NAFA member, Adam Meredith, discusses the hidden or unexpected costs of aircraft ownership. see more
NAFA member, Adam Meredith, President of AOPA Aviation Finance Company, discusses the hidden or unexpected costs of aircraft ownership.
Major hidden costs, for example, can result when a previous owner has deferred maintenance. You’re better off buying an airplane that’s been regularly used because the owner will typically address issues as they arise in order to continue using the plane regularly.
It’s a myth that it’s smart to look for an aircraft that’s had low flying time. Less wear and tear on the engine and the airframe? While those are important considerations, they should not be the only ones. After all, these are machines and machines are made to be run. When an aircraft sits, its problems remain hidden.
Low flying time could mean high maintenance when it’s your time to own the airplane. That’s one reason the first annual inspection can be unusually expensive — another hidden cost. So be prepared.
Here is a list of other hidden costs associated with aircraft ownership:
- Expenses incurred when an airplane is tied down outside (as opposed to protected in a hangar), including repainting and reskinning the exterior and replacing or repairing instrument panels, aircraft seats, interiors or even sun-crazed windows.
- Contaminated fuel, or more likely, a lineman who accidentally fills your gas tanks with the wrong fuel.
- Unforeseen mechanical failures or mishaps, such as a blown tire, a gear door jamming, a baggage door opening in flight and ejecting an object that damages an elevator or tail surface, etc.
- Compliance with unforeseen airworthiness directives (ADs).
- Animal strikes, bird strikes, lightning strikes, prop strikes, strikes by another aircraft taxiing into you.
- Mud daubers corrupting your pitot-static system or rodents chewing through electrical cables or nesting in your push-pull tubes.
- Sudden failure of one or more instruments, navigation radios or engine monitors.
- Even a pandemic.
The list is extensive but not exhaustive. Hence our advice to add 10% to 15% on top of your projected operations budget, so when those hidden costs reveal themselves, you aren’t surprised.
This article was originally published by AOPA Aviation Finance Company on June 10, 2020.
Podcast: Your Private Air Transportation Options – Making An Informed Decision and Executing It CorrectlyYour Private Air Transportation Options – Making An Informed Decision and Executing It Correctly see more
NAFA member, Anthony Kioussis with Asset Insight, hosts their latest podcast "Aircraft Ownership Lifecycle Podcast" featuring NAFA member, Lee Rohde President and CEO of Essex Aviation Group.
Lee Rohde discusses how the consulting company he founded advises aviation-related entities on a wide range of aircraft acquisition, strategic planning, financial, operational and management matters. Specifically, Lee covers:
- Private Air Transportation options – what should prospective users consider in reviewing their options for meeting their travel requirements?
- In the event an entity determines they want to acquire an aircraft, how should they go about identifying the best model to meet their travel requirements?
- What factors have the greatest influence on the decision to acquire a new vs. a pre-owned aircraft?
- The issues and complexities associated with refurbishing or upgrading a pre-owned aircraft.
- The expertise an entity should secure if they are planning an aircraft acquisition.
- The factors to be considered when determining an Offer Price for an aircraft.
- What a pre-purchase inspection entails and why it is such an important part of acquisition process.
Listen to the podcast here.
This podcast was originally published by Asset Insight.
Asset Insight Launches Podcast Series Focusing on the Aircraft Ownership Lifecycle see more
July 7, 2020 – Asset Insight today announced the launch of a new podcast series, available through the company’s website (www.assetinsight.com) and across all podcast platforms, free of charge. The library of episodes is stocked with 15 to 30-minute sessions focused on all segments of the Business & General Aviation aircraft ownership lifecycle – Acquiring, Financing, Operating, Maintaining and Selling. Host Anthony Kioussis visits with expert guests from numerous industry organizations and sectors who offer best practices, timely advice, proven principles, and explore specific aspects of the business aviation industry.
The Asset Insight Podcast library presently features 8 episodes, including sessions with Jay Mesinger at Mesinger Jets; Jim Blessing at Air Fleet Capital; Shelly Svoren at First Republic Bank; Lee Rohde at Essex Aviation; Jim Simpson at First Republic Bank; René Bangelsdorf at Charlie Bravo Aviation; Janine Iannarelli at Par Avion Ltd; and Ryan Waguespack with NATA. More podcasts will be made available each week.
“Asset Insight is in a unique position to bring aviation professionals together to hold timely discussions in short, interesting, educational and entertaining on-demand podcasts.” said Tony Kioussis, president of Asset Insight, LLC and host of the series. “This new aviation podcast series offers our community the opportunity to select episodes and topics on their schedule, and according to their interest and business segment. As many of us work from home to maintain safe social distancing, our podcasts allow people to remain connected. The podcasts can also assist new personnel entering the industry; people that would otherwise find it challenging to secure such information.”
This release was originally published by Asset Insight on July 7, 2020.
Adam Meredith, of AOPA Finance, addresses commonly asked questions on aircraft ownership. see more
NAFA member, Adam Meredith, President of AOPA Finance, addresses commonly asked questions on aircraft ownership during this difficult time. Purchasing an aircraft can be a challenging process under normal circumstances, but can be even more difficult to navigate during market volatility.
Question: With the current market volatility, do you find that lenders are tightening or loosening their credit requirements?
Answer: We have definitely seen some that are tightening credit. Specifically, some lenders are requesting copies of bank/investment statements that are within the last couple of days (vs. 30 days, under regular times). Given stock market volatility this isn’t too surprising. Also, we’ve seen some lenders that are being more cautious lending to individuals with direct financial exposure to COVID-19 (i.e. service industry companies not deemed essential).
Question: What advice are you giving to members who were currently looking to purchase before all of the shelter in place orders? Should we continue our search or place our search on hold until all of this blows over?
If you’re personally at high risk (financially or otherwise) to COVID-19, you’d be well advised to pause the purchase process. However, for everyone else, I’d encourage you to keep looking and work with sellers to create a plan for how to push through the closing process. For advice on guidance with shelter in place requirements, reach out to our trusted legal staff if you’re a legal services plan participant. If not, reach out to our Pilot Information Center to get the latest guidance.
This article was originally published by AOPA Finance on April 23, 2020.
Overview of the GAO Report on FAA see more
In March of 2020, at the request of Congressmen Stephen Lynch and Peter King with the Subcommittee on National Security and the Committee on Oversight and Reform, the GAO released its long-awaited report on the FAA Registry’s ability to handle fraud and abuse risks in aircraft registrations. As the title of the report clearly implies, the GAO found that the FAA Needs to Better Prevent, Detect, and Respond to Fraud and Abuse Risks in Aircraft Registration.
More specifically, however, the report found that the FAA needs to better review and vet the actual owners of aircraft. As we all know, the FAA currently takes filed documents at face value, and records them if they meet certain requirements as set by the FAA itself. While the rest of the industry has been subject to more and more demands to Know Your Customer, and to adhere to KYC and OFAC guidelines, the FAA has remained immune. This report suggests that it is time for the FAA itself to do more due diligence and better vet the entities registering aircraft on its registry.
There is also a clear need to allow law enforcement agencies more access to the data contained in the FAA registry. Currently, registration information is mostly provided in .pdf format which is not easily searchable or accessible. Many law enforcement agencies expressed frustration with an inability to have easy access to this information, and the report outlines opportunities for the FAA to be a center point to house data that could help law enforcement agencies to not only have better access to information, but to potentially allow for better cross-agency coordination to crack down on illegal activity involving the registration and use of general aviation aircraft.
The report seems to focus on increasing transparency in “Opaque Ownership Structures” for registering aircraft, which the GAO believes are at the highest risk for fraud and abuse. Opaque Ownership Structures are legitimate business structures that are widely used by corporations and individuals to facilitate commerce as well as for asset and tax management. However, they lack transparency related to aircraft registrations and can create challenges for safety and law-enforcement investigators seeking information about beneficial owners to support timely investigations.
These ownership structures can include the following:
- shell companies, especially in cases where there is foreign ownership that is spread across jurisdictions;
- complex ownership and control structures involving many layers of shares registered in the name of other legal entities;
- formal nominee shareholders and directors where the identity of the beneficial owner is undisclosed;
- trusts and other legal arrangements that enable a separation of legal ownership and beneficial ownership of assets;
- use of intermediaries in forming legal entities, including professional intermediaries.
It is worth noting that the report specifically excludes publicly traded companies, shifting the focus of these security measures away from commercial airlines and towards the general aviation industry.
On pages 58-59 of the report, the GAO outlined 15 recommendations for Executive Action by the FAA. Many of the recommended improvements to the FAA system are expected to be implemented in the FAA’s modernization project, slated to be completed by October 2021. Generally speaking, the modernization project is expected to help streamline and automate the aircraft registration process, and make the FAA records available to the public at all times. The GAO report includes recommendations for using this new system to improve the FAA’s vetting process of owners registering aircraft on the FAA’s system, and using that technology to allow law enforcement officials more access to registry data. Initial conversations with the FAA indicate they are on track to complete this project by the stated October 2021 deadline.
While the GAO has many recommendations to the FAA, there are still many questions to be answered. These are the Top Issues we have identified:
- The biggest unanswered question causing the most consternation in the industry, is the one involving transparency of ownership information. How much transparency will there really be? Will all aircraft ownership information be made available to the public, or only some? Will there be sections of registry data that remain “private” and only made available to authorized government agencies? That remains to be seen.
- Possibly the second largest question includes cost. The report is clear that the $5 filing fee set in 1964 is not enough to cover even today’s operating expenses, much less the costs to modernize the system. FAA has been talking about increasing registration costs for years, so an increase can likely be expected, but the question of how much remains to be answered. How much will it cost to register an aircraft in the future?
- Time is money, so questions about increases in registration time also remain. If FAA will be doing more vetting of its registrants, how much time will that take? How much longer will it take to register an aircraft with the FAA? What will this do to aircraft closing timelines?
- Lastly, there is the issue of international operations. The report expresses clear concern for FAA’s ability to issue Declarations of International Operations without knowledge or consent of specific law enforcement agencies. FAA currently expedites requests for international flights on a daily basis for the general aviation community, but will they be able to do that in the future? Or will there be a more stringent system of checks and balances required to issue Declarations of International Operations? And how long will it take to finally have one issued?
The FAA has yet to officially respond to the GAO’s report, but they have updated their website on the CARES Initiative to enhance and modernize the FAA registration services. To learn more about it, you can go to their website here: https://www.faa.gov/about/initiatives/cares/
Furthermore, on March 30, 2020, they issued their Third Request For Information, requesting information from the industry. To participate, click here: https://beta.sam.gov/opp/8b7d6e20940d4d5b8b4e8e9e76a991b3/view
As NAFA members, it is important that we participate in any proposed changes to the FAA registration process as much as possible. To the extent that you have time to fill out the FAA’s RFI, we encourage our members to do so.
NAFA will continue to monitor the proposed changes and the FAA’s eventual response and will report those to the membership.
The full report can be found here: https://www.gao.gov/assets/710/705505.pdf
Ain’t Nobody’s Business see more
NAFA member, Edward Kammerer, with Greenberg Traurig, discusses aircraft ownership privacy and security.
When asked why you use business aircraft, you likely would list “security” and privacy” among your top reasons. These legitimate and valid concerns include industrial security, personal security, a desire to keep trips and destinations confidential, and a good old fashioned sense of MYOB.
Many owners go to great lengths to keep the identity of their aircraft and their flying patterns hidden from view. However, despite owners’ best efforts, prying eyes easily can detect and track aircraft and identify their owners. Information available at the FAA Registry and other publicly available government filings, as well as aircraft information websites and services, make aircraft ownership information and destinations easy to obtain.
How Private and Secure is Your Aircraft?
Many aircraft are owned in LLCs formed just for this purpose. While the names of such LLCs may intentionally obfuscate the identify of the aircraft’s “true owner,” public information regarding the ownership and management of such LLCs often point to a company or individual owner. Additionally, services such as JetNet and Amstat are very effective at revealing an aircraft’s “true ownership.”
Contrary to what many think, taking title to an aircraft in an “Owner Trust” does not protect the owner’s identity. The name of the beneficiary of an Owner Trust must be disclosed in the aircraft’s publicly available registration documents. The use of a so-called “Double Trust Structure” can be effective to shield an owner’s identity. A Double Trust uses an Owner Trust with a second trust as the beneficial owner of the Owner Trust. The name of the second trust is a matter of public record, but the name of true owner of the second trust is hidden. Even with a Double Trust, the identity of the true owner can be discovered if the owners are not vigilant.
Anyone with an internet connection can track an aircraft simply by typing a tail number into aircraft tracking websites such as Flightaware.com or various other “plane spotter” websites.
The January 1 requirement that aircraft update their navigation tracking systems to ADS-B standards makes following aircraft movements an option for anyone with readily available and inexpensive equipment. Fortunately, the FAA and the National Business Aviation Association (NBAA) recently announced a program which will allow an owner to block public tracking of real-time positioning and identification information for ADS-B compliant aircraft.
What Can You Do?
While there are no fail-safe methods of keeping your aircraft’s ownership and movements secure, there are several precautionary measures which you can take to help preserve privacy and security.
- Avoid the use of vanity tail numbers and identifying marks on your aircraft which may provide telltale clues to ownership.
- Carefully monitor the identity of signatories to public documents. The identity of the “true owner” of an aircraft can be disclosed by cross-referencing the names of LLC documents to the “true owner” through websites such as LinkedIn. Documents filed at the FAA, such as tail number reservations and re-assignment, can help a determined investigator connect the dots between the true owner and the actual registrant.
- Double Trust structures, if properly formed and vigilantly monitored, can help protect your identity.
- By making an Aircraft Situation Display to Industry (f/k/a as NBAA’s “BARR Program”) blocking request, owners and operators can opt out of having their aircraft information broadcast over the internet.
- Sign up for the NBAA/FAA Program which allows your ADS-B tracking data to be broadcast in a format which is not readily accessible to the public.
Modern technology makes keeping your aircraft’s identity and location private and secure more difficult than ever. However, by taking a few simple precautions, you can shield your identity and aircraft movements from your competition, the media, those with political motivations, and the curious general public.
This article was originally published by Business Aviation Advisor on January 1, 2020.
Three Myths About Business Aircraft Ownership see more
NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses the myths about business aircraft ownership.
David Wyndham speaks to people who are new to Business Aviation on a regular basis, and also hears some recurrent myths about business aircraft ownership. Following he sets straight three of the more common misunderstandings…
I tend to help clients select the appropriate aircraft for their flying needs and to cost out the various ways to achieve that. Along the way is the need and opportunity to educate and inform.
Quite often the decision-maker is informed, but others (perhaps a board member or a CFO) are not. My first task is to listen to, and understand the client’s concerns and then, after validating them, provide answers – or at least a different point of view – for their consideration.
But what are some of the common myths I hear relating to business aircraft ownership? Let's dive in…
Myth 1: You can Make Money Chartering Your Aircraft
One client operates a transcontinental business jet. When it’s in for scheduled maintenance, he often uses charter. After seeing the charter bills, however, he wanted to buy a second transcontinental business jet for his backup and to charter it while he was not flying.
I worked with his aviation manager to find the break-even utilization. When accounting for the acquisition cost as well as the operating costs, there would be a need to fly over 2,000 charter hours annually. Why? There are two parts to the answer:
First: Charter rates are a relative bargain. While $8,000 per hour to charter a Long-Range Jet may seem like a lot, the operating expenses are significant: The variable expenses of fuel and maintenance alone average about $4,000 per hour. The annual fixed costs, including items such as crew, hangar, insurance, training and airborne internet run to $1.4m.
A typical charter payback to the owner is 85% of the listed hourly rate, and the owner pays for the aircraft expenses. So on that basis, our $8,000-per-hour charter provides the owner $6,800 per hour.
Deducting the $4,000 variable hourly costs leaves $2,800 per hour. To accumulate the $1.4m fixed costs takes 500 charter hours.
So, after that isn’t it all profit? In short, no. Our owner paid $60m for his global business jet. Current market depreciation is about 7% per year (or a loss in value of $4.2m per year). And that would require another 1,500 charter hours to make the deficit up. Hence our 2,000-hour break-even point.
Second: Money is not free. Our owner has a cost of capital, or an opportunity cost. If he paid $60m in cash for the jet, he can’t invest that money in his company or other ventures. If you add in a 10% return on capital, there is $6m per year in the lost opportunity of having his money tied-up in the jet.
He could opt to decrease that up front with an operating lease or a loan, but then his fixed expenses increase. To verify this, look at the financial reports of the airlines: An airline needs to fly between 2,500 to 3,000 hours per year per airplane in order to make a profit.
There is almost no way an on-demand charter operator can book enough charter to cover the costs of owning their own business jet. When an aircraft owner utilizes a charter operator to charter their aircraft when not in use, both parties can win.
The charter operator gets the use of a business aircraft without the cost to acquire it. The owner gets some revenues to offset their operating costs.
Myth 2: You Should Focus on Only one Cost… ‘Acquisition’
Every pilot report and airplane review article mentions three things:
- Cabin and amenities;
- How far the airplane flies;
- Acquisition cost.
Whenever I do an analysis of costs, I look at the total life cycle cost. This includes not only the acquisition cost, but the operating costs, and disposition.
While the acquisition cost – less the recovery at resale – is significant, the operating costs can amount to just as much over time.
Myth 3: Operating Costs are Consistent
At least a couple of times each year I have a client who is shocked when confronted with their maintenance costs. A recent situation involved the owner of a large-cabin business jet. The management company had told the owner to budget $3,500 per hour for fuel and maintenance, yet when they looked at their total expenses for 2018 those items averaged over $5,000 per hour.
Working through the management company’s reports, while also running our own “should-cost” analysis, we found a cost listed under maintenance for international travel, for which the mechanic accompanied the jet on a multi-week trip overseas.
Though this was smart planning, it was not necessarily a ‘routine’ maintenance expense.
The owner also had an inspection every 2,400 flight hours. They flew less than 300 hours in 2018 and averaged the cost of the 2,400-hour inspection over the 300 hours they flew, not the 2,400 hours it took to accrue the expense.
In my should-cost analysis the accruals for the maintenance from Conklin & de Decker’s data, adjusting for the cost of fuel, came to approximately $3,600 per hour over time. In any given year, the average for that year varied from about $2,400 to over $7,000 per hour.
The bottom line is that maintenance costs are cyclical. Unless you are on a guaranteed hourly maintenance program provided by the OEM or a third-party provider like Jet Support Services, Inc., the cost in any given year can fluctuate greatly.
All of the above misconceptions can be cleared up by listening, explaining and budgeting correctly. It also helps to have someone who understands both the costs and the operation to assist in the understanding.
More information from www.conklindd.com.
This article was originally published by AvBuyer on August 19, 2019.
The Airplane Acquisition Checklist Series: Part One: The Pre-Purchase see more
NAFA member Adam Meredith, President of AOPA Aviation Finance Company, shares his pre-purchase airplane acquisition checklist.
Did you resolve to upgrade your current aircraft or to buy your first airplane in 2019? Congratulations!. With low inventory and high demand, how you approach the buying process may be the difference between getting your first-choice or settling for an also-ran.
Buying an airplane is like flying an airplane. It’s all about planning, crew resource management and checklists. Your “crew” includes your lender, your insurer, your maintenance contractor and AOPA’s Aviation Finance Group. AOPA Finance can match you with the right lender, and our extensive experience can also provide you the additional leverage you may need in a tight market, at no cost to you.
Like flying, how well you plan, manage your crew and follow your checklists help determine how well the purchase process goes. We’re not talking about pre-flight, flight and post-flight checklists, though. We mean these checklists:
3. Aircraft Delivery
Let’s start with the Pre-purchase Checklist:
• Ownership—personally or through a company or LLC?
• Use—personal or commercial?
• Loan Pre-approval
• Private hangar or shared?
• Aircraft maintenance contractor
Ownership. Are you going to own the airplane yourself or through your company? Will you create an LLC, a partnership or some other type of corporate body? Iron out those details first. They guide which lender can pre-approve you and may also influence the length of the pre-approval process. There are advantages and disadvantages to all ownership scenarios. What’s important to know is that if you decide to change structure at the last minute, it’s a bit like telling your building contractor you want to move a door. At a minimum you know there’s going to be delays in the process and it may completely change the structure.
We’ve seen too many situations where potential buyers got a loan pre-approval based on one ownership scenario (like a partnership), only for them to change the scenario (like dissolving the partnership). That kind of change will negate the pre-approval process and will force the buyer to start over. It may also necessitate finding a different lender.
Use—Personal or Commercial? Part 91 transport for you alone, for your company’s employees or leaseback to the local flight school? Decide how you intend to fly your aircraft and commit to it. There is no advantage in telling your prospective lender and insurer it’s for personal use, only to conduct commercial operations once purchased. Should the discrepancy come to light because of an accident, incident or investigation, it could trigger a steep default interest rate, or worse. Transparent communication is the best way to keep this complex transaction simple.
Now it’s time for:
Loan Pre-Approval. Getting pre-approved confirms what you can afford and enables you to move quickly on an aircraft, both essential in this seller’s market.
Some think it’s a waste of time to get pre-approved because the pre-approval is time-limited. True, pre-approval is good for anywhere from 60 to 90 days, depending on the lender. That’s generally enough time to find the right aircraft. But, if the search period does exceed the pre-approval timeframe, it may be possible to extend the pre-approval period.
Even if the lender won’t extend, re-approval is quicker than an initial pre-approval. So you’re still ahead of the competition.
While waiting on pre-approval, finish the rest of the checklist:
Escrow. Have cash ready to put in an escrow account. Escrow gives you an exclusive option on an aircraft within a specific timeframe. When entering escrow, ask for generous restrictions. The more time you can negotiate, the better. It gives your lender, insurer or AOPA Finance space to conduct background checks, damage history and title searches. Also consider keeping extra money in reserve to add to escrow should the seller require an additional incentive.
Next time: The Purchase and Aircraft Delivery checklist.
This article was originally published by AOPA Aviation Finance Company on February 21, 2019.
When Can Charter Offset Jet Operating Costs? see more
NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses ways to help reduce your costs of business jet ownership.
Are you looking to reduce your total costs of business jet ownership? A management company can charter your aircraft during the idle periods between personal trips. David Wyndham discusses…
Choosing the right firm to manage your jet will be crucial. Firstly, it must have authorization under FAA Part 135 (or its international equivalent outside the US). Secondly, be prepared that the relationship between owner and management company can be complicated given the myriad of regulatory restrictions governing operational control of any aircraft used for commercial service.
Following are the general terms that exist between the aircraft owner and commercial operator:
- The aircraft owner pays all the operating costs (e.g., fuel, maintenance, other aircraft operating expenses, etc.)
- The crew may be billed either as salaries or as an hourly fee
- The aircraft owner gets a variable percentage of the charter revenue
Fact: Your idle asset can generate income that will offset the cost of owning and operating the aircraft.
Myth: Chartering your aircraft means you will “fly for free.”
Some Rules of Thumb
The aircraft owner typically receives 85% of the base charter rate, while the certificate holder keeps the remaining 15%. As outlined above, the aircraft owner typically will pay all the aircraft-specific expenses such as fuel and maintenance. The excess of charter revenue over those expenses is what helps offset the fixed costs, resulting in a net decrease in total cost to the owner.
Other negotiated terms may involve the accrual for maintenance, guaranteed hourly maintenance plans, and fuel cost offsets. Recently, I saw an agreement where the aircraft owner received a set revenue per hour regardless of what the charter operator charged. Another agreement had the charter operator paying the fuel costs with a reduced percentage of the revenues to the owner.
So, what’s in it for the charter operator? Why would they even want to deal with individual owners instead of operating their own fleet?
The Scale Problem of Charter
Charter companies have a scale problem. Market charter rates are not sufficient to cover all the costs of operating an aircraft unless they fly a lot of hours. When you factor in the fixed costs and cost of capital or leasing, charter rates simply don’t pay enough.
The utilization necessary to make a profit by owning the aircraft and chartering it are well beyond what the on-demand charter aircraft typically flies. Scheduled airlines may fly 2,500 hours per year per aircraft and, in many years, still lose money.
I ran the break-even revenues for a global business jet for one owner and, accounting for the cost of capital and taxes, calculated that they would need about 3,000 charter hours per year. For most charter operators, owning a turbine aircraft is not affordable.
Here’s another example to consider. An aircraft that charters for $3,200 per hour can cost about $1,700 per hour for the variable expenses alone. After the charter operator takes its 15%, the owner is left with roughly $2,720 per hour before variable expenses. Factor those in and the owner receives $1,020 per hour in excess of the variable costs.
There are fixed costs and, even with discounts available to the owner, those costs might run to $500k per year.
Assuming the used jet is valued at $3m, the lease payments are $300k per year. Even if you purchased the aircraft, there is a cost of capital as you cannot invest this money elsewhere. Adding the lease expense plus the fixed expenses, you are now at $800k per year.
At an income over operating expense of $1,020 per hour, our owner needs 784 hours of charter revenue to break even before tax considerations. Very few charter operators can generate that much revenue flying in a year.
Who Could Benefit?
For the owner who flies infrequently or has a predictable schedule the revenues from charter can certainly help reduce the cost of flying. The charter operator generates profitable revenues and the owner offsets their costs.
With the proper relationship, both the owner and operator can come out ahead and the charter client gets lower rates and a greater selection of aircraft.
Risk Management Benefit
One less obvious advantage of a charter relationship relates to risk management. As the owner of an aircraft, you will have liabilities related to the safe operation of the aircraft. That’s why you have insurance, right?
If you charter your aircraft, however, the operational risk is shared with the charter operator, even when you are onboard. They assume responsibility for the safe conduct of the flight.
Next month, we’ll address more of the potential issues and concerns associated with chartering your aircraft.
More information from www.conklindd.com
This article was originally published in AvBuyer on January 23, 2019.
Whole Aircraft Ownership: Is It Right For You? see more
NAFA member, David Wyndham with Conklin & de Decker, highlights the benefits of sole ownership of a business aircraft.
If control over your company’s transportation is paramount, sole ownership of a business aircraft is particularly attractive. With high enough utilization, it is also very cost effective.
As a generalization, when your flying needs come close to (or exceed 200 annual hours), whole aircraft ownership can be more cost effective than fractional, charter or membership programs. Whole aircraft ownership offers the following benefits.
Freedom: With whole aircraft ownership a company has the freedom to select the best aircraft to satisfy its needs. Within safety and operating regulations, that aircraft can be operated as the owner requires.
Customization: When a company acquires its own aircraft, the outfitting of the aircraft can be done to suit its operational and travel requirements.
Options for colors, seating, carpeting materials (and more) are able to be matched to your needs and preferences. The larger the cabin size, the more flexibility there is in how the interior can be configured.
Service Levels: The aviation department personnel are the owning company’s employees. Not only is that company able to shape their training and manage their competence, it can affect how they interface personally with passengers.
The ability to hire the employees that fit the organization can be invaluable, and this service level generates a rapport that is effortless and comforting.
Control: In the US, Federal Aviation Regulations (FARs) allow the most flexibility and opportunity for control to not-for-hire operations flown on behalf of the aircraft owner. A company-owned aircraft that is used in support of the business of the company falls under these rules.
While all aircraft must be operated safely, the sole owner of a business aircraft has greater influence over operations than either a charter customer or a fractional owner. Factors influencing safety and security are within the operator’s control.
A whole-aircraft owner has the highest levels of privacy. You can discuss sensitive business, or leave important corporate documents and personal items on board the aircraft.
Responsibility: With this high degree of control comes an equally high level of responsibility. While the FARs state that the pilot in command is the ultimate person responsible for the safe operation of the aircraft, the owner is responsible for the hiring and training of that pilot. The owner has liability for the actions of its employees, and this extends to the aircraft operation.
The owner can manage this risk via high-quality training and insurance. The crew should be trained to the highest appropriate levels of competence. Maintenance engineers (if applicable) also require regular training.
An individual or company owning or leasing their own hangar is also responsible for ground safety. The owner shares the risk by properly insuring the aircraft and crew.
Managing and directing the detailed operation of aviation activities requires individuals versed in management and Business Aviation - a skillset commonly accomplished either by having an in-house aviation manager/director, or by contracting the management of the aviation operation to a management company.
The Role of Management Companies
A management company can offer a turn-key approach of contracting the function and oversight of the aviation operation. These companies specialize in flight operations.
For a first-time owner of a business aircraft, we usually recommend contracted management for starting the aviation operation. In additional to providing flight crews and functional oversight, the management company can provide economic benefits as well:
- Fuel can be purchased in bulk on behalf of multiple aircraft owners;
- Discounts can extend to maintenance (the management company with multiple aircraft should be able to negotiate discounts for spare parts);
- The management company can purchase insurance for its group of owners at rates that can be lower than for a single aircraft.
While management companies tailor their services to meet an owner’s unique requirements, they typically offer the following oversight:
- Hangaring the aircraft
- Managing the aircraft records
- Hiring and training the flight crews
- Managing the maintenance of the aircraft
- Handling the billing and verification of all variable operating expenses (including fuel, maintenance, etc.)
- Ensuring that all regulatory requirements are met by the aircraft and crew
- Refueling the aircraft
- Cleaning and cosmetic upkeep of the managed aircraft.
Offsetting the Costs of Whole Ownership
If you, as the owner, desire to further reduce your total costs, a management company can charter the aircraft when you’re not using it, provided the firm has authorization under FAA Part 135 (or its equivalent in non US countries).
This relationship is complicated as there are regulatory restrictions governing operational control of any aircraft used for commercial service. The general terms are as follows:
- The aircraft owner pays all the operating costs (fuel, maintenance and other aircraft operating expenses).
- The crew may be billed as salaries or as an hourly fee.
- The aircraft owner gets a set percentage of the charter revenue.
The charter revenue the owner receives should be more than enough to cover the operating costs, but will not be enough to cover all of the fixed expenses, debt service and depreciation. The charter revenue is shared between the charter operator and aircraft owner. Rarely, however, does a chartering arrangement with a management company produce a profit for the aircraft owner.
The relationship with the management company is as much a personal relationship as a business relationship. Communication and shared goals are important. If you want control, fly enough hours and accept the responsibility, whole aircraft ownership can be very rewarding.
This article was originally published in AvBuyer on May 14, 2018.
Is a Business Jet Lease Right for You? see more
NAFA member, Keith Hayes with PNC Aviation Finance discusses business jet leases.
Has the aircraft lease market changed since the Great Recession? What are the popular lease types available to business jet owners? AvBuyer spoke with PNC’s Keith Hayes to discuss how leases can benefit certain companies and individuals.
Keith Hayes began a lengthy career in the finance sector with GE Capital in 1985, having joined straight out of college. Starting as an internal auditor, he held several roles within the company transitioning into a credit role and then into a sales/finance role covering a multitude of asset types.
In 2004 he joined the GE Corporate Aircraft group as the National Sales Manager and has been in the aviation finance sector ever since. Today as the National Sales Manager for PNC Aviation Finance, he is well placed to offer insights into the Business Aviation finance market. He is based at the company’s Boise, Idaho offices.
AvBuyer spoke with Keith to discuss the types of leases commonly available to prospective business jet owners; trends in the aircraft lease market; and advice to buyers considering lease as an option for their next business jet purchase.
AvBuyer: How has the aircraft lease market developed/changed over the past few years? Do you foresee further change in the short- to medium-term?
Hayes: The biggest changes have taken place post-recession. Prior to the recession, a lot of aircraft were leased under 10- to 12-year leases with flexibility for the lessee to terminate early within years 4-6 of the lease.
Following the recession, when aircraft values began to plummet, lessees generally found they were ‘under water’ in their leases. Many had no choice but to continue to lease the airplanes until the end of the lease term before returning them to the lessor (the bank).
This was not a positive experience for the lessee or the lessor. Due to the challenges associated with selling the returned aircraft, many lessors stopped offering lease products altogether. Others, PNC Aviation Finance included, continued to offer the product and, now that aircraft values are stabilizing (along with the recent changes in the tax laws), lessors are seeing an uptick in lease activity.
Looking ahead, there are changes taking place in certain accounting rules coming into effect in 2019 and 2020 that will cause leasing to not be as advantageous for financial reporting purposes.
Among the changes is a requirement from the Financial Accounting Standards Board for organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, and to provide disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
However, we believe aircraft leasing will continue to be a value-added structure for certain owners.
AvBuyer: We’re hearing various forecasts of continued growth in the new and used aircraft sales marketplace during 2019. Would you expect to see aircraft leasing influence the aircraft sales trends over the coming year? If so, how?
Hayes: I have always said that financing does not drive the behaviour of aircraft owner. The average aircraft owner changes their airplane every four-to-five years regardless of whether they paid cash, financed or leased their airplane.
Some would argue that when banking ‘became tight’ during the last recession, aircraft sales were impacted, but I question if this was truly a factor. Cash has been, and continues to be, the number one method of paying for an airplane.
But as the global economy continues to thrive, I anticipate our industry will continue to grow; as companies and wealthy individuals continue to have opportunities to deploy cash into high-return assets, they will elect to finance or lease as opposed to paying cash for a ‘non-earning’ asset. Meanwhile, the lease versus finance question typically is driven by the owner’s tax appetite or financial reporting needs, not simply the drive to buy or not buy.
AvBuyer: For those weighing-up whether a lease is right for them, what are the common lease options, and what type of aircraft owner is each tailored to?
Hayes: In short, there are two types of leases: A tax-oriented operating lease (in which the lessor owns the airplane for Federal Income Tax purposes); and a synthetic lease (in which the lessee owns the plane for Federal Income Tax purposes).
Typically, an owner may enter a synthetic lease for a variety of reasons, including deferral of state sales tax and/or financial reporting and off-balance sheet treatment. Under a synthetic lease, the lessee would have full availability of all tax benefits for Federal Income Tax purposes.
Meanwhile, an owner may enter a tax-oriented operating lease for the same benefits realized in a synthetic lease but, most likely, they would do so because they cannot fully utilize the tax benefits.
There are a number of reasons why this would be the case including their level of personal use, passive versus active income, carrying forward of net operating losses, and more. Under a tax-oriented operating lease, the tax benefits are ‘passed’ to the lessor, and the lessor in return offers a lower cost of funds to the lessee.
Commonly, these tax-oriented leases are structured with eight- to ten-year terms with early buy-out options at a point determined by the lessee.
AvBuyer: For those considering whether an aircraft lease is the route they want to take into aircraft ownership, what are the most important things for them to understand?
Hayes: There are a number of variables an owner would want to keep in the front of their minds when leasing an aircraft.
While the documentation process for a lease (versus that for a loan) is not overly complicated, there are certain conditions you want to make sure are ‘market’ ones, including the return provisions, usage provisions and reporting requirements.
Additionally, the inclusion of an early buyout in the lease is an option the lessor may or may not offer. It is up to the individual lessee and their specific requirements to decide if this option is important.
Also worth considering, some lessors have a tax appetite while others do not. The lessee should recognize a lower cost of funds which can be analysed through the early buy-out in exchange for passing the tax benefits to the lessor. If it appears the rate of return is equivalent to debt financing, it could mean the lessor has no tax appetite.
Lastly, in many states, sales tax is paid on the rentals via use tax (as opposed to upfront payment). This can result in a significant deferral and, in some cases, avoidance of sales tax altogether (i.e. if the lease is terminated at an early buyout point and the airplane is then sold, the use tax on the remaining rental is potentially avoided).
This article was originally published on AvBuyer on January 7, 2019.
Financing Your Business Aircraft: Reaping Ownership Benefits, While Avoiding Leasing Pitfalls see more
NAFA member Martin Ormon, President and Founder of Aircraft Finance Corporation, compares the benefits of buying versus leasing your business aircraft.
With the new year comes the first full-year's tax filing under the Tax Cuts and Jobs Act of 2017. If your accountant or Chief Financial Officer (CFO) works like most, you'll have already engaged in a couple of briefings on the charges - on adapting to the law's new language - and you probably have another meeting planned to lay out for you the impact of those changes on this year's numbers.
For those looking to buy or lease a business aircraft after holding-off a while to weigh up the impact of the 2017 tax changes, now would be an excellent time to answer a recurring question asked before companies make a major decision on a big-dollar equipment outlay.
Should you buy or should you lease?
Each approach brings its own benefits and limitations, just as leases themselves vary in type to meet the differing needs of the operator.
But Martin Ormon of Aircraft Finance Corporation questions why so many operators are choosing to lease older aircraft, knowing that to keep it at the end of the lease means coming up with a buyout amount for the leasing company. "Otherwise, they walk away with nothing but their receipts," Ormon notes.
While Ormon acknowledges that for later-model business aircraft lease terms may benefit an operator's cash flow picture, "for many of the older aircraft (7 years and up), buying it with today's more attractive finance terms can make more sense for cash flow - and at the end of the term leave the owner with an asset, paid off and wholly owned," he elaborates.
"A lease structure and the supply of good aircraft and low financing costs for 20 years makes more sense financially than leasing."
But then, financing aircraft sales is Martin Ormon's business. He owns and operates Aircraft Finance Corporation, a rare lending operation with regular terms as long as 20 years for older business-turbine aircraft.
Aircraft Finance Corp: The Backdrop
When we last spoke with Martin Ormon in 2016, the topic focused on understanding the benefits to clients from dealing with Aircraft Finance Corp. versus more traditional banks and finance companies, particularly when financing business aircraft aged 10 and older.
Since then Ormon's business has continued to thrive, so we sought his input on the lay of the land in light of a small renewed 'boom' of recent months. Some credit the boom to the 2017 tax-reform law signed into law 13 months ago. Others credit the resurgent economy and strong market growth - a more tentative view recently.
Still others cite both of the above and a resurgence in market demand after a lengthy period in which many buyers held back. Against the backdrop of the Great Recession and the crash in business-aircraft sales, the resurgence, for whatever cause, is welcome among companies servicing business-aircraft transactions.
What hasn't changed is the availability of good finance terms, according to Ormon. "You get the deals from the secondary (market) guys; you don't get the deals from the guys who make the business."
That means operators looking to buy an older jet still face tougher terms than operators who are able to shop for new or near-new aircraft. "Leasing terms aren't what they once were," Ormon claims. "The guys in the leasing business today are struggling more because of the nightmare hit on residual values.
"And the residual value on some of these aircraft has gone beyond hitting bottom - and they're still getting a resurgence in market value because of increased demand."
Aircraft Finance Corporation continues to do a banner business because of its combination of competitive interest rates, competitive down-payment terms and loan terms as long as 20 years.
"The one thing that i've learned , "Ormon offers, "is that interest rates do not dictate demand for aircraft purchases - while it may effect some who don't have the credit history others do."
Used Aircraft Competing Against New
Ormon cites a number of loans recently written by Aircraft Finance Corporation, loans which took advantage of depressed prices of some older aircraft with loan terms more competitive than lease terms.
"With values where they are today, why would anyone buy a new aircraft?" he asked. "With our 20-year amortization system we can make an aircraft less expensive than leasing."
One example Ormon offers is for a Bombardier Challenger 605. The owner's situation had changed and they needed some relief from the cash-flow pressures. "We refinanced that Challenger 605, which ahd payments exceeding $70,000/month on a seven-year amortization. We did it for 20 (years) and their payment came down to about $20,000/month, solving the owner's problem."
Ormon says that many of the finance outfits don't want people to know that 20-year loan terms are available.
Lease Versus Buy
"At the end of the day, that 20-year term gives a lot of people more financial freedom and flexibility," Ormon highlights.
Todday's terms available from financing firms like Martin Ormon's make financing more attractive than leasing. "You'd still have to buy out the residual value to own that aircraft at the end of the lease. That or accept never owning the airplane."
Weighed against a lease structure with today's supply of good aircraft, the low financing costs for a 20-year term makes borrowing to buy more financially sensible than leasing, Ormon stresses, adding that Aircraft Finance Corporation underwrites its own financing, which makes dealing with the company more streamlined.
This different approach works for the buyers Ormon finances, for the sellers he helps sell their old aircraft, and for Aircraft Finance Corporation of a business.
Ormon's small aircraft finance bank began operations in August 2000, and he let it make money for him while he continued in his own business. "I didn't think much more about the small amount of business we were doing ... until the downturn," he recalls.
"Now, it's going great, because we help people and they come back again for their next deal."
It's good for Business Aviation - and what's good for Business Aviation is good for the aviation economy.
This article was originally published in the February issue of AvBuyer Magazine.
The FAA and aircraft ownership - use a trusted, neutral third party to handle transactions. see more
By Wright Brothers Aircraft Title
Not necessarily. Here’s why.
Philko Aviation, Inc. v. Shacket
United States Supreme Court 462 U.S. 406 (1983)
This is a great example of aircraft ownership and the role of the FAA in sales transactions. In this case, a shady character, Roger Smith, sold an aircraft to the Shackets. Smith provided the aircraft and a photocopy of the bill of sale and told Shacket that he would take care of the paperwork. He never filed the bill of sale with the FAA, so there was no record the transaction ever happened. Shady Smith then resold the same aircraft to Philko Aviation. He told Philko that the plane was in Michigan but provided them with the title documents. Because he provided a bill of sale and there was no record at the FAA of Shacket sale, Philko’s bank closed the deal and filed the bill of sale with the FAA.
So, both parties paid for the plane, but Shacket had the aircraft and Philko had the title. Who really owned it?
The Shackets sued in federal court for ownership of the aircraft. Philko claimed that they had the right to the aircraft because the Shackets did not file any title documents with the FAA (as required by § 503(c) of the Federal Aviation Act of 1958. 49 U.S.C. §§ 1301 et. seq). Obviously, both parties felt they had a right to own the plane. After all, they both paid for it, right?
The court ruled in favor of the Shackets. The reason? The Shackets had a good title under Illinois’ Uniform Commercial Code, which was NOT preempted by the Federal law § 503(c). The law stated that an oral sale is valid against third parties once the buyer takes possession of the aircraft.
The FAA and Aircraft Ownership
What is interesting and notable about this case is the party who held title according to the FAA records was not the party who won the case. In other words, the FAA said that Philko owned the plane, but the courts disagreed and gave the plane to the Shackets because they were in possession of it. Philko Aviation did the right thing by filing with the FAA, but that was not the deciding factor. Possession is 9/10ths of the law, and this case was no different. The party in possession won.
What can we learn from this? Be careful who you deal with. The global nature of aircraft transactions makes it hard for buyers and sellers to know each other. In a previous blog, Born in a Pool Hall, we outline the origins and reasons for using a trusted escrow agent. In this instance, having used a trusted, neutral third party to handle funds and documents would have saved both parties a lot of time, energy, and heartache.
Can a prospective aircraft owner benefit from claiming 100 percent "bonus depreciation"? see more
Can a prospective aircraft owner benefit from claiming 100 percent “bonus depreciation” even though the owner expects to fly the aircraft for personal use? Yes, with limitations and careful structuring under the Internal Revenue Code (IRC). However, in doing so, it is essential to harmonize potentially conflicting rules in the IRC with the Federal Aviation Regulations (FARs) and state law, including sales/use tax laws.
The Tax Cuts and Jobs Act of 2017, which became law on December 22, for the first time allows aircraft owners temporarily to take 50 percent or 100 percent bonus depreciation deductions on preowned aircraft. It also doubles the pre-existing 50 percent bonus depreciation to 100 percent of the cost of certain new aircraft.
A business taxpayer who owns an aircraft can take 100-percent bonus depreciation deductions under the IRC against gross income if it uses the aircraft in its trade or business or for production of income. However, an owner cannot take depreciation deductions for personal use, including entertainment, amusement, or recreation.
The IRC allows certain owners to deduct depreciation from gross income by two methods. The first is straight-line depreciation created under the Alternative Depreciation System. This allows owners to take equal depreciation deductions each year of the “recovery period”—the years to fully write off aircraft. That is six years for aircraft operated under Part 91 and 12 years for aircraft operating under Part 135.
Read the full article on AINsight.