Software steers clients through complex decision-making straits

 - July 31, 2007, 11:51 AM

The process for deciding whether or how to buy a business aircraft is fraught with seemingly incalculable factors and subjective considerations. Over the past five years a small French company called Aero Capital claims to have developed an armory of software power and expertise that can give prospective buyers a higher degree of reassurance that they are making the right move.

The patented Magellan system was first developed over a period of two years at the request of Dassault Aviation, which wanted to offer prospective clients a more objective way of deciding whether its Falcons were right for them. Aero Capital has since expanded the scope of its service; it is now officially endorsed by EADS Socata and Grob Aerospace, and it can provide full analysis of the case for investing in no fewer than 35 different aircraft types.

According to Aero Capital president Laurent Buisson, Magellan now computes about 90 percent of the factors that need to be considered when deciding whether an aircraft purchase makes sense. Unlike systems that consider only direct operating costs, Magellan, he claimed, factors in a complex matrix of cost issues such as asset depreciation, loan rates, taxation, export duties and registration. All of these factors are carefully adjusted to account for variations in the client’s local cost structure.

As a foundation for Magellan’s calculations Aero Capital started with the accountancy-based premises of decision-making exercises such as NBAA’s “No Plane No Gain” program. But it claims to have refined this approach by investing in more detailed assessments of the value of employee time that calculate realistic daily contributions to a company’s revenues to provide estimates of the real cost of time spent traveling.

Having completed assessments for a wide variety of companies with annual revenues ranging from around $10 million to more than $2 billion, Magellan has concluded that for about 70 percent of clients it makes sense to purchase an aircraft. However, in almost all these cases, Aero Capital recommends that the companies do not own and operate the aircraft directly but instead have it managed for them by a professional operator.

In most cases, the client would purchase the aircraft with a bank loan arranged by Aero Capital. The aircraft would be placed immediately under management and the operator would then start paying “rent” for using the aircraft in the charter market–allowing the owner to recoup some of the costs incurred for their flying.

Recouping the Investment
At the end of a typical five-year agreement, the client and Aero Capital can either decide to resell the aircraft or commit to another management agreement. According to the company, owners currently stand to earn something like a 7 or 8 percent “profit” on their investment through the rental income on the aircraft. In some cases, Aero Capital sometimes shares in the ownership of aircraft with its clients and therefore shares in the profits from charter flying.

Buisson told AIN that ad hoc charter will make sense for some companies that need greater flexibility than scheduled airline service but do not have travel requirements that would merit investing directly in an aircraft. He said that, at least in Europe, fractional ownership costs significantly more than the full ownership/charter management terms that Aero Capital arranges for its clients.

But if Magellan is overwhelmingly recommending one formula for using business aircraft, how can the client be sure that he is receiving objective advice and not being shepherded into a transaction that benefits Aero Capital?

Buisson insisted that the Aero Capital business model is inherently neutral because it is paid for directly by the buyer at a rate of E20,000 ($26,000) for each lease that is arranged. It receives no incentives from any other company in the transaction process and so has nothing to gain from recommending a Falcon 900 instead of a Cessna Citation.

As part of the contract terms, Aero Capital will provide guarantees on the financing and maintenance costs that will be incurred. For example, it recently arranged for a German operator to manage a pair of Bombardier Learjet 60s and a Challenger 604 on behalf of a client; this agreement included financial guarantees spanning 80 months.

Aero Capital will often arrange a short-term lease to allow a client to experiment with business aviation to verify that a particular aircraft type will meet actual travel requirements in a cost-effective way before committing to a longer-term arrangement, and it also helps to find interim aircraft for those who face long lead times before taking delivery of new aircraft they have ordered. “We absolutely never push people into something that isn’t right for them,” he said.