Weighing Your Options When Your Aircraft Won’t Sell — Originally published in BusinessAir Magazine, April 2017, Volume 27, No. 4.
Recently, I had a longtime client looking for alternatives for his aircraft, which had been listed for sale far longer than he ever expected. My client no longer wanted to own the aircraft, but was unwilling to consider the low offers being presented by interested buyers. Continuing the pattern of recent years, in 2017 certain aircraft categories are saturated with excess planes for sale. When a large percentage of a fleet is for sale, having an aircraft with high-time, upcoming inspections, an outdated interior, or engines that are not on a maintenance program can make finding a buyer very difficult. Economics 101 tells us that, at some price, the aircraft will sell, but when that price is lower than the seller is willing to consider, what are the alternatives?
Until the aircraft sells, trying to reduce the continuing cost of ownership is important to many sellers, especially those who aren’t planning on using their aircraft. If the aircraft is not already being used in charter operations but can be placed on an on-demand air carrier’s charter certificate at minimal cost, chartering the aircraft until a buyer is found can be a way to offset some of the expense of ownership. However, chartering will only be an effective offset if there is a charter market for the aircraft type in the area where the aircraft is based. If there is no charter market where the aircraft is currently based, but there is a market elsewhere, then a change of home base may be a viable option. If the aircraft is relocated to another home base with a better charter market, it is important to understand, before the move, whether the new location has any tax consequences, such as a higher property tax.
Another alternative to consider is leasing the aircraft. Some private aviation users prefer to enter into leases instead of purchasing an aircraft. While there are some commercial financing leases available, not all users want, or could qualify for, that option. Therefore, there is a market of users who prefer to lease an aircraft directly from the aircraft owner for a finite amount of time. Typically, these leases are written with terms from 12 to 36 months. If the lease revenue generates enough to cover the costs of aircraft ownership and any depreciation, then private leasing may be a worthwhile option for the owner who can’t sell his or her aircraft.
There are, however, risks that need to be mitigated when leasing an aircraft. First, the owners should get to know the prospective lessee and have a comfort level with how the aircraft will be operated and maintained. An owner doesn’t want to lease the aircraft to offset ownership costs only to have the aircraft returned at the end of the lease in a condition that renders it nearly impossible or more difficult to sell. Another nightmare scenario would be the lessee who leases the aircraft and then fails to make the rent payments, forcing an owner to try and recover possession of the aircraft. In order to limit the risks associated with leasing, the lease could provide for the aircraft owner to participate in overseeing the maintenance of the aircraft and allowing the owner to help source the crew that will be employed by the lessee. Additionally, retaining the right to audit the records and inspect the aircraft at any time, and using this right, is highly recommended. Before entering into a lease, the aircraft owner should make sure the lease has all of the protections necessary in the event of a default by the lessee, including an immediate right of the aircraft owner to repossess the aircraft and comprehensive lease return conditions.
It is important to remember that if an aircraft is part of a Section 1031 like-kind exchange, then the aircraft must be sold within 180 days of the date on which the replacement equipment was purchased. The aircraft owner must consider the amount of capital gains that will have to be paid if the like-kind exchange requirements are not met. In some instances, it may make sense for the aircraft owner to consider a lower selling price in order to avoid losing the benefits of the like-kind exchange.
One final consideration is the marketing plan for the aircraft. If the aircraft is only being marketed in the United States, then perhaps worldwide promotion should be considered. If the elected broker doesn’t handle international transactions, it may be worth considering a change in broker. Simply listing the aircraft for sale, if the aircraft category is already saturated, may not be enough. An experienced and savvy broker will market the aircraft imaginatively to set the aircraft apart from the rest. This is particularly important when it is not the best aircraft on the market. The owner and broker may want to perform a cost-benefit analysis and assess the potential value of investing in new paint, completing upcoming maintenance items, enrolling the engines on an engine maintenance program, or doing some interior upgrades to make the aircraft more attractive to the market.
In some situations, it may make sense to hold onto the aircraft and wait for a better time to sell. While holding the aircraft, chartering or leasing may help offset the cost of ownership. However, a full cost-benefit analysis should be completed prior to electing to defer the sale, which must, among other things, include an understanding of the possible tax implications.
Please contact Amanda Applegate at 310-392-5200 or firstname.lastname@example.org.