Economy clouds outlook for aircraft acquisition
It is the best of times to purchase a business jet…and the worst of times to finance it. That was the message to the 23 attendees at the ninth annual Conklin & de Decker Aircraft Acquisition Planning seminar, held recently in Scottsdale, Ariz.
The meeting provides operators with strategies to select and acquire aircraft for business and teaches them how to maximize the return on their investment and minimize costs by choosing business models best suited to their needs. This year, of course, the slowing economy loomed large, and the presentations emphasized how owners could ride out the financial liquidity crisis.
According to a UBS Investment Research report issued at about the time of the seminar, “Business jet financing appears to be drying up, threatening backlogs,” and “pre-owned business jet inventories are now 62 percent higher than year-ago levels…” Michael Amalfitano, senior v-p of corporate aircraft at Bank of America, noted that dips in housing and retail activity are driving the uncertainty throughout the credit markets, “the same as we’ve seen in previous downturns. All this creates fear, which in turn creates lack of investment and the cost of capital rises.” Amalfitano noted trends toward interest-rate volatility with continuing “flight to quality” in which lenders “become more selective about who gets money.”
He said the business jet market, historically cyclical, tends to lag behind the economy as a whole by 18 to 24 months, as happened when corporate profits bottomed in 2001 and the business jet cycle hit its low in 2003. “We’ve been here before,” Amalfitano observed, predicting that “2010 might be the bottom,” based on previous cycles.
The Bank of America exec forecast a continuing increase in pre-owned inventory this year, including new aircraft going on the market soon after delivery. He said the liquidity crisis is complicating acquisition financing for those who can qualify, with more contingencies and conditions written into purchase contracts, and financing for progress payments harder to obtain. Amalfitano added that more thorough background checks and greater credit due diligence are producing longer lender response times, and he advised prospective buyers to begin the process sooner than was previously necessary.
Turning to light amid the gloom, he said delayed purchasing decisions might bring about attractive deals as “the disconnect between buyer and seller expectations” shrinks. Already, he noted, “Buyers are starting to jump in as sellers make adjustments in their expectations.” He predicted that “capital will loosen up as banks and other institutions decide what kind of businesses they want to be. In 2009 the syndication market will open up.” Amalfitano concluded, “We [Bank of America] are open for business. We haven’t stopped writing business, but we’re more client-centric,” meaning that it is focusing its efforts on well qualified prospects.
How Bad Is It?
The current economic climate is “nowhere near” as bad as it could get, said Bill de Decker, the company president and cofounder. As an example he recalled the situation when he entered aircraft sales nearly 40 years ago, coming from Boeing to the newly formed Falcon Jet. “The bottom [of the used aircraft market] came in ’72, when a four-year-old Falcon 20 with 800 total hours, which sold for $1.3 million new, went for $650,000. Then Fred Smith bought 20 Falcon 20s to start FedEx and that took care of the used Falcon inventory.”
Commenting on what appears to be an emerging buyer’s market, de Decker cautioned, “Don’t get taken in by the first good deal that comes along. Financial analysis is necessary to take advantage of buying opportunities.” However, he noted that current financial markets limit aircraft acquisition options. “The money is out there, but you may not like the terms. Financing for buying or leasing are essentially not options in today’s money market, but you can still buy.”
He went on to explain the basic financial analysis tools–life-cycle cost, cash flow, time value of money and net present value, all of which translate to return on investment. Finally, even though his company provides comparison and analysis software for aircraft acquisition, de Decker cautioned against over-reliance on the technology. “Don’t ever let the computer make the decision for you.”
Bill Quinn offered buyers and sellers advice on how to work with an aircraft broker, who, he said, should serve as a consultant. Quinn, with aircraft broker/dealer Cerretani Aviation of Mount Pleasant, S.C., told sellers that aircraft dealers are generally more knowledgeable but “if you’re selling an aircraft through a dealer don’t expect to get market price.” He recommended the services of an aircraft broker/dealer who combines the expertise and resources of a dealer with the personal interest of a broker. “Today’s market requires a lot of different disciplines,” including finance and legal, he explained.
Quinn insisted that “in a precipitously dropping market” the broker must keep clients informed and not create unrealistic sale price expectations. Instead, he should advise a price that will create a sale in the short term. He observed that Cerretani Aviation is “essentially in the leasing business today since three of our clients are trying to sell aircraft without success because they’re upside down on their loans.”
Quinn advised buyers and sellers to determine, before engaging a broker, not only aircraft mission requirements but short- and long-term financial targets, operator internal resources and expectations. Sellers in particular should assemble all available aircraft documentation well in advance. He minimized the need for a formal appraisal in the present market environment. “Today it’s only good if you’re looking to plan or strategize. Next week the value may be different.”
Know Thy Customer
Jay Mesinger, owner of a Boulder, Colo.-based corporate jet sales operation, outlined for an audience heavy with representatives of corporate flight departments and aircraft management companies the pros and cons of air travel options: airline, charter or aircraft ownership. Mesinger said knowing customers and what they expect from air travel is critical to the final decision of “how to own” and “how to operate” one or more aircraft. Discussing aircraft values in a distressed economic environment, he noted that there were approximately 1,000 more aircraft for sale “than at this time last year.”
Noting that deals are there for buyers who can “demonstrate your ability
to close a purchase agreement,” he point- ed to an increasing selection of new air-craft. “As of Novem- ber 1, Cessna found 35 delivery positions [for Citations] up to January 2009 already listed for sale.” Several seminar speakers agreed that airframe OEMs are likely to see decreases in their order backlogs due to delivery position cancellations, and they expect an increasing inventory of “young” pre-owned aircraft as buyers resell airplanes soon after taking delivery.
Former Kodak flight department executive Leonard Beauchemin discussed asset management as an all-encompassing strategy for sustaining or enhancing the reliability, utility and/or financial value of an aircraft.
Beauchemin, now a principal in an Atlanta-area consulting firm, said an asset management plan actually has three lives: a utilization life, a financial life and a physical life. The first is anticipated at purchase and is affected by factors that include flight hours, cycles, calendar age and reliability. Financial life encompasses a lease term or purchase agreement, tax depreciation, book value and market value. Physical life can be reflected in quality of condition and/or configuration, cabin or mods to accommodate a specific mission.
Beauchemin said that each “life” requires planning and meticulous record-keeping to ensure regulatory compliance while protecting reliability, capital value and liquidity. “You will liquidate every aircraft eventually. As part of a crisis management plan,” he advised aircraft managers, “you should be prepared for a sudden liquidation order” from above. “Absence of an asset management plan will always produce a surprise,” he added, concluding, “Hope is not a plan! Luck is not a strategy!”
Match Aircraft and Mission
The sudden change in the economic environment has made the choice of the right aircraft more important than ever, warned Conklin & de Decker part owner David Wyndham. He urged “a right-sizing exercise” using detailed analysis of the buyer’s projected mission profile and passenger base.
Prospective buyers should ask, “Where will the aircraft fly? Who will be riding
in it? How many and how often?” He showed how software like his company’s Aircraft Performance Comparator can provide discriminators to help determine the cost versus benefit of more seating and non-stop range vis à vis a slightly smaller, shorter-range aircraft, which previously might not have been such a necessary consideration.
He suggested compiling a list of evaluation parameters and then “whittling down the candidate aircraft to those that best meet the most parameters.” Ultimately, according to Wyndham, the choice should hinge upon required versus desired based on the mission as defined by frequency, destination, distance, average and peak number of passengers.
Brandon Battles, a Conklin de Decker part owner, commented that evaluating aircraft operating costs is a complex and often misunderstood process. He noted that fully identified annual operating costs range from 43 percent of a used large bizjet’s purchase price to 86 percent for a used turboprop twin. Battles defined and explained variable (hourly) and fixed costs and how they relate to direct and indirect costs. He recommended guaranteed maintenance programs (“power by the hour,” for example) to smooth out peaks and valleys in annual costs and provide accounting predictability.
“But you should ask what is covered and what is not. What are the real benefits? You should be aware that such programs often exclude operator-caused maintenance costs or acts of nature such as hail.” His bottom line advice: Having better control of flight department activity and documentation will better equip the manager to justify the operation’s costs and tasks when confronted by a corporate bean-counter.
Let’s Have a Look
Lee Rohde of Portsmouth, N.H.-based Aviation Management Systems, explained the importance of a proper pre-buy inspection. While not legally required, the pre-buy can be valuable to a buyer in screening prospective aircraft. His company’s insistence on a pre-buy inspection for the client has terminated three deals in the last year, he said.
Typically the buyer assumes the cost of moving a corporate
jet to the inspection site while the seller pays for required corrective maintenance. “We haven’t seen a lot of transactions lately,” he added, “but it’s a buyer’s market. You can insist on a lot of corrective actions.” He also recommended having inspections done by a facility other than the one that has been maintaining the aircraft.