All Aviation Articles By David Wyndham

A New Year’s Resolution for an Aircraft Acquisition

Lots of us come up with New Year’s Resolutions. While most experts agree that the Dead of Winter Post-Christmas Doldrums are not the best time for these things, they live on as strong as ever. So here are a couple resolutions if you are in the market for an aircraft.

Resolution #1. I will do my research. I will have my mission performance parameters defined. I will be realistic – we all want more speed and more range. What do I truly need versus what would I like to have? I will know the difference between the two. I will use "required" and "desired" criteria. This typically involves things like payload, range, speed and take-off/landing capability. They are measureable. Required criteria are those performance items that the aircraft must meet in order to be successful at accomplishing the mission. Desired criteria are the nice-to-have items that, although not necessary for mission accomplishment, will enhance the ability of the aircraft to perform the mission. Desired criteria enable you to better differentiate between the various aircraft.

Resolution #2. I will look at the total costs of owning and operating the aircraft, not just the acquisition price. Older aircraft cost less to acquire, more to operate. The bargain price on that used model may not reflect the true cost of getting it into service. Does the aircraft have a low acquisition price but need paint, interior, and avionics upgrades and have high-time engines?

What about sales taxes? Property taxes? Will the aircraft be used for business so that we can take tax depreciation expenses?

If my engines are not on a guaranteed maintenance program, have I enough of a reserve to cover the major inspection or overhaul? Don’t forget rental engines and the possibility of unscheduled maintenance.

What am I going to do once I have this plane to maintain its value? Will those new avionics add value, or just add “fun” to my aircraft?

Resolution #3. Am I prepared to place the aircraft into service? Do I need training? Do I have the hangar space? Am I prepared for the maintenance requirements of the aircraft? Do I need to get spares or additional tooling or ground support equipment?

Resolution #4. I will get my acquisition team together sooner than the day of closing! I will need technical expertise in aviation and finance. I will also need legal and tax advice. If trading/selling one business aircraft for another can I take advantage of a tax-deferred exchange? Have I talked with my insurance broker to inform them of the aircraft choice?

Overall, I resolve to make my next aircraft acquisition go as smooth as possible. I realize that this takes advance planning and preparation.

Remember the 5 P’s: Prior Planning Prevents Poor Performance! (OK, some of you can add a sixth “P” if you know what I mean).

The Case for FAIR User Fees

Before I get a lump of coal in my stocking delivered by SantaAir, let me stress the word Fair! User Fees as recently proposed would have a negative affect on our industry and perhaps even on safety. Here are some major financial issues we face in aviation:

 

1. On November 17, Congress approved a minibus appropriations measure which funded DOT and FAA for FY 2012. Bad news with that is the AIP gets a $165 million reduction in funding. Less money for airport improvements.

 

2.  A few days later, the Congressional “Super Committee” failed to reach an agreement on funding and deficit reduction, triggering an automatic $1.2 trillion in spending cuts. Of course those mandated automatic cuts will be changed, but cuts are still coming and how will aviation fare? NextGen needs funding to continue, our airports are in need of updates and improvements, ATC may see reductions in controllers and control towers, and the FAA may not be able to replace 600 safety and certification inspectors lost through attrition.

 

3.  The TSA, its 65,000 employees and $600 billion over 10 years is competing for the same dollars. Cuts in the TSA budget may force further security expenditures by airports and local communities. 

 

So we in aviation are seeing cuts in critical programs, a delay or decline in airport improvements, and the FAA can still be held hostage over non-aviation issues. We have little control over all of that.

 

What if we had the FAA as an independent agency, self-funded and with a Board of Directors with General Aviation representation? What if this agency was able to (within limits) control its own budget?  The current FAA funding is not working. Just adding fees on top of a broken funding system will not work either. 

 

I know using the Post Office is maybe not the best example, but they are independent. Take the lessons learned and lets get the FAA set free from DOT. An FAA Board of Directors should have participation from all forms of aviation, airlines and General Aviation. If that could happen, then some form of user-funding with user-participation could work. It may mean a significant increase in fuel taxes along with some new fees, but GA having a formal seat (or seats) at the “table” would be worth it. BARR could be permanently barred. The FAA could get back to part of its original mandate to “promote and regulate” aviation. 

 

For User Fees to work for aviation, first the FAA must be independent and overseen by those with a stake in the venture. Doubtful, but you never know what can happen.


Upgrade or Replace Your Aircraft. Now.

At the recent NBAA I was taking a very informal poll. The question was (a) Double-dip recession or (b) Really sluggish recovery. Most folks opted for (b), including me. Even most market analysts and economists agree that we are very slowly climbing into a recovery. The aviation economy is still very sluggish.

The slow activity in business aviation leaves plenty of opportunity for those of you looking to upgrade your current aircraft or acquire a new one. Here are four reasons to consider the move right now.

Reason #1

Prices of used aircraft are still competitive in favor of the buyer. Aircraft values have bottomed out for much of the business aircraft market. There are a number of good aircraft to choose from. If you are considering upgrading to a more capable aircraft, do it now. 

The manufacturers still have aircraft to sell. Not every model is available new for “immediate delivery,” but delivery times are as short a ever. This is true for the mid-size and smaller jets, turboprops and pistons. It looks like the big cabin market is continuing its improvement.  Big cabin jets seem to be a leading indicator of a recovery.

Reason #2

Upcoming aircraft models in development are mostly set for the next four to six years. Look at the lead times for brand new designs, take into account the weak order books for most of the business aircraft industry and there is not much cash left over to finance a complete new design. Today's designs offer a number of outstanding aircraft. Unless you are waiting for the super-long-range-global business jets from Bombardier and Gulfstream, there is “something for everyone” out there right now.

Don’t forget with the end of the year comes the push by all the manufacturers to close out 2011 with strong deliveries. There may be a white-tail or two available!

Reason #3

If your upgrade path is with the aircraft that you currently have, once again, now is the time to act. The Maintenance, Repair and Overhaul (MRO) facilities have had some tough economic times. Their schedules are not as tightly booked as a three years ago. Depending on the upgrade, you may be able to negotiate good pricing and favorable delivery schedules. Paint and interior upgrades, and avionics enhancements to current production model standards are some good bets right now. Performance enhancements that can save fuel are worth looking at, too. Engine upgrades may be worth the expense if you are at or near engine overhaul with your current engines. A lot of MRO's may be offering deals. See what they offer, get references and go with quality upgrades that have value for your operation.

Reason #4 - 100% Bonus Depreciation

Important Note: The following information in not tax advice. Consult with your accountant or certified tax advisor to see if your situation qualifies for the 100% Bonus Depreciation allowance.

From the Economic Stimulus Incentives in 2010 & 2011 Tax Relief Act: Businesses that acquire and place qualified property into service after Sept. 8, 2010 can claim a depreciation allowance of 100 percent of the cost of the property. The property must be placed in service before Jan. 1, 2012 (Jan. 14, 2013 in the case of certain longer-lived and transportation property). 

New aircraft purchases and new equipment purchases for used aircraft can be expensed in the year of purchase through December 31, 2011. To qualify, the property must be new, used primarily for business purposes, and meet other tests necessary to qualify for Modified Accelerated Cost Recovery System depreciation (MACRS) for the entire time the owner has the aircraft. The 100% Bonus Depreciation is not limited in amount. 

Whether upgrading to a newer, more capable aircraft, or upgrading the capability of the one you already have, now is a good time to evaluate your available options. Do your homework and plan to take advantage of today's market conditions.

 

Guaranteed Maintenance Plans 101

 

I drive my Honda Odyssey about 25,000 miles per year. I’ve done the maintenance on schedule and save for brakes and tires, that is all that it has needed these past few years. No unscheduled maintenance! That’s why I like my Honda. 

Unlike my Honda, aircraft have some very complex systems. Those systems cost far more than my Honda, and an unscheduled event outside of warranty can be costly. Even the scheduled maintenance can be expensive, especially for things such as C-Checks, 12-year inspections and of course, the engine overhaul. 

Turbine airplane manufacturers and one third-party company have tried to take some of the pain away from the maintenance budget and offer some peace of mind with Guaranteed Maintenance Programs (GMP). Here is a primer on these plans.

What are they? As the generic name suggests, these plans are a way to contractually guarantee your maintenance costs. You pay an hourly accrual fee to the plan vendor. That money goes into a reserve account. When maintenance is due, the plan vendor pays for the maintenance. Costs are guaranteed with no major spikes for costly inspections and overhauls. The resale value of the aircraft is enhanced by the dollars accrued in the program, by the guarantee of cost coverage, and by the quality maintenance records these programs require of the operator. 

Along with the financial stability these plans offer, many financial institutions are looking for these programs to secure the value of the aircraft under a loan or lease, especially for the engine coverage.

The history of these plans has its start in the airline industry. When making huge fleet purchases, the deal was sweetened by the engine manufacturers when they offered guarantees on engine costs in order to secure the selection of their engine. Today each major turbine engine manufacturer has some sort of GMP for their engine

In addition to the large turbine engine companies, many of the business airplane manufacturers and Jet Support Services, Inc (JSSI), an independent company, provide these GMP. JSSI is the only major third-party provider of turbine GMP for business aviation.  The engine companies cover their respective engines. The airframe manufacturers cover their airframes and several of the major avionic manufacturers cover their avionics. JSSI covers turbine engines, APUs, and also has programs for many of the newer airplanes’ airframes and avionics.

These companies have an extensive staff of trained maintenance professionals who work with you and the maintenance providers in order to secure both a competitive price and to make sure the vendor does the job in the best possible manner. 

What kinds of maintenance are covered?  These plans tend to cover the scheduled and unscheduled maintenance (except negligence).These plans can cover the engines, the airframe, avionics, or a combination of all three. The most popular seem to be the engine plans (also called power by the hour (C) by Rolls-Royce). Most turbine engines are covered by a GMP for the engine, either by the manufacturer or by JSSI. 

Engine plans typically include parts and labor. Optional coverage can include rental engines.  Airframe plans typically cover the airframe parts. Labor coverage is rare. Part of that may be due to operators having their own in-house maintenance staff. Tracking in-house labor required under a guaranteed plan may not be feasible.  The part coverages are much like the engines covering scheduled and unscheduled part replacement. 

Avionic coverages may or may not be included in the airframe programs. They can get very specific depending on what avionics are installed. 

The GMP can sometimes be tailored to the operator’s specific needs. For example, if the operator is leasing a plane for five years, they may be able to get airframe/avionics coverage for the five year term plus reserves for the engines. 

Best when new! These programs are available on most popular turbine business planes and on some helicopters as well. They are offered at reduced rates to new aircraft buyers. Part of this is to encourage participation, part is due to the warranty coverage of new aircraft, and part is when accruing for maintenance, costs are lower for  younger aircraft. Aircraft buyers are encouraged to sign up early by the reduced rates for new aircraft/engines. Operators of older aircraft/engines can buy into the program, but often at a substantial cost if the aircraft or engines have accumulated many hours. 

Financial professionals love these programs as they offer a stable, predictable cost for maintenance. They’d rather pay $500 per hour for every hour flown than face a half-million dollar maintenance bill every couple years. They also like the insurance against unscheduled maintenance. 

GMP aren’t for everyone. Operators of older aircraft that are not on a program may not be able to afford the buy-in. For them, the engines can be covered if they sign up at engine overhaul, but they still may face a higher expense as they accrue for the higher cost of the second or third overhaul. Fleet operators with significant in-house maintenance may feel they can manage their fleet for a lower average costs. And some operators would rather keep their money until the expense occurs rather than let the GMP provider accrue the money in advance. 

A GMP can add value and provide peace of mind to the aircraft owner. They warrant careful consideration, especially for the new aircraft buyer.

 

Considerations For Putting A Private Aircraft Onto A Part 135 Certificate

For an FAA Part 91 aircraft owner who is looking to reduce the cost of their aircraft, one thing to consider is placing the aircraft onto a commercial certificate. By doing that, when the aircraft is not being used by the owner, it can be earning revenue by flying charter. 

Since you can’t easily go out and get a Part 135 operating certificate, you will need to add your aircraft to an existing certificate holder. This involves a lot of work, and probably some expense on the owner’s part. Here are a few pros and cons to consider if you find yourself having this discussion.

Pros

You can generate revenue that will offset the cost of owning and operating the aircraft.  As a rule of thumb, the aircraft owner typically gets 85% of the base charter rate while the certificate holder keeps the remaining 15%. The aircraft owner typically pays all the aircraft specific charter expenses such as fuel and maintenance. The excess of charter revenue over those expenses helps offset the fixed costs resulting in a net decrease in total cost to the owner.

The aircraft owner can still fly their own aircraft under Part 91, or they can elect to have the certificate holder operate their aircraft under Part 135. Under Part 135 operations, the certificate holder has operational control of the aircraft and crew, and thus, the liability for the charter flight rests with the certificate holder. If the aircraft owner wants to reduce their aircraft liability, this may be an option.

Charter activity is a business use of the aircraft. If the aircraft owner flies mostly personal, non-business use, the charter activity may qualify them to take a tax deduction for the business use of the aircraft. 

Considerations

The FAA has increased scrutiny of a Part 135 certificate holder. Charter operators are required by the FAA to have operational control of the aircraft and crew during all 135 operations. Operating under Part 135 places greater restrictions on aircraft and crew than does Part 91.

Putting an aircraft onto a charter certificate also requires that the aircraft meet the more stringent safety requirements for commercial operations. The initial conformity checks commonly result in additional costs to the owner as the aircraft must be brought into compliance with those standards. The aircraft must also be maintained to the certificate holder’s approved maintenance practices.  This means that all maintenance must be coordinated through the certificate holder. This adds some cost and complexity to the aircraft maintenance function.

The owner may wish the crew to be employed by the certificate holder. The owner’s crew can’t just start flying 135 operations, even if they are as well or better qualified as the certificate holder’s crew. If the owner’s crew is to fly for the certificate holder, that certificate holder must be able to show they have control over the crew and that the crew (much like the aircraft) meets with their approved training program and has drug testing. 

As the aircraft owner is not actively involved in the charter business, the IRS considers the charter income as passive income, much like rental income. So tax planning for the aircraft owner gets more complicated. Thus, the aircraft owner needs a careful review with an aviation tax person. 

There are more tax issues with for-hire flights. Federal Excise Taxes are due on the aircraft charter income. The charter operator commonly handles this. The tax depreciation status of the aircraft may change. In general, an airplane in not-for hire business-use may qualify for a 5-Year accelerated tax depreciation schedule. If the predominant use is commercial for-hire, the IRS limits an airplane (but not a helicopter) to a 7-year accelerated tax depreciation schedule. Contact my partner Nel Stubbs about this (602-404-1854 or [email protected]) or for any aviation tax issues.

Your aircraft insurance and lease or mortgage documentation needs a thorough review to ensure the commercial activity is a permitted use. This may be a pro if the certificate holder has a fleet insurance policy that offers a lower policy cost to the aircraft owner.

Lastly, wear and tear will increase on the aircraft. Not only due to the increased flying in general, but charter customers may not treat the aircraft interior as well as the owner. In the case of some rock bands, they will mistreat the interior!  

For an aircraft owner placing their aircraft onto someone else’s commercial certificate requires careful planning and compromise. The arrangement can be beneficial for both aircraft owner and charter operator, but only if both parties compromise, cooperate and communicate. 


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