Acquisition and Financing
A How-To Guide
Written and Produced by Mark Patiky
“The plane is a mandatory business tool for us,” says Tom Duff, managing partner of Columbia, Miss.-based Southern Tire Mart, LLC, the country’s largest independent truck tire company. “It’s an investment like a manufacturing plant or a store. It helps us build key relationships and generate additional revenues.” Retired real-estate executive Dick Michaux agrees. “What would it cost us if we didn’t have that plane? It’s the cost of missed opportunity,” he says.
Across the nation and around the world, executives like these are discovering that what was once thought to be a corporate luxury is actually an essential tool for today’s most competitive businesses. “More people are getting a taste of [the private flying experience] and realizing the increased success they can achieve by getting to more meetings, getting more done during the day and still tucking their kids in at night,” says Robert Dranitzke, director of marketing, communications and corporate social responsibility for NetJets Europe. As a result, “[using a business aircraft] has become a lot more acceptable.” And it’s a lot more pleasurable, too. “I never enjoyed travel until now,” says Russell Geyser, founder and managing member of Encinitas, Calif.-based Geyser Holdings. “It may be more expensive to fly privately, but it’s worth it.”
“This is a huge asset for people who don’t have enough time in their lives,” agrees Alan Klapmeier, cofounder, president and chief executive officer of Duluth, Minn.-based Cirrus Design. “All of a sudden you can see your grandchildren grow up. You can meet with your clients more often. Or you can get a second home and actually use it. You can do all the things you don’t normally have time to do.”
That could explain why business aircraft deliveries soared an astonishing 39% in the first half of 2008 over 2007, and the trend, although tempered by the ongoing economic turbulence, continues upward. “We’re seeing tremendous worldwide growth. These business aircraft really are giving companies of all sizes a competitive advantage,” says Jim Schuster, chairman and chief executive officer of Hawker Beechcraft and former chairman of the General Aviation Manufacturers Association, a trade group representing global aircraft manufacturers. “The cultural bias against [business] aircraft has really begun to fade as people realize they can be more competitive and operate their businesses more efficiently with these airplanes. Even smaller companies are truly seeing the benefit, and it’s really picking up the pace.”
Green Light to Global Market
The demands of doing business in a global marketplace are driving a greater travel requirement for U.S. companies. “It’s pretty clear that there is a trend toward increased global business travel,” says Kenn Ricci, chairman of fractional ownership provider Flight Options.
Business has gone global and there’s no going back. And these days, thinking forward is no longer enough. You have to start thinking upward.
That’s where this handy how-to guide comes in. The Business Aircraft Acquisition and Financing Guide is your resource for discovering the wide variety of ways to gain access to business aircraft and all the productivity and time-saving benefits they offer. It details some of the most popular options and uncovers some more surprising approaches. It offers smart strategies for first-time buyers. And it speaks to key industry executives who can help you chart the best course for your own needs and develop a customized plan for managing the costs.
The Current Market: Who’s Buying
Despite the malaise in the economy, “globally, the demand for business aircraft remains strong, and that’s due to a lot of different factors,” says Jeff Habib, senior vice president of U.S. sales for Dassault Falcon Jet. “Airlines continue to cut capacity. In addition, the focus of business continues to be global in nature. I think the days of the [corporate] headquarters and manufacturing in the same town are well behind us or rapidly disappearing.” While domestic demand for Dassault’s large-cabin, global-range aircraft is robust, Habib emphasizes that international demand for all business jets has eclipsed traditionally domestic-dominated sales and continues on an upward trajectory, particularly in the expanding Europe, Russia, India, Brazil, Asia-Pacific and Middle East markets.
Dan Tyburski, managing director, Wachovia Equipment Finance, adds: “There’s no question that with globalization, the need to travel greater distances in less time is clearly driving the international demand for long-range business aircraft.” Mary Schwartz, global head of aircraft finance at Citigroup Global Wealth Management, agrees, noting, “Last year, 52% of our business was done internationally. It will probably be 65% to 70% this year.” She attributes that uptick in international buying to escalating global wealth coupled with emerging world markets and foreign currency buying power that has invigorated global business interest. And all this is happening at a time when business aircraft benefits have become more affordable, accessible and available than ever before, explains Mike Moore, senior vice president of business development and aircraft acquisition for JetDirect Aviation, one of the nation’s premier aircraft management and charter services firms.
Personal Buyers – Global Wealth
It’s not only corporate shoppers that are in the market. “We’ve seen a significant shift to personal buyers. An increasing number of high-net-worth individuals are acquiring business jets, a trend that has been increasing over recent years,” comments Rudy Tenore, senior vice president, sales and asset manager, Banc of America Leasing, which is considered the number one U.S. bank-owned leasing company. Likewise, comments Gil Wolin, JetDirect Aviation’s senior vice president, marketing and corporate communications, “The number of financially well-off individuals and entrepreneurs who view business aviation as a valuable tool is increasing every day. Today, 20% [of buyers] are first-time buyers.”
But other factors beyond global economics are driving interest in private aircraft, says Flight Options Chief Executive Officer Mike Silvestro. There’s been a “major cultural shift,” he says. “A generation ago, people sacrificed their family time for business. The baby boomer generation doesn’t want to sacrifice as much quality family time. If they have the resources to choose to travel [privately], they’re deciding to do so.” In addition, an increasing number of female senior executives are assuming more powerful decision-making roles about which airplanes to select for business and also for leisure family travel, he emphasizes.
“The plane is a mandatory business tool for us. It’s an investment like a manufacturing plant
or a store. It helps us build key relationships and generate additional revenues.”
Tom Duff, Managing Partner, Southern Tire Mart, LLC
It’s easy to imagine your own jet hangared nearby, at the ready day or night to whisk you away to the next business meeting or family event. “Be wary of making a purely emotional decision,” cautions Tenore. “You may be enamored of a particular plane, but the reality is you need to select the aircraft that best fits your specific needs.” The vast array of choices in the market range from ultra-long-range globe-spanning aircraft to the new class of very light jets, and with a wide selection of additional options, there’s a lot to consider. The smart choice is based on a careful factual analysis, says David Wyndham, vice president of Orleans, Mass.-based Conklin & de Decker Aviation Information. Any solution should include evaluating the entire spectrum of access opportunities, from charter and jet cards to fractional ownership and outright ownership and management.
“The most important thing to do is to define your mission. Consider where you are going. How many people are you taking? How often are you doing it?” says Wyndham. “Will you make mostly short trips or long trips? Will you fly once a week or once a month? Will you take trips that you never considered before once you have this added flexibility?”
JetDirect Aviation’s Moore takes the decision-making process a step further. “Part of it is determining the right range, the right seating capacity, the right performance for the runways and airports that you’re planning to access; but the other part is, ‘This is a substantial investment: Do you like it?’” If you’re six foot four and a former football tackle, you may not be all that comfortable in a light jet cabin. “If you’re not satisfied with the choice, although it may be a very efficient choice, it’s a very bad choice. You could probably identify 40 to 50 characteristics of airplanes that people like or dislike,” says Moore, whose aircraft acquisition specialists field issues like these every day. In the end, it’s in everyone’s best interest to guide the client to the perfect decision. The ultimate goal, he says, is to hear, “This is the best decision I ever made in my life.”
A Plane of Your Own … or Two?
The old rule of thumb, Wolin points out, was that with a need for fewer than 25 hours per year, charter was likely best; more than that and you’d possibly have considered a jet card. When your needs exceeded 50 hours, you might have considered fractional ownership, and if annual need topped 200 hours, outright ownership might have been the answer. And, while 400 annual hours was the average corporate utilization, owners who were flying less often placed their aircraft on a management company’s charter certificate. That way, they gained revenue when the aircraft would normally be idle, which ultimately reduced the fixed-cost of ownership.
In today’s market, Wolin says, those traditional guidelines may not hold true. With new options and opportunities, combined possibilities attract many new entrants to the business and personal flying community. “Very few of the aircraft ownership solutions are exclusive any more,” Wolin says. Different, more efficient and effective solutions may exist for each specific trip. Aircraft owners may charter their airplane to others and use charter themselves. At the same time they may own a jet card or fractional share to make one-way trips more practical, or to take larger groups for short, quick-turn trips when one’s large jet would be less efficient.
Even when usage tops 200 hours a year, which makes whole aircraft ownership seem practical, you still may be better off with fractional shares in multiple aircraft types, says Banc of America’s Tenore. Matt Doyle, Avantair’s senior executive vice president, sales and marketing, agrees. In fact, you might actually pay for fewer flight hours with fractional ownership, Doyle says. “If you have a sales team in Tulsa that needs to fly today and a CFO in Cincinnati who needs to travel tomorrow, with fractional ownership, you don’t have to reposition your plane halfway across the country.” Or perhaps you want to bring together board members, customers or family members from diverse locations in a single day. A nearly impossible challenge like that with one airplane becomes a cinch with a fractional ownership.
Whether you are buying a whole aircraft or a fractional share, Tony Kioussis, vice president of strategic marketing at GE Capital Solutions, Corporate Aircraft, recommends that you select the plane that best suits your requirements more than 75% to 80% of the time and supplement with a jet card, fractional share or charter for the balance of your flight needs. Flight Options’ Silvestro affirms that strategy. While fractional shareowners can easily exchange hours in their aircraft for a smaller or larger jet for specific trips, he says, as the usage ratio becomes more evenly divided, two fractional shares or jet cards would definitely be more practical. “You may find that a portion of your trips are long cross-country flights with five or six aboard, and a nearly equal portion are short 500- to 1,000-mile flights with only two or three aboard,” he says. In cases like that, he advises splitting hours between a midsize and small-cabin jet. Davis Hunt, regional sales manager for CitationShares, echoes this sentiment: “The nice thing about a fractional share or a jet card is you can right-size it with different combinations of aircraft to suite your specific missions.”
Look to the Future
A needs analysis is essential in determining which acquisition route is best for you, but that examination must extend well beyond the short term. “It’s not only important to consider your travel needs today, but also to examine your travel needs over the next couple of years or next five years,” advises NetJets Executive Vice President of Sales John Colucci. It’s often a difficult prediction to make, especially for corporate executives who must focus first on the next quarter or next year to meet shareholder expectations.
“Until you start flying on these planes, you’re really not certain what your needs will be; but, once you see what it’s like, you’ll discover you are going to use it in ways you hadn’t considered before,” acknowledges a major West Coast retailer who thought he would be using his plane primarily for personal use and quickly learned that the numerous business benefits warranted a much greater investment. “We started with a 25-hour jet card, then we went to a 50-hour jet card, and then we started to see that we were going to need more than 50 hours. That’s when fractional ownership started to make a lot of sense to us,” he says.
Even when a prospective fractional share buyer is certain about his or her needs, there are still additional choices to make, Colucci points out. A midsize jet may be the perfect answer for frequent coast-to-coast travel, but which midsize airplane do you want? “Do you want to get to your destination faster but not have quite as large a cabin? Or do you want a bigger cabin with a flight attendant? Or do you want a big cabin without a flight attendant? Or do you want a very big cabin? We have lots and lots of options,” says Colucci.
Needed: Expert Advice
With a smorgasbord of choices available, today’s buyer needs plenty of guidance. While first-time buyers may not be new to business aviation, they still often find the acquisition process complex. Even those who have previously owned aircraft outright find it challenging, Banc of America’s Tenore points out. “Buyers are looking for a more complete analysis and counsel,” says Dassault’s Habib. They are enlisting third-party consultants to provide objective and impartial financial comparisons and tax implications for the various new and used aircraft choices and acquisition strategies.
Tax expert and acquisitions consultant Nel Stubbs, vice president and co-owner of Conklin & de Decker, agrees. “First-time and experienced buyers are increasingly turning to a team of legal, financial, insurance and operational experts who can guide them on performance, price, contract terms, finance options, tax implications and legal issues.” These aviation specialists are essential in structuring an acquisition and avoiding regulatory trap doors, Stubbs emphasizes. For example, nonspecialist legal and tax advisors desiring to mitigate risk and liability may propose creating an LLC to own and operate the airplane and hire crews. While both the SEC and the IRS consider this approach completely aboveboard, it won’t fly with the FAA. Stubbs points out that the FAA views the new company as a commercial provider of air transportation. Consequently, it falls within very different FAA air charter operating guidelines. In addition, as a commercial flight operation, the tax status, including allowable depreciation schedules, changes.
Stubbs recommends taking full advantage of recommendations from specialist experts, consultants, brokers and management companies to avoid expensive pitfalls.
Cash, Lease, Loan
New financing alternatives offered through established institutions like Bank of America, Citigroup, Wachovia and GE Capital are allowing companies and individuals across the financial spectrum to make an investment in their future productivity and success. Loan or lease arrangements, flexible contracts with opt-out clauses and options to upgrade or downgrade one’s aircraft in midterm all herald new, more fluid approaches to financing aircraft ownership.
Whether acquiring a whole aircraft or a fractional share, “you have to view the acquisition as an investment and not an expense,” advises JetDirect Aviation’s Wolin. At the end of the day, that aircraft will have value. The key question is, how much? A buyer’s propensity to accept that market risk may well guide the financing considerations.
Business aircraft traditionally have held their price, and late-model, large-cabin, long-range jets are doing particularly well. “International demand coupled with the weak dollar has created upward pressure on values, so it is not unusual to find a less-than-five-year-old, large-cabin jet selling for a premium, and in some cases 110% or 120% of its original cost,” says Tenore.
Eliminate Market Risk
Still, whole aircraft or fractional share or buyers concerned about future market pricing can easily eliminate risk through a lease, points out NetJets’ Colucci. The lessor accepts the risk, projects a future value and blends that together to come up with a monthly “rental” payment. At the end of the lease, the lessee walks away with no further obligation.
Another risk-averting route is the jet card, which has zero residual risk, Colucci underscores. “You buy 25 hours, and at the end you’re done [or you buy a new card],” he says. But people lease for reasons other than residual value concerns, Colucci points out: “Some prefer to keep the acquisition off the balance sheet, others want to free up capital, and some lease for budgeting purposes.” When leasing, you make consistent payments over a 60-month period, and you don’t have to write a large check up front.
GE Capital Solutions’ Kioussis sees a growing interest in leasing for still other reasons. “If I can just pay to use the asset, why do I need to own it?” he asks. And while leasing offsets the risk of ownership, “you’re gaining tax advantages because the lessor will pass those through to you.” So even though you might not otherwise qualify for depreciation deductions, you could gain those advantages in the form of lower rental payments. Best of all, those benefits may not contribute to a higher alternative minimum tax payment; and in many states, you can pay the sales and use tax based strictly on the aircraft’s rent rather than on the up-front lump-sum payment that would result from the aircraft’s outright purchase price, says Kioussis: “That could be a heck of a savings.” In addition, the lease, unlike a loan, represents 100% financing with no down payment.
“This is a huge asset for people who don’t have enough time in their lives.
All of a sudden you can see your grandchildren grow up. You can meet with
your clients more often. Or you can get a second home and actually use it.”
Alan Klapmeier, Founder, President and Chief Executive Officer, Cirrus Design
As an industry leader in all aspects of aircraft finance, GE Capital Solutions offers a wide range of lease and loan products. “We are able to create flexible financing solutions for almost any aircraft acquisition, including fixed, floating and adjustable payment structures. We can take a floating-rate finance structure and convert it into a fixed-rate structure over time. We can even structure uneven payments and skip payments and seasonal payments,” says Kioussis. Early purchase options allow the operator to structure, say, a ten-year lease and buyout of the lease at five or seven years, he adds.
While leasing is attractive to many, other buyers prefer the simplicity of loan financing. But with an economy in turmoil, tightening credit and rising fuel prices, loan structures and standards are more stringent than they were last year, points out Citigroup’s Schwartz. Interest rates are up, loan-to-value spreads are increasing and terms are shorter, all of which reflects greater caution in the marketplace, she says.
New Technology Means Added Value
The latest flight deck technology from Rockwell Collins and other companies includes safety features and utility enhancements that greatly extend the capability of the aircraft, particularly in areas of the world that lack the sophisticated infrastructure found in the U.S.
Large LCD displays providing digital graphic instrument indications and moving maps with resolution accuracy of less than six feet offer enhanced flight deck functionality and greater situational awareness. Enhanced vision, which uses infrared sensors to detect ground hazards in darkness, and synthetic vision, which digitally recreates a virtual image of the outside world, are evolving technologies that enhance safety, efficiency and utility in the newest aircraft, remarks David Woo, Rockwell Collins’ director of flight deck systems marketing.
In addition, new cockpit displays incorporate ground-based NEXRAD radar images that provide pilots with a real-time perspective on weather across the continent and make airborne planning and strategic in-flight decisions considerably more effective. Electronic images depicting aircraft ground movements make on-airport navigation far safer. Head-up guidance systems allow pilots to view instrument indications overlaid against the world outside in a holographic-like image seen directly through the windscreen. All of these new technologies are making the world far more accessible, and they are increasing the demand for the latest business jet models incorporating this advanced technology. Now one can land in remote, mountainous or unfamiliar areas of the world at night and in inclement weather with all of the guidance and enhancements that make it both safe and practical.
Corner Office at 50,000 Feet
Dassault’s Habib points out that new cabin developments have an equally vital impact on international business travelers. Because these airplanes are flown globally, they need to provide a greater level of connectivity and business efficiency, he says. “Often, travelers are spending more time aloft than they might in their office on the ground.” Take the newest Falcon 7X, for example, with an unprecedented 6,800-statute-miles range. Remaining aloft for as long as 13 hours, it can take off from London and fly nonstop to anywhere in Asia, Africa, North America and most of South America. For an executive operating in multiple time zones, 10, 12 or 13 hours aloft is a long time to be out of touch. That’s why the latest cabin technology is so critical. Satellite communications; high-speed Internet; 24-hour news, weather, sports and financial market updates — and, in some areas of the world, live TV coverage — all enhance business aircraft utility dramatically, says Woo. When you’re two hours out from your destination heading directly to a meeting halfway around the world, you can discuss and exchange documents and information with your ground-based headquarters as easily as you can walk into your colleague’s office next door, he adds.
Factory-New or Pre-Owned?
With new jet manufacturer delivery backlogs extending five to eight years or more, today’s buyer will have to be patient. But, JetDirect Aviation’s Moore notes, there are many interim solutions, including acquiring a pre-owned model. “A well-maintained used aircraft can be every bit as practical as a brand-new one,” he emphasizes. Completion and refurbishing centers around the nation are upgrading late-model used aircraft to virtually new standards with the latest flight deck avionics and cabin amenities, Moore says. And Banc of America’s Tenore adds that if the aircraft has been upgraded with some of these advanced technologies, its value is certainly enhanced.
Industry analysts have noted a softening in the pre-owned market, particularly for older, smaller jets, but Moore confirms that late-model jets ten years or younger with the latest flight deck enhancements and operating efficiencies are holding their value. Wachovia’s Tyburski agrees. “There’s been a transition [in market interest] over the last six months toward newer, more efficient aircraft that have less time on them, and they fall into the one- to seven-year-old category. The technology, the avionics, the fuel efficiency is very important.”
More MIles, Less Fuel
Although a slowdown in the used aircraft market has traditionally been a precursor to fallout in the new aircraft market, Habib remains bullish. The tremendous interest from new international buyers is restraining any push-back, he says. “Buyers are looking for performance and cost efficiencies, and that’s playing an increasingly larger role in the process. These new-generation aircraft are significantly more fuel-efficient,” he notes. In fact, Dassault’s calculations for the Falcon 7X show the enhanced fuel economy could amount to millions of dollars in cost reductions during a three- to five-year period.
In addition, owners of older aircraft concerned about rising costs of maintenance are trading up to gain new aircraft warranty coverage and technology improvements more suitable to their growing long-range travel needs, says Moore. “Where you used to only have to go from New York to Florida or New York to Los Angeles, all of a sudden you’ve got to go overseas to chase the capital markets.” And, by allowing you to buy new after an aircraft is fully depreciated, a “like kind” exchange can defer tax payments on revenue recaptured in the sale, points out Conklin & de Decker’s Stubbs.
“The ability to get [to any destination] according to your schedule and take that meeting
and clinch that deal, what’s that worth to your company? [Flying on a business jet],
there’s no stress. You’re productive and working the whole time you’re on the aircraft. ”
Robert Dranitzke, Director of Marketing, NetJets Europe