Amanda Applegate

As we enter the 4th quarter, I am reminded that the industry (lenders, escrow agents, brokers, insurance agents, trust companies and attorneys) will once again be working to close as many aircraft purchases and sales as possible before the end of the year. As we sprint to the finish of 2023, it is important to remember that some steps take time and should not be skipped.

Visual inspection   Although the photographs and video tours of aircraft are of a better quality than they ever have been before, there is no replacement for entering an aircraft, sitting in the seat of an aircraft or standing in the cabin. If the principal owner is unable to participate in the visual inspection, having a representative physically view the aircraft and confirm the photographs and videos are an accurate depiction of the actual condition of the aircraft is valuable.

Ownership and Operating Structure; Tax Planning   Even before the specific aircraft is found, the ownership and operating structure, including developing a tax plan can be completed. Then, once the aircraft is sourced, the plan can simply be implemented. There is no reason to wait on this if a 2023 acquisition is planned. I recommend this be started immediately.

Confirmation of Maintenance Program Status   Prior to closing, the parties should independently confirm that the maintenance programs are in good standing and paid through the closing date. There can be a significant delay in assigning the maintenance programs if there is an unpaid balance at the time of the sale or a discrepancy in the final reported hours.

Lender Document Review   Most aircraft loans take around 30 days from start to finish. As a result, if the plan is to finance the aircraft at the time of closing it is important to provide all the documentation the lender requires as far in advance as possible. Most of the lender’s required documents must be completed before closing, including an acceptable certificate of insurance. Plan enough time to get all relevant documents in order prior to year-end. Alternatively, consider paying cash and arranging financing after closing.

Title Searches   Title searches should be done when the purchase agreement is signed so that if there are any liens on the aircraft the releases can be drafted and signed well in advance of closing. If the seller has a lender, then a payoff letter from the current lender will also be needed. The timing of obtaining the payoff letter is something that should be coordinated with the lender, escrow agent and seller. The payoff letter is not something that needs to be done at the last minute.

Know Your Customer Requirements   With the current sanctions, it is important to avoid entering into a contract with any party who is on a sanctions list or if the transaction would otherwise be prohibited by law based on, among other items, the source of funds. Performing due diligence on the parties at the start of the transaction will avoid any pitfalls when the deal is scheduled to close.

Pre-Purchase Inspection and Correction of Discrepancies   Inspection slots are already becoming scarce. It is important to determine the scope of the inspection, location of the inspection and duration of the inspection immediately upon the execution of the letter of intent, if not before.

Management Company Selection   This is another item that does not have to wait until the aircraft is located for purchase. You can evaluate the various management companies in advance so that once an aircraft is found you already have a company selected. It may also be possible to have even negotiated the management agreement prior to closing.

Crew Sourcing   The pilot shortage continues and is real. Sourcing permanent crew for an aircraft is something that should be started as early as possible. Many management companies will start the search process as soon as the letter of intent to manage is signed.

Insurance   If a management company is not providing the insurance for the aircraft, then you can obtain insurance proposals from an insurance broker as soon as the letter of intent is signed. There is no reason to wait and having the cost of insurance early in the process will help with budgeting.

Cross-Border Transactions   If the transaction is a cross-border transaction, make sure all parties are clear regarding the legal requirements of each applicable country and realistic about the amount of time the import/export process will take.

While buying and selling an aircraft involves many moving parts, those parts move even faster when the 4th quarter crunch is in effect. When support service providers are busy, checklists and a team leader become imperative. There must be one person leading the team who is checking to make sure all aspects of the transaction are completed prior closing (i.e., assignment of maintenance programs, insurance, funds, lender agreements, management agreements, international registry account set up, etc.).

My last bit of advice concerns setting the closing date. The last business day of 2023 is Friday, December 29th. In the past, the FAA registry has closed early on or in advance of holidays and sometimes due to inclement weather. It is recommended that 2023 closings be completed no later than December 27, 2023, in order to allow time for the aircraft to be placed into service before year end and avoid any unexpected closing delays that could occur.

When purchasing an aircraft, it is important to focus not only on acquiring the aircraft but also, developing an operational plan, which includes aircraft management. If the aircraft is going to be used for charter, then a charter management company with a Part 135 certificate must be engaged. Aircraft owners who only plan to use the aircraft under Part 91, have three options for managing aircraft operations: (i) hiring a management company to manage everything, including crew, maintenance, and insurance; (ii) creating their own flight department and handling all management tasks themselves; or (iii) selecting a hybrid option wherein the aircraft owner handles certain management tasks and a management company performs other management tasks.

I recommend that first-time aircraft owners hire a management company for a turn-key solution, at least during the first year of ownership. The owner will learn a great deal during that initial year and, in future years, may elect to handle some or all management functions within its existing organization. These tasks will be much easier to accomplish after experiencing the steep learning curve that takes place over the course of the first year of ownership.

One example of the time-consuming work that comes with aircraft ownership is the paperwork. The volume of paperwork can be overwhelming for a startup flight department. Aviation is a highly regulated industry that is very paper intensive. Many large corporate flight departments have a literal library of manuals, logbooks, invoices, payroll records, training records and handbooks. The person responsible for maintaining the library of documents that comes with aircraft ownership must be an expert in organization and regulatory compliance. Aircraft records that are not properly maintained can have a significant negative impact on the resale value of an aircraft. In addition, monthly reporting is required under any applicable maintenance service programs. In a turn-key aircraft management solution, the aircraft manager handles all this and much more.

In addition to the paperwork, there are a host of other items that are difficult in today’s market including staffing, aircraft maintenance scheduling, training slots, human resource issues and insurance. Daily, aircraft management companies face staff shortage issues, lack of availability at maintenance service centers and, sometimes, scarce pilot training slots. As a result, they have experience in how to accomplish these tasks in a restrictive market.

An aircraft management company can handle every aspect of aircraft operations. Someone once told me, “Do what you do well and hire someone to do the rest.” While the cost of full aircraft management may seem high, it allows the aircraft owner to focus on what they do best. Furthermore, there should be no fear of compliance issues when a reputable management company is engaged.

Selecting the right aircraft management company is key to a successful relationship. Here are some key questions to consider:

1. Does the management company have a similar corporate culture to the owner’s corporate culture?

2. In the case of an individual owner, does the management company have a high level of service standards dedicated to that owner’s priorities?

3. What is the retention rate of the management company?

4. What is their growth plan?

Management companies come in all shapes and sizes. Some may specialize in certain types and/or manufacturers and some may service all aircraft types. Some have plans for expansive growth and others don’t want to grow beyond a certain number of clients. Understanding the company today, and how they plan to evolve, will help determine if there is a good match.

There are many options available for aircraft management, not only in which company you select, but the services you desire. While full aircraft management options, as described above, are still dominant in the marketplace, some aircraft owners want more of a hybrid approach. For example, an aircraft owner may prefer to employ their crew and maintenance technicians directly or they may prefer to have their own insurance policy instead of adding their aircraft to the management company’s fleet policy. Most management companies allow for a selection of their services on an ad hoc basis so a hybrid between full-service management and a stand-alone flight department is possible.

If the aircraft owner is going to start a flight department without the use of any management company services, the first hire is usually the chief pilot. If the chief pilot has a strong management background, the flight department is more likely to be successful. But if the chief pilot is too busy flying the aircraft, there will be a limit on their availability for management tasks. Before staffing, there should be a detailed plan that addresses how many hours the aircraft will be flown, hours of operation, maintenance support plan, alternative lift when the aircraft is unavailable and access to alternative crew when full time crew is unavailable. Just like any other department in a company, the role, vision, and expectations for a flight department should be established prior to staffing. To establish a successful flight department, the department head must have time to lead.

For most first-time aircraft owners, outsourcing some, if not all, of the aircraft management for at least the first year or two, is the most likely recipe for success. After the initial period, the owner will know and better understand aircraft operations and the responsibilities that come with it. At that point, an informed decision can be made as to whether the owner wants to staff a flight department, establish a hybrid operation, or simply continue to do what she does well and outsource the rest.

During the pandemic, private aviation boomed and many private aviation providers flourished. With the private aviation market normalizing, some of the companies who launched their businesses during the past three years or were struggling prior to the pandemic, are facing significant challenges. I am often asked for recommendations on selecting the right private aviation provider. I think one of the best things to do is ask impartial members of the aviation community, who have knowledge of most private aviation providers, what insight they may have. Additionally, I would avoid selecting a provider simply because a friend recommended them. The following are an example of some of the questions I would use as I evaluate providers and their product offerings:

1. Is the pricing too good to be true?

2. Does the program make sense from a business perspective and seem like something that is sustainable?

3. Does the company have a proven business model that has been around long enough to show it can sustain the cyclical nature of business aviation?

4. Does the provider have a proven safety record? Does the provider have a safety management system? Has the provider received any designations from third party auditors, such as from ARGUS or Wyvern?

5. Are there any financials of the company that the executive team is willing to share with prospective customers?

6. Who are the executives running the business and what is their background in aviation? Do they have proven success in the aviation industry or have they surrounded themselves with a team of successful leaders in private aviation?

7. Is the provider a charter operator who has its own Part 135 certificate or is the provider a charter broker who depends on other charter operators to fulfill their demand.

8. If the company is a charter operator, how much demand are they fulfilling on their own fleet vs. the use of third-party providers.

9. If outside charter sources are used to cover demand, what are the requirements to be an approved vendor for the provider?

10. Are the hourly prices fixed (guaranteed pricing) or do they allow for variable costs to account for factors the provider cannot control, such as fuel and other third party costs?

11. How are high demand days handled? Can the provider really guarantee their service 365 days a year without putting themselves out of business?

12. Are the insurance levels provided under the program sufficient? If they are lower than the industry norms, why are they low? Is it due to the inability to get more insurance or just an election to keep pricing low?

13. If the provider is not successful are any amounts that are pre-paid recoverable.

a. Are the funds in a segregated account controlled by the customer or are they comingled in a company account.

b. Are the funds being used to purchase an asset, such as a percentage of an aircraft, or just pre-payment for future services with no asset?

Charter demand and charter pricing fluctuates month to month and year to year. Private aviation is a cyclical business. Companies who started during the pandemic and believe that the best year is going to be every year will have a difficult time when charter demand changes or when other factors that affect operating costs are not accounted for in their pricing model.

In order to avoid high-risk providers, I recommend doing your homework or hiring someone to conduct the due diligence necessary to feel secure about your selected provider from both a safety and financial perspective.

As an aircraft owner, it is important to make sure the title of your aircraft remains clear. Unlike some other countries, in the United States we have an owner-based registry where liens can be filed against the aircraft by anyone. Since a notice of lien can be sent to the FAA Civil Aviation Registry (the “Registry”) without the knowledge of the aircraft owner, sometimes these filings create valid liens on the aircraft and other times a cloud on the title. It is a good idea to have a title search of the Registry done annually to make sure there are not any issues with the title of your aircraft. If this annual review is not done, then at the very least title searches for your aircraft should be done when the decision is made to market the aircraft for sale. By conducting the searches prior to finding a buyer for the aircraft, if it is discovered that there are encumbrances/liens which have attached to the aircraft or clouded title, then such encumbrances/liens can be addressed early in the sale process. Another reason to conduct the annual searches is that if the aircraft is financed, then the lender may consider it a breach if there are additional liens placed on the aircraft.

Recently, I have had two separate matters where tax liens were attached to the aircraft without the owner of the aircraft being aware of such attachment. In both cases, the liens were from a time before the current owner owned the aircraft. These types of liens are not uncommon and are better addressed sooner rather than later. Often, the only way to know about these liens is through annual title searches.

In another transaction I was involved with, the aircraft owner discovered that there were five liens attached to the aircraft they owned because a former management company failed to pay for maintenance work done on the aircraft. The owner did not know there were liens on the aircraft until it was under contract to be sold and the escrow agent provided the initial title searches. Unfortunately, in this case, since some of the liens had been attached to the aircraft for more than five years, it proved difficult to locate the lienholders. As a result, the closing had to be delayed until title could be cleared.

I strongly encourage annual title searches to be done by aircraft owners. If the liens attached to the aircraft are the result of a former owner, then the former owner should have a duty to clear the title even after closing. In most aircraft sales the former owner provides a warranty bill of sale where the seller agrees to defend title of the aircraft, even after closing. However, the longer the lien is attached the harder it becomes to reach the seller and have the seller take the actions necessary to clear the liens. The earlier unexpected liens are detected, the more likely it is that the seller will still be reachable and will be willing to take the action necessary to clear title.

There are many great escrow companies in Oklahoma City where the Registry is located. The escrow companies will perform searches on the Registry for a nominal fee. In order to perform the searches, the escrow agent simply needs to know the aircraft registration number and the make, model and serial number of the engines and propellers (if applicable).

In addition to liens filed on the Registry, an international interest can be registered on the airframe and engines of a certain size on the International Registry (“IR”). The IR exists as a result of the Cape Town Treaty, which the United States is a signatory. However, the IR is a two party system and requires consent from the aircraft owner before an international interest is registered against the aircraft. As a result, it is less likely that an international interest will be attached to the aircraft without the knowledge of the aircraft owner. However, if an aircraft is financed and when an aircraft loan is paid off, the aircraft owner should request post-closing IR searches evidencing the discharge of the international interests.

In short, for a bit of annual work and nominal cost, an aircraft owner should conduct annual searches at the Registry, and if applicable, the IR. This would ensure that the aircraft title remains clear of any unknown or unwarranted liens or encumbrances that have attached to title and/or are clouding title of the aircraft. For various reasons, this search will save the aircraft owner headaches in the future when the aircraft is sold. If annual searches are not conducted, the aircraft owner should consider at least doing a search at the end of the first year of ownership and again as soon as a decision is made to list the aircraft for sale.

For nearly 3 years we have been in a seller’s market. I often think of the aircraft market as a clock’s pendulum. It swings back and forth between being a buyer’s market or a sellers’ market and sometimes for long periods of time rests in or around the middle. However, in recent years, the pendulum has been stuck at the top of the arc on the seller’s side.

In March of 2020 the pandemic started us all on a path we did not understand and could not predict. I recall being on many conference calls with industry experts who were not sure if the private aviation market would go into a downward spiral, stay the same, or boom. As we all know now, the demand for private aviation reached an all-time high during the pandemic. As a result, inventory for pre-owned aircraft became scarce, new aircraft order backlogs grew exponentially, the ability for immediate access in fractional programs evaporated and the charter market exploded. The sum of these factors resulted in increased aircraft prices and limitation on availability.

Consequently, the scarcity created by the pandemic (and an increase in demand as the number of people who could afford to fly privately grew), led to some of the most one-sided aircraft transactions I’ve experienced in my 25-year career. Not only have purchase prices been high but the ability to conduct reasonable pre-acquisition aircraft due diligence and the ability to negotiate reasonable terms has been hampered. In some instances, sellers have simply decided to sell to a different buyer for a higher price, in breach of a signed purchase agreement. Additionally, due to the seller having all the negotiating power, there were often time constraints on the acquisition leading to rash decisions made about ownership structure, aircraft selection and post-closing management of the aircraft. These quick closings have led to an increase in management company changes within the first year or two of aircraft ownership and an increase in sales of aircraft that were acquired in the past few years.

In 2023 we are now seeing some signs of the pendulum swinging back toward the middle. Inventory numbers are starting to increase and there are not as many immediate offers on an aircraft as soon as it is listed. However, quality, low-time aircraft in high demand categories are still selling quickly. Perhaps this too will change as we move forward in 2023.

While we are still in a seller’s market, it is not as one-sided as it once was. As a result, buyers can act more rationally and ensure that they are selecting the right aircraft and take the time needed to properly structure the ownership and operation of the aircraft and select the right aircraft management company.

Regardless of what market we are in now or in the future, when the right aircraft becomes available, a smart buyer will be ready to move so they do not miss out on the best aircraft for them. There are several things a buyer can do in anticipation of finding the right aircraft.

1. Ownership and Operating Structure  A first-time aircraft buyer should engage a skilled aviation attorney to help determine the correct aircraft ownership and operating structure, including review of federal and state tax planning and regulatory compliance. Current aircraft owners should work with their aviation attorney to review the current structure and make sure it still is the best considering any changes that have occurred since the aircraft was acquired.

2. Aircraft  Having an experienced and knowledgeable aircraft broker review usage patterns of the past months or years and/or what future usage may be will help to determine the right aircraft type(s) and the number of hours that will be flown. Then, use this information to determine if charter will be allowed on the aircraft.

3. Management Company  Aircraft buyers should consider where the aircraft will be based, the type of aircraft being purchased and if charter is going to be permitted. (This should not just be based on which management company friends have used.) There is also the X factor in finding a management company that will be the right fit based on the culture of the company.

4. Technical Representation  Select a technical representative to oversee the inspection. This may be an employee of the management company or an outside consultant. The representative should have good knowledge of the aircraft type being purchased and be able to be on-site during the pre-purchase inspection.

5. Lender  The lender can be ready to approve a loan once the aircraft is identified by already having the necessary financials and ownership/operating structure in hand. This will allow the cycle time to close on the loan once the aircraft is selected to be shorter.

As we move towards a more balanced market, it is still important to be a prepared buyer. With the seller’s market waning, a buyer has more time to become a thoughtful buyer, which will hopefully result in less time and money being expended after the aircraft is acquired to correct mistakes that could have been addressed prior to closing.

The most common first step in the acquisition of an aircraft is for one of the parties, usually the buyer, to prepare and submit a letter of intent (“LOI”) to the other party. The main reason for using an LOI is to express each party’s understanding of the key business terms of the transaction and to commit to those terms in writing. The LOI confirms that the parties have reached a meeting of the minds on the key business terms. Generally, unless there are extenuating circumstances, the LOI should not be skipped, otherwise more time and effort may be expended on the negotiation of a full agreement before the parties realize they do not have a deal.

For the purchase and sale of an aircraft, the LOI is usually a short, two or three page document that includes the essential terms (identified below) of the deal. The LOI usually includes a provision requiring that the buyer submit a deposit to a specific escrow company within a certain number of days after the execution of the LOI. Additionally, the LOI usually contains a provision that it will terminate and be of no further effect if the final aircraft purchase and sale agreement (“APSA”) is not executed by a certain date.

Given that the LOI is subject to the completion of an APSA and is usually non-binding, the obligation of the parties under an LOI often may be more of a symbolic commitment than a legal commitment. In almost all aircraft LOIs, the deposit is fully refundable, which means the buyer could change her mind at any time and receive a full refund of the deposit. If the LOI is non-binding or the APSA is not agreed upon by the required date, the seller can sell the aircraft to someone else if a better deal comes along. Since the intent of the parties is not always easy to determine and the cost of litigation can be prohibitive, it is in the parties’ best interests to remove any ambiguity from the LOI and clearly state their intentions. It is paramount that the LOI state which sections of the LOI, if any, are intended to be binding on the parties or that the entire LOI is non-binding.

Is the LOI necessary? Yes, it is the best way to start the aircraft purchase and sale process to make sure the parties agree on the key business terms before spending the time and effort to prepare the full APSA. A list of the key business terms to include in the LOI is as follows:

1. Name of the buyer and seller

2. Purchase price

3. Deposit amount and number of days to remit deposit after LOI is signed

4. Escrow agent

5. Visual inspection requirements (if visual inspection has not already taken place), if any

6. Scope of pre-purchase inspection

7. The facility conducting the pre-purchase inspection and at which location

8. Purchaser’s rights to accept or reject the aircraft after the inspection (for any reason or only if significant findings)

9. Definition of discrepancies and seller’s responsibility regarding same

10. Flight cost allocation for all relevant flights

11. Aircraft delivery conditions

12. Closing process (number of days to close after discrepancies have been remedied)

13. Number of days to agree on the final APSA and which party will draft the initial version of the APSA

14. Non-binding statement except for certain key terms

15. No- Shop provision, if applicable

16. Typical miscellaneous provisions (choice of law, confidentiality, assignment rights, deadline for acceptance, taxes, international registry requirements)

The decision to use a LOI or omit the LOI step is a question that should be evaluated with regard to each deal, the parties involved, and considering all the other variables involved so that a strategic, well-informed determination can be made. Most often the LOI should be the first step in the aircraft purchase and sale process and should not be skipped.