Expert Commentary

Checklist ≠ Checking Boxes

Checking means verifying to people in charge of flying things. Risk managers and bankers should be no different. In our practice, few things are more jarring than seeing the closing checklist after learning how many aircraft live in the portfolio.


Corporate Aviation
July 2015

To be clear—everyone has good intentions. The problem isn't that there is woeful negligence or a need to close … or get through the closing to get that commission (though your salespeople will take care of that). The problem is typically understanding the meaning or intent behind a check box.

Here is perhaps the most classic checklist item that can help really prevent train wrecks, or ensure their inevitability:

"Obtain First and Last Pages of Logbook"

The intent behind this original checklist item that must be in hand pre-closing (or at the closing) is that you know two key things:

  1. There is some continuity in the logbooks and aircraft history. (For example, the last page is from the same airplane as the first page, and a first page exists.)
  2. The last page tells you the asset is in airworthy condition—that is, defined as not needing $140,000 to escape the hangar and become airworthy.

The stark reality here is that you want to have some technically oriented person (does not have to be the Federal Aviation Administration (FAA) or an authorized inspector/engineer) look at the last logbook entry and tell you what it means. When the key words, "aircraft is suitable for intended flight," are found, a technical person has a moral obligation to go deeper: what kind of flight? Those words, amazingly, are more problematic than what you would typically "want" to see. Typically, a most recent entry in a logbook would have one of two flavors:

  • something broke—an unscheduled maintenance event where the aircraft was since returned to service, or
  • regular checkup—a sign-off ("return to service" endorsement) after what is known internationally as a major periodic inspection (MPI). In the United States, these are known as "100 hours," annual inspections, or "36-month/1,200 hour" inspections for aircraft that are tracked under more modern airliner-like schedules.

Why This Problem Persists

The fact is that the best of the best fall victim to the axiom "penny wise, pound foolish" when it comes to spending ahead of closings, not after them. When an underwriter files a UCC in your state to "perfect" its interest in the aircraft, it is entering a highly fluid, murky, and at times challenging world. Aircraft simply aren't like real estate—no one, no civil or legal structure has your back. Sure, there are FAA things about "safety," but that safety doesn't extend to financial risk that a buyer or underwriter knowingly or not takes when money changes hands.

The key here, from the bank/underwriter perspective, is that you'd want to know what the rounding error might be in the actual value of what they've just collateralized. Or, put another way, once you've gone that far, it is too late—you want to know that any surprises that suddenly put the bank underwater, or even near the waterline, are things you want to eliminate before the sale.

Imagine Knowing Your Position

Imagine sailing through closings knowing that, at least on the asset side, you were certain that any "gotchas" on airworthiness (i.e., value) were nailed down prior to any money being deployed to a closing or escrow company. Believe it or not, this is entirely possible. The scenario above is not only possible but more common than you would think, especially when times are good and piles of money in many different places are looking to lend against aircraft.

While we don't bask in the TV glamour of aircraft repossessions, we've been around to help bankers with more than a few, and having a front seat at some of them allows us to see that most, if not all, debacles in aircraft finance happen before the closing has occurred. The method of fix is simply to have a method to make sure that your checklist is treated as "please understand why you are checking this box"—and not a perfunctory jab of the pen.

The Solution

While there are a range of specific tools and metrics, the key solution needs to be managerial driven. In good times, aircraft are added to balance sheets at good clip—such a good clip, in fact, that life is good until it is not. When it isn't, the fine print is pulled out and examined to be certain of what the underwriter knew and when it knew it ... and what rights the underwriter has.

While reading logbooks is one thing, an entire suite of metrics can be applied to gauge the relative default or "focus" a given aircraft is worthy of. Here's a short list of things that can indicate near-term trouble:

  • Engine starts, cycles, and flight plans filed
  • Geo-violations, wandering beyond insurance coverage spots
  • Flight operational quality assurance (FOQA) and maintenance operational quality assurance (MOQA) driven data collection and analysis
  • Online logbook updates check in from an independent technical perspective
  • While the wonders of FOQA and MOQA can give an underwriter deep insight into how the client is doing, nothing beats having a member of your team who has been trained to interpret them in a scalable fashion. The larger your loan portfolio fleet is, the less risk and less time each aircraft should represent if you have a continuous improvement process in place on how to finalize the loan process before closing.

And, when and if a "check-in" phone call is required, already having a plan to preserve as much value in an airplane as possible when the time comes is key to better sleep and less heartburn.

Conclusion

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Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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