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  1. Wealth
November 1, 2007

Plane Simple

By Spear's

Want to join the private jet set? Dominic O’Connell knows how.

Want to join the private jet set? Dominic O’Connell knows how.

With its sharp nose, raked wing and trio of rear-mounted engines, the Falcon 7X looks like a cross between a fighter jet and a commercial airliner. That’s because it is. The Falcon is this and next year’s ‘must have’ business jet, the combined Bugatti Veyron and Rolls-Royce Phantom of private aviation.

Made by France’s Dassault Aviation, the people who make the Rafale combat aircraft, it’s big. It can carry up to eight people from London to Singapore non-stop. And it’s fast. It can fly at Mach 0.9, faster than any commercial airliner. It whistles along at 51,000 feet, Concorde territory, high above the congested conventional highways of the sky.

Sound good to you? You’re not alone. Dassault had sold 165 of the £29 million planes even before it was certified as safe to fly last year. If you buy one now, you will have to wait until 2013 for delivery. Reservations on the 7X production line have become the most sought-after pieces of paper in aviation. The rights to a delivery next year were sold recently in London for £3 million.

The private jet market is moving into an unprecedented phase of growth. According to Honeywell, the American aerospace group that is the major supplier of engines and avionics to business jet makers, this year 1,000 planes will be delivered for the first time – 200 more than last year, itself a record.

And that’s just the start. Honeywell thinks the market is about to shift into overdrive, with on average 1,400 aircraft deliveries a year for the next decade – a positive orgy of plane-making that will double the current worldwide fleet. The value of the market over that period will rise to a staggering £113 billion.

What’s even more surprising is that five years ago, corporate aircraft salesmen were having a terrible time, almost unable to give their products away. ‘The end of the dot-com boom sucked the life out of the market, and September 11 pretty much killed it,’ says Trevor Esling, vice-president for international sales at Cessna. Now, sharp
aircraft salesmen in London, a haven for the world’s wealthy, are selling as many aircraft in a week as they did in all of 2002.

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Business aviation executives say the boom is the result of a fortuitous combination of
circumstances. The weakness of the dollar, thecurrency in which all corporate aircraft are priced, has helped to reduce costs. Globalisation means there is a broader base of customers, with Russia and Eastern Europe, in particular, emerging as hot-spots.

Then there is the miserable customer experience of commercial aviation, with some people who have experimented with private jets taking the plunge into outright ownership for fear of having to rejoin the scrum at over-crowded, dilapidated hubs, notably London Heathrow.

Most important is the emergence of a new, relatively wide class of high net worth individuals for whom £5 million or £10 million is not too much to pay for exclusivity in travel. ‘These are not people from The Sunday Times Rich List,’ says David Savile, chief executive of Air Partner, the world’s largest aircraft broker. ‘They are completely off the radar. We recently had a customer who was a Hampshire estate agent, who paid around £5 million for a Cessna Citation.

‘If you had told me five or ten years ago that we would be selling aircraft to Hampshire estate agents, I would have said you were nuts. These people now have the money to have their own aircraft if they want them. For them the equation is not, “Will I have an aircraft?” but “I may as well have an aircraft, because if I don’t, my children will end up getting one anyway with the money I leave them”.’

If you want to join the jet set, there are a dizzying array of options available. You can charter a different jet for each trip (known as an ad-hoc charter), or you can agree in advance a number of charter hours with a jet operator (known as block charter). Ad-hoc charters are acknowledged as the cheapest and easiest way of getting access to a private jet, but they may not be the best option for heavy users, or for people with itineraries that involve mainly one-way flights.

The next step up is fractional ownership. You buy a share of an aircraft (typically one-eighth, or one-quarter). It is then available for a guaranteed number of hours a year, at a certain notice period. As well as the upfront capital costs, you will pay a management fee, as well as a fee per hour flown. Fractional ownership has been one of the biggest growth sectors in recent years, with several of the major companies buying large fleets of aircraft and building up a host of fractional owner clients as investors.

The best known, and largest, of the groups is NetJets, owned by the American investment guru Warren Buffett. Buffett was once a stern critic of business jets, calling their use ‘indefensible’. However, after being persuaded to try one, he became a big fan, buying NetJets and dubbing his own plane the ‘Indispensable’.

Fractional ownership companies – and other jet charter operators – will also offer a separate ‘card’ product, which gives an on-demand service for a hefty upfront payment, but without any exposure to the risks of ownership.

The next step is outright purchase. Individuals should only consider buying their own plane if they find themselves flying in business jets for 150 to 200 hours a year, says George Galanopoulos, managing director of London Executive Aviation.

And before you take the plunge, says Savile, you must ask yourself about the purpose for which you want the plane. Is it for ease of travel, as a business tool or simply for the pride of ownership? ‘There are as many answers to this question as there are owners,’ he says.

Once you have made the decision, consult an expert on what type of plane you need. Most new owners tend to want the biggest, fastest and shiniest – at least until they see the costs of purchase and operation. ‘There is no point buying a Bentley if you are only driving two miles down the road,’ says Galanopoulos. ‘But then again some people like to be seen in a Bentley even if they are just driving a couple of miles.’

The upfront costs are not as high as might be expected. A new wave of ‘very-light jets’ (VLJs) that have come on the market in the past six months has reduced the costs of entry. The Cessna Citation Mustang, for example, can carry four people up to 1,200 nautical miles, enough to get from London to Rome. New, it’s £1.3 million.

Larger jets with longer range and larger, more luxurious cabins – and onboard bathrooms, which most of the VLJs do without – cost more. Mid-sized jets, with range to take six or eight people from London to Moscow, cost from £5 million upwards, and so on all the way up the range to the £24 million to £29 million that big boys like the Falcon 7X fetch.

The purchase price is only the start of the story. Big jets are expensive things to operate. Savile points out: ‘When the aircraft turns up, there is nothing you can do with it without help – you need people to fly it, maintain it and manage the bills.’
And there will be bills. Take as an example the Gulfstream G550, an aircraft roughly in the same league as the 7X. First, the fixed costs: two pilots and two first officers, at £85,000 and £45,000 a year respectively; two cabin attendants, £25,000 each; parking £78,000; operational support (managing the bills and maintenance) £50,000; and insurance £70,000.

Next, the variable costs: air traffic control £175 an hour; fuel £882 an hour; engine maintenance provision £251 an hour; airframe maintenance £198 an hour. All up, operating costs come in at around £3.1 million a year.

But now the good news. A G550 can be chartered for around £4,500 an hour. If your management company manages to rent it for 700 hours a year, it will earn about £3.1 million. Any more hours and it will start to show a positive cash flow. ‘Our advice to clients is that they are not going to make large amounts from their aircraft, but with careful management they should be able to enjoy some very cheap flying themselves,’ says Galanopoulos.

His clients ask either that any charter be cleared with them – or, more commonly, put the aircraft on the market on a first-come-first-served basis, making sure they plan sufficiently in advance to know it will be available when they want it.

Some owners, of course, are not so keen on their machine being available for public hire, preferring to have it waiting on the ground, ready for the next time they need it. While the attitude is understandable, it may not be all that good for the aircraft. ‘Planes tend to be happier when they are flown. The airframes and in particular the avionics systems don’t like sitting around on the ground in the cold and damp,’ says one aircraft broker.

Aircraft are normally bought through a company set up for the purpose, and can be registered wherever it is convenient for the owner – but there is a trap to watch for. If they want your aircraft to earn money from charters from the UK, it needs to be on the British register.

Prospective owners should also spend time thinking about how they want to pay for their new fly-around. Banks have been pulled into the private jet market in recent years because the assets are fungible, and the clients – high-net worth individuals – tend to be good credit risks. Even after the credit crunch, there are attractive deals available with little cash required upfront, high levels of leverage and balloon payments at the end of the deal to settle.

More sophisticated bankers are now offering their high-net worth clients a service that encompasses all their asset classes – property, art, yachts and now aircraft. Two years ago KaupthingSinger & Friedlander decided it should also set
up a specialist aviation division.

‘There is an advantage to having one bank being able to look across this range of assets,’ says Jon Salisbury, the bank’s business development director. ‘We are able to take a much broader view of our clients’ assets, and be much more flexible and fast moving as a result.’

Salisbury said his clients are – by and large – relaxed about the high costs of ownership, seeing the aircraft as a tool that should help them make money. ‘The costs of operating a private aircraft look high, but for our clients the annual fees might potentially be recovered many times over from one extra deal. If the aircraft helps secure that deal, it has paid for itself.’

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