A brighter outlook for business aviation, evident in a resurgence of bizav activity, suggests that the overall economy may have turned the corner toward recovery.
New aircraft sales volume, at approximately $21 billion, has returned to its pre-recession level and most indications suggest a strengthening business aviation industry. The improvement will be slow at first but it will accelerate significantly after this year, at perhaps 3 to 5 percent annually throughout the decade. Increased business activity by smaller companies will see Barons replaced with turboprops and King Airs exchanged for jets. Booming activity in the MRO industries reflects this upturn, with more pre-purchase inspections of pre-owned aircraft translating to more pre-owned aircraft sales, resulting in firming and then climbing pre-owned prices.
With this rosier report card/crystal ball serving as the backdrop, Conklin & de Decker’s 15th annual Aircraft Acquisition Planning seminar attracted a near-record number of attendees from the ranks of aircraft operators, FBOs, charter and fractional operators, aircraft brokers and management companies, legal services and guaranteed maintenance program providers. Six guest speakers joined the four Conklin & de Decker co-owners to present insight into aircraft financing, tax issues and wise aircraft acquisition strategies.
In the 1970s, jet aircraft acquisition revolved around the “glamour” of owning one, and cost ran a distant second, remarked Conklin & de Decker co-founder Bill de Decker. That has changed markedly, he noted, and today it’s cost that drives the decision, with company financial officers often having the final say. He outlined the advantages and disadvantages of whole-aircraft ownership, as opposed to leasing, using financial analysis of all costs–not only acquisition, operating and maintenance but also crew expense and insurance premiums.
Insurance premiums are affected by risk management strategies, which are beginning to include innovative flight crew training programs aimed at preventing loss of control in flight (LOC-I), a major cause of fatal airline and business aviation accidents. Andrew Spiegel, vice president for underwriting at USAIG in Los Angeles, discussed how risk management programs might reduce premiums. He said including flight training in an existing safety management system (SMS) could make an operator’s risk more attractive to underwriters. Spiegel said that although USAIG is evaluating the risk mitigation potential of such training it has not yet instituted formal premium incentives to encourage it.
Upset prevention and recovery training (UPRT) that does offer such incentives is an arrangement among international risk reinsurer and underwriter Swiss Re, flight simulation provider CAE and training operator Aviation Performance Solutions (APS), based at Mesa Gateway Airport (Phoenix). Swiss Re’s Corporate Solutions offers premium credits of up to $25,000 to offset UPRT course costs as well as those of initial and recurrent pilot training.
To date, four companies have sent pilots to the UPRT course and approximately 20 have completed it, with another six companies signed up, said Drake Manning, communications vice president for SR Corporate Solutions. “There are other such programs available in the industry, but we are not aware of any offering this same approach and, to our knowledge, no other offers financial incentives tied to aviation risk management and insurance.”
The three-day UPRT program integrates preparatory web-based self-study, 4.5 flight hours in the high-performance aerobatic Extra 300L, 7.5 hours of ground instruction, a one-hour jet-specific briefing, and a two-hour session in a model-specific Level-D CAE business jet full-flight simulator.
Total cost is $6,922 per pilot. APS offers an optional add-on to the Swiss Re/CAE/APS syllabus: the A-4 Skyhawk upset recovery program, which provides actual experience in departing the envelope during high-altitude (above FL300), all-attitude high-Mach flight.
Deciding on the Right Aircraft
Conklin & de Decker co-owner David Wyndham discussed how best to match an aircraft acquisition to the company’s mission. This, he said, requires a detailed analysis of planned aircraft use and the difference between “nice to have” and “must have” capabilities. He explained how changes in transportation requirements can dictate acquiring different aircraft, or switching from owning aircraft to leasing or chartering to serve the mission.
Bill Quinn, of Aviation Management Systems, Portsmouth, N.H., explained why pre-buy inspections are essential to the acquisition process. He described buying an aircraft without a comprehensive pre-purchase inspection as “playing Russian Roulette with a fully loaded gun.” Quinn stressed that the value of the pre-buy to the purchaser is determined long before it takes place. “The rules of the game are established right at the start, by the wording of the purchase agreement or letter of intent,” he said. “If everything isn’t spelled out then, you may get only the inspection the seller wants you to get, and on his terms.”
Asset Management
Conklin & de Decker co-owner Brandon Battles explained the significance of asset management to flight departments. “Aviation assets are all the elements of an aviation operation,” not just the aircraft, he advised. They include real property, employees and, where the flight department does its own maintenance, parts, inventory and equipment. The department manager must be able to account for and justify them to his company’s financial officers through a complete, understandable budget. o
Accounting for Taxes and Personal Use
Those looking to acquire an aircraft need to consider the tax implications. Conklin & de Decker’s Nel Stubbs concluded the seminar with a review of recent state sales, property and use tax changes along with a detailed explanation of federal excise tax and who is obligated to pay and collect it. She covered how depreciation schedules differ for aircraft operating under FAR Part 91 or Part 135. Her analysis also touched upon the possible effects of non-business aircraft use on the company’s bottom line. Stubbs listed “Gotcha States” that impose a tax or fee on an aircraft that comes into the state on a “regular” basis even though that aircraft has been properly registered in another state. “This is seen in states that have registration fees, license taxes or similar taxes, including Arizona, Virginia, Minnesota, Washington and Maine.” She added, “This is also true of any state with personal-property taxes, Kentucky, Texas, California and Missouri, to name a few.”
She cautioned, “There are a lot of state tax audits going on to recover sales, use and personal-property taxes along with aircraft license and registration fees.” Stubbs went into detail about how to prepare for a federal excise tax audit, pointing out that the IRS considers even some Part 91 operators obligated to collect and pay the commercial FET. She said the best place for an owner whose aircraft is operated through a management company to begin preparing for such an audit is with a carefully worded management agreement.
“It should precisely show who pays and employs the pilots, who has the control of the pilots, pays for insurance, hangar, maintenance and fuel. Owners should directly pay for as much as they can,” she advised so as to avoid the appearance of taxable transactions taking place. If an operator flies solely under Part 91 and assumes that his non-commercial FET is automatically paid though the fuel tax, “…it’s not necessarily so,” Stubbs cautioned, explaining, “The IRS and the FAA disagree on the definition of ‘commercial.’ IRS Rev Ruling 78‐75 states that the FAA’s definition of commercial is not determinative in deciding which tax applies. The IRS perspective is that an operation can be Part 91 for FAA purposes but subject to the commercial FET.”
The IRS is currently focusing particular attention on aircraft that are managed even though operated wholly under Part 91, she noted.