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'Dynamic' and 'Cyclical'

The purchase of an aircraft often takes place at a moment in time, but the market for business aircraft is rarely static, notes Jay Mesinger. The following article will assist the Board in recognizing the key factors and cost areas that are impacted with changing markets.

AvBuyer   |   25th January 2011
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The purchase of an aircraft often takes place at a moment in time, but the market for business aircraft is rarely static, notes Jay Mesinger. The following article will assist the Board in recognizing the key factors and cost areas that are impacted with changing markets.

Many factors are considered when a Board explores whether or not to purchase or replace a business aircraft. Calculations reflect a multitude of costs, such as the price of fuel, insurance premiums and hangar rent. As we estimate residual losses for an aircraft over a period of time, we use very predictable milestones, such as warranty terms and proximity to a major aircraft or engine event.

There is also one more very important piece to consider— specifically the cyclical nature of the business aircraft market. To deny this phenomenon would be to embark on a slippery slope when planning - and an even slipperier incline when measuring the plan going forward.

Over the last 37 years there have been four major economic downturns, each distinctive and having a specific impact on the market and the corresponding valuation changes to aircraft. For the Board to be successful, it is necessary that they recognize the key factors and cost areas that are impacted with changing markets, thus enabling them to best serve the company by being fully aware of the dynamic nature of the Business Aviation community.

Board Members are typically chosen based on specific skill sets that a company feels it needs. Each business leader brings a perspective of governance and lends his or her expertise for the greater good of the company.

Economic trends - up or down - are usually fully understood by the individual Board Members, however they may not understand the influence downturns have on the Business Aviation market specifically.

The four downturns mentioned earlier did not start, nor did they end exclusively in the Business Aviation community. They were driven by external economic factors that affected the aviation industry, each with varying degrees of outcome. In the early days of Business Aviation there was not the same level of global connectivity as we experience today.

Typically a downturn in those days was symptomatic of some economic change in the United States, so understanding the problem and the corresponding solution was easier to comprehend. As the years have gone by and global connectivity has strengthened, economic downturns impact Business Aviation with greater severity and complexity. Following are some specific touch points for the Board to keep in mind.

Optics: These played a significant role in grinding Business Aviation sales to a screeching halt during the last downturn. Having the ‘Big Three’ auto makers sit in front of Congress and be vilified about their business aircraft use had many operators and potential buyers rethink their desire to engage in Business Aviation.

However, in recent discussions, corporate aircraft users feel the “optics” impact with far less severity. Since 2009, businesses have re-gained their confidence and have re-recognized the high value proposition of Business Aviation.

Tax implications: These can also add very interesting cyclical dynamics to the Business Aviation industry. For example, the inclusion of 100% depreciation on business equipment in the Jobs Act passed during the last recession created some positive impacts for the aviation industry. Though not every buyer purchasing an aircraft depreciated the assets, there was a substantial positive effect on those who were able to take advantage of this tax incentive. Manufacturers also enjoyed more sales than they might have consummated had this tax consideration not been in place.

Pre-Owned vs New: In periods of a downturn, there is always a greater emphases on pre-owned inventory rather than new. Downturns usually affect pricing of pre-owned aircraft quicker and with greater severity since new equipment prices are determined by the manufacturer.

Pre-owned aircraft tend to float along the back of all the other economic news. Generally speaking, new products just slow down in sales numbers whereas pre-owned drop in price. In the last downturn, business aircraft prices dropped as much as 50 to 60 percent from their 2007 highs.

Predicting a downturn is very difficult, however it is incumbent upon the Board to consider the ever-changing external economic and global political environment, as well as fluctuations in operating costs based on fuel spikes. These factors can change quickly and affect the residual value of the aircraft asset, which can significantly affect the Board’s planning.

Plan for the known yet expect variances. This is a very dynamic market.

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