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Buying New Or Buying Used

The age-old question- “whether to purchase new or pre-owned-” may not be easily answered in today’s market for business aircraft- suggests Jay Mesinger. Times have changed with the economy- and schedules for the replacement of aircraft have shifted with them.

Jay Mesinger   |   1st September 2012
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Jay Mesinger Jay Mesinger

Jay Mesinger is the CEO and Founder of Mesinger Jet Sales. With over 40 years’ experience in the...
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Traditionally- schedules for replacement of aircraft operated by large corporate flight departments matched the end of the warranty period or the end of the depreciable life of the asset. That approach was predictable and programmable for the company and for the original equipment manufacturers. Orders were placed to match the replacement dates- and fleets were kept modern and relatively new.

As economies weakened over the years- however- the company’s interest in retaining its business aircraft often extended beyond the warranty or depreciation life of the asset. It was not uncommon for companies to shift from a five-year replacement cycle to a 10-year (or longer) replacement cycle. Modernization techniques came into vogue- and older airplanes were updated with fresh paint- new interior and advanced avionics.

Aircraft refurbishment entails less cash and capitalization requirements while extending the life of the asset and providing more value to the company. Today- unless there is a mission change that the current fleet mix cannot accomplish- the idea of whether to buy new is not as easily answered as it once was for large corporations.

FIRST-TIME BUYER DILEMMA
Let’s look at first time buyers and their priority to purchase new or used. In the recovery of 2001- the United States had some very aggressive tax breaks of accelerated depreciation for buying new equipment. The emerging markets outside the USA had not yet raised their beautiful heads.

Furthermore- most manufacturers had unsold equipment sitting on their ramps—Whitetails- as they were called by the industry—and they talked discounts. In fact it was the first time I can recall when I could reasonably compare a new aircraft with a used one on the basis of comparable cost. During that period the price of attractive pre-owned aircraft did not tumble as much as 50 to 70% as they have during the Great Recession following 2007. Coupling these facts with very favorable tax incentives- a decade ago many people bought new- rather than used airplanes.

EMERGING MARKETS
The next significant phenomenon is the attitude of clients within emerging markets. Maybe it is the new wealth of these countries that drives buyers to want only new equipment. Possibly it is the lack of operational experience with aircraft that fosters the perception that the safety and reliability of new is better than used. Whatever the root cause- the emerging markets are mostly focused on new.

When they cannot get brand new aircraft they are willing to take only equipment that is very close to new. This scenario is stimulating demand for new aircraft sales to fill the appetites of emerging markets.

Looking at today’s market for answers to the question of buying new or used- I must say this is a very difficult time for the airframe manufacturers. Unlike the recovery of 2001- this recovery lacks the incentives to compare new to used. Manufacturers do not have excess inventory due to the cut-backs in production that occurred in 2008. The tax incentives are expiring and do not have the impact they did in the last recovery for two very distinct reasons:

• During the current recession- prices of used aircraft have dropped significantly.
• Due to there being less inventory- manufactures are not discounting as in prior recoveries. This creates a much larger delta between new and used aircraft.

Most buyers today look at the spread and are not able to justify the difference for a new aircraft compared to a used aircraft that has a great maintenance and ownership history- great cosmetics and low total time. It is very hard for a buyer to bridge the value gap and buy new just to get a new aircraft warranty. Unless a used aircraft is unable to offer the mission fulfilment available with a new aircraft- most Boards and buyers will strongly consider good used equipment. This market dynamic is really playing havoc on the recovery projections of Original Equipment Manufacturers.

As forecasters try to mark the end of the downturn and the start of real recovery for the manufacturers- the position flag keeps getting placed further and further into the future.

Of course we have an OEM industry that will recover because fleets will age beyond the tipping point for corporations- attitudes of buyers in emerging markets will change- and rules against older aircraft being imported to countries may be mitigated. The decision whether to buy new or used may return to more traditional norms. Just don’t expect it as early as tomorrow.

Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com

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