While new and like-new business jets dominate the evolving Chinese market, it won’t be long before a market for preowned jets will emerge, with current owners looking to trade in their airplanes for newer, likely bigger, ones. But will they have maximized their old aircraft’s residual value?

Here at ABACE 2012 yesterday,  Jay Mesinger, president and CEO of J. Mesinger Corporate Jet Sales in Boulder, Colorado, moderated an educational session on the infrastructure requirements for business aviation.  He spoke about valuation of aircraft for buyers and sellers.

“Countries where the business aviation industry is just getting established, such as China and India, understandably do not have extensive used markets yet,” Mesinger told AIN. “So many owners and operators don’t know what they need to do to maintain the value of their very expensive aircraft assets.”

Market conditions are always an important factor in aircraft valuations, and in the boom years before 2008, many owners saw the market price of their aircraft actually increase. Conversely, all preowned business jets lost value after 2008 and prices of some models are just now starting to claw their way back up.

Doing the Right Things

“Our marketplace has had huge price and value swings over the past few years,” Mesinger said. “No owner has been left unaffected. Doing the right things to keep the value of your aircraft as high as possible has never been as important as it is now.”

One of those “right things” is doing all scheduled maintenance, but some first-time owners in emerging markets are not following manufacturers’ recommendations. “If an owner has never sold a preowned aircraft, he doesn’t know how this affects value,” warned Mesinger.

Improper record-keeping is another value killer, including tracking parts that have been replaced.

Lack of paperwork on parts can create a concern that counterfeit parts have been used because there’s no proof that authorized parts have been used. This makes buyers of preowned aircraft nervous.

Modifications and completions work done after the owner has taken delivery of an airplane needs to be documented, too, specifically with a Form 337 from the U.S. Federal Aviation Administration. “This is one of the most misunderstood factors, even by reputable non-U.S. service organizations,” Mesinger said. It’s not that Mesinger disregards the credibility of authorities in other countries, but it is simply that the FAA does not accept repair work unless a Form 337 is completed. “The aircraft will cost thousands of added dollars to put it on a commercial certificate, if these common and customary practices are not followed,” he said.

In another example, “the smell of highly caustic glue hit us over the head” when opening the door of a Dassault Falcon 900EX EASy, he said. The European owner had engaged a local furniture upholsterer to cover all the seats in the cabin with new leather, but apparently had not appreciated the effects of the unapproved adhesive in the confined space of an aircraft cabin. Nor had the owner any idea that civil aviation authorities have strict regulations regarding the suitability and flammability of materials used in aircraft.

Value Killers

Other aircraft value-killers include environmental ones. “In the U.S., business jet owners typically want their aircraft to be hangared when they are not flying,” said Mesinger. “In emerging markets, however, there are few hangars available, so the airplanes sit outside.” This has a negative effect on the paint life of aircraft, as well as increasing the risk of corrosion on the metal underneath the paint, especially around antennas and other protuberances.

Also, if cabin window shades are not pulled down when an aircraft is sitting outside, interior fabrics and leather deteriorate faster. Direct sunlight and excessive heat can also damage or reduce the life expectancy of cockpit avionics. “So preowned airplanes that are not hangared will get a hit on valuation,” he said.

Finally, Mesinger told AIN, “One question we have learned to ask before we travel thousands of miles to see an aircraft is: ‘Do the owners or passengers smoke inside the aircraft?’ For potential buyers, the foul odor of old smoke may mean that a new interior is required. And smoke may also decrease the life of some avionics. Both factors will reduce the resale value of the aircraft.

“As secondary markets begin to emerge in China and other countries, I have a feeling owners will begin to see how each of these areas gains importance in the residual-value discussion,” Mesinger concluded. “To have a sustainable market in these regions, the assets will have to hold their values and, for them to hold their values, they must meet the same standards as those markets that already have mature and vibrant secondary markets.”