Changing travel needs, fresh availability of cash to invest and current depreciable basis are all driving factors, but when is the right time to transition aircraft? Jet Tolbert discusses…
How do you track the driving factors behind a decision on when to change business jets? How do you efficiently stay ready to make the move up or down in aircraft size without over-thinking it or cancelling trips due to inadequate planning? Following we’ll set out some practical pointers…
Tell Tale Sign #1: Incompatible Missions
A growing market or a key company executive’s purchase of a home in a new location could change the flight department’s requirement for range, runway performance and speed from their aircraft.
Let’s consider the example of a company acquiring a new plant in a remote location. The convenient airport closest to that plant offers a 4,000ft runway at 1,000ft elevation which might restrict the range of many business jets on departure (including the one currently being operated by the Flight Department).
It could even require some aircraft to land at airports that are not as convenient to access the new plant. If that becomes necessary, it’s a sure sign that it’s time to transition to a new aircraft.
Another example might be the company’s recent growth into international markets, necessitating more regular long-range, trans-oceanic travel. Those trips may be beyond the capability of the company jet, requiring the purchase of something more capable.
While selecting an alternative aircraft, operators should bear in mind the runway requirements at the home base and those at the regular international destinations.
Tell Tale Sign #2: Large Upgrade Investment
It may be that the current aircraft was the best aircraft that could be bought with the budget available a few years ago. When purchased it was the budget-buy; a stripped-down base model.
Circumstances can change, and if your company now has cash available to upgrade the aircraft, the inclination may be to invest in the current jet with performance and avionics enhancements as well as paint and interior upgrades.
This may indeed be the best option, ultimately, but it is still wise to consider all options, including whether it could be more cost effective to transition to a different aircraft.
The current needs of the Flight Department can be easily evaluated with consideration of the current aircraft, the current aircraft with the required upgrades, and another aircraft that may have been identified as a suitable replacement.
The upgrade costs may not have gone down much from when you purchased the current airplane, compared to the price of a larger, more capable aircraft that was previously out of budget.
(In the case of trading-up, one should keep in mind that while a buyer of your current aircraft will want it clean and presentable, oftentimes they will be keen to customize it to their own tastes. It is a wise move to ask a sales professional if and how you can save expense on paint, interior, avionics and performance upgrades as you transition from one aircraft to another.)
Tell Tale Sign #3: Tax Benefits
Also worth consideration is that the upgrade options mentioned above might not be an instant expense. They may be depreciable in a similar way as increasing your depreciable basis with a trade into the next aircraft. A closer look at your circumstances might reveal that there is not a tax benefit to one against the other.
On the subject of tax, an aircraft that is nearly depreciated to zero is certainly a motivating factor for the operator to consider ways to increase the depreciable basis.
While at the time of writing it was uncertain whether the 1031 exchange practices allowing aircraft owners to avoid income tax recapture while selling an aircraft and separately purchasing a replacement would continue, it seems there will be ways to continue to increase the depreciable basis through improvements or traditional aircraft trades.
The right aircraft broker will provide help you get a full market value for the trade-in.
Stay Ahead of the Game
One general rule of thumb is to be aware of upcoming changes to the travel needs before they are implemented. This forethought will result in fewer mishaps like cancelled flights or inconvenient fuel stops that cause delays or other surprises.
In general, if there is a long-term change being considered (such as adding new destinations or upgrading and improving the aircraft), the owner would be well-served to contact his or her aircraft sales/acquisitions professional and work with the Flight Department or management company to consider all options thoroughly.
Keep in mind that each party may have their own agenda. Aircraft dealer/brokers on the seller’s side will want to make you the proud owner of an aircraft in their inventory, while a management company that charters or operates your jet will want you to operate the airplane that will produce higher charter revenue, or fits their operational niche.
Your Flight Department may be thinking of the aircraft they’d enjoy flying/operating the most.
By talking with all parties on your acquisition team you can get a better understanding of why each wants you to move in a certain direction, and you will have a more rounded view to ensure your needs are met, and the right type of aircraft will be fueled and ready to move your business forward.