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Domestic and foreign operators of business jets flown to Russia are increasingly seeking clarification about whether they may fly their foreign-registered aircraft between points inside Russia. The practice of flying into a country, collecting passengers and then flying onto another destination within that country is known as cabotage. In Russia, along with many other countries in the world, cabotage is generally not permitted.

According to some people you speak to in Russia, if you really want to do it, you may  if you are willing to assume the risks. The risks that may be involved are generally not talked about but they are substantial.

Bizav in Russia: Some Facts

So how big is the Russian business aviation market? During 2009, there were around 1,300 business jet movements each month at Vnukovo Airport in Moscow. This represents around 68% of all business flights to and from the capital.

There are two groups of foreign-registered business jets that regularly fly to Moscow. The first group includes around 400 corporate jets that are owned directly or indirectly by Russian corporations and individuals. Of these, approximately 20 are registered in Russia.

The second group of aircraft are foreign-registered business jets that re operated by multinational businesses, charter companies and fractional programs. These aircraft are generally not flown within Russia so cabotage is not an issue for them.

Short-term Options

There are a number of ways to fly to multiple destinations with Russia that do not constitute a risk. The simplest of these involves flying a foreign-registered aircraft into Russia with a group of passengers onboard. It is perfectly legal for the aircraft to fly into Moscow, then onto St Petersburg, and then back to the aircraft’s home country as long as no additional passengers are collected along the way. The flight from Moscow to St Petersburg is regarded as part of the aircraft’s roundtrip to and from its home country.

Non-commercial flights that are conducted in the interests of the aircraft’s owner are also legal as long as a one-time permit is obtained. However, ownership of the aircraft can become public knowledge. This option should only be used if the aircraft owner does not mind that information being disclosed.

Legislative Option

The Russian Ministry of Transportation is considering a draft decree that will allow foreign-registered business jets to be used for charter flights within Russia. At a February 2010 conference, two officials from the Ministry announced that it is high priority within the Russian government to create the right tax and customs laws so that many of the foreign-registered, Russian-owned aircraft will be brought back into the country. The Russian government sees this as an important way to create employment and investment in the aviation sector. Until this legislation is passed, there are significant legal risks if a foreign-registered aircraft is utilised for charter service within Russia, even if it has been cleared by Customs.

Long-term Options

For those who wish to place a foreign-registered aircraft in Russia and operate it there on a long-term basis, there are some options available. For example, a foreign-registered aircraft may be leased to a Russian charter company. That Russian charter company should be a certified operator of commercial aircraft if the aircraft is going to be used in charter flights. If the aircraft is not going to be used in charter flights in Russia, it may be placed on the certificate of a Russian certified aviation enterprises in general aviation. However, the aircraft may be subject to customs duties of 20% and VAT payments of 18%.

Aircraft weighing up to 20,000 kilograms are exempt from the 20% customs duty. A Gulfstream G450 is within this limit, however, a GV or G550 will exceed this limit. The VAT must still be paid, although these payments can be made on a monthly basis over 36 months.

New Structures

We have also been examining a proposed structure under which a foreign-registered aircraft may be customs cleared in Russia and operated by a foreign charter company. The structure is essentially a lease of the aircraft from its owner to a Russian limited liability company (known as an OOO in Russia). In this situation, the OOO would lease the aircraft back to a US-based Part 135 charter company. The aircraft could be flown to Russia and Russian customs would have no objection to the aircraft being flown within the country since it has cleared customs. VAT would still be payable.

Until the government decree mentioned above is passed, domestic flights would still formally be prohibited as cabotage flights. However, flight permits authorising such flights are regularly obtained here in Russia, each time as an exception from the general prohibition. If and when the pending government decree is approved, then it should be possible to plan to obtain such one time permits on a regular basis, entirely legally.

There are other ways to bring an aircraft into Russia and fly it domestically. For example, you could create or acquire your own Russian aviation enterprise. You can also try to place the aircraft on the certificate of an existing commercial operator. However, these options may involve considerable expense. Whatever option you chose, make sure you obtain the advice of a reputable law firm that specialises in the aviation industry.

About Capital Legal Services

Capital Legal Services is a full service law firm with offices in Moscow and St Petersburg. The company maintains close relations with aircraft brokers, management companies and legal co-counsel on aviation law matters in Europe and the United States. Derek Bloom has personally overseen around 30 transactions involving the purchase and sale of corporate aircraft and practiced aviation law full time in Washington, DC for one of the leading corporate aviation law firms in the US.

“The commercial management fee for a Beechcraft Premier 1A is around EUR 10.000 per month, subject to monthly flight hours and charter availability. This rate incorporates flight planning.”

Thomas Reiner, Tyrolean Jet Services

As soon as an aircraft enters service, the asset begins to depreciate. Traditionally a safe guideline for market depreciation has been 3 to 4% per year. However, the current market for used aircraft can hardly be considered traditional. In addition to economic considerations, major maintenance, avionics upgrades, modernisation, engine programmes, total flying time and the number of cycles will all impact the baseline value of your asset. With proper planning and the right intelligence, resale value can be calculated in fairly short order.

A new Gulfstream IV (GIV) cost $21 M (€14.4 M) in 1990. Standard features include 13 passenger capacity, aft galley, forward and aft lavatories and an SPZ 8000 Flight Control System with dual FMS and Laseref. The standard engine warranty was five years or 2,500 hours, completion warranty one year, non-structural components (including avionics) five years. At some point, after the basic warranties have expired, assuming an annual usage of 500 hours, the aircraft will incur major capital expenditures for engine inspections (at 4,000 hours or 10 years), airframe check (72 month intervals), gear overhaul (5,000 cycles), avionics upgrades due to regulation and modernisation requirements, and interior refurbishment among other items.

Fleet Comparison Vital

As an aircraft ages you must compare it to the rest of the fleet. How many hours has it flown relative to the fleet, is it enrolled in an engine programme, what is the interior configuration, and have the avionics been updated recently? As of September 2009 the average total time of the GIV fleet was 8,600 hours, 20% were enrolled in an engine programme, 73% were configured with an aft galley, 71% were equipped with Satcom, while 8% had a Head Up Display. Drawing the fleet comparison model gives you a fairly good idea of how your aircraft compares. Excessively high time, a lack of major optional avionics, or an upcoming major maintenance event can all impact baseline value and ultimately resale pricing.

Armed with fleet intelligence you can then compare your aircraft to those currently available on the market. Don’t just compare it with other GIVs, but include competing makes and models. If you can purchase a Challenger 604 or Gulfstream IV SP for $12 M (€8.2 M), why would you pay near that for an older GIV?

The percentage of the fleet that is for sale will also affect value. As a rule of thumb, the baseline value assumes that around 10% of the available fleet is for sale. If it is less than this, the baseline value can be adjusted up – if its higher it needs to be adjusted down. There were 36 GIV aircraft, 16.8% of the fleet, on the market as of 10 September. Therefore the baseline value should be adjusted down around 7% to compensate.

Long-Term Planning

Any prospective seller should ask themselves why their aircraft would sell before the 36 currently available. Current average time on the market for the GIV is 214 days, although 16 have been available for over a year. Recent major maintenance or refurbishment may give you an edge, but your pricing must be attractive, especially when compared to recent sales of GIV and competing models. In the case of the GIV, asking prices range from $7.9 to 12.9 M (€5.4 to 8.9 M) but twenty-one are listed without a firm price (Make Offer). There have been two sales in the past six months, both in the $9 M (€6.2 M) range (+/- 2%).

There are many factors that need to be considered before you price your aircraft. If possible, put a long-term strategic plan in place to track and monitor present value, fleet statistics and market activity on an on-going basis. Before you make major capital investments in your aircraft, first establish what impact it will have on the value of the asset, not only today but also longer term.

Never place an aircraft on the market at Make Offer and never price it near or above the cost of a new model. Doing either of these two things will cost you more in the long run.

Dennis Rousseau, Founder and President of AircraftPost Inc.

Looking back over the past four to five years there have been a number of new entrants into the aircraft financing market. This has resulted in lower margins and increased risk as the market relaxed its structures, raised loan-to-value limits and stretched terms. However, this was ultimately unsustainable and a number of these financiers have since found themselves with significant balance sheet issues and a severe lack of capital. This has resulted in a knock-on effect on the availability of funding.

A number of aircraft financiers have found that they are unable to write new business due to capital constraints. In some extreme cases funders have had to close down their aircraft finance business altogether. Despite this, there are still a small number of active financiers that are open for business in this area.

While cash may be king for corporations and individuals, capital is king for lenders and they are ensuring they use any available capital wisely. As such, many financiers will now only do business with their existing corporate and private clients, enforcing even more prudent parameters around funding.

While financing is not as readily available as it once was, there are still a number of financiers that have available capital to help you with the purchase of your aircraft. The key to obtaining finance in the current climate is to ensure you make your purchase as attractive as possible to your potential financier. Each funder will focus on different requirements, such as asset type, minimum and maximum transaction size, and term of loan among others, but there should be finance available for most sensible transactions.

Tips to Obtain Finance

While the majority of financiers are using their available capital to support existing relationships, it is important to look at broadening your relationship with a funder. You will improve your chances of securing finance if you can provide them with more than a one-off transaction.

Due to the current economic downturn, financiers are risk averse. Where possible, it is important to ensure you provide the opportunity for an attractive, sensible funding structure. This will include a number of factors such as:

• Shorter financing terms
• Lower loan-to-value (a maximum of 80% is reasonable)
• Avoiding pre-delivery payments so the lender does not have to finance a partially completed asset.

You will also help your chances if you plan to register your aircraft in a favoured jurisdiction such as Europe, the USA or the Middle East.

Purchasing a more recent model aircraft (2000 and newer) from a Tier 1 original equipment manufacturer (OEM) will also help. These OEMs are preferred by financiers because they produce a strong core range of aircraft that continue to trade more strongly than their smaller counterparts.

Still Open for Business

Although financing is not as readily available as it once was, there are 
still financiers open for business. 
The easiest way to obtain finance is to make your purchase as attractive to your lender as possible by following the tips above. There has been a shift in the market and this is being felt by everyone, however, the aircraft financing market is certainly not dead.

If I had to answer in one word, I would say “no”. But there are many aspects to consider when insuring a second-hand business jet so the answer cannot be that straightforward. While there is no difference between the liability insurance for a new or second-hand jet, hull and other insurances may be affected during the lifetime of your insurance contract, and if a claim occurs.

Insurers will be sensitive to the history of your aircraft, especially if it has been previously damaged, or if the previous operator was notorious on the insurance market. An insurer will usually consider that an aircraft that has been previously damaged has suffered a “loss of value”. This can be important if you need to make a claim.

Insured or Agreed Value

When you take out insurance on the hull of your aircraft, you will need to choose between an insured value and an agreed value. If your jet is covered with an agreed value and there is a dispute over the amount of a claim, the insurer will need to prove that the amount paid out is justified. If you chose an insured value, you will need to prove the aircraft was worth that amount.

Insurers do not request any documentation when insuring a new aircraft on an agreed value basis as the value requested should reasonably correspond to the market value. However, they might request a survey when insuring a second-hand jet on agreed value.

The value itself is important. Do not under-insure your aircraft! You will save very little on the total cost of your insurance, but you will put your asset at risk. The insured (or agreed) value should correspond to the amount you would need if you had to buy the same type of aircraft.

Wear and Tear

If you do need to make a claim, remember that your insurer will deduct the cost of depreciation from the value of your aircraft’s body and equipment if they are not new. Known as wear and tear, depreciation reflects the natural and gradual deterioration of your aircraft resulting from use and age. You should not expect to be reimbursed in full for an engine that is halfway through its life.

The key to insuring anything is to provide your broker with as much detail as possible. With this information they can ensure your aircraft is covered in order to preserve your assets if a claim occurs.

Christophe Paulin, Verspieren Aviation

The free movement of workers, including pilots, is a fundamental right of citizens of countries that belong to the European Economic Area (EEA). If you want to work in a country that is outside the EEA you may need to obtain a temporary work permit.
According to Eurostat this is becoming increasingly common, with an average of 2.3% of workers in any EU country coming from another member of the block. One international operator we know of is based in mainland Europe, mainly uses UK-based freelance pilots, and pays them in UK pounds.
For more information visit the EURES website which has been established to facilitate the movement of workers between EEA states.

Establishing a Company

Normally a legal resident of an EU-state can establish a company without too much difficulty. In some countries this involves a trip to your local Chamber of Commerce, in others this is done through a government department or agency. Remember to take along copies of your qualifications in case needed.
If you are thinking of becoming a freelancer, it is advised to familiarize yourself with the necessary tax and social security obligations. A good accountant, ideally specialized in the industry, can also help you to work out which type of company structure best meets your needs. Ask other pilots in your area for recommendations and to avoid potential conflicts of interest try not to use the same person or firm used by the operator you will work for.

Insurance Required

Some companies require third-party liability cover of between €1.3 and €2 M ($2 and $3 M). Many operators waive this requirement because it can be difficult to find insurers that will provide cover. This is largely because insurers want to link the cover to aviation activity. In fact, the operator asks for this cover to protect them against legal action by the contactor and is intended to cover only non-duty related events.
During the contract negotiation phase check with the operator if they have any specific insurance requirements. Obtain quotes for this insurance before you sign! Most contract pilots fall under the operator’s general liability cover which indemnifies them for all activity whilst engaged on business for the operator.

Further Information

Contact the European Cockpit Association (ECA) which represents flight crew in Europe. Their website also has an excellent list of links to other national pilot associations.

An executive-only or all-business-class airline typically combines some of the best features of private jets and scheduled services. Flights normally operate on a fixed schedule. However, they depart from dedicated terminals with their own security and customs facilities. This reduces waiting time for passengers and means they can arrive at the airport just 30 minutes before a flight.
During the flight passengers have more space in the cabin and normally better food and wine than you would find on scheduled services. Seats are more spacious than those on regular services and often convert to flat beds so that you can sleep during night-time flights.
The price of a ticket can be lower than using business class on a scheduled service. With the increase in fuel prices there is some scepticism in the market as to whether the model can survive. In the United Kingdom three operators adopted the all-business class model. Of the three, all have now closed their operations. MAXjet went out of business at the end of December 2007, while EOS and SilverJet both ceased operations in May 2008.
L'Avion, which opened an all-business class route between Paris and New York in January 2007, is still operating and has recently been taken over by Open Skies. Open Skies was established by British Airways in June 2008 and features a mix of economy and business class seats in a spacious configuration. Open Skies also flies Paris - New York but plans to add another route from Brussels to New York later in 2008.
The main limitation to all-business class services has been that there are relatively few flights and they only connect between two centres. The combined L'Avion/Open Skies will offer three flights a day which may offer executive travellers some much-needed flexibility.
Lufthansa have recently announced a further variation in the market with the launch of Lufthansa Private Jet (LPJ). This service combines the flexibility of a private jet with the network of a major scheduled carrier. Users of the LPJ service can be flown from a local airport to connect with a scheduled service at one of the airline's major hubs. If the client wants to fly between two points that are not linked by scheduled flights, the LPJ service can be used. At the moment LPJ is restricted to flights in Europe.
Dan Smith, Managing Editor, FlyCorporate

London Executive Aviation reports, "We chose the Legacy because of the cabin size and the fact that the aircraft is derived from a proven airline platform, i.e the EMB135. Good technical and product support. Our Legacies are used partially for owners flights and when available for charters. This varies from one aircraft at 10% owners use and 90% charter, to another that it is used almost exclusively for the owner. We have based our business-plan for the operation of the Legacy on an estimate that our Legacies will fly 600 hours per year. "Concerning the Embraer Executive Care programme for maintaining the aircraft, the EEC is expensive in the first 3 years of operation, but it gives peace of mind for the operator and it enhances future aircraft value. "Our pilots are very happy with the aircraft and its handling. The many redundancy systems, allows an almost 99% despatch reliability. Its good performance also allows to operate from small runways like London City, with no significant problems."
George Galanopoulos, Managing Director, London Executive Aviation Ltd

There are many varieties of jet cards offered by both aircraft manufacturers and private aviation service companies. They all share similarities, however: you are essentially pre-purchasing private flight time. Generally speaking, jet cards are issued in hourly increments. Some may be for as few as 10 hours of flight time, others for 100 hours or more. Each time you fly, the hours flown are deducted from the hours of the card you have purchased. What makes jet cards so attractive for many people is that they are a cost-effective, simple way to have the benefits of private aviation -- security, privacy, comfort and ease -- in a cost effective and simple way. You simply purchase the card and fly. There is no investment capital required, no long-term contract involved, and with no asset purchased (i.e., a whole or fraction of an aircraft) no residual value risk at the end of your contract. In general, jet cards come with some type of guarantee of aircraft availability, the flexibility to choose the aircraft type you fly, and on-board catering. Pricing is generally all-inclusive and easy to understand. Handling, fuel, and crew costs are all included. (Taxes, government fees such as over-flight permits, customs costs and special catering are usually extra.)
Mike Volpe, Vice President Sales, Jet Aviation Business Jets

Other than the physical differences in how they operate, the primary differences between jet and turboprop engines are in the cost of operation and cost of overhaul. Very basically, a turboprop engine is essentially a jet engine that is turned backwards with the turbine section driving the propeller assembly. It is typically a smaller engine than a comparable jet engine with the propeller providing a majority of the thrust (overflow exhaust actually provides some thrust as well). A smaller, more fuel efficient turbine section equates to lower operating and overhaul costs. Aircraft flying with either type of engine have specific mission profiles. Evaluating which engine is best for an operator should take into consideration complete mission profile requirements for the entire aircraft. These considerations could be: typical flight lengths, typical runway lengths, type of runway (grass, gravel or paved), number of passengers to carry, international requirements, etc. Shorter flights tend to favor a turboprop, while longer, high altitude flights favor jet engines as this where they are most efficient. Short, rough airfields also favor a turboprop aircraft as they can operate in this environment whereas jet aircraft in most cases cannot.
Mike Turner, Hawker Beechcraft Corporation, USA