General Aviation Business Journal

Bad Bad Bad Leaseback

I received an email from a girl looking to help her 71 year old Father with a terrible leaseback relationship. It sounds like her father just wanted to learn to fly and got sold a bill of goods by the flight school. Unfortunately, there is not a lot of help to give, her situation requires a lawyer.

I thought her email would be a good read for both schools an prospective aircraft owners / leasors. (I promised to withold her name.) I think the point to the story for both sides is be honest and have a good contract. Also, for aircraft owners, do not let the aircraft log books out of your sight. Anyone with advice for her can comment to this post.

Email 1:

My father bought and leased back two airplanes to a flight school and I think he's been seriously ripped off.

Would you be able to indicate an organization that could help me understand my father's rights in a lease-back situation. My first thoughts would be something like a  consumer protection agency, better business bureau, pilot's association ... ?

Dad has a contract with the school (with a 70/30 splilt - seems 80/20 is standard practise). He wants to sell his planes and for that needs the log books which the school will give him in exchange for $2,000.
Knowing he ows nothing to the school dad went directly to an attorney. Now the school is claiming more than $5,000 to retrieve the log books!

Thanks so much for any recommendations that would help me out.

Email 2:

This really made me feel good. My father lives in XXX, and I am in Europe where I live, and I'm trying to help him with this.

Yes I would like you to post my letter but keeping out names. I read a lot about lease-backs this weekend and see that many especially through schools, have been taken advantage of. I feel so bad for dad - he's 71 - was just working on the pilot's licence when he had a heart attack which changed everything for two years. Inspite of that, his medical was approved a month and a half ago I think via the FAA and he can get that licence and now this !

Email 3:

Dad is a member of the AOPA - and they recommended an attorney who to me, seems a little shy after having recieved rebuttal from the opposing attorney.
I may look for a stronger one but would like to keep costs down.

Since writing you I have obtained the TACK readings for both of dad's planes and he has moved them off the premises of the school but their attorney has put a "lien" on  one of the planes.

I don't know how this was possible - because we have absolutely no bill or invoice from the school that corresponds to the school's claims of non payment. Within a few days their "overdue bills"have gone from $808 to $2,000 and finally to over $5,000.  The opposing attorney is threatening to increase the value of the lien saying that if dad wants to keep his planes he'd better pay his bills and that the school is still calculating what he owes. I find this very strange!

But we don't know what is supposed to be paid! and after calculating, I think the school actually owes money to dad! especially after comparing the flight fees with the Tack readings.

I will contact the BBB - I have written to the Washington State Legislature and the FSDO (as they have been informed my father doesn't have his log books).
I'll also be going to the press if necessary and transmitting dad's story across as many blogs and forums as possible.

I would send my dad down with the police if I knew that he would be able to get the log books and that it truly is illegal to withhold them - we have received opposing information in that regard. When you say it's not an ideal option what do you mean?

The opposing attorney says that the school has the right to keep the books. My father's first attorney says the school has no legal right to keep the books.

Discounts - Come On!

In my position at MyFBO.com it amazes me the number of odd questions I get about aircraft and instructor rates. Flight schools call and ask how to give discounted rates for all kinds of reasons. Although I am all for marketing / promotion, it amazes me how flight schools want to give irrational discounts on their rates. Not to mention that the rates are already to low to begin with, but that is another article.

For example, the average leaseback aircraft works with an 80/20 split. In other words the flight school keeps 20% of what they charge per hour. The same flight schools call and ask me how to give a 10% pre-payment discount in the MyFBO.com Software (the software does support pre-payment rates). This means the flight school is cutting their margin in half. In addition most folks pay with their credit and check cards these days which takes another 2% or more off the top.

For a $100 per hour, 50 hour per month leaseback aircraft, the yearly profit would be $12,000. With a 10% pre-payment discount and 2% in credit card fees this amount is reduced by $7,200, making the yearly profit $4,800. Note that I use the word “profit” loosely. Out of the remaining $4,800, other expenses have to be paid. The same logic above applies to the flight instructors as well.

What is even more amazing is that the same flight school will call back after some time and ask how to add surcharges and fees. Instead of doing away with or altering the discount they want to know how they can charge reservation surcharges, cancellation fees, fuel surcharges, and insurance surcharges. They also ask about surcharges for credit card payments, but this is not legal in most states. Although all the surcharges are supported by the software, they are generally a bad idea. Surcharges greatly add to the complexity of running a business and the worst thing about surcharges is they really make the students angry!

Anyway, what is the point of my ranting and raving? It is that Flight Schools should put plenty of thought into discounts before they publish them.

Come on, why can’t the price just be the price? Are we used car salespeople or Aviation Professionals?

Credit Card Processing

I get asked all the time about accepting credit cards through my software (MyFBO.com).  Credit card processing is not an easy thing to explain briefly, but I will try my best in this post.

Credit card processing seems, at least in my simple CFI brain, very ambiguous.  When a card is processed it goes through numerous institutions, each one with their hand out.  There are merchant banks, card issuing banks, gateways, clearing houses, the major credit card companies, and the salesperson. 

The salespeople are the worst of the bunch; they seem to be the used car salespeople of the financial world.  You can call the same salesperson to inquire about getting a merchant account 20 times and you will get 20 different rates.

The best thing to do to get started processing credit cards is to call me or (God forbid) your other software vendor.   I can inform you as to the compatible hardware and software you will need.  Once informed about interfaces usually the best person to contact is your trusted local banker.  If the local banker does not pan out I can put you in touch with the appropriate merchant / used car salesperson.

You will need at least two things to process credit cards, a merchant account and an IP Gateway.  Remember, that the gateway needs to be compatible with your software provider if you want to integrate; there is more about Gateways later in this post. 

A merchant account is an account provided by a financial institution, generally a bank.  This account works behind the scenes and allows your company to accept credit cards.

There are generally two types of merchant accounts, retail merchant accounts and Internet merchant accounts. You may choose the type of account that you would like, for MyFBO.com Subscribers this is generally an Internet merchant account.  However, companies with high sales volumes may opt to have both types. 

Both types of merchant accounts technically work the same way.  The issue with two types of accounts is money.  Internet transactions have a higher transaction percentage.  The credit card company's logic for charging more for Internet accounts is that there is a higher potential for fraud with non-swiped cards.

So which one should you choose?  You need at least one merchant.  If you are going to have just one, in my opinion it should be an Internet account.  Internet accounts offer so many benefits including, charging cards on file, the ability for customers to pay bills online, and selling gift certificates on your web site. 

Even though Internet accounts cost more, the benefits and convenience out way the costs.  Based on my estimates, if your company does less than $6,000 per month in credit card sales, you should only have one Internet account. 

You should consider setting up a second retail merchant account if your monthly credit card sales exceed $15,000 to $20,000 or you perform a large percentage of retail transactions. 

Once you are allowed to accept credit cards you can integrate with your point of sale software. The old way of processing cards at the point of sale was through a dial up swipe machine rented from your bank. This machine sat on the counter, the customer's card was swiped, and then the machine printed out a little receipt.

The problem with the old way is that it is the old. These old machines add to the number of steps at the point of sale, they do not allow for Internet sales, and they use up a telephone line. With modern technology like the MyFBO.com System and IP Gateways those obsolete machines are no longer required.  In this day and age credit card processing is completely integrated with the dispatch & check-in / fuel sale receipt preparation process and sales can be made automatically using an IP Gateway.

An IP Gateway enables you to authorize, settle, and manage credit card transactions from your location using the speed and security of the Internet. Although everything is linked together, an IP Gateway is a separate "virtual device" that works with your merchant account, but may be purchased separately.  It is possible to just purchase an IP Gateway for the merchant account you already have.

The costs of the merchant accounts and gateways vary.  One-time setup fees are usually a few hundred dollars.  A safe bet for actual operating cost including transaction fees is 3%.  In other words 3% of the revenue processed via credit cards never makes it to you.  I know 3% is a lot of money and nothing gets an aviation business owner's gizzard more than paying 3% of money they worked so hard to earn.  However, credit card processing is just a cost of doing business in this day and age.  Retail rates are slightly lower than the Internet rates above but remember you will need two merchant accounts and two gateways to do both. 

I hope I have explained credit card processing and not confused anyone.  I will attach a graphic from my web site that may explain it visually.  If you have more questions – consider MyFBO.com as a point of sale solution and contact me.