Aircraft Sales Aviation Articles

Scary Thoughts

 

It is May, not September or October, but I'm starting to have scary thoughts about where the global economy and business aviation in particular are headed. There is mixed negative news out there. Here are some things that have me wondering what is to come.

The US Standard & Poor's listing is close to all all-time high for its P/E Ratio. A stock's P/E ratio is equal to the stock's market capitalization (or simply, value of its shares)  divided by its after-tax earnings over a 12-month period (think about profitability). Companies with high P/E Ratios are generally considers as more risky investments as investors are will to pay more for the company's profitability. Right now, the Standard & Poor's index P/E ratio is very high relative to the average. This could indicate an overheated market and foretell a coming downtown in stock prices. If high net worth individuals fear a downturn, they are not as likely to be buying aircraft. Similarly companies fearing a downturn will also spend less, thus be less likely to purchase business aircraft.

There are business aviation reports that support this. Jim Donath of Donath Aircraft Sales puts out a very well researched quarterly report on the pre-owned business jet market. From the first quarter of 2015, news isn't good. Flying activity is higher than in 2014 in the US, but down in the EU. Pre-owned business jet inventories are up for the second consecutive quarter. Donath reports 465 aircraft listed in inventory, the highest since the last recession. Transactions are not keeping pace relative to the growth in inventory. Many of these are older business jets and thus, values and selling prices are low, and the time it takes to sell them is increasing. 

Asset Insight's quarterly market report supports Donath. They state: 

Quality assets are readily available, but increasing maintenance costs are accelerating financial obsolescence for many aircraft.  With nearly 47% of the models we track averaging an ETP Ratio in excess of forty percent, as much as half the “for sale” fleet may be resting with the aircraft’s final owner.  

As mentioned earlier, flight activity in the EU is down 2.7% from 2014 with very light jet activity down 11% in April. Emerging markets for business jet sales, like China, although still growing, are not showing the strenth as in the past.

All of this is at a US or global level and may have a lot or little impact on your business aircraft operations. Still, be cautious and look for warning signs within your own organization.  What is the business climate for your industry?  What is your flying schedule looking like for the rest of the year. Are you flying more trips or more hours than you forecast? Ask your customers what they are anticipating for their air travel needs in the next 12 to 18 months. This can impact your expected maintenance budget for the year.

How are your actual costs compared with your budgeted costs? I bet your fuel expenses are down, but what about overall? I know your flight operation is operating pretty lean, but are there more cost savings to be had without sacrificing safety or service? 

If you are looking at selling your aircraft soon, look at the comparable models for sale. How does your aircraft fit in? Do you have a prime example or just an average aircraft? Are your turbine engines on a guaranteed hourly maintenance plan? If you want your aircraft to sell, you may wish to accelerate upcoming major maintenance to offer the buyer 12 to 24 months without having to do any heavy maintenance. Same thought with avionics upgrades - plan on them before offering your aircraft for sale in order to better define your aircraft as the one to buy.

For us as a company, we are having a good year so far. But we are watching our expenses and being watchful with our cash flow. My question y=to you is this:

Will 2015 end up as a better or worse year for your flying activity than 2014 was? 

 

 

 

 

Buying or Selling an Aircraft?

Written by: Joe Carfagna Jr.
Leading Edge Aviation Solutions, LLC.
This article first appeared in Business Jet Advisor!

FIRST BUY AN EXPERT

It can be tempting for someone to consider handling an aircraft purchase or sale on their own. No one wants to spend money if he or she feels they have the resources to achieve the desired goal themselves. Perhaps they have a skilled aviation manager, or chief of maintenance, an excellent corporate lawyer or a business associate who has been down this road before. Consider, however, these people, no matter how skilled they are at what they do, have only gone through the aircraft purchase or sale process, once, twice, perhaps a few times in their lives. The aviation broker does it for a living, over and over again, under many different scenarios. Hiring a good broker is an insurance policy against making mistakes. In fact, it could be argued that an aircraft broker’s #1 job is to prevent the client from making mistakes.

Today an aircraft broker is not just someone who puts a buyer and a seller together. Following is a list of some of the things, and by all means, not the only things a good aviation broker should be able to do for you:

Even though considerable information is available on the internet, interpreting the information is critical. A reputable broker is following the market every day, knows and understands the market and can interpret trends.

On the sell side a reputable broker will professionally photograph the aircraft, create a color brochure, utilize other marketing materials perhaps video, will utilize e-mail communication, print advertising and perhaps Facebook and Twitter.

If purchasing an aircraft, an analysis of the client’s aircraft utilization requirements should be made to determine appropriate aircraft models for their mission, whether to buy new or used, or supplement with fractional ownership or jet cards, for example. This process is useful even when the client believes they know exactly what they want. The analysis can serve to reinforce their decision or offer alternate choices that could be preferable. The ultimate goal is to have an informed client and to prevent costly disappointments. And part of this evaluation process is an exit strategy. Future market value and marketability should be part of the purchase equation. The value of an aircraft includes its life cycle: Purchase, Use, and Sale.

With the above in mind, one of the most important functions a broker performs for either a buyer or a seller is establishing a price for an aircraft. Nothing exceeds good market knowledge for this process. Pricing an aircraft correctly is critical to the sale process. While the goal is to provide a seller with a good price for an aircraft, realistic pricing is required for an aircraft to sell. Conversely, understanding the market in a purchase transaction is even more critical in order to not overpay and get the best value.

A reputable broker will go on site to physically examine an aircraft whether for sale or purchase. An examination of log books will be performed, maintenance status evaluated, service bulletins and airworthiness directives checked, cosmetics evaluated and equipment surveyed and enumerated.

An aircraft broker typically negotiates the purchase or sale for the client together with the client’s attorney. Market knowledge, technical knowledge and transactional experience are the tools for a successful transaction whether buying or selling, and this is especially true for international transactions. There are a host of considerations in an international transaction for which a good experienced broker can be of invaluable help. Regulations are different in other countries and an aircraft must meet FAA regulatory standards with regard to equipment and modifications if it is to be U.S. registered, and if being exported, there are the regulatory concerns of the foreign country. There are lien searches, de-registration and registration issues, and import and export requirements to be addressed.

An experienced broker can greatly assist in the pre-purchase inspection, a process which is adversarial in nature because it involves issues for both the buyer and the seller. It determines the aircraft’s condition and if it is as represented, what needs to be fixed and who is going to pay for the discrepancies found. Some brokers have in-house technical experts who will go on site for this important inspection to mitigate risk for their client. They will make sure the client is being protected from unnecessary expense, that only the scope of agreed upon inspection is being accomplished, and that no bill is presented for anything that has not been previously approved. If you are the buyer, you want all the discrepancies uncovered within the scope of the inspection. If you are the seller, you want to be sure you are not being held responsible and/or billed for something that should be for the buyer within the scope of the agreed upon inspection.

A good broker can help to orchestrate a successful closing by coordinating with the various people and companies that may be involved in the transaction such as attorneys, an escrow agent, a like-kind exchange agent, tax people, an aviation manager, a chief pilot, a maintenance manager and financing banks.

Attempting to perform an acquisition or disposition on your own with the intent of saving the brokerage fee can be foolhardy. When this approach is chosen it typically costs the inexperienced aircraft purchaser or seller wasted time, motion and money. There can be missed opportunities, deals that go nowhere, higher legal fees, problems coping with the other side’s employees or representatives, all of which can result in frustration, disappointment and most importantly money left on the table.

What's an Airplane Cost? Common Aircraft Price Tags

Curious how much airplane you can get for your money? If you’re just starting your search for an airplane, you might be surprised to learn that aircraft prices vary widely, depending on the year, modifications done to the airplane and the relevancy of the avionics, among other things.. A Cessna 172, for example, might cost $40,000 or $400,000 dollars.

From light aircraft to business jets, the costs vary from large to small. Here are some examples of what you’ll pay for a few of the most commonly purchased airplanes:

The Cessna 172


1982 Cessna 172P: $39,000

1981 Cessna 172P: $72,000

2007 Cessna 172SP: Approximately $150,000-$250,000

2015 Cessna 172SP: Approximately $364,000

 

The Mooney M20

 

1977 Mooney M20J: $65,000

2009 Mooney M20TN Acclaim: $425,000

 

The Beechcraft Baron 58
1977 Baron 58P: $175,000

2005 Baron 58: $649,000

 

The Piper Meridian
2007 PA46-500TP: $1.2 million

2015 PA46-500TP: $2.3 million

 

The King Air
1981 King Air B200: $825,000

2004 King Air B200: $2.3 million

 

The Citation Sovereign
2007 Cessna Citation Sovereign 680: $6.9 million

2008 Citation Sovereign 680: $8.0 million

 

The Gulfstream G550
2006 Gulfstream G550: $25.0 million

2014 Gulfstream G550: $49.9 million

Honda Flies High

Photo: Courtesy of Honda Aircraft Company

Honda Motor has long been a crowd pleaser. Its cars, motorcycles, and lawnmowers are consumer favorites around the world. Now the Japanese giant is about to try its hand at producing a light jet, and by all indications, the plane will be another winner.

The unusually light and speedy HondaJet, priced at $4.5 million and capable of carrying four to six passengers, looks set to win Federal Aviation Administration certification by first-quarter 2015. It will be the most expensive aircraft in its class, but buyers already are lining up. The company claims that its first two years of production are sold out, though it refuses to disclose exactly how many jets it is capable of producing per year.

Honda has been quietly laying the groundwork for this since 1986. Back then, wanting to better understand aircraft design, Honda sent Michimasa Fujino, now 54, to Mississippi State University’s Raspet Flight Research Lab. It was at Raspet that the young Honda engineer eventually designed and built two research aircraft.

The second of these, the MH02, was an all-composite, 8,000-pound, high-wing twin jet with the engines mounted atop the wings, which Fujino would later enhance and dub Otwem, for over-the-wing engine mount, since that was the key distinguishing feature of the plane. He figured that this aesthetically challenged configuration -- which looked vaguely like a giant attacking insect from a 1950s horror movie -- would allow for bigger cabins and improved aerodynamics. After Honda green-lighted a move into the light-jet market, Fujino set about converting his MHO2 research into a commercially viable aircraft.

As Fujino and his team refined the jet over nearly a decade, they also built a massive, state-of-the-art manufacturing, engineering, and service center in Greensboro, N.C. -- for an estimated $140 million. This is now Honda Aircraft, where Fujino serves as CEO and oversees more than 1,200 employees.

Check out the rest of the Mark Huber’s story here!

CAVEAT EMPTOR

The world of aircraft sales is fraught with risk and it is a wise buyer who retains professional assistance in the process of buying or selling an airplane. However, the risk in the selection process is not merely limited to what airplane to choose. In some cases the risk starts with the advisor you choose!

Just because someone holds themselves out as having years of experience in the aviation industry does not necessarily make them an expert in the preowned marketplace. This subset of the aircraft sales profession suffers from an overabundance of self-proclaimed experts who in reality have little or no experience in this unique arena. They may very well have held jobs directly related to the operation, maintenance or even sold new aircraft, but it is a misconception to think that they thus hold the skill set necessary to see a complex transaction through from start to finish. If the deal is more complex, such as a cross-border sale or dealing with a repossession, then you need to make sure that the agent you hire has that specific experience. Nearly all my peers at one time or another have encountered legal counsel who seem to think they can manage the deal better than an experienced preowned salesperson. Perhaps the perceived largess to be earned, accolades to be bestowed or allure of mixing with the top one percenters and business leaders the world over draws folks to the aircraft sales world like a moth to flame. Caveat emptor.

In absence of any regulation or requirement for formal credentials that substantiate one is qualified to conduct a pre-owned aircraft sales transaction, the prospective buyer or seller has little to go on in terms of validating a broker’s level of expertise other than perhaps word of mouth or advertising. While references and recommendations should be requested and verified, does the enduser really understand what qualifies as experience in the preowned aircraft sales marketplace? Being a nice person alone is not good enough. Having years of new aircraft sales experience is not enough. Having spent a career specializing in a particular area of the aviation industry is not enough. Advertising in the aviation industry can be a lot of smoke and mirrors and if you do not know what you are reading, you can easily be beguiled into believing that bigger is better. Anyone can create glossy advertising depicting a wide array of aircraft for sale, but do they really? All the while making claims as to their expertise in aircraft sales.

As you might have guessed, I am here to offer a short tutorial on what to look for when evaluating who to hire to handle your aircraft acquisition or sale. First time buyers in particular…pay attention! You are most at risk as you will for the most part have no basis for comparison. An experienced preowned aircraft sales expert is completely comfortable with taking a transaction from start to finish. As one would expect, they should have an industry network in place, first-hand experience working with the various maintenance facilities and other experts you may seek to employ in the sales process including escrow agents, free-lance technical advisors and legal counsel. After all you are paying that individual to in essence be a project manager and they should have a working knowledge of what each party in a qualified go-to team brings to the table.

An experienced aircraft sales professional will have access to research data for a particular make/model of airplane including comps on which to base what you should be paying for a targeted airplane. Indepth primary research of course assures you of complete coverage. If the salesperson you are dealing with is not able to reach out to each and every owner within a select make/model, then you are not getting what you are in part paying them for. While it doesn’t mean you should not buy an already advertised airplane, you do want to be assured you did not miss any off-market opportunities.

An experienced aircraft sales professional is familiar with all the documents necessary to conduct an aircraft sale. These include, but are not limited to, all FAA documents(if a domestic U.S. sale), transactional instruments such as a Letter of Intent (LOI) or Aircraft Purchase and Sale Agreement (APSA) and the International Registry. Most aircraft sales-professionals are comfortable in drafting at least a template for an LOI and the APSA. If your expert is reluctant to do so, then at the very least they should be actively engaged in assisting legal counsel in the construction of said documents, review and negotiation in an effort to accurately put forth the mechanics of the sale and otherwise avoid obstructions and encumbrances. The list of documents grows if the sale is cross-border in nature and this is not time for your “expert” to be learning how to conduct such a transaction. Of course there is a first-time for everyone and I don’t begrudge anyone a learning curve. As much as ninety percent of the transactions my company is involved in are cross-border in nature and on many an occasion we work with an agent representing the other side who has limited experience in such. Eighty-nine percent of the time they are grateful for the assistance we offer in navigating this territory and welcome suggestions as to how to speed the plow. After all, we share a common interest and that is to conclude the transaction.

Consider it a home run if you find yourself working with an aircraft sales professional who is comfortable with conducting a first-hand review of the subject airplane and records. While the level of familiarity with the plane and logs one should have need not be on the level of a pilot or A & P mechanic, it certainly should be to the extent that one knows what attributes as well as potential problems to look for. They should also be on-site during critical junctures in the prepurchase evaluation. This includes any time a repair is called for, at the time the discrepancy list is prepared and made available for review and at the conclusion of the maintenance so verification of fault rectification is made in a timely fashion. Caveat emptor.

Timing is everything they say and no less so when it comes to an aircraft sales transaction. An aircraft sales professional will have a keen sense of timing and will keep an eye on the specific dates of performance written into an APSA. While we all want to trust that everyone will do their job, an aircraft sales person may have to help marshal the deal along, particularly when it comes to the prebuy, and they should have no reservations in doing so. The squeaky wheel gets the grease. As well, they will have a checklist of what needs to be accomplished in order to close the deal and will keep the parties to the transaction aware of what is done and needs to yet be accomplished. There are delays and then there are delays, but don’t let the delay occur because tasks were left to within days of Closing. Caveat emptor. As this blog unfolds I realize I have just scratched the surface of the myriad of steps and tasks that encompass an aircraft sale. I could write a book, but then I could just keep writing my blog pro bono.