Whether it’s cars, clothes or workspace, consumers are finding new ways to lower costs every day in today’s sharing economy. While collaborating resources can certainly lower the bills, not everything may be worth sharing – but what about your aircraft?
Over time, owner-operators have experimented with a variety of sharing options, from traditional partnerships to fractional or membership models. Today’s pilot can go many routes in the sharing world to find the best fit for their needs.
When done correctly, the numbers show partnerships are a smart path in terms of net-cost and aircraft access. Very few assets have the high-dollar, low-usage combination of an airplane, so it makes sense to split the cost with someone else that also has low-utilization needs. The trick is finding that partner and doing it the right way.
So, what are the secrets to a successful partnership? We spoke to three recognized industry experts to get their opinions:
- Mark Molloy, President of Partners in Aviation – offers professional matching and legal structuring for aircraft co-owners.
- Daniel Cheung, Member of Aviation Tax Consultants – provides customized ownership entity and tax consultation.
- Mark Rogers, President of Lone Mountain Aircraft – offers aircraft sales, acquisition and management services.
Here are five areas to consider before you partner:
1. Make Sure a Partnership is Best for You.
While a partnership offers major financial advantages for the right candidate, it may not be the best fit for everyone. For some, sharing isn’t worth it even if it can save money. For others, a partnership may not be the best solution in regards to access needs.
For example, someone flying 50 hours or less per year will likely find a charter, fractional/jet-card or membership programs to be the most sensible cost-per-hour option. On the other hand, those flying much more than 150 hours per year may find sole-ownership provides the best balance of net-cost and access. According to Molloy, it’s operators flying 150 hours per year or less that should explore a partnership.
“Access is the key. With two operators each flying 150 hours per year or less, both maintain access
comparable to sole-ownership at half the cost. This is where co-ownership makes the most sense.”
KEY TAKEAWAY: How much do you fly? If you fly 150 hours per year or less and can find an operator with similar usage requirements, the value proposition of a partnership is compelling.
2. Choose Your Partner(s) Wisely.
Choosing the right partner(s) is key to a successful aircraft partnership. The general aviation world is full of horror stories because friends decided to partner. While a partnership can certainly be successful with the right pre-defined terms (see #3 below), it can also end poorly due to scheduling conflicts, maintenance disagreements and risks. When looking for a partner, consider the following questions:
- Am I better off partnering with a friend or colleague – or someone with similar interests but no personal relationship to me?
- Can we agree on pre-defined terms in regards to schedule, maintenance, management and exit options?
- What about adding a third or fourth partner to reduce costs further?
The consensus from those we spoke with was that choosing your “buddy from the club” as your aircraft partner is a risky proposition. You may be better served with someone who aligns with your key interests but is outside your social circle.
And while there is no one right answer regarding the number of partners versus complexity and costs, we learned that in most cases, less is more. Adding numbers to the pack will drive down your costs but exponentially increase the complexity of your partnership. The formula for successful partnerships is to keep it simple. The program offered by Partners In Aviation, “PIA Managed Co-Ownership,” limits matches to two operators.
KEY TAKEAWAY: Adhere to a checklist for partnership requirements and stick to it without compromising. Include location and willingness to concur on predefined terms important to you.
3. Agree on Pre-Defined Terms.
How is the aircraft going to be shared? What are the exit options? How will the aircraft be managed? Who is paying for what, and when? If these questions aren’t clearly answered before the partnership begins, it’s likely you’re going to run into trouble.
When it comes to associated costs, there are three approaches in a partnership: his, mine or ours. Owners are either splitting the cost 50/50, splitting based on usage or splitting based on a combination of both. For example, partners could split annual fixed costs 50/50 but pay usage costs proportionate to the amount flown by each partner. This all should be predetermined before the partnership begins.
KEY TAKEAWAY: Agree on predefined terms including the aircraft’s schedule, maintenance operations, management, contract term, exit options and base airport.
4. Get Legal & Tax Counsel.
Before entering a partnership, it’s important to talk to the necessary legal and tax experts to ensure you are protected. Your counsel can help determine the smartest entity for you in regards to your state and local laws, then draft the agreement for you.
“The most common partnership mistake I see is when one or both parties are looking to maximize income tax deductions, yet set up a single LLC together,” said Cheung. “That makes it difficult to navigate from a tax perspective. Partners in this scenario should set up separate entities that are best suited for their situation.”
According to Cheung, good counsel will not only have a knowledge of the IRS and local laws but also a thorough understanding of FAA regulations to ensure sure you are in full compliance.
KEY TAKEAWAY: Get aviation legal and tax counsel to determine the best entity for you to use, separate from your partner’s entity.
5. Involve a Management Company.
Historically, most aircraft partnerships have forgone the use of a management company, opting to handle ongoing maintenance, scheduling and the carrying out of the agreement themselves. While the arrangement proves successful for some, it often time leads to the demise of the partnership for others.
Rogers has assisted in the acquisition of aircraft for both sole-owners and partners for over a decade and now offers management to partnership clients.
“Traditional partnerships often break down due to poor communication involving the scheduling and usage of a shared aircraft,” said Rogers. “We’ve found that the issue is easily resolved with the appropriate management arrangement. By putting management at the center of operations, communication doesn’t flow between partners, but directly through us.”
Hiring a management company helps ensure the agreement initially prepared between partners is carried out as intended and both parties are protected.
“It’s really a negligible cost when you consider the cost-savings of the co-ownership and the protection it provides,” said Rogers. “I would never advise entering a partnership without that safeguard.”
KEY TAKEAWAY: Find a management company that will add value to your ownership experience and has a history of managing partnerships.
When handled correctly, a partnership can cut costs in half, allowing major savings for both parties and the opportunity to step up in aircraft faster. But pilots today know it isn’t as simple as a handshake agreement. A smart partnership takes time and energy to set up, but it can be a savvy investment.