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NAFA member, Brian Proctor, President and CEO of Mente Group, reflects on a record 2018.
Q: It seems that 2018 is turning out to be a year when a lot of aircraft get bought and sold, how has it been for you and Mente Group?
BP: We are having a record year, both as far as buying and selling aircraft are concerned. We are already up on the whole year 2017, and we still have the fourth quarter in front of us. At this rate, and with the transactions already in the pipeline for the fourth quarter, I would expect 2018 to be around 40 percent better than last year, for us.
At the same time, our appraisals business is up around 200 percent on last year. We started this business two years ago and it is growing rapidly. That is a good sign because it means that the banks and finance companies are seeing a lot of demand from people who want to finance aircraft transactions.
Q: Is it mostly the banks and insurance companies that you are doing appraisal work for? And is that mostly for pre-owned?
BP: It is the banks and leasing houses that are keeping us busy. We do a lot of new aircraft appraisals as well. You have to remember that every negotiation with an OEM over a new aircraft purchase is different, and every aircraft is optioned differently. So, lenders want to make sure that what they are financing has the value that they have been led to believe it has.
Much of what we do is document driven rather than going out on site and actually examining the aircraft. The banks use our appraisal to work out the loan-to-value structure for the deal that they feel comfortable with.
We started the appraisal business around two years ago and we have made significant investments in the business since then. We have added another experienced aircraft appraiser to the team, plus a data scientist who manages our online database. We have put a lot of money into this and it allows people to go online and manage their portfolio of aircraft. Last year our database quoted 700 aircraft transaction datapoints and it is up almost as much again so far this year.
Q: What are you using to drive data in this database?
BP: We have a number of sources for the data, but most of it is driven organically by our own researchers and sales folk, plus the business development people. We qualify the database by the quality of the data source and we prioritize our own data, and that of our contacts, since we know this data is going to be good.
Q: How important to you is the appraisal business?
BP: It has been very good for us and we are working at extending the reputation and reach of our appraisal service in the market. What is really good for us is that it touches a different clientele and is also more stable in terms of cash flow, so it is a very useful additional revenue stream for us.
Q: How much do you think Trump’s 100 percent expensing of new and pre-owned aircraft is driving the current deal flow?
BP: It has been very significant. Remembering back, the Bill was signed off on the 18th of December 2017 and by the end of the year, or inside of two weeks, we had two clients come forward and buy aircraft. Moreover, those transactions were not even on our radar on December 18th. So that shows the kind of catalyst the Bill was for deals.
Right now, we have a number of clients working to get closure on deals before the end of calendar year 2018 so that they can claim the 100 percent depreciation against the current year’s profits. It is a huge incentive.
However, we have two headwinds in the market right now. The first is that it has become increasingly more difficult to find good quality aircraft. The second is that when you do get them it is getting very hard to get them into an MRO to get pre-appraisal delivery work done on the aircraft. The MROs are all struggling with maximum capacity. Where it used to be possible to phone them up and get a plane booked within a week, now you are lucky if they can fit the job in next month or the month after.
Q: Playing Devil’s advocate for a moment, do you worry that sales are perhaps bunching up and you could be looking at a long at spell a bit further down the track as far as transactions are concerned?
BP: What I say is bring on the sales. I never worry about sales bunching up. But there is certainly price pressure out there now. I have seen several clients who were looking for pre-owned aircraft, shift to considering new aircraft because the price differential between the two is no longer as attractive as it was.
Clearly, it is becoming a very good time to be a seller, though finding a good replacement aircraft when their existing aircraft goes away, is likely to be a problem. We are not back yet to the crazy days of 2007, but I would liken the current period to what we saw in, say, 2004 or 2005.
Q: What are you seeing with respect to the slimming down of pre-owned inventory?
BP: We have done six G550 transactions in the last two months. When we started the search for suitable G550s for a particular client back in February this year, there were about 30 of them on the market. We began to whittle the choices down and the numbers kept shrinking as we were evaluating them. We ended up with just three aircraft that we could show the
client. The point is that you cannot even say that there is, say, 3.2% of the fleet of a particular model available in the pre-owned market. If you have a discerning client with reasonable constraints on what they are looking for, you could end up with just two or three aircraft to pick from, even if there was 10 percent of the fleet available.
Q: An impossible question, admittedly, but how long do you think the present upturn can last for?
BP: North America is booming, and we are starting to see a lot more interest in aircraft acquisitions out of Western and Eastern Europe and Africa. The Middle East is still quiet and has yet to turn up. So, I would say there is at least a year of strong demand out there that has yet to make its way to the market.
Another point is that if you see the US dollar turning down, that will really stimulate demand for aircraft from Europe and Asia, since it will be tantamount to a big price discount on US manufactured aircraft.
This article was originally published in Business Aviation Magazine, August 2018, p. 26.