Making the Upgrade/Replace Decision

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This post examines whether upgrading or replacement of your business aircraft is appropriate.

The owners of a 10-year old light jet were facing the possibility of significant avionics upgrades in the next few years. They were also considering replacing the aircraft during the same timeframe. While the upgrade would add value to the aircraft and might make it easier to sell, what path was best for the owners?

There are many types of upgrades available for popular aircraft that can change them from unacceptable burdens to mission capable assets while reducing their costs of operation. When does it work to do the upgrade, and when doesn’t it?

Certain avionics upgrades may be required just to keep an aircraft flying. The FAA “NextGen” navigation system is requiring new avionics equipment be installed by 2020 to allow aircraft to use the air navigation system. Modifying the aircraft can be costly, especially for older models with low values. Some aircraft may require even more avionics upgrades to operate globally, especially in Europe. Do you do only the FAA-required upgrade and avoid trips to Europe? Do you acquire a new aircraft? Your flight department must consider several options to evaluate the upgrade/replace decision.

When to Do the Upgrade

Upgrades fall into two categories: adding new safety features and adding new capabilities. Certain upgrades associated with the FAA’s NextGen program will be required by 2020 just to maintain the aircraft’s operational viability. Either you spend the money or sell the aircraft for parts. If you require new avionics but don’t need the advantages of a new aircraft, such as more range, speed or cabin volume, the upgrade path may work. Possibly you seek to add performance, such as better fuel efficiency or range. Companies like Aviation Partners, Raisbeck and Blackhawk have been quite popular for many years. They, and others, have aerodynamic and engine upgrades that allow your current aircraft to fly faster, further, or both. Sierra Industries offers Williams engine upgrades for older Citations that add speed and range.

Nextant Aerospace is remanufacturing older Beechjets into Nextant 400XTi’s – complete with new engines, new avionics and a new interior. Nextant is being joined by an engine upgrade from Textron. Other companies offer engine modifications as well. There are a number of avionic upgrades available from Avidyne, Garmin, Honeywell, Rockwell-Collins and others. Third party specialists are also doing modifications that range from updated navigation gear to a full (glass) panel replacement. When looking at new systems, consider what the current variant of your aircraft (or closest relative) has for its avionic system. Done right, these systems enhance both safety and reliability.

For the passenger cabin, interior specialists offer all sorts of options for in-flight entertainment and airborne Internet as well as new seat designs and modern materials.

It’s Personal
Before you undertake such a major project, however, here are some things to consider:
If you need “more” as in seats, payload or room, your only true alternative is acquiring a larger aircraft.

Aircraft age is also an issue. Older aircraft cost more to maintain than newer ones. Wear and tear items, aging aircraft issues, and engine overhauls all drive costs up. Your aircraft must be in excellent mechanical condition and essentially free of corrosion, otherwise don’t consider the upgrades.

Some upgrades add value to your aircraft while others add value only to you. With today’s market, do the upgrade if it has value to you. If it has value in the market place, so much the better but do it primarily for you. Unique is great with art, not with aircraft. Stick with established programs with a successful track record. Do equipment upgrades that mirror the new models or closest equivalents. Those will tend to have the best impact on resale value and also maintenance supportability.

There is a trade off between putting money into an existing aircraft and replacing it. A decade or two ago, you could always avoid the upgrade analysis and sell the aircraft to a buyer outside the US. That is not so easy anymore. Countries in South America, Africa and Asia are upgrading their air traffic and navigation systems. Many of them are looking toward Europe’s airspace as their model. In today’s economic conditions, spending money on an upgrade may not result in a 100% return on the investment, especially on older turbine-powered airplanes.

For example: upgrading the engines on a King Air C90 can run to over $700,000. A 20-year old C90B sells for just over $1 million. Looking at today’s market, its doubtful that the upgraded C90B can recoup 100% of the upgrade at resale. The engine upgrade will add to the aircraft’s value, but don’t do it just to resell the King Air after the retrofit. The likelihood of recovering all your money is very low. Do it because it adds value to you. If you are upgrading just for a significant mission, but that mission is infrequent, consider the alternative. It might be more cost-effective to charter an aircraft for the occasional European trip rather than upgrade your company’s existing aircraft.

Budget carefully and talk to other operators who have done the same upgrades. Ask your accountant to run the numbers, including all tax considerations as well as your cost of borrowing the funds needed to upgrade or replace. As long as your current aircraft is in excellent mechanical condition and you plan to keep it for the next few years, the added utility and flexibility of the upgrade may add all the value you need.

Making the Upgrade/Replace Decision

New or Pre-owned: Part 3 — Financing

This concludes the 3-part series of pivotal considerations for companies and entrepreneurs seeking to acquire a business aircraft.

In the previous articles of this series, I touched on only two aspects of the new vs. per-owned question: acquisition cost and operating costs. While those are two significant areas in arriving at a purchase decision, we always recommend looking at the full life cycle cost of owning and operating the aircraft.  Some fixed costs such as crew salaries, hangar and liability insurance may be unrelated to the new-vs-pre-owned question. But what about financing the acquisition? Are there more favorable terms for new aircraft? What about residual value of the aircraft at the end of your ownership? For business use, taxes and tax depreciation are also important.

Financing

When looking at the costs to acquire, operate and dispose of the aircraft, used aircraft can often have a significant cash advantage. Consider the new and five-year old mid-sized business jets we used as illustrative in Parts 1 and 2 of this series as an example:

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New aircraft tend to secure better financing or leasing rates than pre-owned equipment. Post-2008, aircraft values took a major tumble, and they have not fully recovered. Newer aircraft remain on the market less time than older aircraft. Several aviation finance experts believe that the aircraft must be less than age 20 at the end of the finance/lease term for the deal to be financially safe. While that advice is a generalization, financing terms and rates support that position.

Financial institutions do not mind taking a residual value risk on an aircraft that is five or ten years old at the end of the lease or finance term. They are much more wary of 20-year and older aircraft, however. For a new business aircraft, 100% financing at low single-digit rates are available for the best credit risks. Older aircraft tend to require 20% to as much as 50% down to secure financing. Lease rates and terms also favor the new business aircraft: a 10-year lease on a new business jet is not a problem, while the bank may balk at longer than five years for a 15-years old business jet.

This fact of financing recognizes that selling a newer aircraft in excellent condition is easier than selling a much older aircraft, even when it is in very good condition. As one example, according to AMSTAT, older Challenger 601-3A models for sale take longer to sell then their new variant, the model 605.

Aircraft                    Percent Fleet for Sale         Average # Days For Sale       Years Built

Challenger 601-3A             12.21%                     495 days                                   1987 – 1993

Challenger 605                    8.55%                      275 days                                    2007 – 2014

In general, newer aircraft sell quicker than their older brethren.

Depreciation: 

Tax Depreciation can narrow the new-versus-used price gap. But the tax advantages are greatest for the first time buyer of the new aircraft. How?

If the aircraft is 100% used for business, 100% of the acquisition price can be depreciated as a business expense. The United States Internal Revenue Service (IRS) allows full depreciation in as little as five years for non commercial operators. Depending on the tax law and whether you can qualify, there has also been a 50% bonus depreciation law that allows up to half the purchase price to be taken in the first year of use for the aircraft. That feature is not available for pre-owned aircraft. So the tax depreciation in the first year of service may allow for a $13.3 million deduction for our new aircraft example. The used aircraft does not qualify for other than the standard IRS allowance. (Note that accelerated depreciation only changes the timing of depreciation, not the duration or amount of total depreciation.)

Aircraft Maximum tax deduction during the first year following acquisition (US)

  • New $13,300,000 if qualify for 50% Bonus
  • Used $ 2,600,000 (MACRS 5-Year)

At a 35% tax rate, the new aircraft with bonus depreciation can have a tax advantage of $3,745,000 ($10.7 million depreciation difference at 35% rate).

This situation often skews the analysis if only the first year is considered.

What happens when you sell the aircraft?

There are two options depending on your subsequent actions regarding aircraft ownership. There will be a capital gains tax on the difference between the sale price and the depreciated value of the aircraft that can negate a significant part of the early deduction. In order to avoid having a capital gains tax on the aircraft sale price less depreciated value, you may be able to defer the gains tax with a 1031 Like Kind Exchange. But in deferring this gain, the basis of the next aircraft you purchase will carry the impact of the depreciated amount, thereby making you unable to depreciate the full value of the replacement aircraft. This can get quite complicated and requires the advice of a tax expert. The huge depreciation advantage of the new aircraft is really only useful in the initial purchase year; its value lessens over time.

Tax planning overseen by a person knowledgeable in the ways of the IRS is required.

Looking at the costs and assuming 100% business use and a 35% tax rate:

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Source: Vref for aircraft values, Conklin & de Decker Life Cycle Cost for operating costs

In the example shown above, the pre-owned aircraft has a net after-tax advantage. This benefit, however, may not always hold true. That is why we always recommend looking at the life cycle costs for each option. Taxes and financing/leasing options may favor one option under particular circumstances.

In summary, new versus pre-owned should take into account mission requirements, aircraft capability, owner preferences and life cycle costs. It can be complicated, so having a consultant’s help can make the decision easier.
Remember to focus on the objective—safe and efficient transportation using a business aircraft.

New or Pre-owned: Part 3 — Financing

New or Pre-owned – Part 2, Pre-Owned

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This is part two off of a three-part series on evaluating options for achieving the benefits of Business Aviation.

Acquisition price is the biggest reason for selecting pre-owned versus new. Since the 2008 recession, the spread between new and used prices has increased. For example, a popular mid-size business jet sells for $26.6 million in 2015. According to Vref Aircraft Value Reference, the 2010 model currently sells for under half that price, at $13 million. A 10-Year old model value is $7 million.

Mid-size Business Jet

Price New = $26.6 million

5-Year old model = $13 million (49% of new)

10-Year old model = $7 million (26% of new)

Rather than buying the same model aircraft new, another option is to upgrade to a large pre-owned aircraft using the same $26 million. We do not normally recommend this option, however: you should buy the aircraft that meets your needs and that you can afford to operate. Operating a large aircraft will cost more, sometimes much more.

Another advantage of the pre-owned aircraft is the time to put the acquisition into service. Popular new aircraft can have waiting times of 12 to 18 months or longer between order and delivery. Even if the new aircraft is in stock, selecting interior appointments and equipment options will take time. A pre-owned aircraft can be put into service quite quickly, depending on the time needed for the financial, legal and contract processes, plus scheduling and accomplishing a pre-buy inspection. For a cash deal it may be possible to put an aircraft into service in a matter of weeks.

Budget for upgrades. You may spend $300,000 to $500,000 in new avionics, repainting the aircraft, and perhaps refurbishing the interior, so budget accordingly. Paint is cosmetic and easy to change. As long as the interior is in good physical condition, new soft-goods (leathers, fabrics, carpets, etc.) are relatively inexpensive and easy to change. New avionics for an aircraft manufactured in the past 15 years or less, while not inexpensive, tend to be technologically feasible and able to meet all the future air navigation requirements. These upgrades to the used aircraft also add value when it comes time to resell.

 

 
Operating costs will be higher for the pre-owned aircraft compared with new equipment. The used aircraft probably is no longer in warranty. If an item needs an unscheduled repair or replacement, you are likely to bear the full cost. New parts do come with warranties, but they are far shorter than the new aircraft warranty coverage. An aircraft’s life is measured in flight-hours and cycles (or landings). Even a 10-year old aircraft with 4,000 hours is still young if it has been maintained properly.

As aircraft age, they tend to require more maintenance. For example, one large business jet has routine scheduled checks every six months or 300 hours. These are relatively minor. Every six years there is a major inspection that costs upwards of $500,000. The likelihood for unscheduled maintenance also increases with ag. Our Conklin & de Decker data suggest that the maintenance costs for an older aircraft can be 25% to 50% higher if it has been in service for 5 to 10 years. For a mid-size business jet, maintenance costs (excluding the engines) can add about $200 to $400 per hour to the averaged maintenance cost reserves, compared with a new aircraft of the same design. So for our hypothetical medium-cabin business jet, purchasing used adds about $300 per hour to the operating costs and requires $500,000 expense to put it into service. How is this cost package still an advantage?

The $13.6 million saved by purchasing pre-owned will easily cover the extra maintenance and refurbishment costs over the next ten or more years! The differences in the operating costs by themselves do not negate the pre-owned option. Part of the higher expense of the new aircraft does get returned when the aircraft is sold, however.

Do not overlook the fact that the well maintained used aircraft also loses less in terms of absolute dollars in its market value. When looking at the costs to acquire, operate and dispose of the aircraft, pre-owned aircraft can often have a significant cash advantage.
So in terms of cash, the pre-owned aircraft in the example presented here should stimulate thought, but the devil is in the details, so they say. We always recommend a thorough life cycle cost analysis as the numbers can be very different for each case.

New or Pre-owned – Part 2, Pre-Owned

Buy New or Pre-Owned (Part 1)

Part One – Buy New

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Today’s consumer of Business Aviation is sufficiently sophisticated to explore the spectrum of available aircraft, new and pre-owned. Starting with this article, here is a three-part series on factors to consider when choosing between these options.

Business jets are certified to the same standards as commercial airliners, yet they typically operate a small fraction of the hours flown by the Scheduled Airlines. Airliners remain in service for decades and are commercially viable well beyond 50,000 flight hours. Thus it is understandable that a pre-owned business jet, properly maintained and updated with required avionics and safety features, is a plausible option when a company or entrepreneur is contemplating multi-million dollar purchase of a business aircraft. Certainly the prudent purchaser looks at all possibilities that provide the advantages of Business Aviation.
When evaluating a business aircraft, the best advice is to select equipment that fits your mission and can be acquired as well as operated within your budget. General wisdom also suggests that pre-owned aircraft cost more to operate, and new aircraft cost more to acquire. As always, there is more to the story. In this three-part article, I’ll explore factors to consider when contemplating purchasing new and considerations when evaluating pre-owned. Furthermore, this series will address what the analysis should involve.
One caveat before we begin. Aircraft are not like automobiles. A 15-year old family sedan with 250,000 miles (400,000 km) is probably at or near the end of its useful life. A new set of tires probably doubles the used sedan’s value, so economically it makes little sense to spend much money keeping it available for transportation. Aircraft, by their design and by the fact they are maintained to exacting tolerances, have useful lives well past 50 years. An aircraft’s life is measured in flight-hours and cycles (or landings). The typical life span of an aircraft can be 50,000 or more flight fours. The DC-3 transport ended production at the end of World War II (as the C-47). TransNorthern Aviation still operates DC-3 aircraft in commercial service in Alaska.
For our discussion, we will be considering “pre-owned aircraft” as those models built in the last 15 or so years that have quiet, fuel-efficient engines and modern avionics.
Why buy new?
While the salesperson jokes nothing beats that new airplane smell, there are many reasons why new is the way to go. New aircraft may be more capable than their predecessors. The Gulfstream G650 has a one-third larger cabin and greater range than the Gulfstream GV-SP. It also provides an advanced cabin-pressurization system that makes those 14-hour long trips even more comfortable. If you need that G650 capability, the GV-SP business jet doesn’t suffice.
New aircraft also come with new technologies that make operating them less costly and potentially more versatile than models available a few years ago. Head-up guidance and synthetic vision can give the pilot the equivalent of a daytime view when landing in poor visibility (surely a safety advantage). Navigating in North America, Europe and across the oceans have evolving requirements for more accurate navigation equipment. The US Federal Aviation Administration “NextGen” navigation system requires new avionics that come with new aircraft.

You also get to choose the options you need, along with interior layout, colors, fabrics and other appointments. While somebody may like the colors of that purple and green aircraft, you may not. This situation is also important if your aircraft needs to match the corporation’s colors or if you have several aircraft with a common livery.
Maintenance monitoring systems and computerized features available on today’s models make troubleshooting the new aircraft a matter of looking up an error code. Line replaceable units make swapping out some equipment as easy as swapping a hard drive on your desktop computer. Cabin connectivity such as high-speed internet as well as anti-noise and anti-vibration technologies have evolved with smart cabins. Today’s aircraft are rapidly becoming an extension of the home office.
Warranties
New aircraft come with full warranties. While new equipment tends to be more reliable, it can be costly to replace. The warranty gives the owner piece of mind that if components fail prematurely; the repair or replacement is covered. New aircraft have reduced maintenance costs. This fact is not just because of warranty and better technology, but also because of the manufacturer’s continuing refinement of required maintenance schedules and reliability centered maintenance practices.
In order to maintain aircraft safety, as aircraft age they tend to require more intense inspections and preventative care. Aircraft that spend a lot of time operating in corrosive environments need more care, for example, and as they age these requirements increase.
The lower required maintenance of new aircraft also mean they can fly more. Aircraft Availability is defined as a percentage of days an aircraft is available for flight in an operating year. (Aircraft Reliability is the percentage of times an available aircraft can be dispatched when available for service. This number is higher, sometimes measurably, than Aircraft Availability.) In order to keep an aircraft reliable (not to mention, safe) requires maintenance. When the aircraft is in for maintenance, it is not available for flight. If an aircraft is down for maintenance three weeks in a year, its availability is 94% (i.e., 49 weeks out of 52-week year).
As aircraft age, unscheduled maintenance increases. More maintenance usually is required to keep a high rate of reliability once the aircraft has been determined to be available. Time in the hanger or maintenance shop detracts from the aircraft’s availability for flight operations. Data researched by Conklin & de Decker show that availability drops from the 95% range for new aircraft, most noticeably after 20 years of age. Average availability is about 70% at age 25 and 55% at age 30.

Aircraft Age                     Maximum Availability
0 – 20                                 years up to 95%
25 years                             up to 70%
30 years                             up to 55%

For the above reason, we rarely recommend a business aircraft operator keep their aircraft beyond age 20.
Replacement Practices
Several of our clients replace their business jet aircraft within six years of purchasing new. With that policy, their aircraft are always in warranty and the aircraft’s first time-intensive maintenance check occurs in year six. That practice easily provides for 600 to 700 hours of flight operations per year per aircraft.
In the next article I will address factors to evaluate when considering pre-owned business aircraft.

Buy New or Pre-Owned (Part 1)

Charter: An Option with Many Dimensions

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When your company’s travel needs are diverse and the frequency of demand for any specific mission does not support a dedicated business aircraft, charter may be the optimum choice.

 
A recent client presented a very interesting challenge. About 40 percent of their private air travel is less than 200 miles, much of it to short runways at airports that are conveniently located to their plants. Another 40 percent or so is in the 800 to 1,500 mile range to visit regional offices. The typical passenger load on these trips is three to five persons with minimal baggage, and the short trips are always out and back in the same day. The last 20 percent of their travel is long range (in excess of 2,000 miles) and although loaded with only five or six passengers, there is considerable baggage on those trips. No one aircraft seemed a best fit for all the company’s travel needs.

 
Any aircraft that could fly the long-range trip could easily handle the intermediate range travel, but finding a long-range alternative capable of the short-range trip was not practical. There were several aircraft models that, lightly loaded for the 200 mile trip, could land and take-off from a few of the shorter runways, but most short-range missions with a long-range aircraft would require operating from larger airports more distant from the desired destination. Furthermore, the acquisition prices of the long-range alternatives were $18 to $25 million and their operating costs were relatively high.

 
There were aircraft capable of the intermediate range trips that could also do the short hops. Their acquisition prices were $7 million to $9 million, and their operating costs were lower than the long-range jets. But they would require a fuel stop on the long-range trip, and the passenger cabin (even with only five persons aboard) was too small to accommodate people and baggage appropriately.

 
For about $3 million to $4 million, a turboprop airplane was very cost effective on the short trips and could easily handle the shortest of the runways at the company’s intended destinations. But the slower speeds of the turboprop made the intermediate trips longer than the client wanted. Furthermore, due to its faster speed, the business jet’s cost per trip was actually very close to the trip cost of the turboprop.

 
With the company’s total utilization and mission profiles, acquiring more than one aircraft was not cost effective.

 

 
Examining Options

 

One recommendation was acquiring a light jet for the short and intermediate range trips and added supplemental charter for the longer trips. Full aircraft ownership for any mission, however, wasn’t cost effective when the company’s frequency of specific needs was analyzed. Thus a second option was chartering three different aircraft that were optimized for each trip.

 
Upon analysis, the client was ideally suited for the all-charter option to address differing trip lengths and baggage requirements. The company had experience chartering various aircraft and had identified several preferred charter operators to provide lift. One offered the light-twin turboprop needed for the short trips. Two other charter companies operated jet aircraft suitable for the longer-range missions. Charter fit all the company needs well.

 

Charter is a flexible option for company travel. My client was able to pick the right aircraft for each mission. If they end up flying more frequently than they do now, ownership might make sense for them in the future, possibly with a light jet for the short and intermediate range trips and adding supplemental charter for the longer trips. But for now, the client needed the option of low utilization and high flexibility that charter provides.

 
Charter as Supplemental Lift

 

This type of flexibility works even for those who own their own aircraft. A chartered aircraft can be the second aircraft when needed, since acquiring another aircraft for a slight increase in utilization does not make fiscal sense. Charter also serves as a means of evaluating the need for new or additional aircraft.

 
Include Jet Card memberships as part of your assessment of the charter option. Cards offer flexibility since card holders pay only for the flights flown and competitive rates can be customized to meet the holder’s needs.

 
Fly on non-peak days and need a lot of one-way trips? Fly only between major metropolitan city-pairs? There may be a charter plan and a business aircraft just right for you.

Charter: An Option with Many Dimensions

Time Value of Money for Business Aircraft

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While lending institutions are restoring practices popular prior to the financial meltdown, even with multi-million dollar transactions cash still remains king. Here is a primer on financing basics.

Let us take a quick look at the state of financing for business aircraft as 2015 dawned. The post-recession return to equity-based lending and the concurrent need for borrowers to provide more detailed financial disclosure, kept financing at about 25% of US retail business jet transactions through the end of the year.

Twelve-month LIBOR rates have been prime sub-one percent since September 2012. The latest Federal Reserve Board (October 2014) Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that 10% of large banks eased their standards for commercial and industrial loans to firms of all sizes, with no one tightening loan standards. Banks are stabilizing their balance sheet. For companies with excellent credit, borrowing money isn’t free, but for a profitable corporation, it is very close.

A big advantage of paying cash for an aircraft transaction is the speed at which the transaction can occur. The immediacy of the cash deal can secure the best pricing as there are no financing contingencies. There is also no debt to disclose on the balance sheet. The cash deal attracts the least amount of external attention as it keeps everything between the buyer and seller. For a company with sufficient liquidity and a Board that is averse to debt, the cash deal is the only deal.

Other Uses of Cash: Financing a multi-million dollar business jet can allow the cash to be used for investing in opportunities that are understood by you, but may appear to have a higher risk for the lender. Traditional asset-based lending for a new or recent vintage business jet currently offers interest rates in the 3% to 4% range. Residual values of newer business jet models have stabilized and remain at higher percentages than most other capital equipment. Generally, getting the best finance terms require down payments of 20%. For a popular business jet, this covers the residual-value risk to the lender.

Leases have advantages for companies that know their utilization will remain stable and that intend on retaining the aircraft for the full term of the lease. A lease can also be a viable option if your company does not need the tax depreciation. With an operating lease, at lease end you can purchase the aircraft at fair market value or return the aircraft and walk away. Some leases have early buyout options. A lease can be financially a good alternative but with two major caveats:

  • Leases can be more restrictive on aircraft utilization
  • Getting out of a lease early is costly.

The lessor, in assuming the residual value risk, wants to maintain the aircraft’s value. An aircraft with lower utilization (i.e., flight hours) will have a higher resale value versus one with higher total flight time. End-of-lease detriment calculations look at the total time flown and the time remaining until heavy maintenance on the major cost components. Flying more than anticipated in the lease agreement can result in a costly expense when the lease ends. Make sure your team understands the end-of-lease terms especially as they relate to aircraft condition and utilization.

Banks love it when customers want to exit their lease early. Even early buyout options may not be that advantageous if the financing agreement calls for high residual percentages. One client we have wants to upgrade their leased midsize jet to a larger jet. If exercising the early buyout option on their midsize jet, they will pay the bank about 50% more than the current market value of the aircraft.

Net Present Value: When we are working with a client evaluating business aircraft options, one part of the analysis is to look at Net Present Value (NPV), which considers income that could be generated from investing the lease payments when they come due. The NPV analysis evaluates both the timing and the magnitude of the cash flow as well as prevailing interest rates. With a business jet, there is no revenue-generation save for the eventual sale of the asset. So, while the business jet acquisition NPV is most always negative, we look to the NPV to identify what cash flows are most favorable to the buyer.

With internal rates of return that are greater than the financing terms, and allowing for the tax depreciation of the aircraft, the NPV favors the finance option over the lease for most of our corporate clients. The higher the internal rate (i.e., hurdle rate), the more favorable financing becomes. Balloon payments can enhance the finance NPV versus the cash purchase. These options tend to be available for new aircraft and for popular pre-owned models that are nearly new.

Lease NPVs tend to be favored when there is little or no tax depreciation benefit, or when the term is very short – under five years.

With any ownership option, you are taking a responsibility for the future value of the asset. The provider of a traditional loan shares that responsibility during the loan term. At loan end, you need to decide whether to sell or trade the aircraft, or continue with that aircraft. For a six-year or longer loan, you are likely finished with any tax depreciation and no longer have the interest expense. From an NPV perspective, you have maximized the value of the loan.

Time Value of Money for Business Aircraft

Who ”Owns” the Aviation Department?

Identifying and serving the ultimate boss provides greatest benefits for shareholders and maximum longevity for aviation personal.

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Aviation Managers and CEOs have a challenge in common—they serve many masters. A CEO needs to be concerned with the shareholders and their returns. He or she must listen to the Board of Directors, yet communicate effectively with employees. The CEO who cannot motivate employees to see the corporation’s Vision and pursue its Mission will face difficulties in meeting corporate goals. For officials of public corporations, there are regulators who also have oversight. Yes, a corporate CEO has many masters.

Like the CEO, the Aviation Manager also has many bosses, even if the Aviation Department’s sole purpose is to be the CEO’s transportation. At the end of the day, it is the corporation and its shareholders who must be served.

The Aviation Department must integrate with the corporate structure and understand how it supports external and internal business units within the entire enterprise. While it is tempting to cater to the CEO, the enlightened Aviation Manager focuses on addressing the goals and objectives of the company as a whole. A Fortune 500 CEO’s tenure varies, but according to the Wall Street Journal, the average tenure is less than 10 years and almost a quarter of departing CEOs leave as a result of a dismissal. Woe be the Aviation Manager who seeks only the favor of a single executive. A key to longevity of the Aviation Department is how well it is enmeshed into the activity of the corporation. I have seen Aviation Departments downsized or closed when their sole-benefactor retired or was let go.

Serving the Entire Company: How can the Aviation Department benefit the entire corporation? Quick answer: It can add value at three levels.
– The Shareholder Level: profits, market share, returns are examples.
– The Enterprise Level: quality, asset management, cost control.
– Executive/Employee Level: productivity, team collaboration, product development

One recent client’s experience shows all three levels being met by the effective utilization of the corporate aircraft. The company had a goal to double the number of retail locations in the Northeast US. The Aviation Department used the corporate aircraft to transport corporate teams to the Northeast to oversee and manage the opening of the new locations and to coordinate the training needed for the new mangers and employees. It flew senior management to speak at the regional meetings. Other times they flew sales and marketing teams to train new employees at multiple sites over a few days. The use of the corporate aircraft allowed this company to maximize its employees time, accelerate the opening of the new retail locations, and ensure a consistent level of customer experience when the stores opened. Thus they met:

– The Shareholder Level: increasing market share by opening new stores.
– The Enterprise Level: maintain quality of service at the new locations.
– Executive/Employee Level: Maintain executive staff productivity while training new staff.

Focus on Corporate Goals: When determining appropriate direction for the Aviation Department, managers should relate trip fulfillment to corporate goals. For the retailer cited above, the utilization strategy was supporting trips to the Northeast US during the corporation’s expansion in that region. At times, senior leaders had to adapt their travel plans in order to allow the aircraft to serve the various other teams involved in the company’s expansion. Of course, it was the senior leadership that made the decisions on priority. But, the Aviation Department knew the corporate goals and developed tactics for how aviation personal and resources would support the company.

Key Performance Indicators (KPIs) should be used to measurethe efficacy and value-added nature of the Aviation Department. As a quick review, for a KPI to be valuable, it must be understandable, meaningful and measurable. In general, a KPI can follow the SMART criteria: Specific, Measurable, Achievable, Relevant, Time-based. They should be directly tied into the utilization strategy and aid in the measuring of the benefits to the company.

One tip, beware of measuring activity rather than productivity. One client managed the flight schedule to maximize the seating on the aircraft traveling to their main operating locations. Sometimes that strategy meant coordinating trips to fill the aircraft seats. For the Aviation Department in this example, more hours could have been flown by making every trip a priority regardless of passenger load. Instead they maximized the productivity of each trip (passengers carried), knowing that the productivity benefit to the company was maintained while managing costs. While hours flown is an important metric, the Aviation Department maximized measures of productivity that supported the executive team and thus the corporation.

While departmental costs are always under review, which is appropriate, be sure to include costs that are avoided in terms of travel expenses such as overnight stays, lost worked time/productivity and other elements of inefficiency.

Throughout the process of satisfying the CEO, the CFO, Board Members and shareholders, the Aviation Department will need feedback from the corporation’s executive leadership. In addition to focusing on corporate goals, feedback is essential to guide the Aviation Department in its quest to serve the many bosses who demand satisfaction.

Ed Note: The National Business Aviation Association (NBAA) and the General Aviation Manufacturers Association (GAMA), through their joint “No Plane No Gain” program, commissioned a set of studies examining the value-added benefits of corporate aviation. If your company’s Aviation Department doesn’t have them, they need to get them!

Who ”Owns” the Aviation Department?