In-House Counsel Challenge: The Bizjet Acquisition

Factors that will inevitably affect China bizjet buyers both inside and outside of China.

Versatility is a valued characteristic for in-house legal counsel. You may be an employment litigator Monday, securities registration counsel Tuesday and a finance attorney on Wednesday. And every so often a wildcard lands on your desk. “We’re looking into acquiring a corporate aircraft.”

Industry trends are pushing more executives in the direction of private travel. Airline consolidation is eliminating nonstop routes, and is making point-to-point travel more time consuming and expensive. Smaller markets are being left to fend for themselves, forcing corporate management into multi-leg journeys or ground transportation. Corporate aircraft are becoming more of a business tool than ever.

There are many ways to get into a private aircraft, and more ways are created every day. Options include charter, jetcards, fractional ownership, owner clubs, traveler clubs and joint aircraft ownership, whole aircraft ownership or lease. A corporate aircraft is a multi-million dollar asset, with associated financing, regulated by at least three federal agencies (in the US). These are unique challenges for the GC to handle. Delegation is always an option, but the GC will need to manage this process. The data that you gather and consider while making a decision will also help support the decision under the corporate business judgment rule in the event that it is later questioned.

  1. Form the Team. A corporate aircraft acquisition is almost always outside the company’s normal operational structure, and there is scant internal expertise.  That’s a recipe for poor decision making unless this shortcoming is addressed. The solution is to form a small, active team and meet frequently as a collaborative group.
  • Identify internal personnel and external advisors to define the mission profile and match that to available aircraft options. Try to work with an advisor that has no financial stake in any specific transaction. Mission profile is determined by frequency and distance of trips. How many trips will the aircraft take per month? How many travelers are typically on a trip? What is the typical flight time and length of stay? The answer to these questions will determine whether you start small (charter or fractional), up-size to owning a small- to mid-sized turboprop or jet aircraft, or go all-in for a trans-global jet.
  • Gather input from the affected executives and staff that will be using and managing the aircraft. Consider their preferences.
  • Tax advisors (with specialized aviation expertise) will help you understand state and international sales and use tax liability, as well as deductibility of aircraft expenses (including depreciation), all of which will affect actual aircraft cost significantly. Tax counsel will also help you create internal documentation policies to support tax positions in the face of tax bureau audits.
  • Legal specialists will identify the lawful means of aircraft ownership and operation. For example, it may be a legal no-brainer to put an expensive, high-risk asset like the aircraft in a special purpose entity, but the law prohibits such an entity from being an aircraft operator; and the government may seek to tax internal payments to that entity as if they are sales of transportation services. While it makes sense to let executives, associates and friends use the aircraft, the ability to accept compensation for that use is strictly limited by  law. Aviation legal counsel will help you get the greatest benefits of your aircraft with controlled risk, within the limits of the law.
  1. Staffing Considerations. Aircraft operations require more personnel than you might think — crew, schedulers and administrative support for maintenance an operations. If you choose fractional ownership or charter, those services are provided to you and you do not need to staff up to fly; but that is not to say that you are not paying for it. You are paying, as part of the fractional program agreement or charter arrangement, for the cost of those personnel.

If you are buying or leasing your own a corporate aircraft, you will need to staff up either internally (forming a flight department) or externally (hiring a management company). In either case, you need to cover all bases: flight and cabin crew, maintenance and repair, regulatory (FAA/TSA) compliance and scheduling. Get aircraft management quotes from a few companies and do your best to break them down for apples-to-apples comparison. Aircraft management agreements are notoriously difficult to to analyze because they are a combination of the pass-through of third party expenses, contracted services and personnel recruiting/training services.

  1. New Internal Policies. If your company is operating corporate aircraft, you will need to adopt and enforce policies on business and personal use, including income attribution, regulatory compliance, corruption compliance, and rules governing the carriage of public officials. In-house counsel will need to educate their internal constituents, and assess compliance with these policies to ensure that they are effective.

The addition of a corporate aircraft to a company’s operations will add to the workload and required expertise of in-house counsel. Depending on the form of ownership or operation, that workload maybe no more than a few hours each year, but for a full flight department operation, it can be much more, particularly during periods when the aircraft is be acquired, financed or sold.

Greg Cirillo
Greg Cirillo

Greg Cirillo is a Member in the U.S. law firm HCH Legal, LLC and has a multinational client base of corporate and high-net-worth individuals who own and operate private aircraft. HCH Legal is based in Bethesda, Maryland and includes attorneys licensed to practice law in New York, Washington DC, Massachusetts, Virginia and Maryland. For more information: www.hchlegal.com

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