Why Most Airplane Sales Never Make It to Closing
This is a post by guest author Robert F. Luke Jr., International Aircraft Consultant for Micro Jet Network, Inc. Robert was asked to contribute to this blog because of his expertise in aircraft brokerage. Any thoughts expressed below are entirely Robert’s and do not necessarily reflect the views of Universal Weather and Aviation, Inc.
As many fellow aircraft brokers can attest, this career can be a lucrative way to earn a living, but can also become frustrating at times. In attempt to sell an aircraft, many in the industry seek the shortest route to closing a sale and miss the opportunity to successfully complete the aircraft closing. Excited about the prospect of closing the deal, many, including myself, have at one point or another in their careers made serious mistakes that jeopardized a successful closing—such as releasing too much confidential information about client or not properly evaluating the interested buyer/seller or their representative. Missteps like these lead to wasting valuable time, energy, effort and in some cases a failure to close the deal.
Here are some steps that successful aircraft brokers take in order to help establish, secure, and complete a successful airplane sale:
1. Secure an exclusive or non-exclusive mandate agreement to represent the client
The first step in completing an airplane sale is to secure an agreement with the client you represent. Whether you represent the buyer or the seller, you want to have a signed agreement that clearly outlines your right to represent your client in the sales transaction. Aircraft sales are similar to the real estate industry in that many brokers look to secure exclusive agreements with their clients. Established airplane broker In a recent study, Jetcraft confirmed that 6% of Citation Excel aircraft manufactured from 1998-2004 are available for sale. Of the 6%, 86% of those aircraft are under exclusive broker agreements. Major airplane brokerage firms such as Viation have signed exclusive agreements directly with corporations like PrivatAir out of Switzerland to represent them in all of their airplane purchases and sales. This ensures that the brokerage firm will be able to legally represent its clients and be properly compensated for their efforts.
2. Sign an NCND with your client and all other parties involved in the sales transaction
Non-Circumvent Non-Disclosure Agreements (NCNDs) performs two main functions. It assures both the buyer and seller that any information regarding the asset data, pricing, and negotiations will be kept strictly confidential between all parties directly involved with the sale—and not shared with any external or unauthorized party. While not always appreciated, an NCND also ensures that representatives of the buyer and seller agree to honor their respective positions and not attempt to make any direct contact of any kind nor circumvent the intermediaries/brokers involved. Established aviation attorney Aaron Schildhaus, who has represented ‘PepsiCo Airlease Corp. and the former Northwest Airlines before the merger with Delta Airlines, endorses the use of NCNDs prior to engaging in contract sale negotiations.
3. Full transparency between the buyer and the seller
Critical areas where most deals usually fall apart are due to not having a Mandate Agreement and the NCND in place. Without these documents, the buyer will not release Proof of Funds (POF), the Aircraft Operator’s Certificate (AOC), and/or their professional and personal profile. In addition, without these documents, the seller or seller groups will not release the full details of the aircraft—because these documents signal the seller that the buyer is a willing and able purchaser. So not having these documents in place can quickly lead to the deal falling apart. However, with the submission of the Mandate, NCND, and AOC upfront, transparency is established, and both the buyer and seller can confirm interest from a financial perspective.
The next step is the Letter of Intent (LOI). With all of the proper documentation in place, the LOI is signed and the sale process moves to the pre-inspection phase as shown with Brad Harris of Dallas Jet International whom confirmed the “price is in the details.
4. Closing the sale
The pre-purchase inspection is the beginning of the closing phase where the buyer inspects the airplane to determine if the asset is worth the offered price accepted in the LOI. The buyer normally pays for the pre-purchase inspection and selects the maintenance, repair, and overhaul (MRO)/maintenance facility that is experienced with the particular airplane make/model. The purchaser will perform a log book/records review of all maintenance performed since the inception of the aircraft. Next, a physical inspection of the airframe and engines are completed and the results and records are analyzed to determine if the plane will pass the pre-purchase inspection. Tim Klenke of ‘Duncan Aviation’ said it best when he stated that “the objective of a pre-purchase evaluation is to help finalize a buying decision by identifying issues that may affect the purchase price.”
If buyer and seller agree to move forward, the next steps in the process are Technical Acceptance and, finally, signing of the Purchase Agreement and Closing of Aircraft (“Closing”).
Aircraft brokers realize that this industry is a high risk yet high reward career. Many wish to reap the harvest of success prematurely, without first being realistic with the longer timeframes that are needed in order to successfully close aviation transactions. Also, tenured aviation professionals bring or gain experience over time in order to earn the trust of peers and perspective clients. Since aircraft brokers work in a de-regulated industry, this requires brokers to earn the trust of their clients, uphold their fiduciary responsibilities, and consistently act with honesty and integrity. Successful brokers, like the companies mentioned in this article, make it to closing because they have a mandate to represent the best interests of their client, sign an NCND, and be transparent throughout the aircraft transition from start to finish, and follow an “already successfully proven” closing formula.
If you have any questions about this article, contact me at firstname.lastname@example.org.