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Back-to-Back Aircraft Transactions 101
August 2, 2010
This publication was not prepared by or under the direction of NBAA. It is being provided to NBAA Members for their general information and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult your attorney or other advisor concerning your own situation and for any specific legal questions you may have.
In a "back-to-back" (B2B) aircraft purchase and sale, an aircraft broker buys an aircraft from seller and sells it to buyer. B2B deals were born of a movement within the aircraft broker industry to provide an alternate method of compensation for aircraft brokers. Aircraft brokers have historically made commissions generally ranging from 0.5% to 1.5%, depending on a variety of factors including deal size, marketability of the aircraft, etc. For purposes of this article, 1% of the sale price of the aircraft is used as the average commission for an aircraft broker.
In the past 10 to 15 years, the size and complexity of aircraft deals have increased dramatically. Additionally, the Internet and the sophistication of private jet market research tools have narrowed the gap between aircraft buyers and sellers. As a result, brokers now have to work harder to put together good deals, often by hiring market researchers, upgrading their marketing efforts and increasing their product, market and valuation knowledge bases considerably. Brokers have also become more adept at finding "off-market" airplanes by developing and maintaining a network of key relationships.
For better or for worse, brokers have generally continued to make an average of 1% of the sale price irrespective of the value created or added by the broker. The inevitable result of the increased cost, work and knowledge provided by brokers for the same amount of remuneration is that some brokers are no longer satisfied with earning 1%. By engineering a B2B deal, a broker has the ability to earn substantially more than 1%.
The catch is B2B deals can get difficult quickly, and the cost and liability of "blowing up" a deal can be in the millions of dollars. Both first time and veteran buyers and sellers are often not up to speed on the complexities of B2B deals or the strategies to manage these deals, and are especially vulnerable because B2B deals look innocuous enough if you do not know what to look for or who to ask.
Many aircraft buyers and sellers would say that the "upside" of a good deal belongs to them because they took the risk in buying or selling the plane. From this perspective, the B2B architect does not have any "skin in the game" and is acting as the customer’s agent, so they should only be paid their 1% fee.
There are also some very real risks to a B2B deal, even if the buyer and seller both know the deal is structured as a B2B and are not concerned about what the B2B architect is making as long as they feel that they are paying or receiving fair market value for the aircraft. With the right acquisition or disposition team, many of these risks can be eliminated, mitigated or managed, but absent assistance from advisors experienced in B2Bs, the parties risk not seeing issues until it is too late to deal with them.
In any event, B2B aircraft transactions will and do occur in today’s market. This article provides the parties with a brief education on B2Bs to enable buyers and sellers to make an informed choice whether to enter into a B2B, and if they do so some pointers to help navigate through the deal.