How Engine Programs Affect Resale

One of the most common questions we get at Guardian Jet is “should I enroll my airplane on an engine program?”  The majority of the time this question has to do with the resale of an aircraft.  Will it sell faster?  Does the buy-in cost really get fully recouped when it sells?

The answer, like many others in aviation, is “it depends.”

Aircraft Model

Whether or not you should enroll your aircraft is mostly based upon which aircraft model you own, and specifically how the market for this model is reacting to engine programs.  Here are some of the metrics we track to help us make this determination.

  • What percentage of aircraft for sale are enrolled?  How does this compare with the percentage of recent sales?
  • Are buyers paying a premium for engine programs? A discounted rate?
  • How long have aircraft been on the market with an engine program? Without?
  • For the recent sales, how long did it take to sell aircraft on an engine program? How long for no program?

As an example we will take a look at the G450 market.

Current Market Enrollment (Number for sale enrolled/total number for sale)

G450: 10/20 (50%)

The G450 market is split with half the sellers enrolled in a program, but how does this affect buyers purchasing behavior?  Compare this percentage to the same calculation with recent sales.

Previous 6 Months Sales Enrollment (Number sold enrolled/Total number sold)

G450: 3/9 (33%)

In the past 6 months the market has been favoring aircraft not enrolled on a program with 6 out of the 9 last sales not enrolled in a program.  While this provides an important snapshot of the current buying tendencies we don’t want to overreact to the data due to its small sample size.  For example, over the past 24 months 14 G450s have sold with an engine program compared to 15 without, closely resembling the 50% market enrollment much closer.

Engine program selling at a premium or a discount?

When Guardian Jet values an aircraft the penalty for not being enrolled in an engine program is equal to the buy-in to the program.  When we look at recent sales we also look to see where aircraft enrolled and aircraft not enrolled are selling in relation to their Aircraft Value Calculation (AVC).

In the previous 6 months of sales in the G450 market, aircraft on an engine program sold at 97.8% of their AVC.  Aircraft not on an engine program sold at 100.8% of their AVC.  Over the past 6 months aircraft not on a program have been selling a slightly higher percentage of their AVC.

Days on the Market/Days to Sell

At Guardian Jet we track two statistics when determining how long aircraft are sitting on the market.  The first is how long the aircraft currently on the market have been for sale. The second, how long it took the most recent aircraft to sell.

G450 Average Days on the Market

On a Program: 302 Days

No Program:  278 Days

G450 Average Days to Sell (Past 6 Months)

On a Program: 173 Days

No Program: 134 Days

G450 Average Days to Sell (Past 24 Months)

On a Program: 221 Days

No Program: 258 Days

Recent statistics once again show an advantage to aircraft not a program with the aircraft selling in a faster period of time.  Interestingly, however, when we look at 2 years of data the advantage is with aircraft on a program.

Let’s summarize our G450 market findings:

Current Market Enrollment vs. Recent Sales Enrollment:

Slight Advantage to Not Enrolled

Recent Sales Pricing:

Slight Advantage to Not Enrolled

Days on the Market/Days to Sell:

Neutral (Recent Activity favor not enrolled while Historical favors enrolled)

Right now the G450 market data suggests buyers are slightly favoring aircraft not on an engine program, but not significantly.  To make a recommendation as to what to do with your aircraft we have to take into consideration a couple of other factors.

The G450 market is only one market and this is only one snapshot in time.  Every market reacts differently to engine programs and they must be studied to make an informed decision.

Other Considerations

Where your engines are in relation to overhaul can also effect our recommendation to enroll.  If the engines are right up against an overhaul the majority of the time we will recommend putting them on the program.  Buyers tend to penalize aircraft up against an overhaul more than just the cost of the overhaul (which will be roughly equivalent to the engine program buy-in cost).  Conversely, if you have on condition engines that are past the hard time equivalent for overhaul it typically makes little sense to enroll in a program.  The cost to buy in to the program becomes more expensive than the overhaul.

If the program buy-in costs seem overwhelming but you’re in a market that has an advantage to aircraft enrolled one option is to enroll at closing.  The aircraft can be marketed as “delivered on an engine program.”  This will satisfy buyers wanting an aircraft enrolled on a program and you can enroll at closing with the proceeds from the sale.  This also gives you flexibility if you find a buyer that does not want an engine program.  One downside to this approach is if something is found in pre-buy you are not covered in the program but are still going to pay the enrollment costs.

Engine programs will occasionally offer significant fleet discounts if you are willing to enroll multiple aircraft at once, especially if you are willing to enroll new replacement aircraft on the program.  This can make it advantageous to buy-in at the lower cost while the market gives you the full benefit of the program.

All things being equal we still like aircraft enrolled on an engine program.  Engine programs are getting more popular as time goes by.  I’ve taken a significant number of calls from buyers looking for an aircraft enrolled on a program I’m still waiting for the first person to ask for an aircraft not enrolled.

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The Treasury Function Belongs in Fleet Planning

The purpose of this article is to encourage the idea of syncing how your company views capital expense to your fleet plan.Treasury belongs in fleet planning because it yields a more nimble, valuable asset (your airplane) which can result in a lower life cycle cost.

In the past, it was not uncommon for aviation to have very little to do with any of the discussion about cash, finance, book depreciation schedules or leasing.  Aviation managers, when included in the equipment decision, were sought to discuss the appropriate type of aircraft to fly and the best practices to operate safely.  Once acquired, as delivery approached, Treasury was included and the decision to pay cash, finance or lease was made in purely financial terms.  Book depreciation schedules were often as conservative as possible in order to preserve earnings and not considered again until it was time to sell.  At that time the loss or gain was trued up, often coming as a surprise in either direction.  Lower book depreciation also favored the aviation manager that was absorbing that expense in the flight department budget.  Aviation managers are often consulted on participation in engine programs but often times it is from a cost perspective as opposed to enhancing aircraft value.   We want to discuss the advantages of bringing all these topics together.

Let’s review some definitions we need in this conversation.

Cash purchase:  We pay cash for the airplane, it’s an asset on our balance sheet.  The plane is expensed to the P & L over the life of the asset through book depreciation.

Debt purchase:  The aircraft is financed with debt, the plane is still an asset on the balance sheet, it just has a corresponding liability equal to the size of the loan balance.  In addition to the book depreciation  like the cash purchase, the interest on the loan is also treated as a P & L expense

Book Value:  We develop a book depreciation schedule for this particular class of asset that attempts to match the value of the asset to the market.  A typical schedule might be 20 years to a 50% salvage value.  Ex: $10M airplane, Annual Book depreciation =.  ((10,000,000/2)/20) = $250,000/year.  At the end of the first year, we would have expensed $250,000 on the P & L and we would have an asset on our books for $9,750,000.  If we sold the airplane on the first day of year 2 for $9,650,000, we would take an additional expense for the book loss of $100,000.  If we sold for $9,850,000, we would incur a $100,000 profit on the sale and it would be treated as ordinary income.

Tax basis:  For the purposes of calculating income tax, the IRS allows an accelerated tax depreciation schedule that allows a 5 year write off for Part 91 aircraft (5 year MACRS actually takes 6 years and the annual deductible expense schedule y1-6 is, 20%, 32%, 19.4%, 11.4%, 11.4%, 5.72%, __%).  The larger the deductible expense and income tax bracket, the larger the incentive to replace equipment for companies with profits to offset.  When a fully depreciated asset is sold, income tax is due on the gain of the sale unless the gain is deferred in a 1031 like kind exchange.

Aircraft Lease:  In a traditional operating lease, a third party lessor steps in, buys the airplane and leases it to the operator.  This allows the operator to not show the airplane as an asset of the company.  As such, it does not depreciate the asset from either a book or tax basis.  The capital expense to the P & L is simply the sum of the annual lease payments.  Leases typically have fixed terms and the ability of the lessee to walk away at the end.

Residual (Terminal) value:  The amount the airplane is worth at the end of the period of time being considered.  This is either a projection based on historical data in an ownership scenario or the calculated purchase option at the end of a lease for the Lessee if Lessee would prefer not to just toss the keys and walk away.

Fleet plan:  Determine the right aircraft, the right number of aircraft and the right timing for aircraft replacement.

Now let’s look at some of the issues we want to consider as aviation managers that are managing assets.

Optimal ownership period

In addition to the right aircraft and the right number of aircraft, it is integral to fleet planning to consider the replacement schedule for the existing equipment.  When aircraft replacement is not being driven by negative factors, obsolescence, poor reliability, near term significant maintenance, poor company performance, public opinion lately, it begs the question, “What is the optimal ownership period?”  Understanding treasury functions is crucial to this.

When deciding how often to replace, an obvious starting point is every five years.  That is when tax depreciation benefits are essentially gone.   Five year warranties from manufacturers keep operating cost lower during that period than subsequent years.  Residual values are higher with lower time equipment than older aircraft.

From a cash flow perspective, before considering the time value of money, life cycle costs almost always point to replacing in five years.  Depending on the discount rate as the cost of capital, that period of time can stretch out to 7-10 years as an optimal ownership period.   Defining that period of time to own, using treasury’s capital expenditure criteria, can’t be done without being attune to the finance function.

Paying Cash vs Debt

Paying cash for an airplane yields the most flexible approach to managing an asset.  The down side is the opportunity cost of the money and the competition for capital vs. investments that earn returns.

Understanding Net Present Value (time value of money) analysis for capital expenditures can help the case for debt vs. cash.  In low interest rate conditions, financing will always beat cash purchases in an NPV comparison.  It’s true that in out of pocket terms, interest always adds to the life cycle cost but it wins the NPV math due to the return on the capital that is preserved by not paying cash.

When considering debt which carries amortization schedules and potentially balloon payments, the current aircraft value calculation and projected aircraft residual values during the ownership period need always be considered in relation to the unamortized balance of the loan.  This allows an asset manager to see where he stands in relation to current market conditions and what he owes.  Any asset with a positive relationship between aircraft value and loan balance is a more liquid, or nimble asset as discussed in the opening.

Book Value – creating schedules and keeping them current

Another important liquidity feature for treasury is the relationship of aircraft value calculation and book value (mark to market).  Again, an aircraft value that is lower than book yields a hit to earnings which is a detriment to selling even if other factors favor it(less liquid).  Also, even if there is agreement to sell, there can often be disagreement about publishing an ask price below the value of the asset on the books which will cause the asset be considered impaired(FASB 144) and immediately written down, often months or quarters before a sale is realized.  Keeping the book value in sync with the market value yields a more nimble asset.

Staying right side up

Being “upside down” in a loan or book conversation can often drive strategy that makes the airplane more difficult to sell.  I am not discussing liquidity in it’s purest academic sense which is the time and ease of converting an asset to cash.  I am using the term because of our familiarity with liquidity.  I prefer the term nimble because always truing our current aircraft value calculation to book and amortization schedules over the life of the asset, gives us more flexibility and options.  The significant savings that come to the asset manager are from more dynamic market opportunities as opposed to non starters that take us by surprise.  Staying in an asset because of a hit to earnings or cash is a trap that we want to avoid.  If we can’t avoid it at least we need to be prepared with a contingency plan.

Leasing

Let’s look at leasing as a great way to avoid the two traps we just discussed.  All of our exposure in owning is relative to poor resale markets that make the airplane less than we thought it would be in the future.  A great way to avoid those threats is to lease.  Leasing spreads our capital cost over time, fixes our replacement term, has all the NPV advantages that debt offers and allows us to throw away our crystal ball about future values.

There are two downsides, first, life cycle cost goes up, meaning out of pocket cash and the corresponding aviation budget.  Second, you trade liquidity for predictability, our nimble factor.  If something happens to change the mission or requirement for the airplane, the lease still stands.  So this conversation certainly belongs in fleet planning which led us to say, in our opening remarks, if we choose a fixed term, it is done proactively.  We pay expensive early termination values to get out early, so we can be stuck, by choice but still stuck.

Engine Programs

Engine programs produce equity which can be transferrable and keep the airplane in the economic equivalent of zero time engines as long as the hourly fees are being paid to the engine program administrator.  While it is fairly easy to calculate the buy in to an engine program, there are times during the life of the engine where buying in is, neutral, favorable and unfavorable.  In unfavorable conditions, there can be negative consequences to for the owner resulting in a less liquid asset.

Winning means spending less.

Let’s define winning, it is spending less over the life of the asset since this a non revenue producing asset.  While our goal is to spend less, we still have the biggest impact on that by taking advantage of market opportunities.  Market opportunities that create the largest win for operators do not occur at predictable, foreseen times. As we create fleet plans, we are not privy to new product announcements, precipitous economic changes, new regulatory requirements, changes in our own company circumstances or the economic condition of aircraft manufacturers.  Private jets are certainly amongst the most elastic capital goods.  This elasticity is what compels us to focus on the liquidity of our asset.  A well managed asset within a current and vibrant fleet plan should always be evaluated as to replacement opportunities.

By keeping an asset in a condition in which it has fewer barriers to trade, it is more likely to always be able to take advantages of replacement opportunities as they arise.  The treasury function belongs in the fleet planning process.

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G550/G450 Pre-Owned Market Update

Overview

The Gulfstream G550 and G450 markets are both very active markets.  The pre-owned markets are being directly affected by Gulfstream’s pricing of new aircraft.  Right now Gulfstream has between four and five quarters of backlog in the G550 and G450 markets.  This is much lower than the two years they typically have.  Historically when the backlog shrank to these levels Gulfstream would become very dynamic and lower pricing to increase the backlog.  Currently, however, Gulfstream is holding new pricing stable and this is fueling high activity in the pre-owned market.

At Guardian Jet we like to separate the market into categories:

  1. Near New – Less than 3 years old and 1,000 hours
  2. Slightly Used – Less than 5 years old and 3,000 hours
  3. Used – Older than 5 years or more than 3,000 hours

 

Market Summary

G550

The G550 market is one of the strongest resale markets in aircraft.  With 439 aircraft in the fleet and 21 for sale, there is 5% of the G550 market for sale.  At Guardian Jet we view a typical market as having 10% of the aircraft for sale.  The G550 with 5% for sale is a seller’s market, though the percentage for sale is rising.  In the third quarter of 2013, there were only 11 G550’s for sale, almost doubling in the past 6 months.

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G550 Number of Aircraft For Sale

In the 1st quarter of 2014, 4 G550’s were sold.  This is, as expected, down from the 7 sold in the 3rd and 4th quarters of 2013.  In comparison, however, the 1st quarter of 2013 had only 1 G550 transaction.  With 4 aircraft with deals pending, we expect the G550 market to continue to be a very active market through 2014.

G450

The G450 market has also had a very active start to 2014, with 5 sales in the 1st quarter.  The 1st quarter activity has shrunk the number of sale down to 16 aircraft, equating to 6% of the fleet.  Over the past 4 quarters the G450 market has averaged just fewer than 5 transactions per quarter.  In comparison the previous 4 quarters before that averaged fewer than 3 transactions per quarter.

The G450 market saw its value drop $4-5M from the 2nd quarter 2012 to the 2nd quarter 2013.  Since then the market has stabilized and is depreciated around $1M in the last 4 quarters.

Image

Near New

G550

The near new G550 market consists of only two aircraft available for sale.  A 2011 G550 for sale has 400 hours on the aircraft is asking $51M and a 2013 aircraft with 320 hours is asking $54.2M, very close to new aircraft pricing.  Typically, when near new aircraft are put on the market they demand close to new aircraft pricing because they are available without a wait for the manufacturer backlog.  Currently, however, the short Gulfstream backlog may shrink the desire to pay new aircraft pricing for a used airplane.  To give you a baseline, a 2009 model with 550 hours sold at the end of last year for $40M.

G450

The G450 near new market is only one aircraft, a 2012 with 350 hours, asking $32.5M.  This ask price reflects the short backlog Gulfstream has slightly more accurately.  Gulfstream is currently quoting around $36M-$37M for a new G450.  The aircraft is owned and operated out of Bermuda and is JAR/OPS1 capable.  This can be a benefit down the road when it is time for resale of the aircraft, but can also provide additional costs importing the aircraft into the United States and getting the aircraft certified by the FAA.

Two of the four most recent G450s to sell were both near new.  Both 2011 aircraft with 700-800 hours, they sold for $29.25M and $27.5M.

 

Slightly Used

G550

The slightly used G550 market consists of five aircraft, three of which are under contract and working towards a deal.  There has been high turnover in both the slightly used and near new markets driven mostly by low hour totals.  On the market currently, 5 of the 21 aircraft for sale have less than 1,000 hours.  Compare this to the last 6 months of sales, where 4 out of the 9 sold with less than 1,000 hours on them.

G450

The G450 has one aircraft currently on the market in the slightly used range.  A 2009 model year aircraft with 1,400 hours asking $27.25M.  Again this demonstrates a desire for lower time aircraft.  8 of the previous 10 sales in the G450 market have had less than 2,000 hours.  Only 5 of the 16 currently listed for sale have less than 2,000 hours.

 

Used

G550

The majority of the G550 market falls into the used category.  There is definitely value to be found in this market.  On the low end of the G550 market aircraft can be bought below $30M.  This represents great value when you consider a new G450 in the mid to upper 30’s.

There is also a large quantity of aircraft coming off warranty with 2,500-4,000 hours.  These aircraft, with engine programs, are listed in the $37-$39M range.

G450

Like the G550, the majority of the market falls into the used category.  The low end of the market has fallen below $20M.  While hours remain a premium in the G450 market aircraft with around 2,000 hours in the 2007-2008 vintage can be had in the $22M-$25M range.

 

Summary

Continuing on through 2014 both aircraft markets appear to be maintaining their high activity and relatively stable pricing.  If Gulfstream begins to significantly discount new aircraft pricing look for the used market activity to slow down as buyers turn to new aircraft instead of low time used models.

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How Long Should I Own My Airplane

I’ve always found it interesting that there is no industry accepted standard for how often you should replace your aircraft. If I asked 10 operators I might get 5 different answers ranging from 5 years to 15 years or longer.

For a manufacturer, the answer to how long you should own your airplane is easy.  At 5 years you run out of warranty and you have fully depreciated your asset. Buy another one.  On the other side of the coin, we have customers who replace their airplanes very 15 years.  If you asked them why they’d probably tell you because they always have.  So who’s right?

From a Life Cycle Cost (LCC) viewpoint they both are.  The reason there is no industry standard is there is no significant advantage to either term.

As my airplane gets older it gets more expensive to maintain.  New airplanes have price increases at the same time your older airplane is losing its value.  The new airplane price increase may be a smaller percentage than the residual hit my older airplane takes every year but e actual dollar value of those activities might be closer than you think.

In an effort to quantify this we came up with our Optimal Ownership Interval study. A series of cash flows are used to determine the Average Annual Life Cycle Cost over different terms.  LCC is defined as the total cost of purchasing operating, applying tax benefits, and selling an aircraft.

In this study we look at a 15 year period during which we model trading aircraft for 15 different terms, trading every year, trading every two years, every three years etc., until we trade every fifteen years.  The results of a study on a new Gulfstream G550 are below.

Ladder We would all intuitively expect that trading in your aircraft every year or two would be prohibitively expensive.  The graph and table support this.  The most expensive term studied was replacing every year.  What was surprising to us how quickly the curve flattened out and how long it stays flat. This supports the notion that there is no bad answer.

Where the curve flattens out on the graph, around the 6 year mark is where we begin to recommend replacement.  After the curve flattens there is no significant penalty for choosing any term in the study.  Said a different way, you could own a new G550for 15 years for roughly the same cost as owning two new aircraft during that same 15 year period.

The G550 works particularly well with this model largely because it does well in terms of retaining its value over time. An aircraft model that gets slaughtered in resale value does not fare as well.  Which is as strong an argument for buying an aircraft type that has maintained a good residual value history as I can come up with.  Every airplane is different and should be studied but the model works with used as well as new.

It is important to consider that these are costs predicted in a perfect world. There are many other factors involved when deciding how long to own an aircraft including:

Residual Value Risk

In a volatile economy like we experienced in 2008 and 2009, newer aircraft maintain their residual value better than older aircraft of the same type. When a recovery happens the newer aircraft will recover quicker. What we are seeing today is that older aircraft are not likely to recover at all.

Regulatory Compliance

Newer aircraft have far less risk of becoming non-compliant in the increasingly more complex regulatory environment. Compliance on an older aircraft can come at a cost that is a significant percentage of the value of the airplane.

Life Cycle Cost is only one way to look at the capital issues surrounding aircraft ownership and optimal ownership intervals. It is important to view your capital expense in the same format as your company looks at it.   Do you lease aircraft, finance them, or pay cash?  Is P&L important or earnings per share?  However your company looks at capital we recommend you take a good look at ownership interval.  You might be able to replace your aircraft sooner than you think..

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The Importance of Regional Aviation Groups

While the National Business Aviation Association promotes business aviation at the national and federal level, it is up to regional aviation groups to play this role at the state and local level.

Since the business aviation industry, federally and locally, seems to constantly be targeted as an area of government focus, it is important that smaller state organizations exist to establish and maintain a positive presence amongst state and local governments.

Composed mainly of volunteers having an interest in the general well-being of the industry in their region, in order to successfully represent and serve the needs of local aviation businesses and communities, members must be willing to put forth the time and effort needed to foster an environment that business aviation can thrive in.

It is not only important to be proactive lobbyers in years when potentially negative legislation is being proposed, but to also remain relevant and continue to educate policy and decision makers in years when immediate threats are not being posed. Using the Connecticut Business Aviation Group as an example, it is amazing to see the power and influence an organization can have when their members band together to communicate their goals and objectives to legislators. In recent years, the CT Business Aviation Group has played a critical role in the growth and success of the Connecticut business aviation industry. We have been instrumental in warding off an onerous property tax bill, fought for and obtained a tax exemption on aircraft parts and maintenance, successfully argued for a runway safety area at Sikorsky Memorial Airport, and convinced legislators of the need for a general aviation caucus.

The regional organizations do not have to act alone. The NBAA places a large focus on supporting regional aviation groups, with regional representatives around the country responsible for promoting general aviation in their given territories. These representatives are easily accessible and always a vital resource ready and willing to support.

Regional aviation associations must also serve as forums for the different members of the business aviation community to exchange ideas and share knowledge. Group gatherings and events serve as great ways to further the mission of the organization, learn from industry leading thought leaders, and network with their colleagues from the region.

As Chair of the CT Business Aviation Group, I look forward to connecting with other state aviation groups and learning of similar success stories at the Regional Aviation Group Forum at the annual NBAA convention this year.

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When Does Fractional Lift Make Sense

If you walk into a hangar today and ask for opinions regarding fractional lift you will get a wide variety of answers.  You could hear anything from “it’s the biggest innovation in recent aviation history” to “it’s overpriced and a waste of money.”  At Guardian Jet, we believe fractional lift is an excellent tool when used correctly.  There are several different situations in which fractional lift is a great tool.

Low Utilization

Possibly the most common usage of fractional aircraft is when the user does not fly enough hours to justify a whole aircraft.  If you only fly 100 hours per year it is hard to justify whole aircraft ownership and the lower capital cost model of fractional ownership makes sense.  At Guardian Jet, we have done several consulting projects establishing just when does aircraft ownership become less expensive than fractional ownership.  The outcome typically concludes at lower levels of utilization, 50-150 hours, fractional aircraft are more economical, while at higher levels of utilization, 250+, whole ownership is more cost effective.  Exactly where fractional lift becomes more expensive is a function of a number of variables including, new vs. used, deadhead percentage, Part 91 vs. Part 135, and the time value of money.

Supplemental Lift

Fractional aircraft ownership can also be a great tool if it is used to supplement fully owned aircraft.  Factional lift is a great tool when used for the following situations:

  • Trips originating and ending at locations far from the home base
  • Multiple aircraft are needed at one time
  • Fitting the right aircraft to the mission

Origin and Destination

Fractional aircraft have the benefit of not charging for deadhead hours, you only pay for when you are on the airplane.  This is highly beneficial in certain circumstances.  Consider the following two scenarios:

Let’s assume your wholly owned aircraft is based in Teterboro, NJ.  An executive based in Los Angeles needs to travel on the corporate aircraft from LA to Seattle and back to LA.  To accomplish this on the wholly owned aircraft would require two deadhead legs from Teterboro to Los Angeles.  With fractional the trip is easily completed with no deadhead paid for.

Again your wholly owned aircraft is based in Teterboro, NJ.  An executive needs to go to Los Angeles on Monday morning and return to Teterboro on Friday night.  Again, using fractional lift could help in this situation.  Instead of deadheading the aircraft home Monday afternoon and back to LA Friday afternoon, the fractional aircraft could be used to once again alleviate long deadhead legs.

Multiple Aircraft

Fractional ownership is extremely useful when more aircraft are needed than are owned.  For a one aircraft owner this could be as simple as two executives needing to go on a trip at the same time.  Even in large corporate fleets it can come in handy as well.  Board meetings are typically a great use of fractional aircraft as all the board members are flying from multiple destinations to arrive at one time.  While this can be a logistical nightmare, and perhaps impossible, with only fully owned aircraft, fractional aircraft can handle the mission with ease.

Fitting the Aircraft to the Mission

The option to upgrade or downgrade your aircraft to fit the mission is not possible in a wholly owned aircraft.  If a company flies 90% of their mission along the East Coast, but the other 10% is cross country trips, a fractionally owned aircraft could help.  Depending on the situation a fractionally purchased small aircraft could be upgraded to a super midsize aircraft to complete the long range mission or the company could have wholly owned small aircraft and supplement that with a super midsize fraction.

What are the Disadvantages of Fractional Ownership?

Obviously there are several advantages to fractionally owned aircraft, but there are also disadvantages.

Fractional lift becomes expensive when under or over utilized due to a large portion of the cost being fixed.  In a recent study Guardian Jet looked at a 200 hour share of a fractional aircraft to study the effects of underutilization to the hourly cost of the program.  The all-in hourly rate for a ¼ share of a Challenger 300 flown exactly 200 hours was $8,560.  If the same ¼ share is underutilized and flown 150 hours the hourly rate grows to $9,737.  If utilization drops even further to 100 hours, the hourly rate increases to over $12,000.  The same issues arise when the aircraft is over utilized and an overage penalty is incurred.  As you can see it becomes very important to match utilization to the number of hours purchased.

The hourly rate of operating a wholly owned aircraft, once an appropriate level of utilization is reached, will almost always be lower than that of a fractional aircraft.  Flying round trip Teterboro to Los Angeles trip will cost significantly less in a wholly owned aircraft if deadhead legs aren’t necessary.

Fractional aircraft also have higher rates for international trips based on the international destination.  International flying is drastically less expensive on a wholly owned aircraft than choosing fractional lift.

Summary

While it has its advantages and disadvantages, fractional lift can be an indispensable tool if used correctly in certain circumstances.  This low capital cost option has found its foothold in the corporate aircraft world and isn’t going anywhere anytime soon.

Please give us a call today at (203) 453-0800 or shoot us a note if you have any questions regarding fractional ownership.

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Preparing Your Aircraft for Sale

At Guardian Jet we believe you should begin thinking about how to prepare your aircraft for sale before you purchase it.  There are a number of factors that will contribute to the eventual disposition price as well as the efficiency of the sales process.  Our goal is always to sell for as much money as possible in the shortest amount of time.

Selling in the least amount of time is critical.  Aircraft that go to contract in the first 90 days after listing typically sell for a higher percentage of their calculated value than if they languish on the market. This is especially true in aircraft markets that are rapidly losing value.  My brother compares trying to sell in these markets to trying to catch a falling knife.

The easiest way to think about preparing an aircraft for sale is to consider what you would be looking for if you were buying this airplane.

Did we configure the aircraft to attract the largest percentage of buyers?

Is the aircraft on an engine program?

What is the condition of the paint and interior?

Do I move forward on avionics upgrades?

How much elasticity is there on pricing?

The truth is there is no easy answer to any of these questions and the answers vary depending on aircraft model and type.  We need to understand the data in the market you are selling in to provide the best answers.  Our goal is to eliminate as few buyers from the potential pool of buyers as possible.

Configuration

In smaller aircraft this is less of an issue but in three interior cabin zone aircraft the configuration can impact your ability to sell.  When purchasing the aircraft we should consider what percentage of the fleet has a forward vs aft galley.  Whether or not an aircraft has a forward lav. can dictate the markets available to sell into. Typically, European customers want the aft lav. to be for passengers only.

Unusual seating configurations can also create issues down the road.  Configuration is expensive to change and unusual configurations can eliminate potential buyers.

Engine Programs

EngineThis is a hotly debated issue in flight departments around the company. The data for your particular airplane market will point you in the right direction.

For example, in the last 6 months there have been 10 used sales of Gulfstream G550’s.  Eight out of the ten aircraft sold were on engine programs. Approximately 62% of the fleet is on an engine program.  Both sets of aircraft, on and off a program, sold for approximately the same percentage of our Aircraft Value Calculation (more on that in another blog). Our AVC uses the buy-in cost of the engine program as a hit to the value of the off program airplanes.

What this all means is that the aircraft on the engine programs are more in demand and the pricing impact is essentially neutral.  Our position is that if it is neutral put your aircraft on the program. No one ever passed an airplane because it was on an engine program but aircraft have been eliminated from consideration by buyers for not being on a program.

This is just one snapshot in the G550 market.  Each aircraft market is different and the data should be analyzed to make the best possible decision.

Paint and Interior

We believe a typical airplane should undergo aesthetic upgrades every 7-8 years.  On this schedule your aircraft will never be far away from the upgrade if you sell in the 7-12 year ownership term that many of our customers favor.  Buyers of aircraft with worn P&I are always looking for a deal.  Fresh, or more appropriately, regularly scheduled refurbishment will not eliminate any buyers.

Avionics/Connectivity

The alphabet soup of avionics regulatory compliance is upon us.  CPDLC, FANS 1A, ADS-B OUT compliance is expensive and therefore a big driver of value.  How and where you use your airplane can be a completely different issue than how the buyer of your airplane might use it.

In a newer, larger aircraft the answer is fairly simple, all the aircraft will be compliant.  But consider a 5 year old Challenger 300.  Bombardier is estimating half the 300 fleet will be upgraded to roughly mimic the new 350.  A high percentage of 300’s are primarily flown in U.S. domestic operations.  This is a much trickier question.  Understanding the particular aircraft model market and the available data on that market will help you make the best decision.

Pricing

Pricing correctly is the cornerstone of the ability to sell your aircraft for top dollar in less time. Correctly does not mean cheaply, we don’t want to leave money on the table.  There is no substitute for data in your pricing discussion.  First, we need to understand where the values aircraft are trading at in the marketplace. Then, we need to look at trends to have an idea of where the market is headed in the next 60-120 days. By combining these sets of information you can be comfortable that your aircraft will compete successfully on the market.

My favorite line about aircraft inventory for sale came from Dan Meisinger, Sr., the longtime owner of Executive Beechcraft in Kansas.  One day he told me, “Don, we ain’t had one forever yet”.  Most everything eventually sells.  But with the proper preparation we can maximize the value of our aircraft asset.

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The Aircraft Offer: 7 Deal Points for Success

Buying or selling an aircraft involves a myriad of people, paperwork, checklists, processes and procedures that need to be carefully orchestrated from start to finish. Leading off the purchase or sale transaction is typically the letter of intent (LOI) or purchase offer. No transactions are ever the same but each LOI does have some common elements that need to be addressed or at least contemplated since this sets the tone of the transaction as well as to ensure a successful conclusion.

PRICE

We like to say that buyers and sellers should fight like cats and dogs over price and the rest should fall into place in a way that is fair and equitable. As a buyer you don’t want to go in too low and the seller choose not to counter or worse yet, choose not to engage.

As a seller, your goal is to counter in a way that elicits further offers with the hopes of reaching the realm where you’d accept a deal.

DEPOSIT

Every offer should clearly spell out when the deposit goes nonrefundable. In a “soft deal” the buyer has the right to walk away up to a certain point in the transaction (typically within a day or two of the delivery of the results of the pre-purchase inspection).

In a “hard deal” the deposit becomes nonrefundable at the signature of the purchase and sale agreement meaning that, as long as the seller fixes the agreed upon discrepancies, the buyer is obligated to consummate the transaction barring any damage or other macro affect on the value of the aircraft.

DELIVERY CONDITIONS

A buyer and seller need to have an understanding of the general delivery condition of the aircraft. Items such as damage, status of logs/records as well as the airworthiness of the aircraft so that a definition of what a discrepancy will be should be fleshed out and agreed upon within the LOI.

PRE-PURCHASE INSPECTION

An understanding of the pre-purchase inspection is vital. Striking a balance between too detailed or not providing enough direction about what the buyer would like to see inspected is the challenge with outlining the pre-purchase inspection.

At a minimum, it should spell out where the aircraft shall be inspected, who is responsible for the costs to inspect, the rectification of any discrepancies and any timing aspects regarding the total duration.

PREPARATION OF THE PURCHASE AND SALE AGREEMENT

Ask any broker or aviation lawyer about who has the right to draft the subsequent purchase and sale agreement and you’ll be presented with several answers each with their own defensible argument why they are right. Sellers like to think they should be able to serve up the first cut of the draft. Buyers will argue they are making the offer so they too should have the right.

Hashing out who prepares the first draft within the LOI will save from having each side racing to complete a draft and worse yet, shifting the focus from putting together an amenable deal.

TIMING

The LOI should set forth a basic timeline for the major transaction milestones such as:

  • How many days from the execution of the offer is the deposit due?
  • How long does the buyer have to decide if they conditionally accept the aircraft after the inspection (in the case of a soft deal).
  • How many days do the parties have to close after the rectification of any discrepancies and the aircraft’s return to service?
  • Perhaps the most important timing item is how long is the offer in effect and how long the parties have to consummate the purchase and sale agreement. Not having one or both of these items in the LOI can have disastrous effects for either the seller or buyer depending on which side you are on.

MOVEMENT FEES

Clearly spelling out who is responsible for the cost of the various movements of the aircraft and at what rate helps lay the ground work for a more detailed definition in the subsequent purchase and sale agreement. Both parties should remember the guidelines set forth for charging or recouping those costs are spelled out clearly in 14 C.F.R. 91.501(d). It also may be a good idea to spell out such items as where the aircraft will be moved for any visual inspections, the pre-buy location and the delivery location.

SPECIAL CONDITIONS

Depending on the situation, the depth of detail the parties want to delve into and any special circumstances associated with the transaction, one or both parties may want to address such items as confidentiality, governing law, binding versus non-binding, and taxes.

The items above are a few of the most important items that should be incorporated into an LOI. The framework agreed to by the buyer and seller in the LOI will serve as the bridge to lead to the more formal and robust aircraft purchase and sale agreement used to provide the detail that will then guide the sale and purchase of the asset.

Given the expectations it sets forth between the parties, it is important to strike a balance. An LOI that is too detailed can unnecessarily slow down the process. An LOI too basic can lead to the unrealistic expectations from both parties when the first draft of the subsequent purchase and sale agreement is served up. The goal is to strike a balance in order to get a deal moving.

There is no hard or fast rule about involving either your internal legal counsel and/or also involving outside aviation legal counsel at this stage.  It typically comes down to each client’s preference, culture or comfort level with buying and selling aircraft. In addition, the deal structure, such as a first time purchase or the need to incorporate a 1031 Like-Kind Exchange, will also often dictate how many additional players will need to be consulted throughout a client’s organization in order to come to terms on an LOI. Regardless, the goal is crafting an LOI that both parties will use to reach an accord and move the deal into the next phase with the eye towards closing the deal.

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GoGo Biz Data Plan Changes

Aircell has recently sent out a customer letter to current subscribers detailing changes coming to the network and announcing new monthly service plans.  The new service plans will take effect on July 16, 2014.

Gogo Biz Unlimited No More

The biggest change is the announcement that Gogo Biz Unlimited will no longer be available.  Any aircraft on an active Unlimited data plan as of July 15 will have the opportunity to keep the Unlimited plan through December 15, 2016.  The current monthly rate of $2,295 will increase to $2,395.  Aircell has promised that rate will not increase by more than $100/month per year.

New Gogo Biz Data Plans and Pricing

Below is a chart Aircell provided with the new plans and pricing.  Aircell’s Multi-Aircraft Discount program will now be available on all Gogo Biz plans.

Gogo Biz Data Plan

Monthly Service Fee

Data Included

Fee/Additional MB

Migration Plan for Existing Customers

Gogo Biz 60

$395

60MB

$7.95/MB

All active Gogo Biz 40 subscribers will automatically move to this plan on July 16, 2014

Gogo Biz 250

$1,195

250MB

$4.95/MB

All active Gogo Biz 100 subscribers will automatically move to this plan on July 16, 2014

Gogo Biz 2500

$2,395

2.5GB

$1.95/MB

Gogo Biz 5000

$3,995

5.0GB

$0.95/MB

What Does This Mean?

Aircell states the majority of existing Gogo Biz data customers will experience no increase in their monthly bill and this is probably the case.

Aircell presumably has placed the data plans at levels where the majority of their clients fall into.  The Gogo Biz 2500 plan will most likely fit the need of anyone currently on the Gogo Biz Unlimited plan.  This does mean operators will have to start tracking data usage, which previously was unnecessary.

The flat monthly fee and unlimited nature of Gogo Biz Unlimited was a primary reason for many users to jump on the Gogo Biz train and why Gogo Biz Unlimited has become as popular as it has.  It will be interesting to see the effect of this on the growth of Gogo Biz.

Despite this announcement, Gogo Biz figures to be around for a long time.  With an upcoming expansion of service into Canada and an ever-increasing network, Gogo is still a low cost domestic data option compared to its satellite-based competitors.

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The FAA Civil Aircraft Registry is Back Open for Business!

We’ve reached out to our escrow contacts and have confirmed that the FAA Civil Aviation Registry is indeed back open this morning. However, they are confirming that the backlog is large and it is going to take quite a bit of time before things are back to normal. Below is a note that one of our escrow agents sent along yesterday:

“Please take into consideration that when the FAA reopens, it is not going to be business as usual. They are going to have a terrible backlog of documents that have been mailed in during the time they have been closed, as well as those that will be filed by all of the title companies when FAA reopens. The FAA averages receipt of 3,000 documents a day, so we are probably talking somewhere in the neighborhood of 30,000 documents that will have to be scanned in and indexed in prior to us being able to tell you that there have been no liens filed during the closure and that we can transfer free and clear title to an aircraft. I am guessing it could take as long as 10 days to get all of these documents indexed in, but this is just a guess at this point.”

Regardless of the above, we here at Guardian Jet, and I think the Business Aviation community as a whole, are very happy that we can once again get back to the business of buying and selling aircraft on behalf of our clients.

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