Owning a private jet is an expensive activity, no question about it, yet the most avid users see a clear rationale for having a jet. What if they see something that most don’t?
By Olga Tcacenco, Head of aviation advisory division KENDRISfly
Of course, the first things that come to mind when speaking of business jets are luxury, privacy, and exclusivity. Although true, shouldn’t this be expected of a product at this price range? High-end cars, properties, resorts, etc. all use the same sales argument.
Yet, when it comes to private jet owners, their perception of value differs: time and convenience are the key factors, followed by security and confidentiality. For high-profile business owners, entrepreneurs or VIPs, time is an essential parameter when using private planes as a mean of transportation.
Cost of Time
Avoiding delays, flight connections, check-in immigration and security queues, whilst complying with inflexible airline schedules, all add hours, if not days, to trips that can otherwise be done in a few hours with a private plane. When considering that in one hour a business valued at $100m will generate more revenue than the hourly cost of most business jets, replacing a two-day business trip with two 6h flights will clearly accelerate business enough to amortize the extra expense of a private flight.
Security and Confidentiality
Should one be working in the natural resources industry, travels might take them into regions where air transportation is scarce, unreliable and potentially unsafe. On the other hand, no airliners (such as the one I’m writing from) really offer any form of confidentiality. This prevents executives from using laptops or even discussing important matters, essentially making travel an idle time for any business.
When the parameters above are established, one needs to fly private. But what is the economic rationale? Once the above set of criteria are met (or others) and someone is required to fly private, then two options exist – rental or ownership.
Primary Factors
Like for any asset, utilization/amortization are the primary factors when it comes to a rental vs. ownership decision. Let’s use the example of a Falcon 2000, which is one of the most successful aircraft in Europe. On the charter market, flights would be sold between 6,000 and 7,000 euros per hour, which once multiplied by enough hours (c. 400 hours) is equivalent to the annual operating cost of the same aircraft (excluding depreciation). The cost of operating such a plane would approximately reach 2.5-3 million euros per annum – based on 500 hours per year (average utilization of a business jet).
On this assumption, the hourly cost would then be 5,000-6,000 euros per hour, hence cheaper than the same aircraft on the charter market. However, flying 500 hours per year is a very high target for a single owner, so the solution relies on chartering out the plane. Assuming 150 hours of personal utilization and 300 hours of the third-party charter, a jet of this size would require 1.5 million euros of fixed costs (crews, planned maintenance, etc.). The variable cost of a flight would be in the range of 3,500 euros per hour, for which the third-party client would pay 7,000 euros.
Based on the above, the charter activity would generate a 1.05 million euros contribution to fixed costs. The variable costs of the owners’ hours (3,500 euros), plus the amortization of the remaining fixed costs (0.45 million euros), would result in an effective hourly cost of 6,500 euros, identical to the charter.
In Favor of Ownership
Then why, one might ask, would someone wish to own a plane? Once again, convenience and flexibility are the answer. Charter, regardless of the way it is structured will only give limited flexibility when compared to ownership.
First of all, no operator would fly without being paid upfront. Therefore, this requires planning or immobilization of large upfront sums of money with operators or brokers. Even with these measures, lead time for payments would be required and would prevent, in most of cases, real last-minute flights. Cancelation fees will also apply. One alternative is to consider block charter or shared ownership. However, these suppliers will charge their clients handsomely, having them pay the real costs of this «perceived» flexibility, which is still limited contractually (peak periods etc.).
Lastly, when booking a charter flight, 90 percent of the time the charter client will pay for the positioning of the aircraft before and/or after a flight. So, a charter client often ends up paying up to two hours per occupied hour flown. This last fact biases the previous calculation in favor of ownership. In some specific circumstances, doubling the hours can even offset the amortization of some second-hand business jets, making ownership truly cheaper than a rental.
Advised by Experts
So, the question really is «why to pay the same, or more, for less value?». Because the market is volatile, because the market is complex and because not all aircrafts or operators are able to deliver these levels of savings. Therefore, before entering the aircraft ownership market, it is key to be advised by experts, who can direct a buyer to the most efficient aircraft for their specific needs.
Future owners of private aircrafts can therefore consult technical and commercial subject-matter experts and, in the further acquisition process, be accompanied by tax law and ownership structure experts.
Olga Tcacenco has a law degree from the University of Wales, is a full STEP member and has over 15 years of experience in the administration of international trusts and companies. She deals with complex cross-border structures of multinational high-net-worth families with a focus on legal and cross-border aspects. She heads KENDRIS aviation advisory division KENDRISfly.
