““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
The Demo Flight
You probably wouldn't dream of buying a car without test-driving it. Yet people sometimes purchase airplanes they have never flown in-or even seen. Some of these buyers rely on a trusted business associate or flight crewmember to look at the aircraft for them, but this is a risky idea. If you're purchasing the airplane and will be riding in it, you'd be well advised to check it out yourself. This is especially true if you've never flown on the model you're considering.
An in-person evaluation will help you determine what you can't tell from pictures: whether the aircraft is noisy or smells bad or whether and to what extent it needs refurbishing. (Maybe after you see the carpet, you'll decide you can live with it.) A demonstration flight can help you determine whether the cabin size and configuration suit you and whether you'll feel comfortable in the aircraft, given how you plan to use it. As such, the flight should demonstrate the airplane in its intended use. A coast-to-coast trip is ideal for a Challenger 604; an intercontinental one is appropriate for a Gulfstream G550.
Most aircraft owners aren't crazy about providing free rides to prospective buyers, but charging a passenger for the flight is generally prohibited unless the trip is conducted under a commercial certificate. In the case of most jet aircraft, however, FAA regulations (Part 91) permit the owner to charge up to two times the fuel cost plus certain listed incidental expenses (see box) for a demonstration flight. If an expense (such as the cost of flight crew, as opposed to crew travel expenses) isn't on the list, no charge is permitted for that expense. The FAA intends such expenses to be covered by doubling the fuel cost.
The regulation permitting charges for demo flights under Part 91 is poorly understood in the industry, and often observed more in the breach, even by people who should know better. First, the FAA permits charges only for the fuel and incidental expenses actually incurred. If you're an aircraft owner providing a demo flight, in other words, you can't estimate what the fuel cost will be and charge for it on that basis; you have to calculate the charge using actual costs. It follows that you can't use some fixed hourly cost (like a charter rate) for demo flights unless you actually conduct the flights under Part 135, in which case you can charge whatever the market will bear.
On the other hand, the FAA permissible amounts are the maximum you can charge. You're free to charge less. For example, the FAA says you can charge a landing fee. Suppose the demo flight ends at an airport where the landing fee is $100. Under the regulation, then, you can charge between $0 and $100 for the landing fee. The same is true for fuel. If you document that the flight's actual fuel cost is $13,400, you can charge up to two times that amount or anything less, so long as you describe it as a charge for the fuel.
Given that you can charge less than the FAA permits, how much should you charge? Demo charges are subject to negotiation and sellers often waive them if the passenger buys the aircraft. For tax reasons, as we will see shortly, it may be better to wait before sending a bill to see whether the sale occurs rather than crediting the purchase price for the amount of the demo. Even if the passenger doesn't buy the aircraft, it's not unusual for him or her to pay actual fuel costs, rather than two times fuel.
Demo arrangements should be memorialized in a written agreement that is consistent with FAA requirements. Because demonstration flights almost always employ pilots supplied by the owner, the FAA treats them as wet leases. So if neither party has a commercial operating certificate, the agreement should contain customary truth-in-leasing disclosures, and the FAA's local Flight Standards District Office should be notified 48 hours prior to the flight.
The agreement should also deal with something that many, if not most, sellers overlook: the 7.5 percent transportation excise tax-which applies to a demonstration flight even if it consists of just flying around for an hour and landing where you took off. The seller has possession, command and control of the aircraft and should therefore collect the tax on the amount paid by the passengers. Of course, if the flight is conducted on a no-charge basis, there will be no amount paid, and thus no tax to collect. This is why it's best to hold off charging for the flight in the case where it's free if the passenger purchases the aircraft, rather than crediting a payment against the sale price.
One final note: a demo flight is no substitute for a test flight. If you're the buyer, you should still have a professional crew conduct such a flight before you finalize your purchase.
Demonstration Flight Charges
Under Federal Aviation Regulations Part 91.501(d), an aircraft owner may charge the following expenses for a demo flight:
• Fuel, oil, lubricants and other additives (up to two times actual cost)
• Travel expenses of the crew, including food, lodging and ground transportation
• Hangar and tiedown costs away from the aircraft's base of operation
• Insurance obtained for the specific flight
• Landing fees, airport taxes and similar assessments
• Customs, foreign permit and similar fees directly related to the flight
• In-flight food and beverages
• Passenger ground transportation
• Flight planning and weather contract services