If you’re not quite ready to take the plunge into aircraft ownership, leasing may be an option that works better for your needs.
In an aircraft leasing arrangement, the owner — or lessor — retains legal title to the aircraft but transfers possession of the aircraft to the lessee. Because of the broad range of options available, not all aircraft leases will meet the above definition.
A variety of leasing options, each with their advantages and disadvantages, is available.
Leasing benefits
The benefits to a lease structure rather than purchasing a private jet include:
- The lessor takes tax depreciation — a benefit passed along to a lessee through low payments and lower implicit interest rates.
- In most states, sales tax is paid over time through the stream of the low monthly payments instead of up-front, yielding a much lower sales tax liability.
- Custom leasing provides flexibility for upgrade or early buyout options.
- True operating leases qualify for off-balance-sheet accounting treatment, providing shareholder sensitivity benefits.
- Leases provide 100-percent financing in most cases.
Some kinds of leases, such as synthetic or capital leases, have considerably different features from the true operating lease described above, so please confer with your accounting or finance advisor to fully understand each lease product.
Lease financing
When leasing an aircraft, a typical loan term is five to seven years. However, the payments will typically amortize over a much longer schedule, such as 10 to 20 years. This loan structure is created on a mortgage-style note with an end-of-term balloon payment yielding a comfortable payment amortization.
A typical lease term is seven to 10 years. A sophisticated corporate aircraft lessor will be able to customize upgrade or early buyout provisions consistent with your thoughts, preferences and aircraft upgrade plans.
Both floating and fixed interest rates are available if you are considering leasing a private jet. In addition, at times hybrid rate structures are also available. Examples of alternative rate structures include:
- floating with changes in LIBOR every 30, 60 or 90 days
- floating with changes in the prime rate or commercial paper
- fixed for a predetermined time (e.g., five years) and then re-set
The best interest rate structure for you depends on the rate climate at the time of your closing as well as the length of time you plan to lease the aircraft. Your aviation lender can offer insight on the interest rate structure best suited to your specific transaction.
Early lease termination
If you decide to end your lease early, the early termination process must involve the cooperation of your lessor to determine:
- whether the lease offers a specific early termination option at that point in time
- Fair Market Value (FMV) of the aircraft relative to the Termination Value (TV) of the lease at that point
- whether an aircraft upgrade or replacement is fostering the early lease termination (which is often the case)
If the FMV is less than the lease TV when the lessee returns the aircraft, the lessee will likely have to make up the difference to the lessor with a lump-sum cash payment.
There’s also another option: Instead of returning the aircraft, the lessee may seek permission from the lessor to market the aircraft. In this case, the lessor agrees to facilitate the sale documentation and closing process. This process is typically used when the lessee is upgrading aircraft with the same lessor.
Key questions to ask
When leasing an aircraft, it is important to select a lessor who can demonstrate a successful history of assisting clients with creative early lease termination solutions. Lessors who have successfully managed corporate aviation assets over the last five to 10 years and are not burdened with multiple nonperforming corporate jets are the most creative, aggressive and helpful lessors.
If you are a first-time aircraft lessee, you should ask these questions about financing to make sure your approach to leasing a private jet is well-planned and strategic:
- Do you desire to structure aircraft ownership in the name of an operating corporation, a corporate subsidiary, an individual’s name or a special purpose LLC?
- What individual or company will provide the financial strength for this transaction?
- Will the aircraft operate according to FAR Part 91 (corporate) or 135 (charter)?
- How many hours of annual use do you expect?
- Will you use an internal flight department or an aircraft management company?
- Will you lease or charter the aircraft to related and/or unrelated parties?
For more information about leasing and financing options, visit www.l-lint.com.
At the upcoming NBAA convention in Orlando, Fla., Oct. 30-Nov. 1, Nexa will present its fourth and final installment in a study commissioned by the NBAA. These Business Aviation User Studies evaluate the success of businesses that use business aircraft and those that do not.
You can read the first three installments here:
So what do expect from this fourth installment? Nexa examined businesses and their performances throughout the recession.
“My expectation is that the companies that have survived and in some cases thrived during the downturn will probably be those that realize that [the business jet] was a critical tool in their tool chest and they used it wisely,” NBAA President Ed Bolen told AIN.
In Part 2, the researchers made three observations about companies that use business jets:
- They performed better financially.
- They weathered the Great Recession better.
- They had better access to customers and markets.
Tell us what you think. Justify your jet, and be proud of it!
Let’s be honest. Much of owning and operating a private jet can be time-consuming, tedious and, at times, stressful. With the convenience of flying privately and the resulting boost in productivity comes the responsibility of staying abreast of safety regulations, tracking and justifying costs, and overseeing myriad other complex details.
Still, it’s not all work and no play. One of the more pleasurable — and trendy — aspects of owning a private jet is outfitting the interior cabin to reflect the passengers’ tastes and the plane’s intended use.
Case in point: Steve Jobs. When Apple awarded him a private plane in 2000, the innovative CEO took a personal approach and spent more than a year customizing the aircraft’s interior, right down to the brushed nickel buttons.
Perhaps you’ll find your own inspiration from some of the most recent design trends:
- The explosive growth of the Asian aviation market has made onboard Feng Shui the latest rage. Designers install rotating furniture that converts into square or round shapes — functional for meetings or mahjong match-ups. For even more in-flight entertainment, add a karaoke machine.
- Beige and boring is out. Rounded corners, enhancement of natural light, and art deco fixtures are adorning the latest jet interiors.
- A design mock-up provided to BAE Systems for its Avro jets resembles something out of The Jetsons. A cargo door opens onto a patio area with a bar for relaxing and entertaining — on the ground, of course.
- Live ferns planted into an interior wall provide a natural, allergy-free wall covering. The plants are fed by a unique irrigation system, and natural light is directed from outside the cabin to keep them healthy.
Even if the design inspiration for your plane’s interior comes from more understated examples than these, take time to think through the look and feel of your plane’s cabin. After all, you’ll spend a fair amount of time inside your jet; you’ll want to enjoy it while you’re there.
On July 27, the 2012 Summer Olympic Games open in London, England. The international event always promises competition, heartfelt stories of hard work and endurance, and of course, extraordinarily intense travel scenarios. London will host 10,500 athletes from 205 countries and millions of spectators.
To add to the chaos, much has been made of the potential for security threats during the Olympic Games. According to John F. Burns of the New York Times, the problems and shortfalls in the training of security personnel are wide-reaching. In order to offer some peace of mind to athletes, attendees, and the general public, officials are looking to the skies:
“A strike force of supersonic Typhoon jet fighters and helicopters carrying snipers went operational at a Royal Air Force base 20 miles from the Olympic Park. The Typhoon pilots were placed on a 24-hour ‘readiness’ status that requires at least one crew member to be seated in their cockpit at all times,” reports Burns.
But there’s more to the Olympics than security issues. And there’s more to aviation than military planes and defensive tactics. So if you’re flying to the Olympics this year, here are a few things to keep in mind:
- At Heathrow, be prepared for long lines to get your passport checked. There is a strong likelihood that Border Force will strike.
- Southend Airport is the closest airport to the Olympic Park — a 45-minute ride on the train.
Travel safely, cheer loudly, and be sure to tell us about your epic Olympic flying adventures.
Safety is the primary concern of every aircraft operator, and nothing is more essential than establishing a comprehensive safety management system (SMS).
PRISM, a subsidiary of Argus International, is a market leader in SMS services and solutions. PRISM’s mission is to dramatically simplify the SMS process for its clients by providing a framework and expertise to help flight operators stay abreast of constantly shifting safety standards and regulations.
PRISM support is wide-ranging:
- Design, implementation and documentation of SMS plans
- FAA-endorsed certification
- Safety training for business, air-carrier and helicopter aviation
- Executive coaching, including Six Sigma Black Belt project leadership consulting
Released last month and free to PRISM customers is the safety app for the iPad. The app provides access to PRISM’s flight risk analysis tool (FRAT) from which users can document flight risk factors and update customized reports. The flight data can be saved in offline mode or uploaded to the organization’s SMS website for further analysis. The app also triggers the appropriate risk notifications to the operator.
When it comes to SMS, it’s critical to seek out expertise and experience from a partner with a comprehensive set of services. PRISM provides customized SMS packages for a variety of aviation needs, and it delivers support and guidance that will keep your flight operations running smoothly and safely.
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It’s been all over the aviation news sites for the past couple of days.
Research In Motion (RIM) is selling one of its two jets: A nine-passenger Dassault F50EX. While this may sound like a bold, cost-cutting move, it really isn’t.
RIM, the maker of the BlackBerry, is facing serious losses. It has endured a 95 percent drop in its market value in the past four years. Ouch! After declining sales in the U.S., the company depends on sales in South Africa and Indonesia.
So the big cost-cutting plan is to sell one private jet? This is a symbolic gesture at best. RIM needs to cut costs by $1 billion. According to a source close to the deal, RIM hopes to sell the jet for $6-7 million. That’s a mere 0.7 percent of the total needed to be cut!
However, Jim deDecker of jet consulting firm Conklin & deDecker puts the sale in perspective: “With corporate aviation, the symbolism far outweighs the dollars.”
Companies don’t do a good enough job of justifying their jets to shareholders and the public. Corporate jets are an integral part of business, especially in a highly competitive, global economy. They save time for valuable executives and allow travel to remote locations.
If RIM’s largest markets are in Africa and Asia, you can be sure executives will still be traveling to those areas frequently, racking up expensive commercial flights. Will the company’s symbolic gesture really deliver value to its shareholders?
If your company is showing strong revenue performance in 2012, and you’ve felt a little lightheaded after tallying up executive travel expenses, perhaps you’re wondering if private jet ownership is the right option for your business. Here are a few key questions that will help guide your decision-making process.
1. How many flight hours does your company log each year?
Experts suggest that just 25 to 33 flight hours per month may be significant enough to justify plane ownership. When doing the math, be sure to factor in commuting time from homes and offices and the amount of unproductive time spent waiting for flights at commercial terminals.
Also, consider the number of employees who will use the aircraft and the distances they fly. If overseas flights are common, flying privately may be more cost-effective and more practical than going on a commercial flight.
2. How much does your company spend annually on commercial air travel?
In addition to tracking current travel expenditures, look back at missed revenue opportunities. Were there new business opportunities that might have been captured if a VP had visited multiple client locations? Did an important customer cancel a contract because he felt he needed more face time with the CEO?
However, don’t underestimate the ongoing costs associated with private jet ownership, either. There are insurance premiums, fuel costs, catering, plane maintenance and pilot salaries — and that’s just for starters. For budgeting, a good rule of thumb is somewhere between $100,000 and $200,000 a year for operational expenses.
3. Is a new aircraft purchase the only option?
Not in this market. There’s plenty of inventory available for firms looking to score a great deal on a pre-owned aircraft. Choosing fractional ownership or even leasing may be a way for your business to test the waters before deciding to purchase a jet outright.
4. Now what?
If you’ve done some preliminary budgeting and still think private jet ownership bears a closer look, then you’ll need to reach out to a broker with the experience and resources to help you navigate the next steps. A relationship-minded broker will help address budget and usage concerns and can offer advice, insight and recommendations that will simplify the decision-making process.
As we celebrate the 4th of July this week, we thought it would be appropriate to pay homage to a truly American aviation innovator: Piper Aircraft. Independence Day focuses on the freedoms all Americans enjoy and have enjoyed for 236 years, and there’s nothing more representative of individual freedom than the ability to fly.
Piper has played a major role in the history of American aviation. In 1930, William T. Piper purchased the assets of Taylor Brothers Aircraft Corporation for $761, and renamed the company Piper Aircraft Corporation in 1937. Piper’s vision was that everyone should be able to fly.
The most widely known Piper Aircraft is the J-3 Cub. Its first flight was in 1938, and the company built 19,888 of these single-engine, high wing cabin monoplanes. These aircraft were an integral tool during World War II. With a fresh coat of olive drab paint and green plexiglass skylight and rear windows, the civilian J-3 Cub became the military L-4. The L-4s were all over the newspapers and newsreels, and distinguished people like First Lady Eleanor Roosevelt and General Dwight Eisenhower were seen flying in them. Additionally, during the war, the J-3 Cub was the training aircraft for the Civilian Pilot Training Program. By the end of the war, 80 percent of the U.S. military pilots had been trained in a Piper Cub.
This year, Piper celebrates 75 years. Congratulations, and thank you! Find out more about their many celebrations this year, and watch a video of the Piper Cub here.
“From the head office to the factory floor, there is an understanding that we at Piper are not just making a thing – we’re making magic. We’re making freedom.”
A new study released in April by the U.S International Trade Commission (USITC) provides an in-depth look at the performance of the business jet market over the past five years. At almost 250 pages, Business Jet Aircraft Industry: Structure and Factors Affecting Competitiveness focuses on business jets weighing less than 50,000 pounds.
How bad was it?
For most industry watchers, the results may not be surprising. The number of delivered business jets peaked in 2008 then fell off sharply from 2009 through 2011. From 2008 to 2011, business jet deliveries fell by 57 percent. The demand for very light business jets was hardest hit, with a staggering 71 percent decline in deliveries during the same three-year period.
In spite of these sobering statistics, aviation industry experts are forecasting slow, steady growth over the next few years — though nothing like the double-digit increases enjoyed in the past. The Teal Group predicts 13,879 business jets to be delivered over the next 10 years, with a measured 4 percent growth in 2012 and 6 percent in 2013.
Homegrown opportunities in manufacturing
The USITC’s report underscores the importance of sustained U.S. business jet production to both domestic and global economic recoveries. Three of the world’s six leading business jet producers are U.S. held companies: Lear, Gulfstream and Hawker Beechcraft Corporation.
Domestic aircraft producers supply much-needed jobs in manufacturing, and U.S companies are also leading the way with safety innovations and technological advances. Companies with plants in the U.S. are also a leading source of parts and systems manufacturing.
Of course, the contribution that business jets make to the U.S. economy doesn’t end with aircraft manufacturing and production. U.S. companies that rely on private business travel help stimulate the economy with increased productivity and by creating new business opportunities worldwide. Due in part to the benefits private air travel provides, these organizations earn more revenue and profits and ultimately create new domestic jobs.
As lawmakers make legislative decisions that affect U.S. business jet production companies, the study may bring some positive attention to a less-than-optimal situation. For that, there’s plenty of reason to hope that the sector will continue to improve, preferably at a faster rate.
