Plane Conversations

From our first article with Plane Conversations, we have advocated for general aviation, pointing out how aircraft charter can be a logical solution to travel difficulties and why corporate flight departments and private aircraft ownership are far more than the corporate excess Main Stream Media supposes.  However, we realize that while we have said that air mass transit is not always your best solution, there are particular instances when it does  makes the most economic sense.  In those cases, travelers have to suck it up and deal with the hassles and inconveniences of scheduled air service.

One of those hassles is airport security.  As I have said before, while I am not a fan of the process, I recognize the need for it and I understand that it is a necessary evil.  In July, a woman was arrested for disorderly conduct at the Nashville International Airport when she refused to allow her teen-aged daughter to go through the body scanner.  This meant that the girl had to be screened using a standard pat-down, a procedure far more thorough than it looks on Law and Order.  The mother wasn’t happy with that, either.  She proceeded to complain loudly, repeatedly and abusively enough that the airport police finally put her under arrest.  She has now achieved some kind of bizarre martyr status in the Main Stream Media.

This absolutely blows my mind.

Her attitude reflects  a common sentiment, though.  The traveling public insists on government protection for fliers. Snicklefitz Traveler cries, “Keep me safe!  Keep me safe!  But do it by screening that other guy, ‘cause I’m not a threat.”  “Keep me safe, but handle it in the way that I want, even though I don’t really know how the whole process works.” “Keep me safe, but don’t inconvenience me.” “Seat me next to people like these….”

Security measures are not created out of a vacuum.  They are in response to a specific threat or incident.  Thanks to Richard Reid, we have our shoes screened.  Thanks to Umar Farouk Abdulmatallab, we have our bodies scanned and our groins checked.  Organizations all over the world use both women and children as soldiers and terrorists.  Security screening is a thankless job and the TSA an easy target for criticism; but, the fact is, the TSA has to get it right every time – or as close to every time as humanly possible –  because the cost of being wrong could be catastrophic.  The terrorist has to get it right only once to achieve that same catastrophic effect.

Flying is a privilege, not a right.  To take advantage of the privilege, we must agree to abide by the rules of the airlines, airports and related agencies.  If you disagree with the measures in place, you don’t have to fly.  People crossed the oceans in ships.  They settled Utah using hand carts.  There are other ways you can get to your destination.

By the way, the attractive, harmless people in the photos are Alyssa Bustamante, a 15-year-old who strangled, stabbed and cut the throat of her nine-year-old neighbor and Anders Breivik who murdered 77 people in Norway.

If Timothy McVeigh taught us nothing else, he should have taught us that evil may look innocuous and that not all of those who would do us harm are from outside our borders.

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After a six month hiatus from flying, I am finally back in the left seat!  And the one thing that has become apparent to me since starting up again is how the end result of some things we choose to do is worth enduring discomfort or hard work.  And this pertains to everything we choose to do in life.  If you don’t enjoy it, then why do it?  Well, of course sometimes there are things we have no choice in, but with flying, this is something I choose to do.  It can be uncomfortable at times  – like the first time Kirk pushed my head into my lap, put the plane in an unusual attitude and said “your airplane.”  He then gave me controls while I was wearing a hood which didn’t allow me to see outside of the cockpit; so, I had to use only the instruments to regain control, returning to normal and level flight.  It can also be hard – like when I have to spend my weekends studying for a ground school test, while everyone else is out having a good time in the gorgeous Tennessee spring weather.  But if you love something, all the other “stuff” becomes worth it. 

During the time I was not flying, I studied only a little (because I hate to), but then ramped up my efforts as the time I knew I would be back up flying again drew closer.  On Monday of this week, I took my first flight in the Katana DA20.  Now you might remember I was flying a Cessna 152 last year, but due to maintenance issues, I had to change to the DA20.  The switch was what took me so long to get back to flying; but, now I’ve done it and and I’ve jumped back in. 

I was nervous about flying again after so long, and especially because I had never flown this type of aircraft before.  But let me tell you, I love this airplane!  All the line service staff at CFM told me I would, but I still had a soft spot for the Cessna 152.  Well, now that I have flown this airplane a few times, I think it is just wonderful.  The canopy allows for a better visual, and it is a very easy airplane to fly.  Steering with brakes is the one thing which has me a little rattled.  Because the nose wheel of the DA20 is not linked to the rudder pedals, turns while taxiing must be made with differential braking.  I was a little swirly on the runway the first time I had to takeoff, but thankfully, Kirk was there to keep me on the runway.  I know in a few lessons I’ll have that down.

I’m somewhat starting all over again lesson-wise, but I’m okay with that because I’m excited to be flying again!  And all the study and discomfort that I know I will sometimes experience in this learning process will pay off with the fact in all the fun I have flying.  I guess the one thing I’m saying here is that sometimes we have to do things we don’t like, but look at what you get at the end.  What do they say?  No pain, no gain?    

I’m going to be blogging about my experiences on a regular basis again.  So follow me along the path to becoming a pilot, because I am definitely going to be sharing some interesting stories, on life in the left seat, and life in general.

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 (Part 5 of 5)

What to Expect in the Purchase Process

Here is a step-by-step general outline of what you can expect in the acquisition of an aircraft.  The order sometimes changes depending on the situation.

1. Ask yourself questions: What do you want?  What do you want to spend? What is your mission? etc.
2. Interview buyer’s agents to represent you, then make a decision and hire one.
3. Expect to sign an agency agreement giving the agent the exclusive right to represent you for a period of time and establishing the fee you will pay as well as any expenses that will be your responsibility.  In the agreement, agents should also list their responsibilities and capabilities.
4. Ask your agent what to expect and when the process will begin to move forward.  Give your agent time to do the job but insist on receiving progress updates.
5. Place a refundable deposit into escrow.  This gives your agent the power to negotiate on your behalf and conveys the seriousness of your intent.
6. Refer anyone who calls you directly to your agent for the duration of the purchase process. You could easily and unknowingly undermine the groundwork your agent has laid.
7. Allow your agent to contact sellers.  Don’t call any aircraft seller during the process but discuss available aircraft with your agent and which sellers your agent should call.  I’ve seen feeding frenzies over a single buyer who got all of the sellers stirred up.  Often the sellers see this as a sign of increased market strength, so they will hold firm on the price your agent is trying to bring down for your benefit.  Your agent should treat you as a partner in the process and should not hesitate to make recommendations to you on aircraft, negotiation tactics, and offers.
8. Look for comparison reports.  Your agent will research the worldwide market and narrow the options to the very best three or four aircraft, usually putting a description of the aircraft on a spreadsheet.
9. Prioritize your preferences.  Based on your individual requirements and discussions with your agent, you will decide which aircraft to pursue first, second, etc., and come up with an offer. 
10. Make an offer.  An offer letter or letter of intent (LOI) will be prepared and submitted to the seller.
11. Expect negotiations.  A counteroffer or other response should be expected within the period outlined in your offer.  Negotiations will lead to an agreement or a decision to move on to another aircraft.
12. Be prepared for one to get away.  Don’t be surprised if an aircraft or two on your top three-or-four list sells.  Often the aircraft you are most interested in is going to be sold quickly … and you may not be the buyer. 
13. Title research.  Once an agreement is reached or looks favorable, your agent will order a title search, chain of title, and an IR and 337 search.  A 337 is a required FAA form for any major repair or alteration of an aircraft. The IR requirements can cause a delay in closing; so, the search should be performed early in the process.
14. Initial inspection.  Prior to the execution of the formal sale and purchase agreement, your agent may send a technical representative to visually inspect the aircraft and conduct a cursory logbook review.  Doing this is much less expensive than putting the aircraft into pre-purchase and then rejecting the aircraft for a reason that could have been easily identified beforehand.
15. Formal agreement.  A formal sale and purchase agreement is executed if the technical rep does not find any major issues and the title search, chain of title, and the IR and 337 searches lead to a positive assessment.
16. Demonstation flight.  A demonstration flight may be in order if you’ve never flown in the aircraft make and model.  The flight would be at the buyer’s expense.
17. Expect a test flight.  A test flight, including a check of the avionics, is performed in-flight prior to the pre-purchase inspection.
18. Prepurchase inspection performance.  While there is more than one way to handle “squawks” – the aircraft items in need of repair or adjustment - typically the seller will pay to remedy the “airworthiness, major systems, and safety of flight” items.  Anything falling outside that definition is the buyer’s responsibility.  Again, each deal is different; so, work with your agent.
19. Post maintenance test flight.  After the repair of the maintenance items, a post-maintenance test flight is performed for the benefit of the buyer and at the buyer’s expense.  This flight will verify that the aircraft is in proper working order prior to your acceptance of and payment for the aircraft.
20. Aircraft acceptance.  You will accept the aircraft upon in-flight verification of operation and confirmation that the logbooks properly reflect the agreed upon inspections.
21. Insurance bonding.  Insurance should be bound on the aircraft at this point or sooner but certainly should be arranged and activated with a call to your agent.
22. Initiate closing.  Both parties must give authorization to the escrow agent to initiate closing (filing of the documents and disbursement of the funds).
23. Aircraft delivery.  Delivery will often occur after closing.  This is a very important tax issue and both parties typically are sensitive to it during the initial negotiations.

Are there any other considerations?  Absolutely.  They include Certificate of Airworthiness (C of A) issues, import/export matters, holdbacks, documentation, engine/parts/avionics programs, aircraft rejection, deposit disposition, and on and on.  Each deal requires flexibility and experience to smoothly navigate through the aircraft purchase process and calmly handle any surprises that may occur.

Buying an aircraft should be an enjoyable experience.  By getting the help of a great agent and by knowing what to expect, it can be.

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(Part 4 of 5)

Pitfalls of Acquiring an Aircraft

You’re chosen your broker, set up your team and chosen an aircraft.  You’re well on your way, but you’re not out of the woods, yet.  Certainly there are many pitfalls in acquiring an aircraft, but these are some of the most common:

Pre-purchase inspection
Just having a pre-purchase inspection performed is not enough.  You need to be certain that the inspection facility understands the make and model of the aircraft that you are buying and is on the cutting edge of current and pending airworthiness directives (ADs) and maintenance issues.  How would you like to buy the only aircraft in your category without an engine program?  Once you’ve bought the aircraft, keep it well-maintained by a first-rate maintenance facility. 

Pending equipment mandates
You purchase an aircraft only to find out that the Federal Aviation Administration (FAA) has mandated additional avionics that will cost a significant percentage of what you just paid for your aircraft, which has happened to aircraft buyers. For instance, there have been FAA mandates on the reduced vertical separation minimum (RVSM), terrain awareness and warning system (TAWS), traffic collision avoidance system (TCAS), and emergency locator transmitter (ELT).  It’s important to learn about pending equipment mandates before you close the deal on your aircraft purchase.

Title issues
More than once I’ve heard buyers or sellers state that they really don’t want to mess with that “IR thing.”  If the FAA reports no liens or encumbrances on your aircraft and engines, but the International Registry (IR) does show an encumbrance, the good ole USA wins the day right?  Wrong!  Not all aircraft require an IR filing, but if your aircraft qualifies, you need to ensure filings are done for the aircraft and engines.  Trust an experience escrow company and agent, like Insured Aircraft Title Service, Inc.

Damage history
If two people sit down and read a log book entry, one might say, “Seems OK to me,” while the other might say, “Something is not right about this.”  The difference?   Experience!  Many sellers have sold their aircraft after representing it as “no damage” or “no known damage” (notice the litigation safeguard difference in the wording…we use it too!) and honestly believed they were telling the truth.  Damage is not always as easy to find as a log entry stating, “Aircraft rolled into a ball.  Repaired in compliance with factory maintenance manual.”   After a first reading of damage entries and several subsequent readings, I’ve sometimes asked myself, “So, was it damaged or …”  Damage can affect the value of an aircraft substantially (10 to 25 percent), so it’s important to determine the aircraft’s damage history.

Possibly the biggest mistake of all
I believe it is absolutely appropriate to aggressively negotiate the price of your aircraft. Pennies add up to dollars if you can save enough of them.  And you can save enough of them on your purchase price; however, if you take this approach in hiring your pilot, you are making a mistake.  You should be prepared to pay top dollar for a first-rate pilot. Aircraft occasionally break, systems fail, and the weather sometimes closes in, but none of these should be life-threatening when you are in the hands of a professional pilot.

Ask your insurance agent what underwriters require as far as a pilot’s minimum qualifications and training.  Then ask what your agent personally recommends.  The answer may be the same, but it may not be; so, ask.  Train your pilot(s) well.  It will cost you more to send your pilot to simulator training twice a year rather than once a year; but, if all hell breaks loose in the aircraft, who do you want in the cockpit?  A pilot who meets your underwriter’s “minimum standard?” Or one who may be over-trained? 

Some pilots are more interested in being able to occasionally use an aircraft than in receiving more pay.  Explore with them what keeps them happy and loyal.  I’ve met many pilots over the years, and the ones who are the most pleasant on the ground and in the air are typically the ones I like the best.  But even the most pleasant pilots may lose their calm if you try to convince them to do something outside of their best judgment.  You may be the boss on the ground; but, you should accept that when it comes to safety in the air, pilots are the boss.

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(Part 3 of 5)

Questions to Consider Before Purchasing an Aircraft
You’ve made the decision to buy and aircraft and you’ve found a great buyer’s agent / broker to help you.  Now, it’s time to ask yourself some questions; so, here’s a list to help you get started.  If you are a first-time aircraft buyer, you may not know the answers to some of these questions.  That’s okay, just use your best judgment.  Of course, these questions and your answers are just the start of the aircraft purchase process, but they will point you in the right direction, assisting you in your decision making and helping guide your agent toward the right aircraft. 

1. What is the primary purpose for the aircraft?
2. Do you have an aircraft in mind?
3. What is your mission (How many passengers will typically be on board? How far are you going? To which cities/airports are you flying? How long will you stay? How often will you fly? etc.) ?
4. Is the aircraft you’re considering suitable for 80 to 90 percent of your missions?
5. What is your budget?
6. Will you be the pilot or the passenger?
7. Will you hire your own crew and manage your own aircraft or hire a professional management firm to manage the aircraft for you?
8. If the aircraft will be used for both business and pleasure, what is the percentage for each use?
9. Are you trading an aircraft?
10. When would you like your new aircraft to be in service?

If you will typically need to carry eight to ten passengers with their bags, you can begin to narrow your purchase choices because you will require a larger aircraft.  Maybe you will need to visit three to four cities a day but stay in each for only one to two hours. In order to do that, you may require a faster aircraft.  If you plan to land at high-altitude or short runway airports, that will help narrow the field for you, as well.

It is not uncommon to get mentally stuck on the few trips per year that an aircraft cannot accommodate for one reason or another, which is why it’s important to remember that the aircraft you buy should be suitable for 80 to 90 percent of your trips.  Unless you have an unlimited budget, buying an aircraft is a trade-off between dollars and capability.

Out of the Box Thinking
Don’t get caught in the all or nothing mode of thinking.  Maybe two smaller aircraft make more sense for you than one large aircraft.  Maybe whole ownership along with fractional ownership of an aircraft is more appropriate.  Chartering the right aircraft for those few trips for which your aircraft isn’t suited may be just the ticket to a smooth-running flight operation.  Even the largest companies find that using an alternative aircraft for supplemental lift is more cost-effective than purchasing a big aircraft or expanding their fleets just to handle a few trips.  Booking flights on a scheduled air carrier should be considered in your decision making, as well.  Your buyer’s agent can help you determine the best options for you.

Assemble Your Team
While your agent can guide you in assembling a team to facilitate the purchase of your aircraft, you need to make sure this “mastermind alliance” is in place and working for your benefit: besides your agent, your team should include a certified public accountant (CPA) or skilled tax specialist, an attorney for limited liability company (LLC) formation and asset protection issues, an insurance professional, an escrow agent, a banker or lender, an inspection facility to conduct the pre-purchase, and possibly a pilot or pilots who can perform a thorough evaluation of the aircraft when it is in flight.

The Biggest Question of all
If you are purchasing a pre-owned plane, don’t expect it to be in the same condition as a new plane.  There will be squawks.  Just ensure your broker negotiates strongly on your behalf and guides you through the process.  However, if you discover that the plane’s condition is not as it was represented or that the costs to put it into quality condition are too high, are you willing to walk away from the deal?  Professional brokers and buyer’s agents rarely have deals fall apart after pre-purchase.  Trust them to guide you through the solutions but be willing to walk away if it is the best course of action for you.

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(Part 2 of 5)

The Key to Success
Before we get into some specific questions to ask yourself, and the steps to making an aircraft purchase, let me tell you the real key to a successful transaction…hire a competent and experienced broker with an excellent reputation.  You’ll most likely refer to the broker as your “agent” or “buyer’s agent,” but “broker” and “acquisition specialist” are also common monikers.  When hiring a broker, it’s important to do your homework.  Get referrals, check out the broker’s website, and interview them.  Ask why you should hire that particular broker instead of another.  The selection process is more difficult than it may seem.  Although most brokers tell you the same things, there are stark differences.
 
A Little Background on the Aircraft Sales and Brokerage Business
There are vast differences in experience, business practices, and ethics among brokers.  Why?   It’s because our industry is completely unregulated.  Anyone can claim to be an aircraft broker, acquisition specialist, mandate wizard, or all-around, good-guy aircraft salesperson.  Even though I know how to fly, I don’t claim to be competent to represent you as pilot-in-command of your aircraft.  Pilots, mechanics, real estate agents, or business people may claim to be competent to represent you because they once bought, sold or were involved in an aircraft transaction; but, they may not truly have the knowledge or skills needed to take you through the aircraft purchase process successfully.

Like all professions, the aircraft brokerage business has people who do their jobs well, those who do their jobs poorly, and others in between.  Some of the most reputable brokers I know do not own aircraft inventory themselves.  However, if a broker (someone selling somebone else’s aircraft) is also a dealer (someone who buys aircraft for his own inventory), then it stands to reason that they know a little something about purchasing an aircraft.  So, find out whether your buyer’s agent/broker is also a dealer. 

A quality broker may recommend tax-saving strategies like a 1031 exchange, putting an aircraft into a charter fleet, or capitalizing on recent tax laws or incentives.  State sales tax is a fact of life, but there are tax-saving strategies you should consider prior to your aircraft purchase.  Besides your broker, also consult with your tax professional to help you discover all of the applicable strategies.

I believe one of the most powerful functions of a buyer’s agent is to remove the emotion from an aircraft purchase decision.  I recently had a somewhat anxious client get upset with me because I rejected two aircraft on his behalf (one before the pre-buy inspection and one duringthe process), even though I had his permission to reject the aircraft.  Later, after I found the right aircraft for him, he thanked me for staying cool, standing up to him respectfully, and watching out for his best interests.  To me, the long-term relationship is what mattered.  To him, getting the aircraft is what mattered.  Since I was acting as a buffer, I helped him buy an aircraft he wouldn’t regret later, keeping both our priorities intact.   

One Last Thought on Brokers
There’s another reason you should be careful that you hire the right person as your broker.  If you get involved with a disreputable or incompetent broker, they could get you involved in a lawsuit that might drag on for years.  And that would certainly would spoil all the fun of buying an aircraft.

A reputable broker should be able to provide you with a list of satisfied clients and will probably urge you to research his reputation by calling people within the industry.  You may find that the broker you’re researching has one of the highest fees among the people you call; however, it’s important to remember that the fee is probably high for a reason.  Professionals will not sell their services to the lowest bidder.  And, you’ll find that hiring the right buyer’s agent/broker to represent you in the purchase of an aircraft will pay for itself in the long run. 

My pointers may not make it a certainty that you’re dealing with the right person, they’re a good road map for finding the right professional to represent you.

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(Part 1 of 5)

As a successful business person, you’ve no doubt been involved in countless complicated high-dollar acquisitions and business deals over the years.  You’ve contemplated the effect on your business, considered the upside and covered the downside.  You’ve also consulted with your tax adviser, banker, attorney, and internal management team.  With the facts in hand and a plan in place, you proceeded with cautious optimism.

When it came time to consider the purchase of an aircraft as a tool to expand your business, you proceeded with the same prudent approach and team of experts, right?  Well, maybe not.

Purchasing an aircraft in light of and compared to other business transactions just doesn’t seem like a complicated process.  Complicated or not, the process is replete with pitfalls.

A Couple of Basics
Prior to launching the aircraft purchase process for a client, reputable aircraft sales firms spend a great deal of time acquiring an understanding a client’s needs, travel history, mission or missions, and budget.   After all, how can we advise you on the right aircraft purchase without first understanding your requirements?

It’s important to know why a client wants or needs an aircraft.  Of course, the reasons will vary depending on whether the client is buying the aircraft for personal use or business use.  In my years at CFM Jet, on more than one occasion I have been told, “I just want one.”  That is a perfectly acceptable answer if money is not a problem.  We’vesold aircraft to clients just twelve months after their last aircraft purchase because they had to have an aircraft that had a potty!

Sometimes a client is looking for an aircraft they’ll hire pilots to fly.  Other times, the client will be the pilot in command of the aircraft.  The purchase process formula will require some adjustment for those different scenarios.

Growing up a third-generation aircraft salesman and enjoying over 20 years in my profession, I have a unique insight into the world of the aircraft transaction.  In the coming weeks, I will post blogs on the process, pitfalls, keys to a successful transaction and the most important post-purchase move that you can make to ensure the ongoing safe operation of your aircraft.

To help you avoid the pitfalls, I’m going to guide you through the process.  While there may be more than one way to the goal, the basic principles of any aircraft purchase are the same.  I’ll cover the basics by explaining how you go about making the decision to choose one aircraft over another, what the considerations are when buying an aircraft, and how you can keep from stepping into one of the hundreds of holes surrounding an aircraft purchase.

The process can be nerve wracking, but it can also be exhilarating.  Join me Thursday to begin the aircraft acquisition adventure as we discuss how to find the right broker for you.

(next installment)

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Why Own a Private Jet?

In previous posts I have compared the cost of ownership of private or corporate jets with the cost of chartering a jet from an operator.  From a purely economic standpoint, jet ownership for a company or individual may not be cost-effiective unless utilization hits a level high enough to spread out the fixed cost of ownership.   Even in low-utilization situations there are certain scenarios where ownership makes sense.  Is there a magic number of annual flight hours you must hit before you can justify owning the aircraft? Not necessarily.  It varies within each situation depending on capital or acquisition costs of the asset and other fixed costs, as well as the availability of suitable aircraft in the immediate area to lease or charter.

So, why do corporations and individuals buy jets when they could charter or rent?

Companies that travel on short notice and require guaranteed access to aircraft are good candidates for ownership.  If your clients need you right now and are willing to pay for your time, then you need the jet when you need it, not when someone else may get it to you.  There is a premium to pay for this convenience, but if it is an integral part of delivering whatever service you are providing, the premium is justifiable.

If you follow the adage of “working where you have to and living where you want to,” you might find yourself in an area of the country where there is neither airline service nor aircraft charter service.  In that case, access to any kind of air travel is only going to happen when you own an aircraft. There are more corporate aircraft located out in small town America than most people would think.  Some people just do not want to live in the big city.  Go figure.  If you are a business located in a micro-urban area, the corporate aircraft may be the only way to get to other markets. The trade-off may be higher transportation costs off-set by the lower general operating costs of doing business in a small town.

Companies and individuals also own aircraft for reasons of security and privacy.  If you own your aircraft, you have total control over who flies in it, when they fly and where they go.  You also have total control over who is flying and maintaining your aircraft.

Last, but not least, you might own the jet just because you can.  A lot of criticism comes from the have-nots against the haves, especially when it comes to flying around in the private jet.  Is it excess or is it simply exercising your right to spend your money as you see fit?  As Oprah Winfrey noted in her commencement speech at Duke University, “It’s great to have a private jet. Anyone that tells you that having your own private jet isn’t great is lying to you.”  If you have earned your money in a free market economy, you deserve to spend your money how ever you want.  I can understand the outrage over companies that used their big, private jets to go to Washington, D.C. and ask for a bail-out funded by our tax dollars.  However, I see no reason or logic in critizing successful entrepreneurs and business people just because they have earned good money and want to spend it on private jet travel.  I hope our country never gets to the point where the government tells us how to spend our money just to appease the masses.

In the end, there are many factors to consider when choosing whether to own an aircraft or to charter one:  Will your usage of it justify the costs?  Do you need to travel with little or no advance notice?  Given your location, do you even have other options?  Do you need the control over equipment quality and pilot experience?  Or, have you worked hard all of your life and see private jet ownership as a just reward?  Only you can answer those questions and determine if, despite what the casual observer might think, aircraft ownership makes sense for you.

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The Charter Cost and Pricing  Side of the Analysis

In part 1 of this series, I discussed briefly the basic economics of aircraft ownership, the fixed and variable costs of ownership.  The fundamentals of economics don’t change from the pure cost side of the equation whether you are a commercial operator (charter provider) or an owner operator. The only things that change the numbers are utilization and, to some smaller degree, economies of scale.

When you consider whether to buy an aircraft or to charter from a commercial operator and you are looking solely at the numbers.  you may conclude that it makes more sense to charter an aircraft if any of  the following conditions exist:

• You have a good, reliable provider of charter aircraft close to your location.
• This operator has the aircraft that will fit your needs most of the time.
• Your need for private aircraft transportation doesn’t require full use of an aircraft

Most charter operators don’t own the aircraft they operate.  The business model that has worked best for charter operators is to manage aircraft for owners who allow the operator to charter the aircraft out when the owner is not using it.  With this business model, the operator usually takes a percentage of the income generated from charter revenues as a profit for managing and marketing the service while the owner gets the majority percentage of the revenue to offset the fixed costs of ownership.  Under-utilized aircraft  are put to work in the charter business while reducing the cost of ownership for those who choose to own.  Sounds very much like the concept of renting your vacation home out when you are not using it, doesn’t it?

This business model has been good for our industry.

In a perfect world, and to the benefit of the owner, an operator would evaluate the fixed and variable costs of ownership and build a rate structure for chartering the aircraft that covers all of the variable costs plus the fixed costs based on optimal utilization – what we would call “cost plus pricing.”  In the current environment, the consumer of private jet travel is the beneficiary of a supply of charter aircraft that is greater than the demand.  Therefore, pricing for chartering a private jet cannot be built on a cost plus basis but must be built on what the market will bear.  When you pay to charter a jet, in most all cases, you are covering the variable costs for the flight but not the fixed costs for the owner spread out over optimal utilization.  The owner still receives some benefit of fixed cost reduction; so, it can be a win-win scenario, provided, that is, that the owner has reasons other than purely economic ones to own the aircraft that is in charter service.

There are many different ways to use private jet aircraft including pure ownership, fractional ownership, leasing, and charter.  Inside each of these different models are variations based on utilization that will change the costs.

The best place to start is to find a good charter operator close to you and try the service.  The good thing about chartering is that you only have to commit to one trip at a time.  It’s a great way to try out the value proposition of private jet travel without the long term commitment and risks of aircraft ownership. The more knowledge you gain over time will allow for a more rational decision about ownership versus renting or chartering.

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Charter (rent) versus Owning a Private Jet
Part 1: Aircraft Ownership Economics 101

There are varying reasons why people choose to charter or rent aircraft versus buying them. Not all reasons are purely economic, but let’s start at the most basic level of the economics of these choices.

There are two basic components of aircraft operating costs.

1. Fixed Costs include the capital investment in the aircraft, insurance, storage of the aircraft, property taxes, salaries for those employed to fly and maintain the aircraft and, in some cases, certain maintenance requirements for an aircraft since they are driven by the calendar rather than by aircraft utilization.

2.  Variable Costs: These costs happen only when the aircraft flies. They include things like fuel, engine costs, maintenance requirements that are driven by utilization (flight hours on an aircraft versus miles driven on an auto). Other variable costs could be landing fees, in-flight catering, and pilot / crew expenses when the aircraft is out on trips.

In most cases these costs, both fixed and variable, remain fairly constant whether you own the aircraft or you are chartering it from someone else who either owns or manages it for its owner. The aircraft burns the same amount of fuel and requires the same maintenance regardless of the ownership. There are some economies of scale that can be obtained by larger operators to reduce the variable side of the equation, but let’s set that aside for now to talk about the relationship between fixed and variable costs of operating an aircraft.

Variable costs are a constant and the measure to use is dollars per flight hour. For example, let’s say that the variable costs per flight hour for your favorite jet are $1000 per flight hour. Every hour you fly the aircraft on trips whether business or pleasure costs $1000. Simple enough!

Fixed costs for your favorite jet are measured in dollars per calendar time. You can use a month or a year, whichever works best for you. If your favorite jet costs $300,000 per year for all of the fixed costs mentioned above, that expense happens whether you fly one hour or 300 hours. For simplicity’s sake, let’s say you use the jet 300 hours per year. If I spread the fixed costs over those 300 hours of use then the fixed costs are costing me $1000 per flight hour.

At this rate of use it is costing the owner $2000 per flight hour to own and operate the aircraft.  Double the use to 600 hours per year and the costs go from $2000 to $1500 per flight hour.
The aircraft doesn’t really care who owns it and who uses it. Those of us in the business get emotionally attached to these flying machines but the secret is out - they are just machines. The cost side of the economics only changes with the utilization and possibly some economy of scale.

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