The Mesinger Blog

(This article is a reprint of my February 2020 blog post for Aviation International News’ AINsight series)

In the business aircraft broker community, we bandy about the word pedigree as a badge of honor. We certainly feel as an industry that value is added when the right pedigree is associated with an aircraft offering, including as fewer number of owners since new, location of operation, records kept with keen detail and completeness, who has been maintaining the aircraft, and any history of repairs. These all stack up to create the story around pedigree.

I started to think recently that pedigree needs to be broadened when considering the overall value of a transaction. Just think for a moment of the other direct and indirect players involved. After all, I have always said our business is more about the people than the equipment.

So how should one begin to rate the pedigree of the rest of the participants in a transaction? What weight would you give those participants in a deal structure? With what willingness would you want to bring a great client into a group of people making up the structure of the transaction that might not be good actors? Let’s talk for a minute about the elephant in the room: representation pedigree.

There is a phenomenon that occurs whenever transactions get reduced due to market slowdowns. Many actors who act as brokers and acquisition specialists begin to operate in what can look very unprofessional and create terrible experiences for those involved, given the seriousness of the investments. They should be handled with a seriousness that leaves everyone in the transaction feeling it was a professional, ethical, and transparent process.

Today we are internally beginning to actually rate the representation pedigree along with the aircraft and ownership pedigree. As we stack up aircraft to consider for a client in an acquisition project, we give a score to who is representing the aircraft for sale.

If we know that the character and reputation of the broker is suspect, we might very well take an otherwise capable aircraft for consideration and footnote for our client discussion that reluctance to approach this offering based on what we know could complicate and even destroy a successful acquisition. We also use the same rating system when we are approached by a broker on the buy side that comes to us with an offer on an airplane we have to sell. Never in all my 46 years in this business have we taken this added step to identify what could be a problem transaction, in advance of the problem, just based on the reputation of the person or company representing the other side.

Some of the pitfalls to recognize can be a lack of depth in knowledge of the equipment that is being represented for sale. This occurs when the hired representative does not ever travel to the aircraft they have for sale. They have not read the records or do not even know what records exist.

Another giveaway of a problem transaction could be if the other side asks our side to pay them. Making matters worse, they will not let the requested payment amount be disclosed in a contract. One thing for sure we know from experience is when the other side needs to be paid by our side, they have no real relationship with their side.

And when things get tough in a deal and usually in every deal at some point they do, that person who is not getting paid by their side will have no benefit to the transaction to sort out the rough spots should they occur. Is it just me or is it getting crazier out there?

Like many of my aircraft sales professional friends I had a good number of calls from people who, with days to go in 2019, called to ask, “do we have time to buy a plane yet this year?” They were motivated by either year-end tax benefits, but even more so because they were bombarded by eblasts with subject lines that touted amazing year-end deals. I assured my callers that if these opportunities were not sold by year-end they would not go up in price the next day as we go into the next year. In fact, they could be even better deals.

The callers even suggested that one way to be able to buy so quickly would be to delay a pre-buy inspection to post-closing with the seller putting some money into escrow to cover discrepancies. In a few calls the buyer even suggested no pre-buy at all if the deal were “sweet” enough. To me both of these suggestions were non-starters. In the case of a post-closing pre-buy where a seller may leave money in escrow here are the problems. First, what if during the pre-buy you discover a problem that would make the plane have a huge value loss and by then you own it. For instance, the inspection reveals corrosion in an area with a fix that created a major repair and to compound that created a non-standard reoccurring inspection protocol. Even in a hard deal that set of circumstances would provide an out for the buyer. The next problem would be defining well enough in a contract exactly what will qualify to be paid for out of escrow. The buyer would have lost all their leverage to persuade the seller to cover that rectification once the plane has been purchased. A real recipe for disaster.

The idea of no pre-buy at all, even at some reduced purchase price, can also lead to huge surprises and leave the buyer with a plane that was never contemplated or would have been completely out of the usual and customary method of due diligence and good buying habits. Make no mistake, having a buyer call and suggest an acquisition completed in days is music to my ears, however it is a song that one will quickly tire of.

This process of quick completion can absolutely work with a new aircraft purchase. In that case success can be more certain.

Now back to the title of the article. A rose by any other name. As I mentioned in the opening paragraph one of the motivations for a buyer was the attraction of the pricing based on the subject line saying call now for an amazing year-end deal. One of the companies that were running that subject line at year-end, and there were many companies doing that, started the year with the same plane being advertised only now the subject line read, “call now for New Year amazing deal”.  

So the idea that the year-end deal would be better than the same plane that did not sell at year-end being available one day later is just not a solid reason to cast out smart buying habits and jump into a bad deal by missing the right steps to buy such an expensive asset. Take your time, don’t get lured into short circuiting process and I assure you the net result will be better pricing, eyes wide open process and clear skies.

Want to talk more about a right way, call me. Let’s discuss this. My phone number is 303-444-6766!

Happy New Year and I hope to bump into many of you in person or at least talk soon.

Unless you are in the business of buying and selling aircraft, the title of this article seems obvious. But does the reality of the title play out in all cases? It is not unusual for a prospective buyer to ask when considering an aircraft to purchase, “what will this plane be worth in a year if I elect to sell it?” That is not such a bad question. However, that question often turns into a reality during a buyer’s first year of ownership for a myriad of reasons.

The reasons an owner might want to sell at various times during the course of their ownership might include health, the sale of the company that owns the aircraft, and economic reasons that may have not been foreseen at the time of the acquisition to name a few. Those are plausible reasons that are mostly beyond the buyer’s control. The reason that also stands out, and is not out of the buyer’s control, is that they simply bought the wrong aircraft for the mission. This is a very unfortunate reason and one that could have been anticipated from the beginning.

Poor planning or no planning for the mission fulfillment is typically the culprit. Like most of my fellow professionals, when addressing the needs of especially the first-time buyer, they build a needs assessment that takes into consideration mission, annual use, and budgeting for the asset. In fact, in some rare cases we actually talk a first-time buyer out of buying, at least under the current analysis. Some of the obvious reasons for that decision could be not enough annual use to justify a whole aircraft purchase, or the right aircraft for the mission may be out of the affordability of the buyer. We believe that one should buy based on fulfilling 50-70% of the clients flying needs. There is no such aircraft that will typically meet 100% of the mission without over buying for some percentage of the mission.

Without that critical mission and use analysis the buyer will probably just be lucky if it all works out as hoped. More likely a buyer will throw their hands up and declare a need to sell and reacquire this time based on the analysis. This frustration could also create a situation where the buyer thinks business aviation is just not good and they walk away entirely which would be unfortunate for the buyer and the industry at large. The other unfortunate part about selling your aircraft after just one year may be an overstated residual loss based on the fundamentals of that particular year. As aircraft are pieces of machinery they do consistently depreciate over time and some years hit harder than others. Over the long term, or at least 3-5 years the loss rate could be more even overall, but the optics of a loss in a first year can add even more angst to a buyer who for whatever reason has decided to sell during or at the end of year one.

As all of you know who are reading this, our industry provides a terrific way to travel the world safely, securely and put you ahead of your competition and in front of your client better than any other method of travel. Sure, communicating via phone is OK but closing the deal typically comes from literally sitting with the prospect or client. This fact cannot be disputed. What also cannot be disputed is the fact that ownership from an economic standpoint seldom pans out when someone buys a plane and has the annual residual loss as well as all of the start-up costs including commissions, inspections, spare parts costs and ground support equipment, staffing and training, and then finds out that the plane they bought is wrong for the mission. Buying not at all or buying the right plane to start with is always smarter and more perfect than buying the wrong plane. This seems simple yet I promise this sound sage advice is not always adhered to and hence the title of the article. Buy a plane to keep it and buy a plane to get the most economic benefit from it.

One of my very favorite holidays and thus personal annual milestones is Thanksgiving. Not a religious experience just a major family experience. As we sit around our Thanksgiving table as a ritual, we will go around to all of the guests to hear what they are thankful for.  For me personally it marks a chance to reflect on another year that hopefully personally is still going strong, which I’m happy to say this year it is. Now let’s look at it, as I also do, as a milestone for the current year’s business.

This year has been strange and filled with nuances that made everyone in our industry stop and try to put words to them. Remember when 2019 started we were in the midst of a government shutdown. We were having very serious trade talks with China that has resulted in a year of exchanging tariffs. All of us were trying to wade through January hoping that when the shutdown dust settled and the trade talks and tariffs eased a bit, we would find the foundation we all enjoyed through the preceding November. Would we have a market that continued a robust transactional trajectory?

So, once the normal January lull that typically lasts the first few weeks of the month were over, with an added extra week for the government to reopen, what did we find? Well, I think we collectively found a market that seemed to be missing the zest and zeal of 2018. We found a bit less frenzy. What would come next with a market missing the frenzy? The good news was and has been, a market that still maintained its balanced supply ratio as well as a market that seemed to be maintaining its balanced residual loss rate. Balance can still be used to describe our market.

The results in 2019 do not seem to have driven anyone back to the fence to sit and watch. We have not had any buyer call and put a project on hold. We have not had sellers rethink transitions. That is all great news. The weird part of the market this year is the loss of the frenzy. The result of a frenzy from last year’s market being missing is what we as a group have been trying to put into words. The number of days on the market for many planes has been stretched out. Yet still within a reasonable range. Prices in many categories have been adjusting slightly downward and a few market segments and price points have slowed to a trickle in activity. A bit less demand and a bit more supply.

Many of the older, lower-end planes that were being sought after by either turboprop step-ups or first-time buyers have not enjoyed the robust activity that they did in 2018. Several newer, higher-end planes have slowed based on aggressive competition from the OEM’s. In fact, I have never seen the OEM’s being as aggressive to not miss a deal. Typically, there seemed to be enough activity for the pre-owned segment as well as the new. The segments seldom collided like they have this year. That collision course has caused corrections in the like-new pricing to create the needed differentiation between the two segments.

So, with all the thankfulness still being a relevant sentiment, what could be ahead? Guess what, November 21^st could see another government shutdown if budget negotiations are not completed and agreed to. 2020 is an election year. This phenomenon always puts a bit of pause into the works. Continued impeachment talks could cause hesitation and consternation to buyers and sellers. We as industry professionals need to be very careful to focus ourselves and our clients on the positive. The high value of business aircraft. The fact that the safety record is so high in our mode of transportation and that new clean sheet entrants being offered by the OEM’s will no doubt bring about larger inventories of young really nice aircraft. I feel like we will all be touting the many things to be thankful for this time next year. By the way, having recently returned home from this year’s NBAA-BACE in Las Vegas and talking to so many of my clients and industry friends, I can definitely say that spirits were high and moods were good. Those that I interacted with are feeling very optimistic and thankful for another year of successes.

I hope everyone will enjoy a family dinner and celebration and continue the tradition of honoring each other, our families, and our friends. The only problem for me is it seems Thanksgiving comes around quicker each year. Happy Thanksgiving!