Tracey Cheek posted an articlePre-Purchase Inspections: Don’t Take a Hit at Time of Sale see more
NAFA member, George Kleros, Senior Vice President of Strategic Fleet Management & Support with JSSI, offers advice to help you avoid taking a hit on the value of your jet when selling.
When the term ‘Pre-Purchase Inspection’ is mentioned, it can create various thoughts in the minds of aviation professionals – not all of them pleasant. Why is that?
The main reason is that this one event can lead to unexpected, costly maintenance issues that may impact the sale of the aircraft.
There are at least five areas that should be addressed to adequately prepare for a Pre-Purchase Inspection, helping you avoid unexpected hurdles when it’s time to close on the sale of the aircraft.
Borescope – Know Before You Go There
For decades, performing an engine borescope prior to acceptance of the aircraft purchase has been a common occurrence. Many people believe the borescope is a standard procedure that is required, and that the transaction won’t move forward without it. However, the need for a borescope of the engine depends on how the buyer and the seller structure this process into a sales agreement.
There are areas that should be well understood before finalizing a sales contract and beginning the Pre-Purchase Inspection.
The first question the seller needs to ask is whether the aircraft hull insurance provider accepts any adverse findings, such as Foreign Object Damage (FOD), if the borescope is performed outside of an incident?
Performing a pre-purchase borescope may not be considered an ‘event’, and if the hull insurance provider does accept the finding(s) under this elective inspection, you need to understand what the underwriter is contracted to cover.
Typically, only direct damage is covered, while restoration of worn assemblies and parts will not be covered. Depending on the engine’s age, time before overhaul, or total time since last shop visit for on-condition engines, the newly discovered FOD could launch a premature overhaul event that may range from $400,000 to $4m in out-of-pocket costs for the seller.
If the aircraft is enrolled on an hourly cost maintenance program, from JSSI or an OEM, it is critical that the seller contact the program provider to understand allowances under their contract and the conditions under which the program coverage will be applied.
All the maintenance programs I have observed over 30-plus years in the industry have not covered FOD and do not recognize work performed outside of the required scheduled maintenance checks.
Maintenance programs vary greatly on how covered items are addressed when an engine enters a shop for a FOD event.
Many programs will cover airworthiness findings unrelated to FOD, but elective inspections or borescope inspections that are out of sequence may not be eligible for coverage. The key is to contact your maintenance program provider and seek permission first. Don’t expect forgiveness later.
Understand Your Sales Agreement Before the Inspection
The sales agreement is the primary tool used to control the process and define the terms of the purchase. Simple sentences or phrases within the agreement are typically not that simple. Interpretation of these words in the contract can drag out or collapse a deal. For example, a term such as ‘discrepancies discovered’ versus ‘airworthiness discrepancies discovered’ can make a significant difference.
In one scenario I witnessed, damage was discovered in an engine following a borescope inspection. The FOD was minor, and the OEM’s engineering team issued a technical variance allowing the condition to continue with no special changes to the maintenance schedule.
When the owner was ready to sell the aircraft, the sales agreement stated any ‘discrepancies’ – and this condition was a discrepancy. It was outside of normal, but acceptable to the OEM with a release letter.
The buyer felt strongly that there was a risk and challenged the seller to correct the problem, or the sale would not proceed per their agreement. The result was an unexpected ‘out-of-pocket’ expense to the seller that could have been avoided.
Know How Much ‘Your’ Aircraft is Worth
It is important to set a reasonable expectation when planning to sell an aircraft. To do this, you should understand what your aircraft is worth prior to listing it for sale. Having an appraisal performed on your aircraft by an accredited appraiser is a valuable exercise.
It can also be beneficial to keep tabs on the aircraft’s value with an appraiser as part of the life cycle plan of owning such an asset. The in-service market values of business jets today have been steady but not stellar and can change significantly from month-to-month.
Just because there is a jet like yours ‘For Sale’ online for an asking price of $8m, you should not expect your aircraft will be worth the same, especially 60 or 90 days later.
Depending on the current inventory, the length of time on the market, the interior layout and the maintenance condition of the aircraft, the value could easily swing drastically in two very different directions.
Hire an Expert
As a seller, you may feel that selling the aircraft without a Pre-Purchase Inspection is advantageous and that avoiding this process could save money. However, the risk of not conducting a Pre-Purchase Inspection usually outweighs the savings and could possibly lead to legal issues if the buyer feels you misrepresented the aircraft.
It is good practice to consult or hire a technical expert to represent you during an aircraft sale.
Before signing the sales agreement and approving the pre-purchase checklist, it is important to have a technician that is an expert on your aircraft type to work with you and the broker representative. They will be there to keep the pre-purchase fair and balanced and help select the proper facility to perform the Pre-Purchase Inspection.
All parties want to be protected, but there are reasonable limits as to how much should be reviewed and looked at, as well as any technical inspections that are essential for the pre-purchase.
Match the Logbooks with Maintenance Tracking System
A very simple yet important check to perform is comparing the aircraft and engine maintenance status report to the actual maintenance entries in the aircraft records. This review could be another task you have the maintenance expert perform for you prior to listing the aircraft.
There will always be a few errors, but most will be very minor. However, during the audit you don’t want to find a major documentation issue that will prolong the Pre-Purchase Inspection when the timing is critical.
A major finding may create other concerns, ultimately driving the buyer or seller away from the deal. This could also ground the aircraft until the issue is corrected at considerable costs.
There are numerous tasks to consider when preparing to sell an aircraft in today’s market. But if you have these five areas covered, you will minimize your risk of ending up on the short-end of the transaction.
This article was originally published in AvBuyer on March 7, 2018.