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Taking Flight: Evaluating Your Private Travel Options

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In response to the COVID-19 pandemic’s impact on the commercial airline industry, more travelers are considering private jet options. Understanding the structure and true costs of each is key to making the right selection.

Various forms of private jet travel have long been an option for executives, business owners and families with multiple homes, or simply the desire to travel frequently. Yet many continued to favor commercial air travel given its comparatively low cost and relative scheduling convenience. However, faced with a global pandemic and its associated health safety concerns, the reduction in the number of commercial flights, the resulting discontinuation of service to some remote domestic airports and severe limitations on international travel, the current state of commercial travel has many travelers considering other options.

Private Aviation Options

There are four main choices when it comes to private jet travel. The following table introduces each, along with its best use and several primary considerations.

desktop-tablet-taking-flight_01-nobg Charter Membership Fractional Ownership Additional factors to consider regardless of the option chosen: • What type of pilot certification does the operator or management company require? • Who maintains the aircraft within the fleet? • If the fleet is not owned by its operator, who owns the planes? • What is the operator’s, and the aircraft’s, safety record? • How are health risks mitigated? “Pay as you go”; no time or financial commitment. Full ownership Requires the upfront purchase of a specified number of hours or a subscription. The commitment determines access to the level of service received and type of aircraft available. Like a vacation home timeshare, a pool of owners shares in the costs of maintaining a fleet of airplanes. Event-driven, such as one-time trips or emergency travel. Maximum flexibility in terms of availability. Owners enjoy consistency of the same crew for every flight vs. membership/ fractional crew rotation. Given the hourly cost and types of aircraft used in these programs, they are most appropriate for intermittent use and domestic travel. But some companies offer international travel or access to private aircraft in other countries. Most fractional ownership arrangements are for a partial interest in an aircraft for a fixed number of years. The ownership arrangement is typically based upon the number of hours the owner expects to use the plane. The management of the aircraft is handled through a separate management company. Fractional owners typically fly in their own planes, not in other planes within the fleet. Unlike commercial travel, cost should not drive the decision as much as safety records, plane ownership and management, and pilot certification requirements. Clients need to be comfortable with the charter operator, understanding the overall pricing and costs, and perform their own due diligence. Structuring ownership and financing arrangements requires the involvement of aviation experts to ensure compliance with regulations and that any available tax incentives are not jeopardized. Provides liquidity in the event of sale and creates an income opportunity from leasing when not needed. Proper financing allows owners to stay invested in longer-term assets like stocks, bonds and real estate. With so many distinct types of programs, each membership option requires careful analysis of the options and associated costs. It is important to understand what charges and fees clients will be responsible for as well as which amenities are part of the membership. It is important to align the membership with the type of plane that is best suited for the client’s needs and flight needs. Memberships typically require a commitment to a certain type or size of aircraft and the estimated number of hours to be traveled each year. Opportunity to sell the share, but this can occur at a discount to the purchase price. Company takes responsibility for maintenance and staffing needs. Fractional owners often consume more hours of use than membership clients. Typically, a 1/8 interest in a plane represents 100 flight hours. The costs for fractional ownership tend to be: (1) aircraft acquisition costs (2) maintenance fees (3) occupied hourly fees, and (4) fuel surcharges and other miscellaneous items. OPTIONS STRUCTURE APPROPRIATE USE PRIMARY CONSIDERATIONS
desktop-tablet-taking-flight_01-nobg Charter Membership Fractional Ownership Additional factors to consider regardless of the option chosen: • What type of pilot certification does the operator or management company require? • Who maintains the aircraft within the fleet? • If the fleet is not owned by its operator, who owns the planes? • What is the operator’s, and the aircraft’s, safety record? • How are health risks mitigated? “Pay as you go”; no time or financial commitment. Full ownership Requires the upfront purchase of a specified number of hours or a subscription. The commitment determines access to the level of service received and type of aircraft available. Like a vacation home timeshare, a pool of owners shares in the costs of maintaining a fleet of airplanes. Event-driven, such as one-time trips or emergency travel. Maximum flexibility in terms of availability. Owners enjoy consistency of the same crew for every flight vs. membership/ fractional crew rotation. Given the hourly cost and types of aircraft used in these programs, they are most appropriate for intermittent use and domestic travel. But some companies offer international travel or access to private aircraft in other countries. Most fractional ownership arrangements are for a partial interest in an aircraft for a fixed number of years. The ownership arrangement is typically based upon the number of hours the owner expects to use the plane. The management of the aircraft is handled through a separate management company. Fractional owners typically fly in their own planes, not in other planes within the fleet. Unlike commercial travel, cost should not drive the decision as much as safety records, plane ownership and management, and pilot certification requirements. Clients need to be comfortable with the charter operator, understanding the overall pricing and costs, and perform their own due diligence. Structuring ownership and financing arrangements requires the involvement of aviation experts to ensure compliance with regulations and that any available tax incentives are not jeopardized. Provides liquidity in the event of sale and creates an income opportunity from leasing when not needed. Proper financing allows owners to stay invested in longer-term assets like stocks, bonds and real estate. With so many distinct types of programs, each membership option requires careful analysis of the options and associated costs. It is important to understand what charges and fees clients will be responsible for as well as which amenities are part of the membership. It is important to align the membership with the type of plane that is best suited for the client’s needs and flight needs. Memberships typically require a commitment to a certain type or size of aircraft and the estimated number of hours to be traveled each year. Opportunity to sell the share, but this can occur at a discount to the purchase price. Company takes responsibility for maintenance and staffing needs. Fractional owners often consume more hours of use than membership clients. Typically, a 1/8 interest in a plane represents 100 flight hours. The costs for fractional ownership tend to be: (1) aircraft acquisition costs (2) maintenance fees (3) occupied hourly fees, and (4) fuel surcharges and other miscellaneous items. OPTIONS STRUCTURE APPROPRIATE USE PRIMARY CONSIDERATIONS
desktop-tablet-taking-flight_01-nobg Charter Membership Fractional Ownership Additional factors to consider regardless of the option chosen: • What type of pilot certification does the operator or management company require? • Who maintains the aircraft within the fleet? • If the fleet is not owned by its operator, who owns the planes? • What is the operator’s, and the aircraft’s, safety record? • How are health risks mitigated? “Pay as you go”; no time or financial commitment. Full ownership Requires the upfront purchase of a specified number of hours or a subscription. The commitment determines access to the level of service received and type of aircraft available. Like a vacation home timeshare, a pool of owners shares in the costs of maintaining a fleet of airplanes. Event-driven, such as one-time trips or emergency travel. Maximum flexibility in terms of availability. Owners enjoy consistency of the same crew for every flight vs. membership/ fractional crew rotation. Given the hourly cost and types of aircraft used in these programs, they are most appropriate for intermittent use and domestic travel. But some companies offer international travel or access to private aircraft in other countries. Most fractional ownership arrangements are for a partial interest in an aircraft for a fixed number of years. The ownership arrangement is typically based upon the number of hours the owner expects to use the plane. The management of the aircraft is handled through a separate management company. Fractional owners typically fly in their own planes, not in other planes within the fleet. Unlike commercial travel, cost should not drive the decision as much as safety records, plane ownership and management, and pilot certification requirements. Clients need to be comfortable with the charter operator, understanding the overall pricing and costs, and perform their own due diligence. Structuring ownership and financing arrangements requires the involvement of aviation experts to ensure compliance with regulations and that any available tax incentives are not jeopardized. Provides liquidity in the event of sale and creates an income opportunity from leasing when not needed. Proper financing allows owners to stay invested in longer-term assets like stocks, bonds and real estate. With so many distinct types of programs, each membership option requires careful analysis of the options and associated costs. It is important to understand what charges and fees clients will be responsible for as well as which amenities are part of the membership. It is important to align the membership with the type of plane that is best suited for the client’s needs and flight needs. Memberships typically require a commitment to a certain type or size of aircraft and the estimated number of hours to be traveled each year. Opportunity to sell the share, but this can occur at a discount to the purchase price. Company takes responsibility for maintenance and staffing needs. Fractional owners often consume more hours of use than membership clients. Typically, a 1/8 interest in a plane represents 100 flight hours. The costs for fractional ownership tend to be: (1) aircraft acquisition costs (2) maintenance fees (3) occupied hourly fees, and (4) fuel surcharges and other miscellaneous items. OPTIONS STRUCTURE APPROPRIATE USE PRIMARY CONSIDERATIONS

Since travel needs vary with each trip, typically the above options are used in complementary ways. For example, the owner of a mid-to-large cabin jet may prefer to use a jet card for a shorter flight because of the costs associated with a larger cabin jet.

Typically, charter and fractional options enable first-time and infrequent users to access private aviation; however the cost per hour can be considerable. Generally, when travel needs reach 150 flight hours annually, full ownership starts to become more cost-effective.

Potential tax savings

The 2017 Tax Cuts and Jobs Act enables any business owner who uses a plane for business purposes at least 50% of the time to potentially deduct the entire purchase price of the plane during the first year of ownership.

Which Option Is Right for You?

As with other financial decisions, when considering private travel, it helps to define what you want to achieve before committing your investable assets, and to what extent. Gaining that understanding starts with answering five key questions with each trip you plan to take.

Where do you want to go today?

Your destination often narrows the options. For instance, prepaid or subscription flights often involve smaller jets and are therefore better suited for shorter, domestic trips. When your business travel frequently takes you around the globe or you have a need for travel on short notice – as in the case of a developer who wants to view a newly listed property before bidding – owning a private jet can be the better choice given the immediate access to an aircraft, crew and ability to access any destination.

How many are traveling?

The size of your party helps determine the type of aircraft you need, which may narrow your options. For instance, the larger the group, the more cost-effective a charter flight for a one-time event such as a wedding or golf tournament may become. However, when traveling alone on short notice domestically, using a private jet membership program may get you an unoccupied seat at a cost comparable to flying first class on a commercial flight.

How important is privacy and consistency?

For membership options, different service levels offer different types of amenities and access to aircraft. For instance, if ensuring you are the cabin’s only occupant so that you can work without interruption or guaranteed privacy is important, a higher membership level or even ownership should be considered.

What is the purpose of your flight?

For perennially time-pressed travelers, the ability to simply drive up to the plane and depart, bypassing commercial security checkpoint lines and restrictive flight schedules, may be reason enough for choosing a private alternative. For families, it may be arranging travel among multiple and remote homes or for regular visits to far-flung relatives. Also, the more frequent your needs, especially where a family business is involved, the more viable fractional or full ownership become.

Case Study

Decision points: comparing memberships

A client wanted to visit family members in three different cities. To accommodate travel preferences regarding cabin size, we requested quotes for a Citation Excel/XLS from three different membership firms. The range in execution and considerations within each of the membership programs illustrates why many travelers involve an aviation expert in their decision-making.

desktop-tablet-taking-flight_02 Total estimated cost for this trip: Total estimated cost for this trip: Total cost at peak usage times would be between: $58,634 $68,500 $68,542 - $75,542 OPTION 2 OPTION 3 OPTION 1 This involved a prepaid arrangement – 25 hours to be used over two years for approximately $193,000. While also a prepaid program, the upfront commitment from this firm was $100,000 and the flights could be used over three years and included access to less expensive “on demand” or single charter flights when it makes sense. This was more of an “on demand” program. While a minimum number of hours is not required at purchase, this firm has an initiation fee ($17,500) and requires annual dues (starting year two) of $8,500. A two-year or three-year membership would have associated costs of at least $26,000 to $34,500 before flying. The program uses a pricing model similar to a ride-sharing company, with dynamic hourly pricing based on demand.
desktop-tablet-taking-flight_02 Total estimated cost for this trip: Total estimated cost for this trip: Total cost at peak usage times would be between: $58,634 $68,500 $68,542 - $75,542 OPTION 2 OPTION 3 OPTION 1 This involved a prepaid arrangement – 25 hours to be used over two years for approximately $193,000. While also a prepaid program, the upfront commitment from this firm was $100,000 and the flights could be used over three years and included access to less expensive “on demand” or single charter flights when it makes sense. This was more of an “on demand” program. While a minimum number of hours is not required at purchase, this firm has an initiation fee ($17,500) and requires annual dues (starting year two) of $8,500. A two-year or three-year membership would have associated costs of at least $26,000 to $34,500 before flying. The program uses a pricing model similar to a ride-sharing company, with dynamic hourly pricing based on demand.
mobile_375px-taking-flight_02 Total estimated cost for this trip: Total estimated cost for this trip: Total cost at peak usage times would be between: $58,634 $68,500 $68,542 - $75,542 OPTION 1 OPTION 2 OPTION 3 This involved a prepaid arrangement – 25 hours to be used over two years for approximately $193,000. While also a prepaid program, the upfront commitment from this firm was $100,000 and the flights could be used over three years and included access to less expensive “on demand” or single charter flights when it makes sense. This was more of an “on demand” program. While a minimum number of hours is not required at purchase, this firm has an initiation fee ($17,500) and requires annual dues (starting year two) of $8,500. A two-year or three-year membership would have associated costs of at least $26,000 to $34,500 before flying. The program uses a pricing model similar to a ride-sharing company, with dynamic hourly pricing based on demand.

By means of comparison, the hourly cost of a similar trip for the owner of this type of plane would be much lower, with the total direct operating cost closer to $30,200. However, after factoring in the fixed costs associated with ownership, the client would need to anticipate making this same type of trip ten times or more annually for ownership to be cost-effective, which is why it was not considered.

Travel incentive

The 2020 CARES ACT waived the 7.5% air transportation excise tax for flights taken between March 28, 2020 and December 31, 2020. As of this writing, it is unclear if this incentive will be extended.

Choose the Right Team

Given the multitude of variables and options involved in selecting the most appropriate private air travel arrangements for your family and business needs, involving aviation experts is advisable. From vetting potential operators and obtaining referrals to confirming an aviation company’s reputation and ultimate cost, they can help you create an analytical framework. Where full or fractional ownership of a plane is under consideration, they also have the experience needed to collaborate with your aviation attorney, appraiser, private banker, brokers and maintenance service company to facilitate the purchase.

Contact Northern Trust to learn more about our aviation resources, ownership support and expertise in structuring personalized financing strategies to meet your air travel needs.

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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