Buying in down market

Several customers called recently for help purchasing an aircraft. Each is a cash buyer and sees unprecedented opportunity at prices not seen in five years. Inevitably, the question arises of ‘what should I buy that I am most likely to get capital appreciation after two or three years of ownership’. First, we caution each that there is no guarantee of capital appreciation because anything is possible regarding aircraft values. However, we do offer advice on how to tilt the odds in your favor.

We research aircraft pricing trends continuously and have confirmed that pre-owned aircraft prices are highly dependent upon factory new deliveries. Also, we have identified that when a model become 8+ years old its price settles at 50-60 percent of factory new pricing. These figures vary depending upon the manufacturer as some hold greater resale value. Gulfstream and Falcon, for example, typically hold value better than other models, whereas the Lear series and Beechjet line experience more significant market depreciation. However, as an estimate, these basic axioms hold true.

We use such trend knowledge to identify aircraft that are priced beneath these values. For example, the Citation Excel market has experienced fairly substantial price decreases recently, pushing its values below the 50% mark in some cases. By contrast, the Gulfstream 550 market, while having already experienced a price decrease in excess of $15 million, is still trying to hold a value at approximately 80% of new value. Each market has its own specific characteristics, usually guided by the owner’s expectations from the previous boom era. Citation owners, for example, saw prices hold very well for a long period, but were relatively immune from the premiums. G550 owners, however, were used to 30% premiums, so they feel a greater reluctance to deviate farther from this psychological selling point.

Once we have helped identify the aircraft that meets your mission requirements and we have assisted in identifying the subgroup that will most likely present the greatest opportunity for capital appreciation, the next step should be pre-arranging financing. In today’s environment, the buyer who can close immediately without financing delays can and does achieve some stunning last minute pricing advantages. We experienced this first hand quite recently assisting a buyer purchase a Falcon 900EX.

Buyer’s markets bring out large numbers of tire- kickers and dreamers. Since you will be neither, it is essential that you demonstrate it. Showing your capabilities to close quickly will set you miles apart from the pack, and will elicit a much stronger reaction from the Seller. We see huge numbers of extremely low offers, most of which are ignored as there is no evidence of the Buyer’s ability to perform. However, a low offer backed up by proof of capability is a much different negotiation and a totally different offer than one that is merely ink on paper.

With your finances in order at the beginning of the purchase process, you are in a much stronger negotiating position to wire a substantial fully refundable deposit to a respected Aircraft Escrow Agent. This shows your commitment and ability to close. Sellers treat negotiations with you as serious and give much more consideration to proposals.

ACCOMMODATION = A BETTER DEAL, FOR YOU
It’s important to be flexible in terms that you offer Sellers. One important item to evaluate how fast the deal can move. Sellers are vitally concerned with one item: how fast will cash arrive in their account. The fastest proposals get all the attention, and usually, the best price. This does not mean you should avoid pre-purchase inspections; quite the contrary. But it does mean you should look carefully at the priorities of each seller and their situation. Being flexible enough to accommodate their position will give you an edge that few others will offer, and more appropriately, give the Seller a reason to sell at a lower price. Take their whole environment into account as well. Different countries have different tax loopholes and structures that can make transactions cumbersome. Our knowledge of knowing how to navigate them to the mutual benefit of both parties can earn you far more credit and much more leverage for a lower price.

Many current buyers approach this market as if they were a hero, coming in to save you from financial ruin by purchasing your aircraft at a highly distressed price. While in rare cases this might be true, most sellers are not overly distressed. While their  aircraft is legitimately for sale at current market values, for most organizations, they are not losing money profusely and would rather keep the aircraft rather than realizing a major loss that  fire sales create. It is important to remember that each owner and each aircraft has its own unique persona and situation, and that while low offers are advisable in this market, there has to be some benefit offered by the buyer in terms and speed in order to make such a favorable deal possible.

In summary, if you operate the aircraft for three to five years, electing to purchase now at very depressed prices could potentially see you realize a significant appreciation in its value. Even if the market should take 24 months to recover, its market value in that era would still be based against factory new pricing, and the prospects of that remaining depressed are limited. Every manufacturer bases pricing with a CPI cost inflation indexer. And even with the economy in the current deep decline, the CPI continues to advance in virtually every economy.

How much of an increase in market value will occur over the next 36 to 60 month? Will prices return to meet the market prices of 12 to 18 months ago? Our crystal ball is not at all clear on that question, but 36 to 60 months after the business aviation downturns of the mid-1970s, early 1990, and 2001, market prices recovered very strongly, which resulted in strong capital appreciation.

Contact details:
Dallas: +1 940 898 1999
London: +44 793 856 3771
www.businessairinternational.com