Is This Article For You?
If you’re considering buying your own jet aircraft for the first time, this section was written especially for you. You may also want to review this if you are struggling with how you go about legally charging your associated companies, subsidiaries, and friends.
You’ll really want to think about almost everything we have to say, and you’re sure to run into a maze of considerations raised by lawyers, aviation consultants, accountants, or your risk management department. You’ll wander from aircraft broker to broker or prospective aircraft to aircraft, trying to figure out not only what equipment you want, but how you’re going to pull off the task of keeping this magic carpet safe, legal, accessible, productive and cash efficient for your company, all the while doing what you really need to do – namely run your business.
Why use a management company in place of your own in house operation? Two words, Expertise and Money.
Most of the benefit starts with allowing the owner to focus on his business and stay out of aviation except as a passenger. In other words, he’s just hiring aviation expertise. It may start with the purchase. And it’s important that an owner do a little research into what aircraft makes sense for the management company to oversee as well as it does for him to understand why he wants it for himself. When the airplane is put on charter, issues of efficiency, cost, and market preference will play a dominant part in determining whether or not anybody gets predictable charter usage. Even if the owner intends to fly it exclusively for himself, maintenance and pilots will become areas where the common aircraft type will enjoy an advantage over something unique that no one can get parts for, and for which few of the flight training facilities even have a simulator. An aircraft management firm can help right here by giving you the most important assistance right up front. Your choice of aircraft will determine everything from which all dreams or nightmares flow. The last thing you want is a great deal on a hangar queen.
This is of course one of the main benefits. And it’s arguably on of the benefits that the seasoned management companies can make. As purchasing increases in absolute dollars, so too go discounts – on fuel, insurance, pilot training, maintenance – the works. It’s a jungle out there and when you are an army of one and you have a problem, guess who will get the short end of the stick. There is safety in numbers.
Flying Professionally, Flying Safely
One management firm put it most succinctly: “My job is to keep the owner from killing himself.” The first real advantage of a management firm is that as an owner, you get the option of picking from a variety of firms who obviously fly, maintain, and staff the same aircraft that you just bought. They’ve had more experience than you. What you have to ask yourself sometimes (as Clint Eastwood might put it) is “how lucky do I feel?” Go with the pros!
Maintenance & FAR Compliance
Every time the FAA issues an “airworthiness directive,” as owner, you are responsible for ascertaining whether it applies to your aircraft, and getting the fix made. This can range from installing a new piece of software into one of your radios to riveting a reinforcement plate onto a wing spar. Additionally, you will have unscheduled and scheduled maintenance of all kinds, based on airplane use, and/or periodic maintenance. Most frequently someone will have to “outsource” this. But even if the work is carefully contracted, maintenance of airframe and power plant logbooks is a nightmare that most owners don’t have the time or knowledge to perform. A management firm can step in here and really earn its keep. It’s important to remember that most insurance underwriters will walk away from any claim where FARs were not in compliance. Record keeping is one of the most knotty but important pieces of FAR compliance. And on your own, you’re just one insurance policy with a claim. The management company is going to be a big customer to the underwriter. A customer with some clout.
Maintenance is an enormous topic – way beyond the scope of this article. But essentially the value of a good management firm is to oversee everything that has to be done, all the time. And a lot of improperly coordinated maintenance is not fatal. It just makes operation of your airplane unreliable. There are many minor equipment failures that will legally allow a crew to fly home if the failure occurs enroute, but not allow a departure unless it’s fixed. Some management companies have their own maintenance staff assigned to each aircraft that force the flight crews through a flight debrief on all potential maintenance items. They also hang around for departure to ensure that no minor items (a burned out landing gear indicator light) jeopardize the reliability of the scheduled charter trips. Sounds like a plan!
Hiring & Firing
Pilots – as the old gag asks: “What’s the difference between a jet pilot and a jet aircraft?” Answer: “the jet aircraft quits whining when it gets on the ground.” The FAA hasn’t signed off on radio controlled business aircraft yet, so pilots are something you’re gonna have to have. Who finds them? Who screens them? Who hires them? Who trains them, replaces them when they’re sick, transports them when their duty time runs out (if you’re on charter) and in general deals with every little problem? The aircraft management firm can and should.
Under the common roof of an aircraft manager with a variety of aircraft, an owner can avail himself to different aircraft that may better fit his requirements for any given trip. This benefit will vary in structure from one management company to the next.
Security & Local Oversight
The larger aviation firms tend to stress their advantages of scale. The aviation firm with a bunch of employees is better suited to help you 24/7. They also tend to emphasize that geography doesn’t matter; they can send people to manage your aircraft anywhere. And in fairness, there are many cases where the extra cost of “positioning” is worth it to have the plane “under the wing” of the manager at his home base. But there are also times when it doesn’t make sense.
Benefits of operating under FAR Part 135
Usually charter brings back some revenue to the owner. Most contracts have very specific clauses about the sharing of additional revenues and expenses, like extra revenue opportunities from a “deadhead” and expenses like landing fees. If chartering out your aircraft is your principal reason for having the plane managed, it makes sense to really pay attention to this part of the agreement. Make sure everybody’s expectations are reasonable. And have some solutions for what happens when things don’t work out. The IRS will require you to show involvement in the operation as it applies to your airplane in order to take advantage of a five-year depreciation schedule. Make sure you understand the implications of Federal excise taxes and who pays them. A couple of years’ unpaid excise taxes can come as a nasty shock to you as the owner.
Companies with subsidiaries, customers, aircraft co-owners, and other user situations that warrant reimbursement have a problem: they are potentially at risk of breaching FAA regulations regarding compensation or use of aircraft for hire. While charter may not always be the cheapest solution for them, it works frequently enough in this regard, and it is definitely the cleanest. When you ponder the consequences of losing use of the airplane entirely for FAR violations versus the tax consequences to another user or subsidiary due to IRS’ excise taxes, it’s easier to pay as you go.
Use Tax Exemptions
Certainly one of the principal incentives for placing an aircraft on Part 135 is economic. It starts these days with the state sales or “use tax” in which it is purchased or based. There is a great deal of discrepancy from state to state. Notwithstanding the above, there are ways to circumvent the state sales and use tax under various conditions. Since most of the exemptions were designed to provide relief for “common carriers” or airlines, the test may be that the aircraft is flying more than half the time commercially. But as mentioned elsewhere, it would appear that flying you or subsidiaries on charter would qualify as contributory usage, providing invoices, excise tax, and other aspects of such usage matches third party charter.
Shifting “Operational Control”
Operators and aviation attorneys report an increased interest by today’s aircraft owner in shifting all operational control to the management firm, and using part 135 to accomplish this. In other words, rather than walk the increasingly dangerous tightrope over whether or not the airplane is under private (Part 91) or commercial (Part 135) regulations when it is being “positioned” for a charter trip, when it is being used by a friend, many owners feel more comfortable making this clear by being always under Part 135, even when they are flying themselves, and despite the fact that they then subject themselves to a 7.5% Federal Excise tax on hourly use of the airplane.
The Contract – The Means to an End
The previous discussion then leads us to the most important aspect of your adventure as an aircraft owner after buying an airplane: picking an aircraft manager and working out the details of the agreement. Let me stop you right now if you think you’re going to get something for nothing. You may be a great negotiator, but your aircraft management team is entitled to a profit, and you’re much better off recalling the old maxim that “you get what you pay for.” It’s your airplane, your employees, and your precious behind at stake, here, isn’t it?
- With that established, and assuming that fundamentally everyone trusts each other, then the real exercise is simply to make everything clear. The management company will start with a fairly standard contract. Key elements will include the how tos and wherefores of every topic I’ve mentioned and then some: maintenance, insurance, hangar storage, fuel, pilots and pilot training, unanticipated charges, charter, approval of use of the aircraft for charter, necessary lead times for you to audit them, for you to “pull the aircraft” from a charter trip.
Try to imagine every problem and address it ahead of time. It makes sense to let them buy your insurance, for instance. In addition to the fact that most firms will get a discount, if the airplane is damaged in the hangar, then you’re both on the same side of the fence with the underwriter. If you bought the insurance it becomes “you vs. Management Company.” Bye bye to that relationship. It’s as important to articulate your goals as it is for the management firm to delineate where they expect to make their profit. Make sure that all services are adequately defined. Who performs the maintenance? The management company, or is it outsourced? What capabilities does the management firm have to oversee and perform the maintenance, and is his role spelled out? Is the management firm entitled to mark up the maintenance, or is he going to pass it on at cost?
As owner, you should be entitled to visit your aircraft, the management company, and see what the logs, and the company’s records on your plane look like. But it’s only reasonable if you’ve worked out a format for such inspections ahead of time and give sufficient advance notice. You can’t expect a management firm to reveal his entire company financials for you.
Maintenance can be a big-ticket deal. But what happens on the day that your management team is up to its hips in your annual inspection, discovers a broken gear actuator and needs to replace it that day to stay on schedule? It’s an unexpected expense and you’re in Frankfurt on a business trip. Both of you should have thought about the good sense of building in a maintenance “upset” dollar figure that would have permitted the firm to have acted on your behalf with some contractual confidence that they were doing the right thing.
At the end of the day, the contract should be the part that you, as a businessman, are most familiar with. Throw out the aviation jargon and you’re really back at the basics of all contracts: clearly stated purposes, remedies, against a proven checklist of items that historically constitute 99% of the issues in that subject area. Properly joined with equal measures of trust, you should get along just great with your aircraft management firm. So let’s get started – before the prices of good used airplanes get even higher!