In the conclusion of his two-article series, Arc & Co’s Director of Aviation Finance, Gary Crichlow examines the options for aircraft ownership when liquidity is tight
Established in 2008, Arc & Co is an award-winning boutique debt advisory firm, specialising in the areas of real estate, marine and aviation assets. The company’s Director of Aviation Finance, Gary Crichlow has important advice for owners struggling to finance their aircraft – advice that has seldom been more relevant than it is in today’s unprecedented market.
Not using your aircraft may seem an obvious way to conserve cash when liquidity is tight, but leaving an aircraft to sit unattended on the ramp is only storing up trouble for later. Aircraft left sitting on the ground deteriorate: batteries drain, paint peels, corrosion sets in – and birds nest in the unlikeliest of places! To combat this, manufacturers mandate specific upkeep procedures for aircraft out of active service beyond a certain period of time. Failure to carry these out – and properly document them – can have serious consequences when it comes to restoring the aircraft into service, from replacing flat tyres all the way up to having to prematurely remove engines for a full overhaul to restart the maintenance clock.
Nick Houseman, co-owner and board member of operator Elit’avia has advice on how best to look after an aircraft that isn’t going to fly regularly: “It really depends on what your intent is – do you plan to sell it as soon as possible? Or keep it until the situation improves? If you’re selling, the best option is probably to move the aircraft to a facility where potential buyers can view it easily and maintenance can be kept up to date. If the intent is to wait it out, then a long-term storage programme should be a consideration to reduce ongoing maintenance costs.”
Colin Brickman, Managing Partner at Switzerland-based aviation technical advisory firm CAMO4jets, comments: “If you can’t afford to fly the aircraft regularly, you need to work with someone who can design a minimum care and storage programme in accordance with the maintenance manual – your operator if they have the necessary technical capabilities, or a competent technical adviser. Keeping the aircraft flight-ready is the best option in most cases but, if you need to, there are other options to preserve the asset for short or extended periods. A good technical adviser can also help find cost-effective parking.”
Talk to Your Financier
With the contractual ability to repossess written into their financing documents, clients in difficulty understandably tend to approach their financier last. It used to be the case that the financier would be left blissfully ignorant while the operator and hourly cost maintenance programme (HCMP) provider bore the brunt of the financial strain. Nowadays it is standard practice for all three parties to work very closely together, so the financier is much more likely to be made aware of financial difficulty early on.
While this may be disconcerting, the reality is that the financier is often the best party to turn to first for help when cash is tight, since it will become infinitely easier to work with the operator and maintenance coverage provider to find a solution if they know the one with the deepest pockets is on board. Furthermore, financiers are not in the business of selling aircraft – it is a major headache for them to do so, and they tend to declare a default or repossess an aircraft only as an absolute last resort. Their response thus far to customers in difficulty due to the COVID-19 pandemic bears this out: they have overwhelmingly taken a pragmatic approach, preferring wherever possible to work out a solution that continues the relationship without acrimony and avoids flooding the market with aircraft for sale.
Engaging the financier early on builds goodwill and engenders the trust that is crucial in any successful restructuring process. It may lead to some creative solutions as well. For example, if maintenance is upcoming, bankrolling the project, in exchange for a share of the sales proceeds, may be a better option for the financier than fire-selling the aircraft, as long as the costs are carefully controlled. There is a limit to how flexible financiers can be though, which is why it is almost always better to start the conversation as soon as possible.
Talk to Your Operator
A quality operator is your best ally when it comes to directly controlling or reducing your outlay. This could be achieved by tailoring use to at least bring the variable costs down to manageable levels, or exploring ways to offset fixed costs.
Houseman advises: “In order to cut costs you’ll need to either reduce your flying or stop entirely. An option definitely worth considering is chartering your aircraft out, since it generates revenue that will contribute to covering fixed costs.” However, he cautions: “You cannot get your fixed costs to zero because there will still be programme costs to pay, insurance, hangar or parking fees, and calendar maintenance.”
Talk to Your HCMP Provider
Scheduled maintenance is a significant source of expense, particularly around engines. Hourly cost maintenance programmes smooth out these periodic spikes in cash outflow. Resist the temptation of allowing coverage to temporarily lapse to conserve cash, and engage your service provider early on. Like financiers, HCMP providers have overwhelmingly been pragmatic with regard to supporting customers in difficulty during this period. Even if your aircraft is not due for expensive scheduled maintenance in the near term, unscheduled events can and do occur, and can leave you exposed to a much bigger bill should you decide to stop funding your HCMP coverage.
Lou Seno, Chairman Emeritus and Special Advisor at Jet Support Services Inc (JSSI) agrees: “Your HCMP provider is crucial to protecting the aircraft’s value and transferability; it is imperative that this coverage does not lapse. Talk with your HCMP representative and get your financier involved, because it’s also in their best interest to make sure their collateral security in the aircraft is maintained.”
Thus, upfront, transparent communication between the various parties pays off. By coordinating a strategy that treats your creditors as partners, you’re much more likely to achieve a solution that allows you to manage on restricted cash flow, while ensuring the aircraft is maintained, insured and protected.
But…
… even the best-laid plans can fail. If a crisis point has been reached and there are no palatable options, the only solution may be to sell the aircraft under duress, although doing so may leave you further exposed to claims should there be a shortfall between your debt obligations and the selling price.
And that’s if you can sell the aircraft at all. The first thing a hangar or maintenance provider does if there are unpaid bills, is impose a lien. “Liens can be a tremendous stumbling block to any deal closing and it’s best to keep even the hint of unpaid bills far, far away from a sale,” says Côme Charron, European Sales Director at aircraft broker Guardian Jet. “Simply put, you won’t sell the aircraft with a lien attached unless it’s readily explainable. A mortgage over the aircraft that the lender has stated will be discharged on sale closing? Fine. A lien due to an outstanding maintenance bill or a deficit in the aircraft’s hourly cost maintenance programme? Not fine. Even if you as the seller have agreed with a creditor that an outstanding bill will be paid on closing out of the sales proceeds in escrow, to the buyer it will only raise suspicions that there may be other encumbrances lurking undetected. That perceived risk will make it much less likely that they will want to proceed.”
Moreover, if you allow the aircraft to sit neglected or fail to document its upkeep, it progressively falls out of its maintenance and upkeep regime and becomes exponentially more expensive to bring back into currency; the stigma of even a short period of ambiguity over the aircraft’s care is anathema to most buyers.
It is always better to avoid an extreme situation like this in the first place. The name of the game at this point is loss minimisation rather than getting out whole. However, if things have deteriorated to this stage, there are certain must-dos in order to get out with as little collateral damage as possible
Clear Unpaid Bills
Don’t leave your operator, financier, HCMP or insurer unpaid while you go incommunicado. Negotiate and clear their outstanding bills, keep them on-side and avail yourself of their expertise to deal with other potential sources of liens. They can help you access the necessary technical expertise: to look over maintenance labour hours expended and parts and materials ordered, for example, making sure you only pay what you are obliged to.
Pay your airfield’s landing and fuel charges and make sure you have no outstanding air navigation fees. The powers accorded to airfields and air navigation service providers, Eurocontrol for example, are wide-ranging and not to be taken lightly.
Don’t Scrimp on Insurance & Certification
The need for upkeep on insurance is hopefully self-evident. Talk to your insurer – you may be able to downgrade your policy to cheaper ‘ground-only’ coverage to save costs.
Keeping on top of the aircraft’s certification, including organisation of its records, is also crucial. It’s especially key if you’re trying to sell quickly and all the more reason to keep your operator onside. Retaining technical advice to ensure this is done is a wise investment.
Price the Aircraft to Sell
Elit’Avia’s Houseman says: “The aim is never to get to the point where you have no other choice but to sell the aircraft, since you may need to part with it at an undesirable price. But should you find yourself in that predicament, consider making the decision as early as possible to reduce sale cost, because longer sale timeframes add fixed costs and increase the likelihood of maintenance inputs being required. Such costs will inevitably play a big part in negotiating a sale price.”
In value terms, Houseman is referring to the hierarchy of selling prices that an aircraft can achieve. A Fair Market Value (FMV) is generally only achievable in a non-distressed situation where the aircraft is not subject to constraints in its upkeep, and you are not under duress to complete the sale, allowing time for the aircraft to be marketed and for a price to be negotiated. Worst-cast scenario is a Scrap or Salvage Value, where the aircraft is no longer worth selling as a flyable asset. In between these two is an Orderly Liquidation Value (OLV), which captures the reality that you’re under compunction to sell quickly, but are aiming to do so in an orderly way.
Achieving each value has a different timeframe, but in all cases holding out rarely results in better pricing. You can’t realistically expect to achieve FMV where there’s extreme time pressure and sales duress, which is why it is always better to decide to sell before the crisis is on top of you. If you’re under compunction to sell, then OLV is generally your best hope; holding out for a higher price is almost always unrealistic. In all cases, time is against you. The longer the aircraft sits, the more it will depreciate, and the more mounting maintenance and upkeep will eat into the sales proceeds from whatever value you’re looking to achieve. So engage a reputable broker, invest in a competent technical representative, price the aircraft decisively for your circumstances, and sell.