Tracey Cheek posted an articleWhat’s the Case for Becoming a Jet’s Last Owner? see more
NAFA member, David Wyndham, VP and Director of Business Strategy with Conklin & de Decker, discusses options for a specialized aircraft buyer and how the operator justifies the decision to buy with a view to becoming an aircraft’s last owner.
As aircraft age, they cost more to maintain and support. Spare parts for aging aircraft can be harder to come by as fewer of these models remain in service today and the OEMs shift focus to their in-production aircraft.
Parts suppliers may ‘build to order’ certain spares when demand levels no longer justify keeping a production line running. Be aware that the cost of these spares can fluctuate greatly as the effects of supply and demand take hold. Finding airworthy used spares is often only possible if there were enough aircraft built for salvage companies to tear down and use as sources.
These incremental maintenance costs and procurement hurdles can render an old aircraft unsuitable for a regular schedule of frequent flying. Nevertheless, for the savvy buyer with specific needs and managed expectations, there may be some value left in these airworthy but aged aircraft.
How Old is too Old?
If an aircraft is well cared for, it can have an almost unlimited life with respect to safety and airworthiness. There are DC-3 aircraft that were in service in the late 1930s still flying today. While not much more than the pilots’ control wheels and OEM’s data plate may be “original equipment”, they are still airborne.
Such aircraft are in the hands of loving and dedicated teams who fly for the joy of keeping them flying, not for transportation or business use.
What ends the life of most aircraft is economics—when the cost of flying them becomes more than the cost of replacing them. This is called the economic useful life, which is defined by the International Society of Transport Aircraft Trading (ISTAT) as follows:
“As it pertains to an aircraft or engine, the economic useful life is the period of time over which it is (or is expected to be) physically and economically feasible to operate in its intended role. Periodic maintenance and repair will usually be required in order to preserve safety and efficiency during the economic useful life.”
This age is contextual. An airliner flying 2,000–3,000 hours per year in short-haul trips will reach its end of life much sooner than a long-range business jet flying 300–400 hours annually. For a piston airplane flying 100 hours per year, its end-of-life can easily extend past a half-century. Age is a factor of calendar time and utilization, or flight time.
Research from Boeing Commercial Airplanes published in an article titled ‘Key Findings on Aircraft Economic Life’ (March 2013) found that while no exact definition exists, their data on over 31,000 airliners suggest that this economic life can be expressed in two general ways:
- The average age of airplanes when they are permanently withdrawn from service;
- The interval of time between delivery of a cohort of airplanes and the date when 50% (or some other fraction) of the cohort has been retired.
But what is a typical useful economic life for a business jet?
Data from JETNET showing the business jet retirements from 2011 to 2015 notes that 144 business jets retire each year on average. The vast majority of these are over 30 years of age. Meanwhile, AMSTAT data shows that today, of the more than 7,300 business jets built before 1998, about 46% of the fleet has been removed from service. This data suggests the useful economic life for a business jet is just over 30 years.
When Does an Aircraft Reach Salvage?
An aircraft at the end of its useful economic life can be sold for parts for salvage or scrap value. The Machinery & Technical Specialties Committee of the American Society of Appraisers (July 2010) defines scrap, or salvage, value as follows:
“An opinion of the amount, expressed in terms of money that could be realized for the property if it were sold for its material content, not for a productive use, as of a specific date.”
So, when does the scrap or salvage value of an aircraft exceed its ‘retail’ value as a flying asset?
If the maintenance to be done exceeds the retail value of the aircraft and, if accomplished, does not return enough retail value to cover the cost of the maintenance, then your aircraft is at salvage. In summary, an aircraft would reach salvage when the upcoming maintenance costs exceed the value of the airplane. That can be any maintenance, be it airframe, engines or avionics.
Combining all the above information leads to the following conclusion: If you are the owner of an airworthy aircraft aged 25 years or older, you could be its final owner.
Nevertheless, there may be aircraft younger than 25 that, owing to limited production runs and a lack of product support, will not be economically feasible to fly for much longer than a few years. Meanwhile, for some of the more popular aircraft with a long production run, you may see 40-year-old aircraft still in the air in sufficient numbers to make supporting them economically feasible.
So why would anyone want to become the last owner of a business jet?
If you understand the limitations, your value proposition is likely to be something like this:
You buy a very old business jet for $2m, spending $3.5m operating it for four years, before selling it for salvage at $500k. The net cost to you is $5m. The owner of a new business jet that paid $30m, meanwhile, will see more than that in market depreciation alone.
However, keep in mind that these older jets spend a lot of time in maintenance and there is a higher chance that you will not be able to “call when needed”, but if your flying needs are infrequent and predictable, you may find there is enough value left in these older jets to make the case for buying one.
Next month, we will illustrate with a case study. Stay tuned!
This article was originally published by AvBuyer on November 5, 2018.