August 1 2004 by Chief Executive
Mark Nylen, the CEO of Mobren Biological, a pharmaceutical ingredient supplier, picked up the phone at his office in Sioux City, Iowa, one morning last spring and heard troubling news. There was a problem at a vendor’s plant in Sandusky, Ohio, that threatened several batches of expensive raw materials. He needed to get there as soon as possible.
Wasting little time, Nylen made a five-minute drive to Sioux City Gateway Airport and boarded his company’s new jet for the 1-hour-and- 40-minute flight to Ohio. “I couldn’t have gotten to the plant in time on a commercial flight,” Nylen says. “The plane allowed me to resolve the product-quality problem in person and get back home the same day. I got to have dinner with my family, attend an event at my son and daughter’s school and sleep in my own bed. I was back at my desk first thing the next morning, rested and ready for work.”
Mobren Biological is one of more than 14,000 companies in the United States that use a fleet of 23,000-plus corporate airplanes and helicopters. Large corporations are the heaviest users of private aircraft, with more than 75 percent of the 500 largest public companies in the U.S. owning and operating their own planes, according to the National Business Aviation Association, a Washington-based trade group. Small and midsize companies, too, invest in business jets and propeller planes to try to stay ahead of their competition.
Although viewed by critics, in some cases rightfully, as symbols of corporate excess, business aircraft offer obvious benefits. They enable time-pressed CEOs to make direct flights to far-flung offices or operations that would take many hours longer to reach via commercial airlines. Even on routes well served by the major carriers, the frequent delays at commercial airports and the chance of a security breach, however small, make the option of owning a corporate plane, or a fleet of them, all the more attractive.
The uses of corporate aviation run the gamut. In addition to transporting their chief executives, companies use their planes to shuttle key customers to corporate headquarters, deliver engineers to manufacturing sites and to help sales and marketing teams spend more time in emerging markets.
Automakers, for example, have relied on business aviation for decades. Ford Motor has been doing so since 1928, when the company introduced its influential Tri-motor plane, which helped sell the concept of aviation to the American public. More recently, Ford has operated two 48-seat commercial-grade Fokker 70s for the past decade to transport engineers and managers between its North American manufacturing plants and its headquarters in Dearborn, Mich. The company also maintains a small fleet of mid- to long-range jets used to shuttle senior executives, as well as a fleet in Europe, where short commercial flights are expensive and many destinations are hard to reach.
After a slowdown during the recent economic downturn, improved corporate earnings over the past two years have renewed interest in business planes, analysts say. One factor fueling sales is what’s known as a bonus depreciation clause included in last year’s tax bill. The provision allows companies to depreciate half of the value of new planes in the first year of ownership. The tax benefit is set to expire in January 2005, although the aircraft lobby is trying to extend it.
The bonus depreciation benefit was the key reason that Mobren Biological bought its $5.4 million eight-seat jet, a Cessna Citation CJ2 late last year. In the past, Nylen and his senior management team would charter aircraft between 50 and 100 hours a year, at an annual cost of $120,000 to $150,000. Now, the company, which produces a raw form of an anticoagulant called heparin for leading pharmaceutical companies around the world, uses its jet about once a week. Its senior managers take it to visit 35 vendor and customer plants throughout the U.S. and Canada, most of them located in rural areas that are poorly served by commercial airlines. In all, says Nylen, the company expects to use its jet up to 300 hours this year. Although it was a large up-front purchase, the CEO says he’s confident the jet ultimately will pay for itself.
Weigh the Variables
With the current optimism in the marketplace and lower prices on both new and used planes, many CEOs will face the inevitable, and difficult, question: When is the right time to buy a corporate plane?
There is a range of sophistication levels among chief executives when it comes to buying a plane, says David Almy, a vice president of the National Business Aviation Association. “CEOs are experts at many things, especially making widgets,” he says, “but they are not necessarily experts at weighing the variables associated with buying a plane.” Almy speaks from years of experience; he has spent time in the executive suite with more than 45 CEOs to determine why they bought business aircraft. “Some CEOs can articulate their rationales immediately, others can’t until the second hour of the conversation, and some explain them during the second day,” Almy says.
He and other experts advise that chief executives who are contemplating buying a corporate plane should first gain experience chartering aircraft, as Nylen did, joining jet-membership programs that offer a fixed number of flying hours for a fixed rate, or buying fractional shares in a jet. The key factor is how many hours your company flies per year, 300 hours being the average cutoff for whole-aircraft ownership, experts say (see chart, above).
For example, to fly 100 hours a year in a Citation Excel jet under a fractional program costs about $337,000 a year in fixed and indirect costs, on top of an initial acquisition cost of $1.28 million. However, fly that same popular midsize jet three times as much and your expenses ratchet up significantly. A three-eighths share, or 300 hours, costs $1.01 million to cover the fixed and indirect costs, beyond an up-front investment of $3.84 million.
According to Jay Mesinger, president of J. Mesinger Corporate Jet Sales, a brokerage and consulting firm based in Boulder, Colo., a company that flies the Excel for 300 hours in a fractional program would save one-fifth the cost if it owned the plane outright and flew the same number of hours. “And you would realize even greater savings the more miles you fly beyond the 300 hours,” Mesinger says.
Industry experts liken the purchase of a business aircraft to buying other large assets. Like acquiring another company or a major piece of technology, purchasing a plane is a complex undertaking that requires thorough due diligence. One common and widely recommended approach is to hire a consultant to make sure you get the right aircraft for your needs and set up the transaction optimally from a tax and liability standpoint.
Armed with software packages and detailed aircraft operating cost data, consultants can analyze both your current and future needs to fly. They also can help a buyer find and engage the services of the team that makes for a successful aircraft purchase: accountants, attorneys, aircraft inspectors (if you are buying a used plane) and a buyer’s broker; and determine how to outsource your needs for pilots and maintenance or set up your in-house flight department.
“You have to look out five or 10 years to see where a company is headed to develop an asset plan to buy a plane,” says Barry Justice, president of CAAP, an aviation consulting firm in Grapevine, Tex. “You have to know whether a company is growing or downsizing, whether divestitures are planned, and whether there will be a geographical shift in operations before you can analyze the need for a plane.”
If your company is indeed ready to buy its first plane, or add to its existing fleet, your timing is right. It is a buyer’s market€¦quot;thanks to deep discounts and incentives being offered by manufacturers still trying to make up for years of slow sales€¦quot;and interest rates remain low. The only drawback is that inventories of popular models are running thin.
|A NEW OPTION: LIGHT JETS|
CEOs and corporate flight departments shopping for short-range aircraft will have a new set of options in the next couple of years when manufacturers roll out what they’re calling very light jets.
In a battle to tap a potentially large market, at least seven aircraft companies are scrambling to certify and deliver these microjets. The planes, which typically seat five or six, can fly 1,300 miles nonstop (from, say, Boston to Atlanta), cruising at 400 miles per hour.
The biggest allure is cost: Very light jets are between a quarter and half as much as entry-level business jets to buy. Plus, at $1 per mile, they’re 60 cents per mile cheaper to operate.
The lowest-priced light jet under development, the Eclipse 500, being built by startup Eclipse Aviation, is priced at just over $1 million. At the upper end, Cessna is marketing its new Citation Mustang (below) for $2.3 million. The cheapest light jet flying today, the Cessna CJ1, is $4.2 million.
Thanks to their low cost and manufacturers’ promises of high performance, microjets are selling fast. Eclipse has more than 2,100 orders. Cessna, a late entrant in the market, had sold 229 Mustangs as of early August.
The market for light jets could become quite large. Honeywell, in its annual aviation forecast, predicts that up to 8,000 microjets could hit the tarmac within 10 to 15 years.
Who’s buying these jets? Manufacturers expect to fill a need among companies to replace aging fleets of propeller-driven planes. But the most sizeable market could be the air-taxi, or sky-cab, segment, where operators will€¦quot;at least in theory€¦quot;have microjets lined up at smaller airports to shuttle CEOs and others on one-way flights.
Although still speculative, the air-taxi market appears poised to take off. Donald Burr, the founder of People Express, and Robert Crandall, the former CEO of American Airlines, are launching an as-yet-unnamed air-taxi company. The aviation innovators have placed a $150 million order for 75 very light jets produced by Adam Aircraft.
Despite its buzz, the nascent industry could be in for some turbulence. Only one microjet, the A700 AdamJet, has flown its first true flight, while others remain in early development stages. And it remains to be seen whether manufacturers can deliver planes for the prices, or the design specs, they’ve promised.
Another issue is gaining Federal Aviation Administration certification. Most of the companies working on light jets are startups. Will they have enough financing to put up the $250 million to $300 million needed to certify their jets?
Still, one thing seems certain: Microjets are coming and they could open up new opportunities for a CEO to step into a corporate or private plane.