Securing hangar space is becoming more involved

 - September 20, 2006, 1:18 PM

Between 1991 and 2003 the number of U.S. companies operating business aircraft (of all types) increased to 10,061 from 6,584, and the number of aircraft to 15,879 from 9,504, according to NBAA statistics. Honeywell’s crystal ball sees delivery of 7,724 business jets between 2003 and 2013–not including bizliners and the industry wild card, very light jets (VLJs).

No doubt, there will be some attrition throughout the existing fleet, but even if Honeywell’s numbers are optimistic, a 30-percent expansion of the business aviation fleet–in new jets alone–is plausible in the next decade.

Not many of those pampered jets are likely to be left out overnight at home base, and hangar space is already tough to come by. Something is going to have to give. Toss in the prospect of VLJs, and there could be a true housing crisis in the business aviation industry. It would seem like a good time to be in the hangar-development game.

There are a few downsides. Some construction loan companies and airport managers recall only too vividly the dark days of the early 1990s, when business flying slowed to a trickle, aircraft residual values plummeted and FBOs on once-bustling airports rented empty hangars to film television commercials and held barn dances. Those with long memories understand that, despite the long-range forecasts for spectacular growth, corporate aviation is a cyclical business fraught with challenging lows to contrast with the euphoric highs.

Because of their unique systems requirements and odd sizes, aircraft hangars are expensive-to-build, restricted-use structures, meaning you can’t convert them to warehouses or hockey rinks without major reinvestment. And because they are located on airports, access concerns would limit their viability within any business other than that for which they are designed–to store airplanes. These can be difficult objections to argue when negotiating a construction loan.

But for now, at least, hangar space is in short supply, and airports and FBOs across the country are having little difficulty convincing airport authorities and lenders that this goose should continue to produce golden eggs for the foreseeable future. In assessing the market for hangar space, a good place to start is looking at some of the many purposes hangars serve.

Transient Tenants

An airplane is a traveling machine, likely to spend a substantial number of nights on the road–particularly if listed on a Part 135 charter certificate as a means of offsetting some of the owner’s costs.

Many aircraft operators are resigned to letting the airplane remain on the ramp overnight under those circumstances–at least in the summer. But come winter, the ravages of ice, snow and fluid-chilling temperatures make the cost of shelter in a heated hangar more palatable.

Not surprisingly, FBOs in northern climes are more attuned to husbanding some of their hangar space for transients–both those who prearrange the service and those whose schedules sometimes force them to show up virtually unannounced. John LaFontsee, general manager of Million Air St. Paul, sets aside a portion of hangar floor for transients, despite the fact that he could probably lease the space to regular tenants. Alain Champonnois, general manager of Skyservice Avitat Toronto, has the same philosophy.

FBOs in frozen climates have developed spreadsheet formulas to calculate the bottom-line cost for every time they open a hangar door. The heating systems are designed to recover temperatures quickly, and line crews undergo training to minimize the seconds the door stays open, not unlike the pit crew of a Nascar race team.

Hanging with the Gang

Many FBOs offer fixed floor space to multiple based tenants in so-called “gang” hangars. Depending on the size of the hangar and the schedules of its tenants, that arrangement can either work smoothly or be a fiscal, logistical and legal nightmare.

Much of the complication comes from the fact that a multiple-tenant hangar contract falls somewhere between a lease and a service agreement. Is the tenant renting square footage? Or is the tenant contracting with the FBO to tow the airplane–out of the hangar before every flight and back into the hangar upon return? Really, it has to be both, but for purposes of insurance and accounting, the definition can be problematic, even confusing, for companies’ accounting departments to attribute costs and for their legal departments to approve contracts.

Every time an aircraft is moved, there’s the chance of minor damage through hangar rash. There are now computer programs that “virtually” arrange aircraft of various sizes and footprints within a given hangar area. But even those careful calculations can go awry.

For the FBO line manager, juggling which airplane is stored up front this week, and which is buried three deep, can be a headache. A King Air owner might not call for his ride for a solid stretch of six weeks (so it gets relegated to the back row) then calls every other day for a week-and-a-half. It can sometimes take as much as an hour to move airplanes in and around the hangar to safely reach the back row.

Some gang hangar contracts call for a required notice period before which they cannot guarantee that the airplane will be available. Whether those terms are in the fine print or not, effective communication goes a long way toward the cooperative effort between FBO and hangar tenant.

Corporate Headquarters

At the other end of the scale is the corporate hangar/flight department headquarters. Such a complex includes purpose-built storage hangars shaped and sized to accommodate the company’s current and hoped-for fleet of aircraft; a dispatch area with schedule board and weather/flight-planning facilities; office accommodations for the chief pilot, line pilots and support personnel; maintenance facilities and parts storage areas that might range from minor to extensive; a passenger lobby and lounge; and sometimes a conference facility designed for offsite meetings at the airport with incoming clients or vendors.

More than ever, security is a vital element today in designing a corporate flight facility. But the threat of terrorism since 9/11 has not caused the flurry of security-system contracting one might have expected. For most large-company flight departments, industrial security was an issue long before the terror threat, so systems were already in place. It’s a truism that corporate flight departments know who is on their airplanes–and have set high levels of security since long before 9/11.

Designing and building such a corporate flight complex can sometimes rival the architectural effort that goes into building the corporate headquarters downtown. In the 1980s book chronicling the heyday of leveraged-buyout takeovers, Barbarians at the Gate, authors Bryan Burrough and John Helyar lampoon the development of R.J. Reynolds-Nabisco’s flight-department headquarters at Atlanta’s Fulton County Airport as wretched excess at the expense of the shareholders. General Electric, rebuffed by local government in its plans to build a corporate hangar at New York’s Westchester County Airport, chose instead to build a complex at Stewart International Airport in Newburgh, N.Y., about 50 miles northwest, for its flight department, which includes a pair of Boeing Business Jets.

Securing approvals and plans to build a corporate flight facility often entails most of the same effort that would be involved in developing an FBO on the airport that would be open to transient traffic. In fact, many large FBOs sprung from existing flight departments as enterprising managers or chief pilots strove to offset some of the department’s expenses, or even turn the operation into a substantial company profit center in its own right.

Some examples include Pentastar Aviation at Detroit-area Oakland County International Airport in Pontiac, Mich., which grew from the Chrysler flight department facility; K-C Aviation, the former Kimberly-Clark flight department that morphed into a completions shop–now owned by Gulfstream; and even Atlantic Aviation, which, beginning in the late 1920s, grew from the flight department of the DuPont family in Wilmington, Del., to become an FBO chain, now backed by a U.S. affiliate of Australian finance house Macquarie Bank (though the original Atlantic Aviation facility in Wilmington is now owned and operated by Dassault Falcon Jet).

Following that same path, if not on the same scale, was Safari Air of Easton, Md. When a Lockheed JetStar owner acquired a well appointed corporate hangar at the airport on the shores of the Chesapeake Bay, his chief pilot, Ken Guinness, requested permission from the airport authority to sell fuel to transient operators.

Though the increase in insurance premiums was substantial, Safari Jet Center was able to offset some of the cost of operating the JetStar by selling fuel to a small cadre of regular clients as part of its business plan. The aircraft owner has since moved on to other pursuits (sailing a yacht around the world), sold the hangar and made the JetStar available for lease, but Guinness said the project worked well while it lasted– and could someday resurface under new ownership.

Somewhere between building a large corporate complex and signing on as a gang hangar tenant is the smaller corporate hangar–sometimes referred to as a condo hangar (though unless the hangar sits on fee-simple land not owned by the airport authority, the term is technically incorrect). In truth, some arrangements make hangars between 3,000 sq ft and 10,000 sq ft available with leases not much more complex than those for a T hangar. In some cases, tenants choose multi-year, long-term leases involving contractual considerations for utilities, outside maintenance, insurance and financing.

One such development is the Custom Hangar Program at Morristown (N.J.) Municipal Airport. Win Perkins, an aviation property consultant and hangar developer, launched the project with partner Dirk Vander Sterre, whose background is in conventional commercial real estate development in northern New Jersey. Perkins sees the custom hangars as filling an important niche for small flight departments.

He said, “They can have a lot of what the big boys have that you don’t get in a common hangar–privacy, office facilities, your own flight-planning area, but some pilots initially balk at the lack of service. They’ll ask, ‘Isn’t it a step down for us to have to move the airplane ourselves?’ But the upside is that they have control. And if they don’t want to buy their own tug, they can buy into the Lektro tug we have in the development. We also have a lav cart available.”

The Custom Route

Perkins said it’s rare to find hangars in the 3,000- to 10,000-sq-ft range in the New York metropolitan area. His custom hangars offer the amenities associated with a larger corporate hangar but available in a smaller dose for operators of small to midsize jets. The hangars are available with upgraded electrical service, climate control (making it feasible to incorporate office space and flight-planning computers), showers, parking and private entrances. “The boss can arrive at the back door, come into the hangar and board the airplane without getting wet in the rain,” said Perkins.

He also noted that tenants can go above and beyond existing security systems to add whatever level of surveillance equipment they deem necessary for their needs. One custom hangar tenant incorporates sophisticated motion sensors with alarms datalinked to an offsite security agency that has access to the hangar in the event of an intrusion.

One of the most compelling benefits of leasing a custom hangar at Morristown is the fuel arrangement. Custom hangar tenants purchase fuel at 27 cents more than the wholesale price as part of their lease agreement. “It’s like having their own fuel farm, again just like the big boys, but without the responsibilities,” said Perkins. He cited the example of a prospective tenant with a Falcon 50 who had been quoted a monthly rental rate $2,500 lower than that of the custom hangar. “But at the price delta for fuel,” said Perkins, “he could make up that difference in one fill-up.”
Though pilots might initially be put off by the prospect of moving their own aircraft, emptying their own lavs and filling their own ice buckets, Perkins said the idea grows on them. “It’s like having your own place,” he said, “and they begin to appreciate the benefits. Pretty soon you’ll see a Tri-Pacer show up in the corner of the hangar, and you know that doesn’t belong to the CEO.”

In return, Perkins and Vander Sterre expect longer-term leases than one would normally see with T-hangar or gang-hangar deals. Custom hangar leases average three to five years, with one tenant signed on for as long as 15 years, including options. Vander Sterre said, “I’m interested in cash flow. A longer-term lease ensures me as a developer–and my lenders–that the check will be coming in every month.”

Vander Sterre added that the stability of longer-term leases allows him to negotiate better rates on construction loans than someone who is building hangars that would lease month-to-month or even year-to-year. Should the tenant fall on hard times, the flight department need to relocate or the customer need to break the lease for any other reason, Vander Sterre said he expects he’d allow breaking the lease if a suitable replacement tenant could be found in a timely manner.

Vander Sterre’s commercial leasing background also came into play in deciding how to structure the leases. He and Perkins chose to offer simple leases that included utilities, maintenance charges and other breakout items rather than creating a more complex contract that could scare away someone used to dealing with hangar rental.

Perkins, who travels the country assessing and evaluating airport properties for lenders and potential buyers, said there are similar developments in Waukegan, Ill.; Fort Lauderdale, Fla.; and in Big Bear Lake, Calif.; and outside Denver. There is also a similar development at Trenton-Mercer County Airport in New Jersey.

Perkins distinguished his concept from the Quail Air Center at Las Vegas McCarran Airport, because he said that famous development is built on fee-simple land, as opposed to land that must be leased from an airport authority.

“Fee-simple land with through-the-fence rights to the airport is the Holy Grail, because they can actually own the property. That makes it far more valuable. In most airport real estate deals, there’s that ugly word–reversion. That means we’ve got to give it back at the end of the lease term. Here at Morristown, we’ve got a 40-year lease, which is pretty good. But it still means that some Perkins heir is going to have to be negotiating with the airport someday,” he said.

Vander Sterre said that some flight departments initially balked at signing even a three-year lease. “But,” he said, “once they evaluated the term guarantees–especially on the fuel-pricing arrange-ment–they were asking if they could extend the terms of the lease even further.”

Private developers, FBOs, airport authorities and individual companies have been keeping construction companies humming with hangar projects throughout the country over the past several years. If forecasts are on track, and if VLJs make a fraction of the imprint they are expected to, then the next five years will see a further tightening of the hangar market and more creative solutions from developers.