Aircraft Value: Obsolescence and Depreciation
Aircraft value can seem both simple and nebulous. The book value is a calculation. And yet predicting days on market and the final price is a crystal ball at best.
A key element is stepping back to look at a bigger picture today on what the aircraft value will be tomorrow.
What Boeing and Embraer Teach Us
One of the benefits business aviation aircraft value is that we get great “hand me downs.” After the military tries it, the airlines will deploy it. If we’re lucky it will then leak into our world after a few years. While the Boeing 787 isn’t in our world yet, it matters as an example now:
It’s an all new design that uses composites extensively, is all electric and doesn’t use “bleed air.” [Bleed air, for non-jet folks, is the pressurized air that is squirted into the fuselage from the engines. It is then redirected for many functions: Pressurization, heating, cooling, anti-ice, etc.] But how does this impact the non-aviation geek and non-flying public?
We’ve entered an era of the flying battery, a power station with wings. The aircraft is a testament to how future aircraft value will be tied to solid state technology. In the 787, it does it all.
Living in an era where your iPad is encroaching on more daily functions, it is important to see the connection.
As your Ipad invades more of your life, consider what this does to aircraft value. It would seem nearly unrelated, but the fact is that where your airplane lies on the spectrum… matters. While there will be teething problems and accidents, the reality is that everything we see in the rest of society will leak into aviation.
Aircraft operators in the business and transport category will play ball or see their balance sheet melt faster.
To be fair, the above is a dramatic sketch of the 787, but it is necessary to have such a simpleton’s view to delve further into the trajectory of the relationship between obsolescence and depreciation. The new player might take chances, but ultimately they drive the future value with new ways of doing things.
With Embraer the story is similar with the Phenom 100 and 300. With the FMS (flight management system) taking a lot more actions in lieu of the crew, Embraer embraced the future. The role historically reserved for the FMS was navigation and flight planning. Embraer took the FMS [Garmin Prodigy 1000 and 3000 suites] and made “the computer brain” a defacto 3rd crew member, monitor and saviour.
All of this translates to the crew doing much less once the engines are turned on.
Why Does The Jet Owner Care?
Fletcher Aldredge has been in the aircraft value game for some time. In tabulating his Q4 aircraft overview for 2015 (below) he shows us how and why to care, by model comparisons.
The table below shows what happened to valuations between 2008 and 2013. A good 5 year snapshot on why you did ok with a Phenom 100 (72% of original value maintained) and even better with a Pilatus PC-12. (88%!)
If you bought a Lear 60XR (28% of your money left) in 2008, you may not have had a clear sense at purchase time just what you were buying. Certainly not relative to what was on the market, coming or right around the corner. While an amazing airplane, fuel, technology, runway requirements all conspired to hurt marketability.
The Phenom 300, were it to have made this table, would sit at 70%. It retained 70% of its original purchase price between 2008 and 2013 using inflation adjusted dollars. Not bad for a new market entrant. Even more relevant when you consider this:
They built an airframe, a suite, a system, and a support network from scratch, for the next 20 years. The gamble was big, both with Boeing’s 787 and Embraer’s highly automated Phenom 100 and 300 series. But the results of initial market (and balance sheet) acceptance were huge.
Looking back at history, the Boeing 707 was just such an animal, as was the Lear 35 and early Citations in the 1970s. Their numbers, performance and technology humbled comparables of the era.
Aircraft Value: Not Just Luxury
Looking at the table above, there are other interesting aircraft that lurk mixed in with the luxury private jet type things. The top contender, the Pilatus PC-12, wins since it so darn employable: Executive shuttle, bush operations, ambulance, special operations, to name a few. It is a versatile aircraft that appeals to a broad domestic and international markets.
So… when you are thinking of getting the best aircraft value in a business jet, consider some key points that leverage simple knowns:
– Do operators besides business aviation and private jet operators use it and what does this do to aircraft value?
– Does it incorporate (or can it upgrade) to new technology that is coming. (ADS-B, CPDLC, FOQA / MOQA, etc.)
– Does it fit the model of the iPad example above? (Talking to your phone, tablet and even calling home to report maintenance?) Can it share info about flight operations or anything that enhances safety?
Three Things to Check
A bank’s criteria to analyze where an aircraft might be in terms of residual value can be needlessly complicated and disconnected. While not proud of our simpleton view, it works. The Jet Owner Index asks three key things:
- #1 Production Thickness: An airplane’s initial popularity is driven by how many were made per year. Sure the total count is nice to know, but did they make 5 per year? Or 50. That number, as easy as it is to find, frequently offers a great retrospective of “oh yeah…. no one was buying them” type feeling on aircraft value.
- #2 Third Party Affinity: What is the ratio of how many are operated for hire in charter operations? The higher the ratio, the busier the fleet. And the more ubiquitous and note-able the aircraft value is. (The words “Learjet” and “Hawker” are popular for a reason. They had the highest 3rd party affinity of their eras.)
- #3 Percentage of Fleet for Sale: Sounds simple right? It is! Look at what it is today vs. What it was last year and you’ll see the trend on your favorite model. Days on market ties into this number too. A large number for sale, that aren’t moving is telling. Telling in a simple way. Most importantly it can highlight how demand for a type is waning.
A key part of the Jet Owner Index is taking a specific make and model, then compare it with others in the same category and class. If you see a big divergences, probe deeper. No matter how strong the emotional tug might be for that beautiful Gulfstream, resist! Remember what the data is telling you and take a 24 hour break from the hunt.
Do that and you’ll find that the table above will corroborate such a story. When everyone wanted them, they were chartered out, and the for sale listings were short. Or… you’ll find the opposite or a variation thereof. Either way, the table’s result will make sense in a historical context.
Certainly the Lear 60XR had its day. But that day was long before Bombardier desparately slapped an “XR” on its jet.
Good marketing can’t hide obsolescence forever.
Does aircraft evolution, value, and technological things get you out of bed in the morning? Me too. Don’t hesitate to contact me via email at email@example.com or text me at (617) 901-3245. We are developing financial, acquisition, and management models for flight departments of all sizes.