Business Aviation Advisor July/August 2014 by Business Aviation Advisor Magazine

July / August 2014

Demand for New Aircraft Models Mirrors Improving Economy Choices Abound in New and Affordable Used Bizjets

JUSTIFY YOUR AIRCRAFT’S VALUE SIX ESSENTIAL QUESTIONS FOR AIRCRAFT ACQUISITION SUCCESS NEW RULES GOVERN INTERNATIONAL FLYING MANAGe YOUR AIRCRAFT OPERATING COSTS

A Business Aviation Media, Inc. Publication

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J u l y /A u g u s t 2 014

• Volume 1 / I s sue 3

F e at u r e s

Demand for New Aircraft Models Mirrors Improving Economy

14 When Insured and Market Values Don’t Match

Choices Abound in New and Affordable Used Bizjets

Avoid Risk with Accurate Appraisal

by Roll an d Vin c ent

by Steph en P. J o hns , CIC

08 Six Essential Questions for Aircraft Acquisition Success

Be Prepared Before You Search

What’s It REALLY Worth? Justify Your Aircraft’s Value by Anthony K ious s is

by J oanne M . Bar b e r a

FBOs, Fuel Costs, and Facilities Fees Rising Costs Drive New Pricing Models

by BAA S TAFF R E P OR T

New Rules Govern International Flying Get Up to Speed Now on the Latest Regulations for Your Destinations

by J ohn S h ee h an

Manage Your Aircraft Operating Costs

by W illia m Qu inn

Understanding Fixed and Direct Charges Can Prevent Surprises

D e pa r t m e n t s Publisher’s Message

The Ultimate Luxury Purchase by G il Wolin

Washington Report

The FAA’s NextGen Program by Davi d Collog an

COVER PHOTO: Gulfstream Aerospace Corp. www.gulfstream.com

The Business of Business Aviation The Information You Need, From Experts You Can Trust Aircraft owners and charterers: you 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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Ju l y/A u g u s t 2 014 B U S I N E S S AV I AT I O N A DV I S O R 3

BE ABOVE IT ALL SELECT AIRCRAFT MANAGEMENT PROGRAMS TAILORED TO YOUR NEEDS. CALL +1 877 392 6442 JETAVIATION.COM/BEABOVEITALL Charter flights in the USA are operated by Jet Aviation Flight Services, Inc. or other FAR Part 135 certified air carriers.

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 Rolland Vincent Rolland Vincent Associates rvincent@rollandvincent.com Joanne M. Barbera Barbera & Watkins, LLC jbarbera@bwaerolaw.com John Sheehan International Business Aviation Council jsheehan@ibac.org William Quinn Aviation Management Systems, Inc. bquinn@amsinc.aero Stephen P. Jones, CIC LL Johns & Associates, Inc. sjohns@lljohns.com Anthony Kioussis Asset Insight, Inc. akioussis@assetinsightinc.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. 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.

The Ultimate Luxury Purchase

eadlines often refer to “non-renewable resources,” usually in reference to oil and natural gas. But during the fourth annual JETNET iQ Global Business Aviation Summit last month in New York City, I was reminded that there’s only one truly non-renewable resource: TIME. That’s really what business aviation is all about — whether you’re buying a charter trip, a jet card, fractional share, or aircraft — you actually are buying back slices of your life that otherwise would be lost to the TSA, inconvenient connections, delays, and other commercial airline time-wasters. You’re not alone. According to data presented by Doug Harrison and Jim Taylor of YouGov PLC (www.research.yougov.com), one of the world’s leading market research firms, reducing stress is the end goal of most purchases by business executives and high net worth individuals. YouGov’s research indicates that these individuals will spend more than $1.1 billion on international travel in 2014. That’s up 38% in less than a decade, a decade of weak worldwide economic growth. Most of those dollars will be spent on business aircraft travel. Whether managing multiple professional activities or facilitating family travel, you use your aircraft to manage the complex demands on your life. As Dr. Taylor commented, “The executive may indeed use business aircraft to save time to get to a meeting — but it’s getting home to spend more time with family that is the real reason to fly privately.” Luxury is not the biggest, latest, or greatest. True luxury is a moment devoid of stress, and using business aviation helps give you more of those moments. But the decision to use business aircraft — and what type of aircraft, jet card, or charter service to use — requires careful research. According to YouGov, 68% of you routinely do that research. You shop based upon need, not want, and you rely on data, not just on brand names. That’s where we come in. Whether you want to learn how best to manage ownership costs, preserve your aircraft’s asset value, or how to approach aircraft acquisition, Business Aviation Advisor provides you with the data you need to make informed decisions. In this issue’s cover story, Rolland Vincent gives you a preview of the newest aircraft models due soon and currently in development. Joanne Barbera offers “Six Essential Questions for Aircraft Acquisition Success,” and Anthony Kioussis helps you justify the current value of your aircraft. Bill Quinn outlines how to manage your aircraft operating costs, and Stephen Johns tells you why it can be dangerous to over-insure your aircraft. In our Staff Report, you’ll learn why FBO fees seem to be increasingly common no matter where you fly, while John Sheehan brings you up-to-date on the new rules for international flying. And Washington Report Editor Dave Collogan explains the latest on NextGen, which should reduce flight delays by 41%. Because time with family, friends, and associates definitely does not come in a bottle. Best regards,

Printed in the USA

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Gil Wolin — Publisher gwolin@bizavadvisor.com Ju l y/A u g u s t 2 014 B U S I N E S S AV I AT I O N A DV I S O R 5

■ Emerging Aircraft

Dassault Falcon Jet 8x Dassault Aviation

Demand for New Aircraft Models

Mirrors Improving Economy Choices Abound in New and Affordable Used Bizjets By Rolland Vincent

Rolland Vincent Associates rvincent@rollandvincent.com

or the first time since the US Great Recession began 6½ years ago, we now see abundant evidence of a widespread industry recovery. In many ways, the recession, a downturn that hit business aviation and aircraft values hard, mimics that of the 1980-82 downturn, with one vital difference. This time, airframe and engine manufacturers’ widespread investments in new products, facilities, and technologies are stimulating a rebound across the industry, fueling its return to growth. Such broad-based investments in new business jet aircraft and engines are both noteworthy and unprecedented, as they are being made by long-standing industry stalwarts like Gulfstream, Dassault, Bombardier, and Textron, as well as by newer entrants. They will have a long-term impact on the value of aircraft currently in

production, as well as on fractional shares and charter fleets. Buyers of new jets currently have almost 50 business jet models from which to choose, ranging from $4M entry-level very light jets up to $65M+ ultra-long-range large cabin jets and converted airliners, with more product announcements expected this year. Newer Original Equipment Manufacturer (OEM) entrants — which include Embraer, Honda, and Pilatus on the airframe side, and Snecma and GE Honda on the engine side — are bolstering the range of product choices available to current and prospective owners. With a strengthening economy, surging corporate profits, unprecedented wealth creation, shrinking used aircraft inventories, and recent deferrals in replacement purchasing, conditions are indeed ripe for a ramp-up in new aircraft purchases. Not surprisingly, many OEMs are concentrating their Research & Development spending to serve customers seeking

6 B U S I N E S S AV I AT I O N A DV I S O R Ju l y/A u g u s t 2 014

larger and more capable aircraft. In contrast with the rest of the business jet market, that large cabin segment fared well throughout the Great Recession, validating the product strategies of Gulfstream, Dassault, Bombardier, and Rolls-Royce, which focus on serving this market. Currently leading the pack in the ultra-longrange segment, the Gulfstream G650 and the in-development G650ER offer unmatched speed and 8,000+ mile non-stop range. The new 7,400+ mile Dassault Falcon 8X and 8,400 mile Bombardier Global 7000 are expected to be in service in 2016, followed by the 9,000+ mile Global 8000 one year later. The large-cabin segment also is being bolstered by a French tour de force with the all-new Falcon 5X, a $45M, 6,000 mile aircraft with entry in service expected in 2017. The 5X offers a new wing, new engines, and the largest cabin cross-section in the industry. With a lighter-weight airframe, more efficient aerodynamics, and w w w. B i z AvA d v i s o r. c o m

Cessna Citation Latitude

Embraer Legacy 650

Bombardier Global 7000

all-new Snecma Silvercrest engines, the Falcon 5X is expected to have fuel burn and emissions up to 33% lower than its competitors, including the Gulfstream G450 and Bombardier Global 5000. Not to be outdone, Gulfstream is working tirelessly on a new family of large cabin jets, including G450 and G550 replacements based on the larger G650 cross-section, with public launch anticipated at the National Business Aviation Association annual convention in October 2014. By building on its successful strategy of offering advanced technology, strong value for the dollar, and superior dispatch

With its recent acquisition of Beechcraft, Textron Aviation now commands more than half of the worldwide business turbine fleet. With holdings including Citation, Hawker, King Air, and Caravan, it is investing heavily in new and improved products to bolster its family of light to mid-size jets. New products include the entry-level Citation M2 and versatile Citation Sovereign+ (both with entry in service in 2013), the high-speed Citation X+ (in 2014), and the stand-up cabin Citation Latitude (in 2015) and Longitude (in 2017). Bombardier is developing the stand-up cabin Learjet 85, which will help to expand

that the company is positioning itself to be a major force in the business aircraft industry going forward. Optimism among business jet owners and operators is highest in North America, where those who believe the industry is past the low point in the current business cycle outnumber by four to one those who believe we’ve yet to reach it. Measured quarterly by JETNET iQ Surveys, these results are the strongest since surveys first were launched in 2010. Pre-owned business jet inventory is dropping to pre-recession levels, with the one notable exception being the six- to ten-

Not surprisingly, many OEMs are concentrating their Research & Development spending to serve customers seeking larger and more capable aircraft. reliability, Embraer is now the fastest growing business jet manufacturer, with an expanding family of aircraft from the large cabin Legacy 650 and Lineage 1000, down to the fast-selling Phenom 100 and 300 light jets. With certification and entry in service expected in 2014 and 2015 respectively, the Legacy 500 and Legacy 450 already are raising the bar in the supermid-size and mid-size jet categories. Their latest fly-by-wire technology, which saves weight and reduces maintenance expense, as well as larger cabin size at the price point, once again causes competition to ask, “How do they do that?” The just-certified $26M Bombardier Challenger 350, with service entry in 2014 with fractional powerhouse NetJets, offers longer-range, larger-cabin, and performance improvements over the Challenger 300, widely acknowledged as the leader in the expanding super-midsize jet category. Customers in the $2025M price bracket also may be tempted to purchase the 4,100+ Gulfstream G280, reassured by its impressive range and runway performance, and by Gulfstream’s outstanding product support and reputation for brand quality. w w w. B i z AvA d v i s o r. c o m

the brand’s appeal to those seeking high performance and a comfortable, productive cabin environment. Pilatus’ innovative $9M light jet, with a rapidly building order backlog that already covers the first three years of production, promises to continue its tradition of providing Swiss quality, versatility, reliability, and short-runway/unimproved airfield performance with an aircraft that has an almost cult-like following among owners and operators. With service entry in 2017, the PC-24 raises the stakes in the light jets market segment against the Citation CJ4, Embraer Phenom 300, and Learjet 70. The innovative and much anticipated $4.5M HondaJet (with entry in service now planned for 2015) is the $100B+ automotive giant’s entry into business aviation. The aircraft offers owners significant improvements in speed, fuel efficiency and emissions, baggage volume, and manufacturing quality in the very light jet category. Honda’s massive investments in airframe and engine technology — the latter in partnership with GE on the HF120 turbofan — and its new headquarters, manufacturing, and service center campus in Greensboro, NC are visible signs

year-old category. Those who bought new aircraft during the 2004 to 2008 “bubble” still are perhaps a year or so from seeing their aircraft values return. With recent memories of significantly higher valuations and large balloon payments required to pay off outstanding loans, owners of these aircraft need to temper their price expectations, especially since most of these models are still in production, with new OEM replacement models for some on the horizon. However, this may be a temporary situation that will resolve itself before too long. With most indicators — GDP, corporate profits, wealth creation, and new R&D investments — pointing in a positive direction, and increasing challenges with commercial airline travel, barring any major geo-political shocks, we are bullish on the prospects for a solid recovery in business aviation, with attractive opportunities for both sellers and buyers. BAA ROLL AND Vincent is President of

Rolland Vincent Associates, an aviation and aerospace market research, forecasting and strategic planning firm. His 30+ years’ experience includes work with manufacturers, commercial operators, and international organizations.

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■ Aircraft Acquisition

Six Essential Questions for Aircraft Acquisition Success Be Prepared Before You Search By Joanne M. Barbera Barbera & Watkins, LLC / jbarbera@bwaerolaw.com

Your business activity is on the rise, company

officers have floated the idea repeatedly, travel needs and budgets finally align: it’s time to acquire an aircraft. Whether this aircraft is your company’s first, or is an addition or a replacement, you best can prepare by answering six basic questions.

WHO?

Assemble the right people by including company representatives from each area that will be involved with the aircraft. The team also should include applicable outside advisors such as an aviation/technical consultant; aviation legal counsel; accountants and Federal, state, and local tax advisors; financial advisors and institutions; “like-kind” exchange company; insurance broker; and title/escrow company. For a foreign registered aircraft, also consider including international advisors for issues such as change of registry, export/import, title, and tax. While you may not need all these individuals, do consider all areas so your team can address the pertinent issues.

WHAT?

What structure will you use to own the aircraft? Consider your company’s travel requirements: destinations, trip distance, airport capabilities, number of passengers, baggage and cargo needs, and desired aircraft features such as avionics and amenities. As you consider your budget, you will analyze both acquisition and ongoing operations costs. Aircraft ownership can take the form of full ownership, leasing, co-ownership, or fractional. Aircraft can be operated on a noncommercial or commercial basis. Noncommercial operations generally prohibit receiving compensation for carrying passengers or property, with a few narrow exceptions. Commercial operations are conducted by certificated air carriers for compensation and have stricter operational requirements. These considerations should help determine whether to purchase a new or used aircraft, the aircraft make and model, and will help you narrow down the ownership and operating structure options.

WHERE?

Where will the aircraft be delivered? Where will it be hangared? Where will it be used regularly? For each location, consider the numerous issues, including: logistics, security, operations, registration, tax, and customs. 8 B U S I N E S S AV I AT I O N A DV I S O R Ju l y/A u g u s t 2 014

WHEN

When does your company need the aircraft? When is the targeted aircraft available? Some new aircraft have backlogs of months or even years. If a used aircraft is desired, consider: Is the potential pool large or small? Is the aircraft available to place into immediate service or does it first require refurbishment? Do financial, tax, or reporting issues dictate timing? For example, both IRC section 1031 “like-kind” exchanges and many states’ trade-in rules have strict timing requirements. Does the pre-arranged financing require some or all transaction(s) be completed within a specified time ?

WHY?

Why are you acquiring the aircraft: for business or personal use, or both? Which company(ies) has business use? How are those businesses related? Documentation of business purpose is crucial for tax and other purposes. If personal use is permitted — by whom and how much? Is third-party use planned? Your answers will inform the ownership and operating structure, and will have significant corporate governance and reporting, budgetary, personnel, legal, regulatory, risk management, and tax implications.

HOW?

How will you set up and implement the selected structure? Generally, in order to register an aircraft in the US, the owner must meet the statutory definition of a “citizen of the United States.” The operational structure must adhere to both FAA and DOT rules. Risk management should consider liability exposure on all levels and within the requirements of all agreements. You also will: arrange and document financing, determine tax positions, set up policies and procedures for ongoing operations, and determine when and how your company will conduct periodic reviews of, and change or update, your plans and procedures. Ideally, at the end of this planning process, your company will make an offer, contract with the seller, perform the inspection, and close on the acquisition. When you have taken the time and effort to work through all the issues involved in these six essential questions, you can feel more confident that your company will benefit fully from the new aircraft. BAA Joanne M . Barber a is a founding partner of Barbera & Watkins, LLC. Since 1993 she has focused on aviation regulatory and tax matters, with extensive experience in purchasing, sales, leasing, financing, and aircraft management. She holds a JD from the University of Michigan and an LL.M. in tax from UMKC.

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■ Aircraft Management

FBOs, Fuel Costs, and Facilities Fees Rising Costs Drive New Pricing Models BUSINESS AVIATION ADVISOR STAFF REPORT hile fuel costs at FBOs have been rising during the last decade, your flight crew’s been working hard to manage these costs. That’s understandable, since fuel consumption represents an average of as much as 61% of your per hour flight costs, according to current data compiled by business aircraft consultants Conklin & deDecker (www.conklindd.com). But fuel sales are the primary source of revenue for the executive aircraft terminal operator, or Fixed Base Operator (FBO), at your origin and destination airports. With business jet flight activity slowly recovering — up less than 2% over last year, according to Aviation Research Group (www.argus.aero) — growth in fuel sales remains slow. That leaves FBOs scrambling to make their numbers. ButFBOs have to make up fuel revenue shortfall somewhere else, to keep the ground services that you need available when you arrive. “FBO” is a curious term for a building firmly planted in concrete adjacent to several thousand feet of hard-surface runway. Long before the development of today’s support infrastructure, the open grass field nearest the final destination was many a town’s unofficial “airport.” Upon the aircraft’s landing, a local fuel supplier — perhaps a truck from a local gas station — would meet it for refueling, and would turn the occasional wrench as required. It was 1927 when the first airline “passenger terminal” was built at Ford Airport in Dearborn, Michigan. Other cities began emulating the new Ford facility, with paved runways and passenger terminals for scheduled service. And heretofore journeyman mechanics begin building “fixed” locations, providing both fuel and technical support, and the term “Fixed Base Operation” became the accepted descriptor for such facilities. Early FBOs were rudimentary, often a lean-to built onto a Quonset hut hangar, with a service counter and Spartan waiting area equipped with second-hand sofas and coffee tables. By the mid-1940s, many single location FBOs like Showalter Aviation in Orlando, FL and Combs Aviation in Denver ramped up their facilities and amenities for pilots and passengers, as well as their focus on “service with a smile” to provide an efficient and comfortable transition point between ground and air transportation. That model changed dramatically in the early 1960s, as the skies began to fill with turbojets burning 300 gallons per hour. First generation business jets had to buy fuel nearly every time 10 B U S I N E S S AV I AT I O N A DV I S O R Ju l y/A u g u s t 2 014

they landed. But most airports had multiple FBOs, and to secure market share, FBOs competed to deliver superior service and made increasing investments in ground facilities. By the 1970s, a dedicated Executive Terminal with separate pilot and passenger lounges, flight planning computers, and personnel trained to deliver safe, high-quality service had become the norm. With the mid-1970s’ arrival of the next generation fuel-efficient turbofan engine, per-hour fuel consumption was cut by as much as 30%. Now business jets could “tanker” between airports, and buy fuel only at FBOs which provided good service at reasonable prices. That forced most FBOs to invest in better facilities and service, in order to earn larger customer fuel purchases. The alternative was to charge a ground handling “facilities” fee to cover a portion of their fixed operating costs and lease payments, as well as the variable costs to meet and greet each aircraft. Today you expect to find those improved services and well-appointed executive terminals at most every FBO. But as fuel efficiencies continue to improve, and fuel buying consortia emerge, there is even more pressure placed on FBO per-gallon fuel margins and return on investment. That’s one reason those facilities fees now are the norm — make a minimum fuel purchase, or pay the fee. Recent aviation manager Internet message boards indicate that fees ranging from $700 to $1200 per FBO arrival are common, depending upon the airport location and aircraft size. FBOs offer you convenience, comfort, and safety. But they cannot exist without your support. Fuel or facility fee — or both? The choice is yours. BAA w w w. B i z AvA d v i s o r. c o m

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■ International Travel

New Rules Govern International Flying Get Up to Speed Now on the Latest Regulations for Your Destinations By John Sheehan

IBAC Audit Manager / jsheehan@ibac.org

ne of the benefits of business aircraft is their ability to readily operate across international borders and operate in other States (countries) with relative ease. Since 1947, the International Civil Aviation Organization (ICAO) has made this possible by creating and promoting comprehensive Standards And Recommended Practices (SARPS) to the 192 State signatories on the treaty covering these issues. Each State is required to operate to ICAO standards if at all feasible. They do so by adopting these standards and incorporating them into their air regulations or, if they choose not to do so, by notifying ICAO of the differences they have taken with the standard. ICAO then publishes these exceptions.

ICAO standards prevail throughout the world with only slight variations. However, the differences filed may be difficult for individual operators to determine only by using ICAO documents. Since not all applicable details may be included, other methods must be used to ensure that you are operating in accordance with standards different from ICAO’s. This determination may be made by consulting with a State’s Aeronautical Information Publication (AIP), regional sections of international navigation providers’ publications, or by hiring an international flight planning service. ICAO standards prevail throughout the world with only slight variations. However, changes effective in 2010 for privately operated large and/or turbojet powered aircraft, have not yet been implemented by many States. These significant items include: ■■ Safety Management System (see BAA April 2014 for more details on SMS) ■■ Operations Manual

■■ Flight crew training program

■■ Maintenance control program ■■ Minimum Equipment List

■■ Fatigue Management System

Since these changes likely will be implemented by most States during the next two to three years, it is imperative for all international operators of business jets to start now to comply with these new standards. Currently, only Bermuda and the Cayman Islands require 12 B U S I N E S S AV I AT I O N A DV I S O R Jul y/A u g u s t 2 014

adherence to all of the new standards and have the authority to ramp check itinerant foreign aircraft to ensure compliance. The European Aviation Safety Agency (EASA) has instructed its 32 members to conform to the new standards by October 2016; a number of these States have indicated that they will do so before then. Significantly, the US has implemented few of these requirements, with little indication that it intends to take further action soon. For N-registered aircraft flying even to Canada or Mexico, this noncompliance could cause difficulties. Fortunately, there is an alternative. A program known as the International Standards for Business Aircraft Operations (ISBAO) is an industry code of practice that can be used by business aviation operators of all sizes worldwide to manage the safety, security, efficiency, and effectiveness of their organizations. Developed by the international business aviation community for its own benefit, IS-BAO incorporates a safety management system as its core, and is based largely on ICAO standards and recommended practices. Incorporating IS-BAO into a business aviation operation demonstrates conformity with international regulations while accommodating the operational needs of the company operating the aircraft. Both Bermuda and the Cayman Islands accept an ISBAO registration as proof of meeting their requirements and EASA has indicated its likely willingness for IS-BAO to be used soon as an acceptable means of compliance to its standards. In addition to satisfying many safety and regulatory compliance issues IS-BAO also: ■■ Establishes an operational management system ■■ Provides measures of effectiveness and efficiency ■■ Increases passenger and company confidence in business aviation operations ■■ Reduces aircraft insurance premiums ■■ Promotes a positive safety culture More than 700 business aviation operators and aircraft charter companies worldwide are now registered with IS-BAO. These numbers will likely grow as States implement recently released ICAO standards for the business aviation community. BAA John Sheehan is the International Business Aviation

Council Audit Manager, working with the IS-BAO standards program. He is an experienced military and civilian pilot, aviation manager, published author, and has worked extensively with the International Civil Aviation Organization.

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Aircraft MANAGEMENT ■

Manage Your Aircraft Operating Costs Understanding Fixed and Direct Charges Can Prevent Surprises By William Quinn Aviation Management Systems, Inc. / bquinn@amsinc.aero

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aircraft, maintenance costs can increase dramatically, representing as much as 50%-60% of the cost to operate the aircraft. Key factors which have an impact on operating costs are: how often and how many total hours the aircraft flies, where it is based and where you travel, how well is it operated and maintained, and its age. Fixed costs of ownership are more straightforward and are driven by how effectively you negotiate these costs, as well as your buying power. Who should be responsible for overseeing and managing the fixed and direct costs of owning a business jet? If your aircraft is managed by an internal flight department, one of the pilots is a likely choice. He or she should possess financial and management experience and skills (or can acquire them quickly), and have the desire to be a manager. If you use an aircraft management company, you will need to stay involved and provide oversight (See Dave Weil, BAA April/May 2014). Or, with the appropriate guidance and direction, sometimes non-aviation personnel, including you, your CFO, or other executive, can handle the financial management of operating your aircraft. If your own usage is low, you can use your aircraft to generate charter revenue to offset some of the fixed costs when you’re not flying, either through an agreement with an existing charter operator, or under your own air carrier certificate. Overseeing and managing the costs of owning and operating your business aircraft is not dificult, but does require care, diligence, and regular review — either by you, your designated executive, or family office. BAA WILLIAM QUINN brings his 40+ years’ aviation experience to his position as Founder/President of Aviation Management Systems, Inc. AMS provides management, technical, operational, and assetbased consulting services to aircraft owners/operators, and to the financial, insurance and legal communities.

Ju l y/A u g u s t 2 014 B U S I N E S S AV I AT I O N A DV I S O R 13

Embraer

usiness aviation offers more travel options than ever before, including fractional ownership, jet cards, dry leasing, and hybrid block charter programs offered by charter brokers or aggregators. But once you are flying about 200 hours per year, you may be ready to consider whole aircraft ownership. As the most capital intensive option, whole aircraft ownership requires specific attention to detail and due diligence. While the cost to acquire the aircraft, the potential tax implications, depreciation benefits, and the cost of capital will have an impact on the overall cost to own the aircraft, we will focus here on the fixed and direct costs, which merit careful review on a regular basis. Fixed costs — crew salaries, hangar rental, training, insurance, subscription services, etc. — are incurred when you fly the aircraft. These costs have annual renewals and should be reviewed at least annually, preferably semi-annually. Direct costs — fuel, maintenance reserves or hourly maintenance programs, FBO service fees, cabin supplies, catering, and crew expenses — should be reviewed at least quarterly, sometimes monthly. The first step is to develop an annual budget, based on the number of hours and cycles you expect to be flying, setting up a chart of accounts to track expenses you think are important to monitor. Once the projected budget is in place, you have a platform from which to benchmark your budgeted costs compared to actual fixed and direct costs. This is a fluid process: in certain months, you may be within your budget, while you may run over in others. Tracking actual costs versus budgeted numbers requires a complete and thorough understanding of your anticipated travel patterns. Then the process of overseeing and managing actual versus budgeted costs is fairly straightforward. When The Numbers Don’t Make Sense When the numbers don’t add up, there are three possible reasons: 1. Budgeted figures did not accurately forecast proposed use, 2. Annual utilization was greater or lesser than projections, and/or 3. Fixed or direct costs were greater than anticipated, possibly due to new regulatory mandates or unscheduled maintenance. Discipline and perseverance are required. The more prominent cost drivers are fuel and maintenance, which can total between 52% and 72% of the aircraft operating cost. For a pre-owned

■ Aircraft Management

When Insured and Market Values Don’t Match Avoid Risk with Accurate Appraisal

he market — not you — determines the worth of your aircraft. And in the case of aircraft disappearance or serious damage, that market value also determines what action your insurer will take. And therein lies the danger in overvaluing an aircraft on your insurance policy. Aircraft physical damage (or “hull”) policies are written on an Agreed Value basis. In the event of destruction or disappearance of the aircraft, the insurance company will pay the Agreed Value in the insurance contract, less any deductible. When an airplane sustains significant damage, the insurance company will consider the cost of repair, the value of the salvage, and the insured Agreed Value in order to determine whether to pay for repair of the airplane, or pay to the owner the insured value as a “total loss.” Here’s an example: in 2005 an owner took delivery of a new Falcon 2000EX EASy and insured the aircraft for the purchase price of $25,230,000. During subsequent insurance renewals, the owner elected to reduce the insured value to $23,000,000 — despite the fact that the average retail price at the time was closer to $18,500,000, according to the then-current issue of the Aircraft Bluebook Price Digest. This decision may have been motivated by bank loan requirements or simply by the owner’s denial of the declining market value — motivation is immaterial. Later the aircraft was struck by an airliner taxiing on the adjacent taxiway and sustained significant damage, with repairs estimated at $14,000,000. To Repair or Not To Repair Although the decision to repair or not to repair is ultimately the aircraft owner’s, the Agreed Value insurance contract determines the insurance company’s payment responsibility. Every policy differs slightly, but most state that an aircraft will be considered a total loss and the insured value will be paid when: The cost to repair plus the salvage value equals, or exceeds the insured aircraft value. Using this formula, consider our Falcon example, assuming a hull salvage value of $6,000,000: $14,000,000 Repair Cost + $6,000,000 Salvage Value = $20,000,000. That does not equal/exceed the insured value of $23,000,000. Based on the policy definition, the aircraft would not be a total loss. The insurance company, which has sole authority, would pay to repair, but not to write off, the aircraft. 14 B U S I N E S S AV I AT I O N A DV I S O R Ju l y/A u g u s t 2 014

Now, consider if the aircraft had been insured at the actual current market value of $18,500,000. This time the math and the policy definition lead clearly to declaring the aircraft a total loss. $14,000,000 Repair Cost + $6,000,000 Salvage Value = $20,000,000. That does equal/exceed the insured value of $18,500,000. This is a total loss and the insured is paid the Agreed Value of $18,500,000. The bottom line is that the insured value must accurately represent the market value of the airplane. Although the insurance industry commonly uses value publications like the Blue Book or vRef, your best option is to have your aircraft evaluated by an American Society of Appraisers’ qualified appraiser. He or she can provide a certified appraisal report based on an onsite physical examination of the aircraft and records, its maintenance history, specific equipment, and any damage history. The downside of over-insuring your aircraft may be more than just paying too high a premium: ■■ You may be forced to repair an aircraft that should be totaled. ■■ You may lose the use of your aircraft for a significant period of time, up to a year or more. While most policies have some provision for the “extra expense” of replacement charter or lease, this coverage is limited. ■■ You may be left with an aircraft that, even after repair, you and your passengers may feel is unsafe. ■■ You now may have a hard-to-sell aircraft which commands a lower sale price due to its damage history. These are the real potential dangers in over-insuring your aircraft, which make it imperative that your insurance policy accurately reflects the market value of your airplane. BAA Stephen P. Johns is President of LL Johns, a leading

general and business aircraft insurance broker. An active private pilot and University of Michigan graduate, he holds a Property & Casualty Agent license, a Surplus Lines license and is a Certified Insurance Counselor (CIC).

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Dassault Aviation

By Stephen P. Johns, CIC LL Johns & Associates, Inc. / sjohns@lljohns.com

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■ Aircraft SALES

What’s It REALLY Worth? Justify Your Aircraft’s Value By Anthony KiouSsis

Asset Insight, Inc. / akioussis@assetinsightinc.com

ou’ve made the financial commitment to sell and replace your aircraft. Then you receive an offer that is below your asking price. How do you justify its value? Traditionally, you could counter the prospective buyer’s offer – and negotiate against yourself. Or, you could objectively justify your ask price by directly comparing your aircraft’s maintenance condition to similar make/model aircraft available for sale. An aircraft’s maintenance condition represents its greatest “wild card.” But maintenance analytics are not simple calculations with respect to its value. Before reviewing an offer: 1. Using a standardized scale, compare, or “grade,” your aircraft’s current maintenance condition against its “optimum maintenance condition” (the day it came off the production line) while taking into account the cost of each maintenance event.

0 All scheduled maintenance events are due

4-6

Aircraft with upcoming, Most aircraft would Aircraft facing only high cost, scheduled score within this relatively low-cost maintenance events maintenance status range maintenance events

8-10 New or recently manufactured aircraft

FINANCIAL EXPOSURE

2. Compute your aircraft’s accrued Maintenance Exposure Value (the accumulated maintenance expense to be paid at some future date). A new aircraft has no accumulated maintenance expense. Once in service, its Maintenance Exposure grows as hours are flown, bringing it closer to its next inspection, and decreases when maintenance events are completed, as follows: Major Maintenance Due

Major Maintenance Due

Major Maintenance Completed

HOURS FLOWN

This calculation determines the likely value of the aircraft’s maintenance condition. With a high Maintenance Financial Exposure, the aircraft’s price is likely to be reduced by more than just the cost of the accrued maintenance expense. Buyers usually are unwilling to incur weeks of additional finance carrying charges waiting for maintenance to be completed. 16 B U S I N E S S AV I AT I O N A DV I S O R Ju l y/A u g u s t 2 014

3. If you are purchasing another aircraft and need to sell yours, your best strategy may be to conduct maintenance sufficient to make the aircraft “sellable,” as defined by existing market conditions. While you incur upfront costs, your aircraft’s Maintenance Financial Exposure Value will decrease, making it less likely your “cost basis” will include additional carrying expenses (financing charges, insurance costs, additional scheduled maintenance, etc.). 4. Calculate the value of any Hourly Cost Maintenance Program (HCMP) covering your aircraft. Three entities can help: Aircraft Bluebook Price Digest (www.aircraftbluebook.com), Vref (www.vrefpub.com), and Asset Insight (www.assetinsightinc.com). HCMP services cover an aircraft’s maintenance expense, including the cost for all but “routine” aircraft scheduled maintenance. Suppose, for example, you are evaluating two aircraft. Aircraft “A” has a Maintenance Financial Exposure value of $1.15M, while the exposure value for aircraft “B” is $2.25M. However, aircraft “B” has its engines and auxiliary power unit (APU) enrolled on HCMP and the value of that coverage is worth $1.1M. Applying that benefit decreases the asset’s Exposure Value to $1.15M, the same as aircraft “A.” Most experienced operators will tell you that aircraft “B” is more valuable, as its scheduled and unscheduled Engine and APU maintenance are covered by its HCMP. Would you pay the same price for these two assets? If your aircraft is not enrolled on HCMP, might the cost of enrollment be less than the cost to conduct early maintenance? While this may sound complicated, professional advisors, such as National Aircraft Resale Association Certified Brokers (www.naraaircraft.com), can help. They will guide you in establishing a pricing strategy tailored to your aircraft’s maintenance and existing market requirements, thus optimizing your aircraft’s value. You cannot manage what you cannot measure. An objective analysis of your asset’s maintenance condition will allow you to treat your aircraft as you would any other major investment, and: ■■ Pay the lowest possible price for the best-rated asset, ■■ Continually grade the asset and compare it to market, ■■ Improve the asset as required by market conditions, and ■■ Sell the aircraft at the most opportune time and with the lowest possible investment. Following these steps to justify your aircraft’s value will help you get the best price for your asset. BAA Anthony Kioussis is president of Asset Insight, Inc., which developed an Asset Grading System Process for evaluating an aircraft’s maintenance condition. His more than 35 years of aviation experience includes GE Capital Corporate Aircraft Finance, Jet Aviation, JSSI, and British Aerospace.

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■ Washington REPORT

FAA’s NextGen Program A Bold Effort to Make Flying Leaner and Greener By DAVID Collogan

18 B U S I N E S S AV I AT I O N A DV I S O R Ju l y/A u g u s t 2 014

In developing these new procedures, the FAA is focusing on what it terms “metroplexes”: systems of airports in close proximity and their shared airspace that serve one or more major cities. The Denver metroplex now has a network of 51 satellite-based procedures designed to provide more direct routes, deconflict the airspace, save fuel, and reduce emissions. Those procedures include 21 arrivals with Optimum Profile Descents (OPDs), instead of the traditional stair-step descent, which requires successive controller clearances to descend to the next level. Flying an OPD allows pilots to reduce engine thrust to idle as far as 150 miles from the airport and essentially glide toward the airport, usually arriving on a more predictable course and speed. Since the new procedures were implemented in the Denver area in 2013, the FAA says the number of go-arounds (missed approaches) due to aircraft coming in too high or too fast has decreased by 35%. The FAA expects similar results in the Houston metroplex, where 61 new procedures were implemented on May 29 of this year, after more than two years of planning and training. Similar improvements have been or will be implemented in a dozen other areas including north Texas, northern California, the Las Vegas Valley, Florida, Atlanta, Boston, New York, and Philadelphia. The new arrival and departure procedures are expected to improve air traffic flows in those areas, and across the country. By 2020, the FAA expects NextGen improvements will reduce delays by 41% compared with what would happen if no NextGen improvements were made, saving you more time on almost every flight. And saving the world 1.6 billion gallons of fuel, as well as reducing cumulative carbon dioxide emissions by 16 million metric tons — perhaps most important to our own “NextGen.” 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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istockphoto

dlcollogan@gmail.com

here is much to savor about flying on a modern business aircraft. It is an incredible time management device, enabling you to move about the world on your own schedule. You fly directly to your destination, without traversing congested terminals or worrying about connecting flights and lost luggage. In addition to offering control over time and routing, having access to your own aircraft affords privacy and security. It permits you to set the in-flight agenda: get some work done without interruptions, communicate with people on the ground or on the airplane, read a book, take a nap, think big thoughts, or have a snack. It’s not surprising that so many retired executives say the one thing they miss most is access to the company airplane. But as good as it is now, the flying experience should get incrementally better over the next half dozen years. The Federal Aviation Administration, in conjunction with the aviation industry and air traffic controllers, is engaged in an ambitious program to make flying more efficient, safer, and even greener. That effort, known as NextGen (Next Generation Air Transportation System) is focused on adapting new technology to better manage air traffic movements and reduce delays both in the air and on the ground. One of the keystone components of NextGen is Automatic Dependent Surveillance-Broadcast (ADS-B), which will eventually supplant radar for tracking aircraft. Earlier this year, the FAA completed installation of a network of more than 700 ADS-B ground station transceivers across the country. Aircraft flying in most controlled airspace must be equipped with what is called ADS-B Out — the ability to broadcast their position to the ADS-B network — by January 1, 2020. ADS-B Out avionics will use onboard navigation equipment to derive an aircraft’s position, which then will be broadcast about once per second to air traffic control services and for use by other aircraft. Operators who decide to equip their aircraft with optional ADSB In will be able to see the location of nearby ADS-B Out equipped aircraft via air-to-air reception or by ground relay. ADS-B In also will provide operators with a comprehensive airspace and airport surface traffic picture, plus graphical weather information from ground-based weather radars and text advisories on significant weather and thunderstorm activity. The advantages of ADS-B will grow in the years ahead as more aircraft are equipped with that capability. But other improvements are being implemented right now. Use of satellite-based approach procedures provides pilots with the ability to fly more direct routes, saving fuel, reducing aircraft exhaust emissions, and making more efficient use of available airspace.

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