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Yearend Aircraft Purchases - A Good Deal?

by David Wyndham 3. December 2013 14:46
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There is less than a month left in 2013. For many businesses, this is a time to look at yearend capital purchases. Buying in December can get a business a nice tax deduction for the year while spending the money as late as December 31. With new business aircraft, you commonly see strong sales and deliveries in the last quarter, December especially. To see if this makes sense from a tax perspective, consult an aviation tax authority, not me. Here are three tips if you find yourself in an airplane-buying mood.

Tip #1. Take the time to plan on what aircraft to acquire. If this article is your first inkling that you want to buy, wait until next year. Buying on impulse often leaves you disappointed. What looked or sounded great in the moment can turn out not to be what you thought you were getting.

When looking at what aircraft to acquire, be objective. Objective means choosing criteria that can be measured. Objective criteria should also be specific to the mission assigned to the aircraft. That way you can avoid over-buying - getting far too much aircraft than you really need. If you are clear about what you need, it is easier to set up your criteria. “Go anywhere, anytime” might set you up for a supersonic tilt-rotor amphibian, but can you afford that? Make sure that whatever aircraft you acquire, that it meets objective criteria for meeting your business’s air transportation needs.

Tip #2. Get your acquisition team together. To get the tax deduction for a business aircraft for 2013, you will generally need to take delivery and place the aircraft into service by year’s end. Ownership involves the title, insurance, sales tax planning, and possibly financing. The bigger the aircraft, the more complexity these deals seem to have. Make sure that your team: legal, tax, insurance, finance, etc. are informed and prepared in advance. Note: in advance is not the day prior to delivery. These professionals are quite busy in December.

Tip #3. Evaluate all of the costs involved in the owning, and operating, of the proposed aircraft. You may be getting a sizeable discount on the aircraft you are looking to purchase, but if it is going to eat up a lot of money in operating expenses, then the deal may not be the best one financially. Look at the total Life Cycle Costs: acquisition, operating costs, finance or lease costs, and potential resale value after a period of use.

Being able to get another tax deduction in 2013 with the acquisition of an aircraft may be great in 2013, but may not be as helpful to your company in 2014 and beyond. As part of the aircraft life cycle costing, you may want to look at your company’s projected profits over the next few years. 2013 may be a profitable year (congratulations), but having a larger write-off next year may be better.

Bonus tip #4. Good things come to those who will wait. When the new aircraft manufacturer makes a lot of year-end deliveries, many of them will come with a trade-in. So Early 2014 should see these same folks with some good deals on pre-owned aircraft. Maybe, just maybe, the deal on the older aircraft might exceed to deal on the new model.

I did not see any “Black Friday” deals on new aircraft. But, depending on the manufacturer and model, there may be some great deals to be had prior to yearend. If you have planned for this in advance, you should be able to make things happen. P.S. - cash is king here as the deal would be guaranteed to close.

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AIRCRAFT SALES | David Wyndham | Aircraft For Sale

Jurassic Jets

by David Wyndham 1. November 2013 16:27
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Are older business aircraft even sellable? And how old is OLD?

At the recent NBAA convention in Las Vegas, I sat in on several briefings about the state of aircraft sales and residual values. It was unanimous that older aircraft are not selling. No news there. It's been that way since 2008. What was interesting is the speakers' definition of "old."

I've been going with older than 15 years as "old" in terms of the ability to sell at a reasonable price within a reasonable amount of time. Age 15 also works with getting financing: The Aircraft Age + Length of Lease/Loan should not exceed 20 years. Age 15 allows for a five year financial deal. It seems like the new "old" is younger than that. And no, we can blame it on the Millennials. Blame it on the economic booms of the late 1990s and again in the mid-2000s.

An "old" business airplane is now older than age 10 in terms of maintaining a residual value and being sellable.

Glancing through the GAMA shipment database by year, business aviation saw significant increases in sales and deliveries during the past 15 years. Many manufacturers saw their sales double, peaking in delivery backlog in about 2008. Thus, there are a large number of relatively recent vintage airplanes available that are in the 5 to 15 year group, and especially aged 5 to 10.

The future air navigation systems that have been developing are in place or will be in the next decade. New or nearly new aircraft are either capable of using the full airspace, or can be easily upgraded. Older aircraft may not be so easily updated, especially older business jets that need the upper altitudes for efficient flight.

Older business aircraft, especially jets, have operating costs significantly higher than their new equivalents. A second or third overhaul on most turbine engines will be very costly due to retirement components within the engine. Unscheduled maintenance is also much higher for these older aircraft.

Lastly, emerging markets outside the US can, and do, purchase mostly new or newer aircraft. Developing nations are adopting the EASA regulations as it relates to aircraft aging issues. Some even place an age limit on imported aircraft.

So we have a large number of recently produced aircraft, many with updated avionic systems, that can be purchased for quite reasonable prices. Financial institutions have the money to lend, provided the credit is excellent. The 20 or 30-year old airplane costly to maintain, and sending them to a developing nation to sell isn't viable. These aircraft are just not selling. Let’s take a look at an example.

Jet Years produced Percent Fleet For Sale Average Days Listed For Sale
Gulfstream GIII 1979-1987 18% 828
Gulfstream GIVSP 1992-2002 13.56% 375
Gulfstream G450 2005-current 7% 239

You can buy a used GIII for under $1 million. But almost no one wants one even at that price. Newer GIVSPs and especially the G450 have a market.

One of the speakers referred to the oldest business aircraft as "Jurassic Jets." They are from a bygone era of cheap gas. They are not selling and the financial institutions do not want them on their books. From what the speakers say, and I agree, this is not going to change. Many of these aircraft are with their last owner.

Why Do People Fly Business Aircraft?

by David Wyndham 7. October 2013 10:42
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The Oct-Nov Business Jet Traveler (BJT) just arrived in my mail this past week. For the third year they published their Readers' Choice Survey. 1,100 of their subscribers responded with their thoughts and ratings regarding business aviation. The more things change, the more some things remain the same. Let's see.

The top three reasons people fly privately?

1. Save time

2. Ability to use airports the airlines don't serve

3. Ability to work enroute

No surprises. In fact all three really are about the productive use of time. You cannot save time, only spend it wisely. People who value their time use business aviation. That doesn't ever change.

The top three aircraft features among the BJT readers were:

1. Range

2. Economical operation

3. Cabin size

Speed was number five and baggage space, last on their list of choices. Economics was a surprise. Yes range and cabin are perennial favorites much as you'd expect. Speed ties directly into saving time, but not at any cost. So having the title of the World's Fastest Business Jet makes for great PR but if it is too expensive... Economics being number two makes me happy as that is how my company makes it living. I think this all ties into a Best Value for the business aviation user: saving time in a non-stop comfortable environment that makes fiscal sense.

Good news: more than half of the respondents flew the same or slightly more in 2013 than they did in 2012 and expect to fly the same or more next year. I'd say that bodes well for a slow and stable recovery. Only 4% reported that they will fly "much less than in the past year."

One set of questions were the same for fractional, jet card and charter users. It asked the respondents to rate those three sources of business aviation from 1 (low) to 5 (high) among nine factors. What interested me of those nine were customer service, value for the price paid, and overall satisfaction. All three scored very close to the same for customer service:

1. Jet Cards Customer Service = 4.20

2. Charter operators Customer Service = 4.18

3. Fractional shares Customer Service = 4.16

With no breakdown among the numbers reporting in the above categories, I'd say the average customer service levels were very good among the three types of service. I've heard anecdotally that some owners were less happy with fractional share companies but I think I have an answer there. Value was a bit different:

1. Charter value for price paid = 3.70

2. Jet Cards value for price paid = 3.70

3. Fractional shares value for price paid = 3.49

Fractional shares rated lower for value than the other two. They also rated 3.15 for Residual Value Terms. Given the drop and non-recovery in used airplane prices since 2008, I'd expect fractional shares to rate lower here versus a non-ownership option. I think this is where the fractional share owners' disappointment lies. They may have been enthusiastic about the ability of a business jet to maintain its value (or felt they were oversold on that?). When they saw that business airplanes lost value and are not recovering, they expressed their disappointment.

For overall satisfaction, I think the issue of residual values caused fractional share owners to be slightly less favorable towards their overall experience:

1. Charter overall satisfaction = 4.00

2. Jet Cards overall satisfaction = 4.00

3. Fractional shares overall satisfaction = 3.89

BJT showed overall satisfaction broken out by manufacturer for owned airplanes. No numerical average was shown so a direct comparison with charter, jet cards and fractional is a bit difficult. "Excellent" rating were from 38% to 67% except for Hawker Beechcraft at 22%. Their financial woes, especially among Hawker Beechcraft jet owners I'm sure contributed to their lowest "Excellent" ratings. But, at that, they did get 54% of their owners giving them a "Very Good" for overall satisfaction. So for the business airplane manufacturers, every one had over 80% of their customers rating them as very good or excellent. I'd say that is, well, a very good rating for ownership.

Aircraft reliability is also rated quite high among business jet owners with all the major manufacturers having very good to excellent scores by 90% or more of their owners. 

Among the business helicopters, BJT had enough scores to report on Bell and Eurocopter. Oddly, Sikorsky did not have enough responses to be included. While Bell rated above Eurocopter (excellent and very good scores) for each of the categories queried, both manufacturers had fewer excellent rating in all categories versus their business airplane owners. Not sure whether helicopter owners are a fussier group or whether, as an industry, helicopter manufacturers are not quite as good at taking care of their business-flying customers as the fixed wing folks. 

The last question asked was "If you could receive a complimentary year of flying on the following, which aircraft would you choose?"  They had four helicopter categories, two turboprop categories and seven business jet categories. You'll have to go see the survey to see if your favorites were the readers' favorites. Let me say that being given any one of those models free to use for a year would make me very happy!

Shared Light Aircraft Ownership Options for Getting Work Done

by David Wyndham 30. July 2013 14:41
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With a light aircraft, sharing the costs among two or more owners is common. If you own a small business, using a light aircraft may be ideal and time-efficient. Sharing the costs with another owner can bring down the threshold of cost.

Successful shared ownership requires consideration of the Three C's: Compatibility, Compromise and Contracts.

There needs to be a degree of compatibility between the owners. The type of aircraft must be suitable to the owners' missions. A Cessna 206 and a Mooney Ovation have different strengths. So do a PC-12 and a Piper Meridian. If you are becoming a second (or third) owner, make sure the aircraft will be effective at what you need to do: big load hauler or speedy cross-country machine. Just as important as the mission is NOT having similar flying schedules. If both owners need to use the aircraft every Monday thru Wednesday, sharing cannot work. Ideally owner #1 is a weekend flier and owner #2 is a business-weekday flier. Discuss in advance what your expectations are and how you will schedule the use of the aircraft.

Even if the owners have compatible aircraft requirements and complimentary travel schedules, there needs to be compromise. There will be times when you need to allow for flexibility in the schedules. Visiting family for Thanksgiving? Maybe this year you get the plane and your partner gets it for next year. Other compromises may involve the maintenance and upgrades. If you are a heavy-IRF flier and your partner isn't, then your requirements for upgrading the avionics will differ. If you fly for your business and take passengers, the interior standard you have may well exceed the pleasure-pilot.

Lastly, there needs to be a contract outlining the sharing of the costs and the responsibilities of each owner, and perhaps most important: a way to end the shared ownership. Will you split the fixed costs like hangar and insurance along ownership share? Will you set up a reserve account to pay in advance for the maintenance? What about unscheduled maintenance, how will you split the costs? The engine may cost $38,000 for an overhaul, or cost well over that if you want to do an exchange. How soon do you want that engine back? What do you do if one owner wants out (or cannot afford to stay in)? What if you ant to take on an additional partner? This should be in writing to keep the relationship as amicable as possible.

Before entering into a shared ownership, sit down and really look at the costs. The hourly rental at the local FBO may seem high until you figure out the cost of the initial investment and fixed costs. Sharing the ownership of an aircraft can lower to cost to access ownership, but everyone involved needs to work together to maximize the utility of the aircraft.

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Don't Sell, Upgrade Your Aircraft

by David Wyndham 1. July 2013 16:19
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If you are looking to upgrade to a newer aircraft, here are three things to consider:

1. The value of your current aircraft has taken a beating since 2008 and you will not be happy with the loss in market value.

2. While you should be able to negotiate a good purchase price for a newer aircraft, many owners still may not be willing to part with their aircraft at today's prices (see #1 above).

3. Your financial institution may not be willing to lend on terms that you find desirable. If the aircraft you are buying is new or nearly so, this isn't an issue. But it is for older aircraft.

If you need "more" as in seats, payload or room, your only alternative is acquiring a larger aircraft. If you need more speed or more range, and want newer avionics, but are happy with your aircraft's cabin, there is another alternative: upgrade your current aircraft. 

Companies like Aviation Partners, Raisbeck and Blackhawk have been quite popular for many years.  They, and others, have performance and engine upgrades that allow your current aircraft to fly faster, further, or both. There a top notch avionic shops offering upgrades that can turn your old steam-ship panel into a modern marvel. Recover the seats and add a new paint job, and voila — a new plane. Is it worth it? Before you undertake such a major project, here are some things to consider:

Why You Might Not Want To Upgrade Your Existing Aircraft

Older aircraft cost more to maintain than newer ones. Wear and tear items, aging aircraft issues, second or third engine overhauls all drive the cost up. Your aircraft must be in excellent mechanical condition and essentially free of corrosion, otherwise don't consider the upgrades.  

You think that the upgrade will add enough value to pay it back when you sell your aircraft. Some upgrades add value to your aircraft while others add value only to you. With today's market, do the upgrade if it has value to you. If it has value in the market place, so much the better but do it for you.

If your current aircraft cabin is plenty suitable, here are some upgrades to consider:

Enhanced Aerodynamics & Engines

Performance enhancements can range from winglets to engine retrofits. Given the cost of fuel, things that make the aircraft go faster on the same fuel, or engines that burn less fuel, can be desirable. 10 knots more speed on 3% less fuel may not sound like  much, but over time will add up. Do the gains make sense to you and your operation?

Glass and More Glass

Update the avionics. There are impressive upgrades that can turn your old analog cockpit into a glass heaven. This can range from updated Nav gear to a full panel replacement. When looking at new systems, look at what the current variant of your aircraft (or closest relative) has for its avionic system. Done right, these systems enhance both safety and reliability.

Budget carefully and talk to other operators who have done the same upgrades. As long as your current aircraft is in excellent mechanical condition and you plan to keep it for the next few years, the added utility and flexibility of the upgrade can add all the value you need.

 

 

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