MANAGEMENT NOTES

Aircraft acquisition-a guide

For best results, research and preparation are vital.

By David Bjellos
ATP/Helo. Gulfstream IVSP, Bell 407


Aviation departments can call on numerous resources to ensure that they choose an appropriate aircraft for their mission needs.

Corporate aviation is growing at an unprecedented pace. Deliveries of turbine-powered aircraft exceeded 1000 for the first time ever in 2007 and back orders have stretched out through 2012 for many OEMs.

Global demand for aircraft has never been higher. While the US currently accounts for 76% of all aircraft in corporate use worldwide, OEMs report that new orders are almost equally divided between the US and the rest of the world. If your company is like many opting for an alternative to the agony of airline travel for business, your first purchase--or upgrade of an existing aircraft--can have significant benefits for your bottom line. However, pitfalls exist for the unprepared.

Even seasoned aviation department managers make use of a second set of eyes during the research and negotiation phase to help with the myriad problems that can be encountered, especially with used aircraft. Many reliable and noteworthy aircraft brokers exist to assist first-time buyers and those with limited experience. Aircraft dealers and salespeople represent every major OEM in every geographical region as well.

Choosing the right travel option

Many options exist, including pure charter, fractional, lease agreements and shared-asset/joint-use equipment and travel cards. Each has pro and con attributes, and a thorough understanding of your principals' needs is crucial to avoid making a mistake. Just because the chairman's friend at XYZ Corp has a certain type of aircraft does not mean it will suit your needs, even if the boss says it will. Research and hard data about performance and cost will provide your principals with the data they need to make an informed decision rather than one based on anecdotal evidence. If you have worked with the company long enough, you know the principals' travel needs, cabin size, range requirements and, generally, the number of guests per trip.

Many useful tools exist that can help determine your needs. One excellent tool to start with is Conklin & de Decker's Aircraft Cost Evaluator, which compares all current turbine-powered aircraft types, breaking figures into hourly costs. This provides a good overview of offerings. Many OEMs used to produce their own data, but now use the Conklin model. Updated annually, it is considered the gold standard for evaluations and the benchmark for all transactional and evaluation data.

Let's assume that you already own an aircraft and the boss is considering an upgrade. Examine your mission profile and determine the number of flights that had to be changed due to insufficient seats, range or performance. If you need a marginal increase, the choices are more difficult than, say, an aircraft capable of Atlantic crossings or with a range in excess of 8 hours. Determine what you think the preferences will be for aircraft and compile a list of 3-5 choices. Most importantly, perhaps, cost should not be the prime consideration. If you are working with an OEM for a new aircraft purchase, separate performance from price. Make the OEM show you how a specific aircraft meets your performance needs--once this is confirmed, you can begin talking price.

Buyer and seller representation

Conklin and de Decker software is crucial for comparing similar equipment in terms of cost and performance.

Brokers come in a variety of guises. A standard broker represents only the seller, whereas a buyer-broker works only for the buyer. It's important to find one that deals in the kind of aircraft you want to purchase, because they will know the limits of negotiations for value-added items like training costs and not-yet-released equipment upgrades.

No broker knows all aircraft intimately, and your end result will be better with a knowledgeable and competent representative. Most importantly, set goals for your broker to accomplish, and define and share your expectations--make him part of your team.

At this point, it's worth beginning to integrate your corporate representation--namely, legal and risk. They will play a very large part of any purchase and the synergy between the parties will enhance the purchase.

Financing has become so competitive that rates for corporate aircraft have come down considerably. The cost of aircraft has risen proportionately as well. The London Inter-Bank Offer Rate (LIBOR) is a good measure for aircraft loans. Because the amounts are so large, most large brokerage houses (CitiGroup, Morgan Stanley, Goldman Sachs) selected a global rate as a benchmark. Rates as low as LIBOR + 0.25% have been quoted on large aircraft such as Bombardier Globals and Gulfstream G550s, making margins very thin and competition tight. Unlike the credit crunch with housing, large loans like these are generally written for less than 5 years, with considerable collateral assets as protection.

Aircraft pre-buy and appraisal

Even when buying a new aircraft, considerable emphasis needs to be placed on the pre-buy. If your maintenance staff has experience on the aircraft type you are purchasing, you are very lucky. If not, there are many individuals who make a living doing pre-buys. Most of these are former technicians and supervisors, often with years of experience on the shop floor or at the factory.

Resources for flight departments: Sample online page from the Official Helicopter Blue Book-a HeliValue$ product.

As with selecting a broker, it is necessary to do due diligence and find a person appropriate for your needs, negotiate your goals and requirements, and define what you expect from them in return. At a minimum, you'll need a full written report of their findings with documentation for any items that fail to meet manufacturer specifications. Having your maintenance team meet with the pre-buy representative is a great idea he/she can share information that will be helpful as your group becomes more familiar with the equipment.

Aircraft appraisals are not unlike car appraisals--the numbers are simply bigger. New aircraft purchases remove quite a bit of latitude from negotiations, but a great deal of subjectivity can be applied for used aircraft.

Aircraft Bluebook Price Digest.

Numerous sources exist to assist buyers--AMSTAT, JETNET reports, Aircraft Blue Book, Vref and the Official Helicopter Blue Book, among others. All use the aircraft component times, equipment, wear and tear on furnishings and dates of paint and major repair work. They then produce a figure that is generally called "fair market value."

Like any asset, supply and demand dictate the willingness of the owner to negotiate. In today's marketplace, used aircraft are often selling for more than new ones-buyers are willing to pay a premium for an instant asset instead of waiting 3-4 years.

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