A guide to choosing the right aircraft manager for you

Services — 02.04.18 BY David M Hernandez
 

After choosing your aircraft, choosing your management company may be the next most important decision in your aviation life. David Hernandez, aviation finance specialist, gives a guide to choosing the best manager for your unique needs.

Selecting the best aircraft management company for an owner’s particular needs is a complex and time consuming process, involving many variables and requiring comprehensive due diligence. The primary reason the selection process is complex and time consuming is because business aircraft are sophisticated and expensive machines. Aircraft operate internationally with many different regulatory requirements, necessitating highly skilled flight crew and managers. Also, there are significant costs associated with operating and maintaining business aircraft. Finally, material differences exist between aircraft managers worldwide, including in the Middle Eastern market, with respect to quality of services, capabilities and expertise. As a result, aircraft owners should consult with knowledgeable advisors and develop a detailed checklist to help them select the best aircraft management company to meet their specific needs.

Determine operational needs

The first step an aircraft owner should take is an assessment of his or her operational needs, which generally requires the owner to consult aviation advisors who have experience negotiating with aircraft management companies. As an initial matter, an aircraft management company selection should be based on the aircraft model, owner’s operational profile, desired operating base and manager’s qualifications, experience and level of client services. The owner also needs to evaluate whether he wants to operate the aircraft exclusively for private, non-commercial operations or make the aircraft available for third-party commercial charters to generate supplemental charter revenue.

Remember, that while third-party charters can create a nice revenue stream, they may limit the availability of the aircraft to the principal and increase the wear and tear on the aircraft.

Author David M Hernandez is a Washington-based shareholder with Vedder Price, a thriving general-practice law firm, and a member of the firm’s Global Transportation Finance team.

 
 
Identify potential managers

Once an owner has completed his operational needs assessment, the next step is to compile a list of potential truly turnkey aircraft management companies. Fortunately, several highly qualified and capable management companies exist in the Middle East. Owners can start researching management companies by simply reviewing the manager’s website, public profile, and reputation in the industry.

You should also look for a management company that has several aircraft under management, ideally move than five, for several reasons. First, you want to hire someone other owners trust with their aircraft. Second, you want a manager that is financially stable; having more aircraft under management generally increases the manager’s financial stability. Finally, a manager with a large, varied fleet of aircraft (light, medium, heavy, etc.) will allow an owner to utilise substitute lift if the owner’s aircraft is grounded for maintenance or a larger or smaller aircraft is needed for a particular trip.

Next, research whether the manager has significant experience with the aircraft type, locations, certifications and ratings. I recommend an on-site visit to the manager’s facilities to meet the relevant personnel. Key initial questions to ask are how many and what type of aircraft does the manager already manage and can the manager meet your operational needs, such as supporting your flight profile and third-party charter requirements?

For example, if an owner wants to operate the aircraft 200 hours a year for personal and business use and charter the aircraft an additional 200 hours per year, can the manager meet the requirements? Also, the owner should inquire about potential charter revenue and set minimum charter rates. Owners and management companies often negotiate the associated minimum charter rate and revenue split. Setting the charter rate too low will actually result in the owner losing money on each charter. Depending on the relevant facts and circumstances, the management company will generally receive 10 to 15 per cent of the charter revenue.

It’s important to stress that the best management company for one client may not be the right management company for another. Did you feel comfortable with the personnel you met? Do you feel your needs will be met? Is this a company you are happy to trust with a major asset? One size does not fit all.

“The best aircraft management arrangements are based on trust and transparency, and that should be reflected in the underlying agreements.”

 
 
 
Flight crew and maintenance

The owner should inquire about the prospective manager’s flight crew staffing, training and aircraft maintenance capabilities, as well as how exactly the manager will be able to support the owner’s operations. Staffing at management companies may vary significantly in terms of size and expertise, so it’s wise to be specific. Does the manager use Flight Safety or other similar flight crew training programmes? Does the manager have sufficient personnel to support your operations? How large is the pilot pool for the owner’s aircraft, and does the manager rely heavily on contract pilots? Where are the crew located, at the base or overseas? Some owners also prefer a dedicated flight crew – they want to see the same pilots and cabin crew every time they board their aircraft.

Regarding maintenance, the management company should discuss its applicable ratings and qualifications, ie, whether it possesses a repair station certification and employs mechanics qualified and rated to perform maintenance on the aircraft. A manager should also have the capabilities to maintain the aircraft on-site (with the exception of comprehensive schedule maintenance and engine overhauls) without outsourcing maintenance.

Managers should also be aware of pending governmental maintenance mandates and potential upgrades. It is generally preferable to have maintenance performed by the management company as opposed to having it outsourced, because it less expensive and the manager will have a better sense of the aircraft condition, which tends to minimise downtime.

They should have more flexibility with scheduling the maintenance events to suit the owner’s plans, and if you have a management arrangement, the owner should not have to pay retail for maintenance.

Financial, accounting and risk considerations

Given the various costs and expenses associated with operating an aircraft, financial and accounting discrepancies are not uncommon and therefore financial and accounting considerations should also be addressed with a high level of scrutiny and detail. After the initial discussions, an aircraft manager should provide a detailed term sheet with cost/expense estimates and an annual budget.

The owner should demand transparency and audit rights, and the ability to contest questionable amounts should be expressly included in the management agreement – whether is it Dhs40 or Dhs40,000. It is important that owners have the explicit right in the associated management agreement to dispute any unfamiliar or irregular charges they notice.

The best aircraft management arrangements are based on trust and transparency, and that should be reflected in the underlying agreements.

 
 

Generally, monthly management fees should be virtually the same across the region. The differences in costs stem from flight crew salaries, training, benefits, fuel, maintenance, parts, insurance (hull and liability), hangar fees and support services/catering. All of these charges should be itemised in the annual budget. Many management companies are able to pass on fuel discounts to their customers at home and at other locations, so do enquire about fuel discounts. An owner needs to confirm that there are no ‘hidden’ charges in order to avoid being shocked upon receipt of an invoice.

Risk considerations should also be discussed as they relate to the management company’s safety record, as noted above, as well as insurance protections and indemnifications. As the owner you should obtain a copy of the insurance policy and confirm limits are sufficient to cover your financial situation. Owners should also fully understand what indemnifications are contained in the associated management agreement.

An indemnity is a contractual obligation of one party (indemnitor) to compensate the loss occurred to the other party (indemnitee) due to the act of the indemnitor. However, some agreements provide that the owner has to compensate the manager for the manager’s loss due to the actions of the manager, even if the manager is negligent. In other words, you must fully understand exactly what is being agreed to when signing a management agreement. It is advised that any management agreements are reviewed and negotiated by the owner’s legal advisors and consultants.

Safety Record and Qualifications

Last, but certainly not least, you, or your representative, should assess the manager’s safety regulatory compliance history, safety record, rating and qualifications. The owner should inquire about the manager’s regulatory compliance record and whether the company has been involved in any accidents or incidents within the last five years, or been involved in any government enforcement actions. You should also ask whether the manager is audited by an internationally recognised audit agency, such as the International Business Aviation Council (IS-BAO). The owner should determine whether the management company has implemented a Safety Management System or similar safety protocol.

The owner also needs to be able to determine the manager’s compliance in the applicable jurisdictions in which it operates. You should ask how long the manager has been in business and the extent of the company’s operations, and also ask whether they would be willing to provide references. To be clear, if you are entrusting your US$60 million Gulfstream G650 to a manager, you need to be very thorough.

In summary, it is important to stress that the best management company for one particular owner may not necessarily be the best management company for another. It can depend on your preferences, usage and the personal relationship you develop with the maganament company personnel.

Interestingly, we occasionally have two clients that have very difference experiences with the same management companies, so do consider various aircraft management companies to ensure that you are getting the best possible aircraft manager for your unique aircraft management needs.

Finally, the aircraft management agreement should be thoroughly reviewed and negotiated – there is no such thing as a standard agreement. It’s very rare for owners to enter into management agreements without requesting revisions to address his or her unique needs or industry standards.

 
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