Business Jet Intelligence Primer

The Reality

Private business jet travel offers numerous advantages over airline travel: convenience, time-savings, control over scheduling, confidentiality, security, a controlled environment to conduct business and, of course, comfort and luxury. But for the relative cost disparity, everyone would fly private rather than commercial. For those in the pre-owned business jet market, buyers have never been able to capture as much utility as the current, depressed market affords.

The Pre-Owned Market

Within 2 years of the financial crisis of 2008, pre-owned business jet values declined by as much as 40% or more. The global inventory of jets for sale doubled to its highest level ever and, with few exceptions, has remained at or near peak levels. As someone who over 3 decades has handled more than 1,000 new and pre-owned business jet transactions, it is difficult to grasp the carnage. For example, a 2006 Gulfstream G450, which sold new for $34mm, and which was worth $42mm in early 2008, can now be acquired for around $20mm depending on its hours flown. Similar examples abound among all classes of business jets.

Mission Requirements

Budgetary issues aside, selecting from among several jet classes requires consideration of the typical (e.g., 80%-90%) mission’s maximum range and number of passengers. Each class includes several makes/models to be compared. With its 4,000nm+ range and 8-10 seat capacity, the Gulfstream G450 would be considered a "Heavy Jet," to be measured along with the Challenger 604/605, the Dassault Falcon 2000 and 900, and the Embraer Legacy. While similar in terms of general utility, each of these jets has its own special characteristics. For example, the Falcon 900 has 3 engines and is the most capable for the rapid ascent required on departures from short runways and in the mountains, and the extra engine provides redundancy for long over-water flights.

Upon engagement, we assist our clients in ascertaining their typical mission requirements and in selecting the jets to meet those requirements. This is followed by our preparation of a market study of the competitors, including a comparison of dimensions, performance, purchase price, market depreciation and other relevant and differentiating factors.

Economics

In addition to the capital cost of the acquisition investment, the 3 principal elements of determining cost per hour are fixed costs (e.g., crew, insurance, storage, calendar maintenance), variable costs (e.g., fuel, hourly maintenance), and market depreciation. If an external © 2013 All Rights Reserved management company is engaged to establish and implement a turnkey flight department, a management fee would be charged; however, part of this fee can be offset by bulk-purchase savings the manager passes along to its managed jet owners. The more hours the jet is flown per annum, the lower the average fixed and total pre-tax cost per hour. Many external managers are licensed to utilize their managed owners’ jets in on-demand charter operations. This arrangement can enable the owner to recoup a portion of its fixed costs during times of low owner usage.

Income Tax Shelter

To the extent of business usage, business jets may be depreciated as 5-year or 7-year property, and the ownership costs (e.g., interest or rent) and operating expenses are deductible as well. As 5-year property, the depreciation deduction in Year 1 would be 20%, and in Year 2 it would be 32%. Given the current top marginal Federal and state income tax rates, on an after-tax basis the cost of owning and operating a jet can be significantly diminished depending on the amount of business usage.

To enable our clients to compare the costs of competing jets, we prepare a pre-tax and after-tax economic analysis of ownership and operating costs. We also prepare a comprehensive analysis and recommendation memorandum addressing the principal issues relevant to the establishment and implementation of an optimal aircraft ownership and operating platform, including liability limitation, asset protection, aviation regulatory compliance, income tax planning and compliance, sales/use and property tax planning and compliance, economics and efficiency.

Financing

Several financial institutions offer asset-based financing for business jets. Both nonrecourse and recourse financing are available, with recourse at up to 90% LTV and nonrecourse up to 75% LTV. Except in the case of C corporations that are not personal holding companies, recourse is required in order fully to capture income tax benefits. Currently, asset-based financing rates are 200-400 basis points higher than securities portfolio lending rates.

Alternatives

Among the available options to whole aircraft ownership are on-demand charter, block charter, and fractional aircraft ownership. Depending upon annual usage, eligibility for income tax benefits and other factors, these platforms could be more cost effective than whole aircraft ownership. As part of the mission requirement and market analysis, upon request we will include a comparative analysis of selected alternative offerings.


Rex E. Reese, Esquire, is a private attorney specializing in business aviation matters. Mr. Reese has handled over 1,000 business aircraft acquisition, sale and financing transactions and is regarded as one of Washington's best tax attorneys. He may be contacted at 703.842.8000, rreese@jetviser.com, www.jetviser.com.