Getting asset strategies right: A guide for aircraft operators
In the first of a series of columns, Edwin Brenninkmeyer, CEO of Oriens Advisors, explains why aircraft operators need to get their asset strategy right to improve cash-flow and cut legal problems.
This month’s guest blog comes from Edwin Brenninkmeyer how provides a guide for aircraft operators for how to get asset strategies right.
Getting asset strategies right is crucial for businesses at all stages of their maturity. The impact on cash-flow of the differing strategies can be significant, as can the legal protection issues surrounding assets. Changing these can become both expensive, and time consuming.
At first glance, there doesn’t seem to be a lot of choice. The aim of most business is to use assets to maximize revenue, and in turn make a profit which can be returned to shareholders in some shape or form. If the assets are to be aircraft for example, these can either be bought with cash (equity) or loans (debt) or perhaps a mixture of both; or borrowed via a traditional lease or management contract. Buying something requires an investor to believe in what you want to achieve, in order for them to provide you equity. Venture capitalists may provide equity or your friendly (?) bank manager, or most probably today, the highly sceptical credit committee, debt. Borrowing the asset requires working capital, which hopefully is largely the surplus cash you make from using the asset, but may well be equity initially until the business turns cash-flow positive.
These financing decisions will drive the amount of cash required to start the business. Generally the less cash you can get away with initially, the better, so you will probably want to start off down the “borrow” route.
Therefore, when you start your business be ruthless and make sure that you understand what assets you want in your business, and how you wish to hold them. For example, if you are an operator looking to run an Air Taxi business you might not want to own your first few aircraft outright. The likelihood of getting asset finance at reasonable rates for a start-up company is pretty low. You might be better off looking at “managed models” in the first instance, where you manage a private owner’s aircraft perhaps?
Another issue is the owning entity of the asset. You may want to optimize use of the legal protection afforded to limited companies, and have a holding company own the assets whilst the operating company leases those assets from the holding company. In the event that your operating company (heaven forbid) struggles and is forced into bankruptcy, the assets are at least protected from the operating company. This structure may also make it easier to attract investors who like the idea of asset finance, but perhaps not the risk of your operational business plan?
Once your business is mature, and is generating positive cash flow, you will want to revisit your asset strategies to ensure that you are maximizing shareholder value. One of the key ratios investors use to assess the health of companies is the return on capital employed. This has lead many a company to follow a positive strategy of asset divestment in order to ensure that the balance sheet is asset light, thus showing an excellent return on capital employed.
Your accountant will want a significant say in your asset strategy, as she or he will want to help you to maximize your tax advantages. For example, if your assets are in a holding entity, what would the taxable implications of your transfer charging decisions be?
There is no simple answer or formulae to follow when deciding your asset strategy. The only common factor being the need to think through all the permutations and ensure that you take professional advice, balanced with commercial common sense. In closing, don’t forget to ensure that you have effective and sufficient insurance coverage, a topic for a future discussion perhaps.
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