Plane Conversations

 (Part 5 of 5)

What to Expect in the Purchase Process

Here is a step-by-step general outline of what you can expect in the acquisition of an aircraft.  The order sometimes changes depending on the situation.

1. Ask yourself questions: What do you want?  What do you want to spend? What is your mission? etc.
2. Interview buyer’s agents to represent you, then make a decision and hire one.
3. Expect to sign an agency agreement giving the agent the exclusive right to represent you for a period of time and establishing the fee you will pay as well as any expenses that will be your responsibility.  In the agreement, agents should also list their responsibilities and capabilities.
4. Ask your agent what to expect and when the process will begin to move forward.  Give your agent time to do the job but insist on receiving progress updates.
5. Place a refundable deposit into escrow.  This gives your agent the power to negotiate on your behalf and conveys the seriousness of your intent.
6. Refer anyone who calls you directly to your agent for the duration of the purchase process. You could easily and unknowingly undermine the groundwork your agent has laid.
7. Allow your agent to contact sellers.  Don’t call any aircraft seller during the process but discuss available aircraft with your agent and which sellers your agent should call.  I’ve seen feeding frenzies over a single buyer who got all of the sellers stirred up.  Often the sellers see this as a sign of increased market strength, so they will hold firm on the price your agent is trying to bring down for your benefit.  Your agent should treat you as a partner in the process and should not hesitate to make recommendations to you on aircraft, negotiation tactics, and offers.
8. Look for comparison reports.  Your agent will research the worldwide market and narrow the options to the very best three or four aircraft, usually putting a description of the aircraft on a spreadsheet.
9. Prioritize your preferences.  Based on your individual requirements and discussions with your agent, you will decide which aircraft to pursue first, second, etc., and come up with an offer. 
10. Make an offer.  An offer letter or letter of intent (LOI) will be prepared and submitted to the seller.
11. Expect negotiations.  A counteroffer or other response should be expected within the period outlined in your offer.  Negotiations will lead to an agreement or a decision to move on to another aircraft.
12. Be prepared for one to get away.  Don’t be surprised if an aircraft or two on your top three-or-four list sells.  Often the aircraft you are most interested in is going to be sold quickly … and you may not be the buyer. 
13. Title research.  Once an agreement is reached or looks favorable, your agent will order a title search, chain of title, and an IR and 337 search.  A 337 is a required FAA form for any major repair or alteration of an aircraft. The IR requirements can cause a delay in closing; so, the search should be performed early in the process.
14. Initial inspection.  Prior to the execution of the formal sale and purchase agreement, your agent may send a technical representative to visually inspect the aircraft and conduct a cursory logbook review.  Doing this is much less expensive than putting the aircraft into pre-purchase and then rejecting the aircraft for a reason that could have been easily identified beforehand.
15. Formal agreement.  A formal sale and purchase agreement is executed if the technical rep does not find any major issues and the title search, chain of title, and the IR and 337 searches lead to a positive assessment.
16. Demonstation flight.  A demonstration flight may be in order if you’ve never flown in the aircraft make and model.  The flight would be at the buyer’s expense.
17. Expect a test flight.  A test flight, including a check of the avionics, is performed in-flight prior to the pre-purchase inspection.
18. Prepurchase inspection performance.  While there is more than one way to handle “squawks” – the aircraft items in need of repair or adjustment - typically the seller will pay to remedy the “airworthiness, major systems, and safety of flight” items.  Anything falling outside that definition is the buyer’s responsibility.  Again, each deal is different; so, work with your agent.
19. Post maintenance test flight.  After the repair of the maintenance items, a post-maintenance test flight is performed for the benefit of the buyer and at the buyer’s expense.  This flight will verify that the aircraft is in proper working order prior to your acceptance of and payment for the aircraft.
20. Aircraft acceptance.  You will accept the aircraft upon in-flight verification of operation and confirmation that the logbooks properly reflect the agreed upon inspections.
21. Insurance bonding.  Insurance should be bound on the aircraft at this point or sooner but certainly should be arranged and activated with a call to your agent.
22. Initiate closing.  Both parties must give authorization to the escrow agent to initiate closing (filing of the documents and disbursement of the funds).
23. Aircraft delivery.  Delivery will often occur after closing.  This is a very important tax issue and both parties typically are sensitive to it during the initial negotiations.

Are there any other considerations?  Absolutely.  They include Certificate of Airworthiness (C of A) issues, import/export matters, holdbacks, documentation, engine/parts/avionics programs, aircraft rejection, deposit disposition, and on and on.  Each deal requires flexibility and experience to smoothly navigate through the aircraft purchase process and calmly handle any surprises that may occur.

Buying an aircraft should be an enjoyable experience.  By getting the help of a great agent and by knowing what to expect, it can be.

(Part 4 of 5)

Pitfalls of Acquiring an Aircraft

You’re chosen your broker, set up your team and chosen an aircraft.  You’re well on your way, but you’re not out of the woods, yet.  Certainly there are many pitfalls in acquiring an aircraft, but these are some of the most common:

Pre-purchase inspection
Just having a pre-purchase inspection performed is not enough.  You need to be certain that the inspection facility understands the make and model of the aircraft that you are buying and is on the cutting edge of current and pending airworthiness directives (ADs) and maintenance issues.  How would you like to buy the only aircraft in your category without an engine program?  Once you’ve bought the aircraft, keep it well-maintained by a first-rate maintenance facility. 

Pending equipment mandates
You purchase an aircraft only to find out that the Federal Aviation Administration (FAA) has mandated additional avionics that will cost a significant percentage of what you just paid for your aircraft, which has happened to aircraft buyers. For instance, there have been FAA mandates on the reduced vertical separation minimum (RVSM), terrain awareness and warning system (TAWS), traffic collision avoidance system (TCAS), and emergency locator transmitter (ELT).  It’s important to learn about pending equipment mandates before you close the deal on your aircraft purchase.

Title issues
More than once I’ve heard buyers or sellers state that they really don’t want to mess with that “IR thing.”  If the FAA reports no liens or encumbrances on your aircraft and engines, but the International Registry (IR) does show an encumbrance, the good ole USA wins the day right?  Wrong!  Not all aircraft require an IR filing, but if your aircraft qualifies, you need to ensure filings are done for the aircraft and engines.  Trust an experience escrow company and agent, like Insured Aircraft Title Service, Inc.

Damage history
If two people sit down and read a log book entry, one might say, “Seems OK to me,” while the other might say, “Something is not right about this.”  The difference?   Experience!  Many sellers have sold their aircraft after representing it as “no damage” or “no known damage” (notice the litigation safeguard difference in the wording…we use it too!) and honestly believed they were telling the truth.  Damage is not always as easy to find as a log entry stating, “Aircraft rolled into a ball.  Repaired in compliance with factory maintenance manual.”   After a first reading of damage entries and several subsequent readings, I’ve sometimes asked myself, “So, was it damaged or …”  Damage can affect the value of an aircraft substantially (10 to 25 percent), so it’s important to determine the aircraft’s damage history.

Possibly the biggest mistake of all
I believe it is absolutely appropriate to aggressively negotiate the price of your aircraft. Pennies add up to dollars if you can save enough of them.  And you can save enough of them on your purchase price; however, if you take this approach in hiring your pilot, you are making a mistake.  You should be prepared to pay top dollar for a first-rate pilot. Aircraft occasionally break, systems fail, and the weather sometimes closes in, but none of these should be life-threatening when you are in the hands of a professional pilot.

Ask your insurance agent what underwriters require as far as a pilot’s minimum qualifications and training.  Then ask what your agent personally recommends.  The answer may be the same, but it may not be; so, ask.  Train your pilot(s) well.  It will cost you more to send your pilot to simulator training twice a year rather than once a year; but, if all hell breaks loose in the aircraft, who do you want in the cockpit?  A pilot who meets your underwriter’s “minimum standard?” Or one who may be over-trained? 

Some pilots are more interested in being able to occasionally use an aircraft than in receiving more pay.  Explore with them what keeps them happy and loyal.  I’ve met many pilots over the years, and the ones who are the most pleasant on the ground and in the air are typically the ones I like the best.  But even the most pleasant pilots may lose their calm if you try to convince them to do something outside of their best judgment.  You may be the boss on the ground; but, you should accept that when it comes to safety in the air, pilots are the boss.

(Part 3 of 5)

Questions to Consider Before Purchasing an Aircraft
You’ve made the decision to buy and aircraft and you’ve found a great buyer’s agent / broker to help you.  Now, it’s time to ask yourself some questions; so, here’s a list to help you get started.  If you are a first-time aircraft buyer, you may not know the answers to some of these questions.  That’s okay, just use your best judgment.  Of course, these questions and your answers are just the start of the aircraft purchase process, but they will point you in the right direction, assisting you in your decision making and helping guide your agent toward the right aircraft. 

1. What is the primary purpose for the aircraft?
2. Do you have an aircraft in mind?
3. What is your mission (How many passengers will typically be on board? How far are you going? To which cities/airports are you flying? How long will you stay? How often will you fly? etc.) ?
4. Is the aircraft you’re considering suitable for 80 to 90 percent of your missions?
5. What is your budget?
6. Will you be the pilot or the passenger?
7. Will you hire your own crew and manage your own aircraft or hire a professional management firm to manage the aircraft for you?
8. If the aircraft will be used for both business and pleasure, what is the percentage for each use?
9. Are you trading an aircraft?
10. When would you like your new aircraft to be in service?

If you will typically need to carry eight to ten passengers with their bags, you can begin to narrow your purchase choices because you will require a larger aircraft.  Maybe you will need to visit three to four cities a day but stay in each for only one to two hours. In order to do that, you may require a faster aircraft.  If you plan to land at high-altitude or short runway airports, that will help narrow the field for you, as well.

It is not uncommon to get mentally stuck on the few trips per year that an aircraft cannot accommodate for one reason or another, which is why it’s important to remember that the aircraft you buy should be suitable for 80 to 90 percent of your trips.  Unless you have an unlimited budget, buying an aircraft is a trade-off between dollars and capability.

Out of the Box Thinking
Don’t get caught in the all or nothing mode of thinking.  Maybe two smaller aircraft make more sense for you than one large aircraft.  Maybe whole ownership along with fractional ownership of an aircraft is more appropriate.  Chartering the right aircraft for those few trips for which your aircraft isn’t suited may be just the ticket to a smooth-running flight operation.  Even the largest companies find that using an alternative aircraft for supplemental lift is more cost-effective than purchasing a big aircraft or expanding their fleets just to handle a few trips.  Booking flights on a scheduled air carrier should be considered in your decision making, as well.  Your buyer’s agent can help you determine the best options for you.

Assemble Your Team
While your agent can guide you in assembling a team to facilitate the purchase of your aircraft, you need to make sure this “mastermind alliance” is in place and working for your benefit: besides your agent, your team should include a certified public accountant (CPA) or skilled tax specialist, an attorney for limited liability company (LLC) formation and asset protection issues, an insurance professional, an escrow agent, a banker or lender, an inspection facility to conduct the pre-purchase, and possibly a pilot or pilots who can perform a thorough evaluation of the aircraft when it is in flight.

The Biggest Question of all
If you are purchasing a pre-owned plane, don’t expect it to be in the same condition as a new plane.  There will be squawks.  Just ensure your broker negotiates strongly on your behalf and guides you through the process.  However, if you discover that the plane’s condition is not as it was represented or that the costs to put it into quality condition are too high, are you willing to walk away from the deal?  Professional brokers and buyer’s agents rarely have deals fall apart after pre-purchase.  Trust them to guide you through the solutions but be willing to walk away if it is the best course of action for you.

(Part 2 of 5)

The Key to Success
Before we get into some specific questions to ask yourself, and the steps to making an aircraft purchase, let me tell you the real key to a successful transaction…hire a competent and experienced broker with an excellent reputation.  You’ll most likely refer to the broker as your “agent” or “buyer’s agent,” but “broker” and “acquisition specialist” are also common monikers.  When hiring a broker, it’s important to do your homework.  Get referrals, check out the broker’s website, and interview them.  Ask why you should hire that particular broker instead of another.  The selection process is more difficult than it may seem.  Although most brokers tell you the same things, there are stark differences.
 
A Little Background on the Aircraft Sales and Brokerage Business
There are vast differences in experience, business practices, and ethics among brokers.  Why?   It’s because our industry is completely unregulated.  Anyone can claim to be an aircraft broker, acquisition specialist, mandate wizard, or all-around, good-guy aircraft salesperson.  Even though I know how to fly, I don’t claim to be competent to represent you as pilot-in-command of your aircraft.  Pilots, mechanics, real estate agents, or business people may claim to be competent to represent you because they once bought, sold or were involved in an aircraft transaction; but, they may not truly have the knowledge or skills needed to take you through the aircraft purchase process successfully.

Like all professions, the aircraft brokerage business has people who do their jobs well, those who do their jobs poorly, and others in between.  Some of the most reputable brokers I know do not own aircraft inventory themselves.  However, if a broker (someone selling somebone else’s aircraft) is also a dealer (someone who buys aircraft for his own inventory), then it stands to reason that they know a little something about purchasing an aircraft.  So, find out whether your buyer’s agent/broker is also a dealer. 

A quality broker may recommend tax-saving strategies like a 1031 exchange, putting an aircraft into a charter fleet, or capitalizing on recent tax laws or incentives.  State sales tax is a fact of life, but there are tax-saving strategies you should consider prior to your aircraft purchase.  Besides your broker, also consult with your tax professional to help you discover all of the applicable strategies.

I believe one of the most powerful functions of a buyer’s agent is to remove the emotion from an aircraft purchase decision.  I recently had a somewhat anxious client get upset with me because I rejected two aircraft on his behalf (one before the pre-buy inspection and one duringthe process), even though I had his permission to reject the aircraft.  Later, after I found the right aircraft for him, he thanked me for staying cool, standing up to him respectfully, and watching out for his best interests.  To me, the long-term relationship is what mattered.  To him, getting the aircraft is what mattered.  Since I was acting as a buffer, I helped him buy an aircraft he wouldn’t regret later, keeping both our priorities intact.   

One Last Thought on Brokers
There’s another reason you should be careful that you hire the right person as your broker.  If you get involved with a disreputable or incompetent broker, they could get you involved in a lawsuit that might drag on for years.  And that would certainly would spoil all the fun of buying an aircraft.

A reputable broker should be able to provide you with a list of satisfied clients and will probably urge you to research his reputation by calling people within the industry.  You may find that the broker you’re researching has one of the highest fees among the people you call; however, it’s important to remember that the fee is probably high for a reason.  Professionals will not sell their services to the lowest bidder.  And, you’ll find that hiring the right buyer’s agent/broker to represent you in the purchase of an aircraft will pay for itself in the long run. 

My pointers may not make it a certainty that you’re dealing with the right person, they’re a good road map for finding the right professional to represent you.

(Part 1 of 5)

As a successful business person, you’ve no doubt been involved in countless complicated high-dollar acquisitions and business deals over the years.  You’ve contemplated the effect on your business, considered the upside and covered the downside.  You’ve also consulted with your tax adviser, banker, attorney, and internal management team.  With the facts in hand and a plan in place, you proceeded with cautious optimism.

When it came time to consider the purchase of an aircraft as a tool to expand your business, you proceeded with the same prudent approach and team of experts, right?  Well, maybe not.

Purchasing an aircraft in light of and compared to other business transactions just doesn’t seem like a complicated process.  Complicated or not, the process is replete with pitfalls.

A Couple of Basics
Prior to launching the aircraft purchase process for a client, reputable aircraft sales firms spend a great deal of time acquiring an understanding a client’s needs, travel history, mission or missions, and budget.   After all, how can we advise you on the right aircraft purchase without first understanding your requirements?

It’s important to know why a client wants or needs an aircraft.  Of course, the reasons will vary depending on whether the client is buying the aircraft for personal use or business use.  In my years at CFM Jet, on more than one occasion I have been told, “I just want one.”  That is a perfectly acceptable answer if money is not a problem.  We’vesold aircraft to clients just twelve months after their last aircraft purchase because they had to have an aircraft that had a potty!

Sometimes a client is looking for an aircraft they’ll hire pilots to fly.  Other times, the client will be the pilot in command of the aircraft.  The purchase process formula will require some adjustment for those different scenarios.

Growing up a third-generation aircraft salesman and enjoying over 20 years in my profession, I have a unique insight into the world of the aircraft transaction.  In the coming weeks, I will post blogs on the process, pitfalls, keys to a successful transaction and the most important post-purchase move that you can make to ensure the ongoing safe operation of your aircraft.

To help you avoid the pitfalls, I’m going to guide you through the process.  While there may be more than one way to the goal, the basic principles of any aircraft purchase are the same.  I’ll cover the basics by explaining how you go about making the decision to choose one aircraft over another, what the considerations are when buying an aircraft, and how you can keep from stepping into one of the hundreds of holes surrounding an aircraft purchase.

The process can be nerve wracking, but it can also be exhilarating.  Join me Thursday to begin the aircraft acquisition adventure as we discuss how to find the right broker for you.

(next installment)

Recently, I had the opportunity to travel to Illinois for a business trip which I parlayed into a mini high school reunion (thank you, Facebook); to Denver, Colorado, to evaluate the conditon and value of a fleet of aircraft; to Orlando, Florida, for a convention and to visit family; and, finally, to Puerto Rico and Florida for business (just business!…right!) 

While I’ve not had the pleasure of living in any other country in the world other than the United States, I still have an appreciation for the freedoms that we enjoy, as if I’ve had to live without them.  Do you relish the freedom we have to travel, or are you caught up in the frustration and inconvenience of it?  Now be honest.  After all, it’s just you and me talking here.  Tell the truth, does the slow, clueless driver in the left lane make you nuts? Does a child kicking your seat from Birmingham to Seattle drive you around the bend? I absolutely believe that we should have expectations and judge our travel service providers based on what we pay and relative to their promises.  But, do you realize the unprecedented ability we have to get from point A to B?  Let’s look at the airlines and how they do it. 

I’ll never forget the Delta Air Lines advertising tag line of the mid 1980s - Delta Gets You There. This was one of the most honest advertising campaigns that I can recall.  They did not claim to get you there on time, happy, on the same day or the same month that you departed!  They didn’t promise that you would arrive with your luggage or that you would make your connections!  There was no promise not to trap you on the ramp for hours without air conditioning, smile at you, feed you, or even suggest that you might want to fly Delta again!  Just that, “hey, whaddyawant?…we get you there don’t we?”  Well, guess what. I can walk, ride my bike, drive or ride my unicycle and “get there”. (Okay, I used to ride a unicycle and still believe after 20 years and I still can…so please just roll with me here.)  My point is that we should expect more from the airlines.  It seems to me that we just take whatever they throw at us. 

At the moment I’m at 36,000 feet on a high profile airline that shall remain nameless (okay, I’ll only say that they are an AMERICAN airline).  And just moments ago I witnessed two flight attendants having a little “spat”.  Nothing instills more confidence in me than overhearing a disagreement between two people whose main purpose is to work as a team to help save my bacon in the event of an emergency.

Here’s what I believe: It’s okay to have expectations of being treated like a human rather than a quiet and helpless zoo animal when you ride the airlines.  Realistically, however, aren’t you just setting yourself up for frustration?  Really, I want you to help me out and answer here.

I think that we should relax, leave early, bring a book, an iPod, the Xanex and demand more, but be realistic about what the airlines are able and willing to deliver.  Appreciate the travel freedoms that we enjoy but keep them in context.  It will keep you calmer, happier and help you appreciate the opportunities that we experience within the boundaries of the airlines’ limited desire to satisfy over their desire for profit.