Warranties in concept provide the purchaser with significant benefits- but understanding precisely what is offered and what role those benefits play in the overall ownership experience is complicated. Cost of ownership- obviously- is reduced when the manufacturer pays for broken items (which OEMs agree to do subject to the terms of the warranty contract). Different aspects of the aircraft- such as avionics- airframe- engines and interiors- however- have different warranty benefits.
The aircraft and components are generally five-year items- for example- while the avionics are usually three year items. Cosmetics (i.e.- cabin interior and external finish) run for one to two years of coverage.
Warranty benefits must be balanced against non-warranty considerations- including new technology- depreciation and corporate culture. Perhaps your company needs features that are not available in older aircraft- thus diminishing the attractiveness of a previously owned machine regardless of price. Particularly interesting may be the 50 percent accelerated bonus depreciation that is available on new aircraft purchased in 2012.
Corporate culture regarding equipment purchases also is a consideration. In the old days corporations had a plan to rotate aircraft at the end of their useful depreciation life- which in many cases matched with the end of the warranty life. As economic conditions have changed over the years this approach to replacement has shifted and now allows for a much longer utilization period for the owner. In fact many companies have shifted to seven years and beyond; some corporations are keeping the planes as long as they are meeting the mission- so economic factors have established a new base-line in the purchase decision.
Now the idea of buying new or used is primarily based on the differentiation between the life-cycle cost of a new aircraft and that of similar low-time used equipment. This change is taking place within even the largest corporations. As long as the mission is being fulfilled- the idea of new may not be quite so appealing in spite of warranties.
This situation became particularly acquit as the price of used aircraft tumbled in 2008 and is still burdensome for original equipment manufacturers. There has been little recovery from that drastic pricing adjustment. The idea of prices rising for pre-owed aircraft is still way off in our future.
Manufacturers are therefore working hard to add benefits to their new products- creating new value propositions for buyers. This is why we see a few of the manufacturers introducing new models- such as the Gulfstream G650 and the Bombardier 6000- 7000 and 8000. These aircraft offer new cockpit designs and features- all of which are meant to create compelling reasons for the buyer to come back to the idea of buying new.
A COMPONENT OF VALUE?
Let’s now focus on warranty as a component of value. The idea of a lowered cost of operation as a result of the warranty is real. Warranties will lower direct costs. However- the value of the warranty is only part of the equation. Savings must be balanced against acquisition costs. Furthermore- there are companies that provide aftermarket parts and labor coverage for avionics and engines- so the buyer can (for a fixed hourly amount) provide that same budgetary protection to their costs as a warranty.
Emerging markets like China- Asia- the Middle East and India do have a real desire to buy new- and I am sure that this is in part driven by the idea of a full warranty being in place. However- in larger part I believe this is a cultural factor based on new wealth buying new products. A warranty is real- it does provide value- and it can be measured by fleet actuarial averages.
This being said- in today’s market new aircraft warranties often do not make the buying difference that they did in preceding years when the price of new and late-model used aircraft were closer together. This market phenomenon is a conundrum that is being deliberated daily by the buyer as well as the manufacturer.
I do not think we are at the end of the story yet. There is more time and market stabilization that must take place for warranties to have the significance they once held in the decision to purchase new aircraft.
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