Please note that this Aerlex Law Group presentation is meant to draw attention to important legal and tax issues in business aviation and does not create or continue an attorney client relationship. It is not intended to be construed as legal advice and cannot be relied upon as such. Readers are urged to consult an attorney or other advisor concerning specific facts or circumstances. Please be advised that any tax advice contained in this presentation is not intended or written to be used, and cannot be used (1) for the purpose of avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter referred to herein.
EVALUATE YOUR PLANNING THROUGH AN ENTERPRISE RISK ASSESSMENT OCTOBER 20, 2014 8:30-9:30AM DEBORAH BEW LIU, AIRCRAFT ACQUISITIONS GREG PANZARELLA, FORMER DIRECTOR OF FLIGHT OPERATIONS STEPHEN HOFER, AERLEX LAW GROUP
ENTERPRISE RISK MANAGEMENT (ERM) Tax Conference: Evaluate your Planning through ERM October 20th, 8:30am 9:30am ERM: Integrating Business Aviation October 21st, 10:30am Noon Scheduler s and Dispatchers Conference San Jose, February 2015 OCTOBER 20, 2014 3
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A HORSE! A HORSE! MY KINGDOM FOR A HORSE! -- Act V, Scene 4, Shakespeare's Richard III On August 22, 1485, Richard III is killed at the Battle of Bosworth Field when his horse stumbles and the king is bludgeoned to death. He is the last king of the House of York and his death ends the 331-year, 14-monarch Plantagenet dynasty in England. For want of a nail, the shoe was lost. For want of a shoe, the horse was lost. For want of a horse, the rider was lost. For want of a rider, the kingdom was lost. And all for the want of a horseshoe nail. OCTOBER 20, 2014 5
LEADERS COMMUNICATE BEYOND THE SILO The purpose of an Enterprise Risk Assessment is to address the gap in communication between flight operations and the C-Suite the corporate headquarters downtown due to perceived expertise. Enhance compliance with a broad base of regulations (beyond operational regulations) and best practices for business aviation. OCTOBER 20, 2014 6
WHAT IS ERM? ERM is short for "Enterprise Risk Management" ERM is a risk-based approach to management ERM provides methods and processes companies can use to BOTH: manage risks, and seize opportunities OCTOBER 20, 2014 7
BEST PRACTICES: ERM IMPERATIVE Define the discipline: Casualty Actuarial Society (CAS) (worldwide, 100-year-old society of actuaries) says ERM is the DISCIPLINE by which an organization in any industry: assesses controls exploits finances monitors } RISK OCTOBER 20, 2014 8
BEST PRACTICES: ERM IMPERATIVE Assess RISK from ALL SOURCES to increase organization's short- and long-term value to stakeholders. Risk types (and examples): Hazard risk: liability for torts, property damage, natural catastrophe Financial risk: pricing risk, asset risk, currency risk, liquidity risk Operational risk: customer satisfaction, product failure, integrity, reputation Strategic risks: competition, social trend, capital availability OCTOBER 20, 2014 9
WHAT DOES ERM MEAN IN AVIATION? "Is it a 'Safety Management System' (SMS)? If so, we've already implemented SMS." "Is it an 'Emergency Response Plan' (ERP)? We've already got an ERP in place." Answer to both: Yes and no. Historically, companies had a limited perception of risk: Accidents (protection provided through insurance and training) Financial (protection provided through cash management and investments) ERM is a "holistic" way of looking at risk OCTOBER 20, 2014 10
HOW DOES ERM WORK? Risk management process: 1. Establish Context 2. Identify Risks 3. Analyze/Quantify Risks 4. Integrate Risks 5. Assess/Prioritize Risks 6. Treat/Exploit Risks 7. Monitor and review risk environment and performance of risk management strategies OCTOBER 20, 2014 11
What we have visibility to (What we know) OCTOBER 20, 2014 12
WHAT WE DON T HAVE VISIBILITY TO (What we don t know) OCTOBER 20, 2014 13
BRIDGING THE GAP Agenda ERM = Its Not what (tactical) but how (strategic) Effect versus Affect Tactical approach provides an Effect Strategic approach portends the Affect Quantify Effect: Total Cost of (Incident / Event / Risk) to the Enterprise Organic nature of exercise tells whether something to worry about How: 360 degree communications The assumption buster OCTOBER 20, 2014 14
TOTAL COST OF RISK (TO ENTERPRISE) Immediate Impact Longer Term Impact Who is engaged Impact to Enterprise / Aviation First Aid, Protect A/C, Minimize PD, Req. notices, Environ. dmg. containment A/C Physical Damage, Property Damage, Bodily Injury, Legal Claims, Environ. Liabs Risk Management, GC/Legal, HR/Admin, Ops, Finance, Leadership Transportation Solutions, Outsourcing, Effectiveness; Operational Control Sequester from media Loss of Biz Dmg. to rep. / good will Ops, Finance, Leadership Executive Support and Oversight; Optics; Operational Control; Corporate Strategy Stand down? Lost Prod. ( acts. 4 def.); PTSD; Recruit., Training HR/Admin, Ops, Finance, Leadership Service Expectations; Talent Pool; Cash Flow; Effectiveness Protect records Lost Equipment Ops, Finance, Leadership Cash Management; Capital Costs; Required Metrics and Benchmarking Loss exceeds ins. / part. insured; Future ins.? RM, GC/Legal, HR/Admin, Finance, Leadership Safety and Risk Management; Cash Management Damages, fines, regulatory action RM, GC/Legal, Ops, Fin, Leadership Tax Strategy; Regulatory Implications Aviation Alignment with Corporate Strategy; Value Proposition for Business Aviation OCTOBER 20, 2014 15
View from the Top (Downtown has these resources: down the hall or outside experts) For Flight Department, the physical disconnect can be the creation of multiple Single point of failures: Legal preparation: Vendor contracts, legal contracts Legal defense: View activities from a courtroom view: NTSB, FAA, civil court, or IRS/State audit Regulatory compliance: It s not just the FARs; It s much broader Corporate policy, corporate image, reputation OCTOBER 20, 2014 16
View from the Top (C-Suite has these resources: down the hall or outside experts) Documentation: Support regulatory, asset management Human Resource Management: Safety/Security, Financial, supportive activities of Employees Financial Management: Profitability Insurance, Reinsurance: risk support OCTOBER 20, 2014 17
VIEW From the bottom looking up to FL 450 (Tactical) Risk comes from not knowing what you are doing. Warren Buffet OCTOBER 20, 2014 18
WHAT ARE THE BUSINESS PROCESSES: DIVIDED SIMPLY FINANCIAL POLICIES REGULATORY RECORDS OCTOBER 20, 2014 19
WHAT ARE THE BUSINESS PROCESSES? 85% ARE THE SAME OCTOBER 20, 2014 20
RISK ASSESSMENT BALANCE WHEEL FINANCIAL OCTOBER 20, 2014 21
RISK ASSESSMENT BALANCE WHEEL REGULATORY OCTOBER 20, 2014 22
RISK ASSESSMENT BALANCE WHEEL CORPORATE POLICIES OCTOBER 20, 2014 23
RISK ASSESSMENT BALANCE WHEEL RECORD-KEEPING OCTOBER 20, 2014 24
HOW DO YOU POPULATE THE WHEEL? Ask the question, what would the impact of be on you? What would the impact of an be on the other business areas? Re-ask the question to each player, what would the impact be on this particular date? OCTOBER 20, 2014 25
ACCIDENT: POST MORTEM Communications with the press? Survivors? What can we do while we wait for the NTSB reports? Insurance carrier declines the tender? Records surfaced we wish we didn t have to live with? OCTOBER 20, 2014 26
ACCIDENT: POST MORTEM What could have been said in advance so crew would not have said! Advance vetting of FBO s hangar-keepers coverage? Independent contractor relationship? Agency relationships? Definitive operational control communication under the lease or pilot services agreement? OCTOBER 20, 2014 27
AIRCRAFT TRANSACTION: POST MORTEM Aircraft Documentation problems? European importation completed? Have aircraft specs been verified? What is remedy if a problem? Mandated regulatory upgrades incorporated? OCTOBER 20, 2014 28
AIRCRAFT TRANSACTION: POST MORTEM Test flight personnel appropriate for technical flight? Did ownership structure portend actual use percentages? Were Form 337 s handled appropriately during inspection? Like-Kind Exchange/1031 been planned for sales tax and property tax? OCTOBER 20, 2014 29
DISCUSSION/DIALOGUE Does anyone want to share a time when lack of communication impacted a transaction or incident? OCTOBER 20, 2014 30
TAKE-AWAYS Gathering gotchas/risks starts the conversation Activity of asking What if focuses the conversation Activity of asking What if on this date = Gets attention How do we see eye-to-eye if we never see face-to-face? Warren Buffet OCTOBER 20, 2014 31
Thank you! OCTOBER 20, 2014 32
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