Tracey Cheek posted an articleScaling the Heights see more
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.
Tracey Cheek posted an articleUpwards at Last? Brian Proctor looks forward to firmer markets. see more
NAFA member, Brian Proctor, President and CEO of Mente Group, looks forward to firmer markets.
AH: How was 2017 for Mente Group and what are your expectations for the year ahead?
BP: That’s a big question! In 2017, last year in February at CJI, we did not know it yet, but the market had already started turning. I think we are now well past the bottom. For example, in terms of units, we see that in the G550 pre-owned market, twelve months ago there were 29 aircraft for sale. As we sit here today at the end of January, there are just 16 pre-owned G550s available for sale. In the Challenger 300 market there were 39 aircraft available, today there are 22. So, we have seen a massive amount of tightening in the pre-owned category. We still haven’t seen a corresponding price increase across the board, though some models are now increasing.
AH: So the falling price of pre-owned aircraft is slowing?
BP: It has flattened, and I believe that the next iteration of aircraft coming onto the pre-owned market will be at a slight premium to today’s asking price. Our estimate is that some time during the third quarter of 2018 we are going to see price increases, assuming that nothing happens to upset the market – no “game changers”!
AH: So, we could be looking at a very fortunate conjunction, with new models coming onto the market from the OEMs at the same time as the pre-owned market is shrinking. That should be good for new purchases since there will be fewer, really attractive, pre-owned alternatives.
BP: The OEMs are probably in a very fortunate position, because the timing of what is happening in the pre-owned market will help them with their new models. However, with most of the new model entrants, the OEMs’ order books have not been as successful so far, as they would have hoped. That said, we are already seeing some people start to shift to new aircraft and that will be great for the OEMs. This is anecdotal, but it is illustrative. We have a client right now who contacted us about buying a pre-owned G280 and that market has just two aircraft available in the world and neither suits his criteria. So, we have shifted to a new search looking at new Challenger 300s and G280s. This is a clear instance of where the OEMs are benefiting from the lack of inventory in the pre-owned market. We are helping him through the comparatives between new and pre-owned. He was looking around the $16 - $17 million ballpark and now that we are a new buyer, we will be somewhere in the $19 - $20 million mark. With that, his out of pocket will be greater, but, with new tax laws in the US, he
should be net-neutral.
AH: What do you think is driving this shift in the market?
BP: I believe there are two components to this. The tax changes in the US are creating a significant amount of free cash flow, and this has happened at a stroke of the pen – plus a lot of lobbying! The President is definitely unlocking things. We are already seeing the implications in the market of more cash being available. And in Europe, we can’t ignore what is going on with the dollar relative to the euro. A $20 million dollar airplane today is 15% cheaper for a European buyer than it was a year ago. Which is nice, obviously. Now there is typically a lag between a price drop and sales. We have done a lot of statistical studies which graph the dollar’s value against a basket of world currencies, versus sales, and the correlation between sales volumes increasing and significant falls in the dollar value are about 80%, which is very strong. As the dollar weakens relative to this basket of currencies, over a period of time we see an influx of new buyers coming in. We are looking to trade that relationship right now. My guess is that around the third quarter of this year, as I said earlier, you will see sales picking up.
AH: You must be loving this, because now, for the first time in a long while, you can say to a prospective buyer, don’t dawdle, the price will go up while you’re dithering.
BP: My first slide in my CJI presentation says: “There has never been a better time to buy”. It is going to get much more expensive, and part of that will be driven by what happens to the dollar. If it drifts to 1.30 euros to the dollar from the current 1.23 euros, that will make the aircraft 10% less expensive for a European buyer. So again, this makes now a great time to buy if you are in Europe. Shifting out of fractional or charter into pre-owned or new today makes a lot more financial sense than it has for a decade.
AH: Is there a rule of thumb for how much disposable net worth you should have in order to buy a jet at a certain price. For example, do you look for someone to have five or ten times the value of the aircraft available to them either as cash or credit?
BP: What makes our firm different is that we do a lot more advisory work than most brokers. So our consulting practice will be engaged to do a feasibility study or a fleet planning study, and during that process we lay out the cost of ownership versus fractional, versus jet cards, versus charter. Very seldom do we ask, what does your cash flow look like, or how much are you worth? The decision is theirs to make when they have all the facts. The thing is, these decisions are very personal. I have a client who is worth more than $10 billion and he refuses to buy an aircraft. I have another client whose net worth is probably under $50 million and he is looking for a Citation to buy. People make value judgments and it is impossible to call. I don’t tell people how to spend their money. We simply frame for them what it is going to cost and then let them make the decision. If I get a sense though that someone is overreaching, going for too big a stretch, I will recommend charter for a few years more. Don’t overspend yourself on an aircraft. Let your business grow a bit more. As my grandmother used to say, “don’t ever buy something that will change your life if you lose it!”
This article was originally published in Business Aviation Magazine, Spring 2018. p. 14.