JULY / AUGUST 2018
KPIs on the Prize Measuring service objectively
SPOTLIGHTING CHARTER CHEATERS BOOMING BUSINESS NEW LINE ON RV FORECASTING SUDDEN DEARTH ACCESS WITHOUT EXCESS LIEN ON ME A Business Aviation Media, Inc. Publication
W W W . B I Z AVA D V I S O R . C O M
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F E AT U R E S
KPIs on the Prize 06 Measuring service objectively
• Volume 5 / I s sue 4
by D ON H E N D E RSON
Booming Business 08 The demand for supersonic transport is speeding up
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Access Without Excess
by J OHN OW E N
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Lien On Me
by A DA M M E R E D ITH
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Ride sharing takes to the skies
When only one partner wants a loan
by BA A S TAFF R E P OR T
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New Line on RV Forecasting
Predicting your aircraft’s residual value
Publisher’s Message 05 Changing Times
by ANTHONY K IOUS S IS
by G IL WOLIN
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Sudden Dearth
Six steps to solving the staffing shortage
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Washington Report
by E L AIN E L AP OTOS K Y
by DAVI D COLLOG AN
D E PA R T M E N T S
Spotlighting Charter Cheaters
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2018 WEBINAR SERIES The Information You Need, From Experts You Can Trust
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Ju l y/A u g u s t 2 018 B U S I N E S S AV I AT I O N A DV I S O R 3
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PUBLISHER’S MESSAGE ■ PUBLISHER Gil Wolin gwolin@bizavadvisor.com CRE ATIVE DIRECTOR Raymond F. Ringston rringston@bizavadvisor.com MANAGING EDITOR G.R. Shapiro gshapiro@bizavadvisor.com ASSISTANT EDITOR Michael B. Murphy mmurphy@bizavadvisor.com WASHINGTON EDITOR David Collogan dlcollogan@gmail.com CONTRIBUTORS Don Henderson The VanAllen Group dhenderson@vanallen.com Anthony Kioussis Asset Insight, Inc. akioussis@assetinsight.com Elaine Lapotosky Jet Professionals elaine.lapotosky@jet-professionals.com Adam Meredith AOPA Aviation Finance adam.meredith@aopafinance.com John Owen Executive AirShare jowen@execairshare.com BUSINESS MANAGER JoAnn O’Keefe jokeefe@bizavadvisor.com BUSINESS AVIATION MEDIA , INC . PO Box 5512 • Wayland, MA 01778 Tel: (800) 655-8496 • Fax: (508) 499-2172 info@bizavadvisor.com www.bizavadvisor.com Editorial contributions should be addressed to: Business Aviation Advisor, PO Box 5512, Wayland, MA 01778, and must be accompanied by return postage. Publisher assumes no responsibility for safety of artwork, photographs, or manuscripts. Permissions: Material in this publication may not be reproduced, stored in a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the prior written permission of the publisher.
Changing Times After a decade of the doldrums, business aviation is breathing a collective sigh of relief. Flight activity continues to rise, month-over-month. According to Argus, turbine aircraft activity in May 2018 was up 4.2% over April, and up 2.2% over May 2017. Argus believes this trend will continue, and projected a 1.9% increase in Part 91 and Part 135 flying for June. The preowned aircraft inventory for sale continues to drop as well. JETNET reports that in March, only 9.3% of the world’s 21,607 business jets and 6.9% of the 15,337 turboprops are currently listed for sale. That’s down almost 2% for jets and 1% for turboprops from a year ago – and down almost half from the preowned inventory peak of 17% in 2009. JETNET iQ recently surveyed more than 450 aircraft owners, and some 70% believe that the current business turbine market is now past its low point. And JP Morgan Chase reported that average turbine aircraft prices also have firmed, rising by 1.5% in April over March. The economy is humming. Unemployment is at an 18-year low, corporate investment is picking up steam, and consumer spending shows signs of rebounding. Many economists think the U.S economy could grow at a nearly 5% annualized rate during this quarter. Yet not a day goes by when my inbox isn’t flooded with “priced reduced” and “make an offer” deals on turbine aircraft listed by brokers throughout the world. These are not thirty-year-old “straight-pipe” turbojets, but rather late-model, well-maintained aircraft of all shapes and sizes. Perhaps these owners are “trading up,” or purchasing a replacement aircraft to take advantage of the new U.S. tax laws (see “Capitalizing On The TCJA,” BAA May/June 2018). And a recent article in the NY Post entitled “More and More Companies Are Dumping Their Corporate Jets,” describes activist investors pressuring some public companies to sell their aircraft, among them JCPenny and Rent-A-Center, with GE and Athena Health also considering such a move. Several years ago, one of my largest charter client companies flew more than 200 hours annually aboard our jet fleet. The company had made a strategic decision not to purchase an aircraft. As the CEO described it, some investor inevitably asked whether the company owned a jet. Using charter enabled him to say “no,” satisfying the investor and still maintaining the competitive edge that business aircraft travel provides. We may never see new turbine aircraft sales hit the pre-2008 peak of 1,317 new deliveries – 700 seems to be the new industry normal. But the signs are good, and your investment in business aviation once again will pay dividends in both asset value and travel time saved.
The views and opinions expressed in Business Aviation Advisor are those of the authors and advertisers, and do not necessarily reflect the policy or position of Business Aviation Media, Inc. Articles presented in this publication are for general information and educational purposes and do not constitute legal or financial advice. Postmaster: Please send address changes to: Business Aviation Media, Inc., PO Box 5512 • Wayland, MA 01778, USA ©Copyright 2018 by Business Aviation Media, Inc. All rights reserved
Gil Wolin — Publisher gwolin@bizavadvisor.com
Printed in the USA Ju l y/A u g u s t 2 018 B U S I N E S S AV I AT I O N A DV I S O R 5
■ FLIGHT OPERATIONS
KPIs on the Prize Measuring Service Objectively
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ne of the tasks of Aviation Team leaders is to develop “metrics” or “KPIs” (Key Performance Indicators) for their operation. Often, they create complex methods of tracking average fuel price, hours flown, and passenger loads. But when asked, “How do you track your customer service experience?” they may answer with another question: “What do you mean?” or “How could we measure something so subjective?” What you seek is the confidence that your crew understands and therefore can deliver a “consistent customer experience” to you and your executives, one that meets your travel requirements every time you fly. So you must communicate those requirements precisely to your crew, to ensure that your aviation department can reliably repeat top level performance, flight after flight. That consistency of service also helps assure you that your team has risk management discipline throughout the operation. This is even more critical if you have multiple crews; standardized discipline on the flight deck avoids customer experiences that differ depending on who is flying. 6 B U S I N E S S AV I AT I O N A DV I S O R
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Step 1: Define Your Expectations
“Aim at nothing and you’ll hit it every time.” – Zig Ziglar. You can’t measure performance when you don’t know your target. The first element of developing customer service metrics is establishing your Service Standards. The most effective method of doing so is to simply sit down and communicate your expectations to your Aviation Team. Just as your team depends on operations manuals that articulate when an aircraft must be powered and ready for passenger arrival, so too is it important to document the key elements of the customer service experience. Expectations might include: ■■ Schedule: When do you expect your crew to be on call? What is your expected minimum response time from phone call to wheels up? 60 minutes? 120 minutes? ■■ Supplemental Lift: When your aircraft is down for maintenance, what arrangements do you expect the crew to make for your substitute transportation? ■■ Extended Stays: When you stay at a destination for an extended period, do you expect your crew to remain onsite throughout your trip? If you make your aircraft available for charter, must they be available to fly revenue trips? w w w. B i z AvA d v i s o r. c o m
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BY DON HENDERSON The VanAllen Group / dhenderson@vanallen.com
“own?” Airport to airport? Office to office to include ground transportation and/or hotels? ■■ Division of duties: Who is to be responsible for each component of the passenger experience? If you are struggling to identify these key elements, send two or three of your non-flight crew aviation team members on a trip. Ask them to document all the details they notice – from the initial trip alert to passenger ground departure arrangements upon return – that have an impact on the comfort and convenience of their trip. Determining these standards also may require reaching out to your most frequent passengers, or others who support you and your passengers. These might include executive assistants, house managers, drivers, security professionals, and other executives. Ask them for their observations and suggestions for areas of improvement.
Step 2: Train to Your Standards
As you define your standards, offer your Aviation Team the right amount of guidance. Without such guidelines, a technically superior aviation team recently lost significant trust and credibility with their executives when they tried to provide the ultimate in customer experience (the “best of everything”) in a corporation whose cultural value is “No Privilege with Position.” Aviation customer service standards must stay between two guardrails: aligned with the larger corporate culture, and consistent in style and execution as similar functions within the company. Practice makes perfect. Like any other procedure performed by your Aviation Team, service standards should be taught, reviewed, and practiced to ensure consistency and compliance. How will you orient new team members to your standards? If you don’t have a dedicated training officer, perhaps you can draw upon resources within the larger organization, or hire a consultant within or outside aviation. Experiential training and benchmarking can have a great impact. If your organization hosts regular Board meetings, have your Aviation Team be a part of the planning committee. Working with the committee to develop these meetings can provide insights which enhance the aviation service standards. And the Aviation Team may provide a valuable perspective to the committee.
Step 3: Develop Your KPIs
Just as your Safety (Risk) Goals for the Aviation Team tend to be behaviorally based, so too are your customer service standards. On the wall of the scheduling department for an operator that regularly flies a large aircraft internationally is a sign in large black letters: “Days Since Last Error,” and under that, in red dry erase marker: “110.” Their aircraft owner is very sensitive to accuracy of trip information (ground arrangements, trip details, etc.) and the scheduling department found this to be a useful motivational tool. While perhaps more draconian than most Aviation Teams might adopt, it’s an example of great customer service metrics: simple, measurable, and specific. w w w. B i z AvA d v i s o r. c o m
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■■ Scope: How much of the passenger experience does your crew
Start with simple metrics based on the key customer service behaviors you’ve identified as critical. For example: ■■ All pre-departure activities completed by 30 minutes before scheduled departure. ■■ Accurate and complete passenger itinerary sent 24 hours before departure. ■■ Passengers addressed by name by all staff at all times. ■■ Aircraft vacuumed after each landing. Occasionally, Aviation Teams use a customer feedback form or survey process. Surveys may generate reportable metrics if the questions are sufficiently specific, but often the frame of reference between individual survey participants is not consistent. For example, your most valued client and frequent passenger may expect different standards than does your junior manager. Surveys are valuable only when they measure against your defined service standards.
Step 4: Review and Refine
Consider instituting a system to track and document customer service “misses” and failures. This system is no different than the one your crew uses to document a missed cockpit checklist or breakdown in operational procedure. Create the discipline to review and share these as a team. Update your Service Standards and procedures as needed. While these misses and failures are not an operational risk, customer service mishaps are a brand and trust risk for the Aviation Team. The best monitors for customer service are you and your own team members. Consider auditing your own Service Standards. You might invite each scheduler, maintenance technician, and pilot to ride on a trip, empty leg, or maintenance positioning flight as a passenger. During this observation flight, each can document the service experience and provide coaching and feedback to the rest of the crew and Aviation Team. These audit results can be recorded and used as a metric. The only successful customer service metrics are those that align with your own expectations. Sharing these metrics or having them visible to your passengers will show that your team is paying attention to their needs. More importantly, confidence in the Aviation Team will grow. BAA DON HENDERSON is Managing Director, Consulting
Services, The VanAllen Group. Responsible for consulting activities from the C-Suite to the hangar floor, he helps Aviation Leaders and Teams become an integral part of the larger enterprise.
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■ INDUSTRY UPDATE
Booming Business The Demand for Supersonic Transport is Speeding Up
ince the retirement of the Concorde in 2003, aircraft manufacturers have invested relatively little in new supersonic technologies, despite the obvious reductions in point-topoint flight times. While Gulfstream, Lockheed Martin, NASA, and others are doing interesting work in the area of mitigating sonic boom, this technology is far from mature. To date, no established original equipment manufacturer is producing an aircraft based on a low-boom design. The largest hurdle for civilian supersonic jets is not sonic boom mitigation, but meeting stringent airport noise standards during takeoff and landing — a concern voiced by airport neighbors ever since the first business jets took flight. Those first aircraft entered service more than 50 years ago, and were as noisy as military fighters. By the early 1970s, the FAA and other agencies mandated lower noise standards for jet aircraft: standards the Concorde couldn’t meet. There is no single sonic boom that occurs when a jet reaches the speed of sound. Rather, as the aircraft flies faster than Mach 1, the sonic boom continues, but is heard only once as the jet flies over. A first generation supersonic jet like the Concorde can operate at low supersonic speeds (up to about Mach 1.2) overland without a boom heard on the ground, and up to Mach 1.5 over water. Moreover, it can meet current airport noise requirements. Newer designs may incorporate boom mitigation technology to allow unfettered cruise over land at speeds up to Mach 1.6 and beyond. So, will we ever fly supersonically again? Will you be able to reduce trans-Atlantic time by three hours, or longer trans-Pacific routes by six hours or more? Regulatory and technological hurdles remain high: ■■ The FAA prohibits flight at Mach 1 or above over land in the U.S. More liberal international rules dictate that no boom reaches the ground. But there is no single, worldwide standard as to how loud a supersonic boom can be, or the minimum altitude for supersonic flights. 8 B U S I N E S S AV I AT I O N A DV I S O R
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■■ The FAA and its foreign counterparts have lowered the noise
bar further for the newest aircraft. ■■ Aircraft wings optimal for subsonic travel and fuel consumption are not optimal for supersonic flight. ■■ High fuel consumption remains a challenge, despite improving aircraft aerodynamics. Solutions to these issues will not be quick or simultaneous. That said, market studies indicate a demand for 600 supersonic business jets in the next 20 years, even with the proviso that such aircraft would be restricted to subsonic speeds over land. That demand has prompted accelerated development of three new supersonic business jets: ■■ Aerion Corporation and GE Aviation are partnering with Lockheed Martin to develop the Aerion AS2, a supersonic business jet. First flights are planned for 2021, with a sale price of $120 million. ■■ Boston-based Spike Aerospace is developing the Spike S-512 Supersonic Business Jet, with a planned introduction by 2023. ■■ Denver-based Boom Technology is planning a supersonic aircraft test flight for 2019, with commercial flights in five years. Supersonic flight will increase users’ mobility exponentially – a transition comparable to that of piston-powered to jet aircraft. What are the advantages for you? The typical user of today’s long-range business jets could expect to save as many as 200 hours annually – time to reach more destinations, meet with more customers, confer more frequently with partners, and complete more deals. Supersonic speed can enable a major boost in executive productivity, and reduce travel-induced physical and mental stress. A first generation supersonic business jet, cruising at Mach 1.4, would shorten a San Francisco-to-Singapore trip from more than 17 hours to about 12 hours. Or enable a New York morning departure to Paris for a half-day meeting, with return home to New York that evening. The case is compelling, and the technology is within our grasp. Expect to see a faster future within a decade, and probably sooner. BAA w w w. B i z AvA d v i s o r. c o m
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■ AIRCRAFT FINANCE
New Line on RV Forecasting Predicting Your Aircraft’s Residual Value BY ANTHONY KIOUSSIS ince an aircraft is a depreciating capital asset, proper financial planning requires an accurate forecast of its anticipated Residual Value (RV) before acquisition. Residual Value forecasting historically has been viewed as a “best guess” – even by some aircraft appraisers. RV predictions used to be based on an aircraft model’s historical performance, but “past performance is not indicative of future results.” And while RVs historically have focused on a single, defined set of parameters for all makes and models of aircraft, the range of makes and models available for sale at any particular moment is continually changing. Each aircraft moves through its own life cycle, independent of events experienced by those of similar makes and models. RV forecasting today takes into account data for the specific aircraft under review, every serial number for the make/model under review, and other comparable models, plus the overall market. New Technology While traditional RV parameters simply “aged” all aircraft based on the market on the day of the projection, today’s technology can analyze a single aircraft in real time within the overall market. That evaluation now includes: ■■ Brand-specific desirability and demand, ■■ Changes in the cost of money and interest, ■■ Global economic factors, ■■ Anticipated “For Sale” market conditions and marketability, ■■ Market factors associated with aircraft availability and age. Residual Value calculation precision also has been improved through maintenance analytics, used to objectively grade the maintenance condition of a specific aircraft versus all comparable aircraft. Those analytics also can calculate the value of any Hourly Cost Maintenance Program enrollment, and the impact of that program on an aircraft’s current value. This is known as the projected “Maintenance Equity”: the funds remaining before scheduled maintenance is required. Finance and leasing companies still want to see the traditional RV trend line (usually presented as a straight-line graph). While this line’s accuracy has improved, more institutions want to see the actual RV line, usually a jagged line that also accounts for Maintenance Equity. Computing speed and advanced modeling techniques enable ongoing, simultaneous Maintenance Equity analyses of all comparable aircraft, thereby placing any one aircraft’s forecasted RV in context relative to that of comparable makes and models currently on the market. In the case of operating leases, many lessors purchase Residual Value Insurance (RVI) to minimize their downside RV risk at lease 10 B U S I N E S S AV I AT I O N A DV I S O R
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termination, and lessees are required to return the asset under a predetermined set of “lease return provisions.” Owners also can purchase RVI, but they usually make an assumption as to what their aircraft will be worth when they sell or trade it. “Hoping” to achieve the assumed value is never a good strategy. What’s Next? RV accuracy will improve further where software programs reside on true Artificial Intelligence (AI) platforms, thanks to embedded algorithms – programs that learn from themselves, thereby becoming smarter as they process more data. As computing power increases, that learning capability will move exponentially with the growth of computing speed. The newest software programs have the ability to replicate analytical processes continually and exactly, eliminating subjectivity and introduction of human error. RV calculations for any individual aircraft don’t take into account changes to regional economic conditions, like the CPI, or the GDP. But they offer a good starting point from which to make additional projections based on economy-neutral, science-driven figures. What does this mean for you as you shop for your next aircraft? Improved RV forecasting provides a more exact assessment of your aircraft’s marketability. The greater the anticipated cost of required future maintenance, the lower the resale value of your aircraft – and the longer it could take to sell. By monitoring your RV carefully, you’ll have a more precise idea of the best time to sell or trade your aircraft. BAA ANTHONY KIOUSSIS is president of Asset Insight, LLC,
which offers eValues™, an online service providing Current and Residual aircraft valuations. With 40+ years in aviation, he serves on the National Aircraft Finance Association Board of Directors.
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Asset Insight, Inc. / akioussis@assetinsight.com
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■ FLIGHT OPERATIONS
Sudden Dearth Six Steps to Solving the Staffing Shortage
BY ELAINE LAPOTOSKY Jet Professionals / elaine.lapotosky@jet-professionals.com
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Accentuate the positive. While business aviation companies generally cannot compete with the more stable schedules and higher salaries paid by commercial airlines, you can offer a number of advantages. These may include more interesting flying assignments, varying flight routes and destinations, and a wider variety of aircraft to fly, as well as the opportunity to develop a direct relationship with executives and senior management. Be willing to offer your candidates a clear path for advancement, if your recruiters identify that as a specific need. You might want to consider working with other aviation employers in the area to build identifiable ways for candidates to progress from flight instructor all the way to chief pilot or director of aviation. Get creative with retention plans. These may include annual bonuses for the first five years, and set salary increases if the employee stays with your company for the required number of years. And understand that retention starts with the initial interview. Following these six steps can connect you with the candidates who are best suited to meet your flight operation’s safety and service requirements, match your corporate culture, and offer you the best possible flying experience. BAA
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EL AINE L APOTOSK Y is Director of Operations for Jet
Aviation Staffing in Teterboro. With Jet for 14 years, she formerly worked at Asset Staffing, and was an aviation recruiter, senior account manager, and regional sales manager.
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he shortage of business aviation pilots with an impressive logbook of flight hours is creating an entirely new dynamic for recruiters and hiring managers hoping to put experience at your control. Today’s current crisis in hiring pilots, flight crews, and technicians has been a problem brewing for years. As recently as just two years ago, good candidates might be open to just about any opportunity. But now they may be afraid to interview, for fear of being found out – that is, losing their current good position for a possible better opportunity. Those who are willing to sit for an interview come with a defined list of expectations and are well versed in you and your company, their prospective employer. They tend to know all about salaries, benefits, schedules, flight crews, technicians, and the company culture: everything your company can offer. The most experienced pilots – those who also are the most in demand – are enjoying what amounts to competitive bidding on salaries and benefits, while pilots with fewer hours are having a more difficult time getting consideration. How can you find the right crew candidate to join your flight department, and how can you be sure he or she is willing to stay with you for the long haul? While there is no secret answer to the new staffing challenges, diligence and hard work are needed to match the ideal candidate to your company’s needs. Here are six tips to maximize your best chance for success: Be sure your recruiters and hiring managers are well prepared for each interview so they know the candidates and what each is looking for in a career. Since each candidate will do his or her best to find out about you, be sure that your company’s internet presence accurately reflects what you want your crew candidates to see. Be willing to prepare an individualized defined compensation and “quality of life” package that addresses the specific needs and interests of your top candidates. This flexibility is increasingly important to younger pilots, who may rank work/ life balance and company culture even above salary. Consider younger, competent pilots with fewer hours in the air. While some companies simply will not look at pilots with less than a specified number of flight hours, you may want to take advantage of the next generation of talented pilots eager to build flight time and progress more quickly to the left seat as Pilot-in-Command.
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■ ALTERNATIVE LIFT
Access Without Excess Ride Sharing Takes to the Skies
BY JOHN OWEN o you remember the last time you took a taxi? If you’re younger than 30, that answer may well be “never.” That’s the impact that ride-sharing services have had in major cities and smaller towns throughout the country. While there are many advantages to this method of travel, efficiency is the major reason society has embraced this technology-driven way to get across town. A tap of a smartphone app gives you a range of information in order to make an informed decision: price, ride availability, time, and distance. You benefit from not having to use your own car for a one-off trip, and the operator can maximize the value of a vehicle that might otherwise be sitting idle in a garage. But on the ground, you don’t know exactly what you’re signing up for when you hit that “request ride” button. When it comes to shared aircraft, you do. All commercial pilots, whether flying for charter or fractional operators, must pass regular physical and flight competency tests, unlike their counterparts on the ground. This assurance is translating into greater demand for similar services, specifically fractional or shared ownership. And it’s the younger generation who is leading the charge. Efficiency Drives Decisions Younger business leaders are discovering that depending on commercial airlines can be an impediment to conducting business deals efficiently. With the number of routes decreasing, and fees and surcharges on the rise, commercial travel today means more time wasted for layovers in connecting cities. The extra inconvenience of tightening security means that more of your time is spent in preparation to see a client or business associate, or to visit a remote office, than is spent face-to-face to discuss business. If you’re already used to mobile banking, or same-day delivery from an online retailer, how does the old airline-based travel paradigm make sense? Business travel providers have figured out more efficient ways to serve you, and increasingly, the market is accepting them. Access Is More Important Than Ownership According to recent research by the international market research firm YouGov, “26% of those with $20 million or more in assets are in the market to access private jets” – a 30% increase from just a decade ago. Of that group, more are open to travel options that include less than whole jet ownership. Desire for fractional ownership, jet cards, and subscription or on-demand services all have risen. 14 B U S I N E S S AV I AT I O N A DV I S O R
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While many people with $10 million or more are willing to share assets, a growing number – 48%, according to YouGov – are increasingly prioritizing having access to services they need, as opposed to actually owning them. That efficiency-on-demand model is borne out in other services, such as vacation rental providers like Airbnb. All of these cut to the core of getting a product’s greatest value with minimal investment. How to Capitalize on the Economics of Sharing Who benefits the most from the new “sharing economy”? You, the consumer. You can lower your travel costs by seeking the providers who maximize their fleet capacity. Sharing forces them to address the age-old problem of flying empty legs to get to one customer. That means more efficient aircraft utilization, and lowering membership, charter, and fractional costs. All of this may add up to a better return on your travel investment than traditional flight departments. Just as on the ground, service will be judged and rewarded. You may be used to rating your ride-sharing drivers, and reading reviews of restaurants instantly. So sharing should increase customer service standards (see “KPIs on the Prize,” p. 6). You have the ultimate power to give your business to those who earn it. Dependable, repeated positive experiences offer you the greatest value – even more than the promise of lower costs. BAA JOHN OWEN is President and CEO of Executive AirShare,
one of the nation’s largest fractional providers. He has nearly 20 years’ experience in management and financial consulting, previously working at State Street, Accenture, and KPMG.
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Executive AirShare / jowen@execairshare.com
Business Aviation’s Most Advanced Aircraft Valuation Tool Simply enter an aircraft’s serial number online: ■ Obtain Current Market Value and Residual Value figures. ■ Compare an aircraft with all units listed for sale. ■ Predict future maintenance events and expense. ■ Value the impact of any Hourly Cost Maintenance Program enrollment. ■ Forecast anticipated marketability – and much more. ■ All information is updated daily. The same methods, techniques, and processes an aircraft appraiser would use. eValues is the only valuation tool that runs on a true Artificial Intelligence platform.
To learn more call us at (540) 905-4555 or visit our website: www.assetinsight.com Atlanta • Chicago • Las Vegas • Orlando • Portsmouth • Washington
AIRCRAFT FINANCE ■
Lien On Me When Only One Partner Wants a Loan
BY ADAM MEREDITH AOPA Aviation Finance / adam.meredith@aopafinance.com
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Four years later, the airplane has depreciated to $6.75 million, and there remains a $3.1 million balance on the loan. The equity in the plane is $3.65 million. At that point, the borrowing partner has an unexpected life event (e.g. divorce, or major lawsuit), and cannot continue to make the loan payments. He/she also is in arrears with the partner on hangar rent and other maintenance-related expenses and so decides to surrender his/her equity to the partner. The non-borrowing partner then “cures” any default with back payments and inherits all the equity. At that point he/she either may find a new partner or sell the aircraft for $6.75 million, after originally having invested $4.5 million. If sold, the partner recovers all of his/her original investment, plus $2.25 million to cover any back owed expenses. This scenario also would apply with more than one partner, with each non-borrowing partner agreeing to the same terms as above. Shared ownership can be an excellent option when your proposed annual flight requirements aren’t large enough to justify owning a dedicated aircraft. But when one of the partners prefers to finance his/her share, make certain that the lender selected can structure a deal that protects both borrower and cash buyer alike. BAA ADAM MEREDITH , President of AOPA Aviation Finance,
connects owners and pilots with aircraft finance lenders. With more than 15 years’ experience in the finance industry, he holds both an MBA and an MS in Finance.
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ou could make good use of a light jet for your business, but you’re not likely to fly it more than 100 hours per year. And the capital cost of a brand new aircraft, plus the fixed operating costs, are a bit more than you want to spend, even considering the benefits of warranties and less downtime with a new versus a used aircraft. Instead of looking at a used and/or less capable aircraft, you decide you want a partner. Co-ownership of an aircraft can be beneficial for you and your partner. (See: “Giving Half a Whole Lot of Thought,” BAA Sept/Oct 2017). A carefully structured partnership can provide many benefits not otherwise available to you by using charter or owning a fractional share, including access, tax advantages, and a dedicated crew, while dividing the cost of ownership in two. Good news! Another likeminded business owner – either someone you know, or one who has been identified for you by an aviation professional – would like to partner with you on the purchase and operation of an aircraft. You’re ready for the purchase, but either you or your intended partner prefers to deploy the cash elsewhere, in your primary business or other investments. So one partner requires a loan while the other does not – your first potential conflict. How will you proceed? The path of least resistance is for the partners to agree to seek financing together, then to arrange some preferential treatment for the less-willing partner, such as a lower allocation of fixed overhead expenses. After all, he or she is agreeing to an unwanted loan. When one partner is adamant about not taking a loan, you can look for a lender who is willing to work with you, and has procedures in place to help facilitate your purchase. Here’s how it might work. The non-financing partner signs an acknowledgement with the lender (i.e. a subordination agreement or an extra signature on the security agreement). This gives both partners a formal relationship with the lender. Typically, the documentation will have an acknowledgment that the non-financing partner either will assume any deficiency from the borrowing partner or turn over the aircraft to the lender. The agreement also will ask the non-borrowing partner to acknowledge that the bank has first priority should a problem arise. For example, an airplane costs $9 million, so each partner must contribute $4.5 million. The non-borrowing partner pays cash, and the other partner makes a down payment of $900,000 and takes a loan for $3.6 million.
■ WASHINGTON REPORT
Spotlighting Charter Cheaters Illegal charter operators can put you behind the liability eight ball BY DAVID COLLOGAN here are hundreds of law-abiding, safety-compliant charter operators in the U.S. who can get you where you need to be in comfort. Unfortunately, there also are an increasing number of shady operators skating on the edge of regulatory requirements who can put you at great risk, personally and financially. Based on a groundswell of complaints from its members about illegal charter operators, the National Air Transportation Association has formed an Illegal Charter Task Force to address the problem in multiple ways. Priority No. 1 is working closely with FAA executives in Washington and inspectors in regional Flight Standards District Offices (FSDOs) to identify and take enforcement action against the industry’s bad apples. NATA and FAA also are developing a number of educational programs for customers, industry professionals, and FAA inspectors to make it easier to identify illegal charter situations. Aviation is one of the most heavily regulated endeavors in the world. Understanding and being able to explain the nuances of those complex regulations has provided impressive incomes, fine homes, and big boats for private-practice attorneys and their government counterparts for decades. Complying with all those regulations is expensive. So, unscrupulous operators sometimes try to reduce their costs by providing charter services without meeting the training and maintenance requirements of Part 135 of the Federal Aviation Regulations. If you are trying to charter a Beech King Air 200 twin turboprop, you might expect price quotes in the range of $1,400 to $2,000 per flight hour. If someone quotes a price 25-30 percent lower than other operators, you could be dealing with a cornercutter. Always ask to see a charter operator’s FAA air carrier certificate when chartering an aircraft. Always make sure the N-number of the aircraft on which you will be traveling is authorized for charter use. You may be told it would be cheaper for you to lease an aircraft instead of charter it, but be very wary. Aircraft leasing for the uninitiated is akin to heading for the Double Black Diamond trail the first time you strap on a pair of skis. Generally, there are two types of aircraft leases, a so-called “dry” lease in which the lessee pays the lessor for use of the aircraft and then finds his own crew to fly the airplane; or a “wet” lease under which the lessor provides both the aircraft and a qualified crew. A “wet” lease is considered a commercial transaction 18 B U S I N E S S AV I AT I O N A DV I S O R
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and an FAA Part 135 certificated air carrier must operate the flight in almost all cases. You should definitely seek the counsel of a qualified attorney with significant aviation industry experience before entering into any sort of aircraft lease agreement. Such an agreement should always be executed in writing because it is extremely difficult to prove the existence of a verbal lease should something go wrong – such as an accident. Getting involved in any leasing arrangement in which commercial transportation is being provided under the guise of a Part 91 (general aviation) operation also can carry serious tax consequences. Providers of commercial aircraft charter are required to collect a 7.5 percent Federal Excise Tax and remit that tax to the IRS. Failure to collect and remit the FET can result in substantial financial penalties and asset forfeiture. Most important, you need to realize that signing a “dry” lease makes you the operator of that aircraft. You will have “operational control” of the aircraft, a critical distinction that makes you – not the aircraft owner – responsible for everything: training, operation, maintenance, liability, and financial consequences. And, if an accident occurs, your insurance carrier and the aircraft owner’s insurance provider probably will refuse to pay because you were engaged in an activity your policy did not cover. You really do not want to take that risk. BAA DAVID COLLOGAN has covered aviation in Washington, DC
for more than four decades. This award-wining journalist is known as one of the most knowledgeable, balanced, wary, and trusted journalists in the aviation community.
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dlcollogan@gmail.com
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