A recent report on what family offices must consider when using private jets highlights how this supposedly "niche" area is in fact big, and increasingly complex, business.
There are around 10,000 family offices around the world (source: EY) and these increasingly internationally-minded organizations need to travel fast. And that means taking to the air, preferably without hassles.
Such requirements show that in countries such as the US where urban hubs are several time-zones apart, it makes sense for family office members to use private aircraft, either hiring them via a specialist firm, via a fractional ownership model, or owning planes outright. But as costs of complying with new regulations and finding pilots from a scarce talent pool have kicked in, the options before even the richest FOs appear to be narrowing.
That in some ways was the lesson of a recent Citi Private Bank report into family offices’ use of aircraft, as reported here. The study also highlighted how there is more to running a family office than managing investments or inter-generational wealth transfer. These organizations also wrestle with transport, sourcing education and health resources for members, physical and cyber-security, and residences. (And none of these activities can be called the “soft” side of family office activity – quite the reverse.)
With aviation resources, family offices, unless they are in the very large bracket and able to afford in-house expertise, rapidly find they need to work with outside experts, Ford von Weise, director, global head, aircraft finance at Citi Private Bank, told this news service.
“Most family folks are….not well suited to managing aircraft or know what to ask people who are managing aircraft,” Weise, who decided to write the recent report after chatting to family offices, said.
“In the past, family offices listened to the first person who sounded credible about aviation. And it used to be the pilot that ran things,” Von Weise continued.
Politics and prices
The cost of avionics upgrades, finding pilots and dealing with regulation and tax issues have made managing aircraft resources a headache. And politics can add another detail on the radar display: in the recent US tax legislation enacted late in December 2017, the issue of tax treatment of private jets hit a political air pocket. The Senate tax bill last November had a provision ensuring that an excise tax for commercial airline flights wasn’t slapped on private flights operated through management companies. Under the law, private jet owners pay a higher fuel tax than commercial airlines do but don’t pay a 7.5 per cent ticket tax. Various reports have contested the idea that this move was any sort of tax break for “the rich”, saying it reinforced existing arrangements in place for years.
However, the market for private jets hasn’t been the glamorous image one sees from glossy magazines. As the Citi PB report made clear, prices of private jets were hammered in the aftermath of the 2008 financial crisis as even the wealthiest persons tightened their belts – suddenly the cost of having that Gulfstream or LearJet parked in the hangar looked harder to justify. And then there is the environmental issue: do family offices, particularly those all keen on the idea of environmentally-focused investments and other new ideas, want to burn up fossil fuels on private travel? Wealthy Millennials might not be so keen on this idea.
The sector has its challenges, therefore. But as the Citi PB study had made clear, there are also reasons to be optimistic, given valuations of aircraft and improving economic conditions.
Adam Steiger of Air Charter Advisors, a firm headquartered in Tamarac, in the Fort Lauderdale area of Florida, said family offices make up a large chunk of his business. (His firm was created in 2012.) Steiger has worked in the industry in various roles, such as working as a sales manager of the largest wholesale aviation marketplace, a situation that gives him an insight, he says, into the logistics and economics of this sector.
“A lot of family offices are not going out there and buying planes like they used to but using on-demand charters and jet card services,” he said. For reasons of risk control, and on cost/benefit grounds, use of charter makes sense for many family offices, Steiger continued.
“For a family office to concentrate on the issues around directly owning a private aircraft is difficult as there so many moving parts involved,” he said, referring not just to the mechanical side but to the business, regularly and HR issues around the operations of private jets.
In general, Steiger said there has been a bit of a trend from direct ownership of entire planes by an owner, to jet card memberships, and towards on-demand charter.
Joe Freeman, head of family office services at Abbot Downing, told this news service that to own aircraft directly requires clients to have wealth in the region of $100 million, $300 million and above. Abbot Downing's client minimum is 50 million in investible assets and $100 million in net worth. Clients need to have that much in assets to purchase an aircraft.
An important area for the firm is providing clients with aircraft financing, lending on different types of aircraft. This is similar to the lending that the firm provides for objects such as yachts, or fine art and other illiquid assets, Freeman said.
Abbot Downing – part of Wells Fargo - does, for example, offer services such as invoicing, billing, cash management and accounting for individuals who need it to manage aircraft; Freeman gave the example of a client who has four planes, and uses these services rather than do them himself. “This client loans out to companies the use of his pilots and planes,” he said. “When the pilot pours fuel into an aircraft, we make sure it gets paid for,” Freeman continued.
One big change that took place about 15 years ago was when US tax rules were changed so that private jets, when used for private purposes, were no longer tax deductible. This drove the ascent of fractional ownership business models such as NetJets, he said. (In the charter space, there are numerous firms, such as Privatefly, or Stratajet; another revenue model that certain firms provide are “jet cards”, where a client knows he or she may use a jet several times a year and the flight cost is deducted from the card. These come with differing terms and conditions.)
Citi PB’s von Weise said that much changed around private jets after the terrorist attacks on the US on September 11, 2001.
“After 9/11 and over the years following on, as the TSA and other agencies rolled out enhanced screening, there has been a material progression of family offices and others to provide private aviation because of the hassle factor,” he said. “Aviation firms are also not all that good at marketing themselves to high net worth individuals and family offices. The airline industry has created a demand for an alternative to the traditional business aviation space and risen to that occasion,” von Weise said.
The Citi report made much of a shortage of pilots – a fact that might at first seem odd, since flying private jets might strike the casual observer as an exciting, reasonably well-paid way to earn a living. But it’s not quite so simple. Von Weise said fewer individuals are available for civilian aviation jobs today because the Baby Boom generation of ex-military pilots who had served in areas such as Vietnam or the Cold War were retiring. This creates a gap. The industry is reacting to this situation by paying large sign-on packages for pilots to train, he said, giving the recent case of Horizon Air, which took this course.
There are new ideas around how to curb the problems of pilot shortages, including apps and flight-sharing networks so that, for example, empty flight-legs can be filled. This also brings up the issue of making the most efficient use of aircraft to mitigate carbon emissions, he added.
What does appear clear is that private jet flight for family offices is not an easy task to manage. Conveying family office beneficiaries around the skies is an increasingly complex task.