Business Aviation Advisor September/October 2014

SEPTEMBER / OCTOBER 2014

Alternative Lift When It’s Time to Fly But Not to Buy

Cross-Border Transactions Buying Aircraft Registered Outside the U.S.

The Changing Lending Climate The New Ground Rule: Relationships Matter

What Drives Jet Fuel Prices?

When You Buy Fuel, You’re Buying More Than Just Jet A

A Business Aviation Media, Inc. Publication

HOURLY COST MAINTENANCE PROGRAMS SENDING OUT AN SMS THE VALUE OF GOOD MAINTENANCE RECORDS

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F E AT U R E S Alternative Lift

When It’s Time to Fly But Not to Buy

by ROLL AN D VIN C E NT

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Sending Out An SMS

Is Your Team’s Understanding of “Safely and on Time” the Same As Yours?

by ROB E R T J . C ONYE RS

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Cross-Border Transactions

Buying Aircraft Registered Outside the U.S.

by E DWAR D H . K A M M E R E R

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• Volume 1 / I s sue 4

“No Vacancy”

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Hourly Cost Maintenance Programs Manage Your Budget – and Much More

by ANTHONY K IOUS S IS

Larger Aircraft Drive Hangar Shortage

by W ILLIA M B E V E RS LUIS

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The Value of Good Maintenance Records Protect Your Asset and Your Safety

by B ILL de D E C K E R

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Selecting the Right Aircraft Broker

by BR A D H AR R IS

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It Can Be As Important As Selecting the Right Aircraft

The Changing Lending Climate

The New Ground Rule: Relationships Matter

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D E PA R T M E N T S Publisher’s Message The Price of Safety

by G IL WOLIN

Washington Report

What Drives Jet Fuel Prices?

by DAVI D C OLLOG AN

by J OHN BA S ILEO

The Business of Business Aviation The Information You Need, From Experts You Can Trust Aircraft owners and charterers now have a resource to help you make the most effective use of your investments in business aviation. Business Aviation Advisor provides the information you need, without technical jargon, on the business of owning and flying business aircraft – from operations to acquisition, to management and finance.

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S e p t e m b e r/O c to b e r 2 014 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 gwolin@bizavadvisor.com CRE ATIVE DIRECTOR Raymond F. Ringston rringston@bizavadvisor.com MANAGING EDITOR G.R. Shapiro gshapiro@bizavadvisor.com EDITORIAL ASSISTANT Michael B. Murphy mmurphy@bizavadvisor.com WASHINGTON EDITOR David Collogan dlcollogan@gmail.com CONTRIBUTORS John Basileo Citi Private Bank john.basileo@citi.com William Beversluis Jet Aviation Flight Services william_beversluis@jetaviation.com Robert J. Conyers Baldwin Aviation rconyers@baldwinaviation.com Bill de Decker Conklin & de Decker Associates, Inc. bdedecker@conklindd.com Brad Harris Dallas Jet International bharris@dallasjet.com Edward H. Kammerer Hinckley Allen & Snyder ekammerer@hinckleyallen.com Anthony Kioussis Asset Insight, Inc. akioussis@assetinsightinc.com Rolland Vincent Rolland Vincent Associates rvincent@rollandvincent.com BUSINESS MANAGER JoAnn O’Keefe jokeefe@bizavadvisor.com BUSINESS AVIATION MEDIA , INC .

PO Box 5512 • Wayland, MA 01778 Tel: (800) 655-8496 • Fax: (508) 499-2172 info@bizavadvisor.com www.bizavadvisor.com Editorial contributions should be addressed to: Business Aviation Advisor, PO Box 5512, Wayland, MA 01778, and must be accompanied by return postage. Publisher assumes no responsibility for safety of artwork, photographs, or manuscripts.

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The Price of Safety

T

he rise of Über and Lyft, the two app-driven rideshare companies which harness non-professional drivers and their cars, has spawned several aviation start-ups trying to emulate their model.

In his cover story, “Alternative Lift,” Rolland Vincent notes that while the economy is recovering, business jets remain underutilized by their owners. So why not make them available to occasional business jet users at a reduced rate?

Because there is a marked difference in operational complexity between autos and aircraft — and that is why the FAA, the European Aviation Safety Agency (EASA), and other international aviation regulatory bodies mandate additional operational safety margins for commercial air charter companies.

The FAA’s Federal Aviation Regulations (FAR) Part 91 covers private flying aboard your own aircraft, and FAR Part 135 governs for-hire air travel aboard business aircraft. The assumption is that, if you are flying aboard your own aircraft, you’ll fly within the limits of your pilots’ skills and experience, as well as your aircraft’s performance capabilities.

But if you are going to offer for-hire air travel to the public, the FAA requires that you adhere to a higher standard. For example, Part 91 jet pilots are required to complete recurrent training annually, while Part 135 crews must train semi-annually. Part 135 also dictates longer runway requirements than are specified by the aircraft manufacturer, which means that some airports available to private operators are not open to chartered jets. Of course, many Part 91 flight departments choose to implement higher operational safety standards, for the owner’s peace of mind and to obtain lower insurance premiums.

The charter industry itself goes even a step further, with three organizations offering safety ratings: Argus, Wyvern, and the Air Charter Safety Foundation. Each requires an independent, third-party audit to earn their respective safety seals of approval, and informed charterers look for these additional commitments to safety from their providers.

Which brings us back to aircraft ride-sharing. Just as every driver must pass a statemandated driving test to operate a car legally, every pilot passes an FAA test to secure his or her license. Are all car drivers safe drivers, just because they have a license? Hardly. I would not climb into a randomly selected car that happened to be going my way, neither would I fly with an unknown private pilot in an unknown aircraft.

To date there have been only a few private aircraft rideshare operations attempted.

BlackJet is in hiatus seeking more capital, and in August the FAA ruled that Massachusetts-based AirPooler is a commercial activity, stating that even paying shared expenses makes these commercial flights subject to more stringent regulation.

Not all pilots and aircraft are trained – nor are all aircraft maintained – equally. You need more than a faceless app to make an informed decision about with whom, and on what aircraft, you choose to fly.

Best regards,

Gil Wolin — Publisher gwolin@bizavadvisor.com

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■ SUPPLEMENTAL TRAVEL

ALTERNATIVE LIFT

When It’s Time to Fly But Not to Buy All signs point to a recovering economy, but for some aircraft owners and users, the recovery may not be fast enough. They are making the transition from owning a business aircraft or fractional share to accessing one through charter, jet cards, and other forms of membership. Given that these forms of access tend to come at relatively high per-hour costs, what are some of the factors that may be driving some people away from ownership?

“I Don’t Need to Fly as Much”

Tracked alongside overall levels of GDP, FAA business jet use data showed a marked dip in 2008 and 2009, and have yet to fully recover. Annualized business jet cycles (one takeoff and landing) in the FAA’s data for May 2014, were 14% below the 2007 annual peak on a trailing twelve months annualized basis. Given that the underlying U.S. business fleet has continued to grow through the Great Recession — it was up 18% from the end of 2007 through the end of Q2 2014 — we estimate that there may be up to 38% underutilized capacity in the fleet, based on pre-recession utilization rates.

In simple terms: there remain a large number of jets — representing more than ¼ of the fleet — that essentially are idle. This excess capacity is being slowly bled off as businesses get back to using these assets productively, but the process is taking time.

Worldwide, 23% of respondents to the Q2 2014 JETNET iQ survey of fixed-wing turbine aircraft owners and operators indicated that their primary aircraft purchase inhibitor is that they simply do not need additional lift at this time.

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Worldwide, business aircraft utilization during the last 12 months was about 350 flight hours per aircraft, based on the Q2 2014 JETNET iQ survey. Notably, 44% of respondents indicate that their utilization is 250 flight hours or less per aircraft.

On the other hand, a number of high-utilization operators recognize and realize the productivity benefits of using their aircraft. In the same survey, 7% of respondents indicate that they fly their turbine aircraft more than 1,000 hours per year.

“I Lost My Shirt”

Not so long ago, and for a brief few years in the run up to the Great Recession, business aircraft actually appreciated in value post-delivery. This was contrary to most people’s experiences with high-end vehicle purchases, as they remembered that sinking-residual-value U.S. GDP and U.S. Business Jet Cycles $20B

$5M

$18B

$4.5M

$16B

$4M

$14B

$3.5M

$12B

$3M

$10B

$2.5M

$8B

$2M

$6B

$1.5M

$4B

$1M

$2B

$500K

$0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 U.S. GDP in Billions of Chained $2009 (Seasonally adjusted at annual rates)

$0

U.S. Business Jet Cycles – Annualized

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DATA SOURCE: U.S. BUREAU OF ECONOMIC ANALYSIS (BEA)

BY ROLLAND VINCENT Rolland Vincent Associates / rvincent@rollandvincent.com

“I Like My Club”

Years ago, travel services company American Express coined the expression “Membership has its privileges.” This tag line captured the essence of a club-like experience that customers value, and may prefer to ownership. The greeting of a concierge who remembers your name is a gratifying reassurance in the busy day of any frequent traveler. Personalized, professional, non-intrusive — these service qualities build relationships. And people who experience the inviting, club-like atmosphere of a premium charter or jet card service tell their friends.

As one recently told me, “They make it so easy and convenient. I don’t know what we would do without them… go ahead and sell anything, but not the jet card!”

Alternative Lift Program Options

In today’s slowly recovering economy, Alternative Lift programs may be among the best options for those who cannot or do not wish to own a whole or shared aircraft. Defined as “the use of corporate aircraft that does not require an ownership or equity position in the equipment,” Alternative Lift includes jet cards, ad hoc charter, block charter, and w w w. B i z AvA d v i s o r. c o m

Annual Flight Hours Per Aircraft <101 Hours

8.4%

101-150 Hours

12.4%

151-200 Hours

13.7%

201-250 Hours

10%

251-300 Hours

10.5%

301-350 Hours

7.7%

351-400 Hours

7.3%

401-450 Hours

5.8%

451-500 Hours

3.5%

501-550 Hours

2.9%

551-600 Hours

2.3% 1.6%

601-650 Hours 651-700 Hours 701-750 Hours 751-800 Hours

Average Flight Hours

354

0.8% 1.1% 0.8%

801-850 Hours

1.8%

851-900 Hours

0.3%

901-950 Hours

0.3%

951-1,000 Hours

1.5%

>1,000 Hours

7.3%

purchasing a day’s use of an aircraft, as well as new program models still in development.

Alternative Lift offers you more flexibility, providing you with the desired access to business aviation — with an hourly premium instead of invested capital — so you can preserve cash for other purposes.

In addition to established charter broker jet card providers like Sentient Flight Services, Air Partners, and Magellan, virtually all fractional share companies offer their own jet card program. These range from NetJet’s original Marquis Jet Card to AAG’s fleet of fractional Sikorsky S-76 helicopters. In contrast, JetLinx, which operates light jets at nine U.S. locations, offers access to its fleet only via a jet card purchase.

Traditional charter operators, such as XO Jet and TWC Aviation have entered the mix using jet cards to market prepaid block charter.

The obvious appeal of card simplicity is bringing new entrants to the market.

DATA SOURCE: U.S. FEDERAL AVIATION ADMINISTRATION (FAA)

feeling of driving off the dealer’s lot in a shiny new car. Depreciation, one of the most significant costs of ownership, is not quite a Newtonian law, but it’s close.

In the up and down of the recent business cycle, some made their money, others lost their proverbial shirt; some deals succeeded, and some collapsed with collateral damage.

Today, with the exception of the large-cabin, long-range Gulfstream G650 and its sister ship the G650ER, the notion of price premiums for aircraft after delivery is now a distant memory. No longer is there a scarcity effect in the market, driving buyers to bid prices upwards to circumvent the long wait times and take control of the desired asset.

Although the large-cabin segment remains where most manufacturers want it to be, buyers of some new large-cabin models reportedly are taking delivery at prices that are 10% or more off list. How times have changed! For those who were caught holding inventory when values began to crater in late 2008 to early 2009, it is tough to get back into the market. What may have seemed like a sure bet suddenly wasn’t.

In 2013, Marquis Jet founder Kenny Dichter launched Wheels Up. After its initial launch with a fleet of turboprop King Air 350i and Cessna Citation XLS jet aircraft, Wheels Up has partnered with Jet Aviation Flight Services to offer mid- and large-cabin jet transport, and with VistaJet for ultra-long-range travel for its 575-plus clients in the U.S. and Europe. Wheels Up members prepay for travel in 25-hour increments, paying only for occupied hours, availability guaranteed.

Irvine, CA-based JetSuite states that it is the only charter operator in the world to guarantee instant quotes “accurate to the penny” with its online booking engine. CEO Alex Wilcox and his team offer last-minute “SuiteDeals” for repositioning flights starting at $536 each way (for a Phenom 100 or CJ3 light jet).

Established Swiss-based operator VistaJet just launched its own U.S.-based program, also in tandem with Jet Aviation Flight Services, which will operate and manage 12 new VistaJet Bombardier Global 5000 jets for U.S. domestic travel. The first two aircraft are in service in Teterboro, NJ, with additional aircraft based according to client demand at other Jet Aviation locations.

Also in 2013, CA-based Surf Air launched its own “all you can fly in a month for a flat fee” model, using seven-passenger Pilatus PC12 NG turboprops. The requirements are that flights are pre-scheduled, and that passengers share the aircraft with others headed to the same destination. Surf Air currently serves five CA cities plus Las Vegas, and has plans to expand significantly.

In a recent JETNET iQ presentation in NYC, Dr. Jim Taylor and Doug Harrison of the market research group YouGov (yougov. com), noted that time savings and lowered stress are the two luxury purchases most valued by executives and high-net-worth individuals. Business jet travel provides both, and these Alternative Lift programs add increased simplicity — with no capital risk — to the mix. BAA ROLL AND VINCENT is President of

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

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■ AIRCRAFT ACQUISITION

Cross-Border Transactions Buying Aircraft Registered Outside the U.S.

BY EDWARD H. KAMMERER Hinckley Allen & Snyder / ekammerer@hinckleyallen.com

A

AS WITH ANY ACQUISITION, ASSEMBLING THE RIGHT “DEAL TEAM” IS ESSENTIAL. The second is the proper expert advice. As with any acquisition, assembling the right “deal team” is essential. As you do so, consider the following: ■■ First, make sure your U.S. team is experienced in cross-border deals. Your aviation attorney, broker, other advisors and bank all should have done import deals before.

■■ You also will need local counsel in the country of registration.

Unlike the U.S. “owner-based” registry, most foreign registries are “operator registries.” The aircraft is registered in the name of the actual aircraft operator, which often is a third party management company. Local counsel will advise you on the status of title, the procedures for releasing any liens, and the proper way to effect deregistration, and will help you set a realistic timeline for these events to take place. Note that while it is not uncommon for foreign aircraft registries to work less than a five-day, 40-hour week, they may be more flexible in working unusual hours to accommodate time zone differences and closings. Be sure to ask local counsel about interests outside of the registry which could create liens on the aircraft.

■■ Is the aircraft registered in a country which recognizes the International Registry (IR)? If so, you will need to release any 8 B U S I N E S S AV I AT I O N A DV I S O R S e p t e m b e r/O c to b e r 2 014

existing liens and register your contract of sale on the IR. If not, you may have to persuade your seller to register as a “Transactional User Entity” to complete the transfer of the aircraft to you on the IR. Many sellers from non-IR countries object to this at first, but will eventually agree to accommodate a buyer’s legitimate IR requirements.

■■ Enlist the services of a Designated Airworthiness Representative (DAR). The DAR will inspect the aircraft to determine whether it is eligible for a United States Airworthiness Certificate. The DAR’s inspection does not replace the normal pre-buy inspection, but normally takes place during that process so it usually does not delay the closing.

■■ Plan on doing some extra due diligence on your seller and on your seller’s lender. Run their names against the various “bad guy lists” established under the USA PATRIOT Act. If you do not have the capacity to do this, your attorney or bank may be able to help.

■■ Hire a United States customs broker. In addition to “importing the aircraft for registration purposes,” the aircraft will need to be imported for U.S. customs purposes. Many aircraft purchases do not require the payment of customs and import duties, and the cost of the registration importation is relatively small. An experienced customs broker will handle the paperwork and steer you to the best point of entry.

Purchasing an aircraft from a registry outside the United States is more complicated than buying a U.S. registered aircraft.

But, with advance planning and with the right team on your side, the extra effort may pay dividends. BAA EDWARD H . K AMMERER is an attorney who advises the

business aviation community on a wide range of transactions and issues. He has more than 30 years of experience in aircraft and equipment acquisitions and finance.

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ISTOCKPHOTO

re you considering your first aircraft purchase? Is now the right time for you to upgrade to a newer or larger model?

Are you convinced that pre-owned prices are not likely to fall any further?

If a pre-owned aircraft is the right choice for you, the available inventory that meets your budget and your mission likely will include a significant number of aircraft registered outside of the United States. Previously, many potential buyers would pare down their “short list” of purchase candidates by simply eliminating aircraft registered in other countries. However, in today’s market, eliminating non-U.S. aircraft may result in an unduly short “short list,” and you just might eliminate some of the best available aircraft in the process. If you are willing to consider buying an aircraft registered outside the US, there are several factors to consider.

The first one is timing. Cross-border deals by their very nature are more complex and will take longer to progress from start to finish, so early planning is essential, as is a certain amount of flexibility. No two cross-border transactions are exactly the same.

■ GROUND SERVICES

“No Vacancy” Larger Aircraft Drive Hangar Shortage

BY WILLIAM BEVERSLUIS Jet Aviation Flight Services / william_beversluis@jetaviation.com

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can move your airplane to a more remote airfield, where hangars are available and less expensive. You then have three options to reach your aircraft: Positioning — Your aircraft can be ferried to your preferred departure point before and after each trip. This option brings its own set of financial and operational challenges: incremental fuel burn and additional time and cycles, which create wear and tear on the airplane thus raising costs. From an operational standpoint, positioning flights will have a direct impact on crew duty time, reducing the amount of duty time your crew is available to fly your planned trip. And positioning the night before may not be feasible in winter weather or if pre-flight maintenance is required.

Driving — You can spend time driving to and from the new location. While the most cost effective, this option reduces the time-saving aspect of owning a business jet.

Using a Helicopter — Traveling by helicopter to and from your new aircraft base, while more expensive, also is more convenient.

You might be able to fly directly from your office building, rather than from a heliport or airport.

Your future travel aboard large-cabin aircraft will require more planning, allow for fewer last-minute changes, and be more costly. Advance planning will help you manage your expectations and your budget, and insure that your aircraft remains an effective business tool. BAA WILLIAM BEVERSLUIS is VP Aircraft Management for Jet

Aviation Flight Services. A 6,000 hour Airline Transport Rated pilot, he previously served as a Fortune 100 flight department manager, as well as sales manager for Gulfstream and Pilatus.

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ISTOCKPHOTO

or most of the last sixty years, light jets dominated new business jet deliveries, followed by midsize aircraft, with large-cabin aircraft reserved for the few requiring intercontinental reach. That is no longer so, as growing global demand for super-midsize and ultra-long range aircraft drives the nascent industry recovery. Bombardier, Cessna, Dassault, Embraer, and Gulfstream are responding by introducing a new generation of exciting and capable aircraft with one thing in common: the newest aircraft are bigger — much bigger.

During the next decade, large-cabin aircraft will be the fastest growing segment, representing 24% of all new jet deliveries, according to Bombardier. Honeywell pegs the combined super-midsize through ultra-long range at 60% of all new deliveries. That’s more than 5,500 new aircraft, valued at almost $200 billion.

Within the next two years, as proud owners begin taking delivery of these new aircraft, they will face an unprecedented challenge: where to hangar their high-value capital asset.

Owners and financiers — who have invested considerable sums for acquisition — rightly expect that these assets not only will be operated safely and responsibly, but also that they will be stored in facilities that are safe, clean, and protected from the elements.

If you are one of those proud new owners, you will want your aircraft proximate and accessible: after all, time and convenience are the driving reasons to own an airplane. But the available hangar space sufficient to house these larger aircraft is at a premium at many airports, particularly those in major metropolitan areas.

Land is a finite resource: so you can expect competition — and higher prices — for those desirable slots.

Lest you think that your FBO or aircraft management company may be taking advantage of you, understand that hangars which once held six or seven airplanes now may have a capacity of only three larger aircraft. The new Gulfstream 650 is slightly more than 99 feet both in length and in wing span, as compared with the G450’s 88-foot length and 79-foot wingspan — a 41% increase in area. Bombardier’s new Global 7000 sports a 111-foot length and 104-foot wingspan, and Embraer’s Lineage is 119 feet long with a 94-foot span.

Hangar expenses — land lease rates, utilities, labor, and upkeep — are not decreasing, so your FBO or aircraft management company must do their best to meet your budget requirements, and still run a responsible business. The result? You can expect your hangar rent to rise by more than just 10% to 15%. Your large aircraft likely will be displacing two or more smaller aircraft.

If you prefer not to pay significantly higher hangar rent, you

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CHARTER

MAINTENANCE

MANAGEMENT

SALES & BROKERAGE

■ AIRCRAFT MAINTENANCE

The Value of Good Maintenance Records Protect Your Asset and Your Safety

BY BILL de DECKER Conklin & de Decker bdedecker@conklindd.com

B

usiness aircraft are a great tool to help solve your business and personal travel problems. But these aircraft also are an investment — assets that must be managed to protect their value. One often overlooked aspect of aircraft asset management is the quality of the maintenance records. Simply put, poor maintenance records easily can detract 10% or 15% from the value of your aircraft. Similarly, when it’s time to sell, poor records also can double or triple the time your aircraft is on the market. And in case of an incident or accident, there can be serious legal consequences to poor recordkeeping. That is because the FAA, European Aviation Safety Agency (EASA), and many other aviation regulatory authorities have very detailed — and strict — requirements regarding maintenance records’ content and comprehensiveness, to maintain the aircraft and its components’ airworthiness.

Some of the major areas that must be covered and typical problems encountered are: ■■ A description of all scheduled and unscheduled maintenance accomplished on the aircraft must be entered into the maintenance logs, including: dates started and completed, parts replaced or repaired, as well as who accomplished and who approved the work. In addition, detailed records of the work performed must be kept on file. Typical problems are: missing detailed records, inadequate description of the work performed, and errors in recording parts and serial numbers of components removed and installed.

■■ Records must be kept for all parts and components installed on the aircraft (or in inventory) by part and serial number as well as by their location on the aircraft, from time of manufacture or last complete overhaul to the present. A common problem is that the part or serial numbers of components installed on the aircraft don’t match the numbers in the records, as a result of typos or forgetting to record the replacement. Another, more serious, problem is that the use of a component without these records renders the aircraft not airworthy.

■■ Any optional equipment on the aircraft must have complete 12 B U S I N E S S AV I AT I O N A DV I S O R S e p t e m b e r/O c to b e r 2 014

documentation, including the wiring diagram, how it ties into the aircraft electrical system, installation drawings, maintenance manual supplement, and, if applicable, flight manual supplement. Often on older aircraft, some of this documentation may have been lost or never was supplied. Unfortunately, without this documentation, the optional equipment is not considered airworthy and must be removed.

Maintenance record requirements are comprehensive, and compliance requires effort by the maintenance technicians, as well as by the designated person responsible for review of the records.

Normally, this individual will be the maintenance manager at a fractional aircraft company or management company assigned to your aircraft or, if you have your own flight operation, your maintenance manager or chief pilot. The person in charge of the aircraft’s maintenance must be sure all records are complete, errors are corrected, and missing entries, data, or documents are obtained.

Any problems are likely to be minor with the large well-established fractional aircraft and management companies, but may be significant if the pilot of your aircraft is also responsible for scheduling the maintenance and shops based on price rather than quality.

What can you, the owner, do? As with any management problem, start by asking questions. How much time does the maintenance person or pilot spend on reviewing the maintenance records for accuracy and completeness? You (or your representative) should ask to see the maintenance records. Are they neat and wellorganized? Ask to see the listing of all components installed on the aircraft and then ask to check a component at random (like an avionics box) to see if the actual numbers match what’s on the list. Ask to see a component history (like the landing gear). If a new piece of equipment was recently installed (like an “Airshow” display), ask to see all the paperwork and manuals. And if any of the answers seem unsatisfactory to you, it may be time for an independent aviation consultant to audit your operation. The cost of such a review is a minor expense compared to the potential impact on your aircraft’s resale value if there is a problem with your records. BAA BILL DE DECKER is chairman of Conklin & de Decker,

specializing in financial management, business and fleet planning, certification issues, life cycle cost, and operations. Previously, Bill worked with FlightSafety, Dassault Falcon Jet, and Boeing. He holds an MS in Engineering/Economics and a BS Aerospace Engineering.

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PREOWNED AIRCRAFT ■

Selecting the Right Aircraft Broker It Can Be As Important As Selecting the Right Aircraft

BY BRAD HARRIS s aircraft transactions have unique and complex options and factors, experience in buying other expensive capital equipment does not guarantee a successful aircraft acquisition. Your first step is to find the best aircraft broker for your needs and situation.

A competent broker will guide you through the myriad of decisions, as well as help you answer many questions you might not think to ask. For example, the broker likely will begin by asking you to define your mission, then ask, “What make and model best fits your current and future transportation requirements?” Your acquisition budget will determine whether you buy a new aircraft, a fractional share, or a pre-owned aircraft.

An aircraft broker’s first responsibility is to thoroughly understand the client’s intentions; then to apply his/her skills, knowledge, experience, and network to generate the best possible client outcome. The best brokers represent the client’s interests throughout the process, and take fiduciary responsibility for the transaction.

While the broker’s responsibilities are substantial, many consumers are surprised to learn that aircraft brokers are not regulated. Therefore, knowing how to select the right broker is vital.

Due Diligence Key factors you should consider: ■■ How long has this broker been in business?

■■ How many transactions per year has this broker completed?

■■ Were those transactions similar to the one I’m considering?

■■ Is his or her specialty relevant to my current situation? (Large cabin, small cabin, specific make and model, new aircraft orders, former fleet aircraft, domestic or international transactions, etc.)

■■ Is the broker experienced as a pilot or maintenance professional for this type of aircraft? Or, does he or she have access to appropriately skilled people?

■■ Does the broker have relevant legal and financial expertise?

If not, does he or she have access to a team of trusted professionals?

As with all due diligence questions, it’s best to validate any information you receive with a third party. You can ask to see reports of recent transactions from JETNET or AMSTAT, established research companies that maintain a current database of all jet and turboprop transactions worldwide. Call several past clients listed in the reports and ask about their experiences.

Also ask the broker to provide several references, keeping in mind that a broker likely will direct you to the clients who were the most satisfied. Ask those referral clients: w w w. B i z AvA d v i s o r. c o m

■■ Did the broker focus on your travel needs and budget, or on

his or her own listings?

■■ Did you feel “pushed” to select a particular aircraft before

completing your own analysis?

■■ If the aircraft was pre-owned, did the broker monitor the

pre-purchase inspection, to insure that the aircraft was “as advertised,” and then properly represent your interests if further negotiations were needed?

■■ Did the broker follow up with you post-closing, to make sure that the aircraft was performing properly?

Brokers are compensated by either a flat fee or a by percentage of the sales price. All other terms are defined in the acquisition agreement, under which you retain the broker exclusively to represent you to acquire an aircraft, usually for 120 to 180 days. Many brokers request a 10% retainer against the estimated purchase or sale price.

Since brokers are not regulated, the National Aircraft Resale Association (NARA), an organization of turbine aircraft brokers, dealers, and support service providers, has implemented its own broker certification program. NARA members follow a strict Code of Ethics, participate in continuing education, and adhere to a documentation standard regarding agreements, listings, and letters of intent.

While there also are excellent non-NARA brokers, applying to your selection the NARA requirements of continuing education in tax, regulatory, and legal matters specific to aircraft transactions, will help ensure that your broker is current on issues critical to a successful transaction.

It’s well worth investing the time to ask the right questions and to verify the answers. Selecting your broker wisely will go a long way toward the best possible outcome for your purchase. BAA BR AD HARRIS, Chairman of NARA (www.NARAaircraft.com),

is founder and CEO of Dallas Jet International (www.DallasJet.com).

He currently is type-rated in ten different aircraft, including Gulfstream, Hawker, Falcon, and Citation.

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DASSAULT AVIATION

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Dallas Jet International / bharris@dallasjet.com

■ AIRCRAFT FINANCE

The Changing Lending Climate The New Ground Rule: Relationships Matter

BY JOHN BASILEO

F

Citi Private Bank / john.basileo@citi.com

rom 2003 to 2007, the business aviation industry experienced a boom of unprecedented proportions. Manufacturers sold record numbers of new aircraft; some sellers were making millions by selling their near-term delivery positions to buyers unwilling to wait two or three years for a plane; retail values for virtually every model of pre-owned aircraft rose steadily, quarter after quarter; and available inventory shrunk so much that pristine, lightly-used large cabin aircraft were sold literally within hours after coming to market.

With all of this activity, and the corresponding billions of dollars at stake, the major banks found themselves in keen competition for every deal. Offering term lengths of ten years, rates well below 100 bps, and loan-to-value (LTV) of 90% and, in many cases, up to 100%, had become standard operating procedure if the bank or lending institution wanted to remain a player in aircraft finance. Additionally, “one off” loans — loans to clients who had no other relationship with the bank — were commonplace.

But today’s lending environment is almost unrecognizable from the one that existed before late 2008, with respect to the willingness, or in some cases even the ability, of major financial institutions to finance private aircraft. While the 2008-09 economic meltdown was in progress, activity in purchasing and financing business aircraft pretty much came to a halt. Many manufacturers claimed negative sales (more deals cancelled than new aircraft sold). Banks, especially those which specialized in leases rather than loans, now faced an abundance of aircraft to sell — and a market with virtually no buyers.

Today, as banks slowly are returning to the business of lending money on aircraft, some new ground rules seem to apply. First, the days of doing only an aircraft deal are over: now, “relationship matters.” If the prospective buyer is not already an existing client with strong financials, he or she will be required to pledge substantial amounts to the bank in non-lending, investment-oriented areas.

Our bank is not alone in presenting itself as a “non-asset lender,” in which the financial strength of the borrower is scrutinized and weighted more substantially than the strength of the aircraft, 14 B U S I N E S S AV I AT I O N A DV I S O R S e p t e m b e r/O c to b e r 2 014

which is looked upon as the “second way out.” A financially sound client looking to buy what the bank would consider a less-thanstellar aircraft likely still would be able to obtain funding. But a client with somewhat spotty financials, even though the aircraft being considered may be top tier, probably would not.

“Twenty is the New Thirty” Gone are the days of the ten- or fifteen-year loan. While some banks or lending institutions still may offer seven-year terms, a term of five years is average, and three is preferred. And while the boom years leading up to 2008 saw routine lending on older aircraft — Gulfstream GIIIs, Challenger 601s, Falcon 50s, et al. — most banks now are content to lend only on aircraft 10 years old or newer, very occasionally considering one as old as 15 years for the right client. Before the downturn, the sum of an aircraft’s age and the term of the loan should not have exceeded thirty; that sum now rarely, if ever, exceeds twenty.

Of course, not every financier has the same target business and target clients. Thus, not every bank has adopted these exact policies. Some still may specialize in asset lending, in which the aircraft loan may be the only business done with a client; while others specialize in financing older aircraft (in this case, you can expect loan rates to be high and LTV to be low); while still others offer leasing as an alternative to a loan.

As the recovery continues, aircraft lending for many private banks appears to have crystalized with much more clearly defined parameters than in the past: ultra-high net worth clients, lending only as part of a much broader relationship, limiting the age of the aircraft being considered, and terms that make good business sense.

Rational, rather than emotional, lending is the order of the day for private banks, and for other knowledgeable financial institutions. BAA JOHN BASILEO, Senior VP, Aircraft Finance Group at Citi

Private Bank, has 35+ years in aviation, at Grumman Aerospace, Raytheon, Gulfstream Aerospace, and Dassault Falcon Jet. He holds a BS in Aerospace Engineering & Applied Mechanics.

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Business Aviation Professionals Taking You to the Next Step For more than 35 years, corporations, high net worth individuals, and owners and operators of business aircraft have looked to AMS to deliver cost effective solutions to complex aviation issues. With an unparalleled combination of expertise and a valuable collection of aviation products and services, AMS is ready to become a member of your decision making team.

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www.amsinc.aero

■ AIRPORT OPERATIONS

Sending Out An SMS Is Your Team’s Understanding of “Safely and on Time” the Same As Yours?

BY ROBERT J. CONYERS

Y

Baldwin Aviation / rconyers@baldwinaviation.com

ou’ve acquired a wonderful and functional aircraft for your business and personal travel. You’ve hired a professional flight crew and a maintenance team. You’ve provided a comfortable home for your new flight department. You have every reason to expect that they will get you where you need to go, safely and on time. But how can you ensure that your team’s understanding of “safely and on time” is the same as yours?

Occasionally, those two objectives are in conflict. Corporate aviation owners and operators have much more leeway than the commercial airlines do in determining how to operate the aircraft within their own tolerance for risk. For example, under Federal Aviation Regulations (FAR Part 91, applicable to private, or noncommercial aviation), there are no rules governing minimum weather conditions for takeoff, crew duty time and rest periods, or training requirements beyond basic currency standards. Without specific guidance from the owner, the crew’s tolerance for risk may differ from yours, possibly leaving you frustrated — or scared.

In today’s business aviation world, these questions typically are resolved in the preparation and approval of a Flight Operations Manual (FOM). The modern FOM covers virtually every aspect of flight department management and operation, from dress codes to Standard Operating Procedures (SOPs). While it is best prepared by the lead aviation professional, it is important that the owner understand and approve its basic principles. When it appears necessary to delay or cancel a planned flight, it’s best that the owner and the flight department manager are on the same page.

In the past decade, aviation safety management has taken an evolutionary leap with development of the Safety Management System (SMS). Before, safety management was the assumed responsibility of the flight department manager or safety manager.

Safety programs often consisted of a poster on the wall and a quarterly all-hands meeting. Under SMS, a systems approach is used to manage the safety program. (SMS has been called the aviation equivalent of ISO 9000.) Specific hazards are identified prior to or at the time they are encountered; associated risk is assessed and, where necessary, mitigated; collected data are analyzed to identify trends or conditions that otherwise would be overlooked. Importantly – even more so than with the FOM – it is critical that the aircraft owner support the SMS as a high priority. Yes, you want to arrive at your destination on time, but only if you can do so safely.

The SMS model developed by the International Civil Aviation Organization (ICAO), and supported by both regulators and aviation organizations, consists of four primary elements: Safety Policy, Risk Management, Safety Promotion, and Safety Assurance, 16 B U S I N E S S AV I AT I O N A DV I S O R S e p t e m b e r/O c to b e r 2 014

Safety Policy (Structure) Safety Promotion

Safety Management System (SMS)

Risk Management Safety Assurance

and several related features. While strictly structured, the SMS model is flexible enough to allow for application by every operator, large or small.

In addition to safety concerns for yourself, your passengers, and your aircraft, other influences drive the adoption of an SMS: ■■ Unlike for commercial airlines and charter operators, at this time there is no regulatory requirement for business aviation to have a certified SMS in place, except in some international locales. However, as SMS rapidly is becoming an industry standard, it has been adopted voluntarily by more than 700 flight departments worldwide. It is expected that nations subscribing to the International Standard for Business Aviation Operations (IS-BAO) eventually will mandate an SMS. ■■ Aviation insurers — who see the safety value in SMS – are rewarding SMS adopters with significant premium discounts.

■■ Finally, prominent aviation attorneys are voicing concerns about the liability implications of not adopting SMS, as it becomes the expected way of doing business – endorsed and encouraged by the FAA, National Transportation Safety Board, National Business Aviation Association, and others.

Should an accident occur to an operator without an SMS, plaintiff attorneys may represent that as substandard performance, which could have a strong impact on a jury.

Consider your safety, business, regulatory, and legal reasons for SMS. Make certain that your pilots and maintenance technicians understand, agree with, and implement your operational priority: a safe arrival. BAA ROBERT J. CONYERS is an Airline Transport Pilot (ATP) and

Certified Flight Instructor (CFI). He came to Baldwin Aviation from Global Aerospace where he had served for more than two decades, most recently as Manager of General Aviation Safety.

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AIRCRAFT MAINTENANCE ■

Hourly Cost Maintenance Programs Manage Your Budget – and Much More

BY ANTHONY KIOUSSIS

Y

Asset Insight, Inc. / akioussis@assetinsightinc.com

our brand-new aircraft comes with a warranty. But over time, aircraft maintenance will account for as much as 35% of your aircraft’s annual operating budget. Unlike some other costs, you have the ability to control this expense by using an Hourly Cost Maintenance Program (HCMP).

Introduced by the engine and airframe Original Equipment Manufacturers (OEMs) to demonstrate their confidence in the cost to maintain their product, HCMPs today are nearly a staple of aircraft ownership. In fact, the value of your aircraft may be affected negatively if you forego the coverage they provide.

HCMP coverage is available from all major airframe, engine, auxiliary power units (APUs), and avionics OEMs, and from one independent provider: Jet Support Services, Inc. (JSSI) (www.jetsupport.com).

“Perpetual aircraft maintenance programs have been critical in maintaining aircraft value through these tough times, particularly in the long-range, large-cabin aircraft segment,” says Lou Seno, ASA (Accredited Senior Appraiser with the American Society of Appraisers), and JSSI’s Chairman Emeritus.

How Does HCMP Coverage Work?

The cost to maintain an aircraft varies by make, model, and age.

Its maintenance program is based on three parameters: flight hours, landings (also referred to as “cycles”), and time (due to calendar-related inspections). Scheduled maintenance will include “cost spikes,” such as major airframe maintenance, and engine or APU overhaul. Additionally, scheduled maintenance costs become less predictable as an aircraft ages, and unscheduled — sometimes costly — maintenance events can occur at any time.

For example, the cost to remove an engine at a remote rural or international location, transport it to an appropriate maintenance facility, transport and install a loaner engine, and then reinstall the repaired engine, could run into millions of dollars.

HCMPs help assure cost stability, by providing predictable, budgeted scheduled maintenance, while concurrently eliminating unexpected repair costs. The owner or operator pays a set fee per hour of operation, based on defined usage parameters, for coverage of certain major components (e.g. engines, avionics, APU), or virtually the entire aircraft.

HCMP coverage also may include manufacturer’s service bulletins, FAA Airworthiness Directives, loaner engines, airframe components, component removal and reinstallation, w w w. B i z AvA d v i s o r. c o m

and passenger cabin equipment. It can be extended to include Life-Limited Components, shipping and logistical support, and even provide a troubleshooting labor allowance.

Stephen Friedrich, Rolls-Royce VP-Sales & Marketing (www. rolls-royce.com) says, “HCMPs meet the needs of the market.

Comprehensive maintenance programs, like CorporateCare®, are a cost effective method of removing operational and financial risk while increasing asset liquidity and residual value.”

In addition to assuring that adequate funds will be available when needed, HCMPs also can enhance the aircraft’s resale residual value, as well as leasing and finance terms.

John Spoor, President and CEO of SAI Valuations (www.saivaluations.com), a major aircraft appraisal firm, states, “An owner might not see the HCMP’s total cost reflected in the aircraft’s resale value. But in many situations, such as an engine failure in a remote locale, an HCMP returns far more than its total cost.”

“Perpetual HCMPs help ensure our investment in the aircraft we finance,” adds Jim Simpson, Managing Director Aviation & Marine Finance, First Republic Bank (www.firstrepublic.com).

“Asset Insight (www.assetinsightinc.com) [a firm that specializes in grading the maintenance condition of aircraft on a standardized scale] is one way to quantify each Program’s value for our own portfolio, as well as to keep our clients informed of their HCMP equity in the aircraft.”

If you are considering an HCMP, evaluate the following: ■■ What maintenance events does the Program actually cover?

■■ What are the costs to enroll an aircraft? Is a “Buy-In Fee” required?

■■ What is the Program term length?

■■ Is it renewable and transferable (with or without a fee)?

■■ Does Program coverage cease past a certain aircraft age?

Even if you own a brand-new aircraft, the manufacturer’s warranty doesn’t cover scheduled maintenance or major inspections.

An Hourly Cost Maintenance Program can help you manage your maintenance budget, preserve your aircraft’s resale value, support your flight department, and provide invaluable assistance in case of a major maintenance event in a remote location. BAA ANTHONY KIOUSSIS is president of Asset Insight, Inc.,

which developed an Asset Grading System Process for evaluating an aircraft’s maintenance condition. His more than 35 years of aviation experience includes postions at GE Capital Corporate Aircraft Finance, Jet Aviation, JSSI, and British Aerospace.

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■ WASHINGTON REPORT

What Drives Jet Fuel Prices?

When You Buy Fuel, You’re Buying More Than Just Jet A

BY DAVID COLLOGAN

18 B U S I N E S S AV I AT I O N A DV I S O R S e p t e m b e r/O c to b e r 2 014

can get fuel shipments via barge if they are located near the coast or navigable inland waterways. But for many FBOs, particularly in remote locations, the only — and most expensive option — is having fuel trucked in.

There also is a vast difference in facilities and amenities among FBOs across the country. Some facilities offering relatively low fuel prices might consist of a small terminal, a rest room, and a couple of vending machines for beverages or snacks. At the other end of the spectrum are FBOs in opulent terminals with conference rooms for customers, flight planning offices, catering, restaurants and concierge service.

A few other points about fuel prices. Most FBOs offer discounts from the posted price ranging from 15 or 20 cents up to 50 or 75 cents per gallon for participants in volume discount programs.

And while fuel typically represents 20% to 30% of a business jet’s annual operating budget, paying a little more for fuel and topnotch service is worth the convenience of using an airport close to your ultimate destination, minimizing ground travel time and traffic problems.

One other thing to keep in mind: when a business jet is stuck on the ground far from home because severe thunderstorms are approaching, the price of fuel becomes a lot less important than whether the FBO can find room in the hangar to shelter your airplane. BAA DAVID COLLOGAN has covered aviation in Washington, DC

for more than four decades. This award-wining journalist is known as one of the most knowledgeable, balanced, wary, and trusted journalists in the aviation community.

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ISTOCKPHOTO

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dlcollogan@gmail.com

viation is one of the most heavily regulated enterprises in the U.S. The Federal Aviation Administration dictates how aircraft are manufactured, tested, and maintained, as well as how pilots and mechanics are trained, and it monitors tens of thousands of flights from takeoff to landing every day.

But when it comes to the price of aviation fuel, most of the decisions are left to the free market — which is why prices vary widely from airport to airport. A recent review of the Aircraft Owners and Pilots Association online fuel price guide showed a nearly $4-per-gallon spread — from $4.27 in Akron, Ohio to $8.19 at San Francisco International Airport — in the posted price of Jet A (the fuel used in turbine aircraft engines).

Part of the reason for big price spreads is competition, or the lack thereof, at many airports. There has been a lot of consolidation in the fixed-base operator (FBO) market during the past 15 years, leaving even some major U.S. airports with only one or two fuel providers.

We talked with a former FBO executive who acknowledged that fuel prices are based in part on “what the market will bear if the demand is there.” But he also pointed out that aviation fuel prices have to be considerably higher than automotive gasoline or diesel because of the cost of doing business at airports — particularly in high-density metropolitan areas where real estate is expensive.

Airport authorities generally impose multiple layers of fees in contracts with FBOs. These might include a flowage fee for every gallon of fuel pumped; a percentage of the FBO’s gross revenues; and a monthly rent payment calculated on the footprint of the FBO’s terminal building, hangars, and the square footage of the ramp area.

In addition, most airports have minimum standards clauses in their contracts, which require FBOs to offer a number of ancillary services, such as aircraft maintenance, avionics repair, or flight training. Typically, those other lines of business have very low margins or even lose money so “fuel has historically been the frontrunner to offset those expenses,” the former FBO executive said. Lease agreements also may require FBOs to operate 18 to 24 hours per day, even if there are very few aircraft arrivals during overnight hours.

The retail price of Jet A also reflects the transportation costs of getting the fuel from the refinery to the airport. The cheapest method is through a pipeline. Some FBOs without pipeline access

MAX SPEED: MACH 0.85 MAX RANGE: 3,600 NM MAX ALTITUDE: 45,000 FT

T HE TOTAL PACKAGE

Delivering superiority in all aspects of a super midsize aircraft, the Gulfstream G280™ gives you outstanding performance, comfort and advanced technology.

Add to that its exceptional fuel efficiency, low operating costs, and Gulfstream’s award-winning worldwide product support network and it’s clear that the G280 is everything you want in a new aircraft. And more.

SCOT T NEAL

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+1 912 965 6023

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scott.neal@gulfstream.com

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Range shown is based on NBAA IFR theoretical range at Mach 0.80 with four passengers. Actual range will be affected by ATC routing, operating speed, weather, outfitting options and other factors.

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