Own or share a jet… go fractional… use an aviation management company: different structures appeal to different owners.
If you’ve found that business airplane your company needs- and the process is progressing toward imminent delivery- now may be a little late to consider how to structure the ownership of the new bird. But if you’re still mulling over the idea- you may want to consider how to structure the ownership and operation of the plane on which you set your sights.
Options are numerous - from outright ownership by the company- to formation of a holding company to own the aircraft- to forming a partnership with others who need an aircraft- or going with a fractional share. The latter provides much the same tax and investment benefits as outright ownership – at low share costs- but with other costs that cover crewing- aircraft maintenance- scheduling and operations.
Outright ownership offers the most control – and the highest obligation- for the owner to find- hire and qualify crew-members- schedule and maintain the aircraft. Alternatively- a partnership is just that – two or more entities sharing ownership- use and obligations. Going with a management company essentially splits the difference between outright ownership – which is preserved – and a fractional share- with the management company handling all the logistics of ownership: crew- maintenance and scheduling. Most management companies- though- will want to use the aircraft in an aviation lease arrangement- which may generate revenue for the aircraft owners but can also complicate scheduling and use.
This month we look briefly at the various options and some of the benefits each entails.
As the outright owner of a business jet- you get to enjoy all the financial benefits that flow from such an investment – tax depreciation and asset retention- as well as the tax deductibility of all costs of operating and maintaining the investment.
Depreciation essentially allows you to deduct from your taxable income the price of the airplane; accelerated depreciation allows the owner to ‘write off’ the airplane’s price faster than the usual seven-year cycle. Bonus depreciation – as business aviation has enjoyed for the past few years – basically also accelerates the depreciation cycle by moving to the first year a larger share of the write-off.
As owner- you’re also responsible for ensuring the aircraft and ensuring its airworthiness. So you’ll need an arrangement with a good maintenance shop. Preferably this will be one already experienced in your aircraft type. You’ll get help from the best shops – but at the end of the day- if there’s a safety or regulatory problem- it’s the owner and operator most on the hook with authorities.
The owner is also responsible for finding- hiring and qualifying crew- both cockpit and- if required- cabin crew. Contracting for crewmembers is common among owners who lack the need for full-time pilots and cabin attendants.
But whether contract or full-time- assuring the qualifications of pilots and cabin attendants are the responsibility of the owner – basically a check of log books and ratings which means knowing and understanding what the Federal Air Regulations require. That means getting pilots to recurrent training every six months and cabin attendants every year. It’s not brain surgery exactly- but for an owner with no aviation background or experience- it can be- to say the least- daunting – if not overwhelming.
Think of aircraft management as subcontracting for an asset manager – or a full-service flight department. Employing an aircraft management firm provides aircraft owners with a turnkey solution to crew- maintain and operate the aircraft. An aircraft management firm may also manage additional use of your aircraft so that it earns its keep when it’s not helping you earn yours.
You – your company or third-party entity – still own the aircraft- still receive the ownership financial benefits at tax time- and gain the additional deduction of the management company’s fees. At the same time- under the auspices of the management company- your asset can fly what are essentially charter flights and generate revenue for its owner when its owner isn’t using it. Not only can this third-party use of your asset further reduce the costs of ownership- it may generate a profit on that ownership.
A reputable- capable management company hires- qualifies and supplies crew- mechanics and storage for your business aircraft. You work with them on scheduling – and owners do get first pick – and when you’re not using the airplane for your own travel needs- the management company charters the aircraft to others in need.
The costs of employing a management firm usually boils down to a monthly fee plus a per-flight-hour fee that can be offset- wholly or in part- by the revenue generated by charter payments. Shop around; not all management deals are created equal. Ultimately- the owner can still be liable for problems- so picking the right fit in a management company is of significant importance.
These work just like any other partnership: several people or companies come together to jointly own the aircraft- and share in its use- costs and benefits.
For liability and tax purposes- partners often come together to form a holding company whose sole business is to buy- own and use the partners’ business aircraft. All the same financial and tax benefits accrue to the entity that holds title to the plane- and the owners of the aircraft holding company share in those in proportion to their share in the company.
The best advice for a prospective partnership participant boils down to this: know your potential partners- be sure you can be involved in a ‘marriage’ with them – and get all the details down in writing. Nothing spoils a good friendship faster than disputes over loved ones- finances – or shared aircraft. And divorce from one of these marriages can be as painful as any domestic dissolution- if not more so.
Think of a fractional share as a partnership operated by an interested management company: You don’t really know your other shareholders; the aircraft you use on any given day may be ‘yours’ – but often isn’t actually the one to which you hold an interest.
Fractionals work this way: You contract to buy a share of a specific business aircraft; increments vary from as small as 1/16 of a share to a whole share. The shareholder receives a minimum number of operating hours per year based on the size of the share held.
The shareholder pays a monthly management fee – similar to the fee paid to aircraft management firms – and a flat rate per hour flown on behalf of the shareholder. The fractional company guarantees an aircraft will show up on a maximum number of hours notice- and supplies the crew- maintenance and aircraft management services.
The shareholder can- in conjunction with the fractional company- sell the share held- move up to a larger share or swap for a share in another aircraft.
The shareholder enjoys the tax benefits of ownership proportional to the size of the share or shares held- and the ability to deduct the other costs associated with share ownership. And if the shareholder needs more hours than included in the agreement- the fractional operators typically have a way to increase your available flight time – at an additional fee.
The fractional company makes money through the resale of shares- from the management and monthly fees- and from the ability to sell off the expended assets – the old planes no longer held in shares.
For thousands of people- the fractional option has proven the most-attractive way to move into a business aircraft – at least- initially. In the nearly 20 years since the first fractional operator – NetJets – started business- hundreds of former aircraft shareholders have gone on to purchase their own aircraft outside the fractional structure. It would seem they liked having access to a business aircraft so much that they bought their own. But there are still plenty of prospective shareholders out there- enough to support the fractional ambitions of CitationShares- Flexjet- Flight Options- NetJet and other smaller- more specialized players.
All are viable options for the prospective owner to whom a share seems more appealing than carving off the whole bird.