Business aviation is experiencing a period of unprecedented growth. The number of projected new business jet deliveries in 2008 is two and one-half times that of ten years ago! Leading aviation forecasters predict deliveries of over 14,000 new business aircraft valued at over $216 billion in the next decade.
Ironically, Ben Franklin’s Advice to a Young Tradesman over 250 years ago foreshadowed this explosive growth in business aviation. Mr. Franklin’s sage exhortation to the young tradesman, “Remember that time is money” is equally instructive to the entrepreneur of the early 21st Century who needs to travel in a time efficient manner.
The travel requirements of today’s fast paced business climate are a key driver of today’s business aviation boom. Consider the following situation: You are a partner in a venture capital firm headquartered in Boston. You and four members of your business team have scheduled a due diligence visit with a promising prospect company located just south of Columbus, Ohio. As part of your evaluation of the management team, you plan on dining with the company’s principals and senior management the evening of the due diligence. Time is of the essence. You need your team back in Boston the next morning to present the findings of your trip. What are your travel options?
COMMERCIAL – POOR OPTIONS
There are no commercial nonstop flights scheduled between Boston and Columbus. The best available one-stop leaves at 6 AM and arrives at 9:50 AM, not nearly enough time for the planned series of all-day meetings. Your return options are not much better. The only return trips leave no time for dinner with the prospect’s management or to meet with your team in preparation for that important meeting the next morning. With these options, you need to fly your team to Columbus the night before and spend the night after your due diligence in a Columbus hotel. You will postpone your meeting back in Boston to the afternoon after you return so that you have time to meet with your team beforehand. There has to be a better way!
REDUCED TRAVEL TIME
Well, there is a better way. Consider the alternatives that business aviation offers. You are no longer limited by the airlines’ departure and arrival schedules. You can start and end your trip when you want, reduce travel time and increase productive business time. These advantages are highlighted when you consider business aviation alternatives for your hypothetical business trip.
There are over 5,000 airports available to business aviation. Compare that to the fact that 70% of commercial airline passengers travel through only 30 hub airports in the commercial hub and spoke system. Utilizing business aviation, you can begin your trip closer to where you live rather than in a crowded commercial hub airport and land closer to your ultimate destination. So you save time on either end of your trip by having access to more convenient airports.
Bypassing the airlines’ hub and spoke system, you are able to utilize direct flights and reduce travel time. Now instead of four hours of travel time with a connecting flight each way, you have nonstop flights of less than two hours. Also consider that you no longer need to worry about airport security lines, arrive hours before you fly, remove your shoes to clear security or worry about whether that tube of toothpaste in your briefcase weighs more than 3 ounces. With corporate aviation, a 6 AM flight from an airport near your home becomes manageable. You can return when you want and still arrive home earlier than with the airlines. You no longer have to worry about cutting short your dinner meeting to catch your flight or worry about overbooked or cancelled flights.
Since you and your team are now traveling and sitting together on a private aircraft, your travel time on the flight to Columbus is devoted to strategizing and preparing for your meetings. On the return flight, you are able to conduct a debriefing session and plan for your meeting the next morning. There is no concern about having your business discussions being overheard by competitors in the airport waiting area or on the plane.
FOCUS ON COST DIFFERENTIAL
Granted, flying on the airlines is probably much less expensive. But consider how Ben Franklin would analyze this situation. When utilizing time out of the office, the ability to work and meet on the corporate aircraft and to lower meal and lodging expenses reduces the cost differential. The cost differential may even tip in favor of business aviation if you factor in intangibles such as the flexibility to extend meetings when necessary, the productivity and qualify of life improvements, the increased personal safety and peace of mind of the passengers and the positive and prosperous image that corporate aviation projects to your customers and prospects.
One of Ben Franklin’s most famous quotes is that “in this world nothing is certain but death and taxes.” While owning a business aircraft will not eliminate the inevitability of taxes, the costs associated with aircraft ownership can generate some tax relief. To the extent that a company aircraft is used in a trade or business or for the production of income, the IRS considers it to be a business asset. Consequently, the costs of operating a business aircraft are business expenses and may be deductible from taxable income.
Furthermore, the acquisition cost of an aircraft or fractional interest may be eligible for accelerated depreciation benefits which generate further tax savings. When properly structured, aircraft owners can depreciate over one-half of the cost of their aircraft in the first two years of ownership. So, for example, an aircraft acquired for $10,000,000 could generate depreciation benefits of up to $5,200,000 by the end of the second year of ownership.
For those operators who can not benefit from large depreciation deductions, leasing an aircraft can be a viable alternative. In an aircraft lease, the lessor acquires title, takes depreciation benefits on its tax return and passes all or a portion of those benefits to the lessee in the form of lower periodic payments. Each taxpayer should consult their individual tax advisor. Many factors can impact the availability of and extent to which a company is entitled to tax benefits in connection with its ownership of an aircraft. Nevertheless, the availability of tax benefits can narrow the gap between the cost of owning an aircraft and flying commercially.
Owners of aircraft have the option to manage the operation of their aircraft for themselves or to arrange for management by a professional aviation management company. Management companies can facilitate the chartering of an aircraft to third parties to help to defray the cost of ownership.
Thousands of companies and individuals have purchased fractional interests in aircraft to serve their business and personal transportation needs and to supplement their existing fleet. Fractional owners purchase a percentage share in an aircraft that entitles them to a specified number of flight hours per year. Share sizes are available in fifty-hour increments and in a full range of aircraft sizes, types and prices. The fractional program manager provides all aviation-related management services.
Jet card programs enable companies to purchase blocks of aircraft time to be utilized when and how the user determines. There is no commitment of capital to the program as the user does not acquire an ownership or leasehold interest in an aircraft. Many jet card owners use their jet card experience to determine if business aviation satisfies their travel mission profile.
Partially as a result of increased concerns about the security, reliability and flexibility of the commercial airline network since September 11, charter operators are reporting increased levels of activity. With charters, a user purchases flight time on an as-needed or block-time basis. In addition to furnishing the aircraft, the charter operator provides all aviation management services, including crew, insurance, fuel and provisions to the customer.
CAREFUL PLANNING IS NECESSARY
Assuming that your company decides to utilize business aviation to serve its air transportation requirements, many important decisions remain. Should your company charter on an as-needed basis, purchase its own aircraft, enter into a fractional interest program or purchase hours using a jet card? Which aircraft model best fulfills your company’s mission profile in the most efficient manner? Fortunately, there are many qualified aviation consultants that can help your company determine what type of operations and which aircraft are right for your company. Many of these consultants can assist your company in locating and purchasing the correct aircraft.
As you might expect, aircraft ownership and operation are highly regulated by the Federal Aviation Administration. In addition, there are many tax, risk management and corporate planning concerns that govern the use and operation of business aircraft. Aircraft owners often inadvertently violate FAA regulations. For example, many businesses choose to acquire a business aircraft in a special purpose corporation or LLC. Absent the presence of an air carrier certificate issued by the FAA, aircraft operations conducted by such companies are often illegal! Violations can subject the owners and operators to civil penalties, FAA and SEC regulatory sanctions and customs delays. Illegal operations can invalidate liability and casualty insurance coverage. In addition, there are many misconceptions concerning the applicability of sales, use and property taxes to business aircraft and with respect to the tax and regulatory consequences of personal use of company aircraft by executives and shareholders.
Prudent companies and individuals that are considering the use or ownership of aircraft should consult with experienced aviation counsel and other aviation and tax professionals regarding these matters. Qualified outside experts will work with a company’s lawyers and accountants, tax personnel and risk management department to formulate a big-picture strategy that meets the overall requirements and needs of the organization and its executives.
Ben Franklin concluded his Advice To A Young Tradesman with the following words of wisdom: “In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both.” If Ben Franklin were alive today, he would likely be a strong proponent of the benefits of business aviation.