The demand for private aircraft has surged the past few years since the early days of the COVID-19 pandemic. Indeed, demand remained elevated throughout 2022 despite stock market volatility, inflation and geopolitical issues, and we have been inundated with calls from clients asking about their best options to own and fly privately.
Our best advice: It’s more important now than ever to be an informed aviation consumer. Be sure to know your ownership options, the realities of the current market, what tax deductions there may (or may not) be, and how your desire to own a plane meshes with your other financial goals.
KNOW THE TYPE OF BUYER YOU ARE
First, what form of ownership interests you? If you think you might like to own the plane by yourself, we suggest pinpointing your reasons. Knowing your “why” will help you to assign an economic value to the goal of airplane ownership. It’s also wise to be clear about just how motivated you are, so you can better weigh this goal against the costs of a plane in light of your other financial priorities.
So, do you want to own a plane primarily because you:
- Want to use your time more efficiently? By far the biggest benefit of private aviation and the reason most people opt to own their own planes is that it saves time and effort. For example, in one day, an executive could fly to meetings in three different cities and still be home for dinner that evening, a feat that likely would be impossible with commercial air travel.
- Have a passion for airplanes? A small number of plane buyers are like car, horse and yacht enthusiasts. They’ve loved aviation since childhood and want to get involved not only in owning, but also running (and potentially even flying) their aircraft.
- Are interested in the experience? COVID-19 has dramatically increased the number of people interested in private aviation because flying alone is inherently safer, health-wise. Also, flying private through providers that have brand affiliations can provide unique access to “money can’t buy” experiences and events. But do note: To enjoy these benefits, it is often unnecessary to take on the full burden of owning and running an aircraft. If you are this kind of buyer, charters or fractional ownership may be your better choices.
DEMAND HIGH, INVENTORY LOW
After “know thyself,” comes “know the market,” and we continue to unquestionably be in a seller’s market: There is a limited supply, higher prices and significantly longer wait times for new planes.
The reasons are clear: Demand for private aviation stayed consistently high through 2021 and 2022. U.S. business jet flight activity was up 15 percent in December 2022 over December 2019’s pre-pandemic levels. The increase was largely in shared aircraft usage, with charter and fractional up 27 percent and 26 percent, respectively.
The major business jet manufacturers have been prioritizing growing their backlogs and maintaining pricing discipline. They remain cautious about heavily increasing production, due to supply-chain challenges and lessons learned from previous cycles in which demand spikes led to oversupply.
DEMAND AT RECORD HIGH
Bottom line: Asking prices for used airplanes have increased 11 percent to as much as 43 percent due to this higher flight activity, COVID-19 concerns, limited inventory and lack of supply from manufacturers. And wait times are now running anywhere from 12 to 30 months for new planes.
Purchasing and operating a plane are always costly propositions. However, given that they are particularly expensive now, we’re emphasizing to clients the need to engage in a thoughtful process.
THE BUYING PROCESS
Our advice is always that clients recognize they’re not making a single decision (i.e., to buy a plane). Typically, they are making as many as three decisions: finding the right plane, structuring the purchase, and running the plane.
To make decisions that best suit your needs always requires thought and consultation with the right people. It’s wise to get input from your family decision makers as well as a broker/consultant, aviation attorney, accountant, financing provider and charter/management company.
Many clients ask trusted family members or leaders in their family offices to handle this process — which, given current market conditions, can now take two to three months of nearly full-time attention. They’ll need to identify the right aircraft, structure the acquisition to suit the family’s goals, and hire the right partner to run the aircraft day-to-day.
POTENTIAL TAX BENEFITS (OR LACK THEREOF)
It is particularly important that you consult with your tax adviser.
We generally recommend against making any move solely for tax purposes. That is as true for airplane buying as it is for any other major purchases, investing, charitable giving and other financial decisions.
You’ll also want to be careful not to assume that tax benefits will help defray all your costs of buying and owning a plane. And, if you are a business principal and think that a plane will help you shelter business as well as other sources of income, think again (particularly if business use is not the sole or predominant purpose of the aircraft).
Yes, there are potential tax advantages (bonus depreciation, interest expense deductibility) if you use an airplane predominantly or exclusively for business purposes, and if those business purposes are well supported and documented scrupulously.
There can be potential limitations to those tax deductions if you or related parties use a business plane for personal flights to any significant degree. Business entertainment as a flight’s primary purpose no longer qualifies as business use. And the rules on leasing to third parties are complex.
Also note that starting in 2023, the bonus depreciation benefits will gradually shrink by 20 percent each year, until they disappear entirely after 2026. There is a one-year delay of this bonus depreciation phaseout generally applicable for certain aircraft placed in service and operated by an owner for its own business use. The sunsetting of the depreciation tax break generally starting this year seems to be adding fuel to the current, already outsized demand to buy a plane soon.
Ryan Fitzpatrick is head of business aircraft finance, and Tom McGraw is head of tax advisory/advice lab at J.P. Morgan Private Bank. Read the original version of the article here.