Strategic Thinking When Acquiring or Selling An Aircraft

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. I’m speaking with Rene Banglesdorf, who is CEO of Charlie Bravo Aviation, a firm operating within the business aircraft acquisition and sales arena. Welcome to our podcast series, Rene.

Rene Banglesdorf (00:55):

Tony, I am so flattered to be asked to join you and I am thrilled to be here today.

Tony Kioussis (01:00):

Let’s start off by discussing how a first time buyer should go about determining the best model to meet their travel requirements.

Rene Banglesdorf (01:09):

Well, Tony, I feel like that’s a little bit of a double edged sword because part of the thrill of buying a plane is to have one that you really love. So first we really like to make sure that someone’s in a plane they feel comfortable in, especially if they haven’t flown a lot privately before. Sometimes they feel a little bit claustrophobic in an aircraft that doesn’t have a standup cabin or a little bit of elbow room. So first we like to judge that and then we really like to understand the ideal places for them to fly. There’s some limitations with some planes on some runways because the runway links. There are also some limitations with some planes because they don’t have the range for the buyer’s mission. So we like to really get a good feel of what they’re going to do with the plane, how many people they want to take with them, or typically have onboard and really what their comfort level is with the size of the cabin.

Tony Kioussis (02:10):

What are the factors you should consider in determining whether to acquire a new versus a pre-owned aircraft?

Rene Banglesdorf (02:16):

The biggest factor in determining new or pre-owned is budget, and the reason that I say that is because the depreciation of an aircraft, and you know this because this is what your company does. A five-year-old aircraft might be significantly less to acquire than a brand new aircraft. So unless you have unique configuration requirements or you really don’t have any budget at all, you just want a doggone new plane, I think you should really look at something that’s three or four years old, even up to 10 years old, if you like something newer, because the cost to acquire that is going to be so much lower. The great thing is that you can refurbish the aircraft. You can change the woodwork, which is expensive, but it can be done. You can change the carpet and the seats and the headliner and the paint and all of those sorts of cosmetic things to customize the aircraft to fit your tastes. So it’s a little bit of a timing issue there. It may take a couple of months to make those refurbishments.

Rene Banglesdorf (03:17):

But, overall, I think the biggest consideration is budget. And then, of course, if you feel really comfortable with having a warranty, with having the relationship with the manufacturer, you can put those things into consideration as well.

Tony Kioussis (03:31):

So I’ve made a decision as to the type of aircraft I wish to acquire. What are the benefits I can attain by utilizing an acquisition consultant?

Rene Banglesdorf (03:41):

The first is really understanding the market, understanding the value of the aircraft, and understanding the mission profile of the aircraft that you’ve chosen. So really understanding that you are in the best type of airplane and then knowing what the features are or the history of that airplane is something that an acquisition consultant can bring to the table. Knowing if there’s an STC that’s been done to certain aircraft and not others, knowing if there’s a history of corrosion in certain components of the aircraft, knowing if an aircraft has had a history in another part of the world, knowing the reputation of the service center that’s taken care of the aircraft. There are a lot of ins and outs that you can find out about a specific aircraft using an acquisition consultant.

Rene Banglesdorf (04:34):

And also, having someone pushing the deal along is really helpful. Lining up financing, lining up upgrades, pushing the service center, to do a fair and complete pre-purchase evaluation, making sure that you’re getting the best deal on insurance, connecting you with a tax consultant to make sure that you’re not going to have a gotcha when the tax bill comes, and really just anticipating every aspect, not just buying an aircraft, but of owning an aircraft.

Tony Kioussis (05:05):

How do you go about determining the optimum aircraft acquisition and tax structure for a client? Is this advice you would expect the client to obtain elsewhere or is this something your firm can help them sort through?

Rene Banglesdorf (05:20):

That’s really a question that I like to answer on a case by case basis because of the complexity of some of the businesses. I believe that owning the aircraft in a single entity LLC if they’re an American buyer, can be really helpful owning the aircraft in a trust. Is there an international buyer as in not U.S., but they want to keep the aircraft on the November and U.S. Registry is something that we could point them in the right direction for. But tax planning is something that I typically defer to a tax consultant, especially if the deal involves more than one international jurisdiction. There’s lots of complexities there that are way above my pay grade.

Tony Kioussis (06:09):

I think a good acquisition consultant stays in the arena that they know and farms out anything else that is required, right?

Rene Banglesdorf (06:18):

Yes, I am very good at asking questions and I have lots of people that I call on to ask questions of. If it’s something that’s going to be outside of my realm of expertise, I am always happy to find someone reliable and trustworthy to pass a client along to.

Tony Kioussis (06:34):

Let’s talk about pricing, always an important element of a successful deal. What factors should be considered when determining an offered price for an aircraft?

Rene Banglesdorf (06:45):

Two schools of thought there. One is on the sales price if you’re selling an aircraft, and then the other is on an offer price if you’re making an offer on an aircraft. And we do a little bit of the same work for both, looking at recent sales figures as much as we can determine those, comparing apples to apples. We have an aeronautical engineer who kind of geeks out over Excel spreadsheets for our clients and he really analyzes exactly what it costs to compare an aircraft apples to apples. And so when we make an offer or when we suggest a sale price for an aircraft, we’re looking at exactly what’s out there in the market and comparing it in such a way that someone would know what they would have to pay to bring one aircraft to the standard of another.

Rene Banglesdorf (07:38):

And we weigh in upcoming maintenance, we weigh in history of ownership, we weigh in total time and engine programs and maintenance and avionics programs into that as well. There are quite a few, probably about 20 points, we would compare on each aircraft in order to come up with a suggested list price or a starting offer. And then we add in a layer of motivation level of the person that we’re making the offer to in an acquisition.

Tony Kioussis (08:10):

Yeah, there’s no question that establishing the motivation level of the seller can weigh heavily on the actual number that goes into the pricing.

Rene Banglesdorf (08:20):

And then also, if we’re going to be able to consummate the deal quickly, if we’re not dependent upon financing, if we don’t need to do a very invasive pre-purchase inspection, we’ll always factor those things in as well, especially if the seller is in a position to make a decision quickly and wants to close the deal quickly. I think those things are worth something so we factor that in when we make an offer on an aircraft as well. Likewise, we do the same thing when we’re trying to sell an aircraft. If our seller wants top dollar, they have an expectation that it may take a little bit longer to achieve that. If they are motivated to sell the aircraft quickly, if they’re in a different financial position, or if they’ve already taken delivery of their replacement aircraft and just want this one off the books, then we may suggest a list price that’s very competitive to move it quickly.

Tony Kioussis (09:16):

Our a client acquiring a pre-owned aircraft, what are the issues and the complexities associated with refurbishing or upgrading the asset prior to delivery?

Rene Banglesdorf (09:26):

We had a situation not too long ago where the owner of the aircraft was allowing some work to be done in advance of the aircraft finishing the work that needed to be done for the pre-purchase inspection, and then the buyer paid for some additional upgrades to be made to the aircraft and then the buyer’s financial situation substantially changed and was unable to close on the deal. So then he’s got an awful lot of money invested in this aircraft. He’d signed an agreement saying that it wasn’t going to go in his favor if he backed away from the deal. So I would say with great caution do upgrades to an aircraft and understand the risk. Sometimes it’s expeditious, you know you’re going to close and you feel really comfortable with the deal and the risk is worth it, and sometimes it’s better to wait.

Tony Kioussis (10:20):

And when you say waiting, do you mean waiting until after you close and basically own the aircraft outright before you try to incorporate any upgrades or refurbishing the aircraft?

Rene Banglesdorf (10:33):

After delivery. That is the least risk way to go.

Tony Kioussis (10:38):

What you’re really looking at is, let’s close on the airplane, let’s make sure we own the asset, and then we can do whatever we want to it, as opposed to trying to do it before you close on it.

Rene Banglesdorf (10:49):

Unless a seller’s paying for it, and then, of course, it’s great to have it done before closing.

Tony Kioussis (10:56):

Once the offer has been accepted, the buyer needs to examine the assets technical status, to your point, to establish their technical risk. Outline what a pre-purchase inspection would involve.

Rene Banglesdorf (11:09):

Like most questions to do with aircraft purchasing, it’s really a complex one and I believe that in the due diligence of making an offer we’re going to have a really good understanding of what maintenance might be upcoming on the aircraft. And so when we’re determining the scope of a pre-purchase inspection, we always look at the maintenance that’s recently been done and schedule maintenance that may be upcoming in the next 6 to 12 months and we determine a pre-purchase inspection to reduce the buyer’s risk of exposure during any upcoming maintenance. So if, for instance, an invasive inspection has just been done, an eight year inspection, a 12 year inspection has just been completed on the aircraft, then it makes sense to audit that and maybe add in some log book review, an additional corrosion inspection, engine borescope, and just use that inspection as part of our pre-purchase inspection.

Rene Banglesdorf (12:12):

But if there’s major maintenance coming up, then, one, that should be reflected in the purchase price. And then, secondly, we may want to do a little bit more thorough pre-purchase inspection. If we’re bringing the aircraft from another country, depending on what country it’s coming from, we may want to do more due diligence about corrosion and we also need to check the requirements for importation of that aircraft to whichever country it’s going to be registered in the future.

Tony Kioussis (12:42):

What are your thoughts on professional aircraft management? Does the assets size matter with respect to such services?

Rene Banglesdorf (12:51):

I think a lot of companies that have previously had a flight department are looking at a professional aircraft management solution now to reduce costs. And I think that this is a really interesting approach, and there are quite a few aircraft management companies out there that do a wonderful job and the fact that they manage dozens to hundreds of aircraft gives an economy of scale in insurance, in fuel, sometimes even in refurbishment and maintenance, they get passed on to the client. I find that this is beneficial to clients, whether they have a large aircraft or a smaller aircraft. Of course, some of the larger companies that manage aircraft don’t really want to do a lot of small aircraft management, but some are interested in doing that or at least in doing it in a limited way.

Rene Banglesdorf (13:48):

Mostly what we see with smaller aircraft is that the pilot will manage the maintenance schedule and all of the details to do with the aircraft. I think it really depends on the comfort level of the person who’s owning the aircraft and their financial advisors. Sometimes there’s a benefit to having it managed on a Part 135 Certificate for tax reasons. We always explore that with clients and probably 60% of the time, I would say, they use a professional aircraft management company. The ones that don’t, usually have smaller aircraft.

Tony Kioussis (14:26):

Understandably, there’s a cost associated to the use of a professional aircraft management company. Are the benefits associated with the use, in terms of the buying power of that company, do they tend to offset the cost to having your aircraft managed? In other words, do the benefits wash out the cost of professional aircraft management?

Rene Banglesdorf (14:49):

I really believe that they do. And they may not completely wash the cost that you pay on a dollar to dollar comparison, but when you factor in the expertise, the follow through, the industry connections, the time involved in getting your internal people up to speed with all of the legalities involved with aircraft ownership, you are buying peace of mind and you’re buying time back from your financial officers of your company. So I think it absolutely pays for itself. Even if it doesn’t completely pay for itself monetarily I think that it more than pays for itself in removing risk and reducing the amount of time spent by executives in your own company that would need to manage the aircraft.

Tony Kioussis (15:46):

My experience is just that, I really do believe aircraft management companies provide a great service to operators and I do think, for the most part, the benefits from their service way overshadow the expense to hire them. I’ve heard that chartering an aircraft can help defray one’s operating costs. What is your opinion about chartering your aircraft and who might find it useful to do so?

Rene Banglesdorf (16:13):

You’ve hit on something that we come up against all of the time, especially with first-time aircraft buyers. I could not tell you how many times I’ve heard someone say, “I’m buying this aircraft because if I can charter it out, I’m going to be able to fly for free.” And I kind of chuckle every time I hear that. And I ask a lot of questions because this is the elusive pot of gold at the end of the rainbow, right? Because if somebody figures that model out, my job selling aircraft becomes so much easier, because if everybody could fly for free if they owned an aircraft then so many more people would want to buy one. I think that this is something that we need to weigh very carefully in an aircraft budget. It’s true, it can help defray some costs. I think it probably more defrays annual fixed cost than it defrays operating costs, for the most part, because the more hours that are put on your aircraft, the more maintenance has to be done on your aircraft, the more frequently you need to refurbish your aircraft and the higher your expenses for the aircraft.

Rene Banglesdorf (17:28):

There are also some things to weigh in about financing, because some banks aren’t interested in financing aircraft that are going to be used more than 50% for Part 135 or a charter. You can defray some costs, and some people are very interested in doing that. Airplanes like to be flown and they operate better when they’re flying frequently. There are pros and cons to doing it. People who only fly 50 or 60 hours a year, it’s a great idea to have it fly some charter. But don’t feel like you’re going to get to fly for free if you put your aircraft on a charter certificate.

Tony Kioussis (18:05):

A lot of people are surprised when they appraise their aircraft at the time of sale and they see how much negative impact the additional flight hours have had on their now fair market value. I don’t think a lot of people take that expense of the charter equation into their thinking when they’re first acquiring the aircraft.

Rene Banglesdorf (18:28):

It’s a little bit of a crystal ball. We don’t necessarily know how much it’s going to decrease the value of the aircraft because the value of the aircraft is really how it stacks up to the other aircraft that are for sale at the time when our client is looking to get rid of his aircraft. So if there are a lot of other aircraft out there with 5000 fewer hours than the one that we’re representing, it’s going to make the high time aircraft slower to sell and draw a much lower price.

Tony Kioussis (19:02):

So I’ve been operating my aircraft for some time and I’ve now decided to replace it. Other than my desire to change my inflight scenery, how can I determine the optimum time to replace my aircraft?

Rene Banglesdorf (19:16):

Well, I think that there are probably three things that really drive that. The first is mission. Have you a desire to fly further? Maybe you’ve expanded internationally and you want to be able to fly across the pond. Then you would want a longer range aircraft. The other related to mission is that we see a lot of is a growing family who want to be able to take grandkids on trips with you or take a larger staff on trips with you, have a little bit more leg room in the aircraft than you did when you first started out. So it would be comfort and mission. And then the third thing, which is probably the biggest driver for business aviation, and that is depreciation. So depending on how you depreciate your aircraft, it may be beneficial to you to sell that asset, recapture that depreciation, and then roll it into your next asset so that you have a business write off. And so that’s the third and the financial driver behind aircraft upgrades.

Tony Kioussis (20:30):

What recommendations do you have for clients relative to optimizing the value of the asset when they want to sell it, as well as its marketability?

Rene Banglesdorf (20:39):

One hugely important thing to do with an aircraft is to keep it on an engine program if it’s on an engine program already. That can be a huge detractor to buyers because they don’t know what the engine overhauls or [inaudible 00:21:00] are going to cost. But engine programs are really important. The other thing is really just the care of the aircraft. We have an aircraft that’s 12 years old under contract right now that has original paint and interior because it was absolutely babied, it’s had clear coat applied, it’s been cleaned and waxed regularly. The interior was detailed every time the aircraft came back into the hanger. It really doesn’t need paint and interior even with twelve year old cosmetics. And we’ve seen other planes that really just were not well cared for. They were kept outside, they weren’t babied, the person caring for the aircraft was not meticulous, and after three or four years, they look like they need new paint and interior.

Rene Banglesdorf (21:47):

So the care of the aircraft in the cosmetics speaks a whole lot about the maintenance of the aircraft. So caring for the aircraft, both the mechanical parts of it and the cosmetic parts of it, really makes your aircraft a lot more marketable and it speaks highly of the pedigree without having to really dig into the log books. Makes a good first impression.

Tony Kioussis (22:12):

Is the need for professional assistance when selling an aircraft any different than when you were purchasing it?

Rene Banglesdorf (22:18):

I think that it’s very similar. I think the need is the same. I think the services are a little bit different. So acquiring the aircraft well is highly dependent upon the broker acquisition consultant’s connections in the industry because they’ll be able to find out the inside scoop on aircraft pretty easily. They’ll know about aircraft that are available for sales that are not listed on Controller, which is where most people look, and maybe able to find a pretty good deal on an aircraft without just repeating information that you could see on Controller. So that’s the important piece for acquiring an aircraft. When it comes to the sale of an aircraft, having a staff that responds really quickly to inquiries on the aircraft is very important. So if you think you’re going to sell your aircraft yourself, but you like to go on trips to the other side of the world and you may not check your email every hour during the day, then you may miss inquiries on your aircraft. And so from that perspective, it’s important to have someone who’s responsive.

Rene Banglesdorf (23:29):

And then the way that they market the aircraft is also very important. We’ve invested pretty heavily in digital advertising. So we do a lot on Facebook. We do a lot to push our website to the top of Google and pushing our aircraft out. Chat on our website, the availability of our staff to show aircraft, those kinds of things are all really important when you’re thinking about someone selling an aircraft. People buy differently now than they did even 10 years ago so having someone sell your aircraft who can adapt to those new buyer profiles is really important. And if you don’t do it every day, then it’s probably something that you should hire someone else to do for you.

Tony Kioussis (24:16):

Thanks for the willingness to share your thoughts and expertise with the audience, Rene. What else would you like people to know about Charlie Bravo Aviation’s capabilities and services? I know you mentioned some things that you folks do. What else is there that you would like the audience to know?

Rene Banglesdorf (24:35):

A little bit because of my journalism background, I just like producing content. We have a series of market reports that we share quarterly. It’s kind of high level information about what’s going on in that particular market, the number that have sold in the last quarter of a particular model, the percentage of the fleet that’s on the market, what the trends that we’re seeing are there, and then a little bit of news about that particular model. So we have those market reports available. We publish them, I think, on 53 or 54 different models quarterly. You can sign up for those on our website. It’s wepushedin.com. We also have buyer’s guides and other tools to help people get a little bit farther into the process, because people like to be well researched before they buy or sell an aircraft, I’m finding more and more.

Rene Banglesdorf (25:30):

We provide a lot of free resources. We do have some paid and then do a lot of interaction within the industry to make sure that we’re staying on top of the latest trends, both in and outside of the industry to make sure that we can provide the best services to our clients.

Tony Kioussis (25:46):

Thanks again, Rene. I really good conversation. Anything else come to mind that you want to bring up?

Rene Banglesdorf (25:52):

No, Tony. I want to know what you think brokers could do better?

Tony Kioussis (25:57):

That’s actually an excellent question. I definitely think that some brokers need to be more transparent than they are about the aircraft that they’re representing. There is at times a lot of market confusion about what the aircraft really looks like. And that’s, in part, one of the reasons why we’ve designed a grading system that’s totally objective that we use to grade aircraft within Asset Insight. The issue I have with the marketplace is that brokers are still using terms like good and bad. “This is a great airplane.” “This is a good airplane.” “That’s a better.” What does that mean? It’s difficult for me to really understand that. So I think the more clarity you can provide in defining the asset I think the more of a service you can provide to the marketplace.

Tony Kioussis (26:48):

But, overall, I have to tell you the complexities of closing deals on aircraft and selling them and finding the right client and finding the right aircraft for a client, these are all not for the faint of heart. You really do have to have expertise and that’s not something you can polish up on every five years when you decide to trade your aircraft. I firmly believed that the aircraft broker brings a lot to the equation. Whether you call them an acquisition consultant, whether you call them a selling broker, it doesn’t really matter. It’s the expertise that matters.

Rene Banglesdorf (27:23):

I will say that one of the things that I love most about my job is that it’s something different every day. I learn something new every day. Things are always changing. Regulations change, tax codes change, what we learn about aircraft changes, and so I think that it’s just a fun industry and I really enjoy it and I appreciate so much all that you do to further the industry and to challenge all of us to be better.

Tony Kioussis (27:53):

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