by Douglas C. Wattoff and Justin A. Marchetta J.D.
Consider for a moment a not uncommon scenario in the private aviation industry. A friend cannot understand a management proposal on a new airplane he is considering, and comes to you for help. It seems like a simple request, however, the deeper you dig the more it seems like you fell into quicksand. The agreement is confusing at best, and it is difficult to determine what the airplane would cost to own. We have come to refer to this type of management agreement misunderstanding as the “Aviation Twilight Zone”.
The Aviation Twilight Zone concept is firmly rooted in the fact that the average college education in the aviation industry is a non-finance undergraduate degree. There are no college degree requirements to be a pilot, although many younger pilots have at least a four year degree, and there are no licensing requirements to sell or broker airplanes. With the exception of those companies offering charter opportunities, management companies have no certification requirements. Unfortunately, there are very few aircraft management degree programs.
On the contrary, the overwhelming majority of buyers have a MBA-level education with a combination of advanced degrees and years of finance experience. This education mismatch between the buyers and the rest of the industry creates an environment where buyers ask analytical questions and management companies (sellers) respond with emotional answers. Throw in a seasoned aviation attorney who speaks buyer’s language and can see through seller’s emotional answers, and the situation often devolves into a powder keg waiting for the right moment to explode and kill an otherwise viable deal. The inability for sellers to furnish buyers with answers in their native language quickly frustrates, and eventually halts, an otherwise productive process. Understanding these very issues, NetJets has built a thriving business on selling a model of simplicity and safety, which is much easier for buyers to understand and much faster for sellers to move. Purchasing a NetJets share is certainly not the least expensive option in the industry, but it is quick and easy from buyer’s point of view.
Working to simplify the process, we suggest that management companies approach expenses in two categories, fixed and variable. Fixed is the airplane in the hangar and variable is the cost of the airplane when flying. (While the airplane is in the hangar, it’s fully crewed to fly x number of hours each year). If the airplane never flies, only fixed costs would be incurred. (The aviation industry loosely uses the term Direct Operating Costs (DOCs) which is a combination of both fixed and variable costs. However, the term DOC is not sufficiently precise to make purchase decisions as it mixes accrual based and cash based accounting. There are no standards for what DOCs include, everyone has their own formula, it’s confusing to the buyer, and the term should be dropped from the industry)
In the next article, we’ll dissect fixed and variable costs along with a discussion on crew costs representing nearly 65% of non-finance fixed costs.
Douglas C Wattoff is the managing member and founder of Millbrook Aviation a worldwide charter and aircraft acquisition management firm. Douglas Wattoff has an MBA from University of Colorado, Air Force Lt Col (ret), and ATP rated pilot with over 6000 flight hours. His unique combination of operational skills, organizational finance, and formal education, brings clarity and transparency to the acquisition and ownership process.
Justin A. Marchetta is an aviation attorney with offices in New Jersey and New York. He represents aircraft owners and operators, pilots, crewmembers, and mechanics in a wide variety of legal matters, including certification, accident and incident investigations, enforcement actions, medical certificate eligibility, and insurance. He regularly counsels aircraft owners and potential owners, and conducts complex domestic and international transactions regarding a wide variety of aircraft from small single engine airplanes up to super-mid and large size business jets. He also represents clients in all aspects of aircraft ownership and operation under both private and commercial operating regulations. Representing on-demand charter companies, fixed-base operators (FBOs), and air tour operators, Mr. Marchetta also counsels aviation businesses in all aspects of their operations. He is a founding member of the New Jersey State Bar Association Aviation Law Committee, and he sits on the board of the Mid-Atlantic Aviation Coalition (MAAC). He also serves as a panel attorney for the Aircraft Owners and Pilots Association (AOPA) Legal Services Plan.