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'One Hit Wonders' and the state of the marketplace today

by Jeremy Cox 31. August 2010 15:05
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“One Hit Wonders” and “Nervous Nelly’s” best describe the potential client base active within the used business jet and turbo-prop market today. A “One Hit Wonder” is someone who makes a very low offer for an advertised aircraft, and if the offer is countered as a part of what would normally be termed ‘normal negotiation’, immediately vaporize and are not available for any further discussion. “Nervous Nelly’s” are buyers whom constantly sit on the fence without stepping off either side of it. They sporadically hang around for days asking all sorts of questions and scenarios, but when you believe that they are ready to make a move, they back away and go quiet for a month or so. “One Hit Wonders” rarely make a deal, but the “Nervous Nelly’s” must be attended to, otherwise six months into the future you learn much to your consternation that they finally reached gestation while talking to another broker, and in turn have bought an aircraft that you would never have shown them, because ultimately it was wrong for them.

Unfortunately this current environment of “Price-Only Buyers” shall most likely prevail as the ‘norm’ for several years to come. Now when I use the term, “Price Only Buyers”, I am describing how, in most cases, the skills and interests normally associated with ‘educated’ and ‘intelligent’ buyers are all but lost today. To illustrate this, an excellent example is found within the Dassault Falcon 20-5 retrofit market.

Even though it is probable that there are two or three kits still in existence, to allow the conversion of several more Falcon 20s, the likelihood of this happening is highly improbable. Since the Honeywell TFE-731 engine retrofit program started in the late 1980s, there have been 117 aircraft that have gone under the knife, so-to-speak, and now sport Honeywell instead of their old General Electric CF700 engines. Today 30% of the fleet are available for purchase in a used condition.

Conversions at the peak of this program normally cost around $4,500,000 to have accomplished. This was on top of the initial acquisition price of the candidate aircraft itself. Many F Models trickled onto the used market in the $7,000,000 to $9,000,000 range. Most sold quickly, because there was high demand for these large-mid cabin aircraft that gained almost a doubling of its range due to the improved fuel efficiency of the retrofitted engines.

23 Falcon 20 Basic Model (which is 13% of the 173 model fleet), 6 Falcon 20D Model (which is 10% of the 61 model fleet), 13 Falcon 20E Model (which is 21% of the 63 model fleet), and 75 Falcon 20F Models (which is 54% of the 138 model fleet) have all since been converted. The greatest distinctions between these four different models are that the D, E and F Models have bigger ‘fuel feeder tanks’ (they carry an extra 80 gallons of fuel); the E and F Models have a higher Zero Fuel Weight; and lastly the F Models eliminated many of the corrosion prone spot welds by going to rivets as a replacement, plus they carry 40 more gallons of fuel than the other Models, they are equipped with Single-Point Refuel Ports as standard, and most significantly they have Full-Span Droop Leading Edge-High lift Devices which provide for shorter take-offs and landings.

Notwithstanding avionics differences between each model, in the 1990s, a Falcon 20C-5BR (Basic Model) would on-average, trade $2,000,000 less than a Falcon 20F-5BR. Now in today’s market virtually none of the Models will break $2,000,000 during a sale, while many, including F Models, sell at or below $1,000,000. With this price-evening of the field, the distinctions of Model differences are pretty much lost on most buyers. The price/value basically takes the educated and intelligent decision making out of the equation. Buyers focus on price alone and pretty much don’t care about the Model differences, which once mattered a great deal. Hence my assertion that Educated and Intelligent Buyers have left the field of business negotiation-conflict.

Why has the Falcon 20-5 Market been levelled so quickly, you might ask? Well I am afraid that it all boils down to age. Business Aviation is relatively young. It can be argued that here in the United States, the Beechcraft Model 18 was the first real-purpose-built Business Aircraft. This and the ex-wartime Douglas DC3 formed the backbone of the post-war Business Fleet of Corporate America. Things rapidly altered in 1959 when the turbo-propeller powered Gulfstream GI was first introduced. Then came the Lockheed JetStar, the North American Rockwell Sabreliner, the Beechcraft King Air, the Learjet 23, the DeHavilland Hawker 125, the North American Rockwell Jet Commander (Westwind), the Dassault Falcon 20, the Gulfstream II, the Cessna Citation 500, and-on-and-on until the present day.

Production deliveries of the Dassault Falcon 20 started in 1965, the year I was born. Production pretty much ended in 1985. The oldest Dash-Five Falcon has celebrated its 44th birthday this year. There is both a force of natural attrition, and also an-industry attrition that which determines the useful life of a product like a business aircraft. Natural attrition is determined by the cost of replacement parts availability and cost. Industry attrition is determined by the banks that lend money to purchasers of these products. Both systems normally run fairly close together, however in the last 50% or so of a product’s life, industry begins to lead the natural state by 15 to 20 years.

In the early 1990s, most banks were quite vocal in letting buyers know that they were reluctant to finance aircraft that were manufactured before 1980. By 2000 that had year-model comfort threshold had risen to 1985. By 2005 we were looking at 1990. Now today, in late 2010, while we are all recovering from the worst recession in living history, that threshold has leapt-up to the smallest gap ever to 2005. Banks just don’t like old aircraft. Of course you can borrow money to snatch up an incredibly deflated value Dassault Falcon 20F-5BR (80%+ discount from ten-years ago), but there is a strong likelihood that you will have to put 80% of the money down as your collateral down-payment, while you are allowed to borrow only 20% of its purchase price. This would have been in reverse 18 months ago, i.e. 20% down and 80% financed. Yes, the world has been completely turned onto its head.

Unfortunately this cause and effect is rife between almost 75% of the entire active fleet of business aircraft. Back in February 2009, I wrote at this Globalair.com site how the business fleet had experienced a 40% to 60% drop in value since the previous year (2008); then in August of 2009 again at Globalair.com we discussed the issue of “when is old, too old?” Now today, I am reporting to you that some models have dropped to 80% or more from their previous values of pre-recessionary times, while a large segment of the fleet just does not currently have any resell value, even at any price.

The secret to success in buying and reselling used business aircraft has not changed on-jot. Instead it has tightened up. In all cases now, the path to enlightened success lays in buying the Youngest, Lowest Time, Best Equipped Aircraft that you can stretch your money to purchase. It’s as simple as that. Meanwhile if you are looking at the new “paradigm of values”, when the economy does improve significantly in five to ten years from now, there is a great chance that your position taken today might see you realizing 300% or 400% on top of what you pay today, when you decide to sell later.

We see now real signs of improvement in the business jet and turbo-prop market, except for the cherry-picking that is still going on in the GIV/GIVSP markets; however, the Gross Domestic Product of the U.S. economy has grown by about 3% so far this year, with good signs that it will maintain this recovery pace without interruption. The only year that historically the U.S. economy saw a ‘double-dip’ recession was in 1981, and that was in response to the Federal Reserve raising the interest rate to combat inflation. Well there is no one, in my own opinion, that would suggest that we are to fear inflation at the moment, or anytime soon, therefore I would love to see the term “Double-Dip Recession” to be struck from the English language, so we can all get on with seeking out a faster path to recovery. My ‘two cents.’ Ciou.

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Jeremy Cox



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