NAFA Administrator posted an article7 Avoidable Mistakes in Acquiring a Bizjet see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses mistakes to avoid when acquiring a private jet aircraft.
Acquiring a private jet aircraft is fraught with the potential to make expensive mistakes. Yet, a qualified aviation team can help a purchaser achieve optimal results by avoiding these seven missteps:
GOING IT ALONE
Assembling the right aviation team admittedly entails some cost and initial effort. But most purchasers quickly realize that buying a jet is not like buying a car, real estate, or other assets. Rather, a jet purchase or lease is complex and requires the assistance of aviation experts who excel in the subject matter and interact seamlessly on a deliberate closing schedule. Tax-intensive, cross-border, and novel purchases may require additional expertise beyond the core team members described below.
Aircraft broker. Purchasers buy aircraft solo, and that can work out. However, a purchaser might suffer buyer’s remorse or experience negative outcomes such as unnecessarily incurring taxes on the purchase. A skilled broker focuses on the purchaser’s needs and wants, knows the “market,” identifies the best available aircraft for the purchaser, and negotiates business and other terms with the team.
Consultants and pilots. Various consultants perform visual and record inspections, appraise aircraft, supervise pre-buy inspections, organize flight departments (Part 91-private aircraft operations), provide insights into choosing Part 135 managers (commercial/charter use), and may provide broker services. Pilots may support, perform, or lead on some tasks but must collaborate with the other team members.
Aviation lawyer. Aviation law is challenging, so non-aviation counsel should not act alone in aircraft purchases. Instead, they should hire an experienced aviation legal team that understands and regularly structures acquisitions amid conflicting tax, regulatory, liability, risk management, choice of owner entity, and other complex rules. They must also regularly draft and negotiate aviation-specific agreements and, importantly, have even broader financing expertise than just aircraft loans and leases.
Aviation insurance broker. The aviation insurance market is no place for a generalist broker. Aviation insurance brokers know how to navigate aircraft insurance markets and negotiate complex policy terms.
Escrow agent and FAA counsel. With few exceptions, purchasers and sellers should use escrow agents, comprised of escrow companies and FAA lawyers. These agents hold and disburse funds, collect and file documents at the FAA, register interests and parties on the International Registry, and may issue title insurance. FAA counsel can also offer legal advice, write title opinions, and draft multiple documents.
NOT SELECTING THE RIGHT AIRCRAFT
Despite the unquestionable benefits of owning or leasing a whole jet aircraft, notably during Covid-19, a prospective purchaser should first rule out other workable options to fly privately, such as chartering or buying a fractional share of a jet. After that, a purchaser should concentrate first on the aircraft/user’s “mission” before deciding on which new or used whole aircraft to buy or lease.
Generally, the term “mission” is aviation speak for a purchaser’s effort to identify aircraft that will serve all or at least most of the private travel the purchaser envisions. When completed, the mission profile informs the search by purchasers and their brokers in today’s active market with numerous jet makes and models for sale.
NOT PLANNING FOR TAXES BEFORE SIGNING AN LOI
Private jets attract the interest of tax authorities at the federal, state, and local levels. Before signing a letter of intent () to acquire a jet, if possible, a purchaser should use accountants and lawyers to develop tax minimization strategies and structures under federal tax law, including the use of bonus depreciation and other business deductions, state sales/use tax laws, and local property laws. Solid planning may be slower than purchasers expect but failing to do so can wreak tax and financial havoc.
NOT CREATING A LEGAL OR STRONG AIRCRAFT OWNERSHIP/OPERATING STRUCTURE
A purchaser should determine the person or entity, often an , that will own the jet, and then structure the operations of the jet in compliance with the s. An owner that violates the s invites FAA scrutiny and, sometimes, enforcement litigation by the FAA or the U.S. Department of Justice, easily causing owners to incur sky-high legal fees.
One of the most common problems stems from illegal charters, which take various forms. One rampant violation occurs when Part 91 operators lease their aircraft to many unrelated travelers, which is really a fake charter operation. Another violation often occurs when an LLC with no business enterprise operates the aircraft it owns or leases. The FAA views these flight operations as creating an illegal “flight department company.” When structured improperly, neither the leasing nor the LLC operator (allegedly) holds mandatory FAA certifications as commercial operators under the FARs.
Owners also frequently believe the same provides a liability shield for its owners (members) from third-party liability claims. However, in general, the LLC will not protect the owners from any lawsuit or liability that may ensue from illegal aircraft flight operations or violations of federal or state laws. Although insurance helps mitigate this risk, it is a false premise that insurance suffices or will respond to alleged liability. More risk mitigation structuring and financial exposure analysis can pay off.
SKIPPING AIRCRAFT INSPECTIONS
Although I have seen prospective purchasers bypass independent inspections in buying a new or used aircraft, that omission has led to surprises or disputes without an adequate legal remedy. Purchasers typically arrange a visual inspection of a jet and a review of its records.
If all goes well, an agreed maintenance facility then performs a pre-buy inspection, an in-depth aircraft checkup, and delivers an inspection report to the parties. This report identifies discrepancies that a seller usually fixes before the purchaser accepts or rejects the jet and closes the purchase. Leaving out this step is at best unwise. Beware—finding a facility and completing an inspection may push beyond a closing schedule.
NOT EXPLORING AIRCRAFT MANAGEMENT ARRANGEMENTS EARLY AND OFTEN
Aircraft management companies hold the life of jet owners and passengers in their hands. These companies differ significantly in size, experience, and services. It is critical to conduct due diligence on at least two companies covering safety, service, transparency, integrity, pricing, and FAA status. Choosing based solely on the lowest cost or a referral may needlessly raise personal, asset, and operational risks.
A purchaser that does not consult a manager during an initial jet inspection may forfeit valuable hands-on knowledge about the operations and maintenance of the subject aircraft. In contract negotiations, a purchaser, with certain team members, should secure balanced terms in such key areas as safety practices, including Covid-19 protocols, expense controls, travel scheduling, and services provided.
NOT CONSIDERING FINANCING BEFORE SIGNING A PURCHASE AGREEMENT
Even if a purchaser intends to buy a jet with cash, it is still worthwhile to inquire about leasing or borrowing to finance a jet acquisition before signing a purchase agreement. Most purchasers earn far more from their investments or businesses than the current very low rates. It is ideal to close a lease or loan at the purchase date, but either financing can occur later. Using a non-aviation lender or lessor is feasible, but may result in higher transaction fees, slower negotiations, and sub-optimal terms.
With the support of an experienced aviation team, a purchaser can complete a simple or complicated acquisition of a business jet smoothly and correctly. As aircraft deal activity rises amid Covid-19 safety concerns, it is worth understanding where mistakes can occur and how to prevent them.
This article was originally published by AINonline on November 13, 2020.
NAFA Administrator posted an articleHow to Rent a Private Jet: Everything You Need to Know About Private Jet Charter Services see more
NAFA member, H. Lee Rohde, III, President and CEO of Essex Aviation, discusses private jet charter services.
Wouldn’t it be great to be able to just rent a jet? Well, with private jet charter services, you can.
Private aircraft charter is an on-demand service that enables passengers to select the aircraft model that most closely meets their travel needs and book a flight in much the same way they’d book a seat on a commercial flight.
Read on to explore private aircraft charter options, expenses, safety considerations and more.
Table of Contents
- Different Types of Private Jet Charter
- Private Aircraft Charter Amenities
- When Does It Make Sense to Rent a Jet?
- How Much Does It Cost to Charter an Airplane?
- Charter Operators vs. Charter Brokers
- How to Identify a Private Jet to Charter
- Private Aircraft Charter Safety Considerations
- Private Jet Charter Alternatives
Different Types of Private Jet Charter Services
Private jet charter services typically fall into one of two broad categories: private jets for business and private jets for leisure.
Private aircraft charter is an attractive option to businesses because it enables them to:
- Arrange flights to multiple cities within a single day according to your schedule, rather than a commercial airline’s
- Bypass long check-in and security lines by boarding through private terminals
- Arrive on-time to important meetings by flying to an airport closer to their final destination
- Access airports often having less ground and air traffic, thereby reducing the potential for delays
- Transport larger groups at a potentially lower overall cost than commercial airfare
- Avoid costly downtime associated with commercial flight delays, layovers and connecting flights
- Support in-flight productivity by eliminating unnecessary distractions and increasing overall travel efficiency
- Conduct onboard business meetings without having to worry about other passengers listening in on sensitive conversations
- Enable team members to travel in a comfortable, inviting atmosphere so that they arrive to their final destination refreshed and prepared
Private air charter is similarly appealing to those who fly primarily for leisure purposes. Private aviation enables such individuals to effectively extend their holiday experience by flying aboard aircraft appointed with the finest luxury amenities, including full-service kitchens, state-of-the-art in-flight entertainment systems and dedicated bedrooms. Private terminals at commercial airports offer a secure, comfortable and relaxed environment, far from the hustle and bustle of the main commercial airport concourse. Local, non-commercially serviced airports enable travelers to arrive closer to their final destination, so they can start their holiday that much sooner. Ultimately, private jet charter can make even the longest haul flightfeel like an escape.
Private Aircraft Charter Amenities
We’ve already touched upon some of the amenities that travelers can expect when they charter a private jet aircraft, but let’s take a closer look at some of the comforts and conveniences passengers enjoy while onboard:
- Open spaces designed with legroom, storage space and aesthetics in mind
- Private lounges featuring plush seating arrangements upholstered with high-end materials
- Personal flight attendant crew members ready to tend to each individual passenger’s needs
- Full-service galleys stocked with a variety of fine foods and beverages
- In-flight food and drink services, including meal catering or onboard personal chef services
- State-of-the-art in-flight entertainment systems featuring cutting-edge audio and visual equipment
- Full-size lavatories, including mirrors, storage and, depending on the aircraft, shower facilities
- Depending on the aircraft, dedicated bedrooms replete with full master suite
- Private conference rooms fitted with built-in video systems, surround sound and Wi-Fi access
- Special accommodations for passengers who wish to fly with pets
Every aspect of the private jet charter experience is designed to accommodate the passenger’s unique needs.
When Does It Makes Sense to Rent a Jet?
Private jet charter services have long been popular amongst travelers who want the experience of private aviation without the long-term commitment associated with dedicated or fractional aircraft ownership. It’s an especially practical option for those who are dealing with a smaller number of trips, or who require flexibility in terms of aircraft size and destination. Interest in private aircraft charter has also increased significantly in light of COVID-19, as travelers seek to find safer alternatives to commercial flights. Travelers who are curious about the prospect of chartering a private aircraft but unsure whether it makes the most sense based on their needs are encouraged to discuss their operations with a private aviation consultant.
How Much Does It Cost to Charter an Airplane?
Unfortunately, there is no one simple answer to this question — the expense of chartering a private aircraft varies substantially based on a number of factors:
- Number of Passengers: This dictates the size of the aircraft (light jet, midsize jet, long range or ultra-long range) and, therefore, available aircraft models from which to choose.
- Dates of Travel and Scheduling: If you primarily charter on holidays and during peak travel times, this can affect your cost. General limited availability and the location of available aircraft can also affect your ability to travel on your desired dates, so it’s best practice to book charter flights as far in advance as possible.
- Flight Route and Destination: More distant destinations with longer flight routes require long range or ultra-long range aircraft models; longer journeys may also require stops to refuel and change crew if required per the Federal Aviation Administration’s (FAA) Pilot Fatigue Rules.
- Length of Time on the Ground: Most private jet charter service providers require an equivalent of two hours per day of flight time. That said, it does not matter how this time is spread out. For example, if a traveler were to depart on a four day trip, they would be required to fly a minimum of eight hours during that trip; however, they could divvy this up by flying two hours each day of the trip, or four hours each during the first and last days of the trip with the aircraft parked during days two and three.
- Round-trip vs. One-way: Round-trip flights are generally more cost effective than one-way trips. The reason for this is that a one-way trip typically requires the aircraft to complete additional flights in order to support a one-way trip request. As a result, most charter providers will actually quote the cost of a round-trip flight, even for a one-way trip. Charter providers that quote a one-way trip will effectively quote, in some form or another, the cost for the flight time of repositioning the aircraft back to its home base. For travelers interested in booking either a one-way or round-trip flight, a private aviation consultant is an invaluable resource because they can help you better understand pricing.
- One-way Options: Although it’s certainly possible to request a one-way trip, from a traditional charter perspective, the cost will likely compare to the cost of a round-trip flight. Therefore, travelers who frequently make one-way trips would probably be best served by looking into a jet card program as opposed to chartering because jet cards tend to cater more to one-way requirements.
That said, some charter providers offer one-way options in which the traveler can take advantage of a positioning flight (that has no passengers) required by another client’s scheduled trip. These opportunities utilize what are referred to as “deadhead flights,” while positioning the aircraft to its primary departure point or returning it to its home base at the end of a primary charter trip. Should your travel needs coincide with a deadhead flight — also known as an “empty leg flight” — this can be a good option, one that is often offered at a discounted rate. It’s important to note, though, that the cost savings associated with deadhead flights pose risks in terms of flexibility because these flights have a predetermined departure date, time and schedule, all based on the schedule — and sometimes changing needs — of the primary charter customer.
On the whole, private jet charter services are less expensive than most other private aviation options because they’re booked on a trip-by-trip basis with no ongoing ownership or program costs.
For private jet charter cost estimates, please refer to the chart below:
Charter Operators vs. Charter Brokers
There are a few different ways to charter a private jet aircraft, including working directly with a charter operator or going through a charter broker.
Charter operators are FAA Part 135 Certified Air Carriers who are directly responsible for the ongoing management and operation of the aircraft on their charter certificate, including staffing, and require FAA certification. Charter brokers are third-party agents that act as liaisons between a client and the FAA Part 135 charter operator chosen to be utilized for the trip. A charter broker will work with their client to secure representation for the booking of the trip and then work with different charter operators to determine which option they believe best meets the trip requirements.
It’s important to note that, unlike Part 135 charter operators, charter brokers are not required to be FAA certified and operate with limited regulatory oversight. That isn’t to say that there aren’t reputable brokers in the market, rather that it’s important to thoroughly vet brokers before choosing to partner with one; a private aviation consultant can prove to be a valuable asset in this review and selection process.
For a more detailed explanation of the difference between charter operators and charter brokers, please refer to our blog post on the subject.
How to Identify a Private Jet to Charter
When determining which type of private jet aircraft model to reserve for a trip, travelers are advised to consider the following:
- How many passengers will be on the flight?
- Do any of those passengers require special accommodations? (For example, a passenger with a wheelchair may need additional space.)
- How much total luggage needs to carried?
- Are there any larger luggage items (golf clubs, skis, bikes, etc.)?
- What is the desired departure airport or location?
- What is the desired arrival airport or destination?
- What is the length of the trip?
- Will the aircraft be repositioned on certain days during the trip? If so, where and for how long?
- Do the passengers require any special amenities (internet service, certain floorplan seating options, etc.)?
Each of these factors plays an important role in determining the necessary size, equipment capability and performance capabilities of the aircraft.
Private Aircraft Charter Safety Considerations
In addition to FAA regulations, there are numerous other industry standards and ratings designed to audit the safety of private aviation companies. The three most well-known are the International Standard for Business Aircraft Operations (IS-BAO), the Aviation Research Group/US (ARGUS) rating system and the Wyvern Wingman Certification program.
IS-BAO was founded by the International Business Aviation Council in an effort to “build a culture that continuously strives for a better, safer way of operating by identifying areas where better risk management will improve safety.” The IS-BAO auditing process consists of three stages designed to verify that safety management activities are appropriately targeted and integrated within an operator’s business. IS-BAO was developed by operators, for operators and is based on the standards outlined by the Standards and Recommended Practices outlined by the International Civil Aviation Organization.
Developed by ARGUS International, the ARGUS rating system is designed to confirm the legitimacy of a charter operator based on their safety record, whether they have liability insurance, pilot training, experience and certifications, pilot background checks and more.
ARGUS ratings break down into four categories, shown in the table below:
Some private jet charter providers will claim that they’re “ARGUS Rated,” but there’s a significant difference between being an ARGUS Gold Rated and ARGUS Platinum Rated operator, so it’s in the travelers’ best interest to partner with a private aviation consultant who can help them understand the difference.
As the first private aircraft safety auditing firm in the country, WYVERN Consulting has garnered a great deal of respect, and its WYVERN Wingman Certification is considered one of the most reputable in the industry. WYVERN audits are governed by six principles: integrity, fair presentation, due professional care, confidentiality, independence and an evidence-based approach. Wingman Certified operators gain an exclusive listing on The Wingman Report, WYVERN’s directory of premier operators, access to WYVERN’s safety data platform and round-the-clock support from the WYVERN team.
Any private aircraft charter company that boasts one or more of these ratings or certifications in addition to meeting FAA regulations would be a preferred option to consider, though it doesn’t hurt to consult a private aviation expert for peace of mind.
Private Jet Charter Alternatives
For those who aren’t sure whether renting a jet is right for them, there’s a world of other private aviation options in store, including:
- Membership Programs: With a membership program, members agree to a fixed cost per hour charter rate at the start of the contract and are billed after each flight. Members typically pay either a monthly management or annual membership fee in addition to the cost per flight.
- Jet Card Program: Jet card program members have their pick of a dedicated service with a predetermined number of hours on a specific aircraft type or size category or a debit card service in which they establish a travel fund account and pay on a trip-by-trip basis using that account.
- Fractional Aircraft Ownership: Fractional owners purchase a share of a specific aircraft type and agree to an annual number of allotted flight hours. Most fractional aircraft ownership programs require a minimum size share of 50 hours of flight time per year, though this can vary depending on the provider.
- Pre-Owned Aircraft Acquisition: Travelers who for a variety of reasons want their own private aircraft without the capital investment of a new aircraft acquisition are advised to consider purchasing pre-owned and investing in aircraft refurbishment services to breathe new life into an existing aircraft.
- New Aircraft Acquisition: The ultimate in luxury, travelers can purchase a new aircraft tailored to their exact requirements and specifications.
If you’re considering private jet charter services or evaluating alternatives, talk to the experts first — specifically, the experts at Essex Aviation Group. With a combined 95 years of aviation experience, we have longstanding private aviation industry connections that we can leverage to your advantage. We’re also intimately familiar with different private aircraft charter companies’ vetting processes, so we can help ensure that every flight you take is a safe flight.
Ready to get started? Contact us today to let us know your unique travel requirements and we’ll help you determine whether private air charter services are right for you.
This article was originally published by Essex Aviation on August 13, 2020.
AINsight: Negotiating Business Aircraft Financing see more
NAFA member, David G. Mayer, partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses negotiating business aircraft financing.
Like large companies, an increasing number of high/ultra-high-net-worth individuals apparently like using other people’s money (OPM) instead of cash to close private aircraft transactions. These transactions include true tax leases, sale leasebacks, financing leases, secured loans, and refinancing of private aircraft by lessors and lenders. These deals also cover a broad range of aircraft by value, cost, cabin size, age, make and model.
It might just be my passing anecdotal experience that these “customers” seem to be more patient, flexible and engaged with their financiers than before the fourth quarter in resolving deal points that matter to them. Perhaps customers have discovered what I regularly see today: financiers, though controlled by bank regulations and internal credit policies, will work diligently and productively with their customers to develop structures and terms acceptable to their customers and the financier.
For lessors and lenders, this apparent surge in financing activity is good news. Yet, they widely acknowledge that “cash is king” in how high/ultra-high net worth individuals typically purchase new and preowned aircraft. According to JetNet, cash wins over secured loans to purchase jets, in an estimated 70 percent of U.S. aircraft purchases or a lower percentage of cash purchases depending on other sources of the information.
Financiers often encounter objections to financing like these: “I have cash available to buy the aircraft with minimal effect on my net worth”; “I really want to avoid the ‘brain damage’ associated with negotiating documentation, responding to onerous credit disclosure requests and abiding by restrictions that financiers will impose on me.”; and “I just prefer, like my buddies, to own the aircraft outright.”
Some financiers apparently have found the magic sauce to overcome these typical customers’ objections when combined with three particular attributes of financing today that appear to underpin the elevation in financing activity.
First and foremost, while money is cheap in the current highly competitive financing market, every client pursues the lowest loan or lease rates, though most lease pricing entails more variables and assumptions than loans.
Some clients even acknowledge what is almost universally true: they can make more money using their cash elsewhere for their businesses or investments. Other clients simply prefer using OPM and holding their cash. With the current volatility in the stock market, coronavirus fears, and concerns about the future economy, OPM may, and maybe should, attract even more interest.
Second, with the passage of the Tax Cuts and Jobs Act of 2017, clients almost always ask whether the aircraft qualifies for bonus depreciation. Correspondingly, they assume, often incorrectly, that they can use and qualify to take these substantial tax benefits. What is important here are ways in which leasing still might enable customers to enjoy some of these tax benefits.
How is that possible? Certain lessors can and do use the tax benefits in pricing leases—when setting rents and casualty values—sums lessees must pay the lessor on the occurrence of a total loss of the aircraft. These lessors can, but might not offer to, share the depreciation tax benefits with the lessee, primarily in the form of lower rents and casualty values.
Importantly, the tax benefits might be available not only when the lessor purchases the aircraft directly from the third-party seller and leases the aircraft to the lessee/customer. These tax benefits might also be available when the lessor purchases the seller’s/lessee’s owned aircraft and leases it back to the seller/lessee. The latter strategy allows the seller/lessee to monetize the value of its aircraft while keeping possession and use of the aircraft subject to the new “sale leaseback” arrangement.
In true operating or tax lease transactions, customers get a third benefit. Lessors assume the residual value risk arising out of aircraft ownership and leasing.
Under federal income tax true lease guidelines and other applicable law, an owner/lessor must, among other requirements, retain continuous residual value risk during the lease term of not than 20 percent of the original cost of the aircraft. Residual value refers to the market value of the aircraft at the end of the applicable lease term.
In reality, the residual value assumed usually far exceeds 20 percent due to the inherent value of aircraft, enabling lessors to assume far higher residual values. The customer is entirely free from residual value “downside” losses in value from, or “upside” gain over, assumed residual value in connection with any subsequent sale, lease or other disposition of the customer’s leased aircraft.
THE RIGHT TEAM
Although customers often have relationships with non-aviation professionals, aircraft transactions will almost always progress more easily, efficiently, and at a lower transaction cost with the right aviation team. It is imperative that the transaction team thoroughly understands and adopts a strategy to fully satisfy the customer’s desired participation, attitude towards the financing negotiation and distinguishing between the “must have” an “nice to have” modifications in the documentation.
As a result, every financing transaction is unique, even when a financier provides basically the same “form” of documents to different customers covering similar aircraft. The right transaction team will understand the big issues, nuances, documents, and characteristics of the financier.
Some clients want to negotiate/win every point. Others simply want the best loan or lease rates from financiers that will stay out of their businesses, minimize fast-trigger defaults, not reach for non-aircraft related collateral such as securities accounts, and impose the fewest restrictions on flight operations.
To achieve the best outcome, the transaction team, especially brokers and technical advisors, should ideally participate starting before the hunt for the right aircraft. The customer should engage the other team members before the negotiation of the letter of intent (LOI) or the financing proposal.
For buyers, the key is to allow adequate time for tax planning, aviation regulatory structuring, identification of the best financier for the particular situation and risk management planning, especially in current volatile insurance markets.
Financiers draft the financing documents in their favor even though they expect the provisions to change depending on the relative bargaining, credit, and relationship strength of the customer. True tax lease transactions usually entail more complex and opaque provisions than secured loans, including extensive aircraft maintenance requirements, aircraft return conditions and federal tax indemnification.
For reasons that differ and do not appear to show a discernable pattern, more high and ultra-high net worth customers seem to be gravitating toward financing private aircraft. Perhaps these potential customers, on closer reflection, have concluded that aircraft financing has significant value and, with the right aircraft transaction team, are easier to close than they anticipated.
The content provided above is intended for informational use only and does not constitute legal advice. Each person involved in these transactions should consult his or her aviation team advisors.
David G. Mayer is a partner in the global Aviation Practice Group at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, which handles worldwide private aircraft matters, including regulatory compliance, tax planning, purchases, sales, leasing and financing, risk management, insurance, aircraft operations, hangar leasing, and aircraft renovations. Mayer frequently represents aircraft owners, flight departments, lessees, borrowers, operators, sellers, purchasers, and managers, as well as lessors and lenders. He can be contacted at firstname.lastname@example.org.
This article was originally published by AINonline on March 13, 2020.
AINsight: Millennials' Shared Use Is a Real Deal see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses millennials, shared use, and private jet travel.
Millennials—those ranging in age from 21 to 37 years old this year—have discovered the private jet travel experience, and they like it. With unique attributes, this generation seems broadly interested in on-demand chartering, sharing flights with friends and, to a lesser extent, owning jets and other types of private aircraft—always on their terms.
Also known as “Gen Y,” Millennials seem to enjoy private aircraft travel “experiences” at an acceptable cost with emphasis on safety, freedom, personalization, efficiency, speed, privacy, customization, and transparency—all couched in a high level of service and luxury. They also crave digital connectivity, mobility, and flexibility to travel when and where they want, preferably arranging private flights on mobile devices.
Their perception of the benefits of business aviation includes accessibility of aircraft on-demand, the ability of aircraft to save time, and the efficiency of aircraft travel to increase their work productivity.
Finally, Millennials care deeply about climate change and social causes. They might prefer aircraft operators that demonstrate their environmental responsibility. In fact, the business aviation community has long been committed to mitigating climate change, proven in part by the formation of a broad industry coalition that emphasizes developing and using sustainable aviation fuel (SAF).
As a generation of roughly 73 million adults, Millennials often have high ambitions. Their top aspiration and priority in 2019, according to Deloitte, is to travel and see the world (57 percent). But their needs and wants are far more than aspirational. Some Millennials have, and others in the foreseeable future may earn or inherit, more than enough money to travel by private aircraft amid their peers who, by one report, now make up nearly half of the world’s super-wealthy, including Millennial billionaires.
Indeed, Millennials already seem to be altering the business aviation industry by transforming a business aircraft from a product for purchase into a tool for transportation services in their “click and ride” world.
VIABLE STEPS FOR MILLENNIALS TO ACCESS PRIVATE AIRCRAFT
What, then, is the right generational, practical, and legal path forward in business aviation to meet the needs and wants of Gen Y? Setting aside the critical issue of selecting the right aircraft for use or purchase, let’s consider two high-level access and legal structures for Millennials to buy, use and share private aircraft along with the corresponding obligations, risks, and benefits.
First, Millennials can decide, and currently seem to prefer, to experience private aviation travel without commitment to, or investment in, aircraft. They simply prefer to click and ride. Second, Millennials can elect to own or lease a fractional share of an aircraft or a whole aircraft.
Regardless of what Millennials choose, private aviation is highly regulated. The FAA oversees the safety of U.S.-registered aircraft operations under the FARs, including Part 91 private flights and Part 135 charter.
Further, now—perhaps more than ever—the FAA is looking for, and potentially taking enforcement actions against, operational and other violations of the FARs. Even with this FAA presence in mind, Millennials can still share ownership or use of aircraft with others or go it alone—as long as they properly structure their arrangements under the FARs.
The following two use and ownership options work under the FARs:
• Use only with no ownership commitment—click and ride. Many Part 135 operators do and increasingly will offer charter-based services such as on-demand charter flights (like renting a car), jet cards (types of pre-paid flight debit cards), block charter programs (package of charter flight hours), club or member programs (reduced flight costs for up-front fees). With myriad choices available, Millennials can select flights by criteria that meet their personal life values, economics and travel preferences, including aircraft type, flight sharing, transparency, connectivity, and privacy.
Although many of the services might be easy and simple for Millennials to use, it is imperative that Millennials do not trade their safety just to pay lower charter fees offered by flying with illegal charter operators. Millennials should do their diligence to identify and steer clear of such legal and personal risks.
• Own or lease specific aircraft. Properly structured, Millennials, solo or in a group, can take a deeper commitment in accessing private aircraft by leasing or owning an aircraft. Ownership, of course, requires a capital investment in an aircraft unlike the click-and-ride model, which has no ownership component. Banks may want to lend part or all of the purchase price to Millennials or buy and lease the aircraft to them, which frees up cash for Millennial to deploy in other ventures or equities.
Within the option to buy or lease aircraft, Millennials can buy and finance or lease a fraction or whole private aircraft. Although a large number of financiers compete to finance or lease whole aircraft, relatively few lenders or lessors finance fractional shares.
Fractional share programs, regulated under Part 91K, offer one good way to dip a toe into the water of aircraft ownership. Fractional shareowners buy and use a certain number of flight hours associated with owning or leasing as little as a one-sixteenth share of an aircraft. This type of purchase might appeal to Millennials who decide to change their interests from click-and-ride offerings to ownership in an aircraft fleet that, for example, uses newer engines and fuels that minimize an aircraft’s carbon footprint, has an outstanding safety record, or has better connectivity features on the ground and aloft.
The next step up in commitment is to buy or lease a whole private aircraft instead of a fraction of one. A Millennial might be able to locate and buy an aircraft that adequately meets his or her personal life values and needs, including size, customization, privacy, and technology. Whole aircraft purchases start to make sense when flying at least 200 hours per year. Before then, click-and-ride or fractional programs might work better economically.
FARS NEVER FAR AWAY
If Millennials need or want to share ownership or leasing of an aircraft jointly with others, they can legally structure such sharing under the FARs. However, being an owner and an operator might not be the same thing, and a joint operator (either as a joint owner or a joint lessee) under Part 91 can be tricky. For example, as a general rule, no cost-sharing, reimbursements, or other compensation in any form can be conveyed to any operator or owner for any Part 91 flight, other than under very limited circumstances.
In many situations, receipt of compensation by the operator will convert the Part 91 flight into an illegal charter. However, if correctly structured, Part 91 will allow Millennials to enter into certain joint ownership and leasing arrangements that Millennials can use to accomplish their objectives.
In contrast, under a bona fide Part 135 flight operation, Millennials can devise their own cost-sharing arrangements under appropriate agreements with much greater flexibility, typically at a higher cost than Part 91 flights.
Millennials today and in the foreseeable future will have the financial means to use or acquire personal aircraft. Only time will tell whether Gen Y prefers to fly private aircraft as a service free of the ownership risks or lean into the world of aircraft ownership or leasing, alone and with friends, to fulfill life experiences and work objectives. No matter which way Millennials go, the FARs will be right there with them.
This article was originally published in AINonline on September 13, 2019.
Owner Personal Liability for Illegal Charter Ops see more
NAFA member David G. Mayer, Partner with Shackelford Law, discusses illegal charter operations, personal liability and LLCs.
It’s an unfortunate reality that private aircraft accidents occur all too often and cause fatalities, personal injuries, and significant property damage. In the first half of 2019, fatalities in private aircraft accidents soared to 47 people, an all-time high for comparable periods. Families who experience these losses usually hire lawyers to seek compensation from aircraft limited liability companies (LLCs), members, owners, operators, manufacturers, and others.
Many aircraft owners believe that, if an LLC holds title to their aircraft, the LLC will protect the owners, as LLC members, from personal liability arising from any accident. This belief extends to any accident that occurs during illegal charter operations.
However, their belief may be wrong. As discussed below, just one prevalent type of illegal charter operation may occur if an LLC operates flights only for the owners/members, using the owner/member’s cash, paid into the LLCs for aircraft operating costs. Though surprising to many people, the LLC becomes a “flight department company” operation that not only is functioning illegally but also may be exposing the owner/members’ personal wealth to the FAA civil penalties and other claims.
Looking into a Real Fatal Accident
On March 8, 2019, a tragic aircraft accident occurred in Florida that killed five people when the twin-engine Piper Aztec in which they were flying hit the surface of a lake on approach to Palm Beach County Glades Airport (KPHK), Pahokee, Florida. Although yet to be officially determined, the initial facts suggest that the passengers hired the pilot who conducted an illegal charter for unspecified compensation. Though he was certified for commercial flights, the pilot’s required second-class medical certificate lapsed on Nov. 30, 2018, more than three months before the deadly flight. As a result, the pilot could not legally conduct the flight. For more on pilot operations, read my article titled Should Aircraft Owners Worry About Their Pilots?, AvBuyer (Dec. 22, 2017).
In addition, the aircraft owner, L-Holding LLC, apparently did not meet the certification requirements under Part 119 of the Federal Aviation Regulations (FARs). Further, it did not hold an operating certificate under FARs Part 135 to lawfully conduct the Piper Aztec's on-demand commercial flight under Part 135.
The Florida accident raises important questions for LLCs and their members that conduct illegal charter operations: Will the LLC, if properly formed, shield the members’ liability from occurrences like the Florida accident or civil penalties imposed by the FAA? In a case like the Florida accident, will the LLC’s insurance provide a defense to civil lawsuits and pay for money judgments? Will insurance respond to FAA civil penalties against the LLC, its members, or the pilot?
Perhaps the most fundamental question for these members or their LLCs is whether, in today’s heightened enforcement environment discussed below, conducting illegal charter operations is worth risking personal wealth to pay a claimant, the FAA, or the Department of Justice (DOJ), and significant legal costs? A similar question exists for any pilot who may lose his or her pilot’s certificate resulting from illegal flight operations.
Structuring LLCs to Mitigate Personal Liability Risk
When properly formed and used, an LLC can maintain the shield afforded to members under various state laws. The laws generally limit the members’ personal liability from the LLC's debts, obligations, and liabilities. Although it is difficult, in the Florida accident or comparable situation, it is reasonable to expect that the claimants will try to penetrate the LLC shield to reach members’ personal assets. This may especially be true in the Florida accident if the families confirm the pilot or the LLC operated the aircraft as an illegal charter.
Spotting Illegal Charters
Illegal charters come in many forms as discussed by the NBAA's The Risks of Flying With Illegal Charter Operators. Three examples deserve emphasis here: a Part 135 operator does not comply with the FARs’ safety standards, illustrated by the apparent lapse of the pilot’s medical certificate before the Florida accident; a Part 91 operator enters into multiple timesharing or leasing arrangements that constitute disguised, sham charter operations that should be operated as Part 135 flights; or an often misunderstood or ignored infraction under Part 91 where members provide cash for flight operations in flight department companies.
Flight department companies, typically created in the form of LLCs, exist and function for the single purpose of owning and operating their own aircraft for the benefit of their members and their guests. Owners pay for the aircraft operating costs through members capital contributions or other cash transfers into the LLC.
These cash infusions fundamentally convert such an LLC into an illegal “commercial operator.” The FAA defines a commercial operator as one that operates an aircraft carrying persons or property “for compensation or hire.” Under a flight department company structure, any payment into the LLC constitutes illegal “compensation.”
If a flight department company and/or its owner let people know that those people can use the aircraft, operated by the company, in exchange for any cost reimbursement to the company, the second fundamental violation likely occurs. The company is likely illegally holding the aircraft out for “hire.”
Perhaps surprising to many owners/members, unless and until the companies obtain a Part 135 air carrier certificate, both these operations “ for compensation or hire,” simply put, constitute illegal charter operations.
For example, think of an LLC member who (1) pays money into the LLC for that member’s flights in order supposedly, in part, to create a liability shield for the benefit of the members; (2) offers a friend that she or he is welcome, at the friend’s expense, payable to the LLC, to “borrow” the LLC’s aircraft, including its pilots, for a weekend college visit; (3) collects fuel costs from a passenger to ride along on the owner/sole member’s ski trip; or (4) flies several golfers to a location for a business meeting but charges passengers non-pro-rata shares of the operating costs.
Some owner/members don’t realize they have created a flight department company or that the normal functions of the company violate the FARs. Others who do know or receive good advice from aviation counsel about the prohibition under the FARs simply ignore or refuse to obey the rules.
I have heard of comments such as: “I have been running the airplane reimbursements and flights through my LLC for many years without any issues and don’t plan to change;” or “My friend has used his LLC to operate his aircraft without any FAA problems;” or “The LLC ownership is a good way to block personal liability, and these rules won’t be a problem for me or my company.”
These Illegal charter operators should appreciate that, in addition to the FAA’s own increased enforcement actions, the FAA has powerful industry allies like the National Air Transport Association (NATA), including NATA’s Air Charter Committee, and the NBAA. NATA’s website, titled Avoid Illegal Charter, provides significant resources to explain illegal charter operations and educate consumers, among others, on the dangers of illegal charter operations. NATA also helps the FAA focus enforcement actions against illegal charter operations while promoting the Illegal Charter Hotline, (888) 759-3581, so anyone can report illegal charter operators.
Aircraft owners and operators can significantly mitigate their risks by asking knowledgeable aviation counsel to conduct a compliance checkup. In completing this task, aviation counsel can confirm that the LLC ownership structure and operations comply with the FARs or, if not, restructure the LLC and/or operations to bring them into compliance.
In addition, counsel should examine the structuring of the LLC under state law to maximize the protection of the members with special attention on the exposure of a single member in LLCs.
Imposing Personal Liability for Illegal Charters
The best structured LLC may not be enough to protect its members from personal liability arising out of illegal charter operations. If members believe the FAA won’t find them, they should take heed; the FAA and the business aviation industry have intensified their scrutiny of, and the FAA has ramped up civil and criminal enforcement actions against, illegal charter operations. For more, see my blog titled AINsight: FAA Actively Pursues Illegal Flight Ops.
Owners who believe insurance will cover them regardless of violations should think again. Insurance policies will likely not cover civil or criminal penalties assessed by the FAA or other governmental agencies. Further, as underwriters continue to increase insurance premiums to curb their losses on claims payouts, they also may reserve rights not to insure a non-compliant charter business or flight department company or their members. They may also look for policy provisions, such as warranties and coverage exclusions, to deny policy claims involving illegal charter operations.
Pursuing Assets of LLC Members for Illegal Charters
As occurs in all aircraft accidents, the FAA and the National Transportation Safety Board (NTSB) launch investigations into the cause(s) of the accident and regulatory aspects of the flight operation associated with the occurrence. If the FAA imposes civil penalties on the LLC or its members exceeding $50,000, the DOJ enters the fray to enforce those civil penalties under FAA Order 2150.3C. And, as noted above, most families file lawsuits against aircraft owners, operators, and others to secure compensation for their losses.
Even if insurers defend the insured, violators can still expect to pay significant legal fees in the defense of the claims or FAA/DOJ actions. A recent Texas case may provide the FAA and DOJ with an additional tool for assessing civil penalties directly against the LLC members; in other words, they allow the FAA and DOJ to pierce the LLC shield that prevents members from incurring personal liability for the LLC’s debts, obligations, and liabilities.
My blog, titled AINsight: Piercing the Aircraft LLC Veil, discussed a 2018 Texas Supreme Court case, Texas v. Morello, in which a Texas water agency sued the sole member-employee of an LLC and the LLC for their failure to comply with an environmental clean-up plan relating to the Texas Water Code. The agency imposed punitive damages and fines on the member for approximately $1 million. After my blog published, Mr. Morello asked the U.S. Supreme Court to hear his argument that the Texas agency did not justify the fines imposed on him personally, thereby piercing the LLC shield. On November 19, 2018, the U.S. Supreme Court refused to hear Mr. Morello’s case.
Given the U.S. Supreme Court decision, the FAA, the DOJ, and other regulatory agencies could use Morello as a legal basis to tap into personal assets of LLC members to pay for civil penalties as happened to Mr. Morello in Texas. Private claimants might also use Morello to sue members based on legal concepts of negligence per se (liability for violations of statutes and regulations that cause harm), reckless disregard for passenger safety or other similar theories of liability under the state laws that govern the case.
The objective is the same in all cases – to pierce the LLC shield and collect money damages from individual members. As a Texas state case, Morello may not be a game-changer nationally. However, the FAA and DOJcould potentially use Morello to impose personal liability of members for illegal charter operations, especially when the members flagrantly, expansively and continuously disregard the FARs.
In conclusion, flight department companies and other illegal charter operators should promptly change course to comply with Part 91, Part 119 and Part 135. The idea is simple: Get certified for charter operations and play by the rules. If they fail to do so, members and their companies not only undermine the regulatory framework designed by the FAA to ensure safety in aviation but also snub the business aviation industry, which expects all operators to do what is right.
This article was originally published on AINonline on July 12, 2019.
FAA Plans To Modernize Its Outdated Civil Aviation Registry Systems, but Key Decisions and Challenges RemainFAA Plans To Modernize Its Outdated Civil Aviation Registry Systems, but Key Decisions and Challenge see more
FAA plans to modernize its outdated Civil Aviation Registry Systems, but key decisions and challenges remain.
Requested by the Chairman of the House Transportation and Infrastructure Committee and its Subcommittee on Aviation and the Chairman of the Senate Committee on Commerce, Science, and Transportation
Federal Aviation Administration | AV2019052 | May 8, 2019
What We Looked At
The Civil Aviation Registry (The Registry) processes and maintains ownership information on approximately 300,000 private and commercial aircraft and records on almost 1.5 million airmen. The Registry is critical for ensuring aircraft are legally owned, maintained, and operated, and many users in law enforcement, safety, the aviation industry, and the public rely on the accuracy and timeliness of its data. The Chairman of the House Transportation and Infrastructure Committee and its Subcommittee on Aviation requested that we assess FAA’s overall management of the Registry and public access to certain Registry elements. We received a similar request from the Chairman of the Senate Committee on Commerce, Science, and Transportation. Our audit objective was to assess FAA’s management of the Civil Aviation Registry. Specifically, we assessed FAA’s
(1) progress in modernizing the Registry and (2) policies for providing public access to Registry-related activities.
What We Found
The Registry’s systems are outdated, and FAA has yet to develop a detailed plan for modernization. The Registry’s current systems cannot support online access outside of the Registry’s offices in Oklahoma City, OK. While FAA is in the early stages of developing plans to modernize the Registry’s systems, the Agency has not yet made key decisions regarding the system. Consequently, the cost and timeframes for Registry modernization remain uncertain, even though FAA is mandated to complete Registry upgrades by October 2021. In addition, the regulations that govern aircraft registration do not reflect current technology or business practices, and FAA will likely need to conduct a rulemaking in conjunction with Registry modernization. If FAA does not complete the rulemaking in coordination with the development of the new system, the Agency risks spending resources on a system that lacks key capabilities.
Due to the current system’s limitations, users who need to access aircraft registration information in real time must access the system through the use of Government-owned computer terminals located at the Registry’s Public Documents Room (PDR) in Oklahoma City. For users who cannot or do not want to travel to Oklahoma City, they can obtain aircraft information online, but that information is updated once a day, rather than in real time. Moving towards a more efficient process hinges on modernizing the Registry, but FAA has not yet developed a plan for allowing real-time access to aircraft information.
FAA concurred with all four of our recommendations and proposed appropriate actions and completion dates.
All OIG audit reports are available on our website at www.oig.dot.gov.
For inquiries about this report, please contact our Office of Congressional and External Affairs at (202) 366-8751.
Click here to read the full report.
This report was originally published by the U.S. Department of Transportation, Office of the Inspector General on May 8, 2019.
Private Aviation Case Study: Transitioning from a Business to Personal Fractional Share see more NAFA member, H. Lee Rohde, III, President and CEO of Essex Aviation, shares a private aviation case study.
As a privately held, family-run company with a substantial global footprint, the client had realized some time ago that relying on commercial airlines was an impractical way to conduct business.
For more than 15 years, the family-run business enjoyed the benefits of fractional aircraft shares for their business travel requirements. They started with a small executive aircraft, which made business travel so efficient that they found themselves increasing their fractional shares. With four family members utilizing the aircraft, 75% of their fractional ownership travel hours went towards business while the remaining 25% was spent on personal use.The Challenge
In 2017, the family sold their business to a group of investment companies. While they no longer needed to travel for business, the family decided they would like to continue flying privately for their personal needs. As part of the acquisition of the business, the buyers also purchased the fractional share the company owned as part of the transaction.
Although the family had a decade-long relationship with their fractional provider for business use, transitioning to personal fractional share required a different strategy to meet their future travel requirements.The Solution
The family’s attorney recommended they consult with Essex Aviation to evaluate their options. As a qualified aviation consulting firm, Essex performed a full analysis of the transition, which included:
- Identifying the type of aircraft that would satisfy their aviation needs.
- Determining any potential conflicts in scheduling.
- Helping the family understand the financial benefits of each option.
The family worked with Essex to review the options available from their then current fractional provider and also received proposals from other providers. Essex worked with the family to review and identify their best options and, for a variety of reasons selected, to go with a new provider.
The family started with a 75-hour fractional share which they leased and later transitioned into a 150-hour share per year to accommodate their increased personal travel requirements.
Essex was able to use their expertise and industry knowledge to perform an initial evaluation and holistic review of all the available options for the family. They also assisted the client with navigating through all of the necessary negotiations and final contract process.
Essex continues to provide thorough aviation consulting services to assist the family whenever they need to add more hours to their contract, explore new options or negotiate the most practical solution.
To download the full case study, click here.
This case study was originally published on Essex Aviation's blog.
What to Consider When Selecting Your Aircraft Management Company see more
NAFA member, Tom Mitchell, Executive Vice President of Essex Aviation Group, Inc. highlights what to consider when selecting your aircraft management company.
When acquiring your first aircraft, one of your first decisions will be how the aircraft will be managed and operated. Some owners opt to run their own flight department, but many seek out a third-party aviation management company. These companies have decades of experience managing aircraft of all types and sizes and their purpose is to make your ownership as seamless as possible.
When considering the various management company options available, you can be certain that they are all quite different as to what they can offer. Depending upon your specific needs and requirements, you will find many of the options may not be the best fit for your specific needs and requirements.
Types of Aviation Management Companies
In the private aircraft management industry, there are three (3) primary types of aircraft management companies:
Within each category are differences in the scope of resources offered, and several factors should be considered and evaluated to determine which type of organization is best for your needs. Always assess each management company’s safety culture, research their incident and accident history and learn about and understand their operational experience and reputation.
Aircraft Management Services
Although every aircraft management company offers different management services, there are certain basic services you should expect to receive such as crew recruitment, accounting, flight coordination, and a well-organized charter department. We recommend that clients who are evaluating a management company consider the following:
Things to look for: Make sure you understand the aircraft management company’s key operations, maintenance, crew management and administrative functions. All of these factors will directly impact your relationship with the company and your use of the aircraft.
Also, keep in mind the geographic location where you intend to base your aircraft. Some aircraft management companies may base all the aircraft they manage at one central location requiring that your aircraft be positioned to your desired departure airport for your trips or for maintenance. Other management companies are able to support your aircraft based at any airport you choose that supports your aircraft’s operational requirements.
Your Requirements for an Aircraft Management Company
A good first step is to outline and prioritize your goals as a private aircraft owner, in order to define what would make an ideal relationship. Be sure to allow sufficient time to review and receive proposals from a range of aircraft management companies and compare their differences. If you begin the selection process with an honest self-assessment, the relationship you build with your aviation management company will be that much better.
Things to look for: Chartering your aircraft to third parties can be a way to generate revenue when you aren’t using your aircraft. If you plan to charter, there are many things you’ll require from your aircraft management company. First and foremost, make sure your management company can operate your aircraft under their own Federal Aviation Regulation (FAR) Part 135 charter certificate.
Allowing your aircraft to be utilized for third-party charter can generate revenue to reduce the owner’s overall operating costs and can also make your aircraft attractive to outside aviation management companies. You should, however, not get false hopes about covering your overall operating costs. “There’s almost never a break-even point,” said Kyle Slover, COO of Volo Aviation “The better way to think of it is, ‘what does it do to my (the owner’s) occupied hourly rate?’ Discuss with your management provider what the financial metrics are that you are trying to reach.”
If internal or third-party Part 135 charter is one of your goals it is prudent to engage the assistance of an independent and knowledgeable industry consultant or advisor to facilitate the ownership structure.
Private aircraft management companies of varying sizes will provide certain advantages and limitations when it comes to chartering. Regardless of who you choose, you’ll want to be sure they’re equipped to handle all aspects of chartering and aviation management.
- Supporting varying flight destinations and times of travel
- Managing all ground services, details and security
- Negotiating discounts on your behalf
As you make your final selection, be sure to choose a private aircraft management company that can meet not only your current but also your future needs. Whichever company you choose, you can and should expect it to partner with you to meet your travel needs, your budget and any charter revenue requirements.
What you should know about using 100% bonus depreciation for private aircraft. see more
Deducting the price tag of a private aircraft under the new 100 percent bonus depreciation rules is an intriguing idea, but it takes some effort. Planned correctly, a prospective aircraft owner can pocket a meaningful amount of cash related to purchasing almost any size and model of aircraft, whether new or pre-owned, including a fractional share of an aircraft.
Knowing About the Source of the Depreciation Benefit
The 100 percent bonus depreciation benefit arises under the Tax Cuts and Jobs Act of 2017, H.R. 1, enacted on Dec. 22, 2017, (the Act), and is now integrated into the Internal Revenue Code (IRC). The Act temporarily allows 100 percent bonus depreciation starting Sept. 27, 2017, and ending Dec. 31, 2022. Bonus depreciation will then phase down 20 percent per year for five years to a zero bonus. The IRS issued proposed regulations for 100 percent bonus depreciation on Aug. 8, 2018. When final, the regulations should help provide some clarity around certain ambiguous provisions in the Act.
Understanding Depreciation for Business Aircraft
Depreciation is an allowance Congress enacted to encourage businesses to purchase tangible personal property, including private aircraft. Depreciation allowances provide that business taxpayers may claim an annual tax deduction to recover the cost or other tax “basis” (adjusted cost) of the property for its wear and tear, deterioration or obsolescence.
Aircraft owners can depreciate an aircraft’s cost or other basis by using the straight-line depreciation method under the Alternative Depreciation System (ADS) or by using the Modified Accelerated Cost Recovery System (MACRS). MACRS is used to recover the cost or other basis of most business and investment property and recovers the cost of eligible property faster than under the straight-line method.
Straight-line depreciation divides up the aircraft cost or other basis in equal parts each year during the prescribed write-off period (called the “recovery period”) of the aircraft until the aircraft has been fully depreciated. The primary use of the aircraft determines the applicable recovery period.
For an aircraft used only by the owner privately, the recovery period is six years under the ADS compared to five years for aircraft and certain helicopters under MACRS. For commercial use aircraft, including aircraft used to fly charters, the recovery period is 12 years under the ADS compared to seven years under MACRS.
An aircraft that qualifies for MACRS should be eligible for 100 percent bonus depreciation in the year in which the taxpayer places the aircraft in service. Even if the aircraft is eligible for 100 percent bonus depreciation, the aircraft owner can still elect straight-line depreciation under the ADS, regular accelerated MACRS according to a schedule prescribed by the IRC (excluding the “bonus”), and 50 percent bonus depreciation – but only for aircraft acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018. The increase to 100 percent bonus depreciation applies to property placed in service after Sept. 27, 2017.
Qualifying for Bonus Depreciation
The IRC imposes certain requirements on private aircraft use to qualify for MACRS and, by extension, 100 percent bonus depreciation. The IRC includes private aircraft in a special category called “listed property” along with certain other property, like vehicles and computers, that an owner can use personally and for business. To qualify for 100 percent bonus depreciation, the owner must “predominantly” operate the aircraft in “qualified business use.”
Predominant use is a critical element that refers to using the aircraft 50 percent or more of flight time. Qualified business use, in general, refers to the aircraft owner (an entity or individual) flying its aircraft in a “trade or business.” Also a critical aspect of tax planning, “trade or business” generally refers to a business enterprise conducted regularly and continuously for income or profit – such as operating a manufacturing plant. The IRC establishes a complicated calculation to achieve the status of qualified business use, which merits careful analysis.
Among other requirements, the aircraft owner must not use the aircraft predominately outside the U.S. – an important restriction for large cabin aircraft that travel globally. Also, the owner must not have used the aircraft before acquiring it or acquire the aircraft from a related party, such as a family member.
Illustrating the Use and Loss of Eligibility for Bonus Depreciation
To illustrate one type of situation, consider that, in 2018 “Fast Food Co.” makes $5 million of ordinary income, which is reported on Form 1120S, an S-Corporation tax return. Fast Food Co. buys a $2 million aircraft in December 2018 to travel between multiple cities. Assuming the aircraft is eligible for 100 percent bonus depreciation, Fast Food Co. issues a federal tax Form K-1 to the sole owner/stockholder, who may then deduct $2 million on his tax return in 2019 for the 2018 tax year.
At a 37 percent tax rate (the highest individual tax rate under the Act), the owner can effectively reduce such taxable income by up to $2 million to a net taxable income of $3 million (not considering other tax deductions or taxes). The tax savings is approximately $740,000 cash in the owner’s pocket, thanks to 100 percent bonus depreciation ($2 million x 37 percent tax rate).
If the aircraft loses its eligibility for MACRS depreciation anytime during the aircraft ownership period, the IRS can apply “recapture” rules to add back to owner’s ordinary income an amount equal to the “excess depreciation” over straight-line depreciation. The add-back would occur in the year in which the aircraft use fails to qualify for MACRS.
At a 37 percent tax rate, the payback to the IRS on the $2 million write-off could be significant for the owner. The tax on the excess depreciation amounts to the difference between 100 percent depreciation of the cost or other basis taken in the first year and the much smaller write-off of approximately equal amounts over the aircraft recovery period between six years for private use and 12 years for commercial use (e.g., $2 million/six years = $333,333/year instead of $2 million in year one).
Using Aircraft for Entertainment and Other Personal Use
Despite planning for qualified business use, most aircraft fly for personal use reasons (e.g., entertainment, amusement or recreation). Owners cannot take depreciation deductions for the flight hours or miles devoted to such personal use, but some depreciation write-offs should remain available if the aircraft is still used predominantly for qualified business use. Aircraft owners must calculate the percentage of personal use relative to business use by noting the names of each person on board, the reason for the travel, the hours and miles of travel and other information.
These calculations determine the entertainment “disallowance” – a part of the cost or other basis of the aircraft that the owner cannot depreciate. Importantly, aircraft owners should be aware of a special rule in the IRC that minimizes the negative effect of the entertainment disallowance for owners who claim 100 percent bonus depreciation.
Planning for Use of 100 Percent Bonus Depreciation
Because each aircraft owner is likely to have a complex tax situation, each owner should engage knowledgeable tax advisors, typically an aviation tax accountant and lawyer, to propose the optimal tax plan. The advisors should analyze such factors as the taxpayer’s organizational structures (individual, S Corp, LLC or C Corp), types of qualified business use, tax rates and any net operating losses (NOLs), timing and types of income, potential for excess business losses affecting single and married taxpayers (new under the Act) and anticipated personal use of the aircraft. Ultimately, an owner’s best path may be to bypass MACRS or 100 percent bonus depreciation if the straight-line depreciation method produces a better tax result.
Further, each aircraft owner should (1) keep detailed flight and passenger records, (2) develop flight planning that conforms to the tax strategy involving the aircraft, and (3) plan for IRS challenges to flying fewer qualified business use hours than necessary to demonstrate predominant business use.
Claiming 100 Percent Bonus Depreciation in 2018
There is still enough time in 2018 to buy and place in service an aircraft or fractional share and take advantage of the 100 percent bonus depreciation. Bonus depreciation is especially valuable toward the end of the year because it’s not long thereafter until a taxpayer can file a federal income tax return and reduce its income by an amount up to the aircraft cost or other basis. However, with 100 percent bonus depreciation available until 2023, it is strongly advisable to choose an aircraft wisely rather than rush to buy the wrong aircraft just so a taxpayer can take the tax deduction in 2018.
Bonus depreciation has generated wide interest in purchasing new or pre-owned private aircraft and fractional shares. Although these purchases take time and planning to close, prospective aircraft owners understand that there is no time like the present to help boost the economy and take flight in a fully depreciated aircraft.
This article was originally posted in Money, Inc. Magazine on October 29, 2018.
The Importance of Consent and Joinder Language in Aircraft Purchase Agreements see more
NAFA member, Debbie Mercer-Erwin of Wright Brothers Aircraft Title discusses the importance of consent and joinder language in aircraft purchase agreements.
In the 15+ years we’ve been in business, we have witnessed the good, the bad, and the ugly when it comes to private aircraft purchases and sales. Whenever possible, we like to share experiences with our customers and readers to prevent you from having an unpleasant transaction.
Prior to preparing a sales agreement, there will be an offer letter. While the terms of the offer letter are not binding, pay close attention as it does represent a commitment and is often used to draw up the sales agreement. The terms of a sales agreement are binding barring a legal reason for being enforceable. It’s important that you understand what is and what is not included. Most likely, buyers and sellers are having agreements drawn up by professionals, but it is still prudent to understand what you’re signing. Surely this sounds like common sense, but it’s worth pointing out.
Before you find yourself preparing for an aircraft closing – either as a buyer or seller – we’d like to help you understand the intricacies of aircraft purchase agreements; in particular, the importance of including Consent and Joinder language.
What is the purpose of a purchase agreement?
A purchase agreement outlines the terms and conditions of the sale. It lets the seller know that you are serious about purchasing the aircraft, and if it meets all the requirements of the agreement (it’s everything it’s represented to be), the aircraft should not be sold to someone else during this time. To protect you from the unforeseen, a buyer should be sure that the deposit given when the purchase agreement is signed is refundable or the trigger for nonrefundable treatment of the deposit.
Whichever party you are in the transaction, understand that the terms are negotiable. Do not agree to or sign anything that makes you uncomfortable. Even if a contract format has worked numerous times in the past, that doesn’t mean it contends with the specific terms and conditions of the current transaction in which you are involved. What has worked in the past could be a trap for the unwary in the present. Don’t sign a contract until it’s revised to meet your needs.
Sales and Purchase problems
Consider this possible scenario without clarity as to the deposit in a purchase agreement:
A buyer puts money in escrow as a deposit on an aircraft. At this point, there are no rules guiding what the escrow agent is supposed to do with the buyer’s funds, because the escrow agent has not been made a party to the agreement.
The buyer changes his mind and decides he doesn’t want to make the purchase. He asks for his money back. Because the escrow agent who is holding the funds is not a party to any of the agreements that exist, there is no clear obligation to anyone except for the depositor of the funds.
When there’s an aircraft purchase agreement, it is often a trigger that obligates the purchaser and makes the deposit nonrefundable. Otherwise there is no direction to an escrow company that says the funds are nonrefundable.
Consent and Joinder language in a sales agreement will help guide an escrow company. It would then be up to a court to determine who gets the deposit money through an interpleader action.
Avoid Problems with Consent and Joinder Language
When aircraft purchase agreements are written or put together by either the legal counsel or the sellers or the buyers, they should include what is known as Consent and Joinder by escrow agent so that they become a party to the agreement.
If you don’t take the time to include this information, you could find yourself in an unexpected situation.
- Under what circumstances does the deposit become nonrefundable?
- What is the seller responsible for with regard to the condition of the aircraft?
- What is each party responsible to do prior to closing?
At minimum, Consent and Joinder language included in your purchase agreement should include the following:
- The Escrow Agent accepts appointment by the Purchaser and Seller hereby as document holder and stakeholder for the sale and purchase of the Aircraft
- The Escrow Agent is acting as a document holder and stakeholder only
- They are not the agent or trustee for either of the parties
- They are not liable to either of the parties for any act or omission unless it involves willful misconduct or negligence on its part.
- The deposit is held exclusively for the sale of the aircraft based on the terms of the Agreement only
These observations are merely points to consider and should not be construed as legal advice or guidance to take or refrain from a particular position. As we discussed in our blog, Can’t I Handle my own Aircraft Closing, parties to an aircraft transaction should seek the advice of legal counsel.
This article was originally published in Wright Brothers Aircraft Title Blog on July 23, 2018.
Private Aircraft Ownership - A More Productive Method of Business Travel. see more
NAFA member, PNC Aviation Finance shares the advantages of private aircraft ownership.
Private aircraft ownership can often invoke images of celebrities jet-setting to exotic locations around the world. In reality, purchasing a private aircraft can save money and offer enhanced opportunities for corporations and businesses owned by high-net-worth individuals.
High-net-worth individuals and corporate executives want to save time and travel quickly to conduct business.
Private and business aircraft ownership can have a positive impact by allowing executives to set their own schedules and grow their business without being at the mercy of commercial airlines. This advantage can save money and could potentially offset the cost of the private aircraft in terms of cost savings, the ability to generate additional business and enhanced travel opportunities.
Rather than viewing the ownership of a private aircraft simply as an expense, in the right situation, it might actually provide a competitive advantage.
Access to Underserved or Remote Locations
The ability to access locations that are “off the beaten track" and not adequately served by regular commercial airline service can be a key advantage of using private aircraft. If your company does business in these types of locations, using a private aircraft can save time wasted in airports, changing flights and renting a car to drive to your ultimate destination.
If restricted to commercial schedules, it may be difficult to justify visiting prospects, clients or company locations in these areas on a frequent basis. This can negatively impact your business and affect potential growth opportunities.
Privacy and productivity
On a private aircraft, business can continue without the presence of strangers sitting in the next seat. This appeals to high-net-worth individuals who have privacy and security concerns that can't be guaranteed on commercial flights and at bustling airports.
In some business situations, executives want to ensure their privacy if they are traveling to a sensitive business meeting involving a confidential transaction, such as a potential acquisition or opportunity with a potential new customer.
A private aircraft offers an environment conducive for working, conducting meetings with other employees or business associates who are also on the flight or transacting business via phone during flight. This additional productivity can be invaluable as preparation can enhance the chances for success in any business situation.
For business executives, the cost of the flight and related expenses to maintain the aircraft can be more than offset by the convenience of being able to fly to a meeting on your own schedule. Sometimes, just showing up can be what it takes to land a new customer.
Tax Advantages and Issues
Purchasing a private aircraft can offer tax advantages, but this acquisition can be more complex than buying a piece of capital equipment or real estate.
A key issue is the ability to justify that a private aircraft is an ordinary and necessary business expense and not just a luxury or convenience purchase.
If an argument can be made that business is normally conducted in locations that have limited or no commercial service, a private aircraft is easier to justify. It can also apply if travel often occurs at the spur of the moment or at irregular times.
Using a private aircraft to address legitimate privacy and security concerns for executives and employees can be another justification.
There can be a number of taxes, such as potential sales and use taxes, associated with private aircraft ownership, one being how the aircraft is owned. Ownership by a separate entity other than the main operating business can lead to tax implications.
Before purchasing a private aircraft, it is wise to have your tax and legal advisers conduct a thorough review in terms of the best ownership structure and the anticipated usage to ensure the best possible tax outcome.
Additionally, there are distinct rules regarding the separation of business and personal use of the aircraft. This can extend to personal use as a perk for employees and even in the case of a spouse flying on an executive plane without a business purpose.
It's important to establish rules for usage and to account for travel using a consistent process that meets both internal and external reporting requirements.
The diligent maintenance of usage records and the reason for each passenger being on each flight is critically important.
If properly structured and used, the cost of private aircraft ownership can be partially offset by tax benefits that can reduce the cost of ownership.
We Can Help
PNC Aviation Finance offers knowledgeable financing solutions to make private aircraft ownership possible and affordable.
We offer custom-tailored financing packages based on business needs and circumstances. Our experienced aviation finance team understands and has extensive knowledge regarding private aircraft ownership requirements, FAA, insurance, operating leases, etc.
We can help you look at the implications of each option and help you decide on the best option for you or your business.
Learn how PNC Aviation Finance can help you fly higher by visiting pnc.com/aviation.
This article was originally published by PNC Aviation Finance.