Heather Gordon is Legal Director at Martyn Fiddler Aviation. Heather joined the team in 2013 having previously practiced within a leading Isle of Man law ...Contact Heather Gordon
5 simple steps to de-risk a business aircraft transaction
Aircraft Owners and operators may understand the unique risks that attach to aircraft transactions; knowing how to manage these risks though is essential. Failing to anticipate or understand when you are entering risky territory, or worse, pushing the boundaries entirely could result in harsh consequences. This failure increases the chance of creating legal, tax and/or insurance issues and could result in financial penalties for the client, as well as increasing the transaction time and tarnishing relationships.
It is common when discussing risk in a business setting to accept that a risk has the upside of the reward opportunities associated with it (for example when looking to acquire a new business). However, when considering risk in business aviation transactions we always work to minimise risk: the priority is to safeguard the client and their aircraft against financial, tax or legal penalties.
Your 5 key steps to help you control and manage risk throughout your business aircraft transaction:
1. Know your mission
Start with the mission. Take the time to carefully identify what your client’s requirements and expectations are in respect of the aircraft they wish to purchase. It will be important to understand what the client would like to do with the aircraft (their mission), for example if the client will primarily be using the aircraft for short range journeys then a ultra-long range business aircraft would likely be unsuitable from a practical basis. This information can then be used to source an aircraft which is well suited to the client’s mission. Of course, if the client has their heart, not their head, set on a particular aircraft then differences may arise where aircraft and mission are not aligned. See below for our advice on setting expectations.
Mission cost. The cost of an aircraft is not just a one off; the ongoing commitment costs (maintenance, hangarage, operations for example) can be a considerable annual outlay. These costs need to be considered in advance to reduce the risk of the aircraft not being a viable long term asset
2. Choose the right team
Having the correct leadership to coordinate a transaction is essential to de-risking. Buying a business aircraft is a complex process with unique attributes which require the expert advice of specialists who understand the context of a business aircraft transaction and have experience in dealing with them.
Appointing an experienced and appropriate leader (usually an aircraft transaction lawyer) to manage the transaction will save time and money. The transaction leader will build a team of specialists, including relevant legal counsel, tax advisor, financier (if applicable), insurer, and perhaps a corporate service provider (if a holding company is required) to give advice at the appropriate times throughout the transaction. A good leader will carefully select a team who will compliment each other and ensure the advice provided by each advisor fits together in the transaction map. The leader will have the overview of the transaction and if one piece of advice is conflicting of another will be able to review the situation and find alternate solutions to minimise risk.
3. Allow enough time for the transaction to be done properly
While there are circumstances in which adding people and money to a transaction can reduce timescales, this is not true when it comes to processes such as aircraft licence applications, registration and other governmental processes. Therefore it is important to understand and recognise points throughout a transaction which require set periods of time (or jobs to be completed in the right order). For example, while an aircraft delivery date coming forward may present an opportunity, if there is insufficient time to have the ownership and registration correctly arranged then problems will arise. Planning an appropriate transaction timeline (and understanding how long each element will take) will allow for a smoother transaction; then, if the unexpected happens, time will be available to positively react to the event.
4. Manage expectations
Every clients is unique and every aircraft transaction is unique. There is no one size fits all.
It is important to manage client expectations and ensure they understand what can reasonably be expected from their transaction: what can be achieved, the process and timescales. Failure to give an accurate picture of the transaction increase the risk of a disappointed client. For example a popular myth is that the initial and ongoing costs of an aircraft can be offset by making it available to charter; the client should be made aware that this is virtually never true.
Similarly, it is important the client understands the true expense of buying and owning aircraft. Aircraft are expensive assets that depreciate in value and come with high running costs. It is almost never true that buying an aircraft is an investment in an appreciating asset (of course the time and efficiency saving should not be underestimated). Managing the client’s expectations with reality is strongly advised: if the anticipated aircraft usage is less than 100 hours a year, there may be a strong argument that charter is preferable to ownership.
Outline potential risks. Even with the best management in place, external factors can still impact a transaction, for example if the aircraft can’t be delivered on time due to a technical error or adverse weather conditions. A good team will be able to outline certain scenarios and decide on a plan B, but the client needs to be aware of such possibilities and have realistic expectations from the outset.
5. Plan with environmental change in mind
Heraclitus said “The only constant is change”. While this is true, most transaction managers would prefer the predictable.
Mission, team, time, and expectations can, for the most part, be controlled internally by the client and their team of specialists. The environment however, whether it be political, social, or economic, carries heavy circumstantial risk which is unfortunately only possible to manage at the time, rather than control in advance.
Transactions can be impacted (or complete derailed) by changes in the environment; by keeping an eye on external events it may be possible to anticipate these to some extent. Surprises cannot be handled in advance when buying an aircraft, but the team should be looking to minimise environmental risks by assessing the current global situation and predicting possible obstacles further down the line. For example, in 2018 it was known that the UK would leave the European Union and the possible impact that political change could have aircraft operations, tax and customs in either the UK or EU. As a result many transaction leaders sought advice as to possible challenges aircraft owners would face on the lead up to and after Brexit.
Good transaction leaders will consider the environmental future by asking:
- Will this aircraft and its proposed operation still be appropriate and meet the mission expectations in a year’s time?
- If changes are made to rules and regulations, does the transaction structure have sufficient flexibility to adapt?
- If something changes dramatically, what is the exit plan for the client and what will their exposure be?
The notion of being clear about mission, managing expectations and having the right team come into their own when considering environmental risk and how to handle surprises (even if some are not as surprising as others!).
Too good to be true?
When an aircraft deal sounds too good to be true it usually is. Similar to purchasing a car being sold way below its market price – it would be logical to question its service history and reliability – the same scepticism should be applied to aircraft. If an aircraft is being sold significantly below market value there will undoubtedly be a reason why. Understanding the reason for this rather than looking at the deal on face value is important to understand any significant risk the client may be exposing themselves to.
- Spend time early on in a transaction to spot risk areas
- Identify what the client’s mission is
- Get a team together that have experience and compliment each other
- Understand what the time scales are and which one are flexible
- Set reasonable client expectations
- Know the present environment and try to pre-empt what will likely come later down the line
- Be realistic – if a deal sounds too good to be true, it probably is
The information included in this article is considered true and correct at the date of publication; changes to rules and regulation made after the time of publication may impact on the accuracy of the information referenced or inferred to in this article. The information in the article may change without notice and Martyn Fiddler Aviation is in no way liable for the accuracy of any information printed or stored or in any way interpreted and used by the user. This article or the information contained in it is not provided or intended to be used as advice of any form.
If you have any doubts or would like to discuss any aspect of this article, please do not hesitate to contact one of our experts who will be happy to discuss your individual circumstance.