At its core, the purchase of an aircraft is similar to the purchase of any other major equipment asset. Aircraft transactions do, however, present certain unusual challenges, requiring planning by the purchaser and some expertise. Experienced aviation counsel will be extremely helpful in ensuring that the contemplated transaction is efficiently completed with the end result of the least tax realization and compliance with all applicable regulations.
Although not comprehensive, listed below are three important considerations in any aircraft acquisition.
How Will the Aircraft be Used?
This is an obvious, but important question. Federal Aviation Administration (FAA) regulations set forth strict requirements with regard to the use of aircraft. Depending on the anticipated use (as a carrier-for-hire, scheduled service, or private use), the owner will have to elect to fall within, and comply with, the applicable FAA regulatory scheme.
While most corporate owners will use the aircraft to carry directors, officers, clients and key employees around the country, there are still important issues to consider. Will the aircraft be used to service other subsidiary and affiliated entities of the corporation? Will it be make available to government officials and political candidates?
These- and related- questions should be addressed early in the process to ensure the owner will be allowed to utilized the aircraft as they anticipated.
Who Will Own the Aircraft, and Who Will Operate It?
For tax, liability and accounting purposes, many corporations feel compelled to create a company with the sole purpose of owning the aircraft.
The bonus depreciation benefit was the key reason that Mobren Biological bought it's $5.4 million eight-seat jet, a Cessna Citation CJ2 late last year. In the past, Nylen and his senior management team would charter aircraft between 50 and 100 hours a year, at an annual cost of $120,000 to $150,000. Now, the company, which produces a raw form of an anticoagulant called heparin for leading pharmaceutical companies around the world, uses it's jet about once a week. Its senior managers take it to visit 35 vendor and customer plants throughout the U.S and Canada, most of them located in rural areas that are poorly served by commercial airlines. In all, says Nylen, the company expects to use it's jet up to 30 hours this year. Although it was a large up-front purchase, the CEO says he's confident the jet will ultimately pay for itself.
Weigh the Variables
With the current optimism in the marketplace and lower prices on both new and used planes, many CEOs will face the inevitable, and difficult question: When is the right time to buy a corporate jet?
There is a range of sophistication levels among chief executives when it comes to buying a jet, says David Almy, a vice president of the National Business Aviation Association. "CEOs are experts at many things, especially make widgets", he says, "but they are not necessarily experts at weighing the variables associated with buying a plane". Almy speaks from years of experience; he has spent time in the executive suite with more than 45 CEOs to determine why they bought business jets. "Some CEOs can articulate their rationales immediately, others can't until the second hour of the conversation, and some explain them during the second day," Almy says.
