How to Find Value in the Used Jet Market Today

With a healthy level of supply and demand, “pre-owned business jet deals are happening at more of a historical pace with buyers giving more thoughtful consideration about the airplanes they’re acquiring”, says Chris Ellis, Avpro’s Managing Partner.

Avpro represents buyers and sellers of new and pre-owned business aircraft and routinely transacts 100 aircraft per year worth more than one billion dollars. 

While business at Avpro has generally been busier in Q1 2024 than in Q1 2023, Chris Ellis (pictured below) measures this against the fact the whole of the first half of 2023 was slow.

And as the pace of transactions returns to a more normal pace than the frenzied market of 2021/2022, the MRO shops though busy in general are finding themselves able to manage demand for Pre-Purchase Inspections better than they were before.

“If as a broker you work with five MRO shops [to arrange Pre-Purchase Inspections], while not all five will have availability, two are likely to,” Ellis shares. “And the waiting time [for a PPI slot] is not three to four months like it was a couple of years back but two weeks now.”

So overall, 2024 has started with all the right elements for a healthy, balanced market continuing to develop.

Some Pre-Owned Jet Markets Challenge the ‘10% Rule’

With that said, Ellis is cautious to point out that not all markets are approaching equilibrium at the same pace, and not all markets are behaving the same.

He highlights a softening Gulfstream G550 market (for example) where supply has increased and prices are down approximately 15% compared to 12 months ago.

“Although there seems to be a lot of units on the market [approximately 45 at the time of this interview], that still does not represent 10% of fleet for sale, since over 600 G550s were built,” he says.

“Most markets continue to have less than 10% of the fleet available for sale, but that doesn’t indicate they’re all strong sellers’ markets,” he adds. “Some can have less than 10% fleet availability and still see prices softening.”

So, whereas the 10% fleet availability has traditionally represented the transition from a seller’s market to a buyer’s one, Ellis reckons what we’re seeing in today’s marketplace could challenge that traditional metrics.

“You’ve got to remember that a lot of these aircraft need significant upgrades,” he explains. “Many are coming up to their 10- or 15-year inspections, and these are going to represent a significant cost to buyers.

“If you’re going to buy a jet in that bucket, you’ll want to improve it so it’s going to last another 10 years. You’ll be looking at upgrading the Wi-Fi, lighting, avionics and more. We’re talking a project that could easily run to $2.5m-$3m and take 4-5 months to complete.

“This could be a reason why some of these markets are softening without their fleet availability reaching 10%.” 

Finding Value in Today’s Pre-Owned Business Jet Market

With that said, Ellis agrees that the market behaves very differently for new and nearly new jets than for older pre-owned jets. “Nearly-new business aircraft will always fetch premium prices when you have factory backlogs on the new aircraft market,” he notes.

“Let’s say I ordered a jet from the manufacturer and have to wait for them to work through a two-year backlog. I’m likely to pay a premium for a like-new pre-owned jet [while I wait].”

But is it really worth paying a premium on a nearly new pre-owned jet that will heavily depreciate in value in its first few years of service?

“If I’m a buyer, I need to weigh various factors to determine the value to me,” Ellis argues. “Other than the availability of the new jet that I’d like to buy, I need to measure the tax benefits of owning the nearly new jet for the next couple of years while I’m waiting for my factory-new model.

“Is it worth paying a 5-10% premium? Some buyers will be OK with that,” he adds. “Value is the circumstances and the calculus that goes into weighing the transaction. This could include the timing and optics behind the acquisition. The buyer needs to weigh much more than just the purchase price before they move forward with a transaction.”

Speaking more generally of the pre-owned market, Ellis notes there’s a much larger supply of aircraft that are less than 15 years old. But he stresses why, for different reasons, buyers should consider paying a premium rather than shopping the bargain basement.

“You really need to be looking for the high-quality airplanes,” he says. “Pedigree is everything when it comes to shopping the pre-owned market.

“Let’s say you buy a cheap airplane, and it turns out to be poorly maintained. It’s going to be hard to get that aircraft to the standard where you want or need it to be. In fact, you’ll probably end up spending more on that airplane with the purchase price and subsequent maintenance work than if you paid more for a high-pedigree older airplane in the first place.”

Buyers prepared to pay more for a top-notch plane will ultimately buy value and get a great airplane, he adds. “Be especially careful when you’re buying an older pre-owned jet from overseas where the maintenance standards may not be the same.”

Increased Bizjet Ownership Costs vs Value in Downsizing

Meanwhile, Ellis mentions a group of current aircraft owners who are looking at the rising cost of owning and operating business aircraft and struggling to justify continued ownership.

“With rising interest, inflation, supply chain problems and more, the costs for some aircraft owners have increased by as much as 35% in the last 18-24 months,” he shares. “Some of these owners are looking at selling their aircraft, believing Fractional Ownership makes better sense.”

For some, that may well be the case, but for others Ellis reckons ‘right-sizing’ is a better option that – for psychological reasons – the business aircraft owner doesn’t necessarily see. “They’re used to having a big cabin while flying their jets intercontinentally.”

If such owners would entertain the possibility of replacing their Long Range jet, for example, with a Super Mid-Size Jet which is still able to perform 75% of their missions non-stop, then they could reduce their operating costs and shop for a really nice, premium pedigree jet – quite possibly for less than they sell their existing aircraft for.

IRS Audits on Business Jet Owners: Allaying Buyer Fears

Although a return of 100% Bonus Depreciation looks to be a strong possibility, and Ellis reckons it will prove an attractive incentive to some US-based buyers who are still waiting on the sidelines, in February the IRS announced plans to conduct dozens of audits on business aircraft owners as part of its ‘campaign’ to address what it believes could be a ‘likely area of non-compliance’.

“Tax benefits – especially 100% Bonus Depreciation – are something lots of buyers have taken advantage of, whether they’re corporations or High Net-Worth Individuals,” Ellis notes. “These aircraft owners will get audited for taking 100% depreciation, but many will have taken great tax advice, too.”

Adding that it’s not just bonus depreciation the IRS is concerned with but the ongoing operations of the business jet, Ellis asks, “What is the real business of flying the jet? Compliance is important to the IRS. If you depreciate the asset as a business tool, they’re going to want to make sure it’s used for business.”

To highlight that there are various strategies buyers of business aircraft can use to ensure they don’t fall foul of the IRS, Ellis shares the story of one client who owned and operated a business jet purely for business purposes.

To ensure the lines between business and personal use were never blurred, the client also had a fractional share in another jet for any grey areas, “keeping the purity of their airplane when it came to depreciating it”.

So, in Ellis’ view it’s not a big surprise that the IRS is conducting the audits announced in February. “If you’re looking to buy a jet and take the tax benefits, just do it correctly,” he says.

“Put in safeguards, like jet cards or fractional shares to ensure the ongoing operations of the jet you buy over the next five years is purely for business.” 

More information from: www.avprojets.com