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owning & operating an aircraft

  • Tracey Cheek posted an article
    When to Plan the Sale of Your Aircraft see more

    NAFA member David Wyndham, Vice President with Conklin & de Decker, shares tips on knowing when the time is right to sell your jet.

    Although it’s important for all owners to have a strategy on when to replace their aircraft, there are several important factors making an owner’s plan specific to their operation. David Wyndham offers insights on these.

    When you acquire an aircraft, whether it is your first or a replacement you may not be thinking about when you should sell. Though it may not be an immediate concern, a savvy owner should still have a strategy in place for when to sell.

    Unfortunately, there is no easy formula for this, nor is there a single tactic to follow. There are, however, two general reasons to dispose of your aircraft. The first is that it’s no longer capable of performing its mission. The second is that the aircraft is no longer economically feasible for the mission.

    Mission Situations

    One of the main reasons why people replace their aircraft is that their mission needs change and the aircraft no longer offers the capability required.

    A typical case is a requirement for greater range or passenger capacity. If you require additional range, your current aircraft could probably still perform the trip with a fuel stop. You should keep in mind that larger, longer range aircraft cost more to acquire and operate. Is avoiding that one-hour fuel stop worth spending $10m-$20m more for a larger aircraft?

    Another scenario might be the need to carry more passengers, more regularly. While adding more seats is not a viable option if you’re to preserve passenger comfort, some aircraft can add one or two more passenger seats with a simple reconfiguration. This may include using a belted lavatory as a passenger seat. (I had one client who used a typical eight-seat Hawker 800XP as a nine-seat shuttle by doing just that.)

    However, flying nine people 3,000 miles with an eight-seat aircraft is not a viable long-term solution, especially with baggage.

    High Utilization Operations

    I have worked with several clients who fly frequently. One has several Light Jets that average about 700 hours per year on 400–800nm legs.

    Maintaining a high utilization schedule such as this is easier with newer aircraft. Newer aircraft require less maintenance and spend less time in the shop for maintenance, which is a major reason why fractional companies have newer models in their fleets.

    Cost of Ownership

    If the cost of keeping your aircraft is outweighed by replacing it, then the best financial plan is to replace your aircraft.

    Operating Costs Increase with Age: As aircraft age, unscheduled maintenance tends to rise. Some components will wear out and other critical components may have a specific life limit.

    Engines are still going to be the biggest single cost item on most aircraft. Engine overhauls are infrequent but high cost, often exceeding $1m per engine on some large-cabin jets.

    At some point, the ability to support the aircraft will become difficult due to increased unscheduled maintenance and a growing scarcity of spare parts.

    Fleet size, the aircraft being out of production, and the average age of the fleet all factor into driving up the costs and availability of spares. This becomes a greater factor for aircraft in their mid-20s and older.

    Residual Values Decline with Age: Along with increased operating costs come declining values. The value of an aircraft is based partly on its age and partly on its maintenance status. For example, a 20-year-old business jet has much of its value associated with its maintenance status. That jet may be worth $2m with the engine in need of an overhaul but it will be worth $4m with freshly overhauled engines and a major inspection recently accomplished.

    Guaranteed hourly maintenance programs help to smooth the value curve by accruing for the maintenance and offering assurances that maintenance costs will remain predictable. But a 20-year-old aircraft on a guaranteed hourly maintenance program is still going to be worth more than a 22-year-old aircraft on a program.

    The Art of Life-Cycle Costing

    The financial planning for when to sell your jet is best done using life cycle costing. This analysis considers the total costs of acquisition, operation and disposition.

    Since you should be doing a maintenance and operating budget annually, the addition of resale value can also be done regularly and will ideally project values for the next three to five years at a minimum.

    While predicting future values is at best an educated guess, the life cycle cost of ‘keep versus replace’ over the next several years can give you a lead time to plan for the aircraft replacement as well as time to perform an analysis on future options.

    Planning for how long to own your aircraft is ultimately determined by your needs, your mission, and the life cycle costs. Consider all these at least annually and forward-plan.

    More information from www.conklindd.com.

    This article was originally published by AvBuyer on April 22, 2019.

  • Tracey Cheek posted an article
    How Long Should You Keep Your Business Jet? see more

    NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses your plan on how long you should keep your business jet.  

    When buying a business jet, it’s important to have an idea of how long you will own the aircraft. But where do you begin your analysis? David Wyndham assesses not only why, but how you should build a plan…

    A client was recently looking at how the cost of owning their first business jet compares to a jet card or block charter. Their expected annual utilization is 350 hours and they plan to operate between two continents, requiring a Large Jet. They ultimately chose not to purchase the aircraft.

    Why did they choose not to own an aircraft? In short, their expected utilization period only covered the next two-to-three years. After that the client expected to retire and fly substantially fewer hours. In this case, a very short-term of ownership, combined with the projected decline in the aircraft’s residual value, meant the total ownership costs favored a well-structured jet card program over outright ownership.

    There is no ideal length of time to own a business aircraft, however. The ideal will differ from one prospective owner to the next. So what are the key considerations that a buyer should take into account when determining the length of ownership?

    Mission Changes

    Changes in the primary mission will often dictate a change of aircraft to one that is a better fit. For example, one flight department suddenly needed to fly much longer trips following a merger. The existing aircraft lacked the necessary non-stop range, creating the need for a replacement aircraft.

    Likewise, if the need to carry a certain number of passengers changes then an equipment change could be required. Mission requirements could dictate a smaller aircraft or a larger one. 

    For example, there's no need for a 12-passenger Long Range Jet if the primary mission changes to short hops with fewer passengers.

    When the mission changes, it's important to establish if these are for the short-term or will be more permanent. A short-term change in mission or hours to be flown might be well-served by charter or a jet card. As a part of your acquisition process, you will need to see if any foreseeable mission changes are likely to occur, and if so, when and for how long.

    Changing Costs

    As an aircraft ages, it requires more maintenance to stay reliable. The time needed to perform that maintenance tends to increase. The costs of operating a newer aircraft are therefore lower than older examples. If the economics of the newer aircraft are lower than the older one, it can further support a change.

    For business-use aircraft, taxes may be another consideration when deciding how long to keep the aircraft. There are some companies that maximize the tax depreciation of the aircraft as aggressively as the tax law allows and, once depreciated, these companies often elect to replace the aircraft.

    Part of this discussion depends on the profits of the corporation and the need for tax deductions. Taxes should never be the sole reason to buy or sell your jet, but they can be a significant decision point. It's always a good idea to consult with a tax expert for further guidance.

    Maintenance, Technology and Parts

    Maintenance Factors: Calendar requirements for travel, advances in technology and the ability to obtain spare parts after an aircraft has been out of production for many years are among the other considerations for determining how long you should plan on keeping your jet.

    If the aircraft is flown a lot, the increased calendar availability of a newer aircraft needs to be factored into the equation. Older aircraft can be down for maintenance more than 50% of the time, which necessitates significant supplemental lift. 

    How might an aging aircraft fit with your projected mission needs five years from the time of purchase?

    Technology Factors: New technology that is required for ATC, navigation and increasing safety may not be cost-effective when modifying older aircraft. For some business jets, updating systems to a modern ‘glass cockpit’ suitable for global navigation can exceed $1m or more. For the older global jet, it may not be worth spending that money. This must be assessed at the time you’re buying a jet.

    Parts Availability: For much older aircraft with fewer left flying, the ability to find spare parts, irrespective of cost, makes the aircraft less able to meet its schedule. A rule of thumb is that if less than half the fleet is still flying, the aircraft can be considered an ‘end-of-life’ model – in which case, you may need to develop a plan for the aircraft’s scrappage once your planned term of ownership is finished.

    In Summary

    If the long-term mission needs are not likely to change, then the decision should center on costs. The costs of keeping or replacing the aircraft should be calculated using a life-cycle cost approach to arrive at the best financial solution.

    This approach considers not only the operating costs but also current and future values. It may also include taxes and the cost of capital.

    In summary, there is not one right answer for how long to own a business aircraft. The timing depends on the age of your aircraft and on the costs of owning and operating it. I’ve seen owners who change aircraft every five-to-seven years and some who keep an aircraft 20 years or longer.

    This article was originally published by AvBuyer on March 6, 2019.

  • Tracey Cheek posted an article
    How to Refurbish Your Jet With Maximum Appeal (Part 1) see more

    NAFA member, Gary Crichlow, Director of Aviation Finance with Arc & Co., discusses business jet refurbishment.

    How would you upgrade your jet to optimize appeal on the resale market? 

    When refurbishing your business jet, how far should you go? How can you anticipate appealing to future buyers, and what should be the priorities with a sale in mind? Arc & Co’s Gary Crichlow shares the insights of Tobias Laps and Iain Houseman.

    Refurbishing or upgrading an aircraft is a very different investment proposition compared to refurbishing a property. While property generally appreciates in value over time, aircraft are fundamentally depreciating assets. Outside of very specific, often unpredictable market conditions, aircraft will lose value as they age.

    Any investment into a business aircraft therefore needs to be looked at from the point of view of slowing that value loss as much as possible and extracting maximum utility, rather than expecting a positive financial return.

    The most effective way to slow natural depreciation is to ensure the aircraft is desirable to the market so it sells quickly when the owner decides they want to upgrade or generate some cash.

    Mainstream, sought-after aircraft models in top maintenance condition that have undergone a high-quality cabin refit don’t tend to stay on the market for long (unless they’re unrealistically priced).

    What Makes an Appealing Interior?

    Naturally, when considering how to fit out the cabin of a private jet, it’s crucial to make choices that not only align with your current needs and desires, but also account for your future buyer’s mindset as much as possible.

    Decisions made now often have a sizeable impact on the future point of sale. The one similarity with selling property is that a well-executed interior should enable the buyer to visualize himself or herself in the cabin with little or no change rather than having to consider the cost of ripping it all out and starting again.

    Following are several themes that are important to consider when it comes to the perceived value that a well-executed cabin refit generates at the point of sale from a buyer’s perspective.

    Note: With our use of the term ‘value’, we encompass not only the actual return by way of an increased sale price (which tends to be the exception rather than the rule), but also the impact on the time it takes to sell the aircraft, thereby minimizing the detrimental effects of depreciation and time on the market.

    Aircraft Condition Over Aircraft Style

    Generally, aircraft in better condition tend to be easier to sell. A relatively new interior that’s in good condition can markedly increase an aircraft’s appeal, but its impact will be very much dependent on the basic aircraft ‘metal’, i.e. its age, hours and maintenance condition.

    Tobias Laps from Comlux Management AG notes that on Large Jets and Bizliners, the design of the interior, the layout and materials tend to have a much bigger impact on the buyer’s decision-making than on smaller aircraft.

    “In our experience, when buyers walk onto an aircraft, they typically know within the first few minutes whether the interior will work for them or not,” Laps explains.

    “If they don’t like the interior at all, they will often walk away from the deal. If there are only certain aspects of the interior that they don’t like, they will then have to decide whether changing those aspects would be worthwhile.

    “It is at this point that they weigh up their view of the basic aircraft, the metal versus the cost of changing the interior to better suit their needs. If the metal is relatively new, in good condition, and is worth significantly more to the buyer than the cost of the interior upgrade, then that’s what will tend to drive the decision,” Laps continues.

    It is therefore of key importance for a seller to understand the interplay between the technical and the cosmetic, which will depend heavily on the specific details of the aircraft.

    Do Cabin Cosmetics Matter?

    There are important aspects of the cabin prospective sellers can address to give buyers a first-class impression of the aircraft’s condition, and according to Laps that begins with choosing an interior layout with resale value in mind well before the actual sale, including “mainstream” color and veneer choices.

    “In terms of specification, wireless connectivity is a trend whereby passengers can connect their own devices while on board,” he adds. “Upgrading a wireless entertainment system is easier because the interior does not have to be removed to rewire components.”

    Know Who You’re Trying to Impress

    Regardless of the layout and specification, Laps emphasizes that the first thing you must do when selling your jet is to prepare to impress the principal’s technical representatives.

    “Make sure the maintenance records are up to date, well-organized and presentable and the aircraft is clean and fully serviceable,” he details. “It’s a very good idea to clean the landing gear, bays and externally-accessed compartments.

    “Only after the representative has examined the technical condition of the aircraft and records and is satisfied will the principal typically come to assess the interior and overall cosmetic condition and make the final decision.”

    In preparing for the principal to come and view the aircraft, it will need to be cleaned. “The exterior should be spotless, and the flight deck and cabin should be deep-cleaned, including the galley, lavatories, carpet and sidewalls,” Laps concludes.

    “Everything should look fresh and up-to-date. Soft goods and furnishings should invite the principal to visualise himself or herself using the aircraft.”

    Age Before Beauty?

    Iain Houseman of Elit’Avia, meanwhile, believes the interior will be a lot more important if the aircraft is older. “If it’s a newer aircraft, then the interior is usually still in pretty good shape and, in that case, it comes down to how appealing it looks to the buyer,” he notes.

    “If the interior has been designed in a way that appeals to a limited group of people (as an example, red leather seats or a carbon fibre interior instead of veneer) that can be a deal-breaker, because buyers will have to spend time and money to change it.

    “For older aircraft, the interior condition can be important for the same reasons – if the interior has recently been redone or is in good condition then the aircraft is more appealing because it doesn’t need significant rework,” Houseman observes.

    “Additionally, there is a need to understand the current technology systems and the proximity of major inspections for the aircraft that will allow upgrades to be incorporated and save considerable costs. 

    "For example, we estimated a major inspection for an owner’s aircraft of $1.1m and got the cost down to just under $800k – and managed to include some key avionics upgrades, internal improvements and soundproofing enhancement, which proved very useful in getting the aircraft ready for sale.”

    In Summary…

    Upgrading and refurbishing an aircraft is a significant investment that can strongly enhance your experience while on board. Nevertheless, when planning for the investment, it’s important to have a realistic view of the value a refurbishment creates.

    A well-executed cabin refit should not only meet your immediate needs in terms of space, aesthetics, utility and connectivity. It should appeal to the broadest possible range of potential buyers when the time comes to move the aircraft on.

    In ‘Part 2’ we’ll explore the current trends in cabin design as owners seek to maximize utility, comfort and style, gaining input from renowned interior designer Celia Sawyer, while also considering the importance of maintaining paperwork and ensuring the design is properly certificated to enhance the chance of selling your aircraft at the best price. Stay tuned…

    More information from www.arcandco.com

    This article was originally published by AvBuyer on August 12, 2019.

     

     

     

  • Tracey Cheek posted an article
    Three Myths About Business Aircraft Ownership see more

    NAFA member, David Wyndham, Vice President with Conklin & de Decker, discusses the myths about business aircraft ownership. 

    David Wyndham speaks to people who are new to Business Aviation on a regular basis, and also hears some recurrent myths about business aircraft ownership. Following he sets straight three of the more common misunderstandings…

    I tend to help clients select the appropriate aircraft for their flying needs and to cost out the various ways to achieve that. Along the way is the need and opportunity to educate and inform.

    Quite often the decision-maker is informed, but others (perhaps a board member or a CFO) are not. My first task is to listen to, and understand the client’s concerns and then, after validating them, provide answers – or at least a different point of view – for their consideration.

    But what are some of the common myths I hear relating to business aircraft ownership? Let's dive in…

     

    Myth 1: You can Make Money Chartering Your Aircraft

    One client operates a transcontinental business jet. When it’s in for scheduled maintenance, he often uses charter. After seeing the charter bills, however, he wanted to buy a second transcontinental business jet for his backup and to charter it while he was not flying.

    I worked with his aviation manager to find the break-even utilization. When accounting for the acquisition cost as well as the operating costs, there would be a need to fly over 2,000 charter hours annually. Why? There are two parts to the answer:

    First: Charter rates are a relative bargain. While $8,000 per hour to charter a Long-Range Jet may seem like a lot, the operating expenses are significant: The variable expenses of fuel and maintenance alone average about $4,000 per hour. The annual fixed costs, including items such as crew, hangar, insurance, training and airborne internet run to $1.4m.

    A typical charter payback to the owner is 85% of the listed hourly rate, and the owner pays for the aircraft expenses. So on that basis, our $8,000-per-hour charter provides the owner $6,800 per hour. 

    Deducting the $4,000 variable hourly costs leaves $2,800 per hour. To accumulate the $1.4m fixed costs takes 500 charter hours.

    So, after that isn’t it all profit? In short, no. Our owner paid $60m for his global business jet. Current market depreciation is about 7% per year (or a loss in value of $4.2m per year). And that would require another 1,500 charter hours to make the deficit up. Hence our 2,000-hour break-even point.

    Second: Money is not free. Our owner has a cost of capital, or an opportunity cost. If he paid $60m in cash for the jet, he can’t invest that money in his company or other ventures. If you add in a 10% return on capital, there is $6m per year in the lost opportunity of having his money tied-up in the jet.

    He could opt to decrease that up front with an operating lease or a loan, but then his fixed expenses increase. To verify this, look at the financial reports of the airlines: An airline needs to fly between 2,500 to 3,000 hours per year per airplane in order to make a profit.

    There is almost no way an on-demand charter operator can book enough charter to cover the costs of owning their own business jet. When an aircraft owner utilizes a charter operator to charter their aircraft when not in use, both parties can win.

    The charter operator gets the use of a business aircraft without the cost to acquire it. The owner gets some revenues to offset their operating costs.

     

    Myth 2: You Should Focus on Only one Cost… ‘Acquisition’

    Every pilot report and airplane review article mentions three things:

    1. Cabin and amenities;
    2. How far the airplane flies;
    3. Acquisition cost.

    Whenever I do an analysis of costs, I look at the total life cycle cost. This includes not only the acquisition cost, but the operating costs, and disposition.

    While the acquisition cost – less the recovery at resale – is significant, the operating costs can amount to just as much over time.

     

    Myth 3: Operating Costs are Consistent

    At least a couple of times each year I have a client who is shocked when confronted with their maintenance costs. A recent situation involved the owner of a large-cabin business jet. The management company had told the owner to budget $3,500 per hour for fuel and maintenance, yet when they looked at their total expenses for 2018 those items averaged over $5,000 per hour.

    Working through the management company’s reports, while also running our own “should-cost” analysis, we found a cost listed under maintenance for international travel, for which the mechanic accompanied the jet on a multi-week trip overseas. 

    Though this was smart planning, it was not necessarily a ‘routine’ maintenance expense.

    The owner also had an inspection every 2,400 flight hours. They flew less than 300 hours in 2018 and averaged the cost of the 2,400-hour inspection over the 300 hours they flew, not the 2,400 hours it took to accrue the expense.

    In my should-cost analysis the accruals for the maintenance from Conklin & de Decker’s data, adjusting for the cost of fuel, came to approximately $3,600 per hour over time. In any given year, the average for that year varied from about $2,400 to over $7,000 per hour.

    The bottom line is that maintenance costs are cyclical. Unless you are on a guaranteed hourly maintenance program provided by the OEM or a third-party provider like Jet Support Services, Inc., the cost in any given year can fluctuate greatly.

     

    In Summary…

    All of the above misconceptions can be cleared up by listening, explaining and budgeting correctly. It also helps to have someone who understands both the costs and the operation to assist in the understanding.

    More information from www.conklindd.com.

    This article was originally published by AvBuyer on August 19, 2019.

  • Tracey Cheek posted an article
    How to Know When It’s Time for a Private Jet Upgrade see more

    NAFA member, Jason Zilberbrand, President of VREF Aircraft Value Reference & Appraisal Services, shares what to look for when determining if you are ready for a jet upgrade.

    If you’ve got a private jet, congrats. You’re one of a very select few people who do.

    Having a private jet is a unique joy. Skipping TSA security checks, avoiding cramped quarters, and traveling on your own schedule are all perks that justify any expenditure.

    But what if your experience is lacking? It might be time for a private jet upgrade.

    If you’re thinking it’s time to revamp your jet but aren’t sure, look no further. VREF will show you a few signs that it’s time to refurbish that baby.

    The Exterior Is Looking Rough

    Considering planes regularly soar through the sky for long periods of time over great distances, it’s understandable that they’d accrue a significant amount of wear and tear over the years. The most obvious form that wear takes is cosmetic.

    The day you bought your jet was probably a joyous occasion. A shiny, gleaming vehicle that was prepared to literally shoot you into the clouds. Only, these days, it might not be so shiny anymore.

    If you’ve found yourself less enthralled with how your jet is looking, it might be time for a new paint job. Sometimes, the only thing you need to reignite that initial love affair is a fresh look. It’s one of the simplest ways to get your jet looking brand new again, so if it’s looking worse for the wear, don’t hesitate to slap a fresh coat of paint on it.

    The Interior Isn’t Looking So Hot Either

    When your jet takes a beating on the outside, it doesn’t have much practical effect on your experience. It might not be as great to look at as it once was, but your trip goes as planned, you won’t be looking at the exterior of your jet during the flight.

    The interior of the jet is what really counts when it comes to having a positive flying experience. A rundown or outdated interior cabin can make travel a serious downer.

    It might be something as simple as cosmetics. If you just don’t like the look of your cabin anymore, revamp it. A sleek, modern update can often do wonders.

    That said, it might be an issue of actual convenience. After all, a private jet isn’t much fun without all the proper amenities.

    If your jet’s tech seems like it’s been lifted straight from a 60s Bond film…Well, actually, that sounds pretty cool. But you know what we mean. Your jet’s features should feel modern.

    Bluray players, up to date television technology and other little details can make or break a flying experience. Don’t let your jet live in the past. If it feels dated, it probably us. Give it a much-needed overhaul.

    Invest in a Private Jet Upgrade

    If you think you need a private jet upgrade, you most likely do. Don’t let your experience be ruined by an aging piece of equipment when all it would take is a fresh look to bring it into the modern age.

    On the other hand, you might be looking to sell your jet and get something new. If so, make sure you’re getting the job done right. Get a top quality professional appraisal right here.

    This article was originally published by VREF Aircraft Value Reference & Appraisal Services on April 22, 2019.

  • Tracey Cheek posted an article
    Arc&Co shares top private jet interior recommendations for maximising aircraft resale value. see more

    NAFA member, Arc&Co, shares their top private jet interior trends and recommendations for condition, utility, history and transferability, with the view to maximise re-sale value. 

    Refurbishing or upgrading an aircraft is a very different investment proposition compared to refurbishing a property. Property generally appreciates in value over time, whereas aircraft are fundamentally depreciating assets: outside of very specific and often unpredictable market conditions, aircraft will lose value as they age. Any investment into private aviation needs to be looked at from the point of view of slowing that value loss as much as possible and extracting maximum utility, rather than expecting a positive financial return.

    The most effective way to slow that natural depreciation is to make sure the aircraft is desirable to the market, so that it sells quickly when the client decides that he/she wants to upgrade or generate some cash. Mainstream, sought-after aircraft models in top maintenance condition that have undergone a high-quality cabin refit don’t tend to stay on the market for long (unless they’re unrealistically priced).

    As a potential seller, it’s critical to realise that aircraft that languish with a “for sale” sign for a prolonged period of time tend to be increasingly penalised when it comes to their net realisable sale proceeds. This happens for a number of reasons:

    1/  Your aircraft becomes “marked”: potential buyers take note of how long the aircraft is on the market. They may start to question whether you are serious about doing a deal, or (worse) whether there is something wrong with the aircraft that the sales brochure is glossing over. They may also presume that you will be under time pressure to conclude a deal. The ramifications quickly compound:  in order to put their suspicions to rest the buyer will then be more likely to insist on a more comprehensive and detailed pre-purchase inspection scope than they otherwise might have. This will then almost inevitably lead to more findings that need to be rectified (at your expense), and the buyer will probably be less willing to compromise and more prone to demand price concessions to get the deal done.

    2/  Your aircraft will be led by, rather than lead, the market: if comparable aircraft sell ahead of yours, their selling prices will tend to set the maximum price expectation for your machine in the mind of potential buyers – regardless
    of whether your aircraft is, in fact, of higher quality. You should also keep in mind the fact that like cars, the model year of an aircraft matters. The market may view your aircraft on 1 January differently to how it viewed your aircraft 24 hours earlier.

    3/ Your aircraft continues to incur costs for its upkeep:even while your aircraft remains grounded, it needs to be hangared and looked after. A full mothballing exercise to suspend the aircraft’s scheduled maintenance is generally not practical, because of the time and effort required to de-mothball for a pre-purchase or test flight, so the aircraft needs to be kept flight-ready. This means performing scheduled maintenance, running the engines and systems, undertaking flights regularly and documenting those activities diligently – all of which rack up costs that eat into your aircraft’s net sale proceeds.

    AN APPEALING INTERIOR

    So, when considering how to fit out the cabin of a private jet, it is crucial to make choices that not only align with your current needs and desires, but also take into account your future buyer’s mindset as much as possible. Decisions made now often have a sizeable impact on the future point of sale. The one similarity with selling property is that a well-executed interior should enable the buyer to visualise himself or herself in the cabin with little or no change, rather than having to consider the cost of ripping it all out and starting again.

    We have highlighted four themes that are important to consider when it comes to the perceived value that a well- executed cabin refit generates at the point of sale from
    a buyer’s perspective. Bear in mind that with our use of the term ‘value’, we encompass not only the actual return by way of an increased selling price (which tends to be the exception rather than the rule), but we also mean the impact on the time it takes to sell the aircraft, thereby minimising the detrimental effects of depreciation and time on the market.

    We approached leading experts in the aviation industry and asked them to comment on each theme.

    1/ Condition

    Generally speaking, aircraft in better condition tend to be easier to sell (all other things being equal). A relatively new interior that is in a good condition can markedly increase an aircraft’s appeal, but its impact will be very much subservient to the basic aircraft “metal”: the aircraft’s age, hours and maintenance condition.

    We asked Tobias Laps from Comlux Management AG – a leader in business aviation, transaction and completion services – for his thoughts on the importance of condition.

    Q/ Do you agree with our view on aircraft condition or does the interior become more of a driver of value for large jets and biz-liners?

    A/ On large jets and bizliners, the design of the interior, the layout and materials tend to have a much bigger impact on the buyer’s decision-making than on smaller aircraft where interiors are pretty much pre-determined by the manufacturer with limited scope of individualisation. In our experience, when buyers walk onto an aircraft, they typically know within the first few minutes whether the interior will work for them or not. If they don’t like the interior at all, they will often walk away from the deal. If there are only certain aspects of the interior that they don’t like, they will then have to decide whether changing those aspects would be worthwhile. It is at this point that they weigh up their view of the basic aircraft, the “metal” compared with the cost of changing the interior to better suit their needs: if the “metal” is relatively new, in good condition, and is worth significantly more to the buyer than the cost of the interior upgrade then that is what will tend to drive the buyer’s decision-making.

    But it’s important to bear in mind that this interplay between the technical and the cosmetic depends very much on the specific details of the aircraft.

    Q/ What are the most important points that a prospective seller should be aware of to give a buyer a first-class impression of the aircraft’s condition?

    A/ Ideally, you would have chosen an interior layout with resale value in mind well before the actual sale: mainstream colour and veneer choices. In terms of specification, wireless connectivity is a trend, whereby passengers can connect their own devices while on board – an added bonus is that upgrading a wireless entertainment system is easier because the interior does not have to be removed to re-wire components.

    Regardless of layout and specification, the first thing you must do when it comes to selling is prepare to impress the principal’s technical representatives. Make sure the maintenance records are up to date, well-organised and presentable and the aircraft is clean and fully serviceable. It is a very good idea to clean the landing gear, bays and externally-accessed compartments. Only after the representative has examined the technical condition of the aircraft and records and been satisfied will the principal typically come to assess the interior and overall cosmetic condition and make the final decision.

    The next step to be taken, once the aircraft has satisfied the technical expert, is to prepare for the principal: the exterior should be spotless, and the flight deck and cabin should be deep-cleaned, including the galley, lavatories, carpet and sidewalls; everything should look fresh and up-to-date. Soft goods and furnishings should invite the principal to visualise himself or herself using the aircraft.

    We also asked Iain Houseman from Elit’Avia – a private jet company specialising in aircraft sales, management, charter and lease as well as lifestyle concierge and travel booking – for his thoughts on the importance of condition.

    Q/ How important is the quality of the interior to an aircraft acquisition vs the aircraft’s age, hours and maintenance condition?

    A/ I think it depends; the interior will be a lot more important if the aircraft is older. If it’s a newer aircraft, then the interior is usually still in pretty good shape and, in that case, it comes down to how appealing it looks to the buyer. If the interior has been designed in a way that appeals to a limited group of people (e.g. red leather seats or a carbon fibre interior instead of veneer) this can be a deal breaker, because buyers will have to spend time and money to change it.

    For older aircraft, the interior condition can be important for the same reasons – if the interior has recently been redone or is in good condition then the aircraft is more appealing, because it doesn’t need significant rework. Additionally, there is a need to understand the current technology systems and the proximity of major inspections for the aircraft that will allow upgrades to be incorporated and save considerable costs. For example, we estimated a major inspection for

    an owner’s aircraft of $1.1 million and got the cost down to just under $800,000 – and managed to include some key avionics upgrades, internal improvements, and soundproofing enhancement. This proved very useful in getting the aircraft ready for sale.

    To conclude, yes the interior is important, but increasingly so are the technological communication suites and entertainment systems, as well as the cabin’s in-flight environment.

    2/ Utility

    The first consideration is, of course, to have an aircraft that does what you want it to do in terms of the cabin layout, amenities, entertainment, connectivity, privacy, etc. However, it is also important to think about the end buyer – how likely is it that your aircraft will be able to meet their needs as well? The most value-enhancing upgrade options tend to be the ones that result in a demonstrable enhancement to utility: for example, they enable the aircraft to fly longer distances; they certify the aircraft to land at certain airports, in certain countries or on more efficient routings; they allow full in-flight connectivity for all users including streaming live; or they have different zones for privacy/ rest/work for principals, entourage and crew.

    We asked Celia Sawyer – who runs her own interior architecture and design firm, and provides private and commercial clients with bespoke, luxury interiors for private jets and helicopters – for her thoughts on utility.

    Q/ What are the things that clients typically look for, from a layout and design point of view, when it comes to evaluating whether an aircraft meets their needs?

    A/ It is different with every client. My Middle Eastern client wanted a lot of gold inside and also wanted the interior to be very opulent, with only the best Italian leathers, a good boudoir to sleep in and a large shower room. A client’s aircraft would be adjusted internally to suit the individual if it was not purchased from new and designed for them personally from the off. Another client of mine wanted no frills, just a contemporary, functional interior with good technology on board; more like a flying board room with a living area next to it that he could work from. So, it really is dependent on the client’s needs and their priorities.

    Q/ How much of a selling point are amenities that might not be for the principal, but strongly appeal to the buyer’s spouse/family/ entourage, such as private family suites, catering facilities, showers, broadband that can accommodate streaming videos/ gaming, additional baggage/stowage space, etc?

    A/ They all want the highest level of technology: that’s something that is always requested, whatever the size of the aircraft. The other amenities on your list are very important to some clients – if they have a family they travel with, they need to have everything available. Of course, it will depend on the size of the aircraft as to whether they can have a shower, or what sort of catering facilities and how much additional baggage space is possible. These design requirements will in turn be driven by what sort of trips they intend to make.

    Q/ What are the top design trends that aircraft owners are choosing?

    A/ I am pleased that my clients are thinking of the environment, with many of them requesting more fuel-efficient aircraft with lower emissions. New and upgraded engine and aerodynamic technology is key in this respect. In keeping with this “green” trend, on the aesthetic side my clients are insisting on lighter-weight interior furnishings and fittings than they may have done previously, but still choosing materials and designs that deliver on comfort, quality and style.

    3/ History

    Buyers prefer to purchase aircraft where the history of ownership, operation and maintenance is simple, well-documented and clear. All of the records – including the installation and certification of the interior, right down to the last detail – should be organised in such a way that a buyer can immediately see and take comfort that everything is in order.

    We spoke to Mr Houseman of Elit’Avia about his views on the history of aircraft and the impact of aircraft records on a sale, asking about his experience in situations where details of the aircraft’s history were poorly organised, as well as situations where a comprehensive and clear suite of documents made for smooth sailing. Mr Houseman comments:

    “In an ideal world, all aircraft purchases would come with the correct documents, such as
    a comprehensive history of ownership and maintenance. Interior installs from the factory are usually well documented, but problems occur in service when the owner decides to change something and does it at their local facility"

    I have seen a number of aircraft that had work done where the paperwork wasn’t in order. This has meant the aircraft could not be moved onto a different registry because you cannot show the history of modifications.

    This is why it is so important for the owner to have an approved operator with quality maintenance and care processes in place to ensure paperwork is properly kept.

    4/ Transferability

    The clarity and completeness of the records are key to the aircraft’s transferability when the time comes to sell, especially if the buyer intends to re-register the aircraft in a different jurisdiction. Different countries have different certification regimes and requirements that do not always overlap: an interior that has been outfitted on a German- registered aircraft under EASA regulations, for example, needs to have the necessary paperwork to allow it to be accepted onto the USA’s aircraft registry under the FAA’s oversight.

    We again spoke to Mr Houseman from Elit’Avia about transferability and asked him the following questions:

    Q/ Is dual certification/release from the major regulatory authorities (FAA/EASA) at the point of installation possible and a practical risk mitigant? How do you go about ensuring that it happens and is it typically more expensive?

    Q/ Is retrospective certification possible and, if so, is it practical?

    Q/ What advice can you give a client who wants to sell an aircraft with, say, an FAA-certified interior, to a European buyer who wants to transfer it to an EASA register?

    Given that the vast majority of private aircraft are built and operated in the US, most will have installations that are FAA-approved. On the flip side, many will have no foreign certification. Therefore, when you go to switch a US aircraft to another jurisdiction such as EASA, it cannot easily be done because the modifications are not EASA- approved – and this can take months to resolve. I saw one case where modifications were done in the US, but the EASA application was not filed, so the aircraft sat for six months getting work done.

    When the owner wanted to put it on an EASA registration, he couldn’t because the EASA approval for the modifications was not complete. He had to put the aircraft on the Isle of Man registry (which accepts both FAA and EASA certifications) and wait a further six months for the EASA approvals to come through.

    I had another situation where a client decided to replace the carpet – it sounds easy, but the carpet was also attached to the seat bases. Burn certification paperwork is required, not only for the carpet, but also for the glue to attach it to the seat base and approval from the seat manufacturer. In total, it took eight weeks for a one-week install!

    In terms of the lessons learned for interiors being installed on new aircraft, you can usually pay the manufacturer to provide EASA certification alongside the FAA’s, because pretty much all the aircraft being built will come with FAA approval on the interior in the form of an STC. There is usually an upcharge for EASA, but from a seller’s perspective, it could make sense to get this for resale purposes.

    It also depends on the model: larger aircraft with an international market would more obviously benefit from more certification to help with resale. However, for smaller aircraft that are predominantly sold in the US, foreign certification may be a nice-to-have rather than a must-have. Multiple certification can be important in older aircraft – if an aircraft has spent its entire life in the US and has had modifications done under FAA STCs that are not EASA-approved then all of the STCs would need EASA approval to import the aircraft onto an EASA registry.

    It’s also important to make the distinction between private or commercial use. The requirements for commercial use vary between countries, so an aircraft that has EASA-only approved modifications could still go on the US registry for Part 91 private operations, but if it’s missing certain equipment mandated specifically by the FAA, it cannot do Part 135 commercial operations. For example, on a Global 6000 requires a $300,000 Crew Force Measurement System to operate under FAA commercial Part 135 rules.

    CONCLUSION

    Upgrading and refurbishing of an aircraft is a significant investment that can strongly enhance your experience whilst on board. It’s important, when planning for the investment, to have a realistic view of the value it creates – a well-executed cabin refit will meet your needs in terms of space, aesthetics, utility and connectivity, as well as have the benefit of appealing to the broadest possible range of potential buyers when the time comes to move the aircraft on. A well-executed cabin refit will not generally result in a positive financial return outside of a very narrow and oft-unpredictable set of market circumstances.

    Doing your homework and enlisting competent expertise is key: an interior refit is a complex project that requires detailed planning and oversight, and strict adherence to a plethora of regulations. Delays and mistakes can be costly and time consuming. You should keep potential future buyers for your aircraft in mind; not just in terms of aesthetics and technology, but also in terms of certification, with the aim being to ensure maximum transferability with minimum headache. Finally, investing in a quality operator is crucial to make sure that paperwork is properly organised and maintained.

    DEFINITIONS:
    
    FAA: Federal Aviation Administration, the national aviation authority of the United States, responsible for regulating all activities pertinent to civil aviation in the US, including certifying aircraft for operation and approving modifications to those aircraft.
    
    EASA: European Union Aviation Safety Agency, the supranational aviation authority for 32 states including all EU members, Switzerland, Norway, Iceland and Liechtenstein.
    
    STC: Supplemental Type Certificate – the certificate issued by an aviation authority certifying that a major modification to the aircraft e.g. a complete cabin refit has been approved. It is a regulatory requirement to have the correct approval in place that aligns with the aircraft’s registration e.g. EASA-registered aircraft must have EASA approvals.
    
    Part 91/Part 135: FAA rules that govern aircraft operations for general non-commercial private (Part 91) and commercial charter (Part 135) use. Most countries defer to either these rules or parallel EASA rules.

    Thanks to our contributors: Tobias Laps from Comlux the Aviation GroupCelia Sawyer one of the leading Private Jet Interior Designers and Iain Houseman from Elit'Avia

    This article was originally published by Arc&Co on June 10, 2019.

  • Tracey Cheek posted an article
    Avoid Overpaying for Your Jet Operation see more

    NAFA member David Wyndham with Conklin & de Decker considers ways for you to safeguard against being taken advantage of when it comes to aircraft bills and ways to manage operating costs efficiently.

    A recent Bloomberg article described how high net worth individuals are potentially being taken advantage of by aggressive overcharges on their aircraft bills. David Wyndham considers this, and highlights ways to understand and manage your operating costs.

    Few specific examples were cited in the Bloomberg article, and unsurprisingly no aircraft owner was willing to attribute their name to such a story, but what it highlighted is that there are many different costs associated with owning and operating an aircraft. These will vary significantly from trip to trip.

    While transparency is offered as one solution to the issue of overcharging, that approach misses one important area: understanding.

    Aviation, like medicine or law, has a complex language that seems designed to confuse the layperson. With medicine and law, you have a professional at your disposal to assist with questions such as, "What do you mean I have hypertension?" or, "Just what is a waiver of subjugation?"

    Many aircraft owners, when faced with complex aircraft bills, have accountants to review and authorize bills for payment. But the accountant often lacks the expertise to fully understand the aircraft costs they are responsible for paying.

    How Should Aircraft Costs be Presented?

    Each bill submitted to an aircraft owner should be itemized with taxes, fees, labor, services and parts. Even with that level of detail, however, many are still unsure as to what the bill means and whether it is too costly.

    I have assisted several owners recently with a detailed review of their costs. While I have yet to come across fraudulent bills or blatant overpricing, it is easy to see why a reasonable question may be, "Why are these bills so high?"

    The first place to start to understand these costs is with a budget. The management company or aviation department must provide a budget based on the expected utilization of the aircraft. At the financial management level there needs to be enough detail so that individual accounts have differentiation, but not so many details that the complexity outweighs the benefits of detail.

    Operating Cost Categories to Consider

    Fuel: A major cost driver for most aircraft, the cost of fuel per gallon will vary and, in many instances, cheap fuel will beget add-on fees away from home. For example, itemized bills will often contain ramp fees and other services.

    Other Trip Expenses: These need to be verified too, and include items such as the catering, hotel and meals for the crew. I had one owner who stayed at high-end hotels. Wanting the crew to be immediately available, he had them stay at the same hotels. As a result, crew travel costs were far greater than what many would consider ‘normal’.

    Maintenance Costs: More detail is required for this within the budget than just one item. Categories should specify whether the bill is for scheduled maintenance (i.e., an 800-hour inspection), or for unscheduled maintenance (i.e. changing a flat tire or replacing a burned-out landing light). 

    Component overhauls and life-limited part replacement should also be noted.

    The annual budget should note the scheduled inspections with the expected flat rate, or the cost to inspect and replace mandatory items, and allow for the on-condition or unscheduled items that may also require service.

    The management company or flight department should get quotes for major maintenance from at least two qualified sources, if possible. And when requesting quotes, you should account for what is included and excluded. If, for example, there are scheduled parts to be replaced, is labor included or only the cost of parts?

    You must also consider time. For example, a low-cost bid that takes 60 days to accomplish may be worse than the higher cost bid with a 30-day return to service.

    Maintenance costs vary from year-to-year and major inspections will cause a large increase in expenditures.

    These major scheduled inspections can occur every 6–10 years on the airframe; sometimes longer. Older airframes exceeding 20 years may see more age-related checks, and these should be accounted for.

    Engines are a separate consideration and require a major service very infrequently. For most private and corporate operations, an engine may have a 4,000-hour mid-life inspection and run 8,000 hours before it gets overhauled. At 400 annual hours, that overhaul is going to occur when the aircraft is 20 years old. Unscheduled events tend to be rare for turbine engines, but they do occur and can be extremely costly.

    How to Make Maintenance Costs Predictable

    Guaranteed hourly maintenance programs (GHMPs), as the name implies, set a fixed guaranteed rate for the maintenance. An engine GHMP is very common for jet engines. In fact, since the financial crisis many lenders and lessors now require them as a standard term of condition.

    There are also airframe and parts-only programs available for many turbine aircraft.

    A GHMP will usually have a contracted price based on utilization and aircraft age and may incur a calendar and hourly fee, or just an hourly fee. A GHMP provides budget stability and peace of mind, as well as added resale value for the aircraft.

    In Summary…

    There needs to be good communication and clear expectations between the owner and management company or aviation department. Cost overruns need to be communicated as soon as they are known, and not after submitting the bill.

    Someone should spend a little time with the owner or accountant to review the major bills and, importantly, ensure there are no surprises. When in doubt, seek the opinion of a professional. Aircraft are complex machines that, when well-maintained, will provide safe and comfortable service for many years.

    More information from www.conklindd.com

    This article was originally published in AvBuyer on May 24, 2019.

  • NAFA Administrator posted an article
    AINsight: What First-time Bizjet Buyers Need To Know see more

    NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLC, shares what first-time business jet buyers need to know.

    Virtually all first-time business jet buyers are sophisticated, successful, and motivated. Often consisting of high- and ultra-high-net-worth individuals and diverse private companies, these prospective buyers might be prompted to buy a business jet by fears of Covid-19 exposure or missing the 100 percent bonus depreciation deduction.

    As vaccine injections spread across the globe, some buyers have entered the market with the optimism that more personal/business travel lies ahead. Some first-time buyers, including millennials, buy jets of all sizes simply because they can.

    A PURCHASE LIKE NONE OTHER

    Buying a business jet is complicated but feasible and worth the effort if you can afford it. Private aircraft can inspire thoughts of positive life-changing possibilities. A jet is a time machine, a tool for productivity, and a haven of health and safety—especially during Covid-19. With the right purchase, a jet is a mode of travel that enhances convenience, security, autonomy, and comfort above and beyond any airline offering.

    Many first-time buyers recognize or admit, and most others quickly learn, that buying a jet is unlike purchasing real estate, automobiles, businesses, or other assets. You encounter unique, technical, and complex issues when purchasing and owning a jet.

    Some buyers insist that, having closed many other complex deals, they can buy a jet with little or no help, only later to discover the error of their ways. But first-time buyers will benefit if they educate themselves and ask for guidance. In any case, do not embark on this journey alone.

    WHERE TO START

    How do you buy a jet? And who can help you figure out whether a jet will provide the benefits you seek rather than become an albatross? Before you begin a search for a jet or assemble a team of experts to help you, write down why you need or want a jet, where you will go, how many seats you need, and the number of hours you expect your aircraft to fly annually. In aviation jargon, you thereby establish your “mission profile.”

    As you progress into the purchasing effort, you should, as basic principles, insist on transparency from all people involved, keep an open mind, participate (there are no “dumb questions”), and be patient. The purchase will probably take longer and be more demanding on your time than you may anticipate.

    ENGAGE A TEAM OF SEASONED PROS

    With the benefit of referrals and research, you can find quality professionals to hire for your transaction. But first, do not sign anything, not a letter of intent (LOI), an aircraft purchase agreement (APA), or other documents before engaging and obtaining input from both an aviation lawyer for new and used aircraft and an aircraft broker primarily for used aircraft. These individuals constitute the core of your team.

    A quality broker will evaluate aircraft of interest to you, parse your mission profile, advise you on appropriate jets for sale, both on and off-market, and guide you on the best make, model, price, and terms for you. Your broker will be your chief aircraft negotiator and usually will lead off the deal.

    Even though you have other lawyers whom you may think can handle the purchase—stop. Instead, rely on an aviation lawyer. He or she should practice extensively in business aviation, describe how and when to structure, negotiate, and document the legal aspects in the transaction.

    The subjects include, among others, FAA regulatory, tax, insurance, risk management, pilot services, international, finance, and aircraft management. Non-aviation lawyers lack the required knowledge to support you properly.

    Although transaction cost is a factor, do not choose a broker or lawyer based on the lowest fees. Choose on value, integrity, responsiveness, years of relevant experience, technical knowledge, and extensive resources in business aviation. These attributes also apply to any other specialist you may engage such as aircraft analysts, aircraft inspectors and appraisers, aviation insurance brokers, management companies, and aviation tax accountants. Ask your lawyer and/or broker for ideas.

    DISCOVER WHAT YOUR TEAM CAN DO FOR YOU

    Your aviation lawyer should provide an overview of the steps from inception through the delivery of your aircraft. As a priority, she or he should propose structures for managing and operating your jet that complies with the Federal Aviation Regulations (FARs), including Part 91 (private operations) and Parts 119 and 135 (commercial/charter operations), as applicable; plan for tax minimization (IRS federal, international, state, and local); and develop strategies to mitigate your personal liability, including, when appropriate, forming a limited liability company (LLC).

    Liability insurance coverage is a critically important risk management tool. In the tight insurance market today, the insufficiency or unavailability of insurance can disrupt or stop your purchase. Engage one aviation insurance broker to find and place coverage acceptable to you after assessing your legal risks.

    If you intend to lease or finance your jet, you should ideally obtain a financing commitment before you sign an LOI to avoid negative ramifications such as lacking adequate cash to close or loss of your purchase deposit. Most financiers require strong aircraft collateral, so ask upfront if your jet passes muster.

    Try to remain objective no matter how strong your relationship with the financier–at least on your “hot button” issues. Amid a long list of loan or lease issues, for example, ask your lawyer to explain how the terms in your financier’s documents, including guaranties, might adversely affect your non-aircraft business operations, reach extra non-aircraft collateral, and limit how, when, and where you can use your aircraft.

    In short, your broker, lawyer, and other specialists on your deal team should enable you to achieve optimal after-tax results and protect you from making avoidable mistakes.

    UNDERSTAND WHAT IT TAKES TO OWN AND OPERATE A PRIVATE JET

    Although a jet offers great benefits, it is essential to understand fully what you are getting into as a new or used jet owner—financially, emotionally, and operationally. Be prepared to hit some cost turbulence, including untimely or unexpected cash demands for capital improvements, maintenance, repairs, and compliance with FAA mandates.

    You can manage some of these expenses with an engine and other maintenance programs, attentive management company work, and manufacturer’s warranties. Importantly, you might be able to charter your aircraft to generate cash flow that partially offsets your costs and even pays some debt. But forget about making a profit or breaking even on chartering. In all events, you should feel comfortable that buying a jet makes sense without relying on unguaranteed charter cash flow to defray your costs.

    Work hard to avoid buyer’s remorse. Beware that you might feel some rush to buy and fly. While some first-time buyers cannot wait to take off, others realize that they should find other travel solutions. In all cases, as a first-time buyer, throttle your actions with a sober analysis of the costs and benefits.

    CONSIDER THE OPTIONS

    Buying a jet is a long-term proposition. So think about your missions and basics of other options to fly privately like purchasing a fractional share or a jet card, chartering, joining a membership or club program, trying a shared-use model, or traveling on a commercial airline. If you buy, you might still consider using these options to supplement or substitute private aircraft to operate your jet most efficiently and economically, or when it is unavailable, possibly as a result of chartering or repairs.

    CONCLUSION

    Buying your first jet can be an exhilarating, emotional, and exhausting experience. It is a complicated and unique transaction, demanding plenty of patience and the use of skilled advisors. If you do obtain the help you need and travel the distance to closing, though, you will likely feel fortunate to reach your destination and satisfied when you arrive.

    This blog is purely informational and reflects the author’s experience and legal practice. It does not, and should not be construed to, provide advice of any kind, express or implied, create a lawyer-client relationship, or suggest or direct you to plan a course of action without expert guidance. Each person involved directly or indirectly in any issue, transaction, or other matter covered in this blog should inquire of, and rely on, his or her aviation professionals and other trusted advisors.

    This article was originally published by AINonline on March 12, 2021.

     

  • NAFA Administrator posted an article
    Strategic Thinking When Acquiring or Selling An Aircraft see more

    In this podcast, NAFA member, Rene Banglesdorf, CEO of Charlie Bravo Aviation, discusses with NAFA member, Tony Kioussis, President and CEO of Asset Insight, LLC, several of the key topics connected with acquiring or selling an aircraft.

    René Bangelsdorf discusses aircraft acquisition and disposition strategies, and her firm’s comprehensive suite of Business Aviation services: In-Depth Research, Marketing & Sales, Acquisitions, and Advisory Services.

    Topics covered include: 

    • Determining the best aircraft to meet a first-time buyer’s private air transportation requirements. 
    • Points to ponder in determining whether to acquire a new, versus a pre-owned aircraft. 
    • The benefits one can secure by utilizing an aircraft Acquisition Consultant and/or a Sales Broker. 
    • Factors to consider when deriving the Offer Price for an aircraft. 
    • The challenges of refurbishing or upgrading an in-service aircraft prior to its acquisition. 
    • The pre-purchase inspection – how much scrutiny is enough. 
    • The costs and benefits associated with Professional Aircraft Management. 
    • Chartering your aircraft – does it really reduce your operating cost? 
    • Determining the optimum time to replace your aircraft. 
    • Optimizing the value, and marketability, of the asset at the time of sale.

    About René Banglesdorf

    René is co-founder and CEO of Charlie Bravo Aviation, an Austin, TX-based company that buys, sells and leases corporate aircraft worldwide. She applies a background in business journalism and marketing from several industries to the company she started in 2008. Charlie Bravo works with government entities, non-profits, corporations both large and small, and private individuals, and has closed deals in more than 40 different countries ranging from hundreds of thousands to $30m+. 

    René is part of an elite group—only 4-6% of high-level aviation positions are held by women in North America and Europe. René serves as a spokesperson for Business Aviation and women in aviation in speaking and press appearances all over the world. René serves on the Advisory Board of the International Aviation Women’s Association. In 2018, she held organized and emceed the IAWA Inaugural GA Women’s Leadership Forum, with more than 100 female leaders from the industry in attendance—and in 2020, took that same forum virtual. 

    In 2020, René was selected by US Secretary of Transportation Elaine Chao to join 29 other women on the DOT’s Women in Aviation Advisory Board. The purpose of the WIAAB is to develop strategies and recommendations that would encourage women and girls to enter the field of aviation. The WIAAB will assess education, training, mentorship, outreach, and recruitment of women in the aviation industry and make recommendations to the President and Congress. 

    René is an active member of the National Business Aircraft Association and the National Air Transportation Association. She serves as an advisor to the Ohio University Department of Management and Strategic Leadership. René also sits on the advisory board of Wingform, an aircraft transaction software company. 

    In November 2019, René was named as a Business Accelerator Coach for Michael Hyatt & Co, one of the fast growing and most widely recognized leadership training companies in North America. Along with the rest of the team, René helps overwhelmed, successful leaders get the focus they need to win at work and succeed at life. 

    To satisfy her passion for writing, René is an editorial contributor to several aviation business publications. Her latest book, Stand Up: How to Flourish When the Odds are Stacked Against You (April 2019) is available on Amazon, or anywhere books are sold. René also hosts a podcast called Defying the Status Quo, on which she interviews women who are crushing it in male-dominated industries. She launched a video podcast with AvBuyer in April 2019 interviewing corporate jet pilots about the planes they fly and their adventures in aviation. View the latest Insiders Guides with René Banglesdorf video series.

    To read a transcript of this podcast, click here.

    To listen to the podcast, click here.

    This podcast was published by Asset Insight. LLC.

  • NAFA Administrator posted an article
    What Are The Top 5 Major Airline Costs? see more

    NAFA member, Jason Zilberbrand, President and CTO of VREF Aircraft Value Reference, answers your questions about what makes airline tickets so pricey. 

    On occasion, even short-distance trips can amount to a total that’s higher than what you might expect. But aside from the time of year and location, what factors are the most costly for a commercial airline?  

    Learn more about the 5 top commercial airline costs.   

    Top 5 Airline Costs

    Due to COVID-19, airlines are seeing historic lows in-flight sales both domestically and internationally. Unfortunately, expenses don’t decrease with the decrease in in-flight sales. Even while grounded, planes must remain maintained, and leases must remain paid. However, these main expenses stay the same for airlines globally.

    There are 5 major airline costs that these companies need to cover.

    1. Fluctuating Prices Of Jet Fuel

    Of the most costly expenses incurred by airlines, fuel is number one. According to the HowStuffWorks, “Domestic airlines in the U.S. spend a combined $2 to $5 billion on jet fuel every month.”

    Fuel can cost an airline anywhere between 15 and 20 percent of its total budget. On top of that, fuel costs tend to vary based on the economy. Airlines are subject to paying for those fluctuations in price.

    Ideally, airlines prefer to buy cheap fuel and pass some of those savings over to their customers. However, in recent months, jet fuel prices have hit a high of $1.67 a gallon. For comparison, jet fuel cost $1.45 per gallon in 2016 when travel was popular, and the current pandemic did not yet exist.

    It may not be easy to justify the price tag on a plane ticket if you look at the cost of jet fuel per gallon alongside the cost of gasoline per gallon. While fuel may be the highest cost incurred by airlines, an airline ticket's cost depends on much more than jet fuel alone.

    2. Labor Expenses 

    Up next in highest airline costs lies in labor expenses. Hiring, training, and maintaining airline employees can take a massive chunk out of an airline’s budget. In 2018, U.S. airlines raked in a revenue of $187 billion and spent a little over $50 billion in labor. This contrast reflects a total of 28% revenue loss due to labor costs.

    When the going gets tough, it’s not difficult to see where budget cuts lie. Because of the pandemic, many airlines put plans in motion to furlough early retirees in anticipation of bringing in younger professionals set at a lower hourly or salary rate. This helps them cut higher-paid income costs and save by hiring more affordable professionals.

    3. Aircraft Rent And Ownership

    It may surprise you to learn that airlines rarely own the aircraft they operate and typically have an active debt from leasing them out. Airlines continue to have to make aircraft payments regardless of how many seats are booked. 

    Airlines everywhere are doing what they can to ensure a more profitable future. Among those big decisions lies within those airlines who canceled or did not plan to repurchase Boeing and Airbus aircraft. With several jets grounded along with plane incidents that caused a negative backlash, both Boeing and Airbus reported huge losses in 2020.

    The European plane manufacturer, Airbus, has reported a loss of $1.3 billion. Meanwhile, Boeing’s losses are set at an estimated whopping $12 billion for the past year.

    Among the top 5 airlines in the U.S., including the following:

    • American Airlines

    • Southwest Airlines

    • Delta Air Lines

    • United Airlines

    • Alaska Airlines

    Each has taken extraordinary measures to cut back on spending while many aircraft are grounded, eating into their rental costs.

    4. The Cost Of Equipment And Maintenance

    Equipment and maintenance are among the other most costly expenses airlines must keep up with. Based on a 2019 International Air Transport Association (IATA) report created using findings from 2018 spending, airlines spent about 9% of their overall operating expenses on equipment and maintenance.

    Airlines need to maintain meticulous records and information regarding maintenance and repairs as the Federal Aviation Administration (FAA) has specific requirements for the benefit of the people who use, trust, and rely on aircraft travel.

    (If you are an aircraft owner, you know how important your logbooks are. We created VREF Vault – a secure digital aircraft database using aviation blockchain technology. Protect your data today!)

    5. Professional Services And Contract Obligations

    Finally, professional services cost airlines within the U.S. about 8.6% of their budget. Marketing services may seem unnecessary, but especially in today’s climate, an airline is nothing if not relevant. Amenities must remain accessible as promised. And the risk of faltering to legal dealings has every airline maintaining their legal defense. Although some services may seem arbitrary, they must keep the airlines running safely and legally. 

    These types of services include the following:

    •  Advertising and marketing

    • Legal pricing

    • Clubs and lounges

    • Special needs travel accommodations

    • Travel products

    • In-flight Wi-Fi and more

    While some more luxurious services are understandably costly, amenities considered everyday or regular amenities can take up a good portion of an airline’s budget.

    Own An Aircraft And Avoid Airlines Altogether

    If you’ve considered purchasing an aircraft for your business or personal needs, make sure your appraisals come from a reputable organization you can trust. We provide comprehensive appraisal and valuation services to give our clients the most accurate information in real-time. Discover our appraisal services here.

    P.S. VREF Vault beta is live! From stolen logbooks to misplaced historical records, VREF Vault maintains crew resource management (CRM) communications, logbooks, and all of your aircraft record databases in one place. Using the same blockchain technology as Bitcoin, VREF Vault acts as your secure digital filing cabinet. Can’t wait to get started? Contact us today.

    This article was originally published by VREF on March 5, 2021.

     

  • Tracey Cheek posted an article
    Tip to Tail—Buying New vs. Used Bizjets see more

    NAFA member David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, shares what you need to know when buying a new versus used business jet. 

    Purchasing a new business jet from the manufacturer (OEM) is a far different transaction than buying a used aircraft from a private third party. And planning for aircraft ownership is also part of this story.

    The contrast in new versus used aircraft is especially pronounced when the used aircraft does not comply with the FAA’s January 1, 2020 Automatic Dependent Surveillance-Broadcast (ADS-B Out) mandate. The lack of ADS-B Out compliance almost certainly will alter the negotiation for such used aircraft and, if the aircraft is not compliant by 2020, it could morph into a fancy paperweight. New OEM aircraft already comply with ADS-B Out requirements.

    This blog covers a few significant strategic, legal, and negotiating differences relating to new and preowned aircraft sale deals and briefly touches on ownership tax planning, risk management, regulatory compliance, and financing/leasing. This blog also briefly touches on OEMs’ perspectives on negotiation and dispute resolution.

    WHAT'S FOR SALE?

    The big-money aspects of a new aircraft deal start by selecting the right aircraft from the OEM and negotiating the aircraft purchase price. Unlike used aircraft deals, OEM agreements include terms on such items as upgrades, installment payment amounts, and pilot and technician training.

    The used aircraft market enjoyed a record year of sales in 2018 that depleted much of the desirable inventory. However, some experts suggest that the cost of ADS-B equipage and a slowing global economy may cause more used aircraft to come to market in the near term; and the lack of ADS-B Out technology may prolong or complicate buy/sell negotiations even if more aircraft become available.

    When purchasing a new or used aircraft, the parties should engage a team of knowledgeable business aviation experts, consisting primarily of an experienced aircraft broker, a technical inspector/analyst, accounting tax advisor, aviation counsel, aircraft management company, insurance broker, and capable title company or special FAA counsel. A non-aviation participant on the buy or sell side can make transactions more difficult or inefficient for experienced buy/sell teams and their principals.

    Every used aircraft should (but surprisingly does not always) undergo a “pre-buy” inspection before a purchase occurs. The inspection should involve technical experts that delve into the records of the aircraft, ADS-B Out compliance, and the physical/mechanical condition of and required repairs to the aircraft. Counsel should conduct or order title, lien, and other searches at the FAA and on the International Registry with a focus on understanding the domestic and any international ownership since birth of the aircraft.

    For new OEM aircraft, the pre-buy inspection process is dissimilar to preowned aircraft, so much so that OEMs often say that an independent inspection of a factory-new aircraft is unnecessary and the OEM can handle everything from contract to delivery.

    Although some purchasers accept exclusive OEM oversight, all purchasers should still consider engaging a technical expert to interact with the OEM’s teams and inspect the aircraft during construction, knowing that OEMs usually will facilitate such inspections but with appropriate limits. Fundamentally, the expert can assure the purchaser that the aircraft conforms to the agreed specifications and the OEM delivers the aircraft in pristine condition. Also, the parties should always conduct legal diligence similar to a used aircraft sale.

    CONTRACT NEGOTIATIONS AND DISPUTE RESOLUTION

    Contractual provisions for used and OEM purchases have some common terms as well as major differences. OEMs believe the form of purchase and sale agreement they provide to their customers works well with few changes. Consequently, the extent of document revisions negotiated and accepted by an OEM may, but not always, pale in comparison to extensive changes drafted into used aircraft purchase agreements.

    OEM contracts personnel, most of whom are not lawyers, have flexibility to make reasonable contract revisions, but their authority has well-honed limits. For example, their authority probably does not extend to accepting unusual revisions, settling a dispute, or altering fundamental OEM liability protections. Accordingly, purchasers should expect these contracts people to seek authority from senior managers or general counsel for revisions to obtain policy or legal guidance on an acceptable contract revision or dispute management.

    For OEMs, each customer and its sale agreement is unique. As such, OEMs uniformly frown on aviation counsel using as precedent sale agreement provisions negotiated in other unrelated transactions with the selling OEM or other OEMs. However, aviation counsel can add value in serving their clients by using their prior experiences to negotiate appropriate terms in the current deal.

    If a customer alleges material breaches by or makes serious litigious claims against the OEM, most OEM general counsel or his/her inside litigation counsel step in and try to reach an accommodation or, if necessary, circle the wagons to protect the OEM’s interests.

    OWNERSHIP PLANNING

    Under the Tax Cuts and Jobs Act of 2017, buyers of new aircraft, like used aircraft buyers, may use 100 percent bonus depreciation if the aircraft buyer qualifies for the tax benefit. Planning for ownership is critical to successful tax structuring. For more, read AINsight: 100% Depreciation and Aircraft Personal Use and AINsight: Maximize Aircraft Bonus Depreciation in 2019.

    A purchaser of a new aircraft can potentially obtain a financing benefit that does not apply to used aircraft. Lenders and lessors often agree to fund installment payments to the OEM as the OEM invoices the customer during construction and upon delivery of the aircraft. In addition, these lenders or lessors are often willing to convert the installment payment arrangement into a long-term loan or lease. Either financing or leasing provides substantial benefits to the parties but requires some additional effort to negotiate the agreements. For more, read  AINsight: Should You Finance or Lease a Bizjet?.

    Business aviation insurance brokers not only place appropriate insurance coverage but also can negotiate effectively with aviation underwriters. Purchasers of used and new aircraft generally understand that insurance is a crucial piece of protecting themselves from liability and property damage. However, they may not fully appreciate that a limited liability company (LLC) that buys the aircraft may not provide the LLC owner with the anticipated liability protection. For more, read AINsight: Piercing the Aircraft LLC Veil.

    Operations of private aircraft under Part 91 (private use) or Part 135 (charter use) in the U.S. demand compliance with the applicable regulations by owners and operators of all aircraft. For example, owners of all aircraft must keep their aircraft in the condition required by the applicable regulations for flight operations, not conduct illegal charter operations, and meet technology requirements, including ADS-B Out. Importantly, the FAAis looking for violators of the regulations, in part as described in AINsight: FAA Actively Pursues Illegal Flight Ops.

    Although purchase transactions of new and used aircraft share certain similar elements, they differ in significant respects. Assisted by knowledgeable professionals, a purchaser can and should address business, tax, financing/leasing, risk management, and regulatory issues as part of each deal. A reasonable and pragmatic approach to these transactions should foster amicable negotiations and ultimately produce the right travel solution for the purchaser.

    This article was originally published by AINonline on May 9, 2019.

  • Tracey Cheek posted an article
    How Brexit Could Affect European Aviation Operations for US Registered Aircraft see more

    NAFA member, Aircraft Guaranty Owner Trustee, discusses the affect of Brexit on European Aviation Operations.

    Brexit is undoubtedly a considerable topic with worldwide implications – people from all corners have been surmising at length – what will take place and when? Meanwhile, negotiations continue with no clear end in sight. The United Kingdom was due to leave the European Union on March 29, 2019, but that has now been extended to October of 2019.   

    We can’t say exactly what will happen, but we have a pretty good idea of what the new UK regulations will look like if and when that change transpires. The general information outlined here will likely survive whatever agreements the UK makes with the EU. 

    Fair warning, according to Howard Dyer, Director and Lead Consultant at Howard G Dyer Ltd, “Brexit before breakfast is bound to cause heartburn throughout the rest of the day.” The coming changes in regulations outlined below may have the same effect on our readers.   

    The UK within EU Regulations 

    Since 2008 and the establishment of the European Aviation Safety Agency (EASA), the EU has been moving toward an aviation safety regime based upon the United States’ model, with the EASA following many of the principles of our own FAA. This includes universal recognition of certificates issued by the EASA and freedom to fly between States.  

    Some of these freedoms extend to associated States like Iceland, Norway, Switzerland and some of the new Balkan countries. This establishes a virtual aviation neighborhood over most of the landmass of Europe, known as the European Common Aviation Area (ECAA). Britain has been a key and influential mover in all this but is now aiming to leave. 

    Currently, aircraft registered in the UK intending charter flight operations to, from, within or via this “European Aviation Neighborhood” need no special permits to operate to and from the UK and the rest of Europe, or within the UK proper. When (if?) the UK leaves the EU, UK-registered air carriers will no longer be considered a part of the neighborhood.  

    One look at the map and a glance at the economic figures for European aviation, and it is clear that the UK is a still a major piece of real estate. Nevertheless, UK air carriers will have to be considered Third Country Operators (TCOs) and will need to hold an EASA-issued Foreign Carrier Permit (FCP) and a Part-TCO Certificate prior to undertaking any commercial flight from the UK to anywhere in the European Aviation Neighborhood (just as the FAA requires to certify foreign carriers in the US). 

    Currently, N-registered aircraft intending flight operations to, from, within or via the UK are already considered TCOs and must hold the EASA-issued FCP and the Part-TCO prior to any commercial flight being taken. This includes charter operations. This will not change, and if an owner/operator has these permits now, they will still be valid after the UK leaves the EU and will not need to be updated.

    Post-Brexit, aircraft registered elsewhere in the European Aviation Neighborhood and operating to, from, or within the UK, will now be considered foreign operators for the UK Civil Aviation Authority (CAA). This also applies to N-registered aircraft. The CAA will therefore begin issuing their own TCO certificates called a UK Part-TCO.   

    The UK Aviation Regulations and the Block Permit 

    After Brexit, the UK will implement new aviation regulations largely mirroring the EU laws – essentially allowing aviation to continue as it did before. The procedures are in place, with few changes, to maintain free passage between States of Europe and the United Kingdom.   

    These new UK laws are comparable to FAA Part 129, which “prescribes rules governing the operation within the United States of foreign air carriers appropriately authorized by the Civil Aeronautics Board or the Department of Transportation (DOT)”.  

    The new rules include the UK Part-TCO mentioned above, but once purchased, operators will then be able to further obtain one of two permits which pertain to where they can operate and how often: 

    1. Foreign Carrier Permit – Operators will still have the option to obtain a Foreign Carrier Permit for either scheduled or unscheduled commercial operations, which will specify where they can go and how often. 
    1. Alternatively, Operators can obtain a Block Permit – which will be a new product offered by the UK. The block permit will not be flight specific and can allow TCO aircraft to go between the UK and European Aviation Neighborhood for an initial period of 3 months, with a potential extension of up to 9 months.  The extension will depend largely on the reciprocal traffic rights granted by the other parties to the agreement.   

    Furthermore, the CAA currently issues ad-hoc charter permits to EU carriers covering either one or a short series of flights on a route-by-route basis for services between the UK and countries outside the European Aviation Neighborhood. This process will remain unchanged and can apply to aircraft registered in the United States.   

    The CAA will have the responsibility to not only issue all TCOs for commercial services, but accordingly, monitor travel rights to and from countries in the European Aviation Neighborhood. The CAA wishes to ensure a minimum regulatory burden is placed on air carriers and is therefore developing a streamlined process for EU carriers.  

    Most commentators recognize all this as a gesture to meet minimum requirements, but with the option to go hard on neighbors who don’t throw soft balls back over the fence. 

    Exceptions to the Block Permit  

    This permit does not apply to aircraft operating purely private flights, meaning zero payment for services (even gas for the flight), to, from, or within the UK – all of which will not need a Block Permit.  

    The requirement also makes exception for: “overflights; state flights from a foreign government or military-registered aircraft; positioning flights, ferry flights or delivery flights; flights for the purpose of undertaking repairs, alterations, maintenance, or salvage; and test flights”. For instance, a carrier flying from Spain to Ireland, crossing over England, wouldn’t need a Block Permit. 

    During any transition period, EU law will still be applicable to the UK, and the UK would still be subject to EU-negotiated Air Transport Agreements.  In that instance, UK or European Aviation Neighborhood members would not need a Permit or any TCOs for operations to, from, or within the UK.   

    What it Means for US Aircraft Owner Trustors 

    These changes mostly apply to charters operators of aircraft of less than 19 seats – most private flights are exempt from the rules outlined above. The bottom line is that post-Brexit, members of the European Aviation Neighborhood will be considered “foreigners” to the UK, and vice versa. Likewise, US registered aircraft will be foreigner to both, which will mean that N-registered aircraft operating in both Europe and the UK will need all permits – the EASA-issued Foreign Carrier Permit, the EASA-issued Part-TCO and the CAA-issued UK Part-TCO.  Again, if you already have the EASA-issued permits, new ones will not be necessary, but the additional UK permit will be mandatory to operate in the UK. 

    It’s important to know the exact requirements during this transition. Without the right documents in place, certain US-registered aircraft operating in the UK could have permits removed, fines invoked, or potentially even be grounded. In the end, if you’ve made it this far reading, you likely have the “Brexit before breakfast heartburn” – it’s as complex as promised – but eventually we’ll figure it out.  

    Many thanks to Howard Dyer, who helped unravel the “Euro-speak” used to explain this new process to the EBAA earlier this year. 

    Howard is an English safety consultant who worked for many years in the UK CAA and was responsible for getting all UK aircraft compliant with the new EASA regulations when they came into force in September 2008.  

    He tells us that it took him years to understand EASA rules written in Euro English. He now tells us that the CAA’s own rules for coming out of the EASA are even harder to untangle. 

    This article was originally published by Aircraft Guaranty Owner Trustee on May 22, 2019.

     

  • Tracey Cheek posted an article
    AINsight: Tip to Tail—Buying New vs. Used Bizjets, ADS-B Out, ADS-B, TCJA, aircraft transactions, see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, discusses unique perspectives of OEMs on negotiating sales and dispute resolution as well as planning for ownership.

    Purchasing a new business jet from the manufacturer (OEM) is a far different transaction than buying a used aircraft from a private third party. And planning for aircraft ownership is also part of this story.

    The contrast in new versus used aircraft is especially pronounced when the used aircraft does not comply with the FAA’s January 1, 2020 Automatic Dependent Surveillance-Broadcast (ADS-B Out) mandate. The lack of ADS-B Out compliance almost certainly will alter the negotiation for such used aircraft and, if the aircraft is not compliant by 2020, it could morph into a fancy paperweight. New OEM aircraft already comply with ADS-B Out requirements.

    This blog covers a few significant strategic, legal, and negotiating differences relating to new and preowned aircraft sale deals and briefly touches on ownership tax planning, risk management, regulatory compliance, and financing/leasing. This blog also briefly touches on OEMs’ perspectives on negotiation and dispute resolution.

    WHAT'S FOR SALE?

    The big-money aspects of a new aircraft deal start by selecting the right aircraft from the OEM and negotiating the aircraft purchase price. Unlike used aircraft deals, OEM agreements include terms on such items as upgrades, installment payment amounts, and pilot and technician training.

    The used aircraft market enjoyed a record year of sales in 2018 that depleted much of the desirable inventory. However, some experts suggest that the cost of ADS-B equipage and a slowing global economy may cause more used aircraft to come to market in the near term; and the lack of ADS-B Out technology may prolong or complicate buy/sell negotiations even if more aircraft become available.

    When purchasing a new or used aircraft, the parties should engage a team of knowledgeable business aviation experts, consisting primarily of an experienced aircraft broker, a technical inspector/analyst, accounting tax advisor, aviation counsel, aircraft management company, insurance broker, and capable title company or special FAA counsel. A non-aviation participant on the buy or sell side can make transactions more difficult or inefficient for experienced buy/sell teams and their principals.

    Every used aircraft should (but surprisingly does not always) undergo a “pre-buy” inspection before a purchase occurs. The inspection should involve technical experts that delve into the records of the aircraft, ADS-B Out compliance, and the physical/mechanical condition of and required repairs to the aircraft. Counsel should conduct or order title, lien, and other searches at the FAA and on the International Registry with a focus on understanding the domestic and any international ownership since birth of the aircraft.

    For new OEM aircraft, the pre-buy inspection process is dissimilar to preowned aircraft, so much so that OEMs often say that an independent inspection of a factory-new aircraft is unnecessary and the OEM can handle everything from contract to delivery.

    Although some purchasers accept exclusive OEM oversight, all purchasers should still consider engaging a technical expert to interact with the OEM’s teams and inspect the aircraft during construction, knowing that OEMs usually will facilitate such inspections but with appropriate limits. Fundamentally, the expert can assure the purchaser that the aircraft conforms to the agreed specifications and the OEM delivers the aircraft in pristine condition. Also, the parties should always conduct legal diligence similar to a used aircraft sale.

    CONTRACT NEGOTIATIONS AND DISPUTE RESOLUTION

    Contractual provisions for used and OEM purchases have some common terms as well as major differences. OEMs believe the form of purchase and sale agreement they provide to their customers works well with few changes. Consequently, the extent of document revisions negotiated and accepted by an OEM may, but not always, pale in comparison to extensive changes drafted into used aircraft purchase agreements.

    OEM contracts personnel, most of whom are not lawyers, have flexibility to make reasonable contract revisions, but their authority has well-honed limits. For example, their authority probably does not extend to accepting unusual revisions, settling a dispute, or altering fundamental OEM liability protections. Accordingly, purchasers should expect these contracts people to seek authority from senior managers or general counsel for revisions to obtain policy or legal guidance on an acceptable contract revision or dispute management.

    For OEMs, each customer and its sale agreement is unique. As such, OEMs uniformly frown on aviation counsel using as precedent sale agreement provisions negotiated in other unrelated transactions with the selling OEM or other OEMs. However, aviation counsel can add value in serving their clients by using their prior experiences to negotiate appropriate terms in the current deal.

    If a customer alleges material breaches by or makes serious litigious claims against the OEM, most OEM general counsel or his/her inside litigation counsel step in and try to reach an accommodation or, if necessary, circle the wagons to protect the OEM’s interests.

    OWNERSHIP PLANNING

    Under the Tax Cuts and Jobs Act of 2017, buyers of new aircraft, like used aircraft buyers, may use 100 percent bonus depreciation if the aircraft buyer qualifies for the tax benefit. Planning for ownership is critical to successful tax structuring. For more, read AINsight: 100% Depreciation and Aircraft Personal Use and AINsight: Maximize Aircraft Bonus Depreciation in 2019.

    A purchaser of a new aircraft can potentially obtain a financing benefit that does not apply to used aircraft. Lenders and lessors often agree to fund installment payments to the OEM as the OEM invoices the customer during construction and upon delivery of the aircraft. In addition, these lenders or lessors are often willing to convert the installment payment arrangement into a long-term loan or lease. Either financing or leasing provides substantial benefits to the parties but requires some additional effort to negotiate the agreements. For more, read  AINsight: Should You Finance or Lease a Bizjet?.

    Business aviation insurance brokers not only place appropriate insurance coverage but also can negotiate effectively with aviation underwriters. Purchasers of used and new aircraft generally understand that insurance is a crucial piece of protecting themselves from liability and property damage. However, they may not fully appreciate that a limited liability company (LLC) that buys the aircraft may not provide the LLC owner with the anticipated liability protection. For more, read AINsight: Piercing the Aircraft LLC Veil.

    Operations of private aircraft under Part 91 (private use) or Part 135 (charter use) in the U.S. demand compliance with the applicable regulations by owners and operators of all aircraft. For example, owners of all aircraft must keep their aircraft in the condition required by the applicable regulations for flight operations, not conduct illegal charter operations, and meet technology requirements, including ADS-B Out. Importantly, the FAAis looking for violators of the regulations, in part as described in AINsight: FAA Actively Pursues Illegal Flight Ops.

    Although purchase transactions of new and used aircraft share certain similar elements, they differ in significant respects. Assisted by knowledgeable professionals, a purchaser can and should address business, tax, financing/leasing, risk management, and regulatory issues as part of each deal. A reasonable and pragmatic approach to these transactions should foster amicable negotiations and ultimately produce the right travel solution for the purchaser.

    This article was originally published in AINonline on May 9, 2019.

  • 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
    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.