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How NOT to Buy a Business Jet
Buying a business jet can be a smart move, but you can make lots of mistakes on the road to ownership. Here are eight of the most common blunders, plus advice on how to avoid them.
1. Buying a business jet the way you’d purchase a car.
An aircraft transaction normally takes weeks or even months, noted Jay Mesinger, president and CEO of J. Mesinger Corporate Jet Sales. “You can’t just walk into a dealer and walk out a few hours later with your airplane,” he said. “It’s a complicated process that involves a lot of decisions, and it’s more than just what airplane to buy and whether it’s new or preowned.”
Barrett Knudsen, an aviation attorney at the Oklahoma City law firm of McAfee & Taft, said there are plenty of legal issues to ponder. For example, “What ownership structure works best for your intended operations? Do you plan to use the aircraft solely for business? The list goes on and on, and there are pitfalls associated with failing to consider each question.”
2. Focusing more on purchase price than operating costs.
While some early-generation business jets can currently be purchased for well under $1 million, the low acquisition cost often belies the enormous expense of operating these aircraft, warned David Wyndham, president of aviation-data supplier Conklin and de Decker.
“First-generation jet engines consume a lot of fuel, and older aircraft can require intensive maintenance, especially unscheduled maintenance,” he said. “Some spare parts may be next to impossible to buy new or come at high prices.” He cited the Learjet 25D, which you can buy preowned for about $240,000 but which Conklin estimates would cost $1,020,000 annually to operate for 300 hours per year. Fixed costs—two pilots, hangar, insurance, training and so on—would add another $300,000 per year, Wyndham said. “At $1.3 million, the annual operating budget would be five and a half times the acquisition cost!”
3. Buying more or less airplane than you need.
While your friend loves his Gulfstream GV, that model isn’t for you if you’re planning on flying one- or two-hour trips. Buying more airplane than you need will mean unnecessarily high operating costs, noted Mesinger. Buying less airplane than you need will also create problems, including not having enough room for your cargo/passenger loads and/or having to make time-eating fuel stops on flights that exceed the airplane’s range. Buy a model that fits your typical mission profile, and if you have an occasional trip that exceeds its capabilities, use charter to meet this need.
4. Expecting an aircraft to appreciate in value.
Though some models did in fact appreciate from 2003 until 2008, consider this part of the unsustainable economic bubble that burst in late 2008. Kevin O’Leary, president at aircraft broker Jet Advisors, said that buyers should expect their aircraft to depreciate at least 5 percent each year. “In no case should anyone expect their aircraft to go up in value,” he added.
5. Overlooking sales-tax implications.
When it comes to tax analysis, hire a specialist. As a general rule, sales tax applies based on the jurisdiction where the aircraft was delivered at closing, said Knudsen. Some states have exemptions, but some of the exemptions have limitations, such as flying the aircraft out of state within a certain number of days. And if your aircraft is being managed, make sure the managing company charges and collects federal excise tax. If it doesn’t, you as the owner will be on the hook when the IRS comes calling. And, if you plan on flying your jet internationally, especially in Europe, don’t forget to consider value-added taxes.
6. Setting up a company solely to operate the aircraft.
Many aircraft purchasers consider setting up a special-purpose company to own the aircraft as a way of reducing liability exposure to the parent, noted Knudsen of McAfee & Taft. This company then receives capital contributions or other funding from external sources to operate the aircraft. “While that may work for many types of assets, it can be a trap for aircraft,” he said. “You could be assessed fines and penalties, pilots’ licenses could be revoked and insurance coverage could be denied.” [See “The Flight Department Company Trap” in BJT’s June/July 2013 issue.—Ed.]
7. Buying an aircraft sight unseen.
Mark Cuban gained attention for purchasing his Gulfstream V online, but he didn’t do so without having it properly inspected. Have a thorough pre-buy inspection performed by a trusted shop (factory-authorized facilities are usually best) to make sure maintenance documentation is in order, no major maintenance issues exist and no inspections are coming due.
8. Going it alone.
Aircraft purchases are complicated. Proceed without professional assistance and you’ll likely end up wasting more money than they would have spent on consultants. Get help.
What our readers had to say
Regarding “How Not to Buy a Business Jet” [2013 Buyers’ Guide] Inspections are only as good as the person/people doing them. Factory-authorized facilities are good and should be able to ensure all items/inspections/bulletins are up to date, but at the end of the day it comes down to the person crawling in, over and around your future purchase. The buyer needs to find a qualified individual who knows the model and is willing to get dirty to verify the condition of your purchase. “Factory authorized” by no means guarantees quality of visual inspection. If you can afford the plane, you can afford a little extra to have it inspected.
Chris Coombs (posted on bjtonline.com)