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Learn to Fly Private
Welcome to the 26th edition of "Learn to Fly Private". I was out of the office last week, so I'm sorry for skipping last week. Hopefully today's newsletter is worth the wait! One of the most common replies on my tweets about aircraft is "if it floats, flies, or [redacted word that also starts with 'F'], it's better to rent than buy." I'll say that I'm a strong proponent of marriage, and this isn't a newsletter about boats, so let's look at the "flies" example and see if its truly better to rent than buy. If this newsletter had an alternative title, it would be called "Private Jets as an Asset Class." This is a deep dive into the evaluation of charter vs. ownership, as well as sharing some anecdotal conversations I have had with end clients about how they think about IRR hurdle rates and using debt on a business tool.
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Now let's dig in...
Comparing Ownership Cost vs. Chartering Cost
Remember a few weeks back when we looked at how to read a Citation XLS listing? We'll use that same aircraft for our comparison between chartering and whole aircraft ownership. The following is not tax advice nor financial advice, but is intended as a framework for decision making based on conversations I have with buyers on a daily basis.
Before we dive into the numbers, let me point out a caveat. If you own an aircraft, there are still repositioning costs. If you stay at a destination for a week, you'll have to pay for your pilots round trip home and storage for the aircraft. The alternative is to fly the aircraft home for a week and back to you (making your 2 hour trip an 8 hour trip). For that reason, I have included 3 different charts to prove this point.
Here are our assumptions and other data. Operating cost data comes from Conklin and DeDecker and the charter cost comes from a conversation with Trilogy Aviation Group.
Purchase Price: $6,495,000
Direct cost per hour: $3,181
Annual Fixed Costs: $646,900
Depreciation: $140,000 per year
Charter Cost Per Hour: $7,000
Assumes zero empty legs, always with the plane
(Assuming 25% Repositioning Flights)
(Assuming aircraft never stays with owner)
The reality is, these are extremes. Sometimes it will return to base and other times it will stay with the owner. As the owner of an aircraft, you will represent one point on the intersection of these two lines. This also assumes Part 91 only, with zero charter revenue offsetting any fixed costs.
Oh yea... and chartering also has the lovely 7.5% FET (federal excise tax) not shown here. Not awesome.
Tax Benefits, Real Depreciation, and Cost of Capital
The above examples of direct operating costs do not take into account any of the financial costs/benefits that come from owning the asset itself. Depending on your tax situation and the way your company operates, there may be more opportunity for comparison.
Depreciation Tax Benefits
Please consult your tax advisor, this is not tax advice. Generally speaking, there are two ways to depreciate an aircraft. The first is with the Modified Accelerated Cost Recovery System (MARCS), and depreciate an aircraft over a 5 year period. Below is a picture of the NBAA MARCS schedule for Part 91 aircraft (no charter).
The other depreciation method, and one that has been a boon to private aviation purchases, is through bonus depreciation. In 2024, buyers are able to take 60% bonus depreciation in the first year and then a modified straight line approach. This is useful for those looking to maximize their tax benefit in the first year of the aircraft being put into service.
Here's a nice chart showing them side-by-side.
On the assumed purchase price of $6,495,000, you will reduce your tax basis by $3,897,000, and if you're in the 28% marginal tax bracket this could mean $1,052,190 in tax savings in the first year. Of course, consult a tax professional to see what it would be in your business and be sure to avoid depreciation recapture.
A note: we are still awaiting the senate to vote on "The Tax Relief for American Families and Workers Act of 2024" which would return 100% bonus depreciation. It's after tax day, so that vote is looking like it's slipping out of our grasps. I remain hopeful.
Real Depreciation Costs
The reality is: an aircraft is a depreciating asset. There are three main factors that determine depreciation on the aircraft.
Total time on airframe (TTAF)
Hours since major overhaul (SMOH)
Age of aircraft
A good estimate is that aircraft depreciate 5-7% per year, depending on how much usage. In the event of a chartered aircraft, it will depreciate around 10% per year due to the high utilization of the aircraft. These depreciation values differ depending on the age of the aircraft, as they tend to stabilize their depreciation curves after ~ 10 years of age.
Cost of Capital
In an attempt to keep this an evergreen post, I'm going to speak in terms of market indices instead of "today's interest rates." Typically, the three financial benchmarks for aircraft loans is based on:
SOFR (Secured Overnight Financing Rate)
5-Year Treasury Rate
WSJ Prime Rate
Today, we're seeing SOFR +125bps to SOFR + 350bps depending on the credit rating of the individual or corporation. To put a time stamp on it, today that would mean 6.8% to 9% interest, with an option to swap into a fixed rate.
Amortization is based primarily on the age of the aircraft and the likely depreciation expected during the life of the loan. A good rule of thumb is age + amortization < 30 years. This is not set in stone.
For those that are paying cash for their aircraft, there is an opportunity cost of capital to be considered. Many savvy CFO's are doing back-of-the-napkin math weighing the opportunity cost of paying cash for their business aircraft vs. using some portion of bank debt.
From our example aircraft above, let's assume the following terms (which are very likely):
75% Loan-to-value, 5 year term, 12 year amortization, 7.75%
Purchase Price: $6,495,000
Down Payment: $1,623,750
Interest Expense: $1,619,765.10
Balloon Payment: $3,367,203
This means, over the life of the loan there will be $1.6m in interest expense and then a balloon payment in month 60 at $3.3m.
Let's Tie It All Together
We assumed earlier that the actual depreciation of the asset was going to be 5%, which gives us a resale value at the end of the 5 year term of $5,025,707.19 and a remaining loan balance of $3,367,203. There have also been monthly installments of $52,063.53 for 60 months. At the end of the 5 year term we have also maximized our tax benefits for depreciation.
If you're not financing, just remove the "loan balance total" line and see relatively how to think of your aircraft purchase.
While tax incentivized, finances is not the only reason people buy airplanes. There is also a convenience factor and a comfort factor.
No one else has been on the plane but you.
You can leave exactly when you want to, or stay if you want to. The plane moves on your schedule.
That is something that can't be replicated by charter or fractional, and that is worth probably more than money.
If it floats, rent it. If it flies, depends on your mission. If it f*cks, buy it. Marriage is great.