From his years of experience advising clients on Business Aviation issues, David Wyndham believes that the time is right for evaluating acquisition. Here's his thinking...
In previous articles within this series on challenging market conditions, we examined different ways to take advantage of falling evaluations for business aircraft. While most pundits agree that sale prices are unlikely to recover dramatically in the near future, the current environment is favorable to buyers and may not continue; such is the cyclical nature of our community.
Even if conditions change, there will likely be more of a flattening of the downward trend versus any increase in market values.
According to AMSTAT's mid-August Resale Market Update Report, business jet retail transactions were up 8.4% in H1 2017 versus H1 2016. AMSTAT stated that 10.7% of active business jets are ‘For Sale’, the lowest percentage since January 2008. The quantity of single-engine turbine helicopters ‘For Sale’ is also at post-recession lows. Turboprops and multi-engine helicopters remain down or flat. With that encouraging news, you would think values would show some strengthening.
AMSTAT data indicate that asking prices are still dropping versus a year ago across all turbine market segments. Medium jet asking prices are down the most at 7.6%, while Heavy jets decreased 5.5% from a year ago. The Vref Q3 report echoes this trend of selling prices: Large/Heavy and Medium jet selling prices were down 5% versus Q4 2016. Vref describes jet prices declining at a slower rate than in the recent past, however.
It is safe to say that used jet values are still favoring the buyer. No one believes the market has hit bottom, because we all have been working in this environment before. Experts are comfortable stating that now is still a good time to buy, however.
Why Now? Striking While the Iron's Hot...
Now presents a buying opportunity if you wish to trade up either to a newer model or a larger model. As an example, we had a client with a 2007 Citation XLS that was considering a used larger jet, perhaps a Citation Sovereign or even a Falcon 2000LX. They were concerned about the lost value in the current XLS. Following are the particulars:
The client does not want to purchase new as they feel the initial decline in value is more than they want to absorb. But the values in recent-model business jets were very attractive. If the client focuses on a possible residual value decline of 5% to as much as 10% in the next year, they miss the fact that the price today is already a very good bargain.
For about $5m more than their current Citation XLS, they can get a 35% larger cabin and more than a 1,000nm increase in range. For less than $14m more they get a stand-up cabin, flat floor, more than double the cabin and more than double the range of their XLS. For their mission, the Sovereign size is a better fit, and the cost of the upgrade is more palatable for their CFO. But the other option has everything they need and want. They have not decided yet.
A Word to the Wise…
Regardless of value, the acquired aircraft must be a fit for your mission. Just because you can buy bigger than you require, remember that with an increase in size come increases in complexity and costs.
Does the bigger aircraft with its higher operating costs add value? Can you replace the aircraft if it no longer performs its assigned mission or if the costs of the options are less than keeping your current aircraft? Take into account the cost of loss-of-use while your aging aircraft is in for more maintenance.
The above client can also acquire a new Citation XLS+ for less than either larger jet option. The aircraft must make sense and support your business needs.
Don't get caught in the Sunk-Cost Fallacy. Accept the lost in residual value in your current aircraft. You will not get it back. Looking ahead, what is the best use of your cash?
Look at all of the costs, particularly over the life of the acquisition. We must take into account the acquisition cost, the cost of operations and estimated future value. What are the pre- and post-tax considerations? Finally, what is the cost of capital or internal rate of return? Does it make sense to pay cash or should you look at financing or leasing?
Consider the Big Picture
If you are looking to upgrade in size, range or other capability, there are good values out there in the market. Keep in mind that a high-quality, recent production model will still get more attention and perhaps have less room for price discounts. Keep that fact in mind when you sell your older aircraft.
Also, pedigree matters. Seek good advice and talk to brokers familiar with your current aircraft. Transaction specialists will be familiar with your candidate options. Now may indeed be the time when the stars align for a great buy.