The benefits of using an aircraft manager

Corporate Jet Investor Staff
By Corporate Jet Investor Staff October 25, 2012 13:37

The benefits of using an aircraft manager

If you are not planning to be an owner/pilot, you will be faced with the option of setting up your own flight department to manage your aircraft or using a third-party manager or aircraft operating company.

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You need to think about not just the time you will spend on board the aircraft, but the whole process of a flight – from purchasing the fuel to hiring the pilot, to filing the flight plan. With an aircraft management company, the entire process is taking care for you.

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While flight departments and pilots can do this, with a manager you are not responsible for hiring or interviewing staff, or negotiating contracts with flight planning companies or maintenance facilities.

“All the owner has to do is make one phone call to the business manager. They say that they want to go from A to B next Tuesday and it’s all arranged for them,” says Tom Wells, general manager at Gama Aviation.

At the end of the month, the total costs for the operation of your aircraft are then sent to you as a single, itemised bill, saving you the hassle of sifting through piles of individual invoices.

Scott Cutshall, vice president of marketing and client relationship officer at TWC Aviation, says that aircraft managers provide a wealth of resources, experience and insight, which an individual aircraft owner would not normally have. “This is not about being smarter, it is about deeper experience,” he says. “We help clients conduct hundreds of aircraft transactions and perform thousands of flights every year, all around the world. So chances are we have encountered that problem, worked with that service provider, or negotiated that agreement before. We are able to leverage the knowledge gained from those prior experiences into driving value and making things simple for our aircraft owners.”

Economies of scale

As with any purchase, the more you buy, the cheaper the price. This means that outgoing costs such as fuel and spare parts can be greatly reduced by large operators who buy in far bigger quantities than individuals operating their own private aircraft.

ALSO READ: How to choose an aircraft manager

It is worth noting, though, that this only applies if the company is already operating your particular aircraft type. Adding a new type is expensive for operators, but you may find that the company is prepared to do this for the purpose of entering a new market.

Flexibility

There will be times when your aircraft is unavailable because of maintenance. Managers with a fleet of aircraft can easily find a replacement for you.

“Our job is removing hassle. If your aircraft is having maintenance done to it or your pilots are ill we can keep you flying,” says Dustin Dryden, CEO of UK operator Hangar8.

Insurance

There are two elements to insurance. One is the cost and the other is the coverage provided.

Operators will typically add you to their existing policy. As they are insuring whole fleets, rather than single aircraft, they will typically receive price discounts and drive more comprehensive coverages.

Insurers also tend to prefer dealing with larger operators, who have strong safety management systems in place and who have built up good relationships with their underwriters through dealing with them on a daily basis. Again, this can help you get a better price and an overall richer coverages.

“At TWC, each client may elect to maintain their own insurance coverage or take advantage of our fleet policy, says Cutshall. “In either case both the operator and the owner will be named insured on the policy.”

Charter income

Although some owners do not like the idea of allowing a stranger on board their aircraft, chartering your aircraft when it is not in use can be quick way to recouping some costs.

“In 2008 you could actually make a profit from charter, but as the charter market has diminished, it has become more difficult,” says Wells. “If your aircraft is only available for 300 hours per year, you are not going to make a profit, but you can get to a position where you are halving your operational costs or more. You really need to make your aircraft available for 500-600 hours per year before you can break even.”

“It is not possible to make a profit, but you can reduce costs by up to 80%, if not a little more, depending on the type of aircraft,” agrees Cutshall. “Aircraft that are 10 years old or newer command a higher price in the charter market and benefit from lower costs of operation. You can charge significantly more for a Challenger 300 with on-board Wi-Fi, for example.”

“Take a Gulfstream 200,” Cutshall adds. “If you charter it for 150 hours per year and fly 100 hours yourself, you would save half a million dollars per year from charter income alone, not to mention the expert support and other savings realized by having an aircraft manager take care of your aircraft. I don’t know anyone that wouldn’t be interested by that.”

Tax benefits

Aircraft operating companies or Part 135 operators are effectively non-scheduled airlines and benefit from tax breaks.

In the US this means that owners can be reimbursed for various items – including federal excise tax on jet fuel. The credit is only $0.175 cents per gallon, but this works out to $13,000 a year if you are flying 300 hours, according to TWC Aviation.

In the European Union, flights with a non-business purpose – often called pleasure flights – are liable to pay mineral oil tax. Depending on the country, this can be equivalent to another 80% on the cost of fuel. Private operators would also need to pay VAT (an equivalent of US sales tax) on top of that cost.

The benefits can be even bigger. In the EU, aircraft operated by “airlines” do not need to pay VAT on the aircraft purchase, which can be around 20% of the aircrafts purchase prices – although you would need to make your aircraft available for charter to benefit from this.

Finance

Using an independent manager can also help you obtain finance. “One of the biggest issues for us is when a client comes to us with a specific manager in mind that it is not really a manager,” says Jim Crowley, managing director at Guggenheim Partners Business Aircraft Investments. “It could be a management company they own, it could be a friend they play golf with or it could be a flight department. We have a pretty simple rule in these cases. We walk.”

Financiers like third party managers because it gives them more control over the aircraft. They will often ask managers to sign an agreement with them and the owners – typically called a tri-partite agreement. Under these agreements operators have a duty to tell the financier is an owner is behind on payments and they commit to help repossess aircraft.

ExecuJet, a large international operator, also offers to finance aircraft, provided that they manage them.

Advising on acquisitions and sales

Some managers also act as brokers but even if they do not, managers can be a fantastic source of advice for owners. No manager wants to operate aircraft that will be unreliable or one that does not suit their customer’s needs.

Maintenance savings

As well as benefitting from economies of scale, aircraft managers can use their experience to save you money on maintenance – particularly warranties on new aircraft.

“We recently took on the management of a Hawker 900 that had been privately managed,” says Hangar8’s Dryden. “Our chief engineer has over 20 years’ of experience as a technical representative for Hawker and as the fleet manager for NetJet’s Hawker fleet. On the second day we had the aircraft he queried a £50,000 maintenance bill that the owner had been told was not covered by the manufacturer’s warranty. The manufacturer paid it in full after two days. This has covered several years of management fees.”

Safety

When you outsource your aircraft management you are handing over the responsibility for your safety. So it is important that you choose one you trust.

“I think operators are at their best when they combine the structure and training requirements of airlines, whilst still retaining, what I would argue is, a superior cabin service,” says Chris Buchholtz, CEO at Hongkong Jet (previously the CEO of Metrojet). “You can have the best of both worlds. You can have airline standards even though you are a private jet operator. The only way to run an aviation business is to put safety first, and everything else should be a long-term derivative of that dedication to safety.”

As well as training and hiring them, aircraft managers can also help support your pilots.

“I think one thing an aircraft manager can offer pilots is a point of reference and a depth of experience says TWC’s Cutshall. “We have a group of pilots that together have a wealth of knowledge and real-world experience to draw from.”

Peace of mind

It is not something that any aircraft owner wants to think about, but if something does go wrong, the protection to you as an owner is far greater if you have a third party manager.

“In a worst case scenario when your plane has crashed into a building; are you comfortable about standing up in court in front of an aggressive barrister or lawyer and explaining how you were qualified to choose the pilots?” says one lawyer. “You may own lots of successful businesses, but unless you are in aviation, it is much better having a specialist take this risk. Particularly as there is a trend towards criminal liability.”

“There won’t like me saying this,” adds the lawyer. “But if something goes wrong with third party manager, you have someone to sue.”

Corporate Jet Investor Staff
By Corporate Jet Investor Staff October 25, 2012 13:37

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