CJI London 2022: Day two – new entrants, easing their flight path
Helping new entrants to understand the true costs of private jet ownership, improving sustainability and fathoming the widening web of Russian sanctions were the three themes dominating the second day of Corporate Jet Investor’s London 2022 conference on Wednesday (March 9th).
Business jet brokers, operators, charter firms, maintenance providers, lawyers and other industry professionals all reported a rising tide of new entrants into private jet aviation. But not all new entrants were well briefed about the full costs of jet ownership – particularly operation and maintenance costs. It was the industry’s role to educate them, agreed speakers.
“There are more first-time buyers than ever before and they require a level of education,” Delray Dobbins, Pratt & Whitney Canada, ESP Sales and Global Strategy told delegates. Only 10% of buyers going into closing were asking for a statement of account. “That creates potential painful exposure points the day after purchase.”
Simplifying topics for owners was a prime responsibility, said Florent Series, TAG Aviation. “Our role is key to explaining and helping the buyer enjoy the experience. If not, they will get a bad taste, leave the industry and never come back.”
Rapidly rising interest rates, after years of historic lows, should also be factored into acquisition costs, said Felipe Ribeiro, Invicta Finance founder and MD. Other soaring costs include fuel prices (with oil briefly reaching $139 a barrel this week) and rising labour and parts costs.
Clients crave simplicity, said Megha Bhatia, Rolls-Royce vice president, Sales & Marketing. “When it comes to simplifying [engine] programmes, everyone in the industry has told us the simple thing is to offer one comprehensive solution. That means you have preventative, scheduled and unscheduled maintenance all covered,” she said.
Francisco Zozaya, JSSI chief revenue officer agreed it is important to discuss major overhaul costs within the life ownership of the aircraft. If the new owner expects regular maintenance bills from the beginning, then it’s an “easier conversation to have later”. But not every aircraft owner should be an aircraft owner. “There are people we should advise not to own an aircraft and to consider charter from a financial standpoint.”
Buying a business jet to charter out is proving a beguiling argument for some but speakers advised caution. “This is the area where I hear the most untrue statements – the claim that charter can pay for all your flights,” said Series of TAG Aviation. “Yes, it can contribute. But is it going to turn around your operation? I don’t think so.”
Underpinning the argument for buying a jet to charter is rising charter rates, after a decade or so of stagnation. Fabian Bello, Journey Aviation CEO noted: “We have been able to bring prices up to where they should have been [pre-Covid]. Now people are happier and that’s very important.”
New entrants and returning buyers, particularly in the younger demographic, are increasingly interested in sustainability. Both groups are probing OEMs and others about their policies on Environmental, Social, and Governance (ESG).
“This is one of the first questions asked of an OEM,” said Stephen Friedrich, Embraer Executive Jets chief commercial officer. “This is happening to us now. We are asked very pointed questions about ESG.” Typical questions include: where does your factories’ power come from? Are you using sustainable manufacturing methods? What is the policy on upcycling, recycling and renewable resources?
Similar concern was reported by Jet Aviation. “Nobody wants to be an ambassador with a brand that will compromise their standing,” said Norbert Ehrich, the company’s vice president Flight Sales EMEA. “More than ever before, we get asked where we stand on ESG.”
Improving business aviation’s sustainability credentials depended, at least in the short term, mainly on the widespread adoption of Sustainable Aviation Fuel (SAF) with carbon-offsetting schemes contributing. Key problems were the lack of availability and high price, both of which require remedies as the industry moves towards net zero carbon emissions by 2050.
Eve Laurier, Bombardier vice president Communications, Public Affairs and Marketing said: “SAF is important for the world. We [business aviation] have a bad rep[utation] – and that’s from a PR person.” While SAF is starting to become better known, much needs to be done to improve its availability, including book-and-claim systems, and lower its price. “It [SAF] will have a huge impact on our industry and that control is in our hands.” This week Chinese private-sector firm Oriental Energy and Honeywell agreed in principle to build a 1m t/year SAF production plant in Maoming, in Guangdong province. Extra production and stronger demand were important means of reducing SAF costs. For example, in California SAF costs $4.20/gallon more than Jet A-1 fuel.
Conducting KYC due diligence research on potential clients, suppliers and other business partners is even more important after sanctions targeting Russian oligarchs. The latest EU advice was delivered by Robert Baltus, European Business Aviation Association chief operating officer. He spoke the day after the UK Department for Transport (DfT) ordered the detention of a Luxembourg-registered private jet, linked to a Russian billionaire at Farnborough Airport due to suspected sanctions breaches.
Don’t assume anything and don’t fly if in doubt, advised Baltus. “If the passenger has a Russian passport, they cannot fly on a business jet [under EU rules] – only on a commercial airline,” he said. Limited exemptions were available – such as on humanitarian grounds. Operators were advised to check with the national authority where their aircraft is registered. Russian aircraft are banned from EU, US and UK airspace. Russian flight crews could continue to operate under the latest sanctions law, said Baltus.
The need for effective KYC was reinforced by US lawyer David Hernandez, Vedder Price, shareholder. This was driven both by US sanctions following the Russian invasion of Ukraine and federal investigations into alleged export offences by Aircraft Guaranty Corporation and Wright Brothers Aircraft Title. (Neither organisation has been convicted of any offence).
“I think we do what we should have done forever,” said Hernandez. “Ask the proper questions, was it [the aircraft] exported properly?” European businesses could find themselves vulnerable to US Bureau of Industry and Security (BIS) sanctions arising from the Russian invasion of Ukraine. “The one that will get Europeans into trouble is the BIS sanctions,” said Hernandez. It is vital businesses check who is their ultimate customer – rather than simply the person who placed the order, possibly speaking with an English accent. Russian buyers are likely to look to EU and UK for suppliers in contravention of sanctions after the US blocked business with the country.
Bruce Marshall, AIC Title Service, executive vice president & general counsel, added: “You cannot be selective with KYC, you must check everybody. The government will act strongly upon any errors.” Penalties for breaching sanctions include seizure of the asset and, on conviction, banning orders from US travel, fines of hundreds of thousands of dollars and possibly prison.
Meanwhile, a key development of the past two years was the emergence of business aviation as a distinct asset class, according to Ford von Weise, director, head of Global Aircraft Finance & Advisory Services, Private Citi Bank.
This was driven by a combination of factors including positive public relations sparked by people not wanting to fly on airlines during the pandemic and improved access to finance led by companies like Global Jet Capital and some banks. Another key factor was the rising tide of private equity investment and infrastructure funds into business aviation infrastructure, charter and operations.
“It [the pandemic] has legitimised this industry,” said Von Weise. “It has moved from being a rich boy toy to its own distinct separate asset class. That’s a big deal.”