business aviation advisor march/april 2015

MARCH / APRIL 2015

W W W.BIZ AVADVISOR .COMA Business Aviation Media, Inc. Publication

MAKING SENSE OF YOUR AVIATION DOLLARS

FOR THE SAFETY OF OUR SKIES

THINKING OF ADDING A MAINTENANCE SERVICE PROGRAM?

Flying Skills and the Automated Cockpit

Why 21st Century Pilots Still Need Stick and Rudder Proficiency

Buying or Selling an Aircraft? First Buy an Expert

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The Business of Business AviationThe Information You Need, From Experts You Can Trust

Aircraft owners and charterers now have a resource to help you make the most effective use of your investments in business aviation. Business Aviation Advisor provides the information you need, without technical jargon, on the business of owning and flying

business aircraft – from operations to acquisition, to management and finance.

Business Aviation Advisor: the Business of Business Aviation

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FE ATURE S

06 Flying Skills and the Automated Cockpit Why 21st century pilots still need stick and rudder proficiency by J IM CANNON

08 Who’s In Charge Here? Questions remain on management fee excise taxes by GLENN HEDIGER

10 Buying or Selling an Aircraft? First Buy an Expert The aircraft broker’s #1 job is to prevent you from making a mistake by JOSEPH CARFAGNA , JR .

12 For the Safety of Our Skies NextGen will mean shorter flight times by MARK FRANCETIC

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14 Making Sense of Your Aviation Dollars Financial analysis ensures the right operating option by DAVE WEIL

16 Thinking of Adding a Maintenance Service Program? Base your choice on more than cost by JEFF AGUR

DE PARTME NTS

05 Publisher’s Message A Taxing Situation by GIL WOLIN

18 Washington Report Focus on FAA Reauthorization by DAVID COLLOGAN

For more information callUSA: + 1 877 392 6442EMEA: + 41 58 158 8686ASIA: + 852 2215 3833 www.jetaviation.com

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PErSPECtIvEFlight Services from Jet Aviation

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Ma r c h /A p r i l 2 0 1 5 B U S I N E S S AV I AT I O N A D V I S O R 5

PUBLISHERGil Wolin

[email protected]

CREATIVE DIRECTORRaymond F. Ringston

[email protected]

MANAGING EDITORG.R. Shapiro

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EDITORIAL ASSISTANTMichael B. Murphy

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WASHINGTON EDITORDavid Collogan

[email protected]

CONTRIBUTORSJeff Agur VanAllen

[email protected]

Jim CannonSundog Aviation LLC

[email protected]

Joseph Carfagna, Jr.Leading Edge Aviation Solutions

[email protected]

Mark FranceticDuncan Aviation

[email protected]

Glenn HedigerAviation Financial Consulting

[email protected]

Dave WeilFlight Dept Solutions

[email protected]

BUSINESS MANAGERJoAnn O’Keefe

[email protected]

BUSINESS AVIATION MEDIA, INC.PO Box 5512 • Wayland, MA 01778

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©Copyright 2015 by Business Aviation Media, Inc.

All rights reserved Printed in the USA

Gil Wolin — Publisher [email protected]

There used to be just two ways to use a business aircraft: own and operate one, or charter as required. The former required capital investment, and created a complex tax situation involving asset depreciation as well as operating expenses. The latter was much simpler: pay-as-you-fly.

In 1963, Executive Jet Aviation (EJA) created block charter. This arrangement offered an availability guarantee and volume discount in return for a minimum annual travel commitment, making access to business jets more attractive. Regional jet and turboprop charter op-erators sprung up all over the world. Many, like Jet Aviation, Clay Lacy, and Priester Avi-ation, still are flying today.

Changes in tax laws first prompted industry innovation in 1971 when the U.S. Internal Revenue Service introduced accelerated depreciation: Modified Accelerated Cost Recov-ery System (MACRS) for capital equipment. Now business aircraft in charter service could be depreciated in five years, provided that they were “commercial aircraft” avail-able for outside charter. This opened the door for the first aircraft management compa-nies, which provided fleet discounts on virtually all operating expenses, as well as that key tax advantage: the ability to generate charter revenue as a commercial aircraft.

In 1986, EJA became NetJets, and introduced fractional aircraft ownership to the world. Again, tax advantages played a major role in fractional appeal. Those requiring as few as 50 hours of jet charter travel annually (a one-eighth share), could gain the avail-ability, investment, and depreciation advantages of ownership, with a capital investment proportional to their travel requirement.

Block charter reemerged in 2001, as travelers with limited jet usage and no need for tax advantages sought access to fractional fleets like NetJets, FlexJet, and Flight Op-tions. Enter Marquis Jet, the first jet card, which bought subdivided, repriced, and resold NetJets shares. Other fractional companies followed suit with their own jet cards, as did virtually every major charter company, as program simplicity for end users trumped in-vestment advantages.

That development set the stage for the next jet accessibility innovations – and again, tax and investment concerns provided the market impetus.

Much has been written about the 2008 collapse in aircraft values. Many business air-craft users became unwilling to risk the capital investment. And so innovators like Wheels Up, VistaJet, JetSuite, Executive AirShare, XO Jet, and Jet Linx have responded with new alternative lift programs, providing preferred fleet access and an hourly rate guaranteed for the contract term.

Today, as aircraft values recover, it seems there still is a market for simplicity. While questions remain as to whether aircraft ride-sharing will ever move beyond recreational travel, the ongoing need for business travel will drive industry innovation. Given today’s commercial airline travel, that is a very good thing.

A Taxing Situation

PUBLISHER’S MESSAGE ■

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BY JIM CANNONSundog Aviation LLC / [email protected]

Technological advancements during the past 30 years have equipped today’s business aircraft with unparalleled levels of safety, automation, and crew information. Enhanced sit-

uational awareness (SA), a key safety factor in the modern cock-pit, has increased the crew’s reliance on automation to manage each flight segment. An unanticipated result of this reliance, however, is fewer opportunities for each pilot to manu-ally operate the flight controls: that is, to actu-ally fly the aircraft.

There is no doubt that automation has made flying safer. However, it is important that you are aware of its limits. While automated systems enhance SA, diminish crew fatigue, and make some errors more evident, they often hide others, or make them less noticeable. Today’s younger pilots have been trained to rely on automa-tion; that’s not unreasonable, given that “hand-flying” the aircraft repre-sents as little as 20 minutes in a typical 1.5 hour flight. But those same pilots may lack the

basic decision making and manual flying skills honed by the re-tiring generation of pilots during thousands of hours of hand-fly-ing various aircraft: those skills most needed in times of equipment malfunction or systems failure.

Concerns about pilot training in the age of automation first sur-faced in a 1995 study on the erosion of manual flight skills (Patrick R. Veillette and R. Decker, “Differences in Aircrew Manual Skills and Automated and Conventional Flightdecks,” National Re-

search Council’s Transportation Research Record, April 1995). They were detailed for business aircraft pilots in

Dr. Veillette’s, “Watching and Waning” (Business

and Commercial Aviation, February 2006). A pilot’s ability to deal with an inflight

emergency: most particularly, a me-chanical or systems failure, and his or her reliance on automation versus manual flight skills, is a major chal-lenge for business aviation flight departments.

What does this mean for you?It means that with the ever-increas-ing complexity of today’s high perfor-

mance business aircraft, your pilots should undergo training at least twice a year

Flying Skills and the Automated Cockpit

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Why 21st Century Pilots Still Need Stick and Rudder Proficiency

■ AIRCRAFT SAFETY

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with a reputable company like FlightSafety, CAE, or SIMCOM in order to maintain critical manual flying proficiency.

Business aircraft training should be conducted in an FAA Full Flight Simulator rated Level C or D. Only they possess the full six degrees of freedom of movement (up/down, left/right, and for-ward/backward) required to replicate real world flight situations.

And, to augment and enhance the recurrent training pilots re-ceive, FlightSafety has developed a comprehensive series of ad-vanced training courses. These courses are designed to enable pilots to practice the perishable skill of aviating and to help ensure they are fully prepared for unusual and emergency circumstances that require correct and immediate action in order to safeguard you, your passengers, fellow crew members, and your aircraft.

These “evidence-based” courses draw upon real-time data of how pilots operate aircraft, and then use that information to de-termine whether unrecognized hazardous patterns are occur-ring. They also use lessons learned from accident investigation reports. Based upon relevant data, these courses allow pilots to ex-perience these hazards in the safe environment of a flight simula-tor, and teach them how to respond in an emergency.

Training in a flight simulator is a critical component of any course designed to help pilots maintain the superior stick and rud-der skills required to safely navigate emergency situations, whether from an external event, an instrument or flight director malfunction, or other on-board equipment failure.

In one such course, designed to teach pilots how to make the Go/No-Go Decision (whether to proceed with or to abort the take-off), pilots are subjected to more than 18 scenarios. Within each, an event happens near V1 (the maximum speed at which the flight crew can abort a takeoff and not overrun the runway) on the take-off roll. Their nearly instantaneous decision to abort or to con-tinue is then debriefed in real time by the instructor. Also presented are simulated scenarios requiring the crew to return the aircraft for landing immediately following takeoff. Pilots prac-tice this highly precise emergency return maneuver multiple times to achieve proficiency and gain confidence.

A second FlightSafety course, “Energy Management,” is based on current operational data from studies conducted as to why some pilots continue an unstable approach (in which the aircraft exceeds the maximum approach and landing speeds) instead of executing a “go-around,” (aborting the landing in order to stabilize the aircraft). Pilots are led through eight different descent scenar-ios in various positions on the approach. They learn how to predict accurately whether or not they will be stable for the approach, and how to recognize and react well before the stabilized approach measurement point. In flight departments using the methods taught in this course, the number of unstable approaches has been reduced dramatically.

A third FlightSafety course, the CRM (Crew Resource Manage-ment)/Human Factors LOFT (Line Oriented Flight Training), is based on the single greatest cause of aircraft accidents: human er-ror. Lack of proper human communication and interaction skills, and the inability to use all available resources, are determining

factors in the causes of many aircraft accidents. This course in-cludes a very realistic and operationally based simulator session where the crew embarks on a long-haul flight. As the instructor inserts various problems, the crew must make difficult and com-plex decisions. The heart of the course is the debriefing session, which spends little time on the technical aspect of any errors, but highlights the human factors that caused the technical mistake to occur. Crews generally complete the course acutely aware of two or three human factors needing improvement.

The fourth FlightSafety course, Upset Prevention and Recovery Training, was developed in tandem with Gulfstream Aerospace. It uses a Level D simulator, and is based on preventing in-flight loss of control of the aircraft. Many regulators and other industry leaders have studied why this occurs without identifying a specific pri-mary cause. It could be a lack of aeronautical science knowledge, over-reliance on automation, or just plain inexperience with ex-treme upset conditions. This course is designed to fill those gaps. Academics are followed by simulator sessions designed to have pi-lots experience the full “flight envelope” (the limits of an aircraft’s speed, load, and altitude capabilities). Pilots are then subjected to five different historically accurate scenarios that ended in fatal ac-cidents. This combination teaches pilots how to escape from all five scenarios and execute a safe landing. To do so, FlightSafety created the first simulator for business aviation that replicates the aircraft handling qualities during full aerodynamic stall and flight charac-teristics at very high speeds, based on actual aircraft flight test data. Pilots receive the most advanced upset prevention and recov-ery training available in the type of aircraft they actually fly, with-out the risk involved using an actual aircraft.

Piloting is often described as “hours of boredom punctuated by moments of panic.” As automation assumes more control of rou-tine flight activities, the pilot’s challenge is to maintain the criti-cal skills needed to navigate those moments safely. That makes twice-yearly recurrent training sessions in Level C or D full-flight simulators mandatory to insure your flying safety. BAA

JIM CANNON , Business Aviation Safety Consultant, performs safety audits for ARGUS. Recently retired as IS-BAO Program Director for IBAC, he was Home Depot’s Director of Flight Operations, an NBAA Board member, and holds an MBA.

■ AIRCRAFT SAFETY


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BY GLENN HEDIGERAviation Financial Consulting / [email protected]

Should the 7.5% Federal Excise Tax (FET), which applies to airline tickets and charter, also apply to fees paid to frac-tional aircraft and business aircraft management compa-

nies? That decades-old question was only partially answered by the U.S. District Court in its recent rulings on NetJets and gov-ernment motions.

This January, the Ohio U.S. District Court ruled on motions for summary judgment filed by both fractional operator NetJets and the government regarding FET on those management fees, and whether NetJets and its subsidiary Executive Jet Management (EJM) provide taxable commercial transportation.

The Court held that NetJets does provide taxable transporta-tion. However, a ruling in 1992 that applies only to NetJets (not the entire industry), precludes the IRS from taxing NetJets on management fees and fuel surcharges.

The Court also denied separate motions by EJM and the IRS as to whether EJM was providing taxable transportation to custom-ers who allow EJM to charter their aircraft to third parties, which leaves this issue open to further litigation or settlement. No decision was made as to EJM clients who operate only for their own use (Part 91).

Thus, there are many unanswered questions with the ongoing IRS audits of management companies:

■■ Enrolling your aircraft on a charter certificate allows you to charter your own airplane and thereby allocate trip costs to a specific project at retail charter rates, as well as generate revenue from third party charters when you’re not flying. Does operating as such make taxable the fees charged to you by your charter management company?

■■ What does this ruling mean for fractional companies? Because it applies only to NetJets, other fractional programs may not claim the same protection. In 2004, the IRS ruled on a different fractional program, saying that monthly manage-ment fees were indeed part of taxable transportation, and FET applied. The Court ruled that NetJets was not bound by another fractional program’s ruling.

■■ What does this mean for management companies? In this case, the IRS only assessed FET on arrangements in which EJM both provided traditional management services and used the customer’s aircraft in the EJM Part 135 charter business. No action was filed by the government on Part 91-only managed aircraft. The Court did say that the arrangement must undergo a factual

analysis to determine whether the owner or the charter company has “possession, command, and control” (PCC) of the aircraft.

NetJets argued that EJM has PCC only during a charter flight, while the owner has PCC when the aircraft was flying for the owner. The government argued under a 1974 ruling that the char-ter operator (in this case, EJM) must have PCC for all activity and that the owner’s payments must be for taxable transportation. The Court dismissed both arguments and said that each arrange-ment must be determined by factual analysis of many factors, including:

■■ Ownership of the aircraft■■ Who provides the services that allow the aircraft to be

operational■■ Who provides the crew, and■■ The nature of the transportation service provided by the

charter company.It’s important to note that providing the crew and employing

the crew were not considered to be identical, but that employ-ment of the crew appeared to be paramount. Furthermore, PCC is governed by tax law analysis, and cannot be contracted away.

Since no resolution was provided on aircraft management ar-rangements, owners will continue to be subject to a “facts and cir-cumstances” analysis in IRS audits. However, audits currently are being suspended at the appeals level, as the IRS and Treasury Department work on developing a formal regulation. Industry trade associations, such as the National Business Aviation Asso-ciation and National Air Transportation Association, are actively engaged with the government on your behalf, offering their prac-tical input to the proposed rules. BAA

Who’s In Charge Here?Questions Remain On Management Fee Excise Taxes

GLENN HEDIGER, President of Aviation Financial Consulting, provides tax, accounting, and compliance consulting on personal and entertainment use income and deductions, SEC reporting, GAAP tax accounting, and acquisition/disposition planning.

■ AVIATION LAW

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Buying or Selling an Aircraft? First Buy an Expert

BY JOSEPH CARFAGNA, JR.Leading Edge Aviation Solutions / [email protected]

It’s tempting to consider handling an aircraft purchase or sale on your own, or with help from your aviation manager, chief of maintenance, attorney, or even a business associate. No mat-

ter how skilled these people are at what they do, it’s likely that, if they have handled an aircraft purchase or sale, it’s been only once or perhaps a few times.

Choosing a good experienced aircraft broker who has com-pleted many transactions for clients with diverse travel and in-vestment requirements, and in varying market conditions, is your insurance policy against making mistakes.

Today’s broker is not just someone who matches a buyer with a seller. He or she also:

■■ Interprets the myriad of information you can find on the Internet. A reputable broker follows the market every day, knows and understands the market and its trends, and can decode them on your behalf.

■■ For sellers, professionally photographs your aircraft, creates a color brochure, and employs the latest marketing materials and methods, perhaps including video and social media.

■■ For buyers, conducts an analysis of your aircraft utilization requirements. This will help you to determine appropriate aircraft makes and models for your mission, whether to buy new or used, or to supplement with fractional ownership or jet cards. Useful even when you think you know exactly what you want, this process can identify alternate choices that might better suit your travel and investment requirements — thereby avoiding potentially costly disappointments. Part of this evaluation process is an exit strategy, as future market value and marketability should be part of the purchase equation.

■■ Establishes the proper, realistic price for the aircraft you are selling or purchasing.

■■ Goes onsite to physically examine the aircraft for sale or purchase. He or she will: examine log books, evaluate maintenance status, check service bulletins and airworthi-ness directives, evaluate cosmetics, and survey and enumer-ate equipment.

■■ Negotiates the purchase or sale for you together with your attorney, using market and technical knowledge and transactional experience.

■■ Navigates the details of international transactions: differing regulations, adherence to FAA standards with regard to equipment and modifications, lien searches, de-registration

and registration issues, and import and export requirements.■■ Assists in the pre-purchase inspection, a process which is

adversarial in nature because it involves issues for both the buyer and the seller. It determines: the aircraft’s condition, whether it is as represented, what might need to be fixed, and who is going to pay for any discrepancies found. Some brokers have in-house technical experts who go onsite to insure you are protected from unnecessary expense, that only the scope of agreed-upon inspection is being accomplished, and that no previously unapproved bill is presented. If you are the buyer, you want any discrepancies uncovered within the scope of the inspection. If you are the seller, you don’t want to be held responsible and/or billed for something that should be the buyer’s responsibility within the scope of the agreed-upon inspection.

■■ Orchestrates a successful closing by coordinating with all parties to the transaction such as: attorneys, escrow agent, like-kind exchange agent, tax advisors, aviation manager, chief pilot, maintenance manager, and financing banks. Attempting to acquire or dispose of an aircraft on your own with

the intent of saving the brokerage fee may be a false economy, con-sidering what costly mistakes in both time and money an inexperi-enced buyer or seller can make. Using an experienced, reliable aircraft broker will help avoid missed opportunities, dead-end deals, unnecessarily high legal fees, and problems coping with the other party’s employees or representatives. It also will help you avoid frustration, disappointment, and money left on the table. BAA

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JOSEPH CARFAGNA JR. is president of Leading Edge Aviation Solutions, a full service aircraft brokerage, aircraft acquisition and consulting firm. He also serves on the Associate Member Advisory Council (AMAC) of the National Business Aviation Association (NBAA).

The Aircraft Broker’s #1 Job Is to Prevent You from Making a Mistake

■ AIRCRAFT SALES & ACQUISITION

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OPERATORWINGMAN

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BY MARK FRANCETICDuncan Aviation / [email protected]

Over the years, the ability to track and place aircraft in re-lation to one another while in flight has required Air Traffic Control (ATC) to maintain a large separation be-

tween aircraft. If ATC can’t see where aircraft are in relation to one another, the controllers must leave empty swaths of sky, mean-ing far fewer aircraft using the nation’s airways at any one time.

These constraints placed on ATC result in delays as aircraft await takeoff, and in wasted fuel as they circle airports waiting their turn to land.

The equipment providing the technological backbone of the ATC system has kept our airspace safe for general, military, and commercial aircraft for nearly 80 years. However, the analog equipment for this aging system is based on radar, and reliance on this system results in gaping holes in our ability to track air traf-fic around the United States.

Rural areas have low coverage rates because their traffic vol-ume doesn’t justify the enormous cost of setting up radar sys-tems. Busy airports around the country are well-covered by the current system, but the reach of these old, analog systems is quite limited. Once an aircraft is out of the range of an airport, its move-ment is no longer automatically tracked by ATC surveillance.

In the 1990s, the Federal Aviation Administration (FAA) pro-posed an overhaul of the ATC system to increase the safety and efficiency of our nation’s airspace.

Reversed Separation Vertical Minimum (RVSM) was imple-mented in 2005, giving ATC a more accurate picture of the verti-cal (altitudinal) separation among aircraft. Precisely assessing numerous aircraft requires those aircraft to be equipped with highly accurate altimeters and air-data computers. However, an-alog altimeters cannot accurately measure air density at higher altitudes. Consequently, ATC padded airspace with 5,000-foot or more separation between aircraft.

With the more accurate digital altimeters, ATC today has an exact picture of where aircraft are in relation to one another, min-imizing spacing of airplanes so that separation has dropped to 1,000 feet in some cases.

This opened the door to the Next Generation Air Transporta-tion System (NextGen) initiatives, which shift the ATC infra-structure from analog-based radar to the less expensive digital-based terrestrial and satellite systems. NextGen man-dates are designed to improve communication between ATC and pilots and let ATC and pilots know the exact location of all aircraft sharing the airspace.

The primary component of the FAA mandates, Automatic De-pendent Surveillance-Broadcast (ADS-B), must be operational in

business aircraft that fly above 10,000 feet by January 1, 2020. To meet this mandate, aircraft will need upgraded Global Position-ing System (GPS) sensors and transponders.

ADS-B gives ATC the ability to accurately track the horizontal position of aircraft in order to paint a three-dimensional picture of all aircraft. With this picture, ATC can now put more aircraft into less space, allowing those aircraft to fly more efficiently and land more safely.

The greatest benefits of the NextGen system are safety and time. Ever had a “near miss,” with another aircraft? The required ADS-B equipment dramatically reduces the chances of mid-air collisions, as aircraft can now accurately read the in-flight posi-tion of other proximate aircraft. With its accurate 3D image, ATC is now able to create known safe spaces around all aircraft above 10,000 feet.

The density of traffic won’t be an issue because of the accuracy of the view of the entire sky. This ability to have more aircraft safely occupy less airspace contributes to considerable savings in terms of time, as well. You’ll spend far less time waiting on the ground for clearance as air traffic is more efficiently integrated into traffic routes.

It’s almost like having a whole new highway system in the sky. BAA

MARK FRANCETIC , Duncan Aviation’s regional avionics sales manager, educates the industry about FANS and ADS-B mandates. An aviation professional since 1980, he has a Ferris State University avionics degree and an A&P license.

For the Safety of Our SkiesNextGen Will Mean Shorter Flight Times

■ FLIGHT OPERATIONS

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BY DAVE WEILFlight Dept Solutions / [email protected]

You know the advantages of business aviation: time savings, schedule flexibility, privacy, and security. As you investi-gate your options, you will find an array of alternatives

and economic arrangements: ■■ Purchase your own dedicated aircraft by paying cash and/or

obtaining a loan, or lease an aircraft. If you put the aircraft onto a management company’s charter certificate, you can use the charter revenue to help offset your fixed costs.

■■ Obtain a fractional interest in a specified type of aircraft, either by paying an upfront purchase price, or by entering into a lease for your fractional share. On an ongoing basis, you will pay a monthly management fee plus a per-hour rate for operating costs and fuel surcharge.

■■ Purchase a jet card by paying a lump sum amount entitling you to a set number of flight hours per year in a certain type of aircraft.

■■ Negotiate a block charter deal for a set number of flight hours. Normally, this option involves paying a lump sum amount up front.

■■ Join a “club.” Combining aspects of card and block charter programs, this relatively recent option, offered by Wheels Up and VistaJet, requires a monthly fee but no equity.

■■ Buy ad hoc charter hours on an as-needed basis. Pay on a flight-by-flight basis for the specific aircraft you are chartering. How will you determine which choice is best for you? The need

for guaranteed availability may rule out most charter options. On the other hand, charter enables you to select the most appropri-ate aircraft for each trip, without any capital investment.

Once your need is defined, finance usually becomes the most important factor in the decision process. Even though there are sig-nificant variations in how each option is financed, there is a way to compare them. Discounted cash flow analysis looks at each option on an after-tax cash basis with the time value of money factored in.

The four key factors inherent in this analysis are: ■■ Make the flight hours comparable. If you own an aircraft,

then the costs you incur are based on actual flight hours flown. However, the other options often charge based on various “block time” arrangements. So to compare costs, an adjustment needs to be made so that each choice includes the same number of actual flight hours.

■■ Factor in taxes. Taxes can have a dramatic impact on analyz-ing the various options. Federal Excise Tax and/or sales tax may need to be added onto some payments in charter, fractional and some management company fees (see “Who’s In

Charge Here?,” page 8). And most importantly, cash expenditures may or may not be tax deductible, while depreciation may be wholly, partially, or not deductible (see “Demystifying Aircraft

Costs” BAA January/February 2015, p. 10). For a taxpayer in a combined 40% (or higher) federal and state tax bracket, tax deductibility will be an important factor in your decision.

■■ Account for your asset value exposure. If you purchase an aircraft or a fractional share of an aircraft, your asset is subject to changes in value. Also, consider historical market value trends in your analysis; only in the last year have many aircraft begun to recover value lost in the 2008 financial crisis.

■■ Recognize the time value of money. Using this core principle of finance, your analysis should compare current and future dollars in a manner that accounts for their difference in value.Too often investing in business jet travel becomes an emo-

tional decision: fresh paint and a new interior can cloud rational thinking. Taking the time for proper financial analysis will en-sure that you select the right operating option, in the best aircraft, for your unique transportation requirements. BAA

Making Sense of Your Aviation Dollars Financial Analysis Ensures the Right Operating Option

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DAVE WEIL previously served for 17 years at TAG Aviation USA and its predecessor, Aviation Methods. He helped TAG grow into the largest aircraft management company in the U.S., led its expansion into Asia, and served as President of its subsidiary, AMI Jet Charter. A past Chair of NBAA’s Tax Committee, he holds an MBA from UCLA.

Find Out – Using Asset Insight’s Web-Based, Cost-Effective Services

■ AIRCRAFT MANAGEMENT

Manage your aircraft as you do your other Financial Assets.

How Is Your Aircraft’s Maintenance Condition

Affecting Its Value?

Call (540) 905-4555

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For more information on how the Embry-Riddle Office of Corporate Relations can assist you,contact us at [email protected], 386.226.6688, or visit erau.edu.

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THE INTERSECTION OF EDUCATION AND INDUSTRYBusiness solutions, talent, and new connections begin at Embry-Riddle’s Office of Corporate Relations. Let us take you there.

BY JEFF AGUR VanAllen / [email protected]

Maintenance service programs can play an important role in managing your business jet or turboprop operations, by helping to:

■■ Simplify your operational budget planning, ■■ Provide insulation against extraordinary unscheduled

maintenance event costs, ■■ Help ensure quicker and more efficient response times, and■■ Integrate all elements of your aircraft’s maintenance,

creating just one point of contact.A full range of programs is available for engines, auxiliary

power units, airframe, avionics, and more, from both Original Equipment Manufacturers (OEMs) and third-party providers. Each program is unique and offers varying levels of coverage, which can include or exclude items like shipping, labor, foreign

object damage, paint, interior, tiered pricing, program transfer/exit costs, and more. When comparing programs, be sure that you or your aviation manager understands all the coverages and contractual terms.

As you evaluate maintenance programs, also consider your company culture, and how it aligns with these strategic initiatives:

Smoother Cash Flows — Does your company and its budget-ing process value smoother cash flows? Or can you live with the variability of annual maintenance costs: both scheduled costs and spikes in expenses to accomplish unscheduled repairs? Maintenance programs can help you to stabilize your budget.

Risk Appetite — With a maintenance program, you essentially are shifting the unscheduled maintenance risk to the program provider. Consider the maintenance program like an insurance policy: does your company prefer to self-insure and live with that

Thinking of Adding a Maintenance Service Program?

■ AIRCRAFT MAINTENANCE

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SINCE MAINTENANCE SERVICE PROGRAMS ARE OPTIONAL, YOUR CHOICE SHOULD BE BASED ON MORE THAN JUST ITS COST.

risk? Or does third-party insurance have value? On larger risk items, such as engine overhauls which, with unanticipated re-pairs, can be as much as $2 million each, shifting that risk to the program provider may offer significant value.

Cost of Money — As you pay into a maintenance program, you are depositing funds with the program provider to pay for all fu-ture maintenance events. There is a cost associated with having those funds be in someone else’s bank, and not working for you. The alternative is to self-allocate the funds, keeping them work-ing within your company. However, this takes internal discipline and oversight, as well as the willingness and ability to cover any extraordinary unscheduled events

Financing Structure — Your company’s financing structure will dictate some of your choices with respect to maintenance programs. Specifically, financing leases require that the aircraft be on an engine maintenance program. Because the engines are key to the value of the aircraft, lessors must have a reasonable way to estimate the value of the aircraft lease termination.

Residual Value and Resale — Maintenance programs have a direct, bottom-line impact on residual values. Thus, a major maintenance event due soon on an aircraft you are selling would have no impact on the aircraft’s value, as that cost already is cov-ered by the program. Since most maintenance programs are transferable, they are a factor when you sell your aircraft. An

aircraft on a maintenance program carries a much lower risk for unscheduled or scheduled maintenance costs for the prospective buyer, who then would assume the hourly cost of the maintenance program after purchase.

Before you consider your next maintenance program:■■ Meet with your finance and treasury departments to examine

your company’s sensitivity to smoother cash flows. ■■ Explore costs of capital and return on investment rates to

determine the total program value and costs.■■ Solicit input from your risk management group as you

consider risk tolerance and risk mitigation.■■ Contact operators of aircraft similar to yours in type and size.

Ask about both the benefits they receive as well as any frustrations with their maintenance programs.Taking these steps can help you determine your best and most

effective maintenance strategy. BAA

JEFF AGUR, CEO of VanAllen, handles fleet planning and aircraft acquisition projects. This year, he supported the detailed planning and acquisition of more than half a billion dollars in jets, turboprops, helicopters, and fractional shares.


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BY DAVID [email protected]

One of the highest priorities for the business aviation com-munity this year is getting Congress to pass FAA reau-thorization legislation before the agency’s current

authorization expires on September 30.Reauthorization years are always a big deal for the agencies af-

fected, and for the constituencies those agencies regulate. That’s because reauthorization bills provide a to-do list for a federal agency and a road map to follow for the next several years.

Once a reauthorization bill is adopted and signed into law, both agency officials and stakeholders have a blueprint that permits them to assess staffing needs, equipment and training invest-ments, and make other long-term capital decisions.

Both the FAA and the aviation community are extra anxious to make sure the process goes smoothly this time around because they are still haunted by the train wreck that ensued several years ago when expiration of the FAA’s operating authority was loom-ing. The deep political divide then between Democrats and Re-publicans on a wide range of issues meant potential gridlock on even routine legislation.

In the case of the FAA, a total of 23 different legislative exten-sions — ranging from a few days to several months — were re-quired before a longer-term bill finally was enacted. Lowlights of that tortuous process included: the partial shutdown of the FAA during August 2011 when Congress was unable to reach timely agreement on a reauthorization extension, and massive ATC de-lays and flight cancellations in April 2012 when the congressional budget sequester caused air traffic controllers to be furloughed.

The widespread frustration generated by the painful start-and-stop process back then bodes well for timely renewal of FAA reauthorization this year because no one wants to go through a mess like that again.

Pete Bunce, President and CEO of the General Aviation Manu-facturers Association (GAMA), is one of those expressing opti-mism. Addressing GAMA’s annual “State of the Industry” press conference in February, Bunce said he believes the aviation com-munity “is in a different place than we were” during the last reau-thorization process.

He complimented Rep. Bill Shuster (R-PA), and Sen. John Thune (R-SD), the chairmen of the House Transportation and In-frastructure Committee, and the Senate Committee on Com-merce, Science, & Transportation, for their early outreach to aviation stakeholders in an effort to build consensus and momen-tum for timely passage of multi-year FAA reauthorization

legislation. Shuster’s committee held an initial reauthorization hearing on November 18 — just two weeks after the election.

Bunce acknowledged there are “some contentious issues be-tween airports and the airlines,” primarily over the level of pas-senger facility charges that airports can collect from airline passengers, and fees imposed on the carriers to support airport infrastructure improvements.

But he noted the “very firm commitment” by Shuster and Thune, and the leadership of the aviation subcommittees in both houses, to work through such issues and get a bill passed this year.

That’s good news. FAA executives charged with running the world’s busiest air traffic control system should not have to lose sleep worrying about furloughing controllers and safety inspec-tors because of a dysfunctional legislative branch.

In addition to its responsibility to keep the current ATC system operating safely 24/7/365, the FAA is at a critical juncture in im-plementing the NextGen air traffic control system of the future. By 2020 — just five years away — nearly 200,000 U.S.-registered aircraft must be equipped with new Automatic Dependent Sur-veillance-Broadcast (ADS-B) technology so they can communi-cate automatically with one another. At the end of 2014, slightly more than 9,000 aircraft had ADS-B installed.

Overseeing, inspecting, and certificating the installation of ADS-B technology in more than 190,000 aircraft in just five years — along with managing all the other elements of NextGen — is a daunting task for the FAA. It will be an impossible one unless Congress eliminates the legislative roadblocks. BAA

Focus on FAAReauthorization

DAVID COLLOGAN has covered aviation in Washington, DC for more than four decades. This award-wining journalist is known as one of the most knowledgeable, balanced, wary, and trusted journalists in the aviation community.

Timely Congressional Action Critical For NextGen

■ WASHINGTON REPORT

MAX SPEED: MACH 0.88MAX RANGE: 4,350 NM

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Range shown is based on NBAA IFR theoretical range at Mach 0.80 with eight passengers. Actual range will be affected by ATC routing, operating speed, weather, outfitting options and other factors.

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Go to aviationbusinessindex.com to find accurate, real-time, updated information on aircraft for sale worldwide.

business aviation advisor march/april 2015

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