When should you buy your own Aircraft?

 by David Fisher - Western Aviation

September 5, 2009

QUESTIONS FOR AIRCRAFT & HELICOPTER PURCHASERS

1. When should a business owner consider buying a private plane?

A private aircraft should be considered only if a client would utilize the aircraft approximately 200 hours a year. If 200 hours a year is not going to be achieved, other forms of transportation should be considered.
 
 

2. What criteria (size, price, brand, etc.) should be considered when purchasing a plane?

The first thing we help a first time buyer do is to establish a mission profile by looking at their travel requirements. We take into account the distances to be flown, how many passengers will typically be on board, the frequency of the most common trips, if non-stop trips are needed or desired, and, based on the profile and the cities traveled, how often the aircraft will need to stop for fuel. A complete analysis, including cabin preference and budget requirements, is critical when deciding which category of aircraft to buy. Remember, all aircraft provide some compromise to performance. Some aircraft choices will be limited due to number of passengers, some will have range issues, while others will not have stand up cabins or fully enclosed lavatories. As you begin establishing your mission profile, we can assist you.
 
 

3. What are some advantages for a small-to-medium business to own a plane?

Saves Time -- Business aircraft not only reduce flight time by providing point-to-point service, they decrease the block or total travel time because they are able to utilize smaller airports closer to final destinations. Also, the office environment of a business aircraft allows travel time to become productive time.
Flexibility -- People who travel by business aircraft do not have to alter their schedules to conform to those of commercial carriers. Consequently, they have the freedom to change course en route and leave and arrive according to their own schedules.
Reliability -- Business aircraft are engineered and built to the highest standards, and companies that maintain their own aircraft have complete control of the readiness of their fleet.
Safety -- In recent years, businesses aircraft have compiled an outstanding safety record that is comparable to or better than that of the airlines.
Improved Marketing Efficiency -- Business aircraft not only extend the reach of a sales force, but they can quickly and easily bring customers to the point of sale.
Facilities Control -- Business aircraft help management extend its control by facilitating personal visits to remote company sites.
Personnel and Industrial Development -- The mobility that business aircraft provide company employees can accelerate training, orientation, and teamwork.
Privacy and Comfort -- Conversations on business aircraft are confidential, and cabins can be configured to accommodate virtually any special needs of the passengers.
Efficiency -- Business aviation enables a company to maximize its two most important assets: people and time.
Security -- A company that uses business aviation controls all aspects of its travel including the visibility of its employees on sensitive missions.
 
 

4. Are there disadvantages to aircraft ownership?

In our 15 overall years as an aviation maintenance technicians, consultants and brokers, we have, purposely, probably talked more people out of buying an aircraft than have into buying one. Incorrect expectations and budgetary constraints are just a few of the reasons that ownership may not be the correct solution for you -- at least for now. Until recently the only answer short of full ownership or chartering was to travel using the commercial airlines. Now, though, there are more options. Typically if you expect to be flying 200 hours a year or less, you should explore the alternatives to full ownership.

The concept of fractional ownership, whereby 1/4 or 1/8 shares of the aircraft are actually sold, is relatively new and has proven extremely successful in solving some people's needs. Those that are involved are, for the most part, quite pleased with the results. Fractional ownership is in its infancy, however; time will tell if the concept proves valuable over the long haul. I would say that a prospect enters into this type of arrangement in great part because of a need for frequent travel but cannot currently justify full ownership. Most fractional ownership commitments are for 5 years. In some situations, the term of the commitment may be too long for a prospect whose aviation needs may be changing more quickly.  An additional downside of fractional ownership is the limitation in selling your share.  You commonly have to sell back to the fractional company at their dictated price with no exceptions.  Maintenance commonly has a huge markup as well.  Fractional programs have huge overhead and that has to be paid by someone.

Chartering is a great way to experience several types of aircraft prior to making a final choice to purchase. Although the hourly cost may seem high, the flexibility and lack of long term commitment makes chartering attractive to many.

Setting up a partnership for aircraft ownership can sometimes be more difficult than choosing a spouse. However, having the right partner(s) can be bliss. If the partners' missions are compatible and their scheduling does not conflict, this 'sharing' of an aircraft can work out very well. I believe a good partnership agreement is the key to the success in this travel solution.
 

 
5. Where should an owner look (classifieds, dealer, etc.) when considering  purchasing a plane?

Whether it is your first aircraft purchase or your third, the use of a professional aircraft broker in this process is no different than going to a responsible real estate broker for a land transaction. The professional aircraft broker should understand the marketplace and the complexities of the process. Research of the market by category, comparable information, contracting and overseeing the pre-buy inspection are all part of the complex job of matching buyer and seller. In about 90% of the transactions that I am involved in, there is broker representation on both sides of the sale/purchase. In my company, our commission comes from the side that has contracted for our services. We believe that your best representation comes from someone dedicated to you. Fees vary and should be discussed with the broker or broker organization you choose to use. In my company our fee slides, based on the acquisition aircraft's price.

In the process of the first time buyer acquisition, we tend to take on an expanded role, as an educator as well as a broker. We very often are involved in the development of the mission profile in addition helping with piloting and management choices. Our skilled staff is versed in all issues of the operation. In a recent first time buyer's acquisition project we helped define the company's mission, thereby defining the category of plane to purchase; we then researched the market, choosing the best aircraft value for the dollar. Our research and findings were reported by means of complete formal presentation and included information on different management companies as well as the best resources for paint, interior and avionic upgrades. This thorough process netted our client one of the best Falcon 900 values seen in many years.  In another case, we put a client into a Citation II and out of his King Air in a trade transaction that was a win-win for both clients.

 
6. What about owning a plane with several small business owners? Is that more feasible?

Business is booming for fractional ownership programs. Increasingly, manufacturers, management and charter companies, lenders and others are examining the merits of jumping on the fractional ownership band-wagon and starting or aligning themselves with a fractional ownership program. Others, who continue to want to cater to a small group of aircraft owners, are engaging in modified joint ownership arrangements, modernized to reflect select attributes of fractional ownership programs. These programs offer varying degrees of joint ownership percentages, interchange and/or timeshare capabilities, and geographic limitations.
 
It is no surprise that fractional ownership programs are attracting many new aircraft owners. These programs offer the appeal of limited financial commitment geared for the occasional aircraft user; they offer the tax benefits of aircraft ownership; some programs offer tremendous geographic flexibility, without significant deadheading costs, for one-way trips to or from any point in the United States, or possibly elsewhere in the world; perhaps, most importantly, they offer expertise and skill in management and operation of aircraft offered by aircraft management companies for decades.
Fractional ownership is not for every prospective aircraft owner and the market has responded with newer, hybrid-type programs which draw from various attributes of the fractional programs. Hard to quantify, perhaps intangible, aspects of fractional programs no doubt leave many prospective aircraft owners still interested in purchasing "their own" aircraft. For owners anticipating modest aircraft use, purchasing an entire aircraft may not be economically viable. Historically, such owners have subsidized ownership costs by allowing their aircraft to be chartered when not otherwise in use. This is still a viable planning option, and the demand for charter has never been greater due largely to fractional ownership programs.
 
Joint ownership, whereby two or more owners jointly acquire an aircraft and share the ownership costs, have also been around for decades, but has been hampered by the logistical issues of coordinating an acquisition and aircraft scheduling with another party. Note: Fractional ownership programs solve these problems. Market dynamics have now refined traditional joint ownership arrangements, springing up around the country, are generally organized by aircraft operators (who likely are involved in the aviation industry) who require limited aircraft access for their own needs, and would like to "sell" ownership interests in their aircraft to others. Some offer a sale of stock or LLC [partnership] interests, while others offer direct ownership in the aircraft. The aircraft may be managed by the "founding" owner, or professionally managed. In the event the founding owner has access to other aircraft (through ownership or management arrangements); limited interchange may also be offered. The new hybrid programs typically do not offer "transport to or from anywhere", style management, but rather keep to more basic ownership parameters. These new arrangements reflect the market's reaction to fractional ownership programs by retaining the intangible aspects of aircraft ownership.
As the economy booms and corporate aircraft become more accepted as a tool for businesses to enhance profitability the market will continue to refine and enhance hybrid ownership programs. Prior to making a purchase decision, it is advisable to consult with an experienced aviation advisor, someone with knowledge of the industry players and the business dynamics.
 

7. Is the prestige of owning a private plane a plus when selling to a large client?

8. Is it better to be a pilot and fly your own plane, or is it better to hire a pilot? Why?

Once you have decided to purchase an aircraft, the next decision is whether to operate it your self or have it professionally managed.

If you set up your own operation, typically you will locate and hire a "Chief Pilot" who becomes your aviation manager. This individual, working with others in your organization, establishes the flight operation. It is important to choose an individual with significant experience because operating a private flight department is a much more complex task than most people realize; flying the aircraft is the "easy part".  You should demand that operating standards be set, governing such things as crew flight and duty time limits, minimum weather operating standards, training and experience criteria for all personnel, drug and alcohol use guidelines, minimum equipment lists for operation of the aircraft, and similar standards.

A method to maintain the aircraft must be established which can range from purchasing maintenance services on an ad-hock basis to hiring a full maintenance staff. In addition, business interface must be developed to field, review, approve and pay all aircraft related bills. Ownership structure and flight department operating methods can have major tax implications, so it is important to secure sound advice from professionals prior to putting the aircraft into service.
 
Aircraft management companies provide full turn-key flight department operations. By securing the services of such an organization, you gain an "instant flight department" incorporating all the disciplines required to operate your aircraft. Management companies charge various fees for their services, but, at least in the case of larger, well established organizations, they can provide significant operating efficiencies and discounts for goods and services that more than offset the fees. Crewing methods vary, but many management companies will provide permanently assigned crews to each owner's aircraft. This provides the continuity many owners want in order to feel comfortable. The management company is responsible to handle all the details of operation of our aircraft, and a good one will shield you from all the hassle that can be associated with owning and operating an aircraft, including providing the necessary tax and ownership structure advice you need. As with all services, check around and be sure to select a management company that is well established and has a good reputation.
 
Professional management outsourcing is gaining popularity as corporations strain under the pressures of constant requirements to increase productivity while aircraft and their operation simultaneously become more complex.
 

9. How much pilot training is needed?
Pilots need to be type rated in each aircraft they fly (not pistons).  There is recurring training as well.   As long as this training is current, and your pilot flies on a fairly regular basis, this should be satisfactory.
 

10. Can expenses be cut down by leasing out the plane when it's not being used?

11. What about a 1031 Exchange?

As a First Time Buyer, you may wonder why Capital Gains Tax Deferment would be a subject of interest to you. Give me a moment of your time and I hope to enlighten you. Not only can a 7 Ton, 50 Foot Aircraft be a very delicate thing, it is also a very valuable investment asset. As with any valuable investment asset the "Bad News" is, if after a couple of years you simply decide to "SELL" you will have to pay substantial Federal Capital Gains Taxes. If however, you complete a 1031 Asset, (Aircraft) Tax Deferred Exchange, you can "Defer" payment of the Capital Gains Tax, possibly forever. IRS allows this "Tax Deferment" if you sell (relinquish) your existing Aircraft and you (within 180 days or less, from the time of the sale) purchase (replace) it with another aircraft.

Pretty simple, right?  Well.... not quite that simple.

IRS does have other requirements, such as, you can NOT be credited, hold, receive or benefit from "Money or Other Property" relating to your Sale, you "MUST" have a written "Exchange Agreement" with an "Unrelated Party PRIOR to your Sale", plus you "MUST" unambiguously identify the new (replacement) Aircraft within the first 45 days of the 180 day or less time period mentioned above....and.....and, but wait a minute; Fear Not the IRS requirements; that's where First Exchange of Arizona, Inc., (First Arizona), as a "Qualified Intermediary" established under the guidelines of IRS Section 1031, and as a wholly owned subsidiary of First American Financial Corporation, stands prepared to assist you in obtaining your desired "Capital Gains Tax Deferment" treatment.  I want to defend these statements by also stating that I am not a tax accountant and that the tax code changes often (even as I write this) and you should consult with your tax adviser before, during and after your aircraft decision.
 

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