The ins and outs of business jets

Business aviation is experiencing a period of unprecedented growth. The number of new business jet deliveries in 2006 was double that of 10 years ago and 50% more than in 2004. Leading aviation forecasters predict deliveries of over 11,000 new business aircraft valued at over $150 billion in the next decade.

The following article will discuss the factors driving increased demand for business aircraft, the benefits and challenges associated with purchasing a plane for business and present several options for those who don’t require a business aircraft full time.

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 and you need your team back in Boston the next morning to present the findings of your trip. What are your travel options?

There are no commercial nonstop flights scheduled between Boston to Columbus. The best available one-stop leaves at 6 a.m. and arrives at 9:50 a.m., not early enough 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.

No more lines

Consider the alternatives that business aviation offers. You are no longer limited by the airlines’ schedules. You can start and end your trip when you want (with more than 5,000 airports available for business aviation), reduce travel time and increase productive business time.

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.

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. And 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.

An aircraft purchased for $10 million could generate depreciation benefits of up to $5.2 million by the end of the second year of ownership.”

Edward H. Kammerer, Partner, Edwards Angell Palmer & Dodge

Granted, flying on the airlines is probably much less expensive. But when you factor in time out of the office, the ability to work and meet on the corporate aircraft, and lower expenses for meals and lodging, the cost differential narrows. 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, productivity and quality 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.

The availability of tax benefits can also narrow the gap between the cost of owning an aircraft and flying commercially. To the extent that a company aircraft is used in a trade or business or for the production of income, the Service 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, an aircraft owner can depreciate over one-half of the cost of his or her aircraft in the first two years of ownership. For example, an aircraft purchased for $10 million could generate depreciation benefits of up to $5.2 million by the end of the second year of ownership.

Buy or lease?

For those operators who cannot benefit from large depreciation deductions, leasing an aircraft may 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 his or her 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.

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 defray the cost of ownership.

If you don’t need a plane full time, you might consider buying a fractional interest in a business aircraft. 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 50-hour increments and in a full range of aircraft sizes, types and prices. The fractional program manager provides all aviation-related management services.

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.”

Edward H. Kammerer, Partner, Edwards Angell Palmer & Dodge

Jet cards

Another option is a jet card program, which enables you to purchase blocks of aircraft time to be used at your discretion. There is no commitment of capital to the program, since 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.

Like a jet card, charter operators allow users to buy 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.

Assuming that your firm decides to use business aviation, many important decisions remain. Should you charter on an as-needed basis, purchase your own aircraft, enter into a fractional interest program or purchase hours using a jet card? Which aircraft model best fulfills your firm’s mission profile in the most efficient manner? Fortunately, there are many qualified aviation consultants that can help you determine the type of operations and aircraft that are right for your firm. Many of these consultants can assist you 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 business aircraft 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 Flight Department 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.

Attorney Edward H. Kammerer is a Partner with the 520-attorney national law firm of Edwards Angell Palmer & Dodge. He focuses in the area of corporate aircraft transactions and may be reached at: ekammerer@eapdlaw.com.