A Delicate Balance: Tom Foley, Owner and CEO of Stevens Aviation, talks with Anthony Harrington. see more
NAFA member, Tom Foley, Owner and CEO of Stevens Aviation, talks with Anthony Harrington, Editorial Director with Business Aviation Magazine.
Q: How has the past year been for Stevens Aviation?
TF: We have been working on a whole range of projects over the last couple of years and a lot of them have now come to fruition, which has helped things tremendously. While the MRO business remains a difficult one, it has to be said that business has firmed up nicely over the last year for the larger players. The fact that President Trump is himself a long-standing enthusiast of business aviation has been very beneficial. People are now buying noticeably more aircraft than they were three years ago, and all that is great for the sector.
Q: How is the refurbishment side of your business doing?
TF: We won a very important contract outside the business aviation space, to do a maintenance and refurbishment programme for the Department of Defense. This involves a good portion of the C12 fleet, probably around 200 or more aircraft. The whole fleet probably numbers around the high 300s. That contract is excellent for us. On top of this, we are having a great deal of success with our Garmin 1000 upgrades for King Airs. We are also doing a lot of ADS-B upgrades. In fact, the Garmin G1000 business is being partially driven by the need for aircraft to be ADS-B ready by 2020. A lot of the old King Airs are not compliant but with the Garmin 1000 upgrade that gives them what the regulations require.
Q: How expensive is the ADS-B upgrade?
TF: The basic upgrade does not take many hours to do, but it is expensive. The cheapest mods work out to $60,000 to $70,000 for labour and equipment.
Q: Are owners and operators generally taking advantage of the necessity to upgrade to ADS-B, to do a full avionics upgrade?
TF: It would be great if they were, but no, not in general. Some are, but the majority are definitely looking for the least expensive route to getting ADS-B compliant. We initially expected people with aircraft like Falcons and Hawkers to want to do a full upgrade, getting an ADS-B mod that fitted in with their existing avionics suite at the very least. But many, as I said, are choosing the least expensive option, being content with basic compliance. Probably the main thing that is driving owners’ thinking on this is the fact that residual values on pre-owned aircraft have fallen dramatically since the global crash of 2008. They don’t see that there is going to be any opportunity for them to recover any major spend when they come to sell. This line of thinking is exacerbated by the fact that most of the aircraft we work on are over 10 years of age. There is very little chance that they would be able to recover the cost of an integrated solution, but they could expect to get back the value of a simple bolt-on addition. You have to keep in mind that this is nothing new. The aviation industry is very expensive, so it is only in the very best of times in private aviation that owners are not watching those nickels and dimes.
Q: What is your view of the current state of the market?
TF: Over the last year and a half we have definitely become larger, but no one in the industry is yet seeing the levels of business we all enjoyed in 2006 and 2007. Owners and operators are still being very careful about what they spend. However, my take on the US economy is that it is quite solid at present and people are definitely less cautious than they were. The private aviation sector is stronger than it was, but the drawback is that aircraft values have not recovered much, and people still have concerns about whether now is the right time to buy a new aircraft or even a pre-owned aircraft.
Q: How is the general refurbishment market doing?
TF: We are seeing a lot of modification and refurbishment work. The used aircraft fleet just keeps getting older, so people have to paint them and put a new interior and new avionics into them, and this is playing well for us.
Q: With sales of new aircraft being slow, the OEMs have refocused on a er sales revenues, looking to capture as much of the opportunities there as they can. How is that impacting you?
TF: That has hurt all the independent MRO providers. We were a Beech service centre at all our locations and Textron pulled all that in-house. Bombardier did the same with Lear servicing. Citation have had their in-house service centres for quite a while now and they make it almost impossible to compete for aircraft that are still under warranty. But that still leaves a large pre-owned eet out there that is more than 10 years of age. The market has adjusted to the new conditions and some of the smaller, less well-capitalised MRO players have dropped out. Larger players like ourselves have stabilized our businesses and the work ow has strengthened along with the economy.
Q: What is the key to competing with the OEMs?
TF: Our strategy is not to be cheaper than the OEMs but rather, to offer a higher level of customer service. We can turn things around more quickly than them, we offer a comparable or better quality and a more pleasant personal experience, because we are less bureaucratic and more customer focused.
Q: What are your thoughts about the future for MRO?
TF: There is no doubt that this is a tough and very technically demanding business. It is hard to execute, but when you execute well, you can make money. So, I am cautious, but I am pleased that the business and the industry as a whole seems to be in a healthier place. One of the challenges is that this business is very volume sensitive, so when the economy turns down, your pro stability deteriorates very quickly. So long as the economy stays strong, things will be healthy, but as and when the economy turns down, all bets are off. We have been around for 60 years and I have owned and run Stevens for the last 29 of those years. We have seen a lot of cycles and we know how to operate through both up and down cycles. We’re glad the down cycle looks to have ended and we are hoping that the up cycle lasts for a good while yet.
This article was originally published in the Autumn 2018 issue of Business Aviation Magazine.
Lessons Learned in Aviation Financing see more
NAFA member, Martin Ormon, founder of Aircraft Finance Corporation, has been financing new and pre-owned aircraft for over twenty years in a niche business that has proven to be successful.
It all started with a deal back in the spring of 1998, during Ormon’s private banking days, when he was the co-owner of a hedge fund in the Northeast. Martin was tasked with assist- ing a client of his – an automobile dealer based Southern California – with a short term bridge loan to make an immediate acquisition of a partially constructed auto dealership. The client had a commitment from a local bank in the area, however due to the timing and urgency of the deal, Ormon stepped in and facilitated the loan. In exchange, the collateral for the deal was a 1996 Hawker 800xp. Within eighteen months, the deal went sour and Ormon ended up with the 1996 Hawker 800xp in his hedge fund portfolio. Ormon, being the ‘smartest guy in the room’ was challenged by his partners, “Okay, smart guy, what are we going to do now?” Ormon replied, “Well, Gentleman, it looks like we’re going into the aviation financing business.” Ormon immediately leased the aircraft to a pharmaceutical company for three years. “That’s when I discovered an attractive quality of ‘mature’ aircraft,” he explains, “even after they have been fully depreciated, their residual value can be impressive. Maintenance programs are a key factor in our credit decisions, how- ever not every aircraft we finance requires one, we do our own appraisals and verify the aircraft maintenance history, Where traditional banks shy away from aircraft aged fifteen years and older, AFC finances aircraft up to 30 years old, with loans from $500,000 to $20,000,000 Dollars.
So, how do they do it? In most cases, Aircraft Finance Corporation partners with regional banks that are federally chartered and then guarantees the loans through a percentage of term of the loan. Ormon explains, “[Our work is] really not that difficult to do. We have skin in the game and that makes a very big difference with regard to rate and term.” It is important to note, that in addition to their experience in the aircraft financing world, their work does require extensive knowledge of their customer. More than 85% of Aircraft Finance Corporation’s loans are made in house, as they under- write, service and portfolio their own loans. Furthermore, the customer’s loans do not get sold to the secondary market. On average, Aircraft Finance Corporation’s customers will keep their aircraft for 42 months. With this type of client loyalty, Aircraft Finance Corporation prides itself on 90+% customer retention. In fact, in 2017 Ormon and his employees closed 56 transactions with an average loan size of 3.2 million dollars.
“We base our amortization on 20 years. It’s our benchmark and it works. It adds to the bottom line of our customers cash flow. Aircraft Finance Corporation offers a vast range of loan programs from 3 years all the way up to 10 years, based all on 20 year amortization and up to 85% of the aircraft valuation. With regard to aviation finance brokers who very seldom have any skin in the game, this quickly becomes very frustrating to them when trying to compete with Aircraft Finance Corporation.”
After the financial crisis in 2008, the ‘big banks’ altered the way in which loans were made on aircraft transactions. With significantly shorter terms and stricter age requirements, they were no longer offering clients, what Aircraft Finance Corporation considers, really great deals. Loans on aircraft aged more than ten years requires a significantly higher down payment, comes with shorter terms and commands higher interest rates. The bar raises even higher for aircraft aged more than twenty years. Overall, resources to finance aircraft that was anything other than factory-new was scarce. Ormon recalls, “Everybody was leaving the market, with thousands of aircraft out there and available. I saw it as a great time to aggressively take market share.”
Ormon ramped up Aircraft Finance Corporation, taking an approach near completely opposite to the conventional banks. “So many aviation lenders dislike an older aircraft on their balance sheet,” Ormon reflects. “In fact, many of the big banks today frequently call Aircraft Finance Corporation to take older aircraft out of their portfolio, which we gladly do.” When it comes to new aircraft, Aircraft Finance Corporation consistently beats the ‘big banks’ who generally want to offer LIBOR-based rate programs. LIBOR-based rate programs can often leave the customer to become stuck with an escalating monthly payment shortly there after the aircraft loan is closed. Ormon believes, “Generally speaking, the ‘big banks’ do not want you to have any options; what you see is what you get.” “Earlier this year, we refi- nanced a Challenger 605 for a Texas business owner. The client had previously financed the aircraft with one of the ‘big banks’ with a monthly payment of $70,169 on a seven year term. With our 20-year term, his payment became $29,515 per month, allowing his business to utilize their new found cash flow. This is why a great percentage of our transactions are with repeat clients. Our clients range from Fortune 500 companies, to golf professionals, to manufacturing companies, etc...”
This article was originally published in BusinessAir, 2018 Vol. 28, No.10. Photo credit: Jay Davis.
What’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.
Used Aircraft Maintenance Analysis – October 2018 see more
NAFA member, Tony Kioussis, President of Asset Insight, discusses which models were the big movers and shakers in October’s used aircraft marketplace.
With inventory asset quality at a 12-month high, and maintenance exposure at a near 12-month best, it would be difficult to conceive a better environment for aircraft trades. So which models were the big movers and shakers in October’s used aircraft marketplace?
Asset Insight’s market analysis on October 31, 2018 covering 93 fixed-wing models and 1,589 aircraft listed for sale revealed an Ask Price increase of 3.4%.
- Large Jet values improved 5.3%, and prices are now up nearly 12% since December 2017;
- Medium Jets lost 1.5%, and are now down 16.4% since December 2017;
- Small Jet values gained 7% to post a 12-month high and a 7.5% gain in 2018;
- Turboprops remained virtually unchanged, having lost 2.3% this year.
The total number of used aircraft listed for sale for Asset Insight’s tracked fleet increased 2.3% (36 units). Large Jet inventory did not change, Medium Jet inventory increased 3.7% (18 units) and Small Jet inventories increased 5.5% (25 units). Turboprop inventory was the only one to experience a reduction, 2.4%, equating to seven aircraft.
As the inventory fleet’s upcoming maintenance events are expected to be less expensive, average Maintenance Exposure (an aircraft’s accumulated/embedded maintenance expense) decreased (improved) slightly, nearly matching the 12-month best figure.
- Large Jets increased (worsened) 0.5% as younger, higher-quality aircraft transacted;
- Medium Jet transactions were of mixed asset quality, causing Maintenance Exposure to increase 1.3%;
- Small Jet trades and fleet additions helped improve (decrease) Maintenance Exposure 1.1%;
- Turboprops (possibly due to seller pricing concessions) helped improve the group’s Maintenance Exposure 5.9% to a 12-month best (lowest) figure.
All this led to a Maintenance Exposure to Price (ETP) Ratio decrease (improvement) of 3% during October that, at 65.1%, was slightly better than the average figure for the past 12 months. Why is this information important?
ETP Ratios Explained…
The ETP Ratio calculates an aircraft's Maintenance Exposure as it relates to the Ask Price. This is achieved by dividing an aircraft's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft's Ask Price. As the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price).
‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increase (in many cases by more than 30%).
So, for example, aircraft whose ETP Ratio exceeded 40% during Q2 2018 were listed for sale an average 72% longer than aircraft whose Ratio was below 40% (169 days versus 291 days on the market, respectively), while during Q3 2018 aircraft whose ETP Ratio exceeded 40% took nearly 34% longer to sell (280 versus 374 Days on Market).
- Turboprops continued to post the lowest (best) ETP Ratio at 49.1%, reflecting a 7% improvement during the past 90 days;
- Large Jets followed with 62.7%, a 2.3% improvement from last month but still 10.6% higher for the year;
- With an impressive 18.7% reduction during September, and an additional 7.2% improvement in October (the group’s best figure during the past 12 months), Small Jet ETP Ratio has improved nearly 21% this year;
- Medium Jets improved slightly in October, but the group’s ETP Ratio, at 77.5%, reflects a 19% increase during 2018 and quantifies the challenges faced by sellers within this highly competitive market sector.
Excluding models whose ETP Ratio has remained over 200% during the previous two months (considered outliers), following is a breakdown of which individual models fared the best, and which fared the worst in October 2018…
Most Improved Models
All of the ‘Most Improved Models’ experienced a Maintenance Exposure reduction (improvement). The Gulfstream GIV-SP (MSG-3) and Bombardier Learjet 45 experienced an Ask Price reduction of $77,000 and $72,000, respectively, while the remaining models posted the following price increases:
- Bombardier Learjet 35A (+$16,400)
- Hawker Beechjet 400A (+$17,815)
- Beechcraft King Air 350 Pre-2001 (+$1,071)
- Embraer Legacy 600 (+$1,566,667)
Gulfstream GIV-SP (MSG-3)
Three retail transactions and two additions to the inventory fleet led to the model posting a near $778k Maintenance Exposure reduction (improvement) that overtook (by a factor of ten) an Ask Price decrease to earn top honor among the Most Improved models in October.
With only 3.6% of the active fleet listed for sale, aircraft with engines enrolled on an Hourly Cost Maintenance Program (HCMP) could easily generate an HCMP-adjusted ETP Ratio below the 40% mark, improving their selling environment.
Bombardier Learjet 35A
The Bombardier Learjet 35A made this list for a second consecutive month by virtue of a $60k Maintenance Exposure reduction and an increased Ask Price.
Actually achieving the price increase may be the real challenge, judging by the two October transaction, the group’s ETP Ratio, and the 36-unit inventory level (even though it represents less than 7% of the active Learjet 35A/36A fleet).
Hawker Beechjet 400A
The 59-unit inventory level remained unchanged in October, as one aircraft transacted, one was withdrawn, and two more assets were listed for sale. The model joined the ‘Most Improved’ list due to a $100k Maintenance Exposure reduction along with a price increase.
However, with 18.4% of the active fleet on the market, sellers whose aircraft are not enrolled on HCMP are on the wrong side of the model’s 52.3% average ETP Ratio and must come to terms with market pricing reality if they hope to structure a deal before year-end.
Beechcraft King Air 350 Pre-2001
Only 20 units were listed for sale at the end of October, and with five units trading during the month the pre-2001 King Air 350 trading environment is very active. With only 7% of the active fleet listed for sale and considering the ETP Ratio ended October at 27.9%, sellers are definitely well-placed to secure good value.
Interestingly, the model’s Maintenance Exposure dropped nearly $173k in October due to lower quality assets transacting, so good value is also available for buyers, assuming they understand the maintenance condition of aircraft they are considering.
Bombardier Learjet 45
One aircraft sold in October and one joined the inventory to maintain the eight-unit fleet for sale. The changes reduced Maintenance Expense by a substantive $189k. More importantly, the $72k ask price reduction resulted from pricing reductions on previously listed aircraft; it was not affected by either the single unit sale or the new addition to the fleet.
It would appear that at least some Learjet 45 owners are focused on selling their aircraft prior to year-end.
Embraer Legacy 600
We were a little surprised to find the Legacy 600 on this list, but detailed analytics provide plenty of explanation. Only three inventory aircraft listed an actual selling price in September, and two of them traded in October (a third one was withdrawn from inventory).
Of the ten listings that were left (5.3% of the active fleet), only one posted an actual Ask Price, and it was substantially higher than those posted for the two traded assets.
Between the model’s relatively low ETP Ratio, the limited listings, and a Maintenance Exposure reduction exceeding $241k, this aircraft might have made the list even without the ‘technical Ask Price reduction’, but it goes to show how figures can be misleading without the benefit of interpretation.
Most Deteriorated Models
All of the ‘Most Deteriorated Models’ experienced a Maintenance Exposure increase, while Ask Price changes were as follows:
- Gulfstream G100 (No change)
- Hawker Beechjet 400 (No change)
- Bombardier Learjet 31 (No change)
- Cessna Citation VI (+$2,000)
- Cessna Citation CJ2 (+$63,214)
- Beechcraft King Air 300 (-$36,111)
No Gulfstream G100 transactions closed in October, and with one addition to the fleet the inventory stands at only three units. This might sound positive, but with production totaling only 22 units that means 13.6% of the fleet (aged between 12-17 years) is listed for sale.
A Maintenance Exposure increase exceeding $1m is unlikely to invite buyers, let alone help sellers. The best opportunity for sellers to market their aircraft lies in identifying a ‘disposable aircraft buyer’ and coming to terms with the true (read, ‘low’) value of their asset.
Hawker Beechjet 400
To understand how quickly marketing opportunities can go from bad to worse, readers might recall that this model was on the ‘Most Improved’ list for September. One model transacted in October, but another joined the inventory to keep the total at five units (9.3% of the active fleet).
The issue challenging sellers is their aging aircraft’s value since ask prices (ranging from $195k to $550k) have little negotiating room. Couple an $87k Maintenance Exposure increase to an already high ETP Ratio and it becomes clear why the Beechjet 400 is on this list.
Bombardier Learjet 31
One transaction closed in October, and the four remaining units represent 11.4% of the active fleet. Similar to the previous two models on this list, Learjet 31 sellers are hobbled by a lack of negotiating room when it comes to their aircraft’s value.
Add a $76k Maintenance Exposure increase to the model’s ETP Ratio and the situation becomes virtually irrational, even if a seller is able to locate someone willing to become the asset’s final owner.
Cessna Citation VI
With only 36 aircraft in the active fleet, the nine listed for sale represent too large a competitive fleet for sellers to benefit. The addition of one lesser quality aircraft increased fleet Maintenance Exposure by over $100k, and the nominal Ask Price increase could not prevent the Citation VI from joining the Most Deteriorated list.
Unlike the previous three models, sellers have some pricing room to maneuver but generating interest in this well-aged fleet will be difficult.
Cessna Citation CJ2
Sales were non-existent during the month of August, and the listed fleet increased by over 50%. The additions increased Maintenance Exposure by over $238k, not a minor figure for this model, nor a number that a $63k average Ask Price increase could overcome.
On the surface, opportunities for sellers do not appear good. However, the 23 aircraft available for sale represent only 9.7% of the active fleet.
With an ETP Ratio averaging 35.1% we believe sales figures will increase once October’s newly-listed eight aircraft have had some market visibility. Prospective buyers are encouraged to act, as CJ2s representing good value are unlikely to enter 2019 as inventory.
Beechcraft King Air 300
No transactions closed in October, and the fleet saw three more aircraft enter inventory, raising the total to 14 units (7.6% of the active fleet). While the King Air 300 is a well-aged model, it continues to experience decent sales due to its operating performance and characteristics.
A Maintenance Exposure increase exceeding $78k and an Ask Price reduction (due to a couple of lower priced units entering inventory) helped secure the model’s place on this list, but several inventory assets offer good value and should be quite marketable.
Since most King Air 300 engines are not enrolled on Hourly Cost Maintenance Programs, owners marketing (or considering selling) non-HCMP aircraft nearing major engine events should be aware that the financial penalty buyers will assess is likely to exceed the cost for each overhaul.
The Seller’s Challenge
Aircraft are, and will continue to be, depreciating assets, making it illogical to think of how one can profit through the sale of an asset acquired five years earlier. However, one can ‘optimize’ their aircraft investment by:
- Acquiring an aircraft, at a reasonable price, able to perform the mission requirements;
- Correctly projecting maintenance costs during the ownership period, perhaps through Hourly Cost Maintenance Program enrollment;
- Limiting scheduled maintenance expense (not covered through HCMP) through detailed analytics of the aircraft’s future maintenance requirement when considering its purchase;
- Securing science-based, objective, Residual Value analyses on an ongoing and regular basis; and
- Remarketing the aircraft at a point in time when its ETP Ratio is below 40%.
It is also important to understand that the ETP Ratio has more to do with buyer and seller dynamics than it does with either the asset’s accrued maintenance or its price. For any aircraft, maintenance can accrue only so far before work must be completed.
But as an aircraft’s value decreases, there will come a point when the accrued maintenance figure equates to more than 40% of the aircraft’s Ask Price. When a prospective buyer adjusts their offer to address this accrued maintenance, the figure is all-too-often considered unacceptable to the seller and a deal is not reached.
It is not until an aircraft undergoes some major maintenance that a seller is sufficiently motivated to accept a lower figure, or a buyer is willing to pay a higher price and the aircraft transacts, ultimately.
A wise seller needs to consider the potential marketability impact early maintenance might have on their aircraft, as well as enrollment on an Hourly Cost Maintenance Program where more than half of their model’s in-service fleet is enrolled on HCMP.
Sellers also need to carefully weigh any offer from a prospective buyer against the loss in value of their aircraft for sale as the asset spends more days on the market awaiting a better offer while simultaneously accruing a higher maintenance figure.
More information from www.assetinsight.com.
This article was originally published by AvBuyer on November 13, 2018.
Where is Business Aviation Heading in 2019? see more
NAFA member, Johnny Foster, President and CEO of OGARAJETS spoke with AvBuyer’s Rebecca Applegarth to discuss some of the current trends in the Business Aviation marketplace and offer insights on where the aircraft sales market could be heading in 2019.
Johnny Foster, President and CEO, OGARAJETS, grew up around Business Aviation. His father, John Foster III, known as the ‘World’s Greatest Fighter Pilot’, retired from the US Navy in 1973 and moved directly into Business Aviation. Johnny and his brother David have many early memories of playing around aircraft in the hangars and flying as their father’s co-pilot on both business and personal trips.
John Foster III formed O’Gara Aviation Company in 1980 with a Naval squadron mate Ed O’Gara, and Johnny joined the team in 1991 just after the company had purchased three Gulfstream GIIs and the outbreak of the Gulf War.
Those were challenging times for a small family business, but tenacity and commitment saw it emerge through recession with its head above water and grow from Turboprop and Light Jet sales into heavy aircraft.
With almost 30 years in the industry, Johnny has experienced up and down cycles in aircraft sales, was appointed president of the company in 2006 and oversaw the rebranding of his business as OGARAJETS in 2013.
Now, at a time that he notes a lack of transparency in much of the industry (with back-to-back deals and ‘flip’ structures common), Johnny points to his father’s vision for the company which has never faltered: “Family values, unquestioned integrity, personal relationships, and roll-your-sleeves-up hard work remain at the cornerstone of our commitment to clients and assurance of continued success,” he offers.
Since its formation, OGARAJETS has completed roughly 1,100 transactions in over 60 countries, totalling more than $5bn in market value. Services offered by OGARAJETS range from sales, brokerage and acquisition to management, leasing and flight operation services.
Tapping in to his vast experience of the pre-owned business jet marketplace, AvBuyer spoke with Johnny to get his perspectives on where the market is, and where it’s going as 2018 draws to a close…
AvBuyer: A review of AMSTAT data released in October representing used aircraft sales between January-August shows the percentage of Heavy/Large Jets for resale to be at its lowest since 1998.
Notably the biggest improvement in turn-over YTD was in the Large Jet ‘mid-age’ segment. What does this tell you about that market, and how do you see the scenario playing out as we move into 2019?
Foster: More than anything, I believe the positive statistics of the pre-owned space reflects a high level of confidence that remains in the market, and that today’s prices (which largely have been compressed over the previous eight-plus years) represent unimaginable values.
As for the Large Jet segment, a quality turnkey aircraft, fully programed, and capable of flying 5,000-plus miles for less than $10m? Wow! There are some tremendous transportation values in this space across all makes and models, especially those aged under 20 years.
The OEMs have largely remained disciplined in their new jet production, which has helped to strengthen the jets aged less than five years old. This is one of the few segments we have actually seen prices rise over the previous 12 months. This thinning supply and strengthening of prices are now opening the door to ‘recovery’ for the six-to-15-year-old space, as AMSTAT is reporting.
While the transaction pace remains feverish, and good quality aircraft that are priced appropriately are selling quickly, the value opportunities remain. Buyers in today’s market must be prepared to move quickly when the right opportunity presents itself. There could never be a more appropriate time to engage a trusted professional to guide purchase efforts and success.
Let’s not overlook that the ‘Tax Cuts and Jobs Act’ has imparted a very measurable and positive impact on the pre-owned aircraft marketplace. We believe the market will continue to enjoy a continued boost into 2019 and beyond.
AvBuyer: At the other end of the market, AMSTAT says the Light Jet fleet for sale is at 10.8%, down 0.7% from this time last year. Can you see a point in the next year or so where the Light Jet market actually moves into traditional sellers’ market territory (i.e. <10% for sale)?
Foster: Business Aviation is not immune to Business 101 lessons of supply and demand. As values across the board have compressed significantly over the last decade, buyers today can simply purchase ‘more’ cabin for the same dollars. So, much of the Light Jet market has continued to lag in transaction flow.
All the while, the OEMs in this segment continue to produce significant numbers of new aircraft of many varieties. There simply is not the demand to absorb the supply. Price compression, or market depreciation will continue.
With that said, looking on a micro-level, there are some specific over-performers in this space, namely Embraer’s Phenom 300.
AvBuyer: Price depreciation has been a hallmark of the used jet market since the great recession. What needs to happen for values to increase again, beyond the newest, best conditioned aircraft on the market?
Foster: This is an interesting thought. Until the collapse in 2008, most owners experienced at least a level (even a rising) value over the term of their ownership. Sure, there were dips in the economy that drove values down in spurts, but most were short-lived and generally owners enjoyed an appreciating asset.
This really made owning aviation assets fun and often ‘justified’. Value appreciation was so common that it took several years after 2009 for me to stop apologizing to clients for their aircraft values slipping.
By 2014, it was clear annual depreciation was here for good, similar to virtually every other piece of capital equipment. Today, in very general terms, we see annual depreciation of over 10% per year for less-than five-year-old assets, trailing down to 2-3% annually on aged assets.
The positive transactions over the last 18 months have begun to flatten the curves, but I am confident depreciation is here to stay and should be factored in any purchase decision.
AvBuyer: In which segments of the market would you expect to see higher demand in 2019?
Foster: I believe the Large Jet sector will remain a point of focus, driving all markets. Each of the OEMs have some amazing launches planned for 2019; significantly more speed, range and comfort all in one package! I suspect there are some more announcements coming, too – though only time will tell…
We also like what we’re seeing with some of the ‘disruption’ now present in the Super-Mid-Size sector; jets with capacity to fly eight passengers over 3,500 miles at a fraction of the capital and operating costs of the Large Jet market. There’s some tremendous value all around.
What do I see ahead for 2019?
Our enjoyment of favorable conditions remains very closely tied to domestic and global environments. So we’re keeping a careful eye on a stock market that has been on an almost eight-year bull run.
In addition, with US mid-term elections that just can’t seem to settle, tariffs being shuffled between global super-powers and ADS-B mandates that are now just 13 months away – there are many factors at play that could influence the pre-owned market for better or worse in 2019.
More information from www.ogarajets.com
This article was originally written and published by Rebecca Applegarth with AvBuyer on November 12, 2018.
Wayne Starling’s advice for anyone starting out in business aviation see more
NAFA member, Alasdair Whyte, Co-Founder and Editor of Corporate Jet Investor, talks with Wayne Starling, with Starling Consulting, LLC., about starting out in business aviation.
Recently, I had the pleasure of being on a panel at the Corporate Jet Investor conference in Miami. One of the questions asked was for any guidance or counseling that I could give a new person starting out in the aviation business. My advice was for a person to find a mentor.
I have thought about that question over the last few days. I wished I would have had the time to go into more depth. Yes, a mentor is important throughout your career, but there are other important elements as well. Throughout my career, I have hired and observed many young talented people come and go. I often reflect on what makes the difference in people succeeding and what causes many of them to fail. I have analyzed this for years and believe that the top 5% do many things that make a big difference in whether they “stay with the pack” or become top performers in their field.
My observations watching those top 5%:
ATTITUDE: It starts and ends with their attitude. What is interesting is the fact that I have asked hundreds of people if they think they have a bad attitude. No surprise here, but almost all of them never admit to being negative or having a bad attitude. However, you and I know that when you are around a person that has a negative attitude, they will brighten a room by leaving! One person with a bad attitude can and will cause severe problems if they remain part of a team.
MOTIVATED: Have you noticed most people that complain and develop a bad attitude are the ones doing the least amount of work or nothing at all! This is where they need help by taking an inventory of their activity. It is hard to be unmotivated when you are busy. If you want to get motivated, then get busy! Do something, i.e. get motivated by making some calls, setting up appointments, talking with customers, reading, studying and learning. Understand that real motivation comes from the “doing” not the “wishing” things would improve.
STEP UP AND MOVE FORWARD: Successful people have a desire to learn. They are involved in stepping up by setting realistic goals and then by moving forward. They take action! Do they make mistakes? Yes, but that is a sign of stepping up and moving forward. In many situations, they will learn from these mistakes more so than from the successes. They don’t coast through life. We all know if you are coasting, you can only coast downhill.
PATIENCE AND COMMITMENT: I don’t mean sit around and wait. Yes, sustainable success takes real time and effort to get the greatest rewards. The road to success is not straight without bumps, hills, and plenty of detours. How you handle the bumps and detours, will determine the person you become. If you want to become a person of value, a person of character, a person respected, then you must be patient while you work and take the steps and move forward.
MONITOR CLOSELY THE PEOPLE AROUND YOU: Some person you meet along the road of life will either pick you up or pull you down, or just hang on to you for a ride. People that don’t know you will form an opinion of your worth based on the people that are your associates. Who are your role models, your mentors, people you respect in the business and would like to emulate? Life is full of choices on your way to success so be picky about your influencers!
All of the above recommendations are part of the puzzle that will make up your success: your attitude, people that you surround yourself with, your patience and commitment, staying motivated, finding a mentor. All pieces of the success puzzle.
Do you want to be one of the top 5% of highly successful people? Step up and move forward and you will not only enjoy the journey, but you will also enjoy success at the destination. Good Luck!
This article was originally published by Corporate Jet Investor on November 29, 2018.
Innovative Private Aviation Options see more
NAFA member, Amanda Applegate, Partner at AERLEX LAW GROUP, discusses innovative private aviation options.
In 1986, when Richard Santulli created NetJets, it was considered revolutionary. NetJets opened up private aviation to a new segment of customers. Flexjet followed in 1995. The pool of potential private aircraft users was made even greater with the advent of Marquis Jet in 2001. Now more than 15 years after the launch of Marquis Jet, there are over 200 jet card products, private aviation membership programs, co-ownership and fractional programs in existence.
The private aviation market, particularly the charter market, remains fragmented. Because of the fragmentation, many consumers find there is not just one solution that fulfills all of their private aviation needs. More than ever, we are seeing consumers use several solutions to meet their range of private aviation needs. Many of my clients own a whole aircraft and supplement their ownership with a membership program, fractional share and/or utilize the charter market. Often each category is sourced with a different provider, which adds unwanted complexity and inefficiencies to scheduling and tracking the multiple private aviation providers.
We have seen some consolidation in recent years. OneSky, LLC, part of Directional Aviation Capital, has acquired Flight Options, Flexjet, Sentient Jet and most recently PrivateFly. PrivateFly is a digital booking service for private jet charters and the company plans to use PrivateFly along with its current digital on-demand charter broker, Skyjet. Further recent consolidation was announced with Vista Global acquiring XOJET, an on-demand business aviation company in North America with 43 aircraft. Vista Global will position XOJET as its entry level product into private aviation. Vista Global is attempting to eliminate the need to use multiple private aviation providers by offering a variety of products.
While most agree that further consolation is needed, there is also a need to leverage technology. Arranging charter is often a manual process, with paper charter request forms for each charter segment and without an efficient payment system. The private jet charter market is not searchable on one software platform, mostly due to the number of Part 135 operators who haven’t yet found a system to consolidate all of their data, thus customers have to search multiple sources to evaluate their options. There are many companies working towards digitalizing the charter market, but until there is more consolidation of current, up to date data, inefficiencies will persist.
In addition to consolidation of fragmented private aviation solutions and the implementation of new technologies to create efficiencies and grow the market, we will also see new product offerings continuing to emerge. Recently I attended revolution.aero, a conference organized by Corporate Jet Investors. This two day conference highlighted the vision of the future of aviation. Billions of dollars have already been invested this year in new aviation solutions. While many have likely heard of Uber Elevate, an urban aerial ridesharing solution currently in development, there are hundreds of other aviation solutions, software programs and aircraft currently in development. The solutions in development are focusing not only on urban mobility, but also the transportation of goods, including important medical needs like the movement of organs and blood. Within the next several years many new solutions, software programs and aircraft will be developed that could significantly change the way we use air transportation on a daily basis.
This article was originally published in BusinessAir Magazine, October 2018, Vol. 28, No. 10.
NAFA member, Johnny Foster, CEO of OGARAJETS, talks to Business Aviation Magazine. see more
Q: What do you think of the market at the moment? How are potential buyers and sellers reacting?
JF: I am generally optimistic. This is particularly true in the heavy segment and the last 30-60 days has seen strong buying activity in all modern segments. There are some pockets of
weakness; however, we are very bullish right now with respect to overall market health.
We have been in a buyer’s market ever since the global financial crash, but it seems to me that we are now firmly transitioning into more of a neutral market. In fact, the market today seems to be edging towards favoring sellers, as quality supply is becoming thinner and thinner.
No one believes that we are going to see a return to the mid-2000s any time soon, where we saw asset values actually appreciating instead of depreciating. But what we are seeing is a very distinct leveling out of what had been very steep annualized market depreciations. We will still see depreciation as the norm, clearly, but I expect it to settle somewhere between 5-10% as the annualized depreciation on new aircraft for the first five years or so after purchase. The curve will begin to flatten in subsequent years and, on average, settle around 3% annually post year-10.
Q: What kind of impact are the various new models and soon-to-be-released models having on the market? Are they stimulating demand?
JF: In my view much of the impact of new models, particularly the G500 and G600, has already been priced into the market. You can see it today in the way that pre-owned G450s in the 10 to 15-year range are now selling at amazing bargain prices. The depreciation suffered by those aircraft is a direct response to the market anticipating the arrival of new platforms and expectations that demand will shift towards those new models.
Moreover, it is not just Gulfstream. Bombardier is experiencing the same thing with depreciation in Globals thanks to the new models they have in the pipeline.
Dassault is rather di erent. ey have always been more stable, price-wise. You don’t see the heavy uctuation in asset values that are more common to Gulfstream, Bombardier, and Textron. Dassault’s business model has always been very di erent from the other OEMs, with its focus on low volumes and high quality. Logic says that you should go for volume if you want a sustainable business, but Dassault has proved itself able to go against that model time a er time. It will be interesting to see if the new leadership is as enthusiastic about bringing new models forward following the passing of Serge Dassault earlier this year. Is the passion still there? Will the new leadership be able to give the market enough con dence
that a lower scale of production can still create very stable pricing?
In today’s tight market what is very clear is that Falcons are holding up very well. The Falcon 2000EX is an excellent example. There is virtually no supply. We have been engaged to purchase one for a US client and we are competing with five other very experienced US corporate buyers, all with virtually the same acquisition requirements.
Q: What kind of pricing are you seeing on the Falcons?
JF: As an example, a 2008 model EX, which was delivered new at roughly $28 million is still making every bit of $12 million and perhaps more. So you are looking at just over a 50% depreciation rate for a 10 year old aircraft. That compares very well against ten-year-old Gulfstreams and Bombardier Globals. In my view, although Dassault argues this is because
their aircraft is inherently better, it really comes down to supply and demand. Tight supply causes prices to stay stable.
Q: So how healthy is the overall market right now?
JF: When we look at the health of the aviation sector in general and the pre-owned market in particular, we generally talk about the percentage of the overall eet that is available for sale at any point in time. Typically, the industry has always embraced 7-10% as the normalized, ‘healthy’ zone for the size of the pre-owned eet up for sale. However, we think that a better indication of the market’s overall health is the pace of turnover of that supply. We use a ten-month period as the yardstick for this measure. If the for-sale fleet turns over in 10 months, we take it that the market is very healthy. If it takes 20 months we begin to get concerned. If we are a buyer, we know that there are going to be some great opportunities when the market slows like that.
So, right now, as I began by saying, the market is transitioning over to a seller’s market. ere are still bargains to be had, but every bargain is relative to what is happening around it. Some 40% of our business involves serving as the buyer’s agent in transactions. With the market as tight as it is today, we have to make sure that the buyer is prepared to move rapidly when an opportunity comes up. We help them with our data and analysis, but we impress on them that the very best opportunities will only be on the market for a matter of days or weeks. Setting proper expectations from onset of the engagement remainsparamount to our success with clients.
Q: Finding the best transaction opportunities doubtless needs deep market knowledge?
JF: Absolutely. A good part of our analysis goes into understanding the nature of the supply available on the market. Many aircra will not be priced reasonably, or they may have some adverse history of damage or corrosion. Many of the aircra listed on the market today have been on the market for two or three years, which is almost an immediate no-no. ere is no reason why an aircra in good condition takes that long to sell, unless the owner simply has unreasonable price expectations. However, even aircra with an adverse story or that need some modernization are sellable, if the seller has been properly guided about the pricing expectations of the market with respect to their aircra .
This article was originally published in the August 2018 issue of Business Aviation Magazine.
Cryptocurrency in Aviation Owner Trustee Transactions: Is It a Viable Option? see more
NAFA member, Debbie Mercer, Owner of Aircraft Guaranty Corporation, discusses cryptocurrency in aviation owner trustee transactions.
Cryptocurrency – Bitcoin, Ethereum, Ripple, among others – seems to be driving the plane in Financial Technology (FinTech) development these days, making many of us curious, confused, and wary. What is it? What are the benefits and risks? How and where can it be used? Is the use of cryptocurrency going to improve access and security in finance activities (which is the main purpose of FinTech) in aviation? More importantly for us, what, if any, is the potential for use in aircraft owner trustee transactions?
To begin, Blockchain, the technology that allowed for these virtual currencies to develop and is running everything behind the scenes, has four main pillars. They include: a distributed ledger, a decentralized database, immutable records, and smart contracts (digital contracts of data agreed upon). These features are important to understanding how cryptocurrencies work and their viability, but we’re going to save any further discussion of blockchain technology and its own potential applications in aviation owner trusts for the next blog.
With this foundation, let’s answer the basics: cryptocurrency (with the first and most notable being Bitcoin) is a digital currency that is traded on a decentralized, encrypted database in the Cloud (blockchain), which is essentially owned by all its participants. The database records all transactions of the currency and is open to anyone who wishes to anonymously participate in the exchange.
While the database allows a high level of transparency and accuracy in regard to the transaction of the currency, it does not prevent illicit activity of the currency. Furthermore, cryptocurrencies are subject to a high degree of exchange rate volatility. These are the two main issues aviation owner trustees must consider when weighing the benefits and risks of using cryptocurrency in their transactions.
Bitcoin specifically has seen significant rise in value over the past year and is accordingly gaining traction as a payment option. For the airlines, travel agencies, and charter companies who have already begun accepting these currencies, it makes sense given the nature of their transactions. Many have cited the ability for 24/7 transactions, faster processing times, cheaper fees (if any), and increased customer service as reasons for accepting cryptocurrency.
Some of these businesses have attempted to limit the exchange rate risk by adding a “buffer” when converting prices. They can also mitigate risk by immediately converting the cryptocurrency’s cash value into fiat currencies (legal tender backed by the government that issued it) through crypto trading platforms like Coinbase or BitPay. Partnering with these exchanges so payment can be accepted at the exact market value at the exact time of transaction is yet another option.
Given the huge difference between airfare sales and the process of aircraft registration transactions, does it make sense for aviation owner trustee companies to accept cryptocurrency for payment? The goal in owner trustee transactions is security and efficiency. In this regard, the aircraft registration process and associated fees present some unique challenges.
Aircraft registration transactions in the United States currently use US dollars. If a foreign national is registering their aircraft in trust, their currency is generally exchanged before sending funds so the entire transaction is handled with only one currency. If Bitcoin or a similar cryptocurrency were accepted by an owner trustee company, the responsibility for exchanging the currency into US dollars would be theirs, and the risk too.
There have been a few noted cases of large asset transactions using cryptocurrency for payment, specifically in real estate. If the seller can quickly liquidate the currency to avoid huge shifts in the market, then there is relatively minimal risk in the transaction. It is possible then that aircraft registrations in trust could be enacted in a similar way, effectively mitigating exchange rate risk. However, lack of regulation and government integration (or acceptance) currently remain deterrents to security and efficiency in this type of transaction.
Nonetheless, the United States and others are beginning to develop regulations regarding cryptocurrency transactions, increasing the odds that it will become more common in the future. In the meantime, however, it will remain a risky currency in a rapidly evolving legal environment. How and when any measures will be enforced is unknown.
Since aviation owner trustee companies must consider all aspects of the industry, especially compliance and security, it is unlikely that the use of cryptocurrency will be a viable option until all the other ducks – education, regulation, integration – are in a row. However, there are a myriad of uses being discussed for blockchain technology in the aviation industry that could radically streamline the aircraft registration process, and possibly open the door for the use of cryptocurrency.
We’ll be discussing those possibilities in our next blog – “Blockchain in Aviation Owner Trustee Transactions: What is the Potential?”
This article was originally published on Aircraft Guaranty Corporation's blog.
Rob Smith, President of Jet Aviation, talks about business success with Anthony Harrington. see more
AH: With trade war tariffs being bandied about, and with emerging economies currently wobbling, 2018 has not been without its problems. How has it been for Jet Aviation?
RS: We have had a great year so far. The outstanding event for us was obviously closing the Hawker Pacific deal and we announced the completion of that acquisition on May 2nd. The transaction itself is valued at $250 million and it adds 19 locations across Asia Pacific and the Middle East to our global network. 2018 brought us seven FBOs, 14 MRO facilities and over 400,000 square feet of hangar space, plus in excess of 800 additional employees. We are now several months into the integration process and that has been a very absorbing challenge. The deal was our largest acquisition ever. Their total revenues were about a third of the size of ours, so it was a huge deal for us. We also received authorization from GACA in Saudi Arabia to provide handling services at Prince Abdul Mohsin Bin Abdulaziz Regional Airport in Yanbu, the Kingdom of Saudi Arabia. Lastly, we are hoping to add an additional two FBO locations in Europe in the near future.
AH: How much overlap is there between your various facilities now you have added Hawker Pacific?
RS: One of the very few overlaps that we have is in Singapore, where we have six hangars on the campus between us, and the two sites are right next door to each other. By the end of the year we will have everything in Singapore badged as Jet Aviation. We are also rebranding our Australian FBOs to Jet Aviation in the first quarter of 2019 and will continue to review the other locations.
AH: The acquisition is obviously a huge leap forward for Jet Aviation. How much organic growth are you seeing on top of that?
RS: We are certainly seeing signs of growth. We’re building a new wide-body hangar at our Basel location. On top of this we have two expansion projects in the US, at our Van Nuys and Teterboro locations. These are two busy FBO locations for us so we are working to stay abreast of, or ahead of, the growth that we see coming in the industry.
AH: Everyone in the MRO field talks about how the shortage of top rate technicians and engineers is impacting the industry. Jet Aviation has an arm that specializes in providing skilled staff. What is demand like?
RS: There is certainly a very clear shortage of skilled folk in the sector, right across the board, including pilots and flight crews. However, our staffing business helps to support the industry by providing engineers or pilots and flight crew. And we are always recruiting heavily in that business to help support the industry.
AH: How is the completions side doing?
RS: One of the major highlights for us was that we were able to announce in the 2nd quarter of this year that we had secured our second Boeing 787 project for an undisclosed private individual. We have three wide body projects just finished or finishing up. We just re-delivered a Boeing 777 in mid-August and we have a second 777 nearing the final stages, plus an Airbus 330. We have orders in the pipeline for Airbus Neos and BBJ MAXs. We’re starting to see some of the narrow body aircraft that were gone from the market for a couple of years, and we are seeing those aircraft being adopted in the VVIP space as well, which is always interesting for completions houses. On another note, we have just been authorized by Airbus as a VIP completions center for the ACJ 350. We don’t have orders for this yet but we are poised and ready, just as with the Boeing 787.
AH: The completions space is fascinating but hugely demanding, as well as risky. How do you rate it?
RS. It is always an interesting space. We are having some great conversations with potential clients. The great thing about running a completions business is lining up the right level of work. You want to get the backlog as close to a perfect fit for your facilities as you can. You don’t want to bring in too much work, or too little, so it is a real balancing act. Completions can so easily swing between feast and famine, so you have to plan your work out carefully.
AH: What are you seeing on the 2020 mandates? Is that driving work for you?
RS: We have not had a whole lot of the ADS-B type work here, though we are qualified to do them. However, until we get our new hangar facility finished in Basel, we are pretty much jam packed as far as workload goes.
AH: That adds credence to the point that a lot of senior MRO people are making, namely that the industry is unlikely to have sufficient capacity to help all those folks who are delaying getting to grips with 2020 mandate work, when they all dash to get their aircraft completed in time…
RS: It is going to be a crunch, no doubt about it. Both ourselves and our competitors are urging operators and owners to book their aircraft in as early as they can. It will be a real rush from now to 2020 to get the work completed.
AH: What are you seeing by way of demand for connectivity upgrades?
RS: This is now a very interesting area. We have several solutions on connectivity that we offer clients. We recently had a 747 in our Basel facility for a Ka band installation and we are committed to developing the STCs for a variety of aircraft type installations. There is a very high demand for high throughput broadband connectivity in the market and we are working with suppliers to have full, seamless solutions available in all our locations. On all the services we offer, one of our key messages to industry is our independence. We don’t play favourites among the OEMs. We have our sister company, Gulfstream, but we also support all other OEMs in the industry.
This article was originally published in Business Aviation Magazine, August 2018.
Aircraft Maintenance: Three Money-Saving Tips see more
NAFA member, Mike Saathoff, Director of Sales Operations & Engine and Accessory Sales with Elliott Aviation, shares three money-saving aircraft maintenance tips.
At a busy time of limited capacity for the aircraft maintenance industry, how does a business jet operator keep its maintenance costs down? Elliott Aviation’s Mike Saathoff offers three cost-saving tips…
The current aircraft maintenance market can create a tough environment for customers trying to schedule maintenance items.
From the supply side, the industry as a whole faces declining workforce availability. From a demand perspective, the market economy has driven flight hours up, which has increased the amount of aircraft maintenance needed.
The demand is further exacerbated by the upcoming mandate for operators to equip with ADS-B and an economy-driven upturn in discretionary spending, putting more capital toward major modifications and large-scope paint and interior upgrades.
In this market shortage, however, there are a few things you can do to make sure that you can save, over the longer-term, on your aircraft maintenance costs. Following is our top three…
1. Plan Ahead
In the environment we’ve just outlined, and with demand at a premium, most top-tier maintenance facilities have a backlog of at least six to 10 weeks. Talk through your event with your maintenance provider and book your slots early.
The increase in demand for maintenance, combined with the limited supply of facilities likely means that the sales team has a large backlog of quotes, so it could take longer than expected to receive your quote.
ADS-B installations are not anticipated to slow until mid-2020, based on projections of the remaining non-compliant aircraft paired with the industry’s capacity to complete them, and the majority of aircraft owners are doing their ADS-B upgrades in conjunction with a major maintenance event.
Properly planning your maintenance events can also help you to take full advantage of your downtime and avoid having to return to the shop for small items.
In addition to your planned maintenance event, a reputable maintenance provider should go over any other items that could be coming due in the next six months, as well as common discrepancies found on your aircraft.
When forecasting your maintenance event it is recommended that you plan as far in advance as possible. This includes developing a full understanding of your upcoming events, including utilizing a maintenance-due/forecasting list such as a Corporate Aircraft Maintenance Planning (CAMP) due list.
2. Understanding Your Requirements
Understanding how your aircraft is utilized and what items are required for your category can help you plan maintenance events. For instance, depending on how many hours you fly you could be categorized as ‘light utilization’, which could mean you qualify for a less-stringent maintenance plan.
Pay close attention to the terms and conditions of any warranty or power-by-the-hour programs to fully understand what they cover.
The other major issue that could impact your requirements is the difference between Part 91 and Part 135 operators. Part 91 operators are only personally flying their aircraft, and the mandatory maintenance requirements can be less. As operators providing charter flights, Part 135 operators have increased requirements and increased need.
As an example, a particular Part 135 operation specification may dictate additional requirements, such as compliance with an OEM’s Service Bulletins (SB) where those same SBs might be optional for Part 91 operators.
3. Maintenance Facility
Selecting the right service center for your aircraft can be a critical component to save you long-term costs. Shopping each maintenance event can lead to inefficiencies and a frustrating experience.
In some cases, selecting a facility that may appear to save you money could only be doing so in the short-term.
For instance, if a shop is only doing the minimum to win an upcoming event, you could experience many unexpected discrepancies – particularly during your next major inspection – which can come as a frustrating surprise to customers, who may have believed their aircraft was being maintained well when, in reality, items that could have saved long-term costs were being overlooked.
Moreover, a facility’s reputation during an aircraft transaction logbook review can also help maximize an aircraft’s selling price.
Ultimately, the above three points should help operators see the part they play in keeping maintenance costs as close to expected as possible. At this busy time for the maintenance industry, taking the time to build proactive relationships is as important as ever.
A proactive operator will identify and build relationships with their maintenance shop, working alongside them to identify and schedule maintenance needs, in many cases before they arise.
More information from www.elliottaviation.com.
This article was originally published in AvBuyer on November 9, 2018.
Need for Speed see more
NAFA member, Brad Harris, Founder, President and CEO of Dallas Jet International, discusses the shrinking volumes in the pre-owned market.
AH: When we spoke back in January this year, you were pretty optimistic. Now that we are heading into the final quarter of 2018, how are things looking?
BH: 2018 is probably going to be the best year that Dallas Jet International has ever had. In speaking with my friendly competitors and colleagues in the aircraft brokering business,
they are all echoing the same sentiment. Starting in October 2016, our business took off and has not slowed down. It started before the Presidential election in the US, before Trump was even elected as a candidate. We are seeing tremendous activity in the United States and are now seeing Europe, the Middle East and China heating up. In addition, charter hours in the US and Europe continue to be strong. Deals are happening in the US, Europe proper, Russia, the Middle East and China. It is all very encouraging.
AH: How are the tax changes introduced by President Trump’s December 2017 Tax Cuts and Jobs Act, impacting aircraft sales and purchases? I am thinking specifically of the fact that the Act withdrew the Section 1031 “like-kind exchange” rules, that allowed someone to sell an aircraft and buy a new aircraft while deferring the recapture of depreciation.
BH: I thought the elimination of the 1031 like-kind exchange provisions in the Act would show up as a negative impact on aircraft sales; however, in reality, the fact that the Act brought in 100 percent expensing of not only new aircraft but now, pre-owned aircraft has been very positive. We have had a number of our buyers wanting to get an aircraft deal done by year-end so that they can take advantage of Trump’s 100 percent expensing. I see this having a real impact for closing numerous deals before the end of the year. We are currently telling our clients that if they plan on selling their aircraft or purchasing an aircraft, prior to year-end, they need to engage us now so that we have enough time to complete their aircraft transaction before December 31, 2018. Since there is no longer the 1031 like-kind exchange, in order to offset any recapture on an aircraft sale, the new or used aircraft would need to purchased and expensed all in within the same year of 2018.
AH: How long does it take to close deals in this kind of environment?
BH: It really depends on the type of aircraft you’re trying to close. A typical transaction takes between five and six weeks to complete. We tend to deal with larger aircraft, which translates to longer transaction timeframes. In this scenario, and depending on the complexity of the transaction, it can take upwards of six to twelve weeks to close. As a result, by the time it gets to mid-October, the purchaser or seller runs the risk of not closing by year-end. However, as the broker, we would most likely recommend to close the transaction by year-end for tax purposes and leave holdback money in escrow to be disbursed as needed for pre-buy discrepancy costs, test flight costs or any other transaction-related expenses.
AH: Determining the amount to be left in escrow could be a difficult conversation!
BH: Absolutely. For example, we recently had a transaction where the buyer wanted to close early on a Gulfstream G450. Our seller agreed to close early and we negotiated to leave
$200,000 in escrow for post-closing expenses. However, the post-closing expenses ended up being $346,000. In this rare situation, the buyer ended up having to come out of pocket the additional $146,000 because our agreement of the holdback was final at $200,000. Since December 2018 will likely yield higher-than-normal closing numbers with Trump’s tax law, a
holdback may be necessary if the aircraft is not returned to service before December 31, 2018. As brokers, we need to be mindful of the holdback amount and make sure it is enough to cover any estimated expense plus any unknown expense. I would recommend a higher holdback amount and make sure you protect your client.
AH: How is the supply and prices of the pre-owned aircraft market?
BH: As little as a year ago, brokers and dealers were complaining that there was an overabundance of pre-owned aircraft on the marketplace. However, in the last 12 months there has been a significant change in regards to low-time, well-equipped US aircraft aged fifteen-years and newer in the pre-owned aircraft marketplace. Which results in a limited supply of good and available pre-owned aircraft. Historically, ten percent of fleet for sale dictates a buyer’s or seller’s market. For example, if there is more than 10 percent of the fleet for sale, then it’s a buyer’s market. If there is less than 10 percent of the fleet for sale, it’s a seller’s market. Today, the percentage of pre-owned Falcon 2000’s on the market is 4.1 percent of the fleet, G450’s for sale are at 6.8 percent of the fleet and shrinking. There are only ten G650 aircraft available on the market today, which is just 3.2 percent of the fleet. The Global 5000 pre-owned market is down to 5.6 percent and the Global 6000 pre-owned market is at 3.6 percent. There are currently no Embraer Legacy 450/500’s on the market for sale. As stated
above, the historic norm for all categories is around 10 percent which is a significant Seller’s market. So, the tightening of the pre-owned market is very visible. I recently spoke at Embraer’s Industry Collaborators Summit in August 2018 and one of the points I made is that our customers need to grasp just how dramatically the market has changed. If you find an aircraft that meets your needs, the client needs to be prepared to act immediately and the buyer has to be ready to pay a reasonable price. As stated above, it is no longer a buyer’s market. We as brokers and dealers need to be smart about how we communicate with our clients. It is okay to tell our clients that the market is tightening up but that there are still good
deals out there and they should be patient but also be ready to move quickly when we send them the right deal. This is an exciting time to be an aircraft broker.
The original article was written and published by Noel Barton with Business Aviation Magazine, Issue 7, Autumn 2018, p. 48.
Tips for Comparing Aircraft Operating Costs see more
NAFA member, David Wyndham, Vice President and Director of Business Strategy at Conklin & de Decker, details the process of a Life Cycle Cost analysis and underlines its importance to any aircraft buyer.
What is a Life Cycle Cost analysis and why does it matter when buying a new business aircraft? David Wyndham explains the process…
A consulting client I worked with was evaluating Large Cabin business jets. Initially the client was more concerned with minimizing the operating expenses and less concerned with the capital costs. As long as the acquisition price fitted within their $25m budget, they would be satisfied.
Yet those evaluating business jet ownership should be concerned with more than just the acquisition costs. They should also factor operating costs (variable and fixed), amortization, interest, depreciation, taxes and the cost of capital. Items like depreciation, interest and taxes – for example - can add as much as 60% to the Aviation Department’s costs depending on the value of the aircraft.
Furthermore, you should also consider when the costs occur.
General Methodology for Life Cycle Costing
When analyzing the potential acquisition of a whole aircraft or a share of one, Life Cycle Costing ensures that all appropriate costs should be considered.
The Life Cycle Costing includes acquisition, operating costs, depreciation and the cost of capital. Amortization, interest, depreciation, and taxes also play a part in what it costs to own and operate an aircraft and can be included in the Life Cycle Costing as appropriate.
The first step is to know what aircraft to evaluate. This is achieved with an understanding of the key missions and the technical analysis of all potential aircraft. You need to be sure you are not buying more (or less) aircraft than you need.
There should be no room for assumption in the process. The costs should cover a specific period and take into account the aircraft’s expected value at the end of the term of ownership.
Comparisons of two or more aircraft should cover the same period of time and utilization, ensuring an apples-to-apples comparison is provided.
On the subject of utilization, you are advised to use miles if the aircraft is flying point-to-point and convert each aircraft to hours based on their speed. To have an accurate comparison, you will need to measure performance using the same criteria. Different aircraft fly at different speeds. Using a mile-based measurement accounts for the speed differences between aircraft.
I also recommend that you have a baseline. If an existing aircraft is to be replaced, that aircraft becomes the baseline. If you charter or own a fractional share in an aircraft, then continuation of that charter or fractional share would be the baseline.
The baseline essentially forms a basis for the comparison, establishing whether the new option under consideration costs less than the current baseline or more. If the cost will be more, what is the value of the increased cost?
Net Present Value Analysis
A complete Life Cycle Cost accounts for the time-value of money in a Net Present Value (NPV) analysis. Using NPV enables the differing cash flows from two or more options to be compared and analyzed from a fair and complete perspective.
An NPV analysis takes into account the time value of money, as well as income and expense cash flows, type of depreciation, tax consequences and residual value of the various options under consideration.
When an expense (or revenue) occurs can be as important as the amount of that item. This is useful in the comparison of Cash Buy vs Lease vs Finance options for the same aircraft.
Business aircraft do not directly generate revenue except for the sale of the aircraft. Thus, the NPV results are typically negative.
When comparing negative NPVs, the "least negative NPV" is the more favorable. In other words, if Option A has an NPV of $5m and the NPV of Option B is $6m, Option A has a better NPV.
You may want to run several scenarios. For example, what if you owned the aircraft for five years? How about ten? What if utilization was increased? What is the break-even point to move from fractional ownership to whole ownership? There may be many possible best alternatives when you adjust the important criteria.
Regarding the client mentioned above, we evaluated new and used business aircraft and found several options that were at the top of the acquisition budget had lower total life cycle costs than aircraft with lower acquisition prices.
A Life Cycle Cost analysis is an important decision-making tool, but it is not the answer all by itself. I like to use the term "Best Value" in combining both the capabilities and the costs of the various options analyzed.
Run the numbers and use them in your decision - but remember: Never let a spreadsheet make the decision for you
This article was originally published in AvBuyer on June 25, 2018.
Nardone and Company, Inc. Joins National Aircraft Finance Association see more
FORT LAUDERDALE, Fla. – Dec. 4, 2018 – National Aircraft Finance Association (NAFA) is pleased to announce that Nardone and Company, Inc. has recently joined its professional network of aviation lenders. “NAFA members proudly finance - support or enable the financing of - general and business aviation aircraft throughout the world, and we’re happy to add Nardone to our association,” said Ford von Weise, President of NAFA.
Nardone & Company, Inc., is a Veteran owned corporation in their 25th year of business. Experience within Nardone & Company exceeds 40 years in the salvage industry and since their establishment on July 8, 1993, they have been dedicated business partners, producing the highest salvage return on the sale of damaged goods - quickly and cost effectively. The company’s Aviation Technical Services focuses solely on aircraft-related salvage, sales/recovery, current market values, inventory loss, and damage evaluations.
The company’s President, George Nardone, Jr. is a member of the National Aircraft Appraisers Association (NAAA). Mr. Nardone has Airline Transport Pilot Ratings and over 40 years of aviation experience. Their staff of highly experienced and dedicated professionals, with senior certified aircraft and USPAP compliant appraisers, pride themselves on immediate response and rapid reporting with complete documentation on all assignments.
Aircraft appraisals by Nardone and Company’s professionals provide the buyer or seller with onsite inspections, valuation utilizing current market conditions and their sophisticated NAAA appraisal that measures every aspect of the aircraft's value at a reasonable cost. They can also manage pre-purchase inspection and provide consulting services to help match clients with the appropriate aircraft to meet their specific requirements.
Much like NAFA, Nardone and Companyupholds the highest standards in aircraft appraisal throughout the aviation industry as dedicated partners with their clients. “We provide credibility and trust every time,” said George Nardone, President and CEO. Nardone and NAFA are committed to fostering the education and experience necessary to develop the aviation industry as a whole.
For more information about Nardone and Company, Inc., visit www.nardoneandcompany.com.
The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit www.NAFA.aero.
“Low Price” or “Good Value”? see more
NAFA member, Barbara Spoor, co-Founder of Asset Insight, LLC, discusses the difference between a low price and a good price and how prior planning produces a premium sale price.
What do you need to know before you purchase an aircraft to ensure that you get the best possible price when it’s time to sell?
While the terms “price” and “value” often are used interchangeably to describe an aircraft’s worth, they actually have different meanings. “Price” is what the buyer pays, while its “value” is the relative worth, utility, and/or importance placed on that asset. Since emotions can run high during the aircraft acquisition process, determining whether an aircraft carrying a “low price” represents “good value” requires a detailed analysis – one that focuses on its future maintenance requirements and estimated Residual Value (RV).
Consider the length of time you plan to keep the aircraft, and how many hours you intend to fly annually. Such data can help project the aircraft’s scheduled maintenance costs during your ownership term. This calculation is neither linear nor simple; costs assumed to be minimal actually can be much higher than anticipated.
For example, scheduled maintenance costs increase over time due to more comprehensive airframe inspections, required either by the manufacturer or new regulation. While some view airframe maintenance costs as relatively minor, they are not. If you plan to own the aircraft for five years, and it will need a double-engine overhaul within ten years, the value of the airplane may be reduced by what the next owner will have to spend: approximately half the cost of the overhaul, perhaps more for an older aircraft. That could run from the high six-figures to several million dollars, depending on make and model.
Carefully consider the cost of scheduled engine maintenance if the aircraft is not enrolled on an Hourly Cost Maintenance Program (HCMP), as maintenance expenses based on “time and materials” undoubtedly will increase over time. Opting to not enroll the aircraft on an HCMP upon purchase will increase your financial risk during your ownership period. And the aircraft still may require HCMP enrollment at resale to make it marketable, due to its “Maintenance Exposure to Ask Price Ratio” (“ETP Ratio”).
The ETP Ratio is a useful indicator of an aircraft’s marketability. It is computed by dividing an aircraft’s Maintenance Exposure (the financial liability accrued for future scheduled maintenance events) by the aircraft’s Ask Price. An analysis of “Days on Market” shows that when the ETP Ratio exceeds 40%, the Days on Market increase by more than 30%. For example, aircraft with ETP Ratios exceeding 40% during Q2 2018 were listed for sale an average of 72% longer than aircraft with ratios below 40% (169 days versus 291 Days on Market, respectively).
The Residual Value Projection
A traditional RV forecast starts with an assumed Current Value that then is degraded based on the aircraft model’s average historical annual depreciation percentage. But the aircraft’s future maintenance condition, perhaps the most important value influencer, is not accounted for appropriately, if at all. Since historical values and trends play no role in an aircraft’s future financial behavior, it’s best to obtain Residual Value figures using objective methodology that assesses the aircraft’s value independently, based on current maintenance condition, future requirements, and proven forward-looking market indicators.
A “low price” is easy to determine. “Good value” is derived by optimizing your investment by:
- Acquiring an aircraft able to perform your mission requirements, at a reasonable price;
- Stabilizing maintenance costs during your ownership period with HCMP enrollment;
- Limiting scheduled maintenance expenses not covered through an HCMP, based on the aircraft’s future maintenance requirement at time of purchase;
- Securing an objective, science-based Residual Value analysis; and,
- Remarketing an HCMP-enrolled aircraft at a predetermined date to ensure that the ETP Ratio is well below 40%.
Taking these steps can help you enjoy the best possible return from your aircraft – both while you own it and when you are ready to sell.
This article was originally published in Business Aviation Advisor on November 1, 2018.