- 11 Jun 2021
- David Wyndham
Is it possible to predict the value of your business jet a few years from now? René Armas Maes provides an insight into residual values, and explains how a good understanding of these will optimize a flight operation from a cash perspective…Back to Articles
Through many consulting engagements, I have seen the impact of residual values on a business aircraft, and on its overall bottom line contribution (or not) to a client’s cash-flow. The purchase price of a factory-new or pre-owned business jetis just the tip of the iceberg, says René Armas Maes...
Supply versus demand; OEM product strategy (i.e. production rates and product support); and how well the aircraft is maintained by its owner all play their part in an aircraft’s residual value.
Over the years I’ve noticed that ‘concept buyers’ (those who are new to the market), and sometimes other naïve buyers spend far too little time doing their due diligence regarding an aircraft’s residual value than they should.
While a lower asking price may incentivize some buyers to close a deal, a higher asking price might actually hold better value to the buyer, because it reflects a favorable combination of the above residual value-drivers.
Simply put, a well maintained aircraft that comes to the market at the right time (i.e. when less than 10% of its make/model is available for sale) is able to retain more residual value compared to other aircraft of similar age and size, commanding a premium price.
It could also ensure its new owners enjoy a lower cost of ownership, since it may also attract better financing terms and conditions. Residual value is a key part of the evaluation process for lessors and financing entities, as it will be a core component of the profit model throughout the term of the loan.
However, forecasting and predicting residual values is not a simple science. For example, in the case of an in-production model, it’s necessary to try and predict when the manufacturer might choose to discontinue production for the aircraft type. Let’s consider an example:
By reviewing Aircraft A’s production rate over the last 10 years, and the percentage of its active fleet for sale, a comparison for this data should be made with its key market competitor (Aircraft B).
Now imagine that Aircraft B has been the best-selling product in its cabin segment for the last five years, and keeps a steady level of inventory on the pre-owned market, while Aircraft A has seen a gradual decrease in new deliveries and a steady increase in pre-owned inventory. It would be safe to assume Aircraft A has a finite time remaining before the OEM seeks to upgrade it to something more attractive/capable to meet the current market needs.
The above illustration shows how even simple analysis can help provide advance insights, even for inexperienced buyers.
But how can actual residual value be predicted three-to-five years from now? Although it’s hard to be exact, the following steps should provide potential buyers with key insights to make an educated guess of how the residual value might trend…
A Solid Foundation
By looking at the above points, potential aircraft buyers and financiers will have a solid foundation to make an initial aircraft value assessment.
Going a step further, a number of datasets can be used to predict aircraft residual values. including Aircraft Bluebook, AMSTAT, Asset Insight’s reports, Conklin & de Decker’s Aircraft Cost Evaluator, JETNET’s fleet evolution database, Vref, secondary research data (including GAMA’s quarterly shipment reports, and Honeywell’s Global Business Aviation Outlook), and more.
FIGURE A: Typical Mid-size Jet Fleet Analysis Data
Future Aircraft Value Curves
Forecasting future aircraft value curves tends to require other, more in-depth analysis including (among other things):
CHART A: Example Residual Value Impact 10 yr. Average
Consultant analysis. Mid-size aircraft products. Average equipped aircraft
By looking at residual values, operators and buyers can save money, and optimize an operation from a cost perspective. To do so, it is vital to understand when an aircraft needs to be replaced and upgraded to optimize the residual value to the owner. The impact on the operation’s cash flow should also be analyzed over a set timeline for the ownership period.
And if sellers are able to demonstrate through cash flow and sound assumptions to a potential buyer how the aircraft’s residual value may hold stronger in the future compared to other jets, they will have a stronger case to sell their aircraft at an attractive price.
Next time, we will discuss how aircraft owners can minimize ‘residual value anxiety’, whether they’re buying a fractional share or an entire new aircraft. Stay tuned!