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BUYING A BUSINESS AIRCRAFT

Three steps towards building the Boardroom or
personal business case


There are many different mission requirements among Business Aviation users. If you are considering taking advantage of the benefits of a business jet for your travel needs- you should be fully versed on your mission requirements first. The following three-step guide offers some key advice to help you identify your exact corporate or personal travel requirements- and subsequently enjoy the full value of your business aircraft.

Step 1

The very fact that you are reading this series of articles shows that you appreciate the time-value solutions in the business world. You will already understand the importance of moving through life securely- safely and in style- while staying ahead of your competition- and in front of your customers.

Maybe those factors alone would be enough to persuade you of the value in utilizing or owning a business jet. If- however- you need more data to make the proposition have value- the following pages are designed to do just that: establish the Value Proposition; help anticipate and define your use of a business aircraft through Mission Profiling; and finally understand the options available to you in Business Aviation.

In the last several years the decision process for companies or individuals considering buying and operating business aircraft around the world has changed dramatically. This is due in part to the high cost of owning business aircraft- along with other issues specific to the region where the company is located- ranging from complex tax and use components- to regulatory barriers- or the sheer logistics associated with owning a business aircraft.

Decisions that once were driven by emotion (i.e. the look and feel of an aircraft) now take place in the Boardroom- or with the counsel of trusted financial partners- where emotions are not the driving force behind a buying decision.
Similar to those involving other important capital investments- today’s decision process is more sophisticated and business-oriented.

There are many different aircraft models available on the market that satisfy an equally diverse range of mission needs- so the selection process can become very confusing unless your decision-making follows a focused path.

To aid Board Members and financial consultants considering buying or utilizing a corporate aircraft- the following perspectives will provide decision-makers a clearer picture of what it is they need:
* First- the “Value Proposition” is established;
* Next the “Mission Profile Analysis” is performed;
* Finally from the above comes the specific “Budget Preparation”.

Each of these tools blend together to give the advisors vision and balance in their decision-making. The following paragraphs address Value Proposition. Steps Two and Three (over the following pages) will deal with Mission Profile Analysis and Budget Preparation respectively. Together these three topics will give the reader insight into the process- and an idea of how to use these tools to build sound fiscal success.

As an aircraft broker with fifty percent of my business being on the acquisition side- I have been able to utilize my process skills in Boardroom meetings to help clients make the best decisions to meet their needs and goals. Often the first telephone call we receive is from someone in the Treasury or Finance side of the corporation. They have been given the task to reach out to the aircraft sales community and build the initial business case for Board consideration of either aircraft acquisition or fleet transition- driven by a change in travel patterns.

Typically they have little background knowledge other than a feeling that “having our own business aircraft may make a difference.” Answers to the following points become crucial in building the Boardroom business case for just how financially sustainable business aircraft utilization will be:
* How can I evaluate the differences between owning- chartering or leasing an aircraft? * Who internally will be most impacted by these differences?
* How will a corporate aircraft increase shareholder value?
* How can I quantify the relative benefits?

Different Shapes & Sizes
In the information-gathering stage the questions are all the same. What becomes interesting is how the individuals or companies begin to elevate the answers differently internally. The outcome is ultimately derived by the sum of these elevated answers- though the thought process is the same.

Value comes in all shapes and sizes. It is defined differently by everyone. It is often weighted on the individual’s or corporation’s considerations of time- efficiency- industrial security and frequency of travel to areas of the world where commercial airlines do not go- do not have regular scheduled flights- or where scheduled service is overly time-consuming.

By using Business Aviation- travel time can be time well spent for discussing important business issues with associates- without concern that company strategy will be overheard by strangers- or that valuable time will be wasted waiting for connecting flights.

Looking at areas of the world where this type of specialized travel has been in place for years can help you understand the immense value and benefit of Business Aviation. In the United States- alternative travel solutions have been a part of business culture for over 60 years- and many of the infrastructure- regulatory as well as operational challenges faced there have been overcome during that time.

These and other mature aviation markets enjoy a greater certainty of airspace use and airport access. Many of the emerging global markets are still struggling with these issues though.

Also- the Value Proposition must be defined - in part - by understanding the areas in the world that your operation- or travel patterns will take you. If you are traveling to parts of the world where airport and airspace access is broad and largely unrestricted- the value will be easier to attain. Therefore- the Value Proposition must first be carefully examined to identify the greatest benefits to you as an entrepreneur- or to the company’s shareholders based on a combination of time-value of money- and time-value of personnel.

The most logical way to begin the analysis is to look at the current method of travel for you or your company and ask yourself:
* Using your current method of travel- are you missing critical business opportunities?
* Is your access to important growth areas for your company or product limited?
* Are you simply spending too much time getting to the places in the world where you desire to go?
* Are you or your personnel finding excuses for not traveling due to the difficult airline connections?
* Are you wasting your company’s most valuable asset—the productivity of your key employees—by inefficient travel?
* Are you wasting your own most precious asset—your time?

If the answer is ‘yes’ to even one of these questions- then the Value Proposition is starting to take shape. Opposite- we will address the ‘Mission Profile Analysis’.


 

The development of the ‘Mission Profile Analysis’

Having established the ‘Value Proposition’ in relation to building the Boardroom business case for utilizing a business aircraft- we arrive at the next developmental step in the process: the ‘Mission Profile Analysis’.

Step 2

The first and formative step toward owning and operating a company aircraft - assessing the ‘Value Proposition’ - allows the Boardroom participants and trusted advisors to vet the value of owning and operating a business aircraft- thereby giving Directors and counsel confidence to proceed with further analysis on the subject.

We weighted the value along traditional thought processes: ease of travel- security- time-savings- productivity while traveling and lifestyle. Once this value is established - at least in your mind if not the Boardroom as a whole - the decision to use Business Aviation must be carried to the next step: How much will it cost to reap the perceived value? This section and the next will answer that question.

The next step- here referred to as the ‘Mission Profile Analysis’- will focus the team on the process of choosing the best potential aircraft to meet the company’s needs.

The development of the Mission Profile is like creating a recipe for a meal. Without considering the number of people dining- or taking into account their specific dietary needs there may be too much of the wrong ingredient- or too little of what would make the meal perfect.

The same is true when determining the right business aircraft for your corporate or business application. What begins seeming like an over-simplistic exercise ends yielding the analytics necessary for the decision-making process- which is now supported by facts- and is defendable to shareholders and financial strategists- who- looking only at the financial outlay- may question the wisdom of utilizing a business jet.

The development of the Mission Profile begins by assessing and building the annual hours-flown equation- and determining which category of business aircraft will fit the mission. Setting up this analysis requires you or the group to consider past travel use as well as future needs - potentially factoring fluctuating business markets such as international growth- or the corporate decision to allow greater depth in use by authorizing associates more access to the company’s aircraft.

Once all those who will have access to the aircraft have been interviewed- their input is committed to a form listing city-pairs regularly travelled- and the frequency those city-pairs will be visited annually.

Flight plans can then be created by either the aircraft sales professional helping in this process- or if this work is not being done to facilitate a first-time acquisition but merely a fleet transition analysis- the flight department can prepare the flight plans based on these city-pairs.

Once each of these plans is created- they will yield the flight-time between the cities and the frequency each pair will be travelled annually. Also- this study will provide the team with the proposed annual use of the aircraft and provide the analyst with the necessary data to present to the management team- thus enabling decisions to be made regarding size and capability of the aircraft being considered. It is at this point that decisions about requirements for range and cabin size can begin to be formulated.

The 70% Rule
One rule we generally apply in strategic planning is that an entrepreneur or company should buy a specific type of aircraft based on 70% of the projected use. If 15% of the proposed use is international travel and 15% is domestic travel- but 70% of all trips are two hours (or less) in flight time- the target aircraft should effectively hit the mark of the two-hour flight requirement. On the other hand- if long-range flights between countries constitute the majority of your travel needs- an aircraft with greater range and cabin space would be desirable.

If you buy an aircraft based on your 30% travel needs- you would probably be overbuying - and costs to buy and operate may outweigh the proposed value of the company aircraft.

Consider cabin size also using the 70% rule. You must consider the number of passenger seats for that percentage of use- as well as other comfort and cabin needs: For example- galley- lavatory- segmented work areas and stand-up cabin features must all be taken into account when building your shortlist of candidate aircraft to fulfil your travel needs.

Soon the categories of aircraft that can be considered become well defined. Small- medium or large cabin aircraft will need to be sorted through- matching the 70% rule with the available aircraft choices.

Factoring Growth Estimates
Since buying and selling aircraft have distinct costs- some thought about your company’s growth estimates for the next three-to-five years should be considered carefully at this juncture. Given the training costs- brokerage commissions as well as staffing requirements- changing aircraft frequently should be avoided.

Once the category of aircraft has been chosen- the Board or advisor-team can begin the final step in the analysis: development of the budget for purchase and operation- not only including capital costs for purchase- but also modernization and upgrade costs throughout the ownership period.

Over the following pages- we will turn our focus to helping the trusted team shape the budget for purchase and operation - and finally make the decision regarding aircraft ownership- as well as review other options available.

If you are ready to explore the following step in this series- then there is no doubt about the Value of Business Aviation to you- but there may be other logical methods of creating the delivery of that Value.

Charter- Fractional Ownership or Leasing will be explored broadly to establish the best solution for you and/ or your company to begin enjoying the incredible world of Business Aviation. Each of these tools is designed to offer vision and balance to maximize your ultimate success.


 

Budget Preparation for a company business aircraft

Having already explored Value Proposition and Mission Profile Analysis (Steps 1 and 2) over the preceding pages- let us assume you have decided to proceed to buy an aircraft. Now you and your trusted advisors are faced with the task of logically viewing the results of the gathered data and choosing the right path forward.

Step 3

It is now time to build the budget for aircraft ownership. This process allows the Board to match value with economic reality. There are three categories of costs to consider within the budget. The first category is ‘Variable Costs’.

Variable Costs to Factor: The variable costs are those that are directly related to each hour of use- including- for example- Hourly Fuel Costs and Hourly Maintenance Labor Costs.

For instance- using a fleet average for the Gulfstream GIV-SP- for every hour flown there may be 2.01 hours of maintenance labor. For the sake of this article- let’s imagine the average hourly labor rate in your local area is $90 USD per hour: you would assign $180.90 USD for every flight hour (2.01 hours x $90 per hour = $180.90).

The manufacturer will also have a fleet average for Parts Costs that can be applied for each hour of flight. Airframe and Engine Programs that reduce the chance of an unpleasant- unplanned maintenance cost-related surprise sometime in the future are also calculated on an hourly basis. Other costs that should be applied are Airways Access Fees- Landing Fees and Catering Costs. Obviously- the more hours per year you fly- the greater the total annual Variable Costs will be.

Fixed Costs to Factor: The next category is ‘Fixed Costs’ - those that go on annually regardless of flight-hours. These contain expenses- for example- that are associated with Salaries and Benefits for pilots and co-pilots as well as in-house maintenance and administrative personnel. Hangar and Office Expenses- Management Fees (if applicable)- Insurance and Training Costs also are fixed on an annual basis. When determining the final hourly cost of operation- the Fixed Cost total will decrease on an hourly basis as the number of flight-hours increases.

Capital Costs to Factor: The third category is ‘Capital Costs’- consisting primarily of the Principle Payments for the aircraft- Refurbishments and Upgrades. Annual Property Tax and Use or Sales Taxes are also factors that need to be considered in the overall annual cost of the aircraft.

Depreciation- while a non-cash item- can have a significant tax effect. You should always engage a qualified aviation tax specialist when determining the correct method of treating these items. This evaluation by a specialist is critical when determining operational strategies and use methods.

Five-Year Plan
It is wise to build these budgets over a five-year period to allow the Board or your personal accountant to determine the running costs and properly add major maintenance events and their corresponding costs into the appropriate year.

Allocation of major overhaul or modification expenses will be a determining factor in the residual value of the asset. Not only will this tool help the Board understand the annual expenditures- but it will also help predict the market value of the asset in relation to the event.

For instance- if you are in year three of your period of ownership and you are 200 flight-hours from a major maintenance event (such as a “Hot Section” inspection) on your engines and have no pre-established program paying for the event- the value of the aircraft may be reduced in the near-term years leading up to the event- and may increase in value in the near-term years following the event.

This strategic view will also help the Board and your advisors plan transition considerations and expenditure planning.

Concluding our Three-Step Process
The set of tools laid out in the three-step process highlighted within this publication will help the Board evaluate the possibility of aircraft ownership and utilization with good vision.

Vision- however- is a funny thing. Sometimes you see things you don’t expect. If the Board was seeking to determine if whole aircraft ownership could be a viable reality- they may have started by looking for a definite answer and ended up finding ambiguity. The idea probably still remains solid and the Value Proposition still holds ture- but the problem is that costs exceed their expectation.

There are alternative solutions for areas that seem ambiguous: In the last 20 years the Business Aviation industry has not only matured in ways that provide greater safety- better access to airspace- new technology and systems- but also in its options for providing access to business aircraft.

Charter- jet cards- fractional- and shared-ownership are all viable ways to proceed with business aircraft travel if whole aircraft ownership is not the right solution for you. All enable you to meet face-to-face with your customers and move ahead of your competition efficiently and effectively.

It is hoped that the preceding three-step approach to ‘Buying a Business Aircraft’ will have illustrated a clear path that you can use in exploring the viability of Business Aviation in maximizing the efficiency and productivity of your own company’s travel plans.


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