Business Aviation Advisor March/April 2015

MARCH / APRIL 2015

Flying Skills and the Automated Cockpit Why 21st Century Pilots Still Need Stick and Rudder Proficiency

Buying or Selling an Aircraft?

First Buy an Expert

MAKING SENSE OF YOUR AVIATION DOLLARS FOR THE SAFETY OF OUR SKIES THINKING OF ADDING A MAINTENANCE SERVICE PROGRAM? 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 Flying Skills and the Automated Cockpit Why 21st century pilots still need stick and rudder proficiency

by J IM C ANNON

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Questions remain on management fee excise taxes

Making Sense of Your Aviation Dollars

Financial analysis ensures the right operating option

by DAVE W E IL

Thinking of Adding a Maintenance Service Program?

by J E FF AGUR

Who’s In Charge Here?

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Base your choice on more than cost

by G LE NN H E D IG E R

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Buying or Selling an Aircraft?

First Buy an Expert The aircraft broker’s #1 job is to prevent you from making a mistake

by J OS E PH C AR FAG N A , J R .

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For the Safety of Our Skies

NextGen will mean shorter flight times

by M AR K FR AN C E TI C

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D E PA R T M E N T S Publisher’s Message A Taxing Situation

by G IL WOLIN

Washington Report

Focus on FAA Reauthorization

by DAVI D C OLLOG AN

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The Business of Business Aviation The Information You Need, From Experts You Can Trust Aircraft owners and charterers now have a resource to help you make the most effective use of your investments in business aviation. Business Aviation Advisor provides the information you need, without technical jargon, on the business of owning and flying business aircraft – from operations to acquisition, to management and finance.

Business Aviation Advisor: the Business of Business Aviation

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Ma r c h /A p r i l 2 015 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 EDITORIAL ASSISTANT Michael B. Murphy mmurphy@bizavadvisor.com WASHINGTON EDITOR David Collogan dlcollogan@gmail.com CONTRIBUTORS Jeff Agur VanAllen jagur@vanallen.com Jim Cannon Sundog Aviation LLC jim_cannon@bellsouth.net Joseph Carfagna, Jr. Leading Edge Aviation Solutions joejr@leas.com Mark Francetic Duncan Aviation mark.francetic@duncanaviation.com Glenn Hediger Aviation Financial Consulting hediger_cpa@yahoo.com Dave Weil Flight Dept Solutions dweil@flightdeptsolutions.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.

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A Taxing Situation There used to be just two ways to use a business aircraft: own and operate one, or charter as required. The former required capital investment, and created a complex tax situation involving asset depreciation as well as operating expenses. The latter was much simpler: pay-as-you-fly.

In 1963, Executive Jet Aviation (EJA) created block charter.

This arrangement offered an availability guarantee and volume discount in return for a minimum annual travel commitment, making access to business jets more attractive. Regional jet and turboprop charter operators sprung up all over the world. Many, like Jet Aviation, Clay Lacy, and Priester Aviation, still are flying today.

Changes in tax laws first prompted industry innovation in 1971 when the U.S. Internal Revenue Service introduced accelerated depreciation: Modified Accelerated Cost Recovery System (MACRS) for capital equipment. Now business aircraft in charter service could be depreciated in five years, provided that they were “commercial aircraft” available for outside charter. This opened the door for the first aircraft management companies, which provided fleet discounts on virtually all operating expenses, as well as that key tax advantage: the ability to generate charter revenue as a commercial aircraft.

In 1986, EJA became NetJets, and introduced fractional aircraft ownership to the world. Again, tax advantages played a major role in fractional appeal. Those requiring as few as 50 hours of jet charter travel annually (a one-eighth share), could gain the availability, investment, and depreciation advantages of ownership, with a capital investment proportional to their travel requirement.

Block charter reemerged in 2001, as travelers with limited jet usage and no need for tax advantages sought access to fractional fleets like NetJets, FlexJet, and Flight Options. Enter Marquis Jet, the first jet card, which bought subdivided, repriced, and resold NetJets shares. Other fractional companies followed suit with their own jet cards, as did virtually every major charter company, as program simplicity for end users trumped investment advantages.

That development set the stage for the next jet accessibility innovations – and again, tax and investment concerns provided the market impetus.

Much has been written about the 2008 collapse in aircraft values. Many business aircraft users became unwilling to risk the capital investment. And so innovators like Wheels Up, VistaJet, JetSuite, Executive AirShare, XO Jet, and Jet Linx have responded with new alternative lift programs, providing preferred fleet access and an hourly rate guaranteed for the contract term.

Today, as aircraft values recover, it seems there still is a market for simplicity. While questions remain as to whether aircraft ride-sharing will ever move beyond recreational travel, the ongoing need for business travel will drive industry innovation. Given today’s commercial airline travel, that is a very good thing.

Gil Wolin — Publisher gwolin@bizavadvisor.com Ma r c h /A p r i l 2 015 B U S I N E S S AV I AT I O N A DV I S O R 5

■ AIRCRAFT SAFETY

Flying Skills

and the Automated Cockpit

BY JIM CANNON

T

Sundog Aviation LLC / jim_cannon@bellsouth.net

echnological advancements during the past 30 years have equipped today’s business aircraft with unparalleled levels of safety, automation, and crew information. Enhanced situational awareness (SA), a key safety factor in the modern cockpit, has increased the crew’s reliance on automation to manage each flight segment. An unanticipated result of this reliance, however, is fewer opportunities for each pilot to manually operate the flight controls: that is, to actually fly the aircraft.

There is no doubt that automation has made flying safer. However, it is important that you are aware of its limits. While automated systems enhance SA, diminish crew fatigue, and make some errors more evident, they often hide others, or make them less noticeable. Today’s younger pilots have been trained to rely on automation; that’s not unreasonable, given that “hand-flying” the aircraft represents as little as 20 minutes in a typical 1.5 hour flight. But those same pilots may lack the 6 B U S I N E S S AV I AT I O N A DV I S O R Ma r c h /A p r i l 2 015

basic decision making and manual flying skills honed by the retiring generation of pilots during thousands of hours of hand-flying various aircraft: those skills most needed in times of equipment malfunction or systems failure.

Concerns about pilot training in the age of automation first surfaced in a 1995 study on the erosion of manual flight skills (Patrick R. Veillette and R. Decker, “Differences in Aircrew Manual Skills and Automated and Conventional Flightdecks,” National Research Council’s Transportation Research Record, April 1995).

They were detailed for business aircraft pilots in Dr. Veillette’s, “Watching and Waning” (Business and Commercial Aviation, February 2006).

A pilot’s ability to deal with an inflight emergency: most particularly, a mechanical or systems failure, and his or her reliance on automation versus manual flight skills, is a major challenge for business aviation flight departments.

What does this mean for you?

It means that with the ever-increasing complexity of today’s high performance business aircraft, your pilots should undergo training at least twice a year w w w. B i z AvA d v i s o r. c o m

FLIGHTSAFETY INTERNATIONAL INC.

Why 21st Century Pilots Still Need Stick and Rudder Proficiency

with a reputable company like FlightSafety, CAE, or SIMCOM in order to maintain critical manual flying proficiency.

Business aircraft training should be conducted in an FAA Full Flight Simulator rated Level C or D. Only they possess the full six degrees of freedom of movement (up/down, left/right, and forward/backward) required to replicate real world flight situations.

And, to augment and enhance the recurrent training pilots receive, FlightSafety has developed a comprehensive series of advanced training courses. These courses are designed to enable pilots to practice the perishable skill of aviating and to help ensure they are fully prepared for unusual and emergency circumstances that require correct and immediate action in order to safeguard you, your passengers, fellow crew members, and your aircraft.

These “evidence-based” courses draw upon real-time data of how pilots operate aircraft, and then use that information to determine whether unrecognized hazardous patterns are occurring. They also use lessons learned from accident investigation reports. Based upon relevant data, these courses allow pilots to experience these hazards in the safe environment of a flight simulator, and teach them how to respond in an emergency.

Training in a flight simulator is a critical component of any course designed to help pilots maintain the superior stick and rudder skills required to safely navigate emergency situations, whether from an external event, an instrument or flight director malfunction, or other on-board equipment failure.

In one such course, designed to teach pilots how to make the Go/No-Go Decision (whether to proceed with or to abort the takeoff), pilots are subjected to more than 18 scenarios. Within each, an event happens near V1 (the maximum speed at which the flight crew can abort a takeoff and not overrun the runway) on the takeoff roll. Their nearly instantaneous decision to abort or to continue is then debriefed in real time by the instructor. Also presented are simulated scenarios requiring the crew to return the aircraft for landing immediately following takeoff. Pilots practice this highly precise emergency return maneuver multiple times to achieve proficiency and gain confidence.

A second FlightSafety course, “Energy Management,” is based on current operational data from studies conducted as to why some pilots continue an unstable approach (in which the aircraft exceeds the maximum approach and landing speeds) instead of executing a “go-around,” (aborting the landing in order to stabilize the aircraft). Pilots are led through eight different descent scenarios in various positions on the approach. They learn how to predict accurately whether or not they will be stable for the approach, and how to recognize and react well before the stabilized approach measurement point. In flight departments using the methods taught in this course, the number of unstable approaches has been reduced dramatically.

A third FlightSafety course, the CRM (Crew Resource Management)/Human Factors LOFT (Line Oriented Flight Training), is based on the single greatest cause of aircraft accidents: human error. Lack of proper human communication and interaction skills, and the inability to use all available resources, are determining w w w. B i z AvA d v i s o r. c o m

factors in the causes of many aircraft accidents. This course includes a very realistic and operationally based simulator session where the crew embarks on a long-haul flight. As the instructor inserts various problems, the crew must make difficult and complex decisions. The heart of the course is the debriefing session, which spends little time on the technical aspect of any errors, but highlights the human factors that caused the technical mistake to occur. Crews generally complete the course acutely aware of two or three human factors needing improvement.

The fourth FlightSafety course, Upset Prevention and Recovery Training, was developed in tandem with Gulfstream Aerospace. It uses a Level D simulator, and is based on preventing in-flight loss of control of the aircraft. Many regulators and other industry leaders have studied why this occurs without identifying a specific primary cause. It could be a lack of aeronautical science knowledge, over-reliance on automation, or just plain inexperience with extreme upset conditions. This course is designed to fill those gaps.

Academics are followed by simulator sessions designed to have pilots experience the full “flight envelope” (the limits of an aircraft’s speed, load, and altitude capabilities). Pilots are then subjected to five different historically accurate scenarios that ended in fatal accidents. This combination teaches pilots how to escape from all five scenarios and execute a safe landing. To do so, FlightSafety created the first simulator for business aviation that replicates the aircraft handling qualities during full aerodynamic stall and flight characteristics at very high speeds, based on actual aircraft flight test data. Pilots receive the most advanced upset prevention and recovery training available in the type of aircraft they actually fly, without the risk involved using an actual aircraft.

Piloting is often described as “hours of boredom punctuated by moments of panic.” As automation assumes more control of routine flight activities, the pilot’s challenge is to maintain the critical skills needed to navigate those moments safely. That makes twice-yearly recurrent training sessions in Level C or D fullflight simulators mandatory to insure your flying safety. BAA JIM CANNON , Business Aviation Safety Consultant, performs

safety audits for ARGUS. Recently retired as IS-BAO Program Director for IBAC, he was Home Depot’s Director of Flight Operations, an NBAA Board member, and holds an MBA.

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■ AVIATION LAW

Who’s In Charge Here?

Questions Remain On Management Fee Excise Taxes

BY GLENN HEDIGER Aviation Financial Consulting / hediger_cpa@yahoo.com

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NetJets argued that EJM has PCC only during a charter flight, while the owner has PCC when the aircraft was flying for the owner. The government argued under a 1974 ruling that the charter operator (in this case, EJM) must have PCC for all activity and that the owner’s payments must be for taxable transportation.

The Court dismissed both arguments and said that each arrangement must be determined by factual analysis of many factors, including: ■■ Ownership of the aircraft ■■ Who provides the services that allow the aircraft to be operational ■■ Who provides the crew, and ■■ The nature of the transportation service provided by the charter company.

It’s important to note that providing the crew and employing the crew were not considered to be identical, but that employment of the crew appeared to be paramount. Furthermore, PCC is governed by tax law analysis, and cannot be contracted away.

Since no resolution was provided on aircraft management arrangements, owners will continue to be subject to a “facts and circumstances” analysis in IRS audits. However, audits currently are being suspended at the appeals level, as the IRS and Treasury Department work on developing a formal regulation. Industry trade associations, such as the National Business Aviation Association and National Air Transportation Association, are actively engaged with the government on your behalf, offering their practical input to the proposed rules. BAA GLENN HEDIGER , President of Aviation Financial

Consulting, provides tax, accounting, and compliance consulting on personal and entertainment use income and deductions, SEC reporting, GAAP tax accounting, and acquisition/disposition planning.

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CESSNA AIRCRAFT CO.

hould the 7.5% Federal Excise Tax (FET), which applies to airline tickets and charter, also apply to fees paid to fractional aircraft and business aircraft management companies? That decades-old question was only partially answered by the U.S. District Court in its recent rulings on NetJets and government motions.

This January, the Ohio U.S. District Court ruled on motions for summary judgment filed by both fractional operator NetJets and the government regarding FET on those management fees, and whether NetJets and its subsidiary Executive Jet Management (EJM) provide taxable commercial transportation.

The Court held that NetJets does provide taxable transportation. However, a ruling in 1992 that applies only to NetJets (not the entire industry), precludes the IRS from taxing NetJets on management fees and fuel surcharges.

The Court also denied separate motions by EJM and the IRS as to whether EJM was providing taxable transportation to customers who allow EJM to charter their aircraft to third parties, which leaves this issue open to further litigation or settlement.

No decision was made as to EJM clients who operate only for their own use (Part 91).

Thus, there are many unanswered questions with the ongoing IRS audits of management companies: ■■ Enrolling your aircraft on a charter certificate allows you to charter your own airplane and thereby allocate trip costs to a specific project at retail charter rates, as well as generate revenue from third party charters when you’re not flying.

Does operating as such make taxable the fees charged to you by your charter management company?

■■ What does this ruling mean for fractional companies?

Because it applies only to NetJets, other fractional programs may not claim the same protection. In 2004, the IRS ruled on a different fractional program, saying that monthly management fees were indeed part of taxable transportation, and FET applied. The Court ruled that NetJets was not bound by another fractional program’s ruling.

■■ What does this mean for management companies? In this case, the IRS only assessed FET on arrangements in which EJM both provided traditional management services and used the customer’s aircraft in the EJM Part 135 charter business. No action was filed by the government on Part 91-only managed aircraft.

The Court did say that the arrangement must undergo a factual analysis to determine whether the owner or the charter company has “possession, command, and control” (PCC) of the aircraft.

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■ AIRCRAFT SALES & ACQUISITION

Buying or Selling an Aircraft?

First Buy an Expert The Aircraft Broker’s #1 Job Is to Prevent You from Making a Mistake

BY JOSEPH CARFAGNA, JR. t’s tempting to consider handling an aircraft purchase or sale on your own, or with help from your aviation manager, chief of maintenance, attorney, or even a business associate. No matter how skilled these people are at what they do, it’s likely that, if they have handled an aircraft purchase or sale, it’s been only once or perhaps a few times.

Choosing a good experienced aircraft broker who has completed many transactions for clients with diverse travel and investment requirements, and in varying market conditions, is your insurance policy against making mistakes.

Today’s broker is not just someone who matches a buyer with a seller. He or she also: ■■ Interprets the myriad of information you can find on the Internet. A reputable broker follows the market every day, knows and understands the market and its trends, and can decode them on your behalf.

■■ For sellers, professionally photographs your aircraft, creates a color brochure, and employs the latest marketing materials and methods, perhaps including video and social media.

■■ For buyers, conducts an analysis of your aircraft utilization requirements. This will help you to determine appropriate aircraft makes and models for your mission, whether to buy new or used, or to supplement with fractional ownership or jet cards. Useful even when you think you know exactly what you want, this process can identify alternate choices that might better suit your travel and investment requirements — thereby avoiding potentially costly disappointments. Part of this evaluation process is an exit strategy, as future market value and marketability should be part of the purchase equation.

■■ Establishes the proper, realistic price for the aircraft you are selling or purchasing.

■■ Goes onsite to physically examine the aircraft for sale or purchase. He or she will: examine log books, evaluate maintenance status, check service bulletins and airworthiness directives, evaluate cosmetics, and survey and enumerate equipment.

■■ Negotiates the purchase or sale for you together with your attorney, using market and technical knowledge and transactional experience.

■■ Navigates the details of international transactions: differing regulations, adherence to FAA standards with regard to equipment and modifications, lien searches, de-registration 10 B U S I N E S S AV I AT I O N A DV I S O R Ma r c h /A p r i l 2 015

and registration issues, and import and export requirements.

■■ Assists in the pre-purchase inspection, a process which is

adversarial in nature because it involves issues for both the buyer and the seller. It determines: the aircraft’s condition, whether it is as represented, what might need to be fixed, and who is going to pay for any discrepancies found. Some brokers have in-house technical experts who go onsite to insure you are protected from unnecessary expense, that only the scope of agreed-upon inspection is being accomplished, and that no previously unapproved bill is presented. If you are the buyer, you want any discrepancies uncovered within the scope of the inspection. If you are the seller, you don’t want to be held responsible and/or billed for something that should be the buyer’s responsibility within the scope of the agreed-upon inspection.

■■ Orchestrates a successful closing by coordinating with all parties to the transaction such as: attorneys, escrow agent, like-kind exchange agent, tax advisors, aviation manager, chief pilot, maintenance manager, and financing banks.

Attempting to acquire or dispose of an aircraft on your own with the intent of saving the brokerage fee may be a false economy, considering what costly mistakes in both time and money an inexperienced buyer or seller can make. Using an experienced, reliable aircraft broker will help avoid missed opportunities, dead-end deals, unnecessarily high legal fees, and problems coping with the other party’s employees or representatives. It also will help you avoid frustration, disappointment, and money left on the table. BAA JOSEPH CARFAGNA JR . is president of Leading Edge

Aviation Solutions, a full service aircraft brokerage, aircraft acquisition and consulting firm. He also serves on the Associate Member Advisory Council (AMAC) of the National Business Aviation Association (NBAA).

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ISTOCKPHOTO

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Leading Edge Aviation Solutions / joejr@leas.com

WINGMAN OPERATOR

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■ FLIGHT OPERATIONS

For the Safety of Our Skies NextGen Will Mean Shorter Flight Times

BY MARK FRANCETIC Duncan Aviation / mark.francetic@duncanaviation.com

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business aircraft that fly above 10,000 feet by January 1, 2020. To meet this mandate, aircraft will need upgraded Global Positioning System (GPS) sensors and transponders.

ADS-B gives ATC the ability to accurately track the horizontal position of aircraft in order to paint a three-dimensional picture of all aircraft. With this picture, ATC can now put more aircraft into less space, allowing those aircraft to fly more efficiently and land more safely.

The greatest benefits of the NextGen system are safety and time. Ever had a “near miss,” with another aircraft? The required ADS-B equipment dramatically reduces the chances of mid-air collisions, as aircraft can now accurately read the in-flight position of other proximate aircraft. With its accurate 3D image, ATC is now able to create known safe spaces around all aircraft above 10,000 feet.

The density of traffic won’t be an issue because of the accuracy of the view of the entire sky. This ability to have more aircraft safely occupy less airspace contributes to considerable savings in terms of time, as well. You’ll spend far less time waiting on the ground for clearance as air traffic is more efficiently integrated into traffic routes.

It’s almost like having a whole new highway system in the sky.

BAA MARK FR ANCETIC , Duncan Aviation’s regional avionics sales

manager, educates the industry about FANS and ADS-B mandates. An aviation professional since 1980, he has a Ferris State University avionics degree and an A&P license.

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ISTOCKPHOTO

ver the years, the ability to track and place aircraft in relation to one another while in flight has required Air Traffic Control (ATC) to maintain a large separation between aircraft. If ATC can’t see where aircraft are in relation to one another, the controllers must leave empty swaths of sky, meaning far fewer aircraft using the nation’s airways at any one time.

These constraints placed on ATC result in delays as aircraft await takeoff, and in wasted fuel as they circle airports waiting their turn to land.

The equipment providing the technological backbone of the ATC system has kept our airspace safe for general, military, and commercial aircraft for nearly 80 years. However, the analog equipment for this aging system is based on radar, and reliance on this system results in gaping holes in our ability to track air traffic around the United States.

Rural areas have low coverage rates because their traffic volume doesn’t justify the enormous cost of setting up radar systems. Busy airports around the country are well-covered by the current system, but the reach of these old, analog systems is quite limited. Once an aircraft is out of the range of an airport, its movement is no longer automatically tracked by ATC surveillance.

In the 1990s, the Federal Aviation Administration (FAA) proposed an overhaul of the ATC system to increase the safety and efficiency of our nation’s airspace.

Reversed Separation Vertical Minimum (RVSM) was implemented in 2005, giving ATC a more accurate picture of the vertical (altitudinal) separation among aircraft. Precisely assessing numerous aircraft requires those aircraft to be equipped with highly accurate altimeters and air-data computers. However, analog altimeters cannot accurately measure air density at higher altitudes. Consequently, ATC padded airspace with 5,000-foot or more separation between aircraft.

With the more accurate digital altimeters, ATC today has an exact picture of where aircraft are in relation to one another, minimizing spacing of airplanes so that separation has dropped to 1,000 feet in some cases.

This opened the door to the Next Generation Air Transportation System (NextGen) initiatives, which shift the ATC infrastructure from analog-based radar to the less expensive digital-based terrestrial and satellite systems. NextGen mandates are designed to improve communication between ATC and pilots and let ATC and pilots know the exact location of all aircraft sharing the airspace.

The primary component of the FAA mandates, Automatic Dependent Surveillance-Broadcast (ADS-B), must be operational in

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■ AIRCRAFT MANAGEMENT

Making Sense of Your Aviation Dollars Financial Analysis Ensures the Right Operating Option

BY DAVE WEIL Flight Dept Solutions / dweil@flightdeptsolutions.com

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■■ Factor in taxes. Taxes can have a dramatic impact on analyz-

ing the various options. Federal Excise Tax and/or sales tax may need to be added onto some payments in charter, fractional and some management company fees (see “Who’s In Charge Here?,” page 8). And most importantly, cash expenditures may or may not be tax deductible, while depreciation may be wholly, partially, or not deductible (see “Demystifying Aircraft Costs” BAA January/February 2015, p. 10). For a taxpayer in a combined 40% (or higher) federal and state tax bracket, tax deductibility will be an important factor in your decision.

■■ Account for your asset value exposure. If you purchase an aircraft or a fractional share of an aircraft, your asset is subject to changes in value. Also, consider historical market value trends in your analysis; only in the last year have many aircraft begun to recover value lost in the 2008 financial crisis.

■■ Recognize the time value of money. Using this core principle of finance, your analysis should compare current and future dollars in a manner that accounts for their difference in value.

Too often investing in business jet travel becomes an emotional decision: fresh paint and a new interior can cloud rational thinking. Taking the time for proper financial analysis will ensure that you select the right operating option, in the best aircraft, for your unique transportation requirements. BAA DAVE WEIL previously served for 17 years at TAG Aviation USA

and its predecessor, Aviation Methods. He helped TAG grow into the largest aircraft management company in the U.S., led its expansion into Asia, and served as President of its subsidiary, AMI Jet Charter.

A past Chair of NBAA’s Tax Committee, he holds an MBA from UCLA.

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DASSAULT AVIATION

ou know the advantages of business aviation: time savings, schedule flexibility, privacy, and security. As you investigate your options, you will find an array of alternatives and economic arrangements: ■■ Purchase your own dedicated aircraft by paying cash and/or obtaining a loan, or lease an aircraft. If you put the aircraft onto a management company’s charter certificate, you can use the charter revenue to help offset your fixed costs.

■■ Obtain a fractional interest in a specified type of aircraft, either by paying an upfront purchase price, or by entering into a lease for your fractional share. On an ongoing basis, you will pay a monthly management fee plus a per-hour rate for operating costs and fuel surcharge.

■■ Purchase a jet card by paying a lump sum amount entitling you to a set number of flight hours per year in a certain type of aircraft.

■■ Negotiate a block charter deal for a set number of flight hours.

Normally, this option involves paying a lump sum amount up front.

■■ Join a “club.” Combining aspects of card and block charter programs, this relatively recent option, offered by Wheels Up and VistaJet, requires a monthly fee but no equity.

■■ Buy ad hoc charter hours on an as-needed basis. Pay on a flight-by-flight basis for the specific aircraft you are chartering.

How will you determine which choice is best for you? The need for guaranteed availability may rule out most charter options. On the other hand, charter enables you to select the most appropriate aircraft for each trip, without any capital investment.

Once your need is defined, finance usually becomes the most important factor in the decision process. Even though there are significant variations in how each option is financed, there is a way to compare them. Discounted cash flow analysis looks at each option on an after-tax cash basis with the time value of money factored in.

The four key factors inherent in this analysis are: ■■ Make the flight hours comparable. If you own an aircraft, then the costs you incur are based on actual flight hours flown. However, the other options often charge based on various “block time” arrangements. So to compare costs, an adjustment needs to be made so that each choice includes the same number of actual flight hours.

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Avoid surprises – learn: ▲ The value of your aircraft’s Maintenance Equity ▲ How your aircraft’s Maintenance Equity compares to the fleet average ▲ The value of your aircraft’s Hourly Cost Maintenance Program coverage ▲ What aircraft Major Sectors are adding to, or detracting from, its value ▲ How to justify your aircraft’s value versus similar assets listed “for sale” ▲ Your aircraft’s scheduled maintenance expense over the next 60 months ▲ When a low aircraft purchase price may not represent good value

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■ AIRCRAFT MAINTENANCE

Thinking of Adding a Maintenance Service Program?

BY JEFF AGUR

M

VanAllen / jagur@vanallen.com

aintenance service programs can play an important role in managing your business jet or turboprop operations, by helping to: ■■ Simplify your operational budget planning, ■■ Provide insulation against extraordinary unscheduled maintenance event costs, ■■ Help ensure quicker and more efficient response times, and ■■ Integrate all elements of your aircraft’s maintenance, creating just one point of contact.

A full range of programs is available for engines, auxiliary power units, airframe, avionics, and more, from both Original Equipment Manufacturers (OEMs) and third-party providers.

Each program is unique and offers varying levels of coverage, which can include or exclude items like shipping, labor, foreign

object damage, paint, interior, tiered pricing, program transfer/ exit costs, and more. When comparing programs, be sure that you or your aviation manager understands all the coverages and contractual terms.

As you evaluate maintenance programs, also consider your company culture, and how it aligns with these strategic initiatives: Smoother Cash Flows — Does your company and its budgeting process value smoother cash flows? Or can you live with the variability of annual maintenance costs: both scheduled costs and spikes in expenses to accomplish unscheduled repairs?

Maintenance programs can help you to stabilize your budget.

Risk Appetite — With a maintenance program, you essentially are shifting the unscheduled maintenance risk to the program provider. Consider the maintenance program like an insurance policy: does your company prefer to self-insure and live with that

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risk? Or does third-party insurance have value? On larger risk items, such as engine overhauls which, with unanticipated repairs, can be as much as $2 million each, shifting that risk to the program provider may offer significant value.

Cost of Money — As you pay into a maintenance program, you are depositing funds with the program provider to pay for all future maintenance events. There is a cost associated with having those funds be in someone else’s bank, and not working for you.

The alternative is to self-allocate the funds, keeping them working within your company. However, this takes internal discipline and oversight, as well as the willingness and ability to cover any extraordinary unscheduled events Financing Structure — Your company’s financing structure will dictate some of your choices with respect to maintenance programs. Specifically, financing leases require that the aircraft be on an engine maintenance program. Because the engines are key to the value of the aircraft, lessors must have a reasonable way to estimate the value of the aircraft lease termination.

Residual Value and Resale — Maintenance programs have a direct, bottom-line impact on residual values. Thus, a major maintenance event due soon on an aircraft you are selling would have no impact on the aircraft’s value, as that cost already is covered by the program. Since most maintenance programs are transferable, they are a factor when you sell your aircraft. An

SINCE MAINTENANCE SERVICE PROGRAMS ARE OPTIONAL, YOUR CHOICE SHOULD BE BASED ON MORE THAN JUST ITS COST. aircraft on a maintenance program carries a much lower risk for unscheduled or scheduled maintenance costs for the prospective buyer, who then would assume the hourly cost of the maintenance program after purchase.

Before you consider your next maintenance program: ■■ Meet with your finance and treasury departments to examine your company’s sensitivity to smoother cash flows.

■■ Explore costs of capital and return on investment rates to determine the total program value and costs.

■■ Solicit input from your risk management group as you consider risk tolerance and risk mitigation.

■■ Contact operators of aircraft similar to yours in type and size.

Ask about both the benefits they receive as well as any frustrations with their maintenance programs.

Taking these steps can help you determine your best and most effective maintenance strategy. BAA JEFF AGUR, CEO of VanAllen, handles fleet planning and aircraft

acquisition projects. This year, he supported the detailed planning and acquisition of more than half a billion dollars in jets, turboprops, helicopters, and fractional shares.

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■ WASHINGTON REPORT

Focus on FAA Reauthorization

Timely Congressional Action Critical For NextGen

BY DAVID COLLOGAN ne of the highest priorities for the business aviation community this year is getting Congress to pass FAA reauthorization legislation before the agency’s current authorization expires on September 30.

Reauthorization years are always a big deal for the agencies affected, and for the constituencies those agencies regulate. That’s because reauthorization bills provide a to-do list for a federal agency and a road map to follow for the next several years.

Once a reauthorization bill is adopted and signed into law, both agency officials and stakeholders have a blueprint that permits them to assess staffing needs, equipment and training investments, and make other long-term capital decisions.

Both the FAA and the aviation community are extra anxious to make sure the process goes smoothly this time around because they are still haunted by the train wreck that ensued several years ago when expiration of the FAA’s operating authority was looming. The deep political divide then between Democrats and Republicans on a wide range of issues meant potential gridlock on even routine legislation.

In the case of the FAA, a total of 23 different legislative extensions — ranging from a few days to several months — were required before a longer-term bill finally was enacted. Lowlights of that tortuous process included: the partial shutdown of the FAA during August 2011 when Congress was unable to reach timely agreement on a reauthorization extension, and massive ATC delays and flight cancellations in April 2012 when the congressional budget sequester caused air traffic controllers to be furloughed.

The widespread frustration generated by the painful startand-stop process back then bodes well for timely renewal of FAA reauthorization this year because no one wants to go through a mess like that again.

Pete Bunce, President and CEO of the General Aviation Manufacturers Association (GAMA), is one of those expressing optimism. Addressing GAMA’s annual “State of the Industry” press conference in February, Bunce said he believes the aviation community “is in a different place than we were” during the last reauthorization process.

He complimented Rep. Bill Shuster (R-PA), and Sen. John Thune (R-SD), the chairmen of the House Transportation and Infrastructure Committee, and the Senate Committee on Commerce, Science, & Transportation, for their early outreach to aviation stakeholders in an effort to build consensus and momentum for timely passage of multi-year FAA reauthorization 18 B U S I N E S S AV I AT I O N A DV I S O R Ma r c h /A p r i l 2 015

legislation. Shuster’s committee held an initial reauthorization hearing on November 18 — just two weeks after the election.

Bunce acknowledged there are “some contentious issues between airports and the airlines,” primarily over the level of passenger facility charges that airports can collect from airline passengers, and fees imposed on the carriers to support airport infrastructure improvements.

But he noted the “very firm commitment” by Shuster and Thune, and the leadership of the aviation subcommittees in both houses, to work through such issues and get a bill passed this year.

That’s good news. FAA executives charged with running the world’s busiest air traffic control system should not have to lose sleep worrying about furloughing controllers and safety inspectors because of a dysfunctional legislative branch.

In addition to its responsibility to keep the current ATC system operating safely 24/7/365, the FAA is at a critical juncture in implementing the NextGen air traffic control system of the future.

By 2020 — just five years away — nearly 200,000 U.S.-registered aircraft must be equipped with new Automatic Dependent Surveillance-Broadcast (ADS-B) technology so they can communicate automatically with one another. At the end of 2014, slightly more than 9,000 aircraft had ADS-B installed.

Overseeing, inspecting, and certificating the installation of ADS-B technology in more than 190,000 aircraft in just five years — along with managing all the other elements of NextGen — is a daunting task for the FAA. It will be an impossible one unless Congress eliminates the legislative roadblocks. 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.

w w w. B i z AvA d v i s o r. c o m

ISTOCKPHOTO

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dlcollogan@gmail.com

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