Buying a newly manufactured aircraft (or a demo aircraft) directly from a manufacturer allows you to have high confidence in the product, and the ability to complete the aircraft to suit your specific needs. The sales contract often feels like an extension of the marketing process and there is a temptation to sign what is presented and count on the warm working relationship to deal with any difficulties. You can count on a typical aircraft manufacturer to treat its customer well, because that is just good business. But there are important decisions to be made in negotiating and signing an aircraft sales agreement, and there is always a good reason to review, revise and negotiate constructively.
The role of the aircraft sales agreement.
Like any written agreement, an aircraft sales agreement does two things.
- The sales agreement tells a story. The aircraft manufacturer wants to sell an aircraft. The buyer wants to purchase one. So, let’s put in writing how we are going to accomplish it. What will the manufacturer be obligated to do, and when? What will the buyer be obligated to do, and when? The more detail the better, for two reasons. Aircraft construction and delivery will go more smoothly if the parties clearly understand their obligations. Second, laying out the story in detail reduces the risk of a basic misunderstanding. Some transactions fail as the parties try to negotiate the sales agreement, and often that is because the deal that he parties thought that they had fell apart when the details were filled in; meaning that they never really had a deal.
- The sales agreement addresses unexpected events. For example, what happens if a payment is missed? What happens if a regulatory action such as an airworthiness directive requires a change in the aircraft mid-contract? What happens if the aircraft is damaged during testing? What if a software upgrade becomes available during aircraft construction? A complete sales agreement deals with as many realistic contingencies as possible.
This is why aircraft sales agreements are very detailed, and seem to grow more detailed every year. If something happens that was not specifically anticipated and addressed in the sales agreement, the transaction becomes uncertain. That is not good for either party. It is important to invest the time and resources to understand the entire contract and make it fit your expectations as much as possible.
Negotiation is really nothing more than trying to influence and change the terms of an aircraft sale agreement before signing, or afterward by amendment and supplement. There are a few reasons to negotiate, and your effort level will depend on some factors discussed below.
- Is the whole story being told, and is it accurate? As noted above the role of a contract is to tell the story of the deal. The manufacturer will always start the drafting, so you have to make sure that they tell the correct story and the whole story. You need to compare the sales agreement to all of the written and verbal commitments that were made to you in the sales process, including materials that you may have seen on the internet or in sales materials.
If something is important to your purchasing decision, and it does not appear in the sales agreement, then you need to ask to have it reflected. This process is good for both parties because it eliminates ambiguities and fixes simple errors. For this reason, it is a good idea to have the people involved in the purchasing process also involved in the contracting process.
- Are there new or unexpected terms in the sales agreement that are unfavorable to you? The answer to this is “yes.” A sales agreement will fill in a lot of the details that are not covered in the term sheet or marketing materials, and many will work against you. This is where the true negotiation takes place, and your ability to improve your position will depend on a few factors.
- Be realistic by understanding your bargaining power. When Gulfstream introduced the G650 (as an uncertificated prototype), the demand for the model was far greater than the supply. Understandably, Gulfstream was not willing to negotiate on the terms of their sales agreement. In contrast, in the last months of production of the Hawker 4000, market uncertainty compelled Hawker to offer significant concessions to customers. When going into a negotiation you need to understand the limits of your bargaining power.
- Understand the manufacturer’s primary risks and fears. Manufacturers have just a few serious concerns and they will not compromise much on contract provisions covering these concerns.
- Manufacturers want uninterrupted aircraft construction, completion and delivery in strict compliance with their production schedule. They do not want an aircraft sitting idle while an owner selects fabrics. For that reason, the sales agreement will include very specific timelines for customer changes, selections, inspections and payments. There will be significant penalties for missing deadlines. Carefully review these time periods and make certain that you can live by them. Consider time differences and local holidays which may interfere with your ability to meet timelines.
- Manufacturers want to be paid for progress, not at delivery; and they want full protection if the buyer defaults. For this reason, there will be deposits and progress payments. Try to connect your payments to milestones, not specific dates. Key milestones to consider include “green” delivery, issuance of airworthiness certificate, and completion delivery.
- Manufactures want real buyers not speculators. Some manufacturers (Gulfstream) are stricter on this point than others (Bombardier). Understand the manufacturer’s concerns and negotiate within those concerns. The manufactures want certainty that they are dealing with a buyer who intends –at the time of signing—to buy the aircraft for itself. There are legitimate reasons to assign a contract due to changed circumstances.
- What does the manufacturer owe you?
An aircraft purchase agreement need not be a one-sided contract. The buyer’s greatest protection is the acceptance inspection. If the contract has properly defined the deliverable aircraft, then the buyer has the opportunity to make certain that the aircraft meets that definition, in every respect.
If a buyer has legitimate concerns then the buyer is entitled to have those concerns addressed. The following are examples of contract points that we negotiated that proved to be very valuable to our clients:
- Payments tied to specific events in the contract, rather than a calendar. This became crucial when an aircraft was delayed due to certification problems.
- Rights to software upgrades that are implemented during the aircraft’s construction. Software is a big part of modern aircraft affecting flight systems, cabin management and entertainment.
- Financial penalties for delay. In rare cases you can get a manufacturer to agree to penalties for missing a deadline. They will usually be limited in dollar amount, but they create an incentive to move quickly.
- Mortgage on the incomplete aircraft. Anyone who had a contract on the original Eclipse Jet knows what happens when a manufacturer goes bankrupt. Your progress payments are lost, and if you do not have a mortgage on your incomplete aircraft, there is nothing in the factory that belongs to you. A lose/lose situation. A manufacturer will usually allow you to put a mortgage on your aircraft but only after it has reached a certain point in its construction.
- The aircraft will be delivered with no damage history. Accidents do happen during construction and testing, and documented damage history devalues an aircraft. Manufacturers have the unique ability to address damage by remanufacturing in a way that avoids damage history. Make sure your contract builds in the regulatory definitions for damage and major repair.