Aircraft Sales Aviation Articles

When to replace an aircraft is more than just simple math

 

Our company co-founder, Bill de Decker, and I recently finished a major aircraft review for a government entity. They had several missions and several types of aircraft that were necessary for the mission. We looked at the missions and their current aircraft. We identified shortfalls in capability and desired utilization. We looked at the current costs, the reliability, and projected out future costs. We identified future mission changes as best we could. We did look at whether it was cost effective for the government or a contractor to own and or operate the aircraft. At the end was a series of business cases for each aircraft and an overall acquisition plan for their aviation operation. None of the missions were simple passenger-carrying missions and, given their requirement to look out 20 years, a lot of long term assumptions had to be inferred. What they now have is a plan with dates and actions that are needed, along with mission and financial justification. All this work was fun and the folks we worked with were a joy. It all came down to this:

There are two major reasons to replace your current aircraft. One reason is the mission has changed and the current aircraft is no longer capable of effectively supporting that mission. The second reason is the economics of owning and operating the aircraft render it too costly as compared to the alternatives. Both can combine to demonstrate and support the value of a business aircraft. 

Both reasons are simple but involve a lot of complexities. 

With respect to missions of a business aircraft, changes tend to fall into sub sets

1. Passenger loads change requiring a different aircraft. If you need nine seats, six won't do. Or perhaps decreasing passenger loads make the idea of a smaller aircraft appealing.

2. Trips change requiring either longer range aircraft or aircraft with different capabilities such as operations from shorter runways or flights into and out of high altitude airports.

3. Utilization also factors into the equation. Either the need for more hours or simultaneous aircraft can drive the decision to add additional aircraft.

Upsizing in capability tends to have an upsizing in budget. What needs to be considered is the added value the aircraft change will bring. Will more passengers enable greater benefits to the company? Does avoiding that fuel stop, and the time avoided, add enough value to make the acquisition and operational costs of the larger aircraft worthwhile? 

I did one analysis that showed Jet B with greater range than the current Jet A. To meet the non-stop range Jet B had to fly at long range cruise. Allowing an hour for a fuel stop, Jet A can fly the two legs at high speed cruise and still arrive within 20 minutes of Jet B. We looked for another option as the value of replacing Jet A with Jet B didn't deliver enough value. 

When looking at costs, make sure to look at all the costs: acquisition, operating costs, fixed costs, taxes, and depreciation (tax and market). Balance that against the mission for a "best value." 

Age is a factor, too. As aircraft age, their maintenance requirements, and costs tend to increase. With that comes decreased availability as the aircraft spend more days in maintenance. What makes this difficult to analyze is the cyclical nature of maintenance can hide this long term increase. 

Many operators when they do a major event like an engine overhaul or heavy airframe maintenance do paint, interior and even avionics upgrades. The costs are significant and not seen again for many years. One decision point here is whether to sell the aircraft a few years before those costs occur, or incur those costs and operate the aircraft for a few more years. This is because most buyers prefer not to have significant costs for the first few years when the acquire a pre-owned aircraft. But if you do the overhaul, etc. the market is not likely to award you with 100% of the cost in an increased value. See, not so easy to decide?

Having a plan in place makes the process easier. Then every year, review the plan, and when appropriate, update it. When to replace is not a simple equation, and it can involve qualitative and quantitative measures. Be proactive and work with the owners/stakeholders in the aircraft to be ready with the justification well in advance of any issues arising. 

"Whatever Lola Wants"

Most of the consulting my company does focuses on making recommendations for the getting most cost effective aircraft for the mission. As part of that we look at many different things, all quantifiable. What is the primary, or key mission for the aircraft?  What must this aircraft do to be considered successful? We work with the aircraft owner, the major users, and, with input from the flight department, develop the measurements of success.

We translate that key mission into quantifiable measures like range, cabin size, speed, payload, take-off and landing performance and many other measures. The mission (VIP transport, EMS, wildlife management, you name it) defines the criteria. We look for the aircraft capable of meeting or exceeding these requirements. Next comes the financial analysis. We know to look at more than just the cost to acquire the aircraft. We take into account all the costs associated with the aircraft . We look at the operating costs of the options. We estimate a residual value at the end of a predicted ownership term. We may look at new versus used, or leases, financing, and cash purchases. And don't forget the ownership structure and tax considerations. 

All this time we work to translate the needs of the customer (aircraft owner) into quantifiable items that we can compare, rank order, and look for a best value option. Some owners state outright that they never lease, or that the aircraft must be in a separate legal entity to mitigate some of the ownership risk. Some will not consider chartering their aircraft while they are not flying. At all times, we seek the middle way between cost and performance.

Business aircraft are business tools whose main return on investment is maximizing the use of time by minimizing the travel time. We look to show the benefits of this "time machine" along with the costs to use it. Sometimes this means a single-engine piston. Other times it can work all the way into a global business jet. Again, the mission defines the requirements which define the aircraft types. 

At the end of our analysis, we present a report with supporting documentation.  We avoid jargon so that the CEO, the CFO, and the aviation manager can all understand the analysis. The report ends with a summary and recommendation. We always aim to show several options and the costs of those options. Option one may be the most cost-effective aircraft. That aircraft may do what is required, but not a lot more. A second option may exceed many of the performance criteria but at a higher total cost. It feels good when discussing the report to see agreement and nods of approval.

But, every once in a while...

Anyone involved in the acquisition process has seen this. You do the analysis, get the charts and photos and spreadsheets ready. The numbers are clear, Aircraft A is the best option. Aircraft B would be a good second choice. Its all there in black and white. A few days or weeks later you get the news. The owner decided on Aircraft D! In your analysis, Aircraft D was not even a third option. What happened! What did we fail to take into account.

Emotion. Our analysis and recommendations are all based on quantifiable measures that take into account the stated mission of the aircraft. It did not account for how  gorgeous Aircraft D looks, especially with that optional interior and paint job! It did't account for the fact that the owner's golf partner has Aircraft A, which is smaller than Aircraft D. Maybe the sales person for Aircraft D really hit it off the with owner. There are many emotional "reasons" that the top choices are not selected. We did our job and presented the facts. I'm not the one writing the check.

Remember, Lola gets what Lola wants

 

Happy Flying

 

 

 

 

 

2015 Business Jet Traveler Readers Expect to Fly More in 2016

The October/November issue of Business Traveler Magazine contains the results of the 5th Annual Readers' Choice Awards.  As with previous surveys, they let the results speak for themselves. Go read it, but first, my observations.

 

Good news for 2016, their readers expect to fly more in 2016 than in 2015 (37.9%) with just over half flying about the same next year. Only 7.3% expect to fly less. This is encouraging since more than one in five (22.7%) reported flying less in 2015 than in 2014. I'd say this is more of a sign of stability or slow growth. Still, slow growth beats a slow decline.

Why people fly is as you think. These private aircraft "save time" by getting people to airports that are not served by the airlines and all the travelers to be productive while en route. These simply spell productivity.  Comfort, privacy and security round out that list. Those last three imply quality of life to me. 

What people fly remains consistent with previous years. It's the economics. That, along with range and cabin are the big three drivers in the aircraft the reader flies. A slight change from 2014 is economics is now the top driver, slightly more than range. Interesting was the number four response: Aircraft Manufacturer. The OEMs try to get brand loyalty and this indicates some level of success in that effort. Aircraft age and speed round off the top half of the list. 

Among the readers using fractional, charter and jet cards, customer service rated top for all three. Overall satisfaction also rated consistently as ver good with no clear advantage to any of them. Value for price paid rated best for Jet Cards. Fractional rated lowest for value which ties into their ranking for residual value terms. That was the lowest average score among all the fractional rating categories. If the reader had not used the provider previously, the biggest factor in selecting the provider was a recommendation of a friend or colleague. Step aside Internet, word of mouth from someone you trust is still the number one reason to buy.

Speaking of value for price paid, for the fixed-wing aircraft, Embraer rated quite well in that category. They also rated very well in cost of maintenance and were close to survey-leader Gulfstream in product support. Kudos to them. Overall, the strongest fixed-wing OEMs were Embraer, Gulfstream, Dassault, and Pilatus. 

Regarding aircraft reliability, Pilatus and Gulfstream received the highest marks. Al the OEMs did well, with Hawker (as in the 800 series) and Bombardier receiving more "fair" ratings and fewer very good to excellent ratings. Regardless, all the fixed-wing OEMs having from 87% to 100% ratings when adding the very good and excellent scores. The wireless and cable providers would love rating like that.

On the helicopter aircraft, Business jet traveler only had sufficient data for Airbus (nee Eurocopter) and Bell. I was surprised that Sikorsky had too few responses. Like last year, neither helicopter OEM received greater than a 40% excellent rating in any category except for reliability, where Bell had 52.4% excellent ratings. That would be last place if put in with the fixed-wing. I'm not sure why the expectations aren't being met.

BJT did ask its reader's that if they could get a year of complimentary flying, which would it be for various categories of aircraft? Read the article to see what folks favored. Most choices were the popular new aircraft for each category. Of note, 6.5% of the Super Mid-Size Cabin Jet readers wanted a Hawker 4000 over the current production offerings. As with last year, no one listed a P51 Mustang. 

2016 looks promising from this survey. It's a small list, but here's hoping its representative. How about you, will you be flying more next year? Let us know if the replies.

Older Aircraft (revisited)

Fall of 2013, I wrote on the subject of what is old for a business aircraft. That article dealt with the issues regarding whether older business aircraft are easily sellable, and tried to put a number on what is old. I think it important enough to revisit again. 

At the recent NBAA regional meeting at Teterboro,  I sat in on briefings about the state of used aircraft sales and residual values. Much like with similar briefings at last two years' NBAA Annual Meeting & Convention, older business aircraft are still not selling. For financing, a general consensus for turbine airplanes is still this: the Aircraft Age + Length of Lease/Loan should not exceed 20 years. Age 15 allows for a five year financial deal. Some lenders are using a younger age than even 15! 

The factors I mentioned in 2013 are still valid:

- A good supply of relatively young, up-to-date, turbine business aircraft are listed as for sale.

- Future air navigation systems requirements such as NextGen and FAA 2020 are still making the ability to update older aircraft in question, both with the cost and timing.

- Markets outside of the US wanting new or nearly new aircraft.

- Increasing operating costs of older aircraft make them less desirable.

While the supply of used business jets is lower as a total percent of the market, the global market is sufficiently large that there is a good selection of aircraft to choose from across most categories. The FAA deadline for new navigation equipment is still January of 2020 and the FAA shows no signs of changing the date. The airframe manufacturers and third party companies are still trying to certify equipment for  the last 10 or 15 years' worth of models. With cheap oil and a strong US dollar, the non-US market is having a tougher time affording these new aircraft. But when they do purchase, they still look at the nearly new models. 

In this article I want to look at the operating costs again, from a different perspective.

You can buy a 30-year-old Gulfstream GIII for about $1 million. A 20-year-old GIVSP sells for about $4.9 million. A 10-year-old G450 sells for around $16 million (source Vref). According to AMSTAT, the GIII models offered for sale have been listed for an average of 491 days - about 16 months. The G450s listed for sale have been on the market about 6 months. So the average G450 is selling before the average GIII. 

Provided both aircraft have the range and cabin that fit your needs, why spend $16 million when you can spend $1 million? For much less than $15 million, you can buy a lot of maintenance and upgrades for the older GIII. It's relative, that's why.

An engine overhaul on a Spey or Tay can run to over $1 million each. Include all the other airframe and avionics maintenance and you can have a maintenance budget of from $3 million (G450) to $5 million (GIII) over five years' typical flying. The G450's maintenance budget is far less relative to the value of the aircraft:

Aircraft Value       Maintenance Budget (5 yrs) Maintenance as Percent Value

G450 $16 million $3 million                                      19%

GIII $1 million $5 million 500%

The maintenance quoted above is required to keep the aircraft in an airworthy condition. In other words, the GIII owner might spend $3 million to keep the GIII in a $1 million sellable condition. The math doesn't work from an investment perspective. A company called Asset Insight does this analysis on business aircraft to a far more detailed degree. Time and time again, their analysis shows that buyers are not willing to spend even close to the value of their aircraft for maintenance. 

If you are the GIII owner, you can shift your perspective about your current aircraft. First, accept that you are likely the last owner of the entire aircraft. Second, spend your maintenance dollars wisely. You may not want to do the engine overhauls, but instead might be able to secure a pair of Spey engines with a two or three years' life remaining for far less than the overhaul. Better yet, keep those engines on a guaranteed hourly maintenance program if they are on one. Or you may elect to sell the aircraft for salvage (keeping someone else's GIII flying for a few more years), and upgrade to the GIVSP or G450. 

I used the GIII as an example. The GIII is still a fine airplane and mechanically, most can be flown for many more years. You can replace the example of the GIII with any other business aircraft of its time. Aircraft buyers are not generally willing to buy low and pay for maintenance bills that equal or exceed the value in the aircraft. That is how the market works. 

 

8 Important Questions to Ask Before Buying Your First Airplane

Buying an airplane isn't quite as simple as buying a car. From operating costs, maintenance requirements, storage and insurance, there are many elements to consider when purchasing an aircraft. If you're a first-time buyer or are considering an aircraft purchase, take the time to investigate the process, learn about the market and ask a lot of questions. To get you started, here are a few things you'll want to consider:

  1. What's your budget?
    This seems obvious, but first-time buyers should take a detailed look at their budget. There are many costs associated with owning an airplane beyond the price tag. You'll need to consider the loan payment, insurance, maintenance, operating costs, hangar or tie down fees, and other surprise costs that might occur out of your control like mandated avionics upgrades.

  2. What can you fly safely?
    Everyone wants a larger and faster airplane, but don't be tempted to buy an airplane that's out of your league. Buy an airplane that you're comfortable flying safely and within your personal skill limitations. Even a slightly more powerful engine, or just a slightly larger airplane can have much different handling characteristics, and advanced avionics can leave you behind in a hurry if you're not familiar. Buying an airplane you don't have a lot of experience in can lead to regret.

  3. What's the purpose of the airplane?
    First-time aircraft buyers need to evaluate their reasons for buying an airplane. What kind of aircraft will provide the function you need? If you really analyze your purpose, you may find that the aircraft you initially have your eye on isn't actually in line with what you need. If you intend on flying an occasional joyride on the weekends in the local area, for example, you probably don't need an overpowered multi-engine machine with top-of-the-line avionics. If you travel long distances for business, an IFR certified, speedy, retractable gear aircraft might be more in line with your needs. Try to avoid buying an airplane based on emotion. Just because it looks cool or has large, powerful engines does not make it a good fit for you.

  4. How much is insurance? What are the requirements to be insured?
    Insurance is complicated. Buying aircraft insurance is not quite as easy as buying auto insurance. Nor is it as cheap. Make sure you know what the insurance costs will be before you start looking for airplanes to purchase. It's no fun to buy your dream airplane just to find out that insurance will be double what you thought it might be - after the insurance company requires you to attend an expensive training class and obtain a certain number of instructional hours in the airplane. These are standard procedures, but can be costly if you're not prepared prior to choosing an aircraft.

  5. Where will you keep it?
    Will you buy or build your own hangar? Will you rent one from the airport? Is there hangar space available at your airport, or will you be tossed out on the ramp? Do you have a back-up plan in place in case your hangar owner decides not to renew your lease? You'll want to ensure you have a place to store your aircraft, and you'll need to budget for those storage costs.

  6. Who will maintain it?
    Choosing a maintenance facility is probably the most important decision you'll make as a new aircraft owner. But don't wait until after your purchase the aircraft to choose a maintenance facility. Finding a trusted mechanic to help you with your purchase will save you time and money in the long run. A trustworthy mechanic can help you with a pre-buy inspection and can offer advice about certain aircraft types and model numbers before you make the purchase. And after the purchase, your mechanic will need to be someone you can completely trust and rely on to provide quality maintenance in accordance with the FAA and manufacturer's standards.

  7. What technology will you need?
    Taking a detailed look at aircraft technology is necessary when you're purchasing an airplane. Make sure you know what technology is necessary for your flying purposes, know what you're willing to sacrifice, and know how much you're willing to pay for the added conveniences of certain technologies. You might be able to get away with purchasing an older aircraft with outdated avionics if your flying is accomplished in good weather and in uncontrolled airspace. But if you often fly in Class B airspace, or mostly on IFR flight plans, you'll want to invest in modern avionics. And what about other technology, like aircraft anti-ice systems, digital engine monitoring, or weather radar? Do you need these things or, if not, do you intend to fork over the money for the added convenience and safety factor?

  8. What's the resale value?
    They say nothing lasts forever, and there will likely come a time when you'll want to or need to sell your aircraft. Do some basic market research about your aircraft to make sure that you'll be able to sell it easily when you want to. Is there a known mechanical problem with this particular make and model? Will the age of the avionics prevent people from wanting to purchase it in five or ten years? Is the safety record good, or is it a type of aircraft that has particular hazards associated with it? Is the logbook history complete and accurate? Has it been well maintained?

There's a lot to think about before buying an airplane. Talking to a number of skilled aviation professionals about the topics listed above will assure that you're armed with as much knowledge as possible before making decisions before, during and after the aircraft buying process. Still in over your head? Consider an aircraft broker.

Have you successfully purchased an airplane before? Share your advice with us!