aviation

  • Tracey Cheek posted an article
    Hagerty Jet Group's Quarterly Market Update for Gulfstream Aircraft Q1 2019 see more

    NAFA member, James Hagerty, President and CEO of Hagerty Jet Group shares the latest Quarterly Market Update for Gulfstream Aircraft for the first quarter of 2019.

    Mixed Market Signals in Pre-owned Gulfstream Markets

    In our previous Gulfstream Pre-owned Aircraft Market Report, Hagerty Jet Group predicted a choppy 2019 for business jet transactions. Entering into Q2, we continue to sense mixed market signals with steady transaction volume, but with increasing supply and notably decreasing ask prices.

    Transaction volume in Q1 2019 was stronger than we anticipated. Most pre-owned Gulfstream markets we track had stronger transaction volume in the past quarter than the prior 12 months. Most notably, there were 16 G550 sales in Q1 2019. That’s almost double the average of the previous three years.

    We tracked a spike in Off Market aircraft transactions that were not publicly advertised or unknown by market participants. For example, 6 of the 16 G550 transactions for the quarter were considered Off Market deals. We consider this as an indication that many buyers are frustrated by the lack of good inventory and sought direct opportunities with unlisted aircraft.

    Although average values remain flat across most makes and models, we expect prices to soften in Q2. In the G550 market alone, there were 14 price reductions in the quarter with an average decrease of -9%. This signals that Sellers are lowering price expectations to compete for buyers who are otherwise considering Off Market alternatives. Although the G550 market had a bump in values of nearly 10% last year, we believe demand will wane with fewer transactions in Q2 than Q1 and at lower prices.

    General sentiment from our peers in the broker community signals a decrease in overall demand as global economic uncertainty continues to loom. Fears of a 2020 recession, the unknown impact of Brexit and US/China trade relations are several common talking points in the industry. The Trump-Bump from a year ago seems to have faded and normalized. Now it’s back to business as usual.

    We are watching closely the new G500 market emerge. The first Pre-Owned G500 came to market in late March with a $49.99M ask price. This is a newly delivered airplane with ferry time only. The ask price is arguably slightly higher than a new plane with a 2020 delivery. We’re interested to see the premiums, if any, a buyer will pay to mark the first“pre-owned” G500 transaction. Please continue to subscribe to receive future editions of our quarterly market report.

    To read the full market update click here.

    This market update was originally published by Hagerty Jet Group on April 1, 2019.

  • Tracey Cheek posted an article
    Millennials in BizAv: What are the Opportunities? see more

    NAFA member, Michael Francis, Vice President with 1st Source Bank's Aircraft Lending Division, discusses the opportunities for millennials in business aviation.

    Millennials are changing the world as we know it for better or for worse depending on your perspective of the change(s) at hand. Michael Francis asks, what is their impact on business aviation? What are the opportunities and changes that they’re likely to bring?

    You may not appreciate avocado toast (yet), but few among us haven’t benefited from, or been impacted by the new ideas emanating from the Millennials, and manifesting into new business models like Uber, Spotify and Facebook.

    How, and in what form, Millennials will change Business Aviation is a conversation in its infancy, given the oldest Millennial is in his or her late 30s and still accumulating the wealth necessary to utilize a business jet in a meaningful way.

    Yet although, in general, finance lenders have not yet seen a meaningful change in how Millennials borrow money, the way they may use Business Aviation could alter how aircraft lenders provide acquisition financing in the future.

    The Sharing Economy

    We’re still some time away from drone-like air taxis dotting our skies, but new business models adapting the “Sharing Economy” model (i.e. Uber, AirBNB, and others) to Business Aviation are making it easier to interface with this demographic – and at a price point lower than it’s historically been.

    Surf Air, Wheels Up and JetSuite are three well-known examples of companies getting attention lately for their transformative business models. Although each of these companies differ in execution, one similarity is they all own or lease at least some of their aircraft, which have some form of secured debt financing.

    Not only have these companies started to change Business Aviation, they are also creating new opportunities for aircraft lenders.

    New Model of Financing?

    Although charter companies have been around since the dawn of private aviation, they’ve often been thinly capitalized and own older, high-time aircraft. This has created a challenge for lenders to finance these companies, since they are usually looking for a borrower with a strong enough balance sheet to weather downturns in the market, and an aircraft which will provide secure collateral with minimal variability in value.

    However, a primary tenant of these new Sharing Economy companies is having access to a fleet of aircraft they have control over, affording them flexibility and responsiveness, which is difficult to do without owning or leasing the aircraft.

    Given the capital required to acquire an aircraft, this usually requires some form of financing. The difference with these new companies though are that they’re a far cry from a “Mom and Pop” charter operator with one aircraft, but have seasoned management and multiple rounds of funding from committed funders and investors.

    Traditional aircraft lenders have had a difficult time financing companies at this stage in their growth, but the validation of these companies thriving and becoming profitable could create a real opportunity for lenders to move beyond the traditional model of financing high net worth individuals and companies.

    What’s the Key

    The key is closely watching the success of these companies, and also understanding how to redeploy their aircraft in the event of a bankruptcy or downturn in the market.

    The demand for high-time aircraft used in a high utilization environment, typical of charter operators, is minimal especially during a down market. However, if the concept behind these new companies thrives, that should increase demand for higher time aircraft as aircraft operators are relatively relaxed about total time on an airframe, but rather are focused on how much “life” is left in it.

    Considering cash has been more popular than debt or lease financing over the past decade, the opportunity to finance these new companies could be a significant opportunity for aircraft financiers in the decades to come.

    Although it’s likely sharing a ride with strangers in your “private aircraft” will be the wave of the future, we’ll see about the avocado toast.

    More information from www.1stsource.com/business/specialty-financing/specialty-financing/aircraft-and-helicopter

    This article was originally published in AvBuyer on October 24, 2018.

  • Tracey Cheek posted an article
    Seller's Market Settles in as Prices Increase and Buyers and Sellers Expectations for Price Come Tog see more

    NAFA member, Tony Kioussis, president of Asset Insight, forecasts prices to continue to increase through first quarter 2019.

    January 22, 2019 – According to Asset Insight’s Year End 2018 Market Report (AI2 Market Report), demand for late model turboprops and large jets continued to increase in the fourth quarter of 2018 and helped drive a continued seller’s market with higher average selling prices.Excellent quality “for sale” aircraft are expected to drive prices up further in Q1 2019 as buyers’ and sellers’ expectations continue to converge on selling price.

    The 4Q 2018 AI2 Market Report analyzes values for every production year of every modern make and model Business Class aircraft, while the Report’s maintenance analytics cover 94 fixed-wing models and 1,591 aircraft listed for sale.

    Other trends detailed in the 4Q 2018 Market Report include:

    • Ask Prices increased for all groups during Q4;

    • Inventory aircraft with higher maintenance exposure relative to Ask Price, spent 57%

      longer on the market than comparable aircraft;

    • Tracked fleet’s Quality Rating remained within the “Excellent” range and saw

      improvement in Q4 2018, over previous 12-month best ratings;

    • Excellent Asset Quality improves Maintenance Exposure for most groups, except for Large

      Jets as the unsold inventory’s accrued/embedded scheduled maintenance increased (worsened).

      “Q4 continued the trend with sales of high-quality, recent models driving average selling prices higher” said Tony Kioussis, president of Asset Insight, LLC. “The seller’s market continued through the end of 2018, and we are forecasting increased prices well into 2019. However, buyers should continue to research the cost for pending maintenance events.”

      Note to editors, managers and owners: Please see the bottom right corner of each category page for a concise summary of the results and conditions in that specific market segment.

      Exclusively available from Asset Insight, the AI2 Market Report includes eTrendTM, a 90-day forecast for aircraft value by make and model. This tool is especially helpful to sellers who are evaluating offers on their aircraft while concurrently considering if their prospects are likely to improve.

    Statistically, Asset Insight's eTrendTM forecasts are based on some of the most robust data analytics in the industry and have been thoroughly back-tested to confirm a significant degree of accuracy.

    To download the complete Market Report covering Q4 2018, visit www.assetinsight.com or click here.

    This press release was published on January 22, 2019 by Asset Insight.

  • Tracey Cheek posted an article
    Podcast: AOPA's Mark Baker Talks Certification Trends see more

    NAFA member, Mark Baker, President of AOPA, gave a presentation about some surprising growth trends in pilot certification at Aero 2019 in Friedrichshafen, Germany.  In this podcast, he discusses the relationship between the number of active pilots, pilot salaries, and flight training in the U.S. and Europe.

    This podcast was originally published by Paul Bertorelli on AvWeb on April 11, 2019. 

     

     

     

     

  • Tracey Cheek posted an article
    Jet Transactions Q4 Bombardier Market Update see more

    NAFA member, Brant Dahlfors, Co-Founder of Jet Transactions, shares the Q4 Bombardier Market update.

    2018 continued its upward trend and ended the year with both new and used deliveries and orders up over 2017. However, the big-bang Q4, that so many projected, seemed to be over by mid-November aided by an increasingly caustic political environment, slowing GDP (worldwide), wild stock market gyrations and finally the threat of a Government shut down that materialized by the end of the Qtr. It wasn’t a bad quarter, it just wasn’t a great quarter as buyer caution outweighed the tax benefit fueled activity, which we began seeing in Q2 & Q3. The caution was also evident in aircraft activity which on a whole was down 0.5% Year over Year according to flight tracking data from Argus International.

    The future remains exciting nonetheless. We saw new certifications in 2018 of the G500 and Global 7500. 2019 will celebrate more exciting aircraft with the G600, Global 5500/6500 and Embraer Praetor 400/500 all due for certification. We expect 2019 to be a tougher growth year as new models will be in low ramp up production rates and the inventory of later model pre-owned aircraft remain low.

    How does this affect the Bombardier pre-owned market? Bombardier products ended the year on a high note, with overall inventory levels down nearly 11% year over year across all tracked models and pre-owned sales rose 30% over the previous quarter. Q4 saw substantial jumps in new units delivered as well compared to Q3-18, though up just 1 unit from last year’s close. Most of the market remains at healthy levels, with only the GL5000 Classic and Vision models inching above 10% of the fleet for sale, respectively. With the GL7500 now approved by both the American and Canadian aviation authorities, 2019 should prove to be a continual improving year for the OEM.

    Click here to see the full report.

    This report was originally published in Jet Transactions newsletter on 1/21/19.

     

  • Tracey Cheek posted an article
    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.

  • Tracey Cheek posted an article
    Podcast: GAMA President Pete Bunce On The Boeing 737 MAX see more

    NAFA member and GAMA President Pete Bunce discusses the potential industry-wide impacts of the questions that have arisen regarding the certification of the Boeing 737 MAX including how to balance safety, regulation and providing a pathway for innovation and new certifications. In this podcast from Aero 2019 in Friedrichshafen, Germany, he also talks the economics of sustainable aviation fuel.  

    Click here to listen to the full podcast.

    This podcast was originally published by Paul Bertorelli in Aviation Safety Magazine's AVwebflash, Volume 26, Number 15c, April 12, 2019.  

     

  • Tracey Cheek posted an article
    Nacelle Coverage - New Protection for Your Engine see more

    NAFA member, Anthony Kioussis, President of Asset Insight, shares information on expanded Hourly Cost Maintenance Program (HCMP) coverage for your business aircraft.

    As a business aircraft owner or operator, you may not know exactly which components your engine Hourly Cost Maintenance Program (HCMP) covers. Is it just the aircraft fuselage and actual engine? The nacelle (the aerodynamic engine cowl and its support system)? The nose cowls, cowl doors, and thrust reverser units? Are all line-replaceable units covered? And if so, are there any exclusions for damage such as corrosion? 

    When an uncovered event occurs, a villain is born – whether it’s the director of maintenance who didn’t budget a $200,000 repair to a thrust reverser unit (TRU), the principal who invited friends for a weekend in Nice but now is faced with a grounded aircraft, or the Original Equipment Manufacturer (OEM) who is happy to address the problem, but will send a costly bill to do so. All parties involved share the pain.

    To avoid the financial expense, and decrease the response time required, to alleviate the problem, inform yourself so that you understand the actual coverage of your engine if it is enrolled on an HCMP (a.k.a. “Long Term Service Agreement”). Until recently, engine manufacturers excluded such hardware coverage in their HMCPs, despite having installed the subcontracted assembly built to their own specifications, with the nacelle and thrust reverser manufacturers. Recent changes should have a positive impact on aircraft reliability, asset value, annual budgeting, and your peace of mind.

    Rolls-Royce has led the way by introducing its CorporateCare® Enhanced program late last year. Including nacelles for the first time, the program covers all maintenance and troubleshooting on the engine cowls, TRUs, and engine build-up on engines powering numerous aircraft, including the Bombardier Global 5000/6000, Global 5500/6500, and Gulfstream 550, 650, and 650ER. By covering repair and replacement costs, as well as key nacelle-specific service bulletins and spares, reliability of enrolled aircraft is likely to improve. 

    Rolls-Royce is not alone. GE recently announced that it would now also provide complete engine and nacelle coverage for the new Passport engine on the Bombardier Global 7500. 

    Why not simply rely on the warranty? Warranties are designed to cover severe defects, or items that break long before their designed useful life ends, causing their financial value to decrease over time. Additionally, warranties generally do not cover engine transportation costs, engine-specific logistics (e.g. an exact pre-specified truck type with a specifically designed suspension) or loaner spare parts while the component is being repaired. Expanded component coverage, which includes nacelles and TRUs, also adds to the asset’s value. The HCMP service coverage ensures that when it’s time to trade or sell the aircraft, its value remains comparable to other aircraft with such coverage. That also enables faster pre-owned transactions due to a decided market preference for aircraft covered by HCMP.

    From an operational standpoint, make sure that you have such contingency plans in place when reviewing your aircraft’s annual budget. A new complete nacelle on a large cabin aircraft easily can cost more than $5 million per side, an unwelcome surprise in any fiscal year. A new TRU alone can cost more than $2 million, and unfortunately, an issue discovered on one side of the aircraft often is also found on the other side: a painful doubling of cost. Even if a component can be repaired, a repair scheme on the TRU could be in the $100,000-$200,000 range, per side.

    Business aviation commands operational reliability, financial predictability, and asset value optimization, both for your own peace of mind and for a swift aircraft sale in a competitive second-hand market. Expanded HCMP coverage that includes nacelles and thrust reversers can increase your aircraft’s value while concurrently improving its re-marketability. 

    This article was originally published by Business Aviation Advisor on December 27, 2018.

  • Tracey Cheek posted an article
    JetTransactions Gulfstream Q4 2018 Quarterly Market Update see more

    NAFA members, Mark Bloomer and Brant Dahlfors, co-founders of Jet Transactions, share the Q4 2018 Market Update.

    2018 continued its upward trend and ended the year with both new and used deliveries and orders up over 2017. However, the big-bang Q4, that so many projected, seemed to be over by mid-November aided by an increasingly caustic political environment, slowing GDP (worldwide), wild stock market gyrations and finally the threat of a Government shut down that materialized by the end of the Qtr. It wasn’t a bad quarter, it just wasn’t a great quarter as buyer caution outweighed the tax benefit fueled activity, which we began seeing in Q2 & Q3. The caution was also evident in aircraft activity which on a whole was down 0.5% Year over Year according to flight tracking data from Argus International.

    The future remains exciting nonetheless. We saw new certifications in 2018 of the G500 and Global 7500. 2019 will celebrate more exciting aircraft with the G600, Global 5500/6500 and Embraer Praetor 400/500 all due for certification. We expect 2019 to be a tougher growth year as new models will be in low ramp up production rates and the inventory of later model pre-owned aircraft remain low.

    How does this affect the Gulfstream pre-owned market? Q4-18 saw a nice jump in activity for both pre-owned and new sales, with an 18% and 63% rise respectively. The G500 is now in service and in the hands of customers both domestically and abroad, and the G600 should be entering service later this year. Owners can look forward to the impressive speed capabilities of both aircraft combined with the legendary Gulfstream cabins. Across the pre-owned market, inventory levels rose roughly 4%, with all tracked models remaining below 10% of the fleet for sale. GIV-SP’s and G450’s saw an amazing year for pre-owned sales, while the newer and larger G650 and G650ER’s slowed down to round out the year.

    Click here to view full report.

    This article was originally published by Jet Transactions on January 21, 2019. 

  • Tracey Cheek posted an article
    FAQ: What is a Flight Department Review, and How Does It Work? see more

    NAFA member, Lee Rohde, Founder, President and CEO of Essex Aviation Group, Inc., discusses what a flight department review is and how it works.

    “Get a second opinion.” 

    It’s a phrase most commonly heard after a trip to the doctor’s office, but it’s applicable to almost all aspects of life. A second opinion provides fresh perspective, which can be valuable when figuring out what to do or how to improve. This is especially true for private business aviation when considering your aircraft management company or internal flight department.

    Whether applying due diligence or requesting information from your management company or flight department that might require mediation by a third party, a flight department review is an excellent way to ensure that your aircraft and the team that supports it are operating at optimal levels.

    H: What is a Flight Department?

    A flight department is the people and processes responsible for the ongoing management, maintenance and operations of an aircraft on behalf of its owner. A flight department’s responsibilities include, but are not limited to, trip analysis, ongoing maintenance, overall operations, aircraft scheduling, flight planning, crew management and so on. A flight department can range anywhere from a single pilot to an entire facility with an organization staffed by a wide range of aviation experts. 

    Although many aircraft owners choose to outsource their flight department to a third-party aircraft management company, it is possible — and common — to rely on an in-house flight department. There are, naturally, pros and cons to both options. First-time aircraft owners often utilize an aircraft management company in order to take advantage of its existing organizational structure, human resources, vendor relationships and regulatory knowledge. In-house flight departments will need to manage all of these aspects, often with the help of outside resources and the existing support available through their primary business organization. 

    Aircraft owners need to consider their overall goals and objectives in order to evaluate which option will best meet their needs. Most owners who are interested in chartering their aircraft will choose to work with a third-party aircraft management company and operate under its existing Part 135 certificate.

    H: What is a Flight Department Review? 

    A flight department review is, as its name implies, an evaluation of an aircraft owner’s flight department conducted by a third-party entity — usually a private aviation consulting firm

    During a review, a consultant will familiarize themselves with the company’s internal policies, as well as policies that ensure compliance with the FAA or other foreign aviation administration under which the aircraft operates. The primary objective of a review should be to determine whether a flight department is performing according to the standards outlined in their operating manuals, which are often contained within, but not limited to, flight operation and general maintenance manuals and safety management systems. In addition, the review should include an extensive study of maintenance records, personnel training, general organization and the level of care and custody extended to the aircraft.

    The results of this evaluation are presented in a written report to the client. More often than not, consultants have limited findings or concerns. The report will outline any findings, as well as potential solutions or options to correct existing issues. The owner is the sole recipient of this report unless they decide to authorize its release to any third parties.

    An experienced private aviation consulting firm will also share best practices and enhancements proven to be successful by other flight departments they’ve reviewed. Most flight departments are eager to share their experiences and solutions with others in the industry. Among other things, sharing best practices contributes to safety enrichment, costs savings and general efficiencies with flight operations.

    H: Who Can Request a Flight Department Review?

    A flight department review is typically requested by an aircraft owner or their direct advisor (such as a family office) as a measure of due diligence to ensure that their aircraft is being managed properly. However, an aircraft owner or advisor might also request a review if they have issues with personnel management or with certain aspects of their management company and its management of the aircraft. 

    In some cases, a management company will even request a flight department review in order to resolve a dispute with an aircraft owner. In situations like this, both parties look to the consultant to provide an unbiased review and information concerning industry best practices and procedures so that both parties can reach an amicable solution and move forward. 

    On occasion, an aircraft financial institution might request a flight department or management company review to ensure that their assets are being properly managed and operated and to confirm the aircraft records are properly maintained and up-to-date. 

    By getting a second opinion in the form of a flight department review, it’s possible for aircraft owners to ensure that they’re receiving the best service possible, be it from their management company or an in-house flight operation, and that they have a quality private aviation experience.


    Lee Rohde, Founder, President and CEO of Essex Aviation, a business and private aviation aircraft acquisition and consulting firm, has 30+ years of experience in financial and operational analysis, manufacturing, distribution and corporate business development.


    This article was originally published by Essex Aviation

     

  • Tracey Cheek posted an article
    What will happen in 2019 see more

    NAFA member, Alasdair Whyte, Editor and Co-Founder of Corporate Jet Investor, shares his forecast for 2019.

    As we start 2019, it is hard to remember another year when so many forecasters are predicting a downturn. 

    And there is a lot of ammunition for pessimists. The year 2018 was the worst 12-months for US, UK and European stock indices since 2008. Investors and analysts are concerned about the potential fall-out from the US-China Trade War; US interest rate rises; and Europe ending quantitative easing. There are too many geopolitical risks to list.

    Some analysts are even warning that years that end in nine often have big changes. They argue that 1789 saw the French Revolution; 1919 the end of the First World War; 1929 The Wall Street Crash leading to the Great Depression; 1939 the start of the Second World War; 1979 the Iranian Revolution; and 1989 the fall of the Berlin Wall. Although this theory does not account for massive changes not happening in 1799, 1809, 1909, 2009 and so on – or huge events in 1912 and other years not ending in a nine. 

    With this gloomy backdrop in mind, here are the key themes for business aviation in 2019:

    US buyers will continue to dominate 
    There are still lots of American buyers who are planning to buy an aircraft in 2019. US equity markets may be skittish, but the firm link between share prices and business jet deliveries stopped working in 2009 (maybe that was the key change for that year). 

    We would argue that business confidence is more important. In November last year, the NFIB said that US small-business confidence was on a record run. Today’s job figures are another boost. Nothing lasts forever, but it is too early to write-off the US. There is still lots of confidence out there. 

    Although there are some bright spots – Brazil could be one – demand in the rest of the world is patchier. It looks set to be a tough year in China (as Apple’s recent announcement shows) and the Middle East. Demand in Europe may be flat – although UK operators are confident that they can cope with Brexit. 

    Business jet deliveries will rise moderately  
    Aircraft manufacturers will deliver more aircraft in 2019. Bombardier and Gulfstream will increase production of their Global 7500 and Gulfstream G500 aircraft. 

    The year will also see the delivery of exciting new aircraft including the Cessna Citation Longitude, Global 6500, Global 5500 and the Praetor 600. The first Airbus A319neo and Boeing BBJMax8 will also be completed. 

    But the key thing is that OEMs are not getting carried away with production – which is a great thing for when the downturn really hits.

    Utilisation will be flattish
    WINGX data coming out next week will show 2018 was a record year for business aircraft flights, although growth slowed in the last six months. The next 12 months are probably likely to be pretty flat – perhaps up by a few percent if we are lucky. Anyone around in 2009 and 2010 will take that.

    NextGen
    This time next year aircraft in the US will need to be equipped with ADS-B Out to fly. It is clear that not every aircraft will make this deadline – but some owners seem happy with this so the year 2020 could see a significant number of aircraft being scrapped. 

    So perhaps not as upbeat as last year’s very accurate forecast. As we said in August, winter is coming (it always comes), but 2019 will not see the full freeze.  

    Best wishes for a Happy, Healthy and Prosperous 2019 on behalf of me, Louisa and the Corporate Jet Investor Team.

    This article was originally published by Alasdair Whyte with CJI on January 7, 2019.

  • Tracey Cheek posted an article
    Optimizing ROI in a depreciating asset see more

    NAFA member, Tony Kioussis, President of Asset Insight, breaks down the basic elements in understanding market dynamics using objective data points.

    Each day, countless organizations collect and disseminate vast amounts of data points relating to business aviation. The challenge has always been translating such data into useful, actionable and timely information. While computers can process immeasurable statistics at the speed of light, their analytical capability must be intelligently guided to generate useful conclusions, as opposed to new data points that further complicate, rather than answer, the original questions. And, perhaps even more important, computers are dispassionate workhorses that can objectively convert massive amounts of data into useful information.

    Asset Quality Rating

    When it comes to aircraft, one of the most basic objective analytics able to act as a planning and decision-making tool is the Asset Quality Rating – a standardized scale by which one can measure the maintenance condition of any asset.

    Asset Quality Rating is comprised of 2 data points. The first one is the aircraft’s Maintenance Rating, which grades an asset’s maintenance status on a standardized scale relative to its Optimal Maintenance Condition (maintenance condition on the day it came off the production line). In very simplistic terms, the figure is computed as follows for a theoretical asset that has only 2 maintenance events:

     

     

     

     

     

    The 2nd data point is the aircraft’s Financial Rating, which grades the asset’s financial condition on a standardized scale relative to its Optimal Maintenance Condition, meaning the aircraft’s Maintenance Rating is weighted by the estimated cost to complete each maintenance event. While the Maintenance Rating for this asset is 5.000 (see above), the asset’s Financial Rating is 2.955 by virtue of its proximity to future scheduled maintenance events (Remaining Useful Life) and the anticipated cost to complete each maintenance event (Maintenance Event Cost).

     

     

     

     

     

     

     

    Averaging the Maintenance Rating and Financial Rating figures derives the aircraft’s Asset Quality Rating:

     

     

     

    To simplify the Asset Quality Rating explanation we assumed the asset had only 2 maintenance events. In reality, an aircraft may have hundreds of maintenance events. Also, each aircraft must be continually compared against its own Optimal Maintenance Condition.

    Using this methodology, Asset Quality Rating permits us to establish a measurement standard that can be applied to all aircraft and allows us to compare different make/model assets directly on the same measurement scale (see Pro Pilot, Aug 2018, p 14). The Asset Quality Rating scale ranges from a low of -2.500 to a high of10.000, and the significance of the figures are detailed on Table A.

    The Maintenance Rating scale ranges from a -5.000 to a 10.000, while the Financial Rating scale ranges from 0.000 to 10.000. There are 2 reasons for this: 1, an operator lying on Part 91 can overrun the OEM’s “recommended” maintenance time-period, at which point the Maintenance Rating for that event would post a negative value. And 2, the financial Rating can be no less than the cost for conducting the event, therefore its value cannot go below zero.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Maintenance Equity and Maintenance Exposure

    There are 2 other objective analytics that can help an aircraft owner plan an aircraft replacement strategy that optimizes their investment in the asset: Maintenance Equity and Maintenance Exposure.

    Maintenance Equity represents, in financial terms, the amount of maintenance value embedded in the asset. It defines the difference between the aircraft’s maximum scheduled maintenance financial value (achieved the day the aircraft came off the production line), LESS the maintenance financial value consumed through utilization.

    Maintenance Exposure represents, in financial terms, the amount of maintenance value consumed through utilization, LESS maintenance completed on the aircraft.

    There is a widely-held misconception that aircraft maintenance condition deteriorates dramatically over time. While some maintenance event costs increase as the asset ages, an aircraft’s Maintenance Equity is renewed as maintenance is conducted. Table B depicts the percent-age of Maintenance Equity retained by an aircraft during its first 5 years in operation, and the percent of Maintenance Equity available during operating years 15 through 20. The initial Maintenance Equity is available due to the aircraft’s recent production date, while scheduled maintenance completion will renew the asset’s Maintenance Equity in later years.

    Read full article here.

    This article was originally published in Professional Pilot April 2019.

     

  • Tracey Cheek posted an article
    FAA Prohibits Use of Registered Agent’s Address for US Registered Owner of Aircraft see more

    NAFA member, Scott McCreary, Vice President at McAfee & Taft, discusses use of Registered Agent's address and the FAA.

    Aircraft registered with the FAA Aircraft Registry must be registered in the name of the actual owner of the aircraft (which is not always the operator), and the owner/applicant for registration must provide its physical address/location on the AC Form 8050-1, Aircraft Registration Application ("Application"). In a recent interpretation, the Federal Aviation Administration Aeronautical Center Central Region Counsel ("ACCRC") has confirmed that the address of the "registered agent" of the owner/applicant is not the address of the actual owner/applicant for purposes of registering the aircraft with the FAA Aircraft Registry. The ACCRC has determined that a registered agent’s address is not the mailing address of the owner/applicant, and the registered agent’s address is not the physical address of the owner/applicant for registration.

    The ACCRC further concluded that if the owner/applicant's correct physical address is not provided the Application is not completed in accordance with 14 C.F.R. §47.31(b)(1). In addition, 14 C.F.R. §47.45 requires the registered owner’s physical address be provided to the FAA following any change of address where a new mailing address is not also the physical address of the registered owner.

    Parties should take care to provide the correct physical address or location of the owner/applicant when registering aircraft with the FAA Aircraft Registry. Failure to provide the correct physical address or location may cause the Application to be rejected or the aircraft registration to otherwise not comply with Federal Aviation Regulations.

    Feel free to contact the aviation team at McAfee & Taft if you have any questions or comments.

    Scott McCreary

    McAfee & Taft

    (405) 552-2367

    scott.mccreary@mcafeetaft.com

    This article was originally published by Scott McCreary with McAfee & Taft on April 10, 2019.

  • Tracey Cheek posted an article
    Cryptocurrency in Aviation Owner Trustee Transactions: Is It a Viable Option? see more

    NAFA member, Debbie Mercer, Owner of Aircraft Guaranty Corporation, discusses cryptocurrency in aviation owner trustee transactions.

    Cryptocurrency – Bitcoin, Ethereum, Ripple, among others – seems to be driving the plane in Financial Technology (FinTech) development these days, making many of us curious, confused, and wary. What is it? What are the benefits and risks? How and where can it be used? Is the use of cryptocurrency going to improve access and security in finance activities (which is the main purpose of FinTech) in aviation? More importantly for us, what, if any, is the potential for use in aircraft owner trustee transactions?

    To begin, Blockchain, the technology that allowed for these virtual currencies to develop and is running everything behind the scenes, has four main pillars. They include: a distributed ledger, a decentralized database, immutable records, and smart contracts (digital contracts of data agreed upon). These features are important to understanding how cryptocurrencies work and their viability, but we’re going to save any further discussion of blockchain technology and its own potential applications in aviation owner trusts for the next blog.

    With this foundation, let’s answer the basics: cryptocurrency (with the first and most notable being Bitcoin) is a digital currency that is traded on a decentralized, encrypted database in the Cloud (blockchain), which is essentially owned by all its participants. The database records all transactions of the currency and is open to anyone who wishes to anonymously participate in the exchange.

    While the database allows a high level of transparency and accuracy in regard to the transaction of the currency, it does not prevent illicit activity of the currency. Furthermore, cryptocurrencies are subject to a high degree of exchange rate volatility. These are the two main issues aviation owner trustees must consider when weighing the benefits and risks of using cryptocurrency in their transactions.

    Bitcoin specifically has seen significant rise in value over the past year and is accordingly gaining traction as a payment option. For the airlines, travel agencies, and charter companies who have already begun accepting these currencies, it makes sense given the nature of their transactions. Many have cited the ability for 24/7 transactions, faster processing times, cheaper fees (if any), and increased customer service as reasons for accepting cryptocurrency.

    Some of these businesses have attempted to limit the exchange rate risk by adding a “buffer” when converting prices. They can also mitigate risk by immediately converting the cryptocurrency’s cash value into fiat currencies (legal tender backed by the government that issued it) through crypto trading platforms like Coinbase or BitPay. Partnering with these exchanges so payment can be accepted at the exact market value at the exact time of transaction is yet another option.

    Given the huge difference between airfare sales and the process of aircraft registration transactions, does it make sense for aviation owner trustee companies to accept cryptocurrency for payment? The goal in owner trustee transactions is security and efficiency.  In this regard, the aircraft registration process and associated fees present some unique challenges.

    Aircraft registration transactions in the United States currently use US dollars. If a foreign national is registering their aircraft in trust, their currency is generally exchanged before sending funds so the entire transaction is handled with only one currency. If Bitcoin or a similar cryptocurrency were accepted by an owner trustee company, the responsibility for exchanging the currency into US dollars would be theirs, and the risk too.

    There have been a few noted cases of large asset transactions using cryptocurrency for payment, specifically in real estate. If the seller can quickly liquidate the currency to avoid huge shifts in the market, then there is relatively minimal risk in the transaction. It is possible then that aircraft registrations in trust could be enacted in a similar way, effectively mitigating exchange rate risk. However, lack of regulation and government integration (or acceptance) currently remain deterrents to security and efficiency in this type of transaction.

    Nonetheless, the United States and others are beginning to develop regulations regarding cryptocurrency transactions, increasing the odds that it will become more common in the future. In the meantime, however, it will remain a risky currency in a rapidly evolving legal environment. How and when any measures will be enforced is unknown.

    Since aviation owner trustee companies must consider all aspects of the industry, especially compliance and security, it is unlikely that the use of cryptocurrency will be a viable option until all the other ducks – education, regulation, integration – are in a row. However, there are a myriad of uses being discussed for blockchain technology in the aviation industry that could radically streamline the aircraft registration process, and possibly open the door for the use of cryptocurrency.

    We’ll be discussing those possibilities in our next blog – “Blockchain in Aviation Owner Trustee Transactions: What is the Potential?”

    This article was originally published on Aircraft Guaranty Corporation's blog. 

  • Tracey Cheek posted an article
    AINsight: Maximize Aircraft Bonus Depreciation in 2019 see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses several aspects of aircraft depreciation including ways to qualify for bonus depreciation.

    Although the total depreciation taken under the straight-line and MACRS depreciation methods is the same, acceleration of depreciation under MACRS increases the time value of the tax benefits of MACRS compared to the slower straight-line method. Consequently, a tax advisor can help evaluate system and method that maximizes depreciation arising out of a taxpayer’s unique circumstances.

    Taxpayers must comply with the MACRS requirements for an aircraft to be eligible for bonus depreciation. Under the Tax Cuts and Jobs Act of 2017, bonus depreciation applies to new and, for the first time, preowned aircraft acquired and placed into service after Sept. 27, 2017, and before Jan. 1, 2023, with a phasedown of 100 percent depreciation starting in 2027. Importantly, to depreciate a preowned aircraft, the taxpayer must not have used the aircraft before purchasing it.

    QUALIFIED BUSINESS USE

    The IRC establishes qualifications for, and limitations on, deducting depreciation under MACRS and, by extension, bonus depreciation. MACRS requires that an aircraft must be used in a trade or business or for the production of income. A taxpayer must also “predominantly” operate the aircraft for “qualified business use” (QBU). In other words, QBU generally means the aircraft operates in connection with the taxpayer’s business enterprise conducted regularly and continuously for income or profit. Predominant use generally refers to 50 percent or more of total aircraft use per tax year.

    In part to guard against taxpayer abuse of depreciation deductions, the IRC has placed aircraft in a special category called “listed property” under IRC Section 280F. In general, listed property that a taxpayer does not use more than 50 percent for business will not qualify for MACRS or bonus depreciation. Instead, such property must be depreciated under the slower ADS using the straight-line method. In relation to depreciation, the failure to comply with MACRS may arise out of excessive personal use under the listed property rules and MACRSrequirements discussed above.

    However, in certain circumstances, an aircraft may be eligible for bonus depreciation if the taxpayer can demonstrate 25 percent business use. Once the 25 percent threshold is met, this special rule in IRC section 280F allows a taxpayer to add in other activity that the rule initially excludes from the QBU test. The effect of the add back is to boost the business use above the basic 50 percent requirement. It is important to prepare contemporaneous and detailed records that support all aspects of QBU on the assumption that the IRS will ask for the records.

    IRC Section 274 describes various types of personal use of aircraft. Often, personal use refers to the use of the aircraft for entertainment, amusement, or recreation such as parties, golf outings, family vacations, and sporting events. But it can also mean personal use of an aircraft for another reason: non-entertainment such as travel of an aircraft passenger for business unrelated to the business activities of the taxpaying entity that owns the aircraft.

    If an aircraft is used for entertainment use, the IRC has a special provision that minimizes the impact of personal use on bonus depreciation. For purposes of depreciation, the provision allows a taxpayer to elect the straight-line calculation of the disallowed deductions attributable to entertainment use. The provision permits a taxpayer to claim bonus depreciation in the acquisition year and, concurrently, elect separately to calculate an IRC Section 274 “entertainment disallowance” using the straight-line method.

    This election allows the taxpayer to deduct more depreciation in the year of acquisition than it otherwise would without the special IRC section 274 rule. This area deserves planning attention as it might, if structured correctly, provide a taxpayer with an increase in after-tax value and spur the taxpayer to establish an entertainment travel policy that applies this provision.

    COMPLIANCE: RECAPTURE INCOME

    My clients often ask whether they can claim bonus depreciation in the acquisition year by satisfying the QBU and other MACRS eligibility requirements in that year and keep bonus depreciation if they do not satisfy the QBU and other MACRS eligibility requirements after the acquisition year. In this scenario, the answer is no. And the consequence might be very expensive for the taxpayer because the Internal Revenue Service (IRS) can use a “recapture” provision.

    By doing so, the IRS causes the taxpayer to recognize income for the excess depreciation taken over the allowable straight-line method as calculated through the year of recapture. After that, the aircraft remains on straight-line and cannot return to MACRS. At a minimum, the taxpayer should track and record the QBU and other MACRS eligibility requirements throughout the ADS recovery period and, to be on the safe side, as long as the taxpayer owns the aircraft.

    Once a taxpayer qualifies for MACRS and bonus depreciation, the taxpayer will still encounter such other limitations as the passive activity loss limitations, the excess business loss limitations, and the hobby-loss rules.

    Prospective purchasers of aircraft seem universally interested in 100 percent bonus depreciation, but, as a taxpayer, the purchaser should not assume either that the aircraft will be eligible for bonus depreciation or that bonus depreciation will offer the optimal tax and economic solution. Still, by planning ahead of a purchase and involving specialized aircraft tax advisors, a purchaser should be able to identify the appropriate type of depreciation to maximize the reduction in its taxable income and lower its after-tax cost of capital. It certainly seems worth looking closely at bonus depreciation as it is easy to appreciate the significant value it might provide in an overall tax strategy.

    If you plan to purchase a private aircraft in the U.S. this year, developing and executing an appropriate tax strategy before you enter into a letter of intent or contract to purchase the aircraft enhances the likelihood that you will be able to take 100 percent depreciation (bonus depreciation). This strategy should incorporate your projected business revenues, intended aircraft use, and unique attributes as a business taxpayer relative to taking depreciation deductions.

    Depreciation is an allowance Congress enacted to encourage businesses to purchase capital equipment and other tangible personal property such as private aircraft. Depreciation allows business taxpayers to claim an annual tax deduction to recover the aircraft cost or other basis (adjusted cost) of the property for its wear and tear, deterioration, or obsolescence. A taxpayer usually deducts depreciation over a certain number of years called the “recovery period.”

    STRAIGHT-LINE, MACRS, AND BONUS DEPRECIATION

    Perhaps the best-known depreciation method is straight-line under the Alternative Depreciation System (ADS). This method allows the taxpayer to deduct roughly equal parts of the aircraft cost or other basis over the applicable recovery period. The recovery period depends on the predominant use of the aircraft. As a rule of thumb, the recovery period is six years for FAR Part 91 aircraft (private use) and 12 years for FAR Part 135 aircraft (commercial use such as chartering or carrying freight).

    The Modified Accelerated Cost Recovery System (MACRS) is another way to depreciate aircraft. The Internal Revenue Code (IRC) sets forth specific requirements that a taxpayer must meet to qualify to use this accelerated depreciation method. MACRS allows a taxpayer to write-off its aircraft in five years for FAR Part 91 (private use) aircraft and seven years for FAR Part 135 aircraft (commercial use). A taxpayer takes depreciation in the early years of the recovery period relative to approximately equal parts under the straight-line method.

    This article was originally published by David G. Mayer in AINonline on March 8, 2019.