Finance and objectives

Barclays Corporate Jet & Superyachts has committed to over $1 billion of lending including the financing of more than 40 aircraft, according to director Paul Fowkes. Buyers, he points out, need to decide between outright ownership, chartering and fractional options by correctly evaluating personal and business needs - asking the question: "Is it just a lifestyle?"

There is a basic formula involving utilisation - up to 100 hours, charter; 100 to 200 hours, consider fractional ownership; 200-plus hours, look at ownership. Buyers also have to consider destinations, operating costs, time savings including the non-usage of first or business class commercial flights, flexibility of planning, assets value and re-marketing. Fowkes says: "They have to ask themselves questions like who will operate the jet, what are the safety and privacy issues, is there good direct access to regional and local airports, and if there are any relevant tax issues."

If finance is required ensure that a specialist aviation finance provider is qualified to recommend the correct structuring of any loan and highlight potential pitfalls.

Buyers also have to know, or track down, the right reputable jet broker, manufacturer or fractional ownership company. An adviser and a lawyer may be needed to check sale and purchase agreements, warranties, title, maintenance records, damage notification history, history of ownership and root of title, any liens that exist on the jet. Due diligence may include a pre-buy inspection and ascertaining who covers the costs of discrepancies or repairs. There are also the issues of insurances, de-registration and registration, valuation and appraisal and future valuation and commissions to brokers.

Dr Daniel Luetolf, managing partner of Swiss Aviation Consultants (SAC), points out that business aircraft finance has followed different patterns compared to commercial airliner finance. "Unlike in the US, strictly asset-based financing has had a scarce availability in Europe."

European lenders not only secure the asset itself but keep a watchful eye on debtors or lessees. "This strategy, together with more conservative loan-to-value ratios, is paying off now," he says. "Fewer repossessions have taken place in Europe compared to the US. However European aircraft financiers are drawing their conclusions from financings that have turned sour during the latest market turmoil."

The European market, he points out, includes not only aircraft registered in European countries but those registered off-shore and others predominantly used by customers originating in the CIS. Luetolf adds: "Typically business aircraft financing takes the format of finance lease structures and to a lesser extent the form of aircraft loans secured by mortgages. There are many instances of more sophisticated structures with lessees or debtors and so-called dedicated legal entities such as Special Purpose Vehicles (SPVs) where shares are pledged by the beneficial owners to the financing institute."

Most business aircraft in Europe, Luetolf says, have been acquired to support the transport needs of individuals, families or enterprises rather than for the purpose of the aircraft earning money. "European regulations have fostered the use of public transport structures exempting aircraft and operations cost from VAT - as long as the operator predominantly flies internationally. This trend will probably continue as regulations issued by EASA and many of the Overseas Territories implement more stringent rules for the operation of complex turbine-powered aircraft resembling those of EU Ops."

Luetolf says the result tends to be triangular structures between the financing institute, the 'beneficial aircraft owner' and the aircraft operator and AOC holder. "Many aircraft lawyers have tried to anticipate in legal language any possible scenario of wrongdoing and the consequence has been financing contracts of dozens of pages."

Some finance institutes have hired aircraft asset managers to help safeguard the technical and documentary status of the aircraft in their portfolios. Others have relied on asset values staying ahead of technical shortfalls.

Luetolf says: "European banks have corrected asset values on their books and in a few cases have cancelled financing agreements and seized financed assets but this really has been the exception rather than the rule."

SAC believes the legal structures and contracts have tended to work under the stress test of repossessions during the last 12 months. "However, the cost of recovering the aircraft has been entirely underestimated and one unexpected but costly problem surfaced. Whereas under lease structures it is relatively easy to get a hold of the physical assets, the financiers were surprised by the operator resistance to handing over the aircraft's documents. They found that by simply taking the documents as a hostage they can delay the re-marketing and re-registration process. As a result of this 'hassle factor' banks were inclined to agree to contribute to the unpaid operation invoices pertaining to their aircraft. This is a factor which was not anticipated in the contracts nor in the cost reflected in the borrowing margins."

An aircraft asset manager was recently quoted as estimating the cost of repossession to approximately US$1 million per case.

SAC Swiss Aviation, an independent aviation advisory company headquartered in Switzerland with representation in Canada and the UAE, believes that lease transactions will continue to be the norm because of the relative ease of repossession and that borrowers will be more closely evaluated as pure asset-based aircraft financing disappears. Luetolf predicts: "The financing of business aircraft purely for charter will become more difficult and loan-to-value ratios will remain conservative. The value of an individual asset will be more closely assessed and monitored over the financing period. The asset itself and the entities managing it - both technically and operationally - will be more firmly monitored."

He adds: "The aircraft will remain entrusted to an operator but the managing of the documents or their archive will be separated from the operator. In Europe and in the Overseas Territory this trend is facilitated by isolating maintenance control from operation by the appointment of an independent CAMO."

Luetolf also predicts financing will become more expensive as financing companies insist on higher margins. He adds: "The amortisations built into the leases will remain given the lower pricing level of the assets upfront. Public transport category operation will gradually replace private aircraft management."

Business aircraft financing will remain feasible given the current reasonable values of the assets in the market. "However, the financing institutes will be even more careful with whom they work and whom they entrust the management of the aircraft."

Purchase guidelines

Rex Reese, an attorney based in McLean, Virginia, says currency advantages and bloated pre-owned jet market inventories mean Europeans and Middle East nationals will continue to look to the US for buying opportunities. "They will require comprehensive and integrated service to initiate, prosecute and conclude the acquisition, financing and export of their aircraft.

"For instance, we represented a major international financial concern which handled the acquisition and export of a Gulfstream V aircraft.

"This included the negotiation and documentation of the letter of intent and the aircraft purchase agreement; overseeing, through an affiliate, the technical inspection; establishing an ownership trust for temporary US registration; applying for a US certificate of airworthiness and for foreign registration number and import certificate of airworthiness; conducting state sales, tax research and developing and implementing tax avoidance strategy and closing the acquisition including FAA and international registry filings."

The firm, he says, has handled more than 1,000 corporate aircraft transactions over two decades. Designated airworthiness repre-sentative Douglas Lowry suggests that five basic checks are among the most important and warns that many aircraft sales go sour due to potential buyers not doing their homework. His checklist includes:

• 1. Examining the serial number prior to buying to ensure that it will be legal for the aircraft to return to the US and to go to other countries (sometimes aircraft are manufactured according to specifications that don't meet US or other type certificate, data sheet/type design).
• 2. Insisting on good record accounting with all primary information in English and that all modifications have the necessary US FAA approved data or EASA approved data.
• 3. Ensuring that all repairs are FAA approved or country/factory of manufacture approved with DER/engineering sign-off.
• 4. Being well represented during the whole process to save money in the long run and ensure they get what they are paying for.
• 5. Making full engine and APU checks.

Aoife O'Sullivan, a partner with the City of London-based international law firm Gates and Partners points out that buyers will need an aircraft and an ownership structure that satisfies the majority of their regular travel needs, keeps time and costs efficiencies intact, and has been bought at a price that makes the aviation taxes and costs effectively balance out the cash outlay.

She says: "Choosing the right broker is an essential part of the acquisition process. Many countries do not regulate such brokers (arguably you are better protected buying low cost housing from an estate agent) and there is a dearth of so-called experts in the field. Choose a professional broker with experience in the acquisition and sale of aircraft from procurement to delivery. It is worth settling the high level terms of the acquisition with the broker from the outset to avoid expensive legal wrangling when it comes to documentation stage."

Buyers should insist on warranties from the manufacturer which may be assigned to future purchasers of the aircraft.

O'Sullivan warns: "The manufacturer will seek to provide for a unilateral change to the delivery schedule in the event of any manufacturing delay. A buyer will usually try to limit the scope of this prerogative and in some cases may be able to negotiate discounts for heavy delays, where the delay extends well beyond the estimated delivery date."

She points out that the purchase of an aircraft is not complete without an aircraft bill of sale. "The seller should be asked to produce evidence of title by way of a chain of bills of sale, in many cases back to birth. Searches should be carried out on the aircraft at the registry where the aircraft is currently registered. If the registry has a mortgage registry attached, searches should be carried out to ascertain whether or not a charge attaches to the aircraft. Not all registries have mortgage registries and in many cases the buyer will have to rely on the seller's assurances as to whether or not any charges or encumbrances exist on the title."

O'Sullivan adds: "As a buyer, it is important to insist that any deposit paid and subsequently the balance of the purchase price, is held in a secure account. It is important for the buyer to agree the process by which it will be entitled to formally inspect the aircraft.

"The seller will want some degree of commitment from the buyer before it agrees to its aircraft being subjected to a full examination. The place and location of delivery under the contract is very important, not least because in many jurisdictions, the place of delivery will trigger the payment of taxes."

JetBrokers European md Tim Barber warns: "All too often we see people reselling an aircraft shortly after purchase because it simply doesn't do what they thought it would or they haven't understood what the real cost of ownership is."

He adds: "With so many aircraft on the market, knowing their true origin is essential for a smooth transaction and for achieving funding. Always make sure the aircraft is owned by the person you think it is, and that they have the authority to sell it."

There is also inherent value in going through a pre-purchase inspection. "The inspection should consist of a written agreement with an inspection protocol, detailed log audit, historical records and include any specific queries the buyer has. If there have been alterations, it is essential to check for compliance as inappropriate work could affect airworthiness."

Ivan Klugman of Integral Aviation Solutions Inc (IAS) says the process of buying an aircraft is too complex for an amateur to contemplate. "I am an aviation consultant with 30 years of experience in the industry and I can tell you that it requires at least three consultants to do the job. If I am the primary consultant during the process I will bring into the loop an aviation attorney and an aviation accountant.

"I have experienced individuals that I match with the needs of my clients in regard to the legal and accounting aspects of the transaction. I handle the negotiations with the seller whether that is a manufacturer of a new aircraft or the owner of a pre-owned aircraft. I also arrange and oversee the pre-purchase of pre-owned aircraft or the acceptance process and completion oversight of a new aircraft. Like a conductor of an orchestra I see to it that we are all reading the same sheet of music and playing our parts at the right time."

Buyers can only purchase a new aircraft with confidence if they have, or hire, the widespread expertise that is necessary.

Questions to ask yourself and the experts

• 1. What exactly is required from the aircraft in terms of where, how far and how often it will be needed? Choose the aircraft that is right for you. Do not just take the recommendation of a friend, whose reasons and requirements for owning a jet may differ greatly from your needs. In particular, and perhaps surprisingly, be wary of advice from pilots, who can be emotionally attached to certain aircraft types. Remember that just because an aircraft is fun to fly, or has an impressive cockpit, it may not necessarily be right for you as a passenger.
• 2. How do you find a reputable jet broker, manufacturer or fractional ownership company? Talk to an operator who understands about a large range of aircraft. There are a dizzying number of executive jet models and variants, so dealing with someone who knows the market is very important. The wrong aircraft could be a costly mistake.
• 3. Does the best purchasing route involve brokers, aircraft manufacturers, or should it be via fractional ownership? Talk to that operator again to establish what is right for you. Having chosen the type of aircraft, establish whether you should be looking to buy from a broker or manufacturer.
• 4. Is now a good time to buy? Buy now! From a buyer's perspective, it is undoubtedly still a good time to acquire new and used aircraft. New owners are therefore entering the market at the moment.
• 5. Where do you find jets for sale? Exploit the address book of your friendly neighbourhood operator. There is no need to establish 'cold' relationships and feel out of your depth; operators will already have good relationships with brokers and manufacturers. By extension, an operator will help you secure the best possible discount on a new aircraft purchase, as well as dependable field support later on. (The US market, which has large percentage of jet owners/operators is a major source. Websites such as Av Buyer, and Better Business Bureau could provide useful background.)
• 6. Which comparisons are useful? Track down a number of quotations for your funding. A number of banks have specialist aviation departments.
• 7. How can companies or individuals that falsely claim to have a jet for sale be weeded out? Don't put the legal aspects of buying or registering an aircraft into the hands of your local lawyer; this is specialist work. Investigate until you find the right expert support.
• 8. What is the best way to obtain all the paperwork such as ownership details, maintenance, insurance and inspections. Consider the history of the aircraft when surveying a potential purchase. For example, if you know the aircraft has been based near a coast, your pre-purchase engineering check should definitely include looking for corrosion caused by a salt-laden atmosphere. Learn to love the checklist! The importance of planning cannot be over-emphasised. There are literally dozens of documents needed simply to fulfill the most basic requirements of buying and delivering a business jet, ranging from the certificate of acceptance and transfer of title and risks, through to the delivery receipt and the shipper's export declaration.
• 9. How can maintenance and repairs be costed and organised? Investigate warranties and support programs. Then find ways to offset the cost of owning a business jet. Charter income, for example, offsets operating overheads and covers finance costs. Then you can enjoy some cheap flying for yourself! Owners today realise that an aircraft, like any other asset, needs to work to earn its keep.

Answers provided by London Executive Aviation