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Special Report: Increasing Business Aircraft Utilization

Oct. 24, 2016

AS NBAA MEMBERS KNOW, business aircraft are incredible tools that help you and your company gain an edge in managing everyday business needs. Your customers, employees and business associates all benefit from the flexibility you have in meeting with them on a moment’s notice, and from your commitment to doing business in person.

Individuals and companies that implement an effective aircraft-utilization strategy for those times when the aircraft otherwise would be sitting idle can better manage both their fixed and variable operating expenses, as well as maximize allowable tax benefits.

The trouble is, that’s not always easy to do, especially if you’re using your aircraft for less than 400 hours per year and generally fly only yourself or one other company person on business trips – especially on international missions. However, there are numerous options available to increase aircraft utilization that enable you or your company to have access to the aircraft when needed.

What follows is a general overview of some of the most effective ways of increasing business aircraft utilization. Each has its pros and cons, and all require in-depth study and even discussions with a professional aviation consultant to help you determine which one is best for your needs.

As always, there are numerous – and often conflicting – FAA, IRS and, for public companies, Securities and Exchange Commission (SEC) regulations and guidelines to consider. So take your time and be thorough in your evaluation before deciding on the utilization program that’s best for you.

IDENTIFYING NEW OPPORTUNITIES

If you own an aircraft, the experts say you should have a business usage plan or policy in place that governs how your aircraft is to be used for business-related travel. NBAA’s Business Aircraft Use Policy Guide offers detailed information designed to help companies establish sound guidelines for using the company aircraft.

For those thinking about purchasing an aircraft, the first thing you should do is decide how you plan to use the plane and estimate the number of hours you’ll be flying it for business purposes. Also, factor in any personal use, but beware of the potential tax consequences of personal use. NBAA’s Personal Use of Business Aircraft Handbook provides detailed information on the rules surrounding non-business use of aircraft.

Included in any aircraft acquisition analysis should be a review of additional aircraft utilization options if the aircraft might be flown fewer hours in a given year.

“My personal philosophy is, if you’re on the borderline of purchasing or not purchasing you’re either going to buy a fractional share or purchase your own aircraft – then considering how to generate some additional utilization can help push you in one direction or another,” said Ryan DeMoor, senior financial analyst for aviation with Amway, a consumer products maker based in Grand Rapids, MI.

If you’re using your aircraft consistently and often flying longer trips, then you’re probably fully using the aircraft. “If the owner of a business aircraft is using it for more than 400 hours per year, then there’s probably no excess time,” said Nel Stubbs, vice president and corporate secretary of Conklin & de Decker, an aviation consulting and tax planning firm with offices in Prescott, AZ, Orleans, MA, and Arlington, TX.

If you’re flying fewer hours than that each year, then the first step in deciding on how to increase utilization is to examine how your aircraft currently is being used. Is it available to just one or a few people in the company?

Assuming a company owns the aircraft and it is only being used by a small group of employees, one way to increase utilization is to consider how other company divisions or employees could conduct business with the aircraft, according to Stubbs.

That’s a fairly straightforward process for a company that owns the airplane and those using it are employees of that company. But if the aircraft is being shared with employees of subsidiary businesses, then increasing utilization gets a bit trickier.

SHARING WITHIN YOUR COMPANY

There are different types of subsidiary companies, said Stubbs. “We have an affiliated group, and we also have what I term ‘brother-sister’ companies.”

Affiliated companies are those where the parent company is a C-corporation, which owns 80 percent or more of each subsidiary business and files a consolidated tax return.

“So flying within the affiliated group is fine and does not trigger any federal excise tax (FET) issues,” explained Stubbs. “You fly in that affiliated group, and the parent company has operational control. It can fly for all the subsidiary companies that make up that consolidated group.”

However, sharing an aircraft among so-called brother-sister companies is a bit more complicated.

For example, if an entrepreneur owns 20 entities, and all of those entities need to utilize the aircraft and share costs, “it’s a difficult situation because you’re limited to a few structures,” said Christopher Younger, an attorney specializing in business aviation and tax law with GKG Law P.C., in Washington, DC. “You can put the plane on a [Part 135] charter certificate and have the other entities charter the plane. The downside is you have those other entities incurring a 7.5 percent FET, and you’re limited in where you can fly the plane, and what hours.”

For flights operated under Part 135, there also are other limits covering crew duty time and other factors.

PART 135 PROS AND PITFALLS

Adding your aircraft to an FAR Part 135 certificate held by a management company is an effective way of increasing utilization and offsetting some costs by generating charter revenue. But there are numerous considerations and pitfalls, advise the experts.

Air charter is one of the more popular methods of increasing utilization, and for some good reasons. An aircraft owner usually receives 85 percent of the base charter rate, while the certificate holder receives the remaining 15 percent. The aircraft owner is responsible for all the aircraft’s charter expenses, including fuel and maintenance. Minus those variable expenses, any remaining revenue helps defray the fixed costs, which helps the owner offset their total ownership costs.

Of course, the owner still has full access to their aircraft, either under Part 91 or by chartering from the Part 135 certificate holder, which maintains operational control and liability for all charter flights.

Still, the experts warn of potential pitfalls to consider. Running a Part 135 operation is complex and requires significant expertise at all levels of the company.

Clay Healey, owner of AIC Title Service in Oklahoma City, OK, advises careful consideration when selecting a Part 135 operator. The pilot who is attempting to run many aspects of a Part 135 operation may not be equipped to handle the complexities of aircraft management, noted Healey. That person “likely is not running a 135 operation the way it should be run,” he said. “It’s kind of like having a dentist do a facelift.”

Take your time and be thorough in your evaluation before deciding on the utilization program that’s best for you.

Healey, who also is a pilot and has owned and operated numerous planes, flies two aircraft that are used for business. He flies them both domestically and internationally for a total of about 300 hours per year.

Stubbs also warns that rarely does chartering cover all the owner’s costs, let alone generate a profit. “Typically, you’re not going to make significant money, and you’re going to put more hours on the aircraft,” she said. “And by putting more hours on that aircraft, it’s going to come up on its maintenance quicker.”

DRY-LEASE CONSIDERATIONS

Another popular option is the dry lease, under which an aircraft owner provides the aircraft, and the lessee supplies the flight crew. The lessee is in operational control of the flights and fully liable for the operation.

This contrasts with a wet lease, where the owner/lessor provides both the aircraft and the crew and retains operational control of the flight. The lessor also typically must hold an operating certificate (usually under FAR Part 135) because the FAA considers the entity to be providing air transportation.

“Dry leasing is an option,” said Younger. “You still can use the aircraft. You have a third party that is not an owner that pays you rent.”

Again, the lessee has to provide the crew. “So if you have crew on your payroll and you want the crew to operate the aircraft at all times, that will be problematic,” he said.

For an owner’s crew to continue to fly the aircraft under a dry lease, the crew would have to form their own company and act as independent contractors. “I have arranged this for a few clients,” Younger said.

Nicholas Correnti, owner of Nicholas Air, said an increase in aircraft ownership over the last few years has raised the popularity of his company’s dry-lease pool. Nicholas Air acts as the management services provider for aircraft owners under this program.

“The big key to our management program is our dry-lease pool, where we lease the aircraft back from the owner,” said Correnti. “To do that, you have to be in our managed pool, and then we provide management services on behalf of the owner.”

The owner still is able to use the aircraft, but the number of hours per year the aircraft owner flies the plane impacts how many hours it is available for dry leasing.

“We have some [owners] that are in our pool that we lease back probably only 50 to 60 hours a year,” Correnti said. “We have some we lease 500 hours a year.”

TIME SHARING, INTERCHANGE

Time-sharing and interchange agreements are other options. The former is an arrangement where an aircraft owner leases the aircraft, including flight crew, to another entity. According to NBAA’s Time-Sharing Agreement Resources, no charge is made for the flights conducted under the arrangement, other than those specified by the FAA.

In a time-sharing agreement, an owner can ask for limited reimbursement for a flight, including certain out-of-pocket expenses associated with the flight, which can be an amount equal to twice the cost of fuel used on the trip. Additional requirements can be found on NBAA’s time-sharing agreements resource page (see below).

“Time sharing is an interesting one,” when seeking to share use of the aircraft with family or a small group of employees, said Stubbs.

“Most of the time, in my experience, a time share usually will cover somewhere between 70 to 85 percent of your costs, so you will not be made whole,” said DeMoor.

Under an interchange agreement, an aircraft owner can exchange or “interchange” an aircraft with one owned by another party. The idea is to maximize use of both aircraft, and it also enables the two parties involved to use an aircraft that is more appropriate for a given trip. Under an interchange agreement, you trade one hour for one hour.

There are occasions when this arrangement works well, say the experts. “Where you have two companies that are on the same airfield and want to trade each other’s aircraft, because one has a smaller aircraft and one has a bigger aircraft, that could make sense,” said DeMoor.

However, a problem arises if one party sells their aircraft, because there is no way to recover hours. If one company has used up more hours than the other in the interchange agreement, which is typical, and that company then sells its aircraft, the company owed the hours simply has no recourse.

“You can’t bill for the unused hours,” said DeMoor, as the interchange has to be on an hour-for-hour basis.

THE FINAL ANALYSIS

No matter which option an owner chooses to increase utilization, one thing is paramount – consult with the experts and utilize NBAA’s resources.

“Have a great accountant, a great tax lawyer and a great aircraft lawyer,” said DeMoor. “When it comes to the FAA, the IRS and the SEC, there are so many ‘gotchas’ along the way.”

FOR MORE INFORMATION

Visit the following NBAA resources online:

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This article originally appeared in the September/October 2016 issue of Business Aviation Insider. Download the magazine app for iOS and Android tablets and smartphones.