As a buyer, understanding the industry of a target company is key to completing a thorough due diligence process. Knowing the ins and outs of an industry can help identify specific or unique due diligence matters which can raise concerns or other red flags that wouldn’t otherwise arise in another context. This article lists some of the unique due diligence matters to review during a transaction involving a target in the aviation industry. Examples of potential targets include airlines, cargo operators, a maintenance/repair/overhaul (MRO) facility, manufacturing, ground handling, and aircraft leasing businesses. Additionally, matters discussed in this article may also be helpful for non-aviation focused companies that own or operate an aircraft as part of a corporate flight department.

     (1) Labor – Unions pose potential problems and obstacles to navigate in any transaction they are involved in. Although unions are not common in most industries nowadays, they are very prevalent in the aviation sector. Understanding of the union agreement in place and potential rights the union may have are essential to avoid delays to, or even avoid the union from blocking, your proposed transaction. Even if the target does not have a direct union agreement in place, it is possible in the aviation industry that such target’s suppliers or even customers have a union involved that could affect your transaction. 

     (2) Economic Risks – Certain sectors of the aviation industry often deal with tight financial margins and most aviation players are highly susceptible to changes in the overall U.S. economy. Understanding how certain economic events effect your target’s suppliers, customers, and bottom line will be beneficial to determine the long-term benefits of a proposed transaction. For example, COVID-19 crippled many major commercial airlines when it first appeared in the U.S., but allowed private jet carriers to post record breaking revenues and profits. While major airlines, together with service providers like MROs and staffing providers, were looking to cut costs to stay afloat, aircraft fleets of private jet carriers seemed insufficient to keep up with demand.  

      (3) Third-party Consents and Authorizations – Perhaps one of the most important, and time consuming, aspects of any aviation transaction will be identifying, satisfying (when applicable), or obtaining (when applicable), third-party consents and authorizations. Depending on the target, certain governmental agencies may need to be given notice or even give approval for your proposed transactions (e.g., the FAA, FCC, or municipal airports). Anyone with experience in mergers and acquisitions will acknowledge the potential frustrations of working with governmental agencies (e.g., lack of communication, waiting periods for responses, additional paperwork, etc.). Other third-parties, such as suppliers, service providers, and even customers may, depending on the agreements in place, require notice or need to give consent to your proposed transaction. Identifying these third-parties early in the diligence process can help avoid delays on the deal’s timeline, especially if involvement of a governmental agency is required. 

     (4) Insurance – Understanding the insurance requirements of a target’s business can help a buyer to avoid ignoring potential costs or risks. For example, some airports may require a target to list them as additional insured on policies or push a target to seek additional insurance to provide indemnification for damages to travelers or their personal property (e.g., below the wing service providers or janitorial work within the airport).  Additionally, a buyer must understand the type of insurance in place to determine if it will be continued or be rolled into any of the buyer’s already existing policies post-closing. 

     (5) Aircraft Leases – Buyers should be tuned into the aircraft fleet of a potential target, if applicable. It is very common for targets to lease aircrafts rather than own them directly. Understanding a target’s aircraft leases can be especially tricky if aircrafts are leased by affiliates or insiders where documentation is scarce or absent. Additionally, taking over leases via an asset acquisition could trigger third-party consents or notice requirements. Some aircraft leases could contain a buy-out provision which a buyer may be more interested in pursuing, but the buyer will need to have the proper financing in place to afford any buy-out in addition to the cost of the proposed transaction. Both parties will need to work together to ensure related aircraft liens and personal guarantees (if applicable) are properly released or properly handled at or promptly after closing. 

     (6) Intellectual Property – Potential trademark infringement is a common concern of buyers in any merger or acquisition transaction. The aviation industry can be tricky when it comes to trademarks as there are many common words used (e.g., aviation), but also many small regional or local aviation players in the industry. It is important for buyers to understand the potential intellectual property risks when acquiring a small target in the aviation industry, especially if the buyer has plans to expand business outside the target’s current geographical location (including foreign operations).

     (7) Joint Ventures –  Joint ventures, such as sharing of airplanes or code sharing, have become a common practice in cutting costs and maximizing profits in the aviation sector. Buyers should be fully informed of any ongoing joint venture agreements a target may have in place, including continual obligations which will become a buyer’s responsibility post-closing.

     (8) Governmental Contracts – Like in other industries, governmental contracts in the aviation sector may have limitations or restrictions about a business’ ownership structure (e.g., small business contracts or USTRANSCOM contracts). A proposed transaction could trigger a default under a governmental contract which may lead to the cancelation or non-renewal of the underlying contract post-closing. The importance and impact of governmental contracts on a target’s business varies, but buyers should be aware of the transaction’s impact when evaluating the benefits of a potential merger or acquisition. Governmental contracts may also require disclosure of indirect ownership, which could be problematic for a private equity group seeking to keep confidentiality of its owners.

     (9) Affiliate Transactions – Affiliate transactions or agreements could be problematic for a buyer post-closing, especially if the affiliate transactions are not at arm’s length. Common affiliate transactions are the leasing of aircrafts, the ability/right of affiliates to use target’s aircraft fleet or property (e.g., office space or flight simulator), and discounted services by the target. Buyers will typically want to terminate affiliate transactions, but sellers may simply want to renegotiate terms to keep such agreements in place. For example, one of the more common requests by sellers of an aviation fleet is the ability to access planes for personal use for free or at a discounted rate post-closing. Although such fringe benefit can often be structured into a deal to please the seller, a buyer could leverage this request to establish goodwill or seek a more buyer-friendly risk allocation in the purchase agreement. 

     (10) Foreign Operations – Buyers should be aware of any foreign operations a target may be involved in, especially if they operate flights abroad. Engagement with foreign counsel or consultants may be required to negotiate with foreign governmental agencies or other third parties which may need to be involved in the proposed transaction. Foreign operations may require a buyer to seek additional permits, licenses, or authorizations form both national and international organizations to continue operations, especially if the transaction is structured as an asset acquisition. 

Understanding the aviation industry is merely the first step in establishing a sound foundation for your due diligence process. Consider engaging with an attorney or other consultant with experience in transactions involving the aviation industry to better position yourself at the negotiating table. The ability to identify potential risks and allocate them accordingly may save you time and money in a transaction and post-close period.