Feature: Go for Brokerage
In July 2001, two Tennessee doctors approached Tony Moseley, owner of Tennessee Jet Aircraft, a company that buys and sells brokerage aircraft. The year before, the doctors had purchased two Learjets from a charter company. The owner of the charter company said he would rent the planes back from the doctors to help offset financing and maintenance costs. The rental fees, however, were not enough to defray the upkeep costs of the worn-out aircraft, so the doctors decided to sell their planes.“How much were the planes worth when we bought them?” the doctors asked Moseley.
“Probably a little over $2 million for both at the time of purchase,” Moseley replied.
The doctors were shocked. They had paid almost $3 million for the planes—over $1.8 million for the Lear 25 and $1.1 million for the Lear 24. And Moseley had worse news for them. The market had softened in 2001, and the two planes together would sell for only a little over $1.5 million. “They were the nicest people you’d ever want to meet,” says Moseley. “They’d been completely taken advantage of by the seller and by the banker who’d loaned them the money.”
As unfortunate as it may sound, Moseley’s story proves that the current market favors buyers instead of sellers. If you are a regular charter flier logging more than 150 hours a year, or a fractional owner with three-sixteenths interest, you are probably considering buying a brokerage jet because it would be more cost-effective—and convenient—to own an aircraft. By owning a plane, you would eliminate the cost of deadhead charter flights, where you must pay to fly the chartered aircraft back to its hangar. You also do not have to pay the management fees and hourly flight fees that fractional companies charge their customers for their services.
The trick is to find the right jet at the right price, which may seem overwhelming, especially if you are a first-time buyer. Sometimes the purchasing process can be as simple as clicking and pointing. Tony Friend, president of Aircraft Shopper Online, an aircraft listing source, recalls a Bay Area investment manager who was scanning the ads on ASO late one night. “He found the Gulfstream V he wanted, and sent an e-mail directly to the seller, and that turned into a deal,” says Friend.
Mike Moore, vice president of sales at TAG Aviation in San Francisco, brokered that very deal and admits he was surprised to receive the late-night e-mail from the Gulfstream-seeking investment manager. “When you’re talking about a $40 million aircraft, you’re talking about the cost of building a new corporate headquarters or buying another com-pany,” says Moore. “You’d never do that without working with a group of experts to evaluate every angle of the deal.”
The following are some mistakes inexperienced buyers make and ways to avoid them.
Failing to understand the aviation market. Consider a scenario in which 300 aircraft of a certain type exist, and 50 of them are on the market. The value of the for-sale planes will be lower than if there were only five of that type available. But how will you know which jets are common and how much they are worth? Your most important defense against paying too much for a used jet is a good aviation broker. “Those guys have their fingers on the pulse of the market,” says Patrick Bailey, an aviation lawyer. “The values of different aircraft are going up and down all the time.”
Buying the wrong kind of jet. Some fliers become emotionally attached to a particular plane, even though it may not suit their needs. A good broker will come to you with questions, such as how often you will use the aircraft, how many passengers will be traveling, and the distances you wish to fly. “Are you buying a jet that’s going to have trouble getting you from Aspen back to New York City with a full load of passengers and fuel?” asks Moore. “Or are you buying a long-range jet when you’re only making one long-range trip per year?”
Getting stuck with a lemon. Once you have made an offer on a jet, you should demand a prepurchase inspection before agreeing on the final terms of sale. You can fly your jet to a facility of your choosing—at your own expense—so the plane can be checked for maintenance problems. The cost of those repairs will come off the asking price. While you should conduct an inspection for any plane, it is crucial to have an older jet checked out. “A newer plane is much more likely to have been maintained well, because none of the owners want to go the cheap route,” says Bailey. “But once a plane has been sold 10 or 12 times, the first thing to go is the maintenance.”
Paying someone else’s tab. In real estate, checking for liens against a property is relatively easy. In aviation, however, there are some twists. For example, a seller may have taken out a loan using a jet engine as collateral instead of the entire plane. You will need an aviation lawyer to make sure the entire jet belongs to the seller. Your lawyer should also check the logbook for liens against maintenance. If the seller skipped out on a $30,000 maintenance bill, you will receive collection notices once you buy the jet. Your lawyer can also make sure the warranties of all the engines and avionics are still in effect and transferable to you.
Enjoying a too-smooth deal. For Moseley, the real tip-off that the two doctors had been swindled was that their banker had financed every penny of the inflated purchase price of their two jets. “When I buy a jet, the banker asks me 20 times if it’s really worth the asking price,” says Moseley. “Their guy just looked the other way, which means he was getting something under the table from the seller.”
Jet purchases are handled in escrow. You send money to an escrow agent, and the seller sends the papers to the agent as well. You will not be able to find out if your banker or chief pilot is getting a bonus from the seller for pushing the deal through. There is no way to stop these payments, but by surrounding yourself with good advisers, you can prevent such payoffs from getting you into a bad deal.
Ultimately, putting together a good team to help you through the buying process is the best way to avoid getting burned by a dishonest seller, says Moseley. “If someone is going to try to buy a jet without a broker or some expert advice,” he says, “they can take a huge hit while trying to save a few dollars on commission.”
Private aviation does not require buying or chartering an aircraft. Other options include leasing, buying a fraction of a jet, or taking out a membership in a flying service. The price and convenience of these options vary widely. Here are descriptions of the various means of private flight, and some of the companies that offer them.
• Chartering is a straightforward, one-time commitment. The cost of the flight is generally calculated on an hourly basis.
Points to consider: You are not saddled with maintenance fees and other costs associated with owning a plane. You must pay to fly the plane back to its hangar after it has dropped you off (the deadhead flight). You also pay extra for crew, landing fees, in-flight phone use, and catering.
Pricing options (provided by Regal Aviation, as of October 2001):
Lear 35: $1,500 an hour
Hawker 700: $2,500 an hour
Gulfstream III: $4,100 an hour
• eBizJets offers a kind of debit card for frequent charter fliers. Depending on the plane you choose, you pay an up-front fee of $100,000, $250,000, or $500,000, then deduct hourly flight fees every time you fly one of the company’s planes.
Points to consider: You do not have to pay any deadhead flight charges or management fees, and there are no blackout dates. eBizJets does not own most of its jets; it rents them from individual jet owners. The operating his-tory of each of the 1,400 aircraft in its network is maintained by an indepen-dent auditor.
Pricing options (as of October 2001):
Light jet, such as a Cessna Citation Bravo: $1,600 an hour
Midsize jet, such as a Hawker 800XP: $2,500 an hour
Heavy jet, such as a Gulfstream IV: $4,000 an hour
• NetJets is the largest fractional ownership company in the world. You purchase a fractional interest (as little as a one-sixteenth interest), and your plane is available whenever you need to fly.
Points to consider: The company functions like an elite airline with its own fleet of jets, pilots, and mechanics, along with in-house meteorological and security services. You must make a five-year commitment, paying an up-front purchase price, plus a monthly maintenance fee and an hourly fee each time you fly.
Pricing options (as of October 2001) for a one-sixteenth share, or 50 hours of flight annually for five years:
Cessna Citation V Ultra: $375,000 up front, plus a $5,224 management fee and an hourly flying rate of $1,318
Hawker 800XP: $813,375 up front, plus a $7,003 monthly management fee and an hourly rate of $1,800
Gulfstream IV-SP: $2 million up front, plus $13,500 monthly and an hourly flying rate of $3,000
• Ownership brings its own set of freedoms, along with new costs and concerns.
Points to consider: The aircraft becomes an asset and an investment. You have nearly total freedom to fly when and where you want. You pay for all maintenance and hangar fees, which can cost hundreds of thousands of dollars annually. You also pay for fuel, crews, avionics, and interior cabin renovations. In addition, you are at the mercy of the ever-changing aviation market if you want to sell the aircraft.
Pricing options (based on asking prices in Aircraft Shopper Online for specific aircraft in October 2001):
1998 Cessna Citation V Ultra: $6 million
1997 Hawker 800XP: upwards of $10 million
1998 Gulfstream IV: $27 million