- 05 Jul 2023
- Gerrard Cowan
- Aircraft Ownership
Is there a set plan to help tell when to start planning the sale of your business aircraft? David Wyndham shares key factors to consider and strategies that will help you pinpoint when a change is necessary.Back to Articles
When you acquire a business aircraft, whether it is your first or a replacement, your next thought is unlikely to be when to sell. Just as before the acquisition, however, it is important to have a plan ready regarding the eventual sale of your aircraft. This will require you to be proactive.
There is no set formula when it comes to planning for the eventual sale of your jet. As with many things, it is situational. As such, there are two situational reasons for replacing an aircraft. These are:
1. When the economic cost of operating the aircraft becomes greater than a potential replacement. (Deteriorating dispatch reliability should also be considered as a cost factor).
2. When your mission requirements evolve/devolve, and your current aircraft no longer provides a good fit.
As aircraft age, unscheduled maintenance needs tend to increase. Some components will wear out while other critical components may have a specific life limit.
The engines will be the biggest single cost item on most aircraft. Engine overhauls are infrequent, but high-cost events often exceed $1m per engine on some Large Jets. Unless they are enrolled on an hourly maintenance plan, their accrued service life can have significant negative impacts on the aircraft value.
At some point, the ability to support the aircraft will become increasingly difficult because of growing unscheduled maintenance needs and scarcity of spare parts. Difficulty in obtaining spare parts impacts the aircraft’s dispatch reliability. When the aircraft spends time undergoing maintenance, it cannot be flown and is unavailable to fulfil the owner’s travel requirements.
After several decades, increased maintenance and limited parts availability can combine to reduce the time the aircraft is available for flight by as much as 50%.
Along with the operating costs that tend to grow as aircraft age, declining residual values should also factor into the equation. Generally, the value of an aircraft is based on a combination of its age and maintenance status. Thus a 20-year-old business jet can have much of its value associated with its maintenance status.
That 20-year-old jet may be worth $3m with the engines in need of overhaul, but it will be worth $6m with freshly overhauled engines.
Tax depreciation also plays a part in the economics of a business-use aircraft. If your business has taken the maximum allowable tax depreciation and your aviation tax advisor shows you how upgrading could be advantageous, it may be worth closer consideration. In general, the tax advantages are not usually the driving factor in an aircraft replacement decision, though. They are one of several factors in the decision.
Financially planning for when to sell your business jet is best done using life-cycle costing.
This type of analysis considers the total costs of acquisition, operation, and disposition (or residual value of the jet). An effective life-cycle cost analysis should account for taxes, depreciation, and the ‘time-value of money’.
Run this for your current aircraft as well as its possible replacement. Calculating and updating the life-cycle cost of whether to keep or replace the aircraft every few years can give you a lead-time to plan for the aircraft’s replacement, and time to perform an analysis on future options.
Another main reason for people to replace their aircraft is that the mission it was bought to fulfil changes, and the aircraft no longer has the capability to achieve the new requirement. A typical example would be a need for more range or passenger capacity.
If you have a requirement for greater range, it is likely the current aircraft can still perform the trip with one or more fuel stops. Longer-range, larger aircraft cost more to acquire and operate – so the major consideration is the benefit of avoiding that one-hour fuel stop versus spending $10-20m more for a larger, longer-range jet.
If the need is extra capacity for more passengers, adding more seats is not always a viable option if you wish to preserve passenger comfort. Nevertheless, some aircraft can add one or two more passenger seats with a simple reconfiguration. This could include using a belted lavatory as a passenger seat.
I had one client who operated an eight-seat Hawker 800XP as a nine-seat shuttle by doing exactly that. Flying nine people aboard an eight-seat (plus belted lav seat) aircraft 3,000nm is not a viable long-term solution, though, especially where baggage space is needed.
As a short-term fix it will buy you time to plan and execute an appropriate sale and upgrade, though. The cost of the upgrade to the larger jet can be returned in the value of a fully mission-capable aircraft.
Alternatively, a change in mission may create a desire to downsize. A 12-passenger jet with 4,800nm range can easily fly four people 1,500nm in optimal comfort, but at what cost? Not only does downsizing typically reduce your operating costs, but a smaller, lighter aircraft can often enable operations into smaller airports, and have a smaller carbon footprint.
So, how can you predict when to sell your private jet? When should planning for that sale begin? Just as a business has periodic reports to let the leadership know how well the business is performing, relative to set goals so should your aviation operation.
- How well do the aircraft’s costs align with the budget?
- How is the aircraft being utilized in terms of passengers, payload, and trip lengths?
- Which of these is showing signs of change?
- What are the possible alternatives?
The savvy owner will have a plan for the use of the aircraft. They will update and modify that plan as changes occur, both internally and externally. Ultimately, a one-year lead-time for the replacement should allow you room to reassemble your acquisition team and prepare to re-enter market.