Don’t blame Business Aviation. Executives without proper Board direction, not business aircraft, abuse shareholders.
The Aviation Manager and I were sitting with the CEO, CFO and Senior Vice President of Manufacturing for the purpose of developing requirements for their company’s next business aircraft. Travel was a major issue as the company dealt with expansion. For example, the Senior VP had been on the road 237 days during the prior year. The company was developing new manufacturing plants in China to go with their current plants in North & South America and Europe. It was clear they needed a bigger, global-capable business jet.
We talked about the requirements for passenger comfort, galley, crew-rest, in-flight communications and non-stop range. The CFO sat quiet throughout this discussion, then there CEO turned to the CFO and asked if he had anything to say.
He did. “I don’t want to see us with a royal barge.”
In ten words, the CFO stated both his financial and mission-related requirements. The new business aircraft had to be a business tool. All the requirements were to be business-related, and he had to be able to explain the “why we have this aircraft” to any Board Member or shareholder. In his eyes, getting too much aircraft, or too luxurious an aircraft, was misuse of the shareholders’ money.
He was right. Board governance sets the tone for using all company resources efficiently. Board direction should be documented in unambiguous policy. An aviation manager cannot set the policies for the use of the business aircraft. That’s the responsibility of senior leadership. People are a company’s most valuable asset. Time is a non-renewable resource. A business aircraft should enable company personnel to make the most efficient use of their time in delivering shareholder value.
But be advised: Business aircraft can also be a source of abuse. It is the Board’s responsibility to create policy to prevent misuse.
Avoiding Abuse: One area that is ripe for abuse, or the perception of abuse, is personal use of the business jet by the senior leadership. In June 16, 2011 the Wall Street Journal had a cover article: “Corporate Jet Set: Leisure vs. Business” (link to: ). That 2011 Wall Street Journal article not only documented the abuses by various public corporations, but also calculated the cost of those personal trips using data generated by our company, Conklin & DeDecker. The WSJ then compared that cost to what companies disclosed to investors. The comparison was not pretty.
In recent US presidential elections, the term “Fat Cats and Their Private Jets” was liberally used to condemn both use and abuse of the business aircraft. Selecting an aircraft based on business needs, however, and presenting a transparent set of use policies make the public justification of the aircraft easy to explain.
Furthermore, there are several issues associated with personal use of a company aircraft. FAA regulations prevent an employee from reimbursing the company for personal use of the business aircraft out of his own funds unless the aviation department is also an FAA licensed commercial operation (i.e., holds an FAA Part 135 Operators Certificate). The IRS has rules about imputed income resulting from an individual’s use of the business aircraft, and the ability of a company to depreciate the business aircraft for purposes of taxes can be in jeopardy with nonbusiness use. The issue is multi-dimensional and complicated, and in most cases it is wise for the Board to place clear constrains on personal use of corporate assets. Under all circumstances, check with legal counsel when vetting the companies use policy for business aircraft.
An executive compensation package can include the use an aircraft for private transportation of the CEO and his or her family provided the cost of such transportation is included as taxable income. A better way to avoid the stigma of personal use of the business aircraft, however, is to provide the senior executive with a jet card or fractional aircraft share for personal use. In this manner, the exact value of the perk is clearly known, the business avoids the negative press, and tax depreciation is secure as the aircraft remains 100% a business tool.
Another area to address in avoiding the reality or the appearance of abuse involves employee spouse travel. The IRS stipulates how such travel is allowed under business use, and how it is to be valued. Travel that is deemed for entertainment also requires careful consideration. Meeting your top customers in the business aircraft and taking them to an entertainment venue like a sporting event should be carefully addressed in the aircraft use policies and reviewed by council—such practice must be judiciously monitored.
This concept is worth repeating: There needs to be clear policy regarding how the business aircraft is to be used, who can use it and what records must be maintained to justify the business reason for each trip. The Board must define what is considered abuse and develop a process to minimize the likelihood of such behavior occurring.
Final thought: The problem is the abuse, not the asset (i.e., the business aircraft) . Employees watching cat videos on their company PC during work hours is an abuse of a business asset. But it doesn’t make for a good news story. The business aircraft is a high-visibility item and makes for juicy headline fodder. No one suggests removing corporate PCs and cell phones due to personal use. It is the same for the business aircraft. The best way to assure efficient application of Business Aviation is through proper use policies.