- 20 Jan 2023
- David Wyndham
- Aircraft Ownership
With many first-time business aircraft owners entering the market lately, several will be facing the reality of their aircraft’s fixed operating costs. Is charter revenue a good way to lessen the bite? David Wyndham reviews...Back to Articles
Your costs are up, and aircraft utilization is low. You are under pressure to keep the budget under control, and your friendly local charter operator suggests you place your aircraft on its Part 135 charter certificate to gain income from flights when you’re not using it. Should you, though?
The offer seems too good to be true. Are there any catches you should look out for? Is this a solution that suits everybody? Over the following paragraphs, we’ll explore reasons why you may or may not wish to charter your aircraft out to offset the operating costs when it’s not flying for you...
It’s worth keeping in mind that agreements vary between charter operators and aircraft owners. The initial question you should ask is whether you can spare the use of your aircraft for charter operations in return for cost- offsetting revenue.
A typical charter agreement sees the owner pay for all the operating costs, while the charter customer pays the going charter rate, along with all incidentals such as airways and landing fees, catering, crew overnight stays, etc.
Usually, the owner receives the revenue from the charter flight, less a 15% commission which goes to the charter certificate holder (the operator). While this is representative of the basic cost/revenue structure, there are variations.
Reasons to Charter out Your Jet
Offsetting Costs: Making your business aircraft available for charter will offset your operating costs – you will not make money. If that were the case, charter operators would always own their aircraft.
Ultimately, charter revenues should exceed the variable expenses of operating the aircraft, leaving the excess amounts to offset the fixed expenses, thus lowering the total cost to the aircraft owner.
Reduced Liability: Another benefit of making your aircraft available to charter is the reduced liability to the owner if all flights are flown on the charter operator’s certificate. Indeed, if (as the owner) your flights are also flown under Part 135 then the operational control for the flight rests with the charter operator, not you.
The rates for chartering your own aircraft won’t be the full charter rate charged by the operator but will need to be discussed with the operator and understood.
While the charter operator will be using its own crew, if your current crew meets all the charter operator’s requirements for training and experience, with the necessary legal and tax planning your crew can be added to the operator’s certificate.
Bulk Buying: Assuming the charter operator has a sizeable number of aircraft in its fleet, you may benefit from higher fuel discounts due to the operator’s ability to purchase a larger volume of fuel.
Meanwhile, adding your aircraft to the operator’s insurance may also help reduce your insurance bill, assuming the operator has an excellent safety record. If you are using the charter operator’s crews, their salaries and training are spread over more flight hours, helping reduce the average cost per hour for the crew.
Reasons NOT to Charter out Your Jet
Clashing Schedules: The biggest reason not to place your aircraft on an operator’s charter certificate is if you already use your aircraft a lot of the time. If that’s the case, there will be little opportunity for offsetting costs with charter revenues.
The charter operator does incur costs in managing your aircraft on its certificate. If you have a constantly changing flight schedule and take the aircraft on the road for long trips, the charter operator won't have access to your aircraft, and you won't get much revenue.
Asset Depreciation: Charter decreases an aircraft’s value due to the increase in utilization. The more hours an aircraft flies, the greater the decrease in value at the time of sale (all other factors being equal in comparable aircraft).
So, for example, a ten-year-old airframe with 6,000 hours will have a lower value and take longer to sell than one in the same overall condition but with 3,000 hours on the engines and airframe.
Regulatory Requirements: Depending on the aircraft, achieving and maintaining conformity to Part 135 requirements may increase your costs. Your aircraft will also need to be on the charter operator’s maintenance plan.
Regulatory requirements may necessitate an increased frequency of maintenance and the addition of further safety equipment. For example, seating that needs to meet current fire-blocking rules may require an upgrade.
As mentioned, such costs are dependent on the aircraft type and configuration, and the initial conformity costs can be spread over time.
Wear and Tear: Increased utilization (especially by others) will also increase the wear and tear on the aircraft. As the aircraft owner, you will need to plan on refurbishing the interior more often.
Legal, Tax, and FAA: Rental income is generally considered a passive income. Passive income (and losses) may impact your ability to fully depreciate the tax on your aircraft. State and local taxes are often different for commercial (e.g., Part 135) operations.
You will need tax guidance from an aviation tax specialist to fully understand the ramifications of making your aircraft available for charter.
If done under the correct circumstances, placing an aircraft on an operator's charter certificate can be a win-win situation. The owner gets revenues to offset costs, and the charter provider gets an aircraft to charter without having to fully support the costs of owning and operating the aircraft with charter revenues.
However, it is important not to enter such an arrangement without carefully researching all the pros and cons, and the requirements and conditions – especially legal and tax.