Residual Values: The Hidden Cost of Business Jets

Is it possible to predict the value of your business jet a few years from now? René Armas Maes provides an insight into residual values, and explains how a good understanding of these will optimize a flight operation from a cash perspective…

René Armas Maes  |  16th June 2021
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    René Armas Maes
    René Armas Maes

    René Armas Maes, Vice President, Commercial, Jet Link International LLC, is an international...

    Private jet image depicting engine nacelle and overwing

    Through many consulting engagements, I have seen the impact of residual values on a business aircraft, and on its overall bottom line contribution (or not) to a client’s cash-flow. The purchase price of a factory-new or pre-owned business jetis just the tip of the iceberg, says René Armas Maes...

    Supply versus demand; OEM product strategy (i.e. production rates and product support); and how well the aircraft is maintained by its owner all play their part in an aircraft’s residual value.

    Over the years I’ve noticed that ‘concept buyers’ (those who are new to the market), and sometimes other naïve buyers spend far too little time doing their due diligence regarding an aircraft’s residual value than they should.

    While a lower asking price may incentivize some buyers to close a deal, a higher asking price might actually hold better value to the buyer, because it reflects a favorable combination of the above residual value-drivers.

    Simply put, a well maintained aircraft that comes to the market at the right time (i.e. when less than 10% of its make/model is available for sale) is able to retain more residual value compared to other aircraft of similar age and size, commanding a premium price.

    It could also ensure its new owners enjoy a lower cost of ownership, since it may also attract better financing terms and conditions. Residual value is a key part of the evaluation process for lessors and financing entities, as it will be a core component of the profit model throughout the term of the loan.

    However, forecasting and predicting residual values is not a simple science. For example, in the case of an in-production model, it’s necessary to try and predict when the manufacturer might choose to discontinue production for the aircraft type. Let’s consider an example:

    By reviewing Aircraft A’s production rate over the last 10 years, and the percentage of its active fleet for sale, a comparison for this data should be made with its key market competitor (Aircraft B).

    Now imagine that Aircraft B has been the best-selling product in its cabin segment for the last five years, and keeps a steady level of inventory on the pre-owned market, while Aircraft A has seen a gradual decrease in new deliveries and a steady increase in pre-owned inventory. It would be safe to assume Aircraft A has a finite time remaining before the OEM seeks to upgrade it to something more attractive/capable to meet the current market needs.

    The above illustration shows how even simple analysis can help provide advance insights, even for inexperienced buyers.

    But how can actual residual value be predicted three-to-five years from now? Although it’s hard to be exact, the following steps should provide potential buyers with key insights to make an educated guess of how the residual value might trend…

    1. For in-production aircraft, review production rates over the last five-to-ten years, paying particular attention to how Q4 sales have been trending during that time. Have Q4 sales consistently exceeded 40% of total annual aircraft sales for the model? This may imply that sales incentives and aggressive discounting strategies are being used to artificially drive sales, which could impact aircraft residual value further down the line. Interrogate the motive for such incentivized selling. Is the OEM simply pushing unit sales on a market that hasn’t been able to absorb its product unless it’s deeply discounted?
    2. Check the number of discontinued aircraft that are in operation: lower fleet numbers equal lower product support and less market interest, both of which will negatively impact the residual value of the model.
    3. OEM product upgrades may also impact residual values. For example, Embraer has evolved its popular Phenom 100 and is today producing the Phenom 100EV. This features a new avionics suite and modified engines to provide more speed and superior hot-and-high performance. How will the imminent likelihood of an upgrade to a current production model impact its residual value on the pre-owned market in the near- and medium-term?
    4. Don’t forget that OEMs sporadically introduce a clean-sheet product replacing an older platform, since these, too, will have an impact on residual value of the older aircraft. Check what is currently in development and certification at the manufacturer, and assess where the highest likelihood for a new model is, based on the OEM’s existing product line and market demand. As an example (and in my opinion), Bombardier may announce a new platform within the 4,000-plus nautical mile range, within the next eighteen months, replacing its Challenger 600 platform which is now 40 years old. Read more in my article Business Jet OEMs: Where are the Product Gaps.
    5. How long are aircraft of the make/model taking to sell, what are the reasons for any changes, and what does this say about the market demand for the type? In a regular, balanced market it may take under nine months to sell an appropriately-priced, well-equipped, and well maintained business jet. (Lower time and younger aircraft will sell faster than older aircraft.)
    6. Likewise, a strong economy can help strengthen aircraft values (and even – rarely – cause asset appreciation) when demand is higher than normal. Business Aviation tends to be a cyclical industry, so the state of the economy can play a significant role for both new market potential and the resale market. A weaker, slower GDP growth economy can put significant downward price pressure on new and pre-owned values, especially when supply exceeds demand. New product pricing will struggle to firm-up when a higher number of the same make/model are available for sale in the pre-owned market.
    7. Aircraft availability and pricing.

    A Solid Foundation

    By looking at the above points, potential aircraft buyers and financiers will have a solid foundation to make an initial aircraft value assessment.

    Going a step further, a number of datasets can be used to predict aircraft residual values. including Aircraft Bluebook, AMSTAT, Asset Insight’s reports, Conklin & de Decker’s Aircraft Cost Evaluator, JETNET’s fleet evolution database, Vref, secondary research data (including GAMA’s quarterly shipment reports, and Honeywell’s Global Business Aviation Outlook), and more.

    FIGURE A: Typical Mid-size Jet Fleet Analysis Data

    Future Aircraft Value Curves

    Forecasting future aircraft value curves tends to require other, more in-depth analysis including (among other things):

    • Historical pricing data for an aircraft type, including product upgrade potential (avionics, cabin amenities etc.) Consider, too, the overall strength and demand of the aircraft’s market segment.
    • The OEM production rate and total number of units expected to be built through a platform’s lifetime.
    • Macro-economic KPIs including incentives that may push brand-new aircraft sales, accelerating depreciation of existing models. Other KPIs may include inflation rate and fuel costs.
    • Other metrics will include aircraft utilization, age, avionics suite, and cabin layout, among others.

    CHART A: Example Residual Value Impact 10 yr. Average

    Consultant analysis. Mid-size aircraft products. Average equipped aircraft

    In Summary

    By looking at residual values, operators and buyers can save money, and optimize an operation from a cost perspective. To do so, it is vital to understand when an aircraft needs to be replaced and upgraded to optimize the residual value to the owner. The impact on the operation’s cash flow should also be analyzed over a set timeline for the ownership period.

    And if sellers are able to demonstrate through cash flow and sound assumptions to a potential buyer how the aircraft’s residual value may hold stronger in the future compared to other jets, they will have a stronger case to sell their aircraft at an attractive price.

    Next time, we will discuss how aircraft owners can minimize ‘residual value anxiety’, whether they’re buying a fractional share or an entire new aircraft. Stay tuned!

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    René Armas Maes

    René Armas Maes

    Editor, Buyer Strategy & Finance

    René Armas Maes, Vice President, Commercial, Jet Link International LLC, is an international aviation consultant and experienced C-Level professional. He has built a successful track record for developing and delivering Business Aviation strategies for Fortune 500 companies, Venture Capital firms, and HNWIs.

    René is a regular columnist for Bloomberg (financial), America Economia (business) and a speaker at aviation conferences worldwide.



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