Increasing Resale Value: What Really Counts?

Jan 26, 2009
By Fred George

It's a tough time to try to sell a business aircraft, perhaps the most difficult resale market since the 2001 to 2004 slump. And most analysts believe the resale market will get worse before it improves, perhaps sinking to levels not seen since the early 1980s. The rollercoaster ride will continue for an uncertain period of time because dealers aren't confident enough in market demand to start building inventory at wholesale prices. Without such a wholesale price floor, it's tough to establish profit margins and thus retail prices. So sellers face turbulent conditions well into 2009.

''[In July 2008], the market was still good for large-cabin, long-range aircraft," said Sean Lancaster, vice president of Washington, D.C.-based Bristol Associates, an internationally recognized firm that specializes in business aircraft transactions. "Now, almost everything is cold, including BBJs, Gulfstreams and Globals. There is no wholesale market and I don't know where the bottom is because nobody is buying inventory. Nothing is hot, but if an aircraft is priced insanely cheap, say 20 percent below value, it will sell."

"The market is flooded with inventory, especially with Lehman Brothers and AIG dumping their airplanes," said Marc Foulkrod, chairman of Burbank-based Avjet Corp., a large-cabin, long-range aircraft management and charter firm that also specializes in aircraft sales and purchase transactions.

"Forget the [price] premiums people were used to getting in 2006, 2007 and early 2008 when airplanes sold for up to 120 percent of their original price. The historical core residual value is 85 to 90 percent [of original price] for well-maintained aircraft and it sunk to 70 percent in 2001 through 2003. Now we're correcting back to the norm," explained Mark Bloomer, president of Camarillo, Calif.-based Bloomer deVere Group Avia.

Bloomer believes that today's slump seems worse than it is because sellers became so accustomed to flipping aircraft for a fat margin over what they paid for them during the halcyon years of late 2005 through early 2008.

Using an astrology analogy, Bloomer said "In 2007 and 2008 we had perfect alignment of the three stars. Oil went up to $140-plus per barrel. The dollar-to-foreign-currency exchange rate fell to historic lows. And emerging markets starting buying business aircraft." This combination created an unprecedented sellers' market. Surging demand in Russia and the Middle East, for instance, meant that you could buy a Gulfstream G550 for $45 million and sell it for $58 million.

That's not the reality today. The sellers' market has imploded. Buyers now have hundreds of aircraft from which to choose and inventories are becoming even more bloated. Aircraft more than 10 years old are especially hard to move because the market is flooded with newer models offering more-advanced avionics, more-fuel-efficient engines, peppier performance and perhaps also lower direct operating costs.

This is difficult for many aircraft sellers to accept after such record-high demand for a wide range of turbine airplanes only a few months ago.

"We tell our sellers that they have to come to the realization that it's now a buyers' market. Eight months ago, it seemed as though there were 30 buyers for every aircraft on the market. Now it's though there are 30 aircraft for every buyer," said Jay Mesinger, president of the Boulder, Colo.-based corporate jet sales firm bearing his name that has more than three decades of buying and selling experience.

Qualified buyers, even if they are presenting low-ball offers, command new respect in today's market. Such bargain hunters often are disdained as "bottom feeders," people not worthy of a return phone call let alone serious consideration as aircraft purchasers.

"Sellers must stop defining such buyers in terms that are less than productive." Mesinger said. "When a buyer comes, a seller has to play as though there's only one buyer in the entire world. The real value of your aircraft is the price a buyer will pay today."

Sitting on an airplane in hopes of getting a higher offer from another buyer can be costly with respect to holding costs that represent lost opportunity to otherwise earn a return on your investment.

"Let's say you have a $2 million airplane and your opportunity cost is 6.5 percent. Every month you sit on the airplane costs you almost $11,000. That's $32,500 you've lost in three months and $65,000 in six months," said John O'Neal, a long-time light turbine aircraft salesman at Eagle Aviation in Columbia, S.C.

O'Neal and Lancaster both noted that the U.S. dollar has gained significant strength on the foreign currency exchange market in recent months, so aircraft sold by U.S. owners simply cost more euros, rubles, rials and reais. That's depressing offshore demand for both new and used aircraft being sold in the United States.
The Pampered Plane Sells Soonest

First impressions are essential when presenting an airplane to a potential buyer. Pristine paint and interior always are critical elements at resale time, but they are especially important when selling an entry-level aircraft in a soft market because restoring it to cream puff condition represents a proportionately higher percentage of asking price for the seller or buyer.

"A ratty looking airplane is a tough sell. If you're considering a paint and interior upgrade, you will get your money out of it. But, pick neutral shades and avoid green [colors]," said James Becker, aircraft research manager for Elliott Aviation in Des Moine. Avocado is out. Ecru is in.

"Nobody wants to buy an ugly airplane. You get more back on your dollar investment in paint and interior than anything else you can do. Fresh P and I will make the difference between selling and not selling in a down market. If it's ugly, then a dealer will want to buy it 'wholesale'. And that's not the guy to whom you want to sell your airplane," advised O'Neal.

"Let's say you have a $2 million to $3.5 million Citation II or Bravo. 'Like new' paint and interior can make up to a $100,000 to $110,000 difference in what you get from a buyer. And it will sell a whole lot sooner."

The image of the pampered airplane should extend far beyond the basic fuselage. That's particularly important as the asking price of the aircraft goes up because more expensive aircraft attract more sophisticated buyers.

"Be proud of your airplane. Take lots of photos, especially during the completion process or during refurbishment. People love that stuff. The process really starts on Day One [of the ownership experience], regardless of whether the aircraft is new or used," said Bristol's Lancaster.

"Cosmetics are important, but aircraft records will make or kill a deal. Aircraft should be maintained as though they must be ready for an FAA inspection anytime. Records should be maintained by ATA chapter with all requirements and actions logged."

How and where the aircraft has been maintained also makes a difference at resale time, according to Lancaster. "Aircraft are extremely expensive to own and extremely expensive to operate. But to maximize residual value, you have to take good care of them. Buyers want to see an airplane that has been maintained by factory service centers or at least factory authorized service centers. It costs 10 percent more to use the factory service centers, but you're likely to get back that 10 percent at resale time."

"When there are all Bombardier, Cessna, Dassault or Gulfstream stamps in the logbook, it doesn't make a difference to the seller. But it sure does to a buyer."

In addition, an aircraft hangar should appear to be a home to the aircraft, as if it were a member of the seller's family. It's the kid's room and the family would hate to see it leave their home. Buyers want to feel that parental-like home care has been lavished on the aircraft they're considering for purchase.

"I've seen hangars that resemble Quonset huts, but that are neat and well maintained. That makes a great first impression, especially if the buyers then go on to find good records," Lancaster said.

He also said that buyers want to meet the head of the company and get a feel for the personal involvement the CEO or president has with the aircraft. "It means a lot to some buyers." It's as though the buyer is meeting the parent, not just the owner.

Moreover, the age of the "child" leaving the home isn't as important as it once was, if the seller can demonstrate that the aircraft has been immaculately maintained. Lancaster cited NetJets as one of the best caretakers of aircraft, a firm that extensively uses factory service center maintenance, keeps meticulous records and regularly refurbishes the interiors.

"Lots of hours on these airplanes? You'd never know it." Lancaster acknowledged that having double the total time on an aircraft adversely affects its resale value, but NetJets' airplanes move quickly on the market because they have near-perfect paint and interiors and they have received top-notch care since new.
Overcoming Objections

Potential buyers have dozens of reasons for rejecting a candidate aircraft. The seller must anticipate each objection and overcome it prior to putting up their aircraft for sale, according to brokers.

Buyers will over-allow for the cost of refurbishing an aircraft because they want to provide margins for unforeseen expenses. They also don't want to buy an aircraft and then have to put it out of service for several weeks to accomplish required maintenance or refurbishment.

"If you're 100 hours away from hot section inspections or 200 hours short of TBO, just do it," recommended Eagle's O'Neal. "No buyer, wholesale dealer or retail customer wants to take the chance of running into a big bill for HSI or overhaul. Besides, it's your responsibility as an owner to set aside engine reserves and then spend them to keep up the airplane."

O'Neal also said that if a major periodic airframe inspection is coming due, it too should be accomplished before putting up the aircraft for sale. "You want to offer a 'no excuses' airplane to overcome any possible buyer's objections."

This is true for all model, performance and price classes, including those in the top echelon.

"Buyers will balk at the potential cost of a looming big engine or airframe inspection or putting the aircraft down for paint and interior, avionics or entertainment system upgrade. Buyers also object to the [lost] opportunity cost of having the airplane sit out of service while a 48- or 72-month maintenance inspection or an upgrade is being done," Avjet's Foulkrod said.

"The majority of buyers want a turnkey operation, not six to eight weeks of downtime as soon as they purchase the airplane," said Bloomer. "A buyer doesn't want to inherit unnecessary costs."

"If the aircraft soon is due for an airframe or engine inspection, the seller should do it. Let's say engine hot section inspections are coming up and you know they'll cost $500,000. Buyers are going to down-sell the airplane by $650,000 to over protect themselves from unforeseen HSI expenses," pointed out Lancaster regarding the proposed sale of a representative large-cabin, long-range aircraft.

Accomplishing such maintenance is particularly important if the engines have yet to achieve maturity in the field. Buyers of Rolls-Royce BR710-equipped aircraft, for example, are more sensitive to the possibility of incurring unforeseen engine maintenance expenses than buyers of Rolls-Royce Tay-powered aircraft because they have proven themselves in more than two decades of service. "The Tay basically is a Rolls-Royce Spey with a fan," commented Lancaster about the low-risk, evolutionary design of the powerplant fitted to Gulfstream GIV, GIV-SP and G450 aircraft. The BR710 still is experiencing some teething pains.

In this regard, manufacturers' airframe, engine and/or avionics maintenance programs are a big plus. If a seller, for instance, has signed up for Rolls-Royce Corporate Care for the company's BR710-powered aircraft, buyers perceive they're protected against unforeseen costs. Honeywell's MSP and Pratt & Whitney Canada's ESP power-by-the-hour programs offer similar benefits to the seller at resale time, virtually all brokers told Business & Commercial Aviation.

"Engine maintenance, avionics maintenance and airframe maintenance programs lend significant value to an airplane - if they're transferrable to the buyer," added Avjet's Foulkrod.

All this assumes the aircraft hasn't needed major unscheduled maintenance, particularly damage history, which has the potential to shred resale value. "Significant damage history results in a tremendous sale discount on top of already discounted prices," Foulkrod observed. The quality of repairs may be difficult to evaluate and the lasting effects on service life may be uncertain.

"If the damage was remedied by replacing parts, rather than repairing them, there's a lot less impact on resale value," Lancaster said. "You can't cancel the item. But, if you restored the aircraft 10 years ago because of a bird strike or blown tire, time helps heal it. If you've had a hangar rash incident and replaced a part 10 years ago, there's not much impact on resale value."
Which Airplane Will Be First to Sell at the Best Price?

Perception counts for plenty in today's market. "People like to think they're being very rational when they're buying an airplane. But they're not. The difference between a 1999 model and a 2000 model is just perception. They'll look at the model year and not the total hours. They might forego a 1999 model with 1,200 hours in favor of a 2000 model with 1,800 hours," O'Neal said.

Aircraft age and total time are major differentiators between aircraft. The demand for aircraft older than 10 years, or ones having more than 10,000 hours, is particularly soft. O'Neal said. Light to midsize models built in the 1980s or earlier are very tough to move.

Regardless of age and total time, buyers prefer used aircraft having the same airframe, engine and avionics configuration as current production aircraft, according to O'Neal. "That's one reason there's a $500,000 difference in a CJ1 compared to a CitationJet."

O'Neal said it's not cost-effective to completely retrofit an older light turbofan or turboprop aircraft to bring it up to new aircraft standards. "Put a full G1000 system in your old King Air 90 and you'll be lucky to get back 50 cents on the dollar. You're trying to add value, but you're just putting on lipstick to gussy it up. It's still not the Pro Line 21 package found on new King Air 90 aircraft."

But buyers do expect to find full-function MFDs aboard candidate aircraft, one that offers all the "bells and whistles." These units should offer flight plan map, onboard radar and satellite weather imagery, TAS or TCAS, and TAWS. Electronic charts are a bonus.

Adding winglets to a turbofan aircraft is great for improving performance, but it doesn't result in a big increase in resale value, according to Lancaster. Mesinger added that installing a full retrofit EFIS package in a turbofan aircraft, upgrading the engines or equipping it with an EFB makes little or no difference in resale value.

"An older Falcon 50, fitted with 731-3D or -4 engines and a full glass cockpit with 9,000 hours total time still is viewed as a Falcon 50 with 9,000 hours total time," Mesinger said.

Appearance, age, total time and impeccable maintenance count for far more improvement in value than pricey avionics or engine upgrades. "If it's two to four years old, in 'like new' condition with 1,000 to 1,500 hours total time, it's more likely to sell," Mesinger said. He also emphasized that lenders shy away from aircraft older than 10 to 15 years, especially with the financial health of a large number of buyers being in question.

Foulkrod noted that older aircraft, such as Hawker 700s, Learjets, Citations, Challenger 601s and early GIVs "are dying." "People want the latest and greatest in technology."

Heavy charter use, coupled with high time, can be a considerable detractor, according to Bloomer. "People pay $5,000 per hour and think they can do anything they want to with the airplane." He also said that used aircraft with only a few previous owners always are preferable to ones that have multiple owners, particularly charter operators.

Bloomer believes that FAR Part 91 operators often take better care of their aircraft than Part 135 operators. Sellers, as a result, are in a favorable market position they've not enjoyed for perhaps as long as 25 years.

"All things considered, buyers today have the pick of the litter. The airplane with the best pedigree, finest care, least total time and lowest price will sell first," Foulkrod said. Others echoed similar comments.

But the need for corporate aircraft will continue to grow even though there's a glut of used aircraft on the market right now, Bloomer noted. "There's still only 24 hours in a day. It's all about travel mobility. You still have to expand the horizons of people who make the deals, increase earnings per share value for stockholders. And companies have to get more [productivity] out of fewer people."

That reality bodes well for the long-term future of the aircraft resale market, even though it's depressed to historic levels at the moment.