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Navigating Today's Aircraft Market:
What You Should Know Before You Buy or Sell
As the market enters its third year of excess inventory and sluggish sales, it's no secret that pre-owned business aircraft these days sell at values up to half of what they would have sold at their peak price in 2007 – before oversupply turned into value collapse.
Tempting aircraft sales advertisements arrive daily in the form of buy-me-now pitches like, "Must Sell Now!" or "Make Offer!"
The temptation for the operator considering changing planes can be considerable; such buyer's-market prices hold huge appeal.
Some may even mull more than mere replacement – they see that move-up fantasy aircraft priced within financial reach and realize they could move up in size and down in age by buying into one of those fabled, never-to-be-seen-again deals.
What's an operator to do? The trusty company airplane still works well, but it's aging. And opportunities this good may never again appear in your lifetime. It's never been easier for a flight department manager, chief pilot, CFO or owner/pilot to shop for business airplanes. But experts in both new and pre-owned business aircraft transactions prescribe caution and common sense to counter any low-price fever.
It's Only Money... Sort of
Reputable business aviation consultants, aircraft-management executives, preowned brokers or new-plane dealers generally deliver the same message: price alone seldom justifies a decision to replace an aircraft.
So if you are overly excited about obtaining a "deal," step away from the other aircraft shoppers and tune out emotion. If you remove buyer's market pricing from the equation, are you still interested in acquiring a new or previously owned aircraft?
Of course, plenty of good reasons to upgrade do exist, as do plenty of considerations should you decide to proceed with a replacement project.
David Wyndham at Conklin de Decker put it simply: "If you wouldn't consider that airplane without the depressed price, maybe you shouldn't be considering the airplane now."
Brian Foley Associates founder Brian Foley echoed Wyndham: "Price alone is a lousy reason to buy – maybe a good reason to sell, but not to buy."
Both men acknowledged the attraction of temporary tax benefits, including bonus depreciation, which accelerates cost recovery. Although the tax-law changes are temporary, bonus depreciation has recently been extended through 2011, which warrants "taking them into consideration," as Wyndham said, "but not as the sole justification [for a purchase]."
Enlist Help From Expert, Friend
Foley reiterated the need for expert help in dealing with the intricacies of pricey transactions involving complex, high-performance aircraft.
Wyndham noted the need for specialized information and experience merely to judge the condition and worth of older business aircraft. A business aircraft transaction, he explained, is no place for casual knowledge, general familiarity or emotion.
"You need a friend, an expert, someone who's on your side, works on your behalf and has no financial stake in what you buy," he stressed.
Foley suggested obtaining knowledgeable, professional assistance when selling an older airplane, too – "unless you happen to be an expert in that plane and its history or condition, like a chief mechanic or chief pilot might be.
"But you don't really want your chief pilot or any pilot involved in representing the airplane you're selling or being the deal maker on the one you plan to buy," Foley added.
Both men agreed: Putting the pilot in charge of acquiring an aircraft may work well when the pilot has a stake in the company – but then again, he or she should have better things to do.
"But you don't want someone who is more focused on the technology and condition of the cockpit than on the back of the plane," Wyndham explained.
Foley added, "You want an independent representative who can look at the big picture and be an equal friend to the crew and cabin occupants alike."
A recent NBAA workshop titled "Six Critical Steps to a Seamless Aircraft Transaction" identified areas warranting attention and expertise:
- Identifying/marketing the target aircraft
- Building the right acquisition or disposition team
- Preparing and getting buy-in on a contractual road map
- Securing acceptable financing
- Managing risks
- Finding a good home for the aircraft.
These considerations underscore the desirability of engaging outside professional help. As Wyndham noted, "It's much the same as you'd expect from an expert working for you on a real-estate deal."
But as Foley noted, covering the contingencies and considerations of a potential sale or acquisition should come only after determining that a change in airplanes benefits your operation.
"It's important not to get carried away by emotion, excitement and enthusiasm over the idea of getting a new airplane without first determining if it's something your company really needs.
"What you need should be something you addressed before you bought the last airplane – so you should have a good grasp of those issues."
Weigh the Wisdom of an Upgrade
Whether it comes from Foley or Wyndham or any other consultant, broker or sales representative, the question of price always should come after questions concerning use and need.
Your current airplane became part of your business for a reason, and probably a number of reasons. Don't deviate from that logic. All experts stress that the reasoning must be better than "because it's a good deal!"
Chances are you would have justified your last aircraft purchase by saying it met your transportation needs, Wyndham explained.
Maybe your existing airplane still delivers, but now needs more rest and care between trips than in years gone by. Perhaps it's getting more expensive to maintain. Maybe you just want to realize the benefits of lower operating costs, which newer aircraft offer through lower fuel consumption and less-frequent, less-expensive maintenance.
Consultants generally ask questions like these of prospective aircraft buyers:
- Are you flying longer distances, more people or more cargo?
- Do you need better runway performance?
- Are you trying to reduce travel times? Perhaps you typically fly the same stage lengths but need to squeeze in one more daily segment.
"If you're thinking of replacing your existing airplane with a newer one, something similar to what worked last time should still fulfill your needs," Wyndham noted.
"If you want bigger or faster or longer range, well, that changes the equation – and you need to make sure [your travel] needs still match up."
As Wyndham and Foley noted, "bigger" also means "more expensive." Businesses usually pick a specific airplane because it matches their 75th percentile needs profile – fulfilling the majority of mission needs the majority of the time.
"Maybe it was 80 percent or 90 percent. Regardless, you don't want to saddle your company with paying for airplane capabilities needed only a fraction of the time," Foley observed. "You can charter for those."
A deal may be attractive because of the financial demands of the existing aircraft. If so, tax considerations should come into play when weighing that great price for the replacement aircraft.
When you blend gains from one or more of the reasons that your airplane is your airplane with today's buyer's market prices, then fold in the value of some temporary, high-dollar tax benefits, you've gone a long way toward operationally and financially weighing the wisdom of an upgrade.
Remember, the company airplane has a raison d'être; any replacement should, too.