Best Structured Practices for Acquiring a Business Aircraft

Harvard Business School professor Ted Levitt said “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” Customers, mainly business leaders, politicians and entrepreneurs, who need to save travel time, require privacy when traveling and need to get work done while onboard an aircraft, have various options of fulfilling their on-demand travel needs – charters, block hour programmes and finally aircraft acquisition. The solution has to start with understanding the key purpose and the nature of the client’s travel needs. In few cases, acquiring an aircraft is just the right solution.

But first, we need to clarify that when customers purchase an aircraft, they should do so primarily for their own use, not to make profit out of external charter, because most likely, they won’t. Revenue from the charter flights can be used to offset some of the ownership costs i.e. fixed costs. But unless you operate a very competitive flight department and have a great demand for your asset, aircraft owners will hardly make profit from one aircraft asset. Aviation companies need to operate on scale to generate profits.

Further there are key issues with professional expertise available for aircraft acquisition. Most of the first time aircraft buyers and many even looking to add an additional aircraft to their company are quite naïve when it comes to aircraft acquisition. In many cases, they seek consultations from aircraft brokers, with no credentials, who aim to push a product, irrespective of whether it is the right one for the client. Most of the brokers don’t have a structured way of understanding client’s requirements and work haphazardly to push any available product to their clients. As a result, we have often seen customers purchasing the wrong kind of aircraft and end up getting frustrated with the whole aircraft ownership experience. This naturally hampers the growth of business aviation industry.

Another key problem is that a lot of freelance pilots and aviation managers act as aircraft sales consultants with no prior experience in completely executing a sale transaction. Pilots are good at flying and operating model specific aircraft. Few individuals managing aviation companies are good at managing daily operations. These are not the ideal skill sets of any aircraft acquisition consultant.

CLIENTS OFTEN ARE INCLINED, AND SOMETIMES RIGHTLY SO, TO PURCHASE THE CHEAPEST OPTION TO REDUCE THEIR INITIAL COST OF ACQUISITION. HOWEVER, THE IDEAL METHOD IS TO CONSIDER THE LIFE-CYCLE OPERATING COSTS OF AN AIRCRAFT.

Helping a client to acquire the right asset which will serve them for a long term requires the following three skill sets:

• Educating the client on what best options are suitable for the client’s travel needs.
• Helping the client in navigating the challenges and avoiding the pitfalls involved in the process of acquiring an aircraft.
• Keeping the client continually informed on the entire aircraft selection, inspection, induction and regulatory processes.

In addition, the aircraft acquisition consultant needs to have a methodical and a structured process to help a client acquire an aircraft. Further, the client also needs to be made aware of the regulatory framework in which the aircraft will operate, mainly the Non-Scheduled Operator Permit (NSOP) and Private categories. This article assumes that the client has some preliminary understanding of the regulatory issues.

After gaining business aviation industry experience, in helping clients acquire the right asset and analyzing best practices, following are my key steps in aircraft acquisition:

START WITH DEFINING THE CLIENT’S MISSION:

I start with understanding the client’s travel requirements – both current and future and then shortlist aircraft based on this preliminary analysis. I usually ask the following key questions and derive inferences:

Q: Where do you fly often during the year? Is it domestic or international?

Ans: Understand the broader mission capabilities required of the aircraft.

Q: Are there any locations that you plan to travel frequently in the next two to three years from now?

Ans: Understand future use of the planned aircraft.

Q: What are some of your most frequent routes?

Ans: Understand what should be the ideal range of the aircraft.

Q: How many persons usually fly during a typical mission?

Ans: Determine the seating capacity of the aircraft.

Q: Do you require a stand up cabin or will a shorter cabin do?

Ans: Understand the comfort level that the client seeks.

Most of the clients don’t have much idea of the budget provisions required for buying an aircraft. Hence the best option is provide some budget estimations of new and preowned options and bring detailed budget discussion at a later stage.

The above discussion during the preliminary stage help us to understand and shortlist few aircraft models that would be most suitable for client’s requirements. By the end of the above discussion, the client becomes aware of various categories of aircraft and feels much comfortable and informed while taking the next steps in short listing the right asset.

IMPORTANT 90/10 RULE

A common mistake that clients make due to incorrect guidance is that they purchase too large an aircraft for their mission requirements. To prevent this, a thumb rule is to use 90/10 principle – Purchase an aircraft which caters to 90 per cent of the annual trip requirements and charter for the rest 10 per cent. Let me give an example.

If a client usually flies within Indian metro cities with 3 to 4 passengers at the most for 90 per cent of the time, then a midsize jet becomes most suitable for cost effective acquisition. If in few cases, the client flies to international (say London) destinations along with five to six passengers, then she would need either a super-midsize jet or a large jet. The cost of acquisition between midsize and super-midsize or a large jet could be in a few million dollars. In addition, the direct operating costs between those categories of the aircraft are between 1.25 and 2X.

Hence the ideal solution using the above rule is that the client buys a mid-size aircraft for 90 per cent of the usage and charters a supermidsize or large jet for 10 per cent of the usage. This saves significant upfront and lifecycle costs of the client. Not relying on 90/10 rule could lead to significant over investment in aircraft.

DISCUSS PROBING QUESTIONS AND CARRY OUT MARKET SCAN

Once we short list a few aircraft models which can match the client’s current and future mission, the next step is to understand the suitability of the aircraft within the Indian ecosystem. The reason is that most of the aircraft are imported into India. Hence the acquired aircraft should seamlessly operate and integrate within the Indian regulatory, maintenance and operational eco-system. During this stage I research for the following supporting factors:

Ecosystem in India to support these elected models:

• Would pilots be readily available to fly and engineers to maintain the aircraft? What is the cost and duration of training required to train new pilots and engineers?
• Is maintenance facility available in India with adequate spares, tools and equipment for the planned acquisition?

There are few examples where clients have bought an aircraft and the asset remained on ground for several months due to lack of spares and/or pilots and maintenance support. The above analysis helps to prevent such expensive mistakes.

In some exceptions, say for Honda Jet aircraft, a strong local dealer provides support in terms of parts and manpower. Large OEMs often provide strong support for first of its type new aircraft. This critical factor can help clients have an assurance that even for a new aircraft models, they need not worry about eco-system support issues.

This is also a good stage to bring up budget plans for the aircraft. The following are important cost buckets and all four have to be considered simultaneously:

• Acquisition cost
• Fixed costs
• Variable or the direct operating costs and
• Life cycle operating costs (a combination of the above three)

Acquisition cost is the one time purchase price of the aircraft. Usually clients finance an aircraft either through debt or through an operating lease. Fixed costs are ones which the client would incur on a monthly basis whether they fly or not. These include salaries and expenses of pilots, regulatory, maintenance and administrative staff, parking, insurance and finance charges. Variable or direct operating costs are costs involved for flying an aircraft on per hour basis. These are mainly fuel, airframe and engine programmes or reserves that occur every hour of flying.

Clients often are inclined, and sometimes rightly so, to purchase the cheapest option to reduce their initial cost of acquisition. However, the ideal method is to consider the life-cycle operating costs of an aircraft. Life cycle costs are estimated using all the above costs typically over seven years. Clients may be surprised to learn that sometimes an aircraft with a higher acquisition cost has a lower life cycle cost due to its efficiency and cost of operation.

One major determining factor is the age of the aircraft. Typically, a newer aircraft would probably come under manufacturer’s warranties leading to lower cost of operations. Depending on the quality of maintenance, higher the age, the higher is the direct operating costs of aircraft. During this stage, I also start discussing aircraft amenities that the clients prefer to have. For some clients’ a hot oven is a must and for others who fly intercontinental, a bed is mandatory.

After this stage, the client narrows down to two to three aircraft models. From this point on, the real work starts.

CARRY OUT DETAILED DUE DILIGENCE OF THE SELECTION AIRCRAFT OPTIONS – MAINLY FOR PRE-OWNED AIRCRAFT

This is the most crucial stage where I and my team provide actual aircraft options to the clients and we do the following:

• Aircraft visits and visual inspections along with the client to ascertain the ground condition of the aircraft.
• Desktop study of CAMP documents to ascertain the quality of maintenance carried out on the aircraft and the next maintenance checks, if any. Often, expensive maintenance checks become due in few months to a year and the cost has to be considered during price negotiations.
• Review of mandatory equipment to operate in India. DGCA has its own list of mandatory equipment which could be over and above the standard equipment installed in most foreign aircraft. It is important that the aircraft must have the mandatory equipment installed or at least have provisions to install to avoid grounding of the aircraft when it is imported into India.

This is the stage where the client confirms an interest in a specific aircraft and we assist in the pricing discussions.

STRUCTURE THE DEAL

During this stage the client (now a buyer) is committed to purchase the aircraft and the following activities occur:

• Pre-purchase inspection (PPI) at the cost of the buyer. PPIs are important as they often bring out deficiencies which could not be ascertained earlier. Buyer can have the option of carrying out PPI by a team of experts or at an MRO preferred by the buyer. The PPIs may lead to cost escalations which have to be mutually discussed between the buyer and the seller.
• Often at this stage, the buyer should have an aviation manager on board who will manage the aviation activities. It is ideal that the buyer’s aviation manager be present during this stage as she will have to manage the maintenance when the aircraft arrives in India.
• Price negotiations: The price negotiations should be fair between the buyer and seller and the aircraft acquisition consultant should ideally balance the discussions between the two to lead to a mutually agreeable price.
• Letter of Intent: The buyer provides a letter of intent to purchase the aircraft with details of responsibilities of the seller.
• Refundable deposit: As a firm commitment, the buyer puts up to 15 per cent of the aircraft cost in an escrow account. The escrow money is released upon reaching certain milestones.

BRING HOME YOUR AIRCRAFT

This is the final stage where the core focus is to bring a foreign registered aircraft into India:

• Purchase agreement: We assist the buyer in structuring the purchase agreement where buyer’s and seller’s responsibilities are clearly laid out.
• Title transfer: The aircraft ownership is transferred from the seller to the buyer in anapproved registry.
• Ferry the aircraft: The buyer’s pilots ferry the aircraft into India. If the pilots are not hired yet or are under training, then the buyer can hire the services of professional freelance pilots who provide such ferry services on one time basis.
• Regulatory framework assistance: During this stage, the buyer’s aviation company or the aircraft management company takes control in getting the aircraft formally inducted under the DGCA’s regulatory framework.

In summary, when evaluating a purchase of a business aircraft, do the following:

• Evaluate credentials and transaction history of the aircraft acquisition consultant.
• Insist on having a structured approach to evaluating aircraft options.
• Ensure that you have complete visibility of the sales transaction.
• Ask for data that is relevant to the transaction.
• Don’t try using a cheap reference which might end up in an expensive mistake later.

Acquiring new or a pre-owned aircraft often requires tremendous efforts on behalf of the aircraft acquisition consultant both in terms of strategic and operational analysis. The above structured approach has been derived from several years of experience from colleagues who have carried out several aircraft sales transactions and should help potential aircraft buyers in making an informed choice.