Business Aviation Advisor June 2014 by Business Aviation Advisor Magazine

May / June 2014

Refurbish & Upgrade Your Aircraft Preserving the value of your asset

Thereâ&#x20AC;&#x2122;s No Place to Pull Over at 41,000 Feet Explore Your Options: Charter, Jet Cards, and Fractional Managing Your Management Company Part One: Finances A Business Aviation Media, Inc. Publication

w w w . b i z ava d v i s o r . c o m

BATTLE T ESTED

Our 35 years of success are founded on one thing: Tireless exertion in defending the interests of our clients. So when you need a partner to maximize your opportunities in a complex aircraft marketplace, donâ&#x20AC;&#x2122;t you want someone proven victorious in the arena?

AVJET.COM (818) 841-6190 SALES

ACQUISITIONS

CHARTER

MANAGEMENT

COMPLETIONS

M a y /J u n e 2 014

F e at u r e s Refurbish and Upgrade Your Aircraft

Preserving the value of your asset requires careful, specific planning

by K e vin Hoffm an

The Fabled Pilot Shortage

It’s their shortage — but doesn’t have to be yours

by Pe te Agur , J r .

There’s No Place to Pull Over at 41,000 Feet

Explore Your Options: Charter, Jet Cards, and Fractional

If you’re not yet ready for whole aircraft ownership, consider these alternatives

by DAVID W YN DH A M

Don’t Be Emotionally Compromised 13 Keeping your cool when purchasing a business jet

by Ste wart H . Lapayow k e r , E s q .

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

14 Managing Your Management Company Part One: Finances

How to be an effective partner in managing your aircraft

by Dave W e il

Finding the Best Deal in an Uncertain Used Aircraft Market

by Jan in e Iannar e lli

Why you need your own dedicated maintenance technician now more than ever

by Tho m a s W. MITCHELL

• Volume 1 / I s sue 2

Used aircraft inventories are stable, but prices are not. What does this means for you, as a buyer or seller?

D e pa r t m e n t s Publisher’s Message Of Highways and Skyways by G il Wolin

Washington Report

Accelerated Aircraft Depreciation

by Davi d Collog an COVER PHOTO: International Jet Interiors www.intljet.com

Ma y/Ju n e 2 014 B U S I N E S S AV I AT I O N A DV I S O R 3

rolls-royce.com

CorporateCare®a global liquid asset

Aircraft enrolled on CorporateCare have higher asset values and liquidity as well as access to a truly global service network. So while you are enjoying engine reliability, supported by the resources and engineering expertise of the OEM, you’ll know you are helping to maximize your asset’s value and liquidity for the future. For more on CorporateCare, contact Steve Friedrich, Vice President – Sales and Marketing, at +1 (703) 834-1700, or email corporate.care@rolls-royce.com.

Trusted to deliver excellence.

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 Pete Agur, Jr. The VanAllen Group, Inc. pagur@vanallen.com Kevin Hoffman Aerospace Concepts khoffman@aerospaceconcepts.com Janine K. Iannarelli Par Avion Ltd. jki@paravionltd.com Stewart H. Lapayowker, Esq. Stewart H. Lapayowker, P.A. stewart.lapayowker@shlpa.com Thomas W. Mitchell Essex Aviation Group, Inc. tmitchell@essexaviation.com Dave Weil Flight Dept Solutions dweil@flightdeptsolutions.com David Wyndham Conklin & de Decker david@conklindd.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. Postmaster: Please send address changes to: Business Aviation Media, Inc., PO Box 5512 • Wayland, MA 01778, USA ©Copyright 2014 by Business Aviation Media, Inc. All rights reserved

Printed in the USA

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

Of Highways and Skyways

n 1946, Nat “King” Cole first sang “Get your kicks on Route 66,” about the fun and romance of long-distance travel by car. Just ten years later Congress enacted the Federal-Aid Highway Act, which created the Interstate Highway System. Federal funds literally paved the way for expeditious road travel throughout the country — for commerce as well as recreation. The surge in travel by road in the ’50s was paralleled by the post-WWII growth in air travel, which was paid for in much the same way, with Federal funds building the “roadways” in the skies over which today’s airline and business jets still travel. To date, ongoing operations and maintenance of both roadways and skyways have been paid for from Federal trust funds — the former with gasoline and diesel taxes, the latter with excise taxes on fuel and commercial air travel. More than half a century later, both are in need of overhaul, and neither trust fund appears to have the money to accomplish the needed “fixes.” The US Highway Trust Fund is projected to run out of money by summer’s end. The Airport and Airways Trust Fund balance was diverted long ago to cover day-to-day FAA operations. This leaves little to invest in NexGen, aviation’s new satellite-based, digital technologies navigation and communications network. NexGen’s new technologies come with new procedures designed to accommodate the ever-growing fleet of commercial and business aircraft, and keep air travel safe and efficient. The solution to both shortfalls, according various governing bodies, is user fees. In the case of road travel, state and local governments look to convert free bridges to toll bridges. For air travel, it’s a per-flight segment fee on all instrument flights — and virtually every business jet flight is operated that way. The daily cost to get to work could increase dramatically, if your commute involves crossing a bridge. And the White House’s proposed $100 per-flight segment fee would add significantly to your business jet travel budget. Never mind the question of the cost of yet another government department to collect those fees. It’s the fee premise that is most troubling — that only the aircraft owner or passenger benefits from a safe and efficient airway system, and therefore should bear the cost. Fortunately, the combined efforts of several aviation trade associations have helped keep these taxing efforts at bay in previous years. But stay tuned and stay in touch — the 2015 budget battle has just begun. Best regards,

Gil Wolin — Publisher gwolin@bizavadvisor.com

Ma y/Ju n e 2 014 B U S I N E S S AV I AT I O N A DV I S O R 5

■ Aircraft Modifications

Bombardier Challenger 850 Completion from Flying Colours Corp.

Flying Colours Corp.

Refurbish and Upgrade Your Aircraft Preserving the value of your asset requires careful, specific planning By Kevin Hoffman

Aerospace Concepts / khoffman@aerospaceconcepts.com

s it time to refurbish or upgrade your aircraft? Start by making a key decision: are you going to keep it — and if so, for how long? — or sell it? If you plan to hold it for another five years, an upgrade or refurbishment will be primarily for your own benefit. If you plan on selling within the next year or two, carefully consider the options that will increase its value or make it more attractive for a quicker sale. Realize that if you design a unique interior or install expensive options, they may not add any substantial value to the aircraft. According to John Spoor, President of Las Vegas-based SAI Valuations, “Upgrading and refurbishment definitely adds value to your aircraft; however it is not dollar for dollar.” Often, those who benefit from your upgrades are the secondary buyers. Spoor says it also matters what upgrades you make. For example, a state-of-the-art upgrade in voice and Internet connectivity can return as much as 80 cents on a dollar, whereas second stage upgrades, such as older technology analog cockpit instruments to flat panel screens, will not return as much value. He recommends considering these factors: 6 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

■■ Aircraft total time — if you want a replacement aircraft with

less time on its airframe and engines (and so presumably less wear and tear), you’re likely to find one, given the current high inventory of pre-owned aircraft on the market. ■■ Any damage history to your aircraft is likely to have an impact on its value. ■■ How desirable is your aircraft’s airframe? Some aircraft are better suited to upgrade and refurbishment than others. ■■ Most aircraft owners now require the latest technology in the cabin, so a “connectivity” upgrade carries high desirability and higher value. Refurbishment or Upgrade? What is the difference between a refurbishment and an upgrade? A refurbishment is a simple change and can include a change in the colors, a new carpet, sidewalls and headliner (the soft goods), and new exterior paint. When complete, the refurbished aircraft will have essentially the same technology interior. But an extensive refurbishment may include a floor plan change, which likely will require a FAA recertification of the interior — undoubtedly raising the refurbishment cost significantly, in both time and money. w w w. B i z AvA d v i s o r. c o m

Or, you can upgrade the aircraft interior by adding options or enhancing the entertainment and communications suite. Your aircraft will benefit from incorporating some of the recent major technological advances in the cabin. While new technology exists in the avionics and engines, you as the owner will experience the direct benefits of upgraded cabin technology. “Aircraft modernization or refurbishment projects can substantively improve an aircraft’s Asset Insight Index,” according to Tony Kioussis, President of Asset Insight, Inc., whose company grades the technical condition of business aircraft for owners, appraisers, and leasing firms. “How much an aircraft’s value improves will vary. While modernization projects can increase the price at time of sale, installation of passenger communication technology not yet available when the aircraft was manufactured can enhance ‘efficiency value’ for the current owner. Optimizing the cost vs. value equation usually comes down to how well the project is managed from the design phase forward.” “For example,” Kioussis says, “the owner may wish to install a three-place divan in a certain position in the cabin. The designer can address the owner’s request, and the facility can install the divan per the designer’s drawings. However, once the owner starts operating the aircraft, he or she may be disappointed with the cabin ventilation system, because achieving the desired installation required an inefficient routing of air ducts. This is why hiring a full-time, independent, project management firm, experienced in aircraft completions, modernizations, and upgrades is critical in such projects. These firms more than pay for themselves.” How to Begin Prior to beginning any project of this magnitude, you should consider employing an outside company that has the capability to manage such a large undertaking. A competent program management firm will be able to keep you informed on the progress, and consult you promptly about important decisions you must make. The program management firm also will oversee the many experts who are involved in the process, including designers, quality inspectors, and technical managers. They also will serve as your liaison to the modification center, as they will be based onsite to oversee the quality of the work, to ensure conformity to your specifications, and keep the project on schedule. Some owners prefer that their own flight department oversee operations. That may be feasible for smaller projects. But the specific expertise required to complete a full refurbishment to your satisfaction, on time and within budget, is usually found only in outside consultants who work with a variety of completion centers on a regular basis — not once every five or more years. The primary (“Keep or Sell?”) decision affects every following decision. Since the cost of a refurbishment or upgrade can vary considerably — depending upon the design changes, options selected, and age of the aircraft — your expectations should be clearly defined at the outset. First you will define a detailed scope of work, including the floor plan design, desired options, any manufacturers’ service bulletins for product improvement you’d like added, or required inspections that need compliance. The w w w. B i z AvA d v i s o r. c o m

Choosing an Aircraft Completion Center ■■ Does it have the capability, experience, and capacity to

work on your aircraft? ■■ Is it approved by the Original Equipment Manufacturer

(OEM) to work on your type of aircraft? Is it an FAA-approved repair center? ■■ Does it have a reputation for doing the highest-quality

work? Will it show you examples? ■■ Where is it located?

Does it have state-of-the-art facilities?

■■ Is there a good working relationship between the work

force and the management? ■■ Will you or your representative have the ability to see

the progress of the build any time you want? more detailed the scope of work, the design, and the specification, the higher the chance that your expectations will be met. Another factor is whether or not your aircraft is due for any detailed inspections. Since major modifications will require removing the interior of the aircraft, the best time to complete a major refurbishment or an upgrade is in conjunction with a major airframe inspection. Expect to go through the cycle of comparing your aircraft’s inspection schedule with prospective modification requirements a few times before you finalize the scope of work and budget. Once you have clearly defined the scope of work, you will select a completion center (or service center) to complete the work. Selection of a capable center should be based on a number of factors (see sidebar above). Once selected, the center will perform an incoming intake inspection, and then order the required parts. Ideally, the completion crew would have all the parts and materials on hand, then work steadily until the project is completed and inspected. But that doesn’t always happen. Many custom components and materials have very long lead times, so proper planning and materials ordering will expedite your project. The Three Project Components Scheduling the work, including ordering parts and materials, is only one of the three main components that must be managed before any refurbishing or upgrade project can begin, the other two being quality and cost. Ideally, each component will complement the others in a timely and efficient way. But not all customers have the same priorities. Some owners want the very highest quality, with no consideration to cost or project completion time. Others will forego possible upgrades that are likely to result in undue schedule delays. The formula for successful completion varies from owner to owner. While routine maintenance helps preserve your aircraft’s dayto-day utility as a business tool, preserving its asset value requires periodic refurbishment and upgrades — and those require careful, specific planning, oversight, and execution. BAA Ma y/Ju n e 2 014 B U S I N E S S AV I AT I O N A DV I S O R 7

■ Flight Crew Management

The Fabled Pilot Shortage It’s their shortage — but doesn’t have to be yours By Pete Agur, Jr. redicted for years but postponed until recently, the severe pilot shortage now is upon us. With the economy improving, the stock market up, and healthier retirement accounts, an increasing number of senior aviators are retiring. The initial effects of the FAA’s 2007 age 65 rule, which raised the mandatory retirement age from 60 to 65, have run their course, and the active commercial pilot population has stabilized at a level sufficient to meet current commercial air travel requirements. But today, talent is rapidly draining out of the more experienced pilot pool, and the inward flow is not robust enough to satisfy projected demand, for several reasons: Flying for the airlines no longer is a career magnet for the young. Being a modern day airline pilot is not a glamorous job with great compensation and benefits. Choosing flying as a career is more difficult because of the greatly increased investment needed to acquire enough flight hours and ratings to qualify for a well-paid position. The military is not churning out pilots into the workforce as it did during the ’70s. There is competition for talent between and within each segment of professional aviation: business aviation (corporate and on-demand air taxi/charter), cargo/freight transport (FedEx, UPS, et al.), and the scheduled airlines (major and regional carriers). But the pilot shortage does not have to affect you. Here’s why: The less desirable segments of aviation are having the hardest time winning the career competition. At the entry level, flying freight for the small haulers is hard work with poor pay. The same

1 2 3

Standing by and ready to fly also is “on duty.” goes for flying for small charter companies and regional airlines. As a result, the major airlines and the big cargo haulers are targeting their recruiting efforts on each of these segments to fill their empty seats, knowing that they need offer only minimal advantages in work load or career opportunity to meet staffing requirements. Business aviation can present the most favorable working conditions for pilots, enabling you, the owner, to attract the more experienced professional — so long as you are willing to offer them a good quality work life and reasonable compensation. Quality of work life for pilots is widely misunderstood. The 8 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

chairman of a multi-billion dollar company recently told me he wants to come back as a pilot because “they have it so easy.” Ironically, our meeting was about pilots leaving because of excessive workload. This executive thought of pilot workload strictly in terms of hours flown. But, in business aviation, hours flown is only a small part of pilot productivity — more correctly defined by days worked, and the definition of that work. Luckily, your airplane easily can support your busy schedule because it has the capacity to fly 365 days each year (less about 5% for scheduled and unscheduled maintenance). Conversely, a pilot’s maximum duty capacity is about 225 days per year (after subtracting weekends, holidays, vacation, sick days, and training days). “Duty” does not mean flying every day. If you want your airplane ready to go year round, it takes 730 pilot days (365 days times two pilot seats). If a pilot has 225 days of duty capacity, it will take 3.24 pilots to support your expectation. To arbitrarily declare that a “no fly” day equals a day off for a crewmember is like telling a fireman he didn’t work just because the alarm bell didn’t ring. A good quality of work life requires balance between work and personal time, as well as feeling respected and appreciated. When these factors are present, money becomes a less important part of the equation. Given a high quality of work life, you can attract and keep the best and brightest by paying market wages. Market plus 25% is unnecessary, as there are not many good jobs out there, and a lot of good people who want them. But unless you provide a great work environment and market compensation, you will have to pay a premium, and even that will not be enough to keep the best and brightest pilots. And if you can’t attract and keep the best and brightest, who is going to fly your plane? BAA w w w. B i z AvA d v i s o r. c o m

istockphoto

The VanAllen Group / pagur@vanallen.com

How Is Your Aircraft’s Maintenance Condition Affecting Its Value?

Find Out — With the Asset Insight Index The Only “Credit Score” for Your Aircraft’s Asset Value This simple-to-understand, industry standard grading scale measures the single greatest factor affecting your aircraft’s asset value — its maintenance condition. The better your aircraft’s maintenance condition, the higher its Index. Avoid surprises, use the Asset Insight Index to: ▲ Objectively analyze and grade your aircraft’s maintenance condition. ▲ Compare your asset to aircraft listed for sale. ▲ Justify your ask or offer price for an aircraft.

Call (540) 905-4555 info@assetinsightinc.com Manage your aircraft as you do your other Financial Assets.

www.assetinsightinc.com

■ Aircraft Maintenance

There’s No Place to Pull Over at 41,000 Feet Why you need your own dedicated maintenance technician now more than ever By Thomas w. Mitchell Essex Aviation Group / tmitchell@essexaviation.com

Hiring a Technician

In addition to superior education, training, and a strong work ethic, look for these skills: ■■ Experience — In addition to knowing how to fix what’s broken, knowing when to ground — and when not to ground — your aircraft is key. ■■ Clear, concise communication and “chemistry” — Since most flight departments are small, working together effectively is important. Lack of, or miscommunication, won’t do, since responsibilities are great and details are many. ■■ Professional business skills that gain your confidence — For an otherwise-excellent hire, there are many industry courses offering non-technical skills for maintenance technicians. ■■ Organizational skills — Record keeping, care of tools and equipment, invoice control, inspection planning, tracking of regulations, tracking of due items are critical — now and when you sell the aircraft. 10 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

higher. Also, intervals between scheduled inspection events have increased and even have doubled in some cases — certainly these are impressive numbers. So while it may sound surprising, you need your own technician now more than ever! Having your own trained technician fills a significant role in keeping your aircraft flying, and flying safely. Here’s why: Today’s aircraft technology requires expert knowledge and very specific training on the make, model, and equipment of your aircraft. The unfortunate alternative often requires purchasing expensive parts that don’t fix the problem, and which can result in delays or canceled trips due to limited diagnostic skills. Your qualified technician will almost always provide a meaningful return on investment. Owners are traveling more, and to more remote locations worldwide, which rarely offer maintenance services. Consider that statistic of 98% or greater dispatch reliability, a major factor in owning an aircraft. Much is behind achieving and maintaining this goal; it doesn’t just happen. The success of dispatch reliability, assuming you’ve purchased the highestquality aircraft, always will be traced to proactive or preventive maintenance actions. Your flight crew and technician will maintain a continual dialogue to ensure that the smallest hints of mechanical issues are addressed and corrected before they manifest into a delay or a cancelled trip. Only two exceptions apply: if your aircraft utilization is very low, a technician may not be financially justified; and if you have easy access to a qualified maintenance consortium at your home base. Otherwise, your own dedicated technician is necessary. After all, when you see a blinking light, there’s no place to “pull over” at 41,000 feet. BAA

1 2 3

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

istockphoto

hen it comes to operating your business aircraft, there are few practical alternatives to having your own pilots. However, when deciding whether to hire your own dedicated maintenance technician, consider these factors. If you’re a long-time user of business aircraft, you might assume that most every fuel stop or your destination airport still has available maintenance at its Fixed Base Operation (FBO) — which used to be true, especially if your plane needed only minor repairs. Today it is more likely that the impressive chrome-and-glass FBO you visit does not offer qualified maintenance services, primarily due to rising costs and the burden of conforming to new regulations. Having less access to maintenance support as you travel requires added contingency planning to keep your aircraft in service. But maintenance services still are available. Looking at aircraft sales brochures or aviation magazines, you can see glossy pictures of impressive and fully equipped maintenance trucks — or even a fleet of dedicated support aircraft — behind a team of technicians ready to travel to your aircraft. The premise? That you can count on “roadside assistance” regardless of the situation or your location. If that’s so, how might that affect your decision to hire your own dedicated maintenance technician? Let’s look at two trends. Quite a few modern aircraft have tracked an impressive dispatch reliability of nearly 98% or even

Bobby Orr — Flying in 1970

SAFETY | EXPERIENCE | RELIABILTY

Discuss the benefits of flying with Rectrix. Call 781.274.0400

Bobby Orr — Flying Today

781-274-0400

www.flyrectrix.com

Rectrix Aviation, Inc. is an ARG/US Platinum Rated and IS-BAO registered FAA Air Carrier, certificate number 6RXA771M

■ Supplemental Travel

Explore Your Options: Charter, Jet Cards, and Fractional If you’re not yet ready for whole aircraft ownership, consider these alternatives By DAVID WYNDHAM oday’s business air travel options today are many, and allow for customization of hours, aircraft, and costs. Whole aircraft ownership offers an aircraft and crew tailored to your specific requirements and preferences, but requires a significant capital investment. We normally recommend that clients new to business air travel start with another option, unless they are certain their travel requirements justify full aircraft purchase. If you’re not yet ready for whole aircraft ownership, consider: On-Demand Charter Charter, an excellent way to experience the benefits of business aviation, is the best option when your travel is intermittent, the type of aircraft needed varies, and you fly not more than about 25 hours per year. Travel by charter is safe, efficient, and when used appropriately, cost-effective. Your commitment is limited to only the individually contracted trip. Charter providers offer a variety of different aircraft to suit most travel needs, and since most are regionally based, you’ll likely find one near your closest metropolitan area. With traditional charter, you pay for the hours the aircraft is used, including any positioning. Other charges include catering, landing fees, and taxes. Discounts can be offered for round-trip/ same day travel, or “empty leg” trips, when your travel matches a repositioning flight on an aircraft returning with no paying passengers. A commitment to advance purchase hours in blocks of time from a single provider is called “block charter” and often offers discounts and/or an availability guarantee. However, absent a block hour purchase, the charter provider or aircraft type you require may not be available on the dates you desire, requiring you to pay for a larger aircraft, for an aircraft to be positioned from far away, or to reschedule your trip. Jet Cards Jet cards make economic sense when you fly 25 to 100 hours annually, especially if different aircraft capabilities frequently are needed. A form of block charter, jet cards commonly are sold in 25-hour blocks, and offer added features such as one-way (or occupied leg only) pricing. Costs may be lower than traditional charter (unless guaranteed availability is included), as you pay in advance for the card and are guaranteed a set price per hour for the aircraft type/ category used. There is no commitment beyond the hours of flight time purchased. You can purchase jet cards according to aircraft type or category, and if you need aircraft for both short 12 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

and long trips, you can purchase different cards for aircraft that best meet each need. Like charter, booking generally is via telephone or online. Many card providers also offer concierge services such as ground transportation, hotel booking, and even special event tickets. Jet cards offer guaranteed availability when booked according to contract, often with as little as 24 hours’ notice. Fractional Ownership Fractional ownership is best for those with consistent travel needs that range between 50 to 200 annual hours. Under fractional aircraft ownership, an aircraft management company facilitates the sale of shares of an aircraft to a number of co-owners, who in turn employ the management company to operate the aircraft on their behalf. Typically, you purchase an interest in a specific aircraft, based on 800 occupied hours per year for each whole aircraft. Each 1/16th share is guaranteed 50 occupied hours annually. You have access to the entire fleet of the provider’s aircraft and can upgrade or downgrade your aircraft category with hourly-fee adjustments. Ownership contracts typically run for five years. Owners are charged only for hours during which they actually occupy the aircraft. In addition to the initial capital outlay (or lease payments), both monthly and hourly charges apply. Costs escalate annually based on the CPI or on a fixed minimum increase. At the contract’s end, your share is sold back to the management company or you may elect to renew. Make the best use of your resources by choosing the right form of business aircraft travel for each trip. And when you are flying 200 to 250 hours annually, it’s time to evaluate full aircraft ownership. BAA w w w. B i z AvA d v i s o r. c o m

istockphoto

Conklin & de Decker / david@conklindd.com

Aircraft Acquisition ■

Don’t Be Emotionally Compromised Keeping your cool when purchasing a business jet By Stewart H. Lapayowker, Esq. Stewart H. Lapayowker, P.A. / stewart.lapayowker@shlpa.com

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

usually reply: “It’s possible, but more likely they’ll respond with their concept of the transaction, and then we’ll discuss it.” The document is distributed, then comes back with some revisions. In the meantime, the client has climbed aboard the aircraft, smelled the leather seats, admired the interior, and spoken with the seller’s representative. I’m convinced there’s some hypnotic drug in the leather, because inevitably, the next time we meet to discuss the letter of intent or purchase agreement, I hear the dreaded tell-tale words: “I want this aircraft,” or “I understand, but that result is not going to happen. I looked them in the eye and I trust them.”

Be willing to walk away. Impatience will cost you money. A transactional lawyer’s job is to explain the risks; the client’s is to evaluate them and make the decision. Aircraft transaction decisions have a high economic impact. To the extent that you are affected by emotion, there is another risk: a client may agree to sub-optimal terms, blinded by having “felt” and “experienced” the aircraft. If you feel afraid to walk away from the aircraft you “must buy,” or more importantly, tell the aviation professionals you’ve engaged to help that you’re now willing to assume all risks, stop. Take a step back and consider whether you are “emotionally compromised” and should relinquish your command. Impatience will cost you money. So will emotion. BAA Ma y/Ju n e 2 014 B U S I N E S S AV I AT I O N A DV I S O R 13

istockphoto

he film Star Trek (J.J. Abrams, dir., Paramount Pictures, 2009) presents an alternate timeline in which Spock is Captain and Kirk is First Officer. Kirk taunts Spock in an effort to upset him and, after beating up Kirk, Spock realizes he’s lost control of his emotions. He announces: “Doctor, I am no longer fit for duty. I hereby relinquish my command on the grounds that I have been emotionally compromised.” Even with almost 25 years of practice handling corporate aircraft purchases, I’m still surprised by how often the process takes on a very personal, emotional tone unlike that of any other business asset purchase. The issues involved in purchasing a corporate aircraft are varied and complex, including the drafting and negotiation of transaction documents, structural and tax issues, among others. Although it would be ideal to address these issues before the client’s decision to acquire the aircraft, most of the time our first meeting is to work on the letter of intent or purchase agreement, because the target aircraft already has been identified. I routinely explain to the client the key issues to be addressed. Will it be a “hard deal” (if the seller fixes the discrepancies, buyer is committed to buy and the deposit is immediately at risk upon signing the purchase agreement), or a “soft deal” (after the inspection, will the buyer have an outright rejection right, and therefore the buyer’s deposit isn’t at risk until technical acceptance)? What should be the deposit amount? Where will the inspection take place? What are the basic delivery conditions? To what extent is the seller obligated to repair discrepancies (only airworthiness/safety of flight, or others)? Is the seller of the aircraft the registered owner or will the buyer purchase in a “backto-back” transaction from a third party? Many of these issues are driven by the objective analysis of the leverage of the parties in the transaction. Is the aircraft in demand? Have prices been falling? Is it a buyer’s or a seller’s market? Was a transaction on the aircraft recently terminated? Assuming the buyer has no previous experience with an aircraft acquisition, one would think that the interaction with aviation counsel would be objective, with the client listening, asking questions, and making rational decisions. However, an aircraft acquisition can have a strong subjective emotional component. Often, I review the letter of intent, explain the issues, get buy-in on needed revisions, and then hear a telling question: “If we go back with these revisions, do you think we’ll lose the deal?” I

■ Aircraft Management

Managing Your Management Company

Part One: Finances By Dave Weil

Flight Dept Solutions / dweil@flightdeptsolutions.com

ou’ve just completed an extensive RFP process to select the management company best suited to your needs. “Now we don’t have to worry about a thing,” you think. But if you want the best return for your investment, someone on your team needs to stay involved. From my more than 20 years with several aircraft management companies, it is clear that clients who ask questions and review their reports monthly tend to get the most careful attention from the management company’s accounting department, especially in these areas:

Monthly Financial Reporting — Your management company should provide you with fully transparent and easily understood reports. Ideally, costs are identified with specific trips, particularly if third party charter trips are flown, so you can verify proper allocation and easily identify any mistakes, and prevent recurring errors. Review your reports carefully every month. Two particularly useful ones are: the monthly trend report, showing a month-to-month comparison by cost category, including direct cost-per-flight hour; and an invoice detail report listing the details of every invoice for each cost category. Your management agreement should require that the monthly report include invoice copies for items greater than a specified dollar amount. Reports and invoice copies should allow you to confirm that no markups are being taken on aircraft costs other than those specified in your agreement. Benefit Charges — Many management companies charge for payroll taxes, workers’ compensation, and benefits as a 14 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

percentage of salary, particularly when an aircraft has assigned dedicated personnel. Full justification for the percentage charged to you must be provided. Typically, a much smaller percentage should be applied to any bonuses paid to the crew, since not all the benefits and taxes apply to such payments. Maintenance Charges — An annual maintenance budget should be prepared with actual results measured against it. If you are charged for management company personnel (other than your assigned mechanic) to perform a significant amount of the maintenance, it’s best to bring in an independent third party periodically to review the charges. All major maintenance events should be subject to a competitive bidding process with at least three bids. Recognize that quality and timeliness may be more important to you than cost. Fuel Purchasing — Every management company claims to get their clients great discounts but that’s not always so. Fuel, in particular, is an expense with wide variations in amounts actually paid. Ask for comparative reports or other data that demonstrate that the fuel discounts you were originally promised are the actual amounts you are paying. Insurance — Many aircraft insurance and workers’ compensation policies provide a premium refund to reward favorable loss experience. Your agreement should indicate that your share of this refund will be credited back to you annually. European VAT — For European trips, many expenditures will be subject to Value-Added Tax (VAT) rates of 20%+. There are companies that, for a fee, will assist your management company to get you a VAT refund. Is this resource being used? Fuel Tax Refund — If your aircraft flies trips for which the federal excise tax (FET) applies — for example, trips flown as charter under FAR Part 135 for purposes of internal rebilling — then you are entitled to a refund on the fuel tax that was paid at the pump for fuel burned on the FET taxable trips. Be sure your management company credits you for these refunds when they take the credit on their own excise tax return. FET on Management Company Payments — Be aware of this controversial situation: some IRS auditors try to assess the 7.5% FET on payments made by aircraft owners to their management company for Part 91 (non-commercial) flights. Ascertain that your management agreement is constructed so as to minimize the likelihood of the tax being assessed. And ask to be updated on whether or not the IRS has approached them on this matter. If your aircraft is or will be managed, plan to be an active partner in the relationship with your management company. BAA w w w. B i z AvA d v i s o r. c o m

iStockphoto

How to be an effective partner in managing your aircraft

ARGUS Ratings The Most Recognized and Requested Symbol of Quality

ARGUS Rated Charter Operators are the most trusted and respected in the world. ARGUS Rated Operators are the only choice for the most selective buyers of charter. ARGUS Ratings are private aviationâ&#x20AC;&#x2122;s only truly independent, third-party source for trusted operator due diligence. Demand the best, demand ARGUS Rated Charter Operators.

FLY CONFIDENTLY WWW.ARGUS.AERO

■ Aircraft SALES

Finding the Best Deal in an Uncertain Used Aircraft Market Used aircraft inventories are stable, but prices are not. What does this means for you, as a buyer or seller? By Janine Iannarelli he business aircraft market always has been exceptionally sensitive to both political unrest and economic distress. Despite recent signs of a nascent US recovery, it continues to struggle, with few exceptions, such as the recently introduced Gulfstream G650. The current resale market bears witness to that struggle. At the end of February 2014, 12.19% of the 10,937 business jets flying today were listed for sale. That’s 2,431 aircraft. The good news? That’s down from 13.5% a year ago, and down from 2009’s nearrecord high of 18.2%, according to JETNET LLC, a leading aviation data and information service. Fewer aircraft for sale means fewer choices. That makes access to accurate information about the market for a particular model of aircraft even more critical to executing a successful transaction. Today, select markets still are undergoing corrections, and the difference between asking price and final sales price varies greatly among aircraft makes and models. For example, recent “pre-owned” Gulfstream G650s are selling for as much as a 10% premium above the original MSRP. From 2009 to 2012, the range between asking and selling price varied from 5% to 15%. Today’s sellers are more realistic, narrowing that gap to shorten negotiations and quickly complete the transaction. But absent good, empirical data, the unknowing first-time buyer can be vulnerable either to overpaying, or to overlooking the need for popular options — like on-board Internet and cell phone connectivity. While such options may dictate a higher purchase price, they can be critical to preserving the aircraft’s asset value at time of resale, as well as enhancing its utility for business, or marketability for charter. Accurate data on specific aircraft makes and models are not readily available to the retail buyer. And gathering information from secondary sources is not a reliable way to evaluate a market, let alone make a “buy” decision. Most online aircraft sales venues are not policed, so old or incorrect information often is mixed in with reliable data. Additionally, “sold” data are nonexistent in the public domain and there is no organized “multi-listing” service to which you can turn for comparable information (“comps”). In order to ascertain fair market value for a specific aircraft, you must know not only what other serial numbers are offered, but their specific attributes as well: year of production; total time 16 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

and cycles on engines, airframe, and other life-limited components; as well as any service program subscriptions covering the engines or airframe, modifications or enhancements, significant avionic installations, and, of course, the maintenance status. Once you’ve selected a specific make and model, it is imperative to review transaction history — what have others actually paid for that type of aircraft? Depending on the make/model, you may need to review transactions only for the past three months — or as far back as a full year. Here’s how access to hard data helped one owner’s resale transaction. In 2012, two owners, one of a Falcon 2000LX and the other of a Citation XLS, found that the other’s aircraft better suited their individual travel needs, and decided to exchange aircraft. Each had some idea of his own aircraft’s value, but not about the other’s. Their initial offers were more than $1,000,000 apart. We were able to provide our client, the Falcon owner, with a wealth of historical transaction data as well as current asking prices for both models. That empirical data provided a sound basis for a price reduction on the XLS, while supporting the Falcon’s price. The owners were able to complete the transaction, each confident that he was getting fair market value for his aircraft, thanks to the ability to reference both actual airplane transaction history and a detailed overview of the current market. Whether buying or selling a used aircraft, access to timely and accurate market data is a requirement for success. Arm yourself with the best, most current data before entering into the sales arena, and stay attuned to the market status and fluctuations. BAA w w w. B i z AvA d v i s o r. c o m

iStockphoto

Par Avion Ltd. / jki@paravionltd.com

Stewart H. Lapayowker, Esq.

Editorial Contributors Pete Agur, Jr.

Chairman & Founder The VanAllen Group, Inc. pagur@vanallen.com www.vanallen.com Pete Agur guides his company’s strategic direction, marketing, and select client projects. After working for four airframe manufacturers, he began consulting in 1985. An accomplished aviation writer and speaker, he is a former Army aviator, safety officer, and flight instructor. He holds an ATP rating for fixed wing aircraft and commercial helicopters, a BS in Aeronautical Sciences, and an MBA.

Attorney Stewart H. Lapayowker, P.A. stewart.lapayowker@shlpa.com www.businessaviationcounsel.com Mr. Lapayowker devotes his law practice to corporate aircraft transactions, and counseling on acquisition, registration and financing of new and pre-owned aircraft. Expert in implementing tax efficient structures, related FAA and DOT regulatory matters, aircraft management arrangements, and compensation-related SEC issues on business aircraft, he chairs the NBAA Tax and Regulatory Committee.

Thomas W. MITCHELL

Executive Vice President Essex Aviation Group, Inc. tmitchell@essexaviation.com www.essexaviation.com Thomas Mitchell provides consulting services for owners, prospective owners, and users of private aircraft. In more than 35 years of senior management experience in business aviation, including 19 years with Jet Aviation, and as flight department manager for Liberty Mutual, he has been responsible for all facets of flight operations, including technical support and aircraft management.

Dave Weil

Kevin Hoffman

President & CEO Aerospace Concepts khoffman@aerospaceconcepts.com www.aerospaceconcepts.com Kevin Hoffman specializes in program management for large aircraft modification, upgrade projects, and new aircraft completions. His experience includes Engineering Flight Test at Gulfstream and Advanced Design at Bombardier Aerospace, where he directed the conceptual design of the Global Express. He holds degrees in Mechanical Engineering, and Aeronautical and Aerospace Engineering.

Janine K. Iannarelli

President Par Avion Ltd. jki@paravionltd.com www.paravionltd.com Janine K. Iannarelli represents corporations and individuals worldwide in business aircraft sales and acquisitions, with expertise in cross-border transactions of midand large-cabin aircraft. With more than 25 years of business aviation experience, she is a member of NBAA; European Business Aviation Association; Women in Aviation, International; and the American Marketing Association.

CEO & Founder Flight Dept Solutions dweil@flightdeptsolutions.com www.flightdeptsolutions.com 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 US, 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.

DAVID WYNDHAM

President Conklin & de Decker david@conklindd.com www.conklindd.com David Wyndham develops and manages new programs, conducts consulting studies, manages aircraft cost and performance databases, and offers customer computer support. As Instructor Pilot in the US Air Force, he handled aircrew training, operations scheduling, and coordinating flight test support with civil and military test engineers. He holds a Master of Aeronautical Science degree and an ATP certificate.

It’s About Time. Enhance your business. Elevate your personal life. Personalized air travel solutions on your terms, from the Intermountain Rockies to around the world. Contact Mike Parker about “The Complete Solution” for heavy jet management

801.933.7564 Office 801.933.7509 Direct 801.910.6920 Mobile mparker@keystoneaviation.com

keystoneaviation.com

CHARTER

MAINTENANCE

MANAGEMENT

SALES & BROKERAGE

■ Washington REPORT

Accelerated Aircraft Depreciation Attractive, but invites IRS scrutiny of aircraft use, records

dlcollogan@gmail.com

he reinstatement of the 50% bonus depreciation for certain assets, including qualified business aircraft, was approved by the Senate Finance Committee in April. The measure is one of a package of tax-break “extenders” designed to provide incentives for companies to make capital investments. The bill passed by Senate Finance would apply to qualified equipment placed into service before January 1, 2016. But, for “certain longer-lived and transportation property” including qualified business aircraft, the deadline to get them into service is January 1, 2017.

Dating back to the Investment Tax Credit in the 1970s, Congress periodically has adopted tax-relief measures aimed at spurring equipment acquisition or plant expansion. Aircraft manufacturers and the associations that represent them have lobbied for such legislation, believing it serves as an important incentive to help push potential customers from shoppers to buyers. To be sure, the ability to depreciate 50% of the value of an asset in the first year of ownership can be a significant advantage in reducing a company’s or individual’s tax bill. But claiming a large tax write-off on an aircraft purchase almost certainly will result in scrutiny of the taxpayer’s returns by the IRS to ensure that a myriad of requirements were met and detailed records kept. Victor Charles Anvick of ATIS Group LLC in Acton, CA has specialized in aviation tax law for more than three decades. In a 2011 analysis for the National Business Aviation Association of a previous iteration of bonus depreciation, he inserted a cautionary author’s note. While detailing the potential advantages of bonus depreciation, Anvick warned, “aircraft owners also need to be aware that the bonus depreciation regulations contain many traps for the unwary. 18 B U S I N E S S AV I AT I O N A DV I S O R Ma y/Ju n e 2 014

Because of the immediate and drastic recapture provisions of the Internal Revenue Code that come into play when business use [of the aircraft] drops to 50% or less for bonus and accelerated depreciation, as well as the special expensing provisions, only those taxpayers who are prepared to embark upon a demanding program of aircraft record-keeping and a disciplined methodology for aircraft business use for long periods of time should consider claiming bonus [and accelerated] depreciation.” A recent decision by the US Tax Court illustrates the perils that can befall a taxpayer unable to adequately answer IRS questions after seeking bonus depreciation of an aircraft. The case (Tax Court Memorandum 2013-275, December 3, 2013) revolves around the late-2003 purchase of a transcontinental business jet for $22 million by an individual who sold high-value life insurance policies to wealthy clients. The insurance salesman, who was enjoying a very successful year in 2003, took delivery of his aircraft on December 30, 2003. He made three flights the same day, which he said were for business. The salesman subsequently claimed $11.2 million in bonus depreciation on his 2003 tax return. In its opinion, the Court noted that on January 4, 2004, the salesman had his airplane flown to a maintenance facility in Illinois for installation of a conference table and larger video display units in the cabin — items he had contracted to purchase in 2003, which he later testified were essential to his business use of the aircraft. Those modifications, which cost nearly $500,000, were not completed until January 30, 2004. So, seven years after the IRS began its audit of the salesman’s 2003 tax return, the Tax Court determined the airplane simply was not available for full service for its intended function in 2003, despite those three December 30 flights. “Until an asset is available for full service it hasn’t been placed in service,” the court said, denying the salesman’s $11.2 million bonus depreciation claim for that year and agreeing with the IRS that the taxpayer was liable for significant penalties. Bonus depreciation can be a big money saver, but do not assume your aircraft purchase will qualify. Seek advice from experienced aviation tax practitioners to get a detailed analysis of your particular situation. And be prepared to save a lot of paperwork for each flight, including the business purpose, identity and role of passengers carried — along with detailed expense records — for a long time. 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

By DAVID Collogan

MAX SPEED: MACH 0.885 MAX RANGE: 6,750 NM MAX ALTITUDE: 51,000 FT Large-Cabin | Ultra-Long-Range

IR OF CONFIDENCE

With the power to fly 55 percent farther than its closest sibling, the ultra-long-range G550â&#x201E;˘ gives you the confidence, capability and comfort to complete any mission. Whether your destination lies across the country, across the continent or across the world, the Gulfstream G550 sets The World Standardâ&#x201E;˘ for business travel.

SCOT T NEAL | +1 912 965 6023 | scott.neal@gulfstream.com | GULFSTREAMG550.com Range shown is based on NBAA IFR theoretical range at Mach 0.80 with eight passengers. Actual range will be affected by ATC routing, operating speed, weather, outfitting options and other factors.

7X SETS A NEW RECORD. FASTEST SELLING FALCON EVER. In seven years since certication, more than 200 Falcon 7X aircraft have entered service, accumulating more than 250,000 hours in the air. Proving themselves around the world every day. Fly with comfort. Fly with condence. Fly anywhere.

WWW.DASSAULTFALCON.COM I FRANCE: +33 1 47 11 88 68 I USA: +1 201 541 4600