Is Flying for Free a Flight of Fancy?

COVID-19 and the bonus depreciation offered by the 2017 Tax Cuts and Jobs Act have both encouraged people to buy business jets and fly privately. However, if you average only 50, 100, or even 150 flight hours per year, owning your own jet may not make as much economic sense as charter and fractional programs.

Nonetheless, there are always people who claim that you can make a business jet pay for itself—and your own flight hours—by chartering it out to third parties. In other words, you buy a jet, cover your costs chartering it, and in effect fly for free. Is this scenario too good to be true? Let’s take a look.

Choosing the Aircraft         

The first question, of course, is what aircraft to acquire. A state-of-the-art, brand-new airplane is more attractive to charter customers than a decrepit, 30-year-old one, but it is also more expensive to acquire and is likely a poor choice if your objective is to fly for free. It’s tempting, then, to consider purchasing a 25- or 30-year-old business jet to drive capital costs down as low as possible. There are many problems, however, with choosing an aircraft that is nearing the end of its useful life; it will have older technology, be unattractive to many charter customers, command a lower charter rate, have higher maintenance costs, and be more susceptible to mechanical failures that interrupt charter service. It is also difficult to finance the purchase of a 25-year-old aircraft and more challenging to find a charter company willing to operate it.

Accordingly, for our purposes, let’s consider a newer—but not too much newer—aircraft like the Challenger 605, a Bombardier 600 Series model introduced in 2006 and replaced by the Challenger 650. Assuming you can find one for sale in today’s tight market, you should be able to acquire a typical CL605 that was first placed in service in, say, 2008, for around $12 million.

That’s a third of its factory-new price but still not a bargain. The desire to fly privately has caused the purchase price of business jets to go up. How long inflated jet prices will last is anyone’s guess; like automobiles, jet values (and prices) decline over time, and there is no question they will be coming down. Assuming a 7 percent annual depreciation rate, you can expect the value of the 2008 CL605 to decline by about $840,000 in the first year alone.

A depreciating asset is hardly a great investment, so another cost of investing in a business jet is missing the opportunity to earn a reasonable return on the $12 million purchase price. Using a conservative rate of return (4 percent per annum), the opportunity cost of the “investment” in the CL605 is about $480,000 per annum. The good news is that, for tax purposes, if you satisfy the requirements for bonus depreciation, and assuming you can use the deductions, you can write off the entire purchase price if the aircraft is placed in service in 2022 or 2023. However, to secure a 100 percent tax write-off, 100 percent of the flights that year would have to be qualified business use for tax purposes, which may mean that “flying for free” means not flying much at all. More importantly, a $12 million tax write-off in a single year would require at least $12 million of taxable income. Let’s see whether that’s feasible.

Considering Charter Operations

To charter out your business jet, you will need someone to operate it for you who has a charter certificate. Typically, this would be the same management company a first-time buyer would select to operate the aircraft for its own flights. As noted earlier, though, reputable management companies can be picky about the aircraft they put on their certificate. They want to avoid, for example, unhappy charter customers who are stuck in the middle of nowhere because the very old jet they chartered is grounded with mechanical issues. For this reason, some management companies won’t put an aircraft on their certificate and offer it for charter if it is more than 20 or 25 years old.

Based on standard industry sources such as Conklin & de Decker’s Aircraft Cost Evaluator, estimated annual fixed operating costs for the CL605 should be about $1.1 million, and hourly direct operating costs about $4,600 per flight hour (about $3,800 in the case of charter flight hours, since the charter customer will be obligated to pay for certain expenses, like landing fees and Wi-Fi). So, if you don’t use the aircraft yourself and are able to charter it out 400 hours per year (typical business jet annual usage), your estimated yearly budget, including opportunity cost and market depreciation, should be about $3.9 million. Over $1.3 million of this will be opportunity cost and depreciation expense, and the balance will be cash operating expenses.

Assuming a charter rate for a CL605 of $5,850 per hour, with an additional $1,485 per hour for the fuel surcharge, hourly charter revenue (after deducting the commission for the charter certificate holder) will be about $2,655 per hour. Accordingly, if you charter the aircraft for 400 hours per year, your total revenue from that will slightly exceed $1 million, compared with $3.9 million in expenses. 

Dealing with a Large Gap

That’s a large gap, and it doesn’t even include the “free” owner flight hours. Can you close it? 

One strategy is to reconsider purchasing a much older aircraft, say 25 years old or even older. This will cut down on the acquisition cost, and therefore on the opportunity cost of the “investment” and the depreciation expense, but not anywhere near enough to close the gap. Moreover, as noted, there are significant trade-offs in chartering an older aircraft for jet financiers and charter operators and their customers.

The other option is to charter the aircraft for more hours. This requires that the aircraft is based at or reasonably close to a location with a high demand for charter. However, more flight hours mean hiring more pilots, paying more for training, incurring hourly and unscheduled maintenance expenses more rapidly, accelerating wear and tear on the paint and interior, and having the aircraft depreciate more quickly. Even ignoring these significant additional costs, to close the gap, the aircraft would have to fly a daunting number of charter hours (over 1,350 per year or 3.7 hours per day, every day). As part of a fleet of older business jets of the same model that could support each other, a high-volume charter scenario might work, but it is difficult to envision how it could make sense for a single aircraft. 

The Bottom Line Is Clear 

This analysis shows that, given the high cost of owning and operating a business jet, it is virtually impossible to cover all the costs by chartering it out. Adding hours where you use the aircraft yourself only widens the gap between income and expense. You could also skimp on expenses, assuming the charter certificate holder doesn’t object: for example, hire the cheapest management company, use cheaper, less-experienced pilots, minimize insurance coverage, park the aircraft outside instead of in a hangar, or avoid needed painting and refurbishments…but all this will likely come back to haunt you. 

So, what is the point of chartering your aircraft? If you have sufficient usage and justification for owning and flying in your own business jet, but you don’t use it as much as you could, chartering it to third parties can offset your fixed costs to some extent. The charter revenue will more than cover the cost of the charter flights themselves, and the balance will help defray the costs you incur no matter how many hours you fly—such as crew, hangar, insurance, and management charges. However, you will still want to avoid chartering the aircraft so much that you need to retain a third pilot, which will increase costs and require even more charter, and may begin to interfere with your own use of your aircraft.

A final note. It’s conceivable that your aircraft could pay for itself if you use it effectively for your own business. Perhaps, for example, your $10 million jet allows you to attend face-to-face meetings that you’d otherwise miss—and that result in $50 million of new business. In that case, you’d recoup your expenses several times over and the costs of owning and operating the jet for the business should be deductible for tax purposes. Just don’t expect to accomplish anything remotely like that by chartering out the airplane.