jet Ownership?
Fixed costs of Large Cabin jet ownership typically run between $1m and $1.2m per year and include the following:
Here’s how the costs for these elements looks:
1) Salaries: The pay for two pilots ranges from $170,000 to $200,000 per pilot, depending on job duties and level of experience. Depending on your operating location and travel schedule, it may be wise to employ an aircraft maintenance engineer/technician on a salary of $80,000+ per year.
And if the schedule is complex, involving frequent changes and multiple individuals who can authorize use of the aircraft, a flight scheduler is recommended as well as an administrative person. Their salaries can be in the region of $60,000 per year.
2) Training: Pilots need training at least annually and that can cost between $75,000 to $80,000 for two crew members.
3) Hangar: For hangar rental, plan on an annual fee between $50,000 and $60,000 for a typical metropolitan area. Premium locations, like New York City, Hong Kong and Geneva, will be significantly higher.
4) Insurance: This can range between $30,000 to $60,000 depending on the aircraft value and liability limits. If the aircraft spends a lot of time outside of developed countries, those costs may increase substantially.
5) Refurbishment: Paint and interior should also be considered. A new interior and paint job may last from seven to nine years with excellent care. Depending on the level of completion, materials and extra features, you should budget approximately $1.2m to $2m for this work.
Additional costs that can be incurred include acquiring aircraft technical publications for the flight crew and additional maintenance, office and travel expenses.
What’s the Overall Cost of Owning a Large Cabin Jet?
In summary, it’s reasonable to plan an operating budget of approximately $2.8m per year for 400 annual hours operations in a Large Cabin business jet, excluding the costs of capital, taxes and depreciation.
This article was originally published by AvBuyer on January 13, 2020.
Over and Above - Hourly Cost Maintenance Programs Offer Unexpected Benefits see more
NAFA member, Anthony Kioussis, President of Asset Insight, LLC, discusses the benefits of Hourly Cost Maintenance Programs.
As OEMs sought to expand aircraft deliveries to Business and General Aviation (B&GA) during the early ’80s, they encountered two hurdles. One was the perceived, if not real, inability of certain engines to achieve their published maintenance intervals, thereby increasing operating costs. The other was operator perception that certain airframes and engines were more expensive to maintain than advertised.
To address both concerns, numerous OEMs modified offerings already available to the airlines, and Hourly Cost Maintenance Programs (HCMP) were born. Initially viewed as expensive, the idea of “guaranteed operating costs” soon was embraced by B&GA operators. And once lenders and lessors began relying on their value to securitize their assets, HCMP coverage became an industry staple.
Today, aircraft owners routinely experience enhanced value when their Program-enrolled aircraft is sold. In fact, not enrolling some models on HCMP may result in a valuation reduction to the aircraft, since the majority of certain models are so enrolled. However, some new and used aircraft buyers may not consider that HCMP offers benefits over and above the value increase to the aircraft. These are quantifiable and can provide value directly to the owner. For example:
- Additional Coverage While Under Warranty – Certain “related expenses” are not covered by warranty, such as the cost for shipping the affected component to the maintenance facility, shipping a rental component to the aircraft, installing the component, the cost of the rental component during the repair period, removing the rental part once the original component has been repaired, return shipping for the rental, shipping cost to the maintenance facility for the original component, and logistical support associated with these tasks – including the cost to transport and house personnel at an unscheduled maintenance event site. That is not to say the warranty is not valuable, but its coverage often is limited to the cost of repairing the affected component.
- Exposure at Resale – Depending on market conditions, an owner may choose to pay to enroll an uncovered aircraft on HCMP rather than having to discount its sale price in excess of that enrollment fee. While incurring the expense at the time of sale, they have enjoyed none of the HCMP coverage benefits.
- Days on Market – Detailed analytics from resale organizations show that an in-service aircraft will take longer to sell absent HCMP coverage. This could mean a substantial loss in value as aircraft are depreciating assets.
- Rental Component Expense – Many owners fail to account for the true cost of rental components, the potential difference in their travel experience when chartering aircraft, the total cost of charters during their asset’s downtime, and storage as well as other fees for their grounded aircraft.
- Freight and Shipping Charges – The cost to ship “Aircraft on Ground” parts, and the freight charges and logistical challenges to transport a component from wherever the event occurred to the service facility, as well as the cost to ship a rental component to the site of the maintenance event, should not be underestimated.
- Financing Benefits – Each aircraft financing entity has its own way of valuing Hourly Cost Maintenance Programs, so it’s difficult to determine the exact value that any one financier may place on HCMP coverage. However, the savings differential over the term of a loan or lease could be substantial.
In addition to the OEMs, HCMP coverage is available from independent sources. Their advantage is the ability to cover components produced by more than one OEM, making them a one-stop-shop. However, some firms may not be acceptable to financing entities, may not offer coverage equivalent to the OEM, and their program may not be transferable – making its value questionable.
Hourly Cost Maintenance Programs are by no means free, but the additional value they can provide to the aircraft’s owner, can make them a wise investment.
This article was originally published by Business Aviation Advisor on January 1, 2020.
Who’s Onboard? Onboarding Your Managed Aircraft see more
NAFA member, Joe Barber, CAM, Vice President Fleet Development with Clay Lacy Aviation, discusses onboarding your managed aircraft.
You’ve bought a new aircraft, or are happy with your current one. In considering many factors, including the frequency of your travel, your need for a “turnkey” operation, and maybe your desire for some charter revenue, you’ve decided to enlist the services of a professional aircraft management company. You’ve done your research (See “Choosing a Management Company,” BAA July/August 2015), made your selection, and are ready to sign.
Similar to any new service you enlist, there is a start-up phase, referred to as “onboarding.” Onboarding is simply the steps that the company will take to properly prepare itself, the aircraft, and the crew, and to satisfy the FAA and DOT to conduct flight operations in an efficient, cost-effective, safe, and legal manner.
The onboarding process begins once your decision is made, even before the contract is signed. It begins with a meeting including you and any of your representatives who will be involved with the aircraft, such as your CFO, executive assistant, or risk manager. The management company team typically includes an onboarding specialist and designated aircraft manager, plus representatives from maintenance, accounting, charter, and human resources. They follow a comprehensive checklist to streamline and expedite the process. Communication is key. The team will meet frequently to review the status of your aircraft transition, and will provide you with weekly updates.
Certain basic processes – and regulations – must be covered for every aircraft, in addition to designing others to meet your own specific requirements. The best management companies use a recognized project management system together with a system for continual improvement. Developed by Toyota engineers, Kanban and Kaizen focus on achieving high-quality results. Other companies use the Six Sigma method and its focus on Total Quality Management. The basic organizing principle is to start with the end in mind: “What will a successful aircraft ownership experience look like for you?” and then use “reverse engineering” to get there.
In the “honeymoon period,” usually the first six months, there is a high level of activity and some topics will require your input. There are more than 180 tasks required to operate safely and meet your individual requirements, which can be grouped into 65 categories, in three main areas:
- Aircraft Management: Flight operations, accounting, vendor negotiations (e.g. fuel discounts), subscriptions, and insurance.
- Flight Operations: scheduling (dispatch), ground transportation, record keeping, installation and oversight of a Safety Management System, crew training and schedules, and issuance of flight manuals.
- Maintenance: inspections, repairs, records and manuals, warranties, equipment compliance, training mechanics, and FAA interface.
Here are some of the questions you may be asked:
- If your aircraft is coming from another management company, would you like to keep the same crew members? For example, if you’re moving to a larger or newer aircraft, is your current crew capable of or interested in operating the replacement aircraft?
- If the management company finds that your crew member does not meet the proper operating standards (identified during transition training), how will this be handled?
- If the aircraft is on a charter certificate, what are your charter requirements (e.g. annual billable hours/revenue)? Do you want the ability to approve every trip, every time? A good management company will track every opportunity and be able to share how many trips were presented, and how many you accepted or declined with the associated revenue per hour.
The onboarding process traditionally takes 60-90 days, but may be extended if the FAA is delayed in conducting your certificate acceptance flight or additional crew training is required. Once complete, you will have one individual assigned to you, often referred to as a “Client Advisor” or “Aircraft Manager” who will serve as your primary point of contact with the management company to ensure that you have a positive experience.
This article was originally published by Business Aviation Advisor on September 1, 2019.
A-OK When AOG see more
NAFA member, Anthony Kioussis, President of Asset Insight, LLC, shares tips on how to get the best aircraft help when you're on the ground.
When traveling to a special event, whether it’s the Super Bowl in Miami this February, the World Economic Forum in Davos or the Kentucky Derby next May, the 2021 U.S. Presidential Inauguration, or other sporting, political, or worldwide business conference, you’ll have company. At these events, an extraordinary number of business aircraft will be landing and then taking off within approximately the very same time as you, vying for hangar space and landing slots at the same airports proximate to the event venue.
But you’re also not alone in that your Original Equipment Manufacturer (OEM), as well as independent maintenance service providers, will be onsite to provide you with parts and technical support should your aircraft experience a maintenance event. What should you know before you travel, what services do the various maintenance providers offer at a high-traffic special event, and how can you best take advantage of their services?
Many support organizations suggest that your head of maintenance and chief pilot contact them as part of trip planning. If your OEM or maintenance support provider offers a pay-per-hour program, consider taking advantage of it, for the highest level of customer service and support.
Support is offered in several ways. For example:
Bombardier Business Aircraft’s dedicated Customer Response Team (CRT) Learjet 45 Parts Express aircraft and CRT mobile units are on location at events, manned by a team of technicians. They carry state-of-the-art diagnostics equipment supporting Learjet, Challenger, and Global aircraft, to supplement their Field Service Representatives to provide you with full service support. They can quickly bring in parts and additional technical personnel if required for unscheduled maintenance events.
Constant Aviation provides full service onsite AOG support at special events. Dedicated technicians provide maintenance, avionics, and structure services, and can be dispatched round-the-clock. With more than 2,838 years of combined experience, Constant Aviation’s AOG service technicians have supported turboprops and business jets at more than 5,700 events at more than 464 airports. Currently, Constant’s AOG mobile units span 21 cities nationwide, offering immediate response 24/7/365.
Dassault offers on-ground services to support Falcon Jet owners with its GO Teams staffed with AOG technicians, and often additional technicians onsite. More help is available at any of the 87 Falcon Authorized Service Centers, backed up by a dedicated Falcon 900 Airborne Support aircraft that can offer alternative lift to customers.
Duncan Aviation has 184 avionics and engine technicians positioned throughout the U.S., ready to travel worldwide to support operators requiring assistance and service. Its avionics satellite shops provide service to operators at 27 shops, and work away locations and Engine Rapid Response Teams offer traveling engine technicians at 14 sites, ready to launch anywhere. Owners traveling in the U.S. are within 150 nautical miles of a Duncan Aviation AOG team.
With almost 1,000 business jets in more than 60 countries, Embraer Executive Jets is prepared to assist its customers anywhere in the world, any time of the day, from any of its 58 authorized service centers. It offers an integrated comprehensive customer support plan for major global events, including broad logistic support and special procedures, and often field service representatives positioned at major events, backed by its 24/7 Contact Center.
GE Aviation offers technical support and dedicated field service representatives for customers flying GE-powered Falcon, Challenger, and Global Jet aircraft. GE Aviation’s nineteen Authorized Service Centers offer comprehensive line maintenance, removals, and re-installations of engines and Line-Replaceable Units (LRUs) and engine spares for CF34-3 engines. GE Aviation offers service agreements through OnPoint, a long-term hourly cost maintenance program.
Gulfstream Field and Airborne Support Teams (FAST) support the full range of Gulfstream business jets, and help ensure a swift, well-coordinated response to all AOG situations. More than 20 U.S.-based pilots and technicians work in around-the-clock shifts, and are equipped with two Gulfstream G150s as their primary aircraft. The FAST1 mobile service center tractor trailer is positioned at many major events, staffed by technicians covering avionics, mechanical, and interiors.
Honeywell has both Avionics and Mechanical Technical Support Engineers (TSE) standing by to support any AOG engine or avionics service requirements. Honeywell also maintains an additional stock of the most commonly used parts in anticipation of any possible orders for such events. Honeywell’s Aerospace Technical Support (ATS) group is available via its AOG call center 24 hours/7 days a week for remote troubleshooting, and its TSE can be dispatched for onsite support.
Pratt & Whitney
Pratt & Whitney actively supports its more than 13,000 customers. At major events, they are onsite to meet customers, positioning Field Support Representatives (FSR) at strategic locations throughout the duration of the event, enabling them to provide onsite troubleshooting support services. With critical engine components on hand, Mobile Repair Teams, as well as rental engine support in-country, are on standby throughout the event.
Rolls-Royce actively supports owners of Gulfstream G350/450, G300/400, and G650, as well as Bombardier Global 5000/6000 and 5500/6500 aircraft. Its On-Wing Care (OWC) is a global in-field specialist maintenance support organization which has handled more than 6,000 field maintenance events and avoided more than 300 unplanned engine removals/shop visits since its inception in 2005. Rolls-Royce stations OWC technicians and a Regional Customer Manager onsite, supported by its 24/7 Operational Service Desk.
Textron Aviation’s 1CALL maintenance support group has a number of Textron Aviation’s 60 Mobile Service Units (MSUs) onsite at events to support Cessna Citation, Beechcraft King Air, and Hawker turbine business jet and turboprop aircraft owners. They are equipped to perform limited inspections, engine, tire and brake service, and more. Additionally, Textron’s Air Response Service has U.S.-based support aircraft available 18 hours a day, 7 days a week, to keep its owners and operators in the air.
Your OEM and maintenance support providers want to be sure that your flights to and from special events are smooth and trouble-free, even if you should experience a maintenance issue. Communicate in advance about your flight plans, so they can help ensure that they have the right number of people and parts in the region and onsite, to support any potential issues and to keep you flying and on schedule.
This article was originally published Business Aviation Advisor on November 1, 2019.
Aviation Trustee Resignation: Practical Advice for Hiring a Successor Trustee see more
NAFA member, David Wall, Senior Trust Counsel with TVPX Aircraft Registration Services, LLC., offers advice when hiring an aviation trustee.
Trusts are commonly used and universally accepted in aviation. Thousands of aircraft have been placed into trusts over the past several decades and the use of trusts has become integral to many aviation ownership, financing and leasing structures.
However, recently a new issue has arisen that forces some owner participants, lessees and lenders to carefully consider their options and take decisive action. How do you proceed when your trustee resigns from its role?
Receipt of a Resignation Notice
A trustee’s decision to resign may result from conflicts with another party, lack of payment, perception of increased risk, corporate restructuring or a general move away from the line of business. The trustee will commence the process by sending an official notice to the required parties of its intention to resign as trustee, along with a request that the owner participants appoint a successor trustee. In some cases, the trustee may provide an informal notice prior to the official resignation notice to provide the parties more time to plan for the transition to a successor trustee.
Most trust agreements require the trustee to give 30-days advance written notice of resignation. In that time the owner participants are required to find and appoint a new owner trustee. Often the process of appointing a successor trustee, especially with complex transactions and structures, may take far longer than 30 days. Fortunately, resigning trustees have been reasonably flexible about granting additional time.
A trust cannot be left without a trustee, so the trustee must remain in the role until a successor is either voluntarily appointed by the owner participants or appointed by judicial action. The process of getting a court appointed trustee is somewhat cumbersome and may result in aircraft registration and loan issues, so should be avoided if possible.
Choosing a Successor Trustee
When selecting a successor trustee, owner participants should consider the party’s qualifications, experience and continued commitment to the aviation industry.
A potential successor trustee must meet all the qualifications of trustee under the trust agreement. In aviation transactions, especially those with U.S. FAA registered aircraft, this will typically include that the successor trustee qualifies as a U.S. citizen pursuant to 49 U.S. Code § 40102(a)(15). There also may be other qualifications to consider such as capitalization or rating agency requirements. Some qualifications can be waived by the owner participants and other parties, but regulatory requirements, such as U.S. citizenship, must always be satisfied.
The parties should also vet any successor trustee based on its experience in similar transactions and capability to perform all the functions set forth in the trust agreement. Consideration should also be given to the successor trustee’s long-term commitment to serving as a trustee in the aviation industry. The successor process can be lengthy and expensive, so choosing your successor trustee wisely may avoid the need to repeat the process in the future.
Documenting the Resignation and Succession
The process of documenting the introduction of a successor trustee can be approached in several ways but must involve all interested parties.
In most situations, the resignation and succession has been handled by way of an instrument between the original trustee, successor trustee and owner participants. Often the resignation of the trustee, the appointment of the successor trustee by the owner participants and the acceptance by the successor trustee of the appointment is handled in one document. In other cases, the old trust and lease are terminated, and the owner participants enter into new agreements with the successor trustee. In either case the parties may need to agree on certain matters related to the registration of the aircraft and will want assurances that the other parties will execute related documents and take such other actions as are necessary to facilitate the appointment of the successor trustee.
Transaction related documents will usually also need to be amended and/or assigned. Lenders should be notified early in the process as they will want to ensure continuation of their security interest. Additionally, lessees should be involved in the process so that leases can be properly assigned, or new leases put into place.
Consideration should be given to documents that need to be filed with aviation authorities with jurisdiction over the aircraft. For any aircraft registered to the trustee with the U.S. FAA, the resignation and succession documents must first be reviewed and approved by FAA Aeronautical Center Counsel and then they can be filed with the FAA along with the documents necessary to register the aircraft to the successor trustee.
Avoiding Common Issues
The best approach to avoiding problems when appointing a successor trustee is to assemble experienced aviation advisers just as you would at the commencement of a transaction.
If there is financing on the aircraft in the trust, the trustee and owner participants are likely required by the loan documents to notify the lender of any change of ownership. Lenders may have different preferences about how to document the appointment, either by amendment or assignment, or may have other requirements, so a failure to involve the lender early in the process may cause delays or create liability under the loan documents.
Lessees and operators should also be notified early of the introduction of the successor trustee. If the trustee is the registered owner of the aircraft, the appointment will require a new registration with the U.S. FAA and potentially with other aviation authorities. The lessee may help identify timing for the successor trustee to enter the structure based on the schedule of the aircraft to avoid liability for certain taxes. Lessees may also need to provide new certificates of insurance.
Involving experienced aviation counsel is essential to avoiding many issues. If the successor trustee will be the new registered owner, potential tax exposure must be considered. In the U.S. and many other jurisdictions, changing the trustee of an existing trust would typically not be considered a taxable event, however, the fact that the registration will change may invoke queries from taxing authorities and some states may view the tax issues differently. Having legal counsel review the applicable tax rules is critical to avoid tax risks.
While receipt of a letter of resignation from a trustee is an unenviable situation, with proper planning and attention to the following steps:
Prompt reaction to a letter of resignation and establishment of communication with the trustee;
Thoughtful selection of a qualified successor trustee;
Consideration of necessary required documentation; and
Engagement of experienced advisers
the introduction of a successor trustee can be safely and efficiently accomplished.
For additional information about the trustee resignation and succession process, contact the TVPX trust professionals, David Wall, Brett King, Mike Hoggan or Scott Nielsen at +1 801.877.0478 or visit our website at www.TVPX.com.
This article was originally published by TVPX Aircraft Registration Services, LLC. on August 15, 2019.
Aircraft Management Arrangements and the Flight Department Company Trap see more
NAFA member, Ryan Swirsky, Associate with GKG Law, discusses aircraft management arrangements and their consequences.
Aircraft owners frequently arrange for aircraft management companies to provide full-service management of their aircraft for aircraft operations under Federal Aviation Regulations (“FAR”) Part 91. However, when the aircraft management company contracts with the aircraft owner, there is the so-called “Flight Department Company Trap” that can result in serious negative consequences.
Some background will be helpful. It is common for a special purpose entity (“SPE”), typically wholly owned by an individual or his or her operating company, to take title to the aircraft. The aircraft management company usually prepares its management agreement for the SPE to sign. This commonly occurs because the management company rarely has any information related to ownership structuring issues.
FAR 91.501(b)(5) allows aircraft operations to be conducted under FAR Part 91 when the carriage of officials, employees, guests, and property of a company on an airplane operated by that company is within the scope of, and incidental to, the business of the company (other than transportation by air) and no charge, assessment, or fee is made for the carriage in excess of the cost of owning, operating, and maintaining the airplane. This generally means that flights must be in furtherance of a primary business activity of the company. For example, flying executives of a company that sells widgets to a manufacturing facility where the widgets are made to oversee production would be within the scope of, and incidental to, the primary business of the company.
Essentially, the Flight Department Company Trap is a situation where the SPE operates its aircraft illegally because stricter FAR are applicable to the SPE’s aircraft operations, but those stricter rules are not followed because the SPE operates the flights solely under FAR Part 91. The primary activity of an SPE would be transportation by air, as there is no other primary business activity being conducted by the SPE (hence leading to the “Flight Department Company” description). Therefore, the SPE will be unable to meet the requirements of FAR 91.501(b)(5). Further, under FAR Part 91, the aircraft operator is not permitted to receive compensation of any kind, except under certain limited exceptions. Capital contributions by an individual or by his or her operating company to the SPE (which would typically be the only way to fund aircraft operations, as the SPE’s only asset is the aircraft) are deemed to be compensation.
With the structure where the SPE enters into the management agreement, the Federal Aviation Administration (“FAA”) would likely view the SPE as providing air transportation services for compensation to the owner of the SPE. The fact that the SPE may be wholly owned by the recipient of such transportation services, or disregarded for federal income tax purposes, is irrelevant.
Fortunately, aircraft owners can still engage aircraft management companies for assistance operating flights under FAR Part 91 if structured correctly. Typically, the structure would entail the SPE “dry” leasing the aircraft (i.e. – lease the aircraft without crew) to an individual or his or her operating business, and the individual or business would enter into the aircraft management agreement. That individual or business would then pay the aircraft management company, and the individual or business would be deemed the operator of those flights by the FAA. Ideally, the SPE would not be involved in any cashflow with respect to the aircraft operating budget and would instead just have cashflow related income from the dry lease.
While, from a practical perspective, it may seem like there is not much difference between the two structures (after all, the same ultimate individual or business is flying on the aircraft, and paying the costs for the flights), use of the incorrect structure can result in serious negative consequences. Those consequences can include violation of insurance policies (and potential denial of coverage by the insurance company in the event of an accident), violation of loan covenants, civil fine exposure by the FAA to the SPE, penalties for the pilots of the aircraft (such as civil fines and license suspension), and federal excise tax liability. Further, liability protection planning may be potentially undermined due to a piercing of the entity veil argument (due to the principal activity of the SPE being to conduct unlawful aircraft operations). It is also more likely than not that this structure will undermine typical state sales and use tax planning.
Aircraft ownership and operation is a complex topic that requires consideration of multiple, often competing, factors. GKG Law’s business aviation attorneys have marshaled extensive knowledge of federal aviation, tax and regulatory issues, and we are one of the leading practices in the country primarily devoted to business aviation law. For more information on this topic or other business aviation related needs, please contact Ryan Swirsky (firstname.lastname@example.org or 202.342.5282).
This article was originally published by GKG Law on September 9, 2019.