Flying Through The Turbulence

June 2, 2009

It is the perfect storm.  Private aviation finds itself under attack-eyes blackened, kicked and battered. And although the industry may be down, is it knocked out?  The lethal mixture of a sagging economy and a public flogging leaves the general aviation marketplace with deep wounds, no doubt.  But this is the perfect time to join the ranks of those who enjoy the efficiencies, safety and other benefits associated with private air travel.

The Market
The last few years in business aviation have been a tale of high-flying popularity and increasing aircraft values. In fact, aircraft manufacturers found themselves with new aircraft order backlogs that stretched out three to five years.  The long list of customers waiting on new aircraft drove pre-owned aircraft values up.  Market dynamics even created an environment where some pre-owned aircraft were selling for more than new ones.  Just like the phenomenon of the Toyota Prius hybrid car when gas prices spiked, demand outpaced supply and pre-owned vehicles brought a premium.  
Not so any longer.  As the economy started sliding and 401(k)s crumbled,  business aviation went into a tailspin in 2008, as corporate and small business jet owners flooded the market with aircraft for sale. This led to a historic drop in aircraft values. The value of business jets, including small-cabin Cessna Citations and ultra-long-range Gulfstream 550s, have been declining for four straight quarters.  In the fourth quarter, the average price decline based on industry pricing guides was 10.7%.  It was the second largest quarterly price decline since data started being collected in 1983.  The depth of the declines varied depending on a manufacturers product mix. Cessna products lost 6.9%, for example, while Bombardier products lost 14.4%, on average.

Overall, business jets have lost 25% of their value in the last six months and some specific models have lost up to 40%. The three- to four-year run-up in aircraft values has been wiped away in a matter of months.

A Disciplined Approach
The supply and demand equation has created a buyer's market, making it an opportune time for individuals and small business owners to consider private aviation.  The benefits of private travel are well documented but the process of successfully analyzing needs and developing strategic, tactical and operational plans are not.  Aircraft acquisitions are complex transactions that require input from a number of trusted advisors.  And complexities aside, they are often an exciting and sometimes emotional event.  Even a cursory glance at the industry reveals a myriad of aviation options, all with their own set of pros and cons that span operational, financial and risk management topics.

A structured approach to aircraft analysis and acquisition will help mitigate the risks of making costly mistakes.  And this applies to all types of scenarios, from fractional ownership in a small Cessna Citation to complete ownership of a Gulfstream capable of crossing oceans.

The process consists of three phases: strategic planning, tactical implementation and operations. Strategic planning is the most important step in the process and includes a thorough look at travel needs and a financial comparison of current transportation costs and those of potential aviation options. Breaking down current transportation costs includes basic questions such as, "How are current travel needs met? How many hours are flown each year?  What does each trip look like in terms of stops, overnights, passengers, baggage and destinations?"  The answers to these and other questions help determine a travel profile and financial baseline.   

The next step is to perform a needs and wants analysis and to consider budgetary, logistical or operational constraints.  Obviously, the principals sit front and center for this discussion, but it is helpful to establish a planning team to assist in reconciling all of the needs and wants with various regulatory requirements. Trusted outside advisors can provide valuable insight on the need for new entities, tax and depreciation strategies, defining business versus personal use and looking at the impact of operating the aircraft under F.A.R Part 91 (private) or Part 135 (commercial) regulations. Aviation consultants, flight department management, attorneys, financial advisors, accountants, bankers, security advisors, insurance and risk management agents and facilities management personnel can all provide needed expertise.  

Once the needs and wants are defined and reconciled against financial and operational constraints, it is time to identify and compare suitable options. This step requires detailed qualitative and quantitative analysis.  Using default operational and financial assumptions, financially model one solution against another.  Use the results of the comparative model to begin a filtering process to narrow the candidate solutions down based on the constraints and other criteria.

As they say, the devil is in the details.  Comparing one private travel solution to another can be tricky.  Being familiar with aircraft maintenance schedules, refurbishment costs, operating costs and residual value trends is where a knowledgeable aviation consultant can add value.  They not only possess technical aviation expertise but also should be proficient in aviation budgeting and financial modeling.  Here is an important note to consider: When modeling these aviation projects over a five- to seven-year period, making an incorrect assumption about the cost of jet fuel does very little to impact the overall net present value of the project.  On the other hand, just ever so slightly making an incorrect assumption about the residual value of the aircraft can dramatically alter the outcome of the upfront analysis.  A very structured and disciplined approach to considering aviation options is a key success factor in mitigating risk and preserving capital.

The second phase in this process is the tactical implementation. This involves executing on the strategic planning completed above. Good strategic analysis results in a comprehensive business plan that lays out a roadmap for moving forward.  It defines parameters as you enter the market to acquire the aircraft or fractional aircraft ownership alternative.  There are a couple of critical steps to ensure success in this phase.  The first is to utilize a broker or advisor with current, relevant market knowledge.  Aircraft markets are very dynamic right now.  Have someone on your team that is in the market on a daily basis.  Shy away from the popular calls stating that a "friend of a friend has a great aircraft for sale."  

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