UK-based IBA Group is one of four companies that has been selected to perform audit work for the U.S. Export-Import Bank’s (Ex-Im) portfolio of around 1,250 commercial aircraft, business jets and helicopters.
Under the five-year $2.5 million contract, IBA will perform routine inspections, checking maintenance records of Ex-Im backed aircraft, as well as the operational integrity and financial stability of the airlines that operate them. A typical sample inspection from a 50-aircraft fleet would be eight to 10 aircraft, while the minimum number from a smaller fleet would be three.
Owen Geach, chief commercial officer at IBA Group, describes this as the “good housekeeping” part of the Ex-Im work. “We form a view on whether there are any concerns,” he said.
The contract also has a “rapid response” element - covering unscheduled maintenance inspections in the event of accidents, incidents, payment defaults, or reported handbacks - which can extend to aircraft repossessions and remarketing.
“We can’t speak for unscheduled events, because they’re obviously market driven, but in terms of scheduled events, Ex-Im expects us to cover roughly 80 operators within their portfolio and, over the five-year term, they expect us to perform a routine inspection at every operator,” he said.
Four companies have been selected by Ex-Im, allowing the worldwide portfolio to be audited within the five-year term. “There are a lot of airlines and aircraft to go around,” Geach said. “The idea of having four is that, on the rare occasions when there might be a conflict of interests, there is always a Plan B.”
A senior Ex-Im official confirmed that several companies, including IBA, have been awarded the contract. However, they added: “Ex-Im cannot release the names of the other companies until all of the contracts have been signed.”
Geach values the IBA portion of the work to be at least $2.5 million over five years, but this could increase, depending on the wider financial climate.
“That’s really going to be driven by the uncertain times that we’re in. If we’re not in the start of a down cycle, then there are certain signs there that we could be. It only takes a few ingredients, such as a spike in oil price, increase in terror events, a financial downturn, or employment issues. We’ve seen half a dozen bankruptcies in Europe in recent weeks. How the contract develops will be largely driven by market forces.”
IBA has already been asked to submit a list of airlines where they see potential risk for Ex-Im. This would include, for example, operators that have had recent accidents, reports of financial problems, countries that have been through an FAA downgrade and airlines that are on the EU blacklist.
The team will also monitor Ex-Im’s entire fleet for unusual ground time. “That’s often a very clear early warning sign that an airline might be parking an aircraft in order to cannibalize it, to provide spare parts of other aircraft within the fleet,” Geach said.
This is not the first time IBA has been selected by Ex-Im. In fact, IBA has won the audit contract every five years since 1994, but over the last few years Ex-Im has not had a long-term contract in place.
Ex-Im offers export-credit guarantees for US-manufactured goods sold overseas, including aircraft. However, political opposition caused Ex-Im’s authorization to expire altogether for five months in 2015. Since resuming operations later that year, the bank has lacked the three-board-member quorum required to approve transactions over $10 million, ruling out involvement in most Boeing commercial aircraft orders. There are currently four Ex-Im board nominations pending confirmation by the Senate. Once the board is restored, Ex-Im will be able to return to deals in excess of $10 million.
“Because of the shut-down, there hasn’t been an official contract in place for asset-management oversight for three years. All they were able to do was react in the event of a bankruptcy or default,” Geach explained.
Between contracts, the Ex-Im official said the portfolio was inspected on an unscheduled basis, as needed, and there were no aircraft repossessions during that period.
Despite the lack of quorum, the Ex-Im portfolio has remained stable at around 1,250 aircraft, because of the long-term nature of aircraft financing. Geach said Ex-Im resumed its search for long-term contractors in April 2018, assessing would-be suppliers based on their experience and technical competence, as well as their ability to scale-up and react. IBA was selected in October and the agreement was finalized at the beginning of November.
“My hope is that other major aviation-lending banks will also start to take a more proactive view over the management of their assets and set up their own oversight programmes. We use the analogy of a smoke detector. It doesn’t cost a lot to do a routine inspection, but if it goes wrong and you do need to repossess, it’s very expensive,” Geach said.
Although IBA is UK based, it has previously inspected Ex-Im aircraft in Brazil, India, Indonesia, Korea, Mexico, Russia, Senegal, Tajikistan, Ukraine and Zimbabwe, among others. “As you can see from that list, it’s truly a worldwide reach,” Geach said. IBA has a core in-house technical team of 10 licenced engineers and inspectors, three employed staff in India and approved contractors in Australia, China, North America and Russia.
Around 40% of IBA’s turnover comes from asset and technical management activities, like the Ex-Im contract, while the remainder comes from valuations, data and advisory work. Geach said IBA typically weathers industry cyclicality well, because technical work – such as aircraft inspections - traditionally picks up during a downturn.