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As an aircraft owner, there may be opportunities to lease your aircraft on an exclusive basis. This can happen with a Part 135 charter company or to an individual or company who needs temporary access to an aircraft, usually because their aircraft is down for extended maintenance, or they are waiting for their own aircraft delivery from a manufacturer. When evaluating the possibility of entering into an exclusive aircraft lease, there are important factors that must be considered and addressed in the perspective lease.

Lessee Without a doubt, the most important aspect for an owner who is entering into an exclusive lease is the identity of the lessee. Extensive due diligence should be performed on the lessee to make sure they have the financial stability to make the payments under the lease and that they have the right aviation team to manage, operate and maintain the aircraft to the in-depth requirements of the aircraft owner.

Territory Since the aircraft is a movable good, it is important to understand which areas of the world where the lessee will be operating the aircraft. Is the area of use going to be restricted to the continental United States or is the lessee going to have the ability to use the aircraft outside of the United States? A larger geographic area of use has greater risk to the aircraft owner, since it may be difficult to locate and/or repossess an aircraft in the event of a default under the lease.

Insurance Prior to entering into an exclusive lease agreement, the agreement should be sent to the insurance provider to make sure they will provide the required coverage, including listing the lessee as an additional insured. The insurance broker may have valuable input regarding the insurance provisions in the lease and therefore a draft of the lease should be provided to the insurance broker early in the negotiations.

Delivery Conditions and Return Conditions Prior to the start of the lease, it is important to determine the condition of the aircraft so there is a benchmark to reference when the aircraft is returned. The Aircraft should be returned in the same condition it was received, but if there is no baseline condition established, the return conditions may be more difficult. A complete list of the return conditions should be included in the lease, along with the details of how and when the lease return inspection will be performed. The lease should include specific details as to (i) who will do the inspection, (ii) who will pay to move the aircraft to the inspection facility, (iii) who will pay for the cost of the inspection and (iv) who will pay to correct any inspection discrepancies. It is also important to stipulate if the inspection will take place during the last month of the lease or after the lease termination.

Duration The duration of the lease will determine how important other aspects of the lease are, including the return conditions. The shorter the lease, the less risk to the owner of the aircraft.

Tax Considerations Consultation with an aviation tax expert prior to entering into the exclusive lease is a must. Income will be generated by the lease of the aircraft and an understanding of how that income will impact the tax planning done for the aircraft when it was acquired is important. The lease should also identify the party responsible for any taxes that may be payable on the lease payments.

Recordation The lease of the aircraft can be recorded with the FAA registry and with the international registry (if the aircraft is of a certain size). A determination as to whether the lease should be recorded will be necessary and often depends on the duration of the lease, the relationship of the parties, and where the aircraft will be operated.

Use Presumably the owner of the aircraft is entering into the lease of the aircraft to generate revenue. The parties will need to determine if the lessee will pay a monthly lease rate, regardless of the number of hours flown, or an hourly lease rate. If a monthly lease rate is selected, the parties will also have to determine if there is a maximum number of flight hours that can occur under the lease before a higher lease rate applies. If the lease rate is hourly, will there be a minimum amount due to the owner during the term of the lease? Also, it is important to determine if there will be any other use restrictions, such as a minimum hour to cycle ratio to prevent additional wear and tear on the aircraft, no smoking on the aircraft, and/or hangarage guidelines away from the home base. In addition, if the owner of the aircraft financed the purchase of the aircraft prior to entering into the lease, the lender may require the owner to obtain the consent of the lender to the lease arrangement.

Cost Allocation The parties will also have to determine who is responsible for costs and the lease should make it clear how and when such payments are made. Property tax, use tax, landing fees, fuel, maintenance, insurance, annual subscriptions, and monthly maintenance program costs are just a few of the costs that need to be allocated between the parties. The lessee must provide its own crew and pay for the crew, however, the cost allocation for some other items may be negotiable.

Inspection and Audit Rights The owner of the aircraft needs to have the right to audit and inspect the aircraft to make sure the aircraft is being maintained in an acceptable manner. This should not just be a provision in the lease, but an item that the owner of the aircraft actually exercises. How often and the scope of the inspection and audit will depend on two main factors: duration of the lease and the relationship between the parties. Another tool that the owner of the aircraft can use is to require the lessee to provide read-only access to the maintenance records. The pedigree of the aircraft can be dramatically impacted if the aircraft is not maintained, or the records are not accurate. As a part of the audit process, the aircraft owner should periodically have a title search run at the FAA to ensure that no unpermitted liens are placed against the aircraft during the lease.

While allowing an aircraft to be used on an exclusive basis by another party can generate revenue for the aircraft owner, there are risks that should be considered before relinquishing control of the aircraft. A thorough and thoughtful exclusive lease agreement should address all relevant factors to protect the aircraft owner and the aircraft.

Over the past 12 months I have had a significant increase in calls with jet card holders, membership program participants and fractional owners who have received the upsetting news that their paid and contracted private aviation provider is unable to provide services. Recently we have seen Jet It, AeroVanti, and Set Jet cease operations along with George Jet pausing operations. Moreover, I am aware of additional aviation service providers who have not officially ceased operations but are currently not fulfilling their contractual requirements and are not providing any private aviation services.

Not only do the card holders, members and fractional owners suffer service disruptions and financial losses when these programs fail, but the private aviation industry suffers reputational damage. Support service companies such as fuel providers, maintenance repair centers and catering companies are often left unpaid by the failed programs. I have also seen cases where the charter operators who provide supplemental support for the failed programs are left unpaid.

Unfortunately, it can be very difficult to determine the financial wherewithal of a private company that is not subject to public disclosure requirements. As a result, some professionals in the industry have started to request additional financial information, even from privately held companies, prior to entering into an agreement with the aviation service provider. Until there is more financial transparency, there are still a few things that can be done to protect against loss:

1. Prepayment If prepayment for future flights is part of the provider’s business model, is the provider willing to segregate the prepayment amount into a separate account in the name of the customer?
2. Aircraft Are the aircraft in the program owned by the company, leased, or chartered on demand? If owned, title searches can be done at a cost of a little over $100, so you can see if any support service providers have filed liens for lack of payment. If aircraft are leased, will the service provider issue letters from the aircraft owners affirming that lease payments are being made in a timely manner.   If the program uses on demand charter, can the service provider supply a list of who their main charter suppliers are and a recent letter indicating that the charter operator is paid on time for the services it provides.
3. Restrictions Is the program set up to guarantee performance everyday of the year? If so, is that business model sustainable based on the number of customers and size of the guaranteed service area? Said another way, is the program providing guaranteed access to aircraft all over the country on a fleet too small to support such a venture?
4. Variable Costs Is the program set up so that variable costs such as fuel and insurance are passed onto the customer or is the program set up to be all inclusive, regardless of variable costs? If the program is all-inclusive, is that sustainable?
5. Leadership and Longevity Who are the leaders of the company? What is their understanding of private aviation and what is their reputation in the industry? How long has the company been in business? How long has the current leadership been in place? Is the company profitable?
6. Service Contracts For the aircraft being operated by the service provider, are there maintenance programs on the engines, APU, airframe etc. and if so, can the program provider furnish a letter that such programs are current and in good standing?
7. Financial Backing Who is providing financial support to the company and will that provider give a letter confirming any recently published financial support announcements? We have seen instances where providers have claimed to have lined up additional financing only to then learn the financing was never approved and distributed.  Another question to ask is, if the provider owns all of the aircraft and new aircraft are on order, where is the capital coming from to make the payments necessary for the new aircraft orders?
8. Lawsuits Is there any history of or pending litigation between the provider and the provider’s customers or suppliers? If so, those lawsuits may provide valuable information in selecting a provider and the court filings are public information. Will the provider represent that there is no pending litigation with customers or suppliers?
9. Product Selection Does the aircraft type offered make sense? Is the aircraft type selected built to fly the number of hours that the program provider plans to use them for? How often will the aircraft selected have to be down for major inspections and how often do those major inspections occur. Have the operating costs been properly calculated based on the planned utilization of the aircraft? Is there enough infrastructure available for the maintenance that will be needed on the aircraft?
10. Margin Does the offer seem too good to be true? Is it hard to understand how the service provider will make any money? Is the offer significantly lower than any other provider? All of these are red flags that should not be ignored.

Before sending a significant amount of money to any service provider, I recommend considering the ten items above. If you can’t get comfortable with these ten items, then perhaps a different program should be considered. If you do not have time to investigate the offer, then call a consultant or an aviation attorney and have them do the investigation for you. Recently, a client called me on a collections case for a charter broker who had not paid the charter operator. As soon as the client said the name, I knew we were in trouble. I think we will see more programs fail in 2024. Business models that were created at a peak of an aviation business cycle (such as during Covid), often do not have enough margin built into them to survive when we are not at a peak. With a bit of diligence on the part of consumers, failing companies (or those likely to fail) can be avoided.

 

When I began my career in the aviation industry 25 years ago, the “life cycle” of private aviation consumers was straightforward and predictable. They sampled private aircraft travel by chartering, moved into fractional ownership and then, eventually, whole aircraft ownership. Later in the life cycle, when the consumer’s travel decreased, they moved back into fractional ownership and eventually returned full circle to charter. Typically, a consumer would rely on a single provider until that provider could no longer satisfy their requirements.

For a variety of reasons, including the recent pandemic, this conventional life cycle of the private aviation consumer has drastically changed. There has been a revolution in private aviation options and platforms, creating many new alternatives that did not previously exist. This has led to a decrease in brand loyalty by private aviation users. Also, many first-time aircraft buyers have not flown privately for an extended period and move right into whole aircraft ownership. Many private aviation consumers have become much savvier and use a combination of multiple aviation solutions to fulfill their various travel needs.

WHY IS THIS IMPORTANT?

When a private aviation consumer finds herself in any one or more of the following scenarios: considering private aviation for the first time, looking for an alternative option to a current service provider, contemplating whole aircraft ownership, or resolving dissatisfaction with a current service provider, there is no standard answer as to what program or option(s) would be best. There are many factors to consider when selecting one or more private aviation products and the consumer does not often have the time to fully explore the multitude of available options. Here are some key considerations to keep in mind:

1. Number of hours flown per year

2. Destinations

3. Importance placed on the age of the aircraft

4. Length of flight segments

5. Ratio of roundtrip vs. one-way travel

6. Number of passengers

7. Peak time traveler or business week traveler

8. Acceptable service level (i.e. on time performance, working entertainment systems, interior condition and amenities)

9. Amount of time available to manage private travel solutions

10. Financial stability of service providers being considered

Given the complexities of the offerings in today’s aviation market and the limited research time available to most consumers, it is often advisable to hire a consultant who is well connected in the industry. The consultant can help the consumer consider the key factors mentioned above, explore the various options and propose the solutions that make the most sense for the customer’s travel profile, needs and wants. When selecting the consultant, it is important to confirm that they do not receive any referral fees or other types of compensation by recommending one program over another. The consumer must be sure the consultant is making their recommendation based solely upon their best interests.

It seems that almost monthly there is a new aviation program or offering that I am hearing about for the first time or a new permutation on an old program. It is sometimes exhausting to keep up with all the changes that are occurring in the marketplace. However, even if you read all the marketing literature, you can’t truly understand a program, the “enhancements” it offers and the performance of the service provided unless you place multiple users into a specific program and evaluate its success. That is why an experienced consultant can bring tremendous value to a consumer evaluating private aviation solutions. As I always remind my private aviation clients, please don’t simply select the program that your friend uses unless your friend has the exact same travel needs and service level expectations. If you do, you may be setting yourself up for a costly disappointment.

There is no longer a typical life cycle pattern for the consumer of private aviation. Take the time to evaluate all the options available (with the help of a trusted consultant) and chart your own path based on the solutions that best suit your unique travel needs.

Since March of 2020, and the onset of the pandemic, our industry has been extraordinarily busy. For the past three-and-a-half years those of us with careers in private aviation have worked tremendously hard fulfilling the needs of our clients. I recall thinking in December 2020 how I was going to get through the month due to the volume of transactions with end of year close dates. I was not alone. During that time, every aircraft lender, broker, and escrow agent I was working with felt overwhelmed.

Now, fourteen quarters later, the pressures we faced in December 2020 are the new norm. Another 4th quarter has come around and we will all, again, be extremely busy. Yet it does not seem as overwhelming this time around because it has become our new normal. Additionally, I have changed my mindset, and instead of having the 4th quarter blues, I am embracing this year and focusing on how lucky I am to work in private aviation.

This mindset change has been slow in coming. However, as I laid awake at 3:00 AM on November 13 thinking of all of the items I needed to accomplish the next day, my mind wandered to the amazing experience I had the week before at Corporate Jet Investor in Miami. At CJI, 450 people gathered to learn from industry experts who shared their wisdom. The conference attendees could interact informally, and it was in those moments, that I started to reflect how amazing my journey in private aviation has been.

Simply put, I love what I do. Working with clients to give them comfort to execute their plans in private aviation brings me tremendous joy. Further, to work in an environment with so many people that I consider not only colleagues, but true friends is an honor and privilege. Having spent 25 years in the industry, I am fortunate that when I attend events like CJI, NBAA, and NAFA to name a few, I am able to reunite with many of these friends.

So, while I joke (but not really) that I will be in my office non-stop until December 29, 2023, this year I am doing it with a smile on my face. I know that 4th quarter does not last forever and that the boom we have seen over the past few years may also not last forever. But, most importantly, I know that there is no work I would rather be doing. I still love guiding my clients to the right private aviation solution for them. I enjoy writing contracts for the newest idea in private aviation and I honestly am thrilled every time a transaction closes.

As we approach Thanksgiving, I am incredibly thankful to have made a career in private aviation and made so many friends along the way. Thank you to each of you who have trusted me as your attorney, worked on a transaction with me, or sent me referrals over the years. I am truly grateful for the work and the friendships.

As we enter the 4th quarter, I am reminded that the industry (lenders, escrow agents, brokers, insurance agents, trust companies and attorneys) will once again be working to close as many aircraft purchases and sales as possible before the end of the year. As we sprint to the finish of 2023, it is important to remember that some steps take time and should not be skipped.

Visual inspection   Although the photographs and video tours of aircraft are of a better quality than they ever have been before, there is no replacement for entering an aircraft, sitting in the seat of an aircraft or standing in the cabin. If the principal owner is unable to participate in the visual inspection, having a representative physically view the aircraft and confirm the photographs and videos are an accurate depiction of the actual condition of the aircraft is valuable.

Ownership and Operating Structure; Tax Planning   Even before the specific aircraft is found, the ownership and operating structure, including developing a tax plan can be completed. Then, once the aircraft is sourced, the plan can simply be implemented. There is no reason to wait on this if a 2023 acquisition is planned. I recommend this be started immediately.

Confirmation of Maintenance Program Status   Prior to closing, the parties should independently confirm that the maintenance programs are in good standing and paid through the closing date. There can be a significant delay in assigning the maintenance programs if there is an unpaid balance at the time of the sale or a discrepancy in the final reported hours.

Lender Document Review   Most aircraft loans take around 30 days from start to finish. As a result, if the plan is to finance the aircraft at the time of closing it is important to provide all the documentation the lender requires as far in advance as possible. Most of the lender’s required documents must be completed before closing, including an acceptable certificate of insurance. Plan enough time to get all relevant documents in order prior to year-end. Alternatively, consider paying cash and arranging financing after closing.

Title Searches   Title searches should be done when the purchase agreement is signed so that if there are any liens on the aircraft the releases can be drafted and signed well in advance of closing. If the seller has a lender, then a payoff letter from the current lender will also be needed. The timing of obtaining the payoff letter is something that should be coordinated with the lender, escrow agent and seller. The payoff letter is not something that needs to be done at the last minute.

Know Your Customer Requirements   With the current sanctions, it is important to avoid entering into a contract with any party who is on a sanctions list or if the transaction would otherwise be prohibited by law based on, among other items, the source of funds. Performing due diligence on the parties at the start of the transaction will avoid any pitfalls when the deal is scheduled to close.

Pre-Purchase Inspection and Correction of Discrepancies   Inspection slots are already becoming scarce. It is important to determine the scope of the inspection, location of the inspection and duration of the inspection immediately upon the execution of the letter of intent, if not before.

Management Company Selection   This is another item that does not have to wait until the aircraft is located for purchase. You can evaluate the various management companies in advance so that once an aircraft is found you already have a company selected. It may also be possible to have even negotiated the management agreement prior to closing.

Crew Sourcing   The pilot shortage continues and is real. Sourcing permanent crew for an aircraft is something that should be started as early as possible. Many management companies will start the search process as soon as the letter of intent to manage is signed.

Insurance   If a management company is not providing the insurance for the aircraft, then you can obtain insurance proposals from an insurance broker as soon as the letter of intent is signed. There is no reason to wait and having the cost of insurance early in the process will help with budgeting.

Cross-Border Transactions   If the transaction is a cross-border transaction, make sure all parties are clear regarding the legal requirements of each applicable country and realistic about the amount of time the import/export process will take.

While buying and selling an aircraft involves many moving parts, those parts move even faster when the 4th quarter crunch is in effect. When support service providers are busy, checklists and a team leader become imperative. There must be one person leading the team who is checking to make sure all aspects of the transaction are completed prior closing (i.e., assignment of maintenance programs, insurance, funds, lender agreements, management agreements, international registry account set up, etc.).

My last bit of advice concerns setting the closing date. The last business day of 2023 is Friday, December 29th. In the past, the FAA registry has closed early on or in advance of holidays and sometimes due to inclement weather. It is recommended that 2023 closings be completed no later than December 27, 2023, in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closing delays that could occur.

When purchasing an aircraft, it is important to focus not only on acquiring the aircraft but also, developing an operational plan, which includes aircraft management. If the aircraft is going to be used for charter, then a charter management company with a Part 135 certificate must be engaged. Aircraft owners who only plan to use the aircraft under Part 91, have three options for managing aircraft operations: (i) hiring a management company to manage everything, including crew, maintenance, and insurance; (ii) creating their own flight department and handling all management tasks themselves; or (iii) selecting a hybrid option wherein the aircraft owner handles certain management tasks and a management company performs other management tasks.

I recommend that first-time aircraft owners hire a management company for a turn-key solution, at least during the first year of ownership. The owner will learn a great deal during that initial year and, in future years, may elect to handle some or all management functions within its existing organization. These tasks will be much easier to accomplish after experiencing the steep learning curve that takes place over the course of the first year of ownership.

One example of the time-consuming work that comes with aircraft ownership is the paperwork. The volume of paperwork can be overwhelming for a startup flight department. Aviation is a highly regulated industry that is very paper intensive. Many large corporate flight departments have a literal library of manuals, logbooks, invoices, payroll records, training records and handbooks. The person responsible for maintaining the library of documents that comes with aircraft ownership must be an expert in organization and regulatory compliance. Aircraft records that are not properly maintained can have a significant negative impact on the resale value of an aircraft. In addition, monthly reporting is required under any applicable maintenance service programs. In a turn-key aircraft management solution, the aircraft manager handles all this and much more.

In addition to the paperwork, there are a host of other items that are difficult in today’s market including staffing, aircraft maintenance scheduling, training slots, human resource issues and insurance. Daily, aircraft management companies face staff shortage issues, lack of availability at maintenance service centers and, sometimes, scarce pilot training slots. As a result, they have experience in how to accomplish these tasks in a restrictive market.

An aircraft management company can handle every aspect of aircraft operations. Someone once told me, “Do what you do well and hire someone to do the rest.” While the cost of full aircraft management may seem high, it allows the aircraft owner to focus on what they do best. Furthermore, there should be no fear of compliance issues when a reputable management company is engaged.

Selecting the right aircraft management company is key to a successful relationship. Here are some key questions to consider:

1. Does the management company have a similar corporate culture to the owner’s corporate culture?

2. In the case of an individual owner, does the management company have a high level of service standards dedicated to that owner’s priorities?

3. What is the retention rate of the management company?

4. What is their growth plan?

Management companies come in all shapes and sizes. Some may specialize in certain types and/or manufacturers and some may service all aircraft types. Some have plans for expansive growth and others don’t want to grow beyond a certain number of clients. Understanding the company today, and how they plan to evolve, will help determine if there is a good match.

There are many options available for aircraft management, not only in which company you select, but the services you desire. While full aircraft management options, as described above, are still dominant in the marketplace, some aircraft owners want more of a hybrid approach. For example, an aircraft owner may prefer to employ their crew and maintenance technicians directly or they may prefer to have their own insurance policy instead of adding their aircraft to the management company’s fleet policy. Most management companies allow for a selection of their services on an ad hoc basis so a hybrid between full-service management and a stand-alone flight department is possible.

If the aircraft owner is going to start a flight department without the use of any management company services, the first hire is usually the chief pilot. If the chief pilot has a strong management background, the flight department is more likely to be successful. But if the chief pilot is too busy flying the aircraft, there will be a limit on their availability for management tasks. Before staffing, there should be a detailed plan that addresses how many hours the aircraft will be flown, hours of operation, maintenance support plan, alternative lift when the aircraft is unavailable and access to alternative crew when full time crew is unavailable. Just like any other department in a company, the role, vision, and expectations for a flight department should be established prior to staffing. To establish a successful flight department, the department head must have time to lead.

For most first-time aircraft owners, outsourcing some, if not all, of the aircraft management for at least the first year or two, is the most likely recipe for success. After the initial period, the owner will know and better understand aircraft operations and the responsibilities that come with it. At that point, an informed decision can be made as to whether the owner wants to staff a flight department, establish a hybrid operation, or simply continue to do what she does well and outsource the rest.