Checking = Verifying
In our practice, few things are more jarring than seeing the closing checklist after learning how many aircraft live in the portfolio.
This pilot won’t taxi this beast without finishing his list. You should think about your loans the same way.
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 assure 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:
- 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 that a first page exists.)
- The last page tells you the asset is in airworthy condition – i.e. 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 FAA or an authorized inspector / engineer) look at the last logbook entry and tell you what it means. When the key words are “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: A maintenance event that was unscheduled and it was since returned to service.
- Regular check up: A sign off (“return to service” endorsement) after what is known internationally as an “MPI” or major periodic inspection. In the US, these are known as “100 hours”, Annual Inspections, or things such as a “36 month / 1200 hour” for aircraft that are tracked under more modern airliner like schedules (see article on Maintenance Steering Group 3 – “MSG 3”)
Why this Problem Persists
The fact is that the best of the best fall victim to the “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” their interest in the aircraft, they are 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 water line, or things you want to eliminate before
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 glamor 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 a “please understand why you are checking this box” box – and not a perfunctory jab of the pen.
While we offer a range of banker specific tools and metrics, the key solution needs to be managerial driven – in good times (see “Bentley to Bus“) 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 they knew it… and what rights they have.
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
- FOQA and 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 that has been trained to interpret them in a scalable fashion. The larger your loan portfolio fleet, 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 when the time comes is key to better sleep and less heartburn.