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Future Values in Business Aviation - What's Certain?
Aircraft values are hotly contested at the beginning of each year by everyone - OEM’s, brokers, appraisers, but what’s the truth? How do you cut through all the noise? What’s absolutely certain anymore?
headlines move articles not always facts
Depending on who you ask - the 2020 biz av market is either booming or on the verge of total collapse. That’s a bit of the world we live in today - hardline positions make for more entertaining arguments and surely help boost search results, but they make it difficult for the rest of us who just want real facts. Misinformation can leave the business aviation industry exposed to an undue optics problem that can ultimately lead to market instability. I’m not breaking out the crystal ball today (I’ll save that for future posts), but here are the facts you need to know.
The Truth…
Extremes are statistically rare. Without delving into the raw mechanics, it’s important to understand that the market always seeks balance and stability. That means that if someone is forecasting record-breaking growth or the world’s largest bust - your spidey-senses should be tingling.
The reality is, it’s tricky to forecast a single segment’s movement and even more so an entire industry. Does movement in the single-engine turboprop market have a huge bearing on the stability of large cabin biz jet sales? No, not necessarily. Business aviation serves as a support role for so many industries, and aircraft classes can serve distinct market segments that may help bolster (or bust) their values.
Here’s the “inside” scoop - the lower the intrinsic utility of the aircraft the more volatile the values will be. It may seem simple and it is really, but this concept has caught the market off guard more than once. During the financial crisis of 2008, the business aviation market faced major market instability with values plummeting across all aircraft types and classes. However, those that suffered the most were those with a lower intrinsic utility to their respective owners. In some cases, large-cabin business jet values fell by over 50% between 2008-2009. Certainly, these aircraft had more to lose in terms of monetary value but a close look at market conditions would reveal that while a high-utility turboprop like the King Air 350 did have an accelerated value loss after 2008, the market overall remained liquid; while an aircraft like the Gulfstream GIV-SP suffered a nearly 40% loss in core value due to downward market pressure from a flooded market (among other factors) which was not an uncommon sight among heavier business jets. I’m not picking on the GIV-SP as a “low-utility” aircraft, it’s a good airplane, but the reality is, the market certainly believed it had lower utility than a King Air - it’s much harder to pivot a GIV-SP from carrying executives from industries that simply no longer possess the capital for continued operation to say, carrying cargo. The great news is manufacturers are more aware of this dynamic now more than ever - low utility aircraft simply don’t sell well.
OEM’s Want a Stable Future
Manufacturers across all types and classes are focused on delivering aircraft that deliver exceptional value to the widest variety of customers. That doesn’t mean that OEM’s are less concerned with delivering a great on-board experience - but they need the “bling” to be backed by discernible value for the customer - like being able to fly faster, further, and higher than ever before while staying connected to what’s happening at the office in real-time. This pressure to innovate or become obsolete has never been more apparent. Over the past decades, we have witnessed a continual consolidation of OEM’s that were not able to keep pace with an industry set on moving forward and overall, that’s good for the consumer. OEM’s that are dedicated to creating true value for their customers not only build better airplanes but are helping assure a more sustainable future for business aviation.
Here’s the Takeaway:
Market forecasts are not always reliable and that’s a problem for consumers and the business aviation industry.
Forecasting values of all of business aviation is disingenuous. Biz av supports a huge variety of industries, many of which, have very little effect on one another.
The intrinsic value an aircraft serves to its consumers is a huge driver of market stability - low utility aircraft will suffer the most during market downturns.
Aircraft manufacturers care about the future. No group has more at stake to guarantee that their planes have a long-lasting value-add for their customers. Especially in a world where consumers are more sensitive to purchasing assets that offer quantifiable ‘real-world’ value.
Cameron Tipton, ASA, ARM-MTS
Author:
Cameron Tipton, ASA, ARM-MTS
accredited senior appraiser
appraisal review & management - mts
National Aviation Day - A Look Forward
December 1903 marked man’s first true attempt to conquer the skies. Since then, we have flown passengers to every edge of the globe, gone supersonic and walked on the moon all in the last 115 years. So what will the next 50 years of progress look like?
Today is National Aviation Day!
December 1903 marked man’s first true attempt to conquer the skies. Since then, we have flown passengers to every edge of the globe, gone supersonic and walked on the moon all in the last 115 years. So what will the next 50 years of progress look like?
Supersonic Flight
As I type, there are men and women working to bring sustainable and efficient supersonic flight to both commercial and business aviation. Sure, the Concorde made the hop from JFK to Heathrow at twice the speed of sound, but it was never really economically viable. Aerion Supersonic has teamed up with Boeing and GE to produce a supersonic business jet (SSBJ) that is slated to enter service in 2025
Aerion AS2
Space Travel
Cities like Houston, Texas are already investing huge amounts of money into a future of space travel. The long-term goal of Houston’s Spaceport and facilities like it is the idea of orbital or sub-orbital travel. In a future where we have a safe and effecient way to get into low earth orbit, trips around the globe that currently take 15+ hours on air carriers can be completed in a little over an hour. Not to mention, trips to further locales, like Mars may become more routine.
Houston Spaceport
Urban Air Mobility
Uber has made it clear that they intend to take to the skies to provide air connectivity high above the traffic on the streets below. It may seem far-fetched until you understand that Boeing, Embraer ,and Bell Helicopter (to name a few) are all heavily involved in the research and development of the program. This project aligns with a similar objective to bring electric turbines to the aircraft market - promising a quieter, greener, more reliable alternative.
Uber Elevate
The Future of Aviation is Bright
Aviation has always pushed the boundaries of what is humanly possible. With a new onset of fresh ideas and creative vision, the next generation of flight is well underway. No matter what the future will look like, I know aviation will continue to be at the forefront of innovation and continue to make the world a smaller, more connected place.
Cameron Tipton, ASA, ARM-MTS
Author:
Cameron Tipton, ASA, ARM-MTS
accredited senior appraiser
appraisal review & management - MTS
Graveyards, Hotels, & Bars - The Truth Behind Aircraft Retirement
Retiring an aircraft out of service is a complicated decision, but for some, it’s a welcome moment. Let’s take a look at some of the most impressive uses for aircraft that have left the sky for good.
planes spend their life safely transporting people across the globe, but what happens after the last flight?
We talked about what puts perfectly good airplanes out of service, forever, but what happens to them once they’re grounded? Like everything else in aviation, it depends. The primary factors relate to the specific aircraft and the life left on the components and the activity of the remaining fleet - who has any use for the parts? Let’s say a high-time Pilatus PC-12/45 had a hangar collapse on the tail and it ripped the aft section of the plane in half. So we have a dramatic case of physical deprecation with some functional depreciation to seal the deal: the insurance company '“totals” the plane. However, in this case there is an active need for PC-12/45 parts and components so everything from the prop, engine, avionics and interior pieces can be sold to serve the remainder of the active fleet.
Let’s say the same scenario happens to a 1968 Beechcraft Queen Air. Odds are, it’s going to cost you (or your insurer) money to get rid of these parts. The avionics are obsolete, the engines have been out of production for over 30 years and it will cost more to harvest the metal than you could possibly gain from its sale. This means it’s going to the salvage yard. You may be familiar with aircraft “boneyards” where hundreds of aircraft are left sitting in the desert, their final resting place. Unfortunately, without some diligent planning retiring an airplane can be surprisingly expensive.
It isn’t all doom and gloom, occasionally, there are more innovative solutions for the hull like turning it into a cocktail bar, a house, or using it on a movie set!
El Avion
Manuel Antonio, Costa Rica
747 Wing House
Malibu, California
Jumbo Stay Hotel
Stockholm Arlanda Airport
727 Fuselage Home
Manuel Antonio, Costa Rica
If you own an older aircraft you may have wondered about what possibilities lie beyond the sky for your airplane. Clearly, the sky is not the limit, however, you may not be interested in opening a hotel in your retrofit Lear 35! If you think your aircraft may be approaching retirement it is probably a great time to speak with an expert that can help plan the next steps, because if there is one consistency in aviation - surprises are rarely good. Our team of aircraft appraisers can be a great resource for really getting into the numbers to truly understand the economics impacting your specific aircraft.
Driving Forces Behind Aircraft Retirement
Aircraft frequently outlive the manufacturer life estimates, sometimes by multiple decades. This is great news for owners and operators who are looking to stretch their investment and helps maintain lower cost options in the used marketplace. However, as some of these aircraft approach 40+ years of faithful service, the shadow of retirement grows larger. So what happens if you’re holding onto an aircraft that is ready to make its last flight? How do you know it’s time? Let’s take a look.
All Good Things Come to an End
Aircraft frequently outlive the manufacturer life estimates, sometimes by multiple decades. This is great news for owners and operators who are looking to stretch their investment and helps maintain lower cost options in the used marketplace. However, as some of these aircraft approach 40+ years of faithful service, the shadow of retirement grows larger. So what happens if you’re holding onto an aircraft that is ready to make its last flight? How do you know it’s time? Let’s take a look.
Walking a Fine-Line
The decision to retire an aircraft is not always as simple as a life-limit on the airframe, in fact, it’s usually a complex decision. There are three driving forces that drive the depreciation of an aircraft (in appraiser terms: “obsolescence”) that are worth explaining.
Physical Depreciation
This is the factor that is most obvious. As a plane ages, so do its parts. Sure, we can replace or rebuild a majority of the components, but things like the actual airframe will continue to wear down over time. Having an aircraft remain outside of the hangar for extended periods or failure to properly preserve the aircraft during inactivity can accelerate physical depreciation.
Economic Depreciation
Economic depreciation is best categorized by the loss in value by factors that are external to the aircraft. A great example is the FAA NEXTGEN requirements for 2020. For some older (but perfectly good) business jets, the cost to equip ADS-B Out by 2020 outweighs the value of the aircraft. Some older Learjet’s may have a “hull” value of $250,000 and ADS-B compliance may cost over $200,000 or there may not be an upgrade path at all.
Functional Depreciation
Functional depreciation is (basically) the loss in value of the aircraft when compared to a newer, more efficient model. A Citation II manufactured in 1980 will cost substantially more to operate than a newer Citation Bravo with more advanced components and more fuel efficient engines, therefore that value will be lower on the less desirable model.
when should you retire your plane?
It isn’t usually one single factor that forces an aircraft into retirement, but a growing number of each of these forms of depreciation until it is simply not economically viable to operate the aircraft any longer. Sure, that 40 year old biz jet may absolutely be airworthy and fly your ideal mission, but add in the growing cost of maintenance and a multi-hundred-thousand-dollar ADS-B Out solution and that value proposition quickly fades away.
Understanding the specific depreciation factors affecting your aircraft is complicated and retiring an aircraft without some advanced planning can be costly. If you own an older aircraft it’s critical that you maintain a pulse on the marketplace specific to your aircraft. Older aircraft can be a great value, but being blindsided by an expensive retirement can quickly wash away any money you saved.
If you own an older aircraft, here are 4 tips to stay ahead of the curve
Check model-specific trends quarterly. Did 10% of the fleet get retired in the last few months? That could be a sign that it’s time to sell.
Understand your maintenance schedule. Is your plane coming up on a heavy maintenance item (“D-Check”)? It might not be worth investing hundreds of thousands of dollars if the aircraft will need to be retired before the next major maintenance event.
Have a plan. Understanding your options ahead of time can save you a huge amount of heartache in the end. Do you want to be the last owner of this aircraft? Do you plan on donating this aircraft to a charity? Parting it out for salvage? Moving it to the desert? Answering these fundamental questions will help guide your ownership and will drastically improve your experience.
Talk with an accredited appraiser. Having someone in your back pocket with a constant pulse on the market is invaluable when your aircraft is near the end of its life. Appraisers are also connected with huge swaths of resources like salvage centers and museums and can provide solid unbiased guidance to help you make these tough decisions.
In the next blog, we’ll take a look at some of the uses aircraft have beyond the sky and the desert graveyards where thousands of aircraft rest untouched.
Author:
Cameron Tipton, ASA
co-founder/accredited senior appraiser
Flight level partners
Depreciate Your Used Aircraft 100% in the First Year
Businesses can take advantage of 100% depreciation on their new or used aircraft in the first year thanks to the 2017 tax bill. However, before you purchase, there a number of considerations that must take place to avoid costly pitfalls and back-taxes.
Changes to the tax code in 2017 allow businesses to accelerate the book depreciation of their aircraft purchase to the first year.
This is what you need to know
WHAT CHANGED?
The passage of the 2017 “Tax Cuts and Jobs Act” changed the first-year depreciation limit from 50% to 100%
Previously, Bonus Depreciation exclusively applied to new aircraft, now it also applies to used aircraft
1031 Exchanges (A.K.A. Like-Kind) are no longer allowed for Personal Property
WHO CAN TAKE ADVANTAGE OF BONUS DEPRECIATION?
This is more complicated than one might think and there are a number of pitfalls that must be considered.
Bonus Depreciation is exclusively for business aircraft and for business use. That means that more than 50% of the aircraft’s usage falls under business-use (defining “business-use” requires a strict view of the tax code).
The aircraft must be eligible for the Modified Accelerated Cost Recovery System (MACRS). A major qualificant of which is that the aircraft cannot be predominately used outside of the United States.
The future use of the aircraft must continue to be predominately for business use, failure of this could result in the IRS recapturing the depreciation in later years.
Regardless of when a purchase order is signed, the aircraft must be placed into service before January 1, 2023. That may seem like a long time but growing manufacturer backlog could easily have delivery dates 4-5 years down the line (I’m looking at you, PC-24).
IS IT ENOUGH?
Ultimately, these types of regulatory incentives are aimed at providing a meaningful boost to the economy. So how has it done? As of posting, the aircraft sales market has made a huge resurgence with values slowly rising and sellers gaining the upper-hand as inventory levels fall across all aircraft types. Bonus Depreciation could surely be described as a factor in this type of growth, coupled with the overall economic success of the United States over the past few years.
I believe the greatest outcome of the Bonus Depreciation program is the number of first-time buyers that have entered the world of aircraft ownership. For many of our clients, Bonus Depreciation was not only a factor but the primary driver to purchase today. This program has allowed countless small businesses to enter private aviation because the economics are simply more attractive than ever before. As with any piece of legislation, I always caution my clients that these types of programs could be rolled-back, so these provisions may not last until 2023.
SPEAK TO AN EXPERT
We advise all of our clients to seek aviation-specific tax and legal support throughout their ownership cycle and when it comes to using Bonus Depreciation it is an absolute necessity. Your personal CPA may be the best around, but groups that specialize in aviation simply understand the pitfalls associated with these large write-offs. Flight Level Partners has built a trusted network of experts that we would happily refer to, without hesitation.
Cameron Tipton, ASA
Does Anyone Care About General Aviation Anymore?
The general aviation community is responsible for cultivating a new group of users to assure our freedom to fly remains unchanged. With more efficient aircraft and innovative ownership strategies, the argument to fly private is stronger than ever.
Santa Fe: General Aviation’s Hotspot for a Weekend
The Flight Level team headed west to Santa Fe last weekend to enjoy one of the AOPA’s infamous “Fly-Ins”. Each year, the Aircraft Owners and Pilot’s Association (AOPA) hosts a number of regional gatherings across the country to facilitate continued growth of general aviation. The events have something for everyone - air shows overhead, educational seminars, beer and food (what else could you want?). But beneath the surface, these Fly-Ins serve an important role in keeping you flying.
Public Support MATTERS
Believe it or not, our freedom to fly, as the general aviation (“GA”, as we call it in the biz) community is constantly up for debate. A quick spin of the globe would reveal a world of highly restricted, pay-for-usage, airspace systems that systemically oppress the growth and sustainability of private aviation. The United States accounts for the majority of GA flying conducted around the world - we LOVE our airplanes. But even more than a love for aviation, the U.S. has realized the incredible business benefits for flying private, but that is for another post….
The voting public (and their duly appointed representatives) hold our fate to fly private in their hands, so what happens if they stop caring?
Just this year, the fate of the Air Traffic Control system was nearly handed over to airline executives (yes, the same executives that keep taking away your legroom). This bill would have dramatically changed the way we approach our airspace system and prioritized commercial airlines over all other traffic (a system that has stifled European GA). But to many, the general aviation system exists in a vacuum and the majority of the public has no knowledge of our secretive world. This keeps us in danger of one day losing this battle.
Share Your Passion
For all of us who work or play within GA our obligation is to continue to share our collective passion with anyone who will listen. I believe that we are at a pivotal moment in our aviation community. Each day aircraft manufacturers are making strides to reduce aircraft operating costs, increase safety margins and appeal to a wider audience than the traditional base of aviators. Aircraft operators have been equally focused on reducing the cost burden on end-users by reinventing the way we access aircraft. Today, there is more opportunity for individuals and businesses alike to use GA, but it takes all of us, working together, to continue to share the opportunities afforded by private aircraft.
Our Commitment
To share this responsibility Flight Level Partners will be featuring the stories of general aviation users from across the country right here on our blog. We would love the opportunity to share how general aviation has benefited you, if you would like to be featured shoot us an email to info@flightlevel.co. With our collective passion, the future of GA is brighter than ever.
