Jay Mesinger is the CEO and Founder of Mesinger Jet Sales. With over 40 years’ experience in the... Read More
Boards look at the big picture- but they often are forced to use lenses that are distorted by changing economic conditions- cautions Jay Mesinger.
Typically the considerable effort and thought that goes into fleet planning centers around mission. The trip study and allowing for the correct passenger count as well as determining annual use and cabin size make up this focus. As long as the mission does not change these studies will direct the rest of the planning and will provide the Board with budgets for operations and capital expenditures.
What happens when circumstances change and uncertainty exists- however? What if the primary mission of the flight department is altered or if there becomes a need to reassess the aircraft fleet mix? How do the dynamics of the aircraft marketplace affect residual values of your existing assets as well as the options for replacing assets? What is the impact of change on the company’s balance sheet?
Sometimes the best laid plans seem imperfect and need to be revisited. Such uncertainty tasks the Board and all those involved with re-calculating plans based on new information. The Board’s ability to respond proactively to changing and uncertain business environments- as opposed to simply reacting- is paramount to the success of the outcome.
FACTORS THAT DRIVE NEW THINKING
Let’s define the factors that can cause a board to rethink- recalculate and respond. If we go back to the basics of the initial planning- we see the need to establish the city-pairs to be traveled as well as the frequency of that travel. This examination establishes the annual use- and the basis for aircraft choice as well as budgets.
Not all change contemplated by a Board in uncertain times will be about pairing down or cutting back. In fact this rethinking could be about accelerating upgrades or additions to a fleet. During the current economy not only are values of aircraft continuing to decline- but the ever-increasing supply may prompt the Board to consider adding to the fleet or moving up in equipment.
What might have been a two-to-five-year timeline to add a second aircraft may be shortened due to historical lows in acquisition prices. This may be especially true if an addition to the fleet is being considered. Even if there is a need to sell existing equipment before acquiring a replacement aircraft- the difference in cost between the older relinquished aircraft and the newer (and possibly bigger) machine still may be favorable.
Let’s not ignore in this discussion the idea that the core business of the company may be suffering- thus driving a need to sell and not replace aircraft. How does a board navigate through such turbulence?
Accurate and honest discussions must take place- and hard and unpleasant decisions may need to be made. Imagine that financial modeling suggests the company should reduce fleet size incrementally or totally. Boards must consider the ramifications of fleet alteration at a time when the marketplace is characterized by over-supply and slower selling cycles. First the conversation must center on value of the fleet. Each aircraft must be analysed carefully. It is critical that this analysis not be affected by what can be called “The Endowment Effect.”
This characteristic is defined as an over-estimation of the value of an asset just because it is owned by you or your company. I see this all the time when someone or some company will say- “I know that is what the other aircraft’s value is- but ours is worth more simply because we own it.” This effect may owe to a sense of the strong pedigree of your aircraft compared to anyone else’s. Such thinking- however- will yield a very dangerous assessment of value and increase the selling time into what might be a period of even lower value.
In summary- plan well. If there is an opportunity to take advantage of these uncertain times by capitalizing on unprecedented buying prices- consider doing so. Fully understand the market you are considering buying into- and also examine those collateral markets to the left and right of the market norm and buy smart. If the decision is to sell and not replace- the same accuracy and knowledge of the markets still is essential to a good outcome.
Remember- just because you may be selling for less than what was predicted when you first bought or planned the future residual value- the outcome can still be managed and a better outcome can still be attained by pricing the aircraft correctly. Beware of overestimating residual value simply because it is owned by your company. Get into- and out of the resale market as quickly as you can.