Across the globe, market watchers report aircraft transaction activity is on the upswing. We convened a panel of experts from four leading brokerage firms to get their views on today’s business aircraft marketplace and where it’s heading. An edited transcript of their comments follows.
What should a client expect from an aircraft broker?
Jay Mesinger: Most people probably think of a brokerage service simply as a company that buys and sells airplanes for clients, but to compete today, a broker needs to add value to the transaction. It’s a team process, and we pay special attention to the people, not just the airplane. A lot of personalities and skill sets are involved. That includes aviation attorneys, the buyer and/or seller, and all their in-house counsel, all the people who deal with risk management, the tax experts and financial planners, and the maintenance facility that will be inspecting the airplane. We work with these groups to orchestrate and navigate, and keep everyone informed and focused.
Todd Jackson: We have the ability to determine the best airplane for the mission, and to help clients better understand the asset they’re buying: what it will cost to own and operate, where the airplane is in its life cycle of maintenance, avionics and interior, the expenses they’re likely to face. The transaction itself requires communication among five parties: the buyer, seller, brokers representing each, and the maintenance facility conducting the pre-buy inspection. All those parties need to be involved in understanding any problem and the solution. We guide them through the process. There’s also power in working with an aircraft sales and brokerage company that is a full-service MRO facility [like Elliott], to leverage the strength of both disciplines. We had a recent transaction where some mechanical issues were found during the pre-buy, and we were able to get better pricing from our service center than the customer was quoted by the local shop, and have the parts sent.
Marc Foulkrod: The term “broker” does many of us an injustice in that we are more than just intermediaries who put the buyer and seller together. You need a team of people who are well versed in all aspects of aviation. We have to understand everything from a market standpoint, legal standpoint, operational standpoint, and lastly a risk standpoint. Being deficient in any of these disciplines adds risk to the deal and lowers your success rate. Many of these deals are terribly complex, and each is different and has its own potential pitfalls, with multiple parties on both sides of the transactions, many of them with completely different agendas.
Steven Gade: These deals are complex—they’re not like buying a suit from the rack. If we’re buying an airplane, we’re communicating with the client’s CFO, the chief pilot, the DOM [director of maintenance]. If we’re selling an airplane, we’re dealing with those people on the seller’s side, and the buyer’s broker. We’re also communicating with the facility doing the pre-buy. Hundreds of emails and points of contact happen throughout the process. On the sales side, there are test flights for the buyer, demo flights, and working out who pays for what. We’re currently helping a client sell an airplane by providing a crew to perform a post-pre-buy flight test. That’s just one of the myriad details in a transaction of this nature.
Buyers and sellers now have access to unprecedented amounts of data on preowned inventory and valuations. What impact is this having on the marketplace and the brokerage field?
Steven Gade: Buyers do have access to more information about what is for sale and what just sold, but there are also more makes and models than ever, and more aircraft-specific complexities and risks than ever. Our role is to engage all of the experts on our team to eliminate risk and maximize value. The knowledge that we have combined with our experience of being in the trenches day in and day out for decades allows us to lead our clients through the path of least resistance. In this business, with all the technical and compliance issues, a couple of misunderstood acronyms, such as in avionics, can make a huge difference.
Marc Foulkrod: Yes, the amount of information that is available now from reputable third parties is immense. But much of it is generic in form and some of it is outdated by the time it reaches the buyer or seller. A perfect example: online valuation services and services that report transaction figures. Most of the information is good for showing the trend in prices, but the actual price data is outdated by the time the prospect gets it. With prices falling so rapidly during the past few years, this data can confuse buyers and sellers. With transactional data, or sale numbers, most services give basic information on the aircraft specs but no story about the deal. Was there a back-to-back involved? What was the maintenance history? Any damage history? Why did the owner sell? These are among the factors that determine price.
Todd Jackson: The internet has allowed people to gather more data and become more educated on all aspects of ownership. It’s good and bad. Because of the tremendous amount of information, buyers sometimes have a tough time getting focused. Or you can have a deal in place with a potential buyer on Friday; then they spend the entire weekend on Controller, and by Monday there are three other airplanes they think they’re interested in. Moreover, operational costs cannot be fully understood by reading data from a paid service or a report. It takes in-depth knowledge of items like avionics obsolescence issues, engine program costs versus benefits, and major inspection intervals. We try to educate our customers to not just look at the price tag of the airplane.
Jay Mesinger: I don’t think that all the data necessarily makes owners and buyers more savvy, but I think they’re more cognizant of making sure they’re buying fuel and sourcing maintenance at the best price. Price and cost have never been as important or as focused on as in the recent past. As a result, we’ve put more emphasis on speaking more eloquently and proactively to clients about real-time market valuations. We’re in the market every day. Sometimes you can’t get actual sale prices, but you can get a range and you have to interpolate a little bit—buyers say they paid less, sellers say they got more. This lack of transparency is one of the factors that makes our sophisticated industry unsophisticated.
Some transaction-tracking services report that average time on market for business jets is increasing. How can a broker get a client's aircraft to move at a fair price today?
Todd Jackson: We understand that every day an aircraft is on the market it will decline in value. That is why we price the aircraft correctly the first time, aggressively market it, and utilize our industry relationships to find a buyer fast, and get the aircraft sold. Our number-one goal is to minimize the time on market while maximizing the sale price, and our aircraft listings have a record of selling faster than the industry’s median days on market. This comes from a combination of in-depth knowledge of each of the markets in which we operate and providing clients with accurate sale-price expectations. We also work with a large network of industry partners and end users to create more sales opportunities.
Jay Mesinger: If you establish the right price through thoughtful consideration, the sooner you can get in and get out, the better you’ll do. The average time on market for all the airplanes we’ve sold in 2017 is 34 days. That’s because we price the aircraft correctly and back it up with data. A client might get less than they wanted, but if they held out for that price, the airplane would sit on the market and eventually they’d have to accept less than they could have gotten when the airplane was first listed. Preowned prices may be going down at a lower and slower residual loss rate than we’ve recently seen, but they’re still going down, and the longer the aircraft is on market the less you’re going to get for it.
Marc Foulkrod: The reason some airplanes sit on the market is simple: sellers either don’t want to hear what their aircraft is really worth or are using brokers who are scared to sit down and properly educate them about why their aircraft is worth what it is. The key to successfully selling an aircraft in a reasonable amount of time and maximizing the sale price is using accurate, up-to-the-minute data, and many times telling sellers what they don’t want to hear. Anytime a broker claims he can get more for your aircraft than all the other brokers say, that should raise a red flag. A good broker can negotiate better terms of the deal, but we don’t make the market; we simply report it.
Steven Gade: There are really two segments of the resale aircraft market: those aircraft that are realistically priced based on current market conditions and those that are not. You could have four airplanes for sale, three on the market for three months, and one for three years, and the average is skewed by one outlier. An accurate measure of average days on the market should include only the segment that is realistically priced. A qualified broker can reduce a seller’s days on the market by educating the seller on market conditions and working together to develop sales and pricing strategies that will result in a sold aircraft in a reasonable amount of time. It is important that we as brokers do not confuse listings as the end game.
Where do you find the best values today, and where do you see the market going over the next year?
Marc Foulkrod: I think there are good values throughout each segment of the market, but in particular, large cabin, and more specifically, aircraft such as the Gulfstream G550, where values have plummeted to levels unthinkable just a few years ago. This is an aircraft that is still in production and can cost upwards of $45 million from the manufacturer, yet you can buy one that is 10 years old with good pedigree for $15 million. In Europe, we are finally seeing years of stagnation and selling begin to reverse. I think in 2018 you’ll see the shift from net sellers to net buyers in the eurozone. Also, we’ve seen the influx of Asian buyers. They want new aircraft, or as near new as possible. Back here domestically, it’s all about value and price. Everything else is secondary.
Todd Jackson: When Elliott Jets starts the aircraft acquisition process there is no specific avenue to find the best opportunity. Most of the time, the top aircraft choices come from off-market sources such as banks, other broker-dealers, OEMs, and even long-time customers looking to sell their aircraft. We have the financial ability to take trade for our own inventory, and that opens a lot of doors for us. Across the board, inventory levels are decreasing. This has not yet seemed to affect price, but it has led to fewer choices for buyers.
Jay Mesinger: Value to me is not price; price is a one-time thing, and cost is a lifetime thing. If you misjudge what value means and think it’s just the cheapest, it’s not going to be the best value. Buy a great plane at the right price, take advantage of what the seller has invested in the airplane, and in fact maybe even spend a little more for it. At the end of the day, that’s the best value. Today, most buyers are in North America while a tremendous amount of inventory is outside North America, where it originally sold. Typically it’s more expensive to import airplanes for a domestic client, but because we’re quickly eating up domestic inventory, we’re more involved with imports. The higher demand will soften the residual value loss rate
Steven Gade: Across the board, the current resale market represents the best retail buying opportunity for business aircraft that anyone can remember. As for where to find the best values, the more important question is how you compare, select, and acquire the best value. The market is still sluggish but recently there’s been more buyer enthusiasm. We’ve seen segments with lower-hanging fruit, such as the Challenger 300, Falcon 2000EX, and 7X, get picked off due to the low level of prices for what the aircraft offer in terms of age, cabin, performance, and desirability.
How and when do you advise buyers to consider resale values?
Steven Gade: We advise our clients to prepare five-year budgets that include realistic depreciation expectations. As part of this process, we provide detailed information that includes estimated costs and downtime for maintenance requirements during this period. The timing of certain events can significantly impact the value of the aircraft and the total cost of ownership. We keep in close contact with our clients after the sale, as we have generally established close working relationships with them through the process, and in many cases personal relationships with them. Our clients’ level of satisfaction, measured on the basis of repeat business, is at the 95 percent level.
Todd Jackson: It’s difficult to speculate about what’s going to happen with the value of a particular make and model: whether the OEM will continue to build it, parts availability, and avionics obsolescence all come into play. When we talk to clients about an aircraft, we talk about the depreciation schedule and when it might make sense to transition out. Accountants need to be involved in these types of questions. We can utilize all kinds of variables to make better-educated guesses, but the reality is that none of us know what they’ll be worth. The market will ultimately determine future values. The number-one advice we always give is to keep your aircraft well maintained at a reputable maintenance facility. That will create more resale value.
Jay Mesinger: The first thing to advise clients is that they’re buying a depreciating piece of equipment. In the recent past, residual values went down 20 to 25 percent per year, and that’s not sustainable. We believe airplanes will probably depreciate 8 to 10 percent per year. Whatever the decline, if you get in at the right price today, you will not be dissatisfied with buying an airplane and accepting that it will go down in value. People who got involved in owning airplanes from about 2003 through 2008 think aircraft went up in value every year, because they almost always did. Today, some people may say, “I want to wait for prices to stabilize before I buy,” but I guess they’ll wait forever.
Marc Foulkrod: Resale values are the most difficult topics to discuss with buyers, but they’re one of the most important factors. Today, buyers not only want to know the best value in the marketplace, they want to discuss what their aircraft will be worth in five years when they contemplate selling it. If you had asked the industry’s leading brokers in 2007 or 2008 to predict what someone’s aircraft would be worth five years out, all of them would’ve been dead wrong. Even the largest financial institutions with hundreds of Harvard quants would’ve been way off. People should buy the aircraft that comes closest to meeting their mission profile at the best value, and then maintain the aircraft properly. When you sell, you want to have the best-maintained aircraft, with modern upgrades, so it stands above the rest. The best-maintained aircraft will retain their value better.
What's your best advice for buyers and sellers in today's market?
Todd Jackson: Buy the airplane that meets your mission and fully understand any operational costs associated. For sellers: price your airplane correctly.
Steven Gade: Align yourself early in the process with a team you trust and that will work hard on your behalf. Spend time together discussing objectives and strategies and be patient, but be ready to act when the right opportunity arises.
Jay Mesinger: My best advice is to put smart people around you who are transparent and honest, and believe them. Let them do their job.
Marc Foulkrod: Focus on the details. Buying an aircraft is not like buying a car. It’s a multimillion-dollar investment and the wrong decision can have huge financial consequences. Also, when hiring a broker, don’t focus on the cost of doing so, but the value of what you are contracting for. A good broker you can trust is worth many multiples more than his fee. People learn this the hard way.
