Working with a management company

Business Jet Traveler » February 2010
If your management company has control of the aircraft, the IRS could charge
Monday, February 1, 2010 - 4:00am

Managing a multimillion-dollar aircraft isn't just another chore, it's a full-scale business-a business many owners want help with. "We're overwhelmed right now," said Scott Phillips, whose company, Jet 1 Charter, provides management and charter services in Naples, Fla. "We have a lot more people asking us to manage airplanes, whether for Part 135 [charter flights] or Part 91 [private flights]."



Robert Seidel of Jet Aviation, a business aviation services provider at New Jersey's Teterboro Airport, echoed Phillips' comments: "We have been inundated, almost unable to manage inquiries and requests for proposals."



Among the factors driving the demand: previously flush owners and those now flying fewer hours want a management company to charter out their aircraft to generate revenue; corporate flight departments are being pressed to demonstrate more fiscal responsibility; and former charter customers who have been drawn to ownership by historically low aircraft prices need their new purchases managed.



Many flight departments are capable of managing their own aircraft. For other owners, a certain level of outside stewardship makes sense because a good management company can offer considerable capabilities, experience and economies of scale. Such a management company will have expertise "in all of the domains required to protect the owner from risk, reduce his costs, maximize his revenue, protect his asset and provide him with the service he expects," said Scott Ashton, chief commercial officer of Gama Aviation in Stratford, Conn.



Here are six key steps to forging a strong management relationship:

1. Define your goals. If you want help managing your aircraft, start by defining your management goals. How many hours per year do you intend to fly, and to what destinations? Do you want to generate charter revenue? If so, how many hours, and how flexible are you in changing your schedule to accommodate charter opportunities? Once you've answered these questions, it's time to look for companies that can deliver what you need.



2. Find the right management company. There are hundreds to choose from. More than 750 U.S. management companies are on the National Business Aviation Association member rolls (

 

data.nbaa.org/prodsvcs/directory/search.cfm), though some sell management software or other products rather than management services. Most management service providers are arms of charter operators, and the two operations work in tandem. Flight department staff, fellow aircraft owners, aircraft brokers and charter companies may be able to point you to excellent candidates for the job.



"A good management company will take time to sit down with the prospective client, will understand the client's needs and will come back with a proposal and say, 'Here's how I came to this number,'" said Michael Moore, director of aviation sales at Meridian Teterboro. "Be wary of anybody that's got a set management fee and people who can give you a price without talking to you."



Keep in mind that not every good management company will be right for you. Some may be unable to meet your needs, may not need your aircraft model in their charter fleets or may have operating standards and procedures you are not comfortable with.



You can operate your aircraft from its current base and have it managed remotely. A management company can hire necessary personnel, establish a liaison with your maintenance team and ensure that all needed services are seamlessly handled.



3. Perform due diligence. It's essential to vet any management company you're considering. Its financial vitality is critical, as this business requires hundreds of thousands of dollars of operating capital for everyday operations. Yet most management companies are privately held and don't release financial information, complicating due diligence. Call suppliers and ask whether the company pays its bills promptly. Contact clients and ask about their experiences.



"There are some good operators out there, and some good lessons to learn," said Rick Maloney, president and CEO of Pentastar Aviation in Waterford, Mich. "Understand who you're talking to, visit their facilities, talk to them and make sure it's a company you're going to trust."



Perhaps most important, check the company's safety record: Is it Wyvern or ARG/US audited and at what level? Check with the National Transportation Safety Board and the FAA for any incidents or accidents involving its aircraft or actions regarding its operations.



4. Opt for Part 91 or Part 135 operations. Your aircraft can be managed for Part 91 or Part 135 operations or both. For example, it can make a Part 91 flight with an owner aboard and a Part 135 flight when it's hired out for charter. An owner may also operate an aircraft under Part 135 regulations even if he has no intention to use it for charter. The route you choose can have important tax and liability consequences.



If it's a Part 135 operation, your local FAA Flight Standards District Office will have a say in the management solution, to ensure it complies with government standards. FSDOs have authority to interpret flight standards within their jurisdictions. If your aircraft needs some item or modification to make it legal for charter-installation of flame-retardant materials in some area, for example-you, the owner, must pay for it.



If you manage your aircraft under Part 91, even if the management company provides total turnkey service, you remain in operational control as far as the FAA is concerned. Thus you retain primary liability and regulatory exposure. For tax purposes the IRS focuses on what it terms "possession, command and control" of the aircraft. If the IRS concludes that your management agreement cedes this authority to the management company, it reserves the right to hit you with the same 7.5-percent excise tax for a flight aboard your own aircraft that is levied on charter customers.



Depending on the terms of the management contract, putting the aircraft on a management company's Part 135 certificate could be interpreted as ceding this authority, according to the NBAA. Therefore, the contract must be written in a way that minimizes the possibility of a successful IRS challenge to the owner's claim of maintaining possession, command and control of the aircraft.



Part 91 operators may find it advantageous to have their aircraft on a Part 135 certificate for several reasons. For one thing, this shifts operational control, and therefore liability, to the management company when flights are operated under Part 135 rules. (Operational control remains with the owner when flights are conducted under Part 91 rules. And an owner might choose to operate some flights under Part 91 rules and others under Part 135. For example, an owner might opt for Part 91 to use an airport that wouldn't meet Part 135 requirements for that aircraft or flight.)



Another reason Part 91 operators may put an airplane on a Part 135 certificate: commercial aircraft may receive more advantageous tax treatment than private aircraft in some states. And operating on a Part 135 certificate simplifies accounting that demonstrates compliance with IRS rules regarding private use of a company's business aircraft.



But the primary reason for putting an aircraft on a Part 135 certificate is to generate income from charter to offset operating costs. Make sure you subject projections of potential revenue to a reality check. Former charter clients who've bought aircraft are often surprised by the economic realities of charter, according to Bob Joyce, director of sales and marketing at Silverhawk Jet Center in Lincoln, Neb.



 "They're stunned when they look at the bottom line and see how razor thin the margins are," Joyce said. "They're convinced [charter companies and owners are] making enormous profits. When we break down the costs for them, we see their jaws drop."



5. Agree on financial terms for charter. The Part 135 charter management environment has changed markedly for owners as a result of the economic downturn. In boom times, charter operators needed lift to meet demand so they promised owners lots of charter hours and gave them concessions on management fees to secure aircraft for their fleets. Now companies are picky about which airplanes they'll manage and what aircraft they'll add to their fleets. And they aren't promising dozens of hours of charter business per month.



 "The charter market has shrunk 30 to 50 percent and people are in a rush to find a management company and a charter company to produce a miracle," said Ian Ewing, vice president of business development at Jet Source in Carlsbad, Calif. "What I will do when talking to someone in that situation is let them know the realities of the marketplace."



Revenue has typically been split 85/15 between the owner and the management/charter company. Other arrangements are now common. Some management companies simply pay a flat hourly fee to the owner for use of the aircraft. For an in-demand large-cabin aircraft, with its bigger margins, the revenue split may be 90/10. Whatever the deal, it's imperative that all income, costs and fees be transparent, with agreements beforehand on when payments will be made, whether charges to the owner will be deducted or whether the owner will be billed separately. Apocryphal cautionary tales from management executives tell of owners who discovered their aircraft was chartered out at rates that didn't cover direct operating costs; the management company was making less money than usual while the owner was losing money. You should be receiving a detailed monthly statement.



6. Negotiate the contract. Management contracts spell out the services to be delivered, the fees to be charged and the responsibilities of each party.



A key part of the contract is the management fee, a fixed monthly charge that covers administrative expenses. Owners are naturally concerned about this fee, but management companies argue that charges for many other items-from catering to benefits contributions-can have a bigger cumulative impact on total costs. Besides, some say, a couple of thousand dollars a month difference shouldn't be the deciding factor regarding stewardship of your $25 million asset.



"Generally speaking, the people we deal with are quite sophisticated and understand the value-added concept of management," said Pentastar's Maloney. "But if somebody is pricing me against Joe and his bag of donuts down the street, I tell them to go down there and take it."



The fee is based in part on the complexity of handling your operations and on whether your aircraft generates revenue for the management company or simply costs it time. Said Meridian's Moore: "If an owner says, 'I want my aircraft to fly 300 hours of charter a year and I fly only 100 hours myself, usually New York to Palm Beach,' we're going to make money on charter. The management fee would be higher for the owner who says, 'I don't want a lot of charter and I fly to the Congo, South Africa and Asia'-places that will be labor intensive for the operations department, making phone calls and arrangements."



Management fees can vary widely for a similar aircraft type, and some companies include other costs in addition to administrative expenses in the figure. So when comparing management fees, make sure you understand everything that is and isn't included. Monthly administrative fees alone typically start in the low four figures for a small-cabin jet, and can reach into the low five figures for a large-cabin business jet.



Keep in mind that with professional management you should see significant savings on insurance, hangaring, fuel agreements, ground transportation, catering and other expenses that need to be factored into the decision. Before signing, have the deal reviewed by an attorney who specializes in aviation contracts to ensure the agreements are in line with FAA and IRS expectations.

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