A rationale that might save you a lot of grief; some may even call it a “recession busting plan.”
I have heard a lot of debate last summer as to whether the used aircraft market was still getting worse, with values in free-fall; or whether it had hit bottom, with the market now stagnant; or whether yet, there are signs of improvement, with increased activity and the best valued aircraft being snatched up.
Regardless of the particular camp you side with, there is absolutely no doubt of two things:
- We have been down this runway before.
- We shall go down this runway again.
Rather than continuing this debate which can be heard around any water cooler or on any shop floor across the country, I felt it better to work outside of the normal sphere by exploring what might constitute a suitable defence against the next recession and its impact upon business jet ownership. Before you bolt because you think this article is not worth your time, please at least let me stress to you that now is absolutely the best time for you to change your current strategy. If you will allow me, I will provide you with 5 ways to protect your investment: 1.) Separating Facts from Myths, 2.) Maintenance Tracking and Service Plans, 3.) Record Keeping and Historical Paper Trails, 4.) Cosmetic Design Schemes, and 5.) Safety Standards.
Before jumping in with the solutions, first we need to understand the problem. I will assume that you currently own your aircraft and you have a mortgage on it. During the most recent conversation that you had with your lending bank, you may have gotten the distinct impression that they (your bank) were extremely nervous about your current holding, because the on-paper loan/value ratio on your aircraft has become quite ugly. I can assure you without any fear of contradiction, that unless you have purchased your current aircraft within the last six months, your current market value has plummeted between 40% and 60% since last summer.
Unfortunately, as far your lender is concerned, you may have now vacated the V.I.P. seats that they had figuratively placed you in when your loan was first underwritten and approved. Your bank is probably showing signs of buckling under the intense pressure that is being brought to bear upon them from their internal management groups, federal regulators and public opinion. If you provide them with any indication of not being able to send the monthly payment to their processing centre, you may well trigger a telephone call to you which may have an underlying but discernible edge of malice to it. This unfortunate type of call is now very common for many aircraft owners today.
Whatever you manage to work out with your bank is great. But don’t play around with your agreed payment plan too much, because once your personal loan manager is replaced by a committee, your loan will be in grave danger of being placed into default, and the bank will force it to foreclosure. By saying this I am not targeting the people who loaned the money to you to buy your aircraft. I can honestly say that I’ve truly never met anyone in the aviation finance industry that would ever be considered to be spiteful or vindictive. The reality of the current situation is that they are dealing with a trickle down problem (actually more like a fire hose) that has impacted our industry based on the larger international financial crisis.
Now let’s assume that you still have a firm grip on the title to your business jet instead of you living under the threat of it being snatched away. Unless you have absolutely no reason to move out of your present aircraft, now is the time for you to pay attention to the used and possibly even the new aircraft marketplace. There are deals out there today that probably will not be repeated for another 15 to 20 years, or more.
As much as we would all like to, even in this digital age, no one can stroll down to Macy’s and buy themselves a time-machine or an oracle’s hat to predict the future of the world’s markets. The biggest challenge in digging out of the present value conundrum is the ability to successfully find the ‘right’ replacement aircraft to hold sufficient future equity performance for your bank to roll your existing loan over into a higher value aircraft today. What do I mean by higher value? Anything that is younger, has less total-time, is better equipped, and has a higher present-day book-value than what you currently have.
Once you have located the ‘perfect’ aircraft, probably with the expertise of a market-savvy broker, you will most likely have to provide an additional 15% to 20% of the trade aircraft’s book/loan value on top of your existing loan. This will give your bank sufficient confidence to make a new loan with you against a better value aircraft today. No doubt that some negotiating will take place between you and your bank on how to handle the pre-payment penalty that is written into your current loan. Often this can be waived. Effectively everyone that has the foresight to follow this procedure, makes a step sideways and up, while the trade-ins move further down into the abyss. Some may actually go to the scrap yard.
Once you, your bank and the broker have closed the deal, celebration is in order. However don’t rest on the laurels of this transaction and relax your grip, because you still need to keep a close scrutiny on how your aircraft is being operated and maintained if you want to recession-proof this aircraft purchase.
Separating Fact from Myth
FACT: Business Jet Aircraft values mirror the Dow-Jones Industrial Average trends. I can prove it to you, if you contact me at my office at JetBrokers.
MYTH: You will never make money on an aircraft purchase. I have several clients that would strongly disagree with this statement.
FACT: The secret to making money is simple – buy low, and sell high. This sounds silly I know, but how often is this rule broken?
MYTH: If it Flies or Floats, lease it! This motto cannot be generalized. Everyone’s economic position and goals are different. From an hourly cost perspective, the following ‘Fact’ completely refutes it.
FACT: The hourly flight cost of trips aboard a business jet, in order of expense from ‘high-to-low’ is as follows: Fractional (most expensive per hour) – Charter – Leasing – Ownership (least expensive per hour).
MYTH: You will make money, or at least your own flying will cost you nothing, if you place your aircraft into a managed charter program. You might defray your overall expense, but just like perpetual motion, ‘free’ does not exist. Is the reduction in your annual expense worth the diminished value from the added wear-and-tear?
FACT: People (buyers) don’t like old and high-time aircraft. There was a time when charter companies thrived on them, but the fractional and independent audit companies have put paid to that. Now the resale market for vintage (older than 25 years) business jets is growing daily, while the number of willing buyers is shrinking at a greater rate.
MYTH: The factory did not make a mistake when they built your aircraft ‘by building it better’ than all of the other aircraft that came off the same production line. This is just posturing and hyperbole that buyers immediately see through. It is how the aircraft is treated through its operational career that determines its true value-enhancing pedigree.
FACT: Paying for and having accomplished maintenance, service bulletins, and industry standard up-grades on your aircraft while it is in your custody will not add value or enhance the price of your aircraft. It will merely maintain its natural market value. Failure to have any of these items accomplished in accordance with the manufacturer’s mandated schedule will actually cause a reduction in value.
Maintenance Tracking and Service Plans
It is extremely important to either start, or keep your aircraft enrolled onto a computerized maintenance tracking program. If you don’t keep pace with the multitude of calendar and hourly inspection, servicing, overhaul and replacement items that are required on your aircraft, safety along with your aircraft value is severely compromised. The same applies to the applicable manufacturer’s engine service plan on your engines, though it is exclusively an issue of value, not safety. When the time comes to sell, if your aircraft is not enrolled in an available service plan, many buyers will not give your aircraft a moment of consideration. At a minimum, you may have to discount your asking price by the plan’s quoted enrolment cost. In a tough market, this strategy might prevent your aircraft from attracting sufficient interest from buyers to actually make it to a sales transaction.
Record Keeping and Historical Paper Trails
Keep all maintenance records, logbooks, warranties, airworthiness tags, work order packages, invoices, etc., in a secure, fire and waterproof safe. Consider access to them on the same level as you would if you owned an original copy of the Declaration of Independence. If anyone other than you, your pilots or your Director of Maintenance wants to handle your documents, make that person justify why they need your records before you let them out of your safe keeping. Never ship your records either. The best way for your records to travel, when it is necessary for them to do so, is to be carried on-board the aircraft or, at the very least, ‘hand-delivered’ by someone who you trust. It is also vital that you take an active role in how, and what, entries are made in the logs as routine maintenance and inspections are accomplished and recorded. The erroneous stroke of a pen could cost you thousands later on. Content and form of entries are extremely important. So often a simple miscalculation of total-time in a log book entry can span thousands of hours before it is caught by a diligent inspector. If this happens, the pedigree of your aircraft is severely reduced. Lastly, don’t limit your accumulated historical paper trail to only airworthiness records. Invoices, receipts and work order copies all add to the pedigree of your aircraft, thus ensuring a higher resale value.
Cosmetic Design Schemes
When you are ready to refurbish both the interior and the exterior of the replacement aircraft, don’t allow your wife or girlfriend to make their mark as an amateur designer. Remember that beauty is always in the eye of the beholder, but your eye is unlikely to be in the same taste of the next buyer of your aircraft. Wild, gaudy, lavishly over-the-top styling and flamboyance will only reap you a lower selling price later on. Many of the aircraft that are selling today are what I like to refer to as ‘ghosts’, i.e. they are painted all white with absolutely no design stripes to turn a buyer off. A clean canvas, so to speak. I’m not suggesting that you ride around in a ‘ghost’ yourself, but at least try to keep your appreciation of Jackson Pollock’s work in your home and not on your aircraft exterior.
If you decide to upgrade your aircraft to a higher safety standard than what is currently mandated by the FAA, it is my professional opinion that the best blueprint that you can use is the specified requirements presented within the European JAR-OPS-1 document. Over the years we have seen a gradual shift of safety philosophy from Washington, DC over to mainland Europe. There are a lot of changes afoot in European regulatory circles now that the European Aviation Safety Agency (EASA) has been established. It is highly likely that JAR-OPS-1 will be superseded by a new document in the not-too-distant future. I suggest that you keep on the look-out for this change. In the meantime, I want to stress that when it comes to guaranteeing yourself the highest possible resale value, ‘less is most definitely not more’ when you are specifying planned equipment and safety upgrades.
How long will you have to hold on to this replacement aircraft before cashing in? Remember my earlier statement about Macy’s? Without an oracle hat myself, I am willing to make a prediction based upon my experience. I believe that your new loan should run for at least the next 60 months before it is allowed to come due, because you probably have longer to wait before we reach the stratospheric pricing that we saw in 2007. Also remember that during this holding period, it is best to try to keep your flight-hours under control and within reason, because 10% or more of the subsequent sales price realized will depend upon the total-time on your aircraft. The average rate that a business jet is flown here in the United States is 450 hours per year which equates to 8.65 hours per week.
I sincerely wish you the very best of luck with successfully beating the next recession by using this, or a similar rationale to recession-proof your next aircraft purchase. I am always available for consultation at JetBrokers, if you need any help or advice on this topic.