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Five Tips for Aircraft Financing/Leasing

by David Wyndham 3. May 2017 14:39
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There is money available today if you are interested in financing or leasing a business aircraft. Interest rates are still low. Here are five rules for getting financing or leasing.

Rule #1. Dance with the one you brought.

Relationships matter. Financial institutions are looking for long-term relationships. If you have done significant business with one institution over the years, they are the first ones to approach for any aircraft financing or leasing. One private banker told me "If you have $300 million in assets with (my bank) there is no way we won't do an aircraft deal with you." Part of this is the significant investment the financial institution has made in keeping you, and your cash, in the bank. The other is that in cultivation and supporting your business, they have a very good idea as to your character.

Rule #2. Character counts.

The Four C's of financing are Character, Credit, Collateral, and Cash Flow. Do you have the credit available for the deal in mind? Aircraft deals can be far more complex than other assets. Any financial institution needs to manage and measure their financial risk and it starts with your credit. Another part in managing the risk is what other assets do you have to guarantee the aircraft deal? Standalone, the financial institution may not want to do interest-only financing, but if you have cash, stocks, and other investments well in excess of the aircraft value, then the risk is lessened. Can you keep the aircraft flying? For $2 million you can buy a 15-year old turboprop or a 22-year old large cabin jet. However, the annual operating budgets are going to be vastly different. Can you afford the $3 million engine overhaul on the jet? Character, whether are you a person of your word, counts more than all the above.

Character ties into rule number one above. The financial institution wants to know, not only from a balance sheet perspective, but from who you our your company is, will you stand by the deal? Given enough money for lawyers, it seems like most contracts can be broken or amended. The financial institution is looking for a trustworthy account.

Our company founder and dear friend, Al Conklin, told me that he measured every sale by the value of the person's handshake. If he didn't trust the person, no amount of legal contracts and forms would make him feel good about the deal.

Rule #3. Get what you need, don't overbuy. 

Aircraft are wonderful business tools. They get you to many places far faster than any other mode of transportation. They enable you to make the out of every minute and do so in a safe and secure environment. Given the availability of pre-owned aircraft you can easily step up in size nod capability for not a lot more money. Get the aircraft that does the majority of your flying in a cost effective manner. Need or want the big cabin plane? Then charter one when necessary. 

I had one client who would not consider a plane in which he could not stand up in the use the lavatory! The smaller cabin jet was less costly to own and operate, but he wanted and was willing to pay to stand. He ended up not buying and continuing to charter. If you do decide to upsize, make sure you understand the ramifications of the budget and are willing to pay.

Rule #4. Communication is key. 

For the lessor, lender, or insurance broker to make sure you get the best service, make sure they understand how you plan to use the aircraft. Will you be doing charter? Will it stay in North America or spend a lot of time in other locations? Are their management agreements? If so, is the financial institution protected adequately in terms of a loss or lien?

Rule #5. Plan.

While a cash-only transaction can be done in the time it takes for a wire transfer to occur, even the aircraft registration process will take more time than that. A US-only financed deal can take three to four weeks at the absolute fastest. Better plan on a month or more. If there are two countries involved, if the Ex-Im Bank is involved in the financing, plan on three to four months minimum for the deal and the importation of the aircraft. 

Financing or leasing a business aircraft is complicated and involves significant finances. You should have qualified aviation legal and tax advice. 

 

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Aircraft Sales | David Wyndham | Aircraft For Sale

Oldies But Goodies, the decision to buy a new aircraft versus old(er) aircraft

by David Wyndham 18. April 2017 15:32
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The majority of manufacturers of new turbine business aircraft are still having difficulties selling their new aircraft. Sales remain sluggish. According to GAMA 2016 was the worst year for business jet deliveries since 2004. Ref: http://aviationweek.com/bca/business-jet-shipments-lowest-2004-gama-says

When I talk to brokers of pre-owned aircraft, many are reporting that 2016 was a very good year and that 2017 is continuing the upward trend. Why is that? One reason is that there are still a lot of quality pre-owned aircraft for sales at prices that have not recovered since the last recession. 

A friend in the finance industry who frequently works with high net worth individuals reports that for them, buying new is not financially the best option. Ten, 15 or 20-year old business jets are safe, have relatively low time versus their life, and, if you understand the maintenance requirements, can offer years of excellent service. 

Business jets still depreciate at alarming rates. A rule of thumb for a new business jet? Try 8% to 10% per year! Sources like Vref and the Aircraft Bluebook Price Digest support this with historical data. For a number of models, you can easily buy a seven-year old for about half or less than acquiring new. The manufacturers' sales people stress the new aircraft have much lower operating costs due to the lower maintenance costs, have the latest avionics, and new aircraft warranties. They are right, but still - that market depreciation! Being a numbers person, I ran some numbers.

looked at several popular large cabin business jets and the below is an average of a couple models. I used Vref pricing and ran operating costs to include the costs aging aircraft maintenance using our Life Cycle Cost software. Here are a couple things to consider.

Acquisition

New aircraft list = $44 million 

7-Year old model = $7.5 million

15-Year old model = $3 million

 

Knowing that acquisition is only part of the costs, what about the variable operating costs - including all the older aircraft maintenance?

Variable Cost Per Hour (on engine hourly maintenance program)

New aircraft = $3,800 per hour 

7-Year old aircraft = $4,900 per hour

15-Year old aircraft = $5,100 per hour

$1,300 per hour in operating cost is a lot - 34% greater than for the new model. The new jet, $44 million and you are good to fly right away. The 15-year old might need $2 million to $4 million in upgrades, new paint & interior, ADS-B, and some engine work. Even the 7-year old will need some upgrades. 

But when you look at residual values as a financier does, that difference in the operating cost budget pales in comparison to what (may) happen to the value. After seven years, that new jet may be worth half of new (or less) based on recent history. That $44 million jet may decline by $22 million! The older jet's value will be dependent on the maintenance status, especially the engines. It's possible that after seven years the now 15-year old may still get $2 million or more if the engines are in good shape. Even if you park the 15-year old jet after seven years' use, you are only out $4 to $6 million. 

One area not covered in these numbers is availability and utilization. A aircraft age, they require more maintenance and the extra maintenance burden requires more downtime. When the aircraft is in for maintenance, it is not available for flight. I you need high utilization, that older aircraft will likely make it difficult to maintain a busy flight schedule. But, for the lower utilization owner, such as many high net worth individuals, 200 hours a year is plenty and that 15-year old jet can easily keep up that schedule. 

Can you keep an older jet flying 30-hours a month? Maybe but not every month. I don't have an exact number as there are too many variables, but maintaining consistent 500-600 annual hours will be very difficult in all but newer models. A new aircraft can sustain that use with ease. That seven-year old model can probably sustain that level save for the "once every 8-year" type of heavy maintenance. 

Consider a company like NetJets. They need to minimize downtime. NetJets and the other fractional aircraft providers all tend to operate newer models. They do this to be able to offer the 800-occupied hours per year for their share owners. They cannot consistently get the revenue hours with older aircraft. 

can't ascertain that the new aircraft sales are going to the high utilization operators while the infrequent-fliers are buying the older models. But that can be one reason while the pre-owned aircraft brokers are enjoying a good year. 


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Aircraft Sales | Aviation Technology | David Wyndham

Can You Make Money In Charter As the Owner?

by David Wyndham 19. March 2017 15:16
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I recently received a call from a past client. He’s looking to acquire a business jet with a partner. When they are not using it, they want to put it on their management company’s charter certificate. He was told that the charter would offset the costs making his aircraft “almost zero to operate.” He was wondering if that was feasible.

Before answering that (no), here’s how this can be set up. The aircraft owner who is looking to reduce the cost of operating their aircraft, places the aircraft onto a commercial Part 135 certificate. When the owner is not using their aircraft, it can be earning revenue by flying charter. You will generate revenue that will offset the cost of owning and operating the aircraft.  You will not “fly for free.”

As a rule of thumb, the aircraft owner typically gets 85% of the base charter rate while the certificate holder keeps the remaining 15%. The aircraft owner typically pays all the aircraft specific charter expenses such as fuel and maintenance. The excess of charter revenue over those expenses helps offset the fixed costs resulting in a net decrease in total cost to the owner.

Charter rates in the US are very low relative to what these aircraft cost to operate. An aircraft that charters for $3,200 per hour can cost about $1,700 pr hour for the variable expenses. Since the charter operator gets 15%, the owner gets $2,720. So far they are ahead $1,020 per hour. But there are fixed costs such as hangar, insurance, pilot fees, etc. that might run $400,000 per year.

Also, this jet costs the owner $3 million to acquire. Lease payments can run to $300,000 per year. If the owner paid cash, there is a cost of capital to the owner as they cannot invest this money elsewhere. Adding the lease expense plus the fixed expenses, you get $700,000 per year. At an income over operating expenses of $1,020 per hour, our owner needs 687 hours of charter revenue to break even before tax considerations. Very, very few charter operators can generate that much revenue flying in a year. 

If this were easy to do, the charter operator would buy the aircraft and keep 100% of the revenues. When you factor in the fixed costs and cost of capital or leasing, charter rates don’t pay enough. But, for the owner who flies infrequently or on a very fixed schedule, the revenues from charter can help reduce their cost of flying. 

If the jet in the example above generated 200 charter hours and the owner flew 200 hours personally, this works to everyone’s advantage. The owner gets $204,000 in income, in effect cutting their fixed expenses in half. They also get to use their aircraft about 25 times per year at eights hours per round trip. The charter operator get the use of an aircraft without the large capital investment. Thus, they get to provide a service and stay in business at today’s charter rates.

For an aircraft owner placing their aircraft onto someone else’s commercial certificate requires careful planning and compromise. The arrangement can be beneficial for both aircraft owner and charter operator, but only if both parties compromise, cooperate and communicate. 

 


 

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David Wyndham

When you "assume"

by David Wyndham 3. February 2017 15:00
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The old saying goes that when you assume something it makes an "ass" out of "u" and "me." That's been demonstrated numerous times. The word assumption does have several definitions. The one in reference above is listed first below. I want to discuss the second definition in relation to the first.

1. a thing that is accepted as true or as certain to happen, without proof

2. the action of taking or beginning to take power or responsibility

The key term to the first definition is "without proof." If we invoke definition two, and take responsibility for defining and offering a level of proof to the assumption, then we have a powerful tool for communication and negotiation. 

In a talk given by James Lara of Greystone Partners at the 2016 NBAA annual meeting, he was discussing the difficulties many of us find in developing a budget. Many times we get into struggles or face the limits of "do more with less." James stated that if you agree on the assumptions to use in developing the budget, the rest becomes straightforward.  With respect to the budget, first agree what the assumptions are. How many trips or hours are needed this year by how many passengers? How many days on the road are needed? What standards do we train to and what are the crew-rest and time-off policies? If fuel cost, salaries, insurance levels, and other costs are mostly a given, then all that remains is the calculation of the total costs to deliver the transportation, safety, and service levels we have just agreed to (assume). If there is a disagreement on the numbers, refer back to the agreed-to assumption that leads to the number. 

This applies to all sorts of communications and relationships. What are the assumptions we are dealing with and are we in agreement? We had this recently at work. We were discussing an issue with one of our software products. When several of us got on a call to discus it, we first had to decide whether it was a problem with the software feature not working correct or whether we didn't communicate to folks what the feature was supposed to do. Once we decided that the issue was the feature didn't do what it was supposed to do, we then set out to reconfigure the feature. And yes, to communicate with our customers better is needed, too. We avoided a lot of wasted time by agreeing what the assumption was in relation to the software before we went down the path to fix it.

This also helps in our relations with other people. With one client, we were tasked to look at their staffing. One area where the assumptions were quite different was in respect to the "free time" when the pilots were on the road. If the aircraft owner went to Barbados for a week, the plane and crew stayed down there as well. On one hand, it sounds good to have a few days in Barbados.  But the pilots are not with family. They are not able to be totally free with their time in case the aircraft owner changes plans. So is this assumed to be work or time off? 

If you are creating a new position or moving someone into a new position, you need to make sure they understand what the job duties and performance criteria are. Helping a client select an aircraft? Do they assume a single-engine turboprop is a safe and cost-effective alternative or are they nervous fliers who want two engines and two pilots at all times? 

Too often we assume the other person has the same assumptions, goals, and reasons for being as we do. When we run into resistance, we can be taken aback to find that is not always true. Checking that your assumptions are in alignment with the other person can avoid many issues and miscommunications. Make it your responsibility to check in with the other person to at least agree on what the baseline considerations are. It's time well spent.

 

 

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Aircraft Sales | David Wyndham | Flight Department

2017 Thoughts - No Recovery Quite Yet?

by David Wyndham 8. December 2016 14:51
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I recently returned from the excellent Corporate Jet Investor CJI-Miami conference. The two-day conference was attend by over 200 financiers, brokers, lawyers, manufacturers, appraisers, consultants and others involved in the transactions of buying and selling corporate aircraft. This includes helicopters, too (see footnote) . There were individual speakers and panel discussions. And way too much good food. Congrats to the CJI team for putting on a great event. Much of the discussion centered around the state of aircraft sales, residual values, and when the "recovery" is coming and where. Here are some things that stood out for me.

Flying is still down. There were three sets of data points supporting this. Jet Support Services (JSSI) has their Business Aviation Index built from the utilization of about 2,000 aircraft flown by their program customers. For third quarter 2016 (2016Q3) flight activity was up 1.4% versus 2015Q3. Sounds good until you see the number, about 29 hours per month, is only 84% of the overall peak utilization. Separating out Part 91 operations showed utilization of 22.5 hours per month - only 270 hours per year. That is not high utilization for the business jet fleet. 

Wingx, using FAA data, was not promising either. They show an average of 101 hours per year for all light jets and 159 annual hours for heavy jets. Not sure how accurate the FAA data is, but trends are trends and they are well off peak levels. Promising is that turboprop and light jet activity is on the rise. 

JetNet's JetNetIQ report also showed increasing aircraft fleet cycles. But total fleet cycles flown this year are only at about 2003 levels even though we have 50% more aircraft in 2016 versus 2003. So we have more business aircraft flying fewer hours and cycles versus peak periods. But flying is slowly increasing. The utilization trend is positive.

Aircraft sales, new or pre-owned, are still flat and pre-owned values overall show no signs of recovering. Several commentators blamed an over supply of business aircraft and buyers in general just not being all that interested in acquiring aircraft.  A couple brokers did note increasing sales activity in turboprops and light jets here in the US. 

Here is a tidbit I got from looking at AMSTAT's data. For business jets globally, about 25% of the fleet, 4,140 jets, is aged over 25 years. Heavy jets are the youngest fleet with only 17% of their number aged over 25. For midsize jets, 24% and for light jets, 33% of the fleet are aged 25 years or older. On the surface, I'd say the time is ripe for those older jet owners to upgrade. Why aren't they doing so in big numbers? 

Data that we see at Conklin & de Decker suggest that as aircraft age, they require increased maintenance to maintain their reliability. This increased maintenance is in dollars and downtime.  As aircraft age, the increase in unscheduled maintenance associated with scheduled inspections also requires a great deal more maintenance down time. Similarly it will take more and more maintenance to achieve any kind of acceptable dispatch reliability. Both detract from the availability of the aircraft for flight operations. Data shows that availability drops from the 95% range for aircraft up to 15 to 20 years of age to an average of 70% at age 25 and 55% at age 30. 

    Aircraft Age        Availability

      0 – 20 years up to 95%

      25 years up to 70%

      30 years up to 55%

By age 30, many aircraft are spending as much time in the shop as being available to fly. Normally this is a big problem and justification enough to acquire younger, more productive, aircraft. But if utilization is low, then maybe this is not such a big deal. The JSSI data are for aircraft under their guaranteed hourly engine maintenance plans. This aircraft are likely to be newer models. Even so, 270 annual hours for a Part 91 business aircraft is not a lot of flying. The Wingsx analysis of the FAA data showing 100-160 annual hours also shows there is plenty of downtime left in the year for scheduled maintenance while meeting g the required flight schedule. 

If operators with these older aircraft are able to meet the flying schedule and they realize the residual value of their aircraft is likely close to spare parts' values, maybe they see little need right now to upgrade. What about FAA NextGen? ADS-B is due by 2020, but for many of these older aircraft with analog equipment, the upgrade may only require a new transponder. If they cannot upgrade, then they might as well fly them until December 31, 2019 and park them. If this is the case for these operators, they may see little benefit to upgrading for another year or two.  

Overall, the general mood at CJI was that things are very slowly improving. But pay close attention to the US. Europe is moribund for business aircraft. As long as oil prices stay low, along with political instability in the Middle East, sales activity there will be slow. Same for Africa.  China and India, although they have the highest rates of GDP growth globally, are growing more slowly than in the past and account for a very small percentage of business aircraft sales. Mexico? Trump, NAFTA, and other trade worries impact there. Brazil's economy isn't promising right now, but Argentina, small a market as they are, is promising. Oceana, another small market for aircraft, is stable. The US has the globe's largest business aircraft fleet. The US, with a pro-business president and Congress combined with the current economic growth that's already underway offers the best hope for the next few years' aircraft sales. 

Personally, I think as 2020 approaches, we will see an uptick in aircraft sales for those aircraft with the ADS-B mods already installed. As supply of these aircraft may be limited, that may help with new aircraft sales.  But given the supply of pre-owned aircraft, that uptick might not be noticeable for another year, or 2018. Food for thought (as if after both Thanksgiving and the CJI buffets I have any room left). 

 

Footnote 1. Most of the helicopter manufacturers are highly dependent on large multi-turbine helicopter sales. Most of those are in oil & gas.  The CJI panel offered little hope for sales unless the price of oil goes up further. However, a recent energy find in West Texas combined the shale oil recovery and fracking technologies getting cheaper point to more land-based oil exploration. Stay tuned.

 

 

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Aircraft Sales | Aviation Technology | David Wyndham | Flying | NBAA | News



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