As published in BusinessAir Magazine
The acquisition of private travel places most CFO’s and “C” suite executives outside their comfort zone. It is a purchase that is highly visible and most companies are not well prepared for the due diligence. The following roadmap is designed for first time jet card, fractional or whole aircraft purchasers as well as those who are operating aircraft that realize they need an unbiased analysis.
Private business jet travel offers greater productivity, security, and convenience. It is more expensive than the airlines in almost every case until the productivity factors, employee retention and response to business opportunities are calculated. Calculating those benefits can be hard, and there might not be a black and white answer. Similar to other gray areas, it sometimes is a leap of faith. However, that does not mean that proper due diligence is not important in finding the best solution.
We have discovered in our last 35+ years in the aviation business that while many of the items we will present seem very obvious, many companies are not executing them in a timely manner resulting in confusion, wrong travel solutions and solutions that are not the best for the company.
The first step is determining an acceptable budget. It may be as small as $325,000 per year for 50 hours of flights in a share of a small light jet, or $1,000,000 plus or minus for the same size aircraft and flying 300 hours per year. The advantage that a current user has is a past history of actual expenses that they can compare to the new offering. It is important to set a realistic budget with a desired limit and an upper limit.
Determining how the aircraft will be used and by which groups will have access to is the next step. Once the authorized users are identified, then a travel analysis can begin. The travel analysis should have any typical destinations, typical passenger loads, and frequencies. If your travel is sporadic to new locations, looking back a couple of years can help paint a future picture. We typically find that the number of passengers is often under reported. Once a plane is available, the added expense for additional passengers is nearly zero. Understanding the exact final location is also important as many business jets can go into smaller airports that are closer to your end destination saving additional travel time. Passenger interviews are insightful into future travel plans.
The above should be completed for companies with flight departments as well. Understanding the typical missions and passenger loads can either lead to a requirement for a more capable aircraft, or illustrate that the same class of aircraft may be adequate for the missions. We always suggest in this section for a required and a desired response. This helps further quantify the mission.
How do you go about the above types of analysis? The dollars are large, and not buying the right solution can be expensive. Most companies are not prepared to do this type of detailed analysis. Flight departments have technical expertise in managing the aviation department and flight safety. However, conducting and interpretation of this data is not their primary job. Using unbiased third party experts is the best method. In the world of consultative selling, providers will offer to do as much of this type of work for you without charge. Unless you are ready to understand the inherent bias in their data you are not getting anything of real value for free.
Once a travel analysis has determined the mission requirements then it is time to find aircraft or travel programs that can accomplish these requirements within the budget. There are typically multiple options that are available. Understanding how those options match best to your situation can be difficult. There might be combinations of smaller shares to accommodate multiple missions. There could be a variety of aircraft that are within the budget with various different advantages. This is the stage where the apples and oranges become difficult to determine what is the best solution. Sometimes it is as small as different variety of apples.
At this point, you might be tempted to just say, well lets go with the number one provider, or the market leader in this class, or XYZ company has this make and model that should work for us as well. However, even with the different variety of apples, there might be one that is better suited for your particular situation.
All travel solutions should be analyzed based on a life cycle cost of the solution over the predicted ownership period. Purchase price, cost of capital and operating costs are significant, however failure to figure the residual value and tax implications can distort the best outcome. Residual values are not a science and the savvy seller understands that a high residual value can make their offering more cost competitive to buyers. Therefore, it is even more important to do solid research to use your own calculations. Failure to not properly predict future values can lead to very costly mistakes.
Prior to making any offers or final decisions, it is important to assemble a team of an aviation specific accountants and an aviation specific legal team. They are the experts in a potential minefield of aviation specific issues. Your in-house team is good at what they do day in and day out. Using outside experts that do aviation as their primary business will keep you out of trouble with issues that are aviation specific, legal and IRS interpretations that change frequently.
Determining the best method of paying for the asset should start early in the process. Will you pay cash, lease, finance and what structure is best for your own circumstances. Your own primary bank may or may not be your best source for aircraft financing. Looking at aviation specific lenders might provide better rates, more flexible terms and make the transaction go trouble free. Teaching a bank how to do a specific aircraft or share loan might seem easy, but it can be a slow and arduous process. There are only a few lenders that will finance a share of an aircraft. Some lenders have age requirements that they will not go beyond. The crisis of 2008 changed many of your business practices and what was normal in your last aircraft loan might be very different today.
In summary, when purchasing a private travel solution that requires a commitment of time, the prudent buyer will do proper due diligence. Using outside experts is well worth the expense for ensuring the best fit for your travel needs and getting the best value.
Mike McCracken
President
Hawkeye Aircraft Acquisitions
