Peter Agur Jr. is Chairman and Founder of VanAllen - a business aviation consultancy firm with... Read More
Boardroom 2 Establishing a Game Plan Aug 14 Main Image
Players in the business aircraft acquisition game
If you play the Business Aircraft Acquisition game well, you can be a winner. But the stakes are high and the game is complex, cautions Pete Agur.
Whether acquiring your first aircraft, its replacement, or an add-on, the objective is the same: Place the best aircraft for your needs into safe and effective service while saving every nickel in making that happen.
The stakes of the game are both intangible and tangible. On the intangible side, if the political or economic environment is not good, your reputation or the brand of your company may be damaged. For instance, during the recent recession several financial services companies received strong negative publicity for having new aircraft on order, even though the deals were struck in better times and the aircraft’s use was clearly justifiable.
The tangible stakes are equally important. A winning result is not getting the lowest price. There are many more facets than the bottom line in creating a gem of a deal. The point is we often see companies leave hundreds of thousands, if not millions of dollars, on the table when they focus on getting the lowest price.
Winning the game starts with proper preparation. For instance, do you evaluate your current aircraft’s major maintenance events several years into the future? If so, you can take advantage of the market’s insensitivity to the cost of those major maintenance events when they are still a year or two out. If a major event is in the immediate future, you can plan on the cost of that event impacting the market value of your current aircraft dollar-for-dollar. That adds up. A major inspection can run $500,000-$1,500,000. If it involves engine overhauls the lost value can double.
Whether you are buying a pre-owned light jet or new intercontinental time machine, there are a number of rules to establish and follow. Those rules should be designed to keep the process from unravelling.
For instance, what ethical standards do you intend to follow? A multi-million dollar acquisition tempts scoundrels both in-house and out. I recently contacted the advertiser of an aircraft that was a perfect fit for one of our clients. The “seller’s” lack of knowledge of the owner’s terms and conditions quickly revealed that he was marketing an aircraft he did not control. His efforts were not illegal, but they would have added unnecessary costs to the transaction. A less obvious example of the grey side of ethics happened with a company that possessed a squeaky clean brand. Their Director of Aviation, the aircraft acquisition project leader, accepted fully paid-vacations from the broker of his pre-owned aircraft. These trips were not fully disclosed or approved. If that kind of behavior became public it would tarnish the company and the aircraft.
Another rule to live by: Never, never, never buy an aircraft, new or pre-owned, without conducting a comprehensive inspection. We know of a deal made between friends that cost the new owner over $2 million when major corrosion in the wings was discovered during the first major inspection. It was an expensive end to the friendship.
Field The ‘A Team’
Assigning the aircraft acquisition project to one person is a sure way to be outplayed. It takes a blended team of subject-matter experts to win. And winning is important because purchasing a business aircraft is one of the largest investments you make in a noncore business arena.
Appointing the project manager is critical. Consider appointing the executive to whom the leader of aviation services reports. Anyone else may not have the big picture perspective needed to understand how all the game’s pieces come together. The team should include:
• Corporate Executive: Preferably the executive to whom aviation services reports;
• Aviation Services Business Unit Leader: Technical expert;
• Aircraft Acquisition Expert: Your unbiased advocate in this complex and dynamic market;
• Legal: Include aircraft acquisitions counsel to vastly streamline the contracting process;
• Corporate Purchasing: To support, not drive the process;
• Corporate Finance: Financing decisions should be separate from the aircraft selection and be structured to maintain flexibility for early exits in case your needs change unexpectedly.
Do not play the game to achieve the lowest score (price)—this exercise is not golf. Play for the best value. Your net economic result can be substantially less expensive than a deal with the lowest purchase price. An aircraft purchase is a blended market basket of goods and services that are individually negotiable.
We find playing collaboratively with the seller often nets a better deal. A take-no-prisoners approach tends to create barriers to effective negotiations. Manufacturers shudder when a wheeler-dealer comes through the door. Some even hold additional economic reserves to support excessively demanding customers. On the pre-owned side, a gentleman’s approach can reap rewards, too. We were awed when one seller paid for all faults during the pre-purchase inspection, including cosmetic items, because he wanted the new owner to love the aircraft as much as he did. That would not have happened if we had been aggressive.
The End Game
The process is complete when the aircraft and crew are ready for passenger trips. That is not the day after delivery. The first 20-25 hours in a new aircraft’s life can be fraught with failures. As thorough as pre-delivery acceptance flights and inspections may be, the first flight hours allow the technology to act up, wiring plugs that are not fully seated to back out, and seeps and leaks to develop. You do not want to experience these kinds of anomalies on company trips. It can tarnish the faith in the new aircraft as well as the decision to acquire it.
Even more important, if the aircraft is new to your flight and maintenance crews, they need time to become accustomed to its real world behaviors, quirks, and cockpit and cabin layouts. The data are very clear: the accident rate for crewmembers during their first hundred hours in a new aircraft is dramatically elevated. Give your crews the time they need to get settled without the pressure to conduct passenger trips before they are ready. An option to accelerate putting the aircraft into service is to rent a mentor pilot to fly with them while they get fully acquainted with their new flying machine.
The preceding points only touch the edges of the very complex Aircraft Acquisition Game. But, a great team can use well-thought out rules and a well-played game-plan to create a winning result.