Efficient and Successful Transactions – the Aircraft Broker’s Value

Tony Kioussis (00:33):

Welcome to another Asset Insight Podcast covering the aircraft ownership life cycle. I am Tony Kioussis, president of Asset Insight and your host. Brad Harris, the president and CEO of Dallas Jet International started selling aircraft in 1993. Since founding Dallas Jet in 2012, Brad has grown the firm’s industry presence into a highly respected aircraft acquisition and sales company. Thanks Brad, for taking the time to add your knowledge and expertise. Let’s assume I’m a first time aircraft buyer. How do you go about determining the optimum aircraft to meet my needs?

Brad Harris (01:09):

Well, there’s several different high level things we talk about, budget’s one of them, how many people, is luggage an important aspect of traveling, do they have short field requirements, do they go into Aspen and do we have high, hot and heavy issues with certain models of airplanes that may perform better in better locations? But I would tell you that those are a few of the things that we would start with and then probably give someone three to five options and see which airplane suits their needs the best. And then we go down the road to trying to identify the perfect airplane for you being a first time buyer.

Tony Kioussis (01:48):

What factors should a buyer consider in determining whether they should purchase a new or an in service area?

Brad Harris (01:52):

Well, there’s some tax benefits of buying new and there’s tax benefits of buying pre-owned. Typically the first life cycle’s three to five years, historically. Since 2008 and 2009, we’ve seen a lot of these new aircraft buy or hold them five to seven, sometimes 10 year before replacing the fleet. And then you get the pre-owned buyer, which is typically, he’s looking for a five-year-old airplane, a 10 year old airplane, and the cycle will go about a 10 year period. And then the second 10 year period is a different buyer. That’s a pre-owned buyer that wants a like new airplane, and that could be five years, that could be 15 years. That guy’s going to be a 10 year old airplane to maybe a 15, 20 year old airplane. And then when you get to the 15, 20 year old aircraft, now you’re going to get charter companies, you’re going to get some fractional owners. You’re going to pick up a whole different customer that’s looking for that 15 to 20 year old airplane, but he’s got a price point as part of the process as well.

Tony Kioussis (02:50):

Price point the primary determinant of new versus used?

Brad Harris (02:57):

Price point is not so much the issue with most of the new aircraft buyers. A pre-owned buyer certainly is price sensitive, but let’s call it a Fortune 50 Company. They want that new feel touch, they want the service of it, they want the reliability of it, they want the warranty side of it, they want new because that’s what historically they’ve done. But for that client that has six aircraft price points going to play a point into the acquisition of whether it’s a CJ3+, a CJ4+, G550. And a Global 6,500, a [inaudible 00:03:33] 300, or Legacy all have different price points, but they all have different needs. So for a new aircraft buyer, it is about cost, but it’s not so much about cost as it is about warranty, and the reliability, and the new aircraft owning experience. The OEMs do a nice job of taking care of their new aircraft customers.

Tony Kioussis (03:50):

And the new aircraft look and feel is what they’re looking at, or is it the new aircraft service from the OEM?

Brad Harris (04:00):

I think both are very important. And I would say they’re equally as important.

Tony Kioussis (04:03):

What are the benefits of using an experienced acquisition consultant like Dallas Jet?

Brad Harris (04:07):

Buying a new or preowned aircraft is a very extensive process. And there are a lot of pitfalls that people don’t know about, whether it’s an owner pilot, whether it’s a pilot, whether it’s an owner that has owned aircraft before, there’s so many processes and there’s so many things that can financially impact the value of buying an aircraft. And historically with Dallas Jet, we have over 100 years of experience. We’ve done over 400 aircraft transactions. That’s a lot of experience and have someone like Dallas Jet come and manage the process of buying a new or pre-owned aircraft, we’re going to charge a fee and we’re historically saving our customers four to probably 7%. That’s the value we bring the experience. We have a full marketing department, we have a full market research department, we have a closing agent. Our closing checklist is over 100 items. To hire a firm like Dallas Jet, you get our relationships, you get our experience, and the things that we’re going to look for are damage history, missing records. We’re going to do a very extensive pre-buy inspection for you, if you’ve got over 90% of the corporate jets listed for sale have a broker from representing them.

Tony Kioussis (05:22):

How does your firm handle legal and tax advice? I know you talked about a number of other services. How do you handle legal and tax advice?

Brad Harris (05:30):

We always partner with legal team, whether that’s a tax legal team, or if that’s an aircraft purchase agreement legal team. And they’re two different types of firms out there that handled two different types of things. And we’re not in the tax advice business, and we’re not in the legal business. We see a lot of that with contracts and working with attorneys, but I would tell you that there are some great aviation attorneys out there that do a great job on aircraft purchase agreements, LOIs, managing a transaction, and then there are certain tax people that give guidance on how to structure the acquisition up into a company, whether it’s lease back or there’s a lot of different ways to structure buying an aircraft and how to structure the transaction, and I would tell you that we would make some recommendations, typically three to five recommendations to a client if he does not already have a relationship with either a tax expert or an attorney.

Brad Harris (06:21):

We put together a team and when you start the process, you have an owner or you have a buyer, you have a seller, and if they have a legal team, we work with the legal team. And then you look at finance and you look at tax, and you look at aircraft, and we’re the aircraft glue that quarterbacks the transaction from start to finish working with multiple different teams. And that may be with an OEM through pre-buy inspection or Duncan Aviation or West Star aviation, or the OEM’s direct. And we have a legal team there. We might have a tax team there. We may have technical oversight with us, where one of the Dallas Jet guys that goes, and we monitor pre-buy inspections and it’s gathering the team together to make a successful transaction and closing by buying the right asset for the right customer that meets the right mission and goals.

Tony Kioussis (07:16):

Can you walk me through your process for determining and justifying the purchase price for an aircraft?

Brad Harris (07:23):

If we are a seller or we’re a buyer, we’re going to do a complete market analysis of everything out there that is for sale and everything that has closed in the last 12 months. And we’re going to vet on what type of airplane the equipment has, how much total times on the airplane, is the airplane engines on a maintenance program, is there a parts program? We’re going to go through and gather all that data, and then we’re going to collect the data, and then we’re going to compare the data. And then at the end of the day, you have a fair market value of the airplane. And if you’re selling, you give the seller data. Now my opinion, it’s not Dallas Jet’s opinion, the data says this is what it should sell for, with the competition that’s out on the market today and how it compares with all the equipment and programs, do what’s sold recently of the last month or the last two months or the last three months, and that two, three sold comps are going to tell you what’s sold and what the equipment is. And it’s really easy to come up with a price that’s driven, again, by the data. And it’s very accurate.

Brad Harris (08:25):

I can predict within a percent or two of where an airplane is going to ultimately sale, if you will. And on the acquisition side, we look at the data the same way. And then let’s say there’s 10 aircraft in a market, we’re going to look at all 10 aircraft and which ones are the best equipped and meet our client’s need. And then we going to go negotiate, let’s say there’s four out there that are similarly equipped, similarly timed and similarly programmed. And we’re going to make an offer. And one of the four companies will be more motivated than the other company. And as long as the equipment and the airplane are similar, you go buy the best airplane at the best price, until you make an offer, you don’t know whether you can buy an airplane for, and so that’s our process of properly pricing a purchase price, or acquiring an aircraft and a particular market.

Tony Kioussis (09:12):

And what timeline are you looking at between making an offer and placing a deposit into escrow for an aircraft?

Brad Harris (09:20):

Well, it depends on the deal and the transaction. For example, we just bought a Gulf Stream 550 and we bought it from a Fortune 100 Company. And my suggestion was let’s put up $1,000,000 before we make the offer, so they know we’re real and the $1,000,000 is refundable. So we put up a deposit before we actually sent in a letter of intent or a purchase offer. Sometimes we want to take that strategy, depends on how motivated we are to, one, buy an airplane and how motivated a particular buyer or seller may be. So on a normal transaction. Our purchase offers basically say, “Upon execution of the LOI, purchaser will put a refundable deposit into escrow within two days, three days,” depending on what the situation is, sometimes immediately. And then the escrow fee is totally refundable until you sign an aircraft purchase agreement.

Brad Harris (10:14):

And once the aircraft purchase agreement’s signed that governs the deposit and you have hard deals and you have soft deals. And a hard deal basically says, “We’re contracting on the aircraft with an aircraft purchase agreement. And here are the delivery conditions. And if we find major damage history, major corrosion history, or missing law books, missing records, then we have the right to walk away. If none of that exists, we find [inaudible 00:10:41] discrepancies that need to be rectified as determined by the facility and the seller fixes systems, operational, operating properly.” That’s a hard deal. So your deposit is non-refundable subject to them selling you an airplane, subject to the delivery conditions. An open deal or a soft deal, what we call, is you can do an inspection and you can walk for any, and all reasons. You’re going to go spend 50 to $125,000 on a pre-buy inspection, but you’re not bound to accept the airplane until you get the inspection report.

Brad Harris (11:15):

Now I’ve had a situation similar to me where we had a soft deal and the buyer had sole right to reject. Well, his wife and he broke up and he was served divorce papers. Well, he walked not because of the airplane, he walked because of a personal reason. And that becomes tough to swallow and tough when you work really hard at doing everything you’re supposed to do in terms of inspections, fixing discrepancies, systems operation functioning properly. It’s disheartening when you have a soft deal that falls apart for not aircraft related issues, if you will.

Tony Kioussis (11:51):

Let’s talk about the reasons for the purchase inspection, as well as the process for establishing and overseeing a successful event. How does your firm handle or oversee this critical step?

Brad Harris (12:02):

It’s probably the most critical step there is and one thing that we pride ourselves on is we’re hands on from start to finish, but really we’re hands on when it goes to an inspection, when it comes to visual inspections, mechanical inspections, and typically depending on the life cycle and the age of the airplane will determine what type of pre-purchase inspection we will do. For example, when I have a deal that I’m tied to with one of my customers, I’ll actually fly to the airplane and ride with it to its inspection location. And sometimes you’ll do a test flight, that’ll be your test flight. We’re on all test flights in person, we’re in person on all of the showings, if you will, if we have an aircraft listed for sale. I personally, go into the three by inspection, we do a debrief. I’m very specific about taking the work scope that we’re doing monitoring that, understanding with all the teams, whether that’s inspection, whether that’s a supervisor, the customer service manager, to the guys on the floor, to avionics guys. We have a whole room of people with all the different departments when we go through debrief. And if we’re selling, I wear one hat. If we’re buying, I wear another hat.

Brad Harris (13:12):

If we’re selling the messages to the facility, that these specifically the items that you should be inspecting. And if you write up discrepancies that aren’t related to a discrepancy identified in this pre purchase inspection, we’re not paying for it because we’re not giving you an open checkbook just to go look at everything in the airplane and start writing up discrepancy. But if we’re buying it, the debrief goes a little bit different. Hey, we’re representing the buyer here, I want you to inspect as you go, inspect every item, we want to write up all discrepancies.

Brad Harris (13:43):

It’s a totally different feel and dive if you will, depending on whether you’re the buyer or the seller. And we monitor that daily. I ask for daily updates, email updates. I ask for pictures, if we’re selling, I ask the maintenance manual be referenced, the discrepancy and why it’s an area where the issue and what are the tolerances. And so I would tell you we’re different because we manage all that from the start to the finish, we go back for closing, there’s a test flight after the inspection, when the aircraft is returned to service, we’re on that test flight. And then we’re with the airplane through closing.

Tony Kioussis (14:16):

Once you’re ready to close, are there tax benefits to closing in specific states? And how do you go about determining that?

Brad Harris (14:24):

Well, again, you have a tax expert on your team that’s been retained and he’ll make some recommendations. For example, Kansas is a flyaway state. So what that means is if you fly it out of Kansas and hangar it somewhere else, under a certain period of time, you file a tax exempt form that you’re going to fly it out of the state of Kansas. For example, South Carolina has a fee. So you fly into South Carolina, you close, you pay actually a tax. And North Carolina does the same thing, but again, a good tax is going to give you advice on certain states. If I sell an aircraft in the state of Texas to a Texas buyer, I have to collect his sales tax and remit it to the state of Texas. So tax advice on closing locations is very important. And for example, in Texas, it’s equivalent about 8.25% to 8.5% depending on the county in Texas you close in. So it can get very expensive on a 20, $30 million airplane.

Tony Kioussis (15:17):

How long does it typically take from a signed offer to the closing of a transaction?

Brad Harris (15:23):

Typically, the purchase offer letter of intent will stipulate you have five business days to do an aircraft purchase agreement, 10 business days, depending on what the buyer and seller agree to. So typically on a normal transaction, you would sign an LOI, within a day or two the deposit gets put up, within a day or two the APA gets circulated by either the buyer or the seller. And depending on what the APA states from a timeline you’re probably a week and a half, two weeks from the initial LOI to an executed aircraft purchase agreement. In that same period of time, you’re working on a pre-buy scope and a pre-buy location and who can take it and on what date. And so that can typically take a week. So now you’re looking at three weeks. Your physical inspection’s typically two weeks, 10 or 15 business days. So now you’re three weeks to an APA and getting into a pre-buy you’re now two weeks, that’s five weeks total. And you can look at discrepancies found in the pre-buy inspection to take maybe a week to two weeks to fix. And so you could be six, seven weeks from initial LOI to closing. You could be as short as probably four weeks, if everybody worked very hard to get an APA done and get into a pre-buy in a timely fashion.

Tony Kioussis (16:45):

A rule of thumb might be anywhere from one to two months, depending on how much work is required to determine the technical condition of the aircraft and buyer speediness, if you will.

Brad Harris (16:55):

100% right. So I’ll tell you a month, two months, some are quicker if you have a group that’s motivated and driven by a quarter end or something like that, that could speed up and it could be three weeks, it could be two and a half weeks. Just depends on the structure and how motivated people are to get something close.

Tony Kioussis (17:11):

We covered a bit of this earlier, but what’s the optimum time to replace a used aircraft or a new aircraft, whether it’s new or used, what’s the optimum time to replace it? How do you determine that?

Brad Harris (17:24):

Historically, what we’ve seen is pre-owned aircraft owners typically keep the airplane three to five years and a new aircraft owner now is keeping it somewhere between five and 10. And so I think you should be prepared to look at the exit strategy when you buy the airplane. So typically I’ll come to our customer at the beginning and say, “How long do you want to own it?” “Well, I don’t know.” “Well, do you think three to five years, do you think 10 years?” “Probably three to five years.” “Okay. So let’s talk about how many hours you going to fly a year?” “Well, I think 200.” “Okay. So now we’re looking at 600 to 1,000 hours you’re going to put on an airplane. Let’s strategically go buy an airplane with fresh motors or fresh paint interior or something that you could fly for 600 to 1,000 hours and not be hurt on a resale value of an airplane.”

Brad Harris (18:10):

If you have an engine overhaul coming through not on a program, that overhaul can cost you 1 million 2 per motor, and so if you buy the aircraft and that motor has a midlife inspection of 10 years and 4,000 hours, so let’s buy one that has just come out of a midlife or just come out of what overhaul for two or 300 hours. So now we’re going to fly it up to $1,000 over the next three to five years. And so now we’re going to have 1500 hours in five years left to a midlife or another overhaul inspection. So really you’ve flown the airplane and not hurt the resale structure of the airplane. If someone tells me, they’re going to keep an airplane 10 years, you look at that differently and you look at what’s coming due in the next 10 years and understand what your operating cost is and what major events may be coming down the road. So I think that the real answer is each deal is a little different, but typically three to five years on a pre-owned and probably five to 10 years on a new aircraft.

Tony Kioussis (19:04):

Well, let’s talk some more about that subject. What are some of the strategies an owner can use to optimize the value of their asset while they own the aircraft and during the disposition process?

Brad Harris (19:15):

While they own it is fly it at average hours. You’re going to have some operators that want to fly four or five, 600 hours a year. That’s higher than normal. But again, strategically, if you know that going into it, you can look for an airplane that is either needing an overhaul or needing something. People will put paint and interior to customize the paint and interior to their liking. I tell most of my people that you probably going to get 50% back out of the paint and interior item. If you put internet on the airplane, you’re probably getting $0.50 on a dollar, but those things sell when you get ready to dispose of the airplane in that three to five year period, and by having internet, and having new paint and interior, and having fresh engines are all going to help sell the airplane. And there are different triggers to look at to strategically plan with your customer for not only the acquisition of what’s needed, but also on the disposal side, when and if that transpires.

Tony Kioussis (20:08):

You mentioned excessive hours of use, which makes sense, paint and interior, communication for the passenger cabin, are those, the baseline criteria that make one aircraft marketable over another seemingly similar aircraft?

Brad Harris (20:24):

Correct. Some people want an airplane and they don’t want to put a $235,000 internet system, so they’ll go buy one that already had it outfitted so they don’t have to do that. You have some customers that want to customize their paint interior, some don’t want to be down for six weeks or eight weeks while the paint and interior is being done. So their direction to me and my team would be go finding something that’s already just ready to go, I want internet that’s important, high speed internet is important, I want a cabin management system that’s been upgraded. The CMS for a Global 5,000, 6,000, that cabin management [inaudible 00:20:56] upgrade $1,000,000. So it’s a significant investment, but depending on the equipment and how someone puts time and effort into maintaining and operating an airplane properly, those add value to the resale process.

Tony Kioussis (21:08):

What does an aircraft broker bring to the table when selling an aircraft? We talked about what a broker brings to the table during the acquisition phase. What about during the selling phase?

Brad Harris (21:22):

We’re a marketing firm. It’s what we do. And we’re a very good marketing firm. But when you hire a broker to sell an airplane, we’re going to put professional photography on the airplane. We’re going to make it a nice presentation for selling the airplane. Most of our photos we do at sunset with a handful of photographers around the world. And we become a marketing firm. Pricing is key in terms of knowing market data, having the market data, having the experience of being in business for 27, 28 years, the relationships, the broker relationships bring great value to a customer, the knowledge, the experience of pricing it properly. We try to get our aircraft out when we list within a couple of weeks. If you price an aircraft properly by using the data, an airplane will sell, unless it’s an anomaly like high total time or needing paint and interior, or you have a major engine inspection coming due, those are anomalies that are harder to sell, but again, there’s prices that help sell that.

Brad Harris (22:26):

And when you price an aircraft properly, whether it needs a lot of stuff or doesn’t need a lot of stuff, we sell it. We get it out to the world, not just United States, not North America ,to the world. I’m up sometimes at night, talking to people in Shanghai and in Asia Pacific, and London, and Germany. And we respond to all those inquiries. We have the relationships, we have the marketing expense. We know the market knowledge of the particular aircraft, both my partner, Sean and I came up from the flying world. I started out as a corporate pilot for International Paper, and we’ve managed and operated airplanes over the years and being able to talk the lingo of I’m typed in a Gulf Stream 550 and I can fly the 550, 450, G5, G4, G4SP, G3, and I have flown them and Falcons and Hawkers and Citations and King Airs. And by operating them, you get a sense of how they perform. And when you talk to a potential buyer, whether that’s a aviation department manager, that’s a chief pilot, that’s your director of maintenance. You can speak that same lingo. So I think that’s the value that we bring to a customer in selling their airplane, is our operational knowledge, our aircraft expertise, our marketing knowledge and the process of start to finish managing an aircraft transaction.

Tony Kioussis (23:45):

Is there anything we haven’t discussed that you want people specifically to know about Dallas Jet International?

Brad Harris (23:52):

Relationships is key. I’ve built 30 years of relationships and now a lot of my good friends are running PNC Aviation Finance, Bank of America Finance, First Source Finance, there’s a lot of people out there that we work with in relationships. And you know from our past relationship with GE and Dave Labrozzi, and I would just tell you that all of that plays into a broker taking care of their client and having a fiduciary responsibility to take care of the client and the client’s needs come first. I’ve worked tirelessly to earn the respect of my colleagues. They’re not many other reputable aircraft broker companies out there that we don’t know that we haven’t worked with before. It’s a relation business. And I tell my customers that you’re a customer for life and we become friends, but at the end of the day, we work and are hired by our clients to do a service for them, and that’s to transact and buy and sell aircraft.

Tony Kioussis (24:48):

This has been another Asset Insight Podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcasts library at assetinsightpodcast.com and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis, and as always, thank you for listening.