In this series, I have covered a myriad of ways to access Business Aviation. Whole aircraft ownership offers the most freedom, customization, personalized service, control and responsibility. Coordinating and utilizing business aircraft requires individuals skilled in management and aviation. This endeavor can be accomplished in-house with your own employees. Another option is the “turn-key” approach of contracting the function and oversight of the aviation operation to a management company.
Aviation management companies specialize in flight operations, which can be a distinct advantage for some aircraft owners. As one long-time user of a management company told me, “We make construction equipment, not fly airplanes.” For a first-time owner of a business aircraft, contracted management is an attractive solution for starting the operation. In additional to providing flight crews and functional oversight, the management company can provide economic benefits as well:
- Fuel can be purchased in bulk on behalf of multiple aircraft owners. A dollar per gallon discount on an aircraft burning 250 gallons per hour is substantial.
- Maintenance purchasing power can result in savings. When the management company represents multiple aircraft, they should be able to negotiate. discounts for spare parts, or at least obtain most favorable buying terms
- The management company can purchase insurance for its group of owners. If they have an excellent safety record and documented best practices (such as an established Safety Management System), the liability and hull insurance rates can be lower than for a single aircraft.
While management companies tailor their services to meet your unique requirements, they typically offer the following oversight:
- Hangaring the aircraft
- Managing the aircraft records
- Hiring and training the flight crews
- Managing the maintenance of the aircraft
- Handling the billing and verification of all variable operating expenses (fuel, maintenance, etc.)
- Ensuring that all regulatory requirements are met by the aircraft and crew
- Refueling aircraft
- Cleaning and cosmetic upkeep of the managed aircraft
Off-setting costs with Charter
If you, as the owner, desire to further reduce your total costs, a management company can charter your aircraft when you are not using it provided the firm has authorization under FAA Part 135 or its equivalent in non US countries. This relationship is complicated as there are regulatory restrictions governing operational control of any aircraft used for commercial service. Here are the general terms:
- The aircraft owner pays all the operating costs (fuel, maintenance, other aircraft operating expenses).
- The crew may be billed as salaries or as an hourly fee.
- The aircraft owner gets a set percentage of the charter revenue.
The charter revenue to the owner should be more than enough to cover the operating costs, but will not be enough to cover all the fixed expenses, debt service, and depreciation. The charter revenue is shared between the charter operator and aircraft owner. Rarely, however, does a chartering arrangement with a management company produce a profit for the aircraft owner.
If you place your aircraft on the charter certificate of a management company, both the aircraft and crew must conform to the charter operator’s approved operating limitations. For example, the aircraft must be on the operator’s approved maintenance program. This requirement may necessitate additional safety equipment be installed on the aircraft, and the frequency and depth of inspections may be increased. The crews must train to the approved operating standards of the charter operator. Furthermore, putting your aircraft on a charter operator’s certificate may incur initial expenses for inspections to demonstrate compliance with FAA standards for commercial service. These costs, which are typically borne by the aircraft owner, can range from several thousand dollars to tens of thousands.
Consider the following example: A mid-size business jet may charter for $3,000 per hour. Typically the owner’s share of the charter rate is 85%, or $2,550 per hour, and the charter operator gets the remaining $450 per hour. The variable costs for fuel and maintenance may be $2,000 per hour, thereby providing the owner an excess of approximately $500 per hour to apply to the remaining aircraft expenses.
Given the added costs of approving your aircraft for on-demand commercial service, there must be a certain amount of charter revenue coming in the make the arrangement work financially. The more you fly for your own purposes, however, the less time the charter operator has available to sell time on your aircraft. Depending on the added costs, which vary from aircraft to aircraft, 50 to 100 hours per year of charter should generate sufficient additional income to cover the added expenses but not produce a profit for the owner.
Furthermore, making your aircraft available for charter impacts its availability for company travel. Some owners find it is difficult and at times impractical to allow a management company to have access to their business aircraft.
Other issues
Charter revenue is passive income. Confer with an aviation tax authority to see if this makes sense in terms of taxes and tax depreciation.
The management agreement is a legal document that addresses who pays what costs, who is responsible for the operation of the aircraft and crew, and how the aircraft is to be maintained. The contract should also cover any restrictions on the use of the aircraft, who maintains the insurance (can be an owner or management company responsibility), the collection and remittance of applicable taxes, and the general legal responsibilities.
The relationship with the management company is as much a personal relationship as a business relationship. Like all relationships, communication and shared goals are important.
(This article and others were first published on AvBuyer.com)
David Wyndham's Aviation Blog 