Why Airlines Need Competition .
By Andrew R Richmond
Whenever I assist a potential aircraft buyer with an acquisition, my first step is to do all I can to talk them out of it. If I throw every possible hurdle at them to convince them it is a bad idea, and they still want to move forward, I know they were meant to be an aircraft owner. Before I explore those hurdles - and then discuss the benefits of aircraft ownership - let's briefly review your alternatives. Perhaps one of these options is a better choice for you.Fly commercial? Are you serious?
First of all and I say this only partly in jest you should at least consider the commercial airlines, especially for international travel. Yes, I know what you are thinking: long delays, bad service, no privacy, limited airports, inedible food, and all the things that make us want to avoid airlines like the plague. However, for international trips the service on many first class airlines has gotten much better and actually rivals what you will experience on a private aircraft. Sure, you have to arrive several hours early, go through TSA, have your bags X-rayed, and possibly take connecting flights. On the plus side, though - and it's a big plus - there is an order of magnitude cost differential between international commercial flights and flying on a private jet. You can easily save many thousands of dollars on every trip. Okay, now that I have made my plug for the commercials, let's talk about your private travel options.
Option 1: Jet Charter
There are many ways to access a private jet - the simplest is to call a charter company and request a quote. They will provide you with a charter quote so you can review pricing, flight times, and other details. You can then determine if it meets your requirements and your budget. Chartering a jet is the easiest way to enter the world of private aviation. There is a downside to charter, however. A charter company will often charge you for the reposition time on an aircraft to fly to your departure location, as well as the deadhead time to return the plane to its base of operations. In other words, you might end up paying for two flights that you are not on. Also, many charter companies offer aircraft that are under their management yet privately owned. Once you decide to book a particular flight, the charter company often must seek owner approval to conduct the trip. If the owner elects to pass, you will not be able to complete the booking process. This owner approval process is the most common complaint that I hear from our charter clients. Some charter operators seem to be better than others at shielding clients from this process, but in general most companies do not have unlimited ability to pick and choose the flights they accept or reject.
Option 2: Jet Card Programs
The next option is what is commonly referred to as the jet card. This is typically a prepaid block of hours on a type of jet, or possibly a particular category of jets usually light, mid-size, or heavy. The issue with card programs is that they charge a much higher hourly rate than charter companies. On the other hand, they do guarantee availability of an aircraft and they charge you only for the time you are flying on the plane. The problem with jet cards is that they can be expensive. The typical hourly rate will be twice that of a chartered plane. However, if you generally fly on longer trips where it is not practical to keep the plane waiting for you, a charter company will usually charge you for the deadhead, or at least a minimum usage fee of two hours per day to keep the plane at your destination until you are ready to return home. Since the jet card company will only charge you for the actual flight time, it may end up being a wash depending on the economics of each trip. Quite often our clients will choose a mix of charter flying and card flying based on the length of their flight and the number of days of their trip. This can be the most cost-effective way to meet all of your travel requirements.
Option 3: Fractional Ownership
The final alternative to ownership is the fractional business model. I call this an "alternative", though in actuality you do become an aircraft owner - typically buying 1/16th of the plane. This 1/16th ownership usually allows you to fly 50 hours per year on that type of aircraft and pay only the direct operating costs for each flight. Similar to the card programs, you pay for the time you are in the air, while the fractional operator absorbs the deadhead and reposition costs. The major difference between the card program and fractional ownership is that you must make a sizable capital investment: usually 1/16th of the approximate retail value of the airplane. Your membership generally lasts five years, after which you will allow the fractional company to sell your interest at the prevailing market value. The fractional model allows you to depreciate your share just as you would any other asset. Often, that depreciation is valuable enough to make fractional ownership more desirable for certain individuals. Whether the value of the depreciation offsets the capital costs and potential risks of selling your share at a low value is up to you, your tax advisor, and perhaps your fortune teller to determine. One last point to note is that while you own an interest in a particular serial number of aircraft, it is rare that you will ever fly on that specific aircraft. Not that it really matters, though, as most fractional companies intentionally outfit every airplane to look exactly the same, so that owners are unaware of which aircraft they are actually on.
Four Great Reasons Not to Buy an Aircraft
Now that you've looked at your options, let me try one last time to talk you out of buying a plane. Here are four very good reasons to choose an alternative.
1. Ownership is very expensive. An aircraft is likely one of the most costly assets you will ever own, and there may be better investments for your money. Remember that the purchase price is only one component of your total cost of ownership. For example, you will also have substantial ongoing fixed costs such as property taxes, hangar fees, crew expenses, and insurance.
2. Repairs and maintenance can ground your plane. Your plane may not always be available to you. Parts can break, requiring you to charter an alternate aircraft while yours is being returned to service. You also may need to charter another plane if yours is down for routine maintenance and planes require a lot of maintenance. Plus, if your plane is off warranty, scheduled maintenance costs can easily run to six figures.
3. Expenses can be unpredictable. Particularly with older airplanes that are not under warranty, one mechanical failure could result in an unanticipated expense of $50,000 or more. Are you prepared for that phone call from your mechanic letting you know that a part has just failed and a new one will cost $50,000 to purchase and install?
4. You could lose lots of money. Aircraft ownership can be a risky investment. We are generally considered to be in a strong aircraft market now, but all markets have cycles. You could possibly end up buying high and selling low. Can you afford to lose perhaps millions of dollars if you need to sell your plane in a down market? Have I talked you out of aircraft ownership yet? For many of you, the answer will be no. In spite of all of these issues, I receive phone calls almost weekly from individuals and companies wanting our help in buying an aircraft, so there is clearly a market for individuals who want to take the plunge. What drives their decision to buy? Let's discuss that now.
Why People Choose to Own
With all of the alternatives to aircraft ownership: charter, jet card, fractional - why do people still buy airplanes? Most of our clients tell us that they want to fly on the same aircraft all the time, with the same flight crew, and the same mechanic or maintenance team caring for the plane. More than any other reason or justification, this seems to be what pushes people toward ownership. Another significant reason is the economics of flying, based on the number of hours you usually fly in a year. When you purchase an airplane, you have substantial fixed costs: interest expense, property taxes, insurance, hangar fees, crew expenses, and maintenance. These expenses exist whether you fly five hours per year or five hundred. However, when you fly on the aircraft your only incremental cost is what we refer to as the “direct operating costs or the direct cost of fuel and maintenance expenses for flying one extra hour on the aircraft. Depending on the type of plane, these expenses can often be half or less than the charter rates for an identical aircraft. The more hours you fly, the more you can balance the fixed-overhead expenses with the savings of paying only direct operating costs for each flight. There is no universally accepted number for how many hours you need to fly before the economic equation tilts in favor of ownership. However, one rule of thumb is that you need to fly at least 200 hours per year to make ownership worth your while. If you fly less than that, you cannot spread your fixed costs over enough flight hours to make the total flight cost competitive with the charter, card, and fractional alternatives. In general, the more hours you fly, the more outright ownership becomes a viable economic solution for you. If you fit this profile or if you simply want to own a jet regardless of your first step is the acquisition phase.
Step One: Aircraft Acquisition
During the acquisition phase, we sit down with our clients and ask lots of questions about their travel requirements. For example, how many hours do you fly? What are your typical destinations? How many passengers? How much luggage? How large a cabin do you need? The list goes on. Next we begin building a travel profile showing anticipated routes, flight times, and costs. From there we can identify a range of potential aircraft types that may meet their requirements. Then we develop approximate capital and operating budgets for each plane. Aircraft are generally categorized by size: light, midsize, or heavy. A typical light jet will have a cabin in which you cannot stand up. It could hold anywhere from 5 to 8 passengers and usually fly between 1400 and 1800 nautical miles. A midsize jet will be roomier inside, often have more luggage capacity, and a cabin that you can (almost) stand up in. Typical ranges for midsize jets are between 1800 and 2600 nautical miles - most hold 6 to 9 passengers. Finally, a heavy jet will have a very roomy cabin, hold up to 14 passengers, and often fly 4000 nautical miles or further. There are planes in each category that fall outside these general parameters, as well as super-lights, super-mids, and super heavy jets which can offer additional cabin space, speed, and range.
Another important decision is whether to buy a new aircraft or one that is used. New planes generally come with a five-year, tip-to-tail warranty. You will still need to pay for inspections, but most other expenses are covered under warranty. Also, you will need to pay an hourly fee on top of the warranty to cover many parts that fail through normal wear and tear. To keep a lid on your costs, you can pay an hourly rate for an engine program. These programs cover the very expensive mid-life inspections and overhauls that are required years down the road. With an engine program, you will be relatively well protected from unexpected expenses associated with maintenance or parts failures.
Naturally, brand new aircraft usually cost much more than resale planes, and because our industry is doing so well, many manufacturers report backlogs of two to five years. This makes new aircraft ownership unrealistic if you want to buy a plane right away. Your only option is to buy a position for a new aircraft held by another individual, typically at a substantial premium over the price they agreed to pay to the OEM. The resale market is where you can often find the best values. While private planes are generally holding their values right now, there are soft spots with certain types of aircraft - possibly due to a glut on the market. This can offer you an excellent opportunity to get a better deal. Once we identify the specific type of aircraft that meets your requirements, our next step is to research the market and identify every one of those planes that is or may be for sale. We will look at current listings, as well as recently closed sales, to determine a fair purchase price. As we work together to identify opportunities, we will eventually select the best one on the market and work to negotiate the right price.
If you are buying a used aircraft, it is critical to perform a thorough pre-buy inspection prior to purchase. How does that work? Typically, you pay for the inspection cost, but the seller pays for any airworthy items that are identified during the inspection. At the conclusion of the inspection, you should be ready to take ownership of an airplane that is in sound condition and ready for first flight. However, you still have more decisions to make and the first is to select an aircraft management company. What Does an Aircraft Management Company Do? What? You say you don't know the first thing about flying or maintaining an airplane? Not to worry. An aircraft management company handles everything for you. Your management company will get to know you and your passengers, identify a crew to fly your airplane, take care of accounting matters associated with paying expenses, oversee aircraft maintenance, and coordinate all your trips. Typically a management company will be involved during the acquisition process, or they may be the company that is helping you with the acquisition. They will likely know a lot about your requirements by the time you are ready to take your first flight.
A management company can also help you to determine whether it makes sense for you to place your aircraft on a charter certificate. Charter can be a great way to offset your operating costs. The way it works is the management company will place your aircraft on their FAA Air Carrier Certificate, and they will advertise it to the public as available for charter. While the profit associated with charter can vary depending on the type of aircraft, most owners find that by accepting a few hundred hours per year of charter it can cover a portion of their fixed ownership costs, making the ownership alternative even more attractive. There are pros and cons to making your plane available for charter. We'll discuss those issues shortly, but first let's address the most important question: selecting the best aircraft management company for your needs and personality. Choosing the Right Aircraft Management Company An aircraft management company is a critical component of operating your newly acquired jet. Choosing the right management company requires careful consideration. All aircraft management companies have the same overall responsibilities, but how they go about it is what differentiates each company. Let's review the main responsibilities of a management company.
1. Crew selection. Your management company will help specify your crew requirements. Most jets require two pilots. Each management company will have their own standards for crew members. Among other factors, the company will look at each pilot's total flying time, the time they have in your particular type of aircraft, and their time as a captain in charge of any aircraft. Generally speaking, the more experience the better, but the management company should help you to evaluate all the factors and make the best selection. You will also need to consider how many crew members you will have. Crew members require personal time off, as well as training, vacation and sick time. Hiring a third crew member allows the management company to provide guaranteed time off for each crew member, but it raises the cost of operation. Some management companies will have 'floater pilots' who can provide relief when needed.
2. Maintenance oversight. Aircraft require constant maintenance oversight. Planes should be inspected prior to and just after a flight, especially when departing from or returning to their base of operation. Some management companies will recommend a dedicated mechanic for your airplane. Others will have a team of mechanics and charge hourly for their services. Either way can work, but the important thing is to make sure your mechanics are familiar with your plane - and properly trained to work on it. If parts or systems break on the road, the management company should have a procedure in place to request off-site maintenance support and determine the best way to return the aircraft to service as quickly as possible.
3. Accounting. Your management company will purchase fuel, employ pilots, secure insurance and hangar facilities, purchase parts, and pay all invoices related to aircraft operations. They will ensure that the bills are being paid are appropriate and the best prices negotiated. They will generally consolidate these expenses into a monthly management report that details each month's worth of activities into one invoice so you will have only one monthly check to write.
4. Flight planning. Each time you take a trip, the flight planning department will coordinate all your activities, including hotel and ground transportation, weather briefings, fuel arrangements, crew assignment, and passenger TSA screening. Should your itinerary change during your trip, the flight planning department will rearrange details as necessary and ensure a smooth travel experience. When searching for a management company, I recommend that owners sit down with three companies before making a selection. Management companies come in all sizes, from single-aircraft operators to national firms. While the basic responsibilities of the management company are the same, how they approach these responsibilities can vary greatly. How much experience do they require for their crew members? How often do they send their pilots through simulator training? How experienced are their mechanics on your type of aircraft? How much turnover do they have in their crew, operations, and management teams? What is their reputation within the industry? Do they have a solid credit history? Once these questions are answered to your satisfaction, the decision should be relatively easy to make. Go with the company that you would most enjoy working with, and which runs it operations the way you would if you were running the business. Each management has its own unique personality. Owners have the best experience when they find a good match between their personality and that of their management company.
Earning Charter Revenue
Some management companies also have an FAA Air Carrier Certificate that allows them to offer your aircraft for charter when you are not using it. Charter revenue can provide a reasonable cost offset to your operation. For example, a Gulfstream GIV typically earns you a profit after expenses of approximately $2,000. With 200 charter hours on your plane, you can generate a profit of $400,000. This could pay most or even all of your crew, insurance, and hangar fees. Planes are built to fly at least 500 hours per year. If you plan to fly 300 hours of personal use, the 200 hours of charter can be a good way to leverage an otherwise underutilized asset. You can put your plane to work for you and generate some profit to reduce the overall operation cost. How does the charter process work? As clients call in potential itineraries, the management company will put together quotes and present them to their charter clients. If the client wants to book the trip, the itinerary will be presented to you and you can then accept or reject the trip. You will be reimbursed for the trip, typically based on a percentage of collected revenue, allowing the management company to deduct a fair commission for their services.
There may be favorable tax consequences to placing charter on your aircraft as well. Each state has its own set of rules and regulations, so this topic is far too complicated to cover here. Check with your local tax and legal advisor for any state laws that favor placing your aircraft into a charter operation. What are the negatives? Placing charter on the aircraft does mean that strangers will be flying on your airplane. They will spill drinks, their kids may create artwork on your leather seats with their crayon kits, and the plane will generally experience more wear and tear than if it sits idle when you are not flying. This must be considered when deciding whether to allow charter on your aircraft. In general, most owners tell us that the cost offset more than justifies the wear and tear, but this is a personal decision owners must make for themselves.
So, Are You Ready to Own an Aircraft?
As I said at the outset, aircraft ownership can be a very rewarding experience. It is not for everyone, and there are private travel alternatives: jet charter, jet card, and fractional ownership that might be a better fit. However, if ownership does make sense for you whatever your reasons an aircraft management company can serve as your trusted adviser, help you acquire the right new or used aircraft at a fair price, oversee management and maintenance, and perhaps help you offset your costs with charter revenue. There are hurdles, to be sure, but for many companies and individuals it's absolutely worth it and a decision they never regret.
This article was written by Andrew Richmond, president of TWC Aviation Inc.
http://www.twcaviation.com/
Article Source: http://EzineArticles.com/?expert=Andrew_R_Richmond
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