The business case for corporate jets
Is it time your organisation stopped using so many commercial flights and bought a corporate jet?
- The benefits of corporate jet ownership are difficult to quantify for the ‘budgeters’ but soon become apparent to the executives doing the work
- As a rough guide, you have to be using an aircraft more than 150 hours per year to justify owning it
- Consideration of brand and image can overwrite economics in certain sectors when considering whether your business warrants a corporate jet
Ever wanted a jet? In theory the decision to lease or buy a business aircraft should be easy – simply comparing airline costs with the cost of the aeroplane. In practice, it is one of the most complex and difficult-to-quantity tasks a business person can undertake.
“Aircraft should be evaluated as business tools, just like a computer. They should justify their presence or be discarded,” says Mike Falls, managing director of Shortstop Jet Charter, based at Essendon airport in Melbourne.
“The benefits are very difficult to quantify for the ‘budgeters’ but soon become apparent to the executives actually doing the work – those using the aircraft,” Falls says.
Steve Padgett, managing director of the Aeromil Group of Companies based at Sunshine Coast Airport in Queensland, says that at the high end of the market it’s about being able to get in and out of developing markets in the Asia Pacific region, with no stops, or only one, where the airlines are simply not convenient – places like Myanmar.
“It’s also about the freedom and opportunity to go where you want, when you want, in privacy,” Padgett says.
In terms of the commercial case, a wide range of factors must be considered.
What are the options to achieving the travel objectives? A mix of scheduled airlines, charter aircraft, limousines, and even public transport may be best.
An often quoted rule of thumb is that you have to be using an aircraft more than 150 hours per year to justify owning it, but experts caution this is only a very rough guide.
Dan Pimentel, writing in the April 2015 issue of the US Aircraft Owners and Pilots Association AOPA Pilot magazine says: “Any aircraft should serve the owner’s primary mission 90% of the time, otherwise it is not the right aircraft.”
If most flights are from Sydney to regional NSW airports served by the airlines, and flights to Perth rare, a corporate jet would be unlikely to be appropriate – whereas frequent missions from Auckland to the lower South Island or Australian East Coast airports not well served by the airlines may justify a jet.
Because two organisations will likely each have different missions and need the aircraft at the same time, it is unlikely sharing will work.
There are operators of fractional ownership – more in the US than Australia, where a company can own a part share in multiple aircraft. This can work well as the operator takes care of all the scheduling, maintenance and crew issues.
It’s about the freedom and opportunity to go where you want, when you want, in privacy.
Can the business really afford a business aircraft? Three cost categories must be considered.
Initially there are acquisition costs, including the “extras” like customisation, delivery, aircrew recruitment, pilot training and placement on the national aircraft register.
A new, technologically advanced, single-engine aircraft like a Cessna TTx or Cirrus SR22 costs between US$650,000 and US$850,000. A second-hand light jet – Padgett just sold four Cessna Mustangs; three in Australia, one in New Zealand – go for just over US$2m. A trans-continental jet costs more than US$20m.
Secondly there are operating costs. The cost of owning a small (five-to-six passenger) jet, excluding operating costs (of about US$2,000 per flight hour) would be around US$500,000 per annum. For a mid-size jet this could exceed US$1m.
Thirdly, and often forgotten, are the exit costs. Is the aircraft of an age and type that there is, or will be, a ready second hand market? Might it be expensive to upgrade the avionics for purchasers or will it, through shortages, actually appreciate in value?
Across all of these costs businesspeople must weigh up tax issues like depreciation allowances, expense deductibility, and FBT.
How do you decide which aircraft is right for your business?
Everyone knows someone who has sat in or flown an aeroplane. These “experts” can be student pilots, private pilots or even commercial pilots with little or no understanding of business.
“You should talk to well-established and creditable industry experts who have no conflict of interest in the advice they give,” says Fall.
“It is unlikely that they will be up to giving quality advice unless they both own and operate aircraft themselves.”
The twin vs single engine debate is interesting.
Contrary to popular misconception, single-engine aircraft have a better safety record than twins. But many corporates will demand two engines – and maybe two pilots.
For Mitchell Water, an Australian company that must reach more or less anywhere in Australia, including outback locations, to install, inspect or repair pipelines, at a moment’s notice, the choice of aircraft was defined by a decision in favour of two engines.
It came down to the popular King Air 350 turbine or a Cessna Citation M2. Based on mission they choose a new M2.
For owners of small businesses, Cirrus has been successful with the Australis, an Australian version of the world’s best-selling general aviation aircraft, the SR22. Produced for Australian conditions the plane has air conditioning, UV protected windows and a whole-of-aircraft parachute that has saved more than 100 lives since Cirrus was founded.
Says director of the Cirrus Centre at Moorabbin near Melbourne, Charles Gunter: “Often when buyers come to us they have already done their own research and are sure the Cirrus is for them. Our role is to ensure the process is enjoyable and easy and to make sure they receive high quality training and support.”
Buyers of high-tech single-engine planes include business owners who are already pilots but who want to fly themselves, or their families, comfortably and quickly. Examples include companies responsible for maintaining runways for mining companies, and a supplier to Bunnings who must visit every store annually.
Do you have the time and expertise for the operational issues?
Even the purchase of a corporate aircraft is an enormously time-consuming and complex matter taking between six and 12 months. And that excludes the waiting time for a new aircraft to be built.
“More and more we are seeing buyers wanting the complete package – the aeroplane, pilots, aircraft operating certificates, training, maintenance, and engine management or parts programs, with warranty periods,” says Padgett.
No doubt this reflects a desire to leave aviation to the experts and the business to the executives.
Aircraft should be evaluated as business tools, just like a computer. They should justify their presence or be discarded.
Do you have safety covered? Executives, especially CEOs, can be the organisation’s most valuable resource, and sometimes travel in groups. Safety must be paramount and of the very highest standard.
Wise advice is that it must be company policy that the pilots make the “go/no-go” decision – never, ever the executives.
Brand and image
Consideration of brand and image can overwrite economics in certain sectors. For example, charter operators report that politicians or public servants can have legitimate economic reasons to travel by jet but are reluctant to be seen doing so and therefore choose a sub-optimal piston or turbine.
The experts say that there is no hard and fast rule as to when to lease or buy an aircraft.
They do agree a “try before you buy” by way of charter, or “put your toe in the water” first with a second hand aircraft can be a good idea.
The decision should be a business one based upon the value an aeroplane will add to the business, acknowledging the value of the time of the executives who will use it.
“The time to consider a corporate aircraft is the point at which the business is starting to suffer from executives not being able to be in the right place at the right time,” says Falls.
All benefits, costs and safety factors must be considered.
Most important of all, talk to others who own corporate aircraft and get the best independent advice available.
This article was first published in the July 2015 issue of Acuity magazine.