This article was written for our China audience, however, some of the guidance is relevant to any buyer and we hope the reader finds the comments informative and constructive….
HOW TO BUY A PRIVATE JET…. (in other words, how 99.99% of the world conducts private jet transactions)
The Familiar Approach to Jet Acquisitions
China aircraft buyers are generally only familiar with the OEM (Gulfstream, Bombardier, Falconjet) buying experience. This typically consists of contacting an OEM recommended by a friend, choosing an aircraft, selecting options for any given aircraft model, agreeing the price with the OEM and confirming a delivery date before signing the OEM contract.
The OEM ‘buying experience’ in China is therefore fairly straightforward (if somewhat more expensive than in other parts of the world). Neither Gulfstream nor Bombardier nor Falconjet are known for their ‘charity’.
Similarly, the OEM buying experience is not particularly time-sensitive. Buyers can conduct an aircraft acquisition at their leisure ….and the OEM’s are patient sellers. Therefore the OEM aircraft sale is very much a ‘pre-packaged’ approach.
The Alternative Approach
When dealing in the pre-owned aircraft marketplace (no matter what the vintage of the desired aircraft), there are significant advantages in terms of cost and access to aircraft (generally, these aircraft are cheaper and there is no delivery delay). Cosmetic changes to the aircraft interior/exterior can be accomplished prior to delivery (but only after the aircraft sale is completed). Reduced cost is by far the biggest advantage of pre-owned acquisitions. Buyers can benefit from significant discounts between (say) a 2011 model when compared to a 2013 model, especially if the sale of an aircraft is the result of a sellers’ distressed circumstances,(more on this subject in future articles).
However, because no two owners, nor their respective aircraft, are particularly alike, it follows that no two pre-owned aircraft sale transactions are identical. Variations in ownership and the particular aircraft under ownership can make for some interesting, but by no means insurmountable, situations during the pre-owned aircraft acquisition process. These situations will arise regardless of how ‘new’ the aircraft under consideration.
Primary reasons for the variables in universal aircraft acquisition transactions are;
- Intrinsic technical and cosmetic aspects of each aircraft
- Buyer/Seller aircraft transaction expectations
- Prevailing Market Conditions
- Global location issues
- Cultural differences
Aviatrade Asia has been conducting globally-oriented aircraft acquisitions of all aircraft types/vintages since 1988 and we can offer guidance with regard to a proven process that can be followed for almost any aircraft acquisition.
In fact, prior to initiating any acquisition, Aviatrade Asia supplies the buyer (client) with a comprehensive flow chart outlining the various steps and anticipated time required to complete these steps. It is very important that the buyer’s expectations are managed on a realistic basis and that the process to accomplish all steps is completely understood by both seller and buyer.
This “how to buy” article precludes any discussion of finance and ownership structure and assumes that a particular aircraft make and model has been identified. The narrow scope of the article also precludes any detailed discussion of the logistics involved.
The elements of a successful acquisition can be roughly summarized as follows;
- Shortlist of suitable aircraft
- Comparative analysis of the aircraft
- Preliminary physical inspection
- Selection of acquisition aircraft.
- Submission of LOI (Letter of Intent to purchase)
- Negotiation/Acceptance of LOI.
- Negotiation and signing of Purchase Agreement (PA)
- Prepurchase inspection
- Management company selection
(….preparations and negotiations for the last two items will begin almost simultaneously with the start of the acquisition)
The Shortlist Preparation
Having identified a particular aircraft make and model, the buyer will require the services of numerous experts from the outset of the investigative process. This expertise is coordinated by the buyer’s advisor and for the sole benefit of the buyer, (much like the role of an orchestra conductor during a symphony performance).
Provided that sufficient aircraft are available for consideration, an advisor (consultant) will recommend a shortlist of perhaps three aircraft for consideration. These aircraft are compared side-by-side for all aspects of their technical points, ownership history (there is usually only one owner for late-model aircraft), maintenance history, cosmetics and interior options such as entertainment and communications systems. This summary is discussed with the buyer (client) and the aircraft are rated in order of preference.
Comparative Analysis of the Shortlist
Obviously, it would be ideal to make the selection directly from the shortlist and proceed to the acquisition. However, geographical location of the short-listed aircraft will influence this analysis and selection due to various factors, not least of which will be the buyer’s willingness to travel significant distances to view an aircraft. Of course, we would anticipate that the buyer would eventually travel to view the selected acquisition aircraft. There is an alternate procedure that can be negotiated between seller and buyer involving prepayment of a flight to the buyer’s location.
Preliminary Physical Inspection
Instead of the buyer traveling to see the short-listed aircraft, appropriate due diligence for each aircraft on the buyer’s shortlist can be accomplished by an experienced inspector together with the buyer’s advisor. This is an important step in the process, regardless of how many aircraft are under consideration. Although digital records and internet access can offer a preliminary indication of aircraft condition and acceptability, the initial physical inspection and onsite records review will provide a much clearer picture of the suitability of each aircraft on the shortlist. Much like buying an expensive home, there is no substitute for the ‘up-close and personal’ investigation.
This preliminary assessment is intended to be somewhat ‘forensic’ in nature and will usually reveal potential reasons for aircraft rejection… such as undisclosed damage or adverse systems trend-monitoring (these issues can be evident even in ‘almost new’ aircraft). It is better to discover these problems ‘early’, as opposed to further along in the acquisition process.
Submission of Letter of Intent
Per the initial sub-title to this article; 99.99% of jets are bought and sold outside of China. Therefore it is extremely important that China buyers retain an experienced international aviation attorney. This aviation attorney can explain all aspects of the acquisition process (from a legal perspective) to the buyer’s attorney. The aviation attorney will guide the buyer through the various aircraft-related legal documents such as LOI, escrow, title/lien search, Purchase Agreement, ownership structure, closing documents, etc. Our US aviation attorney has worked for such Aviatrade Asia clients in China as Phoenix Satellite Television.
The first of these documents is the LOI. This document is submitted to the seller after consultation with the advisor and a review of the preliminary physical inspection. This is an important document because it outlines the fundamental terms of the transaction from the buyer’s perspective. These terms will include such items as purchase price, deposit conditions, timeline for acquisition, etc., (more on this aspect a little further on).
Incidentally, Aviatrade Asia has interacted with a number of law firms in Hong Kong and China who claimed to have had experience with private jet transactions. Unfortunately, it appears that these law firms have only engaged with OEM-standard contracts and commercial aircraft leasing transactions….such aircraft contracting experience, whilst similar in nature, is not really appropriate for the complexity of private aircraft transactions outside of the OEM environment.
Purchase Agreement (PA)
When the buyer and advisor are satisfied with the signed LOI and the particulars of the aircraft under consideration, the buyer/seller engage (via their respective legal counsel) in a negotiation of a comprehensive Purchase Agreement. The initial draft of this document should be prepared by the buyer’s counsel….a buyer should never accept a seller’s offer to provide a draft LOI or Purchase Agreement.
This PA will address many issues that will constitute a ‘road map’ for the entire journey through the acquisition process. Furthermore, the details of the PA will address all of the aviation-specific legal protocols that are probably quite unfamiliar to China buyers…..once again, please remember our ‘99.99%’ observation.
This comprehensive inspection of the selected aircraft is performed at an OEM factory-authorized facility. This inspection is paid for by the buyer (the prepurchase inspection final report is confidential to the buyer) and the report results are made available to the seller solely with respect to any rectification required. Any such rectification, as confirmed and required by the inspection facility, is the responsibility of the seller (this requirement is standard and is addressed in the PA).
There are a number of ‘tactical’ and ‘strategic’ components to this inspection…(much the same as in a game of majong). Aviatrade Asia can offer expert insight into these nuances that will ensure a distinct advantage for the buyer.
As previously mentioned, the export and import process will be initiated almost simultaneously with the signing of the PA. The main reason is that certain technical requirements must be matched to the proposed country of registration (note, this country will not necessarily be the same country designated as ‘home base’).
For most aircraft and especially ‘almost-new’ aircraft, this process is a formality that entails mostly documentation and verification of existing aircraft components and systems.
It should also be noted that the export and import are usually paid for by respective seller and buyer. This, of course, can be negotiated during the LOI and/or PA negotiations…(hence the importance of the preliminary evaluation information that is provided by the inspector and advisor prior to the actual PA signing).
The timing of the export/import process is especially important to buyers who intend to immediately import their aircraft onto CAAC (B) registration. Aviatrade Asia can provide a turnkey solution to buyers who will undoubtedly face import delays for the foreseeable future. Many China buyers are now opting for ‘offshore’ registration, at least in the near term. However, this offshore approach brings its own operating restrictions and must be carefully evaluated.
Management Company Selection
Once again, the initial evaluation of this component of the overall acquisition process will begin at about the same time as the acquisition itself.
The options in China for aircraft management are somewhat limited at present and based upon Aviatrade Asia’s thirty years of operating experience outside of China, ‘bigger is not always better’. Nevertheless, the limited availability of certified management companies in China still leaves room for competitive bidding. The good news is that numerous AOC’s are in the CAAC pipeline (this subject is beyond the scope of this article). If an ‘offshore registry’ is considered, then the management options are much broader.
It is extremely important that China buyers appreciate that our ‘99.99%’ observation governs all aspects of acquisition. With this in mind, there are certain expectations on the part of any seller. These expectations include the anticipated ‘cadence’ of a transaction.
For example, Aviatrade Asia recently lost two good opportunities to acquire late-model Falcon 7X’s for a China buyer, simply because our client observed the Chinese New Year holiday to its fullest and was unpleasantly surprised, upon re-contacting us, to learn that both 7X’s had been put under LOI between the 8th and 18th of February. Apparently, both sellers did not want to risk losing a deal whilst waiting for a promised visit from a China buyer.
Similarly, sellers will have expectations regarding timeframe of a deal after the LOI is signed. All of these timing goals/progress deadlines are spelled out in the LOI and PA. However, we have had experience with China buyers who, despite having signed (and therefore assumedly understood) a PA, have subsequently ignored required timing conditions. This situation does not by itself jeopardize an acquisition, nevertheless, it does not contribute to a harmonious relationship and can cause unnecessary complications in the acquisition process.
With the above in mind, we advise buyers that the usual/expected timeframe to complete an acquisition, from the point at which an LOI is signed, is around eight weeks. This timeline can easily be distorted/extended as a result of international timezones and global religious/ cultural observances. None of these interruptions need derail an acquisition provided that the parties understand that the key to all of these timing issues is ‘communication and coordination’ between the parties.
As this article stated in the title; 99.99% of private jet transactions currently occur outside of China. It therefore follows that 99.99% of the expertise required to successfully complete an aircraft acquisition also resides outside of China. There is no substitute for experience and a seasoned international advisor will provide the necessary guidance and advice that will ensure a seamless and successful acquisition process…..100% of the time !