Addressing Component Discrepancies During A Prebuy

September 2020

During a typical business aircraft transaction, the Purchase Agreement, in addition to guidance from the regulatory agencies and aircraft manufacturer, is what all parties (both Buyer & Seller) reference when deciding what constitutes a discrepancy and who is responsible for paying for it.

However, most Purchase Agreements provide little direction on how to repair the defects. This is left open for a reason. Parts availability, repair capability, parts price, and schedule can all affect the solution.

For the sake of this demonstration, let us assume all parties agree a discrepancy must be fixed. Therefore, what are the Seller’s obligations on how to resolve the discrepancy?

Addressing Component Discrepancies In A Typical Aircraft Purchase Agreement

On-Condition Components (without time or life limits)

Seller is not often required to:

• Install new or overhauled parts
• Install improved parts
• Speed up the handling of the parts
• Perform an exchange, unless under a time restriction or to meet other obligations written into the agreement

Time-Limited Parts

Seller is not obligated to:

• Install new or freshly overhauled components

Life-Limited Parts

The Seller may be allowed to install a part that is continued time.

The only restriction is the part must meet regulatory and traceability standards, as well as the criteria stated in the Purchase Agreement. The Repair Station must also find the part to be acceptable to return the aircraft to service confidently.

Realistic Expectations

To keep the prebuy evaluation productively moving forward without contention, both the Buyer & Seller need to be realistic about current supply chain and marketplace constraints.

Is it reasonable for a Seller to delay a $10 million transaction for 45 days to wait for a part worth a few thousand dollars to be repaired when an exchange unit is available?

Should a Buyer expect a Seller to install a new component at the cost of tens of thousands of dollars when the part can be repaired in a reasonable amount of time for a fraction of the cost?

So how does a Seller avoid excess costs during the prebuy, while allowing the Buyer to have a top-notch prebuy experience?

Communicate: The Buyer, Seller, and Repair Station need an open line of communication. We recommend all parties have on-site meetings at the beginning, middle, and end of the prebuy evaluation to set, manage, and meet expectations.

Inform the Repair Station in advance what the contractual delivery conditions include. For example, will the Seller require several pricing options?

If the Buyer wants the option of knowing what “new and improved” may cost, this should be discussed with the Seller or Seller’s representative beforehand.

If the Seller believes the Buyer understands expectations and will be cooperative, the Seller will most likely be agreeable to working together for the best interests of all involved.

Read The Repair Station Pre-Purchase Agreement: It should be clearly stated in the Repair Stations’ Pre-Purchase Agreement who gets access to the list of discrepancies and who has the authorization to decide how they are handled.  

If the Repair Station does not have such a document, you may wish to take your business elsewhere. Ultimately the Repair Station will seek payment from someone, and if the transaction falls through, or the Buyer decides to reject the aircraft, it will be the Owner or Seller of the aircraft that will bear the responsibility of paying the Repair Station for work performed. Therefore, work performed at the Buyer’s request must be pre-authorized by the Seller and paid for by the Buyer at that time. If the Buyer decides to walk away from the deal, all of the work they authorized is the Seller’s responsibility.

Consider A Parts Program: If the aircraft is on a Parts Program, or still under warranty, the terms and conditions of these programs have clear guidance on what parts can be used if a replacement is needed. Usually, these parts are from the manufacturer or a manufacturer-approved vendor. These programs do not cover the entire aircraft but will typically cover many of the most expensive items, which are the source of frustration for the parties.

“Gold Plating” The Prebuy: If a part can be sent for repair, but the Buyer wants the new and improved version, the Seller may allow this request if:

• the Buyer pays the difference between the repair and the new part
• the new part is readily available and does not adversely affect the delivery schedule
• there are no extenuating circumstances that would impede the sale (such as the new part requiring other modifications to the plane)
• there are no concerns the Buyer will walk on the deal leaving the Seller to pay for the part

By working together, the Buyer can improve the value of their new asset at a discount with no adverse impact to the Seller. 

In-house Repair Station Capabilities: It is in both the Buyer and Seller’s best interests to look carefully at the capability, knowledge, and experience of the repair station.

One of the most often-overlooked considerations is avionics, accessory, and component repair capability. A Repair Station that does not have these will have to procure the part or service from a third party at a significantly higher cost and more extended downtime.

To demonstrate the value of this in-house capability, consider this recent Falcon transaction. The APU mount had light corrosion that was outside the ability of the repair station selected for the Prebuy Evaluation. They could not inspect the mount and return it to service. A new replacement mount was available from the manufacturer at the cost of tens of thousands of dollars.

The mount was instead sent to Duncan Aviation’s Component Repair facility in Lincoln, Nebraska, where we removed the corrosion and inspected, repainted, and returned the mount to the aircraft within 36 hours at a fraction of the cost of the new mount. This is just one example of how having in-house capabilities will save all parties money during a Pre-buy.

Choose The Right Broker: The aircraft sales industry is no longer just about finding the best aircraft at the best price, or being able to market the plane to the largest audience. In today’s environment, clients looking for a significant value from a broker must seek out someone who will actively manage the transaction, engage technically with the repair station, and oversee the entire Pre-purchase Evaluation process.

When considering a Brokerage, examine all of their available resources. Determine if they have relevant operational, regulatory, or technical backgrounds that add value to the transaction. Better yet, if the broker is a subject matter expert or has subject matter experts on staff, ask them to cite examples of how they added value to the transaction or saved clients money. Prospective clients are often blown away when they learn how much value is created or saved.