June 2010 - Page 4 Aviation Articles

Aircraft Financing: A Return to Sanity

Two years ago, if you were interested in purchasing an aircraft and wanted to finance a portion of the acquisition cost, the world was your oyster. Low down payments, extended loan terms of 20 years or more, minimal credit verification all added up to a great deal for buyers in a marketplace full of competition. Much like the home mortgage market or commercial finance world, capital was available and, seemingly, as long as you had a pulse, someone was willing to offer you a loan.

We all know what happened in October 2008: the financial world was turned upside down. Financial markets were faced with the imploding real estate bubble, commercial and secondary market capital providers like Bear Stearns, Merrill Lynch and many retail lenders, big and small, teetered on the brink of ruination. Many fell over the edge. In the aircraft world, lenders retracted and in some cases, exited the market place. Buyers retracted, watching the values plummet to record lows and waiting for the market to hit bottom. Some owners were forced to sell their aircraft whether they wanted to or not.

All of these and many more factors resulted in a fractured aircraft sales and finance market with a huge volume of aircraft for sale, few buyers and even fewer opportunities to finance acquisitions.

Now as we approach mid 2010, we see that the worst of the economic storm seems to have passed and the world of aircraft sales, purchases and financing seems to be returning to a calmer state. I do not mean that these markets have returned to the craziness of 2008 but the phoenix does seem to be rising from, or at least poking its head out of, the ashes.

Aircraft prices seem to have bottomed out and some sources even indicate that the single engine aircraft actually seem to be gaining value (up from the 30% or 40% loss of value that took place in 2009). Finance opportunities are rebounding as well. Although there are far fewer banks and finance companies willing to write aircraft loans, the ones that remain seem to be willing to extend credit, and here is the big difference, provided that more stringent underwriting criteria are met.

The entities that are willing to underwrite aircraft loans generally fall into two categories: 1) Small or medium sized financial institutions who, as a general rule, did not suffer from a high volume of non-performing aircraft loans or 2) Large financial institutions for whom aircraft finance is a less significant portion of their credit related business and who, thanks in no small part to the stabilizing impact of TARP funds, had the ability to absorb them more easily. Regardless of which of these two categories they fall into, the number of aircraft finance entities in the market in 2010 is dramatically smaller.

So, let’s say that you have been watching the aircraft sales market and carefully shepherding your capital for the last eighteen months waiting for the perfect price on the aircraft of your dreams. Having found your prize, you now are interested in financing a portion of the purchase price. What should you do and what should you expect?

You can use an aircraft finance broker or, in some cases, go directly to the actual lender. Some industry groups have associated finance plans and the internet can be a useful tool in determining who to talk to. You will likely find that you will need to make a down payment of at least 15% of the value of the aircraft (more if you anticipate any commercial use of the ship, that the duration of the loan will not exceed twenty years and that you will need to have a strong credit score (FICO), good liquidity and good cash flow. Lenders will look long and hard at financial statements, tax returns, credit reports and/or other documents so it is in your best interest to have all these types of documents ready and know where you stand financially before beginning the loan application process.

If you have not recently checked your credit score, do so. Most states allow you to obtain a free credit report annually. Personally, I think it is a good idea for most of us to check our credit score with all three major credit-reporting agencies at least once a year. In this day of potential identity theft, it is wise to make sure that the only person affecting your credit score is you. If, during the course of your personal credit review, you uncover something that is or appears to be incorrect, address it immediately with the credit agency. Remember, financial institutions occasionally make errors when they report to the credit agencies but it is up to you to see that they are corrected. Historical delinquency issues related to mortgage and installment debt payments are now critical issues impacting financing of luxury items. You should be prepared to expound on any delinquency circumstance that may be reflected on your credit bureau. Such items may not turn out be an automatic disqualifier but will likely impact any finance terms if offered. If you are disputing any creditors reporting, have that documentation available in advance.

Make sure that you can demonstrate to the lender that you will be able to repay the loan, even if unforeseen circumstances arise. Cooperate with them by doing what is needed to demonstrate your credit worthiness for the loan requested and ability to repay it in accordance with the agreed upon terms. After all the financial woes we have been through, lenders are not likely to offer you a loan based solely on your winning smile and steady pulse.

Whatever you do, use common sense. Ask friends and colleagues who have recently (within the past few months) financed an aircraft who they used. Call finance brokers and/or lenders and ask questions. Make sure you are comfortable that the individual and entity you are dealing with has experience in lending, can help you through the transaction efficiently and, most importantly, deal with you in an honest and helpful manner.

Louisville's Seaplanes: History of a landlocked city and its naval aircraft (part 2)

The following is by Louisville historian R. David Schooling. Images are used with implied permission. Read Part 1 here.

 
The Grumman Widgeon was a large, generously appointed, six-place amphibian that Thompson also owned and kept in the Kentucky Flying Service hanger at Bowman Field (LOU), but he frequently flew it into and out of his personal  seaport on the wharf at 2nd & River.

This plane, along with the Piper J-3 and the two Seabees, presented an unusual visual impact attracting curiosity seekers crossing the bridge or entering Louisville from U.S. 41-River Road or arriving or departing train passengers along the elevated track of the Illinois Central atop the wharf  glancing out of their train windows down at the activities on the riverfront. This was an era preceding modern freeways, newer Ohio River bridges and one in which trains still ran.

 
The largest amphibian ever to splash into Louisville's wharf was the
massive Curtiss NC-4 four engine plane. This record setter was the
world's first aircraft to cross the Atlantic. The Nov. 11 & 12  Louisville
visit was 
part of the 1919 goodwill tour.
Photo courtesy the Bowman Eagles Flying Club.

There is some historic record of an earlier attempt to start up seaplane operations in Louisville, perhaps as early as the 1920s. Take for instance the intriguingly named firm dating from July 5, 1920 called the "Ohio River Aero Transport Company."

This company likely was directly connected to a short-lived airmail service using small flying boats operating between Cincinnati and Louisville, mentioned in archived newspaper clips. Further detail about  these  operations  are  unavailable. Thompson’s Seaplane Base operated for a number of years during the mid-to-late 1940s and early 1950s. Details of its closure are uncertain, but Louisville's Seaport and Mr. W.C.Thompson were both widely known and fondly remembered.

 

Without doubt, the largest and most historically notable amphibian aircraft to ever slice her keel through the waters of the Ohio River and pull up to the Louisville wharf was the gigantic, four-engine NC-4 flying boat, which made the first ever Trans-Atlantic crossing.  

Here are some of the impressive statistics for this craft: Wingspan 168 ft.- Power plant- Four 400 h.p. V-12 engines, Fueling Systems Nine 200 gallon fuel tanks with 1,800 gallons of fuel aboard, Operational weight 28,000 lbs. Crew of Six, Dual open-air pilot and navigator cockpits, bow and aft machine gun ports and hatches.

The NC aircraft originally was designed for anti-submarine patrol duties. After its record setting achievement, the NC-4 aircraft was dismantled and shipped back to the States on the USS Aroostook. The crew returned to the United States via the transport USS Zeppelin to the Navy port at Hoboken.

After much pomp and celebratory receptions for the crew’s  achievement, the NC-4 was reassembled and assigned to a schedule of goodwill tours throughout eastern and southern ports. It was flown up the Mississippi to St. Louis, where it officially was transferred by the US Navy to the Smithsonian Institution. After St. Louis, the aircraft made its way to Louisville’s Ohio Riverfront wharf only five months after its achievement at Lisbon, Portugal for viewing by appreciative Louisville citizens at the Ohio River on Nov. 11 and 12, 1919.

Numerous Louisville pilots received water ratings and seaplane training in one of the various Thompson aircraft, flying in and out of the Louisville seaport with W.C."Tommy" Thompson instructing at their side. The wonderful color photo taken under the bridge would have been nothing short of spectacular had all of Thompson’s seaplanes been in a single picture. This story is but one tiny portal into Louisville's long-vanished waterfront, which still holds many similar historic gems.

For posterity sake the research alone has been quiet an adventurous trip.

 

 


W.C.Thompson and friends at the  2nd & River Louisville Seaport

R. David Schooling is a freelance author and historian based near Louisville, Ky., with deep interests in little-known aspects of the area's history. He has written numerous articles and has been published widely, in local and regional publications, especially urban-affairs issues.
An Air Force veteran who served in Japan and Europe, he eventually was assigned and detached to the Royal Air Forces in Germany. Now retired and living just across the Ohio River in Clarksville, Ind., he is working on his latest endeavor, historic electric railways. Inter-urbans, elevated’s and rapid transit were all abundant in Louisville years ago.

While Business is 'Squirrelly as hell,' America is Not Like Europe

We are currently operating under extremely strange times as I see it personally. We officially sloughed off the “recession” label last year, and the activity within the marketplace has bourne this out as being accurate; so much-so that even the heavy iron is again selling now. However any used business aircraft transaction today is for want of a better phrase: “Squirrelly as hell” with buyers willing to walk at the drop of a hat, or the nod of a chin. I believe that this is directly attributable to the uncertainty that is rife within our global lives at the present.

Let’s take for instance the situation in the Greece, Spain, Portugal, Italy and Ireland (Eire); the economies of these Euro-zone countries, and the official currency of the same, are in severe jeopardy. This in turn has the World’s stock markets on the run again, most in the wrong direction, all the while the price of oil seems to be staying in a moderate band because the U.S. Dollar is climbing in value against other currencies, and the folks at OPEC are enjoying economic gains made for them from the foreign exchanges rather than from oil demand.

The rising Dollar is causing great angst amongst the multi-nationals of this great country, because their foreign earned profits translate into fewer Dollars at home here; adding to this pressure at the top, are the alleged socializing of the nation through the new legislation that is seemingly pouring out of Capitol Hill in an un-ending river of change. We are also fighting two wars abroad, and one of the largest natural disasters ever seen on our home shores thanks to deep-well drilling gone bad.

Add all of this up, throw an Icelandic volcano, and the ever present spectre of terrorism into this big pot of woe, and pretty soon the World’s lunch menu poses a bitter and uncertain meal for consumption, hence all of the indecision, flightiness, and all-round bizarre behaviour currently being played out by the buyer of the minute.

The Annual Meeting in Geneva in early May of the European Business Aviation Council was like at surfaced submarine that had been riding out a long period of enemy surface activity, sitting in the silent depths of the ocean. Everyone there was convinced that all enemy action was long-gone and their opportunity to bath in the sun under blue skies was safe, safe, safe. Okay so it sounds like I am writing in some sort of code, but the metaphors that I am using to describe the high-riding optimism of the business aviation industry on that side of the Atlantic Ocean, just didn’t fully jive with our current economic outlook.

You may call me a naysayer, but seeing that only about 8% of the business aircraft fleet resides in Europe, including Russia and the Baltic States, the optimism shown at this convention, might be read two ways: 1.) The industry over there is either in denial or is now experiencing a renaissance whereby the traditional modus operandi of using the airlines and railways to get from city to city is the first choice, with business aircraft service coming in second, is changing to a more American way of thinking; or 2.) We Americans had better start paying attention to how the nice multi-language folks over there, structure their small slice of this industry, because our share is contracting and we shall soon be seeing more and more people choose to charter and ride fractional aircraft over the American tradition of owning your own.

We are still not out of the woods when it comes to public and governmental perception of business aircraft use here, even though geographically, companies cannot achieve successful domestic growth by relying on ground transportation, and the legacy airline system. It is still thought to be passé of corporate management, and private individuals to be visible users of business aircraft. This prevailing point-of-view now active on our side of the Atlantic, has been the norm in Europe since the end of the Second World War, hence the prevalence of the charter and fractional providers over there.

I’m not saying that any of this is bad; however America is just not like Europe. Their model will not fit our business environment. Our industry will suffer mortally though, if the Middle East continues to take on debt without encouraging the much needed and generally forecasted growth, and Asia is unable to order itself into a politically stable region. If these scenarios remain in the so-called “bad zone”, we are all on the brink of a painful consolidation within our business sphere. I for one will shed a tear if Wichita and Seattle become second-tier, aircraft manufacturing cities due to a severe lack of demand, while the BRIC nations: Brasil, Russia, India and China take over and become the first tier. Okay maybe this is inevitable, but there is no reason why we can as a collective group, combat the European trend, and start educating the public and our elected officials, why the American way of doing business is the best for us, and largely for the rest of the World as well.

Compliance With The Voluntary Disclosure Reporting Program Can Protect An Air Carrier Employee's Certificate



© June, 2010 All rights reserved.

The D.C. Circuit Court of Appeals has vacated an NTSB decision in which the Board refused to allow the employee of an air carrier to assert compliance with the Voluntary Disclosure Reporting Program ("VDRP") as an affirmative defense to an FAA order of suspension. As a result, employees of air carriers and other applicable certificate holders, including mechanics, will have the opportunity to prove compliance with the VDRP to avoid civil penalties or other sanctions in an enforcement action.

The VDRP

Under FAA Advisory Circular AC 00-58A, Voluntary Disclosure Reporting Program, the VDRP provides a waiver of enforcement action to certificate holders, including those holding certificates issued under FAR Parts 21, 119, 121, 125, 129, 133, 135, 137, 141, 142, 145, 147, Production Approval Holders ("PAH") and for program managers of qualified fractional ownership programs operating under Part 91K, when the certificate holder meets the requirements of the VDRP. Generally, the certificate holder must detect a violation before the FAA, promptly disclose the violation to the FAA after discovery, and then take prompt corrective action to ensure that the same or similar violation does not recur.

The VDRP also applies to individual airmen and agents of the certificate holder if the following occurs:
  1. The apparent violation involves a deficiency of the certificate holder’s practices or procedures that causes the certificate holder to be in violation of a covered violation of an FAA regulation;

  2. The airman or other agent of the certificate holder, while acting on behalf of the certificate holder, inadvertently violates the FAA’s regulations as a direct result of a deficiency of the certificate holder that causes the certificate holder to be in violation of the regulations. (The VDRP does not apply to the airman or other agent when his or her apparent violation is the result of actions unrelated to the certificate holder’s deficiency);

  3. The airman or other agent immediately makes the report of his or her apparent violation to the certificate holder; and

  4. The certificate holder immediately notifies the FAA of both the airman or other agent’s apparent violation and the apparent deficiency in its practice or procedures.

The Case

In Moshea v. NTSB, an air carrier with whom the airman was employed voluntary disclosed the airman's failure to make certain required maintenance logbook entries pursuant to the VDRP and the FAA concluded that the air carrier and a number of its employees would receive no penalty. However, the FAA subsequently issued an order suspending the airman's airline transport pilot certificate for 60 days based upon alleged violations of FARs 91.7(a) (aircraft must be in airworthy condition for operation), 135.65(b) (requiring pilot to enter any mechanical irregularities into aircraft logs), and 91.13(a) (careless and reckless).

The NTSB Denies The Airman's VDRP Affirmative Defense

The airman appealed the suspension to the NTSB. At the hearing before the administrative law judge ("ALJ") the airman attempted to raise an affirmative defense based on his compliance with the VDRP. However, the ALJ refused to allow the airman to admit evidence bearing on his compliance with the program. The ALJ concluded that the NTSB lacked the jurisdiction to review the discretion as to how the FAA implements the VDRP (i.e. who the FAA lets off the hook and who the FAA decides to go after). As a result, the ALJ upheld the airman's suspension (although the ALJ did reduce it from 60 to 50 days).

The airman appealed the ALJ's decision to the full Board. However, the Board agreed with the ALJ. The Board ruled that it lacked jurisdiction to entertain the airman's affirmative defense and it affirmed his suspension. The airman then appealed the Board's decision to the United States Court of Appeals-D.C. Circuit.

The Court of Appeals Reverses The NTSB

On appeal, the airman argued that he should have been able to offer evidence to support his affirmative defense that he complied with the VDRP as an employee of the air carrier certificate holder. However, the FAA and the NTSB argued that the VDRP was unavailable to the airman because it purportedly "does not relate to the sanctions to be imposed," as required by 49 U.S.C. § 44709(d)(3), even though the VDRP provides that no sanctions will be imposed in cases of voluntary disclosure.

The Court rejected what the Court characterized as the FAA's/NTSB's attempt to "evade" the VDRP. The Court stated that when the VDRP says no sanction will be imposed in a case of voluntary disclosure it is "quite obviously 'related to sanctions'" and, as a result, the Board's analysis was unreasonable and contrary to the statute. The Court also found that the NTSB's decision was inconsistent with its handling of a prior case, Administrator v. Liotta, in which the Board allowed an employee of an air carrier to assert an affirmative defense based on the VDRP. According to the Court, this failure to follow precedent without an explanation was arbitrary and capricious and provided an independent basis for vacating the NTSB's decision.

The Court concluded that the NTSB did have jurisdiction to decide whether the FAA's suspension of the airman's certificate was in compliance with the VDRP. It then vacated the NTSB's decision and remanded the case to allow the airman to offer evidence of compliance in support of his affirmative defense.

Conclusions

It is nice to see the Court requiring both the FAA and NTSB to comply with their policies and rules. Keep in mind that this decision applies to all airmen employed by certificate holders, including mechanics. Mechanics and the certificate holders with whom they are employed should take advantage of the VDRP. If the FAA pursues enforcement action against an individual mechanic when the mechanic and his or her employer have complied with the VDRP, the mechanic should be able to assert compliance with the VDRP as an affirmative defense to defeat the FAA's claims.

Of course, mechanics should file their individual ASRS/NASA Forms in addition to compliance with the VDRP. That way, if the FAA/NTSB determines that the mechanic or its employer did not comply with the VDRP, the mechanic may still be able to avoid sanction if he or she has filed the ASRS/NASA form and meets the requirements of that program. You can download the mechanic ASRS/NASA form or file it online here.

Use Caution When Comparing Costs

Last month I talked about a methodology to compare costs. I suggested that Life Cycle Costing is the preferred method in order to fully understand the total costs of owning and operating an aircraft. Even if Life Cycle Costing, I want to bring another point of caution to you.

What is covered?

We've done many benchmark reports and analyzed the costs of hundreds of aircraft. It is vital to understand exactly what went into the number is that you have.  If you have used Life Cycle Costing yourself, then you will have put forth the effort into your costs. But what about costs from other sources?

If your analysis suggests that an aircraft costs $1,200 per hour and your friend, who operates the same type, tells you $900 per hour, who is correct? Well, you both can be. Just what was covered in each number and what were the underlying assumptions?

Fuel cost is an easy example. For each hour that you fly, your aircraft consumes so much fuel. The $1,200 per hour assumed fuel at $5.25 per gallon while your friend used $4.50 per gallon. At 85 gallons per hour, you are different by $63.75 per hour.

Next up in variable costs is maintenance. But what maintenance is included? Scheduled, unscheduled, retirement items, engines? Are major cost items such as engine overhauls accrued as a cost per hour, or just shown as an average or an interval not equal to the time accrued?

Say you spent $252,000 on an engine overhaul due at 3,600 hours. The accrual cost is $70 per hour. If you have had the aircraft for only two years and flew 600 hours during that time, the “cost per hour” to you is $420 per hour. Quite a difference!  While that cost jumps out as obvious, add up a lot of $1,000 and $500 items. Taken individually, they seem insignificant. In total the effect can be substantial.

Maintenance costs can vary considerably and their cyclical nature adds to the fog surrounding using a single number. While Life Cycle Costing helps, you need to be consistent in the methods and length of time used. Even so, a five year cost period for a new aircraft will differ than a five year cost for a 10-year old aircraft. What maintenance happens when is important.

Training costs, new avionics, upgrading paint and interior, how much insurance coverage you have, whether you have three full time crew or two full time crew and one part time contract pilot, and so on all can add up to significant differences in the cost. 

When you are analyzing and comparing costs from different sources, you need to know what methodology is used and what the numbers include (or exclude). The more detail the better as you can easily be lulled into a false sense of security when two big numbers are close together. Ideally you should run all the numbers yourself using as close to the same assumptions and sources as possible.

Lastly, please keep in mind that every serial number of a single model does not cost the same to operate. In the real world some folks will see higher costs than others, especially in the area of maintenance. Ask questions and understand that "your actual results may vary."

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