Commerce, COVID and Calm

Aircraft Value: Obsolescence and Depreciation ยป Jet Owner Group
Quiet Runway: Hilton Head, SC

When the music stopped, the US turbine aircraft market was arguably already a little fat. And by “fat” we mean: Lots of underutilized inventory, lots of bank exposure and a growing book of unsold new aircraft.

You may have heard the pilot expression:

“Fat, dumb and happy.”

It is the condition known to many of us, up in cruise, with the cabin temp just right, the autopilot doing its job and you fighting off sleep as the sun streams in. To be blunt, our entire society might have been in this spot.

Sequestration and Rumination

Full on COVID19 sequestration spurs the recurring and nagging questions:

What next? And when is “next”?

If only there was a crystal ball, index, or trend indicator we could trust. And why didn’t Bill Gates make more noise at the last board meeting?

For some, owning a private aircraft is a luxury that is manageable so long as the economic winds aren’t hostile to our balance sheet and income statement. For others, it is paid for, has very little overhead (relative to other things) and provides immense convenience and value.

We’ve been fortunate to have advised the full spectrum of the above. Having weathered three minor (by comparison) economic land mines in the past 30 years, here is some perspective:

  • This is not a typical land mine.
  • Business aviation utilization and ownership models were already seeing a major overhaul – they’re now in warp drive.
  • Luxury and private aircraft are a sensitive economic barometer – arguably the most sensitive – pay attention to transactions and utilization.

While smart business aviation concepts were already transforming the landscape, this new pressure will accelerate the inevitable next phase.

Let’s analyze what that could look like, how to get on the right side of history and maximize your position given that the coming period will create opportunity.

Decisions

When is it time to sell?

If you own an aircraft that doesn’t fly much (200 hours or less per year), has low total time and is a relatively late model, you’ll probably want to consider selling the aircraft sooner than later.

The economic winds that are coming are not the friend of your low time, late model airframe. In fact, your low time, late model airframe, has seen its best days and the coming years won’t be friendly to its market value.

It’s appeal will shrink to a marketplace of fewer buyers that are retrenching. Early April 2020, saw the tipping point of longer days on market, severe price cuts and other incentives to move inventory. This trend will accelerate as the marketplace faces the basic challenge: Too many used aircraft, too many unsold new aircraft and plenty of good serviceable charter aircraft.

Average days on market will triple and pricing haircuts to previously appealing models will vary between 30% and 50%.

Hold: The Part 135 / 91 Charter Managed Aircraft

As the fiscal environment tightens on luxury goods, the benefit of being a defacto “air carrier” will afford aircraft owners things their accountants never thought possible.

If you own an aircraft that flies a lot (500 + hours per year), is fully depreciated and has a smidge of charter income, you are in a better spot.

While more aircraft might flood the market for sale, driving your value even lower, one dynamic remains: Road shows, acquisitions, management teams, and other groups are going to be renting King Airs, PC-12s, Hawkers, Citations, Phenoms and Challengers at a greater rate than we saw pre COVID. It is a fact of unstable times: On demand aviation tends to get busy.

But how and why? Chartering aircraft, even up to 200 hours per year, is much cheaper than keeping one watered and fed for the occasional flights.

Economic blight assures us of one thing: Get the aircraft off the books. “On demand” aircraft use spikes in times of crisis. As balance sheets melt globally, those who have no choice but to go point to point, with the family, group or team, will have to rent now that they don’t own.

If you don’t have a relationship with a regional or national Part 135 aircraft management company, now would be a good time to start that investigation.

Time to Buy

You’ve been on the fence for years. And like many, you’ve been waiting for the right opportunity. So now you have one. If you are patient and can wait another 3 to 6 months, you will get the discount that makes it work.

The benefit of extreme pressure is that a marketplace littered with too many golden chariots makes them ubiquitous. Ubiquity is your ally for your next acquisition. Use it and consider these key questions:

  • Cost: True DOCs – What is the actual direct hourly operating cost? Not the seller’s disclosure, or even industry publications, but numbers from actual operations? And what does all the overhead look like?
  • Utilization: What is the flight activity of the type on a monthly or annual basis? Are they flying a lot, relative to their peers?
  • Crew: What is the pilot pool for this type like? Will the crew training cost $40,000 and be impossible to schedule, or are there legions of prequalified people geographically near you?
  • Income: Does the make and model show charter affinity – in other words do charter companies operate many of the type? Or are they unloading them?
  • Trends: Technological obsolescence – Where on the scale of evolution are the engines, airframe and family of related aircraft?

Next Move

The above is a quick overview of typical paths.

However, aircraft market valuation, trends and planning are specific to aircraft owners, markets and geography. If you’d like to set time for a consultation, click here to schedule some time.

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