Your Plane Will Punish You… If You Don’t Behave

By: Stewart Lapayowker

September 27, 2012

Plan Your Preowned Sales Process With Care

WE SPEND OUR TIME HELPING AIRCRAFT OWNERS NAVIGATE the process of the sale and purchase of new and pre-owned aircraft. And there is one universal truth: You don’t really ever know if your aircraft has been cared for properly until it goes through a pre-purchase inspection in connection with its sale to the next owner. In my experience, there are generally two kinds of aircraft owners. The first wants the aircraft managed and maintained properly and professionally, understanding that quality has a cost. The second likes the idea of having an aircraft and can well afford the purchase, but begrudges every nickel required to manage and maintain it. Often the latter do not understand — or want to face — the difference be-tween “high-quality” and “value” in aviation, both of which require timely performance of all required maintenance. They think that, all things being equal (which experienced owners know is not so), “cheap” means “value.” And while this may seem like shrewd economics at the time, sooner or later the aircraft will deliver a brutal and expensive reminder to the contrary, especially at time of resale.

Let’s review the process for the typical sale of a pre-owned aircraft. Initially, the parties enter into an offer to purchase, setting forth the basic terms of the transaction including the price, deposit amount and, importantly, the required technical delivery condition of the aircraft and identification of the inspection facility that will perform the pre-purchase inspection (typically selected by the buyer and reasonably acceptable to the seller). You will never ever under any circumstance sell a jet aircraft to a retail buyer without a pre-purchase inspection to confirm that the aircraft is in satisfactory technical condition.

Every offer assumes that the aircraft is airworthy, has had maintenance performed as required by the manufacturer’s recommended maintenance program, is current and up-to-date on all calendar and cyclical items, and is in compliance with airworthiness directives (that is, changes to the aircraft mandated by the FAA) and mandatory service bulletins (essentially, changes to the aircraft required by the manufacturer to maintain the airworthiness of the aircraft). The economic impact is that if the aircraft does not meet the delivery conditions it is the seller’s responsibility to pay to have the aircraft brought up to date (at least in the current market).

As part of the preliminary process after the offer is signed, there can be a cursory visual inspection. This usually consists of the buyer going to see the aircraft and also includes a cursory records review to ascertain the status of the aircraft and any upcoming “due” items: that is, inspections that are anticipated in the near future, current airworthiness directives or mandatory service bulletins. The initial review of the written and digital maintenance records contribute to the scope of the inspection that the buyer will include in the purchase agreement, but more importantly, forms the basis for a buyer’s impression of the aircraft. This is not just a technical impression, but rather an impression of whether the aircraft has been consistently, routinely and professionally maintained — quite simply, how the seller has cared for the aircraft. Needless to say, that impression influences the buyer’s opinion as to whether the preliminary purchase price is appropriate for the condition of the aircraft. Deals have fallen apart after the merest visual inspection (and no matter what the reason, everyone will know that the deal crashed even before the formal prebuy, casting a long shadow on the seller’s prospects for a quick sale).

Following the visual inspection, the parties negotiate a more formal purchase agreement which contains the scope of the pre-purchase inspection and other customary terms. For a Bombardier aircraft, this can be as detailed as a “Level III” inspection; for a Gulfstream an “aircraft records and condition survey” (or similar), together with additional inspections that the buyer may desire as a result of the records review along with repair facility recommendations (such as performing an engine and APU boroscope ).

The purchase agreement will provide that following receipt of the inspection report, the buyer will have a number of options. Typically, the buyer will have the option to accept the aircraft conditionally subject to the seller’s correction of discrepancies defined in the agreed-upon delivery conditions. What this means is that if the re-pair facility determined that the aircraft doesn’t meet the technical conditions, the seller will need to pay to rectify the discrepancy(ies) in order for the aircraft to be returned to service so that the buyer is committed to buy the aircraft.

Consider the implications. The seller hasn’t performed inspections on time? The seller needs to pay for it. ADs or MSBs not com-plied with in a timely fashion? Parts out of limits? They need to pay for it. Records missing or not complete? They need to pay to research and fill in the blanks. The maintenance service contract not paid cur-rent? The seller needs to bring it current. And instead of any fixes being done when they should have been — and by the seller’s maintenance facility, flight department or management company — now it will be done at the buyer’s selected facility, under time pressure and, in all likelihood, at a significantly increased cost.

Perhaps the agreement will have an outright rejection right which allows the buyer to have the deposit refunded if the aircraft is not acceptable for any reason. No matter the strength of any confidentiality provisions, there is little doubt that those in the market soon will learn of the rejection and the reasons for it. That can have a severe impact on the seller’s efforts to move the aircraft. And to add insult to injury, no matter why the buyer walked away, the seller will be required to pay to have the aircraft returned to service because the inspection facility is obligated not to release the aircraft for flight until any discrepancies found during the prebuy are corrected. It sounds like a double whammy — and it is! The seller not only lost the deal; but also must pay for any and all discrepancy rectification.

How can the surprises be mitigated? Choose experienced and professional management for the aircraft (whether in-house or management company), use reputable maintenance facilities experienced with your aircraft type, and don’t skimp — or sooner or later, your aircraft will punish you.