I dreamed I saw the silver spaceships flying
In the yellow haze of the sun
There were children crying and colors flying
All around the chosen ones.
“After the Gold Rush”, Neil Young
The business aviation market has never seen anything like the last eighteen months. While COVID-19 caused people to avoid flying in commercial jetliners, record numbers of businesses decided to invest in private aircraft for the first time or upgrade to larger, faster, and newer aircraft. Aircraft manufacturers could not produce new aircraft fast enough and inventory in the secondary market was snatched up until few aircraft were available by year-end. Buyers knocked on hangar doors to see if current owners would sell and many accepted rush deals in order to secure something.
Unfortunately, buyers sometimes quickly learn that the reality of aircraft ownership might be different than what they imagined. First-time buyers discover that the costs of owning an aircraft are more substantial than they could have ever expected. Others discover that the aircraft they purchased was perhaps not a good match for their actual transportation needs. If this occurs, what is a remorseful new owner to do? What options are available for them?
The available choices may depend on the reasons for buyer remorse. Below are a few considerations.
Sticker Shock Delayed
Some first-time buyers love the idea of having their own aircraft but quickly question their choices when they come face to face with the costs of ownership. “Buying a horse is the cheapest part of owning it,” says Jay Duckson, President of Central Business Jets. Costs of hangaring, insuring, and crewing an aircraft can mount quickly and can look like a waste, especially if they are not using the aircraft as frequently as they hoped. “People don’t realize that a medium-sized aircraft like a Citation XLS can cost you $50,000 a month, even if you have it parked.” The costs of fueling, operating, and maintaining the aircraft can also become overwhelming once the monthly invoices start flowing after the first flights. This can especially be true if the aircraft purchased was an older model which is less fuel-efficient or simply has higher maintenance costs than newer aircraft.
Fortunately, the demand for aircraft appears to remain strong as we move into 2022, and aircraft prices are still continuing to climb. The best choice for some shocked buyers may be to simply put the aircraft back on the market through a qualified broker. For those buyers who do not want to give up on the dream of aircraft ownership, other options might include finding one or more co-owners or co-users that can help share the costs of ownership. There are several good options that would allow shared usage, depending on the goals of each owner or user. However, any time there is shared aircraft usage and money is changing hands, it takes some careful planning to get it right without running into trouble with the FAA (some of which are described here).
I Just Picked the Wrong Aircraft
In the last eighteen months, aircraft were frequently bought in frantic bidding wars, such that some prospective buyers purchasing in a rush were maybe choosing an aircraft that was not appropriate for their use. It is always a good idea for buyers to work with a knowledgeable broker to help evaluate their transportation needs and determine whether an aircraft has the right operational profile for their company. A buyer that wants to fly to their locations around the Midwest should probably not invest in an aircraft designed to travel coast to coast and internationally.
So, if you have an aircraft that is not working for you, what choice do you have other than selling? One solution that has worked with FMJ clients is to look for another aircraft in their area with which they can swap usage with another owner. For example, if one owner has a short-range aircraft but has an occasional need for long-haul trips, that owner might wish to partner with an owner with a longer-range aircraft that sometimes has a need for cheaper, close-to-home travel. FMJ has assisted clients in implementing these types of FAA-approved methods such as time-sharing agreements, interchange arrangements, or cross-dry leasing to each other.
Worst Case – My Aircraft Is a Lemon
One of the biggest mistakes that buyers can make in a rush is to buy an aircraft without going through an adequate inspection process. The standard in the aircraft industry is that a buyer needs to inspect the aircraft to assure that it is in the condition expected prior to closing such that after closing the sale is “as-is, where-is” with no takebacks. What are your choices when you put your new aircraft in for post-closing maintenance and the mechanic tells you the aircraft is unable to fly?
To some extent, this depends on the reasons why the aircraft is grounded. In some circumstances, an aircraft is unairworthy because authorized repairs were not properly documented. In that case, with a part or two replaced and documented, the aircraft will be back flying relatively quickly. In other circumstances, the work needed could be structural and exceedingly expensive. A buyer in this situation needs to determine the scope of work needed and the possible costs, then assess accordingly. Was the buyer planning on keeping the aircraft for the long term such that a serious investment can be amortized over years? If so, then, perhaps it is worth the investment.
And what if the investment is so expensive, that it is not worth it? Or if the discovered problems are so invasive that the FAA would never allow the aircraft to fly again without a complete rebuild? What does that mean for the buyer? Besides selling the aircraft for scrap, what else might help?
One option is to look for recourse from the seller. While the industry standard is generally “as-is, where-is”, the possibility of recourse really depends on what your purchase agreement says. Did the seller make any representations or warranties that might give you recourse for misleading you? Did the seller disclaim any warranties in a way that would be legally effective? It would be rare to find recourse, but possible.
You could also consider the tax implications of your purchase and review whether it is possible to mitigate your losses through applicable tax deductions. If the aircraft was purchased for business use, certain losses or accelerated depreciation might be available under the right circumstances. It is worth examining to see if it can take away some of the sting.
Best-Case Scenario
Your best-case scenario as a buyer is to plan ahead and avoid these problems before they happen. And we will discuss that topic in our article next month. Stay tuned!
If you have any questions about buying aircraft or the business aviation market, please contact Kevin Johnson at kevin.johnson@fmjlaw.com.
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