““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
Starting a Flight Department
When it comes to outright aircraft ownership, you basically have two choices: hire a management company to handle operations and maintenance or set up your own corporate flight department. Done right, either option will afford you convenience and safety. What it really comes down to is cost versus control.
Hiring a management company is often the less-expensive alternative and offers many advantages (see box on page 28). So if you want to start your own flight department, be prepared: it is a task whose difficulty and cash requirements are on par with those of a complex, capital-hungry business startup. At the outset, you’ll have to get your mind around paying some really big bills and having little to show for it—perhaps months before you’re even ready to go airplane shopping. After that, the expenses will just keep on coming.
Let’s look at some of the costs associated with owning a small jet—a Falcon 10, for example. For a used model that sells for around $1 million or less, salaries and benefits for two pilots will run about $200,000 a year, according to the consulting firm of Conklin & de Decker. Add $27,000 annually to keep those pilots trained; $25,000 for hangar rental; $20,000 for insurance; $15,000 for charts, computerized maintenance programs and aviation weather service; and $16,740 for a refurbishment allowance. A few more incidentals will bring total annual fixed costs to $351,340—and that’s without leaving the ground. The cost of flying, including fuel and maintenance, will be approximately $3,090 per hour, or about $7.22 per mile. So, assuming 409 flight hours per year, this older $1 million airplane will cost you $1.615 million more each year to staff and operate, not including financing costs. And that’s if you’re paying an outside vendor to do the maintenance. If you want to use your own mechanic(s) and equipment, be prepared to pay even more. And keep in mind that these numbers will rise over the life of your aircraft.
Then there is the paperwork. Years ago, I walked into a one-jet flight-department hangar. An entire office was filled with nothing but bookshelves packed with maintenance, operations and flight-training manuals; pilot operating handbooks; flight manifests; charts; maps; and logbooks. Starting a flight department kicks off a paperwork tsunami and your books had better be accurate and up to date. Whoever keeps them needs to be expert in the minutiae of FAA regulations.
As in any other business, finding the right people is the key to success.
But before you start recruiting, you need to have a vision for your flight department. Where will you base your aircraft and what aviation resources are in your area? How many hours a year do you plan to fly? Do you want 24/7 capability? How about the ability to fly internationally and, if so, where? For security and privacy reasons, do you want your own hangar? Your own maintenance operation? Do you see your flight department managing just one aircraft or eventually growing into a multi-aircraft operation? How long do you plan to keep the airplane? Is it leased or owned? At some point might you add a helicopter? Will you use the airplane for executive ad-hoc transport or more like a corporate shuttle? When it is gone for maintenance, what will you use for lift—airlines, charter, a fractional share or an interchange agreement with another jet owner that allows you to use each other’s aircraft? Answering such questions now will guide you into the right aircraft today and ensure maximum future flexibility.
For the sake of this discussion, let’s assume that this is your first jet; that you’ve decided you’ll need only one; and that you want the convenience and total control that go with having full-time pilot employees. You can hire a chief pilot with impeccable management experience to set up your flight department or you can retain a consulting firm to kick-start it for you. For a fixed price of $45,000, for example, Jet Aviation’s JetStart program can create a regulatory and insurance-compliant flight department for you prior to delivery of your jet and can also help with services such as a pre-buy inspection and pilot recruitment.
Finding the right chief pilot is the key to building a good flight department. The trick here is to not pay for someone’s learning curve. Don’t assume any pilot qualified to fly your aircraft can do everything else for you. “High-net-worth individuals and even some large corporations think if a pilot can fly an airplane, he must be smart enough to manage it, and that is so far from the truth,” said Bill Quinn, a consultant and managing director at Charleston Aviation Partners, an aircraft brokerage.
Seek out someone with a lot of experience—by which I mean thousands of hours—in the make and model of aircraft you want to buy. He or she should hold an Airline Transport Pilot (ATP) license, the highest civil rating available. This individual should also be an effective manager and leader and should ideally hold an FAA airframe inspector designation or at least an airframe and powerplant (A&P) mechanic’s license.
Aircraft owners sometimes are tempted to hire chief pilots who are long on charisma and short on experience. That can be a fatal mistake. A chief pilot’s job is to keep you alive by delivering you to your destination safely and to operate your aircraft as economically as possible within the rules and regulations. It’s a big job. In essence, you’re hiring someone to run a multimillion-dollar company and if his judgment or performance is off, you can lose a lot more than money. A good chief pilot will be able to help with the pre-buy inspection, hire the right crew and oversee all issues and expenses associated with aircraft operation, including maintenance.
Some consultants believe that a chief pilot should concentrate on flying and that a separate director of operations should handle oversight for all non-flight responsibilities such as scheduling, maintenance and compliance. When you have five airplanes, you can worry about that.
Now, however, is the time to decide how you will maintain your airplane. This largely depends on where you want to keep it and how you want to pay for it.
At my home airport, we don’t have any mechanics who know how to work on jets, but in 30 to 60 minutes, I could fly to factory-owned and independent service centers for all major brands of corporate aircraft, engines and avionics. Also, a small commercial airport about 20 minutes from me offers airline and air-freight service. So parts and technicians could be sent to me without much bother. However, if I were based in a more remote location, I might think about hiring my own mechanic or basing my aircraft at an airport with more maintenance resources and then having it dispatched to pick me up when needed.
When it comes to dealing with service centers and warranty issues, a pilot with mechanic training can be an invaluable advocate. By having at least one pilot who is a licensed mechanic, also, you can do little things such as fluid changes and top-offs and minor component replacement without having to fly to a service center.
Of course, not all aircraft maintenance and repair work is minor; on the contrary, the bills can be in the hundreds of thousands of dollars—or more. Nothing spoils the thrill of aircraft ownership more than a big, unexpected expense. Hourly airframe and engine maintenance programs from the aircraft builder, engine maker or an independent company can make your maintenance budget almost completely predictable and also give your aircraft a higher resale value. Even if you end up hiring a mechanic, they are generally a good idea.
Why a Management Company Might Be a Better Choice—or Not
If the prospect of setting up your own flight department seems daunting, try using a management firm first, advised Bill Quinn, managing director of the aircraft brokerage Charleston Aviation Partners. “The right management company will really give you an education,” he said. “Try it for a year or two.”
You may find that farming out the job is a better long-term choice for you. A management company can help you acquire the airplane and put it into service rapidly. It can provide you with flight crews you can hire on an hourly basis as opposed to being on the hook for annual salaries. It can handle all the paperwork, which can include all that pesky IRS documentation. And it can oversee all maintenance and warranty claims, insurance and FAA compliance issues. Because of economies of scale, moreover, the management company can often get insurance, fuel and spare/replacement parts at a discount. When your airplane is down for repairs, the company can arrange for alternative lift. It can also help you defer ownership costs by adding your airplane to its Part 135 charter certificate. It likely will place your aircraft in a shared hangar, often a cheaper alternative to building or renting your own.
There are inherent trade-offs with this arrangement, though. You’ll basically need to make an appointment to use your airplane and it may not be available when you want it. If your lifestyle or business requires drop-of-a-hat flight scheduling, this is not the deal for you. Another company employs your flight crew and you’ll likely not have the same crew for each flight. They will try their best to accommodate you, but it is not like having your own crew that really knows you and what you want.
Then there is the not-so-small matter of security. A management company will probably stash your aircraft in a community hangar stuffed with airplanes wingtip-to-wingtip, increasing the chances of “hangar rash” as they are constantly repositioned to get this or that one in or out. You can’t really leave anything of value on the aircraft. This will be a problem if you want to keep your airplane stocked with expensive libations or nice china. (I had a friend whose wife used to keep her full-length mink on his airplane because she got cold riding in back—definitely not a good idea under this arrangement.) And of course potentially dozens of people will know your comings and goings, even if the management company has blocked your tail number from online snooping tools. I keep flashing back to that scene in the movie Wall Street when Charlie Sheen is able to gum up a competitor’s takeover deal because a chatty line boy told him the destination of the other guy’s jet.
Management fees include flat monthly charges for fixed costs, hourly fees for operating expenses and many other components, and they vary widely by aircraft size and complexity. “A management company is not cheap,” warned Fred Happ, president of the New Hampshire-based consulting firm Aviation Solutions.
But in many cases, outside management remains less expensive than starting your own flight department, said David Wyndham, vice president of the consulting firm Conklin and de Decker. “Costs may favor the management company and so may risk management.” This is particularly true if you operate all your flights under the more stringent requirements of FAA Part 135, the rules that apply to charter flights, as opposed to Part 91 private aircraft operations.
Nevertheless, management companies aren’t for everyone.
The Flight Department Company Trap
Setting up an LLC just to own and operate your jet is asking for trouble—and it could be big trouble. See Jeff Wieand’s Taxes, Laws and Finance column.