Leasing a plane to a flight school

My wife is a relatively new pilot (30 mos.), now with her instrument
rating. We bought a Cessna 172 (used: a 2003 in 2005 w/1800 hrs and
a new--150 hr--engine) which we lease to the flight school to "keep
the cost of flying down" by using the plane to generate income to
help offset the loan payments.

I have little active interest in aviation, but Mary Ann has never
found anything so rewarding. I want to see her keep doing anything
that lights her up the way flying does. I am discouraged, however,
with this arrangement. The plane typically shows a modest "profit"
each month, but how much am I losing in depreciation, really? The
hours keep climbing and most of the income seems to go for
maintenance.

Meanwhile, the plane gets beaten up. Every time I see it there is
some new, if minor, damage. Scratches, dings, dents--all the things
that would drive the normal car owner nuts. I see aircraft owners
who are obsessive about the least damage to their craft, so I expect
that all this wear and tear is killing the value of our "investment."

I am an outsider in the pilot community, so I don't know where or
how to get straight answers about how to evaluate this arrangement.
It seems to work quite well for the flight school. We do keep their
mechanic busy. Mary Ann loves all these people and can't wrap her
head around the notion that our best interest is not likely to
coincide with theirs.

I would be happy to dump two years of information on some kind of
aviation accountant who can tell me what's really going on. What is
this really costing us? What should it cost? What are our best
options for keeping Mary Ann affordably in aviation?

-- George McGuan, April 14, 2007

Answers

Leaseback of airplanes works only as a tax scam. You turn something that is not deductible into something that is deductible. It never works on a financial basis. If you want to cut the actual cost of airplane ownership, you establish a partnership with 1 or 2 other pilots.

-- Philip Greenspun, April 14, 2007

I have never been in a leaseback arrangement, but I can say that co-owning a plane is a good way to cut the cost of ownership in half (or more). Very few owners want to fly 7 days a week, so it is just a matter of working out a schedule of who has the plane on what days.

In my mind the problem with leaseback arrangements is that the flight school often takes 25%, fuel burns up another 25% or more, and there is not much left for the owner to put toward the loan payment. In addition, the plane often sits outside (not hangared) because it flys daily. The sun will beat up a plane's paint, interior, and electronics over a period of years.

Again, I never entered into a leasback arrangement because of these concerns. As for my experience with plane ownership, my other comment is that if you buy an old plane, do not do so with the thought that you will fix it up over time. This is not financially sound. At the point where you go to sell it, it will still be an old plane, and while it will be a nice old plane, it will still be an old plane, and you will not get your money back out of it. Much better to buy a newer plane (less than 10 years) and not need to put money into it. That way when you go to sell, it is still worth pretty much the same as when you bought it.

-- David Sanford, April 25, 2007

Sorry I didn't see this earlier.

If you are seeing a profit before tax depreciation, you are likely in a really good leaseback. You should be counting as costs the rebuild of the engine and prop (likely about $13/hour). If you are still making a profit, you are WAY ahead.

Much of the depreciation was paid by the former owner, as I assume you paid about 20% off the planes original list?

You could figure it all out, but really, if you are seeing positive cash flow before taxes you have a winner. Most leasebacks only see positive cash flow after tax returns from depreciation are figured in.

This is a case where your interests and theirs are actually coinciding. Due to the low margins and high risks of running a flight school, it makes little sense for them to own such a new plane.

-- Eric Warren, June 14, 2007