Corporate Governance

Personal Use of Corporate Aircraft: The Debate

By Charlene Hunter

Justified or not, business aircraft use has become a symbol of corporate excess, and is generally under attack. The National Business Aviation Association, an industry trade group, is on the defensive. We have Blog opinions on the matter. But first, in the interest of clarifying the issues, it is useful to distinguish between private airplane use for business purposes and corporate plane use for personal travel.

Corporate plane use for business travel purposes is—or should be—an economic decision made by company management on a cost-benefit basis. The decision should weigh not only the cost of operating an aircraft, but also the value of an executive's time and what is lost through travel by other means. Private airplanes are, as the industry puts it, flying offices, complete with phones, fax, and computer. Confidential meetings can occur, documents can be finalized—work happens. While execs can do laptop work in a first class seat on a commercial plane, they can't have conference calls or transmit the information while in the air.

If an executive's annual compensation is, say, a modest $1 million, that works out to an hourly value of about $333 ($1mil over 50 weeks at 60 hours per week). A coast-to-coast commercial trip might take a total of 7 hours (5 flying and 2 getting to and through the airport), at a 'cost' of executive time of $2331 one-way. If an exec is paid $5 million annually, the flying time cost on the same basis is $11,669. As well, most cities in the U.S. do not have commercial airports nearby (within 30 minutes), so there is additional time to be calculated in driving to or from departure points, as well as the transit time to change flights to get to out-of-the-way places. Therefore, commercial travel can be argued to cost the company a lot more than a first-class ticket.

This is a sensible argument justifiably made by the business aircraft industry. Nel Stubbs, of aviation industry consulting firm Conklin and de Decker, tells the story of an exec who, on Dec 30^th, needed to fly to Mexico to complete a deal before Dec 31^st in order to save $30 million in taxes. He was able to do so only by using the company's 'flying office' to make the trip. By this logic, we all should have been much angrier at the auto execs for NOT flying to Washington than for doing so, and should have insisted that they use every minute of the trip to work on effectively reorganizing their companies.

But use of the corporate plane for personal trips is another story. Arguably, execs can make use of the flying office to get company work done en route to the family vacation home, which has advantages to the company. The issue really is about whether such use is acknowledged, accountable and transparent to directors who (presumably, hopefully) act in shareholders' best interest in negotiating executive compensation. (This Blog frequently debates that presumption, but we will go with it here for sake of argument.) The whole point of SEC disclosure was to make what was previously hidden in company accounts noticeable, and therefore accountable.

The American Jobs Creation Act of 2004 changed the loophole that let companies deduct the full cost of airplane operation while taxing executives only for a fraction of that value when used personally. In effect, taxpayers were subsidizing personal use of corporate aircraft. But no more.

If an exec has $4,784 (taxable SIFL rate for a Philadelphia-San Francisco round trip) of personal use charged as taxable income, the company can only deduct $4,784 as expense; the other $27,216 of actual cost (variable cost to fly a Gulfstream V at $3,200/hour for 10 hours for a Philly-San Fran round trip) is absorbed by the company. (If the exec has his wife and two kids on board, the taxable income amount would be $19,136, offsetting more of the $32,000 incremental cost.) So now, it could be argued, shareholders are subsidizing personal use of company planes.

The debate about use of private company planes should be about whether this cost to the company for providing executives with the perq of personal travel is identified, valued and consciously included as justifiable executive compensation. For example, the report on CEO compensation in the proxy could note that of the $609,530 shown as the cost of personal use of company aircraft, only (say) half of that amount was taxable to the CEO and deductible to the company.  Then the board's decision about the CEO's compensation is based on accounting for ALL the costs.  Again, back to transparency and economics.

Full post as published by The Race to the Bottom on April 22, 2009 (boomark / email).