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Mesinger Pulse: Buy a Plane to Keep It

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.

Key Steps to a Successful Aircraft Transaction

A webinar hosted last month by AIN and sponsored by Duncan Aviation and Mesinger Jet Sales gave participants a road map for a successful business aircraft transaction. The hour-long event featured three industry-expert panelists—Keith Swirsky of GKG Law went over timelines, milestones, and pitfalls of transactions; Keith Hayes of PNC Finance covered financing options, critical pathways to get to the finish line with the right financing product to meet the buyer’s tax and operational needs; and Jad Donaldson, aviation director for Harley Davidson Aviation, spoke about what it is like as an operator to source and trust an aviation professional to guide the sales and marketing process with transparency, integrity, and certainty of completing a transaction. Please listen and enjoy!

Mesinger Pulse: Thanksgiving is Coming and There is a Lot to be Thankful For

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 21st 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!

Mesinger Pulse: Do Changing Market Conditions Change Any Dynamics in the Aircraft Brokerage World?

The idea of market conditions changing for the new and pre-owned valuation proposition of aircraft is not a new discussion. We operate in a very dynamic environment. For the more than 45 years I have been buying and selling aircraft for clients we have seen Sellers markets shift to Buyers markets, then back again. We have seen balanced markets and some dramatic shifts precipitated by geopolitical and global economic calamities.

These shifts all deal with the value of the aircraft. I thought it might be interesting to discuss how the brokerage business itself has evolved and morphed over the years, through recent ups and downs. Often these changes have occurred around transactions being up or down rather than the value of the actual aircraft. If we think of it in terms of the challenges that have occurred to those of us who daily endeavor to make our living brokering and consulting to buyers and sellers, we might draw some interesting parallels.

One thing I have spoken about when describing our community is that joining the ranks of broker or consultant has no barriers to entry. Putting up a shingle seems easy as an entry point. Whenever the economic market weakens and people look around to see what industry could they earn a living in, selling yachts and aircraft seem to stand out. As I have said, from the outside it looks easy, sexy and pays big commissions. It is actually none of those things. Of course, if you do not have years of experience or strong transactional activity, and a Rolodex filled with strong industry relationships boasting about why you could be the person for the job, may only mean your only way to get a buyer or seller’s attention is through the commission rate you will charge. Simply put, very low commission rates are often quoted by newcomers with no real experience. Believe it or not this works for some buyers and sellers who think the price is all that matters when choosing a sales partner.  

I assure you that there are literally dozens of ways a transaction can go awry. Any of these deviations can cost thousands of dollars, or even worse, the entire deal. At that point it is too late to shift the players. During times of transitions it seems the industry gets flooded with new entrants claiming to be qualified to transact a deal on a buyers’ or sellers’ behalf. Be sure to apply the same smarts you each use in the rest of your successful lives. If it seems too good to be true it probably is.

Other evolutions that are much more positive have come into play as well. The idea of high ethical behavior and 100% transparency have taken a more center stage position. More of us who come to work in this arena over the last few years have advocated for this change. We seem to have lagged as an industry in acting in a proper way. We are gaining traction now and making huge strides. Other industries have behaved better as a matter of practice for years before we did. Of course, this manner of doing business did not need to have evolution. Many of us have been practicing this since day one in our respective businesses and lives. 

The RFP has come back into vogue. It seems that procurement has taken back much of the decision and weighting process that was once more often guided by the flight department itself. I believe this change has been brought about by the size of the transaction and the idea that all or most of other significant dollar transactions have been funneled through and narrowed by procurement. This does not alleviate the relationship side of our business but adds a process that works in conjunction with the relationship. Typically, the flight department still provides those long-forged relationships names to be included in the RFP dialog. So, it is really this and that with respect to business opportunities for those of us in the brokerage and consulting business and gaining the marketing or acquisition opportunity with flight department transitions.

As an industry we are seeing consolidation take place. For years we have seen this in the FBO area as well as maintenance and fueling. Now we are starting to see this discussion take place in the brokerage business side of the industry. At the end of the day it will still just be a people business. It is not a brick and mortar play, so just aggregating more people may or may not add value to the segment. That picture is yet to be painted. I have always felt big is not really better with respect to large firms. It still seems to boil down to whichever salesman has the listing typically is the most versed to discuss it with a prospect. Another factor that could be a downside of bigger is the number of competitive planes the firm has for sale at any one time. For instance, at our firm, we do not take on aircraft for sale that are in direct competition to another listing we might have for sale at the time. 

The bottom line is that not just markets change but also player strategy and practices over time.

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