I’d like to start by thanking everyone that chose to read, like and comment on my previous blog post, “The Last Person You’d Ever Expect to Fly Private”. It means a tremendous amount to the team and myself that those words resonated with so many of you.
In this blog post, I am going to be a little more practical, so if you are a numbers orientated kind of person, this is for you. I am going to demystify why so many aircraft owners in the Middle East are losing money on leasing back their planes to classic operators. Most of them do not actually end up even generating a net profit to counterbalance the time they have leased the plane out. A large portion incur losses on behalf of the operator (hence the jolting blog title)!
For those of you on the move, you may wish to hear me talk about the problem in more depth on our newly launched GI Aviation podcast part one. Click here to hear the podcast.
The current situation for many
By now, many of us know the classic model. An aircraft owner buys a plane with the intent to use a certain amount of flight hours per year. As I talk about in the podcast, it’s rare for someone to buy a plane without having someone else to justify it to. So, a CEO might need to justify it to the Board of Directors who, in turn, may need to make a case to shareholders, or a husband may need to make a case for the airplane to his wife. And the default position by many here is to lease the plane to a “classic operator” to claw back some of your investment when the plane would otherwise be sitting idle.
The reason why aircraft owners are actually not making a margin on flights leased to an operator is because while the operator is able to compensate the owner a dollar value per hour flown that appears to include a profit, the owner picks up the tab for wear and tear, insurance, internal upkeep and many other line items we are all too familiar with. These items are, of course, tax deductible, and the saving on tax payment stays with the owner, which then becomes part of their profit margin.
The issue for aircraft owners in the Middle East is… you guessed it… we’re a tax free region. For an aircraft owner, this presents a significant downside. If you are incurring inherent costs on your own flight miles, you can justify the line items associated to the cost. But if you are incurring those costs when somebody else is flying your plane, you are sacrificing your margin. Especially if the operator is putting hundreds of hours per year on the plane.
So, what should an aircraft owner do?
Ideally, the aircraft should be purchased by an overseas entity that offers tax relief to the owner. Typically, these overseas territories would be the US, Europe or even India. The model then changes. The owner of the plane is now based in (say) London. They are then responsible for the aircraft’s usage and costs. That entity would then lease out the aircraft to the primary leaseholder, which would be the same owner’s Middle East based entity. That entity would then sub-let to the local classic operator.
All final costs for insurance, wear and tear and refurbishing are then borne by the parent holding company in London. Of course, all final profits are routed to the same entity, which in turn are subject to UK tax which would enable tax deductions for expenses and ownership costs.
This solution allows owners in the Middle East to let themselves and other parties benefit from use of the plane, while sending any generated revenue to the overseas entity, where tax is paid but also reclaimed. In that sense, all parties benefit, including the overseas company.
Stuck? We’re interested.
Since taking over at GI Aviation, I have spent many hours with the team. Between us, we have racked up way over a hundred years of aviation operations and management experience. One of the reasons for doing the podcast you hear above is to properly announce our consulting arm. We already consult for companies, but as the division has grown, we’ve decided to promote it more actively. The Middle East region currently has a glut of aircraft across the busiest markets such as Abu Dhabi, Dubai and Saudi Arabia. If you’re thinking about getting a corporate or private aircraft, feel free to email me on firstname.lastname@example.org or call us on +971 (0) 2 444 5233. If I am not around, anyone at the office will be able to answer your more immediate questions.