COVER STORY: PRE-PURCHASE INSPECTIONS
Planning the perfect PPI
Pre-purchase inspections can be a major source of angst and expense during an aircraft deal but there are ways to smooth the ride. Words: Rob Hodgetts
COVER STORY: PRE-PURCHASE INSPECTIONS
Planning the perfect PPI
Pre-purchase inspections can be a major source of angst and expense during an aircraft deal but there are ways to smooth the ride. Words: Rob Hodgetts
AIRCRAFT transactions can be shaky at the best of times but possibly the biggest tremors come with the pre-purchase inspection.
This pre-buy survey is one of the major skirmishes between buyer and seller, and if anything is going to scupper an aircraft deal it is the PPI. Buyers are paranoid and terrified of any mention of the C word (corrosion). Sellers hate having to pay for maintenance on an aircraft they are getting rid of.
So how do you ensure the pre-purchase inspection works for you?
“First and foremost, there’s no such thing as a perfect pre-purchase inspection,” says broker Oliver Stone, MD, Colibri Aircraft. “Everyone’s going to leave a little grumpy because that’s how it works.”
The pre-purchase inspection is to check the airworthiness of an aircraft from a technical perspective, including airframe, engines, avionics and systems. It acts as insurance against costly surprises further down the line, just like you might do with a survey on a house or a viewing of a car.
“If I’m representing a buyer, I want to get as deep as possible. The PPI is de-risking the purchase, effectively,” says Tim Barber, aircraft sales and acquisitions, Duncan Aviation. “The seller will want the least intrusive, least invasive PPI possible.”
Aoife O’Sullivan, a partner with the Air Law Firm, adds: “For me, the PPI is the heart of the deal. Certainly, during Covid, you’d hear about these people who were buying aircraft literally ‘as is, where is’. That’s effectively buying yourself a lot of risk.”
For brokers, the PPI ultimately is an exercise in expectation management, adds Stone.
“If a buyer is showing up thinking they’re never going to see the word corrosion, they’re going to be horribly disappointed because all airplanes corrode,” he says.
“And I know sellers have spent a lot of money maintaining airplanes and keeping them perfect but you’re going to have defects and there’s no way around that. If the expectation is, ‘I’m going to go there and have zero findings’, everyone will fail.”
To get to the PPI stage, lawyers from both parties will thrash out the Aircraft Purchase Agreement (APA), a binding contract which sets out the scope of the inspection and the responsibilities of the buyer and seller.
Often the exact wording of the APA, bespoke to each transaction, will have been guided by a preliminary inspection, essentially a one-day look around the aircraft.
“What if, when you go and inspect an aircraft, you walk on board and the cabin smells like mould?” says Phil Balmer, director of maintenance, TAG Aviation in Hong Kong. “What if the cabin smells like smoke? Is the paint condition terrible? Is there significant wear and tear in the cabin? These are issues that might not be covered by the terms of the sales and purchase agreement but could significantly affect the value of that aircraft for the buyer.”
An initial scan of documentation and maintenance history at the preliminary inspection stage is also advised.
“We’re looking for continuity from new,” adds Balmer. “Are they in English and what is the overall quality? You can tell a lot about an operation just by glancing at the quality of their records.”
Stone adds: “If the aircraft has just been through a massive check, why give the manufacturer another hundred grand for pre-buy when you’re just going to look at the same stuff inspected two months ago.”
Contract wording
Tooled up with the available intel, the lawyers will draw up the purchase agreement, defining what is to be included in the inspection and the required delivery condition. This is what the maintenance facility will work to when carrying out the inspection and writing up its report.
“In the contract, we will say it’s airworthy, it’s free of liens, it’s systems are functioning, it’s up to date on its maintenance schedules with no extensions or deferrals, it’s all up to date on programme, paid up to the date of closing,” says O’Sullivan. “That tends to weed out where the issues are.”
The wording of the contract always has the potential for combustion between the two parties.
Sellers have to pay to rectify any airworthiness issues and, on the basis that the more you look, the more you will find, are keen to keep inspections to a minimum. Buyers want peace of mind with a comprehensive inspection and will often push to have other more cosmetic issues covered.
“I remember a few years back we received a bill for something like $25,000 for a microwave,” says Barber, who was representing the seller.
“Clearly the airplane can fly without a microwave, but it became a fairly contentious point.”
Another time, Barber says a buyer deemed the top step of a Challenger too “spongy”. “They were trying to stitch us for $20,000 to fix this step. And there’s no way that it was necessary to make the aircraft airworthy,” he adds.
Some contracts state that all systems must function “as per specification” but that can spark more debate. Obsolete systems can throw up further complications. What happens if a certain piece of hardware is no longer manufactured?
“That could require an upgrade to make it functional,” says Barber “A scratch on a surface would be considered wear and tear, but if the entertainment controller display panel is not operational, then that would be not operating per specification and would be a defect that the seller would have to rectify.”
Some sellers will try to head this off early in the process. “A lot of the sellers on older aircraft are now trying to put wording in that basically says, if the system is obsolete, I don’t have an obligation to replace it,” says O’Sullivan.
Market conditions
Negotiating the extent of the PPI can be a major flashpoint. The basic Level 1 PPI can amount to little more than a walk around and a kick of the tyres, while Level 2 or 3 will be more in-depth, including detailed document and maintenance history reviews, test flights to check systems work and borescopes of the engine and auxiliary power unit (APU).
Some companies, such as Bombardier and Duncan, have moved from a PPI to a pre-purchase evaluation (PPE), which is less an exercise in ticking off maintenance tasks as part of the inspection and more an overall evaluation of the aircraft condition.
Market conditions will play a part in the dance between buyer and seller, often tilting towards one party over the other. During the peak of the Covid market when prices were spiraling, some sellers were refusing a PPI completely.
“There were people rushing out to spend $10m, $20m on a jet and having effectively no insurance back-up,” says Barber. “And lots of people caught colds because they panicked, paid the money and then suddenly realised there’s some big checks coming or some things haven’t been done correctly. Every time a corner is cut in maintenance, that’s a problem for the future.”
Standardising the levels of inspection between OEMs or maintenance facilities is a change O’Sullivan would like to see.
“That might be a simplistic way of looking at it but it’s why it is very important that the buyer of an aircraft has a technical team because by the time it gets back to the lawyers, and therefore back to the seller and the buyer, it’s already escalated and, a lot of times, unnecessarily,” she says.
“But also, your independent guy needs to be familiar with, say, Falcons vs 7500s vs 5000s vs the G550 because they have different nuances and different areas to look at in pre-purchase inspections.”
When the APA is signed, a non-refundable deposit (subject to seller compliance) is placed in an escrow account. “This way, there is some loss to the buyer for pulling out after incurring expenses for the seller,” adds Stone.
Buyers will then arrange to have the aircraft taken to their preferred maintenance facility, at their cost, for the inspections.
Standardising inspections between maintenance facilities is favoured by Aoife O’Sullivan.
PPI checklist
Q. What is a PPI?
A. A pre-purchase inspection is a key step in the transaction chain for buyers and their representatives to assess the airworthiness and condition of an aircraft.
Q. Why is it important?
A. It overs knowledge and leverage for buyer and mitigates risk.
Q. Who pays for a PPI?
A. The buyer pays for the inspection and the costs of flying the jet to their preferred maintenance facility. The seller pays for any airworthiness defects.
Q. What is an Aircraft Purchase Agreement (APA)?
A. This is the contract, thrashed out by lawyers, that defines the scope of the PPI, the responsibilities of both parties, the delivery condition and timeline.
Q. What is included in a PPI?
A. That’s the million-dollar question. Buyers want a comprehensive inspection, sellers want to minimise intrusion as the more discrepancies found, the more they have to pay. The scope can range from a basic walk around to borescopes in every hard-to-reach area. Typically, a PPI is a detailed document check, airworthiness check of the airframe, engines, systems and avionics, and a test flight.
Q. What is the pre-buy process?
A. The buyer identifies an aircraft to purchase and signs a letter of intent. Lawyers draft the APA, often guided by a preliminary inspection of the aircraft and its documents. Once the APA is signed, deposit funds are placed in an escrow account and the jet is flown to the maintenance facility where the PPI will take place. Representatives from both parties are ideally on hand throughout. Airworthiness deficiencies should be rectified by the seller, but lawyers will often argue over other perceived discrepancies, known as ‘squawks’, such as cosmetic issues. Once agreed rectifications have been made, satisfying the terms of the APA, the buyer’s lawyer will take title and the funds are released.
PPIs: Scope for negotiation
From a broker’s perspective, pre-purchase inspection scope can play a significant part in negotiations, according to Stone.
“Generally, you are fighting for every deal and you are convincing a buyer that you’re going to be a cooperative seller and vice versa,” he says.
“Ultimately, the only reason that pre-purchase is happening is because somebody wants to sell something and somebody wants to buy something, so the faster you get that done, the happier everyone is. Getting wrapped up in a pre-purchase inspection for three to four months, which happens all the time, is very difficult to manage.”
But like peeling an onion, the nuances to these negotiations are multi-layered.
“I see it occasionally written into contracts that if the airworthiness squawks [discrepancies] go over half a million dollars, then the seller has the right to walk away,” says Barber. “The thing I will always explain is that, with all due respect, you've now got a non-airworthy aircraft with $650,000 worth of squawks, which have to be fixed, whether you sell it or not. So there’s this inherent risk.”
That’s why all parties need to make their PPI decisions with a commercial head on, while behaving “rationally” and presenting a “logical argument”, says Stone.
“You can’t say it’s my way or the highway because that’s just not the way deals happen, right?” he adds. “There’s always compromises. And the more you look, the more you’re going to find. There’s always hot topics on every airplane type, and you have got to figure out what those topics are. But really ask yourself if this is the hill you want to die on.”
Barber says a PPI is a “pretty good way of falling out with people” but suggests good communication and open discussions can help.
“A few years back, I was selling an aircraft and the buyer said, ‘Let’s set up a WhatsApp group with everyone on it.’ And I immediately thought, ‘Oh my goodness, that sounds like trouble,’” he says.
“But it worked a treat. It just kept people polite. It was quite a tough sale because the aircraft had a lot of squawks and the seller was getting quite anxious. But to this day, he and the buyer are still very good friends. So there is an argument for some civilities and some open communication, although I’ve only done it the once.”
“It’s very important the buyer of an aircraft has a technical team because by the time it gets back to the lawyers, and therefore back to the seller and the buyer, it's already escalated, a lot of times, unnecessarily.”
Aoife O'Sullivan, Air Law Firm
Avoiding huge headaches
A comprehensive document review is “absolutely critical” and should be undertaken by specialists over a couple of weeks, according to Glyn Tookey, regional sales manager EMEA, Duncan Aviation.
Alongside studying maintenance records, one area they should pay close attention to is the aircraft’s certification, considering likely future use scenarios.
“I’ve had a situation where a customer bought a G200 from the US, put it into Turkey and it needed an additional flight data recorder,” says Tookey.
“And there was no means or any way to do it from the OEM. So he had a massive problem and a huge headache in that he bought an aircraft, which was very difficult to become EASA compliant.”
Damage history is another area of the paperwork to check over thoroughly. Major repairs, as defined by the FAA, can be a red flag, but understanding the context is key.
“If an aircraft has been involved in a major incident, people would want to know that,” says Balmer. “However, in many cases during regular maintenance, there might be a repair which is classified as major, but in fact is kind of just normal, as opposed to, for example, a vehicle colliding into the wing of the aircraft.”
Barber adds: “I've seen it where people have bought an airplane, probably without any credible advice and support, and then when they come to sell it, they are horrified that they've got no burn certificates [ensuring compliance with flammability standards] for the aircraft, because it becomes quite a painful task to get those established.”
I spy corrosion: Borescopes may be needed to spot its dreaded effects.
“One of the things that will always be a concern to any buyer and will send a shiver down the spine of any seller is corrosion.”
Tim Barber, Duncan Aviation
Corrosion: Naturally problematic
At some stage in the PPI, the corrosion issue will come up. All aircraft corrode, given it is a natural process that occurs when refined metals degrade into a more chemically stable form. But in the emotional maelstrom of an aircraft transaction, perception can be everything. “One of the things that will always be a concern to any buyer and will send a shiver down the spine of any seller is corrosion,” says Barber.
Some aircraft have areas known to be prone to corrosion, which makes it easier to search for and could lessen the impact. But some spots are more difficult to inspect and require more invasive investigation, which can set alarm bells ringing. Detailed knowledge of where the aircraft has been used, such as a salty coastal location, is another piece of the perception puzzle.
“Corrosion is rarely not fixable,” says Stone. “Everything with airplanes you can fix with time and money. Most corrosion is a very small amount of bubbling, which is scratched off and repainted in an hour’s worth of work.
“The difficulty is when you get small amounts of corrosion in really awkward places. So, for example, there might be an element of corrosion in an area where the only access is to remove a wing. From a safety issue, no problem. They’ll fix it very quickly. “But it’s mostly a perceptional one of a lack of care.”
Corrosion hidden inside areas such as spars, fuel tanks and the tail fin will take a borescope inspection to find it and identify it. “If it’s there, it’s very rarely a cheap solution,” says Barber.
O’Sullivan tends to offer a get-out from the deal if the PPI throws up “significant findings”, which include material corrosion, typically defined as being outside manufacturer’s tolerances. This will need to be fixed, on the seller’s dime, unless it’s on a programme. But then some programmes do not cover corrosion, which further muddies the water.
“If there is material damage or material corrosion, we give them the option to withdraw,” says O’Sullivan. “They don’t have to, but they have the right to reject the aircraft.
“Sellers don’t like that, obviously, because they’re saying you’re now poking around my aircraft, lifting panels, digging around the cockpit and under the toilet, and then you want the right to pull out if you find something significant. Well, yes we do. That’s the whole point.”
Years of data from engine health monitoring programmes
provides confirmation of the unit’s health, says Delray Dobbins.
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To B or not to B
The issue of a borescope inspection can cause considerable angst for all parties during a PPI. A borescope is a miniature camera on a flexible cable that can be threaded into those inaccessible spaces to check for cracks or corrosion or some other damage. For a buyer, it can highlight potential issues and might provide leverage for price negotiations or the opportunity for a swift exit. But equally, it can open up a can of worms and could severely stall a deal while issues are resolved. TAG’s Balmer recommends doing a borescope where possible, even if the aircraft is only two months old. His reasoning is that if any damage is found, the insurer will question when it happened, and the danger is that you might not be covered.
Sellers, meanwhile, are generally resistant to borescopes as any repairs needed for defects to airworthiness will come out of their pocket, especially as most engine programmes won’t cover the findings of a borescope inspection.
“Certain aircraft have certain issues and if you can avoid the borescope being stuck in there, you’re probably going to be a wealthier person when you've got rid of the airplane,” says Barber.
TAG’s Balmer cites an example where a buyer had heard about corrosion issues on the type of aircraft his client was selling and was adamant he needed to put a borescope into some of the underfloor areas.
“I said to the seller, either we walk away from it and we find another buyer or we just let him stick the borescope in there,” he says. “The aircraft’s not that old and the chances are, although I can’t guarantee it, it’ll be fine. We decided to let the borescope go under the lavatory area and it was fine, deal closed.”
Delray Dobbins, director of global strategy, Engine Assurance Program, says buyers of a used aircraft should be allowed to look for items excluded by an engine programme, like foreign object damage (FOD) or corrosion, but he adds that putting a borescope in the hot section is an outdated procedure and “massive overkill”.
He points out that years of data from engine health monitoring (EHM) that comes with most engine programmes provides an accurate and real-time confirmation of the unit’s health.
“An airworthy engine and an engine 100% within limits are two completely different things.”
Delray Dobbins, Engine Assurance Program
“Now the technology is so robust and granular,” he says. “Engine health monitoring gives you a much better picture of the health of the engine and that all those thousands of parts are working in harmony. Rolls-Royce, for example, says it can find anomalies in flight that are imperceptible to the pilot.”
The “slippery slope” starts with the wording of many APAs, which specify that engines must be “within all manufacturers’ specifications and tolerances”, according to Dobbins.
“To be clear, if the engine indications in the cockpit are normal, the engines are current on any inspections called for in Ch 05 of the maintenance manual, they pass a ground run test and have no open squawks on the engines, then that is an airworthy engine,” he says.
He cites the example of an engine which has 5,000 hours and is 1,000-2,000 hours from overhaul. “There is almost no way you’re going to put a borescope in that turbine section and not find something out of limits, but the issue is, there was no cause or operational reason that drove troubleshooting to reveal this anomaly,” he says.
“You can have all sorts of cracks in the combustion liner and wear on the turbine blades below the limits in the manual. But as long as the engine as a whole is performing well and is making all the power it is supposed to, and it’s current on all the inspections, that’s airworthy. And your engine programme is going to cover the issues at the next overhaul. But once seen they have to be dispositioned. Add to this scenario, no rentals for X months, a buyer who may have walked, and a seller who has to pay for the shop repair costs as the findings are not covered by the engine programme. I’ve seen this cause over $1m in exposure for a seller.” Dobbins adds: “An airworthy engine and an engine 100% within limits are two completely different things. If you want an engine 100% within limits, go buy a new aircraft.”
Once the arguing is done, agreements are reached, discrepancies corrected and the technical acceptance certificate signed, the buyer’s lawyer will very quickly take title in preparation for the closing date.
“You’re committed now to the deal. Well, you’re committed on the contract anyway, but you’re more heavily pregnant,” says O’Sullivan.
But like all transactions, there are still human factors, emotion and whimsy at play.
“One pre-purchase inspection had less than $30,000 in squawks, which on a 10-year-old aircraft is nothing,” says Barber. “And the owner walked away from the deal. Unbelievable that somebody could be so stubborn. But these are successful people and sometimes it just comes down to a matter of machismo and who can beat their chest the loudest.”
