Establishing Value for Business Jets in the “New” Economy – Part 1

Part 1:

Recession, deep recession, depression. Which one term correctly describes the economy is debatable, but we can all agree that times are tough. The business jet market has been especially hard hit during this downturn. Where we once had low supply, high demand, high ask/sell prices and easy financing we now see a supply glut, low demand, low selling prices and little to no financing.

Some who bought aircraft at the height of the market want to recoup as much of the cost as possible. Other aircraft owners are upside down on their loan to value ratio, waiting things out, hoping the economy and business jet market will return to some semblance of normalcy.

We must face the reality that our nation is burdened with unprecedented levels of consumer, corporate and government debt. Unemployment is in the double digits and projected to continue to rise. The commercial real estate market is on the edge of collapse. Will our economy return to normal? Perhaps, but not any time soon. Consider this opinion for economic recovery:

Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years … simply cannot be sustained. The X marks a brand new track — a new economy. What will it look like? Nobody knows. All we know is the current economy can’t “recover” because it can’t go back to where it was before the crash. –Robert Reich

With regard to the business jet market, the new economy should result in more realistic values and pricing for aircraft. Our generation of more rational business jet valuations will begin with a look at Baseline Values. Market exuberance or depression has no effect on the Baseline Value of an aircraft.  Rather, the focus is on answering the following questions:

  • How long was the average business jet built to last?
  • How is value generated/maintained over the life cycle of a business jet?
  • How much value, if any, is added to the baseline after spending $2M for engine overhauls, or $1M for paint & interior?

The Gulfstream IV (GIV), for example, was manufactured from 1986 through 1992.  It is a versatile aircraft, carrying up to 12 passengers over 4000 nm, with relative efficiency. A 1990 GIV sold new for $21.2M.  The aircraft will fly on average 450 hours per year. At 4,000 hours/10 years the engines will undergo a midlife inspection at a cost of approximately $700K.  Engine overhauls will be accomplished every 8,000 hours, at an initial cost of $1.5M.  Each subsequent inspection will become more costly.  Every 72 months, a major airframe inspection is required.  The first would cost approximately $150K and similar to the engine, each successive inspection becomes more costly.

Due to the fact that an aircraft is a depreciating asset, each year it will lose a percentage of its original price/value.  Based on historical data, Baseline Value can be plotted quite accurately over time.  Similar to an automobile with high mileage, high total time/hours will ultimately have an impact on value as will interior age/design, engine/airframe inspections, and avionics, all of which can be monitored and calculated using statistical fleet data.

Regardless of economic conditions, the original cost of the aircraft can be depreciated on average over a 30-year life cycle.  This Baseline Value is impacted by only those events specific to the given make/model, such as major engine/airframe inspections, avionics upgrades, et al.  In Part 2, we will correlate market price, market value and recent sales when compared to Baseline Value.

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