Bill Horton was a cautious man of the road
He walked lookin’ over his shoulder and remained faithful to its code
When something caught his eye, he’d measure his need
And then very carefully he’d proceed
“Cautious Man,” Bruce Springsteen
After two years in which COVID-19 had its way with the aviation industry and after at least seven months of barely controlled chaos in business aircraft sales, things appear to be changing. In part, change is being driven by necessity as the lack of available inventory has caused a slowdown in sales for many. In other ways, both those in the middle of the chaos and those on the sidelines have perhaps started watching more closely, considering their next steps rather than just reacting. Aircraft owners started to evaluate whether they really need the lift they had available and whether it was a good time to sell, opting for charter or sharing usage with a friend for a time. Some aircraft buyers have also taken a step back, not being quite so willing to commit to an unknown aircraft at a dramatically increased price just because it was still available.
That said, inventory is still very scarce, and prices are still holding up at unprecedented levels, if not still increasing. How can a buyer be both more cautious and still be prepared to jump into the market to buy when the right deal comes along? Here are five things to consider so that you can be better prepared to seize that offer you just can’t refuse – and to know when it really is a good deal for you.
1.) Have you assembled the team that you need?
Buying an aircraft and putting it into service can be an extremely complex exercise. Whether you are buying for the first time or just buying for the first time in a long time, you need a team of advisors that can readily help you evaluate your choices. For business owners, that team should include at a minimum:
- Financial advisers that understand your business and can help you critically assess how to use an aircraft cost-effectively. It is always good to have someone that will ask the hard questions.
- Accountants and lawyers who understand the use of aircraft. Understanding how to use aircraft in compliance with FAA and IRS rules are key when you share the use of an aircraft and money changes hands. And state, federal, and international tax consequences of aircraft usage can be considerable unless you plan ahead.
- A knowledgeable aircraft broker and/or technical advisors. Together, these advisors can help you decide what kind of aircraft you need, how to evaluate it, and how you will operate it once you have it. A good broker also has contacts off the published path when it comes to finding available deals.
- Insurance and customs brokers. You will need insurance in place from the first moment you purchase an aircraft, and aviation insurance is a specialty that most insurance agents cannot tap. If you are a U.S. buyer bringing an aircraft in internationally, you have multiple hoops to jump through.
2.) How much aircraft do you need?
You have decided you need an aircraft in your business, but what exactly do you need it for? Are you flying to plants and locations around the Midwest that are poorly served by commercial airlines or are you on one coast and regularly have meetings across the continent? And how many hours do you expect to be flying a year, or a month?
An aircraft broker or technical advisor can help you assess the types of aircraft that will best serve your needs and rule out those aircraft that are simply more – in cost, in power, in range – than what you need. And they can assess those that are not adequate for your needs as well. Aside from range and power, are certain aircraft simply too unique for you to adequately support it in your area? Or might there be issues with the insurability or importing of certain aircraft?
Making some of these decisions upfront will give you the ability to focus on certain aircraft types and not be distracted by others that will not serve you well. In today’s market, the ability to focus on what you really need puts you at a significant advantage.
3.) Can you afford to own the aircraft you just decided you could afford to buy?
Aside from what aircraft might fit your needs, you should also assess what the reality of owning such an aircraft will mean for you. Where will you base and hangar it? Do you expect to employ your own crew or contract for services with a local aircraft management company? Do you have a sense of whether there are any major upcoming maintenance events or airworthiness directives that will need compliance?
It comes as a shock to many first-time buyers just how much it costs to own an aircraft, actual flight costs aside. Depending on the aircraft involved, these costs could easily be tens of thousands of dollars a month. As you consider these decisions, you can start to determine aircraft ownership is actually viable for your business or if you should consider alternative approaches to finding your transportation.
4.) Aircraft sales are generally ‘As-Is, Where-Is.” How do you know what problems you may be inheriting?
In any aircraft purchase, FMJ typically spends more time focusing on negotiating appropriate inspection rights and logistics. The scope and handling of the inspection are absolutely key in assuring that you are actually buying an aircraft of the quality you expect.
In the post-COVID-19 world, there is actually another major complication that you need to consider as well. Once you sign a letter of intent or purchase agreement for an aircraft, the pressure is on to inspect and close. The problem is that maintenance facilities are extremely busy today and available inspection slots are hard to come by. As you find and begin to negotiate the purchase of an aircraft, your technical advisors need to be in excellent communication with approved service centers for available slots. Gone are the days when you can negotiate this after signing your LOI.
5.) How much are you willing to bet?
There are those among us who might enjoy an occasional card game, casino visit, or a good long-shot speculation on the stock market. For those same folks who also want to make sure they do not lose their shirts, they likely want to gamble only as much as they reasonably think they can afford to lose.
In a time of wildly increasing aircraft prices, it is worth considering the same question when buying an aircraft. This market will only keep going up for so long and at some point, those values are going to drop, and you may be on the losing side. There may be plenty of reasons to overspend on an aircraft, especially if the need for its use is significant and worth the extra costs. If you are the buyer, however, you should consider whether you are willing to make that decision consciously or if you are simply moving too fast without considering the stakes.
So how does a cautious buyer hedge his losses?
Finding your way through most of the considerations above means starting with assembling your team and putting them to work in wending your way through the issues above. FMJ has been a solid advisor in the business aviation market for two decades and can help you build that team and work your way through the issues.
If you have any questions about buying aircraft or the business aviation market, please contact Kevin Johnson at kevin.johnson@fmjlaw.com. If you missed the first installment of this article series, click here to read After the Gold Rush: Aircraft Buyer’s Remorse and How to Manage It.
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