Purchasing an aircraft can be a nightmare without the right advice
Christian Castang
More and more companies and families across the MENA region are considering acquiring business aircraft. Purchasing these aircraft can be a minefield for the unwary. Drawing aviation finance may still be difficult following the global financial turndown but buyers from the Middle East still enjoy a favoured position with a lot of lease companies or banks but there are pitfalls throughout the process. Project management may be the answer.
Statistics show that some 20 per cent of business jets purchasers are first-time buyers, and they are not necessarily small aircraft either. Large aircraft have been on the shopping list for Middle Eastern buyers in a big way over the past few years and some banks have shown a sustained interest in the financing of large aircraft converted to VVIP bizliners, notably Credit Cuisse (Switzerland), BNP Paribas and Credit Agricole (France), Barclays (UK) CITI and Bank of America (USA). In most cases, this particular business segment represents (in term of numbers) a fraction of their aviation financing activity, let alone their overall business. Yet these banks are highly motivated because their ultimate goal in this “small and niche” business sector is to consolidate and strengthen their overall relationship with wealthy individuals or heads of state.
Christian Castang is the founder of Altair Aero Projects - a specialist in aviation finance that has been successfully experiencing and promoting partnerships with banks, law firms and family offices for its clients across MENA – He explains why the banks are so keen. “There is far more at stake in these financing deals than the VVIP aircraft acquisition alone. And, in fact, these banks have a non-aviation approach to such aircraft financing. Not only do they not rely on the financed asset as a security, (the finance is purely credit based), but they make sure that the repayment capacity of their wealthy client stems from existing estates or businesses that are not related to aviation. In this way they can hedge their risk,” he said. Castang argues that the client’s perspective is also rather unusual. “Although he is buying a large aircraft (sometimes even a wide-body), he does not have, as an airline does, the professional human resources and skills to undertake such a purchase with expert knowledge. Even more, he does not have the experience in outfitting the airliner to become a bizliner.” The issues he needs to address are numerous and extremely complex with significant and costly pitfalls for the unwary buyer. Castang outlined the key issues:
• Defining the right aircraft type to fulfil the client’s needs:
Buyers must be wary of making a purely emotional decision. The intelligent choice is based on a careful factual analysis, evaluating the entire spectrum of aircraft types, finance options and legal implications. The client needs to consider where he is likely to go regularly and how many people will accompany him? Will he make mostly short trips or long trips – once a week or once a month? Will he take trips that he has never considered before once he owns his VVIP jet aircraft?
Part of the decision process is determining the right range, the right seating capacity and the right performance for the runways and airports that he plans to access. It is in everyone’s best interest to guide him accordingly and this also means looking to the future. Buying and outfitting a business jet is not a quick or easy purchase – the needs for the next 3-5 years must be considered as a minimum. Experience shows that the numerous personal and business benefits delivered by a VVIP aircraft often warrant a much greater investment at the outset than originally envisaged.
• Choice between new and used aircraft:
The waiting time for a new aircraft – in particular in this category – can be years, so buyers in a hurry sometimes have no choice but to acquire a pre-owned model to speed the process. A well-maintained used aircraft can be converted or configured to new standards with the latest flight-deck avionics and cabin amenities. This may be quicker but it is not necessarily much less expensive and can be fraught with complicated aviation rules regarding airworthiness certifications that can catch out the inexperienced buyer.
• Research and selection of the required aircraft (if previously used) in the market:
The phrase ‘buyer beware’ comes to mind.
• Aircraft appraisal (if previously used), definition of delivery conditions and purchase negotiation:
Current aircraft values are dictated by ‘the market’. If backlogs are healthy and used aircraft are rare, then it’s a seller’s market and values are on the high side. Also, the delivery slot of new aircraft can be a real challenge, so customers are likely to pay a premium one way or the other. That said, buyers should bear in mind that, beside the price, there may be room for negotiation on the cost of the interior completion package, warranty coverage, crew and maintenance staff training, spare parts etc. It always pays to bring in an expert adviser at this stage.
In the case of pre-owned aircraft due diligence, in particular the pre-purchase inspection of the aircraft and technical records, is vital. These inspections reveal which maintenance or upgrades are to be factored in, to what extent the cabin needs to be refurbished or replaced, and other information that can be leveraged against the asking price. Expert due diligence will also tell if the aircraft has been properly maintained and if it is airworthy.
Ultimately, due diligence can save the buyer millions, as it can also give sufficient reason to walk away from a bad deal. Needless to say, it is vital to have highly proficient people doing it.
• Designer selection:
Pragmatism, realism and practicality should always prevail at the design stage and it goes without saying that designers need to be sensitive, flexible and have a great capacity to listen.
Indeed, when it comes to the technical and regulatory constraints – which are stronger and more numerous in the aviation industry than in many others – understanding them is essential.
For instance, not realising from the outset that the aircraft will fall into the ‘commercial aviation’ category rather than ‘private aviation’ from a certification perspective, will generate endless delays and astronomic costs.
Similarly, as any completion project is governed by an agreement where the cabin interior specifications are a vital component, any omission in the specification can eventually translate into significant additional costs, risks or liabilities.
Applicable regulatory requirements, ease of maintenance, ergonomics, finishes, sound proofing, carpeting, placards and markings, and emergency equipment, are typical matters to be addressed. Such complex detail requires phenomenal hands-on effort and co-ordination by proficient designers.
• Outfitting centre selection and contract negotiation:
With a limited number of outfitting centres, only a handful of which attain the pinnacle of craftsmanship and quality, and waiting lists that can extend to four years, demand exceeds supply and prices are exceptionally high.
It can be tempting to opt for an immediate slot with a second or third league provider where the risks of failure to meet delivery times and desired quality standards are prevalent. This is an area where enormous and expensive mistakes can be made if the entire process is not managed properly.
• Supervision of the completion process:
New technology adds to the value of the aircraft. But it’s expensive and needs to be properly specified and expertly fitted to avoid technical nightmares. The latest communication technology includes safety features and utility enhancements that greatly extend the capability of the aircraft, particularly in areas of the world that lack the sophisticated infrastructures found in Europe, the US and parts of the Middle East and Asia. The latest cabin technology is also essential because these aircraft are flown globally. Satellite communications; high-speed internet; 24-hour news, weather, sports and financial market updates – and, in some parts of the world, live TV coverage – all enhance business aircraft utility and private enjoyment. Professional supervision of the completion process to time, and to budget, pleases both customer and financier.
Castang says that because he is unaware of the complexity of these issues, an inexperienced client often considers he’s merely buying a Bentley and thinks all he needs to do is choose the colour of the leather seats. “This, rather surprisingly, leads to a tendency to ‘do it himself’, imagining he’s saving a few thousand dollars, while what’s really at stake is an overall project cost potentially reaching several hundred million dollars” Castang said.
The same do-it-yourself approach can also apply to more experienced clients who have been through this process before and feel that ‘now they know’. But each project is very different.
By failing to install a proper project management team, the acquisition and outfitting of a bizliner may well become a nightmare where unachieved objectives, poor performances and delivery delays combine to create huge frustrations and conflict.
Today’s buyer needs plenty of expert help. A team of legal, financial, insurance and operational experts who can guide them on performance, price, contract terms, finance options, tax implications and legal issues is essential.
Castang says project management is money well spent. “It seems obvious that a partnership between a bank willing to finance a VVIP bizliner acquisition and completion, and a professional project management organisation is a win-win situation. The bank can introduce these expert management services to its prospective client and, by doing so, achieve at least two goals – differentiate itself from the competition and ensure that the project is kept, as much as possible, under control.
“The client gets professional management that will hold his hand throughout a complex process and the completion centre is happy to benefit from a knowledgeable interface/buffer between themselves and the sometimes capricious and unpredictable client.”.