Commercial Aircraft Leasing uses only a few formal agreements, one of which is the LOI. The Letter of Intent. It’s a great tool for a company – if used correctly.
But there are a lot of cons with those pros and misuse can cost you. Big time.
The letter of intent and its cousin, the MOU (Memorandum of Understanding), are great strategies to start a complicated, multi-level prospective deal. Like selling or leasing commercial aircraft.
At the end of this article, you can download a sample intent letter. With what we feel are standard terms for a business deal. And this approach works for aviation assets (Airplanes, Engines even a set of landing gear). But it should work for any sale or deal negotiation once you know what you are doing.
Which you do. Right?
An LOI is a pre-contract document signed by both parties that is not legally binding*. It can be one page, or twenty. It can be a simple application, or it can be super-detailed. To make the final contract almost fly on autopilot. But it’s what it doesn’t say that can be most valuable.
Some people will say that an MOU is a legal document and an LOI is not. This is true, but a huge simplification. It needs more explaining. First, in our experience, we use the LOI. So, if you are a company selling something, or buying something then this is the tool you use.
In aviation, MOUs are mostly seen between state agencies, intra-governmental teams or in M&As where business agreements or Joint ventures are contemplated. So put simply, if you are a seller/buyer team or Lessor/lessee of assets, use the LOI. If you are forming a partnership or Joint venture, use an MOU.
First off don’t if you don’t have to. If you are in the position of a willing seller (or lessor) and you have found a suitable, willing Lessee or buyer – just go straight to contract. This will be a requirement, so save yourself the time and convert your sale.
But aircraft (and Jet engines) are expensive pieces of machinery that take time to be inspected and approved. And a lot of time between initial contact and that last page signature can pass.
Chris Do says there are three types of clients – Value Buyer, Window Shopper, and Price buyer. When you are trying to sell anything, you deal with a lot of window-shoppers and time wasters. And like most business sectors, we need to kiss a lot of frogs to find the prince.
There’s a significant risk when we engage with a potential buyer- we call it “execution risk”. Which is an opportunity risk that a buyer will fail to sign (or you are excluded from leasing to him) and time is wasted.
Because other, suitable buyers could have come and gone. And losses have now been authored. And if too much time goes by, the market can move in such a way that this can be really, expensive.
Let’s look at it from the seller team point of view – and just flip it if you are buying;
Some key issues the LOI will address are;
All of these could have a fiscal impact on the terms of the deal and the LOI won’t reveal them, only the final contract. So, the LOI is a balancing act between the marketing efforts and the deal decision.
Start with an NDA (non-disclosure agreement). Yes, it’s more paperwork but it’s widespread practice in Aviation, and for good reason. In our experience, you don’t want sensitive company financial information out in the wild. Especially fundamental terms that have been tailored for one client.
You don’t quote the same terms for a 10-year lease to JetBlue as you would for a six-month lease to Air America out of Cambodia (no offense Laos!). If a candidate approaches you looking for specs, prices, or terms – NDA them first. It’s also a wonderful way to kick start the KYC process, as you now have the legal entity details and a contact for your own internal risk guys to have a peek at.
Have a Letter of Intent boiler plate ready to go on all assets you own or manage. Even when you don’t need it. It is great practice, as they ask all the important questions (that you should already know). It allows you to revert internally to get this up-to-date data from your employers. Now you look super-smart.
We also advise for a detailed Letter of Intent if the client is real, and you can develop a better position. The goal is that the LOI terms will be airdropped into the definitive agreement, and this is what you want. 75% of contracts are boilerplate anyway (or should be left to the lawyers and tax advisors).
Everything else is delivery/redelivery items that are standard. Or at least it should be for your application process. The key reason for an LOI is that you want the client to commit to the deal in such a way that he will move to the contract stage. That’s our experience.
In Aircraft leasing terms there are a few basic steps to this whole process
The significant risk is the phase between Inspection and contract. This is when the client or his representatives need to physically go to inspect the aircraft, as is their program entitlement. Hopefully, they see what has been represented but this can take weeks or sometimes months (thanks Covid!).
It’s not as bad as the shipping business where the physical inspections can take a year or more, but if you have a desirable asset and it’s new to a sellers’ market, you really don’t want to waste that much time.
Aviation is still also a very seasonal business with April/May being the start of the European travel season. If you miss your window for delivery here, you could be looking at 6 more months of aircraft parked on the ground. The same goes for November, you don’t want to take an aircraft back when the seasonal program is over.
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