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Gulfstream G650
Rollout (Part One): Defining a market for the best...

In a March 13- 2008- press release Gulfstream Aerospace Corporation officially announced the launch of the flagship G650- using such superlatives as “fastest-” “largest-” and “most technologically advanced.” In fact- Gulfstream apparently designed every G650 parameter to be at least a bit superior (and sometimes more) to other offerings currently on the market.

The market reaction to this roll out is very instructive- and forces aircraft buyers to consider some new things when purchasing a new aircraft. This is the first of two articles on the G650 roll-out- and covers certain strategic issues that buyers (or prospective buyers) should consider.

The Process
Gulfstream’s announcement included a companion letter inviting interested parties to submit their names (together with US$500-000 as a good faith deposit) and a signed letter of intent as an expression of interest in purchasing a G650. Anticipating that demand would be high- Gulfstream created a first-wired-first-served process using an independent escrow agent (JP Morgan)- with delivery positions being allocated based upon wire receipt time.

There are rumors that bidders opened local bank accounts in order to be assured an instant transfer when the gates opened.
To put it mildly- the response exceeded Gulfstream’s expectations. If Gulfstream accepted all of the deposits and offers- it could have booked deliveries well into the 2020s. As a result- Gulfstream revisited its production estimates and made every effort to accept as many bidders as possible within a more reasonable timeframe. Nevertheless- there were some “winners” who will not fly in their G650s until the election of the President who succeeds the President we elect this Fall! The “winning” bidders are now in the process of negotiating the definitive Sales Agreement with Gulfstream. Buyers’ negotiating power (the ability to change the document to favor the buyer) is predictably limited- but by no means precluded.

Why the Frenzy?
There has been a lot of speculation as to the basis for the G650 bidding frenzy. There are several reasons for this overwhelming response:
• Demand for large business jets was already very high- with significant back logs for the larger Gulfstreams- Bombardiers and Dassault Falcons.
• There is a guaranteed pool of business jet customers who simply must have the top- of-the-line product. Gulfstream marketed the G650 as being the leader in most cate- gories- and it was obviously going to be the flagship of the powerful Gulfstream brand. Is it any wonder that the “lower” level G600 will be offered later? Who would belly up for a G600 only to be out- done when your rival buys a G650?
• To certain non-U.S. buyers- the weak U.S. dollar makes the effective offering price of the G650 close to- or lower than- the price of a G550 from a few years ago.
• Even though Gulfstream has included harsh anti-assignment language in their form contract- many buyers are still intoxi- cated by the recent appreciation in large business jet values; and the perceived abil- ity to sell the aircraft at a premium has given buyers comfort and motivation.
• The G650 is the first “clean-sheet” air frame to come out of Gulfstream in a very long time. As with any clean-sheet design- it allows Gulfstream to try new things. Perhaps the most eye-popping feature on the G650 is the cabin windows. Every buyer-bidder I have interacted with raves about the windows. The added size clearly changes the cabin atmosphere. Unique Situations The frenzy and associated backlog for G650 deliveries creates some interesting challenges and opportunities.
• How do you plan for an aircraft delivery that may be seven years away? One buyer noted to me that his remote delivery slot will be his motivation to stay healthy and alive until his delivery date. One thing to consider is that the long lead-time to delivery gives you time for an interim air- craft. And for U.S. buyers- it sets up a potential tax-deferred (1031) exchange in the future.
• How do you finance it? Buyers will have a few million dollars sunk into the contract at the outset- with milestone payments stretching out for years. Some of the mile- stones are based on regulatory certifica- tion and program flights. Conceivably- a buyer could have $15-000-000 invested into the aircraft- and still have several years until delivery. Lenders are still try- ing to determine how to lend in this situa- tion. Most will expect a significant partici- pation (20% or more) from the buyer- plus collateral assignment of the contract. Buyers looking to finance the purchase with a non-U.S.-dollar denominated loan have the added complexity of potential exchange rate fluctuations between con- tract execution and aircraft delivery.
• What happens if there is a major corporate or personal change affecting the buyer during the course of the contract? Gulfstream has gone above and beyond the norm in requiring buyers to sign con- tracts prohibiting assignment of the con- tract (and even attempting to prohibit entering into contracts before delivery that attempt to transfer the aircraft after clos- ing). Are there loopholes? Of course- but they all come with costs and risks. Time will tell if Gulfstream permits “hardship” assignments when a buyer suffers a sub- stantial change in position or status.

It will be interesting to see how the G650 program progresses. As of March 2008- the market for big corporate jets was still very strong- and people were selling used- late model jets at substantial profits. That market has since cooled. Obviously- fuel costs will impact certain buyers and therefore shrink the market for these (and other) business jets - as will the emergence of multi-national laws and regulations on carbon emissions. Lastly- the G650 is still a concept. While nobody doubts Gulfstream’s ability to bring the program to fruition- that is always a risk (mitigated no doubt by Gulfstream’s decision to stay with an aluminum fuselage).

The follow on…
The second of two articles on the G650 delivery will incorporate more data on the success and progress on the G650 program (likely to be released in the next analyst earnings call to be held by General Dynamics (Gulfstream’s parent entity) in late July- 2008)- and a few negotiating ideas for the many buyers that are now signing delivery contracts with Gulfstream.

Greg Cirillo is a Partner with the Washington- D.C. law firm Wiley Rein- LLP- representing private and commercial operators- owners- lessors and financiers in structuring the sale- acquisition- ownership- management and operation of aircraft- and providing Federal tax and state sales and use tax planning services. Greg can be reached at Tel: +1 703-905-2800- email: gcirillo@wileyrein.com 

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