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leasing an aircraft

  • Tracey Cheek posted an article
    3 Ways to Finance your own Corporate or Personal Aircraft see more

    NAFA member Keith Hayes, with PNC Aviation Finance, shares ways to finance your own corporate or personal aircraft.

    Corporate and personal aviation has returned, after being grounded, or at least stalled, in the wake of the Great Recession. Rising financial markets, growing corporate earnings, a strong U.S. dollar, and increasing consumer and business confidence are driving demand for private aircraft. Faced with crowded airports, jammed-packed commercial aircraft, and ever-present delays, high-net worth individuals and corporate executives alike are increasingly turning to private aviation to relieve the time constraints and delays of commercial flying and to take advantage of the myriad of smaller airfields located closer to their final destinations.  Before ringing the airplane broker and kicking the tires, consider these financing options:

    Traditional Loans

    No different than your smaller purchases – like houses, cars and boats – your traditional aircraft loan can be fixed rate or floating rate. Some financial institutions offer a hybrid which features a floating rate loan with the option to buy a “swap.” In other words, you can lock in your rate and benefit from early payoff and interest rate increases. Not a bad idea in a rising rate environment. Traditional loans can be structured for as short as 30 months or as long as 120 months with amortizations as long as 240 months. Just keep in mind, the longer the terms, the higher the interest rate.

    Asset Based Loans

    Over the last fifteen years, this type of financing has become an increasingly popular option for individuals and businesses seeking aircraft ownership without making financial disclosures or guarantees. Only a select number of organizations offer this product, but it has a number of benefits, including:

    • No financial disclosure or covenants – Truly hassle-free asset based financing.  No need to forward years of tax returns and K-1’s or to disclose financials of a privately owned company.
    • No or limited personal guaranties – This may be very important for companies that have bonding requirements or covenants limiting the amount of debt or guaranties than a company may incur. There may be partners involved in the ownership and the owners may be unwilling to sign on the other partner’s debt.
    • Non-recourse – If the borrower defaults, the lender can seize the plane, but cannot seek out the borrower for any further compensation.

    Aircraft Leases

    As with other types of large equipment, businesses as well as individuals may elect to lease an aircraft as an alternative to purchasing.  An individual or business may have multiple reasons to lease instead of purchase, including cash flow considerations, federal income tax considerations, sales tax considerations and accounting treatment. There are several types of leases with the choice often determined by how the aircraft will be used:

    • Non Tax Lease – The lessee (the bank or other entity granting the lease) owns the asset for tax purposes. Typically, this option is put in place for off-balance sheet treatment. The lessor will use the aircraft only for business and has an “appetite” for tax depreciation, therefore, can take advantage of the tax benefits.
    • Tax Lease – The lessor owns the asset for tax purposes, realizing the tax benefits such as the depreciation of the aircraft. Because the lessor takes the tax benefit, the lessee is typically offered a more favorable interest rate.

    Where do you start the journey to find a lender? Often, borrowers start their financing search where they have an existing banking relationship. However, that may not always be your best financial option.

    General aviation industry knowledge should be a critical criteria for your lender. For example, does your lender have expertise with the FAA requirements? Are they aware of new regulations on the horizon that could impact your purchase? Does your lender have an established specialty in aircraft financing or only do an aircraft loan every once in a while at the request of a marquee customer? Is the lender credentialed with key trade associations like the National Business Aviation Association (NBAA), National Aircraft Resale Association (NARA), or and National Aircraft Finance Association (NAFA)? If you don’t know, aircraft brokers and dealers, aviation attorneys and aircraft managers are a good source for referrals and recommendations.

    This article was published by PNC Aviation Finance.

     

  • Tracey Cheek posted an article
    AINsight: Should You Finance or Lease a Bizjet? see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, discusses whether a customer should consider leasing or financing a business jet.

    Lenders and lessors often lament that cash is the main and most frustrating competitor for financing or leasing business jets. Lessees or borrowers often retort that these transactions cause too much “brain damage” to undertake, especially when they have cash available to buy the jet. What then should customers consider in deciding whether to lease or finance business jets—before, or even after, they close their cash purchase?

    It is true that, compared with cash purchases, financing and leasing private jets require extra time, effort, professional cost, and negotiations, not to mention patience while financiers conduct diligence and obtain credit approvals. Despite the additional hassle, potential customers should not be too quick to dismiss financing or leasing, including monetizing currently owned jets in sale-leaseback and post-closing financing transactions, as these financing structures might prove to have substantial value.

    Many customers have overcome any such misgivings about leasing or borrowing—and for good reason. Today’s customers range from large multinational companies to ultra-high-net-worth individuals usually represented by talented family office teams, accountants, or counsel.

    Correspondingly, financiers exist that can meet the needs of virtually every qualified customer with acceptable aircraft. Importantly, lenders and lessors realize the reduction in market inventory of quality preowned jets requires them to consider somewhat older (10 to 15 years old), higher-time jets as worthy collateral or leased assets if the customers can satisfy credit and other required regulatory criteria. Some lenders are able to finance even older jets and small ticket or light aircraft, including propeller or certain turboprops.

    While some clients are concerned about the costs associated with entering into an aircraft loan or lease, the transaction costs should, with exceptions, be immaterial compared to the value or cost of the jet. Further, in acquiring jets that could be eligible for 100 percent bonus depreciation, the all-in value for a customer, on an after-tax basis, might compete well against or even be superior to a cash purchase.

    With leases, customers eliminate the risk of ownership because the lessor actually buys the aircraft. The lessor’s funding of the cost then preserves customer cash for working capital, reinvestment in the customer’s business, and/or funding other capital equipment. Customers can arrange a lease where a lessor purchases the aircraft from the seller and leases it to the customer.

    A lessor can also monetize a jet when the customer sells the jet to the lessor and leases back. Such a sale-leaseback can occur immediately after the purchase or at such later time as meets the customer needs.

    Leases also enable lessees to customize when the lessee can, during the lease term, buy the jet from the lessor or terminate the lease. A lessee may be able to obtain some benefit of 100 percent bonus depreciation from the lessor under the Tax Cuts and Jobs Act of 2017 that they might not otherwise be able to claim. The lessor can take the write-off in any direct purchase of the new aircraft from the manufacturer or, for the first time under the act, a preowned aircraft from the customer or third party seller. In addition, the customer can deduct the rent without the same limitation as interest deductions under the tax law.

    To illustrate the investment aspect, suppose a company enters into a five-year lease with an aircraft cost of $10 million. The customer typically earns 18 percent on its investments and can obtain a fixed rent payment that implies a 7 percent “run” rate. By deploying the $10 million into its investments, the customer earns the 18 percent return while paying the 7 percent rent over a five-year period instead of paying $10 million up front. In its simplest form, the customer would achieve a pre-tax, net return of approximately 11 percent under this example.

    Loans offer similar and other features. For the same $10 million jet, the customer would pay, depending on various factors, between 10 percent ($1 million) and 50 percent ($5 million) of the value or purchase price of the aircraft, with the lender financing the balance. The customer can take 100 percent bonus depreciation under the tax law if the aircraft is eligible for it and deduct the interest subject to limitations.

    Like the lease, the customer can use the remaining cash for other investments, working capital, and/or purchases of capital equipment. Lenders can make the loan concurrent with the purchase or, like a lease, fund the loan in a “back leverage” transaction after closing the purchase.

    In both loans and leases, customers with available cash to purchase an aircraft can, by executing an appropriate post-closing financing or leasing strategy, alleviate the tension of closing a loan or lease concurrently with completing a purchase.

    Although one may think that, when a lender or lessor delivers its “cookie cutter” loan and lease “forms” to its customer, the negotiated deals across all customers would fit within a narrow band of final terms. Such a conclusion is far from reality.

    Every negotiation differs as much as the unique personalities of the customers. Most customers ask about, if not conform to, “market” terms as a reference point in making judgments in negotiations. Lenders and lessors expect their customers to negotiate the documents, but, of course, prefer to close deals faster and easier whenever possible.

    Certain parallel legal terms arise in most financing and leasing deals, which deserve attention by customers. Broadly speaking, customers should consider negotiating provisions that include unreasonably broad representations, unrealistic time limits in which to perform obligations, and no or inadequate cure rights; allow lenders or lessors to transfer the customer’s lease or loan transaction to anyone they choose without notice to, or the consent of, the customer; call for burdensome or unnecessary financial reports or establish reporting based on Generally Accepted Accounting Principles (GAAP) when the financier did not need GAAP financials for its credit approval; demand that lender or lessor consents to, or approves, business or corporate changes unrelated to the aircraft financing (taking a seat at the table for the larger business of the customer than merited by an aircraft financing); limit when, how much, and where the customers can operate their aircraft; trigger defaults for any customer acquisition, merger or corporate reorganization; grab for extra collateral unrelated to the aircraft, such as security in cash accounts or other tangible assets of the customer or guarantor; and require, solely with respect to leases, often complex and one-sided, though indispensable, federal income tax indemnification provisions in tax leases pertaining to a loss of depreciation by the lessor, including 100 percent bonus depreciation.

    Negotiating these provisions, among others, might look like a daunting task for customers, but the right integrated team of business people, lawyers, risk management, tax, and other professionals can negotiate through and close a mutually beneficial transaction with minimal involvement of the true customer. The best results normally occur when the team possesses market knowledge, negotiates the customer’s material issues, and understands where financiers have little wiggle room to negotiate provisions forced into documents by internal policies and regulatory mandates.

    BASIC RULES FOR A SUCCESSFUL FINANCING EXPERIENCE

    Most customers enjoy good relationships with their financiers. As a customer, you can too, if you follow three basic rules:

    First, your relationship with the financier does not end at closing; it begins at closing. Financiers usually like to develop relationships that lead to other business with you and build mutual trust. Your transparency, fairness, and reasonable document compliance will go a long way toward building a strong and lasting relationship.

    Second, never surprise your financiers. Financiers tend to keep open minds about giving consents, which inevitably arise, work out problems, or amend documents, if you keep them informed early and often about your business or personal situations that might adversely affect the aircraft or your compliance with the transaction documents.

    Third, pay your debt or rent when due, without making excuses that worry the lenders or lessors. When financiers become nervous about a non-performing transaction, their cooperation and flexibility may dissipate quickly. They tend to focus on impediments to getting paid and reporting internally about a troubled lease or loan, which may bring unwanted scrutiny on the deal team.

    As easy as a cash purchase of a jet might be, the value proposition for financing or leasing it could ultimately make more sense than a cash deal. Many customers, large and small, have elected to finance or lease jets for good reasons based on their individual needs. Customers should at least consider financing or leasing a jet before they stroke a check to buy one.

    David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing and aircraft renovations. Mayer frequently represents high-wealth individuals and other aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at dmayer@shackelfordlaw.net, via LinkedIn, or by telephone at (214) 780-1306.

    This article was originally published on AINonline on November 8, 2018.

  • Tracey Cheek posted an article
    Esventures LLC Joins National Aircraft Finance Association see more

    FOR IMMEDIATE RELEASE

    EDGEWATER, Md. - Jan. 22, 2019 - National Aircraft Finance Association (NAFA) is pleased to announce that Esventures LLC has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Esventures to our association,” said Ford von Weise, President of NAFA.

    Esventures LLC is a leading service-oriented company with 13 years of experience, providing a broad spectrum of services and expertise in the areas of aviation, engineering, energy, oil and gas and financing. Esventures’ expanding capabilities enable them to offer customers a full range of services, including aircraft leasing/air transportation/operational management, project financing, engineering designs, procurement, construction, installation and maintenance management.

    The company establishes strategic partnerships with specialized industry leaders to constantly improve the level of services they offer, striving to provide the highest quality project deliverables on time, within budget, and at the lowest blended rate in the industry.Esventures’ leasing services supply aircraft on a timely and affordable basis and ensure that clients reach their destination in safety and comfort.Their aircraft management services are meticulous in the care of all operations and maintenance so clients can focus on their business.  

    Much like NAFA, Esventures LLC is proud of their reputation for excellent service and promotes strict standards in the aviation industry. Esventures and NAFA consider safety to be of the utmost concern and are dedicated to fostering highly trained and experienced pilots, crews and aviation professionals.

    For more information about Esventures LLC, visit www.esventuresllc.com.  

    About NAFA: 

    The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.

     

  • Tracey Cheek posted an article
    How to Simplify Aircraft Lease Return see more

    NAFA member, Essex Aviation Group, discusses how to simplify aircraft lease return.

    As the global finance industry evolves, more and more banks are turning to corporate aircraft leasing to create new financial opportunities and expand profit margins.

    The concept is simple enough: Similar to a leasing a car, a bank owns the aircraft and leases it for a predetermined period of time (typically anywhere from 5 to 15 years). During lease agreement negotiations, the parties define the various lease terms — specifically, the length of the lease and terms regarding the intended use and operation of the aircraft.  One of the most important matters that the lease should cover is within the return conditions expected of the aircraft and the definition of any maintenance activities or inspections that the lessee needs to complete prior to returning the aircraft. The lease should also define the aircraft specifications, loose equipment and any additional items that were with the aircraft at the time the lease began and must be returned to the lessor.

    Overseeing a Lease Return

    If you are a lender or the asset manager of an organization that is in the business of leasing aircraft, consider working with a qualified aviation advisor to manage the asset’s return requirements and ensure that the aircraft meets the terms and conditions as defined in the lease agreement.

    In doing so, your advisor will carefully review the lease agreement and evaluate the asset against the terms of the agreement. Evaluation is typically a four-part process, during which the advisor should do the following:

    • Re-review the aircraft records for continuity and completeness (gaps or missing records will affect the value of the asset).
    • Ensure that the aircraft conforms to how it was originally certified or has subsequently been modified.
    • Review any damage history, out of sequence maintenance activities or major repairs.
    • Assist the lessor in the lease return inspection discussions with the lessee.

    Even a minor issue with the asset — say, for example, a malfunctioning galley appliance — being necessary to function and as part of the aircraft’s certification can cost your organization thousands of dollars to repair or replace if this item is not identified during the lease return inspection. It is your advisor’s job to flag any of these types of items or other potential issues and work with the lessee concerning the necessary maintenance work and or repairs that need to be completed to meet the return requirements.

    An aviation advisor can be particularly helpful to small banks that do not have in-house staff with the available time and (potentially) expertise to conduct a thorough review.  Lessors that have older lease agreements will likely need additional guidance prior to the aircraft return to address potential issues that may not be covered. The language used in older lease agreements often tends to be vague compared to newer agreements, which leaves room for interpretation. Often, the two parties will need to negotiate the lease return requirements well in advance of the start of the lease return inspection process. Fortunately, an aviation advisor can work with your asset management team to identify and clarify these terms with the lessee and ensure that your organization maximizes the value of the aircraft upon its return.

    The Importance of Continued Support

    For some aviation advisors, their work ends once the inspection and lease return process are complete. Other aviation advisors, however, will continue to provide quality support and service well after the asset is returned.

    Once the aircraft has been returned, banks and lenders will either re-lease the aircraft or choose to sell that aircraft out of their portfolio. If your organization intends to re-lease or sell an asset, consider working with an aviation advisor who can work with you and other industry service providers to re-market the aircraft. Certain aviation advisors go the extra mile and provide continued on-site support, such as securing a location to safely store the aircraft and manage the necessary maintenance support to keep the aircraft in flight ready condition.

    The key to finding the right aviation advisor is to look for one backed by a team with years of industry experience and proven dedication to its clients. If you would like to speak to an experienced aviation advisor who can provide unbiased advice and assist your organization with lease return management, contact the experts at Essex Aviation today.

    Essex Aviation Group, Inc. was founded in 2013 with the primary goal of providing clients with the most current industry knowledge and experience, a vital component in evaluating business and private aviation transportation needs.

    Representing clients in a wide range of services, Essex builds client relationships through dedication to trust, integrity and a level of responsiveness not found anywhere else. Services include new or pre-owned aircraft acquisitions, new aircraft completion management, pre-owned aircraft refurbishment and upgrade management, block and ad hoc charter service and much more.

    This article was originally posted on the Essex Aviation Group blog.

  • NAFA Administrator posted an article
    Operational Control And Aircraft Leasing: What’s The Big Deal? see more

    NAFA member, Greg Reigel, Partner at Shackelford, Bowen, McKinley & Norton, LLP., discusses operational control and aircraft leasing.

    From the FAA’s perspective, operational control in aircraft leasing transactions is not just a “big deal”, it is “the” deal.

    What Is Operational Control?

    14 C.F.R §1.1 defines operational control as “the exercise of authority over initiating, conducting or terminating a flight.”  In a “wet” lease situation, since the lessor is providing both aircraft and crew, the lessor maintains operational control of all flights.  And in the absence of a specific exemption (such as under 14 C.F.R. § 91.501(c) the lessor who is operating an aircraft under a wet lease will need to have an air carrier certificate to legally operate the aircraft.

    In a “dry” lease situation, the lessee provides its own flight crew, and the lessee exercises operational control over its flights.  The lessee’s operations may be conducted legally under 14 C.F.R. Part 91 without an air carrier certificate.

    It is important to keep in mind that the FAA will look beyond the actual written agreements to determine who has operational control.  Although a lease may be written as a dry lease and says “Dry Lease” at the top of the agreement, for example, that does not mean the FAA cannot take the position that the arrangement is really being conducted as a wet lease.  And if the FAA takes that position when the lessor who is actually operating the aircraft for the lessee does not have an air carrier certificate, then that will be a problem for the lessor, and potentially for the lessee as well.

    Why Does It Matter?

    If the lessor is exercising operational control, then the flight must be conducted in compliance with regulations that are stricter than Part 91 (i.e. Parts 121 or 135). Those regulations limit the types of airports the lessor may utilize, crew qualifications, crew rest and duty times, maintenance requirements etc.  Additionally, the lessor under a wet lease arrangement is required to remit federal excise tax on the amount charged to the lessee.

    Alternatively, if the lessee has operational control under a dry lease the lessee is permitted to operate under the less restrictive and less costly requirements of Part 91.  And federal excise tax is not due on the amounts paid by the lessee to the lessor, although sales tax is often assessed on the lease rate.

    How Do You Determine Who Has Operational Control?

    The FAA has issued guidance for determining which party has operational control in a leasing arrangement.  Advisory Circular 91.37B Truth in Leasing provides FAA inspectors with an explanation of leasing structures and how they may or may not be compliant with the regulations.  Although AC 91.37B only applies to aircraft subject to the requirements of 14 C.F.R. § 91.23, and it is not regulatory in nature, FAA inspectors also use this guidance when reviewing leasing structures that are not subject to truth-in-leasing requirements.

    Here are the types of questions an FAA inspector will ask when the inspector is trying to determine which party has operational control in an aircraft leasing situation:

    • Who decides crewmember and aircraft assignments?
    • Who accept flight requests?
    • Who actually initiates, conducts, and terminates flights?
    • Are the pilots direct employees or agents for the lessor, the lessee, or someone else?
    • Who is responsible for aircraft maintenance and where is that maintenance performed?
    • Who decides when/where maintenance is accomplished, and who pays the maintenance provider for that service?
    • Prior to departure, who ensures the flight, aircraft, and crew comply with regulations?
    • Who determines weather/fuel requirements, and who pays for the fuel at the pump?
    • Who directly pays for the airport fees, parking/hangar costs, food service, and/or rental cars?

    If properly drafted, an aircraft dry lease agreement should answer these questions and, to the extent the answer for any item is “the lessor”, then the lease should explain that answer and how it does not negate lessee’s exercise of operational control.

    For example, if the aircraft is leased to more than one lessee, it may make more sense for the lessor to retain responsibility for maintenance to ensure that the aircraft is consistently maintained in an airworthy condition.  Similarly, lessor maintaining an insurance policy insuring the aircraft and the various lessees may be necessary to make certain the aircraft is insured appropriately.

    However, responsibility for maintenance or insurance are just two indicia of operational control.  And the lessor’s responsibility for maintenance or insurance does not negate the lessee’s responsibility for ensuring that the aircraft is in an airworthy condition and the lessee’s is properly insured prior to any operations conducted under a lease.  Appropriate language in the lease can explain these issues so an FAA inspector reviewing the lease does not misunderstand and draw the wrong conclusion.

    Also be aware that some FAA inspectors rely upon AC 91.37B but do not fully or properly understand its guidance.  For example, in one instance AC 91.37B states “[t]he FAA has taken the position that if a person leases an aircraft to another and also provides the flightcrew, fuel, and maintenance, the lessor of the aircraft is the operator.”

    This language is sometimes misunderstood by inspectors to mean that a lessee does not have operational control when the lessor is responsible for maintenance.  But that is incorrect.

    The key indicia in the language above is lessor’s providing the flightcrew.  However, lessor’s responsibility for maintenance by itself does not indicate that lessor is improperly exercising operational control over lessee flights.  Although it may indicate that lessor is exercising some operational control, without other indicia of operational control by the lessor, performance of maintenance alone is not conclusive.

    Conclusion

    Operational control in aircraft leasing arrangements is, and will continue to be, an area of special emphasis for the FAA.  Although the terms of the lease and other transaction documents are important, the FAA is not bound by those terms when it is making an operational control determination.  Rather, it will also look at the actual arrangements between the parties, as well as the responsibilities of each party, especially if they are inconsistent with the lease.

    When the FAA determines that lessor is exercising operational control in what is supposed to be a Part 91 dry leasing transaction, you can expect that it will act.  Depending upon the circumstances, pilots and operators could be faced with certificate action and civil penalty action.  It is important to understand the indicia of operational control and to be able to determine which party is exercising operational control in an aircraft leasing transaction.  Only then will you be able to ensure that you are operating in compliance with the regulations.

    This article was originally published by Shackelford, Bowen, McKinley & Norton, LLP., on Feburary 5, 2021.

  • NAFA Administrator posted an article
    Top 5 Myths About Business Aircraft Operating Leases see more

    NAFA member, Global Jet Capital, explains myths commonly associated with business aircraft operating leases.

    There are more options today for accessing a business aircraft than ever before: from charter, to fractional ownership, to operating leases, to traditional financing. When dealing with large, highly-regulated assets that could cost tens of millions—or more—to own, weighing the options to find what makes sense for your specific requirements can be difficult. To make navigating the sometimes-complex landscape of business aviation a little easier, we’re going to clear up five common myths around operating leases—and explain some of the advantages of this frequently misunderstood financing option:

    1. OPERATING LEASES ARE TOO RESTRICTIVE—IT’S BETTER TO OWN.

    Operating leases let you keep your aircraft for the duration of the lease, which means consistently using your crew, being able to leave your personal effects on board, and enjoying the experience of ownership while putting your capital to better use. Some restrictions on customization that could potentially impact residual value and other usual lease terms apply, but limitations fall within normal patterns of ownership. With the right lessor, you can expect contract terms that are flexible and fit your unique needs, which make the experience of having an operating lease feel anything but restrictive.

    Additionally, an operating lease with a predictable term makes disposition as simple as turning the aircraft back over to the lessor at end of lease—no additional planning or contingencies needed. Compare that to attempting to sell an aircraft when it’s time to upgrade or make changes to your operations. From hiring a broker, to waiting for months (or even years, in extreme cases) to find a buyer, to paying the costs of maintenance, insurance, and storage in the meantime, you may be looking at millions lost in the process.

    2. YOU’RE STUCK IN A CONTRACT WITH AN OPERATING LEASE, WHICH MAKES IT INCONVENIENT WHEN YOUR BUSINESS CHANGES.

    It’s true that operating leases are contractual, while owning a business aircraft outright is not. But, contracts can be created that adjust easily to a changing mission—including allowing for moves to larger or smaller aircraft, the option to extend, or the option to prematurely end the lease altogether. With the right financing partner, you can expect a flexible, custom-tailored contract that feels right.

    In fact, ownership may have risks and limitations that exceed the limitations of a contractual obligation in an operating lease. If a major uptick in your international markets means that your newly purchased mid-range aircraft is no longer up to the task of supporting your business goals, you bear the risk of waiting a long time to sell with capital tied up in an asset that doesn’t suit your needs. When you’re finally able to sell and need to purchase a new business aircraft with a longer range, you’re looking at a potentially lengthy process to secure traditional financing from a lender, coupled with a much larger capital outlay than the refundable security deposit for a lease.

    3. OPERATING LEASES MAKE SENSE IN BAD RESALE MARKETS OR WHEN INTEREST RATES ARE HIGH, BUT NOT WHEN RESALE VALUE IS STRONG OR WHEN INTEREST RATES ARE LOW.

    Even if there is a strong resale market or low interest rates when you choose to purchase an aircraft, consider the risk that you’re taking on with the large outlay of an aircraft purchase. Traditional financing typically requires large down payments and due to volatile geo-political situations, emerging technology, and the natural realities of market fluctuation, there’s no guarantee that a strong resale market for your aircraft will be there when you choose to sell. That low interest rate environment may be gone, which won’t help entice buyers to purchase your pre-owned aircraft. In the meantime, you may have paid more for a depreciating asset.

    Operating leases eliminate residual value risk and provide predicable costs for the duration of the lease. Budgeting stays precise, liquidity stays high, and the future becomes clearer. The resale market doesn’t come with any guarantees—an operating lease contract does.

    4. OPERATING LEASES ARE ONLY FOR CERTAIN KINDS OF AIRCRAFT. YOU CAN’T JUST GET WHATEVER YOU WANT.

    Whether you have your eye on a new or pre-owned aircraft, or if the pre-owned aircraft you’re interested in is a little older than what you would typically expect for a leasing arrangement, there are very few limitations to what can be obtained with an operating lease today.

    Specialists in business aviation financing like Global Jet Capital look to spread risk across a large portfolio, encompassing aircraft from every major manufacturer, every global market, and a variety of age ranges.

    5. YOU CAN ONLY ACHIEVE PRIVACY BY PURCHASING AN AIRCRAFT, NOT LEASING.

    If privacy is important to you, a leased aircraft may actually provide an additional layer of anonymity. An operating lease reduces visibility to an aircraft’s end user, as the public records of the FAA identify the lessor as the owner of the aircraft, giving you greater privacy.

    This article originally appeared in Business Jet Traveler, February 2021.

  • NAFA Administrator posted an article
    Nine Things to Know When Leasing an Aircraft see more

    NAFA member, George Kleros, Sr. Vice President, Strategic Event Management & Fleet Support at JSSI, shares information on aircraft leasing.

    When leasing an aircraft, what are your maintenance obligations during and at the end of the lease term to ensure that the returned aircraft maintains its value? 

    Focused on that residual value, the lessor will designate a qualified inspector or auditor to perform periodic records reviews and/or asset inspections, throughout the lease period. The intent is to verify the aircraft’s general condition and ensure it remains in compliance with lease requirements.

    After each check, the inspector will send the lessor a report with the graded condition of the aircraft and any specific findings. If anything can or might affect the residual value, you’ll be required to take corrective action to bring the aircraft into compliance.

    At term end, the lessor will conduct an “off-lease” inspection (similar to a pre-purchase inspection) at a factory-owned or authorized service center. All components and systems must be in full working order; or repaired if not. If the major components are near their life limit, you’d be responsible for covering these costs: either a pro-rated percentage based on time consumed, or 100% of the cost to overhaul if it’s close to the event.

    If the aircraft requires repairs for damage or corrosion, you are responsible for the repair cost. Once any repairs required by the lease are completed, any diminution in value due to damage history will be the lessor’s responsibility.

    So what can you do to preserve the value of the aircraft?

    Do …

    • Review the lease document fully to understand the operation, maintenance and return of the aircraft requirements. A good lease-return scenario always starts with a well-defined and documented set of return conditions. Ask questions for clarification prior to signing, to be sure you fully comprehend the broad scope of your obligations.
       
    • Keep the aircraft clean and polished to protect from corrosion and paint deterioration. Unprotected aircraft deteriorate faster than you might expect. The aircraft interior will be inspected for wear, cleanliness, and damage. The exterior will be checked for oil leaks, paint condition, and structural damage.
       
    • Store the records in a secure, dry, fireproof storage cabinet or safe. Damaged or missing records devalue an aircraft and will change residual value. The lessor will come out either annually or bi-annually to see the aircraft and review the records for accuracy and airworthiness.
       
    • Keep up with routine and scheduled maintenance tasks, even if the aircraft is not flying for extended periods of time.
       
    • Address interior and exterior wear items immediately. Waiting can compound the problem and cost more to correct.

    Don’t …

    • Assume the lease document allows for the aircraft to operate under different regulations or use than originally defined.  If the aircraft flies only for you under FAR Part 91 regulations, don’t move your aircraft into a for-hire Part 135 air-taxi arrangement without consulting the lessor; it may not be allowed.
       
    • Leave the aircraft outside. Store it in a hangar when not in use. Sun, humidity, and high temperatures deteriorate interiors and paint exterior, diminishing the residual value.
       
    • Let the aircraft sit inactive for long periods of time. Your aircraft still needs to be flown and systems exercised to keep systems lubricated and reduce risk for damage.
       
    • Ignore missing paint and erosion strips. This leads to corrosion and will be expensive to correct.

    The lessor always requires hull insurance at a specific dollar amount, and generally seeks high liability insurance limits.  If you acquire an hourly cost maintenance program (HCMP), it can help ensure that the aircraft meets return conditions. The lease should state clearly that the maintenance program was current at lease inception and that the HCMP will be transferred to the lessor. An HCMP is very desirable in a lease transaction. It helps preserve the aircraft’s residual value, and helps you avoid penalties and extra costs. 

    This JSSI article was originally published in Business Aviation Advisor November/December 2020.

  • NAFA Administrator posted an article
    COVID-19 Opened the Door to Private Jet Ownership see more

    NAFA member, PNC Aviation Finance, discusses how business travelers and some individuals have bumped up against the limits of charter and fractional private aircraft services and are now pivoting to ownership.

    It's no secret that 2020 changed the landscape of the aviation industry. According to data from the Los Angeles Times[1], 2020 forecasts show that this will be the worst year in the history of commercial aviation with the industry poised to post a net loss of $84.3 billion. Consumer air travel revenue is expected to drop from $876 billion in 2019 to $434 billion in 2020. Initially many individuals considered charter services or fractional shares like JetLinx and NetJets but quickly ran up against usage limits and health concerns as the planes are still shared. As a result, more people are considering direct ownership. Airline brokers have noticed a significant uptick in business. "We're on pace to have one of our best years ever," says David G. Coleman, of Duncan Aviation a private aircraft sales, brokerage and consultancy.[2]

    Key Insights

    • Charter and fractional shares can lower risk compared to commercial airlines but they aren't risk free. Private ownership provides end-to-end control of cleaning, crew health and safety checks as well as limited use of the aircraft.

    • Aviation finance is a fragmented industry. It's important to engage veteran professionals who understand aircraft mechanics as well as financing options.

    • Individuals interested in owning an aircraft should have a clear understanding of the aircraft they are purchasing and be prepared to provide that information to lenders as well. Leasing is also an option, but individuals will want to make sure they've planned for any additional costs and are also well versed in the terms of their lease.

    Charter and Timeshare Services See a Short-term Boost

    While surging in popularity, many corporate travelers are realizing that chartered and shared services only offer limited flexibility in terms of schedule and personal safety standards. "What we're talking about is still a form of mass transit," says Jeff Wieand of Boston Jet Search, a private aircraft broker and consultancy.[3]"There are fewer people involved but the questions remain the same - are they cleaning the plane in between? When was the staff tested? Individuals in these kinds of arrangements don't have much control over the aircraft or the process. The lack of control was a driver toward ownership before the pandemic and more so now."

    Charter and timeshare services also require passengers to book in advance just like conventional travel, which may result in a bit of jostling if your travel schedule doesn't already line up with that of the service provider. While this may not matter much during a normal week, scheduling issues could become especially acute during high travel periods like around the holidays or ahead of virus lockdowns when many people are trying to get to more remote locations.

    Pivot to Ownership

    Historically, owning an aircraft was an all-cash process with a naturally limited audience. But as access to capital has improved, aircraft costs have come down and interest rates have remained low, aircraft ownership is possible for more people.

    "To my mind, what has happened with the pandemic really accelerated trends that were already happening in the private aircraft market. As major carriers continue to cut back on services, if you're someone who needs to be on the road a lot it's a problem," says Coleman. "What we're really in the business of is giving people their time back. And now, with growing health concerns we're helping them find an option that eliminates more of the risk."

    Navigating the Private Aircraft Marketplace

    There is a robust secondary sales market within aircraft that allows people to invest in pre-owned planes that are in working condition and on established maintenance programs that lenders are willing to underwrite. New planes are also available and financeable.

    For those that are new to ownership, both Coleman and Wieand suggest that it's important to work closely with veteran aviation professionals that can correctly assess the plane itself and the financing options.

    "This isn't like buying a car or a house where you can just compare across and get a sense for what things generally cost," explains Coleman. "You really need to understand the life of the aircraft in terms of where it is coming from, the state of the equipment, and maintenance schedules. And, you have to understand that not every bank is going to finance so you're going to want to engage with brokers and financing almost before you choose the plane so that people are on the same page early."

    Avoid Common Leasing and Owning Aircraft Pitfalls

    For those that want to invest in aircraft ownership, they can choose to lease their own planes or buy them outright. The financing considerations for both options differ.

    Leasing requires careful financing. With a lease, it's important for individuals to understand that they are going to be locked into an aircraft for a period of time even if problems with the aircraft arise. Wieand suggests that it's important to consider the potential for those additional costs when determining whether a lease makes the most sense. A close read of the lease terms is also a good way to ensure that there aren't any surprises if problems arise or if someone needs to break the lease for any reason.

    Focus on alignment first and financing second when taking out a loan. Taking out a loan to cover the cost of an aircraft can remove some obstacles like being locked into a lease period, but individuals will make sure that they are working with well respected financing teams that are familiar with these kinds of transactions. Coleman notes that if you're financing before you buy, lenders will typically want to be clear on the results of a pre-buy inspection so that there aren't any discrepancies with aircraft components or functionality. Appraisals and inspections can vary widely provider to provider so potential owners can avoid problems by working with appraisers and inspection teams that the lender is already familiar with and trusts. Coleman adds that some lenders will not finance specific types of planes so it is important to make sure that individuals align their desires with a finance team that is willing to support them.

    "I have seen people get into situations where they find out that they can't get the financing they were counting on because they didn't do the pre-work," Coleman says. "A seasoned aviation finance team will work closely with you on finding solutions but it's best when they are included early on in the process."

    Ready to Help

    PNC Aviation Finance offers knowledgeable financing solutions to make private aircraft ownership possible and affordable.

    We offer custom-tailored financing packages based on business needs and circumstances. Our experienced aviation finance team understands and has extensive knowledge regarding private aircraft ownership requirements, FAA, insurance, operating leases, etc.

    We can help you look at the implications of each option and help you decide on the best option for you or your business.

    Learn how PNC Aviation Finance can help you fly higher by visiting pnc.com/aviation.


    Sources
    1. Los Angeles Times (July 10, 2020) The rich are flying again -- in the comfort of their private jets - https://www.latimes.com/business/story/2020-07-10/charter-private-jet-flight-covid-19-coronavirus
    2. CEO David G. Coleman, Duncan Aviation (November 2020) Interview
    3. CEO Jeff Wieand, Boston Jet Search (November 2020) Interview


    This article was originally published by PNC Aviation Finance on December 17, 2020.

  • NAFA Administrator posted an article
    AINsight: How Dry Leases Can Prevent Illegal Charter see more

    NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses how dry leases can prevent illegal charter.

    Is it possible that a subtle shift is occurring away from the pervasive and persistent menace of illegal charter operations? Anecdotally, and perhaps for me just hopefully, I am seeing more aircraft owners, operators, lessees, and lessors asking whether they need some type of leasing or other structure to avoid FAA scrutiny or personal liability.

    Leasing enables a lessee, which may be an individual or entity (person), to lawfully “operate” and thereby exercise “operational control” over an aircraft under the FARs. Only one person has operational control. Leasing offers a broad array of benefits and structures to direct cash flow from lessees to lessors and vendors, manage risk, minimize certain taxes, share aircraft use and cost among unrelated and affiliated parties, and facilitate commercial operations under FAR Part 135.

    But leasing is not an incidental subject, as explained in the General Aviation Dry Leasing Guide developed by NBAA and several other aviation alphabet groups. This 17-page publication informs aircraft buyers, owners, lessors, lessees, lenders, brokers, lawyers, and other advisors about the flexibility, utility, regulatory aspects, and complexity of leasing.

    Key FAA Leases: Dry and Wet

    It is essential first to understand that a “lease” under the Uniform Commercial Code in part means a transfer by a “lessor” to a “lessee” of the right to possession and use of an aircraft for a term in return for consideration—usually hourly, fixed, and/or variable rent payments.

    In contrast, a true lease might exist when the lessor retains residual value risk—the remaining value of the aircraft at the end of the lease term. Sellers do not take this risk. Finally, a charter is not a lease; it is a service, with no change of aircraft possession.

    Under FAR 91.23, “a lease means any agreement by a person to furnish an aircraft to another person for “compensation or hire, with or without flight crewmembers, that is not a contract of conditional sale.” In this context, the FAA identifies two extremely important categories of leases in Order 8900.1: dry leases and wet leases.

    Dry lease refers to an aircraft transaction in which the lessor provides the aircraft, the lessee independently supplies the crewmembers, and the lessee retains operational control of the flight. FAR 1.1 defines a core regulatory concept of operational control with respect to a flight as “the exercise of authority over initiating, conducting, or terminating a flight.”

    Illegal or unsafe operations may occur when leases or other contracts do not specify who is responsible for operational control of the aircraft and in other circumstances. As such, the FAA focuses on operational control in assessing whether a flight operation is an illegal charter or valid Part 91 operation.

    Operational control under Part 91 does not mean the traveler must fly the aircraft personally. An aircraft owner or lessee typically delegates that responsibility to pilots under Part 91 or charter operator under Part 135. I sometimes refer to the one person that exercises operational control as having the liability target on the person’s back.

    For example, in one of the most common uses of dry leases, an owner enters into a dry lease between a limited liability company (LLC), as the single-purpose aircraft owner entity, to put operational control of flight operations into the hands of one person as the lessee in compliance with Part 91.

    A major business enterprise for profit may be an appropriate dry lessee if the aircraft serves the business of the enterprise whose operations generate substantially more revenue than the operating costs of the aircraft. The LLC owner/member may also agree to an “exclusive dry lease,” with one lessee/operator or “non-exclusive leases” with multiple aircraft lessees/operators under their separate non-exclusive leases.

    The finance world routinely uses exclusive dry leases of various types to enable a lessor to buy an aircraft and lease it to a lessee without crew under a long-term lease. Here, the lessee similarly supplies the crew and assumes all obligations under the lease for the care, custody, and control of the aircraft during the term, including for its maintenance, crewing, operations, cost payments, insurance, and taxes.

    Despite the availability of leasing, new and current aircraft owners still frequently violate the FARs when their LLCs operate the aircraft but have no business other than to own and operate their aircraft, converting the LLCs into illegal “flight department companies.” Such a single-purpose LLC cannot lawfully conduct these operations, share the aircraft for any compensation (anything of value), or offer the aircraft for hire to others unless the LLC obtains an air carrier certificate under Part 119 and operates the aircraft under Part 135. It is quite feasible to use non-exclusive or exclusive dry leases to rectify or avoid these violations.

    In contrast to a dry lease, the FAA defines a wet lease in FAR 110.2 as an aircraft lease whereby the lessor provides both an entire aircraft and at least one crewmember to a lessee. The lessor retains operational control of the flight, unlike a dry lease where the dry lessee supplies its own crew, directs many aspects of flight operations, and retains operational control.

    Another significant distinction exists between Part 91 private operations and Part 135 commercial operations conducted by the air carrier that influences lease structuring. The air carrier (charterer) has the liability target on its back instead of the person that would otherwise exercise operational control under Part 91. This feature appeals to risk-averse Part 91 lessees or owners that want to mitigate the risk of liability for accidents involving their aircraft under their operational control of the aircraft.

    When the Rubber Hits the Runway

    When the conduct of flights blurs the line in determining whether one lessee/passenger has operational control or the lessor/aircraft provider has operational control under Part 91, illegal charter operations may be occurring. Lessees normally must understand and accept operational control and related obligations.

    Although the FAA has no specific criteria to determine when Part 91 dry leases morph into illegal wet leases, lessees should be wary of lessors that offer leases to multiple unrelated parties, induce the parties to hire the lessor’s pilots, and usurp the lessee’s independence in exercising operational control.

    Importantly, the lease parties of large civil aircraft (over 12,500 pounds mtow) must comply with FAR 91.23, the Truth-in-Leasing rules. These rules, which protect and inform lessees, require the filing with the FAA of a copy of the lease within 24 hours of signing and notice to the local FAA Flight Standards office at least 48 hours before the first flight under the lease.

    Conclusion

    There is no excuse for operating an aircraft as an illegal charter, especially when leasing aircraft provides a reasonable way to transfer rights to lessees to possess and use an aircraft under the lessee’s operational control. With the guidance of knowledgeable aviation counsel, individuals and entities can operate safely, lawfully, and knowledgeably under the FARs using leases and other related documentation that will survive FAA scrutiny.

    This article was originally published on AINonline on January 15, 2021.

     

  • NAFA Administrator posted an article
    Return to Lender see more

    NAFA member, George Kleros, Senior VP, Strategic Fleet Management and Fleet Support for Jet Support Services, shares nine things you need to know when leasing an aircraft.

    When leasing an aircraft, what are your maintenance obligations during and at the end of the lease term to ensure that the returned aircraft maintains its value? 

    Focused on that residual value, the lessor will designate a qualified inspector or auditor to perform periodic records reviews and/or asset inspections, throughout the lease period. The intent is to verify the aircraft’s general condition and ensure it remains in compliance with lease requirements.

    After each check, the inspector will send the lessor a report with the graded condition of the aircraft and any specific findings. If anything can or might affect the residual value, you’ll be required to take corrective action to bring the aircraft into compliance.

    At term end, the lessor will conduct an “off-lease” inspection (similar to a pre-purchase inspection) at a factory-owned or authorized service center. All components and systems must be in full working order; or repaired if not. If the major components are near their life limit, you’d be responsible for covering these costs: either a pro-rated percentage based on time consumed, or 100% of the cost to overhaul if it’s close to the event.

    If the aircraft requires repairs for damage or corrosion, you are responsible for the repair cost. Once any repairs required by the lease are completed, any diminution in value due to damage history will be the lessor’s responsibility.

    So what can you do to preserve the value of the aircraft?

    Do …

    • Review the lease document fully to understand the operation, maintenance and return of the aircraft requirements. A good lease-return scenario always starts with a well-defined and documented set of return conditions. Ask questions for clarification prior to signing, to be sure you fully comprehend the broad scope of your obligations.
    • Keep the aircraft clean and polished to protect from corrosion and paint deterioration. Unprotected aircraft deteriorate faster than you might expect. The aircraft interior will be inspected for wear, cleanliness, and damage. The exterior will be checked for oil leaks, paint condition, and structural damage.
    • Store the records in a secure, dry, fireproof storage cabinet or safe. Damaged or missing records devalue an aircraft and will change residual value. The lessor will come out either annually or bi-annually to see the aircraft and review the records for accuracy and airworthiness.
    • Keep up with routine and scheduled maintenance tasks, even if the aircraft is not flying for extended periods of time.
    • Address interior and exterior wear items immediately. Waiting can compound the problem and cost more to correct.

    Don’t …

    • Assume the lease document allows for the aircraft to operate under different regulations or use than originally defined.  If the aircraft flies only for you under FAR Part 91 regulations, don’t move your aircraft into a for-hire Part 135 air-taxi arrangement without consulting the lessor; it may not be allowed.
    • Leave the aircraft outside. Store it in a hangar when not in use. Sun, humidity, and high temperatures deteriorate interiors and paint exterior, diminishing the residual value.
    • Let the aircraft sit inactive for long periods of time. Your aircraft still needs to be flown and systems exercised to keep systems lubricated and reduce risk for damage.
    • Ignore missing paint and erosion strips. This leads to corrosion and will be expensive to correct.

    The lessor always requires hull insurance at a specific dollar amount, and generally seeks high liability insurance limits.  If you acquire an hourly cost maintenance program (HCMP), it can help ensure that the aircraft meets return conditions. The lease should state clearly that the maintenance program was current at lease inception and that the HCMP will be transferred to the lessor. An HCMP is very desirable in a lease transaction. It helps preserve the aircraft’s residual value, and helps you avoid penalties and extra costs. 

    This article originally appeared in Business Aviation Advisor on November 3, 2020.


     

  • NAFA Administrator posted an article
    Lease Agreements! But Wait, There's More! see more

    NAFA member, Air Law Office, P.A., shares two more steps you should consider regarding your aircraft lease agreement.

    You’ve set up your operational structure for your “large civil aircraft” and you have your Part 91 lease in place, what now?  Whether you have purchased a new-to-you aircraft, or you are changing up your operational structure, you’ve found a new lessee to use your aircraft on a Part 91 basis, there are 2 more steps that you have to take.  Many owners and lessees think that the work is finished once the lease agreement is signed, but they are wrong.  The FAA requires that 2 separate copies of the lease agreement must be sent to 2 separate offices of the FAA before the aircraft flies under the new lease agreement.

    First, under FAR §91.23 within 24 hours of execution, a signed copy of the lease agreement shall be mailed to the FAA Aircraft Registration Branch (AFS-750), Attn: Technical Section, P.O. Box 25724, Oklahoma City, OK 73125.  Note: filing the lease agreement with Registry to satisfy this truth-in-leasing requirement does not constitute filing under 14 CFR part 47 or 49 to register the aircraft, or to record for public notice.

    Second, again under FAR §91.23, the lessee must notify the FSDO closest to the aircraft’s departure airport at least 48 hours prior to the first flight under the lease agreement.  This notice can be in-person, via telephone, via fax or via email, depending on the requirements of that FSDO.  The notice must include the identity of the departure airport and the proposed time of the departure of said first flight.

    The Bottom Line:  Be sure to send a copy of the executed lease to Oklahoma City, send a copy to the appropriate FSDO and be sure to carry a copy on-board the aircraft during all applicable operations!  Check in with your legal team ASAP to be sure you are in compliance!  Remember, this article is intended to inform you about issues that you should discuss with your financial and/or legal team and is not intended as legal advice or opinion, you should not act on any information contained in this (or any other) article without directly consulting legal counsel.

    This article was originally published by Air Law Office, P.A. on August 14, 2020.

  • NAFA Administrator posted an article
    Immediate Private Aviation Solutions During and After a Pandemic see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, answers your questions regarding private aviation during and after a pandemic.

    As the United States and other countries around the world start to lift their stay-at-home restrictions, many individuals and companies are electing to increase or exclusively fly privately for the foreseeable future. Prior to the global pandemic, a number of companies and individuals used either a hybrid solution of flying, which included both private and commercial flights, while others elected to fly all flights commercially, even when private aviation was financially viable. The reasons for these choices, such as cost savings or flight shaming, are now being significantly overshadowed as a result of the global pandemic. Today those companies that previously used a hybrid model have new mandates which extend private flying rights to more employees for both business and/or personal use. In addition, those who previously elected to fly commercially are now more likely to select a private aviation solution when it is financially practicable.

    I have been inundated with questions related to immediately available solutions to cover the new normal individuals and companies are navigating. When looking for a private aviation solution the usual choices are still available: ad hoc charter, membership programs, pre-paid jet cards, leases, fractional ownership and whole aircraft ownership. What is different and hard to evaluate is the financial stability of the various service providers. When considering a service provider for private aviation, a few new questions should be asked:

    • What was the cash position of the service provider prior to the pandemic?
    • Did the service provider receive any funds from the CARES Act?
    • Has the service provider defaulted on any significant loans?
    • If funds are prepaid to the service provider, are the funds maintained in separate accounts and who is the owner of those accounts?
    • What budget cuts has the service provider implemented during the pandemic? Have any employees been laid off?

    We have already seen the closure of some private aviation companies as a result of the downturn in flying caused by the global pandemic. Some of these companies had significant prepaid deposits from customers on hand at the time of the closure, which are unlikely to be recoverable. Furthermore, we know that as companies struggle financially that budget cuts will be made, and it is important to understand how the budget cuts may impact safety and service.

    As a result of the financial uncertainty of many private aviation companies, it is more important than ever to have any unsecured prepaid funds maintained in a separate account and in the name of the customer. If that is not an option and the financial information of the service provider is questionable or not available, then negotiating that the prepayment of funds be adjusted into smaller and more frequent payments is recommended.

    When transitioning into a private aviation solution and/or increasing private aviation use, it is also important to look at the duration of time that the use and/or increase in private aviation use will occur. If the new normal for you or your company will likely become a permanent change, then whole aircraft ownership or fractional ownership should be strongly considered, particularly if the number of flight hours needed per year will exceed 100. If the change is anticipated to be temporary or the number of flight hours needed is not significant, then a less permanent solution such as a membership program, jet card or a fractional lease should be considered. If whole aircraft ownership is not the solution selected, then the cleaning process and safety procedures implemented by the service providers should also be evaluated.

    Finally, it is important to not rush the process of purchasing an aircraft or selecting a private aviation service provider. Be sure to evaluate the service provider selected and in the case of the purchase of a whole aircraft, the aircraft selected should go through a complete pre-purchase inspection. Taking such precautions and being deliberate in your evaluations will save you money and help you avoid pitfalls in the future.

    This article was originally published by Aerlex Law Group on July 14, 2020, in Articles, BusinessAir Magazine, The Latest.

     September 28, 2020
  • NAFA Administrator posted an article
    AINsight: Best Five Options To Fly Privately see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the best options to fly privately. 

    As commercial airlines attempt to fill seats amid the Covid-19 pandemic, some families, businesses, and individuals have made a flight to safety by traveling again or for the first time on private aircraft.

    These travelers set their schedules and itineraries for on-demand business or personal flights. They can travel to about 5,300 public-use airports in the U.S., roughly 10 times the number of airports available to commercial aircraft. International airport access expands the flexibility to travel globally. Travelers greatly value saving travel time, the healthy and safe environment, productivity, and convenience of private aircraft while enjoying a comfortable, interconnected, and protected flight experience.

    Although the reasons to fly privately may be obvious, especially in the age of Covid-19, deciding on the right providers and approaches to flying are more complex. Three modes of aircraft travel involve no capital investment: chartering, jet or fraction cards, and membership programs. Each of these options holds strong attributes for new and some repeat flyers. Two other options require capital outlays for frequent flyers: purchasing a whole aircraft or a fractional share of an aircraft.

    Before All Else

    Before making choices from the five types of private aircraft travel described below, each person should complete the following diligence and processes to select the best possible flight experience:

    • Aircraft supports the mission. Identify the right aircraft for your “mission”—industry lingo that refers to identifying the details of a trip. In general, a mission profile covers logistics, operating hours, amenities, connectivity, catering, luggage/storage capacity, number of passengers, and travel distance. One size aircraft might not fit all travel needs, especially for owners or lessees that have access to only one aircraft.

    • Stellar manager, operator, and pilot safety records. Insist that the commercial operator, aircraft manager, and pilots have stellar safety records. The commercial operator should supply a top-flight team, including experienced pilots approved by the operator’s insurer. Managers, operators, and pilots should be free of enforcement actions by, or violation notices from, the FAA. Ask them.

    • Aircraft in good condition. Confirm whether the aircraft complies with its manufacturer’s maintenance and regulatory requirements. The aircraft should also present a well-maintained physical appearance.

    • Robust Covid-19 protocols. Verify that the aircraft manager, commercial operator, and FBO have designed and implemented a robust Covid-19 safety protocol for ground personnel, passengers, and crew, including health screening, social distancing, and personal protective equipment.

    • Adequate insurance coverage. Require that the aircraft manager or commercial operator provide written evidence of comprehensive liability insurance to protect you despite the tightening insurance markets.

    • Aviation experts. Use business aviation experts, including various brokers, technical consultants, and aviation lawyers, to assist in evaluating, documenting, and closing the best option or options for you.

    Chartering Aircraft

    charter is simply an ad hoc transportation service by private aircraft by the seat or whole aircraft. Charter makes the most sense for occasional and new flyers including those seeking a healthy and safe aircraft travel environment during the pandemic. Although more complicated, a charter is like taking a taxi. In legal terms, charter operators engage in air commerce by carrying persons or property for compensation or hire. You can hire a charter service in most cities with a private or public-use airport.

    Perhaps the simplest question about a charter and other options is what kind of aircraft does the traveler need to satisfy his or her top travel priorities? And how much will she or he spend to travel on a private aircraft? Charter rates can easily climb from approximately $1,200 to $12,000 per hour or more, depending on the aircraft selected from light jet or turboprop to an ultra-long-range jet.

    Though charter rates are not inexpensive, charters are somewhat more affordable because charter rates have dropped since 2019. Also, Congress approved, among other tax benefits, an excise tax holiday in the CARES Act, which suspends the 7.5 percent flight excise tax on amounts paid to charter operators from March 28, 2020, to Dec. 31, 2020.

    Cost transparency is sometimes challenging in the charter world. Travelers should ask for receipts detailing charges on their accounts, watch for overlapping charges, and tie the charges to final invoices. It is advisable to compare operator fleet sizes and business models.

    One persistent legal and safety concern arises from illegal charter operations. Broadly speaking, illegal charters occur when the aircraft operator or pilot conducts charter operations without proper certification or fails to comply with strict safety requirements in applicable regulations. Illegal charters have ensnared frequent and occasional charter travelers.

    Customers should look for red flags such as an operator asking customers to sign short-term leases or timesharing agreements. As a result of these regulatory violations, the FAA has, in coordination with the business aviation industry, stepped up its enforcement actions against operators and warned pilots to shun illegal charter operations.

    Membership Programs

    Fee-paying members typically have access to private aircraft for a set number of hours that may range from 25 to 100 hours per year. Program terms, aircraft fleets, and quality vary widely as does pricing for membership and flights. Before joining, travelers should compare programs of operators that have developed creative ways to travel at a predictable cost.

    Jet and Fraction Cards

    Jet and fraction cards cost more than most other aircraft travel options and work like a pre-paid credit card that a traveler uses to pay for 25 to 100 or more flight hours. The cards enable travelers to dip a toe into private aviation. Card amounts vary, starting as low as $25,000 and perhaps lower in this changing segment. These cards and other options can provide supplemental lift to enhance travel flexibility.

    Whole Aircraft Ownership or Leasing

    Buying or leasing a “whole” aircraft often makes sense once a traveler anticipates using at least 200 flight hours per year and wants to control the use, customization, operational control, repair facilities, crewing, base location, and availability of the aircraft. However, many of my clients acquire aircraft knowing they will need fewer hours but also expecting to charter the aircraft to others to offset fixed costs.

    At the outset of deciding whether to buy a whole aircraft, businesses should determine whether bonus depreciation and other tax benefits may be available and structured to reduce their after-tax cost of ownership and operations. Financing is widely available for whole aircraft at historically low rates. It is important to use aviation experts here as purchase, sale, financing, or leasing transactions are often complex.

    Fractional Share Ownership

    Simpler than owning or leasing a whole aircraft, an owner or lessee of an aircraft fractional share typically commits to a five-year program. A fraction typically corresponds to a certain number of annual flight hours, often ranging from 25 to 300 hours, though some programs instead use number of travel days instead of flight hours. Fractional programs charge monthly management and per-hour flight fees, differ in quality, and provide highly personalized service. Bonus depreciation and/or other federal tax benefits might be available like whole aircraft. A few banks will lease or finance a fractional share.

    Conclusion

    To mitigate Covid-19 infection risk, some families, businesses, and individuals have abandoned commercial aircraft travel for on-demand travel in private aircraft. The five best options for such private aircraft flights consist of charter services, membership programs, and jet or fraction cards, along with purchasing or leasing whole or fractional shares of these aircraft.

    Covid-19 has boosted demand to fly by private aircraft, especially charter services. Perhaps this demand foretells a new era of sustainable growth in private aircraft travel as people realize that these flights not only save time but might also save lives.

    Disclaimer: This blog is not intended to convey, and does not convey, legal or other advice. Each person should consult his or her advisors to make decisions about flying privately, as well as any legal or economic implications, risks, or terms in connection with any such decision.

    This article was originally published by AINonline on July 17, 2020.

  • Tracey Cheek posted an article
    JSSI’s Commitment to Business Aviation see more

    Dear NAFA Member:

    As an organization, we at JSSI remain committed to providing world-class service and support to our customers and valued members of the business aviation lending and leasing community.

    Providing Financial Relief for Customers
    Effective immediately, JSSI has:

    • Suspended all annual make and model rate increases through June 30, 2020.
    • Implemented a 25% reduction on annual minimum flight hour invoices paid net 30 days, OR;
    • Extended payment terms to 90 days on annual minimum flight hour invoices in lieu of the 25% reduction. For those paying minimums each month the invoice will be reduced by 25%.
    • For operators using aircraft for rescue flights related to COVID-19, those hours along with additional credits will be applied to the account.

    Supporting the Lending and Leasing Community
    JSSI also reaffirms its commitment to the lending and leasing community by providing a range of services to help navigate through these challenging times. We can provide support, even if an aircraft is not currently on a JSSI or OEM program. 

    Advisory Services
    In addition to hourly cost maintenance programs, we are able to assist with pre-funding audits, asset inspections, desktop appraisals and more. Importantly, with over 75 Technical Advisors in strategic locations, we are ready to reach your asset quickly and efficiently without resorting to air travel during these very restrictive times. 

    If you require assistance, please do not hesitate to call JSSI Advisory Services at +1 312.644.4444 or email advisoryservices@jetsupport.com.

    Preservation Guidance
    With so many operators ceasing flight operations at this time, it’s also important to know that the preservation of the airframe, avionics, APU and engines is not only mandated by the manufacturer but also critical to the long-term airworthiness of the entire aircraft. 

    Our Professional Services team would be happy to provide further guidance on preservation requirements for aircraft not already covered by a JSSI program. For further information, please email info@jetsupport.com.

    As always, we value all feedback from the lending and leasing community. If you have any questions or suggestions, please do not hesitate to contact me directly.

    Sincerely,

    Lou

    Louis C. Seno
    Chairman Emeritus
    e: lseno@jetsupport.com

  • Tracey Cheek posted an article
    AINsight: Millennials' Shared Use Is a Real Deal see more

    NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses millennials, shared use, and private jet travel.

    Millennials—those ranging in age from 21 to 37 years old this year—have discovered the private jet travel experience, and they like it. With unique attributes, this generation seems broadly interested in on-demand chartering, sharing flights with friends and, to a lesser extent, owning jets and other types of private aircraft—always on their terms.

    Also known as “Gen Y,” Millennials seem to enjoy private aircraft travel “experiences” at an acceptable cost with emphasis on safety, freedom, personalization, efficiency, speed, privacy, customization, and transparency—all couched in a high level of service and luxury. They also crave digital connectivity, mobility, and flexibility to travel when and where they want, preferably arranging private flights on mobile devices.

    Their perception of the benefits of business aviation includes accessibility of aircraft on-demand, the ability of aircraft to save time, and the efficiency of aircraft travel to increase their work productivity.

    Finally, Millennials care deeply about climate change and social causes. They might prefer aircraft operators that demonstrate their environmental responsibility. In fact, the business aviation community has long been committed to mitigating climate change, proven in part by the formation of a broad industry coalition that emphasizes developing and using sustainable aviation fuel (SAF).

    As a generation of roughly 73 million adults, Millennials often have high ambitions. Their top aspiration and priority in 2019, according to Deloitte, is to travel and see the world (57 percent). But their needs and wants are far more than aspirational. Some Millennials have, and others in the foreseeable future may earn or inherit, more than enough money to travel by private aircraft amid their peers who, by one report, now make up nearly half of the world’s super-wealthy, including Millennial billionaires.

    Indeed, Millennials already seem to be altering the business aviation industry by transforming a business aircraft from a product for purchase into a tool for transportation services in their “click and ride” world.

    VIABLE STEPS FOR MILLENNIALS TO ACCESS PRIVATE AIRCRAFT

    What, then, is the right generational, practical, and legal path forward in business aviation to meet the needs and wants of Gen Y? Setting aside the critical issue of selecting the right aircraft for use or purchase, let’s consider two high-level access and legal structures for Millennials to buy, use and share private aircraft along with the corresponding obligations, risks, and benefits.

    First, Millennials can decide, and currently seem to prefer, to experience private aviation travel without commitment to, or investment in, aircraft. They simply prefer to click and ride. Second, Millennials can elect to own or lease a fractional share of an aircraft or a whole aircraft.

    Regardless of what Millennials choose, private aviation is highly regulated. The FAA oversees the safety of U.S.-registered aircraft operations under the FARs, including Part 91 private flights and Part 135 charter.

    Further, now—perhaps more than ever—the FAA is looking for, and potentially taking enforcement actions against, operational and other violations of the FARs. Even with this FAA presence in mind, Millennials can still share ownership or use of aircraft with others or go it alone—as long as they properly structure their arrangements under the FARs.

    The following two use and ownership options work under the FARs:

    • Use only with no ownership commitment—click and ride. Many Part 135 operators do and increasingly will offer charter-based services such as on-demand charter flights (like renting a car), jet cards (types of pre-paid flight debit cards), block charter programs (package of charter flight hours), club or member programs (reduced flight costs for up-front fees). With myriad choices available, Millennials can select flights by criteria that meet their personal life values, economics and travel preferences, including aircraft type, flight sharing, transparency, connectivity, and privacy.

    Although many of the services might be easy and simple for Millennials to use, it is imperative that Millennials do not trade their safety just to pay lower charter fees offered by flying with illegal charter operators. Millennials should do their diligence to identify and steer clear of such legal and personal risks.

    • Own or lease specific aircraft. Properly structured, Millennials, solo or in a group, can take a deeper commitment in accessing private aircraft by leasing or owning an aircraft. Ownership, of course, requires a capital investment in an aircraft unlike the click-and-ride model, which has no ownership component. Banks may want to lend part or all of the purchase price to Millennials or buy and lease the aircraft to them, which frees up cash for Millennial to deploy in other ventures or equities.

    Within the option to buy or lease aircraft, Millennials can buy and finance or lease a fraction or whole private aircraft. Although a large number of financiers compete to finance or lease whole aircraft, relatively few lenders or lessors finance fractional shares.

    Fractional share programs, regulated under Part 91K, offer one good way to dip a toe into the water of aircraft ownership. Fractional shareowners buy and use a certain number of flight hours associated with owning or leasing as little as a one-sixteenth share of an aircraft.  This type of purchase might appeal to Millennials who decide to change their interests from click-and-ride offerings to ownership in an aircraft fleet that, for example, uses newer engines and fuels that minimize an aircraft’s carbon footprint, has an outstanding safety record, or has better connectivity features on the ground and aloft.

    The next step up in commitment is to buy or lease a whole private aircraft instead of a fraction of one. A Millennial might be able to locate and buy an aircraft that adequately meets his or her personal life values and needs, including size, customization, privacy, and technology. Whole aircraft purchases start to make sense when flying at least 200 hours per year. Before then, click-and-ride or fractional programs might work better economically.

    FARS NEVER FAR AWAY

    If Millennials need or want to share ownership or leasing of an aircraft jointly with others, they can legally structure such sharing under the FARs. However, being an owner and an operator might not be the same thing, and a joint operator (either as a joint owner or a joint lessee) under Part 91 can be tricky. For example, as a general rule, no cost-sharing, reimbursements, or other compensation in any form can be conveyed to any operator or owner for any Part 91 flight, other than under very limited circumstances.

    In many situations, receipt of compensation by the operator will convert the Part 91 flight into an illegal charter. However, if correctly structured, Part 91 will allow Millennials to enter into certain joint ownership and leasing arrangements that Millennials can use to accomplish their objectives.

    In contrast, under a bona fide Part 135 flight operation, Millennials can devise their own cost-sharing arrangements under appropriate agreements with much greater flexibility, typically at a higher cost than Part 91 flights.

    Millennials today and in the foreseeable future will have the financial means to use or acquire personal aircraft. Only time will tell whether Gen Y prefers to fly private aircraft as a service free of the ownership risks or lean into the world of aircraft ownership or leasing, alone and with friends, to fulfill life experiences and work objectives. No matter which way Millennials go, the FARs will be right there with them.

    This article was originally published in AINonline on September 13, 2019.