At The Money: What Does it Take to Buy Your Own Jet?

0:00I'm Hannah Fry, and as we rely more and more on artificial intelligence in every facet of our lives and businesses, I'm on a mission to find out how we can build the internet that AI needs. Learn more later in the podcast.

0:45Have you ever wondered what it was like to own your own private plane? It may not be as out of reach as you imagine. Sure, some people spend$50 million or more, but there's a plane for nearly every budget. Let's speak with Preston Holland. He's the founder of Prestige Aircraft Finance. He also hosts a weekly private aviation podcast called The VIPC and is author of the newsletter Private Jet Insider, which provides advice and strategies to help clients navigate private aviation. All right, so let's just keep it simple. Do I need to be a billionaire to own my own plane? Barry, you don't need to be a billionaire.

1:27And actually, most of my clients are not billionaires. In order to own an aircraft, one that you're going to sit in the back and you're going to have flown professionally for you, typically what I'm seeing is a net worth of somewhere between$100 and$200 million as kind of the starting point. And so not only is net worth something to consider, but also what does this do for my tax strategy and tax planning? How am I going to use bonus depreciation to my benefit? There's a lot of other things that come with this and how much cash flow does my business spinoff. But generally speaking, when we're thinking about that, it's really in the$100 to$200 million mark before you're starting to buy something like a light jet or maybe a midsize jet.

2:09There are a handful of watches you can buy and a handful of very specific sports cars that sell for more on the secondary market than MSRP. My assumption with jets is that there's depreciation in the used market, not appreciation. Is that a factor here? Or do most of these jets go through the normal straight line depreciation process like a boat as the hours add up? The answer is generally yes to that. Let me add two caveats. One is COVID. And if you watch the valuation of aircraft between 2018, 2019, and 2021, they appreciated significantly. So there's a lot of people that were selling their airplanes in 2021 for what they bought or more than what they bought in 2018, 2019.

2:59So general market trends definitely matters in this scenario. Generally speaking, over a lifetime, there is a real depreciation factor. You sell for less than what you bought it for. And the only nuance to that is in a few make and models and in a very short period of time post delivery. So right now, if you look at the overall ecosystem, I can think of off the top of my head, three models in which that's happening. And they're driven by a few kind of different forces. One is the Phenom 300. The Phenom 300 is an excellent light aircraft, and it is loved by charter operators. It's loved by owners.

3:36And the contract price that you bought it for two years ago while you waited in line, oftentimes you can take possession of it and you flip it immediately and actually get a premium above and beyond. That market specifically, it's happening a lot. The Prater 500 and the Prater 600, which are also an Embraer product, are experiencing similar, but not quite as dramatic to that. The Pilatus PC-12 market has experienced that over the last couple of years. The wait list for a Pilatus PC-12 is five years. If you wanted to buy a brand new PC-12 right now and you got in line, you'd be waiting five years.

4:11And so for the first couple of years, you may be able to fly it for a little bit and then get out of it a little higher than what you have. I imagine the range of private aircraft is very different from what I see in luxury automobiles. The sizes vary a lot, how many people they can carry, how far they can fly, how fast they can go, how broad are the ranges of private planes, and how big is the price range, from small regional planes to cross-Atlantic type jets. Yeah, Barry, let me start with the ratio of size to range, because those two things actually play with each other. You have light jets, which are usually really good for regional travel.

4:56So this is for people who are flying from Atlanta to Charleston, West Virginia, or there are people flying from New York to Chicago, right? Not terribly far as the crow flies. those light jets are not necessarily going to do cross-country type activities, but they're going to be really good for that. When you're thinking about how much am I going to spend, there's also a very wide range. I would say just to give you a really broad range, your get-in price for a jet, and you're talking pretty old, pretty small, is going to be around a million to$2 million. And the top end of the market is going to be what Jeff Bezos just took delivery of, which is a G700 at$75 million sticker.

5:42And it's everything in between. What are the other costs and responsibilities beyond the purchase price? What do people who purchase a plane, what do they need to think about and budget for? The framework to think about this is the difference between fixed costs and variable cost. In the same way, if you're going to draw the boat analogy, whether you boat one day a year or 365 days a year, there's a certain set of costs that are constant and you're going to have to pay them whether you use it a lot or you don't use it. We refer to those as fixed costs, right? So whenever you see somebody say, what's the fixed cost of this airplane?

6:19That is typically crew expense. So that is your pilot expense. That is your training expense because your pilots have to be trained in the aircraft. There's aircraft management, which is you're paying a company, a third-party company to... Basically, it's a property manager for your jet. That is the best comparison. It's not a one-for-one comparison, but it's pretty close. The hanger cost. So Barry, you're in New York. I'm sorry to break it to you, but hanger cost in your neck of the woods is very expensive. But hanger cost, you got to pay it whether you're flying the airplane or not. Your insurance cost is going to be a percentage of full value, liability value, things like that.

6:55And then there's some other miscellaneous fees. There's subscriptions, there's nav aids, there's things like that. That fixed cost will range in the kind of light jet world, $400 ,000 to$500 ,000 a year. And then when you get up into the large aircraft, you may have fixed costs north of a million dollars. If you have to have multiple captains for your aircraft, you're flying a lot, things like that. What are the variable costs like? So when you talk about variable costs, you touched on an important fact, which is the fuel. There is Jet A fuel, which is much more expensive than what you put into your car.

7:28And there are ways to mitigate that. You can get fuel contracts to get you a discount, but it kind of is what it is. You actually pay - Six,$7 a gallon, something like that? Somewhere in there, depends on what part of the country. It can be as low as five and a half. It can be as high as eight and a half. Five and a half, I'll put it into my car. So I mean, I'm okay with that. People don't realize when you're flying a jet, even regionally, you're burning through hundreds of gallons, if not thousands of gallons of fuel. What is the hourly fuel cost for a mid-sized jet? Yeah. So I actually, I have a tool that a friend of mine built.

8:03It's called Avia Cost. And I use that to do all of my calculations. So the Citation XLS, which burns 227 gallons per hour, you have this CJ4, which burns 198 gallons per hour. The Challenger 300, which burns 280 gallons per hour. Once you start getting up into your large aircraft, let's say your global 5000, which is an aircraft that can easily do New York to London, it can do New York to Paris, you're burning 490 gallons of fuel per hour. So it ranges significantly on how much fuel you're burning. There's also in the fuel burn, it's not a one to one, you're not going to save a lot of money. But if you're going faster and burning more fuel, like there's a coefficient there, There's some math to do.

8:47But for instance, right? If we assume$6.25 per hour, the Global 5000 is burning$3 ,000 of fuel per hour. Barry, where do we want to travel on our Global 5000? New York to LA. New York to LA. All right. So we're going to leave out of Teterboro Airport because we are not going to deal with the Port Authority. And we're going to go to John Wayne, which is SNA. Yep. Because we're also not going to deal with LAX. We're going to take four people with us. We are going to fly the Global 5000. It is 2 ,100 miles, nautical miles. It's going to take us four hours and 40 minutes approximately in the Global 5000.

9:25And we are going to have$7 ,000 of variable costs per hour. Our total trip variable cost is going to be$38 ,281 to go from New York to LA. We're talking about fuel costs. We haven't talked about maintenance costs. Plus, if you're flying 100 hours a year and you have a jet, what can you expect in maintenance expenses, assuming nothing goes wrong? Yeah. So a lot of times maintenance is actually calculated on an hourly basis. So you're buying into a program. There is not a direct correlation to this in the real world. The closest it would be is to an insurance product, but you're paying on a consumption basis.

10:09So let's say I am signed up for a maintenance program, a maintenance platform. One of them is called JSSI, Jet Services Solutions, Inc. They have 100 % coverage for my engines. That's going to amortize my overhaul costs, which can be a couple of million bucks that has to happen every 2 ,500 or 5 ,000 hours. It's going to amortize it on a per hour basis. So I pay per hour, I pay to the service, and then they pay my chunky maintenance bills. Those engine programs vary pretty significantly depending on how much coverage. You can also put coverage on the parts on the aircraft, a program called Pro Parts, where you're paying an hourly cost.

10:50And then they're basically, they're taking the other side of the bet that you're going to have less maintenance and you're taking the front side of the bet that says, I'm going to have a lot of maintenance and they're going to pay for it. Or just that I want to have a fixed set of costs and don't have to worry about the possible surprises and willing to pay a little more upfront. Exactly. Yeah. You're willing to pay kind of stretched out over time as opposed to large chunks. So instead of paying your$2 million overhauls, you're going to pay, let's say$1 ,000,$2 ,000 per hour. So generally speaking, if you were to amortize your maintenance expense over your hourly, which is typically how everybody calculates this, on the Global 5000 that we're talking about is going to be around$4 ,100 per hour.

11:32Let's talk a few minutes about jets. If you want to go across the Atlantic, what size jet are we talking about? Yeah, you're going to have to go into the large cabin range. You're going to be looking at the Gulfstream G450 to unlock London. I think it's going to be on the fringe for Paris. The G550 gets it with no problem. the Gulfstream G650, the Bombardier Global 5 ,000, 6 ,000, 6 ,500. There's a lot of numbers. And so you're really going to have to get into that large cabin to comfortably get nonstop from New York to Paris. And that's going to possibly have a flight attendant. It's going to have at least two pilots.

12:10You're going to have at least one nice size restroom, maybe a small restroom in the front. So that's really getting up into your larger cabin aircraft, but that's really how you're going to be able to get transcontinental. I recall a few years ago, there was a commercial pilot shortage. I have a buddy who I grew up with who flies Detroit to South Korea, and he was telling me they just can't find enough pilots. Does that same shortage of qualified pilots exist in private aviation as well? Yeah. So the pilot situation in private and business aviation has undergone some similar pressures to what it has in commercial aviation, the price has gone up.

12:52The price of pilots has gone up. The price of training has gone up. Just everything associated with the pilot has gone up. When you look at kind of the shortage, you have to remember that every pilot has to go through what's called a type rating and every pilot has to go through what's called recurrent training. So Barry, if you are qualified to fly the Gulfstream G650, you have gone through the initial training, the initial type training, and you keep that current because you have a client that is kind of running through flying that aircraft. And then you have one of his buddies that calls and says, Barry, can you come fly my Global 5000?

13:29You would have to go through the initial type training and do the recurrent training, right? Every pilot can only fly so many types of aircraft. And so as you look at kind of the quote unquote pilot shortage, which there's a lot of debate in the industry of whether it even exists or not. If you look at that, you have to look at type ratings. Now, when you're looking at buying an aircraft, one thing that I advise clients to do a lot of times is follow the big dogs. Okay. You've got the big dogs, which is NetJets, they're the largest. FlexJet, which is second largest. VistaJet, which is pretty large.

14:01and then a lot of the other operators. If you follow their make model, kind of their fleet composition, they train so many pilots. I mean, to put it into perspective, for those that follow publicly traded companies, Berkshire Hathaway owns NetJets and Flight Safety. They just reported an up quarter 8 % revenue growth. NetJets owns its own training facility. That's how much, that's how many slots that they were buying in the training facility. So they will actually leak out pilots for people that are like, you know what? I don't want to do the seven days on, seven days off thing. So, you know, feed on 300 pilots, relatively easy to come by.

14:39So someone's thinking about buying a private jet and they're saying to themselves, gee, this sounds like a lot of responsibility and a lot of cost, and maybe it's a little out of their budget. How significant is fractional ownership to the experience of owning your own jet. So fractional is similar, but it sometimes from time to time will feel a bit more like chartering than owning your own aircraft. Now, every fractional contract has slightly different language in their contracts of what's called call-out hours. Barry, I'm going to come to New York and you and I are going to go for a sushi dinner in LA.

15:18I know this great spot. We're going to go out there. If we wanted to leave in two hours, we are not guaranteed availability on a fractional. If we want to leave in 12 hours, let's say we want to leave tomorrow morning, guaranteed availability. And sometimes they will be able to swing something through and actually get you there. When you own an airplane, it is waiting for you at the hangar and you determine how close your pilots have to be so that if you want to leave in 20 minutes, you can do so, right? And so that is the biggest difference in the experience. The other piece is the hassle that comes with hiring pilots and managing stuff.

15:56I have a lot of billionaire clients and billionaire friends that say, look, I don't want to mess with this. I just want the easy button. Fractional is the easy button. Like at the end of the day, you're paying somebody to deal with all the headache and you show up and you get on the airplane and you go, you're not having to say, oh, I've got pilot turnover. It really is the easy button, which is where that fills in the market. Not only can you save kind of on your gross costs. But even if you're flying where it makes sense to fly private, you're negating a lot of that stress. So our last question, someone reaches out to you and says, hey, Preston, I'm thinking about buying my first plane.

16:37What sort of advice do you give to that person? Assemble a good transaction team. That is the number one thing that you have to do. Your transaction team typically looks like person number one is your broker. They're going to be your quarterback is not dissimilar to buying a commercial property. They're going to find the aircraft. They're going to manage the process. They're going to do all of your pre-buy inspections, everything like that. Two, your attorney is probably pretty good in-house. They know nothing about FAA law. So you need to get an aviation-specific attorney. In the grand scheme of things, it's going to be similar pricing to any other specialized attorney, but it's going to make sure your in-house attorney is going to pull their hair out, trying to figure out how to do this, where the aviation attorney is going to be easy.

17:20Third, aviation tax consultant of some sort. There's a few different firms that specialize in aviation tax. Your CPA probably knows how to run your books and make sure that everything's good. They don't understand the concept of truth in leasing and subleases and leasing between all the known entities. And how do you not get flagged by the FAA to illegally charter? So get a tax consultant just to make your life easier. And the last one is a financier. So that's what my firm does. If you're paying cash, we're not necessarily in the equation. But if you're going to finance your aircraft, you may call your bank and they may do it for you.

17:55They may not. Some of the larger banks don't necessarily want to do older aircraft or smaller aircraft. And so then you're kind of left wondering, what am I going to do? How am I going to finance this? We basically run an RFP process for you and make sure that we can kind of drive your rate down, stretch out your amortization, drive your down payment down. Whatever your goals are, we work with family offices, CFOs, to make sure that the proper leverage amount at the right cost is put on the aircraft for whatever your goals are. Hey, you could save money with fractional ownership or with jet memberships.

18:27But for some people, the only way to go is by owning their own private aircraft. I'm Barry Ritholtz, and you're listening to Bloomberg's At The Money.

18:42We'll be right back.