Selecting the Best Aircraft Management Company

Vedder Price

Selecting the best aircraft management company for an owner’s particular needs is a complex and time-consuming process involving many variables and requires comprehensive due diligence. The primary reason the selection process is complex and time-consuming is because business aircraft are very sophisticated and expensive machines. Aircraft operate internationally with many different regulatory requirements, necessitating highly skilled flight crews and managers. Also, there are significant costs associated with operating and maintaining business aircraft. Finally, material differences exist between aircraft managers worldwide 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 select the best aircraft management company to meet the owner’s specific needs.

Determine Operational Needs

The first step an aircraft owner should perform is an assessment of its operational needs, which generally requires an owner to consult aviation advisors that have experience negotiating with aircraft management companies. As an initial matter, 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. An owner also needs to evaluate whether it wants to operate the aircraft exclusively for private, noncommercial operations or to make the aircraft available for third-party commercial charters to generate supplemental charter revenue. While third-party charters create a nice revenue stream, they limit the availability of the aircraft and increase the wear and tear on the aircraft.

Identify Potential Managers

Once an owner has completed its operational needs assessment, the next step is to compile a list of potential turnkey aircraft management companies. Fortunately, several highly qualified and capable management companies exist in the United States and internationally. Owners may start researching management companies by simply reviewing the manager’s website, public Internet profile, and reputation in the industry. An owner also should look for a management company that has several aircraft under management, ideally move than five, for several reasons. First, you want to hire a manager with whom other owners entrust 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 utilize a substitute aircraft if the owner’s aircraft is grounded for maintenance or the owner needs a larger or smaller aircraft for a particular trip.

Next, research whether the manager has significant experience with the aircraft type, locations, certifications and ratings, and reputation in the industry. Consider an on-site visit to assess the manager’s facilities and meet the relevant personnel. Key initial questions to ask are how many and what type of aircraft does the manager manage and can the manager meet the owner’s operational needs, such as supporting the owner’s flight profile and third-party charter requirements? For example, if an owner wants to operate the aircraft 200 hours per each year for personal/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 percent of the charter revenue.

However, it is important to stress that the best management company for one client may not be the right management company for another. One size does not fit all.

Flight Crew and Maintenance Capabilities

An owner should inquire about the 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 utilize Flight Safety or other similar flight crew training programs? Does the manager have sufficient personnel to support the owner’s operations? How large is the pilot pool for the owner’s aircraft, and does the manager rely heavily on contract pilots? Some owners also prefer a dedicated flight crew—they want to see the same pilot(s) every time they board their aircraft.

Regarding maintenance, the management company should discuss its applicable ratings and qualifications, i.e., 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 work. Managers should be aware of pending governmental maintenance mandates and potential upgrades. It is generally preferable to have maintenance performed by the manager as opposed to having it outsourced because it is less expensive and the manager will have a better sense of the aircraft condition, which tends to minimize downtime. Also, if you have a management arrangement, an 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 initial discussions, an aircraft manager should provide a detailed term sheet with cost/expense estimates and an annual budget. An owner should demand transparency and audit rights, and the ability to contest questionable amounts should be expressly included in the management agreement. It is important that an owner have the explicit right in the associated management agreement to dispute any unfamiliar or irregular charges. The best aircraft management arrangements are based on trust and transparency, which 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 items should be itemized in the annual budget. Many management companies are able to pass on fuel discounts to their customers at home and at other locations, so inquire 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. An owner should obtain a copy of the insurance policy and confirm limits are sufficient to cover the owner’s 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 incurred by the other party (indemnitee) due to the act of the indemnitor. However, some agreements provide that the owner must compensate the manager for the manager’s loss due to the actions of the manager even if the manager was negligent. In other words, an owner must fully understand what is being agreed to when signing a management agreement, and often management agreements are reviewed and negotiated by an owner’s legal advisors and consultants.

Safety Record and Qualifications

Last, but not least, an owner 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 manager has been involved in any accidents or incidents within the last five years or been the subject of any government enforcement actions. An owner should also ask whether the manager is member or is audited by an industry-recognized audit agency, Wyvern, Argus or International Business Aviation Council (ISBAO). An owner should determine whether the management company has implemented a Safety Management System or similar safety protocol.

An owner also should determine the manager’s compliance in the applicable jurisdictions in which it operates. An owner should ask how long the manager has been in business and the extent of its operations, and also ask whether it would be willing to provide references. To be clear, if an owner is entrusting its $60 million Gulfstream G-650 to a manager, the owner needs to be thorough.

In sum, it is important to stress that the best management company for a particular owner may not necessarily be the best management company for another owner. Interestingly, we occasionally have two clients that have very different experiences with the same management company, so 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. It is very rare for owners to enter into management agreements without requesting revisions to address an owner’s unique needs or industry standards.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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