MAY / JUNE 2015
Up, Up, and Away
U.S. Growth Leads Emerging World Market Rebound
Flight Planning with Your Family Office Partnering With Professionals Supports Your Aviation Investment GOOD NIGHTS EQUAL GOOD FLIGHTS APPRAISING THE APPRAISER LUCKY SEVEN FRACTIONAL SHARES PROVIDE FLEXIBLE OPTIONS REMOVING ATC FROM FAA? A Business Aviation Media, Inc. Publication
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M ay/J u n e 2 015
Fractional Shares Provide Flexible Options
U.S. growth leads emerging world market rebound
by G IL WOLIN
Flight Planning with Your Family Office
by BOB W ILK E
F E AT U R E S
Up, Up, and Away
by ROLL AN D VIN C E NT
• Volume 2 / I s sue 3
Partnering with professionals supports your aviation investment
Ownership with costs commensurate with travel requirements
After 6½ years of tight restriction, the money’s available – but the rules are different
by LE E ROH D E
Good Nights Equal Good Flights
Preventing flight crew fatigue is vital to safe operations
by J IM HOS E Y
Appraising the Appraiser
Finding the right appraiser is as easy as ASA
by R I C H AR D A . B E R K E M E IE R
D E PA R T M E N T S Publisher’s Message Licensed to Shill by G IL WOLIN
Removing ATC From FAA? by DAVI D C OLLOG AN
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Subscribe to our digital edition at www.bizavadvisor.com/subscribe
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Ma y/Ju n e 2 015 B U S I N E S S AV I AT I O N A DV I S O R 3
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PUBLISHER’S MESSAGE ■ PUBLISHER Gil Wolin firstname.lastname@example.org CRE ATIVE DIRECTOR Raymond F. Ringston email@example.com MANAGING EDITOR G.R. Shapiro firstname.lastname@example.org EDITORIAL ASSISTANT Michael B. Murphy email@example.com WASHINGTON EDITOR David Collogan firstname.lastname@example.org CONTRIBUTORS Richard A. Berkemeier CB Appraisal Review & Management Group email@example.com Jim Hosey Baldwin Aviation firstname.lastname@example.org Lee Rohde Essex Aviation Group email@example.com Rolland Vincent Rolland Vincent Associates firstname.lastname@example.org Bob Wilke AvRisk email@example.com BUSINESS MANAGER JoAnn O’Keefe firstname.lastname@example.org BUSINESS AVIATION MEDIA , INC . PO Box 5512 • Wayland, MA 01778 Tel: (800) 655-8496 • Fax: (508) 499-2172 email@example.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 2015 by Business Aviation Media, Inc. All rights reserved
Licensed to Shill A long-awaited family outing found me on a cruise ship together with members of the American Association of Aesthetic Surgeons, on board for a seminar. Upon discovering that bodies in flight rather than in surgery are my area of expertise, the doctors proceeded to expound on how the Internet and smartphone apps doubtless had changed the economics for business jet charter fliers. “The Internet is perfect to connect travelers with aircraft,” one doctor said excitedly. “Say there’s an aircraft flying home empty from Miami to LA. You should be able to charter that pretty cheaply – maybe even buy just a seat or two – if someone has already paid to have it fly out!” “So, if you found a charter company offering a trip online at the right price – maybe filling an empty leg – you’d buy it using an app?” I asked. “You bet!” “Aren’t you concerned about safety?” “Why should I be? They’re all licensed by the FAA, right?” That reminded me of the quote attributed to “Gus” Grissom, one of the seven original Mercury astronauts, when asked how he felt sitting in the capsule just before launch: “How would you feel, sitting on top of 50,000 parts, knowing that each had been awarded to the lowest bidder?” In front of me was a highly-educated professional who didn’t seem to share Grissom’s concern. “So,” I said, “if there were such a website for aesthetic surgeons, and someone posted a message saying: ‘I had a rhinoplasty scheduled for Thursday 8-11 AM who canceled. I am available for any surgical procedure of three hours or less at a 25% discount,’ that would be a good way to save a buck on a nose job or facelift, right?” The good doctor was aghast. “Of course not!” was the emphatic response. “Before you pick a surgeon, you need to do a lot of research.” “Why? They’re all licensed, aren’t they?” I countered. The doctor grew quiet. “I see your point,” he said. Deflated, he excused himself, and I was left alone with my thoughts – and concerns. Every driver on the highway presumably has a license, but that doesn’t mean I’d ride with just any one of them. Being certificated by the FAA is the starting point for charter due diligence. The scariest part of this conversation was that the doctor’s opinions probably are shared by too many charter users and prospects. Business aviation’s current growth surge has attracted a plethora of charter brokers from fields outside aviation. The relative anonymity of the Internet and smartphone apps enables them to pretend to have experience and expertise they don’t possess – and don’t care to obtain. When it comes to business jet charter, it is definitely “Caveat Emptor.” Several excellent third-party auditing firms, such as ARGUS, as well as many consulting firms, help ensure that users select a qualified operator. But there are no “parental controls” to protect folks like the doctor, who assume safety – perhaps erroneously – while looking for a good deal.
Gil Wolin — Publisher firstname.lastname@example.org
Printed in the USA Ma y/Ju n e 2 015 B U S I N E S S AV I AT I O N A DV I S O R 5
■ INDUSTRY UPDATE
Up, Up, and Away BY ROLLAND VINCENT Rolland Vincent Associates /email@example.com
he United States is a mosaic of contrasts, with 4% of the world’s population, 23% of the world’s GDP, 28% of the world’s airliners, 29% of the world’s HNWIs, and an astounding 61% of the world’s business aviation fleet. Considered by many to be the most mature bizav marketplace, the U.S. nevertheless has experienced solid growth, with its business jet fleet growing more than twice as fast as U.S. real GDP from 2005-2014. Far from being a developed or overdeveloped market, the U.S. is well positioned to capture at least its fair share of the market in 2015 and beyond. How can this be, and what are the drivers? First, the rebound of business aviation mirrors the steady and accelerating recovery of the U.S. economy. At the beginning of 2015, U.S. consumer confidence was at an 11-year high, reflecting solid monthly job growth that has helped return the national unemployment rate to a manageable level below 6%. Oil prices in Q1 2015 declined to about $60 per barrel, a welcome respite for American households and for the broad spectrum of U.S. businesses that are net consumers of energy. 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 2 015
While lower oil prices may give a temporary respite to older jet airliners that otherwise would be headed for the airplane graveyard, the picture is rather different for business aircraft. JETNET iQ Surveys of business aircraft owners and operators suggest that a sustained period of lower oil prices will be strongly positive for aircraft purchase and utilization expectations overall. As most are net energy consumers, they recognize that affordable energy is a welcome development for their businesses and for consumers who depend upon their businesses for products and services. Other factors that should enable U.S. sales in 2015 are stronger corporate profits and balance sheets, coupled with affordable credit. A significant proportion of aircraft owners and operators elected to sit on the sidelines through the Great Recession, riding out the storm of sharply lower aircraft valuations. While memories of asset write-downs and write-offs remain fresh, the frothiness of the market bubble that drove prices well above historical residual value trend lines has subsided. Several new and improved aircraft models are smartly arriving “just in time” to entice buyers who have deferred purchases. The marketplace continues to favor buyers, at least for the time being, and we w w w. B i z AvA d v i s o r. c o m
U.S. Growth Leads Emerging World Market Rebound
expect that they will continue to extract considerable concessions before closing negotiations and signing contracts. With the exception of the price point at which deals will be written, we expect that the environment should remain relatively healthy in 2015 for industry professionals who build, service, finance, or trade in business aircraft. We are seeing early signs that the marketplace optimism is shifting towards owners and operators of light and mid-sized cabin aircraft: categories of aircraft that are strongly represented in the U.S. fleet. JETNET iQ Surveys of business aircraft owners and operators of large cabin jets are less optimistic than before. Some report that they have seen a downturn in long-range flight operations, tied to volatility in emerging and BRICS markets, geopolitical tensions centered in the Middle East, Russia, and Ukraine, and flat commodity prices. In 2015, it is difficult to overstate the importance of the stronger U.S. market to the business aviation industry, home base for more than 12,000 business jets and almost 7,500 business turboprops. Of the top business aircraft country markets, just a handful are expected to grow GDP at 3% or higher in 2015, with the U.S. the most prominent among these.
its manufacturing sector, led by the automotive industry. Since 2011, American, European, and Asian manufacturers have committed to invest an estimated $10 billion in Mexico’s automotive sector, taking advantage of U.S. market access and lower tariff provisions embedded in the North American Free Trade Agreement (NAFTA). Mexico’s economy is projected to grow at about 3% in 2015. Canada, a commodity-centric economy with a high dependence on U.S. trade, has experienced a sharp reduction in the value of its currency relative to the U.S. dollar. In fact, the “Loonie” lost fully 20% of its value in just a nine-month period from mid-2014. This devaluation is good news for Canadian exporters, as it will encourage a surge in cross-border sales to the U.S., and rekindle interest by U.S. corporations in Canadian direct investment. The Canadian economy is now expected to grow at about 2% in 2015, dragged down by slower performance in its energy sector. The United Kingdom, another key business aviation market, will benefit mostly from lower oil prices, low inflation, close economic ties to the U.S., and a relatively strong currency in 2015,
2015 SHOULD CONTINUE TO BE A GOOD YEAR FOR BUSINESS AVIATION, LED BY STRONGER SALES TO U.S. CORPORATIONS AND ENTREPRENEURS So, which business aviation companies are among those best positioned to benefit from the expected U.S. rebound – and by extension, which owners of their products can expect to see improved asset values? In our view, the list includes: ■■ Aircraft and engine manufacturers with an historically strong domestic market share and high brand loyalty (Gulfstream, Dassault Falcon, Cessna/Beechcraft, Pilatus, Pratt & Whitney Canada) ■■ Aircraft manufacturers that have new customer-ready models for 2015 delivery (Embraer, Cessna) ■■ Avionics and cabin communications systems manufacturers that are largely responsible for putting the “office” in the “office in the sky” (Garmin, Rockwell Collins, Gogo Business Aviation) ■■ Maintenance, repair, and overhaul (MRO) and fixed-base operators (FBO) that are among the brands of choice with U.S. owners and operators (Jet Aviation, Duncan Aviation, Landmark Aviation, Million Air, Signature Flight Support, Atlantic Aviation, TAC Air, Hawthorne Aviation, Flying Colours) ■■ Fleet operators with lease and charter products that appeal to U.S. buyers and flyers (NetJets, Flight Options/Flexjet, XOJET, Executive AirShare, JetLinx, JetSuite,PlaneSense, VistaJet, WheelsUp) Activity outside the U.S. will not be dormant in 2015. Mexico, the #2 base for business jets worldwide, will benefit from its geographic proximity to the U.S. and surging inbound investment in w w w. B i z AvA d v i s o r. c o m
with GDP growth forecasted to be in the 2.5-2.6% range. All in all, 2015 should continue to be a good year for business aviation, led by stronger sales to U.S. corporations and entrepreneurs. We forecast that new business jet deliveries will increase about 4% year-over-year to 740 units worldwide, with a total list price value of almost $22 billion. For comparative purposes, this implies an average aircraft value of $29 million, equivalent to a large cabin business jet in the Challenger 605 and Falcon 2000 LXS class. Based on asking prices for pre-owned business jets, this same $29 million is equivalent to the current market value of about 50 Citation I/SPs of late 1970s vintage, the most popular business jet of its era. Flight activity data from Argus International (www.argus. aero) supports this forecast. Corporate turbine aircraft flight activity in 2014 posted its best year since 2008 in all segments. More aircraft and fractional owners as well as charterers are flying more hours, a trend that is expected to continue. Increased flying coupled with increased demand for new aircraft means that your aircraft’s asset value likely is appreciating. That makes 2015 a good year for owners as well as for buyers. BAA ROLL AND VINCENT is President of Rolland Vincent
Associates, an aviation and aerospace market research, forecasting, and strategic planning firm. His 30+ years’ experience includes work with manufacturers, commercial operators, and international organizations.
Ma y/Ju n e 2 015 B U S I N E S S AV I AT I O N A DV I S O R 7
■ AIRCRAFT MANAGEMENT
Flight Planning with Your Family Office Partnering With Professionals Supports Your Aviation Investment BY LEE ROHDE our family office staff has a great deal of experience in managing your wealth and investments, and are familiar with your current aviation travel needs and assets, but most have limited experience with or exposure to business aviation. Business aircraft are not just asset investments; they are tools designed to meet specific business and/or personal travel needs. Determining the aircraft and/or operating option – whether charter, jet card, fractional share, or whole aircraft ownership – that best fulfills those needs as well as your target investment return, requires aviation-specific expertise. A knowledgeable business aviation consultant can help your family office make the best decisions for your aviation investments, by: ■■ Conducting a thorough analysis of your travel details and requirements, including regular destinations, frequency of travel, length of stay, number of passengers, and baggage requirements, as well as specific security, medical, catering, and other needs. ■■ Presenting a range of options to meet those defined requirements, such as: acquiring a new versus a preowned aircraft; if charter or jet card, choosing a local or national provider; and determining whether or not an owned aircraft should fly for charter revenue when you’re not flying. ■■ Assisting with creating proper ownership and operational structures, such as deciding whether to establish an independent flight department or use an aircraft management company, whether to operate the aircraft under FAA regulations governing corporate or commercial aircraft regulations, and determining proper staffing based on annual flight hours. ■■ Representing you during transactions when needed, from initial aircraft acquisition to resale and/or replacement, or from initial charter contract negotiation to contract renewal. ■■ Recruiting, vetting, and recommending qualified flight crew members and maintenance technicians as required. When you are ready to purchase or replace an aircraft, your aircraft consultant, sometimes working in conjunction with a preowned aircraft broker or manufacturer’s representative, will help your family office to determine, identify, and acquire the appropriate aircraft, by guiding them to ask questions essential to properly structuring the deal. He or she also will provide you with the most current aircraft data, information on operations, acquisition costs, and compliance requirements. If you plan to purchase a fractional share or whole aircraft, 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 2 015
consider adding aviation tax and legal counsel to your “aviation team.” Ownership structures in aviation do not follow those traditionally used for your other assets. For example, aviation assets are subject to scrutiny by multiple government agencies including the FAA, IRS, SEC, DOT, and state tax authorities. Often, an action taken concerning one federal or state agency could have an impact on how another agency views the matter. And just as aircraft ownership structures vary from other asset ownership structures, so do aircraft operations structures. For example, owning a car does not require employing a full-time maintenance technician, but owning a business jet does, to insure operational safety, dispatch reliability, and asset preservation. Your aviation advisor will help recruit a qualified technician who stays current with best practices and evolving technology. He or she also can support your family office by conducting regular reviews of your aircraft operation and asset value. For example, expanded travel may dictate adding a jet card or fractional share. Ongoing, proper analysis will help ensure that your operation is appropriate and cost effective for your evolving needs. Where can your family office staff find these professionals? Most established business aviation consultants belong to one or more national aviation trade associations. Contact the National Business Aviation Association (www.nbaa.org), the National Aircraft Finance Association (www.nafa.aero), or the National Aircraft Resale Association (www.naraaircraft.com) for further information. BAA LEE ROHDE , President and CEO of Essex Aviation Group, has
25+ years’ experience in financial and operational analysis and corporate business development. He advises clients on aircraft acquisition, strategic planning, financial, operational, and management matters.
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Essex Aviation Group / firstname.lastname@example.org
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■ AIRCRAFT SAFETY
Good Nights Equal Good Flights Preventing Flight Crew Fatigue is Vital to Safe Operations BY JIM HOSEY s you know well, making sound decisions depends on a clear head and alertness at critical moments. Your aircraft crew faces this challenge daily. Flight attendants, schedulers and dispatchers, and even the technicians working on your aircraft all might have difficulty performing at their best when fatigued. You likely are most aware of the potential negative effects of fatigue on your pilot. A late night departure, an instrument approach in poor weather, or a long day that pushes up against the maximum recommendation (or in the case of commercial charter flights, FAA-regulations) for crew duty hours could lead to unfortunate consequences such as procedural errors, landing without a clearance, or poor decision making – with potentially devastating results. Sleep is a vital physiological need to maintain alertness, high performance, positive mood, and overall health and well-being. Seven to nine hours is the optimal amount for most adults. According to the FAA, there are three types of fatigue: ■■ Transient fatigue, brought on by extreme sleep restriction or extended hours awake within one or two days; ■■ Cumulative fatigue, caused by repeated mild sleep restriction or extended hours awake across a series of days; and ■■ Circadian fatigue, the reduced performance during nighttime hours, particularly during an individual’s “window of circadian low” (typically 2:00-5:59 AM) (U.S. Dept. of Transportation, FAA Advisory Circular Fitness for Duty, 10/11/12).
Studies show that loss of as few as two hours of sleep will induce fatigue and degrade subsequent waking performance and alertness to the same extent as having a .05% blood alcohol concentration (BAC). Four hours of sleep loss results in the equivalent of .10% BAC – legally intoxicated in all U.S. states, and in every country. Cumulative fatigue can be reversed only by sleep, and recovery will take roughly one to two days of extended sleep periods. Quality of sleep also is important for pilots to fly safely, particularly when flying several back-to-back extended flight segments. Aircraft manufacturers have done an excellent job in designing business aircraft. They look and smell wonderful, incorporate the latest technology, and offer amenities for executives, but what about the crew? Almost all aircraft have reclining cockpit seats; some long-range, large cabin models have relief crew areas with reclining seats; and some have relief crew rooms that have beds or seats that recline fully to the horizontal position. 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 2 015
But in some aircraft, the relief crew area is directly behind the pilot’s seat, next to the galley. When the flight attendant is serving, interruptions from noise can prevent high quality sleep. In smaller aircraft without a relief crew area, offering the use of one of the cabin seats to the resting crewmember certainly is preferable to no rest at all. Aviation regulators around the world are starting to provide guidance to operators for developing a Fatigue Risk Management System (FRMS), now mandatory for some parts of the industry, and which eventually will be mandatory worldwide. What procedures should you have in place to prevent flying while fatigued? ■■ As a rule, crew members are expected to report “Fit for Duty” and sufficiently well rested to safely perform the duties of the job. ■■ However, on-the-job or personal events can cause fatigue. Admitting fatigue is the crew member’s responsibility. An “Absent for Fatigue” policy should be encouraged to ensure that the compromised individual is not coerced into performing duties. ■■ Training on the subject of fatigue and the tools to mitigate it should be a must for all members of your flight and ground crews. When your flight crew expresses concerns about fatigue, consider their judgment and experience as your first line of defense against the hazards of flying impaired. Less pressure to Get There Quickly and more to Get There Safely will protect you, your crew, your passengers, and your aircraft. BAA JIM HOSEY, Director of Safety and Compliance, Baldwin Aviation,
flew C-130s and C-5s during his 30-year USAF career, retiring as base Vice Commander, then spent 15 years with a corporate flight department. He serves on NBAA’s Safety Committee.
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Baldwin Aviation / email@example.com
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■ AIRCRAFT FINANCE
Appraising the Appraiser Finding the Right Appraiser is as Easy as ASA BY RICHARD A. BERKEMEIER
fter the savings and loan crisis in the 1980s, and again in 2008, the banking industry responded with new rules and additional safeguards for better risk management. One of the most significant changes involves aircraft appraisals. Prior to 2008, a simple market evaluation by a resale broker, often with just a quick look at the current edition of the Aircraft Blue Book, was sufficient to secure as much as a 90% loan-tovalue ratio for a preowned aircraft. That is no longer so. Today, most banks, leasing companies, and insurance underwriters require that all loan collateral, including business jets, be valued by a qualified, certified appraiser before financing is approved. Those appraisers must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), which was created in 1989 by the Appraisal Foundation, and is the generally accepted standard in Canada and Mexico as well as the U.S. Two organizations provide such appraiser certification: the International Society of Transport Aircraft Trading (ISTAT), which focuses primarily on commercial airliners; and the American Society of Appraisers (ASA), which teaches, tests, and confers credentials to its members, who conduct professional appraisals for business and personal property valuation. The ASA’s Machinery and Technical Specialties division offers the only program to train and certify business aircraft appraisers. Appraisers earn that Aircraft Specialty accreditation by completing a rigorous curriculum and peer evaluation. ASA-accredited appraisers must adhere to the professional standards set forth by ASA’s Code of Ethics and Principles of Appraisal Practice, and well as USPAP (in North America), or the International Valuation Standard elsewhere in the world. The two levels of ASA certification, Accredited Member and Accredited Senior Appraiser, are based on the number of years of appraisal experience, with continuing education courses required to hold either accreditation. The recent rebound in business jet transaction activity has increased the demand for certified appraisals. To meet that need, two established aviation organizations, Jet Support Services, Inc. (JSSI) (www.jetsupport.com) and Embry-Riddle Aeronautical University (ERAU) (www.erau.edu) co-sponsored and co-hosted two ASA accreditation courses earlier this year, one at ERAU’s campus in Daytona Beach, FL, and the other at JSSI’s European headquarters in Farnborough, UK, with more courses planned for this fall. 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 2 015
What does this mean for you, the aircraft owner? If you are interested in monitoring the value of your aircraft, whether for financing, refinancing, or sale; or to verify hull value for insurance coverage, you will need to have your aircraft appraised by an ASA-certified appraiser. This will ensure that you have the most accurate and lender-acceptable data. On average, expect the appraisal to take about one week, with the physical inspection process usually one full day onsite, and the rest reviewing records. The appraiser will conduct a systematic inspection of the interior and the exterior of the aircraft, including: engine, airframe, avionics, instrumentation, and other systems; as well as provide a methodical review of your aircraft’s flight and maintenance log books, FAA registration, title, and owner’s documentation. Most business jet appraisers avoid “desktop only” appraisals because the inspection and review of the records is extremely important. In 2015, the average cost for a full appraisal and inspection – required by most lenders – is about $5,000, perhaps up to $7,500, plus expenses. Be aware, however, that a standard appraisal is not the same as a pre-buy inspection for purchase, which can run between $10,000-$50,000 depending on the size and scope of the work. Rules for lending have changed dramatically in the past six years. If you have not been in the market recently, know that a proper appraisal will ensure that you secure the right equipment at the right price, while meeting your lender’s requirements. For more information about and to find an accredited Appraiser go to www.appraisers.org or call 800-272-8258. BAA RICHARD A . BERKEMEIER , ASA, is chief appraiser for CB
Appraisal Review and Management Group. An active member of ASA’s Board of Governors with 30 years’ banking and leasing experience, he was VP of Citigroups’s Investment Bank.
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CB Appraisal Review & Management Group firstname.lastname@example.org
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It’s ONE Aviation, a remarkable combination of forward-thinking engineers and production staff, plus superior sales and customer support, offering aircraft owners and pilots the industry’s most innovative product line. Whether your ONE thing is jet speed, larger cabin, outstanding operating economy or unimproved runway capability, look to ONE Aviation.
Contact us at +1 (877) 375-7978 email@example.com www.oneaviation.aero
■ ALTERNATIVE LIFT
Fractional Shares Provide Flexible Options Ownership with Costs Commensurate with Travel Requirements BY GIL WOLIN
Business Aviation Media / firstname.lastname@example.org
ntroduced in 1986 by NetJets as an alternative to buying a whole business aircraft or using charter, fractional ownership allows you to share the cost of owning and operating an aircraft with others, while retaining the tax and depreciation advantages of making a capital investment. Fractional ownership differs from charter and membership services, because in both of those alternative lift options, you are paying to fly on someone else’s aircraft instead of taking ownership of the airplane. Today there are more than a half dozen business jet and turboprop fractional programs, each offering its own unique blend of new and preowned aircraft, from light jets and turboprops, to large-cabin, long-range jets, and helicopters. Some owners rely on fractional operators for all their business aircraft needs, while others use them for supplemental lift when their fully owned aircraft is unavailable. The number of shares you purchase in a fractional ownership transaction is informed by how often you plan to fly. You can purchase as little as a one-sixteenth share, which entitles you to 50 hours of use annually, or up to a one-half share for 400 hours per year. As a fractional owner, you are not limited to flying only aboard your own shared aircraft. A fleet interchange agreement provides you with full access to a fleet of similar aircraft, ensuring that you always have availability on demand. If your particular owned aircraft isn’t available, the fractional aircraft management company will offer you another one from the fleet at the same cost per hour. In all cases, you are paying only for occupied hours, with no charge for pre- or post-flight positioning within a defined area of operations (e.g. continental U.S. or Europe). Typically, whole aircraft owners/operators are responsible for the maintenance, flight crew, insurance, regulation compliance, and all other details involved with the care and operation of their aircraft. With fractional ownership, however, the management company provides everything, including the hangar space, scheduling, staffing, flight planning, maintenance, catering, and insurance. As a fractional owner, you are guaranteed that an aircraft will be available to you on as few as four hours’ notice. The larger your share size, the shorter the guaranteed response time. There are three costs involved with fractional ownership: the purchase price, an annual or monthly management fee, and a perhour rate to use the aircraft. Financing is available for the 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 2 015
■■ Lower acquisition cost for an aircraft
■■ Costs of ownership shared with others ■■ Guaranteed availability and rapid response ■■ Ease and simplicity of use and ownership ■■ Flexibility to use other aircraft types per contract ■■ Tax and depreciation benefits commensurate with
share of ownership
■■ Aircraft and crew differ on each flight ■■ Higher hourly costs
■■ May have “blackout” dates limiting access ■■ Aircraft show age quickly (due to high annual utilization) ■■ Reduced resale value due to high times on airframes
and engines: 1,200 to 1,500 hours per year ■■ You may be liable for an accident on owned aircraft, even when owners are not on board ■■ Typically requires a five-year contract with penalties for early termination purchase price, although it comes with stringent requirements. As with full ownership, a subsidiary, affiliated corporation, or special purpose entity can own the aircraft. Fractional ownership offers both advantages and disadvantages. An annual travel requirement of 200 hours is the generally accepted level at which owning a whole aircraft begins to make economic sense. With almost 700 fractional business jets and turboprops aircraft available from among the seven leading operators, as well as an additional 5,500+ charter business jets and turboprops available as back up, a fractional share can be logical choice both for moderate business aircraft users, as well as for supplemental lift for whole aircraft owners. BAA GIL WOLIN’S 43-year career in business aviation includes
senior management positions in leading charter management and FBO companies. He served as publisher of B/CA prior to founding Wolin Aviation Consulting and Business Aviation Advisor.
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How Is Your Aircraft’s Maintenance Condition Affecting Its Value? The Aircraft Graybook Asset Quality Manual Try the new, web-based maintenance equity guide FREE for a limited time
Find Out – Using Asset Insight’s Web-Based, Cost-Effective Services 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 status, the higher its Asset Insight Index.
Avoid surprises – learn: ▲ The value of your aircraft’s Maintenance Equity ▲ How your aircraft’s Maintenance Equity compares to the fleet average ▲ The value of your aircraft’s Hourly Cost Maintenance Program coverage ▲ What aircraft Major Sectors are adding to, or detracting from, its value ▲ How to justify your aircraft’s value versus similar assets listed “for sale” ▲ Your aircraft’s scheduled maintenance expense over the next 60 months ▲ When a low aircraft purchase price may not represent good value
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■ AIRCRAFT FINANCE
After 6½ Years of Tight Restriction, the Money’s Available – But the Rules are Different BY BOB WILKE n October 6, 2008, the first morning of the National Business Aviation Association annual convention, major stock exchange indices suddenly began to plummet. By the time the convention ended three days later, the resulting chaos in the financial world caused lending to dry up. Whereas before, lenders routinely funded aircraft acquisitions at 100% of the purchase price, that practice ended abruptly. Expected residual and collateral values for aircraft costing between $5 million and $65 million declined almost instantly by 25% – and continued to drop for the next several months. What had been a highly competitive market for lending opportunities now became a virtual financing ghost town. Lenders would fund transactions only for solid current customers, at higher rates for shorter terms, with more restrictive loan terms and conditions, and only for newer and larger aircraft. And to a great degree, those restrictive lending policies instituted more than six years ago only now are beginning to loosen. Most lenders will lend only for newer aircraft, and for much shorter terms. A popular formula is that the sum of the age of the aircraft plus the term of the loan or lease cannot exceed fifteen years. Down payment requirements are higher and end-of-term balloon payments are smaller. Refurbishment advancements are by far the exception rather than the rule, and “non-recourse” funding is available only at very high rates (See “The Changing Lending Climate,” Business Aviation Advisor September/October 2014).
What was the root cause for this financing disruption? Unlike in the real estate industry, there was no massive number of borrower defaults. Rather, it was due to a sudden flood of business aircraft into the resale market, triggered by two events. The first was the U.S. government’s demonization of corporate jets in response to the heads of the Big Three automakers each flying their own aircraft to Washington for nationally broadcast Senate hearings on their proposed financial bailout. Most publically traded companies scrambled to divest their aviation assets quickly, without regard to potential losses. Second, plunging corporate profits and the free-falling stock market that did not bottom until May 2009, eliminated demand at the same time that business aircraft supply was near a historic high. The number of medium- to large-cabin aircraft for sale more than doubled virtually overnight. While actual aircraft loan defaults were not prevalent, lender’s collateral and residual value assumptions were in total disarray. Lenders revalued their assets in a blood bath of “Mark to Market” 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 2 015
(fair market) revaluations, creating massive paper losses quarter after quarter. In many cases, the amount of the loan exceeded the market value of the aircraft, creating a negative collateral value. Keys to effective residual and collateral value risk mitigation are selecting the “right” aircraft (make and model with which the lender is familiar and comfortable) and agreeing on a mutuallyacceptable loan or lease structure. This structure very likely will require close monitoring of the status, operation, and maintenance of the aircraft, to reduce collateral value risk and ensure that the aircraft retains the highest possible value, confirmed by periodic professional reappraisal. Inspections of the aircraft, logbooks, flight operations, insurance coverage, maintenance scheduling, and computerized maintenance systems will be monitored carefully and frequently by the financial institution or its agent. Hourly cost maintenance programs for the engines, airframe, and APU may be required as a condition of the financing. What is the benefit for you, the owner, lessee, or operators of the aircraft? Careful lender monitoring makes your investment more valuable during and at the end of the transaction term, and allows the lender or lessor to offer you financing at a lower rate and/or under more favorable terms. Until lenders begin to compete actively for new transaction opportunities, this is the new reality of the business aircraft financing market. BAA BOB WILKE , MBA, is cofounder and Managing Director of
AvRisk. With more than 30 years in aviation finance and consulting, he was a senior manager at JSSI, Boeing, and Bombardier, and teaches Corporate Finance at the university level.
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AvRisk / firstname.lastname@example.org
Fill an empty seat with hope on your next flight. Give a cancer patient a lift.
photo by gabe palacio
Corporate Angel Network arranges free travel for cancer patients using the empty seats on corporate jets. Since 1981, Corporate Angel Network, a notfor-profit organization, has worked with U.S. corporations to schedule more than 45,000 cancer-patient flights and currently transports 250 patients each month to and from treatment. The process is simple. Corporate Angel Networkâ&#x20AC;&#x2122;s staff does all the work. After all, patients and their families have enough to worry about.
Cancer patients fly free in Corporate Angel Network the empty seats on corporate jets. Corporate Angel Network, Inc. (914) 328-1313 www.corpangelnetwork.org
■ WASHINGTON REPORT
Removing ATC From FAA? Sentiment Growing for Major Changes in FAA’s Structure and Governance BY DAVID COLLOGAN early six decades after Congress established FAA, there is a push by key lawmakers and some aviation industry officials to radically transform the agency, including moving air traffic control responsibilities into a new corporate entity and making the agency operate more like a private business. During a March 24 hearing before the House aviation subcommittee, Rep. Bill Shuster (R-PA), chairman of the House Transportation & Infrastructure Committee, charged that FAA’s governance and financing structure “is broken beyond repair.” The underlying problem, Shuster said, is that air traffic control is a high-tech business, but FAA “is not a business, but a vast government bureaucracy. As a government agency, the FAA is simply not set up to determine risks, pursue the most cost-effective investments, manage people to produce results, reward excellence or punish incompetence like a normal business.” Shuster noted that in the same amount of time FAA has been pursuing its NextGen ATC modernization program, “Verizon has upgraded its wireless network four times.” Restructuring an agency whose air traffic control system is the largest and safest in the world might seem like a risky move. But “it’s been done before,” Shuster said. “In the past 20 years, 50 countries have successfully separated their ATC service from the aviation safety regulator.” Different approaches have been used, but Shuster said they’ve had similarly successful results in maintaining or improving safety, modernizing systems, and delivering improved services. Witnesses at the hearing pointed to two key problems with the status quo – the incessant delays and disruptions in congressional funding of FAA, which wreaks havoc on multi-year investment programs like NextGen; and the tortuously slow pace of FAA decision-making. Craig Fuller is a former president of the Aircraft Owners and Pilots Association and current vice chairman of the FAA Management Advisory Committee. He told the subcommittee that FAA’s “structures and processes for decision making and resolution of issues are serving neither the FAA nor the aviation community in a satisfactory manner,” an area of concern “expressed across almost all aviation groups.” While there appears to be significant support for the concept of changing the structure of FAA, the devil will indeed be in the details. Paul Rinaldi, the president of the National Air Traffic Controllers Association, was adamant about the need to provide FAA with a predictable funding stream that cannot be interrupted by partisan budget battles in Congress. 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 2 015
But Rinaldi said “it is critical that the specifics of any reform are vetted among all of the stakeholders. NATCA cannot commit to any concepts in a vacuum. We cannot afford a mistake that upsets this critical engine of economic growth. Given the National Airspace System’s 24/7 activities, any transition, no matter how small, must be seamless.” One of the most contentious issues that must be resolved is how a restructured FAA would be funded. The agency’s $15 billion annual budget is currently supported by congressional appropriations, ticket taxes on airline and charter passengers, and fuel taxes on general and business aviation operators. In written testimony presented to the subcommittee, National Business Aviation Association President and CEO Ed Bolen said “the debate over how to get from where we are to where we want to go… should be undertaken in the context of data, facts, and guiding principles.” Among those principles is the need for Congress to “retain authority over taxes, fees and charges.” NBAA, along with other general aviation organizations, has waged a successful battle against aviation user fees for decades. Bolen reiterated that the fuel taxes paid by General Aviation and business users of the NAS are “the most efficient, effective payment system.” Congress has blocked per-flight user fees for years, Bolen said, “and should continue to oppose them.” BAA DAVID COLLOGAN has covered aviation in Washington, DC
for more than four decades. This award-wining journalist is known as one of the most knowledgeable, balanced, wary, and trusted journalists in the aviation community.
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