In todayâs business environment, making the case for business aviation is more important than ever, and that was the focus of Conklin & de Deckerâs 12th annual Aircraft Acquisition and Planning seminar.
The December event at the Plaza Resort in Scottsdale, Ariz., drew 42 attendees from 15 states and four countries to learn about aircraft financing, tax issues and wise aircraft acquisition strategies They included representatives of fixed- and rotary-wing airframe OEMs, FBOs, charter and fractional operators, aircraft brokers, MRO, aircraft management, legal services, parts and service and guaranteed maintenance program providers.
Conklin & de Decker co-founder Bill de Decker explained that each operator has his own unique set of missions, goals and requirements. The âValue Equation,â he explained, can help operators figure out how best to meet their need for business aviation. He outlined the questions operators should be asking:
⢠What kind of aircraft do we need?
⢠Whatâs better, new or pre-owned?
⢠What will it cost?
⢠How do we structure ownership?
â˘What are the tax implications?
⢠What are the alternatives?â
He also encouraged attendees to consider the important difference between price and value: âPrice is what you pay. Value is what you get.â
Users of business aviation must consider not only the financial costs but also the time value of money (TVM), which de Decker summarized as the assumed return and the effect of inflation over a given period on dollars not paid up front for an asset. TVM considerations, he noted, may make leasing a more logical option than outright purchase. He also explained the terms return on investment and net present value and their importance in a financial analysis of a contemplated aircraft acquisition, which will result in a realistic life-cycle cost projection.
He outlined the advantages and disadvantages of owning a whole aircraft. Advantages include retained value and the âavailability of âyourâ aircraft to meet your needs as required. You have the exclusive use of it.â He added that, for new aircraft, accelerated depreciation might offer significant tax advantages.
Among disadvantages are the capital investment and an open-ended cost commitment that includes maintenance, crew, insurance and the other expenses of operating a wholly owned aircraft. Professional management of aircraft operations and maintenance is a requirement, whether provided by an in-house aviation department or an outside aircraft management company.
The Right Aircraft Decision
Once an operator decides to buy a whole aircraft, what is involved in selecting the best aircraft for the mission? Conklin and de Deckerâs David Wyndham addressed that question. He explained the necessity of basing aircraft acquisition on the proposed mission. This, he said, requires a detailed analysis of planned aircraft use and distinguishing between ârequiredâ and âdesiredâ capabilities. He recommended his firmâs software for comparing aircraft that suit the defined mission in an âapples to applesâ manner. When deciding whether to buy or select another way of meeting a companyâs travel requirements, Wyndham said chartering a necessary trip might be the way to go when the mission analysis shows limited demand for just 10 to 20 hours per year.
Financing Constraints and the Necessity of Budgeting
C&dDâs Brandon Battles described how maintaining a detailed budget will go far in controlling costs, especially for maintenance. He said a budget that includes inventory management can lop 40 percent off the costs of a flight departmentâs maintenance operation, noting also that his companyâs Aircraft Cost Evaluator software can be a valuable tool in laying out a budgeting-based asset management program.
Lenders remain infinitely more particular about those to whom they extend credit than they were in the go-go days preceding 2008. Michelle Schechner, managing director of Citibankâs Citi Private Bank operation in Phoenix, noted, âAircraft financing is back again, but there are still no crazy deals, no 100-percent financingâ and no lending for âoldâ aircraft (more than 15 years old) except to buyers with Bill Gates-level credit and net worth. âBanks want to put their money to work. They have a lot of cash trying to find the right places, but itâs back to basics: credit, character and collateral,â Schechner said.
Aircraft age affects loan-to-value percentages. For a âyoungâ large bizjet, banks are willing to finance 90 percent, on average. For a midsize, financing is typically 85 percent, and 80 percent for a âsmallâ jet. âMiddle-agedâ aircraft (six to 15 years) warrant 80 percent and 75 percent, respectively, while financing for âoldâ aircraftâif it is even availableâwould normally not exceed 70 percent.
In addition, closer deal scrutiny with more regulatory and supervision input is extending closing times and making leasing more attractive than outright ownership. Citi believes that certain aircraft category values will increase this year, and âwe anticipate that [interest] rates will stay very low.â However, banks will continue to look for borrowers with exceptional credit and liquidity to ensure that the borrower can provide first-rate maintenance. Although financial institutions expect higher aircraft values, loans now have demanding terms and conditions that include keeping the aircraft airworthy and well maintained.
Tobias Klietman, a principal of Time Value Property Exchange in Concord, Mass., noted that more business aircraft sale and IRS Section 1031 exchange deals appear to be going through now compared with a year ago because âDeal failures are declining as the pre-owned inventory is becoming more realistically priced.â He said exchange failures were more frequent in the earlier part of the current recession due in large part to the slow pace of used aircraft inventory turnover, which sometimes extended closing times beyond the 12 months the IRS allows for a Section 1031 exchange to be completed.
That observation is borne out by figures showing pre-owned business aircraft inventories continuing to decline in October. However, asking pricesâespecially for jetsâhave yet to find a bottom, according to data released recently by industry research firm JetNet. Business jet inventory in October stood at 13.9 percent of the in-service fleet, down 1.3 percentage points from a year ago. In the first 10 months of this year, jet sales transactions increased by 10.3 percent compared to the same period last year. However, average asking prices fell 15.8 percent, to $4.488 million, in the same time frame and average days on the market swelled by nine days, to 367. Meanwhile, the turboprop market appears to be improving. Inventory of pre-owned turboprops settled in at 9.9 percent in October, down from 10.7 percent last year. Turboprop sales transactions rose by 10.2 percent in the first 10 months, compared with the same period last year, while the number of days on the market decreased by 18 days to 326. Asking prices were the only negative in the turboprop segment, though they fell by only 0.9 percent, to $1.344 million, versus a year ago.
Klietman described the procedures for like-kind, aircraft-for-aircraft exchanges, which can offer capital gains tax avoidance by smoothly moving the proceeds from disposing of an aircraft into acquisition of another of equal or greater value. Discussing the various methods of exchange, he said, âThere are deals where it makes sense, and a lot of deals that donât make sense. Often the key is a sales-tax strategy.â
âRussian Roulette with a Loaded Gunâ
Bill Quinn, of Charleston Aviation Partners in Isle of Palms, S.C., and Lee Rohde, principal of Aviation Management Systems, Portsmouth, N.H., offered advice on working with an aircraft broker and the necessity of pre-buy inspections as part of the acquisition process. Quinn, himself a broker, described buying an aircraft without a comprehensive pre-purchase inspection process as âplaying Russian Roulette with a fully loaded gun.â He said a competent broker will lead the buyer through that process, also providing financing, legal and accounting support and guidance during the entire purchase experience. âHeâs essentially a facilitator.â
Rohde, also a broker, added, âAsk for details of how the broker will go about the process of buying or selling.â He added that the broker should become thoroughly familiar with the buyerâs proposed operational environment and mission profile. Quinn observed that full disclosure on the seller side âis absolutely essential.â
Taxes And Personal Use
Conklin and de Deckerâs Nel Stubbs, who presented her annual state and federal tax, depreciation and personal aircraft use advice, covered how sales and use taxes in various states will affect aircraft ownership and operating costs, and depreciation schedules differ for aircraft operating under FAR Part 91 or Part 135. Her detailed analysis also touched upon the possible effects of non-business use on the companyâs bottom line.