MANAGEMENT NOTES

Aircraft acquisition-a guide

For best results, research and preparation are vital.


Operating costs and asset management

By now, the corporate team will have worked closely with the CEO and officers and made a formal offer which has been accepted. It's important to keep in mind that your department--aviation--may be charged for items such as lien/title searches, demo flights, broker fees and legal costs. Be sure to determine early in the process what expenses will be assigned to aviation and which will be absorbed by corporate to avoid surprises when the budget is due.

Finally, you now have a larger asset to manage and the expectations of the investment by your principals will be held to a higher level. If you use a software suite such as SAP, you're already familiar with cost centers and allocations. If you don't, there are numerous small business software packages and, increasingly, aviation-specific hardware available.

The goal of every department manager should be to provide the corporation with costs--both fixed and variable, and hourly--or each asset used. These may be leased aircraft as well, and the dollars spent are important to the executive board and the finance department. You can prepare by getting together with the CFO and asking what type of reports he/she would like--they will give you a great deal of assistance and advice, and they know that your primary skill set is not finance.

How Cape Town registry affects a purchase

Buyer-broker and prospective purchaser at the 2007 NBAA convention. Aircraft on display provide excellent opportunities to discuss capabilities and performance with OEM representatives.

An international registry (IR), established by the Cape Town Treaty in 2006, applies to aircraft that are sold, leased, subleased or assigned. The IR "perfects" rights in both aircraft and airframe by filing with FAA and on the IR website. It applies to all fixed-wing airframes with 8 or more seats, cargo capacity in excess of 2750 kg and engines with 1750-lb thrust or 550 hp, and to rotary-wing aircraft seating 5 or more and with crew or cargo capacity above 450 kg. Most turbine aircraft meet or exceed these figures.

Registering your aircraft seems straightforward, but the process is complicated and not user-friendly. It can only be done online, and most operators enlist help from manufacturers. While not required, IR is strongly recommended for all purchases and sales. Buyer-brokers and OEMs are inserting the IR language into contracts for new aircraft as a measure to ensure this "perfection of rights" and reduce unknown exposure later.

Summary

These steps will allow flight department managers to approach a purchase/sale with greater confidence, and along with their corporate partners and brokers, ensure a smooth transaction for that shiny new aircraft. As corporate aviation changes into a more business-oriented environment, a solid understanding of high-dollar transactions and good business acumen will enhance anyone's career in an increasingly competitive market. Transactional expertise is a common and valuable skill set to learn--and perhaps the most commonly used in corporate aviation.

A basic checklist

A checklist of items to complete ahead of a planned purchase is useful in ensuring that you get the best value for your principals. Items should include, but are obviously not limited to, the following:

  • Define travel options--charter, fractional, travel card, full ownership/lease.
  • Define 3-5 aircraft that would fit 95% of required flight profiles and provide detailed cost/performance data for the users.
  • Identify a broker with experience in the type(s) of aircraft you are interested in. Define your expectations of them and set goals for each party to achieve.
  • Coordinate with your company's legal, risk, finance and executive committee on insurance, separate LLC or "S" corporation for the new acquisition. Define the costs that aviation will incur. Have the risk department shop for insurance quotes and provide them will all the credentials they need for a reduction in premium.
  • Once you have selected an aircraft, be certain your pre-buy team is well versed on the type and equipment. Obtain a fair market value from the numerous available sources. Be prepared to negotiate through your broker.
  • Make sure that your department has software that can track costs and provide the executive team with reliable figures representative of the aircraft type.
  • Ensure that you register under Cape Town and use a QI for a like-kind exchange, if indicated.

Your first meeting with the risk and legal people can clarify this and allow you an opportunity to send a message to the finance department about new capitalization. Remind each sector about the new tax liability, and arrange for structure/payment schedules, depending on the rate of depreciation being used. The current market still allows for bonus depreciation and should be a consideration for the terms necessary for the budget proposed.

 

 

David Bjellos is the aviation manager for a private corporation whose flight department was the first in south Florida to achieve IS-BAO certification. The company operates a Gulfstream IVSP, a Dassault Falcon 2000, 2 Bell 407s and a Eurocopter EC120.

 

 

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