(Gary) earned his fees several times over and we will not hesitate to utilize his skills in the future.”
-Ross Mandel, Managing Director
ReStart Group, Addison, TX
Read the full testimonial here

Owning an aircraft is an exciting, liberating and joyful experience. It takes the stress out of travel and can be a valuable business tool, giving you the flexibility and reaction time to compete in today’s fast-paced business environment. However, the joy of aircraft ownership can quickly fade if you don’t go about the acquisition process correctly. The intent of this article is to give you a bird’s eye view of how to properly choose an aircraft that will bring you years of usefulness, happiness, and predictability.

Hire an Experienced Aircraft Broker

Although this is admittedly self-serving since we are full-time aircraft brokers, the primary reason you should hire an experienced aircraft broker to assist with the acquisition is that the potential for a million-dollar mistake is very high. Compared to the relatively low cost for a broker, it is a practical necessity. As you read the rest of this article, you will quickly understand why you need an expert to help guide you through the acquisition process, from selecting the correct model of airplane with the appropriate equipment and component status, to what you should do to begin operations immediately post-acquisition. Just like you wouldn’t have surgery without a doctor, you shouldn’t buy an aircraft without a broker. Here are specific reasons you should hire a qualified aircraft broker:

1. Market Knowledge – The aircraft market is constantly changing, sometimes daily, due to dynamic market conditions and there is a limited number of aircraft of any particular type that are available for purchase. You need someone who is in the market everyday and can advise you about accurate market pricing. We regularly hear about buyers who have bought aircraft at prices as much as 20% above market.
2. Experience – There is a standard process for aircraft acquisitions by professional aircraft brokers. Although that process can be shortened under the right circumstances, the process exists to protect both the buyer and the seller. Using the process wisely and being intimately familiar with such a process gives you a distinct advantage. This process is quite complicated and is discussed in detail later in this article.
3. Expertise – You also need a professional that will make sure the aircraft you select is right for your mission. A good broker has the information available to help you make accurate and educated comparisons between different aircraft. Once you have selected a particular model, you must sort through the myriad of differences between each aircraft. Some of the differences are obvious, such as paint and interior quality, but others are much more subtle to the non-professional, such as type of avionics, maintenance history, time on the airframe and various components. Again, experience can make a huge difference.
4. Broker Network – Chances are the aircraft you are interested in buying is represented by another broker. Like in real estate, the 80/20 rule applies. 20% of the brokers do 80% of the business. Generally those brokers know and work with each other on a regular basis. Knowledge of the particular broker selling the aircraft you’re interested in, and how they handle their business can prove an important advantage during the buying/selling process.

Acquisition and Marketing Agreements

Commissions paid to brokers vary from flat fees to a percentage of the sales price. You should expect your broker to prepare an agreement for you, retaining his firm on an exclusive basis to represent you to acquire or sell an aircraft on your behalf. Most acquisition agreements should provide that you are under no obligation to pay a fee to the broker unless there is a successful acquisition. Most acquisition agreements are for a relatively short term, 90 to 120 days. Some brokers require you to pay for all of their expenses, while others only charge for travel expenses or sometimes no expenses at all. Unlike real estate, each party – the purchaser and seller – pays the commission or fee of the broker that represented them. Once you have signed the acquisition agreement, it is on to the fun stuff.

Choosing the Right Aircraft

Choosing the right aircraft is more complicated than you would think and is absolutely critical to your future happiness with your aircraft. Statistically, most owners keep an aircraft only 3.5 years. This is due, in part, to poor initial selection. The cost to acquire an aircraft is not inconsequential. These costs include sales tax, property tax, broker fees, legal fees, tax advisors, pre-purchase maintenance expenses and the money and time to travel to view the prospective aircraft and relocating it to your home base. Doing this process less often is smart. A reputable broker will help you determine what aircraft best suits your missions. To select an aircraft that meets your needs, you will need to know the answers to the following questions:

1. How far do you normally travel (the length of your typical mission)?
2. Where do you go and what is the size of the runway and altitude of the airports at your frequent destinations?
3. How large a cabin do you need (how many passengers)?
4. How fast do you need to go (should you buy a turboprop or jet)?
5. How much capital do you want to invest?
6. How much annual operating expense is acceptable (what’s your budget)?
7. How do you intend to crew the aircraft (will you start a flight department, hire pilots, hire a management company)?
8. How often do you intend to use the aircraft?
9. How new of an aircraft do you want?
10. What are the tax implications of Aircraft ownership? New vs. Used?

Types of Aircraft
As you can imagine, there is a wide variety of aircraft available today and the goal is to match one to your needs. Though there is no one aircraft that is perfect for all missions, generally, most owners buy a particular aircraft because it meets 80% of their missions. Below, we discuss the different categories of business aircraft, focusing on turboprops and jets. Keep in mind, everyone in the aircraft world speaks in knots and nautical miles (1 knot = 1.15 mph and 1 nautical mile = 1.15 statute miles).

TURBOPROPS

A turboprop will seat 5 to 9 passengers and fly at speeds ranging from 240-310 knots. Acquisition costs for a turboprop can range from $600,000 to $6,000,000. Annual operating costs for 200 flight hours with one professional pilot will range from $50,000 a year to $450,000. Turboprops are great for trips ranging from 300 to 1000 nautical miles. Modern turboprops are extraordinarily reliable and may be operated in all types of weather conditions. Turboprops have some key advantages over jets, particularly the very light and light jet category discussed later. Turboprops also have lower operating costs than jets, have the ability to carry a full load of passengers and luggage for most of their standard mission trips of 500 to 1,400 nautical miles, are less expensive to maintain over jets and have the ability to takeoff and land at some of the smallest airports. Their disadvantages include louder cabin noise levels than jets, slightly more vibration from the props and engines, and slower cruise speeds than jets. Turboprops can be operated single pilot, while many jets require a crew of two.

There have been many manufacturers of twin engine turboprops in the past, but only two twin engine corporate turboprops are currently being manufactured, Beechcraft King Airs and Avanti Piaggios. The King Air line of aircraft manufactured by Beechcraft is the most popular model line of twin turboprops in production today. They have larger cabins than the very light and light categories of jets discussed below. They are also the most common and come in three main body styles, the C90, the B200 and 350. The models become larger and faster as you move up the line from the C90 to the 350. The B200 is one of the most popular business aircraft ever built.

There are three very popular models of single engine turboprops, the Socata TBM, the Pilatus PC-12 and the Piper Meridian. These aircraft are particularly economical to operate compared to the twin-engine models because they have only one engine. Single engine turboprops use less fuel, and the repair and overhaul costs are generally half of the twin turboprops. Nevertheless, single turboprop economics should be balanced with the safety factor of having two engines in the King Air and other twin turboprops.

JETS

For purposes of discussion here, we will divide jets into 5 categories: 1) very light jets; 2) light jets; 3) medium jets; 4) heavy jets; and 5) commercial airliners.

Very Light: There are two very light twin jets currently in production, the Cessna Mustang and the Embraer Phenom 100, with many more in the works, including a few single engine jets. They can be purchased for between $2,100,000 and $3,700,000. They seat a maximum of 5 passengers and 1 pilot, but are more practically flown with 4 passengers. Their range is 800 to 1,500 nautical miles, depending on load, and they fly from 340 to 380 knots. Annual operating expenses are slightly more than turboprops. They are generally flown with one pilot.

Light Jets: Light jets generally carry 5 to 7 passengers, cruise 350 to 460 knots and can fly 800 to 1,500 nautical miles. Because light jets have been produced since 1974, the price range for a light jet varies from less than $600,000 for an older model to around $8,000,000 for the newest, most fuel efficient. Annual operating expenses are generally 30% more than turboprops. Among the light jets are the Citation CJ1, Citation CJ2, Citation CJ3, Citation CJ4, Citation I, Citation II, Citation V, Citation Encore, Citation Ultra, Beechcraft Premier I and Beechcraft Hawker 400XP.

Medium Jets: Medium jets generally seat from 6 to 8 passengers and can fly 1,800 to 2,900 nautical miles. There are quite a wide variety of manufactures and models in this category. Speeds vary from 430 to 465 knots. Prices range from $800,000 for older models to around $15,000,000 for the newest. Annual operating costs can run in excess of $1,000,000 per year. Medium jets include the Lear 45, Lear 60, Hawker 800 series, Gulfstream 150, Gulfstream 200, Astra, Citation Excel, Citation XLS, Citation VII, Citation X, Falcon 10, Falcon 20, Falcon 50, and Saberliners.

Heavy Jets: Heavy jets can carry 8 to 14 passengers and have ranges from 3,000 to 7,000 nautical miles. Speeds vary from 445 to 525 knots. Prices vary from less than $500,000 for the old and less fuel-efficient aircraft, to over $50,000,000 for the newest. The annual operating expenses for jets in this category easily top $1,500,000. Heavy Jets include the Challenger 600 series, Gulfstream II, III, IV, V, 350, 450, 550, Bombardier Global, Falcon 900 series, Falcon 2000 series, and Falcon 7X.

Commercial: Commercial jets, such as 737s, 747s, 757s, 767s and many Airbus models can be found in private corporate configurations. Most of these aircraft have speeds around 450 knots or greater and have ranges in excess of 6,000 nautical miles. A few of the earlier models are inexpensive, but not as fuel efficient as newer models. The costs to acquire these types of aircraft can range from $10 million to $100 million. The different interior configurations are endless and limited only by your budget. Such aircraft are commonly used by heads of state, professional sports teams and those in need of carrying more than 14 people.

Acquisition Costs

A critical question for every client is “What can I afford?” As you can imagine, the cost of a jet or turboprop varies widely depending on year of manufacture, avionics, amount of hours on the engines and airframe, quality of the paint and interior, whether the engines are on an engine maintenance plan, and the maintenance history and the timing and scope of any major upcoming mechanical inspections. If the aircraft has any damage history, high total time compared to the rest of the fleet, incomplete records or substantial ownership in third world countries, the market value will be substantially affected. Even if an aircraft is offered at a discount, these negative factors often make an aircraft an unwise purchase because the aircraft can become extremely difficult to resell. As a general rule, aircraft become more expensive to maintain as they age. Also, the newer the aircraft, the more fuel-efficient it is. Many airframe limits exceed 25,000 hours and very few aircraft have accumulated such high airframe times. Most modern jet aircraft and turboprops do not have life limits on their airframes that would exceed the number of hours that an owner would fly during their ownership period. For most aircraft models, there is a smart balance between airframe time, aircraft age and marketability so that you can purchase an aircraft that you will be able to market successfully at the end of your anticipated ownership period. Brokers are particularly helpful with these calculations.

What do I need to know about aircraft maintenance?

All corporate aircraft have inspections that are required and components that must be overhauled at certain prescribed times, based on either the calendar (months or years) or flight hours on the component. The maintenance costs for turboprops will run from $10,000 to $25,000 annually – not including major items that must be overhauled or repaired, such as engines, props, paint, interior, landing gear and windows. Jet aircraft, especially in the medium-to-heavy jet category have annual maintenance expenses that can easily exceed $35,000 per year. Most aircraft have major inspections at 4, 5, 6 or 10 years that can cost in excess of $200,000. Turboprop aircraft generally have inspections due every 200 flight hours, with costs ranging from $7,000 to $25,000. There are maintenance facilities that specialize in certain brands of aircraft, and some facilities are owned by the aircraft manufacturers. The quality of work and costs can vary greatly between shops. It is critical that you make this selection carefully. The right choice will save you money, enhance the future marketability of your aircraft and greatly assist in the safe operation of your aircraft.

Aircraft engines have life limits and have to be overhauled between 3,600 and 10,000 flight hours, although there are some exceptions. Some engine overhauls and maintenance are considered “on condition.” They receive maintenance only when they are found to need it and must be checked periodically. Most turboprop and jet engines have a mid-life or hot section inspection at some interval between overhauls. The mid-life event is considerably less expensive than an overhaul.

Prices vary widely for overhauls and mid-life events. Regardless, owners can purchase maintenance plans for their engines whereby they pay a specified hourly rate to an engine manufacturer. There are also insurance plans which will pay for the mid-life and overhaul costs whenever they come due, even if it occurs prematurely. These engine plans greatly enhance the resale value of the aircraft and we highly recommend them.

Aircraft Refurbishment

Interior refurbishments can cost $40,000 for a turboprop to millions of dollars for heavy jets or commercial aircraft. Painting costs are approximately $25,000 for a small turboprop or very light jet, $50,000 to $125,000 for light to medium jets, and heavy jets can cost in excess of $150,000. An owner can also save money by doing a partial refurbishment, i.e., changing the carpet or re-dying the leather. Although it can be quite satisfying to retrofit your aircraft with the latest paint scheme and interior, keep in mind it can be costly, your aircraft may be down for a few months, and most likely, you will not recoup your investment in any refurbishment. It is almost always better to purchase an aircraft that is as close to what you want as possible.

Operating Costs

There are many reliable sources for estimating direct operating costs and annual fixed costs for aircraft. Your broker can readily access such information and should provide it to you during the aircraft selection process.

Direct operating costs are mainly comprised of fuel and an estimated hourly maintenance cost, based on manufacturer’s recommendations and industry estimates.

Fixed annual costs are mainly comprised of the hangar, insurance, pilot salaries and benefits, and engine reserves. The engine reserves are calculated by dividing the cost to overhaul the engines by the remaining time left on the engine until overhaul. This is not necessarily a cash expenditure, but an estimated amount to be put aside for every hour flown, so that when it comes time to overhaul your aircraft’s engines, there is a readily accessible pool of funds. Or, as discussed earlier, you can buy an aircraft on an engine maintenance plan or pay to put your engines on an engine maintenance plan. There is substantial value in purchasing an aircraft that is already on an engine maintenance plan because a portion of the future overhaul costs have already been pre-paid and the plan covers catastrophic mechanical failures.

Insurance

Getting your aircraft properly insured is very important. Although there are many different coverage options for aircraft, it is most common to have liability coverage and hull coverage. A liability policy covers the owner from lawsuits for damages brought by third parties against the aircraft owner for negligent operation of the aircraft. Liability coverage is commonly available in $1 million, $3 million, $5 million, $10 million, $25 million, $50 million and $100 million denominations. Hull coverage covers any damage to the aircraft. There are few insurance agents that specialize in aviation insurance, but an experienced broker can help you determine your needs.

Tax Benefits of Aircraft Ownership

An additional non-cash cost of an aircraft is depreciation. If an aircraft is operated for charter (referred to as Part 135 use), there is a 7-year depreciation schedule. For aircraft operated primarily for the benefit of the owner (referred to as Part 91 use), there is a 5-year depreciation schedule. When the aircraft is used for business, most of the operating costs can be expensed. It is highly recommended you choose an attorney and accountant familiar with aircraft ownership tax and legal issues prior to closing on an aircraft. Clients that go to their usual legal and accounting professionals will typically find a lack of knowledge on aviation transactions. We recommend you utilize the services of aviation-centric legal, accounting and tax practices as it is not worth the expense and risk to try and get your usual advisors up to speed with aircraft sales tax issues, property tax issues, IRS issues and FAA issues. For instance, it may be of critical importance where the aircraft is based and the type of use the aircraft will have. A professional aircraft broker will have a list of seasoned legal, tax and accounting professionals that will help guide you. What may seem like trivial issues to you can turn into very big mistakes with the IRS and FAA, subjecting you to fines and penalties that can exceed your annual cost of ownership.

Summary

Owning an aircraft is a fantastic experience if you go into the purchase process in a professional, thoughtful and careful manner. This article only touches the surface of many issues involved in the selection and operation of an aircraft. It is critical to obtain guidance from professionals who stake their reputation and livelihood on acquiring aircraft.

As a service to all potential buyers and sellers, C& J Aviation is pleased to offer a chart summarizing the key characteristics of common turboprop and jet aircraft, such as speed, range, cabin size and hourly costs. It can be found on our website at www.cjjets.com.

© 2011 ALL RIGHTS RESERVED by C&J Aviation Partners, LLC

Aircraft Selection

First, you select the aircraft type you want, after detailed discussions with your broker. We have written a separate article that will assist you with the selection process that can be found on our website: www.cjjets.com. Based your broker’s review of the specifications and maintenance information provided by the sellers of the prospective aircraft, the broker will usually narrow your search to just a few aircraft of the particular model you have chosen. You may go and visit those aircraft and receive a demonstration flight which is typically at the purchaser’s expense.

Letter of Intent

Once you have made your selection, a Letter of Intent (“LOI”) is drafted with the general terms of the purchase, in particular setting forth the purchase price, amount of deposit, general terms of the pre-buy inspection and the expiration time for the offer. Frequently, an aviation attorney would be retained by the seller/buyer at this point to assist in drafting the LOI. The purpose of the LOI is primarily to see if the parties can come together on all of the primary terms of the agreement.

Deposit

If the offer is accepted, a deposit of 5% to 10% of the proposed purchase price is immediately wired to a third party aviation escrow company located in Oklahoma City, Oklahoma. All of the escrow companies are located in Oklahoma City so that they can be close to the FAA Aircraft Registry Division, where all of the documentation must be filed to transfer title to U.S. registered aircraft. The LOI provides that within a short period of time an Aircraft Purchase Agreement must be finalized or the LOI is terminated. Frequently, buyers will place a deposit with an escrow company prior to making the first offer in an effort to show how serious they are in purchasing an aircraft.

The Purchase Agreement

The Aircraft Purchase Agreement is frequently drafted by an aviation attorney. The Seller’s attorney generally prepares the initial draft, but this does vary. In some transactions, your broker may utilize their form. The Aircraft Purchase Agreement provides all of the details of the terms of the purchase.

We strongly recommend using a form from an experienced broker or hiring an attorney that specializes in aircraft transactions. There are many legal pitfalls that are unique to aircraft that a real estate or corporate attorney will not know. The way escrow works and title passes is unique to aircraft.

The Aircraft Purchase Agreement provides the purchase amount, the amount of the deposit, whether the deposit is refundable and if so, under what terms, the timing for the pre-purchase inspection and the purchase, the place for the pre-purchase inspection, certain representations by both parties, the warranties provided with the airplane, what happens if there is a default and much more. The standard warranty for a used airplane is that the title is warranted, but the condition of the airplane is not. The purpose of the pre-purchase inspection is to determine the condition of the aircraft. If the condition is not as represented, then the buyer doesn’t have to close and the deposit is refunded.

Pre-Purchase Inspection

Once the purchase agreement is executed by both parties, a pre-buy inspection will begin at a maintenance facility agreed upon by both the purchaser and seller. Jet and turboprop aircraft are highly complex machines that have maintenance requirements based on the calendar (day, month or year limits), hours flown or cycles (number of landings). A purchaser needs to know whether everything is functioning correctly, the exact maintenance status of the aircraft and its components, and whether the records are complete and accurate. The best way to accomplish this is through a comprehensive pre-purchase inspection by a maintenance facility familiar with the type of aircraft the purchaser is buying. This is one of the most important and critical steps in the entire process.

It is extraordinarily unusual for an aircraft to be purchased, even between friends, without going through a pre-buy inspection. The level of the pre-buy inspection is determined by consultation with the maintenance facility and can take as little as a few days, or as long as a few months. At the end of the pre-buy inspection, the maintenance facility produces a list of discrepancies they discovered during their inspection and they will also point out those items that are due for replacement or overhaul because of time, cycles or calendar.

Most Aircraft Purchase Agreements provide that the Seller repair the airworthy discrepancies at their expense. There is usually still some negotiation between the parties about what is considered “airworthy.” We could devote an entire article on this subject. This negotiation can get quite complicated and is really best left up to an experienced broker and/or experienced mechanics. Discrepancy remediation costs typically run from $10,000 to $60,000 for turboprops and $15,000 to $600,000 for jets. Understanding the maintenance history and picking the maintenance facility can make a tremendous difference.

Technical Acceptance

At the conclusion of the negotiation over what discrepancies will be paid for, and by whom, the purchaser will then execute the Technical Acceptance. The purpose of the Technical Acceptance is for the Purchaser to commit to buy the aircraft subject to remediation of the discrepancies. The deposit normally becomes non-refundable at the time the Technical Acceptance is executed. This is appropriate since the seller now has to commit the resources and time to fix the aircraft. Further, it provides a partial remedy should the purchaser default.

Closing and Aircraft Delivery

The Closing can be quite complicated. Simply put, the escrow company coordinates the exchange of the purchase funds in return for the filing with the FAA Aircraft Registry the FAA Bill of Sale and the FAA Application for Registration. The filing of the FAA Bill of Sale effectuates title transfer and the FAA Application for Registration causes the aircraft to be registered in the name of the purchaser. If there is a lender, certain lien documentation is filed with the FAA. Aircraft liability and hull insurance is put in place at this time. With aircraft of a certain size, including many turboprops and jets, documentation is filed with International Registry of Mobile Assets (the “IR”). The escrow company and many aviation attorneys will handle the necessary filings with the IR for the parties to the sale.

Brokers for both sides are involved in the Closing and help to coordinate the Aircraft Delivery, which is done as part of the closing. An Aircraft Delivery Receipt is the written evidence of the acceptance of the aircraft by the purchaser and is executed at closing. The escrow fees generally run from $400 to $4,000 and are dependant on the size of the transaction. You do not earn interest on your monies while they are held in escrow. The escrow fees are normally split equally by the buyer and seller. The fees for the IR are generally paid by each party and run from $400 to $1,000 per registration.

There are many ways to conduct closings. Many closings are handled via teleconference, with all parties attending, including the buyer and seller and their representatives, such as attorneys, lenders and brokers. These closing calls typically last less than 30 minutes unless a seller insists on releasing the FAA Bill of Sale from escrow to the FAA only after the seller’s bank has confirmed receipt of funds. Even this confirmation can be done by email. Frequently, transactions are closed based on simple written closing instructions provided by both the buyer and the seller.

Post Closing Issues

There are many post-closing issues. The new owner needs to be thoughtful about that first flight. Insurance should be in place and a properly trained crew should be retained. Where the first flight originates and terminates can affect sales and property taxes. As such, it should be carefully planned.

If you are using an aircraft management company, most of the post-closing logistical issues will be taken care of for you. You should have the agreement with them completed, negotiated and executed prior to the closing. If you have your own pilots, they will need to have a means for paying for fuel, emergency maintenance, hotels, rental cars, airfare, etc.

Navigation database subscriptions for the aircraft’s navigation systems must be current to fly legally. Certain paperwork must also be on the aircraft. If you intend to fly the aircraft at, or above 29,000 feet, the aircraft must be RVSM certified and a manual must be filed and approved by your local FAA Flight Standards District Office. Your pilots, legal counsel or management company can handle most of these issues.

Maintenance must be kept current or the FAA could ground your aircraft, or worse yet, your safety could be compromised. Before you depart on your first flight, you should know who is going to maintain your aircraft and generally what to expect in terms of annual maintenance costs.

Your aircraft should be hangared, especially if you live in an area subject to severe weather. Some insurance requires hangarage. Hangarage is always recommended to preserve the paint, interior, and operating systems of your aircraft.

Fuel prices can frequently be negotiated with the aviation fuel provider (referred to as, “Fixed Base Operators” or “FBO’s”). Often, you can receive a discount on your fuel if the FBO also provides you hangarage services.

Many jets have service contracts that are assigned to the new owner. Such transfer is not automatic and usually requires a formal assignment and a transfer fee. Follow up is essential with these providers to assure no lapse in service or benefits. This is especially true with engine maintenance programs, as a lapse in service could result in significant loss in the value of aircraft.

Aircraft that are used by companies for business must develop corporate policies for use of the aircraft, particularly non-business use. Improperly handling non-business use can result in significant tax consequences, including the disallowance of deductions. Again, an aviation CPA or legal professional is key to help you avoid the legal and tax pitfalls of aircraft acquisition and ownership.

Your pilots will be generally required by your insurance company to go to training at a professional pilot training facility with simulators. Costs for such training range from $4,000 per year for turboprops to over $35,000 per year for some of the larger jets. The initial training costs more than the annual recurrent training. Some training can be done in your own aircraft. There are disadvantages and advantages to both methods. Some schools book up early and this requires advance planning.

Lastly, many owners will make a decision for tax or other reasons to place their aircraft with a management company that will charter their airplane for an hourly lease rate. This is commonly referred to as charter or Part 135 operations. There are pros and cons to doing this. Generally, you will be able to generate income that can defer operating costs, but at the same time your valuable asset will diminish in value because of the increased use. Careful study should be made of the costs of Part 135 operations and the management company.

Conclusion

Select the right airplane and utilize experienced professionals and you will enjoy years of aircraft ownership. We have only touched on the highlights of the aircraft purchase process. The involvement of professionals dedicated to aircraft transactions will provide you the assistance to make this process go smoothly and efficiently, with the best result possible.

& 2010 ALL RIGHTS RESERVED by C&J Aviation Partners, LLC