07 Mar 2016
Purpose and detail on Pre-Buy Evaluation
To purchase of an aircraft or number of aircraft is not an easy task. Very basic steps to purchase an aircraft are given below
Step 1: Decision
- Determine the make & model of the aircraft which meets buyer’s requirements.
- Determine budget.
Step 2: Evaluation
- Request aircraft specification summary and selling price from the owner and verify if everything is meeting his requirement.
- Contact an expert for aircraft physical inspection and records review for his due diligence.
- On the basis of aircraft physical inspection and records review findings, buyer can negotiate the price with the seller.
Step 3: Completion
- Sign an aircraft purchase agreement with the seller.
- Make sure all the change of ownership legal paperwork and formalities have been completed.
To purchase an aircraft, pre-bye evaluation is most important to make sure the current valuation of the asset.
Pre-Buy Evaluation of the aircraft
To purchase an aircraft is not an easy task, it require a lot of diligence and consideration form buyer. Seller of the aircraft will try to convince the buyer that he has the best aircraft at lower price in market. It’s a responsibility of the buyer that he makes sure, if this or these aircraft are meeting his requirements or not.
Buyer contacts the seller for aircraft specification summary to verify the current status of the aircraft and meeting his requirement to proceed further.
To purchase an aircraft buyer require a team of experts (legal and technical personal) for pre-buy evaluation of the aircraft. For pre-buy evaluation buyer may have his own team or contact 3rd party for the same on his behalf.
A pre-buy evaluation consists of the following major elements:
- Aircraft current build status.
- Signing of LOI.
- Aircraft location.
- Aircraft Inspection.
- Seller contract / agreement with OEM / Tech pubs. / Vendors.
- Review of existing lease agreement between the seller and current lessee (if any).
- Aircraft Current Build Status
This is very essential and primary element to evaluate an aircraft. Seller need to provide following documents to evaluate the current build status
- Aircraft latest utilization report.
- Suite of statements and status reports.
- Aircraft OEM delivery documents.
- Operation specification.
- Aircraft weight report.
On the basis of these documents technical person can determine the base value of the aircraft as on date. On the basis of technical person feedback buyer can take further decision to sign a LOI (letter of intent).
- Signing of Letter of intent (LOI)
LOI is usually legal binding between both parties (seller and buyer). When a buyer need to show the seller that he is really interested and ready to move forward. Buyer must pay a deposit and or commitment fee to the seller (via escrow agent) as consideration for the seller to remove the aircraft from the market. Such security deposit is refundable only in certain circumstances, typically subject to the condition precedent of the finalized sell agreement.
The letter of intent should contain the following key elements:
- Type of letter of intent (LOI) – conditional or unconditional.
- Aircraft identification (MSN number and registration mark).
- Purchase price being offered for the aircraft and deposit amount.
- Scope and location for aircraft inspection.
- Parties’ respective rights to discontinue or obligations to continue the transaction depending upon the inspection’s result.
- Name and address of both parties’ (buyer and seller).
- Aircraft location
Aircraft operational location is an essential element for the consideration of aircraft evaluation.
- Aircraft Inspection
Aircraft inspection is very essential to evaluate the current status of the aircraft. If buyer missed to identify any hidden damage / accident / incident etc., on aircraft or remaining overhaul life of installed components or remaining life of life limited components. So the buyer can minimize the chances of extra expenses.
For such kind of inspection of aircraft buyer needs assistance from group of an expert. Aircraft inspection is a combination of aircraft physical inspection and aircraft records inspection.
- Aircraft Physical Inspection
The designated person has the responsibility to identify and evaluate the physical condition of an aircraft on behalf of buyer. Aircraft physical inspection includes the following
- Aircraft interior and exterior inspection for any dents, corrosion, cracks and paint peeling if visible.
- Physical verification of all the emergency items as per provided report.
- Engine / Landing gears / APU inspection for assigned assembly with attached data plate, and their physical condition.
- Wing inspection for dent, corrosion, fuel leak, paint peeling.
- Physical verification of all the installed avionics components / LRUs as per provided list.
- Aircraft maintenance Records Inspection
The value of an aircraft can be affected by missing records or hidden damage to the aircraft. Value of aircraft lost 15-20% due to missing maintenance documents. When you are dealing with a multi-million dollar aircraft even 1% is significant.
- Verification of the aircraft / engine / propeller / landing gear / APU total time in service and remaining life of life limited component.
- Verify the number of engine / propeller / landing gear / APU shop visit and reason.
- Verification of all the installed avionics items and their upgrades.
- Identification of the chosen maintenance program for the aircraft.
- Verification of all scheduled inspections and maintenance checks specified by the OEM has been complied (including the engines, propellers, landing gears, hard time components and emergency and survival equipment’s).
- Verification of all applicable airworthiness directives compliance.
- Verification of all applicable service bulletins compliance (at least emergency service bulletins).
- Dent and damage mapping, repair work cards and evidence of possible damage history hidden within the records.
- Verify all maintenance records including major alteration, major repair and complied STC paperwork is complete.
- Verify all installed component having manufacturer birth documents / FAA form 1 / EASA form 8130-3.
Aircraft inspection will provide the complete history and maintenance status of the aircraft to buyer.
- Seller contract / agreement with OEM / Tech pubs. / Vendors
Buyer need to know that seller contract / agreement with OEM / Tech Pubs / Vendors and conditions mentioned in those for owner change. Is all the contract / agreement easily convert to buyer or not?
- Review of existing lease agreement between the seller and current lessee (if any)
If aircraft is / are in lease with any operator, so buyer needs to review the lease agreement. In lease agreement buyer need to review the following:
- Lease returns conditions.
- Remaining lease return period.
- Lessee’s maintenance contract for Aircraft / engine / landing gear / component maintenance.
- Operator is MR (maintenance reserve) paying or not.
- If operator is MR paying so the remaining reserve amount.
On the basis of all these element’s feedback and observations, best negotiation would be possible in buyer’s favor.
-By Varun Shanker (India)