- 16 Nov 2021
- René Armas Maes
If you are looking to generate private charter revenue to offset operating costs when your business jet is not in use, how can you assess whether it’s worth your while? René Armas Maes continues his exploration…Back to Articles
Previously, we discussed ways to benchmark different Aircraft Management companies and assess which would yield the closest return to your target private charter revenue contribution, thereby making it worthwhile to charter your business jet out. Here, we consider additional areas that need to be fully understood to build a trust-based, win-win relationship with a management company.
When placing a private jet on the operating certificate of an Aircraft Management company, before receiving any income from aircraft charter activity, an aircraft owner should expect to pay additional costs, which should be carefully weighed-up.
The aircraft owner needs to know what the annual cost will be to maintain the jet to the higher safety and operational standards required for Part 135 operations. Additionally, you should expect more scrutiny from regulators when operating Part 135 flights.
As an example, when a jet is operated under Part 91, service bulletins, airworthiness directives, and special aging aircraft maintenance procedures are recommendations that may not need to be executed as soon as the OEM issues them. However, under Part 135 those recommendations become mandatory and must be executed to maintain airworthiness.
Another issue for the aircraft owner to consider is which Part 135 requirements would apply. Different Part 135 requirements apply to aircraft that have ten or more seats than those with less. A seat capacity of ten or more incurs more stringent requirements, potentially adding a significant additional cost burden.
Moreover, aircraft owners should expect incremental maintenance cost increases associated with the extra wear-and-tear of flying additional charter hours. A buffer to cover those costs should be built into the Direct Operating Cost per hour.
While leasing your airplane to a Part 135 charter operator to generate income can sound attractive, the increased cost of maintenance may prove to be the ‘make or break’ point between a decision to charter the jet out, or not.
The decision and process of placing an airplane onto a Part 135 certificate is a lengthy, multi-step one, and includes the modification of operating manuals, more rigorous maintenance oversight (including mandatory overhaul times), and much more besides.
Aircraft Usage, Availability and Cleaning Procedures
One key area to focus on when negotiating a contract with an Aircraft Management company is how the aircraft will be operated. Will it only fly domestic trips, or a combination of domestic and international? Should the aircraft return to its home-base each day?
Another core area to consider is how flexible you can be in terms of accessibility for Part 135 operations? Placing an aircraft on a Part 135 operating certificate can mean a lack of access to the aircraft sometimes, and that needs to be factored in the decision of whether to charter or not.
Typically, the aircraft management company will be looking to increase the aircraft’s annual utilization to over 250 hours, which increases the chance of scheduling conflicts arising. Aircraft owners who are serious about offsetting costs via charter will anticipate this. Planning and flexibility are key on both sides for a win-win relationship to flourish.
Discuss your month-by-month flight schedule requirements with the Aircraft Management company, along with your “guaranteed” aircraft availability. Agree when the aircraft will be available for Part 135 activities and when it will not be. And agree on the remedy if the aircraft is not available for your use when needed. Will the Aircraft Management company provide supplemental lift?
Beyond when the airplane is used for charter flights, you may also wish to stipulate rules about the type of food and beverages served onboard (i.e., no red wine, preventing stains on carpets, and the associated deep cleaning costs). Agree, too, on which type of cabin cleaning procedure should be executed after each charter flight, and prior to your private use.
Taxes, Liabilities & Accounting
Placing your aircraft on the certificate of an Aircraft Management company to conduct charter services to third parties will impact tax, liability, and accounting, including eligibility for accelerated and bonus depreciation (where the asset is used more than 50% of the time in Part 135 operations), as well as accelerated write-off depreciation schedules.
Involve your legal team to understand the plethora of implications. Specifically, state sales and use taxes should be reviewed carefully.
Depending on the specific arrangement, your team may be able to negotiate different tax structures, while tax exemptions should be reviewed and investigated.
Ascertain whether additional insurance coverage is required for flights when operated under Part 135. Liability, insurance coverage and premiums paid to adequately protect yourself should be a part of the negotiations you have with an Aircraft Management company.
Most disagreements arising between aircraft owners and management companies come from two key areas: Invoices (costs/revenue share) and poor communication. Be clear, making sure you thoroughly understand one another, or where there’s a lack of clarity, ask questions.
Carefully review the administrative fees, mark-ups, surcharges, and fuel prices per gallon. Be clear about your entitlements regarding insurance savings and premium discounts, pilot training, maintenance, spare parts, and bulk purchase benefits (such as fuel procurement).
Finally, negotiate preferred fuel, labor, and maintenance rates. And if you need extra work to be done for your aircraft to comply with Part 135 airworthiness, make sure you negotiate that as part of the deal too.