Smart Ways to Defend Your Jet

Is your aircraft starting to look less like an asset and more of a burden accountants are vying to claim? These simple cost-cutting strategies will improve your financial statements while helping you keep your jet. After close to a year of murky financial forecasts, slipping revenues and no hint of a full economic recovery in sight, it’s all too easy for corporate aircraft owners to raise the white flag. Every other entrepreneur or firm is cutting salaries, scraping bonuses, axing staff, relocating to lower-cost cities and selling their assets. The media has also cast a spotlight on major corporations for continuing to fly top executives around the world in private jets despite the downturn, forcing the latter to strike off their fleet and cancel impending deliveries. But whether or not a complete surrender of a corporation’s aircraft operations will boost its financial health has been much debated. Mr Chris Buchholz, CEO of Metrojet, points out, “Business jets are primarily used as a business tool to enhance efficiency and shareholder value by greatly reducing the point-topoint travelling time of business leaders and senior executives for whom time is very valuable. Business jets are also used to conduct productive meetings in-flight thanks to club seating on board and the confidential environment. Once the time value of the travelling days saved by business jets is factored into the equation, very often business jet travel is more cost effective than airline travel. That being said, there are many ways to be even more cost effective in the current economic climate, depending on the needs of business jet users.” JET asked industry experts for their top recommendations to help corporate aircraft owners make significant savings in the flight department while continuing to enjoy the flexibility, convenience, time savings, security and privacy that made them jet owners in the first place… RATIONALISE YOUR FLEET All operators interviewed agree that rationalising your fleet size and utilisation on different flying occasions is perhaps the most effective way to consistently cut costs in the long run. For shorter trips and trips with fewer executives on board, for instance, business jet users can opt for smaller models with lower hourly costs if it meets their operational requirements in terms of range and number of seats. SPLIT THE BILL Since you are not in this downturn alone, it’s an idea to team up with other operators also under pressure to shave costs. Mr Buchholz says, “Aircraft owners who are not using their aircraft very actively can consider selling a portion of their aircraft to other business jet owners thereby enjoying the benefits of shared ownership. The tradeoff is that each co-owner has less access to the aircraft than a full outright owner, but the fixed costs associated with aircraft ownership including crew salaries and recurrent training, hangar parking and aircraft insurance are shared.” There are a number of ways to share costs including managed charter, joint ownership and interchange agreements. Having been practised for more than 20 years, fractional ownership operations are a proven effective method to fly a plane like you own it, without the huge financial demands of ownership, and it continues to be a popular sharing method today. Embraer’s HQ says, “Charter and fractional ownership models can help control costs if total utilisation is not sufficient to justify full ownership or if companies have a more seasonal aircraft utilisation pattern.” The more you fly annually, however, the more sense it makes to have your own jet. For such owners, it may be better to retain full ownership and put their aircraft on their operator’s Air Operator’s Certificate instead. “This way, the aircraft management company can actively charter out the aircraft when the owner is not using it – the aircraft is not released for charter without prior approval of the owner on a trip per trip basis, so the owner retains a high degree of aircraft schedule control while enjoying the charter revenues that reduce the costs of aircraft ownership,” says Mr Buchholz. REFINANCE Although we find ourselves in a financial downturn, the values of many corporate jets are at an all-time high. This presents the rare opportunity to refinance or engage in a sale-leaseback of the aircraft, and even take cash out to support future operations. According to GE Capital Solutions, refinancings help jet owners uncover hidden equity in their assets, and allow them to improve cash and lower financing costs. In addition, the current aircraft value may exceed your remaining debt, thus allowing you to increase the amount you borrow. In a sale-leaseback, a business sells its aircraft then immediately leases it, maintaining their right to use the asset. This is ideal for owners who believe that equity tied up in aircraft can be better utilised elsewhere. The cash proceeds can be used to pay down debt, enhance liquidity, invest in other assets or prepare for potential acquisitions. Sale-leasebacks can also be used as a tax-planning tool for taxpayers who find that ownership creates an overabundance of tax deductions, such as depreciation from ownership of assets. Embraer’s HQ notes that with any financing option, there will be attached costs: “Their feasibility will depend on the individual conditions of the borrower/lessee and financing institution. Accounting rules will also impact the effectiveness of such transactions. By analysing the overall cash position and company strategy, one can indicate the advantages of a refinancing or a sale and lease back option.” So consult your tax and financial advisers when exploring new financing options. FILL A GAP If you have business aircraft that are not in use, the easiest way to cut ownership costs is to lease them out to buyers waiting for delivery of new aircraft. This involves full surrender of the aircraft for the agreed period, which can range from one to three years. You could do this with a short-term dry lease (lease without crew) or with a sale subject to an option or obligation to buy back the aircraft at a future date. There are a number of leasing options to consider, each with its own advantages for the lessor such as residual risk and tax depreciation, as well as disadvantages. PUT OTHERS BEFORE YOURSELF If you are waiting for delivery of a new aircraft, a good management company can help you buy time or escape the upcoming burden of progress payments and ultimate purchase in several ways. Mr Buchholz says, “There sometimes are limited opportunities for an owner’s aircraft to initially be used by the manufacturer as a demo aircraft from time to time. Owners can explore such options with their aircraft manufacturer. Another approach is to discuss with the aircraft manufacturer to see if the owner can take a later serial number, or sometimes an owner may wish to swap his commitment on a purchased aircraft towards a different aircraft type made by that manufacturer with a later delivery date.” The idea is to work with the aircraft manufacturer to achieve a win-win outcome. Perhaps another buyer is eager to obtain an earlier delivery date, allowing yours to be pushed back, or you could take delivery of the aircraft as scheduled then briefly lease it back to the manufacturer as a demo model so you earn on the lease and defer on ownership costs. Mr Jerome Desmazures, Director of Sales, Dassault Falcon Jet, says, “On a case by case basis, Dassault Falcon Jet is using customers’ aircraft at a rate defined during contract negotiation or according to agreement with management companies.” WORK YOUR NEGOTIATION SKILLS Customer loyalty is a powerful tool when negotiating lower prices with your suppliers, vendors and service providers. If your calculations show that a 10% drop in costs could save your aircraft operations from the bean counters, it’s worth asking for that level of price reduction. And there’s no better time to do it — your FBO, management company, insurance company, hangar lessor and flight crew will much rather preserve their positions at a slight discount instead of seeing your flight operations dissolve altogether. FLY SMARTER Making a few small tweaks to your corporate aircraft operations and utilisation patterns can collectively represent significant savings. For starters, Mr Desmazures suggests switching between business jet and airlines as the situation call for it: "Jet owners can also lower their direct costs by parking theiraircraft in less popular airports, for instance, Shenzhen versus Hong Kong. And they can take advantage of the price discount on services that an established management company can get thanks to its volume.” Embraer’s HQ adds, “If individuals and companies accept making one or two stops more than they were used to, the cost equation can be very satisfying.” Installing winglets on your aircraft can be particularly costsaving for larger aircraft too, since they effectively cut fuel burn. Mr Desmazures says, “It represents a fuel saving of 5% to 10%, so it increases your flight capability and flexibility. Therefore, it is a must to have even though it represents a cost to install.” Today quite a few business jets are already manufactured with winglets as standards. In fact, because of the proven cost savings and extra range possible with winglets, Dassault Falcon Jet has decided to switch all its production of F2000EX and F900EX to the winglet version, and it is offering an upgrade kit for the F2000 family. Meanwhile, Embraer’s HQ advises taking a more analytical approach to winglets, “Over time, performance improvements can advocate for winglet installation in specific aircraft models, but this is not a rule. Benefits are linked also to actual mission profile. Specific analysis must be run in order to fully access the consequences of winglet adoption.” TAKE ADVANTAGE OF FUEL DISCOUNT OR LOYALTY PROGRAMMES Since jet fuel, after labour costs, is the biggest operating cost expense for corporate aircraft, every extra fuel-cutting measure can translate into significant savings. While jet owners have automatically benefited from the drop in fuel prices, there’s more savings to be had in this department if you look closely. Mr Desmazures advises owners to acquire fuel-efficient airplanes adding that “fuel expenses represent 30% of the yearly direct operating cost”. You can also cut fuel costs and consumption by flying at offpeak hours (it means less waiting on ramps and taxiways, and increases the likelihood that air traffic control will give pilots more direct enrouting), and choosing less popular airports, either as a destination or interim stop, for fuel purchases. Fuel card and discount programmes should not be ignored – apart from touting discounts that grow with the volume purchased, many FBO chains and fuel brands are also offering various credits which jet owners can benefit from by simply pledging their loyalty. The amount of savings generated by one or a combination of these strategies will vary with your operation, but at a minimum it will provide short-term relief and buy you time until the turbulence rides over.