What’s the Future of Aircraft Sales and Ownership in America?
This is a post by guest author Dean Kantis, founder and owner of Micro Jet Network, Inc. Dean was asked to contribute to this blog because of his expertise in aircraft brokerage. Any thoughts expressed below are entirely Dean’s and do not necessarily reflect the views of Universal Weather and Aviation, Inc.
Pre-owned business aircraft are taking much longer to sell these days, and there are a growing number of challenges impeding General Aviation (GA) buyers. It may be some time before this situation changes, so aircraft sellers should take a second look at offers they receive from prospective buyers. Here is an explanation why:
1. GA sales have changed in recent years
GA aircraft sales have changed a lot in recent years. In the past, buyers wanted to purchase aircraft positions in order to get aircraft a few months ahead of schedule. During that time – pre-October-2008 – aircraft positions owners were able to yield good returns by selling their positions to new aircraft owners. They were reimbursed for deposits paid, made a small profit and were out of the transaction.
2. The aircraft sales market changed post-2008
Following the global economic downturn of 2008-2009, we began to see aircraft positions selling at a loss. Sellers found they were faced with selling aircraft contracts for about half of the deposits they’d already paid. In many cases, these resale losses were considerable.
The situation has worsened since 2012. We’ve seen many aircraft position owners default on existing aircraft orders. That means they’ve lost their entire deposits as a result of either refusing to pay the next payment and/or failing to sign over aircraft interest to new owners. In most cases, original equipment manufacturers keep paid deposits and release the aircraft position holder from further obligation under the contract.
3. There are more blows ahead for GA
Listen to the news in the media: We’re hearing, more and more, of how sequestration cuts are going to hit GA in important ways. The next round of cuts may really turn out to be a brutal blow for our industry. The Federal Aviation Administration (FAA) was planning to shut down 150 or so private airport towers in key, busy GA traffic areas. Fortunately, there is a temporary hold (through the end of 2013) for about half of those cuts to be extended beyond that date until a definitive resolution occurs. Nevertheless, the policy has the potential to slow much of the growth we’ve seen in GA in recent years.
It may take decades to recover from those policies and other hits to our industry. One ramification of the downturn is the Part 135 business. Because of the FAA sequestration and cutbacks, the FAA will have less staff and will attempt to cut Part 135 certificates from about 4,200 to 2,000 over the next few years. That should drive up the price on interests in Part 135 certificates. We are now seeing more demand from buyers wanting to purchase an existing, clean and proven Part 135 certificate. Many are available at a premium and already have the "proving runs on jet aircraft up to nine passengers" built in, so buyers won’t have to spend time and money to obtain that. Finally, it’s going to be harder to get your own Part 135 certificate due to those changes, and there may be even more challenges in the future.
4. There are other changes to be concerned about
Ever since the global crisis that unfolded in October 2008, banking institutions have not made terms attractive in borrowing money for GA purchases. This has made selling/buying aircraft even more challenging. It’s hard enough trying to convince sellers – after having listed an aircraft for six months or longer – that buyer offers are what they are without having this added financing hurdle factored into the equation. Many aircraft brokers have reduced flat fee sales commissions to help sellers and buyers work out fair purchase/take-home net prices. Still, many sellers believe their planes are worth 15-20% more than what buyers are offering. The result is that aircraft remain on the market for much longer than anticipated. In the current market, sellers who may have to keep aircraft longer than expected must be prepared to factor in carry, maintenance and depreciation costs, among others.
5. Consider saying "yes" to a reasonable offer
Time is not your friend when trying to sell an aircraft. Many holding costs come into play when sellers decide to say "no" to reasonable offers. Considering depreciation, loans and maintenance, the costs of holding aircraft in "for sale" status can be hundreds of thousands of dollars. Newer, more appealing, aircraft models come out all the time, while the market value of older aircraft goes down. Your aircraft broker is caught in the middle in terms of advertising and marketing the aircraft, presenting new offers, prequalifying buyers and closing sales.
6. This brings us back to looming sequester challenges
The prospect of airport towers closing in many of the nation’s largest cities (and hours of customs clearance being reduced or eliminated at many airports) is sure to yield additional blows to GA and to our national economy. Hopefully, there will be some positive changes in the market that will stabilize and grow the economy.
The future for GA sales may be a bumpy ride. In other words, it may not be "smooth flying." While there are bright spots in the GA industry – particularly growth in GA fleets and utilization rates in the international arena – we’re not seeing the GA growth here in the US that would otherwise be possible with more effective government policy. With the sequestration affecting the FAA’s job to offer more Part 135 certificates, our recommendation is to "buy an existing one before you can’t get one." Until next time, safe flying!