Very few business jet owners want the hassle of managing their own aircraft. The complexities involved are such that simply leaving it to the pilot is not going to get you very far.
Moreover, many owners, but by no means all, feel that this new, expensive asset of theirs needs to be made to do at least a bit to earn its keep, which means that the owner has to decide how little or how hard they want to work their jet as far as the charter market is concerned. If they are going to do any charter at all, then the only realistic option is to put the aircraft into the hands of an experienced aircraft management operation that also has a strong pedigree as a charter operator.
Mike Moore, VP of Aircraft Management at Meridian points out that owners differ enormously in their preferences and expectations when it comes to deciding whether to charter and how much charter business they want. There is an additional wrinkle in the decision process because some US states do not require sales tax on business jets if they are going to be run on a Part 135 certificate. So Moore is accustomed to having new owners wanting to put their aircraft on Meridian’s Part 135 certificate from the moment of purchase, even if they do not want to charter the aircraft commercially. They may well decide to only charter the aircraft occasionally to people they either know well themselves, or who come highly recommended by friends and acquaintances.
“We find that more and more of our clients are putting their aircraft on our Part 135, but are not doing any retail, or ‘third party’, chartering at all. They want the Part 135 certification purely for tax purposes,” he notes. When owners want to go this route rather than certifying the aircraft under Part 91, they need to be aware that the regulations governing the operation of aircraft under Part 135 are considerably stricter than under Part 91. There are stricter regulations on pilot rest periods for example, and on landing field clearance distances. “Flying under Part 135 you have to be able to land within 60% of the available runway, plus adhere to a number of other rules that do not apply to Part 91. However, not paying sales tax on a $23 million jet creates a good deal of incentive,” Moore says.
Because of the complexities involved, prospective owners need to take detailed tax advice before making their decision as to which certification process they are going to go for. Meridian can play an important role in this process by setting out in a highly transparent way what the fixed and direct operating costs will be under either approach. In fact one of the keys to building an enduring, long term relationship with owners, Moore says, is transparency. “For many clients to charter or not to charter is a difficult decision. Some will say if you fly my aircraft for 200 charter hours a year, that will only make me a couple of hundred thousand dollars and will be bound to generate some inconvenience, so why do it? Others want to work the plane at least hard enough to pay the salary of one of the pilots and something of the hangarage costs,” he notes.
Owners also vary widely in their attitude to the jet they have just purchased. “We see both ends of the spectrum and everything in between. At the one end you have the guy who is hugely excited, can’t wait to take delivery and is tremendously proud of their aircraft. At the other is the person who buys a $40 million aircraft and walks right past it without a flicker of interest. For them the aircraft is a pure business tool, a convenient and fast way of getting from A to B, and that’s the whole story. As an aircraft it doesn’t attract or interest them much, if at all,” he observes.
Aircraft management is a highly demanding business and the quality of the management company that a new owner chooses can have a massive impact on the ownership experience “In our world there are top tier management companies who really can manage aircraft to the highest standards. I would put Meridian forward as one such, along with the likes of Jet Aviation and the NetJets company, EJM. But we also have the middle tier companies, who do not manage enough aircraft to get any economies of scale going on fuel and suchlike, and who have no depth of experience in the organisation. We have been going since 1946, so we have a great deal of talent in the company,” he comments.
Maintenance is a vital part of aircraft management and it is an area where the management company can really save the owner significant sums. “I still hear people say that all management companies are the same and the only differentiator is price. That is a staggering proposition when you think that what they are contemplating is turning over a $20 million asset to the lowest bidder. You have to look at the company before you look at the price. You need to do your due diligence. Ask for recommendations from people who really know the industry, and follow up references. You want to say to the prospective management company: “Give me the names of five of your clients that I can go and talk to,” Moore advises. If you find that one of the companies bidding for your business is on a cash only basis with their fuel supplier, walk away. Above all, go and inspect the facilities and see if the buildings are in good state or look run down or dilapidated. Look at staff turnover. “Our average staff tenure here at Meridian is between ten and twenty years,” Moore says.
Owners also need to be very clear what exactly it is that they are getting for their management fee. There are a huge number of variables with every purchase, particularly with a pre-owned aircraft, and the figures change depending on the number of hours the aircraft is going to be flown. “What I tell prospective clients is: I can give you a general budget for a particular aircraft model, but once you identify the precise aircraft you want to buy, we will look at specific factors, such as where that aircraft sits in its life cycle, what the state of the engines are, what maintenance schedule it is on, which inspections are coming up and so on. If the aircraft is coming up to a $250,000 service, that is going to impact dramatically on the cost per hour, and can push your direct operating costs from $3,000 an hour to $6,000 an hour. I can tell an owner what a captain is going to cost in today’s market, but landing fees, crew overnight fees, and fuel prices are variables that change depending on where you are flying to,” he notes.
“The hardest thing to unravel in this industry is the lies that get told to owners and prospective owners. I take phone calls from owners who say that they have been talking to an aircraft management company who tell them that they can fly their Gulfstream GIV for 600 charter hours with two pilots. I have to tell them, no, you can’t. If you are going to do 600 hours you need at least three pilots and possibly four, depending on your schedule. That’s the way the regulations work. By the time you hire a third pilot you are not breaking even, so why are you doing it? Moreover, if you come to me with an Embraer Legacy 600 and two pilots and you want a large number of charter hours, your pilots are going to quit because you are working them too hard. Pilots’ salaries in 2014 have increased 12% over 2013, and that is going to add to the strain for any owner who doesn’t really have the depth of finances to run the jet without pushing for an unrealistically large charter quota,” he notes.
Every aircraft has a different cash flow profile. Moore says that Meridian had no problems getting 700 charter hours out of a Challenger 601. “The owner did better than break even on the fixed and direct operating costs. But is that going to happen on every aircraft? No, absolutely not. You have a better shot at it with a super mid-size aircraft, but a smaller aircraft is not going to do it,” he warns.
As Moore says, maintenance repair and inspections are where Meridian looks to make a real difference. “Our mechanics do work on virtually every aircraft type on the market and they are experts at trouble shooting and diagnosing problems. Any licensed mechanic who can really trouble shoot an aircraft issue is going to save you significant sums. Experience really does count in this market,” he comments.
Meridian’s aircraft management business recently added four more aircraft to its managed fleet, which now stands at 25 aircraft, and according to Moore, discussions are underway with four more people who are about to buy aircraft. To support this increase in sales, Meridian has been growing its staff numbers in its aircraft management and charter side and in a major new development for the company, it is in the process of building a West Coast presence. “We have a lease at Hayward Executive Airport, near San Francisco, and we are building a new FBO at Hayward which will give us a coast to coast presence. The plans are going through the approvals process right now and we expect to be breaking ground on the FBO project in the Spring of 2015,” Moore notes..