Private jet for sale? Consider the dollars you’ll put in versus the ones you’ll get out.

Case Study: A 1991 Beechjet 400A Refurbishment

One of the inevitable realities of machines is that they age. In aviation age is compounded by rapidly evolving upgrades to the avionics, better digital management of engine controls and passenger comfort where noise, connectivity and amenities simply become the standard in the newest aircraft that hit the market.

In the case of a 1991 Beechjet 400A – the aircraft began its life at $4.75MM USD (in 1991 dollars) and then rode the roller coaster of depreciation down to today at roughly $500,000. Our case study aircraft had the additional onus of coming due for A through D checks, engines and in dire need of an interior refreshment. It had been through a substantial avionics upgrade in 2005, so there was at least a reprieve from the steam gauge centric panel that it left the factory with, but the reality was that with the additional burden of run out engines and the major periodic inspections coming due, it was worth approximately $120,000.

Who Would Buy That?

When an aircraft is days from being unairworthy, or is parked somewhere and has engines that need to be run every 2 weeks for their internal well being the owner is typically left in a position where they have fewer options than they may think. While the title implies that “sale” is a real possibility, it isn’t when you have the perfect storm of everything coming due. The buyer for the airplane knows that you have to spend (as they will) so even though appraisers will have the aircraft at $120K, the fact is that the fly away price could be 1/2 of that. Parts dealers – the “scrap” option – are sometimes willing to offer as much, but in periods of weaker demand, or for a less popular airframe, you could be looking at 10% of its value. In the case of a 1991 Beechjet 400A, a salvage yard offered 25% of its appraised value and would have fetched the aircraft on a flat bed truck for its voyage to the land of organ and other parts harvesting.

So in many cases, just to ensure the sale of the aircraft, some money is spent for some marketability and longevity. In the case of the 1991 Beechjet project, we went a step further and looked at the charter market, since the Beechjet, now known as the Hawker 400XP, was a current production aircraft until 2009 and the charter market was healthy. This translated into an income potential of each non-owner hour putting $2000 (after re-marketing and management fees) back into the owner’s pocket.

After deliberation of what had to be done, how to get engines that would be appropriate for its age and other careful future crystal ball hedging analysis – the decision was made to do the interior, re-engine the aircraft and complete the A through D checks.

Protecting The Downside

The reality with any improvement job, whether it is your home or aircraft, you simply don’t want to put all new windows into a shack and expect it to affect its value – it is still a shack. Aircraft, however, are a much more emotional target and frequently have too many factors driving the decision making that can quickly leave an owner completely upside down in their aircraft financially. This risk is compounded when you accidentally find it at a shop that is all about them and not you. (e.g. Would you bring a Model T hobbyist project to the Ford dealership?)

When the aircraft is fully depreciated, you make the minimal investment and ignore the sales trickery around safety, what everyone else is doing and buying. An engine is an engine and certification is there to protect you. Resist the temptation to put new windows in a home that simply won’t give you the money back at time of sale.

In the case of a $120,000 Beechjet, we estimated that its future resale figure would be somewhere between $300,000 and $500,000 depending on demand at the time of sale.

Doing The Math

While a crystal ball element is required for deciphering what the future might fetch for the aircraft, a parameter that is controllable is how you go about your upgrades. After careful evaluation of income potential it was determined that if marketed properly the aircraft could generate $900K over three years post refurb. Knowing this helped us then back into a “sanity cap” of just how much should be invested in the aircraft to get more good years of use.

Given that most of that gross income is consumed by the aircraft’s variable and fixed costs – the net to the bottom line is approximately $225K. However, the key factor, from the owner’s perspective is that their own cost per hour also drops during this period since the inbound cash flow acts as a subsidy to the overall operation of the aircraft. The upside? The old airplane is kept, the corporation has increased use of an existing asset and most importantly gets to continue benefiting from large capital depreciation, while also getting the benefit of the income in these waning years.

Math Overview:

$120,000 aircraft value September 2014

{Conduct A – D checks, interior, WIFI, engine overhaul, etc.}

$920,000 aircraft balance sheet basis January 2015
$650,000 aircraft appraised value January 2015
($270,000) real market valuation lost via improvements

$225,000 net income (25% of $900,000 of charter revenue over 3 years)

$45,000 total cost for continued use of aircraft 2015 through 2018

The magic in the numbers above is even more interesting when you consider that much of the $900,000 of charter income is also going towards the much more taxing fixed costs that business aviation suffer from. Unlike their airline cousins, their hourly use (typically 400 per year or less) is low enough that the big fixed costs aren’t typically offset by whatever meager charter income there is. In the case of an aircraft that has nothing left to lose, however, every bit of this revenue is a win.

In short the corporation got the aircraft refurbished for $45,000 net of the future income and also lowered its own hourly use by amortizing its own flying over many more airframe hours accumulated per year.

Why Doesn’t Everyone Do This?

The fact is that business aviation aircraft use is driven by many factors – the primary one being that it is available for upper management on a truly flexible schedule. A schedule that isn’t predictable and requires long wait times on location, while deals are struck, meetings conducted, etc. precludes any income opportunity that would make a dent in the overall operating budget.

However, many jet owners are forward thinking enough to even put their own use priority behind that of their aircraft manager so that their own flying is subsidized to the maximum extent possible.

Another key consideration is the operational framework that you enter, once the aircraft is operated for hire under Part 135 vs. Part 91 (a private aircraft, regulated to a less stringent set of standards). Once you are flying under Part 135, it is a different ball game, and mostly for the better. Not only from a tax perspective, but also from a liability perspective when it comes to operational control. But 135 operations aren’t for everyone – they come with more stringent maintenance, rest and oversight commitments for the operator.

Time for a Make Over

If you own an aging jet, but your bonds to it are strong and there’s no reason to send it out to pasture, be sure to research what your options really are. The reality is that many aircraft, not just the Beechjet, offer airframes that have lived multiple lives providing safe, efficient and financially astute passage for their owner.

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