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IRS Issues Proposed Regulations on Bonus Depreciation

IRS Issues Proposed Regulations on Bonus Depreciation

A recently issued notice of proposed rulemaking from the IRS on the extension and modification of 100 percent bonus depreciation includes key recommendations from NBAA’s formal request for guidance on the deprecation changes passed into law as part of the Tax Cuts and Jobs Act (TCJA).

The TCJA amended the Internal Revenue Code to provide 100 percent bonus depreciation for both qualifying new and used property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. For tax years after 2022, there is a phase down of bonus depreciation in increments of 20 percent each year for qualified property acquired and placed in service before Jan. 1, 2027.

The extension of bonus depreciation to used property was a significant legislative victory for NBAA, and since passage, the association has requested specific guidance on how the provision applies to business aviation. Under the TCJA, used property can only qualify for bonus depreciation if it was not “previously used” by the taxpayer. In its guidance request, NBAA explained that a taxpayer conducting incidental use of an aircraft, such as chartering or demonstration flights, and then ultimately purchasing the aircraft, should not disqualify the acquisition from bonus depreciation. View NBAA’s formal request for guidance. (PDF)

“The definition of ‘previously used’ in the proposed regulations is very taxpayer-favorable. So long as the taxpayer never owned the property or had the right to depreciate it in the past, the property can potentially qualify for bonus depreciation,” said John Hoover, a partner at Holland & Knight LLP and vice chair of NBAA’s Tax Committee. “An aircraft is considered previously used by the taxpayer only if the taxpayer had a depreciable interest in the property before buying it.”

The clarification regarding “previously used” is important, as it broadens the types of transactions that could potentially qualify for bonus depreciation.

“For example, if a taxpayer leased an aircraft from an owner and decided to buy it, the aircraft could be eligible for bonus depreciation,” explained Glenn Hediger, CPA and president of Aviation Financial Consulting, LLC. “Similarly, if an individual chartered an airplane and later decided to purchase it, it could still be eligible for 100 percent bonus depreciation.”

Another clarification relates to when an aircraft is “acquired” for purposes of bonus depreciation. For example, if a taxpayer entered into a binding written contract with a manufacturer to build an aircraft in July 2017, but “physical work of a significant nature” didn’t begin until October 2017, was the aircraft acquired after Sept. 27, 2017 and thus eligible for 100 percent bonus depreciation?

The proposed regulations explain the aircraft is considered “acquired” no later than the date of a binding written contract to build it, even though physical work on the aircraft and actual delivery may occur later. In the example above, the aircraft would not be eligible for 100 percent bonus depreciation because the binding written contract was entered into prior to Sept. 27, 2017.

“NBAA appreciates the work of the IRS and Department of the Treasury to issue these proposed regulations, and we are grateful to see that their position on application of bonus depreciation to used property is consistent with our guidance request,” said Scott O’Brien, NBAA’s senior director of government affairs.

Taxpayers may rely on the proposed regulations for qualified property acquired and placed in service after Sept. 27, 2017.

View the full notice of proposed rulemaking. (PDF)

by NBAA

2018-09-27T15:03:33+00:00 September 27th, 2018|Aircraft Tax, Aviation News, Blog, Economics of Aviation|

U.S. Bizav Flight Activity Continues Climb, Says Argus

 

 

 

 

Business aircraft flying ticked up 2.1 percent year-over-year in the U.S., Canada, and the Caribbean last month, according to TraqPak data released today by business aviation research firm Argus International. This was better than the 0.9 percent increase the company had predicted for the month; Argus is calling for a 1 percent increase this month.

Part 91 activity logged another solid month, climbing 3.8 percent from last August. This was followed by a 0.4 percent increase in Part 135 operations, while fractional flying was flat from a year ago.

For the second consecutive month, all business aircraft categories except for light jets recorded gains. Midsize jet flying marked a resurgence last month, rising 4.2 percent, with turboprops not far behind with a 3.1 percent uplift from a year ago. Large-cabin jets, which have been at the top of the leaderboard for most of the past several years, climbed 1.9 percent year-over-year, while light jet activity dropped by 1.6 percent, continuing recent losses in this category.

Part 135 large-cabin jet flying saw the only double-digit gain in individual categories, rising 14.5 percent. Conversely, fractional large-cabin jets posted the only double-digit decrease, falling 24.8 percent.

by AINalerts

 

2018-09-17T13:33:51+00:00 September 17th, 2018|Aviation News, Blog, Economics of Aviation, General Aviation|

Bizav Salaries Pushing Up, NBAA Survey Finds

As the business aviation industry continues to face a workforce shortage, salaries are pushing up, with several positions improved by double digits and at least one position experiencing a 30 percent increase, according to the 2018 NBAA Compensation Survey. NBAA found an average of 3 to 4 percent increases across the 16 positions involved in the survey. The cash compensation for a non-flying aviation department manager category jumped 30 percent, to $205,000; maintenance foremen were up 14 percent, to $127,000; and senior captain salaries climbed 12 percent, to $164,000, the survey data indicates.
“The survey shows that our members are adjusting and keeping up with industry trends,” said Peter Korns, NBAA’s manager of tax, operations, and workforce engagement. “As our industry continues to work to attract and retain quality talent, we are seeing real efforts to fairly compensate pilots and mechanics who might otherwise seek out alternative opportunities.”
Korns added that the survey was largely in line with expectations. But not all salaries increased. “We see some significant decreases in dispatcher and line service personnel salaries—down 12 percent and 10 percent, respectively—which is cause for further analysis,” he said.
This year’s survey marked its largest data set to date, encompassing 790 NBAA operating member companies that provided data for 4,130 employees.

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By AINalerts : August 28, 2018

2018-08-29T11:25:24+00:00 August 29th, 2018|Aviation News, Blog, Business Aircraft Industry News, Economics of Aviation|

Amstat Report Shows Strengthening of Bizjet Values

Business aircraft valuations are showing signs of rebound, with heavy jets increasing 13.8 percent in the last 12 months and light jets improving by nearly 25 percent, according to Amstat’s latest Aircraft Valuation Tool (AVT) report.

By the end of June, heavy jet values had jumped to $16.3 million, a gain that benefited from a steady climb over the past couple of months. While values have fluctuated in this category this year, the $16.3 million is still up 7.8 percent since the beginning of the year and more than $3 million up from the 12-month low point in October, when values skirted $13 million, the AVT report showed.

Light jets also have showed gains this year, up 4.8 percent since the beginning of the year, to a normalized valuation of $2.5 million. This category has climbed steadily since last August, when values were $2.2 million, and are up notably since June 2017, when they dipped below $2 million.

Medium and super-midsize aircraft values are on par with where they were a year ago. Medium jets have remained at roughly the $3 million level over the past 12 months, while super-mids came in a $6.7 million, near where they were a year ago but a dip from the $7.5 million value in April. Turboprops, meanwhile, are up 1 percent year-over-year, marking a rebound since a drop last fall. Year-to-date, values are up 7.8 percent.

by AINalerts

2018-07-17T14:35:14+00:00 July 17th, 2018|Aviation News, Blog, Business Aircraft Industry News, Economics of Aviation|

Aircraft Marketplace Now ‘Balanced,’ Says Industry Veteran

 

 

 

 

Due to a growing global economy, there has been a turnaround in worldwide jet sales, and the aircraft market is balanced for the first time in years, creating a healthy, sustainable marketplace, according to a veteran broker. “The days of an airplane losing 20, 25 percent a year, which is of course not sustainable, are gone,” said Jay Mesinger, CEO of Mesinger Jet Sales, adding demand is now outpacing supply. “It’s the first time that my industry has been so bold to use words like ‘half full’ or ‘optimistic’ or ‘enthusiastic’ in years, and those are the words that are universally being used by all of us engaged in aviation.” Mesinger shares his perspective in this week’s NBAA Flight Plan podcast.

by NBAA 7/16/2018

2018-07-16T09:07:01+00:00 July 16th, 2018|Aviation News, Blog, Business Aircraft Industry News, Economics of Aviation|

Bonus Depreciation

Bonus depreciation may allow aircraft owners to realize the depreciation benefits of an eligible asset more quickly. Aircraft owners are not entitled to more depreciation, but are allowed to obtain the benefits of depreciation more quickly. When available, bonus depreciation can be utilized by owners of many capital assets and is not an aviation specific benefit.

The U.S. House and Senate have approved extensions of bonus depreciation on numerous occasions, which affirms what many industry analysts and economists understand – that businesses are unable to fully deduct the initial cost of capital investments, including those made in new aircraft, as they do with labor and raw material. Instead, they must write these costs off over many years, and, as a result, never recoup the full value of investments that drive economic growth.

Bonus depreciation delivers long-term stimulus to industries like general aviation, which provides high-skill, and high-paying, jobs for more than 1.1 million Americans, and is responsible for generating $219 billion in economic activity in the United States annually. It also gives American companies access to advanced equipment, including aircraft, making them more competitive, while preserving jobs in aviation-related manufacturing, one of the few industries that contributes positively to America’s trade balance.

The 2017 Tax Cuts and Jobs Act provides for 100 percent bonus depreciation, allowing taxpayers immediate deduction of the cost of aircraft acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2027 (Jan. 1, 2028 for longer production period property and certain aircraft). Through the efforts of NBAA and a coalition of general aviation groups, the new law permits 100 percent bonus depreciation for both factory-new and pre-owned aircraft so long as it is the taxpayer’s first use of the aircraft.

Learn More about New Depreciation Rules Under the 2017 Tax Act.

By NBAA

2018-02-12T10:57:46+00:00 February 12th, 2018|Aircraft Tax, Blog, Economics of Aviation|

Tax Reform Highlights for Business Aviation

The House and Senate have both voted to pass major tax reform legislation, and are expected to send the Tax Cuts and Jobs Act (“Tax Bill”) to the president for his signature before Christmas. The legislation contains important changes for business aviation in several areas.

100-Percent Expensing (Bonus Depreciation)

A 2015 Act extended bonus depreciation for qualified property (including commercial and non-commercial aircraft used in a trade or business with a recovery period of 20 years or less) through 2019, with a phase-down over time from 50 percent to 30 percent.

Under the Tax Bill, however, the current law would be amended to provide for 100-percent expensing, which will allow taxpayers immediately to write off the cost of aircraft acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023 (Jan. 1, 2024 for longer production period property and certain aircraft). Through the efforts of NBAA and a coalition of general aviation groups, the new law would permit 100 percent expensing by the taxpayer for both factory-new and pre-owned aircraft so long as it is the taxpayer’s first use of the aircraft.

For tax years after 2022, the bill provides for a phase down of bonus depreciation in increments of 20 percent each year for qualified aircraft acquired and placed in service before Jan. 1, 2027 (Jan. 1, 2028 for longer production period property and certain aircraft).

Like-Kind Exchanges

Under current law, when property (including business aircraft) held for productive use in the taxpayer’s trade or business or for investment is exchanged for property that is “like-kind,” a special rule under Internal Revenue Code (IRC) § 1031 provides that no gain or loss is recognized to the extent that the replacement property is also held for productive use in a trade or business or for investment purposes.

The Tax Bill modifies this special rule only to allow for like-kind exchanges of real property. As a result, taxpayers will no longer be eligible to defer taxable gain on the sale of aircraft via a like-kind exchange, and the gain would be subject to recapture for tax purposes. This provision is effective for transfers after 2017, and is a permanent repeal of application of IRC § 1031 rules to exchanges involving aircraft and other tangible personal property.

However, a transition rule preserves like-kind exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017. Further, 100 percent expensing of new and used property helps to compensate for the repeal of like-kind exchanges for tangible personal property, though unlike such repeal and as noted above, 100 percent expensing is scheduled to expire in 2023/2024 with an additional phase down until 2027/2028.

Prohibition on Deduction of Employees’ Commuting Expenses

The Tax Bill prohibits employers from deducting the cost of providing transportation to employees to commute between the employee’s residence and place of employment unless provided for the safety of the employee. It is unclear whether this new provision would allow the deduction of commuting expenses included in income, and if so, whether such deduction is limited to only the actual amount of the expense included in income.

Disallowance of Travel Expenses “Directly Related” to Business

The Tax Bill makes far-reaching changes to the basic deduction disallowance rules for business entertainment which could affect many aircraft owners. Historically, the general rule of IRC § 274 disallowed all entertainment expenses (assuming no exception applied) unless directly related or associated with the active conduct of the business. Therefore, the 100 percent deduction disallowance did not apply to the entertainment of business customers, prospective clients, company retreats and other entertainment events where business was conducted immediately before, during or after the entertainment, or the entertainment was clearly associated with a business goal unrelated to providing the entertainment such as the opening of a new business location. Beginning in 2018, the Tax Bill disallows all entertainment expenditures, regardless of whether they are directly related to a business goal.

Repeal of Miscellaneous Itemized Deductions, Including Employee Business Expenses

The Tax Bill eliminates miscellaneous itemized deductions, including employee business expenses beginning in 2018 and before Jan. 1, 2026. Prior to the amendment, employees could deduct expenses incurred in performing their work, subject to the limitation that such expenses (along with other miscellaneous itemized deductions) were only deductible to the extent that the total of such expenses exceeded 2 percent of adjusted gross income.

The 2% floor was a simplification measure in the 1986 Tax Act under which very few taxpayers needed actually to calculate their miscellaneous itemized deductions. For the same reason, eliminating the deduction is expected to affect relatively few taxpayers. However, the effect on the taxpayers whose adjusted gross income is not extremely high and who are currently able to deduct their aircraft expenses as employee business expenses to the extent they exceed the 2 percent floor could be substantial. Such taxpayers may want to consider restructuring their compensation arrangements into accountable plan arrangements, which are not affected by the Tax Bill.

Transportation Excise Tax Does Not Apply to Owner Flights on Managed Aircraft

The Tax Bill also amends IRC § 4261 by adding a new subsection to clarify that owner flights on managed aircraft are not subject to Federal Transportation Excise Tax (FET) ticket tax, but rather are subject to the non-commercial fuel tax. This issue has been the subject of controversy for more than 60 years, and this amendment clarifies the law consistent with the understanding of most people in the industry.

The FET exception applies to payments by the aircraft owner (or lessee) for aircraft management services related to maintenance, support or flights on the aircraft. The exception does not actually require that the owner be on the flight or that the flight be on the business of the owner, but only that the owner (or lessee) pay for the aircraft management services.

“Aircraft management services” are defined broadly, and no distinction is drawn between payments for aircraft management services versus payments for transportation services. It is sufficient that the payments by the owner (or lessee) ultimately cover the aircraft functions identified in the statute as aircraft management services. Since the only requirement is that the payments for aircraft management services be made by the owner or lessee, there appears to be no need to analyze whether or not the management company exercises possession, command and control of the aircraft.

The amendment includes new IRC § 4261(e)(5)(D) that appears to provide that if a portion of any payment is for taxable transportation but such portion is not paid for “aircraft management services,” then such portion of the payment is taxable. While this provision could cause confusion, we believe it is intended to mean that when a payment includes a taxable portion (such as payment for a flight on an aircraft not owned by the payor) and a nontaxable portion (such as payment with respect to a flight on an aircraft owned by the payor), only the taxable portion is subject to FET.

The FET exception only applies with respect to flights paid for by the owner or lessee. Accordingly, if an owner leases the aircraft to a management company, and an affiliate of the owner pays the management company for the flight, the exception would not appear to apply. In contrast, if the aircraft owner leases the aircraft to its affiliate and the affiliate (being a lessee) pays the management company for services related to the flight, then the exception would apply.

Entities that may be disregarded for income tax purposes (such as single-member LLCs, qualified subchapter S subsidiaries and grantor trusts) are respected as separate entities for FET purposes and can expect to be respected for purposes of this exception. For example, if a company owns a single-member LLC which owns an aircraft, the FET exception would not appear to apply to payments by the company to a management company to manage the aircraft. However, if the LLC leases the aircraft to the company, then the company’s payments should be covered by the exception.

The FET exception will not apply to payments by a lessee that is leasing the aircraft from the management company under a lease with a term of thirty-one (31) days or less. This is intended to prevent the exception from applying to one-off customers of a charter company who structure their charters as wet leases. Such a wet lease structure may also be problematic from an FAA regulatory perspective.

The provision is effective for payments after the date of enactment, which could be as early as Dec. 22, 2017. While the provision will not be directly applicable to owner flights prior to this date, we understand that the IRS has recently been (correctly) interpreting current law to not impose FET on management fees with respect to owner flights and we would hope that this provision would reinforce that approach.

Acknowledgments

This article was written by NBAA Tax Committee members John B. Hoover, Cooley LLP, and Ruth Wimer, Winston & Strawn LLP, with thanks to Richard C. Farley, Jr., PwC, and Jeff Wieand, Boston Jet Search. Learn more about the NBAA Tax Committee.

by NBAA Tax Committee

2018-01-11T13:26:55+00:00 January 11th, 2018|Aircraft Tax, Aviation News, Blog, Economics of Aviation|

Jetcraft Forecast Sees Upward Sales Trend

In its annual 10-year business jet market forecast released October 4, Jetcraft (SD01) predicted an upward trend for new business jet sales. Jetcraft acquires, trades and brokers both new and preowned executive and VIP jets.

Jetcraft’s 2017 forecast calls for 8,349 business jet deliveries by 2026, representing $252 billion in revenues (based on 2017 pricing). North America leads the way with 62 percent of deliveries (5,176 aircraft), followed by Europe with 17 percent and Asia with 12 percent (1,420 and 1,002 aircraft, respectively).

Over the past decade the average aircraft list price increased by 56 percent. The forecast sees that number growing by an additional 16 percent by 2026. How might that happen? Jetcraft predicts that 98 percent of the forecasted revenues from new programs will be for widebody or large business jets such as the Citation Hemisphere, Global 7000 and Gulfstream G500 and G600.

“Pinpointing the transition into a new business cycle is challenging,” said Jetcraft chairman Jahid Fazal-Karim. “Our forecast indicates we are finally exiting the post-2008 recession period, entering several years of steadier, healthier growth and expanding revenues.”

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by AINalerts  10/9/2017

2017-10-09T10:53:23+00:00 October 9th, 2017|Aviation News, Blog, Business Aircraft Industry News, Economics of Aviation|

UBS Bizjet Index Jumps 10% as Pre-owned Turns Corner

The latest UBS Business Jet Market Index jumped 10 percent from the August survey as respondents noted healthier pre-owned business jet inventories and improved pricing, as well as higher customer interest. Now at 53, the index score returns to its post-U.S. election high and denotes an improving market.

By cabin size, midsize jets took the lead with an index score of 54, up 7 percent sequentially. This was followed by light jets at 53, a 15 percent increase, and large-cabin jets at 51, which climbed 12 percent from August. UBS Global Research said the straight-up measure of absolute business conditions came in at 5.4, up 5 percent from the previous survey and the highest since before the financial crisis.

According to UBS aerospace analysts David Strauss and Darryl Genovesi, the overall index reflects an improved view of pre-owned aircraft pricing and inventory, with those scores soaring 24 percent and 22 percent, respectively, along with higher customer interest, which rose 11 percent. North American customer interest increased 11 percent and remains strongest at a score of 70, followed by an “improving” Europe (56), while Asia (51), Latin America (48) and the Middle East (47) “appear stable to slightly improving.”

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by AINalerts  October 5, 2017

2017-10-05T13:29:49+00:00 October 5th, 2017|Aviation News, Blog, Economics of Aviation|

North American Bizav Flying ‘Sizzles’ in August

Business aviation flight activity in North America “sizzled” last month, recording a 5.2 percent year-over-year increase, according to TrakPak data released today by Argus International. This is the largest month operations-wise since May 2008 and shattered the business aviation data firm’s 3.3 percent growth forecast for August; it is predicting 3.2 percent this month.

Last month’s results were fueled by a 10.9 percent year-over-year increase in Part 135 charter activity. Part 91K fractional flying also posted a solid 7 percent gain and, for the first time in several months, Part 91 activity was in the black, rising 0.9 percent.

Large-cabin jet activity continued to dominate the aircraft categories, climbing 7.2 percent year-over-year in August. This was followed by light jets, up 5.5 percent; midsize jets, up 4.8 percent; and turboprops, up 4.5 percent.

In individual categories, the Part 135 segment nearly had across-the-board double-digit gains, with the exception of light jets under this catergory, which rose 9.1 percent from a year ago. Part 135 turboprop, midsize jet and large-cabin jet flying soared 11.3 percent, 11.4 percent and 12.6 percent, respectively. Meanwhile, fractional light jet activity rose 17 percent year-over-year. Only Part 91 light jets recorded a slight loss, falling 0.2 percent.

 

by AINalerts  9/13/2017

2017-09-13T13:28:23+00:00 September 13th, 2017|Blog, Economics of Aviation, General Aviation, Uncategorized|

No Evident Change in Bizav Market Demand

Rockwell Collins is standing by the conservative business aviation market outlook it took at the beginning of the year, according to company president and CEO Kelly Ortberg. “We have seen about what we’ve expected in business aviation,” he told AIN during a recent media event at the company’s Winston-Salem, North Carolina seat-manufacturing facility. “We saw a lot of rate decreases last year. I haven’t seen further rate reductions, and I haven’t seen upticks.”

Ortberg remains hopeful that business aviation will bottom out sometime next year. In the meantime, Rockwell Collins has begun to explore synergies between its legacy operation and its new interiors systems business, the former B/E Aerospace.

One example came during a recent discussion with a dealer about an upgrade package for a legacy business jet, Ortberg said. The discussions focused on the flight deck, but when Rockwell Collins shared possible additions from its interiors business, the conversation changed. “The dealer had no idea that there is another set of certified seats and other interior products we can add to that package,” he explained. “The package went from a flight-deck upgrade to an aircraft upgrade. The dealer is ecstatic about the business opportunities.”

Connecting the B/E Aerospace business, which did not have dealers, with Rockwell Collins’s 300-strong dealer network is one of several near-term business aviation opportunities that the new, larger company is pursuing.

by AINalerts  6/5/2017

2017-06-13T02:14:16+00:00 June 5th, 2017|Aviation News, Blog, Economics of Aviation|

NBAA Secures Expanded Small Aircraft Exemption

The U.S. FAA has granted a two-year extension of NBAA’s Small Aircraft Exemption and removed limitations on the applicability to operations outside the U.S. The approval continues an exemption that has been in place since 1972 and historically ran for two years during each extension. But in recent years, the FAA has granted one-year or six-month extensions.

The latest, Exemption 7897I, runs through March 31, 2019, and permits NBAA members who operate piston-powered small aircraft and rotorcraft to take advantage of maintenance and cost-sharing options typically available only to operators of larger, turbine aircraft (more than 12,500 pounds) under Part 91 Subpart F.

Cost reimbursement options are extended under the exemption when NBAA members transport a guest or employees of subsidiary companies on company aircraft. Time-sharing, interchange and joint ownership agreements are also permitted.

Previous exemptions did not cover cost-sharing options when the operations were conducted outside the U.S. NBAA has worked with the FAA to expand that applicability to those operations.

“NBAA is pleased that the FAA has responded favorably to NBAA’s requests for a longer extension period and applicability of the exemption to operations conducted outside the U.S.,” said Doug Carr, NBAA vice president of regulatory and international affairs. “Our long-established small aircraft exemption is a valuable tool for small aircraft operators. It will provide even more benefits with these two positive changes, which allow operators better long-range planning and remove unnecessary restrictions on international operations.”

by AINalerts 4/5/2017

2017-06-13T02:14:16+00:00 April 5th, 2017|Aviation News, Blog, Economics of Aviation, FAA|

Hidden Damage

The Market Stigma of a Damaged Aircraft

Hidden-Damage

What’s the worst thing that can happen to your business jet in an accident or incident, assuming that you, the crew, and your passengers all are safe and unharmed? You might think that it’s a situation resulting in a total loss of the aircraft, but that’s not the case.

For example, if a hangar roof collapses in a storm, destroying your aircraft and making repairs unfeasible, your insurance company most likely would declare it a total loss and issue replacement funds. However, if your airplane is only damaged, and not totally destroyed, your insurer may opt to repair it, leaving you with an aircraft that operates just fine but now has damage history.

In a depressed used aircraft market, even one that now is showing signs of recovery, an aircraft that has sustained physical damage can be hard to sell. Despite the aircraft having been fully restored to an airworthy condition, and regardless of the quality and completeness of repairs, merely having had any damage will have a negative impact on the aircraft’s resale value.

In today’s marketplace, with two aircraft sitting side-by-side, identical in every way except for damage history, the aircraft previously damaged will command a lower price. This difference in value between a damaged aircraft and an identical undamaged one is referred to as the “diminution of value.”

And that is the “hidden damage” that cannot be mitigated or repaired.

The amount of diminution of value that results from damage depends on many factors, including the type of aircraft, the extent of damage, the time since the damage, the method and quality of the repairs, and how the repairs were documented in the aircraft records and logbooks, among many others.

And the marketplace is less accepting of damage history on certain classes of aircraft. For example, the perceived market stigma of damage is far greater to a corporate jet than it would be to a single-engine trainer aircraft or to a commercial airliner.

Damage to any aircraft always is considered a serious matter, especially as it relates to diminution of value. Contrary to past practice, diminution of value resulting from damage cannot be determined easily by consulting accepted, published industry price guides. One cannot do so simply by looking at a chart’s columns stating light, moderate, or heavy damage, and then applying a simple sliding scale formula to be allocated as a deduction to the aircraft value.

For that reason, most published price guides no longer include damage deduction charts. Instead, they advise readers to engage “an experienced appraiser” when assessing the fair market value of a damaged aircraft.

No two damage events ever have the same impact on an aircraft’s market value. When damage occurs, the amount of value diminution suffered by a damaged aircraft must be determined case-by-case. While all aircraft appraisers must meet standards set by the American Society of Appraisers, some exceed those standards. In performing a formal fair market value appraisal report, 35 specific categories of damage assessment must be evaluated. The careful appraiser, specializing in diminution assessments, will take into consideration more than 175 additional individual points, such as:

  • Severity of Damage and Plan for Repair
  • Capability of the Repair Facility
  • Manufacture’s Authorization of the Facility
  • Time, Flight Hours/Cycles Since Repairs Completed
  • Level of Detailed Documentation of Repairs (Historical Records).

In addition to these analysis factors, current market conditions – that is, the inventory of comparable make/model aircraft for sale – always must be considered for an additional value adjustment based on the current supply versus demand.

A damage event is not something that any aircraft owner wants or expects. However, understanding the impact to the aircraft’s fair market value after the smoke clears and the dust settles will be critical to its future resale value.

 

2017-06-13T02:14:17+00:00 March 20th, 2017|Aircraft Insurance, Blog, Economics of Aviation|

Court Blocks New U.S. Overtime Requirements

In a move welcomed by aviation businesses, a U.S. district court has issued an preliminary injunction to block a new Department of Labor rule that would significantly increase eligibility of mandatory overtime. The Labor Department (DOL) in May released the rule, which increased the minimum salary for employees “exempt” from mandatory overtime requirements from $23,660 to $47,476. Under the rule, the exempt threshold would be adjusted periodically. The rule was to take effect December 1.

DOL issued the rule, which increased the number of employees eligible for mandatory overtime from six million to 11 million, over the objections of numerous business groups, including a number of aviation entities. NATA had expressed concern over the impact on small businesses and NBAA had noted that the change was among “the most substantial since the introduction of the Fair Labor Standards Act (FLSA) in 1938.”

Twenty-one states and more than 50 business organizations are challenging the rule, and on November 22 the U.S. District Court for the Eastern District of Texas issued a preliminary injunction blocking both implementation and enforcement of the rule. The court determined that the rule “does not comport with Congress’s intent” as far as who is exempt from the mandatory threshold. The court noted that the rule’s “significant increase to the salary level creates essentially a de facto salary-only test” for exemption, but said this was not in line with congressional intent.

The court noted arguments made by the states that the rule’s provision for periodic adjustments is illegal, because it bypasses a notice and comment period. The court further determined that “because the final rule is unlawful, the court concludes the department also lacks the authority to implement the automatic updating mechanism.”

While the lawsuit was filed by specific states and businesses, the court decided to apply its ruling nationwide because “the scope of the alleged irreparable injury extends nationwide” and added that such application would protect employers and employees from being subject to different regulations based on location.

Aerospace Industries Association (AIA) president and CEO David Melcher lauded the ruling, echoing the belief that the rule exceeded DOL’s statutory authority and cited Congressional Budget Office estimates that the rule would impose more than $1 billion in costs to business.

A responsible increase to the salary threshold for overtime pay is due; however, DOL’s rule moves too far, too fast and disproportionately impacts small businesses, nonprofits, local governments and academic institutions,” Melcher added.

 

2017-06-13T02:14:24+00:00 November 29th, 2016|Blog, Economics of Aviation|