NAFA member David Wyndham, Vice President with Conklin & de Decker, shares tips on knowing when the time is right to sell your jet.
Although it’s important for all owners to have a strategy on when to replace their aircraft, there are several important factors making an owner’s plan specific to their operation. David Wyndham offers insights on these.
When you acquire an aircraft, whether it is your first or a replacement you may not be thinking about when you should sell. Though it may not be an immediate concern, a savvy owner should still have a strategy in place for when to sell.
Unfortunately, there is no easy formula for this, nor is there a single tactic to follow. There are, however, two general reasons to dispose of your aircraft. The first is that it’s no longer capable of performing its mission. The second is that the aircraft is no longer economically feasible for the mission.
One of the main reasons why people replace their aircraft is that their mission needs change and the aircraft no longer offers the capability required.
A typical case is a requirement for greater range or passenger capacity. If you require additional range, your current aircraft could probably still perform the trip with a fuel stop. You should keep in mind that larger, longer range aircraft cost more to acquire and operate. Is avoiding that one-hour fuel stop worth spending $10m-$20m more for a larger aircraft?
Another scenario might be the need to carry more passengers, more regularly. While adding more seats is not a viable option if you’re to preserve passenger comfort, some aircraft can add one or two more passenger seats with a simple reconfiguration. This may include using a belted lavatory as a passenger seat. (I had one client who used a typical eight-seat Hawker 800XP as a nine-seat shuttle by doing just that.)
However, flying nine people 3,000 miles with an eight-seat aircraft is not a viable long-term solution, especially with baggage.
High Utilization Operations
I have worked with several clients who fly frequently. One has several Light Jets that average about 700 hours per year on 400–800nm legs.
Maintaining a high utilization schedule such as this is easier with newer aircraft. Newer aircraft require less maintenance and spend less time in the shop for maintenance, which is a major reason why fractional companies have newer models in their fleets.
Cost of Ownership
If the cost of keeping your aircraft is outweighed by replacing it, then the best financial plan is to replace your aircraft.
Operating Costs Increase with Age: As aircraft age, unscheduled maintenance tends to rise. Some components will wear out and other critical components may have a specific life limit.
Engines are still going to be the biggest single cost item on most aircraft. Engine overhauls are infrequent but high cost, often exceeding $1m per engine on some large-cabin jets.
At some point, the ability to support the aircraft will become difficult due to increased unscheduled maintenance and a growing scarcity of spare parts.
Fleet size, the aircraft being out of production, and the average age of the fleet all factor into driving up the costs and availability of spares. This becomes a greater factor for aircraft in their mid-20s and older.
Residual Values Decline with Age: Along with increased operating costs come declining values. The value of an aircraft is based partly on its age and partly on its maintenance status. For example, a 20-year-old business jet has much of its value associated with its maintenance status. That jet may be worth $2m with the engine in need of an overhaul but it will be worth $4m with freshly overhauled engines and a major inspection recently accomplished.
Guaranteed hourly maintenance programs help to smooth the value curve by accruing for the maintenance and offering assurances that maintenance costs will remain predictable. But a 20-year-old aircraft on a guaranteed hourly maintenance program is still going to be worth more than a 22-year-old aircraft on a program.
The Art of Life-Cycle Costing
The financial planning for when to sell your jet is best done using life cycle costing. This analysis considers the total costs of acquisition, operation and disposition.
Since you should be doing a maintenance and operating budget annually, the addition of resale value can also be done regularly and will ideally project values for the next three to five years at a minimum.
While predicting future values is at best an educated guess, the life cycle cost of ‘keep versus replace’ over the next several years can give you a lead time to plan for the aircraft replacement as well as time to perform an analysis on future options.
Planning for how long to own your aircraft is ultimately determined by your needs, your mission, and the life cycle costs. Consider all these at least annually and forward-plan.
More information from www.conklindd.com.
This article was originally published by AvBuyer on April 22, 2019.