Gray Market Charter

Written by: Joe Moeggenberg, ARGUS International, Inc.

ARGUS  is a specialized aviation services company with global expertise whose mission is to provide the aviation marketplace with the information needed to make informed decisions and manage risk. 

Business jet charter is almost as old as the business jet itself, going back to the early 60s, when the original Lear Jet and Falcon Jet first entered service. In those days charter companies owned their fleets, all operating to government regulations more stringent than those governing private owners. The reason was simple: to provide a substantial safety margin for the paying public who had little or no aviation expertise.

It’s different world today. Most US-based charter companies no longer own their fleets. Rather, they manage them for owners looking to generate revenue by chartering out their aircraft – much like time-sharing a vacation house you use only on weekends.

These management charter companies still must adhere to stringent government-mandated safety regulations, comparable in most cases to those governing commercial airlines – regulations far more stringent than those governing private jet operations. And less than 50% of those charter/management companies also undergo regular third-party, independent audits, as a check against industry best practices and internationally-accepted safety standards.

In fact, about 24% of the world’s 18,000 business jets can be chartered from these government-certificated management charter operators.

Unfortunately, the current economic downturn has prompted more and more private jet owners to “rent out” their aircraft on a far more informal basis, at rates well below market rates. Some are looking for ways to reduce costs or lay off expenses. Others think that they are simply doing a favor for friends. Some industry experts estimate that today, as much as 40 to 50% of current charter flights are illegal, or “gray market,” charters, violating both government safety and commerce regulations.

These “favors” are anything but. Such gray market charters are not only illegal – they are potentially dangerous for owners and “customers,” as well as for the pilots who perform them.

By definition, gray market charters are flights flown by privately- or corporately-owned aircraft, in which the owner is compensated for the flight, without having commercial operating authority to sell air transportation on that aircraft.

According to operators and brokers around the world, these illegal charter flights are becoming more and more common. And where they used to be prevalent primarily in emerging markets such as Eastern Europe and Russia, gray market charter is now a concern in the US as well. Today, many owners actually need to sell their jet but cannot – they are upside-down in their aircraft thanks to depressed current values. Rather than sell at a loss, these owners offer their aircraft for illegal charter to generate some cash flow to cover lease or loan payments.

And that kind of desperation is not a prescription for a safe, professional flight operation.

The potential safety risks to passengers are many and various. Owners concerned about cost may cut corners on maintenance, training, or use low-cost, inexperienced flight crews. Where pilots flying for legal charter operations have strict flight and duty time limits, to insure safety and avoid fatigue, crews flying privately-operated aircraft have no duty time limits.

And not hiring additional crew members is a very good – albeit very unsafe – way to control costs.

Safety aside, gray market charter exposes just about everyone involved to potentially serious legal penalties and liabilities:

•  It invalidates insurance coverage on the aircraft, as insurers categorically will not pay out in the event of an incident or accident when the aircraft is being chartered illegally.
•  It places aircraft financing at risk, as loans and leases must be written specifically to include charter use.
• Owners and flight crews are subject to stiff fines – from the IRS as well as the FAA – and the latter are likely to have their pilots’ licenses suspended or revoked altogether.

“But my friend would never allow the aircraft to fly unsafely,” you say, “for me or anyone else!”

How do you know? If the owner is under financial duress – or the crew is worried about keeping their jobs – either may cut corners attempting to preserve the flight operation.

Authorities have a tough time identifying gray market charter flights, as payment often is made through a broker or a friend of the owner, or even can take the form of barter – you know, “Hey, let me use your jet and you can have my house in Vail for a week.” In those cases, the private operators may not realize that they are flying illegal charters. But that doesn’t lessen the penalties levied when they are discovered. As the saying goes, ignorance of the law is no excuse, no less so when it comes to aviation safety and national regulatory agencies.

The bottom line: saving a few dollars through illegal charter can be very expensive for aircraft owners and their “customers” alike. It’s a very poor risk/reward equation.

For more information on how best to shop for safe, reliable, and legal jet charter, the National Business Aviation Association and National Air Transportation Association have published their own consumer guides to explain the ins and outs of air charter and its providers. The NBAA’s Aircraft Charter Consumer Guide and the NATA’s Chartering an Aircraft: A Consumer Guide and Risk of Illegal Charter are both free and available on their respective websites: www.nbaa.org/charter and www.nata.aero.

To verify that the operator has a legal Aircraft Operating Certificate (AOC), go to www.av-info.faa.gov/opcert.asp or www.argus.aero.

Joe Moeggenberg
ARGUS International, Inc.
President and CEO

Six Sigma for Aviation Safety

By Joe Moeggenberg

President/CEO ARGUS International, Inc

Developed at Motorola more than 25 years ago to improve their manufacturing processes and eliminate defects, Six Sigma revolutionized quality control processes around the world, by proving that proper investments in quality provided outstanding improvements to the bottom line. Companies like GE and Honeywell have seen the benefits of implementing Six Sigma, with fewer reworks and fewer product returns, as higher quality meant improved sales and profitability.

Six Sigma’s success among manufactures led to the modifications and adoption in many other business processes. However, where the goal of a Six Sigma manufacturing process is to achieve a 99.99966% defect-free rate, the goal of aviation safety is Zero Defects, for obvious reasons.

And that’s why the International Civil Aviation Organization (ICAO) developed what amounts to a Six Sigma safety program for business aviation. Flying a corporate jet no longer is just “kick the tires, light the fires” and go, as it was a few decades ago. The industry has evolved, and that kind of cavalier attitude toward safety just won’t fly anymore.

Each Civil Aviation Authority (CAA), such as the US Federal Aviation Administration (FAA), has the option to augment those international standards with its own requirements.

Welcome to the world of Safety Management Systems (SMS) for corporate aviation, which involves both responsibility and accountability for corporate leaders like you.

What is Safety Management?

As defined by ICAO, safety management is a process for establishing lines of safety accountability throughout the organization, including the senior managers like you. Safety management is created by a government developing and implementing a State Safety Program (SSP). The Safety Management System (SMS) is a systematic approach to managing safety in compliance with the SSP. It includes the necessary organizational structures, accountabilities, and policies developed by and for business aircraft operators.

The Regulatory Environment is Changing…

The FAA will have to transition from a regulatory compliance and oversight approach to one based upon risk management, utilizing safety indicators and safety targets. This represents a significant change, from a reactive to a proactive performance-based approach to air safety.

A source of major frustration for many international operators is the various stages of SMS adoption and implementation seen from country to country. Although the global business aviation community is uniting around IBAC’s International Standard for Business Aircraft Operations (IS-BAO), it is not yet the unanimous choice. More detail regarding SMS can be found at http://www.argus.aero/FreeDataEmail.aspx?id=4 .

Phases of SMS Implementation.

The FAA is taking a phased implementation approach to SMS. Business aircraft operators who are IS-BAO registered should find that conformity with these standards provides a beneficial “intermediate step” toward full SMS implementation.

A significant characteristic of the SMS standard is the emphasis on senior management – the C-Suite’s – commitment to operational safety. That emphasis is reinforced by the introduction of the terms “Accountable Executive” and “Documented Safety Accountabilities.” Although familiar concepts in the European Union, these may require some getting used to in the US.

Who Is the Accountable Executive?

The Accountable Executive (AE) is the aircraft operator’s senior management official with overall responsibility for ensuring the safety and security of business aircraft operations. This individual has authority to make policy decisions; provide adequate resources; maintain financial control; lead organizational performance, safety, and management reviews; and accept operational risk. The AE may be a non-pilot CEO or COO, or in the case of smaller organizations, the Director of Operations who is assigned additional responsibilities.

What the Accountable Executive Needs to Understand!

SMS implementation may involve significant change for many operators. The commitment to SMS must be endorsed, supported, and communicated by the AE who leads that change and must understand:

• SMS is a business approach to managing safety
• The use of risk indices and risk mitigation
• The SMS standard requires his or her leadership in the management review process, the identification of and mitigation of identified operational hazards, and acceptance of predicted residual risk associated with a significant change in operations
• The requirement to provide adequate resources for the safety and quality services departments that lead Safety Risk Management
• SMS implementation is a major cultural change in terms “of the way we do business”
• Direct responsibility for safety rests with line management and employees, but must be modeled and supported at the senior management level
• A healthy corporate culture requires constant nurturing, is composed of multiple components, and that non-punitive methods are necessary to manage human error
• Certain individuals in the organization will resist SMS implementation and that the Accountable Executive must model desired attitudes and behaviors to all employees
• There must be continued support for the SMS champion (safety manager) who will lead and communicate the development progress throughout the organization

As a Member of Senior Leadership, What Should I Be Doing Now?

Despite pushback from many experienced pilots and aviation managers, SMS is going to be a requirement for all aircraft operations worldwide. As the global regulatory community’s processes and procedures for monitoring SMS implementation and regulation evolve, here is what you can do to increase your comfort level and enable development of an SMS implementation strategy and timeline:

• Ensure that the organization’s “SMS champion” (safety manager) is both qualified and trained to lead the SMS development effort. Since SMS implementation may require from one to four years, this individual needs to remain in this role for continuity
• If not already in progress, begin familiarization with SMS standards, vocabulary, tools, and techniques. A useful website to obtain the latest FAA SMS materials is sponsored by MITRE Corporation: http://www.mitrecaasd.org/SMS/documents.html
• As an interim step, consider either IOSA or IS-BAO registration. This commitment will provide operators with a start down the path of SMS implementation now rather than waiting for the FAA rule to be published. For international operators, registration signals positive intent to meet SMS requirements and evidence of actual progress

Taking these steps now to familiarize yourself with the new regulations will ensure a smoother transition, greater productivity, and, most importantly, increased safety.

Aircraft Chartering Around the World

Written by: Joe Moeggenberg, ARGUS International, Inc.

If you’ve been chartering US-based business jets and now need to charter in other countries, you may find that booking with non-US operators is easier in many ways, but will require a bit more research – and often, a deeper pocketbook. Here’s why:

Chartering in the US:

A properly maintained, professionally flown business jet can easily fly more than a thousand hours a year. But the average owner flies less than 300 hours annually. For that reason alone, many US owners retain a professional charter company to manage their aircraft and make it available for charter when they are not flying. The charter companies then split the revenue with their owners, who pay trip-operating costs from their share, applying any excess to the cost of their own flying. This symbiotic relationship enables owners to reduce the cost of their own flying, and the charter operator to have a larger fleet of late-model aircraft without any cost of capital to meet charter demand.

In fact, more than 90% of the 850 US business turbine aircraft (jets and turboprops) charter operators’ fleets are comprised primarily of managed aircraft. And that puts more than 4000 turbine aircraft at the disposal of US charter users, at what amounts to a discounted rate, as these operators do not have to include cost of capital in their pricing.

Thus, business jet charter in the US is a relative bargain.

All US charter companies are governed by the same rules and safety standards. They fly according to the Federal Aviation Administration’s Part 135 commercial charter regulations. This standard is more restrictive than Part 91, which governs non-commercial aircraft operations, and is designed to provide an extra margin of operational safety for the presumably unsophisticated charter customer. Part 135 applies to small piston aircraft as well as to large cabin, long-range business jets, and governs maintenance, crew training, and minimum experience levels, as well as duty day and required crew rest. The faster and more complex the aircraft, the more detailed, and in some cases more restrictive, the regulations.

But all charter operators are not created equal. And that’s why ARGUS provides our audit program, an additional layer of operational safety assurance to be sure that all operators, whether or not they are US-based, operate to more than just minimum standards.

Chartering Outside the US:

However, outside the US, both the rules and the economics of chartering are quite different.

In Europe and beyond, virtually all charter operators own their aircraft. Management for charter, common in the US, is virtually non-existent elsewhere.

The upside is that the non-US-based aircraft are dedicated to charter, and operators have complete operational control of their fleets, 24/7. In the US, charter availability of any particular aircraft is dependent upon whether or not the owner is flying that day, and the owner almost always preempts the charter customer. Outside the US, your only competition for an aircraft at any time is another charter customer. And the system is first come, first served.

The downside is that non-US-based charter operator rates reflect that cost fleet ownership. Add to that their increased cost of fuel, taxes (VAT tax runs from 15% to 25%), and international handling/landing fees, and you can expect to pay 30 to 35% more for comparable US-based aircraft.

Additionally, US operators often will offer discounted one way trip pricing, to generate incremental revenue on repositioning trip legs. Not so with non-US operators, who charge on a home-base-to-home-base basis almost exclusively.

Global Safety Differences:

The larger question is one of uniform safety regulations. Where all US-based charter companies operate under that single set of FAA regulations, non-US based operators fly under the regulations of the country in which they are based.

And, there are 1276 non-US based charter operators in 135 countries, according to the current The Air Charter Guide (December 2011-June 2012, Penton Publishing).

More than 100 different sets of regulations, governing more than 1200 operators. That makes for an awful lot of room for variation in safety regulations…

The tremendous growth of business aviation worldwide during the 1990s, and the resulting development of multiple, often-conflicting safety standards, underscores the need for one global regulatory system, based on universally accepted “best practices” promoting safe operations through application of consistent requirements and efficient compliance.

ARGUS applauds the vision and initiative of International Civil Aviation Organization (ICAO), in conjunction with the effort of International Business Aviation Council (IBAC), to accomplish that objective. These organizations have worked tirelessly to promote Safety Management Systems (SMS) to aviation regulatory authorities all over the world.

To facilitate and promote ICAO’s directive of SMS implementation, IBAC, in a collaborative effort with the business aviation community, developed the International Standard for Business Aircraft Operators (IS-BAO). IS-BAO establishes a single global standard to enable operators to effectively evaluate their operation against universally accepted “best practices policies and procedures to manage risk and promote a vibrant safety culture.”

We at ARGUS have thoroughly evaluated the IS-BAO, and are convinced that this standard is an excellent measure of performance, and will be instrumental in advancing safety throughout business aviation. As a result, ARGUS has incorporated the IS-BAO within our audit program. We also have mandated that all company auditors receive IS-BAO training and certification in conjunction with our audit certification and training.

We invite the global business aviation community to fully support the IS-BAO, so that you, the customer, as well as operators worldwide can enjoy all the benefits of this critical initiative. And that means you will fly with peace of mind, knowing that wherever and with whomever in the world you charter, that operator has made your safety their Number One priority.

ARGUS  is a specialized aviation services company with global expertise whose mission is to provide the aviation marketplace with the information needed to make informed decisions and manage risk. 

The Price is Not Right

Written by: Joe Moeggenberg, ARGUS International, Inc.

Business jet charter was born in 1963 with the birth of the  Lear Jet (yes, back then it was two words) and the founding of Executive Jet Aviation in Columbus,Ohio. EJA owned its 20+ aircraft fleet, and charter pricing included not only the cost of flying its trips, but also an allocated portion of EJA’s cost of capital – the aircraft purchase price. Other jet charter companies soon sprang up, each operating company-owned fleets and using a similar pricing model.

But that changed forever in 1967, when Executive Air Fleet (EAF) began offering business jet charter aboard aircraft it managed on behalf of third-party owners, aircraft available when those owners weren’t flying themselves. Now charter clients needed to pay only for the cost to fly their particular trip, without having to pay an allocated capital equipment cost.

Today virtually all of the 850 business turbine aircraft charter management companies in the US use some form of that pricing model; that is, the charter customer pays a rate based only on the cost to fly the trip, without paying the fully-allocated capital cost of the aircraft.

This pricing model is unique to theUS. Charter operators in the rest of the world still own their fleets, and require the charter customer to pay a fully-loaded charter rate, some 25 to 30% higher than US rates. That makes charter flying in theUSrelatively cheap –  and today, perhaps too cheap. The decline in business turbine aircraft charter demand tracks the recent recession, forcing charter operators to scramble in order to stay alive.

Business turbine aircraft flight activity began to slip after peaking in 2007. By 2009, flight activity was down more than 24% from that 2007 high, and remains down more than 19%. Business turbine aircraft charter fared even worse, as 2011 charter flying remained down 27.3% as compared with 2007, down more than 270,000 flights annually.  But there has been no commensurate drop in the number of aircraft available for charter. And so we have the same 4787 aircraft chasing that shrunken market.

A closer look at the charter management model, under which some 80 to 85% of all turbine charter aircraft operate today, illustrates why.

The aircraft owner keeps about 80% of each trip’s charter revenue, to cover the direct and allocated indirect operating costs of the trip. That leaves 20% for the management company to cover all overhead costs: accounting, scheduling, sales commissions (internal as well as charter broker fees), operations and maintenance oversight, and FAA regulatory compliance.

And profit…

In today’s competitive market, many management companies are now charging ridiculously low management fees in order to retain clients. Add to that the downward pressure on charter pricing – the same number of aircraft chasing 27.3% fewer flights – and charter companies are forced to cut corners elsewhere, reducing infrastructure in order to preserve even a slim profit margin.

Add to that the fact that charter brokers are demanding higher commissions, and we find many an operator trying to make a profit by becoming a high volume charter provider. You’re doubtless heard this refrain before: “We lose a little on every sale, but we’ll make it up in volume.”

The net result? No one is making money: neither the charter operator nor its management clients, who are barely covering the direct cost of each trip and receiving little contribution to their fixed costs.

And today that can make charter with the wrong operator a risky proposition.

Let’s take a real world example, drawn from our audit experience. You have a choice between two large cabin, long range Challengers 604s, both in first rate condition and with identical charter rates.

Challenger A has:

• Two young pilots with low total flight time and low time-in-type (specific Challenger experience). They are part-time contract employees, paid on a trip-by-trip basis, and meet the minimum training standard.
• The charter operator provides:
  • Minimum insurance coverages, purchased from a Caymans-based underwriter.
  • Minimal maintenance support.
  • No Safety Management System (SMS) or Emergency Response Plan (ERP)
  • A company without infrastructure,
  • Very little support
  • No dispatch, flight following or customer service

Challenger B has:

• Two professional pilots, with high total flight time as well as time-in-type. They attend recurrent simulator training every six months, and are well-paid, full-time employees.
• The charter operator provides:
  • Complete insurance coverages through a highly-rated underwriter
  • Full time maintenance support
  • An internationally-sanctioned SMS which includes an ERP
  • Complete operations and maintenance support and oversight
  • Full dispatch service, flight following and customer service department

Needless to say, Challenger B has a higher operating cost than Challenger A – and for some very good, but not-so-obvious-to-the-customer reasons.

All charter operators may hold legal FAA charter certificates, but not all charter companies are created equal, nor do they operate to the same standards. Some are content to meet just the minimum required by the FAA.  And it’s curious that business executives who operate their own companies to the highest standards, are willing to compromise their safety by choosing a charter company that operates to lower standards.

You might prefer Challenger A’s price – but would you want to ride it? And would you trust Challenger A with the safety of your family, friends and business associates?

US charter rates have not changed in years, thanks to competitive pressures and charter customers who don’t understand the true cost of safety. The result is that rates simply have not kept pace with increased operating costs.  But higher quality operators need to be able to charge more, to insure continued safe operation – and that means charter customers need to be better educated.

NEXT MONTH- charter pricing outside the US

 

ARGUS  is a specialized aviation services company with global expertise whose mission is to provide the aviation marketplace with the information needed to make informed decisions and manage risk. 

Welcome to Plane Insights

Welcome to Plane Insights. This is a blog where I will discuss the ins and outs of traveling as a business aviation passenger. Some topics that I plan to cover are Grey Market Charter, The Basics of Business Aviation Charter, and Chartering Internationally.

I hope you enjoy this blog,

Joe Moeggenberg

ARGUS International, Inc